Re: | The Hartford Financial Services Group, Inc. |
1. | Please note that we intend to review the Part III information that you intend to incorporate by reference into your Form 10-K when filed. We may have further comments after reviewing that information and we will not be able to clear our review of your filing until we have the opportunity to resolve any resulting comments. |
2. | In the last paragraph of your overview discussion on page 39 you indicate that a sustained low interest rate environment would result in lower net investment income, lower estimated gross profits on certain Talcott Resolution products and lower margins. In the first paragraph on page 74 you state that your expectation in 2013, based on the current interest rate and credit environment, is that the portfolio yield will decline slightly as a result of reinvestment rates that are lower than the yield on maturing securities as well as the impact of the sales of the Retirement Plans and Individual Life businesses and, to mitigate the effect, you have increased your investment in certain higher yielding asset classes, such as commercial whole loans and a modest amount of emerging markets and high-yield securities. Please provide us proposed disclosure to be included, in MD&A, in future periodic reports that discloses and quantifies the expected effects of this known trend or uncertainty on your future financial position, results of operations and cash flows. To the extent that information about cash flows you expect to have to reinvest at lower rates due to potential maturities or calls of your investments, or cash flows that you are committed to pay due to products with guaranteed features is necessary to understand these effects, please provide disclosure to be provided in future periodic reports that include information such as the amount of maturing or callable investments and their weighted average yields and the amount of products with guaranteed features and their rates. |
3. | Regarding your catastrophe losses, please provide disclosure to be provided in future periodic reports that separately quantifies the amount of catastrophe losses for each significant catastrophe. This applies to your Consumer Market disclosure for catastrophes as well. |
For the year ended December 31, 2012 | ||||||||||||
P&C Commercial | Consumer Markets | P&C Other Operations | Total P&C | |||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses, gross | $ | 15,437 | $ | 2,061 | $ | 4,052 | $ | 21,550 | ||||
Reinsurance and other recoverables | 2,343 | 9 | 681 | 3,033 | ||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses, net | 13,094 | 2,052 | 3,371 | 18,517 | ||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 4,178 | 2,390 | — | 6,568 | ||||||||
Current accident year catastrophes [3] | 325 | 381 | — | 706 | ||||||||
Prior accident years | 72 | (141 | ) | 65 | (4 | ) | ||||||
Total provision for unpaid losses and loss adjustment expenses | 4,575 | 2,630 | 65 | 7,270 | ||||||||
Less: Payments | 4,014 | 2,772 | 312 | 7,098 | ||||||||
Ending liabilities for unpaid losses and loss adjustment expenses, net | 13,655 | 1,910 | 3,124 | 18,689 | ||||||||
Reinsurance and other recoverables | 2,365 | 16 | 646 | 3,027 | ||||||||
Ending liabilities for unpaid losses and loss adjustment expenses, gross | $ | 16,020 | $ | 1,926 | $ | 3,770 | $ | 21,716 | ||||
Earned premiums | $ | 6,259 | $ | 3,636 | ||||||||
Loss and loss expense paid ratio [1] | 64.1 | 76.2 | ||||||||||
Loss and loss expense incurred ratio | 73.1 | 72.3 | ||||||||||
Prior accident years development (pts) [2] | 1.2 | (3.9 | ) | |||||||||
[1] | The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums. |
[2] | “Prior accident years development (pts)” represents the ratio of prior accident years development to earned premiums. |
[3] | Contributing to the current accident year catastrophes losses were the following events: |
For the year ended December 31, 2012 | ||||||||||||
P&C Commercial | Consumer Markets | P&C Other Operations | Total P&C | |||||||||
Storm Sandy | $ | 207 | $ | 143 | $ | — | $ | 350 | ||||
Midwest and South Thunderstorms [1] | 30 | 137 | — | 167 | ||||||||
Midwest and South Tornadoes [1] | 64 | 40 | — | 104 | ||||||||
Hail storms (multiple states) | 21 | 35 | — | 56 | ||||||||
Other | 3 | 26 | — | 29 | ||||||||
Total | $ | 325 | $ | 381 | $ | — | $ | 706 | ||||
[1] | These amounts represent an aggregation of multiple catastrophes. |
4. | You have investments of $14.4 billion in fixed maturity securities invested in obligations of states, municipalities and political subdivisions that comprised 11% of your investment portfolio at December 31, 2012. Please provide disclosure to be provided in future periodic reports that discloses the amortized cost and fair value separately showing the amount related to general obligation and special revenue bonds and, for special revenue bonds, the nature of the revenue source. In this regard, it is apparent from your disclosure that you hold primarily general obligation bonds, but it is unclear whether you have material holdings of special revenue bonds. |
December 31, 2012 | |||||||||
Amortized Cost | Fair Value | Weighted Average Credit Quality | |||||||
General Obligation | $ | 2,947 | $ | 3,293 | AA | ||||
Pre-Refunded [1] | 629 | 678 | AAA | ||||||
Revenue | |||||||||
Transportation | 1,652 | 1,800 | A+ | ||||||
Water & Sewer | 1,380 | 1,531 | AA | ||||||
Health Care | 1,302 | 1,443 | AA- | ||||||
Education | 1,288 | 1,446 | AA | ||||||
Leasing [2] | 1,028 | 1,133 | A+ | ||||||
Sales Tax | 862 | 966 | AA | ||||||
Power | 892 | 976 | A+ | ||||||
Housing | 333 | 344 | AA- | ||||||
Other | 688 | 752 | AA- | ||||||
Total Revenue | 9,425 | 10,391 | AA- | ||||||
Total Municipal | $ | 13,001 | $ | 14,362 | AA- | ||||
[1] | Pre-refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. Treasury, agency, or other securities has been established to fund the remaining payment of principal and interest. |
[2] | Leasing revenue bonds are generally the obligations of a financing authority established by the municipality that leases municipal facilities to a municipality. The notes are typically secured by lease payments made by the municipality that is leasing the facilities financed by the issue. Lease payments may be subject to annual appropriation by the municipality or the municipality may be obligated to appropriate general tax revenues to make lease payments. |
5. | You disclose that deferred acquisition costs represent costs that are directly related to the successful acquisition of new and renewal insurance contracts and incremental direct costs of contract acquisition that are incurred in transactions with either independent third parties or employees. Please provide disclosure to be provided in future periodic reports that describes the type of acquisition costs capitalized as required by ASC 944-30-50-1a as amended by ASU 2010-26. |
6. | Please provide us proposed disclosure to be included in future filings to address the following: |
• | Please clarify whether the information presented in the second table on page F-84 represents statutory capital and surplus as required by ASC 944-505-50-1a or whether it is limited to just statutory surplus. Based on the disclosure on page 131 it appears that it may indeed represent statutory capital and surplus, but it seems you may use the terms interchangeably. |
• | Although you disclose that all of your insurance subsidiaries met their minimum statutory capital and surplus requirements, the magnitude of the excess is unclear. Please disclose the amount of statutory capital and surplus necessary to satisfy regulatory requirements if significant in relation to actual statutory capital and surplus, as required under ASC 944-505-50-1b. If not significant, please clarify in the disclosure. |
• | Please provide the disclosures required under ASC 944-505-50-3 through 50-6 or separately represent to us that you do not meet the criteria in ASC 944-505-50-2. |
For the years ended December 31, | |||||||||
Statutory Net Income (Loss) | 2012 | 2011 | 2010 | ||||||
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries | $ | 592 | $ | (1,272 | ) | $ | (140 | ) | |
Property and casualty insurance subsidiaries | 883 | 514 | 1,477 | ||||||
Total | $ | 1,475 | $ | (758 | ) | $ | 1,337 | ||
As of December 31, | ||||||
Statutory Capital and Surplus | 2012 | 2011 | ||||
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries | $ | 6,410 | $ | 7,388 | ||
Property and casualty insurance subsidiaries | 7,645 | 7,412 | ||||
Total | $ | 14,055 | $ | 14,800 | ||
7. | You state that you identified that certain reinsurance recoverable balances associated with the sale of your Individual Life Insurance business was incorrectly omitted in determining the estimated gain or loss on disposition. In order to gain a better understanding of the restatement, please provide us the following information: |
• | The nature and amount of “certain reinsurance recoverable balances” that were omitted and an explanation of any extenuating circumstances explaining why they were originally omitted; |
• | Certain third party reinsurance recoverable balances related to the Individual Life business of $461 million were incorrectly omitted from the analysis used in the third quarter to determine the estimated GAAP gain or loss on disposition. These balances represented all of the reinsurance recoverables associated with the business being sold. |
• | Discussion as to why the goodwill impairment and premium deficiency you now reflect in the third quarter of 2012 should not properly be reflected in an early period. As you disclose on page F-65 and elsewhere that you performed interim goodwill impairment analyses during each of the first three quarters of 2012, please tell us what was substantially different about the terms of the reinsurance arrangement with The Prudential Insurance Company of America as compared to the estimates applied in your impairment tests during the first and second quarters of 2012. Tell us why your apparent understatement of the net assets of the Individual Life business in your initial goodwill impairment test at September 30, 2012 was not also made in your tests for the first two quarters. |
• | Confirmation that there were no omitted reinsurance recoverable balances associated with the disposal of your Retirement Plans business also addressed in your Form 8-K filed January 2, 2013 and a discussion as to whether there were similar balances as those omitted from your Individual Life business initial computations; and |
• | A listing of the net assets of the Individual Life insurance business, excluding the omitted reinsurance recoverable balances, as of September 30, 2012 used to estimate the gain initially anticipated upon the disposal of this business incorporated in your pro forma financial information included as Exhibit 99.2 to your Form 8-K filed January 2, 2013. Also, reconcile this listing of the net assets to the table included as footnote 7 to your pro forma balance sheet summarizing the pro form gain on disposal; |
• | A revised table from footnote 7 of the pro forma balance sheet identified in the preceding bullet incorporating the omitted reinsurance recoverable balances as of September 30, 2013; |
Individual Life Disposition | |||||||||
Analysis of Gain (Loss) | |||||||||
(dollar amounts in millions) | As Originally Estimated | As Restated | Difference | ||||||
Ceding commission | $ | 615 | $ | 615 | $ | — | |||
Fair value of assets in excess of reserves [1] | (531 | ) | (992 | ) | (461 | ) | |||
Intangible asset write-off [2] | (962 | ) | (1,033 | ) | (71 | ) | |||
Transaction costs | (55 | ) | (65 | ) | (10 | ) | |||
Reinsurance loss | (933 | ) | (1,475 | ) | (542 | ) | |||
Realized capital gains - investments | 921 | 891 | (30 | ) | |||||
Realized capital gains - derivatives | 76 | 51 | (25 | ) | |||||
Gain (loss) from disposal of business, pre-tax | $ | 64 | $ | (533 | ) | $ | (597 | ) | |
Loss from disposal of business, after-tax | $ | — | $ | (388 | ) | $ | (388 | ) | |
[1] | Third party reinsurance recoverable balances are included in this line of the analysis. |
[2] | Intangible assets consist of DAC, goodwill, and prepaid and accrued items. The difference between the originally reported balance and the restated balance relates primarily to prepaid reinsurance. |
(dollar amounts in millions) | Retirement Plans | Individual Life | Total | ||||||||
Ceding commission | $ | 355 | $ | 615 | $ | 970 | |||||
Fair value of assets in excess of reserves | (354 | ) | (992 | ) | (1,346 | ) | |||||
Intangible asset write-off | (579 | ) | (1,033 | ) | (1,612 | ) | |||||
Transaction costs | (28 | ) | (65 | ) | (93 | ) | |||||
Reinsurance loss | (606 | ) | (1,475 | ) | (2,081 | ) | |||||
Realized capital gains - investments | 473 | 891 | 1,364 | ||||||||
Realized capital gains - derivatives | 194 | 51 | 245 | ||||||||
Gain (loss) from disposal of business, pre-tax | $ | 61 | $ | (533 | ) | $ | (472 | ) | |||
Gain (loss) from disposal of business, after-tax | $ | 16 | $ | (388 | ) | $ | (372 | ) | |||
• | The Company is responsible for the adequacy and accuracy of the disclosure in the filings; |
• | Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filings; and |
• | The Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |