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Hartford Financial Services (HIG)

Filed: 3 Nov 19, 7:00pm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________ 
FORM 10-Q
 ____________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 001-13958
____________________________________ 
staglogoa03a01a02.jpg
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3317783
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
One Hartford Plaza, Hartford, Connecticut 06155
(Address of principal executive offices) (Zip Code)
(860) 547-5000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareHIGThe New York Stock Exchange
6.10% Notes due October 1, 2041HIG 41The New York Stock Exchange
7.875% Fixed-to-Floating Rate Junior Subordinated Debentures due 2042HGHThe New York Stock Exchange
Depositary Shares, Each Representing a 1/1,000th Interest in a Share of 6.000% Non-Cumulative Preferred Stock, Series G, par value $0.01 per shareHIG PR GThe New York Stock Exchange


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Indicate by check mark:    
     
•     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.YesNo
     
•     whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).YesNo
     
•     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.    
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company

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.  
•     whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YesNo
As of November 1, 2019, there were outstanding 360,421,232 shares of Common Stock, $0.01 par value per share, of the registrant.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
ItemDescriptionPage
  
1.      FINANCIAL STATEMENTS 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
 CONDENSED CONSOLIDATED BALANCE SHEETS - AS OF SEPTEMBER 30, 2019 AND DECEMBER 31, 2018
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
 CONDENSED CONOLIDATED STATEMENTS OF CASH FLOWS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK[a]
4.      CONTROLS AND PROCEDURES
  
1.      LEGAL PROCEEDINGS
1A.   RISK FACTORS
2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
6.      EXHIBITS
 EXHIBITS INDEX
 SIGNATURE
[a]The information required by this item is set forth in the Enterprise Risk Management section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.


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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 II, Item 1A of The Hartford’s Quarterly Report on Form 10-Q for the period ended June 30, 2019, Part I, Item 1A, Risk Factors in The Hartford’s 2018 Form 10-K Annual Report; and our other filings with the Securities and Exchange Commission ("SEC").
Risks Relating to Economic, Political and Global Market Conditions:
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, changes in trade regulation including tariffs and other barriers or other potentially adverse macroeconomic developments on the demand for our products and returns in our investment portfolios;
market risks associated with our business, including changes in credit spreads, equity prices, interest rates, inflation rate, and market volatility;
the impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy;
the impacts of changing climate and weather patterns on our businesses, operations and investment portfolio including on claims, demand and pricing of our products, the availability and cost of reinsurance, our modeling data used to evaluate and manage risks of catastrophes and severe weather events, the value of our investment portfolios and credit risk with reinsurers and other counterparties;
the risks associated with the change in or replacement of the London Inter-Bank Offered Rate ("LIBOR") on the securities we hold or may have issued, other financial instruments and any other assets and liabilities whose value is tied to LIBOR;
the impacts associated with the withdrawal of the United Kingdom (“U.K.”) from the European Union (“E.U.”) on our international operations in the U.K. and E.U.
Insurance Industry and Product-Related Risks:
the possibility of unfavorable loss development, including with respect to long-tailed exposures;
the significant uncertainties that limit our ability to estimate the ultimate reserves necessary for asbestos and environmental claims;
the possibility of a pandemic, earthquake, or other natural or man-made disaster that may adversely affect our businesses;
weather and other natural physical events, including the intensity and frequency of storms, hail, wildfires, flooding, winter storms, hurricanes and tropical storms, as well as climate change and its potential impact on weather patterns;
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;
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;
actions by competitors that may be larger or have greater financial resources than we do;
technological changes, such as usage-based methods of determining premiums, advancements 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;
the Company's ability to market, distribute and provide insurance products and investment advisory services through current and future distribution channels and advisory firms;
the uncertain effects of emerging claim and coverage issues;
Financial Strength, Credit and Counterparty Risks:
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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capital requirements which are subject to many factors, including many that are outside the Company’s control, such as NAIC risk based capital formulas, Funds at Lloyd's and Solvency Capital Requirement, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results;
losses due to nonperformance or defaults by others, including credit risk with counterparties associated with investments, derivatives, premiums receivable, reinsurance recoverables and indemnifications provided by third parties in connection with previous dispositions;
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;
state and international regulatory limitations on the ability of the Company and certain of its subsidiaries to declare and pay dividends;
Risks Relating to Estimates, Assumptions and Valuations:
risk associated with the use of analytical models in making decisions in key areas such as underwriting, pricing, capital management, reserving, investments, reinsurance and catastrophe risk management;
the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the Company’s fair value estimates for its investments and the evaluation of other-than-temporary impairments on available-for-sale securities;
the potential for further impairments of our goodwill or the potential for changes in valuation allowances against deferred tax assets;
Strategic and Operational Risks:
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;
the potential for difficulties arising from outsourcing and similar third-party relationships;
the risks, challenges and uncertainties associated with capital management plans, expense reduction initiatives and other actions, which may include acquisitions, divestitures or restructurings;
risks associated with acquisitions and divestitures, including the challenges of integrating acquired companies or businesses or separating from our divested businesses, which may result in our inability to achieve the anticipated benefits and synergies and may result in unintended consequences;
difficulty in attracting and retaining talented and qualified personnel, including key employees, such as executives, managers and employees with strong technological, analytical and other specialized skills;
the Company’s ability to protect its intellectual property and defend against claims of infringement;
Regulatory and Legal Risks:
the cost and other potential effects of increased federal, state and international regulatory and legislative developments, including those that could adversely impact the demand for the Company’s products, operating costs and required capital levels;
unfavorable judicial or legislative developments;
the impact of changes in federal or state tax laws;
regulatory requirements that could delay, deter or prevent a takeover attempt that stockholders might consider in their best interests; and
the impact of potential changes in accounting principles and related financial reporting requirements.
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.

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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

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of September 30, 2019, the related condensed consolidated statements of operations, comprehensive income (loss), and changes in stockholders' equity for the three-month and nine-month periods ended September 30, 2019 and 2018, and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2019 and 2018, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it 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) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 22, 2019, 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, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. 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 PCAOB, 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.
/s/ DELOITTE & TOUCHE LLP

Hartford, Connecticut
November 4, 2019



6

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations

 Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except for per share data)20192018 20192018
 (Unaudited)
Revenues     
Earned premiums$4,394
$3,987
 $12,500
$11,872
Fee income330
344
 970
994
Net investment income490
444
 1,448
1,323
Net realized capital gains (losses):     
Total other-than-temporary impairment ("OTTI") losses(1)(4) (5)(6)
OTTI losses recognized in other comprehensive income (“OCI”)
3
 2
5
Net OTTI losses recognized in earnings(1)(1) (3)(1)
 Other net realized capital gains90
39
 335
61
 Total net realized capital gains89
38
 332
60
Other revenues44
29
 129
73
Total revenues5,347
4,842
 15,379
14,322
Benefits, losses and expenses     
Benefits, losses and loss adjustment expenses2,914
2,786
 8,533
8,219
Amortization of deferred policy acquisition costs ("DAC")437
348
 1,184
1,034
Insurance operating costs and other expenses1,167
1,091
 3,356
3,195
Loss on extinguishment of debt90

 90
6
Loss on reinsurance transaction

 91

Interest expense67
69
 194
228
Amortization of other intangible assets19
18
 47
54
Total benefits, losses and expenses4,694
4,312
 13,495
12,736
Income from continuing operations, before tax653
530
 1,884
1,586
 Income tax expense118
103
 347
297
Income from continuing operations, net of tax535
427
 1,537
1,289
Income from discontinued operations, net of tax
5
 
322
Net income535
432
 1,537
1,611
Preferred stock dividends11

 16

Net income available to common stockholders$524
$432
 $1,521
$1,611
      
Income from continuing operations, net of tax, available to common stockholders per common share

   
Basic$1.45
$1.19
 $4.21
$3.60
Diluted$1.43
$1.17
 $4.17
$3.54
Net income available to common stockholders per common share


   
Basic$1.45
$1.20
 $4.21
$4.50
Diluted$1.43
$1.19
 $4.17
$4.42
See Notes to Condensed Consolidated Financial Statements.

7

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)

 Three Months Ended September 30, Nine Months Ended September 30,
(in millions)20192018 20192018
 (Unaudited)
Net income$535
$432
 $1,537
$1,611
Other comprehensive income (loss):     
Changes in net unrealized gain on securities401
(171) 1,744
(2,164)
Changes in OTTI losses recognized in other comprehensive income
(1) 1
(1)
Changes in net gain on cash flow hedging instruments6
(5) 22
(37)
Changes in foreign currency translation adjustments(4)1
 
(4)
Changes in pension and other postretirement plan adjustments9
10
 26
29
OCI, net of tax412
(166) 1,793
(2,177)
Comprehensive income (loss)$947
$266
 $3,330
$(566)
See Notes to Condensed Consolidated Financial Statements.

8

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets

(in millions, except for share and per share data)September 30,
2019
December 31, 2018
 (Unaudited) 
Assets
Investments:

Fixed maturities, available-for-sale, at fair value (amortized cost of $40,174 and $35,603)$42,389
$35,652
Fixed maturities, at fair value using the fair value option39
22
Equity securities, at fair value1,414
1,214
Mortgage loans (net of allowances for loan losses of $0 and $1)3,736
3,704
Limited partnerships and other alternative investments1,770
1,723
Other investments302
192
Short-term investments2,927
4,283
Total investments52,577
46,790
Cash207
112
Restricted cash83
9
Premiums receivable and agents’ balances, net4,580
3,995
Reinsurance recoverables, net5,333
4,357
Deferred policy acquisition costs772
670
Deferred income taxes, net376
1,248
Goodwill1,913
1,290
Property and equipment, net1,194
1,006
Other intangible assets, net1,126
657
Other assets2,095
2,173
Total assets$70,256
$62,307
Liabilities

Unpaid losses and loss adjustment expenses$36,188
$33,029
Reserve for future policy benefits645
642
Other policyholder funds and benefits payable764
767
Unearned premiums6,820
5,282
Short-term debt500
413
Long-term debt4,346
4,265
Other liabilities4,915
4,808
Total liabilities54,178
49,206
Commitments and Contingencies Note (12)

Stockholders’ Equity

Preferred stock, $0.01 par value — 50,000,000 shares authorized, 13,800 shares issued at September 30, 2019 and December 31, 2018, aggregate liquidation preference of $345334
334
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 384,923,222 shares issued at September 30, 2019 and December 31, 20184
4
Additional paid-in capital4,302
4,378
Retained earnings12,251
11,055
Treasury stock, at cost — 23,940,696 and 25,772,238 shares(1,027)(1,091)
 Accumulated other comprehensive income (loss), net of tax214
(1,579)
Total stockholders’ equity16,078
13,101
Total liabilities and stockholders’ equity$70,256
$62,307
See Notes to Condensed Consolidated Financial Statements.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity

 Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except for share data)20192018 20192018
 (Unaudited)
Preferred Stock$334
$
 $334
$
Common Stock4
4
 4
4
Additional Paid-in Capital     
Additional Paid-in Capital, beginning of period4,300
4,374
 4,378
4,379
Issuance of shares under incentive and stock compensation plans(17)(9) (91)(92)
Stock-based compensation plans expense19
22
 95
105
Issuance of shares for warrant exercise
(2) (80)(7)
Additional Paid-in Capital, end of period4,302
4,385
 4,302
4,385
Retained Earnings     
Retained Earnings, beginning of period11,836
10,649
 11,055
9,642
Cumulative effect of accounting changes, net of tax

 
5
Adjusted balance, beginning of period11,836
10,649
 11,055
9,647
Net income535
432
 1,537
1,611
Dividends declared on preferred stock(11)
 (16)
Dividends declared on common stock(109)(108) (325)(285)
Retained Earnings, end of period12,251
10,973
 12,251
10,973
Treasury Stock, at cost     
Treasury Stock, at cost, beginning of period(984)(1,128) (1,091)(1,194)
Treasury stock acquired(63)
 (90)
Issuance of shares under incentive and stock compensation plans27
14
 112
109
Net shares acquired related to employee incentive and stock compensation plans(7)(2) (38)(36)
Issuance of shares for warrant exercise
2
 80
7
Treasury Stock, at cost, end of period(1,027)(1,114) (1,027)(1,114)
Accumulated Other Comprehensive Income (Loss), net of tax     
Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period(198)(1,353) (1,579)663
Cumulative effect of accounting changes, net of tax

 
(5)
Adjusted balance, beginning of period(198)(1,353) (1,579)658
Total other comprehensive income (loss)412
(166) 1,793
(2,177)
Accumulated Other Comprehensive Income (Loss), net of tax, end of period214
(1,519) 214
(1,519)
Total Stockholders’ Equity$16,078
$12,729
 $16,078
$12,729
Preferred Shares Outstanding     
Preferred Shares Outstanding, beginning of period13,800

 13,800

Issuance of preferred shares

 

Preferred Shares Outstanding, end of period13,800

 13,800

Common Shares Outstanding     
Common Shares Outstanding, beginning of period (in thousands)361,605
358,359
 359,151
356,835
Treasury stock acquired(1,076)
 (1,581)
Issuance of shares under incentive and stock compensation plans588
331
 2,447
2,373
Return of shares under incentive and stock compensation plans to treasury stock(134)(57) (755)(694)
Issuance of shares for warrant exercise
43
 1,721
162
Common Shares Outstanding, at end of period360,983
358,676
 360,983
358,676
Cash dividends declared per common share$0.30
$0.30
 $0.90
$0.80
Cash dividends declared per preferred share$750.00
$
 $1,125.00
$
See Notes to Condensed Consolidated Financial Statements.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows

 Nine Months Ended September 30,
(in millions)20192018
Operating Activities(Unaudited)
Net income$1,537
$1,611
Adjustments to reconcile net income to net cash provided by operating activities:  
Net realized capital gains(332)(7)
Amortization of deferred policy acquisition costs1,184
1,092
Additions to deferred policy acquisition costs(1,222)(1,057)
Depreciation and amortization333
359
Loss on extinguishment of debt90
6
Gain on sale
(202)
Other operating activities, net75
346
Change in assets and liabilities:  
Decrease in reinsurance recoverables115
111
Decrease (increase) in accrued and deferred income taxes784
(74)
Increase (decrease) in insurance liabilities630
(119)
Net change in other assets and other liabilities(748)(224)
Net cash provided by operating activities2,446
1,842
Investing Activities  
Proceeds from the sale/maturity/prepayment of:  
Fixed maturities, available-for-sale14,335
20,069
Fixed maturities, fair value option7
21
Equity securities, at fair value1,260
1,171
Mortgage loans491
314
Partnerships201
377
Payments for the purchase of:  
Fixed maturities, available-for-sale(15,592)(18,679)
Equity securities, at fair value(847)(1,084)
Mortgage loans(515)(667)
Partnerships(218)(408)
Net proceeds from (payments for) derivatives60
(228)
Net additions of property and equipment(75)(70)
Net proceeds from (payments for) short-term investments1,480
(2,689)
Other investing activities, net(6)(4)
Proceeds from business sold, net of cash transferred
1,115
Amount paid for business acquired, net of cash acquired(1,901)
Net cash used for investing activities(1,320)(762)
Financing Activities  
Deposits and other additions to investment and universal life-type contracts107
1,814
Withdrawals and other deductions from investment and universal life-type contracts(101)(9,210)
Net transfers from separate accounts related to investment and universal life-type contracts
6,949
Repayments at maturity or settlement of consumer notes
(2)
Net decrease in securities loaned or sold under agreements to repurchase(291)(646)
Repayment of debt(1,583)(826)
Proceeds from the issuance of debt1,376
490
Net issuance (return) of shares under incentive and stock compensation plans(18)10
Treasury stock acquired(90)
Dividends paid on preferred stock(16)
Dividends paid on common stock(327)(270)
Net cash used for financing activities(943)(1,691)
Foreign exchange rate effect on cash(14)(4)
Net increase (decrease) in cash, including cash classified as assets held for sale169
(615)
 Less: Net increase (decrease) in cash classified as assets held for sale
(537)
Net increase (decrease) in cash and restricted cash169
(78)
Cash and restricted cash – beginning of period121
180
Cash and restricted cash– end of period$290
$102
Supplemental Disclosure of Cash Flow Information  
Income tax received (paid)$420
$(1)
Interest paid$210
$197
See Notes to Condensed Consolidated Financial Statements.

11

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
(Unaudited)





1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 (collectively, “The Hartford”, the “Company”, “we” or “our”).
On May 23, 2019, the Company completed the previously announced acquisition of The Navigators Group, Inc. ("Navigators Group"), a global specialty underwriter, for $70 a share, or $2.137 billion in cash, including transaction expenses. For further discussion of this transaction, see Note 2 - Business Acquisition of Notes to Condensed Consolidated Financial Statements.
On May 31, 2018, Hartford Holdings, Inc., a wholly owned subsidiary of the Company, completed the sale of the issued and outstanding equity of Hartford Life, Inc. (“HLI”), a holding company, for its life and annuity operating subsidiaries. For further discussion of this transaction, see Note 17 - Business Disposition and Discontinued Operations 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 2018 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 2018 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 that are not held for sale have been eliminated.
Discontinued Operations
The results of operations of a component of the Company are reported in discontinued operations when certain criteria are met as of the date of disposal, or earlier if classified as held-for-sale. When a component is identified for discontinued operations reporting, amounts for prior periods are retrospectively reclassified as discontinued operations. Components are identified as discontinued operations if they are a major part of an entity's operations and financial results such as a separate major line of business or a separate major geographical area of operations.
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 insurance product reserves, net of reinsurance; evaluation of goodwill for impairment; valuation of investments and derivative instruments; valuation allowance on deferred tax assets; and contingencies relating to corporate litigation and regulatory matters.
Reclassifications
Certain reclassifications have been made to prior year financial information to conform to the current year presentation. In particular, restricted cash has been reclassified out of cash to a separate line on the Condensed Consolidated Balance Sheets. Restrictions on cash primarily relate to funds that are held to support regulatory and contractual obligations.
Adoption of New Accounting Standards
Hedging Activities
On January 1, 2019, the Company adopted the Financial Accounting Standards Board's ("FASB") updated guidance for hedge accounting through a cumulative effect adjustment of less than $1 to reclassify cumulative ineffectiveness on cash flow hedges from retained earnings to accumulated other comprehensive income ("AOCI"). The updates allow hedge accounting for new types of interest rate hedges of financial instruments and simplify documentation requirements to qualify for hedge accounting. In addition, any gain or loss from hedge

12

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

ineffectiveness is reported in the same income statement line with the effective hedge results and the hedged transaction. For cash flow hedges, the ineffectiveness is recognized in earnings only when the hedged transaction affects earnings; otherwise, the ineffectiveness gains or losses remain in AOCI. Under previous accounting, total hedge ineffectiveness was reported separately in realized capital gains and losses apart from the hedged transaction. The adoption did not affect the Company’s financial position or cash flows or have a material effect on net income.
Leases
On January 1, 2019, the Company adopted the FASB’s updated lease guidance. Under the updated guidance, lessees with operating leases are required to recognize a liability for the present value of future minimum lease payments with a corresponding asset for the right of use of the property. Prior to the new guidance, future minimum lease payments on operating leases were commitments that were not recognized as liabilities on the balance sheet. Leases are classified as financing or operating leases. Where the lease is economically similar to a purchase because The Hartford obtains control of the underlying asset, the lease is classified as a financing lease and the Company recognizes amortization of the right of use asset and interest expense on the liability. Where the lease provides The Hartford with only the right to control the use of the underlying asset over the lease term and the lease term is greater than one year, the lease is an operating lease and the lease cost is recognized as rental expense over the lease term on a straight-line basis. Leases with a term of one year or less are also expensed over the lease term but not recognized on the balance sheet. On adoption, The Hartford recorded a lease payment obligation of $160 for outstanding leases and a right of use asset of $150, which is net of $10 in lease incentives received, with no change to comparative periods. As permitted by the new guidance, as of the
 
implementation date, the Company did not reassess whether expired or existing contracts are leases or contain leases, did not change the classification of expired or existing operating leases, and did not reassess initial direct costs for existing leases to determine if deferred costs should be written-off or recorded on adoption. The adoption did not impact net income or cash flows.
Future Adoption of New Accounting Standards
Financial Instruments - Credit Losses
The FASB issued updated guidance for recognition and measurement of credit losses on financial instruments. See Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company's 2018 Form 10-K Annual Report for more information on the future adoption of the new financial instruments credit losses accounting standard. The Company will adopt the updated guidance January 1, 2020, as required, although earlier adoption is permitted.  While the ultimate impact of the adoption will depend on the size and composition of the financial instruments and market conditions at the adoption date, the adoption is not expected to have a material effect on the Company’s financial position, cash flows or net income.  The Company’s implementation activities are ongoing and include review and validation of methodologies, data and assumptions used to estimate expected credit losses on financial instruments carried at other than fair value as well as testing updates to our investment accounting system to establish and adjust valuation allowances for fixed maturities, available for sale (“AFS”), subject to a fair value floor.

2. BUSINESS ACQUISITION
Navigators Group
On May 23, 2019, The Hartford acquired 100% of the outstanding shares of Navigators Group for $70 a share, or $2.121 billion in cash, comprised of cash of $2.098 billion and a liability for cash awards to replace share-based awards of $23. The acquisition of the specialty underwriter expands product offerings and geographic reach, and adds underwriting and industry talent to strengthen the Company’s value proposition to agents and customers.

13

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
 As of May 23, 2019
Assets 
Cash and invested assets$3,848
Premiums receivable492
Reinsurance recoverables1,100
Prepaid reinsurance premiums238
Other intangible assets580
Property and equipment83
Other assets99
Total Assets Acquired6,440
Liabilities 
Unpaid losses and loss adjustment expenses2,823
Unearned premiums1,219
Long-term debt284
Deferred income taxes, net48
Other liabilities568
Total Liabilities Assumed4,942
Net identifiable assets acquired1,498
Goodwill [1]623
Net Assets Acquired$2,121
[1] Non-deductible for income tax purposes.
Intangible Assets Recorded in Connection with the Acquisition
AssetAmountWeighted Average Expected Life
Value of in-force contracts - Property and Casualty ("P&C")$180
1
Distribution relationships302
15
Trade name17
10
Total finite life intangibles499
10
Capacity of Lloyd's Syndicate66

Licenses15

Total indefinite life intangibles81
 
Total other intangible assets$580
 

The value of in-force contracts represents the estimated profits relating to the unexpired contracts in force net of related prepaid reinsurance at the acquisition date through expiry of the contracts. The value of distribution relationships was estimated using net cash flows expected to come from the renewals of in-force contracts and new business sold through existing distribution partners less costs to service the related policies. The value of the trade name was estimated using an assumed cost of a market-based royalty fee applied to net cash flows expected to come from business marketed as Navigators, a brand of The Hartford. Lloyd's of London is an insurance market-place operating worldwide ("Lloyd's"). Lloyd's does not underwrite risks. Corporate members accept underwriting risks through the
 
syndicates that they form. The Company accepts risks as the sole corporate member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"). The value of the capacity of Lloyd’s Syndicate was estimated using net cash flows attributable to Navigators Group's right to underwrite business up to an approved level of premium in the Lloyd’s market. The values for in-force contracts, the distribution relationships, trade name and the capacity of the Lloyd's Syndicate were estimated using a discounted cash flow method. Significant inputs to the valuation models include estimates of expected new business, premium retention rates, investment returns, claim costs, expenses and discount rates based on a weighted average cost of capital. The value of licenses to write insurance in over 50 U.S. jurisdictions was estimated based on recent transactions for shell companies.
Expected Pre-tax Amortization Expense [1] for Acquired Intangibles as of September 30, 2019

Value of In-force ContractsOther Intangible Assets
2019 (three months)$38
$5
2020$47
$22
2021$21
$22
2022$9
$22
2023$
$22
[1] In the Condensed Consolidated Statements of Operations, the amortization of value of in-force contracts is reported in amortization of deferred policy acquisition costs and the amortization of other intangible assets is reported in amortization of other intangible assets.
Property and equipment includes real estate owned and right of use assets under leases that were valued based on current values and market rental rates, software that was valued based on estimated replacement cost and furniture and equipment. These will be amortized over periods consistent with the Company’s policy.
The fair value of unpaid losses and loss adjustment expenses net of related reinsurance recoverables was estimated based on the present value of expected future net unpaid loss and loss adjustment expense payments discounted using a risk-free interest rate as of the acquisition date plus a risk margin. The discount and risk margin amounts substantially offset.
Debt assumed in the transaction was valued based on the principal and interest payments discounted at the current market yield. This debt was paid off in August 2019. For further discussion of this transaction, see Note 10 - Debt of Notes to Condensed Consolidated Financial Statements.
The $623 of goodwill recognized is largely attributable to the acquired employee workforce and underwriting talent, leverageable operating platform, improved investment yield and economies of scale. Goodwill is allocated to the Company's Commercial Lines reporting segment.
Immediately after closing on the acquisition of Navigators Group, effective May 23, 2019, the Company purchased an aggregate excess of loss reinsurance agreement covering adverse reserve development (“Navigators ADC”) from National Indemnity Company ("NICO") on behalf of Navigators Insurance Company and certain of its affiliates (collectively, the “Navigators Insurers”). Under the Navigators ADC, the Navigators Insurers paid NICO a

14

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

reinsurance premium of $91 in exchange for reinsurance coverage of $300 of adverse net loss reserve development that attaches $100 above the Navigators Insurers' existing net loss and allocated loss adjustment reserves as of December 31, 2018 subject to the treaty of $1.816 billion for accidents and losses prior to December 31, 2018. In addition to recognizing a $91 before tax charge to earnings in the second quarter of 2019 for the Navigators ADC reinsurance premium, the Company recognized a charge against earnings of $97 before tax in the second quarter of 2019 as a result of a review of Navigators Insurers’ net acquired reserves upon acquisition of the business. Navigators Insurers had previously recognized $52 before tax of adverse reserve development in the first quarter of 2019, including $32 of adverse development subject to the Navigators ADC. As such, reserve development of $97 before tax in the second quarter of 2019 included $68 remaining of the $100 Navigators ADC retention for 2018 and prior accident years and $29 of adverse reserve development related to the 2019 accident year which is not covered by the ADC. The $68 of reserve development for the 2018 and prior accident years recorded in the second quarter of 2019 was net of a $91 reinsurance recoverable recognized under the Navigators ADC with the Company having ceded $91 of the $300 available limit, leaving $209 of remaining limit. There was no additional net adverse development subject to the Navigators ADC in the third quarter as reserve increases in commercial auto were offset by decreases in general liability, marine, commercial property and professional liability. The Navigators ADC will be accounted for as retroactive reinsurance and future adverse reserve development, if any, would result in recognizing a deferred gain.
Since the acquisition date of May 23, 2019, the revenues and net losses of the business acquired have been included in the Company's Consolidated Statements of Operations in the
 
Commercial Lines reporting segment and were $616 and $140, respectively, during the period from the acquisition date to September 30, 2019, including the $91 before tax ($72 net of tax) of premium paid for the Navigators ADC and the charge of $97 before tax ($77 net of tax) for the increase in acquired reserves following the acquisition.
The Company recognized $16 of acquisition related costs for the nine months ended September 30, 2019. These costs are included in insurance operating costs and other expenses in the Condensed Consolidated Statement of Operations.
The acquisition date fair values of assets and liabilities, including insurance reserves and intangible assets, as well as the related estimated useful lives of intangibles, are provisional and are subject to revision within one year of the acquisition date.
The following table presents supplemental unaudited pro forma amounts of revenue and net income for the nine months ended September 30, 2019 and 2018 for the Company as though the business was acquired on January 1, 2018. Pro forma adjustments include the revenue and earnings of Navigators Group for each period as well as amortization of identifiable intangible assets acquired.
Pro Forma Results for the Nine Months Ended September 30

RevenueEarnings
2019 Supplemental (unaudited) combined pro forma$16,055
$1,532
2018 Supplemental (unaudited) combined pro forma$15,404
$1,669


15

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 September 30, Nine Months Ended September 30,
(In millions, except for per share data)20192018 20192018
Earnings     
Income from continuing operations, net of tax$535
$427
 $1,537
$1,289
Less: Preferred stock dividends11

 16

Income from continuing operations, net of tax, available to common stockholders524
427
 $1,521
$1,289
Income from discontinued operations, net of tax, available to common stockholders
5
 
322
Net income available to common stockholders$524
$432
 $1,521
$1,611
Shares     
Weighted average common shares outstanding, basic361.4
358.6
 361.0
358.1
Dilutive effect of stock-based awards under compensation plans4.0
3.6
 3.4
4.0
Dilutive effect of warrants [1]
1.9
 0.7
2.0
Weighted average common shares outstanding and dilutive potential common shares365.4
364.1
 365.1
364.1
Earnings per common share     
Basic     
Income from continuing operations, net of tax, available to common stockholders$1.45
$1.19
 $4.21
$3.60
Income from discontinued operations, net of tax, available to common stockholders
0.01
 
0.90
Net income available to common stockholders$1.45
$1.20
 $4.21
$4.50
Diluted     
Income from continuing operations, net of tax, available to common stockholders$1.43
$1.17
 $4.17
$3.54
Income from discontinued operations, net of tax, available to common stockholders
0.02
 
0.88
Net income available to common stockholders$1.43
$1.19
 $4.17
$4.42
[1] On June 26, 2019, the Capital Purchase Program warrants issued in 2009 expired.
4. SEGMENT INFORMATION
The Company currently conducts business principally in 5 reporting segments including Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits and Hartford Funds, as well as a Corporate category. The Company includes in the Corporate category discontinued operations related to the life and annuity business sold in May 2018, reserves for run-off structured settlement and terminal funding agreement liabilities, capital raising activities (including debt financing and related interest expense), transaction expenses incurred in connection with an acquisition, certain purchase accounting adjustments related to goodwill and other expenses not allocated to the reporting segments. Corporate also includes investment management fees and expenses related to managing third party business, including management of the invested assets
 
of Talcott Resolution Life, Inc. and its subsidiaries ("Talcott Resolution"). Talcott Resolution is the new holding company of the life and annuity business the Company sold in May 2018. In addition, Corporate includes a 9.7% ownership interest in the legal entity that acquired the sold life and annuity business. For further discussion of continued involvement in the life and annuity business sold in May 2018, see Note 17 - Business Disposition and Discontinued Operations of Notes to Condensed Consolidated Financial Statements.
The Company's revenues are generated primarily in the United States ("U.S.") as well as in the United Kingdom, continental Europe and other international locations.

16

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Net Income
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018 20192018
Commercial Lines$336
$289
 $890
$959
Personal Lines94
51
 252
146
Property & Casualty Other Operations18
9
 52
31
Group Benefits146
77
 377
227
Hartford Funds40
41
 108
112
Corporate(99)(35) (142)136
Net income535
432
 1,537
1,611
Preferred stock dividends11

 16

Net income available to common stockholders$524
$432
 $1,521
$1,611


17

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenues
 Three Months Ended September 30, Nine Months Ended September 30,

20192018 20192018
Earned premiums and fee income:

 

Commercial Lines

 

Workers’ compensation$825
$845
 $2,480
$2,495
Liability330
170
 731
480
Marine59

 86

Package business376
343
 1,092
1,013
Property198
154
 529
456
Professional liability137
65
 304
190
Bond67
60
 192
179
Assumed reinsurance75

 104

Automobile191
157
 522
454
Total Commercial Lines2,258
1,794
 6,040
5,267
Personal Lines



 



Automobile564
598
 1,690
1,809
Homeowners248
261
 741
785
Total Personal Lines [1]812
859
 2,431
2,594
Group Benefits



 



Group disability697
684
 2,124
2,051
Group life621
652
 1,902
1,968
Other64
60
 187
179
Total Group Benefits1,382
1,396
 4,213
4,198
Hartford Funds



 



Mutual fund and Exchange-Traded Products ("ETP")231
242
 674
710
Talcott Resolution life and annuity separate accounts [2]23
25
 69
76
Total Hartford Funds254
267
 743
786
Corporate18
15
 43
21
Total earned premiums and fee income4,724
4,331
 13,470
12,866
Net investment income490
444
 1,448
1,323
Net realized capital gains89
38
 332
60
Other revenues44
29
 129
73
Total revenues$5,347
$4,842
 $15,379
$14,322

[1]
For the three months ended September 30, 2019 and 2018, AARP members accounted for earned premiums of $729 and $758, respectively. For the nine months ended September 30, 2019 and 2018, AARP members accounted for earned premiums of $2.2 billion and $2.3 billion, respectively.
[2]Represents revenues earned for investment advisory services on the life and annuity separate account AUM sold in May 2018 that is still managed by the Company's Hartford Funds segment.

18

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue from Non-Insurance Contracts with Customers
  Three months ended September 30, Nine months ended September 30,
 Revenue Line Item20192018 20192018
Commercial Lines    



Installment billing feesFee income$8
$9
 $26
$26
Personal Lines 



 



Installment billing feesFee income9
10
 28
30
Insurance servicing revenuesOther revenues23
24
 65
66
Group Benefits 



 



Administrative servicesFee income45
43
 135
131
Hartford Funds 



 



Advisor, distribution and other management feesFee income232
245
 677
722
Other feesFee income22
21
 65
63
Corporate 



 



Investment management and other feesFee income14
15
 38
21
Transition service revenuesOther revenues6
6
 18
8
Total non-insurance revenues with customers $359
$373
 $1,052
$1,067

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 1Fair 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 2Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or based on prices for similar assets and liabilities.
 
Level 3Fair 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.

19

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of September 30, 2019
 TotalQuoted 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")$1,337
$
$1,337
$
Collateralized loan obligations ("CLOs")2,158

1,862
296
Commercial mortgage-backed securities ("CMBS")4,254

4,234
20
Corporate17,801

17,078
723
Foreign government/government agencies1,117

1,114
3
Municipal9,895

9,895

Residential mortgage-backed securities ("RMBS")4,732

4,118
614
U.S. Treasuries1,095
7
1,088

Total fixed maturities42,389
7
40,726
1,656
Fixed maturities, FVO39

39

Equity securities, at fair value1,414
1,196
148
70
Derivative assets    
Credit derivatives9

9

Foreign exchange derivatives4

4

Interest rate derivatives(1)
(1)
Total derivative assets [1]12

12

Short-term investments2,927
1,211
1,716

Total assets accounted for at fair value on a recurring basis$46,781
$2,414
$42,641
$1,726
Liabilities accounted for at fair value on a recurring basis    
Derivative liabilities    
Credit derivatives(1)
(1)
Equity derivatives(5)

(5)
Foreign exchange derivatives4

4

Interest rate derivatives(69)
(69)
Total derivative liabilities [2](71)
(66)(5)
Contingent consideration [3](21)

(21)
Total liabilities accounted for at fair value on a recurring basis$(92)$
$(66)$(26)


20

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2018
 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")$1,276
$
$1,266
$10
Collateralized loan obligations ("CLOs")1,437

1,337
100
Commercial mortgage-backed securities ("CMBS")3,552

3,540
12
Corporate13,398

12,878
520
Foreign government/government agencies847

844
3
Municipal10,346

10,346

Residential mortgage-backed securities ("RMBS")3,279

2,359
920
U.S. Treasuries1,517
330
1,187

Total fixed maturities35,652
330
33,757
1,565
Fixed maturities, FVO22

22

Equity securities, at fair value1,214
1,093
44
77
Derivative assets    
Credit derivatives5

5

Equity derivatives3


3
Foreign exchange derivatives(2)
(2)
Interest rate derivatives1

1

Total derivative assets [1]7

4
3
Short-term investments4,283
1,039
3,244

Total assets accounted for at fair value on a recurring basis$41,178
$2,462
$37,071
$1,645
Liabilities accounted for at fair value on a recurring basis    
Derivative liabilities    
Credit derivatives(2)
(2)
Equity derivatives1

1

Foreign exchange derivatives(5)
(5)
Interest rate derivatives(62)
(63)1
Total derivative liabilities [2](68)
(69)1
Contingent consideration [3](35)

(35)
Total liabilities accounted for at fair value on a recurring basis$(103)$
$(69)$(34)

[1]Includes 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 and applicable law. See footnote 2 to this table for derivative liabilities.
[2]Includes 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 and applicable law.
[3]For additional information see the Contingent Consideration section below.
In connection with the acquisition of Navigators Group, the Company has overseas deposits in Other Invested Assets of $55 as of September 30, 2019, which are measured at fair value using the net asset value as a practical expedient. There were 0 overseas deposits held as of December 31, 2018.
Fixed Maturities, Equity Securities, Short-term Investments, and 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

21

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, such as municipal 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, 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 derivative instruments is determined primarily using a discounted cash flow model or option model technique and incorporates counterparty credit risk. In some cases, quoted market prices for exchange-traded and over-the-counter ("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.
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 to approve 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 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.

22

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, certain short-term investments, and exchange traded futures and option contracts.
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Derivatives
Level 2
Primary Observable Inputs
Level 3
Primary Unobservable Inputs
Fixed Maturity Investments
Structured securities (includes ABS, CLOs, 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 from 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
 
• 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
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
 Not applicable
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
 Not applicable
Interest rate derivatives
 • Swap yield curve 
• Independent broker quotes
• Interest rate volatility


23

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Significant Unobservable Inputs for Level 3 - Securities
Assets accounted for at fair value on a recurring basisFair
Value
Predominant
Valuation
Technique
Significant
Unobservable Input
MinimumMaximumWeighted Average [1]Impact of
Increase in Input
on Fair Value [2]
As of September 30, 2019
CLOs [3]$225
Discounted cash flowsSpread235 bps244 bps240 bpsDecrease
CMBS [3]$11
Discounted cash flowsSpread (encompasses prepayment, default risk and loss severity)9 bps1,832 bps197 bpsDecrease
Corporate [4]$508
Discounted cash flowsSpread126 bps668 bps223 bpsDecrease
RMBS [3]$614
Discounted cash flowsSpread [6]15 bps231 bps73 bpsDecrease
   Constant prepayment rate [6]1%11%6% Decrease [5]
   Constant default rate [6]1%5%3%Decrease
   Loss severity [6]—%100%72%Decrease
As of December 31, 2018
CMBS [3]$2
Discounted cash flowsSpread (encompasses prepayment, default risk and loss severity)9 bps1,040 bps182 bpsDecrease
Corporate [4]$274
Discounted cash flowsSpread145 bps1,175 bps263 bpsDecrease
RMBS [3]$815
Discounted cash flowsSpread [6]12 bps215 bps86 bpsDecrease
   Constant prepayment rate [6]1%15%6%Decrease [5]
   Constant default rate [6]1%8%3%Decrease
   Loss severity [6]—%100%61%Decrease
[1]The weighted average is determined based on the fair value of the securities.
[2]Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
[3]Excludes securities for which the Company bases fair value on broker quotations.
[4]Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value.
[5]Decrease for above market rate coupons and increase for below market rate coupons.
[6]Generally, a change in the assumption used for the constant default rate would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for constant prepayment rate and would have resulted in wider spreads.
Significant Unobservable Inputs for Level 3 - Derivatives
 Fair
Value
Predominant
Valuation 
Technique
Significant Unobservable InputMinimumMaximumWeighted Average [1]Impact of 
Increase in Input on 
Fair Value [2]
As of September 30, 2019
Equity options$(5)Option modelEquity volatility11%25%15%Increase
As of December 31, 2018
Interest rate swaptions [3]$1
Option modelInterest rate volatility3%3%3%Increase
Equity options$3
Option modelEquity volatility19%21%20%Increase
[1]The weighted average is determined based on the fair value of the derivatives.
[2]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.
[3]The swaptions presented are purchased options that have the right to enter into a pay-fixed swap.
The tables above exclude certain 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. As of

24

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019, 0 significant adjustments were made by the Company to broker prices received.
Contingent Consideration
The acquisition of Lattice Strategies LLC ("Lattice") on July 29, 2016 requires the Company to make payments to former owners of Lattice of up to $60 contingent upon growth in exchange-traded products ("ETP") assets under management ("AUM") over a period of four years 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 11.4%. The risk-adjusted discount rate is an internally generated and significant unobservable input to fair value.
The contingency period for ETP AUM growth ends July 29, 2020 and management adjusts the fair value of the contingent consideration when it revises its projection of ETP AUM for the acquired business. Before discounting to fair value, the Company estimates a total contingent consideration payout of $43, of which $20 was paid in the first nine months of 2019 with ETP AUM of $2.6 billion as of September 30, 2019. Accordingly, as of
 
September 30, 2019, the fair value of $21 reflects remaining consideration payable of $23, assuming ETP AUM for the acquired business grows to approximately $4.1 billion over the contingency period.
Level 3 Assets and Liabilities Measured at Fair Value on a 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 rollforward may be offset by realized and unrealized gains and losses of the associated assets and liabilities in other line items of the financial statements.
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Three Months Ended September 30, 2019
 Total realized/unrealized gains (losses)      
  Fair value as of June 30, 2019Included in net income [1]Included in OCI [2]PurchasesSettlementsSalesTransfers into Level 3 [3]Transfers out of Level 3 [3]Fair value as of September 30, 2019
Assets         
Fixed Maturities, AFS         
 ABS$5
$
$
$
$
$
$
$(5)$
 CLOs286


92
(8)

(74)296
 CMBS35


10
(1)

(24)20
 Corporate568
(3)
166
(7)(4)15
(12)723
 Foreign Govt./Govt. Agencies3







3
 RMBS758

(3)
(51)

(90)614
Total Fixed Maturities, AFS1,655
(3)(3)268
(67)(4)15
(205)1,656
Equity Securities, at fair value72
(2)





70
Total Assets$1,727
$(5)$(3)$268
$(67)$(4)$15
$(205)$1,726
Liabilities         
Contingent Consideration(21)






(21)
Derivatives, net [4]         
 Equity(3)(2)





(5)
Total Derivatives, net [4](3)(2)





(5)
Total Liabilities$(24)$(2)$
$
$
$
$
$
$(26)

25

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Nine Months Ended September 30, 2019
 Total realized/unrealized gains (losses)      
  Fair value as of January 1, 2019Included in net income [1]Included in OCI [2]PurchasesSettlementsSalesTransfers into Level 3 [3]Transfers out of Level 3 [3]Fair value as of September 30, 2019
Assets         
Fixed Maturities, AFS         
 ABS$10
$
$
$5
$(1)$
$
$(14)$
 CLOs100


329
(18)(6)
(109)296
 CMBS12

1
34
(3)

(24)20
 Corporate520
(4)9
261
(13)(68)61
(43)723
 Foreign Govt./Govt. Agencies3







3
 RMBS920
1
(5)134
(163)(35)
(238)614
Total Fixed Maturities, AFS1,565
(3)5
763
(198)(109)61
(428)1,656
Equity Securities, at fair value77
(3)
9

(13)

70
Derivatives, net [4]         
 Interest rate1
(1)






Total Derivatives, net [4]1
(1)






Total Assets$1,643
$(7)$5
$772
$(198)$(122)$61
$(428)$1,726
Liabilities         
Contingent Consideration(35)(6)

20



(21)
Derivatives, net [4]         
 Equity3
(8)





(5)
Total Derivatives, net [4]3
(8)





(5)
Total Liabilities$(32)$(14)$
$
$20
$
$
$
$(26)

26

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Three Months Ended September 30, 2018
 Total realized/unrealized gains (losses)      
  Fair value as of June 30, 2018Included in net income [1]Included in OCI [2]PurchasesSettlementsSalesTransfers into Level 3 [3]Transfers out of Level 3 [3]Fair value as of September 30, 2018
Assets         
Fixed Maturities, AFS         
 ABS$57
$
$
$39
$(2)$
$9
$(49)$54
 CLOs159


211



(74)296
 CMBS28
(1)1

(1)

(5)22
 Corporate559

(2)12
(2)(12)
(4)551
 Foreign Govt./Govt. Agencies3







3
 Municipal9







9
 RMBS1,137

(3)
(77)(26)
(97)934
Total Fixed Maturities, AFS1,952
(1)(4)262
(82)(38)9
(229)1,869
Equity Securities, at fair value66


12




78
Derivatives, net [4]         
 Equity1







1
 Interest rate2







2
Total Derivatives, net [4]3







3
Total Assets$2,021
$(1)$(4)$274
$(82)$(38)$9
$(229)$1,950
Liabilities         
Contingent Consideration(31)(1)





(32)
Total Liabilities$(31)$(1)$
$
$
$
$
$
$(32)

27

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Nine Months Ended September 30, 2018
 Total realized/unrealized gains (losses)      
  Fair value as of January 1, 2018Included in net income [1]Included in OCI [2]PurchasesSettlementsSalesTransfers into Level 3 [3]Transfers out of Level 3 [3]Fair value as of September 30, 2018
Assets         
Fixed Maturities, AFS         
 ABS$19
$
$
$89
$(5)$
$12
$(61)$54
 CLOs95


309

(4)
(104)296
 CMBS69
(1)
25
(4)(8)
(59)22
 Corporate520
1
(10)143
(34)(43)15
(41)551
 Foreign Govt./Govt. Agencies2


1




3
 Municipal17

(1)



(7)9
 RMBS1,230

(10)170
(251)(27)
(178)934
Total Fixed Maturities, AFS1,952

(21)737
(294)(82)27
(450)1,869
Equity Securities, at fair value76
28
1
13

(40)

78
Derivatives, net [4]         
 Equity1
1

1

(2)

1
 Interest rate1
1






2
Total Derivatives, net [4]2
2

1

(2)

3
Total Assets$2,030
$30
$(20)$751
$(294)$(124)$27
$(450)$1,950
Liabilities         
Contingent Consideration(29)(3)





(32)
Total Liabilities$(29)$(3)$
$
$
$
$
$
$(32)
[1]Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes.
[2]All amounts are before income taxes.
[3]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.
[4]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.

28

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
Changes in Unrealized Gains (Losses) for Financial Instruments Classified as
Level 3 Still Held at End of Period
  Three months ended September 30, Nine months ended September 30,
  2019201820192018 2019201820192018
  Changes in Unrealized Gain/(Loss) included in Net Income [1] [2]Changes in Unrealized Gain/(Loss) included in OCI [3] Changes in Unrealized Gain/(Loss) included in Net Income [1] [2]Changes in Unrealized Gain/(Loss) included in OCI [3]
Assets         
Fixed Maturities, AFS         
 CLOs$
$
$
$
 $
$
$1
$
 CMBS


1
 


1
 Corporate(2)

(2) (3)
8
(11)
 Foreign Govt./Govt. Agencies



 

1

 RMBS

(3)(3) 

(4)(10)
Total Fixed Maturities, AFS(2)
(3)(4) (3)
6
(20)
Equity Securities, at fair value(2)


 (2)


Derivatives, net         
 Equity
(1)

 
(1)

 Interest rate



 (1)


Total Derivatives, net
(1)

 (1)(1)

Total Assets$(4)$(1)$(3)$(4) $(6)$(1)$6
$(20)
Liabilities         
Contingent Consideration
(1)

 (6)(3)

Derivatives, net         
 Equity(2)


 (8)


Total Derivatives, net(2)


 (8)


Total Liabilities$(2)$(1)$
$
 $(14)$(3)$
$
[1]All amounts in these rows are reported in net realized capital gains (losses). All amounts are before income taxes.
[2]Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
[3]Changes in unrealized gain (loss) on fixed maturities, AFS are reported in changes in net unrealized gain on securities in the Condensed Consolidated Statements of Comprehensive Income. Changes in interest rate derivatives are reported in changes in net gain on cash flow hedging instruments in the Condensed Consolidated Statements of Comprehensive Income.
Fair Value Option
The Company has elected the fair value option for certain RMBS that contain embedded credit derivatives with underlying credit risk. These securities are included within Fixed Maturities, FVO on the Condensed Consolidated Balance Sheets and changes in the fair value of these securities are reported in net realized capital gains and losses.









 
As of September 30, 2019 and December 31, 2018, the fair value of assets and liabilities using the fair value option was $39 and $22, respectively, within the residential real estate sector.
For the three and nine months ended September 30, 2019 and 2018 there were 0 realized capital gains (losses) related to the fair value of assets using the fair value option.








29

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Financial Instruments Not Carried at Fair Value
Financial Assets and Liabilities Not Carried at Fair Value
 September 30, 2019 December 31, 2018
 Fair Value Hierarchy LevelCarrying AmountFair Value Fair Value Hierarchy LevelCarrying AmountFair Value
Assets       
Mortgage loansLevel 3$3,736
$3,900
 Level 3$3,704
$3,746
Liabilities       
Other policyholder funds and benefits payableLevel 3$772
$774
 Level 3$774
$775
Senior notes [1]Level 2$3,757
$4,416
 Level 2$3,589
$3,887
Junior subordinated debentures [1]Level 2$1,089
$1,122
 Level 2$1,089
$1,052

[1]Included in long-term debt in the Condensed Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
6. INVESTMENTS
Net Realized Capital Gains
 Three Months Ended September 30, Nine Months Ended September 30,
(Before tax)20192018 20192018
Gross gains on sales$77
$26
 $190
$91
Gross losses on sales(4)(41) (44)(129)
Equity securities [1]19
46
 181
88
Net OTTI losses recognized in earnings(1)(1) (3)(1)
Valuation allowances on mortgage loans

 1

Transactional foreign currency revaluation

 
1
Non-qualifying foreign currency derivatives2
1
 2
2
Other, net [2](4)7
 5
8
Net realized capital gains$89
$38
 $332
$60

[1]
Includes all changes in fair value and trading gains and losses for equity securities. The net unrealized gain (loss) on equity securities included in net realized capital gains (losses) related to equity securities still held as of September 30, 2019, were $17 and $100 for the three and nine months ended September 30, 2019, respectively. The net unrealized gain (loss) on equity securities included in net realized capital gains (losses) related to equity securities still held as of September 30, 2018, were $41 and $50 for the three and nine months ended September 30, 2018, respectively.
[2]
Includes gains (losses) on non-qualifying derivatives, excluding foreign currency derivatives, of $(7) and $8, respectively, for the three months ended September 30, 2019 and 2018. For the nine months ended September 30, 2019 and 2018, the non-qualifying derivatives, excluding foreign currency derivatives, were $1 and $6 respectively.
Net realized capital gains (losses) from investment sales are reported as a component of revenues and are determined on a specific identification basis. Before tax, net gains (losses) on sales and impairments previously reported as unrealized gains (losses) in AOCI were $72 and $143 for the three and nine months ended
 
September 30, 2019, respectively, and $(15) and $(59) for the three and nine months ended September 30, 2018, respectively. Proceeds from the sales of AFS securities totaled $2.6 billion and $11.5 billion for the three and nine months ended September 30, 2019 , respectively, and $4.6 billion and $13.1 billion, for the three and nine months ended September 30, 2018, respectively.
Recognition and Presentation of Other-Than-Temporary Impairments
The Company will record an other-than-temporary impairment (“OTTI”) for fixed maturities 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 fixed maturities 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.
Developing 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's considerations include, but are 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)

30

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.
Impairments in Earnings by Type
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018 20192018
Credit impairments$1
$1
 $3
$1
Total impairments$1
$1
 $3
$1

 
Cumulative Credit Impairments
 Three Months Ended September 30, Nine Months Ended September 30,
(Before tax)20192018 20192018
Balance as of beginning of period$(18)$(20) $(19)$(25)
Additions for credit impairments recognized on [1]:     
Securities not previously impaired(1)
 (3)
Securities previously impaired
(1) 
(1)
Reductions for credit impairments previously recognized on:     
Securities that matured or were sold during the period
1
 3
6
Balance as of end of period$(19)$(20) $(19)$(20)
[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
 September 30, 2019 December 31, 2018
 
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$1,315
$23
$(1)$1,337
$
 $1,272
$5
$(1)$1,276
$
CLOs2,162
4
(8)2,158

 1,455
2
(20)1,437

CMBS4,067
193
(6)4,254
(4) 3,581
35
(64)3,552
(5)
Corporate16,867
970
(36)17,801

 13,696
148
(446)13,398

Foreign govt./govt. agencies1,053
65
(1)1,117

 866
7
(26)847

Municipal9,095
801
(1)9,895

 9,972
421
(47)10,346

RMBS4,626
107
(1)4,732

 3,270
44
(35)3,279

U.S. Treasuries989
106

1,095

 1,491
41
(15)1,517

Total fixed maturities, AFS$40,174
$2,269
$(54)$42,389
$(4) $35,603
$703
$(654)$35,652
$(5)
[1]
Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of September 30, 2019 and December 31, 2018.

31

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fixed maturities, AFS, by Contractual Maturity Year
 September 30, 2019 December 31, 2018

Amortized CostFair Value Amortized CostFair Value
One year or less$1,226
$1,233
 $999
$1,002
Over one year through five years7,144
7,333
 5,786
5,791
Over five years through ten years7,405
7,812
 6,611
6,495
Over ten years12,229
13,530
 12,629
12,820
Subtotal28,004
29,908
 26,025
26,108
Mortgage-backed and asset-backed securities12,170
12,481
 9,578
9,544
Total fixed maturities, AFS$40,174
$42,389
 $35,603
$35,652

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 0 investment exposure to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity as of September 30, 2019 or December 31, 2018 other than U.S. government securities and certain U.S. government agencies.
Unrealized Losses on AFS Securities
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of September 30, 2019
 Less Than 12 Months 12 Months or More Total
 Amortized CostFair ValueUnrealized Losses Amortized CostFair ValueUnrealized Losses Amortized CostFair ValueUnrealized Losses
ABS$144
$143
$(1) $11
$11
$
 $155
$154
$(1)
CLOs1,109
1,105
(4) 429
425
(4) 1,538
1,530
(8)
CMBS88
87
(1) 31
26
(5) 119
113
(6)
Corporate930
918
(12) 497
473
(24) 1,427
1,391
(36)
Foreign govt./govt. agencies58
58

 39
38
(1) 97
96
(1)
Municipal128
127
(1) 


 128
127
(1)
RMBS166
165
(1) 69
69

 235
234
(1)
U.S. Treasuries37
37

 119
119

 156
156

Total fixed maturities, AFS in an unrealized loss position$2,660
$2,640
$(20) $1,195
$1,161
$(34) $3,855
$3,801
$(54)
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of December 31, 2018
 Less Than 12 Months 12 Months or More Total
 Amortized CostFair ValueUnrealized Losses Amortized CostFair ValueUnrealized Losses Amortized CostFair ValueUnrealized Losses
ABS$566
$566
$
 $113
$112
$(1) $679
$678
$(1)
CLOs1,358
1,338
(20) 7
7

 1,365
1,345
(20)
CMBS896
882
(14) 1,129
1,079
(50) 2,025
1,961
(64)
Corporate7,174
6,903
(271) 2,541
2,366
(175) 9,715
9,269
(446)
Foreign govt./govt. agencies407
391
(16) 203
193
(10) 610
584
(26)
Municipal1,643
1,613
(30) 292
275
(17) 1,935
1,888
(47)
RMBS1,344
1,329
(15) 648
628
(20) 1,992
1,957
(35)
U.S. Treasuries497
492
(5) 339
329
(10) 836
821
(15)
Total fixed maturities, AFS in an unrealized loss position$13,885
$13,514
$(371) $5,272
$4,989
$(283) $19,157
$18,503
$(654)


32

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of September 30, 2019, AFS securities in an unrealized loss position consisted of 781 securities, primarily in the corporate sector, which were depressed primarily due to widening of credit spreads since the securities were purchased. As of September 30, 2019, 95% of these securities were depressed less than 20% of cost or amortized cost. The decrease in unrealized losses during the nine months ended September 30, 2019 was primarily attributable to lower interest rates and tighter credit spreads.
Most of the securities depressed for twelve months or more relate to corporate securities which were primarily depressed because current market spreads are wider than 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
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.
As of September 30, 2019, mortgage loans had an amortized cost of $3.7 billion and carrying value of $3.7 billion, with 0 valuation allowance. As of December 31, 2018, mortgage loans had an
 
amortized cost of $3.7 billion and carrying value of $3.7 billion, with a valuation allowance of $1.
As of September 30, 2019, there were 0 mortgage loans that had a valuation allowance. As of December 31, 2018, the carrying value of mortgage loans that had a valuation allowance was $23. There were 0 mortgage loans held-for-sale as of September 30, 2019 or December 31, 2018. As of September 30, 2019, the Company had 0 mortgage loans that have had extensions or restructurings other than what is allowable under the original terms of the contract.
The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.
Valuation Allowance Activity
 20192018
Balance, as of January 1$(1)$(1)
Reversals1

Deductions

Balance, as of September 30$
$(1)

The weighted-average LTV ratio of the Company’s mortgage loan portfolio was 52% as of September 30, 2019, while the weighted-average LTV ratio at origination of these loans was 61%. 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. As of September 30, 2019 and December 31, 2018, the Company held 0 delinquent commercial mortgage loans past due by 90 days or more.
Mortgage Loans Credit Quality
 September 30, 2019 December 31, 2018
Loan-to-valueCarrying ValueAvg. Debt-Service Coverage Ratio Carrying ValueAvg. Debt-Service Coverage Ratio
65% - 80%481
1.53x 386
1.60x
Less than 65%3,255
2.52x 3,318
2.59x
Total mortgage loans$3,736
2.39x $3,704
2.49x


33

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Mortgage Loans by Region
 September 30, 2019 December 31, 2018
 Carrying ValuePercent of Total Carrying ValuePercent of Total
East North Central$274
7.3% $250
6.8%
Middle Atlantic306
8.2% 270
7.3%
Mountain63
1.7% 30
0.8%
New England345
9.2% 330
8.9%
Pacific835
22.4% 917
24.8%
South Atlantic743
19.9% 712
19.2%
West North Central121
3.2% 148
4.0%
West South Central406
10.9% 420
11.3%
Other [1]643
17.2% 627
16.9%
Total mortgage loans$3,736
100.0% $3,704
100.0%
[1]Primarily represents loans collateralized by multiple properties in various regions.
Mortgage Loans by Property Type
 September 30, 2019 December 31, 2018
 Carrying ValuePercent of Total Carrying
Value
Percent of Total
Commercial     
Industrial$1,156
30.9% $1,108
29.9%
Multifamily1,156
30.9% 1,138
30.7%
Office719
19.3% 708
19.1%
Retail430
11.5% 392
10.6%
Single Family135
3.6% 82
2.2%
Other140
3.8% 276
7.5%
Total mortgage loans$3,736
100.0% $3,704
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 September 30, 2019, under this program, the Company serviced mortgage loans with a total outstanding principal of $6.6 billion, of which $4.1 billion was serviced on behalf of third parties and $2.5 billion was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets . As of December 31, 2018, the Company serviced mortgage loans with a total outstanding principal balance of $6.0 billion, of which $3.6 billion was serviced on behalf of third parties and $2.4 billion was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or fair value and were 0 as of September 30, 2019 and December 31, 2018, because servicing fees were market-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.
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 September 30, 2019 and December 31, 2018, the Company did not hold any securities for which it is the primary beneficiary.
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 September 30, 2019 and December 31, 2018 was limited to the total carrying value of $1.1 billion and $1.0 billion, respectively, which are included in limited partnerships and other alternative investments in the Company's Condensed Consolidated Balance Sheets. As of September 30, 2019 and December 31, 2018, the Company has outstanding commitments totaling $808 and $718, 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 2018 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. These investments include ABS, CLOs, CMBS and RMBS and are reported in fixed maturities, available-for-sale, 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

34

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
Securities Lending, Repurchase Agreements, and Other Collateral Transactions and Restricted Investments
The Company enters into securities financing transactions as a way to earn additional income or manage liquidity, primarily through securities lending and repurchase agreements.
Payables for Collateral on Investments
 September 30, 2019December 31, 2018
 Fair ValueFair Value
Securities Lending Transactions:  
Gross amount of securities on loan$603
$820
Gross amount of associated liability for collateral received [1]$618
$840
   
Repurchase agreements:  
Gross amount of recognized liabilities for repurchase agreements$
$72
Gross amount of collateral pledged related to repurchase agreements [2]$
$73
Gross amount of recognized receivables for reverse repurchase agreements$52
$64
[1]
Cash collateral received is reinvested in fixed maturities, AFS and short-term investments which are included in the Condensed Consolidated Balance Sheets. Amount includes additional securities collateral received of $0 and $3 which are excluded from the Company's Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, respectively.
[2]Collateral pledged is included within fixed maturities, AFS and short-term investments in the Company's Condensed Consolidated Balance Sheets.
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 are continuous and do not have stated maturity dates and 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 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.
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. The maturity of these transactions is generally ninety days or less. 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, the Company's current positions do not meet the specific conditions for net presentation.
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. 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.
From time to time, the Company enters into reverse repurchase agreements where the Company purchases securities and simultaneously agrees to resell the same or substantially the same securities. The maturity of these transactions is generally within one year. 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. The receivable for reverse repurchase agreements is included within short-term investments in the Company's Condensed Consolidated Balance Sheets.
Other Collateral Transactions
As of September 30, 2019 and December 31, 2018, the Company pledged collateral of $37 and $47, respectively, of U.S. government securities and municipal 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 in Note 7 - Derivatives of Notes to Condensed Consolidated Financial Statements. For disclosure of collateral in support of credit facilities, refer to Note 10 - Debt of Notes to Condensed Consolidated Financial Statements.

35

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other Restricted Investments
The Company is required by law to deposit securities with government agencies in certain states in which it conducts business. As of September 30, 2019 and December 31, 2018, the fair value of securities on deposit was $2.4 billion and $2.2 billion, respectively.
 
In addition, as of September 30, 2019, the Company held fixed maturities and short-term investments of $548 and $0, respectively in trust for the benefit of syndicate policyholders and other investments of $55 primarily consisting of overseas deposits in various countries with Lloyd's to support underwriting activities in those countries.

7. DERIVATIVES
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.
Strategies that Qualify for Hedge Accounting
Some of the Company's derivatives satisfy 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 2018 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. 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 has also entered into interest rate swaps to convert the variable interest payments on the 3 month Libor + 2.125% junior subordinated debt to fixed interest payments. For further information, see the Junior Subordinated Debentures section within Note 13 - Debt of Notes to the Consolidated Financial Statements, included in The Hartford's 2018 Form 10-K Annual Report.
Foreign currency swaps are used to convert non-U.S. denominated cash flows related to certain investment receipts to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.
The Company also previously entered 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 group benefits liabilities.
 
Non-qualifying Strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include hedging and replication strategies that utilize credit default swaps. In addition, hedges of interest rate, foreign currency and equity risk of certain fixed maturities and equities do not qualify for hedge accounting. The non-qualifying strategies include:
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 also enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.
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 addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap going forward. As of September 30, 2019 and December 31, 2018, the notional amount of interest rate swaps in offsetting relationships was $7.6 billion and $7.1 billion, respectively.
Foreign Currency Swaps and Forwards
The Company enters into foreign currency swaps to convert the foreign currency exposures of certain non-U.S. dollar denominated fixed maturity investments to U.S. dollars. The Company may at times enter into foreign currency forwards to hedge non-U.S. dollar denominated cash or equity securities.
Equity Index Options
The Company enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. The Company also enters into call options on equity securities to generate additional return.

36

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 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. 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.
Derivative Balance Sheet Presentation
 Net Derivatives
Asset
Derivatives
Liability Derivatives
 Notional AmountFair ValueFair ValueFair Value
Hedge Designation/ Derivative TypeSep. 30, 2019Dec. 31, 2018Sep. 30, 2019Dec. 31, 2018Sep. 30, 2019Dec. 31, 2018Sep. 30, 2019Dec. 31, 2018
Cash flow hedges        
Interest rate swaps$2,040
$2,040
$
$1
$
$2
$
$(1)
Foreign currency swaps242
153
7
(6)9
2
(2)(8)
Total cash flow hedges2,282
2,193
7
(5)9
4
(2)(9)
Non-qualifying strategies        
Interest rate contracts        
Interest rate swaps and futures8,844
8,451
(70)(62)2
8
(72)(70)
Foreign exchange contracts        
Foreign currency swaps and forwards454
287
1
(1)1


(1)
Credit contracts        
Credit derivatives that purchase credit protection353
6
(2)


(2)
Credit derivatives that assume credit risk [1]521
1,102
10
3
10
8

(5)
Credit derivatives in offsetting positions32
41


5
6
(5)(6)
Equity contracts        
Equity index swaps and options715
211
(5)4
8
5
(13)(1)
Total non-qualifying strategies10,919
10,098
(66)(56)26
27
(92)(83)
Total cash flow hedges and non-qualifying strategies$13,201
$12,291
$(59)$(61)$35
$31
$(94)$(92)
Balance Sheet Location        
Fixed maturities, available-for-sale$225
$153
$
$
$
$
$
$
Other investments1,305
9,864
12
7
15
23
(3)(16)
Other liabilities11,671
2,274
(71)(68)20
8
(91)(76)
Total derivatives$13,201
$12,291
$(59)$(61)$35
$31
$(94)$(92)
[1]The derivative instruments related to this strategy are held for other investment 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 offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.

37

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Offsetting Derivative Assets and Liabilities
 (i)(ii)(iii) = (i) - (ii)(iv)(v) = (iii) - (iv)
   Net Amounts Presented in the Statement of Financial PositionCollateral Disallowed for Offset in the Statement of Financial Position 
 Gross Amounts of Recognized Assets (Liabilities)Gross Amounts Offset in the Statement of Financial PositionDerivative Assets [1] (Liabilities) [2]Accrued Interest and Cash Collateral (Received) [3] Pledged [2]Financial Collateral (Received) Pledged [4]Net Amount
As of September 30, 2019      
Other investments$35
$32
$12
$(9)$1
$2
Other liabilities$(94)$(12)$(71)$(11)$(73)$(9)
As of December 31, 2018      
Other investments$31
$26
$7
$(2)$2
$3
Other liabilities$(92)$(20)$(68)$(4)$(65)$(7)

[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 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. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Gain (Loss) Recognized in OCI
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018 20192018
Interest rate swaps$
$
 $20
$(16)
Foreign currency swaps10

 14
1
Total$10
$
 $34
$(15)

Gain (Loss) Reclassified from AOCI into Income 
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 Net Realized Capital Gain/(Loss)Net Investment IncomeInterest Expense Net Realized Capital Gain/(Loss)Net Investment IncomeInterest Expense Net Realized Capital Gain/(Loss)Net Investment IncomeInterest Expense Net Realized Capital Gain/(Loss)Net Investment IncomeInterest Expense
Interest rate swaps$
$1
$
 $
$7
$
 $2
$1
$1
 $1
$24
$
Foreign currency swaps
1

 


 
2

 


Total$
$2
$
 $
$7
$
 $2
$3
$1
 $1
$24
$
                
Total amounts presented on the Condensed Consolidated Statement of Operations$89
$490
$67
 $38
$444
$69
 $332
$1,448
$194
 $60
$1,323
$228


38

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of September 30, 2019, the Company had $20 of before tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months. 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.
During the three and nine months ended September 30, 2019 and 2018, the Company had 0 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.
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 September 30, Nine Months Ended September 30,
 20192018 20192018
Foreign exchange contracts     
Foreign currency swaps and forwards$2
$1
 $2
$2
Other non-qualifying derivatives     
Interest rate contracts     
Interest rate swaps, swaptions, and futures(5)1
 (20)7
Credit contracts     
Credit derivatives that purchase credit protection(1)
 (1)
Credit derivatives that assume credit risk
8
 27

Equity contracts     
Equity index swaps and options(1)(1) (5)(1)
Total other non-qualifying derivatives(7)8
 1
6
Total [1]$(5)$9
 $3
$8
[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 of Notes to Condensed Consolidated Financial Statements.
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity or referenced index in order to synthetically replicate investment transactions that 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.

39

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Credit Risk Assumed 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 September 30, 2019
Single name credit default swaps       
Investment grade risk exposure$121
$2
5 yearsCorporate CreditA-$
$
Basket credit default swaps [4]       
Investment grade risk exposure400
8
5 yearsCorporate CreditBBB+

Investment grade risk exposure1

Less than 1 yearCMBS CreditA-1

Below investment grade risk exposure15
(5)Less than 1 yearCMBS CreditCCC-15
5
Total [5]$537
$5
   $16
$5
As of December 31, 2018
Single name credit default swaps       
Investment grade risk exposure$169
$2
4 yearsCorporate Credit/
Foreign Gov.
A$
$
Basket credit default swaps [4]       
Investment grade risk exposure799
(1)6 yearsCorporate CreditBBB+

Below investment grade risk exposure125
2
5 yearsCorporate CreditB+

Investment grade risk exposure11

5 yearsCMBS CreditA-2

Below investment grade risk exposure19
(6)Less than 1 yearCMBS CreditCCC19
6
Total [5]$1,123
$(3)   $21
$6

[1]The average credit ratings are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P and Fitch. 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 and applicable law, which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.
[3]The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.
[4]Comprised of 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 of Notes to Condensed Consolidated Financial Statements.
Derivative Collateral Arrangements
The Company enters into various collateral arrangements in connection with its derivative instruments, which require both the pledging and accepting of collateral. As of September 30, 2019 and December 31, 2018, the Company pledged cash collateral with a fair value of less than $1 and $4, respectively, associated with derivative instruments. The collateral receivable has been recorded in other assets or other liabilities on the Company's Condensed Consolidated Balance Sheets as determined by the Company's election to offset on the balance sheet. As of September 30, 2019 and December 31, 2018, the Company also pledged securities collateral associated with derivative instruments with a fair value of $81 and $67, respectively, which have been included in fixed maturities on the Company's Condensed Consolidated Balance Sheets. The counterparties generally have the right to sell or re-pledge these securities.
 
In addition, as of September 30, 2019 and December 31, 2018, the Company has pledged initial margin of securities related to OTC-cleared and exchange traded derivatives with a fair value of $83 and $89, respectively, which are included within fixed maturities on the Company's Condensed Consolidated Balance Sheets.
As of September 30, 2019 and December 31, 2018, the Company accepted cash collateral associated with derivative instruments of $17 and $9, 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 investments or other liabilities as determined by the Company's election to offset on the balance sheet. The Company also accepted securities collateral as of September 30, 2019 and December 31, 2018, with a fair value of $2 and $5, respectively, which the Company has the right to sell or repledge. As of September 30, 2019 and December 31, 2018, the Company had 0 repledged securities and 0 securities held as collateral have been sold. As of September 30, 2019 and December 31, 2018, non-cash collateral accepted was held in

40

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

separate custodial accounts and was not included in the Company’s Consolidated Balance Sheets.
 

8. RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Property and Casualty Insurance Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
 For the nine months ended September 30,
 20192018
Beginning liabilities for unpaid losses and loss adjustment expenses, gross$24,584
$23,775
Reinsurance and other recoverables4,232
3,957
Beginning liabilities for unpaid losses and loss adjustment expenses, net20,352
19,818
Navigators Group acquisition2,001

Provision for unpaid losses and loss adjustment expenses 
 
Current accident year5,448
5,151
Prior accident year development(23)(139)
Total provision for unpaid losses and loss adjustment expenses5,425
5,012
Payments 
 
Current accident year(1,549)(1,647)
Prior accident years(3,403)(3,166)
Total payments(4,952)(4,813)
Foreign currency adjustment

(12)
Ending liabilities for unpaid losses and loss adjustment expenses, net22,814
20,017
Reinsurance and other recoverables5,083
3,780
Ending liabilities for unpaid losses and loss adjustment expenses, gross$27,897
$23,797

41

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unfavorable (Favorable) Prior Accident Year Development
 For the nine months ended September 30,
 20192018
Workers’ compensation$(90)$(97)
Workers’ compensation discount accretion25
30
General liability62
32
Marine8

Package business(32)(16)
Commercial property(16)(10)
Professional liability32
(12)
Bond(2)
Assumed Reinsurance3

Automobile liability - Commercial Lines27
(15)
Automobile liability - Personal Lines(28)(10)
Homeowners
(20)
Net asbestos reserves

Net environmental reserves

Catastrophes(27)(47)
Uncollectible reinsurance
22
Other reserve re-estimates, net15
4
Total prior accident year development [1]$(23)$(139)

[1] Included a prior accident year reserve increase of $68 related to the Navigators Group acquisition for the nine months ended September 30, 2019 consisting of $34 for general liability, $25 for professional liability, $10 for marine, $3 for assumed reinsurance and $2 for commercial auto liability, partially offset by a reserve decrease of $6 for commercial property.
Re-estimates of prior accident year reserves for the nine months ended September 30, 2019
Workers’ compensation reserves were reduced, principally in small commercial driven by lower than previously estimated claim severity for the 2014 through 2017 accident years and, to a lesser extent, in national accounts due to lower estimated claim severity, primarily for accident years 2013 and prior.
General liability reserves were increased, primarily due to reserve increases in small commercial for accident years 2017 and 2018 due to higher frequency of high-severity bodily injury claims, reserve increases in middle and large commercial for accident years 2015 to 2018 due to higher estimated severity, as well as increased estimated severity on the acquired Navigators book of business related to U.S. construction, premises liability, products liability and excess casualty, mostly related to accident years 2014 to 2018. In addition, an increase in reserves for mass torts was offset by a decrease in reserves for extra contractual liability claims.
Marine reserves were increased, principally related to pollution exposure from the 1980s and 1990s related to the Navigators Group book of business.
 
Package business reserves were decreased, primarily due to favorable emergence on property claims related to accident years 2016 through 2018 and due to favorable development of allocated loss adjustment expenses on general liability claims for 2017 and prior accident years.
Commercial property reserves were decreased, principally due to favorable emergence of reported losses, including on the acquired Navigators Group book of business related to offshore energy in accident years 2017 to 2018 and construction engineering across accident years 2015 to 2018.
Professional liability reserves were increased, primarily due to large loss activity, including wrongful termination and discrimination claims, in accident years 2017 and 2018 and increased estimated frequency and severity of directors’ and officers’ reserves on the Navigators Group book of business, principally for the 2014 to 2018 accident years.
Automobile liability reserves were decreased in Personal Lines due to the emergence of lower estimated severity in automobile liability for accident year 2017 and were increased in Commercial Lines due to higher estimated severity on national accounts, principally in accident years 2017 and 2018.
Catastrophe reserves were reduced, primarily as a result of lower estimated net losses from 2017 hurricanes Harvey and Irma.
In September, 2019, PG&E Corporation and Pacific Gas and Electric Company (together, “PG&E”) agreed in principle to an $11 billion settlement with insurers representing approximately 85 percent of insurance subrogation claims to resolve all such claims arising from the 2017 Northern California wildfires and 2018 Camp wildfire. The settlement is subject to approval of the bankruptcy court overseeing PG&E's Chapter 11 bankruptcy filing. The settlement is also subject to the confirmation by the bankruptcy court of a chapter 11 plan of reorganization (a "Plan") which implements the terms of the settlement. If a Plan is approved, certain of the Company’s insurance subsidiaries would be entitled to settlement payments. Based on reserve estimates submitted with the subrogation request, the amount our subsidiaries could collect from PG&E, if any, would be approximately $325 but could be more or less than that amount depending on how the Company’s ultimate paid claims subject to subrogation compare to other insurers’ ultimate paid claims subject to subrogation. Approval of the Plan and amount of the Company’s ultimate subrogation recoveries from PG&E are subject to uncertainty. This includes, among other things, uncertainty regarding liabilities for current or future wildfires caused or allegedly caused by PG&E, the value of recoveries by other creditors and PG&E’s ability to secure funds to pay its creditors.
Given the uncertainty, the Company has not recognized a benefit from potential subrogation from PG&E and will evaluate in future periods when more information becomes known. The first $116 of subrogation recoveries would be offset by a $116 reduction in reinsurance recoverables resulting in no net benefit to income. No changes have been made in 2019 to estimated incurred losses from the 2017 or 2018 wildfires.

42

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Re-estimates of prior accident year reserves for the nine months ended September 30, 2018
Workers’ compensation reserves were reduced in small commercial and middle market, primarily for accident years 2012 to 2015, as both claim frequency and medical claim severity have emerged favorably compared to previous reserve estimates.
General liability reserves were increased, primarily due to an increase in reserves for higher hazard general liability exposures in middle market for accident years 2009 to 2017, partially offset by a decrease in reserves for other lines within middle market, including premises and operations, umbrella and products liability, principally for accident years 2015 and prior. Contributing to the increase in reserves for higher hazard general liability exposures was an increase in large losses and, in more recent accident years, an increase in claim frequency. Contributing to the reduction in reserves for other middle market lines were more favorable outcomes due to initiatives to reduce legal expenses. In addition, reserve increases for claims with lead paint exposure were offset by reserve decreases for other mass torts and extra-contractual liability claims.
Package business reserves were reduced, primarily due to lower reserve estimates for both liability and property for accident years 2010 and prior, including a recovery of loss adjustment expenses for the 2005 accident year.
Commercial property reserves were reduced, driven by an increase in estimated reinsurance recoverables on middle market property losses from the 2017 accident year.
 
Professional liability reserves were reduced, principally for accident years 2014 and prior, for directors and officers liability claims principally due to a number of older claims closing with limited or no payment.
Automobile liability reserves were reduced, primarily driven by reduced estimates of loss adjustment expenses in small commercial for recent accident years and favorable development in personal automobile liability for accident years 2014 to 2017, principally due to lower severity, including with uninsured and underinsured motorist claims.
Homeowners reserves were reduced, primarily in accident years 2013 to 2017, driven by lower than expected severity across multiple perils.
Catastrophe reserves were reduced, primarily as a result of lower estimated net losses from 2017 catastrophes, principally related to hurricanes Harvey and Irma. Before reinsurance, estimated losses for 2017 catastrophe events decreased by $133 in the nine months ended September 30, 2018, resulting in a decrease in reinsurance recoverables of $90 as the Company no longer expects to recover under the 2017 Property Aggregate reinsurance treaty as aggregate ultimate losses for 2017 catastrophe events are now projected to be less than $850.
Uncollectible reinsurance reserves were increased due to lower anticipated recoveries related to older accident years.
Group Life, Disability and Accident Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
 For the nine months ended September 30,
 20192018
Beginning liabilities for unpaid losses and loss adjustment expenses, gross$8,445
$8,512
Reinsurance recoverables239
209
Beginning liabilities for unpaid losses and loss adjustment expenses, net8,206
8,303
Aetna U.S. group life and disability business acquisition
42
Provision for unpaid losses and loss adjustment expenses



Current incurral year3,351
3,423
Prior year's discount accretion169
175
Prior incurral year development [1](321)(284)
Total provision for unpaid losses and loss adjustment expenses [2]3,199
3,314
Payments



Current incurral year(1,603)(1,659)
Prior incurral years(1,743)(1,741)
Total payments(3,346)(3,400)
Ending liabilities for unpaid losses and loss adjustment expenses, net8,059
8,259
Reinsurance recoverables231
241
Ending liabilities for unpaid losses and loss adjustment expenses, gross$8,290
$8,500
[1]Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis.
[2]
Includes unallocated loss adjustment expenses of $130 and $131 for the nine months ended September 30, 2019 and 2018, respectively, that are recorded in insurance operating costs and other expenses in the Condensed Consolidated Statements of Operations.

43

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Re-estimates of prior incurral years reserves for the nine months ended September 30, 2019
Group disability- Prior period reserve estimates decreased by approximately $265 largely driven by group long-term disability claim recoveries higher than prior reserve assumptions and claim incidence lower than prior assumptions.  Long-term disability ("LTD") reserve assumptions were also updated based partially on these more recent favorable trends.  New York Paid Family Leave also experienced favorable claim emergence and refund compared to year-end estimates.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $45 largely driven by lower-than-previously expected claim incidence in group life Premium Waiver.
 
Re-estimates of prior incurral years reserves for the nine months ended September 30, 2018
Group disability- Prior period reserve estimates decreased by approximately $195 largely driven by group long-term
disability claim recoveries higher than prior reserve
assumptions and claim incidence lower than prior assumptions.
Short-term disability has also experienced favorable claim
recoveries.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $85 largely driven by lower-than-previously expected claim incidence inclusive of group life, group life premium waiver, and group accidental death & dismemberment.
9. RESERVE FOR FUTURE POLICY BENEFITS
Changes in Reserves for Future Policy Benefits[1]
Liability balance, as of January 1, 2019$642
Incurred63
Paid(77)
Change in unrealized investment gains and losses17
Liability balance, as of September 30, 2019$645
Reinsurance recoverable asset, as of January 1, 2019$27
Incurred2
Paid
Reinsurance recoverable asset, as of September 30, 2019$29
Liability balance, as of January 1, 2018$713
Incurred10
Paid(25)
Change in unrealized investment gains and losses(42)
Liability balance, as of September 30, 2018$656
Reinsurance recoverable asset, as of January 1, 2018$26
Incurred10
Paid(1)
Reinsurance recoverable asset, as of September 30, 2018$35

[1]Reserves for future policy benefits includes paid-up life insurance and whole-life policies resulting from conversion from group life policies included within the Group Benefits segment and reserves for run-off structured settlement and terminal funding agreement liabilities which are in the Corporate category.


10. DEBT
Shelf Registrations
On May 17, 2019, the Company filed with the Securities and Exchange Commission (the “SEC”) an automatic shelf registration statement (Registration No. 333-231592) for the potential offering and sale of debt and equity securities. The registration statement allows for the following types of securities to be offered: debt securities, junior subordinated debt securities, guarantees, preferred stock, common stock, depositary shares,
 
warrants, stock purchase contracts, and stock purchase units. In that The Hartford is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act of 1933, the registration statement went effective immediately upon filing and The Hartford may offer and sell an unlimited amount of securities under the registration statement during the three -year life of the registration statement.

44

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Senior Notes
On January 15, 2019, The Hartford repaid at maturity the $413 principal amount of its 6.0% senior notes.
In the Navigators Group acquisition, the Company assumed $265 par value 5.75% Senior notes due on October 15, 2023 with a fair value of $284 as of the acquisition date.
On August 19, 2019, The Hartford issued $600 of 2.8% senior notes (“2.8% Notes”) due August 19, 2029 and $800 of 3.6% senior notes (“3.6% Notes”) due August 19, 2049 for net proceeds of approximately $1.38 billion, after deducting underwriting discounts and expenses. Under both senior note issuances interest is payable semi-annually in arrears on August 19 and February 19, commencing February 19, 2020. The Hartford, at its option, can redeem the 2.8% Notes and the 3.6% Notes at any time, in whole or part, at a redemption price equal to the greater of 100% of the principal amount being redeemed or a make-whole amount based on a comparable maturity US Treasury plus a basis point spread, plus any accrued and unpaid interest, except the make-whole amount is not applicable within the final three months of maturity for the 2.8% Notes and the final six months of maturity for the 3.6% Notes. The spread over the comparable maturity US Treasury for determining the make-whole amount is 20 and 25 basis points for the 2.8% Notes and 3.6% Notes, respectively.
After receiving proceeds from the issuance of the 2.8% Notes and 3.6% Notes, in third quarter 2019, The Hartford repaid $265 of
 
5.75% senior notes due 2023 that had been assumed in the Navigators Group acquisition, and its $800 of 5.125% senior notes due 2022 of the Hartford Financial Services Group, Inc., and recognized a loss on extinguishment of debt of $90.
Lloyd's Letter of Credit Facilities
As a result of the acquisition of Navigators Group, The Hartford assumed three existing letter of credit facility agreements: the Club Facility, the Bilateral Facility, and the Australian Dollar Facility. Letters of credit under the Club and Bilateral Facilities are used to provide a portion of the capital requirements at Lloyd's. As of September 30, 2019, uncollateralized letters of credit with an aggregate face amount of $165 and £60 million were outstanding under the Club Facility and $8 was outstanding under the Bilateral Facility. The Bilateral Facility has unused capacity of $17 for issuance of additional letters of credit. Among other covenants, the Club Facility and Bilateral Facility contain financial covenants regarding tangible net worth and Funds at Lloyd's ("FAL"). As of September 30, 2019, Navigators Group was in compliance with all financial covenants.
As of September 30, 2019, letters of credit in the amount of 24 million Australian Dollars were outstanding with 26 million Australian Dollars of unused capacity.

11. INCOME TAXES
Income Tax Expense
Income Tax Rate Reconciliation
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018 20192018
Tax provision at U.S. federal statutory rate$138
$112
 $396
$333
Tax-exempt interest(14)(16) (43)(50)
Dividends received deduction ("DRD")(3)
 (5)
Executive compensation
1
 5
8
Stock-based compensation(3)(3) (7)(5)
Tax Reform
11
 
13
Other
(2) 1
(2)
Provision for income taxes$118
$103
 $347
$297

 
Uncertain Tax Positions
Rollforward of Unrecognized Tax Benefits
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018 20192018
Balance, beginning of period$14
$9
 $14
$9
Gross increases - tax positions in prior period
5
 
5
Gross decreases - tax positions in prior period

 

Balance, end of period$14
$14
 $14
$14

The entire amount of unrecognized tax benefits, if recognized, would affect the effective tax rate in the period of the release.
Other Tax Matters
In July 2019, the Company received a $421 refund of alternative minimum tax (AMT) credits. As of September 30, 2019 the Company had remaining AMT credit carryovers of $413 which are reflected as a current income tax receivable within other assets in the accompanying Condensed Consolidated Balance

45

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Sheets. AMT credits may be used to offset a regular tax liability for any taxable year beginning after December 31, 2017, and are refundable at an amount equal to 50 percent of the excess of the minimum tax credit for the taxable year over the amount of credit allowable for the year against regular tax liability. Any remaining credits not used against regular tax liability are refundable in the 2021 tax year to be realized in 2022. For the three and nine months ended September 30, 2019, the Company offset $2 and $8 of regular tax liability with AMT credits.
The Company had net operating loss (NOL) carryforwards in the United States and the United Kingdom for which future tax benefits of $225 and $1 have been recognized and are included in the Condensed Consolidated Balance Sheet as a component of the net deferred tax asset. The Company also has NOLs in other foreign jurisdictions for which a full valuation allowance has been established. Although the Company projects there will be sufficient future taxable income to fully recover the remainder of the NOL carryover for which benefits have been recognized, the Company's estimate of the likely realization may change over time. The U.S. NOL carryovers, if unused, would expire between 2026 and 2036. The foreign NOLs do not expire.
 
The federal audits for the Company have been completed through 2013, and the Company is not currently under federal examination for any open years. Navigators Group is currently under federal audit for the 2016 year and has completed examinations through 2015. Management believes that adequate provision has been made in the Company's Condensed Consolidated Financial Statements for any potential adjustments that may result from tax examinations and other tax-related matters for all open tax years.
The Company classifies interest and penalties (if applicable) as income tax expense or benefit in the condensed consolidated financial statements. The Company recognized net interest income of $1 for the three and nine months ended September 30, 2019 related to the AMT refund and $0 for the three and nine months ended September 30, 2018. The Company had 0 interest payable as of September 30, 2019 and 2018. The Company does not believe it would be subject to any penalties in any open tax years and, therefore, has not recorded any accrual for penalties.

12. COMMITMENTS AND CONTINGENCIES
Management evaluates each contingent matter separately. A loss is recorded if probable and reasonably estimable. Management establishes liabilities for these contingencies at its “best estimate,” or, if no one number within the range of possible losses is more probable than any other, the Company records an estimated liability at the low end of the range of losses.
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, including claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper claims practices. 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 “Run-off 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 lawsuits seeking certification of a state or national class alleging improper business practices, including, for example, underpayment of claims or improper underwriting practices, as well as individual lawsuits in which punitive damages may be sought. 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.
Run-off Asbestos and Environmental Claims –The Company continues to receive asbestos and environmental ("A&E") 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 vast majority of the Company's exposure to A&E relates to policy coverages provided prior to 1986, reported within the P&C Other Operations segment (“Runoff A&E”). In addition, since 1986, the Company has written asbestos and environmental exposures under general liability policies and pollution liability under homeowners policies, which are reported in the Commercial Lines and Personal Lines segments. 
Prior to 1986, the Company wrote several different categories of insurance contracts that may cover A&E claims. First, the Company wrote primary policies providing the first layer of coverage in an insured’s liability program. Second, the Company wrote excess and umbrella policies providing higher layers of coverage for losses that exhaust the limits of underlying coverage. Third, the Company acted as a reinsurer assuming a portion of those risks assumed by other insurers writing primary, excess, umbrella and reinsurance coverages.
Significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid gross losses and expenses related to environmental and particularly asbestos claims. The degree of variability of gross reserve estimates for these exposures is significantly greater than for other more traditional exposures.
In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate loss development patterns, plaintiffs’ expanding theories of liability, the risks inherent in major litigation, and inconsistent

46

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

emerging legal doctrines. Furthermore, over time, insurers, including the Company, have experienced significant changes in the rate at which asbestos claims are brought, the claims experience of particular insureds, and the value of claims, making predictions of future exposure from past experience uncertain. Plaintiffs and insureds also have sought to use bankruptcy proceedings, including “pre-packaged” bankruptcies, to accelerate and increase loss payments by insurers. In addition, some policyholders have asserted new classes of claims for coverages to which an aggregate limit of liability may not apply. Further uncertainties include insolvencies of other carriers and unanticipated developments pertaining to the Company’s ability to recover reinsurance for A&E claims. Management believes these issues are not likely to be resolved in the near future.
In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include expanding theories of liability and damages, the risks inherent in major litigation, inconsistent decisions concerning the existence and scope of coverage for environmental claims, and uncertainty as to the monetary amount being sought by the claimant from the insured.
The reporting pattern for assumed reinsurance claims, including those related to A&E claims, is much longer than for direct claims. In many instances, it takes months or years to determine that the policyholder’s own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves.
It is also not possible to predict changes in the legal and legislative environment and their effect on the future development of A&E claims.
Given the factors described above, the Company believes the actuarial tools and other techniques it employs to estimate the ultimate cost of claims for more traditional kinds of insurance exposure are less precise in estimating reserves for A&E exposures. For this reason, 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 A&E 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, to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid and reported activity.
While the Company believes that its current A&E 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 estimable now, could be material to The Hartford’s consolidated operating results and liquidity.
For its Run-off A&E, as of September 30, 2019, the Company reported $910 of net asbestos reserves and $133 of net environmental reserves. While the Company believes that its current Run-off A&E reserves are appropriate, significant uncertainties limit our ability 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.
Effective December 31, 2016, the Company entered into an A&E adverse development cover ("ADC") reinsurance agreement with NICO to reduce uncertainty about potential adverse development of A&E reserves. 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 A&E reserves as of December 31, 2016 of approximately $1.7 billion. The $650 reinsurance premium was placed in a collateral trust account as security for NICO’s claim payment obligations to the Company. Under retroactive reinsurance accounting, net adverse A&E reserve development after December 31, 2016 will result in an offsetting reinsurance recoverable up to the $1.5 billion limit. Cumulative ceded losses up to the $650 reinsurance premium paid are recognized as a dollar-for-dollar offset to gross 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 A&E claims after December 31, 2016 in excess of $650 may result in significant charges against earnings. Furthermore, cumulative adverse development of A&E claims could ultimately exceed the $1.5 billion treaty limit in which case any 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 charges could be material to the Company’s consolidated operating results and liquidity. As of September 30, 2019, the Company has incurred $523 in cumulative adverse development on A&E reserves that have been ceded under the ADC treaty with NICO, leaving approximately $977 of coverage available for future adverse net reserve development, if any.
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 September 30, 2019 was $81. For this $81, the legal entities have posted collateral of $80 in the normal course of business. Based on derivative market values as of September 30, 2019, a downgrade of one level below the current financial strength

47

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 September 30, 2019, a downgrade of two levels below the current financial strength ratings by either Moody's or S&P would require an additional $8 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 additional 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.
13. EQUITY
Capital Purchase Program ("CPP") Warrants
CPP warrants were issued in 2009 as part of a program established by the U.S. Department of the Treasury under the Emergency Economic Stabilization Act of 2008. The CPP warrants expired on June 26, 2019.
CPP warrant exercises were 0.1 million for the three months ended September 30, 2018. CPP warrant exercises were 1.9 million and 0.2 million for the nine months ended September 30, 2019 and 2018, respectively. As of December 31, 2018, the Company had 1.9 million of CPP warrants outstanding and exercisable.
 
Equity Repurchase Program
In February, 2019, the Company announced a $1.0 billion share repurchase authorization by the Board of Directors which is effective through December 31, 2020. Based on projected holding company resources, the Company has begun share repurchases in 2019 but anticipates using the majority of the program in 2020. Any repurchase of shares under the equity repurchase program is dependent on market conditions and other factors.
During the period October 1, 2019 to November 1, 2019, the Company repurchased approximately 0.6 million common shares for $36.
Equity Repurchase Activity and Remaining Repurchase Capacity
Three months ended
Common Shares
Repurchased
Cost of Shares RepurchasedAverage Price Paid per ShareRemaining Capacity Under Share Repurchase Authorization
(In millions, except for per share data)    
June 30, 20190.5
$27
$53.84
$973
September 30, 20191.1
$63
$58.50
$910
Total1.6
$90
  

14. CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in AOCI, Net of Tax for the Three Months Ended September 30, 2019
 Changes in
 Net Unrealized Gain on SecuritiesOTTI Losses in OCINet Gain on Cash Flow Hedging InstrumentsForeign Currency Translation AdjustmentsPension and Other Postretirement Plan Adjustments
AOCI,
net of tax
Beginning balance$1,367
$(3)$11
$34
$(1,607)$(198)
OCI before reclassifications458

8
(4)1
463
Amounts reclassified from AOCI(57)
(2)
8
(51)
     OCI, net of tax401

6
(4)9
412
Ending balance$1,768
$(3)$17
$30
$(1,598)$214


48

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in AOCI, Net of Tax for the Nine Months Ended September 30, 2019
 Changes in
 Net Unrealized Gain on SecuritiesOTTI Losses in OCINet Gain on Cash Flow Hedging InstrumentsForeign Currency Translation AdjustmentsPension and Other Postretirement Plan Adjustments
AOCI,
net of tax
Beginning balance$24
$(4)$(5)$30
$(1,624)$(1,579)
OCI before reclassifications1,857
1
27

1
1,886
Amounts reclassified from AOCI(113)
(5)
25
(93)
     OCI, net of tax1,744
1
22

26
1,793
Ending balance$1,768
$(3)$17
$30
$(1,598)$214

Reclassifications from AOCI
 Three Months Ended September 30, 2019Nine Months Ended September 30, 2019Affected Line Item in the Condensed Consolidated Statement of Operations
Net Unrealized Gain on Securities   
Available-for-sale securities$72
$143
Net realized capital gains
 72
143
Total before tax
 15
30
 Income tax expense
 $57
$113
Net income
Net Gains on Cash Flow Hedging Instruments   
Interest rate swaps$
$2
Net realized capital gains
Interest rate swaps1
1
Net investment income
Interest rate swaps
1
Interest expense
Foreign currency swaps1
2
Net investment income
 2
6
Total before tax
 
1
 Income tax expense
 $2
$5
Net income
Pension and Other Postretirement Plan Adjustments   
Amortization of prior service credit$2
$5
Insurance operating costs and other expenses
Amortization of actuarial loss(12)(37)Insurance operating costs and other expenses
 (10)(32)Total before tax
 (2)(7) Income tax expense
 $(8)$(25)Net income
Total amounts reclassified from AOCI$51
$93
Net income


49

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in AOCI, Net of Tax for the Three Months Ended September 30, 2018
 Changes in
 Net Unrealized Gain on SecuritiesOTTI Losses in OCINet Gain on Cash Flow Hedging InstrumentsForeign Currency Translation AdjustmentsPension and Other Postretirement Plan Adjustments
AOCI,
net of tax
Beginning balance$211
$(3)$(12)$33
$(1,582)$(1,353)
OCI before reclassifications(183)(1)1
1
1
(181)
Amounts reclassified from AOCI12

(6)
9
15
     OCI, net of tax(171)(1)(5)1
10
(166)
Ending balance$40
$(4)$(17)$34
$(1,572)$(1,519)

Changes in AOCI, Net of Tax for the Nine Months Ended September 30, 2018
 Changes in
 Net Unrealized Gain on SecuritiesOTTI Losses in OCINet Gain on Cash Flow Hedging InstrumentsForeign Currency Translation AdjustmentsPension and Other Postretirement Plan Adjustments
AOCI,
net of tax
Beginning balance$1,931
$(3)$18
$34
$(1,317)$663
Cumulative effect of accounting changes, net of tax [1]273

2
4
(284)(5)
Adjusted balance, beginning of period2,204
(3)20
38
(1,601)658
OCI before reclassifications [2](2,213)
(12)(4)
(2,229)
Amounts reclassified from AOCI49
(1)(25)
29
52
     OCI, net of tax(2,164)(1)(37)(4)29
(2,177)
Ending balance$40
$(4)$(17)$34
$(1,572)$(1,519)

[1] Includes reclassification to retained earnings of $88 of stranded tax effects and $93 of net unrealized gains, net of tax, related to equity securities. For further discussion of these reclassifications, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to the Consolidated Financial Statements included in The Hartford's 2018 Form 10-K Annual Report.
[2]The reduction in AOCI included the effect of removing $758 of Talcott Resolution AOCI from the balance sheet when the business was sold effective May 31, 2018.

50

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Reclassifications from AOCI
 Three Months Ended September 30, 2018Nine Months Ended September 30, 2018Affected Line Item in the Condensed Consolidated Statement of Operations
Net Unrealized Loss on Securities   
Available-for-sale securities$(15)$(59)Net realized capital gains
 (15)(59)Total before tax
 (3)(12) Income tax expense
 
(2)Income from discontinued operations, net of tax
 $(12)$(49)Net income
OTTI Losses in OCI   
Other than temporary impairments$
$
Net realized capital gains 
 

Income before taxes
 

Income tax expense (benefit)
 $
$1
Income from discontinued operations, net of tax
 $
$1
Net Income (loss)
Net Gains on Cash Flow Hedging Instruments   
Interest rate swaps$
$1
Net realized capital gains
Interest rate swaps7
24
Net investment income
 7
25
Total before tax
 1
5
 Income tax expense (benefit)
 
5
Income from discontinued operations, net of tax
 $6
$25
Net income
Pension and Other Postretirement Plan Adjustments   
Amortization of prior service credit$2
$5
Insurance operating costs and other expenses
Amortization of actuarial loss(14)(42)Insurance operating costs and other expenses
 (12)(37)Total before tax
 (3)(8) Income tax expense
 $(9)$(29)Net income
Total amounts reclassified from AOCI$(15)$(52)Net income

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 2018 Annual Report on
 
Form 10-K. The Company, at its discretion, made a contribution of $70 in September 2019 to the U.S. qualified defined benefit pension plan.
Net Periodic Cost (Benefit)
 Pension Benefits Other Postretirement Benefits
 Three Months Ended September 30,Nine months ended September 30, Three Months Ended September 30,Nine months ended September 30,
 2019201820192018 2019201820192018
Service cost$1
$1
$3
$3
 $
$
$
$
Interest cost40
36
119
107
 2
1
6
4
Expected return on plan assets(57)(57)(170)(172) (1)(2)(3)(5)
Amortization of prior service credit



 (2)(2)(5)(5)
Amortization of actuarial loss11
12
33
37
 1
2
4
5
Net periodic cost (benefit)$(5)$(8)$(15)$(25) $
$(1)$2
$(1)


51

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

16. LEASES
The Hartford has operating leases for real estate and equipment. The right-of-use asset as of September 30, 2019 was $200 and is included in property and equipment, net, in the Condensed Consolidated Balance Sheet. The lease liability as of September 30, 2019 was $209 and is included in other liabilities in the Condensed Consolidated Balance Sheet. Variable lease costs include changes in interest rates on variable rate leases primarily for automobiles.
Components of Lease Expense
 Three Months Ended September 30,Nine Months Ended September 30,
 20192019
Operating lease cost$13
$36
Short-term lease cost
1
Variable lease cost
1
Sublease income(1)(4)
Total lease costs included in insurance operating costs and other expenses$12
$34

Supplemental Operating Lease Information
 September 30, 2019
Operating cash flows for operating leases (for the nine months ended)$36
Weighted-average remaining lease term in years for operating leases6 years
Weighted-average discount rate for operating leases3.6%

 
Maturities of Operating Lease Liabilities
 As of September 30, 2019
2019$13
202051
202139
202233
202330
Thereafter66
Total lease payments232
Less: Discount on lease payments to present value23
Total lease liability$209

In July 2019, The Hartford entered into a 12 year operating lease for office space, which will result in an additional right-of-use asset and lease liability of approximately $34 upon lease commencement in July 2020.

17. BUSINESS DISPOSITION AND DISCONTINUED OPERATIONS
Sale of life and annuity business
On May 31, 2018, the Company’s wholly-owned subsidiary, Hartford Holdings, Inc., completed the sale of its life and annuity business to a group of investors led by Cornell Capital LLC, Atlas Merchant Capital LLC, TRB Advisors LP, Global Atlantic Financial Group, Pine Brook and J. Safra Group. Under the terms of the sale agreement signed December 3, 2017, the investor group formed a limited partnership, Hopmeadow Holdings LP, that acquired HLI, and its life and annuity operating subsidiaries. The Hartford received a 9.7% ownership interest in the limited partnership. The life and annuity operations met the criteria for reporting as discontinued operations and are reported in the Corporate category through the date of sale.
The Hartford reported its 9.7% ownership interest in Hopmeadow Holdings LP, which is accounted for under the equity
 
method, in other assets in the Condensed Consolidated Balance Sheet. The Hartford recognizes its share of income in other revenues in the Condensed Consolidated Statement of Operations on a three month delay, when financial information from the investee becomes available. The Company recognized $14 and $45, before tax, of income for the three and nine months ended September 30, 2019, respectively. Cash inflows for dividends received from Hopmeadow Holdings LP were $67 for the three and nine months ended September 30, 2019. Other cash inflows and outflows from and to the life and annuity business after closing were immaterial to the overall inflows and outflows of the Company.
For further information on the sale, including ongoing transactions with the life and annuity business sold, see Note 20 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements, included in The Hartford's 2018 Form 10-K Annual Report.

52

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Reconciliation of the Major Line Items Constituting Pretax Profit (Loss) of Discontinued Operations
 Three Months Ended September 30,Nine Months Ended September 30,
 20182018
Revenues  
Earned premiums$
$39
Fee income and other
382
Net investment income
519
Net realized capital gains (losses)4
(68)
Total revenues4
872
Benefits, losses and expenses 
 
Benefits, losses and loss adjustment expenses
535
Amortization of DAC
58
Insurance operating costs and other expenses [1](5)157
Total benefits, losses and expenses(5)750
Income before income taxes9
122
Income tax expense (benefit)(7)2
Income from operations of discontinued operations, net of tax16
120
Net realized capital gain (loss) on disposal, net of tax(11)202
Income from discontinued operations, net of tax$5
$322
[1]Corporate allocated overhead has been included in continuing operations.
Cash Flows from Discontinued Operations
 Nine Months Ended September 30,
 2018
Net cash provided by operating activities from discontinued operations$603
Net cash provided by investing activities from discontinued operations$463
Net cash used in financing activities from discontinued operations [1]$(737)
Cash paid for interest$
[1]
Excludes return of capital to parent of $619 for the nine months ended September 30, 2018.
Cash flows from discontinued operations are included in the Condensed Consolidated Statement of Cash Flows.

53




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 for per 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 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 II, Item 1A, Risk Factors of this Quarterly Report on Form 10-Q; Part I, Item 1A, Risk Factors in The Hartford’s 2018 Form 10-K Annual Report; and 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 May 23, 2019, the Company completed the previously announced acquisition of The Navigators Group, Inc. ("Navigators Group"), a global specialty underwriter, for $70 a share, or $2.137 billion in cash, including transaction expenses. Immediately after closing on the acquisition of Navigators Group, effective May 23, 2019, the Company purchased an aggregate excess of loss reinsurance agreement covering adverse development (“Navigators ADC”) from National Indemnity Company ("NICO") on behalf of Navigators Insurance Company and certain of its affiliates (collectively, the “Navigators Insurers”). For further information regarding the Navigators ADC, refer to Insurance Risk in the Enterprise Risk Management section.
On May 31, 2018, Hartford Holdings, Inc., a wholly owned subsidiary of the Company, completed the sale of the issued and outstanding equity of Hartford Life, Inc. (“HLI”), a holding company, and its life and annuity operating subsidiaries. For discussion of this transaction, see Note 17 - Business Disposition and Discontinued Operations of Notes to Condensed Consolidated Financial Statements.
On February 16, 2018, The Hartford entered into a renewal rights agreement with the Farmers Exchanges, of the Farmers Insurance Group of Companies, to acquire its Foremost-branded small commercial business sold through independent agents. Written premium from this agreement began in the third quarter of 2018.
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.
 
Distribution costs within the Hartford Funds segment that were previously netted against fee income are presented gross in insurance operating costs and other expenses.
The Hartford defines increases or decreases greater than or equal to 200% as “NM” or not meaningful.
INDEX
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
Assets Under Management ("AUM")- include mutual fund and exchange-traded products ("ETP") assets. AUM is a measure used by the Company's Hartford Funds segment because a significant portion of the Company’s mutual fund and ETP revenues are based upon asset values. These revenues

54




Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




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")- is calculated based upon a non-GAAP financial measure. It is calculated by dividing (a) common stockholders' equity, excluding AOCI, net of tax, by (b) common shares outstanding and dilutive potential common shares. Book value per diluted share is the most directly comparable U.S. GAAP ("GAAP") measure. 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 it is useful to investors because it eliminates the effect of items in AOCI that can fluctuate significantly from period to period, primarily based on changes in interest rates.
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, any deferred gain resulting from retroactive reinsurance and subsequent changes in the deferred gain, integration and transaction costs in connection with an acquired business, loss on extinguishment of debt, gains and losses on reinsurance transactions, change in loss reserves upon acquisition of a
 
business, income tax benefit from a reduction in deferred income tax valuation allowance, and results of discontinued operations. 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 that tend to be 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. Deferred gain resulting from retroactive reinsurance and subsequent changes in the deferred gain are excluded from core earnings given that these reinsurance agreements economically transfer risk to the reinsurers and including the benefit from retroactive reinsurance in core earnings provides greater insight into the economics of the business. Core earnings are net of preferred stock dividends declared since they 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), net income (loss) available to common stockholders and income (loss) from continuing operations, net of tax, 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), net income (loss) available to common stockholders or income (loss) from continuing operations, net of tax, available to common stockholders and does not reflect the overall profitability of the Company’s business. Therefore, the Company believes that it is useful for investors to evaluate net income (loss), net income (loss) available to common stockholders, income (loss) from continuing operations, net of tax, available to common stockholders and core earnings when reviewing the Company’s performance.
Reconciliation of Net Income to Core Earnings
 Three Months Ended September 30,Nine Months Ended September 30,
 2019201820192018
Net income$535
$432
$1,537
$1,611
Preferred stock dividends11

16

Net income available to common stockholders524
432
1,521
1,611
Adjustments to reconcile net income available to common stockholders to core earnings:







Net realized capital gains excluded from core earnings, before tax(88)(37)(327)(57)
Loss on extinguishment of debt, before tax90

90
6
Loss on reinsurance transaction, before tax

91

Integration and transaction costs associated with acquired business, before tax29
12
70
35
Change in loss reserves upon acquisition of a business, before tax

97

Income tax expense (benefit)(7)16
(2)18
Income from discontinued operations, net of tax
(5)
(322)
Core earnings$548
$418
$1,540
$1,291

55




Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




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 (a) core earnings by (b) 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) on revenues or obscured by the effect on net income of realized capital gains (losses), integration costs, and the impact of Tax Reform on net deferred tax assets. 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 net income margin and core earnings 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 $25 or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers, as defined by the Property Claim Service office of Verisk. For international events, the Company's approach is similar, informed, in part, by how Lloyd's of London defines catastrophes. Lloyd's of London is an insurance market-place operating worldwide ("Lloyd's"). Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"). The current accident year catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums.
Expense Ratio- for the underwriting segments of Commercial Lines and Personal Lines is the ratio of underwriting expenses less fee income, to earned premiums. Underwriting expenses include the amortization of deferred policy acquisition costs ("DAC") and insurance operating costs and expenses, including certain centralized services costs and bad debt expense. DAC include commissions, taxes, licenses and fees and other incremental direct underwriting expenses and are amortized over the policy term.
The expense ratio for Group Benefits is expressed as the ratio of insurance operating costs and other expenses including amortization of intangibles and amortization of DAC, to premiums and other considerations, excluding buyout premiums.
The expense ratio for Commercial Lines, Personal Lines and Group Benefits does not include integration and other transaction costs associated with an acquired business.
Fee Income- is largely driven from amounts earned as a result of contractually defined percentages of assets under management in our Hartford Funds business. These fees are generally earned on a daily basis. Therefore, the growth in assets under management either through positive net flows or favorable market performance will have a favorable impact on fee income.
 
Conversely, either negative net flows or unfavorable market performance will reduce fee income.
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 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 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 to premiums and other considerations, excluding buyout premiums. Since Group Benefits occasionally buys a block of claims for a stated premium amount, the Company excludes this buyout from the loss ratio used for evaluating the profitability of the business as buyouts may distort the loss ratio. Buyout premiums represent takeover of open claim liabilities and other non-recurring premium amounts.
Mutual Fund and Exchange-Traded Product Assets- are owned by the shareholders of those products and not by the Company and, therefore, are not reflected in the Company’s Condensed Consolidated Financial Statements except in instances where the Company seeds new investment products and holds an investment in the fund for a period of time. Mutual fund and ETP assets are a measure used by the Company primarily because a significant portion of the Company’s Hartford Funds segment revenues are based upon asset values. These revenues increase or decrease with a rise or fall in AUM whether caused by changes in the market or through net flows.
New Business Written Premium- represents the amount of premiums charged for policies issued to customers

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




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- 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.
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 the Company ceding losses to reinsurers.
Renewal Earned Price Increase (Decrease)- Written premiums are earned over the policy term, which is six months for certain Personal Lines automobile business and twelve months for substantially all of the remainder of the Company’s Property and Casualty business. Since the Company earns premiums over the six to twelve month term of the policies, renewal earned price increases (decreases) lag renewal written price increases (decreases) by six to twelve months.
Renewal Written Price Increase (Decrease)- for Commercial Lines, represents the combined effect of rate changes, amount of insurance and individual risk pricing decisions per unit of exposure on standard commercial lines policies that renewed. For Personal Lines, renewal written price increases represent the total change in premium per policy since the prior year on those policies that renewed and includes the combined effect of rate changes, amount of insurance and other changes in exposure. For Personal Lines, other changes in exposure include, but are not limited to, the effect of changes in number of drivers, vehicles and incidents, as well as changes in customer policy elections, such as deductibles and limits. The rate component represents the change in rate filed with and approved by state regulators during the period and the amount of insurance represents the change in the value of the rating base, such as model year/vehicle symbol for automobiles, building replacement
 
costs for property and wage inflation for workers’ compensation. A number of factors affect renewal written price increases (decreases) including expected loss costs as projected by the Company’s pricing actuaries, rate filings approved by state regulators, risk selection decisions made by the Company’s underwriters and marketplace competition. Renewal written price changes reflect the property and casualty insurance market cycle. Prices tend to increase for 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 the Hartford Funds segment’s operating performance. ROA, core earnings is calculated by dividing core earnings by a daily average AUM. ROA is the most directly comparable U.S. GAAP measure. The Company believes that ROA, core earnings, provides investors with a valuable measure of the performance of the Hartford Funds segment because it reveals trends in our business that may be obscured by the effect of realized gains (losses). 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- a non-GAAP financial measure that represents the combined ratio before catastrophes, prior accident year development and change in current accident year loss reserves recorded upon acquisition of a business. 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 and current accident year change in loss reserves upon acquisition of a business. 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, amortization of DAC, underwriting expenses, amortization of other intangible assets and dividends to policyholders. 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

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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 net income (loss) to underwriting gain (loss) is set forth in the Results of Operations section within MD&A - Commercial Lines, Personal Lines and Property & Casualty Other Operations.
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.
THE HARTFORD’S OPERATIONS
Overview
The Hartford conducts business principally in five reporting segments including Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits and Hartford Funds, as well as a Corporate category. The Company includes in the Corporate category discontinued operations related to the life and annuity business sold in May 2018, reserves for run-off structured settlement and terminal funding agreement liabilities, 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. Corporate also includes investment management fees and expenses related to managing third party business, including management of the invested assets of Talcott Resolution Life, Inc. and its subsidiaries ("Talcott Resolution"). Talcott Resolution is the new holding company of the life and annuity business that we sold in May 2018. In addition, Corporate includes a 9.7% ownership interest in the legal entity that acquired the life and annuity business sold.
The Company derives its revenues principally from: (a) premiums earned for insurance coverage provided to insureds; (b)
 
management fees on mutual fund and ETP assets; (c) net investment income; (d) fees earned for services provided to third parties; and (e) net realized 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.
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.
Similar to Property & 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. For some of its products, the Company is required to obtain approval for its premium rates from state insurance departments. New and renewal business for group benefits business, particularly for long-term disability, are priced using an assumption about expected investment yields over time. While the Company employs asset-liability duration matching strategies to mitigate risk and may use interest-rate sensitive derivatives to hedge its exposure in the Group Benefits investment portfolio, cash flow patterns related to the payment of benefits and claims are uncertain and actual investment yields could differ significantly from expected investment yields, affecting profitability of the business. In addition to appropriately evaluating and pricing risks, the profitability of the Group Benefits business depends on other factors, including the Company’s response to pricing decisions and other actions taken by competitors, its ability to offer voluntary products and self-service capabilities, the persistency of its sold business and its ability to manage its expenses which it seeks to achieve through economies of scale and operating efficiencies.
The financial results of the Company’s mutual fund and ETP businesses depend largely on the amount of assets under

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




management and the level of fees charged based, in part, on asset share class and product type. Changes in assets under management are driven by two main factors, net flows, and the market return of the funds, which are heavily influenced by the return realized in the equity and bond markets. Net flows are comprised of new sales less redemptions by mutual fund and ETP shareholders. Financial results are highly correlated to the growth in assets under management since these products generally earn fee income on a daily basis.
The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits, losses and loss adjustment expenses are paid. Due to the need to maintain sufficient liquidity to satisfy claim obligations, the majority of the Company’s invested assets have been held in available-for-sale
 
securities, including, among other asset classes, corporate bonds, municipal bonds, government debt, short-term debt, mortgage-backed securities, asset-backed securities and collateralized loan obligations.
The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while generating sufficient net of tax income to meet policyholder and corporate obligations. Investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations.
For further information on the Company's reporting segments refer to Part I, Item 1, Business - Reporting Segments in The Hartford’s 2018 Form 10-K Annual Report.
Financial Highlights
Net Income Available to Common StockholdersNet Income Available to Common Stockholders per Diluted ShareBook Value per Diluted Share
chart-5168ff1cea9459b9a68.jpgchart-48b7daf707a154e484a.jpgchart-b74b767e4f67599bbaa.jpg
Net income available to common stockholders increased from third quarter 2018 primarily due to lower current accident year catastrophes, a lower group disability loss ratio, an increase in net realized capital gains, and higher net investment income, partially offset by a loss on extinguishment of debt in the 2019 period and higher integration costs.
Book value per diluted share increased from December 31, 2018, as a result of a 23% increase in common stockholders' equity resulting primarily from an increase in AOCI as well as net income in excess of dividends.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Net Investment Income   Annualized Investment Yield, Net of tax
chart-080684974d155af181a.jpgchart-8852073b6cf65572baa.jpg
Net investment income increased 10% compared with third quarter 2018 primarily due to higher asset levels, largely driven by the acquisition of Navigators Group, and higher returns on limited partnerships and other alternative investments, partially offset by the impact of lower reinvestment rates.
Net realized capital gains improved from the third quarter 2018, with gains in 2019 primarily driven by net gains on sales of fixed maturity securities driven by duration and credit management trades as well as appreciation in value of equity securities due to higher equity market levels.
Annualized investment yield, net of tax, was consistent with third quarter 2018 as a higher yield on limited partnerships and other alternative investments was offset by the impact of lower reinvestment rates.
Net unrealized gains, net of tax, for fixed maturities in the investment portfolio increased by $401 in third quarter 2019 primarily due to the effect of lower interest rates.
P&C Written PremiumsP&C Combined Ratio
chart-743b84306429547494f.jpgchart-93e4d48614d959b9bd1.jpg
Written premiums for Property & Casualty increased 17% compared with third quarter 2018 reflecting an increase in Commercial Lines, including the effect of the Navigators Group acquisition, partially offset by a decrease in Personal Lines.
Combined ratio for Property & Casualty decreased 1.8 points compared with third quarter 2018, largely due to lower current accident year catastrophes and lower non-catastrophe property losses, partially offset by less favorable prior year reserve development and a higher expense ratio.
Catastrophe losses of $106, before tax, were lower compared with catastrophe losses of $169, before tax, in third quarter 2018, driven by lower losses from hurricanes and tropical storms in the 2019 period and losses from wildfires in the 2018 period.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Prior accident year development was favorable $47, before tax, in the third quarter 2019, primarily due to a decrease in reserves for workers' compensation, personal auto liability and package business, partially offset by an increase in reserves for commercial auto and general liability. Reserve development was a net favorable $60, before tax, in third quarter 2018, primarily due to a decrease in reserves for workers' compensation, professional liability, auto liability and 2017 catastrophes.
Net Income Margin - Group Benefits
chart-16eeb88919135df79da.jpg
Net income margin for Group Benefits increased compared with third quarter 2018 primarily due to a lower group disability ratio, a change to net realized capital gains, and additional tax expense in the 2018 period that was primarily driven by the effect of the lower rate on deferred tax assets due to the filing of the Company's 2017 Federal income tax return and finalization of the opening balance sheet for the Aetna Group Benefits acquisition. This was partially offset by a higher group life loss ratio, higher commission rates on voluntary products and investments in technology and claims operations. Contributing to the net income margin in both the 2019 and 2018 periods was favorable prior incurral year development.
CONSOLIDATED RESULTS OF OPERATIONS
 
The Consolidated Results of Operations should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the related Notes beginning on page 7 as well as with the segment operating results sections of MD&A.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




 Three Months Ended September 30, Nine Months Ended September 30,
 20192018Change 20192018Change
Earned premiums$4,394
$3,987
10% $12,500
$11,872
5%
Fee income330
344
(4%) 970
994
(2%)
Net investment income490
444
10% 1,448
1,323
9%
Net realized capital gains89
38
134% 332
60
NM
Other revenues44
29
52% 129
73
77%
Total revenues5,347
4,842
10% 15,379
14,322
7%
Benefits, losses and loss adjustment expenses2,914
2,786
5% 8,533
8,219
4%
Amortization of deferred policy acquisition costs437
348
26% 1,184
1,034
15%
Insurance operating costs and other expenses1,167
1,091
7% 3,356
3,195
5%
Loss on extinguishment of debt90

NM
 90
6
NM
Loss on reinsurance transaction

% 91

NM
Interest expense67
69
(3%) 194
228
(15%)
Amortization of other intangible assets19
18
6% 47
54
(13%)
Total benefits, losses and expenses4,694
4,312
9% 13,495
12,736
6%
Income from continuing operations, before tax653
530
23% 1,884
1,586
19%
 Income tax expense118
103
15% 347
297
17%
Income from continuing operations, net of tax535
427
25% 1,537
1,289
19%
Income from discontinued operations, net of tax
5
(100%) 
322
(100%)
Net income535
432
24% 1,537
1,611
(5%)
Preferred stock dividends11

NM
 16

NM
Net income available to common stockholders$524
$432
21% $1,521
$1,611
(6%)
Three months ended September 30, 2019 compared to the three months ended September 30, 2018
Net income available to common stockholders increased by $92 from third quarter 2018 primarily due to lower current accident year catastrophes, a lower group disability loss ratio, an increase in net realized capital gains, and higher net investment income, partially offset by a loss on extinguishment of debt in the 2019 period and higher integration costs. In addition, lower non-catastrophe property losses and an increase in earnings from the Company's retained equity interest in the former life and annuity operations were largely offset by the effect of lower Personal Lines earned premium and less favorable P&C prior accident year development.
Earned premiums increased by $407 before tax, reflecting a 26% increase in Commercial Lines, including the effect of the Navigators Group acquisition, partially offset by a 5% decrease in Personal Lines and a 1% decrease in Group Benefits. For a discussion of the Company's operating results by segment, see MD&A - Segment Operating Summaries.
Fee income was down 4% reflecting reduced fee income in Hartford Funds resulting primarily from fee reductions and a shift to lower fee funds.
Net investment income increased by 10%, primarily due to higher asset levels, largely driven by the acquisition of
 
Navigators Group, and higher returns on limited partnerships and other alternative investments, partially offset by the impact of lower reinvestment rates. For further discussion of investment results, see MD&A - Investment Results, Net Investment Income.
Net realized capital gains of $89 in third quarter 2019 increased from third quarter 2018, with gains in 2019 primarily driven by net gains on sales of fixed maturity securities driven by duration and credit management trades and appreciation in value of equity securities due to higher equity market levels. For further discussion of investment results, see MD&A - Investment Results, Net Realized Capital Gains.
Other revenues for the three month period in 2019 included $14 of before tax income recognized on the 9.7% ownership interest in the legal entity that acquired the life and annuity business sold in May 2018.
Benefits, losses and loss adjustment expenses increased primarily due to an increase in Commercial Lines, partially offset by a decrease in Personal Lines and Group Benefits. The increase in Commercial Lines was driven by the effect of losses on earned premium from the acquired Navigators Group business and less favorable prior accident reserve development, partially offset by lower current accident year catastrophes. The decrease in Personal Lines was primarily due to lower current accident year catastrophes and the effect of lower earned premium. Benefits, losses and loss adjustment expenses for Group Benefits decreased, primarily due to a lower group disability loss ratio from lower claim incidence and higher claim terminations.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Current accident year losses and loss adjustment expenses before catastrophes in Property & Casualty increased due to the effect of earned premium from the Navigators Group acquisition, partially offset by lower non-catastrophe property losses and the effect of lower earned premium in Personal Lines.
Current accident year catastrophe losses of $106, before tax, for the three months ended September 30, 2019, compared to $169, before tax, for the prior year period. Catastrophe losses in 2019 were primarily from tornado, wind and hail events in various areas of the Midwest and Mountain West as well as losses from hurricanes and tropical storms in the Southeast. Catastrophe losses in 2018 were primarily from hurricane Florence, wind and hail events in Colorado and wildfires in California and Colorado. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
Net prior accident year reserve development in Property & Casualty was favorable by $47, before tax, for the three months ended September 30, 2019, compared to favorable net reserve development of $60, before tax, for the prior year period. Prior accident year development in 2019 primarily included a decrease of reserves for workers' compensation, personal auto liability and package business, partially offset by an increase in reserves for commercial auto and general liability. Prior accident year development in 2018 primarily included reserve decreases in reserves for workers’ compensation, professional liability, auto liability and catastrophe reserves. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
Amortization of deferred policy acquisition costs was up from the prior year due to an increase in Commercial Lines, which was driven by the impact of the Navigators Group acquisition.
Insurance operating costs and other expenses increased due to operating costs incurred related to the Navigators Group acquisition, higher information technology costs across Commercial Lines, Personal Lines and Group Benefits, and higher commissions in Commercial Lines and Group Benefits. These increases were partially offset by lower incentive compensation and a decrease in Hartford Funds due to lower variable costs.
Loss on extinguishment of debt in the 2019 period arose from repayment before maturity of the Company’s $265 of 5.75% senior notes due 2023 that had been assumed in the Navigators Group acquisition, and its $800 of 5.125% senior notes due 2022 of the Hartford Financial Services Group, Inc.
Income tax expense increased due to an increase in income from continuing operations before tax. Differences between the Company's effective income tax rate and the U.S. statutory rate of 21% are due primarily to tax-exempt interest earned on invested assets, stock-based compensation and non-deductible executive compensation. For further discussion of income taxes, see Note 11 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
 
Nine months ended September 30, 2019 compared to the nine months ended September 30, 2018
Net income available to common stockholders decreased by $90 due to a reduction in income from discontinued operations due to the sale in May 2018 of the life and annuity business, partially offset by an increase in income from continuing operations. Income from continuing operations, net of tax, increased by $248 primarily due to an increase in net realized capital gains, higher net investment income, lower current accident year catastrophe losses in P&C, a lower disability loss ratio in Group Benefits, lower interest expense, a decrease in personal auto liability loss costs and higher earnings from the Company's retained equity interest in the former life and annuity operations. These increases were partially offset by the effect of a loss on reinsurance and reserve increases totaling $188 before tax upon the acquisition of Navigators Group, a higher loss on extinguishment of debt in the 2019 period, an increase in integration and transaction costs, higher non-catastrophe property losses, the effect of lower Personal Lines earned premium, less favorable P&C prior accident year development and higher underwriting expenses.
Earned premiums increased by $628 before tax, reflecting a 15% increase in Commercial Lines, including the effect of the Navigators Group acquisition, partially offset by a 6% decline in Personal Lines with earned premiums for Group Benefits relatively flat. For a discussion of the Company's operating results by segment, see MD&A - Segment Operating Summaries.
Fee income decreased by 2% reflecting lower fee income in Hartford Funds largely due to lower average daily assets under management and a shift to lower fee funds, partially offset by higher fee income in Corporate resulting from fees earned on the management of the investment portfolio of the life and annuity business sold in May 2018.
Net investment income increased by 9% primarily due to higher asset levels, largely driven by the acquisition of Navigators Group, higher income from limited partnerships and other alternative investments, higher average short-term interest rates, and higher returns on equity investments. For further discussion of investment results, see MD&A - Investment Results, Net Investment Income.
Net realized capital gains of $332 for the nine months ended September 30, 2019, improved from the nine months ended September 30, 2018, with gains in 2019 primarily driven by appreciation in value of equity securities due to higher equity market levels and net gains on sales in 2019 of fixed maturity securities driven by duration and credit management trades. For further discussion of investment results, see MD&A - Investment Results, Net Realized Capital Gains.
Other revenues for the nine months ended September 30, 2019 included $45 of before tax income recognized on the 9.7% ownership interest in the legal entity that acquired the life and annuity business sold in May 2018.

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Benefits, losses and loss adjustment expenses increased in Property & Casualty, partially offset by a decrease in Group Benefits. The increase for Property & Casualty was driven by an increase in Commercial Lines, partially offset by a decrease in Personal Lines. The increase in Commercial Lines was principally due to the effect of losses on earned premium from the acquired Navigators Group business, an increase in Navigators Group reserves upon acquisition of the business, a higher current accident year loss and loss adjustment expense ratio before catastrophes and less favorable prior accident year reserve development. The decrease in Personal Lines was primarily due to lower current accident year catastrophes, the effect of lower earned premium and, to a lesser extent, a lower current accident year loss and loss adjustment expense ratio before catastrophes. The decrease in Group Benefits was largely due to a lower group disability loss ratio, including favorable prior incurral year development.
Current accident year losses and loss adjustment expenses before catastrophes in Property & Casualty increased due to the effect of higher earned premium in Commercial Lines, including the impact of the Navigators Group acquisition, and higher non-catastrophe property losses, partially offset by a lower personal auto liability and homeowners loss ratio and the effect of lower earned premium in Personal Lines.
Current accident year catastrophe losses of $348, before tax, for the nine months ended September 30, 2019, compared to $460, before tax, for the prior year period. Catastrophe losses in 2019 were primarily from tornado, wind and hail events in the South, Midwest and Mountain West and winter storms across the country as well as from hurricanes and tropical storms in the Southeast. Catastrophe losses in 2018 were primarily from multiple wind and hail events in Colorado, the Midwest, South and Mid-Atlantic, winter storms on the East Coast, hurricane Florence, and wildfires in California and Colorado. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
Net prior accident year reserve development in Property & Casualty was a net favorable $23, before tax, for the nine months ended September 30, 2019, compared to favorable net reserve development of $139, before tax, for the prior year period. Prior accident year development in 2019 primarily included reserve decreases for workers’ compensation, catastrophes, and package business, partially offset by increases in general liability and professional liability, including increases in Navigators Group reserves upon acquisition of the business. Prior accident year
 
development in 2018 primarily included a decrease in reserves for workers’ compensation and a decrease in catastrophe reserves for the 2017 hurricanes. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
Amortization of deferred policy acquisition costs was up from the prior year period primarily due to an increase in Commercial Lines, including the impact from the Navigators Group acquisition, and to a lesser extent an increase in Group Benefits, partially offset by a decrease in Personal Lines.
Insurance operating costs and other expenses increased due to higher information technology and operations costs across Commercial Lines, Personal Lines and Group Benefits, an increase in direct marketing expenses in Personal Lines to generate new business growth and higher commissions in Commercial Lines and Group Benefits as well as transaction costs and operating costs incurred related to the Navigators Group acquisition. The increase in Property & Casualty and Group Benefits was partially offset by lower incentive compensation and by a decrease in Hartford Funds due to lower variable costs.
Loss on extinguishment of debt in the 2019 period arose from repayment before maturity of the Company’s $265 of 5.75% senior notes due 2023 that had been assumed in the Navigators Group acquisition, and its $800 of 5.125% senior notes due 2022 of the Hartford Financial Services Group, Inc.
Interest expense decreased due to a reduction in outstanding debt.
Amortization of other intangible assets decreased due to lower amortization of intangible assets arising from the acquisition of Aetna's U.S. group life and disability business.
Income tax expense increased primarily due to an increase in income from continuing operations before tax. Differences between the Company's effective income tax rate and the U.S. statutory rate of 21% are due primarily to tax-exempt interest earned on invested assets, stock-based compensation and non-deductible executive compensation. For further discussion of income taxes, see Note 11 - Income Taxes of Notes to Condensed Consolidated Financial Statements.


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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




INVESTMENT RESULTS
Composition of Invested Assets
 September 30, 2019 December 31, 2018
 AmountPercent AmountPercent
Fixed maturities, available-for-sale ("AFS"), at fair value$42,389
80.6% $35,652
76.2%
Fixed maturities, at fair value using the fair value option ("FVO")39
0.1% 22
%
Equity securities, at fair value1,414
2.7% 1,214
2.6%
Mortgage loans3,736
7.1% 3,704
7.9%
Limited partnerships and other alternative investments1,770
3.3% 1,723
3.7%
Other investments [1]302
0.6% 192
0.4%
Short-term investments2,927
5.6% 4,283
9.2%
Total investments$52,577
100.0% $46,790
100.0%
[1]Primarily consists of investments of consolidated investment funds and derivative instruments which are carried at fair value.
September 30, 2019 compared to December 31, 2018
Fixed maturities, AFS increased primarily due to the fixed maturities, AFS acquired as part of the acquisition of Navigators Group as well as an increase in valuations due to lower interest rates and tighter credit spreads.
 
Short-term investments decreased due to the funding of Navigators Group acquisition slightly offset by tax receipts related to the refund of AMT tax credits.
Net Investment Income
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018 20192018
(Before tax)AmountYield [1]AmountYield [1] AmountYield [1]AmountYield [1]
Fixed maturities [2]$392
3.8%$370
3.9% $1,159
3.9%$1,077
3.9%
Equity securities12
3.4%6
2.5% 31
3.0%18
2.4%
Mortgage loans37
4.2%35
4.0% 118
4.3%102
4.1%
Limited partnerships and other alternative investments65
15.3%45
10.6% 181
14.7%157
13.3%
Other [3]5
 10
  21
 27
 
Investment expense(21) (22)  (62) (58) 
Total net investment income$490
4.0%$444
4.0% $1,448
4.1%$1,323
4.0%
Total net investment income excluding limited partnerships and other alternative investments$425
3.6%$399
3.7% $1,267
3.7%$1,166
3.7%
[1]Yields calculated using annualized net investment income divided by the monthly average invested assets at amortized cost 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]Includes income from derivatives that qualify for hedge accounting and hedge fixed maturities.
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Total net investment income for the three month period in 2019 compared to 2018 increased primarily due to higher asset levels, largely driven by the acquisition of Navigators Group, and higher returns on limited partnerships and other alternative investments, partially offset by lower reinvestment
 
rates. Total net investment income for the nine month period in 2019 compared to 2018 increased primarily due to higher asset levels, largely driven by the acquisition of Navigators Group, higher returns on limited partnerships and other alternative investments, higher average short-term interest rates and higher returns on equity investments.
Annualized net investment income yield, excluding limited partnerships and other alternative investments, was 3.6% for the three month period in 2019, down from 3.7% for the same period in 2018 due to lower reinvestment rates. Annualized net investment income yield, excluding limited

65




Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




partnerships and other alternative investments, was 3.7% for the nine month period in 2019, consistent with the same period in 2018.
Average reinvestment rates on fixed maturities and mortgage loans, excluding certain U.S. Treasury securities and cash equivalent securities, for the 2019 three and nine month periods were 3.1% and 3.5%, respectively, which were below the average yield of sales and maturities of 4.1% and 4.0%, respectively, due to lower interest rates and maturities of higher yielding tax-exempt municipals. Average reinvestment rate for
 
the 2018 three and nine month periods was 4.0% which was higher than the average yield of sales and maturities of 3.8% and 3.6%, respectively, due to higher interest rates.
Despite the decline in reinvestment rates in 2019, we expect the annualized net investment income yield for the 2019 calendar year, excluding limited partnerships and other alternative investments, to approximate the portfolio yield earned in 2018. The estimated impact on net investment income yield is subject to change as the composition of the portfolio changes through portfolio management and changes in market conditions.
Net Realized Capital Gains
 Three Months Ended September 30, Nine Months Ended September 30,
(Before tax)20192018 20192018
Gross gains on sales$77
$26
 $190
$91
Gross losses on sales(4)(41) (44)(129)
Equity securities [1]19
46
 181
88
Net other-than-temporary impairment ("OTTI") losses recognized in earnings [2](1)(1) (3)(1)
Valuation allowances on mortgage loans [2]

 1

Transactional foreign currency revaluation

 
1
Non-qualifying foreign currency derivatives2
1
 2
2
Other, net [3](4)7
 5
8
Net realized capital gains$89
$38
 $332
$60
[1]
Includes all changes in fair value and trading gains and losses for equity securities. The net unrealized gain (loss) on equity securities included in net realized capital gains (losses) related to equity securities still held as of September 30, 2019, were $17 and $100 for the three and nine months ended September 30, 2019, respectively. The net unrealized gain (loss) on equity securities included in net realized capital gains (losses) related to equity securities still held as of September 30, 2018, were $41 and $50 for the three and nine months ended September 30, 2018, respectively.
[2]See Other-Than-Temporary Impairments and Valuation Allowances on Mortgage Loans within the Investment Portfolio Risks and Risk Management section of the MD&A.
[3]Primarily consists of changes in value of non-qualifying derivatives, including credit derivatives and interest rate derivatives used to manage duration.
Three and nine months ended September 30, 2019
Gross gains and losses on sales were primarily the result of duration, liquidity and credit management within U.S. treasury securities, corporate securities, and tax-exempt municipal bonds.
Equity securities net gains were primarily driven by appreciation of equity securities due to higher equity market levels.
Other, net losses for the three month period were primarily due to losses on interest rate derivatives of $5 due to a decline in interest rates. Gains for the nine month period were primarily due to gains on credit derivatives of $26 driven by credit spread tightening, partially offset by losses on interest rate derivatives of $20 due to a decline in interest rates.
Three and nine months ended September 30, 2018
Gross gains and losses on sales were primarily the result of duration, liquidity and credit management within corporate securities, U.S. treasury securities, and tax-exempt municipal bonds as well as from the sale of a private real estate investment.
 
Equity securities net gains were driven by appreciation of equity securities due to higher equity market levels and, for the nine month period, gains on sales due to tactical repositioning.
Other, net gains for the three month period were primarily
due to gains on credit derivatives of $6 driven by credit spread
tightening. Gains for the nine month period were primarily driven
by gains on interest rate derivatives of $7 due to an increase in
interest rates.
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;

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




group benefit long-term disability (LTD) reserves, net of reinsurance;
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. 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 2018 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 2018 Form 10-K Annual Report should be read in conjunction with this section to assist with obtaining an understanding of the underlying accounting policies related to these estimates. The following discussion updates certain of the Company’s critical accounting estimates as of September 30, 2019.
 
Property & Casualty Insurance Product Reserves, Net of Reinsurance
P&C Loss and Loss Adjustment Expense ("LAE") Reserves of $22,814, Net of Reinsurance, by Segment as of September 30, 2019
chart-d518983a0aaa571f946.jpg
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.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the Nine Months Ended September 30, 2019

Commercial
Lines
Personal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Beginning liabilities for unpaid losses and loss adjustment expenses, gross$19,455
$2,456
$2,673
$24,584
Reinsurance and other recoverables3,137
108
987
4,232
Beginning liabilities for unpaid losses and loss adjustment expenses, net16,318
2,348
1,686
20,352
Navigators Group acquisition2,001




2,001
Provision for unpaid losses and loss adjustment expenses







Current accident year before catastrophes3,552
1,548

5,100
Current accident year ("CAY") catastrophes234
114

348
Prior accident year development ("PYD")(7)(25)9
(23)
Total provision for unpaid losses and loss adjustment expenses3,779
1,637
9
5,425
Payments(2,981)(1,841)(130)(4,952)
Foreign currency adjustment(12)

(12)
Ending liabilities for unpaid losses and loss adjustment expenses, net19,105
2,144
1,565
22,814
Reinsurance and other recoverables4,006
109
968
5,083
Ending liabilities for unpaid losses and loss adjustment expenses, gross$23,111
$2,253
$2,533
$27,897
Earned premiums and fee income$6,040
$2,431


Loss and loss expense paid ratio [1]49.4
75.7


Loss and loss expense incurred ratio62.8
68.1


Prior accident year development (pts) [2](0.1)(1.0)

[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.
Current Accident Year Catastrophe Losses for the Nine Months Ended September 30, 2019, Net of Reinsurance

Commercial
Lines
Personal
Lines
Total
Wind and hail$140
$87
$227
Winter storms57
19
76
Tropical storms6
4
10
Hurricanes23
4
27
Earthquake1

1
Typhoon6

6
Other1

1
Total catastrophe losses$234
$114
$348
In September, 2019, PG&E Corporation and Pacific Gas and Electric Company (together, “PG&E”) agreed in principle to an $11 billion settlement with insurers representing approximately 85 percent of insurance subrogation claims to resolve all such claims arising from the 2017 Northern California wildfires and 2018 Camp wildfire. The settlement is subject to approval of the bankruptcy court overseeing PG&E's Chapter 11 bankruptcy filing. The settlement is also subject to the confirmation by the bankruptcy court of a chapter 11 plan of reorganization (a "Plan") which implements the terms of the settlement. If a Plan is approved, certain of the Company’s insurance subsidiaries would
 
be entitled to settlement payments. Based on reserve estimates submitted with the subrogation request, the amount our subsidiaries could collect from PG&E, if any, would be approximately $325 but could be more or less than that amount depending on how the Company’s ultimate paid claims subject to subrogation compare to other insurers’ ultimate paid claims subject to subrogation. Approval of the Plan and amount of the Company’s ultimate subrogation recoveries from PG&E are subject to uncertainty. This includes, among other things, uncertainty regarding liabilities for current or future wildfires caused or allegedly caused by PG&E, the value of recoveries by

68




Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




other creditors and PG&E’s ability to secure funds to pay its creditors.
Given the uncertainty, the Company has not recognized a benefit from potential subrogation from PG&E and will evaluate in future periods when more information becomes known. In connection with the 2018 Camp wildfire, the Company has recognized a $32 reinsurance recoverable for losses incurred in excess of a $350 per occurrence retention. Under its 2018 property aggregate catastrophe treaty, the Company has recognized a reinsurance
 
recoverable for aggregate catastrophe losses in excess of an $825 retention, with the recoverable currently estimated at $84. As such, the first $116 of subrogation recoveries would be offset by a $116 reduction in these reinsurance recoverables resulting in no net benefit to income. No changes have been made in 2019 to estimated incurred losses from the 2017 or 2018 wildfires.

Unfavorable (Favorable) Prior Accident Year Development for the Three Months Ended September 30, 2019
 Commercial LinesPersonal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Workers’ compensation$(40)$
$
$(40)
Workers’ compensation discount accretion8


8
General liability19


19
Marine(2)

(2)
Package business(23)

(23)
Commercial property(1)

(1)
Professional liability(1)

(1)
Bond(2)

(2)
Assumed Reinsurance



Automobile liability25
(23)
2
Homeowners
(1)
(1)
Net asbestos reserves



Net environmental reserves



Catastrophes(5)

(5)
Uncollectible reinsurance



Other reserve re-estimates, net3
(4)
(1)
Total prior accident year development$(19)$(28)$
$(47)

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Unfavorable (Favorable) Prior Accident Year Development for the Nine Months Ended September 30, 2019
 Commercial Lines
Personal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Workers’ compensation$(90)$
$
$(90)
Workers’ compensation discount accretion25


25
General liability62


62
Marine8


8
Package business(32)

(32)
Commercial property(16)

(16)
Professional liability32


32
Bond(2)

(2)
Assumed Reinsurance3


3
Automobile liability27
(28)
(1)
Homeowners



Net asbestos reserves



Net environmental reserves



Catastrophes(33)6

(27)
Uncollectible reinsurance



Other reserve re-estimates, net9
(3)9
15
Total prior accident year development$(7)$(25)$9
$(23)
Workers’ compensation reserves were reduced, principally in small commercial driven by lower than previously estimated claim severity for the 2014 through 2017 accident years and, to a lesser extent, in national accounts due to lower estimated claim severity, primarily for accident years 2013 and prior.
General liability reserves were increased, primarily due to reserve increases in small commercial for accident years 2017 and 2018 due to higher frequency of high-severity bodily injury claims, reserve increases in middle and large commercial for accident years 2015 to 2018 due to higher estimated severity, as well as increased estimated severity on the acquired Navigators book of business related to U.S. construction, premises liability, products liability and excess casualty, mostly related to accident years 2014 to 2018. In addition, an increase in reserves for mass torts was offset by a decrease in reserves for extra contractual liability claims.
Marine reserves were increased, principally related to pollution exposure from the 1980s and 1990s related to the Navigators Group book of business.
Package business reserves were decreased, primarily due to favorable emergence on property claims related to accident years 2016 through 2018 and due to favorable
 
development of allocated loss adjustment expenses on general liability claims for 2017 and prior accident years.
Commercial property reserves were decreased, principally due to favorable emergence of reported losses, including on the acquired Navigators Group book of business related to offshore energy in accident years 2017 to 2018 and construction engineering across accident years 2015 to 2018.
Professional liability reserves were increased, primarily due to large loss activity, including wrongful termination and discrimination claims, in accident years 2017 and 2018 and increased estimated frequency and severity of directors’ and officers’ reserves on the Navigators Group book of business, principally for the 2014 to 2018 accident years.
Automobile liability reserves were decreased in Personal Lines due to the emergence of lower estimated severity in automobile liability for accident year 2017 and were increased in Commercial Lines due to higher estimated severity on national accounts, principally in accident years 2017 and 2018
Catastrophes reserves were reduced, primarily as a result of lower estimated net losses from 2017 hurricanes Harvey and Irma.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the Nine Months Ended September 30, 2018
 
Commercial
Lines
Personal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Beginning liabilities for unpaid losses and loss adjustment expenses, gross$18,893
$2,294
$2,588
$23,775
Reinsurance and other recoverables3,147
71
739
3,957
Beginning liabilities for unpaid losses and loss adjustment expenses, net15,746
2,223
1,849
19,818
Provision for unpaid losses and loss adjustment expenses    
Current accident year before catastrophes3,003
1,688

4,691
Current accident year catastrophes238
222

460
Prior accident year development(145)(21)27
(139)
Total provision for unpaid losses and loss adjustment expenses3,096
1,889
27
5,012
Payments(2,676)(1,967)(170)(4,813)
Ending liabilities for unpaid losses and loss adjustment expenses, net16,166
2,145
1,706
20,017
Reinsurance and other recoverables3,089
21
670
3,780
Ending liabilities for unpaid losses and loss adjustment expenses, gross$19,255
$2,166
$2,376
$23,797
Earned premiums and fee income$5,267
$2,594
  
Loss and loss expense paid ratio [1]50.8
75.8
  
Loss and loss expense incurred ratio59.1
73.7
  
Prior accident year development (pts) [2](2.8)(0.8)  
[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.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Current Accident Year Catastrophe Losses for the Nine Months Ended September 30, 2018, Net of Reinsurance
 
Commercial
Lines
Personal
Lines
Total
Wind and hail$118
$158
$276
Winter storms57
22
79
Flooding1
1
2
Volcanic eruption
2
2
Wildfire2
32
34
Hurricane59
6
65
Massachusetts gas explosion1
1
2
Total catastrophe losses$238
$222
$460
Unfavorable (Favorable) Prior Accident Year Development for the Three Months Ended September 30, 2018
 Commercial Lines
Personal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Workers’ compensation$(24)$
$
$(24)
Workers’ compensation discount accretion10


10
General liability4


4
Package business(9)

(9)
Commercial property2


2
Professional liability(20)

(20)
Bond



Automobile liability(5)(10)
(15)
Homeowners
(7)
(7)
Net asbestos reserves



Net environmental reserves



Catastrophes(11)(2)
(13)
Uncollectible reinsurance

11
11
Other reserve re-estimates, net
1

1
Total prior accident year development$(53)$(18)$11
$(60)

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Unfavorable (Favorable) Prior Accident Year Development for the Nine Months Ended September 30, 2018
 Commercial Lines
Personal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Workers’ compensation$(97)$
$
$(97)
Workers’ compensation discount accretion30


30
General liability32


32
Package business(16)

(16)
Commercial property(10)

(10)
Professional liability(12)

(12)
Bond



Automobile liability(15)(10)
(25)
Homeowners
(20)
(20)
Net asbestos reserves



Net environmental reserves



Catastrophes(63)16

(47)
Uncollectible reinsurance

22
22
Other reserve re-estimates, net6
(7)5
4
Total prior accident year development$(145)$(21)$27
$(139)
Workers’ compensation reserves were reduced in small commercial and middle market, primarily for accident years 2012 to 2015, as both claim frequency and medical claim severity have emerged favorably compared to previous reserve estimates.
General liability reserves were increased, primarily due to an increase in reserves for higher hazard general liability exposures in middle market for accident years 2009 to 2017, partially offset by a decrease in reserves for other lines within middle market, including premises and operations, umbrella and products liability, principally for accident years 2015 and prior. Contributing to the increase in reserves for higher hazard general liability exposures was an increase in large losses and, in more recent accident years, an increase in claim frequency. Contributing to the reduction in reserves for other middle market lines were more favorable outcomes due to initiatives to reduce legal expenses. In addition, reserve increases for claims with lead paint exposure were offset by reserve decreases for other mass torts and extra-contractual liability claims.
Package business reserves were reduced, primarily due to lower reserve estimates for both liability and property for accident years 2010 and prior, including a recovery of loss adjustment expenses for the 2005 accident year.
Commercial property reserves were reduced, driven by an increase in estimated reinsurance recoverables on middle market property losses from the 2017 accident year.
Professional liability reserves were reduced, principally for accident years 2014 and prior, for directors and officers liability claims principally due to a number of older claims closing with limited or no payment.
Automobile liability reserves were reduced, primarily driven by reduced estimates of loss adjustment expenses in small commercial for recent accident years and favorable development in personal automobile liability for accident years 2014 to 2017,
 
principally due to lower severity, including with uninsured and underinsured motorist claims.
Homeowners reserves were reduced, primarily in accident years 2013 to 2017, driven by lower than expected severity across multiple perils.
Catastrophes reserves were reduced, primarily as a result of lower estimated net losses from 2017 catastrophes, principally related to hurricanes Harvey and Irma. Before reinsurance, estimated losses for 2017 catastrophe events decreased by $133 in the nine months ended September 30, 2018, resulting in a decrease in reinsurance recoverables of $90 as the Company no longer expects to recover under the 2017 Property Aggregate reinsurance treaty as aggregate ultimate losses for 2017 catastrophe events are now projected to be less than $850.
Uncollectible reinsurance reserves were increased due to lower anticipated recoveries related to older accident years.


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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 September 30, Nine Months Ended September 30,
 20192018Change 20192018Change
Written premiums$2,235
$1,751
28% $6,262
$5,336
17%
Change in unearned premium reserve(15)(34)56% 248
95
161%
Earned premiums2,250
1,785
26% 6,014
5,241
15%
Fee income8
9
(11%) 26
26
%
Losses and loss adjustment expenses



    
Current accident year before catastrophes1,336
1,055
27% 3,552
3,003
18%
Current accident year catastrophes [1]74
95
(22%) 234
238
(2%)
Prior accident year development [1](19)(53)64% (7)(145)95%
Total losses and loss adjustment expenses1,391
1,097
27% 3,779
3,096
22%
Amortization of deferred policy acquisition costs356
264
35% 940
780
21%
Underwriting expenses410
353
16% 1,139
1,013
12%
Amortization of other intangible assets7
2
NM
 11
3
NM
Dividends to policyholders12
8
50% 24
18
33%
Underwriting gain82
70
17% 147
357
(59%)
Net servicing income2
(1)NM
 3

NM
Net investment income [2]291
250
16% 831
750
11%
Net realized capital gains [2]60
29
107% 229
63
NM
Loss on reinsurance transaction

% (91)
NM
Other income (expenses)(20)2
NM
 (27)1
NM
 Income before income taxes415
350
19% 1,092
1,171
(7%)
 Income tax expense [3]79
61
30% 202
212
(5%)
Net income$336
$289
16% $890
$959
(7%)
[1]For discussion of current accident year catastrophes and prior accident year development, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance.
[2]For discussion of consolidated investment results, see MD&A - Investment Results.
[3]
For discussion of income taxes, see Note 11 - Income Taxes of Notes to Condensed Consolidated Financial Statements.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Premium Measures

Three Months Ended September 30, Nine Months Ended September 30,

20192018 20192018
Small commercial new business premium$150
$145
 $508
$443
Middle market new business premium146
131
 463
404
Small commercial policy count retention83%83% 83%82%
Middle market policy count retention [1]83%78% 82%78%
Standard commercial lines renewal written price increases [1] [2]2.8%1.9% 2.3%2.6%
Standard commercial lines renewal earned price increases [1] [2]2.2%3.0% 2.2%3.2%
Small commercial policies in-force as of end of period (in thousands)1,294
1,264
   
Middle market policies in-force as of end of period (in thousands) [1]64
64
   
[1]Excludes certain risk classes of higher hazard general liability in middle market.
[2]Small commercial and middle market lines within middle & large commercial are generally referred to as standard commercial lines.
Underwriting Ratios
 Three Months Ended September 30, Nine Months Ended September 30,

20192018Change 20192018Change
Loss and loss adjustment expense ratio


 


Current accident year before catastrophes59.4
59.1
0.3
 59.1
57.3
1.8
Current accident year catastrophes3.3
5.3
(2.0) 3.9
4.5
(0.6)
Prior accident year development(0.8)(3.0)2.2
 (0.1)(2.8)2.7
Total loss and loss adjustment expense ratio61.8
61.5
0.3
 62.8
59.1
3.7
Expense ratio34.0
34.2
(0.2) 34.3
33.8
0.5
Policyholder dividend ratio0.5
0.4
0.1
 0.4
0.3
0.1
Combined ratio96.4
96.1
0.3
 97.6
93.2
4.4
Current accident year catastrophes and prior year development2.5
2.3
0.2
 3.8
1.7
2.1
Current accident year change in loss reserves upon acquisition of a business [1]


 0.5

0.5
Underlying combined ratio93.9
93.7
0.2
 93.3
91.4
1.9
[1]Upon acquisition of Navigators Group and a review of Navigators Insurers reserves, the nine months ended September 30, 2019 included $68 of prior accident year reserve increases and $29 of current accident year reserve increases which were excluded for the purposes of the underlying combined ratio calculation.
Net Income
chart-8b7921dd82f2581c8d9.jpg
 
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Net income increased for the three months ended September 30, 2019 due to higher net investment income, higher net realized capital gains and a higher underwriting gain.
Net income decreased for the nine months ended September 30, 2019 due to$91 before tax of ADC ceded premium and a lower underwriting gain, primarily due to $97 before tax of reserve increases upon the acquisition of Navigators Group and a decrease in net favorable prior accident year development for other reserves, partially offset by higher net investment income and higher net realized capital gains.
Contributing to the increase in net investment income for both the three and nine month periods was income on invested assets acquired from Navigators Group and higher income from limited

75




Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




partnerships and alternative investments. For further discussion of investment results, see MD&A - Investment Results.
Underwriting Gain
chart-9d9a2e9bbca5501c929.jpg
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Underwriting gain increased in the three month period due to lower current accident year catastrophes, a lower current accident year loss and loss adjustment expense ratio before catastrophes, excluding Navigators Group, and the effect of higher earned premium, excluding Navigators Group, partially offset by less favorable prior accident year development.
Underwriting gain decreased in the nine month period, primarily due to $97 before tax of increases to Navigators reserves upon acquisition of the business, less favorable prior accident year reserve development unrelated to the Navigators Group acquisition, a higher current accident year loss and loss adjustment expense ratio before catastrophes, and higher expenses, partially offset by the effect of higher earned premium, excluding Navigators Group. Higher commissions contributed to the increase in amortization of DAC. Contributing to the increase in underwriting expenses was the effect of higher information technology and operations costs in middle market as well as higher operations and other costs in small commercial associated with the 2018 renewal rights agreement with Farmers Group to acquire its Foremost-branded small commercial business, partially offset by lower incentive compensation.
For both the three and nine month periods, the acquisition of Navigators Group contributed to the increase in earned premiums with a corresponding increase to losses and loss adjustment expenses, amortization of DAC and underwriting expenses. Apart from the effect of the Navigators Group acquisition, earned premiums increased in small commercial and in middle and large commercial.
 
Earned Premiums
chart-144b45eb34be5cd4a75.jpg
[1]Other of $12 and $11 for the three months ended September 30, 2018, and 2019, respectively, and $35 and $33 for the nine months ended September 30, 2018 and 2019, respectively, is included in the total.
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Earned premiums increased for the three and nine months ended September 30, 2019 reflecting written premium growth over the preceding twelve months.
Written premiums increased for the three and nine months ended September 30, 2019 with growth in middle & large commercial, and global specialty, including growth from the acquisition of Navigators Group and, for the nine month period only, growth in small commercial. In standard commercial lines, renewal written price increases declined slightly for the nine month period in 2019, mostly attributable to larger rate decreases in small commercial workers' compensation, partially offset by higher written pricing in property and general liability, and improved for the three month period due to higher written pricing increases in property and general liability and lower written pricing decreases in workers' compensation. New business premium in small commercial and middle market

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increased over the prior year in both the three and nine month periods, with increases in workers' comp and property.
Small commercial written premium was flat for the three month period and increased for the nine month period. The increase for the nine month period was primarily driven by the business acquired under a 2018 renewal rights agreement with Farmers Group to acquire its Foremost-branded small commercial business.
Middle & large commercial written premium growth for both the three and nine month periods was primarily due to new business growth and higher renewal premium in core middle market lines, as well as growth in certain industry verticals, including construction, energy, large property and specialty programs. The increase in renewal premium was due to renewal written price increases and higher audit premium.
Global specialty written premium increased for both the three and nine month periods driven by the acquisition of Navigators as well as growth in financial products and bond.
Loss and LAE Ratio before Catastrophes and Prior Accident Year Development
chart-e8526132e13f5168a69.jpg
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Loss and LAE ratio before catastrophes and prior accident year development increased for the three months ended September 30, 2019, primarily due to a higher loss and loss adjustment expense ratio on the acquired Navigators Group business, partially offset by lower non-catastrophe property losses.
Loss and LAE ratio before catastrophes and prior accident year development increased for the nine months ended September 30, 2019 primarily due to a higher loss and loss adjustment expense ratio on the acquired Navigators Group business and higher non-catastrophe property losses in middle market inland marine.
Included in current accident year loss and loss adjustment expenses before catastrophes for the nine month period was a $29 increase in current accident year Navigators reserves upon acquisition of the business in May 2019, which was driven primarily by increased loss estimates for general liability, international professional liability and assumed reinsurance accident and health business.
 
Current Accident Year Catastrophes and Unfavorable (Favorable) Prior Accident Year Development
chart-5a5fb87c5a0e56b2b5a.jpg
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Current accident year catastrophe losses totaled $74, before tax, for the three months ended September 30, 2019 compared to $95, before tax, for the three months ended September 30, 2018. Current accident year catastrophe losses for the three months ended September 30, 2019 were primarily related to wind and hail events in various areas of the Midwest and Mountain West as well as from hurricane Dorian and tropical storm Imelda. Current accident year catastrophe losses for the three months ended September 30, 2018 were primarily due to wind and hail events in Colorado and hurricane Florence.
Current accident year catastrophe losses totaled $234, before tax, for the nine months ended September 30, 2019 compared to $238 before tax, for the nine months ended September 30, 2018. Current accident year catastrophe losses for the nine months ended September 30, 2019 were primarily from winter storms in the northern plains, Midwest and Northeast as well as tornado, wind and hail events in various areas of the Midwest, Mountain West and South. Current accident year catastrophe losses for the nine months ended September 30, 2018 were primarily due to multiple wind and hail events in Colorado, the Midwest, South and Mid-Atlantic and hurricane Florence as well as winter storms on the east coast.
Prior accident year development was a net favorable $19 for the three month period in 2019, compared with $53 of net favorable prior accident year development for the three month period in 2018 and was a net favorable $7 for the

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nine months ended September 30, 2019 compared to favorable prior accident year development of $145, before tax, for the nine months ended September 30, 2018. Net reserve decreases for the three month period in 2019 were primarily related to lower loss reserve estimates for workers' compensation claims and package business reserves, partially offset by increases in reserves for auto liability and general liability. Net reserve decreases for the nine months ended September 30, 2019 were primarily related to lower loss reserve estimates for workers' compensation claims, catastrophes and package business reserves, largely offset by a $68 before tax increase to Navigators reserves upon acquisition of the business and increases in reserves for auto liability and general liability. The increase in Navigators reserves upon acquisition of the business principally
 
related to higher reserve estimates for general liability, professional liability and marine.
Net reserve decreases for the three months ended September 30, 2018 were primarily related to decreases in reserves for workers' compensation, professional liability and the 2017 hurricanes. Net reserve decreases for the nine month 2018 period were primarily related to decreases for workers' compensation and catastrophe reserves. Estimated losses for 2017 catastrophe events in Commercial Lines decreased by $93 in the nine month 2018 period resulting in a decrease in reinsurance recoverables of $43 as the Company no longer expects to recover under the 2017 Property Aggregate reinsurance treaty.
PERSONAL LINES
Results of Operations
Underwriting Summary
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018Change 20192018Change
Written premiums$822
$854
(4%) $2,417
$2,518
(4%)
Change in unearned premium reserve19
5
NM
 14
(46)130%
Earned premiums803
849
(5%) 2,403
2,564
(6%)
Fee income9
10
(10%) 28
30
(7%)
Losses and loss adjustment expenses


   
Current accident year before catastrophes531
565
(6%) 1,548
1,688
(8%)
Current accident year catastrophes [1]32
74
(57%) 114
222
(49%)
Prior accident year development [1](28)(18)(56%) (25)(21)(19%)
Total losses and loss adjustment expenses535
621
(14%) 1,637
1,889
(13%)
Amortization of DAC64
68
(6%) 194
209
(7%)
Underwriting expenses154
155
(1%) 464
454
2%
Amortization of other intangible assets1
1
% 4
3
33%
Underwriting gain58
14
NM
 132
39
NM
Net servicing income [2]4
5
(20%) 11
13
(15%)
Net investment income [3]46
39
18% 134
116
16%
Net realized capital gains [3]9
5
80% 36
10
NM
Other income (expenses)
1
(100%) (1)1
NM
Income before income taxes117
64
83% 312
179
74%
 Income tax expense [4]23
13
77% 60
33
82%
Net income$94
$51
84% $252
$146
73 %
[1]For discussion of current accident year catastrophes and prior accident year development, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
[2]
Includes servicing revenues of $23 and $24 for the three months ended September 30, 2019 and 2018 and $65 and $66 for the nine months ended September 30, 2019 and 2018. Includes servicing expenses of $19 for both the three months ended September 30, 2019 and 2018, and $54 and $53 for the nine months ended September 30, 2019 and 2018.
[3]For discussion of consolidated investment results, see MD&A - Investment Results.
[4]
For discussion of income taxes, see Note 11 - Income Taxes of Notes to Condensed Consolidated Financial Statements.

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Written and Earned Premiums
 Three Months Ended September 30, Nine Months Ended September 30,
Written Premiums20192018Change 20192018Change
Product Line       
Automobile$562
$583
(4%) $1,681
$1,750
(4%)
Homeowners260
271
(4%) 736
768
(4%)
Total$822
$854
(4%) $2,417
$2,518
(4%)
Earned Premiums  
   

Product Line  
   

Automobile$558
$591
(6%) $1,670
$1,787
(7%)
Homeowners245
258
(5%) 733
777
(6%)
Total$803
$849
(5%) $2,403
$2,564
(6%)
Premium Measures
 Three Months Ended September 30, Nine Months Ended September 30,
Premium Measures20192018 20192018
Policies in-force end of period (in thousands)     
Automobile   1,445
1,547
Homeowners   893
948
New business written premium     
Automobile$58
$47
 $173
$126
Homeowners$21
$12
 $57
$32
Policy count retention     
Automobile85%83% 85%82%
Homeowners86%83% 85%83%
Renewal written price increase     
Automobile4.1%6.0% 4.8%7.9%
Homeowners5.9%9.9% 6.9%9.9%
Renewal earned price increase     
Automobile5.1%9.2% 5.8%10.1%
Homeowners8.0%9.6% 8.8%9.2%

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Underwriting Ratios
 Three Months Ended September 30, Nine Months Ended September 30,
Underwriting Ratios20192018Change 20192018Change
Loss and loss adjustment expense ratio       
Current accident year before catastrophes66.1
66.5
(0.4) 64.4
65.8
(1.4)
Current accident year catastrophes4.0
8.7
(4.7) 4.7
8.7
(4.0)
Prior year development(3.5)(2.1)(1.4) (1.0)(0.8)(0.2)
Total loss and loss adjustment expense ratio66.6
73.1
(6.5) 68.1
73.7
(5.6)
Expense ratio26.2
25.2
1.0
 26.4
24.8
1.6
Combined ratio92.8
98.4
(5.6) 94.5
98.5
(4.0)
Current accident year catastrophes and prior year development0.5
6.6
(6.1) 3.7
7.9
(4.2)
Underlying combined ratio92.3
91.8
0.5
 90.8
90.6
0.2
Product Combined Ratios
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018Change 20192018Change
Automobile  

   

Combined ratio95.7
98.9
(3.2) 95.3
97.2
(1.9)
Underlying combined ratio98.8
98.5
0.3
 96.4
96.4

Homeowners  

   

Combined ratio86.5
96.9
(10.4) 93.0
101.5
(8.5)
Underlying combined ratio76.6
76.3
0.3
 78.1
77.2
0.9
Net Income
chart-69ef0927713e57ff8ab.jpg
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Net income increased for the three month period primarily due to a higher underwriting gain and higher net investment income. Net income for the nine month period increased, primarily due to a higher underwriting gain, an increase in net realized capital gains and higher net investment income.
 
Underwriting Gain
chart-3f13c589538953aca25.jpg
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Underwriting gain increased for the three month period in 2019 primarily due to lower current accident year catastrophes and more favorable prior accident year reserve development partially offset by the effect of lower earned premium. Underwriting gain increased for the nine month period

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




in 2019 primarily due to lower current accident year catastrophes and lower current accident year loss ratios before catastrophes in both auto and homeowners partially offset by the effect of lower earned premium and an increase in underwriting expenses. For the nine month period, the increase in underwriting expenses was largely driven by investments in information technology, and an increase in direct marketing spending, selling expenses, and operational costs to generate new business, partially offset by a reduction in state taxes and assessments and lower incentive compensation. The decrease in amortization of DAC for both the three and nine month periods was commensurate with the reduction in earned premium.
Earned Premiums
chart-7823fdf033d95795b4c.jpg
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Earned premiums decreased in 2019, reflecting a decline in written premium over the prior six to twelve months in both Agency channels and in AARP Direct.
Written premiums decreased in 2019 in AARP Direct and both Agency channels. Despite an increase in new business and higher policy count retention in both auto and homeowners, written premium declined, primarily due to not generating enough new business to offset the loss of non-renewed premium.
Renewal written pricing increases in 2019 were lower in both auto and homeowners in response to moderating loss cost trends.
Policy count retention increased in both automobile and homeowners, in part driven by moderating renewal written price increases.
 
Policies in-force decreased in 2019 in both automobile and homeowners, driven by not generating enough new business to offset the loss of non-renewed policies.
Loss and LAE Ratio before Catastrophes and Prior Accident Year Development
chart-193542664a535edbad6.jpg
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Loss and LAE ratio before catastrophes and prior accident year development decreased in both the three and nine month periods. For auto in the three month period, a modest increase in loss costs was offset by the effect of earned pricing increases. For auto in the nine month period, a decrease in the loss and loss adjustment expense ratio was due to the effect of earned pricing increases and a slight decrease in average claim frequency, partially offset by a modest increase in average claim severity. For home in both the three and nine month periods, the primary drivers were the effect of earned pricing increases as well as lower non-catastrophe loss costs.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Current Accident Year Catastrophes and Unfavorable (Favorable) Prior Accident Year Development
chart-32dff133282d53579d5.jpg
 
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Current accident year catastrophe losses for the three months ended September 30, 2019 were primarily from wind and hail events in the Midwest and Mountain West and losses from hurricane Dorian and tropical storm Imelda. Catastrophe losses for three months ended September 30, 2018 were from catastrophe events across the country, principally wildfires in California and Colorado, wind and hail storms in Colorado and wind storms in the Midwest, Mid-Atlantic and Northeast. Catastrophe losses for the nine months ended September 30, 2019 primarily included winter storms across the country and tornado, wind and hail events in the South, Midwest, and Mountain West. Catastrophe losses for the nine month 2018 period included multiple wind and hail events across the Mountain West, Midwest, South, and Northeast and wildfires in California and Colorado as well as from east coast winter storms.
Prior accident year development was favorable in both the three and nine months ended September 30, 2019 primarily due to a decrease in auto liability reserves for the 2017 accident year. Prior accident year development was favorable in the 2018 three month period primarily due to decreases in reserves for both auto liability and homeowners related to recent accident years. Prior accident year development for the 2018 nine month period included decreases in reserves for auto liability and for homeowners partially offset by increases in reserves for prior accident year catastrophes. Estimated losses for 2017 catastrophe events in Personal Lines decreased by $30 in the 2018 nine month period, resulting in a decrease in reinsurance recoverables of $47, as the Company no longer expects to recover under the 2017 Property Aggregate reinsurance treaty.


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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 September 30, Nine months ended September 30,
 20192018Change 20192018Change
Losses and loss adjustment expenses  

    
       Prior accident year development [1]$
$11
(100%) $9
$27
(67%)
Total losses and loss adjustment expenses
11
(100%) 9
27
(67%)
Underwriting expenses3
3
% 9
9
%
Underwriting loss(3)(14)79% (18)(36)50%
Net investment income [2]21
22
(5%) 64
68
(6%)
Net realized capital gains [2]4
3
33% 17
5
NM
 Income before income taxes22
11
100% 63
37
70%
Income tax expense [3]4
2
100% 11
6
83%
Net income$18
$9
100% $52
$31
68%
[1]For discussion of prior accident year development, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance.
[2]For discussion of consolidated investment results, see MD&A - Investment Results.
[3]
For discussion of income taxes, see Note 11 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
Net Income
chart-7f124a9e98ef562ba0e.jpg
 
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Net Income increased for the three and nine months ended September 30, 2019 primarily due to a decrease in net unfavorable prior accident year development and, for the nine month period, an increase in net realized capital gains.
Underwriting loss decreased for the three and nine months ended September 30, 2019 primarily due to a decrease in unfavorable prior accident year development. Net unfavorable prior accident year reserve development in the 2019 nine month period included reserve increases for product liability and construction defects claims. Net unfavorable prior accident year reserve development in the 2018 nine month period included reserve increases for certain mass torts and the allowance for uncollectible reinsurance.
Asbestos and environmental reserve comprehensive annual reviews will occur in the fourth quarter of 2019. For information on A&E reserves, see MD&A - Critical Accounting Estimates, Asbestos and Environmental Reserves included in the Company's 2018 Form 10-K Annual Report.


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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




GROUP BENEFITS
Results of Operations
Operating Summary
 Three Months Ended September 30, Nine months ended September 30,

20192018Change 20192018Change
Premiums and other considerations$1,382
$1,396
(1%) $4,213
$4,198
%
Net investment income [1]121
117
3% 363
353
3%
Net realized capital gains (losses) [1]14
(3)NM
 26
(26)NM
Total revenues1,517
1,510
% 4,602
4,525
2%
Benefits, losses and loss adjustment expenses983
1,054
(7%) 3,098
3,198
(3%)
Amortization of DAC14
12
17% 41
33
24%
Insurance operating costs and other expenses329
319
3% 968
957
1%
Amortization of other intangible assets10
15
(33%) 31
48
(35%)
Total benefits, losses and expenses1,336
1,400
(5%) 4,138
4,236
(2%)
Income before income taxes181
110
65% 464
289
61%
 Income tax expense [2]35
33
6% 87
62
40%
Net income$146
$77
90% $377
$227
66%
[1]For discussion of consolidated investment results, see MD&A - Investment Results.
[2]
For discussion of income taxes, see Note 11 - Income Taxes of Notes to the Condensed Consolidated Financial Statements.
Premiums and Other Considerations
 Three Months Ended September 30, Nine months ended September 30,

20192018Change 20192018Change
Fully insured – ongoing premiums$1,337
$1,353
(1%) $4,072
$4,062
%
Buyout premiums

% 6
5
20%
Fee income45
43
5% 135
131
3%
Total premiums and other considerations$1,382
$1,396
(1%) $4,213
$4,198
%
Fully insured ongoing sales, excluding buyouts$74
$104
(29%) $580
$643
(10%)
Ratios, Excluding Buyouts
 Three Months Ended September 30, Nine months ended September 30,

20192018Change 20192018Change
Group disability loss ratio64.4%75.9%(11.5) 69.0%75.0%(6.0)
Group life loss ratio80.8%76.6%4.2 80.0%78.3%1.7
Total loss ratio71.1%75.5%(4.4) 73.5%76.2%(2.7)
Expense ratio [1]24.9%23.9%1.0 24.1%23.9%0.2
[1] Integration and transaction costs related to the acquisition of Aetna's U.S. group life and disability business are not included in the expense ratio.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Margin
 Three Months Ended September 30, Nine months ended September 30,
 20192018Change 20192018Change
Net income margin9.6%5.1%4.5
 8.2%5.0%3.2
Adjustments to reconcile net income margin to core earnings margin:       
Net realized capital losses (gains) excluded from core earnings, before tax(0.9%)0.2%(1.1) (0.5%)0.6%(1.1)
Integration and transaction costs associated with acquired business, before tax0.6%0.8%(0.2) 0.6%0.8%(0.2)
 Income tax benefit0.1%0.6%(0.5) %%
Core earnings margin9.4%6.7%2.7
 8.3%6.4%1.9
Net Income
chart-910fd1d28e80582a89d.jpg
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Net income increased for the three and nine-month periods primarily due to a lower loss ratio, a change from net realized capital losses to net realized capital gains and $14 of additional tax expense in the 2018 period that was primarily driven by the effect of the lower rate on deferred tax assets due to the filing of the Company's 2017 Federal income tax return and finalization of the opening balance sheet for the Aetna Group Benefits acquisition. Also contributing to the increase for the nine month period was lower amortization of other intangible assets. Partially offsetting the increase in both the three and nine-month periods was higher insurance operating costs and expenses.
Insurance operating costs and other expenses for the three month and nine month period increased due to higher commissions on our voluntary product offerings and investments in technology and claims operations, partially offset by achievements of expense synergies, and, for the nine month period, lower state taxes and assessments.
 
Fully Insured Ongoing Premiums
chart-7485c21dcfce58589f5.jpg
[1] Other of $60 and $64 is included in the three months ended September 30, 2018, and 2019, respectively, and $179 and $187 for the nine months ended September 30, 2018, and 2019, respectively is included in the total.
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Fully insured ongoing premiums decreased slightly for the three month period reflecting a decrease in group life partially offset by an increase in group disability. For the nine month period, premium was relatively flat as the increase in group disability and the higher premium from Voluntary products was largely offset by a decrease in group life.
Fully insured ongoing sales, excluding buyouts for the three month period decreased 29% driven primarily by a decrease in both group disability and group life sales. For the nine month period, sales decreased 10% as the prior year included first year sales from the new New York Paid Family Leave product and group life sales decreased.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Ratios
chart-0f6af59a457050c48b1.jpg
Three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018
Total loss ratio decreased 4.4 points for the three month
 
period and 2.7 points for the nine month period reflecting a lower disability loss ratio partially offset by a higher group life loss ratio.
The group disability loss ratio decreased 11.5 points and 6.0 points for the three and nine month period, respectively, due to continued favorable incidence trends and strong claim recoveries on prior incurral year reserves. In addition, included in the disability loss ratio for the three and nine month periods were favorable changes in long term disability reserve assumptions of 2.7 points and 0.9 points, respectively, largely driven from updating our claim recovery probabilities due to more recent experience, and an experience refund from prior year related to the New York Paid Family Leave product of 1.1 points and 0.4 points, respectively.
The group life loss ratio increased 4.2 points and 1.7 points in the three and nine month periods, respectively, due to increased life losses largely due to higher severity.
Expense ratio increased 1.0 point for the three month period and 0.2 points in the nine month period due to higher commissions on our voluntary product offerings, and investments in technology and claims, and higher amortization of DAC in both periods, partially offset by achievements of expense synergies, lower variable incentive compensation, and in the nine month period, lower state taxes and assessments.
HARTFORD FUNDS
Results of Operations
Operating Summary
 Three Months Ended September 30, Nine Months Ended September 30,

20192018Change 20192018Change
Fee income and other revenue$254
$267
(5%) $743
$786
(5%)
Net investment income1
1
% 5
3
67%
Net realized capital gains1

NM
 3
(1)NM
Total revenues256
268
(4%) 751
788
(5%)
Amortization of DAC3
4
(25%) 9
12
(25%)
Operating costs and other expenses202
212
(5%) 607
635
(4%)
Total benefits, losses and expenses205
216
(5%) 616
647
(5%)
 Income before income taxes51
52
(2%) 135
141
(4%)
Income tax expense11
11
% 27
29
(7%)
Net income$40
$41
(2%) $108
$112
(4%)
Daily average Hartford Funds AUM$119,738
$119,897
% $116,635
$118,098
(1%)
ROA [1]13.3
13.6
(2%) 12.4
12.7
(2%)
Adjustment to reconcile ROA to ROA, core earnings:       
Effect of net realized capital losses (gains) excluded from core earnings, before tax(0.4)
NM
 (0.3)0.1
NM
ROA, core earnings [1]12.9
13.6
(5%) 12.1
12.8
(5%)
[1] Represents annualized earnings divided by a daily average of assets under management, as measured in basis points.

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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations




Hartford Funds Segment AUM
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018Change 20192018Change
Mutual Fund and ETP AUM - beginning of period$106,889
$101,665
5% $91,557
$99,090
(8%)
Sales - mutual fund5,199
5,176
% 17,218
16,605
4%
Redemptions - mutual fund(6,126)(5,192)(18%) (18,123)(15,892)(14%)
Net flows - ETP127
261
(51%) 874
683
28%
Net flows - mutual fund and ETP(800)245
NM
 (31)1,396
(102%)
Change in market value and other(129)3,623
(104%) 14,434
5,047
186%
Mutual fund and ETP AUM - end of period105,960
105,533
% 105,960
105,533
%
Talcott Resolution life and annuity separate account AUM [1]14,021
15,543
(10%) 14,021
15,543
(10%)
Hartford Funds AUM$119,981
$121,076
(1%) $119,981
$121,076
(1%)
[1]Represents AUM of the life and annuity business sold in May 2018 that is still managed by the Company's Hartford Funds segment.
Mutual Fund and ETP AUM by Asset Class
 September 30,
 20192018Change
Equity$66,999
$69,463
(4%)
Fixed Income15,685
14,831
6%
Multi-Strategy Investments [1]20,429
20,062
2%
Exchange-traded Products2,847
1,177
142%
Mutual Fund and ETP AUM$105,960
$105,533
%