NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS, PROXY STATEMENT AND 2018 ANNUAL REPORT
NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS
Date and Time VOTING Wednesday, May 15, 2019 12:30 p.m. EDT By internet Location www.proxyvote.com One Hartford Plaza Hartford, CT 06155 By toll-free telephone 1-800-690-6903 On behalf of the Board of Directors, I am pleased to invite you to attend the Annual Meeting of Shareholders of The Hartford Financial Services Group, Inc. to be held in the Wallace Stevens Theater at our Home Office at 12:30 p.m. EDT. By mail Follow instructions on your Voting Items proxy card Shareholders will vote of the following items of business: Board Page In person Recommendation Reference At the Annual Meeting 1. Elect a Board of Directors for the coming year; FOR 11
2. Ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting FOR 33 IMPORTANT INFORMATION IF YOU firm for the fiscal year ending December 31, PLAN TO ATTEND THE MEETING IN 2019; PERSON: 3. Consider and approve, on a non-binding, advisory Please remember to bring your ticket and basis, the compensation of our named executive FOR 35 government issued ID! Shareholders can officers as disclosed in this proxy statement; and obtain an admission ticket and directions to the meeting by contacting our Investor 4. Act upon any other business that may properly Relations Department: come before the Annual Meeting or any adjournment thereof. Email: [email protected]
Record Date Telephone: (860) 547-2537 You may vote if you were a shareholder of record at the close of business on Mail: The Hartford March 18, 2019. The Hartford’s proxy materials are available via the internet, Attn: Investor Relations which allows us to reduce printing and delivery costs and lessen adverse One Hartford Plaza (TA1-1) environmental impacts. Hartford, CT 06155 We hope that you will participate in the Annual Meeting, either by attending and If you hold your shares of The Hartford voting in person or by voting through other means. For instructions on voting, through a brokerage account (in “street please refer to page 68 under “How do I vote my shares?” name”), your request for an admission We urge you to review the proxy statement carefully and exercise your right to ticket must include a copy of a brokerage vote. statement reflecting stock ownership as of the record date of March 18, 2019. Dated: April 4, 2019 You can also join our meeting webcast at http://ir.thehartford.com. By order of the Board of Directors
Donald C. Hunt Vice President and Corporate Secretary
2019 Proxy Statement 1 LETTER FROM OUR CHAIRMAN & CEO AND LEAD DIRECTOR
Dear fellow shareholders:
2018 was a year of many significant accomplishments and excellent financial results for The Hartford, despite elevated catastrophe losses. During the year, the Board oversaw the continued integration of the Aetna U.S. group life and disability business; the agreement to acquire The Navigators Group, Inc.; the company’s continued investments in people, processes, and technology; and the separation of Talcott Resolution. As the 2019 Annual Meeting of Shareholders approaches, it is our privilege as Chairman and Lead Director to share details on the Board’s progress in 2018. Strategy and Culture Overseeing strategy is a core responsibility of the Board, and throughout the year, the Board remained highly engaged in the company's strategy of expanding its products and services; becoming an easier company to do business with; and attracting, retaining and developing top talent. In 2018, discussions of strategy, profitability and growth occurred at every Board meeting, remaining an intense focus of the enterprise. Equally important, and part of the ongoing dialogue, were discussions on how The Hartford does business. As The Hartford moves forward in its third century, the company believes that having a diverse and inclusive culture and clear expectations for ethical conduct and exceptional performance are integral to maintaining a thriving and sustainable enterprise. We are proud to have fellow directors who are engaged with employees and committed to supporting the company's culture. Examples that demonstrate the Board's dedication include: • Leadership Accountability. The Compensation and Management Development Committee considers talent management, commitment to ethics and compliance, employee survey results, and success in fostering diversity and inclusion in senior leaders’ performance reviews and compensation decisions. • Engagement with Employees. The Board routinely interacts with employees who have been identified as potential future leaders and directors participate in company events throughout the year, providing opportunities to engage directly with the people driving the company’s results. Board members participated in many events in 2018, including a Professional Women’s Network discussion, an Ethics and Compliance week panel, employee Town Halls, and a dinner for employees who are working on key projects or who participate in the company's nine Employee Resource Groups. • Ethics and Conduct. Employees are encouraged to speak up when they identify an issue or have a concern. The Chief Ethics and Compliance Officer provides the Audit Committee with comprehensive reports of issues and concerns received through various reporting channels, each of which is investigated, and the outcomes of all substantiated issues or concerns. • Acquisitions and Integration. The Board discusses culture during the due diligence and integration phases of any acquisition, recognizing that it is a critical success factor, and strives to be respectful of the acquired business' culture while incorporating beneficial aspects of The Hartford’s culture. Risk Oversight Risk oversight is another core Board function and it is particularly relevant in the insurance industry, where risk management is an essential part of the business. The Hartford has understood risk for more than 200 years. In 2018, the Board reviewed and affirmed a revised enterprise risk appetite framework to reflect the changes to the company over the last few years, including from dispositions and acquisitions. This framework, along with a robust Enterprise Risk Management function to assess and model risks, enables management and the Board to make informed judgments on risk and manage the company’s aggregate exposure. Two areas of risk that have been a particular focus for the Board, along with its ongoing assessment of capital markets and the implications on financial risk, are catastrophe risk and cyber-related risks. As a property and casualty insurer, catastrophe risk oversight is a significant area of focus for the Board. Although The Hartford achieved excellent full-year results, 2018 represented the second consecutive year of severe catastrophe losses above plan. The Board closely oversees management’s continued efforts to evolve The Hartford’s catastrophe risk management strategies based on recent years’ loss events, with increased focus on exposure to wildfires and tornadoes/hail. This oversight includes reviewing management’s loss model refinement, exposure limits, underwriting guidelines and risk transfer arrangements in light of recent and long-term catastrophe experience. The Board is also paying close attention to how climate change may be affecting weather patterns, and devoted time in 2018 to discuss the company’s annual assessment of prevailing science on climate change, and how the company has calibrated its processes to recognize experience and expectations regarding the impact of climate change. While
2 www.thehartford.com the Board and management believe the company’s overall book of business and risk management program performed well given the catastrophe events of 2018, substantial time and resources will continue to be devoted to this aspect of risk management. In today’s environment, cybersecurity is a concern for all companies. The Hartford’s activities, policies and procedures to prevent, detect and respond to cyber incidents are routinely discussed by the Board. The results of the company’s annual penetration testing, where a third party is hired to play an adversarial role in order to validate the company’s cyber defenses under a number of attack scenarios, both from outside the company and from within, were recently discussed with the Board and management. These tests are invaluable in highlighting what is working well and where there are potential vulnerabilities that can be addressed. The Board also regularly considers cyber risk through the lens of the company’s insurance products. The Board has reviewed how those products would respond to different cyber events and potential exposure to the company. This is a rapidly evolving area, and the Board recognizes the need for expertise, discipline and constant vigilance. Board Effectiveness Many of the Board’s strengths - its composition, heightened strategic focus, increased use of competitor data and market analytics, and enhanced communication - are the direct result of its annual self-evaluation process. Like many companies, Board self- evaluation at The Hartford has evolved over the past decade. Several years ago, the Board embarked on a multi-year effort to add rigor to the process, with profound results. For example, in 2016, the Board added individual director interviews to promote more direct, fulsome and candid feedback. The Lead Director meets with each board member between February and May, identifies themes in the feedback received, and leads a discussion on those topics with the full Board in May. This results in feedback for management regarding things like the length and content of Board presentations and Board meeting logistics, as well as formal written goals for the coming Board year. Last July, the Board took the next step in further improving its evaluation process by adopting triennial third-party Board evaluations beginning in 2019. After considering shareholder feedback and reviewing corporate governance best practices, the Board determined that third-party facilitated evaluations could result in even greater candor, provide a neutral perspective, and allow the Board to benchmark the its practices against other high-performing boards and companies. We hope these steps demonstrate the Board's commitment to continuous improvement. As always, we are proud to work closely with management and our fellow directors to ensure that The Hartford is a well-governed, shareholder-focused company with an exceptionally strong culture that is positioned to deliver sustainable, long-term growth and profitability. Thank you for your continued support.
Sincerely,
Christopher J. Swift Trevor Fetter Chairman and Chief Executive Officer Lead Director
2019 Proxy Statement 3 TABLE OF CONTENTS
PROXY SUMMARY 5
BOARD AND GOVERNANCE MATTERS 11 Item 1: Election of Directors 11 Governance Practices and Framework 11 Board Composition and Refreshment 14 Committees of the Board 17 The Board's Role and Responsibilities 15 Director Compensation 22 Certain Relationships and Related Party Transactions 25 Communicating with the Board 25 Director Nominees 26
AUDIT MATTERS 33 Item 2: Ratification of Independent Registered Public Accounting Firm 33 Fees of the Independent Registered Public Accounting Firm 33 Audit Committee Pre-Approval Policies and Procedures 34 Report of the Audit Committee 34
COMPENSATION MATTERS 35 Item 3: Advisory Vote to Approve Executive Compensation 35 Compensation Discussion and Analysis 36 Executive Summary 36 Components of the Compensation Program 40 Process for Determining Senior Executive Compensation (Including NEOs) 44 Pay for Performance 46 Compensation Policies and Practices 49 Effect of Tax and Accounting Considerations on Compensation Design 51 Compensation and Management Development Committee Interlocks and Insider Participation 51 Report of the Compensation and Management Development Committee 51 Executive Compensation Tables 52 CEO Pay Ratio 64
INFORMATION ON STOCK OWNERSHIP 65 Directors and Executive Officers 65 Certain Shareholders 66 Section 16(a) Beneficial Ownership Reporting Compliance 66
INFORMATION ABOUT THE HARTFORD’S ANNUAL MEETING OF SHAREHOLDERS 67 Householding of Proxy Materials 67 Frequently Asked Questions 67 Other Information 71
APPENDIX A: RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES 72
4 www.thehartford.com PROXY SUMMARY This summary highlights information contained elsewhere in this proxy statement. It does not contain all the information you should consider and you should read the entire proxy statement carefully before voting. BOARD AND GOVERNANCE HIGHLIGHTS ITEM 1 ELECTION OF DIRECTORS Each director nominee has an established record of accomplishment in areas relevant to overseeing our businesses and possesses qualifications and characteristics that are essential to a well-functioning and deliberative governing body. ✓ The Board recommends a vote "FOR" each director nominee
Director Nominee, Age(1) Director Current Other Current and Present or Most Recent Experience Independent since Committees(2) Public Company Boards Robert B. Allardice III, 72 ✓ 2008 • Audit • Ellington Residential Former regional CEO, • FIRMCo* Mortgage REIT Deutsche Bank Americas • GasLog Partners Carlos Dominguez, 60 ✓ 2018 • FIRMCo • Medidata Solutions President, • NCG Sprinklr Trevor Fetter,(3) 59 ✓ 2007 • Comp Senior Lecturer, • FIRMCo Harvard Business School Stephen P. McGill, 61 ✓ 2017 • Comp Retired Group President, Aon Plc; Retired Chairman • FIRMCo and CEO, Aon Risk Solutions and Aon Benfield Kathryn A. Mikells, 53 ✓ 2010 • Audit • Diageo plc Chief Financial Officer • FIRMCo Diageo plc Michael G. Morris, 72 ✓ 2004 • Audit • Alcoa Former Chairman, President and CEO, • FIRMCo • L Brands American Electric Power Company • NCG* Julie G. Richardson, 55 ✓ 2014 • Audit* • UBS Former Partner, • FIRMCo • VEREIT Providence Equity Partners • Yext Teresa W. Roseborough, 60 ✓ 2015 • Comp Executive Vice President, General Counsel and • FIRMCo Corporate Secretary, The Home Depot • NCG Virginia P. Ruesterholz, 57 ✓ 2013 • Comp* • Bed Bath & Beyond Former Executive Vice President, • FIRMCo • Frontier Verizon Communications • NCG Communications Christopher J. Swift, 58 2014 • FIRMCo Chairman and CEO, The Hartford Greig Woodring, 67 ✓ 2017 • Audit Retired President and CEO, • FIRMCo Reinsurance Group of America
* Denotes committee chair (1) As of April 4, 2019 (2) Full committee names are as follows: Audit – Audit Committee; Comp – Compensation and Management Development Committee; FIRMCo – Finance, Investment and Risk Management Committee; NCG – Nominating and Corporate Governance Committee (3) Mr. Fetter serves as the Lead Director. For more details on the Lead Director’s role, see page 12
2019 Proxy Statement 5 PROXY SUMMARY
Nominee Tenure* Nominee Diversity
0-5 years: 5
Female: 4 5-10 years: 3
Male: 7 >10 years: 3
*Average independent nominee tenure as of April 4, 2019: 6.4 years
GOVERNANCE BEST PRACTICES The Board and management regularly review best practices in corporate governance and modify our governance policies and practices as warranted. Our current best practices are highlighted below.
✓ Other than CEO, all directors are independent Independent Independent key committees (Audit, Compensation, Nominating) Oversight ✓ ✓ Empowered and engaged independent Lead Director ✓ All directors elected annually ✓ Majority vote standard (with plurality carve-out for contested elections) ✓ Proxy access right Engaged ✓ Director resignation policy Board / ✓ Over-boarding policy limits total public company boards, including The Hartford, to five for non-CEOs and Shareholder two for sitting CEOs Rights ✓ Rigorous Board and committee self-evaluation conducted annually; third party Board evaluations conducted triennially ✓ Meaningful Board education and training on recent and emerging governance and industry trends ✓ Annual shareholder engagement focused on governance, compensation and sustainability issues ✓ Board diversity of experience, tenure, age and gender ✓ Mandatory retirement age of 75 and 15-year term limit promote regular Board refreshment Good ✓ Annual review of CEO succession plan by the independent directors with the CEO Governance ✓ Annual Board review of senior management long-term and emergency succession plans ✓ Stock-ownership guidelines of 6x salary for CEO and 4x salary for other named executive officers ✓ Annual Nominating Committee review of The Hartford's political and lobbying policies and expenditures ✓ Board oversight of sustainability matters; Nominating Committee oversight of sustainability governance Commitment to framework Sustainability ✓ Sustainability Governance Committee comprised of senior management charged with overseeing a comprehensive sustainability strategy and ensuring the full Board is briefed at least annually
SHAREHOLDER ENGAGEMENT We engage with shareholders and solicit feedback in a number of different ways throughout the year. Management and our investor relations team routinely speak with analysts and investors at investor conferences and other formal events, as well as group and one-on-one meetings. In September 2018, we invited a panel of institutional investors to engage with directors at a Board meeting session, a practice we began in 2011. In addition, since 2011 we have maintained an annual shareholder engagement program focused on governance and compensation issues and, more recently, sustainability. In the fall of 2018, management contacted shareholders representing over 50% of shares outstanding and had discussions with shareholders representing approximately 17% of shares outstanding, as many shareholders opted not to participate in calls, noting that they had no material concerns. As a result
6 www.thehartford.com PROXY SUMMARY of shareholder feedback received in 2018 and prior years, and an analysis of governance trends and best practices, the Board and management took several important actions in 2018 to enhance the company's corporate governance practices.
What we heard from shareholders Actions taken Periodic third-party board evaluations can lead to more Adopted third-party facilitated evaluations every three years candid conversations, provide a neutral perspective and help commencing in 2019. boards benchmark their corporate governance practices.
Diversity enhances board performance and is critical to Formalized existing company practice by amending our effective corporate governance. Corporate Governance Guidelines to ensure that diverse candidates are included in the pool from which board candidates are selected. Pay equity is an area of increasing concern and companies Instituted annual pay equity reporting to the Compensation that pay women and people of color fairly are at a Committee and committed to enhanced pay equity practices competitive advantage in attracting and retaining top talent. disclosure beginning with the company's 2018 Sustainability Report (expected to be published in summer 2019).
AUDIT HIGHLIGHTS
ITEM 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM As a matter of good corporate governance, the Board is asking shareholders to ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for 2019. ✓ The Board recommends a vote "FOR" this item
2019 Proxy Statement 7 PROXY SUMMARY
COMPENSATION HIGHLIGHTS ITEM 3 ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION The Board is asking shareholders to approve, on an advisory basis, the compensation of our named executive officers as disclosed in this proxy statement. Our executive compensation program is designed to promote long-term shareholder value creation and support our strategy by (1) encouraging profitable growth consistent with prudent risk management, (2) attracting and retaining key talent, and (3) appropriately aligning pay with short- and long-term performance. ✓ The Board recommends a vote "FOR" this item
2018 FINANCIAL RESULTS Our 2018 financial results were excellent, despite elevated catastrophe losses for the second consecutive year. Full year net income available to common stockholders was $1,801 million, core earnings* were $1,575 million, and our net income and core earnings return on equity ("ROE)*† were 13.7% and 11.6%, respectively, well in excess of our cost of capital. 2018 was also a year of several significant accomplishments, including: • The continued integration of Aetna's U.S. group life and disability business, • The announcement of our agreement to acquire The Navigators Group, Inc. ("Navigators"), a global specialty insurance company, and • The close of the sale of Talcott Resolution. We also made notable progress on our innovation agenda, including the launch of our Small Business Innovation Lab to design and test new products and business models to meet the changing needs of our small business customers, and the purchase of Y-Risk, a company specializing in the sharing and on-demand economy. During the year we also continued to make investments in our people, processes, data, and technology. As we enter 2019, our strategic priorities remain consistent and we are focused on realizing the full potential of the recent acquisitions. Expanding product capabilities and risk appetite are key pillars of our strategy; with the Group Benefits and Navigators acquisitions, the near-term focus is on successfully integrating the acquisitions and maximizing our combined potential, including deepening our distribution relationships and meeting a broader array of customer needs.
Highlighted below are year-over-year comparisons of our net income and core earnings performance and our three-year ROE and core earnings ROE results. Core earnings is the primary determinant of our annual incentive plan funding, as described on page 40, and average annual Core Earnings ROE over a three-year performance period is the metric used for 50% of performance shares granted to Senior Executives, as described on page 41 (in each case, as adjusted for compensation purposes).
YEAR-OVER-YEAR PERFORMANCE THREE-YEAR PERFORMANCE
Net Income (Loss) Core Earnings ROE Core Earnings ROE Available to Common Stockholders 13.7% $1,575 11.6% 5.2% )
$1,801 s n ) $1,014 o s i 6.7% l n l i o 5.2% i l l M i ( $ M ( $ $(3,131) (20.6)% 2017 2018 2017 2018 2016 2017 2018 2016 2017 2018
* Denotes a non-GAAP financial measure. For definitions and reconciliations to the most directly comparable GAAP measure, see Appendix A. † Net income ROE represents net income (loss) available to common stockholders ROE.
8 www.thehartford.com PROXY SUMMARY
Total Shareholder Returns
The following chart shows The Hartford's total shareholder return ("TSR") relative to the S&P 500, S&P 500 Insurance Composite and S&P P&C indices. On both a one- and three-year basis, The Hartford's TSR has lagged the broader market and peers. This result has had a direct impact on compensation for our Senior Executives, including both to their personal stock holdings and with no payout on the TSR component of 2016-2018 performance shares, as described on page 49.
50 35% 40 30% 30 21% 20 9% 10 0 -10 (4)% (5)% -20 (11)% -30 (19)% 1-YEAR (2018) 3-YEAR (2016-2018)
The Hartford (HIG) S&P 500
S&P 500 Insurance Composite S&P 500 Property and Casualty
COMPENSATION DECISIONS The table below reflects the 2018 compensation package (base salary, annual incentive plan ("AIP") award and long-term incentive (“LTI”) award) for each named executive officer ("NEO"). Although this table is not a substitute for the Summary Compensation Table information beginning on page 52, we believe it provides a simple and concise picture of 2018 compensation decisions.
Compensation Component C. Swift B. Costello D. Elliot B. Johnson W. Bloom Base Salary Rate $ 1,150,000 $ 725,000 $ 950,000 $ 575,000 $ 575,000 2018 AIP Award $ 4,800,000 $ 1,925,000 $ 3,050,000 $ 2,250,000 $ 1,550,000 2018 LTI Award $ 8,000,000 $ 1,775,000 $ 5,000,000 $ 1,600,000 $ 1,100,000 Total 2018 Compensation Package $13,950,000 $ 4,425,000 $ 9,000,000 $ 4,425,000 $ 3,225,000
2018 Compensation Decision Rationale The Compensation Committee Performance against pre-established Compensation Core Earnings targets produced a approved an AIP funding level of formulaic AIP funding level capped at 200% of target. The Compensation Committee 160% of target. reduced this funding level to 160% following its qualitative review, taking into consideration a second consecutive year of elevated catastrophe losses. (pages 46-47) The Compensation Committee The company's average annual Compensation Core ROE during the performance period certified a 2016-2018 performance was 10.0%, resulting in a payout of 200% of target for the ROE component (50% of the share award payout at 100% of target. award). Because the company's TSR during the performance period was below threshold, there was no payout for the TSR component (50% of the award). (page 49)
2019 Proxy Statement 9 PROXY SUMMARY
COMPONENTS OF COMPENSATION AND PAY MIX
Compensation Component Description Base Salary • Fixed level of cash compensation based on market data, internal pay equity, responsibility, expertise and performance. Annual Incentive Plan • Variable cash award based primarily on annual company operating performance against a predetermined financial target and achievement of individual performance objectives. Long-Term Incentive Plan • Variable awards granted based on individual performance, potential and market data. • Designed to drive long-term performance, encourage share ownership among senior executives, and foster retention. • Award mix (50% performance shares and 50% stock options) reflects actual stock price performance, peer-relative stock price and dividend performance and actual operating performance.
Approximately 91% of CEO target annual compensation and approximately 84% of other NEO target annual compensation are variable based on performance, including stock price performance:
Pay Mix — CEO Salary Annual Incentive Long-Term Incentive 9% 25% 66%
Variable with Performance: 91%
Pay Mix — Other NEOs Salary Annual Incentive Long-Term Incentive 16% 30% 54%
Variable with Performance: 84%
COMPENSATION BEST PRACTICES Our current compensation best practices include the following:
WHAT WE DO ✓ Compensation heavily weighted towards variable pay ✓ Senior Executives generally receive the same benefits as full-time employees ✓ Double trigger requirement for cash severance and equity vesting upon a change of control* ✓ Cash severance upon a change of control limited to 2x base salary + bonus ✓ Independent compensation consultant ✓ Risk mitigation in plan design and annual review of compensation plans, policies and practices ✓ Prohibition on hedging, monetization, derivative and similar transactions with company securities ✓ Prohibition on Senior Executives pledging company securities ✓ Stock ownership guidelines for directors and Senior Executives ✓ Periodic review of compensation peer groups ✓ Competitive burn rate and dilution for equity program * In the case of equity, so long as the awards are assumed or replaced with substantially equivalent awards
WHAT WE DON'T DO û No tax gross-ups û No individual employment agreements û No granting of stock options with an exercise price less than the fair market value of our common stock on the date of grant û No re-pricing of stock options û No buy-outs of underwater stock options û No reload provisions in any stock option grant û No payment of dividends on unvested performance shares
10 www.thehartford.com BOARD AND GOVERNANCE MATTERS
ITEM 1 ELECTION OF DIRECTORS The Nominating Committee believes the director nominees possess qualifications, skills and experience that are consistent with the standards for the selection of nominees for election to the Board set forth in our Corporate Governance Guidelines described on pages 14-16 and have demonstrated the ability to effectively oversee The Hartford’s corporate, investment and business operations. Biographical information for each director nominee is described beginning on page 26, including the principal occupation and other public company directorships (if any) held in the past five years and a description of the specific experience and expertise that qualifies each nominee to serve as a director of The Hartford. ✓ The Board recommends a vote "FOR" each director nominee
GOVERNANCE PRACTICES AND FRAMEWORK At The Hartford, we aspire to be an exceptional company celebrated for financial performance, character, and customer value. We believe good governance practices and responsible corporate behavior are central to this vision and contribute to our long-term performance. Accordingly, the Board and management regularly consider best practices in corporate governance and shareholder feedback and modify our governance policies and practices as warranted. Our current best practices include:
✓ Other than CEO, all directors are independent Independent Independent key committees (Audit, Compensation, Nominating) Oversight ✓ ✓ Empowered and engaged independent Lead Director ✓ All directors elected annually ✓ Majority vote standard (with plurality carve-out for contested elections) ✓ Proxy access right Engaged ✓ Director resignation policy Board / ✓ Over-boarding policy limits total public company boards, including The Hartford, to five for non-CEOs Shareholder and two for sitting CEOs Rights ✓ Rigorous Board and committee self-evaluation conducted annually; third party Board evaluations conducted triennially ✓ Meaningful Board education and training on recent and emerging governance and industry trends ✓ Annual shareholder engagement focused on governance, compensation and sustainability issues ✓ Board diversity of experience, tenure, age and gender ✓ Mandatory retirement age of 75 and 15-year term limit promote regular Board refreshment ✓ Annual review of CEO succession plan by the independent directors with the CEO Good Governance ✓ Annual Board review of senior management long-term and emergency succession plans ✓ Stock-ownership guidelines of 6x salary for CEO and 4x salary for other named executive officers ✓ Annual Nominating Committee review of The Hartford's political and lobbying policies and expenditures ✓ Board oversight of sustainability matters; Nominating Committee oversight of sustainability Commitment to governance framework Sustainability ✓ Sustainability Governance Committee comprised of senior management charged with overseeing a comprehensive sustainability strategy and ensuring the full Board is briefed at least annually
The fundamental responsibility of our directors is to exercise their business judgment to act in what they reasonably believe to be the best interests of The Hartford and its shareholders. The Board fulfills this responsibility within the general governance framework provided by the following documents: • Articles of Incorporation • By-laws • Corporate Governance Guidelines (compliant with the listing standards of the New York Stock Exchange ("NYSE") and including guidelines for determining director independence and qualifications)
2019 Proxy Statement 11 BOARD AND GOVERNANCE MATTERS
• Charters of the Board’s four standing committees (the Audit Committee; the Compensation and Management Development Committee ("Compensation Committee"); the Finance, Investment and Risk Management Committee ("FIRMCo"); and the Nominating and Corporate Governance Committee ("Nominating Committee")) • Code of Ethics and Business Conduct • Code of Ethics and Business Conduct for Members of the Board of Directors Copies of these documents are available on our investor relations website at http://ir.thehartford.com or upon request sent to our Corporate Secretary (see page 70 for details).
DIRECTOR INDEPENDENCE The Board annually reviews director independence under applicable law, the listing standards of the NYSE and our Corporate Governance Guidelines. In addition, per our Corporate Governance Guidelines, in order to identify potential conflicts of interest and to monitor and preserve the independence, any director who wishes to become a director of another for-profit entity must obtain the pre-approval of the Nominating Committee. The Board has affirmatively determined that all directors other than Mr. Swift are independent.
BOARD LEADERSHIP STRUCTURE
Board Chair Independent Lead Director The roles of CEO and Chairman of the Board (“Chairman”) are Whenever the CEO and Chairman roles are combined, our held by Christopher Swift. Mr. Swift has served as CEO since Corporate Governance Guidelines require the independent July 1, 2014, and was appointed Chairman on January 5, 2015. directors to elect an independent Lead Director. Trevor Fetter In late 2014, before Mr. Swift assumed the role of Chairman, was elected our Lead Director in May 2017. The the Board deliberated extensively on our board leadership responsibilities and authority of the Lead Director include the structure, seeking feedback from shareholders and considering following: extensive corporate governance analysis. The Board concluded • Presiding at all meetings of the Board at which the then, and continues to believe, that our historical approach of Chairman is not present, including executive sessions combining the roles of CEO and Chairman while maintaining of the independent directors; strong, independent board leadership is the optimal leadership structure for the Board to carry out its oversight of our • Serving as a liaison between the CEO and Chairman strategy, business operations and risk management. and the non-management directors; • Regularly conferring with the Chairman on matters of The Board believes other elements of our corporate importance that may require action or oversight by the governance structure ensure independent directors can Board, ensuring the Board focuses on key issues and perform their role as fiduciaries in the Board’s oversight of tasks facing The Hartford; management and our business, and minimize any potential conflicts that may result from combining the roles of CEO and • Approving information sent to the Board and meeting Chairman. For example: agendas for the Board; • Approving the Board meeting schedules to help ensure • All directors other than Mr. Swift are independent; that there is sufficient time for discussion of all agenda • An empowered and engaged Lead Director provides items; independent Board leadership and oversight; and • Maintaining the authority to call meetings of the • At each regularly scheduled Board meeting, the non- independent non-management directors; management directors meet in in executive session • Approving meeting agendas and information for the without the CEO and Chairman present (nine such independent non-management sessions and briefing, as meetings in 2018). appropriate, the Chairman on any issues arising out of these sessions; As part of its evaluation process, the Board has committed to undertaking an annual review of its leadership structure to • If requested by shareholders, ensuring that he or she is ensure it continues to serve the best interests of shareholders available, when appropriate, for consultation and direct and positions the company for future success. communication; and • Leading the Board’s evaluation process and discussion on board refreshment and director tenure. The Board believes that these duties and responsibilities provide for strong independent Board leadership and oversight.
12 www.thehartford.com BOARD AND GOVERNANCE MATTERS
ANNUAL BOARD EVALUATION PROCESS
The Nominating Committee oversees the Board's multi-step evaluation process to ensure an ongoing, rigorous assessment of the Board’s effectiveness, composition and priorities. In addition to the full Board evaluation process, the standing committees of the Board undertake separate self-assessments on an annual basis. In 2018, the Board further augmented its evaluation process with the adoption of third-party facilitated evaluations every three years, commencing in 2019. This was the most recent action in a multi-year effort to enhance the Board’s evaluation process, beginning with the adoption of individual director interviews in 2016. The Board sought and considered shareholder feedback on the merits of third party board evaluation and ultimately concluded that periodic third party board evaluations would promote more candid conversations, provide a neutral perspective, and help the Board benchmark its corporate governance practices.
Board Evaluation and The Lead Director, or third-party evaluator, leads a Board evaluation discussion in Development of Goals executive session guided by the Board’s self-assessment questionnaire and key themes (May) identified through one-on-one discussions. The Board identifies successes and areas for improvement from the prior Board year and establishes formal goals for the year ahead. Annual Corporate The Nominating Committee performs an annual review of The Hartford's corporate Governance Review / governance policies and practices in light of best practices, recent developments and Shareholder trends. In addition, the Nominating Committee reviews feedback on governance issues Engagement Program provided by shareholders during our annual shareholder engagement program. (October to December) The Lead Director leads an interim review of progress made against the goals established Interim Review of Goals during the Board evaluation discussion in May. (December)
The governance review and shareholder feedback inform the development of written questionnaires that the Board and its standing committees use to help guide self- assessment. The Board’s questionnaire covers a wide range of topics, including the Board’s: • Fulfillment of its responsibilities under the Corporate Governance Guidelines; Board Self-Assessment Questionnaires • Effectiveness in overseeing our business plan, strategy and risk management; (February) • Leadership structure and composition, including mix of experience, skills, diversity and tenure; • Relationship with management; and • Processes to support the Board’s oversight function.
One-on-One The Lead Director, or third-party evaluator, meets individually with each independent Discussions director on Board effectiveness, dynamics and areas for improvement. (February to May)
When the Lead Director led the Board evaluation session in May 2018, there was agreement that the Board was operating effectively and a number of improvements directly resulting from the Board's 2017-2018 goals were noted. For example, strategy and growth were discussed at every Board meeting, and a regular cadence was established for updates from the company's Chief Strategy & Ventures Officer and business line leaders, as well as sessions devoted to market dynamics. In addition, the Board engaged in more substantive talent management discussions to understand and assess the health of succession planning.
2019 Proxy Statement 13 BOARD AND GOVERNANCE MATTERS
BOARD COMPOSITION AND REFRESHMENT DIRECTOR SUCCESSION PLANNING The Nominating Committee is responsible for identifying and recommending to the Board candidates for Board membership. Throughout the year, the Nominating Committee considers the Board’s composition, skills and attributes to determine whether they are aligned with our long-term strategy and major risks. The succession planning process is informed by the results of the Board and committee evaluation processes, as well as anticipated needs in light of The Hartford’s retirement and tenure policies (described below). To assist the Nominating Committee in identifying prospective Board nominees when undertaking a search, the company retains an outside search firm. The Nominating Committee also considers candidates suggested by its members, other Board members, management and shareholders.
The Nominating Committee evaluates candidates against the standards and qualifications set forth in our Corporate Governance Guidelines as well as other relevant factors, including the candidate's potential contribution to the diversity of the Board. In 2018 the Board amended our Corporate Governance Guidelines to ensure that diverse candidates are included in the pool from which board candidates are selected. The Nominating Committee's most recent director searches, which began in 2016 and culminated in the elections of Greig Woodring and Stephen McGill in October 2017 and Carlos Dominguez in December 2017, illustrate our typical succession planning process, which begins with an assessment the Board's current skills and attributes, and then identifies skills or attributes that are needed, or may be needed in the future, in light of the company's strategy. Indicative Director Search Process: 2016
Development of Screening of Meeting With Decision and Candidate Candidates Candidates Nomination Specification • Developed skills matrix • Considered three • Top candidates • Nominating Committee to identify desired skills outside search firms and interviewed by recommendation of and attributes selected one to lead Nominating Committee candidates and committee process members, other assignments to full Board • Targeted two areas of directors, and expertise aligned with • Screened 97 candidates management • Board consideration and our strategy: insurance for the insurance adoption of industry experience and specification • Finalist candidates recommendation digital experience underwent background • Screened 195 and conflicts checks • Prioritized diversity candidates for the digital specification
DIRECTOR TENURE The Nominating Committee strives for a Board that includes a mix of varying perspectives and breadth of experience. Newer directors bring fresh ideas and perspectives, while longer tenured directors bring extensive knowledge of our complex operations. As part of its annual evaluation process, the Board assesses its overall composition, including director tenure, and does not believe the independence of any director nominee is compromised due to Board tenure.
In order to promote thoughtful Board refreshment, the Board has adopted the following in our Corporate Governance Guidelines: Nominee Tenure* • Retirement Age. With limited exceptions, an independent director may not be nominated to stand 0-5 years: 5 for election or reelection to the Board after his or her 75th birthday.
• Tenure Policy. An independent director may not stand 5-10 years: 3 for reelection after serving as a director for 15 years.
>10 years: 3
*Average independent nominee tenure as of 4/4/19: 6.4 years
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The Board believes that these age and tenure policies provide discipline to the Board refreshment process, improve succession planning and support Board independence. Moreover, the policies supplement and strengthen the Board evaluation process as follows: • During the annual Board self-assessment process following an independent director's eighth year of service, the Lead Director (or the Chair of the Nominating Committee in the case of the Lead Director) will review with such independent director his or her independence, outside commitments, future plans and other matters that may impact ongoing service on the Board. • During the annual Board self-assessment process following an independent director's twelfth year of service and each year thereafter, discussions will also include the timing of the director’s retirement from the Board (i.e., after 15 years or earlier). DIRECTOR DIVERSITY The Board believes a diverse membership with varying perspectives and breadth of experience is an important attribute of a well- functioning board and contributes positively to robust discussion at meetings. The Nominating Committee considers diversity in the context of the Board as a whole and takes into account considerations relating to race, gender, ethnicity and the range of perspectives the directors bring to their Board work. As part of its consideration of prospective nominees, the Board and the Nominating Committee monitor whether the directors as a group meet The Hartford’s criteria for the composition of the Board, including diversity considerations. As part of our continuing efforts to bring diverse perspectives to the Board: • Since 2010 the Board has added four women, two people of color, and one director of non-U.S. origin; • In 2016, Julie Richardson became chair of the Audit Committee and Virginia Ruesterholz became chair of the Compensation Committee, which increased female leadership on the Board; and • In 2018, the Board amended our Corporate Governance Guidelines to ensure that diverse candidates are included in the pool from which board candidates are selected.
Nominee Diversity According to the 2018 Spencer Stuart Board Index: • Women constituted 24% of all S&P 500 directors, compared to 36% of The Hartford's nominees • People of color* constituted 17% of directors in the top 200 S&P Female: 4 500 companies, compared to 18% of The Hartford's nominees • Directors of non-U.S. origin constituted 8% of directors in the top 200 S&P 500 companies, compared to 9% of The Hartford's nominees Male: 7 • The average tenure of independent directors on S&P 500 boards is 8.1 years, compared to 6.4 years at The Hartford • Women chaired 20% of audit committees and 19% of compensation committees at S&P 500 companies; at The Hartford, women chair both committees * Defined as African-American, Hispanic/Latino and Asian directors.
DIRECTOR ONBOARDING AND ENGAGEMENT All directors are expected to invest the time and energy required to gain an in-depth understanding of our business and strategy. When new directors join the Board, they receive materials to familiarize them with The Hartford, its strategy, leadership, financial performance and governance. In addition, new directors devote multiple days to orientation with senior management. Sessions vary depending on experience and initial committee assignment, but generally include overviews of director responsibilities; each of the company’s businesses; financial results; operations and technology; and enterprise risk management. At least one Board meeting each year is devoted entirely to the company's strategy, and strategy-focused presentations are planned for each regularly scheduled Board meeting.
Our Board members also participate in other company activities and engage directly with our employees at a variety of events throughout the year. Recent examples include speaking at Professional Women’s Network and Ethics and Compliance Week events, as well as attendance at an annual dinner with employees working on key strategic business priorities or engaged with our employee resource groups.
2019 Proxy Statement 15 BOARD AND GOVERNANCE MATTERS
SHAREHOLDER PROPOSED NOMINEES The Nominating Committee will consider director candidates recommended by shareholders using the same criteria described above. Shareholders may also directly nominate someone at an annual meeting. Nominations for director candidates are closed for 2019. To nominate a candidate at our 2020 Annual Meeting, notice must be received by our Corporate Secretary at the address below by February 14, 2020 and must include the information specified in our By-laws, including, but not limited to, the name of the candidate, together with a brief biography, an indication of the candidate’s willingness to serve if elected, and evidence of the nominating shareholder’s ownership of our Common Stock. Pursuant to our proxy access By-law, a shareholder, or group of up to 20 shareholders, may nominate a director and have the nominee included in our proxy statement. The shareholder, or group collectively, must have held at least 3% of our Common Stock for three years in order to make a nomination, and may nominate as many as two directors, or a number of directors equal to 20% of the board, whichever is greater, provided that the shareholder(s) and the nominee(s) satisfy the requirements in our By-laws. Notice of proxy access director nominees for inclusion in our 2020 proxy statement must be received by our Corporate Secretary at the address below no earlier than November 6, 2019 and no later than December 6, 2019. In each case, submissions must be delivered or mailed to Donald C. Hunt, Vice President and Corporate Secretary, The Hartford Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155.
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COMMITTEES OF THE BOARD The Board has four standing committees: the Audit Committee; the Compensation Committee; FIRMCo; and the Nominating Committee. The Board has determined that all of the members of the Audit Committee, the Compensation Committee and the Nominating Committee qualify as “independent” under applicable law, the listing standards of the NYSE and our Corporate Governance Guidelines. The current members of the Board, the committees on which they serve and the primary functions of each committee are identified below.
AUDIT COMMITTEE CURRENT MEMBERS:* “In addition to its annual business and technology risk assessments and review of management’s loss reserve R. Allardice estimates, the Audit Committee devoted substantial time to non-recurring items in 2018, overseeing the accounting impacts resulting from Tax Reform and the final accounting of both the Talcott sale and the 2017 K. Mikells acquisition of Aetna’s U.S. group life and disability business.” M. Morris Julie G. Richardson, Committee Chair since 2016 J. Richardson (Chair) G. Woodring ROLES AND RESPONSIBILITIES • Oversees the integrity of the company's financial statements MEETINGS IN 2018: 9 • Oversees accounting, financial reporting and disclosure processes and the adequacy of management’s systems of internal control over financial reporting * The Board has determined that all members are • Oversees the company's relationship with, and performance of, the independent registered “financially literate” within public accounting firm, including its qualifications and independence the meaning of the listing standards of the NYSE and • Oversees the performance of the internal audit function “audit committee financial • Oversees the company's compliance with legal and regulatory requirements and our Code of experts” within the meaning of the SEC’s regulations. Ethics and Business Conduct • Discusses with management policies with respect to risk assessment and risk management
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE CURRENT MEMBERS: “The Committee has taken an active role in support of the company’s commitment to fair pay, particularly T. Fetter for women and people of color. In 2018, management provided the Committee with a comprehensive review of the company’s process and practices, which include analyzing pay equity three times annually - before, S. McGill during, and after the annual compensation planning cycle - to identify unexplained pay disparities and T. Renyi provide the opportunity to take appropriate actions if necessary. The Committee is pleased with the rigor of T. Roseborough the process and confident that management has and will continue to take steps to ensure pay equity for V. Ruesterholz (Chair) women and people of color. The Committee will receive updates on an annual basis, with report-outs going to the full Board.”
MEETINGS IN 2018: 6 Virginia Ruesterholz, Committee Chair since 2016 ROLES AND RESPONSIBILITIES • Oversees executive compensation and assists in defining an executive total compensation policy • Works with management to develop a clear relationship between pay levels, performance and returns to shareholders, and to align compensation structure with objectives • Has sole authority to retain, compensate and terminate any consulting firm used to evaluate and advise on executive compensation matters • Considers independence standards required by the NYSE or applicable law prior to retaining compensation consultants, accountants, legal counsel or other advisors • Meets annually with a senior risk officer to discuss and evaluate whether incentive compensation arrangements create material risks to the company • Responsible for compensation actions and decisions with respect to certain senior executives, as described in the Compensation Discussion and Analysis beginning on page 36
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FINANCE, INVESTMENT AND RISK MANAGEMENT COMMITTEE CURRENT MEMBERS: “In 2018, FIRMCo continued to focus on the company’s underwriting discipline, the monitoring of R. Allardice (Chair) catastrophe risks and the management of the investment portfolio given the volatility in the capital markets. In addition, in light of the company’s strategic transformation, the Committee reviewed the company’s C. Dominguez updated risk appetite framework.” T. Fetter Robert B. Allardice III, Committee Chair since 2016 S. McGill K. Mikells ROLES AND RESPONSIBILITIES M. Morris • Reviews and recommends changes to enterprise policies governing management activities T. Renyi relating to major risk exposures such as market risk, liquidity and capital requirements, insurance risks and cybersecurity J. Richardson T. Roseborough • Reviews the company's overall risk appetite framework, which includes an enterprise risk appetite statement, risk preferences, risk tolerances, and an associated limit structure for V. Ruesterholz each of the company's major risks C. Swift • Reviews and recommends changes to financial, investment and risk management guidelines G. Woodring • Provides a forum for discussion among management and the entire Board of key financial, MEETINGS IN 2018: 5 investment, and risk management matters
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE Current Members: “In 2018, the Nominating Committee continued its focus on board composition and effectiveness. As a C. Dominguez result of Committee recommendations, the Board formalized its commitment to diversity by adopting a policy to ensure that diverse candidates are considered in each director search; and further enhanced its M. Morris (Chair) evaluation process by adopting third-party facilitated evaluations every three years, commencing in 2019.” T. Renyi Michael G. Morris, Committee Chair since 2018 T. Roseborough V. Ruesterholz ROLES AND RESPONSIBILITIES • Advises and makes recommendations to the Board on corporate governance matters Meetings in 2018: 4 • Considers potential nominees to the Board • Makes recommendations on the organization, size and composition of the Board and its committees • Considers the qualifications, compensation and retirement of directors • Reviews policies and reports on political contributions • Oversees the establishment, management and processes related to environmental, social and governance activities
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THE BOARD’S ROLE AND RESPONSIBILITIES BOARD RISK OVERSIGHT The Board as a whole has ultimate responsibility for risk oversight. We have a formal enterprise Risk Appetite Framework that is reviewed by the Board at least annually. In light of the evolution of the company's business and risk profile, the 2018 review of the Risk Appetite Framework included a revised enterprise risk appetite statement and revised risk preferences, tolerances, and limits. The Board exercises its oversight function through its standing committees, each of which has primary risk oversight responsibility for all matters within the scope of its charter. Annually, each committee reviews and reassesses the adequacy of its charter and the Nominating Committee reviews all charters and recommends any changes to the Board for approval. The chart below provides examples of each committee’s risk oversight responsibilities.
BOARD OF DIRECTORS
AUDIT COMMITTEE COMPENSATION AND FINANCE, INVESTMENT AND NOMINATING AND MANAGEMENT RISK MANAGEMENT CORPORATE GOVERNANCE • Financial reporting DEVELOPMENT COMMITTEE COMMITTEE COMMITTEE • Legal and regulatory • Compensation programs • Insurance risk • Governance policies and compliance procedures • Talent acquisition, • Market risk • Operational risk retention and • Board organization and • Liquidity and capital development membership requirements • Succession planning • Sustainability • Cybersecurity governance
The Audit Committee discusses with management risk assessment and risk management policies. FIRMCo oversees the investment, financial, and risk management activities of the company and has oversight of all risks that do not fall within the oversight responsibility of any other standing committee. FIRMCo is also briefed on our risk profile and risk management activities. With respect to cybersecurity risk oversight, senior members of our Enterprise Risk Management, Information Protection and Internal Audit functions provide detailed, regular reports on cybersecurity matters (including assessments conducted by, or in conjunction with, third parties) to the full Board; FIRMCo, which has principal responsibility for oversight of cybersecurity risk; and/ or the Audit Committee, which oversees controls for the Company's major risk exposures. The topics covered by these reports include The Hartford'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.
For a detailed discussion of management's day-to-day management of risks, including sources, impact and management of specific categories of risk, see Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2018.
BOARD AND SHAREHOLDER MEETING ATTENDANCE The Board met nine times during 2018 and each of the directors attended 75% or more of the aggregate number of meetings of the Board and the committees on which he or she served. We encourage our directors to attend the Annual Meeting of Shareholders, and all of our directors attended the Annual Meeting of Shareholders held on May 16, 2018.
SHAREHOLDER ENGAGEMENT Our Board and management value shareholder views and believe engagement with shareholders promotes transparency, accountability, and strong governance practices. We engage with shareholders and solicit feedback in a number of different ways throughout the year. Management and our investor relations team routinely speak with analysts and investors at investor conferences and other formal events, as well as group and one-on-one meetings. In September 2018, we invited a panel of institutional investors to engage with directors at a Board meeting session, a practice we began in 2011. In addition, since 2011 we have maintained an annual shareholder engagement program focused on governance and compensation issues and, more recently, sustainability.
As part of our annual shareholder engagement program, management contacts our largest shareholders in the fall of each year and reports their feedback directly to the Nominating Committee and the Compensation Committee. In the fall of 2018, management contacted shareholders representing approximately 50% of shares outstanding and had discussions with shareholders representing approximately 17% of shares outstanding, as many shareholders opted not to participate in calls, noting that they had no material concerns.
2019 Proxy Statement 19 BOARD AND GOVERNANCE MATTERS
As a result of shareholder feedback received in 2018 and prior years, and an analysis of governance trends and best practices, the Board and management took several important actions in 2018 to enhance The Hartford's corporate governance practices.
What we heard from shareholders Actions taken Periodic third-party board evaluations can lead to more candid Adopted third-party facilitated evaluations every three years conversations, provide a neutral perspective and help boards commencing in 2019. benchmark their corporate governance practices. Diversity enhances board performance and is critical to Formalized existing company practice by amending our effective corporate governance. Corporate Governance Guidelines to ensure that diverse candidates are included in the pool from which board candidates are selected. Pay equity is an area of increasing concern and companies that Instituted annual pay equity reporting to the Compensation pay women and people of color fairly are at a competitive Committee and committed to enhanced pay equity practices advantage in attracting and retaining top talent. disclosure beginning with the company's 2018 Sustainability Report (expected to be published in summer 2019).
TALENT DEVELOPMENT AND SUCCESSION PLANNING Talent development and succession planning are important parts of the Board’s governance responsibilities. The CEO and independent directors conduct an annual review of succession and continuity plans for the CEO. Succession planning includes the identification and development of potential successors, policies and principles for CEO selection, and plans regarding succession in the case of an emergency or the retirement of the CEO. In addition, each year, the Compensation Committee reviews succession and continuity plans for the CEO and each member of the executive leadership team that reports to the CEO. The Compensation Committee’s charter requires that it discuss the results of these reviews with the independent directors and/or the CEO. However, given the importance of the topic and the engagement of the full Board on the issue, all directors are invited to these sessions. The full Board routinely meets and interacts with employees who have been identified as potential future leaders of the company. In recent years, the Board's robust talent development and succession planning efforts have resulted in the seamless and well- managed transition of internal candidates into the company’s most senior roles. BUSINESS ETHICS AND CONDUCT
“Always act with integrity and honesty, and be accountable in everything you do.” The Hartford's Code of Ethics and Business Conduct
Striving to do the right thing every day and in every situation is fundamental to our culture, and we are proud that we have been recognized eleven times, including in 2019, by The Ethisphere® Institute as one of the “World’s Most Ethical Companies.” We have adopted a Code of Ethics and Business Conduct, which applies to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer. We have also adopted a Code of Ethics and Business Conduct for Members of the Board of Directors (the “Board Code of Ethics”) and a Code of Ethics and Political Compliance. These codes require that all of our employees and directors engage in honest and ethical conduct in performing their duties, provide guidelines for the ethical handling of actual or apparent conflicts of interest, and provide mechanisms to report unethical conduct. Directors certify compliance with the Board Code of Ethics annually. We provide our employees with a comprehensive and ongoing educational program, including courses on our Code of Ethics and Business Conduct, potential conflicts of interest, privacy and information protection, marketplace conduct, and ethical decision- making. Hotlines and online portals have been established for employees, vendors, or others to raise ethical concerns and employees are encouraged to speak up whenever they have an ethics-oriented question or problem.
POLITICAL ACTIVITIES The Nominating Committee reviews the company's political and lobbying policies and reports of political contributions annually. As part of our Code of Ethics and Business Conduct, we do not make corporate contributions to political candidates or parties, and we require that no portion of our dues paid to trade associations be used for political contributions. We do allow the use of corporate resources for non-partisan political activity, including voter education and registration. We have two political action committees (“PACs”), The Hartford Advocates Fund and The Hartford Advocates Federal Fund. The PACs are solely funded by voluntary contributions from eligible employees in management-level roles. The PACs support candidates for federal and state office who are interested in understanding insurance issues and developing public policy to address them. Our website includes information on: (1) contributions made by The Hartford's PACs; (2) our policy on corporate contributions for political purposes; and (3) annual dues, assessments and contributions of $25,000 or more to trade associations and coalitions. To learn more, please access our 2018 Political Activities Report, at https://ir.thehartford.com/corporate-governance/political-engagement.
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SUSTAINABILITY PRACTICES We believe that having a positive impact on the world is the right thing to do and a business imperative. Fostering and safeguarding human achievement has been our business for over two hundred years, and sustainability considerations are integral to our strategy. We recognize that people want to work for, invest in, and buy from an organization that shares their values. Our sustainability efforts address economic, environmental and social impacts as highlighted in four key areas:
ENVIRONMENT SOCIAL GOVERNANCE
Environmental Communities Diversity Ethics & Stewardship & Giving & Inclusion Governance As an insurance company, We help individuals and We are committed to We believe that doing the we understand the risks that communities prevail by building an inclusive and right thing every day is core environmental challenges building safe, strong and engaging culture where to our character, and we are present to people and successful neighborhoods people are respected for proud of our reputation for communities. As stewards of through targeted who they are, recognized for being a company that places the environment, we are philanthropic investments, how they contribute and ethics and integrity above all committed to mitigating by partnering with like- celebrated for growth and else. climate change and reducing minded national and local exceptional performance. our carbon footprint organizations, and by We value the diversity of our incrementally each year. harnessing the power of our employees' skills and life more than 18,500 experiences and invest employees to engage in their deeply in their development communities. so they can deliver on our strategy and propel our company forward.
Our sustainability strategy is built around measurable goals intended to both create long-term shareholder value and contribute positively to society at large. For example, by 2022 some of our goals are to: • Reduce non-biodegradable non-recyclable solid waste by 20% and eliminate the use of Styrofoam; • Reduce our facilities' use of both energy and water by 15%; • Double the percentage of hybrid or electric fleet vehicles, and move to 100% electric for campus shuttles and security vehicles; • Rank in the top quartile in the insurance industry for representation of women and people of color through three levels of reporting to the CEO • Provide one million small business customers and their employees with access to addiction prevention and educational resources to combat the opioid epidemic; and • Bring the total number of children deputized through our signature Junior Fire Marshal® program to more than 115 million. To learn more, please access our Sustainability Highlight Report, which presents our sustainability goals and provides data on our sustainability practices and achievements, and our Global Reporting Initiative (GRI) G4 Response, which offers greater detail on our sustainability activities at: https://www.thehartford.com/about-us/corporate-sustainability.
ESG Governance Under our Corporate Governance Guidelines, the full Board has oversight responsibility for The Hartford's corporate reputation and ESG activities. The Board receives a "deep dive" report on an ESG topic annually. The first such report was a deep dive on climate change and severe weather in February 2018, which, among other things, looked at (1) how the company is reducing its environmental impact; (2) how the company helps its customers reduce their environmental impact through its products, services and investments; and (3) how the company's Enterprise Risk Management function monitors and manages the risks associated with climate change and severe weather. In addition to the Board's oversight responsibility of substantive ESG topics, the Nominating Committee retains oversight of the governance framework and processes related to ESG activities. This includes oversight of the company's Sustainability Governance Committee, a management committee comprised of senior leaders that sets and helps drive execution of the company's sustainability strategy. The Sustainability Governance Committee meets at least four times each year and reports up to the full Board at least annually. In 2018, the Sustainability Governance Committee met six times.
2019 Proxy Statement 21 BOARD AND GOVERNANCE MATTERS
DIRECTOR COMPENSATION We use a combination of cash and stock-based compensation to attract and retain qualified candidates to serve on the Board. Members of the Board who are employees of The Hartford or its subsidiaries are not compensated for service on the Board or any of its committees. For the 2018-2019 Board service year, non-management directors received an annual cash retainer of $100,000 and a $160,000 annual equity grant of restricted stock units (“RSUs”). Annual cash and equity retainer amounts have not increased since 2014. ANNUAL CASH FEES Cash compensation for the 2018-2019 Board service year beginning on May 16, 2018, the date of the 2018 Annual Meeting of Shareholders, and ending on May 15, 2019, the date of the 2019 Annual Meeting, is set forth below.
Annual Cash Compensation(1) Director Compensation Program Annual Retainer $100,000 Chair Retainer $25,000 – Audit $25,000 – FIRMCO, Compensation $15,000 – Nominating Lead Director Retainer $35,000 (1) Directors may elect to defer all or part of the annual Board cash retainer and any Committee Chair or Lead Director cash retainer into RSUs, to be distributed as common stock following the end of the director’s Board service.
ANNUAL EQUITY GRANT In 2018, directors received an annual equity grant of $160,000, payable solely in RSUs pursuant to The Hartford 2014 Incentive Stock Plan.
The RSUs vest and are distributed as common stock at the end of the Board service year, unless the director has elected to defer distribution until the end of Board service. Directors may not sell, exchange, transfer, pledge, or otherwise dispose of the RSUs. Resignation from the Board will result in a forfeiture of all unvested RSUs at the time of such resignation unless otherwise determined by the Compensation Committee. However, RSUs will automatically vest upon the occurrence of any of the following events: (a) retirement from service on the Board in accordance with our Corporate Governance Guidelines; (b) death of the director; (c) total disability of the director, as defined in the 2014 Incentive Stock Plan; (d) resignation by the director under special circumstances where the Compensation Committee, in its sole discretion, consents to waive the remaining vesting period; or (e) a “change of control,” as defined in the 2014 Incentive Stock Plan. Outstanding RSUs are credited with dividend equivalents equal to dividends paid to holders of our common stock. OTHER We provide each director with $100,000 of group life insurance coverage and $750,000 of accidental death and dismemberment and permanent total disability coverage while he or she serves on the Board. We also reimburse directors for travel and related expenses they incur in connection with their Board and committee service. STOCK OWNERSHIP GUIDELINES AND RESTRICTIONS ON TRADING The Board has established stock ownership guidelines for each director to obtain, by the third anniversary of the director’s appointment to the Board, an ownership position in our common stock equal to five times his or her total annual cash retainer (including cash retainers paid for committee chair or Lead Director responsibilities). All directors with at least three years of Board service met the stock ownership guidelines as of December 31, 2018. Our insider trading policy prohibits all hedging activities by directors, and permits directors to engage in transactions involving The Hartford's equity securities only through: (1) a pre-established trading plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934; or (2) during “trading windows” of limited duration following the filing with the SEC of our periodic reports on Forms 10-K and 10-Q and following a determination by the company that the director is not in possession of material non-public information. In addition, our insider trading policy grants us the ability to suspend trading of our equity securities by directors.
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DIRECTOR SUMMARY COMPENSATION TABLE We paid the following compensation to directors for the fiscal year ended December 31, 2018.
Fees Earned or All Other Paid in Cash Stock Awards Compensation Total Name ($)(1) ($)(2) ($) ($) Robert Allardice 125,000 160,000 2,745 287,745 Carlos Dominguez(3) 125,000 200,000 951 325,951 Trevor Fetter 135,000 160,000 789 295,789 Stephen P. McGill(4) 100,000 226,700 1,253 327,953 Kathryn A. Mikells 100,000 160,000 902 260,902 Michael G. Morris 115,000 160,000 2,745 277,745 Thomas Renyi 100,000 160,000 2,745 262,745 Julie G. Richardson 125,000 160,000 789 285,789 Teresa W. Roseborough 100,000 160,000 1,065 261,065 Virginia P. Ruesterholz 125,000 160,000 789 285,789 Greig Woodring(4) 100,000 226,700 1,797 328,497 (1) Directors Mikells, Renyi and Richardson each elected to receive vested RSUs in lieu of cash compensation. The vested RSUs will be distributed as common stock following the end of the director's Board service. (2) These amounts reflect the aggregate grant date fair value of RSU awards granted during the fiscal year ended December 31, 2018. (3) Upon appointment to the Board on February 21, 2018, Mr. Dominguez received a pro-rated annual cash retainer of $25,000 which is included with the 2018-2019 cash retainer of $100,000 he received in May 2018. Mr. Dominguez also received a pro- rated restricted stock unit award for the 2017-2018 Board service year valued at $40,000 based on a closing stock price of $53.81 on February 27, 2018; this award vested on May 16, 2018, the last day of the 2017-2018 Board year. (4) Mr. McGill and Mr. Woodring each received a pro-rated restricted stock unit award valued at $66,700 on February 27, 2018, the first day of the Company’s scheduled trading window following the filing of the Company’s 2017 annual report on Form 10- K. The number of RSUs subject to the award was determined by dividing the grant value of $66,700 by $53.81, the closing market price per share of The Hartford common stock on the grant date of February 27, 2018. These awards fully vested on May 16, 2018, the last day of the 2017-2018 Board year. Mr. McGill elected to defer receipt of his RSU award until the end of his Board service.
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DIRECTOR COMPENSATION TABLE—OUTSTANDING EQUITY The following table shows the number and value of unvested equity awards outstanding as of December 31, 2018. The value of these unvested awards is calculated using a market value of $44.45, the NYSE closing price per share of our common stock on December31, 2018. The numbers have been rounded to the nearest whole dollar or share.
Stock Awards(1) Number Market Value of Shares or of Shares or Units of Stock Units of Stock Stock That Have Not That Have Not (2) (3) Name Grant Date Vested (#) Vested ($) Robert Allardice 7/30/2018 3,056 135,839 Carlos Dominguez 7/30/2018 3,056 135,839 Trevor Fetter 7/30/2018 3,056 135,839 Stephen P. McGill 7/30/2018 3,056 135,839 Kathryn A. Mikells 7/30/2018 3,056 135,839 Michael G. Morris 7/30/2018 3,056 135,839 Thomas Renyi 7/30/2018 3,056 135,839 Julie G. Richardson 7/30/2018 3,056 135,839 Teresa W. Roseborough 7/30/2018 3,056 135,839 Virginia P. Ruesterholz 7/30/2018 3,056 135,839 Greig Woodring 7/30/2018 3,056 135,839 (1) Additional stock ownership information is set forth in the beneficial ownership table on page 65. (2) The RSUs were granted on July 30, 2018, the first day of the scheduled trading window following the filing of our Form 10-Q for the quarter ended June 30, 2018. (3) The number of RSUs for each award was determined by dividing $160,000 by $52.67, the closing price of our common stock as reported on the NYSE on the date of the award. The RSUs will vest on May 15, 2019, and will be distributed at that time in shares of the company’s common stock unless the director had previously elected to defer distribution of all or a portion of his or her annual RSU award until the end of Board service. Directors Fetter, McGill, Mikells, Renyi and Richardson have made elections to defer distribution of 100% of their RSU award.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Board has adopted a Policy for the Review, Approval or Ratification of Transactions with Related Persons. This policy requires our directors and Section 16 executive officers to promptly disclose any actual or potential material conflict of interest to the Chair of the Nominating Committee and the Chairman for evaluation and resolution. If the transaction involves a Section 16 executive officer or an immediate family member of a Section 16 executive officer, the matter must also be disclosed to our General Auditor or Director of Compliance for evaluation and resolution. We did not have any transactions requiring review under this policy during 2018. COMMUNICATING WITH THE BOARD Shareholders and other interested parties may communicate with directors by contacting Donald C. Hunt, Vice President and Corporate Secretary of The Hartford Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155. The Corporate Secretary will relay appropriate questions or messages to the directors. Only items related to the duties and responsibilities of the Board will be forwarded. Anyone interested in raising a complaint or concern regarding accounting issues or other compliance matters directly with the Audit Committee may do so anonymously and confidentially by contacting EthicsPoint:
By internet By telephone By mail
The Hartford c/o EthicsPoint Visit 24/7 1-866-737-6812 (U.S. and Canada) P.O. Box 230369 www.ethicspoint.com 1-866-737-6850 (all other countries) Portland, Oregon 97281
2019 Proxy Statement 25 BOARD AND GOVERNANCE MATTERS
DIRECTOR NOMINEES Eleven individuals will be nominated for election as directors at the Annual Meeting. The terms of office for each elected director will run until the next annual meeting of shareholders and until his or her successor is elected and qualified, or until his or her earlier death, retirement, resignation or removal from office. In accordance with our Corporate Governance Guidelines, each director has submitted a contingent, irrevocable resignation that the Board may accept if the director fails to receive more votes “for” than “against” in an uncontested election. In that situation, the Nominating Committee (or another committee comprised of at least three non-management directors) would make a recommendation to the Board about whether to accept or reject the resignation. The Board, not including the subject director, will act on this recommendation within 90 days from the date of the Annual Meeting, and we will publicly disclose the Board's decision promptly thereafter. If for any reason a nominee should become unable to serve as a director, either the shares of common stock represented by valid proxies will be voted for the election of another individual nominated by the Board, or the Board will reduce the number of directors in order to eliminate the vacancy. The Nominating Committee believes that each director nominee has an established record of accomplishment in areas relevant to our business and objectives, and possesses the characteristics identified in our Corporate Governance Guidelines as essential to a well-functioning and deliberative governing body, including integrity, independence and commitment. Other experience, qualifications and skills the Nominating Committee looks for include the following:
Experience / Qualification Relevance to The Hartford Leadership Experience in significant leadership positions provides us with new insights, and demonstrates key management disciplines that are relevant to the oversight of our business. Insurance and Financial Extensive experience in the insurance and financial services industries provides an understanding of the Services Industries complex regulatory and financial environment in which we operate and is highly important to strategic planning and oversight of our business operations. Digital/Technology Digital and technology expertise is important in light of the speed of digital progress and the development of disruptive technologies both in the insurance industry and more broadly. Corporate Governance An understanding of organizations and governance supports management accountability, transparency and protection of shareholder interests. Risk Management Risk management experience is critical in overseeing the risks we face today and those emerging risks that could present in the future. Finance and Accounting Finance and accounting experience is important in understanding and reviewing our business operations, strategy and financial results. Business Operations An understanding of business operations and processes, and experience making strategic decisions, are and Strategic Planning critical to the oversight of our business, including the assessment of our operating plan and business strategy. Regulatory An understanding of laws and regulations is important because we operate in a highly regulated industry and we are directly affected by governmental actions. Talent Management We place great importance on attracting and retaining superior talent, and motivating employees to achieve desired enterprise and individual performance objectives.
The Nominating Committee believes that our current Board is a diverse group whose collective experiences and qualifications bring a variety of perspectives to the oversight of The Hartford. All of our directors hold, or have held, senior leadership positions in large, complex corporations and/or charitable and not-for-profit organizations. In these positions, they have demonstrated their leadership, intellectual and analytical skills and gained deep experience in core disciplines significant to their oversight responsibilities on our Board. Their roles in these organizations also permit them to offer senior management a diverse range of perspectives about the issues facing a complex financial services company like The Hartford. Key qualifications, skills and experience our directors bring to the Board that are important to the oversight of The Hartford are identified and described below.
26 www.thehartford.com BOARD AND GOVERNANCE MATTERS
ROBERT B. ALLARDICE, III INDEPENDENT Professional highlights: Director since: 2008 • Consultant to Chairman of Supervisory Board, Age: 72 Deutsche Bank (2002-2006) • Regional Chief Executive Officer of North and South Committees: America, Advisory Director, Deutsche Bank Americas • Audit Holding Company (1994-1999) • FIRMCo (Chair) • Consultant, Smith Barney (1993-1995) • Founder of Merger Arbitrage Department, Chief Other public company directorships: Operating Officer of Equity Department, Founding • Ellington Residential Mortgage REIT member of Finance Committee, Morgan Stanley & (2013-present) Company (1974-1993) • GasLog Partners LP (2014-present)
Skills and qualifications relevant to The Hartford: Mr. Allardice has served as a senior leader for multiple large, complex financial institutions, including as regional chief executive officer of Deutsche Bank Americas Holding Corporation, North and South America. He brings to the Board over 35 years of experience in the financial services industry, including at the senior executive officer level. His experience leading capital markets- based businesses is relevant to the oversight of our investment management company and corporate finance activities. In addition, Mr. Allardice has experience in a highly regulated industry, including interfacing with regulators and establishing governance frameworks relevant to the oversight of our business. He has extensive corporate governance experience from service as a director and audit committee member for several large companies, including seven years as Chairman of The Hartford's Audit Committee.
CARLOS DOMINGUEZ INDEPENDENT Professional highlights: Director since: 2018 • Sprinklr Inc. Age: 60 – President (2015-present) – Chief Operating Officer (2015-2018) Committees: • Cisco Systems, Inc. • FIRMCo – Senior Vice President, Office of the Chairman and • Nominating Chief Executive Officer (2008-2015) – Senior Vice President, Worldwide Service Other public company directorships: Provider Operations (2004-2008) • Medidata Solutions, Inc. (2008- – Vice President, U.S. Network Services Provider present) Sales (1999-2004) – Positions of increasing responsibility in operations and sales (1992-1999)
Skills and qualifications relevant to The Hartford: Mr. Dominguez has more than 30 years of enterprise technology experience. He brings to the Board extensive and relevant digital expertise as the company focuses on data analytics and digital capabilities to continuously improve the way it operates and delivers value to customers. As President and Chief Operating Officer of Sprinklr Inc., Mr. Dominguez guides strategic direction and leads the marketing, sales, services, and partnerships teams for a leading social media management company. Prior to joining Sprinklr, he spent seven years as a technology representative for the Chairman and CEO of Cisco Systems, Inc. In this role, Mr. Dominguez engaged with senior executives in the Fortune 500 and government leaders worldwide, sharing insights on how to leverage technology to enhance and transform their businesses. In addition, he led the creation and implementation of Cisco's Innovation Academy, which delivered innovation content to Cisco employees globally.
2019 Proxy Statement 27 BOARD AND GOVERNANCE MATTERS
TREVOR FETTER INDEPENDENT Professional highlights: Director since: 2007 • Senior Lecturer, Harvard Business School (Jan. 2019- Age: 59 present) • Tenet Healthcare Corporation Committees: – Chairman (2015-2017) • Compensation – Chief Executive Officer (2003-2017) • FIRMCo – President (2002-2017) • Chairman and Chief Executive Officer, Broadlane, Inc. Other public company directorships: (2000-2002) • Tenet Healthcare Corporation • Chief Financial Officer, Tenet Healthcare Corporation (2003-2017) (1996-2000)
Skills and qualifications relevant to The Hartford: Mr. Fetter has nearly two decades of experience as chief executive officer of multiple publicly traded companies. He has demonstrated his ability to lead the management, strategy and operations of complex organizations. As a Senior Lecturer at Harvard Business School, he teaches leadership and corporate accountability. He brings to the Board significant experience in corporate finance and financial reporting acquired through senior executive finance roles, including as a chief financial officer of a publicly traded company. He has experience navigating complex regulatory frameworks as the president and chief executive officer of a highly-regulated, publicly traded healthcare company. In addition, Mr. Fetter serves as The Hartford's lead director, providing strong independent Board leadership. He also has extensive corporate governance expertise from service as director of large public companies, including four years as Chairman of the Board’s Nominating and Corporate Governance Committee.
STEPHEN P. McGILL INDEPENDENT Professional highlights: Director since: 2017 • Aon plc Age: 60 – Group President, Aon plc and Chairman and Chief Executive Officer, Risk Solutions (2012-2017) Committees: – Chairman and Chief Executive Officer, Aon Risk • Compensation Solutions (2008-2012) • FIRMCo – Chief Executive Officer, Aon Risk Services, Americas (2007-2008) Other public company directorships: – Chief Executive Officer, Aon Global (2005-2007) • None • Jardine Lloyd Thompson Group plc – Chief Executive Officer (2002-2005) – Deputy Chief Executive Officer (2001-2002) – Director (1997-2001)
Skills and qualifications relevant to The Hartford: Mr. McGill has over 25 years of insurance industry experience. With his deep understanding of the insurance industry, Mr. McGill brings significant and relevant risk management, regulatory and business expertise to the Board. As the leader of an international risk management and reinsurance brokerage, Mr. McGill is able to provide the Board with insights into complex distribution channels, and what it takes to succeed in the marketplace and profitably grow the company’s businesses. In addition, Mr. McGill brings an international perspective to the Board. He serves on the International Advisory Board of British American Business, and is past president of the Insurance Institute of London. In 2014, Mr. McGill was awarded a Commander of the British Empire (CBE) by Queen Elizabeth II in recognition for his exceptional service to the insurance industry and also for humanitarian services.
28 www.thehartford.com BOARD AND GOVERNANCE MATTERS
KATHRYN A. MIKELLS INDEPENDENT Professional highlights: Director since: 2010 • Chief Financial Officer, Diageo plc (2015-present) Age: 53 • Chief Financial Officer, Xerox Corporation (2013-2015) Committees: • Chief Financial Officer, ADT Security Services • Audit (2012-2013) • FIRMCo • Chief Financial Officer, Nalco Company (2010-2011) • UAL Corporation (parent of United Airlines) Other public company directorships: – Chief Financial Officer, Executive Vice President • Diageo plc (2015-present) (2008-2010) – Head of Investor Relations (2007-2008) – Vice President, Financial Planning and Analysis (2006-2007) – Treasurer (2005-2006) Skills and qualifications relevant to The Hartford: Ms. Mikells has extensive experience in a variety of executive management positions, with a focus on leading the finance function of global organizations. She has significant experience in corporate finance and financial reporting acquired through senior executive roles in finance, including as a chief financial officer of multiple publicly traded companies. Ms. Mikells brings to the Board strong management and transformational skills, demonstrated during ADT’s successful transition into an independent company, as well as significant mergers and acquisitions experience acquired through the sale of Naclo to Ecolab and the merger of United Airlines with Continental Airlines. She has demonstrated risk management skills as a leader responsible for financial and corporate planning for domestic and international organizations. In addition, Ms. Mikells has strong talent development skills acquired through years of leading global finance divisions.
MICHAEL G. MORRIS INDEPENDENT Professional highlights: Director since: 2004 • American Electric Power Company, Inc. Age: 72 – Non-Executive Chairman (2012-2014) – Chairman, President and Chief Executive Officer Committees: (2004-2011) • Audit • Chairman, President and Chief Executive Officer, • FIRMCo Northeast Utilities (1997-2003) • Nominating Other public company directorships: • Alcoa Corporation (2002-present) • American Electric Power Company, Inc. (2004-2014) • L Brands, Inc. (2012-present) • Spectra Energy Corp. (2013-2017) • Spectra Energy Partners GP, LLC (2017-2018) Skills and qualifications relevant to The Hartford: Mr. Morris has over two decades of experience as chief executive officer and president of multiple publicly traded companies in the highly regulated energy industry. He brings to the Board significant experience as a senior leader responsible for the strategic direction and management of complex business operations. In addition, he has experience overseeing financial matters in his roles as chairman, president and CEO of AEP, and as chairman, president and CEO of Northeast Utilities. He has proven skills interacting with governmental and regulatory agencies acquired through years of leading various multi-national organizations in the energy and gas industries, serving on the U.S. Department of Energy’s Electricity Advisory Board, the National Governors Association Task Force on Electricity Infrastructure, the Institute of Nuclear Power Operations and as Chair of the Business Roundtable’s Energy Task Force. In addition, he has corporate governance expertise from service as a director and member of the audit, compensation, finance, risk management and nominating/governance committees of various publicly traded companies.
2019 Proxy Statement 29 BOARD AND GOVERNANCE MATTERS
JULIE G. RICHARDSON INDEPENDENT Professional highlights: Director since: 2014 • Providence Equity Partners LLC Age: 55 – Senior Advisor (2012-2014) – Managing Director and Head of New York Private Committees: Equity Team (2003-2012) • Audit (Chair) • Managing Director and Head of Telecommunications, • FIRMCo Media and Technology Investment Banking Group, JPMorgan Chase &Co. (1998-2003) Other public company directorships: • Managing Director, Merrill Lynch (1987-1998) • VEREIT, Inc. (2015-present); • Yext, Inc. (2015-present) • Arconic Inc. (2016-2018); • UBS Group AG (2017-present)
Skills and qualifications relevant to The Hartford: Ms. Richardson has over 25 years of financial services experience as a banker and investment professional at some of the world’s largest financial services firms. Previously, she led management of Providence Equity Partners' New York Office as partner and headed JPMorgan's Global Telecommunications, Media and Technology group. In these roles, Ms. Richardson demonstrated skills leading and managing large, global teams. Ms. Richardson has significant experience in financial analysis and capital markets acquired as a senior leader at global financial services institutions. She also has extensive risk management skills acquired through a long and distinguished career as a leader in both private and public financial investment organizations.
TERESA WYNN ROSEBOROUGH INDEPENDENT Professional highlights: Director since: 2015 • Executive Vice President, General Counsel and Age: 60 Corporate Secretary, The Home Depot (2011-present) • Senior Chief Counsel Compliance & Litigation and Committees: Deputy General Counsel, MetLife, Inc. (2006-2011) • Compensation • Partner, Sutherland, Asbill & Brennan LLP • FIRMCo (1996-2006) • Nominating • Deputy Assistant Attorney General, Office of Legal Counsel, U.S. Department of Justice (1994-1996) Other public company directorships: • None
Skills and qualifications relevant to The Hartford: Ms. Roseborough has over two decades of experience as a senior legal advisor in government, law firm and corporate settings. She has experience as a senior leader responsible for corporate compliance matters at major publicly traded companies and as an attorney focused on complex litigation matters, including before the U.S. Supreme Court. She brings to the Board extensive regulatory experience acquired as a government attorney providing legal counsel to the White House and all executive branch agencies, as well as corporate governance expertise from service as General Counsel and Corporate Secretary of a publicly- traded company. Ms. Roseborough also has in-depth knowledge of the financial services industry gained through senior legal positions at MetLife, Inc., a major provider of insurance and employee benefits.
30 www.thehartford.com BOARD AND GOVERNANCE MATTERS
VIRGINIA P. RUESTERHOLZ INDEPENDENT Professional highlights: Director since: 2013 • Verizon Communications, Inc. Age: 57 – Executive Vice President (Jan. 2012-Jul. 2012) – President, Verizon Services Operations Committees: (2009-2011) • Compensation (Chair) – President, Verizon Telecom (2006-2008) • FIRMCo – President, Verizon Partner Solutions (2005-2006) • Nominating • Positions of increasing responsibility in operations, sales and customer service, New York Telephone Other public company directorships: (1984-2005) • Frontier Communications Corporation (2013-present) • Bed Bath & Beyond Inc. (2017- present) Skills and qualifications relevant to The Hartford: Ms. Ruesterholz has held a variety of senior executive positions, including as Executive Vice President at Verizon Communications and President of the former Verizon Services Operations. As a senior leader of a Fortune 100 company, she has held principal oversight responsibility for key strategic initiatives, navigated the regulatory landscape of large-scale operations, and led an organization with over 25,000 employees. Ms. Ruesterholz brings to the Board vast experience in large-scale operations, including sales and marketing, customer service, technology and risk management. Ms. Ruesterholz also brings to the Board substantial financial and strategic expertise acquired as president of various divisions within Verizon and is currently a Trustee of the Board of Stevens Institute of Technology where she served as Chairman of the Board from 2013-2018.
CHRISTOPHER J. SWIFT Professional highlights: Director since: 2014 • The Hartford Financial Services Group, Inc. Age: 58 – Chairman (2015-present) – Chief Executive Officer (2014-present) Committees: – Executive Vice President and Chief Financial • FIRMCo Officer (2010-2014) • Vice President and Chief Financial Officer, Life and Other public company directorships: Retirement Services, American International Group, • None Inc. (2003-2010) • Partner, KPMG, LLP (1999-2003) • Executive Vice President, Conning Asset Management, General American Life Insurance Company (1997-1999) • KPMG, LLP – Partner (1993-1997) – Auditor (1983-1993)
Skills and qualifications relevant to The Hartford: Mr. Swift has over 30 years of experience in the financial services industry, with a focus on insurance. As Chairman and CEO of The Hartford, he brings to the Board unique insight and knowledge into the complexities of our businesses, relationships, competitive and financial positions, senior leadership and strategic opportunities and challenges. Mr. Swift leads the execution of our strategy, directs capital management actions and strategic investments, and oversees the continuous strengthening of the company’s leadership pipeline. As Chief Financial Officer, he led the team that developed the company’s go-forward strategy. He is a certified public accountant with experience working at a leading international accounting firm, including serving as head of its Global Insurance Industry Practice.
2019 Proxy Statement 31 BOARD AND GOVERNANCE MATTERS
GREIG WOODRING INDEPENDENT Professional highlights: Director since: 2017 • Reinsurance Group of America Age: 67 – President and Chief Executive Officer (1993-2016) Committees: • General American Life Insurance Company • Audit – Executive Vice President (1992-1993) • FIRMCo – Head of Reinsurance (1986-1992) – Positions of increasing responsibility (1979-1986) Other public company directorships: • Reinsurance Group of America, Incorporated (1993-2016) • Sun Life Financial Inc. (Jan. - April 2017)
Skills and qualifications relevant to The Hartford: Mr. Woodring brings significant and valuable insurance industry and leadership experience to the Board, demonstrated by his more than two decades leading Reinsurance Group of America, Incorporated (RGA), a leading life reinsurer with global operations. During his tenure, RGA grew to become one of the world’s leading life reinsurers, with offices in 26 countries and annual revenues of more than $10 billion. Mr. Woodring has demonstrated skills in areas that are relevant to the oversight of the company, including risk management, finance, and operational expertise. Mr. Woodring serves as Chairman of the International Insurance Society, and is a fellow of the Society of Actuaries and a member of the American Academy of Actuaries.
32 www.thehartford.com AUDIT MATTERS
ITEM 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM In accordance with its Board-approved charter, the Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent external audit firm retained to audit the company’s financial statements. The Audit Committee has appointed Deloitte & Touche LLP (“D&T”) as the company’s independent registered public accounting firm for the fiscal year ending December 31, 2019. D&T has been retained as the company’s independent registered public accounting firm since 2002. In order to assure continuing auditor independence, the Audit Committee periodically considers whether there should be a regular rotation of the independent registered public accounting firm.
In selecting D&T for fiscal year 2019, the Audit Committee carefully considered, among other items: • The professional qualifications of D&T, the lead audit partner and other key engagement partners; • D&T’s depth of understanding of the company’s businesses, accounting policies and practices and internal control over financial reporting; • D&T’s quality controls and its processes for maintaining independence; and • The appropriateness of D&T’s fees for audit and non-audit services. The Audit Committee oversees and is ultimately responsible for the outcome of audit fee negotiations associated with the company’s retention of D&T. In addition, when a rotation of the audit firm’s lead engagement partner is mandated, the Audit Committee and its chairperson are involved in the selection of D&T’s new lead engagement partner. The members of the Audit Committee and the Board believe that the continued retention of D&T to serve as the company’s independent external auditor is in the best interests of the company and its investors.
Although shareholder ratification of the appointment of D&T is not required, the Board requests ratification of this appointment by shareholders. If shareholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain D&T.
Representatives of D&T will attend the Annual Meeting, will have the opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions.
The Board recommends that shareholders vote “FOR” the ratification of the appointment of Deloitte & Touche LLP as ✓ our independent registered public accounting firm for the fiscal year ending December 31, 2019.
FEES OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The following table presents fees for professional services provided by D&T, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, the “Deloitte Entities”) for the years ended December 31, 2018 and 2017.
Year Ended December 31, 2018 Year Ended December 31, 2017 Audit fees $ 10,171,000 $ 13,881,000 Audit-related fees(1) $ 1,576,000 $ 1,356,000 Tax fees(2) $ 182,000 $ 184,000 All other fees(3) $ 592,000 $ — Total $ 12,521,000 $ 15,421,000
(1) Fees for the years ended December 31, 2018 and 2017 principally consisted of procedures related to regulatory filings and acquisition or divestiture related services. (2) Fees for the years ended December 31, 2018 and 2017 principally consisted of tax compliance services. (3) Fees for the year ended December 31, 2018 in this category pertain to an engagement for permissible consulting services with an entity previously used by the company, but acquired by D&T in the interim and reengaged in 2018. The Audit Committee reviewed the non-audit services provided by the Deloitte Entities during 2018 and 2017 and concluded that they were compatible with maintaining the Deloitte Entities’ independence.
2019 Proxy Statement 33 AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES The Audit Committee has established policies requiring pre-approval of audit and non-audit services provided by the independent registered public accounting firm. These policies require that the Audit Committee pre-approve specific categories of audit and audit-related services annually. The Audit Committee approves categories of audit services and audit-related services, and related fee budgets. For all pre- approvals, the Audit Committee considers whether such services are consistent with the rules of the SEC and the PCAOB on auditor independence. The independent registered public accounting firm and management report to the Audit Committee on a timely basis regarding the services rendered by, and actual fees paid to, the independent registered public accounting firm to ensure that such services are within the limits approved by the Audit Committee. The Audit Committee’s policies require specific pre- approval of all tax services, internal control-related services and all other permitted services on an individual project basis. As provided by its policies, the Audit Committee has delegated to its Chair the authority to address any requests for pre-approval of services between Audit Committee meetings, up to a maximum of $100,000. The Chair must report any pre-approvals to the full Audit Committee at its next scheduled meeting. REPORT OF THE AUDIT COMMITTEE The Audit Committee currently consists of five independent directors, each of whom is “financially literate” within the meaning of the listing standards of the NYSE and an “audit committee financial expert” within the meaning of the SEC’s regulations. The Audit Committee oversees The Hartford's financial reporting process on behalf of the Board. Management has the primary responsibility for establishing and maintaining adequate internal financial controls, for preparing the financial statements and for the public reporting process. Deloitte & Touche LLP (“D&T”), our independent registered public accounting firm for 2018, is responsible for expressing opinions that (1) our consolidated financial statements present fairly, in all material respects, the financial position, results of operations and cash flows in conformity with generally accepted accounting principles and (2) we maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018. In this context, the Audit Committee has: (1) Reviewed and discussed the audited financial statements for the year ended December 31, 2018 with management; (2) Discussed with D&T the matters required to be discussed by Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 1301, Communications with Audit Committees; and (3) Received the written disclosures and the letter from D&T required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the Audit Committee concerning independence, and has discussed with D&T the independent accountant’s independence. Based on the review and discussions described in this report, the Audit Committee recommended to the Board that the audited financial statements should be included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for filing with the SEC. Report Submitted: February 21, 2019 Members of the Audit Committee: Julie G. Richardson, Chair Robert B. Allardice, III Kathryn A. Mikells Michael G. Morris Greig Woodring
34 www.thehartford.com COMPENSATION MATTERS
ITEM 3 ADVISORY APPROVAL OF 2018 COMPENSATION OF NAMED EXECUTIVE OFFICERS Section 14A of the Securities Exchange Act of 1934, as amended, provides our shareholders with the opportunity to vote to approve, on an advisory basis, the compensation of our NEOs as disclosed in this proxy statement in accordance with the rules of the SEC. We currently intend to hold these votes on an annual basis.
As described in detail in the Compensation Discussion and Analysis beginning on page 36, our executive compensation program is designed to promote long-term shareholder value creation and support our strategy by: (1) encouraging profitable growth consistent with prudent risk management, (2) attracting and retaining key talent, and (3) appropriately aligning pay with short- and long-term performance. The advisory vote on this resolution is not intended to address any specific element of compensation; rather, it relates to the overall compensation of our NEOs, as well as the philosophy, policies and practices described in this proxy statement. You have the opportunity to vote for, against or abstain from voting on the following resolution relating to executive compensation:
RESOLVED, that the shareholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the compensation tables and the narrative discussion contained in this proxy statement.
Because the required vote is advisory, it will not be binding upon the Board. The Compensation Committee will, however, take into account the outcome of the vote when considering future executive compensation arrangements.
The Board recommends that shareholders vote “FOR” the above resolution to approve our compensation of named ✓ executive officers as disclosed in the Compensation Discussion and Analysis, the compensation tables and the narrative discussion contained in this proxy statement.
2019 Proxy Statement 35 COMPENSATION DISCUSSION AND ANALYSIS This section explains our compensation philosophy, summarizes our compensation programs and reviews compensation decisions for the Named Executive Officers (“NEOs”) listed below. It also describes programs that apply to the CEO and all of his executive direct reports, other than senior executives directly supporting our Mutual Funds segment who have an independent compensation program (collectively, “Senior Executives”).
Name Title Christopher Swift Chairman and Chief Executive Officer Beth Costello Executive Vice President and Chief Financial Officer Douglas Elliot President Brion Johnson Executive Vice President and Chief Investment Officer; President of HIMCO William Bloom Executive Vice President, Operations, Technology & Data
EXECUTIVE SUMMARY
PERFORMANCE HIGHLIGHTS
Our 2018 financial results were excellent, despite elevated catastrophe losses for the second consecutive year. Full year net income available to common stockholders was $1,801 million, core earnings* were $1,575 million, and our net income and core earnings return on equity ("ROE)*† were 13.7% and 11.6%, respectively, well in excess of our cost of capital. 2018 was also a year of several significant accomplishments, including: • The continued integration of Aetna's U.S. group life and disability business, • The announcement of our agreement to acquire The Navigators Group, Inc. ("Navigators"), a global specialty insurance company, and • The close of the sale of Talcott Resolution. We also made notable progress on our innovation agenda, including the launch of our Small Business Innovation Lab to design and test new products and business models to meet the changing needs of our small business customers, and the purchase of Y-Risk, a company specializing in the sharing and on-demand economy. During the year we also continued to make investments in our people, processes, data, and technology. As we enter 2019, our strategic priorities remain consistent and we are focused on realizing the full potential of the recent acquisitions. Expanding product capabilities and risk appetite are key pillars of our strategy; with the Group Benefits and Navigators acquisitions, the near-term focus is on successfully integrating the acquisitions and maximizing our combined potential, including deepening our distribution relationships and meeting a broader array of customer needs.
Highlighted below are year-over-year comparisons of our net income and core earnings performance and our three-year ROE and core earnings ROE results. Core earnings is the primary determinant of our annual incentive plan funding, as described on page 40, and average annual Core Earnings ROE over a three-year performance period is the metric used for 50% of performance shares granted to Senior Executives, as described on page 41 (in each case, as adjusted for compensation purposes).
YEAR-OVER-YEAR PERFORMANCE THREE-YEAR PERFORMANCE
Net Income (Loss) Core Earnings ROE Core Earnings ROE Available to Common Stockholders 13.7% $1,575 11.6% 5.2% )
$1,801 s n ) $1,014 o s i 6.7% l n l i o 5.2% i l l M i ( $ M ( $ $(3,131) (20.6)% 2017 2018 2017 2018 2016 2017 2018 2016 2017 2018
* Denotes a non-GAAP financial measure. For definitions and reconciliations to the most directly comparable GAAP measure, see Appendix A. † Net income ROE represents net income (loss) available to common stockholders ROE.
36 www.thehartford.com COMPENSATION MATTERS
2018 Business Performance
In February 2018, the company provided outlooks for the key business metrics highlighted below. These outlooks were management's estimates for 2018 performance based on business, competitive, capital market, catastrophe and other assumptions, and were tied to the company's 2018 operating plan. When setting the 2018 operating plan, both the Board and management concluded that these key business metrics would only be achievable with strong business performance. As described on page 40, these key business metrics drive core earnings results and meeting or exceeding the outlooks is a major determinant of our annual incentive plan funding level. Excluding catastrophe losses, our business segment metrics were in line or better than our outlooks from February 2018.
P&C Net Commercial Lines Personal Lines Group Benefits Investment Income Combined ratio of Combined ratio of P&C net investment Net income of $340 92.6 was better than 106.3 was worse than income of $1.2 billion million was What is outlook of 93.0 - 95.5 outlook of 96.0 - 98.0. was better than significantly better combined ratio? principally due to Results were outlook of $1.125 - than outlook of $275- favorable prior negatively impacted by $1.175 billion $295 million primarily This ratio measures the accident year reserve two hurricanes and the primarily due to higher due to better loss and cost of claims and development, partially largest U.S. wildfire limited partnership expense ratios, expenses for every offset by higher loss in insurance income. particularly in group $100 of earned catastrophe losses. industry history. disability due to premiums. If the continued favorable combined ratio is less Underlying combined Underlying combined incidence and recovery than 100, the company ratio* of 91.5, which ratio of 91.2, which trends, as well as is making an excludes catastrophes excludes catastrophes higher limited underwriting profit. and prior year and prior year partnership income. development, was in development, was in line with outlook. line with outlook.
* Denotes a non-GAAP financial measure. For definitions and reconciliations to the most directly comparable GAAP measure, see Appendix A.
Total Shareholder Returns
The following chart shows The Hartford's total shareholder return ("TSR") relative to the S&P 500, S&P 500 Insurance Composite and S&P P&C indices. On both a one- and three-year basis, The Hartford's TSR has lagged the broader market and peers. This result has had a direct impact on compensation for our Senior Executives, including both to their personal stock holdings and with no payout on the TSR component of 2016-2018 performance shares, as described on page 49.
50 40 35% 30% 30 21% 20 9% 10 0
-10 (4)% (5)% -20 (11)% (19)% -30 1-YEAR (2018) 3-YEAR (2016-2018)
The Hartford (HIG) S&P 500
S&P 500 Insurance Composite S&P 500 Property and Casualty
2019 Proxy Statement 37 COMPENSATION MATTERS
2018 COMPENSATION HIGHLIGHTS
Our executive compensation program is designed to promote long-term shareholder value creation and support our strategy by: (1) encouraging profitable growth consistent with prudent risk management; (2) attracting and retaining key talent; and (3) appropriately aligning pay with annual and long-term performance. The table below reflects the 2018 compensation package (base salary, annual incentive plan ("AIP") award and long-term incentive ("LTI") award) for each NEO. Although this table is not a substitute for the Summary Compensation Table information beginning on page 52, we believe it provides a simple and concise picture of 2018 compensation decisions.
Compensation Component C. Swift B. Costello D. Elliot B. Johnson W. Bloom Base Salary Rate $ 1,150,000 $ 725,000 $ 950,000 $ 575,000 $ 575,000 2018 AIP Award $ 4,800,000 $ 1,925,000 $ 3,050,000 $ 2,250,000 $ 1,550,000 2018 LTI Award $ 8,000,000 $ 1,775,000 $ 5,000,000 $ 1,600,000 $ 1,100,000 Total 2018 Compensation Package $ 13,950,000 $ 4,425,000 $ 9,000,000 $ 4,425,000 $ 3,225,000
2018 Compensation Decisions Rationale The Compensation Committee Performance against pre-established Compensation Core Earnings targets produced a approved an AIP funding level of formulaic AIP funding level capped at 200% of target. The Compensation Committee 160% of target. reduced this funding level to 160% following its qualitative review, taking into consideration a second consecutive year of elevated catastrophe losses. (pages 46-47) The Compensation Committee The company's average annual Compensation Core ROE during the performance period certified a 2016-2018 was 10.0%, resulting in a payout of 200% of target for the ROE component (50% of the performance share award payout award). Because the company's TSR during the performance period was below threshold, at 100% of target. there was no payout for the TSR component (50% of the award). (page 49)
COMPONENTS OF COMPENSATION AND PAY MIX NEO compensation is weighted towards variable compensation (annual and long-term incentives), where actual amounts earned may differ from targeted amounts based on company and individual performance. Each NEO has a target total compensation opportunity that is reviewed annually by the Compensation Committee (in the case of the CEO, by the independent directors) to ensure alignment with our compensation objectives and market practice.
Compensation Component Description Base Salary • Fixed level of cash compensation based on market data, internal pay equity, responsibility, expertise and performance. Annual Incentive Plan • Variable cash award based primarily on annual company operating performance against a predetermined financial target and achievement of individual performance objectives. Long-Term Incentive Plan • Variable awards granted based on individual performance, potential and market data. • Designed to drive long-term performance, encourage share ownership among senior executives, and foster retention. • Award mix (50% performance shares and 50% stock options) reflects actual stock price performance, peer-relative stock price and dividend performance and actual operating performance.
Approximately 91% of CEO target annual compensation and approximately 84% of other NEO target annual compensation are variable based on performance, including stock price performance:
Pay Mix — CEO Salary Annual Incentive Long-Term Incentive 9% 25% 66%
Variable with Performance: 91%
Pay Mix — Other NEOs Salary Annual Incentive Long-Term Incentive 16% 30% 54%
Variable with Performance: 84%
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COMPENSATION BEST PRACTICES Our current compensation best practices include the following:
WHAT WE DO ✓ Compensation heavily weighted towards variable pay ✓ Senior Executives generally receive the same benefits as full-time employees ✓ Double trigger requirement for cash severance and equity vesting upon a change of control* ✓ Cash severance upon a change of control limited to 2x base salary + bonus ✓ Independent compensation consultant ✓ Risk mitigation in plan design and annual review of compensation plans, policies and practices ✓ Prohibition on hedging, monetization, derivative and similar transactions with company securities ✓ Prohibition on Senior Executives pledging company securities ✓ Stock ownership guidelines for directors and Senior Executives ✓ Periodic review of compensation peer groups ✓ Competitive burn rate and dilution for equity program * In the case of equity, so long as the awards are assumed or replaced with substantially equivalent awards
WHAT WE DON'T DO û No tax gross-ups û No individual employment agreements û No granting of stock options with an exercise price less than the fair market value of our common stock on the date of grant û No re-pricing of stock options û No buy-outs of underwater stock options û No reload provisions in any stock option grant û No payment of dividends on unvested performance shares
“SAY-ON-PAY” RESULTS 2018 At last year’s Annual Meeting, shareholders voted 96% in favor of our “Say-on-Pay” proposal. “Say-On-Pay” The Compensation Committee considered the vote to be an endorsement of The Hartford’s executive compensation programs and policies, and took this strong level of support into Support account in reviewing those programs and policies. During our annual shareholder outreach program, management also discussed the vote, along with aspects of its executive compensation, sustainability and corporate governance practices, to gain a deeper understanding of shareholders’ perspectives. 96%
2019 Proxy Statement 39 COMPENSATION MATTERS
COMPONENTS OF THE COMPENSATION PROGRAM Each Senior Executive has a target total compensation opportunity comprised of both fixed (base salary) and variable (annual and long-term incentives) compensation. In addition, Senior Executives are eligible for benefits available to employees generally. This section describes the different components of our compensation program for Senior Executives and lays out the framework in which compensation decisions are made. For a discussion of the 2018 compensation decisions made within this framework, see Pay for Performance beginning on page 46.
1. BASE SALARY Each Senior Executive’s base salary is reviewed by the Compensation Committee (in the case of the CEO, the independent directors) annually, upon promotion, or following a change in job responsibilities, based on market data, internal pay equity and level of responsibility, expertise and performance.
2. ANNUAL INCENTIVE PLAN AWARDS Our employees, including the Senior Executives, are eligible to earn cash awards based on annual company and individual performance. Each employee has a target AIP opportunity. The Compensation Committee uses the following process to determine individual Senior Executive AIP awards. Actual results for 2018 are described on pages 46-49.
STEP 1: Financial Performance Against Target (Primary Criterion) — Produces the formulaic company AIP funding level
The AIP funding level is based primarily on core earnings performance against the annual operating plan reviewed by the Board at the start of the performance/fiscal year. The Compensation Committee selected core earnings because: (1) the Committee believes it best reflects annual operating performance; (2) it is a metric investment analysts commonly look to when evaluating annual performance; (3) it is prevalent among peers; and (4) all employees can impact it.
Certain adjustments are made to core earnings for compensation purposes Treatment of Catastrophes to ensure employees are held accountable for operating decisions made Due to the unpredictability of catastrophe losses that year, and are neither advantaged nor disadvantaged by the effect of (“CATs”), adjustments for, or the exclusion of, CATs certain items outside their control. At the beginning of the year, the from annual award determinations are common Compensation Committee approves a definition of "Compensation Core among P&C insurers. The AIP design includes an Earnings." The definition lists adjustments that will be made to core adjustment in the definition of Compensation Core earnings at year-end in order to arrive at Compensation Core Earnings, Earnings for CATs above or below budget. The CAT such as accounting changes, catastrophe losses above or below budget, and budget represents the estimated CATs included in unusual or non-recurring items. The 2018 definition and a reconciliation the company’s operating plan based on the from GAAP net income to Compensation Core Earnings are provided in company’s long-term CAT experience, generally Appendix A. over 10 years. The Compensation Committee believes this is an appropriate way to manage the As illustrated below, target performance (i.e., achievement of the operating year-to-year volatility that would result from plan) results in an AIP funding level of 100% of target. The Compensation unusually heavy or unusually light CATs in any Committee also establishes a threshold performance level, below which no given year, which would unduly penalize or unduly AIP awards are earned, as well as a maximum funding level for performance benefit employees for results outside their control. significantly exceeding target. In its qualitative review under Step 2, the Compensation Committee retains the flexibility to Compensation Core Earnings use discretion to make adjustments to AIP funding Maximum levels, including as a result of CATs. Performance 200% Target Rigor and Alignment with Shareholders • Both the Board and management deem our annual fiscal year operating plan and the associated AIP financial target to be achievable 150% only with strong business performance. • Key business metrics within the plan, such as Target combined ratios, P&C net investment income, Performance 100% and Group Benefit margins drive core earnings Threshold results. Performance • The outlook for certain of these metrics are
FORMULAIC AIP FUNDING LEVEL FORMULAIC announced to investors at the beginning of each 50% year, which helps align the interests of our 85% 100% 115% Senior Executives with our shareholders, as meeting or exceeding the outlooks is a major PERFORMANCE VS. TARGET determinant of the AIP funding level.
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STEP 2: Qualitative Review — Produces the final company AIP funding level To ensure a holistic review of performance, the Compensation Committee also considers a number of qualitative factors, including achievements that cannot be measured formulaically, or are not yet evident in our financial performance. As a result of this qualitative review, the Compensation Committee may decide to adjust the formulaic AIP funding level up or down to arrive at an AIP funding level more commensurate with company performance in light of these additional factors. Among the qualitative factors the Compensation Committee considers are the following broad performance categories:
Performance Criteria and Metrics Rationale Quality of Earnings: earnings driven by current accident year An assessment of how current accident year activity drove activity, including catastrophe losses, policyholder retention, financial performance informs current year compensation new business, underwriting profitability and expense decisions management Non-Financial and Strategic Objectives: strategic initiatives These achievements are critical for long-term success, but and transactions, diversity, employee engagement, risk impacts may not be reflected in current year-end financials or management and compliance may result in accounting charges in a particular period Peer-Relative Performance: performance relative to peers on How the company performed on a relative basis across the metrics such as stock price and earnings industry is not captured in the quantitative formula The Compensation Committee believes that grounding the AIP funding level in formulaic financial performance against targets, but retaining the flexibility to adjust the funding level to reflect qualitative factors, allows it to arrive at a final AIP funding level that best reflects holistic performance and is aligned with shareholder interests.
STEP 3: Individual Performance — Results in the Senior Executive's AIP award
For each Senior Executive, the company AIP funding level multiplied by the Senior Executive’s target AIP opportunity produces an initial AIP award amount. Where appropriate, the Committee (and, in the case of the CEO, the independent directors) may adjust the Senior Executive’s AIP award amount up or down based on his or her performance in leading a business or function.
3. LONG-TERM INCENTIVE AWARDS The long-term incentive ("LTI") program is designed to drive long-term performance and encourage share ownership among Senior Executives, aligning their interests with those of shareholders. LTI awards are granted on an annual basis following an assessment of individual performance, potential and market data. 2018 LTI awards for Senior Executives consist of performance shares (50% of the award value) and stock options (50% of the award value). This mix provides LTI awards that appropriately blend actual stock price performance, peer-relative stock price and dividend performance and actual operating performance. Performance Shares (50% of LTI Award) Performance shares are designed to reward and retain Senior Executives by allowing them to earn shares of our common stock based on pre-determined performance criteria. Performance shares have a three-year performance period and are settled in shares of common stock ranging from 0% to 200% of the number of performance shares granted depending upon the performance achieved on the following metrics:
Performance Metric Rationale Compensation Core ROE Important strategic measure that drives shareholder value creation (50% weighting) Peer-relative TSR Important measure of our performance against peers that are competing (50% weighting) investment choices in the capital markets
Compensation Core ROE: For 50% of the performance share award, payouts at the end of the performance period, if any, will depend upon achieving a target average annual ROE over a three-year measurement period, as adjusted for compensation purposes. Because of the adjustments made for compensation purposes, Compensation Core ROE will differ from the ROE numbers provided in our financial statements. The Compensation Committee's definition of Compensation Core ROE for 2018 performance share awards is provided in Appendix A.
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As illustrated in the graph at right, for 2018-2020 Compensation Core ROE 2018 performance share awards, the 13.9% target level of performance is an average 200% annual Compensation Core ROE for 2018, 2019, and 2020 of 11.6%, as reflected in 175% the 2018-2020 operating plan. There is no payout for performance below threshold. 150% The maximum Compensation Core ROE 125% payout of 200% reflects ambitious goals that require performance significantly 11.6% beyond target. Threshold and maximum 100% reflect a range of +/-20% of target. 75%
50%
PAYOUT % OF TARGET PAYOUT 35% 9.3%
0% Threshold Target Maximum Peer-Relative TSR: For 50% of the performance share award, payouts, if any, will be based on company TSR performance relative to a Performance Peer Group at the end of the three-year performance period. The Performance Peer Group represents 16 industry specific public companies against which we benchmark performance for compensation purposes.* While there is some overlap, the Performance Peer Group is distinct from the Corporate Peer Group described on page 45, which includes mutual companies where financial data is not publicly available, as well as companies that compete with us for talent. The Compensation Committee believes that the Performance Peer Group should be limited to industry companies that (1) publish results against which to measure our performance and (2) are competing investment choices in capital markets. The Compensation Committee reviews the composition of the Performance Peer Group annually and made the following changes for the 2018 performance share awards: • Added CNA Financial Corp. because it is a competitor in Commercial Lines; • Added MetLife, Inc. because, following our acquisition of the Aetna U.S. group life and disability benefits business, it represents a competitor in group benefits and helps further diversify the Performance Peer Group; • Removed Prudential Financial, Inc., which, following the sale of Talcott Resolution, no longer represents an aligned peer to our current business mix; and • Removed Aon plc, Arthur J. Gallagher & Co., and Marsh & McLennan Companies, Inc., because insurance brokers are not considered direct competitors to our risk-based product businesses. For each company in the Performance Peer Group, TSR will be measured using a 20-day stock price average at the beginning and the end of the performance period in order to smooth out any volatility. As illustrated in the graph below, there would be no payout for performance below the 30th percentile, 35% payout for performance at the 30th percentile, 100% payout for median performance, and 200% payout for performance at the 85th percentile.
2018 Performance Peer Group Three-Year Relative TSR Ranking Alleghany Corp. Allstate Corp. Maximum Performance American Financial Group, Inc. 200%
The Chubb Corp. 175% Cincinnati Financial Corp. 150% CNA Financial Corp. — NEW 125% Everest Re Group, Ltd. Target Performance Hanover Insurance Group 100% Markel Corporation 75% Threshold Mercury General Corp. Performance 50% MetLife, Inc. — NEW 35%
Old Republic International Corp. % OF TARGET PAYOUT The Progressive Corp. 0% 30% 50% 85% The Travelers Companies, Inc. Unum PEER COMPANY PERFORMANCE PERCENTILE W.R. Berkley Group * While the peer group at the time of the grant consisted of 17 companies, AXA subsequently acquired XL Group Ltd., resulting in a performance peer group of 16 companies for measuring TSR performance.
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Stock Options (50% of LTI Awards) The use of stock options directly aligns the interests of our Senior Executives with those of shareholders because options only have value if the price of our common stock on the exercise date exceeds the stock price on the grant date. The stock options are granted at fair market value, vest in three equal installments over three years, and have a 10-year term.
EXECUTIVE BENEFITS AND PERQUISITES Senior Executives are eligible for the same benefits as full-time employees generally, including health, life insurance, disability and retirement benefits. Non-qualified savings and retirement plans provide benefits that would otherwise be provided but for the Internal Revenue Code limits that apply to tax-qualified benefit plans. We provide certain additional perquisites to Senior Executives, including reimbursement of costs for annual physicals and associated travel, relocation benefits when a move is required, and occasional use of tickets for sporting and special events previously acquired by the company when no other business use has been arranged and there is no incremental cost to the company. The CEO also has the use of a company car and driver to allow for greater efficiency while commuting. We own a fractional interest in a corporate aircraft to allow Senior Executives to safely and efficiently travel for business purposes. The corporate aircraft enables Senior Executives to use travel time productively by providing a confidential environment in which to conduct business and eliminating the schedule constraints imposed by commercial airline service. Our aircraft usage policy generally prohibits personal travel via corporate aircraft by Senior Executives except in extraordinary circumstances. On two occasions in January 2018, our CFO and General Counsel determined that extraordinary circumstances existed, permitting our President to travel via corporate aircraft to attend to a family emergency. The Compensation Committee agreed with the finding of extraordinary circumstances and was briefed on each related use of the corporate aircraft. Following a review of peer company and market practices in February 2018, the Compensation Committee recommended, and the independent directors approved, limited personal use of corporate aircraft by our CEO and President. The independent directors encourage the use of corporate aircraft for the personal travel needs of our CEO and President in order to minimize their personal travel time and increase the time they are available for business purposes. Corporate aircraft also enables them to work more productively while traveling for time-sensitive personal matters. The CEO and President's use of corporate aircraft for personal travel is subject to an annual limit of $160,000 and $90,000, respectively, in aggregate incremental costs to the Company. Fixed costs, which do not change based on usage, are excluded. From time to time, a Senior Executive’s expenses for a purpose deemed important to the business may not be considered “directly and integrally related” to the performance of the Senior Executive’s duties as required by applicable SEC rules. These expenses are considered perquisites for disclosure purposes. Examples of such expenses may include attendance at conferences, seminars or award ceremonies, as well as attendance of a Senior Executive’s spouse or guest at business events or dinners where spousal or guest attendance is expected. Whenever required to do so under Internal Revenue Service regulations, we attribute income to Senior Executives for perquisites and the Senior Executive is responsible for the associated tax obligation.
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PROCESS FOR DETERMINING SENIOR EXECUTIVE COMPENSATION (INCLUDING NEOs)
COMPENSATION COMMITTEE The Compensation Committee is responsible for reviewing the performance of and approving compensation awarded to those executives who either report to the CEO or who are subject to the filing requirements of Section 16 of the Securities Exchange Act of 1934 (other than the CEO). The Compensation Committee also evaluates the CEO’s performance and recommends his compensation for approval by the independent directors. With this input from the Compensation Committee, the independent directors review the CEO’s performance and determine his compensation level in the context of the established goals and objectives for the enterprise and his individual performance. The Compensation Committee and the independent directors typically review performance and approve annual incentive awards for the prior fiscal year at their February meeting, along with annual LTI awards and any changes to base salary and target bonus. To assist in this process, the Compensation Committee reviews tally sheets for each NEO to understand how each element of compensation relates to other elements and to the compensation package as a whole, including historical compensation and outstanding equity.
COMPENSATION CONSULTANT Meridian Compensation Partners, LLP ("Meridian") is the Compensation Committee’s independent compensation consultant and has regularly attended Compensation Committee meetings since its engagement. Pursuant to the Compensation Committee's charter, Meridian has not provided services to the company other than consulting services provided to the Compensation Committee and, with respect to CEO and director compensation, the Board. In 2018, following a review of its records and practice guidelines, Meridian provided the Compensation Committee a letter that confirmed its conformity with independence factors under applicable SEC rules and the listing standards of the NYSE.
ROLE OF MANAGEMENT Our Human Resources team supports the Compensation Committee in the execution of its responsibilities. Our Executive Vice President and Chief Human Resources Officer supervises the development of the materials for each Compensation Committee meeting, including market data, historical compensation and outstanding equity, individual and company performance metrics and compensation recommendations for consideration by the Compensation Committee. No member of our management team, including the CEO, has a role in determining his or her own compensation.
BENCHMARKING On an annual basis, the Compensation Committee reviews and considers a number of factors in establishing or recommending a target total compensation opportunity for each individual including, but not limited to, market data, tenure in position, experience, sustained performance, and internal pay equity. Although the Compensation Committee strives for total compensation to be at median, it does not target a specific market position. The various sources of compensation information the Compensation Committee uses to determine the competitive market for our executive officers are described in more detail below.
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2018 Corporate Peer Group The Compensation Committee reviews the peer group used for compensation benchmarking (the "Corporate Peer Group") periodically or upon a significant change in business conditions for the company or its peers. As part of its review, the Compensation Committee considers many factors, including market capitalization, revenues, assets, lines of business and sources and destinations of talent. Several non-P&C and life insurance companies are included in the Corporate Peer Group because, due to their geographic footprint and/or organizational complexity, we compete with them for talent. For this reason, the Corporate Peer Group differs from the Performance Peer Group described above for purposes of the TSR performance measure applicable to performance shares. For 2018, the Compensation Committee did not make any changes to the Corporate Peer Group. Data in millions – as of 12/31/2018(1)
Company Name(2) Revenues Assets Market Cap Aetna Inc.(3) $ — $ — $ — Allstate Corp $ 39,815 $ 112,249 $ 28,461 Berkley (W. R.) Corp. $ 7,692 $ 24,896 $ 9,026 CNA Financial Corp. $ 10,134 $ 57,152 $ 11,983 Chubb Ltd. $ 32,679 $ 167,771 $ 59,527 Cigna Corp. $ 48,569 $ 153,226 $ 72,317 Cincinnati Financial Corp. $ 5,407 $ 21,935 $ 12,599 Lincoln National Corp. $ 16,424 $ 298,147 $ 10,960 Marsh & McLennan Companies $ 14,950 $ 21,578 $ 40,171 MetLife Inc. $ 67,915 $ 687,538 $ 40,520 Principal Financial Group Inc. $ 14,237 $ 243,036 $ 12,502 Progressive Corp. $ 31,955 $ 46,575 $ 35,184 Prudential Financial Inc. $ 63,304 $ 815,078 $ 33,680 Travelers Companies Inc. $ 30,282 $ 104,233 $ 31,720 Unum Group $ 11,599 $ 61,876 $ 6,427 Voya Financial Inc. $ 8,514 $ 154,682 $ 6,242 XL Group Ltd.(3) $ — $ — $ — 25TH PERCENTILE $ 10,866 $ 51,864 $ 11,471 MEDIAN $ 16,424 $ 112,249 $ 28,461 75TH PERCENTILE $ 36,247 $ 205,404 $ 37,678 THE HARTFORD $ 18,955 $ 62,307 $ 15,946 PERCENT RANK 51% 36% 44% (1) Peer data provided by S&P Capital IQ. The amounts shown in the “Revenues” column reflect S&P Capital IQ adjustments to facilitate comparability across companies. (2) An additional four non-public companies are included in the Corporate Peer Group as they submit data to relevant compensation surveys utilized in determining appropriate pay levels for Senior Executives: Liberty Mutual, MassMutual, Nationwide Financial, and State Farm. (3) The 2018 Corporate Peer Group included Aetna Inc., which was acquired by CVS Health Corp. on November 28, 2018, and XL Group Ltd., which was acquired by AXA on September 12, 2018.
2019 Corporate Peer Group For 2019 compensation purposes, in addition to the deletion of Aetna Inc. and XL Group Ltd. as a result of acquisitions, the Compensation Committee made the following changes to better reflect competitors to the company's risk-based product businesses, its current business mix following the sale of Talcott Resolution, and potential competitors for talent.
2018 Corporate ð 4 2 2019 Corporate Peer Group Deletions + Additions = Peer Group ò ò
• Aetna Inc. • American International Group, Inc. • Marsh & McLennan Companies, Inc. • Hanover Insurance Group, Inc. • Prudential Financial Inc. • XL Group Ltd.
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Use of Corporate Peer Group Compensation Data When evaluating and determining individual pay levels, the Compensation Committee reviews compensation data prepared annually by Aon showing the 25th, 50th and 75th percentiles of various pay elements for the companies listed above. As noted previously, the Compensation Committee does not target a specific market position in pay. One of our NEOs, our Chief Investment Officer and President of HIMCO, was also benchmarked against similar roles at a broader group of financial services companies within the standard McLagan Investment Management survey. The Compensation Committee also reviews general industry survey data published by third parties as a general indicator of relevant market conditions and pay practices, including perquisites. Neither the Compensation Committee nor management has any input into companies included in these general industry or financial services company surveys.
PAY FOR PERFORMANCE
2018 AIP PERFORMANCE Based on the assessment of performance described below, the Compensation Committee established an AIP funding level of 160% of target for the 2018 performance year.
STEP 1: Financial Performance Against Target — Produced formulaic AIP funding level capped at 200%
When setting the 2018 operating plan, which forms the basis for the Compensation Core Earnings target, management and the Board anticipated continued underwriting discipline in Commercial Lines and strong results in Group Benefits, improvement in Personal Lines underwriting results, and rate increases in underperforming areas of the business, partially offset by the elimination of core earnings from Talcott Resolution (as a result of its sale) and lower limited partnership returns relative to the strong returns experienced in 2017. The 2018 AIP Compensation Core Earnings target was set at $1,593 million, higher than both the 2017 Compensation Core Earnings target of $1,398 million and 2017 actual performance of $1,572 million. The 2018 Compensation Core Earnings target increased despite a significant loss in earnings power resulting from the sale of Talcott Resolution, partially offset by a lower corporate income tax rate in 2018 and earnings from the Aetna U.S. group life and disability business acquisition. Actual Compensation Core Earnings for 2018 were $1,842 million, producing a formulaic AIP funding level capped at 200% of target, reflecting strong underlying financial performance in each of the company’s business units.
Illustrated at right are the minimum 2018 Compensation Core Earnings threshold, target and maximum $ IN MILLIONS Compensation Core Earnings levels against actual results for 2018. As Actual $1,842 $1,832 discussed on page 40, Compensation Core 200% Earnings will differ from the earnings numbers provided in our financial statements due to pre-determined adjustments made to ensure the AIP funding level reflects the operating 150% performance within management's control.
$1,593 100%
$1,354 FORMULAIC AIP FUNDING LEVEL FORMULAIC 50% Threshold Target Maximum 85% 100% 115%
PERFORMANCE VS. TARGET
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STEP 2: Qualitative Review — Compensation Committee reduced funding level
In assessing overall performance and arriving at the 2018 AIP funding level, the Compensation Committee undertook a qualitative review focused on the following:
Qualitative Criteria Results Considered Quality of Earnings The company's core earnings were above target, driven by favorable non-catastrophe prior year development combined with increased investment income, including strong partnership returns. Excellent business results in Group Benefits and Mutual Funds also contributed to the performance above target. Lower P&C current accident year results, excluding catastrophes, partially offset these favorable results. Results were negatively impacted by catastrophe losses significantly above operating plan. Risk & Compliance The Hartford was again named one of the world’s most ethical companies by Ethisphere Institute in 2018. The Hartford has appeared on the list ten times due to a culture built on a foundation of integrity and respect, backed by a strong ethics and compliance program that emphasizes leadership accountability and preventing ethical lapses and compliance issues Peer-Relative The company’s financial performance (core earnings growth and book value growth) compared favorably Performance to peers; however, the company’s stock underperformed the S&P 500, the S&P P&C index and the S&P Insurance index. Expense Excluding bonus above target and one-time items, expenses were favorable to budget due mainly to Management managing headcount and IT costs. Non-Financial and On or ahead of schedule in integrating Aetna’s U.S. group life and disability business, realizing the revenue Strategic and earnings growth we expected to date from the deal; successfully completed the sale of Talcott Objectives Resolution, improving the core earnings growth profile of the company and generating approximately $1.5 billion in proceeds for deployment; and announced an agreement to acquire The Navigators Group, Inc., which will broaden and deepen our product offerings while greatly enhancing our ability to expand internationally.
As a result of its qualitative review, the Compensation Committee determined that, while strong 2018 results supported AIP funding above target, a second consecutive year of elevated catastrophe losses warranted a decrease in funding from the maximum of 200%. This is consistent with the company's AIP design, described on page 40, which adjusts core earnings for catastrophe losses above or below budget to manage year-to-year volatility, but retains flexibility for the use of Compensation Committee discretion to make adjustments to AIP funding levels. Following a review of the impact of excluding catastrophes above and below budget from Compensation Core Earnings over a multi-year period, the Compensation Committee used its informed discretion to reduce funding to 160%, a level it believed was more commensurate with overall company performance.
2018 NAMED EXECUTIVE OFFICERS' COMPENSATION AND PERFORMANCE
STEP 3: Individual Performance — Each NEO's 2018 AIP award
Christopher Swift Mr. Swift has served as CEO since July 1, 2014; he was also appointed Chairman on January 5, 2015. For 2018, the independent directors approved a base salary of $1,150,000, an AIP target of $3,000,000, and a 2018 LTI award of $8,000,000 granted in the form of 50% stock options and 50% performance shares on February 27, 2018. Based on the process outlined above, the independent directors approved an AIP award of $4,800,000 (160% of target), taking into account that under Mr. Swift’s leadership, the company: • Delivered strong underlying financial results across multiple business segments despite a second consecutive year of elevated catastrophes • Successfully closed the divestiture of Talcott Resolution while simultaneously driving the integration of Aetna’s U.S. group life and disability business and entering into an agreement to acquire Navigators • Continued to focus on innovation, including the launch of our Small Business Innovation Lab, the purchase of Y-Risk, a company specializing in the sharing and on-demand economy, and the enhancement of advanced data and analytic capabilities • Continued to focus on talent management, diversity and inclusion, resulting in employee engagement and enablement scores that are in the top quartile of the market, as measured by the IBM® Kenexa® survey of global companies
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Beth Costello Ms. Costello has served as CFO since July 1, 2014. For 2018, the Compensation Committee approved a base salary of $725,000, an AIP target of $1,200,000, and a 2018 LTI award of $1,775,000 granted in the form of 50% stock options and 50% performance shares on February 27, 2018. Based on the process outlined above, the Compensation Committee approved an AIP award of $1,925,000 (160% of target), taking into account that Ms. Costello: • Co-led the complex closing process for Talcott Resolution while also delivering expense synergy savings on the Aetna acquisition ahead of plan • Delivered a capital management plan that reduced debt by $320 million and successfully launched and priced a $345 million retail preferred stock offering that will fulfill a portion of planned financing needs for 2019, while diversifying the company's capital structure and investor base • Furthered external engagement with investors, rating agencies and bankers • Continued to focus on talent management, diversity and inclusion, resulting in employee engagement and enablement scores that are in the top quartile of the market Douglas Elliot Mr. Elliot has served as President of The Hartford since July 1, 2014. For 2018, the Compensation Committee approved a base salary of $950,000, an AIP target of $1,900,000, and a 2018 LTI award of $5,000,000 granted in the form of 50% stock options and 50% performance shares on February 27, 2018. Based on the process outlined above, the Compensation Committee approved an AIP award of $3,050,000 (161% of target), taking into account that Mr. Elliot: • Delivered record core earnings in Group Benefits and strong Commercial Lines core earnings despite a second consecutive year of elevated catastrophe • Led the continued expansion of product capabilities (including large property, professional liability for Small Commercial and International), which allowed for broader and deeper risk participation • Advanced business intelligence capabilities and predictive modeling in all business segments and the company's Claims organization • Continued to focus on talent management, diversity and inclusion resulting in employee engagement and enablement scores that are in the top quartile of the market Brion Johnson Mr. Johnson has served as Chief Investment Officer and President of HIMCO since May 16, 2012. For 2018, the Compensation Committee approved a base salary of $575,000, an AIP target of $1,400,000 and a 2018 LTI award of $1,600,000 granted in the form of 50% stock options and 50% performance shares on February 27, 2018. Based on the process outlined above, the Compensation Committee approved an AIP award of $2,250,000 (161% of target), taking into account that Mr. Johnson: • Delivered strong performance across all investment measures for HIMCO, resulting in net investment income that exceeded the annual operating plan despite a challenging investment environment • Co-led the complex closing process for Talcott Resolution, completing a multi-year strategy to exit capital market-sensitive businesses • Led several other complex and impactful initiatives, including a five-year agreement to manage the invested assets of Talcott Resolution and Global Atlantic Financial Group and repositioning the Aetna U.S. group life and disability block's investment portfolio • Continued to focus on talent management, diversity and inclusion resulting in employee engagement and enablement scores that are in the top quartile of the market William Bloom Mr. Bloom has served as Executive Vice President of Operations, Technology & Data since July 1, 2014. For 2018, the Compensation Committee approved a base salary of $575,000, an AIP target of $825,000 and a 2018 LTI award of $1,100,000 granted in the form of 50% stock options and 50% performance shares on February 27, 2018. Based on the process outlined above, the Compensation Committee approved an AIP award of $1,550,000 (188% of target), taking into account that Mr. Bloom: • Continued progress on all major IT and digital investments to improve the ease of doing business for customers and distribution partners while achieving expense savings goals • Continued the deployment of robotics and artificial intelligence within Operations
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• Provided significant support for diversity and inclusion and talent initiatives, including Women in Technology, Step IT Up America and Hartcode Academy, an internal front-end developer training program • Continued to strengthen organizational talent through key internal moves and new hires, while maintaining top quartile employee engagement and enablement results
CERTIFICATION OF 2016-2018 PERFORMANCE SHARE AWARDS On March 1, 2016, the Compensation Committee granted Senior Executives performance shares tied 50% to achievement of average annual Compensation Core ROE(1)(2) goals over a three-year measurement period, and 50% to TSR performance relative to a peer group of 17 companies.(3) For the Core ROE component of the award, achievement of average annual Compensation Core ROE of 8.9%, 9.4% and 9.9% during the measurement period would have resulted in payouts of 50%, 100% and 200% of target, respectively. For the TSR component of the award, there would be no payout for performance below the 30th percentile, 50% payout for performance at the 30th percentile, 100% payout for median performance, and 200% payout if our TSR performance ranks ahead of all companies in the performance peer group. These performance shares vested as of December 31, 2018, the end of the three-year performance period, and the Compensation Committee certified a payout at 100% of target on February 20, 2019 based on the following results: • The average of the company's Compensation Core ROE for each year of the measurement period was 10.0%, resulting in a payout capped at 200% of target for the Compensation Core ROE component of the awards • Because the company’s TSR during the performance period was below threshold, there was no payout for the TSR component of the awards Details of the 2016 performance shares are given on page 35 of our 2017 Proxy Statement filed with the Securities and Exchange Commission on April 6, 2017. (1) Because threshold, target and maximum Compensation Core ROE values were established in February 2016 based on the company’s 2016-2018 operating plan before a decision to sell Talcott Resolution had been made, the definition of Compensation Core ROE for 2016 performance share awards was amended to include Talcott Resolution core earnings through September 30, 2017, the period in which management was both actively managing the business and separately reporting its results externally. (2) As a result of the Tax Cuts and Jobs Act of 2017: (a) an adjustment was made pursuant to the definition of Compensation Core Earnings to use the previously enacted corporate income tax rate of 35%, which is higher than the current corporate income tax rate of 21%, and (b) the definition of average equity was amended to exclude the impact on average equity of the charge to earnings that was the result of the effect of the lower enacted corporate income tax rate on deferred tax assets. (3) While the peer group at the time of the grant consisted of 20 companies, AXA subsequently acquired XL Group plc, ACE Limited acquired The Chubb Corporation, and Meiji Yasuda Life Insurance Company acquired StanCorp Financial Group, Inc., resulting in a performance peer group of 17 companies for measuring TSR performance.
COMPENSATION POLICIES AND PRACTICES
STOCK OWNERSHIP AND RETENTION GUIDELINES Senior Executives are expected to meet or exceed certain levels of stock ownership to align their interests with those of shareholders. The Compensation Committee has established the following ownership guidelines for the CEO and other NEOs
Level (As a Multiple of Base Salary) CEO 6x Other NEOs 4x
The Compensation Committee reviews ownership levels annually. NEOs are generally expected to meet these ownership guidelines within five years of appointment to position. As of March 18, 2019, the CEO and each of the NEOs met their respective guideline.
TIMING OF EQUITY GRANTS Equity grants may be awarded four times per year, on the first day of a quarterly trading window following the filing of our Form 10- Q or 10-K for the prior period. Our practice is to grant annual equity awards during the first quarterly trading window of the year. This timing ensures that grants are made at a time when the stock price reflects the most current public data regarding our performance and financial condition as is reasonably possible.
RECOUPMENT POLICY We have a recoupment policy that allows for the recoupment of any incentive compensation (cash or equity) paid or payable at any time to the extent such recoupment either (i) is required by applicable law or listing standards, or (ii) is determined to be necessary or appropriate in light of business circumstances or employee misconduct.
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RISK MITIGATION IN PLAN DESIGN Management has concluded that our compensation policies and practices are not reasonably likely to have a material adverse effect on the company. Our Enterprise Risk Management function performs a risk review of any new incentive compensation plans or any material changes to existing plans annually and completes a comprehensive review of all incentive compensation plans every five years. In 2018, Enterprise Risk Management conducted its annual review and discussed the results of that review with the Compensation Committee. Enterprise Risk Management concluded that current incentive plans do not promote inappropriate risk- taking or encourage the manipulation of reported earnings. The following features of our executive compensation program guard against excessive risk-taking:
Feature Rationale Pay Mix • A mix of fixed and variable, annual and long-term, and cash and equity compensation encourages strategies and actions that are in the company’s long-term best interests • Long-term compensation awards and overlapping vesting periods encourage executives to focus on sustained company results and stock price appreciation Performance • Incentive awards based on a variety of performance metrics diversify the risk associated with any single Metrics indicator of performance Equity • Stock ownership guidelines align executive and shareholder interests Incentives • Equity grants are made only during a trading window following the release of financial results • No reload provisions are included in any stock option awards Plan Design • Incentive plans are not overly leveraged, cap the maximum payout, and include design features intended to balance pay for performance with an appropriate level of risk-taking • The 2014 Incentive Stock Plan does not allow: - Stock options with an exercise price less than the fair market value of our common stock on the grant date - Re-pricing (reduction in exercise price) of stock options, without shareholder approval - Single trigger vesting of awards upon a Change of Control if awards are assumed or replaced with substantially equivalent awards Recoupment • We have a broad incentive compensation recoupment policy in addition to claw-back provisions under the 2014 Incentive Stock Plan
HEDGING AND PLEDGING COMPANY SECURITIES We prohibit our employees and directors from engaging in hedging, monetization, derivative and similar transactions involving company securities. In addition, Senior Executives are prohibited from pledging company securities.
POTENTIAL SEVERANCE AND CHANGE OF CONTROL PAYMENTS The company does not have individual employment agreements. NEOs are covered under a common severance pay plan that provides severance in a lump sum equal to 2x the sum of annual base salary plus target bonus, whether severance occurs before or after a change of control (no gross-up is provided for any change of control excise taxes that might apply). As a condition to receiving severance, Senior Executives must agree to restrictive covenants covering such items as non-competition, non-solicitation of business and employees, non-disclosure and non-disparagement. The company maintains change of control benefits to ensure continuity of management and to permit executives to focus on their responsibilities without undue distraction related to concerns about personal financial security if the company is confronted with a contest for control. These benefits are also designed to ensure that in any such contest, management is not influenced by events that could occur following a change of control. The 2014 Incentive Stock Plan provides for “double trigger” vesting on a change of control. If an NEO terminates employment for “Good Reason” or his employment is terminated without “Cause” (see definitions on page 64) within 2 years following a change of control, then any awards that were assumed or replaced with substantially equivalent awards would vest. If the awards were not assumed or replaced with substantially equivalent awards, they would vest immediately upon the change of control.
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EFFECT OF TAX AND ACCOUNTING CONSIDERATIONS ON COMPENSATION DESIGN In designing our compensation programs, we consider the tax and accounting impact of our decisions. In doing so, we strive to strike a balance between designing appropriate and competitive compensation programs for our executives, maximizing the deductibility of such compensation, and, to the extent reasonably possible, avoiding adverse accounting effects and ensuring that any accounting consequences are appropriately reflected in our financial statements. Principal among the tax considerations has been the potential impact of Section 162(m) of the Internal Revenue Code, which historically denied a publicly traded company a federal income tax deduction for compensation in excess of $1 million paid to the CEO or any of the next three most highly compensated executive officers (other than the CFO) as determined as of the last day of the applicable year, unless the amount of such excess was payable based solely upon the attainment of objective performance criteria. While the Compensation Committee reserved the right to approve incentive awards or other payments that did not qualify as exempt performance-based compensation, our variable compensation, including our performance share payouts, were generally designed to qualify as exempt performance-based compensation. The exemption from Section 162(m)’s deduction limit for performance-based compensation was repealed, effective for taxable years beginning after December 31, 2017, unless the compensation qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017. Notwithstanding the repeal of the performance-based compensation exception and the possible loss of deductions under Section 162(m), we made payments for 2018 subject to the individual award limits and other terms of the Executive Bonus Plan, and we currently expect that the Compensation Committee's process for determining the annual cash bonus amounts going forward will generally remain consistent with its past practice. We believe that it will be necessary to pay compensation that may not be tax- deductible in order to provide competitive compensation and appropriate incentives to certain of our executive officers. Other tax considerations are factored into the design of our compensation programs, including compliance with the requirements of Section 409A of the Internal Revenue Code, which can impose additional taxes on participants in certain arrangements involving deferred compensation, and Sections 280G and 4999 of the Internal Revenue Code, which affect the deductibility of, and impose certain additional excise taxes on, certain payments that are made upon or in connection with a change of control. COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION As of the date of this proxy statement, the Compensation and Management Development Committee consists of directors Ruesterholz (Chair), Fetter, McGill, Renyi, and Roseborough, all of whom are independent non-management directors. None of the Compensation and Management Development Committee members has served as an officer or employee of The Hartford and none of The Hartford’s executive officers has served as a member of a compensation committee or board of directors of any other entity that has an executive officer serving as a member of The Hartford’s Board. REPORT OF THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on our review and discussion with management, we have recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and in the company’s Annual Report on Form 10-K for the year ended December 31, 2018. Report submitted as of March 22, 2019 by: Members of the Compensation and Management Development Committee:
Virginia P. Ruesterholz, Chair Trevor Fetter Stephen P. McGill Thomas A. Renyi Teresa W. Roseborough
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EXECUTIVE COMPENSATION TABLES SUMMARY COMPENSATION TABLE The table below reflects total compensation paid to or earned by each NEO.
Change in Pension Value and Nonqualified Non-Equity Deferred Stock Option Incentive Plan Compensation All Other Name and Principal Salary Bonus Awards Awards Compensation Earnings Compensation Total Position Year ($) ($) ($)(1) ($)(2) ($)(3) ($)(4) ($)(5) ($) Christopher Swift 2018 1,137,500 — 3,736,000 4,000,000 4,800,000 — 210,115 13,883,615 Chairman and Chief Executive Officer 2017 1,100,000 — 3,472,500 3,750,000 4,675,000 34,380 83,405 13,115,285 2016 1,075,000 — 3,404,473 3,575,000 1,925,000 17,769 81,879 10,079,121 Beth Costello 2018 718,750 — 828,925 887,500 1,925,000 — 65,500 4,425,675 Executive Vice President and Chief 2017 700,000 — 810,250 875,000 1,900,000 34,380 65,400 4,385,030 Financial Officer 2016 687,500 — 833,263 875,000 770,000 13,122 65,300 3,244,185 Douglas Elliot 2018 943,750 — 2,335,000 2,500,000 3,050,000 — 170,363 8,999,113 President 2017 925,000 — 2,315,000 2,500,000 3,150,000 15,738 67,526 8,973,264 2016 918,750 — 2,202,194 2,312,500 1,295,000 8,490 67,368 6,804,302 Brion Johnson 2018 562,500 — 747,200 800,000 2,250,000 — 65,500 4,425,200 Executive Vice President and Chief 2017 525,000 — 694,500 750,000 2,300,000 6,199 68,150 4,343,849 Investment Officer; President of HIMCO 2016 525,000 — 642,803 675,000 1,100,000 3,393 68,050 3,014,246 William Bloom, 2018 568,750 — 513,700 550,000 1,550,000 — 68,281 3,250,731 Executive Vice President, 2017 550,000 — 463,000 500,000 1,575,000 14,846 67,845 3,170,691 Operations, Technology & Data (1) This column reflects the full aggregate grant date fair value of performance shares calculated in accordance with FASB ASC Topic 718 for the fiscal years ended December 31, 2018, 2017 and 2016. Detail on the 2018 grants is provided in the Grants of Plan Based Awards Table on page 54. The amounts in this column are not reduced for estimated forfeiture rates during the applicable vesting periods. Other assumptions used in the calculation of these amounts are included in footnote 19 of the company's Annual Reports on Form 10-K for 2018, 2017 and 2016. To determine the fair value of the performance share award under FASB ASC topic 718, the market value on the grant date is adjusted by a factor of 0.9340 to take into consideration that dividends are not paid on unvested performance shares, and to reflect the probable outcome of the performance condition(s) consistent with the estimated aggregate compensation cost to be recognized over the service period, determined as of the grant date. The number of shares payable under these awards will be based on the actual results as compared to pre-established performance conditions and can range from 0-200% of the target award. The value of performance shares assuming the highest possible outcome of the performance conditions determined at the time of grant (200% of the target award), and including an adjustment for no payment of dividends on unvested performance shares, would in total be:
2018 Performance 2017 Performance 2016 Performance Shares Shares Shares NEO (February 27, 2018 grant date) (February 28, 2017 grant date) (March 1, 2016 grant date) C. Swift $ 7,567,405 $ 7,084,289 $ 6,739,911 B. Costello $ 1,678,987 $ 1,652,967 $ 1,649,599 D. Elliot $ 4,729,628 $ 4,722,829 $ 4,359,731 B. Johnson $ 1,513,461 $ 1,416,895 $ 1,272,557 W. Bloom $ 1,040,498 $ 944,566 Under the 2014 Incentive Stock Plan, no more than 500,000 shares in the aggregate can be earned by an individual employee with respect to RSUs and performance share awards made in a single calendar year. As a result, the number of shares ultimately distributed to an employee (or former employee) with respect to awards made in the same year will be reduced, if necessary, so that the number does not exceed this limit. (2) This column reflects the full aggregate grant date fair value for the fiscal years ended December 31, 2018, 2017 and 2016 calculated in accordance with FASB ASC topic 718. The amounts in this column are not reduced for estimated forfeitures during the applicable vesting periods. Other assumptions used in the calculation of these amounts are included in footnote 19 of the company's Annual Reports on Form 10-K for 2018, 2017 and 2016. (3) This column reflects cash AIP awards paid for the respective years. (4) This column reflects the actuarial increase, if any, in the present value of the accumulated benefits of the NEOs under all pension plans established by the company. The amounts were calculated using discount rate and form of payment assumptions consistent with those used in the company’s GAAP financial statements. Actuarial assumptions for 2018 are described in
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further detail in the footnote to the Pension Benefits Table on page 57. Because the discount rate increased from 3.72% to 4.35% in 2018, the change in present value was negative for all five NEOS and therefore not reported in this table. These negative values were ($3,033) for Mr. Swift; ($14,670) for Ms. Costello; ($491) for Mr. Elliot; ($68) for Mr. Johnson; and ($9,055) for Mr. Bloom. (5) This column reflects amounts described in the Summary Compensation Table—All Other Compensation.
Summary Compensation Table - All Other Compensation This table provides more details on the amounts presented in the “All Other Compensation” column in the Summary Compensation Table on page 52 for the NEOs.
Contributions or Other Allocations to Defined Perquisites Contribution Plans Total Name Year ($) ($)(1) ($) Christopher Swift 2018 144,615 (2) 65,500 210,115 Beth Costello 2018 — 65,500 65,500 Douglas Elliot 2018 104,863 (3) 65,500 170,363 Brion Johnson 2018 — 65,500 65,500 William Bloom 2018 2,781 (4) 65,500 68,281 (1) This column represents company contributions under the company’s tax-qualified 401(k) plan (The Hartford Investment and Savings Plan) and The Hartford Excess Savings Plan (the “Excess Savings Plan”), a non-qualified plan established to “mirror” the qualified plan to facilitate deferral of amounts that cannot be deferred under the 401(k) plan due to Internal Revenue Code limits. Additional information can be found under the “Excess Savings Plan” section of the Non-Qualified Deferred Compensation Table beginning on page 58. (2) Perquisite amounts for Mr. Swift include personal use of corporate aircraft not requiring reimbursement to the company ($124,153), commuting costs, and expenses associated with the attendance of Mr. Swift's spouse at business functions. (3) Perquisite amounts for Mr. Elliot include personal use of corporate aircraft related to a family emergency ($31,693), personal use of corporate aircraft not requiring reimbursement to the company ($71,093), and expenses associated with the attendance of Mr. Elliot's spouse at business functions. (4) Perquisite amounts for Mr. Bloom include expenses associated with the annual physical examination benefit and attendance of Mr. Bloom's spouse at a business function.
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GRANTS OF PLAN BASED AWARDS TABLE This table discloses information about equity awards granted to the NEOs in 2018 pursuant to the 2014 Incentive Stock Plan. The table also discloses potential payouts under the AIP and performance share awards. Actual AIP payouts are reported in the Summary Compensation Table on page 52 under the heading “Non-Equity Incentive Plan Compensation.” Equity awards have been rounded to the nearest whole share or option.
All Other Estimated Future Payouts Under Estimated Future Payouts Under Stock All Other Non-Equity Incentive Plan Equity Incentive Plan (1) (2) Awards: Option Grant Awards Awards Number Awards: Exercise Date Fair of Number of or Base Value of Shares Securities Price of Stock and of Underlying Option Option Threshold Target Maximum Threshold Target Maximum Stock or Options Awards Awards Name Plan Grant Date ($) ($) ($) (#) (#) (#) Units (#) (#)(3) ($/Sh) ($)(4) C. Swift 2018 AIP 1,500,000 3,000,000 5,000,000
Stock 2/27/2018 284,819 53.81 4,000,000 Options Performance 2/27/2018 13,009 74,336 148,672 3,736,000 Shares B. Costello 2018 AIP 600,000 1,200,000 2,400,000
Stock 2/27/2018 63,194 53.81 887,500 Options Performance 2/27/2018 2,886 16,493 32,986 828,925 Shares D. Elliot 2018 AIP 950,000 1,900,000 3,800,000
Stock 2/27/2018 178,012 53.81 2,500,000 Options Performance 2/27/2018 8,131 46,460 92,920 2,335,000 Shares B. Johnson 2018 AIP 700,000 1,400,000 2,800,000
Stock 2/27/2018 56,964 53.81 800,000 Options Performance 2/27/2018 2,602 14,867 29,734 747,200 Shares W. Bloom 2018 AIP 412,500 825,000 1,650,000
Stock 2/27/2018 39,163 53.81 550,000 Options Performance 2/27/2018 1,789 10,221 20,442 513,700 Shares (1) Consistent with company practice, the NEO’s threshold, target and maximum AIP award opportunities are based on salary for 2018. The “Threshold” column shows the payout amount for achieving the minimum level of performance for which an amount is payable under the AIP (no amount is payable if this level of performance is not reached). The “Maximum” column shows the maximum amount payable at 200% of target, subject to the limit set out in the Executive Bonus Program approved by shareholders in 2014; the amount for Mr. Swift has been reduced to $5,000,000 to reflect this plan limit. To reward extraordinary performance, the Compensation Committee may, in its sole discretion, authorize individual AIP awards of up to the lower of 300% of the target annual incentive payment level or the Executive Bonus Program limit. The actual 2018 AIP award for each NEO is reported in the “Non-Equity Incentive Plan Compensation” column in the Summary Compensation Table. (2) The performance shares granted to the NEOs on February 27, 2018 vest on December 31, 2020, the end of the three year performance period, based on the company’s TSR performance relative to a peer group established by the Compensation Committee, and performance based on pre-established ROE targets. These two measures are weighted equally (50/50), as described on page 41. The “Threshold” column for this grant represents 17.5% of target which is the payout for achieving the minimum level of performance for which an amount is payable under the program (no amount is payable if this level of performance is not reached). The “Maximum” column for this grant represents 200% of target and is the maximum amount payable. (3) The options granted in 2018 to purchase shares of the company's common stock vest 1/3 per year on each anniversary of the grant date and each option has an exercise price equal to the fair market value of one share of common stock on the date of grant. The value of each stock option award is $14.044 and was determined by using a lattice/Monte-Carlo based option valuation model; this value was not reduced to reflect estimated forfeitures during the vesting period. (4) The NYSE closing price per share of the company’s common stock on February 27, 2018, the date of the 2018 LTI grants for the NEOs, was $53.81. To determine the fair value of the performance share award under FASB ASC topic 718, the market value on the grant date is adjusted by a factor of 0.9340 to take into consideration that dividends are not paid on unvested performance shares, and to reflect the probable outcome of the performance condition(s) consistent with the estimated aggregate compensation cost to be recognized over the service period, determined as of the grant date.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE This table shows outstanding stock option awards classified as exercisable and unexercisable and the number and market value of any unvested or unearned equity awards outstanding as of December 31, 2018 and valued using $44.45, the NYSE closing price per share of the company’s common stock on December 31, 2018.
Option Awards Stock Awards Equity Equity Incentive Incentive Plan Plan Awards: Awards: Market or Number Number of Payout Value of Shares Market Unearned of Unearned Number of Number of or Units Value of Shares, Shares, Units Securities Securities of Stock Shares or Units or or Other Underlying Underlying Option That Units of Other Rights Rights That Unexercised Unexercised Exercise Option Have Not Stock That That Have Have Not Options Options Price Expiration Vested Have Not Not Vested Vested Name Grant Date Exercisable(#)(1) Unexercisable(#)(1) ($) Date (#)(2) Vested ($) (#)(3) ($)(4) Christopher 3/1/2011 92,937 — 28.91 3/1/2021 Swift 2/28/2012 148,448 — 20.63 2/28/2022 3/5/2013 141,388 — 24.15 3/5/2023 3/4/2014 103,872 — 35.83 3/4/2024 3/3/2015 301,887 — 41.25 3/3/2025 3/1/2016 196,320 98,161 43.59 3/1/2026 2/28/2017 100,969 201,939 48.89 2/28/2027 76,703 3,409,448 2/27/2018 — 284,819 53.81 2/27/2028 74,336 3,304,235 Beth 3/4/2014 47,214 — 35.83 3/4/2024 Costello 3/3/2015 77,830 — 41.25 3/3/2025 3/1/2016 48,050 24,026 43.59 3/1/2026 2/28/2017 23,559 47,120 48.89 2/28/2027 17,897 795,522 2/27/2018 — 63,194 53.81 2/27/2028 16,493 733,114 Douglas 3/5/2013 128,535 — 24.15 3/5/2023 Elliot 3/4/2014 94,429 — 35.83 3/4/2024 3/3/2015 207,547 — 41.25 3/3/2025 3/1/2016 126,990 63,496 43.59 3/1/2026 2/28/2017 67,313 134,626 48.89 2/28/2027 51,135 2,272,951 2/27/2018 — 178,012 53.81 2/27/2028 46,460 2,065,147 Brion 3/4/2014 51,936 — 35.83 3/4/2024 Johnson 3/3/2015 56,604 — 41.25 3/3/2025 3/1/2016 37,067 18,534 43.59 3/1/2026 2/28/2017 20,194 40,388 48.89 2/28/2027 15,341 681,907 2/27/2018 — 56,964 53.81 2/27/2028 14,867 660,838 William Bloom 3/3/2015 33,019 — 41.25 3/3/2025 3/1/2016 21,966 10,983 43.59 3/1/2026 8/1/2016 19,576 870,153 2/28/2017 13,462 26,926 48.89 2/28/2027 10,227 454,590 2/27/2018 — 39,163 53.81 2/27/2028 10,221 454,323 (1) Stock options granted to the NEOs vest and become exercisable 1/3 per year on each anniversary of the grant date and generally expire on the tenth anniversary of the grant date. See “(2) Accelerated Stock Option Vesting” on page 62 following the Payments upon Termination or Change of Control table for a description of the circumstances in which vesting is accelerated. (2) Mr. Bloom received a retention RSU award on August 1, 2016 that will vest on August 1, 2019, assuming continued service through that date. See “(3) Accelerated Vesting of Performance Shares and Other LTI Awards” on page 62 following the Payments upon Termination or Change of Control table for a description of the circumstances in which vesting is accelerated for these RSUs. Dividends are credited on RSUs. (3) This column represents unvested performance share awards at target. Dividends are not credited on performance shares. See “(3) Accelerated Vesting of Performance Shares and Other LTI Awards” on page 62 following the Payments upon Termination or Change of Control table for a description of the circumstances in which vesting is accelerated for performance shares. • Performance shares granted on February 28, 2017 vest on December 31, 2019, the end of the three year performance period, based on the company’s TSR performance relative to the peer group established by the Compensation Committee and performance against pre-established ROE targets, with the two measures weighted equally (50/50), as described on page 40 of the 2018 proxy statement. • Performance shares granted on February 27, 2018 vest on December 31, 2020, the end of the three year performance period, based on the company’s TSR performance relative to the peer group established by the Compensation Committee and performance against pre-established ROE targets, with the two measures weighted equally (50/50), as described on page 41 of this proxy statement. (4) This column reflects market value of performance shares granted on February 28, 2017 and February 27, 2018 at target.
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OPTION EXERCISES AND STOCK VESTED TABLE This table provides information regarding option awards exercised and stock awards that vested during 2018. The numbers have been rounded to the nearest whole dollar or share.
Option Awards Stock Awards Number of Number of Shares Value Shares Value Acquired on Realized Acquired on Realized Exercise on Exercise Vesting on Vesting Name (#) ($)(1) (#)(2) ($)(3) Christopher Swift — — 114,085 5,472,111 Beth Costello 71,716 2,069,495 39,316 1,853,592 Douglas Elliot 152,777 4,598,487 85,122 4,050,897 Brion Johnson 57,841 1,669,501 34,728 1,628,459
William Bloom — — 9,176 450,266 (1) The amounts in this column reflect the value realized upon the exercise of vested stock options during 2018. The value realized is the difference between the fair market value of common stock on the date of exercise and the exercise price of the option. All options were exercised pursuant to pre-planned trading plans in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. (2) The numbers in this column reflect the total RSUs and performance shares that vested in 2018. The RSUs were granted on October 30, 2013 and settled in shares for Mr. Swift, Ms. Costello, Mr. Elliott and Mr. Johnson on the vesting date of October 30, 2018. The performance shares were granted on March 1, 2016, vested on December 31, 2018, and paid out at 100% of target following the Compensation Committee’s February 20, 2019 certification of company performance against two equally weighted measures: • at maximum performance for pre-established ROE targets, and • below threshold performance against the relative TSR performance objective for the three-year performance period January 1, 2016 – December 31, 2018.
The table below provides the number of vested RSUs and vested performance shares included in this column:
NEO Vested RSUs Vested Performance Shares C. Swift 32,071 82,014 B. Costello 19,243 20,073 D. Elliot 32,071 53,051 B. Johnson 19,243 15,485 W. Bloom — 9,176
(3) The value of the RSU awards (including accumulated dividend equivalents) is based on the NYSE closing price per share of the company's common stock on October 30, 2018 ($45.14). The value of performance share awards is based on the NYSE closing price per share of the company's common stock on February 20, 2019 ($49.07), the date the Compensation Committee certified the vesting percentage.
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PENSION BENEFITS TABLE The table below shows the number of years of credited service, the actuarial present value of the accumulated pension benefit, and the actual cash balance account as of December 31, 2018 under the company’s tax-qualified pension plan (The Hartford Retirement Plan for U.S. Employees, or the “Retirement Plan”) and the non-qualified pension plan (The Hartford Excess Pension Plan II, or the “Excess Pension Plan”) for each of the NEOs, except Mr. Bloom. Mr. Bloom had accrued a benefit in respect of a prior period of employment when a final average pay formula was applicable. He was rehired after the cash balance account formula accruals ceased as of December 31, 2012. Therefore, the Actual Cash Balance Account or Accrued Benefit column illustrates Mr. Bloom's accrued final average pay formula benefit for his earlier period of employment.
Actual Cash Number of Present Balance Payments Years Value of Account or During Credited Accumulated Accrued Last Fiscal Service Benefit Benefit Year Name Plan Name (#)(1) ($)(2) ($) ($) Christopher Swift Retirement Plan 2.83 67,179 72,228 — Excess Pension Plan 2.83 373,624 401,709 — Beth Costello Retirement Plan 8.67 138,249 158,741 — Excess Pension Plan 8.67 171,872 197,347 — Douglas Elliot Retirement Plan 1.74 46,914 50,059 — Excess Pension Plan 1.74 164,905 175,961 — Brion Johnson Retirement Plan 1.24 28,993 30,858 — Excess Pension Plan 1.24 55,836 59,430 — William Bloom(3) Retirement Plan 3.50 115,437 11,198 — Excess Pension Plan 3.50 1,207 117 — (1) Benefit accruals ceased as of December 31, 2012 under each Plan, but service continues to be credited for purposes of determining whether employees have reached early or normal retirement milestones. As of December 31, 2018, each of the NEOs was vested at 100% in his or her Final Average Earnings benefit or cash balance account. (2) The present value of accumulated benefits under each Plan is calculated assuming that benefits commence at age 65, no pre- retirement mortality, a lump sum form of payment and the same actuarial assumptions used by the company for GAAP financial reporting purposes. Because the cash balance amounts are projected to age 65 using an assumed interest crediting rate of 3.3% (the actual rate in effect for 2018), and the present value as of December 31, 2018 is determined using a discount rate of 4.35%, the present value amounts are lower than the actual December 31, 2018 cash balance accounts. (3) For Mr. Bloom, the present value of the final average pay benefit portion of Mr. Bloom's benefit assumes commencement at the date he would receive an unreduced benefit under the plan (age 62 plus one month) and an annuity form of payment. Mr. Bloom has no accrued benefit under the cash balance formula. Cash Balance Formula Employees hired prior to January 1, 2001 accrued benefits under a final average pay formula through December 31, 2008 and accrued benefits under the cash balance formula from January 1, 2009 to December 31, 2012. For employees hired on or after January 1, 2001, retirement benefits accrued under the cash balance formula until December 31, 2012. Effective December 31, 2012, the cash balance formula under the Retirement Plan and the Excess Pension Plan was frozen for all Plan participants, including the NEOs. Interest continues to be credited on previously accrued amounts, at a rate of 3.3% or based on the 10 year Treasury rate, whichever is greater. All Plan participants are currently vested in their account balances, which they may elect to receive following termination of employment in the form of a single lump sum payment or an actuarially- equivalent form of annuity. In the event of a Change of Control, each NEO would automatically receive a lump sum of the value of his or her Excess Pension Plan cash balance benefit as of the date of the Change of Control, provided that the Change of Control also constitutes a “change in control” as defined in regulations issued under Section 409A of the Internal Revenue Code. Final Average Pay Formula Because Mr. Bloom was previously employed by The Hartford from 1996-1999, he earned benefits under the final average pay formula in effect for employees hired prior to January 1, 2001. This final average pay formula provides an annual pension payable in the form of an annuity commencing as of normal retirement age (age 65) for the participant's lifetime, equal to 2% of the employee's average final pay for each of the first 30 years of credited service prior to January 1, 2009, reduced by 1.67% of the employee's primary Social Security benefit for each of the first 30 years of credited service prior to January 1, 2009. An employee's average final pay is calculated as the sum of (i) average annual base salary for the 60 calendar months of the last 120 calendar months of service prior to 2009 affording the highest average, plus (ii) average annual bonus payments in the five calendar years of the employee's last ten calendar years of service prior to 2009 affording the highest average. Benefits are payable as a single life
2019 Proxy Statement 57 COMPENSATION MATTERS annuity or reduced actuarially-equivalent amount in order to provide for payments to a contingent annuitant. Mr. Bloom is not currently eligible to retire. In the event of a Change of Control, Mr. Bloom would automatically receive a lump sum of the value of his Excess Pension Plan benefit as of the date of the Change of Control, provided that the Change of Control also constitutes a “change in control” as defined in regulations issued under Section 409A of the Internal Revenue Code. NON-QUALIFIED DEFERRED COMPENSATION TABLE Excess Savings Plan NEOs, as well as other employees, may contribute to the company’s Excess Savings Plan, a non-qualified plan established as a “mirror” to the company’s tax-qualified 401(k) plan (The Hartford Investment and Savings Plan). The Excess Savings Plan is intended to facilitate deferral of amounts that cannot be deferred under the 401(k) plan for employees whose compensation exceeds the Internal Revenue Code limit for the 401(k) plan ($275,000 in 2018). When an eligible employee’s annual compensation reaches that Internal Revenue Code limit, the eligible employee can contribute up to six percent (6%) of compensation in excess of that limit to the Excess Savings Plan, up to a combined $1 million annual limit on compensation for both plans. The company makes a matching contribution to the Excess Savings Plan in an amount equal to 100% of the employee’s contribution. Company contributions to the Excess Savings Plan are fully vested and plan balances are payable in a lump sum following termination of employment. The table below shows the notional investment options available under the Excess Savings Plan during 2018 and their annual rates of return for the calendar year ended December 31, 2018, as reported by the administrator of the Excess Savings Plan. The notional investment options available under the Excess Savings Plan correspond to the investment options available to participants in the 401(k) plan. Excess Savings Plan Notional Investment Options
Rate of Return Rate of Return (for the year ended (for the year ended Name of Fund Dec. 31, 2018) Name of Fund Dec. 31, 2018) The Hartford Stock Fund (19.79)% Vanguard Target Retirement 2015 Trust (2.94)% ISP International Equity Fund(1) (18.06)% Vanguard Target Retirement 2020 Trust (4.16)% ISP Active Large Cap Equity Fund(2) (3.29)% Vanguard Target Retirement 2025 Trust (5.05)% ISP Small/Mid Cap Equity Fund(3) (12.30)% Vanguard Target Retirement 2030 Trust (5.78)% Hartford Index Fund(4) 4.78 % Vanguard Target Retirement 2035 Trust (6.51)% State Street S&P 500 Index Fund(4) (4.41)% Vanguard Target Retirement 2040 Trust (7.27)% Hartford Stable Value Fund 2.61 % Vanguard Target Retirement 2045 Trust (7.84)% Hartford Total Return Bond HLS Fund (0.81)% Vanguard Target Retirement 2050 Trust (7.82)% State Street Real Asset Fund (7.09)% Vanguard Target Retirement 2055 Trust (7.83)% Vanguard Federal Money Market Fund 1.78 % Vanguard Target Retirement 2060 Trust (7.80)% Vanguard Target Retirement Income Trust (1.99)% Vanguard Target Retirement 2065 Trust (7.70)% (1) The ISP International Equity Fund is a multi-fund portfolio made up of two underlying mutual funds that provides a blended rate of return. The underlying funds are the Hartford International Opportunities HLS Fund (50%) and Dodge & Cox International Stock Fund (50%). (2) The ISP Active Large Cap Equity Fund is a multi-fund portfolio made up of two underlying funds that provides a blended rate of return. The underlying funds are the Hartford Dividend and Growth HLS Fund (50%) and the Loomis Sayles Growth Fund (50%). (3) The ISP Small/Mid Cap Equity Fund is a multi-fund portfolio made up of four underlying funds (one mutual fund and three managed separate accounts) that provides a blended rate of return. The underlying funds are the T. Rowe Price QM U.S. Small- Cap Growth Fund (20%), Chartwell Investment Partners Small Cap Value Fund (20%), Hartford MidCap HLS Fund (30%) and LMCG Investments Mid Cap Value Fund (30%). (4) The State Street S&P 500 Index Fund was added as an investment option on June 18, 2018, replacing the Hartford Index Fund. The Hartford Index Fund rate of return represents return from January 1, 2018 through June 15, 2018. The State Street S&P 500 Index Fund rate of return represents return from January 1, 2018 through December 31, 2018.
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Non-Qualified Deferred Compensation - Excess Savings Plan The table below shows the NEO and company contributions, the aggregate earnings credited, and the total balance of each NEO’s account under the Excess Savings Plan as of December 31, 2018.
Executive Registrant Aggregate Aggregate Aggregate Contributions Contributions Earnings Withdrawals / Balance Name in Last FY ($)(1) in Last FY ($)(2) in Last FY ($)(3) Distributions ($) at Last FYE ($)(4) Christopher Swift 43,500 43,500 (44,516) — 783,698 Beth Costello 43,500 43,500 13,187 — 579,040 Douglas Elliot 43,500 43,500 14,498 — 634,902 Brion Johnson 43,500 43,500 (37,960) — 542,328 William Bloom 43,500 43,500 (28,052) — 276,502 (1) The amounts shown reflect executive contributions into the Excess Savings Plan during 2018 with respect to Annual Incentive Plan cash awards paid in 2018 in respect of performance during 2017. These amounts are included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table in the 2018 proxy statement. (2) The amounts shown reflect the company’s matching contributions into the Excess Savings Plan in respect of each NEO’s service in 2018. These amounts are also included with the Company's contributions to the 401(k) plan in the “All Other Compensation” column of the Summary Compensation Table on page 52. (3) The amounts shown represent investment gains (or losses) during 2018 on notional investment funds available under the Excess Savings Plan (which mirror investment options available under the 401(k) plan). No portion of these amounts is included in the Summary Compensation Table on page 52 as the company does not provide above-market rates of return. (4) The amounts shown represent the cumulative amount that has been credited to each NEO’s account under the applicable plan as of December 31, 2018. The amounts reflect the sum of the contributions made by each NEO and the company since the NEO first began participating in the Excess Savings Plan (including executive and company contributions reported in the Summary Compensation Tables in previous years), adjusted for any earnings or losses as a result of the performance of the notional investments. The reported balances are not based solely on 2018 service.
2019 Proxy Statement 59 COMPENSATION MATTERS
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL The following section provides information concerning the value of potential payments and benefits as of December 31, 2018 that would be payable to NEOs following termination of employment under various circumstances or in the event of a Change of Control (as defined on page 64). Benefit eligibility and values as of December 31, 2018 vary based on the reason for termination. Senior Executive Severance Pay Plan The NEOs participate in The Hartford Senior Executive Officer Severance Pay Plan (the “Senior Executive Plan”), that provides specified payments and benefits to participants upon termination of employment as a result of severance eligible events. The Senior Executive Plan applies to the NEOs and other executives that the Executive Vice President and Chief Human Resources Officer (the “Plan Administrator”) approves for participation. As a condition to participate in the Senior Executive Plan, the NEOs must agree to such restrictive covenants as are required by the Plan Administrator. In addition to confidentiality and non-disparagement provisions that continue after termination of employment, the NEOs have agreed that, while employed and for a one-year period following a termination of employment, they are subject to non-competition and non-solicitation provisions. If an NEO is involuntarily terminated, other than for Cause (as defined on page 64), and not eligible for retirement treatment under the AIP or for some or all of his or her LTI award(s), he or she would receive: • A lump sum severance amount equal to two times the sum of the executive’s annual base salary and the target AIP award, both determined as of the termination date, payable within 60 days of termination; • A pro rata AIP award, in a discretionary amount, under the company’s AIP for the year in which the termination occurs, payable no later than the March 15 following the calendar year of termination; • To the extent provided by the LTI award terms, unless the NEO is retirement eligible, vesting in a pro rata portion of any outstanding unvested LTI awards (other than Mr. Bloom's August 2016 RSU award), provided that at least one full year of the performance or restriction period of an award has elapsed as of the termination date; and • Continued health coverage and outplacement services for up to twelve months following the termination date. Treatment upon a Change of Control If, within the two year period following a Change of Control (as defined on page 64), (1) the NEO is involuntarily terminated by the company other than for Cause, or (2) the NEO voluntarily terminates employment with the company for Good Reason (as defined on page 64), then the NEO would receive the same severance pay under the Senior Executive Plan as the NEO would have received in the event of involuntary termination before a Change of Control, and would be eligible for a pro rata AIP award as set forth above, except that the pro rata AIP award payable would be at least the same percentage of the target level of payout as is generally applicable to executives whose employment did not terminate. LTI awards would not vest automatically upon a Change of Control so long as the Compensation Committee determines that, upon the Change of Control, the awards would either continue to be honored or be replaced with substantially equivalent alternative awards. If the awards were so honored or replaced, then those awards would fully vest if, within the two year period following the Change of Control, (1) the NEO was involuntarily terminated by the company other than for Cause, or (2) the NEO voluntarily terminated employment with the company for Good Reason. In the event of a Change of Control, the NEO would receive a lump sum equal to the present value of the NEO's benefit under the Excess Pension Plan and his or her Excess Savings Plan balance, provided that the Change of Control also constituted a “change in control” as defined in regulations issued under Section 409A of the Internal Revenue Code. (See (6) Additional Pension Benefits below for a description of Mr. Bloom's Excess Pension Plan benefit upon a Change in Control.) No gross-up would be provided for any excise taxes that apply to an NEO upon a Change of Control. Other Benefits in the Event of Death or Disability In the event of death, an NEO would receive a company-paid life insurance benefit in addition to whatever voluntary group term life insurance coverage is in effect. The company paid benefit would equal one times salary with a cap of $100,000, unless the employee had elected a flat amount of $50,000. In the event of disability, the NEO would be entitled to short and long term disability benefits if he or she were disabled in accordance with the terms of the applicable plan. Upon the commencement of long term disability benefits and while in receipt of long term disability benefits, each NEO would be eligible to participate in company health benefit and life insurance plans for up to a maximum of three years. Eligibility for Retirement Treatment For AIP awards, an NEO is eligible for retirement treatment if (i) the NEO is at least age 50, has at least 10 years of service and the sum of the NEO’s age and service is equal to at least 70, or (ii) the NEO is at least age 65 with at least 5 years of service (the"Rule of 70"). None of the NEOs were eligible to receive retirement treatment for their AIP awards as of December 31, 2018. However, Messrs. Swift, Elliot and Johnson were eligible to receive retirement treatment for their 2016, 2017 and 2018 LTI awards under the Rule of 65, as described below.
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For the 2016, 2017 and 2018 LTI awards, an NEO will receive retirement treatment if he or she provides written notice three months in advance of his or her planned retirement date, continues to perform his or her job responsibilities satisfactorily, and meets one of the following retirement definitions as of the last date paid: (i) the NEO is at least age 55 with at least 5 years of service, and age plus service equals or exceeds 65 (the "Rule of 65"), or (ii) as of the 2016 annual grant date of March 1, 2016, the NEO was at least age 50 with at least 10 years of service and the sum of the NEO's age and service was equal to at least 70 , and the NEO had an outstanding LTI grant as of December 31, 2015. Payments upon Termination or Change of Control The table and further discussion below address benefits that would be payable to the NEOs as of December 31, 2018 assuming their termination of employment on December 31, 2018 under various circumstances or in the event of a Change of Control effective December 31, 2018. The benefits discussed below are in addition to: • The vested stock options set forth in the Outstanding Equity Awards at Fiscal Year-End Table on page 55, • The vested performance shares set forth in the Option Exercises and Stock Vested Table on page 56, • The vested pension benefits set forth in the Pension Benefits Table on page 57, and • The vested benefits set forth in the Non-Qualified Deferred Compensation Table on page 58 (benefits payable from the Excess Savings Plan). The amounts shown for accelerated stock option and other LTI vesting are calculated using the NYSE closing price per share of the company’s common stock on December 31, 2018 of $44.45.
Christopher Beth Douglas Brion William Payment Type Swift Costello Elliot Johnson Bloom VOLUNTARY TERMINATION OR RETIREMENT 2018 AIP Award ($)(1) — — — — — Accelerated Stock Option Vesting ($)(2) 84,418 — 54,607 15,939 — Accelerated Performance Share Vesting ($)(3) 6,713,683 — 4,338,098 1,342,745 — Accelerated Other LTI Vesting ($)(3) — — — — — TOTAL TERMINATION BENEFITS ($) 6,798,101 — 4,392,705 1,358,684 —
INVOLUNTARY TERMINATION – NOT FOR CAUSE 2018 AIP Award ($)(1) 4,800,000 1,925,000 3,050,000 2,250,000 1,550,000 Cash Severance ($)(4) 8,300,000 3,850,000 5,700,000 3,950,000 2,800,000 Accelerated Stock Option Vesting ($)(2) 84,418 17,191 54,607 15,939 7,859 Accelerated Performance Share Vesting ($)(3) 6,713,683 774,719 4,338,098 1,342,745 454,501 Accelerated Other LTI Vesting ($)(3) — — — — — Benefits Continuation and Outplacement ($)(5) 41,591 41,591 36,024 41,795 41,591 TOTAL TERMINATION BENEFITS ($) 19,939,692 6,608,501 13,178,729 7,600,479 4,853,951
CHANGE OF CONTROL/ INVOLUNTARY TERMINATION NOT FOR CAUSE OR TERMINATION FOR GOOD REASON 2018 AIP Award ($)(1) 4,800,000 1,925,000 3,050,000 2,250,000 1,550,000 Cash Severance ($)(4) 8,300,000 3,850,000 5,700,000 3,950,000 2,800,000 Accelerated Stock Option Vesting ($)(2) 84,418 20,662 54,607 15,939 9,445 Accelerated Performance Share Vesting ($)(3) 6,713,683 1,528,636 4,338,098 1,342,745 908,913 Accelerated Other LTI Vesting ($)(3) — — — — 870,153 Benefits Continuation and Outplacement ($)(5) 41,591 41,591 36,024 41,795 41,591 Additional Pension Benefits ($)(6) — — — — 207 TOTAL TERMINATION BENEFITS ($) 19,939,692 7,365,889 13,178,729 7,600,479 6,180,309
INVOLUNTARY TERMINATION – DEATH OR DISABILITY 2018 AIP Award ($)(1) 4,800,000 1,925,000 3,050,000 2,250,000 1,550,000 Accelerated Stock Option Vesting ($)(2) 84,418 20,662 54,607 15,939 9,445 Accelerated Performance Share Vesting ($)(3) 6,713,683 1,528,636 4,338,098 1,342,745 908,913 Accelerated Other LTI Vesting ($)(3) Benefits Continuation ($)(5) 52,034 52,034 35,652 52,517 52,034 TOTAL TERMINATION BENEFITS ($) 11,650,135 3,526,332 7,478,357 3,661,201 2,520,392
2019 Proxy Statement 61 COMPENSATION MATTERS
(1) 2018 AIP Award Voluntary Termination or Retirement. Generally, upon a voluntary termination of employment during 2018, the NEO would not be eligible to receive an AIP award for 2018 unless the Compensation Committee determined otherwise. However, an NEO who is eligible for retirement treatment for an AIP award would be entitled to receive a pro rata award for 2018 based on the portion of the year served, payable no later than March 15 following the calendar year of termination. None of the NEOs were eligible for retirement treatment as of December 31, 2018 under the AIP. Involuntary Termination – Not For Cause. Each NEO would be eligible for a pro rata portion of his or her 2018 AIP award. The amounts shown represent the actual award payable for 2018, as reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 52. Involuntary Termination – Not For Cause, or a Termination For Good Reason, Within Two Years Following a Change of Control. Each NEO would be eligible for a pro rata portion of his or her 2018 AIP award, commensurate with amounts received by the executives who did not terminate employment. The amounts shown represent the actual award payable for 2018, as reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 52. Involuntary Termination For Cause. No AIP award would be payable. Death or Disability. Each NEO would receive a 2018 AIP award comparable to the award that would have been paid had he or she been subject to an involuntary termination (not for Cause). (2) Accelerated Stock Option Vesting Voluntary Termination or Retirement. For a voluntary termination, all unvested options would be canceled, unless the Compensation Committee determined otherwise. Each NEO would be entitled to exercise stock options vested as of the date of his or her termination of employment within the four month period following termination of employment but not beyond the scheduled expiration date. If the NEO is retirement eligible, unvested stock options would immediately vest. Vested options would need to be exercised within the five year period following the applicable retirement date but not beyond the scheduled expiration date. Mr. Swift, Mr. Elliot and Mr. Johnson were eligible for retirement treatment as of December 31, 2018 on their 2016, 2017 and 2018 option awards. Involuntary Termination – Not For Cause. Each NEO would be entitled to pro rata vesting of unvested stock options as long as the options had been outstanding for at least one year from the date of grant. Stock options vested as of the date of termination of employment would need to be exercised within the four month period following termination of employment but not beyond the scheduled expiration date. If the NEO is retirement eligible, unvested stock options would immediately vest. Vested options would need to be exercised within the five year period following the applicable retirement date but not beyond the scheduled expiration date. Mr. Swift, Mr. Elliot and Mr. Johnson were eligible for retirement treatment as of December 31, 2018 on their 2016, 2017 and 2018 option awards. Change of Control. Stock options would not automatically vest upon a Change of Control so long as the Compensation Committee determined that, upon the Change of Control, the awards would either be honored or replaced with substantially equivalent alternative awards. If the stock option awards were so honored or replaced, then vesting of those awards would only be accelerated if the NEO’s employment were to be terminated within two years following the Change of Control without Cause or by the NEO for Good Reason. Stock options, if vested upon the Change of Control, would be exercisable for the remainder of their original term. The amounts shown in the Change of Control section of the table provide the in-the- money value of accelerated stock option vesting presuming that all options were to vest upon a Change of Control on December 31, 2018 (i.e., that the stock option awards were not honored or replaced, or that the NEOs were terminated at the time of the Change of Control without Cause). Involuntary Termination For Cause. All unvested stock options would be canceled. Death or Disability. All unvested stock options would fully vest and would need to be exercised within the five year period following the applicable termination date but not beyond the scheduled expiration date. (3) Accelerated Vesting of Performance Shares and Other LTI Awards Voluntary Termination or Retirement. For a voluntary termination, unvested performance shares and RSUs would be canceled as of the termination of employment date, unless the Compensation Committee determined otherwise. For retirement eligible employees, performance share awards granted on February 28, 2017 and February 27, 2018 would fully vest, subject to compliance with a non-compete provision. As of December 31, 2018, Mr. Swift, Mr. Elliot and Mr. Johnson were eligible to receive retirement treatment on their outstanding performance share awards, subject to compliance with the non-competition provision. Unless the Compensation Committee determined otherwise, Mr. Bloom's RSU award granted on August 1, 2016 would be forfeited upon voluntary termination or retirement, consistent with the terms of that award. Involuntary Termination – Not For Cause. Each NEO would be entitled to pro rata payment of 2017 and 2018 performance share awards at the end of the applicable performance period, except for Mr. Swift, Mr. Elliot and Mr. Johnson who would receive full vesting for their 2017 and 2018 performance share award due to eligibility for retirement treatment, subject to compliance with the non-competition provision. The amount shown is the value the NEO would be entitled to at the end of
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the respective performance period for these awards to which pro rata or full payment applies, based on $44.45, the closing stock price on December 31, 2018, and payout at target. RSUs granted to Mr. Bloom on August 1, 2016 would be forfeited, unless the Compensation Committee determined otherwise. Change Of Control. RSU and performance share awards would not automatically vest upon a Change of Control so long as the Compensation Committee determined that, upon the Change of Control, the awards would either be honored or replaced with substantially equivalent alternative awards. If the RSU awards and the performance share awards were so honored or replaced, then vesting of those awards would only be accelerated if the NEO’s employment were to be terminated within two years following the Change of Control without Cause or by the NEO for Good Reason. The amounts shown in the Change of Control section of the table indicate the value of accelerated vesting presuming that all awards were to vest upon the Change of Control (i.e., Mr. Bloom's RSU award and the performance share awards were not honored or replaced, or that the NEOs were terminated at the time of the Change of Control without Cause), based on $44.45, the closing stock price on December 31, 2018, and, in the case of performance shares, a payout at target. The Compensation Committee could determine that performance share awards would pay out at greater than the target amount. Involuntary Termination For Cause. All unvested awards would be canceled. Death or Disability. Performance share awards granted in 2017 and 2018 would vest in full at target and be payable within 60 days of the termination date. RSUs granted to Mr. Bloom on August 1, 2016 would be forfeited, unless the Compensation Committee determined otherwise. (4) Cash Severance Payments Voluntary Termination or Retirement, Involuntary Termination For Cause, Death or Disability. No benefits would be payable. Involuntary Termination - Not For Cause Before or After a Change of Control, or Termination For Good Reason Within Two Years Following a Change of Control. Each NEO would receive a severance payment calculated as a lump sum equal to two times the sum of base salary and the target AIP award at the time of termination (assumed to be December 31, 2018 for this purpose). In the event of termination after a Change of Control, if the aggregate present value of payments contingent on the Change of Control would result in payment by the NEO of an excise tax on “excess parachute payments,” as described in regulations under Sections 280G and 4999 of the Internal Revenue Code, then the severance amounts shown would be reduced if, as a result, the NEO would thereby receive more on an after-tax basis than he or she would receive if the reduction in the severance amount was not made. The amounts shown assume that such reduction does not occur. (5) Benefits Continuation and Outplacement Voluntary Termination or Retirement. No benefits would be payable. NEOs who terminate employment after attaining age 55 and completing 10 years of service can elect coverage under a company high deductible health plan until age 65 at their own expense. Involuntary Termination - Not For Cause Before or After A Change of Control, or Termination For Good Reason Within Two Years Following a Change of Control. Each NEO would be provided up to one-year of health benefits at the employee cost and up to one-year of executive outplacement services. The amounts shown represent the estimated employer cost of health coverage continuation and outplacement. Involuntary Termination - Death or Disability. Each NEO would be provided 36 months of life and health benefits continuation from the date of termination due to long term disability. (6) Additional Pension Benefits Upon a Change in Control In the event of a Change in Control, all participants in the Excess Pension Plan automatically receive, in a single lump sum, the present value of the benefit accrued as of the date of the Change in Control, provided that the Change of Control also constitutes a "change of control" as defined in regulations issued under Section 409A of the Internal Revenue Code. In such event, the provisions of the Excess Pension Plan regarding the calculation of the lump sum payments due under that Plan's final average pay formula provide for different assumptions to be used, including lower discount rates, than have historically been assumed by the company for GAAP financial reporting purposes. In the event of a Change of Control, the hypothetical lump sum payout from the Excess Pension Plan to Mr. Bloom would thus be greater by $207 than the accumulated benefit present value set forth in the Pension Benefits Table on page 57.
2019 Proxy Statement 63 COMPENSATION MATTERS
DEFINITIONS “Cause” as used above is defined differently, depending upon whether an event occurs before or after a Change of Control. • Prior to a Change of Control, “Cause” is generally defined as termination for misconduct or other disciplinary action. • Upon the occurrence of a Change of Control, “Cause” is generally defined as the termination of the executive’s employment due to: (i) a felony conviction; (ii) an act or acts of dishonesty or gross misconduct which result or are intended to result in damage to the company’s business or reputation; or (iii) repeated violations by the executive of the obligations of his or her position, which violations are demonstrably willful and deliberate and which result in damage to the company’s business or reputation. “Change of Control” is generally defined as: • The filing of a report with the SEC disclosing that a person is the beneficial owner of 40% or more of the outstanding stock of the company entitled to vote in the election of directors of the company; • A person purchases shares pursuant to a tender offer or exchange offer to acquire stock of the company (or securities convertible into stock), provided that after consummation of the offer, the person is the beneficial owner of 20% or more of the outstanding stock of the company entitled to vote in the election of directors of the company; • The consummation of a merger, consolidation, recapitalization or reorganization of the company approved by the stockholders of the company, other than in a transaction immediately following which the persons who were the beneficial owners of the outstanding securities of the company entitled to vote in the election of directors of the company immediately prior to such transaction are the beneficial owners of at least 55% of the total voting power represented by the securities of the entity surviving such transaction entitled to vote in the election of directors of such entity in substantially the same relative proportions as their ownership of the securities of the company entitled to vote in the election of directors of the company immediately prior to such transaction; • The consummation of a sale, lease, exchange or other transfer of all or substantially all the assets of the company approved by the stockholders of the company; or • Within any 24 month period, the persons who were directors of the company immediately before the beginning of such period (the “Incumbent Directors”) cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the company, provided that any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director (A) was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this clause, and (B) was not designated by a person who has entered into an agreement with the company to effect a merger or sale transaction described above. “Good Reason” is generally defined as: • The assignment of duties inconsistent in any material adverse respect with the executive’s position, duties, authority or responsibilities, or any other material adverse change in position, including titles, authority or responsibilities; • A material reduction in base pay or target AIP award; • Being based at any office or location more than 50 miles from the location at which services were performed immediately prior to the Change of Control (provided that such change of office or location also entails a substantially longer commute); • A failure by the company to obtain the assumption and agreement to perform the provisions of the Senior Executive Plan by a successor; or • A termination asserted by the company to be for cause that is subsequently determined not to constitute a termination for Cause.
CEO Pay Ratio For 2018, Mr. Swift had total compensation, as reported in the Summary Compensation Table on page 52, of $13,883,615, while our median employee had total compensation of $104,925, yielding a CEO pay ratio of 132 times the median. Annual base salary at year-end 2018 was used to determine the median employee. The median employee's total compensation was calculated in the same manner as for the CEO in the Summary Compensation Table. No statistical sampling was used and all non-U.S. employees were excluded using the 5% de minimis rule (4 employees were based in Canada at year-end).
64 www.thehartford.com INFORMATION ON STOCK OWNERSHIP DIRECTORS AND EXECUTIVE OFFICERS The following table shows, as of March 18, 2019: (1) the number of shares of our common stock beneficially owned by each director, director nominee, and NEO, and (2) the aggregate number of shares of common stock and common stock-based equity (including RSUs, performance shares granted at target and stock options that will not vest or become exercisable within 60 days, as applicable) held by all directors, director nominees, and Section 16 executive officers as a group.
As of March 18, 2019, no individual director or Section 16 executive officer beneficially owned 1% or more of the total outstanding shares of our common stock. The directors and Section 16 executive officers as a group beneficially owned approximately 1.7% of the total outstanding shares of our common stock as of March 18, 2019.
Name of Beneficial Owner Common Stock(1) Total(2) Robert B. Allardice, III 33,665 33,665 William A. Bloom 137,314 283,170 Beth Costello(3) 321,559 515,538 Carlos Dominguez 3,824 3,824 Douglas Elliot(4) 1,529,510 1,529,510 Trevor Fetter 69,986 69,986 Brion Johnson 472,949 472,949 Stephen P. McGill 4,345 4,345 Kathryn A. Mikells(5) 70,466 70,466 Michael G. Morris 79,702 79,702 Thomas A. Renyi 70,549 70,549 Julie G. Richardson(6) 42,875 42,875 Teresa W. Roseborough 15,838 15,838 Virginia P. Ruesterholz 28,923 28,923 Christopher J. Swift(4)(7) 2,513,447 2,513,447 Greig Woodring(8) 4,407 4,407 All directors and Section 16 executive officers as a group (21 persons) 6,159,562 6,629,802
(1) All shares of common stock are owned directly except as otherwise indicated below. Pursuant to SEC regulations, shares of common stock beneficially owned include shares of common stock that, as of March 18, 2019: (i) may be acquired by directors and Section 16 executive officers upon the vesting or distribution of stock-settled RSUs or the exercise of stock options exercisable within 60 days after March 18, 2019, (ii) are allocated to the accounts of Section 16 executive officers under the company’s tax-qualified 401(k) plan, (iii) are held by Section 16 executive officers under The Hartford Employee Stock Purchase Plan or (iv) are owned by a director’s or a Section 16 executive officer’s spouse or minor child. Of the number of shares of common stock shown above, the following shares may be acquired upon exercise of stock options as of March 18, 2019 or within 60 days thereafter by: Mr. Bloom,105,947 shares; Ms. Costello, 265,303 shares; Mr. Elliot, 1,220,846 shares; Mr. Johnson, 356,409 shares; Mr. Swift, 2,023,003 shares; and all Section 16 executive officers as a group, 4,501,366 shares. (2) This column shows the individual’s total stock-based holdings in the company, including the securities shown in the “Common Stock” column (as described in footnote 1), plus RSUs, performance shares (at target) and stock options that may vest or become exercisable more than 60 days after March 18, 2019. (3) The amount shown includes 11 shares of common stock held by Ms. Costello’s spouse. (4) The amount shown for Messrs. Elliot, Johnson and Swift reflects retirement eligibility as of March 18, 2019 or within 60 days thereafter, as applicable. (5) The amount shown includes 6,800 shares of common stock held by a limited liability company of which Ms. Mikells is a member. (6) The amount shown includes 1,500 shares of common stock held in three separate trusts for which Ms. Richardson serves as co-trustee. (7) The amount shown includes 3,750 shares of common stock held by Mr. Swift’s spouse and 69,050 held in two trusts for which Mr. Swift or his spouse serves as trustee. (8) The amount shown includes 84 shares of common stock held by a trust for which Mr. Woodring serves a trustee.
2019 Proxy Statement 65 INFORMATION ON STOCK OWNERSHIP
CERTAIN SHAREHOLDERS The following table shows those persons known to the company as of February 15, 2019 to be the beneficial owners of more than 5% of our common stock. In furnishing the information below, we have relied on information filed with the SEC by the beneficial owners.
Amount and Nature of Beneficial Name and Address of Beneficial Owner Ownership Percent of Class(1) The Vanguard Group 38,095,029(2) 10.61% 100 Vanguard Blvd. Malvern, PA 19355 BlackRock Inc. 29,817,087(3) 8.3% 55 East 52nd Street New York, NY 10055 JPMorgan Chase & Co. 22,987,494(4) 6.4% 270 Park Avenue New York, NY 10017 State Street Corporation 20,334,282(5) 5.7% One Lincoln Street Boston, MA 02111 (1) The percentages contained in this column are based solely on information provided in Schedules 13G or 13G/A filed with the SEC by each of the beneficial owners listed above regarding their respective holdings of our common stock as of December 31, 2018. (2) This information is based solely on information contained in a Schedule 13G/A filed on February 11, 2019 by The Vanguard Group to report that it was the beneficial owner of 38,095,029 shares of our common stock as of December 31, 2018. Vanguard has (i) the sole power to vote or to direct the vote with respect to 412,698 of such shares, (ii) shared power to vote or to direct the vote with respect to 94,432 of such shares, (iii) the sole power to dispose or direct the disposition with respect to 37,594,942 of such shares and (iv) the shared power to dispose or direct the disposition of 500,087 of such shares. (3) This information is based solely on information contained in a Schedule 13G/A filed on February 11, 2019 by BlackRock, Inc. to report that it was the beneficial owner of 29,817,087 shares of our common stock as of December 31, 2018. BlackRock has (i) sole power to vote or to direct the vote with respect to 26,012,638 of such shares; and (ii) sole power to dispose or direct the disposition of 29,817,087 of such shares. (4) This information is based solely on information contained in a Schedule 13G filed on January 24, 2019 by JPMorgan Chase & Co. to report that it was the beneficial owner of 22,987,494 shares of our common stock as of December 31, 2018. JPMorgan has (i) sole power to vote or to direct the vote with respect to 21,537,105 of such shares; (ii) shared power to vote or to direct the vote of 29,667 of such shares; (iii) sole power to dispose or to direct the disposition of 22,867,554 of such shares; and (iv) shared power to dispose or to direct the disposition of 117,782 of such shares. (5) This information is based solely on information contained in a Schedule 13G filed on February 14, 2019 by State Street Corporation to report that it was the beneficial owner of 20,334,282 shares of our common stock as of December 31, 2018. State Street has (i) the shared power to vote or to direct the vote with respect to 18,908,243 of such shares and (ii) shared power to dispose or direct the disposition of 20,330,917 of such shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our directors and designated Section 16 executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Section 16 executive officers, directors and greater than 10% shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based upon a review of filings with the SEC and written representations from our directors and Section 16 executive officers that no other reports were required, we believe that all Section 16(a) reports were filed timely in 2018.
66 www.thehartford.com INFORMATION ABOUT THE HARTFORD’S ANNUAL MEETING OF SHAREHOLDERS HOUSEHOLDING OF PROXY MATERIALS SEC rules permit companies and intermediaries such as brokers to satisfy delivery requirements for proxy statements and notices with respect to two or more shareholders sharing the same address by delivering a single proxy statement or a single notice addressed to those shareholders. This process, which is commonly referred to as “householding,” provides cost savings for companies. Some brokers household proxy materials, delivering a single proxy statement or notice to multiple shareholders sharing an address unless contrary instructions have been received from the affected shareholders. Once you have received notice from your broker that they will be householding materials to your address, householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate proxy statement or notice, please notify your broker. You may also call (800) 542-1061 or write to: Householding Department, 51 Mercedes Way, Edgewood, New York 11717, and include your name, the name of your broker or other nominee, and your account number(s). You can also request prompt delivery of copies of the Notice of 2019 Annual Meeting of Shareholders, Proxy Statement and 2018 Annual Report by writing to Donald C. Hunt, Vice President and Corporate Secretary, The Hartford Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155. FREQUENTLY ASKED QUESTIONS The Board of Directors of The Hartford is soliciting shareholders’ proxies in connection with the 2019 Annual Meeting of Shareholders, and at any adjournment or postponement thereof. The mailing to shareholders of the notice of Internet availability of proxy materials took place on or about April 4, 2019. Q: Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?
A: Instead of mailing a printed copy of our proxy materials to each shareholder of record, the SEC permits us to furnish proxy materials by providing access to those documents on the Internet. Shareholders will not receive printed copies of the proxy materials unless they request them. The notice instructs you as to how to submit your proxy on the Internet. If you would like to receive a paper or email copy of our proxy materials, you should follow the instructions in the notice for requesting those materials.
Q: How are shares voted if additional matters are presented at the Annual Meeting?
A: Other than the items of business described in this proxy statement, we are not aware of any other business to be acted upon at the Annual Meeting. If you grant a proxy, the persons named as proxyholders, David C. Robinson, Executive Vice President and General Counsel, and Donald C. Hunt, Vice President and Corporate Secretary, will have the discretion to vote your shares on any additional matters properly presented for a vote at the Annual Meeting in accordance with Delaware law and our By-laws.
Q: Who may vote at the Annual Meeting?
A: Holders of our common stock at the close of business on March 18, 2019 (the “Record Date”) may vote at the Annual Meeting. On the Record Date, we had 360,740,923 shares of common stock outstanding and entitled to be voted at the Annual Meeting. You may cast one vote for each share of common stock you hold on all matters presented at the Annual Meeting.
Participants in The Hartford Investment and Savings Plan (“ISP”) and The Hartford Deferred Restricted Stock Unit Plan (“Bonus Swap Plan”) may instruct plan trustees as to how to vote their shares using the methods described on page 68. The trustees of the ISP and the Bonus Swap Plan will vote shares for which they have not received direction in accordance with the terms of the ISP and the Bonus Swap Plan, respectively.
Participants in The Hartford's Employee Stock Purchase Plan (“ESPP”) may vote their shares using the voting methods described on page 68.
2019 Proxy Statement 67 INFORMATION ABOUT THE MEETING
Q: What vote is required to approve each proposal?
A:
Proposal Voting Standard 1 Election of Directors A director will be elected if the number of shares voted “for” that director exceeds the number of votes “against” that director 2 To ratify the appointment of our independent An affirmative vote requires the majority of those shares present in registered public accounting firm person or represented by proxy and entitled to vote 3 To approve, on a non-binding, advisory basis, the An affirmative vote requires the majority of those shares present in compensation of our named executive officers as person or represented by proxy and entitled to vote disclosed in this proxy statement
Q: What is the difference between a “shareholder of record” and a “street name” holder?
A: These terms describe the manner in which your shares are held. If your shares are registered directly in your name through Computershare, our transfer agent, you are a “shareholder of record.” If your shares are held in the name of a brokerage firm, bank, trust or other nominee as custodian on your behalf, you are a “street name” holder.
Q: How do I vote my shares?
A: Subject to the limitations described below, you may vote by proxy:
By internet By telephone
Visit 24/7 Dial toll-free 24/7 www.proxyvote.com 1-800-690-6903
By mailing your Proxy Card In person
Cast your ballot, sign your proxy card and send by mail Shareholders of record may join us in person at the Annual Meeting
When voting on any proposal you may vote “for” or “against” the item or you may abstain from voting. Voting Through the Internet or by Telephone. Whether you hold your shares directly as the shareholder of record or beneficially in “street name,” you may direct your vote by proxy without attending the Annual Meeting. You can vote by proxy using the Internet or a telephone by following the instructions provided in the notice you received. Voting by Proxy Card or Voting Instruction Form. Each shareholder, including any employee of The Hartford who owns common stock through the ISP, the Bonus Swap Plan or the ESPP, may vote by using the proxy card(s) or voting instruction form(s) provided to him or her. When you return a proxy card or voting instruction form that is properly completed and signed, the shares of common stock represented by that card will be voted as you specified.
68 www.thehartford.com INFORMATION ABOUT THE MEETING
Q: Can I vote my shares in person at the Annual Meeting?
A: If you are a shareholder of record, you may vote your shares in person at the Annual Meeting. If you hold your shares in “street name,” you must obtain a legal proxy from your broker, banker, trustee or nominee giving you the right to vote your shares at the Annual Meeting.
Q: Can my shares be voted even if I abstain or don’t vote by proxy or attend the Annual Meeting?
A: If you cast a vote of “abstention” on a proposal, your shares cannot be voted otherwise unless you change your vote (see below). Because they are considered to be present and entitled to vote for purposes of determining voting results, abstentions will have the effect of a vote against Proposal #2 and Proposal #3. Note, however, that abstentions will have no effect on Proposal #1, since only votes “for” or “against” a director nominee will be considered in determining the outcome.
Abstentions are included in the determination of shares present for quorum purposes.
If you don’t vote your shares held in “street name,” your broker can vote your shares in its discretion on matters that the NYSE has ruled discretionary. The ratification of Deloitte & Touche LLP as independent registered public accounting firm is a discretionary item under the NYSE rules. If no contrary direction is given, your shares will be voted on this matter by your broker in its discretion. The NYSE deems the election of directors, the implementation of equity compensation plans and matters relating to executive compensation as non-discretionary matters in which brokers may not vote shares held by a beneficial owner without instructions from such beneficial owner. Accordingly, brokers will not be able to vote your shares for the election of directors, or the advisory vote on compensation of our named executive officers, if you fail to provide specific instructions. If you do not provide instructions, a “broker non-vote” results, and the underlying shares will not be considered voting power present at the Annual Meeting. Therefore, these shares will not be counted in the vote on those matters.
If you do not vote shares for which you are the shareholder of record, your shares will not be voted.
Q: What constitutes a quorum, and why is a quorum required?
A: A quorum is required for our shareholders to conduct business at the Annual Meeting. The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the shares entitled to vote on the Record Date will constitute a quorum, permitting us to conduct the business of the meeting. Abstentions and proxies submitted by brokers (even with limited voting power such as for discretionary matters only) will be considered “present” at the Annual Meeting and counted in determining whether there is a quorum present.
Q: Can I change my vote after I have delivered my proxy?
A: Yes. If you are a shareholder of record, you may revoke your proxy at any time before it is exercised by:
1. Entering a new vote using the Internet or a telephone; 2. Giving written notice of revocation to our Corporate Secretary; 3. Submitting a subsequently dated and properly completed proxy card; or 4. Attending the Annual Meeting and revoking your proxy (your attendance at the Annual Meeting will not by itself revoke your proxy). If you hold shares in “street name,” you may submit new voting instructions by contacting your broker, bank or other nominee. You may also change your vote or revoke your proxy in person at the Annual Meeting if you obtain a legal proxy from the record holder (broker, bank or other nominee) giving you the right to vote the shares.
Q: Where can I find voting results of the Annual Meeting?
A: We will announce preliminary voting results at the Annual Meeting and publish the results in a Form 8-K filed with the SEC within four business days after the date of the Annual Meeting.
2019 Proxy Statement 69 INFORMATION ABOUT THE MEETING
Q: How can I submit a proposal for inclusion in the 2020 proxy statement?
A: We must receive proposals submitted by shareholders for inclusion in the 2020 proxy statement relating to the 2020 Annual Meeting no later than the close of business on December 6, 2019. Any proposal received after that date will not be included in our proxy materials for 2020. In addition, all proposals for inclusion in the 2020 proxy statement must comply with all of the requirements of Rule 14a-8 under the Securities Exchange Act of 1934. No proposal may be presented at the 2020 Annual Meeting unless we receive notice of the proposal by Friday, February 14, 2020. Proposals should be addressed to Donald C. Hunt, Vice President and Corporate Secretary, The Hartford Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155. All proposals must comply with the requirements set forth in our By-laws, a copy of which may be obtained from our Corporate Secretary or on the Corporate Governance page of the investor relations section of our website at http:// ir.thehartford.com.
Q: How may I obtain other information about The Hartford?
A: General information about The Hartford is available on our website at www.thehartford.com. You may view the Corporate Governance page of the investor relations section of our website at http://ir.thehartford.com for the following information, which is also available in print without charge to any shareholder who requests it in writing:
• Copies of this proxy statement SEC Filings • Annual Report on Form 10-K for the fiscal year ended December 31, 2018 • Other filings we have made with the SEC
• Articles of Incorporation • By-laws • Corporate Governance Guidelines (including guidelines for determining director Governance independence and qualifications) Documents • Charters of the Board’s committees • Code of Ethics and Business Conduct • Code of Ethics and Business Conduct for Members of the Board of Directors
Written requests for print copies of any of the above-listed documents should be addressed to Donald C. Hunt, Vice President and Corporate Secretary, The Hartford Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155. For further information, you may also contact our Investor Relations Department at the following address: The Hartford Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155, or call (860) 547-2537.
70 www.thehartford.com INFORMATION ABOUT THE MEETING
OTHER INFORMATION As of the date of this proxy statement, the Board of Directors has no knowledge of any business that will be properly presented for consideration at the Annual Meeting other than that described above. As to other business, if any, that may properly come before the Annual Meeting, the proxies will vote in accordance with their judgment. Present and former directors and present and former officers and other employees of the company may solicit proxies by telephone, telegram or mail, or by meetings with shareholders or their representatives. The company will reimburse brokers, banks or other custodians, nominees and fiduciaries for their charges and expenses in forwarding proxy material to beneficial owners. The company has engaged Morrow Sodali LLC to solicit proxies for the Annual Meeting for a fee of $13,000, plus the payment of Morrow’s out-of-pocket expenses. The company will bear all expenses relating to the solicitation of proxies. The proxy materials are available to you via the Internet. Shareholders who access the company’s materials this way get the information they need electronically, which allows us to reduce printing and delivery costs and lessen adverse environmental impacts. The notice of Internet availability contains instructions as to how to access and review these materials. You may also refer to the notice for instructions regarding how to request paper copies of these materials. We hereby incorporate by reference into this proxy statement “Item 10: Directors, Executive Officers and Corporate Governance of The Hartford” and “Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. By order of the Board of Directors,
Donald C. Hunt Vice President and Corporate Secretary Dated: April 4, 2019 SHAREHOLDERS ARE URGED TO VOTE BY PROXY, WHETHER OR NOT THEY EXPECT TO ATTEND THE ANNUAL MEETING. A SHAREHOLDER MAY REVOKE HIS OR HER PROXY AND VOTE IN PERSON IF HE OR SHE ATTENDS THE ANNUAL MEETING (STREET HOLDERS MUST OBTAIN A LEGAL PROXY FROM THEIR BROKER, BANKER OR TRUSTEE TO VOTE IN PERSON AT THE ANNUAL MEETING).
2019 Proxy Statement 71 APPENDIX A: RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
The Hartford uses non-GAAP financial measures in this proxy statement to assist investors in analyzing the company's operating performance for the periods presented herein. Because The Hartford's calculation of these measures may differ from similar measures used by other companies, investors should be careful when comparing The Hartford's non-GAAP financial measures to those of other companies. Definitions and calculations of non-GAAP and other financial measures used in this proxy statement can be found below and in The Hartford's Investor Financial Supplement for fourth quarter 2018, which is available on The Hartford's website, https:// ir.thehartford.com.
Core Earnings: The Hartford uses the non-GAAP measure core earnings as an important measure of the company’s operating performance. The Hartford believes that the measure core earnings provides investors with a valuable measure of the performance of the company’s ongoing businesses because it reveals trends in our insurance and financial services businesses that may be obscured by including the net effect of certain realized capital gains and losses, certain restructuring and other costs, integration and transaction costs in connection with an acquired business, pension settlements, loss on extinguishment of debt, gains and losses on reinsurance transactions, income tax benefit from reduction in deferred income tax valuation allowance, impact of tax reform on net deferred tax assets, and results of discontinued operations. Some realized capital gains and losses are primarily driven by investment decisions and external economic developments, the nature and timing of which are unrelated to the insurance and underwriting aspects of our business. Accordingly, core earnings excludes the effect of all realized gains and losses (net of tax) that tend to be highly variable from period to period based on capital market conditions. The Hartford believes, however, that some realized capital gains and losses are integrally related to our insurance operations, so core earnings includes net realized gains and losses such as net periodic settlements on credit derivatives. These net realized gains and losses are directly related to an offsetting item included in the income statement such as net investment income. Results from discontinued operations are excluded from core earnings for businesses held for sale because such results could obscure trends in our ongoing businesses that are valuable to our investors' ability to assess the company's financial performance. Core earnings are net of preferred stock dividends declared since they 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), net income (loss) available to common stockholders and income from continuing operations, net of tax, available to common stockholders (during periods when the company reports significant discontinued operations) are the most directly comparable U.S. GAAP measures to core earnings. Income from continuing operations, net of tax, available to common stockholders is net income available to common shareholders, excluding the income (loss) from discontinued operations, net of tax. Core earnings should not be considered as a substitute for net income (loss), net income (loss) available to common stockholders or income (loss) from continuing operations, net of tax, 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, income (loss) from continuing operations, net of tax, available to common stockholders and core earnings when reviewing the company’s performance. Below is a reconciliation of net income (loss) to core earnings for the years ended Dec. 31, 2018 and 2017.
Year Ended Year Ended ($ in millions) Dec. 31, 2018 Dec. 31, 2017 Net income (loss) available to common stockholders GAAP Net Income $ 1,801 $ (3,131) Less: Net realized capital gains (losses), excluded from core earnings, before tax (118) 160 Less: Loss on extinguishment of debt, before tax (6) — Less: Pension settlement, before tax — (750) Less: Integration and transaction costs associated with acquired business, before tax (47) (17) Less: Income tax benefit (expense) 75 (669) Less: Income (loss) from discontinued operations, net of tax 322 (2,869) = Core Earnings $ 1,575 $ 1,014
Compensation Core Earnings: As discussed under “Annual Incentive Plan Awards” on page 40, at the beginning of each year, the Compensation Committee approves a definition of “Compensation Core Earnings,” a non-GAAP financial measure. Compensation Core Earnings is used to set AIP award targets and threshold levels below which no AIP award is earned. Below is the Compensation Committee’s 2018 definition of “Compensation Core Earnings” and a reconciliation of this non-GAAP financial
72 www.thehartford.com APPENDIX A measure to 2018 GAAP net income.
($ in millions) 2018 Core Earnings as reported $ 1,575 Adjusted for, after tax: Income (losses) associated with the cumulative effect of accounting changes and accounting extraordinary items — Total catastrophe losses, including reinstatement premiums, state catastrophe fund assessments and terrorism losses, that are (below) or above the annual catastrophe budget 320 Prior accident year reserve development associated with asbestos and environmental reserves — Entire amount of a (gain) or loss (or such percentage of a gain or loss as determined by the Compensation Committee) associated with any other unusual or non-recurring item, including but not limited to reserve development, significant policyholder behavior changes or transactions in Talcott Resolution, litigation and regulatory settlement charges and/or prior/current year non-recurring tax benefits or charges (53) Income/(losses) associated with discontinued operations through the last date externally reported as core earnings - = Compensation Core Earnings $ 1,842
Core Earnings Return on Equity: The company provides different measures of the return on stockholders' equity (“ROE”). Net income (loss) available to common stockholders ROE ("net income (loss) ROE) is calculated by dividing (a) net income (loss) available to common stockholders for the prior four fiscal quarters by (b) average common stockholders' equity, including AOCI. Core earnings ROE is calculated based on non-GAAP financial measures. Core earnings ROE is calculated by dividing (a) core earnings for the prior four fiscal quarters by (b) average common stockholders' equity, excluding AOCI. Net income ROE is the most directly comparable U.S. GAAP measure. The company excludes AOCI in the calculation of core earnings ROE to provide investors with a measure of how effectively the company is investing the portion of the company's net worth that is primarily attributable to the company's business operations. The company provides to investors return on equity measures based on its non-GAAP core earnings financial measures for the reasons set forth in the related discussion above. A reconciliation of net income ROE to core earnings ROE is set forth below.
Last Twelve Last Twelve Last Twelve Months Months Months Ended Ended Ended Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Net Income (loss) available to common stockholders ROE 13.7% (20.6)% 5.2% Less: Net realized capital gains (losses), excluded from core earnings, before tax (0.9) 1.1 (0.6) Less: Loss on reinsurance transactions, before tax — — (3.8) Less: Pension settlement, before tax — (4.9) — Less: Integration and transaction costs associated with an acquired business, before tax (0.4) (0.1) — Less: Income tax benefit (expense) on items not included in core earnings 0.6 (4.4) 2.7 Less: Income (loss) from discontinued operations, after tax 2.5 (18.9) 1.6 Less: Impact of AOCI, excluded from Core Earnings ROE 0.3 (0.1) 0.1 = Core earnings ROE 11.6% 6.7 % 5.2%
Compensation Core ROE: As discussed under "Long-Term Incentive Awards" on page 41, Compensation Core ROE is used to set performance share targets and threshold levels below which there is no payout. The adjustments described in the left hand column of the table below constitute the Compensation Committee’s 2018 definition of “Compensation Core ROE.” A reconciliation of Compensation Core ROE to GAAP net income ROE for the 2018 performance share awards will not be available until the end of the performance period in 2020. Reconciliations to GAAP net income for 2016 performance share awards are provided in the columns on the right, with any variations from the 2018 definition explained in the notes below the table.
2019 Proxy Statement 73 APPENDIX A
2018 2017 2016 GAAP net income $ 1,807 $ (3,131) $ 896 Preferred stock dividends (6) — — Net income (loss) available to common shareholders 1,801 (3,131) 896 Less the following items: Net realized capital gains/losses after tax and deferred acquisition costs ("DAC"), except (118) 160 (112) for those net realized capital gains/losses resulting from net periodic settlements on credit derivatives and net periodic settlements on fixed annuity cross-currency swaps (these included net realized capital gains and/or losses are directly related to offsetting items included in the income statement, such as net investment income), before tax The impact of the unlock due to change in estimated gross profits (DAC Unlock) — — — Restructuring costs, before tax — — — Income/losses associated with discontinued operations, before tax — — — Loss on extinguishment of debt, before tax (6) — — Reinsurance gains/losses on dispositions, before tax — — (650) Pension settlement gain (loss), before tax — (750) — Integration and transaction costs associated with acquired business, before tax (47) (17) — Income tax benefit (expense) 75 (669) 463 Income from discontinued operations, after tax 322 (2,869) 283 = Core Earnings as reported 1,575 1,014 912 Adjusted for after tax: Income (losses) associated with the cumulative effect of accounting changes, and — — — accounting extraordinary items; Total catastrophe losses, including reinstatement premiums, state catastrophe fund 249 273 1 assessments and terrorism losses that are (below) or above the catastrophe budget.(1) Prior accident year reserve development associated with asbestos and environmental — — 174 reserves Entire amount of a (gain) loss associated with litigation and regulatory settlement (191) — (14) charges and/or with prior/current year non-recurring tax benefits or charges(2) Income/(losses) associated with discontinued operations through the last date — 278 423 externally reported as core earnings(3) = Core Earnings as adjusted 1,633 1,565 1,496 Prior year ending common stockholders' equity, excluding accumulated other — 17,240 17,971 comprehensive income (AOCI) Prior year ending common stockholders' equity, excluding AOCI, adjusted for Tax 13,708 — — Reform Current year ending common stockholders' equity, excluding AOCI 14,346 12,831 17,240 Less: Impact of Tax Reform on equity 736 877 — Current year ending common stockholders' equity, excluding AOCI, adjusted for Tax 15,082 13,708 — Reform Average common stockholders' equity, excluding AOCI, adjusted for Tax Reform 14,395 15,474 17,606 = Compensation Core ROE 11.3% 10.1% 8.5% Average of 2016, 2017 and 2018 Compensation Core ROE = 10.00% (1) The catastrophe budget for each year will be based on the multi-year outlook prepared as of February 2016. The catastrophe budget will be adjusted only for changes in exposures between what is assumed in the multi-year outlook versus exposures as the book is actually constituted in each respective year; and for tornado/hail catastrophes per exposure equal to an 8-year average of prior actual experience for 2016, a 9-year average for 2017 and a 10-year average for 2018. (2) For 2018, an adjustment was made pursuant to the definition of Compensation Core Earnings to use the previously enacted corporate income tax rate of 35%, which is higher than the current corporate income tax rate of 21%. (3) Amendment to the definition of Compensation Core ROE following the agreement to sell Talcott Resolution, as described on p. 49. For 2017, the amount represents Talcott Resolution earnings through September 30, 2017. (4) As a result of the Tax Cuts and Jobs Act of 2017, the definition of average equity was amended to exclude the impact of the charge to earnings that was the result of the effect of the lower enacted corporate income tax rate on net deferred tax assets.
74 www.thehartford.com APPENDIX A
Underlying Combined Ratio: Represents the combined ratio before catastrophes and prior accident year development (PYD) and is a non-GAAP financial measure. Combined ratio is the most directly comparable GAAP measure. The combined ratio is the sum of the loss and loss adjustment expense ratio (also known as a loss ratio), the expense ratio and the policyholder dividend ratio. This ratio measures the cost of losses and expenses for every $100 of earned premiums. A combined ratio below 100 demonstrates a positive underwriting result. A combined ratio above 100 indicates a negative underwriting result. The underlying combined ratio represents the combined ratio for the current accident year, excluding the impact of current accident year catastrophes. 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. Below is a reconciliation of combined ratio to the underlying combined ratio for individual reporting segments for the year-ended December 31, 2018.
Commercial Lines Personal Lines Combined Ratio 92.6 106.3 Less: Impact of catastrophes and PYD on combined ratio 1.1 15.2 = Underlying Combined Ratio 91.5 91.2
2019 Proxy Statement 75 [This Page Intentionally Left Blank] THE HARTFORD FINANCIAL SERVICES GROUP, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018 TABLE OF CONTENTS
Item Description Page Part I 1 BUSINESS 4 1A. RISK FACTORS 13 1B. UNRESOLVED STAFF COMMENTS None 4 MINE SAFETY DISCLOSURES Not Applicable Part II 5 MARKET FOR THE HARTFORD'S COMMON EQUITY, RELATED STOCKHOLDER MATTER AND ISSUER 25 PURCHASES OF EQUITY SECURITIES 6 SELECTED FINANCIAL DATA 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 7 OPERATIONS 28 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK [a] 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA [b] CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL 9 DISCLOSURE None 9A. CONTROLS AND PROCEDURES 104 9B. OTHER INFORMATION None Part III 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE HARTFORD 106 11 EXECUTIVE COMPENSATION [c] 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE [d] 14 PRINCIPAL ACCOUNTING FEES AND SERVICES [e] Part IV INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1 [a] The information required by this item is set forth in the Enterprise Risk Management section of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference. [b] See Index to Consolidated Financial Statements and Schedules elsewhere herein. [c] The information called for by Item 11 will be set forth in the Proxy Statement under the subcaptions "Compensation Discussion and Analysis", "Executive Compensation", "Director Compensation", "Report of the Compensation and Management Development Committee", and "Compensation and Management Development Committee Interlocks and Insider Participation" and is incorporated herein by reference. [d] Any information called for by Item 13 will be set forth in the Proxy Statement under the caption and subcaption "Board and Governance Matters" and "Director Independence" and is incorporated herein by reference. [e] The information called for by Item 14 will be set forth in the Proxy Statement under the caption "Audit Matters" and is incorporated herein by reference.
1 Forward-Looking Statements Certain of the statements contained herein are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “projects,” and similar references to future periods. Forward-looking statements are based on management's current expectations and assumptions regarding future economic, competitive, legislative and other developments and their potential effect upon The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, the “Company” or “The Hartford”). Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual results could differ materially from expectations, depending on the evolution of various factors, including the risks and uncertainties identified below, as well as factors described in such forward-looking statements or in Part I, Item 1A. Risk Factors, in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and those identified from time to time in our other filings with the Securities and Exchange Commission.
• Risks Relating to Economic, Political and Global Market Conditions: ◦ challenges related to the Company’s current operating environment, including global political, economic and market conditions, and the effect of financial market disruptions, economic downturns, changes in trade regulation including tariffs and other barriers or other potentially adverse macroeconomic developments on the demand for our products and returns in our investment portfolios; ◦ market risks associated with our business, including changes in credit spreads, equity prices, interest rates, inflation rate, and market volatility; ◦ the impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy; ◦ the impacts of changing climate and weather patterns on our businesses, operations and investment portfolio including on claims, demand and pricing of our products, the availability and cost of reinsurance, our modeling data used to evaluate and manage risks of catastrophes and severe weather events, the value of our investment portfolios and credit risk with reinsurers and other counterparties; ◦ the risks associated with the change in or replacement of the London Inter-Bank Offered Rate ("LIBOR") on the securities we hold or may have issued, other financial instruments and any other assets and liabilities whose value is tied to LIBOR; • Insurance Industry and Product-Related Risks: ◦ the possibility of unfavorable loss development, including with respect to long-tailed exposures; ◦ the significant uncertainties that limit our ability to estimate the ultimate reserves necessary for asbestos and environmental claims ◦ the possibility of a pandemic, earthquake, or other natural or man-made disaster that may adversely affect our businesses; ◦ weather and other natural physical events, including the intensity and frequency of storms, hail, wildfires, flooding, winter storms, hurricanes and tropical storms, as well as climate change and its potential impact on weather patterns; ◦ the possible occurrence of terrorist attacks and the Company’s inability to contain its exposure as a result of, among other factors, the inability to exclude coverage for terrorist attacks from workers' compensation policies and limitations on reinsurance coverage from the federal government under applicable laws; ◦ the Company’s ability to effectively price its property and casualty policies, including its ability to obtain regulatory consents to pricing actions or to non-renewal or withdrawal of certain product lines; ◦ actions by competitors that may be larger or have greater financial resources than we do; ◦ technological changes, such as usage-based methods of determining premiums, advancements in automotive safety features, the development of autonomous vehicles, and platforms that facilitate ride sharing, which may alter demand for the Company's products, impact the frequency or severity of losses, and/or impact the way the Company markets, distributes and underwrites its products; ◦ the Company's ability to market, distribute and provide insurance products and investment advisory services through current and future distribution channels and advisory firms; ◦ the uncertain effects of emerging claim and coverage issues; • Financial Strength, Credit and Counterparty Risks: ◦ risks to our business, financial position, prospects and results associated with negative rating actions or downgrades in the Company’s financial strength and credit ratings or negative rating actions or downgrades relating to our investments; ◦ the impact on our statutory capital of various factors, including many that are outside the Company’s control, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results;
2 ◦ losses due to nonperformance or defaults by others, including credit risk with counterparties associated with investments, derivatives, premiums receivable, reinsurance recoverables and indemnifications provided by third parties in connection with previous dispositions; ◦ the potential for losses due to our reinsurers' unwillingness or inability to meet their obligations under reinsurance contracts and the availability, pricing and adequacy of reinsurance to protect the Company against losses; ◦ regulatory limitations on the ability of the Company and certain of its subsidiaries to declare and pay dividends; • Risks Relating to Estimates, Assumptions and Valuations: ◦ risk associated with the use of analytical models in making decisions in key areas such as underwriting, pricing, capital management, reserving, investments, reinsurance and catastrophe risk management; ◦ the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the Company’s fair value estimates for its investments and the evaluation of other-than-temporary impairments on available-for-sale securities; ◦ the potential for further impairments of our goodwill or the potential for changes in valuation allowances against deferred tax assets; • Strategic and Operational Risks: ◦ the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster, cyber or other information security incident or other unanticipated event; ◦ the potential for difficulties arising from outsourcing and similar third-party relationships; ◦ the risks, challenges and uncertainties associated with capital management plans, expense reduction initiatives and other actions, which may include acquisitions, divestitures or restructurings; ◦ failure to complete our proposed acquisition of The Navigators Group, Inc. may cause volatility in our securities; ◦ risks associated with acquisitions and divestitures including the challenges of integrating acquired companies or businesses or separating from our divested businesses that may result in our not being able to achieve the anticipated benefits and synergies and may result in unintended consequences; ◦ difficulty in attracting and retaining talented and qualified personnel including key employees, such as executives, managers and employees with strong technological, analytical and other specialized skills; ◦ the Company’s ability to protect its intellectual property and defend against claims of infringement; • Regulatory and Legal Risks: ◦ the cost and other potential effects of increased regulatory and legislative developments, including those that could adversely impact the demand for the Company’s products, operating costs and required capital levels; ◦ unfavorable judicial or legislative developments; ◦ the impact of changes in federal or state tax laws; ◦ regulatory requirements that could delay, deter or prevent a takeover attempt that stockholders might consider in their best interests; and ◦ the impact of potential changes in accounting principles and related financial reporting requirements. Any forward-looking statement made by the Company in this document speaks only as of the date of the filing of this Form 10-K. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
3 Part I - Item 1. Business
Item 1. BUSINESS (Dollar amounts in millions, except for per share data, unless otherwise stated) sold in May 2018. In addition, Corporate includes a 9.7% GENERAL ownership interest in the legal entity that acquired the life and annuity business sold. The Hartford Financial Services Group, Inc. (together with its subsidiaries, “The Hartford”, the “Company”, “we”, or “our”) is a 2018 Revenues of $18,955 [1] by Segment holding company for a group of subsidiaries that provide property and casualty insurance, group benefits, and mutual funds and exchange-traded products to individual and business customers Hartford Funds in the United States. The Hartford is headquartered in $1,033 Connecticut and its oldest subsidiary, Hartford Fire Insurance 6% Company, dates back to 1810. At December 31, 2018, total assets and total stockholders’ equity of The Hartford were $62.3 billion and $13.1 billion, respectively. Commercial Lines $8,035 Group 43% ORGANIZATION Benefits The Hartford strives to maintain and enhance its position as a $6,025 market leader within the financial services industry. The 32% Company sells diverse and innovative products through multiple distribution channels to individuals and businesses and is considered a leading property and casualty and employee group benefits insurer. The Company endeavors to expand its insurance product offerings and distribution and capitalize on the strength of the Company's brand. The Hartford Stag logo is one of the most recognized symbols in the financial services industry. The Personal Lines Company is also working to increase efficiencies through $3,671 investments in technology. 20% As a holding company, The Hartford Financial Services Group, Inc. is separate and distinct from its subsidiaries and has no significant [1]Includes Revenue of $86 for P&C Other Operations and $105 for Corporate. business operations of its own. The holding company relies on the The following discussion describes the principal products and dividends from its insurance companies and other subsidiaries as services, marketing and distribution, and competition of The the principal source of cash flow to meet its obligations, pay Hartford's reporting segments. For further discussion of the dividends and repurchase common stock. Information regarding reporting segments, including financial disclosures of revenues by the cash flow and liquidity needs of The Hartford Financial product line, net income (loss), and assets for each reporting Services Group, Inc. may be found in Part II, Item 7, segment, see Note 4 - Segment Information of Notes to Management’s Discussion and Analysis of Financial Condition Consolidated Financial Statements. and Results of Operations (“MD&A”) — Capital Resources and Liquidity. REPORTING SEGMENTS The Hartford conducts business principally in five reporting segments including Commercial Lines, Personal Lines, Property & Casualty ("P&C") Other Operations, Group Benefits and Hartford Funds (previously referred to as "Mutual Funds"), as well as a Corporate category. The Company includes in the Corporate category discontinued operations related to the life and annuity business sold in May 2018, reserves for run-off structured settlement and terminal funding agreement liabilities, capital raising activities (including debt financing and related interest expense), purchase accounting adjustments related to goodwill and other expenses not allocated to the reporting segments. Corporate also includes investment management fees and expenses related to managing third party business, including management of the invested assets of Talcott Resolution Life, Inc. and its subsidiaries ("Talcott Resolution"). Talcott Resolution is the new holding company of the life and annuity business that we
4 Part I - Item 1. Business
COMMERCIAL LINES
2018 Earned Premiums of $7,047 by Line of Business 2018 Earned Premiums of $7,047 by Product
Specialty commercial $851 Bond 12% Other $241 $45 3% 1% Property $617 9% Workers’ compensation $3,329 Middle 47% Automobile market $608 $2,421 9% 34%
Small General commercial liability $3,730 $653 53% 9%
Professional Package liability business $253 $1,346 4% 19%
Principal Products and Services Automobile Covers damage to a business's fleet of vehicles due to collision or other perils (automobile physical damage). In addition to first party automobile physical damage, commercial automobile covers liability for bodily injuries and property damage suffered by third parties and losses caused by uninsured or under-insured motorists. Property Covers the building a business owns or leases as well as its personal property, including tools and equipment, inventory, and furniture. A commercial property insurance policy covers losses resulting from fire, wind, hail, earthquake, theft and other covered perils, including coverage for assets such as accounts receivable and valuable papers and records. Commercial property may include specialized equipment insurance, which provides coverage for loss or damage resulting from the mechanical breakdown of boilers and machinery, and ocean and inland marine insurance, which provides coverage for goods in transit and unique, one-of-a-kind exposures. General Covers a business in the event it is sued for causing harm to a person and/or damage to property. General liability Liability insurance covers third-party claims arising from accidents occurring on the insured’s premises or arising out of their operations. General liability insurance may also cover losses arising from product liability and provide replacement of lost income due to an event that interrupts business operations. Package Covers both property and general liability damages. Business Workers' Covers employers for losses incurred due to employees sustaining an injury, illness or disability in connection with their Compensation work. Benefits paid under workers’ compensation policies may include reimbursement of medical care costs, replacement income, compensation for permanent injuries and benefits to survivors. Workers’ compensation is provided under both guaranteed cost policies (coverage for a fixed premium) and loss sensitive policies where premiums are adjustable based on the loss experience of the employer. Professional Covers liability arising from directors and officers acting in their official capacity and liability for errors and omissions Liability committed by professionals and others. Coverage may also provide employment practices insurance relating to allegations of wrongful termination and discrimination. Bond Encompasses fidelity and surety insurance, including commercial surety, contract surety and fidelity bonds. Commercial surety includes bonds that insure non-performance by contractors, license and permit bonds to help meet government- mandated requirements and probate and judicial bonds for fiduciaries and civil court proceedings. Contract surety bonds may include payment and performance bonds for contractors. Fidelity bonds may include ERISA bonds related to the handling of retirement plan assets and bonds protecting against employee theft or fraud. The Company also provides credit and political risk insurance offered to clients with global operations.
Through its three lines of business of small commercial, middle United States. In addition, the specialty line of business provides market and specialty, Commercial Lines principally provides professional liability, bond, credit and political risk, loss-sensitive workers’ compensation, property, automobile and general liability workers compensation, general liability, automobile liability and insurance products to businesses, primarily throughout the automobile physical damage coverages. The majority of
5 Part I - Item 1. Business
Commercial Lines written premium is generated by small reduction, enhanced service and leading technology. Larger commercial and middle market, which provide coverage options carriers such as The Hartford continually advance their pricing and customized pricing based on the policyholder’s individual risk sophistication and ease of doing business with agents and characteristics. Within small commercial, both property and customers through the use of technology, analytics and other general liability coverages are offered under a single package capabilities that improve the process of evaluating a risk, quoting policy, marketed under the Spectrum name. Specialty provides a new business and servicing customers. The Company also variety of customized insurance products and services. continuously enhances digital capabilities as customers and distributors demand more access and convenience, and expands Small commercial provides coverages for small businesses, which product and underwriting capabilities to accommodate both the Company considers to be businesses with an annual payroll larger accounts and a broader risk appetite. Existing competitors under $12, revenues under $25 and property values less than $20 and new entrants, including start-up and non-traditional carriers, per location. Through Maxum Specialty Insurance Group are actively looking to expand sales of business insurance ("Maxum"), small commercial also provides excess and surplus products to small businesses through increasing their lines coverage to small businesses including umbrella, general underwriting appetite, deepening their relationships with liability, property and other coverages. Middle market provides distribution partners, and through on-line and direct-to- insurance coverages to medium-sized businesses, which are consumer marketing. companies whose payroll, revenue and property values exceed the small business definition. The Company has a small amount of Middle Market property and casualty business written internationally. For U.S. Middle market business is considered “high touch” and involves exporters and other U.S. companies with international exposures, individual underwriting and pricing decisions. The pricing of the Company covers property, marine and liability risks outside middle market accounts is prone to significant volatility over time the U.S. as the assuming reinsurer under reinsurance agreements due to changes in individual account characteristics and exposure, with third parties. as well as legislative and macro-economic forces. National and In addition to offering standard commercial lines products, regional carriers participate in the middle market insurance middle market includes program business which provides tailored sector, resulting in a competitive environment where pricing and programs, primarily to customers with common risk policy terms are critical to securing new business and retaining characteristics. Within specialty, a significant portion of the existing accounts. Within this competitive environment, The business is written through large deductible programs for Hartford is working to deepen its product and underwriting national accounts. Other programs written within specialty are capabilities, leverage its sales and underwriting talent and expand retrospectively-rated where the premiums are adjustable based its use of data analytics to make risk selection and pricing on loss experience. Also within specialty, the Company writes decisions. In product development and related areas such as captive programs business, which provides tailored programs to claims and risk engineering, the Company is extending its those seeking a loss sensitive solution where premiums are capabilities in industry verticals, such as energy, construction, adjustable based on loss experience. On August 22, 2018, the automobile parts manufacturing, food processing and hospitality. Company entered into a definitive agreement to acquire The Through a business partner, the Company offers business Navigators Group, Inc., a global specialty underwriter. This insurance coverages to exporters and other U.S. companies with a acquisition could change the way we go to market as a physical presence overseas. The Hartford’s middle market commercial lines carrier. business will leverage the investments in product, underwriting, and technology to better match price to individual risk as the firm Marketing and Distribution pursues responsible growth strategies to deliver target returns. Commercial Lines provides insurance products and services Specialty Commercial Specialty commercial competes on an account-by-account basis through the Company’s regional offices, branches and sales and due to the complex nature of each transaction. Competition in policyholder service centers throughout the United States. The this market includes stock companies, mutual companies, products are marketed and distributed nationally using alternative risk sharing groups and other underwriting independent agents, brokers and wholesalers. The independent organizations. agent and broker distribution channel is consolidating and this trend is expected to continue. This will likely result in a larger For specialty casualty businesses, pricing competition continues proportion of written premium being concentrated among fewer to be significant, particularly for the larger individual accounts. As agents and brokers. In addition, the Company offers insurance a means to mitigate the cost of insurance on larger accounts, products to customers of payroll service providers through its more insureds may opt for the loss-sensitive products offered in relationships with major national payroll companies and to our national accounts segment, including retrospectively rated members of affinity organizations. contracts, in lieu of guaranteed cost policies. Under a retrospectively-rated contract, the ultimate premium collected Competition from the insured is adjusted based on how incurred losses for the policy year develop over time, subject to a minimum and Small Commercial maximum premium. Within national accounts, the Company In small commercial, The Hartford competes against large implemented a new risk management platform, allowing national carriers, regional carriers and direct writers. customers better access to claims data and other information Competitors include stock companies, mutual companies and needed by corporate risk managers. This system allows the other underwriting organizations. The small commercial market Company to work more closely with customers to improve long- remains highly competitive and fragmented as carriers seek to term account performance. differentiate themselves through product expansion, price
6 Part I - Item 1. Business
In the bond business, favorable underwriting results in recent officers coverage, specifically excess layers, is under significant years has led to increased competition for market share. competitive price pressure. The middle market private management liability segment is in a more stable competitive and In professional liability, large and medium-sized businesses are in pricing environment. differing competitive environments. Large public director & PERSONAL LINES
2018 Earned Premiums of $3,399 by Line of Business 2018 Earned Premiums of $3,399 by Product
Other agency $336 10% Other AARP agency Homeowners $40 $1,030 $290 1% 9% 30%
Automobile $2,369 AARP direct 70% $2,733 80%
Principal Products and Services Automobile Covers damage to an individual insured’s own vehicle due to collision or other perils and is referred to as automobile physical damage. In addition to first party automobile physical damage, automobile insurance covers liability for bodily injuries and property damage suffered by third parties and losses caused by uninsured or underinsured motorists. Also, under no-fault laws, policies written in some states provide first party personal injury protection. Some of the Company’s personal automobile insurance policies also offer personal umbrella liability coverage for an additional premium. Homeowners Insures against losses to residences and contents from fire, wind and other perils. Homeowners insurance includes owned dwellings, rental properties and coverage for tenants. The policies may provide other coverages, including loss related to recreation vehicles or watercraft, identity theft and personal items such as jewelry.
Personal Lines provides automobile, homeowners and personal updated to reflect the company’s actual experience with umbrella coverages to individuals across the United States, these products. In addition, Personal Lines also including a program designed exclusively for members of AARP continued working with carrier partners to provide risk (“AARP Program”). The Hartford's automobile and homeowners protection options for AARP members with needs products provide coverage options and pricing tailored to a beyond the company’s current product offering. customer's individual risk. The Hartford has individual customer relationships with AARP Program policyholders and, as a group, Marketing and Distribution they represent a significant portion of the total Personal Lines' business. Business sold to AARP members, either direct or Personal Lines reaches diverse customers through multiple through independent agents, amounted to earned premiums of distribution channels, including direct-to-consumer and $3.0 billion, $3.2 billion and $3.3 billion in 2018, 2017 and 2016, independent agents. In direct-to-consumer, Personal Lines respectively. markets its products through a mix of media, including direct mail, digital marketing, television as well as digital and print During 2018, Personal Lines continued to refine its advertising. Through the agency channel, Personal Lines provides automobile and home product offerings marketed under products and services to customers through a network of the Open Road Auto and Home Advantage names. independent agents in the standard personal lines market, Overall rate levels, price segmentation, rating factors primarily serving mature, preferred consumers. These and underwriting procedures were examined and
7 Part I - Item 1. Business independent agents are not employees of the Company. markets are highly competitive. Personal lines insurance is written by insurance companies of varying sizes that compete Personal Lines has made significant investments in offering direct principally on the basis of price, product, service, including claims and agency-based customers the opportunity to interact with the handling, the insurer's ratings and brand recognition. Companies company online, including via mobile devices. In addition, its with strong ratings, recognized brands, direct sales capability and technology platform for telephone sales centers enables sales economies of scale will have a competitive advantage. In recent representatives to provide an enhanced experience for direct-to- years, insurers have increased their advertising in the direct-to- consumer customers, positioning the Company to offer unique consumer market, in an effort to gain new business and retain capabilities to AARP’s member base. profitable business. The growth of direct-to-consumer sales Most of Personal Lines' sales are associated with its exclusive continues to outpace sales in the agency distribution channel. licensing arrangement with AARP, with the current agreement in Insurers that distribute products principally through agency place through January 1, 2023, to market automobile, channels compete by offering commissions and additional homeowners and personal umbrella coverages to AARP's incentives to attract new business. To distinguish themselves in approximately 37 million members, primarily direct but also the marketplace, top tier insurers are offering online and self through independent agents. This relationship with AARP, which service capabilities that make it easier for agents and consumers has been in place since 1984, provides Personal Lines with an to do business with the insurer. A large majority of agents have important competitive advantage given the increase in the been using “comparative rater” tools that allow the agent to population of those over age 50 and the strength of the AARP compare premium quotes among several insurance companies. brand. In most states, auto and home policies issued to AARP The use of comparative rater tools increases price competition. members include a lifetime continuation agreement Insurers that are able to capitalize on their brand and reputation, endorsement, providing that the policies will be renewed as long differentiate their products and deliver strong customer service as certain terms are met, such as timely payment of premium and are more likely to be successful in this market. maintaining a driver’s license in good standing. The use of data mining and predictive modeling is used by more In addition to selling to AARP members, Personal Lines offers its and more carriers to target the most profitable business, and automobile and homeowners products to non-AARP customers, carriers have further segmented their pricing plans to expand primarily through the independent agent channel within select market share in what they believe to be the most profitable underwriting markets where we believe we have a competitive segments. The Company continues to invest in capabilities to advantage. Personal Lines leverages its agency channel to target better utilize data and analytics, and thereby, refine and manage AARP members and other customer segments that value the underwriting and pricing. advice of an independent agent and recognize the differentiated experience the Company provides. In particular, the Company Also, new automobile technology advancements, including lane has taken action to distinguish its brand and improve profitability departure warnings, backup cameras, automatic braking and in the independent agent channel with fewer and more highly active collision alerts, are being deployed rapidly and are partnered agents. expected to improve driver safety and reduce the likelihood of vehicle collisions. However, these features include expensive Competition parts, potentially increasing average claim severity. The personal lines automobile and homeowners insurance PROPERTY & CASUALTY OTHER OPERATIONS
Property & Casualty Other Operations includes certain property For a discussion of coverages provided under policies written and casualty operations, managed by the Company, that have with exposure to A&E, assumed reinsurance and all other non- discontinued writing new business and includes substantially all A&E, see Part II, Item 7, MD&A - Critical Accounting Estimates, of the Company's asbestos and environmental ("A&E") exposures. Property & Casualty Insurance Product Reserves.
8 Part I - Item 1. Business
GROUP BENEFITS
2018 Premiums and Fee Income of $5,598
Other $241 4%
Group life $2,611 47%
Group disability $2,746 49%
Principal Products and Services
Group Life Typically is term life insurance provided in the form of yearly renewable term life insurance. Other life coverages in this category include accidental death and dismemberment and travel accident insurance. Group Disability Typically comprised of both short-term and long-term disability coverage that pays a percentage of an employee’s salary for a period of time if they are ill or injured and cannot perform the duties of their job. Short- term and long-term disability policies have elimination periods that must be satisfied prior to benefit payments. The Company also earns fee income from leave management services and the administration of underwriting, enrollment and claims processing for employer self-funded plans. Other Products Includes other group coverages such as retiree health insurance, critical illness, accident, hospital indemnity and participant accident coverages.
Group insurance typically covers an entire group of people under On November 1, 2017, the Company's group benefits subsidiary, a single contract, most typically the employees of a single Hartford Life and Accident Insurance Company ("HLA") acquired employer or members of an association. Aetna's U.S. group life and disability business through a reinsurance transaction. Revenues and earnings of the Aetna U.S. Group Benefits provides group life, disability and other group group life and disability business are included in operating results coverages to members of employer groups, associations and of the Company's Group Benefits segment since the acquisition affinity groups through direct insurance policies and provides date. For discussion of this transaction, see Note 2- Business reinsurance to other insurance companies. In addition to Acquisitions of Notes to Consolidated Financial Statements. employer paid coverages, the segment offers voluntary product coverages which are offered through employee payroll deductions. Group Benefits also offers disability underwriting, Marketing and Distribution administration, and claims processing to self-funded employer The Group Benefits distribution network is managed through a plans. In addition, the segment offers a single-company leave regional sales office system to distribute its group insurance management solution, which integrates work absence data from products and services through a variety of distribution outlets the insurer’s short-term and long-term group disability and including brokers, consultants, third-party administrators and workers’ compensation insurance with its leave management trade associations. Additionally, the segment has relationships administration services. with several private exchanges which offer its products to Group Benefits generally offers term insurance policies, allowing employer groups. for the adjustment of rates or policy terms in order to minimize The acquisition of Aetna's U.S. group life and disability business the adverse effect of market trends, loss costs, declining interest further enhanced Group Benefit's distribution footprint by rates and other factors. Policies are typically sold with one, two or increasing its sales force. The acquisition also provided Group three-year rate guarantees depending upon the product and Benefits an exclusive, multi year collaboration to sell it's group life market segment. and disability products through Aetna's medical sales team.
9 Part I - Item 1. Business
competitive capabilities through the addition of industry-leading Competition digital technology and an integrated absence management and Group Benefits competes with numerous insurance companies claims platform. and financial intermediaries marketing insurance products. In Additionally, as employers continue to focus on reducing the cost order to differentiate itself, Group Benefits uses its risk of employee benefits, we expect more companies to offer management expertise and economies of scale to derive a voluntary products paid for by employees. Competitive factors competitive advantage. Competitive factors include the extent of affecting the sale of voluntary products include the breadth of products offered, price, the quality of customer and claims products, product education, enrollment capabilities and overall handling services, and the Company's relationship with third- customer service. party distributors and private exchanges. Active price competition continues in the marketplace, resulting in multi-year The Company has expanded its employer group product offerings, rate guarantees being offered to customers. Top tier insurers in including the voluntary product suite, including coverages for the marketplace also offer on-line and self service capabilities to short term absences from work, critical illness and accident third party distributors and consumers. The relatively large size coverages. The Company's enhanced enrollment and marketing and underwriting capacity of the Group Benefits business tools, such as My Tomorrow©, are providing additional provides a competitive advantage over smaller competitors. opportunities to educate individual participants about supplementary benefits and deepen their knowledge about Group Benefits' acquisition of Aetna's U.S. group life and product selection. disability business further increased its market presence and HARTFORD FUNDS
Hartford Funds Segment AUM of $104,840 as Mutual Fund AUM as of December 31, 2018 of December 31, 2018
Talcott Resolution life and ETP Multi-strategy investments annuity separate accounts $1,871 $18,233 $13,283 2% 20% 13% Fixed income $14,467 16%
Equity Mutual funds $56,986 $89,686 64% 86%
Principal Products and Services
Mutual funds Includes 70 actively managed open-ended mutual funds across a variety of asset classes including domestic and international equity, fixed income, and multi-strategy investments, principally subadvised by two unaffiliated institutional asset management firms that have comprehensive global investment capabilities. ETP Includes a suite of exchange-traded products (“ETP”) traded on the New York Stock Exchange that is comprised of strategic beta and actively managed fixed income exchange-traded funds ("ETF"). Strategic beta ETF’s are designed to track indices using both active and passive investment techniques that strive to improve performance relative to traditional capitalization weighted indices. Talcott Resolution life and annuity separate Relates to assets of the life and annuity business sold in May 2018 that are still accounts managed by the Company's Hartford Funds segment.
The Hartford Funds segment provides investment management, comprehensive range of products and services assist clients in administration, product distribution and related services to achieving their desired investment objectives. Assets under investors through a diverse set of investment products in management are separated into three distinct categories referred domestic and international markets. Hartford Funds' to as mutual funds, ETP and Talcott Resolution life and annuity
10 Part I - Item 1. Business separate accounts, which relate to the life and annuity business range of products offered, brand recognition, financial strength, sold in May 2018. The Hartford Funds segment will continue to proprietary distribution channels, quality of service and level of manage the mutual fund assets of Talcott Resolution, though fees charged relative to quality of investment products. The these assets are expected to continue to decline over time. Hartford Funds segment competes with a large number of asset management firms and other financial institutions and Marketing and Distribution differentiates itself through superior fund performance, product breadth, strong distribution and competitive fees. In recent years Our funds and ETPs are sold through national and regional demand for lower cost passive investment strategies has broker-dealer organizations, independent financial advisers, outpaced demand for actively managed strategies and has taken defined contribution plans, financial consultants, bank trust market share from active managers. groups and registered investment advisers. Our distribution team is organized to sell primarily in the United States. The investment products for Talcott Resolution are not actively distributed. Competition The investment management industry is mature and highly competitive. Firms are differentiated by investment performance, CORPORATE
The Company includes in the Corporate category investment Additionally, included in the Corporate category are discontinued management fees and expenses related to managing third party operations from the Company's life and annuity business sold in business, including management of the invested assets of Talcott May 2018 and a 9.7% ownership interest in the legal entity that Resolution, reserves for run-off structured settlement and acquired this business. The assets and liabilities of this business terminal funding agreement liabilities, capital raising activities had been accounted for as held for sale until closing and operating (including debt financing and related interest expense), purchase results of the life and annuity business are included in accounting adjustments related to goodwill and other expenses discontinued operations for all periods prior to the closing date. not allocated to the reporting segments.
RESERVES Total Property & Casualty Reserves as of Total Reserves as of December 31, 2018 December 31, 2018
All Other [1] Personal Lines $1,409 $2,456 4% P&C Other Operations 10% $2,673 11% Group Benefits unpaid losses and P&C unpaid losses loss adjustment and loss expenses adjustment $8,445 expenses 25% $24,584 71%
Commercial Lines [1]Includes reserves for future policy benefits and other policyholder funds and $19,455 benefits payable of $642 and $767, respectively, of which $427 and $455, 79% respectively, relate to the Group Benefits segment with the remainder related to run-off structured settlement and terminal funding agreements within Corporate. The reserve for unpaid losses and loss adjustment expenses includes a liability for unpaid losses, including those that have been incurred but not yet reported, as well as estimates of all expenses associated with processing and settling these insurance claims, including reserves related to both Property & Casualty and Group Benefits.
11 Part I - Item 1. Business
Further discussion of The Hartford’s property and casualty insurance product reserves, including asbestos and UNDERWRITING FOR environmental claims reserves within P&C Other Operations, may be found in Part II, Item 7, MD&A — Critical Accounting Estimates — Property and Casualty Insurance Product Reserves. P&C AND GROUP Additional discussion may be found in Notes to Consolidated Financial Statements, including in the Company’s accounting BENEFITS policies for insurance product reserves within Note 1 - Basis of The Company underwrites the risks it insures in order to manage Presentation and Significant Accounting Policies and in Note 11 - exposure to loss through favorable risk selection and Reserve for Unpaid Losses and Loss Adjustment Expenses of diversification. Risk modeling is used to manage, within specified Notes to Consolidated Financial Statements. limits, the aggregate exposure taken in each line of business and across the Company. For property and casualty business, Total Group Benefits Reserves as of aggregate exposure limits are set by geographic zone and peril. December 31, 2018 Products are priced according to the risk characteristics of the insured’s exposures. Rates charged for Personal Lines products are filed with the states in which we write business. Rates for Other policyholder funds and Reserve for benefits payable future policy Commercial Lines products are also filed with the states but the $455 benefits [2] premium charged may be modified based on the insured’s relative STD and 5% $427 risk profile and workers’ compensation policies may be subject to Life 5% supp. modification based on prior loss experience. Pricing for Group health [1] premium $161 waiver Benefits products, including long-term disability and life 2% $705 insurance, is also based on an underwriting of the risks and a 8% Life and accident, excl. premium projection of estimated losses, including consideration of waiver investment income. $577 6% 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. Geographic Distribution of Earned Premium (% of total) LTD $7,002 Commercial Personal Group 75% Location Lines Lines Benefits Total California 8% 2% 3% 13% New York 5% 1% 3% 9% [1]Includes $118 of short-term disability ("STD") reserves and $43 of supplemental Texas 3% 2% 2% 7% health reserves. [2]Includes $311 of paid up life reserves and policy reserves on life policies, $107 of Florida 2% 2% 2% 6% reserves for conversions to individual life and $9 of other reserves. New Jersey 3% —% 2% 5% Other policyholder funds and benefits payable represent deposits All other [1] 23% 15% 22% 60% from policyholders where the company does not have insurance Total 44% 22% 34% 100% risk but is subject to investment risk. Reserves for future policy [1]No other single state or country accounted for 5% or more of the Company's benefits represent life-contingent reserves for which the consolidated earned premium written in 2018. company is subject to insurance and investment risk. Further discussion of The Hartford's Group Benefits long-term disability reserves may be found in Part II, Item 7, MD&A — Critical Accounting Estimates — Group Benefits Long-term Disability ("LTD") Reserves, Net of Reinsurance. Additional discussion may be found in Note 11 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
12 Part I - Item 1. Business
CLAIMS Management of The Hartford's ADMINISTRATION FOR Investment Portfolio HIMCO manages the Company's investment portfolios to maximize economic value and generate the returns necessary to P&C AND GROUP support the Hartford’s various product obligations, within internally established objectives, guidelines and risk tolerances. BENEFITS The portfolio objectives and guidelines are developed based upon Claims administration includes the functions associated with the the asset/liability profile, including duration, convexity and other receipt of initial loss notices, claims adjudication and estimates, characteristics within specified risk tolerances. The risk legal representation for insureds where appropriate, tolerances considered include, but are not limited to, asset sector, establishment of case reserves, payment of losses and credit issuer allocation limits, and maximum portfolio limits for notification to reinsurers. These activities are performed by below investment grade holdings. The Company attempts to approximately 6,720 claim professionals located in 49 states, minimize adverse impacts to the portfolio and the Company’s organized to meet the specific claim service needs for our various results of operations from changes in economic conditions product offerings. Our combined Workers’ Compensation and through asset diversification, asset allocation limits, asset/liability Group Benefits units enable us to leverage synergies for duration matching and the use of derivatives. For further improved outcomes. discussion of HIMCO’s portfolio management approach, see Part II, Item 7, MD&A — Enterprise Risk Management. Claim payments for benefit, loss and loss adjustment expenses are the largest expenditure for the Company. The Hartford's Investment Portfolio of $46.8 billion as of December 31, 2018 REINSURANCE For discussion of reinsurance, see Part II, Item 7, MD&A — Enterprise Risk Management and Note 8 - Reinsurance of Notes to Consolidated Financial Statements. Taxable fixed maturities (excl. U.S. INVESTMENT treasuries & U.S. treasuries govt. agencies) and gov't 46% agencies and OPERATIONS short-terms 18% Hartford Investment Management Company (“HIMCO”) is an SEC registered investment advisor and manages the Company's investment operations. HIMCO provides customized investment strategies for The Hartford's investment portfolio, as well as for The Hartford's pension plan and institutional clients. In connection with the life and annuity business sold in May 2018, Tax-exempt fixed HIMCO entered into an agreement for an initial five year term to maturities 21% manage the invested assets of Talcott Resolution. Mortgage loans 8% As of December 31, 2018 and 2017, the fair value of HIMCO’s Equity and other 3% total assets under management was approximately $89.6 billion Limited partnerships and other and $98.6 billion, respectively, of which $40.2 billion and $2.1 alternative investments 4% billion, respectively, were held in HIMCO managed third party accounts. Item 1A. RISK FACTORS In deciding whether to invest in The Hartford, you should cause the emergence or exacerbate the effect of others. Such a carefully consider the following risks, any of which could have a combination could materially increase the severity of the impact material adverse effect on our business, financial condition, of these risks on our business, results of operations, financial results of operation or liquidity and could also impact the trading condition or liquidity. price of our securities. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Annual Report on Form 10-K. The following risk factors have been organized by category for ease of use, however many of the risks may have impacts in more than one category. The occurrence of certain of them may, in turn,
13 Part I - Item 1A. Risk Factors
were more volatile than in prior periods, which could be Risks Relating to indicative of a greater risk of a decline. For additional information on equity market sensitivity, see Part II, Item 7 Management's Discussion and Analysis of Financial Economic, Political and Condition and Results of Operation (MD&A), Enterprise Risk Global Market Management, Financial Risk- Equity Risk. • Interest Rate Risk - Global economic conditions may result Conditions in the persistence of a low interest rate environment which would continue to pressure our net investment income and Unfavorable economic, political and global could result in lower margins on certain products. For market conditions may adversely impact our additional information on interest rate sensitivity, see Part II, business and results of operations. Item 7, MD&A, Enterprise Risk Management, Financial Risk - Interest Rate Risk The Company’s investment portfolio and insurance liabilities are sensitive to changes in economic, political and global capital New and renewal business for our property and casualty and market conditions, such as the effect of a weak economy and group benefits products is priced considering prevailing changes in credit spreads, equity prices, interest rates and interest rates. As interest rates decline, in order to achieve inflation. Weak economic conditions, such as high unemployment, the same economic return, we would have to increase low labor force participation, lower family income, a weak real product prices to offset the lower anticipated investment estate market, lower business investment and lower consumer income earned on invested premiums. Conversely, as interest spending may adversely affect the demand for insurance and rates rise, pricing targets will tend to decrease to reflect financial products and lower the Company’s profitability in some higher anticipated investment income. Our ability to cases. In addition, a deterioration in global economic conditions, effectively react to such changes in interest rates may affect including due to a trade war, tariffs or other actions with respect our competitiveness in the marketplace, and in turn, could to international trade agreements or policies, has the potential to, reduce written premium and earnings. For additional among other things, reduce demand for our products, reduce information on interest rate sensitivity, see Part II, Item 7 exposures we insure, drive higher inflation that could increase the Management's Discussion and Analysis of Financial Company’s loss costs and result in increased incidence of claims, Condition and Results of Operation (MD&A), Enterprise Risk particularly for workers’ compensation and disability claims. The Management, Financial Risk - Interest Rate Risk. Company’s investment portfolio includes limited partnerships In addition, due to the long-term nature of the liabilities and other alternative investments and equity securities for which within our Group Benefits operations, particularly for long- changes in value are reported in earnings. These investments may term disability, declines in interest rates over an extended be adversely impacted by economic volatility, including real period of time would result in our having to reinvest at lower estate market deterioration, which could impact our net yields. On the other hand, a rise in interest rates, in the investment returns and result in an adverse impact on operating absence of other countervailing changes, would reduce the results. market value of our investment portfolio. A decline in market Below are several key factors impacted by changes in economic, value of invested assets due to an increase in interest rates political, and global market conditions and their potential effect could also limit our ability to realize tax benefits from on the Company’s business and results of operation: previously recognized capital losses. • Credit Spread Risk - Credit spread exposure is reflected in • Inflation Risk - Inflation is a risk to our property and casualty the market prices of fixed income instruments where lower business because, in many cases, claims are paid out many rated securities generally trade at a higher credit spread. If years after a policy is written and premium is collected for issuer credit spreads increase or widen, the market value of the risk. Accordingly, a greater than expected increase in our investment portfolio may decline. If the credit spread inflation related to the cost of medical services and repairs widening is significant and occurs over an extended period of over the claim settlement period can result in higher claim time, the Company may recognize other-than-temporary costs than what was estimated at the time the policy was impairments, resulting in decreased earnings. If credit written. Inflation can also affect consumer spending and spreads tighten, significantly, the Company’s net investment business investment which can reduce the demand for our income associated with new purchases of fixed maturities products and services. may be reduced. In addition, the value of credit derivatives under which the Company assumes exposure or purchases Concentration of our investment portfolio protection are impacted by changes in credit spreads, with increases the potential for significant losses. losses occurring when credit spreads widen for assumed The concentration of our investment portfolios in any particular exposure or when credit spreads tighten if credit protection industry, collateral type, group of related industries or geographic has been purchased. sector could have an adverse effect on our investment portfolios • Equity Markets Risk - A decline in equity markets may result and consequently on our business, financial condition, results of in unrealized capital losses on investments in equity operations, and liquidity. Events or developments that have a securities recorded against net income and lower earnings negative impact on any particular industry, collateral type, group from Hartford Funds where fee income is earned based upon of related industries or geographic region may have a greater the fair value of the assets under management. Equity adverse effect on our investment portfolio to the extent that the markets are unpredictable. During 2018, the equity markets portfolio is concentrated rather than diversified.
14 Part I - Item 1A. Risk Factors
Further, if issuers of securities or loans we hold are acquired, • effects of extreme weather events on the physical and merge or otherwise consolidate with other issuers of securities or operational exposure of industries and issuers loans held by the Company, our investment portfolio’s credit Because there is significant variability associated with the concentration risk to issuers could increase for a period of time, impacts of climate change, we cannot predict how physical, legal, until the Company is able to sell securities to get back in regulatory and social responses may impact our business. compliance with the established investment credit policies. Changing climate and weather patterns may A change in or replacement of the London adversely affect our business, financial Inter-Bank Offered Rate ("LIBOR") may condition and results of operation. adversely affect the value of certain derivatives and floating rate securities we Climate change presents risks to us as an insurer, investor and hold and floating rate securities we have employer. Climate models indicate that rising temperatures will likely result in rising sea levels over the decades to come and may issued, and any other assets or liabilities increase the frequency and intensity of natural catastrophes and whose value may be tied to LIBOR. severe weather events. Extreme weather events such as Should financial institutions stop reporting the benchmark abnormally high temperatures may result in increased losses interest rate known as LIBOR or change how the rate is associated with our property, auto, workers’ compensation and calculated, the Company could suffer economic loss to the extent group benefits businesses. Changing climate patterns may also it has fixed maturity investments or other financial instruments increase the duration, frequency and intensity of heat/cold waves, that do not provide for a replacement reference rate and which which may result in increased claims for property damage, mature after the date LIBOR is changed or is no longer published. business interruption and losses under workers’ compensation, LIBOR is the interest rate at which banks have historically offered group disability and group life coverages. Precipitation patterns to lend funds to one another for short-term loans. Actions by across the U.S. are projected to change, which if realized, may regulators or law enforcement agencies, as well as the increase risks of flash floods and wildfires. Additionally, there may Intercontinental Exchange (ICE) Benchmark Administration (the be an impact on the demand, price and availability of automobile current administrator of LIBOR) may result in changes to the way and homeowners insurance, and there is a risk of higher LIBOR is determined or the establishment of alternative reinsurance costs or more limited availability of reinsurance reference rates. For example, on July 27, 2017, the U.K. Financial coverage. Changes in climate conditions may also cause our Conduct Authority announced that it intends to stop persuading underlying modeling data to not adequately reflect frequency and or compelling banks to submit LIBOR rates after 2021. The U.S. severity, limiting our ability to effectively evaluate and manage Federal Reserve, based on the recommendations of the New York risks of catastrophes and severe weather events. Among other Federal Reserve’s Alternative Reference Rate Committee impacts, this could result in not charging enough premiums or not (constituted of major derivative market participants and their obtaining timely state approvals for rate increases to cover the regulators), has begun publishing a Secured Overnight Funding risks we insure. We may also experience significant interruptions Rate (“SOFR”) which is intended to replace U.S. dollar LIBOR. to the Company’s systems and operations that hinder our ability Plans for alternative reference rates for other currencies have to sell and service business, manage claims and operate our also been announced. At this time, it is not possible to predict how business. markets will respond to these new rates, and the effect that any In addition, climate change-related risks may adversely impact changes in LIBOR or discontinuation of LIBOR might have on new the value of the securities that we hold. The effects of climate or existing financial instruments. If LIBOR ceases to exist or if the change could also lead to increased credit risk of other methods of calculating LIBOR change from current methods for counterparties we transact business with, including reinsurers. any reason, outstanding contracts with interest rates tied to Rising sea levels may lead to decreases in real estate values in LIBOR may be adversely affected if those contracts either do not coastal areas, reducing premium and demand for commercial automatically provide for a replacement rate such as SOFR or property and homeowners insurance and adversely impacting the convert to another reference rate that could be less favorable to value of our real estate-related investments. Additionally, the Company. Outstanding contracts that could be affected government policies or regulations to slow climate change, such include interest rates on certain derivatives and floating rate as emission controls or technology mandates, may have an securities we hold, securities we have issued, and any other assets adverse impact on sectors such as utilities, transportation and or liabilities whose value is tied to LIBOR. Further, any manufacturing, affecting demand for our products and our uncertainty regarding the continued use and reliability of LIBOR investments in these sectors. as a benchmark interest rate could adversely affect the value of such instruments. Changes in security asset prices may impact the value of our fixed income, real estate and commercial mortgage investments, resulting in realized or unrealized losses on our invested assets. Our decision to invest in certain securities and loans may also be impacted by changes in climate patterns due to: • changes in supply/demand characteristics for fuel (e.g., coal, oil, natural gas) • advances in low-carbon technology and renewable energy development and
15 Part I - Item 1A. Risk Factors
operations and liquidity. As of December 31, 2018, $977 of Insurance Industry and aggregated limit remained available under the adverse development cover. Furthermore, if cumulative A&E losses ceded Product Related Risks to NICO were to exceed the $650 of ceded premium paid to NICO, the Company would defer recognition of the reinsurance Unfavorable loss development may adversely benefit related to incurred losses above $650, resulting in a affect our business, financial condition, charge to earnings until such periods as reinsurance recoveries results of operations and liquidity. begin to be collected. As of December 31, 2018, the Company had ceded cumulative losses of $523 to NICO. For additional We establish property and casualty loss reserves to cover our information related to risks associated with the adverse estimated liability for the payment of all unpaid losses and loss development cover, see Note 8 - Reinsurance and Note 14 - expenses incurred with respect to premiums earned on our Commitments and Contingencies of Notes to Consolidated policies. Loss reserves are estimates of what we expect the Financial Statements. ultimate settlement and administration of claims will cost, less what has been paid to date. These estimates are based upon We are vulnerable to losses from actuarial projections and on our assessment of currently available catastrophes, both natural and man-made. data, as well as estimates of claims severity and frequency, legal theories of liability and other factors. Our insurance operations expose us to claims arising out of catastrophes. Catastrophes can be caused by various Loss reserve estimates are refined periodically as experience unpredictable natural events, including, among others, develops and claims are reported and settled, potentially earthquakes, hurricanes, hailstorms, severe winter weather, wind resulting in increases to our reserves. Increases in reserves storms, fires, tornadoes, and pandemics. Catastrophes can also be would be recognized as an expense during the periods in which man-made, such as terrorist attacks, cyber-attacks, explosions or these determinations are made, thereby adversely affecting our infrastructure failures. results of operations for those periods. In addition, since reserve estimates of aggregate loss costs for prior years are used in The geographic distribution of our business subjects us to pricing our insurance products, inaccurate reserves can lead to catastrophe exposure for events occurring in a number of areas, our products not being priced adequately to cover actual losses including, but not limited to: hurricanes in Florida, the Gulf Coast, and related loss expenses in order to generate a profit. the Northeast and the Atlantic coast regions of the United States; tornadoes and hail in the Midwest and Southeast; earthquakes in We continue to receive asbestos and environmental ("A&E") geographical regions exposed to seismic activity; wildfires in the claims, the vast majority of which relate to policies written before West and the spread of disease. Any increases in the values and 1986. Estimating the ultimate gross reserves needed for unpaid concentrations of insureds and property in these areas would losses and related expenses for asbestos and environmental increase the severity of catastrophic events in the future. In claims is particularly difficult for insurers and reinsurers. The addition, changes in climate and/or weather patterns may actuarial tools and other techniques used to estimate the increase the frequency and/or intensity of severe weather and ultimate cost of more traditional insurance exposures tend to be natural catastrophe events potentially leading to increased less precise when used to estimate reserves for some A&E insured losses. Potential examples include, but are not limited to: exposures. • an increase in the frequency or intensity of wind and Moreover, the assumptions used to estimate gross reserves for thunderstorm and tornado/hailstorm events due to A&E claims, such as claim frequency over time, average severity, increased convection in the atmosphere, and how various policy provisions will be interpreted, are subject to significant uncertainty. It is also not possible to predict changes • more frequent and larger wildfires in certain geographies, in the legal and legislative environment and their effect on the • higher incidence of deluge flooding, and future development of A&E claims. These factors, among others, make the variability of gross reserves estimates for these longer- • the potential for an increase in frequency and severity of tailed exposures significantly greater than for other more hurricane events. traditional exposures. For a further discussion of climate-related risks, see the above- Effective December 31, 2016, the Company entered into an referenced Risk Factor, “Changing climate and weather patterns agreement with National Indemnity Company (“NICO”), a may adversely affect our business, financial condition and results subsidiary of Berkshire Hathaway Inc. (“Berkshire”) whereby the of operation.” Company is reinsured for subsequent adverse development on Our businesses also have exposure to global or nationally substantially all of its net A&E reserves up to an aggregate net occurring pandemics caused by highly infectious and potentially limit of $1.5 billion. The adverse development cover excludes risk fatal diseases spread through human, animal or plant populations. of adverse development on net A&E reserves held by the Company's U.K. Property and Casualty run-off subsidiaries which In the event of one or more catastrophes, policyholders may be have been accounted for as liabilities held for sale in the unable to meet their obligations to pay premiums on our consolidated balance sheets as of December 31, 2016. We remain insurance policies. Further, our liquidity could be constrained by a directly liable to claimants and if the reinsurer does not fulfill its catastrophe, or multiple catastrophes, which could result in obligations under the agreement or if future adverse extraordinary losses. In addition, in part because accounting rules development exceeds the $1.5 billion aggregate limit, we may do not permit insurers to reserve for such catastrophic events need to increase our recorded net reserves which could have a until they occur, claims from catastrophic events could have a material adverse effect on our financial condition, results of material adverse effect on our business, financial condition,
16 Part I - Item 1A. Risk Factors results of operations or liquidity. The amount we charge for property and casualty consumer at the expense of the insurer, catastrophe exposure may be inadequate if the frequency or which may not allow us to reach targeted levels of profitability. In severity of catastrophe losses changes over time or if the models addition to regulating rates, certain states have enacted laws that we use to estimate the exposure prove inadequate. In addition, require a property and casualty insurer to participate in assigned regulators or legislators could limit our ability to charge adequate risk plans, reinsurance facilities, joint underwriting associations pricing for catastrophe exposures or shift more responsibility for and other residual market plans. State regulators also require covering risk. that an insurer offer property and casualty coverage to all consumers and often restrict an insurer's ability to charge the Terrorism is an example of a significant man-made caused price it might otherwise charge or restrict an insurer's ability to potential catastrophe. Private sector catastrophe reinsurance is offer or enforce specific policy deductibles. In these markets, we limited and generally unavailable for terrorism losses caused by may be compelled to underwrite significant amounts of business attacks with nuclear, biological, chemical or radiological weapons. at lower than desired rates or accept additional risk not In addition, workers' compensation policies generally do not have contemplated in our existing rates, participate in the operating exclusions or limitations for terrorism losses. Reinsurance losses of residual market plans or pay assessments to fund coverage from the federal government under the Terrorism Risk operating deficits of state-sponsored funds, possibly leading to Insurance Program Reauthorization Act of 2015 (“TRIPRA”) is lower returns on equity. The laws and regulations of many states also limited and only applies for certified acts of terrorism that also limit an insurer's ability to withdraw from one or more lines exceed a certain threshold of industry losses. Accordingly, the of insurance in the state, except pursuant to a plan that is effects of a terrorist attack in the geographic areas we serve may approved by the state's insurance department. Additionally, result in claims and related losses for which we do not have certain states require insurers to participate in guaranty funds for adequate reinsurance. Further, the continued threat of terrorism impaired or insolvent insurance companies. These funds and the occurrence of terrorist attacks, as well as heightened periodically assess losses against all insurance companies doing security measures and military action in response to these threats business in the state. Any of these factors could have a material and attacks or other geopolitical or military crises, may cause adverse effect on our business, financial condition, results of significant volatility in global financial markets, disruptions to operations or liquidity. commerce and reduced economic activity. These consequences could have an adverse effect on the value of the assets in our Additionally, the property and casualty and group benefits investment portfolio. Terrorist attacks also could disrupt our insurance markets have been historically cyclical, experiencing operation centers. In addition, TRIPRA expires on December 31, periods characterized by relatively high levels of price 2020 and if the U.S. Congress does not reauthorize the program competition, less restrictive underwriting standards, more or significantly reduces the government’s share of covered expansive coverage offerings, multi-year rate guarantees and terrorism losses, the Company’s exposure to terrorism losses declining premium rates, followed by periods of relatively low could increase materially unless it can purchase alternative levels of competition, more selective underwriting standards, terrorism reinsurance protection in the private markets at more coverage restrictions and increasing premium rates. In all of affordable prices or takes actions to materially reduce its our property and casualty and group benefits insurance product exposure in lines of business subject to terrorism risk. For a lines and states, there is a risk that the premium we charge may further discussion of TRIPRA, see Part II, Item 7, MD&A - ultimately prove to be inadequate as reported losses emerge. In Enterprise Risk Management - Insurance Risk Management, addition, there is a risk that regulatory constraints, price Reinsurance as a Risk Management Strategy. competition or incorrect pricing assumptions could prevent us from achieving targeted returns. Inadequate pricing could have a As a result, it is possible that any, or a combination of all, of these material adverse effect on our results of operations and financial factors related to a catastrophe, or multiple catastrophes, condition. whether natural or man-made, can have a material adverse effect on our business, financial condition, results of operations or Competitive activity, use of data analytics, or liquidity. technological changes may adversely affect Pricing for our products is subject to our our market share, demand for our products, ability to adequately assess risks, estimate or our financial results. losses and comply with state insurance The industries in which we operate are highly competitive. Our regulations. principal competitors are other property and casualty insurers, group benefits providers and providers of mutual funds and We seek to price our property and casualty and group benefits exchange-traded products. Competitors may expand their risk insurance policies such that insurance premiums and future net appetites in products and services where The Hartford currently investment income earned on premiums received will provide for enjoys a competitive advantage. Larger competitors with more an acceptable profit in excess of underwriting expenses and the capital and new entrants to the market could result in increased cost of paying claims. Pricing adequacy depends on a number of pricing pressures on a number of our products and services and factors, including proper evaluation of underwriting risks, the may harm our ability to maintain or increase our profitability. For ability to project future claim costs, our expense levels, net example, larger competitors, including those formed through investment income realized, our response to rate actions taken by consolidation or who may acquire new entrants to the market, competitors, legal and regulatory developments, and the ability to such as insurtech firms, may have lower operating costs and an obtain regulatory approval for rate changes. ability to absorb greater risk while maintaining their financial State insurance departments regulate many of the premium rates strength ratings, thereby allowing them to price their products we charge and also propose rate changes for the benefit of the more competitively. In addition, a number of insurers are making
17 Part I - Item 1A. Risk Factors use of "big data" analytics to, among other things, improve pricing Unexpected and unintended claim and accuracy, be more targeted in marketing, strengthen customer relationships and provide more customized loss prevention coverage issues under our insurance services. If they are able to use big data more effectively than we contracts may adversely impact our financial are, it may give them a competitive advantage. Because of the performance. highly competitive nature of the industries we compete in, there Changes in industry practices and in legal, judicial, social and can be no assurance that we will continue to compete effectively other environmental conditions, technological advances or with our industry rivals, or that competitive pressure will not fraudulent activities, may require us to pay claims we did not have a material adverse effect on our business and results of intend to cover when we wrote the policies. These issues may operations. either extend coverage beyond our underwriting intent or Our business could also be affected by technological changes, increase the frequency or severity of claims. In some instances, including further advancements in automotive safety features, these changes, advances or activities may not become apparent the development of autonomous or “self-driving” vehicles, and until some time after we have issued insurance contracts that are platforms that facilitate ride sharing. These technologies could affected by the changes, advances or activities. As a result, the full impact the frequency or severity of losses, disrupt the demand for extent of liability under our insurance contracts may not be certain of our products, or reduce the size of the automobile known for many years after a contract is issued, and this liability insurance market as a whole. In addition, the risks we insure are may have a material adverse effect on our business, financial affected by the increased use of technology in homes and condition, results of operations and liquidity at the time it businesses, including technology used in heating, ventilation, air becomes known. conditioning and security systems and the introduction of more automated loss control measures. While there is substantial uncertainty about the timing, penetration and reliability of such Financial Strength, technologies, and the legal frameworks that may apply, such as for example to autonomous vehicles, any such impacts could have Credit and Counterparty a material adverse effect on our business and results of operations. Risks We may experience difficulty in marketing Downgrades in our financial strength or credit and providing insurance products and ratings may make our products less investment advisory services through attractive, increase our cost of capital and distribution channels and advisory firms. inhibit our ability to refinance our debt. We distribute our insurance products, mutual funds and ETPs Financial strength and credit ratings are important in establishing through a variety of distribution channels and financial the competitive position of insurance companies. Rating agencies intermediaries, including brokers, independent agents, broker- assign ratings based upon several factors. While most of the dealers, banks, registered investment advisors, affinity partners, factors relate to the rated company, others relate to the views of our own internal sales force and other third-party organizations. the rating agency (including its assessment of the strategic In some areas of our business, we generate a significant portion of importance of the rated company to the insurance group), general our business through third-party arrangements. For example, we economic conditions, and circumstances outside the rated market personal lines products in large part through an exclusive company's control. In addition, rating agencies may employ licensing arrangement with AARP that continues through January different models and formulas to assess the financial strength of a 1, 2023. Our ability to distribute products through the AARP rated company, and from time to time rating agencies have program may be adversely impacted by membership levels and altered these models. Changes to the models or factors used by the pace of membership growth. In addition, the independent the rating agencies to assign ratings could adversely impact a agent and broker distribution channel is consolidating which rating agency's judgment of its internal rating and the publicly could result in a larger proportion of written premium being issued rating it assigns us. concentrated among fewer agents and brokers, potentially Our financial strength ratings, which are intended to measure our increasing our cost of acquiring new business. While we ability to meet policyholder obligations, are an important factor periodically seek to renew or extend third party arrangements, affecting public confidence in most of our products and, as a there can be no assurance that our relationship with these third result, our competitiveness. A downgrade or a potential parties will continue or that the economics of these relationships downgrade in the rating of our financial strength or of one of our won't change to make them less financially attractive to the principal insurance subsidiaries could affect our competitive Company. An interruption in our relationship with certain of position and reduce future sales of our products. these third parties could materially affect our ability to market our products and could have a material adverse effect on our Our credit ratings also affect our cost of capital. A downgrade or a business, financial condition, results of operations and liquidity. potential downgrade of our credit ratings could make it more difficult or costly to refinance maturing debt obligations, to support business growth at our insurance subsidiaries and to maintain or improve the financial strength ratings of our principal insurance subsidiaries. These events could materially adversely affect our business, financial condition, results of operations and liquidity. For a further discussion of potential impacts of ratings
18 Part I - Item 1A. Risk Factors downgrades on derivative instruments, including potential credit ratings might be downgraded by one or more rating collateral calls, see Part II, Item 7, MD&A - Capital Resources and agencies. Liquidity - Derivative Commitments. Losses due to nonperformance or defaults by The amount of statutory capital that we must counterparties can have a material adverse hold to maintain our financial strength and effect on the value of our investments, credit ratings and meet other requirements reduce our profitability or sources of liquidity. can vary significantly from time to time and is We have credit risk with counterparties associated with sensitive to a number of factors outside of investments, derivatives, premiums receivable, reinsurance our control. recoverables and indemnifications provided by third parties in connection with previous dispositions. Among others, our We conduct the vast majority of our business through licensed counterparties include issuers of fixed maturity and equity insurance company subsidiaries. Statutory accounting standards securities we hold, borrowers of mortgage loans we hold, and statutory capital and reserve requirements for these entities customers, trading counterparties, counterparties under swaps are prescribed by the applicable insurance regulators and the and other derivative contracts, reinsurers, clearing agents, National Association of Insurance Commissioners (“NAIC”). The exchanges, clearing houses and other financial intermediaries and minimum capital we must hold is based on risk-based capital guarantors. These counterparties may default on their obligations (“RBC”) formulas for both life and property and casualty to us due to bankruptcy, insolvency, lack of liquidity, adverse companies. The RBC formula for life companies is applicable to economic conditions, operational failure, fraud, government our group benefits business and establishes capital requirements intervention and other reasons. In addition, for exchange-traded relating to insurance, business, asset, credit, interest rate and off- derivatives, such as futures, options and "cleared" over-the- balance sheet risks. The RBC formula for property and casualty counter derivatives, the Company is generally exposed to the companies sets required statutory surplus levels based on credit risk of the relevant central counterparty clearing house. underwriting, asset, credit and off-balance sheet risks. Defaults by these counterparties on their obligations to us could In any particular year, statutory surplus amounts and RBC ratios have a material adverse effect on the value of our investments, may increase or decrease depending on a variety of factors, business, financial condition, results of operations and liquidity. including Additionally, if the underlying assets supporting the structured securities we invest in default on their payment obligations, our • the amount of statutory income or losses generated by our securities will incur losses. insurance subsidiaries, • the amount of additional capital our insurance subsidiaries The availability of reinsurance and our ability must hold to support business growth, to recover under reinsurance contracts may • the amount of dividends or distributions taken out of our not be sufficient to protect us against losses. insurance subsidiaries, As an insurer, we frequently use reinsurance to reduce the effect of losses that may arise from, among other things, catastrophes • changes in equity market levels, and other risks that can cause unfavorable results of operations. • the value of certain fixed-income and equity securities in our Under these reinsurance arrangements, other insurers assume a investment portfolio, portion of our losses and related expenses; however, we remain liable as the direct insurer on all risks reinsured. Consequently, • the value of certain derivative instruments, ceded reinsurance arrangements do not eliminate our obligation • changes in interest rates, to pay claims, and we are subject to our reinsurers' credit risk with respect to our ability to recover amounts due from them. • admissibility of deferred tax assets, and The inability or unwillingness of any reinsurer to meet its financial • changes to the NAIC RBC formulas. obligations to us, including the impact of any insolvency or rehabilitation proceedings involving a reinsurer that could affect Most of these factors are outside of the Company's control. The the Company's access to collateral held in trust, could have a Company's financial strength and credit ratings are significantly material adverse effect on our financial condition, results of influenced by the statutory surplus amounts and RBC ratios of operations and liquidity. our insurance company subsidiaries. In addition, rating agencies may implement changes to their internal models that have the In addition, should the availability and cost of reinsurance change effect of increasing the amount of statutory capital we must hold materially, we may have to pay higher reinsurance costs, accept in order to maintain our current ratings. The RBC ratio could also an increase in our net liability exposure, reduce the amount of be negatively affected if the NAIC or state insurance regulators business we write, or access to the extent possible other change the statutory accounting guidance for determining alternatives to reinsurance, such as use of the capital markets. statutory capital. If our statutory capital resources are Further, due to the inherent uncertainties as to collection and the insufficient to maintain a particular rating by one or more rating length of time before reinsurance recoverables will be due, it is agencies, we may need to use holding company resources or seek possible that future adjustments to the Company’s reinsurance to raise capital through public or private equity or debt financing. recoverables, net of the allowance, could be required, which could If we were not to raise additional capital, either at our discretion have a material adverse effect on the Company’s consolidated or because we were unable to do so, our financial strength and results of operations or cash flows in a particular quarterly or annual period.
19 Part I - Item 1A. Risk Factors
Our ability to declare and pay dividends is internal and industry data and assumptions used in the models may not be indicative of what will happen in the future. subject to limitations. Consequently, actual results may differ materially from our The payment of future dividends on our capital stock is subject to modeled results. The profitability and financial condition of the the discretion of our board of directors, which considers, among Company substantially depends on the extent to which our actual other factors, our operating results, overall financial condition, experience is consistent with assumptions we use in our models credit-risk considerations and capital requirements, as well as and ultimate model outputs. If, based upon these models or other general business and market conditions. Our board of directors factors, we misprice our products or our estimates of the risks we may only declare such dividends out of funds legally available for are exposed to prove to be materially inaccurate, our business, such payments. Moreover, our common stockholders are subject financial condition, results of operations or liquidity may be to the prior dividend rights of any holders of depositary shares adversely affected. representing such preferred stock then outstanding. The terms of our outstanding junior subordinated debt securities prohibit us The valuation of our securities and from declaring or paying any dividends or distributions on our investments and the determination of capital stock or purchasing, acquiring, or making a liquidation allowances and impairments are highly payment on such stock, if we have given notice of our election to subjective and based on methodologies, defer interest payments and the related deferral period has not yet commenced or a deferral period is continuing. estimations and assumptions that are subject to differing interpretations and market Moreover, as a holding company that is separate and distinct from conditions. our insurance subsidiaries, we have no significant business operations of our own. Therefore, we rely on dividends from our Estimated fair values of the Company’s investments are based on insurance company subsidiaries and other subsidiaries as the available market information and judgments about financial principal source of cash flow to meet our obligations. Subsidiary instruments, including estimates of the timing and amounts of dividends fund payments on our debt securities and the payment expected future cash flows and the credit standing of the issuer of dividends to stockholders on our capital stock. Connecticut or counterparty. During periods of market disruption, it may be state laws and certain other jurisdictions in which we operate difficult to value certain of our securities if trading becomes less limit the payment of dividends and require notice to and approval frequent and/or market data becomes less observable. There may by the state insurance commissioner for the declaration or be certain asset classes that were in active markets with payment of dividends above certain levels. Dividends paid from significant observable data that become illiquid due to the our insurance subsidiaries are further dependent on their cash financial environment. In addition, there may be certain securities requirements. In addition, in the event of liquidation or whose fair value is based on one or more unobservable inputs, reorganization of a subsidiary, prior claims of a subsidiary’s even during normal market conditions. As a result, the creditors may take precedence over the holding company’s right determination of the fair values of these securities may include to a dividend or distribution from the subsidiary except to the inputs and assumptions that require more estimation and extent that the holding company may be a creditor of that management judgment and the use of complex valuation subsidiary. For further discussion on dividends from insurance methodologies. These fair values may differ materially from the subsidiaries, see Part II, Item 7, MD&A - Capital Resources & value at which the investments may be ultimately sold. Further, Liquidity. rapidly changing or unprecedented credit and equity market conditions could materially impact the valuation of securities and the period-to-period changes in value could vary significantly. Risks Relating to Decreases in value could have a material adverse effect on our business, results of operations, financial condition and liquidity. Estimates, Assumptions Similarly, management’s decision on whether to record an other- than-temporary impairment or write down is subject to and Valuations significant judgments and assumptions regarding changes in Actual results could materially differ from the general economic conditions, the issuer's financial condition or analytical models we use to assist our future recovery prospects, estimated future cash flows, the effects of changes in interest rates or credit spreads, the expected decision making in key areas such as recovery period and the accuracy of third party information used underwriting, pricing, capital management, in internal assessments. As a result, management’s evaluations reserving, investments, reinsurance and and assessments are highly judgmental and its projections of catastrophe risks. future cash flows over the life of certain securities may ultimately prove incorrect as facts and circumstances change. We use models to help make decisions related to, among other things, underwriting, pricing, capital allocation, reserving, If our businesses do not perform well, we may investments, reinsurance, and catastrophe risk. Both proprietary be required to establish a valuation allowance and third party models we use incorporate numerous against the deferred income tax asset or to assumptions and forecasts about the future level and variability of interest rates, capital requirements, loss frequency and recognize an impairment of our goodwill. severity, currency exchange rates, policyholder behavior, equity Our income tax expense includes deferred income taxes arising markets and inflation, among others. The models are subject to from temporary differences between the financial reporting and the inherent limitations of any statistical analysis as the historical tax bases of assets and liabilities and carry-forwards for possible
20 Part I - Item 1A. Risk Factors foreign tax credits, capital losses and net operating losses. employees, customers or business partners for an extended Deferred tax assets are assessed periodically by management to period of time. Even if our employees and business partners are determine if it is more likely than not that the deferred income able to report to work, they may be unable to perform their duties tax assets will be realized. Factors in management's for an extended period of time if our data or systems used to determination include the performance of the business, including conduct our business are disabled or destroyed. the ability to generate, from a variety of sources and tax planning Our systems have been, and will likely continue to be, subject to strategies, sufficient future taxable income and capital gains viruses or other malicious codes, unauthorized access, cyber- before net operating loss and capital loss carry-forwards expire. attacks or other computer related penetrations. The frequency As interest rates rise, it may be difficult to generate realized and sophistication of such threats continue to increase as well. capital gains from the sale of fixed maturity securities to use While, to date, The Hartford is not aware of having experienced a capital loss carryforwards. If based on available information, it is material breach of our cyber security systems, administrative and more likely than not that we are unable to recognize a full tax technical controls as well as other preventive actions may be benefit on deferred tax assets, then a valuation allowance will be insufficient to prevent physical and electronic break-ins, denial of established with a corresponding charge to net income (loss). service, cyber-attacks or other security breaches to our systems Charges to increase our valuation allowance could have a or those of third parties with whom we do business. Such an event material adverse effect on our results of operations and financial could compromise our confidential information as well as that of condition. our clients and third parties, impede or interrupt our business Goodwill represents the excess of the amounts we paid to acquire operations and result in other negative consequences, including subsidiaries and other businesses over the fair value of their net remediation costs, loss of revenue, additional regulatory scrutiny assets at the date of acquisition. We test goodwill at least and litigation and reputational damage. In addition, we routinely annually for impairment. Impairment testing is performed based transmit to third parties personal, confidential and proprietary upon estimates of the fair value of the “reporting unit” to which information, which may be related to employees and customers, the goodwill relates. The reporting unit is the operating segment by email and other electronic means, along with receiving and or a business one level below an operating segment if discrete storing such information on our systems. Although we attempt to financial information is prepared and regularly reviewed by protect privileged and confidential information, we may be management at that level. The fair value of the reporting unit unable to secure the information in all events, especially with could decrease if new business, customer retention, profitability clients, vendors, service providers, counterparties and other third or other drivers of performance differ from expectations. If it is parties who may not have appropriate controls to protect determined that the goodwill has been impaired, the Company confidential information. must write down the goodwill by the amount of the impairment, Our businesses must comply with regulations to control the with a corresponding charge to net income (loss). These write privacy of customer, employee and third party data, and state and downs could have a material adverse effect on our results of federal regulations regarding data privacy are becoming operations or financial condition. increasingly more onerous. A misuse or mishandling of confidential or proprietary information could result in legal Strategic and liability, regulatory action and reputational harm. Third parties, including third party administrators, are also Operational Risks subject to cyber-breaches of confidential information, along with the other risks outlined above, any one of which may result in our Our businesses may suffer and we may incur incurring substantial costs and other negative consequences, substantial costs if we are unable to access including a material adverse effect on our business, reputation, our systems and safeguard the security of our financial condition, results of operations and liquidity. While we data in the event of a disaster, cyber breach maintain cyber liability insurance that provides both third party or other information security incident. liability and first party insurance coverages, our insurance may not be sufficient to protect against all loss. We use technology to process, store, retrieve, evaluate and utilize customer and company data and information. Our information Performance problems due to outsourcing technology and telecommunications systems, in turn, interface and other third-party relationships may with and rely upon third-party systems. We and our third party compromise our ability to conduct business. vendors must be able to access our systems to provide insurance quotes, process premium payments, make changes to existing We outsource certain business and administrative functions and policies, file and pay claims, administer mutual funds, provide rely on third-party vendors to perform certain functions or customer support, manage our investment portfolios, report on provide certain services on our behalf and have a significant financial results and perform other necessary business functions. number of information technology and business processes outsourced with a single vendor. If we are unable to reach Systems failures or outages could compromise our ability to agreement in the negotiation of contracts or renewals with perform these business functions in a timely manner, which could certain third-party providers, or if such third-party providers harm our ability to conduct business and hurt our relationships experience disruptions or do not perform as anticipated, we may with our business partners and customers. In the event of a be unable to meet our obligations to customers and claimants, disaster such as a natural catastrophe, a pandemic, an industrial incur higher costs and lose business which may have a material accident, a cyber-attack, a blackout, a terrorist attack (including adverse effect on our business and results of operations. For conventional, nuclear, biological, chemical or radiological) or war, other risks associated with our outsourcing of certain functions, systems upon which we rely may be inaccessible to our see the immediately preceding risk factor.
21 Part I - Item 1A. Risk Factors
Our ability to execute on capital management underwriting, risk management, claims handling, finance, information technology and actuarial practices. Difficulties plans, expense reduction initiatives and other integrating an acquired business may also result in the acquired actions is subject to material challenges, business performing differently than we expected including uncertainties and risks. through the loss of customers or in our failure to realize anticipated increased premium growth or expense-related The ability to execute on capital management plans is subject to efficiencies. We could be adversely affected by the acquisition material challenges, uncertainties and risks. From time to time, due to unanticipated performance issues and additional expense, our capital management plans may include the repurchase of unforeseen liabilities, transaction-related charges, downgrades of common stock, the paydown of outstanding debt or both. We may third-party rating agencies, diversion of management time and not achieve all of the benefits we expect to derive from these resources to integration challenges, loss of key employees, plans. In the case an equity repurchase plan is approved by the regulatory requirements, exposure to tax liabilities, amortization Board, such capital management plan would be subject to of expenses related to intangibles and charges for impairment of execution risks, including, among others, risks related to market long-term assets or goodwill. In addition, we may be adversely fluctuations, investor interest and potential legal constraints that impacted by uncertainties related to reserve estimates of the could delay execution at an otherwise optimal time. There can be acquired company and its design and operation of internal no assurance that we will fully execute any such plan. In addition, controls over financial reporting. We may be unable to distribute we may not be successful in keeping our businesses cost efficient. as much capital to the holding company as planned due to The Company may not be able to achieve all the revenue regulatory restrictions or other reasons that may adversely affect increases, expense reductions and other synergies that it expects our liquidity. to realize as a result of acquisitions, divestitures or restructurings. We may take future actions, including In addition in the case of business dispositions, we may have acquisitions, divestitures or restructurings that may involve difficulties in separating from our divested businesses which may additional uncertainties and risks that negatively impact our result in our incurring additional, unforeseen expenses, and business, financial condition, results of operations and liquidity. diversion of management’s time and resources to the challenges of business separation. In the case of business or asset Failure to complete our proposed acquisition dispositions, we may have continued financial exposure to the of The Navigators Group, Inc. could impact divested businesses through reinsurance, indemnification or our securities. other financial arrangements following the transaction. We may also retain a position in securities of the acquirer that purchased The completion of the acquisition of The Navigators Group, Inc. the divested business, which subjects us to risks related to the (Navigators Group) is subject to a number of conditions, including price of the equity securities and our ability to monetize such required regulatory approvals. The failure to satisfy all the securities. The expected benefits of acquired or divested required conditions could prevent the acquisition from occurring. businesses may not be realized and involve additional In addition, regulators could impose additional requirements or uncertainties and risks that may negatively impact our business, obligations as conditions for their approval. We can provide no financial condition, results of operations and liquidity. assurance that we will obtain the necessary approvals within the estimated timeframe or at all, or that any such requirements that Difficulty in attracting and retaining talented are imposed by regulators would not result in the termination of and qualified personnel may adversely affect the transaction. Investors’ reactions to a failure to complete the the execution of our business strategies. acquisition of Navigators Group, including possible speculation about alternative uses of capital, may cause volatility in our Our ability to attract, develop and retain talented employees, securities. A failure to complete a proposed transaction of this managers and executives is critical to our success. There is nature can also result in litigation by stockholders and other significant competition within and outside the insurance and disaffected parties. Furthermore, we will have incurred costs, and financial services industry for qualified employees, particularly devoted management time and resources, in connection with the for individuals with highly specialized knowledge in areas such as transaction for which we will receive little or no benefit. In underwriting, actuarial, data and analytics, technology and digital addition, even if we complete the proposed Navigators Group commerce. Our continued ability to compete effectively in our acquisition, we may not be able to successfully integrate businesses and to expand into new business areas depends on our Navigators Group into our business and therefore may not be ability to attract new employees and to retain and motivate our able to achieve the synergies we would expect to receive as a existing employees. The loss of any one or more key employees, result of the acquisition. including executives, managers and employees with strong technological, analytical and other specialized skills, may Acquisitions and divestitures may not adversely impact the execution of our business objectives or produce the anticipated benefits and may result in loss of important institutional knowledge. Our inability result in unintended consequences, which to attract and retain key personnel could have a material adverse could have a material adverse impact on our effect on our financial condition and results of operations. financial condition and results of operations. We may not be able to protect our intellectual We may not be able to successfully integrate acquired businesses property and may be subject to infringement or achieve the expected synergies as a result of such acquisitions claims. or divestitures. The process of integrating an acquired company We rely on a combination of contractual rights and copyright, or business can be complex and costly and may create unforeseen trademark, patent and trade secret laws to establish and protect operating difficulties including ineffective integration of
22 Part I - Item 1A. Risk Factors our intellectual property. Although we use a broad range of as well as strategic transactions such as acquisitions and measures to protect our intellectual property rights, third parties divestitures. may infringe or misappropriate our intellectual property. We may In addition, future regulatory initiatives could be adopted at the have to litigate to enforce and protect our intellectual property federal or state level that could impact the profitability of our and to determine its scope, validity or enforceability, which could businesses. For example, the NAIC and state insurance regulators divert significant resources and may not prove successful. are continually reexamining existing laws and regulations, Litigation to enforce our intellectual property rights may not be specifically focusing on modifications to statutory accounting successful and cost a significant amount of money. The inability to principles, interpretations of existing laws and the development secure or enforce the protection of our intellectual property of new laws and regulations. The NAIC continues to enhance the assets could harm our reputation and have a material adverse U.S. system of insurance solvency regulation, with a particular effect on our business and our ability to compete. We also may be focus on group supervision, risk-based capital, accounting and subject to costly litigation in the event that another party alleges financial reporting, enterprise risk management and reinsurance our operations or activities infringe upon their intellectual which could, among other things, affect statutory measures of property rights, including patent rights, or violate license usage capital sufficiency, including risk-based capital ratios. rights. Any such intellectual property claims and any resulting litigation could result in significant expense and liability for Any proposed or future legislation or NAIC initiatives, if adopted, damages, and in some circumstances we could be enjoined from may be more restrictive on our ability to conduct business than providing certain products or services to our customers, or current regulatory requirements or may result in higher costs or utilizing and benefiting from certain patent, copyrights, increased statutory capital and reserve requirements. In addition, trademarks, trade secrets or licenses, or alternatively could be the Federal Reserve Board and the International Association of required to enter into costly licensing arrangements with third Insurance Supervisors ("IAIS") each have initiatives underway to parties, all of which could have a material adverse effect on our develop insurance group capital standards. While the Company business, results of operations and financial condition. would not currently be subject to either of these capital standard regimes, it is possible that in the future standards similar to what is being contemplated by the Federal Reserve Board or the IAIS Regulatory and Legal could apply to the Company. The NAIC is in the process of developing a U.S. group capital calculation that will employ a Risks methodology based on aggregated risk-based capital. Regulatory and legislative developments Further, a particular regulator or enforcement authority may could have a material adverse impact on our interpret a legal, accounting, or reserving issue differently than business, financial condition, results of we have, exposing us to different or additional regulatory risks. The application of these regulations and guidelines by insurers operations and liquidity. involves interpretations and judgments that may be challenged by In the U.S., regulatory initiatives and legislative developments state insurance departments. The result of those potential may significantly affect our operations and prospects in ways that challenges could require us to increase levels of statutory capital we cannot predict. For example, further reforms to the Affordable and reserves or incur higher operating and/or tax costs. Care Act, and potential modification of the Dodd-Frank Act could In addition, our asset management businesses are also subject to have unanticipated consequences for the Company and its extensive regulation in the various jurisdictions where they businesses. It is unclear whether and to what extent Congress will operate. These laws and regulations are primarily intended to make changes to the Dodd-Frank Act, and how those changes protect investors in the securities markets or investment advisory might impact the Company, its business, financial conditions, clients and generally grant supervisory authorities broad results of operations and liquidity. administrative powers. Compliance with these laws and We are subject to extensive laws and regulations that are regulations is costly, time consuming and personnel intensive, and complex, subject to change and often conflicting in their approach may have an adverse effect on our business, financial condition, or intended outcomes. Compliance with these laws and results of operations and liquidity. regulations can increase cost, affect our strategy, and constrain our ability to adequately price our products. Our insurance business is sensitive to significant changes in the legal environment Our insurance subsidiaries are regulated by the insurance departments of the states in which they are domiciled, licensed or that could adversely affect The Hartford’s authorized to conduct business. State regulations generally seek results of operations or financial condition or to protect the interests of policyholders rather than an insurer or harm its businesses. the insurer’s stockholders and other investors. U.S. state laws grant insurance regulatory authorities broad administrative Like any major P&C insurance company, litigation is a routine part powers with respect to, among other things, licensing and of The Hartford’s business - both in defending and indemnifying authorizing lines of business, approving policy forms and our insureds and in litigating insurance coverage disputes. The premium rates, setting statutory capital and reserve Hartford accounts for such activity by establishing unpaid loss requirements, limiting the types and amounts of certain and loss adjustment expense reserves. Significant changes in the investments and restricting underwriting practices. State legal environment could cause our ultimate liabilities to change insurance departments also set constraints on domestic insurer from our current expectations. Such changes could be judicial in transactions with affiliates and dividends and, in many cases, nature, like trends in the size of jury awards, developments in the must approve affiliate transactions and extraordinary dividends law relating to tort liability or the liability of insurers, and rulings
23 Part I - Item 1A. Risk Factors concerning the scope of insurance coverage or the amount or will consider such factors as the financial strength of the types of damages covered by insurance. Legislative applicant, the acquirer's plans for the future operations of the developments, like changes in federal or state laws relating to the domestic insurer, and any such additional information as the liability of policyholders or insurers, could have a similar effect. It insurance commissioner may deem necessary or appropriate for is impossible to forecast such changes reliably, much less to the protection of policyholders or in the public interest. predict how they might affect our loss reserves or how those Generally, state statutes provide that control over a domestic changes might adversely affect our ability to price our insurance insurer is presumed to exist if any person, directly or indirectly, products appropriately. Thus, significant judicial or legislative owns, controls, holds with the power to vote, or holds proxies developments could adversely affect The Hartford’s business, representing 10 percent or more of the voting securities of the financial condition, results of operations and liquidity. domestic insurer or its parent company. Because a person acquiring 10 percent or more of our common stock would Changes in federal or state tax laws could indirectly control the same percentage of the stock of our U.S. adversely affect our business, financial insurance subsidiaries, the insurance change of control laws of condition, results of operations and liquidity. various U.S. jurisdictions would likely apply to such a transaction. Other laws or required approvals pertaining to one or more of our Changes in federal or state tax laws and tax rates or regulations existing subsidiaries, or a future subsidiary, may contain similar or could have a material adverse effect on our profitability and additional restrictions on the acquisition of control of the financial condition. For example, the recent reduction in tax rates Company. These laws may discourage potential acquisition due to the Tax Cuts and Jobs Act reduced our deferred tax assets proposals and may delay, deter, or prevent a change of control, resulting in a charge against earnings. including transactions that our Board of Directors and some or all of our stockholders might consider to be desirable. In addition, the Company’s tax return reflects certain items such as tax-exempt bond interest, tax credits, and insurance reserve Changes in accounting principles and deductions. There is an increasing risk that, in the context of financial reporting requirements could deficit reduction or overall tax reform, federal and/or state tax legislation could modify or eliminate these items, impacting the adversely affect our results of operations or Company, its investments, investment strategies, and/or its financial condition. policyholders. In the context of deficit reduction or overall tax As an SEC registrant, we are currently required to prepare our reform, federal and/or state tax legislation could modify or financial statements in accordance with U.S. GAAP, as eliminate provisions of current tax law that are beneficial to the promulgated by the Financial Accounting Standards Board Company, including tax-exempt bond interest, tax credits, and ("FASB"). Accordingly, we are required to adopt new guidance or insurance reserve deductions, or could impose new taxes such as interpretations which may have a material effect on our results of on goods or services purchased overseas. operations and financial condition that is either unexpected or On December 22, 2017, the U.S. government enacted has a greater impact than expected. For a description of changes comprehensive tax legislation commonly referred to as the "Tax in accounting standards that are currently pending and, if known, Cuts and Jobs Act" ("Tax Reform"). There is a risk that Congress our estimates of their expected impact, see Note 1 of the may enact a technical corrections bill or other legislation that consolidated financial statements. could affect how provisions of Tax Reform apply to The Hartford. In response to the recent changes in the federal tax law, we could see states enact changes to their tax laws which, in turn, could affect the Company negatively. Among other risks, there is risk that these additional clarifications could increase the taxes on the Company, further increase administrative costs, make the sale of our products more costly and/or make our products less competitive. While the Company expects a benefit to earnings from lower corporate federal income tax rates, there is uncertainty about how insurance carriers will adjust their product pricing, if at all, going forward. If the Company reduces its pricing in response to competition or to state regulatory action, product price reductions could serve to reduce, or even eliminate, the benefit of lower Corporate federal tax rates in periods after 2018.
Regulatory requirements could delay, deter or prevent a takeover attempt that stockholders might consider in their best interests. Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner
24 Part II - Item 5. Market for the Hartford's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 5. MARKET FOR THE HARTFORD’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Hartford’s common stock is traded on the New York Stock announced a $1.0 billion share repurchase authorization by the Exchange (“NYSE”) under the trading symbol “HIG”. As of Board of Directors which is effective through December 31, February 21, 2019, the Company had approximately 11,146 2020. Based on projected holding company resources, the registered holders of record of the Company's common stock. A Company expects to use a portion of the authorization in 2019 substantially greater number of holders of our common stock are but anticipates using the majority of the program in 2020. Any “street name” holders or beneficial holders, whose shares are held repurchase of shares under the equity repurchase program is of record by banks, brokers and other financial institutions. dependent on market conditions and other factors. On June 1, 2018, the Company’s Chief Executive Officer certified to the NYSE that he is not aware of any violation by the Company Total Return to of NYSE corporate governance listing standards, as required by Section 303A.12(a) of the NYSE’s Listed Company Manual. Stockholders There are various legal and regulatory limitations governing the The following tables present The Hartford’s annual return extent to which The Hartford’s insurance subsidiaries may extend percentage and five-year total return on its common stock credit, pay dividends or otherwise provide funds to The Hartford including reinvestment of dividends in comparison to the S&P Financial Services Group, Inc. as discussed in the Liquidity 500 and the S&P Insurance Composite Index. Requirements and Sources of Capital section of Part II, Item 7, MD&A — Capital Resources and Liquidity. During the year ended December 31, 2018, the Company did not repurchase any common shares. In February, 2019, the Company
Annual Return Percentage For the years ended Company/Index 2014 2015 2016 2017 2018 The Hartford Financial Services Group, Inc. 17.13% 6.12% 11.76% 20.26% (19.24%) S&P 500 Index 13.69% 1.38% 11.96% 21.83% (4.38%) S&P Insurance Composite Index 8.29% 2.33% 17.58% 16.19% (11.21%)
Cumulative Five-Year Total Return Base Period For the years ended Company/Index 2013 2014 2015 2016 2017 2018 The Hartford Financial Services Group, Inc. $ 100 117.13 124.30 138.92 167.06 134.92 S&P 500 Index $ 100 113.69 115.26 129.05 157.22 150.33 S&P Insurance Composite Index $ 100 108.29 110.81 130.29 151.38 134.42
25 Part II - Item 5. Market for the Hartford's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
200
150
100
50
0
Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018
The Hartford Financial Services Group, Inc. S&P 500 Index
S&P Insurance Composite Index
26 Part II - Item 6. Selected Financial Data Item 6. SELECTED FINANCIAL DATA The following table sets forth the Company's selected Financial Condition and Results of Operations ("MD&A") consolidated financial data at the dates and for the periods presented in Item 7 and the Company's Consolidated Financial indicated below. The selected financial data should be read in Statements and the related Notes beginning on page F-1. conjunction with Management’s Discussion and Analysis of
(In millions, except per share data) 2018 2017 2016 2015 2014 Income Statement Data Total revenues $ 18,955 $ 17,162 $ 16,291 $ 16,187 $ 15,905 Income from continuing operations before income taxes $ 1,753 $ 723 $ 447 $ 1,478 $ 1,232 Income (loss) from continuing operations, net of tax $ 1,485 $ (262) $ 613 $ 1,189 $ 925 Income (loss) from continuing operations, net of tax, available to common stockholders $ 1,479 $ (262) $ 613 $ 1,189 $ 925 Income (loss) from discontinued operations, net of tax $ 322 $ (2,869) $ 283 $ 493 $ (127) Net income (loss) $ 1,807 $ (3,131) $ 896 $ 1,682 $ 798 Balance Sheet Data Total assets $ 62,307 $ 225,260 $ 224,576 $ 229,616 $ 245,566 Short-term debt $ 413 $ 320 $ 416 $ 275 $ 456 Total debt (including capital lease obligations) $ 4,678 $ 4,998 $ 4,910 $ 5,216 $ 5,966 Preferred stock $ 334 $ — $ — $ — $ — Total stockholders’ equity $ 13,101 $ 13,494 $ 16,903 $ 18,024 $ 19,130 Income (loss) from continuing operations, net of tax, available to common stockholders per common share Basic $ 4.13 $ (0.72) $ 1.58 $ 2.86 $ 2.09 Diluted $ 4.06 $ (0.72) $ 1.55 $ 2.80 $ 2.01 Cash dividends declared per common share $ 1.10 $ 0.94 $ 0.86 $ 0.78 $ 0.66
27 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in millions, except for per share data, unless On May 10, 2017, the Company completed the sale of its U.K. otherwise stated) property and casualty run-off subsidiaries. The operating results of the Company's U.K. property and casualty run-off The Hartford provides projections and other forward-looking subsidiaries are included in the P&C Other Operations information in the following discussions, which contain many reporting segment. For discussion of this transaction, see Note forward-looking statements, particularly relating to the 20 - Business Dispositions and Discontinued Operations of Company’s future financial performance. These forward- Notes to Consolidated Financial Statements. looking statements are estimates based on information currently available to the Company, are made pursuant to the On July 29, 2016, the Company completed the acquisition of safe harbor provisions of the Private Securities Litigation Maxum Specialty Insurance Group and Lattice Strategies LLC. Reform Act of 1995 and are subject to the cautionary Maxum's revenue and earnings since the acquisition date are statements set forth on pages 2 and 3 of this Form 10-K. Actual included in the operating results of the Company's Commercial results are likely to differ, and in the past have differed, Lines reporting segment. Lattice's revenue and earnings since materially from those forecast by the Company, depending on the acquisition date are included in the operating results of the the outcome of various factors, including, but not limited to, Company's Hartford Funds reporting segment. For discussion those set forth in the following discussion and in Part I, Item 1A, of these transactions, see Note 2 - Business Acquisitions of Risk Factors, and those identified from time to time in our other Notes to Consolidated Financial Statements. filings with the Securities and Exchange Commission. The Certain reclassifications have been made to historical financial Hartford undertakes no obligation to publicly update any information presented in Management's Discussion and forward-looking statements, whether as a result of new Analysis of Financial Condition and Results of Operations information, future developments or otherwise. ("MD&A") to conform to the current period presentation. On August 22, 2018, the Company announced it entered into a Distribution costs within the Hartford Funds segment that definitive agreement to acquire all outstanding common shares were previously netted against fee income are presented gross of The Navigators Group, Inc. ("Navigators Group"), a global in insurance operating costs and other expenses. specialty underwriter, for $70 a share, or $2.1 billion in cash. The transaction is expected to close in late March or April The Hartford defines increases or decreases greater than or 2019, subject to customary closing conditions, including receipt equal to 200% as “NM” or not meaningful. of regulatory approvals. On May 31, 2018, Hartford Holdings, Inc., a wholly owned Index subsidiary of the Company, completed the sale of the issued and outstanding equity of Hartford Life, Inc. (“HLI”), a holding Description Page company, and its life and annuity operating subsidiaries. For discussion of this transaction, see Note 20 - Business Key Performance Measures and Ratios 28 Dispositions and Discontinued Operations of Notes to The Hartford's Operations 32 Consolidated Financial Statements. Consolidated Results of Operations 35 On February 16, 2018, The Hartford entered into a renewal Investment Results 39 rights agreement with the Farmers Exchanges, of the Farmers Critical Accounting Estimates 40 Insurance Group of Companies, to acquire its Foremost- branded small commercial business sold through independent Commercial Lines 61 agents. Written premium from this agreement began in the Personal Lines 65 third quarter of 2018. Property & Casualty Other Operations 69 On November 1, 2017, Hartford Life and Accident Insurance Group Benefits 71 Company ("HLA"), a wholly owned subsidiary of the Company, Hartford Funds 74 completed the acquisition of Aetna's U.S. group life and Corporate 76 disability business through a reinsurance transaction. Aetna's U.S. group life and disability revenue and earnings since the Enterprise Risk Management 77 acquisition date are included in the operating results of the Capital Resources and Liquidity 95 Company's Group Benefits reporting segment. For discussion Impact of New Accounting Standards 103 of this transaction, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statements.
28 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Combined Ratio- the sum of the loss and loss adjustment KEY PERFORMANCE expense ratio, the expense ratio and the policyholder dividend ratio. This ratio is a relative measurement that describes the MEASURES AND RATIOS related cost of losses and expenses for every $100 of earned The Company considers the measures and ratios in the following premiums. A combined ratio below 100 demonstrates discussion to be key performance indicators for its businesses. underwriting profit; a combined ratio above 100 demonstrates Management believes that these ratios and measures are useful underwriting losses. in understanding the underlying trends in The Hartford’s Core Earnings- a non-GAAP measure, is an important businesses. However, these key performance indicators should measure of the Company’s operating performance. The Company only be used in conjunction with, and not in lieu of, the results believes that core earnings provides investors with a valuable presented in the segment discussions that follow in this MD&A. measure of the underlying performance of the Company’s These ratios and measures may not be comparable to other businesses because it reveals trends in our insurance and performance measures used by the Company’s competitors. financial services businesses that may be obscured by including the net effect of certain realized capital gains and losses, certain Definitions of Non-GAAP and restructuring and other costs, loss on extinguishment of debt, pension settlements, integration and transaction costs in Other Measures and Ratios connection with an acquired business, gains and losses on Assets Under Management (“AUM”)- include reinsurance transactions, income tax benefit from a reduction in mutual fund and exchange-traded products ("ETP") assets. AUM deferred income tax valuation allowance, impact of the Tax Cuts is a measure used by the Company's Hartford Funds segment and Jobs Act of 2017 ("Tax Reform") on net deferred tax assets, because a significant portion of the Company’s mutual fund and and results of discontinued operations. Some realized capital ETP revenues are based upon asset values. These revenues gains and losses are primarily driven by investment decisions and increase or decrease with a rise or fall in AUM whether caused by external economic developments, the nature and timing of which changes in the market or through net flows. are unrelated to the insurance and underwriting aspects of our business. Accordingly, core earnings excludes the effect of all Book Value per Diluted Share excluding realized gains and losses that tend to be variable from period to accumulated other comprehensive income period based on capital market conditions. The Company believes, however, that some realized capital gains and losses are ("AOCI")- is calculated based upon a non-GAAP financial integrally related to our insurance operations, so core earnings measure. It is calculated by dividing (a) common stockholders' includes net realized gains and losses such as net periodic equity, excluding AOCI, after tax, by (b) common shares settlements on credit derivatives. These net realized gains and outstanding and dilutive potential common shares. Book value losses are directly related to an offsetting item included in the per diluted share is the most directly comparable U.S. GAAP income statement such as net investment income. Core earnings ("GAAP") measure. The Company provides this measure to enable are net of preferred stock dividends declared since they are a cost investors to analyze the amount of the Company's net worth that of financing more akin to interest expense on debt and are is primarily attributable to the Company's business operations. expected to be a recurring expense as long as the preferred stock The Company believes it is useful to investors because it is outstanding. Net income (loss), net income (loss) available to eliminates the effect of items in AOCI that can fluctuate common stockholders and income (loss) from continuing significantly from period to period, primarily based on changes in operations, net of tax, available to common stockholders are the interest rates. most directly comparable U.S. GAAP measures to core earnings. Current Accident Year Catastrophe Ratio- a Core earnings should not be considered as a substitute for net component of the loss and loss adjustment expense ratio, income (loss), net income (loss) available to common stockholders represents the ratio of catastrophe losses incurred in the current or income (loss) from continuing operations, net of tax, available accident year (net of reinsurance) to earned premiums. A to common stockholders and does not reflect the overall catastrophe is an event that causes $25 or more in industry profitability of the Company’s business. Therefore, the Company insured property losses and affects a significant number of believes that it is useful for investors to evaluate net income property and casualty policyholders and insurers, as defined by (loss), net income (loss) available to common stockholders, the Property Claim Service office of Verisk. The current accident income (loss) from continuing operations, net of tax, available to year catastrophe ratio includes the effect of catastrophe losses, common stockholders and core earnings when reviewing the but does not include the effect of reinstatement premiums. Company’s performance.
29 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Net Income (Loss) to Core Earnings
For the years ended December 31, 2018 2017 2016 Net income (loss) $ 1,807 $ (3,131) $ 896 Preferred stock dividends 6 — — Net income (loss) available to common stockholders 1,801 $ (3,131) $ 896 Less: Net realized capital gains (losses) excluded from core earnings, before tax (118) 160 (112) Less: Loss on extinguishment of debt, before tax (6) — — Less: Loss on reinsurance transactions, before tax — — (650) Less: Pension settlement, before tax — (750) — Less: Integration and transaction costs associated with acquired business, before tax (47) (17) — Less: Income tax benefit (expense) [1] 75 (669) 463 Less: Income (loss) from discontinued operations, net of tax 322 (2,869) 283 Core earnings $ 1,575 $ 1,014 $ 912 [1]Includes income tax benefit on items not included in core earnings and other federal income tax benefits and charges, including an $877 charge in 2017 primarily due to a reduction in net deferred tax assets as a result of the decrease in the Federal income tax rate from 35% to 21%.
Core Earnings Margin- a non-GAAP financial measure under management either through positive net flows or favorable that the Company uses to evaluate, and believes is an important market performance will have a favorable impact on fee income. measure of, the Group Benefits segment’s operating Conversely, either negative net flows or unfavorable market performance. Core earnings margin is calculated by dividing (a) performance will reduce fee income. core earnings by (b) revenues excluding buyouts and realized a gains (losses). Net income margin is the most directly comparable Loss and Loss Adjustment Expense Ratio- measure of the cost of claims incurred in the calendar year U.S. GAAP measure. The Company believes that core earnings divided by earned premium and includes losses and loss margin provides investors with a valuable measure of the adjustment expenses incurred for both the current and prior performance of Group Benefits because it reveals trends in the accident years. Among other factors, the loss and loss adjustment business that may be obscured by the effect of buyouts and expense ratio needed for the Company to achieve its targeted realized gains (losses) on revenues or obscured by the effect on return on equity fluctuates from year to year based on changes in net income of realized capital gains (losses), integration costs, and the expected investment yield over the claim settlement period, the impact of Tax Reform on net deferred tax assets. Core the timing of expected claim settlements and the targeted returns earnings margin should not be considered as a substitute for net set by management based on the competitive environment. income margin and does not reflect the overall profitability of Group Benefits. Therefore, the Company believes it is important The loss and loss adjustment expense ratio is affected by claim for investors to evaluate both net income margin and core frequency and claim severity, particularly for shorter-tail earnings margin when reviewing performance. A reconciliation of property lines of business, where the emergence of claim net income margin to core earnings margin is set forth in the frequency and severity is credible and likely indicative of ultimate Results of Operations section within MD&A - Group Benefits. losses. Claim frequency represents the percentage change in the average number of reported claims per unit of exposure in the Expense Ratio- for the underwriting segments of current accident year compared to that of the previous accident Commercial Lines and Personal Lines is the ratio of underwriting year. Claim severity represents the percentage change in the expenses less fee income, to earned premiums. Underwriting estimated average cost per claim in the current accident year expenses include the amortization of deferred policy acquisition compared to that of the previous accident year. As one of the costs ("DAC") and insurance operating costs and expenses, factors used to determine pricing, the Company’s practice is to including certain centralized services costs and bad debt expense. first make an overall assumption about claim frequency and Deferred policy acquisition costs include commissions, taxes, severity for a given line of business and then, as part of the licenses and fees and other incremental direct underwriting ratemaking process, adjust the assumption as appropriate for the expenses and are amortized over the policy term. particular state, product or coverage. The expense ratio for Group Benefits is expressed as the ratio of insurance operating costs and other expenses including Loss and Loss Adjustment Expense Ratio amortization of intangibles and amortization of DAC, to before Catastrophes and Prior Accident Year premiums and other considerations, excluding buyout premiums. Development- a measure of the cost of non-catastrophe The expense ratio does not include integration and other loss and loss adjustment expenses incurred in the current transaction costs associated with an acquired business. accident year divided by earned premiums. Management believes that the current accident year loss and loss adjustment expense Fee Income- is largely driven from amounts earned as a ratio before catastrophes is a performance measure that is useful result of contractually defined percentages of assets under to investors as it removes the impact of volatile and unpredictable management in our Hartford Funds business. These fees are catastrophe losses and prior accident year development. generally earned on a daily basis. Therefore, the growth in assets
30 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Loss Ratio, excluding Buyouts- utilized for the twelve months for substantially all of the remainder of the Group Benefits segment and is expressed as a ratio of benefits, Company’s Property and Casualty business. Since the Company losses and loss adjustment expenses to premiums and other earns premiums over the six to twelve month term of the policies, considerations, excluding buyout premiums. Since Group Benefits renewal earned price increases (decreases) lag renewal written occasionally buys a block of claims for a stated premium amount, price increases (decreases) by six to twelve months. the Company excludes this buyout from the loss ratio used for Renewal Written Price Increase (Decrease)- evaluating the profitability of the business as buyouts may distort for Commercial Lines, represents the combined effect of rate the loss ratio. Buyout premiums represent takeover of open claim changes, amount of insurance and individual risk pricing decisions liabilities and other non-recurring premium amounts. per unit of exposure on policies that renewed. For Personal Lines, Mutual Fund and Exchange-Traded Product renewal written price increases represent the total change in premium per policy since the prior year on those policies that are owned by the shareholders of those products and Assets- renewed and includes the combined effect of rate changes, not by the Company and, therefore, are not reflected in the amount of insurance and other changes in exposure. For Personal Company’s consolidated financial statements except in instances Lines, other changes in exposure include, but are not limited to, where the Company seeds new investment products and holds an the effect of changes in number of drivers, vehicles and incidents, investment in the fund for a period of time. Mutual fund and ETP as well as changes in customer policy elections, such as assets are a measure used by the Company primarily because a deductibles and limits. The rate component represents the significant portion of the Company’s Hartford Funds segment change in rate filed with and approved by state regulators during revenues are based upon asset values. These revenues increase the period and the amount of insurance represents the change in or decrease with a rise or fall in AUM whether caused by changes the value of the rating base, such as model year/vehicle symbol in the market or through net flows. for automobiles, building replacement costs for property and New Business Written Premium- represents the wage inflation for workers’ compensation. A number of factors amount of premiums charged for policies issued to customers affect renewal written price increases (decreases) including who were not insured with the Company in the previous policy expected loss costs as projected by the Company’s pricing term. New business written premium plus renewal policy written actuaries, rate filings approved by state regulators, risk selection premium equals total written premium. decisions made by the Company’s underwriters and marketplace competition. Renewal written price changes reflect the property Policies in Force- represents the number of policies with and casualty insurance market cycle. Prices tend to increase for a coverage in effect as of the end of the period. The number of particular line of business when insurance carriers have incurred policies in force is a growth measure used for Personal Lines and significant losses in that line of business in the recent past or the standard commercial lines within Commercial Lines and is industry as a whole commits less of its capital to writing affected by both new business growth and policy count retention. exposures in that line of business. Prices tend to decrease when recent loss experience has been favorable or when competition Policy Count Retention- represents the ratio of the among insurance carriers increases. Renewal written price number of policies renewed during the period divided by the statistics are subject to change from period to period, based on a number of policies available to renew. The number of policies number of factors, including changes in actuarial estimates and available to renew represents the number of policies, net of any the effect of subsequent cancellations and non-renewals, and cancellations, written in the previous policy term. Policy count modifications made to better reflect ultimate pricing achieved. retention is affected by a number of factors, including the percentage of renewal policy quotes accepted and decisions by Return on Assets (“ROA”), Core Earnings- a non- the Company to non-renew policies because of specific policy GAAP financial measure that the Company uses to evaluate, and underwriting concerns or because of a decision to reduce believes is an important measure of, the Hartford Funds premium writings in certain classes of business or states. Policy segment’s operating performance. ROA, core earnings is count retention is also affected by advertising and rate actions calculated by dividing core earnings by a daily average AUM. ROA taken by competitors. is the most directly comparable U.S. GAAP measure. The Company believes that ROA, core earnings, provides investors Policyholder Dividend Ratio- the ratio of policyholder with a valuable measure of the performance of the Hartford dividends to earned premium. Funds segment because it reveals trends in our business that may be obscured by the effect of realized gains (losses). ROA, core Prior Accident Year Loss and Loss Adjustment earnings, should not be considered as a substitute for ROA and Expense Ratio- represents the increase (decrease) in the does not reflect the overall profitability of our Hartford Funds estimated cost of settling catastrophe and non-catastrophe business. Therefore, the Company believes it is important for claims incurred in prior accident years as recorded in the current investors to evaluate both ROA, and ROA, core earnings when calendar year divided by earned premiums. reviewing the Hartford Funds segment performance. A reconciliation of ROA to ROA, core earnings is set forth in the Reinstatement Premiums- represents additional Results of Operations section within MD&A - Hartford Funds. ceded premium paid for the reinstatement of the amount of reinsurance coverage that was reduced as a result of the Underlying Combined Ratio- a non-GAAP financial Company ceding losses to reinsurers. measure, represents the combined ratio before catastrophes and prior accident year development. Combined ratio is the most Renewal Earned Price Increase (Decrease)- directly comparable U.S. GAAP measure. The Company believes Written premiums are earned over the policy term, which is six the underlying combined ratio is an important measure of the months for certain Personal Lines automobile business and trend in profitability since it removes the impact of volatile and
31 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations unpredictable catastrophe losses and prior accident year loss and loss adjustment expense reserve development. A reconciliation of THE HARTFORD'S combined ratio to underlying combined ratio is set forth in the Results of Operations section within MD&A - Commercial Lines and Personal Lines. OPERATIONS
Underwriting Gain (Loss)- The Company's Overview management evaluates profitability of the P&C businesses The Hartford conducts business principally in five reporting primarily on the basis of underwriting gain (loss). Underwriting segments including Commercial Lines, Personal Lines, Property & gain (loss) is a before tax measure that represents earned Casualty Other Operations, Group Benefits and Hartford Funds, premiums less incurred losses, loss adjustment expenses, as well as a Corporate category. The Company includes in the amortization of deferred policy acquisition costs, underwriting Corporate category investment management fees and expenses expenses, amortization of other intangible assets and dividends related to managing third party business, including management to policyholders. Underwriting gain (loss) is influenced of the invested assets of Talcott Resolution, discontinued significantly by earned premium growth and the adequacy of the operations related to the life and annuity business sold in May Company's pricing. Underwriting profitability over time is also 2018, reserves for run-off structured settlement and terminal greatly influenced by the Company's pricing and underwriting funding agreement liabilities, capital raising activities (including discipline, which seeks to manage exposure to loss through debt financing and related interest expense), purchase accounting favorable risk selection and diversification, its management of adjustments related to goodwill and other expenses not allocated claims, its use of reinsurance and its ability to manage its expense to the reporting segments. In addition, Corporate includes a 9.7% ratio, which it accomplishes through economies of scale and its ownership interest in the legal entity that acquired the life and management of acquisition costs and other underwriting annuity business sold in May 2018. expenses. Net income (loss) is the most directly comparable GAAP measure. The Company believes that underwriting gain The Company derives its revenues principally from: (a) premiums (loss) provides investors with a valuable measure of before tax earned for insurance coverage provided to insureds; (b) profitability derived from underwriting activities, which are management fees on mutual fund and ETP assets; (c) net managed separately from the Company's investing activities. A investment income; (d) fees earned for services provided to third reconciliation of net income (loss) to underwriting gain (loss) for parties; and (e) net realized capital gains and losses. Premiums Commercial Lines, Personal Lines and Property & Casualty Other charged for insurance coverage are earned principally on a pro Operations is set forth in segment sections of MD&A. rata basis over the terms of the related policies in-force.
Written and Earned Premiums- Written premium is The profitability of the Company's property and casualty a statutory accounting financial measure which represents the insurance businesses over time is greatly influenced by the amount of premiums charged for policies issued, net of Company’s underwriting discipline, which seeks to manage reinsurance, during a fiscal period. Earned premium is a U.S. exposure to loss through favorable risk selection and GAAP and statutory measure. Premiums are considered earned diversification, its management of claims, its use of reinsurance, and are included in the financial results on a pro rata basis over the size of its in force block, actual mortality and morbidity the policy period. Management believes that written premium is a experience, and its ability to manage its expense ratio which it performance measure that is useful to investors as it reflects accomplishes through economies of scale and its management of current trends in the Company’s sale of property and casualty acquisition costs and other underwriting expenses. Pricing insurance products. Written and earned premium are recorded adequacy depends on a number of factors, including the ability to net of ceded reinsurance premium. obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future loss cost Traditional life and disability insurance type products, such as frequency and severity based on historical loss experience those sold by Group Benefits, collect premiums from adjusted for known trends, the Company’s response to rate policyholders in exchange for financial protection for the actions taken by competitors, its expense levels and expectations policyholder from a specified insurable loss, such as death or about regulatory and legal developments. The Company seeks to disability. These premiums, together with net investment income price its insurance policies such that insurance premiums and earned, are used to pay the contractual obligations under these future net investment income earned on premiums received will insurance contracts. Two major factors, new sales and cover underwriting expenses and the ultimate cost of paying persistency, impact premium growth. Sales can increase or claims reported on the policies and provide for a profit margin. decrease in a given year based on a number of factors including, For many of its insurance products, the Company is required to but not limited to, customer demand for the Company’s product obtain approval for its premium rates from state insurance offerings, pricing competition, distribution channels and the departments. Company’s reputation and ratings. Persistency refers to the percentage of premium remaining in-force from year-to-year. Similar to Property & Casualty, profitability of the Group Benefits business depends, in large part, on the ability to evaluate and price risks appropriately and make reliable estimates of mortality, morbidity, disability and longevity. To manage the pricing risk, Group Benefits generally offers term insurance policies, allowing for the adjustment of rates or policy terms in order to minimize the adverse effect of market trends, loss costs, declining interest rates and other factors. However, as policies are typically sold with rate guarantees of up to three years, pricing for the
32 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Company’s products could prove to be inadequate if loss and comprised of new sales less redemptions by mutual fund and ETP expense trends emerge adversely during the rate guarantee stockholders. Financial results are highly correlated to the period. For some of its products, the Company is required to growth in assets under management since these products obtain approval for its premium rates from state insurance generally earn fee income on a daily basis. departments. New and renewal business for group benefits The investment return, or yield, on invested assets is an important business, particularly for long-term disability, are priced using an element of the Company’s earnings since insurance products are assumption about expected investment yields over time. While priced with the assumption that premiums received can be the Company employs asset-liability duration matching strategies invested for a period of time before benefits, losses and loss to mitigate risk and may use interest-rate sensitive derivatives to adjustment expenses are paid. Due to the need to maintain hedge its exposure in the Group Benefits investment portfolio, sufficient liquidity to satisfy claim obligations, the majority of the cash flow patterns related to the payment of benefits and claims Company’s invested assets have been held in available-for-sale are uncertain and actual investment yields could differ securities, including, among other asset classes, corporate bonds, significantly from expected investment yields, affecting municipal bonds, government debt, short-term debt, mortgage- profitability of the business. In addition to appropriately backed securities, asset-backed securities and collateralized loan evaluating and pricing risks, the profitability of the Group obligations. Benefits business depends on other factors, including the Company’s response to pricing decisions and other actions taken The primary investment objective for the Company is to maximize by competitors, its ability to offer voluntary products and self- economic value, consistent with acceptable risk parameters, service capabilities, the persistency of its sold business and its including the management of credit risk and interest rate ability to manage its expenses which it seeks to achieve through sensitivity of invested assets, while generating sufficient after tax economies of scale and operating efficiencies. income to meet policyholder and corporate obligations. Investment strategies are developed based on a variety of factors The financial results of the Company’s mutual fund and ETP including business needs, regulatory requirements and tax businesses depend largely on the amount of assets under considerations. management and the level of fees charged based, in part, on asset share class and product type. Changes in assets under For further information on the Company's reporting segments, management are driven by two main factors, net flows and the refer to Part I, Item 1, Business — Reporting Segments. market return of the funds, which are heavily influenced by the return realized in the equity and bond markets. Net flows are Financial Highlights
Net Income (Loss) Available to Net Income (Loss) Available to Common Stockholders per Common Stockholders Diluted Share Book Value per Diluted Share
$8.00 $50.00 $2,500 $1,801 $4.95 $37.11 $4.00 $40.00 $35.06
$0 $0.00 $30.00
-$4.00 $20.00 -$2,500 -$8.00 $10.00 $(3,131) $(8.61) -$5,000 -$12.00 $0.00 2017 2018 2017 2018 2017 2018
Net Income (loss) available to common stockholders of $1,801, or $5.03 per basic share and $4.95 per diluted share, compared with prior year net loss of $3,131, or $8.61 per basic and diluted share. The change from net loss in 2017 to a net income in 2018 was primarily due to a number of charges in 2017, including a $3.3 billion loss on the life and annuity business sold in May 2018, net of tax, $877 of income tax expense primarily from reducing net deferred tax assets due to the reduction of the corporate Federal income tax rate, and the effect of a pension settlement charge of $488, net of tax. Apart from these charges in 2017, net income available to common stockholders increased, driven by higher net income in Commercial Lines, Group Benefits and Hartford Funds that was partially attributable to a lower corporate Federal income tax rate in 2018.
33 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Book value per diluted common share decreased to $35.06 from $37.11 as of December 31, 2017 as a result of a 5% decrease in common stockholders' equity resulting primarily from a decrease in AOCI over the period, partially offset by net income in excess of stockholder dividends.
Net Investment Income Investment Yield After Tax
$2,500 4% 3.3% 3.0% $2,000 $1,780 $1,603 3%
$1,500 2% $1,000
1% $500
$0 0% 2017 2018 2017 2018
Net investment income increased 11% to $1,780 compared with the prior year primarily due to higher average fixed maturities asset levels during 2018 as compared to 2017 largely driven by the acquisition of Aetna's U.S. group life and disability business in November 2017 and, to a lesser extent, higher income from partnerships and other alternative investments and a higher reinvestment rate on fixed maturities.
Net realized capital gains (losses) changed to net losses of $112 from net gains of $165 for the year ended December 31, 2017, with losses in 2018 primarily driven by net losses on sales of fixed maturity securities due to sector repositioning and duration, liquidity and credit management as well as net losses on equity securities resulting from depreciation in value due to lower equity market levels, partially offset by gains on sales due to tactical repositioning.
Annualized investment yield, after tax of 3.3%, was up 30 basis points from 2017 primarily due to the effect of a lower corporate Federal income tax rate.
Net unrealized gains, after tax for fixed maturities in the investment portfolio decreased by $2,180 compared with the prior year primarily due to the effect of credit spread widening and higher interest rates and the removal of AOCI related to the life and annuity business sold in May 2018.
P&C Written Premiums P&C Combined Ratio
100.0 97.8 $12,000 100.0 $10,517 $10,408
$9,000 75.0
$6,000 50.0
$3,000 25.0
$0 0.0 2017 2018 2017 2018
Written premiums for Property & Casualty decreased 1.0% compared with the prior year, reflecting a decrease in Personal Lines, largely offset by an increase in Commercial Lines.
34 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Combined ratio for Property & Casualty decreased 2.2 points to 97.8 compared with a combined ratio of 100.0 for 2017 largely due to a lower current accident year loss and loss adjustment expense ratio for Personal Lines and favorable prior accident year development, partially offset by higher expenses.
Catastrophe losses of $821, before tax, decreased from catastrophe losses of $836, before tax, in the prior year, with catastrophes in both years including losses from California wildfires, hurricanes, winter storms and various wind and hail events.
Prior accident year development for property and casualty was a net favorable $167, before tax, in 2018 primarily due to a decrease in reserves for workers' compensation, automobile liability and 2017 catastrophes, partially offset by an increase in reserves for general liability. Reserve development was a net favorable $41, before tax, in 2017 primarily due to a decrease in reserves for workers compensation and package business, partially offset by a reserve increase for customs bond claims.
Group Benefits Net Income Margin
10%
8% 7.2%
5.6% 6%
4%
2%
0% 2017 2018
Net income margin for Group Benefits declined from 7.2% in 2017 to 5.6% in 2018 primarily due to net realized capital losses of $39, net of tax, in 2018 as compared to net realized capital gains of $19, net of tax, in 2017, integration costs of $37, net of tax, in 2018 as compared to $11, net of tax, in 2017, and a tax benefit of $52 in 2017 from reducing net deferred tax liabilities due to the lower corporate income tax rate, partially offset by an increase in favorable prior incurral year development on long-term disability and premium waiver primarily due to favorable incidence trends and the effect of scale from the acquisition of Aetna’s U.S. group life and disability business on fixed expenses. Prior accident year development, pre-tax, for Group Benefits increased from $185 in 2017 to $324 in 2018 with most of that development from the 2017 incurral year as incidence trends become known after the elimination period is satisfied. The Consolidated Results of Operations should be read in CONSOLIDATED conjunction with the Company's Consolidated Financial Statements and the related Notes beginning on page F-1 as well RESULTS OF as with the segment operating results sections of MD&A. OPERATIONS
35 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations
Increase Increase (Decrease) From (Decrease) From 2018 2017 2016 2017 to 2018 2016 to 2017 Earned premiums $ 15,869 $ 14,141 $ 13,697 $ 1,728 $ 444 Fee income [1] 1,313 1,168 1,041 145 127 Net investment income 1,780 1,603 1,577 177 26 Net realized capital gains (losses) (112) 165 (110) (277) 275 Other revenues 105 85 86 20 (1) Total revenues 18,955 17,162 16,291 1,793 871 Benefits, losses and loss adjustment expenses 11,165 10,174 9,961 991 213 Amortization of deferred policy acquisition costs 1,384 1,372 1,377 12 (5) Insurance operating costs and other expenses 4,281 4,563 3,525 (282) 1,038 Loss on extinguishment of debt 6 — — 6 — Loss on reinsurance transactions — — 650 — (650) Interest expense 298 316 327 (18) (11) Amortization of other intangible assets 68 14 4 54 10 Total benefits, losses and expenses 17,202 16,439 15,844 763 595 Income from continuing operations, before tax 1,753 723 447 1,030 276 Income tax expense (benefit) 268 985 (166) (717) 1,151 Income (loss) from continuing operations, net of tax 1,485 (262) 613 1,747 (875) Income (loss) from discontinued operations, net of tax 322 (2,869) 283 3,191 (3,152) Net income (loss) 1,807 (3,131) 896 4,938 (4,027) Preferred stock dividends 6 — — 6 — Net income (loss) available to common stockholders $ 1,801 $ (3,131) $ 896 $ 4,932 $ (4,027) [1]Excludes distribution costs of $188 and $184 for the years ended December 31, 2017, and 2016, respectively, that were previously netted against fee income and are now presented gross in insurance operating costs and other expenses. Year ended December 31, 2018 compared offset by a 3% increase in Commercial Lines. For a discussion of the Company's operating results by segment, see MD&A - to year ended December 31, 2017 Segment Operating Summaries.
Net income (loss) available to common Fee income increased, reflecting higher income in Group stockholders increased from a net loss in 2017, primarily Benefits related to an increase in administrative service contracts due to a number of charges in 2017, including a $3.3 billion after as a result of the acquisition from Aetna and in Hartford Funds tax loss on sale of the life and annuity business sold in May 2018, largely due to higher average daily AUM during the year despite a $877 of income tax expense primarily from reducing net decline in AUM at the end of the year. deferred tax assets due to the reduction of the corporate Federal income tax rate, and the effect of a pension settlement charge of Net investment income increased primarily due to a $488, after tax. Apart from these charges in 2017, net income higher level of invested assets due to the acquisition of Aetna's available to common stockholders increased, driven by higher U.S. group life and disability business. For further discussion of net income in Commercial Lines, Group Benefits and Hartford investment results, see MD&A - Investment Results, Net Funds that was partially attributable to a lower corporate Investment Income. Federal income tax rate in 2018. Higher earned premium and net investment income in Commercial Lines and Group Benefits, Net realized capital losses of $112 in 2018 were down including from the acquisition of Aetna’s U.S. group life and from net realized capital gains of $165 in 2017. Net losses in disability business, increased fee income in Hartford Funds, more 2018 were primarily driven by net losses on sales of fixed favorable prior accident year development in workers’ maturity securities due to sector repositioning and duration, compensation, a lower current accident year loss ratio before liquidity and credit management as well as net losses on equity catastrophes in Personal Lines and improved long term disability securities resulting from depreciation in value due to lower results, were partially offset by the effect of lower Personal Lines equity market levels, partially offset by gains on sales due to earned premium and higher insurance operating costs and other tactical repositioning. For further discussion of investment expenses, and a change to net realized capital losses. results, see MD&A - Investment Results, Net Realized Capital Gains. Earned premiums increased primarily due to the acquisition of Aetna's U.S. group life and disability benefits Benefits, losses and loss adjustment business that has increased earned premiums in the Group expenses increased in Group Benefits, partially offset by a Benefits segment. Earned premiums in Property and Casualty decrease in Property & Casualty with the increase in Group declined reflecting an 8% decline in Personal Lines, partially Benefits primarily due to the effect of growth in earned premium
36 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations largely resulting from the acquisition of Aetna's U.S. group life assets. For further discussion of income taxes, see Note 16 - and disability business, partially offset by a lower group disability Income Taxes of Notes to Consolidated Financial Statements. loss ratio. The decrease in incurred losses for Property & Casualty was driven by: Income from discontinued operations, net of tax of $322 in 2018, increased from a net loss from discontinued • Current accident year loss and loss adjustment expenses operations of $2.9 billion in 2017. The $322 of income from before catastrophes in Property & Casualty decreased, discontinued operations in 2018 was mostly attributable to primarily resulting from the effect of lower Personal Lines recognizing additional retained tax benefits from the sale of the earned premium and lower loss costs in auto, homeowners life and annuity business in May 2018 and the reclassification of and general liability, partially offset by higher loss costs in $193 of stranded tax effects from AOCI to retained earnings workers’ compensation. related to this sale, both of which reduced the estimated loss on • Current accident year catastrophe losses of $821, before tax, sale. The reclassification of stranded tax effects resulted in a for the year ended December 31, 2018 decreased compared corresponding increase in AOCI related to the assets held for to $836, before tax, for the prior year period. Catastrophe sale. For more information on the reclassification of stranded tax losses in 2018 were primarily from wildfires in California, effects, see Note 1 - Basis of Presentation and Significant hurricanes Florence and Michael in the Southeast, wind and Accounting Policies of Notes to Consolidated Financial hail storms in Colorado, and various wind storms and winter Statements. The $2.9 billion net loss on discontinued operations storms across the country and are net of an estimated in 2017 was driven by a $3.3 billion net loss on the sale of the life reinsurance recoverable of $82 under the 2018 Property and annuity business which closed on May 31, 2018. Aggregate reinsurance treaty. Catastrophe losses in 2017 were primarily due to hurricanes Harvey and Irma in the Year ended December 31, 2017 compared third quarter, California wildfires, and multiple wind and hail to the year ended December 31, 2016 events across various U.S. geographic regions, primarily in the Midwest, Colorado, Texas and the Southeast. For Net income (loss) available to common additional information, see MD&A - Critical Accounting stockholders decreased from net income in 2016 to a net Estimates, Property & Casualty Insurance Product Reserves, loss in 2017 primarily due to a loss on discontinued operations of Net of Reinsurance. $2.9 billion related to the pending sale of the life and annuity business, a charge to income tax expense of $877 arising • Net prior accident year reserve development in Property & primarily from the reduction of net deferred tax assets due to the Casualty was favorable $167, before tax, for the year ended enactment of lower Federal income tax rates and a pension December 31, 2018 compared to favorable net reserve settlement charge of $488 after tax. Partially offsetting the development of $41, before tax, for the prior year period. decline were the effects of a $179 after tax change from net Prior accident year development in 2018 primarily included a realized capital losses in 2016 to net realized capital gains in decrease in reserves for workers’ compensation and a 2017, the effect of a $423 after tax charge in 2016 related to a decrease in catastrophe reserves for the 2017 hurricanes. loss on reinsurance covering the Company’s asbestos and Amortization of deferred policy acquisition environmental exposures and a reduction in the valuation allowance on capital loss carryovers in 2016. In addition, a $324 costs was relatively flat year over year as an increase in after tax improvement in P&C prior accident year development Commercial Lines was largely offset by a decrease in Personal and higher earnings in Group Benefits and Hartford Funds were Lines. largely offset by a $273 after tax increase in current accident Insurance operating costs and other year catastrophes and higher variable incentive compensation. expenses decreased due to a $750 pension settlement charge Earned premiums increased by $444, before tax, in the 2017 period, partially offset by an increase in operating reflecting growth of 3% in Commercial Lines, including the effect costs associated with the acquisition of Aetna's U.S. group life and of the Maxum acquisition, and 14% in Group Benefits, including disability business, increased commissions in Commercial Lines, the effect of acquiring the Aetna U.S. group life and disability and higher variable expenses in Hartford Funds. business, partially offset by a 5% decrease in Personal Lines. For a Amortization of other intangible assets discussion of the Company's operating results by segment, see MD&A - Results of Operations by segment. increased, reflecting the amortization of customer relationship intangibles in the Group Benefits segment that arose from the Fee income increased reflecting a 15% increase in Hartford acquisition of the Aetna U.S. group life and disability business. Funds due to higher assets under management driven by market appreciation and positive net flows and the addition of Schroders Income tax expense decreased primarily due to an $877 funds in the fourth quarter of 2016. For a discussion of the charge in 2017 due to a reduction in net deferred tax assets as a Company's operating results by segment, see MD&A - Results of result of the lower corporate Federal income tax rate partially Operations by segment. offset by an increase in before tax income and the effect of a lower corporate Federal income tax rate in 2018. Differences Net investment income increased 2%, primarily due to between the Company's effective income tax rate and the U.S. higher income from limited partnerships and other alternative statutory rate of 21% and 35% in 2018 and 2017, respectively, investments, partially offset by lower make-whole payment are due primarily to tax-exempt interest earned on invested income on fixed maturities and increased investment expenses. assets, stock-based compensation, non-deductible executive For further discussion of investment results, see MD&A - compensation and the effects of Tax Reform on net deferred tax Investment Results, Net Investment Income (Loss).
37 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net realized capital gains of $165 before tax settlement charge. Apart from the pension settlement charge, compared to net realized capital losses of $110 before tax in insurance operating costs and other expenses increased by 9%, 2016, primarily due to higher net gains on sales, lower primarily driven by higher variable incentive plan compensation, impairments and the effect of losses in 2016 related to the sale of increased IT costs in Commercial Lines, higher variable expenses the Company's U.K. property and casualty run-off subsidiaries in Hartford Funds and $20, before tax, of state guaranty fund and the write-down of investments in solar energy partnerships assessments in Group Benefits, partially offset by lower direct in 2016 that generated tax benefits. For further discussion of marketing and operation costs in Personal Lines. Effective with investment results, see MD&A - Investment Results, Net Realized awards granted in March 2017, long-term incentive Capital Gains (Losses). compensation awards to retirement-eligible employees now fully vest when they are granted, which resulted in an accelerated Benefits, losses and loss adjustment recognition of compensation expense in 2017 of $22 before tax. expenses increased 11% in Group Benefits and decreased 1% For additional information on the pension settlement charge in in P&C. The increase in Group Benefits was largely due to the second quarter 2017, see Note 15 - Employee Benefit Plans of acquisition of Aetna’s U.S. group life and disability business. The Notes to Condensed Consolidated Financial Statements. decrease in P&C was primarily due to the effect of unfavorable Amortization of other intangible assets prior accident year reserve development in 2016, largely offset increased by $10 largely due to amortization of identifiable by higher catastrophe losses in 2017. intangible assets recorded as a result of the acquisition of the • Current accident year losses and loss adjustment expenses Aetna U.S. group life and disability business, including in-force before catastrophes in Property & Casualty were relatively contracts, customer relationships and a marketing agreement flat, primarily resulting from improved loss ratios and lower with Aetna. earned premiums in Personal Lines, offset by higher loss ratios in workers' compensation and general liability. Income tax expense increased primarily due to a charge of $877 as a result of the Tax Cuts and Jobs Act ("Tax Reform") • Current accident year catastrophe losses of $836, before tax, enacted in December, 2017. Among other changes, Tax Reform compared to $416, before tax, for the prior year period. reduced the Federal corporate income tax rate from 35% to 21% Catastrophe losses in 2017 were primarily due to hurricanes effective January 1, 2018 which resulted in a reduction of the Harvey and Irma, California wildfires and multiple wind and Company's net deferred tax assets, including its net operating hail events across various U.S. geographic regions, primarily loss carryovers. Also contributing to the increase in income tax in the Midwest, Colorado, Texas and the Southeast. expense were Federal income tax benefits of $113 in 2016 arising Catastrophe losses in 2016 were primarily due to multiple from investments in solar energy partnerships that generated tax wind and hail and winter storm events across various U.S. benefits and the effect of a federal income tax benefit of $65 in geographic regions, concentrated in Texas and the central 2016 related to the sale of the Company's U.K. property and and southern plains and, to a lesser extent, winter storms and casualty run-off subsidiaries. hurricane Matthew. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Differences between the Company's effective income tax rate Insurance Product Reserves, Net of Reinsurance. and the U.S. statutory rate of 35% are due primarily to the effects of Tax Reform on net deferred tax assets, tax exempt interest • Favorable prior accident year reserve development in earned on invested assets, changes in the valuation allowance Property & Casualty of $41, before tax, compared to recorded on capital loss carryovers and federal tax credits unfavorable reserve development of $457, before tax, for the associated with investments in solar energy partnerships. For prior year period. Prior accident year development in 2017 further discussion of income taxes, see Note 16 - Income Taxes of primarily included decreases in reserves for workers’ Notes to Consolidated Financial Statements. compensation and small commercial package business, partially offset by an increase in reserves for bond claims. Income (loss) from discontinued operations, Prior accident year development in 2016 was largely due to a net of tax decreased from income of $283 in 2016 to a net $268 increase in asbestos and environmental reserves and a loss of $2.9 billion in 2017 with the net loss in 2017 due to a loss $160 increase in Personal Lines automobile liability reserves. on sale of the Company’s life and annuity business of $3.3 billion, For additional information, see MD&A - Critical Accounting partially offset by operating income from discontinued operations Estimates, Reserve Rollforwards and Development. of $388. Operating income from discontinued operations increased from $283 in 2016 primarily due to lower net realized Amortization of deferred policy acquisition capital losses in 2017. Apart from the reduction in net realized costs was relatively flat as higher amortization on higher capital losses, earnings were relatively flat as an increase in the earned premium for Commercial Lines was offset by lower unlock benefit and lower interest credited were largely offset by amortization on lower earned premium for Personal Lines. lower net investment income and lower fee income due to the continued run off of the variable annuity block. Insurance operating costs and other expenses increased primarily due to a $750 pre-tax pension
38 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations INVESTMENT RESULTS
Composition of Invested Assets December 31, 2018 December 31, 2017 Amount Percent Amount Percent Fixed maturities, available-for-sale ("AFS"), at fair value $ 35,652 76.2% $ 36,964 81.9% Fixed maturities, at fair value using the fair value option ("FVO") 22 —% 41 0.1% Equity securities, at fair value [1] 1,214 2.6% Equity securities, AFS, at fair value [1] 1,012 2.3% Mortgage loans 3,704 7.9% 3,175 7.0% Limited partnerships and other alternative investments 1,723 3.7% 1,588 3.5% Other investments [2] 192 0.4% 96 0.2% Short-term investments 4,283 9.2% 2,270 5.0% Total investments $ 46,790 100.0% $ 45,146 100.0% [1]Effective January 1, 2018, with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities at fair value. [2]Primarily consists of investments of consolidated investment funds and derivative instruments which are carried at fair value. Year ended December 31, 2018 compared Short-term investments increased due to proceeds to the year ended December 31, 2017 from the sale of the life and annuity business sold in May 2018 and holding additional short-term investments in preparation to Total investments increased primarily due to an increase fund the Navigators acquisition and debt that matured in January in short-term investments and mortgage loans, largely offset by a 2019. decrease in fixed maturities, AFS. Mortgage Loans increased largely due to new originations Fixed maturities, AFS decreased primarily due to a of commercial mortgage loans within the industrial, multifamily decrease in valuations due to widening of spreads and higher and single family markets. interest rates.
Net Investment Income For the years ended December 31, 2018 2017 2016 (Before tax) Amount Yield [1] Amount Yield [1] Amount Yield [1] Fixed maturities [2] $ 1,459 3.9% $ 1,303 3.9% $ 1,319 4.0% Equity securities 32 3.1% 24 2.8% 22 3.2% Mortgage loans 141 4.1% 124 4.1% 116 4.2% Limited partnerships and other alternative investments 205 13.2% 174 12.0% 128 8.6% Other [3] 20 49 51 Investment expense (77) (71) (59) Total net investment income $ 1,780 4.0% $ 1,603 4.0% $ 1,577 4.0% Total net investment income excluding limited partnerships and other alternative investments $ 1,575 3.7% $ 1,429 3.7% $ 1,449 3.8% [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. [2]Includes net investment income on short-term investments. [3]Primarily includes income from derivatives that qualify for hedge accounting and hedge fixed maturities. Year ended December 31, 2018 compared income increased due to higher returns on private equity and real estate limited partnership investments as well as a higher to the year ended December 31, 2017 reinvestment rate on fixed maturities. Total net investment income increased primarily due Annualized net investment income yield, to higher income from fixed maturities as a result of higher excluding non-routine items which include prepayment penalties average asset levels during 2018 as compared to 2017 largely on mortgage loans and make-whole payments on fixed maturities, driven by the acquisition of Aetna's U.S. group life and disability was 3.7% in 2018 up from 3.6% for the same period for 2017. business in November 2017. In addition, total net investment
39 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Average reinvestment rate, excluding certain U.S. Year ended December 31, 2017 compared Treasury securities and cash equivalent securities, for the year to the year ended December 31, 2016 ended December 31, 2018, was approximately 4.0% which was above the average yield of sales and maturities of 3.7% for the Total net investment income increased primarily same period. For the year ended December 31, 2018, the average due to higher income from limited partnerships and other reinvestment rate of 4.0% increased from 3.5% for the 2017 alternative investments, partially offset by lower make whole period, due to higher interest rates. payment income on fixed maturities and increased investment We expect the annualized net investment income yield for the expense. Income from limited partnerships and other alternative 2019 calendar year, excluding limited partnerships and other investments increased due to higher valuation write-ups of alternative investments, to approximate the portfolio yield private equity partnerships and strong returns on real estate earned in 2018 though it could be higher depending on if investments in 2017. reinvestment rates stay above the sales/maturity yield. The estimated impact on net investment income yield is subject to change as the composition of the portfolio changes through portfolio management and changes in market conditions.
Net Realized Capital Gains (Losses) For the years ended December 31, (Before tax) 2018 2017 2016 Gross gains on sales $ 114 $ 275 $ 222 Gross losses on sales (172) (113) (159) Equity securities [1] (48) — — Net other-than-temporary impairment ("OTTI") losses recognized in earnings [2] (1) (8) (27) Valuation allowances on mortgage loans [3] — (1) — Transactional foreign currency revaluation 1 14 (78) Non-qualifying foreign currency derivatives 3 (14) 83 Other, net [4] (9) 12 (151) Net realized capital gains (losses) $ (112) $ 165 $ (110) [1]Effective January 1, 2018. with the adoption of new accounting standards for equity securities at fair value, includes all changes in fair value and trading gains and losses for equity securities. [2]See Other-Than-Temporary Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A. [3]See Valuation Allowances on Mortgage Loans within the Investment Portfolio Risks and Risk Management section of the MD&A. [4]Primarily consists of changes in value of non-qualifying derivatives, including credit derivatives and interest rate derivatives used to manage duration. Also included for the year ended December 31, 2016, is a loss related to the write-down of investments in solar energy partnerships, which generated tax benefits, and a loss related to the sale of the Company's U.K. property and casualty run-off subsidiaries. Year ended December 31, 2018 impact of a decline in the equity market on the investment portfolio. Gross gains and losses on sales were primarily the result of sector repositioning and duration, liquidity and credit Year ended December 31, 2016 management within corporate securities, U.S. treasury securities were primarily a and tax-exempt municipal bonds. Gross gains and losses on sales result of duration, liquidity and credit management within Equity securities net losses were driven by depreciation of corporate securities, U.S. treasury securities, equity securities, equity securities due to lower equity market levels, partially and tax-exempt municipal bonds. offset by gains on sales due to tactical repositioning. Other, net loss included losses of $96 related to the write- Other, net losses included losses of $11 related to credit down of investments in solar energy partnerships that generated derivatives due to credit spread widening. solar tax credits and losses of $81 associated with the Company's U.K. property and casualty run-off subsidiaries that were sold in Year ended December 31, 2017 May 2017. In addition, there were losses of $15 related to equity Gross gains and losses on sales were primarily a derivatives which were hedging against the impact of a decline in result of duration, liquidity and credit management within the equity market on the investment portfolio. corporate securities, U.S. treasury securities, equity securities, and tax-exempt municipal bonds. Other, net gain included gains of $21 related to credit derivatives due to credit spread tightening, partially offset by losses of $7 related to equity derivatives hedging against the
40 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
management makes subjective and complex judgments that are CRITICAL ACCOUNTING inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are ESTIMATES appropriate based upon the facts available upon compilation of The preparation of financial statements in conformity with U.S. the financial statements. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Property & Casualty Insurance financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ, Product Reserves and in the past have differed, from those estimates. P&C Loss and Loss Adjustment Expense The Company has identified the following estimates as critical in Reserves, that they involve a higher degree of judgment and are subject to a Net of Reinsurance, by Segment as of significant degree of variability: December 31, 2018 • property and casualty insurance product reserves, net of reinsurance; Property & Casualty Other Operations • group benefit long-term disability (LTD) reserves, net of $1,686 reinsurance; 8% Personal Lines • evaluation of goodwill for impairment; $2,348 12% • valuation of investments and derivative instruments including evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on mortgage loans; • valuation allowance on deferred tax assets; and • contingencies relating to corporate litigation and regulatory matters. Commercial Lines Certain of these estimates are particularly sensitive to market $16,318 conditions, and deterioration and/or volatility in the worldwide 80% debt or equity markets could have a material impact on the Consolidated Financial Statements. In developing these estimates Loss and LAE Reserves, Net of Reinsurance as of December 31, 2018
Property & % Total Casualty Total Property & Reserves- Commercial Lines Personal Lines Other Operations Casualty Insurance net Workers’ compensation $ 10,005 $ — $ — $ 10,005 49.2% General liability 2,276 — — 2,276 11.2% Package business [1] 1,609 — — 1,609 7.9% Commercial property 384 — — 384 1.9% Automobile liability 878 1,652 — 2,530 12.4% Automobile physical damage 13 40 — 53 0.3% Professional liability 578 — — 578 2.8% Bond 290 — — 290 1.4% Homeowners — 642 — 642 3.2% Asbestos and environmental 108 11 1,135 1,254 6.2% Assumed reinsurance — — 113 113 0.6% All other 177 3 438 618 3.0% Total reserves-net 16,318 2,348 1,686 20,352 100.0% Reinsurance and other recoverables 3,137 108 987 4,232 Total reserves-gross $ 19,455 $ 2,456 $ 2,673 $ 24,584 [1]Commercial Lines policy packages that include property and general liability coverages are generally referred to as the package line of business.
41 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
For descriptions of the coverages provided under the lines of in the geographic mix of business, changes in the mix of business business shown above, see Part I - Item1, Business. by industry and changes in the mix of business by policy limit or deductible can increase the risk that losses will ultimately Overview of Reserving for Property develop differently than the loss development patterns assumed in our reserving. In addition, changes in the quality of risk and Casualty Insurance Claims selection in underwriting and changes in interpretations of policy It typically takes many months or years to pay claims incurred language could increase or decrease ultimate losses from what under a property and casualty insurance product; accordingly, the was assumed in establishing the reserves. Company must establish reserves at the time the loss is incurred. Most of the Company’s policies provide for occurrence-based In the case of assumed reinsurance, all of the above risks apply. coverage where the loss is incurred when a claim event happens The Company assumes insurance risk from certain pools and like an automobile accident, house or building fire or injury to an associations and, prior to 2004, assumed property and casualty employee under a workers’ compensation policy. Some of the risks from other insurance companies. Changes in the case Company's policies, mostly for directors and officers insurance reserving and reporting patterns of insurance companies ceding and errors and omissions insurance, are claims-made policies to The Hartford can create additional uncertainty in estimating where the loss is incurred in the period the claim event is the reserves. Due to the inherent complexity of the assumptions reported to the Company even if the loss event itself occurred in used, final claim settlements may vary significantly from the an earlier period. present estimates of direct and assumed reserves, particularly Loss and loss adjustment expense reserves provide for the when those settlements may not occur until well into the future. estimated ultimate costs of paying claims under insurance policies written by the Company, less amounts paid to date. These Reinsurance Recoverables- Through both facultative reserves include estimates for both claims that have been and treaty reinsurance agreements, the Company cedes a share reported and those that have not yet been reported, and include of the risks it has underwritten to other insurance companies. The estimates of all expenses associated with processing and settling Company records reinsurance recoverables for loss and loss these claims. Incurred but not reported (“IBNR”) reserves adjustment expenses ceded to its reinsurers representing the represent the difference between the estimated ultimate cost of anticipated recovery from reinsurers of unpaid claims, including all claims and the actual loss and loss adjustment expenses IBNR. reported to the Company by claimants (“reported losses”). The Company estimates the portion of losses and loss adjustment Reported losses represent cumulative loss and loss adjustment expenses to be ceded based on the terms of any applicable expenses paid plus case reserves for outstanding reported claims. facultative and treaty reinsurance, including an estimate of how Company actuaries evaluate the total reserves (IBNR and case IBNR for losses will ultimately be ceded. 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- The Company provides an allowance for uncollectible made policies, the calendar year in which a loss is reported. reinsurance, reflecting management’s best estimate of reinsurance cessions that may be uncollectible in the future due Factors that Change Reserve Estimates- to reinsurers’ unwillingness or inability to pay. The estimated Reserve estimates can change over time because of unexpected allowance considers the credit quality of the Company's changes in the external environment. Inflation in medical care, reinsurers, recent outcomes in arbitration and litigation in hospital care, automobile parts, wages and home and building disputes between reinsurers and cedants and recent repair would cause claims to settle for more than they are initially communication activity between reinsurers and cedants that may reserved. Changes in the economy can cause an increase or signal how the Company’s own reinsurance claims may settle. decrease in the number of reported claims (claim frequency). For Where its reinsurance contracts permit, the Company secures example, an improving economy could result in more automobile funding of future claim obligations with various forms of miles driven and a higher number of automobile reported claims, collateral, including irrevocable letters of credit, secured trusts, or a change in economic conditions can lead to more or less funds held accounts and group-wide offsets. The allowance for workers’ compensation reported claims. An increase in the uncollectible reinsurance was $126 as of December 31, 2018, number or percentage of claims litigated can increase the average comprised of $20 related to Commercial Lines, $1 related to settlement amount per claim (claim severity). Changes in the Personal Lines and $105 related to Property & Casualty Other judicial environment can affect interpretations of damages and Operations. how policy coverage applies which could increase or decrease The Company’s estimate of reinsurance recoverables, net of an claim severity. Over time, judges or juries in certain jurisdictions allowance for uncollectible reinsurance, is subject to similar risks may be more inclined to determine liability and award damages. and uncertainties as the estimate of the gross reserve for unpaid New legislation can also change how damages are defined losses and loss adjustment expenses for direct and assumed resulting in greater frequency or severity. In addition, new types exposures. of injuries may arise from exposures not contemplated when the policies were written. Past examples include pharmaceutical Review of Reserve Adequacy- The Hartford products, silica, lead paint, molestation or abuse and construction regularly reviews the appropriateness of reserve levels at the line defects. of business or more detailed level, taking into consideration the Reserve estimates can also change over time because of changes variety of trends that impact the ultimate settlement of claims. in internal Company operations. A delay or acceleration in For Property & Casualty Other Operations, asbestos and handling claims may signal a need to increase or reduce reserves environmental (“A&E”) reserves are reviewed by type of event from what was initially estimated. New lines of business may have rather than by line of business. loss development patterns that are not well established. Changes
42 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reserve adjustments, which may be material, are reflected in the loss ratio is determined by starting with the average loss ratio of operating results of the period in which the adjustment is recent prior accident years and adjusting that ratio for the effect determined to be necessary. In the judgment of management, of expected changes to earned pricing, loss frequency and information currently available has been properly considered in severity, mix of business, ceded reinsurance and other factors. For establishing the reserves for unpaid losses and loss adjustment short-tail lines, IBNR for the current accident year is initially expenses and in recording the reinsurance recoverables for ceded recorded as the product of the expected loss ratio for the period, unpaid losses. earned premium for the period and the proportion of losses expected to be reported in future calendar periods for the current Reserving Methodology accident period. For long-tailed lines, IBNR reserves for the For a discussion of how A&E reserves are set, see MD&A - P&C current accident year are initially recorded as the product of the Insurance Product Reserves, Reserving for Asbestos and expected loss ratio for the period and the earned premium for the Environmental Claims within Property & Casualty Other period, less reported losses for the period. Operations. The following is a discussion of the reserving As losses emerge or develop in periods subsequent to a given methods used for the Company's property and casualty lines of accident year, reserving actuaries use other methods to estimate business other than asbestos and environmental. ultimate unpaid losses in addition to the expected loss ratio How Reserves Are Set- Reserves are set by line of method. These primarily include paid and reported loss business within the operating segments. A single line of business development methods, frequency/severity techniques and the may be written in more than one segment. Case reserves are Bornhuetter-Ferguson method (a combination of the expected established by a claims handler on each individual claim and are loss ratio and paid development or reported development adjusted as new information becomes known during the course of method). Within any one line of business, the methods that are handling the claim. Lines of business for which reported losses given more influence vary based primarily on the maturity of the emerge over a long period of time are referred to as long-tail lines accident year, the mix of business and the particular internal and of business. Lines of business for which reported losses emerge external influences impacting the claims experience or the more quickly are referred to as short-tail lines of business. The methods. The output of the reserve reviews are reserve estimates Company’s shortest-tail lines of business are homeowners, that are referred to herein as the “actuarial indication”. commercial property and automobile physical damage. The Reserve Discounting- Most of the Company’s property longest tail lines of business include workers’ compensation, and casualty insurance product reserves are not discounted. general liability, professional liability and assumed reinsurance. However, the Company has discounted liabilities funded through For short-tail lines of business, emergence of paid loss and case structured settlements and has discounted certain reserves for reserves is credible and likely indicative of ultimate losses. For indemnity payments due to permanently disabled claimants long-tail lines of business, emergence of paid losses and case under workers’ compensation policies. For further discussion of reserves is less credible in the early periods after a given accident these discounted liabilities, see Note 1 - Basis of Presentation and year and, accordingly, may not be indicative of ultimate losses. Significant Accounting Policies of Notes to Consolidated Financial Statements. Use of Actuarial Methods and Judgments- The Company’s reserving actuaries regularly review reserves for both Differences Between GAAP and Statutory current and prior accident years using the most current claim As of December 31, 2018 and 2017, U.S. data. A variety of actuarial methods and judgments are used for Basis Reserves- property and casualty insurance product reserves for losses and most lines of business to arrive at selections of estimated ultimate loss adjustment expenses, net of reinsurance recoverables, losses and loss adjustment expenses. In 2018, new methods were reported under U.S. GAAP were less than net reserves reported added to inform these selections where appropriate. The reserve on a statutory basis. The primary difference between the selections incorporate input, as appropriate, from claims statutory and GAAP reserve amounts is due to a reinsurance personnel, pricing actuaries and operating management about recoverable on ceded asbestos and environmental adverse reported loss cost trends and other factors that could affect the reserve development under a retroactive reinsurance agreement reserve estimates. Most reserves are reviewed fully each quarter, between the Company and National Indemnity Company including loss and loss adjustment expense reserves for ("NICO"), a subsidiary of Berkshire Hathaway Inc. ("Berkshire"), homeowners, commercial property, automobile physical damage, which is included as a reduction of other liabilities under automobile liability, package property business, and workers’ statutory accounting. compensation. Other reserves, including most general liability and professional liability lines, are reviewed semi-annually. Reserving Methods by Line of Business- Apart Certain additional reserves are also reviewed semi-annually or from A&E which is discussed in the following section on Property annually, including reserves for losses incurred in accident years & Casualty Other Operations, below is a general discussion of older than twelve years for Personal Lines and older than twenty which reserving methods are preferred by line of business. years for Commercial Lines, as well as reserves for bond, assumed Because the actuarial estimates are generated at a much finer reinsurance, latent exposures such as construction defects, and level of detail than line of business (e.g., by distribution channel, unallocated loss adjustment expenses. For reserves that are coverage, accident period), other methods than those described reviewed semi-annually or annually, management monitors the for the line of business may also be employed for a coverage and emergence of paid and reported losses in the intervening accident year within a line of business. Also, as circumstances quarters and, if necessary, performs a reserve review to change, the methods that are given more influence will change. determine whether the reserve estimate should change. An expected loss ratio is used in initially recording the reserves for both short-tail and long-tail lines of business. This expected
43 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Preferred Reserving Methods by Line of Business
Commercial property, These short-tailed lines are fast-developing and paid and reported development techniques are used as these homeowners and methods use historical data to develop paid and reported loss development patterns, which are then applied to automobile physical cumulative paid and reported losses by accident period to estimate ultimate losses. In addition to paid and damage reported development methods, for the most immature accident months, the Company uses frequency and severity techniques and the initial expected loss ratio. The advantage of frequency/severity techniques is that frequency estimates are generally easier to predict and external information can be used to supplement internal data in estimating average severity. Personal automobile For automobile liability, and bodily injury in particular, the Company performs a greater number of techniques liability than it does for commercial property, homeowners and automobile physical damage. In addition to traditional paid and reported development methods, the Company relies on frequency/severity techniques and Berquist- Sherman techniques. Because the paid development technique is affected by changes in claim closure patterns and the reported development method is affected by changes in case reserving practices, the Company uses Berquist-Sherman techniques which adjust these patterns to reflect current settlement rates and case reserving practices. The Company generally uses the reported development method for older accident years and a combination of reported development, frequency/severity and Berquist-Sherman methods for more recent accident years. For older accident periods, reported losses are a good indicator of ultimate losses given the high percentage of ultimate losses reported to date. For more recent periods, the frequency/severity techniques are not affected as much by changes in case reserve practices and changing disposal rates and the Berquist-Sherman techniques specifically adjust for these changes. Automobile liability for For older, more mature accident years, the Company primarily uses reported development techniques. For more commercial lines recent accident years, the Company relies on several methods that incorporate expected loss ratios, reported loss development, paid loss development, frequency/severity, case reserve adequacy, and claim settlement rates. Professional liability Reported and paid loss development patterns for this line tend to be volatile. Therefore, the Company typically relies on frequency and severity techniques. General liability, bond For these long-tailed lines of business, the Company generally relies on the expected loss ratio and reported and large deductible development techniques. The Company generally weights these techniques together, relying more heavily on the workers’ compensation expected loss ratio method at early ages of development and more on the reported development method as an accident year matures. Workers’ Workers’ compensation is the Company’s single largest reserve line of business and a wide range of methods are compensation used. Methods include paid and reported development techniques, the expected loss ratio and Bornhuetter- Ferguson methods, and an in-depth analysis on the largest states. In recent years, we have seen an acceleration of paid losses relative to historical patterns and have adjusted our expected loss development patterns accordingly. This acceleration is due to an increase in lump sum settlements to claimants across multiple accident years. Adjusting for the effect of an acceleration in payments compared to historical patterns, paid loss development techniques are generally preferred for the workers' compensation line, particularly for more mature accident years. For less mature accident years, the Company places greater reliance on expected loss ratio methods. Assumed reinsurance For these lines, the Company tends to rely mostly on reported development techniques. In assumed reinsurance, and all other assumptions are influenced by information gained from claim and underwriting audits. Allocated loss For some lines of business (e.g., professional liability and assumed reinsurance), ALAE and losses are analyzed adjustment expenses together. For most lines of business, however, ALAE is analyzed separately, using paid development techniques (ALAE) and a ratio of paid ALAE to paid loss is applied to loss reserves to estimate unpaid ALAE. Unallocated loss ULAE is analyzed separately from loss and ALAE. For most lines of business, incurred ULAE costs to be paid in the adjustment expenses future are projected based on an expected claim handling cost per claim year, the anticipated claim closure (ULAE) pattern and the ratio of paid ULAE to paid loss is applied to estimated unpaid losses.
In the final step of the reserve review process, senior reserving adjustments of reserves are referred to as “prior accident year actuaries and senior management apply their judgment to development”. Increases in previous estimates of ultimate loss determine the appropriate level of reserves considering the costs are referred to as either an increase in prior accident year actuarial indications and other factors not contemplated in the reserves or as unfavorable reserve development. Decreases in actuarial indications. Those factors include, but are not limited to, previous estimates of ultimate loss costs are referred to as either the assessed reliability of key loss trends and assumptions used in a decrease in prior accident year reserves or as favorable reserve the current actuarial indications, the maturity of the accident development. Reserve development can influence the year, pertinent trends observed over the recent past, the level of comparability of year over year underwriting results. volatility within a particular line of business, and the For a discussion of changes to reserve estimates recorded in improvement or deterioration of actuarial indications in the 2018, see the Reserve Development section below. 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. As of December Current Trends Contributing to 31, 2018, recorded reserves were above the actuarial indications Reserve Uncertainty by an amount comparable with December 31, 2017. The Hartford is a multi-line company in the property and casualty insurance business. The Hartford is therefore subject to reserve Based on the results of the quarterly reserve review process, the uncertainty stemming from changes in loss trends and other Company determines the appropriate reserve adjustments, if any, conditions which could become material at any point in time. As to record. In general, adjustments are made more quickly to more market conditions and loss trends develop, management must mature accident years and less volatile lines of business. Such
44 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations assess whether those conditions constitute a long-term trend claims. Severity trends are affected by changes in internal claim that should result in a reserving action (i.e., increasing or handling and case reserving practices as well as by changes in the decreasing the reserve). external environment. Changes in claim practices increase the uncertainty in the interpretation of case reserve data, which General liability- Within Commercial Lines and Property & increases the uncertainty in recorded reserve levels. Severity Casualty Other Operations, the Company has exposure to trends have increased in recent accident years, in part driven by general liability claims, including from bodily injury, property more expensive parts associated with new automobile damage and product liability. Reserves for these exposures can be technology, causing additional uncertainty about the reliability of particularly difficult to estimate due to the long development past patterns. In addition, the introduction of new products and pattern and uncertainty about how cases will settle. In particular, class plans has led to a different mix of business by type of insured the Company has exposure to bodily injury claims that is the than the Company experienced in the past. Such changes in mix result of long-term or continuous exposure to harmful products increase the uncertainty of the reserve projections, since or substances. Examples include, but are not limited to, historical data and reporting patterns may not be applicable to pharmaceutical products, silica, talcum powder, head injuries and the new business. lead paint. The Company also has exposure to claims from construction defects, where property damage or bodily injury Impact of Key Assumptions on from negligent construction is alleged. In addition, the Company has exposure to claims asserted against religious institutions and Reserves other organizations relating to molestation or abuse. Such As stated above, the Company’s practice is to estimate reserves exposures may involve potentially long latency periods and may using a variety of methods, assumptions and data elements within implicate coverage in multiple policy periods. These factors make its reserve estimation process. The Company does not reserves for such claims more uncertain than other bodily injury consistently use statistical loss distributions or confidence levels or property damage claims. With regard to these exposures, the around its reserve estimate and, as a result, does not disclose Company monitors trends in litigation, the external environment, reserve ranges. the similarities to other mass torts and the potential impact on Across most lines of business, the most important reserve the Company’s reserves. assumptions are future loss development factors applied to paid or reported losses to date. The trend in loss cost frequency and Included in middle market and Workers’ compensation- severity is also a key assumption, particularly in the most recent specialty commercial, workers’ compensation is the Company’s accident years, where loss development factors are less credible. single biggest line of business and the property and casualty line of business with the longest pattern of loss emergence. To the The following discussion discloses possible variation from current extent that patterns in the frequency of settlement payments estimates of loss reserves due to a change in certain key deviate from historical patterns, loss reserve estimates would be indicators of potential losses. For automobile liability lines in both less reliable. Medical costs make up approximately 50% of Personal Lines and Commercial Lines, the key indicator is the workers’ compensation payments. As such, reserve estimates for annual loss cost trend, particularly the severity trend component workers’ compensation are particularly sensitive to changes in of loss costs. For workers’ compensation and general liability, loss medical inflation, the changing use of medical care procedures development patterns are a key indicator, particularly for more and changes in state legislative and regulatory environments. In mature accident years. For workers’ compensation, paid loss addition, a deteriorating economic environment can reduce the development patterns have been impacted by medical cost ability of an injured worker to return to work and lengthen the inflation and other changes in loss cost trends. For general time a worker receives disability benefits. Within specialty liability, loss development patterns have been impacted by, commercial, reserves for large deductible workers’ compensation among other things, emergence of new types of claims (e.g., insurance require estimating losses attributable to the deductible construction defect claims) and a shift in the mixture between amount that will be paid by the insured; if such losses are not paid smaller, more routine claims and larger, more complex claims. by the insured due to financial difficulties, the Company is Each of the impacts described below is estimated individually, contractually liable. without consideration for any correlation among key indicators or Commercial Lines automobile-Uncertainty in among lines of business. Therefore, it would be inappropriate to estimated claim severity causes reserve variability for take each of the amounts described below and add them together commercial automobile losses including reserve variability due to in an attempt to estimate volatility for the Company’s reserves in changes in internal claim handling and case reserving practices as total. For any one reserving line of business, the estimated well as due to changes in the external environment. variation in reserves due to changes in key indicators is a reasonable estimate of possible variation that may occur in the Directors' and officers' insurance- Uncertainty future, likely over a period of several calendar years. The variation regarding the number and severity of class action suits can result discussed is not meant to be a worst-case scenario, and, in reserve volatility for both directors' and officers' insurance therefore, it is possible that future variation may be more than claims. Additionally, the Company’s exposure to losses under the amounts discussed below. directors’ and officers’ insurance policies is primarily in excess layers, making estimates of loss more complex.
Personal Lines automobile- In Personal Lines, while claims emerge over relatively shorter periods, estimates can still vary due to a number of factors, including uncertain estimates of frequency and severity trends, particularly for auto liability
45 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Estimated The estimated liabilities of insureds and the Company’s exposure Reserves, Net of Range of to the insureds depends heavily on an analysis of the relevant Possible Reinsurance Variation legal issues and litigation environment. This analysis is conducted Change in Key December 31, in by the Company’s lawyers and is subject to applicable privileges. Indicator 2018 Reserves Personal +/- 2.5. points $1.7 billion +/- $80 For both asbestos and environmental reserves, the Company also Automobile to the annual analyzes its historical paid and reported losses and expenses year Liability assumed by year, to assess any emerging trends, fluctuations or change in loss characteristics suggested by the aggregate paid and reported cost severity activity. The historical losses and expenses are analyzed on both a for the two most recent direct basis and net of reinsurance. accident years Once the gross ultimate exposure for indemnity and allocated Commercial +/- 2.5 points $0.9 billion +/- $20 loss adjustment expense is determined for its insureds by each Automobile to the annual policy year, the Company calculates its ceded reinsurance Liability assumed projection based on any applicable facultative and treaty change in loss reinsurance and the Company’s experience with reinsurance cost severity for the two collections. See the section that follows entitled Adverse most recent Development Cover that discusses the impact the reinsurance accident years agreement with NICO may have on future adverse development Workers' 2.0% change in $10.0 billion +/- $400 of asbestos and environmental reserves, if any. Compensation paid loss development Uncertainties Regarding Adequacy of A&E patterns Reserves- A number of factors affect the variability of General 10% change in $2.3 billion +/- $200 estimates for gross asbestos and environmental reserves Liability reported loss including assumptions with respect to the frequency of claims, development the average severity of those claims settled with payment, the patterns dismissal rate of claims with no payment, resolution of coverage disputes with our policyholders and the expense to indemnity Reserving for Asbestos and ratio. Reserve estimates for gross asbestos and environmental Environmental Claims reserves are subject to greater variability than reserve estimates for more traditional exposures. How A&E Reserves are Set- The process for establishing reserves for asbestos and environmental claims first The process of estimating asbestos and environmental reserves involves estimating the required reserves gross of ceded remains subject to a wide variety of uncertainties, which are reinsurance and then estimating reinsurance recoverables. In detailed in Note 14 - Commitments and Contingencies of Notes establishing reserves for gross asbestos claims, the Company to Consolidated Financial Statements. The Company believes that evaluates its insureds’ estimated liabilities for such claims by its current asbestos and environmental reserves are appropriate. examining exposures for individual insureds and assessing how Future developments could cause the Company to change its coverage applies. The Company considers a variety of factors, estimates of its gross asbestos and environmental reserves and if including the jurisdictions where underlying claims have been cumulative ceded losses under the adverse development cover brought, past, pending and anticipated future claim activity, the (“ADC”) with NICO exceed the ceded premium paid of $650, level of plaintiff demands, disease mix, past settlement values of there could be significant variability in net income due to timing similar claims, dismissal rates, allocated loss adjustment expense, differences between when gross reserves are increased and when and potential impact of other defendants being in bankruptcy. reinsurance recoveries are recognized. Consistent with past practice, the Company will continue to monitor its reserves in Similarly, the Company reviews exposures to establish gross Property & Casualty Other Operations regularly, including its environmental reserves. The Company considers several factors annual reviews of asbestos liabilities, reinsurance recoverables, in estimating environmental liabilities, including historical values the allowance for uncollectible reinsurance, and environmental of similar claims, the number of sites involved, the insureds’ liabilities. Where future developments indicate, we will make alleged activities at each site, the alleged environmental damage, appropriate adjustments to the reserves at that time. In 2018 and the respective shares of liability of potentially responsible parties, 2017, the Company completed the comprehensive annual review the appropriateness and cost of remediation, the nature of of asbestos and environmental reserves during the fourth governmental enforcement activities or mandated remediation quarter, instead of the second quarter as it had done in previous efforts and potential impact of other defendants being in years. bankruptcy. After evaluating its insureds’ probable liabilities for asbestos and/ Total P&C Insurance Product Reserves or environmental claims, the Company evaluates the insurance Development coverage in place for such claims. The Company considers its In the opinion of management, based upon the known facts and insureds’ total available insurance coverage, including the current law, the reserves recorded for the Company’s property coverage issued by the Company. The Company also considers and casualty insurance products at December 31, 2018 represent relevant judicial interpretations of policy language, the nature of the Company’s best estimate of its ultimate liability for losses and how policy limits are enforced on multi-year policies and loss adjustment expenses related to losses covered by policies applicable coverage defenses or determinations, if any. written by the Company. However, because of the significant
46 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations uncertainties surrounding reserves, it is possible that currently recorded reserves could be material to the Company’s management’s estimate of the ultimate liabilities for these claims results of operations and liquidity. may change in the future and that the required adjustment to Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the Year Ended December 31, 2018
Property & Total Property Commercial Personal Casualty Other & Casualty Lines Lines Operations Insurance Beginning liabilities for unpaid losses and loss adjustment expenses, gross $ 18,893 $ 2,294 $ 2,588 $ 23,775 Reinsurance and other recoverables 3,147 71 739 3,957 Beginning liabilities for unpaid losses and loss adjustment expenses, net 15,746 2,223 1,849 19,818 Provision for unpaid losses and loss adjustment expenses Current accident year before catastrophes 4,037 2,249 — 6,286 Current accident year ("CAY") catastrophes 275 546 — 821 Prior accident year development ("PYD") (200) (32) 65 (167) Total provision for unpaid losses and loss adjustment expenses 4,112 2,763 65 6,940 Less: payments 3,540 2,638 228 6,406 Ending liabilities for unpaid losses and loss adjustment expenses, net 16,318 2,348 1,686 20,352 Reinsurance and other recoverables 3,137 108 987 4,232 Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 19,455 $ 2,456 $ 2,673 $ 24,584 Earned premiums and fee income $ 7,081 $ 3,439 Loss and loss expense paid ratio [1] 50.0 76.7 Loss and loss expense incurred ratio 58.4 81.3 Prior accident year development (pts) [2] (2.8) (0.9) [1]The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums. [2]“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
Current Accident Year Catastrophe Losses for the Year Ended December 31, 2018, Net of Reinsurance Commercial Personal Lines Lines Total Wind and hail $ 124 $ 164 $ 288 Winter storms 50 25 75 Flooding 1 1 2 Volcanic eruption — 2 2 Wildfire 56 384 440 Hurricanes 71 23 94 Massachusetts gas explosion 1 — 1 Earthquake — 1 1 Total catastrophe losses 303 600 903 Less: reinsurance recoverable under the property aggregate treaty [1] (28) (54) (82) Net catastrophe losses $ 275 $ 546 $ 821 [1]Refers to reinsurance recoverable under the Company's Property Aggregate treaty. For further information on the treaty, refer to Part II, Item 7, MD&A — Enterprise Risk Management — Insurance Risk.
47 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2018 Property & Total Property & Commercial Personal Casualty Other Casualty Lines Lines Operations Insurance Workers’ compensation $ (164) $ — $ — $ (164) Workers’ compensation discount accretion 40 — — 40 General liability 52 — — 52 Package business (26) — — (26) Commercial property (12) — — (12) Professional liability (12) — — (12) Bond 2 — — 2 Automobile liability (15) (18) — (33) Homeowners — (25) — (25) Net asbestos reserves — — — — Net environmental reserves — — — — Catastrophes (67) 18 — (49) Uncollectible reinsurance — — 22 22 Other reserve re-estimates, net 2 (7) 43 38
Total prior accident year development $ (200) $ (32) $ 65 $ (167) During 2018, the Company’s re-estimates of prior accident year officers liability claims principally due to a number of older claims reserves included the following significant reserve changes: closing with limited or no payment.
Workers’ compensation reserves were reduced in Automobile liability reserves were reduced, primarily small commercial and middle market, primarily for accident years driven by reduced estimates of loss adjustment expenses in small 2014 and 2015, as claim severity has emerged favorably commercial for recent accident years and favorable development compared to previous reserve estimates. Also contributing was a in personal automobile liability for accident years 2014 to 2017, reduction in estimated reserves for unallocated loss adjustment principally due to lower severity, including with uninsured and expense ("ULAE"). underinsured motorist claims.
General liability reserves were increased, primarily due Homeowners reserves were reduced, primarily in to an increase in reserves for higher hazard general liability accident years 2013 to 2017, driven by lower than expected exposures in middle market for accident years 2009 to 2017, severity across multiple perils. partially offset by a decrease in reserves for other lines within middle market, including premises and operations, umbrella and Asbestos and environmental reserves were products liability, principally for accident years 2015 and prior. unchanged as $238 of adverse development arising from the Contributing to the increase in reserves for higher hazard general fourth quarter 2018 comprehensive annual review was offset by liability exposures was an increase in average claim severity, a $238 recoverable from NICO. For additional information including from large losses and, in more recent accident years, an related to the adverse development cover with NICO, see Note 8 increase in claim frequency. Contributing to the reduction in - Reinsurance and Note 14 - Commitments and Contingencies of reserves for other middle market lines were more favorable Notes to Consolidated Financial Statements. outcomes due to initiatives to reduce legal expenses. In addition, were reduced, primarily as a reserve increases for claims with lead paint exposure were offset Catastrophe reserves result of lower estimated net losses from 2017 catastrophes, by reserve decreases for other mass torts and extra-contractual principally related to hurricanes Harvey and Irma. Before liability claims. reinsurance, estimated losses for 2017 catastrophe events Package business reserves were reduced, primarily decreased by $133, resulting in a decrease in reinsurance due to lower reserve estimates for both liability and property for recoverables of $90 as the Company no longer expects to recover accident years 2010 and prior, including a recovery of loss under the 2017 Property Aggregate reinsurance treaty as adjustment expenses for the 2005 accident year. aggregate ultimate losses for 2017 catastrophe events are now projected to be less than $850. Commercial property reserves were reduced, driven by an increase in estimated reinsurance recoverables on middle Uncollectible reinsurance reserves were increased market property losses from the 2017 accident year. due to lower anticipated recoveries related to older accident years. Professional liability reserves were reduced, principally for accident years 2014 and prior, for directors and Other reserve re-estimates, net, primarily represents an increase in ULAE reserves in Property & Casualty
48 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Other Operations that was principally driven by an increase in expected claim handling costs associated with asbestos and environmental and mass tort claims.
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the Year Ended December 31, 2017
Property & Total Property Commercial Personal Casualty Other & Casualty Lines Lines Operations Insurance Beginning liabilities for unpaid losses and loss adjustment expenses, gross $ 17,950 $ 2,094 $ 2,501 $ 22,545 Reinsurance and other recoverables 3,037 25 426 3,488 Beginning liabilities for unpaid losses and loss adjustment expenses, net 14,913 2,069 2,075 19,057 Provision for unpaid losses and loss adjustment expenses Current accident year before catastrophes 3,961 2,584 — 6,545 Current accident year catastrophes 383 453 — 836 Prior accident year development (22) (37) 18 (41) Total provision for unpaid losses and loss adjustment expenses 4,322 3,000 18 7,340 Less: payments 3,489 2,846 244 6,579 Ending liabilities for unpaid losses and loss adjustment expenses, net 15,746 2,223 1,849 19,818 Reinsurance and other recoverables 3,147 71 739 3,957 Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 18,893 $ 2,294 $ 2,588 $ 23,775 Earned premiums and fee income $ 6,902 $ 3,734 Loss and loss expense paid ratio [1] 50.6 76.2 Loss and loss expense incurred ratio 63.0 81.3 Prior accident year development (pts) [2] (0.3) (1.0) [1]The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums and fee income. [2]“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
Current Accident Year Catastrophe Losses for the Year Ended December 31, 2017, Net of Reinsurance Commercial Personal Lines Lines Total Wind and hail $ 138 $ 176 $ 314 Hurricanes [1] 236 68 304 Wildfires 51 253 304 Winter storms 1 3 4 Total catastrophe losses 426 500 926 Less: reinsurance recoverable under the property aggregate treaty [2] (43) (47) (90) Net catastrophe losses $ 383 $ 453 $ 836 [1]Includes catastrophe losses from Hurricane Harvey and Hurricane Irma of $170 and $121, respectively. [2]Refers to reinsurance recoverable under the Company's Property Aggregate treaty. For further information on the treaty, refer to Part II, Item 7, MD&A — Enterprise Risk Management — Insurance Risk.
49 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2017 Property & Total Property & Commercial Personal Casualty Other Casualty Lines Lines Operations Insurance Workers’ compensation $ (79) $ — $ — $ (79) Workers’ compensation discount accretion 28 — — 28 General liability 11 — — 11 Package business (25) — — (25) Commercial property (8) — — (8) Professional liability 1 — — 1 Bond 32 — — 32 Automobile liability 17 — — 17 Homeowners — (14) — (14) Net asbestos reserves — — — — Net environmental reserves — — — — Catastrophes — (16) — (16) Uncollectible reinsurance (15) — — (15) Other reserve re-estimates, net 16 (7) 18 27 Total prior accident year development $ (22) $ (37) $ 18 $ (41)
During 2017, the Company’s re-estimates of prior accident year Automobile liability reserves within Commercial reserves included the following significant reserve changes: Lines were increased in small commercial and large national accounts for the 2013 to 2016 accident years, driven by higher were reduced in Workers’ compensation reserves frequency of more severe accidents, including litigated claims. small commercial and middle market, given the continued emergence of favorable frequency, primarily for accident years Asbestos and environmental reserves were 2013 to 2015, as well as a reduction in estimated reserves for unchanged as $285 of adverse development arising from the ULAE, partially offset by strengthening reserves for captive fourth quarter 2017 comprehensive annual review was offset by programs within specialty commercial. a $285 recoverable from NICO. For additional information related to the adverse development cover with NICO, see Note 8 were increased for the 2013 General liability reserves - Reinsurance and Note 14 - Commitments and Contingencies of to 2016 accident years on a class of business that insures service Notes to Consolidated Financial Statements. and maintenance contractors. This increase was partially offset by a decrease in recent accident year reserves for other middle Catastrophes reserves were reduced primarily due to market general liability reserves. lower estimates of 2016 wind and hail event losses and a decrease in losses on a 2015 wildfire. Package business reserves were reduced for accident years 2013 and prior largely due to reducing the Company’s Uncollectible reinsurance reserves decreased as a estimate of allocated loss adjustment expenses incurred to settle result of giving greater weight to favorable collectibility the claims. experience in recent calendar periods in estimating future collections. Bond business reserves increased for customs bonds written between 2000 and 2010 which was partly offset by a reduction in reserves for recent accident years as reported losses for commercial and contract surety have emerged favorably.
50 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the Year Ended December 31, 2016
Property & Total Property Commercial Personal Casualty Other & Casualty Lines Lines Operations Insurance Beginning liabilities for unpaid losses and loss adjustment expenses, gross $ 17,302 $ 1,845 $ 3,421 $ 22,568 Reinsurance and other recoverables 3,036 19 570 3,625 Beginning liabilities for unpaid losses and loss adjustment expenses, net 14,266 1,826 2,851 18,943 Add: Maxum Acquisition 122 — — 122 Provision for unpaid losses and loss adjustment expenses Current accident year before catastrophes 3,766 2,808 — 6,574 Current accident year catastrophes 200 216 — 416 Prior accident year development 28 151 278 457 Total provision for unpaid losses and loss adjustment expenses 3,994 3,175 278 7,447 Less: payments 3,469 2,932 567 6,968 Less: net reserves transferred to liabilities held for sale [1] — — 487 487 Ending liabilities for unpaid losses and loss adjustment expenses, net 14,913 2,069 2,075 19,057 Reinsurance and other recoverables 3,037 25 426 3,488 Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 17,950 $ 2,094 $ 2,501 $ 22,545 Earned premiums and fee income $ 6,690 $ 3,937 Loss and loss expense paid ratio [2] 51.9 74.5 Loss and loss expense incurred ratio 60.1 81.5 Prior accident year development (pts) [3] 0.4 3.9 [1]Represents liabilities classified as held-for-sale as of December 31, 2016 and subsequently transferred to the buyer in connection with the sale of the Company's U.K. property and casualty run-off subsidiaries in May 2017. For discussion of the sale transaction, see Note 20 - Business Dispositions and Discontinued Operations 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.
Current Accident Year Catastrophe Losses for the Year Ended December 31, 2016, Net of Reinsurance Commercial Personal Lines Lines Total Wind and hail $ 156 $ 186 $ 342 Winter storms 24 7 $ 31 Hurricane Matthew 17 16 $ 33 Wildfires 3 7 10 Total Catastrophe Losses $ 200 $ 216 $ 416
51 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2016 Property & Total Property & Commercial Personal Casualty Other Casualty Lines Lines Operations Insurance Workers’ compensation $ (119) $ — $ — $ (119) Workers’ compensation discount accretion 28 — — 28 General liability 65 — — 65 Package business 65 — — 65 Commercial property 1 — — 1 Professional liability (37) — — (37) Bond (8) — — (8) Automobile liability 57 160 — 217 Homeowners — (10) — (10) Net asbestos reserves — — 197 197 Net environmental reserves — — 71 71 Catastrophes (4) (3) — (7) Uncollectible reinsurance (30) — — (30) Other reserve re-estimates, net 10 4 10 24 Total prior accident year development $ 28 $ 151 $ 278 $ 457
During 2016, the Company’s re-estimates of prior accident year frequency and severity for the 2015 accident year, including for reserves included the following significant reserve changes: uninsured and under-insured motorist claims, and increased bodily injury severity for the 2014 accident year. Increases in Workers' compensation reserves consider favorable automobile liability loss costs were across both the direct and emergence on reported losses for recent accident years as well as agency distribution channels. a partially offsetting adverse impact related to two recent Florida Supreme Court rulings that have increased the Company’s Asbestos and environmental reserves were exposure to workers’ compensation claims in that state. The increased during the period as a result of the second quarter favorable emergence has been driven by lower frequency and, to 2016 comprehensive annual review. a lesser extent, lower medical severity and management has placed additional weight on this favorable experience as it Uncollectible reinsurance reserves decreased as a becomes more credible. result of giving greater weight to favorable collectibility experience in recent calendar periods in estimating future General liability reserves increased for accident years collections. 2012 - 2015 primarily due to higher severity losses incurred on a class of business that insures service and maintenance Property & Casualty Other Operations contractors and increased for accident years 2008 and 2010 Net reserves and reserve activity in Property & Casualty Other primarily due to indemnity losses and legal costs associated with Operations are categorized and reported as Asbestos, a litigated claim. Environmental, and “All other”. The “All other” category of reserves covers a wide range of insurance and assumed Package business reserves increased due to higher reinsurance coverages, including, but not limited to, potential than expected severity on liability claims, principally for accident liability for construction defects, lead paint, silica, pharmaceutical years 2013 - 2015. Severity for these accident years has products, head injuries, molestation and other long-tail liabilities. developed unfavorably and management has placed more weight In addition to various insurance and assumed reinsurance on emerged experience. exposures, "All other" includes unallocated loss adjustment expense reserves. "All other" also includes the Company’s decreased for claims Professional liability reserves allowance for uncollectible reinsurance. When the Company made years 2008 - 2013, primarily for large accounts, including commutes a ceded reinsurance contract or settles a ceded on non-securities class action cases. Claim costs have emerged reinsurance dispute, net reserves for the related cause of loss favorably as these years have matured and management has (including asbestos, environmental or all other) are increased for placed more weight on the emerged experience. the portion of the allowance for uncollectible reinsurance Automobile liability reserves increased due to attributable to that commutation or settlement. increases in both commercial lines automobile and personal lines automobile. Commercial automobile liability reserves increased, predominately for the 2015 accident year, primarily due to increased frequency of large claims. Personal automobile liability reserves increased, primarily related to increased bodily injury
52 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
P&C Other Operations Property & Casualty Reserves Total Reserves, Net of Reinsurance Asbestos and Environmental Summary as of December 31, 2018
$3,000 Total Asbestos Environmental A&E $2,075 Gross $2,000 $1,849 $1,282 $1,686 Direct $ 1,442 $ 359 $ 1,801 $1,143 $984 Assumed Reinsurance 431 54 485 $1,000 Total 1,873 413 2,286 $234 $151 $182 Ceded- other than NICO (472) (37) (509) $559 $524 $551 $0 Ceded - NICO ADC (350) (173) (523) 12/31/16 12/31/17 12/31/18 Net $ 1,051 $ 203 $ 1,254
All other Environmental Rollforward of Asbestos and Environmental Losses and LAE Asbestos Asbestos Environmental 2018 Beginning liability — net $ 1,215 $ 237 Asbestos and Environmental Reserves Losses and loss adjustment Reserves for asbestos and environmental are primarily within expenses incurred [1] — — P&C Other Operations with less significant amounts of asbestos Losses and loss adjustment and environmental reserves included within Commercial Lines expenses paid (164) (34) and Personal Lines. The following tables include all asbestos and Reclassification of allowance for environmental reserves, including reserves in P&C Other uncollectible insurance [4] — — Operations and Commercial Lines and Personal Lines. Ending liability — net $ 1,051 $ 203 Asbestos and Environmental Net Reserves 2017 Beginning liability — net $ 1,363 $ 292 Asbestos Environmental Losses and loss adjustment 2018 expenses incurred [1] — — Property and Casualty Other Losses and loss adjustment Operations $ 984 $ 151 expenses paid (149) (55) Commercial Lines and Personal Reclassification of allowance for Lines 67 52 uncollectible insurance [4] 1 — Ending liability — net $ 1,051 $ 203 Ending liability — net $ 1,215 $ 237 2017 2016 Property and Casualty Other Beginning liability — net $ 1,803 $ 318 Operations $ 1,143 $ 182 Losses and loss adjustment Commercial Lines and Personal expenses incurred 197 71 Lines 72 55 Losses and loss adjustment Ending liability — net $ 1,215 $ 237 expenses paid [2] (462) (56) 2016 Reclassification of allowance for Property and Casualty Other uncollectible insurance [4] 30 — Operations $ 1,282 $ 234 Net reserves transferred to Commercial Lines and Personal liabilities held for sale [3] (205) (41) Lines 81 58 Ending liability — net $ 1,363 $ 292 Ending liability — net $ 1,363 $ 292 [1]Cumulative incurred losses of $523, net, have been ceded to NICO under an adverse development cover reinsurance agreement. See the section that follows entitled ADC for additional information. [2]Included $289 related to the settlement in 2016 of PPG Industries, Inc. ("PPG") asbestos liabilities, net of reinsurance billed to third-party reinsurers. [3]A&E liabilities classified as held for sale related to the sale of the Company's U.K. property and casualty run-off subsidiaries. [4]Related to the reclassification of an allowance for uncollectible reinsurance from the "All Other" category of P&C Other Operations reserves.
53 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Adverse Development Cover Net and Gross Survival Ratios Effective December 31, 2016, the Company entered into an A&E ADC reinsurance agreement with NICO, a subsidiary of Berkshire Asbestos Environmental Hathaway Inc., to reduce uncertainty about potential adverse One year net survival ratio 6.4 5.9 development. Under the ADC, the Company paid a reinsurance Three year net survival ratio- premium of $650 for NICO to assume adverse net loss and excluding PPG settlement 6.6 4.2 allocated loss adjustment expense reserve development up to One year gross survival ratio 8.6 8.3 $1.5 billion above the Company’s existing net A&E reserves as of December 31, 2016 of approximately $1.7 billion. The $650 Three year gross survival ratio - excluding PPG settlement 9.1 7.1 reinsurance premium was placed in a collateral trust account as security for NICO’s claim payment obligations to the Company. The Company has retained the risk of collection on amounts due Asbestos and Environmental from other third-party reinsurers and continues to be responsible Paid and Incurred Losses and LAE for claims handling and other administrative services, subject to Development certain conditions. The ADC covers substantially all the Company’s A&E reserve development up to the reinsurance limit. Asbestos Environmental Under retroactive reinsurance accounting, net adverse A&E Paid Incurred Paid Incurred Losses & Losses & Losses & Losses & reserve development after December 31, 2016, will result in an LAE LAE LAE LAE offsetting reinsurance recoverable up to the $1.5 billion limit. Cumulative ceded losses up to the $650 reinsurance premium 2018 paid are recognized as a dollar-for-dollar offset to net losses Gross $ 218 $ 252 $ 50 $ 83 incurred before ceding to the ADC. Cumulative ceded losses Ceded- other exceeding the $650 reinsurance premium paid would result in a than NICO (54) (85) (16) (12) deferred gain. The deferred gain would be recognized over the Ceded - NICO claim settlement period in the proportion of the amount of ADC — (167) (71) cumulative ceded losses collected from the reinsurer to the Net $ 164 $ — $ 34 $ — estimated ultimate reinsurance recoveries. Consequently, until 2017 periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of A&E claims after Gross $ 199 $ 306 $ 66 $ 126 December 31, 2016 in excess of $650 may result in significant Ceded- other charges against earnings. than NICO (50) (123) (11) (24) Ceded - NICO As of December 31, 2018, the Company has incurred a ADC — (183) — (102) cumulative $523 in adverse development on A&E reserves that Net $ 149 $ — $ 55 $ — have been ceded under the ADC treaty with NICO, leaving approximately $977 of coverage available for future adverse net 2016 reserve development, if any. Gross $ 535 $ 257 $ 61 $ 77 Ceded- other Net and Gross Survival Ratios than NICO (73) (60) (5) (6) Net and gross survival ratios are a measure of the quotient of the Ceded - NICO carried reserves divided by average annual payments (net of ADC — — — — reinsurance and on a gross basis) and is an indication of the Net $ 462 $ 197 $ 56 $ 71 number of years that carried reserves would last (i.e. survive) if future annual payments were consistent with the calculated historical average. Annual Reserve Reviews The survival ratios shown below are calculated for the one and Review of Asbestos Reserves Since 2017, the Company has performed its regular three year periods ended December 31, 2018. The net basis comprehensive annual review of asbestos reserves in the fourth survival ratio has been materially affected by the adverse quarter. As part of the evaluation in the fourth quarter of 2018, development cover entered into between the Company and the Company reviewed all of its open direct domestic insurance NICO. The Company cedes adverse asbestos and environmental accounts exposed to asbestos liability, as well as assumed development in excess of its December 31, 2016 net carried reinsurance accounts. reserves of $1.7 billion to NICO up to a limit of $1.5 billion. Since December 31, 2016, net reserves for asbestos and environmental During the 2018 fourth quarter review, the Company increased have been declining as the Company has had no net incurred estimated reserves before NICO reinsurance by $167, primarily losses but continues to pay down net loss reserves. This has the due to an increase in average mesothelioma settlement values effect of reducing the one- and three-year net survival ratios driven by elevated plaintiff demands and defendant bankruptcies. shown in the table below. For asbestos, the table also presents The rise in plaintiff demands also resulted in higher than the net survival ratios excluding the effect of the PPG settlement anticipated defense costs for a small subset of peripheral in 2016. See section that follows entitled Major Categories of defendants with a high concentration of asbestos filings in Asbestos Accounts for discussion of the PPG settlement. specific, adverse jurisdictions. In addition, the Company observed unfavorable developments in the application of coverage that resulted in increased liability shares on certain insureds. An
54 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations increase in reserves from umbrella and excess policies in the costs stemming from individual bodily injury liability suits, and 1981-1985 policy years contributed to the adverse development. increased clean-up costs associated with waterways. Based on The increase in reserves was offset by a $167 reinsurance this evaluation, the Company increased its net environmental recoverable under the NICO treaty. reserves for prior year development by $71 in second quarter 2016. As a result of the 2017 fourth quarter review, the Company increased estimated reserves before NICO reinsurance by $183, Major Categories of Asbestos Accounts primarily due to mesothelioma claim filings not declining as Direct asbestos exposures include both Known and Unallocated expected, unfavorable developments in coverage law in some Direct Accounts. jurisdictions and continued filings in specific, adverse jurisdictions. An increase in reserves from umbrella and excess • Known Direct Accounts- includes both Major Asbestos policies in the 1981-1985 policy years contributed to the adverse Defendants and Non-Major Accounts, and represent development. This increase in reserves was offset by a $183 approximately 69% of the Company's total Direct gross reinsurance recoverable under the NICO treaty. asbestos reserves as of December 31, 2018 compared to approximately 63% as of December 31, 2017. Major During the 2016 second quarter review, a substantial majority of Asbestos Defendants have been defined as the “Top 70” the Company’s direct accounts trended as expected, and the accounts in Tillinghast's published Tiers 1 and 2 and Company observed no material changes in the underlying legal Wellington accounts, while Non-Major accounts are environment. However, mesothelioma claims filings have not comprised of all other direct asbestos accounts and largely declined as expected for a small subset of peripheral defendants represent smaller and more peripheral defendants. Major with a high concentration of asbestos filings in specific, adverse Asbestos Defendants have the fewest number of asbestos jurisdictions. As a result, aggregate indemnity and defense costs accounts and up through second quarter 2016 had included did not decline as expected. While the mesothelioma and adverse reserves related to PPG Industries, Inc. (“PPG”). In May 2016, jurisdiction claim trends observed in the 2016 comprehensive the Company pre-paid its funding obligation in the amount of annual review were similar to the 2015 comprehensive annual $315 as permitted under the settlement agreement, arising review, most of the defendants that had reserve increases in the from participation in a 2002 settlement of asbestos liabilities 2016 review did not have a material impact in the 2015 review. of PPG. The Company's funding obligation approximated the Based on this evaluation, the Company increased its net asbestos amount reserved for this exposure. reserves for prior year development by $197 in second quarter 2016. • Unallocated Direct Accounts- includes an estimate of the reserves necessary for asbestos claims related to direct Review of Environmental Reserves insureds that have not previously tendered asbestos claims Since 2017, the Company has performed its regular to the Company and exposures related to liability claims that comprehensive annual review of environmental reserves in the may not be subject to an aggregate limit under the applicable fourth quarter. As part of its evaluation in the fourth quarter of policies. These exposures represent approximately 31% of 2018, the Company reviewed all of its open direct domestic the Company's Direct gross asbestos reserves as of insurance accounts exposed to environmental liability, as well as December 31, 2018 compared to approximately 37% as of assumed reinsurance accounts. December 31, 2017. As a result of the 2018 fourth quarter review, the Company Review of "All Other" Reserves in Property & increased estimated reserves before NICO reinsurance by $71 Casualty Other Operations due to increased defense and clean-up costs associated with In the fourth quarters of 2018, 2017 and 2016, the Company increasingly complex remediation plans at Superfund sites, completed evaluations of certain of its non-asbestos and non- intensifying regulatory scrutiny by state agencies (particularly in environmental reserves in Property & Casualty Other the Pacific Northwest), and increased liability shares due to Operations, including its assumed reinsurance liabilities, unavailability of other responsible parties. The increase in unallocated loss adjustment expense reserves, and allowance for environmental reserves was offset by a $71 reinsurance uncollectible reinsurance. Overall prior year development on all recoverable under the NICO treaty. other reserves resulted in increases (decreases) of $65, $18 and As a result of the 2017 comprehensive annual review, the $(20), respectively for calendar years 2018, 2017 and 2016. Company increased estimated reserves before NICO reinsurance Included in the 2018 adverse reserve development was a $38 by $102. This increase was offset by a reinsurance recoverable of increase in reserves for unallocated loss adjustment expenses, $102 under the NICO cover. A substantial majority of the primarily due to an increase in expected aggregate claim handling Company’s direct environmental accounts trended as expected. costs associated with asbestos and environmental claims. However, a small percentage of the Company’s direct accounts The Company provides an allowance for uncollectible exhibited deterioration due to increased clean-up costs and reinsurance, reflecting management’s best estimate of liability shares associated with Superfund sites and sediments in reinsurance cessions that may be uncollectible in the future due waterways, as well as adverse legal rulings, most notably from to reinsurers’ unwillingness or inability to pay. During the second jurisdictions in the Pacific Northwest. and third quarters of 2018, the Company increased the allowance During the 2016 comprehensive annual review, a substantial by $19, largely driven by potential coverage disputes on a limited majority of the Company's direct environmental accounts number of claims. During the fourth quarters of 2018 and 2017, trended as expected. However, a small percentage of the and second quarter of 2016, the Company completed its annual Company's direct accounts exhibited deterioration associated evaluations of the collectability of the reinsurance recoverables with the tendering of new sites for coverage, increased defense and the adequacy of the allowance for uncollectible reinsurance associated with older, long-term casualty liabilities reported in
55 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Property & Casualty Other Operations. In conducting these Ultimate losses may vary materially from the current estimates. evaluations, the company used its most recent detailed Many factors can contribute to these variations and the need to evaluations of ceded liabilities reported in the segment. The change the previous estimate of required reserve levels. Prior Company analyzed the overall credit quality of the Company’s accident year reserve development is generally due to the reinsurers, recent trends in arbitration and litigation outcomes in emergence of additional facts that were not known or anticipated disputes between cedants and reinsurers, and recent at the time of the prior reserve estimate and/or due to changes in developments in commutation activity between reinsurers and interpretations of information and trends. cedants. As of December 31, 2018, 2017, and 2016 the allowance The table below shows the range of annual reserve re-estimates for uncollectible reinsurance for Property & Casualty Other experienced by The Hartford over the past ten years. The amount Operations totaled $105, $86 and $136, respectively. Due to the of prior accident year development (as shown in the reserve inherent uncertainties as to collection and the length of time rollforward) for a given calendar year is expressed as a percent of before reinsurance recoverables become due, particularly for the beginning calendar year reserves, net of reinsurance. The older, long-term casualty liabilities, it is possible that future ranges presented are significantly influenced by the facts and adjustments to the Company’s reinsurance recoverables, net of circumstances of each particular year and by the fact that only the allowance, could be required. the last ten years are included in the range. Accordingly, these percentages are not intended to be a prediction of the range of Impact of Re-estimates on Property possible future variability. For further discussion of the potential and Casualty Insurance Product for variability in recorded loss reserves, see Preferred Reserving Reserves Methods by Line of Business - Impact of Changes in Key Estimating property and casualty insurance product reserves Assumptions on Reserve Volatility section. uses a variety of methods, assumptions and data elements. Range of Prior Accident Year Unfavorable (Favorable) Development for the Ten Years Ended December 31, 2018
Property & Personal Casualty Other Total Property & Commercial Lines Lines Operations Casualty [1] Annual range of prior accident year unfavorable (favorable) development for the ten years ended December 31, 2018 (3.1%) - 1.0% (6.9%) - 8.3% 0.9% - 9.8% (1.1%) - 2.4% [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 (2.5%) to 1.0%. The potential variability of the Company’s property and casualty The following table summarizes the effect of reserve re- insurance product reserves would normally be expected to vary estimates, net of reinsurance, on calendar year operations for the by segment and the types of loss exposures insured by those ten-year period ended December 31, 2018. The total of each segments. Illustrative factors influencing the potential reserve column details the amount of reserve re-estimates made in the variability for each of the segments are discussed under Critical indicated calendar year and shows the accident years to which Accounting Estimates for Property & Casualty Insurance Product the re-estimates are applicable. The amounts in the total column Reserves and Asbestos and Environmental Reserves. See the on the far right represent the cumulative reserve re-estimates section entitled Property & Casualty Other Operations, Annual during the ten year period ended December 31, 2018 for the Reserve Reviews about the impact that the ADC retroactive indicated accident year in each row. reinsurance agreement with NICO may have on net reserve changes of asbestos and environmental reserves going forward.
56 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Effect of Net Reserve Re-estimates on Calendar Year Operations
Calendar Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total By Accident Year 2008 & Prior $ (186) $ (157) $ 135 $ (19) $ (28) $ 345 $ 327 $ 291 $ 83 $ (58) $ 733 2009 (39) (13) (24) (8) 7 7 10 (12) 20 (52) 2010 245 3 61 (22) 16 15 16 1 335 2011 36 148 (4) 12 (6) 6 11 203 2012 19 — (55) (35) (12) (15) (98) 2013 (98) (43) (29) (33) (2) (205) 2014 (14) 20 (19) (54) (67) 2015 191 (41) (93) 57 2016 (29) 14 (15) 2017 9 9 Increase (decrease) in net reserves $ (186) $ (196) $ 367 $ (4) $ 192 $ 228 $ 250 $ 457 $ (41) $ (167) $ 900
Accident years 2008 and Prior severity trends for personal and commercial automobile liability The net increases in estimates of ultimate losses for accident and increased severity of liability claims on package business, years 2008 and prior are driven mostly by increased reserves for offset by favorable frequency and medical severity trends for asbestos and environmental reserves, and also by increased workers' compensation. estimates for customs bonds and other mass torts claims. Accident year 2016 Partially offsetting these reserve increases was favorable Estimates of ultimate losses were decreased for the 2016 development in general liability and workers’ compensation. accident year largely due to reserve decreases on short-tail lines Additionally, reserves for professional liability were reduced due of business, where results emerge more quickly, somewhat offset to a lower estimate of claim severity in both directors’ and by unfavorable reserve estimates for higher hazard general officers’ and errors and omissions insurance claims. Reserves for liability exposures due to increased frequency and severity personal automobile liability claims were reduced largely due to trends. improvement in emerged claim severity. Accident year 2017 Accident year 2009 Ultimate loss estimates were increased for the 2017 accident Estimates of ultimate losses have emerged favorably for accident year mainly due to unfavorable reserve estimates in general year 2009 mainly related to personal automobile liability. liability, bond and commercial auto liability, largely offset by a reserve release related to catastrophes. General liability was Accident years 2010 and 2011 related to higher hazard exposures which experienced increased Unfavorable changes in estimates of ultimate losses on accident frequency and severity trends. Unfavorable bond reserve re- years 2010 and 2011 were primarily related to workers' estimates were driven by one large claim. compensation and commercial automobile liability. Workers' compensation loss cost trends were higher than initially expected as an increase in frequency outpaced a moderation of severity Group Benefit Long-term trends. Unfavorable commercial automobile liability reserve re- estimates were driven by higher frequency of large loss bodily Disability ("LTD") Reserves, Net injury claims. of Reinsurance Accident years 2012 and 2013 The Company establishes reserves for group life and accident & Estimates of ultimate losses were decreased for accident years health contracts, including long-term disability coverage, for both 2012 and 2013 due to favorable frequency and/or medical outstanding reported claims and claims related to insured events severity trends for workers’ compensation, favorable professional that the Company estimates have been incurred but have not yet liability claim emergence, and lower frequency of late emerging been reported. These reserve estimates can change over time general liability claims for the 2012 accident year. Favorable based on facts and interpretations of circumstances, and emergence of property lines of business, including catastrophes, consideration of various internal factors including The Hartford’s for the 2013 accident year, is partially offset by increased experience with similar cases, claim payment patterns, loss reserves in automobile liability due to increased severity of large control programs and mix of business. In addition, the reserve claims. estimates are influenced by various external factors including court decisions and economic conditions. The effects of inflation Accident years 2014 and 2015 are implicitly considered in the reserving process. Long-tail claim Changes in estimates of ultimate losses for accident years 2014 liabilities are discounted because the payment pattern and the and 2015 were largely driven by unfavorable frequency and ultimate costs are reasonably fixed and determinable on an
57 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations individual claim basis. The majority of Group Benefits’ reserves approval standards or benefit offerings, create a risk that the are for LTD claimants who are known to be disabled and are amount to settle open claims will exceed initial estimates. Since currently receiving benefits. The Company held $6,767 and the monthly income benefit for a claimant is established based on $6,807 of LTD unpaid losses and loss adjustment expenses, net of the individual’s salary at the time of disability and the level of reinsurance, as of December 31, 2018 and 2017, respectively. coverages and benefits provided, inflation is not considered a significant risk to the reserve estimate. Few of the Company’s Reserving Methodology LTD policies provide for cost of living adjustments to the monthly How Reserves are Set - A Disabled Life Reserve income benefit. ("DLR") is calculated for each LTD claim. The DLR for each claim is the expected present value of all future benefit payments starting Impact of Key Assumptions on with the known monthly gross benefit which is reduced for Reserves estimates of the expected claim recovery due to return to work or The key assumptions affecting our group life and accident & claimant death, offsets from other income including offsets from health reserves include: Social Security benefits, and discounting where the discount rate is tied to expected investment yield at the time the claim is Discount Rate - The discount rate is the interest rate at incurred. Estimated future benefit payments represent the which expected future claim cash flows are discounted to monthly income benefit that is paid until recovery, death or determine the present value. A higher selected discount rate expiration of benefits. Claim recoveries are estimated based on results in a lower reserve. If the discount rate is higher than our claim characteristics such as age and diagnosis and represent an future investment returns, our invested assets will not earn estimate of benefits that will terminate, generally as a result of enough investment income to cover the discount accretion on our the claimant returning to work or being deemed able to return to claim reserves which would negatively affect our profits. For work. For claims recently closed due to recovery, a portion of the each incurral year, the discount rates are estimated based on DLR is retained for the possibility that the claim reopens upon investment yields expected to be earned net of investment further evidence of disability. In addition, a reserve for estimated expenses. The incurral year is the year in which the claim is unpaid claim expenses is included in the DLR. incurred and the estimated settlement pattern is determined. The DLR also includes a liability for potential payments to Once established, discount rates for each incurral year are pending claimants beyond the elimination period who have not unchanged except that LTD reserves assumed from the yet been approved for LTD. In these cases, the present value of acquisition of Aetna's U.S. group life and disability business are all future benefits is reduced for the likelihood of claim denial based discounted using current rates as of the November 1, 2017 on Company experience. acquisition date. The weighted average discount rate on LTD reserves was 3.4% and 3.5% in 2018 and 2017, respectively. Had Estimates for incurred but not reported ("IBNR") claims are made the discount rate for each incurral year been 10 basis points by applying completion factors to expected emerged experience lower at the time they were established, our LTD unpaid loss and by line of business. Included within IBNR are bulk reserves for loss adjustment expense reserves would be higher by $32, pretax, claims reported but still within the waiting period, typically 3 or 6 as of December 31, 2018. months depending on the contract. Completion factors are derived from standard actuarial techniques using triangles that Claim Termination Rates (inclusive of display historical claim count emergence by incurral month. These mortality, recoveries, and expiration of estimates are reviewed for reasonableness and are adjusted for current trends and other factors expected to cause a change in benefits) - Claim termination rates are an estimate of the claim emergence. The reserves include an estimate of unpaid rate at which claimants will cease receiving benefits during a claim expenses, including a provision for the cost of initial set-up given calendar year. Terminations result from a number of factors, of the claim once reported. including death, recoveries and expiration of benefits. The probability that benefits will terminate in each future month for For all products, including LTD, there is a period generally ranging each claim is estimated using a predictive model that uses past from two to twelve months, depending on the product and line of Company experience, contract provisions, job characteristics and business, where emerged claims for an incurral year are not yet other claimant-specific characteristics such as diagnosis, time credible enough to be a basis for estimating reserves. In these since disability began, and age. Actual claim termination cases, the ultimate loss is estimated using earned premium experience will vary from period to period. Over the past 10 multiplied by an expected loss ratio based on pricing assumptions years, claim termination rates for a single incurral year have of claim incidence, claim severity, and earned pricing. generally increased and have ranged from 6% below to 13% Current Trends Contributing to above current assumptions over that time period. For a single recent incurral year (such as 2018), a one percent decrease in our Reserve Uncertainty assumption for LTD claim termination rates would increase our In group insurance, LTD has the longest pattern of loss emergence reserves by $9. For all incurral years combined, as of and the highest reserve amount. One significant risk to the December 31, 2018, a one percent decrease in our assumption reserve would be a slowdown in recoveries. In particular, the for our LTD claim termination rates would increase our Group economic environment can affect the ability of a disabled Benefits unpaid losses and loss adjustment expense reserves by employee to return-to-work and the length of time an employee $22. receives disability benefits. Another significant risk is a change in benefit offsets. Often the Company pays a reduced benefit due to offsets from other income sources such as pensions or Social Security Disability Insurance ("SSDI"). Possible changes to the frequency, timing, or amount of offsets, such as a change in SSDI
58 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
priority order: quoted prices, prices from third-party pricing Evaluation of Goodwill for services, internal matrix pricing, and independent broker quotes. The fair value of free-standing derivative instruments are Impairment determined primarily using a discounted cash flow model or Goodwill balances are reviewed for impairment at least annually, option model technique and incorporate counterparty credit risk. or more frequently if events occur or circumstances change that In some cases, quoted market prices for exchange-traded would indicate that a triggering event for a potential impairment transactions and transactions cleared through central clearing has occurred. The goodwill impairment test follows a two-step houses ("OTC-cleared") may be used and in other cases process. In the first step, the fair value of a reporting unit is independent broker quotes may be used. For further discussion, compared to its carrying value. If the carrying value of a reporting see the Fixed Maturities, Equity Securities, Short-term unit exceeds its fair value, the second step of the impairment test Investments and Free-standing Derivatives section in Note 5 - is performed for purposes of measuring the impairment. In the Fair Value Measurements of Notes to Consolidated Financial second step, the fair value of the reporting unit is allocated to all Statements. of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting Evaluation of OTTI on Available-for- unit’s goodwill exceeds the implied goodwill value, an impairment sale Securities and Valuation loss is recognized in an amount equal to that excess, not to exceed the goodwill carrying value. Allowances on Mortgage Loans Each quarter, a committee of investment and accounting The estimated fair value of each reporting unit incorporates professionals evaluates investments to determine if an other- multiple inputs into discounted cash flow calculations including than-temporary impairment (“impairment”) is present for AFS assumptions that market participants would make in valuing the securities or a valuation allowance is required for mortgage loans. reporting unit. Assumptions include levels of economic capital, This evaluation is a quantitative and qualitative process, which is future business growth, earnings projections, assets under subject to risks and uncertainties. For further discussion of the management for Hartford Funds, and the weighted average cost accounting policies, see the Significant Investment Accounting of capital used for purposes of discounting. Decreases in business Policies Section in Note 1 - Basis of Presentation and Significant growth, decreases in earnings projections and increases in the Accounting Policies of Notes to Consolidated Financial weighted average cost of capital will all cause a reporting unit’s Statements. For a discussion of impairments recorded, see the fair value to decrease, increasing the possibility of impairment. Other-than-temporary Impairments within the Investment A reporting unit is defined as an operating segment or one level Portfolio Risks and Risk Management section of the MD&A. below an operating segment. The Company’s reporting units, for which goodwill has been allocated include small commercial Valuation Allowance on within the Commercial Lines segment, Group Benefits, Personal Lines and Hartford Funds. Deferred Tax Assets The carrying value of goodwill is $1,290 as of December 31, 2018 Deferred tax assets represent the tax benefit of future deductible and is comprised of $38 for small commercial, $272 for Hartford temporary differences and certain tax carryforwards. Deferred Funds, $861 for Group Benefits and $119 for Personal Lines. tax assets are measured using the enacted tax rates expected to be in effect when such benefits are realized if there is no change The annual goodwill assessment for the small commercial, in tax law. Under U.S. GAAP, we test the value of deferred tax Hartford Funds, Group Benefits and Personal Lines reporting assets for impairment on a quarterly basis at the entity level units was completed as of October 31, 2018, and resulted in no within each tax jurisdiction, consistent with our filed tax returns. write-downs of goodwill for the year ended December 31, 2018. Deferred tax assets are reduced by a valuation allowance if, based All reporting units passed the first step of the annual impairment on the weight of available evidence, it is more likely than not that test with a significant margin. For information regarding the 2017 some portion, or all, of the deferred tax assets will not be realized. and 2016 impairment tests see Note 10 -Goodwill & Other The determination of the valuation allowance for our deferred Intangible Assets of Notes to Consolidated Financial Statements. tax assets requires management to make certain judgments and assumptions. In evaluating the ability to recover deferred tax Valuation of Investments and assets, we have considered all available evidence as of December 31, 2018, including past operating results, forecasted Derivative Instruments earnings, future taxable income, and prudent and feasible tax planning strategies. In the event we determine it is more likely Fixed Maturities, Equity Securities, than not that we will not be able to realize all or part of our Short-term Investments and Free- deferred tax assets in the future, an increase to the valuation allowance would be charged to earnings in the period such standing Derivatives determination is made. Likewise, if it is later determined that it is The Company generally determines fair values using valuation more likely than not that those deferred tax assets would be techniques that use prices, rates, and other relevant information realized, the previously provided valuation allowance would be evident from market transactions involving identical or similar reversed. Our judgments and assumptions are subject to change instruments. Valuation techniques also include, where given the inherent uncertainty in predicting future performance appropriate, estimates of future cash flows that are converted and specific industry and investment market conditions. into a single discounted amount using current market expectations. The Company uses a "waterfall" approach As of December 31, 2018 and December 31, 2017, the Company comprised of the following pricing sources which are listed in had no valuation allowance. The reduction in the valuation
59 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations allowance in 2016 stems primarily from taxable gains on the termination of derivatives during the period. The Company’s net Contingencies Relating to operating loss carryovers, if unused, would expire between 2026 and 2036. As of December 31, 2018, the Company projects there Corporate Litigation and will be sufficient future taxable income to fully recover the Regulatory Matters remainder of its loss carryovers, though the Company's estimate of the likely realization may change over time. As of December 31, Management evaluates each contingent matter separately. A loss 2018, the Company had AMT credit carryovers of $841 which are is recorded if probable and reasonably estimable. Management reflected as a current income tax receivable within Other Assets establishes reserves for these contingencies at its “best estimate,” in the accompanying consolidated balance sheet. AMT credits or, if no one number within the range of possible losses is more may be used to offset a regular tax liability for any taxable year probable than any other, the Company records an estimated beginning after December 31, 2017, and are refundable at an reserve at the low end of the range of losses. amount equal to 50 percent of the excess of the minimum tax The Company has a quarterly monitoring process involving legal credit for the taxable year over the amount of the credit and accounting professionals. Legal personnel first identify allowable for the year against regular tax liability. Any remaining outstanding corporate litigation and regulatory matters posing a credits not used against regular tax liability are refundable in the reasonable possibility of loss. These matters are then jointly 2021 tax year to be realized in 2022. For additional information reviewed by accounting and legal personnel to evaluate the facts about Tax Reform, see Note - 16, Income Taxes of Notes to and changes since the last review in order to determine if a Consolidated Financial Statements. provision for loss should be recorded or adjusted, the amount In assessing the need for a valuation allowance, management that should be recorded, and the appropriate disclosure. The considered future taxable temporary difference reversals, future outcomes of certain contingencies currently being evaluated by taxable income exclusive of reversing temporary differences and the Company, which relate to corporate litigation and regulatory carryovers, taxable income in open carry back years and other tax matters, are inherently difficult to predict, and the reserves that planning strategies. From time to time, tax planning strategies have been established for the estimated settlement amounts are could include holding a portion of debt securities with market subject to significant changes. Management expects that the value losses until recovery, altering the level of tax exempt ultimate liability, if any, with respect to such lawsuits, after securities held, making investments which have specific tax consideration of provisions made for estimated losses, will not be characteristics, and business considerations such as asset-liability material to the consolidated financial condition of the Company. matching. Management views such tax planning strategies as In view of the uncertainties regarding the outcome of these prudent and feasible, and would implement them, if necessary, to matters, as well as the tax-deductibility of payments, it is possible realize the deferred tax assets. that the ultimate cost to the Company of these matters could exceed the reserve by an amount that would have a material adverse effect on the Company’s consolidated results of operations and liquidity in a particular quarterly or annual period.
60 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations SEGMENT OPERATING SUMMARIES
COMMERCIAL LINES Results of Operations Underwriting Summary
2018 2017 2016 Written premiums $ 7,136 $ 6,956 $ 6,732 Change in unearned premium reserve 89 91 81 Earned premiums 7,047 6,865 6,651 Fee income 34 37 39 Losses and loss adjustment expenses Current accident year before catastrophes 4,037 3,961 3,766 Current accident year catastrophes [1] 275 383 200 Prior accident year development [1] (200) (22) 28 Total losses and loss adjustment expenses 4,112 4,322 3,994 Amortization of DAC 1,048 1,009 973 Underwriting expenses 1,369 1,347 1,230 Amortization of other intangible assets 4 1 — Dividends to policyholders 23 35 15 Underwriting gain 525 188 478 Net servicing income 2 1 2 Net investment income [2] 997 949 917 Net realized capital gains (losses) [2] (43) 103 13 Other income (expenses) (2) 1 (1) Income before income taxes 1,479 1,242 1,409 Income tax expense [3] 267 377 415 Net income $ 1,212 $ 865 $ 994 [1]For discussion of current accident year catastrophes and prior accident year development, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves Development, Net of Reinsurance. [2]For discussion of consolidated investment results, see MD&A - Investment Results. [3]For discussion of income taxes, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements. Premium Measures [1]
2018 2017 2016 New business premium $ 1,298 $ 1,183 $ 1,140 Standard commercial lines policy count retention 82% 84% 84% Standard commercial lines renewal written price increase 2.1% 3.2% 2.2% Standard commercial lines renewal earned price increase 3.0% 2.8% 2.3% Standard commercial lines policies in-force as of end of period (in thousands) 1,340 1,338 1,346 [1]Standard commercial lines consists of small commercial and middle market. Standard commercial premium measures exclude Maxum, higher hazard general liability in middle market and livestock lines of business.
61 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Underwriting Ratios
2018 2017 2016 Loss and loss adjustment expense ratio Current accident year before catastrophes 57.3 57.7 56.6 Current accident year catastrophes 3.9 5.6 3.0 Prior accident year development (2.8) (0.3) 0.4 Total loss and loss adjustment expense ratio 58.4 63.0 60.1 Expense ratio 33.9 33.8 32.5 Policyholder dividend ratio 0.3 0.5 0.2 Combined ratio 92.6 97.3 92.8 Current accident year catastrophes and prior year development 1.1 5.3 3.4 Underlying combined ratio 91.5 92.0 89.4
2019 Outlook Year ended December 31, 2018 compared The Company expects higher Commercial Lines written to the year ended December 31, 2017 premiums in 2019, driven by continued strong policy retention in increased in 2018 due to a higher underwriting small commercial and national accounts, growth in industry Net income gain, a lower corporate Federal income tax rate and, to a lesser verticals in middle market and an increase in new business across extent, an increase in net investment income, partially offset by a Commercial Lines. Management expects positive renewal written shift from net realized capital gains in 2017 to net realized capital pricing in all lines of business except workers' compensation, losses in 2018. (For further discussion of investment results, see which is expected to be flat to down modestly. In addition to the MD&A - Investment Results). impact of pricing trends, written premium growth in 2019 will depend on economic conditions as economic growth is expected Year ended December 31, 2017 compared to moderate in 2019. to the year ended December 31, 2016 Pricing varies significantly by product line with low-to-mid single digit pricing increases expected in property and general liability Net income decreased in 2017 due to a lower underwriting and higher written pricing increases expected in commercial gain, partially offset by increases in net investment income and automobile. In workers’ compensation, given favorable net realized capital gains. (For further discussion of investment profitability trends, rates are expected to decline in 2019. results, see MD&A - Investment Results). The Company expects the Commercial Lines combined ratio will Underwriting Gain be between approximately 94.5 and 96.5 for 2019, compared to 92.6 in 2018, largely due to lower favorable prior year development, partially offset by lower catastrophe losses $800 expected in 2019. The underlying combined ratio is expected to be flat to slightly higher as earned pricing increases may not keep $600 $525 pace with moderate increases in loss costs, and the Company $478 continues to invest in the business . Current accident year catastrophes are assumed to be 3.0 points of the combined ratio $400 in 2019 compared to 3.9 points in 2018. $188 Net Income $200
$0 $1,500 2016 2017 2018 $1,212 $1,250 $994 $1,000 $865 Year ended December 31, 2018 compared to the year ended December 31, 2017 $750 Underwriting gain increased in 2018 primarily due to $500 more favorable prior accident year reserve development in 2018 2016 2017 2018 compared to 2017, lower current accident year catastrophes, and higher earned premium, partially offset by higher underwriting expenses, including higher amortization of DAC.
62 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year ended December 31, 2017 compared rights agreement with Farmers Group to acquire its Foremost-branded small commercial business. The increase in to the year ended December 31, 2016 new business premium was largely offset by the decline in renewal premium. The decline in renewal premium was driven decreased in 2017 primarily due to Underwriting gain by the effect of lower policy retention, partially offset by higher catastrophe losses and higher underwriting expenses renewal written price increases. largely driven by an increase in variable incentive compensation and higher IT costs. Also contributing to the decrease were higher • Middle market written premium growth in 2018 was primarily current accident year loss costs for workers’ compensation, due to strong new business growth, improved retention and general liability and non-catastrophe property, offset by the higher renewal written price increases. effect of earned premium growth and a change from unfavorable prior accident year development in 2016 to favorable • Specialty commercial written premium increased in 2018 development in 2017. driven by growth in financial products and bond, partially offset by a decline in National Accounts. Earned Premiums Year ended December 31, 2017 compared to the year ended December 31, 2016 $8,000 increased in 2017 reflecting written $7,047 Earned premiums $6,865 $7,000 $6,651 premium growth over the preceding twelve months. $3,730 $3,646 $3,467 $6,000 Written premiums increased in 2017 primarily due to growth in small commercial. $5,000 • Small commercial written premium growth for 2017 was
$4,000 primarily due to higher renewal premium driven by renewal written price increases and growth from the acquisition of
$3,000 $2,421 Maxum, partially offset by lower new business premium, $2,334 $2,349 excluding Maxum, and the effect of lower policy retention. $2,000 • Middle market written premiums in 2017 were up modestly $1,000 as higher new and renewal premium was partially offset by $808 $824 $851 modestly higher property reinsurance costs. $0 • Specialty commercial written premiums in 2017 were up 2016 2017 2018 slightly as growth in Bond was largely offset by new business declines in National Accounts.
Specialty Commercial
Middle Market
Small Commercial
Other [1]
[1]Other of $45, $46, and $42 for 2018, 2017, and 2016, respectively, is included in the total. Year ended December 31, 2018 compared to the year ended December 31, 2017 Earned premiums increased in 2018 reflecting written premium growth over the preceding twelve months.
Written premiums increased in 2018 primarily due to growth in middle market, small commercial and specialty commercial. In standard commercial lines, renewal written price increases declined in 2018, mostly attributable to bigger rate decreases in small commercial workers' compensation. New business and renewal written premium increased across most lines of business, particularly in middle market, partially offset by declines in small commercial workers' compensation. • Small commercial written premium increased in 2018, primarily driven by the business acquired under a renewal
63 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Loss and LAE Ratio before Catastrophes and Catastrophes and Prior Accident Year Prior Accident Year Development Development
70 $500 $383 $400 57.7 60 56.6 57.3 $275 $300 $200 $200 50 $100 $28
40 $0
-$100 $(22) 30 -$200 $(200) -$300 20 CAY CATs PYD
10 2016 2017 2018
0
Year ended December 31, 2018 compared
2016 2017 2018 to the year ended December 31, 2017 Current accident year catastrophe losses for 2018 were lower than in 2017 with catastrophes in 2018 primarily from hurricanes Florence and Michael in the Southeast, Year ended December 31, 2018 compared wildfires in California, wind and hail storms in Colorado, and to the year ended December 31, 2017 various wind storms and winter storms across the country. Catastrophe losses in 2018 are net of an estimated reinsurance Loss and LAE ratio before catastrophes and recoverable of $28 under the 2018 Property Aggregate prior accident year development decreased slightly reinsurance treaty that was allocated to Commercial Lines. in 2018, primarily due to a lower loss and loss adjustment Catastrophe losses in 2017 were primarily from hurricanes expense ratio in general liability and commercial auto. The Harvey and Irma as well as from wind and hail events in the current accident year loss and loss adjustment expense ratio for Midwest, Texas and Colorado. workers' compensation was relatively flat as the effect of higher was a net claim frequency was largely offset by the benefit of increased Prior accident year development favorable $200, before tax, for 2018 compared to favorable $22, audit premium driven by higher than initially estimated insured before tax, for 2017. Net reserve decreases for 2018 were payroll. primarily related to decreases for workers' compensation, Year ended December 31, 2017 compared catastrophes and unallocated loss adjustment expense reserves, partially offset by an increase in general liability reserves. to the year ended December 31, 2016 Estimated losses for 2017 catastrophe events in Commercial Loss and LAE ratio before catastrophes and Lines decreased by $93 in 2018 resulting in a decrease in reinsurance recoverables of $43 as the Company no longer prior accident year development increased in expects to recover under the 2017 Property Aggregate 2017, primarily due to a higher loss and loss adjustment expense reinsurance treaty. ratio in both workers' compensation and general liability, as well as higher commercial property losses in middle market. The Year ended December 31, 2017 compared workers’ compensation current accident year loss ratio deteriorated from 2016 to 2017 as increases in average claim to the year ended December 31, 2016 severity outpaced the effect of earned pricing and a modest Current accident year catastrophe losses for reduction in loss cost frequency. 2017 were primarily from hurricanes Harvey and Irma as well as from wind and hail events in the Midwest, Texas and Colorado. Catastrophe losses for 2016 were primarily due to wind and hail events and winter storms across various U.S. geographic regions.
Prior accident year development was favorable in 2017 compared to unfavorable prior accident year development
64 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in 2016. Net reserve decreases for 2017 were primarily related to reduced loss reserve estimates for workers' compensation and small commercial package business, partially offset by reserve increases for bond.
PERSONAL LINES Results of Operations Underwriting Summary
2018 2017 2016 Written premiums $ 3,276 $ 3,561 $ 3,837 Change in unearned premium reserve (123) (129) (61) Earned premiums 3,399 3,690 3,898 Fee income 40 44 39 Losses and loss adjustment expenses Current accident year before catastrophes 2,249 2,584 2,808 Current accident year catastrophes [1] 546 453 216 Prior accident year development [1] (32) (37) 151 Total losses and loss adjustment expenses 2,763 3,000 3,175 Amortization of DAC 275 309 348 Underwriting expenses 611 577 599 Amortization of other intangible assets 4 4 4 Underwriting loss (214) (156) (189) Net servicing income [2] 16 16 20 Net investment income [3] 155 141 135 Net realized capital gains (losses) [3] (7) 15 2 Other income (expenses) (1) 1 — Income (loss) before income taxes (51) 17 (32) Income tax expense (benefit) [4] (19) 26 (23) Net loss $ (32) $ (9) $ (9) [1]For discussion of current accident year catastrophes and prior accident year development, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance. [2]Includes servicing revenues of $84, $85, and $86 for 2018, 2017, and 2016, respectively and includes servicing expenses of $68, $69, and $66 for 2018, 2017, and 2016, respectively. [3]For discussion of consolidated investment results, see MD&A - Investment Results. [4]For discussion of income taxes, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements. Written and Earned Premiums
Written Premiums 2018 2017 2016 Product Line Automobile $ 2,273 $ 2,497 $ 2,694 Homeowners 1,003 1,064 1,143 Total $ 3,276 $ 3,561 $ 3,837 Earned Premiums Product Line Automobile $ 2,369 $ 2,584 $ 2,720 Homeowners 1,030 1,106 1,178 Total $ 3,399 $ 3,690 $ 3,898
65 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Premium Measures
2018 2017 2016 Policies in-force end of period (in thousands) Automobile 1,510 1,702 1,965 Homeowners 927 1,038 1,176 New business written premium Automobile $ 169 $ 152 $ 311 Homeowners $ 46 $ 44 $ 74 Policy count retention Automobile 82% 81% 84% Homeowners 83% 83% 84% Renewal written price increase Automobile 7.2% 10.9% 7.6% Homeowners 9.7% 8.9% 8.0% Renewal earned price increase Automobile 9.6% 9.6% 6.3% Homeowners 9.3% 8.5% 7.6%
Underwriting Ratios
2018 2017 2016 Loss and loss adjustment expense ratio Current accident year before catastrophes 66.2 70.0 72.0 Current accident year catastrophes 16.1 12.3 5.5 Prior accident year development (0.9) (1.0) 3.9 Total loss and loss adjustment expense ratio 81.3 81.3 81.5 Expense ratio 25.0 22.9 23.4 Combined ratio 106.3 104.2 104.8 Current accident year catastrophes and prior year development 15.2 11.3 9.4 Underlying combined ratio 91.2 93.0 95.4
Product Combined Ratios
2018 2017 2016 Automobile Combined ratio 98.6 101.6 111.6 Underlying combined ratio 98.2 99.7 103.9 Homeowners Combined ratio 124.3 110.4 89.3 Underlying combined ratio 75.1 77.1 75.9
2019 Outlook The Company expects the combined ratio for Personal Lines will be between approximately 97.5 and 99.5 for 2019 compared to In 2019, the Company expects the level of pricing increases for 106.3 in 2018, primarily due to lower current accident year automobile and homeowners across the industry to decrease, as catastrophes with the underlying combined ratio flat to slightly loss cost trends have moderated. Accordingly, the Company higher, as the Company increases spending on marketing. Current expects written pricing increases in 2019 to be in the mid single- accident year catastrophes are budgeted to be 6.5 points of the digits for automobile and high single-digits for homeowners. combined ratio in 2019 compared with 16.1 points in 2018. For Written premium is expected to decline slightly in 2019 as non- automobile, we expect the underlying combined ratio to improve renewal of premium more than offsets new business growth, slightly as a modest loss ratio improvement is partially offset by particularly in the agency channel. The Company expects to drive an increase in acquisition costs to increase new business. While new business growth in more states in 2019, particularly in the management actions, including the effect of earned pricing, are direct channel. expected to modestly exceed an increase in loss cost severity,
66 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations those will be partially offset by an increase in direct marketing Year ended December 31, 2018 compared and other expenses to generate new business. The underlying combined ratio for homeowners is expected to increase slightly in to the year ended December 31, 2017 2019, driven by a return to a more normal level of non- increased in 2018 primarily due to catastrophe weather loss experience and higher acquisition costs, Underwriting loss higher current accident year catastrophe losses, higher partially offset by earned pricing increases. underwriting expenses and the effect of lower earned premium, Net Loss partially offset by lower current accident year loss ratios before catastrophes in both auto and homeowners and lower amortization of DAC. The increase in underwriting expenses was largely driven by an increase in direct marketing spending, selling $100 expenses, and operational costs to generate new business. Year ended December 31, 2017 compared to the year ended December 31, 2016 $0 Underwriting loss decreased in 2017 primarily due to a $(9) $(9) change from unfavorable prior accident year development in $(32) 2016 to favorable development in 2017 and lower current accident year loss costs in both auto and homeowners, partially -$100 offset by higher current accident year catastrophe losses. The 2016 2017 2018 decrease in underwriting expenses was primarily due to lower marketing and operations costs, partially offset by higher variable incentive compensation and the decrease in DAC amortization was driven primarily by lower Agency commissions. Year ended December 31, 2018 compared Earned Premiums to the year ended December 31, 2017 Net loss was higher in 2018 than in 2017 due to a higher underwriting loss, a change to net realized capital losses and the effect of a lower corporate income tax rate, partially offset by $4,500 $3,898 $3,690 higher net investment income. $3,399 $2,720 $2,584 $3,000 $2,369 Year ended December 31, 2017 compared to the year ended December 31, 2016 $1,500 $1,178 $1,106 $1,030 $0 Net loss in 2017 was unchanged from 2016 as lower underwriting loss and higher net realized capital gains was offset 2016 2017 2018 by $33 of income tax expense arising primarily from the reduction of net deferred tax assets due to the enactment of lower Federal Homeowners Automobile income tax rates. Underwriting Loss Year ended December 31, 2018 compared
$200 to the year ended December 31, 2017 decreased in 2018, reflecting a decline $100 Earned premiums in written premium over the prior six to twelve months in both
$0 Agency channels and, to a lesser extent, in AARP Direct. Written premiums decreased in 2018 in AARP Direct and -$100 both Agency channels. Despite an increase in new business and stable policy count retention in both auto and homeowners, -$200 $(156) $(189) written premium declined primarily due to not generating enough $(214) new business to offset the loss of non-renewed premium. -$300 2016 2017 2018 Renewal written pricing increases in 2018 were higher in homeowners driven by actions taken to improve profitability and were lower in automobile as loss cost trends have moderated and the Company has sought to increase new business. Policy count retention increased in automobile as renewal written price increases decreased. Policy count
67 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations retention in homeowners was flat despite higher renewal written Year ended December 31, 2018 compared price increases. to the year ended December 31, 2017 Policies in-force decreased in 2018 in both automobile and homeowners, driven by not generating enough new business Loss and loss adjustment expense ratio to offset the loss of non-renewed policies. before catastrophes and prior accident year development decreased in 2018, primarily due to the effect Year ended December 31, 2017 compared of earned pricing increases in both automobile and homeowners to the year ended December 31, 2016 and lower non-catastrophe weather-related homeowners loss costs. Earned premiums decreased in 2017, reflecting a decline in written premium over the prior six to twelve months in the Year ended December 31, 2017 compared Other Agency channel and, to a lesser extent, in AARP Direct. to the year ended December 31, 2016 Written premiums decreased in 2017 in AARP Direct and Loss and loss adjustment expense ratio both Agency channels primarily due to a decline in new business and lower policy count retention in both automobile and before catastrophes and prior accident year homeowners partially offset by the effect of renewal written development decreased in 2017, primarily as a result of price increases. lower automobile liability and auto physical damage frequency and lower non-catastrophe weather-related homeowners losses Renewal written pricing increases were higher in 2017 in both and the effect of earned pricing increases. automobile and home, as the Company increased rates to improve profitability. Current Accident Year Catastrophes and Unfavorable (Favorable) Prior Accident Year Policy count retention decreased in 2017 in both automobile and homeowners, driven in part by renewal written Development pricing increases.
Loss and Loss Adjustment Expense Ratio $600 $546 before Catastrophes and Prior Accident Year $550 Development $500 $453 $450
80 $400 72.0 70.0 $350 70 66.2 $300
$250 $216 60 $200 $151 50 $150 $100
40 $50
$0 30 -$50 $(37) $(32) -$100 20 CAY CATs PYD
10 2016 2017 2018
0
Year ended December 31, 2018 compared 2016 2017 2018 to the year ended December 31, 2017 Current accident year catastrophe losses for 2018 were primarily from wildfires in California, wind and hail storms in Colorado, hurricanes Florence and Michael in the Southeast and various wind storms and winter storms across the country. Catastrophe losses in 2018 are net of an estimated
68 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations reinsurance recoverable of $54 under the 2018 Property Current accident year catastrophe losses for Aggregate reinsurance treaty that was allocated to Personal 2017 were primarily due to hurricanes Harvey and Irma and Lines. Catastrophe losses for 2017 were primarily due to wildfires in California as well as multiple wind and hail events hurricanes Harvey and Irma and wildfires in California as well as across various U.S. geographic regions, concentrated in Texas, multiple wind and hail events across various U.S. geographic Colorado, the Midwest and the Southeast. Catastrophe losses for regions, concentrated in Texas, Colorado, the Midwest and the 2016 were primarily due to multiple wind and hail events across Southeast. various U.S. geographic regions, concentrated in the Midwest and central plains. Prior accident year development was less favorable in 2018 than in 2017 with favorable development in 2018 Prior accident year development was favorable for primarily in automobile liability. 2017 compared to unfavorable prior accident year development for 2016. Net reserves decreased in 2017 primarily due to Year ended December 31, 2017 compared decreases in reserves for prior accident year catastrophes and to the year ended December 31, 2016 homeowners. PROPERTY & CASUALTY OTHER OPERATIONS Results of Operations Underwriting Summary
2018 2017 2016 Written premiums $ (4) $ — $ (1) Change in unearned premium reserve (4) — (1) Earned premiums — — — Losses and loss adjustment expenses Prior accident year development [1] 65 18 278 Total losses and loss adjustment expenses 65 18 278 Underwriting expenses 12 14 19 Underwriting loss (77) (32) (297) Net investment income [2] 90 106 127 Net realized capital gains (losses) [2] (4) 14 (70) Loss on reinsurance transaction — — 650 Other income (expenses) (1) 5 6 Income (loss) before income taxes 8 93 (884) Income tax expense (benefit) [3] (7) 24 (355) Net income (loss) $ 15 $ 69 $ (529) [1]For discussion of prior accident year development, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance. [2]For discussion of consolidated investment results, see MD&A - Investment Results. [3]For discussion of income taxes, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements.
69 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Income (Loss) Pre-tax Charge for Asbestos and Environmental Reserve Increases
$200 $69 $15 $300 $268 $0 $200 $197
$100 -$200 $71 $0 $0 $0 2016 2017 2018 -$400
Environmental Asbestos
-$600 $(529)
-$800 Year ended December 31, 2018 compared 2016 2017 2018 to the year ended December 31, 2017 reflected no net incurred losses and Asbestos Reserves allocated loss adjustment expenses in 2018 as a $167 increase in Year ended December 31, 2018 compared estimated reserves before NICO reinsurance was offset by $167 of losses recoverable under the NICO treaty. The increase in to the year ended December 31, 2017 reserves before NICO reinsurance was primarily due to a higher than previously expected number of mesothelioma claim filings, Net income decreased from 2017 to 2018, primarily due to an increase in the average settlement value of mesothelioma greater adverse reserve development in 2018 related to claims, an increase in defense costs, and the Company assuming a unallocated loss adjustment expenses, the allowance for greater share of liability due to unfavorable interpretations of uncollectible reinsurance and certain mass torts. Also coverage. An increase in reserves from umbrella and excess contributing to the decrease was lower net investment income policies in the 1981-1985 policy years contributed to the adverse driven by the decline in invested assets associated with this run- development. off business. Environmental Reserves reflected no net incurred Year ended December 31, 2017 compared losses and allocated loss adjustment expenses in 2018 as a $71 to the year ended December 31, 2016 increase in estimated reserves before NICO reinsurance was offset by $71 of loss recoverable under the NICO treaty. The Net loss improved from a loss of $529 to net income of $69 increase in reserves before NICO reinsurance was primarily due primarily due to ceded premium of $423 after tax incurred in to increased clean-up costs and liability shares associated with 2016 for an Adverse Reserve Development ("ADC") reinsurance Superfund sites and sediment in waterways, increased defense cover on asbestos and environmental reserves after 2016. (For costs and adverse legal rulings, most notably from jurisdictions in further discussion on the ADC, see MD&A - Critical Accounting the Pacific Northwest. Estimates, Property and Casualty Other Operations). Prior accident year asbestos and environmental losses in 2016 before Year ended December 31, 2017 compared execution of the ADC also contributed to the year over year to the year ended December 31, 2016 improvement. Asbestos Reserves reflected no net incurred losses and allocated loss adjustment expenses in 2017 as a $183 increase in estimated reserves before NICO reinsurance was offset by $183 of losses recoverable under the NICO treaty. The increase in reserves before NICO reinsurance was primarily due to mesothelioma claim filings not declining as expected, unfavorable developments in coverage law in some jurisdictions and continued filings in specific, adverse jurisdictions. An increased share of adverse development from the fourth quarter review is from umbrella and excess policies in the 1981-1985 policy years. Environmental Reserves reflected no net incurred losses and allocated loss adjustment expenses in 2017 as a $102 increase in estimated reserves before NICO reinsurance was offset by $102 of loss recoverable under the NICO treaty. The
70 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations increase in reserves before NICO reinsurance was primarily due legal rulings, most notably from jurisdictions in the Pacific to increased clean-up costs and liability shares associated with Northwest. Superfund sites and sediment in waterways, as well as adverse GROUP BENEFITS Results of Operations Operating Summary
2018 2017 [1] 2016 Premiums and other considerations $ 5,598 $ 3,677 $ 3,223 Net investment income [2] 474 381 366 Net realized capital gains (losses) [2] (47) 34 45 Total revenues 6,025 4,092 3,634 Benefits, losses and loss adjustment expenses 4,214 2,803 2,514 Amortization of DAC 45 33 31 Insurance operating costs and other expenses 1,282 915 776 Amortization of other intangible assets 60 9 — Total benefits, losses and expenses 5,601 3,760 3,321 Income before income taxes 424 332 313 Income tax expense [3] 84 38 83 Net income $ 340 $ 294 $ 230 [1]The Results of Operations related to 2017 include two months of results from Aetna's U.S. group life and disability business due to the acquisition that occurred on November 1, 2017. For discussion of the acquisition, see Note 2 - Business Acquisitions of Notes to the Consolidated Financial Statements. [2]For discussion of consolidated investment results, see MD&A - Investment Results. [3]For discussion of income taxes, see Note 16 - Income Taxes of Notes to the Consolidated Financial Statements. Premiums and Other Considerations
2018 2017 2016 Fully insured — ongoing premiums $ 5,418 $ 3,571 $ 3,142 Buyout premiums 5 15 6 Fee income 175 91 75 Total premiums and other considerations $ 5,598 $ 3,677 $ 3,223 Fully insured ongoing sales, excluding buyouts $ 704 $ 449 $ 450
Ratios, Excluding Buyouts
2018 2017 2016 Group disability loss ratio 73.1% 76.5% 81.4% Group life loss ratio 78.4% 76.7% 75.7% Total loss ratio 75.3% 76.1% 78.0% Expense ratio [1] 24.0% 25.7% 25.1% [1] Integration and transaction costs related to the acquisition of Aetna's U.S. group life and disability business are not included in the expense ratio. Margin
2018 2017 2016 Net income margin 5.6% 7.2% 6.3% Less: Net realized capital gains (losses) excluded from core earnings, after tax (0.6%) 0.4% 0.6% Less: Integration and transaction costs associated with acquired business, after tax (0.6%) (0.3%) —% Less: Income tax benefit (0.2%) 1.3% —% Core earnings margin 7.0% 5.8% 5.7%
71 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2019 Outlook Year ended December 31, 2017 compared The Company expects Group Benefits fully insured ongoing to the year ended December 31, 2016 premiums to be relatively flat in 2019, driven by an expected increased in 2017 compared to 2016, primarily decrease in sales, partly due to the introduction of the New York Net income due to $52 of income tax benefits arising primarily from the Paid Family Leave product in 2018, offset by strong persistency. reduction of net deferred tax liabilities due to the enactment of In 2019, the segment's net income margin is expected to be lower Federal income tax rates. In addition, net income increased between 5.5% and 6.5%, compared to a net income margin of as a result of growth in premiums and other considerations and a 5.6% in 2018. The expected increase largely reflects net realized lower group disability loss ratio, partially offset by an increase in capital losses and higher integration costs associated with the insurance operating costs and other expenses due, in part, to acquired business in 2018. Management expects that the 2019 higher variable incentive compensation as well as integration and core earnings margin, which does not include the effect of net transaction costs related to the acquisition of Aetna's U.S. group realized capital gains (losses) or integration costs associated with life and disability business. Insurance operating costs and other the acquired business, will be in the range of 6.0% to 7.0%, down expenses in 2017 also included state guaranty fund assessments from prior year as strong investment returns from limited of $20 before tax related to the liquidation of a life and health partnerships in 2018 are not assumed to repeat in 2019. The total insurance company. The acquisition of Aetna's U.S. group life and loss ratio and expense ratio are expected to be consistent with disability business, which closed on November 1, 2017, did not 2018. have a material impact on results in 2017. Net Income Insurance operating costs and other expenses increased 18%, primarily due to the inclusion of two $340 months of expenses for the acquired Aetna's U.S. group life and $350 disability business, state guaranty fund assessments of $20 $294 before tax related to the liquidation of a life and health insurance $300 company and an increase in variable incentive compensation. Fully Insured Ongoing Premiums $250 $230
$200 $6,000 $5,418
$5,000 $2,567 $150 $4,000 $3,571 2016 2017 2018 $3,142 $3,000 $1,631 $1,434 $2,610 $2,000 $1,726 Year ended December 31, 2018 compared $1,503 to the year ended December 31, 2017 $1,000 $0 $205 $214 $241 Net income increased in 2018 compared to 2017, primarily 2016 2017 2018 due to higher premiums and other considerations and higher net investment income, including from the acquisition of Aetna's U.S. group life and disability business, a lower loss ratio, and the Other Group life benefit of a lower corporate income tax rate, partially offset by higher insurance operating costs and other expenses, including integration costs, and amortization of intangible assets in Group disability connection with the acquisition, and a change to net realized capital losses. The benefit of the lower corporate income tax rate was largely offset by a $52 tax benefit in 2017 that was primarily due to reducing net deferred tax liabilities given the reduction in Year ended December 31, 2018 compared the corporate income tax rate. to the year ended December 31, 2017 Insurance operating costs and other Fully insured ongoing premiums increased 52% in expenses increased 40% primarily due to the acquisition of 2018 driven primarily by the acquisition of Aetna's U.S. group life Aetna's U.S. group life and disability business, including and disability business, sales in excess of cancellations with strong integration costs and amortization of intangible assets, partially group life and disability persistency, and premium from the New offset by state guaranty fund assessments of $20 before tax York Paid Family Leave product. related to the liquidation of a life and health insurance company in 2017. Integration costs were $47 in 2018 compared to $17 in Fully insured ongoing sales, excluding 2017. buyouts increased 57% primarily due to new business generated by our larger combined sales force following the acquisition of Aetna's U.S. group life and disability business. The
72 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Company also saw an increase in the sale of voluntary products insurance company, partially offset by higher intangible asset and sales of fully insured disability in 2018 due, in part, to the amortization incurred in 2018. addition of the New York Paid Family Leave product. Year ended December 31, 2017 compared Year ended December 31, 2017 compared to the year ended December 31, 2016 to the year ended December 31, 2016 Total loss ratio decreased 1.9 points, primarily due to a Fully insured ongoing premiums increased in 2017, lower group disability loss ratio. The group disability loss ratio in part, because it included two months of premiums for the decreased 4.9 points, driven by continued improvements in acquired Aetna's U.S. group life and disability business. Excluding incidence trends, higher recoveries and modest pricing increases. the impact of the acquisition, fully insured ongoing premiums The group life loss ratio increased 1.0 points, primarily driven by increased 3% due to sales, strong persistency and modest group favorable changes in reserve estimates of 1.3 points in 2016 disability pricing increases. partially offset by favorable mortality in the current year.
Fully insured ongoing sales, excluding Expense ratio increased 0.6 points primarily due to state buyouts were essentially flat to prior year reflecting higher guaranty fund assessments related to the liquidation of a life and group disability sales offset by lower group life and other sales. health insurance company, an increase in variable incentive compensation and amortization of intangible assets recorded in Ratios connection with the acquisition of Aetna's U.S. group life and disability business. Integration and transaction costs of $17 in 2017 related to the acquisition are not included in the expense 125 ratio. 100 75 78.0 76.1 75.3 50 25 25.1 25.7 24.0 0 2016 2017 2018
Expense ratio Loss ratio
Year ended December 31, 2018 compared to the year ended December 31, 2017 Total loss ratio decreased 0.8 points from 2017 to 2018 as a decrease in the group disability loss ratio was partially offset by an increase in the group life loss ratio. The group disability loss ratio decreased 3.4 points driven by continued favorable incidence trends, including favorable prior incurral year development of approximately $230 with most of that development from the 2017 incurral year as incidence trends become known after the elimination period is satisfied. In addition, the group disability loss ratio benefited from the lower discount accretion associated with the disability business acquired from Aetna. The group life loss ratio increased 1.7 points primarily driven by higher expected loss ratios associated with the group life business acquired from Aetna. Group life business (including group life premium waiver) included favorable prior incurral year development of approximately $90 in 2018, mostly from the 2017 incurral year. Expense ratio decreased 1.7 points due to a greater mix of lower commission national accounts business due to the acquisition of Aetna's group life and disability business, higher revenues to cover fixed costs and the effect of state guaranty assessments in 2017 related to the liquidation of a life and health
73 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
HARTFORD FUNDS Results of Operations Operating Summary
2018 2017 2016 Fee income and other revenue $ 1,032 $ 992 $ 885 Net investment income 5 3 1 Net realized capital losses (4) — — Total revenues 1,033 995 886 Amortization of DAC 16 21 24 Operating costs and other expenses [1] 831 805 741 Total benefits, losses and expenses 847 826 765 Income before income taxes 186 169 121 Income tax expense [2] 38 63 43 Net income $ 148 $ 106 $ 78 Daily average total Hartford Funds segment AUM $ 116,876 $ 107,593 $ 92,042 Return on Assets ("ROA") [3] 12.6 9.9 8.5 Less: Effect of net realized capital losses, excluded from core earnings, before tax (0.4) — — Less: Effect of income tax expense 0.1 (0.3) — Return on Assets ("ROA"), core earnings [3] 12.9 10.2 8.5 [1]Includes distribution costs of $188 and $184 for the twelve months ended December 31, 2017 and 2016, respectively, that were previously netted against fee income and are now presented gross in insurance operating costs and other expenses. [2]2017 includes $4 of income tax expense primarily from reducing net deferred tax assets due to the reduction in the corporate Federal income tax rate from 35% to 21%. For further discussion, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements. [3]Represents annualized earnings divided by a daily average of assets under management, as measured in basis points. Hartford Funds Segment AUM
2018 2017 [1] 2016 [1] Mutual Fund and ETP AUM - beginning of period $ 99,090 $ 81,507 $ 74,413 Sales - mutual fund 22,198 23,654 19,135 Redemptions - mutual fund (23,888) (20,409) (20,055) Net flows - ETP 1,404 157 8 Net Flows - mutual fund and ETP (286) 3,402 (912) Change in market value and other (7,247) 14,181 8,006 Mutual Fund and ETP AUM - end of period 91,557 99,090 81,507 Talcott Resolution life and annuity separate account AUM [2] 13,283 16,260 16,010 Hartford Funds AUM $ 104,840 $ 115,350 $ 97,517 [1]ETP AUM has been combined with mutual fund AUM. Previously ETPs were shown separately. [2]Represents AUM of the life and annuity business sold in May, 2018 that is still managed by the Company's Hartford Funds segment. Mutual Fund AUM by Asset Class
2018 2017 2016 Equity $ 56,986 $ 63,740 $ 50,826 Fixed Income 14,467 14,401 13,301 Multi-Strategy Investments [1] 18,233 20,469 17,171 Exchange-traded products 1,871 480 209 Mutual Fund and ETP AUM $ 91,557 $ 99,090 $ 81,507 [1]Includes balanced, allocation, and alternative investment products.
74 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2019 Outlook Hartford Funds AUM Due in large part to the effect of the decline in markets on assets under management since October 2018, the Company expects $115,350 $125,000 $104,840 net income for Hartford Funds to be relatively flat from 2018 to $97,517 2019, provided the Company continues to deliver strong fund $100,000 performance and generates positive net flows. The Company expects to increase net sales in 2019 from a diversified lineup of $75,000 mutual funds and ETPs, though net flows are more uncertain $50,000 given the increased volatility in the markets. Assuming the Company can generate positive net flows and fund performance $25,000 is strong, assets under management are expected to increase $0 modestly despite the continued decline of the Talcott Resolution 12/31/16 12/31/17 12/31/18 AUM. Net Income Year ended December 31, 2018 compared $148 $150 to the year ended December 31, 2017 decreased from December 31, $125 $106 Hartford Funds AUM 2017 to December 31, 2018 largely due to a decline in markets in $100 $78 the fourth quarter of 2018 and the continued expected decline of the Talcott Resolution AUM still managed by the Company. $75 Despite the decline in AUM in the fourth quarter of 2018, average $50 daily assets under management for the year were up 9% due to market appreciation and net positive flows during the first 9 $25 months of 2018. $0 Year ended December 31, 2017 compared 2016 2017 2018 to the year ended December 31, 2016
Hartford Funds AUM increased in 2017 primarily due to Year ended December 31, 2018 compared positive net flows and market appreciation, partially offset by the continued expected decline of the Talcott Resolution AUM still to the year ended December 31, 2017 managed by the Company. Net income increased in 2018 due to higher investment management fees driven by higher average daily assets under management, partially offset by higher variable costs. Also contributing to the increase was the effect of a lower corporate Federal income tax rate. Year ended December 31, 2017 compared to the year ended December 31, 2016 Net income increased in 2017 due to higher investment management fees resulting from higher daily average AUM levels driven in part by the addition of Schroders' funds in late 2016, as well as a reduction in estimated state income tax expense, partially offset by higher variable costs including sub-advisory and distribution and service expenses.
75 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
CORPORATE Results of Operations Operating Summary
2018 2017 2016 Fee income $ 32 $ 4 $ 3 Other revenue 21 — — Net investment income 59 23 31 Net realized capital losses (7) (1) (100) Total revenues (losses) 105 26 (66) Benefits, losses and loss adjustment expenses [1] 11 31 — Insurance operating costs and other expenses 83 59 87 Pension settlement — 750 — Loss on extinguishment of debt [2] 6 — — Interest expense [2] 298 316 327 Total benefits, losses and expenses 398 1,156 414 Loss before income taxes (293) (1,130) (480) Income tax expense (benefit) [3] (95) 457 (329) Loss from continuing operations, net of tax (198) (1,587) (151) Income (loss) from discontinued operations,net of tax 322 (2,869) 283 Net income (loss) $ 124 $ (4,456) $ 132 Preferred stock dividends 6 — — Net income (loss) available to common stockholders $ 118 $ (4,456) $ 132 [1]Represents benefits expense on life and annuity business previously underwritten by the Company. [2]For discussion of debt, see Note 13 - Debt of Notes to Consolidated Financial Statements. [3]2017 includes $867 of income tax expense primarily from reducing net deferred tax assets due to the reduction in the corporate Federal income tax rate from 35% to 21%. For discussion of income taxes, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements. Net Income (Loss) $488, after tax. The settlement charge in 2017 related to the purchase of a group annuity contract to transfer $1.6 billion of certain U.S. qualified pension plan liabilities to a third party. Apart from the effect of these charges in 2017, an increase in fee $1,500 $132 $124 income from managing Talcott Resolution invested assets post- sale and lower interest expense, as well as higher net investment $0 income and lower benefits and losses incurred related to run-off structured settlement and terminal funding agreement liabilities -$1,500 was partially offset by higher investment management expenses
-$3,000 and a lower tax benefit due to the reduction in the corporate Federal income tax rate. Other revenue in 2018 from providing
-$4,500 transition services to Talcott Resolution was offset by the cost of $(4,456) providing those services. -$6,000 Insurance operating costs and other 2016 2017 2018 expenses increased in 2018 largely due to costs incurred to manage the invested assets of Talcott Resolution post-sale,
partially offset by a reduction in centralized services costs Year ended December 31, 2018 compared previously allocated to the life and annuity business sold in May 2018. to the year ended December 31, 2017 Income (loss) from discontinued operations compared to a net loss in 2017, primarily due to Net income increased from loss of $2,869 in 2017 to income of $322 in 2018 a number of charges in 2017, including a $3.3 billion after tax loss with the net loss in 2017 due to a loss on sale of the Company’s on the life and annuity business sold in May 2018, $867 of income life and annuity business of $3.3 billion in 2017. A $202 reduction tax expense primarily from reducing net deferred tax assets due in loss on sale in 2018 was largely offset by a decline in operating to the reduction of the corporate Federal income tax rate from income from the life and annuity business sold in May 2018. The 35% to 21%, and the effect of a pension settlement charge of reduction in loss on sale was largely attributable to an increase in
76 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations the estimated retained net operating loss carryover tax benefits Interest Expense from the life and annuity business sold in May 2018 as well as the reclassification to retained earnings of $193 of tax effects stranded in AOCI due to the accounting for Tax Reform. For more $400 information on the reclassification of stranded tax effects, see $327 $316 Note 1-Basis of Presentation and Significant Accounting Policies $298 within Notes to the Consolidated Financial Statements. $300
Year ended December 31, 2017 compared $200 to the year ended December 31, 2016 Net loss increased primarily due to a $3.3 billion estimated $100 loss on sale of the life and annuity business, $867 of income tax expense arising primarily from the reduction of net deferred tax $0 assets due to the enactment of lower Federal income tax rates 2016 2017 2018 and a $488 after tax pension settlement charge. Insurance operating costs and other expenses decreased in 2017 largely due lower centralized Year ended December 31, 2018 compared services costs and lower estimated state income tax expense. Upon reporting the life and annuity business as discontinued to the year ended December 31, 2017 operations, centralized services costs were reallocated to Interest expense decreased primarily due to the Corporate for all periods presented and those reallocated costs redemption of junior subordinated debentures. On June 15, declined from 2016 to 2017 principally due to a lower allocation 2018, The Hartford redeemed $500 aggregate principal amount of IT costs. of its 8.125% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068 and recognized a $6 loss on Income (loss) from discontinued operations extinguishment of debt for unamortized deferred debt issuance decreased from income of $283 in 2016 to a net loss of $2.9 costs. On March 15, 2018, the Company issued $500 of 4.4% billion in 2017 with the net loss in 2017 due to a loss on sale of senior notes due March 15, 2048 for net proceeds of the Company’s life and annuity business of $3.3 billion, partially approximately $490. The Company used a portion of the net offset by operating income from discontinued operations of $388. proceeds to repay the Company's $320 of 6.3% senior notes at Operating income from discontinued operations increased from maturity. See Note 13 -Debt of Notes to the Consolidated $283 in 2016 primarily due to lower net realized capital losses in Financial Statements. 2017. Apart from the reduction in net realized capital losses, earnings were relatively flat as an increase in the assumption Year ended December 31, 2017 compared study benefit and lower interest credited were largely offset by lower net investment income and lower fee income due to the to the year ended December 31, 2016 continued run off of the variable annuity block. Interest expense decreased primarily due to a decrease in outstanding debt due to debt maturities and the paydown of senior notes.
ENTERPRISE RISK ERCC Members CEO (Chair) MANAGEMENT President The Company’s Board of Directors has ultimate responsibility for Chief Financial Officer risk oversight, as described more fully in our Proxy Statement, Chief Investment Officer while management is tasked with the day-to-day management of Chief Risk Officer the Company’s risks. General Counsel The Company manages and monitors risk through risk policies, Others as deemed necessary by the Committee Chair controls and limits. At the senior management level, an Enterprise Risk and Capital Committee (“ERCC”) oversees the risk profile and risk management practices of the Company. As illustrated below, a number of functional committees sit underneath the ERCC, providing oversight of specific risk areas and recommending risk mitigation strategies to the ERCC.
77 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
ERCC
Economic Asset Liability Underwriting Emerging Risk Operational Catastrophe Capital Model Committee Risk Committee Steering Risk Risk Steering Executive Oversight Committee Committee Committee Committee Committee
The Company's enterprise risk management ("ERM") function • Morbidity- Risk of loss to an insured from illness incurred supports the ERCC and functional committees, and is tasked with, during the course of employment or illness from other among other things: covered perils. • risk identification and assessment; • Disability- Risk of loss incurred from personal or commercial automobile related losses, accidents arising outside of the • the development of risk appetites, tolerances, and limits; workplace, injuries or accidents incurred during the course • risk monitoring; and of employment, or from equipment, with each loss resulting in short term or long-term disability payments. • internal and external risk reporting. • Longevity- Risk of loss from increased life expectancy trends The Company categorizes its main risks as insurance risk, among policyholders receiving long-term benefit payments. operational risk and financial risk, each of which is described in more detail below. Catastrophe risk primarily arises in the property, automobile, group life, group disability, and workers' compensation product Insurance Risk lines. Insurance risk is the risk of losses of both a catastrophic and non- Impact Non-catastrophe insurance risk can arise from catastrophic nature on the P&C and group benefits products the unexpected loss experience, underpriced business and/or Company has sold. Catastrophe insurance risk is the exposure underestimation of loss reserves and can have significant effects arising from both natural (e.g., weather, earthquakes, wildfires, on the Company’s earnings. Catastrophe insurance risk can arise pandemics) and man-made catastrophes (e.g., terrorism, cyber- from various unpredictable events and can have significant attacks) that create a concentration or aggregation of loss across effects on the Company's earnings and may result in losses that the Company's insurance or asset portfolios. could constrain its liquidity.
Sources of Insurance Risk Non-catastrophe Management The Company's policies and procedures for insurance risks exist within each of the Company's divisions managing these risks include disciplined underwriting protocols, except Hartford Funds and include: exposure controls, sophisticated risk-based pricing, risk modeling, risk transfer, and capital management strategies. The Company • Property- Risk of loss to personal or commercial property has established underwriting guidelines for both individual risks, from automobile related accidents, weather, explosions, including individual policy limits, and risks in the aggregate, smoke, shaking, fire, theft, vandalism, inadequate including aggregate exposure limits by geographic zone and peril. installation, faulty equipment, collisions and falling objects, The Company uses both internal and third-party models to and/or machinery mechanical breakdown resulting in estimate the potential loss resulting from various catastrophe physical damage and other covered perils. events and the potential financial impact those events would have • Liability- Risk of loss from automobile related accidents, on the Company's financial position and results of operations uninsured and underinsured drivers, lawsuits from accidents, across its businesses. defective products, breach of warranty, negligent acts by In addition, certain insurance products offered by The Hartford professional practitioners, environmental claims, latent provide coverage for losses incurred due to cyber events and the exposures, fraud, coercion, forgery, failure to fulfill Company has assessed and modeled how those products would obligations per contract surety, liability from errors and respond to different events in order to manage its aggregate omissions, losses from political and credit coverages, losses exposure to losses incurred under the insurance policies we sell. derivative lawsuits, and other securities actions and covered The Company models numerous deterministic scenarios including perils. losses caused by malware, data breach, distributed denial of • Mortality- Risk of loss from unexpected trends in insured service attacks, intrusions of cloud environments and attacks of deaths impacting timing of payouts from group life insurance, power grids. personal or commercial automobile related accidents, and Among specific risk tolerances set by the Company, risk limits are death of employees or executives during the course of set for natural catastrophes, terrorism risk and pandemic risk. employment, while on disability, or while collecting workers compensation benefits.
78 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Risk Definition Details and Company Limits Natural Exposure arising from natural phenomena The Company generally limits its estimated pre-tax loss as a result of natural catastrophe (e.g., earthquakes, wildfires, etc.) that catastrophes for property & casualty exposures from a single 250-year event create a concentration or aggregation of to less than 30% of statutory surplus of the property and casualty insurance loss across the Company's insurance or subsidiaries prior to reinsurance and to less than 15% of statutory surplus of asset portfolios and the inherent volatility the property and casualty insurance subsidiaries after reinsurance. From time of weather or climate pattern changes. to time the estimated loss to natural catastrophes from a single 250-year event prior to reinsurance may fluctuate above or below these limits due to changes in modeled loss estimates, exposures or statutory surplus. - The estimated 250 year pre-tax probable maximum loss from earthquake events is estimated to be $917 before reinsurance and $470 net of reinsurance. [1] - The estimated 250 year pre-tax probable maximum losses from hurricane events are estimated to be $1.6 billion before reinsurance and $877 net of reinsurance. [1] Terrorism The risk of losses from terrorist attacks, Enterprise limits for terrorism apply to aggregations of risk across property- including losses caused by single-site and casualty, group benefits and specific asset portfolios and are defined based on multi-site conventional attacks, as well as a deterministic, single-site conventional terrorism attack scenario. The the potential for attacks using nuclear, Company manages its potential estimated loss from a conventional terrorism biological, chemical or radiological loss scenario, up to $2.0 billion net of reinsurance and $2.5 billion gross of weapons (“NBCR”). reinsurance, before coverage under the Terrorism Risk Insurance Program established under “TRIPRA”. In addition, the Company monitors exposures monthly and employs both internally developed and vendor-licensed loss modeling tools as part of its risk management discipline. Our modeled exposures to conventional terrorist attacks around landmark locations may fluctuate above and below our stated limits. Pandemic The exposure to loss arising from The Company generally limits its estimated pre-tax loss from a single 250 year widespread influenza or other pathogens pandemic event to less than 18% of statutory surplus of the property and or bacterial infections that create an casualty and group benefits insurance subsidiaries. In evaluating these aggregation of loss across the Company's scenarios, the Company assesses the impact on group life policies, short-term insurance or asset portfolios. and long-term disability, property & casualty claims, and losses in the investment portfolio associated with market declines in the event of a widespread pandemic. While ERM has a process to track and manage these limits, from time to time, the estimated loss for pandemics may fluctuate above or below these limits due to changes in modeled loss estimates, exposures, or statutory surplus. [1]The loss estimates represent total property losses for hurricane events and property and workers compensation losses for earthquake events resulting from a single event. The estimates provided are based on 250-year return period loss estimates that have a 0.4% likelihood of being exceeded in any single year. The net loss estimates provided assume that the Company is able to recover all losses ceded to reinsurers under its reinsurance programs. The Company also manages natural catastrophe risk for group life and group disability, which in combination with property and workers compensation loss estimates are subject to separate enterprise risk management net aggregate loss limits as a percent of enterprise surplus. Reinsurance as a Risk Management Strategy place and the statutory surplus benefit from all such prior year In addition to the policies and procedures outlined above, the contracts is immaterial. The Hartford also participates in Company uses reinsurance to transfer certain risks to governmentally administered reinsurance facilities such as the reinsurance companies based on specific geographic or risk Florida Hurricane Catastrophe Fund (“FHCF”), the Terrorism Risk concentrations. A variety of traditional reinsurance products are Insurance Program (“TRIPRA”) and other reinsurance programs used as part of the Company's risk management strategy, relating to particular risks or specific lines of business. including excess of loss occurrence-based products that reinsure Reinsurance for Catastrophes- The Company has catastrophe property and workers' compensation exposures, and individual reinsurance programs, including reinsurance treaties that cover risk (including facultative reinsurance) or quota share property and workers’ compensation losses aggregating from arrangements, that reinsure losses from specific classes or lines of single catastrophe events. business. The Company has no significant finite risk contracts in
79 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Primary Catastrophe Treaty Reinsurance Coverages as of January 1, 2019
Portion of losses Portion of losses retained reinsured by The Hartford Per Occurrence Property Catastrophe Treaty for 1/1/2019 to 12/31/2019 [1] Losses of $0 to $350 from one event None 100% retained 75% of $150 in excess of Losses of $350 to $500 from one event $350 25% co-participation 90% of $600 in excess of Losses of $500 to $1.1 billion from one event [2] $500 10% co-participation
Aggregate Property Catastrophe Treaty for 1/1/2019 to 12/31/2019 [3] $0 to $775 of aggregate losses None 100% retained $775 to $1.0 billion of aggregate losses 100% None
Workers' Compensation Catastrophe Treaty for 1/1/2019 to 12/31/2019 Losses of $0 to $100 from one event None 100% retained 80% of $350 in excess of Losses of $100 to $450 from one event [4] $100 20% co-participation [1]In addition to the Property Occurrence Treaty, for Florida events, The Hartford has purchased the mandatory FHCF reinsurance for the period from 6/1/2018 to 5/30/2019. 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 for $84 of per event losses in excess of a $29 retention. [2]Portions of this layer of coverage extend beyond the traditional one year term. [3]The aggregate treaty is not limited to a single event; rather, it is designed to provide reinsurance protection for the aggregate of all events designated as catastrophes by PCS (Property Claims Services/Verisk) with a $350 limit on any one event. [4]In addition to the limits shown, the worker's 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. In addition to the property catastrophe reinsurance coverage Reinsurance for A&E Reserve Development- Under an ADC described in the above table, the Company has other reinsurance reinsurance agreement, NICO assumes adverse net loss and agreements that cover property catastrophe losses. The Per allocated loss adjustment expense reserve development up to Occurrence Property Catastrophe Treaty and Workers' $1.5 billion above the Company’s net A&E reserves recorded as of Compensation Catastrophe Treaty include a provision to December 31, 2016. Under retroactive reinsurance accounting, reinstate limits in the event that a catastrophe loss exhausts net adverse A&E reserve development after December 31, 2016 limits on one or more layers under the treaties. results in an offsetting reinsurance recoverable up to the $1.5 billion limit. Cumulative ceded losses up to the $650 reinsurance Reinsurance for Terrorism- For the risk of terrorism, private premium paid for the ADC are recognized as a dollar-for-dollar sector catastrophe reinsurance capacity is generally limited and offset to direct losses incurred. As of December 31, 2018, $523 of largely unavailable for terrorism losses caused by nuclear, incurred asbestos and environmental losses had been ceded to biological, chemical or radiological attacks. As such, the NICO, leaving approximately $977 of coverage available for Company's principal reinsurance protection against large-scale future adverse net reserve development, if any. Cumulative ceded terrorist attacks is the coverage currently provided through losses exceeding the $650 reinsurance premium paid would TRIPRA to the end of 2020. result in a deferred gain. The deferred gain would be recognized TRIPRA provides a backstop for insurance-related losses over the claim settlement period in the proportion of the amount resulting from any “act of terrorism”, which is certified by the of cumulative ceded losses collected from the reinsurer to the Secretary of the Treasury, in consultation with the Secretary of estimated ultimate reinsurance recoveries. Consequently, until Homeland Security and the Attorney General, for losses that periods when the deferred gain is recognized as a benefit to exceed a threshold of industry losses of $180 in 2019, with the earnings, cumulative adverse development of A&E claims after threshold increasing to $200 by 2020. Under the program, in any December 31, 2016 in excess of $650 may result in significant one calendar year, the federal government would pay a charges against earnings. Furthermore, there is a risk that percentage of losses incurred from a certified act of terrorism cumulative adverse development of A&E claims could ultimately after an insurer's losses exceed 20% of the Company's eligible exceed the $1.5 billion treaty limit in which case all adverse direct commercial earned premiums of the prior calendar year up development in excess of the treaty limit would be absorbed as a to a combined annual aggregate limit for the federal government charge to earnings by the Company. In these scenarios, the effect and all insurers of $100 billion. The percentage of losses paid by of these charges could be material to the Company’s consolidated the federal government is 81% in 2019, decreasing to 80% in operating results and liquidity. 2020. The Company's estimated deductible under the program is $1.3 billion for 2019. If an act of terrorism or acts of terrorism Reinsurance Recoverables result in covered losses exceeding the $100 billion annual Property and casualty insurance product industry aggregate limit, Congress would be responsible for reinsurance recoverables represent loss and loss determining how additional losses in excess of $100 billion will be adjustment expense recoverables from a number of entities, paid. including reinsurers and pools.
80 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Property & Casualty Reinsurance Where its contracts permit, the Company secures future claim obligations with various forms of collateral, including irrevocable Recoverables letters of credit, secured trusts, funds held accounts and group As of December 31, wide offsets. As part of its reinsurance recoverable review, the Company analyzes recent developments in commutation activity 2018 2017 between reinsurers and cedants, recent trends in arbitration and Paid loss and loss adjustment expenses $ 127 $ 84 litigation outcomes in disputes between cedants and reinsurers Unpaid loss and loss adjustment expenses 3,773 3,496 and the overall credit quality of the Company’s reinsurers. As indicated in the above table, 81.8% of the gross reinsurance Gross reinsurance recoverables 3,900 3,580 recoverables due from reinsurers rated by A.M. Best were rated Less: Allowance for uncollectible A- (excellent) or better as of December 31, 2018. reinsurance (126) (104) Annually, the Company completes evaluations of the reinsurance Net reinsurance recoverables $ 3,774 $ 3,476 recoverable asset associated with older, long-term casualty As shown in the following table, a portion of the total gross liabilities reported in the Property & Casualty Other Operations reinsurance recoverables relates to the Company’s mandatory reporting segment, and the allowance for uncollectible participation in various involuntary assigned risk pools and the reinsurance reported in the Commercial Lines reporting segment. value of annuity contracts held under structured settlement For a discussion regarding the results of these evaluations, see agreements. Reinsurance recoverables due from mandatory pools MD&A - Critical Accounting Estimates, Property and Casualty are backed by the financial strength of the property and casualty Insurance Product Reserves, Net of Reinsurance. insurance industry. Annuities purchased from third-party life Group Benefits reinsurance recoverables represent insurers under structured settlements are recognized as reserve for future policy benefits and unpaid loss and loss reinsurance recoverables in cases where the Company has not adjustment expenses and other policyholder funds and benefits obtained a release from the claimant. Of the remaining gross payable that are recoverable from a number of reinsurers. reinsurance recoverables, the portion of recoverables due from companies rated by A.M. Best is as follows: Group Benefits Reinsurance Recoverables
Distribution of Gross Reinsurance As of December 31, Recoverables 2018 2017 As of December 31, Paid loss and loss adjustment expenses $ 12 $ 27 2018 2017 Unpaid loss and loss adjustment expenses 239 209 Gross reinsurance Gross reinsurance recoverables 251 236 recoverables $ 3,900 $ 3,580 Less: Allowance for uncollectible Less: mandatory (assigned reinsurance [1] — — risk) pools and structured Net reinsurance recoverables $ 251 $ 236 settlements (1,220) (1,199) [1]No allowance for uncollectible reinsurance was required as of December 31, Gross reinsurance 2018 and 2017. recoverables excluding mandatory pools and Guaranty Funds and Other Insurance-related structured settlements $ 2,680 $ 2,381 Assessments % of % of As part of its risk management strategy, the Company regularly Total Total monitors the financial strength of other insurers and, in Rated A- (excellent) or particular, activity by insurance regulators and various state better by A.M. Best [1] $ 2,194 81.8% $ 1,836 77.1% guaranty associations relating to troubled insurers. In all states, Other rated by A.M. insurers licensed to transact certain classes of insurance are Best 1 0.1% 1 0.1% required to become members of a guaranty fund. Total rated companies 2,195 81.9% 1,837 77.2% Voluntary pools 35 1.3% 37 1.5% Operational Risk Captives 302 11.3% 323 13.6% Operational risk is the risk of loss resulting from inadequate or Other not rated failed internal processes and systems, human error, or from companies 148 5.5% 184 7.7% external events. Total $ 2,680 100.0% $ 2,381 100.0% Sources of Operational Risk Operational risk is [1]Based on A.M. Best ratings as of December 31, 2018 and 2017, respectively. inherent in the Company's business and functional areas. To manage reinsurer credit risk, a reinsurance security review Operational risks include: compliance with laws and regulation, committee evaluates the credit standing, financial performance, cybersecurity, business disruption, technology failure, inadequate management and operational quality of each potential reinsurer. execution or process management, reliance on model and data In placing reinsurance, the Company considers the nature of the analytics, internal fraud, external fraud, third party dependency risk reinsured, including the expected liability payout duration, and attraction and retention of talent. and establishes limits tiered by reinsurer credit rating.
81 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Impact Operational risk can result in financial loss, disruption from cybersecurity incidents and internal and external testing of of our business, regulatory actions or damage to our reputation. our cyber defenses. Management Responsibility for day-to-day management Financial Risk of operational risk lies within each business unit and functional area. ERM provides an enterprise-wide view of the Company's Financial risks include direct and indirect risks to the Company's operational risk on an aggregate basis. ERM is responsible for financial objectives coming from events that impact market establishing, maintaining and communicating the framework, conditions or prices. Some events may cause correlated principles and guidelines of the Company's operational risk movement in multiple risk factors. The primary sources of management program. Operational risk mitigation strategies financial risks are the Company's invested assets. Consistent with include the following: its risk appetite, the Company establishes financial risk limits to control potential loss on a U.S. GAAP, statutory, and economic • Establishing policies and monitoring risk tolerances and basis. Exposures are actively monitored and mitigated where exceptions; appropriate. The Company uses various risk management strategies, including reinsurance and over-the-counter ("OTC") • Conducting business risk assessments and implementing and exchange traded derivatives with counterparties meeting the action plans where necessary; appropriate regulatory and due diligence requirements. • Validating existing crisis management protocols; Derivatives are utilized to achieve one of four Company- approved objectives: hedging risk arising from interest rate, • Identifying and monitoring emerging risks; and equity market, commodity market, credit spread and issuer • Purchasing insurance coverage. default, price or currency exchange rate risk or volatility; managing liquidity; controlling transaction costs; or entering into Cybersecurity Risk synthetic replication transactions. Derivative activities are The Hartford has implemented an information protection monitored and evaluated by the Company’s compliance and risk program with established governance routines that promote an management teams and reviewed by senior management. adaptive approach for assessing and managing risks. The Hartford The Company identifies different categories of financial risk, has invested to build a ‘defense-in-depth’ strategy that uses including liquidity, credit, interest rate, equity and foreign multiple security measures to protect the integrity of the currency exchange, as described below. Company's information assets. This ‘defense-in-depth’ strategy aligns to the National Institute of Standards and Technology Liquidity Risk ("NIST") Cyber Security Framework and provides preventative, Liquidity risk is the risk to current or prospective earnings or detective and responsive measures that collectively protects the capital arising from the Company's inability or perceived inability Company. Various cyber assurance methods, including security to meet its contractual funding obligations as they come due. metrics, third party security assessments, external penetration testing, red team exercises, and cyber war game exercises are Sources of Liquidity Risk Sources of liquidity risk used to test the effectiveness of the overall cybersecurity control include funding risk, company-specific liquidity risk and market environment. liquidity risk resulting from differences in the amount and timing The Hartford, like many other large financial services companies, of sources and uses of cash as well as company-specific and blocks attempted cyber intrusions on a daily basis. In the event of general market conditions. Stressed market conditions may a cyber intrusion, the Company invokes its Cyber Incident impact the ability to sell assets or otherwise transact business Response Program (the "Program") commensurate with the and may result in a significant loss in value. nature of the intrusion. While the actual methods employed differ based on the event, our approach employs internal teams and Impact Inadequate capital resources and liquidity could outside advisors with specialized skills to support the response negatively affect the Company’s overall financial strength and its and recovery efforts and requires elevation of issues, as ability to generate cash flows from its businesses, borrow funds at necessary, to senior management. In addition, we have competitive rates, and raise new capital to meet operating and procedures to ensure timely notification of critical cybersecurity growth needs. incidents pursuant to the Program to help identify employees The Company has defined ongoing who may have material non-public information and to implement Management monitoring and reporting requirements to assess liquidity across blackout restrictions on trading the Company's securities during the enterprise under both current and stressed market the investigation and assessment of such cybersecurity incidents. conditions. The Company measures and manages liquidity risk From a governance perspective, senior members of our exposures and funding needs within prescribed limits across legal Enterprise Risk Management, Information Protection and entities, taking into account legal, regulatory and operational Internal Audit functions provide detailed, regular reports on limitations to the transferability of liquid assets. The Company cybersecurity matters to the Board, including the Finance, also monitors internal and external conditions, and identifies Investment, and Risk Management Committee (FIRMCo), a material risk changes and emerging risks that may impact committee comprised of all directors, which has principal operating cash flows or liquid assets. The liquidity requirements responsibility for oversight of cybersecurity risk, and/or the Audit of the Holding Company have been and will continue to be met by Committee, which oversees controls for the Company's major the Holding Company's fixed maturities, short-term investments risk exposures. The topics covered by these updates include the and cash, and dividends from its subsidiaries, principally its Company's activities, policies and procedures to prevent, detect insurance operations, as well as the issuance of common stock, and respond to cybersecurity incidents, as well as lessons learned debt or other capital securities and borrowings from its credit
82 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations facilities as needed. The Company maintains multiple sources of The Company has developed credit exposure thresholds which contingent liquidity including a revolving credit facility, a are based upon counterparty ratings. Aggregate counterparty commercial paper program, an intercompany liquidity agreement credit quality and exposure are monitored on a daily basis that allows for short-term advances of funds among the HFSG utilizing an enterprise-wide credit exposure information system Holding Company and certain affiliates, and access to that contains data on issuers, ratings, exposures, and credit limits. collateralized advances from the Federal Home Loan Bank of Exposures are tracked on a current and potential basis and Boston ("FHLBB") for certain affiliates. The Company's CFO has aggregated by ultimate parent of the counterparty across primary responsibility for liquidity risk. investments, reinsurance receivables, insurance products with credit risk, and derivatives. For further discussion on liquidity see the section on Capital Resources and Liquidity. As of December 31, 2018, the Company had no investment exposure to any credit concentration risk of a single issuer or Credit Risk and Counterparty Risk counterparty greater than 10% of the Company's stockholders' Credit risk is the risk to earnings or capital due to uncertainty of equity, other than the U.S. government and certain U.S. an obligor’s or counterparty’s ability or willingness to meet its government agencies. For further discussion of concentration of obligations in accordance with contractually agreed upon terms. credit risk in the investment portfolio, see the Concentration of Credit risk is comprised of three major factors: the risk of change Credit Risk section in Note 6 - Investments of Notes to in credit quality, or credit migration risk; the risk of default; and Consolidated Financial Statements. the risk of a change in value due to changes in credit spreads.
Sources of Credit Risk The majority of the Assets and Liabilities Subject to Credit Risk Company’s credit risk is concentrated in its investment holdings, but it is also present in the Company’s reinsurance and insurance portfolios. Investments Essentially all of the Company's invested assets are subject to credit risk. Credit related impairments Impact A decline in creditworthiness is typically associated on investments were $1 and $2, in 2018 and 2017, with an increase in an investment’s credit spread, potentially respectively. (See the Enterprise Risk Management section of resulting in an increase in other-than-temporary impairment, and the MD&A under “Other-Than-Temporary Impairments.”) an increased probability of a realized loss upon sale. Premiums receivable and reinsurance recoverables are also subject to credit risk based on the counterparty’s unwillingness or inability to pay. Reinsurance recoverables Reinsurance recoverables, net of an allowance for uncollectible reinsurance, were Management The objective of the Company’s enterprise $4,357 and $4,061, as of December 31, 2018 and 2017, credit risk management strategy is to identify, quantify, and respectively. (See the Enterprise Risk Management section of manage credit risk on an aggregate portfolio basis and to limit the MD&A under “Reinsurance as a Risk Management potential losses in accordance with an established credit risk Strategy.”) management policy. The Company primarily manages its credit risk by holding a diversified mix of investment grade issuers and counterparties across its investment, reinsurance, and insurance Premiums receivable and agents' balances portfolios. Potential losses are also limited within portfolios by Premiums receivable and agents’ balances, net of an diversifying across geographic regions, asset types, and sectors. allowance for doubtful accounts, were $3,995 and $3,910, as of December 31, 2018 and 2017, respectively. (For a The Company manages credit risk on an on-going basis through discussion regarding collectibility of these balances, see Note the use of various processes and analyses. Both the investment 1, Basis of Presentation and Significant Accounting Policies of and reinsurance areas have formulated procedures for Notes to Consolidated Financial Statements under the counterparty approvals and authorizations, which establish section labeled “Revenue Recognition.”) minimum levels of creditworthiness and financial stability. Credits considered for investment are subjected to underwriting reviews. Within the investment portfolio, private securities are subject to Credit Risk of Derivatives management approval. Mitigation strategies vary across the The Company uses various derivative counterparties in executing three sources of credit risk, but may include: its derivative transactions. The use of counterparties creates credit risk that the counterparty may not perform in accordance • Investing in a portfolio of high-quality and diverse securities; with the terms of the derivative transaction. • Selling investments subject to credit risk; Downgrades to the credit ratings of the Company’s insurance • Hedging through use of credit default swaps; operating companies may have adverse implications for its use of derivatives. In some cases, downgrades may give derivative • Clearing transactions through central clearing houses that counterparties for OTC derivatives and clearing brokers for OTC- require daily variation margin; cleared derivatives the right to cancel and settle outstanding derivative trades or require additional collateral to be posted. In • Entering into contracts only with strong creditworthy addition, downgrades may result in counterparties and clearing institutions brokers becoming unwilling to engage in or clear additional • Requiring collateral; and derivatives or may require collateralization before entering into any new trades. • Non-renewing policies/contracts or reinsurance treaties.
83 Managing the Credit Risk of Counterparties permissible investments under the Company’s investment policies. These swaps reference investment grade single to Derivative Instruments corporate issuers and indexes. As of December 31, 2018 and The Company also has derivative counterparty exposure policies 2017, the notional amount related to credit derivatives that which limit the Company’s exposure to credit risk. The Company assume credit risk was $1.1 billion and $823, respectively, while monitors counterparty exposure on a monthly basis to ensure the fair value was $3 for both periods. These amounts do not compliance with Company policies and statutory limitations. The include positions that are in offsetting relationships. Company’s policies with respect to derivative counterparty exposure establishes market-based credit limits, favors long-term For further information on credit derivatives, see Note 7 financial stability and creditworthiness of the counterparty and Derivatives of Notes to Consolidated Financial Statements. typically requires credit enhancement/credit risk reducing agreements, which are monitored and evaluated by the Credit Risk of Business Operations Company’s risk management team and reviewed by senior A portion of the company's commercial business is written with management. large deductible policies or retrospectively-rated plans. Under some commercial insurance contracts with deductible features, The Company minimizes the credit risk of derivative instruments the Company is obligated to pay the claimant the full amount of by entering into transactions with high quality counterparties the claim. The Company is subsequently reimbursed by the primarily rated A or better. The Company also generally requires contract holder for the deductible amount, and is subject to credit that OTC derivative contracts be governed by an International risk until such reimbursement is made. Additionally, Swaps and Derivatives Association ("ISDA") Master Agreement, retrospectively rated policies are utilized primarily for workers which is structured by legal entity and by counterparty and compensation coverage, whereby the ultimate premium is permits right of offset. The Company enters into credit support determined based on actual loss activity. Although the annexes in conjunction with the ISDA agreements, which require retrospectively rated feature of the policy substantially reduces daily collateral settlement based upon agreed upon thresholds. insurance risk for the Company, it does introduce credit risk to The Company has developed credit exposure thresholds which the Company. The Company’s results of operations could be are based upon counterparty ratings. Credit exposures are adversely affected if a significant portion of such contract holders generally quantified based on the prior business day's net fair failed to reimburse the Company for the deductible amount or value, including income accruals, resulting in amounts owed to the retrospectively rated policyholders failed to pay additional the Company by its counterparties or potential payment premiums owed. While the Company attempts to manage the obligations from the Company to its counterparties. The notional risks discussed above through underwriting, credit analysis, amounts of derivative contracts represent the basis upon which collateral requirements, provision for bad debt, and other pay or receive amounts are calculated and are not reflective of oversight mechanisms, the Company’s efforts may not be credit risk. For purposes of daily derivative collateral successful. maintenance, credit exposures are generally quantified based on the prior business day’s market value and collateral is pledged to Interest Rate Risk and held by, or on behalf of, the Company to the extent the Interest rate risk is the risk of financial loss due to adverse current value of the derivatives is greater than zero, subject to changes in the value of assets and liabilities arising from minimum transfer thresholds. In accordance with industry movements in interest rates. Interest rate risk encompasses standards and the contractual agreements, collateral is typically exposures with respect to changes in the level of interest rates, settled on the same business day. the shape of the term structure of rates and the volatility of interest rates. Interest rate risk does not include exposure to For the year ended December 31, 2018, the Company incurred no changes in credit spreads. losses on derivative instruments due to counterparty default. Sources of Interest Rate Risk The Company has Use of Credit Derivatives exposure to interest rates arising from its fixed maturity The Company may also use credit default swaps to manage credit securities, long-term debt obligations, short and long-term exposure or to assume credit risk to enhance yield. disability claim reserves, and discount rate assumptions associated with the Company’s pension and other post Credit Risk Reduced Through Credit Derivatives retirement benefit obligations. The Company uses credit derivatives to purchase credit protection with respect to a single entity or referenced index. The Impact Changes in interest rates from current levels can have Company purchases credit protection through credit default both favorable and unfavorable effects for the Company. swaps to economically hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio. As of December 31, 2018 and 2017, the notional amount related to credit derivatives that purchase credit protection was $6 and $61, respectively, while the fair value was $0 and $1, respectively. These amounts do not include positions that are in offsetting relationships. Credit Risk Assumed Through Credit Derivatives The Company also enters into credit default swaps that assume credit risk as part of replication transactions. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are
84 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Change in Interest Assets and Liabilities Subject to Interest Rate Rates Favorable Effects Unfavorable Effects Risk Additional net Decrease in the fair value investment income due of the fixed income to reinvesting at higher investment portfolio Fixed income investments ñ yields The fair value of fixed income investments, which include fixed maturities, Higher interest expense commercial mortgage loans, and short-term investments, on variable rate debt was $43.7 billion and $42.5 billion at December 31, 2018 and obligations 2017, respectively. The weighted average duration of the Increase in the fair value Lower net investment portfolio, including derivative instruments, was approximately of the fixed income income due to reinvesting 4.7 years and 5.2 years as of December 31, 2018 and 2017, investment portfolio at lower investment respectively. Changes in the fair value of fixed maturities due yields ò to changes in interest rates are reflected as a component of Acceleration in paydowns AOCI. and prepayments or calls of certain mortgage- backed and municipal securities Long-term debt obligations The Company's variable rate debt obligations will generally result in increased interest expense as a result of higher interest rates; the inverse is true Management The Company primarily manages its during a declining interest rate environment. Changes in the exposure to interest rate risk by constructing investment value of long-term debt as a result of changes in interest rates portfolios that seek to protect the firm from the economic impact will impact the fair value of these instruments but not the associated with changes in interest rates by setting portfolio carrying value in the Company's Consolidated Balance duration targets that are aligned with the duration of the Sheets. liabilities that they support. The Company analyzes interest rate risk using various models including parametric models and cash flow simulation under various market scenarios of the liabilities Group life and disability product liabilities The and their supporting investment portfolios. Key metrics that the cash outflows associated with contracts issued by the Company uses to quantify its exposure to interest rate risk Company's Group Benefits segment, primarily group life and inherent in its invested assets and the associated liabilities short and long-term disability policy liabilities, are not include duration, convexity and key rate duration. interest rate sensitive but vary based on timing. Though the aggregate cash flow payment streams are relatively The Company may also utilize a variety of derivative instruments predictable, these products may rely upon actuarial pricing to mitigate interest rate risk associated with its investment assumptions (including mortality and morbidity) and have an portfolio or to hedge liabilities. Interest rate caps, floors, swaps, element of cash flow uncertainty. As of December 31, 2018 swaptions, and futures may be used to manage portfolio duration. and 2017, the Company had $8,445 and $8,512, respectively Interest rate swaps are primarily used to convert interest receipts of reserves for group life and disability contracts. Changes in or payments to a fixed or variable rate. The use of such swaps the value of the liabilities as a result of changes in interest enables the Company to customize contract terms and conditions rates will impact the fair value of these instruments but not to desired objectives and manage the duration profile within the carrying value in the Company's Consolidated Balance established tolerances. Interest rate swaps are also used to hedge Sheets. the variability in the cash flows of a forecasted purchase or sale of fixed rate securities due to changes in interest rates. As of December 31, 2018 and 2017, notional amounts pertaining to derivatives utilized to manage interest rate risk, including offsetting positions, totaled $10.5 billion and $10.2 billion, respectively primarily related to investments. The fair value of these derivatives was $(61) and $(83) as of December 31, 2018 and 2017, respectively.
85 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Interest Rate Sensitivity of Group Benefits Pension and other post-retirement benefit Short and Long-term Disability Reserves and obligations The Company’s pension and other post- Invested Assets Supporting Them retirement benefit obligations are exposed to interest rate risk based upon the sensitivity of present value obligations to Change in Net Economic Value changes in liability discount rates as well as the sensitivity of as of December 31, the fair value of investments in the plan portfolios to changes 2018 2017 in interest rates. The discount rate assumption is based upon Basis point shift -100 +100 -100 +100 an interest rate yield curve that reflects high-quality fixed income investments consistent with the maturity profile of Increase (decrease) in the expected liability cash flows. The Company is exposed to economic value, before tax $ 47 $ (68) $ 51 $ (75) the risk of having to make additional plan contributions if the plans’ investment returns, including from investments in fixed The carrying value of assets supporting the liabilities related to maturities, are lower than expected. (For further discussion of the businesses included in the table above was $10.0 billion and discounting pension and other postretirement benefit $10.1 billion, as of December 31, 2018 and 2017, respectively, obligations, refer to Note 18 - Employee Benefit Plans of and included fixed maturities, commercial mortgage loans and Notes to Consolidated Financial Statements.) As of short-term investments. The assets supporting the liabilities are December 31, 2018 and 2017, the Company had $791 and monitored and managed within set duration guidelines and are $926, respectively, of unfunded liabilities for pension and evaluated on a daily basis, as well as annually, using scenario post-retirement benefit obligations recorded within Other simulation techniques in compliance with regulatory Liabilities in the accompanying Balance Sheets. requirements.
Interest Rate Sensitivity Invested Assets not Supporting Group Life and Disability Reserves Group Life and Disability Reserves and Invested The following table provides an analysis showing the estimated Assets Supporting Them before tax change in the fair value of the Company’s investments Included in the following table is the before tax change in the net and related derivatives, excluding assets supporting group life economic value of contracts issued by the Company’s Group and disability reserves which are included in the table above, Benefits segment, primarily group life and disability, for which assuming 100 basis point upward and downward parallel shifts in fixed valuation discount rate assumptions are established based the yield curve as of December 31, 2018 and 2017. Certain upon investment returns assumed in pricing, along with the financial instruments, such as limited partnerships and other corresponding invested assets. Also included in this analysis are alternative investments, have been omitted from the analysis as the interest rate sensitive derivatives used by the Company to the interest rate sensitivity of these investments is generally hedge its exposure to interest rate risk in the investment lower and less predictable than fixed income investments. portfolios supporting these contracts. This analysis does not include the assets and corresponding liabilities of other insurance Interest Rate Sensitivity of Invested Assets products such as automobile, property, workers' compensation Not Supporting Group Benefits Short and and general liability insurance. Certain financial instruments, such as limited partnerships and other alternative investments, have Long-term Disability Reserves been omitted from the analysis as the interest rate sensitivity of Change in Fair Value as of December these investments is generally lower and less predictable than 31, fixed income investments. The calculation of the estimated hypothetical change in net economic value below assumes a 100 2018 2017 basis point upward and downward parallel shift in the yield curve. Basis point shift -100 +100 -100 +100 The selection of the 100 basis point parallel shift in the yield Increase (decrease) in fair value, before tax $ 1,761 $ (1,511) $ 1,819 $ (1,710) curve was made only as an illustration of the potential hypothetical impact of such an event and should not be construed The carrying value of fixed maturities, commercial mortgage as a prediction of future market events. Actual results could differ loans and short-term investments related to the businesses materially from those illustrated below due to the nature of the included in the table above was $33.7 billion and $32.4 billion, as estimates and assumptions used in the above analysis. The of December 31, 2018 and 2017, respectively. Company’s sensitivity analysis calculation assumes that the composition of invested assets and liabilities remain materially Long-term Debt consistent throughout the year and that the current relationship A 100 basis point parallel decrease in the yield curve would result between short-term and long-term interest rates will remain in an increase in the fair value of the liability of $331 and $340 as constant over time. As a result, these calculations may not fully of December 31, 2018 and 2017, respectively. A 100 basis point capture the impact of portfolio re-allocations, significant product parallel increase in the yield curve would result in a decrease in sales or non-parallel changes in interest rates. the fair value of the liability of $(279) and $(287) as of December 31, 2018 and 2017, respectively. Changes in the value of long- term debt as a result of changes in interest rates will not impact the carrying value in the Company's Consolidated Balance Sheets.
86 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Pension and Other Post-Retirement Plan Obligations Assets supporting pension and other post- A 100 basis point parallel decrease in the yield curve would impact both the value of the underlying pension assets and the retirement benefit plans The Company may be value of the liability, resulting in an increase in the net pension required to make additional plan contributions if equity and other post-retirement plan obligations liability of $178 and investments in the plan portfolios decline in value. For a $226 as of December 31, 2018 and 2017, respectively. A 100 discussion of equity sensitivity, see below. basis point parallel increase in the yield curve would have the The asset allocation mix is reviewed on a periodic basis. In inverse effect and result in a decrease in the net pension and order to minimize the risk, the pension plans maintain a other post-retirement plan obligations liability of $(134) and listing of permissible and prohibited investments and impose $(170) as of December 31, 2018 and 2017, respectively. Gains or concentration limits and investment quality requirements on losses due to changes in interest rates on the pension and post- permissible investment options. Declines in value are retirement plan obligations are recorded within AOCI and are recognized as unrealized losses in AOCI. Increases in equity amortized into the actuarial loss component of net periodic markets are recognized as unrealized gains in AOCI. benefit cost when they exceed a threshold. Unrealized gains and losses in AOCI are amortized into the actuarial loss component of net periodic benefit cost when Equity Risk they exceed a threshold. For further discussion of equity risk associated with the pension plans, see Note 18 Employee Equity risk is the risk of financial loss due to changes in the value Benefit Plans of Notes to Consolidated Financial Statements. of global equities or equity indices.
Sources of Equity Risk The Company has exposure to Assets under management in Hartford Funds may equity risk from invested assets, assets that support the decrease in value during equity market declines, which Company’s pension and other post-retirement benefit plans, and would result in lower earnings because fee income is earned fee income derived from Hartford Funds assets under based upon the value of assets under management. management.
Impact The investment portfolio is exposed to losses from Equity Sensitivity market declines affecting equity securities, alternative assets and Investment portfolio and the assets supporting limited partnerships which could negatively impact the pension and other post-retirement benefit plans Company's reported earnings. For assets supporting pension and Included in the following tables are the estimated before tax other post-retirement benefit plans, the Company may be change in the economic value of the Company’s invested assets required to make additional plan contributions if equity and assets supporting pension and other post-retirement benefit investments in the plan portfolios decline in value. Hartford plans with sensitivity to equity risk. The calculation of the Funds earnings are also significantly influenced by the U.S. and hypothetical change in economic value below assumes a 20% other equity markets. Generally, declines in equity markets will upward and downward shock to the Standard & Poor's 500 reduce the value of assets under management and the amount of Composite Price Index ("S&P 500"). For limited partnerships and fee income generated from those assets. Increases in equity other alternative investments, the movement in economic value is markets will generally have the inverse impact. calculated using a beta analysis largely derived from historical experience relative to the S&P 500. Management The Company uses various approaches in managing its equity exposure, including limits on the proportion The selection of the 20% shock to the S&P 500 was made only as of assets invested in equities, diversification of the equity an illustration to the potential hypothetical impact of such an portfolio, and hedging of changes in equity indices. event and should not be construed as a prediction of future market events. Actual results could differ materially from those illustrated below due to the nature of the estimates and assumptions used in the analysis. These calculations may not fully Assets and Liabilities Subject to Equity Risk capture the impact of portfolio re-allocations or significant product sales. Investment portfolio is exposed to losses from market declines affecting equity securities and certain alternative assets and limited partnerships. Generally, declines in equity markets will reduce the value of these types of investments and could negatively impact the Company’s earnings while increases in equity will have the inverse impact. For equity securities, the changes in fair value are reported in net realized capital gains and losses. For alternative assets and limited partnerships, the Company's share of earnings for the period is recorded in net investment income, though typically on a delay based on the availability of the underlying financial statements. For a discussion of equity sensitivity, see below.
87 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Equity Sensitivity [1]
As of December 31, 2018 As of December 31, 2017 Shock to S&P 500 Shock to S&P 500
(Before tax) Fair Value +20% -20% Fair Value +20% -20% Investment Portfolio $ 3,045 $ 419 $ (418) $ 2,676 $ 360 $ (360) Assets supporting pension and other post-retirement benefit plans $ 1,226 $ 209 $ (209) $ 1,459 $ 251 $ (251) [1]Table excludes the Company's investment in Hopmeadow Holdings LP which is reported in other assets on the Company's Consolidated Balance Sheets. Hartford Funds assets under management and 2017 were approximately $178 and $298, respectively. Hartford Funds earnings are significantly influenced by the U.S. Included in these amounts are $119 and $128 at and other equity markets. If equity markets were to December 31, 2018 and 2017, respectively, related to non- hypothetically decline 20% and remain depressed for one year, U.S. dollar denominated fixed maturities, equities and cash the estimated before tax impact on reported earnings for that that directly support liabilities denominated in the same one year period is $(37) as of December 31, 2018. The selection currencies. The currency risk of the remaining non-U.S. dollar of the 20% shock to the S&P 500 was made only as an illustration denominated fixed maturities and equities are hedged with foreign currency swaps. to the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially due to the nature of the estimates and assumptions used in the analysis. Investment in a P&C run-off entity in the United Kingdom During 2015, the Company entered Foreign Currency Exchange Risk into certain foreign currency forwards to hedge the currency Foreign currency exchange risk is the risk of financial loss due to impacts on changes in equity of a P&C run-off entity in the changes in the relative value between currencies. United Kingdom that was sold during 2017. At December 31, 2016, the derivatives used to hedge the currency impacts Sources of Currency Risk The Company has foreign had a total notional amount of $200, and a total fair value of currency exchange risk in non-U.S. dollar denominated $(2), respectively. The Company terminated these hedges in investments, which primarily consist of fixed maturity and equity 2017. investments and foreign denominated cash.
Impact Changes in relative values between currencies can create variability in cash flows and realized or unrealized gains Financial Risk on Statutory Capital and losses on changes in the fair value of assets and liabilities. Statutory surplus amounts and risk-based capital (“RBC”) ratios may increase or decrease in any period depending upon a variety Based on the fair values of the Company’s non-U.S. dollar of factors and may be compounded in extreme scenarios or if denominated securities and derivative instruments as of multiple factors occur at the same time. In general, as equity December 31, 2018 and 2017, management estimates that a market levels and interest rates decline, the amount and volatility hypothetical 10% unfavorable change in exchange rates would of either our actual or potential obligation, as well as the related decrease the fair values by a before tax total of $9 and $10, statutory surplus and capital margin can be materially negatively respectively. Actual results could differ materially due to the affected, sometimes at a greater than linear rate. At times the nature of the estimates and assumptions used in the analysis. impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. Factors Management The open foreign currency exposure of non- include: U.S. dollar denominated investments will most commonly be reduced through the sale of the assets or through hedges using • A decrease in the value of certain fixed-income and equity currency futures/forwards/swaps. In order to manage the securities in our investment portfolio, due in part to credit currency risk related to any non-U.S. dollar denominated liability spreads widening, may result in a decrease in statutory contracts, the Company holds non-U.S. dollar denominated surplus and RBC ratios. investments which match the underlying currency exposure of the liabilities. • Decreases in the value of certain derivative instruments that do not get hedge accounting, may reduce statutory surplus and RBC ratios. Assets and Liabilities Subject to Foreign • Non-market factors can also impact the amount and Currency Exchange Risk volatility of either our actual or potential obligation, as well as the related statutory surplus and capital margin. Most of these factors are outside of the Company’s control. The Non-U.S. dollar denominated fixed Company’s financial strength and credit ratings are significantly maturities, equities, and cash The fair values of the influenced by the statutory surplus amounts and RBC ratios of non-U.S. dollar denominated fixed maturities, equities and our insurance company subsidiaries. In addition, rating agencies cash, excluding assets held for sale, at December 31, 2018 may implement changes to their internal models that have the
88 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations effect of increasing or decreasing the amount of statutory capital section are based on availability and are generally the midpoint of we must hold in order to maintain our current ratings. the available ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating Investment Portfolio Risk is used. The following table presents the Company’s fixed maturities, AFS, by credit quality. The credit ratings referenced throughout this Fixed Maturities by Credit Quality
December 31, 2018 December 31, 2017 Amortized Fair Percent of Amortized Fair Percent of Cost Value Total Fair Cost Value Total Fair United States Government/Government agencies $ 4,446 $ 4,430 12.4% $ 4,492 $ 4,536 12.3% AAA 6,366 6,440 18.1% 5,864 6,072 16.4% AA 6,861 6,985 19.6% 7,467 7,810 21.1% A 8,314 8,370 23.5% 8,510 8,919 24.1% BBB 8,335 8,163 22.9% 7,632 7,931 21.5% BB & below 1,281 1,264 3.5% 1,647 1,696 4.6% Total fixed maturities, AFS $ 35,603 $ 35,652 100.0% $ 35,612 $ 36,964 100.0%
The fair value of fixed maturities, AFS decreased as compared to Maturities, FVO, are not included in the preceding table. For December 31, 2017, primarily due to a decrease in valuations due further discussion on FVO securities, see Note 5 - Fair Value to widening of credit spreads and higher interest rates. Fixed Measurements of Notes to Consolidated Financial Statements.
89 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Securities by Type
December 31, 2018 December 31, 2017 Cost or Gross Gross Percent Cost or Gross Gross Percent Amortized Unrealized Unrealized Fair of Total Amortized Unrealized Unrealized Fair of Total Cost Gains Losses Value Fair Value Cost Gains Losses Value Fair Value Asset-backed securities ("ABS") Consumer loans $ 1,159 $ 5 $ (1) $ 1,163 3.3% $ 925 $ 7 $ (2) $ 930 2.5% Other 113 — — 113 0.3% 194 2 — 196 0.5% Collateralized loan obligations ("CLOs") 1,455 2 (20) 1,437 4.0% 1,257 3 — 1,260 3.4% CMBS Agency [1] 1,447 13 (33) 1,427 4.0% 1,199 16 (14) 1,201 3.2% Bonds 1,845 13 (29) 1,829 5.1% 1,726 32 (9) 1,749 4.7% Interest only 289 9 (2) 296 0.8% 379 10 (3) 386 1.0% Corporate Basic industry 604 8 (21) 591 1.7% 523 28 (1) 550 1.5% Capital goods 1,132 8 (31) 1,109 3.1% 1,050 44 (4) 1,090 2.9% Consumer cyclical 943 9 (29) 923 2.6% 857 33 (2) 888 2.4% Consumer non- cyclical 1,936 11 (71) 1,876 5.3% 1,643 46 (7) 1,682 4.6% Energy 1,156 14 (43) 1,127 3.1% 1,056 43 (3) 1,096 3.0% Financial services 3,368 17 (99) 3,286 9.2% 2,722 77 (10) 2,789 7.5% Tech./comm. 1,720 34 (54) 1,700 4.8% 1,618 87 (9) 1,696 4.6% Transportation 548 4 (18) 534 1.5% 555 18 — 573 1.6% Utilities 2,017 43 (69) 1,991 5.6% 2,097 110 (19) 2,188 5.9% Other 272 — (11) 261 0.7% 249 4 (1) 252 0.7% Foreign govt./govt. agencies 866 7 (26) 847 2.4% 1,071 43 (4) 1,110 3.0% Municipal bonds Taxable 629 14 (17) 626 1.8% 537 30 (5) 562 1.5% Tax-exempt 9,343 407 (30) 9,720 27.3% 11,206 724 (7) 11,923 32.3% RMBS Agency 1,508 7 (29) 1,486 4.2% 1,530 10 (4) 1,536 4.2% Non-agency 933 5 (6) 932 2.6% 227 3 — 230 0.6% Alt-A 43 4 — 47 0.1% 58 4 — 62 0.2% Sub-prime 786 28 — 814 2.3% 1,170 46 — 1,216 3.3% U.S. Treasuries 1,491 41 (15) 1,517 4.2% 1,763 46 (10) 1,799 4.9% Fixed maturities, AFS 35,603 703 (654) 35,652 100.0% 35,612 1,466 (114) 36,964 100.0% Equity securities Financial services 115 19 — 134 13.3% Other 792 102 (16) 878 86.7% Equity securities, AFS [2] 907 121 (16) 1,012 100.0% Total AFS securities $ 35,603 $ 703 $ (654) $ 35,652 $ 36,519 $ 1,587 $ (130) $ 37,976 Fixed maturities, FVO $ 22 $ 41 Equity securities, at fair value [2] $ 1,214 [1]Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government. [2]Effective January 1, 2018, with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities, at fair value. The fair value of AFS securities decreased as compared with tax-exempt municipal bonds were reallocated into corporate December 31, 2017, primarily due to a decrease in valuations bonds and structured securities during the period. due to widening of credit spreads and higher interest rates. Also,
90 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
European Exposure respectively. The investment exposure largely relates to corporate entities which are domiciled in or generate a significant While the European economy is still growing, the International portion of their revenue within the United Kingdom, Germany, Monetary Fund cut its 2019 growth forecasts for the region, Sweden, Switzerland, and the Netherlands. As of both citing the prospect for a more turbulent external environment, December 31, 2018 and 2017, the weighted average credit including escalating trade tensions and slowing global demand. quality of European investments was A-. Entities domiciled in the Political risk will likely remain elevated in Europe during 2019 United Kingdom comprise the Company's largest European due to uncertainty surrounding Great Britain's pending departure exposure; as of December 31, 2018 and 2017, the U.K. exposure from the European Union ("Brexit"), increasing pressure on totals less than 2% of total invested assets and largely relates to centrist governments in France and Germany and ongoing the industrial and financial services sector and has an average concern over Italian fiscal policy. The Company manages the credit rating of BBB+. The majority of the European investments credit risk associated with its European securities within the are U.S. dollar-denominated, and those securities that are British investment portfolio on an on-going basis using several processes pound or euro-denominated are hedged to U.S. dollars. For a which are supported by macroeconomic analysis and issuer credit discussion of foreign currency risks, see the Foreign Currency analysis. For additional details regarding the Company’s Exchange Risk section of this MD&A. management of credit risk, see the Credit Risk section of this MD&A. Commercial & Residential Real Estate As of December 31, 2018, the Company’s European investment The following table presents the Company’s exposure to CMBS exposure had both an amortized cost and fair value of $2.5 billion, and RMBS by current credit quality included in the preceding or 5% of total invested assets; as of December 31, 2017, Securities by Type table. amortized cost and fair value totaled $1.9 billion and $2 billion, Exposure to CMBS and RMBS as of December 31, 2018
AAA AA A BBB BB and Below Total Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value CMBS Agency [1] $ 1,447 $ 1,427 $ — $ — $ — $ — $ — $ — $ — $ — $ 1,447 $ 1,427 Bonds 983 973 444 436 368 370 50 50 — — 1,845 1,829 Interest Only 204 210 77 79 1 1 5 4 2 2 289 296 Total CMBS 2,634 2,610 521 515 369 371 55 54 2 2 3,581 3,552 RMBS Agency 1,508 1,486 — — — — — — — — 1,508 1,486 Non- Agency 611 610 167 167 111 109 33 33 11 13 933 932 Alt-A — — 10 10 4 5 9 9 20 23 43 47 Sub-Prime 31 32 72 73 211 217 179 186 293 306 786 814 Total RMBS 2,150 2,128 249 250 326 331 221 228 324 342 3,270 3,279 Total CMBS & RMBS $ 4,784 $ 4,738 $ 770 $ 765 $ 695 $ 702 $ 276 $ 282 $ 326 $ 344 $ 6,851 $ 6,831
91 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Exposure to CMBS and RMBS as of December 31, 2017
AAA AA A BBB BB and Below Total Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value CMBS Agency [1] $ 1,199 $ 1,201 $ — $ — $ — $ — $ — $ — $ — $ — $ 1,199 $ 1,201 Bonds 929 940 423 424 314 323 43 44 17 18 1,726 1,749 Interest Only 264 269 104 106 1 1 6 6 4 4 379 386 Total CMBS 2,392 2,410 527 530 315 324 49 50 21 22 3,304 3,336 RMBS Agency 1,530 1,536 — — — — — — — — 1,530 1,536 Non- Agency 122 123 15 14 56 56 21 22 13 15 227 230 Alt-A 2 3 5 5 4 4 13 13 34 37 58 62 Sub-Prime 35 36 74 75 249 255 159 165 653 685 1,170 1,216 Total RMBS 1,689 1,698 94 94 309 315 193 200 700 737 2,985 3,044 Total CMBS & RMBS $ 4,081 $ 4,108 $ 621 $ 624 $ 624 $ 639 $ 242 $ 250 $ 721 $ 759 $ 6,289 $ 6,380 [1]Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government. The Company also has exposure to commercial mortgage loans. weighted average yield of 4.4% during the twelve months ended These loans are collateralized by real estate properties that are December 31, 2018. The Company continues to originate diversified both geographically throughout the United States and commercial loans within primary markets, such as office, by property type. These loans are originated by the Company as industrial and multi-family, focusing on loans with strong LTV high quality whole loans and are participated out to third parties. ratios and high quality property collateral. There were no Loan participations are loans where the Company has purchased mortgage loans held for sale as of December 31, 2018 or or retained a portion of an outstanding loan or package of loans December 31, 2017. and participates on a pro-rata basis in collecting interest and principal pursuant to the terms of the participation agreement. Municipal Bonds As of December 31, 2018, commercial mortgage loans had an The following table presents the Company’s exposure to amortized cost and carrying value of $3.7 billion, with a valuation municipal bonds by type and weighted average credit quality allowance of $1. As of December 31, 2017, commercial mortgage included in the preceding Securities by Type table. loans had an amortized cost and carrying value of $3.2 billion with a valuation allowance of $1. The Company funded $664 of commercial whole loans with a weighted average loan-to-value (“LTV”) ratio of 59% and a
92 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Available For Sale Investments in Municipal Bonds
December 31, 2018 December 31, 2017 Weighted Weighted Amortized Average Amortized Average Cost Fair Value Credit Quality Cost Fair Value Credit Quality General Obligation $ 1,222 $ 1,275 AA $ 1,976 $ 2,087 AA Pre-refunded [1] 1,845 1,904 AAA 1,960 2,067 AAA Revenue Transportation 1,449 1,537 A+ 1,638 1,790 A+ Health Care 1,270 1,304 AA- 1,278 1,359 AA- Education 941 953 AA 1,079 1,130 AA Water & Sewer 816 847 AA 1,069 1,131 AA Leasing [2] 772 799 AA- 809 858 AA- Sales Tax 507 541 AA 537 590 AA Power 308 328 A+ 442 478 AA- Housing 33 35 A+ 79 82 AA- Other 809 823 AA- 876 913 AA- Total Revenue 6,905 7,167 AA- 7,807 8,331 AA- Total Municipal $ 9,972 $ 10,346 AA $ 11,743 $ 12,485 AA [1]Pre-Refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. treasury, agency, or other securities has been established to fund the remaining payments of principal and interest. [2]Leasing revenue bonds are generally the obligations of a financing authority established by the municipality that leases facilities back to a municipality. The notes are typically secured by lease payments made by the municipality that is leasing the facilities financed by the issue. Lease payments may be subject to annual appropriation by the municipality or the municipality may be obligated to appropriate general tax revenues to make lease payments. As of both December 31, 2018 and December 31, 2017, the Limited Partnerships and Other largest issuer concentrations were the New York City Transitional Finance Authority, the New York Dormitory Authority, and the Alternative Investments Commonwealth of Massachusetts, which each comprised less The following table presents the Company’s investments in than 3% of the municipal bond portfolio and were primarily limited partnerships and other alternative investments which comprised of general obligation and revenue bonds. In total, include hedge funds, real estate funds and private equity funds. municipal bonds make up 22% of the fair value of the Company's Real estate funds consist of investments primarily in real estate investment portfolio. The Company has evaluated its portfolio joint ventures and, to a lesser extent, equity funds. Private equity allocation to municipal bonds with respect to the changes in funds primarily consist of investments in funds whose assets corporate income tax rates that began in 2018 and has reduced typically consist of a diversified pool of investments in small to exposure through both asset sales and principal repayments. The mid-sized non-public businesses with high growth potential as Company will continue to actively assess the sector’s relative well as limited exposure to public markets. value over time. Limited Partnerships and Other Alternative Investments - Net Investment Income
Year Ended December 31, 2018 2017 2016 Amount Yield Amount Yield Amount Yield Hedge funds $ 4 9.3% $ 3 23.6% $ (4) (5.5%) Real estate funds 58 12.0% 43 9.1% 32 7.2% Private equity funds 144 22.5% 122 20.7% 105 17.6% Other alternative investments [1] (1) (0.2%) 6 1.6% (5) (1.3%) Total $ 205 13.2% $ 174 12.0% $ 128 8.6%
93 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Investments in Limited Partnerships and Other Alternative Investments
December 31, 2018 December 31, 2017 Amount Percent Amount Percent Hedge funds $ 51 3.0% $ 22 1.4% Real estate funds 499 29.0% 486 30.6% Private equity and other funds 788 45.7% 693 43.6% Other alternative investments [1] 385 22.3% 387 24.4% Total $ 1,723 100.0% $ 1,588 100.0% [1]Consists of an insurer-owned life insurance policy which is invested in hedge funds and other investments. Available-for-sale Securities — Unrealized As part of the Company’s ongoing security monitoring process, the Company has reviewed its AFS securities in an unrealized loss Loss Aging position and concluded that these securities are temporarily The total gross unrealized losses were $654 as of December 31, depressed and are expected to recover in value as the securities 2018, and have increased $524 from December 31, 2017, due to approach maturity or as market spreads tighten. For these widening of credit spreads and higher interest rates. As of securities in an unrealized loss position where a credit December 31, 2018, $631 of the gross unrealized losses were impairment has not been recorded, the Company’s best estimate associated with securities depressed less than 20% of cost or of expected future cash flows are sufficient to recover the amortized cost. The remaining $23 of gross unrealized losses amortized cost basis of the security. Furthermore, the Company were associated with securities depressed greater than 20%. The neither has an intention to sell nor does it expect to be required securities depressed more than 20% are primarily related to one to sell these securities. For further information regarding the corporate issuer with declining credit fundamentals and Company’s impairment analysis, see Other-Than-Temporary commercial real estate securities that were purchased at tighter Impairments in the Investment Portfolio Risks and Risk credit spreads. Management section of this MD&A.
Unrealized Loss Aging for AFS Securities
December 31, 2018 December 31, 2017 Cost or Cost or Amortized Fair Unrealized Amortized Fair Unrealized Consecutive Months Items Cost Value Loss Items Cost Value Loss Three months or less 468 $ 3,191 $ 3,153 $ (38) 1,286 $ 4,315 $ 4,289 $ (26) Greater than three to six months 359 2,530 2,487 (43) 342 1,694 1,673 (21) Greater than six to nine months 347 2,243 2,186 (57) 157 601 594 (7) Greater than nine to eleven months 817 5,921 5,688 (233) 89 188 183 (5) Twelve months or more 969 5,272 4,989 (283) 652 2,040 1,969 (71) Total 2,960 $ 19,157 $18,503 $ (654) 2,526 $ 8,838 $ 8,708 $ (130) Unrealized Loss Aging for AFS Securities Continuously Depressed Over 20%
December 31, 2018 December 31, 2017 Cost or Cost or Amortized Fair Unrealized Amortized Fair Unrealized Consecutive Months Items Cost Value Loss Items Cost Value Loss Three months or less 13 $ 59 $ 43 $ (16) 30 $ 14 $ 10 $ (4) Greater than three to six months — — — — 12 10 7 (3) Greater than six to nine months 3 3 2 (1) — — — — Greater than nine to eleven months 2 2 1 (1) — — — — Twelve months or more 36 13 8 (5) 47 13 7 (6) Total 54 $ 77 $ 54 $ (23) 89 $ 37 $ 24 $ (13)
94 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Other-than-temporary Impairments operating and growth needs over the next twelve months. Recognized in Earnings by Security Type
For the years ended December 31, 2018 2017 2016 SUMMARY OF CAPITAL Credit Impairments RESOURCES AND LIQUIDITY CMBS $ 1 $ 2 $ 1 Corporate — — 20 Capital available at the holding company Equity Impairments — 6 4 as of December 31, 2018: Intent-to-Sell Impairments • $3.4 billion in fixed maturities, short-term investments, Corporate — — 1 and cash at HFSG Holding Company. US Treasuries — — 1 • A senior unsecured five-year revolving credit facility Total $ 1 $ 8 $ 27 that provides for borrowing capacity up to $750 of unsecured credit through March 29, 2023. No borrowings were outstanding as of December 31, 2018. Year ended December 31, 2018 • Borrowings available under a commercial paper For the year ended December 31, 2018, impairments recognized program to a maximum of $750. As of December 31, in earnings were comprised of credit impairments of $1 related to 2018, there was no commercial paper outstanding. CMBS interest-only securities and were identified through security specific review of the expected future cash flows. • The Hartford has an intercompany liquidity agreement that allows for short-term advances of funds among the The Company incorporates its best estimate of future HFSG Holding Company and certain affiliates of up to performance using internal assumptions and judgments that are $2 billion for liquidity and other general corporate informed by economic and industry specific trends, as well as our purposes. expectations with respect to security specific developments. • The Company’s subsidiaries, Hartford Fire Insurance Non-credit impairments recognized in other comprehensive Company (“Hartford Fire”) and Hartford Life and income were $6 for the year ended December 31, 2018. Accident Insurance Company (“HLA”), are members of Future impairments may develop as the result of changes in intent the Federal Home Loan Bank of Boston (“FHLBB”) and to sell specific securities that are in an unrealized loss position or have access to collateralized advances of up to $1.1 if modeling assumptions, such as macroeconomic factors or billion and $0.6 billion, respectively, without prior security specific developments, change unfavorably from our approval of the Connecticut Department of Insurance current modeling assumptions resulting in lower cash flow (“CTDOI”). expectations. Year ended December 31, 2017 2019 expected dividends and other For the year ended December 31, 2017, impairments recognized sources of capital: in earnings were comprised of credit impairments of $2 related to CMBS interest-only securities that were not expected to • P&C - The Company does not anticipate receiving net generate enough cash flow for the Company to recover the dividends from its property and casualty insurance investment. Impairments of equity securities of $6 were subsidiaries in 2019. comprised of securities in an unrealized loss position that the • Group Benefits - Hartford Life and Accident Insurance Company did not expect to recover. Company ("HLA") has $380 dividend capacity for 2019, Year ended December 31, 2016 and anticipates paying $250 to $300 in dividends in 2019. For the year ended December 31, 2016, impairments recognized in earnings were comprised of credit impairments of $21 • Hartford Funds - Anticipates paying $100 to $125 of primarily related to corporate securities due to changes in the dividends in 2019. financial condition of the issuer, impairments on equity securities In addition, The Hartford Financial Services Group, Inc, ("HFSG of $4, and intent-to-sell impairments of $2. Holding Company") anticipates cash tax receipts of approximately $600 to $700, including realization of net CAPITAL RESOURCES operating losses and AMT credits. AND LIQUIDITY The following section discusses the overall financial strength of The Hartford and its insurance operations including their ability to generate cash flows from each of their business segments, borrow funds at competitive rates and raise new capital to meet
95 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Expected liquidity requirements for the On June 15, 2018, The Hartford redeemed $500 aggregate principal amount of its 8.125% Fixed-to-Floating Rate Junior next twelve months as of December 31, Subordinated Debentures due 2068. 2018: On January 15, 2019, The Hartford repaid its $413, 6.0% senior • $413 maturing debt payment made in January of 2019. notes at maturity . • $265 interest on debt. For further information regarding debt, see Note 13 - Debt of Notes to Consolidated Financial Statements. • $21 dividends on preferred stock, subject to the discretion of the Board of Directors. Equity • $440 common stockholders' dividends, subject to the During the year ended December 31, 2018, the Company did not discretion of the Board of Directors and before share repurchase any common shares. In February, 2019, the Company repurchases and any change in common stockholder announced a $1.0 billion share repurchase authorization by the dividend rate. Board of Directors which is effective through December 31, 2020. Based on projected holding company resources, the • $2.2 billion of cash consideration including transaction Company expects to use a portion of the authorization in 2019 expenses to acquire all outstanding common shares of but anticipates using the majority of the program in 2020. Any Navigators Group, a global specialty underwriter. repurchase of shares under the equity repurchase program is dependent on market conditions and other factors. For further information about equity repurchases, see Part II - Liquidity Requirements and Item 5. Market for the Hartford's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Sources of Capital On November 6, 2018, the Company issued 13.8 million depositary shares of the Company’s 6.0% Series G non- The Hartford Financial Services Group, cumulative perpetual preferred stock (the “Preferred Stock”) with Inc. (Holding Company) a liquidation preference of $25,000 per share (equivalent to The liquidity requirements of the holding company of The $25.00 per depositary share), for net proceeds of $334. The Hartford Financial Services Group, Inc. have been and will Preferred Stock is perpetual and has no maturity date but is continue to be met by HFSG Holding Company’s fixed maturities, redeemable at the Company's option in whole or in part, on or short-term investments and cash, dividends from its subsidiaries, after November 15, 2023 at a redemption price of $25,000 per principally its insurance operations, and tax receipts, including share, plus unpaid dividends attributable to the current dividend realization of HFSG Holding Company net operating losses and period. refunds of prior period AMT credits. In addition HFSG Holding The Hartford used the net proceeds from this offering to help Company can meet its liquidity requirements through the fund repayment of the Company's 6.000% Senior Notes due issuance of common stock, debt or other capital securities and January 15, 2019. borrowings from its credit facilities, as needed. For further information regarding Preferred Stock, see Note 15 - As of December 31, 2018, HFSG Holding Company held fixed Equity of Notes to Consolidated Financial Statements. maturities, short-term investments, and cash of $3.4 billion. Expected liquidity requirements of the HFSG Holding Company for the next twelve months include payment of the 6.0% senior Dividends On February 21, 2019, The Hartford’s Board of Directors note of $413 at maturity in January 2019, interest payments on declared a quarterly dividend of $0.30 per common share payable debt of approximately $265, preferred stock dividends of on April 1, 2019 to common stockholders of record as of March 4, approximately $21 and common stockholder dividends of 2019. approximately $440, subject to the discretion of the Board of Directors, as well as $2.2 billion of cash consideration including On February 21, 2019, The Hartford's Board of Directors transaction expenses to acquire all outstanding common shares declared a dividend of $375.00 on each share of the Series G of Navigators Group. preferred stock (equivalent to $0.3750 per depository share) payable on May 15, 2019 to stockholders of record at the close of Expected sources of capital of the HFSG Holding Company for business on May 1, 2019. the next twelve months include dividends from Group Benefits (HLA) of $250 to $300 , dividends from Hartford Funds of $100 On December 13, 2018, The Hartford’s board of directors to $125 and cash tax receipts of approximately $600 to $700, declared a dividend of $412.50 on each share of the Series G including realization of net operating losses and AMT credits. preferred stock (equivalent to $0.4125 per depository share) which was paid on February 15, 2019, to stockholders of record Debt at the close of business on February 1, 2019. On March 15, 2018, The Hartford issued $500 of 4.4% senior notes ("4.4% Notes") due March 15, 2048 for net proceeds of There are no current restrictions on the HFSG Holding approximately $490, after deducting underwriting discounts and Company's ability to pay dividends to its stockholders. For a expenses from the offering. The Hartford used a portion of the discussion of restrictions on dividends to the HFSG Holding net proceeds from this issuance to repay $320 principal amount Company from its insurance subsidiaries, see "Dividends from of its 6.3% senior notes due March 15, 2018, and the balance of Insurance Subsidiaries" below. For a discussion of potential the proceeds will be used for general corporate purposes. limitations on the HFSG Holding Company's ability to pay
96 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations dividends, see Part I, Item 1A, — Risk Factors for the risk factor contract to transfer approximately $1.6 billion of the Company’s "Our ability to declare and pay dividends is subject to limitations". outstanding pension benefit obligations related to certain U.S. retirees, terminated vested participants, and beneficiaries. As a Pension Plans and Other result of this transaction, in the second quarter of 2017, the Company recognized a pre-tax settlement charge of $750 ($488 Postretirement Benefits after tax) and a reduction to stockholders' equity of $144. While the Company has significant discretion in making voluntary contributions to the U. S. qualified defined benefit pension plan, In connection with this transaction, the Company made a minimum contributions are mandated in certain circumstances contribution of $280 in September 2017 to the U.S. qualified pursuant to the Employee Retirement Income Security Act of pension plan in order to maintain the plan’s pre-transaction 1974, as amended by the Pension Protection Act of 2006, the funded status. Worker, Retiree, and Employer Recovery Act of 2008, the Preservation of Access to Care for Medicare Beneficiaries and Dividends from Insurance Subsidiaries Pension Relief Act of 2010, the Moving Ahead for Progress in the Dividends to the HFSG Holding Company from its insurance 21st Century Act of 2012 (MAP-21) and Internal Revenue Code subsidiaries are restricted by insurance regulation. The payment regulations. The Company made contributions to the U. S. of dividends by Connecticut-domiciled insurers is limited under qualified defined benefit pension plan of approximately $101, the insurance holding company laws of Connecticut. These laws $280 and $300 in 2018, 2017 and 2016, respectively. No require notice to and approval by the state insurance contributions were made to the other postretirement plans in commissioner for the declaration or payment of any dividend, 2018, 2017 and 2016. The Company’s 2018, 2017 and 2016 which, together with other dividends or distributions made within required minimum funding contributions were immaterial. The the preceding twelve months, exceeds the greater of (i) 10% of Company does not have a 2019 required minimum funding the insurer’s policyholder surplus as of December 31 of the contribution for the U.S. qualified defined benefit pension plan preceding year or (ii) net income (or net gain from operations, if and the funding requirements for all pension plans are expected such company is a life insurance company) for the twelve-month to be immaterial. The Company has not determined whether, and period ending on the thirty-first day of December last preceding, to what extent, contributions may be made to the U. S. qualified in each case determined under statutory insurance accounting defined benefit pension plan in 2019. The Company will monitor principles. In addition, if any dividend of a Connecticut-domiciled the funded status of the U.S. qualified defined benefit pension insurer exceeds the insurer’s earned surplus, it requires the prior plan during 2019 to make this determination. approval of the Connecticut Insurance Commissioner. The insurance holding company laws of the other jurisdictions in Beginning in 2017, the Company began to use a full yield-curve which The Hartford’s insurance subsidiaries are incorporated (or approach in the estimation of the interest cost component of net deemed commercially domiciled) generally contain similar periodic benefit costs for its qualified and non-qualified pension (although in certain instances more restrictive) limitations on the plans and the postretirement benefit plan. The full yield curve payment of dividends. In addition to statutory limitations on approach applies the specific spot rates along the yield curve that paying dividends, the Company also takes other items into are used in its determination of the projected benefit obligation consideration when determining dividends from subsidiaries. at the beginning of the year. The change was made to provide a These considerations include, but are not limited to, expected better estimate of the interest cost component of net periodic earnings and capitalization of the subsidiaries, regulatory capital benefit cost by better aligning projected benefit cash flows with requirements and liquidity requirements of the individual corresponding spot rates on the yield curve rather than using a operating company. single weighted average discount rate derived from the yield curve as had been done historically. Total dividends paid by P&C subsidiaries to HFSG holding company in 2018 were $3.1 billion. This includes extraordinary This change did not affect the measurement of the Company's dividends of $3.0 billion comprised of a $1.9 billion principal total benefit obligations as the change in the interest cost in net paydown on the intercompany note owed by Hartford Holdings, income is completely offset in the actuarial (gain) loss reported Inc. ("HHI") to Hartford Fire Insurance Company related to the for the period in other comprehensive income. The change life and annuity business sold in May 2018, $226 related to resulted in a reduction of the interest cost component of net interest payments on the note and $900 to fund near-term periodic benefit cost for 2017 of $32 before tax. The discount obligations of the HFSG holding company. In addition, there was rate used to measure interest cost during 2017 was 3.58% for the $50 of ordinary P&C dividends that were paid to HFSG holding period from January 1, 2017 to June 30, 2017 and 3.37% for the company, and $110 of capital contributed by the HFSG holding period from July 1, 2017 to December 31, 2017 for the qualified company to a run-off P&C subsidiary. Excluding the interest pension plan, 3.55% for the non-qualified pension plan, and 3.13% payments on the intercompany note and dividends that were for the postretirement benefit plan. Under the Company's subsequently contributed to a P&C subsidiary, net dividends paid historical estimation approach, the weighted average discount by P&C subsidiaries to HFSG holding company were $2.8 billion rate for the interest cost component would have been 4.22% for during 2018. the period from January 1, 2017 to June 30, 2017 and 3.92% for the period from July 1, 2017 to December 31, 2017 for the Total net dividends received by HFSG holding company in 2018 qualified pension plan, 4.19% for the non-qualified pension plan were $2.9 billion, including the $2.8 billion from P&C subsidiaries and 3.97% for the postretirement benefit plan. The Company and $119 from Hartford Funds during the year. There were no accounted for this change as a change in estimate, and dividends received from Hartford Life and Accident in 2018. accordingly, recognized the effect prospectively beginning in 2017. 2019 Dividend Capacity On June 30, 2017, the Company purchased a group annuity • P&C - Under the formula described above, the Company’s
97 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
property and casualty insurance subsidiaries are permitted For further information regarding revolving credit facilities, see to pay up to a maximum of approximately $1.2 billion in Note 13 - Debt of Notes to Consolidated Financial Statements. dividends to HFSG Holding Company for 2019 without prior approval from the applicable insurance commissioner, Commercial Paper though only $200 of this dividend capacity could be paid The Hartford’s maximum borrowings available under its before the fourth quarter of 2019. In 2019, HFSG Holding commercial paper program are $750. As of December 31, 2018 Company does not anticipate receiving net dividends from there was no commercial paper outstanding. its property and casualty insurance subsidiaries, as planned For further information regarding commercial paper, see Note 13 2019 dividends were received in the fourth quarter 2018. - Debt of Notes to Consolidated Financial Statements. The HFSG Holding Company generally expects to receive net dividends of $850 to $900 a year from its property and Intercompany Liquidity Agreements casualty insurance subsidiaries subject to the profitability of The Company has $2.0 billion available under an intercompany those subsidiaries and their capital needs. liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to • Group Benefits - Hartford Life and Accident Insurance $2 billion for liquidity and other general corporate purposes. The Company ("HLA") has $380 dividend capacity for 2019, and Connecticut Department of Insurance ("CTDOI") granted anticipates paying $250 to $300 dividends in 2019. approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, Other Sources of Capital for the HFSG including the HFSG Holding Company, as admitted assets for Holding Company statutory accounting purposes. The Hartford endeavors to maintain a capital structure that As of December 31, 2018, there were no amounts outstanding at provides financial and operational flexibility to its insurance the HFSG Holding Company. subsidiaries, ratings that support its competitive position in the financial services marketplace (see the "Ratings" section below Collateralized Advances with Federal Home for further discussion), and stockholder returns. As a result, the Loan Bank of Boston Company may from time to time raise capital from the issuance of In August 2018, the Company’s subsidiaries, Hartford Fire debt, common equity, preferred stock, equity-related debt or Insurance Company (“Hartford Fire”) and Hartford Life and other capital securities and is continuously evaluating strategic Accident Insurance Company (“HLA”), became members of the opportunities. The issuance of debt, common equity, equity- Federal Home Loan Bank of Boston (“FHLBB”). Membership related debt or other capital securities could result in the dilution allows these subsidiaries access to collateralized advances, which of stockholder interests or reduced net income due to additional may be short or long-term with fixed or variable rates. interest expense. As of December 31, 2018, there were no advances outstanding Shelf Registrations under either FHLBB facility. The Hartford filed an automatic shelf registration statement with For further information regarding collateralized advances with the Securities and Exchange Commission ("the SEC") on July 29, Federal Home Loan Bank of Boston, see Note 13 - Debt of Notes 2016 that permits it to offer and sell debt and equity securities to Consolidated Financial Statements. during the three-year life of the registration statement. Revolving Credit Facility and Commercial Derivative Commitments Certain of the Company’s derivative agreements contain Paper provisions that are tied to the financial strength ratings, as set by Revolving Credit Facilities nationally recognized statistical agencies, of the individual legal On March 29, 2018, the Company entered into an amendment to entity that entered into the derivative agreement. If the legal its Five-Year Credit Agreement dated October 31, 2014. The entity’s financial strength were to fall below certain ratings, the Amendment reset the level of the Company's minimum counterparties to the derivative agreements could demand consolidated net worth financial covenant to $9 billion, excluding immediate and ongoing full collateralization and in certain AOCI, from its former $13.5 billion (where net worth was defined instances enable the counterparties to terminate the agreements as stockholders' equity excluding AOCI and including junior and demand immediate settlement of all outstanding derivative subordinated debt), among other updates. Among other changes, positions traded under each impacted bilateral agreement. The under an amended and restated credit agreement that became settlement amount is determined by netting the derivative effective in June 2018, after the closing of the sale of the positions transacted under each agreement. If the termination Company's life and annuity business, the aggregate amount of rights were to be exercised by the counterparties, it could impact principal of the credit facility decreased from $1 billion to $750, the legal entity’s ability to conduct hedging activities by including a reduction to the amount available for letters of credit increasing the associated costs and decreasing the willingness of from $250 to $100, the maturity date was extended to March 29, counterparties to transact with the legal entity. The aggregate fair 2023, and the liens covenant and certain other covenants were value of all derivative instruments with credit-risk-related modified. contingent features that are in a net liability position as of As of December 31, 2018, no borrowings were outstanding and December 31, 2018 was $76. For this $76, the legal entities have $3 in letters of credit were issued under the Credit Facility and posted collateral of $71, in the normal course of business. Based the Company was in compliance with all financial covenants. on derivative market values as of December 31, 2018, a downgrade of one level below the current financial strength rates by either Moody’s or S&P would not require additional assets to
98 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations be posted as collateral. Based on derivative market values as of proceeds received through the sale of invested assets. A sale of December 31, 2018, a downgrade of two levels below the current invested assets could result in significant realized capital losses. financial strength ratings by either Moody’s or S&P would require The following tables represent the fixed maturity holdings, an additional $7 of assets to be posted as collateral. These including the aforementioned cash and short-term investments collateral amounts could change as derivative market values necessary to meet liquidity needs, for each of the Company’s change, as a result of changes in our hedging activities or to the insurance operations. extent changes in contractual terms are negotiated. The nature of the collateral that we would post, if required, would be primarily Property & Casualty in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities. As of As of December 31, 2018, no derivative positions would be December 31, 2018 subject to immediate termination in the event of a downgrade of Fixed maturities $ 24,779 one level below the current financial strength ratings. This could change as a result of changes in our hedging activities or to the Short-term investments 1,081 extent changes in contractual terms are negotiated. Cash 91 Insurance Operations Less: Derivative collateral 58 While subject to variability period to period, underwriting and Total $ 25,893 investment cash flows continue to be within historical norms and, therefore, the Company’s insurance operations’ current liquidity Group Benefits Operations position is considered to be sufficient to meet anticipated demands over the next twelve months. For a discussion and As of tabular presentation of the Company’s current contractual December 31, 2018 obligations by period, refer to Off-Balance Sheet Arrangements and Aggregate Contractual Obligations within the Capital Fixed maturities $ 9,882 Resources and Liquidity section of the MD&A. Short-term investments 398 The principal sources of operating funds are premiums, fees Cash 18 earned from assets under management and investment income, Less: Derivative collateral 18 while investing cash flows originate from maturities and sales of invested assets. The primary uses of funds are to pay claims, claim Total $ 10,280 adjustment expenses, commissions and other underwriting and insurance operating costs, to pay taxes, to purchase new investments and to make dividend payments to the HFSG Holding Company. Off-balance Sheet Arrangements and The Company’s insurance operations consist of property and Aggregate Contractual Obligations casualty insurance products (collectively referred to as The Company does not have any off-balance sheet arrangements “Property & Casualty Operations”) and Group Benefits. that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of The Company's insurance operations hold fixed maturity the Company, except for unfunded commitments to purchase securities including a significant short-term investment position investments in limited partnerships and other alternative (securities with maturities of one year or less at the time of investments, private placements, and mortgage loans as disclosed purchase) to meet liquidity needs. Liquidity requirements that are in Note 14 - Commitments and Contingencies of Notes to unable to be funded by the Company's insurance operations' Consolidated Financial Statements. short-term investments would be satisfied with current operating funds, including premiums or investing cash flows, which includes
99 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Aggregate Contractual Obligations as of December 31, 2018
Payments due by period Less than 1-3 3-5 More than Total 1 year years years 5 years Property and casualty obligations [1] $ 24,972 $ 5,740 $ 5,882 $ 2,868 $ 10,482 Group life and disability obligations [2] 11,041 1,315 3,749 1,630 4,347 Operating lease obligations [3] 173 44 61 34 34 Long-term debt obligations [4] 9,803 674 956 1,180 6,993 Purchase obligations [5] 2,107 1,515 375 181 36 Other liabilities reflected on the balance sheet [6] 933 933 — — — Total $ 49,029 $ 10,221 $ 11,023 $ 5,893 $ 21,892 [1]The following points are significant to understanding the cash flows estimated for obligations (gross of reinsurance) under property and casualty contracts: • Reserves for Property & Casualty unpaid losses and loss adjustment expenses include IBNR and case reserves. While payments due on claim reserves are considered contractual obligations because they relate to insurance policies issued by the Company, the ultimate amount to be paid to settle both case reserves and IBNR is an estimate, subject to significant uncertainty. The actual amount to be paid is not finally determined until the Company reaches a settlement with the claimant. Final claim settlements may vary significantly from the present estimates, particularly since many claims will not be settled until well into the future. • In estimating the timing of future payments by year, the Company has assumed that its historical payment patterns will continue. However, the actual timing of future payments could vary materially from these estimates due to, among other things, changes in claim reporting and payment patterns and large unanticipated settlements. In particular, there is significant uncertainty over the claim payment patterns of asbestos and environmental claims. In addition, the table does not include future cash flows related to the receipt of premiums that may be used, in part, to fund loss payments. • Under U.S. GAAP, the Company is only permitted to discount reserves for losses and loss adjustment expenses in cases where the payment pattern and ultimate loss costs are fixed and determinable on an individual claim basis. For the Company, these include claim settlements with permanently disabled claimants. As of December 31, 2018, the total property and casualty reserves in the above table are gross of a reserve discount of $388. • Amounts shown do not consider $4.2 billion of reinsurance and other recoverables the Company expects to collect related to property and casualty obligations. [2] Estimated group life and disability obligations are based on assumptions comparable with the Company’s historical experience, modified for recent observed trends. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. As of December 31, 2018, the total group life and disability obligations in the above table are gross of a reserve discount of $1.5 billion. [3]Includes future minimum lease payments on operating lease agreements. See Note 14 - Commitments and Contingencies of Notes to Consolidated Financial Statements for additional discussion on lease commitments. [4]Includes contractual principal and interest payments. See Note 13 - Debt of Notes to Consolidated Financial Statements for additional discussion of long-term debt obligations. [5]Includes $954 in commitments to purchase investments including approximately $707 of limited partnership and other alternative investments, $163 of private debt and equity securities, and $84 of mortgage loans. Of the $954 in commitments to purchase investments, $48 are related to mortgage loan commitments which the Company can cancel unconditionally. Outstanding commitments under these limited partnerships and mortgage loans are included in payments due in less than 1 year since the timing of funding these commitments cannot be reliably estimated. The remaining commitments to purchase investments primarily represent payables for securities purchased which are reflected on the Company’s Consolidated Balance Sheets. Also included in purchase obligations is $688 relating to contractual commitments to purchase various goods and services such as maintenance, human resources, and information technology in the normal course of business. Purchase obligations exclude contracts that are cancelable without penalty or contracts that do not specify minimum levels of goods or services to be purchased. [6]Includes cash collateral of $9 which the Company has accepted in connection with the Company’s derivative instruments. Since the timing of the return of the collateral is uncertain, the return of the collateral has been included in the payments due in less than 1 year. Also included in other long-term liabilities are net unrecognized tax benefits of $14. Capitalization
Capital Structure December 31, December 31, 2018 2017 Change Short-term debt (includes current maturities of long-term debt) $ 413 $ 320 29% Long-term debt 4,265 4,678 (9%) Total debt 4,678 4,998 (6%) Common stockholders' equity, excluding AOCI 14,346 12,831 12% Preferred stock 334 — —% AOCI, net of tax (1,579) 663 (338%) Total stockholders’ equity $ 13,101 $ 13,494 (3%) Total capitalization $ 17,779 $ 18,492 (4%) Debt to stockholders’ equity 36% 37% Debt to capitalization 26% 27%
Total stockholders' equity decreased in 2018 primarily due to a related to the life and annuity business sold in May 2018, as well decrease in AOCI, partially offset by net income in excess of as due to lower net unrealized capital gains on fixed maturities. stockholder dividends and the issuance of preferred stock in Total capitalization decreased $713, or 4%, as of December 31, 2018. AOCI decreased mainly due to the removal of AOCI
100 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2018 compared with December 31, 2017 primarily due to the 17 - Changes in and Reclassifications From Accumulated Other decrease in stockholders' equity and decrease in total debt. Comprehensive Income (Loss) of Notes to Consolidated Financial Statements. For additional information regarding AOCI, net of tax, see Note Cash Flow [1] 2018 2017 2016 Net cash provided by operating activities $ 2,843 $ 2,186 $ 2,066 Net cash provided by (used for) investing activities $ (1,962) $ (1,442) $ 949 Net cash used for financing activities $ (1,467) $ (979) $ (2,541) Cash — end of year $ 121 $ 180 $ 328 [1] Cash activities include cash flows from Discontinued Operations; see Note 20 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements for information on cash flows from Discontinued Operations. Year ended December 31, 2018 compared repurchase of common shares outstanding and the payment of common stock dividends, offset by an increase in cash from to the year ended December 31, 2017 securities loaned or sold under agreements to repurchase securities and issuance of debt. Cash used for financing activities Cash provided by operating activities increased in 2016 consisted primarily of repurchases of common shares in 2018 as compared to the prior year period primarily due to the outstanding of $1.3 billion, net payments for deposits, transfers effect of a $650 payment in 2017 for the ADC reinsurance and withdrawals for investments and universal life products of agreement with NICO and the effect of an increase in premium $782 and repayment of debt of $275. and fee income received, partially offset by an increase in payments for benefits, losses, and loss adjustment expenses as well as operating expenses that were mostly driven by the Equity Markets acquisition of the Aetna U.S. group life and disability business. For a discussion of the potential impact of the equity markets on Cash used for investing activities increased in 2018 capital and liquidity, see the Financial Risk on Statutory Capital compared to the prior year period primarily due to payments for and Liquidity Risk section in this MD&A. short term investments and an increase in net payments for equity securities and mortgage loans, partially offset by proceeds Ratings from the life and annuity business sold in May 2018 and an Ratings are an important factor in establishing a competitive increase in net proceeds from available for sale securities. position in the insurance marketplace and impact the Company's Cash used for financing activities increased from ability to access financing and its cost of borrowing. There can be the 2017 period primarily due to a change to a decrease in no assurance that the Company’s ratings will continue for any securities loaned or sold under agreements to repurchase, as well given period of time, or that they will not be changed. In the event as an increase in debt repayments in 2018, partially offset by a the Company’s ratings are downgraded, the Company’s reduction in treasury stock acquired, proceeds raised from competitive position, ability to access financing, and its cost of preferred stock issued net of issuance costs and a decline in borrowing, may be adversely impacted. separate account activity. Insurance Financial Strength Ratings as of Year ended December 31, 2017 compared February 20, 2019 to the year ended December 31, 2016 As of February 20, 2019 Cash provided by operating activities increased Standard in 2017 as compared to the prior year due, in part, to an increase A.M. Best & Poor's Moody's in fee income received, a decrease in taxes paid and a decrease in Hartford Fire Insurance Property & Casualty claim payments, largely offset by the $650 Company A+ A+ A1 ceded premium paid to NICO for the asbestos and environmental Hartford Life and Accident adverse development cover entered into in 2016. Insurance Company A A A2 Other Ratings: Cash used for investing activities in 2017 primarily relates to the acquisition of Aetna's U.S. group life and disability The Hartford Financial business for $1.4 billion (net of cash acquired), net of $222 of net Services Group, Inc.: proceeds from the sale of the Company's P&C U.K. run-off Senior debt a- BBB+ Baa1 business. Cash provided by investing activities in 2016 primarily Commercial paper AMB-1 A-2 P-2 related to net proceeds from available-for-sale securities of $2.7 billion, partially offset by net payments for short-term These ratings are not a recommendation to buy or hold any of The investments of $1.4 billion. Hartford’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization. Cash used for financing activities in 2017 consists The agencies consider many factors in determining the final primarily of net payments for deposits, transfers and withdrawals rating of an insurance company. One consideration is the relative for investments and universal life products of $991, the
101 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations level of statutory capital and surplus (referred to collectively as Risk Factors — “Downgrades in our financial strength or credit "statutory capital") necessary to support the business written and ratings may make our products less attractive, increase our cost is reported in accordance with accounting practices prescribed by of capital and inhibit our ability to refinance our debt.” the applicable state insurance department. See Part I, Item 1A. Statutory Capital
Statutory Capital Rollforward for the Company's Insurance Subsidiaries Property and Casualty Group Benefits Insurance Insurance Subsidiaries [1] Subsidiary Total U.S. statutory capital at January 1, 2018 $ 7,396 $ 2,029 $ 9,425 Statutory income 1,114 390 1,504 Dividends to parent (840) — (840) Other items (235) (12) (247) Net change to U.S. statutory capital 39 378 417 U.S. statutory capital at December 31, 2018 $ 7,435 $ 2,407 $ 9,842 [1]The statutory capital for property and casualty insurance subsidiaries in this table does not include the value of an intercompany note owed by HHI to Hartford Fire Insurance Company. Accordingly, neither the $1.9 billion principal paydown of the note nor an associated $1.9 billion of dividends to the holding company during the year ended December 31, 2018 are reflected in this table. Stat to GAAP Differences • Goodwill arising from the acquisition of a business is tested for recoverability on an annual basis (or more frequently, as Significant differences between U.S. GAAP stockholders’ equity necessary) for U.S. GAAP, while under U.S. STAT goodwill is and aggregate statutory capital prepared in accordance with U.S. amortized over a period not to exceed 10 years and the STAT include the following: amount of goodwill admitted as an asset is limited. • U.S. STAT excludes equity of non-insurance and foreign In addition, certain assets, including a portion of premiums insurance subsidiaries not held by U.S. insurance subsidiaries. receivable and fixed assets, are non-admitted (recorded at zero value and charged against surplus) under U.S. STAT. U.S. GAAP • Costs incurred by the Company to acquire insurance policies generally evaluates assets based on their recoverability. are deferred under U.S. GAAP while those costs are expensed immediately under U.S. STAT. Risk-Based Capital • Temporary differences between the book and tax basis of an The Company's U.S. insurance companies' states of domicile asset or liability which are recorded as deferred tax assets impose RBC requirements. The requirements provide a means of are evaluated for recoverability under U.S. GAAP while those measuring the minimum amount of statutory capital appropriate amounts deferred are subject to limitations under U.S. STAT. for an insurance company to support its overall business operations based on its size and risk profile. Companies below • The assumptions used in the determination of Group specific trigger points or ratios are classified within certain levels, Benefits reserves (i.e. for Group Benefits contracts) are each of which requires specified corrective action. All of the prescribed under U.S. STAT, while the assumptions used Company's operating insurance subsidiaries had RBC ratios in under U.S. GAAP are generally the Company’s best excess of the minimum levels required by the applicable insurance estimates. regulations. • The difference between the amortized cost and fair value of Similar to the RBC ratios that are employed by U.S. insurance fixed maturity and other investments, net of tax, is recorded regulators, regulatory authorities in the international as an increase or decrease to the carrying value of the jurisdictions in which the Company operates generally establish related asset and to equity under U.S. GAAP, while U.S. STAT minimum solvency requirements for insurance companies. All of only records certain securities at fair value, such as equity the Company's international insurance subsidiaries have capital securities and certain lower rated bonds required by the levels in excess of the minimum levels required by the applicable NAIC to be recorded at the lower of amortized cost or fair regulatory authorities. value. Sensitivity • U.S. STAT for life insurance companies like HLA establishes a In any particular year, statutory capital amounts and RBC ratios formula reserve for realized and unrealized losses due to may increase or decrease depending upon a variety of factors. default and equity risks associated with certain invested The amount of change in the statutory capital or RBC ratios can assets (the Asset Valuation Reserve), while U.S. GAAP does vary based on individual factors and may be compounded in not. Also, for those realized gains and losses caused by extreme scenarios or if multiple factors occur at the same time. At changes in interest rates, U.S. STAT for life insurance times the impact of changes in certain market factors or a companies defers and amortizes the gains and losses, caused combination of multiple factors on RBC ratios can be by changes in interest rates, into income over the original life counterintuitive. For further discussion on these factors and the to maturity of the asset sold (the Interest Maintenance potential impacts to the life insurance subsidiaries, see MD&A - Reserve) while U.S. GAAP does not. Enterprise Risk Management, Financial Risk on Statutory Capital.
102 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Statutory capital at the property and casualty subsidiaries has condition, results of operations and liquidity" under "Risk historically been maintained at or above the capital level required Factors" in Part I. to meet “AA level” ratings from rating agencies. Statutory capital generated by the property and casualty subsidiaries in excess of Guaranty Fund and Other Insurance- the capital level required to meet “AA level” ratings is available for use by the enterprise or for corporate purposes. The amount of related Assessments For a discussion regarding Guaranty Fund and Other Insurance- statutory capital can increase or decrease depending on a number related Assessments, see Note 14 Commitments and of factors affecting property and casualty results including, Contingencies of Notes to Consolidated Financial Statements. 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. IMPACT OF NEW Contingencies ACCOUNTING Legal Proceedings For a discussion regarding contingencies related to The STANDARDS Hartford’s legal proceedings, please see the information For a discussion of accounting standards, see Note 1 - Basis of contained under “Litigation” and “Asbestos and Environmental Presentation and Significant Accounting Policies of Notes to Claims,” in Note 14 - Commitments and Contingencies of the Consolidated Financial Statements. Notes to Consolidated Financial Statements and Part I, Item 3 Legal Proceedings, which are incorporated herein by reference. Legislative and Regulatory Developments Patient Protection and Affordable Care Act of 2010 (the "Affordable Care Act") It is unclear whether the Administration, Congress or the courts will seek to reverse, amend or alter the ongoing operation of the Affordable Care Act ("ACA"). If such actions were to occur, they may have an impact on various aspects of our business, including our insurance businesses. It is unclear what an amended ACA would entail, and to what extent there may be a transition period for the phase out of the ACA. The impact to The Hartford as an employer would be consistent with other large employers. The Hartford’s core business does not involve the issuance of health insurance, and we have not observed any material impacts on the Company’s workers’ compensation business or group benefits business from the enactment of the ACA. We will continue to monitor the impact of the ACA and any reforms on consumer, broker and medical provider behavior for leading indicators of changes in medical costs or loss payments primarily on the Company's workers' compensation and disability liabilities.
Tax Reform At the end of 2017, Congress passed and the president signed, the Tax Cuts and Jobs Act of 2017 ("Tax Reform"), which enacted significant reforms to the U.S. tax code. The major areas of interest to the company include the reduction of the corporate tax rate from 35% to 21% and the repeal of the corporate alternative minimum tax (AMT) and the refunding of AMT credits. We continue to analyze Tax Reform for other potential impacts. The U.S. Treasury and IRS are developing guidance implementing Tax Reform, and Congress may consider additional technical corrections to the legislation. Tax proposals and regulatory initiatives which have been or are being considered by Congress and/or the U.S. Treasury Department could have a material effect on the company and its insurance businesses. The nature and timing of any Congressional or regulatory action with respect to any such efforts is unclear. For additional information on risks to the Company related to Tax Reform, please see the risk factor entitled "Changes in federal or state tax laws could adversely affect our business, financial
103 Part II - Item 9A. Controls and Procedures Item 9A. CONTROLS AND PROCEDURES Management’s annual report on internal control over financial reporting The management of The Hartford Financial Services Group, Inc. and its subsidiaries (“The Hartford”) is responsible for establishing and maintaining adequate internal control over financial reporting for The Hartford as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. A company's internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Hartford's management assessed its internal controls over financial reporting as of December 31, 2018 in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment under those criteria, The Hartford's management concluded that its internal control over financial reporting was effective as of December 31, 2018.
104 Part II - Item 9A. Controls and Procedures
Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of The Hartford Financial Services Group, Inc. Hartford, Connecticut Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, the "Company") as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 22, 2019, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut February 22, 2019
105 Part III - Item 10. Directors, and Executive Officers and Corporate Governance of the Hartford
Part III - Item 10. Directors, and Executive Officers and Corporate Governance of the Hartford Item 10. DIRECTORS, AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE HARTFORD Certain of the information called for by Item 10 will be set forth in Any waiver of, or material amendment to, the Code of Ethics and the definitive proxy statement for the 2019 annual meeting of Business Conduct will be posted promptly to our web site in stockholders (the “Proxy Statement”) to be filed by The Hartford accordance with applicable NYSE and SEC rules. with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K under the captions and subcaptions “Board and Governance Matters”, Executive Officers of The “Director Nominees" and "Section (16)(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. Hartford The Company has adopted a Code of Ethics and Business Information about the executive officers of The Hartford who are Conduct, which is applicable to all employees of the Company, also nominees for election as directors will be set forth in The including the principal executive officer, the principal financial Hartford’s Proxy Statement. Set forth below is information about officer and the principal accounting officer. The Code of Ethics the other executive officers of the Company as of February 15, and Business Conduct is available on the investor relations 2019: section of the Company’s website at: http://ir.thehartford.com.
Name Age Position with The Hartford and Business Experience For the Past Five Years William A. Bloom 55 Executive Vice President of Operations and Technology (August 2014 - present); President of Global Client Services, EXL (July 2010-July 2014) Kathleen M. 61 Chief Marketing and Communications Officer (June 2015-present); Senior Vice President of Strategy Bromage and Marketing, Small Commercial and Senior Vice President of Brand Marketing (July 2012-June 2015) Beth A. Costello 51 Executive Vice President and Chief Financial Officer (July 2014-present); President of the life and annuity business sold in May 2018 and formerly referred to as Talcott Resolution (July 2012-July 2014) Douglas G. Elliot 58 President (July 2014-present); Executive Vice President and President of Commercial Lines (April 2011- July 2014) Martha Gervasi 57 Executive Vice President, Human Resources (May 2012-present)
Brion S. Johnson 59 Executive Vice President, Chief Investment Officer (May 2012-Present); President of the life and annuity business sold in May 2018 and formerly referred to as Talcott Resolution (July 2014-May 2018) Scott R. Lewis 56 Senior Vice President and Controller (May 2013-present); Senior Vice President and Chief Financial Officer, Personal Lines (2009-May 2013) Robert W. Paiano 57 Executive Vice President and Chief Risk Officer (June 2017-Present); Senior Vice President & Treasurer (July 2010-May 2017)
David C. Robinson 53 Executive Vice President and General Counsel (June 2015-present); Senior Vice President and Director of Commercial Markets Law (August 2014-May 2015); Senior Vice President and Head of Enterprise Transformation, Strategy and Corporate Development (April 2012-August 2014)
106 THE HARTFORD FINANCIAL SERVICES GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Description Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Statements of Operations — For the Years Ended December 31, 2018, 2017 and 2016 F-3 Consolidated Statements of Comprehensive Income (Loss) — For the Years Ended December 31, 2018, 2017 and 2016 F-4 Consolidated Balance Sheets — As of December 31, 2018 and 2017 F-5 Consolidated Statements of Changes in Stockholders’ Equity — For the Years Ended December 31, 2018, 2017 and 2016 F-6 Consolidated Statements of Cash Flows — For the Years Ended December 31, 2018, 2017 and 2016 F-7 Notes to Consolidated Financial Statements F-8
F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of The Hartford Financial Services Group, Inc. Hartford, Connecticut Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP Hartford, Connecticut February 22, 2019
We have served as the Company’s auditor since 2002.
F-2 THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Operations
For the years ended December 31, (In millions, except for per share data) 2018 2017 2016 Revenues Earned premiums $ 15,869 $ 14,141 $ 13,697 Fee income 1,313 1,168 1,041 Net investment income 1,780 1,603 1,577 Net realized capital gains (losses): Total other-than-temporary impairment (“OTTI”) losses (7) (15) (35) OTTI losses recognized in other comprehensive income 6 7 8 Net OTTI losses recognized in earnings (1) (8) (27) Other net realized capital gains (losses) (111) 173 (83) Total net realized capital gains (losses) (112) 165 (110) Other revenues 105 85 86 Total revenues 18,955 17,162 16,291 Benefits, losses and expenses Benefits, losses and loss adjustment expenses 11,165 10,174 9,961 Amortization of deferred policy acquisition costs ("DAC") 1,384 1,372 1,377 Insurance operating costs and other expenses 4,281 4,563 3,525 Loss on extinguishment of debt 6 — — Loss on reinsurance transaction — — 650 Interest expense 298 316 327 Amortization of other intangible assets 68 14 4 Total benefits, losses and expenses 17,202 16,439 15,844 Income from continuing operations before income taxes 1,753 723 447 Income tax expense (benefit) 268 985 (166) Income (loss) from continuing operations, net of tax 1,485 (262) 613 Income (loss) from discontinued operations, net of tax 322 (2,869) 283 Net income (loss) 1,807 (3,131) 896 Preferred stock dividends 6 — — Net income (loss) available to common stockholders $ 1,801 $ (3,131) $ 896
Income (loss) from continuing operations, net of tax, available to common stockholders per common share Basic $ 4.13 $ (0.72) $ 1.58 Diluted $ 4.06 $ (0.72) $ 1.55 Net income (loss) available to common stockholders per common share Basic $ 5.03 $ (8.61) $ 2.31 Diluted $ 4.95 $ (8.61) $ 2.27
See Notes to Consolidated Financial Statements.
F-3 THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, (In millions) 2018 2017 2016 Net income (loss) $ 1,807 $ (3,131) $ 896 Other comprehensive income (loss): Changes in net unrealized gain on securities (2,180) 655 (3) Changes in OTTI losses recognized in other comprehensive income (1) — 4 Changes in net gain on cash flow hedging instruments (25) (58) (54) Changes in foreign currency translation adjustments (8) 28 61 Changes in pension and other postretirement plan adjustments (23) 375 (16) OCI, net of tax (2,237) 1,000 (8) Comprehensive income (loss) $ (430) $ (2,131) $ 888
See Notes to Consolidated Financial Statements.
F-4 THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Balance Sheets
As of December 31, (In millions, except for share and per share data) 2018 2017 Assets Investments: Fixed maturities, available-for-sale, at fair value (amortized cost of $35,603 and $35,612) $ 35,652 $ 36,964 Fixed maturities, at fair value using the fair value option 22 41 Equity securities, at fair value 1,214 — Equity securities, available-for-sale, at fair value (cost of $0 and $907) — 1,012 Mortgage loans (net of allowances for loan losses of $1 and $1) 3,704 3,175 Limited partnerships and other alternative investments 1,723 1,588 Other investments 192 96 Short-term investments 4,283 2,270 Total investments 46,790 45,146 Cash 121 180 Premiums receivable and agents’ balances, net 3,995 3,910 Reinsurance recoverables, net 4,357 4,061 Deferred policy acquisition costs 670 650 Deferred income taxes, net 1,248 1,164 Goodwill 1,290 1,290 Property and equipment, net 1,006 1,034 Other intangible assets, net 657 659 Other assets 2,173 2,230 Assets held for sale — 164,936 Total assets $ 62,307 $ 225,260 Liabilities Unpaid losses and loss adjustment expenses $ 33,029 $ 32,287 Reserve for future policy benefits 642 713 Other policyholder funds and benefits payable 767 816 Unearned premiums 5,282 5,322 Short-term debt 413 320 Long-term debt 4,265 4,678 Other liabilities 4,808 5,188 Liabilities held for sale — 162,442 Total liabilities 49,206 211,766 Commitments and Contingencies (Note 14) Stockholders’ Equity Preferred stock, $0.01 par value — 50,000,000 shares authorized, 13,800 shares issued as of December 31, 2018, aggregate liquidation preference of $345 334 — Common stock, $0.01 par value — 1,500,000,000 shares authorized, 384,923,222 shares issued at December 31, 2018 and December 31, 2017 4 4 Additional paid-in capital 4,378 4,379 Retained earnings 11,055 9,642 Treasury stock, at cost — 25,772,238 and 28,088,186 shares (1,091) (1,194) Accumulated other comprehensive income (loss), net of tax (1,579) 663 Total stockholders' equity 13,101 13,494 Total liabilities and stockholders’ equity $ 62,307 $ 225,260
See Notes to Consolidated Financial Statements.
F-5 THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, (In millions, except for share data) 2018 2017 2016 Preferred Stock Preferred Stock, beginning of period $ — $ — $ — Issuance of preferred stock 334 — — Preferred Stock, end of period 334 — — Common Stock 4 4 4 Additional Paid-in Capital Additional Paid-in Capital, beginning of period 4,379 5,247 8,973 Issuance of shares under incentive and stock compensation plans (110) (76) (143) Stock-based compensation plans expense 123 104 74 Tax benefit on employee stock options and share-based awards — — 5 Issuance of shares for warrant exercise (14) (67) (16) Treasury stock retired — (829) (3,646) Additional Paid-in Capital, end of period 4,378 4,379 5,247 Retained Earnings Retained Earnings, beginning of period 9,642 13,114 12,550 Cumulative effect of accounting changes, net of tax 5 — — Adjusted balance beginning of period 9,647 13,114 12,550 Net income (loss) 1,807 (3,131) 896 Dividends declared on preferred stock (6) — — Dividends declared on common stock (393) (341) (332) Retained Earnings, end of period 11,055 9,642 13,114 Treasury Stock, at cost Treasury Stock, at cost, beginning of period (1,194) (1,125) (3,557) Treasury stock acquired — (1,028) (1,330) Treasury stock retired — 829 3,647 Issuance of shares under incentive and stock compensation plans 132 100 153 Net shares acquired related to employee incentive and stock compensation plans (43) (37) (54) Issuance of shares for warrant exercise 14 67 16 Treasury Stock, at cost, end of period (1,091) (1,194) (1,125) Accumulated Other Comprehensive Income (Loss), net of tax Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period 663 (337) (329) Cumulative effect of accounting changes, net of tax (5) — — Adjusted balance beginning of period 658 (337) (329) Total other comprehensive income (loss) (2,237) 1,000 (8) Accumulated Other Comprehensive (Loss) Income, net of tax, end of period (1,579) 663 (337) Total Stockholders’ Equity $ 13,101 $ 13,494 $ 16,903
Preferred Shares Outstanding Preferred Shares Outstanding, beginning of period — — — Issuance of preferred shares 13,800 — — Preferred Shares Outstanding, end of period 13,800 — — Common Shares Outstanding Common Shares Outstanding, beginning of period (in thousands) 356,835 373,949 401,821 Treasury stock acquired — (20,218) (30,782) Issuance of shares under incentive and stock compensation plans 2,856 2,301 3,766 Return of shares under incentive and stock compensation plans to treasury stock (849) (747) (1,243) Issuance of shares for warrant exercise 309 1,550 387 Common Shares Outstanding, end of period 359,151 356,835 373,949 Cash dividends declared per common share $ 1.10 $ 0.94 $ 0.86
See Notes to Consolidated Financial Statements.
F-6 THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Cash Flows
For the years ended December 31, (In millions) 2018 2017 2016 Operating Activities Net income (loss) $ 1,807 $ (3,131) $ 896 Adjustments to reconcile net income (loss) to net cash provided by operating activities Net realized capital losses (gains) 165 (111) 187 Amortization of deferred policy acquisition costs 1,442 1,417 1,523 Additions to deferred policy acquisition costs (1,404) (1,383) (1,390) Depreciation and amortization 467 399 398 Pension settlement expense — 747 — Loss on extinguishment of debt 6 — — Loss (gain) on sale of business (202) 3,257 81 Other operating activities, net 408 408 178 Change in assets and liabilities: Decrease (increase) in reinsurance recoverables (323) (935) 272 Increase (decrease) in accrued and deferred income taxes (103) 170 (250) Impact of tax reform on accrued and deferred income taxes — 877 — Increase (decrease) in insurance liabilities 493 1,648 322 Net change in other assets and other liabilities 87 (1,177) (151) Net cash provided by operating activities 2,843 2,186 2,066 Investing Activities Proceeds from the sale/maturity/prepayment of: Fixed maturities, available-for-sale 24,700 31,646 24,486 Fixed maturities, fair value option 23 148 238 Equity securities at fair value 1,230 — — Equity securities, available-for-sale — 810 709 Mortgage loans 483 734 647 Partnerships 433 274 779 Payments for the purchase of: Fixed maturities, available-for-sale (23,173) (30,923) (21,844) Fixed maturities, fair value option — — (94) Equity securities at fair value (1,500) — — Equity securities, available-for-sale — (638) (662) Mortgage loans (983) (1,096) (717) Partnerships (481) (509) (441) Net payments for derivatives (224) (314) (247) Net additions to property and equipment (122) (250) (224) Net (payments for) short-term investments (3,460) (144) (1,377) Other investing activities, net (3) 21 (129) Proceeds from businesses sold, net of cash transferred 1,115 222 — Amounts paid for business acquired, net of cash acquired — (1,423) (175) Net cash provided by (used for) investing activities (1,962) (1,442) 949 Financing Activities Deposits and other additions to investment and universal life-type contracts 1,814 4,602 4,186 Withdrawals and other deductions from investment and universal life-type contracts (9,210) (13,562) (14,790) Net transfers from separate accounts related to investment and universal life-type contracts 6,949 7,969 9,822 Repayments at maturity or settlement of consumer notes (2) (13) (17) Net increase (decrease) in securities loaned or sold under agreements to repurchase (621) 1,320 188 Repayment of debt (826) (416) (275) Proceeds from the issuance of debt 490 500 — Preferred stock issued, net of issuance costs 334 — — Net issuance (return) of shares under incentive and stock compensation plans (16) (10) 9 Treasury stock acquired — (1,028) (1,330) Dividends paid on common stock (379) (341) (334) Net cash used for financing activities (1,467) (979) (2,541) Foreign exchange rate effect on cash (10) 70 (40) Net increase (decrease) in cash, including cash classified as assets held for sale (596) (165) 434 Less: Net increase (decrease) in cash classified as assets held for sale (537) (17) 249 Net increase (decrease) in cash (59) (148) 185 Cash — beginning of period 180 328 143 Cash — end of period $ 121 $ 180 $ 328 Supplemental Disclosure of Cash Flow Information Income tax received (paid) $ 9 $ 6 $ (130) Interest paid $ 292 $ 322 $ 336
See Notes to Consolidated Financial Statements.
F-7 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in millions, except for per share data, unless otherwise stated)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The Hartford Financial Services Group, Inc. is a holding company Discontinued Operations for insurance and financial services subsidiaries that provide The results of operations of a component of the Company are property and casualty insurance, group life and disability reported in discontinued operations when certain criteria are met products and mutual funds and exchange-traded products to as of the date of disposal, or earlier if classified as held-for-sale. individual and business customers in the United States When a component is identified for discontinued operations (collectively, “The Hartford”, the “Company”, “we” or “our”). reporting, amounts for prior periods are retrospectively On August 22, 2018, the Company announced it entered into a reclassified as discontinued operations. Components are definitive agreement to acquire all outstanding common shares of identified as discontinued operations if they are a major part of an The Navigators Group, Inc. ("Navigators Group"), a global entity's operations and financial results such as a separate major specialty underwriter, for $70 a share, or $2.1 billion in cash. The line of business or a separate major geographical area of transaction is expected to close in late March or April 2019, operations. subject to customary closing conditions, including receipt of regulatory approvals. Use of Estimates On May 31, 2018, Hartford Holdings, Inc., a wholly owned The preparation of financial statements in conformity with U.S. subsidiary of the Company, completed the sale of the issued and GAAP requires management to make estimates and assumptions outstanding equity of Hartford Life, Inc. (“HLI”), a holding that affect the reported amounts of assets and liabilities and the company, for its life and annuity operating subsidiaries. disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and On November 1, 2017, Hartford Life and Accident Insurance expenses during the reporting period. Actual results could differ Company ("HLA"), a wholly owned subsidiary of the Company, from those estimates. completed the acquisition of Aetna's U.S. group life and disability business through a reinsurance transaction. The most significant estimates include those used in determining property and casualty and group long-term disability insurance On May 10, 2017, the Company completed the sale of its United product reserves, net of reinsurance; evaluation of goodwill for Kingdom ("U.K.") property and casualty run-off subsidiaries. impairment; valuation of investments and derivative instruments; On July 29, 2016, the Company completed the acquisition of valuation allowance on deferred tax assets; and contingencies Northern Homelands Company, the holding company of Maxum relating to corporate litigation and regulatory matters. Specialty Insurance Group (collectively "Maxum"). On July 29, 2016, the Company completed the acquisition of Lattice Reclassifications Strategies LLC ("Lattice"). Certain reclassifications have been made to prior year financial For further discussion of these transactions, see Note 2 - Business information to conform to the current year presentation. In Acquisitions and Note 20 - Business Dispositions and particular: Discontinued Operations of Notes to Consolidated Financial • Distribution costs within the Hartford Funds segment that Statements. were previously netted against fee income are presented The Consolidated Financial Statements have been prepared in gross in insurance operating costs and other expenses. Refer accordance with accounting principles generally accepted in the to the "Revenue Recognition" passage within the "Adoption United States of America (“U.S. GAAP”) which differ materially of New Accounting Standards" section below for further from the accounting practices prescribed by various insurance information. regulatory authorities. Adoption of New Accounting Consolidation Standards The Consolidated Financial Statements include the accounts of The Hartford Financial Services Group, Inc., and entities in which Stock Compensation the Company directly or indirectly has a controlling financial On January 1, 2017 the Company adopted new stock interest. Entities in which the Company has significant influence compensation guidance issued by the Financial Accounting over the operating and financing decisions but does not control Standards Board ("FASB") on a prospective basis. The updated are reported using the equity method. All intercompany guidance requires the excess tax benefit or tax deficiency on transactions and balances between The Hartford and its vesting or settlement of stock-based awards to be recognized in subsidiaries and affiliates that are not held for sale have been earnings as an income tax benefit or expense, respectively, eliminated. instead of as an adjustment to additional paid-in capital. The new guidance also requires the related cash flows to be presented in operating activities instead of in financing activities. The amount of excess tax benefit or tax deficiency realized on vesting or settlement of awards depends upon the difference between the
F-8 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) market value of awards at vesting or settlement and the grant financial instruments through a cumulative effect adjustment to date fair value recognized through compensation expense. The the opening balances of retained earnings and AOCI. The new excess tax benefit or tax deficiency is a discrete item in the guidance requires investments in equity securities to be reporting period in which it occurs and is not considered in measured at fair value with any changes in valuation reported in determining the annual estimated effective tax rate for interim net income except for investments that are consolidated or are reporting. The excess tax benefit recognized in earnings for the accounted for under the equity method of accounting. The new year ended December 31, 2018 and 2017 was $5 and $15, guidance also requires a deferred tax asset resulting from net respectively, and the excess tax benefit recognized in additional unrealized losses on fixed maturities, available-for-sale that are paid-in capital for the year ended December 31, 2016 was $5. recognized in AOCI to be evaluated for recoverability in combination with the Company’s other deferred tax assets. Reclassification of Effect of Tax Rate Under prior guidance, the Company reported equity securities, available-for-sale ("AFS"), at fair value with changes in fair value Change from AOCI to Retained reported in other comprehensive income. As of January 1, 2018, Earnings the Company reclassified from AOCI to retained earnings net On January 1, 2018, the Company adopted the FASB's new unrealized gains of $83, after tax, related to equity securities guidance for the effect on deferred tax assets and liabilities having a fair value of $1.0 billion. In addition, $10 of net related to items recorded in accumulated other comprehensive unrealized gains net of shadow DAC related to discontinued income ("AOCI") resulting from the Tax Cuts and Jobs Act of 2017 operations were reclassified from AOCI to retained earnings of ("Tax Reform") enacted on December 22, 2017. Tax Reform the life and annuity business held for sale, which increased the reduced the federal tax rate applied to the Company’s deferred estimated loss on sale in 2018 by the same amount. Beginning in tax balances from 35% to 21% on enactment. Under U.S. GAAP, 2018, the Company reports equity securities at fair value with the Company recorded the total effect of the change in enacted changes in fair value reported in net realized capital gains and tax rates on deferred tax balances as a charge to income tax losses. expense within net income during the fourth quarter of 2017, including the change in deferred tax balances related to Revenue Recognition components of AOCI. The new accounting guidance permitted On January 1, 2018, the Company adopted the FASB’s updated the Company to reclassify the “stranded” tax effects out of AOCI guidance for recognizing revenue from contracts with customers, and into retained earnings that resulted from recording the tax which excludes insurance contracts and financial instruments. effects of unrealized investment gains, unrecognized actuarial Revenue subject to the guidance is recognized when, or as, goods losses on pension and other postretirement benefit plans, and or services are transferred to customers in an amount that cumulative translation adjustments at a 35% tax rate because the reflects the consideration that an entity is expected to receive in 14 point reduction in tax rate was recognized in net income exchange for those goods or services. For all but certain revenues instead of other comprehensive income. On adoption, the associated with our Hartford Funds business, the updated Company recorded a reclassification of $88 from AOCI to guidance is consistent with previous guidance for the Company’s retained earnings. As a result of the reclassification, in the first transactions and did not have an effect on the Company’s quarter of 2018, the Company reduced the estimated loss on sale financial position, cash flows or net income. The updated recorded in income from discontinued operations by $193, net of guidance also updated criteria for determining when the tax, for the increase in AOCI related to the assets held for sale. Company acts as a principal or an agent. The Company The reduction in the loss on sale resulted in a corresponding determined that it is the principal for some of its mutual fund increase in assets held for sale and AOCI as of January 1, 2018 distribution service contracts and, upon adoption, reclassified and the AOCI associated with assets held for sale was removed distribution costs of $188 and $184 for the years ended from the balance sheet when the sale closed on May 31, December 31, 2017, and 2016, respectively, that were previously 2018. Additionally, as of January 1, 2018, the Company netted against fee income to insurance operating costs and other reclassified $105 of stranded tax effects related to continuing expenses. operations which reduced AOCI and increased retained earnings. Information about the nature, amount, timing of recognition and Financial Instruments- Recognition cash flows for the Company’s revenues subject to the updated guidance follows. and Measurement On January 1, 2018, the Company adopted updated guidance issued by the FASB for the recognition and measurement of
F-9 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue from Non-Insurance Contracts with Customers
Year ended December 31, Revenue Line Item 2018 2017 2016 Commercial Lines Installment billing fees Fee income $ 34 $ 37 $ 39 Personal Lines Installment billing fees Fee income 40 44 39 Insurance servicing revenues Other revenues 84 85 86 Group Benefits Administrative services Fee income 175 91 75 Hartford Funds Advisor, distribution and other management fees Fee income 947 897 797 Other fees Fee income 85 95 88 Corporate Investment management and other fees Fee income 32 4 3 Transition service revenues Other revenues 21 — — Total revenues subject to updated guidance $ 1,418 $ 1,253 $ 1,127
Installment fees are charged on property and casualty insurance holding company of the life and annuity business the Company contracts for billing the insurance customer in installments over sold in May 2018. These fees, calculated based on the average the policy term. These fees are recognized in fee income as quarterly net asset values, are recorded in the period in which the earned on collection. services are provided and are collected quarterly. Fluctuations in markets and interest rates and other changes to the composition Insurance servicing revenues within Personal Lines consist of up- of assets under management are all factors that ultimately have a front commissions earned for collecting premiums and processing direct effect on fee income earned. claims on insurance policies for which The Hartford does not assume underwriting risk, predominantly related to the National Corporate transition service revenues consist of operational Flood Insurance Plan program. These insurance servicing services provided to The Hartford’s former life and annuity revenues are recognized over the period of the flood program's business that will be provided for a period up to twenty-four policy terms. months from the May 31, 2018 sale date. The transition service revenues are recognized as other revenues in the period in which Group Benefits products earn fee income from employers for the the services are provided with payments collected monthly. administration of underwriting, implementation and claims processing for employer self-funded plans and for leave management services. Fees are recognized as services are Future Adoption of New provided and collected monthly. Accounting Standards Hartford Funds provides investment management, administrative and distribution services to mutual funds and exchange-traded Hedging Activities products. The Company assesses investment advisory, The FASB issued updated guidance on hedge accounting. The distribution and other asset management fees primarily based on updates allow hedge accounting for new types of interest rate the average daily net asset values from mutual funds and hedges of financial instruments and simplify documentation exchange-traded products, which are recorded in the period in requirements to qualify for hedge accounting. In addition, any which the services are provided and collected monthly. gain or loss from hedge ineffectiveness will be reported in the Fluctuations in domestic and international markets and related same income statement line with the effective hedge results and investment performance, volume and mix of sales and the hedged transaction. For cash flow hedges, the ineffectiveness redemptions of mutual funds or exchange-traded products, and will be recognized in earnings only when the hedged transaction other changes to the composition of assets under management affects earnings; otherwise, the ineffectiveness gains or losses are all factors that ultimately have a direct effect on fee income will remain in AOCI. Under current accounting, total hedge earned. ineffectiveness is reported separately in realized gains and losses apart from the hedged transaction. The Company will adopt the Hartford Funds other fees primarily include transfer agent fees, guidance effective January 1, 2019 through a cumulative effect generally assessed as a charge per account, and are recognized as adjustment of less than $1 to reclassify cumulative fee income in the period in which the services are provided with ineffectiveness on open cash flow hedges from retained earnings payments collected monthly. to AOCI. The adoption will not affect the Company’s financial Corporate investment management and other fees are primarily position or cash flows or have a material effect on net income. for managing third party invested assets, including management of the invested assets of Talcott Resolution Life, Inc. and its subsidiaries ("Talcott Resolution"). Talcott Resolution is the new
F-10 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
adjustable valuation allowances on fixed maturities AFS, subject Goodwill to a fair value floor. The FASB issued updated guidance on testing goodwill for impairment. The updated guidance requires recognition and measurement of goodwill impairment based on the excess of the Leases The FASB issued updated guidance on lease accounting. Under carrying value of the reporting unit compared to its estimated fair the new guidance, effective January 1, 2019, lessees with value, with the amount of the impairment not to exceed the operating leases are required to recognize a liability for the carrying value of the reporting unit’s goodwill. Under existing present value of future minimum lease payments with a guidance, if the reporting unit’s carrying value exceeds its corresponding asset for the right of use of the property. Under estimated fair value, the Company allocates the fair value of the guidance effective through December 31, 2018, future minimum reporting unit to all of the assets and liabilities of the reporting lease payments on operating leases are commitments that are not unit to determine an implied goodwill value. An impairment loss is recognized as liabilities on the balance sheet. Under the new then recognized for the excess, if any, of the carrying value of the guidance, leases will be classified as financing or operating leases. reporting unit’s goodwill compared to the implied goodwill value. Where the lease is economically similar to a purchase because The Company expects to adopt the updated guidance January 1, The Hartford obtains control of the underlying asset, the lease 2020 on a prospective basis as required, although earlier will be a financing lease and the Company will recognize adoption is permitted. While the Company would not have amortization of the right of use asset and interest expense on the recognized a goodwill impairment loss for the years presented, liability. Where the lease provides The Hartford with only the the impact of the adoption will depend on the estimated fair value right to control the use of the underlying asset over the lease of the Company’s reporting units compared to the carrying value term and the lease term is greater than one year, the lease will be at adoption. an operating lease and the lease costs will be recognized as rental expense over the lease term on a straight-line basis. Leases with a Financial Instruments - Credit Losses term of one year or less will also be expensed over the lease term The FASB issued updated guidance for recognition and but will not be recognized on the balance sheet. The Company will measurement of credit losses on financial instruments. The new adopt the guidance as of the January 1, 2019, effective date with guidance will replace the “incurred loss” approach with an no change to comparative periods and record a lease payment “expected loss” model for recognizing credit losses for financial obligation of approximately $160 for outstanding leases and a instruments carried at other than fair value, which will initially right of use asset of approximately $150, which is net of $10 in result in the recognition of greater allowances for losses. The lease incentives received. The Hartford will elect to apply the allowance will be an estimate of credit losses expected over the package of practical expedients and not reassess expired or life of financial instruments carried at other than fair value, such existing contracts that are or contain leases; all operating leases as mortgage loans, reinsurance recoverables and receivables. will remain classified as operating leases on adoption; and initial Credit losses on fixed maturities AFS carried at fair value will direct costs on existing leases will not be reassessed to determine continue to be measured like other-than-temporary impairments if deferred costs should be written-off or recorded on adoption. ("OTTI"); however, the losses will be recognized through an The adoption will not impact net income or cash flows. allowance and no longer as an adjustment to the cost basis. Recoveries of impairments on fixed maturities AFS will be recognized as reversals of valuation allowances and no longer Reserve for Future Policy Benefits The FASB issued new guidance on accounting for long-duration accreted as investment income through an adjustment to the insurance contracts. The Company’s long-duration insurance investment yield. The allowance on fixed maturities AFS cannot contracts include paid-up life insurance and whole-life insurance cause the net carrying value to be below fair value and, policies resulting from conversion from group life policies and therefore, it is possible that future increases in fair value due to run-off structured settlement and terminal funding agreement decreases in market interest rates could cause the reversal of a liabilities with total future policy benefit reserves of $642 as of valuation allowance and increase net income. The new guidance December 31, 2018. Under existing guidance, a reserve for future also requires purchased financial assets with a more-than- policy benefits is calculated as the present value of future insignificant amount of credit deterioration since original benefits and related expenses less the present value of any future issuance to be recorded based on contractual amounts due and premiums using assumptions “locked in” at the time the policies an initial allowance recorded at the date of purchase. The were issued, including discount rate, lapse rate, mortality, and Company will adopt the guidance effective January 1, 2020, expense assumptions. Under existing guidance, assumptions are through a cumulative-effect adjustment to retained earnings for only updated if there is an expected premium deficiency. The new the change in the allowance for credit losses for financial guidance will require that underlying cash flow assumptions (such instruments carried at other than fair value. No allowance will be as for lapse rate, mortality and expenses) be reviewed and recognized at adoption for fixed maturities AFS; rather, their cost updated at least annually in the same quarter each year. The new basis will be evaluated for an allowance for credit losses guidance also requires that the discount rate assumption be prospectively. The Company has not yet determined the effect updated each quarter and be based on an upper-medium grade on the Company’s consolidated financial statements and the (low-credit-risk) fixed-income investment yield. The change in the ultimate impact of the adoption will depend on the composition reserve estimate as a result of updating cash flow assumptions of the financial instruments and market conditions at the will be recognized in net income. The change in the reserve adoption date. Significant implementation matters yet to be estimate as a result of updating the discount rate assumption will addressed include estimating lifetime expected losses on be recognized in other comprehensive income. Because reserves financial instruments carried at other than fair value, will be based on updated assumptions and no longer locked in at determining the impact of valuation allowances on net contract inception, there will no longer be a test for premium investment income from fixed maturities AFS, and updating our deficiency. The new guidance will be effective January 1, 2021, investment accounting system functionality to maintain
F-11 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) and will be applied to balances in place as of the earliest period derivatives, and are carried at fair value with changes in value presented. Early adoption is permitted. The Company has not yet recorded in realized capital gains and losses. Mortgage loans are determined the method or timing for adoption or estimated the recorded at the outstanding principal balance adjusted for effect on the Company’s financial statements. amortization of premiums or discounts and net of valuation allowances. Short-term investments are carried at amortized Significant Accounting Policies cost, which approximates fair value. Limited partnerships and other alternative investments are reported at their carrying value The Company’s significant accounting policies are as follows: and are primarily accounted for under the equity method with the Company’s share of earnings included in net investment income. Revenue Recognition Recognition of income related to limited partnerships and other Property and casualty insurance premiums are earned on a pro alternative investments is delayed due to the availability of the rata basis over the policy period and include accruals for ultimate related financial information, as private equity and other funds premium revenue anticipated under auditable and are generally on a three-month delay and hedge funds on a one- retrospectively rated policies. Unearned premiums represent the month delay. Accordingly, income for the years ended premiums applicable to the unexpired terms of policies in force. December 31, 2018, 2017, and 2016 may not include the full An estimated allowance for doubtful accounts is recorded on the impact of current year changes in valuation of the underlying basis of periodic evaluations of balances due from insureds, assets and liabilities of the funds, which are generally obtained management’s experience and current economic conditions. The from the limited partnerships. Other investments primarily Company charges off any balances that are determined to be consist of investments of consolidated investment funds and uncollectible. The allowance for doubtful accounts included in derivative instruments which are carried at fair value. The premiums receivable and agents’ balances in the Consolidated Company has provided seed money for investment funds and Balance Sheets was $135 and $132 as of December 31, 2018 and reports the underlying investments at fair value with changes in 2017, respectively. the fair value recognized in income consistent with accounting Group life, disability and accident premiums are generally due requirements for investment companies. from policyholders and recognized as revenue on a pro rata basis over the period of the contracts. Net Realized Capital Gains and Losses Net realized capital gains and losses from investment sales are Revenue from non-insurance contracts with customers is reported as a component of revenues and are determined on a discussed above in "Adoption of New Accounting Standards, specific identification basis. Net realized capital gains and losses Revenue Recognition." also result from fair value changes in fixed maturities, FVO, equity securities, and derivatives contracts that do not qualify, or are not Dividends to Policyholders designated, as a hedge for accounting purposes as well as Policyholder dividends are paid to certain property and casualty ineffectiveness on derivatives that qualify for hedge accounting policyholders. Policies that receive dividends are referred to as treatment. Impairments and mortgage loan valuation allowances participating policies. Participating dividends to policyholders are are recognized as net realized capital losses in accordance with accrued and reported in insurance operating costs and other the Company’s impairment and mortgage loan valuation expenses and other liabilities using an estimate of the amount to allowance policies as discussed in Note 6 - Investments of Notes be paid based on underlying contractual obligations under to Consolidated Financial Statements. Foreign currency policies and applicable state laws. transaction remeasurements are also included in net realized capital gains and losses. Net written premiums for participating property and casualty insurance policies represented 10%, 10% and 9% of total net Net Investment Income written premiums for the years ended December 31, 2018, 2017 Interest income from fixed maturities and mortgage loans is and 2016, respectively. Participating dividends to property and recognized when earned on the constant effective yield method casualty policyholders were $23, $35 and $15 for the years based on estimated timing of cash flows. Most premiums and ended December 31, 2018, 2017 and 2016, respectively. discounts on fixed maturities are amortized to the maturity date. There were no additional amounts of income allocated to Premiums on callable bonds may be amortized to call dates based participating policyholders. on call prices. For securitized financial assets subject to prepayment risk, yields are recalculated and adjusted periodically Investments to reflect historical and/or estimated future prepayments using the retrospective method; however, if these investments are Overview impaired and for certain other asset-backed securities, any yield The Company’s investments in fixed maturities include bonds, adjustments are made using the prospective method. Prepayment structured securities, redeemable preferred stock and fees and make-whole payments on fixed maturities and mortgage commercial paper. Most of these investments are classified as loans are recorded in net investment income when earned. For available-for-sale ("AFS") and are carried at fair value. The after equity securities, dividends are recognized as investment income tax difference between fair value and cost or amortized cost is on the ex-dividend date. Limited partnerships and other reflected in stockholders’ equity as a component of AOCI. alternative investments primarily use the equity method of Effective January 1, 2018, equity securities are measured at fair accounting to recognize the Company’s share of earnings. For value with any changes in valuation reported in net income. For impaired debt securities, the Company accretes the new cost further information, see Financial Instruments - Recognition and basis to the estimated future cash flows over the expected Measurement discussion above. Fixed maturities for which the remaining life of the security by prospectively adjusting the Company elected the fair value option are classified as FVO, security’s yield, if necessary. The Company’s non-income generally certain securities that contain embedded credit
F-12 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) producing investments were not material for the years ended Foreign currency swaps exchange an initial principal amount in December 31, 2018, 2017 and 2016. two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be a Derivative Instruments periodic exchange of payments at specified intervals calculated Overview using the agreed upon rates and exchanged principal amounts. The Company utilizes a variety of over-the-counter ("OTC") The Company’s derivative transactions conducted in insurance derivatives, derivatives cleared through central clearing houses company subsidiaries are used in strategies permitted under the ("OTC-cleared") and exchange traded derivative instruments as derivative use plans required by the State of Connecticut, the part of its overall risk management strategy as well as to enter State of Illinois and the State of New York insurance departments. into replication transactions. The types of instruments may include swaps, caps, floors, forwards, futures and options to Accounting and Financial Statement achieve one of four Company-approved objectives: Presentation of Derivative Instruments and • to hedge risk arising from interest rate, equity market, Hedging Activities commodity market, credit spread and issuer default, price or Derivative instruments are recognized on the Consolidated currency exchange rate risk or volatility; Balance Sheets at fair value and are reported in Other Investments and Other Liabilities. For balance sheet presentation • to manage liquidity; purposes, the Company has elected to offset the fair value • to control transaction costs; amounts, income accruals, and related cash collateral receivables and payables of OTC derivative instruments executed in a legal • to enter into synthetic replication transactions. entity and with the same counterparty or under a master netting Interest rate and credit default swaps involve the periodic agreement, which provides the Company with the legal right of exchange of cash flows with other parties, at specified intervals, offset. calculated using agreed upon rates or other financial variables On the date the derivative contract is entered into, the Company and notional principal amounts. Generally, little to no cash or designates the derivative as (1) a hedge of the fair value of a principal payments are exchanged at the inception of the recognized asset or liability (“fair value” hedge), (2) a hedge of the contract. Typically, at the time a swap is entered into, the cash variability in cash flows of a forecasted transaction or of amounts flow streams exchanged by the counterparties are equal in value. to be received or paid related to a recognized asset or liability The Company clears certain interest rate swap and credit default (“cash flow” hedge), (3) a hedge of a net investment in a foreign swap derivative transactions through central clearing houses. operation (“net investment” hedge) or (4) held for other OTC-cleared derivatives require initial collateral at the inception investment and/or risk management purposes, which primarily of the trade in the form of cash or highly liquid securities, such as involve managing asset or liability related risks and do not qualify U.S. Treasuries and government agency investments. Central for hedge accounting. The Company currently does not designate clearing houses also require additional cash as variation margin any derivatives as fair value or net investment hedges. based on daily market value movements. For information on Changes in the fair value of a derivative collateral, see the derivative collateral arrangements section in Cash Flow Hedges - that is designated and qualifies as a cash flow hedge, including Note 7 - Derivatives of Notes to Consolidated Financial foreign-currency cash flow hedges, are recorded in AOCI and are Statements. In addition, OTC-cleared transactions include price reclassified into earnings when the variability of the cash flow of alignment amounts either received or paid on the variation the hedged item impacts earnings. Gains and losses on derivative margin, which are reflected in realized capital gains and losses or, contracts that are reclassified from AOCI to current period if characterized as interest, in net investment income. earnings are included in the line item in the Consolidated Forward contracts are customized commitments that specify a Statements of Operations in which the cash flows of the hedged rate of interest or currency exchange rate to be paid or received item are recorded. Any hedge ineffectiveness is recorded on an obligation beginning on a future start date and are typically immediately in current period earnings as net realized capital settled in cash. gains and losses. Periodic derivative net coupon settlements are recorded in the line item of the Consolidated Statements of Financial futures are standardized commitments to either Operations in which the cash flows of the hedged item are purchase or sell designated financial instruments, at a future date, recorded. Cash flows from cash flow hedges are presented in the for a specified price and may be settled in cash or through same category as the cash flows from the items being hedged in delivery of the underlying instrument. Futures contracts trade on the Consolidated Statement of Cash Flows. organized exchanges. Margin requirements for futures are met by pledging securities or cash, and changes in the futures’ contract Other Investment and/or Risk Management values are settled daily in cash. Activities - The Company’s other investment and/or risk management activities primarily relate to strategies used to Option contracts grant the purchaser, for a premium payment, reduce economic risk or replicate permitted investments and do the right to either purchase from or sell to the issuer a financial not receive hedge accounting treatment. Changes in the fair instrument at a specified price, within a specified period or on a value, including periodic derivative net coupon settlements, of stated date. The contracts may reference commodities, which derivative instruments held for other investment and/or risk grant the purchaser the right to either purchase from or sell to management purposes are reported in current period earnings as the issuer commodities at a specified price, within a specified net realized capital gains and losses. period or on a stated date. Option contracts are typically settled in cash.
F-13 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hedge Documentation and Effectiveness derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host Testing instrument in the Consolidated Balance Sheets, is carried at fair To qualify for hedge accounting treatment, a derivative must be value with changes in fair value reported in net realized capital highly effective in mitigating the designated changes in fair value gains and losses. or cash flow of the hedged item. At hedge inception, the Company formally documents all relationships between hedging Credit Risk of Derivative Instruments instruments and hedged items, as well as its risk-management Credit risk is defined as the risk of financial loss due to objective and strategy for undertaking each hedge transaction. uncertainty of an obligor’s or counterparty’s ability or willingness The documentation process includes linking derivatives that are to meet its obligations in accordance with agreed upon terms. designated as fair value, cash flow, or net investment hedges to Credit exposures are measured using the market value of the specific assets or liabilities on the balance sheet or to specific derivatives, resulting in amounts owed to the Company by its forecasted transactions and defining the effectiveness and counterparties or potential payment obligations from the ineffectiveness testing methods to be used. The Company also Company to its counterparties. The Company generally requires formally assesses both at the hedge’s inception and ongoing on a that OTC derivative contracts, other than certain forward quarterly basis, whether the derivatives that are used in hedging contracts, be governed by International Swaps and Derivatives transactions have been and are expected to continue to be highly Association ("ISDA") agreements which are structured by legal effective in offsetting changes in fair values, cash flows or net entity and by counterparty, and permit right of offset. Some investment in foreign operations of hedged items. Hedge agreements require daily collateral settlement based upon effectiveness is assessed primarily using quantitative methods as agreed upon thresholds. For purposes of daily derivative well as using qualitative methods. Quantitative methods include collateral maintenance, credit exposures are generally quantified regression or other statistical analysis of changes in fair value or based on the prior business day’s market value and collateral is cash flows associated with the hedge relationship. Qualitative pledged to and held by, or on behalf of, the Company to the extent methods may include comparison of critical terms of the the current value of the derivatives is greater than zero, subject derivative to the hedged item. Hedge ineffectiveness of the hedge to minimum transfer thresholds. The Company also minimizes the relationships are measured each reporting period using the credit risk of derivative instruments by entering into transactions “Change in Variable Cash Flows Method”, the “Change in Fair with high quality counterparties primarily rated A or better, Value Method”, the “Hypothetical Derivative Method”, or the which are monitored and evaluated by the Company’s risk “Dollar Offset Method”. management team and reviewed by senior management. OTC- cleared derivatives are governed by clearing house rules. Discontinuance of Hedge Accounting Transactions cleared through a central clearing house reduce risk The Company discontinues hedge accounting prospectively when due to their ability to require daily variation margin and act as an (1) it is determined that the qualifying criteria are no longer met; independent valuation source. In addition, the Company monitors (2) the derivative is no longer designated as a hedging instrument; counterparty credit exposure on a monthly basis to ensure or (3) the derivative expires or is sold, terminated or exercised. compliance with Company policies and statutory limitations. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value Cash hedge, the derivative continues to be carried at fair value on the Cash represents cash on hand and demand deposits with banks or balance sheet with changes in its fair value recognized in current other financial institutions. period earnings. Changes in the fair value of the hedged item attributable to the hedged risk is no longer adjusted through Reinsurance current period earnings and the existing basis adjustment is The Company cedes insurance to affiliated and unaffiliated amortized to earnings over the remaining life of the hedged item insurers in order to limit its maximum losses and to diversify its through the applicable earnings component associated with the exposures and provide statutory surplus relief. Such hedged item. arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations When cash flow hedge accounting is discontinued because the could result in losses to the Company. The Company also assumes Company becomes aware that it is not probable that the reinsurance from other insurers and is a member of and forecasted transaction will occur, the derivative continues to be participates in reinsurance pools and associations. Assumed carried on the balance sheet at its fair value, and gains and losses reinsurance refers to the Company’s acceptance of certain that were accumulated in AOCI are recognized immediately in insurance risks that other insurance companies or pools have earnings. underwritten. In other situations in which hedge accounting is discontinued, Reinsurance accounting is followed for ceded and assumed including those where the derivative is sold, terminated or transactions that provide indemnification against loss or liability exercised, amounts previously deferred in AOCI are reclassified relating to insurance risk (i.e. risk transfer). To meet risk transfer into earnings when earnings are impacted by the hedged item. requirements, a reinsurance agreement must include insurance Embedded Derivatives risk, consisting of underwriting and timing risk, and a reasonable possibility of a significant loss to the reinsurer. If the ceded and The Company purchases investments that contain embedded assumed transactions do not meet risk transfer requirements, the derivative instruments. When it is determined that (1) the Company accounts for these transactions as financing embedded derivative possesses economic characteristics that are transactions. not clearly and closely related to the economic characteristics of the host contract and (2) a separate instrument with the same Premiums, benefits, losses and loss adjustment expenses reflect terms would qualify as a derivative instrument, the embedded the net effects of ceded and assumed reinsurance transactions.
F-14 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Included in other assets are prepaid reinsurance premiums, which the reporting unit is allocated to all of the assets and liabilities of represent the portion of premiums ceded to reinsurers applicable the reporting unit to determine an implied goodwill value. If the to the unexpired terms of the reinsurance contracts. Reinsurance carrying amount of the reporting unit’s goodwill exceeds the recoverables are balances due from reinsurance companies for implied goodwill value, an impairment loss is recognized in an paid and unpaid losses and loss adjustment expenses and are amount equal to that excess. presented net of an allowance for uncollectible reinsurance. Management’s determination of the fair value of each reporting Changes in the allowance for uncollectible reinsurance are unit incorporates multiple inputs into discounted cash flow reported in benefits, losses and loss adjustment expenses in the calculations, including assumptions that market participants Company's Consolidated Statements of Operations. would make in valuing the reporting unit. Assumptions include The Company evaluates the financial condition of its reinsurers levels of economic capital required to support the business, and concentrations of credit risk. Reinsurance is placed with future business growth, earnings projections and, for the reinsurers that meet strict financial criteria established by the Hartford Funds segment, assets under management and the Company. weighted average cost of capital used for purposes of discounting. Decreases in business growth, decreases in earnings projections Deferred Policy Acquisition Costs and increases in the weighted average cost of capital will all cause Deferred policy acquisition costs ("DAC") represent costs that are a reporting unit’s fair value to decrease, increasing the possibility directly related to the acquisition of new and renewal insurance of impairments. contracts and incremental direct costs of contract acquisition that are incurred in transactions with independent third parties Intangible Assets or in compensation to employees. Such costs primarily include Acquired intangible assets on the Consolidated Balance Sheets commissions, premium taxes, costs of policy issuance and include purchased customer relationship and agency or other underwriting, and certain other expenses that are directly related distribution rights and licenses measured at fair value at to successfully issued contracts. acquisition. The Company amortizes finite-lived other intangible assets over their useful lives generally on a straight-line basis over For property and casualty insurance products and group life, the period of expected benefit, ranging from 1 to 15 years. disability and accident contracts, costs are deferred and Management revises amortization periods if it believes there has amortized ratably over the period the related premiums are been a change in the length of time that an intangible asset will earned. Deferred acquisition costs are reviewed to determine if continue to have value. Indefinite-lived intangible assets are not they are recoverable from future income, and if not, are charged subject to amortization. Intangible assets are assessed for to expense. Anticipated investment income is considered in the impairment generally when events or circumstances indicate a determination of the recoverability of DAC. potential impairment and at least annually for indefinite-lived intangibles. If the carrying amount is not recoverable from Income Taxes undiscounted cash flows, the impairment is measured as the The Company recognizes taxes payable or refundable for the difference between the carrying amount and fair value. current year and deferred taxes for the tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities Property and Equipment Property and equipment, which includes capitalized software, is are measured using enacted tax rates expected to apply to carried at cost net of accumulated depreciation. Depreciation is taxable income in the years the temporary differences are based on the estimated useful lives of the various classes of expected to reverse. A deferred tax provision is recorded for the property and equipment and is determined principally on the tax effects of differences between the Company's current taxable straight-line method. Accumulated depreciation was $1.6 billion income and its income before tax under generally accepted and $2.6 billion as of December 31, 2018 and 2017, respectively, accounting principles in the Consolidated Statements of with the decrease due to the removal of fully depreciated assets Operations. For deferred tax assets, the Company records a in 2018. Depreciation expense was $232, $197, and $186 for the valuation allowance that is adequate to reduce the total deferred years ended December 31, 2018, 2017 and 2016, respectively. tax asset to an amount that will more likely than not be realized. Goodwill Unpaid Losses and Loss Adjustment Goodwill represents the excess of the cost to acquire a business Expenses over the fair value of net assets acquired. Goodwill is not For property and casualty and group life and disability insurance amortized but is reviewed for impairment at least annually or products, the Company establishes reserves for unpaid losses and more frequently if events occur or circumstances change that loss adjustment expenses to provide for the estimated costs of would indicate that a triggering event for a potential impairment paying claims under insurance policies written by the Company. has occurred. The goodwill impairment test follows a two-step These reserves include estimates for both claims that have been process. In the first step, the fair value of a reporting unit is reported and those that have been incurred but not reported compared to its carrying value. A reporting unit is defined as an ("IBNR"), and include estimates of all losses and loss adjustment operating segment or one level below an operating segment. The expenses associated with processing and settling these claims. Company’s reporting units, for which goodwill has been allocated Estimating the ultimate cost of future losses and loss adjustment include small commercial within the Commercial Lines segment, expenses is an uncertain and complex process. This estimation Group Benefits, Personal Lines and Hartford Funds. If the process is based significantly on the assumption that past carrying value of a reporting unit exceeds its fair value, the developments are an appropriate predictor of future events, and second step of the impairment test is performed for purposes of involves a variety of actuarial techniques that analyze experience, measuring the impairment. In the second step, the fair value of trends and other relevant factors. The effects of inflation are
F-15 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) implicitly considered in the reserving process. A number of Group life and disability contracts with long-tail claim liabilities complex factors influence the uncertainties involved with the are discounted because the payment pattern and the ultimate reserving process including social and economic trends and costs are reasonably fixed and determinable on an individual changes in the concepts of legal liability and damage awards. claim basis. The discount rates are estimated based on investment Accordingly, final claim settlements may vary from the present yields expected to be earned on the cash flows net of investment estimates, particularly when those payments may not occur until expenses and expected credit losses. The Company establishes well into the future. The Company regularly reviews the discount rates for these reserves in the year the claims are adequacy of its estimated losses and loss adjustment expense incurred (the incurral year) which is when the estimated reserves by reserve line within the various reporting segments. settlement pattern is determined. The discount rate for life and Adjustments to previously established reserves are reflected in disability reserves acquired from Aetna's U.S. group life and the operating results of the period in which the adjustment is disability business were based on interest rates in effect at the determined to be necessary. Such adjustments could possibly be acquisition date of November 1, 2017. significant, reflecting any variety of new and adverse or favorable For further information about how unpaid losses and loss trends. adjustment expenses are established, see Note 11 - Reserve for Most of the Company’s property and casualty insurance products Unpaid Losses and Loss Adjustment Expenses of Notes to reserves are not discounted. However, the Company has Consolidated Financial Statements. discounted to present value certain reserves for indemnity payments that are due to permanently disabled claimants under Foreign Currency workers’ compensation policies because the payment pattern and Foreign currency translation gains and losses are reflected in the ultimate costs are reasonably fixed and determinable on an stockholders’ equity as a component of AOCI. The Company’s individual claim basis. The discount rate is based on the risk free foreign subsidiaries’ balance sheet accounts are translated at the rate for the expected claim duration as determined in the year the exchange rates in effect at each year end and income statement claims were incurred. The Company also has discounted liabilities accounts are translated at the average rates of exchange for run-off structured settlement agreements that provide fixed prevailing during the year. The national currencies of the periodic payments to claimants. These structured settlements international operations are generally their functional currencies. include annuities purchased to fund unpaid losses for Gains and losses resulting from the remeasurement of foreign permanently disabled claimants. These structured settlement currency transactions are reflected in earnings in realized capital liabilities are discounted to present value using the rate implicit in gains (losses) in the period in which they occur. the purchased annuities and the purchased annuities are accounted for within reinsurance recoverables.
2. BUSINESS ACQUISITIONS finalized its provisional estimates with a final cash settlement Aetna Group Insurance within the one year measurement period allowed under U.S. On November 1, 2017, The Hartford acquired Aetna's U.S. group GAAP ("GAAP"). As a result, in the third quarter of 2018, The life and disability business through a reinsurance transaction for Hartford recorded additional assets and liabilities at fair value of total consideration of $1.452 billion, comprised of cash of $1.450 $80 and $80, respectively, with no change in goodwill. The billion and share-based awards of $2, and recorded provisional following table presents the preliminary allocation of the estimates of the fair value of the assets acquired and liabilities purchase price to the assets acquired and liabilities assumed as of assumed. The acquisition enables the Company to increase its the acquisition date, the measurement period adjustments market share in the group life and disability industry. In 2018, The recorded, and the final purchase price allocation. Hartford and Aetna agreed on the final assets acquired and liabilities assumed as of the acquisition date and The Hartford
F-16 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
Preliminary Value as of November 1, 2017 (as Measurement Period As Adjusted Value as of previously reported as Adjustments November 1, 2017 of December 31, 2017) Assets Cash and invested assets $ 3,360 $ 45 $ 3,405 Premiums receivable 96 7 103 Deferred income taxes, net 56 13 69 Other intangible assets 629 — 629 Property and equipment 68 — 68 Reinsurance recoverables — 31 31 Other assets 16 (16) — Total Assets Acquired 4,225 80 4,305 Liabilities Unpaid losses and loss adjustment expenses 2,833 71 2,904 Reserve for future policy benefits payable 346 1 347 Other policyholder funds and benefits payable 245 1 246 Unearned premiums 3 1 4 Other liabilities 69 6 75 Total Liabilities Assumed 3,496 80 3,576 Net identifiable assets acquired 729 — 729 Goodwill [1] 723 — 723 Net Assets Acquired $ 1,452 $ — $ 1,452 [1]Approximately $610 is deductible for income tax purposes. The effect of measurement period adjustments on the Property and equipment represents an internally developed Consolidated Statements of Operations for the year ended integrated absence management software acquired that was December 31, 2018 was immaterial and was determined as if the valued based on estimated replacement cost. The software is accounting had been completed as of the acquisition date. amortized over 5 years on a straight-line basis. Intangible Assets Recorded in Connection Unpaid losses and loss adjustment expenses acquired were with the Acquisition recorded at estimated fair value equal to the present value of expected future unpaid loss and loss adjustment expense Asset Amount Estimated payments discounted using the net investment yield estimated as Useful Life of the acquisition date plus a risk margin. The fair value adjustment for the risk margin is amortized over 12 years based Value of in-force contracts $ 23 1 year on the payout pattern of losses and loss expenses as estimated as Customer relationships 590 15 years of the acquisition date. Marketing agreement with Aetna 16 15 years The revenues and earnings of the business acquired are included Total $ 629 in the Company's Consolidated Statements of Operations in the Group Benefits reporting segment and were $370 and $(37) in The value of in-force contracts represents the estimated profits the year of acquisition, respectively. relating to the unexpired contracts in force at the acquisition date through expiry of the contracts. The value of customer The $723 of goodwill recognized is largely attributable to the relationships was estimated using net cash flows expected to acquired employee workforce, expected expense synergies, come from the renewals of in-force contracts acquired less costs economies of scale, and tax benefits not included within the value to service the related policies. The value of the marketing of identifiable intangibles. Goodwill is allocated to the Company's agreement with Aetna was estimated using net cash flows Group Benefits reporting segment. expected to come from incremental new business written during The Company recognized $17 of acquisition related costs in the the three-year duration of the agreement, less costs to service year of acquisition. These costs are included in insurance the related contracts. The value for each of the identifiable operating costs and other expenses in the Consolidated intangible assets was estimated using a discounted cash flow Statement of Operations. method. Significant inputs to the valuation models include estimates of expected premiums, persistency rates, investment The following table presents supplemental pro forma amounts of returns, claim costs, expenses and discount rates based on a revenue and net income for the Company in 2016 and 2017 as weighted average cost of capital. though the business was acquired on January 1, 2016.
F-17 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro Forma Results (Unaudited) Lattice On July 29, 2016, an indirect wholly-owned subsidiary of the Twelve months Twelve months Company acquired 100% of the membership interests ended ended December 31, December 31, outstanding of Lattice Strategies LLC, an investment management 2017 [1] 2016 [1] firm and provider of strategic beta exchange-traded products ("ETP") with approximately $200 of assets under management Total Revenue $ 18,899 $ 18,348 ("AUM") at the acquisition date. Net Income $ (3,077) $ 953 [1]Pro forma adjustments include the revenue and earnings of the Aetna U.S. group Fair Value of the Consideration Transferred at life and disability business as well as amortization of identifiable intangible assets the Acquisition Date acquired and the fair value adjustment to acquired insurance reserves. Pro forma adjustments do not include retrospective adjustments to defer and amortize Cash $ 19 acquisition costs as would be recorded under the Company’s accounting policy. Maxum Contingent consideration 23 On July 29, 2016, the Company acquired 100% of the Total $ 42 outstanding shares of Northern Homelands Company, the holding company of Maxum Specialty Insurance Group headquartered in Fair Value of Assets Acquired and Liabilities Alpharetta, Georgia in a cash transaction for approximately $169. Assumed at the Acquisition Date The acquisition adds excess and surplus lines capability to the Company's small commercial line of business. Maxum is As of maintaining its brand and limited wholesale distribution model. July 29, 2016 Maxum's revenues and earnings since the acquisition date are Assets included in the Company's Consolidated Statements of Intangible assets [1] $ 11 Operations in the Commercial Lines reporting segment. Cash 1 Fair Value of Assets Acquired and Liabilities Total assets acquired 12 Assumed at the Acquisition Date Liabilities As of Total liabilities assumed 1 July 29, 2016 Net identifiable assets acquired 11 Assets Goodwill [2] 31 Cash and investments (including cash of $12) $ 274 Net assets acquired $ 42 Reinsurance recoverables 113 [1]Comprised of indefinite lived intangibles of $10 related to customer relationships Intangible assets [1] 11 and $1 of other intangibles, which are amortized over 5 to 8 years. [2]Deductible for federal income tax purposes. Other assets 79 Lattice's revenues and earnings since the acquisition date are Total assets acquired 477 included in the Company's Consolidated Statements of Liabilities Operations in the Hartford Funds reporting segment. Unpaid losses 235 In addition to the initial cash consideration, the Company is Unearned premiums 77 required to make future payments to the former owners of Other liabilities 34 Lattice of up to $60 based upon growth in ETP AUM over four Total liabilities assumed 346 years beginning on the date of acquisition. The contingent consideration was measured at fair value at the acquisition date Net identifiable assets acquired 131 by projecting future ETP AUM and discounting expected Goodwill [2] 38 payments back to the valuation date. The projected ETP AUM and Net assets acquired $ 169 risk-adjusted discount rate are significant unobservable inputs to fair value. [1]Comprised of indefinite lived intangibles of $4 related to state insurance licenses acquired and other intangibles of $7 related to agency distribution relationships The goodwill recognized is attributable to the fact that the of Maxum which are amortized over 10 years. acquisition of Lattice enables the Company to offer ETPs which [2]Non-deductible for income tax purposes. are expected to be a significant source of future revenue and The goodwill recognized is attributable to expected growth from earnings growth. Goodwill is allocated to the Hartford Funds the opportunity to sell both existing products and excess and reporting segment. surplus lines coverage to a broader customer base and has been allocated to the small commercial reporting unit within the The Company recognized $1 of acquisition related costs for the Commercial Lines reporting segment. year ended December 31, 2016. These costs are included in insurance operating costs and other expenses in the Consolidated The Company recognized $1 of acquisition related costs for the Statement of Operations. year ended December 31, 2016. These costs are included in insurance operating costs and other expenses in the Consolidated Statement of Operations.
F-18 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. EARNINGS (LOSS) PER COMMON SHARE Computation of Basic and Diluted Earnings per Common Share
For the years ended December 31, (In millions, except for per share data) 2018 2017 2016 Earnings Income (loss) from continuing operations, net of tax $ 1,485 $ (262) $ 613 Less: Preferred stock dividends 6 — — Income (loss) from continuing operations, net of tax, available to common stockholders 1,479 (262) 613 Income (loss) from discontinued operations, net of tax, available to common stockholders 322 (2,869) 283 Net income (loss) available to common stockholders 1,801 (3,131) 896 Shares Weighted average common shares outstanding, basic 358.4 363.7 387.7 Dilutive effect of warrants 1.9 — 3.6 Dilutive effect of stock-based awards under compensation plans 3.8 — 3.5 Weighted average common shares outstanding and dilutive potential common shares [1] 364.1 363.7 394.8 Earnings per common share Basic Income (loss) from continuing operations, net of tax, available to common stockholders $ 4.13 $ (0.72) $ 1.58 Income (loss) from discontinued operations, net of tax, available to common stockholders 0.90 (7.89) 0.73 Net income (loss) available to common stockholders $ 5.03 $ (8.61) $ 2.31 Diluted Income (loss) from continuing operations, net of tax, available to common stockholders $ 4.06 $ (0.72) $ 1.55 Income (loss) from discontinued operations, net of tax, available to common stockholders 0.89 (7.89) 0.72 Net income (loss) available to common stockholders $ 4.95 $ (8.61) $ 2.27 [1]For additional information, see Note 15 - Equity and Note 19 - Stock Compensation Plans of Notes to Consolidated Financial Statements. Basic earnings per common share is computed based on the ended December 31, 2017, the Company was required to use weighted average number of common shares outstanding during basic weighted average common shares outstanding in the the year. Diluted earnings per common share includes the diluted calculations, since the inclusion of 4.3 million shares for dilutive effect of assumed exercise or issuance of warrants and stock compensation plans and 2.5 million shares for warrants stock-based awards under compensation plans. would have been antidilutive to the calculations. In periods where a loss from continuing operations available to Under the treasury stock method, for warrants and stock-based common stockholders or net loss available to common awards, shares are assumed to be issued and then reduced for the stockholders is recognized, inclusion of incremental dilutive number of shares repurchaseable with theoretical proceeds at shares would be antidilutive. Due to the antidilutive impact, such the average market price for the period. Contingently issuable shares are excluded from the diluted earnings per share shares are included for the number of shares issuable assuming calculation of income (loss) from continuing operations, net of tax, the end of the reporting period was the end of the contingency available to common stockholders and net income (loss) available period, if dilutive. to common stockholders in such periods. As a result, for the year 4. SEGMENT INFORMATION The Company currently conducts business principally in five segments. Corporate also includes investment management fees reporting segments including Commercial Lines, Personal Lines, and expenses related to managing third party business, including Property & Casualty ("P&C") Other Operations, Group Benefits management of the invested assets of Talcott Resolution Life. In and Hartford Funds (previously referred to as "Mutual Funds"), as addition, Corporate includes a 9.7% ownership interest in the well as a Corporate category. The Company includes in the legal entity that acquired the life and annuity business sold. For Corporate category discontinued operations related to the life further discussion of continued involvement in the life and and annuity business sold in May 2018, reserves for run-off annuity business sold in May 2018, see Note 20 - Business structured settlement and terminal funding agreement liabilities, Dispositions and Discontinued Operations of Notes to capital raising activities (including debt financing and related Consolidated Financial Statements. interest expense), purchase accounting adjustments related to The Company’s reporting segments, as well as the Corporate goodwill and other expenses not allocated to the reporting category, are as follows:
F-19 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Lines Revenues Commercial Lines provides workers’ compensation, property, automobile, marine, livestock, liability and umbrella coverages For the years ended December 31, primarily throughout the U.S., along with a variety of customized insurance products and risk management services including 2018 2017 2016 professional liability, bond, surety, and specialty casualty Earned premiums and fee income: coverages. Commercial Lines Personal Lines Workers’ compensation $ 3,341 $ 3,287 $ 3,187 Personal Lines provides standard automobile, homeowners and Liability 653 604 585 personal umbrella coverages to individuals across the U.S., including a special program designed exclusively for members of Package business 1,364 1,301 1,249 AARP. Property 618 604 577 Property & Casualty Other Operations Professional liability 254 246 231 Property & Casualty Other Operations includes certain property Bond 241 230 218 and casualty operations, managed by the Company, that have Automobile 610 630 643 discontinued writing new business and includes substantially all Total Commercial Lines 7,081 6,902 6,690 of the Company’s asbestos and environmental exposures. Personal Lines Group Benefits Automobile 2,398 2,617 2,749 Group Benefits provides employers, associations and financial institutions with group life, accident and disability coverage, along Homeowners 1,041 1,117 1,188 with other products and services, including voluntary benefits, Total Personal Lines [1] 3,439 3,734 3,937 and group retiree health. Property & Casualty Other Operations — — — Hartford Funds Hartford Funds offers investment products for retail and Group Benefits retirement accounts as well as ETPs and provides investment Group disability 2,746 1,718 1,506 management and administrative services such as product design, Group life 2,611 1,745 1,512 implementation and oversight. This business also manages a portion of the mutual funds which support the variable annuity Other 241 214 205 products within the life and annuity business sold in May 2018. Total Group Benefits 5,598 3,677 3,223 Corporate Hartford Funds The Company includes in the Corporate category investment Mutual fund and Exchange- management fees and expenses related to managing third party Traded Products ("ETP") 932 888 779 business, including management of the invested assets of Talcott Talcott Resolution life and Resolution, discontinued operations related to the life and annuity separate accounts [3] 100 104 106 annuity business sold in May 2018, reserves for run-off Total Hartford Funds [2] 1,032 992 885 structured settlement and terminal funding agreement liabilities, capital raising activities (including debt financing and related Corporate 32 4 3 interest expense), purchase accounting adjustments related to Total earned premiums and fee goodwill and other expenses not allocated to the reporting income 17,182 15,309 14,738 segments. In addition, Corporate includes a 9.7% ownership Total net investment income 1,780 1,603 1,577 interest in the legal entity that acquired the life and annuity business sold in May 2018. Net realized capital gains (losses) (112) 165 (110) Other revenues 105 85 86 Financial Measures and Other Total revenues $18,955 $17,162 $16,291 Segment Information [1]For 2018, 2017 and 2016, AARP members accounted for earned premiums of Certain transactions between segments occur during the year $3.0 billion, $3.2 billion and $3.3 billion, respectively. that primarily relate to tax settlements, insurance coverage, [2]Excludes distribution costs of $188 and $184 for the years ended December expense reimbursements, services provided, investment transfers 31, 2017, and 2016, respectively, that were previously netted against fee income and capital contributions. In addition, certain inter-segment and are now presented gross in insurance operating costs and other expenses. [3]Represents revenues earned on the life and annuity separate account AUM sold in transactions occur that relate to interest income on allocated May 2018 that is still managed by the Company's Hartford Funds segment. surplus. Consolidated net investment income is unaffected by such transactions.
F-20 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Income (Loss) Amortization of Other Intangible Assets
For the years ended For the years ended December 31, December 31, 2018 2017 2016 2018 2017 2016 Commercial Lines $ 1,212 $ 865 $ 994 Commercial Lines $ 4 $ 1 $ — Personal Lines (32) (9) (9) Personal Lines 4 4 4 Property & Casualty Other Operations 15 69 (529) Group Benefits 60 9 — Group Benefits 340 294 230 Total amortization of other intangible assets $ 68 $ 14 $ 4 Hartford Funds 148 106 78 Corporate 124 (4,456) 132 Income Tax Expense (Benefit) Net income (loss) $ 1,807 $ (3,131) $ 896 For the years ended Preferred stock dividends 6 — — December 31, Net income (loss) available to 2018 2017 2016 common stockholders $ 1,801 $ (3,131) $ 896 Commercial Lines $ 267 377 415 Net Investment Income Personal Lines (19) 26 (23) Property & Casualty Other For the years ended Operations (7) 24 (355) December 31, Group Benefits 84 38 83 2018 2017 2016 Hartford Funds 38 63 43 Commercial Lines $ 997 $ 949 $ 917 Corporate (95) 457 (329) Personal Lines 155 141 135 Total income tax expense Property & Casualty Other (benefit) $ 268 $ 985 $ (166) Operations 90 106 127 Group Benefits 474 381 366 Assets Hartford Funds 5 3 1 As of December 31, Corporate 59 23 31 2018 2017 Net investment income $ 1,780 $ 1,603 $ 1,577 Commercial Lines $ 31,693 $ 31,281 Amortization of Deferred Policy Acquisition Personal Lines 6,180 6,251 Costs Property & Casualty Other Operations 3,351 3,568 For the years ended Group Benefits 14,114 14,478 December 31, Hartford Funds 583 547 2018 2017 2016 Corporate 6,386 169,135 Commercial Lines $ 1,048 $ 1,009 $ 973 Total assets $ 62,307 $ 225,260 Personal Lines 275 309 348 Group Benefits 45 33 31 Hartford Funds 16 21 24 Corporate — — 1 Total amortization of deferred policy acquisition costs $ 1,384 $ 1,372 $ 1,377
5. FAIR VALUE MEASUREMENTS The Company carries certain financial assets and liabilities at hierarchy that gives the highest priority to the use of quoted estimated fair value. Fair value is defined as the price that would prices in active markets, followed by the use of market observable be received to sell an asset or paid to transfer a liability in the inputs, followed by the use of unobservable inputs. The fair value principal or most advantageous market in an orderly transaction hierarchy levels are as follows: between market participants. Our fair value framework includes a
F-21 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Level 1 Fair values based primarily on unadjusted quoted Company’s best estimate of an amount that could prices for identical assets, or liabilities, in active be realized in a market exchange for the asset or markets that the Company has the ability to access liability. Also included are securities that are traded at the measurement date. within illiquid markets and/or priced by independent brokers. Level 2 Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or The Company will classify the financial asset or liability by level based on prices for similar assets and liabilities. based upon the lowest level input that is significant to the determination of the fair value. In most cases, both observable Level 3 Fair values derived when one or more of the inputs (e.g., changes in interest rates) and unobservable inputs significant inputs are unobservable (including (e.g., changes in risk assumptions) are used to determine fair assumptions about risk). With little or no values that the Company has classified within Level 3. observable market, the determination of fair values uses considerable judgment and represents the
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2018 Quoted Prices in Active Markets Significant Significant for Identical Observable Unobservable Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Assets accounted for at fair value on a recurring basis Fixed maturities, AFS Asset backed securities ("ABS") $ 1,276 $ — $ 1,266 $ 10 Collateralized loan obligations ("CLOs") 1,437 — 1,337 100 Commercial mortgage-backed securities ("CMBS") 3,552 — 3,540 12 Corporate 13,398 — 12,878 520 Foreign government/government agencies 847 — 844 3 Municipal 10,346 — 10,346 — Residential mortgage-backed securities ("RMBS") 3,279 — 2,359 920 U.S. Treasuries 1,517 330 1,187 — Total fixed maturities 35,652 330 33,757 1,565 Fixed maturities, FVO 22 — 22 — Equity securities, at fair value 1,214 1,093 44 77 Derivative assets Credit derivatives 5 — 5 — Equity derivatives 3 — — 3 Foreign exchange derivatives (2) — (2) — Interest rate derivatives 1 — 1 — Total derivative assets [1] 7 — 4 3 Short-term investments 4,283 1,039 3,244 — Total assets accounted for at fair value on a recurring basis $ 41,178 $ 2,462 $ 37,071 $ 1,645 Liabilities accounted for at fair value on a recurring basis Derivative liabilities Credit derivatives (2) — (2) — Equity derivatives 1 — 1 — Foreign exchange derivatives (5) — (5) — Interest rate derivatives (62) — (63) 1 Total derivative liabilities [2] (68) — (69) 1 Contingent consideration [3] (35) — — (35) Total liabilities accounted for at fair value on a recurring basis $ (103) $ — $ (69) $ (34) [1]Includes derivative instruments in a net positive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law. See footnote 2 to this table for derivative liabilities. [2]Includes derivative instruments in a net negative fair value position (derivative liability) after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law. [3]For additional information see the Contingent Consideration section below.
F-22 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2017 Quoted Prices in Active Markets Significant Significant for Identical Observable Unobservable Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Assets accounted for at fair value on a recurring basis Fixed maturities, AFS Asset-backed-securities ("ABS") $ 1,126 $ — $ 1,107 $ 19 Collateralized loan obligations ("CLOs") 1,260 — 1,165 95 Commercial mortgage-backed securities ("CMBS") 3,336 — 3,267 69 Corporate 12,804 — 12,284 520 Foreign government/government agencies 1,110 — 1,108 2 Municipal 12,485 — 12,468 17 Residential mortgage-backed securities ("RMBS") 3,044 — 1,814 1,230 U.S. Treasuries 1,799 333 1,466 — Total fixed maturities 36,964 333 34,679 1,952 Fixed maturities, FVO 41 — 41 — Equity securities, AFS 1,012 887 49 76 Derivative assets Credit derivatives 9 — 9 — Foreign exchange derivatives (1) — (1) — Equity derivatives 1 — — 1 Interest rate derivatives 1 — 1 — Total derivative assets [1] 10 — 9 1 Short-term investments 2,270 1,098 1,172 — Total assets accounted for at fair value on a recurring basis $ 40,297 $ 2,318 $ 35,950 $ 2,029 Liabilities accounted for at fair value on a recurring basis Derivative liabilities Credit derivatives (3) — (3) — Foreign exchange derivatives (13) — (13) — Interest rate derivatives (84) — (85) 1 Total derivative liabilities [2] (100) — (101) 1 Contingent consideration [3] (29) — — (29) Total liabilities accounted for at fair value on a recurring basis $ (129) $ — $ (101) $ (28) [1]Includes derivative instruments in a net positive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law. See footnote 2 to this table for derivative liabilities. [2]Includes derivative instruments in a net negative fair value position (derivative liability) after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law. [3]For additional information see the Contingent Consideration section below. • Quoted prices, unadjusted, for identical assets or liabilities in Fixed Maturities, Equity active markets, which are classified as Level 1. Securities, Short-term • Prices from third-party pricing services, which primarily utilize a combination of techniques. These services utilize Investments, and Derivatives recently reported trades of identical, similar, or benchmark securities making adjustments for market observable inputs Valuation Techniques available through the reporting date. If there are no recently The Company generally determines fair values using valuation reported trades, they may use a discounted cash flow techniques that use prices, rates, and other relevant information technique to develop a price using expected cash flows based evident from market transactions involving identical or similar upon the anticipated future performance of the underlying instruments. Valuation techniques also include, where collateral discounted at an estimated market rate. Both appropriate, estimates of future cash flows that are converted techniques develop prices that consider the time value of into a single discounted amount using current market future cash flows and provide a margin for risk, including expectations. The Company uses a "waterfall" approach liquidity and credit risk. Most prices provided by third-party comprised of the following pricing sources and techniques, which pricing services are classified as Level 2 because the inputs are listed in priority order: used in pricing the securities are observable. However, some
F-23 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
securities that are less liquid or trade less actively are management professionals, meet monthly to review market data classified as Level 3. Additionally, certain long-dated trends, pricing and trading statistics and results, and any securities, such as municipal securities and bank loans, proposed pricing methodology changes. include benchmark interest rate or credit spread The Securities Working Group reviews prices received from third assumptions that are not observable in the marketplace and parties to ensure that the prices represent a reasonable estimate are thus classified as Level 3. of the fair value. The group considers trading volume, new • Internal matrix pricing, which is a valuation process issuance activity, market trends, new regulatory rulings and other internally developed for private placement securities for factors to determine whether the market activity is significantly which the Company is unable to obtain a price from a third- different than normal activity in an active market. A dedicated party pricing service. Internal pricing matrices determine pricing unit follows up with trading and investment sector credit spreads that, when combined with risk-free rates, are professionals and challenges prices of third-party pricing services applied to contractual cash flows to develop a price. The when the estimated assumptions used differ from what the unit Company develops credit spreads using market based data believes a market participant would use. If the available evidence for public securities adjusted for credit spread differentials indicates that pricing from third-party pricing services or broker between public and private securities, which are obtained quotes is based upon transactions that are stale or not from from a survey of multiple private placement brokers. The trades made in an orderly market, the Company places little, if market-based reference credit spread considers the issuer’s any, weight on the third party service’s transaction price and will financial strength and term to maturity, using an estimate fair value using an internal process, such as a pricing independent public security index and trade information, matrix. while the credit spread differential considers the non-public The Derivatives Working Group reviews the inputs, assumptions nature of the security. Securities priced using internal matrix and methodologies used to ensure that the prices represent a pricing are classified as Level 2 because the inputs are reasonable estimate of the fair value. A dedicated pricing team observable or can be corroborated with observable data. works directly with investment sector professionals to • Independent broker quotes, which are typically non-binding, investigate the impacts of changes in the market environment on use inputs that can be difficult to corroborate with prices or valuations of derivatives. New models and any changes observable market based data. Brokers may use present to current models are required to have detailed documentation value techniques using assumptions specific to the security and are validated to a second source. The model validation types, or they may use recent transactions of similar documentation and results of validation are presented to the securities. Due to the lack of transparency in the process that Valuation Committee for approval. brokers use to develop prices, valuations that are based on The Company conducts other monitoring controls around independent broker quotes are classified as Level 3. securities and derivatives pricing including, but not limited to, the The fair value of derivative instruments is determined primarily following: using a discounted cash flow model or option model technique • Review of daily price changes over specific thresholds and and incorporate counterparty credit risk. In some cases, quoted new trade comparison to third-party pricing services. market prices for exchange-traded and OTC-cleared derivatives may be used and in other cases independent broker quotes may • Daily comparison of OTC derivative market valuations to be used. The pricing valuation models primarily use inputs that counterparty valuations. are observable in the market or can be corroborated by observable market data. The valuation of certain derivatives may • Review of weekly price changes compared to published bond include significant inputs that are unobservable, such as volatility prices of a corporate bond index. levels, and reflect the Company’s view of what other market • Monthly reviews of price changes over thresholds, stale participants would use when pricing such instruments. prices, missing prices, and zero prices. Valuation Controls • Monthly validation of prices to a second source for securities The fair value process for investments is monitored by the in most sectors and for certain derivatives. Valuation Committee, which is a cross-functional group of senior In addition, the Company’s enterprise-wide Operational Risk management within the Company that meets at least quarterly. Management function, led by the Chief Risk Officer, is responsible The purpose of the committee is to oversee the pricing policy and for model risk management and provides an independent review procedures, as well as to approve changes to valuation of the suitability and reliability of model inputs, as well as an methodologies and pricing sources. Controls and procedures analysis of significant changes to current models. used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due- Valuation Inputs diligence reviews. Quoted prices for identical assets in active markets are There are also two working groups under the Valuation considered Level 1 and consist of on-the-run U.S. Treasuries, Committee: a Securities Fair Value Working Group (“Securities money market funds, exchange-traded equity securities, open- Working Group”) and a Derivatives Fair Value Working Group ended mutual funds, certain short-term investments, and ("Derivatives Working Group"). The working groups, which exchange traded futures and option contracts. include various investment, operations, accounting and risk
F-24 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Derivatives
Level 2 Level 3 Primary Observable Inputs Primary Unobservable Inputs Fixed Maturity Investments Structured securities (includes ABS, CLOs CMBS and RMBS) • Benchmark yields and spreads • Independent broker quotes • Monthly payment information • Credit spreads beyond observable curve • Collateral performance, which varies by vintage year and includes • Interest rates beyond observable curve delinquency rates, loss severity rates and refinancing assumptions • Credit default swap indices Other inputs for less liquid securities or those that trade less actively, including subprime RMBS: Other inputs for ABS and RMBS: • Estimated cash flows • Estimate of future principal prepayments, derived from the • Credit spreads, which include illiquidity premium characteristics of the underlying structure • Constant prepayment rates • Prepayment speeds previously experienced at the interest rate • Constant default rates levels projected for the collateral • Loss severity Corporates • Benchmark yields and spreads • Independent broker quotes • Reported trades, bids, offers of the same or similar securities • Credit spreads beyond observable curve • Issuer spreads and credit default swap curves • Interest rates beyond observable curve Other inputs for investment grade privately placed securities that Other inputs for below investment grade privately placed utilize internal matrix pricing : securities: • Credit spreads for public securities of similar quality, maturity, and • Independent broker quotes sector, adjusted for non-public nature • Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature U.S Treasuries, Municipals, and Foreign government/government agencies • Benchmark yields and spreads • Credit spreads beyond observable curve • Issuer credit default swap curves • Interest rates beyond observable curve • Political events in emerging market economies • Municipal Securities Rulemaking Board reported trades and material event notices • Issuer financial statements Equity Securities • Quoted prices in markets that are not active • For privately traded equity securities, internal discounted cash flow models utilizing earnings multiples or other cash flow assumptions that are not observable Short Term Investments • Benchmark yields and spreads Not applicable • Reported trades, bids, offers • Issuer spreads and credit default swap curves • Material event notices and new issue money market rates Derivatives Credit derivatives • Swap yield curve Not applicable • Credit default swap curves Equity derivatives • Equity index levels • Independent broker quotes • Swap yield curve • Equity volatility Foreign exchange derivatives • Swap yield curve Not applicable • Currency spot and forward rates • Cross currency basis curves Interest rate derivatives • Swap yield curve • Independent broker quotes • Interest rate volatility
F-25 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Significant Unobservable Inputs for Level 3 - Securities
Impact of Increase in Assets accounted Predominant Weighted Input for at fair value on Fair Valuation Average on Fair a recurring basis Value Technique Significant Unobservable Input Minimum Maximum [1] Value [2] As of December 31, 2018 CMBS [3] $ 2 Discounted Spread (encompasses prepayment, 9 bps 1,040 bps 182 bps Decrease cash flows default risk and loss severity) Corporate [4] 274 Discounted Spread 145 bps 1,175 bps 263 bps Decrease cash flows RMBS [3] 815 Discounted Spread [6] 12 bps 215 bps 86 bps Decrease cash flows Constant prepayment rate [6] 1% 15% 6% Decrease [5] Constant default rate [6] 1% 8% 3% Decrease
Loss severity [6] —% 100% 61% Decrease
As of December 31, 2017 CMBS [3] $ 56 Discounted Spread (encompasses prepayment, Decrease cash flows default risk and loss severity) 9 bps 1,040 bps 400 bps Corporate [4] 251 Discounted Spread Decrease cash flows 103 bps 1,000 bps 242 bps Municipal 17 Discounted Spread Decrease cash flows 192 bps 250 bps 219 bps RMBS [3] 1,215 Discounted Spread [6] Decrease cash flows 24 bps 351 bps 74 bps Constant prepayment rate [6] 1% 25% 6% Decrease [5] Constant default rate [6] —% 9% 4% Decrease
Loss severity [6] —% 100% 66% Decrease
[1]The weighted average is determined based on the fair value of the securities. [2]Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. [3]Excludes securities for which the Company bases fair value on broker quotations. [4]Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value. [5]Decrease for above market rate coupons and increase for below market rate coupons. [6]Generally, a change in the assumption used for the constant default rate would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for constant prepayment rate and would have resulted in wider spreads. Significant Unobservable Inputs for Level 3 - Derivatives
Predominant Impact of Fair Valuation Significant Weighted Increase in Input Value Technique Unobservable Input Minimum Maximum Average [1] on Fair Value [2] As of December 31, 2018 Interest rate swaptions [3] 1 Option model Interest rate volatility 3% 3% 3% Increase Equity options 3 Option model Equity volatility 19% 21% 20% Increase As of December 31, 2017 Interest rate swaptions [3] 1 Option model Interest rate volatility 2% 2% 2% Increase Equity options 1 Option model Equity volatility 18% 22% 20% Increase [1]The weighted average is determined based on the fair value of the derivatives. [2]Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise noted. Changes in fair value will be inversely impacted for short positions. [3]The swaptions presented are purchased options that have the right to enter into a pay-fixed swap.
F-26 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tables above exclude securities for which fair values are The contingency period for ETP AUM growth ends July 29, 2020 predominately based on independent broker quotes. While the and management adjusts the fair value of the contingent Company does not have access to the significant unobservable consideration when it revises its projection of ETP AUM for the inputs that independent brokers may use in their pricing process, acquired business. Before discounting to fair value, the Company the Company believes brokers likely use inputs similar to those has accrued consideration payable of $40 assuming ETP AUM for used by the Company and third-party pricing services to price the acquired business grows to approximately $4 billion over the similar instruments. As such, in their pricing models, brokers likely contingency period. This contingent consideration payable use estimated loss severity rates, prepayment rates, constant included $10 payable in the first quarter of 2019 given that ETP default rates and credit spreads. Therefore, similar to non-broker AUM reached $1 billion in the fourth quarter of 2018. priced securities, increases in these inputs would generally cause fair values to decrease. For the year ended December 31, 2018, Level 3 Assets and Liabilities no significant adjustments were made by the Company to broker prices received. Measured at Fair Value on a Contingent Consideration Recurring Basis Using The acquisition of Lattice Strategies LLC ("Lattice") on July 29, Significant Unobservable 2016 requires the Company to make payments to former owners of Lattice of up to $60 contingent upon growth in exchange- Inputs traded products ("ETP") AUM over a period of four years The Company uses derivative instruments to manage the risk beginning on the date of acquisition. The contingent associated with certain assets and liabilities. However, the consideration is measured at fair value on a quarterly basis by derivative instrument may not be classified with the same fair projecting future eligible ETP AUM over the contingency period value hierarchy level as the associated asset or liability. to estimate the amount of expected payout. The future expected Therefore, the realized and unrealized gains and losses on payout is discounted back to the valuation date using a risk- derivatives reported in the Level 3 rollforward may be offset by adjusted discount rate of 16.6%. The risk-adjusted discount rate realized and unrealized gains and losses of the associated assets is an internally generated and significant unobservable input to and liabilities in other line items of the financial statements. fair value.
F-27 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Year Ended December 31, 2018
Total realized/ unrealized gains (losses) Fair value Fair value as of Included in Transfers Transfers as of January 1, net income Included into Level out of December 2018 [1] in OCI [2] Purchases Settlements Sales 3 [3] Level 3 [3] 31, 2018 Assets Fixed Maturities, AFS ABS $ 19 $ — $ — $ 90 $ (5) $ (4) $ 12 $ (102) $ 10 CLOs 95 — — 330 — (13) — (312) 100 CMBS 69 (1) — 25 (14) (8) — (59) 12 Corporate 520 1 (18) 197 (36) (52) 31 (123) 520 Foreign Govt./Govt. Agencies 2 — — 1 — — — — 3 Municipal 17 — (1) — — (1) — (15) — RMBS 1,230 — (16) 273 (319) (52) 4 (200) 920 Total Fixed Maturities, AFS 1,952 — (35) 916 (374) (130) 47 (811) 1,565 Equity Securities, at fair value 76 29 — 12 — (40) — — 77 Derivatives, net [4] Equity 1 3 — 1 — (2) — — 3 Interest rate 1 — — — — — — — 1 Total Derivatives, net [4] 2 3 — 1 — (2) — — 4 Total Assets 2,030 32 (35) 929 (374) (172) 47 (811) 1,646 Liabilities Contingent Consideration [5] (29) (6) — — — — — — (35) Total Liabilities $ (29) $ (6) $ — $ — $ — $ — $ — $ — $ (35) [1]Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes. [2]All amounts are before income taxes. [3]Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs. [4]Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Consolidated Balance Sheets in other investments and other liabilities. [5]For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statement for discussion of the contingent consideration in connection with the acquisition of Lattice. Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
F-28 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Year Ended December 31, 2017
Total realized/ unrealized gains (losses) Fair value Fair value as of Included in Transfers Transfers as of January 1, net income Included into Level out of December 2017 [1] in OCI [2] Purchases Settlements Sales 3 [3] Level 3 [3] 31, 2017 Assets Fixed Maturities, AFS ABS $ 45 $ — $ — $ 56 $ (6) $ (6) $ 27 $ (97) $ 19 CLOs 154 18 (13) 214 (101) (24) — (153) 95 CMBS 59 (2) — 76 (9) (10) — (45) 69 Corporate 514 1 19 232 (76) (157) 71 (84) 520 Foreign Govt./Govt. Agencies 47 — 3 12 (1) (2) — (57) 2 Municipal 46 4 1 1 — (35) — — 17 RMBS 1,261 — 36 209 (268) (7) — (1) 1,230 Total Fixed Maturities, AFS 2,126 21 46 800 (461) (241) 98 (437) 1,952 Fixed Maturities, FVO 11 — — 4 (2) (13) — — — Equity Securities, AFS 55 — (3) 24 — — — — 76 Derivatives, net [4] Equity — (4) — 5 — — — — 1 Interest rate 9 (8) — — — — — — 1 Other contracts 1 (1) — — — — — — — Total Derivatives, net [4] 10 (13) — 5 — — — — 2 Total Assets 2,202 8 43 833 (463) (254) 98 (437) 2,030 Liabilities Contingent Considerations [5] (25) (4) — — — — — — (29) Total Liabilities $ (25) $ (4) $ — $ — $ — $ — $ — $ — $ (29) [1]Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes. [2]All amounts are before income taxes. [3]Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs. [4]Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Consolidated Balance Sheets in other investments and other liabilities. [5]For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statement for discussion of the contingent consideration in connection with the acquisition of Lattice. Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
F-29 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in Unrealized Gains (Losses) for Financial Instruments Classified as Level 3 Still Held at Year End
December 31, 2018 2017 Changes in Unrealized Gain/ Changes in Unrealized Gain/ (Loss) included in Net Changes in Unrealized Gain/ (Loss) included in Net Income [1] [2] (Loss) included in OCI [3] Income [1] [2] Assets Fixed Maturities, AFS ABS $ — $ 1 $ — CMBS (1) 28 (2) Corporate — (42) — Municipal — 24 — RMBS — 17 — Total Fixed Maturities, AFS (1) 28 (2) Derivatives, net Equity 1 (5) Interest rate — — (7) Total Derivatives, net 1 — (12) Total Assets — 28 (14) Liabilities Contingent Consideration [4] (6) (4) Total Liabilities $ (6) $ — $ (4) [1]All amounts in these rows are reported in net realized capital gains (losses). All amounts are before income taxes. [2]Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein. [3]Changes in unrealized gain/(loss) on fixed maturities, AFS are reported in changes in net unrealized gain on securities in the Consolidated Statements of Comprehensive Income. Changes in interest rate derivatives are reported in changes in net gain on cash flow hedging instruments in the Consolidated Statements of Comprehensive Income. [4]For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statements for discussion of the contingent consideration in connection with the acquisition of Lattice. return swaps were recorded in net realized capital gains and Fair Value Option losses. These equity securities were classified within equity The Company has elected the fair value option for certain securities, AFS on the Consolidated Balance Sheets. Income securities that contain embedded credit derivatives with earned from FVO securities was recorded in net investment underlying credit risk primarily related to residential real estate, income and changes in fair value were recorded in net realized and these securities are included within fixed maturities, FVO on capital gains and losses. the Consolidated Balance Sheets. The Company reports changes For the year-ended December 31, 2018, the realized capital gains in the fair value of these securities in net realized capital gains (losses) related to the fair value of assets using the fair value and losses. option were $(1) within the residential real estate sector. For the As of December 31, 2018 and December 31, 2017, the fair value year-ended December 31, 2017, the income earned from FVO of assets and liabilities using the fair value option was $22 and and the changes recorded in net realized capital gains (losses) $41, respectively, within the residential real estate sector. were driven by corporate bond and equity securities of $(1) and $1, respectively. For the year-ended December 31, 2016 the The Company also previously elected the fair value option for realized capital gains (losses) related to the fair value of assets certain equity securities in order to align the accounting with using the fair value option were $5 and $(1) within the residential total return swap contracts that hedged the risk associated with real estate and foreign government sectors. the investments. The swaps did not qualify for hedge accounting and the change in value of both the equity securities and the total
F-30 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial Instruments Not Carried at Fair Value Financial Assets and Liabilities Not Carried at Fair Value
December 31, 2018 December 31, 2017 Fair Value Fair Value Hierarchy Carrying Hierarchy Carrying Level Amount Fair Value Level Amount Fair Value Assets Mortgage loans Level 3 $ 3,704 $ 3,746 Level 3 $ 3,175 $ 3,220 Liabilities Other policyholder funds and benefits payable Level 3 $ 774 $ 775 Level 3 $ 825 $ 827 Senior notes [1] Level 2 $ 3,589 $ 3,887 Level 2 $ 3,415 $ 4,054 Junior subordinated debentures [1] Level 2 $ 1,089 $ 1,052 Level 2 $ 1,583 $ 1,699 [1]Included in long-term debt in the Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
6. INVESTMENTS Net Investment Income Net Realized Capital Gains (Losses)
For the years ended December 31, For the years ended December 31, (Before tax) 2018 2017 2016 (Before tax) 2018 2017 2016 Fixed maturities [1] $ 1,459 $ 1,303 $ 1,319 Gross gains on sales $ 114 $ 275 $ 222 Equity securities 32 24 22 Gross losses on sales (172) (113) (159) Mortgage loans 141 124 116 Equity securities [1] (48) — — Limited partnerships and Net OTTI losses other alternative recognized in earnings (1) (8) (27) investments 205 174 128 Valuation allowances on Other investments [2] 20 49 51 mortgage loans — (1) — Transactional foreign Investment expenses (77) (71) (59) currency revaluation 1 14 (78) Total net investment Non-qualifying foreign income $ 1,780 $ 1,603 $ 1,577 currency derivatives 3 (14) 83 [1]Includes net investment income on short-term investments. [2]Includes income from derivatives that hedge fixed maturities and qualify for Other, net [2] (9) 12 (151) hedge accounting. Net realized capital gains (losses) $ (112) $ 165 $ (110) [1]Effective January 1, 2018, with adoption of new accounting guidance for equity securities at fair value, includes all changes in fair value and trading gains and losses for equity securities. [2]Includes gains (losses) on non-qualifying derivatives, excluding foreign currency derivatives, of $(15), $8, and $(9), respectively for 2018, 2017 and 2016. Also included for the year ended December 31, 2016, is a loss related to the write- down of investments in solar energy partnerships, which generated tax benefits, and a loss related to the sale of the Company's U.K. property and casualty run-off subsidiaries. Net realized capital gains (losses) from investment sales are reported as a component of revenues and are determined on a specific identification basis. Before tax, net gains (losses) on sales and impairments previously reported as unrealized gains or losses in AOCI were $(80), $152, and $36 for the years ended December 31, 2018, 2017, and 2016, respectively. Effective January 1, 2018, with adoption of new accounting guidance for equity securities, the proceeds from sales of AFS securities no longer includes equity securities.
F-31 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The net unrealized gain (loss) on equity securities included in net fundamentals, security-specific developments, industry earnings realized capital gains (losses) related to equity securities still held multiples and the issuer’s ability to restructure and execute asset as of December 31, 2018, was $(80) for the year-ended sales. December 31, 2018. Prior to January 1, 2018, changes in net For structured securities, assumptions include, but are not limited unrealized gains (losses) on equity securities were included in to, various performance indicators such as historical and AOCI. projected default and recovery rates, credit ratings, current and Sales of AFS Securities projected delinquency rates, loan-to-value ("LTV") ratios, average cumulative collateral loss rates that vary by vintage year, For the years ended December 31, prepayment speeds, and property value declines. These assumptions require the use of significant management judgment 2018 2017 2016 and include the probability of issuer default and estimates Fixed maturities, AFS regarding timing and amount of expected recoveries which may Sale proceeds $ 21,327 $ 17,614 $ 9,984 include estimating the underlying collateral value. Gross gains 90 204 196 Prior to January 1, 2018, the Company recorded an OTTI for certain equity securities with debt-like characteristics if the Gross losses (169) (90) (138) Company intended to sell or it was more likely than not that the Equity securities, AFS Company was required to sell the security before a recovery in Sale proceeds $ 607 $ 359 value as well as for those equity securities for which the Company did not expect to recover the entire amortized cost basis. The Gross gains 69 26 Company also recorded an OTTI for equity securities where the Gross losses (23) (20) decline in the fair value was deemed to be other-than-temporary.
Sales of AFS securities in 2018 were primarily a result of duration Impairments in Earnings by Type and liquidity management as well as tactical changes to the portfolio as a result of changing market conditions. For the years ended December 31, 2018 2017 2016 Recognition and Presentation of Other-Than-Temporary Impairments Credit impairments $ 1 $ 2 $ 21 The Company will record an other-than-temporary impairment Impairments on equity securities 6 4 (“OTTI”) for fixed maturities if the Company intends to sell or it is more likely than not that the Company will be required to sell the Intent-to-sell impairments — — 2 security before a recovery in value. A corresponding charge is Total impairments $ 1 $ 8 $ 27 recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. Cumulative Credit Impairments The Company will also record an OTTI for those fixed maturities For the years ended December 31, for which the Company does not expect to recover the entire amortized cost basis. For these securities, the excess of the (Before tax) 2018 2017 2016 amortized cost basis over its fair value is separated into the Balance as of beginning of portion representing a credit OTTI, which is recorded in net period $ (25) $ (110) $ (113) realized capital losses, and the remaining non-credit amount, Additions for credit which is recorded in OCI. The credit OTTI amount is the excess of impairments recognized its amortized cost basis over the Company’s best estimate of on [1]: discounted expected future cash flows. The non-credit amount is Securities not the excess of the best estimate of the discounted expected future previously impaired — (1) (16) cash flows over the fair value. The Company’s best estimate of Securities previously discounted expected future cash flows becomes the new cost impaired (1) (1) (5) basis and accretes prospectively into net investment income over Reductions for credit the estimated remaining life of the security. impairments previously recognized on: Developing the Company’s best estimate of expected future cash flows is a quantitative and qualitative process that incorporates Securities that information received from third-party sources along with certain matured or were sold during the period 7 76 15 internal assumptions regarding the future performance. The Company's considerations include, but are not limited to, (a) Securities due to an changes in the financial condition of the issuer and the underlying increase in expected cash flows — 11 9 collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) Balance as of end of payment structure of the security and (e) the extent to which the period $ (19) $ (25) $ (110) fair value has been less than the amortized cost of the security. [1]These additions are included in the net OTTI losses recognized in earnings in the Consolidated Statements of Operations. For non-structured securities, assumptions include, but are not limited to, economic and industry-specific trends and
F-32 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Available-for-Sale Securities AFS Securities by Type
December 31, 2018 December 31, 2017
Non- Non- Cost or Gross Gross Credit Cost or Gross Gross Credit Amortized Unrealized Unrealized Fair OTTI Amortized Unrealized Unrealized Fair OTTI Cost Gains Losses Value [1] Cost Gains Losses Value [1] ABS $ 1,272 $ 5 $ (1) $ 1,276 $ — $ 1,119 $ 9 $ (2) $ 1,126 $ — CLOs 1,455 2 (20) 1,437 — 1,257 3 — 1,260 — CMBS 3,581 35 (64) 3,552 (5) 3,304 58 (26) 3,336 (5) Corporate 13,696 148 (446) 13,398 — 12,370 490 (56) 12,804 — Foreign govt./govt. agencies 866 7 (26) 847 — 1,071 43 (4) 1,110 — Municipal 9,972 421 (47) 10,346 — 11,743 754 (12) 12,485 — RMBS 3,270 44 (35) 3,279 — 2,985 63 (4) 3,044 — U.S. Treasuries 1,491 41 (15) 1,517 — 1,763 46 (10) 1,799 — Total fixed maturities, AFS 35,603 703 (654) 35,652 (5) 35,612 1,466 (114) 36,964 (5) Equity securities, AFS [2] 907 121 (16) 1,012 — Total AFS securities $ 35,603 $ 703 $ (654) $ 35,652 $ (5) $ 36,519 $ 1,587 $ (130) $ 37,976 $ (5) [1]Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of December 31, 2018 and 2017. [2]Effective January 1, 2018, with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities at fair value and are excluded from the table above as of December 31, 2018. Fixed maturities, AFS, by Contractual Maturity Year
December 31, 2018 December 31, 2017 Amortized Amortized Cost Fair Value Cost Fair Value One year or less $ 999 $ 1,002 $ 1,507 $ 1,513 Over one year through five years 5,786 5,791 5,007 5,119 Over five years through ten years 6,611 6,495 6,505 6,700 Over ten years 12,629 12,820 13,928 14,866 Subtotal 26,025 26,108 26,947 28,198 Mortgage-backed and asset-backed securities 9,578 9,544 8,665 8,766 Total fixed maturities, AFS $ 35,603 $ 35,652 $ 35,612 $ 36,964
Estimated maturities may differ from contractual maturities due agencies, the Company’s three largest exposures by issuer were to security call or prepayment provisions. Due to the potential for the New York State Dormitory Authority, Commonwealth of variability in payment speeds (i.e. prepayments or extensions), Massachusetts and the New York City Transitional Finance mortgage-backed and asset-backed securities are not categorized Authority which each comprised less than 1% of total invested by contractual maturity. assets. As of December 31, 2017, other than U.S. government and certain U.S. government agencies, the Company’s three largest Concentration of Credit Risk exposures by issuer were New York City Transitional Finance The Company aims to maintain a diversified investment portfolio Authority, New York State Dormitory Authority and the including issuer, sector and geographic stratification, where Commonwealth of Massachusetts which each comprised less applicable, and has established certain exposure limits, than 1% of total invested assets. The Company’s three largest diversification standards and review procedures to mitigate exposures by sector as of December 31, 2018 were the municipal credit risk. The Company had no investment exposure to any securities, CMBS and the financial services sector which credit concentration risk of a single issuer greater than 10% of comprised approximately 22%, 8% and 7%, respectively, of total the Company's stockholders' equity, other than the U.S. invested assets. The Company’s three largest exposures by sector government and certain U.S. government agencies as of as of December 31, 2017 were municipal securities, CMBS and December 31, 2018 or December 31, 2017. As of December 31, RMBS which comprised approximately 28%, 7% and 7%, 2018, other than U.S. government and certain U.S. government respectively, of total invested assets.
F-33 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unrealized Losses on AFS Securities Unrealized Loss Aging for AFS Securities by Type and Length of Time as of December 31, 2018
Less Than 12 Months 12 Months or More Total Amortized Fair Unrealized Amortized Fair Unrealized Amortized Fair Unrealized Cost Value Losses Cost Value Losses Cost Value Losses ABS $ 566 $ 566 $ — $ 113 $ 112 $ (1) $ 679 $ 678 $ (1) CLOs 1,358 1,338 (20) 7 7 — 1,365 1,345 (20) CMBS 896 882 (14) 1,129 1,079 (50) 2,025 1,961 (64) Corporate 7,174 6,903 (271) 2,541 2,366 (175) 9,715 9,269 (446) Foreign govt./govt. agencies 407 391 (16) 203 193 (10) 610 584 (26) Municipal 1,643 1,613 (30) 292 275 (17) 1,935 1,888 (47) RMBS 1,344 1,329 (15) 648 628 (20) 1,992 1,957 (35) U.S. Treasuries 497 492 (5) 339 329 (10) 836 821 (15) Total fixed maturities, AFS in an unrealized loss position $ 13,885 $ 13,514 $ (371) $ 5,272 $ 4,989 $ (283) $ 19,157 $ 18,503 $ (654)
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of December 31, 2017
Less Than 12 Months 12 Months or More Total Amortized Fair Unrealized Amortized Fair Unrealized Amortized Fair Unrealized Cost Value Losses Cost Value Losses Cost Value Losses ABS $ 461 $ 460 $ (1) $ 30 $ 29 $ (1) $ 491 $ 489 $ (2) CLOs 359 359 — 1 1 — 360 360 — CMBS 1,178 1,167 (11) 243 228 (15) 1,421 1,395 (26) Corporate 2,322 2,302 (20) 1,064 1,028 (36) 3,386 3,330 (56) Foreign govt./govt. agencies 244 242 (2) 51 49 (2) 295 291 (4) Municipal 511 507 (4) 236 228 (8) 747 735 (12) RMBS 889 887 (2) 137 135 (2) 1,026 1,022 (4) U.S. Treasuries 658 652 (6) 254 250 (4) 912 902 (10) Total fixed maturities, AFS in an unrealized loss position 6,622 6,576 (46) 2,016 1,948 (68) 8,638 8,524 (114) Equity securities, AFS [1] 176 163 (13) 24 21 (3) 200 184 (16) Total securities in an unrealized loss position $ 6,798 $ 6,739 $ (59) $ 2,040 $ 1,969 $ (71) $ 8,838 $ 8,708 $ (130) [1]Effective January 1, 2018 , with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities at fair value and are excluded from the table above as of December 31, 2018. As of December 31, 2018, AFS securities in an unrealized loss position consisted of 2,960 securities, primarily in the corporate Mortgage Loans and commercial real estate sectors, which were depressed primarily due to widening of credit spreads and an increase in Mortgage Loan Valuation Allowances Mortgage loans are considered to be impaired when management interest rates since the securities were purchased. As of estimates that, based upon current information and events, it is December 31, 2018, 98% of these securities were depressed less probable that the Company will be unable to collect amounts due than 20% of cost or amortized cost. The increase in unrealized according to the contractual terms of the loan agreement. The losses during 2018 was primarily attributable to widening of Company reviews mortgage loans on a quarterly basis to identify credit spreads and higher interest rates. potential credit losses. Among other factors, management Most of the securities depressed for twelve months or more reviews current and projected macroeconomic trends, such as relate to corporate securities and structured securities with unemployment rates and property-specific factors such as rental exposure to commercial real estate. Corporate securities and rates, occupancy levels, LTV ratios and debt service coverage commercial real estate securities were primarily depressed ratios (“DSCR”). In addition, the Company considers historical, because current market spreads are wider and interest rates are current and projected delinquency rates and property values. higher than at the securities' respective purchase dates. The Estimates of collectibility require the use of significant Company neither has an intention to sell nor does it expect to be management judgment and include the probability and timing of required to sell the securities outlined in the preceding borrower default and loss severity estimates. In addition, cash discussion. flow projections may change based upon new information about the borrower's ability to pay and/or the value of underlying collateral such as changes in projected property value estimates. For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying
F-34 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) amount and estimated fair value. The mortgage loan's estimated Mortgage Loans Credit Quality fair value is most frequently the Company's share of the fair value of the collateral but may also be the Company’s share of either (a) the present value of the expected future cash flows discounted December 31, 2018 December 31, 2017 at the loan’s effective interest rate or (b) the loan’s observable market price. A valuation allowance may be recorded for an Avg. Avg. individual loan or for a group of loans that have an LTV ratio of Debt- Debt- 90% or greater, a low DSCR or have other lower credit quality Service Service characteristics. Changes in valuation allowances are recorded in Carrying Coverage Carrying Coverage Loan-to-value Value Ratio Value Ratio net realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the Greater than borrowers continue to make payments under the original or 80% $ — 0.00x $ 18 1.27x restructured loan terms. The Company stops accruing interest 65% - 80% 386 1.60x 265 1.95x income on loans when it is probable that the Company will not Less than 65% 3,318 2.59x 2,892 2.76x receive interest and principal payments according to the Total mortgage contractual terms of the loan agreement. The Company resumes loans $ 3,704 2.49x $ 3,175 2.69x accruing interest income when it determines that sufficient collateral exists to satisfy the full amount of the loan principal and Mortgage Loans by Region interest payments and when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is December 31, December 31, recognized when received. 2018 2017 As of December 31, 2018 and December 31, 2017 mortgage Carrying Percent Carrying Percent loans had an amortized cost and carrying value of $3.7 billion and Value of Total Value of Total $3.2 billion, respectively, with a valuation allowance of $1 for East North Central $ 250 6.8% $ 251 7.9% both periods. Middle Atlantic 270 7.3% 272 8.6% As of December 31, 2018 the carrying value of mortgage loans Mountain 30 0.8% 31 1.0% that had a valuation allowance was $23. There were no mortgage New England 330 8.9% 293 9.2% loans held-for-sale as of both December 31, 2018 and December 31, 2017. As of December 31, 2018, the Company had no Pacific 917 24.8% 760 23.9% mortgage loans that have had extensions or restructurings other South Atlantic 712 19.2% 710 22.4% than what is allowable under the original terms of the contract. West North Central 148 4.0% 149 4.7% The following table presents the activity within the Company’s West South Central 420 11.3% 278 8.7% valuation allowance for mortgage loans. These loans have been Other [1] 627 16.9% 431 13.6% evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial. Total mortgage loans $ 3,704 100.0% $ 3,175 100.0% [1]Primarily represents loans collateralized by multiple properties in various regions. Valuation Allowance Activity Mortgage Loans by Property Type For the years ended December 31, December 31, 2018 December 31, 2017 2018 2017 2016 Carrying Percent Carrying Percent Balance as of January 1 $ (1) $ — $ (4) Value of Total Value of Total Reversals/(Additions) — (1) — Commercial Deductions — — 4 Industrial 1,108 29.9% 817 25.7% Balance as of December Multifamily 1,138 30.7% 1,006 31.7% 31 $ (1) $ (1) $ — Office 708 19.1% 751 23.7% The weighted-average LTV ratio of the Company’s mortgage loan Retail 392 10.6% 367 11.5% portfolio was 52% as of December 31, 2018, while the weighted- Single Family 82 2.2% — —% average LTV ratio at origination of these loans was 61%. LTV Other 276 7.5% 234 7.4% ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan collateral values are Total mortgage $ 3,704 100.0% $ 3,175 100.0% updated no less than annually through reviews of the underlying loans properties. Factors considered in estimating property values include, among other things, actual and expected property cash Mortgage Servicing flows, geographic market data and the ratio of the property's net The Company originates, sells and services commercial mortgage operating income to its value. DSCR compares a property’s net loans on behalf of third parties and recognizes servicing fees operating income to the borrower’s principal and interest income over the period that services are performed. As of payments. As of December 31, 2018 and December 31, 2017, the December 31, 2018, under this program, the Company serviced Company held no delinquent commercial mortgages loan past mortgage loans with a total outstanding principal of $6.0 billion, due by 90 days or more. of which $3.6 billion was serviced on behalf of third parties and $2.4 billion was retained and reported in total investments on the
F-35 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company's Consolidated Balance Sheets. As of December 31, investment. For these investments, the Company determined it is 2017, the Company serviced mortgage loans with a total not the primary beneficiary due to the relative size of the outstanding principal balance of $1.3 billion, of which $402 was Company’s investment in comparison to the principal amount of serviced on behalf of third parties, $566 was retained and the structured securities issued by the VIEs, the level of credit reported in total investments and $356 was reported in assets subordination which reduces the Company’s obligation to absorb held for sale on the Company's Consolidated Balance Sheets. losses or right to receive benefits and the Company’s inability to Servicing rights are carried at the lower of cost or fair value and direct the activities that most significantly impact the economic were zero as of December 31, 2018 and 2017, because servicing performance of the VIEs. The Company’s maximum exposure to fees were market-level fees at origination and remain adequate to loss on these investments is limited to the amount of the compensate the Company for servicing the loans. Company’s investment. Variable Interest Entities Securities Lending, Repurchase The Company is engaged with various special purpose entities and other entities that are deemed to be VIEs primarily as an Agreements and Other investor through normal investment activities but also as an Collateral Transactions investment manager. The Company enters into securities financing transactions as a A VIE is an entity that either has investors that lack certain way to earn additional income or manage liquidity, primarily essential characteristics of a controlling financial interest, such as through securities lending and repurchase agreements. simple majority kick-out rights, or lacks sufficient funds to finance its own activities without financial support provided by other Securities Lending entities. The Company performs ongoing qualitative assessments Under a securities lending program, the Company lends certain of its VIEs to determine whether the Company has a controlling fixed maturities within the corporate, foreign government/ financial interest in the VIE and therefore is the primary government agencies, and municipal sectors as well as equity beneficiary. The Company is deemed to have a controlling securities to qualifying third-party borrowers in return for financial interest when it has both the ability to direct the collateral in the form of cash or securities. For domestic and non- activities that most significantly impact the economic domestic loaned securities, respectively, borrowers provide performance of the VIE and the obligation to absorb losses or collateral of 102% and 105% of the fair value of the securities lent right to receive benefits from the VIE that could potentially be at the time of the loan. Borrowers will return the securities to the significant to the VIE. Based on the Company’s assessment, if it Company for cash or securities collateral at maturity dates determines it is the primary beneficiary, the Company generally of 90 days or less. Security collateral on deposit from consolidates the VIE in the Company’s Consolidated Financial counterparties in connection with securities lending transactions Statements. may not be sold or re-pledged, except in the event of default by the counterparty, and is not reflected on the Company’s Consolidated VIEs Consolidated Balance Sheets. Additional collateral is obtained if As of December 31, 2018 and December 31, 2017, the Company the fair value of the collateral falls below 100% of the fair value of did not hold any securities for which it is the primary beneficiary. the loaned securities. The agreements are continuous and do not have stated maturity dates and provide the counterparty the Non-Consolidated VIEs right to sell or re-pledge the securities loaned. If cash, rather than The Company, through normal investment activities, makes securities, is received as collateral, the cash is typically invested in passive investments in limited partnerships and other alternative short-term investments or fixed maturities and is reported as an investments. For these non-consolidated VIEs, the Company has asset on the Company's Consolidated Balance Sheets. Income determined it is not the primary beneficiary as it has no ability to associated with securities lending transactions is reported as a direct activities that could significantly affect the economic component of net investment income in the Company’s performance of the investments. The Company’s maximum Consolidated Statements of Operations. exposure to loss as of December 31, 2018 and 2017 is limited to the total carrying value of $1 billion and $920, respectively, which Repurchase Agreements are included in limited partnerships and other alternative From time to time, the Company enters into repurchase investments in the Company's Consolidated Balance Sheets. As of agreements to manage liquidity or to earn incremental income. A December 31, 2018 and 2017, the Company has outstanding repurchase agreement is a transaction in which one party commitments totaling $718 and $787, respectively, whereby the (transferor) agrees to sell securities to another party (transferee) Company is committed to fund these investments and may be in return for cash (or securities), with a simultaneous agreement called by the partnership during the commitment period to fund to repurchase the same securities at a specified price at a later the purchase of new investments and partnership expenses. date. These transactions have a remaining maturity of ninety days These investments are generally of a passive nature in that the or less. Repurchase agreements include master netting provisions Company does not take an active role in management. that provide both counterparties the right to offset claims and In addition, the Company makes passive investments in apply securities held by them with respect to their obligations in structured securities issued by VIEs for which the Company is not the event of a default. Although the Company has the contractual the manager. These investments are included in ABS, CLOs, right to offset claims, the Company's current positions do not CMBS and RMBS in the Available-for-Sale Securities table and meet the specific conditions for net presentation. fixed maturities, FVO, in the Company’s Consolidated Balance Under repurchase agreements, the Company transfers collateral Sheets. The Company has not provided financial or other support of U.S. government and government agency securities and with respect to these investments other than its original
F-36 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) receives cash. For repurchase agreements, the Company obtains pledged collateral of $47 and $104, respectively, of U.S. cash in an amount equal to at least 95% of the fair value of the government securities and government agency securities or cash securities transferred. The agreements require additional primarily related to certain bank loan participations committed to collateral to be transferred when necessary and provide the through a limited partnership agreement. These amounts also counterparty the right to sell or re-pledge the securities include collateral related to letters of credit. transferred. The cash received from the repurchase program is For disclosure of collateral in support of derivative transactions, typically invested in short-term investments or fixed maturities refer to the Derivative Collateral Arrangements section in Note 7 and is reported as an asset on the Company's Consolidated - Derivatives of Notes to Consolidated Financial Statements. Balance Sheets. The Company accounts for the repurchase agreements as collateralized borrowings. The securities transferred under repurchase agreements are included in fixed Equity Method Investments maturities, AFS with the obligation to repurchase those securities The majority of the Company's investments in limited recorded in other liabilities on the Company's Consolidated partnerships and other alternative investments, including hedge Balance Sheets. funds, real estate funds, and private equity funds (collectively, From time to time, the Company enters into reverse repurchase “limited partnerships”), are accounted for under the equity agreements where the Company purchases securities and method of accounting. The remainder of investments in limited simultaneously agrees to resell the same or substantially the partnerships and other alternative investments consists of same securities. The agreements require additional collateral to investments in insurer-owned life insurance accounted for at cash be transferred to the Company when necessary and the Company surrender value. The Company's investment in Hopmeadow has the right to sell or re-pledge the securities received. The Holdings LP is reported in other assets on the Company's Company accounts for reverse repurchase agreements as Consolidated Balance Sheets and is accounted for under the collateralized financing. The receivable for reverse repurchase equity method of accounting. For further discussion on agreements is included within short-term investments in the Hopmeadow Holdings LP, refer to Sale of Life and Annuity Company's Consolidated Balance Sheets. Business within Note 20 - Business Dispositions and Discontinued Operations of Notes to the Consolidated Financial Statements. The Company recognized total equity method Securities Lending and Repurchase income of $214, $168, and $137 for the periods ended Agreements December 31, 2018, 2017 and 2016, respectively. Equity method income is reported in net investment income except amounts December December 31, 2018 31, 2017 related to strategic investments classified in other assets are reported in other revenues. For investments accounted for under Fair Value Fair Value the equity method, the Company’s maximum exposure to loss as Securities Lending Transactions: of December 31, 2018 is limited to the total carrying value of $1.5 Gross amount of securities on loan $ 820 $ 922 billion. In addition, the Company has outstanding commitments Gross amount of associated liability for totaling $741 to fund limited partnership investments as of collateral received [1] $ 840 $ 945 December 31, 2018. The Company’s investments accounted for under the equity method are generally of a passive nature in that Repurchase agreements: the Company does not take an active role in the management. In 2018, aggregate investment income from investments accounted Gross amount of recognized liabilities for repurchase agreements $ 72 $ 174 for under the equity method exceeded 10% of the Company’s pre-tax consolidated net income (loss). Accordingly, the Company Gross amount of collateral pledged related to repurchase agreements [2] $ 73 $ 176 is disclosing aggregated summarized financial data for the Company’s investments accounted for under the equity method. Gross amount of recognized receivables for reverse repurchase agreements $ 64 $ — This aggregated summarized financial data does not represent [1]Cash collateral received is reinvested in fixed maturities, AFS and short term the Company’s proportionate share of investees' assets or investments which are included in the Consolidated Balance Sheets. Amount earnings. Aggregate total assets of the investees totaled $311 includes additional securities collateral received of $3 and $0 million which are billion and $165.9 billion as of December 31, 2018 and 2017, excluded from the Company's Consolidated Balance Sheets as of December 31, respectively. Aggregate total liabilities of the investees totaled 2018 and December 31, 2017, respectively. $187.7 billion and $47.8 billion as of December 31, 2018 and [2]Collateral pledged is included within fixed maturities, AFS and short term investments in the Company's Consolidated Balance Sheets. 2017, respectively. Aggregate net investment income of the investees totaled $773, $1.9 billion, and $844 for the periods Other Collateral Transactions ended December 31, 2018, 2017 and 2016, respectively. The Company is required by law to deposit securities with Aggregate net income excluding net investment income of the government agencies in certain states in which it conducts investees totaled $12.3 billion, $9.8 billion and $7.7 billion for the business. As of December 31, 2018 and December 31, 2017, the periods ended December 31, 2018, 2017 and 2016, respectively. fair value of securities on deposit was $2.2 billion and $2.5 billion, As of, and for the period ended, December 31, 2018, the respectively. aggregated summarized financial data reflects the latest available financial information. As of December 31, 2018 and December 31, 2017, the Company
F-37 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. DERIVATIVES The Company utilizes a variety of OTC, OTC-cleared and against default risk and credit-related changes in the value of exchange traded derivative instruments as a part of its overall risk fixed maturity securities. Credit default swaps are also used to management strategy as well as to enter into replication assume credit risk related to an individual entity or referenced transactions. Derivative instruments are used to manage risk index as a part of replication transactions. These contracts associated with interest rate, equity market, credit spread, issuer require the Company to pay or receive a periodic fee in exchange default, price, and currency exchange rate risk or volatility. for compensation from the counterparty should the referenced Replication transactions are used as an economical means to security issuers experience a credit event, as defined in the synthetically replicate the characteristics and performance of contract. In addition, the Company enters into credit default assets that are permissible investments under the Company’s swaps to terminate existing credit default swaps, thereby investment policies. offsetting the changes in value of the original swap going forward. Strategies that Qualify for Interest Rate Swaps, Swaptions and Futures Hedge Accounting The Company uses interest rate swaps, swaptions and futures to Some of the Company's derivatives satisfy hedge accounting manage interest rate duration between assets and liabilities in requirements as outlined in Note 1 - Basis of Presentation and certain investment portfolios. In addition, the Company enters Significant Accounting Policies of Notes to Consolidated Financial into interest rate swaps to terminate existing swaps, thereby Statements. Typically, these hedging instruments include interest offsetting the changes in value of the original swap going forward. rate swaps and, to a lesser extent, foreign currency swaps where As of December 31, 2018 and 2017, the notional amount of the terms or expected cash flows of the hedged item closely interest rate swaps in offsetting relationships was $7.1 billion and match the terms of the swap. The interest rate swaps are typically $7.3 billion, respectively. used to manage interest rate duration of certain fixed maturity securities. The hedge strategies by hedge accounting designation Foreign Currency Swaps and Forwards include: The Company enters into foreign currency swaps to convert the foreign currency exposures of certain foreign currency- Cash Flow Hedges denominated fixed maturity investments to U.S. dollars. The Interest rate swaps are predominantly used to manage portfolio Company may at times enter into foreign currency forwards to duration and better match cash receipts from assets with cash hedge non-U.S. dollar denominated cash and, previously, equity disbursements required to fund liabilities. These derivatives securities. The Company previously entered into foreign currency primarily convert interest receipts on floating-rate fixed maturity forwards to hedge currency impacts on changes in equity of the securities to fixed rates. The Company has also entered into U.K. property and casualty run-off subsidiaries that were sold in interest rate swaps to convert the variable interest payments on May 2017. For further information on the disposition, see Note 3 month Libor + 2.125% junior subordinated debt to fixed 20 - Business Dispositions and Discontinued Operations of Notes interest payments. For further information, see the Junior to Consolidated Financial Statements. Subordinated Debentures section within Note 13 - Debt of Notes to Consolidated Financial Statements. Equity Index Options Foreign currency swaps are used to convert foreign currency- The Company enters into equity index options to hedge the denominated cash flows related to certain investment receipts impact of a decline in the equity markets on the investment and liability payments to U.S. dollars in order to reduce cash flow portfolio. The Company also enters into call options on equity fluctuations due to changes in currency rates. securities to generate additional return. The Company previously entered into total return swaps to hedge equity risk of specific The Company also previously entered into forward starting swap common stock investments which were accounted for using fair agreements to hedge the interest rate exposure related to the value option in order to align the accounting treatment within net future purchase of fixed-rate securities, primarily to hedge realized capital gains (losses). The Company has not held these interest rate risk inherent in the assumptions used to price total return swaps since January 2016. certain group benefits liabilities. Contingent Capital Facility Put Option Non-qualifying Strategies The Company previously entered into a put option agreement that provided the Company the right to require a third-party trust Derivative relationships that do not qualify for hedge accounting to purchase, at any time, The Hartford’s junior subordinated (“non-qualifying strategies”) primarily include hedging and notes in a maximum aggregate principal amount of $500. On replication strategies that utilize credit default swaps. In addition, February 8, 2017, The Hartford exercised the put option resulting hedges of interest rate, foreign currency and equity risk of certain in the issuance of $500 in junior subordinated notes with fixed maturities and equities do not qualify for hedge accounting. proceeds received on February 15, 2017. Under the put option The non-qualifying strategies include: agreement, The Hartford had been paying premiums on a periodic basis and had agreed to reimburse the trust for certain fees and Credit Contracts ordinary expenses. Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge
F-38 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
accruals or related cash collateral receivables and payables, Derivative Balance Sheet which are netted with derivative fair value amounts to determine balance sheet presentation. The Company’s derivative Classification instruments are held for risk management purposes, unless For reporting purposes, the Company has elected to offset within otherwise noted in the following table. The notional amount of assets or liabilities based upon the net of the fair value amounts, derivative contracts represents the basis upon which pay or income accruals, and related cash collateral receivables and receive amounts are calculated and is presented in the table to payables of OTC derivative instruments executed in a legal entity quantify the volume of the Company’s derivative activity. and with the same counterparty under a master netting Notional amounts are not necessarily reflective of credit risk. agreement, which provides the Company with the legal right of offset. The following fair value amounts do not include income Derivative Balance Sheet Presentation
Asset Derivatives Liability Derivatives Net Derivatives [1] [1] Notional Amount Fair Value Fair Value Fair Value Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Hedge Designation/ Derivative Type 2018 2017 2018 2017 2018 2017 2018 2017 Cash flow hedges Interest rate swaps $ 2,040 $ 2,190 $ 1 $ — $ 2 $ 1 $ (1) $ (1) Foreign currency swaps 153 153 (6) (13) 2 — (8) (13) Total cash flow hedges 2,193 2,343 (5) (13) 4 1 (9) (14) Non-qualifying strategies Interest rate contracts Interest rate swaps and futures 8,451 7,986 (62) (83) 8 7 (70) (90) Foreign exchange contracts Foreign currency swaps and forwards 287 213 (1) (1) — — (1) (1) Credit contracts Credit derivatives that purchase credit protection 6 61 — 1 — 2 — (1) Credit derivatives that assume credit risk [2] 1,102 823 3 3 8 3 (5) — Credit derivatives in offsetting positions 41 1,046 — 2 6 11 (6) (9) Equity contracts Equity index swaps and options 211 258 4 1 5 1 (1) — Total non-qualifying strategies 10,098 10,387 (56) (77) 27 24 (83) (101) Total cash flow hedges and non-qualifying strategies $ 12,291 $ 12,730 $ (61) $ (90) $ 31 $ 25 $ (92) $ (115) Balance Sheet Location Fixed maturities, available-for-sale $ 153 $ 153 $ — $ — $ — $ — $ — $ — Other investments 9,864 9,957 7 10 23 16 (16) (6) Other liabilities 2,274 2,620 (68) (100) 8 9 (76) (109) Total derivatives $ 12,291 $ 12,730 $ (61) $ (90) $ 31 $ 25 $ (92) $ (115) [1]Certain prior year amounts have been restated to conform to the current year presentation for OTC-cleared derivatives. [2]The derivative instruments related to this strategy are held for other investment purposes. derivative instruments that are traded under a common master Offsetting of Derivative Assets/ netting agreement, as described in the preceding discussion. Also Liabilities included in the tables are financial collateral receivables and The following tables present the gross fair value amounts, the payables, which are contractually permitted to be offset upon an amounts offset, and net position of derivative instruments eligible event of default, although are disallowed for offsetting under U.S. for offset in the Company's Consolidated Balance Sheets. GAAP. Amounts offset include fair value amounts, income accruals and related cash collateral receivables and payables associated with
F-39 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Offsetting Derivative Assets and Liabilities
(i) (ii) (iii) = (i) - (ii) (iv) (v) = (iii) - (iv) Collateral Disallowed for Offset in the Net Amounts Presented in the Statement of Statement of Financial Position Financial Position Accrued Interest and Gross Amounts Gross Amounts Cash of Recognized Offset in the Derivative Collateral Financial Collateral Assets Statement of Assets [2] (Received) [4] (Received) Pledged (Liabilities) [1] Financial Position (Liabilities) [3] Pledged [3] [5] Net Amount As of December 31, 2018 Other investments $ 31 $ 26 $ 7 $ (2) $ 2 $ 3 Other liabilities $ (92) $ (20) $ (68) $ (4) $ (65) $ (7) As of December 31, 2017 Other investments $ 25 $ 22 $ 10 $ (7) $ 1 $ 2 Other liabilities $ (115) $ (10) $ (100) $ (5) $ (96) $ (9) [1]For amounts shown as of December 31, 2017, certain amounts have been restated to conform to the current year presentation for OTC-cleared derivatives. [2]Included in other investments in the Company's Consolidated Balance Sheets. [3]Included in other liabilities in the Company's Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty. [4]Included in other investments in the Company's Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty. [5]Excludes collateral associated with exchange-traded derivative instruments. During the years ended December 31, 2018, 2017, and 2016 the Cash Flow Hedges Company had no ineffectiveness recognized in income within net For derivative instruments that are designated and qualify as cash realized capital gains (losses). flow hedges, the effective portion of the gain or loss on the As of December 31, 2018, the before tax deferred net gains on derivative is reported as a component of OCI and reclassified into derivative instruments recorded in AOCI that are expected to be earnings in the same period or periods during which the hedged reclassified to earnings during the next twelve months are $23. transaction affects earnings. Gains and losses on the derivative This expectation is based on the anticipated interest payments on representing hedge ineffectiveness are recognized in current hedged investments in fixed maturity securities that will occur period earnings. All components of each derivative’s gain or loss over the next twelve months, at which time the Company will were included in the assessment of hedge effectiveness. recognize the deferred net gains (losses) as an adjustment to net Derivatives in Cash Flow Hedging investment income over the term of the investment cash flows. Relationships During the years ended December 31, 2018, 2017, and 2016, the Company had no net reclassifications from AOCI to earnings Gain (Loss) Recognized in OCI resulting from the discontinuance of cash-flow hedges due to on Derivative (Effective Portion) forecasted transactions that were no longer probable of occurring. 2018 2017 2016 Interest rate swaps $ 5 $ 8 $ — Non-Qualifying Strategies Foreign currency swaps 7 (14) 1 For non-qualifying strategies, including embedded derivatives Total $ 12 $ (6) $ 1 that are required to be bifurcated from their host contracts and accounted for as derivatives, the gain or loss on the derivative is Gain Reclassified from AOCI recognized currently in earnings within net realized capital gains into Income (Effective Portion) (losses). 2018 2017 2016 Interest rate swaps Net realized capital gain/ (loss) $ 6 $ 5 $ 10 Net investment income 30 37 37 Total $ 36 $ 42 $ 47
F-40 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Non-Qualifying Strategies Recognized within Net Realized Capital Gains (Losses)
For the Year Ended December 31, 2018 2017 2016 Foreign exchange contracts Foreign currency swaps and forwards $ 3 $ (14) $ 83 Other non-qualifying derivatives Interest rate contracts Interest rate swaps, swaptions and futures (3) (5) 1 Credit contracts Credit derivatives that purchase credit protection — 28 (17) Credit derivatives that assume credit risk (14) (7) 28 Equity contracts Equity options 2 (7) (15) Other Contingent capital facility put option — (1) (6) Total other non-qualifying derivatives (15) 8 (9) Total [1] $ (12) $ (6) $ 74 [1]Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 5 - Fair Value Measurements of Notes to Consolidated Financial Statements. issuer’s debt obligation after the occurrence of the credit event. A Credit Risk Assumed through Credit credit event is generally defined as a default on contractually Derivatives obligated interest or principal payments or bankruptcy of the The Company enters into credit default swaps that assume credit referenced entity. The credit default swaps in which the Company risk of a single entity or referenced index in order to synthetically assumes credit risk primarily reference investment grade single replicate investment transactions that are permissible under the corporate issuers and baskets, which include standard diversified Company's investment policies. The Company will receive portfolios of corporate and CMBS issuers. The diversified periodic payments based on an agreed upon rate and notional portfolios of corporate issuers are established within sector amount and will only make a payment if there is a credit event. A concentration limits and may be divided into tranches that credit event payment will typically be equal to the notional value possess different credit ratings. of the swap contract less the value of the referenced security
F-41 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Credit Risk Assumed Derivatives by Type
Underlying Referenced Credit Obligation(s) [1]
Weighted Offsetting Notional Average Average Notional Offsetting Amount Fair Years to Credit Amount Fair Value [2] Value Maturity Type Rating [3] [3] As of December 31, 2018 Single name credit default swaps Corporate Credit/ Investment grade risk exposure $ 169 $ 2 4 years Foreign Gov. A $ — $ — Basket credit default swaps [4] Investment grade risk exposure 799 (1) 6 years Corporate Credit BBB+ — — Below investment grade risk exposure 125 2 5 years Corporate Credit B+ — — Investment grade risk exposure 11 — 5 years CMBS Credit A- 2 — Below investment grade risk Less than exposure 19 (6) 1 year CMBS Credit CCC 19 6 Total [5] $ 1,123 $ (3) $ 21 $ 6 As of December 31, 2017 Single name credit default swaps Corporate Credit/ Investment grade risk exposure $ 130 $ 3 5 years Foreign Gov. A- $ — $ — Below investment grade risk Less than exposure 9 — 1 year Corporate Credit B 9 — Basket credit default swaps [4] Investment grade risk exposure 1,137 2 3 years Corporate Credit BBB+ 454 (2) Below investment grade risk exposure 27 2 3 years Corporate Credit B+ 27 — Investment grade risk exposure 13 (1) 5 years CMBS Credit A 3 — Below investment grade risk Less than exposure 30 (6) 1 year CMBS Credit CCC 30 7 Total [5] $ 1,346 $ — $ 523 $ 5 [1]The average credit ratings are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used. [2]Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements and applicable law which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses. [3]The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap. [4]Comprised of swaps of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. [5]Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 5 - Fair Value Measurements. of Notes to Consolidated Financial Statements. have been included in fixed maturities on the Consolidated Derivative Collateral Balance Sheets. In addition, as of December 31, 2018 and 2017 , the Company has also pledged initial margin of securities related Arrangements to OTC-cleared and exchange traded derivatives with a fair value The Company enters into various collateral arrangements in of $89 and $96, respectively, which are included within fixed connection with its derivative instruments, which require both maturities on the Company's Consolidated Balance Sheets. The the pledging and accepting of collateral. As of December 31, 2018 counterparties generally have the right to sell or re-pledge these and 2017, the Company pledged cash collateral with a fair value securities. of $4 and $1 associated with derivative instruments. The collateral receivable has been recorded in other assets or other As of December 31, 2018 and 2017, the Company accepted cash liabilities on the Company's Consolidated Balance Sheets as collateral associated with derivative instruments of $9 and $11, determined by the Company's election to offset on the balance respectively, which was invested and recorded in the sheet. As of December 31, 2018 and 2017, the Company also Consolidated Balance Sheets in fixed maturities and short-term pledged securities collateral associated with derivative investments with corresponding amounts recorded in other instruments with a fair value of $67 and $101, respectively, which investments or other liabilities as determined by the Company's election to offset on the balance sheet. The Company also
F-42 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) accepted securities collateral as of December 31, 2018 and 2017 not sell any securities held as collateral. In addition, as of with a fair value of $5 and $2, respectively, none of which the December 31, 2018 and 2017, non-cash collateral accepted was Company has the ability to sell or repledge. As of December 31, held in separate custodial accounts and was not included in the 2018 and 2017, the Company had no repledged securities and did Company’s Consolidated Balance Sheets. 8. REINSURANCE The Company cedes insurance risk to reinsurers to enable the ceded losses up to the $650 reinsurance premium paid are Company to manage capital and risk exposure. Such recognized as a dollar-for-dollar offset to direct losses incurred. arrangements do not relieve the Company of its primary liability Cumulative ceded losses exceeding the $650 reinsurance to policyholders. Failure of reinsurers to honor their obligations premium paid would result in a deferred gain. The deferred gain could result in losses to the Company. The Company's procedures would be recognized over the claim settlement period in the include carefully selecting its reinsurers, structuring agreements proportion of the amount of cumulative ceded losses collected to provide collateral funds where necessary, and regularly from the reinsurer to the estimated ultimate reinsurance monitoring the financial condition and ratings of its reinsurers. recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse On December 31, 2016, the Company entered into an asbestos development of asbestos and environmental claims after and environmental adverse development cover (“ADC”) December 31, 2016 in excess of $650 may result in significant reinsurance agreement with National Indemnity Company charges against earnings. As of December 31, 2018, the Company (“NICO”), a subsidiary of Berkshire Hathaway Inc. (“Berkshire”), to has incurred $523 in cumulative adverse development on reduce uncertainty about potential adverse development of asbestos and environmental reserves that have been ceded under asbestos and environmental reserves. Under the ADC, the the ADC treaty with NICO. Company paid a reinsurance premium of $650 for NICO to assume adverse net loss reserve development up to $1.5 billion above the Company’s existing net asbestos and environmental Reinsurance Recoverables (“A&E”) reserves as of December 31, 2016 of approximately $1.7 Reinsurance recoverables include balances due from reinsurance billion. The $650 reinsurance premium was placed into a companies and are presented net of an allowance for collateral trust account as security for NICO’s claim payment uncollectible reinsurance. Reinsurance recoverables include an obligations to the Company. As of December 31, 2016, other estimate of the amount of gross losses and loss adjustment liabilities included $650 for the accrued reinsurance premium expense reserves that may be ceded under the terms of the paid in January, 2017. The Company has retained the risk of reinsurance agreements, including incurred but not reported collection on amounts due from other third-party reinsurers and unpaid losses. The Company’s estimate of losses and loss continues to be responsible for claims handling and other adjustment expense reserves ceded to reinsurers is based on administrative services, subject to certain conditions. The ADC assumptions that are consistent with those used in establishing covers substantially all the Company’s A&E reserve development the gross reserves for amounts the Company owes to its up to the reinsurance limit. claimants. The Company estimates its ceded reinsurance recoverables based on the terms of any applicable facultative and The ADC has been accounted for as retroactive reinsurance and treaty reinsurance, including an estimate of how incurred but not the Company reported the $650 cost as a loss on reinsurance reported losses will ultimately be ceded under reinsurance transaction in 2016 in the Consolidated Statements of agreements. Accordingly, the Company’s estimate of reinsurance Operations. For segment reporting, the loss on reinsurance was recoverables is subject to similar risks and uncertainties as the reported in Property and Casualty Other Operations. Under estimate of the gross reserve for unpaid losses and loss retroactive reinsurance accounting, net adverse A&E reserve adjustment expenses. development after December 31, 2016 will result in an offsetting reinsurance recoverable up to the $1.5 billion limit. Cumulative Reinsurance Recoverables
As of December 31, 2018 December 31, 2017 Property and Casualty Insurance Products Paid loss and loss adjustment expenses $ 127 $ 84 Unpaid loss and loss adjustment expenses 3,773 3,496 Gross reinsurance recoverables 3,900 3,580 Allowance for uncollectible reinsurance (126) (104) Net P&C reinsurance recoverables 3,774 3,476 Group Benefits net reinsurance recoverables [1] 251 236 Recoverable related to reserves in Corporate 332 349 Reinsurance recoverables, net $ 4,357 $ 4,061 [1]No allowance for uncollectible reinsurance was required as of December 31, 2018 and 2017.
F-43 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The allowance for uncollectible reinsurance reflects Due to the inherent uncertainties as to collection and the length management’s best estimate of reinsurance cessions that may be of time before reinsurance recoverables become due, it is possible uncollectible in the future due to reinsurers’ unwillingness or that future adjustments to the Company’s reinsurance inability to pay. The Company analyzes recent developments in recoverables, net of the allowance, could be required, which could commutation activity between reinsurers and cedants, recent have a material adverse effect on the Company’s consolidated trends in arbitration and litigation outcomes in disputes between results of operations or cash flows in a particular quarter or reinsurers and cedants and the overall credit quality of the annual period. Company’s reinsurers. Based on this analysis, the Company may adjust the allowance for uncollectible reinsurance or charge off Insurance Revenues reinsurer balances that are determined to be uncollectible. Where its contracts permit, the Company secures future claim The effect of reinsurance on insurance revenues is as follows: obligations with various forms of collateral, including irrevocable letters of credit, secured trusts, funds held accounts and group- wide offsets.
Property and Casualty Insurance Revenue
For the years ended December 31, Premiums Written 2018 2017 2016 Direct $ 10,784 $ 10,865 $ 10,906 Assumed 217 223 253 Ceded (593) (571) (591) Net $ 10,408 $ 10,517 $ 10,568 Premiums Earned Direct $ 10,824 $ 10,923 $ 10,871 Assumed 221 232 261 Ceded (599) (600) (583) Net $ 10,446 $ 10,555 $ 10,549
Ceded losses, which reduce losses and loss adjustment expenses incurred, were $661, $901 and $388 for the years ended December 31, 2018, 2017 and 2016, respectively.
Group Benefits Revenue
For the years ended December 31, 2018 2017 2016 Gross earned premiums, fees and other considerations $ 3,615 $ 3,281 $ 3,160 Reinsurance assumed 2,044 446 107 Reinsurance ceded (61) (50) (44) Net earned premiums, fees and other considerations $ 5,598 $ 3,677 $ 3,223
For its group benefits products, the Company reinsures certain of allowance for commissions and expenses and is liable for a its risks to other reinsurers under yearly renewable term and corresponding proportionate amount of all benefit payments. The coinsurance arrangements and variations thereto. Yearly increase in premiums assumed in 2018 and 2017 was primarily renewable term and coinsurance arrangements result in passing a due to premiums related to Aetna's U.S. group life and disability portion of the risk to the reinsurer. Generally, the reinsurer business acquired by the Company effective November 1, 2017 receives a proportionate amount of the premiums less an whereby Aetna is fronting the business for a period of time.
F-44 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. DEFERRED POLICY ACQUISITION COSTS Changes in the DAC Balance
For the years ended December 31, 2018 2017 2016 Balance, beginning of period $ 650 $ 645 $ 636 Deferred costs 1,404 1,377 1,378 Amortization — DAC (1,384) (1,372) (1,377) Add: Maxum acquisition — — 8 Balance, end of period $ 670 $ 650 $ 645
10. GOODWILL & OTHER INTANGIBLE ASSETS Goodwill Carrying Value as of December 31, 2018
Commercial Personal Hartford Group Lines Lines Funds Benefits Corporate [1] Total Balance at December 31, 2016 $ 38 $ 119 $ 180 $ — $ 230 $ 567 Goodwill related to acquisitions [2] — — — 723 — 723 Balance at December 31, 2017 $ 38 $ 119 $ 180 $ 723 $ 230 $ 1,290 Goodwill related to acquisitions — — — — — — Balance at December 31, 2018 $ 38 $ 119 $ 180 $ 723 $ 230 $ 1,290 [1]The Corporate category includes goodwill that was acquired at a holding company level and not pushed down to a subsidiary within a reportable segment. Carrying value of goodwill within Corporate as of December 31, 2018, 2017, and 2016 includes $138 and $92 for the Group Benefits and Hartford Funds reporting units, respectively. [2]For further discussion on goodwill related to the acquisition of Aetna's U.S. group life and disability business, refer to Note 2 - Business Acquisitions to Consolidated Financial Statements. The annual goodwill assessment for The Hartford's reporting years then ended. In 2018, all reporting units passed the first step units was completed as of October 31, 2018, 2017, and 2016, of their annual impairment test with a significant margin. which resulted in no write-downs of goodwill in the respective Other Intangible Assets
As of December 31, 2018 As of December 31, 2017 Weighted Gross Net Gross Net Average Carrying Accumulated Carrying Carrying Accumulated Carrying Expected Amount Amortization Amount Amount Amortization Amount Life Amortized Intangible Assets: Value of in-force contracts $ 23 $ (23) $ — $ 23 $ (3) $ 20 1 Customer relationships [1] 636 (49) 587 590 (6) 584 15 Marketing agreement with Aetna 16 (1) 15 16 — 16 15 Distribution Agreement 79 (56) 23 70 (52) 18 15 Agency relationships & Other [2] 21 (3) 18 9 (2) 7 13 Total Finite Life Intangibles 775 (132) 643 708 (63) 645 14 Total Indefinite Life Intangible Assets 14 — 14 14 — 14 Total Other Intangible Assets $ 789 $ (132) $ 657 $ 722 $ (63) $ 659 [1]On February 16, 2018, The Company entered into a renewal rights agreement with Farmers Exchanges of the Farmers Group of Companies to acquire its Foremost-branded small commercial business sold through independent agents. In connection with the renewal rights agreement, the Company recorded a customer relationships intangible asset of $46 which will be amortized over 10 years. [2]On December 1, 2018, the Company acquired Y-Risk LLC and recorded an agency relationships intangible asset of $12 which will be amortized over 15 years.
F-45 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Expected Pre-tax Amortization Expense
For the years ended December 31, 2019 $ 53 2020 $ 53 2021 $ 53 2022 $ 52 2023 $ 47
11. RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Property and Casualty Insurance Products Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
For the years ended December 31, 2018 2017 2016 Beginning liabilities for unpaid losses and loss adjustment expenses, gross $ 23,775 $ 22,545 $ 22,568 Reinsurance and other recoverables 3,957 3,488 3,625 Beginning liabilities for unpaid losses and loss adjustment expenses, net 19,818 19,057 18,943 Add: Maxum acquisition — — 122 Provision for unpaid losses and loss adjustment expenses Current accident year 7,107 7,381 6,990 Prior accident year development (167) (41) 457 Total provision for unpaid losses and loss adjustment expenses 6,940 7,340 7,447 Less: payments Current accident year 2,452 2,751 2,749 Prior accident years 3,954 3,828 4,219 Total payments 6,406 6,579 6,968 Less: net reserves transferred to liabilities held for sale — — 487 Ending liabilities for unpaid losses and loss adjustment expenses, net 20,352 19,818 19,057 Reinsurance and other recoverables 4,232 3,957 3,488 Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 24,584 $ 23,775 $ 22,545
Property and Casualty Insurance Products Reserves, Net of Reinsurance, that are Discounted
For the years ended December 31, 2018 2017 2016 Liability for unpaid losses and loss adjustment expenses, at undiscounted amounts $ 1,331 $ 1,387 $ 1,504 Less: amount of discount 388 410 483 Carrying value of liability for unpaid losses and loss adjustment expenses $ 943 $ 977 $ 1,021 Discount accretion included in losses and loss adjustment expenses $ 40 $ 30 $ 29 Weighted average discount rate 2.98% 3.06% 3.11% Range of discount rates 1.77% - 14.15% 1.77% - 14.15% 1.77% - 14.15%
The current accident year benefit from discounting property and The reserves recorded for the Company’s property and casualty casualty insurance product reserves was $12 in 2018, $15 in insurance products at December 31, 2018 represent the 2017 and $27 in 2016. Reserves are discounted at rates in effect Company’s best estimate of its ultimate liability for losses and at the time claims were incurred, ranging from 1.77% for accident loss adjustment expenses related to losses covered by policies year 2012 to 14.15% for accident year 1981. written by the Company. However, because of the significant
F-46 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) uncertainties surrounding reserves it is possible that • General liability reserves were increased, management’s estimate of the ultimate liabilities for these claims primarily due to an increase in reserves for higher hazard may change and that the required adjustment to recorded general liability exposures in middle market for accident reserves could exceed the currently recorded reserves by an years 2009 to 2017, partially offset by a decrease in reserves amount that could be material to the Company’s results of for other lines within middle market, including premises and operations or cash flows. operations, umbrella and products liability, principally for Losses and loss adjustment expenses are also impacted by trends accident years 2015 and prior. Contributing to the increase including frequency and severity as well as changes in the in reserves for higher hazard general liability exposures was legislative and regulatory environment. In the case of the an increase in average claim severity, including from large reserves for asbestos exposures, factors contributing to the high losses and, in more recent accident years, an increase in degree of uncertainty in the ultimate settlement of the liabilities claim frequency. Contributing to the reduction in reserves gross of reinsurance include inadequate loss development for other middle market lines were more favorable outcomes patterns, plaintiffs’ expanding theories of liability, the risks due to initiatives to reduce legal expenses. In addition, inherent in major litigation, and inconsistent emerging legal reserve increases for claims with lead paint exposure were doctrines. In the case of the reserves for environmental offset by reserve decreases for other mass torts and extra- exposures before reinsurance, factors contributing to the high contractual liability claims. degree of uncertainty in gross reserves include expanding were reduced, theories of liabilities and damages, the risks inherent in major • Package business reserves primarily due to lower reserve estimates for both liability litigation, inconsistent decisions concerning the existence and and property for accident years 2010 and prior, including a scope of coverage for environmental claims, and uncertainty as to recovery of loss adjustment expenses for the 2005 accident the monetary amount being sought by the claimant from the year. insured. (Favorable) Unfavorable Prior Accident Year • Commercial property reserves were reduced, driven by an increase in estimated reinsurance recoverables Development on middle market property losses from the 2017 accident year. For the years ended December 31, • Professional liability reserves were reduced, 2018 2017 2016 principally for accident years 2014 and prior, for directors Workers’ compensation $ (164) $ (79) $ (119) and officers liability claims principally due to a number of older claims closing with limited or no payment. Workers’ compensation discount accretion 40 28 28 • Automobile liability reserves were reduced, General liability 52 11 65 primarily driven by reduced estimates of loss adjustment Package business (26) (25) 65 expenses in small commercial for recent accident years and favorable development in personal automobile liability for Commercial property (12) (8) 1 accident years 2014 to 2017, principally due to lower Professional liability (12) 1 (37) severity, including with uninsured and underinsured motorist Bond 2 32 (8) claims. Automobile liability - Commercial Lines (15) 17 57 • Homeowners reserves were reduced, primarily in Automobile liability - Personal Lines (18) — 160 accident years 2013 to 2017, driven by lower than expected Homeowners (25) (14) (10) severity across multiple perils. Net asbestos reserves — — 197 • Asbestos and environmental reserves were Net environmental reserves — — 71 unchanged as $238 of adverse development arising from the Catastrophes (49) (16) (7) fourth quarter 2018 comprehensive annual review was offset by a $238 recoverable from NICO. For additional Uncollectible reinsurance 22 (15) (30) information related to the adverse development cover with Other reserve re-estimates, net 38 27 24 NICO, see Note 8 - Reinsurance and Note 14 - Commitments Total prior accident year development $ (167) $ (41) $ 457 and Contingencies of Notes to Consolidated Financial Statements.
2018 re-estimates of prior accident year • Catastrophe reserves were reduced, primarily as a reserves result of lower estimated net losses from 2017 catastrophes, principally related to hurricanes Harvey and Irma. Before • Workers’ compensation reserves were reduced reinsurance, estimated losses for 2017 catastrophe events in small commercial and middle market, primarily for decreased by $133, resulting in a decrease in reinsurance accident years 2014 and 2015, as claim severity has emerged recoverables of $90 as the Company no longer expects to favorably compared to previous reserve estimates. Also recover under the 2017 Property Aggregate reinsurance contributing was a reduction in estimated reserves for treaty as aggregate ultimate losses for 2017 catastrophe unallocated loss adjustment expense ("ULAE"). events are now projected to be less than $850.
F-47 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• Uncollectible reinsurance reserves were experience in recent calendar periods in estimating future increased due to lower anticipated recoveries related to collections. older accident years. 2016 re-estimates of prior accident year • Other reserve re-estimates, net, primarily reserves represents an increase in ULAE reserves in Property & Casualty Other Operations that was principally driven by an • Workers' compensation reserves consider increase in expected claim handling costs associated with favorable emergence on reported losses for recent accident asbestos and environmental and mass tort claims. years as well as a partially offsetting adverse impact related to two recent Florida Supreme Court rulings that have 2017 re-estimates of prior accident year increased the Company’s exposure to workers’ reserves compensation claims in that state. The favorable emergence has been driven by lower frequency and, to a lesser extent, • Workers’ compensation reserves were reduced lower medical severity and management has placed in small commercial and middle market, given the continued additional weight on this favorable experience as it becomes emergence of favorable frequency, primarily for accident more credible. years 2013 to 2015, as well as a reduction in estimated reserves for unallocated loss adjustment expenses, partially • General liability reserves increased for accident offset by strengthening reserves for captive programs within years 2012 - 2015 primarily due to higher severity losses specialty commercial. incurred on a class of business that insures service and maintenance contractors and increased for accident years • General liability reserves were increased for the 2008 and 2010 primarily due to indemnity losses and legal 2013 to 2016 accident years on a class of business that costs associated with a litigated claim. insures service and maintenance contractors. This increase was partially offset by a decrease in recent accident year • Package business reserves increased due to reserves for other middle market general liability reserves. higher than expected severity on liability claims, principally for accident years 2013 - 2015. Severity for these accident • Package business reserves were reduced for years has developed unfavorably and management has accident years 2013 and prior largely due to reducing the placed more weight on emerged experience. Company’s estimate of allocated loss adjustment expenses incurred to settle the claims. • Professional liability reserves decreased for claims made years 2008 - 2013, primarily for large accounts, • Bond business reserves increased for customs including on non-securities class action cases. Claim costs bonds written between 2000 and 2010 which was partly have emerged favorably as these years have matured and offset by a reduction in reserves for recent accident years as management has placed more weight on the emerged reported losses for commercial and contract surety have experience. emerged favorably. • Automobile liability reserves increased due to • Automobile liability reserves within Commercial increases in both commercial lines automobile and personal Lines were increased in small commercial and large national lines automobile. Commercial automobile liability reserves accounts for the 2013 to 2016 accident years, driven by increased, predominately for the 2015 accident year, higher frequency of more severe accidents, including primarily due to increased frequency of large claims. litigated claims Personal automobile liability reserves increased, primarily related to increased bodily injury frequency and severity for • Asbestos and environmental reserves were the 2015 accident year, including for uninsured and under- unchanged as $285 of adverse development arising from the insured motorist claims, and increased bodily injury severity fourth quarter 2017 comprehensive annual review was for the 2014 accident year. Increases in automobile liability offset by a $285 recoverable from NICO. For additional loss costs were across both the direct and agency information related to the adverse development cover with distribution channels. NICO, see Note 8 - Reinsurance and Note 14 - Commitments and Contingencies of Notes to Consolidated Financial • Asbestos and environmental reserves were Statements. increased during the period as a result of the second quarter 2016 comprehensive annual review. • Catastrophes reserves were reduced primarily due to lower estimates of 2016 wind and hail event losses and a • Uncollectible reinsurance reserves decreased decrease in losses on a 2015 wildfire. as a result of giving greater weight to favorable collectibility experience in recent calendar periods in estimating future • Uncollectible reinsurance reserves decreased collections. as a result of giving greater weight to favorable collectibility
F-48 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reconciliation of Loss Development to Liability for Unpaid Losses and Loss Adjustment Expenses As of December 31, 2018
Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance Subtotal Unpaid Unpaid Cumulative Cumulative Unallocated Losses and Liability for Incurred for Paid for Unpaid for Loss Loss Unpaid Accident Accident Accident Adjustment Adjustment Losses and Years Years Years not Expenses, Expenses, Reinsurance Loss Displayed in Displayed in Displayed in Net of Net of and Other Adjustment Reserve Line Triangles Triangles Triangles [1] Reinsurance Discount Reinsurance Recoverables Expenses Workers' compensation $ 18,685 $ (10,965) $ 2,316 $ 341 $ (372) $ 10,005 $ 2,160 $ 12,165 General liability 3,605 (1,840) 417 94 — 2,276 234 2,510 Package business 6,600 (5,128) 43 94 — 1,609 44 1,653 Commercial property 3,124 (2,763) 14 9 — 384 41 425 Commercial automobile liability 3,442 (2,604) 17 23 — 878 43 921 Commercial automobile physical damage 221 (210) 2 — — 13 — 13 Professional liability 1,491 (973) 41 19 — 578 306 884 Bond 598 (356) 28 20 — 290 12 302 Personal automobile liability 12,262 (10,703) 21 72 — 1,652 25 1,677 Personal automobile physical damage 1,752 (1,716) 1 3 — 40 — 40 Homeowners 7,714 (7,110) 2 36 — 642 83 725 Other ongoing business 197 (1) (16) 180 297 477 Asbestos and environmental [2] 1,254 — — 1,254 1,032 2,286 Other operations [2] 413 138 — 551 (45) 506 Total P&C $ 59,494 $ (44,368) $ 4,766 $ 848 $ (388) $ 20,352 $ 4,232 $ 24,584 [1]Amounts represent reserves for claims that were incurred more than ten years ago for long-tail lines and more than three years ago for short-tail lines. [2]Asbestos and environmental and other operations include asbestos, environmental and other latent exposures not foreseen when coverages were written, including, but not limited to, potential liability for pharmaceutical products, silica, talcum powder, head injuries, lead paint, construction defects, molestation and other long-tail liabilities. These reserve lines do not have significant paid or incurred loss development for the most recent ten accident years and therefore do not have loss development displayed in triangles. The reserve lines in the above table and the loss triangles that to the number of years for which claims incurred typically remain follow represent the significant lines of business for which the outstanding, not exceeding ten years. Short-tail lines, which Company regularly reviews the appropriateness of reserve levels. represent claims generally expected to be paid within a few years, These reserve lines differ from the reserve lines reported on a have three years of claim development displayed. IBNR reserves statutory basis, as prescribed by the National Association of shown in loss triangles include reserve for incurred but not Insurance Commissioners ("NAIC"). reported claims as well as reserves for expected development on reported claims. The following loss triangles present historical loss development for incurred and paid claims by accident year. Triangles are limited
F-49 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Workers' Compensation
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2009 $ 1,462 $ 1,455 $ 1,478 $ 1,493 $ 1,504 $ 1,504 $ 1,519 $ 1,529 $ 1,522 $ 1,534 $ 168 135,804 2010 1,560 1,775 1,814 1,858 1,857 1,882 1,881 1,878 1,892 236 156,747 2011 2,013 2,099 2,204 2,206 2,221 2,224 2,232 2,242 342 177,819 2012 2,185 2,207 2,207 2,181 2,168 2,169 2,154 385 171,219 2013 2,020 1,981 1,920 1,883 1,861 1,861 451 151,153 2014 1,869 1,838 1,789 1,761 1,713 532 125,840 2015 1,873 1,835 1,801 1,724 613 113,493 2016 1,772 1,772 1,780 787 111,190 2017 1,862 1,869 1,061 109,982 2018 1,916 1,363 109,842 Total $18,685
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 $ 265 $ 587 $ 792 $ 937 $ 1,042 $ 1,115 $ 1,170 $ 1,208 $ 1,242 $ 1,263 2010 316 709 970 1,154 1,287 1,374 1,439 1,489 1,522 2011 371 841 1,156 1,368 1,518 1,622 1,690 1,746 2012 359 809 1,106 1,313 1,436 1,529 1,587 2013 304 675 917 1,071 1,175 1,260 2014 275 598 811 960 1,041 2015 261 576 778 909 2016 255 579 779 2017 261 575 2018 283 Total $10,965
F-50 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
General Liability
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2009 $ 382 $ 398 $ 394 $ 382 $ 359 $ 348 $ 347 $ 346 $ 341 $ 351 $ 39 20,714 2010 355 362 352 355 343 345 376 377 393 46 18,949 2011 353 343 323 316 315 320 318 326 52 16,854 2012 321 315 310 295 304 298 304 69 11,761 2013 318 321 332 352 344 352 80 9,906 2014 317 318 336 342 351 112 10,358 2015 316 346 345 364 164 10,805 2016 352 351 380 241 11,960 2017 363 385 289 10,965 2018 399 352 10,023 Total $ 3,605
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 $ 22 $ 63 $ 124 $ 181 $ 227 $ 256 $ 277 $ 287 $ 297 $ 304 2010 14 51 115 181 224 259 314 331 337 2011 11 47 93 154 198 234 252 264 2012 8 39 75 124 167 198 215 2013 7 35 95 152 207 242 2014 11 31 88 142 195 2015 7 32 80 139 2016 8 32 79 2017 12 48 2018 17 Total $ 1,840
F-51 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Package Business
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2009 $ 587 $ 584 $ 584 $ 572 $ 578 $ 577 $ 576 $ 576 $ 574 $ 569 $ 15 50,413 2010 657 662 654 652 652 651 653 651 649 19 52,410 2011 810 792 790 800 808 814 813 812 31 60,967 2012 736 725 728 731 736 735 739 39 59,715 2013 579 565 573 585 586 592 46 43,415 2014 566 578 601 602 603 70 42,928 2015 582 588 585 583 94 41,678 2016 655 638 632 170 43,129 2017 695 702 257 44,709 2018 719 335 38,034 Total $ 6,600
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 $ 227 $ 351 $ 411 $ 463 $ 503 $ 527 $ 539 $ 547 $ 550 $ 551 2010 270 414 487 539 570 601 613 618 625 2011 377 555 621 684 727 748 762 772 2012 286 486 560 616 652 673 687 2013 225 339 414 467 504 522 2014 226 345 416 468 507 2015 212 332 383 445 2016 225 353 410 2017 235 372 2018 237 Total $ 5,128
F-52 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Property
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2009 $ 267 $ 264 $ 259 $ 258 $ 251 $ 257 $ 257 $ 257 $ 257 $ 258 $ — 28,286 2010 286 283 279 282 284 284 284 284 284 — 28,515 2011 357 356 356 362 361 360 359 359 — 29,110 2012 329 301 301 305 306 305 305 1 25,789 2013 234 218 219 220 216 215 — 20,289 2014 268 260 262 264 263 — 19,758 2015 264 264 268 270 — 19,061 2016 328 331 327 5 19,945 2017 515 440 62 20,703 2018 403 86 17,839 Total $ 3,124
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 $ 179 $ 247 $ 252 $ 256 $ 256 $ 257 $ 257 $ 257 $ 257 $ 257 2010 198 266 276 281 283 284 284 284 284 2011 231 332 350 355 358 359 360 360 2012 171 279 294 300 304 303 303 2013 157 208 216 218 215 215 2014 168 243 258 264 262 2015 172 239 255 265 2016 188 285 310 2017 210 334 2018 173 Total $ 2,763
F-53 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Automobile Liability
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2009 $ 306 $ 292 $ 287 $ 287 $ 297 $ 301 $ 302 $ 302 $ 302 $ 302 $ — 38,703 2010 277 280 296 319 323 328 327 324 322 4 38,153 2011 272 310 356 356 366 365 362 362 4 39,293 2012 311 376 390 401 394 390 387 6 35,999 2013 309 314 329 336 335 333 18 31,918 2014 306 314 328 333 337 23 29,260 2015 302 353 368 351 43 28,079 2016 372 380 376 90 28,154 2017 346 358 165 24,587 2018 314 205 20,675 Total $ 3,442
Cumulative Paid Losses & Allocated Loss Adjustment Expense, Net of Reinsurance For the years ended December 31 (Unaudited) Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 $ 56 $ 115 $ 175 $ 237 $ 274 $ 291 $ 298 $ 300 $ 301 $ 301 2010 55 125 188 252 289 300 308 313 316 2011 62 133 211 273 315 339 348 352 2012 65 142 233 306 345 358 371 2013 61 128 199 255 289 306 2014 58 129 195 249 295 2015 61 141 204 264 2016 62 140 222 2017 55 123 2018 54 Total $ 2,604
F-54 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Automobile Physical Damage
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2016 2017 2018 Reserves Reported 2016 $ 79 $ 78 $ 78 $ — 26,367 2017 85 81 3 24,275 2018 62 2 19,167 Total $ 221
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident Year 2016 2017 2018 2016 $ 71 $ 78 $ 77 2017 74 79 2018 54 Total $ 210
F-55 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Professional Liability
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Claims Made IBNR Claims Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2009 $ 254 $ 251 $ 244 $ 266 $ 257 $ 263 $ 255 $ 257 $ 257 $ 259 $ 20 5,115 2010 202 211 212 205 201 200 195 199 192 22 4,894 2011 226 228 232 226 219 219 220 215 38 4,708 2012 174 172 168 149 146 144 139 18 3,734 2013 136 136 123 110 103 99 27 2,791 2014 116 123 118 114 109 33 2,891 2015 104 113 113 114 32 2,957 2016 106 106 125 71 3,133 2017 107 113 75 3,111 2018 126 107 2,971 Total $ 1,491
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Claims Made Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 $ 17 $ 69 $ 127 $ 177 $ 194 $ 226 $ 225 $ 226 $ 235 $ 238 2010 22 62 103 137 148 157 162 166 169 2011 11 57 100 128 163 170 173 176 2012 11 41 60 89 97 107 109 2013 4 19 31 39 55 66 2014 4 21 40 64 72 2015 4 23 49 63 2016 4 25 46 2017 6 26 2018 8 Total $ 973
F-56 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Bond
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2009 $ 71 $ 71 $ 69 $ 58 $ 57 $ 51 $ 49 $ 49 $ 49 $ 49 $ 5 3,321 2010 71 75 80 79 73 69 70 90 71 3 2,674 2011 72 76 76 75 70 70 69 69 9 2,134 2012 69 69 60 53 48 48 43 9 1,720 2013 63 58 54 48 48 38 18 1,456 2014 69 65 65 66 58 13 1,373 2015 65 65 62 59 23 1,368 2016 59 59 58 37 1,272 2017 61 88 38 1,204 2018 65 59 1,040 Total $ 598
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 $ 9 $ 32 $ 45 $ 46 $ 44 $ 43 $ 44 $ 44 $ 44 $ 43 2010 13 46 59 58 59 63 66 66 67 2011 12 39 51 56 57 59 59 59 2012 12 25 26 24 25 25 33 2013 3 9 17 18 18 18 2014 18 31 40 43 42 2015 9 19 23 31 2016 2 11 13 2017 5 45 2018 5 Total $ 356
F-57 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Personal Automobile Liability
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2009 $ 1,351 $ 1,305 $ 1,280 $ 1,255 $ 1,256 $ 1,260 $ 1,259 $ 1,257 $ 1,257 $ 1,257 $ 3 254,555 2010 1,346 1,321 1,293 1,287 1,282 1,275 1,265 1,265 1,264 3 248,944 2011 1,181 1,170 1,180 1,173 1,166 1,154 1,154 1,153 5 221,886 2012 1,141 1,149 1,146 1,142 1,133 1,130 1,130 7 210,750 2013 1,131 1,145 1,144 1,153 1,152 1,153 8 205,462 2014 1,146 1,153 1,198 1,200 1,199 15 208,942 2015 1,195 1,340 1,338 1,330 38 216,707 2016 1,407 1,402 1,393 103 215,126 2017 1,277 1,275 276 185,716 2018 1,108 510 146,845 Total $12,262
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 $ 492 $ 888 $ 1,083 $ 1,171 $ 1,223 $ 1,240 $ 1,246 $ 1,250 $ 1,251 $ 1,251 2010 496 915 1,108 1,202 1,239 1,251 1,256 1,258 1,260 2011 447 826 1,006 1,088 1,126 1,140 1,145 1,146 2012 441 818 986 1,067 1,104 1,114 1,120 2013 442 816 1,002 1,091 1,121 1,135 2014 430 843 1,032 1,125 1,165 2015 475 935 1,142 1,243 2016 505 968 1,188 2017 441 836 2018 359 Total $10,703
F-58 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Personal Automobile Physical Damage
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2016 2017 2018 Reserves Reported 2016 $ 665 $ 656 $ 655 $ 3 406,588 2017 598 588 (3) 361,857 2018 509 3 288,993 Total $ 1,752
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident Year 2016 2017 2018 2016 $ 634 $ 653 $ 651 2017 574 591 2018 474 Total $ 1,716
F-59 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Homeowners
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident IBNR Claims Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2009 $ 757 $ 777 $ 776 $ 772 $ 772 $ 772 $ 772 $ 769 $ 768 $ 768 $ — 149,799 2010 838 850 838 840 840 840 836 834 834 — 161,590 2011 955 920 919 916 914 911 908 907 — 179,389 2012 774 741 741 741 739 738 738 1 142,828 2013 673 638 637 634 632 630 1 113,518 2014 710 707 702 700 698 1 121,863 2015 690 703 690 684 3 119,888 2016 669 673 663 7 119,441 2017 866 889 45 123,426 2018 903 89 94,946 Total $ 7,714
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 $ 559 $ 727 $ 749 $ 759 $ 763 $ 765 $ 766 $ 766 $ 767 $ 767 2010 599 789 815 825 829 832 833 833 834 2011 709 871 891 899 903 905 908 907 2012 547 696 719 727 731 734 735 2013 467 590 611 622 626 627 2014 526 663 684 691 695 2015 487 645 665 674 2016 481 621 640 2017 538 747 2018 484 Total $ 7,110
Property and casualty reserves, including referred to as short-tail lines of business. The Company’s shortest IBNR reserves tail lines of business are homeowners, commercial property and automobile physical damage. The longest tail lines of business The Company estimates ultimate losses and allocated loss include workers’ compensation, general liability and professional adjustment expenses by accident year. IBNR represents the liability. For short-tail lines of business, emergence of paid loss excess of estimated ultimate loss reserves over case reserves. The and case reserves is credible and likely indicative of ultimate process to estimate ultimate losses and loss adjustment expenses losses. For long-tail lines of business, emergence of paid losses is an integral part of the Company's reserve setting. Reserves for and case reserves is less credible in the early periods after a given allocated and unallocated loss adjustment expenses are generally accident year and, accordingly, may not be indicative of ultimate established separate from the reserves for losses. losses. Reserves for losses are set by line of business within the reporting The Company’s reserving actuaries regularly review reserves for segments. Case reserves are established by a claims handler on both current and prior accident years using the most current each individual claim and are adjusted as new information claim data. A variety of actuarial methods and judgments are used becomes known during the course of handling the claim. Lines of for most lines of business to arrive at selections of estimated business for which reported losses emerge over a long period of ultimate losses and loss adjustment expenses. While actuarial time are referred to as long-tail lines of business. Lines of methods used and judgments change depending on the age of the business for which reported losses emerge more quickly are
F-60 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) accident year, in 2018, there were no new methods or types of reported development method for some of the long-tailed lines judgments introduced or changes in how those methods and like general liability. In addition, for long-tailed lines of business, judgments were applied. The reserve selections incorporate the Company relies on the expected loss ratio method for input, as appropriate, from claims personnel, pricing actuaries and immature accident years. Frequency/severity techniques are used operating management about reported loss cost trends and other predominantly for professional liability and are also used for factors that could affect the reserve estimates. automobile liability. For most lines, reserves for allocated loss adjustment expenses ("ALAE", or those expenses related to For both short-tail and long-tail lines of business, an expected loss specific claims) are analyzed using paid development techniques ratio is used to record initial reserves. This expected loss ratio is and an analysis of the relationship between ALAE and loss determined by starting with the average loss ratio of recent prior payments. Reserves for unallocated loss adjustment expenses accident years and adjusting that ratio for the effect of expected ("ULAE") are determined using the expected cost per claim year changes to earned pricing, loss frequency and severity, mix of and the anticipated claim closure pattern as well as the ratio of business, ceded reinsurance and other factors. For short-tail lines, paid ULAE to paid losses. IBNR for the current accident year is initially recorded as the product of the expected loss ratio for the period, earned premium In the final step of the reserve review process, senior reserving for the period and the proportion of losses expected to be actuaries and senior management apply their judgment to reported in future calendar periods for the current accident determine the appropriate level of reserves considering the period. For long-tailed lines, IBNR reserves for the current actuarial indications and other factors not contemplated in the accident year are initially recorded as the product of the expected actuarial indications. Those factors include, but are not limited to, loss ratio for the period and the earned premium for the period, the assessed reliability of key loss trends and assumptions used in less reported losses for the period. For certain short-tailed lines the current actuarial indications, the maturity of the accident of business, IBNR amounts in the above loss development year, pertinent trends observed over the recent past, the level of triangles are negative due to anticipated salvage and subrogation volatility within a particular line of business, and the recoveries on paid losses. improvement or deterioration of actuarial indications. As losses for a given accident year emerge or develop in Cumulative number of reported claims subsequent periods, reserving actuaries use other methods to For property and casualty, claim counts represent the number of estimate ultimate unpaid losses in addition to the expected loss claim features on a reported claim where a claim feature is each ratio method. These primarily include paid and reported loss separate coverage for each claimant affected by the claim event. development methods, frequency/severity techniques and the For example, one car accident that results in two bodily injury Bornhuetter-Ferguson method (a combination of the expected claims and one automobile damage liability claim would be loss ratio and paid development or reported development counted as three claims within the personal automobile liability method). Within any one line of business, the methods that are triangle. Similarly, a fire that impacts one commercial building given more weight vary based primarily on the maturity of the may result in multiple claim features due to the potential for accident year, the mix of business and the particular internal and claims related to business interruption, structural damage, and external influences impacting the claims experience or the loss of the physical contents of the building. Claim features that methods. The output of the reserve reviews are reserve estimates result in no paid losses are included in the reported claim counts. that are referred to as the “actuarial indication”. Paid development and reported development techniques are used for most lines of business though more weight is given to the
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited) 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Reserve Line Year Year Year Year Year Year Year Year Year Year Workers' compensation 15.8% 19.5% 12.9% 9.0% 6.1% 4.6% 3.2% 2.5% 2.0% 1.4% General liability 3.3% 8.7% 14.9% 16.5% 13.7% 9.7% 7.8% 3.6% 2.1% 2.1% Package business 38.1% 21.3% 10.3% 8.7% 5.8% 3.5% 1.9% 1.1% 0.7% 0.3% Commercial property 60.8% 27.6% 4.9% 1.9% 0.3% 0.1% 0.1% —% —% —% Commercial automobile liability 17.2% 20.5% 20.7% 18.1% 11.6% 4.8% 2.7% 1.1% 0.6% 0.1% Commercial automobile physical damage 90.0% 7.1% (0.5%) Professional liability 5.7% 18.6% 18.1% 16.2% 9.8% 7.6% 1.3% 1.4% 2.5% 1.1% Bond 15.4% 30.8% 13.9% 3.3% 0.3% 1.5% 6.1% (0.1%) 1.0% (1.9%) Personal automobile liability 36.9% 33.0% 15.6% 7.4% 3.3% 1.1% 0.5% 0.2% 0.1% —% Personal automobile physical damage 95.9% 2.8% (0.3%) Homeowners 70.4% 21.1% 3.0% 1.2% 0.5% 0.3% 0.1% 0.1% —% —%
F-61 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Group Life, Disability and Accident Products Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
For the years ended December 31, 2018 2017 2016 Beginning liabilities for unpaid losses and loss adjustment expenses, gross $ 8,512 $ 5,772 $ 5,889 Reinsurance recoverables 209 208 218 Beginning liabilities for unpaid losses and loss adjustment expenses, net 8,303 5,564 5,671 Add: Aetna U.S. group life and disability business acquisition [1] 42 2,833 — Provision for unpaid losses and loss adjustment expenses Current incurral year 4,470 2,868 2,562 Prior year's discount accretion 227 202 202 Prior incurral year development [2] (324) (185) (162) Total provision for unpaid losses and loss adjustment expenses [3] 4,373 2,885 2,602 Less: payments Current incurral year 2,377 1,528 1,327 Prior incurral years 2,135 1,451 1,382 Total payments 4,512 2,979 2,709 Ending liabilities for unpaid losses and loss adjustment expenses, net 8,206 8,303 5,564 Reinsurance recoverables 239 209 208 Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 8,445 $ 8,512 $ 5,772 [1]Amount recognized in 2018 represents an adjustment to Aetna U.S. group life and disability business reserves, net of reinsurance as of the acquisition date, upon finalization of the opening balance sheet. [2]Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis. [3]Includes unallocated loss adjustment expenses of $194, $111 and $100 for the years ended December 31, 2018, 2017 and 2016, respectively, that are recorded in insurance operating costs and other expenses in the Consolidated Statements of Operations. Group Life, Disability and Accident Products Reserves, Net of Reinsurance, that are Discounted
For the years ended December 31, 2018 2017 2016 Liability for unpaid losses and loss adjustment expenses, at undiscounted amounts $ 8,957 $ 9,071 $ 6,382 Less: amount of discount 1,505 1,536 1,303 Carrying value of liability for unpaid losses and loss adjustment expenses $ 7,452 $ 7,535 $ 5,079 Weighted average discount rate 3.4% 3.5% 4.3% Range of discount rate 2.1% - 8.0% 2.1% - 8.0% 3.0% - 8.0%
Reserves are discounted at rates in effect at the time claims were Re-estimates of prior incurral years incurred, ranging from 2.1% for life and disability reserves acquired from Aetna based on interest rates in effect at the reserves in 2018 was driven by the acquisition date of November 1, 2017, to 8.0% for the Company’s following: pre-acquisition reserves for incurral year 1990, and vary by product. Prior year's discount accretion has been calculated as • Group disability- Prior period reserve estimates the average reserve balance for the year times the weighted decreased by approximately $230 largely driven by group average discount rate. The decrease in the weighted average long-term disability claim recoveries higher than prior discount rate from 2016 to 2017 was primarily due to the fact reserve assumptions and, primarily for the 2017 incurral that reserves for the Aetna U.S. group life and disability business year, claim incidence lower than prior assumptions. Short- are discounted at market rates in effect as of the acquisition date. term disability also experienced favorable claim recoveries.
F-62 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• Group life and accident (including group estimates was favorable claim incidence on group life premium waiver for incurral year 2016 life premium waiver)- Prior period reserve estimates decreased by approximately $90 largely driven by lower-than-previously expected claim incidence inclusive of Re-estimates of prior incurral years group life, group life premium waiver, and group accidental reserves in 2016 was driven by the death & dismemberment, principally for the 2017 incurral following: year. • Group disability- Prior period estimates decreased by Re-estimates of prior incurral years approximately $90 largely driven by group long-term reserves in 2017 was driven by the disability claim recoveries higher than prior reserve following: assumptions, particularly in the older incurral years. This favorability was partially offset by lower Social Security • Group disability- Prior period estimates decreased by Disability approvals driven by lower approval rates and approximately $125 driven by group long-term disability backlogs in the Social Security Administration. favorable claim incidence for incurral year 2016 and claim • Group life and accident (including group recoveries higher than prior reserve assumptions. life premium waiver-Contributing to an approximately $75 decrease in prior period reserve • Group life and accident (including group estimates was favorable claim incidence on group life life premium waiver)- Contributing to an premium waiver for incurral year 2015. approximately $60 decrease in prior period reserve Reconciliation of Loss Development to Liability for Unpaid Losses and Loss Adjustment Expenses as of December 31, 2018
Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance Subtotal Unpaid Unpaid Cumulative Cumulative Unallocated Losses and Liability for Incurred for Paid for Unpaid for Loss Loss Unpaid Incurral Incurral Incurral Adjustment Adjustment Losses and Years Years Years not Expenses, Expenses, Reinsurance Loss Displayed in Displayed in Displayed in Net of Net of and Other Adjustment Reserve Line Triangles Triangles Triangles Reinsurance Discount Reinsurance Recoverables Expenses Group long-term disability $ 11,934 $ (6,217) $ 2,243 $ 171 $ (1,364) $ 6,767 $ 235 $ 7,002 Group life and accident, excluding premium waiver 5,820 (5,367) 139 2 (19) 575 2 577 Group short-term disability 113 5 — 118 — 118 Group life premium waiver 818 7 (122) 703 2 705 Group supplemental health 43 — — 43 — 43 Total Group Benefits $ 17,754 $ (11,584) $ 3,356 $ 185 $ (1,505) $ 8,206 $ 239 $ 8,445
The following loss triangles present historical loss development provided seven incurral years of claims data as data for earlier for incurred and paid claims by the year the insured claim periods was not available with respect to the U.S. group life and occurred, referred to as the incurral year. Triangles are limited to disability business acquired from Aetna. Short-tail lines, which the number of years for which claims incurred typically remain represent claims generally expected to be paid within a few years, outstanding. For group long-term disability, the Company has have three years of claim development displayed.
F-63 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Group Long-Term Disability
Undiscounted Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Incurral IBNR Claims Year 2011 2012 2013 2014 2015 2016 2017 2018 Reserves Reported 2011 1,917 1,761 1,660 1,659 1,669 1,660 1,649 1,638 1 39,097 2012 1,829 1,605 1,539 1,532 1,530 1,515 1,504 1 37,343 2013 1,660 1,479 1,429 1,429 1,416 1,413 1 31,755 2014 1,636 1,473 1,430 1,431 1,431 3 32,970 2015 1,595 1,442 1,422 1,420 5 33,541 2016 1,651 1,481 1,468 12 34,259 2017 1,597 1,413 36 31,135 2018 1,647 810 19,386 Total $ 11,934
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance For the years ended December 31, (Unaudited) Incurral Year 2011 2012 2013 2014 2015 2016 2017 2018 2011 118 508 743 886 996 1,087 1,167 1,231 2012 108 483 708 835 933 1,014 1,080 2013 102 443 664 791 881 954 2014 103 448 675 801 884 2015 108 460 687 806 2016 112 479 705 2017 109 452 2018 105 Total $ 6,217
F-64 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
recovery, a portion of the DLR is retained for the possibility that Group Life and Accident, excluding the claim reopens upon further evidence of disability. In addition, Premium Waiver a reserve for estimated unpaid claim expenses is included in the DLR. Undiscounted Incurred Losses & Allocated For incurral years with IBNR claims, estimates of ultimate losses Loss Adjustment Expenses, Net of are made by applying completion factors to the dollar amount of Reinsurance claims reported or expected depending on the market segment. For the years ended December IBNR represents estimated ultimate losses less both DLR and 31, cumulative paid amounts for all reported claims. Completion (Unaudited) factors are derived using standard actuarial techniques using triangles that display historical claim count emergence by incurral Incurral IBNR Claims Year 2016 2017 2018 Reserves Reporte month. These estimates are reviewed for reasonableness and are d adjusted for current trends and other factors expected to cause a 2016 $ 1,974 $ 1,919 $ 1,915 $ 5 45,206 change in claim emergence. The IBNR includes an estimate of 2017 1,999 1,953 20 44,539 unpaid claim expenses, including a provision for the cost of initial set-up of the claim once reported. 2018 1,952 376 41,876 Total $ 5,820 For all products, including LTD, there is a period generally ranging from two to twelve months, depending on the product and market segment, where emerged claim information for an incurral year is Cumulative Paid Losses & not yet credible enough to be a basis for an IBNR projection. In Allocated Loss Adjustment these cases, the ultimate losses and allocated loss adjustment expenses are estimated using earned premium multiplied by an Expenses, Net of Reinsurance expected loss ratio. For the years ended December 31, The Company also records reserves for future death benefits under group term life policies that provide for premiums to be (Unaudited) waived in the event the insured is unable to work due to disability Incurral and has satisfied an elimination period, which is typically nine Year 2016 2017 2018 months ("premium waiver reserves"). The death benefit reserve 2016 $ 1,529 $ 1,888 $ 1,906 for these group life premium waiver claims is estimated for a 2017 1,551 1,929 known disabled claimant equal to the present value of expected future cash outflows (typically a lump sum face amount payable at 2018 1,532 death plus claim expenses) with separate estimates for claimant Total $ 5,367 recovery (when no death benefit is payable) and for death before recovery or benefit expiry (when death benefit is payable). The Group life, disability and accident reserves, IBNR for premium waiver death benefits is estimated with including IBNR standard actuarial development methods. The majority of Group Benefits’ reserves are for long-term In addition, the Company also records reserves for group term disability ("LTD") claimants who are known to be disabled and are life, accidental death & dismemberment, short term disability, and currently receiving benefits. A Disabled Life Reserve ("DLR") is other group products that have short claim payout periods. For calculated for each LTD claim. The DLR for each claim is the these products, reserves are determined using paid or reported expected present value of all estimated future benefit payments actuarial development methods. The resulting claim triangles and includes estimates of claim recovery, investment yield, and produce a completion pattern and estimate of ultimate loss. IBNR offsets from other income, including offsets from Social Security for these lines of business equals the estimated ultimate losses benefits and workers’ compensation. Estimated future benefit and loss adjustment expenses less the amount of paid or reported payments represent the monthly income benefit that is paid until claims depending on whether the paid or reported development recovery, death or expiration of benefits. Claim recoveries are method was used. Estimates are reviewed for reasonableness and estimated based on claim characteristics such as age and are adjusted for current trends or other factors that affect the diagnosis and represent an estimate of benefits that will development pattern. terminate, generally as a result of the claimant returning to work or being deemed able to return to work. The DLR also includes a Cumulative number of reported claims liability for payments to claimants who have not yet been For group life, disability and accident coverages, claim counts approved for LTD either because they have not yet satisfied the include claims that are approved, pending approval and waiting (or elimination) period or because the approval or denial terminated and exclude denied claims. Due to the nature of the decision has not yet been made. In these cases, the present value claims, one claimant represents one event. of future benefits is reduced for the likelihood of claim denial based on Company experience. For claims recently closed due to
F-65 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
(Unaudited)
1st Year 2nd Year 3rd Year 4th Year 5th Year 6th Year 7th Year 8th Year Group long-term disability 7.3% 24.4% 15.4% 8.7% 6.3% 5.4% 4.6% 3.9% Group life and accident, excluding premium waiver 79.3% 19.0% 0.9%
12. RESERVE FOR FUTURE POLICY BENEFITS
Changes in Reserves for Future Policy Benefits [1] Liability Balance, as of January 1, 2018 $ 713 Incurred 72 Paid (101) Change in unrealized investment gains and losses (42) Liability Balance, as of December 31, 2018 $ 642 Reinsurance recoverable asset, as of January 1, 2018 $ 26 Incurred 1 Paid — Reinsurance recoverable asset, as of December 31, 2018 $ 27
Liability Balance, as of January 1, 2017 $ 322 Acquired [2] 346 Incurred 86 Paid (50) Change in unrealized investment gains and losses 9 Liability Balance, as of December 31, 2017 $ 713 Reinsurance recoverable asset, as of January 1, 2017 $ 28 Incurred (1) Paid (1) Reinsurance recoverable asset, as of December 31, 2017 $ 26 [1]Reserves for future policy benefits includes paid-up life insurance and whole-life policies resulting from conversion from group life policies included within the Group Benefits segment and reserves for run-off structured settlement and terminal funding agreement liabilities which are in the Corporate category. [2]Represents reserves, net, related to the U.S. group life and disability business acquired from Aetna, as of the acquisition date. For additional information. see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statements. 13. DEBT The Company’s long-term debt securities are issued by HFSG Holding Company, and are unsecured obligations of HFSG Holding Company, and rank on a parity with all other unsecured and unsubordinated indebtedness of HFSG Holding Company. Debt is carried net of discount and issuance cost. Interest expense on debt is included in the corporate category for segment reporting.
F-66 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Short-term and Long-term Debt by Issuance Junior Subordinated As of December 31, Debentures 2018 2017 Junior Subordinated Debentures by Issuance Revolving Credit Facilities $ — $ — Senior Notes and Debentures 3 Month 7.875% Libor + 6.3% Notes, due 2018 — 320 Issue Debentures 2.125% 6.0% Notes, due 2019 413 413 Face Value $ 600 $ 500 5.5% Notes, due 2020 500 500 Interest Rate [1] 7.875% [2] N/A [3] 5.125% Notes, due 2022 800 800 April 15, February 5.95% Notes, due 2036 300 300 Call Date 2022 15, 2022 [4] 6.625% Notes, due 2040 295 295 3 Month 3 Month Interest Rate Subsequent to Call Libor + Libor + 6.1% Notes, due 2041 409 409 Date [2] 5.596% 2.125% [5] 6.625% Notes, due 2042 178 178 April 15, February 12, 4.4% Notes, due 2048 500 — Final Maturity 2042 2067 [1]Interest rate in effect until call date. 4.3% Notes, due 2043 300 300 [2]Payable quarterly in arrears. Junior Subordinated Debentures [3]Debentures were issued on call date. [4]The original call date was February 15, 2017. Replacement Capital Covenant 7.875% Notes, due 2042 600 600 associated with the debenture prohibits the Company from redeeming all or any 3 month Libor + 2.125% Notes, due portion of the notes on or prior to February 15, 2022. 2067 [1] 500 500 [5]In April, 2017 the company entered into an interest rate swap agreement expiring 8.125% Notes, due 2068 — 500 February 15, 2027 to effectively convert the interest payments for the 3 month Libor + 2.125% debenture into fixed interest payments of approximately 4.39%. Total Notes and Debentures 4,795 5,115 The debentures are unsecured, subordinated and junior in right of Unamortized discount and debt issuance cost [2] (117) (117) payment and upon liquidation to all of the Company’s existing and future senior indebtedness. In addition, the debentures are Total Debt 4,678 4,998 effectively subordinated to all of the Company’s subsidiaries’ Less: Current maturities 413 320 existing and future indebtedness and other liabilities, including Long-Term Debt $ 4,265 $ 4,678 obligations to policyholders. The debentures do not limit the Company’s or the Company’s subsidiaries’ ability to incur [1]In April 2017, the Company entered into an interest rate swap agreement expiring February 15, 2027 to effectively convert the variable interest payments additional debt, including debt that ranks senior in right of for this debenture into fixed interest payments of approximately 4.39%. payment and upon liquidation to the debentures. [2]The amount primarily consists of $78 and $79 as of December 31, 2018 and 2017, respectively, on the 6.1% Notes, due 2041. The Company has the right to defer interest payments for up to a consecutive ten years without giving rise to an event of default. The effective interest rate on the 6.1% senior notes due 2041 is Deferred interest will continue to accrue and will accrue 7.9%. The effective interest rate on the remaining notes does not additional interest at the then applicable interest rate. If the differ materially from the stated rate. The Company incurred Company defers interest payments, the Company generally may interest expense of $298, $316 and $327 on debt for the years not make payments on or redeem or purchase any shares of its ended December 31, 2018, 2017 and 2016, respectively. capital stock or any of its debt securities or guarantees that rank upon liquidation, dissolution or winding up equally with or junior Senior Notes to the debentures, subject to certain limited exceptions. On March 15, 2018, The Hartford issued $500 of 4.4% senior On June 15, 2018, The Hartford redeemed $500 aggregate notes ("4.4% Notes") due March 15, 2048 for net proceeds of principal amount of its 8.125% Fixed-to-Floating Rate Junior approximately $490, after deducting underwriting discounts and Subordinated Debentures due 2068. During the initial offering of expenses from the offering. Interest is payable semi-annually in the 8.125% debentures, the Company entered into a replacement arrears on March 15 and September 15, commencing capital covenant ("RCC"), and under the terms of the RCC, if the September 15, 2018. The Hartford, at its option, can redeem the Company redeemed the 8.125% debentures at any time prior to 4.4% Notes at any time, in whole or in part, at a redemption price June 15, 2048 it could only do so with the proceeds from the sale equal to the greater of 100% of the principal amount being of certain qualifying replacement securities. The 3 month Libor redeemed or a make-whole amount based on a comparable plus 2.125% debentures issued February 15, 2017 are qualifying maturity US Treasury plus 25 basis points, plus any accrued and replacement securities within the definition of RCC. In unpaid interest, except the option of a make-whole payment is connection with this redemption, the Company recognized a $6 not applicable within the final six months before maturity. loss on extinguishment of debt for unamortized deferred debt issuance costs. On March 15, 2018, The Hartford repaid at maturity the $320 principal amount of its 6.3% senior notes. The 7.875% and 3 month Libor plus 2.125% debentures may be redeemed in whole prior to the call date upon certain tax or rating agency events, at a price equal to the greater of 100% of the principal amount being redeemed and the applicable make-whole
F-67 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) amount plus any accrued and unpaid interest. The Company may amount of principal of the credit facility decreased from $1 billion elect to redeem the 7.875% and 3 month Libor plus 2.125% to $750, including a reduction to the amount available for letters debentures in whole or in part on or after the call date for the of credit from $250 to $100, the maturity date was extended to principal amount being redeemed plus accrued and unpaid March 29, 2023, and the liens covenant and certain other interest to the date of redemption. covenants were modified. In connection with the offering of the three month LIBOR plus Revolving loans from the Credit Facility may be in multiple 2.125% debenture, the Company entered into a RCC for the currencies. U.S. dollar loans will bear interest at a floating rate benefit of holders of one or more designated series of the equivalent to an indexed rate depending on the type of borrowing Company's indebtedness, initially the Company's 4.3% notes due and a basis point spread based on The Hartford's credit rating and 2043. Under the terms of the RCC, if the Company redeems the will mature no later than March 29, 2023. Letters of credit issued debenture any time prior to February 12, 2047 (or such earlier from the Credit Facility bear a fee based on The Hartford's credit date on which the RCC terminates by its terms) it can only do so rating and expire no later than March 29, 2024. The Credit with the proceeds from the sale of certain qualifying replacement Facility requires the Company to maintain a minimum securities. The RCC also prohibits the Company from redeeming consolidated net worth, excluding AOCI, of $9 billion, limit the all or any portion of the notes on or prior to February 15, 2022. ratio of senior debt to capitalization, excluding AOCI, at 35% and meet other customary covenants. The Credit Facility is for In April, 2017 the company entered into an interest rate swap general corporate purposes. agreement expiring February 15, 2027 to effectively convert the variable interest payments for the 3 month Libor plus 2.125% As of December 31, 2018, no borrowings were outstanding, $3 in debenture into fixed interest payments of approximately 4.39%. letters of credit were issued under the Credit Facility and the Company was in compliance with all financial covenants Long-Term Debt Long-term Debt Maturities (at par value) as of Commercial Paper As of December 31, 2018, the Hartford's maximum borrowings December 31, 2018 available under its commercial paper program was $750 and 2019 - Current maturities $ 413 there was no commercial paper outstanding. The Company is dependent upon market conditions to access short-term 2020 $ 500 financing through the issuance of commercial paper to investors. 2021 $ — On July 19, 2018, the Board of Directors revised the Company's 2022 $ 800 commercial paper issuance authorization from $1 billion to $750 to align the program with the Company's $750 five year revolving 2023 $ — credit facility which became effective on June 11, 2018. Thereafter $ 3,082 Collateralized Advances with Shelf Registrations Federal Home Loan Bank of On July 29, 2016, the Company filed with the Securities and Exchange Commission (the “SEC”) an automatic shelf registration Boston statement (Registration No. 333-212778) for the potential In August 2018, the Company’s subsidiaries, Hartford Fire offering and sale of debt and equity securities. The registration Insurance Company (“Hartford Fire”) and Hartford Life and statement allows for the following types of securities to be Accident Insurance Company (“HLA”), became members of the offered: debt securities, junior subordinated debt securities, Federal Home Loan Bank of Boston (“FHLBB”). Membership preferred stock, common stock, depositary shares, warrants, allows these subsidiaries access to collateralized advances, which stock purchase contracts, and stock purchase units. In that The may be short- or long-term with fixed or variable rates. FHLBB Hartford is a well-known seasoned issuer, as defined in Rule 405 membership required the purchase of member stock and requires under the Securities Act of 1933, the registration statement went additional member stock ownership of 3% or 4% of any amount effective immediately upon filing and The Hartford may offer and borrowed. Acceptable forms of collateral include real estate sell an unlimited amount of securities under the registration backed fixed maturities and mortgage loans and the amount of statement during the three-year life of the registration advances that can be taken is limited to a percentage of the fair statement. value of the assets that ranges from a high of 97% for US government-backed fixed maturities maturing within 3 years to a Revolving Credit Facilities low of 40% for A-rated commercial mortgage-backed fixed On March 29, 2018, the Company entered into an amendment maturities maturing in 5 years or more. In its consolidated (the "Amendment") to its Five-Year Credit Agreement dated balance sheets, The Hartford would present the liability for October 31, 2014. The Amendment reset the level of the advances taken based on use of the funds with advances for Company's minimum consolidated net worth financial covenant general corporate purposes presented in short- or long-term debt to $9 billion, excluding AOCI, from its former $13.5 billion (where and advances to earn incremental investment income presented net worth was defined as stockholders' equity excluding AOCI in other liabilities, consistent with other collateralized financing and including junior subordinated debt), among other updates. transactions such as securities lending and repurchase Among other changes, under an amended and restated credit agreements. The Connecticut Department of Insurance agreement that became effective in June 2018 after the closing of (“CTDOI”) permits Hartford Fire and HLA to pledge up to $1.1 the sale of the Company's life and annuity business, the aggregate billion and $0.6 billion in qualifying assets, respectively, without prior approval, to secure FHLBB advances in 2019. The pledge
F-68 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) limit is determined annually based on statutory admitted assets and capital and surplus of Hartford Fire and HLA, respectively. As of December 31, 2018, there were no advances outstanding under the FHLBB facility.
14. COMMITMENTS AND CONTINGENCIES Management evaluates each contingent matter separately. A loss The Company wrote several different categories of insurance is recorded if probable and reasonably estimable. Management contracts that may cover asbestos and environmental claims. establishes liabilities for these contingencies at its “best First, the Company wrote primary policies providing the first estimate,” or, if no one number within the range of possible losses layer of coverage in an insured’s liability program. Second, the is more probable than any other, the Company records an Company wrote excess and umbrella policies providing higher estimated liability at the low end of the range of losses. layers of coverage for losses that exhaust the limits of underlying coverage. Third, the Company acted as a reinsurer assuming a Litigation portion of those risks assumed by other insurers writing primary, excess, umbrella and reinsurance coverages. Fourth, subsidiaries The Hartford is involved in claims litigation arising in the ordinary of the Company participated in the London Market, writing both course of business, both as a liability insurer defending or direct insurance and assumed reinsurance business. providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought Significant uncertainty limits the ability of insurers and reinsurers against it. The Hartford accounts for such activity through the to estimate the ultimate reserves necessary for unpaid gross establishment of unpaid loss and loss adjustment expense losses and expenses related to environmental and particularly reserves. Subject to the uncertainties in the following discussion asbestos claims. The degree of variability of gross reserve under the caption “Asbestos and Environmental Claims,” estimates for these exposures is significantly greater than for management expects that the ultimate liability, if any, with other more traditional exposures. respect to such ordinary-course claims litigation, after In the case of the reserves for asbestos exposures, factors consideration of provisions made for potential losses and costs of contributing to the high degree of uncertainty include inadequate defense, will not be material to the consolidated financial loss development patterns, plaintiffs’ expanding theories of condition, results of operations or cash flows of The Hartford. liability, the risks inherent in major litigation, and inconsistent The Hartford is also involved in other kinds of legal actions, some emerging legal doctrines. Furthermore, over time, insurers, of which assert claims for substantial amounts. These actions including the Company, have experienced significant changes in include, among others, and in addition to the matters in the the rate at which asbestos claims are brought, the claims following discussion, putative state and federal class actions experience of particular insureds, and the value of claims, making seeking certification of a state or national class. Such putative predictions of future exposure from past experience uncertain. class actions have alleged, for example, underpayment of claims Plaintiffs and insureds also have sought to use bankruptcy or improper underwriting practices in connection with various proceedings, including “pre-packaged” bankruptcies, to kinds of insurance policies, such as personal and commercial accelerate and increase loss payments by insurers. In addition, automobile, property, disability, life and inland marine. The some policyholders have asserted new classes of claims for Hartford also is involved in individual actions in which punitive coverages to which an aggregate limit of liability may not apply. damages are sought, such as claims alleging bad faith in the Further uncertainties include insolvencies of other carriers and handling of insurance claims or other allegedly unfair or improper unanticipated developments pertaining to the Company’s ability business practices. Like many other insurers, The Hartford also to recover reinsurance for asbestos and environmental claims. has been joined in actions by asbestos plaintiffs asserting, among Management believes these issues are not likely to be resolved in other things, that insurers had a duty to protect the public from the near future. the dangers of asbestos and that insurers committed unfair trade In the case of the reserves for environmental exposures, factors practices by asserting defenses on behalf of their policyholders in contributing to the high degree of uncertainty include expanding the underlying asbestos cases. Management expects that the theories of liability and damages, the risks inherent in major ultimate liability, if any, with respect to such lawsuits, after litigation, inconsistent decisions concerning the existence and consideration of provisions made for estimated losses, will not be scope of coverage for environmental claims, and uncertainty as to material to the consolidated financial condition of The Hartford. the monetary amount being sought by the claimant from the Nonetheless, given the large or indeterminate amounts sought in insured. certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, The reporting pattern for assumed reinsurance claims, including have a material adverse effect on the Company's results of those related to asbestos and environmental claims, is much operations or cash flows in particular quarterly or annual periods. longer than for direct claims. In many instances, it takes months or years to determine that the policyholder’s own obligations Asbestos and Environmental Claims have been met and how the reinsurance in question may apply to The Company continues to receive asbestos and environmental such claims. The delay in reporting reinsurance claims and claims. Asbestos claims relate primarily to bodily injuries asserted exposures adds to the uncertainty of estimating the related by people who came in contact with asbestos or products reserves. containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs.
F-69 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
It is also not possible to predict changes in the legal and legislative development of asbestos and environmental claims could environment and their effect on the future development of ultimately exceed the $1.5 billion treaty limit in which case any asbestos and environmental claims. adverse development in excess of the treaty limit would be absorbed as a charge to earnings by the Company. In these Given the factors described above, the Company believes the scenarios, the effect of these charges could be material to the actuarial tools and other techniques it employs to estimate the Company’s consolidated operating results and liquidity. As of ultimate cost of claims for more traditional kinds of insurance December 31, 2018, the Company has incurred cumulative $523 exposure are less precise in estimating reserves for asbestos and in adverse development on asbestos and environmental reserves environmental exposures. For this reason, the Company that have been ceded under the ADC treaty with NICO, leaving principally relies on exposure-based analysis to estimate the approximately $977 of coverage available for future adverse ultimate costs of these claims, both gross and net of reinsurance, reserve development, if any. and regularly evaluates new account information in assessing its potential asbestos and environmental exposures. The Company supplements this exposure-based analysis with evaluations of the Lease Commitments Company’s historical direct net loss and expense paid and The total rental expense on operating leases was $56, $57, and reported experience, and net loss and expense paid and reported $53 in 2018, 2017, and 2016, respectively, which excludes experience by calendar and/or report year, to assess any sublease rental income of $4, $3, and $2 in 2018, 2017 and 2016, emerging trends, fluctuations or characteristics suggested by the respectively. aggregate paid and reported activity. Future minimum lease commitments as of While the Company believes that its current asbestos and environmental reserves are appropriate, significant uncertainties December 31, 2018 limit the ability of insurers and reinsurers to estimate the ultimate Operating reserves necessary for unpaid losses and related expenses. The Leases ultimate liabilities, thus, could exceed the currently recorded 2019 $ 44 reserves, and any such additional liability, while not estimable now, could be material to The Hartford's consolidated operating 2020 36 results and liquidity. 2021 25 As of December 31, 2018, the Company reported $1.1 billion of 2022 18 net asbestos reserves and $203 of net environmental reserves. 2023 16 While the Company believes that its current A&E reserves are Thereafter 34 appropriate, significant uncertainties limit our ability to estimate the ultimate reserves necessary for unpaid losses and related Total minimum lease payments [1] $ 173 expenses. The ultimate liabilities, thus, could exceed the currently [1]Excludes expected future minimum sublease income of approximately $2, $1, $1, recorded reserves, and any such additional liability, while not $0, $0 and $0 in 2019, 2020, 2021, 2022, 2023 and thereafter respectively. reasonably estimable now, could be material to The Hartford's The Company’s lease commitments consist primarily of lease consolidated operating results and liquidity. agreements for office space, automobiles, and office equipment Effective December 31, 2016, the Company entered into an A&E that expire at various dates. ADC reinsurance agreement with NICO, a subsidiary of Berkshire Hathaway Inc., to reduce uncertainty about potential adverse Unfunded Commitments development of asbestos and environmental reserves. Under the As of December 31, 2018, the Company has outstanding ADC, the Company paid a reinsurance premium of $650 for NICO commitments totaling $954, of which $707 is committed to fund to assume adverse net loss and allocated loss adjustment expense limited partnership and other alternative investments, which may reserve development up to $1.5 billion above the Company’s be called by the partnership during the commitment period to existing net asbestos and environmental reserves as of December fund the purchase of new investments and partnership expenses. 31, 2016 of approximately $1.7 billion. The $650 reinsurance Additionally, $163 of the outstanding commitments relate to premium was placed into a collateral trust account as security for various funding obligations associated with private debt and NICO’s claim payment obligations to the Company. Under equity securities. The remaining outstanding commitments of retroactive reinsurance accounting, net adverse asbestos and $84 relate to mortgage loans. Of the $954 in total outstanding environmental reserve development after December 31, 2016 commitments, $48 are related to mortgage loan commitments will result in an offsetting reinsurance recoverable up to the $1.5 which the Company can cancel unconditionally. billion limit. Cumulative ceded losses up to the $650 reinsurance premium paid are recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the $650 Guaranty Funds and Other reinsurance premium paid would result in a deferred gain. The deferred gain would be recognized over the claim settlement Insurance-Related period in the proportion of the amount of cumulative ceded Assessments losses collected from the reinsurer to the estimated ultimate In all states, insurers licensed to transact certain classes of reinsurance recoveries. Consequently, until periods when the insurance are required to become members of a guaranty fund. In deferred gain is recognized as a benefit to earnings, cumulative most states, in the event of the insolvency of an insurer writing adverse development of asbestos and environmental claims after any such class of insurance in the state, the guaranty funds may December 31, 2016 in excess of $650 may result in significant assess its members to pay covered claims of the insolvent charges against earnings. Furthermore, cumulative adverse insurers. Assessments are based on each member's proportionate
F-70 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) share of written premiums in the state for the classes of insurance posted collateral of $71 in the normal course of business. Based in which the insolvent insurer was engaged. Assessments are on derivative market values as of December 31, 2018, a generally limited for any year to one or two percent of the downgrade of one level below the current financial strength rates premiums written per year depending on the state. Some states by either Moody’s or S&P would not require additional assets to permit member insurers to recover assessments paid through be posted as collateral. Based on derivative market values as of surcharges on policyholders or through full or partial premium December 31, 2018, a downgrade of two levels below the current tax offsets, while other states permit recovery of assessments financial strength ratings by either Moody’s or S&P would require through the rate filing process. an additional $7 of assets to be posted as collateral. These collateral amounts could change as derivative market values Liabilities for guaranty fund and other insurance-related change, as a result of changes in our hedging activities or to the assessments are accrued when an assessment is probable, when it extent changes in contractual terms are negotiated. The nature of can be reasonably estimated, and when the event obligating the the collateral that we post, if required, is primarily in the form of Company to pay an imposed or probable assessment has U.S. Treasury bills, U.S. Treasury notes and government agency occurred. Liabilities for guaranty funds and other insurance- securities. related assessments are not discounted and are included as part of other liabilities in the Consolidated Balance Sheets. As of December 31, 2018 and 2017 the liability balance was $97 and Guarantees $113, respectively. As of December 31, 2018 and 2017 amounts In the ordinary course of selling businesses or entities to third related to premium tax offsets of $2 and $6, respectively, were parties, the Company has agreed to indemnify purchasers for included in other assets. losses arising subsequent to the closing due to breaches of representations and warranties with respect to the business or Derivative Commitments entity being sold or with respect to covenants and obligations of the Company and/or its subsidiaries. These obligations are Certain of the Company’s derivative agreements contain typically subject to various time limitations, defined by the provisions that are tied to the financial strength ratings, as set by contract or by operation of law, such as statutes of limitation. In nationally recognized statistical agencies, of the individual legal some cases, the maximum potential obligation is subject to entity that entered into the derivative agreement. If the legal contractual limitations, while in other cases such limitations are entity’s financial strength were to fall below certain ratings, the not specified or applicable. The Company does not expect to counterparties to the derivative agreements could demand make any payments on these guarantees and is not carrying any immediate and ongoing full collateralization and in certain liabilities associated with these guarantees. instances enable the counterparties to terminate the agreements and demand immediate settlement of all outstanding derivative The Hartford has guaranteed the obligations of certain life, positions traded under each impacted bilateral agreement. The accident and health and annuity contracts of the life and annuity settlement amount is determined by netting the derivative business written by Hartford Life Insurance Company between positions transacted under each agreement. If the termination 1990 and 1997 and written by Hartford Life and Annuity rights were to be exercised by the counterparties, it could impact Insurance Company between 1993 and 2009. After the sale of the legal entity’s ability to conduct hedging activities by this business in May 2018, the purchaser indemnified the increasing the associated costs and decreasing the willingness of Company for any liability arising under the guarantees. The counterparties to transact with the legal entity. The aggregate fair guarantees have no limitation as to maximum potential future value of all derivative instruments with credit-risk-related payments. The Hartford has not recorded a liability and the contingent features that are in a net liability position as of likelihood for any payments under these guarantees is remote. December 31, 2018 was $76, of which the legal entities have 15. EQUITY Share Number”). Accordingly, the CPP warrant exercise price was Capital Purchase Program $8.836, $8.999 and $9.126 and the Warrant Share Number was 1.1, 1.0 and 1.0 as of December 31, 2018, 2017 and 2016, ("CPP") Warrants respectively. The exercise price will be settled by the Company As of December 31, 2018 and 2017, respectively, the Company withholding the number of common shares issuable upon exercise has 1.9 million and 2.2 million CPP warrants outstanding and of the warrants equal to the value of the aggregate exercise price exercisable. The CPP warrants were issued in 2009 as part of a of the warrants so exercised determined by reference to the program established by the U.S. Department of the Treasury closing price of the Company's common stock on the trading day under the Emergency Economic Stabilization Act of 2008. The on which the warrants are exercised and notice is delivered to the CPP warrants expire in June 2019. warrant agent. CPP warrant exercises were 0.3 million, 1.8 million and 0.4 million during the years ended December 31, 2018, 2017 and 2016, Equity Repurchase Program respectively. During the year ended December 31, 2018, the Company did not The declaration of common stock dividends by the Company in repurchase any common shares. In February, 2019, the Company excess of a threshold triggers a provision in the Company's announced a 1.0 billion share repurchase authorization by the warrant agreement with The Bank of New York Mellon resulting Board of Directors which is effective through December 31, in adjustments to the CPP warrant exercise price and the number 2020. Based on projected holding company resources, the of shares deliverable for each warrant exercised (the “Warrant Company expects to use a portion of the authorization in 2019
F-71 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) but anticipates using the majority of the program in 2020. Any as "statutory capital". Life insurance subsidiaries include the repurchase of shares under the equity repurchase program is Group Benefits insurance subsidiary and, for periods up until the dependent on market conditions and other factors. sale date, the life and annuity business sold in May 2018. Preferred Stock Statutory Net Income (Loss) On November 6, 2018, the Company issued 13.8 million For the years ended depositary shares each representing 1/1000th interest in a share December 31, of the Company’s 6.0% Series G non-cumulative perpetual 2018 2017 2016 preferred stock (the “Preferred Stock”) with a liquidation Group Benefits Insurance preference of $25,000 per share (equivalent to $25.00 per Subsidiary $ 390 $ (1,066) $ 208 depositary share), for net cash proceeds of $334. The Preferred Stock is perpetual and has no maturity date. Dividends will be Property and Casualty Insurance Subsidiaries 1,114 950 304 payable, if declared, quarterly in arrears on the 15th day of February, May, August and November of each year, commencing Life and annuity business sold in May, 2018 196 369 349 on February 15, 2019. If a dividend is not declared before the dividend payment date for any dividend period, The Hartford will Total $ 1,700 $ 253 $ 861 have no obligation to pay dividends otherwise attributable to such dividend period. If a dividend is not declared and paid or Statutory Capital made payable on all outstanding shares of the Preferred Stock for the latest completed dividend period, no dividends may be paid or As of December 31, declared on The Hartford’s common stock and The Hartford may 2018 2017 not purchase, redeem, or otherwise acquire its common stock. Group Benefits Insurance The Preferred Stock is redeemable at the Company’s option in Subsidiary $ 2,407 $ 2,029 whole or in part, on or after November 15, 2023 at a redemption Property and Casualty Insurance price of $25,000 per share, plus unpaid dividends attributable to Subsidiaries 7,435 7,396 the current dividend period. Prior to November 15, 2023, the Total $ 9,842 $ 9,425 Preferred Stock is redeemable at the Company’s option, in whole but not in part, within 90 days of the occurrence of (a) a rating agency event at a redemption price equal to $25,500 per share, Regulatory Capital plus unpaid dividends attributable to the current dividend period in circumstances where a rating agency changes its criteria used Requirements to assign equity credit to securities like the Preferred Stock; or (b) The Company's U.S. insurance companies' states of domicile a regulatory capital event at a redemption price equal to $25,000 impose risk-based capital (“RBC”) requirements. The per share, plus unpaid dividends attributable to the current requirements provide a means of measuring the minimum dividend period in circumstances where a capital regulator such amount of statutory capital appropriate for an insurance as a state insurance regulator changes or proposes to change company to support its overall business operations based on its capital adequacy rules. size and risk profile. Companies below specific trigger points or ratios are classified within certain levels, each of which requires On December 13, 2018, The Hartford’s board of directors specified corrective action. All of the Company's operating declared a dividend of $412.50 on each share of the Series G insurance subsidiaries had RBC ratios in excess of the minimum preferred stock (equivalent to $0.4125 per depository share) levels required by the applicable insurance regulations. payable on February 15, 2019, to stockholders of record at the close of business on February 1, 2019. Similar to the RBC ratios that are employed by U.S. insurance regulators, regulatory authorities in the international jurisdictions in which the Company operates generally establish Statutory Results minimum solvency requirements for insurance companies. All of The domestic insurance subsidiaries of The Hartford prepare the Company's international insurance subsidiaries have capital their statutory financial statements in conformity with statutory levels in excess of the minimum levels required by the applicable accounting practices prescribed or permitted by the applicable regulatory authorities. state insurance department which vary materially from U.S. GAAP. Prescribed statutory accounting practices include publications of the National Association of Insurance Dividend Restrictions Commissioners (“NAIC”), as well as state laws, regulations and Dividends to the HFSG Holding Company from its insurance general administrative rules. The differences between statutory subsidiaries are restricted by insurance regulation. The payment financial statements and financial statements prepared in of dividends by Connecticut-domiciled insurers is limited under accordance with U.S. GAAP vary between domestic and foreign the insurance holding company laws of Connecticut. These laws jurisdictions. The principal differences are that statutory financial require notice to and approval by the state insurance statements do not reflect deferred policy acquisition costs and commissioner for the declaration or payment of any dividend, limit deferred income taxes, predominately use interest rate and which, together with other dividends or distributions made within mortality assumptions prescribed by the NAIC for life benefit the preceding twelve months, exceeds the greater of (i) 10% of reserves, generally carry bonds at amortized cost, and present the insurer’s policyholder surplus as of December 31 of the reinsurance assets and liabilities net of reinsurance. For reporting preceding year or (ii) net income (or net gain from operations, if purposes, statutory capital and surplus is referred to collectively such company is a life insurance company) for the twelve-month
F-72 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) period ending on the thirty-first day of December last preceding, Total net dividends received by HFSG holding company in 2018 in each case determined under statutory insurance accounting were $2.9 billion, including the $2.8 billion from P&C subsidiaries principles. In addition, if any dividend of a Connecticut-domiciled and $119 from Hartford Funds during the year. There were no insurer exceeds the insurer’s earned surplus, it requires the prior dividends received from Hartford Life and Accident in 2018. approval of the Connecticut Insurance Commissioner. The Under the formula described above, in 2019, the Company’s insurance holding company laws of the other jurisdictions in property and casualty insurance subsidiaries are permitted to pay which The Hartford’s insurance subsidiaries are incorporated (or up to a maximum of approximately $1.2 billion in dividends to deemed commercially domiciled) generally contain similar HFSG Holding Company without prior approval from the (although in certain instances more restrictive) limitations on the applicable insurance commissioner, though only $200 of this payment of dividends. In addition to statutory limitations on dividend capacity could be paid before the fourth quarter of paying dividends, the Company also takes other items into 2019. In 2019, HFSG Holding Company does not anticipate consideration when determining dividends from subsidiaries. receiving net dividends from its property and casualty insurance These considerations include, but are not limited to, expected subsidiaries, as planned 2019 dividends were received in the earnings and capitalization of the subsidiaries, regulatory capital fourth quarter 2018. The HFSG Holding Company generally requirements and liquidity requirements of the individual expects to receive net dividends of $850 to $900 a year from its operating company. property and casualty insurance subsidiaries subject to the Total dividends paid by P&C subsidiaries to HFSG holding profitability of those subsidiaries and their capital needs. company in 2018 were $3.1 billion. This includes extraordinary Hartford Life and Accident Insurance Company ("HLA") has $380 dividends of $3.0 billion, comprised of a $1.9 billion principal dividend capacity for 2019 and anticipates paying $250 to $300 paydown on the intercompany note owed by Hartford Holdings, dividends in 2019. Inc. ("HHI") to Hartford Fire Insurance Company related to the life and annuity business sold in May 2018, $226 related to There are no current restrictions on the HFSG Holding interest payments on the note and $900 to fund near-term Company's ability to pay dividends to its stockholders. obligations of the HFSG holding company. In addition, there was $50 of ordinary P&C dividends that were paid to HFSG holding company, and $110 of capital contributed by the HFSG holding Restricted Net Assets company to a run-off P&C subsidiary. Excluding the interest The Company's insurance subsidiaries had net assets of $10.1 payments on the intercompany note and dividends that were billion, determined in accordance with U.S. GAAP, that were subsequently contributed to a P&C subsidiary, net dividends paid restricted from payment to the HFSG Holding Company, without by P&C subsidiaries to HFSG holding company were $2.8 billion prior regulatory approval at December 31, 2018. during 2018.
16. INCOME TAXES Company recorded a net income tax benefit from Tax Reform of Tax Reform $39 in 2018. On December 22, 2017, the U.S. government enacted As of December 31, 2018, the Company had AMT carryovers of comprehensive tax legislation commonly referred to as the Tax $841 which are reflected as a current income tax receivable Cuts and Jobs Act (“Tax Reform”). Tax Reform establishes new tax within Other Assets in the accompanying consolidated balance laws effective January 1, 2018, including, but not limited to, (1) sheet. AMT credits may be used to offset a regular tax liability for reduction of the U.S. federal corporate income tax rate from 35% any taxable year beginning after December 31, 2017, and are to 21%; (2) elimination of the corporate alternative minimum tax refundable at an amount equal to 50 percent of the excess of the (AMT) and changing how existing AMT credits can be realized, (3) minimum tax credit for the taxable year over the amount of the limitations on the deductibility of certain executive credit allowable for the year against regular tax liability. Any compensation, (4) changes to the discounting of statutory remaining credits not used against regular tax liability are reserves for tax purposes, and (5) limitations on net operating refundable in the 2021 tax year to be realized in 2022. losses (NOLs) generated after December 31, 2017 though there is no impact to the Company’s current NOL carryforwards. Income Tax Expense Related to Tax Reform, the Company recorded a provisional net The Company and its subsidiaries file income tax returns in the income tax expense of $877 in the period ending December 31, U.S. federal jurisdiction, and various state and foreign 2017. This net expense consisted of an $821 reduction of the jurisdictions, as applicable. Income (loss) from continuing Company’s deferred tax assets primarily due to the reduction in operations before income taxes included income from domestic the U.S. federal corporate income tax rate and a $56 operations of $1,753, $704 and $521 for the years ended sequestration fee payable associated with refundable AMT December 31, 2018, 2017 and 2016, and income (losses) from credits. foreign operations of $0, $19 and $(74) for the years ended During 2018, the Company recorded income tax expense of $17 December 31, 2018, 2017 and 2016. as measurement period adjustments related to Tax Reform due to the filing of the Company's 2017 federal income tax return and completion of the Aetna Group Benefits acquisition. In addition, the Company recorded an income tax benefit of $56, reflecting the elimination of the sequestration fee payable. In total, the
F-73 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income Tax Expense (Benefit) Also included in 2016 is a tax benefit primarily due to the sale of the Company's U.K. property and casualty run-off subsidiaries. For the years ended The tax benefit of $37 relates to the difference between the tax December 31, basis and book basis of the Company's investment in the 2018 2017 2016 subsidiaries net of additional foreign tax rate differentials. The total estimated tax benefit recognized in 2016 related to the sale Income Tax Expense (Benefit) of the U.K. property and casualty run-off subsidiaries was $76. Current - U.S. Federal $ (18) $ 116 $ 10 For discussion of this transaction, see Note 20 - Business International — 1 — Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements. Total current (18) 117 10 Deferred - U.S. Federal 286 866 (173) Deferred Taxes International — 2 (3) Deferred tax assets and liabilities on the consolidated balance Total deferred 286 868 (176) sheets represent the tax consequences of differences between Total income tax expense the financial reporting and tax basis of assets and liabilities. The (benefit) $ 268 $ 985 $ (166) deferred tax assets and liabilities as of December 31, 2018 and 2017 shown in the table below reflect the lower corporate Income Tax Rate Reconciliation Federal income tax rate as a result of Tax Reform. Deferred tax balances for the year ended December 31, 2017 related to the For the years ended life and annuity business sold in May 2018 are not included in the December 31, table below as they were included in assets held for sale as of 2018 2017 2016 December 31, 2017. In lieu of recording a benefit of the tax Tax provision at U.S. federal capital loss on the sale of the life and annuity business, the statutory rate [1] $ 368 $ 253 $ 157 Company elected to retain tax net operating loss carryovers with an estimated benefit of $477 as of December 31, 2018. Tax-exempt interest (66) (123) (124) Decrease in deferred tax Deferred Tax Assets (Liabilities) valuation allowance — — (79) Executive Compensation 11 — — As of December 31, Stock-based compensation (5) (15) — 2018 2017 Solar credits — — (79) Deferred Tax Assets Sale of the U.K. property & Loss reserves and tax discount $ 150 $ 104 casualty run-off subsidiaries and Unearned premium reserve and foreign rate differential — 5 (37) other underwriting related Tax Reform (39) 877 — reserves 355 352 Other (1) (12) (4) Investment-related items 183 194 Employee benefits 287 313 Provision (benefit) for income taxes $ 268 $ 985 $ (166) General business credit carryover 1 3 [1] Due to the passage of Tax Reform on December 22, 2017, current and prior Net operating loss carryover 521 710 period federal statutory rates are reflected at 21% and 35% respectively. Foreign tax credit carryover — 26 In addition to the effect of tax-exempt interest, the Company's Other — 1 effective tax rate for the year ended December 31, 2018 reflects a federal income tax expense of $11 related to non-deductible Total Deferred Tax Assets 1,497 1,703 executive compensation and a benefit of $5 related to a Deferred Tax Liabilities deduction for stock-based compensation that vested at a fair Deferred acquisition costs (104) (103) value per share greater than the fair value on the date of grant. Net unrealized gains on Included in 2018 is a benefit of $39 related to Tax Reform, investments (7) (306) primarily due to the elimination of the sequestration fee on AMT Other depreciable and credits. amortizable assets (135) (130) Included in 2017 is an expense of $877 due to the effects of Tax Other (3) — Reform, primarily due to the reduction in net deferred tax assets Total Deferred Tax Liabilities (249) (539) as a result of the reduction in the federal corporate income tax Net Deferred Tax Asset $ 1,248 $ 1,164 rate from 35% to 21%. Included in 2016 is a benefit of $79 due to the investment in solar A deferred tax valuation allowance has not been recorded energy partnerships. The total tax benefit from the transaction because the Company believes the deferred tax assets will more was $113, which included the tax effects of the related financial likely than not be realized. In assessing the need for a valuation statement realized loss from writing down the investment in allowance, management considered future taxable temporary partnerships. difference reversals, future taxable income exclusive of reversing temporary differences and carryovers, taxable income in open carry back years and other tax planning strategies. From time to
F-74 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) time, tax planning strategies could include holding a portion of The entire amount of unrecognized tax benefits, if recognized, debt securities with market value losses until recovery, altering would affect the effective tax rate in the period of the release. the level of tax exempt securities held, making investments which In addition, for the year ended December 31, 2018 the Company have specific tax characteristics, and business considerations recorded a receivable of $5 related to a tax indemnification such as asset-liability matching. Management views such tax agreement associated with the life and annuity business sold in planning strategies as prudent and feasible and would implement May 2018. The receivable is separate from the tax liability and is them, if necessary, to realize the deferred tax assets. classified as an other asset on the balance sheet. As shown in the deferred tax assets (liabilities) table above, included in net deferred income taxes are the future tax benefits Other Tax Matters associated with U.S. net operating loss carryover and general business credit carryovers. Net operating loss carryovers, if The federal audits have been completed through 2013, and the unused, would expire between 2026 and 2036. General business Company is not currently under examination for any open years. credits would expire between 2026 and 2027. Management believes that adequate provision has been made in the consolidated financial statements for any potential U.S. NOLs reflected above arose in taxable years prior to 2017 adjustments that may result from tax examinations and other tax and are still subject to prior tax law which allows for carryback related matters for all open tax years. and limits the period over which carryforwards may be used to offset taxable income. Utilization of the Company's loss The Company classifies interest and penalties (if applicable) as carryovers is dependent upon the generation of sufficient future income tax expense in the consolidated financial statements. The taxable income. Although the Company projects there will be Company recognized no interest expense for the years ended sufficient future taxable income to fully recover the remainder of December 31, 2018, 2017 and 2016. The Company had no the loss carryover, the Company's estimate of the likely interest payable as of December 31, 2018 and 2017. The realization may change over time. Company does not believe it would be subject to any penalties in any open tax years and, therefore, has not recorded any accrual Uncertain Tax Positions for penalties. Rollforward of Unrecognized Tax Benefits
For the years ended December 31, 2018 2017 2016 Balance, beginning of period $ 9 $ 12 $ 12 Gross increases - tax positions in prior period 5 3 — Gross decreases - tax positions in prior period — — — Gross decreases - tax reform — (6) — Balance, end of period $ 14 $ 9 $ 12
F-75 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Changes in AOCI, Net of Tax for the Year Ended December 31, 2018
Changes in Net Gain Pension and Net (Loss) on Foreign Other Unrealized OTTI Cash Flow Currency Postretirement Gain on Losses in Hedging Translation Plan AOCI, Securities OCI Instruments Adjustments Adjustments net of tax Beginning balance $ 1,931 $ (3) $ 18 $ 34 $ (1,317) $ 663 Cumulative effect of accounting changes, net of tax [1] 273 — 2 4 (284) (5) Adjusted balance, beginning of period 2,204 (3) 20 38 (1,601) 658 OCI before reclassifications [2] (2,245) — 8 (8) (61) (2,306) Amounts reclassified from AOCI 65 (1) (33) — 38 69 OCI, net of tax (2,180) (1) (25) (8) (23) (2,237) Ending balance $ 24 $ (4) $ (5) $ 30 $ (1,624) $ (1,579) [1]Includes reclassification to retained earnings of $88 of stranded tax effects and $93 of net unrealized gains, after tax, related to equity securities. Refer to Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements for further information. [2]The reduction in AOCI included the effect of removing $758 of AOCI from the balance sheet when the life and annuity business was sold in May 2018. Changes in AOCI, Net of Tax for the Year Ended December 31, 2017
Changes in Pension and Net Net Gain on Foreign Other Unrealized OTTI Cash Flow Currency Postretirement Gain on Losses in Hedging Translation Plan AOCI, Securities OCI Instruments Adjustments Adjustments net of tax Beginning balance $ 1,276 $ (3) $ 76 $ 6 $ (1,692) $ (337) OCI before reclassifications 857 — (8) 28 (146) 731 Amounts reclassified from AOCI (202) — (50) — 521 269 OCI, net of tax 655 — (58) 28 375 1,000 Ending balance $ 1,931 $ (3) $ 18 $ 34 $ (1,317) $ 663
Changes in AOCI, Net of Tax for the Year ended December 31, 2016
Changes in Pension and Net Net Gain on Foreign Other Unrealized OTTI Cash Flow Currency Postretirement Gain on Losses in Hedging Translation Plan AOCI, Securities OCI Instruments Adjustments Adjustments net of tax Beginning balance $ 1,279 $ (7) $ 130 $ (55) $ (1,676) $ (329) OCI before reclassifications 83 1 (8) (37) (52) (13) Amounts reclassified from AOCI (86) 3 (46) 98 36 5 OCI, net of tax (3) 4 (54) 61 (16) (8) Ending balance $ 1,276 $ (3) $ 76 $ 6 $ (1,692) $ (337)
F-76 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reclassifications from AOCI
Affected Line Item in the Consolidated Statement of AOCI Amount Reclassified from AOCI Operations For the year For the year For the year ended ended ended December 31, December 31, December 31, 2018 2017 2016 Net Unrealized Gain on Securities Available-for-sale securities $ (80) $ 152 $ 36 Net realized capital gains (losses) (80) 152 36 Total before tax (17) 53 13 Income tax expense (benefit) Income (loss) from discontinued (2) 103 63 operations, net of tax $ (65) $ 202 $ 86 Net income (loss) OTTI Losses in OCI Other than temporary impairments $ — $ — $ (2) Net realized capital gains (losses) — — (2) Total before tax — — (1) Income tax expense (benefit) Income (loss) from discontinued 1 — (2) operations, net of tax 1 — (3) Net income (loss) Net Gain on Cash Flow Hedging Instruments Interest rate swaps $ 6 $ 5 $ 10 Net realized capital gains (losses) Interest rate swaps 30 37 37 Net investment income 36 42 47 Total before tax 8 15 17 Income tax expense (benefit) Income (loss) from discontinued $ 5 $ 23 $ 16 operations, net of tax $ 33 $ 50 $ 46 Net income (loss) Foreign Currency Translation Adjustments Currency translation adjustments [1] $ — $ — $ (118) Net realized capital gains (losses) — — (118) Total before tax — — (20) Income tax expense (benefit) $ — $ — $ (98) Net income (loss) Pension and Other Postretirement Plan Adjustments Insurance operating costs and Amortization of prior service credit $ 7 $ 7 $ 6 other expenses Insurance operating costs and Amortization of actuarial loss (55) (61) (61) other expenses Insurance operating costs and Settlement loss — (747) — other expenses (48) (801) (55) Total before tax (10) (280) (19) Income tax expense (benefit) (38) (521) (36) Net income (loss) Total amounts reclassified from AOCI $ (69) $ (269) $ (5) Net income (loss) [1]Amount in 2016 relates to the sale of the U.K. property and casualty. 18. EMPLOYEE BENEFIT PLANS which designated contributions may be invested in a variety of Investment and Savings Plan investments, including up to 10% in a fund consisting largely of Substantially all U.S. employees of the Company are eligible to common stock of The Hartford. The Company's contributions participate in The Hartford Investment and Savings Plan under include a non-elective contribution of 2.0% of eligible
F-77 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) compensation and a dollar-for-dollar matching contribution of up to 6.0% of eligible compensation contributed by the employee Assumptions Pursuant to accounting principles related to the Company’s each pay period. The Company also maintains a non-qualified pension and other postretirement obligations to employees savings plan, The Hartford Excess Savings Plan, with the dollar- under its various benefit plans, the Company is required to make for-dollar matching contributions of employee compensation in a significant number of assumptions in order to calculate the excess of the amount that can be contributed under the tax- related liabilities and expenses each period. The two economic qualified Investment and Savings Plan. An employee's eligible assumptions that have the most impact on pension and other compensation includes overtime and bonuses but for the postretirement expense under the defined benefit pension plan Investment and Savings Plan and Excess Savings Plan combined, is and group retiree health plan are the discount rate and the limited to $1 annually. The total cost to The Hartford for these expected long-term rate of return on plan assets. The assumed plans was approximately $134, $113 and $115 for the years discount rates and yield curve is based on high-quality fixed ended December 31, 2018, 2017 and 2016, respectively. income investments consistent with the maturity profile of the Additionally, The Hartford has established defined contribution expected liability cash flows. Based on all available market and pension plans for certain employees of the Company’s industry information, it was determined that 4.35% and 4.23% international subsidiaries. The cost to The Hartford for the years were the appropriate discount rates as of December 31, 2018 to ended December 31, 2018, 2017 and 2016 for these plans was calculate the Company’s pension and other postretirement immaterial. obligations, respectively. The expected long-term rate of return considers the actual Post Retirement Benefit Plans compound rates of return earned over various historical time Defined Benefit Pension Plan- The Company maintains periods. The Company also considers the investment volatility, The Hartford Retirement Plan for U.S. Employees, a U.S. qualified duration and total returns for various time periods related to the defined benefit pension plan (the “Plan”) that covers substantially characteristics of the pension obligation, which are influenced by all U.S. employees hired prior to January 1, 2013. The Company the Company's workforce demographics. In addition, the also maintains non-qualified pension plans to provide retirement Company considers long-term market return expectations for an benefits previously accrued that are in excess of Internal Revenue investment mix that generally anticipates 60% fixed income Code limitations. securities and 40% non fixed income securities (global equities, hedge funds and private market alternatives) to derive an The Plan includes two benefit formulas, both of which are frozen: expected long-term rate of return. Based upon these analyses, a final average pay formula (for which all accruals ceased as of management determined the long-term rate of return assumption December 31, 2008) and a cash balance formula for which benefit to be 6.60% and 6.60% for the years ended December 31, 2018 accruals ceased as of December 31, 2012, although interest will and 2017, respectively. To determine the Company's 2019 continue to accrue to existing cash balance formula account expense, the Company is currently assuming an expected long- balances. Employees who were participants as of December 31, term rate of return on plan assets of 6.45% and 6.00% for the 2012 continue to earn vesting credit with respect to their frozen Company's pension and other post retirement obligations, accrued benefits if they continue to work. The interest crediting respectively. rate on the cash balance plan is the greater of the average annual yield on 10-year U.S. Treasury Securities or 3.3%. The Hartford Weighted Average Assumptions Used in Excess Pension Plan II, the Company's non-qualified excess Calculating the Benefit Obligations and the pension benefit plan for certain highly compensated employees, is Net Amount Recognized also frozen. The Company provides certain Other Group Retiree Health Plan- Postretirement health care and life insurance benefits for eligible retired Pension Benefits Benefits employees. The Company’s contribution for health care benefits will depend upon the retiree’s date of retirement and years of For the years ended December 31, service. In addition, the plan has a defined dollar cap for certain 2018 2017 2018 2017 retirees which limits average Company contributions. The Discount rate 4.35% 3.73% 4.23% 3.55% Hartford has prefunded a portion of the health care obligations through a trust fund where such prefunding can be accomplished on a tax effective basis. Beginning January 1, 2017, for retirees 65 Weighted Average Assumptions Used in and older who were participating in the Retiree PPO Medical Calculating the Net Periodic Benefit Cost for Plan, the Company funds the cost of medical and dental health Pension Plans care benefits through contributions to a Health Reimbursement Account and covered individuals can access a variety of insurance For the years ended plans from a health care exchange. Effective January 1, 2002, December 31, Company-subsidized retiree medical, retiree dental and retiree 2018 2017 2016 life insurance benefits were eliminated for employees with Discount rate 3.73% 4.22% 4.25% original hire dates with the Company on or after January 1, 2002. The Company also amended its postretirement medical, dental Expected long-term rate of and life insurance coverage plans to no longer provide subsidized return on plan assets 6.60% 6.60% 6.70% coverage for employees who retired on or after January 1, 2014.
F-78 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Weighted Average Assumptions Used in Change in Benefit Obligation Calculating the Net Periodic Benefit Cost for Other Other Postretirement Plans Postretirement Pension Benefits Benefits For the years ended December 31, For the years ended December 31, 2018 2017 2016 2018 2017 2018 2017 Discount rate 3.55% 3.97% 4.00% Benefit obligation — Expected long-term rate of beginning of year $ 4,376 $ 5,650 $ 256 $ 272 return on plan assets 6.60% 6.60% 6.60% Service cost 4 4 — — Assumed Health Care Cost Trend Rates Interest cost 142 170 7 8 Plan participants’ For the years ended contributions — — 11 11 December 31, Actuarial (gain) loss (6) 139 — 5 2018 2017 2016 Settlements — (1,647) — — Pre-65 health care cost trend rate 6.50% 6.75% 6.90% Changes in assumptions (329) 332 (11) 10 Post-65 health care cost trend Benefits and expenses rate N/A N/A N/A paid (186) (273) (45) (51) Rate to which the cost trend rate Retiree drug subsidy — — 2 1 is assumed to decline (the ultimate trend rate) 4.50% 4.50% 5.00% Foreign exchange adjustment (1) 1 — — Year that the rate reaches the ultimate trend rate 2028 2028 2024 Benefit obligation — end of year $ 4,000 $ 4,376 $ 220 $ 256
Obligations and Funded Status Changes in assumptions in 2018 primarily included a $281 The following tables set forth a reconciliation of beginning and decrease in the benefit obligation for pension benefits as a result ending balances of the benefit obligation and fair value of plan of an increase in the discount rate from 3.73% as of the assets, as well as the funded status of the Company's defined December 31, 2017 valuation to 4.35% as of the December 31, benefit pension and postretirement health care and life insurance 2018 valuation. Changes in assumptions in 2017 included a $350 benefit plans. International plans represent an immaterial increase in the benefit obligation for pension benefits as a result percentage of total pension assets, liabilities and expense and, for of a decline in the discount rate from 4.22% as of the December reporting purposes, are combined with domestic plans. 31, 2016 valuation to 3.73% as of the December 31, 2017 valuation. The cash balance plan pension benefit obligation was $412 and $443 as of December 31, 2018 and 2017, respectively. The interest crediting rate was 3.30% in 2018, 2017, and 2016. On June 30, 2017, the Company transferred invested assets and cash from plan assets to purchase a group annuity contract that transferred approximately $1.6 billion of the Company's outstanding pension obligations related to certain U.S. retirees, terminated vested participants and beneficiaries. As a result of this transaction, the Company recognized a pre-tax settlement charge of $750. The settlement charge was included in the corporate category for segment reporting.
F-79 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Change in Plan Assets Amounts Recognized in the Consolidated Balance Sheets Other Postretirement Other Pension Benefits Benefits Postretirement For the years ended December 31, Pension Benefits Benefits 2018 2017 2018 2017 As of December 31, Fair value of plan 2018 2017 2018 2017 assets — beginning of Other liabilities $ 656 $ 784 $ 135 $ 142 year $ 3,592 $ 4,678 $ 114 $ 138 Actual return on plan assets (172) 549 (2) 11 Components of Net Periodic Benefit Employer Cost (Benefit) and Other Amounts contributions 103 280 — — Recognized in Other Comprehensive Benefits paid [1] (161) (248) (27) (35) Income (Loss) Expenses paid (17) (21) — — As a result of the pension settlement, in 2017, the Company Settlements — (1,647) — — recognized a pre-tax settlement charge of $750 ($488 after tax) and a reduction to stockholders' equity of $144. Foreign exchange adjustment (1) 1 — — In connection with this transaction, the Company made a Fair value of plan contribution of $280 in September 2017 to the U.S. qualified assets — end of year $ 3,344 $ 3,592 $ 85 $ 114 pension plan in order to maintain the plan's pre-transaction Funded status — end funded status. of year $ (656) $ (784) $ (135) $ (142) Beginning with the first quarter of 2017, the Company adopted [1]Other postretirement benefits paid represent non-key employee postretirement the full yield curve approach in the estimation of the interest cost medical benefits paid from the Company's prefunded trust fund. component of net periodic benefit costs for its qualified and non- The fair value of assets for pension benefits, and hence the qualified pension plans and the postretirement benefit plan. The funded status, presented in the table above excludes assets of full yield curve approach applies the specific spot rates along the $139 and $144 as of December 31, 2018 and 2017, respectively, yield curve that are used in its determination of the projected held in rabbi trusts and designated for the non-qualified pension benefit obligation at the beginning of the year. The change has plans. The assets do not qualify as plan assets; however, the assets been made to provide a better estimate of the interest cost are available to pay benefits for certain retired, terminated and component of net periodic benefit cost by better aligning active participants. Such assets are available to the Company’s projected benefit cash flows with corresponding spot rates on the general creditors in the event of insolvency. The rabbi trust assets yield curve rather than using a single weighted average discount consist of equity and fixed income investments. To the extent the rate derived from the yield curve as had been done historically. fair value of these rabbi trusts were included in the table above, This change does not affect the measurement of the Company's pension plan assets would have been $3,483 and $3,736 as of total benefit obligations as the change in the interest cost in net December 31, 2018 and 2017, respectively, and the funded status income is completely offset in the actuarial (gain) loss reported of pension benefits would have been $(517)and $(640) as of for the period in other comprehensive income. The change December 31, 2018 and 2017, respectively. reduced the before tax interest cost component of net periodic Defined Benefit Pension Plans with an benefit cost by $32 for the year ended December 31, 2017. The discount rate being used to measure interest cost was 3.58% for Accumulated Benefit Obligation in Excess of the period from January 1, 2017 to June 30, 2017 and 3.37% for Plan Assets the period from July 1, 2017 to December 31, 2017 for the qualified pension plan, 3.55% for the non-qualified pension plan, As of December 31, and 3.13% for the postretirement benefit plan. Under the 2018 2017 Company's historical estimation approach, the weighted average discount rate for the interest cost component would have been Projected benefit obligation $ 4,000 $ 4,376 4.22% for the period from January 1, 2017 to June 30, 2017 and Accumulated benefit obligation $ 4,000 $ 4,376 3.92% for the period from July 1, 2017 to December 31, 2017 for Fair value of plan assets $ 3,344 $ 3,592 the qualified pension plan, 4.19% for the non-qualified pension plan and 3.97% for the postretirement benefit plan. The Company accounted for this change as a change in estimate, and accordingly, has recognized the effect prospectively beginning in 2017.
F-80 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Periodic Cost (Benefit)
Pension Benefits Other Postretirement Benefits For the years ended December 31, 2018 2017 2016 2018 2017 2016 Service cost $ 4 $ 4 $ 2 $ — $ — $ — Interest cost 142 170 237 7 8 11 Expected return on plan assets (227) (267) (311) (7) (8) (10) Amortization of prior service credit — — — (7) (7) (6) Amortization of actuarial loss 49 56 56 6 5 5 Settlements — 750 — — — — Net periodic cost (benefit) $ (32) $ 713 $ (16) $ (1) $ (2) $ —
Amounts Recognized in Other Comprehensive Income (Loss)
Pension Benefits Other Postretirement Benefits For the years ended December 31, 2018 2017 2016 2018 2017 2016 Amortization of actuarial loss $ 49 $ 56 $ 56 $ 6 $ 5 $ 5 Settlement loss — 750 — — — — Amortization of prior service credit — — — (6) (7) (6) Net loss arising during the year (91) (209) (66) 3 (12) (4) Total $ (42) $ 597 $ (10) $ 3 $ (14) $ (5)
Amounts in Accumulated Other Comprehensive Income (Loss), Before Tax, not yet Recognized as Components of Net Periodic Benefit Cost
Pension Benefits Other Postretirement Benefits As of December 31, 2018 2017 2016 2018 2017 2016 Net loss $ (2,008) $ (1,966) $ (2,563) $ (120) $ (129) $ (122) Prior service credit — — — 72 78 85 Total $ (2,008) $ (1,966) $ (2,563) $ (48) $ (51) $ (37)
The pension settlement transaction resulted in a decrease to Target Asset Allocation unrecognized net loss of $750 in 2017. Other Plan Assets Pension Plans Postretirement Plans Investment Strategy and Target Allocation Minimum Maximum Minimum Maximum The overall investment strategy of the Plan is to maximize total Equity securities 5% 35% 15% 45% investment returns to provide sufficient funding for present and anticipated future benefit obligations within the constraints of a Fixed income securities 50% 70% 55% 85% prudent level of portfolio risk and diversification. With respect to asset management, the oversight responsibility of the Plan rests Alternative assets —% 45% —% —% with The Hartford’s Pension Fund Trust and Investment Committee composed of individuals whose responsibilities Divergent market performance among different asset classes include establishing overall objectives and the setting of may, from time to time, cause the asset allocation to deviate from investment policy; selecting appropriate investment options and the desired asset allocation ranges. The asset allocation mix is ranges; reviewing the asset allocation mix and asset allocation reviewed on a periodic basis. If it is determined that an asset targets on a regular basis; and monitoring performance to allocation mix rebalancing is required, future portfolio additions determine whether or not the rate of return objectives are being and withdrawals will be used, as necessary, to bring the allocation met and that policy and guidelines are being followed. The within tactical ranges. Company believes that the asset allocation decision will be the single most important factor determining the long-term The Plan invests in commingled funds and partnerships managed performance of the Plan. by unaffiliated managers to gain exposure to emerging markets, equity, hedge funds and other alternative investments. These portfolios encompass multiple asset classes reflecting the current
F-81 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) needs of the Plan, the investment preferences and risk tolerance Pension Plan Assets at Fair Value as of of the Plan and the desired degree of diversification. These asset classes include publicly traded equities, bonds and alternative December 31, 2017 investments and are made up of individual investments in cash Asset Category Level 1 Level 2 Level 3 Total and cash equivalents, equity securities, debt securities, asset- backed securities, mortgage loans and hedge funds. Hedge fund Short-term investments: $ 21 $ 168 $ — $ 189 investments represent a diversified portfolio of partnership investments in a variety of strategies. Fixed Income Securities: In addition, the Company uses U.S. Treasury bond futures Corporate — 1,549 14 1,563 contracts and U.S. Treasury STRIPS in a duration overlay program to adjust the duration of Plan assets to better match the duration RMBS — 28 2 30 of the benefit obligation. U.S. Treasuries 3 74 — 77 Foreign government — 16 1 17 Investment Valuation CMBS — 28 2 30 Pension Plan Assets at Fair Value as of Other fixed income December 31, 2018 [1] — 97 2 99 Mortgage Loans — — 140 140 Asset Category Level 1 Level 2 Level 3 Total Equity Securities: Short-term investments: $ 50 $ 60 $ — $ 110 Large-cap domestic 595 89 — 684 Fixed Income Mid-cap domestic 11 — — 11 Securities: International 343 — — 343 Corporate — 1,663 14 1,677 Total pension plan RMBS — 62 1 63 assets at fair value, in the fair value U.S. Treasuries 10 120 — 130 hierarchy [2] $ 973 $ 2,049 $ 161 $ 3,183 Foreign government — 15 2 17 Other Investments, at net asset value [3]: CMBS — 22 — 22 Private Market Other fixed income Alternatives 168 [1] — 52 1 53 Hedge funds 212 Mortgage Loans — — 133 133 Total pension plan Equity Securities: assets at fair value. $ 973 $ 2,049 $ 161 $ 3,563 Domestic 376 3 — 379 [1]Includes ABS, municipal bonds, and CDOs. International 303 — — 303 [2]Excludes approximately $1 of investment payables net of investment receivables that are excluded from this disclosure requirement because they are trade Total pension plan receivables in the ordinary course of business where the carrying amount assets at fair value, approximates fair value. Also excludes approximately $30 of interest receivable. in the fair value [3]Investments that are measured at net asset value per share or an equivalent and hierarchy [2] $ 739 $ 1,997 $ 151 $ 2,887 have not been classified in the fair value hierarchy. Other Investments, at The tables below provide fair value level 3 rollforwards for the net asset value [3]: Pension Plan Assets for which significant unobservable inputs Private Market (Level 3) are used in the fair value measurement on a recurring Alternatives 272 basis. The Plan classifies the fair value of financial instruments Hedge funds 186 within Level 3 if there are no observable markets for the Total pension plan instruments or, in the absence of active markets, if one or more of assets at fair value. $ 739 $ 1,997 $ 151 $ 3,345 the significant inputs used to determine fair value are based on [1]Includes ABS, municipal bonds, and CDOs. the Plan’s own assumptions. Therefore, the gains and losses in the [2]Excludes approximately $1 of investment payables net of investment receivables tables below include changes in fair value due to both observable that are excluded from this disclosure requirement because they are trade and unobservable factors. receivables in the ordinary course of business where the carrying amount approximates fair value. [3]Investments that are measured at net asset value per share or an equivalent and have not been classified in the fair value hierarchy.
F-82 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2018 Pension Plan Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Foreign Mortgage Assets Corporate RMBS government loans Other [1] Totals Fair Value as of January 1, 2018 $ 14 $ 2 $ 1 $ 140 $ 4 $ 161 Realized gains,net — — — — — — Changes in unrealized gains (losses), net (1) — — (1) — (2) Purchases 5 — 1 — — 6 Settlements — — — — — — Sales (4) (1) — (6) (3) (14) Transfers into Level 3 — — — — — — Transfers out of Level 3 — — — — — — Fair Value as of December 31, 2018 $ 14 $ 1 $ 2 $ 133 $ 1 $ 151 [1]"Other" includes U.S. Treasuries, Other fixed income and CMBS investments. During the year ended December 31, 2018, transfers into and lack thereof of market observable information and the re- (out) of Level 3 are primarily attributable to the appearance of or evaluation of the observability of pricing inputs.
2017 Pension Plan Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Foreign Mortgage Assets Corporate RMBS government loans Other [1] Totals Fair Value as of January 1, 2017 $ 13 $ 10 $ 1 $ 121 $ 22 $ 167 Realized gains,net — — — — 2 2 Changes in unrealized gains, net 2 — — 2 2 6 Purchases 11 1 — 17 7 36 Settlements — (5) — — (1) (6) Sales (12) (4) — — (19) (35) Transfers into Level 3 — — — — 2 2 Transfers out of Level 3 — — — — (11) (11) Fair Value as of December 31, 2017 $ 14 $ 2 $ 1 $ 140 $ 4 $ 161 [1]"Other" includes U.S. Treasuries, Other fixed income and CMBS investments. During the year ended December 31, 2017, transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs. There was less than $1 in Company common stock included in the Plan’s assets as of December 31, 2018 and 2017.
F-83 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
There was no Company common stock included in the other Other Postretirement Plan Assets postretirement benefit plan assets as of December 31, 2018 and at Fair Value as of December 31, 2018 2017. Asset Category Level 1 Level 2 Level 3 Total Concentration of Risk Short-term investments $ 4 $ — $ — $ 4 In order to minimize risk, the Plan maintains a listing of permissible and prohibited investments. In addition, the Plan has Fixed Income certain concentration limits and investment quality requirements Securities: imposed on permissible investment options. Permissible Corporate — 19 — 19 investments include U.S. equity, international equity, alternative RMBS — 15 — 15 asset and fixed income investments including derivative instruments. Permissible derivative instruments include futures U.S. Treasuries 6 13 — 19 contracts, options, swaps, currency forwards, caps or floors and Foreign government — 1 — 1 may be used to control risk or enhance return but will not be used CMBS — 2 — 2 for leverage purposes. Other fixed income — 2 — 2 Securities specifically prohibited from purchase include, but are Equity Securities: not limited to: shares or fixed income instruments issued by The Large-cap 23 — — 23 Hartford, short sales of any type within long-only portfolios, non- derivative securities involving the use of margin, leveraged Total other floaters and inverse floaters, including money market obligations, postretirement plan assets at fair value [1] $ 33 $ 52 $ — $ 85 natural resource real properties such as oil, gas or timber and precious metals. [1]Excludes approximately $1 of investment receivables net of investment payables that are excluded from this disclosure requirement because they are trade Other than U.S. government and certain U.S. government receivables in the ordinary course of business where the carrying amount agencies backed by the full faith and credit of the U.S. approximates fair value. government, the Plan does not have any material exposure to any concentration risk of a single issuer. Other Postretirement Plan Assets at Fair Value as of December 31, 2017 Cash Flows Asset Category Level 1 Level 2 Level 3 Total Company Contributions Short-term investments $ 4 $ — $ — $ 4 Other Fixed Income Pension Postretirement Securities: Employer Contributions Benefits Benefits Corporate — 25 — 25 2018 $ 103 $ — RMBS — 17 — 17 2017 $ 281 $ — U.S. Treasuries 1 25 — 26 In 2018, the Company, at its discretion, made $101 in Foreign government — 1 — 1 contributions to the U.S. qualified defined benefit pension plan. CMBS — 5 — 5 The Company does not have a 2019 required minimum funding Other fixed income — 4 1 5 contribution for the U.S. qualified defined benefit pension plan. The Company has not determined whether, and to what extent, Equity Securities: contributions may be made to the U. S. qualified defined benefit Large-cap 30 — — 30 pension plan in 2019. The Company will monitor the funded Total other status of the U.S. qualified defined benefit pension plan during postretirement plan 2019 to make this determination. assets at fair value [1] $ 35 $ 77 $ 1 $ 113 Employer contributions in 2018 and 2017 were made in cash and [1]Excludes approximately $0 of investment payables net of investment receivables that are excluded from this disclosure requirement because they are trade did not include contributions of the Company’s common stock. receivables in the ordinary course of business where the carrying amount approximates fair value. Also excludes approximately $1 of interest receivable. For other postretirement plan assets measured using significant unobservable inputs (level 3), the fair value for other fixed income securities decreased from $1 as of December 31, 2017 to $0 as of December 31, 2018 due to $1 in sales. For other postretirement plan level 3 assets, the fair value of corporate securities decreased from $1 as of December 31, 2016 to $0 as of December 31, 2017 due to $1 in purchases and $2 in sales. RMBS decreased from $1 to $0 due to $1 in settlements. Other fixed income remained at $1 from 2016 to 2017 due to $1 in purchases and $1 transfers out of level 3.
F-84 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Benefit Payments Amounts of Benefits Expected to be Paid over the next Ten Years from Pension and other Postretirement Plans as of December 31, 2018
Other Pension Postretirement Benefits Benefits 2019 $ 239 $ 27 2020 239 24 2021 246 22 2022 251 20 2023 250 18 2024 - 2028 1,263 67 Total $ 2,488 $ 178
19. STOCK COMPENSATION PLANS The Company's stock-based compensation plans are described share awards that are based on actual versus targeted return on below. Shares issued in satisfaction of stock-based compensation equity over the performance period. The modification eliminated may be made available from authorized but unissued shares, the benefit to return on equity that arose from the charge against shares held by the Company in treasury or from shares purchased earnings in 2017 driven by the effect of the lower corporate in the open market. In 2018, 2017 and 2016, the Company issued income tax rate on the carrying value of net deferred tax assets. shares from treasury in satisfaction of stock-based compensation. This modification had no impact on compensation cost recognized over the vesting period since compensation cost Stock-based compensation expense, included in insurance based on the original performance share conditions is projected operating costs and other expenses in the consolidated statement to be higher than what the cost would be based on the of operations, was as follows: performance share conditions as modified. Stock-Based Compensation Expense Stock Plan For the years ended Future stock-based awards may be granted under The Hartford's December 31, 2014 Incentive Stock Plan (the "Incentive Stock Plan") other than 2018 2017 2016 the Subsidiary Stock Plan and the Employee Stock Purchase Plan Stock-based compensation plans described below. The Incentive Stock Plan provides for awards to expense [1] $ 130 $ 116 $ 81 be granted in the form of non-qualified or incentive stock options qualifying under Section 422 of the Internal Revenue Code, stock Income tax benefit (27) (41) (29) appreciation rights, performance shares, restricted stock or Excess tax benefit on awards restricted stock units, or any other form of stock-based award. vested, exercised and expired (5) (15) — The maximum number of shares, subject to adjustments set forth Total stock-based in the Incentive Stock Plan, that may be issued to Company compensation plans expense, employees and third party service providers during the 10-year after tax [2] $ 98 $ 60 $ 52 duration of the Incentive Stock Plan is 12,000,000 shares. If any [1]The increase in stock-based compensation plans expense in 2018 and 2017 was award under an earlier incentive stock plan is forfeited, largely due to a change made in 2017 to provide accelerated vesting of newly terminated, surrendered, exchanged, expires unexercised, or is issued restricted stock unit and performance share awards to retirement eligible settled in cash in lieu of stock (including to effect tax withholding) employees. [2]The increase in stock-based compensation plans expense, after-tax in 2018 is or for the net issuance of a lesser number of shares than the primarily related to the reduction of the U.S. federal corporate tax rate from 35% number subject to the award, the shares of stock subject to such to 21%. award (or the relevant portion thereof) shall be available for awards under the Incentive Stock Plan and such shares shall be The Company did not capitalize any cost of stock-based added to the maximum limit. As of December 31, 2018, there compensation. As of December 31, 2018, the total compensation were 7,294,481 shares available for future issuance. cost related to non-vested awards not yet recognized was $64, which is expected to be recognized over a weighted average The fair values of awards granted under the Incentive Stock Plan period of 1.9 years. are measured as of the grant date and expensed ratably over the awards’ vesting periods, generally 3 years. For stock option In the second quarter of 2018, The Hartford modified the terms awards to retirement-eligible employees the Company recognizes of the portion of its outstanding 2016 and 2017 performance the expense over a period shorter than the stated vesting period
F-85 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) because the employees receive accelerated vesting upon termination and exercise experience to determine the option retirement and therefore the vesting period is considered non- value. substantive. Beginning with awards granted in 2017, employees The valuation model incorporates ranges of assumptions for with restricted stock units and performance shares receive inputs, and those ranges are disclosed below. The term structure accelerated vesting upon meeting certain retirement eligibility of volatility is generally constructed utilizing implied volatilities criteria. from exchange-traded options, CPP warrants related to the Company’s stock, historical volatility of the Company’s stock and Stock Option Awards other factors. The Company uses historical data to estimate Under the Incentive Stock Plan, options granted have an exercise option exercise and employee termination within the valuation price at least equal to the market price of the Company’s common model, and accommodates variations in employee preference and stock on the date of grant, and an option’s maximum term is not to risk-tolerance by segregating the grantee pool into a series of exceed 10 years. Options generally become exercisable over a behavioral cohorts and conducting a fair valuation for each period of three years commencing one year from the date of cohort individually. The expected term of options granted is grant. Certain other options become exercisable at the later of derived from the output of the option valuation model and three years from the date of grant or upon specified market represents, in a mathematical sense, the period of time that appreciation of the Company's common shares. options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the The Company uses a hybrid lattice/Monte-Carlo based option U.S. Constant Maturity Treasury yield curve in effect at the time valuation model (the “valuation model”) that incorporates the of grant. possibility of early exercise of options into the valuation. The valuation model also incorporates the Company’s historical Stock Options Valuation Assumptions
For the years ended December 31, 2018 2017 2016 Expected dividend yield 1.8% 1.9% 2.0% Expected annualized spot volatility 20.8% -36.5% 21.8% -37.9% 27.3% -41.3% Weighted average annualized volatility 29.0% 29.5% 34.1% Risk-free spot rate 1.5% -2.9% 0.4% -2.4% 0.3% -1.8% Expected term 5.7 years 5.0 years 5.0 years
Non-qualified Stock Option Activity Under the Incentive Stock Plan
Weighted Number of Weighted Average Options Average Remaining Aggregate (in Exercise Contractual Intrinsic thousands) Price Term Value For the year ended December 31, 2018 Outstanding at beginning of year 5,212 $ 37.25 Granted 876 $ 53.81 Exercised (571) $ 26.43 Forfeited — $ — Expired (27) $ 74.88 Outstanding at end of year 5,490 $ 40.84 6.1 years $ 32 Outstanding, fully vested and expected to vest 5,240 $ 42.79 6.1 years $ 30 Exercisable at end of year 3,737 $ 36.30 4.9 years $ 32
Aggregate intrinsic value represents the value of the Company's closing stock price on the last trading day of the period in excess Share Awards of the exercise price multiplied by the number of options Share awards granted under the Incentive Stock Plan and outstanding or exercisable. The aggregate intrinsic value excludes outstanding include restricted stock units and performance the effect of stock options that have a zero or negative intrinsic shares. value. The weighted average grant-date fair value per share of options granted during the years ended December 31, 2018, Restricted Stock and Restricted Stock 2017, and 2016 was $14.04, $12.38 and $12.14, respectively. The total intrinsic value of options exercised during the years ended Units Restricted stock units are share equivalents that are credited December 31, 2018, 2017 and 2016 was $14, $8, and $1, with dividend equivalents. Dividend equivalents are accumulated respectively. and paid in incremental shares when the underlying units vest.
F-86 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restricted stock are shares of The Hartford's common stock with common stock on the date of grant less a discount for the absence restrictions as to transferability until vested. Restricted stock of dividends. Stock-compensation expense for these performance units and restricted stock awards are valued equal to the market share awards without market conditions is based on a current price of the Company’s common stock on the date of grant. estimate of the number of awards expected to vest based on the Generally, restricted stock units vest at the end of or over three performance level achieved and, therefore, may change during years; certain restricted stock units vest at the end of five years. the performance period as new estimates of performance are Beginning in 2017, restricted stock units vest at the earlier of available. employees retirement eligibility date or three years. Equity Other performance share awards or portions thereof have a awards granted to non-employee directors generally vest in one market condition based upon the Company's total stockholder year and were made in the form of restricted stock units in 2018, return relative to a group of peer companies within a period of 2017 and 2016. three years from the date of grant. Stock compensation expense for these performance share awards is based on the number of Performance Shares awards expected to vest as estimated at the grant date and, Performance shares become payable within a range of 0% to therefore, does not change for changes in estimated 200% of the number of shares initially granted based upon the performance. The Company uses a risk neutral Monte-Carlo attainment of specific performance goals achieved at the end of valuation model that incorporates time to maturity, implied or over three years. While most performance shares vest at the volatilities of the Company and the peer companies, and end of or over three years, certain performance shares vest at the correlations between the Company and the peer companies and end of five years. Beginning in 2017, performance shares vest at interest rates. the earlier of employees retirement eligibility date or three years. Performance share awards that are not dependent on market conditions are valued equal to the market price of the Company's Assumptions for Total Shareholder Return Performance Shares
For the years ended December 31, 2018 2017 2016 Volatility of common stock 20.8% 20.3% 22.2% Average volatility of peer companies 17.0% -25.0% 15.0% -25.0% 15.0% -26.0% Average correlation coefficient of peer companies 54.0% 60.0% 56.0% Risk-free spot rate 2.4% 1.5% 1.0% Term 3.0 years 3.0 years 3.0 years
Total Share Awards Non-vested Share Award Activity Under the Incentive Stock Plan
Restricted Stock and Restricted Stock Units Performance Shares Number of Weighted- Number of Weighted- Shares Average Shares Average (in Grant-Date (in Grant date thousands) Fair Value thousands) Fair Value Non-vested shares For the year ended December 31, 2018 Non-vested at beginning of year 4,444 $ 43.94 795 $ 45.16 Granted 1,359 $ 53.11 372 $ 50.26 Performance based adjustment 188 $ 43.59 Vested (1,721) $ 41.52 (539) $ 43.59 Forfeited (636) $ 46.07 (81) $ 44.45 Non-vested at end of year 3,446 $ 48.43 735 $ 49.56 The weighted average grant-date fair value per share of respectively, based on actual or estimated performance factors. restricted stock units and restricted stock granted during the The Company did not make cash payments in settlement of stock years ended December 31, 2018, 2017, and 2016 was $53.11, compensation during the years ended December 31, 2018, 2017 $48.90 and $42.87, respectively. The weighted average grant- and 2016. date fair value per share of performance shares granted during the years ended December 31, 2018, 2017, and 2016 was $50.26, Subsidiary Stock Plan $48.89 and $41.50, respectively. In 2013 the Company established a subsidiary stock-based The total fair value of shares vested during the years ended compensation plan similar to The Hartford Incentive Stock Plan December 31, 2018, 2017 and 2016 was $114, $94 and $128, except that it awards non-public subsidiary stock as
F-87 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) compensation. The Company recognized stock-based of the market price per share on the last trading day of the compensation plan expense of $9, $9 and $7 in the years ended offering period. Accordingly, the plan is a non-compensatory plan. December 31, 2018, 2017 and 2016, respectively, for the Employees purchase a variable number of shares of stock through subsidiary stock plan. Upon employee vesting of subsidiary stock, payroll deductions elected as of the beginning of the offering the Company recognizes a noncontrolling equity interest. period. The Company may sell up to 15,400,000 shares of stock to Employees are restricted from selling vested subsidiary stock to eligible employees under the ESPP. As of December 31, 2018, anyone other than the Company and the Company has discretion there were 4,297,972 shares available for future issuance. During on the amount of stock to repurchase. Therefore, the subsidiary the years ended December 31, 2018, 2017 and 2016, 219,661 stock is classified as equity because it is not mandatorily shares, 204,533 shares, and 222,113 shares were sold, redeemable. For the year ended December 31, 2018, the respectively. The weighted average per share fair value of the Company repurchased $4 in subsidiary stock. discount under the ESPP was $2.56, $2.63 and $2.26 during the years ended December 31, 2018, 2017 and 2016, respectively. Employee Stock Purchase Plan The fair value is estimated based on the 5% discount off the market price per share on the last trading day of the offering The Company sponsors The Hartford Employee Stock Purchase period. Plan (“ESPP”). Under this plan, eligible employees of The Hartford purchase common stock of the Company at a discount rate of 5% 20. BUSINESS DISPOSITIONS AND DISCONTINUED OPERATIONS Sale of U.K. business Sale of life and annuity On May 10, 2017, the Company completed the sale of its U.K. property and casualty run-off subsidiaries, Hartford Financial business Products International Limited and Downlands Liability On May 31, 2018, the Company’s wholly-owned subsidiary, Management Limited, in a cash transaction to Catalina Holdings Hartford Holdings, Inc. (HHI), completed the sale of its life and U.K. Limited ("buyer"), for approximately $272, net of transaction annuity business to a group of investors led by Cornell Capital costs. The Company's U.K. property and casualty run-off LLC, Atlas Merchant Capital LLC, TRB Advisors LP, Global Atlantic subsidiaries are included in the P&C Other Operations reporting Financial Group, Pine Brook and J. Safra Group. Under the terms segment. Revenues and earnings are not material to the of the sale agreement signed December 3, 2017, the investor Company's consolidated results of operations for the years ended group formed a limited partnership, Hopmeadow Holdings LP, December 31, 2017 and 2016. that acquired Hartford Life, Inc. (HLI), and its life and annuity operating subsidiaries, for cash of approximately $1.4 billion after The sale resulted in an after tax capital loss from the transaction a pre-closing dividend to The Hartford of $300. The Hartford of $5 on the sale for the year ended December 31, 2016. received a 9.7% ownership interest in the limited partnership, valued at a cost of $164 as of the sale date. In addition, as part of Major Classes of Assets and Liabilities the terms of the sale agreement, The Hartford reduced its long- Transferred by the Company to the Buyer in term debt by $142 because the debt, which was issued by HLI, Connection with the Sale was included as part of the sale. Including cash proceeds and the retained equity interest and net of transaction costs, net Carrying Value as of proceeds for the sale were approximately $1.5 billion. The life and annuity operations met the criteria for reporting as discontinued December 31, Closing 2016 [2] operations and are reported in the Corporate category through the date of sale. Assets Cash and investments $ 669 $ 657 The Company recognized a loss on sale within discontinued operations of approximately $3.3 billion in 2017 and a reduction Reinsurance recoverables and in loss on sale of $202 in 2018. The reduction in loss on sale in other [1] 268 213 2018 primarily resulted from the reclassification to retained Total assets held for sale 937 870 earnings of $193 of tax effects stranded in AOCI due to the Liabilities accounting for Tax Reform and a $141 increase in estimated retained tax benefits, primarily net operating loss carryovers, Reserve for future policy benefits and unpaid loss and partially offset by $104 of operating income from discontinued loss adjustment expenses 653 600 operations during the period up until the closing date and a Other liabilities 12 11 reclassification of $10 of net unrealized capital gains from AOCI to retained earnings. See Note 1 - Adoption of New Accounting Total liabilities held for sale $ 665 $ 611 Standards within Basis of Presentation and Significant [1]Includes intercompany reinsurance recoverables of $71 as of December 31, Accounting Policies, for additional information about the 2016, settled in cash at closing. reclassifications from AOCI to retained earnings. The estimated [2]Classified as assets and liabilities held for sale. amount of retained net operating loss carryovers depends on the estimated tax basis of the business sold which increased subsequent to the date the Company entered into the sale
F-88 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) agreement. At closing, stockholders’ equity was further reduced Reconciliation of the Major Line Items for the amount of AOCI of the life and annuity business, which was approximately $758, largely consisting of net unrealized Constituting Pretax Profit (Loss) of gains on investments, net of shadow DAC. The AOCI balance was Discontinued Operations $1 billion as of December 31, 2017. For the years ended December 31, Cash inflows and outflows from and to the life and annuity 2018 2017 2016 business after closing were immaterial to the overall inflows and outflows of the Company. Additionally, the revenues and Revenues expenses presented in continuing operations related to pre- Earned premiums $ 39 $ 106 $ 114 disposal operations were immaterial. Fee income and other 382 912 931 The Company will continue to manage invested assets of the life Net investment income 519 1,289 1,384 and annuity business sold in May 2018 for an initial term of five Net realized capital losses (68) (53) (158) years and provide transition services for up to 24 months. Total revenues 872 2,254 2,271 The Hartford reported its 9.7% ownership interest in Benefits, losses and Hopmeadow Holdings LP, which is accounted for under the equity expenses method, in other assets in the Consolidated Balance Sheet. The Benefits, losses and loss Hartford recognizes its share of income in other revenues in the adjustment expenses 535 1,416 1,390 Consolidated Statement of Operations on a three month delay, when financial information from the investee becomes available. Amortization of DAC 58 45 146 The Company recognized $8 of income for 2018. Insurance operating costs and other expenses [1] 157 368 378 Major Classes of Assets and Liabilities Total benefits, losses and Transferred to the Buyer in Connection with expenses 750 1,829 1,914 the Sale Income before income taxes 122 425 357 Carrying Value as of Income tax expense December 31, (benefit) 2 37 74 Closing 2017 [2] Income from operations Assets of discontinued operations, net of tax 120 388 283 Cash and investments $ 27,058 $ 30,135 Net realized capital gain Reinsurance recoverables 20,718 20,785 (loss) on disposal, net of Loss accrual [1] (3,044) (3,257) tax 202 (3,257) — Other assets 2,907 1,439 Income (loss) from discontinued operations, Separate account assets 110,773 115,834 net of tax $ 322 $ (2,869) $ 283 Total assets held for sale $ 158,412 $ 164,936 [1]Corporate allocated overhead has been included in continuing operations. Liabilities Cash Flows from Discontinued Operations Reserve for future policy benefits included in the Consolidated Statement of and unpaid loss and loss adjustment expenses $ 14,308 $ 14,482 Cash Flows Other policyholder funds and benefits payable 28,680 29,228 Year Ended December 31, Long-term debt 142 142 2018 2017 2016 Other liabilities 2,222 2,756 Net cash provided by operating activities from Separate account liabilities 110,773 115,834 discontinued operations $ 603 $ 797 $ 784 Total liabilities held for sale $ 156,125 $ 162,442 Net cash provided by investing activities from [1]Represents the estimated accrued loss on sale of the Company's life and annuity discontinued operations $ 463 $ 1,466 $ 864 business. [2]Classified as assets and liabilities held for sale. Net cash used in financing activities from discontinued operations [1] $ (737) $ (884) $ (647) Cash paid for interest $ — $ 11 $ 11 [1]Excludes return of capital to parent of $619, $1,396, and $752 for 2018, 2017 and 2016, respectively.
F-89 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. QUARTERLY RESULTS (UNAUDITED) Current and Historical Quarterly Results of the Company
Three months ended March 31, June 30, September 30, December 31,
2018 2017 2018 2017 2018 2017 2018 2017 Revenues $ 4,691 $ 4,169 $ 4,789 $ 4,214 $ 4,842 $ 4,192 $ 4,633 $ 4,587 Benefits, losses and expenses 4,172 3,768 4,252 4,495 4,312 4,011 4,466 4,165 Income (loss) from continuing operations, net of tax 428 303 434 (152) 427 145 196 (558)
Income (loss) from discontinued operations, net of tax 169 75 148 112 5 89 — (3,145) Net income (loss) $ 597 $ 378 $ 582 $ (40) $ 432 $ 234 $ 196 $ (3,703) Less: Preferred stock dividends — — — — — — 6 —
Net income (loss) available to common stockholders $ 597 $ 378 $ 582 $ (40) $ 432 $ 234 $ 190 $ (3,703) Basic Income (loss) from continuing operations, net of tax, available to common stockholders per share $ 1.20 $ 0.82 $ 1.21 $ (0.42) $ 1.19 $ 0.40 $ 0.53 $ (1.56) Income (loss) from discontinued operations, net of tax per share $ 0.47 $ 0.20 $ 0.41 $ 0.31 $ 0.01 $ 0.25 $ — $ (8.81) Net income (loss) per common share available to common stockholders $ 1.67 $ 1.02 $ 1.62 $ (0.11) $ 1.20 $ 0.65 $ 0.53 $ (10.37) Diluted Income (loss) from continuing operations, net of tax, available to common stockholders per share $ 1.18 $ 0.80 $ 1.19 $ (0.42) $ 1.17 $ 0.40 $ 0.52 $ (1.56) Income (loss) from discontinued operations, net of tax per share $ 0.46 $ 0.20 $ 0.41 $ 0.31 $ 0.02 $ 0.24 $ — $ (8.81) Net income (loss) per common share available to common stockholders $ 1.64 $ 1.00 $ 1.60 $ (0.11) $ 1.19 $ 0.64 $ 0.52 $ (10.37)
Weighted average common shares outstanding, basic 357.5 371.4 358.3 366.0 358.6 360.2 359.1 357.0 Weighted average shares outstanding and dilutive potential common shares [1] 363.9 378.6 364.2 366.0 364.1 367.0 364.0 357.0 [1]In periods where a loss from continuing operations, net of tax, available to common stockholders or net loss available to common stockholders is recognized, inclusion of incremental dilutive shares would be antidilutive. Due to the antidilutive impact, such shares are excluded from the diluted earnings per share calculation of income (loss) from continuing operations, net of tax, available to common stockholders and net income (loss) available to common stockholders in such periods.
F-90 [This Page Intentionally Left Blank] [This Page Intentionally Left Blank] [This Page Intentionally Left Blank] Corporate Information
Corporate Headquarters The Hartford Financial Services Group, Inc. One Hartford Plaza Hartford, CT 06155
Internet Address www.thehartford.com
Investor Relations The Hartford Financial Services Group, Inc. Investor Relations One Hartford Plaza (TA1-1) Hartford, CT 06155 860-547-2537 E-mail: [email protected]
Transfer Agent/Shareholder Record Shareholder correspondence should be mailed to: Computershare Trust Company, N.A. P.O. Box 505000 Louisville, KY 40233
Overnight correspondence should be mailed to: Computershare Trust Company, N.A. 462 South 4th Street, Suite 1600 Louisville, KY, 40202
Shareholder website: www.computershare.com/investor
Shareholder online inquiries: https://www-us.computershare.com/investor/Contact
Annual Report on Form 10-K Shareholders may receive without charge a copy of The Hartford’s Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission upon request to: Donald C. Hunt Vice President and Corporate Secretary The Hartford Financial Services Group, Inc. One Hartford Plaza Hartford, CT 06155 EQUIPPING PEOPLE TO ACHIEVE ALL THEIR POSSIBILITIES.
As a leading provider of disability insurance, The Hartford has a long-held belief that sports are an important part of physical rehabilitation following a disabling illness or injury. Today, 40 million1 Americans have a disability and often face greater obstacles to healthy living and employment than the general population. We believe people are capable of achieving amazing things with the right encouragement and support. That’s why The Hartford has been sponsoring athletes with disabilities for 25 years, and became a Founding Partner and the Official Disability Insurance Sponsor of U.S. Paralympics in 2003. Now, through our new Ability Equipped program, we are broadening our support and celebrating human achievement.
million1 Americans have 40 a disability and often face greater obstacles to healthy living and employment than the general population.
About Ability Equipped Developed in partnership with Disabled Sports USA (DSUSA) in 2018, our Ability Equipped program is designed to improve access to adaptive sports and provide adaptive sports equipment for youth and adults with disabilities across the country. Through this program, we’re: ABOVE: Michael O’Hearn, Alpine Skier, receives adaptive sports equipment from The Hartford. Encouraging people and athletes to achieve – by providing them the equipment they need to make it happen. ON THE COVER: From right: Lia “Rui Rui” Bleifuss, cross-country Nordic sit skier, and her Supporting the Paralympic Movement in the United coach, Hudson Van Slooten. States – by partnering with 20 DSUSA Chapters across the country to make adaptive sports programs and A longstanding partner of Disabled Sports USA, equipment more accessible. The Hartford celebrated its 25th year as the title sponsor of The Hartford Ski Spectacular in 2018, Bringing people of all abilities together – by sponsoring one of the nation’s largest winter sports festivals The Hartford Ski Spectacular and the Angel City Games. for people with disabilities. During the event, nine Inspiring the next generation – to believe what’s possible. young athletes received adaptive sports equipment With Ability Equipped, we’re providing people with the from The Hartford. right equipment and support they need to achieve all Photos by Joe Kusumoto Photography. the possibilities life has to offer. Learn more at TheHartford.com/ability WE DO THE RIGHT THING AND HOLD OURSELVES TO THE HIGHEST ETHICAL STANDARDS.
It’s fundamental to our culture: Doing the right thing every day and in every situation. And while our efforts do award us recognition, the real reward is the impact we make on our employees, our customers and our communities.
World’s Most Ethical Companies®, Ethisphere Institute (2019)
Best Place to Work for Lesbian, Gay, Bisexual and Transgender (LGBT) Equality, Human Rights Campaign, Corporate Equality Index (2018)
Military Friendly Employer, Military Times (2018)
2018 Bloomberg Financial Services Gender-Equality Index (BFGEI)
The Hartford Named A Best Employer For Healthy Lifestyles®, National Business Group (2018)
100% Disability Equality Index, Best Place to Work (2018)
Named to the Dow Jones Sustainability Indices (2018)
LEARN MORE AT TheHartford.com/our-company
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1 U.S. Census Bureau, 2015 American Community Survey One-Year Estimates. The Hartford® is The Hartford Financial Services Group, Inc. and its subsidiaries, including issuing companies, Hartford Fire Insurance Company, and Hartford Life and Accident Insurance Company. Its headquarters is in Hartford, CT.
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