XML 57 R14.htm IDEA: XBRL DOCUMENT
v3.21.1

Derivative Instruments | 3 Months Ended
--- | ---
Mar. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives Instruments | 6. 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 or income generation covered call 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 2020 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. 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 3 month LIBOR + 2.125% junior subordinated debt to fixed interest payments. For further information, see the Junior Subordinated Debentures section within Note 14 - Debt of Notes to the Consolidated Financial Statements, included in The Hartford's 2020 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 hedges of interest rate, foreign currency and equity risk of certain fixed maturities and equities. In addition, hedging and replication strategies that utilize credit default swaps 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 or the Company 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 March 31, 2021 and December 31, 2020, 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. 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.
Derivative Balance Sheet Presentation
| Net Derivatives |  | Asset Derivatives |  | Liability Derivatives
| Notional Amount | Fair Value |  | Fair Value |  | Fair Value
Hedge Designation/ Derivative Type | Mar. 31, 2021 | Dec. 31, 2020 | Mar. 31, 2021 | Dec. 31, 2020 |  | Mar. 31, 2021 | Dec. 31, 2020 |  | Mar. 31, 2021 | Dec. 31, 2020
Cash flow hedges |  |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 2,340 |  | $ | 2,340 |  | $ | — |  | $ | — |  |  | $ | — |  | $ | — |  |  | $ | — |  | $ | — |
Foreign currency swaps | 297 |  | 286 |  | (10) |  | (13) |  |  | 3 |  | 3 |  |  | (13) |  | (16) |
Total cash flow hedges | 2,637 |  | 2,626 |  | (10) |  | (13) |  |  | 3 |  | 3 |  |  | (13) |  | (16) |
Non-qualifying strategies |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  |  |  |  |  |  |  |  |  |
Interest rate swaps and futures | 7,926 |  | 8,335 |  | (44) |  | (69) |  |  | 4 |  | 4 |  |  | (48) |  | (73) |
Foreign exchange contracts |  |  |  |  |  |  |  |  |  |
Foreign currency swaps and forwards | 269 |  | 269 |  | — |  | — |  |  | — |  | — |  |  | — |  | — |
Credit contracts |  |  |  |  |  |  |  |  |  |
Credit derivatives that purchase credit protection | 6 |  | 6 |  | — |  | — |  |  | — |  | — |  |  | — |  | — |
Credit derivatives that assume credit risk [1] | 675 |  | 675 |  | 21 |  | 21 |  |  | 21 |  | 21 |  |  | — |  | — |
Credit derivatives in offsetting positions | 216 |  | 218 |  | — |  | — |  |  | 5 |  | 5 |  |  | (5) |  | (5) |
Total non-qualifying strategies | 9,092 |  | 9,503 |  | (23) |  | (48) |  |  | 30 |  | 30 |  |  | (53) |  | (78) |
Total cash flow hedges and non-qualifying strategies | $ | 11,729 |  | $ | 12,129 |  | $ | (33) |  | $ | (61) |  |  | $ | 33 |  | $ | 33 |  |  | $ | (66) |  | $ | (94) |
Balance Sheet Location |  |  |  |  |  |  |  |  |  |
Fixed maturities, available-for-sale | $ | 269 |  | $ | 269 |  | $ | — |  | $ | — |  |  | $ | — |  | $ | — |  |  | $ | — |  | $ | — |
Other investments | 9,657 |  | 9,585 |  | 22 |  | 23 |  |  | 24 |  | 25 |  |  | (2) |  | (2) |
Other liabilities | 1,803 |  | 2,275 |  | (55) |  | (84) |  |  | 9 |  | 8 |  |  | (64) |  | (92) |
Total derivatives | $ | 11,729 |  | $ | 12,129 |  | $ | (33) |  | $ | (61) |  |  | $ | 33 |  | $ | 33 |  |  | $ | (66) |  | $ | (94) |
[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.
Offsetting Derivative Assets and Liabilities
| (i) | (ii) | (iii) = (i) - (ii) | (iv) | (v) = (iii) - (iv)
|  |  | Net Amounts Presented in the Statement of Financial Position | Collateral Disallowed for Offset in the Statement of Financial Position |
| Gross Amounts of Recognized Assets (Liabilities) | Gross Amounts Offset in the Statement of Financial Position | Derivative Assets [1] (Liabilities) [2] | Accrued Interest and Cash Collateral (Received) [3] Pledged [2] | Financial Collateral (Received) Pledged [4] | Net Amount
As of March 31, 2021 |  |  |  |  |  |
Other investments | $ | 33 |  | $ | 30 |  | $ | 22 |  | $ | (19) |  | $ | 1 |  | $ | 2 |
Other liabilities | $ | (66) |  | $ | (4) |  | $ | (55) |  | $ | (7) |  | $ | (57) |  | $ | (5) |
As of December 31, 2020 |  |  |  |  |  |
Other investments | $ | 33 |  | $ | 31 |  | $ | 23 |  | $ | (21) |  | $ | 1 |  | $ | 1 |
Other liabilities | $ | (94) |  | $ | (6) |  | $ | (84) |  | $ | (4) |  | $ | (83) |  | $ | (5) |
[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 March 31, |  |
|  |  | 2021 | 2020 |  |  |
Interest rate swaps |  |  | $ | 10 |  | $ | 32 |  |  |  |
Foreign currency swaps |  |  | 4 |  | 28 |  |  |  |
Total |  |  | $ | 14 |  | $ | 60 |  |  |  |
Gain (Loss) Reclassified from AOCI into Income
| Three Months Ended March 31, |  |
| 2021 | 2020 |  |  |
| Net Realized Capital Gain/(Loss) | Net Investment Income | Interest Expense | Net Realized Capital Gain/(Loss) | Net Investment Income | Interest Expense |  |  |  |  |  |  |
Interest rate swaps | $ | — |  | $ | 10 |  | $ | (2) |  | $ | — |  | $ | 3 |  | $ | — |  |  |  |  |  |  |  |
Foreign currency swaps | — |  | 1 |  | — |  | — |  | 1 |  | — |  |  |  |  |  |  |  |
Total | $ | — |  | $ | 11 |  | $ | (2) |  | $ | — |  | $ | 4 |  | $ | — |  |  |  |  |  |  |  |
Total amounts presented on the Condensed Consolidated Statement of Operations | $ | 80 |  | $ | 509 |  | $ | 57 |  | $ | (231) |  | $ | 459 |  | $ | 64 |  |  |  |  |  |  |  |
As of March 31, 2021, the before tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $35. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities and long-term debt that will occur over the next twelve months. At that time, the Company will recognize the deferred net gains (losses) as an adjustment to net investment income and interest expense over the term of the investment cash flows. During the three months ended March 31, 2021 and 2020, the Company had no 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 March 31, |  |
| 2021 | 2020 |  |  |
Foreign exchange contracts |  |  |  |  |
Foreign currency swaps and forwards | $ | — |  | $ | 3 |  |  |  |
Interest rate contracts |  |  |  |  |
Interest rate swaps, swaptions, and futures | 32 |  | 20 |  |  |  |
Credit contracts |  |  |  |  |
Credit derivatives that purchase credit protection | — |  | 6 |  |  |  |
Credit derivatives that assume credit risk | 3 |  | (12) |  |  |  |
Equity contracts |  |  |  |  |
Equity index swaps and options | — |  | 75 |  |  |  |
Total [1] | $ | 35 |  | $ | 92 |  |  |  |
[1]Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. Credit Risk Assumed through Credit Derivatives The Company enters into credit default swaps that assume credit risk of a single entity or referenced index in order to synthetically replicate investment transactions that are permissible under the Company's investment policies. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include standard diversified portfolios of corporate and CMBS issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.
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 March 31, 2021
Single name credit default swaps |  |  |  |  |  |  |
Investment grade risk exposure | $ | 100 |  | $ | 2 |  | 5 years | Corporate Credit | A | $ | — |  | $ | — |
Basket credit default swaps [4] |  |  |  |  |  |  |
Investment grade risk exposure | 500 |  | 12 |  | 5 years | Corporate Credit | BBB+ | — |  | — |
Below investment grade risk exposure | 75 |  | 7 |  | 5 years | Corporate Credit | B+ | — |  | — |
Investment grade risk exposure | 100 |  | 1 |  | 7 years | CMBS Credit | AAA | 100 |  | (1) |
Below investment grade risk exposure | 8 |  | (4) |  | Less than 1 year | CMBS Credit | CCC+ | 8 |  | 4 |
Total [5] | $ | 783 |  | $ | 18 |  |  |  |  | $ | 108 |  | $ | 3 |
As of December 31, 2020
Single name credit default swaps |  |  |  |  |  |  |
Investment grade risk exposure | $ | 175 |  | $ | 9 |  | 5 years | Corporate Credit | A- | $ | — |  | $ | — |
Basket credit default swaps [4] |  |  |  |  |  |  |
Investment grade risk exposure | 500 |  | 12 |  | 5 years | Corporate Credit | BBB+ | — |  | — |
Investment grade risk exposure | 100 |  | 1 |  | 8 years | CMBS Credit | AAA | 100 |  | (1) |
Below investment grade risk exposure | 9 |  | (4) |  | Less than 1 year | CMBS Credit | CCC+ | 9 |  | 4 |
Total [5] | $ | 784 |  | $ | 18 |  |  |  |  | $ | 109 |  | $ | 3 |
[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. 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 March 31, 2021 and December 31, 2020, the Company has not pledged cash collateral associated with derivative instruments. In general, collateral receivable is 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 March 31, 2021 and December 31, 2020, the Company pledged securities collateral associated with derivative instruments with a fair value of $61 and $90, 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 March 31, 2021 and December 31, 2020, the Company has pledged initial margin of securities related to OTC-cleared and exchange traded derivatives with a fair value of $60 and $83, respectively, which are included within fixed maturities on the Company's Condensed Consolidated Balance Sheets. As of March 31, 2021 and December 31, 2020, the Company accepted cash collateral associated with derivative instruments of $22 and $24, 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 March 31, 2021 and December 31, 2020, with a fair value of $1 as of both dates, which the Company has the right to sell or repledge. As of March 31, 2021 and December 31, 2020, the Company had no repledged securities and no 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.

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration