The Hartford(HIG) - 2020 Q4 - Annual Report

Part I Business Overview The Hartford is a holding company offering P&C insurance, group benefits, and mutual funds, focused on strategic growth and efficiency initiatives General Overview and Strategic Priorities The company, with significant assets and equity, outlined 2020 strategic initiatives and 2021 priorities focusing on growth, efficiency, and capital return - The Hartford is a holding company providing P&C insurance, group benefits, and mutual funds, with total assets of $74.1 billion and stockholders' equity of $18.6 billion as of December 31, 2020[19] - The company's 2020 strategic initiatives included integrating the Navigators Group acquisition, investing in technology, launching new products, and implementing the "Hartford Next" cost reduction plan[24] - The "Hartford Next" operational transformation plan aims to achieve an annual reduction in insurance operating costs and other expenses of approximately $500 million by 2022, relative to 2019 levels[24][25] - Priorities for 2021 include capitalizing on firm pricing in Commercial Lines, transforming Personal Lines, growing Group Benefits revenues, and returning capital to shareholders[30][33] 2020 Financial Results Key financial highlights for 2020 include net income, diluted EPS, ROE, book value growth, and total revenues, alongside COVID-19 claim impacts 2020 Financial Highlights | Metric | Value | Note | | :--- | :--- | :--- | | Net Income to Common Stockholders | $1.7 billion | - | | Diluted EPS | $4.76 | - | | Net Income ROE | 10% | - | | Book Value per Diluted Share | $50.39 | Up 15% | | Total Revenues | $20.5 billion | Down 1% from 2019 | | P&C Direct COVID-19 Claims | $278 million | - | | Group Benefits COVID-19 Impacts | $230 million | Principally $239M in excess mortality | Reporting Segments The company operates through five primary reporting segments: Commercial Lines, Personal Lines, Group Benefits, Hartford Funds, and P&C Other Operations - The company operates through five reporting segments: Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, and Hartford Funds, plus a Corporate category[35] 2020 Revenues by Segment | Segment | Revenue (in millions) | | :--- | :--- | | Commercial Lines | $9,506 | | Personal Lines | $3,042 | | Group Benefits | $6,006 | | Hartford Funds | $1,001 | | P&C Other Operations | $54 | | Corporate | $146 | | Total | $20,523 | - Commercial Lines offers products through small, middle & large commercial, and global specialty lines, with the 2019 Navigators Group acquisition expanding global specialty business[42][45][46] - Personal Lines provides automobile, homeowners, and umbrella coverage, primarily through an exclusive AARP program, and is rolling out new products in 2021 to regain competitive momentum[59][60][64] - Group Benefits provides group life, disability, and other coverages, differentiated by risk management expertise, economies of scale, and an integrated absence management platform[75][76][79] - Hartford Funds provides investment management and distribution for mutual funds and ETPs, with total Assets Under Management (AUM) of $139.4 billion as of December 31, 2020[84][85] Reserves, Underwriting, and Operations The company manages significant reserves, employs disciplined underwriting practices, and oversees investment operations through HIMCO Total Reserves as of December 31, 2020 | Reserve Category | Amount (in millions) | | :--- | :--- | | P&C Unpaid Losses & LAE | $23,897 | | Group Benefits Unpaid Losses & LAE | $7,996 | | Future Policy Benefits & Other | $1,339 | | Total Reserves | $33,232 | - The company manages underwriting exposure through risk selection, diversification, and modeling, setting aggregate exposure limits and focusing on pricing adequacy[102][104] - Hartford Investment Management Company (HIMCO) manages the company's investment operations, with total assets under management of approximately $106.1 billion, including The Hartford's own $56.5 billion portfolio and third-party assets[109][110][113] Regulation, Intellectual Property, and Human Capital The company operates under extensive state, federal, and foreign regulations, protects its valuable intellectual property, and manages human capital with a focus on employee well-being - The company is subject to extensive state, federal, and foreign insurance and securities laws, primarily aimed at protecting policyholders and investors, covering solvency, capital, and market conduct[113][117] - The Hartford relies on trademarks, patents, and trade secret laws to protect its highly valuable intellectual property, including the Stag Logo[120][121] - As of December 31, 2020, The Hartford had approximately 18,500 employees, with a focus on talent attraction, development, pay equity, wellness, and diversity and inclusion[122][124] - In response to COVID-19, the company implemented mitigation strategies including enabling 95% of employees to work from home, enhancing benefits, and increasing mental health support[135][140] Risk Factors The company faces significant risks from the COVID-19 pandemic, economic conditions, catastrophes, competition, and operational challenges like cybersecurity COVID-19 Pandemic Risk The COVID-19 pandemic poses significant risks, including increased loss costs, reduced product demand, lower premiums, and operational disruptions from remote work - The COVID-19 pandemic presents significant risks, including increased loss costs for workers' compensation, group life, and disability insurance, alongside litigation regarding business interruption claims[145][147][150] - Economic disruption from the pandemic could lead to reduced product demand, lower premiums, especially in workers' compensation and group benefits, and increased policy lapses[157] - The company faces operational risks from a remote workforce, including potential cybersecurity attacks and disruptions to business processes like claims settlement and premium collection[158] Economic, Political and Global Market Conditions The business is sensitive to market conditions, including interest rates, credit spreads, and equity prices, alongside risks from climate change and LIBOR discontinuance - The business is sensitive to market conditions, including changes in credit spreads, equity prices, interest rates, and inflation, impacting investment returns and product demand[160] - A persistent low interest rate environment pressures net investment income and may necessitate product price increases to achieve target returns[161] - Climate change presents risks through increased frequency and intensity of natural catastrophes, potentially leading to higher claims, increased reinsurance costs, and investment portfolio impacts[167] - The planned discontinuance of LIBOR after 2021 creates uncertainty and could adversely affect the value of floating-rate investments and debentures[170][171] Insurance Industry and Product Related Risks The company faces risks from unfavorable loss development, particularly long-tailed exposures like A&E, significant catastrophe losses, and intense industry competition - The company is exposed to unfavorable loss development, particularly from long-tailed exposures like asbestos and environmental (A&E) claims, with a reinsurance agreement mitigating risk up to $1.5 billion[183][186][188] - Significant losses from natural and man-made catastrophes could materially affect financial results, with climate change potentially increasing their frequency and severity[189][190] - The insurance industry is highly competitive, with pressure on pricing and products, and technological changes like autonomous vehicles could disrupt the market[201][203] Financial Strength, Credit and Counterparty Risks The company faces risks from financial strength and credit rating downgrades, counterparty defaults, and reliance on dividends from its insurance subsidiaries - Downgrades in financial strength or credit ratings could harm the company's competitive position, reduce sales, and increase capital costs[206][208] - The company is exposed to credit risk from counterparties, including security issuers, reinsurers, and customers, where defaults could materially affect financial results[215] - As a holding company, The Hartford relies on dividends from its insurance subsidiaries, which are subject to state and international regulatory limitations[219][220] Other Risks (Estimates, Strategic, Operational, Regulatory, Legal) Other risks include inaccuracies in analytical models, potential cyber breaches, challenges with acquisitions and divestitures, and complex regulatory developments - The company relies on analytical models for key decisions in pricing, reserving, and catastrophe risk management, where inaccuracies could adversely affect results[221][222] - A significant operational risk is the potential for a cyber breach or information security incident, which could compromise data, interrupt business, and cause substantial costs[228][231] - The company faces risks associated with acquisitions and divestitures, including challenges in integrating businesses and achieving anticipated synergies[237] - The business is subject to extensive and complex regulatory and legislative developments at federal, state, and international levels, potentially increasing costs and constraining pricing[243] Properties As of December 31, 2020, The Hartford owned approximately 1.8 million square feet of building space, primarily its home office complex in Hartford, CT. Additionally, it leased approximately 1.5 million square feet in North America and 33 thousand square feet overseas for various business operations Property Holdings as of Dec 31, 2020 | Type | Location | Square Feet (approx.) | | :--- | :--- | :--- | | Owned | Hartford, CT Area | 1.77 million | | Owned | Belgium | 22 thousand | | Leased | North America | 1.5 million | | Leased | London | 22 thousand | | Leased | Other Overseas | 11 thousand | Legal Proceedings The company's legal proceedings are discussed in Note 15 of the Notes to Consolidated Financial Statements. This includes details on litigation related to COVID-19 business income insurance coverage and ongoing asbestos and environmental claims - For a detailed discussion of legal proceedings, the company refers to Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements[261] - Key areas of litigation include COVID-19 Pandemic Business Income Insurance Coverage Litigation and Asbestos and Environmental Claims[261] Part II Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Hartford's common stock trades on the NYSE under the symbol 'HIG'. In December 2020, the Board authorized a new $1.5 billion share repurchase program for 2021-2022. The company's five-year cumulative total return was 25.94%, underperforming both the S&P 500 (103.04%) and the S&P Insurance Composite Index (56.26%) over the same period - The company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol "HIG"[263] - In December 2020, a new $1.5 billion share repurchase authorization was approved for 2021-2022, with 1.1 million shares repurchased for $56 million by February 2021[267] Cumulative Five-Year Total Return Comparison | Company/Index | 2015 (Base) | 2020 (End) | Cumulative Return | | :--- | :--- | :--- | :--- | | The Hartford Financial Services Group, Inc. | $100 | $125.94 | 25.94% | | S&P 500 Index | $100 | $203.04 | 103.04% | | S&P Insurance Composite Index | $100 | $156.26 | 56.26% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A analyzes 2020 financial performance, noting a 17% decrease in net income due to COVID-19 and capital losses, offset by favorable auto claims, and details segment results and risk management Key Performance Measures and Ratios The company utilizes non-GAAP measures such as Core Earnings and the Underlying Combined Ratio to evaluate underlying business trends and current year profitability - The company uses several non-GAAP measures, including Core Earnings, which excludes certain realized capital gains/losses, restructuring costs, and discontinued operations to reveal underlying business trends[283][287] Reconciliation of Net Income to Core Earnings | (in millions) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net income available to common stockholders | $1,716 | $2,064 | $1,801 | | Core earnings | $2,086 | $2,062 | $1,575 | - Another key non-GAAP measure is the Underlying Combined Ratio for P&C segments, representing the combined ratio before catastrophes and prior accident year development, providing a view of current accident year profitability[311] The Hartford's Operations COVID-19 negatively impacted 2020 revenues and incurred losses, while the "Hartford Next" plan aims for significant annual expense reductions by 2022 - The COVID-19 pandemic negatively impacted 2020 revenues, with Commercial Lines written premium declining 4% and Personal Lines 6%, partly due to an $81 million premium refund[327][329] - Direct COVID-19 incurred losses in 2020 totaled $278 million in P&C and led to $239 million in excess mortality in Group Benefits life business[333][335] - The company launched the "Hartford Next" operational transformation and cost reduction plan in July 2020, expecting to achieve a $500 million annual expense reduction by 2022[341] Hartford Next Program - Net Expense (Savings) Projections | (in millions) | 2020 (Actual) | 2021 (Estimate) | 2022 (Estimate) | | :--- | :--- | :--- | :--- | | Total Program Costs | $153 | $110 | $77 | | Cumulative Savings (vs 2019) | ($106) | ($350) | ($500) | | Net Expense (Savings) | $47 | ($240) | ($423) | Consolidated Results of Operations Consolidated results show a 17% decrease in net income to common stockholders, driven by a shift to capital losses, COVID-19 claims, and higher catastrophe losses Consolidated Results of Operations | (in millions) | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $20,523 | $20,740 | (1%) | | Total benefits, losses and expenses | $18,403 | $18,180 | 1% | | Net income available to common stockholders | $1,716 | $2,064 | (17%) | - The 17% decrease in net income available to common stockholders was primarily driven by a $409 million pre-tax shift from net realized capital gains to losses, COVID-19 claims, and higher catastrophe losses[354] - Earned premiums increased 2% to $17.3 billion, driven by the full-year impact of the Navigators Group acquisition in Commercial Lines, offsetting declines in other segments[353][360] - Total benefits, losses, and expenses increased by 1%, primarily due to higher P&C losses from COVID-19 and catastrophes, and higher mortality in Group Benefits[353][365] Investment Results The investment portfolio is primarily fixed maturities, with net investment income decreasing due to lower yields and a shift to net realized capital losses in 2020 Investment Portfolio Composition (as of Dec 31) | Asset Class | 2020 Fair Value ($M) | % of Total | 2019 Fair Value ($M) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Fixed maturities, AFS | $45,035 | 79.7% | $42,148 | 79.5% | | Equity securities | $1,438 | 2.5% | $1,657 | 3.1% | | Mortgage loans | $4,493 | 7.9% | $4,215 | 8.0% | | Other (incl. Short-term) | $5,566 | 9.9% | $5,010 | 9.4% | | Total Investments | $56,532 | 100.0% | $53,030 | 100.0% | - Net investment income decreased 5% to $1.85 billion in 2020 from $1.95 billion in 2019, primarily due to lower yields on fixed maturity investments[377][379] - The company experienced net realized capital losses of $14 million in 2020, a significant shift from net realized capital gains of $395 million in 2019, driven by mark-to-market and credit losses[384][390] Critical Accounting Estimates Critical accounting estimates include P&C and Group Benefits reserves, goodwill impairment, investment valuation, and litigation contingencies, all subject to significant uncertainty - The company identifies several critical accounting estimates, including P&C insurance product reserves, group benefit LTD reserves, goodwill impairment, valuation of investments, and litigation contingencies[394] - P&C loss reserves are subject to significant uncertainty from factors like inflation, claim frequency/severity, and legal environment changes, with long-tail lines being particularly complex to estimate[400][401] - For 2020, the company recorded net favorable prior accident year development of $136 million in P&C, primarily from a $529 million catastrophe reserve reduction, partially offset by increases for sexual molestation claims ($254 million) and A&E ($208 million)[451][456] - Group Benefit LTD reserves are sensitive to discount and claim termination rates; a 10 basis point decrease in discount rate would increase reserves by $29 million, and a 1% decrease in termination rates by $22 million[510][512] - The annual goodwill impairment test as of October 31, 2020, resulted in no write-downs, with all reporting units passing with a significant margin despite COVID-19 impacts[519][520] Segment Operating Summaries This section provides detailed operating summaries for Commercial Lines, Personal Lines, Group Benefits, and Hartford Funds, highlighting key financial metrics for each Commercial Lines Results | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Written Premiums | $8,969M | $8,452M | | Net Income | $856M | $1,192M | | Combined Ratio | 100.4% | 97.7% | | Underlying Combined Ratio | 95.5% | 94.0% | Personal Lines Results | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Written Premiums | $2,936M | $3,131M | | Net Income | $718M | $318M | | Combined Ratio | 75.5% | 95.0% | | Underlying Combined Ratio | 83.1% | 91.9% | Group Benefits Results | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Premiums & Other Considerations | $5,536M | $5,603M | | Net Income | $383M | $536M | | Total Loss Ratio (excl. buyouts) | 74.5% | 72.3% | | Core Earnings Margin | 6.4% | 8.9% | Hartford Funds Results | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $1,001M | $1,011M | | Net Income | $170M | $149M | | End of Period AUM | $139.4B | $127.0B | Enterprise Risk Management The company manages insurance, operational, and financial risks through a structured framework, utilizing underwriting discipline, exposure controls, and reinsurance treaties - The company categorizes its main risks as insurance, operational, and financial, with an Enterprise Risk and Capital Committee (ERCC) overseeing risk profile and management[643][646] - Insurance risk is managed through underwriting discipline, exposure controls, modeling, and reinsurance, with specific limits set for natural catastrophes, terrorism, and pandemic risk[647][651][653] - The company utilizes various reinsurance treaties to mitigate catastrophe losses, including per-occurrence and aggregate property treaties, with renewals after July 2020 excluding communicable disease coverage[657][658][153] - Financial risks, including liquidity, credit, interest rate, equity, and foreign currency, are managed through diversification, derivative hedging, and established limits[686][687] Capital Resources and Liquidity The holding company maintains strong liquidity and access to credit, with expected subsidiary dividends supporting its capital structure and healthy RBC ratios - As of December 31, 2020, the holding company had $1.8 billion in liquid assets and access to a $750 million revolving credit facility and a $2.0 billion intercompany liquidity agreement[816][817] - For 2021, the company expects to receive $850-$900 million in net dividends from P&C subsidiaries, $250-$295 million from Group Benefits, and $125-$150 million from Hartford Funds[818] Capital Structure (as of Dec 31) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Total debt | $4,352 | $4,848 | | Total stockholders' equity | $18,556 | $16,270 | | Total capitalization | $22,908 | $21,118 | | Debt to capitalization | 19% | 23% | - All U.S. operating insurance subsidiaries had Risk-Based Capital (RBC) ratios in excess of minimum required levels as of year-end 2020[888] Financial Statements and Supplementary Data This section contains The Hartford's audited consolidated financial statements for the fiscal year ended December 31, 2020, including the Consolidated Statements of Operations, Comprehensive Income, Balance Sheets, Changes in Stockholders' Equity, and Cash Flows. It also includes detailed Notes to the Financial Statements, which provide further explanation of accounting policies and specific financial items, and supplementary financial schedules required by the SEC Consolidated Financial Statements This section presents key highlights from the Consolidated Statements of Operations, Balance Sheets, and Cash Flows for the fiscal year 2020 Consolidated Statement of Operations Highlights (Year Ended Dec 31) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Total revenues | $20,523 | $20,740 | | Total benefits, losses and expenses | $18,403 | $18,180 | | Net income | $1,737 | $2,085 | Consolidated Balance Sheet Highlights (As of Dec 31) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Total investments | $56,532 | $53,030 | | Total assets | $74,111 | $70,817 | | Total liabilities | $55,555 | $54,547 | | Total stockholders' equity | $18,556 | $16,270 | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,871 | $3,489 | | Net cash used for investing activities | ($2,066) | ($2,148) | | Net cash used for financing activities | ($1,778) | ($1,191) | Notes to Consolidated Financial Statements These notes provide detailed explanations of accounting policies, the Navigators acquisition, segment revenues, P&C loss reserves, debt changes, and Hartford Next restructuring costs - Note 2: The acquisition of Navigators Group was completed on May 23, 2019, for $2.1 billion, recognizing $621 million in goodwill allocated to Commercial Lines[1058][1065] - Note 4: Commercial Lines was the largest segment by earned premiums in 2020 at $8.9 billion, followed by Group Benefits at $5.5 billion and Personal Lines at $3.0 billion[1088] - Note 12: P&C loss reserves show a net liability of $23.9 billion at year-end 2020, up from $23.0 billion in 2019, with $7.8 billion in current year provisions and $136 million favorable prior year development[1297] - Note 14: Total debt decreased to $4.35 billion at year-end 2020 from $4.85 billion in 2019, primarily due to the repayment of $500 million in senior notes[1428][1431] - Note 23: The company incurred $104 million in pre-tax restructuring costs in 2020 related to "Hartford Next", primarily for $73 million in severance benefits[1635][1638] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020. Management's assessment of internal control over financial reporting, based on the COSO framework, also concluded that these controls were effective. The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting - The Company's principal executive and financial officers concluded that disclosure controls and procedures were effective as of December 31, 2020[906] - Management assessed internal controls over financial reporting using the COSO framework and concluded they were effective as of December 31, 2020[910] - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2020[914] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is largely incorporated by reference from the company's definitive proxy statement for its 2021 annual meeting of stockholders. The report provides a list of executive officers who are not director nominees, including their age, position, and business experience - Information regarding directors and corporate governance is incorporated by reference from the company's 2021 proxy statement[920] Executive Officers (as of Feb 10, 2021) | Name | Age | Position | | :--- | :--- | :--- | | Jonathan R. Bennett | 56 | Executive VP and Head of Group Benefits | | William A. Bloom | 57 | Executive VP of Operations and Technology | | Kathleen M. Bromage | 63 | Chief Marketing and Communications Officer | | Beth A. Costello | 53 | Executive VP and Chief Financial Officer | | Douglas G. Elliot | 60 | President | | Scott R. Lewis | 58 | Senior VP and Controller | | Robert W. Paiano | 59 | Executive VP and Chief Risk Officer | | David C. Robinson | 55 | Executive VP and General Counsel | | Lori A. Rodden | 50 | Executive VP Chief Human Resources Officer | | Amy M. Stepnowski | 52 | Executive VP Chief Investment Officer | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2021 proxy statement. As of December 31, 2020, under equity compensation plans approved by stockholders, there were 11.3 million securities to be issued upon exercise of outstanding options and rights, with a weighted-average exercise price of $45.54. There were 15.5 million securities remaining available for future issuance under these plans Equity Compensation Plan Information (as of Dec 31, 2020) | Category | Number of Securities (in thousands) | Weighted-Average Exercise Price | | :--- | :--- | :--- | | To be Issued Upon Exercise | 11,349 | $45.54 | | Available for Future Issuance | 15,479 | N/A | - On May 20, 2020, stockholders approved the 2020 Stock Incentive Plan, superseding earlier plans, with forfeited or expired awards becoming available for issuance under the new plan[927] Part IV Exhibits, Financial Statement Schedules This section provides an index of all financial statements, schedules, and exhibits filed as part of the 10-K report. It includes the independent auditor's report, the full consolidated financial statements and notes, and supplementary financial schedules required by the SEC - This section contains the index to the Consolidated Financial Statements, Schedules, and Exhibits filed with the report[931][933] - Key supplementary schedules filed include Schedule I (Summary of Investments), Schedule II (Condensed Financial Information), and Schedule VI (Supplemental Property and Casualty Insurance Information)[933]