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Hartford Financial Services (HIG)

Filed: 31 Jul 20, 8:39am
0000874766 us-gaap:EquityContractMember us-gaap:DerivativeMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:OtherComprehensiveIncomeMember 2020-01-01 2020-06-30 0000874766 us-gaap:OperatingSegmentsMember srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMember us-gaap:PropertyLiabilityAndCasualtyInsuranceSegmentMember 2019-12-31







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 June 30, 2020
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
____________________________________ 
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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 July 28, 2020, there were outstanding 358,196,405 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 JUNE 30, 2020
TABLE OF CONTENTS
ItemDescriptionPage
  
1.      FINANCIAL STATEMENTS 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019
 CONDENSED CONSOLIDATED BALANCE SHEETS - AS OF JUNE 30, 2020 AND DECEMBER 31, 2019
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019
 CONDENSED CONOLIDATED STATEMENTS OF CASH FLOWS - FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
 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 I, Item 1A, Risk Factors in The Hartford’s 2019 Form 10-K Annual Report, as amended in Part II Item 1A herein; and those identified from time to time in our other filings with the Securities and Exchange Commission.
Risks relating to the pandemic caused by the spread of novel strain of coronavirus, specifically identified as the Coronavirus Disease 2019 (“COVID-19”) including impacts to the Company's insurance and product-related, regulatory/legal, recessionary and other global economic, capital and liquidity and operational risks
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, foreign currency exchange rates 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 discontinuance 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, including usage-based methods of determining premiums, advancements in automotive safety features, the development of autonomous vehicles, and platforms that facilitate ride sharing,
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 National Association of Insurance Commissioners ("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 intent-to-sell impairments and allowance for credit losses 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, 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, state or foreign 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 June 30, 2020, the related condensed consolidated statements of operations, comprehensive income (loss), and changes in stockholders' equity for the three-month and six-month periods ended June 30, 2020 and 2019, and of cash flows for the six-month periods ended June 30, 2020 and 2019, 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, 2019, 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 21, 2020, 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, 2019, 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
July 30, 2020



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

 Three Months Ended June 30, Six Months Ended June 30,
(in millions, except for per share data)20202019 20202019
 (Unaudited)
Revenues     
Earned premiums$4,234
$4,166
 $8,625
$8,106
Fee income298
326
 618
640
Net investment income339
488
 798
958
Net realized capital gains (losses)109
80
 (122)243
Other revenues88
32
 105
85
Total revenues5,068
5,092
 10,024
10,032
Benefits, losses and expenses     
Benefits, losses and loss adjustment expenses2,847
2,934
 5,763
5,619
Amortization of deferred policy acquisition costs ("DAC")429
392
 866
747
Insurance operating costs and other expenses1,125
1,141
 2,301
2,189
Loss on reinsurance transaction
91
 
91
Interest expense57
63
 121
127
Amortization of other intangible assets18
15
 37
28
Total benefits, losses and expenses4,476
4,636
 9,088
8,801
Income before income taxes592
456
 936
1,231
 Income tax expense124
84
 195
229
Net income468
372
 741
1,002
Preferred stock dividends5

 10
5
Net income available to common stockholders$463
$372
 $731
$997
Net income available to common stockholders per common share


   
Basic$1.29
$1.03
 $2.04
$2.76
Diluted$1.29
$1.02
 $2.03
$2.73
See Notes to Condensed Consolidated Financial Statements.

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

 Three Months Ended June 30, Six Months Ended June 30,
(in millions)20202019 20202019
 (Unaudited)
Net income$468
$372
 $741
$1,002
Other comprehensive income (loss):     
Changes in net unrealized gain on fixed maturities1,428
664
 371
1,343
Change in unrealized losses on fixed maturities for which an allowance for credit losses ("ACL") has been recorded


 1


Changes in other-than-temporary impairment ("OTTI") losses recognized in other comprehensive income 
  1
Changes in net gain on cash flow hedging instruments(5)11
 39
16
Changes in foreign currency translation adjustments1
3
 (7)4
Changes in pension and other postretirement plan adjustments12
9
 23
17
OCI, net of tax1,436
687
 427
1,381
Comprehensive income$1,904
$1,059
 $1,168
$2,383
See Notes to Condensed Consolidated Financial Statements.

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

(in millions, except for share and per share data)June 30,
2020
December 31, 2019
 (Unaudited) 
Assets
Investments:

Fixed maturities, available-for-sale, at fair value (amortized cost of $39,640 and $40,078, and ACL of $32 and $0)$42,200
$42,148
Fixed maturities, at fair value using the fair value option1
11
Equity securities, at fair value756
1,657
Mortgage loans (net of ACL of $43 and $0)4,399
4,215
Limited partnerships and other alternative investments1,826
1,758
Other investments178
320
Short-term investments3,668
2,921
Total investments53,028
53,030
Cash291
185
Restricted cash81
77
Premiums receivable and agents' balances (net of ACL of $183 and $145)4,595
4,384
Reinsurance recoverables (net of allowance for uncollectible reinsurance of $111 and $114)5,640
5,527
Deferred policy acquisition costs812
785
Deferred income taxes, net130
299
Goodwill1,911
1,913
Property and equipment, net1,135
1,181
Other intangible assets, net996
1,070
Other assets2,371
2,366
Total assets$70,990
$70,817
Liabilities

Unpaid losses and loss adjustment expenses$36,870
$36,517
Reserve for future policy benefits652
635
Other policyholder funds and benefits payable750
755
Unearned premiums6,872
6,635
Short-term debt
500
Long-term debt4,350
4,348
Other liabilities4,424
5,157
Total liabilities53,918
54,547
Commitments and Contingencies (Note 14)

Stockholders’ Equity

Preferred stock, $0.01 par value — 50,000,000 shares authorized, 13,800 shares issued at June 30, 2020 and December 31, 2019, aggregate liquidation preference of $345334
334
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 384,923,222 shares issued at June 30, 2020 and December 31, 20194
4
Additional paid-in capital4,299
4,312
Retained earnings13,167
12,685
Treasury stock, at cost — 26,824,475 and 25,352,977 shares(1,211)(1,117)
Accumulated other comprehensive income, net of tax479
52
Total stockholders’ equity17,072
16,270
Total liabilities and stockholders’ equity$70,990
$70,817
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 June 30, Six Months Ended June 30,
(in millions, except for share data)20202019 20202019
 (Unaudited)
Preferred Stock$334
$334
 $334
$334
Common Stock4
4
 4
4
Additional Paid-in Capital     
Additional Paid-in Capital, beginning of period4,286
4,329
 4,312
4,378
Issuance of shares under incentive and stock compensation plans(5)(6) (84)(74)
Stock-based compensation plans expense18
21
 71
76
Issuance of shares for warrant exercise
(44) 
(80)
Additional Paid-in Capital, end of period4,299
4,300
 4,299
4,300
Retained Earnings     
Retained Earnings, beginning of period12,819
11,572
 12,685
11,055
Cumulative effect of accounting changes, net of tax

 (18)
Adjusted balance, beginning of period12,819
11,572
 12,667
11,055
Net income468
372
 741
1,002
Dividends declared on preferred stock(5)
 (10)(5)
Dividends declared on common stock(115)(108) (231)(216)
Retained Earnings, end of period13,167
11,836
 13,167
11,836
Treasury Stock, at cost     
Treasury Stock, at cost, beginning of period(1,220)(1,014) (1,117)(1,091)
Treasury stock acquired
(27) (150)(27)
Issuance of shares under incentive and stock compensation plans9
14
 91
85
Net shares acquired related to employee incentive and stock compensation plans
(1) (35)(31)
Issuance of shares for warrant exercise
44
 
80
Treasury Stock, at cost, end of period(1,211)(984) (1,211)(984)
Accumulated Other Comprehensive Income (Loss), net of tax     
Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period(957)(885) 52
(1,579)
Total other comprehensive income1,436
687
 427
1,381
Accumulated Other Comprehensive Income (Loss), net of tax, end of period479
(198) 479
(198)
Total Stockholders’ Equity$17,072
$15,292
 $17,072
$15,292
Preferred Shares Outstanding     
Preferred Shares Outstanding, beginning of period13,800
13,800
 13,800
13,800
Issuance of preferred shares

 

Preferred Shares Outstanding, end of period13,800
13,800
 13,800
13,800
Common Shares Outstanding     
Common Shares Outstanding, beginning of period (in thousands)357,934
360,865
 359,570
359,151
Treasury stock acquired
(505) (2,661)(505)
Issuance of shares under incentive and stock compensation plans175
325
 1,860
1,859
Return of shares under incentive and stock compensation plans to treasury stock(10)(20) (670)(621)
Issuance of shares for warrant exercise
940
 
1,721
Common Shares Outstanding, at end of period358,099
361,605
 358,099
361,605
Cash dividends declared per common share$0.325
$0.30
 $0.65
$0.60
Cash dividends declared per preferred share$375.00
$
 $750.00
$375.00
See Notes to Condensed Consolidated Financial Statements.

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

 Six Months Ended June 30,
(in millions)20202019
Operating Activities(Unaudited)
Net income$741
$1,002
Adjustments to reconcile net income to net cash provided by operating activities:  
Net realized capital losses (gains)122
(243)
Amortization of deferred policy acquisition costs866
747
Additions to deferred policy acquisition costs(856)(799)
Depreciation and amortization269
221
Other operating activities, net95
64
Change in assets and liabilities:  
Decrease (increase) in reinsurance recoverables(123)57
Net change in accrued and deferred income taxes175
277
Increase in insurance liabilities597
565
Net change in other assets and other liabilities(619)(887)
Net cash provided by operating activities1,267
1,004
Investing Activities  
Proceeds from the sale/maturity/prepayment of:  
Fixed maturities, available-for-sale9,023
10,770
Fixed maturities, fair value option9
4
Equity securities, at fair value1,353
1,024
Mortgage loans536
346
Partnerships43
122
Payments for the purchase of:  
Fixed maturities, available-for-sale(8,362)(11,027)
Equity securities, at fair value(671)(951)
Mortgage loans(762)(280)
Partnerships(187)(167)
Net proceeds from derivatives139
45
Net additions of property and equipment(51)(44)
Net proceeds from (payments for) short-term investments(883)2,090
Other investing activities, net28
(1)
Amount paid for business acquired, net of cash acquired
(1,901)
Net cash provided by investing activities215
30
Financing Activities  
Deposits and other additions to investment and universal life-type contracts29
106
Withdrawals and other deductions from investment and universal life-type contracts(26)(77)
Net decrease in securities loaned or sold under agreements to repurchase(418)(178)
Repayment of debt(500)(413)
Net return of shares under incentive and stock compensation plans(28)(39)
Treasury stock acquired(150)(27)
Dividends paid on preferred stock(10)(11)
Dividends paid on common stock(224)(216)
Net cash used for financing activities(1,327)(855)
Foreign exchange rate effect on cash(45)(17)
Net increase in cash and restricted cash110
162
Cash and restricted cash – beginning of period262
121
Cash and restricted cash– end of period$372
$283
Supplemental Disclosure of Cash Flow Information  
Income tax paid$3
$1
Interest paid$124
$137
See Notes to Condensed Consolidated Financial Statements.

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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 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.
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 2019 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 2019 Form 10-K Annual Report.
Consolidation
The Condensed Consolidated Financial Statements include the accounts of The Hartford Financial Services Group, Inc., and entities in which the Company directly or indirectly has a controlling financial interest. Entities in which the Company has significant influence over the operating and financing decisions but does not control are reported using the equity method. All intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
 
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining property and casualty and group long-term disability 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.
Adoption of New Accounting Standards
Goodwill
On January 1, 2020, the Company adopted the Financial Accounting Standards Board's ("FASB") updated guidance on testing goodwill for impairment with 0 effect at adoption. The updated guidance requires impairment of goodwill if the carrying value of the reporting unit is greater than the estimated fair value, with the amount of the impairment not to exceed the carrying value of the reporting unit’s goodwill. Goodwill is reviewed for impairment at least annually and more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred.  Under the updated guidance, changes in market-based factors are more likely to result in a goodwill impairment than under the prior accounting guidance, whether a reporting unit's fair value is estimated using an income approach or a market approach. For example, changes in the weighted average cost of capital that is used to discount expected cash flows under the income approach or changes in market-based factors such as peer company price to earnings multiples or price to book multiples under a market approach can significantly affect changes to the estimated fair value of each reporting unit and such changes could result in impairments that have a material effect on our results of operations and financial condition.
Financial Instruments - Credit Losses
On January 1, 2020, the Company adopted the FASB’s updated guidance for recognition and measurement of credit losses on financial instruments. The new guidance replaces the “incurred loss” approach with an “expected loss” model for recognizing credit losses for financial instruments carried at other than fair value. Under the new model, for financial instruments carried at other than fair value, such as mortgage loans, reinsurance recoverables and receivables, an allowance for credit losses

12

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

("ACL") is recognized which is an estimate of credit losses expected over the life of financial instruments. Under the prior accounting model an ACL was recognized using an incurred loss approach. The new guidance also requires that we estimate a liability for credit losses ("LCL") on off balance sheet credit exposures such as financial guarantees and mortgage loan commitments that the Company cannot unconditionally cancel.
Credit losses on fixed maturities, AFS carried at fair value continue to be measured based on the present value of expected future cash flows compared to amortized cost; however, the losses are now recognized through an ACL and no longer as an adjustment to the amortized cost. Recoveries of impairments on fixed maturities, AFS are now recognized as reversals of the ACL and no longer accreted as investment income through an adjustment to the investment yield. The ACL on fixed maturities, AFS cannot cause the net carrying value to be below fair value and, therefore, it is possible that future increases in fair value due to decreases in market interest rates could cause the reversal of the ACL and increase net income. The new guidance also requires purchased financial assets with a more-than-insignificant amount of credit deterioration since original issuance to be recorded based on contractual amounts due and an initial allowance recorded at the date of purchase.
The Company adopted the guidance effective January 1, 2020, through a cumulative-effect adjustment that decreased retained earnings by $18, representing a net increase to the ACL and LCL, after-tax. No ACL was recognized at adoption for fixed maturities AFS; rather, these investments are evaluated for an ACL prospectively. The Company does not have any purchased financial assets with a more than insignificant amount of credit deterioration since original issuance.
Impact of Adoption on Condensed Consolidated Balance Sheet
 Balance as of January 1, 2020
 Opening BalanceCumulative Effect of Accounting ChangeAdjusted Opening Balance
Mortgage loans$4,215

$4,215
ACL on mortgage loans
$(19)(19)
Mortgage loans, net of ACL4,215
(19)4,196
Premiums receivable and agents’ balances4,529

4,529
ACL on premiums receivable and agents' balances(145)23
(122)
Premiums receivable and agents' balances, net of ACL4,384
23
4,407
Reinsurance recoverables5,641

5,641
ACL and allowance for disputed amounts on reinsurance recoverables(114)(2)(116)
Reinsurance recoverables, net of allowance for uncollectible reinsurance5,527
(2)5,525
Deferred income tax asset, net299
5
304
Other liabilities(5,157)(25)(5,182)
Retained Earnings$12,685
$(18)$12,667
 
Summary of Adoption Impacts
Net increase to ACL and LCL$(23)
Net tax effects5
Net decrease to retained earnings$(18)

Reference Rate Reform
On March 12, 2020, the Company adopted the FASB’s temporary guidance which allows The Hartford to account for contract modifications made solely due to rate reform (such as replacing LIBOR with another reference rate) as continuations of existing contracts and to maintain hedge accounting when the hedging effectiveness between a financial instrument and its hedge is only affected by the change to a replacement rate. As a result, The Hartford will not recognize gains and losses during the transition period of LIBOR to an alternative reference rate that would otherwise have arisen from accounting assessments and remeasurements. The guidance expires for contract modifications made and hedge relationships entered into or evaluated after December 31, 2022. The Company is not required to measure the effect of adoption on its financial position, cash flows or net income because the guidance provides relief from accounting for the effects of the change to a replacement rate.
Mortgage Loan Modification
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Section 4013 of the CARES Act allows financial institutions the option to suspend the requirement to disclose and account for loan modifications as troubled debt restructurings for loan modifications related to the novel strain of coronavirus, specifically identified as the Coronavirus Disease 2019 (“COVID-19”) pandemic occurring between March 1, 2020 and the earlier of 60 days after the end of the national emergency or December 31, 2020. The Company’s adoption of Section 4013 of the CARES Act had 0 impact on our results of operations, financial position or cash flows because The Hartford has not granted significant concessions to borrowers on its mortgage loans that would have been disclosed and accounted for as troubled debt restructurings.

13

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

2. BUSINESS ACQUISITION
Navigators Group
On May 23, 2019, The Hartford acquired Navigators Group, a specialty underwriter, for total consideration of $2.121 billion and recorded provisional estimates of the fair value of the assets acquired and liabilities assumed. In the second quarter of 2020, The Hartford finalized its provisional estimates and recorded
 
additional assets of $9 and liabilities of $7 with a net reduction in goodwill of $2. The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date, the measurement period adjustments recorded, and the final purchase price allocation.
Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
 Preliminary Values as of May 23, 2019 (as previously reported)Measurement Period AdjustmentsAdjusted Values as of May 23, 2019
Assets   
Cash and invested assets$3,848
$3
$3,851
Premiums receivable492
6
498
Reinsurance recoverables1,100
(3)1,097
Prepaid reinsurance premiums238

238
Other intangible assets580

580
Property and equipment83

83
Other assets99
3
102
Total Assets Acquired6,440
9
6,449
Liabilities   
Unpaid losses and loss adjustment expenses2,823

2,823
Unearned premiums1,219

1,219
Long-term debt284

284
Deferred income taxes, net48
(1)47
Other liabilities568
8
576
Total Liabilities Assumed4,942
7
4,949
Net identifiable assets acquired1,498
2
1,500
Goodwill [1]623
(2)621
Net Assets Acquired$2,121
$
$2,121
[1] Non-deductible for income tax purposes.
The measurement period adjustments, determined as if the accounting had been completed as of the acquisition date, had no effect on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020.
The following table presents supplemental pro forma amounts of revenue and net income for the Company for the six months ended June 30, 2019, as though the business was acquired on January 1, 2018. Pro forma adjustments include the revenue and earnings of Navigators Group as well as amortization of identifiable intangible assets acquired.
 
Pro Forma Results

Six months ended June 30, 2019
Total Revenue$10,708
Net Income$997


14

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 June 30, Six Months Ended June 30,
(In millions, except for per share data)20202019 20202019
Earnings     
Net income$468
$372
 $741
$1,002
Less: Preferred stock dividends5

 10
5
Net income available to common stockholders$463
$372
 $731
$997
Shares     
Weighted average common shares outstanding, basic358.1
361.4
 358.3
360.7
Dilutive effect of warrants [1]
0.5
 
0.9
Dilutive effect of stock-based awards under compensation plans1.2
3.2
 1.9
3.3
Weighted average common shares outstanding and dilutive potential common shares359.3
365.1
 360.2
364.9
Net income available to common stockholders per common share     
Basic$1.29
$1.03
 $2.04
$2.76
Diluted$1.29
$1.02
 $2.03
$2.73
[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.
Net Income
 Three Months Ended June 30, Six Months Ended June 30,
 20202019 20202019
Commercial Lines$(66)$191
 $55
$554
Personal Lines371
62
 469
158
Property & Casualty Other Operations5
11
 10
34
Group Benefits101
113
 205
231
Hartford Funds39
38
 75
68
Corporate18
(43) (73)(43)
Net income468
372
 741
1,002
Preferred stock dividends5

 10
5
Net income available to common stockholders$463
$372
 $731
$997


15

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

Revenues
 Three Months Ended June 30, Six Months Ended June 30,

20202019 20202019
Earned premiums and fee income:

 

Commercial Lines

 

Workers’ compensation$720
$832
 $1,536
$1,656
Liability337
233
 680
401
Marine67
27
 132
27
Package business383
365
 760
717
Property185
175
 390
331
Professional liability149
98
 292
166
Bond68
65
 138
125
Assumed reinsurance72
29
 138
29
Automobile181
172
 369
330
Total Commercial Lines2,162
1,996
 4,435
3,782
Personal Lines



 



Automobile462
565
 1,005
1,126
Homeowners241
246
 481
493
Total Personal Lines [1]703
811
 1,486
1,619
Group Benefits



 



Group disability719
723
 1,445
1,427
Group life632
638
 1,239
1,281
Other72
61
 130
123
Total Group Benefits1,423
1,422
 2,814
2,831
Hartford Funds



 



Mutual fund and Exchange-Traded Products ("ETP")207
227
 432
443
Talcott Resolution life and annuity separate accounts [2]20
24
 42
46
Total Hartford Funds227
251
 474
489
Corporate17
12
 34
25
Total earned premiums and fee income4,532
4,492
 9,243
8,746
Net investment income339
488
 798
958
Net realized capital gains (losses)109
80
 (122)243
Other revenues88
32
 105
85
Total revenues$5,068
$5,092
 $10,024
$10,032

[1]
For the three months ended June 30, 2020 and 2019, AARP members accounted for earned premiums of $633 and $726, respectively. For the six months ended June 30, 2020 and 2019, AARP members accounted for earned premiums of $1.3 billion and $1.4 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.

16

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

Revenue from Non-Insurance Contracts with Customers
  Three Months Ended June 30, Six Months Ended June 30,
 Revenue Line Item20202019 20202019
Commercial Lines    



Installment billing feesFee income$5
$9
 $13
$18
Personal Lines 



 



Installment billing feesFee income9
10
 18
19
Insurance servicing revenuesOther revenues21
23
 40
42
Group Benefits 



 



Administrative servicesFee income45
45
 88
90
Hartford Funds 



 



Advisor, distribution and other management feesFee income207
228
 431
446
Other feesFee income20
22
 43
43
Corporate 



 



Investment management and other feesFee income12
11
 25
24
Transition service revenuesOther revenues
6
 2
12
Total non-insurance revenues with customers $319
$354
 $660
$694

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.


17

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 June 30, 2020
 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")$1,416
$
$1,393
$23
Collateralized loan obligations ("CLOs")2,187

2,088
99
Commercial mortgage-backed securities ("CMBS")4,211

4,191
20
Corporate18,563

17,454
1,109
Foreign government/government agencies972

972

Municipal9,394

9,394

Residential mortgage-backed securities ("RMBS")3,895

3,416
479
U.S. Treasuries1,562
450
1,112

Total fixed maturities42,200
450
40,020
1,730
Fixed maturities, FVO1

1

Equity securities, at fair value756
320
370
66
Derivative assets    
Credit derivatives7

7

Foreign exchange derivatives5

5

Total derivative assets [1]12

12

Short-term investments3,668
3,125
529
14
Total assets accounted for at fair value on a recurring basis$46,637
$3,895
$40,932
$1,810
Liabilities accounted for at fair value on a recurring basis    
Derivative liabilities    
Foreign exchange derivatives$16
$
$16
$
Interest rate derivatives(86)
(86)
Total derivative liabilities [2](70)
(70)
Total liabilities accounted for at fair value on a recurring basis$(70)$
$(70)$


18

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, 2019
 Total
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets accounted for at fair value on a recurring basis    
Fixed maturities, AFS    
ABS$1,476
$
$1,461
$15
CLOs2,183

2,088
95
CMBS4,338

4,329
9
Corporate17,396

16,664
732
Foreign government/government agencies1,123

1,120
3
Municipal9,498

9,498

RMBS4,869

4,309
560
U.S. Treasuries1,265
330
935

Total fixed maturities42,148
330
40,404
1,414
Fixed maturities, FVO11

11

Equity securities, at fair value1,657
1,401
183
73
Derivative assets    
Credit derivatives11

11

Interest rate derivatives1

1

Total derivative assets [1]12

12

Short-term investments2,921
1,028
1,878
15
Total assets accounted for at fair value on a recurring basis$46,749
$2,759
$42,488
$1,502
Liabilities accounted for at fair value on a recurring basis    
Derivative liabilities    
Credit derivatives$(1)$
$(1)$
Equity derivatives(15)

(15)
Foreign exchange derivatives(2)
(2)
Interest rate derivatives(60)
(60)
Total derivative liabilities [2](78)
(63)(15)
Contingent consideration [3](22)

(22)
Total liabilities accounted for at fair value on a recurring basis$(100)$
$(63)$(37)

[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.
[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 $48 and $38 as of June 30, 2020 and December 31, 2019, respectively, which are measured at fair value using the net asset value as a practical expedient.
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 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

19

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

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 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 process for determining the fair value of investments is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company. The purpose of the Valuation Committee is to provide oversight of the pricing policy, procedures and controls, including approval of valuation methodologies and pricing sources. The Valuation Committee reviews market data trends, pricing statistics and trading statistics to ensure that prices are reasonable and consistent with our fair value framework. Controls and procedures used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due-diligence reviews. Controls include, but are not limited to, reviewing daily and monthly price changes, stale prices, and missing prices and comparing new trade prices to third-party pricing services, weekly price changes to published bond prices of a corporate bond index, and daily OTC derivative market valuations to counterparty valuations. The Company has a dedicated pricing unit that works with trading and investment professionals to challenge the price received by a third party pricing source if the Company believes that the valuation received does not accurately reflect the fair value. New valuation models and changes to current models require approval by the Valuation Committee. In addition, the Company’s enterprise-wide Operational Risk Management function provides an independent review of the suitability and reliability of model inputs, as well as an analysis of significant changes to current models.
Valuation Inputs
Quoted prices for identical assets in active markets are considered Level 1 and consist of on-the-run U.S. Treasuries, money market funds, exchange-traded equity securities, open-ended mutual funds, certain short-term investments, and exchange traded futures and option contracts.

20

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

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, CLOs 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 and private bank loans:
• 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
  • Independent broker quotes
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


21

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 June 30, 2020
CLOs [3]$79
Discounted cash flowsSpread486 bps486 bps486 bpsDecrease
Corporate [4]$994
Discounted cash flowsSpread78 bps1,007 bps323 bpsDecrease
RMBS [3]$479
Discounted cash flowsSpread [6]43 bps528 bps167 bpsDecrease
   Constant prepayment rate [6]—%11%5% Decrease [5]
   Constant default rate [6]1%7%3%Decrease
   Loss severity [6]—%100%77%Decrease
As of December 31, 2019
CLOs [3]$95
Discounted cash flowsSpread246 bps246 bps246 bpsDecrease
CMBS [3]$1
Discounted cash flowsSpread (encompasses prepayment, default risk and loss severity)9 bps1,832 bps161 bpsDecrease
Corporate [4]$633
Discounted cash flowsSpread93 bps788 bps236 bpsDecrease
RMBS [3]$560
Discounted cash flowsSpread [6]5 bps233 bps79 bpsDecrease
   Constant prepayment rate [6]—%11%6%Decrease [5]
   Constant default rate [6]1%6%3%Decrease
   Loss severity [6]—%100%70%Decrease
[1]The weighted average is determined based on the fair value of the securities.
[2]Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
[3]Excludes securities for which the Company bases fair value on broker quotations.
[4]Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value.
[5]Decrease for above market rate coupons and increase for below market rate coupons.
[6]Generally, a change in the assumption used for the constant default rate would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for constant prepayment rate and would have resulted in wider spreads.
Significant Unobservable Inputs for Level 3 - Derivatives [1]
 Fair
Value
Predominant
Valuation 
Technique
Significant Unobservable InputMinimumMaximumWeighted Average [2]Impact of 
Increase in Input  Value [3]
As of December 31, 2019
Equity options$(15)Option modelEquity volatility13%28%17%Increase
[1]
As of June 30, 2020, the fair values of the Company's level 3 derivatives were less than $1 and are excluded from the table.
[2]The weighted average is determined based on the fair value of the derivatives.
[3]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.
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 June 30, 2020, 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 required the Company to make payments to former owners

22

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

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 was 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 had been discounted back to the valuation date using a risk-adjusted discount rate of 10.0%. The risk-adjusted discount rate is an internally generated and significant unobservable input to fair value.
In January 2020, we made a third payment of $10 after Lattice AUM reached $3.0 billion. Given the dramatic market declines and outflow in March, 2020, the Lattice AUM declined to $2.3 billion as of March 30, 2020 and the Company reduced the remaining contingent consideration liability to 0, recognizing an $11.9 before tax reduction in expense in first quarter 2020. The earn out period ended on July 29, 2020 with 0 additional consideration payable.
 
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 June 30, 2020
 Total realized/unrealized gains (losses)      
  Fair value as of March 31, 2020Included in net income [1]Included in OCI [2]PurchasesSettlementsSalesTransfers into Level 3 [3]Transfers out of Level 3 [3]Fair value as of June 30, 2020
Assets         
Fixed Maturities, AFS         
 ABS$19
$
$
$23
$
$
$
$(19)$23
 CLOs83

4
19
(7)


99
 CMBS18


3
(1)


20
 Corporate709
(22)61
22
(28)(19)412
(26)1,109
 Foreign Govt./Govt. Agencies3






(3)
 RMBS487

13
21
(42)


479
Total Fixed Maturities, AFS1,319
(22)78
88
(78)(19)412
(48)1,730
Equity Securities, at fair value69
(3)





66
Short-term investments14







14
Total Assets$1,402
$(25)$78
$88
$(78)$(19)$412
$(48)$1,810
Liabilities         
Contingent Consideration$
$
$
$
$
$
$
$
$
Total Liabilities$
$
$
$
$
$
$
$
$

23

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 Six Months Ended June 30, 2020
 Total realized/unrealized gains (losses)      
  Fair value as of January 1, 2020Included in net income [1]Included in OCI [2]PurchasesSettlementsSalesTransfers into Level 3 [3]Transfers out of Level 3 [3]Fair value as of June 30, 2020
Assets         
Fixed Maturities, AFS         
 ABS$15
$
$(1)$43
$
$
$
$(34)$23
 CLOs95

(2)19
(13)


99
 CMBS9


13
(2)


20
 Corporate732
(32)(19)116
(64)(27)459
(56)1,109
 Foreign Govt./Govt. Agencies3






(3)
 RMBS560

(12)26
(88)(7)

479
Total Fixed Maturities, AFS1,414
(32)(34)217
(167)(34)459
(93)1,730
Equity Securities, at fair value73
(10)
3




66
Short-term investments15



(1)


14
Total Assets$1,502
$(42)$(34)$220
$(168)$(34)$459
$(93)$1,810
Liabilities         
Contingent Consideration$(22)$12
$
$
$10
$
$
$
$
Derivatives, net [4]         
 Equity(15)36



(21)


Total Derivatives, net [4](15)36



(21)


Total Liabilities$(37)$48
$
$
$10
$(21)$
$
$
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Three Months Ended June 30, 2019
 Total realized/unrealized gains (losses)      
  Fair value as of March 31, 2019Included in net income [1]Included in OCI [2]PurchasesSettlementsSalesTransfers into Level 3 [3]Transfers out of Level 3 [3]Fair value as of June 30, 2019
Assets         
Fixed Maturities, AFS         
 ABS$9
$
$
$5
$
$
$
$(9)$5
 CLOs114


202
(10)

(20)286
 CMBS12


24
(1)


35
 Corporate525

2
58
(4)(39)34
(8)568
 Foreign Govt./Govt. Agencies3







3
 RMBS771


90
(58)

(45)758
Total Fixed Maturities, AFS1,434

2
379
(73)(39)34
(82)1,655
Equity Securities, at fair value73


4

(5)

72
Derivatives, net [4]         
 Equity1
(4)





(3)
Total Derivatives, net [4]1
(4)





(3)
Total Assets$1,508
$(4)$2
$383
$(73)$(44)$34
$(82)$1,724
Liabilities         
Contingent Consideration(29)(2)

10



(21)
Total Liabilities$(29)$(2)$
$
$10
$
$
$
$(21)


24

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 Six Months Ended June 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 June 30, 2019
Assets         
Fixed Maturities, AFS         
 ABS$10
$
$
$5
$(1)$
$
$(9)$5
 CLOs100


237
(10)(6)
(35)286
 CMBS12

1
24
(2)


35
 Corporate520
(1)9
95
(6)(64)46
(31)568
 Foreign Govt./Govt. Agencies3







3
 RMBS920
1
(2)134
(112)(35)
(148)758
Total Fixed Maturities, AFS1,565

8
495
(131)(105)46
(223)1,655
Equity Securities, at fair value77
(1)
9

(13)

72
Derivatives, net [4]         
 Equity3
(6)





(3)
 Interest rate1
(1)






Total Derivatives, net [4]4
(7)





(3)
Total Assets$1,646
$(8)$8
$504
$(131)$(118)$46
$(223)$1,724
Liabilities         
Contingent Consideration$(35)$(6)$
$
$20
$
$
$
$(21)
Total Liabilities$(35)$(6)$
$
$20
$
$
$
$(21)
[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. Transfers into Level 3 for the three and six months ended June 30, 2020, were primarily related to private securities that were priced using internal matrix pricing in the prior period, but changed to broker pricing in the current period.
[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.

25

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 June 30, Six Months Ended June 30,
  2020201920202019 2020201920202019
  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$
$
$4
$
 $
$
$(2)$
 Corporate

61
2
 
(1)(12)9
 RMBS

13

 

(11)(1)
Total Fixed Maturities, AFS

78
2
 
(1)(25)8
Equity Securities, at fair value(3)


 (9)


Derivatives, net         
 Equity
(4)



 
(6)

 Interest rate



 
(1)

Total Derivatives, net
(4)

 
(7)

Total Assets$(3)$(4)$78
$2
 $(9)$(8)$(25)$8
Liabilities         
Contingent Consideration$
$(2)$
$
 $12
$(6)$
$
Total Liabilities$
$(2)$
$
 $12
$(6)$
$
[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 June 30, 2020 and December 31, 2019, the fair value of assets using the fair value option was $1 and $11, respectively, within the residential real estate sector.
For the three and six months ended June 30, 2020 and 2019 there were 0 realized capital gains (losses) related to the fair value of assets using the fair value option.
Financial Instruments Not Carried at Fair Value
Financial Assets and Liabilities Not Carried at Fair Value
 June 30, 2020 December 31, 2019
 Fair Value Hierarchy LevelCarrying Amount [1]Fair Value Fair Value Hierarchy LevelCarrying AmountFair Value
Assets       
Mortgage loansLevel 3$4,399
$4,586
 Level 3$4,215
$4,350
Liabilities       
Other policyholder funds and benefits payableLevel 3$758
$760
 Level 3$763
$765
Senior notes [2]Level 2$3,260
$4,088
 Level 2$3,759
$4,456
Junior subordinated debentures [2]Level 2$1,090
$1,026
 Level 2$1,089
$1,153

[1]
As of June 30, 2020, carrying amount of mortgage loans is net of ACL of $43.
[2]Included in long-term debt in the Condensed Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
6. INVESTMENTS

26

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

Net Realized Capital Gains (Losses)
 Three Months Ended June 30, Six Months Ended June 30,
(Before tax)20202019 20202019
Gross gains on sales$96
$69
 $174
$113
Gross losses on sales(22)(19) (30)(40)
Equity securities [1]75
30
 (311)162
Change in ACL on fixed maturities, AFS [2](20)  (32) 
Change in ACL on mortgage loans [2](22)  (24) 
Intent-to-sell impairments

 (5)
Net OTTI losses recognized in earnings 
  (2)
Valuation allowances on mortgage loans 1
  1
Other, net [3]2
(1) 106
9
Net realized capital gains (losses)$109
$80
 $(122)$243

[1]
The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of June 30, 2020, were $67 and $(34) for the three and six months ended June 30, 2020, respectively. The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of June 30, 2019, were $29 and $74 for the three and six months ended June 30, 2019, respectively.
[2]
Represents the change in ACL recorded during the period following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies.
[3]
Includes gains (losses) from transactional foreign currency revaluation of $0 and $10 for the three and six months ended June 30, 2020 , respectively. For the same periods, also includes gains (losses) on non-qualifying derivatives of $7 and $99, respectively. For the three and six months ended June 30, 2019, includes gains (losses) on non-qualifying derivatives of $(7) and $8, respectively.
Proceeds from the sales of fixed maturities, AFS totaled $4.1 billion and $7.2 billion for the three and six months ended June 30, 2020, respectively, and $4.6 billion and $8.9 billion for the three and six months ended June 30, 2018, respectively.
Accrued Interest Receivable on Fixed Maturities, AFS and Mortgage Loans
As of June 30, 2020 and December 31, 2019, the Company reported accrued interest receivable related to fixed maturities, AFS of $323 and $334, respectively, and accrued interest receivable related to mortgage loans of $14 and $14, respectively. These amounts are recorded in other assets on the Condensed Consolidated Balance Sheets and are not included in the amortized cost or fair value of the fixed maturities or mortgage loans. The Company does not include the current accrued interest receivable balance when estimating the ACL. The Company has a policy to write-off accrued interest receivable balances that are more than 90 days past due. Write-offs of accrued interest receivable are recorded as a credit loss component of realized capital gains and losses.
Interest income on fixed maturities and mortgage loans is accrued unless it is past due over 90 days or management deems the interest uncollectible.
 
Recognition and Presentation of Intent-to-Sell Impairments and ACL on Fixed Maturities, AFS
The Company will record an "intent-to-sell impairment" as a reduction to the amortized cost of fixed maturities, AFS in an unrealized loss position if the Company intends to sell or it is more likely than not that the Company will be required to sell the fixed maturity before a recovery in value. A corresponding charge is recorded in net realized capital losses equal to the difference between the fair value on the impairment date and the amortized cost basis of the fixed maturity before recognizing the impairment.
When fixed maturities are in an unrealized loss position and the Company does not record an intent-to-sell impairment, the Company will record an ACL for the portion of the unrealized loss due to a credit loss. Any remaining unrealized loss on a fixed maturity after recording an ACL is the non-credit amount and is recorded in OCI. The ACL is the excess of the amortized cost over the greater of the Company's best estimate of the present value of expected future cash flows or the security's fair value. Cash flows are discounted at the effective yield that is used to record interest income. The ACL cannot exceed the unrealized loss and, therefore, it may fluctuate with changes in the fair value of the fixed maturity if the fair value is greater than the Company's best estimate of the present value of expected future cash flows. The initial ACL and any subsequent changes are recorded in net realized capital gains and losses. The ACL is written off against the amortized cost in the period in which all or a portion of the related fixed maturity investment is determined to be uncollectible.
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/or the underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) payment structure of the security and (e) the extent to which the fair value has been less than the amortized cost of the security.
For non-structured securities, assumptions include, but are not limited to, economic and industry-specific trends and fundamentals, instrument-specific developments including changes in credit ratings, 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 ratios ("LTVs"), 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.

27

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

ACL on Fixed Maturities, AFS by Type
 Three Months Ended June 30, 2020 Six Months Ended June 30, 2020
(Before tax)CorporateTotal CorporateTotal
Balance as of beginning of period$(12)$(12) $
$
Credit losses on fixed maturities where credit losses were not previously recorded(23)(23) (35)(35)
Reduction due to sales2
2
 2
2
Net increases (decreases) in allowance on fixed maturities that had an allowance in a previous period1
1
 1
1
Balance as of end of period$(32)$(32) $(32)$(32)

Cumulative Credit Impairments on Fixed Maturities, AFS

 Three Months Ended June 30, Six Months Ended June 30,
(Before tax)2019 2019
Balance as of beginning of period$(18) $(19)
Additions for credit impairments recognized on [1]:   
Fixed maturities not previously impaired
 (2)
Reductions for credit impairments previously recognized on:   
Fixed maturities that matured or were sold during the period
 3
Balance as of end of period$(18) $(18)
[1]These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations.

28

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

Fixed Maturities, AFS
Fixed Maturities, AFS, by Type
 June 30, 2020 December 31, 2019
 

Amortized
Cost
ACL [1]
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 

Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-Credit
OTTI [2]
ABS$1,387
$
$30
$(1)$1,416
 $1,461
$18
$(3)$1,476
$
CLOs2,246


(59)2,187
 2,186
5
(8)2,183

CMBS4,067

208
(64)4,211
 4,210
141
(13)4,338
(4)
Corporate17,283
(32)1,441
(129)18,563
 16,435
986
(25)17,396

Foreign govt./govt. agencies906

70
(4)972
 1,057
66

1,123

Municipal8,604

804
(14)9,394
 8,763
737
(2)9,498

RMBS3,750

149
(4)3,895
 4,775
97
(3)4,869

U.S. Treasuries1,397

165

1,562
 1,191
75
(1)1,265

Total fixed maturities, AFS$39,640
$(32)$2,867
$(275)$42,200
 $40,078
$2,125
$(55)$42,148
$(4)
[1]Represents the ACL recorded following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies.
[2]Represents the amount of cumulative non-credit impairment losses recognized in OCI on fixed maturities that also had credit impairments. These losses are included in gross unrealized losses as of December 31, 2019.
Fixed Maturities, AFS, by Contractual Maturity Year
 June 30, 2020 December 31, 2019

Amortized CostFair Value Amortized CostFair Value
One year or less$1,312
$1,324
 $1,082
$1,090
Over one year through five years7,274
7,556
 7,200
7,401
Over five years through ten years7,601
8,129
 7,395
7,803
Over ten years12,003
13,482
 11,769
12,988
Subtotal28,190
30,491
 27,446
29,282
Mortgage-backed and asset-backed securities11,450
11,709
 12,632
12,866
Total fixed maturities, AFS$39,640
$42,200
 $40,078
$42,148

Estimated maturities may differ from contractual maturities due to 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 June 30, 2020 or December 31, 2019 other than U.S. government securities and certain U.S. government agencies.
Unrealized Losses on Fixed Maturities, AFS

29

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

Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of June 30, 2020
 Less Than 12 Months 12 Months or More Total
 Fair ValueUnrealized Losses Fair ValueUnrealized Losses Fair ValueUnrealized Losses
ABS$127
$(1) $
$
 $127
$(1)
CLOs1,435
(34) 723
(25) 2,158
(59)
CMBS734
(59) 17
(5) 751
(64)
Corporate1,646
(99) 179
(30) 1,825
(129)
Foreign govt./govt. agencies136
(4) 1

 137
(4)
Municipal319
(14) 

 319
(14)
RMBS195
(3) 35
(1) 230
(4)
U.S. Treasuries236

 

 236

Total fixed maturities, AFS in an unrealized loss position$4,828
$(214) $955
$(61) $5,783
$(275)
Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of December 31, 2019
 Less Than 12 Months 12 Months or More Total
 Fair ValueUnrealized Losses Fair ValueUnrealized Losses Fair ValueUnrealized Losses
ABS$398
$(3) $9
$
 $407
$(3)
CLOs679
(2) 923
(6) 1,602
(8)
CMBS538
(7) 20
(6) 558
(13)
Corporate789
(9) 328
(16) 1,117
(25)
Foreign govt./govt. agencies101

 29

 130

Municipal222
(2) 

 222
(2)
RMBS614
(3) 68

 682
(3)
U.S. Treasuries88

 34
(1) 122
(1)
Total fixed maturities, AFS in an unrealized loss position$3,429
$(26) $1,411
$(29) $4,840
$(55)

As of June 30, 2020, fixed maturities, AFS in an unrealized loss position consisted of 1,149 fixed maturities, primarily in the corporate sectors, most notably energy issuers, as well as issuers in the financial services sector and issuers within the travel, leisure, and gaming industry, and CMBS and CLO sectors, which were depressed largely due to widening of credit spreads since the fixed maturities were purchased. As of June 30, 2020, 96% of these fixed maturities were depressed less than 20% of cost or amortized cost. The increase in unrealized losses during the six months ended June 30, 2020 was primarily attributable to wider credit spreads, partially offset by lower interest rates.
Most of the fixed maturities depressed for twelve months or more relate to the corporate and CLO sectors. Corporate fixed maturities and CLO securities were primarily depressed because current market spreads are wider than at the respective purchase dates. Certain other corporate fixed maturities were depressed because of their variable-rate coupons and long-dated maturities, and current credit spreads are wider than at their purchase dates. The Company neither has an intention to sell nor does it expect to be required to sell the fixed maturities outlined in the preceding discussion. The decision to record credit impairments on fixed maturities, AFS in the form of an ACL requires us to make qualitative and quantitative estimates of expected future cash flows. Given the uncertainty about the ultimate impact of the COVID-19 pandemic on issuers of these securities, actual cash
 
flows could ultimately deviate significantly from our expectations resulting in realized losses in future periods.
Mortgage Loans
ACL on Mortgage Loans
The Company reviews mortgage loans on a quarterly basis to estimate the ACL with changes in the ACL recorded in net realized capital gains and losses. Apart from an ACL recorded on individual mortgage loans where the borrower is experiencing financial difficulties, the Company records an ACL on the pool of mortgage loans based on lifetime expected credit losses. The Company utilizes a third-party forecasting model to estimate lifetime expected credit losses at a loan level under multiple economic scenarios. The scenarios use macroeconomic data provided by an internationally recognized economics firm that generates forecasts of varying economic factors such as GDP growth, unemployment and interest rates. The economic scenarios are projected over 10 years. The first two to four years of the 10-year period assume a specific modeled economic scenario (including moderate upside, moderate recession and severe recession scenarios) and then revert to historical long-term assumptions over the remaining period. Using these economic scenarios, the forecasting model projects property-specific operating income and capitalization rates used to

30

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

estimate the value of a future operating income stream. The operating income and the property valuations derived from capitalization rates are compared to loan payment and principal amounts to create debt service coverage ratios ("DSCRs") and LTVs over the forecast period. The model overlays historical data about mortgage loan performance based on DSCRs and LTVs and projects the probability of default, amount of loss given a default and resulting expected loss through maturity for each loan under each economic scenario. Economic scenarios are probability-weighted based on a statistical analysis of the forecasted economic factors and qualitative analysis. The Company records the change in the ACL on mortgage loans based on the weighted-average expected credit losses across the selected economic scenarios. In response to significant economic stress experienced as a result of the COVID-19 pandemic, during the first six months of 2020, the Company increased the weight of both a moderate and severe recession in our estimate of the ACL. The ultimate impact to the Company’s financial statements could vary significantly from our estimates depending on, among other things, the duration and severity of the pandemic, the duration and severity of the economic downturn and the degree to which federal, state and local government actions to mitigate the economic impact of COVID-19 are effective. The impact on our commercial mortgage loan portfolio will also be impacted by borrower behavior in response to the economic stress. Borrowers with lower LTVs have an incentive to continue to make payments of principal and/or interest in order to preserve the equity they have in the underlying commercial real estate properties. As property values decline, borrowers have less incentive to continue to make payments.
When a borrower is experiencing financial difficulty, including when foreclosure is probable, the Company measures an ACL on individual mortgage loans. The ACL is established for any shortfall between the amortized cost of the loan and the fair value of the collateral less costs to sell. As of June 30, 2020, the Company did 0t have any mortgage loans for which an ACL was established on an individual basis.
Estimates of collectibility from an individual borrower 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. There were 0 mortgage loans held-for-sale as of June 30, 2020 or December 31, 2019. For the three
 
and six months ended June 30, 2020 and 2019, respectively, the Company did 0t have any modifications that were accounted for as troubled debt restructurings.
ACL on Mortgage Loans
 Three Months Ended June 30, Six Months Ended June 30,
 20202019 20202019
ACL as of beginning of period$(21)$(1) $
$(1)
Cumulative effect of accounting changes [1]   (19) 
Adjusted beginning ACL(21)(1) (19)(1)
Current period provision(22)1
 (24)1
ACL as of June 30,$(43)$
 $(43)$
[1]
Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies.
The increase in the allowance for the three and six months ended June 30, 2020, is the result of giving increased weight to recession scenarios in response to the COVID-19 pandemic as well as lower estimated property values and operating income to better reflect current economic conditions. In addition, for the six months ended June 30, 2020, the increase in the allowance includes the recognition of an ACL in connection with the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies of these Notes to Condensed Consolidated Financial Statements.

The weighted-average LTV ratio of the Company’s mortgage loan portfolio was 56% as of June 30, 2020, 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 with property values based on appraisals updated no less than annually. 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 and are updated no less than annually through reviews of underlying properties.
Mortgage Loans LTV & DSCR by Origination Year as of June 30, 2020
 202020192018201720162015 & PriorTotal
Loan-to-valueAmortized CostAvg. DSCRAmortized CostAvg. DSCRAmortized CostAvg. DSCRAmortized CostAvg. DSCRAmortized CostAvg. DSCRAmortized CostAvg. DSCRAmortized Cost [1]Avg. DSCR
65% - 80%$8
2.59x$266
1.85x$248
2.07x$80
1.63x$80
1.85x$131
1.74x$813
1.89x
Less than 65%393
2.58x705
2.68x450
2.02x428
1.88x207
2.98x1,446
2.89x3,629
2.59x
Total mortgage loans$401
2.58x$971
2.45x$698
2.04x$508
1.84x$287
2.66x$1,577
2.79x$4,442
2.46x
[1] Amortized cost of mortgage loans excludes ACL of $43.

31

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

Mortgage Loans LTV & DSCR
 December 31, 2019
Loan-to-valueAmortized CostAvg. DSCR
65% - 80%$376
1.53x
Less than 65%3,839
2.56x
Total mortgage loans$4,215
2.46x

Mortgage Loans by Region
 June 30, 2020 December 31, 2019
 Amortized Cost [1]Percent of Total Amortized CostPercent of Total
East North Central$284
6.4% $270
6.4%
Middle Atlantic338
7.6% 319
7.5%
Mountain185
4.2% 109
2.6%
New England398
9.0% 344
8.2%
Pacific931
20.9% 906
21.5%
South Atlantic955
21.5% 944
22.4%
West North Central44
1.0% 46
1.1%
West South Central475
10.7% 439
10.4%
Other [2]832
18.7% 838
19.9%
Total mortgage loans$4,442
100.0% $4,215
100.0%
[1]
Amortized cost of mortgage loans excludes ACL of $43.
[2]Primarily represents loans collateralized by multiple properties in various regions.
Mortgage Loans by Property Type
 June 30, 2020 December 31, 2019
 Amortized Cost [1]Percent of Total Amortized CostPercent of Total
Commercial     
Industrial$1,298
29.2% $1,167
27.7%
Multifamily1,427
32.1% 1,313
31.2%
Office757
17.1% 723
17.2%
Retail785
17.7% 735
17.4%
Single Family135
3.0% 137
3.2%
Other40
0.9% 140
3.3%
Total mortgage loans$4,442
100.0% $4,215
100.0%
[1] Amortized cost of mortgage loans excludes ACL of $43.
Past-Due Mortgage Loans
Mortgage loans are considered past due if a payment of principal or interest is not received according to the contractual terms of the loan agreement, which typically includes a grace period. As of June 30, 2020 and December 31, 2019, the Company held 0 mortgage loans considered past due.
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
 
June 30, 2020, under this program, the Company serviced mortgage loans with a total outstanding principal of $6.6 billion, of which $3.5 billion was serviced on behalf of third parties and $3.1 billion was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets. As of December 31, 2019, the Company serviced mortgage loans with a total outstanding principal balance of $6.4 billion, of which $3.5 billion was serviced on behalf of third parties and $2.9 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 June 30, 2020 and December 31, 2019, because servicing fees were market-level fees at origination and remain adequate to compensate the Company for servicing the loans.
Purchased Financial Assets with Credit Deterioration
Purchased financial assets with credit deterioration ("PCD") are purchased financial assets with a “more-than-insignificant” amount of credit deterioration since origination. PCD assets are assessed only at initial acquisition date and for any investments identified, the Company records an allowance at acquisition with a corresponding increase to the amortized cost basis. As of June 30, 2020, the Company held 0 PCD fixed maturities, AFS or mortgage 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 June 30, 2020 and December 31, 2019, 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 June 30, 2020 and December 31, 2019 was

32

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

limited to the total carrying value of $1.2 billion and $1.1 billion, respectively, which are included in limited partnerships and other alternative investments in the Company's Condensed Consolidated Balance Sheets. As of June 30, 2020 and December 31, 2019, the Company has outstanding commitments totaling $746 and $851, 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 2019 Form 10-K Annual Report.
In addition, the Company makes passive investments in structured securities issued by VIEs for which the Company is not the manager. These investments are included in ABS, CLOs, CMBS and RMBS and are reported in fixed maturities, AFS, and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
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.
 
Securities Lending and Repurchase Agreements
 June 30, 2020December 31, 2019
 Fair ValueFair Value
Securities Lending Transactions:  
Gross amount of securities on loan$165
$606
Gross amount of associated liability for collateral received [1]$169
$621
   
Repurchase agreements:  
Gross amount of recognized receivables for reverse repurchase agreements$14
$15
[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 $34 which are excluded from the Company's Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively.
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 parties 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.

33

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

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 under specified conditions 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 under specified conditions 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 June 30, 2020 and December 31, 2019, the Company pledged collateral of $34 and $37, 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.
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 June 30, 2020 and December 31, 2019, the fair value of securities on deposit was $2.5 billion and $2.3 billion, respectively.
In addition, as of June 30, 2020, the Company held fixed maturities and short-term investments of $604 and $24, respectively, in trust for the benefit of syndicate policyholders, deposited fixed maturities of $64 into a Lloyd's of London ("Lloyd's") trust account to provide a portion of the required capital, and maintained other investments of $48 primarily consisting of overseas deposits in various countries with Lloyd's to support underwriting activities in those countries. As of December 31, 2019, the Company held fixed maturities and short-term investments of $447 and $189, respectively, in trust and other investments of $38 primarily consisting of overseas deposits in various countries with Lloyd's. Lloyd's is an insurance market-place operating worldwide. Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate").
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 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 2019 Form 10-K Annual Report. Typically, these hedging instruments include interest rate swaps and, to a lesser extent, foreign currency swaps where the terms or expected cash flows of the hedged item closely match the terms of the swap. The interest rate swaps are typically used to manage interest rate duration of certain fixed maturity securities or debt instruments issued. 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 variable-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 2019 Form 10-K Annual Report.
Foreign currency swaps are used to convert foreign currency 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

34

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

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 June 30, 2020 and December 31, 2019, the notional amount of interest rate swaps in offsetting relationships was $7.6 billion.
Foreign Currency Swaps and Forwards
The Company enters into foreign currency swaps to convert the foreign currency exposures of certain foreign currency-
 
denominated fixed maturity investments to U.S. dollars. The Company may at times enter into foreign currency forwards to hedge non-U.S. dollar denominated cash.
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 covered call options on equity securities to generate additional return.
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.

35

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

Derivative Balance Sheet Presentation
 Net Derivatives 
Asset
Derivatives
 Liability Derivatives
 Notional AmountFair Value Fair Value Fair Value
Hedge Designation/ Derivative TypeJun. 30, 2020Dec. 31, 2019Jun. 30, 2020Dec. 31, 2019 Jun. 30, 2020Dec. 31, 2019 Jun. 30, 2020Dec. 31, 2019
Cash flow hedges          
Interest rate swaps$2,340
$2,040
$
$
 $
$1
 $
$(1)
Foreign currency swaps287
270
21
(1) 21
3
 
(4)
Total cash flow hedges2,627
2,310
21
(1) 21
4
 
(5)
Non-qualifying strategies          
Interest rate contracts          
Interest rate swaps and futures8,333
9,338
(86)(59) 4
3
 (90)(62)
Foreign exchange contracts          
Foreign currency swaps and forwards270
464

(1) 

 
(1)
Credit contracts          
Credit derivatives that purchase credit protection5
124

(3) 

 
(3)
Credit derivatives that assume credit risk [1]600
500
7
13
 7
13
 

Credit derivatives in offsetting positions224
29


 5
5
 (5)(5)
Equity contracts          
Equity index swaps and options4
941

(15) 
15
 
(30)
Total non-qualifying strategies9,436
11,396
(79)(65) 16
36
 (95)(101)
Total cash flow hedges and non-qualifying strategies$12,063
$13,706
$(58)$(66) $37
$40
 $(95)$(106)
Balance Sheet Location          
Fixed maturities, available-for-sale$270
$244
$
$
 $
$
 $
$
Other investments1,490
1,277
12
12
 14
13
 (2)(1)
Other liabilities10,303
12,185
(70)(78) 23
27
 (93)(105)
Total derivatives$12,063
$13,706
$(58)$(66) $37
$40
 $(95)$(106)
[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.

36

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 June 30, 2020      
Other investments$37
$35
$12
$(10)$1
$1
Other liabilities$(95)$(10)$(70)$(15)$(78)$(7)
As of December 31, 2019      
Other investments$40
$37
$12
$(9)$1
$2
Other liabilities$(106)$(23)$(78)$(5)$(73)$(10)

[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 June 30, Six Months Ended June 30,
 20202019 20202019
Interest rate swaps$4
$13
 $36
$20
Foreign currency swaps(4)4
 24
4
Total$
$17
 $60
$24

Gain (Loss) Reclassified from AOCI into Income
 Three Months Ended June 30, Six Months Ended June 30,
 20202019 20202019
 Net Realized Capital Gain/(Loss)Net Investment IncomeInterest ExpenseNet Realized Capital Gain/(Loss)Net Investment IncomeInterest Expense Net Realized Capital Gain/(Loss)Net Investment IncomeInterest ExpenseNet Realized Capital Gain/(Loss)Net Investment IncomeInterest Expense
Interest rate swaps$
$7
$(2)$2
$
$1
 $
$10
$(2)$2
$
$1
Foreign currency swaps
1




 
2


1

Total$
$8
$(2)$2
$
$1
 $
$12
$(2)$2
$1
$1
              
Total amounts presented on the Condensed Consolidated Statement of Operations$109
$339
$57
$80
$488
$63
 $(122)$798
$121
$243
$958
$127

As of June 30, 2020, the Company had $35 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

37

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

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 six months ended June 30, 2020 and 2019, 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 June 30, Six Months Ended June 30,
 20202019 20202019
Foreign exchange contracts     
Foreign currency swaps and forwards$
$(1) $3
$
Interest rate contracts     
Interest rate swaps, swaptions, and futures1
(7) 21
(15)
Credit contracts     
Credit derivatives that purchase credit protection(2)(1) 4

Credit derivatives that assume credit risk8
6
 (4)27
Equity contracts     
Equity index swaps and options
(4) 75
(4)
Total [1]$7
$(7) $99
$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 and CMBS issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.

38

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 June 30, 2020
Single name credit default swaps       
Investment grade risk exposure$100
$1
5 yearsCorporate CreditA-$
$
Basket credit default swaps [4]       
Investment grade risk exposure500
6
5 yearsCorporate CreditBBB+

Investment grade risk exposure100

8 yearsCMBS CreditAAA100

Below investment grade risk exposure12
(4)Less than 1 yearCMBS CreditCCC12
4
Total [5]$712
$3
   $112
$4
As of December 31, 2019
Single name credit default swaps       
Investment grade risk exposure$100
$3
5 yearsCorporate CreditA-$
$
Basket credit default swaps [4]       
Investment grade risk exposure400
10
5 yearsCorporate CreditBBB+

Investment grade risk exposure1

Less than 1 yearCMBS CreditA1

Below investment grade risk exposure14
(5)Less than 1 yearCMBS CreditCCC-14
5
Total [5]$515
$8
   $15
$5

[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 June 30, 2020 and December 31, 2019, the Company pledged cash collateral with a fair value of less than $1 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 June 30, 2020 and December 31, 2019, the Company also pledged securities collateral associated with derivative instruments with a fair value of $86 and $78, 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 June 30, 2020 and December 31, 2019, the Company has pledged initial margin of securities related to OTC-cleared and exchange traded derivatives with a fair value of $98
 
and $88, respectively, which are included within fixed maturities on the Company's Condensed Consolidated Balance Sheets.
As of June 30, 2020 and December 31, 2019, the Company accepted cash collateral associated with derivative instruments of $25 and $16, 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 June 30, 2020 and December 31, 2019, with a fair value of $1 as of both dates, which the Company has the right to sell or repledge. As of June 30, 2020 and December 31, 2019, the Company had 0 repledged securities and 0 securities held as collateral have been sold. Non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Condensed Consolidated Balance Sheets.


39

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

8. PREMIUMS RECEIVABLE AND AGENTS' BALANCES
Premiums Receivable and Agents' Balances
 As of June 30, 2020
Premiums receivable, excluding receivables for losses within a deductible and retrospectively-rated policy premiums$4,177
Receivables for loss within a deductible and retrospectively-rated policy premiums, by credit quality: 
AAA
AA141
A61
BBB222
BB104
Below BB73
Total receivables for losses within a deductible and retrospectively-rated policy premiums601
  
Total Premiums Receivable and Agents' Balances, Gross4,778
ACL(183)
Total Premiums Receivable and Agents' Balances, Net of ACL$4,595

ACL on Premiums Receivable and Agents' Balances
Premium receivable and agents' balances, excluding receivables for losses within a deductible and retrospectively-rated policy premiums, are primarily comprised of premiums due from policyholders, which are typically collectible within one year or less. The Company had an immaterial amount of receivables with a due date of more than one year that are past-due. Balances are considered past due when amounts that have been billed are not collected within contractually stipulated time periods.
For these balances, the ACL is estimated based on an aging of receivables and recent historical credit loss and collection experience, adjusted for current economic conditions and reasonable and supportable forecasts, when appropriate. In response to significant economic stress experienced as a result of the COVID-19 pandemic, the Company increased the expected loss factors used to estimate the ACL based on collections experience during past moderate and severe recessions as well as experience during periods when we provided policyholders additional time to make premiums payments. In the second quarter of 2020, we gave greater weight to recent experience which has shown a higher level of aged and uncollectible receivables than previously estimated due to the economic stress our customers are facing.
A portion of the Company's Commercial Lines business is written with large deductibles or under retrospectively-rated plans.
 
Under some commercial insurance contracts with a large deductible, the Company is obligated to pay the claimant the full amount of the claim and the Company is subsequently reimbursed by the policyholder for the deductible amount. As such, the Company is subject to credit risk until reimbursement is made. Retrospectively-rated policies are utilized primarily for workers' compensation coverage, whereby the ultimate premium is adjusted based on actual losses incurred. Although the premium adjustment feature of a retrospectively-rated policy substantially reduces insurance risk for the Company, it presents credit risk to the Company. The Company’s results of operations could be adversely affected if a significant portion of such policyholders failed to reimburse the Company for the deductible amount or the amount of additional premium owed under retrospectively-rated policies. The Company manages these credit risks through credit analysis, collateral requirements, and oversight.
The ACL for receivables for loss within a deductible and retrospectively-rated policy premiums is estimated as the amount of the receivable exposed to loss multiplied by estimated factors for probability of default and the amount of loss given a default. The probability of default is assigned based on each policyholder's credit rating, or a rating is estimated if no external rating is available. Credit ratings are reviewed and updated at least annually. The exposure amount is estimated net of collateral and other credit enhancement, considering the nature of the collateral, potential future changes in collateral values, and historical loss information for the type of collateral obtained. The probability of default factors are historical corporate defaults for receivables with similar durations estimated through multiple economic cycles. Credit ratings are forward-looking and consider a variety of economic outcomes. The loss given default factors are based on a study of historical recovery rates for general creditors through multiple economic cycles. The Company's evaluation of the required ACL for receivables for loss within a deductible and retrospectively-rated policy premiums considers the current economic environment as well as the probability-weighted macroeconomic scenarios similar to the approach used for estimating the ACL for mortgage loans. See Note 6 - Investments of Notes to Condensed Consolidated Financial Statements. In response to significant economic stress experienced as a result of the COVID-19 pandemic during the first six months of 2020, the Company increased the weight of both a moderate and severe recession scenario in our estimate of the ACL.
The ultimate impact to the Company’s financial statements from the COVID-19 pandemic could vary significantly from our estimates depending on the duration and severity of the pandemic, the duration and severity of the economic downturn and the degree to which federal, state and local government actions to mitigate the economic impact of COVID-19 are effective.


40

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

Rollforward of ACL on Premiums Receivable and Agents' Balances
 Three Months Ended June 30, 2020 Six Months Ended June 30, 2020

Premiums Receivable and Agents' Balances, Excluding Receivables for Loss within a Deductible and Retrospectively-Rated Policy Premiums
Receivables for Loss within a Deductible and Retrospectively-Rated Policy Premiums
Total
 Premiums Receivable and Agents' Balances, Excluding Receivables for Loss within a Deductible and Retrospectively-Rated Policy Premiums
Receivables for Loss within a Deductible and Retrospectively-Rated Policy Premiums
Total
Beginning ACL$(98)$(41)$(139) $(85)$(60)$(145)
Cumulative effect of accounting change [1]


 2
21
23
Adjusted beginning ACL(98)(41)(139) (83)(39)(122)
Current period provision(48)(3)(51) (76)(5)(81)
Current period gross write-offs8

8
 23

23
Current period gross recoveries(1)
(1) (3)
(3)
Ending ACL$(139)$(44)$(183) $(139)$(44)$(183)

[1]
Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.
The cumulative effect of accounting changes is attributable to the recognition of an ACL in connection with the adoption of accounting guidance for credit losses on January 1, 2020 that was less than the allowance recognized under the prior guidance. The adjusted beginning ACL was based on the Company’s historical loss information adjusted for current conditions and the forecasted economic environment at the time the guidance was adopted. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements. The increase in the allowance during the three and six months ended June 30,
 
2020 is primarily due to adjusting loss factors and an increase in aged premiums receivable as well as giving more weight to recession scenarios on receivables for loss within a deductible and retrospectively-rated policy premiums in response to the COVID-19 pandemic, as discussed above.
The Company records total credit loss expenses related to premiums receivable in insurance operating costs and other expenses. Write-offs of premiums receivable and agents' balances and any related ACL are recorded in the period in which the balance is deemed uncollectible.
9. REINSURANCE
The Company cedes insurance risk to reinsurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company's procedures include carefully selecting its reinsurers, structuring agreements to provide collateral funds where necessary, and regularly monitoring the financial condition and ratings of its reinsurers.
Reinsurance Recoverables
Reinsurance recoverables include balances due from reinsurance companies and are presented net of an allowance for uncollectible reinsurance. Reinsurance recoverables include an estimate of the amount of gross losses and loss adjustment
 
expense reserves that may be ceded under the terms of the reinsurance agreements, including incurred but not reported unpaid losses. The Company’s estimate of losses and loss adjustment expense reserves ceded to reinsurers is based on assumptions that are consistent with those used in establishing the gross reserves for amounts the Company owes to its claimants. The Company estimates its ceded reinsurance recoverables based on the terms of any applicable facultative and treaty reinsurance, including an estimate of how incurred but not reported losses will ultimately be ceded under reinsurance agreements. Accordingly, the Company’s estimate of reinsurance recoverables is subject to similar risks and uncertainties as the estimate of the gross reserve for unpaid losses and loss adjustment expenses.

41

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

Reinsurance Recoverables by Credit Quality Indicator as of June 30, 2020
 Property and CasualtyGroup BenefitsCorporateTotal
A.M. Best Financial Strength Rating    
A++$1,242
$
$
$1,242
A+1,752
232
311
2,295
A591


591
A-26
9

35
B++678

3
681
Below B++23
1

24
Total Rated by A.M. Best4,312
242
314
4,868
Mandatory (Assigned) and Voluntary Risk Pools264


264
Captives322


322
Other not rated companies288
9

297
Gross Reinsurance Recoverables5,186
251
314
5,751
Allowance for uncollectible reinsurance(108)(1)(2)(111)
Net Reinsurance Recoverables$5,078
$250
$312
$5,640

The Company had no reinsurance recoverables with a due date of one year or more that are past-due. Balances are considered past due when amounts that have been billed are not collected within contractually stipulated time periods, generally 30, 60 or 90 days.
To manage reinsurer credit risk, a reinsurance security review committee evaluates the credit standing, financial performance, management and operational quality of each potential reinsurer. In placing reinsurance, the Company considers the nature of the risk reinsured, including the expected liability payout duration, and establishes limits tiered by reinsurer credit rating.
Where its contracts permit, the Company secures future claim obligations with various forms of collateral or other credit enhancement, including irrevocable letters of credit, secured trusts, funds held accounts and group wide offsets. As part of its reinsurance recoverable review, the Company analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation outcomes in disputes between cedants and reinsurers and the overall credit quality of the Company’s reinsurers.
The Company periodically evaluates the recoverability of its reinsurance recoverable assets and establishes an allowance for uncollectible reinsurance. The allowance for uncollectible reinsurance reflects management’s best estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers’ unwillingness or inability to pay. The allowance for uncollectible reinsurance comprises an ACL and an allowance for disputed balances. Based on this analysis, the Company may adjust the allowance for uncollectible reinsurance or charge off reinsurer balances that are determined to be uncollectible.
Due to the inherent uncertainties as to collection and the length of time before reinsurance recoverables become due, it is possible that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be required, which could have a material adverse effect on the Company’s consolidated results of operations or cash flows in a particular quarter or annual period.
The ACL is estimated as the amount of reinsurance recoverables exposed to loss multiplied by estimated factors for the probability
 
of default and the amount of loss given a default. The probability of default is assigned based on each reinsurer's credit rating, or a rating is estimated if no external rating is available. Credit ratings are reviewed and updated at least annually. The probability of default factors are historical insurer and reinsurer defaults for liabilities with similar durations to the reinsured liabilities as estimated through multiple economic cycles. Credit ratings are forward-looking and consider a variety of economic outcomes. The loss given default factors are based on a study of historical recovery rates for general creditors of corporations through multiple economic cycles or, in the case of purchased annuities funding structured settlements accounted for as reinsurance, historical recovery rates for annuity contract holders.
As shown in the table above, a portion of the total gross reinsurance recoverable balance relates to the Company’s participation in various mandatory (assigned) and voluntary risk pools. Reinsurance recoverables due from pools are backed by the financial position of all insurance companies participating in the pools and the credit backing the reinsurance recoverable is not limited to the financial strength of each pool. The mandatory pools generally are funded through policy assessments or surcharges and if any participant in the pool defaults, remaining liabilities are apportioned among the other members.
The Company's evaluation of the required ACL for reinsurance recoverables considers the current economic environment as well as macroeconomic scenarios similar to the approach used to estimate the ACL for mortgage loans. See Note 6 - Investments of Notes to Condensed Consolidated Financial Statements. Insurance companies, including reinsurers, are regulated and hold risk-based capital to mitigate the risk of loss due to economic factors and other risks. Non-U.S. reinsurers are either subject to a capital regime substantively equivalent to domestic insurers or we hold collateral to support collection of reinsurance recoverables. As a result, there is limited history of losses from insurer defaults. In response to significant economic stress experienced as a result of the COVID-19 pandemic during the first six months of 2020, the Company increased the weight of both a moderate and severe recession in our estimate of the ACL. The Company expects the impact to reinsurers to be somewhat mitigated by their regulated capital and liquidity positions. The

42

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

ultimate impact to the Company’s financial statements could vary significantly from our estimates depending on the duration and severity of the pandemic, the duration and severity of the economic downturn and the degree to which federal, state and
 
local government actions to mitigate the economic impact of COVID-19 are effective. The following table presents the activity within the Company’s ACL for reinsurance recoverables.
Allowance for Uncollectible Reinsurance
 Three Months Ended June 30, 2020 Six Months Ended June 30, 2020
 Property and CasualtyGroup BenefitsCorporateTotal Property and CasualtyGroup BenefitsCorporateTotal
Beginning allowance for uncollectible reinsurance$(114)$(1)$(2)$(117) $(114)$
$
$(114)
Beginning allowance for disputed amounts(65)

(65) (66)

(66)
Beginning ACL(49)(1)(2)(52) (48)

(48)
Cumulative effect of accounting change [1]



 
(1)(1)(2)
Adjusted beginning ACL(49)(1)(2)(52) (48)(1)(1)(50)
Current period provision(1)

(1) (2)
(1)(3)
Current period gross recoveries(1)

(1) (1)

(1)
Ending ACL(51)(1)(2)(54) (51)(1)(2)(54)
Ending allowance for disputed amounts(57)

(57) (57)

(57)
Ending allowance for uncollectible reinsurance$(108)$(1)$(2)$(111) $(108)$(1)$(2)$(111)
[1] Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies.
The Company records credit loss expenses related to reinsurance recoverables in benefits losses and loss adjustment expenses. Write-offs of reinsurance recoverables and any related ACL are recorded in the period in which the balance is deemed uncollectible. Expected recoveries are included in the estimate of the ACL. There were 0 write-offs for the three and six months ended June 30, 2020, respectively.

43

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

10. 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 six months ended June 30,
 20202019
Beginning liabilities for unpaid losses and loss adjustment expenses, gross$28,261
$24,584
Reinsurance and other recoverables5,275
4,232
Beginning liabilities for unpaid losses and loss adjustment expenses, net22,986
20,352
Navigators Group acquisition
2,001
Provision for unpaid losses and loss adjustment expenses 
 
Current accident year3,962
3,475
Prior accident year development [1](245)24
Total provision for unpaid losses and loss adjustment expenses3,717
3,499
Change in deferred gain on retroactive reinsurance included in other liabilities [1](83)
Payments 
 
Current accident year(778)(848)
Prior accident years(2,575)(2,381)
Total payments(3,353)(3,229)
Foreign currency adjustment

(10)
Ending liabilities for unpaid losses and loss adjustment expenses, net23,257
22,623
Reinsurance and other recoverables5,427
5,125
Ending liabilities for unpaid losses and loss adjustment expenses, gross$28,684
$27,748
[1] Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators adverse development cover ('Navigators ADC') which, under retroactive reinsurance accounting, is deferred and is recognized over the period the ceded losses are recovered in cash from National Indemnity Company ("NICO"). For additional information regarding the Navigators ADC agreement, please refer to Adverse Development Covers discussion below.

44

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

Unfavorable (Favorable) Prior Accident Year Development
 For the six months ended June 30,
 20202019
Workers’ compensation$(38)$(50)
Workers’ compensation discount accretion18
17
General liability114
43
Marine1
10
Package business(6)(9)
Commercial property(2)(15)
Professional liability5
33
Bond(10)
Assumed reinsurance(7)3
Automobile liability - Commercial Lines27
2
Automobile liability - Personal Lines(21)(5)
Homeowners
1
Catastrophes(413)(22)
Uncollectible reinsurance(2)
Other reserve re-estimates, net6
16
Prior accident year development before change in deferred gain(328)24
Change in deferred gain on retroactive reinsurance included in other liabilities [1]83

Total prior accident year development$(245)$24

[1] The change in deferred gain for the six months ended June 30, 2020 primarily included increased reserves for professional liability, marine, general liability, prior accident year catastrophes, and assumed reinsurance.
Re-estimates of prior accident year reserves for the six months ended June 30, 2020
Workers’ compensation reserves were reduced on national account business within middle & large commercial, driven by lower than previously estimated claim severity for the 2014 and prior accident years and were reduced in small commercial due to lower than expected claim severity for the 2013 to 2018 accident years.
General liability reserves were increased in first quarter 2020, primarily related to guaranteed cost construction business for accident years 2016 to 2019 as incurred losses are developing higher than previously expected for premises and operations claims and product liability claims, partly due to a change in industry mix and a heavier concentration of losses in California than initially assumed. General liability reserves were also increased in second quarter 2020 on primary layer construction account business mainly related to the 2018 accident year and is largely included as a component of the change in deferred gain under retroactive reinsurance in the above table. In addition, the Company recorded an increase in reserves for sexual molestation and abuse claims in the second quarter of 2020 related to cases brought against religious and other institutions that were insureds of the Company. During the second quarter of 2020, the Company increased these reserves
 
by $102 considering the impact of recent bankruptcy filings and an expected increase in claim incidence largely driven by legislation passed in a number of states that provides an opportunity for claimants to file claims for a period of time despite the fact that the original statute of limitations had expired.
Marine reserves were increased principally due to an increase in domestic marine liability, mostly in accident years 2017 and 2018 due to a higher number of large losses. The increase in marine reserves is included as a component of the change in deferred gain under retroactive reinsurance in the above table.
Commercial property reserves were decreased for accident year 2019 due to favorable developments on marine and middle market property claims.
Professional liability reserves were increased primarily due to an increase in large D&O losses within Global Specialty, principally in the 2016 and 2017 accident years. The reserve increases within Global Specialty are included as a component of the change in deferred gain under retroactive reinsurance in the above table.
Assumed reinsurance reserves were increased for accident year 2018 mostly due to higher accident and health reserve estimates for medical professionals on assumed casualty business. These reserve increases are included as a component of the change in deferred gain under retroactive reinsurance in the above table.
Automobile liability reserves were decreased in Personal Lines principally due to lower than previously expected AARP Direct automobile liability claim severity for the 2017 and 2018 accident years. Automobile liability reserves were increased in Commercial Lines primarily due to higher than expected large losses on national accounts in the first quarter of 2020 related to accident years 2015 to 2017 and due to large losses within middle & large commercial, primarily within the 2018 and 2019 accident years.
Catastrophes reserves were reduced, primarily due to a a reduction in estimated reserves for 2017 and 2018 California wildfires and a reduction in estimated catastrophes for wind and hail events in the 2018 and 2019 accident years, partially offset by an increase in reserves for 2019 typhoons Hagibis and Faxai in Asia. The reduction in reserves for the 2017 and 2018 wildfires was largely due to recognizing a $289 subrogation benefit in the second quarter of 2020 from PG&E Corporation and Pacific Gas and Electric Company (together, “PG&E”).
In December, 2019, the judge overseeing the bankruptcy of PG&E approved an $11 billion settlement of insurance subrogation claims to resolve all such claims arising from the 2017 Northern California wildfires and 2018 Camp wildfire. That settlement was contingent upon, among other things, the judge entering an order confirming PG&E’s chapter 11 bankruptcy plan (“PG&E Plan”) incorporating the settlement agreement. On June 20, 2020, the bankruptcy court judge approved the PG&E Plan and PG&E subsequently transferred the $11 billion settlement amount to a trust designed to allocate and distribute the settlement among subrogation holders, including certain of the Company’s insurance subsidiaries. In the second quarter of 2020, the Company recorded an estimated $289 subrogation benefit

45

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

though the ultimate amount it collects will depend on how the Company’s ultimate paid claims subject to subrogation compare to other insurers’ ultimate paid claims subject to subrogation.
Re-estimates of prior accident year reserves for the six months ended June 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.
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, 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.
Package business reserves were decreased, primarily due to favorable emergence on property claims related to accident years 2016 through 2018.
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.
Marine reserves were increased, principally related to pollution exposure from the 1980s and 1990s related to the Navigators Group book of business.
Automobile liability reserves were reduced, primarily driven by the emergence of lower estimated severity in personal automobile liability for accident year 2017.
Catastrophes reserves were reduced, primarily as a result of lower estimated net losses from 2017 hurricanes Harvey and Irma.
Adverse Development Covers
The Company has an adverse development cover reinsurance agreement with NICO, a subsidiary of Berkshire Hathaway Inc., to reinsure loss development after 2016 on substantially all of the Company’s asbestos and environmental reserves (the “A&E ADC”). Under the A&E ADC, the Company paid a reinsurance premium of $650 for NICO to assume adverse net loss 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 including reserves for A&E exposure for accident years prior to 1986 that are reported in Property & Casualty Other Operations ("Run-off A&E") and reserves for A&E exposure for accident years 1986 and subsequent from policies underwritten prior to 2016 that are reported in ongoing Commercial Lines and Personal Lines. The $650 reinsurance premium was placed into a collateral trust account as security for NICO’s claim payment obligations to the Company. The Company has retained the risk of collection on amounts due from other third-party reinsurers and continues to be responsible for claims handling and other administrative services, subject to certain conditions. The A&E ADC covers substantially all the Company’s A&E reserve development up to the reinsurance limit.
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 direct losses incurred. Cumulative ceded losses exceeding the $650 reinsurance premium paid would result in a deferred gain. The deferred gain would be recognized over the claim settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of asbestos and environmental claims after December 31, 2016 in excess of $650 may result in significant charges against earnings. As of June 30, 2020, the Company has incurred $640 in cumulative adverse development on asbestos and environmental reserves that have been ceded under the A&E ADC treaty with NICO with $860 of available limit remaining under the A&E ADC.
Immediately after closing on the acquisition of Navigators Group, effective May 23, 2019, the Company purchased the Navigators ADC, an aggregate excess of loss reinsurance agreement covering adverse reserve development, from NICO, on behalf of Navigators Insurers. Under the Navigators ADC, the Navigators Insurers paid NICO a 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.
As of June 30, 2020, the Company has recorded a reinsurance recoverable under the Navigators ADC of $190, as estimated cumulative loss development on the 2018 and prior accident year reserves of $290 exceed the $100 deductible. While the reinsurance recoverable is $190, the Company has also recorded a $99 cumulative deferred gain within other liabilities since, under retroactive reinsurance accounting, ceded losses in excess of the $91 of ceded premium paid must be recognized as a deferred gain. As the Company has ceded $190 of the $300 available limit, there is $110 of remaining limit available as of June 30, 2020.

46

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

Group Life, Disability and Accident Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
 For the six months ended June 30,
 20202019
Beginning liabilities for unpaid losses and loss adjustment expenses, gross$8,256
$8,445
Reinsurance recoverables [1]246
239
Beginning liabilities for unpaid losses and loss adjustment expenses, net8,010
8,206
Provision for unpaid losses and loss adjustment expenses



Current incurral year2,297
2,269
Prior year's discount accretion111
117
Prior incurral year development [2](315)(206)
Total provision for unpaid losses and loss adjustment expenses [3]2,093
2,180
Payments



Current incurral year(871)(922)
Prior incurral years(1,290)(1,342)
Total payments(2,161)(2,264)
Ending liabilities for unpaid losses and loss adjustment expenses, net7,942
8,122
Reinsurance recoverables244
234
Ending liabilities for unpaid losses and loss adjustment expenses, gross$8,186
$8,356
[1]
Reflects a cumulative effect adjustment of $(1) representing an adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. See Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements for further information.
[2]Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis.
[3]
Includes unallocated loss adjustment expenses of $89 and $85 for the six months ended June 30, 2020 and 2019, respectively, that are recorded in insurance operating costs and other expenses in the Condensed Consolidated Statements of Operations.
Re-estimates of prior incurral years reserves for the six months ended June 30, 2020
Group disability- Prior period reserve estimates decreased by approximately $230 largely driven by group long-term disability lower claim incidence and higher recoveries on prior incurral year claims, and a refund on the New York Paid Family Leave program.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $65 largely driven by lower prior year mortality than prior assumptions in group life and lower-than-previously expected claim incidence in group life premium waiver.
Supplemental Accident & Health- Prior period reserve estimates decreased by approximately $20 driven by lower-than-expected emergence of prior year claims, especially for voluntary critical Illness and voluntary accident products.
 
Re-estimates of prior incurral years reserves for the six months ended June 30, 2019
Group disability- Prior period reserve estimates decreased by approximately $175 largely driven by group long-term disability claim incidence lower than prior assumptions, as well as claim recoveries and Social Security Disability approvals higher than prior reserve assumptions. New York Paid Family Leave also experienced favorable claim emergence compared to year-end estimates.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $25 largely driven by lower than previously expected claim incidence in group life premium waiver.

47

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

11. RESERVE FOR FUTURE POLICY BENEFITS
Changes in Reserves for Future Policy Benefits[1]
Liability balance, as of January 1, 2020$635
Incurred53
Paid(42)
Change in unrealized investment gains and losses6
Liability balance, as of June 30, 2020$652
Reinsurance recoverable asset, as of January 1, 2020$31
Incurred(4)
Paid
Reinsurance recoverable asset, as of June 30, 2020$27
Liability balance, as of January 1, 2019$642
Incurred44
Paid(55)
Change in unrealized investment gains and losses13
Liability balance, as of June 30, 2019$644
Reinsurance recoverable asset, as of January 1, 2019$27
Incurred
Paid
Reinsurance recoverable asset, as of June 30, 2019$27

[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.
12. DEBT
Senior Notes
On March 30, 2020, The Hartford repaid at maturity the $500 principal amount of its 5.5% senior notes.
Lloyd's Letter of Credit Facilities
As a result of the acquisition of Navigators Group, The Hartford has two letter of credit facility agreements: the Club Facility and the Bilateral Facility, which are used to provide a portion of the capital requirements at Lloyd's. As of June 30, 2020, uncollateralized letters of credit with an aggregate face amount of $165 and £60 million were outstanding under the Club Facility and £18 million was outstanding under the Bilateral Facility. As of June 30, 2020, the Bilateral Facility has unused capacity of $3 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 June 30, 2020, Navigators Group was in compliance with all financial covenants.

48

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

13. INCOME TAXES
Income Tax Expense
Income Tax Rate Reconciliation
 Three Months Ended June 30, Six Months Ended June 30,
 20202019 20202019
Tax provision at U.S. federal statutory rate$125
$95
 $197
$258
Tax-exempt interest(12)(14) (24)(29)
Executive compensation
1
 5
5
Increase in deferred tax valuation allowance7

 13

Stock-based compensation
(1) (1)(4)
Other4
3
 5
(1)
Provision for income taxes$124
$84
 $195
$229

Uncertain Tax Positions
Rollforward of Unrecognized Tax Benefits
 Three Months Ended June 30, Six Months Ended June 30,
 20202019 20202019
Balance, beginning of period$14
$14
 $14
$14
Gross increases - tax positions in prior period

 

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
On March 27, 2020, as part of the business stimulus package in response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The CARES Act established new tax provisions including, but not limited to: (1) five-year carryback of net operating losses ("NOLs") generated in 2018, 2019 and 2020; (2)
 
accelerated refund of alternative minimum tax ("AMT") credit carryforwards; and (3) retroactive changes to allow accelerated depreciation for certain depreciable property.
The legislation does not have a material impact on the Company due to the lack of taxable income in carryback periods and the fact that the Company was already expecting to receive a refund or reduction of regular tax payable for all the remaining AMT credits in 2020.
As of June 30, 2020 the Company had remaining AMT credit carryforwards of $410 which are reflected as a current income tax receivable within other assets in the accompanying Condensed Consolidated Balance Sheets. In July of 2020, the Company received a $206 refund of AMT credits including $1 of interest, with the remaining balance of $205 to be utilized against federal estimated tax payments due in July and September.
For the period ending June 30, 2020, the Company has utilized all US net operating loss carryforwards as a reduction of 2020 current tax liability. The Company has foreign net operating losses of $13 for which a valuation allowance of $11 has been established. While the foreign NOLs do not expire, this assessment reflects uncertainty in the Company's ability to generate sufficient taxable income in the near term in those specific jurisdictions.
Management has assessed the need for a valuation allowance against its deferred tax assets based on tax character and jurisdiction. In making the assessment, management considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and carryovers, taxable income in open carry back years and other tax planning strategies. From time to time, tax planning strategies could include holding a portion of debt securities with market value losses until recovery, altering the level of tax exempt securities held, making investments which have specific tax characteristics, and business considerations such as asset-liability matching. Management views such tax planning strategies as prudent and feasible and would implement them, if necessary, to realize the deferred tax assets.
The federal audits for the Company have been completed through 2013, and the Company is not currently under federal examination for any open years. The statute of limitations is closed through the 2015 tax year with the exception of NOL carryforwards utilized in open tax 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.
14. 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

49

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

insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to the uncertainties discussed  under “Regulatory and Legal Risks” of the Risk Factors disclosed in Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, as amended in Part II Item 1A herein, and 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 putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper sales or underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, property, disability, life and inland marine. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
COVID-19 Pandemic Business Income Insurance Coverage Litigation
Like many others in the property and casualty insurance industry, beginning in April 2020, various direct and indirect subsidiaries of the Company (collectively the "Hartford Writing Companies”), and in some instances the Company itself, have been served as defendants in lawsuits seeking insurance coverage under commercial insurance policies issued by the Hartford Writing Companies for alleged losses resulting from the shutdown or suspension of their businesses due to the spread of COVID-19. As of July 29, 2020, the Company is aware of more than 150 such lawsuits, of which 45 purport to be filed on behalf of broad nationwide or statewide classes of policyholders. These lawsuits have been filed in state and federal courts in roughly 25 states. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts, interest, and attorney’s fees. Many of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages. Several groups of plaintiffs have asked the Joint Panel on Multi-District Litigation (“JPMDL”) for an order that would coordinate or consolidate for
 
pre-trial purposes, all COVID-19 pandemic business income coverage lawsuits pending in federal court against any commercial insurer, including Hartford Writing Companies. The Company and others in the insurance industry, and some plaintiffs, have opposed that request. The JPMDL's decision is expected in or after August 2020.
The Company and its subsidiaries deny the allegations and intend to defend vigorously. The Hartford Writing Companies maintain that they have no coverage obligations with respect to these suits for business income allegedly lost by the plaintiffs due to the COVID-19 pandemic based on the clear terms of the applicable insurance policies. Although the policy terms vary depending, among other things, upon the size, nature, and location of the policyholder’s business, in general, the claims at issue in these lawsuits were denied because the claimant identified no direct physical damage or loss to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any such damage or loss in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. In addition, the vast majority of the policies at issue expressly exclude from coverage any loss caused directly or indirectly by the presence, growth, proliferation, spread or activity of a virus, subject to a narrow set of exceptions not applicable in connection with this pandemic, and contain a pollution and contamination exclusion that, among other things, expressly excludes from coverage any loss caused by material that threatens human health or welfare.
In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present numerous uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any state or nationwide classes will be certified and the size and scope of any such classes, and whether the validity of the coverage defenses will be determined by one court or many. The legal theories advocated by plaintiffs vary significantly by case as do the state laws that govern the policy interpretation, and virtually no substantive legal rulings have been made. In addition, business income calculations depend upon a wide range of factors that are particular to the circumstances of each individual policyholder and, here, virtually none of the plaintiffs have submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss, and, in any event, the Company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. Accordingly, management cannot now reasonably estimate the possible loss or range of loss, if any. Nonetheless, given the large number of claims and potential claims, the indeterminate amounts sought, and the inherent unpredictability of litigation, it is possible that adverse outcomes, if any, in the aggregate, could have a material adverse effect on the Company’s consolidated operating results.
Run-off Asbestos and Environmental Claims
The Company continues to receive 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.

50

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

The vast majority of the Company's exposure to A&E relates to Run-off A&E, reported within the P&C Other Operations segment. 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 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 June 30, 2020, the Company reported $815 of net asbestos reserves and $106 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.
The Company’s A&E ADC reinsurance agreement with NICO reinsures substantially all A&E reserve development for 2016 and prior accident years, including Run-off A&E and A&E reserves included in Commercial Lines and Personal Lines. The A&E ADC has a coverage limit of $1.5 billion above the Company’s existing net A&E reserves as of December 31, 2016 of approximately $1.7 billion . As of June 30, 2020, the Company has incurred $640 in cumulative adverse development on A&E reserves that have been ceded under the A&E ADC treaty with NICO, leaving $860 of coverage available for future adverse net reserve development, if any. Cumulative adverse development of A&E claims for accident years 2016 and prior 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. For more information on the A&E ADC, refer to Note 11, Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements included in the Company's 2019 Form 10-K Annual Report.
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

51

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

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 June 30, 2020 was $83 for which the legal entities have posted collateral of $86 in the normal course of business. Based on derivative market values as of June 30, 2020, a downgrade of one level below the current financial strength ratings by either Moody's or S&P would not require additional assets to be posted as collateral. A downgrade of two levels would require an additional $5 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.
Guarantees
The Hartford has guaranteed the timely payment of contractual claims under certain life, accident and health and annuity contracts issued by its former life and annuity business with most of the guaranteed contracts issued between 1990 and 1997 (the "Talcott Guarantees"). Upon the sale of the life and annuity business in May 2018, the purchaser indemnified the Company for any liability arising under the guarantees. The Talcott Guarantees cover contractual obligations only but otherwise have no limitation as to maximum potential future payments. Prior to January 1, 2020, the Company had not recorded a liability because the likelihood of any payment under the Talcott Guarantees is remote. Upon adoption of new credit loss guidance on January 1, 2020, the Company estimated a LCL of $25. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.
 
The LCL is calculated for the estimated amount payable under guaranteed contracts multiplied by the probability of default and the amount of loss given a default. The probability of default is assigned by credit rating of the applicable insurance company that issued the contract and is based on historical insurance industry defaults for liabilities with similar durations estimated through multiple economic cycles. Credit ratings are current and forward-looking and consider a variety of economic outcomes. Because annuities represent the majority of the contracts issued, the loss given default factors are based on a historical study of annuity policyholder recoveries from insolvent estate assets. The Company's exposure is expected to run off over a period that will include more than one economic cycle.
The Company's evaluation of the required LCL for the Talcott Guarantees considers the current economic environment as well as macroeconomic scenarios similar to the approach used to estimate the ACL for mortgage loans. See Note 6 - Investments of Notes to Condensed Consolidated Financial Statements. In response to significant economic stress experienced as a result of the COVID-19 pandemic, during the first six months of 2020 the Company increased the weight of both a moderate and severe recession scenario in our estimate of the LCL. The ultimate impact to the Company’s financial statements could vary significantly from our estimates depending on the duration and severity of the pandemic, the duration and severity of the economic downturn and the degree to which federal, state and local government actions to mitigate the economic impact of COVID-19 are effective. The Company has never experienced a loss on financial guarantees of this nature and we believe the risk of loss is remote. For the three and six months ended June 30, 2020, the Company recorded total credit loss expense within insurance operating costs and other expenses of $2 and $3, respectively, related to the Talcott Guarantees as a result of giving increased weight to recession scenarios in response to the COVID-19 pandemic, as discussed above.
15. EQUITY
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. During the six months ended June 30, 2020, the Company repurchased 2.7 million
 
common shares for $150. Any repurchase of shares under the remaining equity repurchase authorization of $650 is dependent on market conditions and other factors including the extent to which COVID-19 impacts our business, results of operations, financial condition and liquidity.

52

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

16. CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in AOCI, Net of Tax for the Three Months Ended June 30, 2020
 Changes in
 Net Unrealized Gain on Fixed MaturitiesUnrealized Loss on Fixed Maturities with ACLNet Gain on Cash Flow Hedging InstrumentsForeign Currency Translation AdjustmentsPension and Other Postretirement Plan AdjustmentsAOCI,
net of tax
Beginning balance$627
$(2)$53
$26
$(1,661)$(957)
OCI before reclassifications1,469


1

1,470
Amounts reclassified from AOCI(41)
(5)
12
(34)
     OCI, net of tax1,428

(5)1
12
1,436
Ending balance$2,055
$(2)$48
$27
$(1,649)$479
Changes in AOCI, Net of Tax for the Six Months Ended June 30, 2020
 Changes in
 Net Unrealized Gain on Fixed MaturitiesUnrealized Loss on Fixed Maturities with ACLNet Gain on Cash Flow Hedging InstrumentsForeign Currency Translation AdjustmentsPension and Other Postretirement Plan AdjustmentsAOCI,
net of tax
Beginning balance$1,684
$(3)$9
$34
$(1,672)$52
OCI before reclassifications454
1
47
(7)(1)494
Amounts reclassified from AOCI(83)
(8)
24
(67)
     OCI, net of tax371
1
39
(7)23
427
Ending balance$2,055
$(2)$48
$27
$(1,649)$479


53

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

Reclassifications from AOCI
 Three Months Ended June 30, 2020Six Months Ended June 30, 2020Affected Line Item in the Condensed Consolidated Statement of Operations
Net Unrealized Gain on Fixed Maturities   
Available-for-sale fixed maturities$52
$105
Net realized capital gains (losses)
 52
105
Total before tax
 11
22
 Income tax expense
 $41
$83
Net income
Net Gains on Cash Flow Hedging Instruments   
Interest rate swaps$7
10
Net investment income
Interest rate swaps(2)(2)Interest expense
Foreign currency swaps1
2
Net investment income
 6
10
Total before tax
 1
2
 Income tax expense
 $5
$8
Net income
Pension and Other Postretirement Plan Adjustments   
Amortization of prior service credit$1
$3
Insurance operating costs and other expenses
Amortization of actuarial loss(16)(33)Insurance operating costs and other expenses
 (15)(30)Total before tax
 (3)(6) Income tax expense
 $(12)$(24)Net income
Total amounts reclassified from AOCI$34
$67
Net income

Changes in AOCI, Net of Tax for the Three Months Ended June 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 AdjustmentsAOCI,
net of tax
Beginning balance$703
$(3)$
$31
$(1,616)$(885)
OCI before reclassifications703

13
3

719
Amounts reclassified from AOCI(39)
(2)
9
(32)
     OCI, net of tax664

11
3
9
687
Ending balance$1,367
$(3)$11
$34
$(1,607)$(198)

Changes in AOCI, Net of Tax for the Six Months Ended June 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 reclassifications1,399
1
19
4

1,423
Amounts reclassified from AOCI(56)
(3)
17
(42)
     OCI, net of tax1,343
1
16
4
17
1,381
Ending balance$1,367
$(3)$11
$34
$(1,607)$(198)


54

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

Reclassifications from AOCI
 Three Months Ended June 30, 2019Six Months Ended June 30, 2019Affected Line Item in the Condensed Consolidated Statement of Operations
Net Unrealized Gain on Securities   
Available-for-sale securities$50
$71
Net realized capital gains (losses)
 50
71
Total before tax
 11
15
 Income tax expense
 $39
$56
Net income
Net Gains on Cash Flow Hedging Instruments   
Interest rate swaps$2
$2
Net realized capital gains (losses)
Interest rate swaps1
1
Interest expense
Foreign currency swaps
1
Net investment income
 3
4
Total before tax
 1
1
 Income tax expense
 $2
$3
Net income
Pension and Other Postretirement Plan Adjustments   
Amortization of prior service credit$2
$3
Insurance operating costs and other expenses
Amortization of actuarial loss(13)(25)Insurance operating costs and other expenses
 (11)(22)Total before tax
 (2)(5) Income tax expense
 $(9)$(17)Net income
Total amounts reclassified from AOCI$32
$42
Net income

17. 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 2019 Annual Report on Form 10-K.
Net Periodic Cost (Benefit)
 Pension Benefits Other Postretirement Benefits
 Three Months Ended June 30,Six months ended June 30, Three Months Ended June 30,Six months ended June 30,
 2020201920202019 2020201920202019
Service cost$1
$1
$2
$2
 $
$
$
$
Interest cost32
40
64
79
 1
2
3
4
Expected return on plan assets(54)(56)(108)(113) (1)(1)(2)(2)
Amortization of prior service credit



 (1)(2)(3)(3)
Amortization of actuarial loss15
11
30
22
 1
2
3
3
Net periodic cost (benefit)$(6)$(4)$(12)$(10) $
$1
$1
$2

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

55




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




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 2019 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 acquisition of Navigators Group, a specialty underwriter. For discussion of this transaction, see Note 2 - Business Acquisition of Notes to Condensed Consolidated Financial Statements.
Certain reclassifications have been made to historical financial information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") to conform to the current period presentation.
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 increase or decrease with a rise or fall in AUM whether caused by changes in the market or through net flows.
Book Value per Diluted Share excluding accumulated other comprehensive income ("AOCI")- This is a non-GAAP per share measure that is calculated by dividing (a) common stockholders' equity, excluding AOCI, after tax, by (b) common shares outstanding and dilutive potential common shares. The Company provides this measure to enable investors to analyze the amount of the Company's net worth that is primarily attributable to the Company's business operations. The Company believes that excluding AOCI from the numerator is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period, primarily based on changes in interest rates. Book value per diluted share is the most directly comparable U.S. GAAP measure.
Combined Ratio- The sum of the loss and loss adjustment expense ratio, the expense ratio and the policyholder dividend ratio. This ratio is a relative measurement that describes the related cost of losses and expenses for every $100 of earned premiums. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting losses.
Core Earnings- The Hartford uses the non-GAAP measure core earnings as an important measure of the Company’s operating performance. The Hartford believes that core earnings provides investors with a valuable measure of the performance of the Company’s ongoing businesses because it reveals trends in our insurance and financial services businesses that may be obscured by including the net effect of certain items. Therefore, the following items are excluded from core earnings:
Certain realized capital gains and losses - 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 highly variable from period to period based on capital market conditions. The Hartford 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.
Integration and transaction costs in connection with an acquired business - As transaction costs are incurred upon acquisition of a business and integration costs are completed

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within a short period after an acquisition, they do not represent ongoing costs of the business.
Loss on extinguishment of debt - Largely consisting of make-whole payments or tender premiums upon paying debt off before maturity, these losses are not a recurring operating expense of the business.
Gains and losses on reinsurance transactions - Gains or losses on reinsurance, such as those entered into upon sale of a business or to reinsure loss reserves, are not a recurring operating expense of the business.
Change in loss reserves upon acquisition of a business - These changes in loss reserves are excluded from core earnings because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition.
Change in valuation allowance on deferred taxes related to non-core components of pre-tax income - These changes in valuation allowances are excluded from core earnings because they relate to non-core components of pre-tax income, such as tax attributes like capital loss carryforwards.
Results of discontinued operations - These results are excluded from core earnings for businesses sold or held for sale because such results could obscure the ability to compare period over period results for our ongoing businesses.
 
Deferred gain resulting from retroactive reinsurance and subsequent changes in the deferred gain - Retroactive reinsurance agreements economically transfer risk to the reinsurers and including the full benefit from retroactive reinsurance in core earnings provides greater insight into the economics of the business.
In addition to the above components of net income available to common stockholders that are excluded from core earnings, preferred stock dividends declared, which are excluded from net income available to common stockholders, are included in the determination of core earnings. Preferred stock dividends are a cost of financing more akin to interest expense on debt and are expected to be a recurring expense as long as the preferred stock is outstanding.
Net income (loss) and net income (loss) available to common stockholders are the most directly comparable U.S. GAAP measures to core earnings. Core earnings should not be considered as a substitute for net income (loss) or net income (loss) available to common stockholders and does not reflect the overall profitability of the Company’s business. Therefore, The Hartford believes that it is useful for investors to evaluate net income (loss), net income (loss) available to common stockholders, and core earnings when reviewing the Company’s performance.
Reconciliation of Net Income to Core Earnings

 Three Months Ended June 30, Six Months Ended June 30,
 20202019 20202019
Net income$468
$372
 $741
$1,002
Preferred stock dividends5

 10
5
Net income available to common stockholders463
372
 731
997
Adjustments to reconcile net income available to common stockholders to core earnings:



 



Net realized capital losses (gains) excluded from core earnings, before tax(107)(79) 125
(239)
Loss on reinsurance transaction, before tax
91
 
91
Integration and transaction costs associated with acquired business, before tax13
31
 26
41
Change in loss reserves upon acquisition of a business, before tax
97
 
97
Change in deferred gain on retroactive reinsurance, before tax54

 83

Income tax expense (benefit)15
(27) (42)5
Core earnings$438
$485
 $923
$992
Core Earnings Margin- The Hartford uses the non-GAAP measure core earnings margin to evaluate, and believes it is an important measure of, the Group Benefits segment's operating performance. Core earnings margin is calculated by dividing core earnings by revenues, excluding buyouts and realized gains (losses). Net income margin, calculated by dividing net income by revenues, is the most directly comparable U.S. GAAP measure. The Company believes that core earnings margin provides investors with a valuable measure of the performance of Group Benefits because it reveals trends in the business that may be obscured by the effect of buyouts and realized gains (losses) as well as other items excluded in the calculation of core earnings.
 
Core earnings margin should not be considered as a substitute for net income margin and does not reflect the overall profitability of Group Benefits. Therefore, the Company believes it is important for investors to evaluate both core earnings margin and net income margin when reviewing performance. A reconciliation of net income margin to core earnings margin is set forth in the Results of Operations section within MD&A - Group Benefits.
Current Accident Year Catastrophe Ratio- A component of the loss and loss adjustment expense ratio, represents the ratio of catastrophe losses incurred in the current accident year (net of reinsurance) to earned premiums. For U.S. events, a catastrophe is an event that causes $25 or more in

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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, excluding those related to buyout premiums, to premiums and other considerations, excluding buyout premiums. Since Group Benefits occasionally buys a block of claims for a stated premium amount, the Company excludes this buyout from the loss ratio used for evaluating the profitability of the business as buyouts may distort the loss ratio. Buyout premiums represent takeover of open claim liabilities and other non-recurring premium amounts.
Mutual 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 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.
Premium Retention- Represents renewal premium written in the current period divided by total premium written in the prior period.
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

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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- The Company uses this non-GAAP financial measure to evaluate, and
 
believes is an important measure of, the Hartford Funds segment’s operating performance. ROA, core earnings is calculated by dividing annualized core earnings by a daily average AUM. ROA is the most directly comparable U.S. GAAP measure. The Company believes that ROA, core earnings, provides investors with a valuable measure of the performance of the Hartford Funds segment because it reveals trends in our business that may be obscured by the effect of items excluded in the calculation of core earnings. ROA, core earnings, should not be considered as a substitute for ROA and does not reflect the overall profitability of our Hartford Funds business. Therefore, the Company believes it is important for investors to evaluate both ROA, and ROA, core earnings when reviewing the Hartford Funds segment performance. A reconciliation of ROA to ROA, core earnings is set forth in the Results of Operations section within MD&A - Hartford Funds.
Underlying Combined Ratio- This non-GAAP financial measure of underwriting results represents the combined ratio before catastrophes, prior accident year development and current accident year change in loss reserves upon acquisition of a business. Combined ratio is the most directly comparable GAAP measure. The underlying combined ratio represents the combined ratio for the current accident year, excluding the impact of current accident year catastrophes and current accident year change in loss reserves upon acquisition of a business. The Company believes this ratio is an important measure of the trend in profitability since it removes the impact of volatile and unpredictable catastrophe losses and prior accident year loss and loss adjustment expense reserve development. The changes to loss reserves upon acquisition of a business are excluded from underlying combined ratio because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition as such trends are valuable to our investors' ability to assess the Company's financial performance. A reconciliation of combined ratio to underlying combined ratio is set forth in the Results of Operations section within MD&A - Commercial Lines and Personal Lines.
Underwriting Gain (Loss)- The Hartford's management evaluates profitability of the Commercial and Personal Lines segments primarily on the basis of underwriting gain or loss. Underwriting gain (loss) is a before tax non-GAAP measure that represents earned premiums less incurred losses, loss adjustment expenses and underwriting expenses. Net income (loss) is the most directly comparable GAAP measure. Underwriting gain (loss) is influenced significantly by earned premium growth and the adequacy of The Hartford's pricing. Underwriting profitability over time is also greatly influenced by The Hartford's underwriting discipline, as management strives to manage exposure to loss through favorable risk selection and diversification, effective management of claims, use of reinsurance and its ability to manage its expenses. The Hartford believes that the measure underwriting gain (loss) provides investors with a valuable measure of profitability, before tax, derived from underwriting activities, which are managed separately from the Company's investing activities.

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




Reconciliation of Net Income to Underwriting Gain (Loss)
 Three Months Ended June 30, Six Months Ended June 30,
 20202019 20202019
Commercial Lines
Net income (loss)$(66)$191
 $55
$554
Adjustments to reconcile net income to underwriting gain (loss):     
Net servicing income
(2) (1)(1)
Net investment income(204)(281) (481)(540)
Net realized capital losses (gains)(64)(54) 79
(169)
Other expense11
6
 17
7
Loss on reinsurance transaction
91
 
91
Income tax expense (benefit)(9)44
 19
123
Underwriting gain (loss)$(332)$(5) $(312)$65
Personal Lines
Net income$371
$62
 $469
$158
Adjustments to reconcile net income to underwriting gain (loss):     
Net servicing income(3)(4) (5)(7)
Net investment income(28)(46) (69)(88)
Net realized capital losses (gains)(8)(8) 15
(27)
Other expense (income)(1)2
 (1)1
Income tax expense97
14
 122
37
Underwriting gain$428
$20
 $531
$74
P&C Other Ops
Net income$5
$11
 $10
$34
Adjustments to reconcile net income to underwriting gain (loss):     
Net investment income(10)(21) (26)(43)
Net realized capital losses (gains)(2)(4) 5
(13)
Income tax expense
2
 1
7
Underwriting loss$(7)$(12) $(10)$(15)
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
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 reserves for run-off structured settlement and terminal funding agreement liabilities, capital raising activities (including equity financing, debt financing and related interest expense), transaction expenses incurred in connection with an acquisition, purchase accounting adjustments related to goodwill, other expenses not allocated to the reporting segments and the results of Y-Risk, a business of the Company that provides insurance for businesses in the sharing and on-demand economy. 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 holding company of the life and annuity business that was sold in May 2018. In addition, Corporate includes a 9.7%

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




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. Most of Personal Lines written premium is associated with our exclusive licensing agreement with AARP.  This agreement provides an important competitive advantage given the size of the 50 plus population and the strength of the AARP brand.  During the second quarter of this year, the Company extended this agreement through December 31, 2032.
Similar to property and casualty, profitability of the group benefits business depends, in large part, on the ability to evaluate and price risks appropriately and make reliable estimates of mortality, morbidity, disability and longevity. To manage the pricing risk, Group Benefits generally offers term insurance policies, allowing for the adjustment of rates or policy terms in order to minimize the adverse effect of market trends, loss costs, declining interest rates and other factors. However, as policies are typically sold with rate guarantees of up to three years, pricing for the Company’s products could prove to be inadequate if loss and expense trends emerge adversely during the rate guarantee period or if investment returns are lower than expected at the time the products were sold. For some of its products, the Company is required to obtain approval for its premium rates from state insurance departments. New and renewal business for group benefits business, particularly for long-term disability, 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 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 the two main factors of net flows and the market return of the funds, which are heavily influenced by the return realized in the equity and bond markets. Net flows are comprised of new sales less redemptions by mutual fund and 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.
Impact of COVID-19 on our financial condition, results of operations and liquidity
Impact to revenues
Earned premiums
The COVID-19 pandemic has caused significant disruption to the economy of the U.S. and other countries in which we operate. Due to government restrictions that have prevented some businesses from offering goods and services to their customers and due to shelter-in-place guidelines that have reduced business activity, many of our customers, especially small businesses, have had to curtail their operations or have found they are unable to meet cash flow needs due to declining business volume, causing some to lay off workers. As one of the largest providers of small business insurance in the U.S., we experienced a 9% year over year decline in our small commercial written premium in second quarter 2020. In addition to the expected decline in small commercial written and earned premium, other business lines in Commercial Lines have also been negatively affected due to

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government-mandated restrictions and stay-at-home guidelines reducing business activity and due to consumers having less disposable income or less willingness to spend on the products and services that our commercial lines policyholders sell. Excluding the effect of the Navigators acquisition, Commercial Lines written premium declined $207, or 11% year over year in second quarter 2020 and we expect written premium declines to continue for the remainder of 2020, driven by lower new business, and an expected increase in small commercial policy cancellations in third quarter 2020 as well as audits, endorsements or changes to in-force policies that decrease premiums to reflect reduced exposures.
Within Commercial Lines, workers’ compensation written premium declined in the second quarter of 2020 and is expected to continue to decline over the remainder of 2020, partly due to declining payrolls as a result of the economic effects of COVID-19. While the impact of the COVID-19 pandemic on Personal Lines written premium has been less than the effect in Commercial Lines, we expect written premium declines to continue for the remainder of 2020 due to expected higher policy cancellations in the third quarter, in part due to increased shopping behaviors, and lower new business levels arising out of the competitive marketplace. In addition, The Hartford provided a 15 percent refund on policyholders’ April, May and June personal automobile insurance premiums which reduced Personal Lines written and earned premiums by $81 in the second quarter of 2020. In Group Benefits, fully insured ongoing premium for 2020 may decline modestly year over year due to the economic downturn causing lower sales of new policies, declining payrolls reducing premiums on existing accounts and the potential that some employers may cancel coverage. Because of the economic stress caused by COVID-19, we also expect a higher amount of uncollectible premiums receivable. As a result, to reflect our higher expectation of credit losses, The Hartford increased its allowance for credit losses ("ACL") on premiums receivable by $20 in the first quarter and $44 in the second quarter of 2020.
Fee revenues
Our Hartford Funds segment revenues are based on average daily assets under management and due to the significant decline in equity markets during the first quarter of 2020, our average daily assets under management have declined since the fourth quarter of 2019. While Hartford Funds net income for the six months ended June 30, 2020 was up $7 largely due to a $9 after-tax reduction in contingent consideration payable, if daily average assets under management decline further, we could experience 2020 full year net income from our Hartford Funds segment that is below 2019 net income.
Net investment income and realized capital gains (losses)
We expect lower net investment income in 2020 than in 2019. In an effort to stimulate the economy, central banks have reduced benchmark interest rates to near zero, impacting our yields on floating rate securities and reinvestment rates. From late March to mid-May, 2020, the Company temporarily reinvested receipts of interest and proceeds from maturing fixed maturity investments in liquid, short-term investments. While the Company resumed investing in fixed maturities in May, 2020, lower interest rates since the pandemic began have generally resulted in lower investment yields on newly invested funds.
 
Income or losses on investments in limited partnerships and other alternative investments are recognized on a lag as results from private equity investments and other funds are generally reported on a three-month delay. Accordingly, we recognized losses of $71 before tax on our limited partnership and other alternative investments in second quarter 2020 due to lower valuations. We could recognize additional losses on our limited partnership and other alternative investments over the remainder of 2020 if valuations continue to decline. A prolonged period of lower interest rates could depress the Company's net investment income such that to earn the same level of return on equity we may have to charge higher premiums for the insurance products we sell unless loss costs similarly lessen. Increasing premiums may be challenging during an economic downturn particularly as the insurance industry competes to retain a smaller industry premium base.
Net realized capital gains (losses) for the three and six month periods included a total $75 and ($311) respectively, of before tax unrealized mark-to-market gains (losses) on equity securities held and net realized gains (losses) on equity securities sold, net of realized gains on equity derivative hedges. While equity markets in the second quarter of 2020 recovered much of the value they lost during the first quarter, economic conditions remain uncertain and if equity markets decline again, we would incur more net realized capital losses in future periods, though the Company reduced its investments in public equity securities during March and April of 2020, with the fair value of equity securities declining from $1.7 billion as of December 31, 2019 to $756 as of June 30, 2020.
Net realized capital losses for the three and six month periods also included $42 and $56, respectively, of increases in the allowance for credit losses, partially offset by reversals of the allowance due to improvements in market value or sales, and $0 and $5, respectively, of intent-to-sell impairments. The increase in the allowance for credit losses in the three and six month periods included increases of $20 and $32, respectively, on available for sale fixed maturities and $22 and $24, respectively, on commercial mortgage loans. If it takes a prolonged period for the economy to recover or if the impacts of the economic downturn are deeper than anticipated, we could experience further credit losses and intent-to-sell impairments, particularly with highly leveraged companies and issuers in the energy, commercial real estate, and travel and leisure sectors, resulting in further net realized capital losses.
Impact to direct benefits, losses and loss adjustment expenses from COVID-19 claims
In the second quarter of 2020, we recorded direct COVID-19 incurred losses of $251, including $213 in P&C and $38 in Group Benefits, reflecting management’s best estimate of the ultimate cost of settling COVID-19 claims incurred in the second quarter. Second quarter COVID-19 incurred losses and loss adjustment expenses of $213 in P&C primarily included $141 for property claims, $35 for workers’ compensation, net of favorable frequency on other workers' compensation claims, and $37 of incurred losses largely concentrated in financial lines such as D&O and E&O. Nearly all of our property insurance policies require direct physical loss or damage to property and contain standard exclusions that we believe preclude coverage for COVID-19 related claims, and the vast majority of such policies

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contain exclusions for virus-related losses. Included in the $141 of COVID-19 property incurred losses and loss adjustment expenses in the second quarter were $101 of losses arising from a small number of property policies that do not require direct physical loss or damage and from policies intended to cover specific business needs, including crisis management and performance disruption. In addition, we recorded a reserve of $40 for legal defense costs. Given the significant business disruptions that have occurred due to the COVID-19 pandemic, the Company has experienced increased property claims, resulting in increased litigation activity and legal expenses. Within Property & Casualty, we incur COVID-19 workers’ compensation losses when it is determined that workers were exposed to COVID-19 out of and in the course of their employment and in other cases where states have passed laws providing for the presumption of coverage for certain industry classes, including health care and other essential workers. While current accident year losses for workers’ compensation have increased $75 in second quarter 2020 due to COVID-19 claims, this has been partially offset by lower claim frequency of non-COVID-19 related workers’ compensation claims due to reduced business activity, resulting in a net increase in incurred losses of $35 in second quarter 2020. Favorable non-COVID-19 workers’ compensation claim frequency could continue over the remainder of 2020 though likely to a lesser extent as more business activity resumes. Second quarter 2020 COVID-19 incurred losses of $38 in Group Benefits consisted of $43 in losses on group life claims, partially offset by a reduction in reserves for first quarter 2020 short-term disability and paid family leave claims. The Company could incur additional COVID-19 direct incurred losses over the remainder of 2020, particularly for workers’ compensation and financial lines within P&C and in group life.
Other impacts from COVID-19 and resulting economic downturn
Apart from impacts on the investment portfolio, net investment income and net realized capital gains (losses), in second quarter 2020, the Company incurred a number of other insurance business impacts from the COVID-19 pandemic and the resulting economic downturn as follows:
As noted above, Personal Lines written and earned premiums were reduced by $81 in second quarter 2020 due to providing automobile policyholders with premium refunds or credits in recognition of the decrease in miles driven. In the second quarter, we recognized an estimated $111 decrease in current accident incurred losses in Personal Lines automobile due to a significant reduction in miles driven since the pandemic began though miles driven has begun to increase again as some states have eased restrictions.
The Company reduced audit premiums receivable by $100 in second quarter 2020 driven by the economic effects of COVID-19 reducing our insured exposures, principally in workers’ compensation. Net of a related reduction in estimated incurred losses and commissions attributable to the reduction in exposure, the net effect in second quarter was a $34 reduction in income before tax. Estimated audit premiums receivable could decrease over the remainder of 2020 though likely to a lesser extent with the magnitude of the impact depending on the scale and timing of an economic recovery in the U.S..
 
The Company has also waived late payment fees for a period of time for business and personal insurance customers and temporarily suspended the policy cancellation process for policyholders of our Commercial Lines, Personal Lines and Group Benefits segments with the period of policy cancellations for non-payment varying by state.
Because of the economic stress caused by COVID-19 and partly due to the extension of billing terms, we also expect a higher amount of uncollectible premiums receivable. As a result, to reflect our higher expectation of credit losses, The Hartford increased its allowance for credit losses ("ACL") on premiums receivable by $20 in the first quarter and $44 in the second quarter of 2020.
Apart from the increase in this allowance, we have experienced a decline in insurance operating costs and other expenses due to lower acquisition-related and other operating costs associated with lower earned premium volumes and expect that trend to continue for the remainder of 2020.
As a result of the effects of COVID-19 on our economy, we evaluated our goodwill and other intangible assets for impairment as of June 30, 2020 and determined that no impairments are necessary. The estimated fair values of reporting units with goodwill and of certain intangible assets are sensitive to changes in discount rates and are based on expected cash flows assuming the economy does not begin to revive until the latter half of 2020 with continued gradual improvement in 2021.
For information about additional resources the Company has to manage capital and liquidity during the COVID-19 pandemic and financial crisis, refer to the Capital Resources & Liquidity section of MD&A.
For additional information about the potential impacts of the COVID-19 pandemic and resulting economic crisis, see the risk factor "The pandemic caused by the spread of COVID-19 has disrupted our operations and may have a material adverse impact on our business results, financial condition, results of operations and/or liquidity" in Item 1A of Part II.
P&C combined ratios and Group Benefits margin
In 2020, we expect our combined ratio for Commercial Lines to be higher than the outlook range we provided in our 2019 Form 10-K, primarily due to COVID-19 incurred losses, higher than budgeted current accident year catastrophe losses and an increase in reserves for sexual molestation and abuse claims in second quarter 2020. We expect the underlying combined ratio for Commercial Lines in 2020 to be higher due to COVID-19 incurred losses. In 2020, we expect our combined ratio for Personal Lines to be lower than the outlook range we provided in our 2019 Form 10-K, primarily due to favorable prior accident year catastrophe reserve development year-to-date, including a $260 subrogation recoverable from PG&E recorded in the second quarter, and expect the underlying combined ratio for Personal lines to be lower primarily due to favorable automobile claim frequency and lower non-catastrophe homeowners’ claims, partially offset by $81 before tax of premium credits issued to policyholders in the second quarter.

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




Our net income margin and core earnings margin for Group Benefits may be higher or lower than the outlook ranges we provided in our 2019 Form 10-K depending on the net effect of COVID-19 group life claims and continued favorable emergence of claim incidence on group disability.
Common stockholders’ equity
Apart from the direct loss and premium impacts of COVID-19 on net income, we could also experience a reduction in AOCI within common stockholders’ equity. The net unrealized gain position on our portfolio of fixed maturities, AFS increased by $522 from December 31, 2019 to June 30, 2020, due to an increase in valuations resulting from a decline in interest rates, partially offset by wider credit spreads. If credit spreads widen going forward or if interest rates increase from the level they were at as of June 30, 2020, we would recognize a decline in the fair value of fixed maturities, AFS in future periods through a reduction of AOCI within common stockholders’ equity.
During the six months ended June 30, 2020, the Company repurchased 2.7 million common shares for $150 under a $1.0 billion share repurchase authorization by the Board of Directors approved in February, 2019. Any repurchase of shares under the remaining equity repurchase authorization of $650 is dependent on market conditions and other factors including the extent to which COVID-19 impacts our business, results of operations, financial condition and liquidity.
For further information on the Company's reporting segments refer to Part I, Item 1, Business - Reporting Segments in The Hartford’s 2019 Form 10-K Annual Report.
Operational Transformation and Cost Reduction Plan
In recognition of the need to become more cost efficient and competitive along with enhancing the experience we provide to agents and customers, on July 30, 2020, the Company announced an operational transformation and cost reduction plan it refers to as Hartford Next. Through reduction of its headcount, IT investments to further enhance our capabilities, and other activities, relative to 2019, the Company expects to achieve a reduction in annual insurance operating costs and other expenses of approximately $500 by 2022. The Hartford Next program will contribute to our goal of reducing the 2022 P&C expense ratio by about 2.0 to 2.5 points and reducing the 2022 GB expense ratio by about 1.5 to 2.0 points.
To achieve those expected savings, we expect to spend approximately $360, with those costs expected to be approximately $120 over the balance of 2020, $110 in 2021, $90 in 2022 and $40 after 2022. The estimated costs of approximately $360 includes an expected $50 in capitalized development costs for internal use software to be amortized over the useful life of the software, typically 3 years. Of the estimated costs of $360, approximately $320 would be recognized as an expense through the end of 2022, with $30 of IT asset amortization and $10 of other expenses after 2022. Included in the estimated costs of $360, we expect to incur restructuring costs of approximately $130, including approximately $70 of
 
employee severance, and approximately $60 of other costs, including consulting expenses and the cost to retire certain IT applications.
These estimated restructuring and other costs do not include costs associated with a real estate consolidation plan as those plans are not yet sufficiently developed to provide an estimate of those costs and related savings.
All of the costs of the Hartford Next program will be included in insurance operating costs and other expenses in the Consolidated Statement of Operations though restructuring costs will be reported as a charge to net income but not in core earnings. Relative to 2019 full year actual expenses, the Company estimates a reduction in insurance operating costs and other expenses of approximately $40 over the last six months of 2020, approximately $300 in 2021 and approximately $500 in 2022.
The following table shows the expected costs of the Hartford Next program, including restructuring costs, and expected expense savings through 2022:
Hartford Next Expected Costs and Expense Savings
 July 1 to Dec. 31, 202020212022
Employee severance$70
$
$
Retirement of IT applications and other20
30
10
Estimated restructuring costs to be expensed and paid90
30
10
Non-capitalized IT costs to be paid [1]20
50
50
Other costs to be paid10
20
20
Amortization of capitalized IT development costs [2]
10
10
Estimated costs to be expensed included in core earnings30
80
80
Total estimated Hartford Next program costs to be expensed120
110
90
Expense savings relative to 2019 beginning July 1, 2020(40)(300)(500)
Net expense (savings) before-tax$80
$(190)$(410)
    
Net expense (savings) before-tax:   
To be accounted for within core earnings$(10)$(220)$(420)
Restructuring costs excluded from core earnings90
30
10
Net expense (savings) before tax$80
$(190)$(410)
[1]Does not include approximately $10 of non-capitalized IT costs to be incurred after 2022.
[2]Does not include approximately $30 of IT asset amortization after 2022.

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




Financial Highlights
Net Income Available to Common Stockholders Net Income Available to Common Stockholders per Diluted Share Book Value per Diluted Share
chart-fa98470369f7569c873.jpgchart-e8e16e7f613f51a0a94.jpgchart-c3f5c8873a6854e7b79.jpg
ÝIncreased $91 or 24% ÝIncreased $0.27 or 26% ÝIncreased $2.74 or 6%
+
Net favorable prior accident year development in P&C in 2020, due primarily to a reduction in catastrophe reserves, including a $289 before tax subrogation recovery from PG&E


 +Increase in net income +
Increase in common stockholders' equity largely due to an increase in AOCI, primarily driven by unrealized capital gains on available for sale securities

 +
Decrease in dilutive shares, principally from share repurchases up through March 2020


 
  
+
Lower non-COVID-19 current accident year non-catastrophe losses in homeowners and marine and lower personal automobile claim frequency, partially offset by premium credits to policyholders of $81 before tax and higher non-COVID-19 incurred property claims in small commercial



    +Net income in excess of stockholder dividends
    +Decrease in dilutive shares
+A lower Group Benefits disability loss ratio      
+The Navigators ADC premium of $91 before tax paid in the 2019 period      
+Higher income from the retained interest in Talcott and higher net realized capital gains      
-
COVID-19 incurred losses and benefits of $251 before tax

      
-Lower net investment income      
-
Higher current accident year catastrophes largely due to losses from the civil unrest

      
Investment Yield, After Tax Property & Casualty Combined Ratio Group Benefits Net Income Margin
chart-b9400855a30c53c1a78.jpgchart-c00237bf6d935db8853.jpgchart-9b1a8d1d06ea5dbf876.jpg
ÞDecreased 120 bps ÞImproved 3.0 points ÞDecreased 0.6 points
-Losses on limited partnerships and other alternative investments in 2020 due to valuation declines within the underlying fund investments +Favorable net prior accident year development in Personal Lines in 2020, resulting primarily from a reduction in catastrophe reserves, including a subrogation recovery from PG&E -COVID-19 incurred benefits and losses of $38 before tax
  -Lower net investment income
-
Lower reinvestment rates and lower yield on variable rate securities due to the decline in interest rates

 +Lower current accident year loss ratio in Personal Lines, due to lower claim frequency -A decrease in net realized capital gains
-Higher liquidity levels resulting in a larger share of the portfolio invested at short-term rates -Higher current accident year catastrophes, largely due to losses from the civil unrest -Higher insurance operating costs and other expenses
   -Higher current accident year loss ratio in Commercial Lines driven by COVID-19 losses and credit losses on premiums receivable, partially offset by lower other underwriting expenses +A lower group disability loss ratio, driven by lower claim incidence and higher recoveries, including favorable prior incurral year development

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




CONSOLIDATED RESULTS OF OPERATIONS
 
The Consolidated Results of Operations should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the related Notes beginning on page 7 as well as with the segment operating results sections of MD&A.
Consolidated Results of Operations
 Three Months Ended June 30, Six Months Ended June 30,
 20202019Change 20202019Change
Earned premiums$4,234
$4,166
2% $8,625
$8,106
6%
Fee income298
326
(9%) 618
640
(3%)
Net investment income339
488
(31%) 798
958
(17%)
Net realized capital gains (losses)109
80
36% (122)243
(150%)
Other revenues88
32
175% 105
85
24%
Total revenues5,068
5,092
% 10,024
10,032
%
Benefits, losses and loss adjustment expenses2,847
2,934
(3%) 5,763
5,619
3%
Amortization of deferred policy acquisition costs429
392
9% 866
747
16%
Insurance operating costs and other expenses1,125
1,141
(1%) 2,301
2,189
5%
Loss on reinsurance transaction
91
(100%) 
91
(100%)
Interest expense57
63
(10%) 121
127
(5%)
Amortization of other intangible assets18
15
20% 37
28
32%
Total benefits, losses and expenses4,476
4,636
(3%) 9,088
8,801
3%
Income, before tax592
456
30% 936
1,231
(24%)
Income tax expense124
84
48% 195
229
(15%)
Net income468
372
26% 741
1,002
(26%)
Preferred stock dividends5

NM
 10
5
100%
Net income available to common stockholders$463
$372
24% $731
$997
(27%)
Three months ended June 30, 2020 compared to the three months ended June 30, 2019
Net income available to common stockholders increased by $91 in the three month period, primarily due to an increase in net favorable P&C prior accident year reserve development of $239 after-tax, the effect of lower claim incidence and higher recoveries on non-COVID-19 group disability claims, higher marine current accident year loss costs in second quarter 2019, an increase of $51, after tax, in income from the Company's retained equity interest in the former life and annuity operations, Navigators ADC premium paid of $72 after-tax in the second quarter of 2019 and an increase in net realized capital gains, partially offset by COVID-19 incurred benefits and losses of $198 after tax in second quarter 2020, an increase in current accident year catastrophes of $87 after tax driven by losses from the civil unrest in late May and June of
 
2020, lower net investment income and higher non-COVID-19 non-catastrophe property loss costs in small commercial.
Also contributing to the change in net income for the three month period was the effect of lower claim frequency in Personal Lines automobile due to shelter-in-place guidelines of $88 after-tax and lower weather-related non-catastrophe homeowners’ claims, partially offset by Personal Lines automobile premium credits to policyholder of $64 after-tax and an increase in the credit allowance on premiums receivable of $35 after-tax. For a discussion of the Company's operating results by segment, see MD&A - Segment Operating Summaries. For further discussion of impacts resulting from the COVID-19 pandemic, refer to the Impact of COVID-19 on our financial condition, results of operations and liquidity section of this MD&A.

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




Revenue
Earned Premiums
chart-8103b29c7f3c5a5a840.jpg
[1] For the three months ended June 30, 2020, the total includes $5 in Corporate. For the three months ended June 30, 2019, there was $1 in earned premiums recorded Corporate other revenue.
Earned premiums increased primarily due to:
An increase in Property and Casualty reflecting a 9% increase in Commercial Lines, including the effect of the Navigators Group acquisition, partially offset by the impact of the COVID-19 pandemic, including declines in new business, lower estimated audit premiums on workers’ compensation and general liability policies and, in middle market, a decline in premium retention.
A decline of 13% in Personal Lines, largely reflecting the impact of the COVID-19 pandemic, including the impact of the Company offering a 15 percent premium credit on policyholders’ April, May and June personal automobile insurance premiums totaling $81 for the second quarter of 2020.
Earned premiums in Group Benefits were relatively flat compared to the prior year period as premium received from the takeover of open claim liabilities and higher voluntary product premiums offset modest declines in group disability and group life.
Fee income decreased primarily due to lower fee income in Hartford Funds as a result of lower average daily assets under management.
Other revenues increased primarily due to higher income earned from the retained interest in the legal entity that acquired the life and annuity business sold in 2018.
 

Net Investment Income
chart-99f29afb7e7a5f1eb4a.jpg
Net investment income decreased primarily due to:
Losses on limited partnerships and other alternative investments in second quarter 2020 due to lower valuations of the underlying fund investments. Income (loss) from limited partnerships is generally reported on a three-month delay.
A lower yield on fixed maturity investments resulting from reinvesting at lower rates and a lower yield on floating rate investments.
The impact of holding a higher level of liquidity.
Partially offset by a higher level of invested assets, primarily due to the acquisition of Navigators Group.
Net realized capital gains increased primarily driven by:
Appreciation in the value of equity securities due to the increase in equity market levels in the second quarter 2020.
An increase in net gains on sales of fixed maturity securities.
Partially offset by increases in credit losses on fixed maturities, AFS and mortgage loans.
For further discussion of investment results, see MD&A - Investment Results, Net Realized Capital Gains and MD&A - Investment Results, Net Investment Income.

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




Benefits, losses and expenses
Losses and LAE Incurred for P&C
chart-acdc302635d4fc3ad0c.jpg
Benefits, losses and loss adjustment expenses decreased due to:
A decrease in incurred losses for Property & Casualty, driven by:
A favorable change in Property & Casualty net prior accident year reserve development of $303, before tax. Prior accident year reserve development in 2020 was a net favorable $268 before tax driven by $400 of reserve reductions related to catastrophes, including decreases in estimated losses arising from wind and hail events in 2018 and 2019 and from the 2017 and 2018 California wildfires, including a $289 before tax subrogation benefit from PG&E. Apart from catastrophes, second quarter 2020 reserve development primarily included a $102 before tax increase in reserves related to sexual molestation and abuse claims. Due to recognizing a deferred gain on retroactive reinsurance, the $268 of net favorable reserve development in second quarter 2020 included $54 before tax of adverse development for Navigators related to 2018 and prior accident years even though that development has been economically ceded to NICO. Prior accident year development in the 2019 period primarily included an increase in Navigators Group's prior accident year reserves, partially offset by a release of reserves for workers' compensation and 2017 catastrophes. For further discussion, see Note 10 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
 

Losses and LAE Incurred for Group Benefits
chart-acbed8307ef61f0496a.jpg
An increase in Property & Casualty current accident year ("CAY") loss and loss adjustment expenses before catastrophes primarily due to COVID-19 incurred losses of $213, the effect on incurred losses of earned premium from the Navigators Group acquisition, partially offset by lower weather-related non-catastrophe homeowners claims and lower claim frequency in personal automobile due to shelter-in-place guidelines reducing miles driven. COVID-19 incurred losses are net of favorable frequency of workers' compensation claims due to reduced business activity and lower payrolls.
An increase in current accident year catastrophe losses of $110, before tax. Catastrophe losses in the second quarter of 2020 were primarily from the civil unrest that took place in late May and June as well as from wind and hail events principally in the South, Midwest and Great Plains. Catastrophe losses in 2019 were primarily from tornado, wind and hail events in various areas of the Midwest and South. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
A decrease in Group Benefits driven by a lower claim incidence and higher recoveries on group disability claims, partially offset by $38 of COVID-19 incurred benefits and losses, driven by group life.
For further discussion of impacts resulting from the COVID-19 pandemic, refer to the Impact of COVID-19 on our financial condition, results of operations and liquidity section of this MD&A.

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




Amortization of deferred policy acquisition costs increased from the prior year period primarily due to the acquisition of Navigators Group in May of 2019.
Insurance operating costs and other expenses decreased modestly due to lower incentive compensation, lower employee travel expenses, and a decrease in Hartford Funds due to lower variable costs, partially offset by:
A $44 before tax increase in the ACL on uncollectible premiums receivable in second quarter 2020 due to the economic impacts of COVID-19.
 
A full quarter of operating costs incurred in the 2020 period related to the Navigators Group acquisition in May of 2019.
Income tax expense increased primarily due to a increase in income before tax. For further discussion of income taxes, see Note 13 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
Six months ended June 30, 2020 compared to the six months ended June 30, 2019
Net income available to common stockholders decreased by $266 in the six month period, primarily due to a change from net realized capital gains to net realized capital losses of $288 after-tax, COVID-19 incurred benefits and losses of $211 after tax for the six month period in 2020, an increase in current accident year catastrophes of $63 after tax driven by losses from the civil unrest in late May and June of 2020 and lower net investment income, partially offset by an increase in net favorable P&C prior accident year reserve development of $213 after-tax, the effect of lower claim incidence and higher recoveries on non-COVID-19 group disability claims, lower Commercial Lines non-COVID-19 current accident year non-catastrophe loss costs and Navigators ADC premium paid of $72 after-tax in the second quarter of 2019.
Also contributing to the change in net income for the three month period was the effect of lower claim frequency in Personal Lines automobile due to shelter-in-place guidelines of $88 after-tax and higher income from the Company’s retained equity interest in the former life and annuity operations, partially offset by Personal Lines automobile premium credits to policyholder of $64 after-tax, higher operating costs and other expenses in Group Benefits and an increase in the credit allowance on premiums receivable related to COVID of $51 after-tax. For further discussion of impacts resulting from the COVID-19 pandemic, refer to the Impact of COVID-19 on our financial condition, results of operations and liquidity section of this MD&A.
For a discussion of the Company's operating results by segment, see MD&A - Segment Operating Summaries. In addition, for further discussion of impacts resulting from the COVID-19 pandemic, refer to the Impact of COVID-19 on our financial condition, results of operations and liquidity section of this MD&A.
 
Revenue
Earned Premiums
chart-2b0e591a2a335ab1ac1.jpg
[1] For the six months ended June 30, 2020, the total includes $9 in Corporate. For the six months ended June 30,2019, there was $1 of earned premiums recorded in Corporate other revenue.
Earned premiums increased primarily due to:
An increase in Property and Casualty reflecting a 17% increase in Commercial Lines driven by the Navigators Group acquisition, partially offset by an 8% decline in Personal Lines. Driving part of the decrease in Personal Lines earned premiums for the six month period was the impact of the Company offering a 15 percent credit on policyholders’ April, May and June personal automobile insurance premiums totaling $81 in premium credits.
A decrease in Group Benefits as a decline in group life was partially offset by premium received from the takeover of open claim liabilities.
Fee income decreased due to:

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




Lower fee income in Hartford Funds largely due to a shift in mix of assets to lower fee funds and, to a lesser extent, lower installment fee income in P&C.
Other revenues increased primarily due to higher income earned from the retained interest in the legal entity that acquired the life and annuity business sold in 2018.
Net Investment Income
chart-b4732ff2560852e89a0.jpg







 
Net investment income decreased primarily due to:
Losses from limited partnership and other alternative investments in second quarter 2020 due to lower valuations of the underlying fund investments. Income (loss) from limited partnerships is generally reported on a three-month delay.
A lower yield on fixed maturity investments resulting from reinvesting at lower rates and a lower yield on floating rate investments.
The impact of holding a higher level of liquidity.
Partially offset by a higher level of invested assets, primarily due to the acquisition of Navigators Group.
Net realized capital gains (losses) decreased primarily driven by:
Depreciation in the value of equity securities due to the significant decline in equity market levels in the first quarter of 2020 as well as realized losses upon sales of equity securities.
Partially offset by gains realized upon termination of derivatives used to hedge against declines in equity market levels and, to a lesser extent, higher net gains on sales of fixed maturity securities in 2020, primarily driven by trades to manage duration and credit.
For further discussion of investment results, see MD&A - Investment Results, Net Realized Capital Gains and MD&A - Investment Results, Net Investment Income.

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




Benefits, losses and expenses
Losses and LAE Incurred for P&C
chart-149c8816c5eb5a61df6.jpg
Benefits, losses and loss adjustment expenses increased due to:
An increase in incurred losses for Property & Casualty which was driven by an increase in Commercial Lines, partially offset by a decrease in Personal Lines, and was attributable to:
An increase in Property & Casualty current accident year ("CAY") loss and loss adjustment expenses before catastrophes due to the effect on incurred losses of earned premium from the Navigators Group acquisition, and COVID-19 incurred losses of $213, partially offset by lower weather-related non-catastrophe property claims, lower marine loss costs and lower claim frequency in personal automobile due to shelter-in-place guidelines reducing miles driven. COVID-19 incurred losses are net of favorable frequency of workers’ compensation claims due to reduced business activity and lower payrolls.
A favorable change in Property & Casualty net prior accident year reserve development of $269, before tax. Prior accident year reserve development in 2020 was a favorable $245 before tax, driven by $413 of reserve reductions related to catastrophes, including decreases in estimated losses arising from wind and hail events in 2018 and 2019 and from the 2017 and 2018 California wildfires, including a $289 before tax subrogation benefit from PG&E. Apart from catastrophes, reserve development in the six months ended June 30, 2020 primarily included a $102 before tax reserve increase for sexual molestation and abuse claims and $83 before tax of adverse development for Navigators related to 2018 and prior accident years. While the Navigators’ reserve development has been economically ceded to NICO, the Company recognized a deferred gain under
 

Losses and LAE Incurred for Group Benefits
chart-065616cf429aeacfbee.jpg
retroactive reinsurance accounting. Prior accident year development in 2019 primarily included increases in Navigators Group reserves upon acquisition of the business, partially offset by reserve decreases for workers’ compensation, catastrophes, and package business. For further discussion, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
An increase in current accident year catastrophe losses of $80, before tax. Catastrophe losses in 2020 were primarily from the civil unrest that began in late May, 2020 and from tornado, wind and hail events in the South, Midwest and Great Plains. Catastrophe losses in 2019 were primarily from tornado, wind and hail events in the South and Midwest and winter storms across the country. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance.
Partially offsetting the increase in Property & Casualty was a decrease in Group Benefits driven by a lower group disability loss ratio including an increase in favorable prior incurral year development, partially offset by $54 before tax of COVID-19 incurred benefits and losses.
For further discussion of impacts resulting from the COVID-19 pandemic, refer to the Impact of COVID-19 on our financial condition, results of operations and liquidity section of this MD&A.
Amortization of deferred policy acquisition costs was up from the prior year period primarily due to:
An increase in Commercial Lines primarily due to the impact of the Navigators Group acquisition, partially offset by a decrease in Personal Lines, with Group Benefits relatively flat to the prior year period.

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




Insurance operating costs and other expenses increased due to:
Higher information technology costs in Group Benefits.
Operating costs incurred in the 2020 period due to the Navigators Group acquisition in May of 2019, partially offset by lower integration and transaction costs in the six months ended June 30, 2020.
A $64 before tax increase in the ACL on uncollectible premiums receivable in 2020 due to the economic impacts of COVID-19.
 
A reduction in Group Benefits’ state taxes and assessments in first quarter 2019.
Partially offsetting the increase in expenses was a decrease in Hartford Funds due to lower variable costs and an overall reduction in employee travel costs.
Income tax expense decreased primarily due to a decrease in income before tax.
For further discussion of income taxes, see Note 13 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
INVESTMENT RESULTS
Composition of Invested Assets
 June 30, 2020 December 31, 2019
 AmountPercent AmountPercent
Fixed maturities, available-for-sale ("AFS"), at fair value$42,200
79.6% $42,148
79.5%
Fixed maturities, at fair value using the fair value option ("FVO")1
% 11
%
Equity securities, at fair value756
1.4% 1,657
3.1%
Mortgage loans (net of ACL of $43 and $0)4,399
8.3% 4,215
8.0%
Limited partnerships and other alternative investments1,826
3.5% 1,758
3.3%
Other investments [1]178
0.3% 320
0.6%
Short-term investments3,668
6.9% 2,921
5.5%
Total investments$53,028
100.0% $53,030
100.0%
[1]Primarily consists of consolidated investment funds and derivative instruments which are carried at fair value.
June 30, 2020 compared to December 31, 2019
Fixed maturities, AFS increased slightly due to an increase in valuations as a result of a decline in interest rates, partially offset by wider credit spreads. The increase was mostly offset by the reinvestment of principal and interest into short-term investments.
Equity Securities, at fair value decreased primarily due to sales of equity securities during March and April.
 
Short-term investments increased due to actions taken to increase liquidity, primarily by reinvesting principal and interest, as well as proceeds from sales, into short-term instruments, partially offset by the March 2020 pay down of $500 of senior notes at maturity and the return of collateral related to a decline in the Company's security lending program.



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




Net Investment Income
 Three Months Ended June 30, Six Months Ended June 30, 2020
 20202019 20202019
(Before tax)AmountYield [1]AmountYield [1] AmountYield [1]AmountYield [1]
Fixed maturities [2]$357
3.4 %$386
3.9% $734
3.5 %$767
3.9%
Equity securities6
3.1 %12
3.4% 18
3.1 %19
2.9%
Mortgage loans42
3.8 %41
4.5% 84
3.9 %81
4.4%
Limited partnerships and other alternative investments(71)(15.3)%60
13.9% (13)(1.5)%116
13.9%
Other [3]21
 7
  9
 16
 
Investment expense(16) (18)  (34) (41) 
Total net investment income$339
2.7 %$488
4.2% $798
3.2 %$958
4.1%
Total net investment income excluding limited partnerships and other alternative investments$410
3.4 %$428
3.8% $811
3.4 %$842
3.8%
[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]Primarily includes income from derivatives that qualify for hedge accounting and hedge fixed maturities.
Three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
Total net investment income decreased in the 2020 period, primarily due to losses on limited partnerships and other alternative investments in second quarter 2020, which are generally reported on a three month delay, due to lower valuations of the underlying fund investments. Also contributing to the decrease was a lower yield on fixed maturity investments resulting from reinvesting at lower rates and a lower yield on floating rate investments, partially offset by a higher level of invested assets, primarily due to the acquisition of Navigators Group.
Annualized net investment income yield, excluding limited partnerships and other alternative investments was down primarily due to lower reinvestment rates and a lower yield on short-term and variable rate securities due to a decline in rates.
 
Average reinvestment rates on fixed maturities and mortgage loans, excluding certain U.S. Treasury securities, for the three and six month periods ended June 30, 2020, were 2.7% and 2.8%, respectively, which were below the average yield of sales and maturities of 3.6% and 3.5%, respectively. Average reinvestment rates for the three and six month periods ended June 30, 2019, were 3.5% and 3.7%, respectively, which were below the average yield of sales and maturities of 4.0%.
We expect the annualized net investment income yield for the year ended December 31, 2020, excluding limited partnerships and other alternative investments, to be lower than the portfolio yield earned for the year ended December 31, 2019, due to a lower yield on short-term investments, lower reinvestment rates, lower prepayment penalties on mortgage loans and make-whole payments on fixed maturities, and a greater percentage of the portfolio invested in short-term investments. 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.


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




Net Realized Capital Gains (Losses)
 Three Months Ended June 30, Six Months Ended June 30, 2020
(Before tax)20202019 20202019
Gross gains on sales$96
$69
 $174
$113
Gross losses on sales(22)(19) (30)(40)
Equity securities [1]75
30
 (311)162
Change in ACL on fixed maturities, AFS [2](20)  (32) 
Change in ACL on mortgage loans [2](22)  (24) 
Intent-to-sell impairments [3]

 (5)
Net other-than-temporary impairment ("OTTI") losses recognized in earnings 
  (2)
Valuation allowances on mortgage loans 1
  1
Other, net [4]2
(1) 106
9
Net realized capital gains (losses)$109
$80
 $(122)$243
[1]
The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of June 30, 2020, were $67 and $(34) for the three and six months ended June 30, 2020, respectively. The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of June 30, 2019, were $29 and $74 for the three and six months ended June 30, 2019, respectively.
[2]Represents the change in ACL recorded during the period following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies. In addition, see ACL on Fixed Maturities, AFS and ACL on Mortgage Loans within the Investment Portfolio Risks and Risk Management section of the MD&A.
[3]See Intent-to-Sell Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
[4]
Includes gains (losses) from transactional foreign currency revaluation of $0 and $10 for the three and six months ended June 30, 2020 , respectively. For the same periods, also includes gains (losses) on non-qualifying derivatives of $7 and $99, respectively. For the three and six months ended June 30, 2019, includes gains (losses) on non-qualifying derivatives of $(7) and $8, respectively.
Three and six months ended June 30, 2020
Gross gains and losses on sales were primarily driven by sales of U.S. treasury securities for duration and/or liquidity management and issuer-specific sales of corporate securities.
Equity securities net gains for the three month period ended June 30, 2020 were primarily driven by mark-to-market gains due to an increase in equity market levels. For the six month period ended June 30, 2020, net losses were driven by mark-to-market losses due to the decline in equity market levels in the first quarter and losses incurred on sales across multiple issuers as the Company reduced its exposure to equity securities.
Other, net gains for the six month period were primarily due to $75 of realized gains on terminated derivatives used to hedge against a decline in equity market levels and $21 of gains on interest rate derivatives due to a decline in interest rates.
Three and six months ended June 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 gains for the six month period were primarily due to gains on credit derivatives of $27 driven by credit spread
 
tightening, partially offset by losses on interest rate derivatives of $15 due to a decline 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;
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

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




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 2019 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 2019 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 June 30, 2020.
Property & Casualty Insurance Product Reserves, Net of Reinsurance
P&C Loss and Loss Adjustment Expense Reserves, Net of Reinsurance, by Segment as of June 30, 2020
chart-5089fe4f13c15df79d1.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 Six Months Ended June 30, 2020

Commercial
Lines
Personal
Lines
Property & Casualty Other OperationsCorporateTotal Property & Casualty and Corporate
Beginning liabilities for unpaid losses and loss adjustment expenses, gross$23,363
$2,201
$2,697
$
$28,261
Reinsurance and other recoverables [1]4,029
68
1,178

5,275
Beginning liabilities for unpaid losses and loss adjustment expenses, net19,334
2,133
1,519

22,986
Transfer of Y-Risk reserves from Commercial Lines to Corporate(5)

5

Provision for unpaid losses and loss adjustment expenses








Current accident year before catastrophes2,815
819

7
3,641
Current accident year ("CAY") catastrophes248
74

(1)321
Prior accident year development ("PYD") [2]118
(367)4

(245)
Total provision for unpaid losses and loss adjustment expenses3,181
526
4
6
3,717
Change in deferred gain on retroactive reinsurance included in other liabilities [2](83)


(83)
Payments(2,254)(1,001)(94)(4)(3,353)
Foreign currency adjustment(10)


(10)
Ending liabilities for unpaid losses and loss adjustment expenses, net20,163
1,658
1,429
7
23,257
Reinsurance and other recoverables4,225
27
1,175

5,427
Ending liabilities for unpaid losses and loss adjustment expenses, gross$24,388
$1,685
$2,604
$7
$28,684
Earned premiums and fee income$4,435
$1,486

 
Loss and loss expense paid ratio [3]50.8
67.4

 
Loss and loss expense incurred ratio71.9
35.8

 
Prior accident year development (pts) [4]2.7
(25.0)
 
[1]
Reflects a cumulative effect adjustment of $1 and $(1) for Commercial Lines and Property & Casualty Other Operations respectively, representing an adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. See Note 1 - Basis of Presentation and Significant Accounting Policies for further information.
[2]
Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators adverse development cover ("Navigators ADC") which, under retroactive reinsurance accounting, is deferred and recognized over the period the ceded losses are recovered in cash from NICO. For additional information regarding the Navigators ADC agreement, please refer to Note 10 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
[3]The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums.
[4]“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.

In December, 2019, the judge overseeing the bankruptcy of PG&E Corporation and Pacific Gas and Electric Company (together, “PG&E”) approved an $11 billion settlement of insurance subrogation claims to resolve all such claims arising from the 2017 Northern California wildfires and 2018 Camp wildfire. That settlement was contingent upon, among other things, the judge entering an order confirming PG&E’s chapter 11 bankruptcy plan (“PG&E Plan”) incorporating the settlement agreement. On June 20, 2020, the bankruptcy court judge approved the PG&E Plan and PG&E subsequently transferred the $11 billion settlement
 
amount to a trust designed to allocate and distribute the settlement among subrogation holders, including certain of the Company’s insurance subsidiaries. In the second quarter of 2020, the Company recorded an estimated $289 subrogation benefit though the ultimate amount it collects will depend on how the Company’s ultimate paid claims subject to subrogation compare to other insurers’ ultimate paid claims subject to subrogation. On July 24, 2020, the Company received an initial distribution, net of attorney costs, of $216.

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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 Six Months Ended June 30, 2020, Net of Reinsurance

Commercial
Lines
Personal
Lines
Total
Wind and hail$134
$72
$206
Tropical Storms1
1
2
Explosion/Fire2
1
3
Civil Unrest110

110
Other1

1
Total catastrophe losses$248
$74
$322
Unfavorable (Favorable) Prior Accident Year Development for the Three Months Ended June 30, 2020
 Commercial LinesPersonal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Workers’ compensation$(21)$
$
$(21)
Workers’ compensation discount accretion9


9
General liability102


102
Marine1


1
Package business(7)

(7)
Commercial property5


5
Professional liability4


4
Bond(10)

(10)
Assumed reinsurance(7)

(7)
Automobile liability22
(15)
7
Homeowners
2

2
Net asbestos reserves



Net environmental reserves



Catastrophes(67)(333)
(400)
Uncollectible reinsurance

(2)(2)
Other reserve re-estimates, net(8)(3)6
(5)
Prior accident year development before change in deferred gain23
(349)4
(322)
Change in deferred gain on retroactive reinsurance included in other liabilities54


54
Total prior accident year development$77
$(349)$4
$(268)

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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 Six Months Ended June 30, 2020
 Commercial LinesPersonal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Workers’ compensation$(38)$
$
$(38)
Workers’ compensation discount accretion18


18
General liability114


114
Marine1


1
Package business(6)

(6)
Commercial property(2)

(2)
Professional liability5


5
Bond(10)

(10)
Assumed reinsurance(7)

(7)
Automobile liability27
(21)
6
Homeowners



Net asbestos reserves



Net environmental reserves



Catastrophes(72)(341)
(413)
Uncollectible reinsurance

(2)(2)
Other reserve re-estimates, net5
(5)6
6
Prior accident year development before change in deferred gain35
(367)4
(328)
Change in deferred gain on retroactive reinsurance included in other liabilities83


83
Total prior accident year development$118
$(367)$4
$(245)


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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 Six Months Ended June 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
Navigator's Group acquisition2,001


2,001
Provision for unpaid losses and loss adjustment expenses    
Current accident year before catastrophes2,216
1,017

3,233
Current accident year catastrophes160
82

242
Prior accident year development12
3
9
24
Total provision for unpaid losses and loss adjustment expenses2,388
1,102
9
3,499
Payments(1,886)(1,261)(82)(3,229)
Ending liabilities for unpaid losses and loss adjustment expenses, net18,821
2,189
1,613
22,623
Reinsurance and other recoverables4,039
112
974
5,125
Ending liabilities for unpaid losses and loss adjustment expenses, gross$22,860
$2,301
$2,587
$27,748
Earned premiums and fee income$3,782
$1,619
  
Loss and loss expense paid ratio [1]49.9
77.9
  
Loss and loss expense incurred ratio63.4
68.9
  
Prior accident year development (pts) [2]0.3
0.2
  
[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 Six Months Ended June 30, 2019, Net of Reinsurance
 
Commercial
Lines
Personal
Lines
Total
Wind and hail$95
$63
$158
Winter storms60
19
79
Flooding1

1
Other4

4
Total catastrophe losses$160
$82
$242

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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 Three Months Ended June 30, 2019
 Commercial Lines
Personal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Workers’ compensation$(30)$
$
$(30)
Workers’ compensation discount accretion9


9
General liability37


37
Marine10


10
Package business(14)

(14)
Commercial property(13)

(13)
Professional liability33


33
Bond



Assumed Reinsurance3


3
Automobile liability2


2
Homeowners



Net asbestos reserves



Net environmental reserves



Catastrophes(16)2

(14)
Uncollectible reinsurance



Other reserve re-estimates, net1
2
9
12
Total prior accident year development$22
$4
$9
$35
Unfavorable (Favorable) Prior Accident Year Development for the Six Months Ended June 30, 2019
 Commercial Lines
Personal
Lines
Property & Casualty Other OperationsTotal Property & Casualty Insurance
Workers’ compensation$(50)$
$
$(50)
Workers’ compensation discount accretion17


17
General liability43


43
Marine10
  10
Package business(9)

(9)
Commercial property(15)

(15)
Professional liability33


33
Bond



Assumed Reinsurance3
  3
Automobile liability2
(5)
(3)
Homeowners
1

1
Net asbestos reserves



Net environmental reserves



Catastrophes(28)6

(22)
Uncollectible reinsurance



Other reserve re-estimates, net6
1
9
16
Total prior accident year development$12
$3
$9
$24

For discussion of the factors contributing to unfavorable (favorable) prior accident year reserve development, please refer to Note 10 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
 
Current Trends Contributing to Reserve Uncertainty
As discussed in our 2019 Form 10-K, as market conditions and loss trends develop, management must assess whether those

80




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




conditions constitute a long-term trend that should result in a reserving action (i.e., increasing or decreasing property and casualty reserve). The Company has exposure to general liability claims, including from bodily injury, property damage and product liability and to workers’ compensation claims, including from injury, illness or disability to an insured’s employee while at work. Benefits paid under workers’ compensation policies may include reimbursement of medical care costs, replacement income and compensation for permanent injuries and benefits to survivors. Reserves for these exposures can be particularly difficult to estimate due to the long development pattern and uncertainty about how cases will settle.
As further explained under "Impacts of COVID-19" within The Hartford's Operations section of MD&A, through June 30, 2020, the Company incurred $213 of COVID-19 claims in P&C, including in workers' compensation, property and financial lines. Under workers’ compensation, we could experience a continuation of COVID-19 incurred losses, particularly due to laws or directives in certain states that require coverage of COVID-19 claims for health care and other essential workers based on a presumption that they contracted the virus while working. We could also incur losses on general liability policies if claimants can successfully assert that insureds were negligent from protecting employees, customers and others from exposure though we do not expect this exposure to be significant. Under commercial property policies, we have reserved for business interruption claims that pertain to policies in middle & large commercial and in global specialty which do not require direct physical loss or property damage. In other cases, particularly in small commercial, where there are policy exclusions and the general requirement that there be direct physical loss or damage to the property, we have not recorded loss reserves as there is no coverage though we have recorded a reserve for legal defense costs. In our commercial surety lines, there continues to be the potential for elevated frequency and severity due to an increase in the number of bankruptcies, especially in small businesses and impacted industries such as hospitality, entertainment and transportation. In construction surety, there is the potential for continued elevated losses from contractors who experience project shutdowns or payment delays, which negatively impact their cash flows, or result in disruptions in their supply chains, labor shortages or inflation in the cost of materials. We have also experienced an increase in COVID-19 related claims under director’s and officers’ insurance policies.
Reserve estimates for COVID-19 claims are difficult to estimate. In establishing reserves for COVID-19 incurred claims through June 30, 2020, we have provided IBNR at a higher percentage of ultimate estimated incurred losses than usual as we expect longer claim reporting patterns given the economic effects of COVID-19. For example, we expect longer delays than usual between the time a worker is treated and the date the claim is eventually submitted for workers' compensation coverage. Reserve estimates for D&O, E&O and employment practices liability are subject to significant uncertainty given that estimates must be made of the expected ultimate severity of claims that have just recently been reported.

 
Group Benefit Reserves
The Company establishes reserves for group life and accident & health contracts, including long-term disability coverage, for both reported claims and claims related to insured events that the Company estimates have been incurred but have not yet been reported. As long-term disability reserves are long-tail claim liabilities, they are discounted because the payment pattern and the ultimate costs are reasonably fixed and determinable on an individual claim basis. The Company held $6,583 and $6,616 of LTD unpaid losses and loss adjustment expenses, net of reinsurance, as of June 30, 2020 and December 31, 2019, respectively.
Impact of COVID-19 on 2020 Results of Operations
Due to the COVID-19 pandemic, the Company is exposed to short-term disability claims and group life claims. Through June 30, 2020, the Company had incurred short-term disability claims and claims for extended benefits under New York's paid family leave and disability programs totaling $11, before tax and group life claims of $43 before tax.
Current Trends Contributing to Reserve Uncertainty
We hedge our interest rate exposure over a three year period at the time we price and sell long-term disability policies and our weighted average discount rate assumption for the 2020 incurral year is down slightly from that of the 2019 incurral year.
While we have not seen a significant change in claim recovery patterns to date, in future periods, because of COVID-19, we could experience a delay in the Social Security Administration’s processing of disability claims and a delay in physicians approving a disability claimant’s ability to return to work, resulting in lower expected claim terminations or recoveries, including Social Security offsets. Also, due to the effects on the economy, including higher unemployment, we could experience an increase in claim incidence on long-term disability claims.
Evaluation of Goodwill for Impairment
Goodwill balances are reviewed for impairment at least annually, or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. Effective January 1, 2020, the Company adopted updated accounting guidance on recognition and measurement of goodwill impairment, as required. The updated guidance requires recognition and measurement of goodwill impairment based on the excess of the carrying value of the reporting unit over its estimated fair value, up to the amount of the reporting unit’s goodwill.
The estimated fair value of each reporting unit incorporates multiple inputs into discounted cash flow calculations including assumptions that market participants would make in valuing the reporting unit. Assumptions include levels of economic capital, future business growth, earnings projections, assets under management for Hartford Funds and the weighted average cost of capital used for purposes of discounting. Decreases in business growth, decreases in earnings projections and increases in the

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




weighted average cost of capital will all cause a reporting unit’s fair value to decrease, increasing the possibility of impairment.
A reporting unit is defined as an operating segment or one level below an operating segment. The Company’s reporting units for which goodwill has been allocated consist of Commercial Lines, Personal Lines, Group Benefits and Hartford Funds.
The carrying value of goodwill was $1,911 as of June 30, 2020 and was comprised of $659 for Commercial Lines, $119 for Personal Lines, $861 for Group Benefits and $272 for Hartford Funds.
Due to changes in the economy because of the COVID-19 pandemic, the weighted average cost of capital used to discount expected cash flows under the Company’s test for impairment increased during the first half of 2020 for most reporting units, which reduces estimated fair values of those reporting units.
Since the pandemic began, near-term expected net cash flows over the forecast period have been reduced due to lower
 
revenues arising from the economic effects of COVID-19 and, for Commercial Lines and Group Benefits, an expected continuation of COVID-19 claims.
Considering the impacts of COVID-19, the Company evaluated the impact of market factors on the fair value of the reporting units using the income approach and determined the estimated fair values do not indicate a goodwill impairment for any reporting unit.  If the weighted average cost of capital used for purposes of discounting increases significantly or if the economic downturn worsens or persists for an extended period and the Company’s actual and forecasted operating results deteriorate, the Company may determine it is more likely than not that a reporting unit’s fair value is below its carrying value, including goodwill, and perform an interim impairment test, which could result in an impairment of goodwill.


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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 June 30, Six Months Ended June 30,
 20202019Change 20202019Change
Written premiums$2,165
$2,078
4% $4,573
$4,027
14%
Change in unearned premium reserve8
91
(91%) 151
263
(43%)
Earned premiums2,157
1,987
9% 4,422
3,764
17%
Fee income5
9
(44%) 13
18
(28%)
Losses and loss adjustment expenses



    
Current accident year before catastrophes1,472
1,179
25% 2,815
2,216
27%
Current accident year catastrophes [1]193
90
114% 248
160
55%
Prior accident year development [1]77
22
NM
 118
12
NM
Total losses and loss adjustment expenses1,742
1,291
35% 3,181
2,388
33%
Amortization of deferred policy acquisition costs351
310
13% 707
584
21%
Underwriting expenses387
392
(1%) 830
729
14%
Amortization of other intangible assets7
2
NM
 14
4
NM
Dividends to policyholders7
6
17% 15
12
25%
Underwriting gain (loss)(332)(5)NM
 (312)65
NM
Net servicing income
2
(100%) 1
1
%
Net investment income [2]204
281
(27%) 481
540
(11%)
Net realized capital gains (losses) [2]64
54
19% (79)169
(147%)
Loss on reinsurance transaction
(91)100% 
(91)100%
Other expenses(11)(6)(83%) (17)(7)(143%)
Income (loss) before income taxes(75)235
(132%) 74
677
(89%)
Income tax expense (benefit) [3](9)44
(120%) 19
123
(85%)
Net income (loss)$(66)$191
(135%) $55
$554
(90%)
[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 Development, Net of Reinsurance and Note 10 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
[2]For discussion of consolidated investment results, see MD&A - Investment Results.
[3]
For discussion of income taxes, see Note 13 - 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 June 30, Six Months Ended June 30,

20202019 20202019
Small commercial new business premium$118
$183
 $275
$358
Middle market new business premium99
177
 224
317
Small commercial policy count retention88%83% 86%83%
Middle market policy count retention [1]79%81% 78%81%
Standard commercial lines renewal written price increases [1] [2]3.6%2.1% 3.9%1.8%
Standard commercial lines renewal earned price increases [1] [2]3.8%2.0% 3.5%2.2%
Small commercial premium retention86%86% 86%86%
Middle market premium retention [1]77%86% 79%85%
Small commercial policies in-force as of end of period (in thousands)1,297
1,291
   
Middle market policies in-force as of end of period (in thousands) [1]60
64
   
[1]Middle market disclosures exclude loss sensitive and programs businesses.
[2]Small commercial and middle market lines within middle & large commercial are generally referred to as standard commercial lines.
Underwriting Ratios
 Three Months Ended June 30, Six Months Ended June 30,

20202019Change 20202019Change
Loss and loss adjustment expense ratio


 


Current accident year before catastrophes68.2
59.3
8.9
 63.7
58.9
4.8
Current accident year catastrophes8.9
4.5
4.4
 5.6
4.3
1.3
Prior accident year development3.6
1.1
2.5
 2.7
0.3
2.4
Total loss and loss adjustment expense ratio80.8
65.0
15.8
 71.9
63.4
8.5
Expense ratio34.3
35.0
(0.7) 34.8
34.5
0.3
Policyholder dividend ratio0.3
0.3

 0.3
0.3

Combined ratio115.4
100.3
15.1
 107.1
98.3
8.8
Impact of current accident year catastrophes and prior year development(12.5)(5.6)(6.9) (8.3)(4.6)(3.7)
Impact of current accident year change in loss reserves upon acquisition of a business [1]
(1.5)1.5
 
(0.8)0.8
Underlying combined ratio102.9
93.2
9.7
 98.8
92.9
5.9
[1] Upon acquisition of Navigators Group and a review of Navigators Insurers reserves, the three and six months ended June 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 (Loss)
chart-0e9e059639ab5049ad3.jpg
 
Three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
Net loss for the three months ended June 30, 2020 compared to net income for the prior year three month period primarily due to increased underwriting losses driven by COVID-19 incurred losses, higher current accident year catastrophes driven by losses from the civil unrest in late May and June and an increase in net unfavorable prior accident year development as well as lower net investment income, primarily driven by losses on limited partnerships and other investments in the second quarter of 2020, partially offset by $91 before tax of ADC ceded premium in the prior year period.
Net income decreased for the six month period primarily due to a change from an underwriting gain in 2019 to an underwriting loss in 2020, a change from net realized capital

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gains in 2019 to net realized capital losses in 2020 largely due to equity market declines in the first quarter of 2020 and lower net investment income, primarily driven by losses on investments in limited partnerships and other alternative investments in the second quarter of 2020. Partially offsetting the decline in net income was $91 before tax of ADC ceded premium in the prior year period. For further discussion of investment results, see MD&A - Investment Results.
Underwriting Gain (Loss)
chart-9b52b31c89985fb89e6.jpg
Three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
Underwriting loss increased in the three month period primarily due to COVID-19 incurred losses in property, workers’ compensation and financial lines, higher current accident year catastrophes driven by civil unrest, and an increase in net unfavorable prior year development. Second quarter COVID-19 incurred losses and loss adjustment expenses of $213 in P&C primarily included $141 for property claims,$35 for workers’ compensation, net of favorable frequency on other workers' compensation claims, and $37 of incurred losses largely concentrated in financial lines such as D&O and E&O. Included in the $141 of COVID-19 property incurred losses and loss adjustment expenses in the second quarter were $101 of losses arising from a small number of property policies that do not require direct physical loss or damage and from policies intended to cover specific business needs, including crisis management and performance disruption. In addition, we recorded a reserve of $40 for legal defense costs. The effect of lower estimated audit premium on workers’ compensation and general liability net of lower incurred losses, was largely offset by lower non-catastrophe property losses. Underwriting expenses were down slightly year over year as a reduction in travel, incentive compensation and other expenses more than offset an increase in the ACL on premiums receivable.
Underwriting loss in the 2020 six month period compared with an underwriting gain in the 2019 six month period with the underwriting loss in 2020 primarily due to COVID-19 incurred
 
losses in property, workers’ compensation and financial lines, higher current accident year catastrophes driven by civil unrest, an increase in net unfavorable prior year development and higher underwriting expenses, including amortization of DAC. Contributing to the increase in underwriting expenses was an increase in the ACL on premiums receivable in 2020 due to the economic impacts of COVID-19 and the effect of a reduction in state taxes and assessments in first quarter 2019, partly offset by a reduction in travel, incentive compensation and marketing expenses.
Additionally in both the three and six month periods, the acquisition of Navigators Group contributed to an 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 decreased in both periods.
Earned Premiums
chart-6fcd792b5b71524e9c3.jpg
[1]Other of $11 and $10 for the three months ended June 30, 2019, and 2020, respectively, and $22 and $21 for the six months ended June 30, 2019 and 2020, respectively, is included in the total.
Three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
Earned premiums increased for the three and six months ended June 30, 2020 reflecting the acquisition of Navigators Group. Excluding Navigators, earned premiums declined in both periods.

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Written premiums increased in the three and six months ended June 30, 2020 with the growth largely attributed to the acquisition of Navigators Group. Excluding Navigators, premiums declined in both the three and six month periods due to lower new business across most lines, lower premium retention in middle market as well as reductions in estimated audit premiums receivable and endorsements reducing premium in workers’ compensation due to a declining exposure base, partially offset by continued written pricing increases. In standard commercial lines, renewal written price increases were higher than 2019 for both the three and six month periods, including double digit rate increases in middle market automobile and specialty excess liability lines and mid-to-high single digit rate increases in most other standard commercial lines. Small commercial workers’ compensation written pricing continued to decrease in both the three and six month periods, with larger decreases in the second quarter. In Global Specialty, our US Wholesale book achieved a 24% renewal written price increase, led by excess casualty, property and automobile.  The International lines also achieved strong price increases, led by D&O.
New business premium decreased in both the three and six month periods in most lines driven by lower quote volume due to the economic effects of COVID-19 and a competitive pricing environment. Also contributing to the decrease in new business in Small Commercial was the effect of new business from the 2018 Foremost renewal rights agreement of $28 and $60 in the 2019 three and six month periods, respectively.
Small commercial written premium declined for both the three and six month periods driven by a decrease in workers’ compensation, partially offset by growth in package business.
Middle & large commercial written premium decreased for both the three and six month periods driven by lower new business and premium retention across all lines, partially offset by the acquisition of Navigators Group. Apart from the increase from Navigators Group, middle & large commercial premium decreases in both periods were primarily driven by declines in workers’ compensation, as well as other product lines within industry verticals and national accounts.
Global specialty written premium increased for both the three and six month periods driven by the acquisition of Navigators Group. Apart from Navigators Group, global specialty decreased in both the three and six month periods due to a decline in wholesale and bond business, partially offset by growth in professional liability.
 
Current Accident Year Loss and LAE Ratio before Catastrophes
chart-fc9b0e888dd556208da.jpg
Three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
Current accident year loss and LAE ratio before catastrophes increased for both the three and six months ended June 30, 2020, primarily due to COVID-19 incurred losses of $213 before tax, including losses in property, workers’ compensation and financial lines, partially offset by favorable frequency in workers’ compensation due to government restrictions and shelter in place guidelines limiting business activity as well as lower marine losses and, for the six month period, lower non-COVID-19 non-catastrophe property claims in small commercial. The Company incurred COVID-19 business interruption property losses in the three and six month periods on the small number of property policies that do not require direct physical loss or damage, including for crisis management and performance disruption coverage, and recorded a reserve for legal defense costs. Workers’ compensation COVID-19 incurred losses were driven by claims in both states with presumptive coverage and in other states where the claimant must prove their COVID-19 illness was contracted at work. Financial lines COVID-19 claims were primarily driven by exposures in D&O, E&O and employment practices liability and the recessionary impacts on the surety book of business.

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Catastrophes and Unfavorable (Favorable) Prior Accident Year Development
chart-47ea4bfa2d7e54f3b62.jpg
Three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
Current accident year catastrophe losses for the three months ended June 30, 2020 included losses from the civil unrest that took place in late May and June as well as wind and hail events principally in the South, Midwest and Great Plains.
Current accident year catastrophe losses for the three months ended June 30, 2019 were all tornado, wind and hail events in various areas of the Midwest and South.
Current accident year catastrophe losses for the six months ended June 30, 2020 were primarily from the civil
 
unrest and from tornado, wind and hail events in the South, Midwest and Great Plains. Current accident year catastrophe losses for the six months ended June 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 and South.
Prior accident year development was a net unfavorable $77 before tax in the 2020 three month period compared to a net unfavorable $22 before tax in the comparable 2019 period and was a net unfavorable $118 before tax in the 2020 six month period compared to a net unfavorable $12 before tax in the comparable 2019 period. Net unfavorable reserve development for the three and six months ended June 30, 2020 included reserve increases for general liability driven primarily by increases in reserves for sexual molestation and abuse claims, and increases in automobile liability reserves, partially offset by reserve decreases for workers' compensation and catastrophes. Favorable development on prior year catastrophe reserves in the three and six month periods was due to recognizing a $29 before tax subrogation benefit from a settlement with PG&E over certain of the 2017 and 2018 California wildfires and a reduction in estimated catastrophe losses from a number of wind and hail events that occurred in 2018 and 2019. Prior accident year development in the three and six month periods of 2020 also included $54 million and $83 million, respectively, of reserve increases related to Navigators Group on 2018 and prior accident years that was economically ceded to NICO but for which the benefit was not recognized in earnings as it has been recorded as a deferred gain on retroactive reinsurance. Net reserve increases for the three and six months ended June 30, 2019 were primarily related to a $68 before tax increase to Navigators reserves upon acquisition of the business, partially offset by lower loss reserve estimates for workers' compensation claims, catastrophes, and, for the three month period only, a decrease in package business reserves. The increase in Navigators reserves upon acquisition of the business principally related to higher reserve estimates for general liability, professional liability and marine.

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




PERSONAL LINES
Results of Operations
Underwriting Summary
 Three Months Ended June 30, Six Months Ended June 30,
 20202019Change 20202019Change
Written premiums$738
$824
(10%) $1,482
$1,595
(7%)
Change in unearned premium reserve44
23
91% 14
(5)NM
Earned premiums694
801
(13%) 1,468
1,600
(8%)
Fee income9