Part I – Point 2. Discussion and analysis by management of the financial position and operating results Point 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in millions except for per share data, unless otherwise stated) TheHartford 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-Q. 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; Part I, Item 1A, Risk Factors in TheHartford's 2020 Form 10-K Annual Report; and our other filings with theSecurities and Exchange Commission . TheHartford undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. OnSeptember 30, 2020 , the Company entered into a definitive agreement to sell all of the issued and outstanding equity ofNavigators Holdings (Europe) N.V. , aBelgium holding company, and its subsidiaries,Bracht, Deckers & Mackelbert N.V. ("BDM") andAssurances Contintales Contintale Verzekeringen N.V. ("ASCO"), (collectively referred to as "Continental Europe Operations"). For discussion of this transaction, see Note 17 - Business Disposition of Notes to Condensed Consolidated Financial Statements. Certain reclassifications have been made to historical financial information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") to conform to the current period presentation. TheHartford defines increases or decreases greater than or equal to 200% as "NM" or not meaningful. INDEX Description Page Key Performance Measures and Ratios 54 The Hartford's Operations 60 F inancial Highlights 64 Consolidated Results of Operations 65 Investment Results 71 Critical Accounting Estimates 73 Commercial Lines 79 Personal Lines 84 Property & Casualty Other Operations 89 Group Benefits 90 Hartford Funds 93 Corporate 95 Enterprise Risk Management 96 Capital Resources and Liquidity 108 Impact of New Accounting Standards 115 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 TheHartford'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.
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DEFINITIONS OF NON-GAAP AND OTHER MEASURES AND RATIOS
Assets Under Management ("AUM")- Include mutual fund and exchange-traded
products ("ETP") assets. AUM is a measure used by the Company's Hartford Funds
segment because a significant portion of the Company's mutual fund and ETP
revenues are based upon asset values. These revenues 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 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:
â¢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.
â¢Restructuring and other costs - Costs incurred as part of a restructuring plan
are not a recurring operating expense of the business.
â¢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.
â¢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.
â¢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.
â¢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.
â¢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.
â¢Change in valuation allowance on deferred taxes related to non-core components
of pre-tax income - These changes in valuation allowances are excluded from core
earnings because they relate to non-core components of pre-tax income, such as
tax attributes like capital loss carryforwards.
â¢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.
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Reconciliation of Net Income to Core Earnings
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net income $ 482 $ 459 $ 1,636 $ 1,200
Preferred stock dividends 6 6 16 16
Net income available to common stockholders 476 453 1,620 1,184
Adjustments to reconcile net disposable income
shareholders with basic earnings:
Net realized losses (gains) excluded from basic results,
before tax
(68) (6) (293) 119 Restructuring and other costs, before tax (12) 87 (1) 87 Integration and other non-recurring M&A costs, before tax 8 14 53 40
Change in deferred gain on retroactive reinsurance, before tax 28
14 73 97 Income tax expense (benefit) [1] 10 (35) 29 (77) Core earnings$ 442 $ 527 $ 1,481 $ 1,450 [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- TheHartford 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 comparableU.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. ForU.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 ofVerisk . For international events, the Company's approach is similar, informed, in part, by howLloyd'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 positive net flows or favorable market performance will have a favorable impact on fee income. Conversely, either negative net flows or unfavorable market performance will reduce fee income. Gross New Business Premium- Represents the amount of premiums charged, before ceded reinsurance, for policies issued to customers who were not insured with the Company in the previous policy term. Gross new business premium plus gross renewal written premium less ceded reinsurance equals total written premium. Loss and Loss Adjustment Expense Ratio- A measure of the cost of claims incurred in the calendar year divided by earned premium and includes losses and loss adjustment expenses incurred for both the current and prior 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
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| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 PriorAccident 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 Condensed Consolidated Financial Statements except in instances where the Company seeds new investment products and holds an investment in the fund for a period of time. 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 are based upon asset values. These revenues 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 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
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Results of Operations
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.
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Results of Operations
Reconciliation of Net Income to Underwriting Gain (Loss)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Commercial Lines
Net income $ 357 $ 323 $ 1,055 $ 378
Adjustments to reconcile net income to underwriting gain
(loss):
Net servicing income (2) (1) (11) (2)
Net investment income (421) (316) (1,130) (797)
Net realized losses (gains) (51) 26 (142) 105
Other expense 5 8 15 25
Income tax expense 82 52 228 71
Underwriting gain (loss) $ (30) $ 92 $ 15 $ (220)
Personal Lines
Net income $ 51 $ 79 $ 304 $ 548
Adjustments to reconcile net income to underwriting gain
(loss):
Net servicing income (6) (5) (15) (10)
Net investment income (44) (41) (119) (110)
Net realized losses (4) (3) (17) 12
Other income 1 2 1 1
Income tax expense 12 20 76 142
Underwriting gain $ 10 $ 52 $ 230 $ 583
P&C Other Ops
Net income $ 22 $ 2 $ 26 $ 12
Adjustments to reconcile net income to underwriting gain
(loss):
Net investment income (22) (14) (58) (40)
Net realized losses (2) (2) (7) 3
Income tax expense 5 1 5 2
Underwriting gain (loss) $ 3 $ (13) $ (34) $ (23)
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.
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| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THEHARTFORD'S OPERATIONS TheHartford 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 the invested assets ofTalcott Resolution Life, Inc. and its subsidiaries. In addition, up untilJune 30, 2021 , Corporate included a 9.7% ownership interest inHopmeadow Holdings LP , the legal entity that acquired Talcott Resolution inMay 2018 (Hopmeadow Holdings, LP ,Talcott Resolution Life Inc. , and its subsidiaries are collectively referred to as "Talcott Resolution"). The sale of Talcott Resolution was completed onJune 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 for the nine months endedSeptember 30, 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 1221's ("Lloyd's Syndicate") 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 withAARP . This agreement provides an important competitive advantage given the size of the 50 plus population and the strength of the AARP brand. In 2020, the Company extended this agreement throughDecember 31, 2032 . 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
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| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 theU.S. and other countries in which we operate. As one of the largest providers of small business insurance in theU.S. , we were negatively affected by economic effects of the pandemic on small businesses beginning in March of 2020. An improvement in economic conditions in the three and nine months endedSeptember 30, 2021 has contributed to an increase of 14% and 10% respectively, in our small commercial written premiums. Our middle & large commercial business was also negatively affected by COVID-19 and written premium in that line has rebounded with an increase of 18% and 11%, respectively, in the three and nine month period. Overall, Commercial Lines written premium increased$333 , or 15%, and$757 , or 11%, respectively, in the three and nine months endedSeptember 30, 2021 with growth in workers' compensation, small commercial package business, general liability,U.S. wholesale,U.S. financial lines and global reinsurance. Personal Lines written premium declined 2% and 1%, respectively, for the three and nine months endedSeptember 30, 2021 due to the effect of non-renewed premium exceeding new business, partially offset in the nine month period by the effect of premium credits given in the second quarter of 2020. In Group Benefits, fully insured ongoing premium increased 4% and 3%, respectively, in the three and nine months endedSeptember 30, 2021 , primarily due to higher in-force employer group disability premiums and higher supplemental health product premiums. Impact to direct benefits, losses and loss adjustment expenses from COVID-19 claims Total direct COVID-19 and excess mortality claims were higher in the first nine months of 2021 compared to the comparable period in 2020 largely due to an increase in excess mortality claims in our group life business given the high level of deaths in the first nine months of 2021, partially offset by commercial property COVID-19 losses incurred in the second quarter of 2020. For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020 Excess mortality claims on group life$ 212 $ 42 $ 422 $ 87 COVID-19 short-term disability claims [1] 16 (14) 23 (14) Workers' compensation COVID-19 claims - 17 20 52 Global specialty financial lines and other 3 20 10 57 Commercial property - - - 141
Total direct claims related to COVID-19 and excess mortality
[1]The nine months endedSeptember 30, 2020 included both short-term disability andNew York paid family leave claims related to COVID-19. For the three and nine months endedSeptember 30, 2020 , 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 effectiveness of the vaccines, how long the Delta variant surge will last, the potential spread of new COVID-19 variants, 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 the nine months endedSeptember 30, 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 the nine months endedSeptember 30, 2020 primarily included$141 for property claims. There were no COVID-19 P&C property losses incurred in the three or nine months endedSeptember 30, 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 have begun to increase again as we emerge from the pandemic which has increased automobile loss costs in 2021. In addition, as the effects of favorable claim frequency from lower miles driven during the pandemic are factored into rates, we expect lower earned pricing increases resulting in a higher
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| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations expected 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 three and nine months endedSeptember 30, 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 have risen in 2021 and higher interest rates reduce the fair value of our investments in fixed maturity securities, AFS. Aided by some improvement in the economy and the effect of the government's economic stimulus payments to our customers, in the three and nine months endedSeptember 30, 2021 , we recorded decreases of$10 and$28 , respectively, in the 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 incurred when shelter-in-place orders were in effect. 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 impact on our business results, financial condition, results of operations and/or liquidity" in Item 1A of Part I of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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, onJuly 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$395 over the course of the program, with$203 expensed cumulatively throughSeptember 30, 2021 , and expected expenses of$15 over the last three months of 2021,$68 in 2022 and$110 after 2022, with the expenses after 2022 consisting mostly of amortization of internal use software, non-capitalized IT costs and capitalized real estate costs. Included in the estimated costs of$395 , we expect to incur restructuring costs of approximately$133 , including$49 of employee severance, and approximately$84 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 the nine months endedSeptember 30, 2021 and expected annual costs and expense savings relative to 2019 for the full year in 2021 and 2022:
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Hartford Next Costs and Expense Savings
Nine months ended
September 30, 2021 Estimate for 2021 Estimate for 2022
Employee severance $ (24) $ (24) $ -
IT costs to retire applications 6 9 12
Professional fees and other expenses 17 20 10
Estimated restructuring costs (1) 5 22
Non-capitalized IT costs 38 41 24
Other costs 13 18 16
Amortization of capitalized IT development costs - - 5
[1]
Amortization of capitalized real estate [2] - - 1 Estimated costs within core earnings 51 59 46 Total Hartford Next program costs $ 50 $ 64 $ 68 Cumulative savings for the period relative to $ (306) $ (400) $ (540)
2019
Net expense (savings) before tax: $ (256) $ (336) $ (472) Net expense (savings) before tax: Accounted for within core earnings $ (255) $ (341) $ (494) Restructuring costs recognized outside of core (1) 5 22
earnings
Net expense (savings) before tax $ (256) $ (336) $ (472)
[1]Does not understand about
[2]Does not understand about
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL HIGHLIGHTS
Net Income Available to Net Income Available to Common Book Value per
Common Stockholders Stockholders per Diluted Share Diluted Share
[[Image Removed: hig-20210930_g2.jpg]] [[Image Removed: hig-20210930_g3.jpg]]
[[Image Removed: hig-20210930_g4.jpg]]
Increase
+ Increase in net investment + Increase in net income +
Reduction of outstanding shares due
income available to common to share repurchases
stockholders
+ Higher earned premiums in + Share repurchases -
Decrease in common shareholders
Commercial Lines and a lower
equity largely due to a decline in
P&C current accident year
AOCI, mainly due to a decrease
loss ratio before COVID-19
in net unrealized capital gains available
- Increase in dilutive shares
to sell securities, in part
under stock-based
offset by a net profit greater than
compensation largely due to
dividends from ordinary shareholders and
an increase in the quarterly
share buybacks
average stock price
+ Reduced restructuring costs
+ Increase in net realized
wins
+ Decrease in P&C COVID-19
losses suffered
– Increase in excess mortality
losses in group life
– An unfavorable change in P&C
previous accident year reserve
development
– Increase in the number of accidents in progress
year of catastrophic losses
– Increase in P&C subscription
expenses and benefits
insurance operating costs
and other expenses
Investment Yield, After Tax Property & Casualty Group Benefits Net Income
Combined Ratio Margin
[[Image Removed: hig-20210930_g5.jpg]] [[Image Removed: hig-20210930_g6.jpg]]
[[Image Removed: hig-20210930_g7.jpg]]
à 70 basis point increase à 4.8 point increase à 6.2 point decrease
+ Higher returns + Change to an unfavorable history – Higher excess mortality in the group
limited partnerships accident year reserve life
and other alternative development
investments
– Less reinvestment + Higher personal automobile – Higher collective disability loss
rates claim frequency and severity
ratio due to short-term increase
impact of disability benefit claims as a
the previous year benefited from less
+ Higher current accident year
elective procedures during the
catastrophe losses early stages of the pandemic
- Lower current accident year
loss ratio before COVID-19 in
global specialty, workers' - A higher expense ratio
compensation, and
non-catastrophe property +
Increase in net investment income
- Decrease in COVID-19 incurred
losses
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| Table of Contents Index to MD&A
