Business Acquisitions (Notes)

9 Months Ended

Sep. 30, 2019

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

2. BUSINESS ACQUISITION

Navigators Group

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

Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date



	As of May 23, 2019
Assets
Cash and invested assets	$	3,848
Premiums receivable	492
Reinsurance recoverables	1,100
Prepaid reinsurance premiums	238
Other intangible assets	580
Property and equipment	83
Other assets	99
Total Assets Acquired	6,440
Liabilities
Unpaid losses and loss adjustment expenses	2,823
Unearned premiums	1,219
Long-term debt	284
Deferred income taxes, net	48
Other liabilities	568
Total Liabilities Assumed	4,942
Net identifiable assets acquired	1,498
Goodwill [1]	623
Net Assets Acquired	$	2,121

[1] Non-deductible for income tax purposes.

Intangible Assets Recorded in Connection with the Acquisition



Asset	Amount		Weighted Average Expected Life
Value of in-force contracts - Property and Casualty ("P&C")	$	180	1
Distribution relationships	302		15
Trade name	17		10
Total finite life intangibles	499		10
Capacity of Lloyd's Syndicate	66
Licenses	15
Total indefinite life intangibles	81
Total other intangible assets	$	580

The value of in-force contracts represents the estimated profits relating to the unexpired contracts in force net of related prepaid reinsurance at the acquisition date through expiry of the contracts. The value of distribution relationships was estimated using net cash flows expected to come from the renewals of in-force contracts and new business sold through existing distribution partners less costs to service the related policies. The value of the trade name was estimated using an assumed cost of a market-based royalty fee applied to net cash flows expected to come from business marketed as Navigators, a brand of The Hartford. Lloyd's of London is an insurance market-place operating worldwide ("Lloyd's"). Lloyd's does not underwrite risks. Corporate members accept underwriting risks through the

syndicates that they form. The Company accepts risks as the sole corporate member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"). The value of the capacity of Lloyd’s Syndicate was estimated using net cash flows attributable to Navigators Group's right to underwrite business up to an approved level of premium in the Lloyd’s market. The values for in-force contracts, the distribution relationships, trade name and the capacity of the Lloyd's Syndicate were estimated using a discounted cash flow method. Significant inputs to the valuation models include estimates of expected new business, premium retention rates, investment returns, claim costs, expenses and discount rates based on a weighted average cost of capital. The value of licenses to write insurance in over 50 U.S. jurisdictions was estimated based on recent transactions for shell companies.

Expected Pre-tax Amortization Expense^[1] for Acquired Intangibles as of September 30, 2019



	Value of In-force Contracts		Other Intangible Assets
2019 (three months)	$	38	$	5
2020	$	47	$	22
2021	$	21	$	22
2022	$	9	$	22
2023	$	—	$	22

[1] In the Condensed Consolidated Statements of Operations, the amortization of value of in-force contracts is reported in amortization of deferred policy acquisition costs and the amortization of other intangible assets is reported in amortization of other intangible assets.

Property and equipment includes real estate owned and right of use assets under leases that were valued based on current values and market rental rates, software that was valued based on estimated replacement cost and furniture and equipment. These will be amortized over periods consistent with the Company’s policy.

The fair value of unpaid losses and loss adjustment expenses net of related reinsurance recoverables was estimated based on the present value of expected future net unpaid loss and loss adjustment expense payments discounted using a risk-free interest rate as of the acquisition date plus a risk margin. The discount and risk margin amounts substantially offset.

Debt assumed in the transaction was valued based on the principal and interest payments discounted at the current market yield. This debt was paid off in August 2019. For further discussion of this transaction, see Note 10 - Debt of Notes to Condensed Consolidated Financial Statements.

The $623 of goodwill recognized is largely attributable to the acquired employee workforce and underwriting talent, leverageable operating platform, improved investment yield and economies of scale. Goodwill is allocated to the Company's Commercial Lines reporting segment.

Immediately after closing on the acquisition of Navigators Group, effective May 23, 2019, the Company purchased an aggregate excess of loss reinsurance agreement covering adverse reserve development (“Navigators ADC”) from National Indemnity Company ("NICO") on behalf of Navigators Insurance Company and certain of its affiliates (collectively, the “Navigators Insurers”). Under the Navigators ADC, the Navigators Insurers paid NICO a

reinsurance premium of $91 in exchange for reinsurance coverage of $300 of adverse net loss reserve development that attaches $100 above the Navigators Insurers' existing net loss and allocated loss adjustment reserves as of December 31, 2018 subject to the treaty of $1.816 billion for accidents and losses prior to December 31, 2018. In addition to recognizing a $91 before tax charge to earnings in the second quarter of 2019 for the Navigators ADC reinsurance premium, the Company recognized a charge against earnings of $97 before tax in the second quarter of 2019 as a result of a review of Navigators Insurers’ net acquired reserves upon acquisition of the business. Navigators Insurers had previously recognized $52 before tax of adverse reserve development in the first quarter of 2019, including $32 of adverse development subject to the Navigators ADC. As such, reserve development of $97 before tax in the second quarter of 2019 included $68 remaining of the $100 Navigators ADC retention for 2018 and prior accident years and $29 of adverse reserve development related to the 2019 accident year which is not covered by the ADC. The $68 of reserve development for the 2018 and prior accident years recorded in the second quarter of 2019 was net of a $91 reinsurance recoverable recognized under the Navigators ADC with the Company having ceded $91 of the $300 available limit, leaving $209 of remaining limit. There was no additional net adverse development subject to the Navigators ADC in the third quarter as reserve increases in commercial auto were offset by decreases in general liability, marine, commercial property and professional liability. The Navigators ADC will be accounted for as retroactive reinsurance and future adverse reserve development, if any, would result in recognizing a deferred gain.

Since the acquisition date of May 23, 2019, the revenues and net losses of the business acquired have been included in the Company's Consolidated Statements of Operations in the

Commercial Lines reporting segment and were $616 and $140, respectively, during the period from the acquisition date to September 30, 2019, including the $91 before tax ($72 net of tax) of premium paid for the Navigators ADC and the charge of $97 before tax ($77 net of tax) for the increase in acquired reserves following the acquisition.

The Company recognized $16 of acquisition related costs for the nine months ended September 30, 2019. These costs are included in insurance operating costs and other expenses in the Condensed Consolidated Statement of Operations.

The acquisition date fair values of assets and liabilities, including insurance reserves and intangible assets, as well as the related estimated useful lives of intangibles, are provisional and are subject to revision within one year of the acquisition date.

The following table presents supplemental unaudited pro forma amounts of revenue and net income for the nine months ended September 30, 2019 and 2018 for the Company as though the business was acquired on January 1, 2018. Pro forma adjustments include the revenue and earnings of Navigators Group for each period as well as amortization of identifiable intangible assets acquired.

Pro Forma Results for the Nine Months Ended September 30



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