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Basis of Presentation and Significant Accounting Policies
 6 Months Ended
Jun. 30, 2023
Accounting Policies [Abstract]  
Basis of Presentation and Accounting Policies
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 funds ("ETF") to individual and business customers in the United States as well as in the United Kingdom and other international locations (collectively, “The Hartford”, the “Company”, “we” or “our”).
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 2022 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 statement 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 2022 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. 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; and contingencies relating to corporate litigation and regulatory matters.
Reclassifications
Certain reclassifications have been made to prior period financial information to conform to the current period presentation.
Adoption of New Accounting Standards
Reserve for Future Policy Benefits
On January 1, 2023, the Company adopted the Financial Accounting Standard Board's ("FASB") updated guidance on accounting for long duration insurance contracts, which was applied on a modified retrospective basis as of January 1, 2021.
The new guidance requires the discount rate assumption to be updated, as of the transition date and quarterly going forward, to a current upper-medium grade fixed-income investment yield, which has been interpreted to represent a yield based on single-A credit rated fixed maturity instruments with similar duration to the liability. The new guidance also eliminated the requirement to adjust the reserve for future policy benefits for unrealized gains and losses on fixed maturity investments as if those unrealized gains and losses were realized (referred to as shadow reserves). The change in the reserve estimate resulting from updating the discount rate assumptions and eliminating shadow reserves was recognized as a net cumulative effect adjustment that increased the reserve for future policy benefits by $85 and decreased AOCI by $65, net of deferred tax effects as of January 1, 2021.
The new guidance also requires that underlying cash flow assumptions (i.e., mortality, lapse and expense) in the reserve for future policy benefits be based on best estimate assumptions. The adjustments to the reserve for future policy benefits at adoption resulted in establishing a deferred profit liability ("DPL") on limited pay contracts of $18 representing the estimated profits based on best estimate cash flow assumptions.
The effect of adopting this guidance on the Company’s reserve for future policy benefits was as follows:
Impact of Adoption on Reserve for Future Policy Benefits
Payout AnnuitiesLife ConversionsPaid-up LifeDPLOtherTotal
Reserve for Future Policy Benefits as of December 31, 2020$189 $94 $267 $— $88 $638 
Adjustments:
Removal of shadow reserve [1](26)— — — — (26)
Update cash flow assumptions and establish DPL(16)— (2)18 — — 
Effect of measurement at current single-A rate [1]59 21 29 — 2 111 
Total Adjustments17 21 27 18 2 85 
Reserve for Future Policy Benefits as of January 1, 2021206 115 294 18 90 723 
Change in reserves due to changes in the single-A rate(11)(7)(15)— — (33)
Other changes in reserves(7)(14)(17)2 (8)(44)
Reserve for Future Policy Benefits as of December 31, 2021$188 $94 $262 $20 $82 $646 
[1]These changes were reflected as an adjustment to opening AOCI as of January 1, 2021, with a corresponding deferred tax benefit and increase in reinsurance recoverables of $18 and $2, respectively, resulting in a net decrease to AOCI of $65.
The effect of adopting this guidance on the Company’s Condensed Consolidated Balance Sheets as of January 1, 2021 as well as December 31, 2022 and 2021, Condensed
Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 was as follows:
Impact of Adoption on Condensed Consolidated Balance Sheets
As of December 31, 2022As of December 31, 2021As of January 1, 2021
As previously reportedEffect of changeAs currently reportedAs previously reportedEffect of changeAs currently reportedBalance prior to adoptionEffect of changeAs currently reported
Reinsurance recoverables$6,966 $(2)$6,964 $6,523 $1 $6,524 $6,011 $2 $6,013 
Deferred income taxes, net$1,449 $(12)$1,437 $270 $11 $281 $46 $18 $64 
Reserve for future policy benefits$561 $(59)$502 $596 $50 $646 $638 $85 $723 
Retained earnings$17,048 $10 $17,058 $15,764 $6 $15,770 $13,918 $— $13,918 
AOCI$(3,876)$35 $(3,841)$172 $(44)$128 $1,170 $(65)$1,105 
Total stockholders' equity$13,631 $45 $13,676 $17,843 $(38)$17,805 $18,556 $(65)$18,491 
Impact of Adoption on Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2022Six Months Ended June 30, 2022
As previously reportedEffect of changeAs currently reportedAs previously reportedEffect of changeAs currently reported
Benefits, losses and loss adjustment expenses$3,076 $(2)$3,074 $6,194 $— $6,194 
Income before income taxes$552 $2 $554 $1,095 $— $1,095 
Income tax expense$110 $— $110 $208 $— $208 
Net income$442 $2 $444 $887 $— $887 
Net income available to common stockholders$437 $2 $439 $877 $— $877 
Net income available to common stockholders per common share
Basic$1.33 $0.01 $1.34 $2.66 $— $2.66 
Diluted$1.32 $— $1.32 $2.62 $— $2.62 
Impact of Adoption on Condensed Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2022Six Months Ended June 30, 2022
As previously reportedEffect of changeAs currently reportedAs previously reportedEffect of changeAs currently reported
Change in net unrealized gain (loss) on fixed maturities, AFS$(1,592)$(5)$(1,597)$(3,474)$(15)$(3,489)
Change in liability for future policy benefits adjustments$— $29 $29 $— $72 $72 
Other comprehensive loss, net of tax$(1,563)$24 $(1,539)$(3,434)$57 $(3,377)
Comprehensive loss$(1,121)$26 $(1,095)$(2,547)$57 $(2,490)
SIGNIFICANT ACCOUNTING POLICIES
Reserve for Future Policy Benefits
The Company’s 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 reported in the Corporate category.
Contracts are grouped into cohorts by contract type and issue year. The Company establishes reserves for future policy benefits using the net premium approach, which represents the present value of future policyholder benefits and related expenses less the present value of future net premiums. Net premiums are calculated by multiplying gross premiums for the contracts in a specific cohort by a net premium ratio. The net premium ratio is determined for the lifetime of a given cohort as the present value of net benefits divided by the present value of gross premiums. Related expenses include termination and settlement costs and exclude acquisition costs and non-claim related costs, such as costs relating to investments, general administration, policy maintenance, product development, market research and general overhead or any other costs, which are expensed as incurred.
The Company estimates premiums, benefits and related expense cash flows using methods that include assumptions, such as estimates of mortality, lapse, and claim-related expenses, and the possible impact of inflation on those expenses. Benefits include all guaranteed cash flows to be paid to the policyholder.
The reserve for future policy benefits is adjusted for differences between actual and expected experience. Each quarter, the Company updates its estimates of cash flows expected over the life of a group of contracts using actual historical experience. These updated cash flows are used to calculate the revised net premiums and net premium ratio, which are used to derive an updated reserve for future policy benefits. In subsequent periods, the revised net premiums are used to measure the reserve for future policy benefits, subject to future revisions. Future cash flow assumptions, including mortality, lapse and expense are reviewed and, if a change is indicated, updated at least annually in the third quarter.
The difference between the newly calculated reserve balance and the reserve balance before updating for actual experience and/or future cash flow assumptions is the remeasurement gain or loss, which is immaterial for the three and six months ended June 30, 2023 and 2022, and is presented in benefits losses and loss adjustments expense in the Condensed Consolidated Statements of Operations. Changes to the reserve due to updates to cash flow assumptions discounted at the discount rate used immediately prior to transition are recognized on a catch-up basis in the Condensed Consolidated Statement of Operations.
The discount rate assumption is an equivalent single rate that is based on a current market observable, upper-medium grade fixed maturity yield. This has been interpreted to represent a yield based on single-A credit rated fixed maturity instruments with similar duration to the liability. The Company uses the yield of a market observable index of single-A credit rated fixed maturities as the basis for setting the discount rate. The discount rate assumption is updated quarterly and the change in the reserve estimate resulting from updating the discount rate assumption is recognized in other comprehensive income.