Part I Results of Operations
MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL SITUATION AND OPERATING RESULTS
(Amounts in millions of dollars, except for per share data, unless otherwise indicated)
Hartfordprovides projections and other forward-looking information in the following discussions, which contain many forward-looking statements, particularly relating to the Company's future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the cautionary statements set forth on pages 4 and 5 of this Form 10-Q. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in the following discussion; Part I, Item 1A, Risk Factors in The Hartford's2021 Form 10-K Annual Report; and our other filings with the Securities and Exchange Commission. The Hartfordundertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.
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.
INDEX Description Page Key Performance Measures and Ratios 51 The
Hartford'sOperations 57 Financial Highlights 59 Consolidated Results of Operations 63 Investment Results 65 Critical Accounting Estimates 68 Commercial Lines 73 Personal Lines 78 Property & Casualty Other Operations 82 Group Benefits 83 Hartford Funds 85 Corporate 87 Enterprise Risk Management 88 Capital Resources and Liquidity 98 Impact of New Accounting Standards 105
Throughout the MD&A we use certain terms and abbreviations, the most commonly used are summarized in the Acronyms section.
KEY PERFORMANCE INDICATORS 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'sbusinesses. 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. 51
| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Definitions of Non-GAAP and Other Measures and Ratios Assets Under Management ("AUM")- Include mutual fund and exchange-traded funds ("ETF") assets. AUM is a measure used by the Company's Hartford Funds segment because a significant portion of the segments's revenues and expenses are based upon asset values. These revenues and expenses increase or decrease with a rise or fall in AUM whether caused by changes in the market or through net flows. Book Value per Diluted Share excluding accumulated other comprehensive income ("AOCI")- This is a non-GAAP per share measure that is calculated by dividing (a) common stockholders' equity, excluding AOCI, after tax, by (b) common shares outstanding and dilutive potential common shares. The Company provides this measure to enable investors to analyze the amount of the Company's net worth that is primarily attributable to the Company's business operations. The Company believes that excluding AOCI from the numerator is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period, primarily based on changes in interest rates. Book value per diluted share is the most directly comparable
U.S.GAAP measure. Combined Ratio- The sum of the loss and loss adjustment expense ratio, the expense ratio and the policyholder dividend ratio. This ratio is a relative measurement that describes the related cost of losses and expenses for every $100of earned premiums. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting losses. Core Earnings- The Hartforduses the non-GAAP measure core earnings as an important measure of the Company's operating performance. The Hartfordbelieves that core earnings provides investors with a valuable measure of the performance of the Company's ongoing businesses because it reveals trends in our insurance and financial services businesses that may be obscured by including the net effect of certain items. Therefore, the following items are excluded from core earnings: •Certain realized gains and losses - Some realized gains and losses are primarily driven by investment decisions and external economic developments, the nature and timing of which are unrelated to the insurance and underwriting aspects of our business. Accordingly, core earnings excludes the effect of all realized gains and losses that tend to be highly variable from period to period based on capital market conditions. The Hartfordbelieves, however, that some realized gains and losses are integrally related to our insurance operations, so core earnings includes net realized gains and losses such as net periodic settlements on credit derivatives. These net realized gains and losses are directly related to an offsetting item included in the income statement such as net investment income.
•Restructuring and other costs – Costs incurred as part of a restructuring plan are not recurring operating expenses of the company.
•Loss on extinguishment of debt - Largely consisting of make-whole payments or tender premiums upon paying debt off before maturity, these losses are not a recurring operating expense of the business. •Gains and losses on reinsurance transactions - Gains or losses on reinsurance, such as those entered into upon sale of a business or to reinsure loss reserves, are not a recurring operating expense of the business. •Integration and other non-recurring M&A costs - These costs, including transaction costs incurred in connection with an acquired business, are incurred over a short period of time and do not represent an ongoing operating expense of the business. •Change in loss reserves upon acquisition of a business - These changes in loss reserves are excluded from core earnings because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition. •Deferred gain resulting from retroactive reinsurance and subsequent changes in the deferred gain - Retroactive reinsurance agreements economically transfer risk to the reinsurers and including the full benefit from retroactive reinsurance in core earnings provides greater insight into the economics of the business. •Change in valuation allowance on deferred taxes related to non-core components of before tax income - These changes in valuation allowances are excluded from core earnings because they relate to non-core components of before tax income, such as tax attributes like capital loss carryforwards. •Results of discontinued operations - These results are excluded from core earnings for businesses sold or held for sale because such results could obscure the ability to compare period over period results for our ongoing businesses. In addition to the above components of net income available to common stockholders that are excluded from core earnings, preferred stock dividends declared, which are excluded from net income available to common stockholders, are included in the determination of core earnings. Preferred stock dividends are a cost of financing more akin to interest expense on debt and are expected to be a recurring expense as long as the preferred stock is outstanding. Net income (loss) and net income (loss) available to common stockholders are the most directly comparable
U.S.GAAP measures to core earnings. Core earnings should not be considered as a substitute for net income (loss) or net income (loss) available to common stockholders and does not reflect the overall profitability of the Company's business. Therefore, The Hartfordbelieves that it is useful for investors to evaluate net income (loss), net income (loss) available to common stockholders, and core earnings when reviewing the Company's performance. 52
| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Reconciliation of Net Income to Core Earnings Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income
$ 442 $ 905$ 887 $ 1,154Preferred stock dividends 5 5 10 10 Net income available to common stockholders 437 900 877 1,144
Adjustments to reconcile net income available to common shareholders with core earnings: Net realized losses (gains) excluded from core earnings, before tax
336 (148) 482 (225) Restructuring and other costs, before tax 2 - 7 11 Loss on extinguishment of debt, before tax 9 - 9 - Integration and other non-recurring M&A costs, before tax 6 36 11 45
Change in deferred gain on retroactive reinsurance, before tax –
39 - 45 Income tax expense (benefit)  (76) 9 (111) 19 Core earnings
$ 714 $ 836 $ 1,275 $ 1,039
Primarily represents federal income tax expense (benefit) related to pre-tax items not included in basic income and includes the effect of changes in net deferred taxes due to changes in effective tax rates.
Core Earnings Margin- The
Hartforduses the non-GAAP measure core earnings margin to evaluate, and believes it is an important measure of, the Group Benefits segment's operating performance. Core earnings margin is calculated by dividing core earnings by revenues, excluding buyouts and realized gains (losses). Net income margin, calculated by dividing net income by revenues, is the most directly comparable U.S.GAAP measure. The Company believes that core earnings margin provides investors with a valuable measure of the performance of Group Benefits because it reveals trends in the business that may be obscured by the effect of buyouts and realized gains (losses) as well as other items excluded in the calculation of core earnings. Core earnings margin should not be considered as a substitute for net income margin and does not reflect the overall profitability of Group Benefits. Therefore, the Company believes it is important for investors to evaluate both core earnings margin and net income margin when reviewing performance. A reconciliation of net income margin to core earnings margin is set forth in the Results of Operations section within MD&A - Group Benefits. Current Accident Year Catastrophe Ratio- A component of the loss and loss adjustment expense ratio, represents the ratio of catastrophe losses incurred in the current accident year (net of reinsurance) to earned premiums. For U.S.events, a catastrophe is an event that causes $25or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers, as defined by the Property Claim Services office of Verisk. For international events, the Company's approach is similar, informed, in part, by how Lloyd's of Londondefines major losses. Lloyd's of Londonis an insurance market-place operating worldwide ("Lloyd's"). Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"). The current accident year catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums. Expense Ratio- For the underwriting segments of Commercial Lines and Personal Lines is the ratio of underwriting expenses less fee income, to earned premiums. Underwriting expenses include the amortization of deferred policy acquisition costs ("DAC") and insurance operating costs and expenses, including certain centralized services costs and bad debt expense. DAC include commissions, taxes, licenses and fees and other incremental direct underwriting expenses and are amortized over the policy term.
The expense ratio for Group Benefits is expressed as the ratio of insurance operating expenses and other expenses, including amortization of intangibles and amortization of CARs, to premiums and other consideration, to exclusion of redemption premiums.
The expense ratio for Commercial Lines, Personal Lines and Group Benefits does not include integration and other transaction costs associated with an acquired business. Fee Income- Is largely driven from amounts earned as a result of contractually defined percentages of assets under management in our Hartford Funds business. These fees are generally earned on a daily basis. Therefore, the growth in assets under management either through net inflows or favorable market performance will have a favorable impact on fee income. Conversely, either net outflows or unfavorable market performance will reduce fee income. Gross New Business Premium- Represents the amount of premiums charged, before ceded reinsurance, for policies issued to customers who were not insured with the Company in the previous policy term. Gross new business premium plus gross renewal written premium less ceded reinsurance equals total written premium. Loss and Loss Adjustment Expense Ratio- A measure of the cost of claims incurred in the calendar year divided by earned premium and includes losses and loss adjustment expenses incurred for both the current and prior accident years. Among other factors, the loss and loss adjustment expense ratio needed for the Company to achieve its targeted return on equity ("ROE") fluctuates from year to year based on changes in the expected investment yield over the claim settlement period, the timing of expected claim settlements and the targeted returns set by management based on the competitive environment.
| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The loss and loss adjustment expense ratio is affected by claim frequency and claim severity, particularly for shorter-tail property lines of business, where the emergence of claim frequency and severity is credible and likely indicative of ultimate losses. Claim frequency represents the percentage change in the average number of reported claims per unit of exposure in the current accident year compared to that of the previous accident year. Claim severity represents the percentage change in the estimated average cost per claim in the current accident year compared to that of the previous accident year. As one of the factors used to determine pricing, the Company's practice is to first make an overall assumption about claim frequency and severity for a given line of business and then, as part of the rate-making process, adjust the assumption as appropriate for the particular state, product or coverage. Loss and Loss Adjustment Expense Ratio before Catastrophes and Prior
Accident Year Development- A measure of the cost of non-catastrophe loss and loss adjustment expenses incurred in the current accident year divided by earned premiums. Management believes that the current accident year loss and loss adjustment expense ratio before catastrophes is a performance measure that is useful to investors as it removes the impact of volatile and unpredictable catastrophe losses and prior accident year development. Loss Ratio, excluding Buyouts- Utilized for the Group Benefits segment and is expressed as a ratio of benefits, losses and loss adjustment expenses, excluding those related to buyout premiums, to premiums and other considerations, excluding buyout premiums. Since Group Benefits occasionally buys a block of claims for a stated premium amount, the Company excludes this buyout from the loss ratio used for evaluating the profitability of the business as buyouts may distort the loss ratio. Buyout premiums represent takeover of open claim liabilities and other non-recurring premium amounts. Mutual Fundand Exchange-Traded Fund Assets- Are owned by the shareowners of those products and not by the Company and, therefore, are not reflected in the Company's Condensed Consolidated Financial Statements except in instances where the Company seeds new investment products. Mutual fund and ETF assets are a measure used by the Company primarily because a significant portion of the Company's Hartford Funds segment revenues and expenses are based upon asset values. These revenues and expenses increase or decrease with a rise or fall in AUM whether caused by changes in the market or through net flows.
Net New Business Premium – Represents the amount of premiums charged, after reinsurance ceded, for policies issued to customers who were not insured with the Company during the previous policy term. The net new business premium plus the renewal written premium equals the total written premium.
Policy Count Retention- Represents the ratio of the number of renewal policies issued during the current year period divided by the number of policies issued in the previous calendar period before considering policies cancelled subsequent to renewal. Policy count retention is affected by a number of factors, including the percentage of renewal policy quotes accepted and decisions by the Company to non-renew policies because of specific policy underwriting concerns or
due to a decision to reduce premium entries in certain categories of companies or States. Font count retention is also affected by advertising and pricing actions taken by competitors.
Policies in Force- Represents the number of policies with coverage in effect as of the end of the period. The number of policies in force is a growth measure used for Personal Lines and standard commercial lines (small commercial and middle market lines within middle & large commercial) within Commercial Lines and is affected by both new business growth and policy count retention.
Policyholder dividend ratio – The ratio of policyholder dividends to premiums earned.
Prior year loss and loss adjustment expense ratio – Represents the increase (decrease) in the estimated cost of adjusting catastrophic and non-catastrophic claims incurred in previous accident years as recorded in the current calendar year, divided by earned premiums.
Reinstatement Premiums – Represents additional ceded premiums paid for reinsurance of the amount of reinsurance coverage that has been reduced as a result of the Company ceding losses to reinsurers.
Renewal Earned Price Increase (Decrease)- Written premiums are earned over the policy term, which is six months for certain Personal Lines automobile business and twelve months for substantially all of the remainder of the Company's Property and Casualty ("P&C") 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 and individual risk pricing decisions per unit of exposure on policies that renewed and, for small commercial and middle market business, includes amount of insurance. For Personal Lines, renewal written price increases represent the total change in premium per policy since the prior year on those policies that renewed and includes the combined effect of rate changes, amount of insurance and other changes in exposure. For Personal Lines, other changes in exposure include, but are not limited to, the effect of changes in number of drivers, vehicles and incidents, as well as changes in customer policy elections, such as deductibles and limits. The rate component represents the change in rate filed with and approved by state regulators during the period and the amount of insurance represents the change in the value of the rating base, such as model year/vehicle symbol for automobiles, building replacement costs for property and wage inflation for workers' compensation. A number of factors affect renewal written price increases (decreases) including expected loss costs as projected by the Company's pricing actuaries, rate filings approved by state regulators, risk selection decisions made by the Company's underwriters and marketplace competition. Renewal written price changes reflect the property and casualty insurance market cycle. Prices tend to increase for 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 54
| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations recent loss experience has been favorable or when competition among insurance carriers increases. Renewal written price statistics are subject to change from period to period, based on a number of factors, including changes in actuarial estimates and the effect of subsequent cancellations and non-renewals, and modifications made to better reflect ultimate pricing achieved. Return on Assets ("ROA"),
Core Earnings-The Companyuses this non-GAAP financial measure to evaluate, and believes is an important measure of, the Hartford Funds segment's operating performance. ROA, core earnings is calculated by dividing annualized core earnings by a daily average AUM. ROA is the most directly comparable U.S.GAAP measure. The Company believes that ROA, core earnings, provides investors with a valuable measure of the performance of the HartfordFunds segment because it reveals trends in our business that may be obscured by the effect of items excluded in the calculation of core earnings. ROA, core earnings, should not be considered as a substitute for ROA and does not reflect the overall profitability of our Hartford Funds business. Therefore, the Company believes it is important for investors to evaluate both ROA, and ROA, core earnings when reviewing the Hartford Funds segment performance. A reconciliation of ROA to ROA, core earnings is set forth in the Results of Operations section within MD&A - Hartford Funds. Underlying Combined Ratio- This non-GAAP financial measure of underwriting results represents the combined ratio before catastrophes, prior accident year development and current accident year change in loss reserves upon acquisition of a business. Combined ratio is the most directly comparable GAAP measure. The underlying combined ratio represents the combined ratio for the current accident year, excluding the impact of current accident year catastrophes and current accident year change in loss reserves upon acquisition of a business. The Company believes this ratio is an important measure of the trend in profitability since it removes the impact of volatile and unpredictable catastrophe losses and prior accident year loss and loss adjustment expense reserve development. The changes to loss reserves upon acquisition of a business are excluded from underlying combined ratio because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition as such trends are valuable to our investors' ability to assess the Company's financial performance. A reconciliation of combined ratio to underlying combined ratio is set forth in the Results of Operations section within MD&A - Commercial Lines and Personal Lines. Underwriting Gain (Loss)- The Hartford'smanagement evaluates profitability of the Commercial and Personal Lines segments primarily on the basis of underwriting gain or loss. Underwriting gain (loss) is a before tax non-GAAP measure that represents earned premiums less incurred losses, loss adjustment expenses and underwriting expenses. Net income (loss) is the most directly comparable GAAP measure. Underwriting gain (loss) is influenced significantly by earned premium growth and the adequacy of The Hartford'spricing. Underwriting profitability over time is also greatly influenced by The Hartford'sunderwriting discipline, as management strives to manage exposure to loss through favorable risk selection and diversification, effective management of claims, use of reinsurance and its ability to manage its expenses. The Hartfordbelieves that the measure underwriting gain (loss) provides investors with a valuable measure of profitability, before tax, derived from underwriting activities, which are managed separately from the Company's investing activities. 55
| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Reconciliation of Net Income to Underwriting Gain (Loss) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Commercial Lines Net income $ 389
$ 569$ 772 $ 698Adjustments to reconcile net income to underwriting gain (loss): Net servicing income - (7) (1) (9) Net investment income (356) (382) (689) (709) Net realized losses (gains) 198 (47) 289 (91) Other expense 1 6 8 10 Income tax expense 101 122 196 146 Underwriting gain $ 333 $ 261$ 575 $ 45Personal Lines Net income $ 6 $ 118$ 83 $ 253Adjustments to reconcile net income to underwriting gain: Net servicing income (4) (5) (8) (9) Net investment income (35) (40) (68) (75) Net realized losses (gains) 18 (6) 27 (13) Other income 1 - 1 - Income tax expense 1 29 21 64 Underwriting gain (loss) $ (13) $ 96$ 56 $ 220P&C Other Operations Net income (loss) $ (20) $ 17$ (12) $ 4Adjustments to reconcile net income to underwriting loss: Net investment income (16) (20) (32) (36) Net realized losses (gains) 9 (3) 13 (5) Income tax expense (benefit) (5) 4 (4) - Underwriting loss $ (32) $ (2)$ (35) $ (37)Written and Earned Premiums- Written premium represents the amount of premiums charged for policies issued, net of reinsurance, during a fiscal period. Premiums are considered earned and are included in the financial results on a pro rata basis over the policy period. Management believes that written premium is a performance measure that is useful to investors as it reflects current trends in the Company's sale of property and casualty insurance products. Written and earned premium are recorded net of ceded reinsurance premium. Traditional life and disability insurance type products, such as those sold by Group Benefits, collect premiums from policyholders in exchange for financial protection for the policyholder from a specified insurable loss, such as death or disability. These premiums together with net investment income earned are used to pay the contractual obligations under these insurance contracts. Two major factors, new sales and persistency, impact premium growth. Sales can increase or decrease in a given year based on a number of factors, including but not limited to, customer demand for the Company's product offerings, pricing competition, distribution channels and the Company's reputation and ratings. Persistency refers to the percentage of premium remaining in-force from year-to-year. 56
| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THE
HARTFORD'SOPERATIONS The Hartfordconducts business principally in five reporting segments including Commercial Lines, Personal Lines, Property & Casualty Other Operations, GroupBenefits and Hartford Funds, as well as a Corporate category. The Company includes in the Corporate category reserves for run-off structured settlement and terminal funding agreement liabilities, restructuring costs, capital raising activities (including equity financing, debt financing and related interest expense), transaction expenses incurred in connection with an acquisition, certain M&A costs, purchase accounting adjustments related to goodwill and other expenses not allocated to the reporting segments. Corporate also includes investment management fees and expenses related to managing third party business, including management of a portion of the invested assets of Talcott Resolution Life, Inc.and its subsidiaries as well as certain affiliates. In addition, up until June 30, 2021, Corporate included a 9.7% ownership interest in Hopmeadow Holdings LP, the legal entity that acquired Talcott Resolution in May 2018( Hopmeadow Holdings, LP, Talcott Resolution Life Inc., and its subsidiaries are collectively referred to as "Talcott Resolution"). The sale of Talcott Resolution to a new investor was completed on June 30, 2021. The Company received a total of $217in connection with the sale of its 9.7% ownership interest, resulting in a realized gain of $46before tax in 2021. The Company derives its revenues principally from: (a) premiums earned for insurance coverage provided to insureds; (b) management fees on mutual fund and ETF assets; (c) net investment income; (d) fees earned for services provided to third parties; and (e) net realized gains and losses. Premiums charged for insurance coverage are earned principally on a pro rata basis over the terms of the related policies in-force. The profitability of the Company's property and casualty insurance businesses over time is greatly influenced by the Company's underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance, the size of its in force block, actual mortality and morbidity experience, and its ability to manage its expense ratio which it accomplishes through economies of scale and its management of acquisition costs and other underwriting expenses. Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future loss cost frequency and severity based on historical loss experience adjusted for known trends, the Company's response to rate actions taken by competitors, its expense levels and expectations about regulatory and legal developments. The Company seeks to price its insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. For many of its insurance products, the Company is required to obtain approval for its premium rates from state insurance departments and the Lloyd's Syndicate's ability to write business is subject to Lloyd's approval for its premium capacity each year. Most of Personal Lines written premium is associated with our exclusive licensing agreement with AARP, which is effective through December 31, 2032. This agreement provides an important competitive advantage given the size of the 50 plus population and the strength of the AARP brand. Similar to property and casualty, profitability of the group benefits business depends, in large part, on the ability to evaluate and price risks appropriately and make reliable estimates of mortality, morbidity, disability and longevity. To manage the pricing risk, Group Benefits generally offers term insurance policies, allowing for the adjustment of rates or policy terms in order to minimize the adverse effect of market trends, loss costs, declining interest rates and other factors. However, as policies are typically sold with rate guarantees of up to three years, pricing for the Company's products could prove to be inadequate if loss and expense trends emerge adversely during the rate guarantee period or if investment returns are lower than expected at the time the products were sold. For some of its products, the Company is required to obtain approval for its premium rates from state insurance departments. New and renewal business for group benefits business, particularly for long-term disability ("LTD"), are priced using an assumption about expected investment yields over time. While the Company employs asset-liability duration matching strategies to mitigate risk and may use interest-rate sensitive derivatives to hedge its exposure in the Group Benefits investment portfolio, cash flow patterns related to the payment of benefits and claims are uncertain and actual investment yields could differ significantly from expected investment yields, affecting profitability of the business. In addition to appropriately evaluating and pricing risks, the profitability of the Group Benefits business depends on other factors, including the Company's response to pricing decisions and other actions taken by competitors, its ability to offer voluntary products and self-service capabilities, the persistency of its sold business and its ability to manage its expenses which it seeks to achieve through economies of scale and operating efficiencies. The financial results of the Company's mutual fund and ETF businesses depend largely on the amount of assets under management and the level of fees charged based, in part, on asset share class and fund type. Changes in assets under management are driven by the two main factors of net flows and the market return of the funds, which are heavily influenced by the return realized in the equity and bond markets. Net flows are comprised of new sales less redemptions by mutual fund and ETF shareowners. Financial results are highly correlated to the growth in assets under management since these funds generally earn fee income on a daily basis. The investment return, or yield, on invested assets is an important element of the Company's earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits, losses and loss adjustment expenses are paid. Due to the need to maintain sufficient liquidity to satisfy claim obligations, the majority of the Company's invested assets have been held in available-for-sale ("AFS") securities, including, among other asset classes, corporate bonds, municipal bonds, government debt, short-term debt, mortgage-backed securities, asset-backed securities and collateralized loan obligations ("CLO"). 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 57
| Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations invested assets, while generating sufficient net of tax income to meet policyholder and corporate obligations. Investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations. Impact of
Ukraineconflict on our results of operations From the Ukraineconflict, the Company incurred $27of catastrophe losses, net of reinsurance, in the six months ended June 30, 2022, all in the first quarter, that included exposures under political violence and terrorism ("PV&T") policies, including aviation war, as well as under credit and political risk insurance ("CPRI") policies. Also in the first quarter of 2022, the Company recognized provisions for reinstatement premium of $11as a result of estimated ceded incurred losses related to the conflict. The Company's direct investment exposure is limited to bonds issued by Russian entities with an amortized cost of $16and a fair value of $7as of June 30, 2022, with an allowance for credit losses ("ACL") of $9. The Company does not have any investments in Belarusor Ukraine. For a discussion of the risks associated with a deterioration in global economic conditions and/or geopolitical conditions, including due to military action, please refer to the Risk Factors in our 2021 Form 10-K, including one entitled "Unfavorable economic, political and global market conditions may adversely impact our business and results of operations" and another entitled "We are vulnerable to losses from catastrophes, both natural and man-made".
Operational transformation and cost reduction plan Recognizing the need to become more profitable and competitive while improving the experience we provide to
agents and customers, on
July 30, 2020, the Company announced an operational transformation and cost reduction plan it refers to as Hartford Next. Through reduction of its headcount, Information Technology ("IT") investments to further enhance our capabilities, and other activities, relative to 2019, the Company expects to achieve a reduction in annual insurance operating costs and other expenses of approximately $540by 2022 and $625by 2023. To achieve those expected savings, we expect to incur approximately $393over the course of the program, with $253expensed cumulatively through June 30, 2022, and expected expenses of $43over the last six months of 2022, $40in 2023, and $57after 2023, with the expenses after 2023 consisting mostly of amortization of internal use software and capitalized real estate costs. Included in the estimated costs of $393, we expect to incur restructuring costs of approximately $127, including $41of employee severance, $26to retire certain IT applications, and $60for consulting and lease termination expenses. Restructuring costs are reported as a charge to net income but not in core earnings. The following table presents Hartford Next program costs incurred, including restructuring costs, and expense savings realized in the six months ended June 30, 2022and expected annual costs and expense savings for the full year in 2022 and 2023: Hartford Next Costs and Expense Savings Six Months Ended June 30, 2022 Estimate for 2022 Estimate for 2023 Employee severance $ (7) $ (7) $ - IT costs to retire applications 5 10 5 Professional fees and other expenses 9 14 - Estimated restructuring costs 7 17 5 Non-capitalized IT costs 23 45 19 Other costs 5 12 6 Amortization of capitalized IT development costs 1 4 9
Amortization of capitalized real estate  - 1 1 Estimated costs within core earnings 29 62 35 Total Hartford Next program costs $ 36 $ 79 $ 40 Cumulative savings for the period relative to (267) (540) (625)
Net expense (savings) before tax: $ (231) $ (461) $ (585) Net expense (savings) before tax: Accounted for within core earnings $ (238) $ (478) $ (590) Restructuring costs recognized outside of core 7 17 5
Net expense (savings) before tax $ (231) $ (461) $ (585)
Does not include approx.
Does not include approx.
| Table of Contents Index to MD&A
Part I – Point 2. Management report and analysis of the financial situation and operating results
SECOND QUARTER FINANCIAL HIGHLIGHTS
Net Income Available to Net Income Available to Common Book Value per Common Stockholders Stockholders per Diluted Share Diluted Share
[[Image Removed: hig-20220630_g2.jpg]] [[Image Removed: hig-20220630_g3.jpg]]
[[Image Removed: hig-20220630_g4.jpg]] Þ Decreased
$463or 51% Þ Decreased $1.19or 47% Þ Decreased $9.15or 17.8%
– A change in the net amount realized – Decrease in net income – Decrease in equity
losses available to common
largely due to a decrease in AOCI,
mainly due to a change from the net
- Less favorable P&C prior
unrealized gains to net unrealized losses
accident year reserve on
titles also available for sale
development + Share repurchases as
dividends and shares of ordinary shareholders
redemptions exceeding net income
- Higher loss ratio in Personal Lines automobile and homeowners - Greater P&C underwriting expenses and Group Benefits insurance operating costs +
Reduction of outstanding shares due to
and other expenses share
– Decline in net investment income
– Higher disability loss
ratio in group benefits
+ In Commercial Lines, more
earned premiums and a decrease
current accident year loss
+ In collective guarantees, decrease
claims excess mortality and
the effect of higher premiums Investment Yield, After Tax Property & Casualty Group Benefits Net Income Combined Ratio Margin
[[Image Removed: hig-20220630_g5.jpg]] [[Image Removed: hig-20220630_g6.jpg]]
[[Image Removed: hig-20220630_g7.jpg]] Þ Decreased 40 bps Ý Increased 2.9 points Þ Decreased 4.1 points - Lower returns on limited + Lower favorable prior -
A change in net realized losses
partnerships and other accident year reserve alternative investments development -
A higher group loss ratio
due to lower paid family in New York
Leave risk adjustment allowance, with
– A fall in the valuation of + Rise in the personal automobile
equity fund investments in claim severity
the 2022 period due to the
recorded in the 2021 period decline in equity market - Lower current accident year levels loss ratio before catastrophes in Commercial Lines - Lower catastrophe losses -
Higher operating costs of insurance and
Reduction of excess mortality in group life
Higher ongoing fully insured premiums
| Table of Contents Index to MD&A
Part I – Point 2. Management report and analysis of the financial situation and operating results
CONSOLIDATED OPERATING RESULTS
The Consolidated Results of Operations should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the related Notes as well as with the segment operating results sections of MD&A.
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