HARTFORD FINANCIAL SERVICES GROUP, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
(Mark One)
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ý
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2016
or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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)
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Delaware
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13-3317783
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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One Hartford Plaza, Hartford, Connecticut 06155
(Address of principal executive offices) (Zip Code)
(860) 547-5000
(Registrant’s telephone number, including area code)
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Indicate by check mark:
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Yes
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No
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• 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.
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ý
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¨
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• whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
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ý
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¨
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• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
x
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Accelerated filer
¨
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Non-accelerated filer
¨
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Smaller reporting company
¨
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• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
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¨
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ý
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As of
October 26, 2016
, there were outstanding
377,734,367
shares of Common Stock,
$0.01
par value per share, of the registrant.
1
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2016
TABLE OF CONTENTS
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Item
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Description
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Page
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1.
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||
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Condensed Consolidated Statements of Operations — For the
Three and Nine Months Ended September 30, 2016 and 2015
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Condensed Consolidated Statements of Comprehensive Income — For the
Three and Nine Months Ended September 30, 2016 and 2015
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||
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Condensed Consolidated Balance Sheets — As of
September 30, 2016 and December 31, 2015
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||
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Condensed Consolidated Statements of Changes in Stockholders’ Equity — For the
Nine Months Ended September 30, 2016 and 2015
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||
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Condensed Consolidated Statements of Cash Flows — For the
Nine Months Ended September 30, 2016 and 2015
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2.
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||
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3.
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4.
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1.
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1A.
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2.
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6.
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2
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 our current expectations and assumptions regarding economic, competitive, legislative and other developments. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, the “Company” or “The Hartford”). Future developments may not be in line with management’s expectations or may have unanticipated effects. 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 The Hartford’s
2015
Form 10-K Annual Report, and those identified from time to time in our other filings with the Securities and Exchange Commission.
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•
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Risks Related to Economic, Market and Political Conditions:
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◦
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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 or other potentially adverse macroeconomic developments on the attractiveness of our products, the returns in our investment portfolios and the hedging costs associated with our runoff annuity block;
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◦
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the financial impacts on the Company relating to the referendum vote on June 23, 2016 by the United Kingdom to leave the European Union;
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◦
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financial risk related to the continued reinvestment of our investment portfolios and performance of our hedge program for our runoff annuity block;
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◦
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market risks associated with our business, including changes in interest rates, credit spreads, equity prices, market volatility and foreign exchange rates, commodities prices and implied volatility levels;
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◦
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the impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy;
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•
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Risks Relating to Estimates, Assumptions and Valuations;
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◦
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risk associated with the use of analytical models in making decisions in key areas such as underwriting, capital management, hedging, reserving, and catastrophe risk management;
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◦
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the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the valuation of the Company’s financial instruments that could result in changes to investment valuations;
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◦
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the subjective determinations that underlie the Company’s evaluation of other-than-temporary impairments on available-for-sale securities;
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◦
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the potential for further acceleration of deferred policy acquisition cost amortization;
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◦
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the potential for further impairments of our goodwill or the potential for changes in valuation allowances against deferred tax assets;
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◦
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the significant uncertainties that limit our ability to estimate the ultimate reserves necessary for asbestos and environmental claims;
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•
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Financial Strength, Credit and Counterparty Risks:
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◦
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the impact on our statutory capital of various factors, including many that are outside the Company’s control, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results;
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◦
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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;
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◦
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losses due to nonperformance or defaults by others, including sourcing partners, derivative counterparties and other third parties;
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◦
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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;
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3
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•
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Insurance Industry and Product-Related Risks:
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◦
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the possibility of unfavorable loss development including with respect to long-tailed exposures;
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◦
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the possibility of a pandemic, earthquake, or other natural or man-made disaster that may adversely affect our businesses;
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◦
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weather and other natural physical events, including the severity and frequency of storms, hail, winter storms, hurricanes and tropical storms, as well as climate change and its potential impact on weather patterns;
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◦
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the possible occurrence of terrorist attacks and the Company’s ability 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;
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◦
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the uncertain effects of emerging claim and coverage issues;
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◦
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actions by our competitors, many of which are larger or have greater financial resources than we do;
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◦
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technology changes, such as usage-based methods of determining premiums, advancement in automotive safety features, the development of autonomous vehicles, and platforms that facilitate ride sharing, which may alter demand for the Company's products, impact the frequency or severity of losses, and/or impact the way the Company markets, distributes and underwrites its products;
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◦
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the Company’s ability to market, distribute and provide insurance products and investment advisory services through current and future distribution channels and advisory firms;
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◦
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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;
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◦
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volatility in our statutory and United States ("U.S.") GAAP earnings and potential material changes to our results resulting from our adjustment of our risk management program to emphasize protection of economic value;
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•
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Regulatory and Legal Risks:
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◦
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the cost and other effects of increased regulation as a result of the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the potential effect of other domestic and foreign regulatory developments, including those that could adversely impact the demand for the Company’s products, operating costs and required capital levels;
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◦
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unfavorable judicial or legislative developments;
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◦
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regulatory limitations on the ability of the Company and certain of its subsidiaries to declare and pay dividends;
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◦
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the impact of changes in federal or state tax laws;
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◦
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regulatory requirements that could delay, deter or prevent a takeover attempt that shareholders might consider in their best interests;
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◦
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the impact of potential changes in accounting principles and related financial reporting requirements;
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•
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Other Strategic and Operational Risks:
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◦
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risks associated with the runoff of our Talcott Resolution business;
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◦
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the risks, challenges and uncertainties associated with our capital management plan, including as a result of changes in our financial position and earnings, share price, capital position, legal restrictions, other investment opportunities, and other factors;
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◦
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the risks, challenges and uncertainties associated with our expense reduction initiatives and other actions, which may include acquisitions, divestitures or restructurings;
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◦
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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;
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◦
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the risk that our framework for managing operational risks may not be effective in mitigating material risk and loss to the Company;
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◦
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the potential for difficulties arising from outsourcing and similar third-party relationships; and
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◦
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the Company’s ability to protect its intellectual property and defend against claims of infringement.
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4
Any forward-looking statement made by the Company in this document speaks only as of the date of the filing of this Form 10-Q. 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
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Item 1.
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Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of
September 30, 2016
, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended
September 30, 2016
and
2015
, and statements of changes in stockholders' equity and cash flows for the nine-month periods ended September 30, 2016 and 2015. These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of
December 31, 2015
, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of
December 31, 2015
is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
October 27, 2016
6
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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Three Months Ended September 30,
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Nine Months Ended September 30,
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||||||||||||
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(In millions, except for per share data)
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2016
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2015
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2016
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2015
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|||||||||
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(Unaudited)
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||||||||||||
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Revenues
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|||||||||||||
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Earned premiums
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$
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3,484
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$
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3,404
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$
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10,332
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$
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10,117
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Fee income
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432
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|
448
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1,280
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1,376
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|
|||||
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Net investment income
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772
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730
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2,203
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2,335
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|||||
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Net realized capital gains (losses):
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|||||||||||||
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Total other-than-temporary impairment ("OTTI") losses
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(15
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)
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(42
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)
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(50
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)
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(67
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)
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|||||
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OTTI losses recognized in other comprehensive income (loss) (“OCI”)
|
1
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|
2
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6
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|
4
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|
|||||
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Net OTTI losses recognized in earnings
|
(14
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)
|
(40
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)
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(44
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)
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(63
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)
|
|||||
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Other net realized capital gains (losses)
|
(3
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)
|
(4
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)
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(75
|
)
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33
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|
|||||
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Total net realized capital losses
|
(17
|
)
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(44
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)
|
(119
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)
|
(30
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)
|
|||||
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Other revenues
|
24
|
|
24
|
|
67
|
|
66
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|
|||||
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Total revenues
|
4,695
|
|
4,562
|
|
13,763
|
|
13,864
|
|
|||||
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Benefits, losses and expenses
|
|||||||||||||
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Benefits, losses and loss adjustment expenses
|
2,780
|
|
2,710
|
|
8,563
|
|
8,085
|
|
|||||
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Amortization of deferred policy acquisition costs ("DAC")
|
403
|
|
434
|
|
1,145
|
|
1,212
|
|
|||||
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Insurance operating costs and other expenses
|
898
|
|
971
|
|
2,719
|
|
2,829
|
|
|||||
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Loss on extinguishment of debt
|
—
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|
—
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|
—
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|
21
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|
|||||
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Reinsurance gain on dispositions
|
—
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|
(20
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)
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—
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|
(28
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)
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|||||
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Interest expense
|
86
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88
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|
257
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|
271
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|
|||||
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Total benefits, losses and expenses
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4,167
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|
4,183
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|
12,684
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|
12,390
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|
|||||
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Income before income taxes
|
528
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|
379
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|
1,079
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|
1,474
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|
|||||
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Income tax expense
|
90
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|
7
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|
102
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|
222
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|
|||||
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Income from continuing operations, net of tax
|
438
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|
372
|
|
977
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|
1,252
|
|
|||||
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Income from discontinued operations, net of tax
|
—
|
|
9
|
|
—
|
|
9
|
|
|||||
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Net income
|
$
|
438
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|
$
|
381
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|
$
|
977
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|
$
|
1,261
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|
|
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Income from continuing operations, net of tax, per common share
|
|||||||||||||
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Basic
|
$
|
1.14
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|
$
|
0.90
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|
$
|
2.50
|
|
$
|
2.99
|
|
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Diluted
|
$
|
1.12
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|
$
|
0.88
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$
|
2.45
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$
|
2.92
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|
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Net income per common share
|
|||||||||||||
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Basic
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$
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1.14
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$
|
0.92
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|
$
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2.50
|
|
$
|
3.01
|
|
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Diluted
|
$
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1.12
|
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$
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0.90
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|
$
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2.45
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|
$
|
2.94
|
|
|
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Cash dividends declared per common share
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$
|
0.21
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|
$
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0.21
|
|
$
|
0.63
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|
$
|
0.57
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|
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See Notes to Condensed Consolidated Financial Statements.
7
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
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|||||||||||
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(In millions)
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
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(Unaudited)
|
||||||||||||
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Net income
|
$
|
438
|
|
$
|
381
|
|
$
|
977
|
|
$
|
1,261
|
|
|
|
Other comprehensive income (loss):
|
|||||||||||||
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Changes in net unrealized gain on securities
|
22
|
|
(94
|
)
|
1,180
|
|
(807
|
)
|
|||||
|
Changes in OTTI losses recognized in other comprehensive income
|
5
|
|
3
|
|
2
|
|
1
|
|
|||||
|
Changes in net gain on cash flow hedging instruments
|
(28
|
)
|
48
|
|
42
|
|
20
|
|
|||||
|
Changes in foreign currency translation adjustments
|
78
|
|
(14
|
)
|
65
|
|
(30
|
)
|
|||||
|
Changes in pension and other postretirement plan adjustments
|
10
|
|
9
|
|
27
|
|
28
|
|
|||||
|
OCI, net of tax
|
87
|
|
(48
|
)
|
1,316
|
|
(788
|
)
|
|||||
|
Comprehensive income
|
$
|
525
|
|
$
|
333
|
|
$
|
2,293
|
|
$
|
473
|
|
|
See Notes to Condensed Consolidated Financial Statements.
8
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(In millions, except for share and per share data)
|
September 30,
2016 |
December 31, 2015
|
||||
|
|
(Unaudited)
|
|||||
|
Assets
|
||||||
|
Investments:
|
||||||
|
Fixed maturities, available-for-sale, at fair value (amortized cost of $55,742 and $56,965)
|
$
|
60,225
|
|
$
|
59,196
|
|
|
Fixed maturities, at fair value using the fair value option (includes variable interest entity assets of $0 and $150)
|
360
|
|
503
|
|
||
|
Equity securities, available-for-sale, at fair value (cost of $812 and $1,135) (includes equity securities, at fair value using the fair value option, of $0 and $282, and variable interest entity assets of $0 and $1)
|
875
|
|
1,121
|
|
||
|
Mortgage loans (net of allowances for loan losses of $19 and $23)
|
5,611
|
|
5,624
|
|
||
|
Policy loans, at outstanding balance
|
1,432
|
|
1,447
|
|
||
|
Limited partnerships and other alternative investments (includes variable interest entity assets of $0 and $2)
|
2,482
|
|
2,874
|
|
||
|
Other investments
|
515
|
|
120
|
|
||
|
Short-term investments (includes variable interest entity assets, at fair value, of $0 and $3)
|
2,219
|
|
1,843
|
|
||
|
Total investments
|
73,719
|
|
72,728
|
|
||
|
Cash (includes variable interest entity assets, at fair value, of $5 and $10)
|
810
|
|
448
|
|
||
|
Premiums receivable and agents’ balances, net
|
3,663
|
|
3,537
|
|
||
|
Reinsurance recoverables, net
|
23,126
|
|
23,189
|
|
||
|
Deferred policy acquisition costs
|
1,683
|
|
1,816
|
|
||
|
Deferred income taxes, net
|
2,439
|
|
3,206
|
|
||
|
Goodwill
|
567
|
|
498
|
|
||
|
Property and equipment, net
|
1,001
|
|
974
|
|
||
|
Other assets
|
1,853
|
|
1,829
|
|
||
|
Assets held for sale
|
921
|
|
—
|
|
||
|
Separate account assets
|
118,648
|
|
120,123
|
|
||
|
Total assets
|
$
|
228,430
|
|
$
|
228,348
|
|
|
Liabilities
|
||||||
|
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
|
$
|
41,852
|
|
$
|
41,572
|
|
|
Other policyholder funds and benefits payable
|
31,245
|
|
31,670
|
|
||
|
Unearned premiums
|
5,622
|
|
5,385
|
|
||
|
Short-term debt
|
690
|
|
275
|
|
||
|
Long-term debt
|
4,635
|
|
5,084
|
|
||
|
Other liabilities (includes variable interest entity liabilities of $5 and $12)
|
6,427
|
|
6,597
|
|
||
|
Liabilities held for sale
|
653
|
|
—
|
|
||
|
Separate account liabilities
|
118,648
|
|
120,123
|
|
||
|
Total liabilities
|
$
|
209,772
|
|
$
|
210,706
|
|
|
Commitments and Contingencies (Note 8)
|
||||||
|
Stockholders’ Equity
|
||||||
|
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 490,923,222 and 490,923,222 shares issued
|
5
|
|
5
|
|
||
|
Additional paid-in capital
|
8,893
|
|
8,973
|
|
||
|
Retained earnings
|
13,282
|
|
12,550
|
|
||
|
Treasury stock, at cost — 111,275,234 and 89,102,038 shares
|
(4,509
|
)
|
(3,557
|
)
|
||
|
Accumulated other comprehensive income ("AOCI"), net of tax
|
987
|
|
(329
|
)
|
||
|
Total stockholders’ equity
|
$
|
18,658
|
|
$
|
17,642
|
|
|
Total liabilities and stockholders’ equity
|
$
|
228,430
|
|
$
|
228,348
|
|
See Notes to Condensed Consolidated Financial Statements.
9
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
|
|
Nine Months Ended September 30,
|
|||||
|
(In millions, except for share data)
|
2016
|
2015
|
||||
|
|
(Unaudited)
|
|||||
|
Common Stock
|
$
|
5
|
|
$
|
5
|
|
|
Additional Paid-in Capital, beginning of period
|
8,973
|
|
9,123
|
|
||
|
Issuance of shares under incentive and stock compensation plans
|
(129
|
)
|
(164
|
)
|
||
|
Stock-based compensation plans expense
|
58
|
|
57
|
|
||
|
Tax benefit on employee stock options and share-based awards
|
2
|
|
27
|
|
||
|
Issuance of shares for warrant exercise
|
(11
|
)
|
(87
|
)
|
||
|
Additional Paid-in Capital, end of period
|
8,893
|
|
8,956
|
|
||
|
Retained Earnings, beginning of period
|
12,550
|
|
11,191
|
|
||
|
Net income
|
977
|
|
1,261
|
|
||
|
Dividends declared on common stock
|
(245
|
)
|
(237
|
)
|
||
|
Retained Earnings, end of period
|
13,282
|
|
12,215
|
|
||
|
Treasury Stock, at cost, beginning of period
|
(3,557
|
)
|
(2,527
|
)
|
||
|
Treasury stock acquired
|
(1,050
|
)
|
(800
|
)
|
||
|
Issuance of shares under incentive and stock compensation plans
|
134
|
|
182
|
|
||
|
Net shares acquired related to employee incentive and stock compensation plans
|
(47
|
)
|
(54
|
)
|
||
|
Issuance of shares for warrant exercise
|
11
|
|
87
|
|
||
|
Treasury Stock, at cost, end of period
|
(4,509
|
)
|
(3,112
|
)
|
||
|
Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period
|
(329
|
)
|
928
|
|
||
|
Total other comprehensive income (loss)
|
1,316
|
|
(788
|
)
|
||
|
Accumulated Other Comprehensive Income (Loss), net of tax, end of period
|
987
|
|
140
|
|
||
|
Total Stockholders’ Equity
|
$
|
18,658
|
|
$
|
18,204
|
|
|
Common Shares Outstanding, beginning of period (in thousands)
|
401,821
|
|
424,416
|
|
||
|
Treasury stock acquired
|
(24,652
|
)
|
(18,625
|
)
|
||
|
Issuance of shares under incentive and stock compensation plans
|
3,297
|
|
4,617
|
|
||
|
Return of shares under incentive and stock compensation plans to treasury stock
|
(1,091
|
)
|
(1,306
|
)
|
||
|
Issuance of shares for warrant exercise
|
273
|
|
2,212
|
|
||
|
Common Shares Outstanding, at end of period
|
379,648
|
|
411,314
|
|
||
See Notes to Condensed Consolidated Financial Statements.
10
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
|
|
Nine Months Ended September 30,
|
|||||
|
(In millions)
|
2016
|
2015
|
||||
|
Operating Activities
|
(Unaudited)
|
|||||
|
Net income
|
$
|
977
|
|
$
|
1,261
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||
|
Net realized capital losses
|
119
|
|
30
|
|
||
|
Amortization of deferred policy acquisition costs
|
1,145
|
|
1,212
|
|
||
|
Additions to deferred policy acquisition costs
|
(1,052
|
)
|
(1,055
|
)
|
||
|
Depreciation and amortization
|
296
|
|
245
|
|
||
|
Loss on extinguishment of debt
|
—
|
|
21
|
|
||
|
Reinsurance gain on disposition
|
—
|
|
(28
|
)
|
||
|
Other operating activities, net
|
119
|
|
78
|
|
||
|
Change in assets and liabilities:
|
||||||
|
Decrease in reinsurance recoverables
|
349
|
|
161
|
|
||
|
Increase (decrease) in deferred and accrued income taxes
|
(51
|
)
|
254
|
|
||
|
Increase in reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums
|
403
|
|
449
|
|
||
|
Net change in other assets and other liabilities
|
(900
|
)
|
(628
|
)
|
||
|
Net cash provided by operating activities
|
1,405
|
|
2,000
|
|
||
|
Investing Activities
|
||||||
|
Proceeds from the sale/maturity/prepayment of:
|
||||||
|
Fixed maturities, available-for-sale
|
17,007
|
|
19,210
|
|
||
|
Fixed maturities, fair value option
|
163
|
|
111
|
|
||
|
Equity securities, available-for-sale
|
562
|
|
1,171
|
|
||
|
Mortgage loans
|
325
|
|
613
|
|
||
|
Partnerships
|
656
|
|
298
|
|
||
|
Payments for the purchase of:
|
||||||
|
Fixed maturities, available-for-sale
|
(16,141
|
)
|
(19,919
|
)
|
||
|
Fixed maturities, fair value option
|
(94
|
)
|
(180
|
)
|
||
|
Equity securities, available-for-sale
|
(384
|
)
|
(1,007
|
)
|
||
|
Mortgage loans
|
(305
|
)
|
(612
|
)
|
||
|
Partnerships
|
(298
|
)
|
(411
|
)
|
||
|
Net proceeds from derivatives
|
154
|
|
64
|
|
||
|
Net increase (decrease) in policy loans
|
14
|
|
(12
|
)
|
||
|
Net additions to property and equipment
|
(183
|
)
|
(194
|
)
|
||
|
Net proceeds from (payments for) short-term investments
|
(388
|
)
|
1,472
|
|
||
|
Other investing activities, net
|
32
|
|
(1
|
)
|
||
|
Acquisitions, net of cash acquired
|
(175
|
)
|
—
|
|
||
|
Net cash provided by investing activities
|
945
|
|
603
|
|
||
|
Financing Activities
|
||||||
|
Deposits and other additions to investment and universal life-type contracts
|
3,381
|
|
3,703
|
|
||
|
Withdrawals and other deductions from investment and universal life-type contracts
|
(11,737
|
)
|
(12,935
|
)
|
||
|
Net transfers from separate accounts related to investment and universal life-type contracts
|
7,734
|
|
8,218
|
|
||
|
Repayments at maturity or settlement of consumer notes
|
(14
|
)
|
(31
|
)
|
||
|
Net increase (decrease) in securities loaned or sold under agreements to repurchase
|
(38
|
)
|
313
|
|
||
|
Repayment of debt
|
—
|
|
(585
|
)
|
||
|
Net issuance of shares under incentive and stock compensation plans and excess tax benefit
|
10
|
|
40
|
|
||
|
Treasury stock acquired
|
(1,050
|
)
|
(800
|
)
|
||
|
Dividends paid on common stock
|
(253
|
)
|
(229
|
)
|
||
|
Net cash used for financing activities
|
(1,967
|
)
|
(2,306
|
)
|
||
|
Foreign exchange rate effect on cash
|
(21
|
)
|
(31
|
)
|
||
|
Net increase in cash
|
362
|
|
266
|
|
||
|
Cash – beginning of period
|
448
|
|
399
|
|
||
|
Cash – end of period
|
$
|
810
|
|
$
|
665
|
|
|
Supplemental Disclosure of Cash Flow Information
|
||||||
|
Income tax refunds received (paid)
|
$
|
(131
|
)
|
$
|
80
|
|
|
Interest paid
|
$
|
239
|
|
$
|
258
|
|
See Notes to Condensed Consolidated Financial Statements
11
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
(Unaudited)
1
. Basis of Presentation and Significant Accounting Policies
The Hartford Financial Services Group, Inc. is a holding company for insurance and financial services subsidiaries that provide property and casualty insurance, group life and disability products, and mutual funds and exchange traded funds to individual and business customers in the United States (collectively, “The Hartford”, the “Company”, “we” or “our”). Also, the Company continues to runoff life and annuity products previously sold.
On July 29, 2016, the Company completed the acquisition of Northern Homelands Company, the holding company of Maxum Specialty Insurance Group (collectively "Maxum"). On July 29, 2016, the Company completed the acquisition of Lattice Strategies LLC ("Lattice"). On July 26, 2016, the Company announced the signing of a definitive agreement to sell its United Kingdom ("U.K.") property and casualty run-off subsidiaries. For discussion of these transactions, see Note
2
-
Business Acquisitions and Dispositions
of Notes to Condensed Consolidated Financial Statements.
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, which differ materially from the accounting practices prescribed by various insurance regulatory authorities. These Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's
2015
Form 10-K Annual Report. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year.
The accompanying Condensed Consolidated Financial Statements and Notes are unaudited. These financial statements reflect all adjustments (generally consisting only of normal accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. The Company's significant accounting policies are summarized in Note
1
-
Basis of Presentation and Significant Accounting Policies
of Notes to Consolidated Financial Statements included in the Company's
2015
Form 10-K Annual Report.
Consolidation
The Condensed Consolidated Financial Statements include the accounts of The Hartford Financial Services Group, Inc., and entities in which the Company directly or indirectly has a controlling financial interest. Entities in which the Company has significant influence over the operating and financing decisions but does not control are reported using the equity method. All intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated.
Use of 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 the 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 from those estimates.
The most significant estimates include those used in determining property and casualty insurance product reserves, net of reinsurance; estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life-type contracts; evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on investments; living benefits required to be fair valued; evaluation of goodwill for impairment; valuation of investments and derivative instruments; valuation allowance on deferred tax assets; and contingencies relating to corporate litigation and regulatory matters. 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 Condensed Consolidated Financial Statements.
Reclassifications
Certain reclassifications have been made to prior period financial information to conform to the current period presentation.
Adoption of New Accounting Standards
On January 1, 2016 the Company adopted new consolidation guidance issued by the Financial Accounting Standards Board (“FASB”). The updates revise when to consolidate variable interest entities ("VIEs") and general partners’ investments in limited partnerships, end the deferral granted for applying the VIE guidance to certain investment companies, and reduce the number of circumstances where a decision maker’s or service provider’s fee arrangement is deemed to be a variable interest in an entity. The updates also modify guidance for determining whether limited partnerships are VIEs or voting interest entities. The new guidance did not have a material effect on the Company’s Condensed Consolidated Financial Statements.
12
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Significant Accounting Policies (continued)
Future Adoption of New Accounting Standards
Financial Instruments - Credit Losses
In June 2016, the FASB issued updated guidance for recognition and measurement of credit losses on financial instruments. The new guidance will replace the “incurred loss” approach with an “expected loss” model for recognizing credit losses for instruments carried at other than fair value, which will initially result in the recognition of greater allowances for losses. The allowance will be an estimate of credit losses expected over the life of debt instruments, such as mortgage loans, reinsurance recoverables and receivables. Credit losses on available-for-sale (“AFS”) debt securities carried at fair value will continue to be measured as other-than-temporary impairments (“OTTI”) when incurred; however, the losses will be recognized through an allowance and no longer as an adjustment to the cost basis. Recoveries of OTTI will be recognized as reversals of valuation allowances and no longer accreted as investment income through an adjustment to the investment yield. The allowance on AFS securities cannot cause the net carrying value to be below fair value and, therefore, it is possible that increases in fair value due to decreases in market interest rates could cause the reversal of a valuation allowance and increase net income. The new guidance will also require purchased financial assets with a more-than-insignificant amount of credit deterioration since original issuance to be recorded based on contractual amounts due and an initial allowance recorded at the date of purchase. The guidance is effective January 1, 2020 through a cumulative-effect adjustment to retained earnings for the change in the allowance for credit losses for debt instruments carried at other than fair value. No allowance will be recognized at adoption for AFS debt securities; rather, their cost basis will be evaluated for an allowance for OTTI prospectively. Early adoption is permitted as of January 1, 2019. The Company has not yet determined the timing for adoption or estimated the effect on the Company’s consolidated financial statements.
Leases
In February 2016, the FASB issued updated guidance on lease accounting. Under the new guidance, lessees with operating leases will be required to recognize a liability for the present value of future minimum lease payments with a corresponding asset for the right of use of the property. Under existing guidance, future minimum lease payments on operating leases are commitments that are not recognized as liabilities on the balance sheet. The updated guidance is to be adopted effective January 1, 2019 through a cumulative effect adjustment to retained earnings for the earliest period presented, with early application permitted. Leases will be classified as financing or operating leases similar to capital and operating leases, respectively, under current accounting guidance. Where the lease is economically similar to a purchase because The Hartford obtains control of the underlying asset, the lease will be a financing lease and the Company will recognize amortization of the right of use asset and interest expense on the liability. Where the lease provides The Hartford with only the right to control the use of the underlying asset over the lease term and the lease term is greater than one year, the lease will be an operating lease and the amortization and interest cost will be recognized as rental expense over the lease term on a straight-line basis. Leases with a term of one year or less will also be expensed over the lease term but will not be recognized on the balance sheet. The Company is currently evaluating the potential impact of the new guidance to the consolidated financial statements, including the timing of adoption. We do not expect a material impact to the consolidated financial statements; however, it is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date.
Stock Compensation
In March 2016, the FASB issued updated guidance on accounting for share-based payments to employees. The updated guidance requires the excess tax benefit or deficiency on vesting or settlement of awards to be recognized in earnings as an income tax benefit or expense, respectively. This recognition of excess tax benefits and deficiencies will result in earnings volatility as current accounting guidance recognizes these amounts as an adjustment to additional paid-in capital.
The excess tax benefit was
$27
and
$6
for the years ended December 31, 2015 and 2014, respectively, which would have increased net income in each of those years. The excess tax benefits or deficiencies are discrete items in the reporting period in which they occur, and so will not be considered in determining the annual estimated effective tax rate. The excess tax benefits or deficiencies will be presented as a cash flow within operating activities instead of within financing activities as is the case under current accounting. The Hartford will adopt the updated guidance January 1, 2017 and will recognize excess tax benefits or deficiencies in net income, as well as the related cash flows in operating activities, on a prospective basis. The impact of the adoption will depend on the excess tax benefits or deficiencies realized on vesting or settlement of awards resulting from the difference between the market value of awards at vesting or settlement and the grant date fair value recognized through compensation expense.
13
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Business Acquisitions and Dispositions
Business Acquisitions
Maxum
On July 29, 2016, the Company acquired 100% of the outstanding shares of Northern Homelands Company, the holding company of Maxum Specialty Insurance Group headquartered in Alpharetta, Georgia in a cash transaction for approximately
$169
, subject to post closing adjustments. The acquisition adds excess and surplus lines capability to the Company's Small Commercial line of business. Maxum will maintain its brand and limited wholesale distribution model. Maxum's revenues and earnings since the acquisition date are included in the Company's Condensed Consolidated Statements of Operations and are not material to the Company's consolidated results of operations for the three and nine months ended September 30, 2016.
The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date.
|
As of
July 29, 2016
|
|||
|
Assets
|
|||
|
Cash and investments (including cash of $12)
|
$
|
274
|
|
|
Reinsurance recoverables
|
113
|
|
|
|
Intangible assets [1]
|
11
|
|
|
|
Other assets
|
80
|
|
|
|
Total assets acquired
|
478
|
|
|
|
Liabilities
|
|||
|
Unpaid losses
|
235
|
|
|
|
Unearned premiums
|
77
|
|
|
|
Other liabilities
|
34
|
|
|
|
Total liabilities assumed
|
346
|
|
|
|
Net identifiable assets acquired
|
132
|
|
|
|
Goodwill [2]
|
37
|
|
|
|
Net assets acquired
|
$
|
169
|
|
|
[1]
|
Comprised of indefinite lived intangibles of
$5
related to state insurance licenses acquired and other intangibles of
$6
related to agency distribution relationships of Maxum which will amortize over 10 years.
|
|
[2]
|
Non-deductible for income tax purposes.
|
The goodwill recognized is attributable to expected growth from the opportunity to sell both existing products and excess and surplus lines coverage to a broader customer base and will be allocated to the Small Commercial reporting unit within the Commercial Lines reporting segment.
The Company recognized
$1
of acquisition related costs in the three months ended September 30, 2016. These costs are included in insurance operating costs and other expenses in the Condensed Consolidated Statement of Operations.
Lattice
On July 29, 2016, an indirect wholly-owned subsidiary of the Company acquired 100% of the membership interests outstanding of Lattice Strategies LLC, an investment management firm and provider of strategic beta exchange-traded funds ("ETF") with approximately
$200
of assets under management ("AUM") at the acquisition date.
The following table summarizes the fair value of the consideration transferred at the acquisition date.
|
Fair value of consideration transferred
|
|||
|
Cash
|
$
|
19
|
|
|
Contingent consideration
|
23
|
|
|
|
Total
|
$
|
42
|
|
The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date.
14
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Business Acquisitions and Dispositions (continued)
|
As of
July 29, 2016
|
|||
|
Assets
|
|||
|
Intangible assets [1]
|
$
|
11
|
|
|
Other assets (including cash of $1)
|
2
|
|
|
|
Total assets acquired
|
13
|
|
|
|
Liabilities
|
|||
|
Total liabilities assumed
|
1
|
|
|
|
Net identifiable assets acquired
|
12
|
|
|
|
Goodwill [2]
|
30
|
|
|
|
Net assets acquired
|
$
|
42
|
|
|
[1]
|
Comprised of an indefinite lived intangible asset of
$10
related to customer relationships and
$1
of other intangibles, which are amortizable over 5 to 8 years.
|
|
[2]
|
Deductible for federal income tax purposes.
|
Lattice's revenues and earnings since the acquisition date are included in the Company's Condensed Consolidated Statements of Operations in the Mutual Funds reporting segment and are not material to the Company's consolidated results of operations for the three and nine months ended September 30, 2016.
In addition to the initial cash consideration, the Company is required to make future payments to the former owners of Lattice of up to
$60
based upon growth in ETF AUM over a four-year period beginning on the date of acquisition.
The contingent consideration was measured at fair value at the acquisition date by projecting future ETF AUM and discounting expected payments back to the valuation date. The projected ETF AUM and risk-adjusted discount rate are significant unobservable inputs to fair value.
The goodwill recognized is attributable to the fact that the acquisition of Lattice enables the Company to offer ETFs which are expected to be a significant source of future revenue and earnings growth. Goodwill will be allocated to the Mutual Funds reporting segment.
The Company recognized
$1
of acquisition related costs in the three months ended September 30, 2016. These costs are included in insurance operating costs and other expenses in the Condensed Consolidated Statement of Operations.
Business Disposition
Sale of U.K. businesses
On July 26, 2016, the Company announced it had entered into an agreement to sell its U.K. property and casualty run-off subsidiaries, Hartford Financial Products International Limited and Downlands Liability Management Limited, in a cash transaction to Catalina Holdings UK Limited ("buyer"), for approximately
$268
, net of transaction costs. The Company's U.K. property and casualty run-off subsidiaries are included in the P&C Other Operations reporting segment. Revenues and earnings are not material to the Company's consolidated results of operations for the three and nine months ended September 30, 2016 and 2015.
The Company recognized an estimated capital loss of
$59
, before tax, and related income tax benefit of
$65
, for an estimated after-tax net gain of
$6
on the sale for the three and nine months ended September 30, 2016. The accrual for the estimated before tax loss is included as a reduction of the carrying value of assets held for sale in the Company's Condensed Consolidated Balance Sheets as of September 30, 2016. The transaction is expected to close in the fourth quarter of 2016, subject to regulatory approvals and other customary closing conditions.
15
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Business Acquisitions and Dispositions (continued)
The carrying values of the assets and liabilities to be transferred by the Company to the buyer in connection with the sale are as follows:
|
As of September 30, 2016
|
|||
|
Assets
|
|||
|
Cash and investments
|
$
|
695
|
|
|
Reinsurance recoverables [1]
|
226
|
|
|
|
Total assets held for sale
|
921
|
|
|
|
Liabilities
|
|
|
|
|
Reserve for future policy benefits and unpaid loss and loss adjustment expenses
|
638
|
|
|
|
Other liabilities
|
15
|
|
|
|
Total liabilities held for sale
|
$
|
653
|
|
|
[1]
|
Includes intercompany reinsurance recoverables of
$58
to be settled in cash or securities prior to closing.
|
16
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Earnings Per Common Share
The following table presents the computation of basic and diluted earnings per common share.
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||
|
(In millions, except for per share data)
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Earnings
|
|||||||||||||
|
Income from continuing operations
|
|||||||||||||
|
Income from continuing operations, net of tax
|
$
|
438
|
|
$
|
372
|
|
$
|
977
|
|
$
|
1,252
|
|
|
|
Income from discontinued operations, net of tax
|
—
|
|
9
|
|
—
|
|
9
|
|
|||||
|
Net income
|
$
|
438
|
|
$
|
381
|
|
$
|
977
|
|
$
|
1,261
|
|
|
|
Shares
|
|||||||||||||
|
Weighted average common shares outstanding, basic
|
383.8
|
|
413.8
|
|
391.4
|
|
418.4
|
|
|||||
|
Dilutive effect of stock compensation plans
|
3.2
|
|
5.1
|
|
3.5
|
|
5.0
|
|
|||||
|
Dilutive effect of warrants
|
3.5
|
|
4.1
|
|
3.6
|
|
4.9
|
|
|||||
|
Weighted average common shares outstanding and dilutive potential common shares
|
390.5
|
|
423.0
|
|
398.5
|
|
428.3
|
|
|||||
|
Net income per common share
|
|||||||||||||
|
Basic
|
|||||||||||||
|
Income from continuing operations, net of tax
|
$
|
1.14
|
|
$
|
0.90
|
|
$
|
2.50
|
|
$
|
2.99
|
|
|
|
Income from discontinued operations, net of tax
|
—
|
|
0.02
|
|
—
|
|
0.02
|
|
|||||
|
Net income per common share
|
$
|
1.14
|
|
$
|
0.92
|
|
$
|
2.50
|
|
$
|
3.01
|
|
|
|
Diluted
|
|||||||||||||
|
Income from continuing operations, net of tax
|
$
|
1.12
|
|
$
|
0.88
|
|
$
|
2.45
|
|
$
|
2.92
|
|
|
|
Income from discontinued operations, net of tax
|
—
|
|
0.02
|
|
—
|
|
0.02
|
|
|||||
|
Net income per common share
|
$
|
1.12
|
|
$
|
0.90
|
|
$
|
2.45
|
|
$
|
2.94
|
|
|
4. Segment Information
The Company currently conducts business principally in
six
reporting segments including Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds and Talcott Resolution, as well as a Corporate category. The Company's revenues are generated primarily in the United States ("U.S."). Any foreign sourced revenue is immaterial.
The following table presents net income (loss) for each reporting segment, as well as the Corporate category.
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
Net Income (Loss)
|
2016
|
2015
|
2016
|
2015
|
||||||||
|
Commercial Lines
|
$
|
272
|
|
$
|
211
|
|
$
|
740
|
|
$
|
710
|
|
|
Personal Lines
|
29
|
|
19
|
|
(4
|
)
|
136
|
|
||||
|
Property & Casualty Other Operations
|
31
|
|
16
|
|
(106
|
)
|
(72
|
)
|
||||
|
Group Benefits
|
62
|
|
42
|
|
167
|
|
150
|
|
||||
|
Mutual Funds
|
21
|
|
22
|
|
61
|
|
66
|
|
||||
|
Talcott Resolution
|
78
|
|
74
|
|
199
|
|
402
|
|
||||
|
Corporate
|
(55
|
)
|
(3
|
)
|
(80
|
)
|
(131
|
)
|
||||
|
Net income
|
$
|
438
|
|
$
|
381
|
|
$
|
977
|
|
$
|
1,261
|
|
17
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Segment Information (continued)
The following table presents revenues by product line for each reporting segment, as well as the Corporate category.
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||
|
Revenues
|
2016
|
2015
|
2016
|
2015
|
||||||||
|
Earned premiums and fee income
|
||||||||||||
|
Commercial Lines
|
||||||||||||
|
Workers’ compensation
|
$
|
772
|
|
$
|
769
|
|
$
|
2,299
|
|
$
|
2,273
|
|
|
Liability
|
156
|
|
146
|
|
447
|
|
423
|
|
||||
|
Package business
|
313
|
|
305
|
|
925
|
|
896
|
|
||||
|
Automobile
|
162
|
|
156
|
|
472
|
|
456
|
|
||||
|
Professional liability
|
57
|
|
58
|
|
165
|
|
168
|
|
||||
|
Bond
|
56
|
|
55
|
|
163
|
|
163
|
|
||||
|
Property
|
161
|
|
158
|
|
479
|
|
474
|
|
||||
|
Total Commercial Lines
|
1,677
|
|
1,647
|
|
4,950
|
|
4,853
|
|
||||
|
Personal Lines
|
||||||||||||
|
Automobile
|
686
|
|
674
|
|
2,044
|
|
1,994
|
|
||||
|
Homeowners
|
294
|
|
303
|
|
887
|
|
901
|
|
||||
|
Total Personal Lines [1]
|
980
|
|
977
|
|
2,931
|
|
2,895
|
|
||||
|
Property & Casualty Other Operations
|
—
|
|
1
|
|
—
|
|
1
|
|
||||
|
Group Benefits
|
||||||||||||
|
Group disability
|
378
|
|
361
|
|
1,128
|
|
1,106
|
|
||||
|
Group life
|
383
|
|
365
|
|
1,134
|
|
1,106
|
|
||||
|
Other
|
51
|
|
43
|
|
153
|
|
133
|
|
||||
|
Total Group Benefits
|
812
|
|
769
|
|
2,415
|
|
2,345
|
|
||||
|
Mutual Funds
|
||||||||||||
|
Mutual Fund
|
153
|
|
154
|
|
442
|
|
457
|
|
||||
|
Talcott
|
25
|
|
28
|
|
75
|
|
88
|
|
||||
|
Total Mutual Funds
|
178
|
|
182
|
|
517
|
|
545
|
|
||||
|
Talcott Resolution
|
268
|
|
275
|
|
796
|
|
848
|
|
||||
|
Corporate
|
1
|
|
1
|
|
3
|
|
6
|
|
||||
|
Total earned premiums and fee income
|
3,916
|
|
3,852
|
|
11,612
|
|
11,493
|
|
||||
|
Net investment income
|
772
|
|
730
|
|
2,203
|
|
2,335
|
|
||||
|
Net realized capital losses
|
(17
|
)
|
(44
|
)
|
(119
|
)
|
(30
|
)
|
||||
|
Other revenues
|
24
|
|
24
|
|
67
|
|
66
|
|
||||
|
Total revenues
|
$
|
4,695
|
|
$
|
4,562
|
|
$
|
13,763
|
|
$
|
13,864
|
|
|
[1]
|
For the
three months ended
September 30, 2016
and
2015
, AARP members accounted for earned premiums of
$825
and
$797
, respectively. For the
nine months ended
September 30, 2016
and
2015
, AARP members accounted for earned premiums of
$2.4 billion
and
$2.3 billion
.
|
18
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
Fair value is determined based on the "exit price" notion which is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Financial instruments carried at fair value in the Company's Condensed Consolidated Financial Statements include fixed maturity and equity securities, available-for-sale ("AFS"); fixed maturities and equity securities at fair value using the fair value option ("FVO"); short-term investments; freestanding and embedded derivatives; certain limited partnerships and other alternative investments; separate account assets and certain other liabilities.
The Company's estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The Company categorizes its assets and liabilities measured at estimated fair value based on whether the significant inputs into the valuation are observable. The fair value hierarchy categorizes the inputs in the valuation techniques used to measure fair value into three broad Levels (Level 1, 2 or 3).
|
Level 1
|
Unadjusted quoted prices for identical assets, or liabilities, in active markets that the Company has the ability to access at the measurement date.
|
|
Level 2
|
Observable inputs, other than quoted prices included in Level 1, for the asset or liability, or prices for similar assets and liabilities.
|
|
Level 3
|
Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Because Level 3 fair values, by their nature, contain one or more significant unobservable inputs, as there is little or no observable market for these assets and liabilities, considerable judgment is used to determine the Level 3 fair values. Level 3 fair values represent the Company’s best estimate of an amount that could be realized in a current market exchange absent actual market exchanges.
|
In many situations, inputs used to measure the fair value of an asset or liability position may fall into different levels of the fair value hierarchy. In these situations, the Company will determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. In most cases, both observable (e.g., changes in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the determination of fair values that the Company has classified within Level 3. Consequently, these values and the related gains and losses are based upon both observable and unobservable inputs. The Company’s fixed maturities included in Level 3 are classified as such because these securities are primarily within illiquid markets and/or priced by independent brokers.
19
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
The following tables present assets and (liabilities) carried at fair value by hierarchy level. Upon implementation of the new disclosure guidance effective in 2016, certain NAV-based fair values are no longer included in the fair value level disclosures; however, these amounts are included in the total fair value disclosed. As a result, prior period values for limited partnerships and other alternative investments and certain separate account assets have been removed from Level 2 and Level 3.
|
|
September 30, 2016
|
|||||||||||
|
|
Total
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||
|
Assets accounted for at fair value on a recurring basis
|
||||||||||||
|
Fixed maturities, AFS
|
||||||||||||
|
Asset-backed-securities ("ABS")
|
$
|
2,685
|
|
$
|
—
|
|
$
|
2,654
|
|
$
|
31
|
|
|
Collateralized debt obligations ("CDOs")
|
2,573
|
|
—
|
|
2,104
|
|
469
|
|
||||
|
Commercial mortgage-backed securities ("CMBS")
|
5,268
|
|
—
|
|
5,191
|
|
77
|
|
||||
|
Corporate
|
26,904
|
|
—
|
|
25,810
|
|
1,094
|
|
||||
|
Foreign government/government agencies
|
1,186
|
|
—
|
|
1,112
|
|
74
|
|
||||
|
Municipal
|
12,594
|
|
—
|
|
12,468
|
|
126
|
|
||||
|
Residential mortgage-backed securities ("RMBS")
|
4,936
|
|
—
|
|
2,881
|
|
2,055
|
|
||||
|
U.S. Treasuries
|
4,079
|
|
348
|
|
3,731
|
|
—
|
|
||||
|
Total fixed maturities
|
60,225
|
|
348
|
|
55,951
|
|
3,926
|
|
||||
|
Fixed maturities, FVO
|
360
|
|
—
|
|
351
|
|
9
|
|
||||
|
Equity securities, trading [1]
|
11
|
|
11
|
|
—
|
|
—
|
|
||||
|
Equity securities, AFS
|
875
|
|
645
|
|
130
|
|
100
|
|
||||
|
Derivative assets
|
||||||||||||
|
Credit derivatives
|
8
|
|
—
|
|
8
|
|
—
|
|
||||
|
Foreign exchange derivatives
|
2
|
|
—
|
|
2
|
|
—
|
|
||||
|
Interest rate derivatives
|
104
|
|
—
|
|
104
|
|
—
|
|
||||
|
Guaranteed minimum withdrawal benefit ("GMWB") hedging instruments
|
66
|
|
—
|
|
(15
|
)
|
81
|
|
||||
|
Macro hedge program
|
96
|
|
—
|
|
—
|
|
96
|
|
||||
|
Other derivative contracts
|
2
|
|
—
|
|
—
|
|
2
|
|
||||
|
Total derivative assets [2]
|
278
|
|
—
|
|
99
|
|
179
|
|
||||
|
Short-term investments
|
2,219
|
|
494
|
|
1,725
|
|
—
|
|
||||
|
Limited partnerships and other alternative investments [3]
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Reinsurance recoverable for GMWB
|
98
|
|
—
|
|
—
|
|
98
|
|
||||
|
Modified coinsurance reinsurance contracts
|
31
|
|
—
|
|
31
|
|
—
|
|
||||
|
Separate account assets [4]
|
116,163
|
|
74,870
|
|
40,028
|
|
325
|
|
||||
|
Total assets accounted for at fair value on a recurring basis
|
$
|
180,260
|
|
$
|
76,368
|
|
$
|
98,315
|
|
$
|
4,637
|
|
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||
|
GMWB
|
$
|
(348
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(348
|
)
|
|
Equity linked notes
|
(31
|
)
|
—
|
|
—
|
|
(31
|
)
|
||||
|
Total other policyholder funds and benefits payable
|
(379
|
)
|
—
|
|
—
|
|
(379
|
)
|
||||
|
Derivative liabilities
|
||||||||||||
|
Credit derivatives
|
(10
|
)
|
—
|
|
(10
|
)
|
—
|
|
||||
|
Equity derivatives
|
30
|
|
—
|
|
30
|
|
—
|
|
||||
|
Foreign exchange derivatives
|
(257
|
)
|
—
|
|
(257
|
)
|
—
|
|
||||
|
Interest rate derivatives
|
(961
|
)
|
—
|
|
(929
|
)
|
(32
|
)
|
||||
|
GMWB hedging instruments
|
103
|
|
—
|
|
53
|
|
50
|
|
||||
|
Macro hedge program
|
40
|
|
—
|
|
(32
|
)
|
72
|
|
||||
|
Total derivative liabilities [5]
|
(1,055
|
)
|
—
|
|
(1,145
|
)
|
90
|
|
||||
|
Contingent consideration [6]
|
23
|
|
—
|
|
—
|
|
23
|
|
||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$
|
(1,411
|
)
|
$
|
—
|
|
$
|
(1,145
|
)
|
$
|
(266
|
)
|
20
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
|
|
December 31, 2015
|
|||||||||||
|
|
Total
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||
|
Assets accounted for at fair value on a recurring basis
|
||||||||||||
|
Fixed maturities, AFS
|
||||||||||||
|
ABS
|
$
|
2,499
|
|
$
|
—
|
|
$
|
2,462
|
|
$
|
37
|
|
|
CDOs
|
3,038
|
|
—
|
|
2,497
|
|
541
|
|
||||
|
CMBS
|
4,717
|
|
—
|
|
4,567
|
|
150
|
|
||||
|
Corporate
|
26,802
|
|
—
|
|
25,948
|
|
854
|
|
||||
|
Foreign government/government agencies
|
1,308
|
|
—
|
|
1,248
|
|
60
|
|
||||
|
Municipal
|
12,121
|
|
—
|
|
12,072
|
|
49
|
|
||||
|
RMBS
|
4,046
|
|
—
|
|
2,424
|
|
1,622
|
|
||||
|
U.S. Treasuries
|
4,665
|
|
740
|
|
3,925
|
|
—
|
|
||||
|
Total fixed maturities
|
59,196
|
|
740
|
|
55,143
|
|
3,313
|
|
||||
|
Fixed maturities, FVO
|
503
|
|
2
|
|
485
|
|
16
|
|
||||
|
Equity securities, trading [1]
|
11
|
|
11
|
|
—
|
|
—
|
|
||||
|
Equity securities, AFS
|
1,121
|
|
874
|
|
154
|
|
93
|
|
||||
|
Derivative assets
|
||||||||||||
|
Credit derivatives
|
21
|
|
—
|
|
21
|
|
—
|
|
||||
|
Foreign exchange derivatives
|
15
|
|
—
|
|
15
|
|
—
|
|
||||
|
Interest rate derivatives
|
(227
|
)
|
—
|
|
(227
|
)
|
—
|
|
||||
|
GMWB hedging instruments
|
111
|
|
—
|
|
27
|
|
84
|
|
||||
|
Macro hedge program
|
74
|
|
—
|
|
—
|
|
74
|
|
||||
|
Other derivative contracts
|
7
|
|
—
|
|
—
|
|
7
|
|
||||
|
Total derivative assets [2]
|
1
|
|
—
|
|
(164
|
)
|
165
|
|
||||
|
Short-term investments
|
1,843
|
|
333
|
|
1,510
|
|
—
|
|
||||
|
Limited partnerships and other alternative investments [3]
|
622
|
|
—
|
|
—
|
|
—
|
|
||||
|
Reinsurance recoverable for GMWB
|
83
|
|
—
|
|
—
|
|
83
|
|
||||
|
Modified coinsurance reinsurance contracts
|
79
|
|
—
|
|
79
|
|
—
|
|
||||
|
Separate account assets [4]
|
118,174
|
|
78,110
|
|
38,700
|
|
140
|
|
||||
|
Total assets accounted for at fair value on a recurring basis
|
$
|
181,633
|
|
$
|
80,070
|
|
$
|
95,907
|
|
$
|
3,810
|
|
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||
|
GMWB
|
$
|
(262
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(262
|
)
|
|
Equity linked notes
|
(26
|
)
|
—
|
|
—
|
|
(26
|
)
|
||||
|
Total other policyholder funds and benefits payable
|
(288
|
)
|
—
|
|
—
|
|
(288
|
)
|
||||
|
Derivative liabilities
|
||||||||||||
|
Credit derivatives
|
(16
|
)
|
—
|
|
(16
|
)
|
—
|
|
||||
|
Equity derivatives
|
41
|
|
—
|
|
41
|
|
—
|
|
||||
|
Foreign exchange derivatives
|
(374
|
)
|
—
|
|
(374
|
)
|
—
|
|
||||
|
Interest rate derivatives
|
(569
|
)
|
—
|
|
(547
|
)
|
(22
|
)
|
||||
|
GMWB hedging instruments
|
47
|
|
—
|
|
(4
|
)
|
51
|
|
||||
|
Macro hedge program
|
73
|
|
—
|
|
—
|
|
73
|
|
||||
|
Total derivative liabilities [5]
|
(798
|
)
|
—
|
|
(900
|
)
|
102
|
|
||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$
|
(1,086
|
)
|
$
|
—
|
|
$
|
(900
|
)
|
$
|
(186
|
)
|
21
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
|
[1]
|
Included in other investments on the Condensed Consolidated Balance Sheets.
|
|
[2]
|
Includes over-the-counter ("OTC") and OTC-cleared derivative instruments in a net positive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements, clearing house rules and applicable law. See the following footnote 5 for derivative liabilities.
|
|
[3]
|
Represents hedge funds where investment company accounting was applied to a wholly-owned fund of funds measured at fair value. During 2016, the Company liquidated this fund of funds.
|
|
[4]
|
Approximately
$2.5 billion
and
$1.8 billion
of investment sales receivable, as of
September 30, 2016
, and
December 31, 2015
, respectively, are excluded from this disclosure requirement because they are trade receivables in the ordinary course of business where the carrying amount approximates fair value. Included in the total fair value amount are
$0.9 billion
and
$1.2 billion
of investments, as of
September 30, 2016
and
December 31, 2015
, for which the fair value is estimated using the net asset value per unit as a practical expedient and which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy in connection with the retrospective adoption of ASU 2015-07, Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent), on January 1, 2016.
|
|
[5]
|
Includes OTC and OTC-cleared derivative instruments in a net negative fair value position (derivative liability) after consideration of the accrued interest and impact of collateral posting requirements, which may be imposed by agreements, clearing house rules and applicable law.
|
|
[6]
|
For additional information on the Lattice acquisition, see Note
2
-
Business Acquisitions and Dispositions
of Notes to Condensed Consolidated Financial Statements.
|
Valuation Techniques, Procedures and Controls
The Company determines the fair values of certain financial assets and liabilities based on quoted market prices where available, and where prices represent a reasonable estimate of fair value. The Company also determines fair value based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s default spreads, liquidity, and where appropriate, risk margins on unobservable parameters.
The fair value process is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The Valuation Committee is co-chaired by the Heads of Investment Operations and Accounting, and has representation from various investment sector professionals, accounting, operations, legal, compliance, and risk management. The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments as well as addressing valuation issues and approving changes to valuation methodologies and pricing sources. There are also two working groups under the Valuation Committee, a Securities Fair Value Working Group (“Securities Working Group”) and a Derivatives Fair Value Working Group ("Derivatives Working Group"), which include various investment, operations, accounting and risk management professionals that meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes.
The Company also has an enterprise-wide Operational Risk Management function, led by the Chief Operational Risk Officer, which is responsible for establishing, maintaining and communicating the framework, principles and guidelines of the Company's operational risk management program. This includes model risk management which provides an independent review of the suitability, characteristics and reliability of model inputs as well as an analysis of significant changes to current models.
Fixed Maturities, Equity Securities, and Short-term Investments
The fair value of fixed maturities, equity securities, and short-term investments in an active and orderly market (e.g., not distressed or forced liquidation) are determined by management using a "waterfall" approach after considering the following pricing sources: quoted prices for identical assets or liabilities, prices from third-party pricing services, independent broker quotations, or internal matrix pricing processes. Typical inputs used by these pricing sources include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and/or estimated cash flows, prepayment speeds, and default rates. Most fixed maturities do not trade daily. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third-party pricing services utilize matrix pricing to derive security prices. Matrix pricing relies on securities' relationships to other benchmark quoted securities, which trade more frequently. Pricing services utilize recently reported trades of identical or similar securities making adjustments through the reporting date based on the preceding outlined available market observable information. If there are no recently reported trades, the third-party pricing services may develop a security price using expected future cash flows based upon collateral performance and discounted at an estimated market rate. Both matrix pricing and discounted cash flow techniques develop prices by factoring in the time value for cash flows and risk, including liquidity and credit.
Prices from third-party pricing services may be unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain securities are priced via independent broker quotations which utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these independent broker quotations are non-binding.
22
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
The Company utilizes an internally developed matrix pricing process for private placement securities for which the Company is unable to obtain a price from a third-party pricing service. The Company's process is similar to the third-party pricing services. The Company develops credit spreads each month using market based data for public securities adjusted for credit spread differentials between public and private securities which are obtained from a survey of multiple private placement brokers. The credit spreads determined through this survey approach are based upon the issuer’s financial strength and term to maturity, utilizing independent public security index and trade information and adjusting for the non-public nature of the securities. Credit spreads combined with risk-free rates are applied to contractual cash flows to develop a price.
The Securities Working Group performs ongoing analyses of the prices and credit spreads received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. As a part of these analyses, the Company considers trading volume, new issuance activity and other factors to determine whether the market activity is significantly different than normal activity in an active market, and if so, whether transactions may not be orderly considering the weight of available evidence. If the available evidence indicates that pricing is based upon transactions that are stale or not orderly, the Company places little, if any, weight on the transaction price and will estimate fair value utilizing an internal pricing model. In addition, the Company ensures that prices received from independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models utilizing spreads, and when available, market indices. As a result of this analysis, if the Company determines that there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly and approved by the Valuation Committee.
The Company conducts other specific monitoring controls around pricing. Daily analyses identify price changes over
3%
for fixed maturities and
5%
for equity securities and trade prices for both debt and equity securities that differ over
3%
to the current day's price. Weekly analyses identify prices that differ more than
5%
from published bond prices of a corporate bond index. Monthly analyses identify price changes over
3%
, prices that have not changed, and missing prices. Also on a monthly basis, a second source validation is performed on most sectors. Analyses are conducted by a dedicated pricing unit that follows up with trading and investment sector professionals and challenges prices with vendors when the estimated assumptions used differ from what the Company feels a market participant would use. Examples of other procedures performed include, but are not limited to, initial and on-going review of third-party pricing services’ methodologies, review of pricing statistics and trends, and back testing recent trades.
The Company has analyzed the third-party pricing services’ valuation methodologies and related inputs, and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Most prices provided by third-party pricing services are classified into Level 2 because the inputs used in pricing the securities are observable. Due to the lack of transparency in the process that brokers use to develop prices, most valuations that are based on brokers’ prices are classified as Level 3. Some valuations may be classified as Level 2 if the price can be corroborated with observable market data.
Derivative Instruments, including Embedded Derivatives within Investments
Derivative instruments are fair valued using pricing valuation models for OTC derivatives that utilize independent market data inputs, quoted market prices for exchange-traded and OTC-cleared derivatives, or independent broker quotations. Excluding embedded and reinsurance related derivatives, as of September 30, 2016 and December 31, 2015, 97% and 96%, respectively, of derivatives, based upon notional values, were priced by valuation models, including discounted cash flow models and option-pricing models that utilize present value techniques, or quoted market prices. The remaining derivatives were priced by broker quotations.
The Derivatives Working Group performs ongoing analyses of the valuations, assumptions and methodologies used to ensure that the prices represent a reasonable estimate of the fair value. The Company performs various controls on derivative valuations which include both quantitative and qualitative analyses. Analyses are conducted by a dedicated derivative pricing team that works directly with investment sector professionals to analyze impacts of changes in the market environment and investigate variances. On a daily basis, market valuations are compared to counterparty valuations for OTC derivatives. There are monthly analyses to identify market value changes greater than pre-defined thresholds, stale prices, missing prices, and zero prices. Also on a monthly basis, a second source validation, typically to broker quotations, is performed for certain of the more complex derivatives and all new deals during the month. A model validation review is performed on any new models, which typically includes detailed documentation and validation to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval.
The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instrument may not be classified with the same fair value hierarchy level as the associated assets and liabilities. Therefore, the realized and unrealized gains and losses on derivatives reported in the Level 3 rollforward may be offset by realized and unrealized gains and losses of the associated assets and liabilities in other line items of the financial statements.
23
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
Limited Partnerships and Other Alternative Investments
The portion of limited partnerships and other alternative investments recorded at fair value represents hedge funds for which investment company accounting has been applied to a wholly-owned fund of funds measured at fair value. During 2016, the Company liquidated this wholly-owned hedge fund of funds. Fair value was determined for these funds using the fund’s NAV, as a practical expedient, calculated on a monthly basis, and is the amount at which a unit or shareholder may have redeemed their investment, if redemption was allowed.
Valuation Inputs for Investments
For Level 1 investments, which are comprised of on-the-run U.S. Treasuries, money market funds, exchange-traded equity securities, open-ended mutual funds, short-term investments, and exchange traded futures and option contracts, valuations are based on quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date.
For the Company’s Level 2 and 3 debt securities, typical inputs used by pricing techniques include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and/or estimated cash flows, prepayment speeds, and default rates. Derivative instruments are valued using mid-market inputs that are predominantly observable in the market.
A description of additional inputs used in the Company’s Level 2 and Level 3 measurements is included in the following discussion:
|
Level 2
|
The fair values of most of the Company’s Level 2 investments are determined by management after considering prices received from third party pricing services. These investments include most fixed maturities and preferred stocks, including those reported in separate account assets
as well as certain derivative instruments.
|
|
•
|
ABS, CDOs, CMBS and RMBS
– Primary inputs also include monthly payment information, collateral performance, which varies by vintage year and includes delinquency rates, collateral valuation loss severity rates, collateral refinancing assumptions, and credit default swap indices. ABS and RMBS prices also include estimates of the rate of future principal prepayments over the remaining life of the securities. These estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral.
|
|
•
|
Corporates, including investment grade private placements
– Primary inputs also include observations of credit default swap curves related to the issuer.
|
|
•
|
Foreign government/government agencies
— Primary inputs also include observations of credit default swap curves related to the issuer and political events in emerging market economies.
|
|
•
|
Municipals
– Primary inputs also include Municipal Securities Rulemaking Board reported trades and material event notices, and issuer financial statements.
|
|
•
|
Short-term investments
– Primary inputs also include material event notices and new issue money market rates.
|
|
•
|
Credit derivatives –
Primary inputs include the swap yield curve and credit default swap curves.
|
|
•
|
Equity derivatives
– Primary inputs include equity index levels.
|
|
•
|
Foreign exchange derivatives –
Primary inputs include the swap yield curve, currency spot and forward rates, and cross currency basis curves.
|
|
•
|
Interest rate derivatives –
Primary input is the swap yield curve.
|
24
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
|
Level 3
|
Most of the Company's securities classified as Level 3 include less liquid securities such as lower quality ABS, CMBS, commercial real estate ("CRE") CDOs and RMBS primarily backed by sub-prime loans. Also included in Level 3 are securities valued based on broker prices or broker spreads, without adjustments. Primary inputs for non-broker priced investments, including structured securities, are consistent with the typical inputs used in the preceding noted Level 2 measurements, but are Level 3 due to their less liquid markets. Additionally, certain long-dated securities are priced based on third party pricing services, including certain municipal securities, foreign government/government agency securities, and bank loans, which are included with corporate fixed maturities. Primary inputs for these long-dated securities are consistent with the typical inputs used in the preceding noted Level 1 and Level 2 measurements, but include benchmark interest rate or credit spread assumptions that are not observable in the marketplace. Significant inputs for Level 3 derivative contracts primarily include the typical inputs used in the preceding noted Level 1 and Level 2 measurements, but also include equity and interest rate volatility and swap yield curves beyond observable limits.
|
Transfers between Levels
Transfers of securities among the levels occur at the beginning of the reporting period. The amount of transfers from Level 1 to Level 2 was
$508
and
$1,316
, for the
three and nine months ended
September 30, 2016
and
$471
and
$995
for the
three and nine months ended
September 30, 2015
, respectively, which represented previously on-the-run U.S. Treasury securities that are now off-the-run. For the
three and nine months ended
September 30, 2016
and
2015
, there were
no
transfers from Level 2 to Level 1. See the fair value roll-forward tables for the
three and nine months ended
September 30, 2016
and
2015
, for the transfers into and out of Level 3.
25
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
Significant Unobservable Inputs for Level 3 Assets Measured at Fair Value
The following tables present information about significant unobservable inputs used in Level 3 assets measured at fair value. The tables exclude ABS, CRE CDOs, certain CMBS, corporate and municipal securities as well as index options for which fair values are based on broker quotations.
|
Securities
|
Unobservable Inputs
|
||||||||
|
|
As of September 30, 2016
|
||||||||
|
Assets Accounted for at Fair Value on a Recurring Basis
|
Fair
Value
|
Predominant
Valuation Technique |
Significant
Unobservable Input
|
Minimum
|
Maximum
|
Weighted Average [1]
|
Impact of
Increase in Input
on Fair Value [2]
|
||
|
CMBS [3]
|
$
|
53
|
|
Discounted cash flows
|
Spread (encompasses prepayment, default risk and loss severity)
|
11 bps
|
1,274 bps
|
331 bps
|
Decrease
|
|
Corporate [3]
|
508
|
|
Discounted cash flows
|
Spread
|
87 bps
|
1,364 bps
|
421 bps
|
Decrease
|
|
|
Municipal [3]
|
109
|
|
Discounted cash flows
|
Spread
|
195 bps
|
326 bps
|
252 bps
|
Decrease
|
|
|
RMBS
|
2,055
|
|
Discounted cash flows
|
Spread
|
43 bps
|
1,736 bps
|
194 bps
|
Decrease
|
|
|
Constant prepayment rate
|
—%
|
20%
|
3%
|
Decrease [4]
|
|||||
|
Constant default rate
|
—%
|
11%
|
6%
|
Decrease
|
|||||
|
Loss severity
|
—%
|
100%
|
79%
|
Decrease
|
|||||
|
As of December 31, 2015
|
|||||||||
|
CMBS [3]
|
$
|
122
|
|
Discounted cash flows
|
Spread (encompasses prepayment, default risk and loss severity)
|
31 bps
|
1,505 bps
|
266 bps
|
Decrease
|
|
Corporate [3]
|
339
|
|
Discounted cash flows
|
Spread
|
63 bps
|
800 bps
|
306 bps
|
Decrease
|
|
|
Municipal [3]
|
31
|
|
Discounted cash flows
|
Spread
|
193 bps
|
193 bps
|
193 bps
|
Decrease
|
|
|
RMBS
|
1,622
|
|
Discounted cash flows
|
Spread
|
30 bps
|
1,696 bps
|
178 bps
|
Decrease
|
|
|
Constant prepayment rate
|
—%
|
20%
|
2%
|
Decrease [4]
|
|||||
|
Constant default rate
|
1%
|
10%
|
6%
|
Decrease
|
|||||
|
Loss severity
|
—%
|
100%
|
78%
|
Decrease
|
|||||
|
[1]
|
The weighted average is determined based on the fair value of the securities.
|
|
[2]
|
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
|
|
[3]
|
Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value.
|
|
[4]
|
Decrease for above market rate coupons and increase for below market rate coupons.
|
26
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
|
Freestanding Derivatives
|
Unobservable Inputs
|
|||||||||
|
|
As of September 30, 2016
|
|||||||||
|
|
Fair
Value
|
Predominant
Valuation Technique |
Significant Unobservable Input
|
Minimum
|
Maximum
|
Impact of
Increase in Input on
Fair Value [1]
|
||||
|
Interest rate derivative
|
||||||||||
|
Interest rate swaps
|
$
|
(34
|
)
|
Discounted cash flows
|
Swap curve beyond 30 years
|
2
|
%
|
2
|
%
|
Decrease
|
|
Interest rate swaptions [2]
|
2
|
|
Option model
|
Interest rate volatility
|
1
|
%
|
1
|
%
|
Increase
|
|
|
GMWB hedging instruments
|
||||||||||
|
Equity variance swaps
|
(36
|
)
|
Option model
|
Equity volatility
|
20
|
%
|
23
|
%
|
Increase
|
|
|
Equity options
|
25
|
|
Option model
|
Equity volatility
|
27
|
%
|
29
|
%
|
Increase
|
|
|
Customized swaps
|
142
|
|
Discounted cash flows
|
Equity volatility
|
12
|
%
|
30
|
%
|
Increase
|
|
|
Macro hedge program [3]
|
||||||||||
|
Equity options
|
195
|
|
Option model
|
Equity volatility
|
15
|
%
|
27
|
%
|
Increase
|
|
|
As of December 31, 2015
|
||||||||||
|
Interest rate derivative
|
||||||||||
|
Interest rate swaps
|
$
|
(30
|
)
|
Discounted cash flows
|
Swap curve beyond 30 years
|
3
|
%
|
3
|
%
|
Decrease
|
|
Interest rate swaptions [2]
|
8
|
|
Option model
|
Interest rate volatility
|
1
|
%
|
2
|
%
|
Increase
|
|
|
GMWB hedging instruments
|
||||||||||
|
Equity variance swaps
|
(31
|
)
|
Option model
|
Equity volatility
|
19
|
%
|
21
|
%
|
Increase
|
|
|
Equity options
|
35
|
|
Option model
|
Equity volatility
|
27
|
%
|
29
|
%
|
Increase
|
|
|
Customized swaps
|
131
|
|
Discounted cash flows
|
Equity volatility
|
10
|
%
|
40
|
%
|
Increase
|
|
|
Macro hedge program [3]
|
||||||||||
|
Equity options
|
179
|
|
Option model
|
Equity volatility
|
14
|
%
|
28
|
%
|
Increase
|
|
|
[1]
|
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise noted. Changes in fair value will be inversely impacted for short positions.
|
|
[2]
|
The swaptions presented are purchased options that have the right to enter into a pay-fixed swap.
|
|
[3]
|
Excludes derivatives for which the Company bases fair value on broker quotations as noted in the following discussion.
|
Securities and derivatives for which the Company bases fair value on broker quotations include ABS, CDOs, CMBS, corporate, and index options. Due to the lack of transparency in the process brokers use to develop prices for these investments, the Company does not have access to the significant unobservable inputs brokers use to price these securities and derivatives. The Company believes however, the types of inputs brokers may use would likely be similar to those used to price securities and derivatives for which inputs are available to the Company, and therefore may include but not be limited to, loss severity rates, constant prepayment rates, constant default rates and credit spreads. Therefore, similar to non broker priced securities and derivatives, generally, increases in these inputs would cause fair values to decrease. For the
three and nine months ended
September 30, 2016
, no significant adjustments were made by the Company to broker prices received.
Product Derivatives
The Company formerly offered certain variable annuity products with GMWB riders. The GMWB provides the policyholder with a guaranteed remaining balance (“GRB”) which is generally equal to premiums less withdrawals. If the policyholder’s account value is reduced to the specified level through a combination of market declines and withdrawals but the GRB still has value, the Company is obligated to continue to make annuity payments to the policyholder until the GRB is exhausted. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. GMWB payments that are not life-contingent represent an embedded derivative in the variable annuity contract. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative is carried at fair value, with changes in fair value reported in net realized capital gains and losses. The Company’s GMWB liability, excluding life-contingent benefits, is carried at fair value and reported in other policyholder funds and benefits payable in the Condensed Consolidated Balance Sheets. The notional value of the embedded derivative is the GRB.
27
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
In valuing the embedded derivative, the Company attributes to the derivative a portion of the fees collected from the contract holder equal to the present value of future GMWB claims (the “Attributed Fees”) as determined at contract issuance. All changes in the fair value of the embedded derivative are recorded in net realized capital gains and losses. The excess of fees collected from the contract holder over the Attributed Fees are associated with the host variable annuity contract and are reported in fee income.
GMWB Reinsurance Derivative
The Company has reinsurance arrangements in place to transfer a portion of its risk of loss due to GMWB. These arrangements are recognized as derivatives and carried at fair value in reinsurance recoverables. Changes in the fair value of the reinsurance agreements are reported in net realized capital gains and losses.
The fair value of the GMWB reinsurance derivative is calculated as an aggregation of the components described in the following Living Benefits Required to be Fair Valued discussion and is modeled using significant unobservable policyholder behavior inputs, identical to those used in calculating the underlying liability, such as lapses, fund selection, resets and withdrawal utilization and risk margins.
Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable)
Fair values for GMWBs classified as embedded derivatives are calculated using the income approach based upon internally developed models because active, observable markets do not exist for those items. The fair value of these GMWBs and the related reinsurance and customized freestanding derivatives are calculated as an aggregation of the following components: Best Estimate Claim Payments; Credit Standing Adjustment; and Margins. The resulting aggregation is reconciled or calibrated, if necessary, to market information that is, or may be, available to the Company, but may not be observable by other market participants, including reinsurance discussions and transactions. The Company believes the aggregation of these components, as necessary and as reconciled or calibrated to the market information available to the Company, results in an amount that the Company would be required to transfer to or receive from market participants in an active liquid market, if one existed, for those market participants to assume the risks associated with the guaranteed minimum benefits and the related reinsurance and customized derivatives. The fair value is likely to materially diverge from the ultimate settlement of the liability as the Company believes settlement will be based on our best estimate assumptions rather than those best estimate assumptions plus risk margins. In the absence of any transfer of the guaranteed benefit liability to a third party, the release of risk margins is likely to be reflected as realized gains in future periods’ net income. Each component described in the following discussion is unobservable in the marketplace and requires subjectivity by the Company in determining its value. Oversight of the Company's valuation policies and processes for product and GMWB reinsurance derivatives is performed by a multidisciplinary group comprised of finance, actuarial and risk management professionals. This multidisciplinary group reviews and approves changes and enhancements to the Company's valuation model as well as associated controls.
Best Estimate Claim Payments
The Best Estimate Claim Payments are calculated based on actuarial and capital market assumptions related to projected cash flows, including the present value of benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior such as lapses, fund selection, resets and withdrawal utilization. For the customized derivatives, policyholder behavior is prescribed in the derivative contract. Because of the dynamic and complex nature of these cash flows, best estimate assumptions and a Monte Carlo stochastic process are used in valuation. The Monte Carlo stochastic process involves the generation of thousands of scenarios that assume risk neutral returns consistent with swap rates and a blend of observable implied index volatility levels. Estimating these cash flows involves numerous estimates and subjective judgments regarding a number of variables. These variables include expected market rates of return, market volatility, correlations of market index returns to funds, fund performance, discount rates and assumptions about policyholder behavior which emerge over time.
At each valuation date, the Company assumes expected returns based on:
|
•
|
risk-free rates as represented by the Eurodollar futures, LIBOR deposits and swap rates to derive forward curve rates;
|
|
•
|
market implied volatility assumptions for each underlying index based primarily on a blend of observed market “implied volatility” data;
|
|
•
|
correlations of historical returns across underlying well known market indices based on actual observed returns over the ten years preceding the valuation date; and
|
|
•
|
three years of history for fund indexes compared to separate account fund regression.
|
28
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
The Company updates capital market assumptions used in the GMWB liability model such as interest rates, equity indices and the blend of implied equity index volatilities on a daily basis. The Company monitors various aspects of policyholder behavior and may modify certain of its assumptions, including policyholder lapses and withdrawal rates, if credible emerging data indicates that changes are warranted. In addition, the Company will continue to evaluate policyholder behavior assumptions as we implement initiatives to reduce the size of the variable annuity business. At a minimum, all policyholder behavior assumptions are reviewed and updated, as appropriate, in conjunction with the completion of the Company’s annual comprehensive study in the fourth quarter of each year to refine the estimate of future gross profits.
Credit Standing Adjustment
This assumption makes an adjustment that market participants would make, in determining fair value, to reflect the risk that guaranteed benefit obligations, or the GMWB reinsurance recoverables will not be fulfilled. The Company incorporates a blend of observable Company and reinsurer credit default spreads from capital markets, adjusted for market recoverability. The credit standing adjustment assumption, net of reinsurance, resulted in pre-tax realized gains (losses) of
$0
and
$0
, for the
three months ended
September 30, 2016
and
2015
, respectively and
$(1)
and
$(1)
for the
nine months ended
September 30, 2016
and
2015
, respectively. As of
September 30, 2016
and
December 31, 2015
the credit standing adjustment was
$(1)
and
$0
, respectively.
Margins
The behavior risk margin adds a margin that market participants would require, in determining fair value, for the risk that the Company’s assumptions about policyholder behavior could differ from actual experience. The behavior risk margin is calculated by taking the difference between adverse policyholder behavior assumptions and best estimate assumptions.
There were
no
policyholder assumption updates related to the behavior risk margin for the
three and nine months ended
September 30, 2016
and
2015
. As of
September 30, 2016
and
December 31, 2015
the behavior risk margin was
$42
and
$45
.
In addition to the non-market-based update described in the preceding discussion, the Company recognized non-market-based updates driven by the relative outperformance (underperformance) of the underlying actively managed funds as compared to their respective indices resulting in pre-tax realized gains (losses) of approximately
$11
and
$(21)
, for the
three months ended
September 30, 2016
and
2015
, respectively and
$24
and
$(10)
for the
nine months ended
September 30, 2016
and
2015
, respectively.
The following table provides quantitative information about the significant unobservable inputs and is applicable to the GMWB embedded derivative and the GMWB reinsurance derivative.
|
As of September 30, 2016
|
|||
|
Significant Unobservable Input
|
Unobservable Inputs (Minimum)
|
Unobservable Inputs (Maximum)
|
Impact of Increase in Input
on Fair Value Measurement [1]
|
|
Withdrawal Utilization [2]
|
20%
|
100%
|
Increase
|
|
Withdrawal Rates [3]
|
—%
|
8%
|
Increase
|
|
Lapse Rates [4]
|
—%
|
75%
|
Decrease
|
|
Reset Elections [5]
|
20%
|
75%
|
Increase
|
|
Equity Volatility [6]
|
12%
|
30%
|
Increase
|
|
As of December 31, 2015
|
|||
|
Significant Unobservable Input
|
Unobservable Inputs (Minimum)
|
Unobservable Inputs (Maximum)
|
Impact of Increase in Input
on Fair Value Measurement [1] |
|
Withdrawal Utilization [2]
|
20%
|
100%
|
Increase
|
|
Withdrawal Rates [3]
|
—%
|
8%
|
Increase
|
|
Lapse Rates [4]
|
—%
|
75%
|
Decrease
|
|
Reset Elections [5]
|
20%
|
75%
|
Increase
|
|
Equity Volatility [6]
|
10%
|
40%
|
Increase
|
|
[1]
|
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
|
|
[2]
|
Range represents assumed cumulative percentages of policyholders taking withdrawals.
|
|
[3]
|
Range represents assumed cumulative annual amount withdrawn by policyholders.
|
|
[4]
|
Range represents assumed annual percentages of full surrender of the underlying variable annuity contracts across all policy durations for in force business.
|
|
[5]
|
Range represents assumed cumulative percentages of policyholders that would elect to reset their guaranteed benefit base.
|
|
[6]
|
Range represents implied market volatilities for equity indices based on multiple pricing sources.
|
29
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
Generally, a change in withdrawal utilization assumptions would be accompanied by a directionally opposite change in lapse rate assumptions, as the behavior of policyholders that utilize GMWB riders is typically different from policyholders that do not utilize these riders.
Separate Account Assets
Separate account assets are primarily invested in mutual funds. Other separate account assets include fixed maturities, limited partnerships, equity securities, short-term investments and derivatives that are valued in the same manner, and using the same pricing sources and inputs, as those investments held by the Company. For limited partnerships in which fair value represents the separate account's share of the NAV,
39%
and
28%
were subject to significant liquidation restrictions due to lock-up or gating provisions as of
September 30, 2016
and
December 31, 2015
, respectively. Limited partnerships where redemptions are not allowed consisted of
19%
and
4%
as of
September 30, 2016
and
December 31, 2015
, respectively. Separate account assets classified as Level 3 primarily include long-dated bank loans, subprime RMBS, and commercial mortgage loans.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The following tables provide fair value roll-forwards for the
three and nine months ended
September 30, 2016
and
2015
, for the financial instruments classified as Level 3.
For the
three months ended
September 30, 2016
|
|
Fixed Maturities, AFS
|
|
|||||||||||||||||||||||||
|
Assets
|
ABS
|
CDOs
|
CMBS
|
Corporate
|
Foreign
Govt./Govt.
Agencies
|
Municipal
|
RMBS
|
Total Fixed
Maturities,
AFS
|
Fixed
Maturities,
FVO
|
||||||||||||||||||
|
Fair value as of June 30, 2016
|
$
|
41
|
|
$
|
478
|
|
$
|
79
|
|
$
|
1,136
|
|
$
|
72
|
|
$
|
90
|
|
$
|
1,873
|
|
$
|
3,769
|
|
$
|
6
|
|
|
Total realized/unrealized gains (losses)
|
|||||||||||||||||||||||||||
|
Included in net income [1] [2] [6]
|
—
|
|
—
|
|
(1
|
)
|
(12
|
)
|
—
|
|
—
|
|
—
|
|
(13
|
)
|
—
|
|
|||||||||
|
Included in OCI [3]
|
—
|
|
(3
|
)
|
—
|
|
27
|
|
2
|
|
2
|
|
15
|
|
43
|
|
—
|
|
|||||||||
|
Purchases
|
18
|
|
1
|
|
15
|
|
69
|
|
9
|
|
34
|
|
253
|
|
399
|
|
5
|
|
|||||||||
|
Settlements
|
—
|
|
(7
|
)
|
(6
|
)
|
3
|
|
(1
|
)
|
—
|
|
(78
|
)
|
(89
|
)
|
(1
|
)
|
|||||||||
|
Sales
|
(2
|
)
|
—
|
|
—
|
|
(52
|
)
|
(8
|
)
|
—
|
|
(8
|
)
|
(70
|
)
|
(1
|
)
|
|||||||||
|
Transfers into Level 3 [4]
|
—
|
|
—
|
|
—
|
|
115
|
|
—
|
|
—
|
|
—
|
|
115
|
|
—
|
|
|||||||||
|
Transfers out of Level 3 [4]
|
(26
|
)
|
—
|
|
(10
|
)
|
(192
|
)
|
—
|
|
—
|
|
—
|
|
(228
|
)
|
—
|
|
|||||||||
|
Fair value as of September 30, 2016
|
$
|
31
|
|
$
|
469
|
|
$
|
77
|
|
$
|
1,094
|
|
$
|
74
|
|
$
|
126
|
|
$
|
2,055
|
|
$
|
3,926
|
|
$
|
9
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7]
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(13
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(13
|
)
|
$
|
—
|
|
|
Freestanding Derivatives [5]
|
|||||||||||||||||||||
|
Assets (Liabilities)
|
Equity
Securities,
AFS
|
Equity
|
Interest
Rate
|
GMWB
Hedging
|
Macro
Hedge
Program
|
Other
Contracts
|
Total Free-
Standing
Derivatives [5]
|
||||||||||||||
|
Fair value as of June 30, 2016
|
$
|
97
|
|
$
|
1
|
|
$
|
(32
|
)
|
$
|
165
|
|
$
|
141
|
|
$
|
4
|
|
$
|
279
|
|
|
Total realized/unrealized gains (losses)
|
|||||||||||||||||||||
|
Included in net income [1] [2] [6]
|
(1
|
)
|
(1
|
)
|
—
|
|
(34
|
)
|
(32
|
)
|
(2
|
)
|
(69
|
)
|
|||||||
|
Included in OCI [3]
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Purchases
|
4
|
|
—
|
|
—
|
|
—
|
|
63
|
|
—
|
|
63
|
|
|||||||
|
Settlements
|
—
|
|
—
|
|
—
|
|
—
|
|
(4
|
)
|
—
|
|
(4
|
)
|
|||||||
|
Sales
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Transfers into Level 3 [4]
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Transfers out of Level 3 [4]
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Fair value as of September 30, 2016
|
$
|
100
|
|
$
|
—
|
|
$
|
(32
|
)
|
$
|
131
|
|
$
|
168
|
|
$
|
2
|
|
$
|
269
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7]
|
$
|
(1
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(34
|
)
|
$
|
(34
|
)
|
$
|
(2
|
)
|
$
|
(70
|
)
|
30
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
|
Assets
|
Reinsurance Recoverable for GMWB
|
Separate Accounts
|
||||
|
Fair value as of June 30, 2016
|
$
|
106
|
|
$
|
171
|
|
|
Total realized/unrealized gains (losses)
|
||||||
|
Included in net income [1] [2] [6]
|
(12
|
)
|
1
|
|
||
|
Included in OCI [3]
|
—
|
|
(1
|
)
|
||
|
Purchases
|
—
|
|
165
|
|
||
|
Settlements
|
4
|
|
(3
|
)
|
||
|
Sales
|
—
|
|
(11
|
)
|
||
|
Transfers into Level 3 [4]
|
—
|
|
10
|
|
||
|
Transfers out of Level 3 [4]
|
—
|
|
(7
|
)
|
||
|
Fair value as of September 30, 2016
|
$
|
98
|
|
$
|
325
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7]
|
$
|
(12
|
)
|
$
|
—
|
|
|
|
Other Policyholder Funds and Benefits Payable
|
|||||||||||
|
Liabilities
|
Guaranteed Withdrawal Benefits
|
Equity Linked Notes
|
Total Other Policyholder Funds and Benefits Payable
|
Contingent Consideration [8]
|
||||||||
|
Fair value as of June 30, 2016
|
$
|
(412
|
)
|
$
|
(28
|
)
|
$
|
(440
|
)
|
$
|
—
|
|
|
Issuance
|
—
|
|
—
|
|
—
|
|
23
|
|
||||
|
Total realized/unrealized gains (losses)
|
|
|
|
|
|
|
||||||
|
Included in net income [1] [2] [6]
|
81
|
|
(3
|
)
|
78
|
|
—
|
|
||||
|
Insurance operating costs and other expenses
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Settlements
|
(17
|
)
|
—
|
|
(17
|
)
|
—
|
|
||||
|
Fair value as of September 30, 2016
|
$
|
(348
|
)
|
$
|
(31
|
)
|
$
|
(379
|
)
|
$
|
23
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7]
|
$
|
81
|
|
$
|
(3
|
)
|
$
|
78
|
|
$
|
—
|
|
31
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
For the
nine months ended
September 30, 2016
|
|
Fixed Maturities, AFS
|
|
|||||||||||||||||||||||||
|
Assets
|
ABS
|
CDOs
|
CMBS
|
Corporate
|
Foreign Govt./Govt. Agencies
|
Municipal
|
RMBS
|
Total Fixed Maturities, AFS
|
Fixed Maturities, FVO
|
||||||||||||||||||
|
Fair value as of January 1, 2016
|
$
|
37
|
|
$
|
541
|
|
$
|
150
|
|
$
|
854
|
|
$
|
60
|
|
$
|
49
|
|
$
|
1,622
|
|
$
|
3,313
|
|
$
|
16
|
|
|
Total realized/unrealized gains (losses)
|
|||||||||||||||||||||||||||
|
Included in net income [1] [2] [6]
|
—
|
|
(1
|
)
|
(2
|
)
|
(26
|
)
|
1
|
|
—
|
|
—
|
|
(28
|
)
|
(1
|
)
|
|||||||||
|
Included in OCI [3]
|
—
|
|
(5
|
)
|
(3
|
)
|
39
|
|
11
|
|
7
|
|
11
|
|
60
|
|
—
|
|
|||||||||
|
Purchases
|
18
|
|
1
|
|
65
|
|
136
|
|
24
|
|
54
|
|
683
|
|
981
|
|
11
|
|
|||||||||
|
Settlements
|
(7
|
)
|
(67
|
)
|
(24
|
)
|
(52
|
)
|
(3
|
)
|
—
|
|
(236
|
)
|
(389
|
)
|
(3
|
)
|
|||||||||
|
Sales
|
(2
|
)
|
—
|
|
(3
|
)
|
(143
|
)
|
(19
|
)
|
—
|
|
(8
|
)
|
(175
|
)
|
(4
|
)
|
|||||||||
|
Transfers into Level 3 [4]
|
18
|
|
—
|
|
1
|
|
628
|
|
—
|
|
16
|
|
5
|
|
668
|
|
—
|
|
|||||||||
|
Transfers out of Level 3 [4]
|
(33
|
)
|
—
|
|
(107
|
)
|
(342
|
)
|
—
|
|
—
|
|
(22
|
)
|
(504
|
)
|
(10
|
)
|
|||||||||
|
Fair value as of September 30, 2016
|
$
|
31
|
|
$
|
469
|
|
$
|
77
|
|
$
|
1,094
|
|
$
|
74
|
|
$
|
126
|
|
$
|
2,055
|
|
$
|
3,926
|
|
$
|
9
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7]
|
$
|
—
|
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
(14
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(15
|
)
|
$
|
—
|
|
|
|
|
Freestanding Derivatives [5]
|
|||||||||||||||||||
|
Assets (Liabilities)
|
Equity Securities, AFS
|
Equity
|
Interest Rate
|
GMWB Hedging
|
Macro Hedge Program
|
Other Contracts
|
Total Free-Standing Derivatives [5]
|
||||||||||||||
|
Fair value as of January 1, 2016
|
$
|
93
|
|
$
|
—
|
|
$
|
(22
|
)
|
$
|
135
|
|
$
|
147
|
|
$
|
7
|
|
$
|
267
|
|
|
Total realized/unrealized gains (losses)
|
|||||||||||||||||||||
|
Included in net income [1] [2] [6]
|
(1
|
)
|
(16
|
)
|
(10
|
)
|
(10
|
)
|
(36
|
)
|
(5
|
)
|
(77
|
)
|
|||||||
|
Included in OCI [3]
|
7
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Purchases
|
6
|
|
16
|
|
—
|
|
—
|
|
63
|
|
—
|
|
79
|
|
|||||||
|
Settlements
|
—
|
|
—
|
|
—
|
|
—
|
|
(6
|
)
|
—
|
|
(6
|
)
|
|||||||
|
Sales
|
(5
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Transfers into Level 3 [4]
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Transfers out of Level 3 [4]
|
—
|
|
—
|
|
—
|
|
6
|
|
—
|
|
—
|
|
6
|
|
|||||||
|
Fair value as of September 30, 2016
|
$
|
100
|
|
$
|
—
|
|
$
|
(32
|
)
|
$
|
131
|
|
$
|
168
|
|
$
|
2
|
|
$
|
269
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7]
|
$
|
(1
|
)
|
$
|
—
|
|
$
|
(10
|
)
|
$
|
(2
|
)
|
$
|
(31
|
)
|
$
|
(5
|
)
|
$
|
(48
|
)
|
32
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
|
Assets
|
Reinsurance Recoverable for GMWB
|
Separate Accounts
|
||||
|
Fair value as of January 1, 2016
|
$
|
83
|
|
$
|
139
|
|
|
Total realized/unrealized gains (losses)
|
||||||
|
Included in net income [1] [2] [6]
|
4
|
|
1
|
|
||
|
Included in OCI [3]
|
—
|
|
5
|
|
||
|
Purchases
|
—
|
|
226
|
|
||
|
Settlements
|
11
|
|
(12
|
)
|
||
|
Sales
|
—
|
|
(27
|
)
|
||
|
Transfers into Level 3 [4]
|
—
|
|
16
|
|
||
|
Transfers out of Level 3 [4]
|
—
|
|
(23
|
)
|
||
|
Fair value as of September 30, 2016
|
$
|
98
|
|
$
|
325
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7]
|
$
|
4
|
|
$
|
—
|
|
|
|
Other Policyholder Funds and Benefits Payable
|
|||||||||||
|
Liabilities
|
Guaranteed Withdrawal Benefits
|
Equity Linked Notes
|
Total Other Policyholder Funds and Benefits Payable
|
Contingent Consideration [8]
|
||||||||
|
Fair value as of January 1, 2016
|
$
|
(262
|
)
|
$
|
(26
|
)
|
$
|
(288
|
)
|
$
|
—
|
|
|
Issuance
|
—
|
|
—
|
|
—
|
|
23
|
|
||||
|
Total realized/unrealized gains (losses)
|
|
|
|
|
|
|
||||||
|
Included in net income [1] [2] [6]
|
(36
|
)
|
(5
|
)
|
(41
|
)
|
—
|
|
||||
|
Included in OCI [3]
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Insurance operating costs and other expenses
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Settlements
|
(50
|
)
|
—
|
|
(50
|
)
|
—
|
|
||||
|
Fair value as of September 30, 2016
|
$
|
(348
|
)
|
$
|
(31
|
)
|
$
|
(379
|
)
|
$
|
23
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2016 [2] [7]
|
$
|
(36
|
)
|
$
|
(5
|
)
|
$
|
(41
|
)
|
$
|
—
|
|
33
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
For the
three months ended
September 30, 2015
|
|
Fixed Maturities, AFS
|
|
|||||||||||||||||||||||||
|
Assets
|
ABS
|
CDOs
|
CMBS
|
Corporate
|
Foreign Govt./Govt. Agencies
|
Municipal
|
RMBS
|
Total Fixed Maturities, AFS
|
Fixed Maturities, FVO
|
||||||||||||||||||
|
Fair value as of June 30, 2015
|
$
|
53
|
|
$
|
564
|
|
$
|
214
|
|
$
|
931
|
|
$
|
40
|
|
$
|
49
|
|
$
|
1,540
|
|
$
|
3,391
|
|
$
|
86
|
|
|
Total realized/unrealized gains (losses)
|
|||||||||||||||||||||||||||
|
Included in net income [1] [2] [6]
|
—
|
|
(1
|
)
|
1
|
|
(9
|
)
|
—
|
|
—
|
|
—
|
|
(9
|
)
|
—
|
|
|||||||||
|
Included in OCI [3]
|
—
|
|
(9
|
)
|
(5
|
)
|
1
|
|
(1
|
)
|
1
|
|
(6
|
)
|
(19
|
)
|
—
|
|
|||||||||
|
Purchases
|
8
|
|
—
|
|
6
|
|
38
|
|
3
|
|
—
|
|
71
|
|
126
|
|
2
|
|
|||||||||
|
Settlements
|
(2
|
)
|
(9
|
)
|
(26
|
)
|
(22
|
)
|
(1
|
)
|
—
|
|
(56
|
)
|
(116
|
)
|
(24
|
)
|
|||||||||
|
Sales
|
(3
|
)
|
—
|
|
—
|
|
(47
|
)
|
(2
|
)
|
—
|
|
(57
|
)
|
(109
|
)
|
(1
|
)
|
|||||||||
|
Transfers into Level 3 [4]
|
—
|
|
—
|
|
2
|
|
51
|
|
11
|
|
—
|
|
—
|
|
64
|
|
—
|
|
|||||||||
|
Transfers out of Level 3 [4]
|
(29
|
)
|
—
|
|
(23
|
)
|
(38
|
)
|
—
|
|
—
|
|
—
|
|
(90
|
)
|
(2
|
)
|
|||||||||
|
Fair value as of September 30, 2015
|
$
|
27
|
|
$
|
545
|
|
$
|
169
|
|
$
|
905
|
|
$
|
50
|
|
$
|
50
|
|
$
|
1,492
|
|
$
|
3,238
|
|
$
|
61
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7]
|
$
|
—
|
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
(11
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(12
|
)
|
$
|
—
|
|
|
|
|
Freestanding Derivatives [5]
|
|||||||||||||||||||||||||
|
Assets (Liabilities)
|
Equity Securities, AFS
|
Credit
|
Commodity
|
Equity
|
Interest Rate
|
GMWB Hedging
|
Macro Hedge Program
|
Other Contracts
|
Total Free-Standing Derivatives [5]
|
||||||||||||||||||
|
Fair value as of June 30, 2015
|
$
|
97
|
|
$
|
—
|
|
$
|
3
|
|
$
|
3
|
|
$
|
(14
|
)
|
$
|
125
|
|
$
|
165
|
|
$
|
9
|
|
$
|
291
|
|
|
Total realized/unrealized gains (losses)
|
|
||||||||||||||||||||||||||
|
Included in net income [1] [2] [6]
|
(6
|
)
|
—
|
|
4
|
|
(3
|
)
|
(6
|
)
|
46
|
|
18
|
|
(1
|
)
|
58
|
|
|||||||||
|
Included in OCI [3]
|
5
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Purchases
|
4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Settlements
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Sales
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Transfers into Level 3 [4]
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Transfers out of Level 3 [4]
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Fair value as of September 30, 2015
|
$
|
99
|
|
$
|
—
|
|
$
|
7
|
|
$
|
—
|
|
$
|
(20
|
)
|
$
|
171
|
|
$
|
183
|
|
$
|
8
|
|
$
|
349
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7]
|
$
|
(6
|
)
|
$
|
—
|
|
$
|
4
|
|
$
|
—
|
|
$
|
(5
|
)
|
$
|
48
|
|
$
|
12
|
|
$
|
(1
|
)
|
$
|
58
|
|
34
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
|
Assets
|
Reinsurance Recoverable for GMWB
|
Separate Accounts
|
||||
|
Fair value as of June 30, 2015
|
$
|
50
|
|
$
|
285
|
|
|
Total realized/unrealized gains (losses)
|
||||||
|
Included in net income [1] [2] [6]
|
46
|
|
28
|
|
||
|
Included in OCI [3]
|
—
|
|
(2
|
)
|
||
|
Purchases
|
—
|
|
57
|
|
||
|
Settlements
|
(23
|
)
|
(6
|
)
|
||
|
Sales
|
—
|
|
(200
|
)
|
||
|
Transfers into Level 3 [4]
|
—
|
|
1
|
|
||
|
Transfers out of Level 3 [4]
|
—
|
|
1
|
|
||
|
Fair value as of September 30, 2015
|
$
|
73
|
|
$
|
164
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7]
|
$
|
46
|
|
$
|
31
|
|
|
|
Other Policyholder Funds and Benefits Payable
|
|
||||||||||
|
Liabilities
|
Guaranteed Withdrawal Benefits
|
Equity Linked Notes
|
Total Other Policyholder Funds and Benefits Payable
|
Consumer Notes
|
||||||||
|
Fair value as of June 30, 2015
|
$
|
(112
|
)
|
$
|
(26
|
)
|
$
|
(138
|
)
|
$
|
(3
|
)
|
|
Total realized/unrealized gains (losses)
|
|
|
||||||||||
|
Included in net income [1] [2] [6]
|
(177
|
)
|
5
|
|
(172
|
)
|
3
|
|
||||
|
Included in OCI [3]
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Settlements
|
19
|
|
—
|
|
19
|
|
—
|
|
||||
|
Fair value as of September 30, 2015
|
$
|
(270
|
)
|
$
|
(21
|
)
|
$
|
(291
|
)
|
$
|
—
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7]
|
$
|
(177
|
)
|
$
|
5
|
|
$
|
(172
|
)
|
$
|
3
|
|
35
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
For the
nine months ended
September 30, 2015
|
|
Fixed Maturities, AFS
|
|
|||||||||||||||||||||||||
|
Assets
|
ABS
|
CDOs
|
CMBS
|
Corporate
|
Foreign Govt./Govt. Agencies
|
Municipal
|
RMBS
|
Total Fixed Maturities, AFS
|
Fixed Maturities, FVO
|
||||||||||||||||||
|
Fair value as of January 1, 2015
|
$
|
122
|
|
$
|
623
|
|
$
|
284
|
|
$
|
1,040
|
|
$
|
59
|
|
$
|
66
|
|
$
|
1,281
|
|
$
|
3,475
|
|
$
|
92
|
|
|
Total realized/unrealized gains (losses)
|
|||||||||||||||||||||||||||
|
Included in net income [1] [2] [6]
|
1
|
|
(5
|
)
|
2
|
|
(13
|
)
|
—
|
|
1
|
|
(2
|
)
|
(16
|
)
|
(7
|
)
|
|||||||||
|
Included in OCI [3]
|
(2
|
)
|
8
|
|
(8
|
)
|
(41
|
)
|
(4
|
)
|
(4
|
)
|
(6
|
)
|
(57
|
)
|
—
|
|
|||||||||
|
Purchases
|
79
|
|
—
|
|
45
|
|
61
|
|
15
|
|
—
|
|
516
|
|
716
|
|
21
|
|
|||||||||
|
Settlements
|
(6
|
)
|
(34
|
)
|
(64
|
)
|
(51
|
)
|
(3
|
)
|
(13
|
)
|
(149
|
)
|
(320
|
)
|
(24
|
)
|
|||||||||
|
Sales
|
(16
|
)
|
—
|
|
(6
|
)
|
(80
|
)
|
(28
|
)
|
—
|
|
(142
|
)
|
(272
|
)
|
(8
|
)
|
|||||||||
|
Transfers into Level 3 [4]
|
1
|
|
—
|
|
7
|
|
202
|
|
11
|
|
—
|
|
47
|
|
268
|
|
—
|
|
|||||||||
|
Transfers out of Level 3 [4]
|
(152
|
)
|
(47
|
)
|
(91
|
)
|
(213
|
)
|
—
|
|
—
|
|
(53
|
)
|
(556
|
)
|
(13
|
)
|
|||||||||
|
Fair value as of September 30, 2015
|
$
|
27
|
|
$
|
545
|
|
$
|
169
|
|
$
|
905
|
|
$
|
50
|
|
$
|
50
|
|
$
|
1,492
|
|
$
|
3,238
|
|
$
|
61
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7]
|
$
|
1
|
|
$
|
(1
|
)
|
$
|
(2
|
)
|
$
|
(11
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(13
|
)
|
$
|
(2
|
)
|
|
|
|
Freestanding Derivatives [5]
|
|||||||||||||||||||||||||
|
Assets (Liabilities)
|
Equity Securities, AFS
|
Credit
|
Commodity
|
Equity
|
Interest Rate
|
GMWB Hedging
|
Macro Hedge Program
|
Other Contracts
|
Total Free-Standing Derivatives [5]
|
||||||||||||||||||
|
Fair value as of January 1, 2015
|
$
|
98
|
|
$
|
(9
|
)
|
$
|
—
|
|
$
|
6
|
|
$
|
(7
|
)
|
$
|
170
|
|
$
|
141
|
|
$
|
12
|
|
$
|
313
|
|
|
Total realized/unrealized gains (losses)
|
|
||||||||||||||||||||||||||
|
Included in net income [1] [2] [6]
|
6
|
|
(1
|
)
|
(3
|
)
|
9
|
|
(8
|
)
|
21
|
|
(5
|
)
|
(4
|
)
|
9
|
|
|||||||||
|
Included in OCI [3]
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Purchases
|
16
|
|
(13
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
47
|
|
—
|
|
34
|
|
|||||||||
|
Settlements
|
—
|
|
—
|
|
—
|
|
(15
|
)
|
(5
|
)
|
(20
|
)
|
—
|
|
—
|
|
(40
|
)
|
|||||||||
|
Sales
|
(17
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Transfers into Level 3 [4]
|
—
|
|
—
|
|
10
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
10
|
|
|||||||||
|
Transfers out of Level 3 [4]
|
(5
|
)
|
23
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
23
|
|
|||||||||
|
Fair value as of September 30, 2015
|
$
|
99
|
|
$
|
—
|
|
$
|
7
|
|
$
|
—
|
|
$
|
(20
|
)
|
$
|
171
|
|
$
|
183
|
|
$
|
8
|
|
$
|
349
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7]
|
$
|
(6
|
)
|
$
|
2
|
|
$
|
(4
|
)
|
$
|
3
|
|
$
|
(17
|
)
|
$
|
32
|
|
$
|
(3
|
)
|
$
|
(5
|
)
|
$
|
8
|
|
36
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
|
Assets
|
Reinsurance Recoverable for GMWB
|
Separate Accounts
|
||||
|
Fair value as of January 1, 2015
|
$
|
56
|
|
$
|
112
|
|
|
Total realized/unrealized gains (losses)
|
||||||
|
Included in net income [1] [2] [6]
|
31
|
|
29
|
|
||
|
Included in OCI [3]
|
—
|
|
(3
|
)
|
||
|
Purchases
|
—
|
|
317
|
|
||
|
Settlements
|
(14
|
)
|
(16
|
)
|
||
|
Sales
|
—
|
|
(226
|
)
|
||
|
Transfers into Level 3 [4]
|
—
|
|
7
|
|
||
|
Transfers out of Level 3 [4]
|
—
|
|
(56
|
)
|
||
|
Fair value as of September 30, 2015
|
$
|
73
|
|
$
|
164
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7]
|
$
|
31
|
|
$
|
32
|
|
|
Other Policyholder Funds and Benefits Payable
|
||||||||||||
|
Liabilities
|
Guaranteed Withdrawal Benefits
|
Equity Linked Notes
|
Total Other Policyholder Funds and Benefits Payable
|
Consumer Notes
|
||||||||
|
Fair value as of January 1, 2015
|
$
|
(139
|
)
|
$
|
(26
|
)
|
$
|
(165
|
)
|
$
|
(3
|
)
|
|
Total realized/unrealized gains (losses)
|
|
|
||||||||||
|
Included in net income [1] [2] [6]
|
(118
|
)
|
5
|
|
(113
|
)
|
3
|
|
||||
|
Settlements
|
(13
|
)
|
—
|
|
(13
|
)
|
—
|
|
||||
|
Fair value as of September 30, 2015
|
$
|
(270
|
)
|
$
|
(21
|
)
|
$
|
(291
|
)
|
$
|
—
|
|
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2015 [2] [7]
|
$
|
(118
|
)
|
$
|
5
|
|
$
|
(113
|
)
|
$
|
3
|
|
|
[1]
|
The Company classifies realized and unrealized gains (losses) on GMWB reinsurance derivatives and GMWB embedded derivatives as unrealized gains (losses) for purposes of disclosure in this table because it is impracticable to track on a contract-by-contract basis the realized gains (losses) for these derivatives and embedded derivatives.
|
|
[2]
|
All amounts in these rows are reported in net realized capital gains (losses). The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on net income for the Company. All amounts are before income taxes and amortization of DAC.
|
|
[3]
|
All amounts are before income taxes and amortization of DAC.
|
|
[4]
|
Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.
|
|
[5]
|
Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Condensed Consolidated Balance Sheets in other investments and other liabilities.
|
|
[6]
|
Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
|
|
[7]
|
Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
|
|
[8]
|
For additional information, see Note
2
-
Business Acquisitions and Dispositions
of Notes to Condensed Consolidated Financial Statements for discussion of the contingent consideration in connection with the acquisition of Lattice.
|
37
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
Fair Value Option
FVO investments include certain securities that contain embedded credit derivatives with underlying credit risk primarily related to residential and commercial real estate, for which the Company has elected the fair value option. The Company also classifies the underlying fixed maturities held in certain consolidated investment funds within the Fixed Maturities, FVO line on the Condensed Consolidated Balance Sheets. The Company reports these consolidated investment companies at fair value with changes in the fair value of these securities recognized in net realized capital gains and losses, which is consistent with accounting requirements for investment companies. The investment funds hold fixed income securities in multiple sectors and the Company has management and control of the funds as well as a significant ownership interest.
The Company also elected the fair value option for certain equity securities in order to align the accounting with total return swap contracts that hedge the risk associated with the investments. The swaps do not qualify for hedge accounting and the change in value of both the equity securities and the total return swaps are recorded in net realized capital gains and losses. These equity securities are classified within equity securities, AFS on the Condensed Consolidated Balance Sheets. As of
September 30, 2016
, the Company no longer holds these investments. Income earned from FVO securities is recorded in net investment income and changes in fair value are recorded in net realized capital gains and losses.
The following table presents the changes in fair value of those assets and liabilities accounted for using the fair value option reported in net realized capital gains and losses in the Company’s Condensed Consolidated Statements of Operations.
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Assets
|
|||||||||||||
|
Fixed maturities, FVO
|
|||||||||||||
|
Corporate
|
$
|
1
|
|
$
|
(2
|
)
|
$
|
1
|
|
$
|
(5
|
)
|
|
|
CDOs
|
—
|
|
1
|
|
—
|
|
2
|
|
|||||
|
Foreign government
|
—
|
|
(3
|
)
|
(1
|
)
|
(4
|
)
|
|||||
|
RMBS
|
3
|
|
—
|
|
8
|
|
—
|
|
|||||
|
Total fixed maturities, FVO
|
$
|
4
|
|
$
|
(4
|
)
|
$
|
8
|
|
$
|
(7
|
)
|
|
|
Equity, FVO
|
—
|
|
—
|
|
(34
|
)
|
3
|
|
|||||
|
Total realized capital gains (losses)
|
$
|
4
|
|
$
|
(4
|
)
|
$
|
(26
|
)
|
$
|
(4
|
)
|
|
The following table presents the fair value of assets and liabilities accounted for using the fair value option included in the Company’s Condensed Consolidated Balance Sheets.
|
|
September 30, 2016
|
December 31, 2015
|
||||
|
Assets
|
||||||
|
Fixed maturities, FVO
|
||||||
|
ABS
|
$
|
6
|
|
$
|
13
|
|
|
CDOs
|
3
|
|
6
|
|
||
|
CMBS
|
8
|
|
24
|
|
||
|
Corporate
|
34
|
|
87
|
|
||
|
Foreign government
|
—
|
|
2
|
|
||
|
U.S government
|
2
|
|
3
|
|
||
|
RMBS
|
307
|
|
368
|
|
||
|
Total fixed maturities, FVO
|
$
|
360
|
|
$
|
503
|
|
|
Equity, FVO [1]
|
$
|
—
|
|
$
|
282
|
|
|
[1]
|
Included in equity securities, AFS on the Condensed Consolidated Balance Sheets. The Company did not hold any equity securities, FVO as of
September 30, 2016
.
|
38
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)
Financial Instruments Not Carried at Fair Value
The following table presents carrying amounts and fair values of the Company’s financial instruments not carried at fair value.
|
|
September 30, 2016
|
December 31, 2015
|
||||||||||||
|
|
Fair Value Hierarchy Level
|
Carrying Amount
|
Fair Value
|
Carrying Amount
|
Fair Value
|
|||||||||
|
Assets
|
||||||||||||||
|
Policy loans
|
Level 3
|
$
|
1,432
|
|
$
|
1,432
|
|
$
|
1,447
|
|
$
|
1,447
|
|
|
|
Mortgage loans
|
Level 3
|
5,611
|
|
5,857
|
|
5,624
|
|
5,736
|
|
|||||
|
Liabilities
|
||||||||||||||
|
Other policyholder funds and benefits payable [1]
|
Level 3
|
$
|
6,607
|
|
$
|
6,887
|
|
$
|
6,706
|
|
$
|
6,898
|
|
|
|
Senior notes [2]
|
Level 2
|
4,242
|
|
4,894
|
|
4,259
|
|
4,811
|
|
|||||
|
Junior subordinated debentures [2]
|
Level 2
|
1,083
|
|
1,299
|
|
1,100
|
|
1,304
|
|
|||||
|
Consumer notes [3]
|
Level 3
|
24
|
|
24
|
|
38
|
|
38
|
|
|||||
|
Assumed investment contracts [3]
|
Level 3
|
754
|
|
806
|
|
619
|
|
682
|
|
|||||
|
[1]
|
Excludes guarantees on variable annuities, group accident and health and universal life insurance contracts, including corporate owned life insurance.
|
|
[2]
|
Included in long-term debt in the Condensed Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
|
|
[3]
|
Included in other liabilities in the Condensed Consolidated Balance Sheets.
|
Fair values for policy loans were determined using current loan coupon rates, which reflect the current rates available under the contracts. As a result, the fair value approximates the carrying value of the policy loans.
Fair values for mortgage loans were estimated using discounted cash flow calculations based on current lending rates for similar type loans. Current lending rates reflect changes in credit spreads and the remaining terms of the loans.
Fair values for other policyholder funds and benefits payable and assumed investment contracts, not carried at fair value, are estimated based on the cash surrender values of the underlying policies or by estimating future cash flows discounted at current interest rates adjusted for credit risk.
Fair values for senior notes and junior subordinated debentures are determined using the market approach based on reported trades, benchmark interest rates and issuer spread for the Company which may consider credit default swaps.
Fair values for consumer notes were estimated using discounted cash flow calculations using current interest rates adjusted for estimated loan durations.
39
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments
Net Realized Capital Gains (Losses)
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||
|
(Before tax)
|
2016
|
2015
|
2016
|
2015
|
||||||||
|
Gross gains on sales
|
$
|
114
|
|
$
|
83
|
|
$
|
328
|
|
$
|
401
|
|
|
Gross losses on sales
|
(24
|
)
|
(73
|
)
|
(157
|
)
|
(333
|
)
|
||||
|
Net OTTI losses recognized in earnings
|
(14
|
)
|
(40
|
)
|
(44
|
)
|
(63
|
)
|
||||
|
Valuation allowances on mortgage loans
|
—
|
|
1
|
|
—
|
|
(2
|
)
|
||||
|
Periodic net coupon settlements on credit derivatives
|
2
|
|
3
|
|
2
|
|
8
|
|
||||
|
Results of variable annuity hedge program
|
|
|
|
|
|
|||||||
|
GMWB derivatives, net
|
6
|
|
(32
|
)
|
(8
|
)
|
(35
|
)
|
||||
|
Macro hedge program
|
(64
|
)
|
51
|
|
(98
|
)
|
24
|
|
||||
|
Total results of variable annuity hedge program
|
(58
|
)
|
19
|
|
(106
|
)
|
(11
|
)
|
||||
|
Other, net [1]
|
(37
|
)
|
(37
|
)
|
(142
|
)
|
(30
|
)
|
||||
|
Net realized capital gains (losses)
|
$
|
(17
|
)
|
$
|
(44
|
)
|
$
|
(119
|
)
|
$
|
(30
|
)
|
|
[1]
|
Includes changes in the value of non-qualifying derivatives and transactional foreign currency revaluation gains (losses). For the three months ended
September 30, 2016
and
2015
, transactional foreign currency revaluation losses were
$(19)
and
$(17)
, respectively, and related to yen denominated fixed payout annuity liabilities as well as the change in equity of the U.K. P&C runoff subsidiaries, currently held for sale, which were largely offset by gains of
$18
and
$8
, respectively, on derivative instruments used to hedge the foreign currency exposure. For the nine months ended
September 30, 2016
and
2015
, the transactional foreign currency revaluation losses were
$(150)
and
$(1)
, respectively, while there were also gains (losses) on the related hedging instruments of
$135
and
$(23)
, respectively. The three and nine months ended September 30, 2016 also include an estimated capital loss on sale of the Company's U.K. property and casualty run-off subsidiaries of
$59
, before tax. This excludes a related income tax benefit of
$65
included within income tax expense on the Condensed Consolidated Statements of Operations, for an estimated after-tax net gain of
$6
on the sale.
|
Net realized capital gains and losses from investment sales are reported as a component of revenues and are determined on a specific identification basis. Before tax, net gains (losses) on sales and impairments previously reported as unrealized gains (losses) in AOCI were
$77
and
$128
, respectively, for the
three and nine months ended
September 30, 2016
, and
$(29)
and
$14
for the
three and nine months ended
September 30, 2015
, respectively. Proceeds from sales of AFS securities totaled
$4.3 billion
and
$13.3 billion
, respectively, for the
three and nine months ended
September 30, 2016
, and
$4.5 billion
and
$16.3 billion
for
three and nine months ended
September 30, 2015
,
respectively.
Recognition and Presentation of Other-Than-Temporary Impairments
The Company deems bonds and certain equity securities with debt-like characteristics (collectively “debt securities”) to be other-than-temporarily impaired (“impaired”) if a security meets the following conditions: a) the Company intends to sell or it is more likely than not that the Company will be required to sell the security before a recovery in value, or b) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell or it is more likely than not that the Company will be required to sell the security before a recovery in value, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. For those impaired debt securities which do not meet the first condition and for which the Company does not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit OTTI, which is recorded in net realized capital losses, and the remaining non-credit impairment, which is recorded in OCI. Generally, the Company determines a security’s credit impairment as the difference between its amortized cost basis and its best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment. The remaining non-credit impairment is the difference between the security’s fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior to the impairment, which typically includes current market liquidity and risk premiums. The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s new cost basis. The Company accretes the new cost basis to the estimated future cash flows over the expected remaining life of the security by prospectively adjusting the security’s yield, if necessary.
40
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments (continued)
The Company’s evaluation of whether a credit impairment exists for debt securities includes but is not limited to, the following factors: (a) changes in the financial condition of the security’s underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) changes in the financial condition, credit rating and near-term prospects of the issuer, (d) the extent to which the fair value has been less than the amortized cost of the security and (e) the payment structure of the security. The Company’s best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future performance of the security. The Company’s best estimate of future cash flows involves assumptions including, but not limited to, earnings multiples, underlying asset valuations and various performance indicators, such as historical and projected default and recovery rates, credit ratings, current and projected delinquency rates, and loan-to-value ("LTV") ratios. In addition, for structured securities, the Company considers factors including, but not limited to, average cumulative collateral loss rates that vary by vintage year, commercial and residential property value declines that vary by property type and location and commercial real estate delinquency levels. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value. In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer and/or underlying collateral such as changes in the projections of the underlying property value estimates.
For equity securities where the decline in the fair value is deemed to be other-than-temporary, a charge is recorded in net realized capital losses equal to the difference between the fair value and cost basis of the security. The previous cost basis less the impairment becomes the security’s new cost basis. The Company asserts its intent and ability to retain those equity securities deemed to be temporarily impaired until the price recovers. Once identified, these securities are systematically restricted from trading unless approved by investment and accounting professionals.
The primary factors considered in evaluating whether an impairment exists for an equity security may include, but are not limited to: (a) the length of time and extent to which the fair value has been less than the cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on preferred stock dividends and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery.
The following table presents the Company's impairments by impairment type.
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Credit impairments
|
$
|
13
|
|
$
|
12
|
|
$
|
36
|
|
$
|
16
|
|
|
Intent-to-sell impairments
|
—
|
|
21
|
|
3
|
|
38
|
|
||||
|
Impairments on equity securities
|
1
|
|
6
|
|
5
|
|
6
|
|
||||
|
Other impairments
|
—
|
|
1
|
|
—
|
|
3
|
|
||||
|
Total impairments
|
$
|
14
|
|
$
|
40
|
|
$
|
44
|
|
$
|
63
|
|
The following table presents a roll-forward of the Company’s cumulative credit impairments on fixed maturities held.
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
(Before tax)
|
2016
|
2015
|
2016
|
2015
|
||||||||
|
Balance as of beginning of period
|
$
|
(293
|
)
|
$
|
(388
|
)
|
$
|
(324
|
)
|
$
|
(424
|
)
|
|
Additions for credit impairments recognized on [1]:
|
||||||||||||
|
Securities not previously impaired
|
(4
|
)
|
—
|
|
(25
|
)
|
(3
|
)
|
||||
|
Securities previously impaired
|
(9
|
)
|
(12
|
)
|
(11
|
)
|
(13
|
)
|
||||
|
Reductions for credit impairments previously recognized on:
|
||||||||||||
|
Securities that matured or were sold during the period
|
14
|
|
51
|
|
50
|
|
61
|
|
||||
|
Securities the Company made the decision to sell or more likely than not will be required to sell
|
—
|
|
—
|
|
—
|
|
2
|
|
||||
|
Securities due to an increase in expected cash flows
|
5
|
|
12
|
|
23
|
|
40
|
|
||||
|
Balance as of end of period
|
$
|
(287
|
)
|
$
|
(337
|
)
|
$
|
(287
|
)
|
$
|
(337
|
)
|
|
[1]
|
These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations.
|
41
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments (continued)
Available-for-Sale Securities
The following table presents the Company’s AFS securities by type.
|
|
September 30, 2016
|
December 31, 2015
|
||||||||||||||||||||||||||||
|
|
Cost or
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
Non-Credit
OTTI [1]
|
Cost or
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
Non-Credit
OTTI [1]
|
||||||||||||||||||||
|
ABS
|
$
|
2,683
|
|
$
|
35
|
|
$
|
(33
|
)
|
$
|
2,685
|
|
$
|
—
|
|
$
|
2,520
|
|
$
|
24
|
|
$
|
(45
|
)
|
$
|
2,499
|
|
$
|
—
|
|
|
CDOs [2]
|
2,514
|
|
67
|
|
(9
|
)
|
2,573
|
|
—
|
|
2,989
|
|
75
|
|
(23
|
)
|
3,038
|
|
—
|
|
||||||||||
|
CMBS
|
5,066
|
|
226
|
|
(24
|
)
|
5,268
|
|
(7
|
)
|
4,668
|
|
105
|
|
(56
|
)
|
4,717
|
|
(8
|
)
|
||||||||||
|
Corporate
|
24,615
|
|
2,370
|
|
(81
|
)
|
26,904
|
|
—
|
|
25,876
|
|
1,342
|
|
(416
|
)
|
26,802
|
|
(3
|
)
|
||||||||||
|
Foreign govt./govt. agencies
|
1,106
|
|
83
|
|
(3
|
)
|
1,186
|
|
—
|
|
1,321
|
|
34
|
|
(47
|
)
|
1,308
|
|
—
|
|
||||||||||
|
Municipal
|
11,345
|
|
1,254
|
|
(5
|
)
|
12,594
|
|
—
|
|
11,124
|
|
1,008
|
|
(11
|
)
|
12,121
|
|
—
|
|
||||||||||
|
RMBS
|
4,815
|
|
131
|
|
(10
|
)
|
4,936
|
|
—
|
|
3,986
|
|
82
|
|
(22
|
)
|
4,046
|
|
—
|
|
||||||||||
|
U.S. Treasuries
|
3,598
|
|
484
|
|
(3
|
)
|
4,079
|
|
—
|
|
4,481
|
|
222
|
|
(38
|
)
|
4,665
|
|
—
|
|
||||||||||
|
Total fixed maturities, AFS
|
$
|
55,742
|
|
$
|
4,650
|
|
$
|
(168
|
)
|
$
|
60,225
|
|
$
|
(7
|
)
|
$
|
56,965
|
|
$
|
2,892
|
|
$
|
(658
|
)
|
$
|
59,196
|
|
$
|
(11
|
)
|
|
Equity securities, AFS [3]
|
812
|
|
80
|
|
(17
|
)
|
875
|
|
—
|
|
842
|
|
38
|
|
(41
|
)
|
839
|
|
—
|
|
||||||||||
|
Total AFS securities
|
$
|
56,554
|
|
$
|
4,730
|
|
$
|
(185
|
)
|
$
|
61,100
|
|
$
|
(7
|
)
|
$
|
57,807
|
|
$
|
2,930
|
|
$
|
(699
|
)
|
$
|
60,035
|
|
$
|
(11
|
)
|
|
[1]
|
Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of
September 30, 2016
, and
December 31, 2015
.
|
|
[2]
|
Gross unrealized gains (losses) exclude the fair value of bifurcated embedded derivatives within certain securities. Subsequent changes in value are recorded in net realized capital gains (losses).
|
|
[3]
|
Excluded equity securities, FVO, with a cost and fair value of
$293
and
$282
as of
December 31, 2015
. The Company held
no
equity securities, FVO as of
September 30, 2016
.
|
The following table presents the Company’s fixed maturities, AFS, by contractual maturity year.
|
September 30, 2016
|
December 31, 2015
|
|||||||||||
|
Contractual Maturity
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
||||||||
|
One year or less
|
$
|
1,832
|
|
$
|
1,848
|
|
$
|
2,373
|
|
$
|
2,405
|
|
|
Over one year through five years
|
9,623
|
|
10,052
|
|
10,929
|
|
11,200
|
|
||||
|
Over five years through ten years
|
9,082
|
|
9,671
|
|
9,322
|
|
9,497
|
|
||||
|
Over ten years
|
20,127
|
|
23,192
|
|
20,178
|
|
21,794
|
|
||||
|
Subtotal
|
40,664
|
|
44,763
|
|
42,802
|
|
44,896
|
|
||||
|
Mortgage-backed and asset-backed securities
|
15,078
|
|
15,462
|
|
14,163
|
|
14,300
|
|
||||
|
Total fixed maturities, AFS
|
$
|
55,742
|
|
$
|
60,225
|
|
$
|
56,965
|
|
$
|
59,196
|
|
Estimated maturities may differ from contractual maturities due to security call or prepayment provisions. Due to the potential for variability in payment speeds (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.
Concentration of Credit Risk
The Company aims to maintain a diversified investment portfolio including issuer, sector and geographic stratification, where applicable, and has established certain exposure limits, diversification standards and review procedures to mitigate credit risk. The Company had
no
investment exposure to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholders' equity
, other than the U.S. government and certain U.S. government agencies as of
September 30, 2016
, and
December 31, 2015
.
42
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments (continued)
Unrealized Losses on AFS Securities
The following tables present the Company’s unrealized loss aging for AFS securities by type and length of time the security was in a continuous unrealized loss position.
|
|
September 30, 2016
|
||||||||||||||||||||||||||
|
|
Less Than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||||
|
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
||||||||||||||||||
|
ABS
|
$
|
321
|
|
$
|
320
|
|
$
|
(1
|
)
|
$
|
364
|
|
$
|
332
|
|
$
|
(32
|
)
|
$
|
685
|
|
$
|
652
|
|
$
|
(33
|
)
|
|
CDOs [1]
|
665
|
|
664
|
|
(2
|
)
|
1,028
|
|
1,021
|
|
(7
|
)
|
1,693
|
|
1,685
|
|
(9
|
)
|
|||||||||
|
CMBS
|
548
|
|
540
|
|
(8
|
)
|
259
|
|
243
|
|
(16
|
)
|
807
|
|
783
|
|
(24
|
)
|
|||||||||
|
Corporate
|
1,759
|
|
1,725
|
|
(34
|
)
|
812
|
|
765
|
|
(47
|
)
|
2,571
|
|
2,490
|
|
(81
|
)
|
|||||||||
|
Foreign govt./govt. agencies
|
105
|
|
104
|
|
(1
|
)
|
27
|
|
25
|
|
(2
|
)
|
132
|
|
129
|
|
(3
|
)
|
|||||||||
|
Municipal
|
334
|
|
331
|
|
(3
|
)
|
47
|
|
45
|
|
(2
|
)
|
381
|
|
376
|
|
(5
|
)
|
|||||||||
|
RMBS
|
278
|
|
278
|
|
—
|
|
707
|
|
697
|
|
(10
|
)
|
985
|
|
975
|
|
(10
|
)
|
|||||||||
|
U.S. Treasuries
|
347
|
|
344
|
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
347
|
|
344
|
|
(3
|
)
|
|||||||||
|
Total fixed maturities, AFS
|
$
|
4,357
|
|
$
|
4,306
|
|
$
|
(52
|
)
|
$
|
3,244
|
|
$
|
3,128
|
|
$
|
(116
|
)
|
$
|
7,601
|
|
$
|
7,434
|
|
$
|
(168
|
)
|
|
Equity securities, AFS [2]
|
171
|
|
160
|
|
(11
|
)
|
68
|
|
62
|
|
(6
|
)
|
239
|
|
222
|
|
(17
|
)
|
|||||||||
|
Total securities in an unrealized loss position
|
$
|
4,528
|
|
$
|
4,466
|
|
$
|
(63
|
)
|
$
|
3,312
|
|
$
|
3,190
|
|
$
|
(122
|
)
|
$
|
7,840
|
|
$
|
7,656
|
|
$
|
(185
|
)
|
|
|
December 31, 2015
|
||||||||||||||||||||||||||
|
|
Less Than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||||
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
|||||||||||||||||||
|
ABS
|
$
|
1,619
|
|
$
|
1,609
|
|
$
|
(10
|
)
|
$
|
357
|
|
$
|
322
|
|
$
|
(35
|
)
|
$
|
1,976
|
|
$
|
1,931
|
|
$
|
(45
|
)
|
|
CDOs [1]
|
1,164
|
|
1,154
|
|
(10
|
)
|
1,243
|
|
1,227
|
|
(13
|
)
|
2,407
|
|
2,381
|
|
(23
|
)
|
|||||||||
|
CMBS
|
1,726
|
|
1,681
|
|
(45
|
)
|
189
|
|
178
|
|
(11
|
)
|
1,915
|
|
1,859
|
|
(56
|
)
|
|||||||||
|
Corporate
|
9,206
|
|
8,866
|
|
(340
|
)
|
656
|
|
580
|
|
(76
|
)
|
9,862
|
|
9,446
|
|
(416
|
)
|
|||||||||
|
Foreign govt./govt. agencies
|
679
|
|
646
|
|
(33
|
)
|
124
|
|
110
|
|
(14
|
)
|
803
|
|
756
|
|
(47
|
)
|
|||||||||
|
Municipal
|
440
|
|
430
|
|
(10
|
)
|
18
|
|
17
|
|
(1
|
)
|
458
|
|
447
|
|
(11
|
)
|
|||||||||
|
RMBS
|
1,349
|
|
1,340
|
|
(9
|
)
|
415
|
|
402
|
|
(13
|
)
|
1,764
|
|
1,742
|
|
(22
|
)
|
|||||||||
|
U.S. Treasuries
|
2,432
|
|
2,394
|
|
(38
|
)
|
8
|
|
8
|
|
—
|
|
2,440
|
|
2,402
|
|
(38
|
)
|
|||||||||
|
Total fixed maturities, AFS
|
$
|
18,615
|
|
$
|
18,120
|
|
$
|
(495
|
)
|
$
|
3,010
|
|
$
|
2,844
|
|
$
|
(163
|
)
|
$
|
21,625
|
|
$
|
20,964
|
|
$
|
(658
|
)
|
|
Equity securities, AFS [2]
|
480
|
|
449
|
|
(31
|
)
|
62
|
|
52
|
|
(10
|
)
|
542
|
|
501
|
|
(41
|
)
|
|||||||||
|
Total securities in an unrealized loss position
|
$
|
19,095
|
|
$
|
18,569
|
|
$
|
(526
|
)
|
$
|
3,072
|
|
$
|
2,896
|
|
$
|
(173
|
)
|
$
|
22,167
|
|
$
|
21,465
|
|
$
|
(699
|
)
|
|
[1]
|
Unrealized losses exclude the change in fair value of bifurcated embedded derivatives within certain securities, for which changes in fair value are recorded in net realized capital gains (losses).
|
|
[2]
|
As of
September 30, 2016
, and
December 31, 2015
, excludes equity securities, FVO which are included in equity securities, AFS on the Condensed Consolidated Balance Sheets.
|
As of
September 30, 2016
, AFS securities in an unrealized loss position consisted of
3,022
securities, primarily in the corporate sector, which were depressed primarily due to widening of credit spreads since the securities were purchased. As of
September 30, 2016
,
92%
of these securities were depressed less than
20%
of cost or amortized cost. The decrease in unrealized losses during
2016
was primarily attributable to a decline in interest rates and tighter credit spreads.
43
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments (continued)
Most of the securities depressed for twelve months or more relate to student loan ABS, corporate securities concentrated in the financial services sector, and structured securities with exposure to commercial and residential real estate. Corporate financial services securities and student loan ABS were primarily depressed because the securities have floating-rate coupons and long-dated maturities, and current credit spreads are wider than when these securities were purchased. For certain commercial and residential real estate securities, current spreads are wider than spreads at the securities' respective purchase dates. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined in the preceding discussion.
Mortgage Loans
Mortgage Loan Valuation Allowances
The Company’s security monitoring process reviews mortgage loans on a quarterly basis to identify potential credit losses. Commercial mortgage loans are considered to be impaired when management estimates that, based upon current information and events, it is probable that the Company will be unable to collect amounts due according to the contractual terms of the loan agreement. Criteria used to determine if an impairment exists include, but are not limited to: current and projected macroeconomic factors, such as unemployment rates, and property-specific factors such as rental rates, occupancy levels, LTV ratios and debt service coverage ratios (“DSCR”). In addition, the Company considers historic, current and projected delinquency rates and property values. These assumptions require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, projections of expected future cash flows may change based upon new information regarding the performance of the borrower and/or underlying collateral such as changes in the projections of the underlying property value estimates.
For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying amount and the Company’s share of either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price or, most frequently, (c) the fair value of the collateral. A valuation allowance has been established for either individual loans or as a projected loss contingency for loans with an LTV ratio of 90% or greater and after consideration of other credit quality factors, including DSCR. Changes in valuation allowances are recorded in net realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the loans continue to perform under the original or restructured terms. Interest income ceases to accrue for loans when it is probable that the Company will not receive interest and principal payments according to the contractual terms of the loan agreement. Loans may resume accrual status when it is determined that sufficient collateral exists to satisfy the full amount of the loan and interest payments as well as when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is recognized when received.
|
|
September 30, 2016
|
December 31, 2015
|
||||||||||||||||
|
|
Amortized Cost [1]
|
Valuation Allowance
|
Carrying Value
|
Amortized Cost [1]
|
Valuation Allowance
|
Carrying Value
|
||||||||||||
|
Total commercial mortgage loans
|
$
|
5,630
|
|
$
|
(19
|
)
|
$
|
5,611
|
|
$
|
5,647
|
|
$
|
(23
|
)
|
$
|
5,624
|
|
|
[1]
|
Amortized cost represents carrying value prior to valuation allowances, if any.
|
As of
September 30, 2016
, and
December 31, 2015
, the carrying value of mortgage loans associated with the valuation allowance was
$31
and
$82
, respectively. There were
no
mortgage loans held-for-sale as of
September 30, 2016
, and
December 31, 2015
. As of
September 30, 2016
, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.
The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.
|
2016
|
2015
|
|||||
|
Balance, as of January 1
|
$
|
(23
|
)
|
$
|
(18
|
)
|
|
(Additions)/Reversals
|
—
|
|
(4
|
)
|
||
|
Deductions
|
4
|
|
2
|
|
||
|
Balance, as of September 30
|
$
|
(19
|
)
|
$
|
(20
|
)
|
44
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments (continued)
The weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was
53%
as of
September 30, 2016
, while the weighted-average LTV ratio at origination of these loans was
62%
. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan values are updated no less than annually through property level reviews of the portfolio. Factors considered in the property valuation include, but are not limited to, actual and expected property cash flows, geographic market data and capitalization rates. DSCR compares a property’s net operating income to the borrower’s principal and interest payments. As of
September 30, 2016
, the Company held
one
delinquent commercial mortgage loan past due by 90 days or more. The loan had a total carrying value and valuation allowance of
$15
and
$16
, respectively, and was not accruing income. As of
December 31, 2015
, the Company held
two
delinquent commercial mortgage loans, past due by 90 days or more. The loans had a total carrying value and valuation allowance of
$17
and
$20
, respectively, and were not accruing income.
The following table presents the carrying value of the Company’s commercial mortgage loans by LTV and DSCR.
|
Commercial Mortgage Loans Credit Quality
|
||||||||
|
|
September 30, 2016
|
December 31, 2015
|
||||||
|
Loan-to-value
|
Carrying Value
|
Avg. Debt-Service Coverage Ratio
|
Carrying Value
|
Avg. Debt-Service Coverage Ratio
|
||||
|
Greater than 80%
|
$
|
15
|
|
0.45x
|
$
|
24
|
|
0.81x
|
|
65% - 80%
|
640
|
|
2.06x
|
623
|
|
1.82x
|
||
|
Less than 65%
|
4,956
|
|
2.79x
|
4,977
|
|
2.75x
|
||
|
Total commercial mortgage loans
|
$
|
5,611
|
|
2.68x
|
$
|
5,624
|
|
2.63x
|
The following tables present the carrying value of the Company’s mortgage loans by region and property type.
|
Mortgage Loans by Region
|
||||||||||
|
|
September 30, 2016
|
December 31, 2015
|
||||||||
|
|
Carrying Value
|
Percent of Total
|
Carrying Value
|
Percent of Total
|
||||||
|
East North Central
|
$
|
294
|
|
5.2
|
%
|
$
|
289
|
|
5.1
|
%
|
|
East South Central
|
14
|
|
0.3
|
%
|
14
|
|
0.2
|
%
|
||
|
Middle Atlantic
|
418
|
|
7.4
|
%
|
384
|
|
6.8
|
%
|
||
|
Mountain
|
35
|
|
0.6
|
%
|
32
|
|
0.6
|
%
|
||
|
New England
|
400
|
|
7.1
|
%
|
446
|
|
7.9
|
%
|
||
|
Pacific
|
1,635
|
|
29.2
|
%
|
1,669
|
|
29.7
|
%
|
||
|
South Atlantic
|
1,193
|
|
21.3
|
%
|
1,174
|
|
20.9
|
%
|
||
|
West North Central
|
29
|
|
0.5
|
%
|
29
|
|
0.5
|
%
|
||
|
West South Central
|
338
|
|
6.0
|
%
|
318
|
|
5.7
|
%
|
||
|
Other [1]
|
1,255
|
|
22.4
|
%
|
1,269
|
|
22.6
|
%
|
||
|
Total mortgage loans
|
$
|
5,611
|
|
100.0
|
%
|
$
|
5,624
|
|
100.0
|
%
|
|
[1]
|
Primarily represents loans collateralized by multiple properties in various regions.
|
|
Mortgage Loans by Property Type
|
||||||||||
|
|
September 30, 2016
|
December 31, 2015
|
||||||||
|
|
Carrying Value
|
Percent of Total
|
Carrying
Value |
Percent of Total
|
||||||
|
Commercial
|
||||||||||
|
Agricultural
|
$
|
16
|
|
0.3
|
%
|
$
|
26
|
|
0.5
|
%
|
|
Industrial
|
1,444
|
|
25.7
|
%
|
1,422
|
|
25.3
|
%
|
||
|
Lodging
|
25
|
|
0.4
|
%
|
26
|
|
0.5
|
%
|
||
|
Multifamily
|
1,386
|
|
24.7
|
%
|
1,345
|
|
23.9
|
%
|
||
|
Office
|
1,451
|
|
25.9
|
%
|
1,547
|
|
27.5
|
%
|
||
|
Retail
|
1,050
|
|
18.7
|
%
|
1,109
|
|
19.7
|
%
|
||
|
Other
|
239
|
|
4.3
|
%
|
149
|
|
2.6
|
%
|
||
|
Total mortgage loans
|
$
|
5,611
|
|
100.0
|
%
|
$
|
5,624
|
|
100.0
|
%
|
45
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments (continued)
Mortgage Servicing
The Company originates, sells and services commercial mortgage loans on behalf of third parties and recognizes servicing fees over the period that services are performed in fee income. As of
September 30, 2016
, the Company serviced commercial mortgage loans under this program with a total outstanding principal of
$571
, of which
$186
was serviced on behalf of third parties and
$385
was retained and reported on the Company’s Condensed Consolidated Balance Sheets, including
$104
in separate account assets. As of
December 31, 2015
, the Company serviced commercial mortgage loans under this program with a total outstanding principal of
$359
, of which
$129
was serviced on behalf of third parties and
$230
was retained and reported on the Company’s Condensed Consolidated Balance Sheets, including
$54
in separate account assets. Servicing rights are carried at the lower of cost or fair value and were
zero
as of
September 30, 2016
and
December 31, 2015
, because servicing fees were market-level fees at origination and remain adequate to compensate the Company to administer the servicing.
Variable Interest Entities
The Company is involved with various special purpose entities and other entities that are deemed to be VIEs primarily as a collateral or investment manager and as an investor through normal investment activities as well as a means of accessing capital through a contingent capital facility.
A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest, such as simple majority kick-out rights, or lacks sufficient funds to finance its own activities without financial support provided by other entities. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Condensed Consolidated Financial Statements.
Consolidated VIEs
The following table presents the carrying value of assets and liabilities, and the maximum exposure to loss relating to the VIEs for which the Company is the primary beneficiary. Creditors have no recourse against the Company in the event of default by these VIEs nor does the Company have any implied or unfunded commitments to these VIEs. The Company’s financial or other support provided to these VIEs is limited to its collateral or investment management services and original investment.
|
|
September 30, 2016
|
December 31, 2015
|
||||||||||||||||
|
|
Total Assets
|
Total Liabilities [1]
|
Maximum Exposure to Loss [2]
|
Total Assets
|
Total Liabilities [1]
|
Maximum Exposure to Loss [2]
|
||||||||||||
|
CDO [3]
|
$
|
5
|
|
$
|
5
|
|
$
|
—
|
|
$
|
5
|
|
$
|
5
|
|
$
|
—
|
|
|
Investment funds [4]
|
—
|
|
—
|
|
—
|
|
159
|
|
7
|
|
151
|
|
||||||
|
Limited partnerships and other alternative investments [5]
|
—
|
|
—
|
|
—
|
|
2
|
|
—
|
|
2
|
|
||||||
|
Total
|
$
|
5
|
|
$
|
5
|
|
$
|
—
|
|
$
|
166
|
|
$
|
12
|
|
$
|
153
|
|
|
[1]
|
Included in other liabilities on the Company’s Condensed Consolidated Balance Sheets.
|
|
[2]
|
The maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment income or as a realized capital loss and is the cost basis of the Company’s investment.
|
|
[3]
|
Total assets included in cash on the Company’s Condensed Consolidated Balance Sheets.
|
|
[4]
|
Total assets included in fixed maturities, FVO, short-term investments, equity, AFS, and cash on the Company’s Condensed Consolidated Balance Sheets.
|
|
[5]
|
Total assets included in limited partnerships and other alternative investments on the Company’s Condensed Consolidated Balance Sheets.
|
Effective January 1, 2016, the Company adopted new consolidation guidance and determined that three investment funds, that were previously identified as consolidated VIEs and for which the Company has management and control of the investments, are voting interest entities under the new consolidation guidance. The Company still owns a majority interest in one investment fund that is still consolidated on the Company's Condensed Consolidated Financial Statements; however, as of
September 30, 2016
, this fund is not included as VIE in the table above. The remaining two investment funds previously identified as consolidated VIEs were disposed of during the first six months of the year. CDO represents a structured investment vehicle for which the Company has a controlling financial interest as it provides collateral management services, earns a fee for those services and also holds investments in the security issued by this vehicle. For further information on the adoption, see Note
1
-
Basis of Presentation and Significant Accounting Policies
of Notes to Condensed Consolidated Financial Statements.
46
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments (continued)
Non-Consolidated VIEs
The Company, through normal investment activities, makes passive investments in limited partnerships and other alternative investments. Upon the adoption of the new consolidation guidance, discussed above, these investments are now considered VIEs. For these non-consolidated VIEs, the Company has determined it is not the primary beneficiary as it has no ability to direct activities that could significantly affect the economic performance of the investments. The Company’s maximum exposure to loss as of
September 30, 2016
and
December 31, 2015
is limited to the total carrying value of
$1.8
billion and
$1.5
billion, respectively, which are included in limited partnerships and other alternative investments in the Company's Condensed Consolidated Balance Sheets. As of
September 30, 2016
and
December 31, 2015
, the Company has outstanding commitments totaling
$1.3 billion
and
$692
million, respectively, whereby the Company is committed to fund these investments and may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses. These investments are generally of a passive nature in that the Company does not take an active role in management. For further discussion of these investments, see Equity Method Investments within Note 6 - Investments and Derivatives of Notes to Consolidated Financial Statements included in the Company’s
2015
Form 10-K Annual Report.
In addition, the Company also makes passive investments in structured securities issued by VIEs for which the Company is not the manager and, therefore, does not consolidate. These investments are included in ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
The Company also holds a significant variable interest in a VIE for which it is not the primary beneficiary. This VIE represents a contingent capital facility ("facility") that has been held by the Company since February 2007 and for which the Company has
no
implied or unfunded commitments. Assets and liabilities recorded for the contingent capital facility were
$2
and
$3
, respectively, as of
September 30, 2016
, and
$7
and
$8
, respectively, as of
December 31, 2015
. Additionally, the Company has a maximum exposure to loss of
$3
and
$3
, respectively, as of
September 30, 2016
, and
December 31, 2015
, which represents the issuance costs that were incurred to establish the facility. The Company does not have a controlling financial interest as it does not manage the assets of the facility nor does it have the obligation to absorb losses or the right to receive benefits that could potentially be significant to the facility, as the asset manager has significant variable interest in the vehicle. The Company’s financial or other support provided to the facility is limited to providing ongoing support to cover the facility’s operating expenses. As such, the Company does not consolidate its variable interest in the facility. For further information on the facility, see Note 11 - Debt of Notes to Consolidated Financial Statements included in The Hartford’s
2015
Form 10-K Annual Report.
Securities Lending, Repurchase Agreements, and Similar Transactions and Other Collateral Transactions
The Company participates in securities lending programs to generate additional income. Through these programs, certain fixed maturities within the corporate, foreign government/government agencies, and municipal sectors as well as equity securities are loaned from the Company’s portfolio to qualifying third-party borrowers in return for collateral in the form of cash or securities. Borrowers of these securities provide collateral of 102% and 105% of the fair value of the securities lent at the time of the loan for domestic and non-domestic securities, respectively. The borrower will return the securities to the Company for cash or securities collateral at maturity dates generally of 90 days or less. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, except in the event of default, and is not reflected on the Company’s consolidated balance sheets. The fair value of the loaned securities is monitored and additional collateral is obtained if the fair value of the collateral falls below 100% of the fair value of the loaned securities. The agreements provide the counterparty the right to sell or re-pledge the securities transferred. If cash, rather than securities, is received as collateral, the cash is typically invested in short-term investments or fixed maturities and is reported as an asset on the consolidated balance sheets. Income associated with securities lending transactions is reported as a component of net investment income on the Company’s consolidated statements of operations. As of
September 30, 2016
, the fair value of securities on loan and the associated liability for cash collateral received was
$168
and
$114
, respectively. The Company also received securities collateral of
$57
which was not included in the Company's Condensed Consolidated Balance Sheets. As of
December 31, 2015
, the fair value of securities on loan and the associated liability for cash collateral received was
$67
and
$68
, respectively.
From time to time, the Company enters into repurchase agreements and similar transactions to manage liquidity or to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. A dollar roll is a type of repurchase agreement where a mortgage backed security is sold with an agreement to repurchase substantially the same security at a specified time in the future. Repurchase transactions generally have a contractual maturity of ninety days or less.
47
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments (continued)
As part of repurchase agreements, the Company transfers collateral of U.S. government and government agency securities and receives cash. For repurchase agreements, the Company obtains cash in an amount equal to at least
95%
of the fair value of the securities transferred. The agreements contain contractual provisions that require additional collateral to be transferred when necessary and provide the counterparty the right to sell or re-pledge the securities transferred. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities. Repurchase agreements include master netting provisions that provide the counterparties the right to offset claims and apply securities held by them with respect to their obligations in the event of a default. Although the Company has the contractual right to offset claims, fixed maturities do not meet the specific conditions for net presentation under U.S. GAAP. The Company accounts for the repurchase agreements as collateralized borrowings. The securities transferred under repurchase agreements are included in fixed maturities, AFS with the obligation to repurchase those securities recorded in other liabilities on the Company's Condensed Consolidated Balance Sheets.
As of
September 30, 2016
, the Company reported in fixed maturities, AFS on the Condensed Consolidated Balance Sheets financial collateral pledged relating to repurchase agreements of
$358
. The Company reported a corresponding obligation to repurchase the pledged securities of
$356
in other liabilities on the Condensed Consolidated Balance Sheets. As of
December 31, 2015
, the Company reported financial collateral pledged relating to repurchase agreements
$440
in fixed maturities, AFS and
$5
in cash. The Company reported a corresponding obligation to repurchase the pledged securities of
$445
in other liabilities on the Condensed Consolidated Balance Sheets. The Company had
no
outstanding dollar roll transactions as of
September 30, 2016
or
December 31, 2015
.
The Company is required by law to deposit securities with government agencies in certain states in which it conducts business. As of
September 30, 2016
, and
December 31, 2015
, the fair value of securities on deposit was approximately
$2.6 billion
and
$2.5 billion
, respectively.
As of
September 30, 2016
and
December 31, 2015
, the Company has pledged as collateral
$75
and
$35
, respectively, of U.S. government securities and government agency securities or cash primarily related to certain bank loan participations committed to through a limited partnership agreement. Also included is collateral related to letters of credit.
For disclosure of collateral in support of derivative transactions, refer to the Derivative Collateral Arrangements section of Note - 7
Derivative Instruments
.
48
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments
The Company utilizes a variety of OTC, OTC-cleared and exchange traded derivative instruments as a part of its overall risk management strategy as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, commodity market, credit spread, issuer default, price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies. The Company also may enter into and has previously issued financial instruments and products that either are accounted for as free-standing derivatives, such as certain reinsurance contracts, or may contain features that are deemed to be embedded derivative instruments, such as the GMWB rider included with certain variable annuity products.
Strategies That Qualify for Hedge Accounting
Certain derivatives that the Company enters into satisfy the hedge accounting requirements as outlined in Note
1
-
Basis of Presentation and Significant Accounting Policies
of Notes to Consolidated Financial Statements, included in The Hartford’s
2015
Form 10-K Annual Report. Typically, these hedge relationships include interest rate swaps and, to a lesser extent, foreign currency swaps where the terms or expected cash flows of the hedged item closely match the terms of the swap. The interest rate swaps are typically used to manage interest rate duration of certain fixed maturity securities or liability contracts. The hedge strategies by hedge accounting designation include:
Cash Flow Hedges
Interest rate swaps are predominantly used to manage portfolio duration and better match cash receipts from assets with cash disbursements required to fund liabilities. These derivatives primarily convert interest receipts on floating-rate fixed maturity securities to fixed rates. The Company also enters into forward starting swap agreements to hedge the interest rate exposure related to the purchase of fixed-rate securities, primarily to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign currency swaps are used to convert foreign currency-denominated cash flows related to certain investment receipts and liability payments to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.
Fair Value Hedges
Interest rate swaps are used to hedge the changes in fair value of fixed maturity securities due to fluctuations in interest rates. These swaps are typically used to manage interest rate duration.
Non-Qualifying Strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include the hedge program for the Company's variable annuity products as well as the hedging and replication strategies that utilize credit default swaps. In addition, hedges of interest rate, foreign currency and equity risk of certain fixed maturities, equities and liabilities do not qualify for hedge accounting.
The non-qualifying strategies include:
Interest Rate Swaps, Swaptions, and Futures
The Company uses interest rate swaps, swaptions, and futures to manage duration between assets and liabilities in certain investment portfolios. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap. As of
September 30, 2016
, and
December 31, 2015
, the notional amount of interest rate swaps in offsetting relationships was
$12.1 billion
and
$12.9 billion
, respectively.
Foreign Currency Swaps and Forwards
Foreign currency forwards are used to hedge non-U.S. dollar denominated cash and equity securities as well as currency impacts on changes in equity of the U.K. property and casualty runoff subsidiaries that is held for sale. For further information on the disposition, see Note 2 - Business Acquisitions and Dispositions of Notes to Condensed Consolidated Financial Statements. The Company also enters into foreign currency swaps and forwards to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.
Fixed Payout Annuity Hedge
The Company reinsures certain yen denominated fixed payout annuities. The Company invests in U.S. dollar denominated assets to support the reinsurance liability. The Company has in place pay U.S. dollar, receive yen swap contracts to hedge the currency and yen interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
49
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
Credit Contracts
Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in value of fixed maturity securities. Credit default swaps are also used to assume credit risk related to an individual entity or referenced index as a part of replication transactions. These contracts require the Company to pay or receive a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed to credit risk related to certain structured fixed maturity securities that have embedded credit derivatives, which reference a standard index of corporate securities. In addition, the Company enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.
Equity Index Swaps and Options
The Company enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. During 2015, the Company entered into a total return swap to hedge equity risk of specific common stock investments which were accounted for using the fair value option in order to align the accounting treatment within net realized capital gains (losses). The swap matured in January 2016 and the specific common stock investments were sold at that time. In addition, the Company formerly offered certain equity indexed products that remain in force, a portion of which contain embedded derivatives that require bifurcation. The Company uses equity index swaps to economically hedge the equity volatility risk associated with the equity indexed products.
Commodity Contracts
The Company has used put option contracts on oil futures to partially offset potential losses related to certain fixed maturity securities that could be impacted by changes in oil prices.
GMWB Derivatives, Net
The Company formerly offered certain variable annuity products with GMWB riders. The GMWB product is a bifurcated embedded derivative (“GMWB product derivatives”) that has a notional value equal to the GRB. The Company uses reinsurance contracts to transfer a portion of its risk of loss due to GMWB. The reinsurance contracts covering GMWB (“GMWB reinsurance contracts”) are accounted for as free-standing derivatives with a notional amount equal to the GRB amount.
The Company utilizes derivatives (“GMWB hedging instruments”) as part of a dynamic hedging program designed to hedge a portion of the capital market risk exposures of the non-reinsured GMWB riders due to changes in interest rates, equity market levels, and equity volatility. These derivatives include customized swaps, interest rate swaps and futures, and equity swaps, options and futures, on certain indices including the S&P 500 index, EAFE index and NASDAQ index. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices. The following table presents notional and fair value for GMWB hedging instruments.
|
|
Notional Amount
|
Fair Value
|
||||||||||
|
|
September 30,
2016 |
December 31, 2015
|
September 30,
2016 |
December 31, 2015
|
||||||||
|
Customized swaps
|
$
|
5,366
|
|
$
|
5,877
|
|
$
|
142
|
|
$
|
131
|
|
|
Equity swaps, options, and futures
|
1,355
|
|
1,362
|
|
(13
|
)
|
2
|
|
||||
|
Interest rate swaps and futures
|
3,743
|
|
3,740
|
|
40
|
|
25
|
|
||||
|
Total
|
$
|
10,464
|
|
$
|
10,979
|
|
$
|
169
|
|
$
|
158
|
|
Macro Hedge Program
The Company utilizes equity swaps, options, futures, and forwards to provide partial protection against the statutory tail scenario risk arising from GMWB and guaranteed minimum death benefit ("GMDB") liabilities on the Company's statutory surplus. These derivatives cover some of the residual risks not otherwise covered by the dynamic hedging program. The following table presents notional and fair value for the macro hedge program.
|
|
Notional Amount
|
Fair Value
|
||||||||||
|
|
September 30,
2016 |
December 31, 2015
|
September 30,
2016 |
December 31, 2015
|
||||||||
|
Equity swaps, options, futures, and forwards
|
$
|
6,348
|
|
$
|
4,548
|
|
$
|
136
|
|
$
|
147
|
|
|
Total
|
$
|
6,348
|
|
$
|
4,548
|
|
$
|
136
|
|
$
|
147
|
|
50
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
Contingent Capital Facility Put Option
The Company entered into a put option agreement that provides the Company the right to require a third-party trust to purchase, at any time, The Hartford’s junior subordinated notes in a maximum aggregate principal amount of
$500
. Under the put option agreement, The Hartford will pay premiums on a periodic basis and will reimburse the trust for certain fees and ordinary expenses.
Modified Coinsurance Reinsurance Contracts
As of
September 30, 2016
, and
December 31, 2015
, the Company had approximately
$921
and
$895
, respectively, of invested assets supporting other policyholder funds and benefits payable reinsured under a modified coinsurance arrangement in connection with the sale of the Individual Life business, which was structured as a reinsurance transaction. The assets are primarily held in a trust established by the Company. The Company pays or receives cash quarterly to settle the results of the reinsured business, including the investment results. As a result of this modified coinsurance arrangement, the Company has an embedded derivative that transfers to the reinsurer certain unrealized changes in fair value due to interest rate and credit risks of these assets. The notional amount of the embedded derivative reinsurance contracts are the invested assets that are carried at fair value supporting the reinsured reserves.
Derivative Balance Sheet Classification
The following table summarizes the balance sheet classification of the Company’s derivative related net fair value amounts as well as the gross asset and liability fair value amounts. For reporting purposes, the Company has elected to offset within total assets or total liabilities based upon the net of the fair value amounts, income accruals, and related cash collateral receivables and payables of OTC derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement, which provides the Company with the legal right of offset. The Company has also elected to offset within total assets or total liabilities based upon the net of the fair value amounts, income accruals and related cash collateral receivables and payables of OTC-cleared derivative instruments based on clearing house agreements. The following fair value amounts do not include income accruals or related cash collateral receivables and payables, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivative fair value reported as liabilities after taking into account the master netting agreements was
$1.4 billion
and $
1.1 billion
, respectively, as of
September 30, 2016
, and
December 31, 2015
. Derivatives in the Company’s separate accounts, where the associated gains and losses accrue directly to policyholders, are not included in the table below. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the following table. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk. The following tables exclude investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note
5
-
Fair Value Measurements
of Notes to Condensed Consolidated Financial Statements.
51
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
|
|
Net Derivatives
|
Asset Derivatives
|
Liability Derivatives
|
|||||||||||||||||||||
|
|
Notional Amount
|
Fair Value
|
Fair Value
|
Fair Value
|
||||||||||||||||||||
|
Hedge Designation/ Derivative Type
|
Sep. 30, 2016
|
Dec. 31, 2015
|
Sep. 30, 2016
|
Dec. 31, 2015
|
Sep. 30, 2016
|
Dec. 31, 2015
|
Sep. 30, 2016
|
Dec. 31, 2015
|
||||||||||||||||
|
Cash flow hedges
|
||||||||||||||||||||||||
|
Interest rate swaps
|
$
|
3,443
|
|
$
|
3,527
|
|
$
|
74
|
|
$
|
17
|
|
$
|
84
|
|
$
|
50
|
|
$
|
(10
|
)
|
$
|
(33
|
)
|
|
Foreign currency swaps
|
182
|
|
143
|
|
(17
|
)
|
(19
|
)
|
8
|
|
7
|
|
(25
|
)
|
(26
|
)
|
||||||||
|
Total cash flow hedges
|
3,625
|
|
3,670
|
|
57
|
|
(2
|
)
|
92
|
|
57
|
|
(35
|
)
|
(59
|
)
|
||||||||
|
Fair value hedges
|
||||||||||||||||||||||||
|
Interest rate swaps
|
23
|
|
23
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||
|
Total fair value hedges
|
23
|
|
23
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||
|
Non-qualifying strategies
|
||||||||||||||||||||||||
|
Interest rate contracts
|
||||||||||||||||||||||||
|
Interest rate swaps, swaptions, and futures
|
12,816
|
|
14,290
|
|
(931
|
)
|
(814
|
)
|
590
|
|
297
|
|
(1,521
|
)
|
(1,111
|
)
|
||||||||
|
Foreign exchange contracts
|
||||||||||||||||||||||||
|
Foreign currency swaps and forwards
|
1,090
|
|
653
|
|
9
|
|
17
|
|
15
|
|
17
|
|
(6
|
)
|
—
|
|
||||||||
|
Fixed payout annuity hedge
|
1,063
|
|
1,063
|
|
(247
|
)
|
(357
|
)
|
—
|
|
—
|
|
(247
|
)
|
(357
|
)
|
||||||||
|
Credit contracts
|
||||||||||||||||||||||||
|
Credit derivatives that purchase credit protection
|
185
|
|
423
|
|
(5
|
)
|
18
|
|
—
|
|
22
|
|
(5
|
)
|
(4
|
)
|
||||||||
|
Credit derivatives that assume credit risk [1]
|
1,828
|
|
2,458
|
|
4
|
|
(13
|
)
|
15
|
|
9
|
|
(11
|
)
|
(22
|
)
|
||||||||
|
Credit derivatives in offsetting positions
|
3,797
|
|
4,059
|
|
—
|
|
(2
|
)
|
43
|
|
40
|
|
(43
|
)
|
(42
|
)
|
||||||||
|
Equity contracts
|
||||||||||||||||||||||||
|
Equity index swaps and options
|
105
|
|
419
|
|
(1
|
)
|
15
|
|
30
|
|
41
|
|
(31
|
)
|
(26
|
)
|
||||||||
|
Variable annuity hedge program
|
||||||||||||||||||||||||
|
GMWB product derivatives [2]
|
13,603
|
|
15,099
|
|
(348
|
)
|
(262
|
)
|
—
|
|
—
|
|
(348
|
)
|
(262
|
)
|
||||||||
|
GMWB reinsurance contracts
|
2,809
|
|
3,106
|
|
98
|
|
83
|
|
98
|
|
83
|
|
—
|
|
—
|
|
||||||||
|
GMWB hedging instruments
|
10,464
|
|
10,979
|
|
169
|
|
158
|
|
307
|
|
264
|
|
(138
|
)
|
(106
|
)
|
||||||||
|
Macro hedge program
|
6,348
|
|
4,548
|
|
136
|
|
147
|
|
197
|
|
179
|
|
(61
|
)
|
(32
|
)
|
||||||||
|
Other
|
||||||||||||||||||||||||
|
Contingent capital facility put option
|
500
|
|
500
|
|
2
|
|
7
|
|
2
|
|
7
|
|
—
|
|
—
|
|
||||||||
|
Modified coinsurance reinsurance contracts
|
921
|
|
895
|
|
31
|
|
79
|
|
31
|
|
79
|
|
—
|
|
—
|
|
||||||||
|
Total non-qualifying strategies
|
55,529
|
|
58,492
|
|
(1,083
|
)
|
(924
|
)
|
1,328
|
|
1,038
|
|
(2,411
|
)
|
(1,962
|
)
|
||||||||
|
Total cash flow hedges, fair value hedges, and non-qualifying strategies
|
$
|
59,177
|
|
$
|
62,185
|
|
$
|
(1,026
|
)
|
$
|
(926
|
)
|
$
|
1,420
|
|
$
|
1,095
|
|
$
|
(2,446
|
)
|
$
|
(2,021
|
)
|
|
Balance Sheet Location
|
||||||||||||||||||||||||
|
Fixed maturities, available-for-sale
|
$
|
416
|
|
$
|
425
|
|
$
|
1
|
|
$
|
(3
|
)
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(3
|
)
|
|
Other investments
|
10,477
|
|
23,253
|
|
278
|
|
1
|
|
350
|
|
409
|
|
(72
|
)
|
(408
|
)
|
||||||||
|
Other liabilities
|
30,902
|
|
19,358
|
|
(1,055
|
)
|
(798
|
)
|
940
|
|
524
|
|
(1,995
|
)
|
(1,322
|
)
|
||||||||
|
Reinsurance recoverables
|
3,729
|
|
4,000
|
|
129
|
|
162
|
|
129
|
|
162
|
|
—
|
|
—
|
|
||||||||
|
Other policyholder funds and benefits payable
|
13,653
|
|
15,149
|
|
(379
|
)
|
(288
|
)
|
—
|
|
—
|
|
(379
|
)
|
(288
|
)
|
||||||||
|
Total derivatives
|
$
|
59,177
|
|
$
|
62,185
|
|
$
|
(1,026
|
)
|
$
|
(926
|
)
|
$
|
1,420
|
|
$
|
1,095
|
|
$
|
(2,446
|
)
|
$
|
(2,021
|
)
|
|
[1]
|
The derivative instruments related to this strategy are held for other investment purposes.
|
|
[2]
|
These derivatives are embedded within liabilities and are not held for risk management purposes.
|
52
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
Change in Notional Amount
The net decrease in notional amount of derivatives since
December 31, 2015
, was primarily due to the following:
|
•
|
The decline in the combined notional amount associated with the GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily driven by policyholder lapses and partial withdrawals.
|
|
•
|
The decline in notional amount related to non-qualifying interest rate derivatives was primarily driven by the termination of interest rate swaps that were used for duration management.
|
|
•
|
The decline in notional amount related to the termination of credit derivatives that assume credit risk was a result of re-balancing within certain fixed maturity sectors. The terminated positions related to replication transactions that pair credit derivatives with high quality liquid securities to earn a higher credit spread.
|
|
•
|
The increase in the notional amount associated with the macro hedge program was primarily due to purchases of equity options and forwards to hedge more of the equity risk.
|
|
•
|
The increase in the notional amount related to foreign currency derivatives was primarily due to purchases of currency forwards that are used to hedge non-U.S. dollar denominated cash.
|
Change in Fair Value
The net decline in the total fair value of derivative instruments since
December 31, 2015
, was primarily related to the following:
|
•
|
The decrease in fair value related to the combined GMWB hedging program was primarily due to an increase in the U.S. equity markets, assumption and fund regression updates, partially offset by an increase in fair value driven by favorable policyholder behavior and outperformance of the underlying actively managed funds compared to their respective indices.
|
|
•
|
The increase in fair value associated with qualifying cash flow hedge interest rate swaps was due to a decline in interest rates and the decrease in fair value related to non-qualifying interest rate swaps was due to the termination of offsetting swaps that were in a net gain position.
|
|
•
|
The decrease in the fair value associated with modified coinsurance reinsurance contracts, which are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies, was primarily driven by a decline in interest rates.
|
|
•
|
The increase in fair value associated with the fixed payout annuity hedges was primarily driven by an appreciation of the Japanese yen in comparison to the U.S. dollar, slightly offset by a decline in U.S. interest rates.
|
Offsetting of Derivative Assets (Liabilities)
The following tables present the gross fair value amounts, the amounts offset, and net position of derivative instruments eligible for offset in the Company's Condensed Consolidated Balance Sheets. Amounts offset include fair value amounts, income accruals and related cash collateral receivables and payables associated with derivative instruments that are traded under a common master netting agreement, as described in the preceding discussion. Also included in the tables are financial collateral receivables and payables, which are contractually permitted to be offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.
53
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
As of
September 30, 2016
|
(i)
|
(ii)
|
(iii) = (i) - (ii)
|
(iv)
|
(v) = (iii) - (iv)
|
|||||||||||||||||||
|
Net Amounts Presented in the Statement of Financial Position
|
Collateral Disallowed for Offset in the Statement of Financial Position
|
||||||||||||||||||||||
|
Gross Amounts of Recognized Assets
|
Gross Amounts Offset in the Statement of Financial Position
|
Derivative Assets [1]
|
Accrued Interest and Cash Collateral Received [2]
|
Financial Collateral Received [4]
|
Net Amount
|
||||||||||||||||||
|
Description
|
|||||||||||||||||||||||
|
Other investments
|
$
|
1,290
|
|
$
|
1,024
|
|
$
|
278
|
|
$
|
(12
|
)
|
$
|
209
|
|
$
|
57
|
|
|||||
|
Gross Amounts of Recognized Liabilities
|
Gross Amounts Offset in the Statement of Financial Position
|
Derivative Liabilities [3]
|
Accrued Interest and Cash Collateral Pledged [3]
|
Financial Collateral Pledged [4]
|
Net Amount
|
||||||||||||||||||
|
Description
|
|||||||||||||||||||||||
|
Other liabilities
|
$
|
(2,067
|
)
|
$
|
(1,049
|
)
|
$
|
(1,055
|
)
|
$
|
37
|
|
$
|
(974
|
)
|
$
|
(44
|
)
|
|||||
As of
December 31, 2015
|
(i)
|
(ii)
|
(iii) = (i) - (ii)
|
(iv)
|
(v) = (iii) - (iv)
|
|||||||||||||||||||
|
Net Amounts Presented in the Statement of Financial Position
|
Collateral Disallowed for Offset in the Statement of Financial Position
|
||||||||||||||||||||||
|
Gross Amounts of Recognized Assets
|
Gross Amounts Offset in the Statement of Financial Position
|
Derivative Assets [1]
|
Accrued Interest and Cash Collateral Received [2]
|
Financial Collateral Received [4]
|
Net Amount
|
||||||||||||||||||
|
Description
|
|||||||||||||||||||||||
|
Other investments
|
$
|
933
|
|
$
|
756
|
|
$
|
1
|
|
$
|
176
|
|
$
|
100
|
|
$
|
77
|
|
|||||
|
Gross Amounts of Recognized Liabilities
|
Gross Amounts Offset in the Statement of Financial Position
|
Derivative Liabilities [3]
|
Accrued Interest and Cash Collateral Pledged [3]
|
Financial Collateral Pledged [4]
|
Net Amount
|
||||||||||||||||||
|
Description
|
|||||||||||||||||||||||
|
Other liabilities
|
$
|
(1,730
|
)
|
$
|
(818
|
)
|
$
|
(798
|
)
|
$
|
(114
|
)
|
$
|
(889
|
)
|
$
|
(23
|
)
|
|||||
|
[1]
|
Included in other invested assets in the Company's Condensed Consolidated Balance Sheets.
|
|
[2]
|
Included in other assets in the Company's Condensed Consolidated Balance Sheets and amount presented is limited to the net derivative receivable associated with each counterparty.
|
|
[3]
|
Included in other liabilities in the Company's Condensed Consolidated Balance Sheets and amount presented is limited to the net derivative payable associated with each counterparty.
|
|
[4]
|
Excludes collateral associated with exchange-traded derivative instruments.
|
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current period earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
54
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
The following tables present the components of the gain or loss on derivatives that qualify as cash flow hedges:
Derivatives in Cash Flow Hedging Relationships
|
|
Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
|
Net Realized Capital Gains(Losses) Recognized in Income on Derivative (Ineffective Portion)
|
|||||||||||||||||||||||
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
|||||||||||||||||
|
Interest rate swaps
|
$
|
(26
|
)
|
$
|
91
|
|
$
|
120
|
|
$
|
76
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
Foreign currency swaps
|
—
|
|
—
|
|
1
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Total
|
$
|
(26
|
)
|
$
|
91
|
|
$
|
121
|
|
$
|
75
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
|
|||||||||||||
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||
|
|
Location
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Interest rate swaps
|
Net realized capital gains
|
$
|
—
|
|
$
|
1
|
|
$
|
7
|
|
$
|
4
|
|
|
|
Interest rate swaps
|
Net investment income
|
16
|
|
15
|
|
46
|
|
47
|
|
|||||
|
Foreign currency swaps
|
Net realized capital gains (losses)
|
1
|
|
—
|
|
3
|
|
(7
|
)
|
|||||
|
Total
|
$
|
17
|
|
$
|
16
|
|
$
|
56
|
|
$
|
44
|
|
||
As of
September 30, 2016
, the before-tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are
$29
. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to net investment income over the term of the investment cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows for forecasted transactions, excluding interest payments on existing variable-rate financial instruments, is approximately
two years
.
During the
three and nine months ended
September 30, 2016
, and
September 30, 2015
, the Company had
no
net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current period earnings. The Company includes the gain or loss on the derivative in the same line item as the offsetting loss or gain on the hedged item. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
For both the
three and nine months ended
September 30, 2016
and
2015
, the Company recognized in income losses of
less than $1
representing the ineffective portion of fair value hedges for the derivative instrument and the hedged item.
Non-Qualifying Strategies
For non-qualifying strategies, including embedded derivatives that are required to be bifurcated from their host contracts and accounted for as derivatives, the gain or loss on the derivative is recognized currently in earnings within net realized capital gains (losses). The following table presents the gain or loss recognized in income on non-qualifying strategies:
55
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
Derivatives Used in Non-Qualifying Strategies
Gain or (Loss) Recognized within Net Realized Capital Gains and Losses
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Interest rate contracts
|
|||||||||||||
|
Interest rate swaps, swaptions, and futures
|
$
|
(2
|
)
|
$
|
(11
|
)
|
$
|
(22
|
)
|
$
|
(16
|
)
|
|
|
Foreign exchange contracts
|
|||||||||||||
|
Foreign currency swaps and forwards [1]
|
4
|
|
3
|
|
25
|
|
11
|
|
|||||
|
Fixed payout annuity hedge [2]
|
13
|
|
8
|
|
109
|
|
(23
|
)
|
|||||
|
Credit contracts
|
|||||||||||||
|
Credit derivatives that purchase credit protection
|
(12
|
)
|
7
|
|
(19
|
)
|
5
|
|
|||||
|
Credit derivatives that assume credit risk
|
24
|
|
(23
|
)
|
28
|
|
(25
|
)
|
|||||
|
Equity contracts
|
|||||||||||||
|
Equity index swaps and options
|
(2
|
)
|
1
|
|
15
|
|
4
|
|
|||||
|
Commodity contracts
|
|||||||||||||
|
Commodity options
|
—
|
|
2
|
|
—
|
|
(8
|
)
|
|||||
|
Variable annuity hedge program
|
|||||||||||||
|
GMWB product derivatives
|
87
|
|
(150
|
)
|
(22
|
)
|
(91
|
)
|
|||||
|
GMWB reinsurance contracts
|
(15
|
)
|
24
|
|
(2
|
)
|
15
|
|
|||||
|
GMWB hedging instruments
|
(66
|
)
|
94
|
|
16
|
|
41
|
|
|||||
|
Macro hedge program
|
(64
|
)
|
51
|
|
(98
|
)
|
24
|
|
|||||
|
Other
|
|||||||||||||
|
Contingent capital facility put option
|
(1
|
)
|
(2
|
)
|
(4
|
)
|
(5
|
)
|
|||||
|
Modified coinsurance reinsurance contracts
|
(1
|
)
|
2
|
|
(48
|
)
|
28
|
|
|||||
|
Total [3]
|
$
|
(35
|
)
|
$
|
6
|
|
$
|
(22
|
)
|
$
|
(40
|
)
|
|
|
[1]
|
Not included in this amount is the associated transactional foreign currency revaluation related to changes in equity of the U.K. property and casualty runoff subsidiaries, currently held for sale, adjusted through realized capital losses of
$(10)
and $
(33)
for the
three and nine months ended
September 30, 2016
.
|
|
[2]
|
Not included in this amount is the associated liability adjustment for changes in foreign exchange spot rates through realized capital losses of
$(10)
and
$(17)
for the
three months ended
September 30, 2016
and
2015
, respectively, and
$(118)
and
$(1)
for the
nine months ended
September 30, 2016
and
2015
, respectively.
|
|
[3]
|
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note
5
-
Fair Value Measurements
.
|
For the
three months ended
September 30, 2016
, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
|
•
|
The net gain on fixed payout annuity hedge was primarily driven by an appreciation of the Japanese yen in comparison to the U.S. dollar.
|
|
•
|
The net gain on credit contracts was primarily driven by credit spread tightening.
|
|
•
|
The net gain related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily due to favorable policyholder behavior and outperformance of the underlying actively managed funds compared to their respective indices, partially offset by losses resulting from assumption updates and an increase in interest rates.
|
|
•
|
The net loss on the macro hedge program was primarily driven by an increase in equity markets, time decay of options, and a decline in equity volatility.
|
56
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
For the
nine months ended
September 30, 2016
, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
|
•
|
The net loss related to interest rate derivatives was primarily driven by a decline in interest rates and terminations of derivative positions used for duration management.
|
|
•
|
The net gain on foreign currency swaps and forwards primarily related to the U.K. property and casualty runoff subsidiary hedge and was driven by depreciation of the British pound.
|
|
•
|
The net gain on the fixed annuity payout hedge was driven by an appreciation of the Japanese yen in comparison to the U.S. dollar, slightly offset by a decline in U.S. interest rates.
|
|
•
|
The net gain on credit contracts was primarily driven by credit spread tightening.
|
|
•
|
The net loss related to the combined GMWB hedging program was primarily due to an increase in the U.S. equity markets, partially offset by non-market gains. The non-market gains include favorable policyholder behavior and outperformance of the underlying actively managed funds compared to their respective indices, partially offset by assumption and fund regression updates.
|
|
•
|
The net loss on the macro hedge program was primarily driven by an increase in equity markets and time decay of options.
|
|
•
|
The loss associated with modified coinsurance reinsurance contracts, which are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies, was primarily driven by a decline in interest rates. The assets remain on the Company's books and the Company recorded an offsetting gain in AOCI as a result of the increase in market value of the bonds.
|
For the
three and nine months ended
September 30, 2015
, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
|
•
|
The losses related to interest rate swaps were driven by a decline in interest rates.
|
|
•
|
For the nine months
September 30, 2015
, the net loss related to the fixed payout annuity hedge was primarily driven by a decline in U.S. interest rates.
|
|
•
|
The net losses related to credit derivatives were primarily driven by widening credit spreads.
|
|
•
|
The net losses related to the combined GMWB hedging program which includes the GMWB product, reinsurance, and hedging derivatives, were primarily driven by underperformance of the underlying actively managed funds compared to their respective indices and unfavorable policyholder behavior.
|
|
•
|
For the three months ended
September 30, 2015
, the gain on the macro hedge program was primarily driven by a decline in equity markets. For the nine months ended
September 30, 2015
, the gain on the macro hedge program was primarily driven by a decline in equity markets, increased equity volatility, and a decline in interest rates, partially offset by a loss driven by time decay on options.
|
|
•
|
The gains associated with modified coinsurance reinsurance contracts, which are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies, were primarily driven by widening credit spreads, partially offset by a decline in long-term interest rates.
|
For additional disclosures regarding contingent credit related features in derivative agreements, see Note
10
-
Commitments and Contingencies
of Notes to Condensed Consolidated Financial Statements.
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity or referenced index in order to synthetically replicate investment transactions that would be permissible under the Company's investment policies. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include standard diversified portfolios of corporate and CMBS issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.
57
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
The following tables present the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type and average credit ratings, and offsetting notional amounts and fair value for credit derivatives in which the Company is assuming credit risk as of
September 30, 2016
, and
December 31, 2015
.
As of September 30, 2016
|
|
|
|
|
Underlying Referenced Credit
Obligation(s) [1]
|
|
|
|||||||||
|
Credit Derivative Type by Derivative Risk Exposure
|
Notional
Amount
[2]
|
Fair
Value
|
Weighted
Average
Years to
Maturity
|
Type
|
Average
Credit
Rating
|
Offsetting
Notional
Amount [3]
|
Offsetting
Fair
Value [3]
|
||||||||
|
Single name credit default swaps
|
|||||||||||||||
|
Investment grade risk exposure
|
$
|
169
|
|
$
|
1
|
|
4 years
|
Corporate Credit/
Foreign Gov. |
A-
|
$
|
50
|
|
$
|
—
|
|
|
Below investment grade risk exposure
|
77
|
|
—
|
|
1 year
|
Corporate Credit
|
B+
|
77
|
|
—
|
|
||||
|
Basket credit default swaps [4]
|
|||||||||||||||
|
Investment grade risk exposure
|
2,446
|
|
23
|
|
3 years
|
Corporate Credit
|
BBB+
|
1,415
|
|
(10
|
)
|
||||
|
Below investment grade risk exposure
|
50
|
|
3
|
|
5 years
|
Corporate Credit
|
B+
|
50
|
|
(3
|
)
|
||||
|
Investment grade risk exposure
|
516
|
|
(12
|
)
|
5 years
|
CMBS Credit
|
AA+
|
188
|
|
1
|
|
||||
|
Below investment grade risk exposure
|
118
|
|
(28
|
)
|
1 year
|
CMBS Credit
|
CCC
|
118
|
|
28
|
|
||||
|
Embedded credit derivatives
|
|||||||||||||||
|
Investment grade risk exposure
|
350
|
|
351
|
|
1 year
|
Corporate Credit
|
A+
|
—
|
|
—
|
|
||||
|
Total [5]
|
$
|
3,726
|
|
$
|
338
|
|
$
|
1,898
|
|
$
|
16
|
|
|||
As of December 31, 2015
|
|
|
|
|
Underlying Referenced
Credit Obligation(s) [1]
|
|
|
|||||||||
|
Credit Derivative Type by Derivative Risk Exposure
|
Notional
Amount [2]
|
Fair
Value
|
Weighted
Average
Years to
Maturity
|
Type
|
Average
Credit
Rating
|
Offsetting
Notional
Amount [3]
|
Offsetting
Fair
Value [3]
|
||||||||
|
Single name credit default swaps
|
|||||||||||||||
|
Investment grade risk exposure
|
$
|
190
|
|
$
|
(1
|
)
|
1 year
|
Corporate Credit/
Foreign Gov. |
BBB+
|
$
|
176
|
|
$
|
(1
|
)
|
|
Below investment grade risk exposure
|
77
|
|
(2
|
)
|
2 years
|
Corporate Credit
|
B
|
77
|
|
1
|
|
||||
|
Basket credit default swaps [4]
|
|||||||||||||||
|
Investment grade risk exposure
|
3,036
|
|
22
|
|
4 years
|
Corporate Credit
|
BBB+
|
1,411
|
|
(13
|
)
|
||||
|
Investment grade risk exposure
|
681
|
|
(19
|
)
|
6 years
|
CMBS Credit
|
AA+
|
212
|
|
1
|
|
||||
|
Below investment grade risk exposure
|
153
|
|
(25
|
)
|
1 year
|
CMBS Credit
|
CCC
|
153
|
|
25
|
|
||||
|
Embedded credit derivatives
|
|||||||||||||||
|
Investment grade risk exposure
|
350
|
|
346
|
|
1 year
|
Corporate Credit
|
A+
|
—
|
|
—
|
|
||||
|
Total [5]
|
$
|
4,487
|
|
$
|
321
|
|
$
|
2,029
|
|
$
|
13
|
|
|||
|
[1]
|
The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, Fitch, and Morningstar. If no rating is available from a rating agency, then an internally developed rating is used.
|
|
[2]
|
Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements, clearing house rules, and applicable law, which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.
|
|
[3]
|
The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.
|
|
[4]
|
Includes
$3.1 billion
and
$3.9 billion
as of
September 30, 2016
, and
December 31, 2015
, respectively, of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index.
|
|
[5]
|
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note
5
-
Fair Value Measurements
.
|
58
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments (continued)
Derivative Collateral Arrangements
The Company enters into various collateral arrangements in connection with its derivative instruments, which require both the pledging and accepting of collateral. As of
September 30, 2016
, and
December 31, 2015
, the Company pledged cash collateral associated with derivative instruments with a fair value of
$403
and
$488
, respectively, for which the collateral receivable has been primarily included within other assets on the Company's Condensed Consolidated Balance Sheets. The Company also pledged securities collateral associated with derivative instruments with a fair value of
$1.2 billion
and
$1.1 billion
, respectively, as of
September 30, 2016
, and
December 31, 2015
, which have been included in fixed maturities on the Condensed Consolidated Balance Sheets. The counterparties have the right to sell or re-pledge these securities.
As of
September 30, 2016
, and
December 31, 2015
, the Company accepted cash collateral associated with derivative instruments of
$378
and
$369
, respectively, which was invested and recorded in the Company's Condensed Consolidated Balance Sheets in fixed maturities and short-term investments with corresponding amounts recorded in other liabilities. The Company also accepted securities collateral as of
September 30, 2016
, and
December 31, 2015
, with a fair value of
$219
and
$100
, respectively, of which the Company has the ability to sell or repledge
$207
and
$100
, respectively.
As of September 30, 2016, and December 31, 2015, the Company had no repledged securities and did not sell any securities. In addition, as of September 30, 2016, and December 31, 2015, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Condensed Consolidated Balance Sheets.
59
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Separate Accounts, Death Benefits and Other Insurance Benefit Features
Changes in the gross GMDB/GMWB and universal life secondary guarantee benefits are as follows:
|
GMDB/GMWB [1,2]
|
Universal Life Secondary Guarantees
|
|||||
|
Liability balance as of January 1, 2016
|
$
|
863
|
|
$
|
2,313
|
|
|
Incurred [3]
|
50
|
|
234
|
|
||
|
Paid
|
(92
|
)
|
—
|
|
||
|
Liability balance as of September 30, 2016
|
$
|
821
|
|
$
|
2,547
|
|
|
Reinsurance recoverable asset, as of January 1, 2016
|
$
|
523
|
|
$
|
2,313
|
|
|
Incurred [3]
|
40
|
|
234
|
|
||
|
Paid
|
(73
|
)
|
—
|
|
||
|
Reinsurance recoverable asset, as of September 30, 2016
|
$
|
490
|
|
$
|
2,547
|
|
|
GMDB/GMWB [1,2]
|
Universal Life Secondary Guarantees
|
|||||
|
Liability balance as of January 1, 2015
|
$
|
812
|
|
$
|
2,041
|
|
|
Incurred [3]
|
76
|
|
203
|
|
||
|
Paid
|
(83
|
)
|
—
|
|
||
|
Liability balance as of September 30, 2015
|
$
|
805
|
|
$
|
2,244
|
|
|
Reinsurance recoverable asset, as of January 1, 2015
|
$
|
481
|
|
$
|
2,041
|
|
|
Incurred [3]
|
89
|
|
203
|
|
||
|
Paid
|
(66
|
)
|
—
|
|
||
|
Reinsurance recoverable asset, as of September 30, 2015
|
$
|
504
|
|
$
|
2,244
|
|
|
[1]
|
Included in Reserve for future policy benefits and unpaid losses and loss adjustment expenses on the Condensed Consolidated Balance Sheets.
|
|
[2]
|
These liability balances include all GMDB benefits, plus the life-contingent portion of GMWB benefits in excess of the return of the GRB. GMWB benefits up to the return of the GRB are embedded derivatives held at fair value and are excluded from these balances.
|
|
[3]
|
Includes the portion of assessments established as additions to reserves as well as changes in estimates affecting the reserves.
|
The following table provides details concerning GMDB/GMWB exposure as of
September 30, 2016
:
|
Account Value by GMDB/GMWB Type
|
||||||||||
|
Maximum anniversary value (“MAV”) [1]
|
Account Value (“AV”) [8]
|
Net Amount at Risk (“NAR”) [9]
|
Retained Net Amount at Risk (“RNAR”) [9]
|
Weighted Average Attained Age of Annuitant
|
||||||
|
MAV only
|
$
|
13,815
|
|
$
|
2,353
|
|
$
|
359
|
|
71
|
|
With 5% rollup [2]
|
1,188
|
|
192
|
|
61
|
|
71
|
|||
|
With Earnings Protection Benefit Rider (“EPB”) [3]
|
3,516
|
|
472
|
|
75
|
|
70
|
|||
|
With 5% rollup & EPB
|
475
|
|
104
|
|
23
|
|
73
|
|||
|
Total MAV
|
18,994
|
|
3,121
|
|
518
|
|
||||
|
Asset Protection Benefit (“APB”) [4]
|
10,766
|
|
197
|
|
131
|
|
69
|
|||
|
Lifetime Income Benefit (“LIB”) — Death Benefit [5]
|
480
|
|
6
|
|
6
|
|
69
|
|||
|
Reset [6] (5-7 years)
|
2,457
|
|
15
|
|
14
|
|
70
|
|||
|
Return of Premium (“ROP”) [7]/Other
|
8,999
|
|
65
|
|
61
|
|
68
|
|||
|
Subtotal Variable Annuity with GMDB/GMWB [10]
|
41,696
|
|
$
|
3,404
|
|
$
|
730
|
|
70
|
|
|
Less: General Account Value with GMDB/GMWB
|
3,806
|
|
||||||||
|
Subtotal Separate Account Liabilities with GMDB
|
37,890
|
|
||||||||
|
Separate Account Liabilities without GMDB
|
80,758
|
|
||||||||
|
Total Separate Account Liabilities
|
$
|
118,648
|
|
|||||||
60
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)
|
[1]
|
MAV GMDB is the greatest of current AV, net premiums paid and the highest AV on any anniversary before age
80 years
(adjusted for withdrawals).
|
|
[2]
|
Rollup GMDB is the greatest of the MAV, current AV, net premium paid and premiums (adjusted for withdrawals) accumulated at generally
5%
simple interest up to the earlier of age
80 years
or
100%
of adjusted premiums.
|
|
[3]
|
EPB GMDB is the greatest of the MAV, current AV, or contract value plus a percentage of the contract’s growth. The contract’s growth is AV less premiums net of withdrawals, subject to a cap of
200%
of premiums net of withdrawals.
|
|
[4]
|
APB GMDB is the greater of current AV or MAV, not to exceed current AV plus
25%
times the greater of net premiums and MAV (each adjusted for premiums in the past
12 months
).
|
|
[5]
|
LIB GMDB is the greatest of current AV; net premiums paid; or, for certain contracts, a benefit amount generally based on market performance that ratchets over time.
|
|
[6]
|
Reset GMDB is the greatest of current AV, net premiums paid and the most recent
five
to
seven
year anniversary AV before age
80 years
(adjusted for withdrawals).
|
|
[7]
|
ROP GMDB is the greater of current AV or net premiums paid.
|
|
[8]
|
AV includes the contract holder’s investment in the separate account and the general account.
|
|
[9]
|
NAR is defined as the guaranteed benefit in excess of the current AV. RNAR represents NAR reduced for reinsurance. NAR and RNAR are highly sensitive to equity markets movements and increase when equity markets decline.
|
|
[10]
|
Some variable annuity contracts with GMDB also have a life-contingent GMWB that may provide for benefits in excess of the return of the GRB. Such contracts included in this amount have
$6.6 billion
of total account value and weighted average attained age of
72 years
. There is
no
NAR or retained NAR related to these contracts.
|
Account balances of contracts with guarantees were invested in variable separate accounts as follows:
|
Asset type
|
As of September 30, 2016
|
As of December 31, 2015
|
||||
|
Equity securities (including mutual funds)
|
$
|
34,772
|
|
$
|
36,970
|
|
|
Cash and cash equivalents
|
3,118
|
|
3,453
|
|
||
|
Total
|
$
|
37,890
|
|
$
|
40,423
|
|
As of
September 30, 2016
and
December 31, 2015
, approximately
16%
and
17%
, respectively, of the equity securities (including mutual funds), in the preceding table were funds invested in fixed income securities and approximately
84%
and
83%
, respectively, were funds invested in equity securities.
For further information on guaranteed living benefits that are accounted for at fair value, such as GMWB, see Note
5
-
Fair Value Measurements
of Notes to Condensed Consolidated Financial Statements.
61
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Income Taxes
A reconciliation of the tax provision at the U.S. federal statutory rate to the provision (benefit) for income taxes is as follows:
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Tax provision at U.S. federal statutory rate
|
$
|
185
|
|
$
|
133
|
|
$
|
378
|
|
$
|
516
|
|
|
Tax-exempt interest
|
(31
|
)
|
(33
|
)
|
(94
|
)
|
(100
|
)
|
||||
|
Dividends-received deduction ("DRD")
|
(14
|
)
|
(36
|
)
|
(57
|
)
|
(131
|
)
|
||||
|
Decrease in valuation allowance
|
—
|
|
(60
|
)
|
(78
|
)
|
(57
|
)
|
||||
|
Sale of U.K. business
|
(50
|
)
|
—
|
|
(50
|
)
|
—
|
|
||||
|
Other
|
—
|
|
3
|
|
3
|
|
(6
|
)
|
||||
|
Provision for income taxes
|
$
|
90
|
|
$
|
7
|
|
$
|
102
|
|
$
|
222
|
|
In addition to the effect of tax-exempt interest and DRD, the Company’s effective tax rate for the
three and nine months ended
September 30, 2016
reflects a federal income tax benefit related to the sale of the Company's U.K. property and casualty runoff subsidiaries. The tax benefit of
$50
relates to the difference between the tax basis and book basis of the Company's investment in the subsidiaries. The total estimated tax benefit recognized related to the sale of the U.K. property and casualty runoff subsidiaries was
$65
. For discussion of this transaction, see Note
2
-
Business Acquisitions and Dispositions
of Notes to Condensed Consolidated Financial Statements. The Company’s effective tax rate for the nine months ended
September 30, 2016
also reflects a reduction of
$78
in deferred tax valuation allowance related to capital loss carryovers, which are fully utilized.
The Company's effective tax rate for the
three and nine months ended
September 30, 2015 reflects a
$60
benefit from the reduction of the deferred tax asset valuation allowance on the capital loss carryover due to taxable gains on sales of investments in the third quarter 2015. The Company’s effective tax rate for the
nine months ended
September 30, 2015 also reflects a
$36
net reduction in the provision for income taxes related to uncertain tax positions consisting of a
$48
reduction in the provision in second quarter 2015, offset by a
$12
increase in the provision for the three months ended September 30, 2015.
The separate account DRD is estimated for the current year using information from the most recent return, adjusted for current year equity market performance and other appropriate factors, including estimated levels of corporate dividend payments and level of policy owner equity account balances. The actual current year DRD can vary from estimates based on, but not limited to, changes in eligible dividends received in the mutual funds, amounts of distribution from these mutual funds, amounts of short-term capital gains at the mutual fund level and the Company’s taxable income before the DRD. The Company evaluates its DRD computations on a quarterly basis.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||
|
Balance, beginning of period
|
$
|
12
|
|
$
|
—
|
|
$
|
12
|
|
$
|
48
|
|
|
Gross increases - tax positions in prior period
|
—
|
|
12
|
|
—
|
|
12
|
|
||||
|
Gross decreases - tax positions in prior period [1]
|
—
|
|
—
|
|
—
|
|
(48
|
)
|
||||
|
Balance, end of period
|
$
|
12
|
|
$
|
12
|
|
$
|
12
|
|
$
|
12
|
|
|
[1]
|
Gross decreases in 2015 relate to conclusion of the Internal Revenue Service audit of the Company's 2007-2011 federal consolidated corporate income tax returns.
|
The entire amount of unrecognized tax benefits, if recognized, would affect the effective tax rate in the period of the release.
The federal audit of the years 2012 and 2013 began in March 2015 and is expected to be completed in 2017. Management believes that adequate provision has been made in the financial statements for any potential adjustments that may result from tax examinations and other tax-related matters for all open tax years.
62
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Income Taxes (continued)
Net deferred income taxes include the future tax benefits associated with the net operating loss carryover, foreign tax credit carryover, capital loss carryover, and alternative minimum tax credit carryover as follows:
|
As of
|
||||||||||||||||||
|
September 30, 2016
|
December 31, 2015
|
Expiration
|
||||||||||||||||
|
Carryover amount
|
Expected tax benefit, gross
|
Carryover amount
|
Expected tax benefit, gross
|
Dates
|
Amount
|
|||||||||||||
|
Net operating loss carryover - U.S.
|
$
|
4,820
|
|
$
|
1,687
|
|
$
|
5,182
|
|
$
|
1,814
|
|
2016
|
-
|
2020
|
$
|
3
|
|
|
2023
|
-
|
2033
|
$
|
4,817
|
|
|||||||||||||
|
Net operating loss carryover - foreign
|
$
|
76
|
|
$
|
15
|
|
$
|
89
|
|
$
|
17
|
|
No expiration
|
$
|
76
|
|
||
|
Foreign tax credit carryover
|
$
|
65
|
|
$
|
65
|
|
$
|
154
|
|
$
|
154
|
|
2020
|
-
|
2024
|
$
|
65
|
|
|
Capital loss carryover
|
$
|
—
|
|
$
|
—
|
|
$
|
222
|
|
$
|
78
|
|
|
$
|
—
|
|
||
|
Alternative minimum tax credit carryover
|
$
|
684
|
|
$
|
684
|
|
$
|
639
|
|
$
|
639
|
|
No expiration
|
$
|
684
|
|
||
Net Operating Loss Carryover
Due to limitations on the use of losses for one subsidiary, a valuation allowance of
$1
has been established as of
September 30, 2016
and December 31, 2015 in order to recognize only the portion of net operating losses that will more likely than not be realized.
Utilization of these loss carryovers is dependent upon the generation of sufficient future taxable income. Most of the net operating loss carryover originated from the Company's U.S. and international annuity business, including from the hedging program. Given the continued runoff of the U.S. fixed and variable annuity business, the exposure to taxable losses from the Talcott Resolution business is significantly lessened. Given the expected earnings of its property and casualty, group benefits and mutual fund businesses, the Company expects to generate sufficient taxable income in the future to utilize its net operating loss carryover net of the recorded valuation allowance. Although the Company projects there will be sufficient future taxable income to fully recover the remainder of the loss carryover, the Company's estimate of the likely realization may change over time.
Alternative Minimum Tax Credit and Foreign Tax Credit Carryover
These credits are available to offset regular federal income taxes from future taxable income and although the Company believes there will be sufficient future regular federal taxable income, there can be no certainty that future events will not affect the ability to utilize the credits. Additionally, the use of the foreign tax credits generally depends on the generation of sufficient taxable income to first utilize all U.S. net operating loss carryover. However, the Company has identified and begun to purchase certain investments which allow for utilization of the foreign tax credits without first using the net operating loss carryover. Consequently, the Company believes it is more likely than not the foreign tax credit carryover will be fully realized. Accordingly, no valuation allowance has been provided on either the alternative minimum tax carryover or foreign tax credit carryover.
63
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Commitments and Contingencies
Litigation
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to the uncertainties in the following discussion under the caption “Asbestos and Environmental Claims,” management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, and in addition to the matters in the following discussion, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, property, disability, life and inland marine. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
In addition to the inherent difficulty of predicting litigation outcomes, the Mutual Funds Litigation identified below purports to seek substantial damages for unsubstantiated conduct spanning a multi-year period based on novel applications of complex legal theories. The alleged damages are not quantified or factually supported in the complaint, and, in any event, the Company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. The application of the legal standard identified by the court for assessing the potentially available damages, as described below, is inherently unpredictable, and no legal precedent has been identified that would aid in determining a reasonable estimate of potential loss. Accordingly, management cannot reasonably estimate the possible loss or range of loss, if any.
Mutual Funds Litigation —
In February 2011, a derivative action was brought on behalf of six Hartford retail mutual funds in the United States District Court for the District of New Jersey, alleging that Hartford Investment Financial Services, LLC (“HIFSCO”), an indirect subsidiary of the Company, received excessive advisory and distribution fees in violation of its statutory fiduciary duty under Section 36(b) of the Investment Company Act of 1940. HIFSCO moved to dismiss and, in September 2011, the motion was granted in part and denied in part, with leave to amend the complaint. In November 2011, plaintiffs filed an amended complaint on behalf of The Hartford Global Health Fund, The Hartford Conservative Allocation Fund, The Hartford Growth Opportunities Fund, The Hartford Inflation Plus Fund, The Hartford Advisors Fund, and The Hartford Capital Appreciation Fund. Plaintiffs seek to rescind the investment management agreements and distribution plans between HIFSCO and these funds and to recover the total fees charged thereunder or, in the alternative, to recover any improper compensation HIFSCO received, in addition to lost earnings. HIFSCO filed a partial motion to dismiss the amended complaint and, in December 2012, the court dismissed without prejudice the claims regarding distribution fees and denied the motion with respect to the advisory fees claims. In March 2014, the plaintiffs filed a new complaint that, among other things, added as new plaintiffs The Hartford Floating Rate Fund and The Hartford Small Company Fund and named as a defendant Hartford Funds Management Company, LLC (“HFMC”), an indirect subsidiary of the Company which assumed the role as advisor to the funds as of January 2013. In June 2015, HFMC and HIFSCO moved for summary judgment, and plaintiffs cross-moved for partial summary judgment with respect to The Hartford Capital Appreciation Fund. In March 2016, the court, in large part, denied summary judgment for all parties. The court granted judgment for HFMC and HIFSCO with respect to all claims made by The Hartford Small Company Fund and certain claims made by The Hartford Floating Rate Fund. The court further ruled that the appropriate measure of damages on the surviving claims is the difference, if any, between the actual advisory fees paid through trial and those that could have been paid under the applicable legal standard. A bench trial on the issue of liability is scheduled to be held in November 2016.
64
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Commitments and Contingencies (continued)
Asbestos and Environmental Claims
– As discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Property and Casualty Insurance Product Reserves, Net of Reinsurance - Property & Casualty Other Operations Claims, The Hartford continues to receive asbestos and environmental claims that involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels and reinsurance coverages, as well as the methodologies it uses to estimate its exposures. Because of the significant uncertainties that limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses, particularly those related to asbestos, the ultimate liabilities may exceed the currently recorded reserves. Any such additional liability cannot be reasonably estimated now but could be material to The Hartford’s consolidated operating results and liquidity.
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical agencies, of the individual legal entity that entered into the derivative agreement. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full collateralization and in certain instances demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could impact the legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position as of
September 30, 2016
is
$1.4 billion
. Of this
$1.4 billion
the legal entities have posted collateral of
$1.6 billion
in the normal course of business. In addition, the Company has posted collateral of
$31
associated with a customized GMWB derivative. Based on derivative market values as of
September 30, 2016
a downgrade of one or two levels below the current financial strength ratings by either Moody’s or S&P would not require additional assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the collateral that we would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
11
. Equity
Capital Purchase Program ("CPP") Warrants
As of
September 30, 2016
and
December 31, 2015
, respectively, the Company has
4.1 million
and
4.4 million
of CPP warrants outstanding and exercisable. CPP warrant exercises were
0.1 million
and
1.1 million
for the
three months ended
September 30, 2016
and 2015, respectively and
0.3 million
and
2.7 million
during the
nine months ended
September 30, 2016
and
2015
, respectively.
The declaration of common stock dividends by the Company in excess of a threshold triggers a provision in the Company's warrant agreement with The Bank of New York Mellon resulting in adjustments to the CPP warrant exercise price. Accordingly, the declaration of a common stock dividend during the
three months ended
September 30, 2016
resulted in an adjustment to the CPP warrant exercise price. The CPP warrant exercise price was
$9.161
as of
September 30, 2016
and
$9.264
as of
December 31, 2015
.
Equity Repurchase Program
The following summarizes equity repurchase activity in
2016
and remaining repurchase capacity as of
September 30, 2016
.
|
Three months ended
|
Common Shares
Repurchased
|
Cost of Shares Repurchased
|
Average Price Paid per Share
|
Remaining Capacity Under Share Repurchase Authorization
|
|||||||
|
(In millions, except for per share data)
|
|||||||||||
|
March 31, 2016
|
8.4
|
|
$
|
350
|
|
$
|
41.72
|
|
|
|
|
|
June 30, 2016
|
7.8
|
|
$
|
350
|
|
$
|
44.74
|
|
|||
|
September 30, 2016
|
8.4
|
|
$
|
350
|
|
$
|
41.54
|
|
|||
|
Total
|
24.6
|
|
$
|
1,050
|
|
|
|
$
|
280
|
|
|
In October 2016, the Board of Directors authorized a new equity repurchase plan for
$1.3 billion
for the period commencing October 31, 2016 through December 31, 2017. The
$1.3 billion
authorization is in addition to the Company’s prior equity repurchase plan, which expires on December 31, 2016. During the period
October 1, 2016 through October 26, 2016
, the Company repurchased approximately
2.0 million
common shares for
$85
.
65
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Changes In and Reclassifications From Accumulated Other Comprehensive Income
Changes in AOCI, net of tax, by component consist of the following:
Three months ended September 30,
2016
|
Changes in
|
||||||||||||||||||
|
Net Unrealized Gain on Securities
|
OTTI Losses in OCI
|
Net Gain on Cash Flow Hedging Instruments
|
Foreign Currency Translation Adjustments
|
Pension and Other Postretirement Plan Adjustments
|
AOCI, net of tax
|
|||||||||||||
|
Beginning balance
|
$
|
2,437
|
|
$
|
(10
|
)
|
$
|
200
|
|
$
|
(68
|
)
|
$
|
(1,659
|
)
|
$
|
900
|
|
|
OCI before reclassifications
|
72
|
|
4
|
|
(17
|
)
|
78
|
|
—
|
|
137
|
|
||||||
|
Amounts reclassified from AOCI
|
(50
|
)
|
1
|
|
(11
|
)
|
—
|
|
10
|
|
(50
|
)
|
||||||
|
OCI, net of tax
|
22
|
|
5
|
|
(28
|
)
|
78
|
|
10
|
|
87
|
|
||||||
|
Ending balance
|
$
|
2,459
|
|
$
|
(5
|
)
|
$
|
172
|
|
$
|
10
|
|
$
|
(1,649
|
)
|
$
|
987
|
|
Nine months ended September 30, 2016
|
Changes in
|
||||||||||||||||||
|
Net Unrealized Gain on Securities
|
OTTI Losses in OCI
|
Net Gain on Cash Flow Hedging Instruments
|
Foreign Currency Translation Adjustments
|
Pension and Other Postretirement Plan Adjustments
|
AOCI, net of tax
|
|||||||||||||
|
Beginning balance
|
$
|
1,279
|
|
$
|
(7
|
)
|
$
|
130
|
|
$
|
(55
|
)
|
$
|
(1,676
|
)
|
$
|
(329
|
)
|
|
OCI before reclassifications
|
1,263
|
|
(1
|
)
|
78
|
|
65
|
|
—
|
|
1,405
|
|
||||||
|
Amounts reclassified from AOCI
|
(83
|
)
|
3
|
|
(36
|
)
|
—
|
|
27
|
|
(89
|
)
|
||||||
|
OCI, net of tax
|
1,180
|
|
2
|
|
42
|
|
65
|
|
27
|
|
1,316
|
|
||||||
|
Ending balance
|
$
|
2,459
|
|
$
|
(5
|
)
|
$
|
172
|
|
$
|
10
|
|
$
|
(1,649
|
)
|
$
|
987
|
|
Reclassifications from AOCI consist of the following:
|
AOCI
|
Amount Reclassified from AOCI
|
Affected Line Item in the Condensed
Consolidated Statement of Operations |
|||||
|
Three Months Ended September 30, 2016
|
Nine Months Ended September 30, 2016
|
||||||
|
Net Unrealized Gain on Securities
|
|||||||
|
Available-for-sale securities
|
$
|
77
|
|
$
|
128
|
|
Net realized capital losses
|
|
77
|
|
128
|
|
Total before tax
|
|||
|
27
|
|
45
|
|
Income tax expense
|
|||
|
$
|
50
|
|
$
|
83
|
|
Net income
|
|
|
OTTI Losses in OCI
|
|||||||
|
Other than temporary impairments
|
$
|
(1
|
)
|
$
|
(5
|
)
|
Net realized capital losses
|
|
(1
|
)
|
(5
|
)
|
Total before tax
|
|||
|
—
|
|
(2
|
)
|
Income tax expense
|
|||
|
$
|
(1
|
)
|
$
|
(3
|
)
|
Net income
|
|
|
Net Gains on Cash Flow Hedging Instruments
|
|||||||
|
Interest rate swaps
|
$
|
—
|
|
$
|
7
|
|
Net realized capital losses
|
|
Interest rate swaps
|
16
|
|
46
|
|
Net investment income
|
||
|
Foreign currency swaps
|
1
|
|
3
|
|
Net realized capital losses
|
||
|
17
|
|
56
|
|
Total before tax
|
|||
|
6
|
|
20
|
|
Income tax expense
|
|||
|
$
|
11
|
|
$
|
36
|
|
Net income
|
|
|
Pension and Other Postretirement Plan Adjustments
|
|||||||
|
Amortization of prior service credit
|
$
|
2
|
|
$
|
5
|
|
Insurance operating costs and other expenses
|
|
Amortization of actuarial loss
|
(17
|
)
|
(46
|
)
|
Insurance operating costs and other expenses
|
||
|
(15
|
)
|
(41
|
)
|
Total before tax
|
|||
|
(5
|
)
|
(14
|
)
|
Income tax expense
|
|||
|
$
|
(10
|
)
|
$
|
(27
|
)
|
Net income
|
|
|
Total amounts reclassified from AOCI
|
$
|
50
|
|
$
|
89
|
|
Net income
|
66
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Changes In and Reclassifications From Accumulated Other Comprehensive Income (continued)
Changes in AOCI, net of tax, by component consist of the following:
Three months ended September 30,
2015
|
Changes in
|
||||||||||||||||||
|
Net Unrealized Gain on Securities
|
OTTI Losses in OCI
|
Net Gain on Cash Flow Hedging Instruments
|
Foreign Currency Translation Adjustments
|
Pension and Other Postretirement Plan Adjustments
|
AOCI, net of tax
|
|||||||||||||
|
Beginning balance
|
$
|
1,657
|
|
$
|
(7
|
)
|
$
|
122
|
|
$
|
(24
|
)
|
$
|
(1,560
|
)
|
$
|
188
|
|
|
OCI before reclassifications
|
(113
|
)
|
2
|
|
58
|
|
(14
|
)
|
(1
|
)
|
(68
|
)
|
||||||
|
Amounts reclassified from AOCI
|
19
|
|
1
|
|
(10
|
)
|
—
|
|
10
|
|
20
|
|
||||||
|
OCI, net of tax
|
(94
|
)
|
3
|
|
48
|
|
(14
|
)
|
9
|
|
(48
|
)
|
||||||
|
Ending balance
|
$
|
1,563
|
|
$
|
(4
|
)
|
$
|
170
|
|
$
|
(38
|
)
|
$
|
(1,551
|
)
|
$
|
140
|
|
Nine months ended September 30, 2015
|
Changes in
|
||||||||||||||||||
|
Net Unrealized Gain on Securities
|
OTTI Losses in OCI
|
Net Gain on Cash Flow Hedging Instruments
|
Foreign Currency Translation Adjustments
|
Pension and Other Postretirement Plan Adjustments
|
AOCI, net of tax
|
|||||||||||||
|
Beginning balance
|
$
|
2,370
|
|
$
|
(5
|
)
|
$
|
150
|
|
$
|
(8
|
)
|
$
|
(1,579
|
)
|
$
|
928
|
|
|
OCI before reclassifications
|
(798
|
)
|
—
|
|
49
|
|
(30
|
)
|
—
|
|
(779
|
)
|
||||||
|
Amounts reclassified from AOCI
|
(9
|
)
|
1
|
|
(29
|
)
|
—
|
|
28
|
|
(9
|
)
|
||||||
|
OCI, net of tax
|
(807
|
)
|
1
|
|
20
|
|
(30
|
)
|
28
|
|
(788
|
)
|
||||||
|
Ending balance
|
$
|
1,563
|
|
$
|
(4
|
)
|
$
|
170
|
|
$
|
(38
|
)
|
$
|
(1,551
|
)
|
$
|
140
|
|
Reclassifications from AOCI consist of the following:
|
AOCI
|
Amount Reclassified from AOCI
|
Affected Line Item in the Condensed
Consolidated Statement of Operations |
|||||
|
Three Months Ended September 30, 2015
|
Nine Months Ended September 30, 2015
|
||||||
|
Net Unrealized Gain on Securities
|
|||||||
|
Available-for-sale securities
|
$
|
(29
|
)
|
$
|
14
|
|
Net realized capital losses
|
|
(29
|
)
|
14
|
|
Total before tax
|
|||
|
(10
|
)
|
5
|
|
Income tax expense
|
|||
|
$
|
(19
|
)
|
$
|
9
|
|
Net income
|
|
|
OTTI Losses in OCI
|
|||||||
|
Other than temporary impairments
|
$
|
(1
|
)
|
$
|
(2
|
)
|
Net realized capital losses
|
|
(1
|
)
|
(2
|
)
|
Total before tax
|
|||
|
—
|
|
(1
|
)
|
Income tax expense
|
|||
|
$
|
(1
|
)
|
$
|
(1
|
)
|
Net income
|
|
|
Net Gains on Cash Flow Hedging Instruments
|
|||||||
|
Interest rate swaps
|
$
|
1
|
|
$
|
4
|
|
Net realized capital losses
|
|
Interest rate swaps
|
15
|
|
47
|
|
Net investment income
|
||
|
Foreign currency swaps
|
—
|
|
(7
|
)
|
Net realized capital losses
|
||
|
16
|
|
44
|
|
Total before tax
|
|||
|
6
|
|
15
|
|
Income tax expense
|
|||
|
$
|
10
|
|
$
|
29
|
|
Net income
|
|
|
Pension and Other Postretirement Plan Adjustments
|
|||||||
|
Amortization of prior service credit
|
$
|
2
|
|
$
|
5
|
|
Insurance operating costs and other expenses
|
|
Amortization of actuarial loss
|
(17
|
)
|
(48
|
)
|
Insurance operating costs and other expenses
|
||
|
(15
|
)
|
(43
|
)
|
Total before tax
|
|||
|
(5
|
)
|
(15
|
)
|
Income tax expense
|
|||
|
$
|
(10
|
)
|
$
|
(28
|
)
|
Net income
|
|
|
Total amounts reclassified from AOCI
|
$
|
(20
|
)
|
$
|
9
|
|
Net income
|
67
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
13
. Employee Benefit Plans
The Company’s employee benefit plans are described in Note 16 - Employee Benefit Plans of Notes to Consolidated Financial Statements included in The Hartford’s 2015 Annual Report on Form 10-K.
Components of Net Periodic Cost (Benefit)
Net periodic cost (benefit) included the following components:
|
|
Pension Benefits
|
Other Postretirement Benefits
|
||||||||||
|
Three Months Ended September 30,
|
Three Months Ended September 30,
|
|||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||
|
Service cost
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Interest cost
|
60
|
|
60
|
|
2
|
|
3
|
|
||||
|
Expected return on plan assets
|
(78
|
)
|
(77
|
)
|
(2
|
)
|
(3
|
)
|
||||
|
Amortization of prior service credit
|
—
|
|
—
|
|
(2
|
)
|
(2
|
)
|
||||
|
Amortization of actuarial loss
|
15
|
|
16
|
|
2
|
|
1
|
|
||||
|
Net periodic benefit
|
$
|
(2
|
)
|
$
|
(1
|
)
|
$
|
—
|
|
$
|
(1
|
)
|
|
Pension Benefits
|
Other Postretirement Benefits
|
|||||||||||
|
Nine months ended September 30,
|
Nine months ended September 30,
|
|||||||||||
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Service cost
|
$
|
2
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
|
Interest cost
|
178
|
|
177
|
|
8
|
|
9
|
|
||||
|
Expected return on plan assets
|
(231
|
)
|
(233
|
)
|
(7
|
)
|
(9
|
)
|
||||
|
Amortization of prior service credit
|
—
|
|
—
|
|
(5
|
)
|
(5
|
)
|
||||
|
Amortization of actuarial loss
|
42
|
|
45
|
|
4
|
|
3
|
|
||||
|
Net periodic benefit
|
$
|
(9
|
)
|
$
|
(10
|
)
|
$
|
—
|
|
$
|
(2
|
)
|
68
AND RESULTS OF OPERATIONS
(Dollar amounts in millions except 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 3 and 4 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 each following discussion and in Part I, Item 1A, Risk Factors in The Hartford’s
2015
Form 10-K Annual Report, 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 July 29, 2016, the Company completed the acquisition of Maxum Specialty Insurance Group and Lattice Strategies LLC. Maxum's revenue and earnings since the acquisition date are included in the operating results of the Company's Commercial Lines reporting segment. Lattice's revenue and earnings since the acquisition date are included in the operating results of the Company's Mutual Funds reporting segment. On July 26, 2016, the Company announced it had entered into an agreement to sell its U.K. property and casualty run-off subsidiaries. The operating results of the Company's U.K. property and casualty run-off subsidiaries are included in the P&C Other Operations reporting segment. For discussion of these transactions, see Note
2
-
Business Acquisitions and Dispositions
of Notes to Condensed Consolidated Financial Statements.
The Hartford defines increases or decreases greater than or equal to 200% as “NM” or not meaningful.
INDEX
|
Description
|
Page
|
|
Commercial
Lines
|
|
|
Personal Lines
|
|
69
THE HARTFORD’S OPERATIONS
Overview
The Hartford conducts business principally in six reporting segments including Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds and Talcott Resolution, as well as a Corporate category. The Hartford includes in its Corporate category the Company’s capital raising activities (including debt financing and related interest expense, purchase accounting adjustments related to goodwill and other expenses not allocated to the reporting segments).
The Company derives its revenues principally from: (a) premiums earned for insurance coverage provided to insureds; (b) fee income, including asset management fees, on separate account and mutual fund assets and mortality and expense fees, as well as cost of insurance charges; (c) net investment income; (d) fees earned for services provided to third parties; and (e) net realized capital 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. Asset management fees and mortality and expense fees are primarily generated from separate account assets. Cost of insurance charges are assessed on the net amount at risk for investment-oriented life insurance products.
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.
The financial results in the Company’s mutual fund, ETF and variable annuity businesses depend largely on the amount of the contractholder or shareholder account value or assets under management on which it earns fees and the level of fees charged. Changes in account value or assets under management are driven by two main factors: net flows, and the market return of the funds, which is heavily influenced by the return realized in the equity markets. Net flows are comprised of deposits less withdrawals and surrenders, redemptions, death benefits, policy charges and annuitizations of investment type contracts, such as variable annuity contracts. In the mutual fund and ETF business, net flows are known as net sales. Net sales are comprised of new sales less redemptions by mutual fund customers. The Company uses the average daily value of the S&P 500 Index as an indicator for evaluating market returns of the underlying account portfolios for the variable annuity business. Financial results of variable products are highly correlated to the growth in account values or assets under management since these products generally earn fee income on a daily basis. Equity market movements could also result in benefits for or charges against deferred acquisition costs.
The profitability of fixed annuities and other “spread-based” products depends largely on the Company’s ability to earn target spreads between earned investment rates on its general account assets and interest credited to policyholders.
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, loss 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, equities, corporate bonds, municipal bonds, government debt, short-term debt, mortgage-backed securities and asset-backed securities and collateralized debt 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 after-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.
For further information on the Company's reporting segments refer to Part I, Item 1, Business - Reporting Segments in The Hartford’s
2015
Form 10-K Annual Report.
70
Financial Highlights - Third Quarter 2016
|
•
|
Net income was
$438
, or
$1.14
per basic share and
$1.12
per diluted share, compared with third quarter 2015 net income of
$381
, or
$0.92
per basic share and
$0.90
per diluted share.
|
|
•
|
Common share repurchases totaled
$350
, or
8.4 million
shares and
$83
of dividends were paid to shareholders.
|
|
•
|
Book value per diluted common share (excluding AOCI) increased to
$45.74
from
$44.74
as of June 30, 2016 primarily due to a
2%
decrease in common shares outstanding and dilutive potential common shares.
|
|
•
|
Net investment income increased
6%
to
$772
compared with third quarter 2015 due to an increase in income from limited partnerships and other alternative investments.
|
|
•
|
Net realized capital losses decreased by
$27
compared with third quarter 2015 primarily due to an increase in net gains on the sale of corporate securities, U.S. Treasury securities and municipal bonds and a change from net losses to net gains on non-qualifying derivatives, partially offset by macro hedge losses on the variable annuity hedge program.
|
|
•
|
Annualized investment yield of
4.5%
, before tax, increased from
4.1%
, before tax, compared with third quarter 2015, primarily due to higher income from limited partnerships.
|
|
•
|
Net unrealized gains, after-tax, in the investment portfolio increased by
$22
compared with a decrease of
$94
in third quarter 2015 due to lower interest rates and tighter credit spreads.
|
|
•
|
Property & Casualty written premiums compared with third quarter 2015 were flat reflecting a decrease in Personal Lines offset by an increase in Commercial Lines.
|
|
•
|
Property & Casualty combined ratio decreased
0.8
points to
96.5
compared with a combined ratio of
97.3
in third quarter 2015.
|
|
•
|
Commercial Lines current accident year underwriting results before catastrophes increased due to improved results in workers' compensation and specialty lines, partially offset by higher commercial auto losses.
|
|
•
|
Personal Lines current accident year underwriting results before catastrophes decreased due to higher auto liability loss costs, partially offset by lower direct marketing expenses.
|
|
•
|
Catastrophe losses of
$80
, before tax, increased from catastrophe losses of
$76
, before tax, in third quarter 2015.
|
|
•
|
Unfavorable prior accident year reserve development, primarily due to increased commercial auto liability reserves, totaled
$25
, before tax, compared with unfavorable prior accident year development of
$37
, before tax, in third quarter 2015.
|
|
•
|
Group Benefits net income margin increased to
6.7%
from
4.9%
in third quarter 2015.
|
|
•
|
Talcott Resolution net income was
$78
compared with
$74
in third quarter 2015.
|
71
CONSOLIDATED RESULTS OF OPERATIONS
|
Operating Summary
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
||||||||||||
|
Earned premiums
|
$
|
3,484
|
|
$
|
3,404
|
|
2
|
%
|
$
|
10,332
|
|
$
|
10,117
|
|
2
|
%
|
|
|
Fee income
|
432
|
|
448
|
|
(4
|
%)
|
1,280
|
|
1,376
|
|
(7
|
%)
|
|||||
|
Net investment income
|
772
|
|
730
|
|
6
|
%
|
2,203
|
|
2,335
|
|
(6
|
%)
|
|||||
|
Net realized capital losses
|
(17
|
)
|
(44
|
)
|
61
|
%
|
(119
|
)
|
(30
|
)
|
NM
|
|
|||||
|
Other revenues
|
24
|
|
24
|
|
—
|
%
|
67
|
|
66
|
|
2
|
%
|
|||||
|
Total revenues
|
4,695
|
|
4,562
|
|
3
|
%
|
13,763
|
|
13,864
|
|
(1
|
%)
|
|||||
|
Benefits, losses and loss adjustment expenses
|
2,780
|
|
2,710
|
|
3
|
%
|
8,563
|
|
8,085
|
|
6
|
%
|
|||||
|
Amortization of deferred policy acquisition costs
|
403
|
|
434
|
|
(7
|
%)
|
1,145
|
|
1,212
|
|
(6
|
%)
|
|||||
|
Insurance operating costs and other expenses
|
898
|
|
971
|
|
(8
|
%)
|
2,719
|
|
2,829
|
|
(4
|
%)
|
|||||
|
Loss on extinguishment of debt
|
—
|
|
—
|
|
—
|
%
|
—
|
|
21
|
|
(100
|
%)
|
|||||
|
Reinsurance gain on dispositions
|
—
|
|
(20
|
)
|
100
|
%
|
—
|
|
(28
|
)
|
100
|
%
|
|||||
|
Interest expense
|
86
|
|
88
|
|
(2
|
%)
|
257
|
|
271
|
|
(5
|
%)
|
|||||
|
Total benefits, losses and expenses
|
4,167
|
|
4,183
|
|
—
|
%
|
12,684
|
|
12,390
|
|
2
|
%
|
|||||
|
Income from continuing operations before income taxes
|
528
|
|
379
|
|
39
|
%
|
1,079
|
|
1,474
|
|
(27
|
%)
|
|||||
|
Income tax expense
|
90
|
|
7
|
|
NM
|
|
102
|
|
222
|
|
(54
|
%)
|
|||||
|
Income from continuing operations, net of tax
|
438
|
|
372
|
|
18
|
%
|
977
|
|
1,252
|
|
(22
|
%)
|
|||||
|
Income from discontinued operations, net of tax
|
—
|
|
9
|
|
(100
|
%)
|
—
|
|
9
|
|
(100
|
%)
|
|||||
|
Net income
|
$
|
438
|
|
$
|
381
|
|
15
|
%
|
$
|
977
|
|
$
|
1,261
|
|
(23
|
%)
|
|
Three months ended
September 30, 2016
compared to the three months ended
September 30, 2015
Net income, compared to the prior year period, increased for the
three months ended
September 30, 2016
primarily due to lower net realized capital losses, higher net investment income and a lower unlock charge, partially offset by the effect of a reduction in the deferred tax valuation allowance in the third quarter of 2015. An increase in earned premiums and lower insurance operating costs and other expenses due to lower direct marketing expenses was largely offset by lower fee income and higher benefits, losses and loss adjustment expenses.
Earned premiums.
The increase in earned premiums of
2%
or $80, before tax, reflected growth of
2%
in Commercial Lines and 5% in Group Benefits. For a discussion of the Company's operating results by segment, see MD&A - Results of Operations by segment.
Fee income.
The decrease in fee income was primarily due to the continued runoff of the Talcott Resolution variable annuity block.
Net investment income.
The increase in net investment income was primarily due to an increase in income from limited partnerships and other alternative investments. For further discussion of investment results, see MD&A - Investment Results, Net Investment Income (Loss).
Net realized capital losses.
The net loss of $17 in the third quarter of 2016 included an estimated loss of $59, before tax, on the pending sale of the Company's U.K. property and casualty run-off subsidiaries. Apart from the estimated loss on sale, the Company recognized net realized capital gains in the third quarter of 2016 compared to net losses in the prior year as net gains on the sale of corporate securities, U.S. Treasury securities and municipal bonds for the three months ended September 30, 2016 more than offset a change from net gains to net losses on the variable annuity hedge program. For further discussion of investment results, see MD&A - Investment Results, Net Realized Capital Gains (Losses).
Benefits, losses and loss adjustment expenses.
Incurred losses increased in both Property and Casualty and Group Benefits with the increase in Group Benefits due to the effect of a growth in earned premium and higher group life loss severity. The net increase in incurred losses for Property and Casualty was due to:
|
•
|
A $54, before tax, increase in current accident year losses and loss adjustment expenses before catastrophes in Property & Casualty, primarily resulting from the effect of Commercial Lines earned premium growth and higher loss costs in both Commercial and Personal auto.
|
72
|
•
|
Current accident year catastrophe losses of
$80
, before tax, for the
three months ended
September 30, 2016
, compared to
$76
, before tax, for the prior year period. Catastrophe losses in 2016 were primarily due to multiple wind and hail events across various U.S. geographic regions. Catastrophe losses in 2015 were primarily due to wildfires and, to a lesser extent, multiple wind and hail events across various U.S. geographic regions. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
|
|
•
|
Unfavorable prior accident year reserve development in Property and Casualty of
$25
, before tax, for the
three months ended
September 30, 2016
, compared to unfavorable reserve development of
$37
, before tax, for the prior year period.
|
|
◦
|
Prior accident year reserve development in 2016 was due to an increase in commercial auto liability predominantly for accident year 2015 primarily due to increased frequency of large claims.
|
|
◦
|
Prior accident year reserve development in 2015 was primarily due to an increase in reserves in commercial auto liability. For additional information, see MD&A - Critical Accounting Estimates, Reserve Roll Forwards and Development.
|
Insurance operating costs and other expenses
. The decrease in insurance operating costs and other expenses was primarily due to a reduction in Personal Lines direct marketing costs and lower underwriting and other expenses in Talcott Resolution, Commercial Lines and Group Benefits.
Income taxes.
Differences between the Company's effective income tax rate and the U.S. statutory rate of 35% are due primarily to tax-exempt interest earned on invested assets, the dividends received deduction and changes in the valuation allowance recorded on capital loss carryovers. The
three months ended
September 30, 2016
included a federal income tax benefit of $65 related to the pending sale of the Company's U.K. property and casualty run-off subsidiaries. The three months ended September 30, 2015 included a federal income tax benefit of
$60
related to the partial reduction of the deferred tax valuation allowance on capital loss carryovers due to taxable gains on sales of investments. For further discussion of income taxes, see Note
9
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
Nine months ended
September 30, 2016
compared to the
nine months ended
September 30, 2015
Net income, compared to the prior year period, decreased for the
nine months ended
September 30, 2016
primarily due to lower net investment income and fee income, an increase in Property & Casualty incurred losses and higher net realized capital losses, partially offset by higher earned premiums and lower insurance operating costs and other expenses due to lower direct marketing expenses. The increase in incurred losses included higher unfavorable prior accident year reserve development, an increase in catastrophe losses and an increase in current accident year losses and loss adjustment expenses before catastrophes.
Earned premiums.
The increase of
2%
or $215, before tax, reflected growth of
2%
in Commercial Lines,
1%
in Personal Lines and 3% in Group Benefits. For a discussion of the Company's operating results by segment, see the segment sections of MD&A.
Net investment income.
The decrease in net investment income was primarily due to a decrease in income from limited partnerships and other alternative investments. For further discussion of investment results, see MD&A - Investment Results, Net Investment Income (Loss).
Net realized capital losses.
The increase was primarily due to before tax losses associated with the pending sale of the Company's U.K. property and casualty run-off subsidiaries and losses associated with modified coinsurance reinsurance contracts driven by a decline in interest rates, as well as losses on equity derivatives and interest rate derivatives. For further discussion of investment results, see MD&A - Investment Results, Net Realized Capital Gains (Losses).
Benefits, losses and loss adjustment expenses.
Incurred losses increased in both Property and Casualty and Group Benefits with the increase in Group Benefits due to the effect of growth in earned premium and higher group life loss severity. The net increase in incurred losses for Property and Casualty was due to:
|
•
|
A $155, before tax, increase in current accident year losses and loss adjustment expenses before catastrophes in Property & Casualty, primarily resulting from the effect of earned premium growth and higher personal auto liability loss costs, partially offset by lower workers' compensation loss costs.
|
|
•
|
Current accident year catastrophe losses of
$355
, before tax, for the
nine months ended
September 30, 2016
, compared to
$298
, before tax, for the prior year period. Catastrophe losses in 2016 were primarily due to multiple wind and hail events across various U.S. geographic regions, concentrated in Texas and the central and southern plains and, to a lesser extent, winter storms. Catastrophe losses in 2015 were primarily due to multiple winter storms and wind and hail events across various U.S. geographic regions as well as wildfires. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
|
|
•
|
Unfavorable prior accident year reserve development in Property and Casualty of
$409
, before tax, for the
nine months ended
September 30, 2016
, compared to unfavorable reserve development of
$255
, before tax, for the prior year period.
|
73
|
◦
|
Prior accident year reserve development in 2016 was primarily due to a $268 increase in asbestos and environmental reserves and a $140 increase in personal auto liability reserves. An increase in asbestos reserves of $197 primarily related to greater than expected mesothelioma claim filings for a small percentage of defendants in specific, adverse jurisdictions. As a result, aggregate indemnity and defense costs have not declined as expected. Environmental reserves increased $71 in 2016 primarily due to deterioration associated with the tendering of new sites for policy coverage, increased defense costs stemming from individual bodily injury liability suits, and increased clean-up costs associated with waterways. Reserves were increased in Personal Lines auto liability for accident years 2014 and 2015, primarily due to higher than expected emerged auto liability frequency and severity.
|
|
◦
|
Prior accident year reserve development in 2015 was primarily due to an increase in asbestos reserves of $146 and environmental reserves of $52. For additional information, see MD&A - Critical Accounting Estimates, Reserve Roll Forwards and Development.
|
Insurance operating costs and other expenses
. The decrease in insurance operating costs and other expenses was primarily due to a reduction in Personal Lines direct marketing costs and lower underwriting and other expenses in Talcott Resolution and Group Benefits.
Income taxes.
Differences between the Company's effective income tax rate and the U.S. statutory rate of 35% are due primarily to tax-exempt interest earned on invested assets, the dividends received deduction and changes in the valuation allowance recorded on capital loss carryovers. The
nine months ended
September 30, 2016
included federal income tax benefits of
$78
related to the partial reduction of the deferred tax valuation allowance on capital loss carryovers due to taxable gains on the termination of certain derivatives during the period and $65 related to the pending sale of the Company's U.K. property and casualty run-off subsidiaries. The
nine months ended
September 30, 2015 included a federal income tax benefit of
$36
, related to uncertain tax positions and a tax benefit of $60 related to the partial reduction of the deferred tax valuation allowance on capital loss carryovers due to taxable gains on sales of investments. For further discussion of income taxes, see Note
9
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
INVESTMENT RESULTS
Composition of Invested Assets
|
|
September 30, 2016
|
December 31, 2015
|
|||||||||
|
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||
|
Fixed maturities, available-for-sale ("AFS"), at fair value
|
$
|
60,225
|
|
81.7
|
%
|
$
|
59,196
|
|
81.4
|
%
|
|
|
Fixed maturities, at fair value using the fair value option ("FVO")
|
360
|
|
0.5
|
%
|
503
|
|
0.7
|
%
|
|||
|
Equity securities, AFS, at fair value [1]
|
875
|
|
1.2
|
%
|
1,121
|
|
1.5
|
%
|
|||
|
Mortgage loans
|
5,611
|
|
7.6
|
%
|
5,624
|
|
7.7
|
%
|
|||
|
Policy loans, at outstanding balance
|
1,432
|
|
1.9
|
%
|
1,447
|
|
2.0
|
%
|
|||
|
Limited partnerships and other alternative investments
|
2,482
|
|
3.4
|
%
|
2,874
|
|
4.0
|
%
|
|||
|
Other investments [2]
|
515
|
|
0.7
|
%
|
120
|
|
0.2
|
%
|
|||
|
Short-term investments
|
2,219
|
|
3.0
|
%
|
1,843
|
|
2.5
|
%
|
|||
|
Total investments
|
$
|
73,719
|
|
100.0
|
%
|
$
|
72,728
|
|
100.0
|
%
|
|
|
[1]
|
Included equity securities at fair value using the FVO of
$282
as of
December 31, 2015
. The Company did not hold any equity securities, FVO as of
September 30, 2016
.
|
|
[2]
|
Primarily relates to derivative instruments.
|
The increase in total investments since
December 31, 2015
, was primarily the result of an increase in fixed maturities, AFS and short-term investments, partially offset by a decrease in limited partnerships and other alternative investments. The increase in fixed maturities, AFS was primarily due to an increase in valuations as a result of a decline in interest rates and tighter credit spreads, partially offset by the transfer of assets to assets held for sale related to the U.K. property and casualty run-off subsidiaries. For further information on the disposition, see Note 2 - Business Acquisitions and Dispositions of Notes to Condensed Consolidated Financial Statements. The increase in short-term investments was largely due to holding more short-term investments until those assets are reinvested into longer duration asset classes. The decline in limited partnerships and other alternative investments was primarily due to redemptions in hedge fund investments which were reinvested into other asset classes.
74
Net Investment Income (Loss)
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
|||||||||||||||||
|
(Before tax)
|
Amount
|
Yield [1]
|
Amount
|
Yield [1]
|
Amount
|
Yield [1]
|
Amount
|
Yield [1]
|
|||||||||||||
|
Fixed maturities [2]
|
$
|
589
|
|
4.2
|
%
|
$
|
608
|
|
4.3
|
%
|
$
|
1,788
|
|
4.2
|
%
|
$
|
1,811
|
|
4.2
|
%
|
|
|
Equity securities, AFS
|
5
|
|
2.7
|
%
|
8
|
|
3.7
|
%
|
22
|
|
3.3
|
%
|
19
|
|
2.5
|
%
|
|||||
|
Mortgage loans
|
62
|
|
4.4
|
%
|
67
|
|
4.8
|
%
|
182
|
|
4.3
|
%
|
207
|
|
4.9
|
%
|
|||||
|
Policy loans
|
20
|
|
5.3
|
%
|
20
|
|
5.7
|
%
|
62
|
|
5.7
|
%
|
60
|
|
5.6
|
%
|
|||||
|
Limited partnerships and other alternative investments
|
93
|
|
15.2
|
%
|
22
|
|
2.9
|
%
|
141
|
|
7.3
|
%
|
215
|
|
10.0
|
%
|
|||||
|
Other [3]
|
29
|
|
33
|
|
90
|
|
106
|
|
|||||||||||||
|
Investment expense
|
(26
|
)
|
(28
|
)
|
(82
|
)
|
(83
|
)
|
|||||||||||||
|
Total net investment income
|
772
|
|
4.5
|
%
|
730
|
|
4.1
|
%
|
2,203
|
|
4.2
|
%
|
2,335
|
|
4.4
|
%
|
|||||
|
Total net investment income excluding limited partnerships and other alternative investments
|
$
|
679
|
|
4.1
|
%
|
$
|
708
|
|
4.2
|
%
|
$
|
2,062
|
|
4.1
|
%
|
$
|
2,120
|
|
4.1
|
%
|
|
|
[1]
|
Yields calculated using annualized net investment income divided by the monthly average invested assets at cost, amortized cost, or adjusted carrying value, as applicable, excluding repurchase agreement and securities lending collateral, if any, and derivatives book value.
|
|
[2]
|
Includes net investment income on short-term investments.
|
|
[3]
|
Primarily includes income from derivatives that qualify for hedge accounting and that hedge fixed maturities.
|
Three and nine months ended
September 30, 2016
, compared to the
three and nine months ended
September 30, 2015
Total net investment income for the
three months ended
September 30, 2016
, increased as compared to the
three months ended
September 30, 2015
, primarily due to an increase in income from limited partnerships and other alternative investments. The increase in limited partnership and alternative investment income was primarily due to an increase in the valuation on private equity funds as well as losses on hedge funds in the prior year driven by negative returns on global macro and credit strategies. Total net investment income for the
nine months ended
September 30, 2016
, was lower as compared to the
nine months ended
September 30, 2015
, primarily due to lower income from limited partnerships and other alternative investments. The decline in partnership income was primarily due to higher income in the prior year due to both the sale of an underlying company within a real estate fund and higher valuations. Excluding limited partnerships and other alternative investments, net investment income for
three and nine months ended
September 30, 2016
declined as compared to the
three and nine months ended
September 30, 2015
, primarily due to lower income from make-whole premiums on fixed maturities and prepayment premiums on mortgage loans as well as the effect of reinvesting at lower interest rates and a decrease in invested asset levels as a result of the run-off of Talcott Resolution.
Annualized net investment income yield, excluding limited partnerships and other alternative investments and income received from make-whole premiums on fixed maturities and prepayment premiums on mortgage loans, was
4.0%
, for the
nine months ended
September 30, 2016
, consistent with the yield of the same period in
2015
, as the impact of reinvesting at lower rates was offset by lower liquidity levels and slightly longer portfolio duration.
The average reinvestment rate, excluding certain U.S. Treasury securities and cash equivalent securities, for the
nine months ended
September 30, 2016
, was approximately
3.4%
, which was below the average yield of sales and maturities of
4.1%
for the same period due to the current interest rate environment.
Going forward, if interest rates continue to stay at current levels, we expect the annualized net investment income yield, excluding limited partnerships and other alternative investments, to decline from the current net investment income yield due to lower reinvestment rates. The estimated impact on net investment income is subject to change as the composition of the portfolio changes through portfolio management and trading activities and changes in market conditions.
75
Net Realized Capital Gains (Losses)
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
(Before tax)
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Gross gains on sales
|
$
|
114
|
|
$
|
83
|
|
$
|
328
|
|
$
|
401
|
|
|
|
Gross losses on sales
|
(24
|
)
|
(73
|
)
|
(157
|
)
|
(333
|
)
|
|||||
|
Net other-than-temporary impairment ("OTTI") losses recognized in earnings
|
(14
|
)
|
(40
|
)
|
(44
|
)
|
(63
|
)
|
|||||
|
Valuation allowances on mortgage loans
|
—
|
|
1
|
|
—
|
|
(2
|
)
|
|||||
|
Periodic net coupon settlements on credit derivatives
|
2
|
|
3
|
|
2
|
|
8
|
|
|||||
|
Results of variable annuity hedge program
|
|||||||||||||
|
GMWB derivatives, net
|
6
|
|
(32
|
)
|
(8
|
)
|
(35
|
)
|
|||||
|
Macro hedge program
|
(64
|
)
|
51
|
|
(98
|
)
|
24
|
|
|||||
|
Total results of variable annuity hedge program
|
(58
|
)
|
19
|
|
(106
|
)
|
(11
|
)
|
|||||
|
Other, net [1]
|
(37
|
)
|
(37
|
)
|
(142
|
)
|
(30
|
)
|
|||||
|
Net realized capital gains (losses)
|
$
|
(17
|
)
|
$
|
(44
|
)
|
$
|
(119
|
)
|
$
|
(30
|
)
|
|
|
[1]
|
Includes changes in value of non-qualifying derivatives, including credit derivatives, interest rate derivatives used to manage duration, and the fixed payout annuity hedge. The three and nine months ended September 30, 2016 also include an estimated capital loss on sale of the Company's U.K. property and casualty run-off subsidiaries of
$59
, before tax. This excludes a related income tax benefit of
$65
included within income tax expense on the Condensed Consolidated Statements of Operations, for an estimated after-tax net gain of
$6
on the sale.
|
Details on the Company’s net realized capital gains and losses are as follows:
Gross Gains and Losses on Sales
|
•
|
Gross gains on sales for the
three and nine months ended
September 30, 2016
, were primarily due to gains on the sale of U.S. Treasury securities, corporate securities, including tender offers, and municipal bonds. Gross losses on sales for the
three and nine months ended
September 30, 2016
, were primarily the result of losses on the sale of corporate and equity securities. The sales were primarily a result of duration, liquidity and credit management.
|
|
•
|
Gross gains on sales for the
three months ended
September 30, 2015
, were primarily due to gains on the sale of corporate and U.S. treasury securities. Gross losses on sales for the
three months ended
September 30, 2015
, were primarily the result of losses on the sale of corporate securities. Gross gains on sales for the
nine months ended
September 30, 2015
, were primarily due to gains on the sale of corporate, U.S treasury and equity securities. Gross losses on sales for the
nine months ended
September 30, 2015
, were primarily the result of losses on the sale of corporate securities as well as equity and U.S. treasury securities. The sales were primarily a result of duration, liquidity and credit management, as well as tactical changes to the portfolio as a result of changing market conditions.
|
Net OTTI Losses
|
•
|
See Other-Than-Temporary Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
|
76
Variable Annuity Hedge Program
|
•
|
For the three months ended
September 30, 2016
, the net gain related to the combined GMWB hedging program which includes the GMWB product, reinsurance, and hedging derivatives, was primarily due to gains of
$16
due to favorable policyholder behavior and gains of
$11
driven by outperformance of the underlying actively managed funds as compared to their respective indices, partially offset by losses of
$11
primarily resulting from assumption updates and losses of
$6
due to an increase in interest rates.
|
|
•
|
For the nine months ended
September 30, 2016
, the net loss related to the combined GMWB hedging program was primarily due to losses of
$19
driven by an increase in U.S equity markets, partially offset by non-market gains of
$14
. The non-market gains include favorable policyholder behavior and outperformance of the underlying actively managed funds compared to their respective indices, partially offset by assumption and fund regression updates.
|
|
•
|
For the three and nine months ended
September 30, 2016
, the losses on the macro hedge program were primarily due to losses of
$25
and
$58
, respectively, driven by an increase in equity markets and losses of
$19
and
$40
, respectively, driven by time decay on options. Additional losses of
$9
for the three months ended
September 30, 2016
were driven by a decline in equity volatility.
|
|
•
|
For the three and nine months ended
September 30, 2015
, the net losses related to the combined GMWB hedging program were primarily due to losses of
$21
and
$10
, respectively, resulting from the underperformance of the underlying actively managed funds compared to their respective indices and losses of
$9
and
$12
, respectively, driven by unfavorable policyholder behavior.
|
|
•
|
For the three months ended
September 30, 2015
, the gain on the macro hedge program was primarily due to gains of
$42
driven by a decline in equity markets. For the nine months ended
September 30, 2015
the gain on the macro hedge program was primarily due to gains of
$39
driven by a decline in equity markets, gains of
$12
driven by increased equity volatility, and gains of
$8
driven by a decline in interest rates. The gains for the nine months ended
September 30, 2015
were partially offset by losses of
$33
driven by time decay on options.
|
Other, Net
|
•
|
Other, net loss for the three months ended
September 30, 2016
, primarily included a loss of
$59
associated with the Company's U.K. property and casualty run-off subsidiaries currently held for sale, partially offset by gains of
$10
on credit derivatives driven by credit spread tightening.
|
|
•
|
Other, net loss for the nine months ended
September 30, 2016
, was primarily due to a loss of
$59
associated with the Company's U.K. property and casualty run-off subsidiaries currently held for sale and losses of
$48
associated with modified coinsurance reinsurance contracts driven by a decline in interest rates. Modified coinsurance reinsurance contracts are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies. The assets remain on the Company's books and the Company recorded an offsetting gain in AOCI as a result of the increase in market value of the bonds. Additional losses for the nine months ended
September 30, 2016
, were due to losses of
$28
on equity derivatives which were hedging against a decline in the equity market on the investment portfolio and losses of
$16
on interest rate derivatives driven by a decline in interest rates.
|
|
•
|
Other, net loss for the three months ended
September 30, 2015
, was primarily due to losses of
$20
on credit derivatives driven by widening credit spreads and losses of
$11
on interest derivatives due to a decline in interest rates. Other, net loss for the nine months ended
September 30, 2015
, was primarily due to losses of
$28
on credit derivatives driven by widening credit spreads and losses of
$24
related to fixed payout annuity hedge primarily driven by a decline in U.S. interest rates. These losses for the nine months ended
September 30, 2015
, were partially offset by gains of
$28
related to modified coinsurance reinsurance contracts, primarily driven by widening credit spreads, partially offset by a decline in long-term interest rates.
|
77
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“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;
|
|
•
|
estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life-type contracts;
|
|
•
|
evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on mortgage loans;
|
|
•
|
living benefits required to be fair valued (in other policyholder funds and benefits payable);
|
|
•
|
evaluation of goodwill for impairment;
|
|
•
|
valuation of investments and derivative instruments;
|
|
•
|
valuation allowance on deferred tax assets; and
|
|
•
|
contingencies relating to corporate litigation and regulatory matters.
|
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 Condensed Consolidated Financial Statements. 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.
The Company’s critical accounting estimates are discussed in Part II, Item 7 MD&A in the Company’s
2015
Form 10-K Annual Report. In addition, Note
1
-
Basis of Presentation and Significant Accounting Policies
of Notes to Consolidated Financial Statements included in the Company's
2015
Form 10-K Annual Report should be read in conjunction with this section to assist with obtaining an understanding of the underlying accounting policies related to these estimates. The following discussion updates certain of the Company’s critical accounting estimates as of
September 30, 2016
.
78
Property & Casualty Insurance Product Reserves, Net of Reinsurance
Reserve Roll Forwards and Development
Based on the results of the quarterly reserve review process, the Company determines the appropriate reserve adjustments, if any, to record. Recorded reserve estimates are adjusted after consideration of numerous factors, including but not limited to, the magnitude of the difference between the actuarial indication and the recorded reserves, improvement or deterioration of actuarial indications in the period, the maturity of the accident year, trends observed over the recent past and the level of volatility within a particular line of business. In general, adjustments are made more quickly to more mature accident years and less volatile lines of business. Such adjustments of reserves 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 and is set forth in the paragraphs and tables that follow.
A roll-forward of property and casualty insurance product liabilities for unpaid losses and loss adjustment expenses follows:
|
Nine Months Ended September 30, 2016
|
||||||||||||
|
Commercial
Lines
|
Personal
Lines
|
Property & Casualty Other Operations
|
Total Property & Casualty Insurance
|
|||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
16,559
|
|
$
|
1,845
|
|
$
|
3,421
|
|
$
|
21,825
|
|
|
Reinsurance and other recoverables
|
2,293
|
|
19
|
|
570
|
|
2,882
|
|
||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
14,266
|
|
1,826
|
|
2,851
|
|
18,943
|
|
||||
|
Add: Maxum acquisition [4]
|
122
|
|
—
|
|
—
|
|
122
|
|
||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
2,820
|
|
2,040
|
|
—
|
|
4,860
|
|
||||
|
Current accident year catastrophes [5]
|
167
|
|
188
|
|
—
|
|
355
|
|
||||
|
Prior accident year development
|
8
|
|
131
|
|
270
|
|
409
|
|
||||
|
Total provision for unpaid losses and loss adjustment expenses
|
2,995
|
|
2,359
|
|
270
|
|
5,624
|
|
||||
|
Less: payments
|
2,582
|
|
2,228
|
|
471
|
|
5,281
|
|
||||
|
Less: net reserves transferred to liabilities held for sale [3]
|
—
|
|
—
|
|
487
|
|
487
|
|
||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
14,801
|
|
1,957
|
|
2,163
|
|
18,921
|
|
||||
|
Reinsurance and other recoverables
|
2,299
|
|
18
|
|
377
|
|
2,694
|
|
||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
17,100
|
|
$
|
1,975
|
|
$
|
2,540
|
|
$
|
21,615
|
|
|
Earned premiums
|
$
|
4,950
|
|
$
|
2,931
|
|
||||||
|
Loss and loss expense paid ratio [1]
|
52.2
|
|
76.0
|
|
||||||||
|
Loss and loss expense incurred ratio
|
60.5
|
|
80.5
|
|
||||||||
|
Prior accident year development (pts) [2]
|
0.2
|
|
4.5
|
|
||||||||
|
[1]
|
The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums.
|
|
[2]
|
“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
|
|
[3]
|
Liabilities to be transferred to the buyer in connection with the pending sale of the Company's U.K. property and casualty run-off subsidiaries are classified as held for sale in the Company's Condensed Consolidated Balance Sheets as of September 30, 2016.
|
|
[4]
|
Represents Maxum reserves, net as of the acquisition date.
|
|
[5]
|
Contributing to the current accident year catastrophes losses were the following events:
|
|
Nine Months Ended September 30, 2016
|
|||||||||
|
Category
|
Commercial Lines
|
Personal Lines
|
Total Property & Casualty Insurance
|
||||||
|
Wind and hail [1]
|
$
|
142
|
|
$
|
179
|
|
$
|
321
|
|
|
Winter storms [1]
|
25
|
|
7
|
|
32
|
|
|||
|
Wildfire
|
—
|
|
2
|
|
2
|
|
|||
|
Total
|
$
|
167
|
|
$
|
188
|
|
$
|
355
|
|
|
[1]
|
These amounts represent an aggregation of multiple catastrophes.
|
79
Prior accident year development recorded in
2016
Included within prior accident year development were the following increases (decreases) to reserves:
|
Three Months Ended September 30, 2016
|
||||||||||||
|
|
Commercial Lines
|
Personal
Lines
|
Property & Casualty Other Operations
|
Total Property & Casualty Insurance
|
||||||||
|
Auto liability
|
$
|
18
|
|
$
|
—
|
|
$
|
—
|
|
$
|
18
|
|
|
Homeowners
|
—
|
|
1
|
|
—
|
|
1
|
|
||||
|
Professional liability
|
(2
|
)
|
—
|
|
—
|
|
(2
|
)
|
||||
|
Package business
|
(2
|
)
|
—
|
|
—
|
|
(2
|
)
|
||||
|
General liability
|
1
|
|
—
|
|
—
|
|
1
|
|
||||
|
Commercial property
|
5
|
|
—
|
|
—
|
|
5
|
|
||||
|
Workers’ compensation
|
(4
|
)
|
—
|
|
—
|
|
(4
|
)
|
||||
|
Workers’ compensation discount accretion
|
7
|
|
—
|
|
—
|
|
7
|
|
||||
|
Catastrophes
|
(3
|
)
|
1
|
|
—
|
|
(2
|
)
|
||||
|
Other reserve re-estimates, net
|
2
|
|
1
|
|
—
|
|
3
|
|
||||
|
Total prior accident year development
|
$
|
22
|
|
$
|
3
|
|
$
|
—
|
|
$
|
25
|
|
|
Nine Months Ended September 30, 2016
|
||||||||||||
|
|
Commercial
Lines
|
Personal
Lines
|
Property &
Casualty Other
Operations
|
Total
Property &
Casualty
Insurance
|
||||||||
|
Auto liability
|
$
|
19
|
|
$
|
140
|
|
$
|
—
|
|
$
|
159
|
|
|
Homeowners
|
—
|
|
(4
|
)
|
—
|
|
(4
|
)
|
||||
|
Professional liability
|
(35
|
)
|
—
|
|
—
|
|
(35
|
)
|
||||
|
Package business
|
50
|
|
—
|
|
—
|
|
50
|
|
||||
|
General liability
|
67
|
|
—
|
|
—
|
|
67
|
|
||||
|
Bond
|
(6
|
)
|
—
|
|
—
|
|
(6
|
)
|
||||
|
Commercial property
|
2
|
|
—
|
|
—
|
|
2
|
|
||||
|
Net asbestos reserves
|
—
|
|
—
|
|
197
|
|
197
|
|
||||
|
Net environmental reserves
|
—
|
|
—
|
|
71
|
|
71
|
|
||||
|
Workers’ compensation
|
(87
|
)
|
—
|
|
—
|
|
(87
|
)
|
||||
|
Workers’ compensation discount accretion
|
21
|
|
—
|
|
—
|
|
21
|
|
||||
|
Catastrophes
|
(4
|
)
|
(3
|
)
|
—
|
|
(7
|
)
|
||||
|
Uncollectible reinsurance
|
(30
|
)
|
—
|
|
—
|
|
(30
|
)
|
||||
|
Other reserve re-estimates, net
|
11
|
|
(2
|
)
|
2
|
|
11
|
|
||||
|
Total prior accident years development
|
$
|
8
|
|
$
|
131
|
|
$
|
270
|
|
$
|
409
|
|
During the
three and nine months ended
September 30, 2016
, the Company’s re-estimates of prior accident year reserves included the following significant reserve changes:
|
•
|
Increased reserves in commercial auto liability, predominately for the 2015 accident year, primarily due to increased frequency of large claims.
|
|
•
|
Increased reserves in personal auto liability, primarily related to increased bodily injury frequency and severity for the 2015 accident year, including for uninsured and under-insured motorist claims, and increased bodily injury severity for the 2014 accident year. Increases in auto liability loss costs were across both the direct and agency distribution channels.
|
|
•
|
Decreased reserves in professional liability for claims made years 2008 - 2013, primarily for large accounts, including on non-securities class action cases. Claim costs have emerged favorably as these years have matured and management has placed more weight on the emerged experience.
|
|
•
|
Increased reserves in small commercial package business due to higher than expected severity on liability claims, principally for accident years 2013 - 2015. Severity for these accident years has developed unfavorably and management has placed more weight on emerged experience.
|
|
•
|
Increased reserves in general liability for accident years 2012 - 2015 primarily due to higher severity losses incurred on a class of business that insures service and maintenance contractors and, in second quarter 2016, increased reserves in general liability for accident years 2008 and 2010 primarily due to indemnity losses and legal costs associated with a litigated claim.
|
80
|
•
|
Workers’ compensation reserves consider favorable emergence on reported losses for recent accident years as well as a partially offsetting adverse impact related to two recent Florida Supreme Court rulings that have increased the Company’s exposure to workers’ compensation claims in that state. The favorable emergence has been driven by lower frequency and, to a lesser extent, lower medical severity and management has placed additional weight on this favorable experience as it becomes more credible.
|
|
•
|
Decreased reserves for uncollectible reinsurance as a result of giving greater weight to favorable collectability experience in recent calendar periods in estimating future collections.
|
|
•
|
Refer to the Property & Casualty Other Operations sections for discussion of the increase in net asbestos, net environmental and other reserve re-estimates, net.
|
A roll-forward of property and casualty insurance product liabilities for unpaid losses and loss adjustment expenses follows:
|
Nine Months Ended September 30, 2015
|
||||||||||||
|
|
Commercial
Lines [3]
|
Personal
Lines
|
Property & Casualty Other Operations
|
Total Property & Casualty Insurance
|
||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
16,465
|
|
$
|
1,874
|
|
$
|
3,467
|
|
$
|
21,806
|
|
|
Reinsurance and other recoverables
|
2,459
|
|
18
|
|
564
|
|
3,041
|
|
||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
14,006
|
|
1,856
|
|
2,903
|
|
18,765
|
|
||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
2,789
|
|
1,916
|
|
—
|
|
4,705
|
|
||||
|
Current accident year catastrophes [3]
|
108
|
|
190
|
|
—
|
|
298
|
|
||||
|
Prior accident year development
|
69
|
|
(18
|
)
|
204
|
|
255
|
|
||||
|
Total provision for unpaid losses and loss adjustment expenses
|
2,966
|
|
2,088
|
|
204
|
|
5,258
|
|
||||
|
Less: payments
|
2,743
|
|
2,062
|
|
215
|
|
5,020
|
|
||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
14,229
|
|
1,882
|
|
2,892
|
|
19,003
|
|
||||
|
Reinsurance and other recoverables
|
2,343
|
|
17
|
|
589
|
|
2,949
|
|
||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
16,572
|
|
$
|
1,899
|
|
$
|
3,481
|
|
$
|
21,952
|
|
|
Earned premiums
|
$
|
4,853
|
|
$
|
2,895
|
|
||||||
|
Loss and loss expense paid ratio [1]
|
56.5
|
|
71.2
|
|
||||||||
|
Loss and loss expense incurred ratio
|
61.1
|
|
72.1
|
|
||||||||
|
Prior accident year development (pts) [2]
|
1.4
|
|
(0.6
|
)
|
||||||||
|
[1]
|
The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums.
|
|
[2]
|
“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
|
|
[3]
|
Contributing to the current accident year catastrophes losses were the following events:
|
|
Nine Months Ended September 30, 2015
|
|||||||||
|
Category
|
Commercial Lines
|
Personal Lines
|
Total Property & Casualty Insurance
|
||||||
|
Winter storms [1]
|
$
|
60
|
|
$
|
25
|
|
$
|
85
|
|
|
Tornadoes [1]
|
18
|
|
27
|
|
45
|
|
|||
|
Wind and hail [1]
|
27
|
|
81
|
|
108
|
|
|||
|
Other [2]
|
3
|
|
57
|
|
60
|
|
|||
|
Total
|
$
|
108
|
|
$
|
190
|
|
$
|
298
|
|
|
[1]
|
These amounts represent an aggregation of multiple catastrophes.
|
|
[2]
|
Consists primarily of wildfires.
|
81
Prior accident year development recorded in
2015
Included within prior accident year development were the following increases (decreases) to reserves:
|
Three Months Ended September 30, 2015
|
||||||||||||
|
|
Commercial Lines
|
Personal
Lines
|
Property & Casualty Other Operations
|
Total Property & Casualty Insurance
|
||||||||
|
Auto liability
|
$
|
30
|
|
$
|
(7
|
)
|
$
|
—
|
|
$
|
23
|
|
|
Homeowners
|
—
|
|
2
|
|
—
|
|
2
|
|
||||
|
Professional liability
|
(6
|
)
|
—
|
|
—
|
|
(6
|
)
|
||||
|
Package business
|
3
|
|
—
|
|
—
|
|
3
|
|
||||
|
General liability
|
9
|
|
—
|
|
—
|
|
9
|
|
||||
|
Commercial property
|
4
|
|
—
|
|
—
|
|
4
|
|
||||
|
Workers’ compensation discount accretion
|
7
|
|
—
|
|
—
|
|
7
|
|
||||
|
Catastrophes
|
1
|
|
—
|
|
—
|
|
1
|
|
||||
|
Other reserve re-estimates, net
|
2
|
|
(9
|
)
|
1
|
|
(6
|
)
|
||||
|
Total prior accident year development
|
$
|
50
|
|
$
|
(14
|
)
|
$
|
1
|
|
$
|
37
|
|
|
Nine Months Ended September 30, 2015
|
||||||||||||
|
|
Commercial
Lines
|
Personal
Lines
|
Property &
Casualty Other
Operations
|
Total
Property &
Casualty
Insurance
|
||||||||
|
Auto liability
|
$
|
60
|
|
$
|
(7
|
)
|
$
|
—
|
|
$
|
53
|
|
|
Homeowners
|
—
|
|
9
|
|
—
|
|
9
|
|
||||
|
Professional liability
|
(23
|
)
|
—
|
|
—
|
|
(23
|
)
|
||||
|
Package business
|
8
|
|
—
|
|
—
|
|
8
|
|
||||
|
General liability
|
(7
|
)
|
—
|
|
—
|
|
(7
|
)
|
||||
|
Commercial property
|
(2
|
)
|
—
|
|
—
|
|
(2
|
)
|
||||
|
Net asbestos reserves
|
—
|
|
—
|
|
146
|
|
146
|
|
||||
|
Net environmental reserves
|
—
|
|
—
|
|
55
|
|
55
|
|
||||
|
Workers’ compensation discount accretion
|
22
|
|
—
|
|
—
|
|
22
|
|
||||
|
Catastrophes
|
(1
|
)
|
(16
|
)
|
—
|
|
(17
|
)
|
||||
|
Other reserve re-estimates, net
|
12
|
|
(4
|
)
|
3
|
|
11
|
|
||||
|
Total prior accident years development
|
$
|
69
|
|
$
|
(18
|
)
|
$
|
204
|
|
$
|
255
|
|
During the
three and nine months ended
September 30, 2015
, the Company’s re-estimates of prior accident year reserves included the following significant reserve changes:
|
•
|
Increased reserves in commercial auto liability due to increased severity of large claims, predominantly for accident years 2010 through 2013.
|
|
•
|
Decreased reserves in professional liability for claims made years 2009 - 2011 primarily for large accounts. Claim costs for these accident years have emerged favorably as these years have matured and management has placed more weight on the emerged experience.
|
|
•
|
Apart from workers' compensation discount accretion, changes in workers' compensation reserves netted to zero, as a decrease in nominal reserves was offset by a reduction in the amount of workers' compensation loss reserve discount driven by the improvement in claim closure rates resulting in a decrease in the number of outstanding claims for permanently disabled claimants.
|
|
•
|
Decreased catastrophe reserves primarily for accident year 2014 as fourth quarter 2014 catastrophes have developed favorably.
|
|
•
|
Within Other reserve re-estimates, net, decreased contract surety reserves across several accident years and decreased commercial surety reserves for accident years 2012 - 2014 as a result of lower emerged losses. These reserve decreases were offset by an increase in reserves for commercial surety related to accident years 2007 and prior as the number of new claims reported has outpaced expectations.
|
|
•
|
Refer to the Property & Casualty Other Operations sections for discussion of the increase to net asbestos reserves, net environmental reserves and other reserve re-estimates, net.
|
82
Property & Casualty Other Operations Claims
Reserve Activity
Reserves and reserve activity in Property & Casualty Other Operations are categorized and reported as asbestos, environmental, or “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, molestation and other long-tail liabilities.
The following tables present reserve activity, inclusive of estimates for both reported and incurred but not reported claims, net of reinsurance, for Property & Casualty Other Operations, categorized by asbestos, environmental and all other claims.
Property & Casualty Other Operations Losses and Loss Adjustment Expenses
|
Three Months Ended September 30, 2016
|
Asbestos
|
|
Environmental
|
All Other [1]
|
Total
|
||||||||
|
Beginning liability—net [2][3] [4]
|
$
|
1,565
|
|
|
$
|
302
|
|
$
|
848
|
|
$
|
2,715
|
|
|
Losses and loss adjustment expenses incurred
|
—
|
|
|
—
|
|
—
|
|
$
|
—
|
|
|||
|
Less: losses and loss adjustment expenses paid
|
38
|
|
|
9
|
|
18
|
|
$
|
65
|
|
|||
|
Less: net reserves transferred to liabilities held for sale [6]
|
205
|
|
41
|
|
241
|
|
$
|
487
|
|
||||
|
Ending liability – net [2][3]
|
$
|
1,322
|
|
[5]
|
$
|
252
|
|
$
|
589
|
|
$
|
2,163
|
|
|
Nine Months Ended September 30, 2016
|
Asbestos
|
|
Environmental
|
All Other [1]
|
Total
|
||||||||
|
Beginning liability—net [2][4]
|
$
|
1,712
|
|
|
$
|
247
|
|
$
|
892
|
|
$
|
2,851
|
|
|
Losses and loss adjustment expenses incurred
|
197
|
|
71
|
|
2
|
|
270
|
|
|||||
|
Less: losses and loss adjustment expenses paid
|
382
|
|
[4]
|
25
|
|
64
|
|
471
|
|
||||
|
Less: net reserves transferred to liabilities held for sale [6]
|
205
|
|
41
|
|
241
|
|
487
|
|
|||||
|
Ending liability – net [2][3]
|
$
|
1,322
|
|
[5]
|
$
|
252
|
|
$
|
589
|
|
$
|
2,163
|
|
|
[1]
|
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, the portion of the allowance for uncollectible reinsurance attributable to that commutation or settlement, if any, is reclassified to the appropriate cause of loss.
|
|
[2]
|
Excludes amounts reported in Commercial Lines and Personal Lines reporting segments (collectively “Ongoing Operations”) for asbestos and environmental net liabilities of $14 and $9 respectively, as of December 31, 2015 and $15 and $7, respectively, as of
September 30, 2016
. Total net losses and loss adjustment expenses incurred for the
three and nine months ended
September 30, 2016
includes $3 and $16, respectively, related to asbestos and environmental claims. Total net losses and loss adjustment expenses paid for the
three and nine months ended
September 30, 2016
includes $6 and $17, respectively, related to asbestos and environmental claims.
|
|
[3]
|
Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were
$2,222
and
$287
, respectively, as of December 31, 2015 and $2,012 and $332 as of
September 30, 2016
.
|
|
[4]
|
Includes payment of $262 related to the settlement of PPG Industries, Inc. ("PPG") asbestos liabilities, net of reinsurance billed to third-party reinsurers.
|
|
[5]
|
The one year and average three year net paid amounts for asbestos claims, including claims in Ongoing Operations, were $427 and $279, respectively, resulting in a one year net survival ratio of 3.6 and a three year net survival ratio of 5.5. Excluding the impact of the PPG settlement, the average one year and three year paid amounts were $165 and $192 respectively, resulting in a one year net survival ratio of 9.3 and a three year net survival ratio of 8.0. Net survival ratio is the quotient of the net carried reserves divided by the average annual payment amount and is an indication of the number of years that the net carried reserve would last (i.e. survive) if the future annual claim payments were consistent with the calculated historical average.
|
|
[6]
|
Liabilities to be transferred to the buyer in connection with the pending sale of the Company's U.K. property and casualty run-off subsidiaries are classified as held for sale in the Company's Condensed Consolidated Balance Sheets as of September 30, 2016.
|
83
|
Three Months Ended September 30, 2015
|
Asbestos
|
Environmental
|
All Other
|
Total
|
|||||||||
|
Beginning liability—net [1][2]
|
$
|
1,777
|
|
$
|
271
|
|
$
|
915
|
|
$
|
2,963
|
|
|
|
Losses and loss adjustment expenses incurred
|
—
|
|
—
|
|
1
|
|
1
|
|
|||||
|
Less : losses and loss adjustment expenses paid
|
42
|
|
17
|
|
13
|
|
72
|
|
|||||
|
Ending liability – net [1][2]
|
$
|
1,735
|
|
[3]
|
$
|
254
|
|
$
|
903
|
|
$
|
2,892
|
|
|
Nine Months Ended September 30, 2015
|
Asbestos
|
|
Environmental
|
All Other
|
Total
|
||||||||
|
Beginning liability—net [1][2]
|
$
|
1,710
|
|
|
$
|
241
|
|
$
|
952
|
|
$
|
2,903
|
|
|
Losses and loss adjustment expenses incurred
|
146
|
|
55
|
|
3
|
|
204
|
|
|||||
|
Less: losses and loss adjustment expenses paid
|
121
|
|
42
|
|
52
|
|
215
|
|
|||||
|
Ending liability – net [1][2]
|
$
|
1,735
|
|
[3]
|
$
|
254
|
|
$
|
903
|
|
$
|
2,892
|
|
|
[1]
|
Excludes amounts reported in Commercial Lines and Personal Lines reporting segments (collectively “Ongoing Operations”) for asbestos and environmental net liabilities of
$16
and
$6
, respectively, as of December 31, 2014 and
$14
and
$9
, respectively, as of
September 30, 2015
. Total net losses and loss adjustment expenses incurred for the
three and nine months ended
September 30, 2015
includes $4 and $9, respectively, related to asbestos and environmental claims. Total net losses and loss adjustment expenses paid for the
three and nine months ended
September 30, 2015
includes
$4
and $9, respectively, related to asbestos and environmental claims.
|
|
[2]
|
Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were
$2,193
and
$267
, respectively, as of December 31, 2014 and
$2,248
and
$296
as of
September 30, 2015
.
|
|
[3]
|
The one year and average three year net paid amounts for asbestos claims, including Ongoing Operations, were
$179
and
$203
, respectively, resulting in a one year net survival ratio of
9.8
and a three year net survival ratio of
8.6
. Net survival ratio is the quotient of the net carried reserves divided by the average annual payment amount and is an indication of the number of years that the net carried reserve would last (i.e. survive) if the future annual claim payments were consistent with the calculated historical average.
|
For paid and incurred losses and loss adjustment expenses reporting, the Company classifies its asbestos and environmental reserves into three categories: Direct, Assumed Reinsurance and London Market. Direct insurance includes primary and excess coverage. Assumed Reinsurance includes both “treaty” reinsurance (covering broad categories of claims or blocks of business) and “facultative” reinsurance (covering specific risks or individual policies of primary or excess insurance companies). London Market business includes the business written by one or more of the Company’s subsidiaries in the United Kingdom, which are no longer active in the insurance or reinsurance business. Such business includes both direct insurance and assumed reinsurance. Of the three categories of claims (Direct, Assumed Reinsurance and London Market), direct policies tend to have the greatest factual development from which to estimate the Company’s exposures.
Assumed insurance exposures are less predictable than direct insurance exposures because the Company does not generally receive notice of a reinsurance claim until the underlying direct insurance claim is mature. This causes a delay in the receipt of information at the reinsurer level and adds to the uncertainty of estimating related reserves.
London Market exposures are the most uncertain of the three categories of claims. As a participant in the London Market (comprised of both Lloyd's of London and London Market companies), certain subsidiaries of the Company wrote business on a subscription basis, with those subsidiaries' involvement being limited to a relatively small percentage of a total contract placement. Claims are reported, via a broker, to the “lead” underwriter and, once agreed to, are presented to the following markets for concurrence. This reporting and claim agreement process makes estimating liabilities for this business the most uncertain of the three categories of claims.
The following table sets forth paid and incurred loss activity by the three categories of claims for asbestos and environmental.
Paid and Incurred Losses and Loss Adjustment Expenses (“LAE”) Development – Asbestos and Environmental
|
|
Asbestos [1]
|
Environmental [1]
|
||||||||||
|
Three Months Ended September 30, 2016
|
Paid
Losses & LAE |
Incurred
Losses & LAE |
Paid
Losses & LAE |
Incurred
Losses & LAE |
||||||||
|
Gross
|
||||||||||||
|
Direct
|
$
|
27
|
|
$
|
—
|
|
$
|
7
|
|
$
|
—
|
|
|
Assumed Reinsurance
|
17
|
|
—
|
|
1
|
|
—
|
|
||||
|
London Market
|
3
|
|
—
|
|
1
|
|
—
|
|
||||
|
Total
|
47
|
|
—
|
|
9
|
|
—
|
|
||||
|
Ceded
|
(9
|
)
|
—
|
|
—
|
|
—
|
|
||||
|
Net
|
$
|
38
|
|
$
|
—
|
|
$
|
9
|
|
$
|
—
|
|
84
|
|
Asbestos [1]
|
Environmental [1]
|
||||||||||
|
Nine Months Ended September 30, 2016
|
Paid
Losses & LAE
|
Incurred
Losses & LAE
|
Paid
Losses & LAE
|
Incurred
Losses & LAE
|
||||||||
|
Gross
|
||||||||||||
|
Direct
|
$
|
421
|
|
$
|
257
|
|
$
|
24
|
|
$
|
77
|
|
|
Assumed Reinsurance
|
33
|
|
—
|
|
3
|
|
—
|
|
||||
|
London Market
|
13
|
|
—
|
|
4
|
|
—
|
|
||||
|
Total
|
467
|
|
257
|
|
31
|
|
77
|
|
||||
|
Ceded
|
(85
|
)
|
(60
|
)
|
(6
|
)
|
(6
|
)
|
||||
|
Net
|
$
|
382
|
|
$
|
197
|
|
$
|
25
|
|
$
|
71
|
|
|
[1]
|
Excludes asbestos and environmental paid and incurred loss and LAE reported in Ongoing Operations. Total gross losses and LAE incurred in Ongoing Operations for the
three and nine months ended
September 30, 2016
includes $3 and $17, respectively, related to asbestos and environmental claims. Total gross losses and LAE paid in Ongoing Operations for the
three and nine months ended
September 30, 2016
includes $7 and $18, respectively, related to asbestos and environmental claims.
|
During the second quarter of 2016, the Company completed its annual ground-up asbestos reserve evaluation. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to asbestos liability, as well as assumed reinsurance accounts. Based on this evaluation, the Company increased its net asbestos reserves by $197. A substantial majority of the Company’s direct accounts have trended as expected, and the Company has observed no material changes in the underlying legal environment during the past year. However, mesothelioma claims filings have not declined as expected for a small subset of peripheral defendants with a high concentration of asbestos filings in specific, adverse jurisdictions. As a result, aggregate indemnity and defense costs have not declined as expected. While the mesothelioma and adverse jurisdiction claim trends observed in the 2016 reserve study were similar to the 2015 study, most of the defendants that had reserve increases in the 2016 study did not have a material impact in the 2015 study. The Company expects to continue to perform an evaluation of its asbestos liabilities annually.
During the second quarter of 2016, the Company completed its annual ground-up environmental reserve evaluation. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to environmental liability, as well as assumed reinsurance accounts. Based on this evaluation, the Company increased its net environmental reserves by $71. A substantial majority of the Company's direct environmental accounts have trended as expected. However, a small percentage of the Company's direct accounts have exhibited deterioration associated with the tendering of new sites for coverage, increased defense costs stemming from individual bodily injury liability suits, and increased clean-up costs associated with waterways. The Company expects to continue to perform an evaluation of its environmental liabilities annually.
Uncertainties Regarding Adequacy of Asbestos and Environmental Reserves
A number of factors affect the variability of estimates for 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. The uncertainty with respect to the underlying reserve assumptions for asbestos and environmental adds a greater degree of variability to these reserve estimates than reserve estimates for more traditional exposures. While this variability is reflected in part in the size of the range of reserves developed by the Company, that range may still not be indicative of the potential variance between the ultimate outcome and the recorded reserves. The recorded net reserves as of
September 30, 2016
of approximately $1.8 billion ($1.5 billion and $0.3 billion for asbestos and environmental, respectively), are within an estimated range, unadjusted for covariance, of $1.4 billion to
$2.3 billion
. The process of estimating asbestos and environmental reserves remains subject to a wide variety of uncertainties, which are detailed in the Company's
2015
Form 10-K Annual Report. The Company believes that its current asbestos and environmental reserves are appropriate. However, analyses of future developments could cause the Company to change its estimates and ranges of its asbestos and environmental reserves, and the effect of these changes could be material to the Company's consolidated operating results and liquidity.
Consistent with the Company's long-standing reserve practices, the Company will continue to review and monitor its reserves in Property & Casualty Other Operations regularly, including its annual reviews of asbestos liabilities, reinsurance recoverables and the allowance for uncollectible reinsurance, and environmental liabilities, and where future developments indicate, make appropriate adjustments to the reserves. For a discussion of the Company's reserving practices, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance in the Company's
2015
Form 10-K Annual Report.
85
Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts
Estimated gross profits ("EGPs") are used in the amortization of the deferred policy acquisition costs ("DAC") asset and sales inducement assets (“SIA”). Portions of EGPs are also used in the valuation of reserves for death and other insurance benefit features on variable annuity and other universal life type contracts.
The most significant EGP based balances are as follows:
|
Talcott Resolution
|
||||||
|
As of September 30, 2016
|
As of December 31, 2015
|
|||||
|
DAC
|
$
|
1,030
|
|
$
|
1,180
|
|
|
SIA
|
$
|
55
|
|
$
|
56
|
|
|
Death and Other Insurance Benefit Reserves, net of reinsurance [1]
|
$
|
331
|
|
$
|
340
|
|
|
[1]
|
For additional information on death and other insurance benefit reserves, see Note
8
-
Separate Accounts, Death Benefits and Other Insurance Benefit Features
of Notes to Condensed Consolidated Financial Statements.
|
Unlocks
The benefit (charge) to income net of tax as a result of the Unlocks is as follow:
|
Talcott Resolution
|
|||||||||||||
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||
|
2016
|
2015
|
2016
|
2015
|
||||||||||
|
DAC
|
$
|
(29
|
)
|
$
|
(43
|
)
|
$
|
(17
|
)
|
$
|
(31
|
)
|
|
|
SIA
|
4
|
|
(3
|
)
|
5
|
|
(2
|
)
|
|||||
|
Death and Other Insurance Benefit Reserves
|
12
|
|
(3
|
)
|
30
|
|
60
|
|
|||||
|
Total (before tax)
|
$
|
(13
|
)
|
$
|
(49
|
)
|
$
|
18
|
|
$
|
27
|
|
|
|
Income tax effect
|
(4
|
)
|
(16
|
)
|
7
|
|
10
|
|
|||||
|
Total (after-tax)
|
$
|
(9
|
)
|
$
|
(33
|
)
|
$
|
11
|
|
$
|
17
|
|
|
The Unlock charge, after-tax, for the three months ended
September 30, 2016
was primarily due to the reduction of the fixed annuity DAC balance to zero due to the impact of the sustained low interest rates on estimated gross profits, partially offset by an off-cycle assumption change that reduced future expected lapse rates given recent experience and an unlock benefit on variable annuity DAC due to separate account returns being above our aggregated estimated returns during the period largely due to an increase in equity markets. The Unlock benefit, after-tax, for the nine months ended
September 30, 2016
was primarily due to separate account returns being above our aggregated estimated returns during the period largely due to an increase in equity markets partially offset by the reduction of the fixed annuity DAC balance to zero.
The Unlock charge, after tax, for the three months ended
September 30, 2015
was due to separate accounts being below our aggregated returns during the period largely due to the decline in equity markets. The Unlock benefit, after-tax, for the nine months ended
September 30, 2015
was primarily due to an off-cycle assumption change related to benefit utilization and partially offset by separate account returns being below our aggregated estimated returns during the period.
An Unlock revises EGPs, on a quarterly basis, to reflect the Company’s current best estimate assumptions and market updates of policyholder account value. Modifications to the Company’s hedging programs may impact EGPs, and correspondingly impact DAC recoverability. After each quarterly Unlock, the Company also tests the aggregate recoverability of DAC by comparing the DAC balance to the present value of future EGPs. The margin between the DAC balance and the present value of future EGPs for variable annuities was
41%
as of
September 30, 2016
. If the margin between the DAC asset and the present value of future EGPs is exhausted, then further reductions in EGPs would cause portions of DAC to be unrecoverable and the DAC asset would be written down to equal future EGPs.
86
Valuation Allowance on Deferred Tax Assets
Deferred tax assets represent the tax benefit of future deductible temporary differences and tax carryforwards. Deferred tax assets are measured using the enacted tax rates expected to be in effect when such benefits are realized if there is no change in tax law. Under U.S. GAAP, we test the value of deferred tax assets for impairment on a quarterly basis at the entity level within each tax jurisdiction, consistent with our filed tax returns. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The determination of the valuation allowance for our deferred tax assets requires management to make certain judgments and assumptions. In evaluating the ability to recover deferred tax assets, we have considered all available evidence as of
September 30, 2016
, including past operating results, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In the event we determine it is not more likely than not that we will be able to realize all or part of our deferred tax assets in the future, an increase to the valuation allowance would be charged to earnings in the period such determination is made. Likewise, if it is later determined that it is more likely than not that those deferred tax assets would be realized, the previously provided valuation allowance would be reversed. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance and specific industry and investment market conditions.
As of September 30, 2016, the deferred tax asset valuation allowance was reduced to
$1
with the remaining allowance related to limitations on the use of losses for one subsidiary. In assessing the need for a valuation allowance, management considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and carryovers, taxable income in open carry back years and other tax planning strategies. From time to time, tax planning strategies could include holding a portion of debt securities with market value losses until recovery, altering the level of tax exempt securities held, making investments which have specific tax characteristics, and business considerations such as asset-liability matching. Management views such tax planning strategies as prudent and feasible, and would implement them, if necessary, to realize the deferred tax assets.
87
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
Account Value
Account value includes policyholders’ balances for investment contracts and reserves for future policy benefits for insurance contracts. Account value is a measure used by the Company because a significant portion of the Company’s fee income is based upon the level of account value. These revenues increase or decrease with a rise or fall in assets under management whether caused by changes in the market or through net flows.
Assets Under Management
Assets under management (“AUM”) include account values and mutual fund and ETF assets. AUM is a measure used by the Company because a significant portion of the Company’s 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.
Catastrophe Ratio
The catastrophe ratio (a component of the loss and loss adjustment expense ratio) represents the ratio of catastrophe losses incurred in the current calendar year (net of reinsurance) to earned premiums and includes catastrophe losses incurred for both the current and prior accident years. 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. The catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums.
Combined Ratio
The combined ratio is 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.
Combined Ratio before Catastrophes and Prior Accident Year Development
The combined ratio before catastrophes and prior accident year development, a non-GAAP financial measure, represents the combined ratio for the current accident year, excluding the impact of catastrophes. Combined ratio is the most directly comparable U.S. GAAP measure. A reconciliation of combined ratio to combined ratio before prior accident year development is set forth in MD&A - Commercial Lines and Personal Lines.
Core Earnings
Core earnings, a non-GAAP measure, is an important measure of the Company’s operating performance. The Company 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 realized capital gains and losses, certain restructuring and other costs, pension settlements, loss on extinguishment of debt, reinsurance gains and losses from disposal of businesses, income tax benefit from reduction in deferred income tax valuation allowance, discontinued operations, and the impact of Unlocks to DAC, SIA, and death and other insurance benefit reserve balances. Some realized capital gains and losses are primarily driven by investment decisions and external economic developments, the nature and timing of which are unrelated to the insurance and underwriting aspects of our business. Accordingly, core earnings excludes the effect of all realized gains and losses (net of tax and the effects of DAC) that tend to be highly variable from period to period based on capital market conditions. The Company believes, however, that some realized capital gains and losses are integrally related to our insurance operations, so core earnings includes net realized gains and losses such as net periodic settlements on credit derivatives. These net realized gains and losses are directly related to an offsetting item included in the income statement such as net investment income. Net income (loss) is the most directly comparable U.S. GAAP measure. Core earnings should not be considered as a substitute for net income (loss) and does not reflect the overall profitability of the Company’s business. Therefore, the Company believes that it is useful for investors to evaluate both net income (loss) and core earnings when reviewing the Company’s performance.
88
A reconciliation of net income to core earnings is set forth in the following table:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Net income
|
$
|
438
|
|
$
|
381
|
|
$
|
977
|
|
$
|
1,261
|
|
|
|
Less: Unlock benefit (charge), before tax
|
(13
|
)
|
(49
|
)
|
18
|
|
27
|
|
|||||
|
Less: Net realized capital losses including DAC, excluded from core earnings, before tax
|
(13
|
)
|
(49
|
)
|
(110
|
)
|
(40
|
)
|
|||||
|
Less: Restructuring and other costs, before tax
|
—
|
|
(4
|
)
|
—
|
|
(16
|
)
|
|||||
|
Less: Loss on extinguishment of debt, before tax
|
—
|
|
—
|
|
—
|
|
(21
|
)
|
|||||
|
Less: Net reinsurance gain on dispositions, before tax
|
—
|
|
20
|
|
—
|
|
28
|
|
|||||
|
Less: Income tax benefit on items not included in core earnings
|
51
|
|
90
|
|
149
|
|
69
|
|
|||||
|
Less: Income from discontinued operations, after-tax
|
—
|
|
9
|
|
—
|
|
9
|
|
|||||
|
Core earnings
|
$
|
413
|
|
$
|
364
|
|
$
|
920
|
|
$
|
1,205
|
|
|
Core Earnings Margin
Core earnings margin is a non-GAAP financial measure that the Company uses to evaluate, and believes 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 is the most directly comparable U.S. GAAP measure. Net income margin is calculated by dividing net income by revenues excluding buyouts and realized gains (losses).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). 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 Margin section within MD&A - Group Benefits.
Current Accident Year Loss and Loss Adjustment Expense Ratio before Catastrophes
The current accident year loss and loss adjustment expense ratio before catastrophes is a measure of the cost of non-catastrophe claims 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.
Expense Ratio
The expense ratio for the underwriting segments of Commercial Lines and Personal Lines is the ratio of underwriting expenses to earned premiums. Underwriting expenses include the amortization of deferred policy acquisition costs and insurance operating costs and expenses, including certain centralized services and bad debt expense. Deferred policy acquisition costs include commissions, taxes, licenses and fees and other 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 and amortization of deferred policy acquisition costs, to premiums and other considerations, excluding buyout premiums.
Fee Income
Fee income is largely driven from amounts collected as a result of contractually defined percentages of assets under management. These fees are generally collected on a daily basis. Therefore, the growth in assets under management either through positive net flows or net sales, or favorable market performance will have a favorable impact on fee income. Conversely, either negative net flows or net sales, or unfavorable market performance will reduce fee income.
Full Surrender Rates
Full surrender rates are an internal measure of contract surrenders calculated using annualized full surrenders divided by a two-point average of annuity account values. The full surrender rate represents full contract liquidation and excludes partial withdrawals.
89
Loss and Loss Adjustment Expense Ratio
The loss and loss adjustment expense ratio is a measure of the cost of claims incurred in the calendar year divided by earned premium and includes losses incurred for both the current and prior accident years, as well as the costs of mortality and morbidity and other contractholder benefits to policyholders. Among other factors, the loss and loss adjustment expense ratio needed for the Company to achieve its targeted return on equity 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 ratemaking process, adjust the assumption as appropriate for the particular state, product or coverage.
Loss Ratio, excluding Buyouts
The loss ratio is utilized for the Group Benefits segment and is expressed as a ratio of benefits, losses and loss adjustment expenses 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 underwriting results 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 Fund Assets
Mutual fund and ETF assets are owned by the shareholders of those funds and not by the Company and therefore are not reflected in the Company’s consolidated financial statements. Mutual fund and ETF assets are a measure used by the Company because a significant portion of the Company’s 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.
New Business Written Premium
New business written premium represents the amount of premiums charged for policies issued to customers who were not insured with the Company in the previous policy term. New business written premium plus renewal policy written premium equals total written premium.
Policies in Force
Policies in force represent 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 within Commercial Lines and is affected by both new business growth and policy count retention.
Policy Count Retention
Policy count retention represents the ratio of the number of policies renewed during the period divided by the number of policies available to renew. The number of policies available to renew represents the number of policies, net of any cancellations, written in the previous policy term. 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.
Policyholder Dividend Ratio
The policyholder dividend ratio is the ratio of policyholder dividends to earned premium.
Prior Accident Year Loss and Loss Adjustment Expense Ratio
The 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
Reinstatement premium represents additional ceded premium paid for the reinstatement of the amount of reinsurance coverage that was reduced as a result of a reinsurance loss payment.
90
Renewal Earned Price Increase (Decrease)
Written premiums are earned over the policy term, which is six months for certain Personal Lines auto 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)
Renewal written price increase (decrease) represents the combined effect of rate changes, amount of insurance and individual risk pricing decisions per unit of exposure since the prior year. The rate component represents the change in rate filings 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 auto, 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 on rate achieved, and modifications made to better reflect ultimate pricing achieved.
Return on Assets (“ROA”), Core Earnings
ROA, core earnings, is a non-GAAP financial measure that the Company uses to evaluate, and believes is an important measure of, certain of the segment’s operating performance. 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 certain of the Company’s on-going businesses because it reveals trends in our businesses that may be obscured by the effect of realized gains (losses). ROA, core earnings, should not be considered as a substitute for ROA and does not reflect the overall profitability of our businesses. Therefore, the Company believes it is important for investors to evaluate both ROA, core earnings, and ROA when reviewing the Company’s performance. ROA, core earnings is calculated by dividing core earnings by a two-point average AUM.
Underwriting Gain (Loss)
The Company's management evaluates profitability of the P&C businesses primarily on the basis of underwriting gain (loss). Underwriting gain (loss) is a before-tax measure that represents earned premiums less incurred losses, loss adjustment expenses and underwriting expenses. Underwriting gain (loss) is influenced significantly by earned premium growth and the adequacy of the Company's pricing. Underwriting profitability over time is also greatly influenced by the Company's pricing and underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance 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. Net income (loss) is the most directly comparable GAAP measure
.
The Company believes that underwriting gain (loss) provides investors with a valuable measure of before-tax profitability derived from underwriting activities, which are managed separately from the Company's investing activities. A reconciliation of underwriting gain (loss) to net income (loss) for Commercial Lines, Personal Lines and Property & Casualty Other Operations is set forth in segment sections of MD&A.
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. Written and earned premium are recorded net of ceded reinsurance premium.
Traditional life 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 from the overall investment strategy 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 policies remaining in-force from year-to-year.
91
COMMERCIAL LINES
Results of Operations
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||||
|
Underwriting Summary
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||||||
|
Written premiums
|
$
|
1,673
|
|
$
|
1,639
|
|
2
|
%
|
$
|
5,068
|
|
$
|
5,016
|
|
1
|
%
|
|
|
Change in unearned premium reserve
|
(4
|
)
|
(8
|
)
|
50
|
%
|
118
|
|
163
|
|
(28
|
%)
|
|||||
|
Earned premiums
|
1,677
|
|
1,647
|
|
2
|
%
|
4,950
|
|
4,853
|
|
2
|
%
|
|||||
|
Losses and loss adjustment expenses
|
|||||||||||||||||
|
Current accident year before catastrophes
|
969
|
|
952
|
|
2
|
%
|
2,820
|
|
2,789
|
|
1
|
%
|
|||||
|
Current accident year catastrophes
|
43
|
|
8
|
|
NM
|
|
167
|
|
108
|
|
55
|
%
|
|||||
|
Prior accident year development
|
22
|
|
50
|
|
(56
|
%)
|
8
|
|
69
|
|
(88
|
%)
|
|||||
|
Total losses and loss adjustment expenses
|
1,034
|
|
1,010
|
|
2
|
%
|
2,995
|
|
2,966
|
|
1
|
%
|
|||||
|
Amortization of DAC
|
243
|
|
239
|
|
2
|
%
|
727
|
|
710
|
|
2
|
%
|
|||||
|
Underwriting expenses
|
293
|
|
304
|
|
(4
|
%)
|
886
|
|
883
|
|
—
|
%
|
|||||
|
Dividends to policyholders
|
4
|
|
4
|
|
—
|
%
|
12
|
|
13
|
|
(8
|
%)
|
|||||
|
Underwriting gain
|
103
|
|
90
|
|
14
|
%
|
330
|
|
281
|
|
17
|
%
|
|||||
|
Net servicing income [1]
|
8
|
|
6
|
|
33
|
%
|
17
|
|
14
|
|
21
|
%
|
|||||
|
Net investment income
|
239
|
|
208
|
|
15
|
%
|
674
|
|
704
|
|
(4
|
%)
|
|||||
|
Net realized capital gains (losses)
|
39
|
|
(18
|
)
|
NM
|
|
31
|
|
(17
|
)
|
NM
|
|
|||||
|
Other income (expense)
|
(3
|
)
|
1
|
|
NM
|
|
(2
|
)
|
4
|
|
(150
|
%)
|
|||||
|
Income before income taxes
|
386
|
|
287
|
|
34
|
%
|
1,050
|
|
986
|
|
6
|
%
|
|||||
|
Income tax expense
|
114
|
|
83
|
|
37
|
%
|
310
|
|
283
|
|
10
|
%
|
|||||
|
Income from continuing operations, net of tax
|
272
|
|
204
|
|
33
|
%
|
740
|
|
703
|
|
5
|
%
|
|||||
|
Income from discontinued operations, net of tax
|
—
|
|
7
|
|
(100
|
%)
|
—
|
|
7
|
|
(100
|
%)
|
|||||
|
Net income
|
$
|
272
|
|
$
|
211
|
|
29
|
%
|
$
|
740
|
|
$
|
710
|
|
4
|
%
|
|
|
[1]
|
Includes servicing revenues of
$24
for the
three months ended
September 30, 2016
and
2015
, and
$67
and
$66
for the
nine months ended
September 30, 2016
and
2015
, respectively.
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||
|
Premium Measures [1]
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
New business premium
|
$
|
270
|
|
$
|
271
|
|
$
|
832
|
|
$
|
850
|
|
|
|
Standard commercial lines policy count retention
|
85
|
%
|
84
|
%
|
84
|
%
|
84
|
%
|
|||||
|
Standard commercial lines renewal written pricing increases
|
2
|
%
|
2
|
%
|
2
|
%
|
2
|
%
|
|||||
|
Standard commercial lines renewal earned pricing increases
|
2
|
%
|
3
|
%
|
2
|
%
|
4
|
%
|
|||||
|
Standard commercial lines policies in-force as of end of period (in thousands)
|
1,345
|
|
1,301
|
|
|||||||||
|
[1]
|
Standard commercial lines consists of small commercial and middle market. Standard commercial premium measures exclude Maxum, middle market specialty programs and livestock lines of business.
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||
|
Underwriting Ratios
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||
|
Loss and loss adjustment expense ratio
|
|||||||||||||
|
Current accident year before catastrophes
|
57.8
|
|
57.8
|
|
—
|
|
57.0
|
|
57.5
|
|
0.5
|
|
|
|
Current accident year catastrophes
|
2.6
|
|
0.5
|
|
(2.1
|
)
|
3.4
|
|
2.2
|
|
(1.2
|
)
|
|
|
Prior accident year development
|
1.3
|
|
3.0
|
|
1.7
|
|
0.2
|
|
1.4
|
|
1.2
|
|
|
|
Total loss and loss adjustment expense ratio
|
61.7
|
|
61.3
|
|
(0.4
|
)
|
60.5
|
|
61.1
|
|
0.6
|
|
|
|
Expense ratio
|
32.0
|
|
33.0
|
|
1.0
|
|
32.6
|
|
32.8
|
|
0.2
|
|
|
|
Policyholder dividend ratio
|
0.2
|
|
0.2
|
|
—
|
|
0.2
|
|
0.3
|
|
0.1
|
|
|
|
Combined ratio
|
93.9
|
|
94.5
|
|
0.6
|
|
93.3
|
|
94.2
|
|
0.9
|
|
|
|
Current accident year catastrophes and prior year development
|
3.9
|
|
3.5
|
|
(0.4
|
)
|
3.6
|
|
3.6
|
|
—
|
|
|
|
Combined ratio before catastrophes and prior year development
|
90.0
|
|
91.0
|
|
1.0
|
|
89.8
|
|
90.6
|
|
0.8
|
|
|
92
Three and nine months ended
September 30, 2016
compared to the
three and nine months ended
September 30, 2015
Overview
Net income for the
three months ended
September 30, 2016
, as compared to the prior year period, increased primarily due to a shift to net realized capital gains in the current year from net realized capital losses in the prior year, as well as higher net investment income and a higher underwriting gain. The increase in underwriting gain was primarily due to lower unfavorable prior accident year reserve development, earned premium growth and lower expenses, partially offset by higher current accident year catastrophes.
Net income for the
nine months ended
September 30, 2016
, as compared to the prior year period, increased primarily due to a higher underwriting gain and a shift to net realized capital gains in the current year from net realized capital losses in the prior year, partially offset by lower net investment income. The increase in underwriting gain was driven by lower unfavorable prior accident year reserve development, earned premium growth and a lower current accident year loss and loss adjustment expense ratio before catastrophes, partially offset by higher current accident year catastrophe losses.
Revenues - Earned and Written Premiums
Earned premiums for the
three and nine months ended
September 30, 2016
, as compared to the prior year period, increased reflecting written premium growth over the preceding twelve months.
Written premiums, as compared to the prior year period, increased for the
three and nine months ended
September 30, 2016
primarily due to growth in small commercial, partially offset by decreases in middle market and specialty commercial. Small commercial growth was primarily due to higher renewal and audit premium, as well as new business premium growth and renewal written pricing increases. The decrease in middle market was primarily driven by lower new business premium, partially offset by increased renewal written premium including the effect of renewal written pricing increases while the decrease in specialty commercial was primarily due to lower National Accounts premium. For the
three and nine months ended
September 30, 2016
renewal written pricing increases averaged 2% in standard commercial, which included 3% for small commercial and 1% for middle market.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses for the
three and nine months ended
September 30, 2016
, as compared to the prior year period, increased reflecting higher current accident year losses and loss adjustment expenses, including higher catastrophes, partially offset by lower unfavorable prior accident year reserve development.
|
•
|
The current accident year loss and loss adjustment expense ratio before catastrophes for the
three months ended
September 30, 2016
, was unchanged from the prior year period at
57.8
, as a lower loss and loss adjustment expense ratio in workers' compensation was offset by a higher loss and loss adjustment expense ratio commercial auto and higher non-catastrophe property losses.
|
The decrease in the current accident year loss and loss adjustment expense ratio before catastrophes for the
nine months ended
September 30, 2016
, as compared to the prior year period from
57.5
to
57.0
, was primarily due to a lower loss and loss adjustment expense ratio in workers' compensation.
|
•
|
Current accident year catastrophe losses totaled
$43
, before tax, for the
three months ended
September 30, 2016
, compared to
$8
before tax, for the
three months ended
September 30, 2015
. Catastrophe losses for 2016 were primarily due to multiple wind and hail events concentrated in the Midwest and the central plains. Catastrophe losses for 2015 were primarily due to wind and hail events across various U.S. geographic regions. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
|
Current accident year catastrophe losses totaled
$167
, before tax, for the
nine months ended
September 30, 2016
, compared to
$108
, before tax, for the
nine months ended
September 30, 2015
. Catastrophe losses for both periods were primarily due to wind and hail events and winter storms across various U.S. geographic regions. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
93
|
•
|
Unfavorable prior accident year reserve development of
$22
, before tax, for the
three months ended
September 30, 2016
, compared to unfavorable reserve development of
$50
, before tax, for the
three months ended
September 30, 2015
. The net reserve increase for the
three months ended
September 30, 2016
related primarily to increases in commercial auto liability. Net reserve increases for the
three months ended
September 30, 2015
related primarily to commercial auto liability and worker's compensation discount accretion. For additional information, see MD&A - Critical Accounting Estimates, Reserve Roll-forwards and Development.
|
Unfavorable prior accident year reserve development of
$8
, before tax, for the
nine months ended
September 30, 2016
, compared to unfavorable reserve development of
$69
, before tax, for the
nine months ended
September 30, 2015
. Net reserve increases for the
nine months ended
September 30, 2016
were primarily related to to reserve increases for general liability, package business and commercial auto, largely offset by reserve decreases in workers' compensation, professional liability and uncollectible reinsurance. Net reserve increases for the
nine months ended
September 30, 2015
were primarily related to commercial auto liability and worker's compensation discount accretion, partially offset by a reduction in reserves for professional liability. For additional information, see MD&A - Critical Accounting Estimates, Reserve Roll-forwards and Development.
Underwriting Ratios
The combined ratio decreased
0.6
points to
93.9
in the three month period primarily due to a decrease in unfavorable prior year development and a lower expense ratio, partially offset by higher catastrophes. The combined ratio, before catastrophes and prior year development, decreased
1.0
points to
90.0
for the three months ended
September 30, 2016
from
91.0
for the three months ended
September 30, 2015
due to a lower expense ratio.
The combined ratio decreased
0.9
points to
93.3
in the nine month period primarily due to a decrease in the combined ratio before catastrophes and prior year development. The combined ratio before catastrophes and prior year development decreased
0.8
points, to
89.8
for the
nine months ended
September 30, 2016
from
90.6
for the
nine months ended
September 30, 2015
. The decrease was primarily due to a decrease in the current accident year loss and loss adjustment expense ratio before catastrophes as well as a lower expense ratio.
Investment Results
Investment income increased for the
three months ended
September 30, 2016
, as compared to the prior year period and decreased for the
nine months ended
September 30, 2016
. For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
Income Taxes
The effective tax rates in
2016
and
2015
differ from the U.S. federal statutory rate of 35% primarily due to permanent differences related to investments in tax exempt securities. For discussion of income taxes, see Note
9
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
94
PERSONAL LINES
Results of Operations
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
|
Underwriting Summary
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||||||
|
Written premiums
|
$
|
1,000
|
|
$
|
1,034
|
|
(3
|
%)
|
$
|
2,945
|
|
$
|
2,982
|
|
(1
|
%)
|
|
|
Change in unearned premium reserve
|
20
|
|
57
|
|
(65
|
%)
|
14
|
|
87
|
|
(84
|
%)
|
|||||
|
Earned premiums
|
980
|
|
977
|
|
—
|
%
|
2,931
|
|
2,895
|
|
1
|
%
|
|||||
|
Losses and loss adjustment expenses
|
|
|
|||||||||||||||
|
Current accident year before catastrophes
|
719
|
|
682
|
|
5
|
%
|
2,040
|
|
1,916
|
|
6
|
%
|
|||||
|
Current accident year catastrophes
|
37
|
|
68
|
|
(46
|
%)
|
188
|
|
190
|
|
(1
|
%)
|
|||||
|
Prior accident year development
|
3
|
|
(14
|
)
|
121
|
%
|
131
|
|
(18
|
)
|
NM
|
|
|||||
|
Total losses and loss adjustment expenses
|
759
|
|
736
|
|
3
|
%
|
2,359
|
|
2,088
|
|
13
|
%
|
|||||
|
Amortization of DAC
|
86
|
|
90
|
|
(4
|
%)
|
264
|
|
270
|
|
(2
|
%)
|
|||||
|
Underwriting expenses
|
137
|
|
162
|
|
(15
|
%)
|
432
|
|
465
|
|
(7
|
%)
|
|||||
|
Underwriting gain (loss)
|
(2
|
)
|
(11
|
)
|
82
|
%
|
(124
|
)
|
72
|
|
NM
|
|
|||||
|
Net servicing income
|
—
|
|
—
|
|
—
|
%
|
—
|
|
3
|
|
(100
|
%)
|
|||||
|
Net investment income
|
35
|
|
29
|
|
21
|
%
|
99
|
|
98
|
|
1
|
%
|
|||||
|
Net realized capital gains
|
5
|
|
4
|
|
25
|
%
|
4
|
|
4
|
|
—
|
%
|
|||||
|
Other income (expense)
|
2
|
|
(1
|
)
|
NM
|
|
2
|
|
16
|
|
(88
|
%)
|
|||||
|
Income (loss) before income taxes
|
40
|
|
21
|
|
90
|
%
|
(19
|
)
|
193
|
|
(110
|
)%
|
|||||
|
Income tax expense (benefit)
|
11
|
|
2
|
|
NM
|
|
(15
|
)
|
57
|
|
(126
|
%)
|
|||||
|
Net income (loss)
|
$
|
29
|
|
$
|
19
|
|
53
|
%
|
$
|
(4
|
)
|
$
|
136
|
|
(103
|
)%
|
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||||
|
Written Premiums
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||||||
|
Product Line
|
|||||||||||||||||
|
Automobile
|
$
|
691
|
|
$
|
707
|
|
(2
|
%)
|
$
|
2,067
|
|
$
|
2,066
|
|
—
|
%
|
|
|
Homeowners
|
309
|
|
327
|
|
(6
|
%)
|
878
|
|
916
|
|
(4
|
%)
|
|||||
|
Total
|
$
|
1,000
|
|
$
|
1,034
|
|
(3
|
%)
|
$
|
2,945
|
|
$
|
2,982
|
|
(1
|
%)
|
|
|
Earned Premiums
|
|
|
|
||||||||||||||
|
Product Line
|
|
|
|
||||||||||||||
|
Automobile
|
$
|
686
|
|
$
|
674
|
|
2
|
%
|
$
|
2,044
|
|
$
|
1,994
|
|
3
|
%
|
|
|
Homeowners
|
294
|
|
303
|
|
(3
|
%)
|
887
|
|
901
|
|
(2
|
%)
|
|||||
|
Total
|
$
|
980
|
|
$
|
977
|
|
—
|
%
|
$
|
2,931
|
|
$
|
2,895
|
|
1
|
%
|
|
95
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
Premium Measures
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
Policies in-force end of period (in thousands)
|
|||||||||||||
|
Automobile
|
2,016
|
|
2,052
|
|
|||||||||
|
Homeowners
|
1,208
|
|
1,284
|
|
|||||||||
|
New business written premium
|
|||||||||||||
|
Automobile
|
$
|
70
|
|
$
|
111
|
|
$
|
263
|
|
$
|
308
|
|
|
|
Homeowners
|
$
|
18
|
|
$
|
29
|
|
$
|
62
|
|
$
|
85
|
|
|
|
Policy count retention
|
|||||||||||||
|
Automobile
|
84
|
%
|
84
|
%
|
84
|
%
|
84
|
%
|
|||||
|
Homeowners
|
84
|
%
|
85
|
%
|
84
|
%
|
85
|
%
|
|||||
|
Renewal written pricing increase
|
|||||||||||||
|
Automobile
|
7
|
%
|
6
|
%
|
7
|
%
|
6
|
%
|
|||||
|
Homeowners
|
10
|
%
|
8
|
%
|
10
|
%
|
8
|
%
|
|||||
|
Renewal earned pricing increase
|
|||||||||||||
|
Automobile
|
7
|
%
|
6
|
%
|
6
|
%
|
6
|
%
|
|||||
|
Homeowners
|
9
|
%
|
8
|
%
|
9
|
%
|
8
|
%
|
|||||
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
Underwriting Ratios
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||
|
Loss and loss adjustment expense ratio
|
|||||||||||||
|
Current accident year before catastrophes
|
73.4
|
|
69.8
|
|
(3.6
|
)
|
69.6
|
|
66.2
|
|
(3.4
|
)
|
|
|
Current accident year catastrophes
|
3.8
|
|
7.0
|
|
3.2
|
|
6.4
|
|
6.6
|
|
0.2
|
|
|
|
Prior year development
|
0.3
|
|
(1.4
|
)
|
(1.7
|
)
|
4.5
|
|
(0.6
|
)
|
(5.1
|
)
|
|
|
Total loss and loss adjustment expense ratio
|
77.4
|
|
75.3
|
|
(2.1
|
)
|
80.5
|
|
72.1
|
|
(8.4
|
)
|
|
|
Expense ratio
|
22.8
|
|
25.8
|
|
3.0
|
|
23.7
|
|
25.4
|
|
1.7
|
|
|
|
Combined ratio
|
100.2
|
|
101.1
|
|
0.9
|
|
104.2
|
|
97.5
|
|
(6.7
|
)
|
|
|
Current accident year catastrophes and prior year development
|
4.1
|
|
5.6
|
|
1.5
|
|
10.9
|
|
6.0
|
|
(4.9
|
)
|
|
|
Combined ratio before catastrophes and prior year development
|
96.1
|
|
95.6
|
|
(0.5
|
)
|
93.3
|
|
91.6
|
|
(1.7
|
)
|
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||
|
Product Combined Ratios
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||
|
Automobile
|
|
|
|
|
|||||||||
|
Combined ratio
|
104.8
|
|
100.4
|
|
(4.4
|
)
|
109.5
|
|
98.1
|
|
(11.4
|
)
|
|
|
Combined ratio before catastrophes and prior year development
|
103.1
|
|
101.6
|
|
(1.5
|
)
|
100.7
|
|
97.6
|
|
(3.1
|
)
|
|
|
Homeowners
|
|
|
|
|
|||||||||
|
Combined ratio
|
89.2
|
|
105.5
|
|
16.3
|
|
92.1
|
|
97.1
|
|
5.0
|
|
|
|
Combined ratio before catastrophes and prior year development
|
79.6
|
|
82.4
|
|
2.8
|
|
76.3
|
|
78.2
|
|
1.9
|
|
|
96
Three and nine months ended
September 30, 2016
compared to the
three and nine months ended
September 30, 2015
Overview
Net income increased for the three months ended
September 30, 2016
, as compared with the prior year period primarily due to lower catastrophe losses and underwriting expenses due to a decrease in direct marketing expenses and higher net investment income, partially offset by higher current accident year losses and loss adjustment expenses before catastrophes. Net loss for the
nine months ended
September 30, 2016
, as compared with net income in the prior year period, is primarily due to unfavorable auto liability prior accident year development as well as higher current accident year losses and loss adjustment expenses before catastrophes, partially offset by lower underwriting expenses due to a decrease in direct marketing expenses.
Revenues - Earned and Written Premiums
Earned premiums for the
three and nine months ended
September 30, 2016
, as compared to the prior year periods, increased reflecting written premium growth in 2015. Written premiums for the
three and nine months ended
September 30, 2016
, as compared to the prior year periods, decreased primarily due to a decline in new business. Policy count retention for homeowners was lower for the
three and nine months ended
September 30, 2016
, as compared to the prior year periods, driven in part by renewal written pricing increases.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses for the
three and nine months ended
September 30, 2016
, as compared to the prior year periods, increased primarily due to higher current accident year losses and loss adjustment expenses before catastrophes and an increase in prior accident year development driven by favorable prior accident year development in the prior period.
|
•
|
Current accident year losses and loss adjustment expenses before catastrophes increased for the
three months ended
September 30, 2016
, compared to the prior year period, as a result of higher auto liability frequency, and to a lesser extent, the effect of an increase in earned premiums. The current accident year loss and loss adjustment expense ratio before catastrophes of
73.4
in
2016
increased
3.6
points from
69.8
in
2015
.
|
Current accident year losses and loss adjustment expenses before catastrophes increased for the
nine months ended
September 30, 2016
, compared to the prior year period, as a result of higher auto liability frequency and severity, and to a lesser extent, the effect of an increase in earned premiums. The current accident year loss and loss adjustment expense ratio before catastrophes of
69.6
in
2016
increased
3.4
points from
66.2
in
2015
.
|
•
|
Current accident year catastrophe losses of
$37
before tax, for the
three months ended
September 30, 2016
compared to
$68
, before tax, for the prior year period. Catastrophe losses for the
three months ended
September 30, 2016
were primarily due to multiple wind and hail events across various U.S. geographic regions. Catastrophe losses in 2015 were primarily due to wildfires in California.
|
Current accident year catastrophe losses of
$188
before tax, for the
nine months ended
September 30, 2016
compared to
$190
, before tax, for the prior year period. Catastrophe losses for the
nine months ended
September 30, 2016
were primarily due to multiple wind and hail events across various U.S. geographic regions, concentrated in the Midwest and central plains. Catastrophe losses in 2015 were primarily due to wildfires in California and multiple wind and hail events across various U.S. geographic regions.
|
•
|
Unfavorable prior accident year development of
$3
, before tax, for the
three months ended
September 30, 2016
compared to favorable prior accident year development of
$14
, before tax, for the prior year period with the favorable development in the three months ended September 30, 2015 mainly due to reduced reserves for catastrophes.
|
Unfavorable prior accident year development of
$131
, before tax, for the
nine months ended
September 30, 2016
compared to favorable prior accident year development of
$18
, before tax, for the prior year period. The net reserve increase for 2016 was primarily related to increased bodily injury frequency and severity for the 2015 accident year and increased bodily injury severity for the 2014 accident year. Increases in auto liability loss costs were across both the direct and agency distribution channels. The net reserve decrease for 2015 was related to 2014 catastrophes and reduced reserves in auto liability due to lower litigation costs. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
Underwriting Ratios
The combined ratio decreased
0.9
points for the three months ended September 30, 2016, reflecting a decrease in the current accident year catastrophe ratio and a decrease in the expense ratio, partially offset by an increase in the current accident year losses and loss adjustment expense ratio before catastrophes and an increase in the prior accident year development ratio. The combined ratio increased
6.7
points for the nine months ended
September 30, 2016
, reflecting an increase in the current accident year losses and loss adjustment expense ratio before catastrophes and an increase in the prior accident year development ratio, partially offset by a decrease in the expense ratio.
97
The combined ratio, before current accident year catastrophes and prior year development, increased
0.5
points and
1.7
points for the three and nine months ended
September 30, 2016
, respectively, reflecting an increase in the current accident year losses and loss adjustment expense ratio before catastrophe for auto, partially offset by a decrease in the expense ratio.
Auto frequency and severity trends in the third quarter of 2016 were generally consistent with the first half of 2016, resulting in higher auto losses compared to third quarter 2015. If fourth quarter 2016 auto frequency and severity trends remain at the levels experienced during the first nine months of 2016, the Company expects that the full year 2016 Personal Lines combined ratio before catastrophes and prior accident year development would be at the high end of a range of 93.0 to 94.0. For auto, the current accident year loss and loss adjustment expense ratio before catastrophes is expected to be higher for full year 2016 than in 2015 driven by higher auto liability frequency and severity, partially offset by earned pricing increases and the expected benefit of underwriting and claims initiatives. For homeowners, the current accident year loss and loss adjustment expense ratio before catastrophes is expected to be lower for full year 2016 than in 2015, driven by earned pricing increases partially offset by increased average claim severity, though subject to uncertainty with the volatility of weather and non-weather related claims.
Investment Results
Investment income increased for the
three and nine months ended
September 30, 2016
, as compared to the prior year periods. For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
Income Taxes
The effective tax rates in
2016
and
2015
differ from the U.S. federal statutory rate of 35% primarily due to permanent differences related to investments in tax exempt securities. For discussion of income taxes, see Note
9
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
98
PROPERTY & CASUALTY OTHER OPERATIONS
Results of Operations
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
|
Underwriting Summary
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||||||
|
Losses and loss adjustment expenses
|
|
|
|
|
|||||||||||||
|
Prior accident year development
|
$
|
—
|
|
$
|
1
|
|
(100
|
%)
|
$
|
270
|
|
$
|
204
|
|
32
|
%
|
|
|
Total losses and loss adjustment expenses
|
—
|
|
1
|
|
(100
|
%)
|
270
|
|
204
|
|
32
|
%
|
|||||
|
Underwriting expenses
|
7
|
|
8
|
|
(13
|
%)
|
20
|
|
21
|
|
(5
|
%)
|
|||||
|
Underwriting loss
|
(7
|
)
|
(8
|
)
|
13
|
%
|
(290
|
)
|
(224
|
)
|
(29
|
%)
|
|||||
|
Net investment income
|
31
|
|
30
|
|
3
|
%
|
96
|
|
99
|
|
(3
|
%)
|
|||||
|
Net realized capital gains (losses)
|
(47
|
)
|
(2
|
)
|
NM
|
|
(44
|
)
|
4
|
|
NM
|
|
|||||
|
Other income
|
2
|
|
2
|
|
—
|
%
|
4
|
|
4
|
|
—
|
%
|
|||||
|
Income (loss) before income taxes
|
(21
|
)
|
22
|
|
(195
|
%)
|
(234
|
)
|
(117
|
)
|
(100
|
%)
|
|||||
|
Income tax expense (benefit)
|
(52
|
)
|
6
|
|
NM
|
|
(128
|
)
|
(45
|
)
|
(184
|
%)
|
|||||
|
Net income (loss)
|
$
|
31
|
|
$
|
16
|
|
94
|
%
|
$
|
(106
|
)
|
$
|
(72
|
)
|
(47
|
%)
|
|
Three and nine months ended
September 30, 2016
compared to the
three and nine months ended
September 30, 2015
Net income for the
three months ended
September 30, 2016
, as compared to the prior year period, increased primarily due to recognition of an estimated after-tax net gain of $6 on the pending sale of the Company's U.K. property and casualty run-off subsidiaries consisting of an estimated capital loss of
$59
, before tax, and an estimated federal income tax benefit of
$65
. Apart from the estimated pre-tax loss of $59, net realized capital gains (losses) changed from a net loss in the 2015 period to a net gain in the 2016 period contributing to the increase in net income.
Net loss for the nine months ended
September 30, 2016
, as compared to the prior year period, increased primarily due to higher unfavorable net asbestos and environmental reserve development associated with the Company's annual ground-up reserve evaluations. Total losses and loss adjustment expenses in
2016
and
2015
included prior accident year development of
$197
and
$146
, before tax, respectively, related to asbestos reserves and
$71
and
$52
, respectively, related to environmental reserves.
Asbestos reserves increased in
2016
as mesothelioma claims filings have not declined as expected in specific, adverse jurisdictions. As a result, aggregate indemnity and defense costs have not declined as expected resulting in unfavorable net asbestos reserve development. Environmental reserves increased in
2016
primarily due to deterioration associated with the tendering of new sites for policy coverage, increased defense costs stemming from individual bodily injury liability suits, and increased clean-up costs associated with waterways.
The annual reviews of asbestos and environmental liabilities occur in the second quarter of the year. For information on asbestos and environmental reserves, see MD&A - Critical Accounting Estimates, Property & Casualty Other Operations Claims, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
Investment income increased for the
three months ended
September 30, 2016
, as compared to the prior year period, and decreased for the
nine months ended
September 30, 2016
. For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
For further discussion of income taxes, see Note
9
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
99
GROUP BENEFITS
Results of Operations
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||||
|
Operating Summary
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||||||
|
Premiums and other considerations
|
$
|
812
|
|
$
|
769
|
|
6
|
%
|
$
|
2,415
|
|
$
|
2,345
|
|
3
|
%
|
|
|
Net investment income
|
95
|
|
91
|
|
4
|
%
|
271
|
|
283
|
|
(4
|
)%
|
|||||
|
Net realized capital gains (losses)
|
19
|
|
(6
|
)
|
NM
|
|
37
|
|
(5
|
)
|
NM
|
|
|||||
|
Total revenues
|
926
|
|
854
|
|
8
|
%
|
2,723
|
|
2,623
|
|
4
|
%
|
|||||
|
Benefits, losses and loss adjustment expenses
|
642
|
|
591
|
|
9
|
%
|
1,894
|
|
1,807
|
|
5
|
%
|
|||||
|
Amortization of deferred policy acquisition costs
|
8
|
|
8
|
|
—
|
%
|
23
|
|
24
|
|
(4
|
)%
|
|||||
|
Insurance operating costs and other expenses
|
190
|
|
198
|
|
(4
|
)%
|
580
|
|
589
|
|
(2
|
)%
|
|||||
|
Total benefits, losses and expenses
|
840
|
|
797
|
|
5
|
%
|
2,497
|
|
2,420
|
|
3
|
%
|
|||||
|
Income before income taxes
|
86
|
|
57
|
|
51
|
%
|
226
|
|
203
|
|
11
|
%
|
|||||
|
Income tax expense
|
24
|
|
15
|
|
60
|
%
|
59
|
|
53
|
|
11
|
%
|
|||||
|
Net income
|
$
|
62
|
|
$
|
42
|
|
48
|
%
|
$
|
167
|
|
$
|
150
|
|
11
|
%
|
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||||
|
Premiums and other considerations
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||||||
|
Fully insured – ongoing premiums
|
$
|
792
|
|
$
|
751
|
|
5
|
%
|
$
|
2,354
|
|
$
|
2,294
|
|
3
|
%
|
|
|
Buyout premiums
|
—
|
|
1
|
|
(100
|
)%
|
6
|
|
1
|
|
NM
|
|
|||||
|
Other
|
20
|
|
17
|
|
18
|
%
|
55
|
|
50
|
|
10
|
%
|
|||||
|
Total premiums and other considerations
|
$
|
812
|
|
$
|
769
|
|
6
|
%
|
$
|
2,415
|
|
$
|
2,345
|
|
3
|
%
|
|
|
Fully insured ongoing sales, excluding buyouts
|
$
|
61
|
|
$
|
61
|
|
—
|
%
|
$
|
407
|
|
$
|
419
|
|
(3
|
)%
|
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||
|
Ratios, excluding buyouts
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||
|
Group disability loss ratio
|
79.4
|
%
|
80.9
|
%
|
1.5
|
80.5
|
%
|
81.2
|
%
|
0.7
|
|
|
Group life loss ratio
|
80.0
|
%
|
73.4
|
%
|
(6.6)
|
77.4
|
%
|
74.3
|
%
|
(3.1)
|
|
|
Total loss ratio
|
79.1
|
%
|
76.8
|
%
|
(2.3)
|
78.4
|
%
|
77.0
|
%
|
(1.4)
|
|
|
Expense ratio
|
24.4
|
%
|
26.8
|
%
|
2.4
|
25.0
|
%
|
26.2
|
%
|
1.2
|
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||
|
Margin
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||
|
Net income margin
|
6.7
|
%
|
4.9
|
%
|
1.8
|
|
6.1
|
%
|
5.7
|
%
|
0.4
|
|
|
|
Effect of net capital realized gains (losses), net of tax on after-tax margin
|
1.1
|
%
|
(0.6
|
)%
|
1.7
|
|
0.7
|
%
|
(0.2
|
)%
|
0.9
|
|
|
|
Core earnings margin
|
5.6
|
%
|
5.5
|
%
|
0.1
|
|
5.4
|
%
|
5.9
|
%
|
(0.5
|
)
|
|
100
Three and nine months ended
September 30, 2016
compared to the
three and nine months ended
September 30, 2015
Net income increased for the
three and nine months ended
September 30, 2016
, as compared to the prior year periods, primarily due to higher net realized capital gains, higher premiums and other considerations and lower insurance operating costs and other expenses,
partially offset by higher benefits, losses and loss adjustment expenses.
Premiums and other considerations for the
three and nine months ended
September 30, 2016
, increased
6%
and
3%
, respectively, compared to the prior year periods. Fully insured ongoing premiums increased
5%
and
3%
for the
three and nine months ended
September 30, 2016
, respectively, compared to the prior year periods due to strong persistency and pricing increases. Insurance operating costs and other expenses decreased
4%
and
2%
for the
three and nine months ended
September 30, 2016
, respectively, compared to the prior year period, due primarily to decreased administrative expenses.
Fully insured ongoing sales, excluding buyouts, for the
three months ended
September 30, 2016
, were essentially flat as compared to the prior year period and decreased
3%
for the
nine months ended
September 30, 2016
, compared to the prior year period reflecting lower disability sales.
The total loss ratio increased
2.3
points to
79.1%
for the
three months ended
September 30, 2016
and
1.4
points to
78.4%
for the
nine months ended
September 30, 2016
, as compared to the prior year period, due to a higher group life loss ratio. The group life loss ratio increased
6.6
points for the
three months ended
September 30, 2016
and
3.1
points for the
nine months ended
September 30, 2016
, due to higher severity. The group disability loss ratio decreased
1.5
points for the
three months ended
September 30, 2016
, compared to the prior year period which included 4.8 points of favorable changes in long term disability reserve assumptions. The decrease in the disability loss ratio reflects increased pricing and improved incidence trends. The group disability loss ratio decreased
0.7
points for the
nine months ended
September 30, 2016
, compared to the prior year period, primarily driven by increased pricing and improved incidence trends, partially offset by an increase in long term disability claim severity. Included in the disability loss ratio for the
nine months ended
September 30, 2016
were favorable changes in long term disability reserve assumptions of 0.5 points as compared to 1.6 points in the prior year.
The expense ratio improved
2.4
points and
1.2
points for the
three and nine months ended
September 30, 2016
, respectively, compared to the prior year period, reflecting premium growth and lower administrative expenses.
Investment income for the
three months ended
September 30, 2016
increased
4%
as compared to the prior year period. Investment income for the
nine months ended
September 30, 2016
decreased
4%
as compared to the prior year period. For discussion of consolidated investment results, see MD&A - Investment Results, Investment Income (Loss) and Net Realized Capital Gains (Losses).
The effective tax rates in
2016
and
2015
differ from the U.S. federal statutory rate of 35% primarily due to permanent differences related to investments in tax exempt securities. For discussion of income taxes, see Note
9
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
101
MUTUAL FUNDS
Results of Operations
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
|
Operating Summary
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
|||||||||||
|
Fee income and other
|
$
|
178
|
|
$
|
182
|
|
(2
|
)%
|
$
|
517
|
|
$
|
545
|
|
(5
|
)%
|
|
|
Net investment income
|
—
|
|
—
|
|
—
|
%
|
1
|
|
—
|
|
NM
|
|
|||||
|
Total revenues
|
178
|
|
182
|
|
(2
|
)%
|
518
|
|
545
|
|
(5
|
)%
|
|||||
|
Amortization of DAC
|
6
|
|
5
|
|
20
|
%
|
17
|
|
16
|
|
6
|
%
|
|||||
|
Insurance operating costs and other expenses
|
141
|
|
143
|
|
(1
|
)%
|
407
|
|
427
|
|
(5
|
)%
|
|||||
|
Total benefits, losses and expenses
|
147
|
|
148
|
|
(1
|
)%
|
424
|
|
443
|
|
(4
|
)%
|
|||||
|
Income before income taxes
|
31
|
|
34
|
|
(9
|
)%
|
94
|
|
102
|
|
(8
|
)%
|
|||||
|
Income tax expense
|
10
|
|
12
|
|
(17
|
)%
|
33
|
|
36
|
|
(8
|
)%
|
|||||
|
Net income
|
$
|
21
|
|
$
|
22
|
|
(5
|
)%
|
$
|
61
|
|
$
|
66
|
|
(8
|
)%
|
|
|
Average Total Mutual Funds segment AUM
|
$
|
92,962
|
|
$
|
92,350
|
|
1
|
%
|
$
|
93,232
|
|
$
|
91,331
|
|
2
|
%
|
|
|
Return on Assets
|
|||||||||||||||||
|
Net income
|
9.0
|
|
9.5
|
|
(5
|
)%
|
8.7
|
|
9.6
|
|
(9
|
)%
|
|||||
|
Core earnings
|
9.0
|
|
9.5
|
|
(5
|
)%
|
8.7
|
|
9.6
|
|
(9
|
)%
|
|||||
|
Mutual Funds segment AUM
|
|||||||||||||||||
|
Mutual Fund AUM - beginning of period
|
$
|
74,941
|
|
$
|
76,251
|
|
(2
|
)%
|
$
|
74,413
|
|
$
|
73,035
|
|
2
|
%
|
|
|
Sales
|
4,896
|
|
4,192
|
|
17
|
%
|
13,682
|
|
12,891
|
|
6
|
%
|
|||||
|
Redemptions
|
(4,702
|
)
|
(3,885
|
)
|
(21
|
)%
|
(14,093
|
)
|
(11,805
|
)
|
(19
|
)%
|
|||||
|
Net flows
|
194
|
|
307
|
|
(37
|
)%
|
(411
|
)
|
1,086
|
|
(138
|
)%
|
|||||
|
Change in market value and other
|
2,769
|
|
(5,013
|
)
|
155
|
%
|
3,902
|
|
(2,576
|
)
|
NM
|
|
|||||
|
Mutual Fund AUM - end of period
|
$
|
77,904
|
|
$
|
71,545
|
|
9
|
%
|
$
|
77,904
|
|
$
|
71,545
|
|
9
|
%
|
|
|
Exchange Traded Funds AUM [1]
|
210
|
|
NM
|
|
210
|
|
NM
|
|
|||||||||
|
Mutual Funds segment AUM before Talcott Resolution
|
78,114
|
|
71,545
|
|
NM
|
|
78,114
|
|
71,545
|
|
NM
|
|
|||||
|
Talcott Resolution AUM [2]
|
16,387
|
|
17,498
|
|
(6
|
)%
|
16,387
|
|
17,498
|
|
(6
|
)%
|
|||||
|
Total Mutual Funds segment AUM
|
$
|
94,501
|
|
$
|
89,043
|
|
6
|
%
|
$
|
94,501
|
|
$
|
89,043
|
|
6
|
%
|
|
|
Mutual Fund AUM by Asset Class
|
|||||||||||||||||
|
Equity
|
$
|
48,476
|
|
$
|
44,318
|
|
9
|
%
|
$
|
48,476
|
|
$
|
44,318
|
|
9
|
%
|
|
|
Fixed Income
|
12,864
|
|
13,443
|
|
(4
|
)%
|
12,864
|
|
13,443
|
|
(4
|
)%
|
|||||
|
Multi-Strategy Investments [3]
|
16,564
|
|
13,784
|
|
20
|
%
|
16,564
|
|
13,784
|
|
20
|
%
|
|||||
|
Mutual Fund AUM
|
$
|
77,904
|
|
$
|
71,545
|
|
9
|
%
|
$
|
77,904
|
|
$
|
71,545
|
|
9
|
%
|
|
|
[1]
|
Includes AUM of
$205
acquired upon acquisition of Lattice Strategies, LLC in July 2016.
|
|
[2]
|
Talcott Resolution AUM consists of Company-sponsored mutual fund assets held in separate accounts supporting variable insurance and investment products.
|
|
[3]
|
Includes balanced, allocation, and alternative investment products.
|
Three and nine months ended
September 30, 2016
compared to the
three and nine months ended
September 30, 2015
Net income for the
three and nine months ended
September 30, 2016
decreased compared to the prior year periods due to lower investment management fees resulting from a mix shift to lower-fee mutual funds combined with increased expenses incurred in connection with the acquisition of Lattice. See Note 2 - Business Acquisitions and Dispositions of the Notes to Consolidated Financial Statements for more information on the acquisition of Lattice.
Sales for the
three and nine months ended
September 30, 2016
increased compared to the prior year periods offset by certain redemptions related to portfolio rebalancing. Total Mutual Funds segment AUM for the
three and nine months ended
September 30, 2016
increased to
$94.5 billion
compared to prior year of
$89.0 billion
due to market value appreciation.
102
TALCOTT RESOLUTION
Results of Operations
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
|
Operating Summary
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
||||||||||
|
Earned premiums
|
$
|
35
|
|
$
|
27
|
|
30
|
%
|
$
|
91
|
|
$
|
73
|
|
25
|
%
|
|
Fee income and other
|
233
|
|
248
|
|
(6
|
%)
|
705
|
|
775
|
|
(9
|
%)
|
||||
|
Net investment income
|
366
|
|
367
|
|
—
|
%
|
1,039
|
|
1,139
|
|
(9
|
%)
|
||||
|
Realized capital gains (losses):
|
|
|
||||||||||||||
|
Total other-than-temporary impairment (“OTTI”) losses
|
(10
|
)
|
(21
|
)
|
52
|
%
|
(19
|
)
|
(28
|
)
|
32
|
%
|
||||
|
Other net realized capital gains (losses)
|
(22
|
)
|
2
|
|
NM
|
|
(122
|
)
|
(5
|
)
|
NM
|
|
||||
|
Net realized capital losses
|
(32
|
)
|
(19
|
)
|
(68
|
%)
|
(141
|
)
|
(33
|
)
|
NM
|
|
||||
|
Total revenues
|
602
|
|
623
|
|
(3
|
%)
|
1,694
|
|
1,954
|
|
(13
|
%)
|
||||
|
Benefits, losses and loss adjustment expenses
|
345
|
|
372
|
|
(7
|
%)
|
1,045
|
|
1,020
|
|
2
|
%
|
||||
|
Amortization of DAC
|
60
|
|
92
|
|
(35
|
%)
|
114
|
|
192
|
|
(41
|
%)
|
||||
|
Insurance operating costs and other expenses
|
105
|
|
123
|
|
(15
|
%)
|
325
|
|
363
|
|
(10
|
%)
|
||||
|
Reinsurance gain on dispositions [4]
|
—
|
|
(20
|
)
|
100
|
%
|
—
|
|
(28
|
)
|
100
|
%
|
||||
|
Total benefits, losses and expenses
|
510
|
|
567
|
|
(10
|
%)
|
1,484
|
|
1,547
|
|
(4
|
%)
|
||||
|
Income before income taxes
|
92
|
|
56
|
|
64
|
%
|
210
|
|
407
|
|
(48
|
%)
|
||||
|
Income tax expense [1]
|
14
|
|
(16
|
)
|
188
|
%
|
11
|
|
7
|
|
57
|
%
|
||||
|
Income from continuing operations, net of tax
|
$
|
78
|
|
$
|
72
|
|
8
|
%
|
$
|
199
|
|
$
|
400
|
|
(50
|
%)
|
|
Income from discontinued operations, net of tax [2]
|
—
|
|
2
|
|
(100
|
%)
|
—
|
|
2
|
|
(100
|
%)
|
||||
|
Net income
|
$
|
78
|
|
$
|
74
|
|
5
|
%
|
$
|
199
|
|
$
|
402
|
|
(50
|
%)
|
|
Assets Under Management (end of period)
|
|
|||||||||||||||
|
Variable annuity account value
|
$
|
41,696
|
|
$
|
44,464
|
|
(6
|
%)
|
|
|
||||||
|
Fixed market value adjusted and payout annuities
|
7,792
|
|
8,272
|
|
(6
|
%)
|
|
|
||||||||
|
Institutional annuity account value
|
15,550
|
|
15,230
|
|
2
|
%
|
|
|
||||||||
|
Other account value [3]
|
86,869
|
|
87,635
|
|
(1
|
%)
|
|
|
||||||||
|
Total account value
|
$
|
151,907
|
|
$
|
155,601
|
|
(2
|
%)
|
|
|
||||||
|
Variable Annuity Account Value
|
|
|||||||||||||||
|
Account value, beginning of period
|
$
|
41,738
|
|
$
|
49,359
|
|
(15
|
%)
|
$
|
44,245
|
|
$
|
52,861
|
|
(16
|
%)
|
|
Net outflows
|
(1,417
|
)
|
(1,815
|
)
|
22
|
%
|
(4,379
|
)
|
(6,190
|
)
|
29
|
%
|
||||
|
Change in market value and other
|
1,375
|
|
(3,080
|
)
|
145
|
%
|
1,830
|
|
(2,207
|
)
|
183
|
%
|
||||
|
Account value, end of period
|
$
|
41,696
|
|
$
|
44,464
|
|
(6
|
%)
|
$
|
41,696
|
|
$
|
44,464
|
|
(6
|
%)
|
|
[1]
|
The three and nine months ended September 30, 2015 includes a
$36
net reduction in the provision for income taxes primarily related to the release of reserves due to the resolution of uncertain tax provisions.
|
|
[2]
|
Represents the income from operations of HLIKK.
|
|
[3]
|
Other account value included
$31.5 billion
,
$14.6 billion
, and
$40.7 billion
as of
September 30, 2016
for the Retirement Plans, Individual Life and Private Placement Life Insurance businesses, respectively. Other account value included
$33.1 billion
,
$14.5 billion
, and $40.0 billion at
September 30, 2015
for the Retirement Plans, Individual Life and Private Placement Life Insurance businesses, respectively. Account
values
a
ssociated with the Retirement Plans and Individual Life businesses no longer generate asset-based fee income due to the sales of these businesses through reinsurance transactions.
|
|
[4]
|
Amounts pertain to the Individual Life business sold in 2013.
|
103
Three and nine months ended
September 30, 2016
compared to the
three and nine months ended
September 30, 2015
Net income for the three months ended
September 30, 2016
, as compared to the prior year period, increased primarily due to a reduced unlock charge, net realized capital gains from investment sales in 2016 and lower insurance operating costs and other expenses due to the continued run off of the variable annuity block. This was partially offset by losses in the macro hedge program, lower tax benefits recognized in the current year period and lower fee income due to the continued runoff of the variable annuity block and a reinsurance gain on disposition in 2015. In addition, lower fixed maturity investment income due to the run off of the annuity business was offset by higher limited partnership investment income. Net income for the nine months ended
September 30, 2016
, as compared to the prior year period, decreased primarily due to lower tax benefits recognized in the current year period and higher realized capital losses driven by a modified coinsurance reinsurance contract related to the Individual Life business and macro hedge program losses and a reinsurance gain on dispositions in 2015. In addition, lower fee income due to the continued runoff of the variable annuity block contributed to a decrease in net income. This was partially offset by lower amortization of DAC and lower insurance operating costs and other expenses due to the continued run off of the variable annuity block.
Account values for Talcott Resolution decreased to approximately
$152 billion
at
September 30, 2016
from approximately
$156 billion
at
September 30, 2015
primarily due to net outflows in variable annuity account value, partially offset by market appreciation. For the
three months ended
September 30, 2016
and the nine months ended
September 30, 2016
, variable annuity net outflows were approximately
$1.4 billion
and
$4.4 billion
due to the continued runoff of the business.
For the
three months ended
September 30, 2016
, the annualized full surrender rate on variable annuities declined to
7.4%
compared to
9.1%
for the
three months ended
September 30, 2015
. For the nine months ended
September 30, 2016
, the annualized full surrender rate on variable annuities declined to
7.2%
compared to
10.3%
for the nine months ended
September 30, 2015
. This decrease was primarily due to lower surrender activity and no in-force management initiatives in 2016. In addition, lower surrender activity for the nine months ended September 30, 2016 was due to market declines in the first two months of 2016 resulting in increased value of guarantees which causes fewer policyholders to surrender.
Contract counts decreased
10%
for variable annuities at
September 30, 2016
compared to
September 30, 2015
primarily due to the continued runoff of the block.
The effective tax rates in
2016
and
2015
differ from the U.S. federal statutory rate of 35% primarily due to permanent differences related to separate account DRD. For discussion of income taxes, see Note
9
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
104
CORPORATE
Results of Operations
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
|
Operating Summary
|
2016
|
2015
|
Change
|
2016
|
2015
|
Change
|
||||||||||
|
Fee income [1]
|
$
|
1
|
|
$
|
1
|
|
—
|
%
|
$
|
3
|
|
$
|
6
|
|
(50
|
%)
|
|
Net investment income
|
6
|
|
5
|
|
20
|
%
|
23
|
|
12
|
|
92
|
%
|
||||
|
Net realized capital gains (losses)
|
(1
|
)
|
(3
|
)
|
67
|
%
|
(6
|
)
|
17
|
|
(135
|
%)
|
||||
|
Total revenues
|
6
|
|
3
|
|
100
|
%
|
20
|
|
35
|
|
(43
|
%)
|
||||
|
Insurance operating costs and other expenses [1]
|
6
|
|
13
|
|
(54
|
%)
|
11
|
|
43
|
|
(74
|
%)
|
||||
|
Loss on extinguishment of debt
|
—
|
|
—
|
|
—
|
%
|
—
|
|
21
|
|
(100
|
%)
|
||||
|
Interest expense
|
86
|
|
88
|
|
(2
|
%)
|
257
|
|
271
|
|
(5
|
%)
|
||||
|
Total benefits, losses and expenses
|
92
|
|
101
|
|
(9
|
%)
|
268
|
|
335
|
|
(20
|
%)
|
||||
|
Loss before income taxes
|
(86
|
)
|
(98
|
)
|
12
|
%
|
(248
|
)
|
(300
|
)
|
17
|
%
|
||||
|
Income tax benefit
|
(31
|
)
|
(95
|
)
|
67
|
%
|
(168
|
)
|
(169
|
)
|
1
|
%
|
||||
|
Net loss
|
$
|
(55
|
)
|
$
|
(3
|
)
|
NM
|
|
$
|
(80
|
)
|
$
|
(131
|
)
|
39
|
%
|
|
[1]
|
Fee income includes the income associated with the sales of non-proprietary insurance products in the Company’s broker-dealer subsidiaries that has an offsetting commission expense included in insurance operating costs and other expenses.
|
Three and nine months ended
September 30, 2016
compared to the
three and nine months ended
September 30, 2015
Net loss for the
three months ended
September 30, 2016
increased from a net loss in the prior year period primarily due to the effect of a $60 tax benefit in the 2015 period from a reduction of the deferred tax valuation allowance on capital loss carryovers.
Net loss for the
nine months ended
September 30, 2016
compared to the prior year period improved primarily due to a decrease in insurance operating costs and other expenses, an increase in net investment income and lower interest expense, partially offset by a change from net realized capital gains to net realized capital losses.
For discussion of income taxes, see Note
9
Income Taxes
of Notes to Condensed Consolidated Financial Statements. For a discussion of investment results, see MD&A - Investment Results, Net Investment Income (loss) and Net Realized Capital Gains (losses).
105
ENTERPRISE RISK MANAGEMENT
The Company has an enterprise risk management function (“ERM”) that is charged with providing analysis of the Company’s risks on an individual and aggregated basis and with ensuring that the Company’s risks remain within its risk appetite and tolerances. The Company has established the Enterprise Risk and Capital Committee (“ERCC”) that includes the Company’s CEO, President, Chief Financial Officer (“CFO”), Chief Investment Officer (“CIO”), Chief Risk Officer, General Counsel and others as deemed necessary by the committee chair. The ERCC is responsible for managing the Company’s risks and overseeing the enterprise risk management program.
The Company categorizes its main risks as follows:
|
•
|
Insurance Risk
|
|
•
|
Operational Risk
|
|
•
|
Financial Risk
|
Refer to the MD&A in The Hartford’s
2015
Form 10-K Annual Report for an explanation of the Company’s Operational Risk.
Insurance Risk Management
The Company categorizes its insurance risks across both property-casualty and life products. The Company establishes risk limits to control potential loss and actively monitors the risk exposures as a percent of statutory surplus. The Company also uses reinsurance to transfer insurance risk to well-established and financially secure reinsurers.
Reinsurance as a Risk Management Strategy
The Company utilizes reinsurance to transfer risk to affiliated and unaffiliated insurers. Reinsurance is used to manage aggregation of risk as well as to transfer certain risk to reinsurance companies based on specific geographic or risk concentrations. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company.
The Company is a member of and participates in several reinsurance pools and associations. The Company evaluates the financial condition of its reinsurers and concentrations of credit risk. Reinsurance is placed with reinsurers that meet strict financial criteria established by the Company.
Reinsurance for Catastrophes
The Company has several catastrophe reinsurance programs, including reinsurance treaties that cover property and workers' compensation losses aggregating from single catastrophe events. The following table summarizes the primary catastrophe treaty reinsurance coverages that the Company has in place as of September 30, 2016:
|
Coverage
|
Treaty Term
|
% of Layer(s) Reinsurance
|
Per Occurrence Limit
|
Retention
|
|||||
|
Principal property catastrophe program covering property catastrophe losses from a single event [1]
|
1/1/2016 to 1/1/2017
|
90%
|
$
|
850
|
|
$
|
350
|
|
|
|
Reinsurance with the FHCF covering Florida Personal Lines property catastrophe losses from a single event
|
6/1/2016 to 6/1/2017
|
90%
|
$
|
121
|
|
[2]
|
$
|
38
|
|
|
Workers compensation losses arising from a single catastrophe event [3]
|
7/1/2016 to 7/1/2017
|
80%
|
$
|
350
|
|
$
|
100
|
|
|
|
[1]
|
Certain aspects of our catastrophe treaty have terms that extend beyond the traditional one year term.
|
|
[2]
|
The per occurrence limit on the Florida Hurricane Catastrophe Fund (“FHCF”) treaty is $121 for the 6/1/2016 to 6/1/2017 treaty year based on the Company's election to purchase the required coverage from FHCF. Coverage is based on the best available information from FHCF, which was updated in June 2016.
|
|
[3]
|
In addition, to the preceding limit shown, the workers compensation reinsurance includes a non-catastrophe, industrial accident layer, 80% of a $30 per event limit in excess a $20 retention.
|
In addition to the property catastrophe reinsurance coverage described in the above table, the Company has other catastrophe and working layer treaties and facultative reinsurance agreements that cover property catastrophe losses on an aggregate excess of loss and on a per risk basis. The principal property catastrophe reinsurance program and certain other reinsurance programs include a provision to reinstate limits in the event that a catastrophe loss exhausts limits on one or more layers under the treaties. In addition, covering the period from January 1, 2014 to December 31, 2016, the Company has an aggregate loss treaty in place which provides one limit of $200 over the three-year period of aggregate qualifying property catastrophe losses in excess of a net retention of $860.
106
Reinsurance Recoverables
Reinsurance Security
To manage reinsurer credit risk, a reinsurance security review committee evaluates the credit standing, financial performance, management and operational quality of each potential reinsurer. Through this process, the Company maintains a centralized list of reinsurers approved for participation in reinsurance transactions. Only reinsurers approved through this process are eligible to participate in new reinsurance transactions. The Company's approval designations reflect the differing credit exposure associated with various classes of business. Participation eligibility is categorized based upon the nature of the risk reinsured, including the expected liability payout duration. In addition to defining participation eligibility, the Company regularly monitors credit risk exposure to each reinsurance counterparty and has established limits tiered by counterparty credit rating. For further discussion on how the Company manages and mitigates third party credit risk, see MD&A - Enterprise Risk Management, Credit Risk.
Property & Casualty Insurance Product Reinsurance Recoverables
Property & Casualty insurance product reinsurance recoverables represent loss and loss adjustment expense recoverables from a number of entities, including reinsurers and pools.
The components of the gross and net reinsurance recoverables are summarized as follows:
|
Reinsurance Recoverables [3]
|
As of September 30, 2016
|
As of December 31, 2015
|
||||
|
Paid loss and loss adjustment expenses [1]
|
$
|
133
|
|
$
|
119
|
|
|
Unpaid loss and loss adjustment expenses
|
2,385
|
|
2,662
|
|
||
|
Gross reinsurance recoverables
|
$
|
2,518
|
|
$
|
2,781
|
|
|
Less: Allowance for uncollectible reinsurance
|
(205
|
)
|
(266
|
)
|
||
|
Net reinsurance recoverables [2]
|
$
|
2,313
|
|
$
|
2,515
|
|
|
[1]
|
As of September 30, 2016 included $39 of reinsurance recoverables from reinsurers for losses paid on the PPG settlement. For additional information, see MD&A - Critical Accounting Estimates,
Property & Casualty Other Operations Claims, Reserve Activity.
|
|
[2]
|
As of September 30, 2016 included reinsurance recoverables of
$113
acquired upon acquisition in July 2016 of Maxum and subsequent activity.
|
|
[3]
|
Excludes gross reinsurance recoverables of
$249
and related allowance of
$23
for uncollectible reinsurance related to the pending sale of the Company's U.K. property and casualty run-off subsidiaries. As of September 30, 2016, the net reinsurance recoverables of
$226
are classified as held for sale in the Company's Condensed Consolidated Balance Sheets.
|
Life Insurance Product Reinsurance Recoverables
Life insurance product reinsurance recoverables represent future policy benefits and unpaid loss and loss adjustment expenses and other policyholder funds and benefits payable that are recoverable from a number of reinsurers.
The components of the gross and net reinsurance recoverables are as follows:
|
Reinsurance Recoverables
|
As of September 30, 2016
|
As of December 31, 2015
|
||||
|
Future policy benefits and unpaid loss and loss adjustment expenses and other policyholder funds and benefits payable
|
$
|
20,813
|
|
$
|
20,674
|
|
|
Gross reinsurance recoverables
|
$
|
20,813
|
|
$
|
20,674
|
|
|
Less: Allowance for uncollectible reinsurance [1]
|
—
|
|
—
|
|
||
|
Net reinsurance recoverables
|
$
|
20,813
|
|
$
|
20,674
|
|
|
[1]
|
No allowance for uncollectible reinsurance is required as of
September 30, 2016
and
December 31, 2015
.
|
As of September 30, 2016
, the Company has reinsurance recoverables from MassMutual and Prudential of $8.5 billion and $11.0 billion, respectively. As of December 31, 2015, the Company had reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.8 billion, respectively. The Company's obligations to its direct policyholders that have been reinsured to MassMutual and Prudential are secured by invested assets held in trust. Net of invested assets held in trust, as of September 30, 2016,
the Company has no reinsurance-related concentrations of credit risk greater than 10% of the Company’s Condensed Consolidated Stockholders’ Equity.
For further explanation of the Company's Insurance Risk Management strategy, see MD&A Enterprise Risk Management Insurance Risk Management in The Hartford's 2015 Form 10-K Annual Report.
107
Financial Risk Management
The Company identifies the following categories of financial risk:
|
•
|
Liquidity Risk
|
|
•
|
Interest Rate Risk
|
|
•
|
Foreign Currency Exchange Risk
|
|
•
|
Equity Risk
|
|
•
|
Credit Risk
|
Financial risks include direct, and indirect risks to the Company’s financial objectives coming from events that impact market conditions or prices. Financial risk also includes exposure to events that may cause correlated movement in multiple risk factors. The primary source of financial risks are the Company’s general account assets and the liabilities that those assets back, together with the guarantees which the company has written over various liability products, particularly its portfolio of variable annuities. The Company assesses its financial risk on a U.S. GAAP, statutory and economic basis. The Hartford has developed a disciplined approach to financial risk management that is well integrated into the Company’s underwriting, pricing, hedging, claims, asset and liability management, new product, and capital management processes. Consistent with its risk appetite, the Company establishes financial risk limits to control potential loss. Exposures are actively monitored, and mitigated where appropriate. The Company uses various risk management strategies, including reinsurance and over-the-counter and exchange traded derivatives with counterparties meeting the appropriate regulatory and due diligence requirements. Derivatives are utilized to achieve one of four Company-approved objectives: to hedge risk arising from interest rate, equity market, commodity market, credit spread and issuer default, price or currency exchange rate risk or volatility; to manage liquidity; to control transaction costs; or to enter into synthetic replication transactions.
Liquidity Risk
Liquidity risk is the risk to current or prospective earnings or capital arising from the Company’s inability or perceived inability to meet its contractual cash obligations at the legal entity level when they come due over given time horizons without incurring unacceptable costs and without relying on uncommitted funding sources. Liquidity risk includes the inability to manage unplanned increases or accelerations in cash outflows, decreases or changes in funding sources, and changes in market conditions that affect the ability to liquidate assets quickly to meet obligations with minimal loss in value. Components of liquidity risk include funding risk, company specific liquidity risk and market liquidity risk. Funding risk is the gap between sources and uses of cash under normal and stressed conditions taking into consideration structural, regulatory and legal entity constraints. Company specific liquidity risk represents changes in institution-specific conditions that affect the Company’s ability to sell assets or otherwise transact business without incurring a significant loss in value. Market liquidity risk represents changes in general market conditions that affect the institution’s ability to sell assets or otherwise transact business without incurring a significant loss in value.
The Company has defined ongoing monitoring and reporting requirements to assess liquidity across the enterprise under both current and stressed market conditions. The Company measures and manages liquidity risk exposures and funding needs within prescribed limits and across legal entities, taking into account legal, regulatory and operational limitations to the transferability of liquidity. The Company also monitors internal and external conditions, identifies material risk changes and emerging risks that may impact liquidity. The Company’s CFO has primary responsibility for liquidity risk.
For further discussion on liquidity see the section on Capital Resources and Liquidity.
Interest Rate Risk
Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and liabilities arising from movements in interest rates. Interest rate risk encompasses exposures with respect to changes in the level of interest rates, the shape of the term structure of rates and the volatility of interest rates. Interest rate risk does not include exposure to changes in credit spreads. The Company has exposure to interest rates arising from its fixed maturity securities, interest sensitive liabilities and discount rate assumptions associated with the Company’s pension and other post retirement benefit obligations.
An increase in interest rates from current levels is generally a favorable development for the Company. Interest rate increases are expected to provide additional net investment income, reduce the cost of the variable annuity hedging program, and limit the potential risk of margin erosion due to minimum guaranteed crediting rates in certain Talcott Resolution products. However, if long-term interest rates rise dramatically within a six to twelve month time period, certain Talcott Resolution businesses may be exposed to disintermediation risk. Disintermediation risk refers to the risk that policyholders will surrender their contracts in a rising interest rate environment requiring the Company to liquidate assets in an unrealized loss position. In conjunction with the interest rate risk measurement and management techniques, certain of Talcott Resolution's fixed income product offerings have market value adjustment provisions at contract surrender. An increase in interest rates may also impact the Company’s tax planning strategies and in particular its ability to utilize tax benefits of previously recognized realized capital losses.
108
A decline in interest rates results in certain mortgage-backed and municipal securities being more susceptible to paydowns and prepayments or calls. During such periods, the Company generally will not be able to reinvest the proceeds at comparable yields. Lower interest rates will also likely result in lower net investment income, increased hedging costs associated with variable annuities and, if declines are sustained for a long period of time, it may subject the Company to reinvestment risk and possibly reduced profit margins associated with guaranteed crediting rates on certain Talcott Resolution products. Conversely, the fair value of the investment portfolio will increase when interest rates decline and the Company’s interest expense will be lower on its variable rate debt obligations.
The Company manages its exposure to interest rate risk by constructing investment portfolios that maintain asset allocation limits and asset/liability duration matching targets which may include the use of derivatives. The Company analyzes interest rate risk using various models including parametric models and cash flow simulation under various market scenarios of the liabilities and their supporting investment portfolios. Key metrics that the Company uses to quantify its exposure to interest rate risk inherent in its invested assets and interest rate sensitive liabilities include duration, convexity and key rate duration. Duration is the price sensitivity of a financial instrument or series of cash flows to a parallel change in the underlying yield curve used to value the financial instrument or series of cash flows. For example, a duration of 5 means the price of the security will change by approximately 5% for a 100 basis point change in interest rates. Convexity is used to approximate how the duration of a security changes as interest rates change in a parallel manner. Key rate duration analysis measures the price sensitivity of a security or series of cash flows to each point along the yield curve and enables the Company to estimate the price change of a security assuming non-parallel interest rate movements.
To calculate duration, convexity, and key rate durations, projections of asset and liability cash flows are discounted to a present value using interest rate assumptions. These cash flows are then revalued at alternative interest rate levels to determine the percentage change in fair value due to an incremental change in the entire yield curve for duration and convexity, or a particular point on the yield curve for key rate duration. Cash flows from corporate obligations are assumed to be consistent with the contractual payment streams on a yield to worst basis. Yield to worst is a basis that represents the lowest potential yield that can be received without the issuer actually defaulting. The primary assumptions used in calculating cash flow projections include expected asset payment streams taking into account prepayment speeds, issuer call options and contract holder behavior. Mortgage-backed and asset-backed securities are modeled based on estimates of the rate of future prepayments of principal over the remaining life of the securities. These estimates are developed by incorporating collateral surveillance and anticipated future market dynamics. Actual prepayment experience may vary from these estimates.
The Company is also exposed to interest rate risk based upon the sensitivity of the present value of the Company’s pension and other postretirement benefit obligations to changes in liability discount rates. The discount rate assumption is based upon an interest rate yield curve that reflects high-quality fixed income investments consistent with the maturity profile of the expected liability cash flows. For further discussion of discounting pension and other postretirement benefit obligations, refer to Note 16- Employee Benefit Plans of Notes to Consolidated Financial Statements in The Hartford’s
2015
Form 10-K Annual Report. In addition, management evaluates performance of certain Talcott Resolution products based on net investment spread which is, in part, influenced by changes in interest rates.
The investments and liabilities primarily associated with interest rate risk are included in the following discussion. Certain product liabilities, including those containing GMWB or GMDB, expose the Company to interest rate risk but also have significant equity risk. These liabilities are discussed as part of the Variable Product Guarantee Risks and Risk Management section.
Foreign Currency Exchange Risk
Foreign currency exchange risk is defined as the risk of financial loss due to changes in the relative value between currencies. The Company’s foreign currency exchange risk is related to non-U.S. dollar denominated investments, which primarily consist of fixed maturity investments, a yen denominated fixed payout annuity and changes in equity of the U.K. property and casualty runoff subsidiaries currently held for sale. In addition, Talcott Resolution formerly issued non-U.S. dollar denominated funding agreement liability contracts. A significant portion of the Company’s foreign currency exposure is mitigated through the use of derivatives.
Fixed Maturity Investments
The risk associated with the non-U.S. dollar denominated fixed maturities relates to potential decreases in value and income resulting from unfavorable changes in foreign exchange rates. In order to manage currency exposures, the Company enters into foreign currency swaps to hedge the variability in cash flows as the fair value associated with certain foreign denominated fixed maturities declines. These foreign currency swaps are structured to match the foreign currency cash flows of the hedged foreign denominated securities.
Liabilities
The Company has foreign currency exchange risk associated with yen denominated fixed payout annuities under a reinsurance contract. The Company has entered into pay U.S. dollar, receive yen swap contracts to hedge the currency exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments. In addition, the Company has in place certain foreign currency forwards to hedge the currency impacts on changes in equity of the U.K. property and casualty runoff subsidiaries.
Talcott Resolution previously issued non-U.S. dollar denominated funding agreement liability contracts that remain outstanding. The Company hedged the foreign currency risk associated with these liability contracts with currency rate swaps.
109
Equity Risk
Equity risk is defined as the risk of financial loss due to changes in the value of global equities or equity indices. The Company has exposure to equity risk from assets under management, embedded derivatives within the Company’s variable annuities and assets that support the Company’s pension plans and other post retirement benefit plans. Equity Risk on the Company’s variable annuity products is mitigated through various hedging programs. (See the Variable Annuity Hedging Program Section).
The Company's exposure to equity risk includes the potential for lower earnings associated with certain businesses such as mutual funds and variable annuities where fee income is earned based upon the value of the assets under management. For further discussion of equity risk, see the following Variable Product Guarantee Risks and Risk Management section. In addition, Talcott Resolution includes certain guaranteed benefits, primarily associated with variable annuity products, which increase the Company's potential benefit exposure in the periods that equity markets decline.
The Company is also subject to equity risk based upon the assets that support its pension plans and other post retirement benefit plans. The asset allocation mix is reviewed on a periodic basis. In order to minimize risk, the pension plans maintain a listing of permissible and prohibited investments. In addition, the pension plans have certain concentration limits and investment quality requirements imposed on permissible investment options.
Variable Product Guarantee Risks and Risk Management
The Company’s variable products are significantly influenced by the U.S. and other equity markets. Increases or declines in equity markets impact certain assets and liabilities related to the Company’s variable products and the Company’s earnings derived from those products. The Company’s variable products include variable annuity contracts and mutual funds.
Generally, declines in equity markets will:
|
•
|
reduce the value of assets under management and the amount of fee income generated from those assets;
|
|
•
|
increase the liability for GMWB benefits resulting in realized capital losses;
|
|
•
|
increase the value of derivative assets used to hedge product guarantees resulting in realized capital gains;
|
|
•
|
increase the costs of the hedging instruments we use in our hedging program;
|
|
•
|
increase the Company’s net amount at risk ("NAR") for GMDB and GMWB benefits;
|
|
•
|
increase the amount of required assets to be held backing variable annuity guarantees to maintain required regulatory reserve levels and targeted risk based capital ratios; and
|
|
•
|
decrease the Company’s estimated future gross profits, resulting in a DAC unlock charge. See Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity Contracts within the Critical Accounting Estimates section of the MD&A for further information.
|
Generally, increases in equity markets will have the inverse impact of those listed in the preceding discussion. For additional information, see Risk Hedging - Variable Annuity Hedging Program section.
Variable Annuity Guaranteed Benefits
The Company’s variable annuities include GMDB and certain contracts include GMWB features. Declines in the equity markets will increase the Company’s liability for these benefits. Many contracts with a GMDB include a maximum anniversary value ("MAV"), which in rising markets resets the guarantee on anniversary to be ‘at the money’. As the MAV increases, it can increase the NAR for subsequent declines in account value. Generally, a GMWB contract is ‘in the money’ if the contractholder’s guaranteed remaining balance (“GRB”) becomes greater than the account value.
The NAR is generally defined as the guaranteed minimum benefit amount in excess of the contractholder’s current account value. Variable annuity account values with guarantee features were
$41.7 billion
and
$44.2 billion
as of
September 30, 2016
and
December 31, 2015
, respectively.
110
The following tables summarize the account values of the Company’s variable annuities with guarantee features and the NAR split between GMDB and GMWB (retained net amount at risk does not take into consideration the effects of the variable annuity hedge programs in place as of each balance sheet date):
|
Total Variable Annuity Guarantees
|
|||||||||||||
|
As of September 30, 2016
|
|||||||||||||
|
($ in billions)
|
Account
Value
|
Gross Net
Amount at Risk
|
Retained Net
Amount at Risk
|
% of Contracts In
the Money [2]
|
% In the
Money [2] [3]
|
||||||||
|
Variable Annuity [1]
|
|||||||||||||
|
GMDB
|
$
|
41.7
|
|
$
|
3.4
|
|
$
|
0.7
|
|
31
|
%
|
13
|
%
|
|
GMWB
|
$
|
18.9
|
|
$
|
0.2
|
|
$
|
0.1
|
|
7
|
%
|
12
|
%
|
|
Total Variable Annuity Guarantees
|
|||||||||||||
|
As of December 31, 2015
|
|||||||||||||
|
($ in billions)
|
Account
Value
|
Gross Net
Amount at Risk
|
Retained Net
Amount at Risk
|
% of Contracts In
the Money [2] |
% In the
Money [2] [3] |
||||||||
|
Variable Annuity [1]
|
|||||||||||||
|
GMDB
|
$
|
44.2
|
|
$
|
4.2
|
|
$
|
1.1
|
|
55
|
%
|
9
|
%
|
|
GMWB
|
$
|
20.2
|
|
$
|
0.2
|
|
$
|
0.2
|
|
11
|
%
|
9
|
%
|
|
[1]
|
Policies with a guaranteed living benefit also have a guaranteed death benefit. The NAR for each benefit is shown; however these benefits are not additive. When a policy terminates due to death, any NAR related to GMWB is released. Similarly, when a policy goes into benefit status on a GMWB, the GMDB NAR is reduced to zero.
|
|
[2]
|
Excludes contracts that are fully reinsured.
|
|
[3]
|
For all contracts that are “in the money”, this represents the percentage by which the average contract was in the money.
|
Many policyholders with a GMDB also have a GMWB. Policyholders that have a product that offers both guarantees can only receive
the GMDB or GMWB. The GMDB NAR disclosed in the preceding tables is a point in time measurement and assumes that all participants utilize the GMDB benefit on that measurement date. For additional information on the Company’s GMDB liability, see Note
8
-
Separate Accounts, Death Benefits and Other Insurance Benefit Features
of Notes to Condensed Consolidated Financial Statements.
The Company expects to incur GMDB payments in the future only if the policyholder has an “in the money” GMDB at their death. For policies with a GMWB rider, the Company expects to incur GMWB payments in the future only if the account value is reduced over time to a specified level through a combination of market performance and periodic withdrawals, at which point the contractholder will receive an annuity equal to the GRB which is generally equal to premiums less withdrawals. For the Company’s “life-time” GMWB products, this annuity can exceed the GRB. As the account value fluctuates with equity market returns on a daily basis and the “life-time” GMWB payments may exceed the GRB, the ultimate amount to be paid by the Company, if any, is uncertain and could be significantly more or less than the Company’s current carried liability. For additional information on the Company’s GMWB liability, see Note
5
-
Fair Value Measurements
of Notes to Condensed Consolidated Financial Statements.
Variable Annuity Market Risk Exposures
The following table summarizes the broad Variable Annuity Guarantees offered by the Company and the market risks to which the guarantee is most exposed from a U.S. GAAP accounting perspective:
|
Variable Annuity Guarantees [1]
|
U.S. GAAP Treatment [1]
|
Primary Market Risk Exposures [1]
|
|
GMDB and life-contingent component of the GMWB
|
Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid
|
Equity Market Levels
|
|
GMWB (excluding life-contingent portions)
|
Fair Value
|
Equity Market Levels / Implied Volatility / Interest Rates
|
|
[1]
|
Each of these guarantees and the related U.S. GAAP accounting volatility will also be influenced by actual and estimated policyholder behavior.
|
Risk Hedging
Variable Annuity Hedging Program
The Company’s variable annuity hedging is primarily focused, through the use of reinsurance and capital market derivative instruments, on reducing the economic exposure to market risks associated with guaranteed benefits that are embedded in our variable annuity contracts. The variable annuity hedging also considers the potential impacts on statutory capital.
111
Reinsurance
The Company uses reinsurance for a portion of contracts with GMWB riders issued prior to the second quarter of 2006. The Company also uses reinsurance for a majority of the GMDB issued.
Capital Market Derivatives
GMWB Hedge Program
The Company enters into derivative contracts to hedge market risk exposures associated with the GMWB liabilities that are not reinsured. These derivative contracts include customized swaps, interest rate swaps and futures, and equity swaps, options, and futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index.
Additionally, the Company holds customized derivative contracts to provide protection from certain capital market risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized derivative contracts are based on policyholder behavior assumptions specified at the inception of the derivative contracts. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices.
While the Company actively manages this dynamic hedging program, increased U.S. GAAP earnings volatility may result from factors including, but not limited to: policyholder behavior, capital markets, divergence between the performance of the underlying funds and the hedging indices, changes in hedging positions and the relative emphasis placed on various risk management objectives.
Macro Hedge Program
The Company’s macro hedging program uses derivative instruments, such as options, forwards and futures on equities and interest rates, to provide protection against the statutory tail scenario risk arising from GMWB and GMDB liabilities on the Company’s statutory surplus. These macro hedges cover some of the residual risks not otherwise covered by the dynamic hedging program. Management assesses this residual risk under various scenarios in designing and executing the macro hedge program. The macro hedge program will result in additional U.S. GAAP earnings volatility as changes in the value of the macro hedge derivatives, which are designed to reduce statutory reserve and capital volatility, may not be closely aligned to changes in GAAP liabilities.
Variable Annuity Hedging Program Sensitivities
The underlying guaranteed living benefit liabilities (excluding the life contingent portion of GMWB contracts) and hedge assets within the GMWB hedge and Macro hedge programs are carried at fair value.
The following table presents our estimates of the potential instantaneous impacts from sudden market stresses related to equity market prices, interest rates, and implied market volatilities. The following sensitivities represent: (1) the net estimated difference between the change in the fair value of GMWB liabilities and the underlying hedge instruments and (2) the estimated change in fair value of the hedge instruments for the macro program, before the impacts of amortization of DAC and taxes. As noted in the preceding discussion, certain hedge assets are used to hedge liabilities that are not carried at fair value and will not have a liability offset in the U.S. GAAP sensitivity analysis. All sensitivities are measured as of September 30, 2016 and are related to the fair value of liabilities and hedge instruments in place at that date for the Company’s variable annuity hedge programs. The impacts presented in the table that follows are estimated individually and measured without consideration of any correlation among market risk factors.
|
GAAP Sensitivity Analysis
|
As of September 30, 2016
|
|||||||||||||||||
|
(before tax and DAC) [1]
|
GMWB
|
Macro
|
||||||||||||||||
|
Equity Market Return
|
-20
|
%
|
-10
|
%
|
10
|
%
|
-20
|
%
|
-10
|
%
|
10
|
%
|
||||||
|
Potential Net Fair Value Impact
|
$
|
(33
|
)
|
$
|
(13
|
)
|
$
|
7
|
|
$
|
298
|
|
$
|
130
|
|
$
|
(96
|
)
|
|
Interest Rates
|
-50bps
|
|
-25bps
|
|
+25bps
|
|
-50bps
|
|
-25bps
|
|
+25bps
|
|
||||||
|
Potential Net Fair Value Impact
|
$
|
(2
|
)
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
8
|
|
$
|
4
|
|
$
|
(4
|
)
|
|
Implied Volatilities
|
10
|
%
|
2
|
%
|
-10
|
%
|
10
|
%
|
2
|
%
|
-10
|
%
|
||||||
|
Potential Net Fair Value Impact
|
$
|
(70
|
)
|
$
|
(14
|
)
|
$
|
67
|
|
$
|
140
|
|
$
|
28
|
|
$
|
(122
|
)
|
|
[1]
|
These sensitivities are based on the following key market levels as of
September 30, 2016
: 1) S&P of
2,168
; 2) 10yr US swap rate of
1.47%
; 3) S&P 10yr volatility of
27.04%
.
|
112
The preceding sensitivity analysis is an estimate and should not be used to predict the future financial performance of the Company’s variable annuity hedge programs. The actual net changes in the fair value liability and the hedging assets illustrated in the preceding table may vary materially depending on a variety of factors which include but are not limited to:
|
•
|
The sensitivity analysis is only valid as of the measurement date and assumes instantaneous changes in the capital market factors and no ability to rebalance hedge positions prior to the market changes;
|
|
•
|
Changes to the underlying hedging program, policyholder behavior, and variation in underlying fund performance relative to the hedged index, which could materially impact the liability; and
|
|
•
|
The impact of elapsed time on liabilities or hedge assets, any non-parallel shifts in capital market factors, or correlated moves across the sensitivities.
|
Financial Risk on Statutory Capital
Statutory surplus amounts and risk-based capital (“RBC”) ratios may increase or decrease in any period depending upon a variety of factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. At times, the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. Factors include:
|
•
|
In general, as equity market levels and interest rates decline, the amount and volatility of both our actual potential obligation, as well as the related statutory surplus and capital margin for death and living benefit guarantees associated with variable annuity contracts can be materially negatively affected, sometimes at a greater than linear rate. Other market factors that can impact statutory surplus, reserve levels and capital margin include differences in performance of variable subaccounts relative to indices and/or realized equity and interest rate volatilities. In addition, as equity market levels increase, generally surplus levels will increase. RBC ratios will also tend to increase when equity markets increase. However, as a result of a number of factors and market conditions, including the level of hedging costs and other risk transfer activities, reserve requirements for death and living benefit guarantees and RBC requirements could increase with rising equity markets, resulting in lower RBC ratios. Non-market factors, which can also impact the amount and volatility of both our actual potential obligation, as well as the related statutory surplus and capital margin, include actual and estimated policyholder behavior experience as it pertains to lapsation, partial withdrawals, and mortality.
|
|
•
|
As the value of certain fixed-income and equity securities in our investment portfolio decreases, due in part to credit spread widening, statutory surplus and RBC ratios may decrease.
|
|
•
|
As the value of certain derivative instruments that do not get hedge accounting decreases, statutory surplus and RBC ratios may decrease.
|
|
•
|
Our statutory surplus is also impacted by widening credit spreads as a result of the accounting for the assets and liabilities in our fixed market value adjusted "MVA" annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates. In many capital market scenarios, current crediting rates are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, actual credit spreads on investment asset may increase sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value losses. As actual credit spreads are not fully reflected in the current crediting rates the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in reductions in statutory surplus. This has resulted and may continue to result in the need to devote significant additional capital to support the product.
|
|
•
|
With respect to our fixed annuity business, sustained low interest rates may decrease spread income and potentially increase required reserves which may result in a reduction in statutory surplus and an increase in NAIC required capital.
|
Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company subsidiaries. In addition, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital we must hold in order to maintain our current ratings.
The Company has reinsured approximately
38%
of its risk associated with GMWB and
79%
of its risk associated with the aggregate GMDB exposure. These reinsurance agreements serve to reduce the Company’s exposure to changes in the statutory reserves and the related capital and RBC ratios associated with changes in the capital markets. The Company also continues to explore other solutions for mitigating the capital market risk effect on surplus, such as internal and external reinsurance solutions, modifications to our hedging program, changes in product design and expense management.
113
Credit Risk
Credit risk is defined as the risk to earnings or capital due to uncertainty of an obligor’s or counterparty’s ability or willingness to meet its obligations in accordance with contractually agreed upon terms. The majority of the Company’s credit risk is concentrated in its investment holdings but is also present in reinsurance and insurance portfolios. Credit risk is comprised of three major factors: the risk of change in credit quality, or credit migration risk; the risk of default; and the risk of a change in value due to changes in credit spread. A decline in creditworthiness is typically associated with an increase in an investment’s credit spread, potentially resulting in an increase in other-than-temporary impairments and an increased probability of a realized loss upon sale.
The objective of the Company’s enterprise credit risk management strategy is to identify, quantify, and manage credit risk on an aggregate portfolio basis and to limit potential losses in accordance with an established credit risk management policy. The Company manages to its credit risk appetite by primarily holding a diversified mix of investment grade issuers and counterparties across its investment, reinsurance, and insurance portfolios. Potential losses are also limited within portfolios by diversifying across geographic regions, asset types, and sectors.
The Company manages credit risk exposure from its inception to its maturity or sale. Both the investment and reinsurance areas have formulated procedures for counterparty approvals and authorizations. Although approval processes may vary by area and type of credit risk, approval processes establish minimum levels of creditworthiness and financial stability. Credits considered for investment are subjected to underwriting reviews. Within the investment portfolio, private securities are subject to committee review for approval.
Credit risks are managed on an on-going basis through the use of various processes and analyses. At the investment, reinsurance, and insurance product levels, fundamental credit analyses are performed at the issuer/counterparty level on a regular basis. To provide a holistic review within the investment portfolio, fundamental analyses are supported by credit ratings, assigned by nationally recognized rating agencies or internally assigned, and by quantitative credit analyses. The Company utilizes various risk tools, such as credit value at risk ("VaR") to measure spread, migration, and default risk on a monthly basis. Issuer and security level risk measures are also utilized. In the event of deterioration in credit quality, the Company maintains watch lists of problem counterparties within the investment and reinsurance portfolios. The watch lists are updated based on regular credit examinations and management reviews. The Company also performs quarterly assessments of probable expected losses in the investment portfolio. The process is conducted on a sector basis and is intended to promptly assess and identify potential problems in the portfolio and to recognize necessary impairments.
Credit risk policies at the enterprise and operation level ensure comprehensive and consistent approaches to quantifying, evaluating, and managing credit risk under expected and stressed conditions. These policies define the scope of the risk, authorities, accountabilities, terms, and limits, and are regularly reviewed and approved by senior management. Aggregate counterparty credit quality and exposure is monitored on a daily basis utilizing an enterprise-wide credit exposure information system that contains data on issuers, ratings, exposures, and credit limits. Exposures are tracked on a current and potential basis. Credit exposures are reported regularly to the Company's Asset Liability Committee ("ALCO") and the ERCC. Exposures are aggregated by ultimate parent across investments, reinsurance receivables, insurance products with credit risk, and derivative counterparties.
The Company exercises various methods to mitigate its credit risk exposure within its investment and reinsurance portfolios. Some of the reasons for mitigating credit risk include financial instability or poor credit, avoidance of arbitration or litigation, future uncertainty of the counterparty, and exposure in excess of risk tolerances. Credit risk within the investment portfolio is most commonly mitigated through asset sales or the use of derivative instruments. Counterparty credit risk is mitigated through the practice of entering into contracts only with strong creditworthy institutions and through the practice of holding and posting of collateral. In addition,
transactions cleared through a central clearing house reduce risk due to their ability to require daily variation margin, monitor the Company's ability to request additional collateral in the event of a counterparty downgrade, and be an independent valuation source.
Systemic credit risk is mitigated through the construction of high-quality, diverse portfolios that are subject to regular underwriting of credit risks. For further discussion of the Company’s investment and derivative instruments, see the Portfolio Risks and Risk Management section and Note
6
-
Investments
of Notes to Condensed Consolidated Financial Statements. For further discussion on managing and mitigating credit risk from the use of reinsurance via an enterprise security review process, see MD&A - Enterprise Risk Management, Insurance Risk Management, Reinsurance as a Risk Management Strategy.
As of
September 30, 2016
, the Company had
no
investment exposure to any credit concentration risk of a single issuer or counterparty greater than 10% of the Company’s stockholders' equity, other than the U.S. government and certain U.S. government securities. For further discussion of concentration of credit risk in the investment portfolio, see MD&A - Enterprise Risk Management, Insurance Risk Management, Reinsurance as a Risk Management Strategy and the Concentration of Credit Risk section in Note
6
-
Investments
of Notes to Condensed Consolidated Financial Statements.
114
Derivative Instruments
The Company utilizes a variety of over-the-counter ("OTC"), OTC-cleared and exchange-traded derivative instruments as a part of its overall risk management strategy as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, commodity market, credit spread, issuer default, price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies. For further information on the Company’s use of derivatives, see Note
7
-
Derivative Instruments
of Notes to Condensed Consolidated Financial Statements.
Derivative activities are monitored and evaluated by the Company’s compliance and risk management teams and reviewed by senior management. In addition, the Company monitors counterparty credit exposure on a monthly basis to ensure compliance with Company policies and statutory limitations. The notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. Downgrades to the credit ratings of The Hartford’s insurance operating companies may have adverse implications for its use of derivatives including those used to hedge benefit guarantees of variable annuities. In some cases, downgrades may give derivative counterparties for OTC derivatives and clearing brokers for OTC-cleared derivatives the right to cancel and settle outstanding derivative trades or require additional collateral to be posted. In addition, downgrades may result in counterparties and clearing brokers becoming unwilling to engage in or clear additional derivatives or may require collateralization before entering into any new trades. This would restrict the supply of derivative instruments commonly used to hedge variable annuity guarantees, particularly long-dated equity derivatives and interest rate swaps.
The Company uses various derivative counterparties in executing its derivative transactions. The use of counterparties creates credit risk that the counterparty may not perform in accordance with the terms of the derivative transaction. The Company has derivative counterparty exposure policies which limit the Company’s exposure to credit risk. The Company’s policies with respect to derivative counterparty exposure establish market-based credit limits, favor long-term financial stability and creditworthiness of the counterparty and typically require credit enhancement/credit risk reducing agreements. The Company minimizes the credit risk of derivative instruments by entering into transactions with high quality counterparties primarily rated A or better, which are monitored and evaluated by the Company’s risk management team and reviewed by senior management. The Company also generally requires that OTC derivative contracts be governed by an International Swaps and Derivatives Association ("ISDA") Master Agreement, which is structured by legal entity and by counterparty and permits right of offset.
The Company has developed credit exposure thresholds which are based upon counterparty ratings. Credit exposures are measured using the market value of the derivatives, resulting in amounts owed to the Company by its counterparties or potential payment obligations from the Company to its counterparties. The Company enters into credit support annexes in conjunction with the ISDA agreements, which require daily collateral settlement based upon agreed upon thresholds. For purposes of daily derivative collateral maintenance, credit exposures are generally quantified based on the prior business day’s market value and collateral is pledged to and held by, or on behalf of, the Company to the extent the current value of the derivatives exceed the contractual thresholds. In accordance with industry standard and the contractual agreements, collateral is typically settled on the next business day. The Company has exposure to credit risk for amounts below the exposure thresholds which are uncollateralized as well as for market fluctuations that may occur between contractual settlement periods of collateral movements.
For the company’s derivative programs, the maximum uncollateralized threshold for a derivative counterparty for a single legal entity is a net market value of
$10
. The Company currently transacts OTC derivatives in five legal entities that have a threshold greater than zero; therefore, the maximum combined threshold for a single counterparty across all legal entities that use derivatives is a net market value of
$50
. In addition, the Company may have exposure to multiple counterparties in a single corporate family due to a common credit support provider. As of
September 30, 2016
, the maximum combined threshold for all counterparties under a single credit support provider across all legal entities that use derivatives was a net market value of
$100
. Based on the contractual terms of the collateral agreements, these thresholds may be immediately reduced due to a downgrade in either party’s credit rating. For further discussion, see the Derivative Commitments section of Note
10
Commitments and Contingencies
of Notes to Condensed Consolidated Financial Statements.
For the
nine months ended
September 30, 2016
, the Company has incurred no losses on derivative instruments due to counterparty default.
In addition to counterparty credit risk, the Company may also introduce credit risk through the use of credit default swaps that are entered into to manage credit exposure. Credit default swaps involve a transfer of credit risk of one or many referenced entities from one party to another in exchange for periodic payments. The party that purchases credit protection will make periodic payments based on an agreed upon rate and notional amount, and for certain transactions there will also be an upfront premium payment. The second party, who assumes credit risk, will typically only make a payment if there is a credit event as defined in the contract and such payment will be typically equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation. A credit event is generally defined as default on contractually obligated interest or principal payments or bankruptcy of the referenced entity.
115
The Company uses credit derivatives to purchase credit protection and to assume credit risk with respect to a single entity, referenced index, or asset pool. The Company purchases credit protection through credit default swaps to economically hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio. The Company also enters into credit default swaps that assume credit risk as part of replication transactions. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies. These swaps reference investment grade single corporate issuers and baskets, which include customized diversified portfolios of corporate issuers, which are established within sector concentration limits and may be divided into tranches which possess different credit ratings.
Investment Portfolio Risks and Risk Management
Investment Portfolio Composition
The following table presents the Company’s fixed maturities, AFS, by credit quality. The following average credit ratings referenced throughout this section are based on availability and are the midpoint of the applicable ratings among Moody’s, S&P, Fitch and Morningstar. If no rating is available from a rating agency, then an internally developed rating is used.
|
Fixed Maturities by Credit Quality
|
||||||||||||||||
|
|
September 30, 2016
|
December 31, 2015
|
||||||||||||||
|
|
Amortized Cost
|
Fair Value
|
Percent of Total Fair Value
|
Amortized Cost
|
Fair Value
|
Percent of Total Fair Value
|
||||||||||
|
United States Government/Government agencies
|
$
|
7,590
|
|
$
|
8,225
|
|
13.6
|
%
|
$
|
7,911
|
|
$
|
8,179
|
|
13.8
|
%
|
|
AAA
|
7,289
|
|
7,693
|
|
12.8
|
%
|
6,980
|
|
7,195
|
|
12.2
|
%
|
||||
|
AA
|
9,536
|
|
10,342
|
|
17.2
|
%
|
9,943
|
|
10,584
|
|
17.9
|
%
|
||||
|
A
|
14,314
|
|
15,804
|
|
26.2
|
%
|
14,297
|
|
15,128
|
|
25.5
|
%
|
||||
|
BBB
|
13,589
|
|
14,657
|
|
24.3
|
%
|
14,598
|
|
14,918
|
|
25.2
|
%
|
||||
|
BB & below
|
3,424
|
|
3,504
|
|
5.9
|
%
|
3,236
|
|
3,192
|
|
5.4
|
%
|
||||
|
Total fixed maturities, AFS
|
$
|
55,742
|
|
$
|
60,225
|
|
100
|
%
|
$
|
56,965
|
|
$
|
59,196
|
|
100
|
%
|
The fair value of securities increased, as compared to
December 31, 2015
, primarily related to higher valuations due to a decline in interest rates and credit spread tightening, partially offset by the transfer of assets to assets held for sale related to the U.K. property and casualty run-off subsidiaries and the run-off of Talcott Resolution. For further discussion on the disposition, see Note 2 - Business Acquisitions and Dispositions of Notes to Condensed Consolidated Financial Statements. The increase in AAA is primarily related to purchases of municipal bonds. In addition, the decline in BBB was due to sales of corporates, mainly financial and energy-related names. Fixed maturities, FVO, are not included in the preceding table. For further discussion on FVO securities, see Note
5
-
Fair Value Measurements
of Notes to Condensed Consolidated Financial Statements.
116
The following table presents the Company’s AFS securities by type as well as fixed maturities and equity, FVO.
|
Securities by Type
|
|||||||||||||||||||||||||||||||||||||
|
|
September 30, 2016
|
December 31, 2015
|
|||||||||||||||||||||||||||||||||||
|
|
Cost or Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
Percent of Total Fair Value
|
Cost or Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
Percent of Total Fair Value
|
|||||||||||||||||||||||||||
|
ABS
|
|||||||||||||||||||||||||||||||||||||
|
Consumer loans
|
$
|
2,363
|
|
$
|
21
|
|
$
|
(31
|
)
|
$
|
2,353
|
|
3.9
|
%
|
$
|
2,183
|
|
$
|
6
|
|
$
|
(40
|
)
|
$
|
2,149
|
|
3.6
|
%
|
|||||||||
|
Small business
|
86
|
|
6
|
|
(2
|
)
|
90
|
|
0.1
|
%
|
123
|
|
12
|
|
(4
|
)
|
131
|
|
0.2
|
%
|
|||||||||||||||||
|
Other
|
234
|
|
8
|
|
—
|
|
242
|
|
0.4
|
%
|
214
|
|
6
|
|
(1
|
)
|
219
|
|
0.4
|
%
|
|||||||||||||||||
|
Collateralized debt obligations ("CDOs")
|
|||||||||||||||||||||||||||||||||||||
|
Collateralized loan obligations ("CLOs")
|
2,106
|
|
8
|
|
(9
|
)
|
2,105
|
|
3.5
|
%
|
2,514
|
|
4
|
|
(21
|
)
|
2,497
|
|
4.2
|
%
|
|||||||||||||||||
|
Commercial real estate ("CREs")
|
21
|
|
22
|
|
—
|
|
43
|
|
0.1
|
%
|
91
|
|
42
|
|
(1
|
)
|
132
|
|
0.2
|
%
|
|||||||||||||||||
|
Other [1]
|
387
|
|
37
|
|
—
|
|
425
|
|
0.7
|
%
|
384
|
|
29
|
|
(1
|
)
|
409
|
|
0.7
|
%
|
|||||||||||||||||
|
CMBS
|
|||||||||||||||||||||||||||||||||||||
|
Agency backed [2]
|
1,516
|
|
63
|
|
(10
|
)
|
1,569
|
|
2.6
|
%
|
1,224
|
|
34
|
|
(8
|
)
|
1,250
|
|
2.1
|
%
|
|||||||||||||||||
|
Bonds
|
2,795
|
|
142
|
|
(7
|
)
|
2,930
|
|
4.8
|
%
|
2,725
|
|
58
|
|
(29
|
)
|
2,754
|
|
4.7
|
%
|
|||||||||||||||||
|
Interest only (“IOs”)
|
755
|
|
21
|
|
(7
|
)
|
769
|
|
1.3
|
%
|
719
|
|
13
|
|
(19
|
)
|
713
|
|
1.2
|
%
|
|||||||||||||||||
|
Corporate
|
|||||||||||||||||||||||||||||||||||||
|
Basic industry
|
1,099
|
|
95
|
|
(2
|
)
|
1,192
|
|
2.0
|
%
|
1,161
|
|
55
|
|
(45
|
)
|
1,171
|
|
2.0
|
%
|
|||||||||||||||||
|
Capital goods
|
1,564
|
|
157
|
|
(2
|
)
|
1,719
|
|
2.9
|
%
|
1,781
|
|
110
|
|
(15
|
)
|
1,876
|
|
3.2
|
%
|
|||||||||||||||||
|
Consumer cyclical
|
1,759
|
|
137
|
|
(2
|
)
|
1,894
|
|
3.1
|
%
|
1,848
|
|
68
|
|
(24
|
)
|
1,892
|
|
3.2
|
%
|
|||||||||||||||||
|
Consumer non-cyclical
|
3,795
|
|
386
|
|
(3
|
)
|
4,178
|
|
6.9
|
%
|
3,735
|
|
196
|
|
(24
|
)
|
3,907
|
|
6.6
|
%
|
|||||||||||||||||
|
Energy
|
1,979
|
|
180
|
|
(17
|
)
|
2,142
|
|
3.6
|
%
|
2,276
|
|
84
|
|
(111
|
)
|
2,249
|
|
3.8
|
%
|
|||||||||||||||||
|
Financial services
|
5,034
|
|
405
|
|
(31
|
)
|
5,408
|
|
9.0
|
%
|
6,083
|
|
246
|
|
(63
|
)
|
6,266
|
|
10.6
|
%
|
|||||||||||||||||
|
Tech./comm.
|
3,402
|
|
403
|
|
(3
|
)
|
3,802
|
|
6.3
|
%
|
3,553
|
|
229
|
|
(62
|
)
|
3,720
|
|
6.3
|
%
|
|||||||||||||||||
|
Transportation
|
833
|
|
77
|
|
(5
|
)
|
905
|
|
1.5
|
%
|
869
|
|
43
|
|
(10
|
)
|
902
|
|
1.5
|
%
|
|||||||||||||||||
|
Utilities
|
4,881
|
|
512
|
|
(15
|
)
|
5,378
|
|
8.8
|
%
|
4,395
|
|
299
|
|
(60
|
)
|
4,634
|
|
7.8
|
%
|
|||||||||||||||||
|
Other
|
269
|
|
18
|
|
(1
|
)
|
286
|
|
0.5
|
%
|
175
|
|
12
|
|
(2
|
)
|
185
|
|
0.3
|
%
|
|||||||||||||||||
|
Foreign govt./govt. agencies
|
1,106
|
|
83
|
|
(3
|
)
|
1,186
|
|
2.0
|
%
|
1,321
|
|
34
|
|
(47
|
)
|
1,308
|
|
2.2
|
%
|
|||||||||||||||||
|
Municipal bonds
|
|||||||||||||||||||||||||||||||||||||
|
Taxable
|
1,501
|
|
221
|
|
(2
|
)
|
1,720
|
|
2.9
|
%
|
1,315
|
|
92
|
|
(9
|
)
|
1,398
|
|
2.4
|
%
|
|||||||||||||||||
|
Tax-exempt
|
9,844
|
|
1,033
|
|
(3
|
)
|
10,874
|
|
18.1
|
%
|
9,809
|
|
916
|
|
(2
|
)
|
10,723
|
|
18.1
|
%
|
|||||||||||||||||
|
RMBS
|
|||||||||||||||||||||||||||||||||||||
|
Agency
|
2,476
|
|
101
|
|
—
|
|
2,577
|
|
4.3
|
%
|
2,206
|
|
64
|
|
(6
|
)
|
2,264
|
|
3.8
|
%
|
|||||||||||||||||
|
Non-agency
|
172
|
|
7
|
|
—
|
|
179
|
|
0.3
|
%
|
89
|
|
2
|
|
—
|
|
91
|
|
0.2
|
%
|
|||||||||||||||||
|
Alt-A
|
122
|
|
2
|
|
—
|
|
124
|
|
0.2
|
%
|
68
|
|
1
|
|
—
|
|
69
|
|
0.1
|
%
|
|||||||||||||||||
|
Sub-prime
|
2,045
|
|
21
|
|
(10
|
)
|
2,056
|
|
3.4
|
%
|
1,623
|
|
15
|
|
(16
|
)
|
1,622
|
|
2.7
|
%
|
|||||||||||||||||
|
U.S. Treasuries
|
3,598
|
|
484
|
|
(3
|
)
|
4,079
|
|
6.8
|
%
|
4,481
|
|
222
|
|
(38
|
)
|
4,665
|
|
7.9
|
%
|
|||||||||||||||||
|
Fixed maturities, AFS
|
55,742
|
|
4,650
|
|
(168
|
)
|
60,225
|
|
100
|
%
|
56,965
|
|
2,892
|
|
(658
|
)
|
59,196
|
|
100
|
%
|
|||||||||||||||||
|
Equity securities
|
|||||||||||||||||||||||||||||||||||||
|
Financial services
|
132
|
|
10
|
|
—
|
|
142
|
|
16.2
|
%
|
159
|
|
1
|
|
(2
|
)
|
158
|
|
18.8
|
%
|
|||||||||||||||||
|
Other
|
680
|
|
70
|
|
(17
|
)
|
733
|
|
83.8
|
%
|
683
|
|
37
|
|
(39
|
)
|
681
|
|
81.2
|
%
|
|||||||||||||||||
|
Equity securities, AFS
|
812
|
|
80
|
|
(17
|
)
|
875
|
|
100
|
%
|
842
|
|
38
|
|
(41
|
)
|
839
|
|
100
|
%
|
|||||||||||||||||
|
Total AFS securities
|
$
|
56,554
|
|
$
|
4,730
|
|
$
|
(185
|
)
|
$
|
61,100
|
|
$
|
57,807
|
|
$
|
2,930
|
|
$
|
(699
|
)
|
$
|
60,035
|
|
|||||||||||||
|
Fixed maturities, FVO
|
$
|
360
|
|
$
|
503
|
|
|||||||||||||||||||||||||||||||
|
Equity, FVO [3]
|
$
|
—
|
|
$
|
282
|
|
|||||||||||||||||||||||||||||||
|
[1]
|
Gross unrealized gains (losses) exclude the fair value of bifurcated embedded derivatives within certain securities. Changes in value are recorded in net realized capital gains (losses).
|
|
[2]
|
Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government.
|
|
[3]
|
Included in equity securities, AFS on the Condensed Consolidated Balance Sheets. The Company did
not
hold any equity securities, FVO as of
September 30, 2016
.
|
117
The increase in the fair value of AFS securities, as compared to
December 31, 2015
, was primarily related to higher valuations due to a decline in interest rates and credit spread tightening, partially offset by the transfer of assets to assets held for sale related to the U.K. property and casualty run-off subsidiaries and the run-off of Talcott Resolution. For further discussion on the disposition, see Note 2 - Business Acquisitions and Dispositions of Notes to Condensed Consolidated Financial Statements. The Company also reduced its allocation to corporate securities, mainly financial and energy-related names, and purchased agency and non-agency mortgage-backed securities.
Financial Services
The Company’s investment in the financial services sector is predominantly through investment grade banking and insurance institutions. The following table presents the Company’s fixed maturities and equity, AFS securities in the financial services sector that are included in the preceding Securities by Type table.
|
|
September 30, 2016
|
December 31, 2015
|
|||||||||||||||||
|
|
Amortized Cost
|
Fair Value
|
Net Unrealized Gain/(Loss)
|
Amortized Cost
|
Fair Value
|
Net Unrealized Gain/(Loss)
|
|||||||||||||
|
AAA
|
$
|
22
|
|
$
|
23
|
|
$
|
1
|
|
$
|
40
|
|
$
|
42
|
|
$
|
2
|
|
|
|
AA
|
654
|
|
691
|
|
37
|
|
747
|
|
763
|
|
16
|
|
|||||||
|
A
|
2,237
|
|
2,433
|
|
196
|
|
2,922
|
|
3,025
|
|
103
|
|
|||||||
|
BBB
|
1,923
|
|
2,049
|
|
126
|
|
2,133
|
|
2,188
|
|
55
|
|
|||||||
|
BB & below
|
330
|
|
354
|
|
24
|
|
400
|
|
406
|
|
6
|
|
|||||||
|
Total [1]
|
$
|
5,166
|
|
$
|
5,550
|
|
$
|
384
|
|
$
|
6,242
|
|
$
|
6,424
|
|
$
|
182
|
|
|
|
[1]
|
Included equity, AFS securities with an amortized cost and fair value of
$132
and
$142
, respectively as of
September 30, 2016
and an amortized cost and fair value of
$159
and
$158
, respectively, as of
December 31, 2015
included in the AFS by type table above.
|
The Company's investment in the financial services sector decreased, as compared to
December 31, 2015
, due to sales, partially offset by an increase in valuations as a result of a decline in interest rates.
Commercial Real Estate
The following table presents the Company’s exposure to CMBS bonds by current credit quality and vintage year included in the preceding Securities by Type table. Credit protection represents the current weighted average percentage of the outstanding capital structure subordinated to the Company’s investment holding that is available to absorb losses before the security incurs the first dollar loss of principal and excludes any equity interest or property value in excess of outstanding debt.
CMBS – Bonds [1]
|
September 30, 2016
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
|
AAA
|
AA
|
A
|
BBB
|
BB and Below
|
Total
|
|||||||||||||||||||||||||||||||||||||||||
|
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
|||||||||||||||||||||||||||||||||||
|
2005 & Prior
|
$
|
116
|
|
$
|
130
|
|
$
|
49
|
|
$
|
57
|
|
$
|
3
|
|
$
|
3
|
|
$
|
6
|
|
$
|
6
|
|
$
|
1
|
|
$
|
1
|
|
$
|
175
|
|
$
|
197
|
|
|||||||||||
|
2006
|
12
|
|
13
|
|
65
|
|
65
|
|
68
|
|
68
|
|
34
|
|
34
|
|
5
|
|
5
|
|
184
|
|
185
|
|
|||||||||||||||||||||||
|
2007
|
192
|
|
193
|
|
126
|
|
130
|
|
116
|
|
117
|
|
9
|
|
9
|
|
21
|
|
22
|
|
464
|
|
471
|
|
|||||||||||||||||||||||
|
2008
|
35
|
|
36
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
35
|
|
36
|
|
|||||||||||||||||||||||
|
2009
|
11
|
|
11
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
11
|
|
11
|
|
|||||||||||||||||||||||
|
2010
|
18
|
|
20
|
|
8
|
|
8
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
26
|
|
28
|
|
|||||||||||||||||||||||
|
2011
|
55
|
|
61
|
|
—
|
|
—
|
|
5
|
|
5
|
|
10
|
|
10
|
|
—
|
|
—
|
|
70
|
|
76
|
|
|||||||||||||||||||||||
|
2012
|
40
|
|
42
|
|
6
|
|
6
|
|
30
|
|
31
|
|
20
|
|
19
|
|
—
|
|
—
|
|
96
|
|
98
|
|
|||||||||||||||||||||||
|
2013
|
16
|
|
17
|
|
95
|
|
103
|
|
110
|
|
118
|
|
4
|
|
4
|
|
—
|
|
—
|
|
225
|
|
242
|
|
|||||||||||||||||||||||
|
2014
|
301
|
|
323
|
|
60
|
|
64
|
|
76
|
|
79
|
|
1
|
|
1
|
|
—
|
|
—
|
|
438
|
|
467
|
|
|||||||||||||||||||||||
|
2015
|
201
|
|
212
|
|
200
|
|
209
|
|
203
|
|
214
|
|
86
|
|
89
|
|
—
|
|
—
|
|
690
|
|
724
|
|
|||||||||||||||||||||||
|
2016
|
83
|
|
85
|
|
152
|
|
154
|
|
104
|
|
111
|
|
42
|
|
45
|
|
—
|
|
—
|
|
381
|
|
395
|
|
|||||||||||||||||||||||
|
Total
|
$
|
1,080
|
|
$
|
1,143
|
|
$
|
761
|
|
$
|
796
|
|
$
|
715
|
|
$
|
746
|
|
$
|
212
|
|
$
|
217
|
|
$
|
27
|
|
$
|
28
|
|
$
|
2,795
|
|
$
|
2,930
|
|
|||||||||||
|
Credit protection
|
33.2%
|
25.2%
|
20.1%
|
22.2%
|
35.2%
|
26.8%
|
|||||||||||||||||||||||||||||||||||||||||
118
|
December 31, 2015
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
|
AAA
|
AA
|
A
|
BBB
|
BB and Below
|
Total
|
|||||||||||||||||||||||||||||||||||||||||
|
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
|||||||||||||||||||||||||||||||||||
|
2005 & Prior
|
$
|
110
|
|
$
|
119
|
|
$
|
77
|
|
$
|
83
|
|
$
|
5
|
|
$
|
5
|
|
$
|
5
|
|
$
|
5
|
|
$
|
2
|
|
$
|
2
|
|
$
|
199
|
|
$
|
214
|
|
|||||||||||
|
2006
|
149
|
|
151
|
|
102
|
|
104
|
|
140
|
|
141
|
|
61
|
|
62
|
|
22
|
|
22
|
|
474
|
|
480
|
|
|||||||||||||||||||||||
|
2007
|
202
|
|
206
|
|
170
|
|
178
|
|
81
|
|
83
|
|
20
|
|
20
|
|
51
|
|
52
|
|
524
|
|
539
|
|
|||||||||||||||||||||||
|
2008
|
37
|
|
38
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
37
|
|
38
|
|
|||||||||||||||||||||||
|
2009
|
11
|
|
11
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
11
|
|
11
|
|
|||||||||||||||||||||||
|
2010
|
18
|
|
19
|
|
8
|
|
8
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
26
|
|
27
|
|
|||||||||||||||||||||||
|
2011
|
55
|
|
59
|
|
—
|
|
—
|
|
—
|
|
—
|
|
23
|
|
23
|
|
—
|
|
—
|
|
78
|
|
82
|
|
|||||||||||||||||||||||
|
2012
|
40
|
|
40
|
|
6
|
|
6
|
|
26
|
|
26
|
|
33
|
|
32
|
|
—
|
|
—
|
|
105
|
|
104
|
|
|||||||||||||||||||||||
|
2013
|
16
|
|
16
|
|
95
|
|
97
|
|
79
|
|
80
|
|
9
|
|
10
|
|
1
|
|
1
|
|
200
|
|
204
|
|
|||||||||||||||||||||||
|
2014
|
329
|
|
335
|
|
58
|
|
58
|
|
69
|
|
68
|
|
6
|
|
6
|
|
2
|
|
2
|
|
464
|
|
469
|
|
|||||||||||||||||||||||
|
2015
|
201
|
|
197
|
|
163
|
|
158
|
|
172
|
|
165
|
|
71
|
|
66
|
|
—
|
|
—
|
|
607
|
|
586
|
|
|||||||||||||||||||||||
|
Total
|
$
|
1,168
|
|
$
|
1,191
|
|
$
|
679
|
|
$
|
692
|
|
$
|
572
|
|
$
|
568
|
|
$
|
228
|
|
$
|
224
|
|
$
|
78
|
|
$
|
79
|
|
$
|
2,725
|
|
$
|
2,754
|
|
|||||||||||
|
Credit
protection |
32.9%
|
25.8%
|
18.4%
|
16.6%
|
18.7%
|
26.3%
|
|||||||||||||||||||||||||||||||||||||||||
|
[1]
|
The vintage year represents the year the pool of loans was originated.
|
The Company also has exposure to CRE CDOs with an amortized cost and fair value of
$21
and
$43
, respectively, as of
September 30, 2016
, and
$91
and
$132
respectively, as of
December 31, 2015
. These securities are comprised of diversified pools of commercial mortgage loans or equity positions of other CMBS securitizations.
In addition to CMBS bonds and CRE CDOs, the Company has exposure to commercial mortgage loans as presented in the following table. These loans are collateralized by a variety of commercial properties and are diversified both geographically throughout the United States and by property type. These loans are primarily in the form of whole loans, where the Company is the sole lender, but may include participations. Loan participations are loans that the Company has purchased or retained a portion of an outstanding loan or package of loans and participates on a pro-rata basis in collecting interest and principal pursuant to the terms of the participation agreement. In general, A-Note participations have senior payment priority, followed by B-Note participations and then mezzanine loan participations. As of
September 30, 2016
, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings, other than what is allowable under the original terms of the contract, are immaterial.
Commercial Mortgage Loans
|
|
September 30, 2016
|
December 31, 2015
|
|||||||||||||||||||||
|
|
Amortized Cost [1]
|
Valuation Allowance
|
Carrying Value
|
Amortized Cost [1]
|
Valuation Allowance
|
Carrying Value
|
|||||||||||||||||
|
Whole loans
|
$
|
5,493
|
|
$
|
(19
|
)
|
$
|
5,474
|
|
$
|
5,491
|
|
$
|
(23
|
)
|
$
|
5,468
|
|
|||||
|
A-Note participations
|
137
|
|
—
|
|
137
|
|
139
|
|
—
|
|
139
|
|
|||||||||||
|
B-Note participations
|
—
|
|
—
|
|
—
|
|
17
|
|
—
|
|
17
|
|
|||||||||||
|
Total
|
$
|
5,630
|
|
$
|
(19
|
)
|
$
|
5,611
|
|
$
|
5,647
|
|
$
|
(23
|
)
|
$
|
5,624
|
|
|||||
|
[1]
|
Amortized cost represents carrying value prior to valuation allowances, if any.
|
The Company funded $
238
of commercial whole loans with a weighted average loan-to-value (“LTV”) ratio of
66%
and a weighted average yield of
3.79%
during the
nine months ended
September 30, 2016
. The Company continues to originate commercial whole loans within primary markets, such as office, industrial and multi-family, focusing on loans with strong LTV ratios and high quality property collateral. There were no mortgage loans held for sale as of
September 30, 2016
, or
December 31, 2015
.
119
Municipal Bonds
The following table summarizes the amortized cost, fair value, and weighted average credit quality of the Company's available-for-sale investments in municipal bonds.
|
|
September 30, 2016
|
December 31, 2015
|
|||||||||||||||||
|
|
Amortized Cost
|
Fair Value
|
Weighted Average Credit Quality
|
Amortized Cost
|
Fair Value
|
Weighted Average Credit Quality
|
|||||||||||||
|
General Obligation
|
$
|
1,975
|
|
$
|
2,180
|
|
AA
|
$
|
2,069
|
|
$
|
2,243
|
|
AA
|
|||||
|
Pre-Refunded [1]
|
1,369
|
|
1,465
|
|
AAA
|
850
|
|
903
|
|
AAA
|
|||||||||
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Transportation
|
1,629
|
|
1,866
|
|
A+
|
1,566
|
|
1,744
|
|
A+
|
|||||||||
|
Health Care
|
1,293
|
|
1,430
|
|
AA-
|
1,371
|
|
1,499
|
|
AA-
|
|||||||||
|
Water & Sewer
|
1,143
|
|
1,253
|
|
AA
|
1,228
|
|
1,324
|
|
AA
|
|||||||||
|
Education
|
1,094
|
|
1,206
|
|
AA+
|
1,109
|
|
1,205
|
|
AA
|
|||||||||
|
Sales Tax
|
642
|
|
744
|
|
AA
|
692
|
|
779
|
|
AA-
|
|||||||||
|
Leasing [2]
|
788
|
|
882
|
|
AA-
|
728
|
|
803
|
|
AA-
|
|||||||||
|
Power
|
586
|
|
657
|
|
A+
|
658
|
|
709
|
|
A+
|
|||||||||
|
Housing
|
137
|
|
148
|
|
A
|
91
|
|
94
|
|
AA
|
|||||||||
|
Other
|
689
|
|
763
|
|
AA-
|
762
|
|
818
|
|
AA-
|
|||||||||
|
Total Revenue
|
8,001
|
|
8,949
|
|
AA-
|
8,205
|
|
8,975
|
|
AA-
|
|||||||||
|
Total Municipal
|
$
|
11,345
|
|
$
|
12,594
|
|
AA
|
$
|
11,124
|
|
$
|
12,121
|
|
AA-
|
|||||
|
[1]
|
Pre-Refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. Treasury, agency, or other securities has been established to fund the remaining payments of principal and interest.
|
|
[2]
|
Leasing revenue bonds are generally the obligations of a financing authority established by the municipality that leases facilities back to a municipality. The notes are typically secured by lease payments made by the municipality that is leasing the facilities financed by the issue. Lease payments may be subject to annual appropriation by the municipality or the municipality may be obligated to appropriate general tax revenues to make lease payments.
|
As of
September 30, 2016
and
December 31, 2015
, the largest issuer concentrations were the
state of California
, the
Commonwealth of Massachusetts
, and the
New York Dormitory Authority
, which each comprised less than
3%
of the municipal bond portfolio and were comprised of
general obligation and revenue bonds
.
Limited Partnerships and Other Alternative Investments
The following table presents the Company’s investments in limited partnerships and other alternative investments which include hedge funds, real estate funds, and private equity and other funds. Since December 31, 2015, the Company has reduced the allocation to hedge funds. Real estate funds consist of investments primarily in real estate equity funds, including some funds with public market exposure, and real estate joint ventures. Private equity and other funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small to mid-sized non-public businesses with high growth potential as well as limited exposure to public markets.
|
|
September 30, 2016
|
December 31, 2015
|
|||||||||
|
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||
|
Hedge funds
|
$
|
552
|
|
22.2
|
%
|
$
|
1,034
|
|
36.0
|
%
|
|
|
Real estate funds
|
598
|
|
24.1
|
%
|
576
|
|
20.0
|
%
|
|||
|
Private equity and other funds
|
1,332
|
|
53.7
|
%
|
1,264
|
|
44.0
|
%
|
|||
|
Total
|
$
|
2,482
|
|
100
|
%
|
$
|
2,874
|
|
100
|
%
|
|
120
Available-for-Sale Securities — Unrealized Loss Aging
Total gross unrealized losses were $
185
as of
September 30, 2016
and have decreased $
514
, or
74%
, from
December 31, 2015
primarily due to lower interest rates and tighter credit spreads. As of
September 30, 2016
, $
162
of the gross unrealized losses were associated with securities depressed less than 20% of cost or amortized cost. The remaining $
23
of gross unrealized losses were associated with securities depressed greater than 20%. The securities depressed more than 20% are primarily corporate securities and securities with exposure to commercial real estate, which are depressed primarily due to wider credit spreads since the securities were purchased.
As part of the Company’s ongoing security monitoring process, the Company has reviewed its AFS securities in an unrealized loss position and concluded that these securities are temporarily depressed and are expected to recover in value as the securities approach maturity or as market spreads tighten. For these securities in an unrealized loss position where a credit impairment has not been recorded, the Company’s best estimate of expected future cash flows are sufficient to recover the amortized cost basis of the security. Furthermore, the Company neither has an intention to sell nor does it expect to be required to sell these securities. For further information regarding the Company’s impairment analysis, see Other-Than-Temporary Impairments in the Investment Portfolio Risks and Risk Management section of this MD&A.
The following tables present the Company’s unrealized loss aging for AFS securities by length of time the security was in a continuous unrealized loss position:
|
|
September 30, 2016
|
December 31, 2015
|
|||||||||||||||||||||||||||
|
Consecutive Months
|
Items
|
Cost or Amortized Cost
|
Fair Value
|
Unrealized Loss [1]
|
Items
|
Cost or Amortized Cost
|
Fair Value
|
Unrealized Loss [1]
|
|||||||||||||||||||||
|
Three months or less
|
1,594
|
|
$
|
2,826
|
|
$
|
2,802
|
|
$
|
(24
|
)
|
2,094
|
|
$
|
10,535
|
|
$
|
10,398
|
|
$
|
(137
|
)
|
|||||||
|
Greater than three to six months
|
268
|
|
621
|
|
606
|
|
(15
|
)
|
819
|
|
2,837
|
|
2,735
|
|
(102
|
)
|
|||||||||||||
|
Greater than six to nine months
|
221
|
|
543
|
|
533
|
|
(11
|
)
|
933
|
|
4,421
|
|
4,194
|
|
(227
|
)
|
|||||||||||||
|
Greater than nine to eleven months
|
223
|
|
538
|
|
525
|
|
(13
|
)
|
329
|
|
1,302
|
|
1,242
|
|
(60
|
)
|
|||||||||||||
|
Twelve months or more
|
716
|
|
3,312
|
|
3,190
|
|
(122
|
)
|
675
|
|
3,072
|
|
2,896
|
|
(173
|
)
|
|||||||||||||
|
Total
|
3,022
|
|
$
|
7,840
|
|
$
|
7,656
|
|
$
|
(185
|
)
|
4,850
|
|
$
|
22,167
|
|
$
|
21,465
|
|
$
|
(699
|
)
|
|||||||
|
[1]
|
Unrealized losses exclude the fair value of bifurcated embedded derivatives within certain securities as changes in value are recorded in net realized capital gains (losses).
|
The following table presents the Company’s unrealized loss aging for AFS securities continuously depressed over 20% by length of time (included in the preceding table):
|
|
September 30, 2016
|
December 31, 2015
|
|||||||||||||||||||||||||||
|
Consecutive Months
|
Items
|
Cost or Amortized Cost
|
Fair Value
|
Unrealized Loss
|
Items
|
Cost or Amortized Cost
|
Fair Value
|
Unrealized Loss
|
|||||||||||||||||||||
|
Three months or less
|
95
|
|
$
|
23
|
|
$
|
17
|
|
$
|
(6
|
)
|
240
|
|
$
|
288
|
|
$
|
212
|
|
$
|
(76
|
)
|
|||||||
|
Greater than three to six months
|
46
|
|
18
|
|
13
|
|
(5
|
)
|
130
|
|
77
|
|
51
|
|
(26
|
)
|
|||||||||||||
|
Greater than six to nine months
|
28
|
|
1
|
|
1
|
|
—
|
|
5
|
|
3
|
|
2
|
|
(1
|
)
|
|||||||||||||
|
Greater than nine to eleven months
|
27
|
|
2
|
|
1
|
|
(1
|
)
|
6
|
|
12
|
|
8
|
|
(4
|
)
|
|||||||||||||
|
Twelve months or more
|
45
|
|
29
|
|
18
|
|
(11
|
)
|
50
|
|
28
|
|
18
|
|
(10
|
)
|
|||||||||||||
|
Total
|
241
|
|
$
|
73
|
|
$
|
50
|
|
$
|
(23
|
)
|
431
|
|
$
|
408
|
|
$
|
291
|
|
$
|
(117
|
)
|
|||||||
121
Other-Than-Temporary Impairments
The following table presents the Company’s impairments recognized in earnings by security type:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
|||||||||
|
CRE CDOs
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1
|
|
|
|
CMBS IOs
|
—
|
|
1
|
|
1
|
|
2
|
|
|||||
|
Corporate
|
13
|
|
31
|
|
38
|
|
43
|
|
|||||
|
Equity
|
1
|
|
6
|
|
5
|
|
7
|
|
|||||
|
Municipal
|
—
|
|
—
|
|
—
|
|
1
|
|
|||||
|
RMBS Sub-prime
|
—
|
|
—
|
|
—
|
|
1
|
|
|||||
|
Foreign government
|
—
|
|
1
|
|
—
|
|
5
|
|
|||||
|
Other
|
—
|
|
1
|
|
—
|
|
3
|
|
|||||
|
Total
|
$
|
14
|
|
$
|
40
|
|
$
|
44
|
|
$
|
63
|
|
|
Three and nine months ended
September 30, 2016
For the
three and nine months ended
September 30, 2016
, impairments recognized in earnings were comprised of credit impairments of
$13
and
$36
, respectively, impairments on equity securities of
$1
and
$5
, respectively, and impairments of securities that the Company intends to sell ("intent-to-sell impairments") of
$0
and
$3
, respectively.
Credit impairments for the
three months ended
September 30, 2016
related to private issuers experiencing financial difficulty. Credit impairments for the
nine months ended
September 30, 2016
were primarily related to corporate securities and were identified through security specific reviews and resulted from changes in the financial condition of the issuer. The Company incorporates its best estimate of future performance using internal assumptions and judgments that are informed by economic and industry specific trends as well as our expectations with respect to security specific developments. Impairments on equity securities were comprised of securities in an unrealized loss position that the Company does not believe will recover in the foreseeable future. Intent-to-sell impairments for the
nine months ended
September 30, 2016
were primarily comprised of securities in the corporate sector.
Non-credit impairments recognized in other comprehensive income were
$1
and
$6
for the
three and nine months ended
September 30, 2016
, respectively. These non-credit impairments represent the difference between fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment, rather than at current market implied credit spreads.
Future impairments may develop as the result of changes in intent-to-sell specific securities or if actual results underperform current modeling assumptions, which may be the result of, but are not limited to, macroeconomic factors and security-specific performance below current expectations.
Three and nine months ended
September 30, 2015
For the
three and nine months ended
September 30, 2015
, impairments recognized in earnings were comprised of securities the Company intends to sell of
$21
and
$38
, respectively; credit impairments of
$12
and
$16
, respectively; impairments on equity securities of
$6
and
$6
, respectively; and other impairments of
$1
and
$3
, respectively. Impairments for the the
three and nine months ended
September 30, 2015
were primarily impairments on corporate securities the Company has made the decision to sell. Credit impairments for the
three and nine months ended
September 30, 2015
were primarily identified through security specific reviews and resulted from changes in the financial condition and near term prospects of certain issuers. Non-credit impairments recognized in other comprehensive income were
$2
and
$4
for the
three and nine months ended
September 30, 2015
, respectively.
122
CAPITAL RESOURCES AND LIQUIDITY
The following section discusses the overall financial strength of The Hartford and its insurance operations including their ability to generate cash flows from each of their business segments, borrow funds at competitive rates and raise new capital to meet operating and growth needs over the next twelve months.
Liquidity Requirements and Sources of Capital
The Hartford Financial Services Group, Inc. (Holding Company)
The liquidity requirements of the holding company of The Hartford Financial Services Group, Inc. (“HFSG Holding Company”) have been and will continue to be met by HFSG Holding Company’s fixed maturities, short-term investments and cash, and dividends from its subsidiaries, principally its insurance operations, as well as the issuance of common stock, debt or other capital securities and borrowings from its credit facilities, as needed.
As of
September 30, 2016
, HFSG Holding Company held fixed maturities, short-term investments and cash of
$1.7 billion
. Expected liquidity requirements of the HFSG Holding Company for the next twelve months include payments of
5.5%
senior notes of
$275
at maturity in October 2016 and
5.375%
senior notes of
$416
at maturity in March 2017, interest payments on debt of approximately
$320
and common stockholder dividends, subject to the discretion of the Board of Directors, of approximately
$335
.
The Hartford has an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to
$2 billion
for liquidity and other general corporate purposes. The Connecticut Insurance Department ("CTDOI") granted approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, including the HFSG Holding Company, as admitted assets for statutory accounting purposes. As of
September 30, 2016
, there were no amounts outstanding from the HFSG Holding Company.
Debt
On October 17, 2016, the Company repaid its
$275
,
5.5%
senior notes at maturity.
In 2015, the Board of Directors authorized the extension of the existing debt capital management program through December 31, 2016. The Company does not intend to utilize the remaining authorization of approximately
$180
.
Equity
During the
nine months ended
September 30, 2016
, the Company repurchased
24.6 million
common shares for
$1,050
. As of September 30, 2016 the Company had
$280
remaining under the
$4.375 billion
repurchase authorization which expires on December 31, 2016. During the period
October 1, 2016 through October 26, 2016
, the Company repurchased approximately
2.0 million
common shares for
$85
under this authorization.
In October 2016, the Board of Directors authorized a new equity repurchase plan for
$1.3 billion
for the period commencing October 31, 2016 through December 31, 2017.
For further information about equity repurchases, see Part II. Other Information, Item 2.
Dividends
On October 27, 2016, The Hartford's Board of Directors declared a quarterly dividend of $0.23 per common share payable on January 3, 2017 to common shareholders of record as of December 1, 2016.
On July 21, 2016, The Hartford's Board of Directors declared a quarterly dividend of $0.21 per common share payable on October 3, 2016 to common shareholders of record as of September 1, 2016.
On May 19, 2016, The Hartford's Board of Directors declared a quarterly dividend of $0.21 per common share payable on July 1, 2016 to common shareholders of record as of June 1, 2016.
On February 25, 2016, The Hartford’s Board of Directors declared a quarterly dividend of $0.21 per common share payable on April 1, 2016 to common shareholders of record as of March 7, 2016.
There are no current restrictions on the HFSG Holding Company's ability to pay dividends to its shareholders.
For a discussion of restrictions on dividends to the HFSG Holding Company from its insurance subsidiaries, see the following "Dividends from Insurance Subsidiaries" discussion. For a discussion of potential restrictions on the HFSG Holding Company's ability to pay dividends, see the risk factor "Our ability to declare and pay dividends is subject to limitations" in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
123
Pension Plans and Other Postretirement Benefits
The Company does not have a 2016 required minimum funding contribution for the U.S. qualified defined benefit pension plan and the funding requirements for all pension plans are expected to be immaterial.
The Company contributed
$300
in September 2016 to its U.S. qualified pension plan.
Dividends from Insurance Subsidiaries
Dividends to the HFSG Holding Company from its insurance subsidiaries are restricted by insurance regulation. The payment of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws of Connecticut. These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the twelve-month period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting principles. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the insurer’s earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner. The insurance holding company laws of the other jurisdictions in which The Hartford’s insurance subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar (although in certain instances more restrictive) limitations on the payment of dividends. Dividends paid to HFSG Holding Company by its life insurance subsidiaries are further dependent on cash requirements of Hartford Life, Inc. ("HLI") and other factors. In addition to statutory limitations on paying dividends, the Company also takes other items into consideration when determining dividends from subsidiaries. These considerations include, but are not limited to expected earnings and capitalization of the subsidiaries, regulatory capital requirements and liquidity requirements of the individual operating company.
In 2016, The Company’s property and casualty insurance subsidiaries are permitted to pay up to a maximum of approximately $1.6 billion in dividends to HFSG Holding Company without prior approval from the applicable insurance commissioner. During the first nine months of 2016, HFSG Holding Company received approximately $820 in dividends from its property and casualty insurance subsidiaries. Dividends received from its property-casualty subsidiaries included approximately $220 related to principal and interest payments on an intercompany note between Hartford Holdings, Inc. ("HHI") and Hartford Fire Insurance Company.
In 2016, Hartford Life and Accident Insurance Company ("HLA") is permitted to pay up to a maximum of $165 in dividends without prior approval from the insurance commissioner. During the nine months of 2016, HFSG Holding Company received approximately $180 in dividends from HLA.
During the first nine months of 2016, Hartford Life Insurance Company ("HLIC") paid dividends of
$750
.
Over the remainder of 2016, HSFG Holding Company anticipates receiving additional net dividends of approximately $200 from its property-casualty insurance subsidiaries and $60 from HLA, subject to regulatory approval. HLIC has no ordinary dividend capacity for the remainder of 2016.
Other Sources of Capital for the HFSG Holding Company
The Hartford endeavors to maintain a capital structure that provides financial and operational flexibility to its insurance subsidiaries, ratings that support its competitive position in the financial services marketplace (see the "Ratings" section below for further discussion), and shareholder returns. As a result, the Company may from time to time raise capital from the issuance of equity, equity-related debt or other capital securities and is continuously evaluating strategic opportunities. The issuance of debt, common equity, equity-related debt or other capital securities could result in the dilution of shareholder interests or reduced net income due to additional interest expense.
Shelf Registrations
On July 29, 2016, The Hartford filed with the Securities and Exchange Commission (the “SEC”) an automatic shelf registration statement (Registration No. 333-190506) for the potential offering and sale of debt and equity securities. The registration statement allows for the following types of securities to be offered: debt securities, junior subordinated debt securities, preferred stock, common stock, depositary shares, warrants, stock purchase contracts, and stock purchase units. In that The Hartford is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act of 1933, the registration statement went effective immediately upon filing and The Hartford may offer and sell an unlimited amount of securities under the registration statement during the three-year life of the registration statement.
124
Contingent Capital Facility
The Hartford is party to a put option agreement that provides The Hartford with the right to require the Glen Meadow ABC Trust, a Delaware statutory trust, at any time and from time to time, to purchase The Hartford’s junior subordinated notes in a maximum aggregate principal amount not to exceed
$500
. Under the Put Option Agreement, The Hartford pays the Glen Meadow ABC Trust premiums on a periodic basis, calculated with respect to the aggregate principal amount of notes that The Hartford had the right to put to the Glen Meadow ABC Trust for such period. The Hartford has agreed to reimburse the Glen Meadow ABC Trust for certain fees and ordinary expenses. The Company holds a variable interest in the Glen Meadow ABC Trust where the Company is not the primary beneficiary. As a result, the Company did not consolidate the Glen Meadow ABC Trust. As of
September 30, 2016
, The Hartford has not exercised its right to require Glen Meadow ABC Trust to purchase the Notes. As a result, the Notes remain a source of capital for the HFSG Holding Company.
Commercial Paper and Revolving Credit Facility
Commercial Paper
The Hartford’s maximum borrowings available under its commercial paper program are
$1 billion
. The Company is dependent upon market conditions to access short-term financing through the issuance of commercial paper to investors. As of
September 30, 2016
, there was no commercial paper outstanding.
Revolving Credit Facilities
The Company has a senior unsecured five-year revolving credit facility (the “Credit Facility”) that provides for borrowing capacity up to
$1 billion
of unsecured credit through October 31, 2019 available in U.S. dollars, Euro, Sterling, Canadian dollars and Japanese Yen. As of
September 30, 2016
, no borrowings were outstanding under the Credit Facility. As of
September 30, 2016
, the Company was in compliance with all financial covenants within the Credit Facility.
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical rating agencies, of the individual legal entity that entered into the derivative agreement. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full collateralization and in certain instances demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could impact the legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position as of
September 30, 2016
is
$1.4 billion
. Of this
$1.4 billion
, the legal entities have posted collateral of
$1.6 billion
in the normal course of business. In addition, the Company has posted collateral of
$31
associated with a customized GMWB derivative. Based on derivative market values as of
September 30, 2016
, a downgrade of one or two levels below the current financial strength ratings by either Moody’s or S&P would not require additional assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the collateral that we would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
As of
September 30, 2016
, the aggregate notional amount and fair value of derivative relationships that could be subject to immediate termination in the event of rating agency downgrades to either BBB+ or Baa1 was
$104
and
$(14)
, respectively.
Insurance Operations
Current and expected patterns of claim frequency and severity or surrenders may change from period to period but continue to be within historical norms and, therefore, the Company’s insurance operations’ current liquidity position is considered to be sufficient to meet anticipated demands over the next twelve months, including any obligations related to the Company’s restructuring activities. For a discussion and tabular presentation of the Company’s current contractual obligations by period, refer to Off-Balance Sheet Arrangements and Aggregate Contractual Obligations within the Capital Resources and Liquidity section of the MD&A included in The Hartford’s
2015
Form 10-K Annual Report.
The principal sources of operating funds are premiums, fees earned from assets under management and investment income, while investing cash flows originate from maturities and sales of invested assets. The primary uses of funds are to pay claims, claim adjustment expenses, commissions and other underwriting expenses, taxes, to purchase new investments and to make dividend payments to the HFSG Holding Company.
The Company’s insurance operations consist of property and casualty insurance products (collectively referred to as “Property & Casualty Operations”) and life insurance and legacy annuity products (collectively referred to as “Life Operations”).
125
Property & Casualty Operations
Property & Casualty Operations holds fixed maturity securities including a significant short-term investment position (securities with maturities of one year or less at the time of purchase) to meet liquidity needs.
Property & Casualty Operations’ fixed maturities, short-term investments, and cash are summarized as follows:
|
September 30, 2016
|
|||
|
Fixed maturities
|
$
|
26,056
|
|
|
Short-term investments
|
628
|
|
|
|
Cash
|
355
|
|
|
|
Less: Derivative collateral
|
213
|
|
|
|
Total
|
$
|
26,826
|
|
Liquidity requirements that are unable to be funded by Property & Casualty Operation’s short-term investments would be satisfied with current operating funds, including premiums received or through the sale of invested assets. A sale of invested assets could result in significant realized losses.
Life Operations
Life Operations’ total general account contractholder obligations are supported by
$42 billion
of cash and total general account invested assets, which included a significant short-term investment position to meet liquidity needs.
Life Operations’ fixed maturities, short-term investments, and cash are summarized as follows:
|
September 30, 2016
|
|||
|
Fixed maturities
|
$
|
33,314
|
|
|
Short-term investments
|
1,097
|
|
|
|
Cash
|
455
|
|
|
|
Less: Derivative collateral
|
1,377
|
|
|
|
Total
|
$
|
33,489
|
|
Capital resources available to fund liquidity upon contractholder surrender or termination are a function of the legal entity in which the liquidity requirement resides. Generally, obligations of Group Benefits will be funded by Hartford Life and Accident Insurance Company. Obligations of Talcott Resolution will generally be funded by Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company.
HLIC, an indirect wholly-owned subsidiary, is a member of the Federal Home Loan Bank of Boston (“FHLBB”). Membership allows HLIC access to collateralized advances, which may be used to support various spread-based businesses and enhance liquidity management. FHLBB membership requires the company to own member stock and advances require the purchase of activity stock. The amount of advances that can be taken are dependent on the asset types pledged to secure the advances. The CTDOI will permit HLIC to pledge up to
$1.2 billion
in qualifying assets to secure FHLBB advances for
2016
. The pledge limit is recalculated annually based on statutory admitted assets and capital and surplus. HLIC would need to seek the prior approval of the CTDOI in order to exceed these limits. As of September 30, 2016, HLIC had no advances outstanding under the FHLBB facility.
126
|
Contractholder Obligations
|
September 30, 2016
|
||
|
Total Life contractholder obligations
|
$
|
170,155
|
|
|
Less: Separate account assets [1]
|
118,648
|
|
|
|
General account contractholder obligations
|
$
|
51,507
|
|
|
Composition of General Account Contractholder Obligations
|
|||
|
Contracts without a surrender provision and/or fixed payout dates [2]
|
$
|
25,231
|
|
|
U.S. Fixed MVA annuities [3]
|
5,258
|
|
|
|
Other [4]
|
21,018
|
|
|
|
General account contractholder obligations
|
$
|
51,507
|
|
|
[1]
|
In the event customers elect to surrender separate account assets, Life Operations will use the proceeds from the sale of the assets to fund the surrender, and Life Operations’ liquidity position will not be impacted. In some instances Life Operations will receive a percentage of the surrender amount as compensation for early surrender (surrender charge), increasing Life Operations’ liquidity position. In addition, a surrender of variable annuity separate account or general account assets (see the following) will decrease Life Operations’ obligation for payments on guaranteed living and death benefits.
|
|
[2]
|
Relates to contracts such as payout annuities or institutional notes or surrenders of term life, group benefit contracts or death and living benefit reserves for which surrenders will have no current effect on Life Operations’ liquidity requirements.
|
|
[3]
|
Relates to annuities that are recorded in the general account under U.S. GAAP as the contractholders are subject to the Company's credit risk, although these annuities are held in a statutory separate account. In the statutory separate account, Life Operations is required to maintain invested assets with a fair value greater than or equal to the MVA surrender value of the Fixed MVA contract. In the event assets decline in value at a greater rate than the MVA surrender value of the Fixed MVA contract, Life Operations is required to contribute additional capital to the statutory separate account. Life Operations will fund these required contributions with operating cash flows or short-term investments. In the event that operating cash flows or short-term investments are not sufficient to fund required contributions, the Company may have to sell other invested assets at a loss, potentially resulting in a decrease in statutory surplus. As the fair value of invested assets in the statutory separate account are currently at least equal to the MVA surrender value of the Fixed MVA contract, surrender of Fixed MVA annuities will have an insignificant impact on the liquidity requirements of Life Operations.
|
|
[4]
|
Surrenders of, or policy loans taken from, as applicable, these general account liabilities, which include the general account option for Life Operations' individual variable annuities and the variable life contracts of the former Individual Life business, the general account option for annuities of the former Retirement Plans business and universal life contracts sold by the former Individual Life business, may be funded through operating cash flows of Life Operations, available short-term investments, or Life Operations may be required to sell fixed maturity investments to fund the surrender payment. Sales of fixed maturity investments could result in the recognition of realized losses and insufficient proceeds to fully fund the surrender amount. In this circumstance, Life Operations may need to take other actions, including enforcing certain contract provisions which could restrict surrenders and/or slow or defer payouts. The Company has ceded reinsurance in connection with the sales of its Retirement Plans and Individual Life businesses in 2013 to MassMutual and Prudential, respectively. These reinsurance transactions do not extinguish the Company's primary liability on the insurance policies issued under these businesses.
|
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
There have been
no
material changes to the Company’s off-balance sheet arrangements and aggregate contractual obligations since the filing of the Company’s
2015
Form 10-K Annual Report.
Capitalization
The capital structure of The Hartford consists of debt and stockholders’ equity, summarized as follows:
|
September 30, 2016
|
December 31, 2015
|
Change
|
||||||
|
Short-term debt (includes current maturities of long-term debt)
|
$
|
690
|
|
$
|
275
|
|
151
|
%
|
|
Long-term debt
|
4,635
|
|
5,084
|
|
(9
|
)%
|
||
|
Total debt [1]
|
5,325
|
|
5,359
|
|
(1
|
)%
|
||
|
Stockholders’ equity excluding accumulated other comprehensive income (loss), net of tax (“AOCI”)
|
17,671
|
|
17,971
|
|
(2
|
)%
|
||
|
AOCI, net of tax
|
987
|
|
(329
|
)
|
(400
|
)%
|
||
|
Total stockholders’ equity
|
$
|
18,658
|
|
$
|
17,642
|
|
6
|
%
|
|
Total capitalization including AOCI
|
$
|
23,983
|
|
$
|
23,001
|
|
4
|
%
|
|
Debt to stockholders’ equity
|
29
|
%
|
30
|
%
|
||||
|
Debt to capitalization
|
22
|
%
|
23
|
%
|
||||
|
[1]
|
Total debt of the Company excludes
$24
and
$38
of consumer notes as of
September 30, 2016
and
December 31, 2015
, respectively
.
|
127
Total capitalization increased
$982
, or
4%
, as of
September 30, 2016
compared to
December 31, 2015
primarily due to increases in AOCI.
For additional information on AOCI, net of tax, and unrealized capital gains from securities, see Note
12
-
Changes In and Reclassifications From Accumulated Other Comprehensive Income
, and Note
6
-
Investments
of Notes to Condensed Consolidated Financial Statements.
Cash Flows
|
|
Nine Months Ended September 30,
|
|||||
|
|
2016
|
2015
|
||||
|
Net cash provided by operating activities
|
$
|
1,405
|
|
$
|
2,000
|
|
|
Net cash provided by investing activities
|
$
|
945
|
|
$
|
603
|
|
|
Net cash used for financing activities
|
$
|
(1,967
|
)
|
$
|
(2,306
|
)
|
|
Cash – end of period
|
$
|
810
|
|
$
|
665
|
|
Cash provided by operating activities decreased in
2016
as compared to the prior year period primarily due to an increase in claims paid including the Company's payment of $315 in the three months ended June 30, 2016 related to the settlement of PPG asbestos liabilities. In addition, the Company contributed $300 to its U.S. qualified pension plan in the three months ended September 30, 2016.
Cash provided by investing activities in
2016
primarily relates to net proceeds from available-for-sale securities of $1.0 billion and net proceeds from partnerships of $358, partially offset by net payments for short-term investments of
$388
and cash paid for acquisitions of
$175
, net of cash acquired of $13. Cash provided by investing activities in
2015
primarily relates to net proceeds from short-term investments of $1.5 billion, partially offset by net payments for available-for-sale securities of $545.
Cash used for financing activities in
2016
consists primarily of acquisition of treasury stock of
$1,050
, net payments for deposits, transfers and withdrawals for investments and universal life products of
$622
and dividends paid on common stock of $253. Cash used for financing activities in
2015
consists primarily of net payments for deposits, transfers and withdrawals for investments and universal life products of $1 billion, repayment of debt of $585 and acquisition of treasury stock of $800, partially offset by $313 in proceeds from securities sold under repurchase agreements.
Operating cash flows for the
nine months ended
September 30, 2016
have been adequate to meet liquidity requirements.
Equity Markets
For a discussion of the potential impact of the equity markets on capital and liquidity, see the Enterprise Risk Management section of the MD&A.
Ratings
Ratings are an important factor in establishing competitive position in the insurance marketplace and impact the Company’s ability to access financing and its cost of borrowing. There can be no assurance that the Company’s ratings will continue for any given period of time, or that they will not be changed. In the event the Company’s ratings are downgraded, the Company’s competitive position, ability to access financing, and its cost of borrowing, may be adversely impacted.
The following table summarizes The Hartford’s significant member companies’ financial ratings from the major independent rating organizations as of
October 25, 2016
.
|
Insurance Financial Strength Ratings:
|
A.M. Best
|
Standard & Poor’s
|
Moody’s
|
|
Hartford Fire Insurance Company
|
A+
|
A+
|
A1
|
|
Hartford Life and Accident Insurance Company
|
A
|
A
|
A2
|
|
Hartford Life Insurance Company
|
A-
|
BBB+
|
Baa2
|
|
Hartford Life and Annuity Insurance Company
|
A-
|
BBB+
|
Baa2
|
|
Other Ratings:
|
|||
|
The Hartford Financial Services Group, Inc.:
|
|||
|
Senior debt
|
a-
|
BBB+
|
Baa2
|
|
Commercial paper
|
AMB-1
|
A-2
|
P-2
|
These ratings are not a recommendation to buy or hold any of The Hartford’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.
128
The agencies consider many factors in determining the final rating of an insurance company. One consideration is the relative level of statutory capital and surplus (referred to collectively as "statutory capital") necessary to support the business written and is reported in accordance with accounting practices prescribed by the applicable state insurance department.
Statutory Capital
The table below sets forth statutory capital for the Company’s insurance subsidiaries.
|
September 30, 2016
|
December 31, 2015
|
|||||
|
Life insurance subsidiaries
|
$
|
6,039
|
|
$
|
6,591
|
|
|
Property and casualty insurance subsidiaries
|
8,655
|
|
8,563
|
|
||
|
Total
|
$
|
14,694
|
|
$
|
15,154
|
|
Statutory capital for the life insurance subsidiaries decreased by $552 primarily due to dividends of $930, partially offset by net income of $285 as well as variable annuity impacts of $121 included in Talcott Resolution.
Statutory capital for property and casualty increased by $92, primarily due to statutory net income of $574, unrealized gain on investments of $264 and an increase in deferred tax assets of $74, partially offset by dividends to HFSG Holding Company of approximately $820.
Contingencies
Legal Proceedings
– For a discussion regarding contingencies related to The Hartford’s legal proceedings, please see the information contained under “Litigation” in Note
10
-
Commitments and Contingencies
of the Notes to Condensed Consolidated Financial Statements and Part II, Item 1 Legal Proceedings, which are incorporated herein by reference.
Legislative and Regulatory Developments
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”)
Since it was enacted in 2010, the Dodd-Frank Act has resulted in significant changes to the regulation of the financial services industry, including changes to the rules governing derivatives, restrictions on proprietary trading by certain entities, the creation of a Federal Insurance Office within the U.S. Treasury, and enhancements to corporate governance rules, among other things. The Dodd-Frank Act requires significant rulemaking across numerous agencies within the federal government. Rulemaking, and implementation of newly-adopted rules, is ongoing and may affect our operations and governance in ways that could adversely affect our financial condition and results of operations.
Patient Protection and Affordable Care Act of 2010 (the "Affordable Care Act")
On March 23, 2010, the President signed the Affordable Care Act. While many of the key provisions of the Affordable Care Act have become effective, there remains uncertainty with its implementation. Federal agencies continue rulemaking for certain provisions, along with being subject to legal and legislative challenges. In addition, certain provisions of the Affordable Care Act have been amended or delayed, such as the employer mandate which will continue to be phased in during 2016. The impact of the Affordable Care Act to The Hartford as an employer is consistent with other large employers. The Hartford’s core business does not involve the issuance of health insurance and we do not issue any products that insure customers under the Affordable Care Act’s individual mandate. To date, there have been certain limited impacts to The Hartford's group benefits businesses including additional opportunities to market our group benefit products and services through private exchanges. While we have not observed any material impacts on the Company's workers' compensation business or group benefits business, we continue to monitor the impact of the Affordable Care Act on consumer, broker and medical provider behavior for leading indicators of changes in medical costs or loss payments primarily on the Company's workers' compensation and disability liabilities.
United States Department of Labor Fiduciary Rule
On April 6, 2016, the U.S. Department of Labor (“DOL”) issued a final regulation that expands the range of activities considered to be fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code. Implementation will be phased in, with the regulation in full effect by January 1, 2018. The regulation could have an adverse impact on our current offerings of mutual funds and ETFs, along with contracts in our run-off lines of business, and may impact the way we provide investment-related information and support to financial advisors, plan sponsors, plan participants, plan beneficiaries and Individual Retirement Account owners. On June 1, 2016, a group of nine plaintiffs, including the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association (SIFMA), filed a lawsuit against the DOL challenging the fiduciary rule. In addition, other industry groups and insurers have filed separate lawsuits against DOL. Among the claims, the lawsuits allege the unconstitutionality of the fiduciary rule and that DOL exceeded its rulemaking authority. We are currently analyzing the potential effect of the regulation and subsequent litigation on our businesses.
129
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note
1
-
Basis of Presentation and Significant Accounting Policies
of Notes to Consolidated Financial Statements included in The Hartford’s
2015
Form 10-K Annual Report and Note
1
-
Basis of Presentation and Significant Accounting Policies
of Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
|
Item 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The information contained in the Financial Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
|
Item 4.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
The Company’s principal executive officer and its principal financial officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) have concluded that the Company’s disclosure controls and procedures are effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of
September 30, 2016
.
Changes in Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting that occurred during the Company's current fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
130
|
Item 1.
|
LEGAL PROCEEDINGS
|
Litigation
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to the uncertainties in the following discussion under the caption “Asbestos and Environmental Claims,” management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, and in addition to the matters in the following description, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, property, disability, life and inland marine. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
In addition to the inherent difficulty of predicting litigation outcomes, the Mutual Funds Litigation identified below purports to seek substantial damages for unsubstantiated conduct spanning a multi-year period based on novel applications of complex legal theories. The alleged damages are not quantified or factually supported in the complaint, and, in any event, the Company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. The application of the legal standard identified by the court for assessing the potentially available damages, as described below, is inherently unpredictable, and no legal precedent has been identified that would aid in determining a reasonable estimate of potential loss. Accordingly, management cannot reasonably estimate the possible loss or range of loss, if any.
Mutual Funds Litigation —
In February 2011, a derivative action was brought on behalf of six Hartford retail mutual funds in the United States District Court for the District of New Jersey, alleging that Hartford Investment Financial Services, LLC (“HIFSCO”), an indirect subsidiary of the Company, received excessive advisory and distribution fees in violation of its statutory fiduciary duty under Section 36(b) of the Investment Company Act of 1940. HIFSCO moved to dismiss and, in September 2011, the motion was granted in part and denied in part, with leave to amend the complaint. In November 2011, plaintiffs filed an amended complaint on behalf of The Hartford Global Health Fund, The Hartford Conservative Allocation Fund, The Hartford Growth Opportunities Fund, The Hartford Inflation Plus Fund, The Hartford Advisors Fund, and The Hartford Capital Appreciation Fund. Plaintiffs seek to rescind the investment management agreements and distribution plans between HIFSCO and these funds and to recover the total fees charged thereunder or, in the alternative, to recover any improper compensation HIFSCO received, in addition to lost earnings. HIFSCO filed a partial motion to dismiss the amended complaint and, in December 2012, the court dismissed without prejudice the claims regarding distribution fees and denied the motion with respect to the advisory fees claims. In March 2014, the plaintiffs filed a new complaint that, among other things, added as new plaintiffs The Hartford Floating Rate Fund and The Hartford Small Company Fund and named as a defendant Hartford Funds Management Company, LLC (“HFMC”), an indirect subsidiary of the Company which assumed the role as advisor to the funds as of January 2013. In June 2015, HFMC and HIFSCO moved for summary judgment, and plaintiffs cross-moved for partial summary judgment with respect to The Hartford Capital Appreciation Fund. In March 2016, the court, in large part, denied summary judgment for all parties. The court granted judgment for HFMC and HIFSCO with respect to all claims made by The Hartford Small Company Fund and certain claims made by The Hartford Floating Rate Fund. The court further ruled that the appropriate measure of damages on the surviving claims is the difference, if any, between the actual advisory fees paid through trial and those that could have been paid under the applicable legal standard. A bench trial on the issue of liability is scheduled to be held in November 2016.
Asbestos and Environmental Claims
– As discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Property and Casualty Insurance Product Reserves, Net of Reinsurance - Property & Casualty Other Operations Claims, The Hartford continues to receive asbestos and environmental claims that involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels and reinsurance coverages, as well as the methodologies it uses to estimate its exposures. Because of the significant uncertainties that limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses, particularly those related to asbestos, the ultimate liabilities may exceed the currently recorded reserves. Any such additional liability cannot be reasonably estimated now but could be material to The Hartford’s consolidated operating results and liquidity.
131
|
Item 1A.
|
RISK FACTORS
|
Investing in The Hartford involves risk. In deciding whether to invest in The Hartford, you should carefully consider the risk factors disclosed in Item 1A of Part I of the Company's Annual Report on Form 10-K, as updated by Item 1A of Part I of the Company's Form 10-Q for the period ended June 30, 2016, any of which could have a significant or material adverse effect on the business, financial condition, operating results or liquidity of The Hartford. This information should be considered carefully together with the other information contained in this report and the other reports and materials filed by The Hartford with the SEC.
132
|
Item 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Purchases of Equity Securities by the Issuer
The Company’s repurchase authorization permits purchases of common stock, as well as warrants or other derivative securities. Repurchases may be made in the open market, through derivative, accelerated share repurchase and other privately negotiated transactions, and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended. The timing of any future repurchases will be 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, and other corporate considerations. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.
The following table summarizes the Company’s repurchases of its common stock under the Company’s equity repurchase plan, which expires on Dec. 31, 2016 during the three months ended
September 30, 2016
:
|
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
|
||||||
|
|
|
|
(in millions)
|
|||||||
|
July 1, 2016 - July 31, 2016
|
2,260,312
|
|
$
|
43.54
|
|
2,260,312
|
|
$
|
532
|
|
|
August 1, 2016 - August 31, 2016
|
4,063,895
|
|
$
|
40.28
|
|
4,063,895
|
|
$
|
368
|
|
|
September 1, 2016 - September 30, 2016
|
2,105,915
|
|
$
|
41.81
|
|
2,105,915
|
|
$
|
280
|
|
|
Total
|
8,430,122
|
|
$
|
41.54
|
|
8,430,122
|
|
|||
In October 2016, the Board of Directors authorized a new equity repurchase plan for $1.3 billion for the period commencing October 31, 2016 through December 31, 2017.
|
See Exhibits Index on page
|
135
.
|
133
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
|
The Hartford Financial Services Group, Inc.
|
|||
|
|
(Registrant)
|
|||
|
Date:
|
October 27, 2016
|
/s/ Scott R. Lewis
|
||
|
Scott R. Lewis
|
||||
|
|
Senior Vice President and Controller
|
|||
|
|
(Chief accounting officer and duly
authorized signatory)
|
|||
134
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE QUARTER ENDED
SEPTEMBER 30, 2016
FORM 10-Q
EXHIBITS INDEX
|
Exhibit No.
|
Description
|
Form
|
File No.
|
Exhibit No
|
Filing Date
|
|
|
3.01
|
Amended and Restated By-Laws of The Hartford Financial Services Group, Inc. ("The Hartford"), amended effective on July 21, 2016.
|
8-K
|
001-13958
|
3.1
|
7/21/2016
|
|
|
15.01
|
Deloitte & Touche LLP Letter of Awareness.**
|
|||||
|
31.01
|
Certification of Christopher J. Swift pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
|
|||||
|
31.02
|
Certification of Beth A. Bombara pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
|
|||||
|
32.01
|
Certification of Christopher J. Swift pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
|||||
|
32.02
|
Certification of Beth A. Bombara pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
|||||
|
101.INS
|
XBRL Instance Document.**
|
|||||
|
101.SCH
|
XBRL Taxonomy Extension Schema.**
|
|||||
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase.**
|
|||||
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase.**
|
|||||
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase.**
|
|||||
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase.**
|
|||||
|
**
|
Filed with the Securities and Exchange Commission as an exhibit to this report.
|
|||||
135
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial ConditionItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits