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
March 31, 2017
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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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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Emerging growth company
¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
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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
April 25, 2017
, there were outstanding
367,360,904
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
MARCH 31, 2017
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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FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
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CONDENSED CONSOLIDATED BALANCE SHEETS - AS OF MARCH 31, 2017 AND DECEMBER 31, 2016
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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4.
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CONTROLS AND PROCEDURES
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1.
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LEGAL PROCEEDINGS
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1A.
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RISK FACTORS
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2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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6.
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EXHIBITS
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SIGNATURE
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EXHIBITS INDEX
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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 management's current expectations and assumptions regarding future economic, competitive, legislative and other developments and their potential effect upon The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, the "Company" or "The Hartford"). Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual results could differ materially from expectations, depending on the evolution of various factors, including the risks and uncertainties identified below, as well as factors described in such forward-looking statements or in Part I, Item 1A, Risk Factors in The Hartford’s
2016
Form 10-K Annual Report, and those identified from time to time in our other filings with the Securities and Exchange Commission ("SEC").
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•
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Risks Related to Economic, Political and Global Market 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 demand for our products, returns in our investment portfolios and the hedging costs associated with our run-off annuity block;
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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 run-off annuity block;
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◦
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market risks associated with our business, including changes in credit spreads, equity prices, interest rates, inflation rate, market volatility and foreign exchange rates;
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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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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 inability to contain its exposure as a result of, among other factors, the inability to exclude coverage for terrorist attacks from workers' compensation policies and limitations on reinsurance coverage from the federal government under applicable laws;
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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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actions by competitors that may be 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 uncertain effects of emerging claim and coverage issues;
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◦
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volatility in our statutory and United States ("U.S.") Generally Accepted Accounting Principles ("GAAP") earnings and potential material changes to our results resulting from our risk management program to emphasize protection of economic value;
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•
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Financial Strength, Credit and Counterparty Risks:
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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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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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losses due to nonperformance or defaults by others, including sourcing partners, derivative counterparties and other third parties;
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3
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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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•
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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 Company’s fair value estimates for its investments and the evaluation of other-than-temporary impairments on available-for-sale securities;
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the potential for further acceleration of deferred policy acquisition cost amortization and an increase in reserve for certain guaranteed benefits in our variable annuities;
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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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Strategic and Operational Risks:
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◦
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risks associated with the run off of our Talcott Resolution business;
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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 risks, challenges and uncertainties associated with our capital management plan, expense reduction initiatives and other actions, which may include acquisitions, divestitures or restructurings;
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◦
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the potential for difficulties arising from outsourcing and similar third-party relationships;
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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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•
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Regulatory and Legal Risks:
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◦
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the cost and other potential effects of increased regulatory and legislative developments, including those that could adversely impact the demand for the Company’s products, operating costs and required capital levels;
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◦
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unfavorable judicial or legislative developments;
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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; and
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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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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.
4
Part I - Item 1. Financial Statements
Item 1. Financial Statements
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
March 31, 2017
, and the related condensed consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for the three-month periods ended
March 31, 2017
and
2016
. 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, 2016
, 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 24, 2017, 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, 2016
is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
April 27, 2017
5
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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Three Months Ended March 31,
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||||||
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(In millions, except for per share data)
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2017
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2016
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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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3,473
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$
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3,404
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Fee income
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455
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445
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Net investment income
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728
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696
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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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(3
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)
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(27
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)
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OTTI losses recognized in other comprehensive income (“OCI”)
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2
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4
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Net OTTI losses recognized in earnings
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(1
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)
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(23
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)
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Other net realized capital losses
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(19
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)
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(132
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)
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Total net realized capital losses
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(20
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)
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(155
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)
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Other revenues
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19
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20
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Total revenues
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4,655
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|
4,410
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|
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Benefits, losses and expenses
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|
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||||
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Benefits, losses and loss adjustment expenses
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2,757
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2,641
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|
||
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Amortization of deferred policy acquisition costs ("DAC")
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363
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|
374
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|
||
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Insurance operating costs and other expenses
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965
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|
928
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||
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Interest expense
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83
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|
86
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|
||
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Total benefits, losses and expenses
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4,168
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|
4,029
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|
||
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Income before income taxes
|
487
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|
381
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|
||
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Income tax expense
|
109
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|
58
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|
||
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Net income
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$
|
378
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$
|
323
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|
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Net income per common share
|
|
|
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|||
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Basic
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$
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1.02
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$
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0.81
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Diluted
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$
|
1.00
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|
$
|
0.79
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|
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Cash dividends declared per common share
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$
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0.23
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$
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0.21
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See Notes to Condensed Consolidated Financial Statements.
6
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
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Three Months Ended March 31,
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|||||
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(In millions)
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2017
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2016
|
||||
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(Unaudited)
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|||||
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Net income
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$
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378
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$
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323
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Other comprehensive income (loss):
|
||||||
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Changes in net unrealized gain on securities
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137
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522
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Changes in OTTI losses recognized in other comprehensive income
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(1
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)
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(8
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)
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Changes in net gain on cash flow hedging instruments
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(18
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)
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54
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Changes in foreign currency translation adjustments
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2
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6
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||
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Changes in pension and other postretirement plan adjustments
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10
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9
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OCI, net of tax
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130
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|
583
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||
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Comprehensive income
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$
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508
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$
|
906
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See Notes to Condensed Consolidated Financial Statements.
7
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(In millions, except for share and per share data)
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March 31,
2017 |
December 31, 2016
|
||||
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(Unaudited)
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|||||
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Assets
|
||||||
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Investments:
|
||||||
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Fixed maturities, available-for-sale, at fair value (amortized cost of $53,908 and $53,805)
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$
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56,326
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$
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56,003
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Fixed maturities, at fair value using the fair value option
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160
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293
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|
||
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Equity securities, available-for-sale, at fair value (cost of $1,135 and $1,020) (includes equity securities, at fair value using the fair value option, of $123 and $0)
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1,223
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1,097
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Mortgage loans (net of allowances for loan losses of $19 and $19)
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5,685
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5,697
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Policy loans, at outstanding balance
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1,442
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1,444
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Limited partnerships and other alternative investments
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2,418
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2,456
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Other investments
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340
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|
403
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Short-term investments
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4,595
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3,244
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Total investments
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72,189
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70,637
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Cash (includes variable interest entity assets, at fair value, of $5 and $5)
|
337
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|
882
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||
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Premiums receivable and agents’ balances, net
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3,764
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|
3,731
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|
||
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Reinsurance recoverables, net
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23,405
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|
23,311
|
|
||
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Deferred policy acquisition costs
|
1,693
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|
1,711
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|
||
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Deferred income taxes, net
|
3,105
|
|
3,281
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|
||
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Goodwill
|
567
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|
567
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||
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Property and equipment, net
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984
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|
991
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|
||
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Other assets
|
1,839
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|
1,786
|
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||
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Assets held for sale
|
923
|
|
870
|
|
||
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Separate account assets
|
116,582
|
|
115,665
|
|
||
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Total assets
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$
|
225,388
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|
$
|
223,432
|
|
|
Liabilities
|
|
|
||||
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Unpaid losses and loss adjustment expenses
|
$
|
27,687
|
|
$
|
27,605
|
|
|
Reserve for future policy benefits
|
14,051
|
|
13,929
|
|
||
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Other policyholder funds and benefits payable
|
30,863
|
|
31,176
|
|
||
|
Unearned premiums
|
5,609
|
|
5,499
|
|
||
|
Short-term debt
|
320
|
|
416
|
|
||
|
Long-term debt
|
4,817
|
|
4,636
|
|
||
|
Other liabilities (includes variable interest entity liabilities of $5 and $5)
|
7,789
|
|
6,992
|
|
||
|
Liabilities held for sale
|
661
|
|
611
|
|
||
|
Separate account liabilities
|
116,582
|
|
115,665
|
|
||
|
Total liabilities
|
$
|
208,379
|
|
$
|
206,529
|
|
|
Commitments and Contingencies (Note 12)
|
||||||
|
Stockholders’ Equity
|
||||||
|
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 402,923,222 and 402,923,222 shares issued
|
4
|
|
4
|
|
||
|
Additional paid-in capital
|
5,177
|
|
5,247
|
|
||
|
Retained earnings
|
13,406
|
|
13,114
|
|
||
|
Treasury stock, at cost — 33,726,771 and 28,974,069 shares
|
(1,371
|
)
|
(1,125
|
)
|
||
|
Accumulated other comprehensive income ("AOCI"), net of tax
|
(207
|
)
|
(337
|
)
|
||
|
Total stockholders’ equity
|
$
|
17,009
|
|
$
|
16,903
|
|
|
Total liabilities and stockholders’ equity
|
$
|
225,388
|
|
$
|
223,432
|
|
See Notes to Condensed Consolidated Financial Statements.
8
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
|
|
Three Months Ended March 31,
|
|||||
|
(In millions, except for share data)
|
2017
|
2016
|
||||
|
|
(Unaudited)
|
|||||
|
Common Stock
|
$
|
4
|
|
$
|
5
|
|
|
Additional Paid-in Capital, beginning of period
|
5,247
|
|
8,973
|
|
||
|
Issuance of shares under incentive and stock compensation plans
|
(66
|
)
|
(124
|
)
|
||
|
Stock-based compensation plans expense
|
36
|
|
19
|
|
||
|
Tax benefit on employee stock options and share-based awards
|
—
|
|
24
|
|
||
|
Issuance of shares for warrant exercise
|
(40
|
)
|
(7
|
)
|
||
|
Additional Paid-in Capital, end of period
|
5,177
|
|
8,885
|
|
||
|
Retained Earnings, beginning of period
|
13,114
|
|
12,550
|
|
||
|
Net income
|
378
|
|
323
|
|
||
|
Dividends declared on common stock
|
(86
|
)
|
(84
|
)
|
||
|
Retained Earnings, end of period
|
13,406
|
|
12,789
|
|
||
|
Treasury Stock, at cost, beginning of period
|
(1,125
|
)
|
(3,557
|
)
|
||
|
Treasury stock acquired
|
(325
|
)
|
(350
|
)
|
||
|
Issuance of shares under incentive and stock compensation plans
|
72
|
|
125
|
|
||
|
Net shares acquired related to employee incentive and stock compensation plans
|
(33
|
)
|
(46
|
)
|
||
|
Issuance of shares for warrant exercise
|
40
|
|
7
|
|
||
|
Treasury Stock, at cost, end of period
|
(1,371
|
)
|
(3,821
|
)
|
||
|
Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period
|
(337
|
)
|
(329
|
)
|
||
|
Total other comprehensive income (loss)
|
130
|
|
583
|
|
||
|
Accumulated Other Comprehensive Income (Loss), net of tax, end of period
|
(207
|
)
|
254
|
|
||
|
Total Stockholders’ Equity
|
$
|
17,009
|
|
$
|
18,112
|
|
|
Common Shares Outstanding, beginning of period (in thousands)
|
373,949
|
|
401,821
|
|
||
|
Treasury stock acquired
|
(6,709
|
)
|
(8,394
|
)
|
||
|
Issuance of shares under incentive and stock compensation plans
|
1,690
|
|
3,069
|
|
||
|
Return of shares under incentive and stock compensation plans to treasury stock
|
(674
|
)
|
(1,066
|
)
|
||
|
Issuance of shares for warrant exercise
|
940
|
|
173
|
|
||
|
Common Shares Outstanding, at end of period
|
369,196
|
|
395,603
|
|
||
See Notes to Condensed Consolidated Financial Statements.
9
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
|
|
Three Months Ended March 31,
|
|||||
|
(In millions)
|
2017
|
2016
|
||||
|
Operating Activities
|
(Unaudited)
|
|||||
|
Net income
|
$
|
378
|
|
$
|
323
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||
|
Net realized capital losses
|
20
|
|
155
|
|
||
|
Amortization of deferred policy acquisition costs
|
363
|
|
374
|
|
||
|
Additions to deferred policy acquisition costs
|
(352
|
)
|
(354
|
)
|
||
|
Depreciation and amortization
|
96
|
|
95
|
|
||
|
Other operating activities, net
|
111
|
|
81
|
|
||
|
Change in assets and liabilities:
|
||||||
|
(Increase) decrease in reinsurance recoverables
|
(7
|
)
|
53
|
|
||
|
Increase (decrease) in deferred and accrued income taxes
|
256
|
|
(14
|
)
|
||
|
Increase in reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums
|
293
|
|
158
|
|
||
|
Net change in other assets and other liabilities
|
(933
|
)
|
(473
|
)
|
||
|
Net cash provided by operating activities
|
225
|
|
398
|
|
||
|
Investing Activities
|
||||||
|
Proceeds from the sale/maturity/prepayment of:
|
||||||
|
Fixed maturities, available-for-sale
|
8,020
|
|
5,460
|
|
||
|
Fixed maturities, fair value option
|
62
|
|
19
|
|
||
|
Equity securities, available-for-sale
|
216
|
|
414
|
|
||
|
Mortgage loans
|
213
|
|
114
|
|
||
|
Partnerships
|
83
|
|
235
|
|
||
|
Payments for the purchase of:
|
||||||
|
Fixed maturities, available-for-sale
|
(7,809
|
)
|
(5,752
|
)
|
||
|
Fixed maturities, fair value option
|
—
|
|
(38
|
)
|
||
|
Equity securities, available-for-sale
|
(278
|
)
|
(130
|
)
|
||
|
Mortgage loans
|
(199
|
)
|
(128
|
)
|
||
|
Partnerships
|
(86
|
)
|
(88
|
)
|
||
|
Net (payments for) proceeds from derivatives
|
(56
|
)
|
189
|
|
||
|
Net increase in policy loans
|
2
|
|
2
|
|
||
|
Net additions to property and equipment
|
(41
|
)
|
(84
|
)
|
||
|
Net payments for short-term investments
|
(1,317
|
)
|
(29
|
)
|
||
|
Other investing activities, net
|
(18
|
)
|
10
|
|
||
|
Net cash provided (used) by investing activities
|
(1,208
|
)
|
194
|
|
||
|
Financing Activities
|
||||||
|
Deposits and other additions to investment and universal life-type contracts
|
1,398
|
|
1,165
|
|
||
|
Withdrawals and other deductions from investment and universal life-type contracts
|
(3,773
|
)
|
(4,174
|
)
|
||
|
Net transfers from separate accounts related to investment and universal life-type contracts
|
2,057
|
|
2,810
|
|
||
|
Repayments at maturity or settlement of consumer notes
|
(7
|
)
|
(5
|
)
|
||
|
Net increase in securities loaned or sold under agreements to repurchase
|
1,115
|
|
64
|
|
||
|
Repayment of debt
|
(416
|
)
|
—
|
|
||
|
Proceeds from the issuance of debt
|
500
|
|
—
|
|
||
|
Net (return) issuance of shares under incentive and stock compensation plans
|
(26
|
)
|
10
|
|
||
|
Treasury stock acquired
|
(325
|
)
|
(350
|
)
|
||
|
Dividends paid on common stock
|
(87
|
)
|
(85
|
)
|
||
|
Net cash provided (used) for financing activities
|
436
|
|
(565
|
)
|
||
|
Foreign exchange rate effect on cash
|
2
|
|
4
|
|
||
|
Net (decrease) increase in cash
|
(545
|
)
|
31
|
|
||
|
Cash – beginning of period
|
882
|
|
448
|
|
||
|
Cash – end of period
|
$
|
337
|
|
$
|
479
|
|
|
Supplemental Disclosure of Cash Flow Information
|
||||||
|
Income tax refunds received
|
$
|
132
|
|
$
|
—
|
|
|
Interest paid
|
$
|
71
|
|
$
|
71
|
|
See Notes to Condensed Consolidated Financial Statements
10
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
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 products to individual and business customers in the United States (collectively, “The Hartford”, the “Company”, “we” or “our”). Also, the Company continues to run off life and annuity products previously sold.
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 this transaction, see Note
2
-
Business Disposition
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
2016
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
2016
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 and group long-term disability (LTD) 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; living benefits required to be fair valued; evaluation of goodwill for impairment; valuation of investments and derivative instruments, including evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on mortgage loans; valuation allowance on deferred tax assets; and contingencies relating to corporate litigation and regulatory matters. 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 year financial information to conform to the current year presentation. In particular, billing installment fees that were previously reflected as an offset to insurance operating costs and other expenses are now classified as revenues.
Adoption of New Accounting Standards
Stock Compensation
On January 1, 2017 the Company adopted new stock compensation guidance issued by the Financial Accounting Standards Board ("FASB") on a prospective basis. The updated guidance requires the excess tax benefit or tax deficiency on vesting or settlement of stock-based awards to be recognized in earnings as an income tax benefit or expense, respectively, instead of as an adjustment to additional paid-in capital. The new guidance also requires the related cash flows to be presented in operating activities instead of in financing activities. The amount of excess tax benefit or tax deficiency realized on vesting or settlement of awards depends upon the difference between the market value of awards at vesting or settlement and the grant date fair value recognized through compensation expense. The excess tax benefit or tax deficiency is a discrete item in the reporting period in which it occurs and is not considered in determining the annual estimated effective tax rate for interim reporting.
The excess tax benefit recognized in earnings for the three months ended March 31, 2017 was
$7
and the excess tax benefit recognized in additional paid in capital for the three months ended March 31, 2016 was
$24
.
11
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Business Disposition
Sale of U.K. business
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 U.K. Limited ("buyer"), for approximately
$262
, 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 months ended March 31, 2017 and 2016.
The pending sale resulted in a total estimated after-tax capital loss from the transaction of
$5
in the year ended December 31, 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 March 31, 2017. The transaction is expected to close in the second quarter of 2017, subject to customary closing conditions.
Carrying Values of the Assets and Liabilities to be Transferred by the Company to the Buyer in Connection with the Sale
|
Carrying Value as of
|
||
|
March 31, 2017
|
December 31, 2016
|
|
|
Assets
|
||
|
Cash and investments
|
$657
|
$657
|
|
Reinsurance recoverables and other [1]
|
266
|
213
|
|
Total assets held for sale
|
$923
|
$870
|
|
Liabilities
|
|
|
|
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
|
$646
|
$600
|
|
Other liabilities
|
15
|
11
|
|
Total liabilities held for sale
|
$661
|
$611
|
|
[1]
|
Includes intercompany reinsurance recoverables of
$69
and
$71
to be settled in cash or securities prior to closing as of March 31, 2017 and December 31, 2016, respectively.
|
12
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Earnings Per Common Share
|
Computation of Basic and Diluted Earnings per Common Share
|
||||||
|
Three Months Ended March 31,
|
||||||
|
(In millions, except for per share data)
|
2017
|
2016
|
||||
|
Earnings
|
||||||
|
Net income
|
$
|
378
|
|
$
|
323
|
|
|
Shares
|
||||||
|
Weighted average common shares outstanding, basic
|
371.4
|
|
398.5
|
|
||
|
Dilutive effect of stock compensation plans
|
4.2
|
|
4.2
|
|
||
|
Dilutive effect of warrants
|
3.0
|
|
3.6
|
|
||
|
Weighted average common shares outstanding and dilutive potential common shares
|
378.6
|
|
406.3
|
|
||
|
Net income per common share
|
||||||
|
Basic
|
$
|
1.02
|
|
$
|
0.81
|
|
|
Diluted
|
$
|
1.00
|
|
$
|
0.79
|
|
13
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Net Income (Loss)
|
Three Months Ended March 31,
|
||||||
|
Net Income (Loss)
|
2017
|
2016
|
||||
|
Commercial Lines [1]
|
$
|
231
|
|
$
|
225
|
|
|
Personal Lines [1]
|
33
|
|
23
|
|
||
|
Property & Casualty Other Operations
|
24
|
|
17
|
|
||
|
Group Benefits
|
45
|
|
50
|
|
||
|
Mutual Funds
|
23
|
|
20
|
|
||
|
Talcott Resolution
|
68
|
|
17
|
|
||
|
Corporate
|
(46
|
)
|
(29
|
)
|
||
|
Net income
|
$
|
378
|
|
$
|
323
|
|
|
[1]
|
For the three months ended
March 31, 2017
and
2016
there was a segment change which resulted in a movement from Commercial Lines to Personal Lines of
$3
of net servicing revenues associated with our participation in the National Flood Insurance Program.
|
Revenues
|
Three Months Ended March 31,
|
||||||
|
Revenues
|
2017
|
2016
|
||||
|
Earned premiums and fee income
|
||||||
|
Commercial Lines
|
||||||
|
Workers’ compensation
|
$
|
813
|
|
$
|
759
|
|
|
Liability
|
148
|
|
143
|
|
||
|
Package business
|
314
|
|
308
|
|
||
|
Automobile
|
161
|
|
158
|
|
||
|
Professional liability
|
60
|
|
53
|
|
||
|
Bond
|
55
|
|
53
|
|
||
|
Property
|
147
|
|
159
|
|
||
|
Total Commercial Lines [1]
|
1,698
|
|
1,633
|
|
||
|
Personal Lines
|
|
|
|
|
||
|
Automobile
|
662
|
|
685
|
|
||
|
Homeowners
|
283
|
|
299
|
|
||
|
Total Personal Lines [1] [2]
|
945
|
|
984
|
|
||
|
Group Benefits
|
||||||
|
Group disability
|
381
|
|
369
|
|
||
|
Group life
|
399
|
|
375
|
|
||
|
Other
|
55
|
|
51
|
|
||
|
Total Group Benefits
|
835
|
|
795
|
|
||
|
Mutual Funds
|
||||||
|
Mutual Fund
|
167
|
|
142
|
|
||
|
Talcott
|
24
|
|
25
|
|
||
|
Total Mutual Funds
|
191
|
|
167
|
|
||
|
Talcott Resolution
|
258
|
|
269
|
|
||
|
Corporate
|
1
|
|
1
|
|
||
|
Total earned premiums and fee income
|
3,928
|
|
3,849
|
|
||
|
Net investment income
|
728
|
|
696
|
|
||
|
Net realized capital losses
|
(20
|
)
|
(155
|
)
|
||
|
Other revenues
|
19
|
|
20
|
|
||
|
Total revenues
|
$
|
4,655
|
|
$
|
4,410
|
|
|
[1]
|
Commercial Lines and Personal Lines includes installment fees of
$10
and
$11
, respectively, for the three months ended March 31, 2017. Commercial Lines and Personal Lines includes installment fees of
$10
and
$9
, respectively, for the three months ended March 31, 2016.
|
|
[2]
|
For the
three months ended
March 31, 2017
and
2016
, AARP members accounted for earned premiums of
$800
and
$807
, respectively.
|
14
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
The Company carries certain financial assets and liabilities at estimated fair value. Fair value 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 in an orderly transaction between market participants. Our fair value framework includes a hierarchy that gives the highest priority to the use of quoted prices in active markets, followed by the use of market observable inputs, followed by the use of unobservable inputs. The fair value hierarchy levels are as follows:
|
Level 1
|
Fair values based primarily on 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
|
Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or based on prices for similar assets and liabilities.
|
|
Level 3
|
Fair values derived when one or more of the significant inputs are unobservable (including assumptions about risk). With little or no observable market, the determination of fair values uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. Also included are securities that are traded within illiquid markets and/or priced by independent brokers.
|
The Company will classify the financial asset or liability by level based upon the lowest level input that is significant to the determination of the fair value. In most cases, both observable inputs (e.g., changes in interest rates) and unobservable inputs (e.g., changes in risk assumptions) are used to determine fair values that the Company has classified within Level 3.
15
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of March 31, 2017
|
||||||||||||
|
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")
|
$
|
2,265
|
|
$
|
—
|
|
$
|
2,140
|
|
$
|
125
|
|
|
Collateralized debt obligations ("CDOs")
|
2,311
|
|
—
|
|
1,992
|
|
319
|
|
||||
|
Commercial mortgage-backed securities ("CMBS")
|
5,099
|
|
—
|
|
4,982
|
|
117
|
|
||||
|
Corporate
|
25,730
|
|
—
|
|
24,652
|
|
1,078
|
|
||||
|
Foreign government/government agencies
|
1,187
|
|
—
|
|
1,121
|
|
66
|
|
||||
|
Bonds of municipalities and political subdivisions ("municipal bonds")
|
11,780
|
|
—
|
|
11,663
|
|
117
|
|
||||
|
Residential mortgage-backed securities ("RMBS")
|
3,921
|
|
—
|
|
1,873
|
|
2,048
|
|
||||
|
U.S. Treasuries
|
4,033
|
|
688
|
|
3,345
|
|
—
|
|
||||
|
Total fixed maturities
|
56,326
|
|
688
|
|
51,768
|
|
3,870
|
|
||||
|
Fixed maturities, FVO
|
160
|
|
—
|
|
160
|
|
—
|
|
||||
|
Equity securities, trading [1]
|
11
|
|
11
|
|
—
|
|
—
|
|
||||
|
Equity securities, AFS
|
1,223
|
|
936
|
|
188
|
|
99
|
|
||||
|
Derivative assets
|
||||||||||||
|
Credit derivatives
|
2
|
|
—
|
|
2
|
|
—
|
|
||||
|
Equity derivatives
|
4
|
|
—
|
|
—
|
|
4
|
|
||||
|
Foreign exchange derivatives
|
3
|
|
—
|
|
3
|
|
—
|
|
||||
|
Interest rate derivatives
|
48
|
|
—
|
|
43
|
|
5
|
|
||||
|
GMWB hedging instruments
|
80
|
|
—
|
|
36
|
|
44
|
|
||||
|
Macro hedge program
|
113
|
|
—
|
|
9
|
|
104
|
|
||||
|
Total derivative assets [2]
|
250
|
|
—
|
|
93
|
|
157
|
|
||||
|
Short-term investments
|
4,595
|
|
2,077
|
|
2,518
|
|
—
|
|
||||
|
Reinsurance recoverable for GMWB
|
60
|
|
—
|
|
—
|
|
60
|
|
||||
|
Modified coinsurance reinsurance contracts
|
66
|
|
—
|
|
66
|
|
—
|
|
||||
|
Separate account assets [3]
|
113,585
|
|
73,539
|
|
38,882
|
|
277
|
|
||||
|
Total assets accounted for at fair value on a recurring basis
|
$
|
176,276
|
|
$
|
77,251
|
|
$
|
93,675
|
|
$
|
4,463
|
|
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||
|
GMWB embedded derivative
|
$
|
(157
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(157
|
)
|
|
Equity linked notes
|
(36
|
)
|
—
|
|
—
|
|
(36
|
)
|
||||
|
Total other policyholder funds and benefits payable
|
(193
|
)
|
—
|
|
—
|
|
(193
|
)
|
||||
|
Derivative liabilities
|
||||||||||||
|
Credit derivatives
|
(2
|
)
|
—
|
|
(2
|
)
|
—
|
|
||||
|
Equity derivatives
|
37
|
|
—
|
|
37
|
|
—
|
|
||||
|
Foreign exchange derivatives
|
(262
|
)
|
—
|
|
(262
|
)
|
—
|
|
||||
|
Interest rate derivatives
|
(517
|
)
|
—
|
|
(488
|
)
|
(29
|
)
|
||||
|
GMWB hedging instruments
|
3
|
|
—
|
|
1
|
|
2
|
|
||||
|
Macro hedge program
|
58
|
|
—
|
|
3
|
|
55
|
|
||||
|
Total derivative liabilities [4]
|
(683
|
)
|
—
|
|
(711
|
)
|
28
|
|
||||
|
Contingent consideration [5]
|
(26
|
)
|
—
|
|
—
|
|
(26
|
)
|
||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$
|
(902
|
)
|
$
|
—
|
|
$
|
(711
|
)
|
$
|
(191
|
)
|
16
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 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
|
||||||||||||
|
ABS
|
$
|
2,382
|
|
$
|
—
|
|
$
|
2,300
|
|
$
|
82
|
|
|
CDOs
|
1,916
|
|
—
|
|
1,502
|
|
414
|
|
||||
|
CMBS
|
4,936
|
|
—
|
|
4,856
|
|
80
|
|
||||
|
Corporate
|
25,666
|
|
—
|
|
24,586
|
|
1,080
|
|
||||
|
Foreign government/government agencies
|
1,171
|
|
—
|
|
1,107
|
|
64
|
|
||||
|
Municipal bonds
|
11,486
|
|
—
|
|
11,368
|
|
118
|
|
||||
|
RMBS
|
4,767
|
|
—
|
|
2,795
|
|
1,972
|
|
||||
|
U.S. Treasuries
|
3,679
|
|
620
|
|
3,059
|
|
—
|
|
||||
|
Total fixed maturities
|
56,003
|
|
620
|
|
51,573
|
|
3,810
|
|
||||
|
Fixed maturities, FVO
|
293
|
|
1
|
|
281
|
|
11
|
|
||||
|
Equity securities, trading [1]
|
11
|
|
11
|
|
—
|
|
—
|
|
||||
|
Equity securities, AFS
|
1,097
|
|
821
|
|
177
|
|
99
|
|
||||
|
Derivative assets
|
||||||||||||
|
Credit derivatives
|
17
|
|
—
|
|
17
|
|
—
|
|
||||
|
Foreign exchange derivatives
|
27
|
|
—
|
|
27
|
|
—
|
|
||||
|
Interest rate derivatives
|
(427
|
)
|
—
|
|
(427
|
)
|
—
|
|
||||
|
GMWB hedging instruments
|
74
|
|
—
|
|
14
|
|
60
|
|
||||
|
Macro hedge program
|
128
|
|
—
|
|
8
|
|
120
|
|
||||
|
Other derivative contracts
|
1
|
|
—
|
|
—
|
|
1
|
|
||||
|
Total derivative assets [2]
|
(180
|
)
|
—
|
|
(361
|
)
|
181
|
|
||||
|
Short-term investments
|
3,244
|
|
878
|
|
2,366
|
|
—
|
|
||||
|
Reinsurance recoverable for GMWB
|
73
|
|
—
|
|
—
|
|
73
|
|
||||
|
Modified coinsurance reinsurance contracts
|
68
|
|
—
|
|
68
|
|
—
|
|
||||
|
Separate account assets [3]
|
111,634
|
|
71,606
|
|
38,856
|
|
201
|
|
||||
|
Total assets accounted for at fair value on a recurring basis
|
$
|
172,243
|
|
$
|
73,937
|
|
$
|
92,960
|
|
$
|
4,375
|
|
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||
|
GMWB embedded derivative
|
$
|
(241
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(241
|
)
|
|
Equity linked notes
|
(33
|
)
|
—
|
|
—
|
|
(33
|
)
|
||||
|
Total other policyholder funds and benefits payable
|
(274
|
)
|
—
|
|
—
|
|
(274
|
)
|
||||
|
Derivative liabilities
|
||||||||||||
|
Credit derivatives
|
(13
|
)
|
—
|
|
(13
|
)
|
—
|
|
||||
|
Equity derivatives
|
33
|
|
—
|
|
33
|
|
—
|
|
||||
|
Foreign exchange derivatives
|
(237
|
)
|
—
|
|
(237
|
)
|
—
|
|
||||
|
Interest rate derivatives
|
(542
|
)
|
—
|
|
(521
|
)
|
(21
|
)
|
||||
|
GMWB hedging instruments
|
20
|
|
—
|
|
(1
|
)
|
21
|
|
||||
|
Macro hedge program
|
50
|
|
—
|
|
3
|
|
47
|
|
||||
|
Total derivative liabilities [4]
|
(689
|
)
|
—
|
|
(736
|
)
|
47
|
|
||||
|
Contingent consideration [5]
|
(25
|
)
|
—
|
|
—
|
|
(25
|
)
|
||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$
|
(988
|
)
|
$
|
—
|
|
$
|
(736
|
)
|
$
|
(252
|
)
|
|
[1]
|
Included in other investments on the Condensed Consolidated Balance Sheets.
|
|
[2]
|
Includes 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 footnote 4 to this table for derivative liabilities.
|
17
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
[3]
|
Approximately
$3.0 billion
and
$4.0 billion
of investment sales receivable, as of
March 31, 2017
, and
December 31, 2016
, 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
$887
and
$1.0 billion
of investments, as of
March 31, 2017
and
December 31, 2016
, for which the fair value is estimated using the net asset value per unit as a practical expedient which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy.
|
|
[4]
|
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.
|
|
[5]
|
For additional information see the Contingent Consideration section below.
|
Fixed Maturities, Equity Securities, Short-term Investments, and Free-standing Derivatives
Valuation Techniques
The Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market expectations. The Company uses a "waterfall" approach comprised of the following pricing sources and techniques, which are listed in priority order:
|
•
|
Quoted prices, unadjusted, for identical assets or liabilities in active markets, which are classified as Level 1.
|
|
•
|
Prices from third-party pricing services, which primarily utilize a combination of techniques. These services utilize recently reported trades of identical, similar, or benchmark securities making adjustments for market observable inputs available through the reporting date. If there are no recently reported trades, they may use a discounted cash flow technique to develop a price using expected cash flows based upon the anticipated future performance of the underlying collateral discounted at an estimated market rate. Both techniques develop prices that consider the time value of future cash flows and provide a margin for risk, including liquidity and credit risk. Most prices provided by third-party pricing services are classified as Level 2 because the inputs used in pricing the securities are observable. However, some securities that are less liquid or trade less actively are classified as Level 3. Additionally, certain long-dated securities, including certain municipal securities, foreign government/government agency securities, and bank loans, include benchmark interest rate or credit spread assumptions that are not observable in the marketplace and are thus classified as Level 3.
|
|
•
|
Internal matrix pricing, which is a valuation process internally developed for private placement securities for which the Company is unable to obtain a price from a third-party pricing service. Internal pricing matrices determine credit spreads that, when combined with risk-free rates, are applied to contractual cash flows to develop a price. The Company develops credit spreads 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 market-based reference credit spread considers the issuer’s financial strength and term to maturity, using an
|
independent public security index and trade information, while the credit spread differential considers the non-public nature of the security. Securities priced using internal matrix pricing are classified as Level 2 because the inputs are observable or can be corroborated with observable data.
|
•
|
Independent broker quotes, which are typically non-binding and use inputs that can be difficult to corroborate with observable market based data. Brokers may use present value techniques using assumptions specific to the security types, or they may use recent transactions of similar securities. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on independent broker quotes are classified as Level 3.
|
The fair value of free-standing derivative instruments are determined primarily using a discounted cash flow model or option model technique and incorporate counterparty credit risk. In some cases, quoted market prices for exchange-traded and OTC-cleared derivatives may be used and in other cases independent broker quotes may be used. The pricing valuation models primarily use inputs that are observable in the market or can be corroborated by observable market data. The valuation of certain derivatives may include significant inputs that are unobservable, such as volatility levels, and reflect the Company’s view of what other market participants would use when pricing such instruments. Unobservable market data is used in the valuation of customized derivatives that are used to hedge certain GMWB variable annuity riders. See the section “GMWB Embedded, Customized, and Reinsurance Derivatives” below for further discussion of the valuation model used to value these customized derivatives.
Valuation Controls
The fair value process for investments is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The purpose of the committee is to oversee the pricing policy and procedures, as well as approving changes to valuation methodologies and pricing sources. Controls and procedures used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due-diligence reviews.
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"). The working groups, which include various investment, operations, accounting and risk management professionals, meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes.
The Securities Working Group reviews prices received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The group considers trading volume, new
18
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
issuance activity, market trends, new regulatory rulings and other factors to determine whether the market activity is significantly different than normal activity in an active market. A dedicated pricing unit follows up with trading and investment sector professionals and challenges prices of third-party pricing services when the estimated assumptions used differ from what the unit believes a market participant would use. If the available evidence indicates that pricing from third-party pricing services or broker quotes is based upon transactions that are stale or not from trades made in an orderly market, the Company places little, if any, weight on the third party service’s transaction price and will estimate fair value using an internal process, such as a pricing matrix.
The Derivatives Working Group reviews the inputs, assumptions and methodologies used to ensure that the prices represent a reasonable estimate of the fair value. A dedicated pricing team works directly with investment sector professionals to investigate the impacts of changes in the market environment on prices or valuations of derivatives. New models and any changes to current models are required to have detailed documentation and are validated to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval.
The Company conducts other monitoring controls around securities and derivatives pricing including, but not limited to, the following:
|
•
|
Review of daily price changes over specific thresholds and new trade comparison to third-party pricing services.
|
|
•
|
Daily comparison of OTC derivative market valuations to counterparty valuations.
|
|
•
|
Review of weekly price changes compared to published bond prices of a corporate bond index.
|
|
•
|
Monthly reviews of price changes over thresholds, stale prices, missing prices, and zero prices.
|
|
•
|
Monthly validation of prices to a second source for securities in most sectors and for certain derivatives.
|
In addition, the Company’s enterprise-wide Operational Risk Management function, led by the Chief Risk Officer, is responsible for model risk management and provides an independent review of the suitability and reliability of model inputs, as well as an analysis of significant changes to current models.
Valuation Inputs
Quoted prices for identical assets in active markets are considered Level 1 and consist 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.
19
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Freestanding Derivatives
|
|||
|
Level 2
Primary Observable Inputs
|
Level 3
Primary Unobservable Inputs
|
||
|
Fixed Maturity Investments
|
|||
|
Structured securities (includes ABS, CDOs CMBS and RMBS)
|
|||
|
• Benchmark yields and spreads
• Monthly payment information
• Collateral performance, which varies by vintage year and includes delinquency rates, loss severity rates and refinancing assumptions
• Credit default swap indices
Other inputs for ABS and RMBS:
• Estimate of future principal prepayments, derived based on the characteristics of the underlying structure
• Prepayment speeds previously experienced at the interest rate levels projected for the collateral
|
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for less liquid securities or those that trade less actively, including subprime RMBS:
• Estimated cash flows
• Credit spreads, which include illiquidity premium
• Constant prepayment rates
• Constant default rates
• Loss severity
|
||
|
Corporates
|
|||
|
• Benchmark yields and spreads
• Reported trades, bids, offers of the same or similar securities
• Issuer spreads and credit default swap curves
Other inputs for investment grade privately placed securities that utilize internal matrix pricing :
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
|
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for below investment grade privately placed securities:
• Independent broker quotes
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
|
||
|
U.S Treasuries, Municipals, and Foreign government/government agencies
|
|||
|
• Benchmark yields and spreads
• Issuer credit default swap curves
• Political events in emerging market economies
• Municipal Securities Rulemaking Board reported trades and material event notices
• Issuer financial statements
|
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
|
||
|
Equity Securities
|
|||
|
• Quoted prices in markets that are not active
|
• For privately traded equity securities, internal discounted cash flow models utilizing earnings multiples or other cash flow assumptions that are not observable; or they may be held at cost
|
||
|
Short Term Investments
|
|||
|
• Benchmark yields and spreads
• Reported trades, bids, offers
• Issuer spreads and credit default swap curves
• Material event notices and new issue money market rates
|
Not applicable
|
||
|
Derivatives
|
|||
|
Credit derivatives
|
|||
|
• Swap yield curve
• Credit default swap curves
|
• Independent broker quotes
• Yield curves beyond observable limits
|
||
|
Equity derivatives
|
|||
|
• Equity index levels
• Swap yield curve
|
• Independent broker quotes
• Equity volatility
|
||
|
Foreign exchange derivatives
|
|||
|
• Swap yield curve
• Currency spot and forward rates
• Cross currency basis curves
|
• Independent broker quotes
|
||
|
Interest rate derivatives
|
|||
|
• Swap yield curve
|
• Independent broker quotes
• Interest rate volatility
|
||
20
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
Significant Unobservable Inputs for Level 3 - Securities
|
|||||||||
|
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] |
||
|
As of March 31, 2017
|
|||||||||
|
CMBS [3]
|
$
|
76
|
|
Discounted cash flows
|
Spread (encompasses prepayment, default risk and loss severity)
|
9 bps
|
1,272 bps
|
463 bps
|
Decrease
|
|
Corporate [4]
|
438
|
|
Discounted cash flows
|
Spread
|
107 bps
|
963 bps
|
328 bps
|
Decrease
|
|
|
Municipal [3]
|
101
|
|
Discounted cash flows
|
Spread
|
186 bps
|
241 bps
|
208 bps
|
Decrease
|
|
|
RMBS [3]
|
2,038
|
|
Discounted cash flows
|
Spread
|
34 bps
|
1,371 bps
|
179 bps
|
Decrease
|
|
|
Constant prepayment rate
|
—%
|
20%
|
4%
|
Decrease [5]
|
|||||
|
Constant default rate
|
1%
|
10%
|
5%
|
Decrease
|
|||||
|
Loss severity
|
—%
|
100%
|
73%
|
Decrease
|
|||||
|
As of December 31, 2016
|
|||||||||
|
CMBS [3]
|
$
|
52
|
|
Discounted cash flows
|
Spread (encompasses prepayment, default risk and loss severity)
|
10 bps
|
1,273 bps
|
366 bps
|
Decrease
|
|
Corporate [4]
|
510
|
|
Discounted cash flows
|
Spread
|
122 bps
|
1,302 bps
|
359 bps
|
Decrease
|
|
|
Municipal [3]
|
101
|
|
Discounted cash flows
|
Spread
|
135 bps
|
286 bps
|
221 bps
|
Decrease
|
|
|
RMBS [3]
|
1,963
|
|
Discounted cash flows
|
Spread
|
16 bps
|
1,830 bps
|
192 bps
|
Decrease
|
|
|
Constant prepayment rate
|
—%
|
20%
|
4%
|
Decrease [5]
|
|||||
|
Constant default rate
|
—%
|
11%
|
5%
|
Decrease
|
|||||
|
Loss severity
|
—%
|
100%
|
75%
|
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 based fair value on broker quotations.
|
|
[4]
|
Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value.
|
|
[5]
|
Decrease for above market rate coupons and increase for below market rate coupons.
|
21
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
Significant Unobservable Inputs for Level 3 - Freestanding Derivatives
|
||||||||||
|
Fair
Value |
Predominant
Valuation Technique |
Significant Unobservable Input
|
Minimum
|
Maximum
|
Impact of
Increase in Input on Fair Value [1] |
|||||
|
As of March 31, 2017
|
||||||||||
|
Interest rate derivatives
|
||||||||||
|
Interest rate swaps
|
$
|
(29
|
)
|
Discounted cash flows
|
Swap curve beyond 30 years
|
3
|
%
|
3
|
%
|
Decrease
|
|
Interest rate swaptions [2]
|
5
|
|
Option model
|
Interest rate volatility
|
2
|
%
|
2
|
%
|
Increase
|
|
|
GMWB hedging instruments
|
||||||||||
|
Equity variance swaps
|
(39
|
)
|
Option model
|
Equity volatility
|
16
|
%
|
20
|
%
|
Increase
|
|
|
Equity options
|
9
|
|
Option model
|
Equity volatility
|
26
|
%
|
28
|
%
|
Increase
|
|
|
Customized swaps
|
76
|
|
Discounted cash flows
|
Equity volatility
|
9
|
%
|
30
|
%
|
Increase
|
|
|
Macro hedge program [3]
|
||||||||||
|
Equity options
|
164
|
|
Option model
|
Equity volatility
|
15
|
%
|
32
|
%
|
Increase
|
|
|
As of December 31, 2016
|
||||||||||
|
Interest rate derivatives
|
||||||||||
|
Interest rate swaps
|
$
|
(29
|
)
|
Discounted cash flows
|
Swap curve beyond 30 years
|
3
|
%
|
3
|
%
|
Decrease
|
|
Interest rate swaptions [2]
|
8
|
|
Option model
|
Interest rate volatility
|
2
|
%
|
2
|
%
|
Increase
|
|
|
GMWB hedging instruments
|
||||||||||
|
Equity variance swaps
|
(36
|
)
|
Option model
|
Equity volatility
|
20
|
%
|
23
|
%
|
Increase
|
|
|
Equity options
|
17
|
|
Option model
|
Equity volatility
|
27
|
%
|
30
|
%
|
Increase
|
|
|
Customized swaps
|
100
|
|
Discounted cash flows
|
Equity volatility
|
12
|
%
|
30
|
%
|
Increase
|
|
|
Macro hedge program [3]
|
||||||||||
|
Equity options
|
188
|
|
Option model
|
Equity volatility
|
17
|
%
|
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.
|
The tables above exclude the portion of ABS, CRE CDOs, index options and certain corporate securities for which fair values are predominately based on independent broker quotes. While the Company does not have access to the significant unobservable inputs that independent brokers may use in their pricing process, the Company believes brokers likely use inputs similar to those used by the Company and third-party pricing services to price similar instruments. As such, in their pricing models, brokers likely use estimated loss severity rates, prepayment rates, constant default rates and credit spreads. Therefore, similar to non-broker priced securities, increases in these inputs would generally cause fair values to decrease.
For the
three months ended
March 31, 2017
,
no
significant adjustments were made by the Company to broker prices received.
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
$621
and
$741
for the
three months ended
March 31, 2017
and
March 31, 2016
, respectively, which represented previously on-the-run U.S. Treasury securities that are now off-the-run. For the
three months ended
March 31, 2017
and
2016
, there were
no
transfers from Level 2 to Level 1. See the fair value roll-forward tables for the
three months ended
March 31, 2017
and
2016
, for the transfers into and out of Level 3.
22
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
GMWB Embedded, Customized and Reinsurance Derivatives
|
GMWB Embedded Derivatives
|
The Company formerly offered certain variable annuity products with GMWB riders that provide 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 a 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. When payments of the GRB are not life-contingent, the GMWB represents an embedded derivative carried at fair value reported in other policyholder funds and benefits payable in the Condensed Consolidated Balance Sheets with changes in fair value reported in net realized capital gains and losses.
|
|
Free-standing Customized Derivatives
|
The Company holds free-standing customized derivative contracts to provide protection from certain capital markets risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized derivatives 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. These derivatives are reported in the Condensed Consolidated Balance Sheets within other investments or other liabilities, as appropriate, after considering the impact of master netting agreements.
|
|
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 carried at fair value and reported in reinsurance recoverables in the Condensed Consolidated Balance Sheets. Changes in the fair value of the reinsurance agreements are reported in net realized capital gains and losses.
|
Valuation Techniques
Fair values for GMWB embedded derivatives, free-standing customized derivatives and reinsurance derivatives are classified as Level 3 in the fair value hierarchy and are calculated using internally developed models that utilize significant unobservable inputs because active, observable markets do not exist for these items. In valuing the GMWB embedded derivative, the Company attributes to the derivative a portion of the expected fees to be collected over the expected life of the contract from the contract holder equal to the present value of future GMWB claims. The excess of fees collected from the contract holder in the current period over the portion of fees attributed to the embedded derivative in the current period are associated with the host variable annuity contract and reported in fee income.
Valuation Controls
Oversight of the Company's valuation policies and processes for GMWB embedded, reinsurance, and customized 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.
Valuation Inputs
The fair value for each of the non-life contingent GMWBs, the free-standing customized derivatives and the GMWB reinsurance derivative is calculated as an aggregation of the following components: Best Estimate Claim Payments; Credit Standing Adjustment; and Margins. The Company believes the aggregation of these components results in an amount that a market participant in an active liquid market would require, if such a market existed, to assume the risks associated with the guaranteed minimum benefits and the related reinsurance and customized derivatives. Each component described in the following discussion is unobservable in the marketplace and requires subjectivity by the Company in determining its value.
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 unobservable inputs including expectations concerning policyholder behavior. These assumptions are input into a stochastic risk neutral scenario process that is used to determine the valuation and involves numerous estimates and subjective judgments regarding a number of variables.
The Company monitors various aspects of policyholder behavior and may modify certain of its assumptions, including living benefit lapses and withdrawal rates, if credible emerging data indicates that changes are warranted. In addition, the Company will continue to evaluate policyholder behavior assumptions should we implement initiatives to reduce the size of the variable annuity business. At a minimum, all policyholder behavior assumptions are reviewed and updated at least annually as part of the Company’s annual fourth-quarter comprehensive study to refine its estimate of future gross profits. In addition, the Company recognizes non-market-based updates driven by the relative outperformance (underperformance) of the underlying actively managed funds as compared to their respective indices.
Credit Standing Adjustment
The credit standing adjustment is an estimate of the additional amount that market participants would require in determining fair value to reflect the risk that GMWB 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.
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.
23
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
Valuation Inputs Used in Levels 2 and 3 Measurements for GMWB Embedded, Customized and Reinsurance Derivatives
|
|||
|
Level 2
Primary Observable Inputs |
Level 3
Primary Unobservable Inputs |
||
|
• Risk-free rates as represented by the Eurodollar futures, LIBOR deposits and swap rates to derive forward curve rates
• Correlations of 10 years of observed historical returns across underlying well-known market indices
• Correlations of historical index returns compared to separate account fund returns
• Equity index levels
|
• Market implied equity volatility assumptions
Assumptions about policyholder behavior, including: • Withdrawal utilization
• Withdrawal rates
• Lapse rates
• Reset elections
|
||
|
Significant Unobservable Inputs for Level 3 GMWB Embedded Customized and Reinsurance Derivatives
|
|||
|
As of March 31, 2017
|
|||
|
Significant Unobservable Input
|
Unobservable Inputs (Minimum)
|
Unobservable Inputs (Maximum)
|
Impact of Increase in Input
on Fair Value Measurement [1] |
|
Withdrawal Utilization [2]
|
15%
|
100%
|
Increase
|
|
Withdrawal Rates [3]
|
—%
|
8%
|
Increase
|
|
Lapse Rates [4]
|
—%
|
40%
|
Decrease
|
|
Reset Elections [5]
|
20%
|
75%
|
Increase
|
|
Equity Volatility [6]
|
9%
|
30%
|
Increase
|
|
As of December 31, 2016
|
|||
|
Significant Unobservable Input
|
Unobservable Inputs (Minimum)
|
Unobservable Inputs (Maximum)
|
Impact of Increase in Input
on Fair Value Measurement [1] |
|
Withdrawal Utilization [2]
|
15%
|
100%
|
Increase
|
|
Withdrawal Rates [3]
|
—%
|
8%
|
Increase
|
|
Lapse Rates [4]
|
—%
|
40%
|
Decrease
|
|
Reset Elections [5]
|
20%
|
75%
|
Increase
|
|
Equity Volatility [6]
|
12%
|
30%
|
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.
|
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,
42%
and
39%
were subject to significant liquidation restrictions as of
March 31, 2017
and
December 31, 2016
, respectively. Total limited partnerships that do not allow any form of redemption were
12%
and
11%
as of
March 31, 2017
and
December 31, 2016
, respectively. Separate account assets classified as Level 3 primarily include long-dated bank loans, subprime RMBS, and commercial mortgage loans.
Contingent Consideration
The acquisition of Lattice Strategies LLC ("Lattice") in 2016 requires the Company to make payments to former owners of Lattice of up to
$60
contingent upon growth in exchange-traded products ("ETP") AUM over a four-year period beginning on the date of acquisition. The contingent consideration is measured at fair value on a quarterly basis by projecting future eligible ETP AUM over the contingency period to estimate the amount of expected payout. The future expected payout is discounted back to the valuation date using a risk-adjusted discount rate of
18.8%.
The risk-adjusted discount rate is an internally generated and significant unobservable input to fair value.
Level 3 Assets and Liabilities Measured at Fair Value on a
24
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
Recurring Basis Using Significant Unobservable Inputs
The Company uses 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 asset or liability. Therefore, the realized and unrealized gains and losses on derivatives reported in the Level 3 roll-forward may be offset by realized and unrealized gains and losses of the associated assets and liabilities in other line items of the financial statements.
|
Fair Value Roll-forwards for Financial Instruments Classified as Level 3 for the Three Months Ended March 31, 2017
|
||||||||||||||||||||||||||||
|
Total realized/unrealized gains (losses)
|
||||||||||||||||||||||||||||
|
Fair value as of January 1, 2017
|
Included in net income [1] [2] [6]
|
Included in OCI [3]
|
Purchases [8]
|
Settlements
|
Sales
|
Transfers into Level 3 [4]
|
Transfers out of Level 3 [4]
|
Fair value as of March 31, 2017
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Fixed Maturities, AFS
|
||||||||||||||||||||||||||||
|
ABS
|
$
|
82
|
|
$
|
—
|
|
$
|
—
|
|
$
|
45
|
|
$
|
(5
|
)
|
$
|
—
|
|
$
|
26
|
|
$
|
(23
|
)
|
$
|
125
|
|
|
|
CDOs
|
414
|
|
—
|
|
4
|
|
—
|
|
(1
|
)
|
—
|
|
—
|
|
(98
|
)
|
319
|
|
||||||||||
|
CMBS
|
80
|
|
(1
|
)
|
—
|
|
56
|
|
(3
|
)
|
—
|
|
—
|
|
(15
|
)
|
117
|
|
||||||||||
|
Corporate
|
1,080
|
|
6
|
|
16
|
|
169
|
|
(36
|
)
|
(160
|
)
|
40
|
|
(37
|
)
|
1,078
|
|
||||||||||
|
Foreign Govt./Govt. Agencies
|
64
|
|
—
|
|
3
|
|
—
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
66
|
|
||||||||||
|
Municipal
|
118
|
|
—
|
|
5
|
|
—
|
|
—
|
|
(6
|
)
|
—
|
|
—
|
|
117
|
|
||||||||||
|
RMBS
|
1,972
|
|
—
|
|
6
|
|
173
|
|
(96
|
)
|
(7
|
)
|
—
|
|
—
|
|
2,048
|
|
||||||||||
|
Total Fixed Maturities, AFS
|
3,810
|
|
5
|
|
34
|
|
443
|
|
(142
|
)
|
(173
|
)
|
66
|
|
(173
|
)
|
3,870
|
|
||||||||||
|
Fixed Maturities, FVO
|
11
|
|
—
|
|
—
|
|
4
|
|
(2
|
)
|
(13
|
)
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Equity Securities, AFS
|
99
|
|
—
|
|
(4
|
)
|
4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
99
|
|
||||||||||
|
Freestanding Derivatives, net [5]
|
||||||||||||||||||||||||||||
|
Equity
|
—
|
|
(1
|
)
|
—
|
|
5
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4
|
|
||||||||||
|
Interest rate
|
(21
|
)
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(24
|
)
|
||||||||||
|
GMWB hedging instruments
|
81
|
|
(35
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
46
|
|
||||||||||
|
Macro hedge program
|
167
|
|
(8
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
159
|
|
||||||||||
|
Other contracts
|
1
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Total Freestanding Derivatives, net [5]
|
228
|
|
(48
|
)
|
—
|
|
5
|
|
—
|
|
—
|
|
—
|
|
—
|
|
185
|
|
||||||||||
|
Reinsurance Recoverable for GMWB
|
73
|
|
(17
|
)
|
—
|
|
—
|
|
4
|
|
—
|
|
—
|
|
—
|
|
60
|
|
||||||||||
|
Separate Accounts
|
201
|
|
—
|
|
3
|
|
97
|
|
(4
|
)
|
(8
|
)
|
3
|
|
(15
|
)
|
277
|
|
||||||||||
|
Total Assets
|
$
|
4,422
|
|
$
|
(60
|
)
|
$
|
33
|
|
$
|
553
|
|
$
|
(144
|
)
|
$
|
(194
|
)
|
$
|
69
|
|
$
|
(188
|
)
|
$
|
4,491
|
|
|
|
Liabilities
|
||||||||||||||||||||||||||||
|
Other Policyholder Funds and Benefits Payable
|
||||||||||||||||||||||||||||
|
Guaranteed Withdrawal Benefits
|
$
|
(241
|
)
|
$
|
100
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(16
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(157
|
)
|
|
|
Equity Linked Notes
|
(33
|
)
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(36
|
)
|
||||||||||
|
Total Other Policyholder Funds and Benefits Payable
|
(274
|
)
|
97
|
|
—
|
|
—
|
|
(16
|
)
|
—
|
|
—
|
|
—
|
|
(193
|
)
|
||||||||||
|
Contingent Consideration [7]
|
(25
|
)
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(26
|
)
|
||||||||||
|
Total Liabilities
|
$
|
(299
|
)
|
$
|
96
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(16
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(219
|
)
|
|
25
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
Fair Value Roll-forwards for Financial Instruments Classified as Level 3 for the Three Months Ended March 31, 2016
|
||||||||||||||||||||||||||||
|
Total realized/unrealized gains (losses)
|
||||||||||||||||||||||||||||
|
Fair value as of January 1, 2016
|
Included in net income [1] [2] [6]
|
Included in OCI [3]
|
Purchases [8]
|
Settlements
|
Sales
|
Transfers into Level 3 [4]
|
Transfers out of Level 3 [4]
|
Fair value as of March 31, 2016
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Fixed Maturities, AFS
|
||||||||||||||||||||||||||||
|
ABS
|
$
|
37
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(3
|
)
|
$
|
—
|
|
$
|
5
|
|
$
|
(7
|
)
|
$
|
32
|
|
|
|
CDOs
|
541
|
|
—
|
|
—
|
|
—
|
|
1
|
|
—
|
|
—
|
|
—
|
|
542
|
|
||||||||||
|
CMBS
|
150
|
|
(1
|
)
|
(8
|
)
|
40
|
|
(9
|
)
|
—
|
|
—
|
|
(38
|
)
|
134
|
|
||||||||||
|
Corporate
|
854
|
|
(13
|
)
|
(7
|
)
|
30
|
|
(5
|
)
|
(25
|
)
|
58
|
|
(58
|
)
|
834
|
|
||||||||||
|
Foreign Govt./Govt. Agencies
|
60
|
|
—
|
|
5
|
|
14
|
|
(1
|
)
|
(2
|
)
|
—
|
|
—
|
|
76
|
|
||||||||||
|
Municipal
|
49
|
|
—
|
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
50
|
|
||||||||||
|
RMBS
|
1,622
|
|
—
|
|
(14
|
)
|
333
|
|
(57
|
)
|
—
|
|
2
|
|
—
|
|
1,886
|
|
||||||||||
|
Total Fixed Maturities, AFS
|
3,313
|
|
(14
|
)
|
(23
|
)
|
417
|
|
(74
|
)
|
(27
|
)
|
65
|
|
(103
|
)
|
3,554
|
|
||||||||||
|
Fixed Maturities, FVO
|
16
|
|
(2
|
)
|
—
|
|
5
|
|
(1
|
)
|
—
|
|
—
|
|
(4
|
)
|
14
|
|
||||||||||
|
Equity Securities, AFS
|
93
|
|
(1
|
)
|
2
|
|
—
|
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
92
|
|
||||||||||
|
Freestanding Derivatives, net [5]
|
||||||||||||||||||||||||||||
|
Equity
|
—
|
|
(11
|
)
|
—
|
|
16
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5
|
|
||||||||||
|
Interest rate
|
(22
|
)
|
(6
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(28
|
)
|
||||||||||
|
GMWB hedging instruments
|
135
|
|
9
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
144
|
|
||||||||||
|
Macro hedge program
|
147
|
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
145
|
|
||||||||||
|
Other contracts
|
7
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5
|
|
||||||||||
|
Total Freestanding Derivatives, net [5]
|
267
|
|
(10
|
)
|
—
|
|
16
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
271
|
|
||||||||||
|
Reinsurance Recoverable for GMWB
|
83
|
|
12
|
|
—
|
|
—
|
|
4
|
|
—
|
|
—
|
|
—
|
|
99
|
|
||||||||||
|
Separate Accounts
|
139
|
|
—
|
|
4
|
|
38
|
|
(5
|
)
|
(10
|
)
|
3
|
|
(15
|
)
|
154
|
|
||||||||||
|
Total Assets
|
$
|
3,911
|
|
$
|
(15
|
)
|
$
|
(17
|
)
|
$
|
476
|
|
$
|
(78
|
)
|
$
|
(39
|
)
|
$
|
68
|
|
$
|
(122
|
)
|
$
|
4,184
|
|
|
|
Liabilities
|
||||||||||||||||||||||||||||
|
Other Policyholder Funds and Benefits Payable
|
||||||||||||||||||||||||||||
|
Guaranteed Withdrawal Benefits
|
$
|
(262
|
)
|
$
|
(82
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(17
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(361
|
)
|
|
|
Equity Linked Notes
|
(26
|
)
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(25
|
)
|
||||||||||
|
Total Other Policyholder Funds and Benefits Payable
|
(288
|
)
|
(81
|
)
|
—
|
|
—
|
|
(17
|
)
|
—
|
|
—
|
|
—
|
|
(386
|
)
|
||||||||||
|
Total Liabilities
|
$
|
(288
|
)
|
$
|
(81
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(17
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(386
|
)
|
|
|
[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]
|
Amounts in these rows are generally 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]
|
For additional information, see the Contingent Consideration section of Note
5
-
Fair Value Measurements
of Notes to Condensed Consolidated Financial Statements.
|
|
[8]
|
Includes issuance of contingent consideration associated with the Lattice acquisition, see Note
2
-
Business Disposition
of Notes to Condensed Consolidated Financial Statements for additional discussion.
|
26
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
Changes in Unrealized Gains (Losses) Included in Net Income for Financial Instruments Classified as Level 3 Still Held at:
|
|||||||
|
March 31, 2017 [1] [2]
|
March 31, 2016 [1] [2]
|
||||||
|
Assets
|
|||||||
|
Fixed Maturities, AFS
|
|||||||
|
ABS
|
$
|
—
|
|
$
|
—
|
|
|
|
CDOs
|
—
|
|
—
|
|
|||
|
CMBS
|
(1
|
)
|
(1
|
)
|
|||
|
Corporate
|
—
|
|
(13
|
)
|
|||
|
Foreign Govt./Govt. Agencies
|
—
|
|
—
|
|
|||
|
Municipal
|
—
|
|
—
|
|
|||
|
RMBS
|
—
|
|
—
|
|
|||
|
Total Fixed Maturities, AFS
|
(1
|
)
|
(14
|
)
|
|||
|
Fixed Maturities, FVO
|
—
|
|
(1
|
)
|
|||
|
Equity Securities, AFS
|
—
|
|
(1
|
)
|
|||
|
Freestanding Derivatives, net
|
|||||||
|
Equity
|
(1
|
)
|
(11
|
)
|
|||
|
Interest rate
|
(3
|
)
|
(6
|
)
|
|||
|
GMWB hedging instruments
|
(36
|
)
|
9
|
|
|||
|
Macro hedge program
|
(8
|
)
|
(1
|
)
|
|||
|
Other Contracts
|
—
|
|
(2
|
)
|
|||
|
Total Freestanding Derivatives, net
|
(48
|
)
|
(11
|
)
|
|||
|
Reinsurance Recoverable for GMWB
|
(17
|
)
|
12
|
|
|||
|
Separate Accounts
|
—
|
|
—
|
|
|||
|
Total Assets
|
$
|
(66
|
)
|
$
|
(15
|
)
|
|
|
Liabilities
|
|||||||
|
Other Policyholder Funds and Benefits Payable
|
|||||||
|
Guaranteed Withdrawal Benefits
|
$
|
100
|
|
$
|
(82
|
)
|
|
|
Equity Linked Notes
|
(3
|
)
|
1
|
|
|||
|
Total Other Policyholder Funds and Benefits Payable
|
97
|
|
(81
|
)
|
|||
|
Contingent Consideration [3]
|
(1
|
)
|
—
|
|
|||
|
Total Liabilities
|
$
|
96
|
|
$
|
(81
|
)
|
|
|
[1]
|
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.
|
|
[2]
|
Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
|
|
[3]
|
For additional information, see the Contingent Consideration section of Note
5
-
Fair Value Measurements
of Notes to Condensed Consolidated Financial Statements.
|
Fair Value Option
The Company has elected the fair value option for certain securities that contain embedded credit derivatives with underlying credit risk primarily related to residential real estate, and these securities are included within Fixed Maturities, FVO on the Condensed Consolidated Balance Sheets. The Company previously classified the underlying fixed maturities held in certain consolidated investment funds within Fixed Maturities, FVO. The Company reported the underlying fixed maturities of 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 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. 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.
27
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
|
Changes in Fair Value of Assets using Fair Value Option
|
||||||
|
|
Three Months Ended March 31,
|
|||||
|
|
2017
|
2016
|
||||
|
Assets
|
||||||
|
Fixed maturities, FVO
|
||||||
|
Corporate
|
$
|
(1
|
)
|
$
|
—
|
|
|
Foreign government
|
—
|
|
(1
|
)
|
||
|
RMBS
|
1
|
|
1
|
|
||
|
Total fixed maturities, FVO
|
$
|
—
|
|
$
|
—
|
|
|
Equity, FVO
|
(1
|
)
|
(34
|
)
|
||
|
Total realized capital gains (losses)
|
$
|
(1
|
)
|
$
|
(34
|
)
|
|
Fair Value of Assets and Liabilities using the Fair Value Option
|
||||||
|
March 31, 2017
|
December 31, 2016
|
|||||
|
Assets
|
||||||
|
Fixed maturities, FVO
|
||||||
|
ABS
|
$
|
—
|
|
$
|
7
|
|
|
CDOs
|
—
|
|
3
|
|
||
|
CMBS
|
—
|
|
8
|
|
||
|
Corporate
|
—
|
|
40
|
|
||
|
U.S government
|
—
|
|
7
|
|
||
|
RMBS
|
160
|
|
228
|
|
||
|
Total fixed maturities, FVO
|
$
|
160
|
|
$
|
293
|
|
|
Equity, FVO [1]
|
$
|
123
|
|
$
|
—
|
|
|
[1]
|
Included in equity securities, AFS on the Condensed Consolidated Balance Sheets.
|
|
Financial Assets and Liabilities Not Carried at Fair Value
|
|||||||
|
Fair Value Hierarchy Level
|
Carrying Amount
|
Fair Value
|
|||||
|
March 31, 2017
|
|||||||
|
Assets
|
|||||||
|
Policy loans
|
Level 3
|
$
|
1,442
|
|
$
|
1,442
|
|
|
Mortgage loans
|
Level 3
|
5,685
|
|
5,689
|
|
||
|
Liabilities
|
|||||||
|
Other policyholder funds and benefits payable [1]
|
Level 3
|
$
|
6,626
|
|
$
|
6,809
|
|
|
Senior notes [2]
|
Level 2
|
3,554
|
|
4,110
|
|
||
|
Junior subordinated debentures [2]
|
Level 2
|
1,583
|
|
1,708
|
|
||
|
Consumer notes [3] [4]
|
Level 3
|
14
|
|
14
|
|
||
|
Assumed investment contracts [3]
|
Level 3
|
514
|
|
547
|
|
||
|
December 31, 2016
|
|||||||
|
Assets
|
|||||||
|
Policy loans
|
Level 3
|
$
|
1,444
|
|
$
|
1,444
|
|
|
Mortgage loans
|
Level 3
|
5,697
|
|
5,721
|
|
||
|
Liabilities
|
|||||||
|
Other policyholder funds and benefits payable [1]
|
Level 3
|
$
|
6,714
|
|
$
|
6,906
|
|
|
Senior notes [2]
|
Level 2
|
3,969
|
|
4,487
|
|
||
|
Junior subordinated debentures [2]
|
Level 2
|
1,083
|
|
1,246
|
|
||
|
Consumer notes [3] [4]
|
Level 3
|
20
|
|
20
|
|
||
|
Assumed investment contracts [3]
|
Level 3
|
487
|
|
526
|
|
||
|
[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]
|
Excludes amounts carried at fair value and included in preceding disclosures.
|
|
[4]
|
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.
28
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements
(continued)
Fair values for consumer notes were estimated using discounted cash flow calculations using current interest rates adjusted for estimated loan durations.
29
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments
|
Net Realized Capital Gains (Losses)
|
||||||
|
|
Three Months Ended March 31,
|
|||||
|
(Before tax)
|
2017
|
2016
|
||||
|
Gross gains on sales
|
$
|
112
|
|
$
|
90
|
|
|
Gross losses on sales
|
(75
|
)
|
(108
|
)
|
||
|
Net OTTI losses recognized in earnings
|
(1
|
)
|
(23
|
)
|
||
|
Results of variable annuity hedge program
|
|
|
||||
|
GMWB derivatives, net
|
18
|
|
(17
|
)
|
||
|
Macro hedge program
|
(86
|
)
|
(14
|
)
|
||
|
Total results of variable annuity hedge program
|
(68
|
)
|
(31
|
)
|
||
|
Transactional foreign currency revaluation
|
(13
|
)
|
(44
|
)
|
||
|
Non-qualifying foreign currency derivatives
|
11
|
|
39
|
|
||
|
Other, net [1]
|
14
|
|
(78
|
)
|
||
|
Net realized capital gains (losses)
|
$
|
(20
|
)
|
$
|
(155
|
)
|
|
[1]
|
Includes non-qualifying derivatives, excluding variable annuity hedge program and foreign currency derivatives, of
$10
and
$(37)
, respectively for the
three months ended
March 31, 2017
and
2016
.
|
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 (and losses) on sales and impairments previously reported as unrealized gains (or losses) in AOCI were
$36
and
$41
for the
three months ended
March 31, 2017
and
2016
, respectively. Proceeds from sales of AFS securities totaled
$6.7 billion
and
$4.9 billion
for the
three months ended
March 31, 2017
and
2016
, respectively.
Recognition and Presentation of Other-Than-Temporary Impairments
The Company will record an other-than-temporary impairment (“OTTI”) for fixed maturities and certain equity securities with debt-like characteristics (collectively “debt securities”) 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 corresponding charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security.
The Company will also record an OTTI for those debt securities for which the Company does not expect to recover the entire amortized cost basis. For these securities, the excess of the amortized cost basis over its fair value is separated into the portion representing a credit OTTI, which is recorded in net realized capital losses, and the remaining non-credit amount, which is recorded in OCI. The credit OTTI amount is the excess of its amortized cost basis over the Company’s best estimate of discounted expected future cash flows. The non-credit amount is the excess of the best estimate of the discounted expected future cash flows over the fair value. The Company’s best estimate of discounted expected future cash flows becomes the new cost
basis and accretes prospectively into net investment income over the estimated remaining life of the security.
The Company’s best estimate of expected future cash flows is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions regarding the future performance. The Company considers, but is not limited to (a) changes in the financial condition of the issuer and the underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) payment structure of the security and (e) the extent to which the fair value has been less than the amortized cost of the security.
For non-structured securities, assumptions include, but are not limited to, economic and industry-specific trends and fundamentals, security-specific developments, industry earnings multiples and the issuer’s ability to restructure and execute asset sales.
For structured securities, assumptions include, but are not limited to, various performance indicators such as historical and projected default and recovery rates, credit ratings, current and projected delinquency rates, loan-to-value ("LTV") ratios, average cumulative collateral loss rates that vary by vintage year, prepayment speeds, and property value declines. 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.
The Company will also record an OTTI for equity securities where the decline in the fair value is deemed to be other-than-temporary. A corresponding 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 new cost basis. The Company’s evaluation and assumptions used to determine an equity OTTI include, but is 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. For the remaining equity securities which are determined to be temporarily impaired, the Company asserts its intent and ability to retain those equity securities until the price recovers.
|
Impairments in Earnings by Type
|
||||||
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
|||||
|
Credit impairments
|
$
|
1
|
|
$
|
18
|
|
|
Intent-to-sell impairments
|
—
|
|
2
|
|
||
|
Impairments on equity securities
|
—
|
|
3
|
|
||
|
Total impairments
|
$
|
1
|
|
$
|
23
|
|
30
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments
(continued)
|
Cumulative Credit Impairments
|
||||||
|
Three Months Ended March 31,
|
||||||
|
(Before tax)
|
2017
|
2016
|
||||
|
Balance as of beginning of period
|
$
|
(280
|
)
|
$
|
(324
|
)
|
|
Additions for credit impairments recognized on [1]:
|
||||||
|
Securities not previously impaired
|
(1
|
)
|
(17
|
)
|
||
|
Securities previously impaired
|
—
|
|
(1
|
)
|
||
|
Reductions for credit impairments previously recognized on:
|
||||||
|
Securities that matured or were sold during the period
|
12
|
|
1
|
|
||
|
Securities due to an increase in expected cash flows
|
9
|
|
5
|
|
||
|
Balance as of end of period
|
$
|
(260
|
)
|
$
|
(336
|
)
|
|
[1]
|
These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations.
|
Available-for-Sale Securities
|
AFS Securities by Type
|
||||||||||||||||||||||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
||||||||||||||||||||||||||||
|
|
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
|
$
|
2,267
|
|
$
|
20
|
|
$
|
(22
|
)
|
$
|
2,265
|
|
$
|
—
|
|
$
|
2,396
|
|
$
|
17
|
|
$
|
(31
|
)
|
$
|
2,382
|
|
$
|
—
|
|
|
CDOs [2]
|
2,243
|
|
71
|
|
(3
|
)
|
2,311
|
|
—
|
|
1,853
|
|
67
|
|
(4
|
)
|
1,916
|
|
—
|
|
||||||||||
|
CMBS
|
5,055
|
|
102
|
|
(58
|
)
|
5,099
|
|
(7
|
)
|
4,907
|
|
97
|
|
(68
|
)
|
4,936
|
|
(6
|
)
|
||||||||||
|
Corporate
|
24,371
|
|
1,548
|
|
(189
|
)
|
25,730
|
|
—
|
|
24,380
|
|
1,510
|
|
(224
|
)
|
25,666
|
|
—
|
|
||||||||||
|
Foreign govt./govt. agencies
|
1,151
|
|
48
|
|
(12
|
)
|
1,187
|
|
—
|
|
1,164
|
|
33
|
|
(26
|
)
|
1,171
|
|
—
|
|
||||||||||
|
Municipal
|
11,076
|
|
759
|
|
(55
|
)
|
11,780
|
|
—
|
|
10,825
|
|
732
|
|
(71
|
)
|
11,486
|
|
—
|
|
||||||||||
|
RMBS
|
3,866
|
|
69
|
|
(14
|
)
|
3,921
|
|
—
|
|
4,738
|
|
66
|
|
(37
|
)
|
4,767
|
|
—
|
|
||||||||||
|
U.S. Treasuries
|
3,879
|
|
189
|
|
(35
|
)
|
4,033
|
|
—
|
|
3,542
|
|
182
|
|
(45
|
)
|
3,679
|
|
—
|
|
||||||||||
|
Total fixed maturities, AFS
|
$
|
53,908
|
|
$
|
2,806
|
|
$
|
(388
|
)
|
$
|
56,326
|
|
$
|
(7
|
)
|
$
|
53,805
|
|
$
|
2,704
|
|
$
|
(506
|
)
|
$
|
56,003
|
|
$
|
(6
|
)
|
|
Equity securities, AFS [3]
|
1,011
|
|
107
|
|
(18
|
)
|
1,100
|
|
—
|
|
1,020
|
|
96
|
|
(19
|
)
|
1,097
|
|
—
|
|
||||||||||
|
Total AFS securities
|
$
|
54,919
|
|
$
|
2,913
|
|
$
|
(406
|
)
|
$
|
57,426
|
|
$
|
(7
|
)
|
$
|
54,825
|
|
$
|
2,800
|
|
$
|
(525
|
)
|
$
|
57,100
|
|
$
|
(6
|
)
|
|
[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
March 31, 2017
, and
December 31, 2016
.
|
|
[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]
|
Excludes equity securities, FVO, with a cost and fair value of
$124
and
$123
as of
March 31, 2017
. The Company held
no
equity securities, FVO as of
December 31, 2016
.
|
31
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments
(continued)
|
Fixed maturities, AFS, by Contractual Maturity Year
|
||||||||||||
|
March 31, 2017
|
December 31, 2016
|
|||||||||||
|
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
||||||||
|
One year or less
|
$
|
1,693
|
|
$
|
1,709
|
|
$
|
1,896
|
|
$
|
1,912
|
|
|
Over one year through five years
|
9,145
|
|
9,422
|
|
9,015
|
|
9,289
|
|
||||
|
Over five years through ten years
|
9,079
|
|
9,325
|
|
9,038
|
|
9,245
|
|
||||
|
Over ten years
|
20,560
|
|
22,274
|
|
19,962
|
|
21,556
|
|
||||
|
Subtotal
|
40,477
|
|
42,730
|
|
39,911
|
|
42,002
|
|
||||
|
Mortgage-backed and asset-backed securities
|
13,431
|
|
13,596
|
|
13,894
|
|
14,001
|
|
||||
|
Total fixed maturities, AFS
|
$
|
53,908
|
|
$
|
56,326
|
|
$
|
53,805
|
|
$
|
56,003
|
|
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
March 31, 2017
and
December 31, 2016
.
Unrealized Losses on AFS Securities
|
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of March 31, 2017
|
|||||||||||||||||||||||||||
|
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
|
$
|
544
|
|
$
|
542
|
|
$
|
(2
|
)
|
$
|
276
|
|
$
|
256
|
|
$
|
(20
|
)
|
$
|
820
|
|
$
|
798
|
|
$
|
(22
|
)
|
|
CDOs [1]
|
1,253
|
|
1,251
|
|
(2
|
)
|
284
|
|
283
|
|
(1
|
)
|
1,537
|
|
1,534
|
|
(3
|
)
|
|||||||||
|
CMBS
|
1,804
|
|
1,764
|
|
(40
|
)
|
309
|
|
291
|
|
(18
|
)
|
2,113
|
|
2,055
|
|
(58
|
)
|
|||||||||
|
Corporate
|
4,813
|
|
4,671
|
|
(142
|
)
|
865
|
|
818
|
|
(47
|
)
|
5,678
|
|
5,489
|
|
(189
|
)
|
|||||||||
|
Foreign govt./govt. agencies
|
350
|
|
341
|
|
(9
|
)
|
36
|
|
33
|
|
(3
|
)
|
386
|
|
374
|
|
(12
|
)
|
|||||||||
|
Municipal
|
1,372
|
|
1,318
|
|
(54
|
)
|
35
|
|
34
|
|
(1
|
)
|
1,407
|
|
1,352
|
|
(55
|
)
|
|||||||||
|
RMBS
|
865
|
|
856
|
|
(9
|
)
|
453
|
|
448
|
|
(5
|
)
|
1,318
|
|
1,304
|
|
(14
|
)
|
|||||||||
|
U.S. Treasuries
|
1,425
|
|
1,390
|
|
(35
|
)
|
—
|
|
—
|
|
—
|
|
1,425
|
|
1,390
|
|
(35
|
)
|
|||||||||
|
Total fixed maturities, AFS
|
$
|
12,426
|
|
$
|
12,133
|
|
$
|
(293
|
)
|
$
|
2,258
|
|
$
|
2,163
|
|
$
|
(95
|
)
|
$
|
14,684
|
|
$
|
14,296
|
|
$
|
(388
|
)
|
|
Equity securities, AFS [2]
|
238
|
|
223
|
|
(15
|
)
|
30
|
|
27
|
|
(3
|
)
|
268
|
|
250
|
|
(18
|
)
|
|||||||||
|
Total securities in an unrealized loss position
|
$
|
12,664
|
|
$
|
12,356
|
|
$
|
(308
|
)
|
$
|
2,288
|
|
$
|
2,190
|
|
$
|
(98
|
)
|
$
|
14,952
|
|
$
|
14,546
|
|
$
|
(406
|
)
|
32
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments
(continued)
|
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of December 31, 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
|
$
|
582
|
|
$
|
579
|
|
$
|
(3
|
)
|
$
|
368
|
|
$
|
340
|
|
$
|
(28
|
)
|
$
|
950
|
|
$
|
919
|
|
$
|
(31
|
)
|
|
CDOs [1]
|
641
|
|
640
|
|
(1
|
)
|
370
|
|
367
|
|
(3
|
)
|
1,011
|
|
1,007
|
|
(4
|
)
|
|||||||||
|
CMBS
|
2,076
|
|
2,027
|
|
(49
|
)
|
293
|
|
274
|
|
(19
|
)
|
2,369
|
|
2,301
|
|
(68
|
)
|
|||||||||
|
Corporate
|
5,418
|
|
5,248
|
|
(170
|
)
|
835
|
|
781
|
|
(54
|
)
|
6,253
|
|
6,029
|
|
(224
|
)
|
|||||||||
|
Foreign govt./govt. agencies
|
573
|
|
550
|
|
(23
|
)
|
27
|
|
24
|
|
(3
|
)
|
600
|
|
574
|
|
(26
|
)
|
|||||||||
|
Municipal
|
1,567
|
|
1,498
|
|
(69
|
)
|
43
|
|
41
|
|
(2
|
)
|
1,610
|
|
1,539
|
|
(71
|
)
|
|||||||||
|
RMBS
|
1,655
|
|
1,624
|
|
(31
|
)
|
591
|
|
585
|
|
(6
|
)
|
2,246
|
|
2,209
|
|
(37
|
)
|
|||||||||
|
U.S. Treasuries
|
1,432
|
|
1,387
|
|
(45
|
)
|
—
|
|
—
|
|
—
|
|
1,432
|
|
1,387
|
|
(45
|
)
|
|||||||||
|
Total fixed maturities, AFS
|
$
|
13,944
|
|
$
|
13,553
|
|
$
|
(391
|
)
|
$
|
2,527
|
|
$
|
2,412
|
|
$
|
(115
|
)
|
$
|
16,471
|
|
$
|
15,965
|
|
$
|
(506
|
)
|
|
Equity securities, AFS [2]
|
330
|
|
315
|
|
(15
|
)
|
38
|
|
34
|
|
(4
|
)
|
368
|
|
349
|
|
(19
|
)
|
|||||||||
|
Total securities in an unrealized loss position
|
$
|
14,274
|
|
$
|
13,868
|
|
$
|
(406
|
)
|
$
|
2,565
|
|
$
|
2,446
|
|
$
|
(119
|
)
|
$
|
16,839
|
|
$
|
16,314
|
|
$
|
(525
|
)
|
|
[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
March 31, 2017
, excludes equity securities, FVO which are included in equity securities, AFS on the Condensed Consolidated Balance Sheets. The Company held
no
equity securities, FVO as of
December 31, 2016
.
|
As of
March 31, 2017
, AFS securities in an unrealized loss position consisted of
3,528
securities, primarily in the corporate sector, which were depressed primarily due to an increase in interest rates and/or widening of credit spreads since the securities were purchased. As of
March 31, 2017
,
94%
of these securities were depressed less than
20%
of cost or amortized cost. The decrease in unrealized losses during first quarter
2017
was primarily attributable to a decline in long-term interest rates as well as tighter credit spreads across most sectors.
Most of the securities depressed for twelve months or more relate to corporate securities primarily in the financial services and energy-related sectors, student loan ABS and structured securities with exposure to commercial real estate. Corporate financial services securities and student loan ABS were primarily depressed because the securities have floating-rate coupons and have long-dated maturities, and current credit spreads are wider than when these securities were purchased. Corporate securities within the energy sector are in an unrealized loss position primarily due to depressed oil prices. For certain commercial real estate securities, current spreads are wider than market 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
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. The Company reviews mortgage loans on a quarterly basis to identify potential credit losses. Among other factors, management reviews current and projected macroeconomic
trends, 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 historical, current and projected delinquency rates and property values. Estimates of collectibility require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, cash flow projections may change based upon new information about the borrower's ability to pay and/or the value of underlying collateral such as changes in projected property value estimates.
For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying amount and estimated fair value. The mortgage loan's estimated fair value is most frequently the Company's share of the fair value of the collateral but may also be the Company’s share of either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate or (b) the loan’s observable market price. A valuation allowance may be recorded for an individual loan or for a group of loans that have an LTV ratio of 90% or greater, a low DSCR or have other lower credit quality characteristics. 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 borrowers continue to make payments under the original or restructured loan terms. The Company stops accruing interest income on loans when it is probable that the Company will not receive interest and principal payments according to the contractual terms of the loan agreement. The Company resumes accruing interest income when it determines that sufficient collateral exists to satisfy the full amount of the loan principal and interest payments and when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is recognized when received.
33
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments
(continued)
As of
March 31, 2017
and
December 31, 2016
, commercial mortgage loans had an amortized cost of
$5.7 billion
, with a valuation allowance of
$19
and a carrying value of
$5.7 billion
.
As of
March 31, 2017
and
December 31, 2016
, the carrying value of mortgage loans that had a valuation allowance was
$57
and
$31
, respectively. There were
no
mortgage loans held-for-sale as of
March 31, 2017
or
December 31, 2016
. As of
March 31, 2017
, the Company had an immaterial amount of mortgage loans that have had extensions or restructurings other than what is allowable under the original terms of the contract.
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.
|
Valuation Allowance Activity
|
||||||
|
2017
|
2016
|
|||||
|
Balance, as of January 1
|
$
|
(19
|
)
|
$
|
(23
|
)
|
|
(Additions)/Reversals
|
—
|
|
—
|
|
||
|
Deductions
|
—
|
|
1
|
|
||
|
Balance, as of March 31
|
$
|
(19
|
)
|
$
|
(22
|
)
|
The weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was
51%
as of
March 31, 2017
, 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 collateral values are updated no less than annually through reviews of the underlying properties. Factors considered in estimating property values include, among other things, actual and expected property cash flows, geographic market data and the ratio of the property's net operating income to its value. DSCR compares a property’s net operating income to the borrower’s principal and interest payments. The weighted average DSCR of the Company's commercial mortgage loan portfolio was
2.67
x as of
March 31, 2017
. As of
March 31, 2017
, the Company held
two
delinquent commercial mortgage loan past due by 90 days or more. The loans had a total carrying value and valuation allowance of
$27
and
$18
, respectively, and neither loan was accruing income. As of
December 31, 2016
, the Company held
one
delinquent commercial mortgage loans 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.
|
Commercial Mortgage Loans Credit Quality
|
||||||||
|
|
March 31, 2017
|
December 31, 2016
|
||||||
|
Loan-to-value
|
Carrying Value
|
Avg. Debt-Service Coverage Ratio
|
Carrying Value
|
Avg. Debt-Service Coverage Ratio
|
||||
|
Greater than 80%
|
$
|
21
|
|
0.59x
|
$
|
20
|
|
0.59x
|
|
65% - 80%
|
524
|
|
2.20x
|
568
|
|
2.17x
|
||
|
Less than 65%
|
5,140
|
|
2.74x
|
5,109
|
|
2.78x
|
||
|
Total commercial mortgage loans
|
$
|
5,685
|
|
2.67x
|
$
|
5,697
|
|
2.70x
|
|
Mortgage Loans by Region
|
||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
||||||||
|
|
Carrying Value
|
Percent of Total
|
Carrying Value
|
Percent of Total
|
||||||
|
East North Central
|
$
|
293
|
|
5.2
|
%
|
$
|
293
|
|
5.1
|
%
|
|
East South Central
|
14
|
|
0.2
|
%
|
14
|
|
0.2
|
%
|
||
|
Middle Atlantic
|
557
|
|
9.8
|
%
|
534
|
|
9.4
|
%
|
||
|
Mountain
|
61
|
|
1.1
|
%
|
61
|
|
1.1
|
%
|
||
|
New England
|
389
|
|
6.8
|
%
|
345
|
|
6.1
|
%
|
||
|
Pacific
|
1,604
|
|
28.2
|
%
|
1,609
|
|
28.3
|
%
|
||
|
South Atlantic
|
1,217
|
|
21.4
|
%
|
1,198
|
|
21.0
|
%
|
||
|
West North Central
|
40
|
|
0.7
|
%
|
40
|
|
0.7
|
%
|
||
|
West South Central
|
347
|
|
6.1
|
%
|
338
|
|
5.9
|
%
|
||
|
Other [1]
|
1,163
|
|
20.5
|
%
|
1,265
|
|
22.2
|
%
|
||
|
Total mortgage loans
|
$
|
5,685
|
|
100.0
|
%
|
$
|
5,697
|
|
100.0
|
%
|
|
[1]
|
Primarily represents loans collateralized by multiple properties in various regions.
|
|
Mortgage Loans by Property Type
|
||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
||||||||
|
|
Carrying Value
|
Percent of Total
|
Carrying
Value |
Percent of Total
|
||||||
|
Commercial
|
||||||||||
|
Agricultural
|
$
|
16
|
|
0.3
|
%
|
$
|
16
|
|
0.3
|
%
|
|
Industrial
|
1,397
|
|
24.6
|
%
|
1,468
|
|
25.7
|
%
|
||
|
Lodging
|
25
|
|
0.4
|
%
|
25
|
|
0.4
|
%
|
||
|
Multifamily
|
1,372
|
|
24.1
|
%
|
1,365
|
|
24.0
|
%
|
||
|
Office
|
1,427
|
|
25.1
|
%
|
1,361
|
|
23.9
|
%
|
||
|
Retail
|
1,012
|
|
17.8
|
%
|
1,036
|
|
18.2
|
%
|
||
|
Other
|
436
|
|
7.7
|
%
|
426
|
|
7.5
|
%
|
||
|
Total mortgage loans
|
$
|
5,685
|
|
100.0
|
%
|
$
|
5,697
|
|
100.0
|
%
|
Mortgage Servicing
The Company originates, sells and services commercial mortgage loans on behalf of third parties and recognizes servicing fee income over the period that services are performed. As of
March 31, 2017
, under this program, the Company serviced commercial mortgage loans with a total outstanding principal of
$983
, of which
$266
was serviced on behalf of third parties and
$717
was retained and reported on the Company’s Condensed Consolidated Balance Sheets, including
$143
in separate account assets. As of
December 31, 2016
, the Company serviced commercial mortgage loans with a total outstanding principal balance of
$901
, of which
$251
was serviced on behalf of third parties and
$650
was retained and reported as assets on the Company’s Condensed Consolidated Balance Sheets, including
$124
in separate account assets. Servicing rights are carried at the lower of cost or fair value and were
zero
as of
March 31, 2017
and
December 31, 2016
, because servicing fees were market-
34
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments
(continued)
level fees at origination and remain adequate to compensate the Company for servicing the loans.
Variable Interest Entities
The Company is engaged with various special purpose entities and other entities that are deemed to be VIEs primarily as an investor through normal investment activities but also as an investment manager and previously as a means of accessing capital through a contingent capital facility ("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
As of March 31, 2017 and December 31, 2016, the Company held one CDO for which it is the primarily beneficiary. The CDO represents a structured investment vehicle for which the Company has a controlling financial interest. As of
March 31, 2017
and
December 31, 2016
the Company held total CDO assets of
$5
included in cash with an associated liability of
$5
included in other liabilities on the Company's Condensed Consolidated Balance Sheets. The Company does
not
have any additional exposure to loss associated with this investment.
Non-Consolidated VIEs
The Company, through normal investment activities, makes passive investments in limited partnerships and other alternative investments. 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
March 31, 2017
and
December 31, 2016
is limited to the total carrying value of
$1.7
billion which are included in limited partnerships and other alternative investments in the Company's Condensed Consolidated Balance Sheets. As of
March 31, 2017
and
December 31, 2016
, the Company has outstanding commitments totaling
$1.1
billion and
$1.2
billion, 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 of Notes to Consolidated Financial Statements included in the Company’s
2016
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.
As of
December 31, 2016
, the Company held a significant variable interest in a VIE for which it is not the primary beneficiary. This VIE represented a facility that was held by the Company since February 2007. Assets and liabilities recorded for the contingent capital facility were
$1
and
$3
, respectively, as of
December 31, 2016
. as well as a maximum exposure to loss of
$3
. The Company did not have a controlling financial interest and as such, did not consolidate its variable interest in the facility. As of
March 31, 2017
, after having exercised its put option under the facility to issue debt, the Company no longer held a significant interest in the facility. For further information on the facility, see Note
10
-
Debt
of Notes to Condensed Consolidated Financial Statements.
Securities Lending, Repurchase Agreements and Other Collateral Transactions
The Company enters into securities financing transactions as a way to earn additional income or manage liquidity, primarily through securities lending and repurchase agreements.
Securities Lending
Under a securities lending program, the Company lends certain fixed maturities within the corporate, foreign government/government agencies, and municipal sectors as well as equity securities to qualifying third-party borrowers in return for collateral in the form of cash or securities. For domestic and non-domestic loaned securities, respectively, borrowers provide collateral of 102% and 105% of the fair value of the securities lent at the time of the loan. Borrowers 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 by the counterparty, and is not reflected on the Company’s Condensed Consolidated Balance Sheets. 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 loaned. If cash, rather than securities, is received as collateral, the cash is typically invested in short-term investments or fixed maturities
35
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments
(continued)
and is reported as an asset on the Company's Condensed Consolidated Balance Sheets. Income associated with securities lending transactions is reported as a component of net investment income in the Company’s Condensed Consolidated Statements of Operations. As of
March 31, 2017
, the fair value of securities on loan and the associated liability for cash collateral received was
$1.5
billion and
$1.5
billion, respectively. The Company also received securities collateral of
$59
which was not included on the Company's Condensed Consolidated Balance Sheets. As of
December 31, 2016
, the fair value of securities on loan and the associated liability for cash collateral received was
$488
and
$461
, respectively. The Company also received securities collateral of $
39
which was not included on the Company's Condensed Consolidated Balance Sheets.
Repurchase Agreements
From time to time, the Company enters into repurchase agreements to manage liquidity or to earn incremental 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. These transactions generally have a contractual maturity of ninety days or less.
Under 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 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 and is reported as an asset on the Company's Condensed Consolidated Balance Sheets. Repurchase agreements include master netting provisions that provide both 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
March 31, 2017
and
December 31, 2016
, the Company reported in fixed maturities, AFS on the Condensed Consolidated Balances Sheets financial collateral pledged relating to repurchase agreements of
$318
and
$226
, respectively. As of
December 31, 2016
, the Company also reported cash collateral pledged relating to repurchase agreements of
$22
. The Company reported a corresponding obligation to repurchase the pledged securities of
$313
and
$241
, respectively, as of
March 31, 2017
and
December 31, 2016
in other liabilities on the Condensed Consolidated Balance Sheets.
Under reverse repurchase agreements, the Company purchases securities and simultaneously agrees to resell the same or substantially the same securities. The agreements require
additional collateral to be transferred to the Company when necessary and the Company has the right to sell or re-pledge the securities received. The Company accounts for reverse repurchase agreements as collateralized financing. As of
March 31, 2017
, the Company reported
$96
within short-term investments on the Condensed Consolidated Balance Sheets representing a receivable for the amount of cash transferred to purchase the securities. The Company did
not
hold any reverse repurchase agreements as of
December 31, 2016
.
Other Agreements
The Company is required by law to deposit securities with government agencies in certain states in which it conducts business. As of
March 31, 2017
and
December 31, 2016
, the fair value of securities on deposit was approximately
$2.5 billion
.
As of
March 31, 2017
and
December 31, 2016
, the Company has pledged as collateral
$104
and
$102
, 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. These amounts also include 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
of Notes to Condensed Consolidated Financial Statements.
36
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO 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, 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 as embedded derivative instruments, such as GMWB riders included with certain variable annuity products.
Strategies that Qualify for Hedge Accounting
Some of the Company's derivatives 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
2016
Form 10-K Annual Report. Typically, these hedging instruments 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 future purchase of fixed-rate securities, primarily to hedge interest rate risk inherent in the assumptions used to price certain product 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
The Company previously used interest rate swaps to hedge the changes in fair value of fixed maturity securities due to fluctuations in interest rates. These swaps were 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 interest rate 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
March 31, 2017
, and
December 31, 2016
, the notional amount of interest rate swaps in offsetting relationships was
$10.2 billion
and
$10.6 billion
, respectively.
Foreign Currency Swaps and Forwards
The Company enters into foreign currency swaps to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars. The Company also enters into foreign currency forwards to hedge currency impacts on changes in equity of the U.K. property and casualty run-off subsidiaries that are held for sale. For further information on the disposition, see Note
2
-
Business Acquisitions, Dispositions and Discontinued Operations
of Notes to Consolidated Financial Statements, included in The Hartford’s
2016
Form 10-K Annual Report. The Company had previously entered into foreign currency forwards to hedge non-U.S. dollar denominated cash and equity securities.
Fixed Payout Annuity Hedge
The Company has obligations for certain yen denominated fixed payout annuities under an assumed reinsurance contract. The Company invests in U.S. dollar denominated assets to support the assumed 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.
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 the 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 total return swaps to hedge equity risk of specific common stock investments which are accounted for
37
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments
(continued)
using fair value option in order to align the accounting treatment within net realized capital gains (losses). The Company also enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. In addition, the Company formerly offered certain equity indexed products that remain in force, a portion of which contain embedded derivatives that require changes in value to be bifurcated from the host contract. The Company uses equity index swaps to economically hedge the equity volatility risk associated with the equity indexed products.
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 reinsured.
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. The GMWB hedging instruments hedge 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.
|
GMWB Hedging Instruments
|
||||||||||||
|
|
Notional Amount
|
Fair Value
|
||||||||||
|
|
Mar. 31, 2017
|
Dec. 31, 2016
|
Mar. 31, 2017
|
Dec. 31, 2016
|
||||||||
|
Customized swaps
|
$
|
5,213
|
|
$
|
5,191
|
|
$
|
76
|
|
$
|
100
|
|
|
Equity swaps, options, and futures
|
1,374
|
|
1,362
|
|
(35
|
)
|
(27
|
)
|
||||
|
Interest rate swaps and futures
|
3,350
|
|
3,703
|
|
42
|
|
21
|
|
||||
|
Total
|
$
|
9,937
|
|
$
|
10,256
|
|
$
|
83
|
|
$
|
94
|
|
Macro Hedge Program
The Company utilizes equity swaps, options, 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.
Contingent Capital Facility Put Option
The Company previously entered into a put option agreement that provided 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
. On February 8, 2017, The Hartford exercised the put option resulting in the issuance of
$500
in junior subordinated notes with proceeds received on February 15, 2017. Under the put option agreement, The Hartford had been paying premiums on a periodic basis and has agreed to reimburse the trust for certain fees and ordinary expenses. For further information on the put option agreement, see the Contingent Capital Facility section within Note 13 - Debt of Notes to Consolidated Financial Statements, included in The Hartford's 2016 Form 10-K Annual Report.
Modified Coinsurance Reinsurance Contracts
As of
March 31, 2017
, and
December 31, 2016
, the Company had
$875
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 operating 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 of investments subject to interest rate and credit risk. The notional amount of the embedded derivative reinsurance contracts are the invested assets which are carried at fair value and support the reinsured reserves.
Derivative Balance Sheet Classification
For reporting purposes, the Company has elected to offset within assets or 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 assets or liabilities 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
$877
and
$963
as of
March 31, 2017
, and
December 31, 2016
, respectively. 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
38
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments
(continued)
Measurements
of Notes to the Condensed Consolidated Financial Statements.
|
Derivative Balance Sheet Presentation
|
||||||||||||||||||||||||
|
Net Derivatives
|
Asset Derivatives
|
Liability Derivatives
|
||||||||||||||||||||||
|
Notional Amount
|
Fair Value
|
Fair Value
|
Fair Value
|
|||||||||||||||||||||
|
Hedge Designation/ Derivative Type
|
Mar. 31, 2017
|
Dec. 31, 2016
|
Mar. 31, 2017
|
Dec. 31, 2016
|
Mar. 31, 2017
|
Dec. 31, 2016
|
Mar. 31, 2017
|
Dec. 31, 2016
|
||||||||||||||||
|
Cash flow hedges
|
||||||||||||||||||||||||
|
Interest rate swaps
|
$
|
3,480
|
|
$
|
3,440
|
|
$
|
5
|
|
$
|
(79
|
)
|
$
|
97
|
|
$
|
11
|
|
$
|
(92
|
)
|
$
|
(90
|
)
|
|
Foreign currency swaps
|
239
|
|
239
|
|
(14
|
)
|
(15
|
)
|
11
|
|
11
|
|
(25
|
)
|
(26
|
)
|
||||||||
|
Total cash flow hedges
|
3,719
|
|
3,679
|
|
(9
|
)
|
(94
|
)
|
108
|
|
22
|
|
(117
|
)
|
(116
|
)
|
||||||||
|
Non-qualifying strategies
|
||||||||||||||||||||||||
|
Interest rate contracts
|
||||||||||||||||||||||||
|
Interest rate swaps, swaptions, and futures
|
11,080
|
|
11,743
|
|
(474
|
)
|
(890
|
)
|
648
|
|
264
|
|
(1,122
|
)
|
(1,154
|
)
|
||||||||
|
Foreign exchange contracts
|
||||||||||||||||||||||||
|
Foreign currency swaps and forwards
|
307
|
|
1,064
|
|
(3
|
)
|
68
|
|
—
|
|
70
|
|
(3
|
)
|
(2
|
)
|
||||||||
|
Fixed payout annuity hedge
|
804
|
|
804
|
|
(242
|
)
|
(263
|
)
|
—
|
|
—
|
|
(242
|
)
|
(263
|
)
|
||||||||
|
Credit contracts
|
||||||||||||||||||||||||
|
Credit derivatives that purchase credit protection
|
159
|
|
209
|
|
(4
|
)
|
(4
|
)
|
1
|
|
—
|
|
(5
|
)
|
(4
|
)
|
||||||||
|
Credit derivatives that assume credit risk [1]
|
1,904
|
|
1,309
|
|
—
|
|
10
|
|
26
|
|
15
|
|
(26
|
)
|
(5
|
)
|
||||||||
|
Credit derivatives in offsetting positions
|
3,128
|
|
3,317
|
|
3
|
|
(1
|
)
|
36
|
|
39
|
|
(33
|
)
|
(40
|
)
|
||||||||
|
Equity contracts
|
||||||||||||||||||||||||
|
Equity index swaps and options
|
339
|
|
105
|
|
5
|
|
—
|
|
41
|
|
33
|
|
(36
|
)
|
(33
|
)
|
||||||||
|
Variable annuity hedge program
|
||||||||||||||||||||||||
|
GMWB product derivatives [2]
|
12,631
|
|
13,114
|
|
(157
|
)
|
(241
|
)
|
—
|
|
—
|
|
(157
|
)
|
(241
|
)
|
||||||||
|
GMWB reinsurance contracts
|
2,616
|
|
2,709
|
|
60
|
|
73
|
|
60
|
|
73
|
|
—
|
|
—
|
|
||||||||
|
GMWB hedging instruments
|
9,937
|
|
10,256
|
|
83
|
|
94
|
|
171
|
|
190
|
|
(88
|
)
|
(96
|
)
|
||||||||
|
Macro hedge program
|
6,722
|
|
6,532
|
|
171
|
|
178
|
|
186
|
|
201
|
|
(15
|
)
|
(23
|
)
|
||||||||
|
Other
|
||||||||||||||||||||||||
|
Contingent capital facility put option
|
—
|
|
500
|
|
—
|
|
1
|
|
—
|
|
1
|
|
—
|
|
—
|
|
||||||||
|
Modified coinsurance reinsurance contracts
|
875
|
|
875
|
|
66
|
|
68
|
|
66
|
|
68
|
|
—
|
|
—
|
|
||||||||
|
Total non-qualifying strategies
|
50,502
|
|
52,537
|
|
(492
|
)
|
(907
|
)
|
1,235
|
|
954
|
|
(1,727
|
)
|
(1,861
|
)
|
||||||||
|
Total cash flow hedges, fair value hedges, and non-qualifying strategies
|
$
|
54,221
|
|
$
|
56,216
|
|
$
|
(501
|
)
|
$
|
(1,001
|
)
|
$
|
1,343
|
|
$
|
976
|
|
$
|
(1,844
|
)
|
$
|
(1,977
|
)
|
|
Balance Sheet Location
|
||||||||||||||||||||||||
|
Fixed maturities, available-for-sale
|
$
|
296
|
|
$
|
322
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
|
Other investments
|
23,717
|
|
23,620
|
|
250
|
|
(180
|
)
|
821
|
|
377
|
|
(571
|
)
|
(557
|
)
|
||||||||
|
Other liabilities
|
14,036
|
|
15,526
|
|
(683
|
)
|
(689
|
)
|
396
|
|
457
|
|
(1,079
|
)
|
(1,146
|
)
|
||||||||
|
Reinsurance recoverables
|
3,491
|
|
3,584
|
|
126
|
|
141
|
|
126
|
|
141
|
|
—
|
|
—
|
|
||||||||
|
Other policyholder funds and benefits payable
|
12,681
|
|
13,164
|
|
(194
|
)
|
(274
|
)
|
—
|
|
—
|
|
(194
|
)
|
(274
|
)
|
||||||||
|
Total derivatives
|
$
|
54,221
|
|
$
|
56,216
|
|
$
|
(501
|
)
|
$
|
(1,001
|
)
|
$
|
1,343
|
|
$
|
976
|
|
$
|
(1,844
|
)
|
$
|
(1,977
|
)
|
|
[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.
|
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
39
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments
(continued)
offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.
|
Offsetting Derivative Assets and Liabilities
|
|||||||||||||||||||||||
|
(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 (Liabilities)
|
Gross Amounts Offset in the Statement of Financial Position
|
Derivative Assets [1] (Liabilities) [2]
|
Accrued Interest and Cash Collateral (Received) [3] Pledged [2]
|
Financial Collateral (Received) Pledged [4]
|
Net Amount
|
||||||||||||||||||
|
As of March 31, 2017
|
|||||||||||||||||||||||
|
Other investments
|
$
|
1,217
|
|
$
|
1,101
|
|
$
|
250
|
|
$
|
(134
|
)
|
$
|
73
|
|
$
|
43
|
|
|||||
|
Other liabilities
|
$
|
(1,650
|
)
|
$
|
(820
|
)
|
$
|
(683
|
)
|
$
|
(147
|
)
|
$
|
(811
|
)
|
$
|
(19
|
)
|
|||||
|
As of December 31, 2016
|
|||||||||||||||||||||||
|
Other investments
|
$
|
834
|
|
$
|
670
|
|
$
|
(180
|
)
|
$
|
344
|
|
$
|
103
|
|
$
|
61
|
|
|||||
|
Other liabilities
|
$
|
(1,703
|
)
|
$
|
(884
|
)
|
$
|
(689
|
)
|
$
|
(130
|
)
|
$
|
(763
|
)
|
$
|
(56
|
)
|
|||||
|
[1]
|
Included in other investments in the Company's Condensed Consolidated Balance Sheets.
|
|
[2]
|
Included in other liabilities in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty.
|
|
[3]
|
Included in other investments in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative receivable 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.
|
Derivatives in Cash Flow Hedging Relationships
|
|||||||||
|
Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|||||||||
|
Three Months Ended March 31,
|
|||||||||
|
2017
|
2016
|
||||||||
|
Interest rate swaps
|
$
|
(7
|
)
|
$
|
106
|
||||
|
Foreign currency swaps
|
1
|
1
|
|||||||
|
Total
|
$
|
(6
|
)
|
$
|
107
|
||||
|
Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
|
|||||||||
|
Three Months Ended March 31,
|
|||||||||
|
2017
|
2016
|
||||||||
|
Interest rate swaps
|
|||||||||
|
Net realized
capital gain/(loss)
|
$
|
4
|
$
|
5
|
|||||
|
Net investment income
|
16
|
15
|
|||||||
|
Foreign currency swaps
|
|||||||||
|
Net realized
capital gain/(loss)
|
1
|
4
|
|||||||
|
Total
|
$
|
21
|
$
|
24
|
|||||
40
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments
(continued)
During the
three months ended
March 31, 2017
, and
March 31, 2016
, the Company had no ineffectiveness recognized in income within net realized capital gains (losses).
As of
March 31, 2017
, 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
$46
. 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 less than
two years
.
During the
three months ended
March 31, 2017
, and
March 31, 2016
, 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 fair value hedges, the gain or loss on the derivatives as well as the
offsetting loss or gain on the hedged items attributable to the hedged risk are recognized in current 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 the
three months ended
March 31, 2017
, the Company did not hold any fair value hedges. For the
three months ended
March 31, 2016
, the Company recognized in income immaterial gains and (losses) for the ineffective portion of fair value hedges related to 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).
|
Non-Qualifying Strategies Recognized within Net Realized Capital Gains (Losses)
|
||||||
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
|||||
|
Variable annuity hedge program
|
||||||
|
GMWB product derivatives
|
$
|
101
|
|
$
|
(79
|
)
|
|
GMWB reinsurance contracts
|
(18
|
)
|
12
|
|
||
|
GMWB hedging instruments
|
(65
|
)
|
50
|
|
||
|
Macro hedge program
|
(86
|
)
|
(14
|
)
|
||
|
Total variable annuity hedge program
|
(68
|
)
|
(31
|
)
|
||
|
Foreign exchange contracts
|
||||||
|
Foreign currency swaps and forwards
|
(10
|
)
|
3
|
|
||
|
Fixed payout annuity hedge
|
21
|
|
36
|
|
||
|
Total foreign exchange contracts
|
11
|
|
39
|
|
||
|
Other non-qualifying derivatives
|
||||||
|
Interest rate contracts
|
||||||
|
Interest rate swaps, swaptions, and futures
|
7
|
|
(24
|
)
|
||
|
Credit contracts
|
||||||
|
Credit derivatives that purchase credit protection
|
(11
|
)
|
(5
|
)
|
||
|
Credit derivatives that assume credit risk
|
17
|
|
(2
|
)
|
||
|
Equity contracts
|
||||||
|
Equity index swaps and options
|
—
|
|
18
|
|
||
|
Other
|
||||||
|
Contingent capital facility put option
|
(1
|
)
|
(2
|
)
|
||
|
Modified coinsurance reinsurance contracts
|
(2
|
)
|
(22
|
)
|
||
|
Total other non-qualifying derivatives
|
10
|
|
(37
|
)
|
||
|
Total [1]
|
$
|
(47
|
)
|
$
|
(29
|
)
|
|
[1]
|
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note
5
-
Fair Value Measurements
.
|
41
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments
(continued)
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 are 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.
|
Credit Derivatives by Type
|
|||||||||||||||
|
Underlying Referenced Credit
Obligation(s) [1]
|
|||||||||||||||
|
Notional
Amount
[2]
|
Fair
Value
|
Weighted
Average
Years to
Maturity
|
Type
|
Average
Credit
Rating
|
Offsetting
Notional
Amount [3]
|
Offsetting
Fair
Value [3]
|
|||||||||
|
As of March 31, 2017
|
|||||||||||||||
|
Single name credit default swaps
|
|||||||||||||||
|
Investment grade risk exposure
|
$
|
229
|
|
$
|
2
|
|
4 years
|
Corporate Credit/
Foreign Gov. |
A-
|
$
|
40
|
|
$
|
—
|
|
|
Below investment grade risk exposure
|
52
|
|
—
|
|
1 year
|
Corporate Credit
|
B-
|
52
|
|
(1
|
)
|
||||
|
Basket credit default swaps [4]
|
|||||||||||||||
|
Investment grade risk exposure
|
2,589
|
|
8
|
|
3 years
|
Corporate Credit
|
BBB+
|
1,204
|
|
(7
|
)
|
||||
|
Below investment grade risk exposure
|
50
|
|
4
|
|
4 years
|
Corporate Credit
|
B+
|
49
|
|
—
|
|
||||
|
Investment grade risk exposure
|
246
|
|
(4
|
)
|
4 years
|
CMBS Credit
|
AA
|
116
|
|
1
|
|
||||
|
Below investment grade risk exposure
|
102
|
|
(19
|
)
|
less than 1 year
|
CMBS Credit
|
CCC
|
103
|
|
19
|
|
||||
|
Embedded credit derivatives
|
|||||||||||||||
|
Investment grade risk exposure
|
200
|
|
200
|
|
less than 1 year
|
Corporate Credit
|
A+
|
—
|
|
—
|
|
||||
|
Total [5]
|
$
|
3,468
|
|
$
|
191
|
|
$
|
1,564
|
|
$
|
12
|
|
|||
|
As of December 31, 2016
|
|||||||||||||||
|
Single name credit default swaps
|
|||||||||||||||
|
Investment grade risk exposure
|
$
|
169
|
|
$
|
—
|
|
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
|
2,065
|
|
22
|
|
3 years
|
Corporate Credit
|
BBB+
|
1,204
|
|
(10
|
)
|
||||
|
Below investment grade risk exposure
|
50
|
|
3
|
|
4 years
|
Corporate Credit
|
B
|
50
|
|
(3
|
)
|
||||
|
Investment grade risk exposure
|
297
|
|
(5
|
)
|
4 years
|
CMBS Credit
|
AA
|
167
|
|
1
|
|
||||
|
Below investment grade risk exposure
|
110
|
|
(26
|
)
|
1 year
|
CMBS Credit
|
CCC
|
111
|
|
26
|
|
||||
|
Embedded credit derivatives
|
|||||||||||||||
|
Investment grade risk exposure
|
200
|
|
201
|
|
Less than 1 year
|
Corporate Credit
|
A+
|
—
|
|
—
|
|
||||
|
Total [5]
|
$
|
2,968
|
|
$
|
195
|
|
$
|
1,659
|
|
$
|
14
|
|
|||
|
[1]
|
The average credit ratings are based on availability and are generally the midpoint of the available 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.
|
42
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Derivative Instruments
(continued)
|
[4]
|
Includes
$3.0 billion
and
$2.5 billion
as of
March 31, 2017
, and
December 31, 2016
, respectively, of notional amount on swaps of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index.
|
|
[5]
|
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note
5
-
Fair Value Measurements
.
|
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
March 31, 2017
, and
December 31, 2016
, the Company pledged cash collateral associated with derivative instruments with a fair value of
$26
and
$623
, respectively, for which the collateral receivable has been primarily included within other investments on the Company's Condensed Consolidated Balance Sheets. As of
March 31, 2017
, and
December 31, 2016
, the Company also pledged securities collateral associated with derivative instruments with a fair value of
$862
and
$1.1 billion
, respectively, 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
March 31, 2017
, and
December 31, 2016
, the Company accepted cash collateral associated with derivative instruments of
$386
and
$387
, 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
March 31, 2017
, and
December 31, 2016
, with a fair value of
$77
and
$109
, respectively, of which the Company has the ability to sell or repledge
$27
and
$81
, respectively.
As of March 31, 2017, and December 31, 2016, the Company had no repledged securities and did not sell any securities. In addition, as of March 31, 2017, and December 31, 2016, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Condensed Consolidated Balance Sheets.
43
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Reserve for Unpaid Losses and Loss Adjustment Expenses
Roll-forward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
|
|
For the three months ended March 31,
|
|||||
|
|
2017
|
2016
|
||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
21,833
|
|
$
|
21,825
|
|
|
Reinsurance and other recoverables
|
2,776
|
|
2,882
|
|
||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
19,057
|
|
18,943
|
|
||
|
Provision for unpaid losses and loss adjustment expenses
|
|
|
|
|
||
|
Current accident year
|
1,762
|
|
1,636
|
|
||
|
Prior accident year development
|
12
|
|
33
|
|
||
|
Total provision for unpaid losses and loss adjustment expenses
|
1,774
|
|
1,669
|
|
||
|
Less: payments
|
|
|
|
|
||
|
Current accident year
|
352
|
|
358
|
|
||
|
Prior accident years
|
1,300
|
|
1,266
|
|
||
|
Total payments
|
1,652
|
|
1,624
|
|
||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
19,179
|
|
18,988
|
|
||
|
Reinsurance and other recoverables [1]
|
2,772
|
|
2,835
|
|
||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
21,951
|
|
$
|
21,823
|
|
|
[1]
|
Includes reinsurance recoverables of
$2,365
and
$2,451
for the three months ended
March 31, 2017
and
2016
, respectively.
|
(Favorable) Unfavorable Prior Accident Year Development
|
For the three months ended March 31,
|
||||||
|
2017
|
2016
|
|||||
|
Workers’ compensation
|
$
|
(20
|
)
|
$
|
(79
|
)
|
|
Workers’ compensation discount accretion
|
8
|
|
7
|
|
||
|
General liability
|
10
|
|
32
|
|
||
|
Package business
|
—
|
|
45
|
|
||
|
Commercial property
|
1
|
|
(2
|
)
|
||
|
Professional liability
|
—
|
|
(33
|
)
|
||
|
Bond
|
(10
|
)
|
(6
|
)
|
||
|
Automobile liability - Commercial Lines
|
20
|
|
9
|
|
||
|
Automobile liability - Personal Lines
|
—
|
|
65
|
|
||
|
Homeowners
|
—
|
|
(6
|
)
|
||
|
Net asbestos reserves
|
—
|
|
—
|
|
||
|
Net environmental reserves
|
—
|
|
—
|
|
||
|
Catastrophes
|
(3
|
)
|
(7
|
)
|
||
|
Uncollectible reinsurance
|
—
|
|
—
|
|
||
|
Other reserve re-estimates, net
|
6
|
|
8
|
|
||
|
Total prior accident year development
|
$
|
12
|
|
$
|
33
|
|
Re-estimates of prior accident year reserves for the
three months ended
March 31, 2017
Workers’ compensation reserves
in Small Commercial were reduced given the continued emergence of favorable frequency for accident years 2013 to 2015. Management has placed additional weight on this favorable experience as it becomes more credible.
General liability reserves
were in
creased for the 2013 to 2016 accident years on a class of business that insures service and maintenance contractors. This increase was partially offset by a decrease in recent accident year reserves for other Middle Market general liability reserves.
Automobile liability reserves
within Commercial Lines were
increased in Small Commercial and large national accounts for the 2013 to 2016 accident years, driven by higher frequency of more severe accidents, including litigated claims.
Bond business reserves
related to recent accident years were reduced as reported losses for commercial and contract surety have emerged favorably.
Re-estimates of prior accident year reserves for the
three months ended
March 31, 2016
Workers' compensation reserves
decreased for accident years 2013 through 2015 due to favorable frequency
44
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Reserve for Unpaid Losses and Loss Adjustment Expenses
(continued)
and, to a lesser extent, lower medical severity trends. Loss costs for these accident years continued to emerge favorably as evidenced by the reserve review completed in the first quarter and management has been placing additional weight on this favorable experience as it becomes more credible.
General liability reserves
increased for accident years 2012 through 2015 primarily due to higher severity losses incurred on a class of business that insures service and maintenance contractors.
Small commercial package business reserves
increased due to higher than expected severity on liability claims, principally for accident years 2013 through 2015. Severity for these accident years has developed unfavorably and management has placed more weight on emerged experience.
Automobile liability reserves
increased in personal lines automobile liability for accident years 2014 and 2015
primarily due to higher emerged bodily injury severity and, for the third and fourth accident quarters of 2015, an increase in bodily injury frequency. Increases in automobile liability loss costs were across both the AARP direct and the independent agency lines of business.
Professional liability reserves
decreased for claims made years 2008 through 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.
Group Life, Disability and Accident Products
Roll-forward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
|
For the three months ended March 31,
|
||||||
|
2017
|
2016 [1]
|
|||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
5,772
|
|
$
|
5,889
|
|
|
Reinsurance recoverables
|
208
|
|
218
|
|
||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
5,564
|
|
5,671
|
|
||
|
Provision for unpaid losses and loss adjustment expenses
|
|
|
|
|
||
|
Current incurral year
|
678
|
|
638
|
|
||
|
Prior year's discount accretion
|
52
|
|
54
|
|
||
|
Prior incurral year development [2]
|
(69
|
)
|
(53
|
)
|
||
|
Total provision for unpaid losses and loss adjustment expenses [3]
|
661
|
|
639
|
|
||
|
Less: payments
|
|
|
|
|
||
|
Current incurral year
|
178
|
|
174
|
|
||
|
Prior incurral years
|
519
|
|
509
|
|
||
|
Total payments
|
697
|
|
683
|
|
||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
5,528
|
|
5,627
|
|
||
|
Reinsurance recoverables
|
208
|
|
219
|
|
||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
5,736
|
|
$
|
5,846
|
|
|
[1]
|
Certain prior year amounts have been reclassified to conform to the current year presentation for unpaid losses and loss adjustment expenses.
|
|
[2]
|
Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis.
|
|
[3]
|
Includes unallocated loss adjustment expenses of
$24
, and
$24
for for the three months ended
March 31, 2017
and
2016
, respectively, that are recorded in insurance operating costs and other expenses in the Condensed Consolidated Statements of Operations.
|
Re-estimates of prior incurral years reserves for the
three months ended
March 31, 2017
Group Disability-
Prior period reserve estimates decreased by approximately
$35
largely driven by group long-term disability claim recoveries higher than prior reserve assumptions. This favorability was partially offset by lower Social Security Disability approvals driven by lower approval rates and ongoing backlogs in the Social Security Administration.
Group Life and Accident (including Group Life Premium Waiver)-
Prior period reserve estimates decreased by approximately
$35
largely driven by lower than previously expected claim incidence. This was partially offset by higher than expected claim severity.
Re-estimates of prior incurral years reserves for the
three months ended
March 31, 2016
Group Disability-
Prior period reserve estimates decreased by approximately
$35
largely driven by group long-term disability claim recoveries higher than prior reserve
45
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Reserve for Unpaid Losses and Loss Adjustment Expenses
(continued)
assumptions. This favorability was partially offset by lower Social Security Disability approvals driven by lower approval rates and ongoing backlogs in the Social Security Administration.
Group Life and Accident (including Group Life Premium Waiver)-
Prior period reserve estimates decreased by approximately
$20
largely driven by lower than previously expected incidence on Group Life Premium Waiver and lower than previously expected severity on Group Accidental Death & Dismemberment.
46
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Reserve for Future Policy Benefits and Separate Account Liabilities
|
Changes in Reserves for Future Policy Benefits
|
||||||||||||
|
Universal Life - Type Contracts
|
||||||||||||
|
GMDB/GMWB [1]
|
Universal Life Secondary Guarantees
|
Traditional Annuity and Other Contracts [2]
|
Total Future Policy Benefits
|
|||||||||
|
Liability balance as of January 1, 2017
|
$
|
786
|
|
$
|
2,627
|
|
$
|
10,516
|
|
$
|
13,929
|
|
|
Incurred [3]
|
24
|
|
79
|
|
225
|
|
328
|
|
||||
|
Paid
|
(27
|
)
|
—
|
|
(197
|
)
|
(224
|
)
|
||||
|
Change in unrealized investment gains and losses
|
—
|
|
—
|
|
18
|
|
18
|
|
||||
|
Liability balance as of March 31, 2017
|
$
|
783
|
|
$
|
2,706
|
|
$
|
10,562
|
|
$
|
14,051
|
|
|
Reinsurance recoverable asset, as of January 1, 2017
|
$
|
432
|
|
$
|
2,627
|
|
$
|
1,392
|
|
$
|
4,451
|
|
|
Incurred [3]
|
17
|
|
79
|
|
46
|
|
142
|
|
||||
|
Paid
|
(23
|
)
|
—
|
|
(11
|
)
|
(34
|
)
|
||||
|
Reinsurance recoverable asset, as of March 31, 2017
|
$
|
426
|
|
$
|
2,706
|
|
$
|
1,427
|
|
$
|
4,559
|
|
|
Universal Life - Type Contracts
|
||||||||||||
|
GMDB/GMWB [1]
|
Universal Life Secondary Guarantees
|
Traditional Annuity and Other Contracts [2]
|
Total Future Policy Benefits
|
|||||||||
|
Liability balance as of January 1, 2016
|
$
|
863
|
|
$
|
2,313
|
|
$
|
10,683
|
|
$
|
13,859
|
|
|
Incurred [3]
|
28
|
|
69
|
|
227
|
|
324
|
|
||||
|
Paid
|
(38
|
)
|
—
|
|
(196
|
)
|
(234
|
)
|
||||
|
Change in unrealized investment gains and losses
|
—
|
|
—
|
|
224
|
|
224
|
|
||||
|
Liability balance as of March 31, 2016
|
$
|
853
|
|
$
|
2,382
|
|
$
|
10,938
|
|
$
|
14,173
|
|
|
Reinsurance recoverable asset, as of January 1, 2016
|
$
|
523
|
|
$
|
2,313
|
|
$
|
1,478
|
|
$
|
4,314
|
|
|
Incurred [3]
|
25
|
|
69
|
|
37
|
|
131
|
|
||||
|
Paid
|
(29
|
)
|
—
|
|
(15
|
)
|
(44
|
)
|
||||
|
Reinsurance recoverable asset, as of March 31, 2016
|
$
|
519
|
|
$
|
2,382
|
|
$
|
1,500
|
|
$
|
4,401
|
|
|
[1]
|
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 that make up a shortfall between the account value and the GRB are embedded derivatives held at fair value and are excluded from these balances.
|
|
[2]
|
Represents life-contingent reserves for which the company is subject to insurance and investment risk.
|
|
[3]
|
Includes the portion of assessments established as additions to reserves as well as changes in estimates affecting the reserves.
|
47
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Reserve for Future Policy Benefits and Separate Account Liabilities
(continued)
|
Account Value by GMDB/GMWB Type as of March 31, 2017
|
||||||||||
|
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
|
$
|
13,713
|
|
$
|
2,166
|
|
$
|
326
|
|
71
|
|
With 5% rollup [2]
|
1,166
|
|
166
|
|
53
|
|
71
|
|||
|
With Earnings Protection Benefit Rider (“EPB”) [3]
|
3,484
|
|
493
|
|
77
|
|
71
|
|||
|
With 5% rollup & EPB
|
475
|
|
104
|
|
23
|
|
73
|
|||
|
Total MAV
|
18,838
|
|
2,929
|
|
479
|
|
||||
|
Asset Protection Benefit (“APB”) [4]
|
10,416
|
|
127
|
|
83
|
|
69
|
|||
|
Lifetime Income Benefit (“LIB”) — Death Benefit [5]
|
463
|
|
5
|
|
5
|
|
70
|
|||
|
Reset [6] (5-7 years)
|
2,436
|
|
7
|
|
7
|
|
70
|
|||
|
Return of Premium (“ROP”) [7]/Other
|
8,795
|
|
63
|
|
60
|
|
69
|
|||
|
Subtotal Variable Annuity with GMDB/GMWB [10]
|
40,948
|
|
$
|
3,131
|
|
$
|
634
|
|
70
|
|
|
Less: General Account Value with GMDB/GMWB
|
3,727
|
|
||||||||
|
Subtotal Separate Account Liabilities with GMDB
|
37,221
|
|
||||||||
|
Separate Account Liabilities without GMDB
|
79,361
|
|
||||||||
|
Total Separate Account Liabilities
|
$
|
116,582
|
|
|||||||
|
[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
$6.4 billion
of total account value and weighted average attained age of
72 years
. There is
no
NAR or retained NAR related to these contracts. Includes
$1.5 billion
of contracts that had a GMDB at issue but
no
longer have a GMDB due to certain elections made by policyholders or their beneficiaries.
|
Account Balance Breakdown of Variable Separate Account Investments for Contracts with Guarantees
|
||||||
|
Asset type
|
As of March 31, 2017
|
As of December 31, 2016
|
||||
|
Equity securities (including mutual funds)
|
$
|
34,244
|
|
$
|
33,880
|
|
|
Cash and cash equivalents
|
2,977
|
|
3,045
|
|
||
|
Total
|
$
|
37,221
|
|
$
|
36,925
|
|
As of
March 31, 2017
and
December 31, 2016
, approximately
15%
and
16%
, respectively, of the equity securities (including mutual funds), in the preceding table were funds invested in fixed income securities and approximately
85%
and
84%
, 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.
48
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Senior Notes
On March 15, 2017, the Company repaid its
$416
,
5.375%
senior notes at maturity.
Junior Subordinated Debentures
On February 15, 2017, pursuant to a put option agreement with the Glen Meadow ABC Trust, the Company issued
$500
junior subordinated notes with a scheduled maturity of February 12, 2047, and a final maturity of February 12, 2067. The junior subordinated notes bear interest at an annual rate of
three-month LIBOR plus 2.125%
, payable quarterly. The Hartford will have the right, on one or more occasions, to defer interest payments due on the junior subordinated notes under specified circumstances.
Upon receipt of the proceeds, the Company entered into a replacement capital covenant (the "RCC"). Under the terms of the RCC, if the Company redeems the notes at any time prior to February 12, 2047 (or such earlier date on which the RCC terminates by its terms) it can only do so with the proceeds from the sale of certain qualifying replacement securities. The RCC also prohibits the Company from redeeming all or any portion of the notes on or prior to February 15, 2022.
In April, 2017, the Company entered into an interest rate swap agreement expiring February 15, 2027 to effectively convert the variable interest payments into fixed interest payments of approximately
4.39%
.
49
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Income Taxes
|
Income Tax Rate Reconciliation
|
||||||
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
|||||
|
Tax provision at U.S. federal statutory rate
|
$
|
170
|
|
$
|
133
|
|
|
Tax-exempt interest
|
(30
|
)
|
(32
|
)
|
||
|
Dividends-received deduction ("DRD")
|
(19
|
)
|
(22
|
)
|
||
|
Decrease in valuation allowance
|
—
|
|
(25
|
)
|
||
|
Stock compensation
|
(7
|
)
|
—
|
|
||
|
Other
|
(5
|
)
|
4
|
|
||
|
Provision for income taxes
|
$
|
109
|
|
$
|
58
|
|
In addition to the effect of tax-exempt interest and DRD, the Company’s effective tax rate for the
three months ended
March 31, 2017
reflects a
$7
federal income tax benefit related to a deduction for stock-based compensation that vested at a fair value per share greater than the fair value on the date of grant.
The Company's effective tax rate for the
three months ended
March 31, 2016 reflects a
$25
benefit from the partial reduction of the deferred tax asset valuation allowance on the capital loss carryover due to taxable gains on sales of investments during the period.
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.
|
Roll-forward of Unrecognized Tax Benefits
|
||||||
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
|||||
|
Balance, beginning of period
|
$
|
12
|
|
$
|
12
|
|
|
Gross increases - tax positions in prior period
|
—
|
|
—
|
|
||
|
Gross decreases - tax positions in prior period
|
—
|
|
—
|
|
||
|
Balance, end of period
|
$
|
12
|
|
$
|
12
|
|
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 was completed as of March 31, 2017 with no additional adjustments. The Company has received notification from the Internal Revenue Service of its intention to audit the recently acquired subsidiary, Maxum, for its 2014 tax year. Management believes that adequate provision has been made in the consolidated financial statements for any potential adjustments that may result from tax examinations and other tax-related matters for all open tax years.
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.
|
Future Tax Benefits
|
||||||||||||||||||
|
As of
|
||||||||||||||||||
|
March 31, 2017
|
December 31, 2016
|
Expiration
|
||||||||||||||||
|
Carryover amount
|
Expected tax benefit, gross
|
Carryover amount
|
Expected tax benefit, gross
|
Dates
|
Amount
|
|||||||||||||
|
Net operating loss carryover - U.S.
|
$
|
5,165
|
|
$
|
1,808
|
|
$
|
5,412
|
|
$
|
1,894
|
|
2020
|
|
|
$
|
1
|
|
|
2023
|
-
|
2036
|
$
|
5,164
|
|
|||||||||||||
|
Net operating loss carryover - foreign [1]
|
$
|
51
|
|
$
|
10
|
|
$
|
48
|
|
$
|
9
|
|
No expiration
|
$
|
51
|
|
||
|
Foreign tax credit carryover
|
$
|
49
|
|
$
|
49
|
|
$
|
56
|
|
$
|
56
|
|
2021
|
-
|
2024
|
$
|
49
|
|
|
Capital loss carryover
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
0
|
$
|
—
|
|
||
|
Alternative minimum tax credit carryover
|
$
|
650
|
|
$
|
650
|
|
$
|
640
|
|
$
|
640
|
|
No expiration
|
$
|
650
|
|
||
|
General business credit carryover
|
$
|
90
|
|
$
|
90
|
|
$
|
99
|
|
$
|
99
|
|
2031
|
-
|
2036
|
$
|
90
|
|
|
[1]
|
Related to subsidiaries included in the sale of the U.K. property and casualty run-off business and part of the assets held for sale. For additional information, see Note
2
-
Business Disposition
of Notes to Condensed Consolidated Financial Statements.
|
Net Operating Loss Carryover
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 run off of the U.S. fixed and variable annuity business, the exposure to taxable losses from the
50
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Income Taxes
(continued)
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. 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.
Tax Credit Carryovers
Alternative Minimum Tax Credits-
These credit carryovers are available to offset regular federal income taxes from future taxable income and have no expiration date. Since the Company believes there will be sufficient regular federal taxable income in the future, and these credits have no expiration date, the Company believes it is more likely than not they will be fully utilized and thus no valuation allowance has been provided.
Foreign Tax Credits-
As with the alternative minimum tax credits, these credits are available to offset regular federal income taxes from future taxable income. The use of these credits prior to expiration depends on the generation of sufficient taxable income to first utilize all U.S. net operating loss carryovers. 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.
General Business Credits-
General business credits are comprised primarily of solar credits acquired in 2016. Solar credits may offset all tax liability including alternative minimum tax; thus, the Company believes it is more likely than not the credits will be fully utilized and, accordingly, no valuation allowance has been provided.
51
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. 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. During the course of the litigation, the claims regarding distribution fees were dismissed without prejudice, the lineup of funds as plaintiffs changed several times, and the plaintiffs added as a defendant Hartford Funds Management Company (“HFMC”), an indirect subsidiary of the Company that assumed the role of 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 one fund. In March 2016, the court denied the plaintiff's motion, and granted summary judgment for HIFSCO and HFMC with respect to one fund, leaving six funds as plaintiffs: The Hartford Balanced Fund, The Hartford Capital Appreciation Fund, The Hartford Floating Rate Fund, The Hartford Growth Opportunities Fund, The Hartford Healthcare Fund, and The Hartford Inflation Plus Fund. The court further ruled that the appropriate measure of damages on the surviving claims would be the difference, if any, between the actual advisory fees paid through trial and the fees permitted under the applicable legal standard. A bench trial on the issue of liability was held in November 2016. In February 2017, the court granted judgment for HIFSCO and HFMC as to all claims. Plaintiffs have appealed to the United States Court of Appeals for the Third Circuit.
Asbestos and Environmental Claims
–The Company continues to receive asbestos and environmental claims. Asbestos claims relate primarily to bodily injuries asserted by people who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs.
The Company principally relies on exposure-based analysis to estimate the ultimate costs of these claims, both gross and net of reinsurance, and regularly evaluates new account information in assessing its potential asbestos and environmental exposures. The Company supplements this exposure-based analysis with evaluations of the Company’s historical direct net loss and expense paid and reported experience, and net loss and expense paid and reported experience by calendar and/or report year.
While the Company believes that its current asbestos and environmental reserves are appropriate, significant uncertainties limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not reasonably estimable now, could be material to The Hartford’s consolidated operating results and liquidity.
Under an adverse development cover (“ADC”) reinsurance agreement with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., the Company paid
$650
to reinsure adverse development of net asbestos and environmental loss and allocated loss adjustment expense reserves of up to
$1.5 billion
above the Company’s net asbestos and environmental reserves as of December 31, 2016 of approximately
$1.7 billion
.
Under retroactive reinsurance accounting, net adverse asbestos and environmental reserve development after December 31,
52
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies
(continued)
2016, if any, will result in an offsetting reinsurance recoverable up to the
$1.5 billion
limit. Cumulative ceded losses up to the
$650
reinsurance premium paid would be recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the
$650
reinsurance premium paid would result in a deferred gain. The deferred gain would be recognized over the claim settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of asbestos and environmental claims after December 31, 2016 in excess of
$650
may result in significant charges against earnings. Furthermore, there is a risk that cumulative adverse development of asbestos and environmental claims could ultimately exceed the
$1.5 billion
treaty limit in which case all adverse development in excess of the treaty limit would be absorbed as a charge to earnings by the Company. In these scenarios, the effect of these changes could be material to the Company’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 enable the counterparties to terminate the agreements and 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
March 31, 2017
was
$826
. For this
$826
, the legal entities have posted collateral of
$866
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
March 31, 2017
a downgrade of one level below the current financial strength ratings by either Moody’s or S&P would not require additional assets to be posted as collateral. Based on derivative market values as of
March 31, 2017
, a downgrade of two levels below the current financial strength ratings by either Moody's or S&P would require additional
$10
of 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 post, when required, is primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
53
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Equity
Capital Purchase Program ("CPP") Warrants
As of
March 31, 2017
and
December 31, 2016
, respectively, the Company has
3.0 million
and
4.0 million
of CPP warrants outstanding and exercisable. CPP warrant exercises were
1.0 million
and
0.2 million
for the
three months ended
March 31, 2017
and 2016, 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
March 31, 2017
resulted in an adjustment to the
CPP warrant exercise price. The CPP warrant exercise price was
$9.093
as of
March 31, 2017
and
$9.126
as of
December 31, 2016
.
Equity Repurchase Program
The Company's authorization for equity repurchases is
$1.3 billion
for the period October 31, 2016 through December 31, 2017 with
$975
remaining as of
March 31, 2017
.
During the
three months ended
March 31, 2017
, the Company repurchased
6.7 million
common shares for
$325
.
During the period
April 1, 2017 through April 25, 2017
, the Company repurchased approximately
1.9 million
common shares for
$92
.
54
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Changes In and Reclassifications From Accumulated Other Comprehensive Income
|
Changes in AOCI, Net of Tax for the Three Months Ended March 31, 2017
|
||||||||||||||||||
|
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
|
$
|
1,276
|
|
$
|
(3
|
)
|
$
|
76
|
|
$
|
6
|
|
$
|
(1,692
|
)
|
$
|
(337
|
)
|
|
OCI before reclassifications
|
160
|
|
(1
|
)
|
(4
|
)
|
2
|
|
—
|
|
157
|
|
||||||
|
Amounts reclassified from AOCI
|
(23
|
)
|
—
|
|
(14
|
)
|
—
|
|
10
|
|
(27
|
)
|
||||||
|
OCI, net of tax
|
137
|
|
(1
|
)
|
(18
|
)
|
2
|
|
10
|
|
130
|
|
||||||
|
Ending balance
|
$
|
1,413
|
|
$
|
(4
|
)
|
$
|
58
|
|
$
|
8
|
|
$
|
(1,682
|
)
|
$
|
(207
|
)
|
|
Reclassifications from AOCI
|
||||
|
Three Months Ended March 31, 2017
|
Affected Line Item in the Condensed Consolidated Statement of Operations
|
|||
|
Net Unrealized Gain on Securities
|
||||
|
Available-for-sale securities
|
$
|
36
|
|
Net realized capital gains (losses)
|
|
36
|
|
Total before tax
|
||
|
13
|
|
Income tax expense (benefit)
|
||
|
$
|
23
|
|
Net income
|
|
|
Net Gains on Cash Flow Hedging Instruments
|
||||
|
Interest rate swaps
|
$
|
4
|
|
Net realized capital gains (losses)
|
|
Interest rate swaps
|
16
|
|
Net investment income
|
|
|
Foreign currency swaps
|
1
|
|
Net realized capital gains (losses)
|
|
|
21
|
|
Total before tax
|
||
|
7
|
|
Income tax expense (benefit)
|
||
|
$
|
14
|
|
Net income
|
|
|
Pension and Other Postretirement Plan Adjustments
|
||||
|
Amortization of prior service credit
|
$
|
1
|
|
Insurance operating costs and other expenses
|
|
Amortization of actuarial loss
|
(16
|
)
|
Insurance operating costs and other expenses
|
|
|
(15
|
)
|
Total before tax
|
||
|
(5
|
)
|
Income tax expense (benefit)
|
||
|
$
|
(10
|
)
|
Net income
|
|
|
Total amounts reclassified from AOCI
|
$
|
27
|
|
Net income
|
55
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Changes In and Reclassifications From Accumulated Other Comprehensive Income
(continued)
|
Changes in AOCI, Net of Tax for the Three Months Ended March 31, 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
|
549
|
|
(9
|
)
|
70
|
|
6
|
|
1
|
|
617
|
|
||||||
|
Amounts reclassified from AOCI
|
(27
|
)
|
1
|
|
(16
|
)
|
—
|
|
8
|
|
(34
|
)
|
||||||
|
OCI, net of tax
|
522
|
|
(8
|
)
|
54
|
|
6
|
|
9
|
|
583
|
|
||||||
|
Ending balance
|
$
|
1,801
|
|
$
|
(15
|
)
|
$
|
184
|
|
$
|
(49
|
)
|
$
|
(1,667
|
)
|
$
|
254
|
|
|
Reclassifications of AOCI
|
||||
|
Three Months Ended March 31, 2016
|
Affected Line Item in the Condensed Consolidated Statement of Operations
|
|||
|
Net Unrealized Gain on Securities
|
||||
|
Available-for-sale securities
|
$
|
41
|
|
Net realized capital gains (losses)
|
|
41
|
|
Total before tax
|
||
|
14
|
|
Income tax expense (benefit)
|
||
|
$
|
27
|
|
Net income
|
|
|
OTTI Losses in OCI
|
||||
|
Other than temporary impairments
|
$
|
(1
|
)
|
Net realized capital gains (losses)
|
|
(1
|
)
|
Total before tax
|
||
|
—
|
|
Income tax expense (benefit)
|
||
|
$
|
(1
|
)
|
Net income
|
|
|
Net Gains on Cash Flow Hedging Instruments
|
||||
|
Interest rate swaps
|
$
|
5
|
|
Net realized capital gains (losses)
|
|
Interest rate swaps
|
15
|
|
Net investment income
|
|
|
Foreign currency swaps
|
4
|
|
Net realized capital gains (losses)
|
|
|
24
|
|
Total before tax
|
||
|
8
|
|
Income tax expense (benefit)
|
||
|
$
|
16
|
|
Net income
|
|
|
Pension and Other Postretirement Plan Adjustments
|
||||
|
Amortization of prior service credit
|
$
|
2
|
|
Insurance operating costs and other expenses
|
|
Amortization of actuarial loss
|
(15
|
)
|
Insurance operating costs and other expenses
|
|
|
(13
|
)
|
Total before tax
|
||
|
(5
|
)
|
Income tax expense (benefit)
|
||
|
$
|
(8
|
)
|
Net income
|
|
|
Total amounts reclassified from AOCI
|
$
|
34
|
|
Net income
|
56
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Employee Benefit Plans
The Company’s employee benefit plans are described in Note
18
-
Employee Benefit Plans
of Notes to Consolidated Financial Statements included in The Hartford’s 2016 Annual Report on Form 10-K.
Beginning with the first quarter of 2017, the Company adopted the full yield curve approach in the estimation of the interest cost component of net periodic benefit costs for its qualified and non-qualified pension plans and the postretirement benefit plan. The full yield curve approach applies the specific spot rates along the yield curve that are used in its determination of the projected benefit obligation at the beginning of the year. The change has been made to provide a better estimate of the interest cost component of net periodic benefit cost by better aligning projected benefit cash flows with corresponding spot rates on the yield curve rather than using a single weighted average discount rate derived from the yield curve as had been done historically.
This change does not affect the measurement of the Company's total benefit obligations as the change in the interest cost in net income is completely offset in the actuarial (gain) loss reported for the period in other comprehensive income. The change reduced the interest cost component of net periodic benefit cost in the first quarter of 2017 by
$9
before tax. The discount rate being used to measure interest cost during 2017 is
3.58%
,
3.55%
and
3.13%
for the qualified pension plan, non-qualified pension plan and postretirement benefit plan, respectively. Under the Company's historical estimation approach, the weighted average discount rate for the interest cost component would have been
4.22%
,
4.19%
and
3.97%
for the qualified pension plan, non-qualified pension plan and postretirement benefit plan, respectively. The Company accounted for the change in estimation approach as a change in estimate, and accordingly, is recognizing the effect prospectively beginning in 2017.
|
Components of Net Periodic Cost (Benefit)
|
||||||||||||
|
Pension Benefits
|
Other Postretirement Benefits
|
|||||||||||
|
Three Months Ended March 31,
|
Three Months Ended March 31,
|
|||||||||||
|
2017
|
2016
|
2017
|
2016
|
|||||||||
|
Service cost
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Interest cost
|
49
|
|
59
|
|
2
|
|
3
|
|
||||
|
Expected return on plan assets
|
(79
|
)
|
(77
|
)
|
(2
|
)
|
(2
|
)
|
||||
|
Amortization of prior service credit
|
—
|
|
—
|
|
(1
|
)
|
(2
|
)
|
||||
|
Amortization of actuarial loss
|
15
|
|
14
|
|
1
|
|
1
|
|
||||
|
Net periodic benefit
|
$
|
(14
|
)
|
$
|
(4
|
)
|
$
|
—
|
|
$
|
—
|
|
57
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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 the following discussion and in Part I, Item 1A, Risk Factors in The Hartford’s
2016
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 this transaction, see Note
2
-
Business Disposition
of Notes to Condensed Consolidated Financial Statements.
Certain reclassifications have been made to historical financial information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") to conform to the current period presentation.
Fee income from installment fees reported by the Commercial Lines and Personal Lines reporting segments has been reclassified from underwriting expenses to fee income and included in total revenues. The reclassification of installment fees did not impact previously reported underwriting gain (loss), underwriting ratios, or net income (loss) either in the Commercial Lines or Personal Lines reporting segments and did not impact previously reported consolidated net income or core earnings.
Separately, the flood servicing business has been realigned from Specialty Commercial within the Commercial Lines reporting segment to the Personal Lines reporting segment. This realignment did not materially impact previously reported Commercial Lines or Personal Lines underwriting results or net income. The realignment of the flood servicing business did not
impact previously reported consolidated net income or core earnings.
The Hartford defines increases or decreases greater than or equal to 200% as “NM” or not meaningful.
INDEX
|
Description
|
Page
|
|
Key Performance Measures and Ratios
|
|
|
Commercial
Lines
|
|
|
Personal Lines
|
|
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-
includes policyholders’ balances for investment and insurance contracts and reserves for certain future policy benefits insurance contracts. Account value is a measure used by the Company because a significant portion of
58
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 ("AUM")-
include account values, mutual fund and ETP 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.
Book Value per Diluted Share-
a U.S. GAAP financial measure that represents a per share assessment of the value of a company's equity. It is calculated by dividing (a) common stockholders' equity by (b) common shares outstanding and dilutive potential common shares. The Company provides book value per diluted share to enable investors to assess the value of the Company’s equity.
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 sum of the loss and loss adjustment expense ratio, the expense ratio and the policyholder dividend ratio. This ratio is a relative measurement that describes the related cost of losses and expenses for every
$100
of earned premiums. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting losses.
Core Earnings-
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 underlying performance of the Company’s 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 deferred policy acquisition cos ("DAC"), sales inducement assets ("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.
Reconciliation of Net Income to Core Earnings
|
|
Three Months Ended March 31,
|
|||||
|
|
2017
|
2016
|
||||
|
Net income
|
$
|
378
|
|
$
|
323
|
|
|
Less: Unlock benefit (charge), before tax
|
18
|
|
13
|
|
||
|
Less: Net realized capital gains (losses) after DAC, excluded from core earnings, before tax
|
(20
|
)
|
(148
|
)
|
||
|
Less: Income tax benefit (expense) [1]
|
2
|
|
73
|
|
||
|
Core earnings
|
$
|
378
|
|
$
|
385
|
|
[1] Includes income tax benefit on items not included in core earnings and other federal income tax benefits and charges.
Core Earnings Margin-
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. 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 Results of Operations section within MD&A - Group Benefits.
Expense Ratio-
for the underwriting segments of Commercial Lines and Personal Lines is the ratio of underwriting expenses less fee income, to earned premiums. Underwriting expenses include the amortization of deferred policy acquisition costs and insurance operating costs and expenses, including
59
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
certain centralized services costs and bad debt expense. Deferred policy acquisition costs include commissions, taxes, licenses and fees and other incremental direct underwriting expenses and are amortized over the policy term.
The expense ratio for Group Benefits is expressed as the ratio of insurance operating costs and other expenses and amortization of deferred policy acquisition costs, to premiums and other considerations, excluding buyout premiums.
Fee Income-
largely driven from amounts earned as a result of contractually defined percentages of assets under management, including account value of annuities and other products. These fees are generally earned 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. Fee income also includes installment billing fees charged to Commercial Lines and Personal Lines insureds.
Full Surrender Rates-
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.
Loss and Loss Adjustment Expense Ratio-
a measure of the cost of claims incurred in the calendar year divided by earned premium and includes losses 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 and Loss Adjustment Expense Ratio before Catastrophes and Prior Accident Year Development-
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.
Loss Ratio, excluding Buyouts-
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 Product Assets-
owned by the shareholders of those products and not by the Company and therefore are not reflected in the Company’s consolidated financial statements. Mutual fund and ETP assets are a measure used by the Company primarily 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-
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-
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-
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 ratio of policyholder dividends to earned premium.
Prior Accident Year Loss and Loss Adjustment Expense Ratio-
represents the increase (decrease) in the estimated cost of settling catastrophe and non-catastrophe claims incurred in prior accident years as recorded in the current calendar year divided by earned premiums.
Reinstatement Premiums-
represents additional ceded premium paid for the reinstatement of the amount of reinsurance coverage that was reduced as a result of a reinsurance loss payment.
Renewal Earned Price Increase (Decrease)-
Written premiums are earned over the policy term, which is six
60
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
months for certain Personal Lines automobile business and twelve months for substantially all of the remainder of the Company’s Property and Casualty business. Since the Company earns premiums over the six to twelve month term of the policies, renewal earned price increases (decreases) lag renewal written price increases (decreases) by six to twelve months.
Renewal Written Price Increase (Decrease)-
for Commercial Lines, represents the combined effect of rate changes, amount of insurance and individual risk pricing decisions per unit of exposure on policies that renewed. For Personal Lines, renewal written price increases represent the total change in premium per policy on those policies that renewed and includes the combined effect of rate changes, amount of insurance and other changes in exposure. For Personal Lines, other changes in exposure include, but are not limited to, the effect of changes in number of drivers, vehicles and incidents, as well as changes in customer policy elections, such as deductibles and limits.
The rate component represents the change in rate filed with and approved by state regulators during the period and the amount of insurance represents the change in the value of the rating base, such as model year/vehicle symbol for automobiles, building replacement costs for property and wage inflation for workers’ compensation. A number of factors affect renewal written price increases (decreases) including expected loss costs as projected by the Company’s pricing actuaries, rate filings approved by state regulators, risk selection decisions made by the Company’s underwriters and marketplace competition. Renewal written price changes reflect the property and casualty insurance market cycle. Prices tend to increase for a particular line of business when insurance carriers have incurred significant losses in that line of business in the recent past or the industry as a whole commits less of its capital to writing exposures in that line of business. Prices tend to decrease when recent loss experience has been favorable or when competition among insurance carriers increases. Renewal written price statistics are subject to change from period to period, based on a number of factors, including changes in actuarial estimates and the effect of subsequent cancellations and non-renewals, and modifications made to better reflect ultimate pricing achieved.
Return on Assets (“ROA”), Core Earnings-
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 daily average AUM. A reconciliation of ROA to ROA, core earnings is set forth in the Results of Operations section within MD&A - Mutual Funds.
Underlying Combined Ratio-
a non-GAAP financial measure, represents the combined ratio before catastrophes and prior accident year development. Combined ratio is the most directly comparable U.S. GAAP measure.
The Company believes
the underlying combined ratio is an important measure of the trend in profitability since it removes the impact of volatile and unpredictable catastrophe losses and prior accident year loss and loss adjustment expense reserve development. A reconciliation of combined ratio to underlying combined ratio is set forth in the Results of Operations section within MD&A - Commercial Lines and Personal Lines.
Underwriting Gain (Loss)-
The 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 is a statutory accounting financial measure which represents the amount of premiums charged for policies issued, net of reinsurance, during a fiscal period. Earned premium is a U.S. GAAP and statutory measure. Premiums are considered earned and are included in the financial results on a pro rata basis over the policy period. Management believes that written premium is a performance measure that is useful to investors as it reflects current trends in the Company’s sale of property and casualty insurance products. Written and earned premium are recorded net of ceded reinsurance premium.
Traditional life 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.
61
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, mutual fund and ETP assets, 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 and assets under management. 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, ETP 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 and fixed income 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 ETP business, net flows are known as net sales. Net sales are comprised of new sales less redemptions by mutual fund and ETP shareholders. 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 and fixed income market movements could also result in benefits for or charges against DAC.
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
2016
Form 10-K Annual Report.
62
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Highlights
|
Net Income
|
Net Income per Diluted Share
|
Book Value per Diluted Share
|
Net income
was
$378
, or
$1.02
per basic share and
$1.00
per diluted share, compared with first quarter 2016 net income of
$323
, or
$0.81
per basic share and
$0.79
per diluted share, primarily due to lower net realized capital losses and higher net investment income.
Common share repurchases
during first quarter 2017 totaled
$325
, or
6.7 million
shares and
$87
of dividends were paid to shareholders.
Book value per diluted common share
increased to
$45.25
from
$44.35
as of December 31, 2016 as a result of a
1%
decrease in common shares outstanding and dilutive potential common shares and a 1% increase in stockholders' equity resulting primarily from an increase in accumulated other comprehensive income driven by higher net unrealized capital gains. Net income for the period largely offset common dividends and share repurchases.
|
Net Investment Income
|
Investment Yield After-tax
|
Net investment income
increased
5%
to
$728
compared with first quarter 2016 primarily due to higher income from investments in limited partnerships and alternative investments, partially offset by lower asset levels and reinvesting at lower interest rates.
Net realized capital losses
decreased by
$135
compared with first quarter 2016 primarily due to a change to net gains on sales as a result of duration, liquidity and credit management within corporate, residential mortgage-backed securities ("RMBS") and U.S. treasury securities as well as a change from net losses to net gains on non-qualifying interest rate derivatives, partially offset by higher variable annuity hedge program losses.
Annualized investment yield
of
3.0%
, after-tax, increased from
2.8%
, after-tax, compared with first quarter 2016, primarily due to higher income from limited partnerships.
63
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net unrealized gains, after-tax
, in the investment portfolio increased by
$137
compared with a increase of
$522
in first quarter 2016 due to tighter credit spreads.
|
Written Premiums
|
Combined Ratio
|
Written premiums
increased
1%
compared with first quarter 2016 for Property & Casualty reflecting an increase in Commercial Lines largely offset by a decrease in Personal Lines.
Combined ratio
for
Property & Casualty increased
2.7
points to
97.4
compared with a combined ratio of
94.7
in first quarter 2016, largely due to higher catastrophe losses and a higher current accident year loss ratio in commercial lines automobile, personal lines automobile and homeowners, partially offset by less net unfavorable prior year reserve development.
Catastrophe losses
of
$150
, before tax, increased from catastrophe losses of
$91
, before tax, in first quarter 2016, largely due to more severe wind and hail events in first quarter 2017.
Prior accident year development
was unfavorable by
$12
, before tax, primarily due to increased reserves for commercial automobile and general liability, partially offset by a decrease in reserves for workers' compensation, compared with unfavorable prior accident year development of
$33
, before tax, in first quarter 2016.
|
Group Benefits Core Earnings Margin [1]
|
Net Income - Talcott Resolution
|
|
[1]
|
A reconciliation of the net income margin to core earnings margin is set forth in the Results of Operations section within MD&A - Group Benefits.
|
Core earnings margin
for Group Benefits decreased to
4.3%
from
5.5%
in first quarter 2016, due to
$13
after-tax of state guaranty fund assessments, partially offset by higher net investment income and net realized capital gains.
Net income - Talcott Resolution
was
$68
compared with
$17
in first quarter 2016, primarily due to lower net realized capital losses.
64
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS
The Consolidated Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes beginning on page F-1 as well as with the segment operating results sections of MD&A.
|
Three Months Ended March 31,
|
||||||||
|
2017
|
2016
|
Change
|
||||||
|
Earned premiums
|
$
|
3,473
|
|
$
|
3,404
|
|
2
|
%
|
|
Fee income
|
455
|
|
445
|
|
2
|
%
|
||
|
Net investment income
|
728
|
|
696
|
|
5
|
%
|
||
|
Net realized capital losses
|
(20
|
)
|
(155
|
)
|
87
|
%
|
||
|
Other revenues
|
19
|
|
20
|
|
(5
|
%)
|
||
|
Total revenues
|
4,655
|
|
4,410
|
|
6
|
%
|
||
|
Benefits, losses and loss adjustment expenses
|
2,757
|
|
2,641
|
|
4
|
%
|
||
|
Amortization of deferred policy acquisition costs
|
363
|
|
374
|
|
(3
|
%)
|
||
|
Insurance operating costs and other expenses
|
965
|
|
928
|
|
4
|
%
|
||
|
Interest expense
|
83
|
|
86
|
|
(3
|
%)
|
||
|
Total benefits, losses and expenses
|
4,168
|
|
4,029
|
|
3
|
%
|
||
|
Income before income taxes
|
487
|
|
381
|
|
28
|
%
|
||
|
Income tax expense
|
109
|
|
58
|
|
88
|
%
|
||
|
Net income
|
$
|
378
|
|
$
|
323
|
|
17
|
%
|
Three months ended
March 31, 2017
compared to the three months ended
March 31, 2016
Net income
increased primarily due to lower net realized capital losses, and higher net investment income, partially offset by a state guaranty fund assessment in Group Benefits and a lower Property & Casualty underwriting gain. The lower underwriting gain in Property & Casualty was largely due to higher catastrophes and higher current accident year loss costs in commercial lines automobile, personal lines automobile and homeowners, partially offset by a lower amount of unfavorable net reserve development.
Earned premiums
increased by
2%
or
$69
, before tax, reflecting growth of
4%
in Commercial Lines, including the effect of the Maxum acquisition, and
5%
in Group Benefits, partially offset by a
4%
decrease in Personal Lines. For a discussion of the Company's operating results by segment, see MD&A - Results of Operations by segment.
Fee income
increased reflecting a
14%
increase in Mutual Funds, partially offset by a
7%
decline in Talcott Resolution. For a discussion of the Company's operating results by segment, see MD&A - Results of Operations by segment.
Net investment income
increased primarily due to higher income from limited partnerships and other alternative investments due to an increase in valuations of private equity funds as well as losses on hedge funds in first quarter 2016. For further discussion of investment results, see MD&A - Investment Results, Net Investment Income (Loss).
Net realized capital losses
decreased due to a change to net gains on sales as a result of duration, liquidity and credit management within corporate, residential mortgage-backed securities and U.S. treasury securities as well as a change from net losses to net gains on non-qualifying interest rate derivatives, partially offset by higher variable annuity hedge program losses. For further discussion of investment results, see MD&A - Investment Results, Net Realized Capital Gains (Losses).
Benefits, losses and loss adjustment expenses
increased in both Property & Casualty and Group Benefits with the increase in Group Benefits primarily due to the effect of growth in earned premium. The net increase in incurred losses for Property & Casualty was driven by:
|
•
|
Losses and loss adjustment expenses before catastrophes in Property & Casualty increased $67, before tax, primarily resulting from the effect of Commercial Lines earned premium growth in Small Commercial and higher loss costs in commercial lines automobile, personal lines automobile and homeowners.
|
|
•
|
Current accident year catastrophe losses of
$150
, before tax, for the
three months ended
March 31, 2017
, compared to
$91
, before tax, for the prior year period. Catastrophe losses in 2017 were primarily due to multiple wind and hail events across various U.S. geographic regions, primarily in the Midwest, Texas and the Southeast. Catastrophe losses in 2016 were primarily due to multiple wind and hail events across various U.S. geographic regions, concentrated in the central and southern plains and, to a lesser extent, winter storms. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance
|
65
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Product Reserves, Net of Reinsurance.
|
•
|
Unfavorable prior accident year reserve development in Property & Casualty of
$12
, before tax, for the
three months ended
March 31, 2017
, compared to unfavorable reserve development of
$33
, before tax, for the prior year period.
|
|
▪
|
Net unfavorable prior accident year reserve development in first quarter 2017 was primarily due to an increase in reserves for commercial automobile liability and general liability, partially offset by a decrease in reserves for bond and workers' compensation. The increase in estimate for commercial automobile was
in Small Commercial and large national accounts for the 2013 to 2016 accident years, driven by higher frequency of more severe accidents, including litigated claims.
|
|
▪
|
Prior accident year reserve development in 2016 was primarily due to an increase in reserves in personal lines automobile liability and small commercial package business, partially offset by favorable development in workers' compensation. For additional information, see MD&A - Critical Accounting Estimates, Reserve Roll Forwards and Development.
|
Amortization of deferred policy acquisition costs
decreased primarily due to lower acquisition costs on a lower earned premium for Personal Lines and the effect of the runoff of Talcott Resolution, partially offset by higher acquisition costs on higher earned premium for Commercial Lines.
Insurance operating costs and other expenses
increased primarily due to a
$20
before tax of state guaranty fund assessments in Group Benefits, higher variable expenses in Mutual Funds and higher long-term incentive plan compensation costs, partially offset by a reduction in Personal Lines direct marketing costs. Effective with awards granted in March, 2017, long-term incentive compensation awards to retirement-eligible employees now fully vest when they are granted, which resulted in an accelerated recognition of compensation expense in first quarter 2017 of
$18
pre-tax.
Income tax expense
increased for the
three months ended
March 31, 2017
by
$51
from
$58
for the
three months ended
March 31, 2016
primarily due to the
$106
increase in income before income taxes and the effect of a federal income tax benefit of
$25
in first quarter 2016 related to the partial reduction of the deferred tax asset valuation allowance on the capital loss carryover due to taxable gains on sales of investments during the period.
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. For further discussion of income taxes, see Note
11
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
INVESTMENT RESULTS
|
March 31, 2017
|
December 31, 2016
|
||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||
|
Fixed maturities, available-for-sale ("AFS"), at fair value
|
$
|
56,326
|
|
78.0
|
%
|
$
|
56,003
|
|
79.3
|
%
|
|
|
Fixed maturities, at fair value using the fair value option ("FVO")
|
160
|
|
0.2
|
%
|
293
|
|
0.4
|
%
|
|||
|
Equity securities, AFS, at fair value [1]
|
1,223
|
|
1.7
|
%
|
1,097
|
|
1.6
|
%
|
|||
|
Mortgage loans
|
5,685
|
|
7.9
|
%
|
5,697
|
|
8.1
|
%
|
|||
|
Policy loans, at outstanding balance
|
1,442
|
|
2.0
|
%
|
1,444
|
|
1.9
|
%
|
|||
|
Limited partnerships and other alternative investments
|
2,418
|
|
3.3
|
%
|
2,456
|
|
3.5
|
%
|
|||
|
Other investments [2]
|
340
|
|
0.5
|
%
|
403
|
|
0.6
|
%
|
|||
|
Short-term investments
|
4,595
|
|
6.4
|
%
|
3,244
|
|
4.6
|
%
|
|||
|
Total investments
|
$
|
72,189
|
|
100.0
|
%
|
$
|
70,637
|
|
100.0
|
%
|
|
|
[1]
|
Includes equity securities at fair value using the FVO of
$123
as of
March 31, 2017
. The Company did not hold any equity securities, FVO as of
December 31, 2016
.
|
|
[2]
|
Primarily relates to derivative instruments.
|
March 31, 2017 compared to December, 31, 2016
Total investments
increased primarily due to an increase in short-term investments and fixed maturities, AFS.
Short-term investments
increased largely due to an increase in short-term investments held as part of the Company's
securities lending agreements as well as holding more short-term investments until those assets are reinvested into longer duration asset classes. For more information on the securities lending agreements, see Note 6 - Investments.
Fixed maturities, AFS
increased primarily due to an increase in valuations as a result of a decline in longer dated interest rates and tighter credit spreads across most sectors.
66
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Net Investment Income (Loss)
|
||||||||||
|
|
Three Months Ended March 31,
|
|||||||||
|
|
2017
|
2016
|
||||||||
|
(Before tax)
|
Amount
|
Yield [1]
|
Amount
|
Yield [1]
|
||||||
|
Fixed maturities [2]
|
$
|
575
|
|
4.2
|
%
|
$
|
595
|
|
4.2
|
%
|
|
Equity securities
|
5
|
|
1.9
|
%
|
11
|
|
4.7
|
%
|
||
|
Mortgage loans
|
62
|
|
4.3
|
%
|
60
|
|
4.3
|
%
|
||
|
Policy loans
|
19
|
|
5.1
|
%
|
22
|
|
6.0
|
%
|
||
|
Limited partnerships and other alternative investments
|
70
|
|
11.6
|
%
|
8
|
|
1.2
|
%
|
||
|
Other [3]
|
29
|
|
27
|
|
||||||
|
Investment expense
|
(32
|
)
|
(27
|
)
|
||||||
|
Total net investment income
|
$
|
728
|
|
4.3
|
%
|
$
|
696
|
|
4.0
|
%
|
|
Total net investment income excluding limited partnerships and other alternative investments
|
$
|
658
|
|
4.0
|
%
|
$
|
688
|
|
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 hedge fixed maturities.
|
Three months ended
March 31, 2017
, compared to the
three months ended
March 31, 2016
Total net investment income
increased primarily due to higher income from limited partnerships and other alternative investments due to an increase in valuations of private equity funds as well as losses on hedge funds in first quarter 2016. Total net investment income excluding limited partnerships and other alternative investments decreased primarily due to lower asset levels as a result of the continued run-off of Talcott Resolution and lower reinvestment rates.
Annualized net investment income yield,
excluding limited partnerships and other alternative investments, was
4.0%
in
2017
, down slightly from the same period in
2016
. Excluding make-whole payments on fixed maturities, income received from previously impaired securities, and prepayment penalties on mortgage loans, the annualized investment income yield was
3.9%
for the
three months ended
March 31, 2017
, down from
4.1%
for the
three months ended
March 31, 2016
, primarily due to reinvesting at lower rates.
New money yield
excluding certain U.S. Treasury securities and cash equivalent securities for the three months ended
March 31, 2017
, was approximately
3.7%
which was below the average yield of sales and maturities of
3.9%
for the same period in 2016. For the three months ended
March 31, 2017
, the new money yield of
3.7%
decreased slightly from
3.8%
for the three months ended
March 31, 2016
, due to tighter credit spreads.
We expect the annualized net investment income yield in 2017, excluding limited partnerships and other alternative investments, to be slightly below the portfolio yield earned in 2016. This assumes the Company earns less income in 2017 from make-whole payments on fixed maturities and prepayment penalties on mortgage loans than it did in 2016 and that reinvestment rates continue to be below the average yield of sales and maturities. 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.
67
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Net Realized Capital Gains (Losses)
|
||||||
|
Three Months Ended March 31,
|
||||||
|
(Before tax)
|
2017
|
2016
|
||||
|
Gross gains on sales
|
$
|
112
|
|
$
|
90
|
|
|
Gross losses on sales
|
(75
|
)
|
(108
|
)
|
||
|
Net other-than-temporary impairment ("OTTI") losses recognized in earnings [1]
|
(1
|
)
|
(23
|
)
|
||
|
Results of variable annuity hedge program
|
||||||
|
GMWB derivatives, net
|
18
|
|
(17
|
)
|
||
|
Macro hedge program
|
(86
|
)
|
(14
|
)
|
||
|
Total results of variable annuity hedge program
|
(68
|
)
|
(31
|
)
|
||
|
Transactional foreign currency revaluation
|
(13
|
)
|
(44
|
)
|
||
|
Non-qualifying foreign currency derivatives
|
11
|
|
39
|
|
||
|
Other, net [2]
|
14
|
|
(78
|
)
|
||
|
Net realized capital gains (losses)
|
$
|
(20
|
)
|
$
|
(155
|
)
|
|
[1]
|
See Other-Than-Temporary Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
|
|
[2]
|
Primarily consists of changes in value of non-qualifying derivatives, including credit derivatives, interest rate derivatives used to manage duration, and embedded derivatives associated with modified coinsurance reinsurance contracts. Also included for the three months ended March 31, 2017, is a loss related to the sale of the Company's U.K. property and casualty run-off subsidiaries.
|
Three months ended
March 31, 2017
Gross gains and losses on sales
were primarily the result of duration, liquidity and credit management within corporate, residential mortgage-backed securities ("RMBS") and U.S. treasury securities.
Variable annuity hedge program losses
included losses on the macro hedge program primarily due to losses of
$46
driven by an improvement in domestic equity markets,
$26
driven by a decline in equity market volatility and
$19
driven by time decay on options. These losses were partially offset by net gains on the combined GMWB derivatives, net, which include the GMWB product, reinsurance, and hedging derivatives, primarily driven by gains of
$10
due to a decline in equity market volatility and
$7
driven by policy holder behavior.
Other, net
gains primarily related to $14 of interest rate derivatives used to manage duration.
Three months ended
March 31, 2016
Gross gains and losses on sales
were primarily due to the sale of U.S. treasury securities, corporate securities and municipal bonds. 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, including the sales to reduce exposure to energy, emerging markets and other below investment grade corporate securities.
Variable annuity hedge program losses
included losses on the combined GMWB derivatives, net, primarily driven by losses of $9 due to a decline in the value of equity derivatives and losses of $7 driven by liability model fund regression updates. Losses on the macro hedge program were primarily due to losses of $16 driven by a decline in value of equity derivatives and losses of $10 driven by time decay on options, partially offset by gains of $14 driven by a decline in interest rates.
Other, net
loss was primarily due to losses of $23 on equity derivatives which were hedging the impact of a decline in the
equity market on the investment portfolio, losses of $19 on interest rate derivatives driven by market changes and losses of $22 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.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ, and in the past have differed, from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
|
•
|
property and casualty insurance product reserves, net of reinsurance;
|
|
•
|
group benefit long-term disability (LTD) 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;
|
|
•
|
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 including evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on mortgage loans;
|
68
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
•
|
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
2016
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
2016
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
March 31, 2017
.
Property & Casualty Insurance Product Reserves, Net of Reinsurance
P&C Loss and Loss Adjustment Expense ("LAE") Reserves of
$19,179
, Net of Reinsurance, by Segment as of
March 31, 2017
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.
69
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Roll-forward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and Loss Adjustment Expenses for the
Three Months Ended
March 31, 2017
|
Commercial
Lines
|
Personal
Lines
|
Property & Casualty Other Operations
|
Total Property & Casualty Insurance
|
|||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
17,238
|
|
$
|
2,094
|
|
$
|
2,501
|
|
$
|
21,833
|
|
|
Reinsurance and other recoverables
|
2,325
|
|
25
|
|
426
|
|
2,776
|
|
||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
14,913
|
|
2,069
|
|
2,075
|
|
19,057
|
|
||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
968
|
|
644
|
|
—
|
|
1,612
|
|
||||
|
Current accident year ("CAY") catastrophes ("CATS")
|
71
|
|
79
|
|
—
|
|
150
|
|
||||
|
Prior accident year development ("PYD")
|
15
|
|
(4
|
)
|
1
|
|
12
|
|
||||
|
Total provision for unpaid losses and loss adjustment expenses
|
1,054
|
|
719
|
|
1
|
|
1,774
|
|
||||
|
Less: payments
|
863
|
|
710
|
|
79
|
|
1,652
|
|
||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
15,104
|
|
2,078
|
|
1,997
|
|
19,179
|
|
||||
|
Reinsurance and other recoverables
|
2,336
|
|
25
|
|
411
|
|
2,772
|
|
||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
17,440
|
|
$
|
2,103
|
|
$
|
2,408
|
|
$
|
21,951
|
|
|
Earned premiums
|
$
|
1,698
|
|
$
|
945
|
|
||||||
|
Loss and loss expense paid ratio [1]
|
50.8
|
|
75.1
|
|
||||||||
|
Loss and loss expense incurred ratio
|
62.4
|
|
77.0
|
|
||||||||
|
Prior accident year development (pts) [2]
|
0.9
|
|
(0.4
|
)
|
||||||||
|
[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.
|
Catastrophe Losses of
$150
for the
Three Months Ended
March 31, 2017
[1] These amounts represent an aggregation of multiple catastrophes.
[2] Includes Commercial Lines of $1 and Personal Lines of $3.
70
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Prior Accident Year Development of
$12
for the
Three Months Ended
March 31, 2017
|
|
Commercial Lines
|
Personal
Lines
|
Property & Casualty Other Operations
|
Total Property & Casualty Insurance
|
||||||||
|
Workers’ compensation
|
$
|
(20
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(20
|
)
|
|
Workers’ compensation discount accretion
|
8
|
|
—
|
|
—
|
|
8
|
|
||||
|
General liability
|
10
|
|
—
|
|
—
|
|
10
|
|
||||
|
Package business
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Commercial property
|
1
|
|
—
|
|
—
|
|
1
|
|
||||
|
Professional liability
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Bond
|
(10
|
)
|
—
|
|
—
|
|
(10
|
)
|
||||
|
Automobile liability
|
20
|
|
—
|
|
—
|
|
20
|
|
||||
|
Homeowners
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Net asbestos reserves
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Net environmental reserves
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Catastrophes
|
—
|
|
(3
|
)
|
—
|
|
(3
|
)
|
||||
|
Uncollectible reinsurance
|
—
|
|
—
|
|
—
|
|
—
|
|
||||
|
Other reserve re-estimates, net
|
6
|
|
(1
|
)
|
1
|
|
6
|
|
||||
|
Total prior accident year development
|
$
|
15
|
|
$
|
(4
|
)
|
$
|
1
|
|
$
|
12
|
|
For discussion of prior accident year development for the
three months ended
March 31, 2017
, refer to the Property and Casualty Insurance Products section of Note
8
-
Reserve for
Unpaid Losses and Loss Adjustment Expenses
of Notes to Condensed Consolidated Financial Statements.
Roll-forward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the
Three Months Ended
March 31, 2016
|
|
Commercial
Lines [3]
|
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
|
|
||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
913
|
|
632
|
|
—
|
|
1,545
|
|
||||
|
Current accident year catastrophes
|
44
|
|
47
|
|
—
|
|
91
|
|
||||
|
Prior accident year development
|
(20
|
)
|
52
|
|
1
|
|
33
|
|
||||
|
Total provision for unpaid losses and loss adjustment expenses
|
937
|
|
731
|
|
1
|
|
1,669
|
|
||||
|
Less: payments
|
854
|
|
707
|
|
63
|
|
1,624
|
|
||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
14,349
|
|
1,850
|
|
2,789
|
|
18,988
|
|
||||
|
Reinsurance and other recoverables
|
2,251
|
|
19
|
|
565
|
|
2,835
|
|
||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
16,600
|
|
$
|
1,869
|
|
$
|
3,354
|
|
$
|
21,823
|
|
|
Earned premiums
|
$
|
1,623
|
|
$
|
975
|
|
||||||
|
Loss and loss expense paid ratio [1]
|
52.6
|
|
72.5
|
|
||||||||
|
Loss and loss expense incurred ratio
|
57.7
|
|
75.0
|
|
||||||||
|
Prior accident year development (pts) [2]
|
(1.2
|
)
|
5.3
|
|
||||||||
|
[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.
|
71
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Catastrophe Losses of
$91
for the
Three Months Ended
March 31, 2016
|
[1]
|
These amounts represent an aggregation of multiple catastrophes.
|
Prior Accident Year Development of
$33
for the
Three Months Ended
March 31, 2016
|
|
Commercial Lines
|
Personal
Lines
|
Property & Casualty Other Operations
|
Total Property & Casualty Insurance
|
||||||||
|
Workers’ compensation
|
$
|
(79
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(79
|
)
|
|
Workers’ compensation discount accretion
|
7
|
|
—
|
|
—
|
|
7
|
|
||||
|
General liability
|
32
|
|
—
|
|
—
|
|
32
|
|
||||
|
Package business
|
45
|
|
—
|
|
—
|
|
45
|
|
||||
|
Commercial property
|
(2
|
)
|
—
|
|
—
|
|
(2
|
)
|
||||
|
Professional liability
|
(33
|
)
|
—
|
|
—
|
|
(33
|
)
|
||||
|
Bond
|
(6
|
)
|
—
|
|
—
|
|
(6
|
)
|
||||
|
Automobile liability
|
9
|
|
65
|
|
—
|
|
74
|
|
||||
|
Homeowners
|
—
|
|
(6
|
)
|
—
|
|
(6
|
)
|
||||
|
Catastrophes
|
(2
|
)
|
(5
|
)
|
—
|
|
(7
|
)
|
||||
|
Other reserve re-estimates, net
|
9
|
|
(2
|
)
|
1
|
|
8
|
|
||||
|
Total prior accident year development
|
$
|
(20
|
)
|
$
|
52
|
|
$
|
1
|
|
$
|
33
|
|
For discussion of prior accident year development for the
three months ended
March 31, 2016
, refer to the Property and Casualty Insurance Products section of Note
8
-
Reserve for Unpaid Losses and Loss Adjustment Expenses
of Notes to Condensed Consolidated Financial Statements.
72
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
P&C Other Operations Total Reserves, Net of Reinsurance [1]
[1] Excludes net reserves of
$487
to be transferred to the buyer in connection with the pending sale of the Company's U.K. property and casualty run-off subsidiaries. These net reserves, of which
$246
was for asbestos and environmental, are included in liabilities held for sale as of March 31, 2017 and December 31, 2016.
Asbestos and Environmental Reserves
Reserves for asbestos and environmental are primarily within P&C Other Operations with less significant amounts of asbestos and environmental reserves included within Commercial Lines and Personal Lines reporting segments (collectively "Ongoing Operations"). The following tables include all asbestos and environmental reserves, including reserves in P&C Other Operations and Ongoing Operations.
Asbestos and Environmental Net Reserves
|
Asbestos
|
Environmental
|
|||||
|
March 31, 2017
|
|
|
||||
|
Property and Casualty Other Operations
|
$
|
1,243
|
|
$
|
207
|
|
|
Commercial Lines and Personal Lines
|
77
|
|
57
|
|
||
|
Ending liability — net
|
$
|
1,320
|
|
$
|
264
|
|
|
December 31, 2016
|
|
|
||||
|
Property and Casualty Other Operations
|
$
|
1,282
|
|
$
|
234
|
|
|
Commercial Lines and Personal Lines
|
81
|
|
58
|
|
||
|
Ending liability — net
|
$
|
1,363
|
|
$
|
292
|
|
Property & Casualty Reserves Asbestos and Environmental Summary as of
March 31, 2017
|
Asbestos
|
Environmental
|
Total A&E
|
||||||||
|
Gross
|
||||||||||
|
Direct
|
$
|
1,513
|
|
$
|
280
|
|
$
|
1,793
|
|
|
|
Assumed Reinsurance
|
162
|
|
7
|
|
169
|
|
||||
|
London Market
|
293
|
|
47
|
|
340
|
|
||||
|
Total
|
1,968
|
|
334
|
|
2,302
|
|
||||
|
Ceded
|
(443
|
)
|
(29
|
)
|
(472
|
)
|
||||
|
Net reserves transferred to liabilities held for sale
|
(205
|
)
|
(41
|
)
|
(246
|
)
|
||||
|
Net
|
$
|
1,320
|
|
$
|
264
|
|
$
|
1,584
|
|
|
Roll-Forward of Asbestos and Environmental Losses and LAE for the
Three Months Ended
March 31, 2017
and
March 31, 2016
|
Asbestos
|
Environmental
|
|||||
|
2017
|
||||||
|
Beginning liability—net
|
$
|
1,363
|
|
$
|
292
|
|
|
Reclassification of allowance for uncollectible reinsurance [1]
|
1
|
|
—
|
|
||
|
Losses and loss adjustment expenses paid
|
(44
|
)
|
(28
|
)
|
||
|
Ending liability – net
|
$
|
1,320
|
|
$
|
264
|
|
|
2016
|
||||||
|
Beginning liability—net
|
$
|
1,803
|
|
$
|
318
|
|
|
Losses and loss adjustment expenses paid
|
(37
|
)
|
(10
|
)
|
||
|
Ending liability – net
|
$
|
1,766
|
|
$
|
308
|
|
[1] Related to the reclassification of an allowance for uncollectible reinsurance from the "All Other" category of P&C Other Operations reserves.
The Company classifies its asbestos and environmental reserves into three categories: Direct, Assumed Reinsurance and London Market.
|
•
|
Direct Insurance-
includes primary and excess coverage. Of the three categories of claims, direct policies tend to have the greatest factual development from which to estimate the Company’s exposures.
|
|
•
|
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). Assumed Reinsurance exposures are less predictable than direct insurance exposures because the Company does not generally receive notice of a reinsurance
|
73
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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-
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. 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.
|
Net Survival Ratio
Net survival ratio is the quotient of the net carried reserves divided by average annual payments net of reinsurance and is an indication of the number of years that net carried reserves would last (i.e. survive) if future annual net payments were consistent with the calculated historical average.
The net survival ratios shown below are calculated for the one and three year periods ended March 31, 2017 and are calculated excluding the effect of net carried reserves for asbestos and environmental related to the pending sale of the Company's U.K. Property & Casualty runoff subsidiaries as those carried reserves are included in liabilities held for sale in the consolidated balance sheet as of March 31, 2017.
See section that follows entitled Adverse Development Cover which could materially affect the survival ratio of net reserves given that adverse development of asbestos and environmental reserves, if any, subsequent to December 31, 2016 will be ceded to NICO up to the reinsurance limit.
For asbestos, the table also presents the net survival ratios excluding the effect of the PPG settlement in the second quarter of 2016.
Net Survival Ratios
|
Asbestos
|
Environmental
|
|
|
One year net survival ratio
|
2.9
|
3.6
|
|
Three year net survival ratio
|
4.9
|
4.4
|
|
One year net survival ratio - excluding PPG settlement
|
7.6
|
|
|
Three year net survival ratio - excluding PPG settlement
|
7.7
|
|
Asbestos and Environmental Paid and Incurred Losses and LAE Development for the
Three Months Ended
March 31, 2017
|
|
Asbestos
|
Environmental
|
||||||||||
|
Paid
Losses & LAE |
Incurred
Losses & LAE |
Paid
Losses & LAE |
Incurred
Losses & LAE |
|||||||||
|
Gross
|
||||||||||||
|
Direct
|
$
|
41
|
|
$
|
—
|
|
$
|
33
|
|
$
|
—
|
|
|
Assumed Reinsurance
|
15
|
|
—
|
|
1
|
|
—
|
|
||||
|
London Market
|
6
|
|
—
|
|
1
|
|
—
|
|
||||
|
Total
|
62
|
|
—
|
|
35
|
|
—
|
|
||||
|
Ceded
|
(18
|
)
|
—
|
|
(7
|
)
|
—
|
|
||||
|
Net
|
$
|
44
|
|
$
|
—
|
|
$
|
28
|
|
$
|
—
|
|
Adverse Development Cover
Effective December 31, 2016, the Company entered into an asbestos and environmental adverse development cover (“ADC”) reinsurance agreement with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., to reduce uncertainty about potential adverse development. Under the ADC, the Company paid a reinsurance premium of
$650
for NICO to assume adverse net loss and allocated loss adjustment expense reserve development up to
$1.5 billion
above the Company’s existing net asbestos and environmental (“A&E”) reserves as of December 31, 2016 of approximately $1.7 billion. The
$650
reinsurance premium was placed into a collateral trust account as security for NICO’s claim payment obligations to the Company. The Company has retained the risk of collection on amounts due from other third-party reinsurers and continues to be responsible for claims handling and other administrative services, subject to certain conditions. The ADC covers substantially all the Company’s A&E reserve development up to the reinsurance limit. The ADC excludes risk of adverse development on net asbestos and environmental reserves held by the Company’s U.K. Property and Casualty run-off subsidiaries which have been accounted for as liabilities held for sale in the consolidated balance sheets as of March 31, 2017 and December 31, 2016.
The ADC has been accounted for as retroactive reinsurance and the Company reported the
$650
cost as a loss on reinsurance transaction in 2016 in the consolidated statement of operations. Under retroactive reinsurance accounting, net adverse asbestos and environmental reserve development after December 31, 2016, if any, will result in an offsetting reinsurance recoverable up to the
$1.5 billion
limit. Cumulative ceded losses up to the
$650
reinsurance premium paid would be recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the
$650
reinsurance premium paid would result in a deferred gain. The deferred gain would be recognized over the claim settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries.
Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of asbestos and
74
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
environmental claims after December 31, 2016 in excess of
$650
may result in significant charges against earnings.
Uncertainties Regarding Adequacy of Asbestos and Environmental Reserves
A number of factors affect the variability of estimates for asbestos and environmental reserves before considering the effect of the reinsurance agreement with NICO, 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.
Excluding net asbestos and environmental reserves of the Company's U.K. property and casualty subsidiaries that are included in liabilities held for sale, as of
March 31, 2017
, the Company reported $1.3 billion of net asbestos reserves and $264 million of net environmental reserves. The Company believes that its current asbestos and environmental reserves are appropriate. However, analyses of future developments could cause The Hartford to change its estimates of its asbestos and environmental reserves. As discussed above the effect of these changes could be material to the Company's liquidity and, if cumulative adverse development subsequent to December 31, 2016 exceeded $650 million, the effect of the changes could be material to the Company's consolidated operating results. The process of estimating asbestos and environmental reserves remains subject to a wide variety of uncertainties, which are detailed in the Company's
2016
Form 10-K Annual Report.
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
2016
Form 10-K Annual Report.
Estimated Gross Profits
Estimated gross profits (“EGPs”) are used in the valuation and amortization of assets, including DAC and 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.
|
Talcott Resolution Significant EGP - based Balances
|
||||||
|
As of March 31, 2017
|
As of December 31, 2016
|
|||||
|
DAC
|
$
|
1,042
|
|
$
|
1,066
|
|
|
SIA
|
$
|
53
|
|
$
|
53
|
|
|
Death and Other Insurance Benefit Reserves, net of reinsurance [1]
|
$
|
357
|
|
$
|
354
|
|
|
[1]
|
For additional information on death and other insurance benefit reserves, see Note
9
-
Reserve for Future Policy Benefits and Separate Account Liabilities
of Notes to Condensed Consolidated Financial Statements.
|
|
Talcott Resolution Benefit (Charge) to Income, Net of Tax, as a Result of Unlock
|
||||||
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
|||||
|
DAC
|
$
|
12
|
|
$
|
1
|
|
|
SIA
|
1
|
|
1
|
|
||
|
Death and Other Insurance Benefit Reserves
|
5
|
|
11
|
|
||
|
Total (before tax)
|
$
|
18
|
|
$
|
13
|
|
|
Income tax effect
|
6
|
|
4
|
|
||
|
Total (after-tax)
|
$
|
12
|
|
$
|
9
|
|
The Unlock benefit of $12, after-tax, for the
three months ended
March 31, 2017
was largely due to separate account returns being above our aggregated estimated returns during the period, partially offset by higher than expected lapses.
The Unlock benefit of $9, after-tax, for the
three months ended
March 31, 2016
was primarily driven by the effect that actual versus expected returns during the quarter had on aggregated estimated return as well as by lower than expected lapses.
Use of Estimated Gross Profits in Amortization and Reserving
For most annuity contracts, the Company estimates gross profits over 20 years as EGPs emerging subsequent to that time frame are immaterial. Products sold in a particular year are aggregated into cohorts. Future gross profits for each cohort are projected over the estimated lives of the underlying contracts, based on future account value projections for variable annuity products. The projection of future account values requires the use of certain assumptions including: separate account returns; separate account fund mix; fees assessed against the contract holder’s account balance; surrender and lapse rates; interest margin; mortality; and the extent and duration of hedging activities and hedging costs. Changes in these assumptions and changes to other policyholder behavior assumptions such as resets, partial surrenders, reaction to price increases, and asset allocations cause EGPs to fluctuate, which impacts earnings.
The Company determines EGPs from a single deterministic reversion to mean (“RTM”) separate account return projection which is an estimation technique commonly used by insurance
75
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
entities to project future separate account returns. Through this estimation technique, the Company’s DAC model is adjusted to reflect actual account values at the end of each quarter. Through consideration of recent market returns, the Company will unlock, or adjust, projected returns over a future period so that the account value returns to the long-term expected rate of return, providing that those projected returns do not exceed certain caps.
Market Unlocks
In addition to updating assumptions in the fourth quarter of each year, an Unlock revises EGPs, on a quarterly basis, to reflect the Company’s current best estimate assumptions and market updates of policyholder account value. The Unlock for future separate account returns is determined each quarter. Under RTM, the expected long-term weighted average rate of return is
8.3%
. The annual return assumed over the next five years of approximately
0.8%
was calculated based on the return needed over that period to produce an 8.3% return since March of 2009, the date the Company adopted the RTM estimation technique to project future separate account returns. Based on the expected trend of policy lapses and annuitizations, the Company expects approximately
50%
of its block of variable annuities to run off in the next 5 years.
Aggregate 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
42%
as of
March 31, 2017
. 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.
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
March 31, 2017
, 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 March 31, 2017 and December 31, 2016, the Company had no valuation allowance. 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.
76
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
SEGMENT OPERATING SUMMARIES
|
COMMERCIAL LINES
|
Results of Operations
Underwriting Summary
|
Three Months Ended March 31,
|
||||||||
|
2017
|
2016
|
Change
|
||||||
|
Written premiums
|
$
|
1,821
|
|
$
|
1,726
|
|
6
|
%
|
|
Change in unearned premium reserve
|
133
|
|
103
|
|
29
|
%
|
||
|
Earned premiums
|
1,688
|
|
1,623
|
|
4
|
%
|
||
|
Fee income
|
10
|
|
10
|
|
—
|
%
|
||
|
Losses and loss adjustment expenses
|
|
|
|
|
||||
|
Current accident year before catastrophes
|
968
|
|
913
|
|
6
|
%
|
||
|
Current accident year catastrophes
|
71
|
|
44
|
|
61
|
%
|
||
|
Prior accident year development
|
15
|
|
(20
|
)
|
175
|
%
|
||
|
Total losses and loss adjustment expenses
|
1,054
|
|
937
|
|
12
|
%
|
||
|
Amortization of deferred policy acquisition costs
|
249
|
|
242
|
|
3
|
%
|
||
|
Underwriting expenses
|
323
|
|
305
|
|
6
|
%
|
||
|
Dividends to policyholders
|
4
|
|
4
|
|
—
|
%
|
||
|
Underwriting gain
|
68
|
|
145
|
|
(53
|
%)
|
||
|
Net investment income [1]
|
243
|
|
209
|
|
16
|
%
|
||
|
Net realized capital gains (losses) [1]
|
11
|
|
(33
|
)
|
133
|
%
|
||
|
Other income
|
1
|
|
1
|
|
—
|
%
|
||
|
Income before income taxes
|
323
|
|
322
|
|
—
|
%
|
||
|
Income tax expense [2]
|
92
|
|
97
|
|
(5
|
%)
|
||
|
Net income
|
$
|
231
|
|
$
|
225
|
|
3
|
%
|
|
[1]
|
For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
|
|
[2]
|
For discussion of income taxes, see Note
11
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
|
Premium Measures [1]
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
|||||
|
New business premium
|
$
|
313
|
|
$
|
275
|
|
|
Standard commercial lines policy count retention
|
85
|
%
|
84
|
%
|
||
|
Standard commercial lines renewal written price increase
|
3.3
|
%
|
2.2
|
%
|
||
|
Standard commercial lines renewal earned price increase
|
2.4
|
%
|
2.5
|
%
|
||
|
Standard commercial lines policies in-force as of end of period (in thousands)
|
1,347
|
|
1,314
|
|
||
|
[1]
|
Standard commercial lines consists of small commercial and middle market. Standard commercial premium measures exclude middle market programs and livestock lines of business.
|
77
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Underwriting Ratios
|
Three Months Ended March 31,
|
||||||
|
|
2017
|
2016
|
Change
|
|||
|
Loss and loss adjustment expense ratio
|
||||||
|
Current accident year before catastrophes
|
57.3
|
|
56.3
|
|
1.0
|
|
|
Current accident year catastrophes
|
4.2
|
|
2.7
|
|
1.5
|
|
|
Prior accident year development
|
0.9
|
|
(1.2
|
)
|
2.1
|
|
|
Total loss and loss adjustment expense ratio
|
62.4
|
|
57.7
|
|
4.7
|
|
|
Expense ratio
|
33.3
|
|
33.1
|
|
0.2
|
|
|
Policyholder dividend ratio
|
0.2
|
|
0.2
|
|
—
|
|
|
Combined ratio
|
96.0
|
|
91.1
|
|
4.9
|
|
|
Current accident year catastrophes and prior year development
|
5.1
|
|
1.5
|
|
3.6
|
|
|
Underlying combined ratio
|
90.9
|
|
89.6
|
|
1.3
|
|
Net Income
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Net income
increased primarily due to a change to net realized capital gains in first quarter 2017 from net realized capital losses in first quarter 2016, as well as higher net investment income, partially offset by a lower underwriting gain.
Underwriting Gain
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Underwriting gain
decreased due to higher current accident year losses and loss adjustment expenses, including higher catastrophes, as well as a change to unfavorable prior accident year reserve development and higher underwriting expenses, partially offset by earned premium growth. The higher underwriting expenses included an increase in costs for long-term incentive compensation due to recognition of long-term compensation expense for retirement-eligible employees and higher IT costs.
78
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Earned Premiums
[1] Other of
$11
and
$12
for
three months ended
March 31, 2016
, and
2017
, respectively, is included in the total.
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Earned premiums
increased reflecting written premium growth over the preceding twelve months.
Written premiums
increased for the
three months ended
March 31, 2017
primarily due to growth in small commercial, middle market' and specialty commercial.
|
•
|
Small Commercial growth was primarily due to higher renewal premium driven by slightly higher policy retention and renewal written price increases, as well as growth from the acquisition of Maxum, partially offset by lower new business premium, excluding Maxum.
|
|
•
|
Middle Market growth was primarily driven by higher new business and audit premium.
|
|
•
|
Specialty Commercial growth was primarily due to higher new and renewal premium in Bond.
|
|
•
|
For the
three months ended
March 31, 2017
, renewal written price increases averaged
3.3%
in standard commercial, which included 4.5% for Small Commercial and 0.9% for Middle Market.
|
Loss and LAE Ratio before Catastrophes and Prior Accident Year Development
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Loss and LAE ratio before catastrophes and prior accident year development
increased for the
three months ended
March 31, 2017
principally due to a higher loss and loss adjustment expense ratio in commercial automobile, driven by elevated severity.
79
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Catastrophes and (Favorable) Unfavorable Prior Accident Year Development
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Current accident year catastrophe losses
totaled
$71
, before tax, for the
three months ended
March 31, 2017
, compared to
$44
, before tax, for the
three months ended
March 31, 2016
. Catastrophe losses for the
three months ended
March 31, 2017
were primarily due to wind and hail events and winter storms in the Midwest, Texas and the Southeast. Catastrophe losses for the
three months ended
March 31, 2016
were primarily due to winter storms across various U.S. geographic regions and, to a lesser extent, multiple wind and hail events concentrated in the central and southern plains.
Prior accident year development
of
$15
, before tax, was unfavorable for the
three months ended
March 31, 2017
, compared to favorable prior accident year development of
$20
, before tax, for the
three months ended
March 31, 2016
. Net reserve increases for the
three months ended
March 31, 2017
were primarily related to commercial automobile liability and general liability, largely offset by a decrease in reserves for bond and workers’ compensation. Net reserve decreases for the
three months ended
March 31, 2016
were primarily related to decreases in professional liability and workers' compensation reserves, partially offset by increases in reserves related to the small commercial package business, and in general liability for a class of business that insures service and maintenance contractors.
80
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
PERSONAL LINES
|
Results of Operations
Underwriting Summary
|
Three Months Ended March 31,
|
||||||||
|
Underwriting Summary
|
2017
|
2016
|
Change
|
|||||
|
Written premiums
|
$
|
889
|
|
$
|
953
|
|
(7
|
%)
|
|
Change in unearned premium reserve
|
(45
|
)
|
(22
|
)
|
(105
|
%)
|
||
|
Earned premiums
|
934
|
|
975
|
|
(4
|
%)
|
||
|
Fee income
|
11
|
|
9
|
|
22
|
%
|
||
|
Losses and loss adjustment expenses
|
|
|
|
|||||
|
Current accident year before catastrophes
|
644
|
|
632
|
|
2
|
%
|
||
|
Current accident year catastrophes
|
79
|
|
47
|
|
68
|
%
|
||
|
Prior accident year development
|
(4
|
)
|
52
|
|
(108
|
%)
|
||
|
Total losses and loss adjustment expenses
|
719
|
|
731
|
|
(2
|
%)
|
||
|
Amortization of DAC
|
81
|
|
89
|
|
(9
|
%)
|
||
|
Underwriting expenses
|
138
|
|
163
|
|
(15
|
%)
|
||
|
Underwriting gain
|
7
|
|
1
|
|
NM
|
|
||
|
Net servicing income [1]
|
3
|
|
4
|
|
(25
|
%)
|
||
|
Net investment income [2]
|
36
|
|
31
|
|
16
|
%
|
||
|
Net realized capital gains [2]
|
2
|
|
(5
|
)
|
140
|
%
|
||
|
Other expense
|
(1
|
)
|
—
|
|
NM
|
|
||
|
Income before income taxes
|
47
|
|
31
|
|
52
|
%
|
||
|
Income tax expense [3]
|
14
|
|
8
|
|
75
|
%
|
||
|
Net income
|
$
|
33
|
|
$
|
23
|
|
43
|
%
|
|
[1]
|
Includes servicing revenues of
$19
and
$20
for the
three months ended
March 31, 2017
and
2016
, respectively.
|
|
[2]
|
For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
|
|
[3]
|
For discussion of income taxes, see Note
11
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
|
Written and Earned Premiums
|
Three Months Ended March 31,
|
||||||||
|
Written Premiums
|
2017
|
2016
|
Change
|
|||||
|
Product Line
|
||||||||
|
Automobile
|
$
|
645
|
|
$
|
690
|
|
(7
|
%)
|
|
Homeowners
|
244
|
|
263
|
|
(7
|
%)
|
||
|
Total
|
$
|
889
|
|
$
|
953
|
|
(7
|
%)
|
|
Earned Premiums
|
|
|||||||
|
Product Line
|
|
|||||||
|
Automobile
|
$
|
654
|
|
$
|
678
|
|
(4
|
%)
|
|
Homeowners
|
280
|
|
297
|
|
(6
|
%)
|
||
|
Total
|
$
|
934
|
|
$
|
975
|
|
(4
|
%)
|
81
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Premium Measures
|
Three Months Ended March 31,
|
||||||
|
Premium Measures
|
2017
|
2016
|
||||
|
Policies in-force end of period (in thousands)
|
||||||
|
Automobile
|
1,905
|
|
2,073
|
|
||
|
Homeowners
|
1,144
|
|
1,262
|
|
||
|
New business written premium
|
||||||
|
Automobile
|
$
|
42
|
|
$
|
110
|
|
|
Homeowners
|
$
|
12
|
|
$
|
23
|
|
|
Policy count retention
|
||||||
|
Automobile
|
82
|
%
|
84
|
%
|
||
|
Homeowners
|
82
|
%
|
84
|
%
|
||
|
Renewal written price increase
|
||||||
|
Automobile
|
10.5
|
%
|
6.1
|
%
|
||
|
Homeowners
|
8.9
|
%
|
8.1
|
%
|
||
|
Renewal earned price increase
|
||||||
|
Automobile
|
8.2
|
%
|
5.7
|
%
|
||
|
Homeowners
|
8.2
|
%
|
7.2
|
%
|
||
Underwriting Ratios
|
Three Months Ended March 31,
|
||||||
|
Underwriting Ratios
|
2017
|
2016
|
Change
|
|||
|
Loss and loss adjustment expense ratio
|
||||||
|
Current accident year before catastrophes
|
69.0
|
|
64.8
|
|
4.2
|
|
|
Current accident year catastrophes
|
8.5
|
|
4.8
|
|
3.7
|
|
|
Prior year development
|
(0.4
|
)
|
5.3
|
|
(5.7
|
)
|
|
Total loss and loss adjustment expense ratio
|
77.0
|
|
75.0
|
|
2.0
|
|
|
Expense ratio
|
22.3
|
|
24.9
|
|
(2.6
|
)
|
|
Combined ratio
|
99.3
|
|
99.9
|
|
(0.6
|
)
|
|
Current accident year catastrophes and prior year development
|
8.1
|
|
10.1
|
|
(2.0
|
)
|
|
Underlying combined ratio
|
91.2
|
|
89.7
|
|
1.5
|
|
Product Combined Ratios
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
Change
|
||||
|
Automobile
|
|
|
||||
|
Combined ratio
|
97.5
|
|
106.6
|
|
(9.1
|
)
|
|
Underlying combined ratio
|
96.6
|
|
96.2
|
|
0.4
|
|
|
Homeowners
|
|
|
||||
|
Combined ratio
|
103.4
|
|
84.7
|
|
18.7
|
|
|
Underlying combined ratio
|
78.9
|
|
75.1
|
|
3.8
|
|
82
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Income
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Net income
increased primarily due to a higher underwriting gain, an increase in net investment income and a change from net realized capital losses to net realized capital gains.
Underwriting Gain
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Underwriting gain
increased primarily due to
the effect of net unfavorable reserve development in first quarter 2016 and a decrease in underwriting expenses, partially offset by higher catastrophes, a higher current accident year loss and loss adjustment expense ratio before catastrophes and the effect of a decline in earned premium. The decrease in underwriting expenses was primarily due to a decrease in direct marketing expenses.
Earned Premiums
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Earned premiums
decreased reflecting a decline in written premium over the prior six to twelve months, particularly in non-AARP member Agency business.
Written premiums
decreased in both the direct and agency channels primarily due a decline in new business and lower policy count retention in both automobile and homeowners.
Renewal written pricing increased in both automobile and home as the Company increased rates to improve profitability.
Policy count retention
for both automobile and homeowners was lower in 2017 driven in part by renewal written pricing increases.
83
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Loss and LAE Ratio before Catastrophes and Prior Accident Year Development
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Loss and LAE ratio before catastrophes and prior accident year development
increased primarily as a result of higher automobile liability frequency and severity and higher fire and non-catastrophe weather-related homeowners losses, partially offset by the effect of increases in earned pricing. T
aking into account management’s current view of first quarter 2016 loss cost changes, in first quarter 2017, automobile liability frequency has decreased while automobile liability severity has increased modestly.
Catastrophes and (Favorable) Unfavorable Prior Accident Year Development
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Current accident year catastrophe losses
of
$79
, before tax,
for the
three months ended
March 31, 2017
, increased compared to
$47
, before tax,
for the
three months ended
March 31, 2016
due to more severe wind and hail events. Catastrophe losses
for the
three months ended
March 31, 2017
were primarily due to multiple wind and hail events across various U.S. geographic regions, concentrated in the Midwest, Texas and the southeast. Catastrophe losses
for the
three months ended
March 31, 2016
were primarily due to multiple wind and hail events across various U.S. geographic regions, concentrated in the central and southern plains.
Prior accident year development
of
$4
, before tax, was favorable
for the
three months ended
March 31, 2017
, compared to unfavorable prior accident year development of
$52
, before tax,
for the
three months ended
March 31, 2016
.
Net reserves
decreased
for the
three months ended
March 31, 2017
primarily due to decreases in reserves for prior accident year catastrophes. Net reserves increased for
for the
three months ended
March 31, 2016
primarily due to increased reserves in automobile liability for accident years 2014 and 2015 primarily due to higher emerged bodily injury severity and, for the third and fourth accident quarters of 2015, an increase in bodily injury frequency.
84
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
PROPERTY & CASUALTY OTHER OPERATIONS
|
Results of Operations
Underwriting Summary
|
|
Three Months Ended March 31,
|
|||||||
|
Underwriting Summary
|
2017
|
2016
|
Change
|
|||||
|
Losses and loss adjustment expenses
|
|
|
||||||
|
Prior accident year development
|
$
|
1
|
|
$
|
1
|
|
—
|
%
|
|
Total losses and loss adjustment expenses
|
1
|
|
1
|
|
—
|
%
|
||
|
Underwriting expenses
|
5
|
|
7
|
|
(29
|
%)
|
||
|
Underwriting loss
|
(6
|
)
|
(8
|
)
|
25
|
%
|
||
|
Net investment income [1]
|
31
|
|
32
|
|
(3
|
%)
|
||
|
Net realized capital gains (losses) [1]
|
4
|
|
(3
|
)
|
NM
|
|
||
|
Other income
|
2
|
|
2
|
|
—
|
%
|
||
|
Income before income taxes
|
31
|
|
23
|
|
35
|
%
|
||
|
Income tax expense [2]
|
7
|
|
6
|
|
17
|
%
|
||
|
Net income
|
$
|
24
|
|
$
|
17
|
|
41
|
%
|
|
[1]
|
For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
|
[2] For discussion of income taxes, see Note
11
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
Net Income
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Net income
for the
three months ended
March 31, 2017
, as compared to the prior year period, increased primarily due to a change to net realized capital gains in the current year period from net realized capital losses in the prior year period.
Asbestos and environmental reserve
reviews will
occur in the fourth quarter of the year, beginning in 2017. 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.
85
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
GROUP BENEFITS
|
|
Operating Summary
|
||||||||
|
Three Months Ended March 31,
|
||||||||
|
|
2017
|
2016
|
Change
|
|||||
|
Premiums and other considerations
|
$
|
835
|
|
$
|
795
|
|
5
|
%
|
|
Net investment income
|
95
|
|
88
|
|
8
|
%
|
||
|
Net realized capital gains (losses) [1]
|
8
|
|
2
|
|
NM
|
|
||
|
Total revenues
|
938
|
|
885
|
|
6
|
%
|
||
|
Benefits, losses and loss adjustment expenses
|
651
|
|
618
|
|
5
|
%
|
||
|
Amortization of deferred policy acquisition costs
|
8
|
|
8
|
|
—
|
%
|
||
|
Insurance operating costs and other expenses
|
220
|
|
194
|
|
13
|
%
|
||
|
Total benefits, losses and expenses
|
879
|
|
820
|
|
7
|
%
|
||
|
Income before income taxes
|
59
|
|
65
|
|
(9
|
)%
|
||
|
Income tax expense [2]
|
14
|
|
15
|
|
(7
|
)%
|
||
|
Net income
|
$
|
45
|
|
$
|
50
|
|
(10
|
)%
|
|
[1]
|
For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
|
|
[2]
|
For discussion of income taxes, see Note
11
-
Income Taxes
of Notes to the Consolidated Financial Statements.
|
|
Premiums and Other Considerations
|
||||||||
|
Three Months Ended March 31,
|
||||||||
|
|
2017
|
2016
|
Change
|
|||||
|
Fully insured – ongoing premiums
|
$
|
805
|
|
$
|
772
|
|
4
|
%
|
|
Buyout premiums
|
11
|
|
6
|
|
83
|
%
|
||
|
Fee income
|
19
|
|
17
|
|
12
|
%
|
||
|
Total premiums and other considerations
|
$
|
835
|
|
$
|
795
|
|
5
|
%
|
|
Fully insured ongoing sales, excluding buyouts
|
$
|
211
|
|
$
|
266
|
|
(21
|
)%
|
|
Ratios, Excluding Buyouts
|
|||||
|
Three Months Ended March 31,
|
|||||
|
|
2017
|
2016
|
Change
|
||
|
Group disability loss ratio
|
82.9
|
%
|
82.4
|
%
|
(0.5)
|
|
Group life loss ratio
|
73.1
|
%
|
73.8
|
%
|
0.7
|
|
Total loss ratio
|
77.7
|
%
|
77.6
|
%
|
(0.1)
|
|
Expense ratio
|
27.7
|
%
|
25.6
|
%
|
(2.1)
|
|
Margin
|
||||||
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
Change
|
||||
|
Net income margin
|
4.9
|
%
|
5.7
|
%
|
(0.8
|
)
|
|
Effect of net capital realized gains (losses), net of tax on after-tax margin
|
0.6
|
%
|
0.2
|
%
|
0.4
|
|
|
Core earnings margin
|
4.3
|
%
|
5.5
|
%
|
(1.2
|
)
|
86
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Income
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Net income
decreased due to state guaranty fund assessments of
$13
after-tax related to the liquidation of a life and health insurance company, partially offset by higher net investment income and net realized capital gains.
Insurance operating costs and other expenses
increased
13%
due primarily to state guaranty fund assessments of
$20
before tax related to the liquidation of a life and health insurance company.
Fully Insured Ongoing Premiums
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Fully insured ongoing premiums
increased
4%
due to strong group life and group disability persistency and disability pricing increases.
Fully insured ongoing sales, excluding buyouts
, were down
21%
due to fewer large case sales in the current year.
Ratios
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Total loss ratio
increased
0.1
points to
77.7%
due to a slightly higher group disability loss ratio, partially offset by a slightly lower group life loss ratio. The group disability loss ratio increased
0.5
points due to an increase in expected long term disability claim severity, partially offset by continued improvements in incidence trends and pricing as well as continued strong long-term disability claim recoveries. The group life loss ratio decreased
0.7
points due to lower incidence.
Expense ratio
increased
2.1
points primarily due to state guaranty fund assessments related to the liquidation of a life and health insurance company.
87
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
MUTUAL FUNDS
|
Results of Operations
Operating Summary
|
Three Months Ended March 31,
|
||||||||
|
|
2017
|
2016
|
Change
|
|||||
|
Fee income and other revenue
|
$
|
191
|
|
$
|
167
|
|
14
|
%
|
|
Net investment income
|
1
|
|
—
|
|
NM
|
|
||
|
Total revenues
|
192
|
|
167
|
|
15
|
%
|
||
|
Amortization of DAC
|
6
|
|
5
|
|
20
|
%
|
||
|
Operating costs and other expenses
|
151
|
|
131
|
|
15
|
%
|
||
|
Total benefits, losses and expenses
|
157
|
|
136
|
|
15
|
%
|
||
|
Income before income taxes
|
35
|
|
31
|
|
13
|
%
|
||
|
Income tax expense
|
12
|
|
11
|
|
9
|
%
|
||
|
Net income
|
$
|
23
|
|
$
|
20
|
|
15
|
%
|
|
Daily Average Total Mutual Funds segment AUM
|
$
|
101,114
|
|
$
|
87,192
|
|
16
|
%
|
|
Return on Assets ("ROA") [1]
|
||||||||
|
Net income
|
9.2
|
|
9.3
|
|
(1
|
)%
|
||
|
Core Earnings
|
9.2
|
|
9.3
|
|
(1
|
)%
|
||
[1] Represents annualized earnings divided by a daily average of assets under management, as measured in basis points.
Mutual Funds Segment AUM
|
Three Months Ended March 31,
|
||||||||
|
2017
|
2016
|
Change
|
||||||
|
Mutual Fund AUM - beginning of period
|
$
|
81,298
|
|
$
|
74,413
|
|
9
|
%
|
|
Sales
|
7,218
|
|
4,699
|
|
54
|
%
|
||
|
Redemptions
|
(5,885
|
)
|
(4,885
|
)
|
(20
|
)%
|
||
|
Net flows
|
1,333
|
|
(186
|
)
|
NM
|
|
||
|
Change in market value and other [1]
|
4,167
|
|
(608
|
)
|
NM
|
|
||
|
Mutual Fund AUM - end of period
|
$
|
86,798
|
|
$
|
73,619
|
|
18
|
%
|
|
Exchange Traded Products AUM [2] [4]
|
278
|
|
NM
|
|
||||
|
Mutual Funds segment AUM before Talcott Resolution
|
87,076
|
|
73,619
|
|
18
|
%
|
||
|
Talcott Resolution AUM [3]
|
16,123
|
|
16,795
|
|
(4
|
)%
|
||
|
Total Mutual Funds segment AUM
|
$
|
103,199
|
|
$
|
90,414
|
|
14
|
%
|
[1] Other includes AUM from adoption of ten U.S. mutual funds with aggregate AUM of approximately $3.0 billion (as of October 2016) from Schroder Investment Management North America Inc.
[2] Includes AUM of approximately $200 acquired upon acquisition in July 2016 of Lattice Strategies, LLC and subsequent net flows and change in market value.
[3] Talcott Resolution AUM consist of Company-sponsored mutual fund assets held in separate accounts supporting variable insurance and investment products.
[4] Includes two actively managed fixed income ETP's launched in March 2017.
Mutual Fund AUM by Asset Class
|
March 31,
2017 |
March 31, 2016
|
Change
|
||||||
|
Equity
|
$
|
54,683
|
|
$
|
46,455
|
|
18
|
%
|
|
Fixed Income
|
13,973
|
|
12,389
|
|
13
|
%
|
||
|
Multi-Strategy Investments [1]
|
18,142
|
|
14,775
|
|
23
|
%
|
||
|
Mutual Fund AUM
|
$
|
86,798
|
|
$
|
73,619
|
|
18
|
%
|
[1] Includes balanced allocation, and alternative investment products.
88
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Income
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Net income
for the
three months ended
March 31, 2017
increased compared to the prior year period due to higher investment management fees resulting from higher AUM levels, partially offset by higher variable sub-advisory, distribution and service expenses.
Total Mutual Funds segment AUM for the
three months ended
March 31, 2017
increased to
$103.2 billion
compared to first quarter 2016 of
$90.4 billion
due to market appreciation, the addition of Schroders Mutual Funds (in October 2016) and positive net flows, partially offset by the continued run off of Talcott Resolution AUM. Mutual Fund net flows for the
three months ended
March 31, 2017
totaled
$1.3 billion
compared with net outflows of
$0.2 billion
in the prior year period due to strong sales and positive net flows in all asset classes.
89
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
TALCOTT RESOLUTION
|
Results of Operations
|
Operating Summary
|
||||||||
|
Three Months Ended March 31,
|
||||||||
|
|
2017
|
2016
|
Change
|
|||||
|
Earned premiums
|
$
|
35
|
|
$
|
28
|
|
25
|
%
|
|
Fee income and other
|
223
|
|
241
|
|
(7
|
%)
|
||
|
Net investment income [1]
|
318
|
|
325
|
|
(2
|
%)
|
||
|
Realized capital gains (losses):
|
|
|
||||||
|
Total other-than-temporary impairment (“OTTI”) losses
|
—
|
|
(7
|
)
|
100
|
%
|
||
|
Other net realized capital gains (losses)
|
(45
|
)
|
(105
|
)
|
57
|
%
|
||
|
Net realized capital gains (losses) [1]
|
(45
|
)
|
(112
|
)
|
60
|
%
|
||
|
Total revenues
|
531
|
|
482
|
|
10
|
%
|
||
|
Benefits, losses and loss adjustment expenses
|
332
|
|
354
|
|
(6
|
%)
|
||
|
Amortization of DAC
|
19
|
|
30
|
|
(37
|
%)
|
||
|
Insurance operating costs and other expenses
|
106
|
|
105
|
|
1
|
%
|
||
|
Total benefits, losses and expenses
|
457
|
|
489
|
|
(7
|
%)
|
||
|
Income before income taxes
|
74
|
|
(7
|
)
|
NM
|
|
||
|
Income tax expense (benefit)
|
6
|
|
(24
|
)
|
125
|
%
|
||
|
Net income
|
$
|
68
|
|
$
|
17
|
|
NM
|
|
|
Assets Under Management (end of period)
|
|
|||||||
|
Variable annuity account value
|
$
|
40,948
|
|
$
|
42,500
|
|
(4
|
%)
|
|
Fixed market value adjusted and payout annuities
|
7,571
|
|
8,014
|
|
(6
|
%)
|
||
|
Institutional annuity account value
|
15,177
|
|
15,169
|
|
—
|
%
|
||
|
Other account value [2]
|
87,237
|
|
86,762
|
|
1
|
%
|
||
|
Total account value
|
$
|
150,933
|
|
$
|
152,445
|
|
(1
|
%)
|
|
Variable Annuity Account Value
|
|
|||||||
|
Account value, beginning of period
|
$
|
40,698
|
|
$
|
44,245
|
|
(8
|
%)
|
|
Net outflows
|
(1,520
|
)
|
(1,466
|
)
|
(4
|
%)
|
||
|
Change in market value and other
|
1,770
|
|
(279
|
)
|
NM
|
|
||
|
Account value, end of period
|
$
|
40,948
|
|
$
|
42,500
|
|
(4
|
%)
|
|
[1]
|
For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
|
|
[2]
|
Other account value included
$31.3 billion
,
$14.8 billion
, and
$41.1 billion
as of
March 31, 2017
for the Retirement Plans, Individual Life and Private Placement Life Insurance businesses, respectively. Other account value included
$31.9 billion
,
$14.5 billion
, and
40.4 billion
at
March 31, 2016
for the Retirement Plans, Individual Life and Private Placement Life Insurance businesses, respectively. Account values associated 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.
|
90
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Income (Loss)
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Net income
increased primarily due to lower net realized capital losses in 2017. Net realized capital losses were down due to a change from net losses to net gains on GMWB derivatives, net gains on sales of investments in first quarter 2017 and lower losses on the modified coinsurance reinsurance contract related to the individual life business reinsured with Prudential, partially offset by higher losses on the variable annuity macro hedge program. Apart from the lower net realized capital losses and a modest increase in unlock benefit, earnings rose due to lower interest credited, partially offset by lower net investment income, lower tax benefits recognized in the current year period and lower fee income due to the continued run off of the variable annuity block.
Net investment income decreased due to the
run off of the annuity business assets under management, partially offset by higher limited partnership investment income.
Total Account Value
March 31, 2017
compared to
March 31, 2016
Account value
decreased to approximately
$151 billion
due to net outflows in variable annuity account value, partially offset by market appreciation.
Variable annuity net outflows
were approximately
$1.5 billion
due to the continued run-off of the business.
Variable Annuity Annualized Full Surrender Rate
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Variable annuity annualized full surrender rate
increased to
7.8%
. This increase was primarily because as market appreciation has increased account values, contract holders are more likely to surrender since the GMDB and GMWB market level guarantees do not have as much value.
Contract Counts (in thousands)
March 31, 2017
compared to
March 31, 2016
Contract counts
decreased 9% for annuities, primarily due to the continued run-off of the block.
Income Taxes
The effective tax rates in
2017
and
2016
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
11
-
Income Taxes
of Notes to Condensed Consolidated Financial Statements.
91
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
CORPORATE
|
Results of Operations
Operating Summary
|
Three Months Ended March 31,
|
||||||||
|
Operating Summary
|
2017
|
2016
|
Change
|
|||||
|
Fee income [1]
|
$
|
1
|
|
$
|
1
|
|
—
|
%
|
|
Net investment income
|
4
|
|
11
|
|
(64
|
%)
|
||
|
Net realized capital gains (losses)
|
—
|
|
(4
|
)
|
100
|
%
|
||
|
Total revenues
|
5
|
|
8
|
|
(38
|
%)
|
||
|
Insurance operating costs and other expenses [1]
|
4
|
|
6
|
|
(33
|
%)
|
||
|
Interest expense
|
83
|
|
86
|
|
(3
|
%)
|
||
|
Total benefits, losses and expenses
|
87
|
|
92
|
|
(5
|
%)
|
||
|
Loss before income taxes
|
(82
|
)
|
(84
|
)
|
2
|
%
|
||
|
Income tax benefit
|
(36
|
)
|
(55
|
)
|
35
|
%
|
||
|
Net loss
|
$
|
(46
|
)
|
$
|
(29
|
)
|
(59
|
%)
|
|
[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.
|
Net Loss
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Net loss
for the
three months ended
March 31, 2017
increased from a net loss in the prior year period primarily due to a decrease in income tax benefits. First quarter 2016 included a federal income tax benefit of
$25
in the 2016 period related to the reduction of the deferred tax valuation allowance on capital loss carryovers and first quarter 2017 included a
$7
federal income tax benefit related to the vesting of stock-based compensation at a fair value per share higher than the grant date fair value per share.
Interest Expense
Three months ended
March 31, 2017
compared to the
three months ended
March 31, 2016
Interest expense
decreased primarily due to a decrease in outstanding debt due to debt maturities. Since
March 31, 2016
,
$691
of senior notes have matured. For a discussion of income taxes, see Note
11
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).
92
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
ENTERPRISE RISK MANAGEMENT
The Company’s Board of Directors has ultimate responsibility for risk oversight, as described more fully in our Proxy Statement, while management is tasked with the day-to-day management of the Company’s risks.
The Company manages and monitors risk through risk policies, controls and limits. At the senior management level, an Enterprise Risk and Capital Committee (“ERCC”) oversees the risk profile and risk management practices of the Company.
The Company's enterprise risk management ("ERM") function supports the ERCC and functional committees, and is tasked with, among other things:
|
•
|
risk identification and assessment;
|
|
•
|
the development of risk appetites, tolerances, and limits;
|
|
•
|
risk monitoring; and
|
|
•
|
internal and external risk reporting.
|
The Company categorizes its main risks as insurance risk, operational risk and financial risk. Insurance risk and financial risk are described in more detail below. Operational risk and s
pecific risk tolerances for natural catastrophes, terrorism risk and pandemic risk are described in the ERM section of the MD&A in The Hartford’s
2016
Form 10-K Annual Report.
Insurance Risk
The Company categorizes its insurance risks across property-
casualty, group benefits and life products. Non-catastrophe insurance risk arises from a number of exposure including to property, liability, mortality, morbidity, disability and longevity. Catastrophe risk primarily arises in the group life, group disability, property, and workers' compensation product lines. 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 uses reinsurance to transfer certain risks to reinsurance companies based on specific geographic or risk concentrations. A variety of traditional reinsurance products are used as part of the Company's risk management strategy, including excess of loss occurrence-based products that reinsure property and workers compensation exposures, and individual risk or quota share arrangements, that reinsure losses from specific classes or lines of business. The Company has no significant finite risk contracts in place and the statutory surplus benefit from all such prior year contracts is immaterial. Facultative reinsurance is used by the Company to manage policy-specific risk exposures based on established underwriting guidelines. The Hartford also participates in governmentally administered reinsurance facilities such as the Florida Hurricane Catastrophe Fund (“FHCF”), the Terrorism Risk Insurance Program established under “TRIPRA” and other reinsurance programs relating to particular risks or specific lines of business.
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.
Primary Catastrophe Treaty Reinsurance Coverages as of
March 31, 2017
|
Coverage
|
Effective for the period
|
% of layer(s) reinsurance
|
Per occurrence limit
|
Retention
|
|||||
|
Property losses arising from a single catastrophe event [1] [2]
|
1/1/2017 to 1/1/2018
|
88%
|
$
|
800
|
|
$
|
350
|
|
|
|
Property catastrophe losses from a Personal Lines Florida hurricane
|
6/1/2016 to 6/1/2017
|
90%
|
$
|
109
|
|
[3]
|
$
|
34
|
|
|
Workers compensation losses arising from a single catastrophe event [4]
|
1/1/2017 to 12/31/2017
|
80%
|
$
|
350
|
|
$
|
100
|
|
|
|
[1]
|
Certain aspects of our principal catastrophe treaty have terms that extend beyond the traditional one year term. While overall treaty is placed at 88%, each layer's placement varies slightly.
|
|
[2]
|
$50 of the property occurrence treaty can alternatively be used as part of the Property Aggregate treaty referenced below.
|
|
[3]
|
The per occurrence limit on the FHCF treaty is $109 for the 6/1/2016 to 6/1/2017 treaty year based on the Company's election to purchase the required coverage from the Florida Hurricane Catastrophe Fund ("FHCF"). Coverage is based on the best available information from FHCF, which was updated in January 2017.
|
|
[4]
|
In addition to the limit shown, the workers compensation reinsurance includes a non-catastrophe, industrial accident layer, providing coverage for 80% of a$30 per event limit in excess of 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, 2017 to December 31, 2017, the Company has a Property Aggregate treaty in place which provides one limit of
$200 of aggregate qualifying property catastrophe losses in excess of a net retention of $850.
Reinsurance for Terrorism-
For the risk of terrorism, private sector catastrophe reinsurance capacity is generally limited and largely unavailable for terrorism losses caused by nuclear, biological, chemical or radiological ("NBCR") attacks. As such, the Company's principal reinsurance protection against large-scale terrorist attacks is the coverage currently provided through the Terrorism Risk Insurance Program ("TRIPRA") to the end of 2020.
93
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
TRIPRA provides a backstop for insurance-related losses resulting from any “act of terrorism”, which is certified by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney General, for losses that exceed a threshold of industry losses of $100 in 2015, with the threshold increasing to $200 by 2020. Under the program, in any one calendar year, the federal government would pay a percentage of losses incurred from a certified act of terrorism after an insurer's losses exceed 20% of the Company's eligible direct commercial earned premiums of the prior calendar year up to a combined annual aggregate limit for the federal government and all insurers of $100 billion. The percentage of losses paid by the federal government is 83% in 2017, decreasing by 1 point
annually to 80% in the year 2020. The Company's estimated deductible under the program is $1.2 billion for 2017. If an act of terrorism or acts of terrorism result in covered losses exceeding the $100 billion annual industry aggregate limit, a future Congress would be responsible for determining how additional losses in excess of $100 billion will be paid.
Reinsurance Recoverables
Property and casualty insurance product reinsurance recoverables
represent loss and loss adjustment expense recoverables from a number of entities, including reinsurers and pools.
Property & Casualty Reinsurance Recoverables
|
As of March 31, 2017
|
As of December 31, 2016
|
|||||
|
Paid loss and loss adjustment expenses
|
$
|
85
|
|
$
|
89
|
|
|
Unpaid loss and loss adjustment expenses
|
2,445
|
|
2,449
|
|
||
|
Gross reinsurance recoverables [1]
|
$
|
2,530
|
|
$
|
2,538
|
|
|
Less: Allowance for uncollectible reinsurance
|
(187
|
)
|
(165
|
)
|
||
|
Net reinsurance recoverables
|
$
|
2,365
|
|
$
|
2,373
|
|
[1] As of March 31, 2017 and December 31, 2016, excludes reinsurance recoverables of $210 and $178, respectively, to be transferred to the buyer in connection with the pending sale of the Company's U.K. property and casualty run-off subsidiaries.
Group benefits and 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.
Group Benefits and Life Insurance Reinsurance Recoverables
|
Reinsurance Recoverables
|
As of March 31, 2017
|
As of December 31, 2016
|
||||
|
Future policy benefits and unpaid loss and loss adjustment expenses and other policyholder funds and benefits payable
|
$
|
21,040
|
|
$
|
20,938
|
|
|
Gross reinsurance recoverables
|
$
|
21,040
|
|
$
|
20,938
|
|
|
Less: Allowance for uncollectible reinsurance [1]
|
—
|
|
—
|
|
||
|
Net reinsurance recoverables
|
$
|
21,040
|
|
$
|
20,938
|
|
[1] No allowance for uncollectible reinsurance is required as of
March 31, 2017
and
December 31, 2016
.
As of March 31, 2017
, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $11.2 billion, respectively. As of December 31, 2016, the Company had reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $11.1 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
March 31, 2017
,
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 2016 Form 10-K Annual Report.
Financial Risk
Financial risks include direct and indirect risks to the Company's financial objectives coming from events that impact market
conditions or prices. Some events may cause correlated movement in multiple risk factors. The primary sources of financial risks are the Company's general account assets and the liabilities and the guarantees which the company has written over various liability products, particularly its fixed and variable annuity guarantees. Consistent with its risk appetite, the Company establishes financial risk limits to control potential loss on a U.S. GAAP, statutory, and economic basis. Exposures are actively monitored, and 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: hedging risk arising from interest rate, equity market, commodity market, credit spread and issuer default, price or currency exchange rate risk or volatility; managing liquidity; controlling transaction costs; or entering into synthetic replication transactions. Derivative activities are monitored and evaluated by the Company’s compliance and risk management teams and reviewed by senior management.
94
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company identifies different categories of financial risk, including liquidity, credit, interest rate, equity and foreign currency exchange.
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 funding obligations as they come due. Stressed market conditions may impact the ability to sell assets or otherwise transact business and may result in a significant loss in value.
The Company measures and manages liquidity risk exposures and funding needs within prescribed limits across legal entities, taking into account legal, regulatory and operational limitations to the transferability of liquidity. The Company also monitors internal and external conditions, and identifies material risk changes and emerging risks that may impact liquidity.
For further discussion on liquidity see the section on Capital Resources and Liquidity.
Credit Risk
Credit risk is 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 it is also present in the Company’s reinsurance and insurance portfolios, including credit risk associated with reinsurance recoverables and premiums receivable.
The Company primarily manages its credit risk by 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.
Mitigation strategies vary but may include:
|
•
|
Investing in a portfolio of high-quality and diverse securities;
|
|
•
|
Selling investments subject to credit risk;
|
|
•
|
Hedging through use of single name or basket credit default swaps;
|
|
•
|
Clearing transactions through central clearing houses that require daily variation margin;
|
|
•
|
Entering into contracts only with strong creditworthy institutions
|
|
•
|
Requiring collateral; and
|
|
•
|
Non-renewing policies/contracts or reinsurance treaties.
|
As of
March 31, 2017
, 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 the Concentration of Credit Risk section in Note
6
-
Investments
of Notes to Condensed Consolidated Financial Statements.
Credit Risk of Derivatives
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.
Downgrades to the credit ratings of the Company’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 over-the-counter ("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 also has derivative counterparty exposure policies which limit the Company’s exposure to credit risk.
For the company’s derivative programs, the maximum uncollateralized threshold for a derivative counterparty for a single legal entity is $
10
. The Company currently transacts OTC derivatives in five legal entities that have a threshold greater than zero. The maximum combined threshold for a single counterparty across all legal entities that use derivatives and have a threshold greater than zero is $
10
. In addition, the Company may have exposure to multiple counterparties in a single corporate family due to a common credit support provider. As of
March 31, 2017
, the maximum combined threshold for all counterparties under a single credit support provider across all legal entities that use derivatives and have a threshold greater than zero was $
10
. 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
12
Commitments and Contingencies
of Notes to Condensed Consolidated Financial Statements.
For the
three months ended March 31,
2017
, the Company incurred no losses on derivative instruments due to counterparty default.
Use of Credit Derivatives
The Company may also use credit default swaps to manage credit exposure or to assume credit risk to enhance yield.
Credit Risk Reduced Through Credit Derivatives
The Company uses credit derivatives to purchase credit protection 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.
Credit Risk Assumed Through Credit Derivatives
The Company also enters into credit default swaps that assume credit risk as part of replication transactions. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment
95
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
For further information on credit derivatives, see Note
7
-
Derivative Instruments
of Notes to Condensed Consolidated Financial Statements.
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 such as fixed rate annuities and structured settlements and discount rate assumptions associated with the Company’s pension and other post retirement benefit obligations. In addition, 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. Management also evaluates performance of certain Talcott Resolution products based on net investment spread which is, in part, influenced by changes in interest rates.
Changes in interest rates from current levels can have both favorable and unfavorable effects for the Company.
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 also utilizes a variety of derivative instruments to mitigate interest rate risk associated with its investment portfolio or to hedge liabilities. Interest rate caps, floors, swaps, swaptions, and futures may be used to manage portfolio duration.
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. The Company uses various approaches in managing its equity exposure, including limits on the proportion of assets invested in equities, diversification of the equity portfolio, reinsurance of product liabilities and hedging of changes in equity indices. Equity Risk on the Company’s variable annuity products is mitigated through various hedging programs which are primarily focused on mitigating the economic exposure while considering the potential impacts on statutory and GAAP accounting results. (See the Variable Annuity Hedging Program Section).
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 and the Company has a dynamic and macro hedging program in place to hedge the exposure.
For 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.
Managing Equity Risk on the Company's Variable Annuity Products-
Most of the Company’s variable annuities include GMDB and certain contracts with GMDB also 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 the 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
$40.9 billion
and
$40.7 billion
as of
March 31, 2017
and
December 31, 2016
, respectively.
The following tables summarize the account values of the Company’s variable annuities with guarantee features and the NAR split between various guarantee features (retained net amount at risk does not take into consideration the effects of the variable annuity hedge programs in place as of each balance sheet date).
|
Total Variable Annuity Guarantees as of March 31, 2017
|
|||||||||||||
|
($ 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]
|
||||||||
|
U.S. Variable Annuity [1]
|
|||||||||||||
|
GMDB [4]
|
$
|
40.9
|
|
$
|
3.1
|
|
$
|
0.6
|
|
17
|
%
|
22
|
%
|
|
GMWB
|
$
|
18.3
|
|
$
|
0.2
|
|
$
|
0.1
|
|
6
|
%
|
17
|
%
|
96
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Total Variable Annuity Guarantees as of December 31, 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]
|
||||||||
|
U.S. Variable Annuity [1]
|
|||||||||||||
|
GMDB [4]
|
$
|
40.7
|
|
$
|
3.3
|
|
$
|
0.7
|
|
28
|
%
|
14
|
%
|
|
GMWB
|
$
|
18.3
|
|
$
|
0.2
|
|
$
|
0.1
|
|
7
|
%
|
13
|
%
|
|
[1]
|
Contracts 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 contract terminates due to death, any NAR related to GMWB is released. Similarly, when a contract 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.
|
|
[4]
|
Includes contracts that had a GMDB at issue but no longer have a GMDB due to certain elections made by policyholders or their beneficiaries. Such contracts had $1.5 billion of account value as of both March 31, 2017 and December 31, 2016.
|
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 on that measurement date.
The Company expects to incur GMDB payments in the future only if the policyholder has an “in the money” GMDB at their death. For contracts 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. For additional information on the Company's GMDB liability, see Note
9
-
Reserve for Future Policy Benefits and Separate Account Liabilities
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.
|
Variable Annuity Hedging Program
The Company’s variable annuity hedging program 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 program also considers the potential impacts on statutory capital.
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 with NAR.
GMWB Hedge Program
Under the dynamic hedging 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 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
97
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 withdrawal 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 March 31, 2017 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 (before tax and DAC) as of March 31, 2017 [1]
|
||||||||||||||||||
|
GMWB
|
Macro
|
|||||||||||||||||
|
Equity Market Return
|
-20
|
%
|
-10
|
%
|
10
|
%
|
-20
|
%
|
-10
|
%
|
10
|
%
|
||||||
|
Potential Net Fair Value Impact
|
$
|
(4
|
)
|
$
|
—
|
|
$
|
(5
|
)
|
$
|
248
|
|
$
|
101
|
|
$
|
(66
|
)
|
|
Interest Rates
|
-50bps
|
|
-25bps
|
|
+25bps
|
|
-50bps
|
|
-25bps
|
|
+25bps
|
|
||||||
|
Potential Net Fair Value Impact
|
$
|
(3
|
)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
3
|
|
$
|
2
|
|
$
|
(1
|
)
|
|
Implied Volatilities
|
10
|
%
|
2
|
%
|
-10
|
%
|
10
|
%
|
2
|
%
|
-10
|
%
|
||||||
|
Potential Net Fair Value Impact
|
$
|
(67
|
)
|
$
|
(13
|
)
|
$
|
63
|
|
$
|
133
|
|
$
|
26
|
|
$
|
(119
|
)
|
|
[1]
|
These sensitivities are based on the following key market levels as of March 31, 2017: 1) S&P of
2,363
; 2) 10yr US swap rate of
2.43%
; and 3) S&P 10yr volatility of
25.39%
.
|
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.
|
Foreign Currency Exchange Risk
Foreign currency exchange risk is the risk of financial loss due to changes in the relative value between currencies.
The Company has foreign currency exchange risk primarily in non-U.S. dollar denominated fixed maturity investments, foreign denominated cash, a yen denominated fixed payout annuity and changes in equity of a P&C run-off entity in the United Kingdom. In addition, the Company’s Talcott Resolution segment formerly issued non-U.S. dollar denominated funding agreement liability contracts.
The open foreign currency exposure of non-U.S. dollar denominated investments will most commonly be reduced through the sale of the assets or through hedges using currency futures/forwards/swaps. In order to manage the currency risk related to any non-U.S. dollar denominated liability contracts, the Company enters into foreign currency swaps or holds non-U.S. dollar denominated investments.
Investment Portfolio Risk
The following table presents the Company’s fixed maturities, AFS, by credit quality. The credit ratings referenced throughout this section are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P, Fitch and Morningstar. If no rating is available from a rating agency, then an internally developed rating is used.
98
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Fixed Maturities by Credit Quality
|
||||||||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
||||||||||||||
|
|
Amortized Cost
|
Fair Value
|
Percent of Total Fair Value
|
Amortized Cost
|
Fair Value
|
Percent of Total Fair Value
|
||||||||||
|
United States Government/Government agencies
|
$
|
7,089
|
|
$
|
7,281
|
|
12.9
|
%
|
$
|
7,474
|
|
$
|
7,626
|
|
13.6
|
%
|
|
AAA
|
6,770
|
|
7,032
|
|
12.5
|
%
|
6,733
|
|
6,969
|
|
12.5
|
%
|
||||
|
AA
|
9,193
|
|
9,634
|
|
17.1
|
%
|
8,764
|
|
9,182
|
|
16.4
|
%
|
||||
|
A
|
14,078
|
|
14,936
|
|
26.5
|
%
|
14,169
|
|
14,996
|
|
26.8
|
%
|
||||
|
BBB
|
13,433
|
|
14,003
|
|
24.9
|
%
|
13,399
|
|
13,901
|
|
24.8
|
%
|
||||
|
BB & below
|
3,345
|
|
3,440
|
|
6.1
|
%
|
3,266
|
|
3,329
|
|
5.9
|
%
|
||||
|
Total fixed maturities, AFS
|
$
|
53,908
|
|
$
|
56,326
|
|
100
|
%
|
$
|
53,805
|
|
$
|
56,003
|
|
100
|
%
|
The fair value of securities increased, as compared to
December 31, 2016
, primarily due to higher valuations as a result of a decline in longer dated interest rates and tighter credit spreads across most sectors. 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.
99
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Securities by Type
|
||||||||||||||||||||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
||||||||||||||||||||||||||
|
|
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
|
||||||||||||||||||
|
Asset-backed securities ("ABS")
|
||||||||||||||||||||||||||||
|
Consumer loans
|
$
|
1,896
|
|
$
|
13
|
|
$
|
(20
|
)
|
$
|
1,889
|
|
3.4
|
%
|
$
|
2,057
|
|
$
|
10
|
|
$
|
(30
|
)
|
$
|
2,037
|
|
3.6
|
%
|
|
Small business
|
85
|
|
4
|
|
(1
|
)
|
88
|
|
0.2
|
%
|
86
|
|
3
|
|
(1
|
)
|
88
|
|
0.2
|
%
|
||||||||
|
Other
|
286
|
|
3
|
|
(1
|
)
|
288
|
|
0.5
|
%
|
253
|
|
4
|
|
—
|
|
257
|
|
0.5
|
%
|
||||||||
|
Collateralized debt obligations ("CDOs")
|
||||||||||||||||||||||||||||
|
Collateralized loan obligations ("CLOs")
|
1,988
|
|
7
|
|
(3
|
)
|
1,992
|
|
3.5
|
%
|
1,597
|
|
7
|
|
(4
|
)
|
1,600
|
|
2.9
|
%
|
||||||||
|
Commercial real estate ("CREs")
|
16
|
|
35
|
|
—
|
|
51
|
|
0.1
|
%
|
18
|
|
30
|
|
—
|
|
48
|
|
0.1
|
%
|
||||||||
|
Other [1]
|
239
|
|
29
|
|
—
|
|
268
|
|
0.5
|
%
|
238
|
|
30
|
|
—
|
|
268
|
|
0.5
|
%
|
||||||||
|
CMBS
|
||||||||||||||||||||||||||||
|
Agency backed [2]
|
1,639
|
|
27
|
|
(19
|
)
|
1,647
|
|
2.9
|
%
|
1,439
|
|
24
|
|
(20
|
)
|
1,443
|
|
2.6
|
%
|
||||||||
|
Bonds
|
2,647
|
|
60
|
|
(28
|
)
|
2,679
|
|
4.8
|
%
|
2,681
|
|
62
|
|
(33
|
)
|
2,710
|
|
4.7
|
%
|
||||||||
|
Interest only (“IOs”)
|
769
|
|
15
|
|
(11
|
)
|
773
|
|
1.4
|
%
|
787
|
|
11
|
|
(15
|
)
|
783
|
|
1.4
|
%
|
||||||||
|
Corporate
|
||||||||||||||||||||||||||||
|
Basic industry
|
1,090
|
|
68
|
|
(5
|
)
|
1,153
|
|
2.0
|
%
|
1,071
|
|
61
|
|
(9
|
)
|
1,123
|
|
2.0
|
%
|
||||||||
|
Capital goods
|
1,655
|
|
105
|
|
(13
|
)
|
1,747
|
|
3.1
|
%
|
1,522
|
|
110
|
|
(15
|
)
|
1,617
|
|
2.9
|
%
|
||||||||
|
Consumer cyclical
|
1,437
|
|
77
|
|
(6
|
)
|
1,508
|
|
2.7
|
%
|
1,517
|
|
78
|
|
(10
|
)
|
1,585
|
|
2.8
|
%
|
||||||||
|
Consumer non-cyclical
|
3,563
|
|
202
|
|
(36
|
)
|
3,729
|
|
6.5
|
%
|
3,792
|
|
206
|
|
(45
|
)
|
3,953
|
|
7.1
|
%
|
||||||||
|
Energy
|
2,140
|
|
151
|
|
(14
|
)
|
2,277
|
|
4.0
|
%
|
2,098
|
|
142
|
|
(17
|
)
|
2,223
|
|
4.0
|
%
|
||||||||
|
Financial services
|
4,740
|
|
278
|
|
(25
|
)
|
4,993
|
|
8.8
|
%
|
4,806
|
|
262
|
|
(32
|
)
|
5,036
|
|
9.0
|
%
|
||||||||
|
Tech./comm.
|
3,512
|
|
274
|
|
(17
|
)
|
3,769
|
|
6.7
|
%
|
3,385
|
|
265
|
|
(20
|
)
|
3,630
|
|
6.5
|
%
|
||||||||
|
Transportation
|
905
|
|
49
|
|
(6
|
)
|
948
|
|
1.7
|
%
|
896
|
|
46
|
|
(7
|
)
|
935
|
|
1.7
|
%
|
||||||||
|
Utilities
|
5,018
|
|
330
|
|
(64
|
)
|
5,284
|
|
9.4
|
%
|
5,024
|
|
326
|
|
(65
|
)
|
5,285
|
|
9.3
|
%
|
||||||||
|
Other
|
311
|
|
14
|
|
(3
|
)
|
322
|
|
0.6
|
%
|
269
|
|
14
|
|
(4
|
)
|
279
|
|
0.5
|
%
|
||||||||
|
Foreign govt./govt. agencies
|
1,151
|
|
48
|
|
(12
|
)
|
1,187
|
|
2.1
|
%
|
1,164
|
|
33
|
|
(26
|
)
|
1,171
|
|
2.1
|
%
|
||||||||
|
Municipal bonds
|
||||||||||||||||||||||||||||
|
Taxable
|
1,459
|
|
111
|
|
(18
|
)
|
1,552
|
|
2.8
|
%
|
1,497
|
|
116
|
|
(20
|
)
|
1,593
|
|
2.8
|
%
|
||||||||
|
Tax-exempt
|
9,617
|
|
648
|
|
(37
|
)
|
10,228
|
|
18.2
|
%
|
9,328
|
|
616
|
|
(51
|
)
|
9,893
|
|
17.7
|
%
|
||||||||
|
RMBS
|
||||||||||||||||||||||||||||
|
Agency
|
1,571
|
|
37
|
|
(7
|
)
|
1,601
|
|
2.8
|
%
|
2,493
|
|
39
|
|
(28
|
)
|
2,504
|
|
4.5
|
%
|
||||||||
|
Non-agency
|
154
|
|
2
|
|
(1
|
)
|
155
|
|
0.3
|
%
|
178
|
|
3
|
|
(1
|
)
|
180
|
|
0.3
|
%
|
||||||||
|
Alt-A
|
122
|
|
4
|
|
—
|
|
126
|
|
0.2
|
%
|
117
|
|
2
|
|
—
|
|
119
|
|
0.2
|
%
|
||||||||
|
Sub-prime
|
2,019
|
|
26
|
|
(6
|
)
|
2,039
|
|
3.6
|
%
|
1,950
|
|
22
|
|
(8
|
)
|
1,964
|
|
3.5
|
%
|
||||||||
|
U.S. Treasuries
|
3,879
|
|
189
|
|
(35
|
)
|
4,033
|
|
7.2
|
%
|
3,542
|
|
182
|
|
(45
|
)
|
3,679
|
|
6.6
|
%
|
||||||||
|
Fixed maturities, AFS
|
53,908
|
|
2,806
|
|
(388
|
)
|
56,326
|
|
100
|
%
|
53,805
|
|
2,704
|
|
(506
|
)
|
56,003
|
|
100
|
%
|
||||||||
|
Equity securities
|
||||||||||||||||||||||||||||
|
Financial services
|
177
|
|
20
|
|
—
|
|
197
|
|
17.9
|
%
|
203
|
|
15
|
|
(1
|
)
|
217
|
|
19.8
|
%
|
||||||||
|
Other
|
834
|
|
87
|
|
(18
|
)
|
903
|
|
82.1
|
%
|
817
|
|
81
|
|
(18
|
)
|
880
|
|
80.2
|
%
|
||||||||
|
Equity securities, AFS
|
1,011
|
|
107
|
|
(18
|
)
|
1,100
|
|
100
|
%
|
1,020
|
|
96
|
|
(19
|
)
|
1,097
|
|
100
|
%
|
||||||||
|
Total AFS securities
|
$
|
54,919
|
|
$
|
2,913
|
|
$
|
(406
|
)
|
$
|
57,426
|
|
$
|
54,825
|
|
$
|
2,800
|
|
$
|
(525
|
)
|
$
|
57,100
|
|
||||
|
Fixed maturities, FVO
|
$
|
160
|
|
$
|
293
|
|
||||||||||||||||||||||
|
Equity, FVO [3]
|
$
|
123
|
|
$
|
—
|
|
||||||||||||||||||||||
|
[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
December 31, 2016
.
|
100
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The fair value of AFS securities increased as compared to
December 31, 2016
due to higher valuations as a result of a decrease in long-term interest rates and tighter credit spreads across most sectors. The Company also reduced its allocation to agency RMBS and reinvested proceeds into CLOs and tax-exempt municipal bonds.
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.
|
Financial Services by Credit Quality
|
|||||||||||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
|||||||||||||||||
|
|
Amortized Cost
|
Fair Value
|
Net Unrealized Gain/(Loss)
|
Amortized Cost
|
Fair Value
|
Net Unrealized Gain/(Loss)
|
|||||||||||||
|
AAA
|
$
|
33
|
|
$
|
35
|
|
$
|
2
|
|
$
|
13
|
|
$
|
15
|
|
$
|
2
|
|
|
|
AA
|
526
|
|
548
|
|
22
|
|
583
|
|
602
|
|
19
|
|
|||||||
|
A
|
2,204
|
|
2,346
|
|
142
|
|
2,219
|
|
2,354
|
|
135
|
|
|||||||
|
BBB
|
1,885
|
|
1,966
|
|
81
|
|
1,856
|
|
1,934
|
|
78
|
|
|||||||
|
BB & below
|
269
|
|
295
|
|
26
|
|
338
|
|
348
|
|
10
|
|
|||||||
|
Total [1]
|
$
|
4,917
|
|
$
|
5,190
|
|
$
|
273
|
|
$
|
5,009
|
|
$
|
5,253
|
|
$
|
244
|
|
|
[1]Includes equity, AFS securities with an amortized cost and fair value of
$177
and
$197
, respectively as of
March 31, 2017
and an amortized cost and fair value of
$203
and
$217
, respectively, as of
December 31, 2016
included in the Securities by Type table above.
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.
|
Exposure to CMBS Bonds as of March 31, 2017
|
||||||||||||||||||||||||||||||||||||
|
|
AAA
|
AA
|
A
|
BBB
|
BB and Below
|
Total
|
||||||||||||||||||||||||||||||
|
Vintage Year [1]
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
||||||||||||||||||||||||
|
2008 & Prior
|
$
|
180
|
|
$
|
193
|
|
$
|
133
|
|
$
|
138
|
|
$
|
62
|
|
$
|
62
|
|
$
|
9
|
|
$
|
9
|
|
$
|
22
|
|
$
|
22
|
|
$
|
406
|
|
$
|
424
|
|
|
2009
|
—
|
|
—
|
|
11
|
|
11
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
11
|
|
11
|
|
||||||||||||
|
2010
|
18
|
|
19
|
|
8
|
|
8
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
26
|
|
27
|
|
||||||||||||
|
2011
|
55
|
|
59
|
|
—
|
|
—
|
|
15
|
|
15
|
|
—
|
|
—
|
|
—
|
|
—
|
|
70
|
|
74
|
|
||||||||||||
|
2012
|
39
|
|
40
|
|
6
|
|
6
|
|
21
|
|
21
|
|
19
|
|
18
|
|
—
|
|
—
|
|
85
|
|
85
|
|
||||||||||||
|
2013
|
16
|
|
16
|
|
95
|
|
98
|
|
102
|
|
106
|
|
4
|
|
4
|
|
—
|
|
—
|
|
217
|
|
224
|
|
||||||||||||
|
2014
|
301
|
|
308
|
|
63
|
|
65
|
|
72
|
|
70
|
|
5
|
|
5
|
|
8
|
|
8
|
|
449
|
|
456
|
|
||||||||||||
|
2015
|
165
|
|
165
|
|
200
|
|
198
|
|
208
|
|
208
|
|
109
|
|
110
|
|
11
|
|
10
|
|
693
|
|
691
|
|
||||||||||||
|
2016
|
133
|
|
131
|
|
252
|
|
246
|
|
121
|
|
123
|
|
79
|
|
81
|
|
—
|
|
—
|
|
585
|
|
581
|
|
||||||||||||
|
2017
|
—
|
|
—
|
|
84
|
|
84
|
|
—
|
|
—
|
|
21
|
|
22
|
|
—
|
|
—
|
|
105
|
|
106
|
|
||||||||||||
|
Total
|
$
|
907
|
|
$
|
931
|
|
$
|
852
|
|
$
|
854
|
|
$
|
601
|
|
$
|
605
|
|
$
|
246
|
|
$
|
249
|
|
$
|
41
|
|
$
|
40
|
|
$
|
2,647
|
|
$
|
2,679
|
|
|
Credit protection
|
31.8%
|
24.2%
|
16.9%
|
13.2%
|
21.7%
|
24.1%
|
||||||||||||||||||||||||||||||
101
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Exposure to CMBS Bonds as of December 31, 2016
|
||||||||||||||||||||||||||||||||||||
|
|
AAA
|
AA
|
A
|
BBB
|
BB and Below
|
Total
|
||||||||||||||||||||||||||||||
|
Vintage Year [1]
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
Amortized Cost
|
Fair Value
|
||||||||||||||||||||||||
|
2008 & Prior
|
$
|
278
|
|
$
|
294
|
|
$
|
137
|
|
$
|
143
|
|
$
|
102
|
|
$
|
102
|
|
$
|
14
|
|
$
|
14
|
|
$
|
22
|
|
$
|
22
|
|
$
|
553
|
|
$
|
575
|
|
|
2009
|
11
|
|
11
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
11
|
|
11
|
|
||||||||||||
|
2010
|
18
|
|
19
|
|
8
|
|
8
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
26
|
|
27
|
|
||||||||||||
|
2011
|
55
|
|
59
|
|
—
|
|
—
|
|
13
|
|
13
|
|
2
|
|
2
|
|
—
|
|
—
|
|
70
|
|
74
|
|
||||||||||||
|
2012
|
40
|
|
41
|
|
6
|
|
6
|
|
30
|
|
30
|
|
20
|
|
18
|
|
—
|
|
—
|
|
96
|
|
95
|
|
||||||||||||
|
2013
|
16
|
|
17
|
|
95
|
|
99
|
|
110
|
|
113
|
|
4
|
|
4
|
|
—
|
|
—
|
|
225
|
|
233
|
|
||||||||||||
|
2014
|
301
|
|
309
|
|
64
|
|
65
|
|
72
|
|
70
|
|
1
|
|
1
|
|
—
|
|
—
|
|
438
|
|
445
|
|
||||||||||||
|
2015
|
210
|
|
210
|
|
200
|
|
198
|
|
207
|
|
206
|
|
87
|
|
87
|
|
—
|
|
—
|
|
704
|
|
701
|
|
||||||||||||
|
2016
|
132
|
|
130
|
|
249
|
|
242
|
|
113
|
|
113
|
|
64
|
|
64
|
|
—
|
|
—
|
|
558
|
|
549
|
|
||||||||||||
|
Total
|
$
|
1,061
|
|
$
|
1,090
|
|
$
|
759
|
|
$
|
761
|
|
$
|
647
|
|
$
|
647
|
|
$
|
192
|
|
$
|
190
|
|
$
|
22
|
|
$
|
22
|
|
$
|
2,681
|
|
$
|
2,710
|
|
|
Credit
protection |
33.3%
|
22.4%
|
18.0%
|
16.2%
|
32.5%
|
25.3%
|
||||||||||||||||||||||||||||||
|
[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
$16
and
$51
, respectively, as of
March 31, 2017
, and
$18
and
$48
respectively, as of
December 31, 2016
. These securities are comprised of 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 where 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.
|
Commercial Mortgage Loans
|
|||||||||||||||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
|||||||||||||||||||||
|
|
Amortized Cost [1]
|
Valuation Allowance
|
Carrying Value
|
Amortized Cost [1]
|
Valuation Allowance
|
Carrying Value
|
|||||||||||||||||
|
Whole loans
|
$
|
5,568
|
|
$
|
(19
|
)
|
$
|
5,549
|
|
$
|
5,580
|
|
$
|
(19
|
)
|
$
|
5,561
|
|
|||||
|
A-Note participations
|
136
|
|
—
|
|
136
|
|
136
|
|
—
|
|
136
|
|
|||||||||||
|
Total
|
$
|
5,704
|
|
$
|
(19
|
)
|
$
|
5,685
|
|
$
|
5,716
|
|
$
|
(19
|
)
|
$
|
5,697
|
|
|||||
[1] Amortized cost represents carrying value prior to valuation allowances, if any.
The Company funded $
151
of commercial whole loans with a weighted average loan-to-value (“LTV”) ratio of
62%
and a weighted average yield of
4.02%
during the
three months ended
March 31, 2017
. 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
March 31, 2017
, or
December 31, 2016
.
Municipal Bonds
The following table presents the Company's exposure to municipal bonds by type and weighted average credit quality included in the preceding Securities by Type table.
102
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Available For Sale Investments in Municipal Bonds
|
|||||||||||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
|||||||||||||||||
|
|
Amortized Cost
|
Fair Value
|
Weighted Average Credit Quality
|
Amortized Cost
|
Fair Value
|
Weighted Average Credit Quality
|
|||||||||||||
|
General Obligation
|
$
|
1,793
|
|
$
|
1,900
|
|
AA
|
$
|
1,809
|
|
$
|
1,907
|
|
AA
|
|||||
|
Pre-refunded [1]
|
1,650
|
|
1,765
|
|
AAA
|
1,590
|
|
1,693
|
|
AAA
|
|||||||||
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Transportation
|
1,626
|
|
1,759
|
|
A+
|
1,591
|
|
1,724
|
|
A+
|
|||||||||
|
Health Care
|
1,131
|
|
1,199
|
|
AA-
|
1,216
|
|
1,285
|
|
AA-
|
|||||||||
|
Water & Sewer
|
1,058
|
|
1,115
|
|
AA
|
1,019
|
|
1,066
|
|
AA
|
|||||||||
|
Education
|
1,050
|
|
1,086
|
|
AA
|
988
|
|
1,023
|
|
AA
|
|||||||||
|
Sales Tax
|
579
|
|
632
|
|
AA
|
574
|
|
627
|
|
AA
|
|||||||||
|
Leasing [2]
|
786
|
|
847
|
|
AA-
|
681
|
|
734
|
|
AA-
|
|||||||||
|
Power
|
528
|
|
558
|
|
A+
|
571
|
|
605
|
|
A+
|
|||||||||
|
Housing
|
113
|
|
120
|
|
A+
|
136
|
|
140
|
|
A
|
|||||||||
|
Other
|
762
|
|
799
|
|
AA-
|
650
|
|
682
|
|
AA-
|
|||||||||
|
Total Revenue
|
7,633
|
|
8,115
|
|
AA-
|
7,426
|
|
7,886
|
|
AA-
|
|||||||||
|
Total Municipal
|
$
|
11,076
|
|
$
|
11,780
|
|
AA
|
$
|
10,825
|
|
$
|
11,486
|
|
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
March 31, 2017
and
December 31, 2016
, 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 primarily 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. 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.
|
Investments in Limited Partnerships and Other Alternative Investments
|
|||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
|||||||||
|
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||
|
Hedge funds
|
$
|
152
|
|
6.3
|
%
|
$
|
155
|
|
6.3
|
%
|
|
|
Real estate funds
|
600
|
|
24.8
|
%
|
629
|
|
25.6
|
%
|
|||
|
Private equity and other funds
|
1,280
|
|
52.9
|
%
|
1,291
|
|
52.6
|
%
|
|||
|
Other alternative investments [1]
|
386
|
|
16.0
|
%
|
381
|
|
15.5
|
%
|
|||
|
Total
|
$
|
2,418
|
|
100
|
%
|
$
|
2,456
|
|
100
|
%
|
|
Available-for-sale Securities — Unrealized Loss Aging
The total gross unrealized losses were $
406
as of
March 31, 2017
and have decreased $
119
, or
23%
, from
December 31, 2016
, primarily due to a decline in longer term interest rates and tighter credit spreads across most sectors. As of
March 31, 2017
, $
385
of the gross unrealized losses were associated with securities depressed less than 20% of cost or amortized cost. The remaining
$
21
of gross unrealized losses were associated with securities depressed greater than 20%. The securities depressed more than 20% are primarily securities with exposure to commercial real estate and municipal securities which are depressed primarily due to higher rates since the securities were purchased, as well as equity securities depressed due to issuer specific deterioration.
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
103
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
|
Unrealized Loss Aging for AFS Securities
|
|||||||||||||||||||||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
|||||||||||||||||||||||||||
|
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
|
1,120
|
|
$
|
4,529
|
|
$
|
4,495
|
|
$
|
(34
|
)
|
2,119
|
|
$
|
11,299
|
|
$
|
11,037
|
|
$
|
(262
|
)
|
|||||||
|
Greater than three to six months
|
1,091
|
|
6,177
|
|
6,010
|
|
(167
|
)
|
1,109
|
|
2,039
|
|
1,934
|
|
(105
|
)
|
|||||||||||||
|
Greater than six to nine months
|
580
|
|
1,525
|
|
1,443
|
|
(82
|
)
|
151
|
|
484
|
|
456
|
|
(28
|
)
|
|||||||||||||
|
Greater than nine to eleven months
|
119
|
|
433
|
|
408
|
|
(25
|
)
|
151
|
|
452
|
|
441
|
|
(11
|
)
|
|||||||||||||
|
Twelve months or more
|
618
|
|
2,288
|
|
2,190
|
|
(98
|
)
|
657
|
|
2,565
|
|
2,446
|
|
(119
|
)
|
|||||||||||||
|
Total
|
3,528
|
|
$
|
14,952
|
|
$
|
14,546
|
|
$
|
(406
|
)
|
4,187
|
|
$
|
16,839
|
|
$
|
16,314
|
|
$
|
(525
|
)
|
|||||||
|
[1]
|
Unrealized losses exclude the fair value of bifurcated embedded derivative features of certain securities as changes in value are recorded in net realized capital gains (losses).
|
|
Unrealized Loss Aging for AFS Securities Continuously Depressed Over 20%
|
|||||||||||||||||||||||||||||
|
|
March 31, 2017
|
December 31, 2016
|
|||||||||||||||||||||||||||
|
Consecutive Months
|
Items
|
Cost or Amortized Cost
|
Fair Value
|
Unrealized Loss
|
Items
|
Cost or Amortized Cost
|
Fair Value
|
Unrealized Loss [1]
|
|||||||||||||||||||||
|
Three months or less
|
80
|
|
$
|
21
|
|
$
|
15
|
|
$
|
(6
|
)
|
83
|
|
$
|
24
|
|
$
|
18
|
|
$
|
(6
|
)
|
|||||||
|
Greater than three to six months
|
33
|
|
15
|
|
11
|
|
(4
|
)
|
38
|
|
13
|
|
9
|
|
(4
|
)
|
|||||||||||||
|
Greater than six to nine months
|
23
|
|
9
|
|
6
|
|
(3
|
)
|
21
|
|
14
|
|
10
|
|
(4
|
)
|
|||||||||||||
|
Greater than nine to eleven months
|
16
|
|
8
|
|
6
|
|
(2
|
)
|
11
|
|
1
|
|
—
|
|
(1
|
)
|
|||||||||||||
|
Twelve months or more
|
57
|
|
16
|
|
10
|
|
(6
|
)
|
56
|
|
19
|
|
11
|
|
(8
|
)
|
|||||||||||||
|
Total
|
209
|
|
$
|
69
|
|
$
|
48
|
|
$
|
(21
|
)
|
209
|
|
$
|
71
|
|
$
|
48
|
|
$
|
(23
|
)
|
|||||||
|
[1]
|
Unrealized losses exclude the fair value of bifurcated embedded derivative features of certain securities as changes in value are recorded in net realized capital gains (losses).
|
|
Other-than-temporary Impairments Recognized in Earnings by Security Type
|
||||||
|
For the three months ended March 31,
|
||||||
|
|
2017
|
2016
|
||||
|
CMBS
|
$
|
1
|
|
$
|
1
|
|
|
Corporate
|
—
|
|
19
|
|
||
|
Equity
|
—
|
|
3
|
|
||
|
Total
|
$
|
1
|
|
$
|
23
|
|
Three months ended
March 31, 2017
For the three months ended
March 31, 2017
, impairments recognized in earnings were comprised of credit impairments of $
1
. These impairments were primarily related to interest-only CMBS and were identified through security specific review of the expected future cash flows. 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.
Non-credit impairments recognized in other comprehensive income were $
2
for the three months ended
March 31, 2017
.
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 months ended
March 31, 2016
For the
three months ended
March 31, 2016
, impairments recognized in earnings were comprised of credit impairments of $
18
and intent-to-sell impairments of
$2
, both of which were primarily concentrated in corporate securities. Also, impairments recognized in earnings included impairments on equity securities of $
3
that were in an unrealized loss position and the Company no longer believed the securities would recover in the foreseeable future.
104
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
SUMMARY OF CAPITAL RESOURCES AND LIQUIDITY
Capital available at the holding company as of
March 31, 2017
:
|
•
|
$1.3 billion
in fixed maturities, short-term investments and cash at HFSG Holding Company
|
|
•
|
Borrowings available under a commercial paper program to a maximum of
$1 billion
. As of
March 31, 2017
there was
no
commercial paper outstanding
|
|
•
|
A senior unsecured five-year revolving credit facility that provides for borrowing capacity up to
$1 billion
of unsecured credit through October 31, 2019.
No
borrowings were outstanding as of
March 31, 2017
|
Expected liquidity requirements for the next twelve months as of
March 31, 2017
:
|
•
|
$320
maturing debt payment due in March of 2018
|
|
•
|
$320
of interest on debt
|
|
•
|
$335
of common stockholders dividends, subject to the discretion of the Board of Directors
|
Equity repurchase program:
|
•
|
Authorization for equity repurchases of up to
$1.3 billion
for the period October 31, 2016 through December 31, 2017
|
|
•
|
$975
remaining as of
March 31, 2017
|
2017 subsidiary dividend capacity:
|
•
|
Dividend capacity of
$1.5 billion
for property and casualty subsidiaries with $850 net dividends expected in 2017. During the first three months of 2017, property and casualty subsidiaries paid
$220
in dividends to the holding company including $20 related to an intercompany note.
|
|
•
|
Dividend capacity of
$207
for Hartford Life and Accident Insurance Company ("HLA") with $250 of dividends expected in 2017, subject to regulatory approval. During the first three months of 2017, HLA paid
$63
in dividends to the holding company.
|
|
•
|
Dividend capacity of
$1 billion
for Hartford Life Insurance Company. On January 30, 2017, Hartford Life Insurance Company ("HLIC") paid a dividend of
$300
.
|
|
•
|
Over the remainder of 2017, HSFG Holding Company anticipates receiving additional net dividends of approximately
$650
from its property-casualty insurance subsidiaries,
$300
from HLIC, and
$187
from HLA, subject to regulatory approval.
|
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
March 31, 2017
, HFSG Holding Company held fixed maturities, short-term investments and cash of
$1.3 billion
. Expected liquidity requirements of the HFSG Holding Company for the next twelve months include payments of
6.3%
senior notes of
$320
at maturity in March 2018 and 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
March 31, 2017
, there were no amounts outstanding from the HFSG Holding Company.
105
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Debt
On
March 15, 2017
, the Company repaid its
$416
,
5.375%
senior notes at maturity.
On February 15, 2017, pursuant to the put option agreement with the Glen Meadow ABC Trust, the Company issued $500 junior subordinated notes with a scheduled maturity of February 12, 2047, and a final maturity of February 12, 2067. The junior subordinated notes bear interest at an annual rate of three-month LIBOR plus 2.125%, payable quarterly. The Hartford will have the right, on one or more occasions, to defer interest payments due on the junior subordinated notes under specified circumstances.
The Company expects to use the proceeds of the junior subordinated notes to fund the call of $500 in 8.125% junior subordinated debentures that are due 2068 and that are first callable in June 2018. As such, the proceeds of the $500 of junior subordinated notes issued under the contingent capital facility will be held at the holding company until June of 2018, resulting in an increase in debt to capital ratios during that time.
Upon receipt of the proceeds, the Company entered into a replacement capital covenant (the "RCC"). Under the terms of the RCC, if the Company redeems the notes at any time prior to February 12, 2047 (or such earlier date on which the RCC terminates by its terms) it can only do so with the proceeds from the sale of certain qualifying replacement securities. The RCC also prohibits the Company from redeeming all or any portion of the notes on or prior to February 15, 2022.
In April, 2017, the Company entered into an interest rate swap agreement expiring February 15, 2027 to effectively convert the variable interest payments into fixed interest payments of approximately 4.39%.
Intercompany Liquidity Agreements
On January 5, 2017, Hartford Fire Insurance Company, a subsidiary of the Company, issued a Revolving Note (the "Note") in the principal amount of
$230
to Hartford Accident and Indemnity Company, an indirect wholly-owned subsidiary of the Company, under the intercompany liquidity agreement. The note was issued to fund the liquidity needs associated with the $650 ceded premium paid in January 2017 for the adverse development cover with NICO. The Note was repaid on March 29, 2017. The company has
$2.0 billion
available under the intercompany liquidity agreement as of March 31, 2017.
Equity
The Company's authorization for equity repurchases is
$1.3 billion
for the period October 31, 2016 through December 31, 2017 with
$975
remaining as of
March 31, 2017
.
During the
three months ended
March 31, 2017
, the Company repurchased
6.7 million
common shares for
$325
. During the period
April 1, 2017 through April 25, 2017
, the Company repurchased approximately
1.9 million
common shares for
$92
under this authorization.
For further information about equity repurchases, see Part II. Other Information, Item 2.
Dividends
On February 23, 2017, The Hartford’s Board of Directors declared a quarterly dividend of $0.23 per common share payable on April 3, 2017 to common shareholders of record as of March 6, 2017.
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, 2016
.
Pension Plans and Other Postretirement Benefits
The Company does not have a 2017 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 has not determined whether, and to what extent, contributions may be made to the U.S. qualified defined benefit pension plan in 2017. The Company will monitor the funded status of the U.S. qualified defined benefit pension plan during 2017 to make this determination.
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 2017, The Company’s property and casualty insurance subsidiaries are permitted to pay up to a maximum of
106
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
approximately
$1.5 billion
in dividends to HFSG Holding Company without prior approval from the applicable insurance commissioner. During the first three months of 2017, HFSG Holding Company received approximately
$220
in dividends from its property and casualty insurance subsidiaries. Dividends received from its property-casualty subsidiaries included approximately $20 related to principal and interest payments on an intercompany note between Hartford Holdings, Inc. ("HHI") and Hartford Fire Insurance Company, resulting in a net dividend of $200.
In 2017, Hartford Life and Accident Insurance Company ("HLA") is permitted to pay up to a maximum of
$207
in dividends without prior approval from the insurance commissioner. During the first three months of 2017, HFSG Holding Company received approximately
$63
in dividends from HLA.
In 2017, Hartford Life Insurance Company ("HLIC") is permitted to pay up to a maximum of
$1 billion
in dividends to HFSG Holding Company without prior approval from the insurance commissioner. However, to meet the liquidity needed to pay dividends up to the HFSG Holding Company, HLIC may require receiving regulatory approval for extraordinary dividends from HLIC's wholly-owned subsidiary, Hartford Life and Annuity Insurance Company. During the first three months of 2017, HLIC paid dividends of
$300
.
Over the remainder of 2017, HSFG Holding Company anticipates receiving additional net dividends of approximately
$650
from its property-casualty insurance subsidiaries,
$300
from HLIC, and
$187
from HLA, subject to regulatory approval.
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
The Hartford filed an automatic shelf registration statement with the Securities and Exchange Commission ("the SEC") on July 29, 2016 that permits it to offer and sell debt and equity securities during the three-year life of the registration statement.
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
March 31, 2017
, 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
March 31, 2017
, no borrowings were outstanding under the Credit Facility. As of
March 31, 2017
, 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
March 31, 2017
was
$826
. For this
$826
, the legal entities have posted collateral of
$866
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
March 31, 2017
, a downgrade of one level below the current financial strength ratings by either Moody’s or S&P would not require additional assets to be posted as collateral. Based on derivative market values as of
March 31, 2017
, a downgrade of two levels below the current financial strength ratings by either Moody's or S&P would require additional $10 of 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
March 31, 2017
, the aggregate notional amount and fair value of derivative relationships that could be subject to immediate termination in the event of a downgrade of one level below the current financial strength ratings was
$1.1 billion
and
$21
, respectively. These 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.
Insurance Operations
While subject to variability period to period, claim frequency and severity patterns and the level of policy surrenders 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. 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
107
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Capital Resources and Liquidity section of the MD&A included in The Hartford’s
2016
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, to pay 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”).
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
|
|||
|
As of March 31, 2017
|
|||
|
Fixed maturities
|
$
|
24,804
|
|
|
Short-term investments
|
1,606
|
|
|
|
Cash
|
84
|
|
|
|
Less: Derivative collateral
|
101
|
|
|
|
Total
|
$
|
26,393
|
|
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 capital gains (losses).
Life Operations
Life Operations’ total general account contractholder obligations are supported by
$40 billion
of cash and total general account invested assets, which included the following significant short-term investment position to meet liquidity needs.
|
Life Operations
|
|||
|
As of March 31, 2017
|
|||
|
Fixed maturities
|
$
|
31,153
|
|
|
Short-term investments
|
2,236
|
|
|
|
Cash
|
253
|
|
|
|
Less: Derivative collateral
|
1,148
|
|
|
|
Total
|
$
|
32,494
|
|
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 is dependent on the asset types pledged to secure the advances. The CTDOI will permit HLIC to pledge up to
$1.1 billion
in qualifying assets to secure FHLBB advances for
2017
. 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
March 31, 2017
, HLIC had no advances outstanding under the FHLBB facility.
|
Contractholder Obligations
|
|||
|
As of March 31, 2017
|
|||
|
Total Life contractholder obligations
|
$
|
167,246
|
|
|
Less: Separate account assets [1]
|
116,582
|
|
|
|
General account contractholder obligations
|
$
|
50,664
|
|
|
Composition of General Account Contractholder Obligations
|
|||
|
Contracts without a surrender provision and/or fixed payout dates [2]
|
$
|
24,629
|
|
|
U.S. Fixed MVA annuities [3]
|
5,037
|
|
|
|
Other [4]
|
20,998
|
|
|
|
General account contractholder obligations
|
$
|
50,664
|
|
|
[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, institutional notes, term life, group benefit contracts, or death and living benefit reserves, which cannot be surrendered for cash.
|
|
[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 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.
|
108
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of 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 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
2016
Form 10-K Annual Report.
Capitalization
|
Capital Structure
|
||||||||
|
March 31, 2017
|
December 31, 2016
|
Change
|
||||||
|
Short-term debt (includes current maturities of long-term debt)
|
$
|
320
|
|
$
|
416
|
|
(23
|
)%
|
|
Long-term debt
|
4,817
|
|
4,636
|
|
4
|
%
|
||
|
Total debt [1]
|
5,137
|
|
5,052
|
|
2
|
%
|
||
|
Stockholders’ equity excluding accumulated other comprehensive income (loss), net of tax (“AOCI”)
|
17,216
|
|
17,240
|
|
—
|
%
|
||
|
AOCI, net of tax
|
(207
|
)
|
(337
|
)
|
(39
|
)%
|
||
|
Total stockholders’ equity
|
$
|
17,009
|
|
$
|
16,903
|
|
1
|
%
|
|
Total capitalization including AOCI
|
$
|
22,146
|
|
$
|
21,955
|
|
1
|
%
|
|
Debt to stockholders’ equity
|
30
|
%
|
30
|
%
|
||||
|
Debt to capitalization
|
23
|
%
|
23
|
%
|
||||
|
[1]
|
Total debt of the Company excludes
$14
and
$20
of consumer notes as of
March 31, 2017
and
December 31, 2016
, respectively.
|
Total capitalization increased
$191
, or
1%
, as of
March 31, 2017
compared to
December 31, 2016
primarily due to increases in AOCI.
For additional information on AOCI, net of tax, and unrealized capital gains from securities, see Note
14
-
Changes In and
Reclassifications From Accumulated Other Comprehensive Income
, and Note
6
-
Investments
of Notes to Condensed Consolidated Financial Statements.
Cash Flow
|
Three Months Ended March 31,
|
||||||
|
2017
|
2016
|
|||||
|
Net cash provided by operating activities
|
$
|
225
|
|
$
|
398
|
|
|
Net cash provided (used) by investing activities
|
$
|
(1,208
|
)
|
$
|
194
|
|
|
Net cash provided (used) for financing activities
|
$
|
436
|
|
$
|
(565
|
)
|
|
Cash – end of period
|
$
|
337
|
|
$
|
479
|
|
Cash provided by operating activities
decreased in
2017
as compared to the prior year period primarily due to a
$650
premium payment for an asbestos and environmental adverse development cover reinsurance agreement, largely offset by an increase in securities lending payables.
Cash used by investing activities
in
2017
primarily relates to net payments for short-term investments of $1,317 and net payments for derivatives of $56. Cash provided by investing activities in
2016
primarily relates to net proceeds from derivatives of $189 and net proceeds from partnerships of $147, partially offset by additions to property and equipment of of $84.
Cash provided for financing activities
in
2017
consists primarily of net increase in securities loaned or sold
under agreements to repurchase of $1,115. Cash used for financing activities in
2016
consists primarily of acquisitions of treasury stock of $350 and net payments for deposits, transfers and withdrawals for investments and universal life products of $199.
Operating cash flows
for the
three months ended
March 31, 2017
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 Financial Risk Liquidity Risk and Financial Risk on Statutory Capital sections in this MD&A.
109
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
|
Insurance Financial Strength Ratings as of April 25, 2017
|
|||
|
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.
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
|
Statutory Capital Roll Forward for the Company's Insurance Subsidiaries
|
|||||||||
|
Property and Casualty Insurance Subsidiaries
|
Life Insurance Subsidiaries
|
Total
|
|||||||
|
U.S. statutory capital at December 31, 2016
|
$
|
8,261
|
|
$
|
6,022
|
|
$
|
14,283
|
|
|
Variable annuity surplus impacts
|
—
|
|
(31
|
)
|
(31
|
)
|
|||
|
Statutory earnings (excluding VA for Life)
|
346
|
|
122
|
|
468
|
|
|||
|
Dividends to parent
|
(221
|
)
|
(363
|
)
|
(584
|
)
|
|||
|
Other items
|
(152
|
)
|
6
|
|
(146
|
)
|
|||
|
Net change to U.S. statutory capital
|
(27
|
)
|
(266
|
)
|
(293
|
)
|
|||
|
U.S. statutory capital at March 31, 2017
|
$
|
8,234
|
|
$
|
5,756
|
|
$
|
13,990
|
|
Contingencies
Legal Proceedings
– For a discussion regarding contingencies related to The Hartford’s legal proceedings, please see the information contained under “Litigation” in Note
12
-
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
Patient Protection and Affordable Care Act of 2010 (the "Affordable Care Act")
The outcome of the new Administration’s stated intention to repeal and replace the Affordable Care Act may have an impact on various aspects of our business, including our insurance businesses. It is unclear what a replacement of the Affordable Care Act would entail, and to what extent there may be a transition period for the phase out of the Affordable Care Act. The impact 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 have not observed any material impacts on the Company’s workers’ compensation business or group benefits business. We will continue to monitor the impact of the Affordable Care Act and any reforms on consumer, broker and medical provider behavior for leading indicators of changes in medical costs or loss payments primarily on the Company's workers' compensation and disability liabilities.
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
110
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code. On April 4, 2017, the DOL extended the applicability date for the final rule from April 10, 2017 to June 9, 2017. Implementation will be phased in, with the regulation in full effect by January 1, 2018. The impact of the new regulation on our mutual fund business is difficult to assess because the regulation is new and is still being studied.
While we continue to analyze the regulation, we believe the regulation may impact the compensation paid to the financial intermediaries who sell our mutual funds to their retirement clients and could negatively impact our mutual funds business.
In 2016, several plaintiffs, including insurers and industry groups such as the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association (SIFMA), filed a lawsuit against the DOL challenging the constitutionality of the fiduciary rule, and the DOL's rulemaking authority. In most cases, the district courts have entered a summary judgment in favor of the DOL. It is unclear whether the plaintiffs will appeal. We continue to monitor potential effects of case law and the regulatory landscape on our mutual funds business.
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
2016
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.
111
Part I - Item 3. Quantitative and Qualitative Disclosure About Market Risk
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.
112
Part I - Item 4. Controls and Procedures
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
March 31, 2017
.
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.
113
Part II - Item 1. Legal Proceedings
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 related to The Hartford's asbestos and environmental claims discussed in Note
12
-
Commitments and Contingencies
of the Notes to Consolidated
Financial Statements,
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. During the course of the litigation, the claims regarding distribution fees were dismissed without prejudice, the lineup of funds as plaintiffs changed several times, and the plaintiffs added as a defendant Hartford Funds Management Company (“HFMC”), an indirect subsidiary of the Company that assumed the role of 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 one fund. In March 2016, the court denied the plaintiff's motion, and granted summary judgment for HIFSCO and HFMC with respect to one fund, leaving six funds as plaintiffs: The Hartford Balanced Fund, The Hartford Capital Appreciation Fund, The Hartford Floating Rate Fund, The Hartford Growth Opportunities Fund, The Hartford Healthcare Fund, and The Hartford Inflation Plus Fund. The court further ruled that the appropriate measure of damages on the surviving claims would be the difference, if any, between the actual advisory fees paid through trial and the fees permitted under the applicable legal standard. A bench trial on the issue of liability was held in November 2016. In February 2017, the court granted judgment for HIFSCO and HFMC as to all claims. Plaintiffs have appealed to the United States Court of Appeals for the Third Circuit.
114
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 for the year ended December 31, 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.
115
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 Company's authorization for equity repurchases is
$1.3 billion
for the period commencing October 31, 2016 through December 31, 2017.
|
Repurchases of Common Stock by the Issuer for the Three Months Ended March 31, 2017
|
||||||||||
|
Period
|
Total Number
of Shares
Purchased [1]
|
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)
|
|||||||
|
January 1, 2017 - January 31, 2017
|
2,275,500
|
|
$
|
48.43
|
|
2,275,500
|
|
$
|
1,190
|
|
|
February 1, 2017 - February 28, 2017
|
2,161,100
|
|
$
|
48.20
|
|
2,161,100
|
|
$
|
1,086
|
|
|
March 1, 2017 - March 31, 2017
|
2,271,954
|
|
$
|
48.75
|
|
2,271,954
|
|
$
|
975
|
|
|
Total
|
6,708,554
|
|
$
|
48.47
|
|
6,708,554
|
|
|||
|
[1]
|
Excludes
674,279
shares in net settlement of employee tax withholding obligations related to equity awards under the Company's Incentive Stock Plan. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that otherwise would have been issued as a result of the vesting of equity awards. The Company paid approximately
$33 million
in employee tax withholding obligations related to net share settlements in the three months ended
March 31, 2017
.
|
116
|
See Exhibits Index on page
|
119
.
|
117
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:
|
April 27, 2017
|
/s/ Scott R. Lewis
|
||
|
Scott R. Lewis
|
||||
|
|
Senior Vice President and Controller
|
|||
|
|
(Chief accounting officer and duly
authorized signatory)
|
|||
118
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE QUARTER ENDED
MARCH 31, 2017
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
|
|
*10.01
|
The Hartford 2014 Incentive Stock Plan Form of Individual Award Agreement. **
|
||||
|
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.**
|
||||
|
*
|
Management contract, compensatory plan or arrangement.
|
||||
|
**
|
Filed with the Securities and Exchange Commission as an exhibit to this report.
|
||||
119
TABLE OF CONTENTS