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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the fiscal year ended December 31, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from to
Commission file number 001-13958
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 13-3317783 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
One Hartford Plaza, Hartford, Connecticut 06155
(Address of principal executive offices) (Zip Code)
(860) 547-5000
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, par value $0.01 per share | HIG | The New York Stock Exchange | ||||||
| 6.10% Notes due October 1, 2041 | HIG 41 | The New York Stock Exchange | ||||||
| 7.875% Fixed-to-Floating Rate Junior Subordinated Debentures due 2042 | HGH | The New York Stock Exchange | ||||||
| Depositary Shares, Each Representing a 1/1,000th Interest in a Share of 6.000% Non-Cumulative Preferred Stock, Series G, par value $0.01 per share | HIG PR G | The New York Stock Exchange | ||||||
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
None
| Indicate by check mark: | |||||||||||||||||
| • | if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | Yes | ☑ | No | |||||||||||||
| • | if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. | Yes | No | ☑ | |||||||||||||
| • | whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | ☑ | No | |||||||||||||
| • | whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Yes | ☑ | No | |||||||||||||
| • | whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. | ||||||||||||||||
| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
| • whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No | ☑ | ||||||||||
The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant as of June 30, 2021 was approximately $22 billion, based on the closing price of $61.97 per share of the Common Stock on the New York Stock Exchange on June 30, 2021.
As of February 17, 2022, there were outstanding 331,646,836 shares of Common Stock, $0.01 par value per share, of the registrant.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for its 2022 annual meeting of stockholders are incorporated by reference in Part III of this Form 10-K.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021
TABLE OF CONTENTS
| Item | Description | Page | ||||||
| 1 | ||||||||
| 1A. | ||||||||
| 1B. | UNRESOLVED STAFF COMMENTS | None | ||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | MINE SAFETY DISCLOSURES | Not Applicable | ||||||
| 5 | ||||||||
| 6 | RESERVED | None | ||||||
| 7 | ||||||||
| 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | [a] | ||||||
| 8 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | [b] | ||||||
| 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | None | ||||||
| 9A. | ||||||||
| 9B. | OTHER INFORMATION | None | ||||||
| 10 | ||||||||
| 11 | EXECUTIVE COMPENSATION | [c] | ||||||
| 12 | ||||||||
| 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | [d] | ||||||
| 14 | PRINCIPAL ACCOUNTING FEES AND SERVICES | [e] | ||||||
| 15 | ||||||||
| 16 | FORM 10-K SUMMARY | Not Applicable | ||||||
[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.
3
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 the continued COVID-19 pandemic, including impacts to the Company's insurance and product-related, regulatory/legal, recessionary and other global economic, capital and liquidity and operational risks
•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, foreign currency exchange rates 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 discontinuance 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 another pandemic, civil unrest, 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 thunderstorms, tornadoes, 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, including usage-based methods of determining premiums, advancements in automotive safety features, the development of autonomous vehicles, and platforms that facilitate ride sharing,
◦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;
4
◦capital requirements which are subject to many factors, including many that are outside the Company’s control, such as National Association of Insurance Commissioners ("NAIC") risk based capital formulas, rating agency capital models, Funds at Lloyd's and Solvency Capital Requirement, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results;
◦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;
◦state and international 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 intent-to-sell impairments and allowance for credit losses on available-for-sale securities and mortgage loans;
◦the potential for impairments of our goodwill;
•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;
◦risks associated with acquisitions and divestitures, including the challenges of integrating acquired companies or businesses, which may result in our inability 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 federal, state and international 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, state or foreign 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.
5
Part I - Item 1. Business
| Item 1. | ||||||||||||||
BUSINESS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
GENERAL
The Hartford Financial Services Group, Inc. (together with its subsidiaries, “The Hartford”, the “Company”, “we”, or “our”) is a holding company for a group of subsidiaries that provide property and casualty ("P&C") insurance, group benefits insurance and services, and mutual funds and exchange-traded products to individual and business customers in the United States as well as in the United Kingdom and other international locations. The Hartford is headquartered in Connecticut and its oldest subsidiary, Hartford Fire Insurance Company, dates back to 1810. At December 31, 2021, total assets and total stockholders’ equity of The Hartford were $76.6 billion and $17.8 billion, respectively.
ORGANIZATION
The Hartford strives to maintain and enhance its position as a market leader within the financial services industry. The 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 Hartford Stag logo is one of the most recognized symbols in the financial services industry.
As a holding company, The Hartford Financial Services Group, Inc. is separate and distinct from its subsidiaries and has no significant business operations of its own. The holding company relies on the dividends from its insurance companies and other subsidiaries as the principal source of cash flow to meet its obligations, pay dividends and repurchase common stock.
Information regarding the cash flow and liquidity needs of The Hartford Financial Services Group, Inc. may be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Capital Resources and Liquidity.
PURPOSE and STRATEGIC PRIORITIES
The Hartford’s mission is to provide people with the support and protection they need to pursue their unique ambitions, seize opportunity, and prevail through unexpected challenge. Our strategy to maximize value creation for all stakeholders focuses on advancing underwriting excellence, emphasizing digital capabilities, maximizing distribution channels, optimizing organizational efficiency, and advancing environmental, social and governance ("ESG") leadership.
We endeavor to maintain and enhance our position as a market leader by leveraging our core strengths of underwriting excellence, risk management, claims, product development and distribution. We are investing in claims, analytics, data science and digital capabilities to strengthen our existing competitive advantages.
An ethics, people, and performance-driven culture drives our values. We have proactive positions on ESG issues important to our sustainability, and our capacity to deliver long-term stockholder value.
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Part I - Item 1. Business
2022 Priorities
As we enter 2022, our strategy remains consistent and we are focused on the following priorities across our businesses:
•Advancing leading underwriting capabilities across our portfolio to offer expanded products and services;
•Emphasizing digital, data and analytics, and data science that enhance the customer experience and improve the underwriting and claims decision making;
•Maximizing distribution channels and product breadth to increase market share;
•Optimizing organizational efficiency with a focus on continuous improvement. For information on the Company’s operational transformation and cost reduction plan (called “Hartford Next”), refer to The Hartford’s Operations section of Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Before considering investments in new products and technology, we are on track to achieve a reduction in annual insurance operating costs and other expenses of approximately $540 in 2022 and $625 in 2023, relative to 2019;
•Balancing capital deployment for organic growth, investments in the business, and return to stockholders through dividends and share repurchases; and
•Continuing to advance ESG leadership in order to attract and retain top talent and enhance value to stockholders. For more information on retaining and attracting talent through our diversity, equity and inclusion initiatives, refer to the Human Capital Resources section of Part 1, Item 1.
Within our businesses, we will continue to pursue objectives specific to each, including:
Commercial Lines
•Benefiting from a firm pricing environment in most property and liability lines while navigating continued pricing pressure in workers’ compensation by staying disciplined in our underwriting;
•Successfully leveraging our broader underwriting capabilities, product breadth, risk appetite and expanded access to cross-sell global specialty product lines to customers of small commercial and middle & large commercial, and grow specialized verticals in middle & large commercial;
•Accelerating use of data, digital technology and voice of customer to transform and differentiate our business; and
•Expanding distribution to match customers’ preferred access points.
Personal Lines
•Continuing to transform our products, regain competitive momentum, and grow top-line through the continued rollout of our new automobile and homeowners product, Prevail, which is tailored to the
mature market and includes digital service capabilities that provide real time transaction support;
•Transforming underwriting to improve member experience and reduce expense;
•Driving new business growth in AARP Direct through direct marketing initiatives designed to increase conversion rates; and
•Expanding use of telematics and investing in digital capabilities.
Group Benefits
•Continuing to grow revenues through strong sales and persistency;
•Expanding absence/leave management capabilities and pursuing product innovation to meet the rapidly evolving needs of employers and employees;
•Continuing to grow market share of voluntary product offerings, including supplemental health coverage, as well as new state paid family and medical leave;
•Completing the implementation of our disability and leave management claims platform, The Hartford Ability Advantage, to enhance the overall customer experience and accommodate the Company’s leave management programs; and
•Investing in data and analytics to enhance risk management and reinvent processes at the intersection of data, analytics, artificial intelligence and technology.
Hartford Funds
•Driving organic growth across key distribution channels;
•Working with subadvisors to launch products to meet the needs of financial advisors and their clients.
REPORTING SEGMENTS
The Hartford conducts business principally in five reporting segments including Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits and Hartford Funds, as well as a Corporate category. The Company includes in the Corporate category reserves for run-off structured settlement and terminal funding agreement liabilities, restructuring costs, capital raising activities (including equity financing, debt financing and related interest expense), transaction expenses incurred in connection with acquisitions, certain M&A costs, 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 a portion of the invested assets of Talcott Resolution Life, Inc. and its subsidiaries as well as certain affiliates. Talcott Resolution Life, Inc. is the holding company of the life and annuity business that we sold in May 2018. In addition, up until June 30, 2021, Corporate included a 9.7% ownership interest in Hopmeadow Holdings LP, the legal entity that acquired Talcott Resolution in May 2018
7
Part I - Item 1. Business
(Hopmeadow Holdings, LP, Talcott Resolution Life Inc., and its subsidiaries are collectively referred to as “Talcott Resolution”).
2021 Revenues of $22,390 by Segment
[1]Includes Revenue of $88 for Property & Casualty Other Operations and $137 for Corporate.
The following discussion describes the principal products and services, marketing and distribution, and competition of The Hartford's reporting segments. For further discussion of the reporting segments, including financial disclosures of revenues by product line, net income (loss), and assets for each reporting segment, see Note 4 - Segment Information of Notes to Consolidated Financial Statements.
|COMMERCIAL LINES | ||
2021 Earned Premiums of $9,541 by Line of Business
2021 Earned Premiums of $9,541 by Product
8
Part I - Item 1. Business
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. | ||||
| General Liability | Covers a business in the event it is sued for causing harm to a person and/or damage to property. General 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 provides replacement of lost income due to an event that interrupts business operations. | ||||
| Marine | Encompasses various ocean and inland marine coverages including cargo, craft, hull, specie, transport and liability, among others. | ||||
| Package Business | Covers both property and general liability damages. | ||||
| Workers' Compensation | Covers employers for losses incurred due to employees sustaining an injury, illness or disability in connection with their 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 Liability | Covers liability arising from directors and officers acting in their official capacity and liability for errors and omissions 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. | ||||
| Assumed Reinsurance | Includes assumed reinsurance of property, liability, surety, credit and political, marine and agriculture risks throughout the world but principally in Europe and the Americas. Business principally provides cover on broad books of business (i.e. treaty), as opposed to individual risks (i.e. facultative). | ||||
Through its three lines of business of small commercial, middle & large commercial, and global specialty, Commercial Lines offers its products and services to businesses in the United States ("U.S.") and internationally. Commercial Lines generally consists of products written for small businesses and middle market companies as well as national and multi-national accounts, largely distributed through retail agents and brokers, wholesale agents and global and specialty reinsurance brokers. The majority of Commercial Lines written premium is generated by small commercial and middle market lines, which provide coverage options and customized pricing based on the policyholder’s individual risk characteristics. Small commercial and middle market lines within middle & large commercial are generally referred to as standard commercial lines.
Small commercial provides coverages for small businesses, which the Company generally considers to be businesses with an annual payroll under $20, revenues under $50 and property values less than $20 per location. Primary coverages provided include workers' compensation, property, general liability and commercial automobile. Within small commercial, both property and general liability coverages are offered under a single package policy, marketed under the Spectrum name. Small commercial also provides excess and surplus lines coverage to small businesses including umbrella, general liability, property and other coverages.
Middle & large commercial business provides insurance coverages to medium-sized and national accounts businesses, which are companies whose payroll, revenue and property values exceed the small business definition. In addition to offering standard commercial lines products, including workers' compensation, property, general liability and commercial automobile products, middle & large commercial includes program business which provides tailored programs, primarily to customers with common risk characteristics. On national accounts, a significant portion of the business is written through large deductible programs. Other programs written within middle & large commercial are retrospectively-rated where the ultimate premium collected from the insured is adjusted based on how incurred losses for the policy year develop over time, subject to a minimum and maximum premium. Also within middle & large commercial, the Company writes captive programs business, which provides tailored programs to those seeking a loss sensitive solution where premiums are adjustable based on loss experience.
Lines of business written by small commercial and middle & large commercial are subject to rate regulation and written pricing increases or decreases partly in response to loss cost trends. Workers’ compensation rates are based on loss experience and are informed by data submitted through the National Council on Compensation Insurance ("NCCI"). Workers’ compensation rates have been under downward pressure for the industry due to favorable loss cost trends in
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Part I - Item 1. Business
recent years, including due to lower claim frequency that occurred during the pandemic.
Global specialty provides a variety of customized insurance products, including property, liability, marine, professional liability, and bond. The vast majority of the business written by our Navigators Group insurance subsidiaries is reported in the global specialty business unit.
Marketing and Distribution
Commercial Lines provides insurance products and services through the Company’s regional offices, branches and sales and policyholder service centers throughout the United States and, to a lesser extent, overseas, principally in the United Kingdom. The products are marketed and distributed using independent retail agents and brokers, wholesale agents and global and specialty reinsurance brokers, with business also sold direct-to-consumer. In addition, the Company offers insurance products to customers of payroll service providers through its relationships with major national payroll companies in the United States and to members of affinity organizations. As the sole corporate member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"), the Company has the exclusive right to underwrite business up to an approved level of premium in the Lloyd’s market.
In the United States, independent agents, brokers and wholesalers are consolidating and this trend is expected to continue. This will likely result in a larger proportion of written premium being concentrated among fewer agents, brokers and wholesalers. These distribution partners are leveraging data and analytics for bargaining power.
Competition
Small Commercial
In small commercial, The Hartford competes against large national carriers, regional carriers and direct writers. Competitors include stock companies, mutual companies and other underwriting organizations. The small commercial market remains highly competitive and fragmented as carriers seek to differentiate themselves through product expansion, price, enhanced service and leading technology. Larger carriers such as The Hartford are continually advancing their pricing sophistication and ease of doing business with agents and customers through the use of technology, analytics and other capabilities that improve the process of evaluating a risk, quoting new business and servicing customers. The Company also continuously enhances digital capabilities as customers and distributors demand more access and convenience, and expands product and underwriting capabilities to accommodate both larger accounts and a broader risk appetite.
Existing competitors and new entrants, including start-up and non-traditional carriers, are actively looking to expand sales of business insurance products to small businesses through increasing their underwriting appetite, deepening their relationships with distribution partners, and through on-line and direct-to-consumer marketing. Carriers that can quote business in an automated way have a competitive advantage by shortening the time from quoting to issuance. Through its ICON quoting tool, The Hartford quotes over 70% of its Spectrum package business and workers’ compensation new business policies without human intervention.
Middle & Large Commercial
Middle & large commercial business is considered “high touch” and involves individual underwriting and pricing decisions. Competition in this market includes stock companies, mutual companies, alternative risk sharing groups and other underwriting organizations. In addition, some larger brokers are now becoming competitors through acquisition of managing general agents or managing general underwriters. Carriers in this marketplace seek to differentiate their product offerings, including by leveraging their umbrella and excess liability underwriting capacity to sell other lines of business. The pricing of middle market and national accounts is prone to significant volatility over time due to changes in individual account characteristics and exposure, as well as legislative and macro-economic forces. National and regional carriers participate in the middle & large commercial insurance sector, resulting in a competitive environment where pricing and policy terms are critical to securing new business and retaining existing accounts. Within this competitive environment, The Hartford is working to deepen its product and underwriting capabilities, leverage its sales and underwriting talent and expand its use of data analytics and third party data to make risk selection and pricing decisions. In product development and related areas such as claims and risk engineering, the Company has extended its capabilities in industry verticals, such as energy, construction, technology and life sciences.
Through business partners, the Company offers business insurance coverages to exporters and other U.S. companies with a physical presence overseas. The Hartford’s middle & large commercial business will leverage the investments in product, underwriting, and technology to better match price to individual risk as the firm pursues responsible growth strategies to deliver target returns.
For specialty casualty businesses within middle & large commercial, pricing competition continues to be significant, particularly for the larger individual accounts. As a means to mitigate the cost of insurance on larger accounts, more insureds may opt for loss-sensitive products, including retrospectively rated contracts, in lieu of guaranteed cost policies.
Global Specialty
Global specialty competes against multi-national insurance and reinsurance companies, writing marine, property, excess casualty, professional liability, bond and assumed reinsurance. Global specialty writes many surplus lines of business which are lines of business not written through standard products licensed or admitted in a state. Since 2010, surplus lines has accounted for an increasing share of total commercial lines industry direct written premiums.
Customers served by the global specialty marketplace expect tailored policy language for their unique risks and, increasingly, are looking for a single insurance carrier to meet all their coverage needs. The Company has been successful in cross-selling global specialty product lines acquired through the Navigators Insurance Group acquisition to customers of small commercial and of middle & large commercial and seeks to expand cross-sell opportunities in the future. The Hartford competes on the basis of its underwriting capabilities where it uses data and actuarial insights to enhance risk selection. The Company seeks to drive greater efficiency, shorten the quoting process and improve the customer’s experience through
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Part I - Item 1. Business
expanded use of digital capabilities. While global specialty benefitted from firm market conditions in 2020 and 2021, more capital has entered the specialty lines marketplace, increasing competition and putting downward pressure on rates.
Lloyd's Syndicate and London market business have been under financial stress in recent years due to a perceived lack of adequate pricing and an excessive focus on growth at the expense of underwriting discipline in those markets, combined with a significant increase in the level of catastrophe activity. As such, syndicates and London market carriers, including The Hartford, have taken pricing and underwriting actions to improve
profitability. Lloyd's, which is regulated by the Financial Conduct Authority and Prudential Regulatory Authority in the U.K., has been implementing changes to improve performance of the syndicates including a more rigorous approach to the approval of syndicate business plans. Additionally, Lloyd’s has also introduced recent changes which require that members limit the amount of tier 2 capital (e.g. letters of credit) that can be used to meet syndicate solvency capital requirements. For further discussion, see Part II, Item 7, MD&A - Capital Resources and Liquidity.
|PERSONAL LINES | ||
2021 Earned Premiums of $2,954 by Line of Business
2021 Earned Premiums of $2,954 by Product
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 umbrella coverages to individuals across the United States, mostly through a program designed exclusively for members of AARP (“AARP Program”). The Hartford's automobile and homeowners products provide coverage options and pricing tailored to a customer's individual risk. The Hartford has individual customer relationships with AARP Program policyholders and, as a group, they represent a significant portion of the total Personal Lines' business. Business sold to AARP members, either direct or through independent agents, amounted to earned premiums of $2.7 billion, $2.8 billion and
$2.9 billion in 2021, 2020 and 2019, respectively. The AARP relationship provides The Company with a competitive advantage to capitalize on the continued growth of the over age-50 population.
During 2021, the Company began introducing its new product, Prevail, which is being rolled out for new business on a state-by-state basis through 2022 and into 2023 and was in seven states as of December, 2021. Prevail is tailored to the mature market and includes digital service capabilities that provide real time transaction support. Among other things, overall rate levels, price segmentation, rating factors and underwriting procedures
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are being updated through the introduction of Prevail. Personal Lines works with carrier partners to provide risk protection options for AARP members with needs beyond the company’s current product offering.
Marketing and Distribution
Personal Lines reaches diverse customers through multiple distribution channels, including direct-to-consumer and independent agents. The direct-to-consumer channel continues to represent a larger share of the automobile insurance market, accounting for more than one-third of premiums. In direct-to-consumer, Personal Lines markets its products through a mix of media, including direct mail, digital marketing, television as well as digital and print advertising. Through the agency channel, Personal Lines provides products and services to customers through a network of independent agents in the standard personal lines market, primarily serving mature, preferred consumers. These independent agents are not employees of the Company.
Personal Lines has made significant investments in offering direct and agency-based customers the opportunity to interact with the company on-line, including via mobile devices. In addition, its technology platform for telephone sales centers enables sales representatives to provide an enhanced experience for direct-to-consumer customers, positioning the Company to offer unique capabilities to AARP’s member base.
Most of Personal Lines' sales are associated with its exclusive licensing arrangement with AARP, with the current agreement in place through December 31, 2032, to market automobile, homeowners and personal umbrella coverages to AARP's approximately 37 million members, primarily direct but also through independent agents. This relationship with AARP, which has been in place since 1984, provides Personal Lines with an important competitive advantage given the increase in the population of those over age 50 and the strength of the AARP brand.
New business premium growth partly depends on the rate that consumers shop for insurance and while shopping rates have generally rebounded since the depths of the pandemic, they have rebounded more slowly in the 50-plus age segment. Prior to May 2021, in most states, new business automobile and home policies were issued to AARP members with a lifetime continuation agreement endorsement, providing that the policies will be renewed as long as certain terms are met, such as timely payment of premium and maintaining a driver’s license in good standing. However, beginning in May 2021, Personal Lines no longer offers the lifetime continuation agreement to new business home and automobile policies. The endorsement will remain on renewal policies with original new business effective dates prior to May 2021.
In addition to selling to AARP members, Personal Lines offers its automobile and homeowners products to non-AARP customers, primarily through the independent agent channel within select underwriting markets where we believe we have a competitive advantage. Personal Lines leverages its agency channel to target AARP members and other customer segments that value the advice of an independent agent and recognize the differentiated experience the Company provides. In particular, the Company has taken action to distinguish its brand and improve profitability in the independent agent channel with fewer and more highly partnered agents.
Competition
The personal lines automobile and homeowners insurance markets are highly competitive. Personal lines insurance is written by insurance companies of varying sizes that compete principally on the basis of price, product, service, including claims handling, the insurer's ratings and brand recognition. Companies with strong ratings, recognized brands, direct sales capability and economies of scale will have a competitive advantage. Larger carriers have the advantage of economies of scale with the top ten personal lines insurers accounting for approximately 70% of market share.
In recent years, insurers have increased their advertising in the direct-to-consumer market in an effort to gain new business and retain profitable business. The growth of direct-to-consumer sales, including by new entrants to the marketplace, continues to outpace sales in the agency distribution channel.
Insurers that distribute products principally through agency channels compete by offering commissions and additional incentives to attract new business. To distinguish themselves in the marketplace, top tier insurers are offering on-line and self-service capabilities that make it easier for agents and consumers to do business with the insurer. A large majority of agents have been using “comparative rater” tools that allow the agent to compare premium quotes among several insurance companies. The use of comparative rater tools increases price competition. Insurers that are able to capitalize on their brand and reputation, differentiate their products and deliver strong customer service are more likely to be successful in this market.
The use of data mining and predictive modeling is used by more and more carriers to target the most profitable business, and carriers have further segmented their pricing plans to expand market share in what they believe to be the most profitable segments. The Company continues to invest in capabilities to better utilize data and analytics, and thereby, refine and manage underwriting and pricing. Carriers, including The Hartford, have invested in telematics capabilities to enable better risk selection and pricing segmentation in response to changes in driving patterns. In 43 states, the Hartford offers its telematics program, TrueLane, which offers discounts for good driving behavior based on such attributes as braking, speed, distracted driving, and acceleration.
Also, new automobile technology advancements, including lane departure warnings, backup cameras, automatic braking and active collision alerts, are being deployed rapidly and are expected to improve driver safety and reduce the likelihood of vehicle collisions. However, these features include expensive parts, potentially increasing average claim severity.
In 2021, inflation had an increasing impact on the industry. Supply chain pressures, advanced vehicle technology, and a tight labor market have increased the cost of automobile repairs and supply chain issues are also resulting in higher costs to repair homes.
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|P&C OTHER OPERATIONS | ||
Property & Casualty Other Operations includes certain property and casualty operations, managed by the Company, that have discontinued writing new business and includes substantially all of the Company's pre-1986 asbestos and environmental ("A&E") exposures. For a discussion of coverages provided under
policies written with exposure to A&E prior to 1986, reported within the P&C Other Operations segment (“Run-off A&E”), run-off assumed reinsurance and all other non-A&E exposures, see Part II, Item 7, MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves.
|GROUP BENEFITS | ||
2021 Premiums and Fee Income of $5,687
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 short-term disability and long-term disability plans that pay 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 for federal, state and employer family and medical leave programs, as well as the administration of employer self-funded disability 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 a single contract, most typically the employees of a single employer or members of an association.
Group Benefits provides group life, disability and other group coverages to members of employer groups, associations and affinity groups through direct insurance policies and provides reinsurance to other insurance companies. In addition to employer paid coverages, the segment offers voluntary product coverages which are offered through employee payroll deductions. Group Benefits also offers disability underwriting, administration, and claims processing to self-funded employer plans. In addition, the segment offers a single-company leave management solution, which integrates work absence data from the insurer’s short-term and long-term group disability and
workers’ compensation insurance business with its leave management administration services.
Statutory paid family leave ("PFL") and paid family medical leave ("PFML") programs are a source of growth as the Company offers fully insured coverage or administers self-insured coverage for some of these programs. As of 2021, nine states and the District of Columbia have enacted PFL programs and additional states are considering adopting paid family leave or paid family and medical leave programs.
Group Benefits generally offers term insurance policies, allowing for the adjustment of rates or policy terms at renewal in order to minimize the adverse effect of market trends, loss costs, declining interest rates and other factors. Policies are typically
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sold with one, two or three-year rate guarantees depending upon the product and market segment.
Marketing and Distribution
The Group Benefits distribution network is managed through a regional sales office system to distribute its group insurance products and services through a variety of distribution outlets including brokers, consultants, third-party administrators and trade associations. Additionally, the segment has relationships with several private exchanges which offer its products to employer groups. Technology providers, including human resources platform vendors, are taking an increasingly prominent role in influencing customer decisions that also influence selection of the group benefits insurance provider.
Competition
Group Benefits competes with numerous insurance companies and financial intermediaries marketing insurance products. The market for group benefits is expected to grow as the COVID-19 pandemic has driven new demand for employee benefits among both employees and employers. For example, there is increased interest in benefits addressing mental health and wellness, caregiving costs and remote work considerations.
In order to differentiate itself, Group Benefits uses its risk management expertise and economies of scale to derive a competitive advantage. Competitive factors include the extent of products offered, price, the quality of customer and claims handling services, and the Company's relationship with third-party distributors and private exchanges. Active price competition continues in the marketplace, resulting in multi-year rate guarantees being offered to customers. Top tier insurers in
the marketplace also offer on-line and self-service capabilities to third party distributors and consumers. The relatively large size and underwriting capacity of the Group Benefits business provides a competitive advantage over smaller competitors.
The Company's market presence has increased in recent years, benefiting from our industry leading digital technology and integrated absence management and claims platform.
Additionally, as employers continue to focus on reducing the cost of employee benefits, we expect more companies to offer voluntary products paid for by employees. Across the industry, the sale of voluntary product offerings, including supplemental health coverage, is growing at a faster rate than employer-provided benefits. Competitive factors affecting the sale of voluntary products include the breadth of products, product education, enrollment capabilities and overall customer service. The Company, as well its competitors, are investing in technology to offer digital capabilities, and to improve product offerings and service levels, particularly with voluntary products.
We offer voluntary products including critical illness, accident and hospital indemnity coverage to employees through our Employee Choice Benefits programs, and travel accident coverage for employers and other organizations. The Company's enhanced enrollment and marketing tools, such as My Tomorrow©, are providing additional opportunities to educate individual participants about supplementary benefits and deepen their knowledge about product selection.
In addition to providing group disability, leave management and life insurance, we offer integrated claim, leave and benefits administration with The Hartford's Ability Advantage platform.
|HARTFORD FUNDS | ||
Hartford Funds Segment Assets Under Management ("AUM") of $157,895 as of December 31, 2021
Mutual Fund AUM as of December 31, 2021
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Principal Products and Services
| Mutual Funds | Includes approximately 60 actively managed 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 | Exchange-traded products ("ETP") include actively managed exchange-traded funds (ETFs) and multifactor ETFs. Actively managed ETFs include fixed income, domestic equity and commodity products utilizing the same investment platform as our mutual funds. Multifactor ETFs are designed to track indices using passive investment techniques that strive to improve performance relative to traditional capitalization-weighted indices. | ||||
| Talcott Resolution life and annuity separate accounts | Relates to assets of the life and annuity business sold in May 2018 that are still managed by the Company's Hartford Funds segment. | ||||
The Hartford Funds segment provides investment management, administration, product distribution and related services to investors through a diverse set of investment products in domestic and international markets. Hartford Funds' comprehensive range of products and services assist clients in achieving their desired investment objectives. AUM are separated into three distinct categories referred to as mutual funds, ETP and Talcott Resolution life and annuity separate accounts, which relate to the life and annuity business sold in May 2018. The Hartford Funds segment will continue to manage the mutual fund assets of Talcott Resolution, though these assets are expected to continue to decline over time.
Marketing and Distribution
Our funds and ETPs are sold through national and regional broker-dealer organizations, independent financial advisers, defined contribution plans, financial consultants, bank trust 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, range of products offered, brand recognition, financial strength, proprietary distribution channels, quality of service and level of fees charged relative to quality of investment products. The Hartford Funds segment competes with a large number of asset management firms and other financial institutions and differentiates itself through superior fund performance, product breadth, strong distribution and competitive fees. In recent years demand for lower cost passive investment strategies has outpaced demand for actively managed strategies and has taken market share from active managers.
|CORPORATE | ||
The Company includes in the Corporate category investment management fees and expenses related to managing third party business, including management of a portion of the invested assets of Talcott Resolution, reserves for run-off structured settlement and terminal funding agreement liabilities, restructuring costs, capital raising activities (including equity financing, debt financing and related interest expense), transaction expenses incurred in connection with an acquisition, certain M&A costs, purchase accounting adjustments related to
goodwill and other expenses not allocated to the reporting segments.
Additionally, until June 30, 2021 the Corporate category included a 9.7% ownership interest in the legal entity that acquired Talcott Resolution. For discussion of this sale, see Part II, Item 7, MD&A — The Hartford's Operations.
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RESERVES
Total Reserves as of December 31, 2021 [1]
[1]Includes reserves for future policy benefits and other policyholder funds and benefits payable of $596 and $687, respectively, of which $399 and $426, 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.
Total Property & Casualty Reserves as of December 31, 2021
Further discussion of The Hartford’s property and casualty insurance product reserves, including run-off asbestos and 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. Additional discussion may be found in Notes to Consolidated Financial Statements, including in the Company’s accounting policies for insurance product reserves within Note 1 - Basis of Presentation and Significant Accounting Policies and in Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
Total Group Benefits Reserves as of December 31, 2021 [1]
[1]Includes short duration contract reserves of $129 for short-term disability and $39 of supplemental health as well as reserves for future policy benefits that includes $286 of paid up life reserves and policy reserves on life policies, $96 of reserves for conversions to individual life and $17 of other reserves.
Group Benefits reserves include unpaid loss and loss adjustments expenses for long-term disability, group life and other lines of business as well as reserves for other policyholder funds and reserves for future policy benefits. Other policyholder funds and benefits payable represent deposits from policyholders where the company does not have insurance risk but is subject to investment risk. Reserves for future policy benefits represent life-contingent reserves for which the company is subject to insurance and investment risk.
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 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
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UNDERWRITING FOR P&C AND GROUP BENEFITS
The Company underwrites the risks it insures in order to manage exposure to loss through favorable risk selection and diversification. Risk modeling is used to manage, within specified limits, the aggregate exposure taken in each line of business and across the Company. For property and casualty business, aggregate exposure limits are set by geographic zone and peril. 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 Commercial Lines products are also filed with the states but the premium charged may be modified based on the insured’s relative risk profile and workers’ compensation policies may be subject to modification based on prior loss experience. Pricing for Group Benefits products, including long-term disability and life insurance, is also based on an underwriting of the risks and a projection of estimated losses, including consideration of investment income.
Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future loss cost frequency and severity based on historical loss experience adjusted for known trends, the Company’s response to rate actions taken by competitors, its expense levels and expectations about regulatory and legal developments. The Company seeks to price its insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. For many of its insurance products, the Company is required to obtain approval for its premium rates from state insurance departments and the Lloyd's Syndicate's ability to write business is subject to Lloyd's approval for its premium capacity each year.
Geographic Distribution of Earned Premium (% of total)
| Location | Commercial Lines | Personal Lines | Group Benefits | Total | ||||||||||
| California | 8 | % | 2 | % | 2 | % | 12 | % | ||||||
| New York | 5 | % | 1 | % | 3 | % | 9 | % | ||||||
| Texas | 4 | % | 1 | % | 2 | % | 7 | % | ||||||
| Florida | 3 | % | 1 | % | 1 | % | 5 | % | ||||||
| All other [1] | 33 | % | 11 | % | 23 | % | 67 | % | ||||||
| Total | 53 | % | 16 | % | 31 | % | 100 | % | ||||||
[1]No other single state or country accounted for 5% or more of the Company's consolidated earned premium in 2021.
CLAIMS ADMINISTRATION FOR P&C AND GROUP BENEFITS
Claims administration includes the functions associated with the receipt of initial loss notices, claims adjudication and estimates, legal representation for insureds where appropriate, establishment of case reserves, payment of losses and notification to reinsurers. These activities are performed by approximately 6,600 claim professionals handling 50 states, Washington D.C and 2 international locations, organized to meet the specific claim service needs for our various product offerings. Our combined workers’ compensation and Group Benefits units enable us to leverage synergies for improved outcomes.
Claim payments for benefits, losses and loss adjustment expenses are the largest expenditure for the Company.
REINSURANCE
For discussion of reinsurance, see Part II, Item 7, MD&A — Enterprise Risk Management and Note 9 - Reinsurance of Notes to Consolidated Financial Statements.
INVESTMENT OPERATIONS
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, including certain assets of Talcott Resolution.
As of December 31, 2021 and 2020, the fair value of HIMCO’s total assets under management was approximately $105.4 billion and $106.1 billion, respectively, including $43.6 billion and $45.9 billion, respectively, that were held in HIMCO managed third party accounts and $4.7 billion and $4.6 billion, respectively, that support the Company's pension and other postretirement benefit plans.
Management of The Hartford's Investment Portfolio
HIMCO manages the Company's investment portfolios to maximize economic value and generate the returns necessary to support The Hartford’s various product obligations, within internally established objectives, guidelines and risk tolerances. The portfolio objectives and guidelines are developed based upon the asset/liability profile, including duration, convexity and other characteristics within specified risk tolerances. The risk tolerances considered include, but are not limited to, asset sector, credit issuer allocation limits, and maximum portfolio limits for below investment grade holdings. The Company attempts to minimize adverse impacts to the portfolio and the
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Company’s results of operations from changes in economic conditions through asset diversification, asset allocation limits, asset/liability duration matching and the use of derivatives. For further discussion of HIMCO’s portfolio management approach, see Part II, Item 7, MD&A — Enterprise Risk Management.
The Hartford's Investment Portfolio of $57.7 billion as of December 31, 2021
ENTERPRISE RISK MANAGEMENT
The Company has insurance, operational and financial risks. For discussion on how The Hartford manages these risks, see Part II, Item 7, MD&A - Enterprise Risk Management.
REGULATION
State and Foreign Insurance Laws
State insurance laws are intended to supervise and regulate insurers with the goal of protecting policyholders and ensuring the solvency of the insurers. As such, the insurance laws and regulations grant broad authority to state insurance departments (“Departments”) to oversee and regulate the business of insurance. The Departments monitor the financial stability of an insurer by requiring insurers to maintain certain solvency standards and minimum capital and surplus requirements; invested asset requirements; state deposits of securities; guaranty fund premiums; restrictions on the size of risks which may be insured under a single policy; and adequate reserves and other necessary provisions for unearned premiums, unpaid losses and loss adjustment expenses and other liabilities, both reported and unreported. In addition, the Departments perform periodic market and financial examinations of insurers and require insurers to file annual and other reports on the financial condition of the companies. Policyholder protection is also regulated by the Departments through licensing of insurers, sales employees, agents and brokers and others; approval of
premium rates and policy forms; and claims administration requirements.
Many states also have laws regulating insurance holding company systems. These laws require insurance companies, which are formed and chartered in the state (“Domestic Insurers”), to register with the state department of insurance (referred to as their “domestic state or regulator”) and file information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. Insurance holding company regulations principally relate to (i) state insurance approval of the acquisition of Domestic Insurers, (ii) prior review or approval of certain transactions between the domestic insurer and its affiliates, and (iii) regulation of dividends made by the domestic insurer. All transactions within a holding company system affecting Domestic Insurers must be determined to be fair and equitable.
The extent of financial services regulation on business outside the United States varies significantly among the countries in which The Hartford operates. Foreign financial services providers in certain countries are faced with greater restrictions than domestic competitors domiciled in that particular jurisdiction. Our International operations include a Lloyd’s Syndicate which is required to meet the minimum market standards set by Lloyd’s, as well as UK Prudential Regulation Authority (“PRA”) and UK Financial Conduct Authority (“FCA”) regulatory requirements. Pursuant to Solvency II, both Lloyd’s and the PRA focus on the adequacy of capital held and solvency of an insurer against the risk profile and management of the authorized insurer in setting capital requirements
Federal and State Securities and Financial Regulation Laws
The Company sells and distributes its mutual funds through a broker dealer subsidiary, and is subject to regulation promulgated and enforced by the Financial Industry Regulatory Authority, the SEC and/or, in some instances, state securities administrators. Other subsidiaries operate as investment advisers registered with the SEC under the Investment Advisers’ Act of 1940, as amended, and are registered as investment advisers under certain state laws, as applicable. Because federal and state laws and regulations are primarily intended to protect investors in securities markets, they generally grant regulators broad rulemaking and enforcement authority. Some of these regulations include, among other things, regulations impacting sales methods, trading practices, suitability of investments, use and safekeeping of customers’ funds, corporate governance, capital, recordkeeping, and reporting requirements.
Failure to comply with federal and state laws and regulations may result in fines, the issuance of cease-and-desist orders or suspension, termination or limitation of the activities of our operations and/or our employees.
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INTELLECTUAL PROPERTY
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property.
We have a trademark portfolio that we consider important in the marketing of our products and services, including, among others, the trademarks of The Hartford name, the Stag Logo and the combination of these two trademarks. The duration of trademark registrations may be renewed indefinitely subject to country-specific use and registration requirements. We regard our trademarks as highly valuable assets in marketing our products and services and vigorously seek to protect them against infringement. In addition, we own a number of patents and patent applications relating to on-line quoting, insurance related processing, insurance telematics, proprietary interface platforms, and other matters, some of which may be important to our business operations. Patents are of varying duration depending on filing date, and will typically expire at the end of their natural term.
HUMAN CAPITAL RESOURCES
The Hartford has approximately 18,100 employees as of December 31, 2021.
Management, including the CEO and Chief Human Resources Officer ("CHRO"), establishes the hiring and compensation practices for our company. The Board is periodically updated on key employee engagement and employee relations measures, including our annual employee survey results. In addition, the Board’s Compensation and Management Development Committee (“Compensation Committee”) is responsible for reviewing performance and approving compensation paid to senior leaders, and, among other things, the oversight of succession planning, pay equity practices, and diversity, equity and inclusion ("DEI") initiatives. Our Human Resources team, led by our CHRO, supports the Compensation Committee in the execution of its responsibilities. In addition to the day-to-day support and counseling they provide to our leaders, managers and employees, the Human Resources team also monitors key indicators to keep a pulse on trends across our employee population including employee engagement, employee relations matters, career mobility, talent acquisition, and retention.
Talent Attraction, Retention and Development
The Hartford prioritizes building a diverse workforce and an inclusive and equitable work environment where employees are respected, inspired to perform at their best, and are recognized for their contributions. We believe that the combination of a diverse workforce and an operating culture that actively embraces different experiences, perspectives and insights results in better decisions, outcomes and experiences for both our customers and employees. We persistently work to improve the employee experience in support of our continuing strategic
objective to attract, retain and develop the best talent in the industry.
Our commitment to a robust talent pool starts at the top. The Board of Directors engages with the Compensation Committee annually to review executive level talent, consider key pipeline talent and conduct succession planning. In addition, our leadership team conducts a comprehensive annual Talent Review process across our organization each year.
In 2021, we achieved top quartile employee engagement and performance enablement scores as measured by an independent third party survey through continued focus on management effectiveness, collaboration, innovation and well-being, as well as DEI.
To keep pace with the evolving expectations of employees and external candidates, we focus on a broad array of actions, including:
•Providing career growth and development opportunities by enhancing our talent management systems, including succession planning, executive recruitment, training, development and retention strategies; and
•Holding leaders accountable for their talent decisions and measuring progress against business line-specific DEI goals (including a talent mobility scorecard), reviewed periodically by the CEO and executive leadership team.
For entry-level roles in the organization, we recruit at colleges and universities, partner with both internal and external recruiters, and offer a range of training and development programs, including:
•The Hartford’s Leadership Development program which provides curriculum to enhance leadership skill sets for all participants – from first-time leaders through our executive ranks;
•The Hartford’s Apprenticeship Program which prepares students for careers in insurance; and
•Our HartCode Academy Developer Training Program which provides employees with Information Technology ("IT") application development skills, providing a pipeline of diverse IT talent from across the Company.
Pay and Benefits
Compensation and Pay Equity
We offer competitive pay and benefits to our employees, with a performance-based, variable compensation structure making up a larger share of the total compensation paid to executives and senior leaders in the organization. Variable compensation includes an annual bonus plan and long-term incentive awards. Annual bonus payouts are informed by whether the Company achieves core earnings above or below a target level that is determined from the annual operating plan set at the beginning of each year and reviewed and approved by the Compensation Committee. Long-term incentive awards include restricted stock units, performance shares and, for the most senior executives, stock options. Additional information about The Hartford’s variable compensation programs is provided in the Company’s Proxy Statement.
To help ensure pay equity, we use an independent third party compensation specialist firm to conduct statistical pay equity
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analyses for our U.S. employees each year – a three-step process that includes analysis before, during and after the annual compensation planning cycle. This analysis enables us to identify unexplained pay disparities, conduct additional research to determine reasons for these differences and take appropriate actions to address the disparities if necessary.
The Compensation Committee is updated annually on our compensation equity processes and status.
The Hartford also engages in a number of additional practices to ensure pay fairness, including:
•Centralized compensation function ensuring consistent programs and practices across the enterprise;
•Enterprise-wide framework for evaluating and aligning roles and compensation levels based on job responsibilities, market competitiveness, strategic importance of the role, and other relevant factors;
•Prohibition against asking external job applicants for current or historical compensation information;
•A practice to disclose to applicants and employees the salary ranges for all posted positions;
•Individual compensation decisions that consider each employee’s experience, proficiency, and performance;
•Training for managers and human resources business partners on performance assessment and compensation planning; and
•Multiple levels of review and approval required for all compensation decisions.
We are committed to our extensive, long-standing policies and practices to ensure fair pay across the organization, while also staying attuned to external best practices and insights, and leveraging input from subject matter experts. We evaluate our performance every year, and as markets and talent pools shift over time we work to evolve our practices accordingly.
Employee Health and Wellness
The Hartford offers a comprehensive benefits package and award-winning wellness programs to help our employees live healthy lives and achieve their full potential. Our extensive benefits include:
•Medical plan options;
•Dental and vision coverage options;
•401(k) plan with company non-elective and matching contributions;
•Paid time off ("PTO") with at least 19 days of annual eligibility to start;
•Paid holidays;
•Flexible work schedules, including remote work arrangements;
•Tuition reimbursement;
•Family medical leave;
•Parental leave;
•Adoption support program;
•Organ and bone marrow donation leave policy; and
•Employee assistance program.
The Company also offers a medical advocacy program and well-being programs including nutrition counseling, weight management, sleep improvement, fitness reimbursement and more.
Diversity, Equity and Inclusion
The Hartford seeks to be an insurance industry leader in having a diverse workforce and promoting an equitable and inclusive workplace, enabling us to attract and leverage top talent to meet our business goals. We are committed to ethical conduct and a bias-free workplace for all employees as we continue building, enhancing and sustaining an inclusive supportive culture that reflects the diversity of our customer base.
We continue to invest in and accelerate a wide range of strategies to improve representation of talent that’s demographically underrepresented in the insurance industry, including targeted initiatives to improve the representation of women and people of color, and education to help employees understand, identify and mitigate bias.
We are proud to have taken additional steps to hold our leaders accountable for making progress against our DEI goals. To that end, the Company required each business and functional area, in partnership with our human resources team, to create and adopt individualized DEI plans with specific DEI goals. Leaders meet with the CEO twice a year to review progress against those goals and final results are then considered as part of the annual performance assessment process. The Company has demonstrated its commitment to DEI progress through its active involvement in organizations such as the CEO Action for Racial Equity and Catalyst CEO Champions for Change and has been recognized for its commitment to inclusive workplaces by a number of organizations.
Our 2021 performance share grants under the Company’s long-term incentive plan included a performance share modifier tied to the company's workforce representation goals. The modifier will determine whether an increase or decrease of 10% on performance share awards is warranted based upon performance against predetermined year-end 2023 representation goals for women and people of color in executive level roles. This change will be described in greater detail in our 2022 proxy statement. The Compensation and Management Development Committee's intent is to include the modifier with 2024 and 2027 performance share awards to encourage progress toward the Company's 2030 representation goals.
Building a diverse workforce and creating an equitable and inclusive culture is a top priority and a business imperative. We recognize that this work is central to leading, governing and managing risks better. As of December 31, 2021, women and people of color represent 61% and 30% of our workforce, respectively. The Board of Directors is updated annually on the Company’s DEI efforts.
We have nine Employee Resource Groups (“ERG’s”) that are voluntary participation groups led by employees, dedicated to fostering a diverse and inclusive workplace. These groups focus on the development and success of the Company’s employees through education, networking, mentorship and community volunteer opportunities. As of December 31, 2021, we had 106
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local ERG chapters, and over 50% of employees were members of at least one ERG. In 2021, over 6,000 employees participated in Courageous Conversations, a program to allow employees to respectfully exchange perspectives, that ultimately contributes to a more inclusive workplace. Additionally, the Empower program is an enterprise leadership program designed to accelerate the readiness and encourage sponsorship of high performing, high potential people of color.
For more information on the Company’s human capital including our commitments, goals, initiatives and progress, as well as our employee demographics, refer to The Hartford’s Sustainability Highlight Report available on the investor relations section of the Company’s website at: https://ir.thehartford.com. The Hartford’s 2021 Sustainability Highlight Report is expected to be published prior to the Company’s annual meeting in May 2022.
AVAILABLE INFORMATION
The Company’s Internet address is www.thehartford.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available, without charge, on the investor relations section of our website, https://ir.thehartford.com, as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Reports filed with the SEC may be viewed at www.sec.gov. References in this report to our website address are provided only as a convenience and do not constitute, and should not be viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.
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Part I - Item 1A. Risk Factors
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RISK FACTORS
In deciding whether to invest in The Hartford, you should carefully consider the following risks, any of which could have a material adverse effect on our business, financial condition, results of operations or liquidity and could also impact the trading 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, cause the emergence or exacerbate the effect of others. Such a combination could materially increase the severity of the impact of these risks on our business, results of operations, financial condition or liquidity.
The pandemic caused by the spread of COVID-19 could continue to impact our business and may have a material adverse impact on our business results, financial condition, results of operations and/or liquidity.
The global spread of COVID-19 has continued to cause significant market uncertainty and economic disruption. The extent to which COVID-19 continues to impact our business, financial condition, results of operations and/or liquidity will depend on future developments which are highly uncertain and cannot be easily predicted including: the potential spread of new COVID-19 variants; the effectiveness of vaccines; natural immunity and current or emerging therapeutic treatments in preventing infection, serious illness and death; the percentage of those infected who are of working age; and the strain on the health care system preventing timely treatment of chronic illnesses. Additional uncertainty exists regarding governmental, business and individual actions that have been and may continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; potential legislative, regulatory, and judicial responses to the pandemic pertaining specifically to insurance underwriting and claims; the effect on our customers and customers’ demand for our products; our ability to sell our products and our ability to use historical experience to assist our decision making in areas including underwriting, pricing, capital management and investments.
Below are several key effects of COVID-19 on the Company’s business results, financial condition, results of operations and/or liquidity:
•Insurance and Product Related Risk - The Company may continue to incur increased loss costs under insurance policies that we have written including for workers’ compensation, group life insurance, short-term disability, general liability, surety, director and officer liability, and employment practices liability, as well as property business.
In addition, the Company’s Group Benefits business has issued group life policies to employers and associations, which may continue to result in increased death claims due to claims where COVID-19 is specifically listed as the cause of death and indirect impacts of the pandemic such as causes of death due to patients deferring regular treatments of chronic conditions (together, referred to as "excess mortality"). We may also continue to experience higher short-term disability and paid family leave claims from employees and covered individuals who have been affected by COVID-19.
Under general liability or umbrella policies, we may have exposure to increased claims for indemnification from our insureds who may be found liable for negligently having exposed third parties to COVID-19 at a place of business, home or other premise. In our commercial surety lines, there is the potential for elevated frequency and severity due to an increase in the number of bankruptcies, especially in small businesses and impacted industries such as hospitality, entertainment and transportation. In construction surety, there is the potential for elevated losses if contractors experience project shutdowns or payment delays, which could negatively impact their cash flows, or result in disruptions in their supply chains, labor shortages or inflation in the cost of materials. We may also have increased allegations under director and officer and employment practices liability policies for inadequate disclosures, mismanagement of resources, and hiring/lay off actions relating to COVID-19.
Nearly all of our property insurance policies require direct physical loss or damage to property and contain standard exclusions that we believe preclude coverage for COVID-19 related claims, and the vast majority of such policies contain exclusions for virus-related losses. Nevertheless, the Company and certain of its writing companies have been served as defendants in lawsuits seeking insurance coverage under commercial insurance policies for alleged losses resulting from the shutdown or suspension of our insureds’ businesses due to the spread of COVID-19. While the Company and its subsidiaries deny the allegations and are defending vigorously and while almost none of the plaintiffs have submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss, it is possible that adverse outcomes, if any, in the aggregate, could have a material adverse effect on the Company’s consolidated operating results.
•Regulatory/Legal Risk - There could be legal and regulatory responses to concerns about COVID-19 and related public health issues that will impact our business, including the possible extension of insurance coverage beyond our policy language, such as for business interruption, civil authority and other claims. Further, policyholders may elect to litigate coverage issues which would lead to increased costs to the Company. For additional information on legislative and regulatory risks,
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see Part I, Item 2, MD&A - Capital Resources and Liquidity, Contingencies, Legislative and Regulatory Developments.
•Recessionary and other Global Economic Risk - If vaccines and other treatments are not effective at preventing serious illness or death from any new COVID-19 variants that arise, governments may reinstitute containment efforts, including curtailing access to businesses, including many of the Company’s insureds. In addition, disruption of the supply chain or other factors caused by the pandemic could result in an economic downturn and, as a result, potentially increase policy lapses and non-renewals and reduce demand for new business. In an economic downturn, employers may reduce work forces, resulting in lower premiums for the Company’s workers’ compensation and group benefit products. As such, the continuation of the COVID-19 pandemic and resulting economic stress could reduce earned premiums.
In addition, in an economic downturn or in periods of a decline in real estate valuations, the Company could experience credit losses on various asset balances, including receivables and the principal amount of various invested assets, including fixed maturities and mortgage loans. In addition to credit losses on invested assets, The Company could experience declines in the value of available for sale debt securities if credit spreads were to widen significantly, which would reduce stockholders’ equity. In addition, disruption in equity markets could result in net realized or unrealized losses on our equity securities carried at fair value or reduce net investment income in future periods from our non-fixed income investment portfolio, including from private equity, hedge fund and real estate partnership investments. The Company could also experience higher reinsurance costs and/or more limited availability of reinsurance coverage. Reinsurance treaties renewed by the Company subsequent to July 1, 2020 exclude coverage for losses arising from communicable diseases.
Also, market volatility may cause us to change our existing hedging strategies resulting in economic loss. If markets become less liquid and/or experience lower trading volumes, it may be more difficult to value certain investment securities that we hold. Additionally, the Company may determine that an impairment has occurred when assessing its goodwill and other intangible assets, which would result in reduced earnings in the period that the impairment is recorded.
•Capital and Liquidity Risk - We may also experience capital and liquidity pressures including the need to provide additional capital to certain insurance subsidiaries, reductions in the amount of available dividend capacity from our subsidiaries and the need to post more collateral due to declining investment valuations or due to requirements under derivative agreements. Further, among other possible actions, we may choose not to repurchase shares and may decide to invest proceeds from maturing fixed maturities in short-term investments which earn lower returns.
•Operational Risk - The Company also faces operational risks as a result of COVID-19. The Company has limited the number of employees working in its offices, resulting in the vast majority of employees working from home as of
February 2022. While the Company has the technology in place to enable hybrid and remote arrangements and to facilitate communication with insureds, intermediaries, claimants and other third parties, there is a risk that business operations will be disrupted due to, among other things, cybersecurity attacks or data security incidents, higher than anticipated web traffic and call volumes as well as lack of sufficient broadband internet connectivity for employees and third parties working from home. In addition, if large numbers of our employees contract COVID-19 and are unable to perform their duties due to illness, it may result in periods of inadequate staffing. If any of those disruptions become significant, results could include, among other impacts, delays in settling claims, processing new business, renewals, cancellations and endorsements for insureds, billing and collecting premiums, transacting with reinsurers, contracting with and paying vendors, and disruptions to investment operations.
We rely on vendors, including some located overseas, for a number of services including IT development, IT maintenance support and various business processes, including, among others, certain claims administration, policy administration, and other operational functions. As the COVID-19 virus has affected virtually all parts of the world, our vendors could also experience disruptions to their operations and while we have contingency plans for some level of disruption, there can be no assurance that issues vendors experience with their business processes would not have a material effect on our own operations.
For all of the reasons discussed above, the global public health and economic impacts caused by the COVID 19 pandemic could have a material adverse effect on our financial condition, results of operations and liquidity.
Risks Relating to Economic, Political and Global Market Conditions
Unfavorable economic, political and global market conditions may adversely impact our business and results of operations.
The Company’s investment portfolio and insurance business are sensitive to changes in economic, political and global capital market conditions, such as the effect of a weak economy, including labor supply shortages, and changes in credit spreads, equity prices, interest rates, inflation, foreign currency exchange rates, and shifts in demand and supply of U.S. dollars. Weak economic conditions, such as high unemployment, low labor force participation, lower family income, a weak real estate market, lower business investment and lower consumer spending may adversely affect the demand for insurance and financial products and lower the Company’s profitability in some cases. In addition, political instability, politically motivated violence or civil unrest, may increase the frequency and severity of insured losses. In addition, a deterioration in global economic
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Part I - Item 1A. Risk Factors
conditions and/or geopolitical conditions, including due to military action, trade wars, tariffs or other actions with respect to international trade agreements or policies, has the potential to, among other things, reduce demand for our products, reduce exposures we insure, drive higher inflation that could increase the Company’s loss costs and result in increased incidence of claims, particularly for workers’ compensation and disability claims. The Company’s investment portfolio includes limited partnerships and other alternative investments and equity securities for which changes in value are reported in earnings. These investments may be adversely impacted by economic volatility, including real estate market deterioration, which could impact our net investment returns and result in an adverse impact on operating results.
Below are several key factors impacted by changes in economic, political, and global market conditions and their potential effect on the Company’s business and results of operations:
•Credit Spread Risk - Credit spread exposure is reflected in the market prices of fixed income instruments where lower rated securities generally trade at a higher credit spread. If issuer credit spreads increase or widen, the market value of our investment portfolio may decline. If the credit spread widening is significant and occurs over an extended period of time, the Company may recognize credit losses, resulting in decreased earnings. If credit spreads tighten significantly, the Company’s net investment income associated with new purchases of fixed maturities may be reduced. In addition, the value of credit derivatives under which the Company assumes exposure or purchases protection are impacted by changes in credit spreads, with losses occurring when credit spreads widen for assumed exposure or when credit spreads tighten if credit protection has been purchased.
•Equity Markets Risk - A decline in equity markets may result in net realized or unrealized losses on our equity securities carried at fair value or reduce net investment income in future periods from our non-fixed income investment portfolio, including from private equity, hedge fund and real estate partnership investments, and lower earnings from Hartford Funds where fee income is earned based upon the fair value of the assets under management. Equity markets are unpredictable. In the past few years, equity markets have been volatile, which could be indicative of a greater risk of a decline. For additional information on equity market sensitivity, see Part II, Item 7, MD&A - Enterprise Risk Management, Financial Risk- Equity Risk.
•Interest Rate Risk - Global economic conditions may result in the persistence of a low interest rate environment which would continue to pressure our net investment income and could result in lower margins on certain products. For additional information on interest rate sensitivity, see Part II, Item 7, MD&A - Enterprise Risk Management, Financial Risk - Interest Rate Risk
New and renewal business for our property and casualty and group benefits products is priced considering prevailing interest rates. As interest rates decline, in order to achieve the same economic return, we would have to increase product prices to offset the lower anticipated investment income earned on invested premiums. Conversely, as interest rates rise, pricing targets will tend to decrease to
reflect higher anticipated investment income. Our ability to effectively react to such changes in interest rates may affect our competitiveness in the marketplace, and in turn, could reduce written premium and earnings. For additional information on interest rate sensitivity, see Part II, Item 7, MD&A - Enterprise Risk Management, Financial Risk - Interest Rate Risk.
In addition, due to the long-term nature of the liabilities within our Group Benefits operations, particularly for long-term disability, declines in interest rates over an extended period of time would result in our having to reinvest at lower yields. On the other hand, a rise in interest rates, in the absence of other countervailing changes, would reduce the market value of our investment portfolio. A decline in market value of invested assets due to an increase in interest rates could also limit our ability to realize tax benefits from recognized capital losses.
•Inflation Risk - Inflation is a risk to our property and casualty business because, in many cases, claims are paid out many years after a policy is written and premium is collected for the risk. Supply chain issues arising from conditions due to the pandemic have contributed to inflation in the cost of labor and repairs for insurance claims paid to insureds and third parties. A greater than expected increase in inflation related to the cost of medical services and repairs over the claim settlement period can result in higher claim costs than what was estimated at the time the policy was written. Inflation can also affect consumer spending and business investment which can reduce the demand for our products and services. In addition, sustained inflation may result in an increase in interest rates, which would result in a reduction in the fair value of our investment portfolio.
•Changes in the Labor Market - Evolving labor market conditions, including increased competition for talent, could make it difficult to hire and retain employees and could increase compensation and benefit expense. New technologies may lead to changes in skill sets needed from the workforce, resulting in difficulty in attracting, developing and retaining employees. If insured businesses cannot hire enough qualified people to sell products and services to customers, economic activity may be depressed and lower insured exposure, hindering the Company's growth.
•Foreign Currency Exchange Rate - Changes in foreign currency exchange rates may impact our non-U.S. dollar denominated investments and foreign subsidiaries. As the Company has expanded its international operations, exposure to exchange rate fluctuations has increased. We hold cash and fixed maturity securities denominated in foreign currencies, including British Pounds and Canadian dollars, among others, and also have other assets and liabilities denominated in foreign currencies such as premiums receivable and loss reserves. While the Company predominately uses asset-liability matching, including the use of derivatives, to hedge certain of these exposures to fluctuations in foreign currency exchange rates, these actions do not eliminate the risk that
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Part I - Item 1A. Risk Factors
changes in the exchange rates of foreign currencies to the U.S. dollar could result in financial loss to the Company, including realized or unrealized losses resulting from currency revaluation and increases to regulatory capital requirements for foreign subsidiaries that have net assets that are not denominated in their local currency. For additional information on foreign exchange risk, see Part II, Item 7, MD&A - Enterprise Risk Management, Financial Risk.
Concentration of our investment portfolio increases the potential for significant losses.
The concentration of our investment portfolios in any particular industry, collateral type, group of related industries or geographic sector could have an adverse effect on our investment portfolios and consequently on our business, financial condition, results of operations, and liquidity. Events or developments that have a negative impact on any particular industry, collateral type, group of related industries or geographic region may have a greater adverse effect on our investment portfolio to the extent that the portfolio is concentrated rather than diversified.
Further, if issuers of securities or loans we hold are acquired, merge or otherwise consolidate with other issuers of securities or loans held by the Company, our investment portfolio’s credit concentration risk to issuers could increase for a period of time, until the Company is able to sell securities to get back in compliance with the established investment credit policies.
Changing climate and weather patterns may adversely affect our business, financial condition and results of operation.
Climate change presents risks to us as an insurer, investor and employer. Climate models indicate that rising temperatures will likely result in rising sea levels over the decades to come and may increase the frequency and intensity of natural catastrophes and severe weather events. Extreme weather events such as abnormally high temperatures may result in increased losses associated with our property, automobile, workers’ compensation and group benefits businesses. Changing climate patterns may also increase the duration, frequency and intensity of heat/cold waves, which may result in increased claims for property damage, business interruption and losses under workers’ compensation, group disability and group life coverages. Precipitation patterns across the U.S. are projected to change, which if realized, may increase risks of flash floods and wildfires. If third parties assert that climate change-related risks and damages are caused by insured businesses, or arise from alleged mismanagement at insured businesses, we may experience increased claims under general liability and management liability policies. Additionally, there may be an impact on the demand, price and availability of automobile and homeowners insurance, and there is a risk of higher reinsurance costs or more limited availability of reinsurance coverage. Changes in climate conditions may also cause our underlying modeling data to not adequately reflect frequency and severity, limiting our ability to effectively evaluate and manage risks of catastrophes and severe weather events. Among other impacts, this could result in not charging enough premiums or not obtaining timely state approvals for rate increases to cover the risks we insure. We may also experience
significant interruptions to the Company’s systems and operations that hinder our ability to sell and service business, manage claims and operate our business.
In addition, climate change-related risks may adversely impact the value of the investments that we hold, resulting in potential realized or unrealized losses on our invested assets. Our decision to invest in certain securities, loans, or other investments may also be impacted by changes in climate patterns due to:
•changes in supply/demand for traditional sources of energy (e.g., coal, oil, natural gas);
•advances in low-carbon technology and renewable energy development;
•effects of extreme weather events on the physical and operational exposure of industries and issuers; and
•internal investment guidelines and policies related to the global energy transition.
The effects of climate change could also lead to increased credit risk of other counterparties we transact business with, including reinsurers. Rising sea levels may lead to decreases in real estate values in coastal areas, reducing premium and demand for commercial property and homeowners insurance and adversely impacting the value of our real estate-related investments. Additionally, government policies or regulations to slow climate change, such as emission controls or technology mandates, may have an adverse impact on sectors such as utilities, transportation and manufacturing, affecting demand for our products and our investments in these sectors. Moreover, regulators may undertake actions to minimize the effects of climate change on consumers, which could affect coverage provided under insurance contracts and administrative process.
These emerging regulatory initiatives, or other climate-related policies we adopt, may result in non-renewal of business or not underwriting or investing in certain industry sectors.
Because there is significant variability associated with the impacts of climate change, we cannot predict how physical, legal, regulatory and social responses may impact our business.
The discontinuance of LIBOR may adversely affect the value of certain investments we hold and floating rate securities we have issued, and any other assets or liabilities whose value may be tied to LIBOR.
LIBOR is an indicative measure of the average interest rate at which major global banks could borrow from one another. LIBOR is used as a benchmark or reference rate in certain derivatives and floating rate fixed maturities that are part of our investment portfolio, as well as two classes of junior subordinated debentures that we have issued and are currently outstanding.
In July 2017, the U.K. Financial Conduct Authority ("FCA") announced that by the end of 2021 it intended to stop persuading or compelling banks to report information used to set LIBOR. Since 2017, actions by regulators have resulted in efforts to establish alternative reference rates to LIBOR in several major currencies. The Alternative Reference Rate
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Part I - Item 1A. Risk Factors
Committee, a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Funding Rate (“SOFR”) as its preferred alternative rate for U.S. dollar LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. The Federal Reserve Bank of New York began publishing daily SOFR in April 2018. Development and adoption of broadly accepted methodologies for transitioning from LIBOR, an unsecured forward-looking rate, to SOFR, a secured rate based on historical transactions, is ongoing.
On March 5, 2021, the FCA announced that publication of certain LIBOR settings in currencies other than U.S. dollars would cease immediately after December 31, 2021, and that publication of U.S. dollar LIBOR on a representative basis would cease for the one-week and two-month settings immediately after December 31, 2021 and for the remaining U.S. dollar settings immediately after June 30, 2023. Although the most widely used settings of U.S. dollar LIBOR continue to be published and used in existing transactions, regulatory pressures and other factors have resulted in a general decline in new U.S. dollar LIBOR-based transactions.
The Company continues to monitor and assess the potential impacts of the discontinuation of LIBOR, which will vary depending on (1) existing contract language to determine a LIBOR replacement rate, referred to as “fallback provisions”, in individual contracts, (2) the effects of certain legislation providing for LIBOR replacement rates or otherwise affecting contractual fallback provisions and (3) whether, how, and when industry participants develop and widely adopt new reference rates and fallback provisions for both existing and new products or instruments. At this time, it is not possible to predict how markets will respond to these new rates and the effect that the discontinuation of LIBOR might have on new or existing financial instruments. If LIBOR ceases to exist or is found by regulators to no longer be representative, outstanding contracts with interest rates tied to LIBOR may be adversely affected and impact our results of operations through a reduction in value of some of our LIBOR referenced floating rate investments, an increase in the interest we pay on our outstanding junior subordinated debentures, or an adverse impact to hedge effectiveness of derivatives or availability of hedge accounting. Additionally, any discontinuation of or transition from LIBOR may impact pricing, valuation and risk analytic processes and hedging strategies.
For additional information on the Company’s financial instruments that are tied to LIBOR, see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, Enterprise Risk Management, Financial Risk.
Insurance Industry and Product Related Risks
Unfavorable loss development may adversely affect our business, financial condition, results of operations and liquidity.
We establish property and casualty loss reserves to cover our estimated liability for the payment of all unpaid losses and loss expenses incurred with respect to premiums earned on our policies. Loss reserves are estimates of what we expect the ultimate settlement and administration of claims will cost, less what has been paid to date. These estimates are based upon actuarial projections and on our assessment of currently available data, as well as estimates of claims severity and frequency, legal theories of liability and other factors. For risks due to evolving changes in social, economic and environmental conditions, see the Risk Factor, “Unexpected and unintended claim and coverage issues under our insurance contracts may adversely impact our financial performance.”
Loss reserve estimates are refined periodically as experience develops and claims are reported and settled, potentially resulting in increases to our reserves. Increases in reserves would be recognized as an expense during the periods in which these determinations are made, thereby adversely affecting our results of operations for those periods. In addition, since reserve estimates of aggregate loss costs for prior years are used in pricing our insurance products, inaccurate reserves can lead to our products not being priced adequately to cover actual losses and related loss expenses in order to generate a profit.
We continue to receive A&E claims, the vast majority of which relate to policies written before 1986. Estimating the ultimate gross reserves needed for unpaid losses and related expenses for asbestos and environmental claims is particularly difficult for insurers and reinsurers. The actuarial tools and other techniques used to estimate the ultimate cost of more traditional insurance exposures tend to be less precise when used to estimate reserves for some A&E exposures.
Moreover, the assumptions used to estimate gross reserves for A&E claims, such as claim frequency over time, average severity, and how various policy provisions will be interpreted, are subject to significant uncertainty. It is also not possible to predict changes in the legal and legislative environment and their effect on the future development of A&E claims. These factors, among others, make the variability of gross reserves estimates for these longer-tailed exposures significantly greater than for other more traditional exposures.
Effective December 31, 2016, the Company entered into an agreement with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc. (“Berkshire”) whereby the Company is reinsured for subsequent adverse development on substantially all of its net A&E reserves up to an aggregate net limit of $1.5 billion. We remain directly liable to claimants and if the reinsurer does not fulfill its obligations under the agreement or if future adverse development exceeds the $1.5 billion aggregate limit, we may need to increase our recorded net reserves which could have a material adverse effect on our financial condition, results of operations and liquidity. For
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Part I - Item 1A. Risk Factors
additional information related to risks associated with the adverse development cover, see Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
We are vulnerable to losses from catastrophes, both natural and man-made.
Our insurance operations expose us to claims arising out of catastrophes. Catastrophes can be caused by various unpredictable natural events, including, among others, earthquakes, hurricanes, hailstorms, severe winter weather, wind storms, fires, tornadoes, and pandemics. Catastrophes can also be man-made, such as terrorist attacks, civil unrest, cyber-attacks, explosions or infrastructure failures.
The geographic distribution of our business subjects us to catastrophe exposure for events occurring in a number of areas, including, but not limited to: hurricanes in Florida, the Gulf Coast, the Northeast and the Atlantic coast regions of the United States; tornadoes and hail in the Midwest and Southeast; earthquakes in geographical regions exposed to seismic activity; wildfires in the West; and the spread of disease, which can occur throughout multiple geographic locations. We are also exposed to catastrophe losses in other parts of the world through our global specialty business. Any increases in the values and concentrations of insureds and property in these areas would increase the severity of catastrophic events in the future. In addition, changes in climate and/or weather patterns may increase the frequency and/or intensity of severe weather and natural catastrophe events potentially leading to increased insured losses. Potential examples include, but are not limited to:
•an increase in the frequency or intensity of wind and thunderstorm and tornado/hailstorm events due to increased convection in the atmosphere,
•more frequent and larger wildfires in certain geographies,
•higher incidence of deluge flooding, and
•the potential for an increase in frequency and severity of hurricane events.
Insufficient incorporation of climatic trends into widely used catastrophe models and internal tools to assess risk from natural catastrophe perils could lead to ineffective evaluation and management of catastrophe risk. For a further discussion of climate-related risks, see the above-referenced Risk Factor, “Changing climate and weather patterns may adversely affect our business, financial condition and results of operation.”
Our businesses also have exposure to global or nationally occurring pandemics caused by highly infectious and potentially fatal diseases spread through human, animal or plant populations.
In the event of one or more catastrophes, policyholders may be unable to meet their obligations to pay premiums on our insurance policies. Further, our liquidity could be constrained by a catastrophe, or multiple catastrophes. In addition, in part because accounting rules do not permit insurers to reserve for such catastrophic events until they occur, claims from catastrophic events could have a material adverse effect on our business, financial condition, results of operations or liquidity. The amount we charge for catastrophe exposure may be
inadequate if the frequency or severity of catastrophe losses changes over time or if the models we use to estimate the exposure prove inadequate. In addition, regulators or legislators could limit our ability to charge adequate pricing for catastrophe exposures or shift more responsibility for covering risk.
Terrorism is an example of a significant man-made caused potential catastrophe. Private sector catastrophe reinsurance is limited and generally unavailable for terrorism losses caused by attacks with nuclear, biological, chemical or radiological weapons. In addition, workers' compensation policies generally do not have exclusions or limitations for terrorism losses. Reinsurance coverage from the federal government under the Terrorism Risk Insurance Program (the "Program") Reauthorization Act of 2019 (“TRIPRA 2019”) is also limited and only applies for certified acts of terrorism that exceed a certain threshold of industry losses. Accordingly, the effects of a terrorist attack in the geographic areas we serve may result in claims and related losses for which we do not have adequate reinsurance. TRIPRA 2019 also requires that the federal government create the following reports, which could lead to additional legislation or regulation: (1) Treasury Department to include in its biennial report on the effectiveness of the Program an evaluation of the availability and affordability of terrorism risk insurance for places of worship; and (2) Government Accountability Office report to analyze and address the vulnerabilities and potential costs of cyber terrorism, to assess adequacy of coverage under the Program, and to make recommendations for future legislative changes to address evolving cyber terrorism risks. Further, the continued threat of terrorism and the occurrence of terrorist attacks, as well as heightened security measures and military action in response to these threats and attacks or other geopolitical or military crises, may cause significant volatility in global financial markets, disruptions to commerce and reduced economic activity. These consequences could have an adverse effect on the value of the assets in our investment portfolio. Terrorist attacks also could disrupt our operation centers. In addition, TRIPRA 2019 expires on December 31, 2027 and if the U.S. Congress does not reauthorize the program or significantly reduces the government’s share of covered terrorism losses, the Company’s exposure to terrorism losses could increase materially unless it can purchase alternative terrorism reinsurance protection in the private markets at affordable prices or takes actions to materially reduce its exposure in lines of business subject to terrorism risk. For a further discussion of TRIPRA, see Part II, Item 7, MD&A - Enterprise Risk Management - Insurance Risk Management, Reinsurance as a Risk Management Strategy.
Cyber risk exposure exists through stand-alone cyber policies as well as cyber coverage endorsements on some property, general liability, management liability and directors and officers policies. Increasing frequency of cyber attacks and the evolving nature of cyber risk taking place across the globe may potentially lead to increased insured losses across the industry and for the businesses we insure. Our insureds may be increasingly exposed to cyber-related attacks with insured losses to property (including data and systems), breach of data, ransom payments and business interruption.
As a result, it is possible that any, or a combination of all, of these factors related to a catastrophe, or multiple catastrophes, whether natural or man-made, can have a material adverse
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effect on our business, financial condition, results of operations or liquidity.
Pricing for our products is subject to our ability to adequately assess risks, estimate losses and comply with state and international insurance regulations.
We seek to price our property and casualty and group benefits insurance policies such that insurance premiums and future net investment income earned on premiums received will provide for an acceptable profit in excess of underwriting expenses and the cost of paying claims. Pricing adequacy depends on a number of factors, including proper evaluation of underwriting risks, the ability to project future claim costs, our expense levels, net investment income realized, our response to rate actions taken by competitors, legal and regulatory developments, including in international markets, and the ability to obtain regulatory approval for rate changes.
State insurance departments regulate many of the premium rates we charge and also propose rate changes for the benefit of the property and casualty consumer at the expense of the insurer, which may not allow us to reach targeted levels of profitability. Moreover, regulators may seek to prohibit or constrain the use of certain underwriting and rating factors, which may affect our ability to price risks. In addition to regulating rates, certain states have enacted laws that require a property and casualty insurer to participate in assigned risk plans, reinsurance facilities, joint underwriting associations and other residual market plans. State regulators also require that an insurer offer property and casualty coverage to all consumers and often restrict an insurer's ability to charge the price it might otherwise charge or restrict an insurer's ability to offer or enforce specific policy deductibles. In these markets, we may be compelled to underwrite significant amounts of business at lower than desired rates or accept additional risk not contemplated in our existing rates, participate in the operating losses of residual market plans or pay assessments to fund operating deficits of state-sponsored funds, possibly leading to lower returns on equity. The laws and regulations of many states also limit an insurer's ability to withdraw from one or more lines of insurance in the state, except pursuant to a plan that is approved by the state's insurance department. Additionally, certain states require insurers to participate in guaranty funds for impaired or insolvent insurance companies. These funds periodically assess losses against all insurance companies doing business in the state. Any of these factors could have a material adverse effect on our business, financial condition, results of operations or liquidity. For more on international regulatory risks, see the Risk Factor, “Regulatory and legislative developments could have a material adverse impact on our business, financial condition, results of operations and liquidity.”
Additionally, the property and casualty and group benefits insurance markets have been historically cyclical, experiencing periods characterized by relatively high levels of price competition, less restrictive underwriting standards, more expansive coverage offerings, multi-year rate guarantees and declining premium rates, followed by periods of relatively low levels of competition, more selective underwriting standards, more coverage restrictions and increasing premium rates. In all of our property and casualty and group benefits insurance product lines, there is a risk that the premium we charge may
ultimately prove to be inadequate as reported losses emerge. In addition, there is a risk that regulatory constraints, price competition or incorrect pricing assumptions could prevent us from achieving targeted returns. Inadequate pricing could have a material adverse effect on our results of operations and financial condition.
Competitive activity, use of predictive analytics, or technological changes may adversely affect our market share, demand for our products, or our financial results.
The industries in which we operate are highly competitive. Our principal competitors are other property and casualty insurers, group benefits providers and providers of mutual funds and exchange-traded products. Competitors may expand their risk appetites in products and services where The Hartford currently enjoys a competitive advantage. Larger competitors with more capital and new entrants to the market could result in increased pricing pressures on a number of our products and services and may harm our ability to maintain or increase our profitability. For example, larger competitors, including those formed through consolidation or who may acquire new entrants to the market, such as insurtech firms, may have lower operating costs and an ability to absorb greater risk while maintaining their financial strength ratings, thereby allowing them to price their products more competitively. In addition, a number of insurers are making use of predictive analytics to, among other things, improve pricing accuracy, be more targeted in marketing, strengthen customer relationships and provide more customized loss prevention services. If they are able to use predictive analytics and other data and/or adopt innovative new technologies more effectively than we are, it may give them a competitive advantage. Because of the highly competitive nature of the industries we compete in, there can be no assurance that we will continue to compete effectively with our industry rivals, or that competitive pressure will not have a material adverse effect on our business and results of operations.
Our business could also be affected by technological changes, including further advancements in automotive safety features, the development of autonomous or “self-driving” vehicles, and platforms that facilitate ride sharing. These technologies could impact the frequency or severity of losses, disrupt the demand for certain of our products, or reduce the size of the automobile insurance market as a whole. The risks we insure are also affected by the increased use of technology in homes and businesses, including technology used in heating, ventilation, air conditioning and security systems and the introduction of more automated loss control measures. Increased use of advanced analytics and automation in the workplace could potentially affect the demand for workers' compensation insurance products over time. In addition, our business may be disrupted due to failures of accelerated technological changes, including our automation of minimally complex tasks, which may adversely impact our business and results of operations. While there is substantial uncertainty about the timing, penetration and reliability of such technologies, and the legal frameworks that may apply, such as to autonomous vehicles, any such impacts could have a material adverse effect on our business and results of operations.
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We may experience difficulty in marketing and providing insurance products and investment advisory services through distribution channels and advisory firms.
We distribute our insurance products, mutual funds and ETPs through a variety of distribution channels and financial intermediaries, including brokers, independent agents, wholesale agents, reinsurance brokers, broker-dealers, banks, registered investment advisors, affinity partners, our own internal sales force and other third-party organizations. In some areas of our business, we generate a significant portion of our business through third-party arrangements. For example, we market personal lines products in large part through an exclusive licensing arrangement with AARP that continues through December 31, 2032. Our ability to distribute products through the AARP program may be adversely impacted by membership levels and the pace of membership growth. In addition, the independent agent and broker distribution channel is consolidating which could result in a larger proportion of written premium being concentrated among fewer agents and brokers, potentially increasing our cost of acquiring new business. While we periodically seek to renew or extend third party arrangements, there can be no assurance that our relationship with these third parties will continue or that the economics of these relationships won't change to make them less financially attractive to the Company. An interruption in our relationship with certain of these third parties could materially affect our ability to market our products and could have a material adverse effect on our business, financial condition, results of operations and liquidity.
Unexpected and unintended claim and coverage issues under our insurance contracts may adversely impact our financial performance.
Changes in industry practices and in legal, judicial, social and other environmental conditions, technological advances or fraudulent activities, may require us to pay claims we did not intend to cover when we wrote the policies. Social, economic, political and environmental issues, including rising income inequality, climate change, prescription drug use and addiction, exposures to new substances or those substances previously considered to be safe and found to have latent exposure, along with the use of social media to proliferate messaging around such issues, has expanded the theories for reporting claims, which may increase our claims administration and/or litigation costs. State and local governments' increased efforts aimed to respond to the costs and concerns associated with these types of issues, may also lead to expansive, new theories for reporting claims or may lead to the passage of "reviver" statutes that extend the statute of limitations for the reporting of these claims, including statutes passed in certain states with respect to sexual molestation and sexual abuse claims. In addition, these and other social, economic, political and environmental issues may either extend coverage beyond our underwriting intent or increase the frequency or severity of claims. Some of these changes, advances or activities may not become apparent until some time after we have issued insurance contracts that are affected by the changes, advances or activities and/or we may be unable to compensate for such losses through future pricing
and underwriting. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued, and this liability may have a material adverse effect on our business, financial condition, results of operations and liquidity at the time it becomes known.
Financial Strength, Credit and Counterparty Risks
Downgrades in our financial strength or credit ratings may make our products less attractive, increase our cost of capital and inhibit our ability to refinance our debt.
Financial strength and credit ratings are important in establishing the competitive position of insurance companies. Rating agencies assign ratings based upon several factors. While most of the factors relate to the rated company, others relate to the views of the rating agency (including its assessment of the strategic importance of the rated company to the insurance group), general economic conditions, and circumstances outside the rated company's control. In addition, rating agencies may employ different models and formulas to assess the financial strength of a rated company, and from time to time rating agencies have altered these models. Changes to the models or factors used by the rating agencies to assign ratings could adversely impact a rating agency's judgment of its internal rating and the publicly issued rating it assigns us.
Our financial strength ratings, which are intended to measure our ability to meet policyholder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness. A downgrade or a potential downgrade in the rating of our financial strength or of one of our principal insurance subsidiaries could affect our competitive position and reduce future sales of our products.
Our credit ratings also affect our cost of capital. A downgrade or a 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 downgrades on derivative instruments, including potential collateral calls, see Part II, Item 7, MD&A - Capital Resources and Liquidity - Derivative Commitments.
The amount of capital that we must hold to maintain our financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of our control.
We conduct the vast majority of our business through licensed insurance company subsidiaries. In the United States, statutory accounting standards and statutory capital and reserve requirements for these entities are prescribed by the applicable
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insurance regulators and the NAIC. The minimum capital we must hold is based on risk-based capital (“RBC”) formulas for both life and property and casualty companies. The RBC formula for life companies is applicable to our group benefits business and establishes capital requirements relating to insurance, business, asset, credit, interest rate and off-balance sheet risks. The RBC formula for property and casualty companies sets required statutory surplus levels based on underwriting, asset and credit and off-balance sheet risks.
Countries in which our international insurance subsidiaries are incorporated or deemed commercially domiciled are subject to regulatory requirements as defined by the regulatory jurisdiction, including Solvency II. In addition, our Lloyd’s member company must maintain required Funds at Lloyd's ("FAL") to meet the capital requirements of its syndicate. The FAL is determined based on the syndicate’s Solvency Capital Requirement (“SCR”) under the Solvency II capital adequacy model plus an economic capital assessment determined by the Lloyd’s Franchise Board (which is responsible for the day-to-day management of the Lloyd's market).
In any particular year, statutory surplus amounts, RBC ratios, FAL and SCR may increase or decrease depending on a variety of factors, some of which are outside the Company's control, including:
•the amount of statutory income or losses generated by our insurance subsidiaries;
•the amount of additional capital our insurance subsidiaries must hold to support business growth;
•the amount of dividends or distributions paid to the holding company;
•changes in equity market levels;
•the value of certain fixed-income and equity securities in our investment portfolio;
•the value of certain derivative instruments;
•changes in interest rates;
•admissibility of deferred tax assets;
•changes to the regulatory capital formulas; and
•regulatory changes to accounting guidance for determining capital adequacy.
Among other factors, rating agencies consider the level of statutory capital and surplus of our U.S. insurance subsidiaries as well as the level of a measure of Generally Accepted Accounting Principles ("GAAP") capital held by the Company in determining the Company's financial strength and credit ratings. Rating agencies may implement changes to their capital formulas that have the effect of increasing the amount of capital we must hold in order to maintain our current ratings. If our capital resources are insufficient to maintain a particular rating by one or more rating agencies, we may need to raise capital through public or private equity or debt financing. If we were not to raise additional capital, either at our discretion or because we were unable to do so, our financial strength and credit ratings might be downgraded by one or more rating agencies.
Losses due to nonperformance or defaults by counterparties can have a material adverse effect on the value of our investments, reduce our profitability or sources of liquidity.
We have credit risk with counterparties associated with investments, derivatives, premiums receivable, reinsurance recoverables and indemnifications provided by third parties in connection with previous dispositions. Among others, our counterparties include issuers of fixed maturity and equity securities we hold, borrowers of mortgage loans we hold, customers, trading counterparties, counterparties under swaps and other derivative contracts, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries and guarantors. These counterparties may default on their obligations to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud, government intervention and other reasons. In addition, for exchange-traded derivatives, such as futures, options and "cleared" over-the-counter derivatives, the Company is generally exposed to the credit risk of the relevant central counterparty clearing house. Defaults by these counterparties on their obligations to us could have a material adverse effect on the value of our investments, financial condition, results of operations and liquidity. Additionally, if the underlying assets supporting the structured securities we invest in default on their payment obligations, our securities will incur losses.
The availability of reinsurance and our ability to recover under reinsurance contracts may not be sufficient to protect us against losses.
As an insurer, we frequently use reinsurance to reduce the effect of losses that may arise from, among other things, catastrophes and other risks that can cause unfavorable results of operations. In addition, our assumed reinsurance business purchases retrocessional coverage for a portion of the risks it assumes. Under these reinsurance arrangements, other insurers assume a portion of our losses and related expenses; however, we remain liable as the direct insurer on all risks reinsured. Consequently, ceded reinsurance arrangements do not eliminate our obligation to pay claims, and we are subject to our reinsurers' credit risk with respect to our ability to recover amounts due from them. The inability or unwillingness of any reinsurer or retrocessionaire to meet its financial obligations to us, including the impact of any insolvency or rehabilitation proceedings involving a reinsurer or retrocessionaire that could affect the Company's access to collateral held in trust, could have a material adverse effect on our financial condition, results of operations and liquidity.
In addition, should the availability and cost of reinsurance change materially, we may have to pay higher reinsurance costs, accept an increase in our net liability exposure, reduce the amount of business we write, or access to the extent possible other alternatives to reinsurance, such as use of the capital markets. Further, due to the inherent uncertainties as to collection and the length of time before reinsurance recoverables will be due, it is possible that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be required, which could have a material adverse effect on the Company’s consolidated results of operations or liquidity in a particular quarterly or annual period.
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Our ability to declare and pay dividends is subject to limitations.
The payment of future dividends on our capital stock is subject to the discretion of our board of directors, which considers, among other factors, our operating results, overall financial condition, credit-risk considerations and capital requirements, as well as general business and market conditions. Our board of directors may only declare such dividends out of funds legally available for such payments. Moreover, our common stockholders are subject to the prior dividend rights of any holders of depositary shares representing preferred stock then outstanding. The terms of our outstanding junior subordinated debt securities prohibit us from declaring or paying any dividends or distributions on our capital stock or purchasing, acquiring, or making a liquidation payment on such stock, if we have given notice of our election to defer interest payments and the related deferral period has not yet commenced or a deferral period is continuing.
Moreover, as a holding company that is separate and distinct from our insurance subsidiaries, we have no significant business operations of our own. Therefore, we rely on dividends from our insurance company subsidiaries and other subsidiaries as the principal source of cash flow to meet our obligations. Subsidiary dividends fund payments on our debt securities and the payment of dividends to stockholders on our capital stock. Connecticut state laws and certain other U.S. jurisdictions in which we operate limit the payment of dividends and require notice to and approval by the state insurance commissioner for the declaration or payment of dividends above certain levels. The laws and regulations of the countries in which our international insurance subsidiaries are incorporated or deemed commercially domiciled, as well as requirements of the Council of Lloyd’s, also impose limitations on the payment of dividends which, in some instances, are more restrictive. Dividends paid from our insurance subsidiaries are further dependent on their cash requirements. In addition, in the event of liquidation or reorganization of a subsidiary, prior claims of a subsidiary’s creditors may take precedence over the holding company’s right to a dividend or distribution from the subsidiary except to the extent that the holding company may be a creditor of that subsidiary. For further discussion on dividends from insurance subsidiaries, see Part II, Item 7, MD&A - Capital Resources & Liquidity.
Risks Relating to Estimates, Assumptions and Valuations
Actual results could materially differ from the analytical models we use to assist our decision making in key areas such as underwriting, pricing, capital management, reserving, investments, reinsurance and catastrophe risks.
We use models to help make decisions related to, among other things, underwriting, pricing, capital allocation, reserving, investments, reinsurance, and catastrophe risk. Both proprietary
and third party models we use incorporate numerous assumptions and forecasts about the future level and variability of interest rates, capital requirements, loss frequency and severity, currency exchange rates, policyholder behavior, equity markets and inflation, among others. The models are subject to the inherent limitations of any statistical analysis as the historical internal and industry data and assumptions used in the models may not be indicative of what will happen in the future. Consequently, actual results may differ materially from our modeled results. The profitability and financial condition of the Company substantially depends on the extent to which our actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our products or our estimates of the risks we are exposed to prove to be materially inaccurate, our business, financial condition, results of operations or liquidity may be adversely affected.
The valuation of our securities and investments and the determination of allowances and credit losses are highly subjective and based on methodologies, estimations and assumptions that are subject to differing interpretations and market conditions.
Estimated fair values of the Company’s investments are based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. During periods of market disruption, it may be difficult to value certain of our securities if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the financial environment. In addition, there may be certain securities whose fair value is based on one or more unobservable inputs, even during normal market conditions. As a result, the determination of the fair values of these securities may include inputs and assumptions that require more estimation and management judgment and the use of complex valuation methodologies. These fair values may differ materially from the value at which the investments may be ultimately sold. Further, 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. Decreases in value could have a material adverse effect on our business, results of operations, financial condition and liquidity.
Similarly, management’s decision on whether to record an allowance for credit losses is subject to significant judgments and assumptions regarding changes in general economic conditions, the issuer's financial condition or future recovery prospects, estimated future cash flows, the expected recovery period and the accuracy of third party information used in internal assessments. As a result, management’s evaluations and assessments are highly judgmental and its projections of future cash flows over the life of certain securities may ultimately prove incorrect as facts and circumstances change.
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If our businesses do not perform well, we may be required to recognize an impairment of our goodwill.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill at least annually for impairment. Impairment testing is performed based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. The reporting unit is the operating segment or a business one level below an operating segment if discrete financial information is prepared and regularly reviewed by management at that level. The fair value of the reporting unit could decrease if new business, customer retention, profitability or other drivers of performance differ from expectations. If it is determined that the goodwill has been impaired, the Company must write down the goodwill by the amount of the impairment, with a corresponding charge to net income (loss). These write downs could have a material adverse effect on our results of operations or financial condition.
Strategic and Operational Risks
Our businesses may suffer and we may incur substantial costs if we are unable to access our systems and safeguard the security of our data in the event of a disaster, cyber breach or other information security incident.
We use technology to process, store, retrieve, evaluate and utilize customer and company data and information. Our information technology and telecommunications systems, in turn, interface with and rely upon third-party systems. We and our third party vendors must be able to access our systems to provide insurance quotes, process premium payments, make changes to existing policies, file and pay claims, administer mutual funds, provide customer support, manage our investment portfolios, report on financial results and perform other necessary business functions.
Systems failures or outages could compromise our ability to perform these business functions in a timely manner, which could harm our ability to conduct business and hurt our relationships with our business partners and customers. In the event of a disaster such as a natural catastrophe, a pandemic, civil unrest, an industrial accident, a cyber-attack, a blackout, a terrorist attack (including conventional, nuclear, biological, chemical or radiological) or war, systems upon which we rely may be inaccessible to our employees, customers or business partners for an extended period of time. Even if our employees and business partners are able to report to work, they may be unable to perform their duties for an extended period of time if our data or systems used to conduct our business are disabled or destroyed.
Our systems have been, and will likely continue to be, subject to viruses or other malicious codes, unauthorized access, cyber-attacks (such as ransomware and denial of service), cyber frauds or other computer related penetrations. The frequency and sophistication of such threats continue to increase as well.
While, to date, The Hartford is not aware of having experienced a material breach of our cyber security systems, administrative, internal accounting and technical controls as well as other preventive actions may be insufficient to prevent physical and electronic break-ins, denial of service, cyber-attacks, business email compromises, ransomware or other security breaches to our systems or those of third parties with whom we do business. Such an event could compromise our confidential information as well as that of our clients and third parties, impede or interrupt our business operations and result in other negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and litigation and reputational damage. In addition, we routinely transmit to third parties personal, confidential and proprietary information, which may be related to employees and customers, by email and other electronic means, along with receiving and storing such information on our systems. Although we attempt to protect privileged and confidential information, we may be unable to secure the information in all events, especially with clients, vendors, service providers, counterparties and other third parties who may not have appropriate controls to protect confidential information.
Our businesses must comply with regulations to control the privacy of customer, employee and third party data, and state, federal and international regulations regarding data privacy, including the European Union General Data Protection Regulation and California Consumer Privacy Act, are becoming increasingly more onerous. A misuse or mishandling of confidential or proprietary information could result in legal liability, regulatory action and reputational harm.
Third parties, including third party administrators and cloud-based systems, are also subject to cyber-attacks and breaches of confidential information, along with the other risks outlined above, any one of which may result in our incurring substantial costs and other negative consequences, including a material adverse effect on our business, reputation, financial condition, results of operations and liquidity. While we maintain cyber liability insurance that provides both third party liability and first party insurance coverages, our insurance may not be sufficient to protect against all loss.
Performance problems due to outsourcing and other third-party relationships may compromise our ability to conduct business.
We outsource certain business and administrative functions and rely on third-party vendors to perform certain functions or provide certain services on our behalf and have a significant number of information technology and business processes outsourced with a single vendor. If we are unable to reach agreement in the negotiation of contracts or renewals with certain third-party providers, or if such third-party providers experience disruptions in their processes or with relied upon vendors, or if they do not perform as anticipated, we may be unable to meet our obligations to customers and claimants, incur higher costs and lose business which may have a material adverse effect on our business and results of operations. For other risks associated with our outsourcing of certain functions, see the Risk Factor, “Our businesses may suffer and we may incur substantial costs if we are unable to access our systems and safeguard the security of our data in the event of a disaster, cyber breach or other information security incident.”
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Our ability to execute on capital management plans, expense reduction initiatives and other actions is subject to material challenges, uncertainties and risks.
The ability to execute on capital management plans is subject to material challenges, uncertainties and risks. From time to time, our capital management plans may include the repurchase of common stock, the paydown of outstanding debt or both. We may not achieve all of the benefits we expect to derive from these plans. For an equity repurchase plan approved by the Board, such capital management plan would be subject to execution risks, including, among others, risks related to market fluctuations, investor interest and potential legal constraints that could delay execution at an otherwise optimal time. There can be no assurance that we will fully execute any such plan. In addition, we may not be successful in keeping our businesses cost efficient. We may take future actions, including acquisitions, divestitures or restructurings that may involve additional uncertainties and risks that negatively impact our business, financial condition, results of operations and liquidity.
Acquisitions and divestitures may not produce the anticipated benefits and may result in unintended consequences, which could have a material adverse impact on our financial condition and results of operations.
We may not be able to successfully integrate acquired businesses or achieve the expected synergies as a result of such acquisitions or divestitures. The process of integrating an acquired company or business can be complex and costly and may create unforeseen operating difficulties including ineffective integration of underwriting, risk management, claims handling, finance, information technology and actuarial practices. Difficulties integrating an acquired business may also result in the acquired business performing differently than we expected including through the loss of customers or in our failure to realize anticipated increased premium growth or expense-related efficiencies. We could be adversely affected by the acquisition due to unanticipated performance issues and additional expense, unforeseen liabilities, transaction-related charges, downgrades by third-party rating agencies, diversion of management time and resources to integration challenges, loss of key employees, regulatory requirements, exposure to tax liabilities, amortization of expenses related to intangibles and charges for impairment of long-term assets or goodwill. In addition, we may be adversely impacted by uncertainties related to reserve estimates of the acquired company and its design and operation of internal controls over financial reporting. We may be unable to distribute as much capital to the holding company as planned due to regulatory restrictions or other reasons that may adversely affect our liquidity.
In addition, in the case of business or asset dispositions, we may have continued financial exposure to the divested businesses through reinsurance, indemnification or other financial arrangements following the transaction. The expected benefits of acquired or divested businesses may not be realized and involve additional uncertainties and risks that may negatively impact our business, financial condition, results of operations and liquidity.
Difficulty in attracting and retaining talented and qualified personnel may adversely affect the execution of our business strategies.
Our ability to attract, develop and retain talented employees, managers and executives is critical to our success. There is significant competition within and outside the insurance and financial services industry for qualified employees, particularly for individuals with highly specialized knowledge in areas such as underwriting, actuarial, data and analytics, technology and digital commerce and investment management. Our continued ability to compete effectively in our businesses and to expand into new business areas depends on our ability to attract new employees and to develop, retain and motivate our existing employees. The loss of key employees, including executives, managers and employees with strong technological, analytical and other specialized skills, may adversely impact the execution of our business objectives or result in loss of important institutional knowledge. Our inability to attract and retain key personnel could have a material adverse effect on our financial condition and results of operations.
We may not be able to protect our intellectual property and may be subject to infringement claims.
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our intellectual property and to determine its scope, validity or enforceability, which could divert significant resources and may not prove successful. Litigation to enforce our intellectual property rights may not be successful and cost a significant amount of money. The inability to secure or enforce the protection of our intellectual property assets could harm our reputation and have a material adverse effect on our business and our ability to compete. We also may be subject to costly litigation in the event that another party alleges our operations or activities infringe upon their intellectual property rights, including patent rights, or violate license usage rights. Any such intellectual property claims and any resulting litigation could result in significant expense and liability for damages, and in some circumstances we could be enjoined from providing certain products or services to our customers, or utilizing and benefiting from certain patent, copyrights, trademarks, trade secrets or licenses, or alternatively could be required to enter into costly licensing arrangements with third parties, all of which could have a material adverse effect on our business, results of operations and financial condition.
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Part I - Item 1A. Risk Factors
Regulatory and Legal Risks
Regulatory and legislative developments could have a material adverse impact on our business, financial condition, results of operations and liquidity.
We are subject to extensive laws and regulations that are complex, subject to change and often conflict in their approach or intended outcomes. Compliance with these laws and regulations can increase cost, affect our strategy, and constrain our ability to adequately price our products.
In the U.S., regulatory initiatives and legislative developments may significantly affect our operations and prospects in ways that we cannot predict. For example, further reforms to the Affordable Care Act, and potential modifications of the Dodd-Frank Act, including expansion of the role of the Federal Insurance Office ("FIO") or repeal of the McCarran-Ferguson Act, could have unanticipated consequences for the Company and its businesses. It is unclear whether and to what extent Congress will continue to pursue these types of reforms, and how those changes might impact the Company, its business, financial conditions, results of operations and liquidity.
Our U.S. insurance subsidiaries are regulated by the insurance departments of the states in which they are domiciled, licensed or authorized to conduct business. State regulations generally seek to protect the interests of policyholders rather than an insurer or the insurer’s stockholders and other investors. U.S. state laws grant insurance regulatory authorities broad administrative powers with respect to, among other things, licensing and authorizing lines of business, approving policy forms and premium rates, setting statutory capital and reserve requirements, limiting the types and amounts of certain investments and restricting underwriting practices. State insurance departments also set constraints on domestic insurer transactions with affiliates and dividends and, in many cases, must approve affiliate transactions and extraordinary dividends as well as strategic transactions such as acquisitions and divestitures.
Our international insurance subsidiaries are subject to the laws and regulations of the relevant jurisdictions in which they operate, including the requirements of the Prudential Regulation Authority and the Financial Conduct Authority in the U.K and the Insurance Authority in Hong Kong. Our Lloyd’s Syndicate is also subject to management and supervision by the Council of Lloyd’s, which has wide discretionary powers to regulate members’ underwriting at Lloyd’s, as well as regulations imposed by overseas regulators where the Lloyd’s Syndicate conducts business.
There is continued uncertainty as to whether and how the U.K. might continue to access the E.U. Single Market now that the U.K. has left the E.U. following the conclusion of the Trade and Cooperation Agreement on December 30, 2020. There is the prospect of "equivalence" decisions to provide the U.K. with access, but these would be designed to cover a limited range of financial services activity and not offer permanent market access.
In addition, future regulatory initiatives could be adopted at the federal, state and international level that could impact the profitability of our businesses. For example, the NAIC and state insurance regulators are continually reexamining existing laws and regulations, specifically focusing on modifications to U.S. statutory accounting principles, interpretations of existing laws and the development of new laws and regulations. The NAIC continues to enhance the U.S. system of insurance solvency regulation, with a particular focus on group supervision, risk-based capital, accounting and financial reporting, enterprise risk management and reinsurance which could, among other things, affect statutory measures of capital sufficiency, including risk-based capital ratios.
In response to climate change, regulators at the federal, state and international level could impose new regulations requiring disclosure of underwriting or investment in certain industry sectors or could take other actions such as implementing a temporary moratorium on cancellation of policies within catastrophe prone areas. Specifically, the U.S. Securities and Exchange Commission (“SEC”) is considering new rules to require climate-related risk disclosures in public filings and the FIO continues to analyze the potential for climate change to affect insurance and reinsurance coverage, which could result in increased data collection and reporting. Regulators may also impose new requirements affecting our operations such as enforcing compliance with reductions in greenhouse gas emissions (GHGe) and increasing the targeted reductions in the future.
In addition, changes in laws or regulations, particularly relating to privacy and data security and potential limitations on predictive models, such as use of certain underwriting rating variables, may materially impede our ability to execute on business strategies and/or our ability to be competitive. Any proposed or future legislation or NAIC initiatives, if adopted, may be more restrictive on our ability to conduct business than current regulatory requirements or may result in higher costs or increased statutory capital and reserve requirements. In addition, the Federal Reserve Board and the International Association of Insurance Supervisors ("IAIS") continue to advance the development of insurance group capital standards. As of January 1, 2020, the IAIS Insurance Capital Standard entered a five-year monitoring period at the end of which insurance firms are required to be in compliance with such standards. While the Company 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 could apply to the Company. Working through the NAIC, U.S. state insurance regulators have developed a group capital calculation for use in solvency-monitoring activities. The calculation is intended to provide additional analytical information to the lead state for use in assessing group risks and capital adequacy to complement the current holding company analysis in the U.S. The next step is for the revised NAIC Model Act and Regulation to go to the states for adoption. The Covered Agreement between the U.S. and European Union, as well as the Covered Agreement between the U.S. and the U.K., provide a 60-month period (expiring September 22, 2022) for the U.S. to implement a "worldwide group capital calculation" for U.S. groups. If this deadline is not met, European Union member states and the U.K. each could potentially subject U.S. groups doing business in the EU and the U.K. to their own group supervision requirements, possibly including imposition of Solvency II's group capital standard.
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Further, a particular regulator or enforcement authority may interpret a legal, accounting, or reserving issue differently than we have, exposing us to different or additional regulatory risks. The application of these regulations and guidelines by insurers involves interpretations and judgments that may be challenged by state insurance departments and other regulators. The result of those potential challenges could require us to increase levels of regulatory capital and reserves or incur higher operating and/or tax costs.
In addition, our asset management businesses are also subject to extensive regulation in the various jurisdictions where they operate. These laws and regulations are primarily intended to protect investors in the securities markets or investment advisory clients and generally grant supervisory authorities broad administrative powers. Compliance with these laws and regulations is costly, time consuming and personnel intensive, and may have an adverse effect on our business, financial condition, results of operations and liquidity.
Our insurance business is sensitive to significant changes in the legal environment that could adversely affect The Hartford’s results of operations or financial condition or harm its businesses.
Like any major P&C insurance company, litigation is a routine part of The Hartford’s business - both in defending and indemnifying our insureds and in litigating insurance coverage disputes. The Hartford accounts for such activity by establishing unpaid loss and loss adjustment expense reserves. Significant changes in the legal environment could cause our ultimate liabilities to change from our current expectations. Such changes could be judicial in nature, like trends in the size of jury awards, developments in the law relating to tort liability or the liability of insurers, and rulings concerning the scope of insurance coverage or the amount or types of damages covered by insurance. In addition, changes in federal or state laws and regulations relating to the liability of insurers or policyholders, including state laws expanding “bad faith” liability and state “reviver” statutes, extending statutes of limitations for certain sexual molestation and sexual abuse claims, could result in changes in business practices, additional litigation, or could result in unexpected losses, including increased frequency and severity of claims. It is impossible to forecast such changes reliably, much less to predict how they might affect our loss reserves or how those changes might adversely affect our ability to price our insurance products appropriately. Thus, significant judicial or legislative developments could adversely affect The Hartford’s business, financial condition, results of operations and liquidity.
Changes in federal, state or foreign tax laws could adversely affect our business, financial condition, results of operations and liquidity.
Changes in federal, state or foreign tax laws and tax rates or regulations could have a material adverse effect on our profitability and financial condition by increasing the Company's overall tax and compliance burdens. The Company’s federal and state tax returns reflect certain items such as tax-exempt bond interest, tax credits, and insurance reserve deductions. There is an increasing risk that, in the context of tax reform in
the U.S., federal and/or state tax legislation could modify or eliminate these items, impacting the Company, its investments, investment strategies, and/or its policyholders.
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 will consider such factors as the financial strength of the applicant, the acquirer's plans for the future operations of the domestic insurer, and any such additional information as the insurance commissioner may deem necessary or appropriate for the protection of policyholders or in the public interest. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10 percent or more of the voting securities of the domestic insurer or its parent company. Because a person acquiring 10 percent or more of our common stock would indirectly control the same percentage of the stock of our U.S. insurance subsidiaries, the insurance change of control laws of various U.S. jurisdictions would likely apply to such a transaction. Other laws or required approvals pertaining to one or more of our existing subsidiaries, or a future subsidiary, may contain similar or additional restrictions on the acquisition of control of the Company. These laws and similar rules applying to subsidiaries domiciled outside of the United States may discourage potential acquisition proposals and may delay, deter, or prevent a change of control, including transactions that our Board of Directors and some or all of our stockholders might consider to be desirable.
Changes in accounting principles and financial reporting requirements could adversely affect our results of operations or financial condition.
As an SEC registrant, we are currently required to prepare our financial statements in accordance with U.S. GAAP, as promulgated by the Financial Accounting Standards Board ("FASB"). Accordingly, we are required to adopt new guidance or interpretations which may have a material effect on our results of operations and financial condition that is either unexpected or has a greater impact than expected. For a description of changes in accounting standards that are currently pending and, if known, our estimates of their expected impact, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to the Consolidated Financial Statements.
35
Part I - Item 2. Properties
| Item 2. | ||||||||||||||
PROPERTIES
As of December 31, 2021, The Hartford owned building space totaling approximately 1.8 million square feet consisting principally of 1.77 million square feet for its home office complex in Hartford, Connecticut and other properties within the greater Hartford, Connecticut area. In addition, we lease offices throughout North America, the United Kingdom and other overseas locations to house administrative, claims handling,
sales and other business operations. As of December 31, 2021, The Hartford leased approximately 1.3 million square feet throughout North America, 22 thousand square feet in London and 5 thousand square feet in other international branches. All of the properties owned or leased are used by one or more of all five reporting segments, depending on the location. For more information on reporting segments, see Part I, Item 1, Business Reporting Segments. The Company believes its properties and facilities are suitable and adequate for current operations.
| Item 3. | ||||||||||||||
LEGAL PROCEEDINGS
For a discussion regarding The Hartford’s legal proceedings, see the information contained under “Litigation,” including “COVID-19 Pandemic Business Income Insurance Litigation ” and “Run-off Asbestos and Environmental Claims,” in Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements.
36
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 Exchange (“NYSE”) under the trading symbol “HIG”. As of February 17, 2022, the Company had approximately 9,679 registered holders of record of the Company's common stock. A substantially greater number of holders of our common stock are “street name” holders or beneficial holders, whose shares
are held of record by banks, brokers and other financial institutions.
The Hartford's cash dividends paid on common stock and expected payment of future cash dividends are discussed in the Summary of Capital Resources and Liquidity and Liquidity Requirements and Sources of Capital - Dividends sections of Part II, Item 7, MD&A — Capital Resources and Liquidity.
For information related to securities authorized for issuance under equity compensation plans, see Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Repurchases of common stock by the Company during the quarter ended December 31, 2021 are set forth below. During the period from January 1, 2022 through February 17, 2022, the Company repurchased 3.8 million shares for $274.
| Repurchases of Common Stock by the Issuer for the Three Months Ended December 31, 2021 | ||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs [1] | ||||||||||
| (in millions) | ||||||||||||||
| October 1, 2021 - October 31, 2021 | 1,618,168 | $ | 72.42 | 1,618,168 | $ | 1,681 | ||||||||
| November 1, 2021 - November 30, 2021 | 3,165,842 | $ | 71.02 | 3,165,842 | $ | 1,456 | ||||||||
| December 1, 2021 - December 31, 2021 | 2,328,073 | $ | 67.86 | 2,328,073 | $ | 1,298 | ||||||||
| Total | 7,112,083 | $ | 70.31 | 7,112,083 | ||||||||||
[1]On December 17, 2020, the Board of Directors authorized a new equity repurchase plan for $1.5 billion for the period commencing January 1, 2021 through December 31, 2022. The Board of Directors increased this authorization by $1 billion on April 22, 2021 and by $500 on October 28, 2021, bringing the aggregate repurchase authorization to $3.0 billion through December 31, 2022. The timing of any repurchases of shares under the remaining equity repurchase authorization is dependent upon several factors, including the market price of the Company's securities, the Company's capital position, consideration of the effect of any repurchases on the Company's financial strength or credit ratings, the Company's blackout periods, and other considerations.
|TOTAL RETURN TO STOCKHOLDERS | ||
The following tables present The Hartford’s annual return percentage and five-year total return on its common stock including reinvestment of dividends in comparison to the S&P
500 and the S&P Insurance Composite Index.
| Annual Return Percentage | ||||||||||||||||||||
| For the years ended | ||||||||||||||||||||
| Company/Index | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||
| The Hartford Financial Services Group, Inc. | 20.25 | % | (19.24 | %) | 39.71 | % | (16.98 | %) | 44.27 | % | ||||||||||
| S&P 500 Index | 21.83 | % | (4.38 | %) | 31.49 | % | 18.40 | % | 28.71 | % | ||||||||||
| S&P Insurance Composite Index | 16.19 | % | (11.21 | %) | 29.38 | % | (0.44 | %) | 32.12 | % | ||||||||||
37
Part II - Item 5. Market for the Hartford's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
| Cumulative Five-Year Total Return | |||||||||||||||||||||||||||||
| Base | |||||||||||||||||||||||||||||
| Period | For the years ended | ||||||||||||||||||||||||||||
| Company/Index | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||||||||
| The Hartford Financial Services Group, Inc. | $ | 100 | $ | 120.25 | $ | 97.11 | $ | 135.68 | $ | 112.64 | $ | 162.51 | |||||||||||||||||
| S&P 500 Index | $ | 100 | $ | 121.83 | $ | 116.49 | $ | 153.18 | $ | 181.36 | $ | 233.43 | |||||||||||||||||
| S&P Insurance Composite Index | $ | 100 | $ | 116.19 | $ | 103.17 | $ | 133.48 | $ | 132.89 | $ | 175.57 | |||||||||||||||||
38
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 otherwise stated)
The Hartford provides projections and other forward-looking information in the following discussions, which contain many forward-looking statements, particularly relating to the Company’s future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the cautionary statements set forth on pages 4 and 5 of this Form 10-K. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in the following discussion and in Part I, Item 1A, Risk Factors, and those identified from time to time in our other filings with the Securities and Exchange Commission. The Hartford undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.
On December 29, 2021, the Company completed the sale of all of the issued and outstanding equity of Navigators Holdings (Europe) N.V., a Belgium holding company, and its subsidiaries, Bracht, Deckers & Mackelbert N.V. (“BDM”) and Assurances Contintales Contintale Verzekeringen N.V. (“ASCO”), (collectively referred to as "Continental Europe Operations").
For discussion of reclassifications, acquisitions, and dispositions, see Note 1 - Basis of Presentation and Significant Accounting Policies, Note 2 - Business Acquisitions and Note 22 - Business Dispositions of Notes to Consolidated Financial Statements.
The Hartford defines increases or decreases greater than or equal to 200% as “NM” or not meaningful.
For discussion of the earliest of the three years included in the financial statements of the current filing, refer to Part 2, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in The Hartford’s 2020 Form 10-K Annual Report.
Index
| Description | Page | ||||
Throughout the MD&A, we use certain terms and abbreviations, the more commonly used are summarized in the Acronyms section.
KEY PERFORMANCE MEASURES AND RATIOS
The Company considers the measures and ratios in the following discussion to be key performance indicators for its businesses. Management believes that these ratios and measures are useful in understanding the underlying trends in The Hartford’s businesses. However, these key performance indicators should only be used in conjunction with, and not in lieu of, the results presented in the segment discussions that follow in this MD&A. These ratios and measures may not be comparable to other performance measures used by the Company’s competitors.
Definitions of Non-GAAP and Other Measures and Ratios
Assets Under Management (“AUM”)- Include mutual fund and ETP assets. AUM is a measure used by the Company's Hartford Funds segment because a significant portion of the segments’s revenues and expenses are based upon asset values. These revenues and expenses increase or decrease with a rise or fall in AUM whether caused by changes in the market or through net flows.
Book Value per Diluted Share excluding accumulated other comprehensive income ("AOCI")- This is a non-GAAP per share measure that is calculated by dividing (a) common stockholders' equity, excluding AOCI, after tax, by (b) common shares outstanding
39
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
and dilutive potential common shares. The Company provides this measure to enable investors to analyze the amount of the Company's net worth that is primarily attributable to the Company's business operations. The Company believes that excluding AOCI from the numerator is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period, primarily based on changes in interest rates. Book value per diluted share is the most directly comparable U.S. GAAP measure.
Combined Ratio- The sum of the loss and loss adjustment expense ratio, the expense ratio and the policyholder dividend ratio. This ratio is a relative measurement that describes the related cost of losses and expenses for every $100 of earned premiums. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting losses.
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 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 items. Therefore, the following items are excluded from core earnings:
•Certain realized gains and losses - Some realized 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 that tend to be highly variable from period to period based on capital market conditions. The Hartford believes, however, that some realized 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.
•Restructuring and other costs - Costs incurred as part of a restructuring plan are not a recurring operating expense of the business.
•Loss on extinguishment of debt - Largely consisting of make-whole payments or tender premiums upon paying debt off before maturity, these losses are not a recurring operating expense of the business.
•Gains and losses on reinsurance transactions - Gains or losses on reinsurance, such as those entered into upon sale of a business or to reinsure loss reserves, are not a recurring operating expense of the business.
•Integration and other non-recurring M&A costs - These costs, including transaction costs incurred in connection with an acquired business, are incurred over a short period of time and do not represent an ongoing operating expense of the business.
•Change in loss reserves upon acquisition of a business - These changes in loss reserves are excluded from core earnings because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition.
•Deferred gain resulting from retroactive reinsurance and subsequent changes in the deferred gain - Retroactive reinsurance agreements economically transfer risk to the reinsurers and including the full benefit from retroactive reinsurance in core earnings provides greater insight into the economics of the business.
•Change in valuation allowance on deferred taxes related to non-core components of before tax income - These changes in valuation allowances are excluded from core earnings because they relate to non-core components of before tax income, such as tax attributes like capital loss carryforwards.
•Results of discontinued operations - These results are excluded from core earnings for businesses sold or held for sale because such results could obscure the ability to compare period over period results for our ongoing businesses.
In addition to the above components of net income available to common stockholders that are excluded from core earnings, preferred stock dividends declared, which are excluded from net income available to common stockholders, are included in the determination of core earnings. Preferred stock dividends are a cost of financing more akin to interest expense on debt and are expected to be a recurring expense as long as the preferred stock is outstanding.
Net income (loss) and net income (loss) available to common stockholders are the most directly comparable U.S. GAAP measures to core earnings. Core earnings should not be considered as a substitute for net income (loss) or net income (loss) available to common stockholders and does not reflect the overall profitability of the Company's business. Therefore, The Hartford believes that it is useful for investors to evaluate net income (loss), net income (loss) available to common stockholders, and core earnings when reviewing the Company's performance.
40
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Net Income to Core Earnings
| For the years ended December 31, | |||||||||||
| 2021 | 2020 | 2019 | |||||||||
| Net income | $ | 2,365 | $ | 1,737 | $ | 2,085 | |||||
| Preferred stock dividends | 21 | 21 | 21 | ||||||||
| Net income available to common stockholders | $ | 2,344 | $ | 1,716 | $ | 2,064 | |||||
| Adjustments to reconcile net income available to common stockholders to core earnings: | |||||||||||
| Net realized losses (gains) excluded from core earnings, before tax | (505) | 18 | (389) | ||||||||
| Restructuring and other costs, before tax | 1 | 104 | — | ||||||||
| Loss on extinguishment of debt, before tax | — | — | 90 | ||||||||
| Loss on reinsurance transactions, before tax | — | — | 91 | ||||||||
| Integration and other non-recurring M&A costs, before tax | 58 | 51 | 91 | ||||||||
| Change in loss reserves upon acquisition of a business, before tax | — | — | 97 | ||||||||
| Change in deferred gain on retroactive reinsurance, before tax | 246 | 312 | 16 | ||||||||
| Income tax expense (benefit) [1] | 34 | (115) | 2 | ||||||||
| Core earnings | $ | 2,178 | $ | 2,086 | $ | 2,062 | |||||
[1] Primarily represents the federal income tax expense (benefit) related to before tax items not included in core earnings and includes the effect of changes in net deferred taxes due to changes in enacted tax rates.
Core Earnings Margin- The Hartford uses the non-GAAP measure core earnings margin to evaluate, and believes it is an important measure of, the Group Benefits segment's operating performance. Core earnings margin is calculated by dividing core earnings by revenues, excluding buyouts and realized gains (losses). Net income margin, calculated by dividing net income by revenues, is the most directly comparable U.S. GAAP measure. The Company believes that core earnings margin provides investors with a valuable measure of the performance of Group Benefits because it reveals trends in the business that may be obscured by the effect of buyouts and realized gains (losses) as well as other items excluded in the calculation of core earnings. Core earnings margin should not be considered as a substitute for net income margin and does not reflect the overall profitability of Group Benefits. Therefore, the Company believes it is important for investors to evaluate both core earnings margin and net income margin when reviewing performance. A reconciliation of net income margin to core earnings margin is set forth in the Results of Operations section within MD&A - Group Benefits.
Current Accident Year Catastrophe Ratio- A component of the loss and loss adjustment expense ratio, represents the ratio of catastrophe losses incurred in the current accident year (net of reinsurance) to earned premiums. For U.S. events, a catastrophe is an event that causes $25 or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers, as defined by the Property Claim Services office of Verisk. For international events, the Company's approach is similar, informed, in part, by how Lloyd's of London defines catastrophes. Lloyd's of London is an insurance market-place operating worldwide ("Lloyd's"). Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"). The current accident year catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums.
Expense Ratio- For the underwriting segments of Commercial Lines and Personal Lines is the ratio of underwriting expenses less fee income, to earned premiums. Underwriting expenses include the amortization of deferred policy acquisition costs ("DAC") and insurance operating costs and expenses, including certain centralized services costs and bad debt expense. DAC include commissions, taxes, licenses and fees and other incremental direct underwriting expenses and are amortized over the policy term.
The expense ratio for Group Benefits is expressed as the ratio of insurance operating costs and other expenses including amortization of intangibles and amortization of DAC, to premiums and other considerations, excluding buyout premiums.
The expense ratio for Commercial Lines, Personal Lines and Group Benefits does not include integration and other transaction costs associated with an acquired business.
Fee Income- Is largely driven from amounts earned as a result of contractually defined percentages of assets under management in our Hartford Funds business. These fees are generally earned on a daily basis. Therefore, the growth in assets under management either through net inflows or favorable market performance will have a favorable impact on fee income. Conversely, either net outflows or unfavorable market performance will reduce fee income.
Gross New Business Premium- Represents the amount of premiums charged, before ceded reinsurance, for policies issued to customers who were not insured with the Company in the previous policy term. Gross new business premium plus gross renewal written premium less ceded reinsurance equals total written premium.
Loss and Loss Adjustment Expense Ratio- A measure of the cost of claims incurred in the calendar year divided by earned premium and includes losses and loss
41
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
adjustment expenses incurred for both the current and prior accident years. Among other factors, the loss and loss adjustment expense ratio needed for the Company to achieve its targeted return on equity ("ROE") fluctuates from year to year based on changes in the expected investment yield over the claim settlement period, the timing of expected claim settlements and the targeted returns set by management based on the competitive environment.
The loss and loss adjustment expense ratio is affected by claim frequency and claim severity, particularly for shorter-tail property lines of business, where the emergence of claim frequency and severity is credible and likely indicative of ultimate losses. Claim frequency represents the percentage change in the average number of reported claims per unit of exposure in the current accident year compared to that of the previous accident year. Claim severity represents the percentage change in the estimated average cost per claim in the current accident year compared to that of the previous accident year. As one of the factors used to determine pricing, the Company’s practice is to first make an overall assumption about claim frequency and severity for a given line of business and then, as part of the rate-making process, adjust the assumption as appropriate for the particular state, product or coverage.
Loss and Loss Adjustment Expense Ratio before Catastrophes and Prior Accident Year Development- A measure of the cost of non-catastrophe loss and loss adjustment expenses incurred in the current accident year divided by earned premiums. Management believes that the current accident year loss and loss adjustment expense ratio before catastrophes is a performance measure that is useful to investors as it removes the impact of volatile and unpredictable catastrophe losses and prior accident year development.
Loss Ratio, excluding Buyouts- Utilized for the Group Benefits segment and is expressed as a ratio of benefits, losses and loss adjustment expenses, excluding those related to buyout premiums, to premiums and other considerations, excluding buyout premiums. Since Group Benefits occasionally buys a block of claims for a stated premium amount, the Company excludes this buyout from the loss ratio used for evaluating the profitability of the business as buyouts may distort the loss ratio. Buyout premiums represent takeover of open claim liabilities and other non-recurring premium amounts.
Mutual Fund and Exchange-Traded Product Assets- Are owned by the shareholders of those products and not by the Company and, therefore, are not reflected in the Company’s Consolidated Financial Statements except in instances where the Company seeds new investment products.
Mutual fund and ETP assets are a measure used by the Company primarily because a significant portion of the Company’s Hartford Funds segment revenues and expenses are based upon asset values. These revenues and expenses increase or decrease with a rise or fall in AUM whether caused by changes in the market or through net flows.
Net New Business Premium- Represents the amount of premiums charged, after ceded reinsurance, for policies issued to customers who were not insured with the Company in the
previous policy term. Net new business premium plus renewal written premium equals total written premium.
Policy Count Retention- Represents the ratio of the number of renewal policies issued during the current year period divided by the number of policies issued in the previous calendar period before considering policies cancelled subsequent to renewal. Policy count retention is affected by a number of factors, including the percentage of renewal policy quotes accepted and decisions by the Company to non-renew policies because of specific policy underwriting concerns or because of a decision to reduce premium writings in certain classes of business or states. Policy count retention is also affected by advertising and rate actions taken by competitors.
Policy Count Retention, Net of Cancellations- Represents the ratio of the number of renewal policies issued net of cancellations during the current year period divided by the number of policies issued net of cancellations in the previous calendar period.
Policies in Force- Represents the number of policies with coverage in effect as of the end of the period. The number of policies in force is a growth measure used for Personal Lines and standard commercial lines (small commercial and middle market lines within middle & large commercial) within Commercial Lines and is affected by both new business growth and policy count retention.
Policyholder Dividend Ratio- The ratio of policyholder dividends to earned premium.
Prior Accident Year Loss and Loss Adjustment Expense Ratio- Represents the increase (decrease) in the estimated cost of settling catastrophe and non-catastrophe claims incurred in prior accident years as recorded in the current calendar year divided by earned premiums.
Reinstatement Premiums- Represents additional ceded premium paid for the reinstatement of the amount of reinsurance coverage that was reduced as a result of the Company ceding losses to reinsurers.
Renewal Earned Price Increase (Decrease)- Written premiums are earned over the policy term, which is six months for certain Personal Lines automobile business and twelve months for substantially all of the remainder of the Company’s Property and Casualty business. Since the Company earns premiums over the six to twelve month term of the policies, renewal earned price increases (decreases) lag renewal written price increases (decreases) by six to twelve months.
Renewal Written Price Increase (Decrease)- For Commercial Lines, represents the combined effect of rate changes, amount of insurance and individual risk pricing decisions per unit of exposure on commercial lines policies that renewed. For Personal Lines, renewal written price increases represent the total change in premium per policy since the prior year on those policies that renewed and includes the combined effect of rate changes, amount of insurance and other changes in exposure. For Personal Lines, other changes in exposure include, but are not limited to, the effect of changes in number of drivers, vehicles and incidents, as well as changes in customer policy elections, such as deductibles and limits. The rate
42
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
component represents the change in rate filed with and approved by state regulators during the period and the amount of insurance represents the change in the value of the rating base, such as model year/vehicle symbol for automobiles, building replacement costs for property and wage inflation for workers’ compensation. A number of factors affect renewal written price increases (decreases) including expected loss costs as projected by the Company’s pricing actuaries, rate filings approved by state regulators, risk selection decisions made by the Company’s underwriters and marketplace competition. Renewal written price changes reflect the property and casualty insurance market cycle. Prices tend to increase for a particular line of business when insurance carriers have incurred significant losses in that line of business in the recent past or the industry as a whole commits less of its capital to writing exposures in that line of business. Prices tend to decrease when recent loss experience has been favorable or when competition among insurance carriers increases. Renewal written price statistics are subject to change from period to period, based on a number of factors, including changes in actuarial estimates and the effect of subsequent cancellations and non-renewals, and modifications made to better reflect ultimate pricing achieved.
Return on Assets ("ROA"), Core Earnings-The Company uses this non-GAAP financial measure to evaluate, and believes is an important measure of, the Hartford Funds segment’s operating performance. ROA, core earnings is calculated by dividing annualized core earnings by a daily average AUM. ROA is the most directly comparable U.S. GAAP measure. The Company believes that ROA, core earnings, provides investors with a valuable measure of the performance of the Hartford Funds segment because it reveals trends in our business that may be obscured by the effect of items excluded in the calculation of core earnings. ROA, core earnings, should not be considered as a substitute for ROA and does not reflect the overall profitability of our Hartford Funds business. Therefore, the Company believes it is important for investors to evaluate both ROA, and ROA, core earnings when reviewing the Hartford Funds segment performance. A reconciliation of ROA to ROA, core earnings is set forth in the Results of Operations section within MD&A - Hartford Funds.
Underlying Combined Ratio-This non-GAAP financial measure of underwriting results represents the combined ratio before catastrophes, prior accident year development and current accident year change in loss reserves upon acquisition of a business. Combined ratio is the most directly comparable GAAP measure. The underlying combined ratio represents the combined ratio for the current accident year, excluding the impact of current accident year catastrophes and current accident year change in loss reserves upon acquisition of a business. The Company believes this ratio is an important measure of the trend in profitability since it removes the impact of volatile and unpredictable catastrophe losses and prior accident year loss and loss adjustment expense reserve development. The changes to loss reserves upon acquisition of a business are excluded from underlying combined ratio because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition as such trends are valuable to our investors' ability to assess the Company's financial performance. A reconciliation of combined ratio to underlying combined ratio is set forth in the Results of Operations section within MD&A - Commercial Lines and Personal Lines.
Underwriting Gain (Loss)- The Hartford's management evaluates profitability of the Commercial and Personal Lines segments primarily on the basis of underwriting gain or loss. Underwriting gain (loss) is a before tax non-GAAP measure that represents earned premiums less incurred losses, loss adjustment expenses and underwriting expenses. Net income (loss) is the most directly comparable GAAP measure. Underwriting gain (loss) is influenced significantly by earned premium growth and the adequacy of The Hartford's pricing. Underwriting profitability over time is also greatly influenced by The Hartford's underwriting discipline, as management strives to manage exposure to loss through favorable risk selection and diversification, effective management of claims, use of reinsurance and its ability to manage its expenses. The Hartford believes that the measure underwriting gain (loss) provides investors with a valuable measure of profitability, before tax, derived from underwriting activities, which are managed separately from the Company's investing activities.
43
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Net Income to Underwriting Gain (Loss)
| For the years ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Commercial Lines | |||||||||||||||||
| Net income | $ | 1,757 | $ | 856 | $ | 1,192 | |||||||||||
| Adjustments to reconcile net income to underwriting gain (loss): | |||||||||||||||||
| Net servicing income | (13) | (4) | (2) | ||||||||||||||
| Net investment income | (1,502) | (1,160) | (1,129) | ||||||||||||||
| Net realized losses (gains) | (260) | 60 | (271) | ||||||||||||||
| Other expense | 18 | 35 | 38 | ||||||||||||||
| Loss on reinsurance transaction | — | — | 91 | ||||||||||||||
| Income tax expense | 402 | 176 | 270 | ||||||||||||||
| Underwriting gain (loss) | $ | 402 | $ | (37) | $ | 189 | |||||||||||
| Personal Lines | |||||||||||||||||
| Net income (loss) | $ | 385 | $ | 718 | $ | 318 | |||||||||||
| Adjustments to reconcile net income to underwriting gain (loss): | |||||||||||||||||
| Net servicing income | (19) | (14) | (13) | ||||||||||||||
| Net investment income | (157) | (157) | (179) | ||||||||||||||
| Net realized losses (gains) | (29) | 5 | (43) | ||||||||||||||
| Other expense | — | 1 | 1 | ||||||||||||||
| Income tax expense | 95 | 184 | 76 | ||||||||||||||
| Underwriting gain | $ | 275 | $ | 737 | $ | 160 | |||||||||||
| P&C Other Ops | |||||||||||||||||
| Net Income | $ | (95) | $ | (168) | $ | 61 | |||||||||||
| Adjustments to reconcile net income to underwriting gain (loss): | |||||||||||||||||
| Net investment income | (75) | (55) | (84) | ||||||||||||||
| Net realized losses (gains) | (13) | 1 | (20) | ||||||||||||||
| Other expense (income) | 1 | (1) | — | ||||||||||||||
| Income tax expense (benefit) | (28) | (46) | 12 | ||||||||||||||
| Underwriting loss | $ | (210) | $ | (269) | $ | (31) | |||||||||||
Written and Earned Premiums- Written premium represents the amount of premiums charged for policies issued, net of reinsurance, during a fiscal period. Premiums are considered earned and are included in the financial results on a pro rata basis over the policy period. Management believes that written premium is a performance measure that is useful to investors as it reflects current trends in the Company’s sale of property and casualty insurance products. Written and earned premium are recorded net of ceded reinsurance premium.
Traditional life and disability insurance type products, such as those sold by Group Benefits, collect premiums from policyholders in exchange for financial protection for the policyholder from a specified insurable loss, such as death or disability. These premiums, together with net investment income earned, are used to pay the contractual obligations under these insurance contracts.
Two major factors, new sales and persistency, impact premium growth. Sales can increase or decrease in a given year based on a number of factors including, but not limited to, customer demand for the Company’s product offerings, pricing competition, distribution channels and the Company’s reputation
and ratings. Persistency refers to the percentage of premium remaining in-force from year-to-year.
THE HARTFORD'S OPERATIONS
The Hartford conducts business principally in five reporting segments including Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits and Hartford Funds, as well as a Corporate category. The Company includes in the Corporate category reserves for run-off structured settlement and terminal funding agreement liabilities, restructuring costs, capital raising activities (including equity financing, debt financing and related interest expense), transaction expenses incurred in connection with an acquisition, certain M&A costs, 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 a portion of the invested assets of Talcott Resolution Life, Inc. and its subsidiaries as well as
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
certain affiliates. In addition, up until June 30, 2021, Corporate included a 9.7% ownership interest in Hopmeadow Holdings LP, the legal entity that acquired Talcott Resolution in May 2018 (Hopmeadow Holdings, LP, Talcott Resolution Life Inc., and its subsidiaries are collectively referred to as "Talcott Resolution"). The sale of Talcott Resolution to a new investor was completed on June 30, 2021. The Company received a total of $217 in connection with the sale of its 9.7% ownership interest, resulting in a realized gain of $46 before tax in 2021.
The Company derives its revenues principally from: (a) premiums earned for insurance coverage provided to insureds; (b) management fees on mutual fund and ETP assets; (c) net investment income; (d) fees earned for services provided to third parties; and (e) net realized gains and losses. Premiums charged for insurance coverage are earned principally on a pro rata basis over the terms of the related policies in-force.
The profitability of the Company's property and casualty insurance businesses over time is greatly influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance, the size of its in force block, actual mortality and morbidity experience, and its ability to manage its expense ratio which it accomplishes through economies of scale and its management of acquisition costs and other underwriting expenses. Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future loss cost frequency and severity based on historical loss experience adjusted for known trends, the Company’s response to rate actions taken by competitors, its expense levels and expectations about regulatory and legal developments. The Company seeks to price its insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. For many of its insurance products, the Company is required to obtain approval for its premium rates from state insurance departments and the Lloyd's Syndicate's ability to write business is subject to Lloyd's approval for its premium capacity each year. Most of Personal Lines written premium is associated with our exclusive licensing agreement with AARP, which is effective through December 31, 2032. This agreement provides an important competitive advantage given the size of the 50 plus population and the strength of the AARP brand.
Similar to property and 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 Company’s products could prove to be inadequate if loss and expense trends emerge adversely during the rate guarantee period or if investment returns are lower than expected at the time the products were sold. For some of its products, the Company is required to obtain approval for its premium rates from state insurance departments. New and
renewal business for group benefits business, particularly for long-term disability, are priced using an assumption about expected investment yields over time. While the Company employs asset-liability duration matching strategies to mitigate risk and may use interest-rate sensitive derivatives to hedge its exposure in the Group Benefits investment portfolio, cash flow patterns related to the payment of benefits and claims are uncertain and actual investment yields could differ significantly from expected investment yields, affecting profitability of the business. In addition to appropriately evaluating and pricing risks, the profitability of the Group Benefits business depends on other factors, including the Company’s response to pricing decisions and other actions taken by competitors, its ability to offer voluntary products and self-service capabilities, the persistency of its sold business and its ability to manage its expenses which it seeks to achieve through economies of scale and operating efficiencies.
The financial results of the Company’s mutual fund and ETP businesses depend largely on the amount of assets under management and the level of fees charged based, in part, on asset share class and product type. Changes in assets under management are driven by the two main factors of net flows and the market return of the funds, which are heavily influenced by the return realized in the equity and bond markets. Net flows are comprised of new sales less redemptions by mutual fund and ETP shareholders. Financial results are highly correlated to the growth in assets under management since these products generally earn fee income on a daily basis.
The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits, losses and loss adjustment expenses are paid. Due to the need to maintain sufficient liquidity to satisfy claim obligations, the majority of the Company’s invested assets have been held in available-for-sale securities, including, among other asset classes, corporate bonds, municipal bonds, government debt, short-term debt, mortgage-backed securities, asset-backed securities and collateralized loan obligations. The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while generating sufficient net of tax income to meet policyholder and corporate obligations. Investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations.
Impact of COVID-19 on our financial condition, results of operations and liquidity
Impact to written and earned premiums
Despite the rollout of vaccines and states largely lifting restrictions allowing business to re-open, the COVID-19 pandemic continues to pose a threat to the economic recovery of the U.S. and other countries in which we operate. As one of the largest providers of small business insurance in the U.S., we were negatively affected by economic effects of the pandemic on small businesses beginning in March of 2020. An
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
improvement in economic conditions in 2021 has contributed to an increase of 11% in our small commercial written premiums. Our middle & large commercial business was also negatively affected by COVID-19 and written premium has rebounded with an increase of 12% in 2021. Overall, Commercial Lines written premium increased $1,072, or 12%, in 2021 with growth in workers' compensation, small commercial package business, general liability, U.S. wholesale, U.S. financial lines and global reinsurance.
Personal Lines written premium declined 1% in 2021 due to the effect of non-renewed premium exceeding new business, partially offset by the effect of premium credits given in the second quarter of 2020.
In Group Benefits, fully insured ongoing premium increased 4% in 2021, primarily due to higher in-force employer group
disability premiums and higher supplemental health product premiums.
Impact to direct benefits, losses and loss adjustment expenses from COVID-19 claims
Total pandemic-related losses were higher in 2021 compared to 2020 driven by higher excess mortality in our group life business and an increase in pandemic-related short-term disability claims, partially offset by a reduction of P&C COVID-19 incurred losses.
| For the year ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Excess mortality claims on group life | $ | 583 | $ | 239 | |||||||||||||
| COVID-19 short-term disability claims [1] | 31 | (9) | |||||||||||||||
| Workers' compensation COVID-19 claims | 20 | 66 | |||||||||||||||
| Global specialty financial lines and other | 11 | 71 | |||||||||||||||
| Commercial property | — | 141 | |||||||||||||||
| Total direct COVID-19 and excess mortality claims | $ | 645 | $ | 508 | |||||||||||||
[1]The year ended December 31, 2020 included both short-term disability and New York paid family leave claims related to COVID-19 and lower incurred losses due to fewer elective procedures during the early stages of the pandemic more than offset direct COVID-19 incurred losses.
Excess mortality in the group life business includes both claims where COVID-19 is specifically listed as the cause of death and indirect impacts of the pandemic such as causes of death due to patients deferring regular treatments of chronic conditions. The incidence of excess mortality claims is subject to significant uncertainty as it is dependent on a number of factors difficult to predict including, among others, the ultimate vaccination rate of the population, the potential spread of new COVID-19 variants, the effectiveness of the vaccines against new variants, the effectiveness of other treatments to prevent serious illness and death, the percentage of those infected who are of working age and the strain on the health care system preventing timely treatment of chronic illnesses.
Within P&C, direct COVID-19 incurred losses in 2021 were predominantly on workers' compensation claims incurred in the first quarter. We incur COVID-19 workers’ compensation losses when it is determined that workers were exposed to COVID-19 out of and in the course of their employment and in other cases where states have passed laws providing for the presumption of coverage for certain industry classes, including health care and other essential workers.
Apart from COVID-19 workers' compensation claims, net of favorable frequency, and incurred losses within financial lines, P&C COVID-19 incurred losses in 2020 primarily included $141 for property claims. There were no COVID-19 P&C property losses incurred in 2021. Nearly all of our property insurance policies require direct physical loss or damage to property and contain standard exclusions that we believe preclude coverage for COVID-19 related claims, and the vast majority of such policies contain exclusions for virus-related losses.
Other impacts from COVID-19
In Personal Lines automobile, miles driven and average claim severity increased in 2021, which has increased automobile loss costs. In addition, as the effects of favorable claim frequency
from lower miles driven during the pandemic have been factored into rates, we have experienced lower earned pricing increases resulting in a higher automobile loss ratio in 2021 than in 2020. Refer to Personal Lines Results of Operations for discussion of pricing and loss cost trends for the year ended December 31, 2021.
As we emerge from the pandemic, inflationary pressures in the economy have resulted in increased claim severity in 2021 in automobile and property lines of business in both Commercial Lines and Personal Lines. As expectations of inflationary pressures have increased, interest rates rose in 2021 and higher interest rates reduce the fair value of our investments in fixed maturity securities, available for sale ("AFS").
Aided by some improvement in the economy and the effect of the government’s economic stimulus payments to our customers, in 2021, we recorded a decrease of $47 in the allowance for credit losses ("ACL") on premiums receivable, reflecting a lower expectation of credit losses, though there remains an elevated risk of uncollectible premiums receivable relative to historical trends if economic conditions do not improve further.
As we emerge from the pandemic, we expect travel costs and certain employee benefits costs will increase relative to the lower level of those costs we have incurred in 2020 and 2021.
For information about resources the Company has to manage capital and liquidity, refer to the Capital Resources & Liquidity section of MD&A.
For additional information about the potential economic impacts to the Company of the COVID-19 pandemic, see the risk factor "The pandemic caused by the spread of COVID-19 has disrupted our operations and may have a material adverse
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
impact on our business results, financial condition, results of operations and/or liquidity" in Item 1A of Part I.
Operational transformation and cost reduction plan
In recognition of the need to become more cost efficient and competitive along with enhancing the experience we provide to agents and customers, on July 30, 2020, the Company announced an operational transformation and cost reduction plan it refers to as Hartford Next.Through reduction of its headcount, IT investments to further enhance our capabilities, and other activities, relative to 2019, the Company expects to achieve a reduction in annual insurance operating costs and other expenses of approximately $540 by 2022 and $625 by 2023.
To achieve those expected savings, we expect to incur approximately $401 over the course of the program, with $217
expensed cumulatively through December 31, 2021, and expected expenses of $89 in 2022, $38 in 2023 and $57 after 2023, with the expenses after 2023 consisting mostly of amortization of internal use software and capitalized real estate costs. Included in the estimated costs of $401, we expect to incur restructuring costs of approximately $130, including $48 of employee severance, and approximately $82 of other costs, including consulting expenses, lease termination expenses and the cost to retire certain IT applications. Restructuring costs are reported as a charge to net income but not in core earnings.
The following table presents Hartford Next program costs incurred, including restructuring costs, and expense savings relative to 2019 realized in 2021 and expected annual costs and expense savings relative to 2019 for the full year in 2022 and 2023:
| Hartford Next Costs and Expense Savings | |||||||||||||||||
| 2020 | 2021 | Estimate for 2022 | Estimate for 2023 | ||||||||||||||
| Employee severance | $ | 73 | $ | (25) | $ | — | $ | — | |||||||||
| IT costs to retire applications | 2 | 9 | 10 | — | |||||||||||||
| Professional fees and other expenses | 29 | 17 | 15 | — | |||||||||||||
| Estimated restructuring costs | 104 | 1 | 25 | — | |||||||||||||
| Non-capitalized IT costs | 30 | 46 | 45 | 22 | |||||||||||||
| Other costs | 19 | 17 | 14 | 6 | |||||||||||||
| Amortization of capitalized IT development costs [1] | — | — | 4 | 9 | |||||||||||||
| Amortization of capitalized real estate [2] | — | — | 1 | 1 | |||||||||||||
| Estimated costs within core earnings | 49 | 63 | 64 | 38 | |||||||||||||
| Total Hartford Next program costs | 153 | 64 | 89 | 38 | |||||||||||||
| Cumulative savings relative to 2019 beginning July 1, 2020 | (106) | (423) | (540) | (625) | |||||||||||||
| Net expense (savings) before tax | $ | 47 | $ | (359) | $ | (451) | $ | (587) | |||||||||
| Net expense (savings) before tax: | |||||||||||||||||
| To be accounted for within core earnings | $ | (57) | $ | (360) | $ | (476) | $ | (587) | |||||||||
| Restructuring costs recognized outside of core earnings | 104 | 1 | 25 | — | |||||||||||||
| Net expense (savings) before tax | $ | 47 | $ | (359) | $ | (451) | $ | (587) | |||||||||
[1]Does not include approximately $34 of IT asset amortization after 2023.
[2]Does not include approximately $19 of real estate amortization after 2023.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2021 FINANCIAL HIGHLIGHTS
| Net Income Available to Common Stockholders | Net Income Available to Common Stockholders per Diluted Share | Book Value per Diluted Share | ||||||||||||
| Ý | Increased $628 or 37% | Ý | Increased $1.86 or 39% | Ý | Increased $0.97 or 1.9% | |||||||||||||||||||||||||||
| + | A change from net realized losses in the 2020 period to gains in the 2021 period | + | Increase in net income available to common stockholders | + | Net income in excess of common stockholder dividends and share repurchases | |||||||||||||||||||||||||||
| + | Increase in net investment income | + | Share repurchases | + | Decrease in dilutive shares from the prior year | |||||||||||||||||||||||||||
| + | Decrease in P&C COVID-19 incurred losses | - | Increase in dilutive shares under stock-based compensation largely due to an increase in the quarterly average stock price | |||||||||||||||||||||||||||||
| + | Higher earned premiums in Commercial Lines and a lower P&C underlying loss ratio before COVID-19 | - | Decrease in common stockholders' equity largely due to decrease in AOCI, driven by a decline in net unrealized gains on available for sale securities | |||||||||||||||||||||||||||||
| + | Lower restructuring costs | |||||||||||||||||||||||||||||||
| + | Increase in earnings from Hartford Funds | |||||||||||||||||||||||||||||||
| - | Higher excess mortality losses in group life and COVID-19 losses in group disability | |||||||||||||||||||||||||||||||
| - | A change from net favorable to net unfavorable P&C prior accident year reserve development | |||||||||||||||||||||||||||||||
| - | Higher current accident year catastrophes | |||||||||||||||||||||||||||||||
| - | An increase in personal automobile claim frequency and severity | |||||||||||||||||||||||||||||||
| - | Lower income from the former Talcott Resolution investment | |||||||||||||||||||||||||||||||
| Investment Yield, After Tax | Property & Casualty Combined Ratio | Group Benefits Net Income Margin | ||||||||||||
| Ý | Increased 50 bps | Þ | Improved 0.1 points | Þ | Decreased 2.5 points | |||||||||||||||||||||||||||
| + | Greater returns on limited partnerships and other alternative investments | + | Decrease in COVID-19 incurred losses | - | Higher excess mortality in group life | |||||||||||||||||||||||||||
| - | Lower reinvestment rates and lower yield on variable rate securities | + | Lower current accident year loss ratio before COVID-19 in global specialty and workers' compensation | - | A higher group disability loss ratio primarily due to higher short-term and long-term disability claim incidence | |||||||||||||||||||||||||||
| - | A change to unfavorable prior accident year reserve development | - | A higher expense ratio | |||||||||||||||||||||||||||||
| + | Higher net investment income | |||||||||||||||||||||||||||||||
| - | Higher current accident year catastrophes | + | Greater net realized gains | |||||||||||||||||||||||||||||
| - | Higher personal automobile claim frequency and severity | |||||||||||||||||||||||||||||||
| - | An increase in underwriting expenses | |||||||||||||||||||||||||||||||
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS
The Consolidated Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes as well as with the segment operating results sections of the MD&A.
Consolidated Results of Operations
| 2021 | 2020 | 2019 | Increase (Decrease) From 2020 to 2021 | Increase (Decrease) From 2019 to 2020 | ||||||||||||||||||||||||||||
| Earned premiums | $ | 17,999 | $ | 17,288 | $ | 16,923 | 4 | % | 2 | % | ||||||||||||||||||||||
| Fee income | 1,488 | 1,277 | 1,301 | 17 | % | (2 | %) | |||||||||||||||||||||||||
| Net investment income | 2,313 | 1,846 | 1,951 | 25 | % | (5 | %) | |||||||||||||||||||||||||
| Net realized gains (losses) | 509 | (14) | 395 | NM | (104 | %) | ||||||||||||||||||||||||||
| Other revenues | 81 | 126 | 170 | (36 | %) | (26 | %) | |||||||||||||||||||||||||
| Total revenues | 22,390 | 20,523 | 20,740 | 9 | % | (1 | %) | |||||||||||||||||||||||||
| Benefits, losses and loss adjustment expenses | 12,729 | 11,805 | 11,472 | 8 | % | 3 | % | |||||||||||||||||||||||||
| Amortization of deferred policy acquisition costs | 1,680 | 1,706 | 1,622 | (2 | %) | 5 | % | |||||||||||||||||||||||||
| Insurance operating costs and other expenses | 4,779 | 4,480 | 4,580 | 7 | % | (2 | %) | |||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | 90 | — | % | (100 | %) | |||||||||||||||||||||||||
| Loss on reinsurance transactions | — | — | 91 | — | % | (100 | %) | |||||||||||||||||||||||||
| Interest expense | 234 | 236 | 259 | (1 | %) | (9 | %) | |||||||||||||||||||||||||
| Amortization of other intangible assets | 71 | 72 | 66 | (1 | %) | 9 | % | |||||||||||||||||||||||||
| Restructuring and other costs | 1 | 104 | — | (99 | %) | NM | ||||||||||||||||||||||||||
| Total benefits, losses and expenses | 19,494 | 18,403 | 18,180 | 6 | % | 1 | % | |||||||||||||||||||||||||
| Income before income taxes | 2,896 | 2,120 | 2,560 | 37 | % | (17 | %) | |||||||||||||||||||||||||
| Income tax expense | 531 | 383 | 475 | 39 | % | (19 | %) | |||||||||||||||||||||||||
| Net income | 2,365 | 1,737 | 2,085 | 36 | % | (17 | %) | |||||||||||||||||||||||||
| Preferred stock dividends | 21 | 21 | 21 | — | % | — | % | |||||||||||||||||||||||||
| Net income available to common stockholders | $ | 2,344 | $ | 1,716 | $ | 2,064 | 37 | % | (17 | %) | ||||||||||||||||||||||
Year ended December 31, 2021 compared to year ended December 31, 2020
Net income available to common stockholders increased by $628 primarily driven by:
•A $523 before tax change from net realized losses in 2020 to net realized gains in 2021, primarily driven by changes in valuation and sales of equity securities from losses in the 2020 period to gains in the 2021 period;
•An increase in net investment income of $467 before tax driven by higher returns on limited partnerships and other alternative investments;
• A $103 before tax decrease in restructuring costs related to the Hartford Next operational transformation and cost reduction plan;
•An increase in earnings from Hartford Funds; and
•An increase in P&C underwriting results of $36 before tax, with a reduction in COVID-19 incurred losses, a lower Commercial Lines underlying loss and loss adjustment expense ratio before COVID-19 and the effect of earned premium growth largely offset by a change to net unfavorable prior accident year reserve development, higher personal automobile loss costs and higher underwriting expenses.
These increases were partially offset by:
•A $384 before tax increase in excess mortality claims and COVID-19 related impacts to short-term-disability losses; and
•Lower income from the Talcott Resolution investment, which was divested on June 30, 2021.
For a discussion of the Company's operating results by segment, see MD&A - Segment Operating Summaries. In addition, for further discussion of impacts resulting from the COVID-19 pandemic, refer to the Impact of COVID-19 on our financial condition, results of operations and liquidity section of this MD&A.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
REVENUE
Earned Premiums
[1]For the years ended 2020 and 2019, the total includes $9, and $10 respectively, recorded in Corporate other revenue.
Earned premiums increased primarily due to:
•An increase in P&C reflecting a 7% increase in Commercial Lines and a 2% decrease in Personal Lines. Contributing to the increase in Commercial Lines was the effect of higher audit and endorsement premiums as the result of higher insured exposures given the economic recovery in 2021. For Personal Lines, the effect of non-renewals outpacing new business was partially offset by the effect of $81 in COVID-related premium credits in the 2020 period; and
•An increase in Group Benefits earned premium of 3% year over year due to an increase in group disability and higher supplemental health product premiums, partially offset by the effect of buyout premium in the 2020 period.
Fee income increased, largely driven by Hartford Funds as a result of higher daily average assets under management due to an increase in equity market levels and net inflows.
Other revenues decreased by $45, primarily driven by lower income of $53 before tax from the Talcott Resolution investment, which was divested on June 30, 2021.
Net investment income increased primarily due to:
•Greater income from limited partnerships and other alternative investments primarily driven by higher valuations and cash distributions within private equity funds and sales of underlying investments within real estate funds;
•A higher level of invested assets;
Net Investment Income
•Greater income from non-routine income items, including yield adjustments on prepayable securities; and
•Higher yield from equity investments.
These increases were partially offset by:
•A lower yield on fixed maturity investments resulting from reinvesting at lower rates and a lower yield on floating rate investments.
Net realized gains (losses) changed from net losses in the 2020 period to net gains in the 2021 period, primarily driven by:
•Gains on equity securities in the 2021 period driven by appreciation in value compared to losses on equity securities in the 2020 period, partially offset by net realized gains in the 2020 period upon termination of derivatives used to hedge against a decline in equity market levels;
•A net reduction in ACL on mortgage loans and fixed maturities in the 2021 period due to an improved economic outlook, compared to increases in the ACL on mortgage loans and fixed maturities in the 2020 period;
•A $46 before tax net realized gain in 2021 resulting from sale of the Company's 9.7% previously owned interest in Talcott Resolution;
•A lower level of losses in 2021 than in 2020 related to the sale of the Continental Europe Operations; and
•Higher net realized gains on sales of fixed maturity securities.
For further discussion of investment results, see MD&A - Investment Results, Net Realized Gains and MD&A - Investment Results, Net Investment Income.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
BENEFITS, LOSSES AND EXPENSES
P&C Losses and LAE Incurred
Benefits, losses and loss adjustment expenses increased due to:
•An increase in incurred losses for Property & Casualty of $457 which was driven by:
•An unfavorable change of $335 in P&C net prior accident year reserve development. Prior accident year reserve development in the 2021 period was a net unfavorable $199 before tax, driven by reserve increases for sexual molestation and sexual abuse claims, primarily to reflect claims made against the Boy Scouts of America ("BSA"), partially offset by reserve decreases in workers' compensation, catastrophes, package business, personal automobile, commercial property, and bond. Prior accident year development in the 2021 period also included adverse reserve development ceded to NICO under an adverse development cover ("ADC") of $155 before tax for A&E reserves and $91 before tax for Navigators reserves related to 2018 and prior accident years, both of which the Company recognized a deferred gain under retroactive reinsurance accounting. Prior accident year reserve development in 2020 was a favorable $136 before tax, driven by $529 of reserve reductions related to catastrophes, including decreases in estimated losses arising from wind and hail events in 2017, 2018 and 2019 and from the 2017 and 2018 California wildfires, including a $289 before tax subrogation benefit from PG&E Corporation and Pacific Gas and Electric Company (together, "PG&E"). Reserve development in 2020 also included a $254 before tax reserve increase for sexual molestation and abuse claims, a $208 before tax increase in A&E reserves and a $102 before tax of adverse development for Navigators related to 2018 and prior accident years. While $220 of A&E and $102 of Navigators’ reserve development in 2020 has been economically ceded to
Group Benefits Losses and LAE Incurred
NICO, the Company recognized a $312 deferred gain under retroactive reinsurance accounting with $10 of the $220 ceded A&E losses recognized as a benefit to income in 2020. For further discussion, see Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements;
•An increase in current accident year catastrophe losses of $58, before tax. Catastrophe losses in the 2021 period were principally from hurricane Ida and February winter storms, as well as from tornado, wind and hail events in Texas, the Midwest and Southeast. Catastrophe losses in 2020 were primarily from civil unrest, a number of hurricanes and tropical storms, Pacific Coast wildfires and Northeast windstorms as well as tornado, wind and hail events in the South, Midwest and Central Plains; and
•An increase in P&C current accident year ("CAY") loss and loss adjustment expenses before catastrophes primarily due to the effect of higher earned premiums in commercial lines, higher personal automobile claim frequency and severity, and higher non-catastrophe property losses partially offset by a $247 before tax decrease in COVID-19 incurred losses and lower current accident year loss ratios before COVID-19 in global specialty, workers’ compensation and general liability.
•An increase in Group Benefits of $475 primarily driven by a $344 before tax increase in excess mortality claims in group life, the effect of an increase in earned premiums and higher short-term and long-term disability claim incidence especially compared to the favorable incidence levels experienced during the early stages of the pandemic. The increased claim incidence was partially offset by a higher
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
favorable New York Paid Family Leave adjustment recognized in the 2021 period.
For further discussion of impacts resulting from the COVID-19 pandemic, refer to the impact of COVID-19 on our financial condition, results of operations and liquidity section of this MD&A.
Amortization of deferred policy acquisition costs decreased from the prior year period driven, in part, by a decrease in Personal Lines due to lower earned premiums.
Insurance operating costs and other expenses increased due to:
•Higher variable costs of the Hartford Funds business due to higher daily average assets under management;
•Higher variable incentive compensation costs;
•An increase in supplemental and contingent commissions;
•Increased costs in Group Benefits to handle elevated claim levels resulting from the pandemic, higher technology costs and increased AARP direct marketing costs in Personal Lines; and
•Legal and consulting costs associated with the unsolicited proposals from Chubb Limited (“Chubb”) to acquire the Company.
These increases were partially offset by:
•Lower staffing and other costs driven by the Company’s Hartford Next operational transformation and cost reduction plan; and
•A decrease in the ACL on uncollectible premiums receivable in Property & Casualty and Group Benefits in the 2021 period compared to an increase in the 2020 period due to the economic impacts of COVID-19.
Restructuring and other costs decreased as the prior year period included severance costs related to the Company's Hartford Next operational transformation and cost reduction plan. For further discussion of impacts resulting from the Hartford Next initiative, see MD&A - The Hartford's Operations, The Hartford's Operations, Operational Transformation and Cost Reduction Plan and Note 23 - Restructuring and Other Costs of Notes to Consolidated Financial Statements.
Income tax expense increased primarily due to an increase in income before tax.
For further discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements.
INVESTMENT RESULTS
| Composition of Invested Assets | |||||||||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||||||
| Fixed maturities, available-for-sale ("AFS"), at fair value | $ | 42,847 | 74.2 | % | $ | 45,035 | 79.7 | % | |||||||||
| Equity securities, at fair value | 2,094 | 3.6 | % | 1,438 | 2.5 | % | |||||||||||
| Mortgage loans (net of ACL of $29 and $38) | 5,383 | 9.3 | % | 4,493 | 7.9 | % | |||||||||||
| Limited partnerships and other alternative investments | 3,353 | 5.8 | % | 2,082 | 3.7 | % | |||||||||||
| Other investments [1] | 375 | 0.7 | % | 201 | 0.4 | % | |||||||||||
| Short-term investments | 3,697 | 6.4 | % | 3,283 | 5.8 | % | |||||||||||
| Total investments | $ | 57,749 | 100.0 | % | $ | 56,532 | 100.0 | % | |||||||||
[1] Primarily consists of fixed maturities, at fair value using the fair value option ("FVO"), equity fund investments, overseas deposits, consolidated investment funds and derivative instruments which are carried at fair value.
December 31, 2021 compared to December 31, 2020
Total investments increased primarily due to an increase in limited partnerships and other alternative investments, mortgage loans, and equity securities, partially offset by a decrease in fixed maturities, AFS.
Limited partnerships and other alternative investments increased primarily driven by increased valuations and additional investments in real estate joint ventures.
Mortgage loans increased largely due to funding of industrial, multifamily, and retail commercial whole loans.
Equity securities increased due to net purchases and appreciation in value due to higher equity market levels.
Fixed maturities, AFS decreased primarily due to a decrease in valuations due to higher interest rates, partially offset by tighter credit spreads. The decline was also due to the reinvestment into other asset classes.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
| Net Investment Income | ||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||
| (Before tax) | Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | ||||||||||||||||||||
| Fixed maturities [2] | $ | 1,349 | 3.1 | % | $ | 1,442 | 3.4 | % | $ | 1,559 | 3.8 | % | ||||||||||||||
| Equity securities | 73 | 4.9 | % | 39 | 3.7 | % | 46 | 3.4 | % | |||||||||||||||||
| Mortgage loans | 181 | 3.7 | % | 172 | 3.9 | % | 165 | 4.4 | % | |||||||||||||||||
| Limited partnerships and other alternative investments | 732 | 31.8 | % | 222 | 12.3 | % | 232 | 14.4 | % | |||||||||||||||||
| Other [3] | 58 | 42 | 32 | |||||||||||||||||||||||
| Investment expense | (80) | (71) | (83) | |||||||||||||||||||||||
| Total net investment income | $ | 2,313 | 4.3 | % | $ | 1,846 | 3.6 | % | $ | 1,951 | 4.1 | % | ||||||||||||||
| Total net investment income excluding limited partnerships and other alternative investments | $ | 1,581 | 3.1 | % | $ | 1,624 | 3.3 | % | $ | 1,719 | 3.7 | % | ||||||||||||||
[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 changes in fair value of certain equity fund investments and income from derivatives that qualify for hedge accounting and are used to hedge fixed maturities.
Year ended December 31, 2021 compared to the year ended December 31, 2020
Total net investment income increased primarily due to:
•Greater income from limited partnerships and other alternative investments primarily driven by higher valuations and cash distributions within private equity funds and sales of underlying investments within real estate funds;
•A higher level of invested assets;
•Greater income from non-routine items, including yield adjustments on prepayable securities; and
•A higher yield from equity investments.
These increases were partially offset by a lower yield on fixed maturities resulting from reinvesting at lower rates and a lower yield on floating rate investments.
Annualized net investment income yield, excluding limited partnerships and other alternative investments, was down primarily due to lower reinvestment rates, partially offset
by greater income from non-routine income items and a higher yield on equity securities.
Average reinvestment rate, on fixed maturities and mortgage loans, excluding certain U.S. Treasury securities, for the year-ended December 31, 2021, was 2.6% which was below the average yield of sales and maturities of 3.0% for the same period. Average reinvestment rate for the year-ended December 31, 2020, was 2.5% which was below the average yield of sales and maturities of 3.4%.
For the 2022 calendar year, we expect the annualized net investment income yield, excluding limited partnerships and other alternative investments, to be lower than the portfolio yield earned in 2021 due to lower reinvestment rates. The estimated impact on annualized net investment income yield is subject to variability due to evolving market conditions, active portfolio management, and the level of non-routine income items, such as make-whole payments, prepayment penalties on mortgage loans and yield adjustments on prepayable securities.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
| Net Realized Gains (Losses) | |||||||||||
| For the years ended December 31, | |||||||||||
| (Before tax) | 2021 | 2020 | 2019 | ||||||||
Gross gains on sales of fixed maturities | $ | 319 | $ | 255 | $ | 234 | |||||
Gross losses on sales of fixed maturities | (89) | (50) | (56) | ||||||||
| Equity securities [1] | 227 | (214) | 254 | ||||||||
| Net credit losses on fixed maturities, AFS [2] | 4 | (28) | |||||||||
| Change in ACL on mortgage loans [3] | 9 | (19) | |||||||||
| Intent-to-sell impairments [2] | — | (5) | — | ||||||||
| Net other-than-temporary impairment ("OTTI") losses recognized in earnings | (3) | ||||||||||
| Valuation allowances on mortgage loans | 1 | ||||||||||
| Other, net [4] | 39 | 47 | (35) | ||||||||
| Net realized gains (losses) | $ | 509 | $ | (14) | $ | 395 | |||||
[1]The net unrealized gains on equity securities still held as of the end of the period and included in net realized gains (losses) were $155, $53, and $164 for the years ended December 31, 2021, 2020, and 2019, respectively.
[2]Due to the adoption of accounting guidance for credit losses on January 1, 2020, realized losses previously reported as OTTI are now presented as credit losses which are net of any recoveries. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies. In addition, see Credit Losses on Fixed Maturities, AFS and Intent-to-Sell Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
[3]Represents the change in ACL recorded during the period following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies. In addition, see ACL on Mortgage Loans within the Investment Portfolio Risks and Risk Management section of the MD&A.
[4]Includes gains (losses) on non-qualifying derivatives for 2021, 2020, and 2019 of $12, $104, and $(24), respectively, gains (losses) from transactional foreign currency revaluation of $(1), $(1) and (9), respectively, and a loss of $21 and $48, respectively, on the sale of Continental Europe Operations for the years ended December 31, 2021 and 2020. For the year-ended December 31, 2021, there was also a gain of $46 on the sale of the Company's previously owned interest in Talcott Resolution.
Year ended December 31, 2021
Gross gains and losses on sales were primarily due to net sales of corporate securities and tax-exempt municipals, in addition to sales of U.S. treasuries for duration and risk management.
Equity securities net gains were primarily driven by appreciation in value due to higher equity market levels and gains realized on exit of private equity direct investments.
Other, net gains and losses included a gain of $46 on the sale of the Company's 9.7% retained interest in Talcott Resolution, sold on June 30, 2021, and a loss of $21 related to the sale of the Company's Continental Europe Operations, which was completed on December 29, 2021. Also included were gains of $7 on credit derivatives driven by a decrease in credit spreads.
Year ended December 31, 2020
Gross gains and losses on sales were primarily driven by issuer-specific sales of corporate securities and tax-exempt municipal bonds, rebalancing within the foreign government sector, and sales of U.S. treasury securities for duration and/or liquidity management.
Equity securities net losses were driven by mark-to-market losses due to the decline in equity market levels in the first quarter and losses incurred on sales across multiple issuers as the Company reduced its exposure to equity securities, partially offset by mark-to-market gains on certain preferred equities.
Other, net gains are primarily due to $75 of realized gains on terminated derivatives used to hedge against a decline in equity market levels and $21 of gains on interest rate derivatives due to a decline in interest rates. These gains were partially offset by
a loss of $48, before tax, on the sale of the Company’s Continental Europe Operations which the Company agreed to sell in September of 2020.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ, and in the past have differed, from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
•property and casualty insurance product reserves, net of reinsurance;
•group benefit LTD reserves, net of reinsurance;
•evaluation of goodwill for impairment;
•valuation of investments and derivative instruments including evaluation of credit losses on fixed maturities, AFS and ACL on mortgage loans; and
•contingencies relating to corporate litigation and regulatory matters.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
In developing these estimates management makes subjective and complex judgments that are 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 appropriate based upon the
facts available upon compilation of the financial statements. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Consolidated Financial Statements.
|PROPERTY & CASUALTY INSURANCE PRODUCT RESERVES, NET OF REINSURANCE
P&C Loss and Loss Adjustment Expense Reserves, Net of Reinsurance, by Segment as of December 31, 2021
Loss and LAE Reserves, Net of Reinsurance as of December 31, 2021
| Commercial Lines | Personal Lines | Property & Casualty Other Operations | Total Property & Casualty Insurance | % Total Reserves-net | ||||||||||||||||
| Workers’ compensation | $ | 11,259 | $ | — | $ | — | $ | 11,259 | 44.4% | |||||||||||
| General liability | 4,960 | — | — | 4,960 | 19.5% | |||||||||||||||
| Marine | 303 | — | — | 303 | 1.2% | |||||||||||||||
| Package business [1] | 1,924 | — | — | 1,924 | 7.6% | |||||||||||||||
| Commercial property | 530 | — | — | 530 | 2.1% | |||||||||||||||
| Automobile liability | 1,175 | 1,390 | — | 2,565 | 10.1% | |||||||||||||||
| Automobile physical damage | 14 | 40 | — | 54 | 0.2% | |||||||||||||||
| Professional liability | 1,261 | — | — | 1,261 | 5.0% | |||||||||||||||
| Bond | 434 | — | — | 434 | 1.7% | |||||||||||||||
| Homeowners | — | 364 | — | 364 | 1.4% | |||||||||||||||
| Asbestos and environmental | 110 | 10 | 604 | 724 | 2.9% | |||||||||||||||
| Assumed reinsurance | 285 | — | 96 | 381 | 1.5% | |||||||||||||||
| All other | 171 | 3 | 435 | 609 | 2.4% | |||||||||||||||
| Total reserves-net | 22,426 | 1,807 | 1,135 | 25,368 | 100.0% | |||||||||||||||
| Reinsurance and other recoverables | 4,480 | 37 | 1,564 | 6,081 | ||||||||||||||||
| Total reserves-gross | $ | 26,906 | $ | 1,844 | $ | 2,699 | $ | 31,449 | ||||||||||||
[1]Commercial Lines policy packages that include property and general liability coverages are generally referred to as the package line of business.
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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 business shown above, see Part I - Item1, Business.
Overview of Reserving for Property and Casualty Insurance Claims
It typically takes many months or years to pay claims incurred under a property and casualty insurance product; accordingly, the Company must establish reserves at the time the loss is incurred. Most of the Company’s policies provide for occurrence-based coverage where the loss is incurred when a claim event happens like an automobile accident, house or building fire or injury to an employee under a workers’ compensation policy. Some of the Company's policies, mostly for directors and officers insurance and errors and omissions insurance, are claims-made policies where the loss is incurred in the period the claim event is reported to the Company even if the loss event itself occurred in an earlier period.
Loss and loss adjustment expense reserves provide for the estimated ultimate costs of paying claims under insurance policies written by the Company, less amounts paid to date. These reserves include estimates for both claims that have been reported and those that have not yet been reported, and include estimates of all expenses associated with processing and settling these claims. Case reserves are established by a claims handler on each individual claim and are adjusted as new information becomes known during the course of handling the claim. Incurred but not reported (“IBNR”) reserves represent the difference between the estimated ultimate cost of all claims and the actual loss and loss adjustment expenses reported to the Company by claimants (“reported losses”). Reported losses represent cumulative loss and loss adjustment expenses paid plus case reserves for outstanding reported claims. For most lines, Company actuaries evaluate the total reserves (IBNR and case reserves) on an accident year basis. An accident year is the calendar year in which a loss is incurred, or, in the case of claims-made policies, the calendar year in which a loss is reported. For certain lines acquired from the Navigators Group book of business, total reserves are evaluated on a policy year basis and then converted to accident year. A policy year is the calendar year in which a policy incepts.
Factors that Change Reserve Estimates- Reserve estimates can change over time because of unexpected changes in the external environment. Inflation in claim costs, such as with medical care, hospital care, automobile parts, wages and home and building repair, would cause claims to settle for more than they are initially reserved. Changes in the economy can cause an increase or decrease in the number of reported claims (claim frequency). For example, an improving economy could result in more automobile miles driven and a higher number of automobile reported claims, or a change in economic conditions can lead to more or less workers’ compensation reported claims. An increase in the number or percentage of claims litigated can increase the average settlement amount per claim (claim severity). Changes in the judicial environment can affect interpretations of damages and how policy coverage applies which could increase or decrease claim severity. Over time, judges or juries in certain jurisdictions may be more inclined to determine liability and award damages. New legislation can also change how damages are defined or change the statutes of limitations for the filing of civil suits, resulting in greater claim frequency or severity. In addition, new
types of injuries may arise from exposures not contemplated when the policies were written. Past examples include pharmaceutical products, silica, lead paint, sexual molestation and sexual abuse and construction defects.
Reserve estimates can also change over time because of changes in internal Company operations. A delay or acceleration in handling claims may signal a need to increase or reduce reserves from what was initially estimated. New lines of business may have loss development patterns that are not well established. Changes in the geographic mix of business, changes in the mix of business by industry and changes in the mix of business by policy limit or deductible can increase the risk that losses will ultimately develop differently than the loss development patterns assumed in our reserving. In addition, changes in the quality of risk selection in underwriting and changes in interpretations of policy language could increase or decrease ultimate losses from what was assumed in establishing the reserves.
In the case of assumed reinsurance, all of the above risks apply. The Company assumes property and casualty risks from other insurance companies as part of its Global Re business acquired from Navigators Group and from certain pools and associations. Global Re, which is a part of the global specialty business, mostly assumes property, casualty and specialty risks. Changes in the case reserving and reporting patterns of insurance companies ceding to The Hartford can create additional uncertainty in estimating the reserves. Due to the inherent complexity of the assumptions used, final claim settlements may vary significantly from the present estimates of direct and assumed reserves, particularly when those settlements may not occur until well into the future.
Reinsurance Recoverables- Through both facultative and treaty reinsurance agreements, the Company cedes a share of the risks it has underwritten to other insurance companies. The Company records reinsurance recoverables for losses and loss adjustment expenses ceded to its reinsurers representing the anticipated recovery from reinsurers of unpaid claims, including IBNR.
The Company estimates the portion of losses and loss adjustment expenses to be ceded based on the terms of any applicable facultative and treaty reinsurance, including an estimate of IBNR for losses that will ultimately be ceded.
The Company provides an allowance for uncollectible reinsurance, reflecting management’s best estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers’ unwillingness or inability to pay. The allowance for uncollectible reinsurance comprises an ACL and an allowance for disputed balances. The ACL primarily considers the credit quality of the Company's reinsurers while the allowance for disputes considers recent outcomes in arbitration and litigation in disputes between reinsurers and cedants and recent commutation activity between reinsurers and cedants that may signal how the Company’s own reinsurance claims may settle. Where its reinsurance contracts permit, the Company secures funding of future claim obligations with various forms of collateral, including irrevocable letters of credit, secured trusts, funds held accounts and group-wide offsets. The allowance for uncollectible reinsurance was $96 as of December 31, 2021, comprised of $42 related to Commercial Lines, $1 related to
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Personal Lines and $53 related to Property & Casualty Other Operations.
The Company’s estimate of reinsurance recoverables, net of an allowance for uncollectible reinsurance, is subject to similar risks and uncertainties as the estimate of the gross reserve for unpaid losses and loss adjustment expenses for direct and assumed exposures.
Review of Reserve Adequacy- The Hartford regularly reviews the appropriateness of reserve levels at the line of business or more detailed level, taking into consideration the variety of trends that impact the ultimate settlement of claims. For Property & Casualty Other Operations, asbestos and environmental (“Run-off A&E”) reserves are reviewed by type of event rather than by line of business.
Reserve adjustments, which may be material, are reflected in the operating results of the period in which the adjustment is determined to be necessary. In the judgment of management, information currently available has been properly considered in establishing the reserves for unpaid losses and loss adjustment expenses and in recording the reinsurance recoverables for ceded unpaid losses.
Reserving Methodology
The following is a discussion of the reserving methods used for the Company's property and casualty lines of business other than asbestos and environmental.
Reserves are set by line of business within the operating segments. A single line of business may be written in more than one segment. Lines of business for which reported losses emerge over a long period of time are referred to as long-tail lines of business. Lines of business for which reported losses emerge more quickly are referred to as short-tail lines of business. The Company’s shortest-tail lines of business are homeowners, commercial property, marine and automobile physical damage. The longest tail lines of business include workers’ compensation, general liability, professional liability and assumed reinsurance. For short-tail lines of business, emergence of paid losses and case reserves is credible and likely indicative of ultimate losses. For long-tail lines of business, emergence of paid losses and case reserves is less credible in the early periods after a given accident year and, accordingly, may not be indicative of ultimate losses.
Use of Actuarial Methods and Judgments- The Company’s reserving actuaries regularly review reserves for both current and prior accident years using the most current claim data. A variety of actuarial methods and judgments are used for most lines of business to arrive at selections of estimated ultimate losses and loss adjustment expenses. New methods may be added for specific lines over time to inform these selections where appropriate. The reserve selections incorporate input, as appropriate, from claims personnel, pricing actuaries and operating management about reported loss cost trends and other factors that could affect the reserve estimates. Most reserves are reviewed fully each quarter, including loss and loss adjustment expense reserves for homeowners, commercial property, marine property, automobile physical damage, automobile liability, package property business, and workers’ compensation. Other reserves, including most general liability and professional liability lines, are reviewed semi-annually. Certain additional reserves are also reviewed semi-
annually or annually, including reserves for losses incurred in accident years older than twelve years for Personal Lines and older than twenty years for Commercial Lines, as well as reserves for bond, assumed reinsurance, latent exposures such as construction defects, and unallocated loss adjustment expenses. For reserves that are reviewed semi-annually or annually, management monitors the emergence of paid and reported losses in the intervening quarters and, if necessary, performs a reserve review to 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 loss ratio is determined by starting with the average loss ratio of recent prior accident years and adjusting that ratio for the effect of expected changes to earned pricing, loss frequency and severity, mix of business, ceded reinsurance and other factors. For short-tail lines, IBNR for the current accident year is initially recorded as the product of the expected loss ratio for the period, earned premium for the period and the proportion of losses expected to be reported in future calendar periods for the current accident period. For long-tailed lines, IBNR reserves for the current accident year are initially recorded as the product of the expected loss ratio for the period and the earned premium for the period, less reported losses for the period.
As losses emerge or develop in periods subsequent to a given accident year, reserving actuaries use other methods to estimate ultimate unpaid losses in addition to the expected loss ratio method. These primarily include paid and reported loss development methods, frequency/severity techniques and the Bornhuetter-Ferguson method (a combination of the expected loss ratio and paid development or reported development method). Within any one line of business, the methods that are given more influence vary based primarily on the maturity of the accident year, the mix of business and the particular internal and external influences impacting the claims experience or the methods. The output of the reserve reviews are reserve estimates representing a range of actuarial indications.
Reserve Discounting- Most of the Company’s property and casualty insurance product reserves are not discounted. However, the Company has discounted liabilities funded through structured settlements and has discounted a portion of workers’ compensation reserves that have a fixed and determinable payment stream. For further discussion of these discounted liabilities, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements.
Differences Between GAAP and Statutory Basis Reserves- As of December 31, 2021 and 2020, U.S. property and casualty insurance product reserves for losses and loss adjustment expenses, net of reinsurance recoverables, reported under U.S. GAAP were lower than net reserves reported on a statutory basis, primarily due to reinsurance recoverables on two ceded retroactive reinsurance agreements that are recorded as a reduction of other liabilities under statutory accounting. One of the retroactive reinsurance agreements covers substantially all adverse development on asbestos and environmental reserves subsequent to 2016, up to a $1.5 billion limit, and the other covered adverse development on Navigators Insurers' existing net loss and allocated loss adjustment reserves as of December 31, 2018, up to a $300 limit. Under both agreements,
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
the Company cedes to NICO, a subsidiary of Berkshire Hathaway Inc. ("Berkshire").
Reserving Methods by Line of Business- Apart from Run-off A&E which is discussed in the following section on Property & Casualty Other Operations, below is a general discussion of which reserving methods are preferred by line of business. Because the actuarial estimates are generated at a
much finer level of detail than line of business (e.g., by distribution channel, coverage, accident period), other methods than those described for the line of business may also be employed for a coverage and accident year within a line of business. Also, as circumstances change, the methods that are given more influence will change.
Preferred Reserving Methods by Line of Business
| Commercial property, homeowners and automobile physical damage | These short-tailed lines are fast-developing and paid and reported development techniques are used as these methods use historical data to develop paid and reported loss development patterns, which are then applied to cumulative paid and reported losses by accident period to estimate ultimate losses. In addition to paid and 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 liability | For personal automobile liability, and bodily injury in particular, 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 reviews and often relies on 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. | ||||
| Commercial automobile liability | The Company performs a variety of techniques, including the paid and reported development methods and frequency/severity techniques. For older, more mature accident years, the Company primarily uses reported development techniques. For more 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 supplements the expected loss ratio method and paid and reported development methods with others such as individual claim reviews and frequency and severity techniques. | ||||
| General liability, bond and large deductible workers’ compensation | For these long-tailed lines of business, the Company generally relies on the expected loss ratio and reported development techniques. The Company generally weights these techniques together, relying more heavily on the expected loss ratio method at early ages of development and shifting more weight onto the reported development method as an accident year matures. For certain general liability lines the Company uses a Berquist-Sherman technique to adjust for changes in claim reserving patterns. The Company also uses various frequency/severity methods aimed at capturing large loss development and in some bond lines individual claim reviews are used. | ||||
| Workers’ compensation | Workers’ compensation is the Company’s single largest reserve line of business and a wide range of methods are used. Due to the long-tailed nature of workers' compensation, the selection of methods is driven by expected loss ratio methods ("ELR") at early evaluations with emphasis shifting first to Bornhuetter-Ferguson methods, then to paid and reported development methods (with more reliance placed on paid methods), and finally to methods that are responsive to the inventory of open claims. Across these techniques, there are adjustments related to changes in emergence patterns across years, projections of future cost inflation, outlier claims, and analysis of larger states. | ||||
| Marine | For marine liability, the Company generally relies on the expected loss ratio, Berquist-Sherman, and reported development techniques. The Company generally weights these techniques together, relying more heavily on the expected loss ratio method at early ages of development and then shifts towards Berquist-Sherman and then more towards the reported development method as an accident year matures. For marine property segments, the Company relies on a Berquist-Sherman method for early development ages then shifts to reported development techniques. | ||||
| Assumed reinsurance and all other | Standard methods, such as expected loss ratio, Berquist-Sherman and reported development techniques are applied. These methods and analyses are informed by underlying treaty by treaty analyses supporting the expected loss ratios, and cedant data will often inform the loss development patterns. In some instances, reserve indications may also be influenced by information gained from claims and underwriting audits. Policy quarter and policy year loss reserve estimates are then converted to an accident year basis. | ||||
| Allocated loss adjustment expenses ("ALAE") | For some lines of business (e.g., professional liability, assumed reinsurance, and the acquired Navigators Group book of business), ALAE and losses are analyzed together. For most lines of business, however, ALAE is analyzed separately, using paid development techniques and a ratio of paid ALAE to paid loss is applied to loss reserves to estimate unpaid ALAE. | ||||
| Unallocated loss adjustment expenses ("ULAE") | ULAE is analyzed separately from loss and ALAE. For most lines of business, future ULAE costs to be paid are projected based on an expected claim handling cost per claim year, the anticipated claim closure pattern and the ratio of paid ULAE to paid loss is applied to estimated unpaid losses. For some lines, a simplified paid-to-paid approach is used. | ||||
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The recorded reserve for losses and loss adjustment expenses represents the Company's best estimate of the ultimate settlement amount of unpaid losses and loss adjustment expenses. In applying judgment, the best estimate is selected after considering the estimates derived from a number of actuarial methods, giving more weight to those methods deemed more predictive of ultimate unpaid losses and loss adjustment expenses. The Company does not produce a statistical range or confidence interval of reserve estimates and, since reserving methods with more credibility are given greater weight, the selected best estimate may differ from the mid-point of the various estimates produced by the actuarial methods used.
Assumptions used in arriving at the selected actuarial indications consider a number of factors, including the immaturity of emerged claims in recent accident years, emerging trends in the recent past, and the level of volatility within each line of business.
Adjustments to reserves of prior accident years are referred to as “prior accident year development”. Increases in previous estimates of ultimate loss costs are referred to as either an increase in prior accident year reserves or as unfavorable reserve development. Decreases in previous estimates of ultimate loss costs are referred to as either a decrease in prior accident year reserves or as favorable reserve development. Reserve development can influence the comparability of year over year underwriting results.
For a discussion of changes to reserve estimates recorded in 2021, see Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses in the Notes to Consolidated Financial Statements.
Current Trends Contributing to Reserve Uncertainty
The Hartford is a multi-line company in the property and casualty insurance business. The Hartford is, therefore, subject to reserve uncertainty stemming from changes in loss trends and other conditions which could become material at any point in time. As market conditions and loss trends develop, management must assess whether those conditions constitute a long-term trend that should result in a reserving action (i.e., increasing or decreasing the reserve).
General liability- Within Commercial Lines and Property & Casualty Other Operations, the Company has exposure to general liability claims, including from bodily injury, property damage and product liability. Reserves for these exposures can be particularly difficult to estimate due to the long development pattern and uncertainty about how cases will settle. In particular, the Company has exposure to bodily injury claims that is the result of long-term or continuous exposure to harmful products or substances. Examples include, but are not limited to, pharmaceutical products, silica, talcum powder, per-and polyfluoroalkyl substances ("PFAS"), head injuries and lead paint. The Company also has exposure to claims from construction defects, where property damage or bodily injury from negligent construction is alleged. In addition, the Company has exposure to claims asserted against religious institutions, and other organizations, including the Boy Scouts of America, relating to sexual molestation and sexual abuse. For additional information related to the Company's settlement agreement with
the Boy Scouts of America, see Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses in the Notes to Consolidated Financial Statements. State “reviver” statutes, extending statutes of limitations for certain sexual molestation and sexual abuse claims, could result in additional litigation or could result in unexpected sexual molestation and sexual abuse losses. Such exposures may involve potentially long latency periods and may implicate coverage in multiple policy periods, which can raise complex coverage issues with significant effects on the ultimate scope of coverage. Such exposures may also be impacted by insured bankruptcies. These factors make reserves for such claims more uncertain than other bodily injury or property damage claims. With regard to these exposures, the Company monitors trends in litigation, the external environment including legislation, the similarities to other mass torts and the potential impact on the Company’s reserves. Additionally, uncertainty in estimated claim severity causes reserve variability, particularly with respect to changes in internal claim handling and case reserving practices.
Workers’ compensation- Included in both small commercial and in middle & large commercial, workers’ compensation is the Company’s single biggest line of business and the property and casualty line of business with the longest pattern of loss emergence. To the extent that patterns in the frequency of settlement payments deviate from historical patterns, loss reserve estimates would be less reliable. Medical costs make up approximately 50% of workers’ compensation payments. As such, reserve estimates for workers’ compensation are particularly sensitive to changes in medical inflation, the changing use of medical care procedures and changes in state legislative and regulatory environments. In addition, a deteriorating economic environment can reduce the ability of an injured worker to return to work and lengthen the time a worker receives disability benefits. In National Accounts, reserves for large deductible workers’ compensation insurance require estimating losses attributable to the deductible amount that will be paid by the insured; if such losses are not paid by the insured due to financial difficulties, the Company is contractually liable.
Commercial Lines automobile- Uncertainty in estimated claim severity causes reserve variability for commercial automobile losses including reserve variability due to changes in internal claim handling and case reserving practices as well as due to changes in the external environment.
Directors' and officers' insurance- Uncertainty regarding the number and severity of security class action suits can result in reserve volatility for directors' and officers' insurance claims. Additionally, the Company’s exposure to losses under directors’ and officers’ insurance policies, both domestically and internationally, is primarily in excess layers, making estimates of loss more complex.
Personal Lines automobile- 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. Severity trends are affected by changes in internal claim handling and case reserving practices as well as by changes in the external environment, such as due to inflation in labor and materials because of supply chain disruptions affecting repair costs. Changes in claim practices increase the uncertainty in the interpretation of case reserve data, which
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increases the uncertainty in recorded reserve levels. Severity trends have increased in recent accident years, in part driven by more expensive parts associated with new automobile technology, causing additional uncertainty about the reliability of past patterns. In addition, the introduction of new products and class plans has led to a different mix of business by type of insured than the Company experienced in the past. Such changes in mix increase the uncertainty of the reserve projections, since historical data and reporting patterns may not be applicable to the new business.
Assumed reinsurance- While the pricing and reserving processes can be challenging and idiosyncratic for insurance companies, the inherent uncertainties of setting prices and estimating such reserves are even greater for the reinsurer. This is primarily due to the longer time between the date of an occurrence and the reporting of claims to the reinsurer, the diversity of development patterns among different types of reinsurance treaties or contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing pricing and reserving practices among ceding companies. In addition, trends that have affected development of liabilities in the past may not necessarily occur or impact liability development in the same manner or to the same degree in the future. As a result, actual losses and LAE may deviate, perhaps substantially, from the expected estimates.
International business- In addition to several of the line-specific trends listed above, the International business acquired through the Navigators Group book of business may have additional uncertainty due to geopolitical, foreign currency, and trade dispute risks.
COVID-19 impacts- As further explained under the "Impact of COVID-19 on our financial condition, results of operations and liquidity" section of this MD&A, the Company incurred $31 of COVID-19 claims in 2021 within P&C, including in workers' compensation and financial lines. Under workers’ compensation, we have experienced a continuation of COVID-19 incurred losses, particularly due to laws or directives in certain states that require coverage of COVID-19 claims for health care and other essential workers based on a presumption that they contracted the virus while working. Under financial lines, we have experienced COVID-19 related claims under employment practices liability insurance policies. These claims tend to be low severity and we are monitoring emerging trends related to return to work and vaccine mandates. We continue to monitor exposure under director's and officer's insurance policies.
In addition to the direct impacts of COVID-19 mentioned above, we are monitoring for indirect impacts as well. This past year we have seen inflationary pressure on building material and labor costs due to supply chain disruption because of the pandemic. This has the potential to impact homeowners and commercial property severity and lengthen reporting patterns due to claim settlement delays. Supply chain disruption as a result of the pandemic has also had an impact on the automobile industry impacting physical damage severities.
Reserve estimates for COVID-19 claims are difficult to estimate. In establishing reserves for COVID-19 incurred claims through December 31, 2021, we have provided IBNR at a higher percentage of ultimate estimated incurred losses than usual as we expect longer claim reporting patterns given the effects of COVID-19. For example, we expect longer delays than usual between the time a worker is treated and the date the claim is
eventually submitted for workers' compensation coverage. Reserve estimates for directors’ and officers’ (“D&O”), errors and omissions ("E&O") and employment practices liability are subject to significant uncertainty given that estimates must be made of the expected ultimate severity of claims that have recently been reported. Changes in the legal environment and litigation process, including but not limited to court delays and closings, may also have potential impacts on development patterns for liability lines.
Catastrophes- Within Commercial Lines and Personal Lines, the Company is exposed to incurred losses from catastrophe events, primarily for damage to property. Reserves for hurricanes, tropical storms, tornado/hail, wildfires, earthquakes and other catastrophe events are subject to significant uncertainty about the number and average severity of claims arising from those events, particularly in cases where the event occurs near the end of a financial reporting period when there is limited information about the extent of damages. For example, after a catastrophe event, it may take a period of time before we are able to access the impacted areas limiting the ability of our claims adjusting staff to inspect losses, make estimates and determine the damages that are covered by the policy. To estimate catastrophe losses, we consider information from claim notices received to date, third party data, visual images of the affected area where we have exposures and our own historical experience of loss reporting patterns for similar events.
Impact of Key Assumptions on Reserves
As stated above, the Company’s practice is to estimate reserves using a variety of methods, assumptions and data elements within its reserve estimation. The Company does not use statistical loss distributions or confidence levels in the process of determining its reserve estimate and, as a result, does not disclose reserve ranges.
Across most lines of business, the most important reserve assumptions are future loss development factors applied to paid or reported losses to date. The trend in loss cost frequency and severity is also a key assumption, particularly in the most recent accident years, where loss development factors are less credible.
The following discussion discloses possible variation from current estimates of loss reserves due to a change in certain key indicators of potential losses. For automobile liability lines in both Personal Lines and Commercial Lines, the key indicator is the annual loss cost trend, particularly the severity trend component of loss costs. For workers’ compensation and general liability, loss development patterns are a key indicator, particularly for more mature accident years. For workers’ compensation, paid loss development patterns have been impacted by medical cost inflation and other changes in loss cost trends. For general liability, incurred loss development patterns have been impacted by, among other things, emergence of new types of claims (e.g., PFAS claims) and a shift in the mixture between smaller, more routine claims and larger, more complex claims.
Each of the impacts described below is estimated individually, without consideration for any correlation among key indicators or among lines of business. Therefore, it would be inappropriate to take each of the amounts described below and add them
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together in an attempt to estimate volatility for the Company’s reserves in total. For any one reserving line of business, the estimated variation in reserves due to changes in key indicators is a reasonable estimate of potential reserve development that may occur in the future, likely over a period of several calendar years. The variation discussed is not meant to be a worst-case scenario, and, therefore, it is possible that future variation may be more than the amounts discussed below. Moreover, the variation discussed does not represent a complete statistical range of potential reserve outcomes, and factors exist beyond the key indicators considered which have the potential to drive additional variation to the Company's reserves.
| Possible Change in Key Indicator | Reserves, Net of Reinsurance December 31, 2021 | Estimated Range of Potential Reserve Development | |||||||||
Personal Automobile Liability | +/- 2.5 points to the annual assumed change in loss cost severity for the two most recent accident years | $1.4 billion | +/- $65 | ||||||||
| Commercial Automobile Liability | +/- 2.5 points to the annual assumed change in loss cost severity for the two most recent accident years | $1.2 billion | +/- $30 | ||||||||
| Workers' Compensation | 2% change in paid loss development patterns | $11.3 billion | +/- $400 | ||||||||
| General Liability | 8% change in reported loss development patterns | $5.0 billion | +/- $500 | ||||||||
Reserving for Asbestos and Environmental Claims
How A&E Reserves are Set- The process for establishing reserves for asbestos and environmental claims first involves estimating the required reserves gross of ceded reinsurance and then estimating reinsurance recoverables.
In establishing reserves for gross asbestos claims, the Company evaluates its insureds’ estimated liabilities for such claims by examining exposures for individual insureds and assessing how coverage applies. The Company considers a variety of factors, including the jurisdictions where underlying claims have been brought, past, pending and anticipated future claim activity, the level of plaintiff demands, disease mix, past settlement values of similar claims, dismissal rates, allocated loss adjustment expense, and potential impact of other defendants being in bankruptcy.
Similarly, the Company reviews exposures to establish gross environmental reserves. The Company considers several factors in estimating environmental liabilities, including historical values of similar claims, the number of sites involved, the insureds’ alleged activities at each site, the alleged environmental damage, the respective shares of liability of
potentially responsible parties, the appropriateness and cost of remediation, the nature of governmental enforcement activities or mandated remediation efforts and potential impact of other defendants being in bankruptcy.
After evaluating its insureds’ probable liabilities for asbestos and/or environmental claims, the Company evaluates the insurance coverage in place for such claims. The Company considers its insureds’ total available insurance coverage, including the coverage issued by the Company. The Company also considers relevant judicial interpretations of policy language, the nature of how policy limits are enforced on multi-year policies and applicable coverage defenses or determinations, if any.
The estimated liabilities of insureds and the Company’s exposure to the insureds depends heavily on an analysis of the relevant legal issues and litigation environment. This analysis is conducted by the Company’s lawyers and is subject to applicable privileges.
For both asbestos and environmental reserves, the Company also analyzes its historical paid and reported losses and expenses year by year, to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid and reported activity. The historical losses and expenses are analyzed on both a direct basis and net of reinsurance.
Once the gross ultimate exposure for indemnity and allocated loss adjustment expense is determined for its insureds by each policy year, the Company calculates its ceded reinsurance projection based on any applicable facultative and treaty reinsurance and the Company’s experience with reinsurance collections. See the section that follows entitled A&E Adverse Development Cover that discusses the impact the reinsurance agreement with NICO may have on future adverse development of asbestos and environmental reserves, if any.
Uncertainties Regarding Adequacy of A&E Reserves- A number of factors affect the variability of estimates for gross asbestos and environmental reserves including assumptions with respect to the frequency of claims, the average severity of those claims settled with payment, the dismissal rate of claims with no payment, resolution of coverage disputes with our policyholders and the expense to indemnity ratio. Reserve estimates for gross asbestos and environmental reserves are subject to greater variability than reserve estimates for more traditional exposures.
The process of estimating asbestos and environmental reserves remains subject to a wide variety of uncertainties, which are detailed in Note 15 - Commitments and Contingencies of Notes to Consolidated Financial Statements. The Company believes that its current asbestos and environmental reserves are appropriate. Future developments could continue to cause the Company to change its estimates of its gross asbestos and environmental reserves. Losses ceded under the adverse development cover ("A&E ADC") with NICO in excess of the ceded premium paid of $650 have resulted in a deferred gain resulting in a timing difference between when gross reserves are increased and when reinsurance recoveries are recognized. This timing difference results in a charge to net income until such periods when the recoveries are recognized. Consistent with past practice, the Company will continue to monitor its reserves in Property & Casualty Other Operations regularly,
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
including its annual reviews of asbestos liabilities, reinsurance recoverables, the allowance for uncollectible reinsurance, and environmental liabilities. Where future developments indicate, we will make appropriate adjustments to the reserves at that time.
Total P&C Insurance Product Reserves Development
In the opinion of management, based upon the known facts and current law, the reserves recorded for the Company’s property
and casualty insurance products at December 31, 2021 represent the Company’s best estimate of its ultimate liability for unpaid losses and loss adjustment expenses related to losses covered by policies written by the Company. However, because of the significant uncertainties surrounding reserves, it is possible that management’s estimate of the ultimate liabilities for these claims may change in the future and that the required adjustment to currently recorded reserves could be material to the Company’s results of operations and liquidity.
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the Year Ended December 31, 2021
| Commercial Lines | Personal Lines | Property & Casualty Other Operations | Total Property & Casualty Insurance | |||||||||||||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, gross | $ | 25,058 | $ | 1,836 | $ | 2,728 | $ | 29,622 | ||||||||||||
| Reinsurance and other recoverables | 4,271 | 28 | 1,426 | 5,725 | ||||||||||||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, net | 20,787 | 1,808 | 1,302 | 23,897 | ||||||||||||||||
| Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||
| Current accident year before catastrophes | 5,407 | 1,840 | — | 7,247 | ||||||||||||||||
| Current accident year ("CAY") catastrophes | 496 | 168 | — | 664 | ||||||||||||||||
| Prior accident year development ("PYD") [1] | 141 | (144) | 202 | 199 | ||||||||||||||||
| Total provision for unpaid losses and loss adjustment expenses | 6,044 | 1,864 | 202 | 8,110 | ||||||||||||||||
| Change in deferred gain on retroactive reinsurance included in other liabilities [1] | (91) | — | (155) | (246) | ||||||||||||||||
| Payments | (4,316) | (1,865) | (214) | (6,395) | ||||||||||||||||
| Foreign currency adjustment | 2 | — | — | 2 | ||||||||||||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, net | 22,426 | 1,807 | 1,135 | 25,368 | ||||||||||||||||
| Reinsurance and other recoverables | 4,480 | 37 | 1,564 | 6,081 | ||||||||||||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, gross | $ | 26,906 | $ | 1,844 | $ | 2,699 | $ | 31,449 | ||||||||||||
| Earned premiums and fee income | $ | 9,575 | $ | 2,986 | ||||||||||||||||
| Loss and loss expense paid ratio [2] | 45.1 | 62.5 | ||||||||||||||||||
| Loss and loss expense incurred ratio | 63.4 | 63.1 | ||||||||||||||||||
| Prior accident year development (pts) [3] | 1.5 | (4.9) | ||||||||||||||||||
[1]Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators and A&E ADCs which, under retroactive reinsurance accounting, is deferred and is recognized over the period the ceded losses are recovered in cash from NICO. For additional information regarding the two adverse development cover reinsurance agreements, refer to Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[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.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
| Current Accident Year Catastrophe Losses for the Year Ended December 31, 2021, Net of Reinsurance | |||||||||||
Commercial Lines | Personal Lines | Total | |||||||||
| Wind and hail | $ | 157 | $ | 94 | $ | 251 | |||||
| Winter storms [1] | 151 | 18 | 169 | ||||||||
| Hurricanes and Tropical Storms | 151 | 43 | 194 | ||||||||
| Wildfires | 9 | 23 | 32 | ||||||||
| Losses ceded to the aggregate catastrophe treaty [2] | (29) | (10) | (39) | ||||||||
| Catastrophes before assumed reinsurance | 439 | 168 | 607 | ||||||||
| Global assumed reinsurance business [3] | 57 | — | 57 | ||||||||
| Total catastrophe losses | $ | 496 | $ | 168 | $ | 664 | |||||
[1]Includes catastrophe losses from the February winter storms in Texas and other areas within Commercial Lines and Personal Lines of $206 and $24, respectively, gross of reinsurance, and $151 and $18, respectively, net of reinsurance under the Company's per occurrence property catastrophe treaty covering events other than earthquakes and named hurricanes and tropical storms. The reinsurance covers 70% of up to $250 of losses in excess of $100 from such events occurring within a seven day time period, subject to a $50 annual aggregate deductible. These recoveries do not inure to the benefit of the aggregate property catastrophe treaty reinsurers. For further information on the treaty, refer to Enterprise Risk Management — Insurance Risk section of this MD&A.
[2]For further information on the aggregate catastrophe treaty, refer to Enterprise Risk Management — Insurance Risk section of this MD&A.
[3]Catastrophe losses incurred on global assumed reinsurance business are not covered under the Company's aggregate property catastrophe treaty. For further information on the treaty, refer to Enterprise Risk Management — Insurance Risk section of this MD&A.
| Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2021 | ||||||||||||||
| Commercial Lines | Personal Lines | Property & Casualty Other Operations | Total Property & Casualty Insurance | |||||||||||
| Workers’ compensation | $ | (190) | $ | — | $ | — | $ | (190) | ||||||
| Workers’ compensation discount accretion | 35 | — | — | 35 | ||||||||||
| General liability | 454 | — | — | 454 | ||||||||||
| Marine | 1 | — | — | 1 | ||||||||||
| Package business | (91) | — | — | (91) | ||||||||||
| Commercial property | (26) | — | — | (26) | ||||||||||
| Professional liability | (2) | — | — | (2) | ||||||||||
| Bond | (26) | — | — | (26) | ||||||||||
| Assumed reinsurance | (6) | — | — | (6) | ||||||||||
| Automobile liability | 9 | (90) | — | (81) | ||||||||||
| Homeowners | — | 3 | — | 3 | ||||||||||
| Net asbestos and environmental reserves | — | — | — | — | ||||||||||
| Catastrophes | (97) | (57) | — | (154) | ||||||||||
| Uncollectible reinsurance | (5) | — | (1) | (6) | ||||||||||
| Other reserve re-estimates, net | (6) | — | 48 | 42 | ||||||||||
| Prior accident year development before change in deferred gain | 50 | (144) | 47 | (47) | ||||||||||
| Change in deferred gain on retroactive reinsurance included in other liabilities | 91 | — | 155 | 246 | ||||||||||
| Total prior accident year development | $ | 141 | $ | (144) | $ | 202 | $ | 199 | ||||||
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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, 2020
| Commercial Lines | Personal Lines | Property & Casualty Other Operations | Total Property & Casualty Insurance | ||||||||||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, gross | $ | 23,363 | $ | 2,201 | $ | 2,697 | $ | 28,261 | |||||||||
| Reinsurance and other recoverables [1] | 4,029 | 68 | 1,178 | 5,275 | |||||||||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, net | 19,334 | 2,133 | 1,519 | 22,986 | |||||||||||||
| Provision for unpaid losses and loss adjustment expenses | |||||||||||||||||
| Current accident year before catastrophes | 5,493 | 1,695 | — | 7,188 | |||||||||||||
| Current accident year catastrophes | 397 | 209 | — | 606 | |||||||||||||
| Prior accident year development [2] | 44 | (438) | 258 | (136) | |||||||||||||
| Total provision for unpaid losses and loss adjustment expenses | 5,934 | 1,466 | 258 | 7,658 | |||||||||||||
| Change in deferred gain on retroactive reinsurance included in other liabilities [2] | (102) | — | (210) | (312) | |||||||||||||
| Payments | (4,348) | (1,791) | (265) | (6,404) | |||||||||||||
| Net reserves transferred to liabilities held for sale | (45) | — | — | (45) | |||||||||||||
| Foreign currency adjustment | 14 | — | — | 14 | |||||||||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, net | 20,787 | 1,808 | 1,302 | 23,897 | |||||||||||||
| Reinsurance and other recoverables | 4,271 | 28 | 1,426 | 5,725 | |||||||||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, gross | $ | 25,058 | $ | 1,836 | $ | 2,728 | $ | 29,622 | |||||||||
| Earned premiums and fee income | $ | 8,940 | $ | 3,042 | |||||||||||||
| Loss and loss expense paid ratio [3] | 48.6 | 58.9 | |||||||||||||||
| Loss and loss expense incurred ratio | 66.5 | 48.7 | |||||||||||||||
| Prior accident year development (pts) [4] | 0.5 | (14.6) | |||||||||||||||
[1]Includes a cumulative effect adjustment of $1 and $(1) for Commercial Lines and Property & Casualty Other Operations respectively, representing an adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. See Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements for further information.
[2]Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators and A&E ADCs which, under retroactive reinsurance accounting, is deferred and is recognized over the period the ceded losses are recovered in cash from NICO. For additional information regarding the two adverse development cover reinsurance agreements, refer to Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[3]The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums and fee income.
[4]“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, 2020, Net of Reinsurance | |||||||||||
Commercial Lines | Personal Lines | Total | |||||||||
| Wind and hail | $ | 167 | $ | 97 | $ | 264 | |||||
| Civil Unrest | 105 | — | 105 | ||||||||
| Hurricanes and Tropical Storms | 96 | 51 | 147 | ||||||||
| Wildfires | 21 | 61 | 82 | ||||||||
| Other | 8 | — | 8 | ||||||||
| Total catastrophe losses | $ | 397 | $ | 209 | $ | 606 | |||||
In December, 2019, the judge overseeing the bankruptcy of PG&E approved an $11 billion settlement of insurance subrogation claims to resolve all such claims arising from the 2017 Northern California wildfires and 2018 Camp wildfire. That settlement was contingent upon, among other things, the judge entering an order confirming PG&E’s chapter 11 bankruptcy plan (“PG&E Plan”) incorporating the settlement agreement. On June 20, 2020, the bankruptcy court judge approved the PG&E
Plan and PG&E subsequently transferred the $11 billion settlement amount to a trust designed to allocate and distribute the settlement among subrogation holders, including certain of the Company’s insurance subsidiaries. In the second quarter of 2020, the Company recorded an estimated $289 subrogation benefit though the ultimate amount it collects will depend on how the Company’s ultimate paid claims subject to subrogation compare to other insurers’ ultimate paid claims subject to
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
subrogation. In 2020, the Company received distributions, net of attorney costs, of $227.
| Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2020 | ||||||||||||||
| Commercial Lines | Personal Lines | Property & Casualty Other Operations | Total Property & Casualty Insurance | |||||||||||
| Workers’ compensation | $ | (110) | $ | — | $ | — | $ | (110) | ||||||
| Workers’ compensation discount accretion | 35 | — | — | 35 | ||||||||||
| General liability | 237 | — | — | 237 | ||||||||||
| Marine | 3 | — | — | 3 | ||||||||||
| Package business | (58) | — | — | (58) | ||||||||||
| Commercial property | (4) | — | — | (4) | ||||||||||
| Professional liability | (14) | — | — | (14) | ||||||||||
| Bond | (19) | — | — | (19) | ||||||||||
| Assumed reinsurance | (6) | — | — | (6) | ||||||||||
| Automobile liability | 27 | (61) | — | (34) | ||||||||||
| Homeowners | — | 7 | — | 7 | ||||||||||
| Net asbestos and environmental reserves | — | — | (2) | (2) | ||||||||||
| Catastrophes | (149) | (380) | — | (529) | ||||||||||
| Uncollectible reinsurance | — | — | (8) | (8) | ||||||||||
| Other reserve re-estimates, net | — | (4) | 58 | 54 | ||||||||||
| Prior accident year development before change in deferred gain | (58) | (438) | 48 | (448) | ||||||||||
| Change in deferred gain on retroactive reinsurance included in other liabilities | 102 | — | 210 | 312 | ||||||||||
| Total prior accident year development | $ | 44 | $ | (438) | $ | 258 | $ | (136) | ||||||
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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, 2019
| Commercial Lines | Personal Lines | Property & Casualty Other Operations | Total Property & Casualty Insurance | |||||||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, gross | $ | 19,455 | $ | 2,456 | $ | 2,673 | $ | 24,584 | ||||||
| Reinsurance and other recoverables | 3,137 | 108 | 987 | 4,232 | ||||||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, net | 16,318 | 2,348 | 1,686 | 20,352 | ||||||||||
| Navigators Group Acquisition | 2,001 | — | — | 2,001 | ||||||||||
| Provision for unpaid losses and loss adjustment expenses | ||||||||||||||
| Current accident year before catastrophes | 4,913 | 2,087 | — | 7,000 | ||||||||||
| Current accident year catastrophes | 323 | 140 | — | 463 | ||||||||||
| Prior accident year development [1] | (44) | (42) | 21 | (65) | ||||||||||
| Total provision for unpaid losses and loss adjustment expenses | 5,192 | 2,185 | 21 | 7,398 | ||||||||||
| Change in deferred gain on retroactive reinsurance included in other liabilities [1] | (16) | — | — | (16) | ||||||||||
| Payments | (4,161) | (2,400) | (187) | (6,748) | ||||||||||
| Foreign currency adjustment | (1) | — | — | (1) | ||||||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, net | 19,333 | 2,133 | 1,520 | 22,986 | ||||||||||
| Reinsurance and other recoverables | 4,030 | 68 | 1,177 | 5,275 | ||||||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, gross | $ | 23,363 | $ | 2,201 | $ | 2,697 | $ | 28,261 | ||||||
| Earned premiums and fee income | $ | 8,325 | $ | 3,235 | ||||||||||
| Loss and loss expense paid ratio [2] | 50.0 | 74.2 | ||||||||||||
| Loss and loss expense incurred ratio | 62.6 | 68.3 | ||||||||||||
| Prior accident year development (pts) [3] | (0.5) | (1.3) | ||||||||||||
[1]Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators and A&E ADCs which, under retroactive reinsurance accounting, is deferred and is recognized over the period the ceded losses are recovered in cash from NICO. For additional information regarding the two adverse development cover reinsurance agreements, refer to Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[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, 2019, Net of Reinsurance | |||||||||||
Commercial Lines | Personal Lines | Total | |||||||||
| Wind and hail | $ | 157 | $ | 102 | $ | 259 | |||||
| Winter storms | 54 | 18 | 72 | ||||||||
| Tropical storms | 18 | 5 | 23 | ||||||||
| Hurricanes | 20 | 4 | 24 | ||||||||
| Wildfires | 4 | 4 | 8 | ||||||||
| Tornadoes | 53 | 7 | 60 | ||||||||
| Typhoons | 16 | — | 16 | ||||||||
| Other | 1 | — | 1 | ||||||||
| Total catastrophe losses | $ | 323 | $ | 140 | $ | 463 | |||||
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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, 2019 | ||||||||||||||
| Commercial Lines | Personal Lines | Property & Casualty Other Operations | Total Property & Casualty Insurance | |||||||||||
| Workers’ compensation | $ | (120) | $ | — | $ | — | $ | (120) | ||||||
| Workers’ compensation discount accretion | 33 | — | — | 33 | ||||||||||
| General liability | 61 | — | — | 61 | ||||||||||
| Marine | 8 | — | — | 8 | ||||||||||
| Package business | (47) | — | — | (47) | ||||||||||
| Commercial property | (11) | — | — | (11) | ||||||||||
| Professional liability | 29 | — | — | 29 | ||||||||||
| Bond | (3) | — | — | (3) | ||||||||||
| Assumed reinsurance | 3 | — | — | 3 | ||||||||||
| Automobile liability | 27 | (38) | — | (11) | ||||||||||
| Homeowners | — | 3 | — | 3 | ||||||||||
| Net asbestos and environmental reserves | — | — | — | — | ||||||||||
| Catastrophes | (40) | (2) | — | (42) | ||||||||||
| Uncollectible reinsurance | (5) | — | (25) | (30) | ||||||||||
| Other reserve re-estimates, net | 5 | (5) | 46 | 46 | ||||||||||
| Total prior accident year development | (60) | (42) | 21 | (81) | ||||||||||
| Change in deferred gain on retroactive reinsurance included in other liabilities | 16 | — | — | 16 | ||||||||||
| Total prior accident year development | $ | (44) | $ | (42) | $ | 21 | $ | (65) | ||||||
For discussion of the factors contributing to unfavorable (favorable) for the prior accident year reserve development 2021, 2020, and 2019 periods, refer to Note 12 - Reserve for
Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
|PROPERTY & CASUALTY OTHER OPERATIONS
Net reserves and reserve activity in Property & Casualty Other Operations are categorized and reported as asbestos, environmental, and “all other”. The “all other” category of reserves covers a wide range of insurance and assumed reinsurance coverages, including, but not limited to, potential liability for construction defects, lead paint, silica, pharmaceutical products, head injuries, sexual molestation and sexual abuse and other long-tail liabilities. In addition to various insurance and assumed reinsurance exposures, "all other" includes unallocated loss adjustment expense reserves. "All other" also includes the Company’s allowance for uncollectible reinsurance. When the Company commutes a ceded reinsurance contract or settles a ceded reinsurance dispute, net reserves for the related cause of loss (including asbestos, environmental or all other) are increased for the portion of the
allowance for uncollectible reinsurance attributable to that commutation or settlement.
Asbestos and Environmental Reserves
The vast majority of the Company's exposure to A&E relates to policy coverages provided prior to 1986, reported within the P&C Other Operations segment (“Run-off A&E”). In addition, since 1986, the Company has written asbestos and environmental exposures under general liability policies and pollution liability under homeowners policies, which are reported in the Commercial Lines and Personal Lines segments.
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Run-off A&E Summary as of December 31, 2021
| Asbestos | Environmental | Total Run-off A&E | ||||||||||||
| Gross | ||||||||||||||
| Direct | $ | 1,247 | $ | 394 | $ | 1,641 | ||||||||
| Assumed Reinsurance | 460 | 68 | 528 | |||||||||||
| Total | 1,707 | 462 | 2,169 | |||||||||||
| Ceded- other than NICO | (444) | (68) | (512) | |||||||||||
| Total net reserves, before ceded losses to NICO | 1,263 | 394 | 1,657 | |||||||||||
| Ceded - NICO A&E ADC "Run-off"[1] | (1,053) | |||||||||||||
| Net | $ | 604 | ||||||||||||
[1]Including $1,053 of ceded losses for Run-off A&E and a ($38) reduction in ceded losses for Commercial Lines and Personal Lines, cumulative net incurred losses of $1,015 have been ceded to NICO under an adverse development cover reinsurance agreement. See the section that follows entitled A&E Adverse Development Cover for additional information.
Rollforward of Run-off A&E Losses and LAE
| Asbestos | Environmental | Total Run-off A&E | |||||||||
| 2021 | |||||||||||
| Beginning net reserves before reinsurance recoverable from NICO | $ | 1,268 | $ | 419 | $ | 1,687 | |||||
| Losses and loss adjustment expenses incurred before ceding to NICO A&E ADC | 104 | 51 | 155 | ||||||||
| Losses and loss adjustment expenses paid | (112) | (76) | (188) | ||||||||
| Reclassification of allowance for uncollectible reinsurance [1] | 3 | — | 3 | ||||||||
| Ending net reserves before reinsurance recoverable from NICO | 1,263 | 394 | 1,657 | ||||||||
| Reinsurance recoverable from NICO A&E ADC | (1,053) | ||||||||||
| Ending net reserves | $ | 604 | |||||||||
| 2020 | |||||||||||
| Beginning net reserves before reinsurance recoverable from NICO | $ | 1,308 | $ | 346 | $ | 1,654 | |||||
| Losses and loss adjustment expenses incurred before ceding to NICO A&E ADC | 130 | 106 | 236 | ||||||||
| Losses and loss adjustment expenses paid | (172) | (33) | (205) | ||||||||
| Reclassification of allowance for uncollectible reinsurance [1] | 2 | — | 2 | ||||||||
| Ending net reserves before reinsurance recoverable from NICO | 1,268 | 419 | 1,687 | ||||||||
| Reinsurance recoverable from NICO A&E ADC | (898) | ||||||||||
| Ending net reserves | $ | 789 | |||||||||
| 2019 | |||||||||||
| Beginning net reserves before reinsurance recoverable from NICO | $ | 1,342 | $ | 321 | $ | 1,663 | |||||
| Losses and loss adjustment expenses incurred before ceding to NICO A&E ADC | 76 | 56 | 132 | ||||||||
| Losses and loss adjustment expenses paid | (111) | (32) | (143) | ||||||||
| Reclassification of allowance for uncollectible reinsurance [1] | 1 | 1 | 2 | ||||||||
| Ending net reserves before reinsurance recoverable from NICO | 1,308 | 346 | 1,654 | ||||||||
| Reinsurance recoverable from NICO A&E ADC | (660) | ||||||||||
| Ending liability — net | $ | 994 | |||||||||
[1]Related to the reclassification of an allowance for uncollectible reinsurance from the "all other" category of P&C Other Operations reserves.
A&E Adverse Development Cover
Effective December 31, 2016, the Company entered into an A&E ADC reinsurance agreement with NICO, a subsidiary of Berkshire, to reduce uncertainty about potential adverse development. Under the A&E ADC, the Company paid a reinsurance premium of $650 for NICO to assume adverse net loss and allocated loss adjustment expense reserve development up to $1.5 billion above the Company’s existing net A&E reserves as of December 31, 2016 of approximately $1.7 billion, including both Run-off A&E and A&E reserves in Commercial Lines and Personal Lines. The $650 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 from other third-party reinsurers and continues to be responsible for claims handling and other administrative services, subject to certain conditions. The A&E ADC covers substantially all the Company’s A&E reserve development up to the reinsurance limit.
Under retroactive reinsurance accounting, net adverse A&E reserve development after December 31, 2016 results in an offsetting reinsurance recoverable up to the $1.5 billion limit. Cumulative ceded losses up to the $650 reinsurance
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
premium paid have been recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the $650 reinsurance premium paid have resulted in a deferred gain. As of December 31, 2021, the Company has incurred a cumulative $1,015 in adverse development on A&E reserves that have been ceded under the A&E ADC treaty with NICO, including $1,053 for Run-off A&E reserves, partially offset by a $38 reduction for A&E reserves in Commercial Lines and Personal Lines. As such, $485 of coverage is available for future adverse net reserve development, if any. As a result, the Company has recorded a $365 deferred gain within other liabilities, representing the difference between the reinsurance recoverable of $1,015 and ceded premium paid of $650. The deferred gain is recognized over the claim settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of asbestos and environmental claims will result in charges against earnings, which may be significant.
Net and Gross Survival Ratios
Net and gross survival ratios are a measure of the quotient of the carried reserves divided by average annual payments (net of reinsurance and on a gross basis) and is an indication of the number of years that carried reserves would last (i.e. survive) if future annual payments were consistent with the calculated historical average.
Since December 31, 2016, asbestos and environmental net reserves have been declining since all adverse development has been ceded to NICO, up to a limit of $1.5 billion and the deferred gain on retroactive reinsurance has been recorded within other liabilities rather than in net loss and loss adjustment expense reserves. Recoveries from NICO will not be collected until the Company has cumulative loss payments of more than the attachment point of $1.7 billion which was based on the carrying value of net reserves as of December 31, 2016. Accordingly, the payment of losses without any current collection of recoveries from NICO has reduced the Company’s net loss reserves which decreases the net survival ratios such that, unadjusted, the net survival ratios would not be representative of the true number of years of average loss payments covered by the reserves. Therefore, the net survival ratios presented in the table below are calculated before considering the effect of the A&E ADC reinsurance agreement but net of other reinsurance in place.
Net and Gross Survival Ratios
| Asbestos | Environmental | |||||||||||||
| One year net survival ratio | 11.3 | 5.2 | ||||||||||||
| Three year net survival ratio | 9.6 | 8.4 | ||||||||||||
| One year gross survival ratio | 10.9 | 4.2 | ||||||||||||
| Three year gross survival ratio | 9.4 | 7.4 | ||||||||||||
Run-off A&E Paid and Incurred Losses and LAE Development
| Asbestos | Environmental | Total A&E | ||||||||||||||||||
| Paid Losses & LAE | Incurred Losses & LAE | Paid Losses & LAE | Incurred Losses & LAE | Paid Losses & LAE | Incurred Losses & LAE | |||||||||||||||
| 2021 | ||||||||||||||||||||
| Gross | $ | 157 | $ | 148 | $ | 109 | $ | 55 | $ | 266 | $ | 203 | ||||||||
| Ceded- other than NICO | (45) | (44) | (33) | (4) | (78) | (48) | ||||||||||||||
| Net - Gross of ADC | 112 | 104 | 76 | 51 | 188 | 155 | ||||||||||||||
| Ceded - NICO A&E ADC | — | (155) | ||||||||||||||||||
| Net | $ | 188 | $ | — | ||||||||||||||||
| 2020 | ||||||||||||||||||||
| Gross | $ | 252 | $ | 170 | $ | 40 | $ | 141 | $ | 292 | $ | 311 | ||||||||
| Ceded- other than NICO | (80) | (40) | (7) | (35) | (87) | (75) | ||||||||||||||
| Net - Gross of ADC | 172 | 130 | 33 | 106 | 205 | 236 | ||||||||||||||
| Ceded - NICO A&E ADC | — | (238) | ||||||||||||||||||
| Net | $ | 205 | $ | (2) | ||||||||||||||||
| 2019 | ||||||||||||||||||||
| Gross | $ | 131 | $ | 115 | $ | 39 | $ | 95 | $ | 170 | $ | 210 | ||||||||
| Ceded- other than NICO | (20) | (39) | (7) | (39) | (27) | (78) | ||||||||||||||
| Net - Gross of ADC | 111 | 76 | 32 | 56 | 143 | 132 | ||||||||||||||
| Ceded - NICO A&E ADC | — | (132) | ||||||||||||||||||
| Net | $ | 143 | $ | — | ||||||||||||||||
Annual Reserve Reviews
Review of Asbestos and Environmental Reserves
The Company performs its regular comprehensive annual review of asbestos and environmental reserves in the fourth quarter, including both Run-off A&E (P&C Other Operations) and asbestos and environmental reserves included in Commercial
Lines and Personal Lines. As part of the evaluation of asbestos and environmental reserves in the fourth quarter of 2021, the Company reviewed all of its open direct domestic insurance accounts exposed to asbestos and environmental liability, as well as assumed reinsurance accounts.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2021 comprehensive annual reviews
As a result of the 2021 fourth quarter review, the Company increased estimated asbestos reserves before NICO reinsurance by $106, including $104 in P&C Other Operations, primarily due to an increase in claim settlement rates, claim settlement values, and defense costs, which more than offset the impact of a decline in claim filing frequency. Also contributing was an increase in the Company's estimated share of liability under pending or potential cost sharing agreements and settlements. The increase in asbestos reserves was offset by a $106 reinsurance recoverable under the NICO treaty.
As a result of the 2021 fourth quarter review, the Company increased estimated environmental reserves before NICO reinsurance by $49, including $51 in P&C Other Operations, primarily due to the settlement of a large coal ash remediation claim, an increase in legal defense costs and higher site remediation costs. The increase in environmental reserves was offset by a $49 reinsurance recoverable under the NICO treaty.
The total $155 increase in asbestos and environmental reserves in P&C Other Operations was offset by a $155 reinsurance recoverable under the NICO treaty. Since cumulative losses ceded to the A&E ADC exceed the $650 of ceded premium paid, the Company recognized a $155 increase in deferred gain on retroactive reinsurance, resulting in the Company recording a charge to earnings of $155 in 2021.
2020 comprehensive annual reviews
As a result of the 2020 fourth quarter review, the Company increased estimated asbestos reserves before NICO reinsurance in P&C Other Operations by $130, primarily due to an increase in the rate of asbestos claims settlements for both mesothelioma and non-mesothelioma claims. In addition, average settlement values and defense costs were higher than anticipated, driven by elevated plaintiff demands. Overall, the number of claim filings in the period covered by the 2020 study was roughly flat with the 2019 study, driven by an increase in non-mesothelioma claim filings, while the number of mesothelioma claim filings decreased as expected. The increase in asbestos reserves was offset by $132 reinsurance recoverable under the NICO treaty, recognizing ($2) in reserve releases not subject to the NICO treaty.
As a result of the 2020 fourth quarter review, the Company increased estimated environmental reserves before NICO reinsurance in P&C Other Operations by $106, primarily due to an increasing number of claims and suits alleging contamination from or exposure to PFAS. In addition, higher than anticipated remediation costs and legal defense costs also contributed to the reserve increase. The increase in environmental reserves was offset by a $106 reinsurance recoverable under the NICO treaty.
The total $236 increase in asbestos and environmental reserves in P&C Other Operations was offset by a $238 reinsurance recoverable under the NICO treaty, with a ($2) release in asbestos reserves not subject to the NICO treaty. Including a reduction of asbestos and environmental reserves in Commercial Lines and Personal Lines, the net increase in A&E reserves ceded to the A&E ADC in 2020 was $220 offset by a $220 increase in reinsurance recoverables under the NICO treaty. However, since cumulative losses ceded to the A&E ADC of $860 exceed the $650 of ceded premium paid, the Company recognized a $210 increase in deferred gain on retroactive
reinsurance, resulting in the Company recording a charge to earnings of $208 in 2020, consisting of the $210 deferred gain net of the $2 of favorable development on A&E reserves not subject to the NICO treaty.
For information regarding the 2019 comprehensive annual review, refer to Part 2, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in The Hartford’s 2020 Form 10-K Annual Report.
Major Categories of Asbestos Accounts
Direct asbestos exposures include both Known and Unallocated Direct Accounts.
•Known Direct Accounts- includes both Major Asbestos Defendants and Non-Major Accounts, and represent approximately 71% of the Company's total Direct gross asbestos reserves as of December 31, 2021 compared to approximately 71% as of December 31, 2020. Major Asbestos Defendants have been defined as the “Top 70” accounts in Tillinghast's published Tiers 1 and 2 and Wellington accounts, while Non-Major accounts are comprised of all other direct asbestos accounts and largely represent smaller and more peripheral defendants. Major Asbestos Defendants have the fewest number of asbestos accounts.
•Unallocated Direct Accounts- includes an estimate of the reserves necessary for asbestos claims related to direct insureds that have not previously tendered asbestos claims to the Company and exposures related to liability claims that may not be subject to an aggregate limit under the applicable policies. These exposures represent approximately 29% of the Company's Direct gross asbestos reserves as of December 31, 2021 compared to approximately 29% as of December 31, 2020.
Review of "All Other" Reserves in Property & Casualty Other Operations
Prior year development on all other reserves resulted in increases of $47, $50 and $21, respectively for calendar years 2021, 2020 and 2019. Included in the 2021 adverse reserve development was the portion of the increase in reserve for sexual molestation and sexual abuse claims recognized in P&C Other Operations, principally on assumed reinsurance. Also included in 2021 adverse development was an increase in reserves for ULAE, primarily due to an increase in expected aggregate claim handling costs associated with asbestos and environmental claims. For more information on the increase in reserves for sexual molestation and sexual abuse claims, see Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses, of the Notes to Consolidated Financial Statements.
The Company provides an allowance for uncollectible reinsurance, reflecting management’s best estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers’ unwillingness or inability to pay. In performing its assessment, the Company evaluates the collectibility of the reinsurance recoverables and the adequacy of the allowance for uncollectible reinsurance associated with older, long-term casualty liabilities reported in Property & Casualty Other Operations. In conducting these evaluations, the company used its most recent detailed evaluations of ceded liabilities reported in the segment. The Company analyzed the overall credit quality of the Company’s reinsurers, recent trends in arbitration and litigation outcomes in disputes between cedants and reinsurers,
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
and recent developments in commutation activity between reinsurers and cedants. As of 2021, 2020, and 2019 the allowance for uncollectible reinsurance for Property & Casualty Other Operations totaled $53, $60 and $71, respectively. Due to the inherent uncertainties as to collection and the length of time
before reinsurance recoverables become due, particularly for older, long-term casualty liabilities, it is possible that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be required.
|IMPACT OF RE-ESTIMATES ON PROPERTY & CASUALTY INSURANCE PRODUCT RESERVES
Estimating property and casualty insurance product reserves uses a variety of methods, assumptions and data elements. Ultimate losses may vary materially from the current estimates. Many factors can contribute to these variations and the need to change the previous estimate of required reserve levels. Prior accident year reserve development is generally due to the emergence of additional facts that were not known or anticipated at the time of the prior reserve estimate and/or due to changes in interpretations of information and trends.
The table below shows the range of annual reserve re-estimates experienced by The Hartford over the past ten years. The range of prior accident year development shown in the table below is net of losses ceded, including losses ceded under two adverse
development cover reinsurance agreements with NICO that are accounted for as a deferred gain on retroactive reinsurance. The amount of prior accident year development (as shown in the reserve rollforward) for a given calendar year is expressed as a percent of the beginning calendar year reserves, net of reinsurance. The ranges presented are significantly influenced by the facts and circumstances of each particular year and by the fact that only the last ten years are included in the range. Accordingly, these percentages are not intended to be a prediction of the range of possible future variability. For further discussion of the potential for variability in recorded loss reserves, see Preferred Reserving Methods by Line of Business and Impact of Key Assumptions on Reserves sections.
Range of Prior Accident Year Unfavorable (Favorable) Development for the Ten Years Ended December 31, 2021
| Commercial Lines | Personal Lines | Property & Casualty Other Operations | Total Property & Casualty [1] | |||||||||||
| Annual range of prior accident year unfavorable (favorable) development for the ten years ended December 31, 2021 | (1.3%) - 0.6% | (20.5%) - 8.3% | 0.9% - 9.8% | (1.9%) - 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 (1.9%) to 1.0%.
The potential variability of the Company’s property and casualty insurance product reserves would normally be expected to vary by segment and the types of loss exposures insured by those segments. Illustrative factors influencing the potential reserve variability for each of the segments are discussed under Critical Accounting Estimates for Property & Casualty Insurance Product Reserves and Asbestos and Environmental Reserves. See the section entitled Property & Casualty Other Operations, Annual Reserve Reviews about the impact that the A&E ADC retroactive reinsurance agreement with NICO has on net reserve changes of asbestos and environmental reserves.
The following table summarizes the effect of reserve re-estimates, net of reinsurance, on calendar year operations for the ten-year period ended December 31, 2021. The total of each column details the amount of reserve re-estimates made in the indicated calendar year and shows the accident years to which the re-estimates are applicable. The amounts in the total column on the far right represent the cumulative reserve re-estimates during the ten year period ended December 31, 2021 for the indicated accident year in each row. This table does not include Navigators Group reserve re-estimates for periods prior to the acquisition of the business on May 23, 2019.
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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 | |||||||||||||||||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | Total | |||||||||||||||||||||||||
| By Accident Year | |||||||||||||||||||||||||||||||||||
| 2011 & Prior | $ | (4) | $ | 173 | $ | 326 | $ | 362 | $ | 310 | $ | 93 | $ | (26) | $ | 19 | $ | 277 | $ | 569 | $ | 2,099 | |||||||||||||
| 2012 | 19 | — | (55) | (35) | (12) | (15) | (15) | (25) | (14) | (152) | |||||||||||||||||||||||||
| 2013 | (98) | (43) | (29) | (33) | (2) | (26) | (15) | (35) | (281) | ||||||||||||||||||||||||||
| 2014 | (14) | 20 | (19) | (54) | (29) | (28) | (59) | (183) | |||||||||||||||||||||||||||
| 2015 | 191 | (41) | (93) | 19 | (16) | (70) | (10) | ||||||||||||||||||||||||||||
| 2016 | (29) | 14 | (11) | (38) | (83) | (147) | |||||||||||||||||||||||||||||
| 2017 | 9 | (116) | (204) | (111) | (422) | ||||||||||||||||||||||||||||||
| 2018 | 78 | (307) | (96) | (325) | |||||||||||||||||||||||||||||||
| 2019 | (92) | (47) | (139) | ||||||||||||||||||||||||||||||||
| 2020 | (101) | (101) | |||||||||||||||||||||||||||||||||
| Increase (decrease) in net reserves [1] | (4) | 192 | 228 | 250 | 457 | (41) | (167) | (81) | (448) | (47) | 339 | ||||||||||||||||||||||||
| Change in deferred gain on retroactive reinsurance included in other liabilities | 16 | 312 | 246 | ||||||||||||||||||||||||||||||||
| Total unfavorable (favorable) prior accident year development | $ | (65) | $ | (136) | $ | 199 | |||||||||||||||||||||||||||||
[1]Increase (decrease) in net reserves by accident year in the above table is net of losses ceded, including losses ceded under two adverse development cover reinsurance agreements with NICO accounted for as a deferred gain on retroactive reinsurance. One agreement covers substantially all A&E reserve development for 2016 and prior accident years (the “A&E ADC”) up to an aggregate limit of $1.5 billion and the other covered substantially all reserve development of Navigators Insurance Company and certain of its affiliates for 2018 and prior accident years (“Navigators ADC”) up to an aggregate limit of $300. For calendar years before 2017, the 2011 and prior accident year development includes adverse development for A&E reserves. For additional information regarding the two adverse development cover reinsurance agreements, refer to Note 12 – Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
The commentary below explains, by accident year, the total prior accident year development recognized over the past 10 years.
Accident year 2011 and Prior
The net increases in estimates of ultimate losses for accident years 2011 and prior were driven mostly by increased reserves for asbestos and environmental reserves, and also by increased estimates for customs bonds, sexual molestation and sexual abuse and other mass torts claims. Also contributing was an increase in workers' compensation and commercial automobile liability, offset by favorable development in personal automobile liability.
Accident years 2012 and 2013
Estimates of ultimate losses were decreased for accident years 2012 and 2013 due to favorable frequency and/or medical severity trends for workers’ compensation and favorable professional liability claim emergence. Favorable emergence of property lines of business, including catastrophes, for the 2013 accident year, was partially offset by increased reserves in automobile liability due to increased severity of large claims.
Accident years 2014 and 2015
Changes in estimates of ultimate losses for accident years 2014 and 2015 were largely driven by favorable frequency and medical severity trends for workers' compensation, partially offset by unfavorable frequency and severity trends for personal and commercial automobile liability and increased severity of liability claims on package business.
Accident year 2016
Estimates of ultimate losses were decreased for the 2016 accident year largely due to reserve decreases on workers' compensation and personal automobile liability due to lower
estimated severity, partially offset by unfavorable reserve estimates for higher hazard general liability exposures due to increased frequency and severity trends, higher estimated severity in middle & large commercial and on the acquired Navigators Group book of business related to U.S. construction, premises liability, products liability and excess casualty.
Accident year 2017
Ultimate loss estimates were decreased for the 2017 accident year mainly due to release of reserves related to catastrophes, lower reserve estimates in personal automobile liability due to emergence of lower estimated severity and lower reserve estimates for workers’ compensation related to lower than previously estimated claim severity, partially offset by increases in estimates of ultimate losses in general liability and bond. Partially offsetting was an increase to general liability reserves that was related to high hazard exposures which experienced increased frequency and severity trends. In addition, unfavorable bond reserve re-estimates were driven by large claims.
Accident year 2018
Ultimate loss estimates were decreased for the 2018 accident year mainly due to reduction in estimated catastrophe reserves for California wildfires and for various wind and hail events. Reserve estimates were also reduced, to a lesser extent, for personal automobile liability which decreased due to lower than previously expected claim severity. These reserve decreases were partially offset by increases in commercial automobile liability and general liability. Commercial automobile liability reserve increases were related to higher estimated severity on middle & large commercial claims. Increases in general liability reserves for middle market and complex liability claims were also largely due to higher than previously expected severity.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Accident year 2019
Ultimate loss estimates were decreased for the 2019 accident year mainly due to favorable emergence of property lines of business, primarily related to catastrophes. In addition, reduced reserve estimates for personal automobile liability were largely offset by higher reserve estimates for commercial automobile liability.
Accident year 2020
Ultimate loss estimates were decreased for the 2020 accident year mainly due to favorable emergence of property lines of business, inclusive of catastrophes. Reserve estimates were also reduced, to a lesser extent, for personal automobile liability due to lower estimated severity and for general liability.
|GROUP BENEFIT RESERVES, NET OF REINSURANCE
The Company establishes reserves for group life and accident & health contracts, including long-term disability coverage, for both reported claims and claims related to insured events that the Company estimates have been incurred but have not yet been reported. As long-term disability reserves are long-tail claim liabilities, they are discounted because the payment pattern and the ultimate costs are reasonably fixed and determinable on an individual claim basis. The Company held $6,437 and $6,494 of LTD unpaid losses and loss adjustment expenses, net of reinsurance, as of December 31, 2021 and 2020, respectively.
Reserving Methodology
How Reserves are Set - A Disabled Life Reserve ("DLR") is calculated for each LTD claim. The DLR for each claim is the expected present value of all future benefit payments starting with the known monthly gross benefit which is reduced for estimates of the expected claim recovery due to return to work or claimant death, offsets from other income including offsets from Social Security benefits, and discounting where the discount rate is tied to expected investment yield at the time the claim is incurred. Estimated future benefit payments represent the monthly income benefit that is paid until recovery, death or expiration of benefits. Claim recoveries are estimated based on claim characteristics such as age and diagnosis and represent an estimate of benefits that will terminate, generally as a result of the claimant returning to work or being deemed able to return to work. For claims recently closed due to recovery, a portion of the DLR is retained for the possibility that the claim reopens upon further evidence of disability. In addition, a reserve for estimated unpaid claim expenses is included in the DLR.
The DLR also includes a liability for potential payments to pending claimants beyond the elimination period who have not yet been approved for LTD. In these cases, the present value of future benefits is reduced for the likelihood of claim denial based on Company experience.
Estimates for IBNR claims are made by applying completion factors to expected emerged experience by line of business. Included within IBNR are bulk reserves for claims reported but still within the waiting period until benefits are paid, typically 3 or 6 months depending on the contract. Completion factors are derived from standard actuarial techniques using triangles that display historical claim count emergence by incurral month. These estimates are reviewed for reasonableness and are adjusted for current trends and other factors expected to cause a change in claim emergence. The reserves include an estimate of unpaid claim expenses, including a provision for the cost of initial set-up of the claim once reported.
For all products, including LTD, there is a period generally ranging from two to twelve months, depending on the product and line of business, where emerged claims for an incurral year
are not yet credible enough to be a basis for estimating reserves. In these cases, the ultimate loss is estimated using earned premium multiplied by an expected loss ratio based on pricing assumptions of claim incidence, claim severity, and earned pricing.
Impact of Key Assumptions on Reserves
The key assumptions affecting long-term disability, which is the largest reserve within Group Benefits, include:
Discount Rate - The discount rate is the interest rate at which expected future claim cash flows are discounted to determine the present value. A higher selected discount rate results in a lower reserve. If the discount rate is higher than our future investment returns, our invested assets will not earn enough investment income to cover the discount accretion on our claim reserves which would negatively affect our profits. For each incurral year, the discount rates are estimated based on investment yields expected to be earned net of investment expenses. The incurral year is the year in which the claim is incurred and the estimated settlement pattern is determined. Once established, discount rates for each incurral year are unchanged except that LTD reserves assumed from the acquisition of Aetna's U.S. group life and disability business are all discounted using rates as of the November 1, 2017 acquisition date. The weighted average discount rate on LTD reserves was 3.3% and 3.4% in 2021 and 2020, respectively. Had the discount rate for each incurral year been 10 basis points lower at the time they were established, our LTD unpaid loss and loss adjustment expense reserves would be higher by $28, before tax, as of December 31, 2021.
Claim Termination Rates (inclusive of mortality, recoveries, and expiration of benefits) - Claim termination rates are an estimate of the rate at which claimants will cease receiving benefits during a given calendar year. Terminations result from a number of factors, including death, recoveries and expiration of benefits. The probability that benefits will terminate in each future month for each claim is estimated using a predictive model that uses past Company experience, contract provisions, job characteristics and other claimant-specific characteristics such as diagnosis, time since disability began, and age. Actual claim termination experience will vary from period to period. Over the past 10 years, claim termination rates for a single incurral year have generally increased and have ranged from 5% below to 8% above current assumptions over that time period. For a single recent incurral year (such as 2021), a one percent decrease in our assumption for LTD claim termination rates would increase our reserves by $10. For all incurral years combined, as of December 31, 2021, a one percent decrease in our assumption for our LTD claim
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termination rates would increase our Group Benefits unpaid losses and loss adjustment expense reserves by $23.
Impact of COVID-19 on 2021 Results of Operations
Within Group Benefits, the Company experienced excess mortality in its group life business of $583 in 2021, primarily caused by direct and indirect impacts of COVID-19. Within the group disability business, in 2021 the Company recognized $31 of COVID-19 related losses from short-term disability claims.
Current Trends Contributing to Reserve Uncertainty
While we have not seen a significant change in claim recovery patterns to date due to COVID-19, we have observed delays in
the Social Security Administration’s processing of disability claims. Other potential pandemic-related risks, such as delays in medical care or return-to-work and the emerging risk of long-COVID symptoms are being monitored. Also, due to the effects on the economy, we could experience an increase in claim incidence on long-term disability claims.
We hedge our interest rate exposure over a three year period at the time we price and sell long-term disability policies and our weighted average discount rate assumption for the 2021 incurral year is down slightly from that of the 2020 incurral year.
|EVALUATION OF GOODWILL FOR IMPAIRMENT
Goodwill balances are reviewed for impairment at least annually, or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. The recognition and measurement of goodwill impairment is based on the excess of the carrying value of the reporting unit over its estimated fair value, up to the amount of the reporting unit’s goodwill.
The estimated fair value of each reporting unit incorporates multiple inputs into discounted cash flow calculations including assumptions that market participants would make in valuing the reporting unit. Assumptions include levels of economic capital, future business growth, earnings projections, assets under management for Hartford Funds and the weighted average cost of capital used for purposes of discounting. Decreases in business growth, decreases in earnings projections and increases in the weighted average cost of capital will all cause a reporting unit’s fair value to decrease, increasing the possibility of impairment.
A reporting unit is defined as an operating segment or one level below an operating segment. The Company’s reporting units for which goodwill has been allocated consist of Commercial Lines, Personal Lines, Group Benefits and Hartford Funds.
The carrying value of goodwill was $1,911 as of December 31, 2021 and was comprised of $659 for Commercial Lines, $119 for Personal Lines, $861 for Group Benefits, and $272 for Hartford Funds.
The annual goodwill assessment for the reporting units was completed as of October 31, 2021, and resulted in no write-downs of goodwill for the year ended December 31, 2021. All reporting units passed the annual impairment test with a significant margin. For information regarding the 2021 and 2020 impairment tests see Note 11 - Goodwill & Other Intangible Assets of Notes to Consolidated Financial Statements.
|VALUATION OF INVESTMENTS AND DERIVATIVE INSTRUMENTS
Fixed Maturities, Equity Securities, Short-term Investments, and Derivatives
The Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market expectations. The Company uses a "waterfall" approach comprised of the following pricing sources which are listed in priority order: quoted prices, prices from third-party pricing services, internal matrix pricing, and independent broker quotes. The fair value of derivative instruments is determined primarily using a discounted cash flow model or option model technique and incorporate counterparty credit risk. In some cases, quoted market prices for exchange-traded transactions and transactions cleared through central clearing houses ("OTC-cleared") may be used and in other cases independent broker quotes may be
used. For further discussion, see the Fixed Maturities, Equity Securities, Short-term Investments and Derivatives section in Note 5 - Fair Value Measurements of Notes to Consolidated Financial Statements.
Evaluation of Credit Losses on Fixed Maturities, AFS and ACL on Mortgage Loans
Each quarter, a committee of investment and accounting professionals evaluates investments to determine if a credit loss is present for fixed maturities, AFS or an ACL is required for mortgage loans. This evaluation is a quantitative and qualitative process, which is subject to risks and uncertainties. For further discussion of the accounting policies, see the Significant Investment Accounting Policies Section in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements. For a discussion of credit losses recorded, see the Credit Losses on Fixed Maturities, AFS and Intent-to-Sell Impairments and ACL on Mortgage Loans
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
sections within the Investment Portfolio Risks and Risk Management section of the MD&A.
|CONTINGENCIES RELATING TO CORPORATE LITIGATION AND REGULATORY MATTERS
Management evaluates each contingent matter separately. A loss is recorded if probable and reasonably estimable. Management establishes reserves for these contingencies at its “best estimate,” or, if no one number within the range of possible losses is more probable than any other, the Company records an estimated reserve at the low end of the range of losses.
The Company has a quarterly monitoring process involving legal and accounting professionals. Legal personnel first identify outstanding corporate litigation and regulatory matters posing a reasonable possibility of loss. These matters are then jointly reviewed by accounting and legal personnel to evaluate the facts and changes since the last review in order to determine if a provision for loss should be recorded or adjusted, the amount that should be recorded, and the appropriate disclosure. The outcomes of certain contingencies currently being evaluated by
the Company, which relate to corporate litigation and regulatory matters, are inherently difficult to predict, and the reserves that have been established for the estimated settlement amounts are subject to significant changes. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of the Company. In view of the uncertainties regarding the outcome of these matters, as well as the tax-deductibility of payments, it is possible 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.
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| SEGMENT OPERATING SUMMARIES | ||
|COMMERCIAL LINES - RESULTS OF OPERATIONS | ||
Underwriting Summary
| 2021 | 2020 | 2019 | Increase (Decrease) From 2020 to 2021 | Increase (Decrease) From 2019 to 2020 | |||||||||||||
| Written premiums | $ | 10,041 | $ | 8,969 | $ | 8,452 | 12 | % | 6 | % | |||||||
| Change in unearned premium reserve | 500 | 59 | 162 | NM | (64 | %) | |||||||||||
| Earned premiums | 9,541 | 8,910 | 8,290 | 7 | % | 7 | % | ||||||||||
| Fee income | 34 | 30 | 35 | 13 | % | (14 | %) | ||||||||||
| Losses and loss adjustment expenses | |||||||||||||||||
| Current accident year before catastrophes | 5,407 | 5,488 | 4,913 | (1 | %) | 12 | % | ||||||||||
| Current accident year catastrophes [1] | 496 | 397 | 323 | 25 | % | 23 | % | ||||||||||
| Prior accident year development [1] | 141 | 44 | (44) | NM | NM | ||||||||||||
| Total losses and loss adjustment expenses | 6,044 | 5,929 | 5,192 | 2 | % | 14 | % | ||||||||||
| Amortization of DAC | 1,398 | 1,397 | 1,296 | — | % | 8 | % | ||||||||||
| Underwriting expenses | 1,678 | 1,594 | 1,600 | 5 | % | — | % | ||||||||||
| Amortization of other intangible assets | 29 | 28 | 18 | 4 | % | 56 | % | ||||||||||
| Dividends to policyholders | 24 | 29 | 30 | (17 | %) | (3 | %) | ||||||||||
| Underwriting gain (loss) | 402 | (37) | 189 | NM | (120 | %) | |||||||||||
| Net servicing income | 13 | 4 | 2 | NM | 100 | % | |||||||||||
| Net investment income [2] | 1,502 | 1,160 | 1,129 | 29 | % | 3 | % | ||||||||||
| Net realized gains (losses) [2] | 260 | (60) | 271 | NM | (122 | %) | |||||||||||
| Loss on reinsurance transaction | — | — | (91) | — | % | 100 | % | ||||||||||
| Other (expenses) | (18) | (35) | (38) | 49 | % | 8 | % | ||||||||||
| Income before income taxes | 2,159 | 1,032 | 1,462 | 109 | % | (29 | %) | ||||||||||
| Income tax expense [3] | 402 | 176 | 270 | 128 | % | (35 | %) | ||||||||||
| Net income | $ | 1,757 | $ | 856 | $ | 1,192 | 105 | % | (28 | %) | |||||||
[1]For additional information on 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 and Note 12- Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[2]For discussion of consolidated investment results, see MD&A - Investment Results.
[3]For discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements.
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Premium Measures
| 2021 | 2020 | 2019 | ||||||||||||
| Small Commercial: | ||||||||||||||
| Net new business premium | $ | 673 | $ | 557 | $ | 646 | ||||||||
| Policy count retention [1] | 84 | % | 83 | % | 82 | % | ||||||||
| Policy count retention, net of cancellations [1] | 87 | % | 84 | % | 83 | % | ||||||||
| Renewal written price increases | 3.0 | % | 2.0 | % | 1.7 | % | ||||||||
| Renewal earned price increases | 2.6 | % | 2.1 | % | 1.9 | % | ||||||||
| Policies in-force as of end of period (in thousands) | 1,366 | 1,283 | 1,291 | |||||||||||
| Middle Market [2]: | ||||||||||||||
| Net new business premium | $ | 532 | $ | 479 | $ | 584 | ||||||||
| Policy count retention [1] | 82 | % | 78 | % | 81 | % | ||||||||
| Policy count retention, net of cancellations [1] | 83 | % | 78 | % | 81 | % | ||||||||
| Renewal written price increases | 6.0 | % | 7.7 | % | 3.9 | % | ||||||||
| Renewal earned price increases | 7.3 | % | 6.5 | % | 2.8 | % | ||||||||
| Global Specialty: | ||||||||||||||
| Global specialty gross new business premium [3] | $ | 912 | $ | 752 | ||||||||||
| U.S. global specialty renewal written price increases | 11.5 | % | 17.3 | % | ||||||||||
| U.S. global specialty renewal earned price increases | 16.6 | % | 13.0 | % | ||||||||||
| International global specialty renewal written price increases [4] | 19.6 | % | 41.8 | % | ||||||||||
| International global specialty renewal earned price increases [4] | 42.8 | % | 41.3 | % | ||||||||||
[1]Policy count retention represents the ratio of the number of renewal policies issued during the current year period divided by the number of policies issued in the previous calendar year period before considering policies cancelled subsequent to renewal. Policy count retention, net of cancellations, represents the ratio of the number of renewal policies issued net of cancellations during the current year period divided by the number of policies issued net of cancellations in the previous calendar year period.
[2]Except for net new business premium, metrics for middle market exclude loss sensitive and programs businesses.
[3]Excludes Global Re and Continental Europe Operations and is before ceded reinsurance.
[4]Excludes offshore energy policies, political violence and terrorism policies, and any business under which the managing agent of our Lloyd's Syndicate delegates underwriting authority to coverholders and other third parties.
Underwriting Ratios
| 2021 | 2020 | 2019 | Increase (Decrease) From 2020 to 2021 | Increase (Decrease) From 2019 to 2020 | |||||||||||||
| Loss and loss adjustment expense ratio | |||||||||||||||||
| Current accident year before catastrophes | 56.7 | 61.6 | 59.3 | (4.9) | 2.3 | ||||||||||||
| Current accident year catastrophes | 5.2 | 4.5 | 3.9 | 0.7 | 0.6 | ||||||||||||
| Prior accident year development | 1.5 | 0.5 | (0.5) | 1.0 | 1.0 | ||||||||||||
| Total loss and loss adjustment expense ratio | 63.3 | 66.5 | 62.6 | (3.2) | 3.9 | ||||||||||||
| Expense ratio | 32.2 | 33.5 | 34.7 | (1.3) | (1.2) | ||||||||||||
| Policyholder dividend ratio | 0.3 | 0.3 | 0.4 | — | (0.1) | ||||||||||||
| Combined ratio | 95.8 | 100.4 | 97.7 | (4.6) | 2.7 | ||||||||||||
| Impact of current accident year catastrophes and prior year development | (6.7) | (5.0) | (3.4) | (1.7) | (1.6) | ||||||||||||
| Impact of current accident year change in loss reserves upon acquisition of a business [1] | — | — | (0.3) | — | 0.3 | ||||||||||||
| Underlying combined ratio | 89.1 | 95.5 | 94.0 | (6.4) | 1.5 | ||||||||||||
[1]Upon acquisition of Navigators Group and a review of Navigators Insurers reserves, the year ended December 31, 2019 included $68 of prior accident year reserve increases and $29 of current accident year reserve increases which were excluded for the purposes of the underlying combined ratio calculation.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Income
Year ended December 31, 2021 compared to the year ended December 31, 2020
Net income increased primarily due to a change from an underwriting loss to an underwriting gain, higher net investment income and a change from net realized losses to net realized gains. For further discussion of investment results, see MD&A - Investment Results.
Underwriting Gain (Loss)
Year ended December 31, 2021 compared to the year ended December 31, 2020
Underwriting gain in 2021 compared with an underwriting loss in 2020 with the improvement primarily due to lower current accident year losses before catastrophes, partially offset by higher net unfavorable prior accident year development and higher current accident year catastrophes. The decrease in current accident year losses before catastrophes was primarily driven by $278 before tax of COVID-19 incurred losses in 2020 compared with $31 before tax of COVID-19 incurred losses in 2021, partially offset by the impact of higher earned premium on incurred losses. Underwriting expenses increased due to higher contingent and supplemental commissions, incentive compensation, technology costs and marketing expenses, partially offset by a decrease in the allowance for credit losses on premiums receivable in the 2021 period compared to an increase in the 2020 period and savings from Hartford Next initiatives.
Earned Premiums
[1]Other of $42, $43 and $43 for 2019, 2020 and 2021, respectively, is included in the total.
Written Premiums
[1]Other written premiums of $41, $41 and $43 for the year ended December 31, 2019, 2020 and 2021, respectively, is included in the total.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year ended December 31, 2021 compared to the year ended December 31, 2020
Earned premiums increased in 2021 due to written premium increases over the prior 12 months as well as due to higher premiums from audits and endorsements, principally in workers’ compensation due to an increasing exposure base from higher payrolls as the economy recovers from the pandemic.
Written premiums increased in 2021 driven by growth in small commercial, middle & large commercial and global specialty across most lines of business.
The Company recognized renewal written pricing increases in all lines in 2021, with moderating price increases across most lines in middle market and global specialty. In global specialty, our U.S. wholesale book achieved an approximate 16% renewal written price increase, led by excess casualty. Global specialty international lines achieved a nearly 20% price increase, led by D&O. In small commercial, renewal written price increases were higher in 2021 than 2020, with workers' compensation pricing slightly positive in 2021 due to rising wages, along with mid-single digit increases in most other lines. In middle market, the Company recognized high single-digit to low double-digit rate increases in most middle market lines other than workers’ compensation, which experienced low single-digit written pricing increases.
Written premium increased across all three lines of business.
•Small commercial written premium increased in 2021 driven by exposure growth from higher audit and endorsement premium, higher policy count retention, renewal written pricing increases in all lines as well as new business growth. Written premium grew in all lines of business, with the most significant growth in package business and workers’ compensation.
•Middle & large commercial written premium increased in 2021 driven by exposure growth from higher audit and endorsement premium, improved retention, renewal written pricing increases in all lines as well as new business growth. Written premium grew in most lines of business, including general industries, national accounts, complex liability solutions and specialized industries.
•Global specialty written premium increased in 2021 driven by continued strong written pricing increases, higher retention and growth in gross new written premium. Written premium grew in all lines except international, with the most significant growth in U.S. wholesale, financial lines and global reinsurance.
Current Accident Year Loss and LAE Ratio before Catastrophes
Year ended December 31, 2021 compared to the year ended December 31, 2020
Current Accident Year Loss and LAE ratio before catastrophes decreased in 2021 primarily due to lower COVID-19 incurred losses in 2021 as well as due to lower loss ratios in global specialty and workers’ compensation. The lower loss ratios in global specialty were largely the result of rate and underwriting actions to improve profitability in those lines and was driven by U.S. financial lines, global reinsurance, U.S. wholesale and international.
2021 included COVID-19 incurred losses of $31 before tax, including losses of $20 in workers’ compensation and $11 in financial and other lines. 2020 included COVID-19 incurred losses of $278 before tax, including losses of $141 in property, $66 in workers’ compensation, net of favorable frequency on other workers' compensation claims, and $71 in financial and other lines.
Included in the $141 of COVID-19 property incurred losses and loss adjustment expenses in 2020 were $101 of losses arising from a small number of property policies that do not require direct physical loss or damage and from policies intended to cover specific business needs, including crisis management and performance disruption as well as a reserve of $40 for legal defense costs. Workers’ compensation COVID-19 incurred losses include claims in both states with presumptive coverage and in other states where the claimant must prove their COVID-19 illness was contracted at work. Financial lines COVID-19 claims include exposures in D&O, E&O and employment practices liability and the recessionary impacts on the surety book of business.
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Catastrophes and Unfavorable (Favorable) Prior Accident Year Development
Year ended December 31, 2021 compared to the year ended December 31, 2020
Current accident year catastrophe losses for 2021 included losses from tornado, wind and hail events, mostly concentrated in the Midwest, Texas and Southeast as well as hurricane Ida, and February winter storms primarily in the South.
Current accident year catastrophe losses for 2020 were primarily from civil unrest, a number of hurricanes and tropical storms, Pacific Coast wildfires, and Northeast windstorms as well as tornado, wind and hail events in the South, Midwest and Central Plains.
Prior accident year development was net unfavorable for 2021. Reserve development in 2021 included an increase in general liability that included a reserve increase related to the settlement with Boy Scouts of America on sexual molestation and sexual abuse claims, largely offset by reserve decreases for workers' compensation, package business, catastrophes, commercial property and bond.
Net unfavorable reserve development for 2020 included reserve increases for general liability driven primarily by increases in reserves for sexual molestation and sexual abuse claims, and increases in commercial automobile liability reserves, partially offset by net reserve decreases for catastrophes, workers' compensation and package business. Partially offsetting was
favorable development on prior year catastrophe reserves in 2020 due to recognizing a $29 before tax subrogation benefit from a settlement with PG&E over certain of the 2017 and 2018 California wildfires and a reduction in estimated catastrophe losses from a number of wind and hail events that occurred in 2017, 2018 and 2019.
Prior accident year development in both 2021 and 2020 included reserve increases related to Navigators Group on 2018 and prior accident years that was economically ceded to NICO but for which the benefit was not recognized in earnings as it has been recorded as a deferred gain on retroactive reinsurance.
2022 Outlook
The Company expects Commercial Lines written premiums in 2022 to be 4% to 5% higher than written premiums in 2021, with growth across small commercial, middle & large commercial, and global specialty. In small commercial, policy retention is expected to remain strong with new business growth across all lines of business. In middle & large commercial, we expect written premium growth in our general industries book of business driven by improved retention and new business growth, as well as an increase in new business in specialized industries. In global specialty, premium growth in 2022 is expected primarily in wholesale and financial lines in the U.S., as well as in global reinsurance and international.
In 2022, management expects positive renewal written pricing in most lines, though workers' compensation pricing is expected to be flat to slightly negative. Across the rest of Commercial Lines, mid single-digit rate increases are expected to continue in most lines with written pricing increases in the high single-digits in wholesale and ocean marine. Written pricing increases in 2022 in lines other than workers’ compensation are driven by a number of factors including the effects of social inflation, increased catastrophe losses due to changing weather patterns, and a prolonged low interest rate environment, that puts added pressure on the need for underwriting profits to make up for the lost investment yield.
The Company expects the Commercial Lines combined ratio will be 90.0 to 92.0 in 2022, compared to 95.8 in 2021, primarily due to lower current accident year catastrophe losses expected in 2022, and the effect of a prior accident year reserve increase and COVID-19 incurred claims in 2021. Apart from lower expected COVID-19 claims, we expect earned pricing increases in excess of loss costs in most lines except workers’ compensation, while the expense ratio is expected to improve driven, in part, by additional savings from Hartford Next initiatives. The underlying combined ratio is expected to be 86.5 to 88.5 in 2022 compared to 89.1 in 2021.
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| PERSONAL LINES - RESULTS OF OPERATIONS | ||
Underwriting Summary
| 2021 | 2020 | 2019 | Increase (Decrease) From 2020 to 2021 | Increase (Decrease) From 2019 to 2020 | |||||||||||||
| Written premiums | $ | 2,908 | $ | 2,936 | $ | 3,131 | (1 | %) | (6 | %) | |||||||
| Change in unearned premium reserve | (46) | (72) | (67) | 36 | % | (7 | %) | ||||||||||
| Earned premiums | 2,954 | 3,008 | 3,198 | (2 | %) | (6 | %) | ||||||||||
| Fee income | 32 | 34 | 37 | (6 | %) | (8 | %) | ||||||||||
| Losses and loss adjustment expenses | |||||||||||||||||
| Current accident year before catastrophes | 1,840 | 1,695 | 2,087 | 9 | % | (19 | %) | ||||||||||
| Current accident year catastrophes [1] | 168 | 209 | 140 | (20 | %) | 49 | % | ||||||||||
| Prior accident year development [1] | (144) | (438) | (42) | 67 | % | NM | |||||||||||
| Total losses and loss adjustment expenses | 1,864 | 1,466 | 2,185 | 27 | % | (33 | %) | ||||||||||
| Amortization of DAC | 230 | 244 | 259 | (6 | %) | (6 | %) | ||||||||||
| Underwriting expenses | 615 | 591 | 625 | 4 | % | (5 | %) | ||||||||||
| Amortization of other intangible assets | 2 | 4 | 6 | (50 | %) | (33 | %) | ||||||||||
| Underwriting gain | 275 | 737 | 160 | (63 | %) | NM | |||||||||||
| Net servicing income [2] | 19 | 14 | 13 | 36 | % | 8 | % | ||||||||||
| Net investment income [3] | 157 | 157 | 179 | — | % | (12 | %) | ||||||||||
| Net realized gains (losses) [3] | 29 | (5) | 43 | NM | (112 | %) | |||||||||||
| Other income (expenses) | — | (1) | (1) | 100 | % | — | % | ||||||||||
| Income before income taxes | 480 | 902 | 394 | (47 | %) | 129 | % | ||||||||||
| Income tax expense [4] | 95 | 184 | 76 | (48 | %) | 142 | % | ||||||||||
| Net income | $ | 385 | $ | 718 | $ | 318 | (46 | %) | 126 | % | |||||||
[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 and Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses.
[2]Includes servicing revenues of $80, $81, and $83 for 2021, 2020, and 2019, respectively and includes servicing expenses of $61, $67, and $70 for 2021, 2020, and 2019, respectively.
[3]For discussion of consolidated investment results, see MD&A - Investment Results.
[4]For discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements.
Written and Earned Premiums
| Written Premiums | 2021 | 2020 | 2019 | Increase (Decrease) From 2020 to 2021 | Increase (Decrease) From 2019 to 2020 | ||||||||||||
| Product Line | |||||||||||||||||
| Automobile | $ | 1,997 | $ | 2,003 | $ | 2,176 | — | % | (8 | %) | |||||||
| Homeowners | 911 | 933 | 955 | (2 | %) | (2 | %) | ||||||||||
| Total | $ | 2,908 | $ | 2,936 | $ | 3,131 | (1 | %) | (6 | %) | |||||||
| Earned Premiums | |||||||||||||||||
| Product Line | |||||||||||||||||
| Automobile | $ | 2,035 | $ | 2,058 | $ | 2,221 | (1 | %) | (7 | %) | |||||||
| Homeowners | 919 | 950 | 977 | (3 | %) | (3 | %) | ||||||||||
| Total | $ | 2,954 | $ | 3,008 | $ | 3,198 | (2 | %) | (6 | %) | |||||||
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Premium Measures
| 2021 | 2020 | 2019 | |||||||||||||||
| Policies in-force end of period (in thousands) | |||||||||||||||||
| Automobile | 1,317 | 1,369 | 1,422 | ||||||||||||||
| Homeowners | 773 | 826 | 877 | ||||||||||||||
| New business written premium | |||||||||||||||||
| Automobile | $ | 219 | $ | 223 | $ | 220 | |||||||||||
| Homeowners | $ | 60 | $ | 63 | $ | 73 | |||||||||||
| Policy count retention [1] | |||||||||||||||||
| Automobile | 84 | % | 84 | % | 83 | % | |||||||||||
| Homeowners | 85 | % | 84 | % | 83 | % | |||||||||||
| Policy count retention, net of cancellations [1] | |||||||||||||||||
| Automobile | 84 | % | 86 | % | 85 | % | |||||||||||
| Homeowners | 84 | % | 86 | % | 85 | % | |||||||||||
| Renewal written price increase | |||||||||||||||||
| Automobile | 2.2 | % | 2.4 | % | 4.6 | % | |||||||||||
| Homeowners | 8.5 | % | 6.4 | % | 6.5 | % | |||||||||||
| Renewal earned price increase | |||||||||||||||||
| Automobile | 2.1 | % | 3.4 | % | 5.5 | % | |||||||||||
| Homeowners | 8.1 | % | 5.7 | % | 8.4 | % | |||||||||||
[1]Policy count retention represents the ratio of the number of renewal policies issued during the current year period divided by the number of policies issued in the previous calendar period before considering policies cancelled subsequent to renewal. Policy count retention, net of cancellations, represents the ratio of the number of renewal policies issued net of cancellations during the current year period divided by the number of policies issued net of cancellations in the previous calendar period.
Underwriting Ratios
| 2021 | 2020 | 2019 | Increase (Decrease) From 2020 to 2021 | Increase (Decrease) From 2019 to 2020 | |||||||||||||
| Loss and loss adjustment expense ratio | |||||||||||||||||
| Current accident year before catastrophes | 62.3 | 56.3 | 65.3 | 6.0 | (9.0) | ||||||||||||
| Current accident year catastrophes | 5.7 | 6.9 | 4.4 | (1.2) | 2.5 | ||||||||||||
| Prior accident year development | (4.9) | (14.6) | (1.3) | 9.7 | (13.3) | ||||||||||||
| Total loss and loss adjustment expense ratio | 63.1 | 48.7 | 68.3 | 14.4 | (19.6) | ||||||||||||
| Expense ratio | 27.6 | 26.8 | 26.7 | 0.8 | 0.1 | ||||||||||||
| Combined ratio | 90.7 | 75.5 | 95.0 | 15.2 | (19.5) | ||||||||||||
| Impact of current accident year catastrophes and prior year development | (0.8) | 7.7 | (3.1) | (8.5) | 10.8 | ||||||||||||
| Underlying combined ratio | 89.9 | 83.1 | 91.9 | 6.8 | (8.8) | ||||||||||||
Product Combined Ratios
| 2021 | 2020 | 2019 | Increase (Decrease) From 2020 to 2021 | Increase (Decrease) From 2019 to 2020 | |||||||||||||
| Automobile | |||||||||||||||||
| Combined ratio | 92.9 | 85.5 | 96.6 | 7.4 | (11.1) | ||||||||||||
| Underlying combined ratio | 95.9 | 88.0 | 97.9 | 7.9 | (9.9) | ||||||||||||
| Homeowners | |||||||||||||||||
| Combined ratio | 86.8 | 54.2 | 91.7 | 32.6 | (37.5) | ||||||||||||
| Underlying combined ratio | 76.5 | 72.5 | 78.3 | 4.0 | (5.8) | ||||||||||||
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Income
Year ended December 31, 2021 compared to the year ended December 31, 2020
Net income decreased in 2021, largely driven by a decrease in underwriting gain, partially offset by a change from net realized losses to net realized gains and an increase in net servicing income.
Underwriting Gain
Year ended December 31, 2021 compared to the year ended December 31, 2020
Underwriting gain decreased in 2021, primarily due to a decrease in favorable prior accident year catastrophe reserve development and higher current accident year personal automobile loss costs. Also contributing was an increase in underwriting expenses and higher current accident year non-catastrophe property losses, partially offset by lower current accident year catastrophe losses. Contributing to the increase in underwriting expenses in 2021 was higher costs for AARP direct marketing, incentive compensation, and technology, partially offset by cost savings from the Hartford Next initiative.
Earned Premiums
Year ended December 31, 2021 compared to the year ended December 31, 2020
Earned premiums decreased in 2021 due to the effect of a decline in written premium over the prior twelve months in both Agency channels and in AARP Direct due to non-renewals exceeding new business. The decrease was partially offset by the effect of $81 of premium credits given to automobile policyholders in the second quarter of 2020 in recognition of shelter-in-place guidelines that reduced miles driven in 2020.
Written Premiums
Written premiums decreased in automobile for 2021 due to the effect of non-renewed premium exceeding new business, partially offset by the effect of the premium credits given in the 2020 period. Written premium declined in homeowners due to the effect of non-renewed premium exceeding new business. For automobile and homeowners new business decreased in 2021 compared to the prior year.
Renewal written pricing increases were down modestly in automobile for 2021 while renewal written pricing increases for homeowners were higher in 2021 in response to recent loss cost trends.
Policy count retention was flat for automobile and was up slightly for homeowners.
Policies in-force decreased in the 2021 period in both automobile and homeowners driven by not generating enough new business to offset the loss of non-renewed policies.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Current Accident Year Loss and Loss Adjustment Expense Ratio before Catastrophes
Year ended December 31, 2021 compared to the year ended December 31, 2020
Current accident year loss and LAE ratio before catastrophes increased in 2021 by 7.1 points in automobile and 3.1 points in homeowners. The increase in automobile was due to higher claim frequency, due to an increase in miles driven, and an increase in average claim severity. For 2021, the homeowners current accident year loss and LAE ratio before catastrophes increased due to an increase in weather and non-weather severity, partially offset by the effect of earned pricing increases. Contributing to the increase in homeowners severity was the effect of higher rebuilding costs and a greater number of large losses.
Current Accident Year Catastrophes and Unfavorable (Favorable) Prior Accident Year Development
Year ended December 31, 2021 compared to the year ended December 31, 2020
Current accident year catastrophe losses decreased in 2021 compared to the prior year. Current accident year catastrophe losses for 2021 included losses from hurricane Ida, tropical storms, California wildfires, and February winter storms as well as losses largely from tornado, wind and hail events, mostly concentrated in Texas, the Southeast, Midwest and Mountain West.
Current accident year catastrophe losses for 2020 were primarily from Pacific Coast wildfires, tropical storm Isaias, hurricane Laura, and various tornado, wind and hail events in the South, Midwest and Central Plains.
Prior accident year development was less favorable in 2021, with the decrease largely due to lower reserve reductions for prior year catastrophes. Prior accident year development was favorable in 2021, with a reduction in personal automobile liability and a decrease in catastrophe reserves, driven by reductions in estimates for prior year hurricanes, tornado & hail and wildfires, including the benefit of higher expected subrogation recoveries related to the 2017 and 2018 California wildfires. Prior accident year development was favorable in 2020 with reserve reductions in catastrophes and, to a lesser extent, personal automobile liability. The reduction in catastrophe reserves for 2020 was driven by lower estimated losses for the 2017 and 2018 California wildfires, including a $260 subrogation benefit from PG&E, as well as a reduction in losses for various 2018 and 2019 wind and hail events.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2022 Outlook
Written premium is expected to decrease in 2022 compared with 2021 as non-renewal of premium more than offsets new business. While new business conversions are expected to increase with the continued rollout of the Prevail automobile and home product in additional states, new business premium is expected to be lower despite expected higher conversion rates as the Company transitions from 12-month automobile policies to 6-month automobile policies for AARP members.
In 2022, the Company expects written pricing increases in automobile to be in the low to mid-single digits throughout the year as the effect of recent claim frequency and severity trends are reflected in rate filings. Written pricing increases in homeowners are expected to be in the mid-to-high single digits.
The Company expects the combined ratio for Personal Lines will be 97.0 to 99.0 in 2022 compared to 90.7 in 2021 as 2021
benefited from claim frequency that was still below pre-pandemic levels as well as from lower current accident year catastrophe losses and favorable prior accident year development. The underlying combined ratio for Personal Lines is expected to be 90.0 to 92.0 in 2022 compared to 89.9 in 2021 due to an increase in the current accident year loss and loss adjustment expense ratio before catastrophes in both automobile and homeowners with supply chain disruptions causing an increase in severity through 2022. For automobile, we expect the underlying combined ratio to increase driven by an increase in both claim frequency and severity. The underlying combined ratio for homeowners is also expected to increase in 2022, primarily driven by a return to a higher, more normal, level of non-catastrophe weather loss experience, partially offset by the effect of earned pricing increases.
| PROPERTY & CASUALTY OTHER OPERATIONS - RESULTS OF OPERATIONS | ||
Underwriting Summary
| 2021 | 2020 | 2019 | Increase (Decrease) From 2020 to 2021 | Increase (Decrease) From 2019 to 2020 | |||||||||||||
| Change in unearned premium reserve | $ | — | $ | — | $ | (2) | — | % | 100 | % | |||||||
| Earned premiums | — | — | 2 | — | % | (100 | %) | ||||||||||
| Losses and loss adjustment expenses | |||||||||||||||||
| Prior accident year development [1] | 202 | 258 | 21 | (22 | %) | NM | |||||||||||
| Total losses and loss adjustment expenses | 202 | 258 | 21 | (22 | %) | NM | |||||||||||
| Underwriting expenses | 8 | 11 | 12 | (27 | %) | (8 | %) | ||||||||||
| Underwriting loss | (210) | (269) | (31) | 22 | % | NM | |||||||||||
| Net investment income [2] | 75 | 55 | 84 | 36 | % | (35 | %) | ||||||||||
| Net realized gains (losses) [2] | 13 | (1) | 20 | NM | (105 | %) | |||||||||||
| Other income (expenses) | (1) | 1 | — | NM | NM | ||||||||||||
| Income (loss) before income taxes | (123) | (214) | 73 | 43 | % | NM | |||||||||||
| Income tax expense (benefit) [3] | (28) | (46) | 12 | 39 | % | NM | |||||||||||
| Net income (loss) | $ | (95) | $ | (168) | $ | 61 | 43 | % | NM | ||||||||
[1]For discussion of prior accident year development, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance and Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[2]For discussion of consolidated investment results, see MD&A - Investment Results.
[3]For discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Income (Loss)
Year ended December 31, 2021 compared to the year ended December 31, 2020
Net loss in 2021 decreased compared to 2020, primarily due to lower unfavorable prior accident year reserve development, higher net investment income and a change from net realized losses to net realized gains.
Underwriting loss in 2021 decreased from 2020 primarily due to a lower increase in A&E reserves. Unfavorable prior
accident year development in 2021 included a $155 increase in A&E reserves, an increase in reserves for sexual molestation and sexual abuse claims, primarily on assumed reinsurance, and a $14 increase in ULAE reserves, partially offset by a reduction in the allowance for uncollectible reinsurance. Unfavorable prior accident year development in 2020 primarily included a $208 increase in A&E reserves, and a $35 increase in ULAE reserves. In both periods, the increase in ULAE reserves was primarily driven by the higher estimate for A&E claims.
Before NICO reinsurance in 2021, A&E reserves were increased by $155 in P&C Other Operations, including $104 for asbestos and $51 for environmental. Cumulative adverse A&E reserve development on both ongoing operations and P&C Other Operations totaled $1,015 through December 31, 2021 and since this amount exceeds ceded premium paid for the A&E ADC of $650, the Company has recognized a $365 deferred gain on retroactive reinsurance as of December 31, 2021, within other liabilities, including a $155 increase in deferred gain in 2021 recognized within P&C Other Operations.
Asbestos reserves prior accident year development in 2021 before NICO reinsurance of $104 was primarily due to an increase in claim settlement rates, claim settlement values, and defense costs, which more than offset the impact of a decline in claim filing frequency. Also contributing was an increase in the Company's estimated share of liability under pending or potential cost sharing agreements and settlements.
Environmental reserves prior accident year development in 2021 before NICO reinsurance of $51 was primarily due to the settlement of a large coal ash remediation claim, an increase in legal defense costs and higher site remediation costs.
|GROUP BENEFITS - RESULTS OF OPERATIONS | ||
Operating Summary
| 2021 | 2020 | 2019 | Increase (Decrease) From 2020 to 2021 | Increase (Decrease) From 2019 to 2020 | |||||||||||||
| Premiums and other considerations | $ | 5,687 | $ | 5,536 | $ | 5,603 | 3 | % | (1 | %) | |||||||
| Net investment income [1] | 550 | 448 | 486 | 23 | % | (8 | %) | ||||||||||
| Net realized gains [1] | 130 | 22 | 34 | NM | (35 | %) | |||||||||||
| Total revenues | 6,367 | 6,006 | 6,123 | 6 | % | (2 | %) | ||||||||||
| Benefits, losses and loss adjustment expenses | 4,612 | 4,137 | 4,055 | 11 | % | 2 | % | ||||||||||
| Amortization of DAC | 40 | 50 | 54 | (20 | %) | (7 | %) | ||||||||||
| Insurance operating costs and other e | |||||||||||||||||