HARTFORD FINANCIAL SERVICES GROUP, INC.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
or
| o | 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
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)
(Address of principal executive offices) (Zip Code)
(860) 547-5000
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: the following, all of which are listed on the New York Stock Exchange, Inc.
Common Stock, par value $0.01 per share
6.1% Notes due October 1, 2041
Common Stock, par value $0.01 per share
6.1% Notes due October 1, 2041
Securities registered pursuant to Section 12(g) of the Act:
| 7.9% Notes due June 15, 2010 | 5.375% Notes due March 15, 2017 | |
| 5.25% Notes due October 15, 2011 | 6.3% Notes due March 15, 2018 | |
| 4.625% Notes due July 15, 2013 | 6.0% Notes due January 15, 2019 | |
| 4.75% Notes due March 1, 2014 | 5.95% Notes due October 15, 2036 | |
| 7.3% Debentures due November 1, 2015 | 8.125% Junior Subordinated Debentures due June 15, 2068 | |
| 5.5% Notes due October 15, 2016 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
þ
No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes
o
No
þ
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.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 and post such files).
Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant
as of June 30, 2009 was approximately $3.9 billion, based on the closing price of $11.87 per share
of the Common Stock on the New York Stock Exchange on June 30, 2009.
As of February 15, 2010, there were outstanding 384,128,538 shares of Common Stock, $0.01 par value
per share, of the registrant.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for its 2010 annual meeting of shareholders
are incorporated by reference in Part III of this Form 10-K.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
2
Table of Contents
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,” and similar references to future periods.
Forward-looking statements are based on our current expectations and assumptions regarding
economic, competitive and legislative developments. Because forward-looking statements relate to
the future, they are subject to inherent uncertainties, risks and changes in circumstances that are
difficult to predict. They have been made based upon management’s expectations and beliefs
concerning future developments and their potential effect upon The Hartford Financial Services
Group, Inc. and its subsidiaries (collectively, the “Company”). Future developments may not be in
line with management’s expectations or have unanticipated effects. Actual results could differ
materially from expectations, depending on the evolution of various factors, including those set
forth in Part I, Item 1A. These important risks and uncertainties include:
| • |
significant risks and uncertainties related to the Company’s current operating environment,
which reflects continued volatility in financial markets, constrained capital and credit
markets and uncertainty about the timing and strength of an economic recovery and the impact
of governmental budgetary and regulatory initiatives and whether management’s initiatives to
address these risks will be effective;
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risks associated with our continued execution of steps to realign our business and
reposition our investment portfolio, including the potential need to adjust our plans to take
other restructuring actions, such as divestitures;
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market risks associated with our business, including changes in interest rates, credit
spreads, equity prices, foreign exchange rates, as well as challenging or deteriorating
conditions in key sectors such as the commercial real estate market, that have pressured our
results and are expected to continue to do so in 2010;
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volatility in our earnings resulting from our recent adjustment of our risk
management program to emphasize protection of statutory surplus;
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the impact on our statutory capital of various factors, including many that are outside the
Company’s control, which can in turn affect our credit and financial strength ratings, cost of
capital, regulatory compliance and other aspects of our business and results;
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risks to our business, financial position, prospects and results associated with downgrades
in the Company’s financial strength and credit ratings or negative rating actions relating to
our investments;
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the potential for differing interpretations of the methodologies, estimations and
assumptions that underlie the valuation of the Company’s financial instruments that could
result in changes to investment valuations;
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the subjective determinations that underlie the Company’s evaluation of
other-than-temporary impairments on available-for-sale securities;
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losses due to nonperformance or defaults by others;
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the potential for further acceleration of deferred policy acquisition cost amortization;
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the potential for further impairments of our goodwill or the potential for establishing
valuation allowances against deferred tax assets;
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the possible occurrence of terrorist attacks and the Company’s ability to contain its
exposure, including the effect of the absence or insufficiency of applicable terrorism
legislation on coverage;
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the difficulty in predicting the Company’s potential exposure for asbestos and
environmental claims;
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the possibility of a pandemic or other man-made disaster that may adversely affect the
Company’s businesses and cost and availability of reinsurance;
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weather and other natural physical events, including the severity and frequency of storms,
hail, snowfall and other winter conditions, natural disasters such as hurricanes and
earthquakes, as well as climate change, including effects on weather patterns, greenhouse
gases, sea, land and air temperatures, sea levels, rain and snow;
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the response of reinsurance companies under reinsurance contracts and the availability,
pricing and adequacy of reinsurance to protect the Company against losses;
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the possibility of unfavorable loss development;
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actions by our competitors, many of which are larger or have greater financial resources
than we do;
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the costs, compliance and other consequences of the Company’s participation in the Capital
Purchase Program under the Emergency Economic Stabilization Act of 2008 and the eventual
repayment thereof;
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unfavorable judicial or legislative developments;
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3
Table of Contents
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the potential effect of domestic and foreign regulatory developments, including those that
could adversely impact the demand for the Company’s products, operating costs and required
capital levels, including changes to statutory reserves and/or risk-based capital requirements
related to secondary guarantees under universal life and variable annuity products;
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the Company’s ability to distribute its products through distribution channels, both
current and future;
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the uncertain effects of emerging claim and coverage issues;
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the ability of the Company’s subsidiaries to pay dividends to the Company;
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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;
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the Company’s ability to maintain the availability of its systems and safeguard the
security of its data in the event of a disaster or other unanticipated events;
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the potential for difficulties arising from outsourcing relationships;
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the impact of potential changes in federal or state tax laws, including changes affecting
the availability of the separate account dividend received deduction;
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the impact of potential changes in accounting principles and related financial reporting
requirements;
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the Company’s ability to protect its intellectual property and defend against claims of
infringement; and
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other factors described in such forward-looking statements.
|
Any forward-looking statement made by us in this document speaks only as of the date on which it is
made. Factors or events that could cause our actual results to differ may emerge from time to
time, and it is not possible for us to predict all of them. We undertake no obligation to publicly
update any forward-looking statement, whether as a result of new information, future developments
or otherwise, except as may be required by law.
4
Table of Contents
(Dollar amounts in millions, except for per share data, unless otherwise stated)
General
The Hartford Financial Services Group, Inc. (together with its subsidiaries, “The Hartford” or the
“Company”) is an insurance and financial services company. The Hartford, headquartered in
Connecticut, is among the largest providers of investment products, individual life, group life and
group disability insurance products, and property and casualty insurance products in the United
States of America. Hartford Fire Insurance Company, founded in 1810, is the oldest of The
Hartford’s subsidiaries. The Hartford writes its business primarily in the United States of
America. During the second quarter of 2009, the Company acquired Federal Trust Corporation and
became a savings and loan holding company. At December 31, 2009, total assets and total
stockholders’ equity of The Hartford were $307.7 billion and $17.9 billion, respectively.
Organization
The Hartford strives to maintain and enhance its position as a market leader within the financial
services industry. The Company sells diverse and innovative products through multiple distribution
channels to consumers and businesses. The Company is continuously seeking to develop and expand
its distribution channels, achieving cost efficiencies through economies of scale and improved
technology, and capitalizes on its brand name and The Hartford Stag Logo, one of the most
recognized symbols in the financial services industry.
As a holding company that is separate and distinct from its subsidiaries, The Hartford Financial
Services Group, Inc. has no significant business operations of its own. Therefore, it relies on
the dividends from its insurance companies and other subsidiaries as the principal source of cash
flow to meet its obligations. Additional information regarding the cash flow and liquidity needs
of The Hartford Financial Services Group, Inc. may be found in the Capital Resources and Liquidity
section of Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations (“MD&A”).
The Company maintains a retail mutual fund operation, whereby the Company, through wholly-owned
subsidiaries, provides investment management and administrative services to series of The Hartford
Mutual Funds, Inc.; The Hartford Mutual Funds II, Inc.; and The Hartford Income Shares Fund, Inc.
(collectively, “mutual funds”), consisting of 52 mutual funds and 1 closed-end fund, as of December
31, 2009. The Company charges fees to these funds, which are recorded as revenue by the Company.
These mutual funds are registered with the Securities and Exchange Commission (“SEC”) under the
Investment Company Act of 1940. The Company, through its wholly-owned subsidiaries, also provides
investment management and administrative services (for which it receives revenue) for 18 mutual
funds established under the laws of the Province of Ontario, Canada, and registered with the
Ontario Securities Commission.
The mutual funds are owned by the shareholders of those funds and not by the Company. As such, the
mutual fund assets and liabilities and related investment returns are not reflected in the
Company’s Consolidated Financial Statements since they are not assets, liabilities and operations
of the Company.
Reporting Segments
The Hartford is organized into two major operations: Life and Property & Casualty, each containing
reporting segments. Within the Life and Property & Casualty operations, The Hartford conducts
business principally in eleven reporting segments. Corporate primarily includes the Company’s debt
financing and related interest expense, as well as other capital raising activities, banking
operations and certain purchase accounting adjustments.
The following is a discussion of Life and Property & Casualty operations, including principal
products, distribution, and competition. For financial disclosures on revenues by product, profit
and loss, and assets for each reporting segment, see Note 3 of the Notes to Consolidated Financial
Statements.
Life Segments
Life is organized into six reporting segments, Retail Products Group (“Retail”), Individual Life,
Group Benefits, Retirement Plans, International and Institutional Solutions Group
(“Institutional”). Life’s Other category includes: leveraged private placement life insurance;
corporate items not directly attributable to any of its reporting segments; the mark-to-mark
adjustment for international variable annuity account assets that are classified as equity
securities, trading, and related change in interest credited; and intersegment eliminations.
For disclosures of assets under management, account values, fully insured ongoing premiums, life
insurance in-force and net investment spread, see Part II, Item 7, MD&A, Key Performance Measures
and Ratios and the respective segment discussions. Life provides
investment products for approximately 7
million customers; life insurance for approximately 753,000 customers, group benefits products for
millions of individuals, and maintains in-force annuity products for approximately 485,000
International customers.
5
Table of Contents
Life Principal Products
Retail provides variable and fixed individual annuities with living and death benefit guarantees,
mutual funds and 529 plans in the United States. In October 2009, the Company launched a new
variable annuity product designed to meet customer needs for growth and income within the risk
tolerances of The Hartford which is replacing its guaranteed minimum withdrawal benefit product.
Individual Life provides variable universal life, universal life, interest sensitive whole life and
term life insurance products to affluent, emerging affluent and business life insurance clients.
Group Benefits provides group life, accident and disability coverage, group retiree health and
voluntary benefits to individual members of employer groups, associations, affinity groups and
financial institutions. Group Benefits offers disability underwriting, administration, claims
processing services and reinsurance to other insurers and self-funded employer plans. Policies
sold in this segment are generally term insurance allowing Group Benefits to adjust the rates or
terms of its policies in order to minimize the adverse effect of market trends, declining interest
rates, and other factors. Policies are typically sold with one-, two- or three-year rate
guarantees depending upon the product.
Retirement Plans provides retirement products and services, including asset management and plan
administration, to small and medium-size corporations pursuant to Section 401(k) of the Internal
Revenue Code of 1986, as amended (“401(k)”). Retirement also provides retirement products and
services, including asset management and plan administration, to municipalities and not-for-profit
organizations pursuant to Section 457 and 403(b) of the Internal Revenue Code of 1986, as amended
(“457 and 403(b)”). In 2008, Retirement completed three acquisitions. Return on assets was lower
for Retirement Plans overall in 2009 reflecting in part, a full year of the new business mix
represented by the acquisitions, which includes larger, more institutionally priced plans,
predominantly executed on a mutual fund platform, and the cost of maintaining multiple technology
platforms during the integration period.
International, with operations in Japan, Brazil, Ireland, Canada, and the United Kingdom, provides
investments, retirement savings and other insurance and savings products to individuals and groups
outside the United States. During the second quarter of 2009, the Company suspended all new sales
in the Japan and European operations. International is currently completing its restructuring of
its operations to maximize profitability and capital efficiency while continuing to focus on risk
management and maintaining appropriate service levels for in-force policies. In the fourth quarter
of 2009, International has entered into an agreement to divest its Brazil joint venture.
Institutional, prior to the fourth quarter of 2009, provided variable private placement life
insurance (“PPLI”), structured settlements, institutional annuities, longevity assurance, income
annuities, institutional mutual funds and stable value investment products. In the fourth quarter
of 2009, the Company completed a strategic review of the Institutional business and has decided to
exit several businesses that have been determined to be outside of the Company’s core business
model. Institutional PPLI, mutual funds, income annuities and certain institutional annuities will
continue to be managed for growth. The private placement life insurance industry (including the
corporate-owned and bank-owned life insurance markets) has experienced a slowdown in sales due to,
among other things, limited availability of stable value wrap providers. We believe that the
Company’s current PPLI assets will experience high persistency, but our ability to grow this
business in the future will be affected by near term market and industry challenges. Structured
settlements, guaranteed investment products, and most institutional annuities will not be actively
marketed, however, certain guaranteed investment products, such as funding agreements, may be
offered on a selective basis.
Life Distribution
Retail’s distribution network includes national and regional broker-dealer organizations, banks and
other financial institutions and independent financial advisors. Life periodically negotiates
provisions and terms of its relationships with unaffiliated parties, and there can be no assurance
that such terms will remain acceptable to Life or such third parties. Life’s primary wholesaler of
its individual annuities is Hartford Life Distributors, LLC, and its affiliate, PLANCO, LLC
(collectively “HLD”) which are indirect wholly-owned subsidiaries of Hartford Life. HLD provides
sales support to registered representatives, financial planners and broker-dealers at brokerage
firms and banks across the United States. As part of the Company’s assessment of its opportunities
in the variable annuity marketplace it significantly scaled back its HLD operations in 2009.
Individual Life’s distribution network includes national and regional broker-dealer organizations,
banks, independent agents, independent life and property-casualty agents, and Woodbury Financial
Services, an indirect, wholly-owned subsidiary retail broker-dealer. To wholesale Life’s products,
Life has a group of highly qualified life insurance professionals with specialized training in
sophisticated life insurance sales.
Group Benefits distribution network includes an experienced group of Company employees, managed
through a regional sales office system, to distribute its group insurance products and services
through a variety of distribution outlets, including brokers, consultants, third-party
administrators and trade associations.
Retirement Plans distribution network includes Company employees with extensive experience selling
its products and services through national and regional broker-dealer firms, banks and other
financial institutions.
International’s distribution network, prior to the second quarter of 2009, included broker-dealer
organizations, banks and other financial institutions and independent financial advisors.
International suspended sales in the second quarter of 2009 in Japan and the U.K.
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Table of Contents
Institutional’s distribution network includes: specialized brokers, with expertise in the large
case market; financial advisors that work with individual investors; investment banking and wealth
management specialists; benefits consulting firms; investment consulting firms employed by
retirement plan sponsors; and Hartford employees.
Life Competition
Retail and Retirement compete with numerous other insurance companies as well as certain banks,
securities brokerage firms, independent financial advisors and other financial intermediaries
marketing annuities, mutual funds and other retirement-oriented products. Product sales are
affected by competitive factors such as investment performance ratings, product design, visibility
in the marketplace, financial strength ratings, distribution capabilities, levels of charges and
credited rates, reputation and customer service.
Retail’s annuity deposits continue to decline resulting from the recent equity market volatility
and competition. Many competitors have responded to the recent equity market volatility by
increasing the price of their living benefit products and changing the level of the guarantee
offered. Management believes that the most significant industry de-risking changes have occurred.
However, competitors continue to sell annuity products with significant guarantees. In the first
six months of 2009, the Company increased fees on in-force variable annuity guarantees in order to
address the risks and costs associated with variable annuity benefit features. The Company
continues to explore other risk limiting techniques including product design, hedging and
reinsurance. As part of the Company’s de-risking initiative, the Company is transitioning to a new
variable annuity product designed to meet customers’ future income needs within the risk tolerances
of the Company.
Retail mutual funds compete with other mutual fund companies and differentiate themselves through
product solutions, performance, expenses, wholesaling and service. In this non-proprietary broker
sold market, The Hartford and its competitors compete aggressively for net sales. Success will be
driven by diversifying net sales across the mutual fund platform, delivering superior investment
performance and creating new investment solutions for current and future mutual fund shareholders.
For the 457 and 403(b) as well as the 401(k) markets, which offer mutual funds wrapped in a
variable annuity, variable funding agreement, or mutual fund retirement program, the variety of
available funds and their performance is most important to plan sponsors. The competitors tend to
be the major mutual fund companies. The past few years have seen consolidation among industry
providers seeking to increase scale, improve cost efficiencies, and enter new market segments. The
consolidation of providers is expected to continue as smaller providers exit the market.
Individual Life competes with approximately 1,000 life insurance companies in the United States, as
well as other financial intermediaries marketing insurance products
.
Product sales are affected
primarily by the breadth and quality of life insurance products, pricing, relationships with
third-party distributors, effectiveness of wholesaling support, pricing and availability of
reinsurance, and the quality of underwriting and customer service. The individual life industry
continues to see a distribution shift away from the traditional life insurance sales agents, to the
consultative financial advisor as the place people go to buy their life insurance. Individual
Life’s regional sales office system is a differentiator in the market and allows it to compete
effectively across multiple distribution outlets.
Group Benefits competes with numerous other insurance companies and other financial intermediaries
marketing insurance products. Group Benefits focuses on its risk management expertise and on
efficiencies and economies of scale to derive a competitive advantage. Competitive factors
primarily affecting Group Benefits are the variety and quality of products and services offered,
the price quoted for coverage and services, Life’s relationships with its third-party distributors,
and the quality of customer service. In addition, active price competition continues in the
marketplace resulting in longer rate guarantee periods being offered to customers. Top tier
carriers in the marketplace also offer on-line and self service capabilities to agents and
consumers. The relatively large size and underwriting capacity of the Group Benefits business
provides opportunities not available to smaller companies.
Institutional competes with other life insurance companies and asset managers who provide
investment and risk management solutions. Product sales are often affected by competitive factors
such as investment performance, company credit ratings, perceived financial strength, product
design, marketplace visibility, distribution capabilities, fees, credited rates, and customer
service. In 2009, ratings agency downgrades, as well as changes in the Company’s strategic business
model, limited Institutional sales and resulted in the Company exiting certain markets. For
institutional mutual funds, the variety of available funds, fee levels, and fund performance are
most important to plan sponsors and investment consultants. Competitors tend to be the major
mutual fund companies, insurance companies, and asset managers.
7
Table of Contents
Property & Casualty Segments
Property & Casualty is organized into five reporting segments: the underwriting segments of
Personal Lines, Small Commercial, Middle Market and Specialty Commercial (collectively “Ongoing
Operations”); and the Other Operations segment. For a discussion of Property & Casualty operations
including segment performance, see Part II, Item 7, MD&A, Key Performance Measures and Ratios and
the respective segment discussions.
Property & Casualty Principal Products
Property & Casualty provides (1) workers’ compensation, property, automobile, liability, umbrella,
specialty casualty, marine, livestock and fidelity and surety coverages to commercial accounts
primarily throughout the United States; (2) professional liability coverage and directors and
officers liability coverage; (3) automobile, homeowners and home-based business coverage to
individuals throughout the United States; and (4) insurance-related services.
The Hartford seeks to distinguish itself in the property and casualty market through its product
depth and innovation, distribution capacity, customer service expertise, and technology for ease of
doing business.
Personal Lines provides standard automobile, homeowners and home-based business coverages to
individuals across the United States, including a special program designed exclusively for members
of AARP. Over the past three years, The Hartford rolled out new auto and homeowners products with
more coverage options and customized pricing tailored to a customer’s individual risk. AARP
represents a significant portion of the total Personal Lines business and amounted to earned
premiums of $2.8 billion in both 2009 and 2008 and $2.7 billion in 2007. Personal Lines also
operates a member contact center for health insurance products offered through the AARP Health
program. In July, 2009, the Company extended the AARP Health program agreement through 2018.
Small Commercial and Middle Market provide workers’ compensation, property, automobile, liability
and umbrella coverages under several different products, primarily throughout the United States.
In Small Commercial, some of these coverages are sold together as part of a single multi-peril
package policy called Spectrum. The sale of Spectrum business owners’ package policies and
workers’ compensation policies accounts for most of the written premium in the Small Commercial
segment. Like Personal Lines, Small Commercial offers a product with more coverage options and
customized pricing based on the policyholder’s individualized risk characteristics. Workers’
compensation insurance accounts for the largest share of the written premium in the Middle Market
segment. Small Commercial businesses generally represent companies with up to $5 in annual
payroll, $15 in annual revenues or $15 in total property values while Middle market businesses
generally represent companies with greater than $5 in annual payroll, $15 in annual revenues or $15
in total property values.
Specialty Commercial offers a variety of customized insurance products and risk management
services. Specialty Commercial provides standard commercial insurance products including workers’
compensation, automobile and liability coverages to large-sized companies. Specialty Commercial
also provides professional liability, fidelity, surety and specialty casualty coverages. A
significant portion of specialty casualty business, including workers’ compensation business, is
written through large deductible programs where the insured typically provides collateral to
support loss payments made within their deductible. The specialty casualty business also provides
retrospectively-rated programs where the premiums are adjustable based on loss experience. Captive
and Specialty Programs within Specialty Commercial, provides insurance products and services
primarily to captive insurance companies, pools and self-insurance groups. In addition, Specialty
Commercial provides third-party administrator services for claims administration, integrated
benefits and loss control through Specialty Risk Services, LLC, a subsidiary of the Company.
The Other Operations segment operates under a single management structure, Heritage Holdings, which
is responsible for two related activities. The first activity is the management of certain
subsidiaries and operations of The Hartford that have discontinued writing new business. The
second is the management of claims (and the associated reserves) related to asbestos, environmental
and other exposures.
Property & Casualty Marketing and Distribution
Personal Lines reaches diverse markets through multiple distribution channels including direct
sales to the consumer, brokers and independent agents. In direct sales to the consumer, the
Company markets its products through a mix of media, including direct marketing, the internet and
advertising in publications. Most of Personal Lines’ direct sales to the consumer are through its
exclusive licensing arrangement with AARP to market automobile, homeowners and home-based business
insurance products to AARP’s nearly 37 million members. The Hartford’s exclusive licensing
arrangement with AARP continues until January 1, 2020 for automobile, homeowners and home-based
business. This agreement provides Personal Lines with an important competitive advantage as
management expects favorable “baby boom” demographics to increase AARP membership during this
period.
The Personal Lines Agency business provides customized products and services to customers through a
network of independent agents in the standard personal lines market. Similar to the other Ongoing
Operations’ segments, these independent agents are not employees of The Hartford. An important
strategic objective of the Company is to develop common products and processes for all of its
personal lines business regardless of the distribution channel. In 2009, the Company began selling
its new Open Road Advantage auto product in 20 states. In those 20 states, the Open Road Advantage
auto product is sold across the Company’s distribution channels, including directly to AARP
members, through independent agents to both AARP members and non-members and directly to
non-members in four pilot states.
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Table of Contents
Both Small Commercial and Middle Market provide insurance products and services through the
Company’s home office located in Hartford, Connecticut, and multiple domestic regional office
locations and insurance centers. The segments market their products nationwide utilizing brokers
and independent agents. The current pace of consolidation within the independent agent and broker
distribution channel will likely continue such that, in the future, a larger share of written
premium will likely be concentrated with the larger agents and brokers. In Small Commercial, the
Company also has relationships with payroll service providers whereby the Company offers insurance
products to customers of the payroll service providers.
Specialty Commercial provides insurance products and services through its home office located in
Hartford, Connecticut and multiple domestic office locations. The segment markets its products
nationwide utilizing a variety of distribution networks including independent retail agents,
brokers and wholesalers.
Property & Casualty Competition
The personal lines automobile and homeowners businesses are highly competitive. Personal lines
insurance is written by insurance companies of varying sizes that compete on the basis of price,
product, service (including claims handling), stability of the insurer and brand recognition.
Companies with recognized brands, direct sales capability and economies of scale will have a
competitive advantage. In the past three years, a number of carriers have increased their
advertising in an effort to gain new business and retain profitable business. This has been
particularly true of carriers that sell directly to the consumer. Sales of personal lines
insurance directly to the consumer have been growing faster than sales through agents, particularly
for auto insurance, and now sales of auto insurance direct to the consumer represent more than 20%
of total industry auto premium.
Carriers that distribute products mainly through agents have been competing by offering agents
increased commissions and additional incentives to attract new business. To distinguish themselves
in the marketplace, top tier carriers are offering on-line and self service capabilities to agents
and consumers. More agents have been using “comparative rater” tools that allow the agent to
compare premium quotes among several insurance companies. The use of comparative rater tools has
further increased price competition. Carriers with more efficient cost structures will have an
advantage in competing for new business through price. The use of data mining and predictive
modeling is used by more and more carriers to target the most profitable business and, carriers
have further segmented their pricing plans to expand market share in what they believe to be the
most profitable segments. Many insurers have reduced their writings of new homeowners business in
catastrophe-exposed states which has intensified competition in areas that are not subject to the
same level of catastrophes, such as states in the Midwest.
The total market premium for personal auto insurance is expected to grow about 3% in 2010 driven
primarily by increases in written pricing with new passenger vehicle sales expected to be
relatively flat. Despite the sluggish housing market, total market premium for personal homeowners
insurance is expected to increase about 3% to 4% in 2010 driven by rate increases and efforts to
improve insurance-to-value.
The insurance market for small commercial businesses is competitive with insurers seeking to
differentiate themselves through product, price, service and technology. The Hartford competes
against a number of large, national carriers as well as regional competitors in certain
territories. Competitors include other stock companies, mutual companies and other underwriting
organizations.
The market for small commercial business has become more competitive as favorable loss costs in the
past few years have led carriers to expand coverage and reduce pricing. Written premium growth
rates in the small commercial market have slowed and underwriting margins will likely decrease due
to earned pricing decreases and increases in loss cost severity. A number of companies have sought
to grow their business by increasing their underwriting appetite, appointing new agents and
expanding business with existing agents. Carriers serving middle market-sized accounts are more
aggressively competing for small commercial accounts as small commercial business has generally
been less price-sensitive.
Similar to the personal lines market, carriers offering small commercial products have been
improving their pricing sophistication and ease of doing business with the agent including the use
of predictive modeling tools and automation to speed up the process of evaluating a risk and
quoting on new business. As a result, price competition has increased, particularly for larger
accounts within small commercial. The relatively large size and underwriting capacity of The
Hartford provide opportunities not available to smaller insurers.
The middle market commercial insurance marketplace is a highly competitive environment regarding
product, price and service. The Hartford competes against a number of large, national carriers as
well as regional insurers in certain territories. Competitors include other stock companies,
mutual companies and alternative risk sharing groups.
Middle Market business is characterized as “high touch” with case-by-case underwriting and pricing
decisions. As such, compared to Small Commercial, the pricing of Middle Market accounts is prone
to more significant variation or cyclicality from year to year. Legislative reforms in a number of
states in recent years have helped to control indemnity costs on workers’ compensation claims, but
these have also led to rate reductions in many states.
In addition, companies writing middle market business have continued to experience a reduction in
average premium size due to shrinking company payrolls, exposure bases and continued price
competition. These factors coupled with soft market conditions, characterized by highly
competitive pricing on new business, have resulted in more new business opportunities in the
marketplace as customers shop their policies for a better price. Despite additional opportunities,
The Hartford continues to maintain a disciplined underwriting approach. In the soft market, Middle
Market is seeing an increase in industry specialization by agents and brokers which has placed even
greater importance on the carrier’s need to demonstrate industry expertise to win new business. To
gain a competitive advantage, carriers are improving automation with the agent or broker,
appointing more agents and enhancing their product offerings.
9
Table of Contents
Specialty Commercial is comprised of a diverse group of businesses that operate independently
within their specific industries. These businesses, while somewhat interrelated, have different
business models and operating cycles. Specialty Commercial competes with other stock companies,
mutual companies, alternative risk sharing groups and other underwriting organizations for much of
its business on an account by account basis due to the complex nature of each transaction. The
relatively large size and underwriting capacity of The Hartford provide opportunities not available
to smaller companies. Disciplined underwriting and targeted returns are the objectives of
Specialty Commercial since premium writings may fluctuate based on the segment’s view of perceived
market opportunity.
For specialty casualty business, written pricing competition continues to be significant,
particularly for the larger individual accounts. Carriers are trying to protect their in-force
casualty business by starting to renew policies well before the policy renewal date. Employing
this early renewal practice often prevents other carriers from quoting on the business, resulting
in fewer new business opportunities within the marketplace. With national account business, as the
market continues to soften, more insureds may opt for guaranteed cost policies in lieu of
loss-sensitive products.
Carriers writing professional liability business are increasingly more focused on profitable
private, middle market companies. This trend has continued as the downturn in the economy has led
to a significant drop in the number of initial public offerings and volatility for all public
companies. Losses taken on investment portfolios have affected the financial strength ratings of
some insurers in the marketplace for directors and officers and errors and omissions insurance and
a carrier’s new business opportunities can be significantly affected by customer perceptions about
its financial strength.
For surety business, favorable underwriting results within the past couple of years has led to more
intense competition for market share. This could lead to written price declines and less favorable
terms and conditions. Driven by the upheaval in the credit markets, new private construction
activity has declined dramatically, resulting in lower demand for contract surety business.
Life Reserves
Life insurance subsidiaries of the Company establish and carry as liabilities, predominantly, five
types of reserves: (1) a liability equal to the balance that accrues to the benefit of the
policyholder as of the financial statement date, otherwise known as the account value, (2) a
liability for unpaid losses, including those that have been incurred but not yet reported, (3) a
liability for future policy benefits, representing the present value of future benefits to be paid
to or on behalf of policyholders less the present value of future net premiums; (4) fair value
reserves for living benefits embedded derivative guarantees; and (5) death and living benefit
reserves which are computed based on a percentage of revenues less actual claim costs. The
liabilities for unpaid losses and future policy benefits are calculated based on actuarially
recognized methods using morbidity and mortality tables, which are modified to reflect Life’s
actual experience when appropriate. Liabilities for unpaid losses include estimates of amounts to
fully settle known reported claims as well as claims related to insured events that the Company
estimates have been incurred but have not yet been reported. Future policy benefit reserves are
computed at amounts that, with additions from estimated net premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are expected to be
sufficient to meet Life’s policy obligations at their maturities or in the event of an insured’s
disability or death. Other insurance liabilities include those for unearned premiums and benefits
in excess of account value. Reserves for assumed reinsurance are computed in a manner that is
comparable to direct insurance reserves.
Property & Casualty Reserves
The Hartford establishes property and casualty reserves to provide for the estimated costs of
paying claims under insurance policies written by The Hartford. These reserves include estimates
for both claims that have been reported to The Hartford and those that have been incurred but not
reported (“IBNR”) and include estimates of all expenses associated with processing and settling
these claims. This estimation process involves a variety of actuarial techniques and is primarily
based on historical experience and consideration of current trends.
The Hartford continues to receive claims that assert damages from asbestos-related and
environmental-related exposures. As discussed further in Part II, Item 7, MD&A — Critical
Accounting Estimates, significant uncertainty limits the Company’s ability to estimate the ultimate
reserves necessary for unpaid losses and related expenses with regard to environmental and
particularly asbestos claims.
Most of the Company’s property and casualty reserves are not discounted. However, the Company has
discounted liabilities funded through structured settlements and has discounted certain reserves
for indemnity payments due to permanently disabled claimants under workers’ compensation policies.
For further discussion of the Company’s discounted reserves, see Note 11 of Notes to Consolidated
Financial Statements.
As of December 31, 2009, net property and casualty reserves for losses and loss adjustment expenses
reported under accounting principles generally accepted in the United States of America (“U.S.
GAAP”) were approximately equal to net reserves reported on a statutory basis. Under U.S. GAAP,
liabilities for unpaid losses for permanently disabled workers’ compensation claimants are
discounted at rates that are no higher than risk-free interest rates and which generally exceed the
statutory discount rates set by regulators, such that workers’ compensation reserves for statutory
reporting are higher than the reserves for U.S. GAAP reporting. Largely offsetting the effect of
the difference in discounting is that a portion of the U.S. GAAP provision for uncollectible
reinsurance is not recognized under statutory accounting.
Further discussion of The Hartford’s property and casualty reserves, including asbestos and
environmental claims reserves, may be found in Part II, Item 7, MD&A — Critical Accounting
Estimates — Property and Casualty Reserves, Net of Reinsurance.
10
Table of Contents
A reconciliation of liabilities for unpaid losses and loss adjustment expenses is herein referenced
from Note 11 of Notes to Consolidated Financial Statements. A table depicting the historical
development of the liabilities for unpaid losses and loss adjustment expenses, net of reinsurance,
follows.
Loss Development Table
Property And Casualty Loss And Loss Adjustment Expense Liability Development — Net of Reinsurance
For the Years Ended December 31, [1]
Property And Casualty Loss And Loss Adjustment Expense Liability Development — Net of Reinsurance
For the Years Ended December 31, [1]
| 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||||||||
|
Liabilities for unpaid
losses and loss
adjustment expenses,
net of reinsurance
|
$ | 12,476 | $ | 12,316 | $ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | $ | 18,347 | $ | 18,210 | ||||||||||||||||||||||
|
Cumulative paid losses
and loss expenses
|
||||||||||||||||||||||||||||||||||||||||||||
|
One year later
|
2,994 | 3,272 | 3,339 | 3,480 | 4,415 | 3,594 | 3,702 | 3,727 | 3,703 | 3,771 | ||||||||||||||||||||||||||||||||||
|
Two years later
|
5,019 | 5,315 | 5,621 | 6,781 | 6,779 | 6,035 | 6,122 | 5,980 | 5,980 | |||||||||||||||||||||||||||||||||||
|
Three years later
|
6,437 | 6,972 | 8,324 | 8,591 | 8,686 | 7,825 | 7,755 | 7,544 | — | |||||||||||||||||||||||||||||||||||
|
Four years later
|
7,652 | 9,195 | 9,710 | 10,061 | 10,075 | 9,045 | 8,889 | — | — | |||||||||||||||||||||||||||||||||||
|
Five years later
|
9,567 | 10,227 | 10,871 | 11,181 | 11,063 | 9,928 | — | — | — | |||||||||||||||||||||||||||||||||||
|
Six years later
|
10,376 | 11,140 | 11,832 | 12,015 | 11,821 | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Seven years later
|
11,137 | 11,961 | 12,563 | 12,672 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Eight years later
|
11,856 | 12,616 | 13,166 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Nine years later
|
12,432 | 13,167 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Ten years later
|
12,939 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Liabilities re-estimated
|
||||||||||||||||||||||||||||||||||||||||||||
|
One year later
|
12,472 | 12,459 | 13,153 | 15,965 | 16,632 | 16,439 | 17,159 | 17,652 | 18,005 | 18,161 | ||||||||||||||||||||||||||||||||||
|
Two years later
|
12,527 | 12,776 | 16,176 | 16,501 | 17,232 | 16,838 | 17,347 | 17,475 | 17,858 | |||||||||||||||||||||||||||||||||||
|
Three years later
|
12,698 | 15,760 | 16,768 | 17,338 | 17,739 | 17,240 | 17,318 | 17,441 | — | |||||||||||||||||||||||||||||||||||
|
Four years later
|
15,609 | 16,584 | 17,425 | 17,876 | 18,367 | 17,344 | 17,497 | — | — | |||||||||||||||||||||||||||||||||||
|
Five years later
|
16,256 | 17,048 | 17,927 | 18,630 | 18,554 | 17,570 | — | — | — | |||||||||||||||||||||||||||||||||||
|
Six years later
|
16,568 | 17,512 | 18,686 | 18,838 | 18,836 | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Seven years later
|
17,031 | 18,216 | 18,892 | 19,126 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Eight years later
|
17,655 | 18,410 | 19,192 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Nine years later
|
17,841 | 18,649 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Ten years later
|
18,055 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Deficiency
(redundancy), net of
reinsurance
|
$ | 5,579 | $ | 6,333 | $ | 6,332 | $ | 5,985 | $ | 2,618 | $ | 1,379 | $ | 634 | $ | (163 | ) | $ | (373 | ) | $ | (186 | ) | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
| [1] |
The above table excludes Hartford Insurance, Singapore as a result of its sale in September
2001; Hartford Seguros as a result of its sale in February 2001; and Zwolsche as a result of
its sale in December 2000.
|
The table above shows the cumulative deficiency (redundancy) of the Company’s reserves, net of
reinsurance, as now estimated with the benefit of additional information. Those amounts are
comprised of changes in estimates of gross losses and changes in estimates of related reinsurance
recoveries.
The table below, for the periods presented, reconciles the net reserves to the gross reserves, as
initially estimated and recorded, and as currently estimated and recorded, and computes the
cumulative deficiency (redundancy) of the Company’s reserves before reinsurance.
Property And Casualty Loss And Loss Adjustment Expense Liability Development — Gross
For the Years Ended December 31, [1]
For the Years Ended December 31, [1]
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||||||||
|
Net reserve, as initially estimated
|
$ | 12,316 | $ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | $ | 18,347 | $ | 18,210 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Reinsurance and other
recoverables, as initially
estimated
|
3,871 | 4,176 | 3,950 | 5,497 | 5,138 | 5,403 | 4,387 | 3,922 | 3,586 | 3,441 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross reserve, as initially
estimated
|
$ | 16,187 | $ | 17,036 | $ | 17,091 | $ | 21,715 | $ | 21,329 | $ | 22,266 | $ | 21,991 | $ | 22,153 | $ | 21,933 | $ | 21,651 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Net re-estimated reserve
|
$ | 18,649 | $ | 19,192 | $ | 19,126 | $ | 18,836 | $ | 17,570 | $ | 17,497 | $ | 17,441 | $ | 17,858 | $ | 18,161 | ||||||||||||||||||||||
|
Re-estimated and other reinsurance
recoverables
|
5,644 | 5,802 | 5,426 | 5,348 | 5,250 | 5,571 | 3,997 | 3,745 | 3,409 | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross re-estimated reserve
|
$ | 24,293 | $ | 24,994 | $ | 24,552 | $ | 24,184 | $ | 22,820 | $ | 23,068 | $ | 21,438 | $ | 21,603 | $ | 21,570 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross deficiency (redundancy)
|
$ | 8,106 | $ | 7,958 | $ | 7,461 | $ | 2,469 | $ | 1,491 | $ | 802 | $ | (553 | ) | $ | (550 | ) | $ | (363 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
| [1] |
The above table excludes Hartford Insurance, Singapore as a result of its sale in September
2001; Hartford Seguros as a result of its sale in February 2001; and Zwolsche as a result of
its sale in December 2000.
|
11
Table of Contents
The following table is derived from the Loss Development table and summarizes the effect of reserve
re-estimates, net of reinsurance, on calendar year operations for the ten-year period ended
December 31, 2009. The total of each column details the amount of reserve re-estimates made in the
indicated calendar year and shows the accident years to which the re-estimates are applicable. The
amounts in the total accident year column on the far right represent the cumulative reserve
re-estimates during the ten-year period ended December 31, 2009 for the indicated accident year(s).
Effect of Net Reserve Re-estimates on Calendar Year Operations
| Calendar Year | ||||||||||||||||||||||||||||||||||||||||||||
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | Total | ||||||||||||||||||||||||||||||||||
|
By Accident year
|
||||||||||||||||||||||||||||||||||||||||||||
|
1999 & Prior
|
$ | (4 | ) | $ | 55 | $ | 171 | $ | 2,911 | $ | 647 | $ | 312 | $ | 463 | $ | 624 | $ | 186 | $ | 214 | $ | 5,579 | |||||||||||||||||||||
|
2000
|
— | 88 | 146 | 73 | 177 | 152 | 1 | 80 | 8 | 25 | 750 | |||||||||||||||||||||||||||||||||
|
2001
|
— | — | (24 | ) | 39 | (232 | ) | 193 | 38 | 55 | 12 | 61 | 142 | |||||||||||||||||||||||||||||||
|
2002
|
— | — | — | (199 | ) | (56 | ) | 180 | 36 | (5 | ) | 2 | (12 | ) | (54 | ) | ||||||||||||||||||||||||||||
|
2003
|
— | — | — | — | (122 | ) | (237 | ) | (31 | ) | (126 | ) | (21 | ) | (6 | ) | (543 | ) | ||||||||||||||||||||||||||
|
2004
|
— | — | — | — | — | (352 | ) | (108 | ) | (226 | ) | (83 | ) | (56 | ) | (825 | ) | |||||||||||||||||||||||||||
|
2005
|
— | — | — | — | — | — | (103 | ) | (214 | ) | (133 | ) | (47 | ) | (497 | ) | ||||||||||||||||||||||||||||
|
2006
|
— | — | — | — | — | — | — | (140 | ) | (148 | ) | (213 | ) | (501 | ) | |||||||||||||||||||||||||||||
|
2007
|
— | — | — | — | — | — | — | — | (49 | ) | (113 | ) | (162 | ) | ||||||||||||||||||||||||||||||
|
2008
|
— | — | — | — | — | — | — | — | — | (39 | ) | (39 | ) | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | (4 | ) | $ | 143 | $ | 293 | $ | 2,824 | $ | 414 | $ | 248 | $ | 296 | $ | 48 | $ | (226 | ) | $ | (186 | ) | $ | 3,850 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
During the 2007 calendar year, the Company refined its processes for allocating incurred but not
reported (“IBNR”) reserves by accident year, resulting in a reclassification of $347 of IBNR
reserves from the 2003 to 2006 accident years to the 2002 and prior accident years. This
reclassification of reserves by accident year had no effect on total recorded reserves within any
segment or on total recorded reserves for any line of business within a segment.
Reserve changes for accident years 1999 & Prior
The largest impacts of net reserve re-estimates are shown in the “1999 & Prior” accident years.
The reserve re-estimates in calendar year 2003 include an increase in reserves of $2.6 billion
related to reserve strengthening based on the Company’s evaluation of its asbestos reserves. The
reserve evaluation that led to the strengthening in calendar year 2003 confirmed the Company’s view
of the existence of a substantial long-term deterioration in the asbestos litigation environment.
The reserve re-estimates in calendar years 2004 and 2006 were largely attributable to reductions in
the reinsurance recoverable asset associated with older, long-term casualty liabilities.
Reserve changes for accident year 2000
Prior to calendar year 2006, there was reserve deterioration, spread over several calendar years,
on accident years 2000 and prior driven, in part, by deterioration of reserves for assumed casualty
reinsurance and workers’ compensation claims. Numerous actuarial assumptions on assumed casualty
reinsurance turned out to be low, including loss cost trends, particularly on excess of loss
business, and the impact of deteriorating terms and conditions. Workers’ compensation reserves
also deteriorated, as medical inflation trends were above initial expectations.
Reserve changes for accident years 2001 and 2002
Accident years 2001 and 2002 are reasonably close to original estimates. However, each year shows
some swings by calendar period, with some favorable development prior to calendar year 2005,
largely offset by unfavorable development in calendar years 2005 through 2008. The release for
accident year 2001 during calendar year 2004 relates primarily to reserves for September 11.
Subsequent adverse developments on accident year 2001 relate to assumed casualty reinsurance and
unexpected development on mature claims in both general liability and workers’ compensation.
Reserve releases for accident year 2002 during calendar years 2003 and 2004 come largely from
short-tail lines of business, where results emerge quickly and actual reported losses are
predictive of ultimate losses. Reserve increases on accident year 2002 during calendar year 2005
were recognized, as unfavorable development on accident years prior to 2002 caused the Company to
increase its estimate of unpaid losses for the 2002 accident year.
12
Table of Contents
Reserve changes for accident years 2003 through 2008
Even after considering the 2007 calendar year reclassification of $347 of IBNR reserves from the
2003 to 2006 accident years to the 2002 and prior accident years, accident years 2003 through 2007
show favorable development in calendar years 2004 through 2009. A portion of the release comes
from short-tail lines of business, where results emerge quickly. During calendar year 2005 and
2006, favorable re-estimates occurred in Personal Lines for both loss and allocated loss adjustment
expenses. In addition, catastrophe reserves related to the 2004 and 2005 hurricanes developed
favorably in 2006. During calendar years 2005 through 2008, the Company recognized favorable
re-estimates of both loss and allocated loss adjustment expenses on workers’ compensation claims
driven, in part, by state legal reforms, including in California and Florida, underwriting actions
and expense reduction initiatives that have had a greater impact in controlling costs than was
originally estimated. In 2007, the Company released reserves for Small Commercial package business
claims as reported losses have emerged favorably to previous expectations. In 2007 through 2009,
the Company released reserves for Middle Market general liability claims due to the favorable
emergence of losses for high hazard and umbrella general liability claims. Reserves for
professional liability claims were released in 2008 and 2009 related to the 2003 through 2007
accident years due to a lower estimate of claim severity on both directors’ and officers’ insurance
claims and errors and omissions insurance claims. Reserves of Personal Lines auto liability claims
were released in 2008 due largely to an improvement in emerged claim severity for the 2005 to 2007
accident years.
Ceded Reinsurance
The Hartford cedes insurance risk to reinsurance companies. Reinsurance does not relieve The
Hartford of its primary liability and, as such, failure of reinsurers to honor their obligations
could result in losses to The Hartford. The Hartford evaluates the risk transfer of its
reinsurance contracts, the financial condition of its reinsurers and monitors concentrations of
credit risk. The Company’s monitoring procedures include careful initial selection of its
reinsurers, structuring agreements to provide collateral funds where possible, and regularly
monitoring the financial condition and ratings of its reinsurers. Reinsurance accounting is
followed for ceded transactions that provide indemnification against loss or liability relating to
insurance risk (i.e., risk transfer). For further discussion, see Note 6 of Notes to Consolidated
Financial Statements. If the ceded transactions do not provide risk transfer, the Company accounts
for these transactions as financing transactions.
For Property & Casualty operations, these reinsurance arrangements are intended to provide greater
diversification of business and limit The Hartford’s maximum net loss arising from large risks or
catastrophes. A major portion of The Hartford’s property and casualty reinsurance is effected
under general reinsurance contracts known as treaties, or, in some instances, is negotiated on an
individual risk basis, known as facultative reinsurance. The Hartford also has in-force excess of
loss contracts with reinsurers that protect it against a specified part or all of a layer of losses
over stipulated amounts.
In accordance with normal industry practice, Life is involved in both the cession and assumption of
insurance with other insurance and reinsurance companies. As of December 31, 2009 and 2008, the
Company’s policy for the largest amount of life insurance retained on any one life by the life
operations was $10. In addition, Life has reinsured U.S. minimum death benefit guarantees, Japan’s
guaranteed minimum death and income benefits, as well as U.S. guaranteed minimum withdrawal
benefits offered in connection with its variable annuity contracts. Reinsurance of the Company’s
GMWB riders meet the definition of a derivative reported at fair value: under fair value the change
in fair value of the reinsurance derivative is reported in earnings. Life also assumes reinsurance
from other insurers. For the years ended December 31, 2009, 2008 and 2007, Life did not make any
significant changes in the terms under which reinsurance is ceded to other insurers. For further
discussion on reinsurance, see Part II, Item 7, MD&A — Capital Markets Risk Management -
Reinsurance.
Investment Operations
The Company’s investment portfolios are primarily divided between Life and Property & Casualty and
are managed by Hartford Investment Management Company (“HIMCO”). HIMCO manages the portfolios to
maximize economic value, while attempting to generate the income necessary to support the Company’s
various product obligations, within internally established objectives, guidelines and risk
tolerances. The portfolio objectives and guidelines are developed based upon the asset/liability
profile, including duration, convexity and other characteristics within specified risk tolerances.
The risk tolerances considered include, for example, asset and credit issuer allocation limits,
maximum portfolio below investment grade holdings and foreign currency exposure. The Company
attempts to minimize adverse impacts to the portfolio and the Company’s results of operations from
changes in economic conditions through asset allocation limits, asset/liability duration matching
and through the use of derivatives. For further discussion of HIMCO’s portfolio management
approach, see Part II, Item 7, MD&A — Investment Credit Risk.
In addition to managing the general account assets of the Company, HIMCO is also an SEC registered
investment advisor for third-party institutional clients, a sub-advisor for certain mutual funds
and serves as the sponsor and collateral manager for capital markets transactions. HIMCO
specializes in investment management that incorporates proprietary research and active management
within a disciplined risk framework to provide value added returns versus peers and benchmarks. As
of December 31, 2009 and 2008, the fair value of HIMCO’s total assets under management was
approximately $144.0 billion and $138.8 billion, respectively, of which $8.1 billion and $7.7
billion, respectively, were held in HIMCO managed third party accounts.
13
Table of Contents
Regulation and Premium Rates
Insurance companies are subject to comprehensive and detailed regulation and supervision throughout
the United States. The extent of such regulation varies, but generally has its source in statutes
which delegate regulatory, supervisory and administrative powers to state insurance departments.
Such powers relate to, among other things, the standards of solvency that must be met and
maintained; the licensing of insurers and their agents; the nature of and limitations on
investments; establishing premium rates; claim handling and trade practices; restrictions on the
size of risks which may be insured under a single policy; deposits of securities for the benefit of
policyholders; approval of policy forms; periodic examinations of the affairs of companies; annual
and other reports required to be filed on the financial condition of companies or for other
purposes; fixing maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other necessary provisions for
unearned premiums, unpaid losses and loss adjustment expenses and other liabilities, both reported
and unreported.
Most states have enacted legislation that regulates insurance holding company systems such as The
Hartford. This legislation provides that each insurance company in the system is required to
register with the insurance department of its state of domicile and furnish information concerning
the operations of companies within the holding company system that may materially affect the
operations, management or financial condition of the insurers within the system. All transactions
within a holding company system affecting insurers must be fair and equitable. Notice to the
insurance departments is required prior to the consummation of transactions affecting the ownership
or control of an insurer and of certain material transactions between an insurer and any entity in
its holding company system. In addition, certain of such transactions cannot be consummated
without the applicable insurance department’s prior approval. In the jurisdictions in which the
Company’s insurance company subsidiaries are domiciled, the acquisition of more than 10% of The
Hartford’s outstanding common stock would require the acquiring party to make various regulatory
filings.
The extent of insurance regulation on business outside the United States varies significantly among
the countries in which The Hartford operates. Some countries have minimal regulatory requirements,
while others regulate insurers extensively. Foreign insurers in certain countries are faced with
greater restrictions than domestic competitors domiciled in that particular jurisdiction. The
Hartford’s international operations are comprised of insurers licensed in their respective
countries.
In 2009, the Company acquired Federal Trust Corporation, a thrift holding company, and as a result
is subject to regulations by the Office of Thrift Supervision. Also, as a result of the Company’s
participation in the Capital Purchase Program, it is subject to certain restrictions and oversight
by the U.S. Treasury.
Intellectual Property
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret
laws to establish and protect our intellectual property.
We have a worldwide trademark portfolio that we consider important in the marketing of our products
and services, including, among others, the trademarks of The Hartford name, the Stag Logo and the
combination of these two marks. The duration of trademark registrations varies from country to
country and may be renewed indefinitely subject to country-specific use and registration
requirements. We regard our trademarks as extremely valuable assets in marketing our products and
services and vigorously seek to protect them against infringement.
Employees
The Hartford had approximately 28,000 employees as of December 31, 2009.
Available Information
The Hartford makes available, free of charge, on or through its Internet website
(http://www.thehartford.com) The Hartford’s annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Exchange Act as soon as reasonably practicable after The Hartford
electronically files such material with, or furnishes it to, the SEC.
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Investing in The Hartford involves risk. In deciding whether to invest in The Hartford, you should
carefully consider the following risk factors, any of which could have a significant or material
adverse effect on the business, financial condition, operating results or liquidity of The
Hartford. This information should be considered carefully together with the other information
contained in this report and the other reports and materials filed by The Hartford with the SEC.
Our operating environment remains challenging in light of uncertainty about the timing and strength
of an economic recovery and the impact of governmental budgetary and regulatory initiatives. The
steps we have taken to realign our businesses and strengthen our capital position may not be
adequate to mitigate the financial, competitive and other risks associated with our operating
environment, particularly if economic conditions deteriorate from their current levels or
regulatory requirements change significantly, and we may be required to or we may seek to raise
additional capital or take other strategic or financial actions that could adversely affect our
business and results or trading prices for our common stock.
Persistent volatility in financial markets and uncertainty about the timing and strength of a
recovery in the global economy adversely affected our business and results in 2009, and we believe
that these conditions may continue to affect our operating environment in 2010. High unemployment,
lower family income, lower business investment and lower consumer spending in most geographic
markets we serve have adversely affected the demand for financial and insurance products, as well
as their profitability in some cases. Our results, financial condition and statutory capital
remain sensitive to equity and credit market performance, and we expect that market volatility will
continue to pressure returns in our life and property and casualty investment portfolios and that
our hedging costs will remain high. Until economic conditions become more stable and improve, we
also expect to experience realized and unrealized investment losses, particularly in the commercial
real estate sector where significant market illiquidity and risk premiums exist that reflect the
current uncertainty in the real estate market. Deterioration or negative rating agency actions
with respect to our investments, or our own credit and financial strength ratings, could also
indirectly adversely affect our statutory capital and RBC ratios, which could in turn have other
negative consequences for our business and results.
The steps we have taken to realign our businesses and strengthen our capital position may not be
adequate if economic conditions do not stabilize in line with our forecasts or if they experience a
significant deterioration. These steps include ongoing initiatives, particularly those relating to
repositioning our investment portfolios, so we are also exposed to significant execution risk. In
addition, we have modified our variable annuity product offerings and, in October 2009, launched a
new variable annuity product. However, the future success of this new variable annuity product
will be dependent on market acceptance. The level of market acceptance of this new product will
directly affect the level of variable annuity sales of the Company in the future. If our actions
are not adequate, our ability to support the scale of our business and to absorb operating losses
and liabilities under our customer contracts could be impaired, which would in turn adversely
affect our overall competitiveness. We could be required to raise additional capital or consider
other actions to manage our capital position and liquidity or further reduce our exposure to market
and financial risks. While we participated in the Capital Purchase Program (the “CPP”) of the U.S.
Treasury Department (“Treasury”) as a means to strengthen our capital position, we may seek to
repay those funds, which would also likely require us to raise capital. Any capital that we raise
may be on terms that are dilutive to shareholders or otherwise unfavorable to us. We may also be
forced to sell assets on unfavorable terms that could cause us to incur charges or lose the
potential for market upside on those assets in a market recovery. We could also face other
pressures, such as employee recruitment and retention issues and potential loss of distributors for
our products. Finally, trading prices for our common stock could decline as a result or in
anticipation of sales of our common stock or equity-linked instruments.
Even if the measures we have taken (or take in the future) are effective to mitigate the risks
associated with our current operating environment, they may have unintended consequences. For
example, rebalancing our hedging program may better protect our statutory surplus, but also results
in greater U.S. GAAP earnings volatility. Actions we take may also entail impairment or other
charges or adversely affect our ability to compete successfully in an increasingly difficult
consumer market.
Regulatory developments relating to the recent financial crisis may also significantly affect our
operations and prospects in ways that we cannot predict. U.S. and overseas governmental or
regulatory authorities, including the SEC, the Office of Thrift Supervision (“OTS”), the New York
Stock Exchange (“NYSE”) or the Financial Industry Regulatory Authority (“FINRA”), are considering
enhanced or new regulatory requirements intended to prevent future crises or otherwise stabilize
the institutions under their supervision. New regulations will likely affect critical matters,
including capital requirements, and published proposals by insurance regulatory authorities that
could reduce the pressure on our capital position may not be adopted or may be adopted in a form
that does not afford as much capital relief as anticipated. If we fail to manage the impact of
these developments effectively, our prospects, results and financial condition could be materially
adversely affected.
We are exposed to significant financial and capital markets risk, including changes in interest
rates, credit spreads, equity prices, foreign exchange rates and global real estate market
deterioration which may have a material adverse effect on our results of operations, financial
condition and liquidity.
We are exposed to significant financial and capital markets risk, including changes in interest
rates, credit spreads, equity prices, foreign currency exchange rates and global real estate market
deterioration.
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One important exposure to equity risk relates to the potential for lower earnings associated with
certain of our Life businesses, such as variable annuities, where fee income is earned based upon
the fair value of the assets under management. The decline in equity markets over the last two
years has significantly reduced assets under management and related fee income during that period.
In addition, certain of our Life products offer guaranteed benefits which increase our potential
obligation and statutory capital exposure should equity markets decline. Due to declines in equity
markets, our liability for these guaranteed benefits has significantly increased and our statutory
capital position has decreased. Further sustained declines in equity markets may result in the need
to devote significant additional capital to support these products. We are also exposed to interest
rate and equity risk based upon the discount rate and expected long-term rate of return assumptions
associated with our pension and other post-retirement benefit obligations. Sustained declines in
long-term interest rates or equity returns are likely to have a negative effect on the funded
status of these plans.
Our exposure to interest rate risk relates primarily to the market price and cash flow variability
associated with changes in interest rates. A rise in interest rates, in the absence of other
countervailing changes, will increase the net unrealized loss position of our investment portfolio
and, if long-term interest rates rise dramatically within a six-to-twelve month time period,
certain of our Life businesses may be exposed to disintermediation risk. Disintermediation risk
refers to the risk that our policyholders may surrender their contracts in a rising interest rate
environment, requiring us to liquidate assets in an unrealized loss position. An increase in
interest rates can also impact our tax planning strategies and in particular our ability to utilize
tax benefits to offset certain previously recognized realized capital losses. Due to the long-term
nature of the liabilities associated with certain of our Life businesses, such as structured
settlements and guaranteed benefits on variable annuities, sustained declines in long-term interest
rates may subject us to reinvestment risks and increased hedging costs. In other situations,
declines in interest rates or changes in credit spreads may result in reducing the duration of
certain Life liabilities, creating asset liability duration mismatches and lower spread income.
Our exposure to credit spreads primarily relates to market price and cash flow variability
associated with changes in credit spreads. If issuer credit spreads widen significantly or retain
historically wide levels over an extended period of time, additional other-than-temporary
impairments and increases in the net unrealized loss position of our investment portfolio will
likely result. In addition, losses have also occurred due to the volatility in credit spreads.
When credit spreads widen, we incur losses associated with the credit derivatives where the Company
assumes exposure. When credit spreads tighten, we incur losses associated with derivatives where
the Company has purchased credit protection. If credit spreads tighten significantly, the
Company’s net investment income associated with new purchases of fixed maturities may be reduced.
In addition, a reduction in market liquidity can make it difficult to value certain of our
securities when trading becomes less frequent. As such, valuations may include assumptions or
estimates that may be more susceptible to significant period-to-period changes which could have a
material adverse effect on our consolidated results of operations or financial condition.
Our statutory surplus is also affected by widening credit spreads as a result of the accounting for
the assets and liabilities on our fixed market value adjusted (“MVA”) annuities. Statutory
separate account assets supporting the fixed MVA annuities are recorded at fair value. In
determining the statutory reserve for the fixed MVA annuities we are required to use current
crediting rates in the U.S. and Japanese LIBOR in Japan. In many capital market scenarios, current
crediting rates in the U.S. are highly correlated with market rates implicit in the fair value of
statutory separate account assets. As a result, the change in the statutory reserve from period to
period will likely substantially offset the change in the fair value of the statutory separate
account assets. However, in periods of volatile credit markets, actual credit spreads on
investment assets may increase sharply for certain sub-sectors of the overall credit market,
resulting in statutory separate account asset market value losses. As actual credit spreads are
not fully reflected in current crediting rates in the U.S. or Japanese LIBOR in Japan, the
calculation of statutory reserves will not substantially offset the change in fair value of the
statutory separate account assets resulting in reductions in statutory surplus. This has resulted
and may continue to result in the need to devote significant additional capital to support the
product.
Our primary foreign currency exchange risks are related to net income from
foreign operations, non-U.S. dollar denominated investments, investments in foreign subsidiaries,
our yen-denominated individual fixed annuity product, and certain guaranteed benefits associated
with the Japan and U.K. variable annuities. These risks relate to potential decreases in value and
income resulting from a strengthening or weakening in foreign exchange rates versus the U.S.
dollar. In general, the weakening of foreign currencies versus the U.S. dollar will unfavorably
affect net income from foreign operations, the value of non-U.S. dollar denominated investments,
investments in foreign subsidiaries and realized gains or losses on the yen denominated individual
fixed annuity product. In comparison, certain of our Life
products offer guaranteed benefits which could substantially increase our potential obligation and
statutory capital exposure should the yen strengthen versus other currencies. Correspondingly, a
strengthening of the U.S. dollar compared to other currencies will increase our exposure to the
U.S. variable annuity guarantee benefits where policyholders have elected to invest in
international funds.
Our real estate market exposure includes investments in commercial mortgage-backed securities
(“CMBS”), residential mortgage-backed securities (“RMBS”), commercial real estate (“CRE”)
collateralized debt obligations (“CDOs”), mortgage and real estate partnerships, and mortgage
loans. The recent deterioration in the global real estate market, as evidenced by increases in
property vacancy rates, delinquencies and foreclosures, has negatively impacted property values and
sources of refinancing resulting in market illiquidity and risk premiums that reflect the current
uncertainty in the real estate market. Should these trends continue, further reductions in net
investment income associated with real estate partnerships, impairments of real estate backed
securities and increases in our valuation allowance for mortgage loans may result.
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If significant, further declines in equity prices, changes in U.S. interest rates, changes in
credit spreads, the strengthening or weakening of foreign currencies against the U.S. dollar, and
global real estate market deterioration, individually or in combination, could continue to have a
material adverse effect on our consolidated results of operations, financial condition and
liquidity both directly and indirectly by creating competitive and other pressures including, but
not limited to, employee retention issues and the potential loss of distributors for our products.
In addition, in the conduct of our business, there could be scenarios where in order to reduce
risks, fulfill our obligations or to raise incremental liquidity, we would sell assets at a loss.
Declines in equity markets, changes in interest rates and credit spreads and global real estate
market deterioration can also negatively impact the fair values of each of our segments. If a
significant decline in the fair value of a segment occurred and this resulted in an excess of that
segment’s book value over fair value, the goodwill assigned to that segment might be impaired and
could cause the Company to record a charge to impair a part or all of the related goodwill assets.
Our adjustment of our risk management program relating to products we offer with guaranteed
benefits to emphasize protection of statutory surplus will likely result in greater U.S. GAAP
volatility in our earnings and potentially material charges to net income in periods of rising
equity market pricing levels.
Some of the products offered by our life businesses, especially variable annuities, offer certain
guaranteed benefits which, in the event of a decline in equity markets, would not only result in
lower earnings, but will also increase our exposure to liability for benefit claims. We are also
subject to equity market volatility related to these benefits, especially the guaranteed minimum
withdrawal benefit (“GMWB”), guaranteed minimum accumulation benefit (“GMAB”), guaranteed minimum
death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) offered with variable annuity
products. As of December 31, 2009, the net liability for GMWB and
GMAB was $2.0 billion. At that date, the liability for GMIB and GMDB was a combined $989, net of
reinsurance. We use reinsurance structures and have modified benefit features to mitigate the
exposure associated with GMDB. We also use reinsurance in combination with a modification of
benefit features and derivative instruments to attempt to minimize the claim exposure and to reduce
the volatility of net income associated with the GMWB liability. However, due to the severe
economic conditions in the fourth quarter of 2008, we adjusted our risk management program to place
greater relative emphasis on the protection of statutory surplus. This shift in relative emphasis
has resulted in greater U.S. GAAP earnings volatility in 2009 and, based upon the types of hedging
instruments used, can result in potentially material charges to net income in periods of rising
equity market pricing levels. While we believe that these actions have improved the efficiency of
our risk management related to these benefits, we remain liable for the guaranteed benefits in the
event that reinsurers or derivative counterparties are unable or unwilling to pay. We are also
subject to the risk that other management procedures prove ineffective or that unanticipated
policyholder behavior, combined with adverse market events, produces economic losses beyond the
scope of the risk management techniques employed, which individually or collectively may have a
material adverse effect on our consolidated results of operations, financial condition and cash
flows.
The amount of statutory capital that we have and the amount of statutory capital that we must hold
to maintain our financial strength and credit ratings and meet other requirements can vary
significantly from time to time and is sensitive to a number of factors outside of our control,
including equity market, credit market, interest rate and foreign currency conditions, changes in
policyholder behavior and changes in rating agency models.
We conduct the vast majority of our business through licensed insurance company subsidiaries.
Accounting standards and statutory capital and reserve requirements for these entities are
prescribed by the applicable insurance regulators and the National Association of Insurance
Commissioners (“NAIC”). Insurance regulators have established regulations that provide minimum
capitalization requirements based on risk-based capital (“RBC”) formulas for both life and property
and casualty companies. The RBC formula for life companies establishes capital requirements
relating to insurance, business, asset and interest rate risks, including equity, interest rate and
expense recovery risks associated with variable annuities and group annuities that contain death
benefits or certain living benefits. The RBC formula for property and casualty companies adjusts
statutory surplus levels for certain underwriting, asset, credit and off-balance sheet risks.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending
on a variety of factors — the amount of statutory income or losses generated by our insurance
subsidiaries (which itself is sensitive to equity market and credit market conditions), the amount
of additional capital our insurance subsidiaries must hold to support business growth, changes in
equity market levels, the value of certain fixed-income and equity securities in our investment
portfolio, the value of certain derivative instruments, changes in interest rates and foreign
currency exchange rates, as well as changes to the NAIC RBC formulas. Most of these factors are
outside of the Company’s control. The Company’s financial strength and credit ratings are
significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company
subsidiaries. In addition, rating agencies may implement changes to their internal models that have
the effect of increasing the amount of statutory capital we must hold in order to maintain our
current ratings. Also, in extreme scenarios of equity market declines, the amount of additional
statutory reserves that we are required to hold for our variable annuity guarantees increases at a
greater than linear rate. This reduces the statutory surplus used in calculating our RBC ratios.
When equity markets increase, surplus levels and RBC ratios will generally increase, however, as a
result of a number of factors and market conditions, including the level of hedging costs and other
risk transfer activities, reserve requirements for death and living benefit guarantees and RBC
requirements could increase resulting in lower RBC ratios. Due to all of these factors, projecting
statutory capital and the related RBC ratios is complex. In 2009, our financial strength and
credit ratings were downgraded by multiple rating agencies. If our statutory capital resources are
insufficient to maintain a particular rating by one or more rating agencies, we may seek to raise
additional capital through public or private equity or debt financing. If we were not to raise
additional capital, either at our discretion or because we were unable to do so, our financial
strength and credit ratings might be further downgraded by one or more rating agencies.
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We have experienced and may experience additional future downgrades in our financial strength or
credit ratings, which may make our products less attractive, increase our cost of capital and
inhibit our ability to refinance our debt, which would have a material adverse effect on our
business, results of operations, financial condition and liquidity.
Financial strength and credit ratings, including commercial paper ratings, are an important factor
in establishing the competitive position of insurance companies. In 2009, our financial strength
and credit ratings were downgraded by multiple rating agencies. Rating agencies assign ratings
based upon several factors. While most of the factors relate to the rated company, some of the
factors relate to the views of the rating agency, general economic conditions, and circumstances
outside the rated company’s control. In addition, rating agencies may employ different models and
formulas to assess the financial strength of a rated company, and from time to time rating agencies
have, at their discretion, altered these models. Changes to the models, general economic
conditions, or circumstances outside our control could impact a rating agency’s judgment of its
rating and the rating it assigns us. We cannot predict what actions rating agencies may take, or
what actions we may take in response to the actions of rating agencies, which may adversely affect
us.
Our financial strength ratings, which are intended to measure our ability to meet policyholder
obligations, are an important factor affecting public confidence in most of our products and, as a
result, our competitiveness. A downgrade or an announced potential further downgrade in the rating
of our financial strength or of one of our principal insurance subsidiaries could affect our
competitive position and reduce future sales of our products.
Our credit ratings also affect our cost of capital. A downgrade or an announced potential
downgrade of our credit ratings could make it more difficult or costly to refinance maturing debt
obligations, to support business growth at our insurance subsidiaries and to maintain or improve
the financial strength ratings of our principal insurance subsidiaries. Downgrades could begin to
trigger potentially material collateral calls on certain of our derivative instruments and
counterparty rights to terminate derivative relationships, both of which could limit our ability to
purchase additional derivative instruments. These events could materially adversely affect our
business, results of operations, financial condition and liquidity.
Our valuations of many of our financial instruments include methodologies, estimations and
assumptions that are subject to differing interpretations and could result in changes to investment
valuations that may materially adversely affect our results of operations and financial condition.
The following financial instruments are carried at fair value in the Company’s consolidated
financial statements: fixed maturities, equity securities, freestanding and embedded derivatives,
and separate account assets. The Company is required to categorize these securities into a
three-level hierarchy, based on the priority of the inputs to the respective valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
In many situations, inputs used to measure the fair value of an asset or liability position may
fall into different levels of the fair value hierarchy. In these situations, the Company will
determine the level in which the fair value falls based upon the lowest level input that is
significant to the determination of the fair value.
The determination of fair values are made at a specific point in time, based on available market
information and judgments about financial instruments, including estimates of the timing and
amounts of expected future cash flows and the credit standing of the issuer or counterparty. The
use of different methodologies and assumptions may have a material effect on the estimated fair
value amounts.
During periods of market disruption, including periods of rapidly widening credit spreads or
illiquidity, it may be difficult to value certain of our securities if trading becomes less
frequent and/or market data becomes less observable. There may be certain asset classes that were
in active markets with significant observable data that become illiquid due to the financial
environment. In such cases, more securities may fall to Level 3 and thus require more subjectivity
and management judgment. As such, valuations may include inputs and assumptions that are less
observable or require greater estimation thereby resulting in values that may differ materially
from the value at which the investments may be ultimately sold. Further, rapidly changing and
unprecedented credit and equity market conditions could materially impact the valuation of
securities as reported within our consolidated financial statements and the period-to-period
changes in value could vary significantly. Decreases in value could have a material adverse effect
on our results of operations and financial condition. As of December 31, 2009, 9%, 75% and 16% of
our available for sale securities and short-term investments were considered to be Level 1, 2 and
3, respectively.
Evaluation of available-for-sale securities for other-than-temporary impairment involves subjective
determinations and could materially impact our results of operations.
The evaluation of impairments is a quantitative and qualitative process, which is subject to risks
and uncertainties and is intended to determine whether a credit and/or non-credit impairment exists
and whether an impairment should be recognized in current period earnings or in other comprehensive
income. The risks and uncertainties include changes in general economic conditions, the issuer’s
financial condition or future recovery prospects, the effects of changes in interest rates or
credit spreads and the expected recovery period. For securitized financial assets with contractual
cash flows, the Company currently uses its best estimate of cash flows over the life of the
security. In addition, estimating future cash flows involves incorporating information received
from third-party sources and making internal assumptions and judgments regarding the future
performance of the underlying collateral and assessing the probability that an adverse change in
future cash flows has occurred. The determination of the amount of other-than-temporary
impairments is based upon our quarterly evaluation and assessment of known and inherent risks
associated with the respective asset class. Such evaluations and assessments are revised as
conditions change and new information becomes available.
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Additionally, our management considers a wide range of factors about the security issuer and uses
their best judgment in evaluating the cause of the decline in the estimated fair value of the
security and in assessing the prospects for recovery. Inherent in management’s evaluation of the
security are assumptions and estimates about the operations of the issuer and its future earnings
potential. Considerations in the impairment evaluation process include, but are not limited to:
| • |
the length of time and the extent to which the fair value has been less than cost or
amortized cost;
|
| • |
changes in the financial condition, credit rating and near-term prospects of the issuer;
|
| • |
whether the issuer is current on contractually obligated interest and principal
payments;
|
| • |
changes in the financial condition of the security’s underlying collateral;
|
| • |
the payment structure of the security;
|
| • |
the potential for impairments in an entire industry sector or sub-sector;
|
| • |
the potential for impairments in certain economically depressed geographic locations;
|
| • |
the potential for impairments of securities where the issuer, series of issuers or
industry has suffered a catastrophic type of loss or has exhausted natural resources;
|
| • |
unfavorable changes in forecasted cash flows on mortgage-backed and asset-backed
securities;
|
| • |
for mortgage-backed and asset-backed securities, commercial and residential property
value declines that vary by property type and location and average cumulative collateral
loss rates that vary by vintage year;
|
| • |
other subjective factors, including concentrations and information obtained from
regulators and rating agencies;
|
| • |
our intent to sell a debt or an equity security with debt-like characteristics
(collectively, “debt security”) or whether it is more likely than not that the Company will
be required to sell the debt security before its anticipated recovery; and
|
| • |
our intent and ability to retain an equity security without debt-like characteristics
for a period of time sufficient to allow for the recovery of its value.
|
During 2009, the Company recognized $1.5 billion of impairment losses in earnings. Additional
impairments may be recorded in the future, which could materially adversely affect our results and
financial condition.
Losses due to nonperformance or defaults by others, including issuers of investment securities
(which include structured securities such as commercial mortgage backed securities and residential
mortgage backed securities or other high yielding bonds) mortgage loans or reinsurance and
derivative instrument counterparties, could have a material adverse effect on the value of our
investments, results of operations, financial condition and cash flows.
Issuers or borrowers whose securities or loans we hold, customers, trading counterparties,
counterparties under swaps and other derivative contracts, reinsurers, clearing agents, exchanges,
clearing houses and other financial intermediaries and guarantors may default on their obligations
to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational
failure, fraud, government intervention or other reasons. Such defaults could have a material
adverse effect on our results of operations, financial condition and cash flows. Additionally, the
underlying assets supporting our structured securities or loans may deteriorate causing these
securities or loans to incur losses.
Our investment portfolio includes securities backed by real estate assets that have been adversely
impacted due to the recent recessionary period and the associated property value declines,
resulting in a reduction in expected future cash flow for certain securities. Additional
significant property value declines and loss rates, which exceed our current estimates, as outlined
in Part II, Item 7, MD&A — Investment Credit Risk — Other-Than-Temporary Impairments, could have a
material adverse effect on our results of operations, financial condition and cash flows.
The Company is not exposed to any credit concentration risk of a single issuer greater than 10% of
the Company’s stockholders’ equity other than U.S. government and U.S. government agencies backed
by the full faith and credit of the U.S. government. However, if issuers of securities or loans we
hold are acquired, merge or otherwise consolidate with other issuers of securities or loans held by
the Company, the Company’s credit concentration risk could increase above the 10% threshold, for a
period of time, until the Company is able to sell securities to get back in compliance with the
established investment credit policies.
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If assumptions used in estimating future gross profits differ from actual experience, we may be
required to accelerate the amortization of DAC and increase reserves for guaranteed minimum death
and income benefits, which could have a material adverse effect on our results of operations and
financial condition.
The Company defers acquisition costs associated with the sales of its universal and variable life
and variable annuity products. These costs are amortized over the expected life of the contracts.
The remaining deferred but not yet amortized cost is referred to as the Deferred Acquisition Cost
(“DAC”) asset. We amortize these costs in proportion to the present value of estimated gross
profits (“EGPs”). The Company also establishes reserves for GMDB and GMIB using components of
EGPs. The projection of estimated gross profits requires the use of certain assumptions,
principally related to separate account fund returns in excess of amounts credited to
policyholders, surrender and lapse rates, interest margin (including impairments), mortality, and
hedging costs. Of these factors, we anticipate that changes in investment returns are most likely
to impact the rate of amortization of such costs. However, other factors such as those the Company
might employ to reduce risk, such as the cost of hedging or other risk mitigating techniques, could
also significantly reduce estimates of future gross profits. Estimating future gross profits is a
complex process requiring considerable judgment and the forecasting of events well into the future.
If our assumptions regarding policyholder behavior, hedging costs or costs to employ other risk
mitigating techniques prove to be inaccurate, if significant impairment charges are anticipated or
if significant or sustained equity market declines persist, we could be required to accelerate the
amortization of DAC related to variable annuity and variable universal life contracts, and increase
reserves for GMDB and GMIB which would result in a charge to net income. Such adjustments could
have a material adverse effect on our results of operations and financial condition. For 2009, the
Company recorded a $1.0 billion, after-tax, charge related to the DAC Unlock.
If our businesses do not perform well, we may be required to recognize an impairment of our
goodwill or to establish a valuation allowance against the deferred income tax asset, which could
have a material adverse effect on our results of operations and financial condition.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses
over the fair value of their net assets at the date of acquisition. We test goodwill at least
annually for impairment. Impairment testing is performed based upon estimates of the fair value of
the “reporting unit” to which the goodwill relates. The reporting unit is the operating segment or
a business one level below that operating segment if discrete financial information is prepared and
regularly reviewed by management at that level. The fair value of the reporting unit is impacted by
the performance of the business and could be adversely impacted by any efforts made by the Company
to limit risk. If it is determined that the goodwill has been impaired, the Company must write
down the goodwill by the amount of the impairment, with a corresponding charge to net income. These
write downs could have a material adverse effect on our results of operations or financial
condition.
Deferred income tax represents the tax effect of the differences between the book and tax basis of
assets and liabilities. Deferred tax assets are assessed periodically by management to determine if
they are realizable. Factors in management’s determination include the performance of the business
including the ability to generate capital gains, to offset previously recognized capital losses,
from a variety of sources and tax planning strategies. However, we anticipate limited ability,
going forward, to recognize a full tax benefit on certain realized capital losses. Therefore, if
based on available information, it is more likely than not that the deferred income tax asset will
not be realized then a valuation allowance must be established with a corresponding charge to net
income. Our valuation allowance of $86, as of December 31, 2009, based on future facts and
circumstances may not be sufficient. Charges to increase our valuation allowance could have a
material adverse effect on our results of operations and financial condition.
The occurrence of one or more terrorist attacks in the geographic areas we serve or the threat of
terrorism in general may have a material adverse effect on our business, consolidated operating
results, financial condition and liquidity.
The occurrence of one or more terrorist attacks in the geographic areas we serve could result in
substantially higher claims under our insurance policies than we have anticipated. Private sector
catastrophe reinsurance is extremely limited and generally unavailable for terrorism losses caused
by attacks with nuclear, biological, chemical or radiological weapons. Reinsurance coverage from
the federal government under the Terrorism Risk Insurance Program Reauthorization Act of 2007 is
also limited. Accordingly, the effects of a terrorist attack in the geographic areas we serve may
result in claims and related losses for which we do not have adequate reinsurance. This would
likely cause us to increase our reserves, adversely affect our earnings during the period or
periods affected and, could adversely affect our liquidity and financial condition. Further, the
continued threat of terrorism and the occurrence of terrorist attacks, as well as heightened
security measures and military action in response to these threats and attacks, may cause
significant volatility in global financial markets, disruptions to commerce and reduced economic
activity. These consequences could have an adverse effect on the value of the assets in our
investment portfolio as well as those in our separate accounts. The continued threat of terrorism
also could result in increased reinsurance prices and potentially cause us to retain more risk than
we otherwise would retain if we were able to obtain reinsurance at lower prices. Terrorist attacks
also could disrupt our operations centers in the U.S. or abroad. As a result, it is possible that
any, or a combination of all, of these factors may have a material adverse effect on our business,
consolidated operating results, financial condition and liquidity.
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It is difficult for us to predict our potential exposure for asbestos and environmental claims, and
our ultimate liability may exceed our currently recorded reserves, which may have a material
adverse effect on our operating results, financial condition and liquidity.
We continue to receive asbestos and environmental claims. Significant uncertainty limits the
ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses
and related expenses for both environmental and particularly asbestos claims. We believe that the
actuarial tools and other techniques we employ to estimate the ultimate cost of claims for more
traditional kinds of insurance exposure are less precise in estimating reserves for our asbestos
and environmental exposures. Traditional actuarial reserving techniques cannot reasonably estimate
the ultimate cost of these claims, particularly during periods where theories of law are in flux.
Accordingly, the degree of variability of reserve estimates for these exposures is significantly
greater than for other more traditional exposures. It is also not possible to predict changes in
the legal and legislative environment and their effect on the future development of asbestos and
environmental claims. Because of the significant uncertainties that limit the ability of insurers
and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses
for both environmental and particularly asbestos claims, the ultimate liabilities may exceed the
currently recorded reserves. Any such additional liability cannot be reasonably estimated now but
could have a material adverse effect on our consolidated operating results, financial condition and
liquidity.
We are particularly vulnerable to losses from the incidence and severity of catastrophes, both
natural and man-made, the occurrence of which may have a material adverse effect on our financial
condition, consolidated results of operations and liquidity.
Our property and casualty insurance operations expose us to claims arising out of catastrophes.
Catastrophes can be caused by various unpredictable events, including earthquakes, hurricanes,
hailstorms, severe winter weather, fires, tornadoes, explosions and other natural or man-made
disasters. We also face substantial exposure to losses resulting from acts of terrorism, disease
pandemics and political instability. The geographic distribution of our business subjects us to
catastrophe exposure for natural events occurring in a number of areas, including, but not limited
to, hurricanes in Florida, the Gulf Coast, the Northeast and the Atlantic coast regions of the
United States, and earthquakes in California and the New Madrid region of the United States. We
expect that increases in the values and concentrations of insured property in these areas will
continue to increase the severity of catastrophic events in the future. Starting in 2004 and 2005,
third-party catastrophe loss models for hurricane loss events have incorporated medium-term
forecasts of increased hurricane frequency and severity — reflecting the potential influence of
multi-decadal climate patterns within the Atlantic. In addition, changing climate conditions across
longer time scales, including the potential risk of broader climate change, may be increasing, or
may in the future increase, the frequency and severity of certain natural catastrophe losses across
various geographic regions. In addition, changing climate conditions, primarily rising global
temperatures, may be increasing, or may in the future increase, the frequency and severity of
natural catastrophes such as hurricanes. Potential examples of the impact of climate change on
catastrophe exposure include, but are not limited to the following: an increase in the frequency or
severity of wind and thunderstorm and tornado/hailstorm events due to increased convection in the
atmosphere, more frequent brush fires in certain geographies due to prolonged periods of drought,
higher incidence of deluge flooding, and the potential for an increase in severity of the largest
hurricane events due to higher sea surface temperatures. Our life insurance operations are also
exposed to risk of loss from catastrophes. For example, natural or man-made disasters or a disease
pandemic such as could arise from avian flu, could significantly increase our mortality and
morbidity experience. Policyholders may be unable to meet their obligations to pay premiums on our
insurance policies or make deposits on our investment products. Our liquidity could be constrained
by a catastrophe, or multiple catastrophes, which could result in extraordinary losses. In
addition, in part because accounting rules do not permit insurers to reserve for such catastrophic
events until they occur, claims from catastrophic events could have a material adverse effect on
our financial condition, consolidated results of operations and cash flows. To the extent that
loss experience unfolds or models improve, we will seek to reflect any increased risk in the design
and pricing of our products. However, the Company may be exposed to regulatory or legislative
actions that prevent a full accounting of loss expectations in the design or price of our products
or result in additional risk-shifting to the insurance industry.
We may incur losses due to our reinsurers’ unwillingness or inability to meet their obligations
under reinsurance contracts and the availability, pricing and adequacy of reinsurance may not be
sufficient to protect us against losses.
As an insurer, we frequently seek to reduce the losses that may arise from catastrophes or
mortality, or other events that can cause unfavorable results of operations, through reinsurance.
Under these reinsurance arrangements, other insurers assume a portion of our losses and related
expenses; however, we remain liable as the direct insurer on all risks reinsured. Consequently,
ceded reinsurance arrangements do not eliminate our obligation to pay claims, and we are subject to
our reinsurers’ credit risk with respect to our ability to recover amounts due from them. Although
we evaluate periodically the financial condition of our reinsurers to minimize our exposure to
significant losses from reinsurer insolvencies, our reinsurers may become financially unsound or
choose to dispute their contractual obligations by the time their financial obligations become due.
The inability or unwillingness of any reinsurer to meet its financial obligations to us could have
a material adverse effect on our consolidated operating results. In addition, market conditions
beyond our control determine the availability and cost of the reinsurance we are able to purchase.
Historically, reinsurance pricing has changed significantly from time to time. No assurances can
be made that reinsurance will remain continuously available to us to the same extent and on the
same terms as are currently available. If we were unable to maintain our current level of
reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at
prices that we consider acceptable, we would have to either accept an increase in our net liability
exposure, reduce the amount of business we write, or develop other alternatives to reinsurance.
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Our consolidated results of operations, financial condition and cash flows may be materially
adversely affected by unfavorable loss development.
Our success, in part, depends upon our ability to accurately assess the risks associated with the
businesses that we insure. We establish loss reserves to cover our estimated liability for the
payment of all unpaid losses and loss expenses incurred with respect to premiums earned on the
policies that we write. Loss reserves do not represent an exact calculation of liability. Rather,
loss reserves are estimates of what we expect the ultimate settlement and administration of claims
will cost, less what has been paid to date. These estimates are based upon actuarial and
statistical projections and on our assessment of currently available data, as well as estimates of
claims severity and frequency, legal theories of liability and other factors. Loss reserve
estimates are refined periodically as experience develops and claims are reported and settled.
Establishing an appropriate level of loss reserves is an inherently uncertain process. Because of
this uncertainty, it is possible that our reserves at any given time will prove inadequate.
Furthermore, since estimates of aggregate loss costs for prior accident years are used in pricing
our insurance products, we could later determine that our products were not priced adequately to
cover actual losses and related loss expenses in order to generate a profit. To the extent we
determine that losses and related loss expenses are emerging unfavorably to our initial
expectations, we will be required to increase reserves. Increases in reserves would be recognized
as an expense during the period or periods in which these determinations are made, thereby
adversely affecting our results of operations for the related period or periods. Depending on the
severity and timing of any changes in these estimated losses, such determinations could have a
material adverse effect on our consolidated results of operations, financial condition and cash
flows.
Competitive activity may adversely affect our market share and financial results, which could have
a material adverse effect on our business, results of operations and financial condition.
The insurance industry is highly competitive. Our competitors include other insurers and, because
many of our products include an investment component, securities firms, investment advisers, mutual
funds, banks and other financial institutions. In recent years, there has been substantial
consolidation and convergence among companies in the insurance and financial services industries
resulting in increased competition from large, well-capitalized insurance and financial services
firms that market products and services similar to ours. The current economic environment has only
served to further increase competition. Many of these firms also have been able to increase their
distribution systems through mergers or contractual arrangements. These competitors compete with
us for producers such as brokers and independent agents and for our employees. Larger competitors
may have lower operating costs and an ability to absorb greater risk while maintaining their
financial strength ratings, thereby allowing them to price their products more competitively.
These highly competitive pressures could result in increased pricing pressures on a number of our
products and services, particularly as competitors seek to win market share, and may harm our
ability to maintain or increase our profitability. In addition, as actual or potential future
downgrades occur, and if our competitors have not been similarly downgraded, sales of our products
could be significantly reduced. Because of the highly competitive nature of the insurance
industry, there can be no assurance that we will continue to effectively compete with our industry
rivals, or that competitive pressure will not have a material adverse effect on our business,
results of operations and financial condition.
Our participation in the CPP subjects us to additional restrictions, oversight and cost that could
materially affect our business, results and prospects.
Although participation in the CPP has been an important component of our strategy to enhance our
capital position and financial flexibility, our continued participation subjects us to additional
restrictions, oversight and costs, and has other potential consequences, that could materially
affect our business, results and prospects, including the following:
| • |
Our continued participation in the CPP, even as other financial institutions have repaid
their government assistance, may cause us to be perceived as having greater capital needs and
weaker overall financial prospects than those of our competitors that have not participated in
the CPP, which could adversely affect our competitive position and results, including new
product sales and policy retention rates, and affect trading prices for our common stock.
|
| • |
As a condition to our participation in CPP, we acquired Federal Trust Corporation, the
parent company of Federal Trust Bank (“FTB”), a federally chartered, FDIC-insured thrift. As a
savings and loan holding company, we are subject to regulation, supervision and examination by
the OTS and OTS reporting requirements. All of our activities must be financially-related
activities as defined by federal law (which includes insurance activities), and OTS has
enforcement authority over us, including the right to pursue administrative orders or
penalties and the right to restrict or prohibit activities determined by OTS to be a serious
risk to FTB. We must also be a source of strength to FTB, which could require further capital
contributions.
|
| • |
Receipt of CPP funds subjects us to restrictions, oversight and costs that may have an
adverse impact on our business, results or the trading prices for our common stock. For
example, we are subject to significant limitations on the amount and form of bonus, retention
and other incentive compensation that we may pay to executive officers and senior management.
These provisions may adversely affect our ability to attract and retain executive officers and
other key personnel. Other regulatory initiatives applicable to participants in federal
funding programs may also be forthcoming. Compliance with such current and potential
regulation and scrutiny may significantly increase our costs, impede the efficiency of our
internal business processes, require us to increase our regulatory capital and limit our
ability to pursue business opportunities in an efficient manner.
|
| • |
Future federal statutes may adversely affect the terms of the CPP that are applicable to
us, and the Treasury may amend the terms of our agreement unilaterally if required by future
statutes, including in a manner materially adverse to us.
|
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| • |
While our objective is to repay the CPP funds invested in us, our ability to do so is
subject to federal regulatory approvals that may impose significant conditions, including a
requirement that we raise additional capital, and we cannot predict whether or when we may
reach agreement with the federal regulators with respect to the terms of our repayment. Our
ability to raise capital as a condition to repayment will in turn depend on a variety of
considerations, including our capital resources and market conditions at the time, as well as
the terms on which we could raise capital, and any potential dilutive impact on shareholders.
|
We may experience unfavorable judicial or legislative developments that could have a material
adverse effect on our results of operations, financial condition and liquidity.
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 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. The
Company is also involved in legal actions that do not arise in the ordinary course of business,
some of which assert claims for substantial amounts. Pervasive or significant changes in the
judicial environment relating to matters such as trends in the size of jury awards, developments in
the law relating to the liability of insurers or tort defendants, and rulings concerning the
availability or amount of certain types of damages could cause our ultimate liabilities to change
from our current expectations. Changes in federal or state tort litigation laws or other
applicable law could have a similar effect. It is not possible to predict changes in the judicial
and legislative environment and their impact on the future development of the adequacy of our loss
reserves, particularly reserves for longer-tailed lines of business, including asbestos and
environmental reserves, and how those changes might adversely affect our ability to price our
products appropriately. Our results, financial condition and liquidity could also be adversely
affected if judicial or legislative developments cause our ultimate liabilities to increase from
current expectations.
Potential changes in domestic and foreign regulation may increase our business costs and required
capital levels, which could have a material adverse effect on our business, consolidated operating
results, financial condition and liquidity.
We are subject to extensive U.S. and non-U.S. laws and regulations that are complex, subject to
change and often conflicting in their approach or intended outcomes. Compliance with these laws
and regulations is costly and can affect our strategy, as well as the demand for and profitability
of the products we offer. There is also a risk that any particular regulator’s or enforcement
authority’s interpretation of a legal issue may change over time to our detriment, or expose us to
different or additional regulatory risks.
State insurance laws regulate most aspects of our U.S. insurance businesses, and our insurance
subsidiaries are regulated by the insurance departments of the states in which they are domiciled,
licensed or authorized to conduct business. U.S. state laws grant insurance regulatory authorities
broad administrative powers with respect to, among other things:
| • |
licensing companies and agents to transact business;
|
| • |
calculating the value of assets to determine compliance with statutory requirements;
|
| • |
mandating certain insurance benefits;
|
| • |
regulating certain premium rates;
|
| • |
reviewing and approving policy forms;
|
| • |
regulating unfair trade and claims practices, including through the imposition of
restrictions on marketing and sales practices, distribution arrangements and payment of
inducements;
|
| • |
establishing statutory capital and reserve requirements and solvency standards;
|
| • |
fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed
crediting rates on life insurance policies and annuity contracts;
|
| • |
approving changes in control of insurance companies;
|
| • |
restricting the payment of dividends and other transactions between affiliates;
|
| • |
establishing assessments and surcharges for guaranty funds, second-injury funds and other
mandatory pooling arrangements;
|
| • |
requiring insurers to dividend to policy holders any excess profits; and
|
| • |
regulating the types, amounts and valuation of investments.
|
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State insurance regulators and the NAIC regularly re-examine existing laws and regulations
applicable to insurance companies and their products. Our international operations are subject to
regulation in the relevant jurisdictions in which they operate, which in many ways is similar to
the state regulation outlined above, with similar related restrictions. Our asset management
businesses are also subject to extensive regulation in the various jurisdictions where they
operate. These laws and regulations are primarily intended to protect investors in the securities
markets or investment advisory clients and generally grant supervisory authorities broad
administrative powers. Changes in these laws and regulations, or in the interpretations thereof,
are often made for the benefit of the consumer at the expense of the insurer and thus could have a
material adverse effect on our business, consolidated operating results, financial condition and
liquidity. Compliance with these laws and regulations is also time consuming and
personnel-intensive, and changes in these laws and regulations may increase materially our direct
and indirect compliance costs and other expenses of doing business, thus having an adverse effect
on our business, consolidated operating results, financial condition and liquidity.
We may experience difficulty in marketing and distributing products through our current and future
distribution channels.
We distribute our annuity, life and property and casualty insurance products through a variety of
distribution channels, including brokers, independent agents, broker-dealers, banks, wholesalers,
affinity partners, our own internal sales force and other third-party organizations. In some areas
of our business, we generate a significant portion of our business through individual third-party
arrangements. For example, we generated approximately 72% of our personal lines earned premium in
2009 under an exclusive licensing arrangement with AARP that continues until January 1, 2020. We
periodically negotiate provisions and renewals of these relationships, and there can be no
assurance that such terms will remain acceptable to us or such third parties. An interruption in
our continuing relationship with certain of these third parties could materially affect our ability
to market our products and could have a material adverse effect on our business, operating results
and financial condition.
Our business, results of operations, financial condition and liquidity may be adversely affected by
the emergence of unexpected and unintended claim and coverage issues.
As industry practices and legal, judicial, social and other environmental conditions change,
unexpected and unintended issues related to claims and coverage may emerge. These issues may
either extend coverage beyond our underwriting intent or increase the frequency or severity of
claims. In some instances, these changes may not become apparent until some time after we have
issued insurance contracts that are affected by the changes. As a result, the full extent of
liability under our insurance contracts may not be known for many years after a contract is issued,
and this liability may have a material adverse effect on our business, results of operations,
financial condition and liquidity at the time it becomes known.
Limits on the ability of our insurance subsidiaries to pay dividends to us could have a material
adverse effect on our liquidity.
The Hartford Financial Services Group, Inc. is a holding company with no significant operations.
Our principal asset is the stock of our insurance subsidiaries. State insurance regulatory
authorities limit the payment of dividends by insurance subsidiaries. These restrictions and other
regulatory requirements affect the ability of our insurance subsidiaries to make dividend payments.
Limits on the ability of the insurance subsidiaries to pay dividends could have a material adverse
effect on our liquidity, including our ability to pay dividends to shareholders and service our
debt.
As a property and casualty insurer, the premium rates we are able to charge and the profits we are
able to obtain are affected by the actions of state insurance departments that regulate our
business, the cyclical nature of the business in which we compete and our ability to adequately
price the risks we underwrite, which may have a material adverse effect on our consolidated results
of operations, financial condition and cash flows.
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, our
response to rate actions taken by competitors, and expectations about regulatory and legal
developments and expense levels. We seek to price our property and casualty insurance policies
such that insurance premiums and future net investment income earned on premiums received will
provide for an acceptable profit in excess of underwriting expenses and the cost of paying claims.
State insurance departments that regulate us often propose premium rate changes for the benefit of
the consumer at the expense of the insurer and may not allow us to reach targeted levels of
profitability. In addition to regulating rates, certain states have enacted laws that require a
property and casualty insurer conducting business in that state to participate in assigned risk
plans, reinsurance facilities, joint underwriting associations and other residual market plans, or
to offer coverage to all consumers and often restrict an insurer’s ability to charge the price it
might otherwise charge. In these markets, we may be compelled to underwrite significant amounts of
business at lower than desired rates, participate in the operating losses of residual market plans
or pay assessments to fund operating deficits of state-sponsored funds, possibly leading to an
unacceptable returns on equity. The laws and regulations of many states also limit an insurer’s
ability to withdraw from one or more lines of insurance in the state, except pursuant to a plan
that is approved by the state’s insurance department. Additionally, certain states require
insurers to participate in guaranty funds for impaired or insolvent insurance companies. These
funds periodically assess losses against all insurance companies doing business in the state. Any
of these factors could have a material adverse effect on our consolidated results of operations.
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Additionally, the property and casualty insurance market is historically cyclical, experiencing
periods characterized by relatively high levels of price competition, less restrictive underwriting
standards and relatively low premium rates, followed by periods of relatively low levels of
competition, more selective underwriting standards and relatively high premium rates. 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 when 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. In a
number of product lines and states, we continue to experience premium rate reductions. In these
product lines and states, there is a risk that the premium we charge may ultimately prove to be
inadequate as reported losses emerge. Even in a period of rate increases, there is a risk that
regulatory constraints, price competition or incorrect pricing assumptions could prevent us from
achieving targeted returns. Inadequate pricing could have a material adverse effect on our
consolidated results of operations.
If we are unable to maintain the availability of our systems and safeguard the security of our data
due to the occurrence of disasters or other unanticipated events, our ability to conduct business
may be compromised, which may have a material adverse effect on our business, consolidated results
of operations, financial condition or cash flows.
We use computer systems to store, retrieve, evaluate and utilize customer and company data and
information. Our computer, information technology and telecommunications systems, in turn,
interface with and rely upon third-party systems. Our business is highly dependent on our ability,
and the ability of certain affiliated third parties, to access these systems to perform necessary
business functions, including, without limitation, providing insurance quotes, processing premium
payments, making changes to existing policies, filing and paying claims, administering variable
annuity products and mutual funds, providing customer support and managing our investment
portfolios. Systems failures or outages could compromise our ability to perform these functions in
a timely manner, which could harm our ability to conduct business and hurt our relationships with
our business partners and customers. In the event of a disaster such as a natural catastrophe, an
industrial accident, a blackout, a computer virus, a terrorist attack or war, our systems may be
inaccessible to our employees, customers or business partners for an extended period of time. Even
if our employees are able to report to work, they may be unable to perform their duties for an
extended period of time if our data or systems are disabled or destroyed. Our systems could also
be subject to physical and electronic break-ins, and subject to similar disruptions from
unauthorized tampering with our systems. This may impede or interrupt our business operations and
may have a material adverse effect on our business, consolidated operating results, financial
condition or liquidity.
If we experience difficulties arising from outsourcing relationships, our ability to conduct
business may be compromised.
We outsource certain technology and business functions to third parties and expect to do so
selectively in the future. If we do not effectively develop and implement our outsourcing
strategy, third-party providers do not perform as anticipated, or we experience problems with a
transition, we may experience operational difficulties, increased costs and a loss of business that
may have a material adverse effect on our consolidated results of operations.
Potential changes in federal or state tax laws, including changes impacting the availability of the
separate account dividend received deduction, could adversely affect our business, consolidated
operating results or financial condition or liquidity.
Many of the products that the Company sells benefit from one or more forms of tax-favored status
under current federal and state income tax regimes. For example, the Company sells life insurance
policies that benefit from the deferral or elimination of taxation on earnings accrued under the
policy, as well as permanent exclusion of certain death benefits that may be paid to policyholders’
beneficiaries. We also sell annuity contracts that allow the policyholders to defer the recognition
of taxable income earned within the contract. Other products that the Company sells also enjoy
similar, as well as other, types of tax advantages. The Company also benefits from certain tax
benefits, including but not limited to, tax-exempt bond interest, dividends-received deductions,
tax credits (such as foreign tax credits), and insurance reserve deductions.
Due in large part to the recent financial crisis that has affected many governments, there is an
increasing risk that federal and/or state tax legislation could be enacted that would result in
higher taxes on insurance companies and/or their policyholders. Although the specific form of any
such potential legislation is uncertain, it could include lessening or eliminating some or all of
the tax advantages currently benefiting the Company or its policyholders including, but not limited
to, those mentioned above. This could occur in the context of deficit reduction or other tax
reforms. The effects of any such changes could result in materially lower product sales, lapses of
policies currently held, and/or our incurrence of materially higher corporate taxes.
Changes in accounting principles and financial reporting requirements could result in material
changes to our reported results and financial condition.
U.S. GAAP and related financial reporting requirements are complex, continually evolving and may be
subject to varied interpretation by the relevant authoritative bodies. Such varied interpretations
could result from differing views related to specific facts and circumstances. Changes in U.S.
GAAP and financial reporting requirements, or in the interpretation of U.S. GAAP or those
requirements, could result in material changes to our reported results and financial condition.
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We may not be able to protect our intellectual property and may be subject to infringement claims.
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret
laws to establish and protect our intellectual property. Although we use a broad range of measures
to protect our intellectual property rights, third parties may infringe or misappropriate our
intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks,
patents, trade secrets and know-how or to determine their scope, validity or enforceability, which
represents a diversion of resources that may be significant in amount and may not prove successful.
The loss of intellectual property protection or the inability to secure or enforce the protection
of our intellectual property assets could have a material adverse effect on our business and our
ability to compete.
We also may be subject to costly litigation in the event that another party alleges our operations
or activities infringe upon another party’s intellectual property rights. Third parties may have,
or may eventually be issued, patents that could be infringed by our products, methods, processes or
services. Any party that holds such a patent could make a claim of infringement against us. We may
also be subject to claims by third parties for breach of copyright, trademark, trade secret or
license usage rights. Any such claims and any resulting litigation could result in significant
liability for damages. If we were found to have infringed a third-party patent or other
intellectual property rights, we could incur substantial liability, and in some circumstances could
be enjoined from providing certain products or services to our customers or utilizing and
benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses, or
alternatively could be required to enter into costly licensing arrangements with third parties, all
of which could have a material adverse effect on our business, results of operations and financial
condition.
None.
As of December 31, 2009 and 2008, The Hartford owned building space of approximately 2.7 million
and 2.5 million square feet, respectively, of which approximately 2.3 million and 2.1 million
square feet, respectively, comprised its Hartford, Connecticut location and other properties within
the greater Hartford, Connecticut area. In addition, as of December 31, 2009 and 2008, The
Hartford leased approximately 5.0 million and 5.7 million square feet, respectively, throughout the
United States of America, and approximately 220 thousand square feet, for both 2009 and 2008, in
other countries. All of the properties owned or leased are used by one or more of all eleven
reporting segments, depending on the location. For more information on reporting segments, see
Part I, Item 1, Business of The Hartford — Reporting Segments. The Company believes its properties
and facilities are suitable and adequate for current operations.
For a discussion of legal proceedings, see Note 12 of the Notes to Consolidated Financial
Statements, which is incorporated herein by reference.
No matter was submitted to a vote of security holders of The Hartford Financial Services Group,
Inc. during the fourth quarter of 2009.
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| Item 5. |
MARKET FOR THE HARTFORD’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
|
The Hartford’s common stock is traded on the New York Stock Exchange (“NYSE”) under the trading
symbol “HIG”.
The following table presents the high and low closing prices for the common stock of The Hartford
on the NYSE for the periods indicated, and the quarterly dividends declared per share.
| 1 st Qtr. | 2 nd Qtr. | 3 rd Qtr. | 4 th Qtr. | |||||||||||||
|
2009
|
||||||||||||||||
|
Common Stock Price
|
||||||||||||||||
|
High
|
$ | 19.68 | $ | 18.16 | $ | 28.62 | $ | 29.20 | ||||||||
|
Low
|
$ | 3.62 | $ | 7.67 | $ | 10.18 | $ | 23.16 | ||||||||
|
Dividends Declared
|
$ | 0.05 | $ | 0.05 | $ | 0.05 | $ | 0.05 | ||||||||
|
2008
|
||||||||||||||||
|
Common Stock Price
|
||||||||||||||||
|
High
|
$ | 84.93 | $ | 79.13 | $ | 67.74 | $ | 38.11 | ||||||||
|
Low
|
$ | 66.05 | $ | 64.57 | $ | 40.99 | $ | 4.95 | ||||||||
|
Dividends Declared
|
$ | 0.53 | $ | 0.53 | $ | 0.53 | $ | 0.32 | ||||||||
On February 18, 2010, The Hartford’s Board of Directors declared a quarterly dividend of $0.05 per
common share payable on April 1, 2010 to common shareholders of record as of March 1, 2010.
As of February 16, 2010, the Company had approximately 280,000 shareholders. The closing price of
The Hartford’s common stock on the NYSE on February 16, 2010 was $23.95.
The Company’s Chief Executive Officer has certified to the NYSE that he is not aware of any
violation by the Company of NYSE corporate governance listing standards, as required by Section
303A.12(a) of the NYSE’s Listed Company Manual.
There are also various legal and regulatory limitations governing the extent to which The
Hartford’s insurance subsidiaries may extend credit, pay dividends or otherwise provide funds to
The Hartford Financial Services Group, Inc. as discussed in Part II, Item 7, MD&A — Capital
Resources and Liquidity — Liquidity Requirements and Sources of Capital.
See Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, for information related to securities authorized for issuance under equity
compensation plans.
Purchases of Equity Securities by the Issuer
The following table summarizes the Company’s repurchases of its common stock for the three months
ended December 31, 2009:
| Approximate Dollar | ||||||||||||||||
| Total Number of | Value of Shares that | |||||||||||||||
| Shares Purchased as | May Yet Be | |||||||||||||||
| Total Number | Average Price | Part of Publicly | Purchased Under | |||||||||||||
| of Shares | Paid Per | Announced Plans or | the Plans or | |||||||||||||
| Period | Purchased [1] | Share | Programs | Programs | ||||||||||||
| (in millions) | ||||||||||||||||
|
October 1, 2009 – October 31, 2009
|
22,353 | $ | 27.49 | — | $ | 807 | ||||||||||
|
November 1, 2009 – November 30, 2009
|
2,210 | $ | 24.49 | — | $ | 807 | ||||||||||
|
December 1, 2009 – December 31, 2009
|
2,519 | $ | 24.40 | — | $ | 807 | ||||||||||
|
|
||||||||||||||||
|
Total
|
27,082 | $ | 26.96 | — | N/A | |||||||||||
|
|
||||||||||||||||
| [1] |
Primarily relates to shares acquired from employees of the Company for tax withholding
purposes in connection with the Company’s stock compensation plans.
|
The Hartford’s Board of Directors has authorized a $1 billion stock repurchase program. The
Company’s repurchase authorization permits purchases of common stock, which may be in the open
market or through privately negotiated transactions. The Company also may enter into derivative
transactions to facilitate future repurchases of common stock. The timing of any future
repurchases will be dependent upon several factors, including the market price of the Company’s
securities, the Company’s capital position, consideration of the effect of any repurchases on the
Company’s financial strength or credit ratings, restrictions arising from the Company’s
participation in the CPP, and other corporate considerations. The repurchase program may be
modified, extended or terminated by the Board of Directors at any time.
27
Table of Contents
Total Return to Shareholders
The following tables present The Hartford’s annual percentage return and five-year total return on
its common stock including reinvestment of dividends in comparison to the S&P 500 and the S&P
Insurance Composite Index.
Annual Return Percentage
| For the Years Ended December 31, | ||||||||||||||||||||
| Company/Index | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||
|
The Hartford Financial Services Group, Inc.
|
25.83 | % | 10.82 | % | (4.55 | %) | (79.99 | %) | 43.91 | % | ||||||||||
|
S&P 500 Index
|
4.91 | % | 15.79 | % | 5.49 | % | (37.00 | %) | 26.46 | % | ||||||||||
|
S&P Insurance Composite Index
|
14.10 | % | 10.91 | % | (6.31 | %) | (58.14 | %) | 13.90 | % | ||||||||||
Cumulative Five-Year Total Return
| Base | ||||||||||||||||||||||||
| Period | For the Years Ended December 31, | |||||||||||||||||||||||
| Company/Index | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||
|
The Hartford Financial Services Group, Inc.
|
$ | 100 | $ | 125.83 | $ | 139.44 | $ | 133.09 | $ | 26.63 | $ | 38.32 | ||||||||||||
|
S&P 500 Index
|
$ | 100 | $ | 104.91 | $ | 121.48 | $ | 128.16 | $ | 80.74 | $ | 102.11 | ||||||||||||
|
S&P Insurance Composite Index
|
$ | 100 | $ | 114.10 | $ | 126.56 | $ | 118.57 | $ | 49.63 | $ | 56.53 | ||||||||||||
Comparison of Cumulative Five-Year Total Return
28
Table of Contents
(In millions, except for per share data and combined ratios)
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Income Statement Data
|
||||||||||||||||||||
|
Earned premiums
|
$ | 14,424 | $ | 15,503 | $ | 15,619 | $ | 15,023 | $ | 14,359 | ||||||||||
|
Fee income
|
4,576 | 5,135 | 5,436 | 4,739 | 4,012 | |||||||||||||||
|
Net investment income (loss):
|
||||||||||||||||||||
|
Securities available-for-sale and other
|
4,031 | 4,335 | 5,214 | 4,691 | 4,384 | |||||||||||||||
|
Equity securities, trading
|
3,188 | (10,340 | ) | 145 | 1,824 | 3,847 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total net investment income (loss)
|
7,219 | (6,005 | ) | 5,359 | 6,515 | 8,231 | ||||||||||||||
|
Net realized capital gains (losses) [1]
|
(2,010 | ) | (5,918 | ) | (994 | ) | (251 | ) | 17 | |||||||||||
|
Other revenues
|
492 | 504 | 496 | 474 | 464 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total revenues
|
24,701 | 9,219 | 25,916 | 26,500 | 27,083 | |||||||||||||||
|
Benefits, losses and loss adjustment expenses
|
13,831 | 14,088 | 13,919 | 13,218 | 12,929 | |||||||||||||||
|
Benefits, losses and loss adjustment expenses — returns
credited on International variable annuities
|
3,188 | (10,340 | ) | 145 | 1,824 | 3,847 | ||||||||||||||
|
Amortization of deferred policy acquisition costs and
present value of future profits
|
4,267 | 4,271 | 2,989 | 3,558 | 3,169 | |||||||||||||||
|
Insurance operating costs and expenses
|
3,749 | 3,993 | 3,894 | 3,252 | 3,227 | |||||||||||||||
|
Interest expense
|
476 | 343 | 263 | 277 | 252 | |||||||||||||||
|
Goodwill impairment
|
32 | 745 | — | — | — | |||||||||||||||
|
Other expenses
|
886 | 710 | 701 | 769 | 674 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total benefits, losses and expenses
|
26,429 | 13,810 | 21,911 | 22,898 | 24,098 | |||||||||||||||
|
Income (loss) before income taxes
|
(1,728 | ) | (4,591 | ) | 4,005 | 3,602 | 2,985 | |||||||||||||
|
Income tax expense (benefit)
|
(841 | ) | (1,842 | ) | 1,056 | 857 | 711 | |||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss)
|
(887 | ) | (2,749 | ) | 2,949 | 2,745 | 2,274 | |||||||||||||
|
Preferred stock dividends and accretion of discount
|
127 | 8 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss) available to common shareholders
|
$ | (1,014 | ) | $ | (2,757 | ) | $ | 2,949 | $ | 2,745 | $ | 2,274 | ||||||||
|
|
||||||||||||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||
|
Separate account assets
|
$ | 150,394 | $ | 130,184 | $ | 199,946 | $ | 180,484 | $ | 150,875 | ||||||||||
|
Total assets
|
307,717 | 287,583 | 360,361 | 326,544 | 285,412 | |||||||||||||||
|
Short-term debt
|
343 | 398 | 1,365 | 599 | 719 | |||||||||||||||
|
Long-term debt
|
5,496 | 5,823 | 3,142 | 3,504 | 4,048 | |||||||||||||||
|
Separate account liabilities
|
150,394 | 130,184 | 199,946 | 180,484 | 150,875 | |||||||||||||||
|
Stockholders’ equity, excluding AOCI
|
21,177 | 16,788 | 20,062 | 18,698 | 15,235 | |||||||||||||||
|
AOCI, net of tax
|
(3,312 | ) | (7,520 | ) | (858 | ) | 178 | 90 | ||||||||||||
|
Total stockholders’ equity
|
17,865 | 9,268 | 19,204 | 18,876 | 15,325 | |||||||||||||||
|
|
||||||||||||||||||||
|
Earnings (Loss) Per Common Share Data
|
||||||||||||||||||||
|
Basic
|
$ | (2.93 | ) | $ | (8.99 | ) | $ | 9.32 | $ | 8.89 | $ | 7.63 | ||||||||
|
Diluted
|
(2.93 | ) | (8.99 | ) | 9.24 | 8.69 | 7.44 | |||||||||||||
|
Cash dividends declared per common share
|
0.20 | 1.91 | 2.03 | 1.70 | 1.17 | |||||||||||||||
|
|
||||||||||||||||||||
|
Other Data
|
||||||||||||||||||||
|
Mutual fund assets [2]
|
$ | 64,997 | $ | 50,126 | $ | 55,531 | $ | 43,732 | $ | 32,705 | ||||||||||
|
|
||||||||||||||||||||
|
Operating Data
Combined ratios
|
||||||||||||||||||||
|
Ongoing Property & Casualty Operations
|
90.4 | 90.7 | 90.8 | 89.3 | 93.2 | |||||||||||||||
|
|
||||||||||||||||||||
| [1] |
Included in 2009 and 2008 are impairments of $1.5 billion and $4.0 billion, respectively.
|
|
| [2] |
Mutual funds are owned by the shareholders of those funds and not by the Company. As a result, they are not reflected in
total assets in the Company’s balance sheet.
|
29
Table of Contents
AND RESULTS OF OPERATIONS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
addresses the financial condition of The Hartford Financial Services Group, Inc. and its
subsidiaries (collectively, “The Hartford” or the “Company”) as of December 31, 2009, compared with
December 31, 2008, and its results of operations for each of the three years in the period ended
December 31, 2009. This discussion should be read in conjunction with the Consolidated Financial
Statements and related Notes beginning on page F-1. Certain reclassifications have been made to
prior year financial information to conform to the current year presentation.
INDEX
| Description | Page | |||
|
|
||||
| 31 | ||||
|
|
||||
| 34 | ||||
|
|
||||
| 39 | ||||
|
|
||||
| 67 | ||||
|
|
||||
| 73 | ||||
|
|
||||
| 80 | ||||
|
|
||||
| 83 | ||||
|
|
||||
| 86 | ||||
|
|
||||
| 88 | ||||
|
|
||||
| 90 | ||||
|
|
||||
| 93 | ||||
|
|
||||
| 95 | ||||
|
|
||||
| 96 | ||||
|
|
||||
| 100 | ||||
|
|
||||
| 103 | ||||
|
|
||||
| 106 | ||||
|
|
||||
| 109 | ||||
|
|
||||
| 110 | ||||
|
|
||||
| 111 | ||||
|
|
||||
| 116 | ||||
|
|
||||
| 126 | ||||
|
|
||||
| 133 | ||||
|
|
||||
| 143 | ||||
30
Table of Contents
CONSOLIDATED RESULTS OF OPERATIONS
| (In millions, except for per share data) | For the years ended December 31, | |||||||||||
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Earned premiums
|
$ | 14,424 | $ | 15,503 | $ | 15,619 | ||||||
|
Fee income
|
4,576 | 5,135 | 5,436 | |||||||||
|
Net investment income (loss):
|
||||||||||||
|
Securities available-for-sale and other
|
4,031 | 4,335 | 5,214 | |||||||||
|
Equity securities, trading [1]
|
3,188 | (10,340 | ) | 145 | ||||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
7,219 | (6,005 | ) | 5,359 | ||||||||
|
|
||||||||||||
|
Net realized capital losses:
|
||||||||||||
|
Total other-than-temporary impairment (“OTTI”) losses
|
(2,191 | ) | (3,964 | ) | (483 | ) | ||||||
|
OTTI losses recognized in other comprehensive income
|
683 | — | — | |||||||||
|
|
||||||||||||
|
Net OTTI losses recognized in earnings
|
(1,508 | ) | (3,964 | ) | (483 | ) | ||||||
|
Net realized capital losses, excluding net OTTI losses recognized in earnings
|
(502 | ) | (1,954 | ) | (511 | ) | ||||||
|
|
||||||||||||
|
Total net realized capital losses
|
(2,010 | ) | (5,918 | ) | (994 | ) | ||||||
|
|
||||||||||||
|
Other revenues
|
492 | 504 | 496 | |||||||||
|
|
||||||||||||
|
Total revenues
|
24,701 | 9,219 | 25,916 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
13,831 | 14,088 | 13,919 | |||||||||
|
Benefits, losses and loss adjustment expenses — returns
credited on International variable annuities [1]
|
3,188 | (10,340 | ) | 145 | ||||||||
|
Amortization of deferred policy acquisition costs and
present value of future profits
|
4,267 | 4,271 | 2,989 | |||||||||
|
Insurance operating costs and expenses
|
3,749 | 3,993 | 3,894 | |||||||||
|
Interest expense
|
476 | 343 | 263 | |||||||||
|
Goodwill impairment
|
32 | 745 | — | |||||||||
|
Other expenses
|
886 | 710 | 701 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
26,429 | 13,810 | 21,911 | |||||||||
|
Income (loss) before income taxes
|
(1,728 | ) | (4,591 | ) | 4,005 | |||||||
|
Income tax expense (benefit)
|
(841 | ) | (1,842 | ) | 1,056 | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (887 | ) | $ | (2,749 | ) | $ | 2,949 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental Operating Data
|
||||||||||||
|
Diluted earnings (loss) per common share
|
$ | (2.93 | ) | $ | (8.99 | ) | $ | 9.24 | ||||
|
Total revenues, excluding net investment income on equity securities, trading
|
21,513 | 19,559 | 25,771 | |||||||||
|
DAC Unlock benefit (charge), after-tax
|
(1,034 | ) | (932 | ) | 213 | |||||||
| As of December 31, | ||||||||||||
| Summary of Financial Condition | 2009 | 2008 | 2007 | |||||||||
|
Total assets
|
$ | 307,717 | $ | 287,583 | $ | 360,361 | ||||||
|
Total investment, excluding equity securities, trading
|
93,235 | 89,287 | 94,904 | |||||||||
|
Total stockholders’ equity
|
17,865 | 9,268 | 19,204 | |||||||||
| [1] |
Includes investment income and mark-to-market effects of equity securities, trading,
supporting the international variable annuity business, which are classified in net
investment income with corresponding amounts credited to policyholders within benefits,
losses and loss adjustment expenses.
|
31
Table of Contents
| Increase | Increase | |||||||||||||||||||
| (Decrease) From | (Decrease) From | |||||||||||||||||||
| Net Income (Loss) by Operation and Life Segment | 2009 | 2008 | 2007 | 2008 to 2009 | 2007 to 2008 | |||||||||||||||
|
Life
|
||||||||||||||||||||
|
Retail
|
$ | (410 | ) | $ | (1,399 | ) | $ | 812 | $ | 989 | $ | (2,211 | ) | |||||||
|
Individual Life
|
15 | (43 | ) | 182 | 58 | (225 | ) | |||||||||||||
|
Group Benefits
|
193 | (6 | ) | 315 | 199 | (321 | ) | |||||||||||||
|
Retirement Plans
|
(222 | ) | (157 | ) | 61 | (65 | ) | (218 | ) | |||||||||||
|
International
|
(183 | ) | (325 | ) | 223 | 142 | (548 | ) | ||||||||||||
|
Institutional
|
(515 | ) | (502 | ) | 17 | (13 | ) | (519 | ) | |||||||||||
|
Other
|
(165 | ) | (11 | ) | (52 | ) | (154 | ) | 41 | |||||||||||
|
|
||||||||||||||||||||
|
Total Life
|
(1,287 | ) | (2,443 | ) | 1,558 | 1,156 | (4,001 | ) | ||||||||||||
|
Property & Casualty
|
||||||||||||||||||||
|
Ongoing Operations
|
||||||||||||||||||||
|
Underwriting results
|
||||||||||||||||||||
|
Personal Lines
|
120 | 280 | 322 | (160 | ) | (42 | ) | |||||||||||||
|
Small Commercial
|
395 | 437 | 508 | (42 | ) | (71 | ) | |||||||||||||
|
Middle Market
|
258 | 169 | 157 | 89 | 12 | |||||||||||||||
|
Specialty Commercial
|
170 | 71 | (18 | ) | 99 | 89 | ||||||||||||||
|
|
||||||||||||||||||||
|
Ongoing Operations underwriting results
|
943 | 957 | 969 | (14 | ) | (12 | ) | |||||||||||||
|
Net servicing income [1]
|
37 | 31 | 52 | 6 | (21 | ) | ||||||||||||||
|
Net investment income
|
943 | 1,056 | 1,439 | (113 | ) | (383 | ) | |||||||||||||
|
Net realized capital losses
|
(266 | ) | (1,669 | ) | (160 | ) | 1,403 | (1,509 | ) | |||||||||||
|
Other expenses
|
(223 | ) | (219 | ) | (248 | ) | (4 | ) | 29 | |||||||||||
|
|
||||||||||||||||||||
|
Income before income taxes
|
1,434 | 156 | 2,052 | 1,278 | (1,896 | ) | ||||||||||||||
|
Income tax expense (benefit)
|
374 | (33 | ) | 575 | 407 | (608 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Ongoing Operations
|
1,060 | 189 | 1,477 | 871 | (1,288 | ) | ||||||||||||||
|
Other Operations
|
(77 | ) | (97 | ) | 30 | 20 | (127 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Total Property & Casualty
|
983 | 92 | 1,507 | 891 | (1,415 | ) | ||||||||||||||
|
Corporate
|
(583 | ) | (398 | ) | (116 | ) | (185 | ) | (282 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Net income (loss)
|
$ | (887 | ) | $ | (2,749 | ) | $ | 2,949 | $ | 1,862 | $ | (5,698 | ) | |||||||
|
|
||||||||||||||||||||
| [1] |
Net of expenses related to service business.
|
Year ended December 31, 2009 compared to the year ended December 31, 2008
Consolidated net loss decreased primarily due to the following:
| • |
A decrease in net realized losses, which included other-than-temporary impairments of $1.5
billion compared to $4.0 billion in 2009 and 2008, respectively, and gains on the variable
annuity hedge program of $631 in 2009 compared to losses of $639 in 2008. Partially
offsetting the decrease in realized losses was approximately $300 in net realized capital
losses in 2009 related to the settlement of a contingent obligation to Allianz SE (“Allianz”).
|
| • |
Goodwill impairments in 2009 were $32, after-tax, recorded in Corporate compared to $597,
after-tax, in 2008 with $323, after-tax, recorded in Corporate and $274, after-tax, recorded
in Life.
|
Excluding net realized capital losses and goodwill impairments, Life operations earnings decreased
approximately $300 and Property & Casualty operations earnings decreased approximately $150 from
2008 to 2009. See the segment sections of the MD&A for a discussion on the respective operations’
performance.
Year ended December 31, 2008 compared to the year ended December 31, 2007
The change from consolidated net income to consolidated net loss was primarily due to the
following:
| • |
Net realized losses of $5.9 billion in 2008 compared to $994 in 2007, which included
other-than-temporary impairments of $4.0 billion in 2008 and $483 in 2007.
|
| • |
DAC Unlock, after-tax, impact to earnings was a charge of $932 in 2008 compared to a
benefit of $213 in 2007.
|
| • |
Goodwill impairments in 2008 were $597, after-tax, with $323, after-tax, recorded in
Corporate and $274, after-tax, in Life compared to no goodwill impairments recorded in 2007.
|
Excluding net realized capital losses, goodwill impairments and DAC Unlocks, Life operations
earnings decreased approximately $500 and Property & Casualty operations earnings decreased
approximately $300 from 2007 to 2008. See the segment sections of the MD&A for a discussion on the
respective operations’ performance.
32
Table of Contents
Income Taxes
The effective tax rates for 2009, 2008 and 2007 were 49%, 40%, and 26%, respectively. The
principal causes of the differences between the effective rate and the U.S. statutory rate of 35%
for 2009, 2008 and 2007 were tax-exempt interest earned on invested assets and the separate account
dividends received deduction (“DRD”). This caused an increase in the tax benefit on the 2009 and
2008 pre-tax losses and a decrease in the tax expense on the 2007 pre-tax income. The effective
tax rate for 2009 also includes the tax effect of a non-deductible expense related to the
settlement of a contingent obligation to Allianz. For additional information, see Note 13 of the
Notes to Consolidated Financial Statements.
The separate account DRD is estimated for the current year using information from the prior
year-end, adjusted for current year equity market performance and other appropriate factors,
including estimated levels of corporate dividend payments. The actual current year DRD can vary
from estimates based on, but not limited to, changes in eligible dividends received by the mutual
funds, amounts of distribution from these mutual funds, amounts of short-term capital gains at the
mutual fund level and the Company’s taxable income before the DRD. The Company recorded benefits
of $181, $176 and $155 related to the separate account DRD in the years ended December 31, 2009,
2008 and 2007, respectively, which included a benefit (charge) in 2009 of $29 related to prior year
tax returns, in 2008 of $9 related to a true-up of the prior year tax return, and in 2007 of $(1)
related to a true-up of the prior year tax return.
In Revenue Ruling 2007-61, issued on September 25, 2007, the Internal Revenue Service (“IRS”)
announced its intention to issue regulations with respect to certain computational aspects of the
DRD on separate account assets held in connection with variable annuity contracts. Revenue Ruling
2007-61 suspended Revenue Ruling 2007-54, issued in August 2007 that purported to change accepted
industry and IRS interpretations of the statutes governing these computational questions. Any
regulations that the IRS may ultimately propose for issuance in this area will be subject to public
notice and comment, at which time insurance companies and other members of the public will have the
opportunity to raise legal and practical questions about the content, scope and application of such
regulations. As a result, the ultimate timing and substance of any such regulations are unknown,
but they could result in the elimination of some or all of the separate account DRD tax benefit
that the Company receives. Management believes that it is highly likely that any such regulations
would apply prospectively only.
The Company receives a foreign tax credit against its U.S. tax liability for foreign taxes paid by
the Company including payments from its separate account assets. The separate account foreign tax
credit is estimated for the current year using information from the most recent filed return,
adjusted for the change in the allocation of separate account investments to the international
equity markets during the current year. The actual current year foreign tax credit can vary from
the estimates due to actual foreign tax credits passed through by the mutual funds. The Company
recorded benefits of $16, $16 and $11 related to the separate account foreign tax credit in the
years ended December 31, 2009, 2008 and 2007, respectively. These amounts included benefits
related to true-ups of prior years’ tax returns of $3, $4 and $0 in 2009, 2008 and 2007,
respectively.
The Company’s unrecognized tax benefits decreased by $43 during 2009 as a result of the completion
of the 2002 through 2006 IRS examinations, bringing the total unrecognized tax benefits to $48 as
of December 31, 2009. This entire amount, if it were recognized, would affect the effective tax
rate.
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OUTLOOKS
Outlooks
The Hartford provides projections and other forward-looking information in the following
discussions, which contain many forward-looking statements, particularly relating to the 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 precautionary statements set forth
on page 3 of this Form 10-K. 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 each discussion below and in Item 1A, Risk
Factors.
Life
Retail
In the long-term, management continues to believe the market for retirement products will expand as
individuals increasingly save and plan for retirement. Demographic trends suggest that as the
“baby boom” generation matures, a significant portion of the United States population will allocate
a greater percentage of their disposable incomes to saving for their retirement years due to
uncertainty surrounding the Social Security system and increases in average life expectancy.
Near-term, the Company is continuing to experience lower variable annuity sales as a result of
market disruption, and the competitiveness of the Company’s current product offerings. The Company
expects these lower sales levels to continue into 2010. Despite the partial equity market recovery
over the past nine months, the current market level and market volatility have resulted in higher
claim costs, and have increased the cost and volatility of hedging programs, and the level of
capital needed to support living benefit guarantees. Many competitors have responded to recent
market turbulence by increasing the price of their guaranteed living benefits and changing the
amount of the guarantee offered. Management believes that the most significant industry de-risking
changes have occurred. In the first six months of 2009, the Company adjusted pricing levels and
took other actions to de-risk its variable annuity product features in order to address the risks
and costs associated with variable annuity benefit features in the current economic environment and
continues to explore other risk limiting techniques such as changes to hedging or other reinsurance
structures. The Company will continue to evaluate the benefits offered within its variable
annuities and launched a new variable annuity product in October 2009 that responds to customer
needs for growth and income within the risk tolerances of The Hartford.
Continued equity market volatility or significant declines in interest rates are also likely to
continue to impact the cost and effectiveness of our guaranteed minimum withdrawal benefit (“GMWB”)
hedging program and could result in material losses in our hedging program. For more information
on the GMWB hedging program, see the Life Equity Product Risk Management section within Capital
Markets Risk Management.
The Company’s fixed annuity sales have declined throughout 2009 as a result of lower interest rates
and the transition to a new product. Management expects fixed annuity sales to continue to be
challenged until interest rates increase.
For the retail mutual fund business, net sales can vary significantly depending on market
conditions, as was experienced throughout 2009. The continued declines in equity markets in the
first quarter of 2009 helped drive declines in the Company’s mutual fund deposits and assets under
management. During the last nine months of 2009, the equity markets improved from the first
quarter and certain key funds performed strongly relative to the market, and as a result, the
Company’s mutual fund assets under management and deposits have increased correspondingly. As this
business continues to evolve, success will be driven by diversifying net sales across the mutual
fund platform, delivering superior investment performance and creating new investment solutions for
current and future mutual fund shareholders.
The decline in assets under management as compared to 2008 is the result of continued depressed
values of the equity markets in 2009 as compared to 2008, which has decreased the extent of the
scale efficiencies that Retail has benefited from in recent years. The significant reduction in
assets under management has resulted in revenues declining faster than expenses causing lower
earnings during 2009. The equity markets have partially recovered during the last nine months of
2009, which has helped improve profitability in recent quarters, and management expects this
improvement to continue into 2010. The equity markets have not recovered to their pre-2008 levels;
so while profitability in 2010 is expected to be better than 2009 (barring any significant equity
market declines), not withstanding expense reduction the Company has not recovered the efficiency
of scale that it had prior to 2008. Individual Annuity net investment spread has been impacted by
losses on limited partnership and other alternative investments, lower yields on fixed maturities
and an increase in crediting rates on renewals for MVA annuities. Management expects these
conditions to persist in 2010. Management has evaluated, and will continue to actively evaluate,
its expense structure to ensure the business is controlling costs while maintaining an appropriate
level of service to our customers.
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Individual Life
Future sales for all products will be influenced by active management of current distribution
relationships, responding to the negative impact of recent merger and consolidation activity on
existing distribution relationships and the development of new sources of distribution, and the
Company’s ratings, as published by the various ratings agencies, while offering competitive and
innovative products and product features. The current economic environment poses challenges for
future sales; while life insurance products respond well to consumer demand for financial security
and wealth accumulation solutions, individuals may be reluctant to transfer funds when market
volatility has recently resulted in significant declines in investment values. In addition, the
availability and terms of capital solutions in the marketplace, as discussed below, to support
universal life products with secondary guarantees, may reduce future growth in these products.
Effective November 1, 2007, Individual Life reinsured the policy liability related to statutory
reserves in universal life with secondary guarantees to a captive reinsurance affiliate. An
unaffiliated standby third-party letter of credit supports a portion of the statutory reserves that
have been ceded to this subsidiary. The use of the letter of credit enhanced statutory capital but
resulted in a decline in net investment income and increased expenses in future periods for
Individual Life. As of December 31, 2009, the transaction provided approximately $585 of statutory
capital relief associated with the Company’s universal life products with secondary guarantees.
The Company received notice from the issuer of the letter of credit that they will be terminating
the letter of credit as it applies to new business written after January 31, 2010. In addition,
the issuer has notified the Company that it will not extend the letter of credit, covering the
in-force, beyond its current expiration date of December 31, 2028. The letter of credit is
expected to provide sufficient coverage for the reinsured business through 2028. Management is
reviewing product design alternatives with the objective of developing a competitively priced
product that meets the Company’s capital efficiency objectives.
For risk management purposes, Individual Life accepts and retains up to $10 in risk on any one
life. Individual Life uses reinsurance where appropriate to protect against the severity of losses
on individual claims; however, death claim experience may continue to lead to periodic short-term
earnings volatility. In the fourth quarter of 2008, Individual Life began ceding insurance under a
new reinsurance structure for all new business excluding term life insurance. The new reinsurance
structure allows Individual Life greater flexibility in writing larger policies, while retaining
less of the overall risk associated with individual insured lives. This new reinsurance structure
will help balance the overall profitability of Individual Life’s business. The financial results
of this change in the reinsurance structure will be recognized over time as the percentage of new
business subject to the structure grows. This will result in Individual Life recognizing
increasing reinsurance premiums while reducing earnings volatility associated with mortality
experience over time.
Individual Life continues to face uncertainty surrounding estate tax legislation, aggressive
competition from other life insurance providers, reduced availability and higher price of
reinsurance, and the current regulatory environment related to reserving for term life insurance
and universal life products with no-lapse guarantees. Additionally, volatility in the equity
markets may reduce the attractiveness of variable universal life products. These risks may have a
negative impact on Individual Life’s future sales and earnings. Despite these risks, management
believes there are opportunities to increase future sales by implementing strategies to expand
distribution capabilities, including utilizing independent agents and continuing to build on the
strong relationships within the financial institution marketplace.
Group Benefits
Group Benefits’ sales may fluctuate based on the competitive pricing environment in the
marketplace. In this competitive environment the Company has seen weakness in its first quarter
2010 sales. The Company anticipates relatively stable loss ratios and expense ratios over the
long-term based on underlying trends in the in-force business and disciplined new business and
renewal underwriting. The Company experienced higher disability loss ratios in 2009; however, the
Company believes this is within the normal range of volatility.
The economic downturn, which resulted in rising unemployment, combined with the potential for
employees to lessen spending on the Company’s products, negatively impacted premium levels in 2009.
Premium levels are expected to remain relatively flat in 2010, or until there is economic
expansion and lower unemployment rates compared to the end of 2009 levels. Over time, as employers
design benefit strategies to attract and retain employees, while attempting to control their
benefit costs, management believes that the need for the Company’s products will continue to
expand. This combined with the significant number of employees who currently do not have coverage
or adequate levels of coverage, creates continued opportunities for our products and services.
Retirement Plans
The future financial results of the Retirement Plans segment will depend on Life’s ability to
increase assets under management across all businesses, achieve scale in areas with a high degree
of fixed costs and maintain its investment spread earnings on the general account products sold
largely in the 403(b)/457 business. Disciplined expense management will continue to be a focus of
the Retirement Plans segment as necessary investments in service and technology are made to effect
the integration of the acquisitions made in 2008.
Retirement Plans deposits have been negatively impacted by market volatility and by the market
declines in 2008 and the first quarter of 2009 as businesses reduce their workforces and offer
more modest salary increases and as workers potentially allocate less to retirement accounts in the
near term. The impact of the partial equity markets recovery over the last nine months has been
offset by a few large case surrenders, resulting in an overall decline in average assets under
management compared to 2008. The reduction in average assets under management has strained net
income in 2009, and this earnings strain is expected to continue until average account value
exceeds the level seen in the first half of 2008.
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International
During the second quarter of 2009, the Company suspended all new sales in International’s Japan and
European operations. International is currently in the process of restructuring its operations to
maximize profitability and capital efficiency while continuing to focus on risk management and
maintaining appropriate service levels.
Profitability depends on the account values of our customers, which are affected by equity, bond
and currency markets. Periods of favorable market performance will increase assets under
management and thus increase fee income earned on those assets, while unfavorable market
performance will have the reverse effect. In addition, higher or lower account value levels will
generally reduce or increase, respectively, certain costs for individual annuities to the Company,
such as guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”),
guaranteed minimum accumulation benefits (“GMAB”) and GMWB. Prudent expense management is also an
important component of product profitability. During 2009, the Company took actions to realign our
organization and significantly reduce our expense structure which will result in improved earnings
over time. The Company continually evaluates opportunities to mitigate the risks associated with
International businesses and manage expenses in order to balance costs and earnings stability.
Markets partly recovered in the last three quarters of 2009, after a decline in the first quarter,
resulting in increased margins in the second, third, and fourth quarters.
In the fourth quarter of 2009, Hartford Life International, Ltd., an indirect, wholly-owned
subsidiary of Hartford Life Insurance Company, entered into a Share Purchase Agreement with Icatu
Holding, S.A, the Company’s joint venture partner, for the sale of all of the Company’s common
registered shares and preferred registered shares in Icatu Hartford Seguros S.A, its Brazil
operation. The expected settlement date will be during the first quarter of 2010. The sale of our
interests in Icatu Hartford Seguros S.A. will allow the Company to focus on its core U.S. centric
businesses and reduce exposure to currency volatility, but will also reduce the expected future
earnings of International.
Institutional
In 2009, the Company decided to exit several businesses that were determined to be outside of the
Company’s core business model. Several lines – institutional mutual funds, private placement life
insurance, income annuities and certain institutional annuities will continue to be managed for
growth. The private placement life insurance industry (including the corporate-owned and
bank-owned life insurance markets) has experienced a slowdown in sales due to, among other things,
limited availability of stable value wrap providers. We believe that the Company’s current PPLI
assets will experience high persistency, but our ability to grow this business in the future will
be affected by near term market and industry challenges. The remaining businesses, structured
settlements, guaranteed investment products, and most institutional annuities will be managed in
conjunction with other businesses that the Company has previously decided will not be actively
marketed or sold.
The net income of this segment depends on Institutional’s ability to retain assets under
management, the relative mix of business, and net investment spread. Net investment spread, as
discussed in Institutional’s Operating section of this MD&A, has declined year over year and
management expects net investment spread will remain pressured in the intermediate future due to
the low level of market short-term interest rates, increased allocation to lower yielding U.S.
Treasuries and short-term investments, and anticipated performance of limited partnerships and
other alternative investments.
Stable
value products experienced net outflows in 2009 as a result of contractual maturities and the
payments associated with certain contracts which allow an investor to accelerate principal
repayments (after a defined notice period of typically thirteen months), as well as the Company
opting to accelerate the repayment of principal for certain stable value products. A total of $3.9
billion of account value was paid out on stable value contracts during 2009. The Company has the
option to accelerate the repayment of principal for certain other stable value products and will
continue to evaluate calling these contracts on a contract by contract basis based upon the
financial impact to the Company. In addition, the Company may, from time to time, seek to retire
or repurchase certain other stable value products in open market transactions. Such repurchases,
if any, will depend on prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. Institutional will fund these obligations from cash and short-term
investments presently held in its investment portfolios along with projected receipts of earned
interest and principal maturities from long-term invested assets.
Property & Casualty
Personal Lines
The Company expects Personal Lines’ written premiums in 2010 will be relatively flat as growth in
AARP is expected to be largely offset by a decline in Agency. The Company expects personal auto
written premiums will be relatively flat as the effects of increased written premiums from the sale
of the Company’s Open Road Advantage product and increased written pricing will likely be offset by
actions to reduce written premiums in certain market segments and territories. The Company expects
homeowners’ written premiums will also be relatively flat as an increase in written pricing and the
cross-sell of AARP homeowners’ insurance to auto policyholders will likely be offset by the effect
of rate and underwriting actions to improve profitability.
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The Company will continue to use direct marketing to AARP members to drive new business in AARP and
will expand the sale of its Open Road Advantage product through independent agents to drive new
business in Agency. In all states where the Open Road Advantage product is available, the Company
distributes its discounted AARP Open Road Advantage auto product through those independent agents
who are authorized to offer the AARP product. The Company expects to expand the sale of the Open
Road Advantage auto product to an additional 23 states in 2010.
In 2009, renewal written pricing increased 3% for auto and 5% for home and management expects that
renewal written pricing for both auto and homeowners will continue to increase in 2010 driven by
rate increases in response to rising loss costs. For both auto and home, management expects that
the increase in average written premium per policy in 2010 will not be as significant as the
increase in written pricing due primarily to a continued shift to more preferred market segment
business (which has lower average premium) and growth in states and territories with lower average
premium.
The combined ratio before catastrophes and prior accident year development for Personal Lines in
2010 is expected to be relatively close to the 92.0 ratio achieved in 2009 as a slight improvement
in the current accident year loss and loss adjustment expense ratio is expected to be offset by a
slight increase in the expense ratio. For auto business, emerged claim frequency increased in 2009
after a historically low claim frequency in 2008. In 2010, management expects ultimate claim
frequency for the 2010 accident year will be slightly favorable reflecting the Company’s shift to
more preferred market segment business. While emerged claim severity increases for auto were flat
to the prior year, management expects auto claim severity to increase in 2010 more in line with
historical experience. Non-catastrophe homeowners’ loss costs increased in 2009 due to higher
claim frequency and severity and management expects that loss costs will increase in 2010 driven by
higher claim severity. In response to increasing loss costs, the Company is taking rating and
underwriting actions in auto and homeowners and the Company expects the current accident year loss
and loss adjustment expense ratio before catastrophes for both auto and homeowners will be slightly
lower in 2010. Management expects the expense ratio will be slightly higher in 2010 driven by
higher amortization of AARP acquisition costs.
Small Commercial
Within the Small Commercial segment, management expects single-digit written premium growth in
2010, due to higher new business premium and stabilization of policy count retention. During 2009,
the Company experienced a decrease in both earned audit premium and endorsement premium, primarily
as a result of lower payrolls. This resulted in declining average premium on renewed policies, a
trend that is expected to continue into the early part of 2010. Small Commercial introduced
several initiatives in 2009 including programs aimed at improving policy count retention and new
product offerings for package business and expects to introduce a new pricing model for commercial
auto in 2010. The workers’ compensation business is expected to produce strong policy growth in
2010 reflecting: our current market position and capabilities; targeted broadening of underwriting
capabilities in selected industries; and leveraging the payroll model to both increase penetration
in well-established partners and continue developing opportunities with recently added partners
including the marketing relationship with Intuit. While renewal written pricing in Small
Commercial was flat in 2009, increases are expected in 2010.
The Small Commercial segment’s combined ratio before catastrophes and prior accident year
development is expected to be higher in 2010 than the 84.4 achieved in 2009. The increase in the
combined ratio results from an expected increase in the current accident year loss and loss
adjustment expense ratio, as well as, a higher expense ratio. Small Commercial experienced
favorable frequency trends on workers’ compensation and commercial auto claims in recent accident
years. Management expects favorable frequency to continue, but at a moderated rate, for the 2010
accident year. Across the Small Commercial lines of business, severity is expected to continue its
long-term upward trend. The expense ratio is expected to be higher in 2010 driven by an increase
in total underwriting expenses.
Middle Market
Management expects that 2010 written premiums for Middle Market will be higher due to an increase
in new business premium, while policy count retention is expected to remain flat. Written premiums
in Middle Market decreased by 10% in 2009 as the downturn in the economy reduced exposures across
most lines of business, particularly payroll exposures for workers’ compensation and construction
lines in marine, which were partially reflected in lower earned audit premium.
The Company continues to take a disciplined approach to evaluating and pricing risks in the face of
declines in renewal written pricing. While renewal written pricing for Middle Market business
declined by 2% in 2009, management expects carriers will continue to price new business more
aggressively than renewals. Carriers in the commercial lines market segment reported some
moderation in the rate of price declines in 2009. Like in the Personal Lines and Small Commercial
market segments, current economic conditions (lower payrolls, declines in production, lower sales,
etc.) have reduced written premium growth opportunities in Middle Market.
In 2010, management will seek to compete for new business and protect renewals in Middle Market by,
among other actions, refining its pricing and risk selection models, targeting industries with
growth potential and looking to cross-sell other lines on existing accounts.
The combined ratio before catastrophes and prior accident year development for Middle Market is
expected to be higher in 2010 than the 95.1 achieved in 2009 due to an expected increase in the
current accident year loss and loss adjustment expense ratio and, to a lesser extent, an increase
in the expense ratio. Claim cost severity was favorable on property and marine in 2009. However,
management expects that claim cost severity for property and marine claims will return to
historically normal levels in 2010 and that severity will continue to increase for general
liability and workers’ compensation claims. The Company also expects a continuation of moderately
lower frequency in 2010.
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Specialty Commercial
Within Specialty Commercial, management expects written premiums to be slightly higher in 2010,
primarily due to higher casualty premiums, partially offset by the impact of business and economic
changes experienced in 2009. Written premiums decreased by 17% in 2009, due to a combination of
the sale of First State Management Group, the effects of the economic downturn, ratings concerns,
and market-driven changes in a reinsurance arrangement. The Company sold its core excess and
surplus lines property businesses in March 2009. Additionally, as with other commercial lines
segments, Specialty Commercial experienced the same negative impacts of the recession on written
premiums. And, while the Company’s ratings stabilized in May of 2009, concerns about the Company’s
financial strength to that point had a negative effect on commercial directors’ and officers’ and
contract surety lines of business. Lastly, the reinsurance program for the professional liability
lines renewed in July 2009 with a change in structure from primarily an excess of loss program to a
variable quota share arrangement. This change was market driven and consistent with the Company’s
expectations. This will have the impact of depressing the net written premium growth for
professional liability through the second quarter of 2010.
For professional liability business within Specialty Commercial, the Company expects its losses
from the fallout of the sub-prime mortgage market and the broader credit crisis to be manageable
based on several factors. Principal among them is the diversified nature of the Company’s product
and customer portfolio, with a majority of the Company’s total in-force professional liability net
written premium derived from policyholders with privately-held ownership and, therefore, relatively
low shareholder class action exposure. Reinsurance substantially mitigates the net limits exposed
per policy and no single industry segment comprises 15% or more of the Company’s professional
liability book of business by net written premium. About half of the Company’s limits exposed to
federal shareholder class action claims filed in 2008 and 2009 are under Side-A D&O insurance
policies that provide protection to individual directors and officers only in cases where their
company cannot indemnify them. In addition, 88% of the exposed limits are on excess policies
rather than primary policies. Regarding the Madoff and Stanford alleged fraud cases which continue
to evolve, based on a detailed ground-up review of all claims notices received to date and an
analysis of potentially involved parties noted in press reports, the Company anticipates only a
limited number of its policies and corresponding net limits to be exposed. The Company expects its
losses from the sub-prime mortgage and credit crisis, as well as its exposure to the Madoff and
Stanford cases, to be within its expected loss estimates.
In 2010, the combined ratio before catastrophes and prior accident year development for Specialty
Commercial is expected to be slightly higher than the 100.1 experienced in 2009 due to an expected
increase in the current accident year loss and loss adjustment expense ratio and the dividend
ratio, partially offset by a decrease in the expense ratio.
Investment Income
Property & Casualty net investment income is expected to be more favorable in 2010 than in 2009 due
to increased allocation of liquid investments to spread based investments, such as investment grade
corporate bonds, and more favorable limited partnership results.
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CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America (“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 has
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 reserves,
net of reinsurance; life estimated gross profits used in the valuation and amortization of assets
and liabilities associated with variable annuity and other universal life-type contracts;
evaluation of other-than-temporary impairments on available-for-sale securities and valuation
allowances on investments; living benefits required to be fair valued; goodwill impairment;
valuation of investments and derivative instruments; pension and other postretirement benefit
obligations; 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 debt or equity markets could have
a material impact on the 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.
Property and Casualty Reserves, Net of Reinsurance
The Hartford establishes property and casualty reserves to provide for the estimated costs of
paying claims under insurance policies written by the Company. These reserves include estimates
for both claims that have been reported and those that have not yet been reported, and include
estimates of all expenses associated with processing and settling these claims. Incurred but not
reported (“IBNR”) reserves represent the difference between the estimated ultimate cost of all
claims and the actual reported loss and loss adjustment expenses (“reported losses”). Reported
losses represent cumulative loss and loss adjustment expenses paid plus case reserves for
outstanding reported claims. Company actuaries evaluate the total reserves (IBNR and case
reserves) on an accident year basis. An accident year is the calendar year in which a loss is
incurred, or, in the case of claims-made policies, the calendar year in which a loss is reported.
Reserve estimates can change over time because of unexpected changes in the external environment.
Potential external factors include (1) changes in the inflation rate for goods and services related
to covered damages such as medical care, hospital care, auto parts, wages and home repair, (2)
changes in the general economic environment that could cause unanticipated changes in the claim
frequency per unit insured, (3) changes in the litigation environment as evidenced by changes in
claimant attorney representation in the claims negotiation and settlement process, (4) changes in
the judicial environment regarding the interpretation of policy provisions relating to the
determination of coverage and/or the amount of damages awarded for certain types of damages, (5)
changes in the social environment regarding the general attitude of juries in the determination of
liability and damages, (6) changes in the legislative environment regarding the definition of
damages and (7) new types of injuries caused by new types of injurious exposure: past examples
include breast implants, lead paint and construction defects.
Reserve estimates can also change over time because of changes in internal company operations.
Potential internal factors include (1) periodic changes in claims handling procedures, (2) growth
in new lines of business where exposure and loss development patterns are not well established or
(3) changes in the quality of risk selection in the underwriting process. In the case of assumed
reinsurance, all of the above risks apply. In addition, changes in ceding company case reserving
and reporting patterns can create additional factors that need to be considered in estimating the
reserves. Due to the inherent complexity of the assumptions used, final claim settlements may vary
significantly from the present estimates, particularly when those settlements may not occur until
well into the future.
Through both facultative and treaty reinsurance agreements, the Company cedes a share of the risks
it has underwritten to other insurance companies. The Company’s net reserves for loss and loss
adjustment expenses include anticipated recovery from reinsurers on unpaid claims. The estimated
amount of the anticipated recovery, or reinsurance recoverable, is net of an allowance for
uncollectible reinsurance.
Reinsurance recoverables include an estimate of the amount of gross loss and loss adjustment
expense reserves that may be ceded under the terms of the reinsurance agreements, including IBNR
unpaid losses. The Company calculates its ceded reinsurance projection based on the terms of any
applicable facultative and treaty reinsurance, including an estimate by reinsurance agreement of
how IBNR losses will ultimately be ceded.
The Company provides an allowance for uncollectible reinsurance, reflecting management’s best
estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers’
unwillingness or inability to pay. The Company analyzes recent developments in commutation
activity between reinsurers and cedants, recent trends in arbitration and litigation outcomes in
disputes between reinsurers and cedants and the overall credit quality of the Company’s reinsurers.
Where its contracts permit, the Company secures future claim obligations with various forms of
collateral, including irrevocable letters of credit, secured trusts, funds held accounts and
group-wide offsets. The allowance for uncollectible reinsurance was $335 as of December 31, 2009,
including $226 related to Other Operations and $109 related to Ongoing Operations.
The Company’s estimate of reinsurance recoverables, net of an allowance for uncollectible
reinsurance, is subject to similar risks and uncertainties as the estimate of the gross reserve for
unpaid losses and loss adjustment expenses.
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The Hartford, like other insurance companies, categorizes and tracks its insurance reserves for its
segments by “line of business”. Furthermore, The Hartford regularly reviews the appropriateness of
reserve levels at the line of business level, taking into consideration the variety of trends that
impact the ultimate settlement of claims for the subsets of claims in each particular line of
business. In addition, within the Other Operations segment, the Company has reserves for asbestos
and environmental (“A&E”) claims. Adjustments to previously established reserves, which may be
material, are reflected in the operating results of the period in which the adjustment is
determined to be necessary. In the judgment of management, information currently available has
been properly considered in the reserves established for losses and loss adjustment expenses.
The following table shows loss and loss adjustment expense reserves by line of business and by
operating segment as of December 31, 2009, net of reinsurance:
| Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
| Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
|
Reserve Line of Business
|
||||||||||||||||||||||||||||
|
Property
|
$ | 323 | $ | 2 | $ | 42 | $ | 56 | $ | 423 | $ | — | $ | 423 | ||||||||||||||
|
Auto physical damage
|
16 | 5 | 5 | 9 | 35 | — | 35 | |||||||||||||||||||||
|
Auto liability
|
1,674 | 248 | 238 | 161 | 2,321 | — | 2,321 | |||||||||||||||||||||
|
Package business
|
— | 1,131 | 881 | 136 | 2,148 | — | 2,148 | |||||||||||||||||||||
|
Workers’ compensation
|
9 | 1,933 | 2,270 | 2,272 | 6,484 | — | 6,484 | |||||||||||||||||||||
|
General liability
|
26 | 145 | 693 | 1,286 | 2,150 | — | 2,150 | |||||||||||||||||||||
|
Professional liability
|
— | — | — | 742 | 742 | — | 742 | |||||||||||||||||||||
|
Fidelity and surety
|
— | — | — | 261 | 261 | — | 261 | |||||||||||||||||||||
|
Assumed Reinsurance [1]
|
— | — | — | — | — | 496 | 496 | |||||||||||||||||||||
|
All other non-A&E
|
— | — | — | — | — | 936 | 936 | |||||||||||||||||||||
|
A&E
|
2 | 2 | 8 | 3 | 15 | 2,199 | 2,214 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total reserves-net
|
2,050 | 3,466 | 4,137 | 4,926 | 14,579 | 3,631 | 18,210 | |||||||||||||||||||||
|
Reinsurance and other recoverables
|
20 | 137 | 305 | 2,118 | 2,580 | 861 | 3,441 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total reserves-gross
|
$ | 2,070 | $ | 3,603 | $ | 4,442 | $ | 7,044 | $ | 17,159 | $ | 4,492 | $ | 21,651 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
| [1] |
These net loss and loss adjustment expense reserves relate to assumed reinsurance that was
moved into Other Operations (formerly known as “HartRe”).
|
Reserving within Ongoing and Other Operations
(See Reserving for Asbestos and Environmental Claims within Other Operations for a discussion of
how A&E reserves are set)
How reserves are set
Reserves are set by line of business within the various operating segments. A single line of
business may be written in more than one segment. Case reserves are established by a claims
handler on each individual claim and are adjusted as new information becomes known during the
course of handling the claim. Lines of business for which loss data (e.g., paid losses and case
reserves) emerge (i.e., is reported) over a long period of time are referred to as long-tail lines
of business. Lines of business for which loss data emerge more quickly are referred to as
short-tail lines of business. Within the Company’s Ongoing Operations, the shortest-tail lines of
business are property and auto physical damage. The longest tail lines of business within Ongoing
Operations include workers’ compensation, general liability, and professional liability. Assumed
reinsurance, which is within Other Operations, is also long-tail business. For short-tail lines of
business, emergence of paid loss and case reserves is credible and likely indicative of ultimate
losses. For long-tail lines of business, emergence of paid losses and case reserves is less
credible in the early periods and, accordingly, may not be indicative of ultimate losses.
Company reserving actuaries, who are independent of the business units, regularly review reserves
for both current and prior accident years using the most current claim data. For most lines of
business, these reserve reviews incorporate a variety of actuarial methods and judgments and
involve rigorous analysis. These selections incorporate input, as judged by the reserving
actuaries to be appropriate, from claims personnel, pricing actuaries and operating management on
reported loss cost trends and other factors that could affect the reserve estimates. Most reserves
are reviewed fully each quarter, including loss reserves for property, auto physical damage, auto
liability, package business, workers’ compensation, most general liability, professional liability
and fidelity and surety. Other reserves are reviewed semi-annually (twice per year) or annually.
These include, but are not limited to, reserves for losses incurred before 1989, allocated loss
adjustment expenses, assumed reinsurance, latent exposures such as construction defects,
unallocated loss adjustment expense and all other non-A&E exposures within Other Operations. For
reserves that are reviewed semi-annually or annually, management monitors the emergence of paid and
reported losses in the intervening quarters to either confirm that the estimate of ultimate losses
should not change or, if necessary, perform a reserve review to determine whether the reserve
estimate should change.
An expected loss ratio is used in initially recording the reserves for both short-tail and
long-tail lines of business. This expected loss ratio is determined through a review of prior
accident years’ loss ratios and expected changes to earned pricing, loss costs, mix of business,
ceded reinsurance and other factors that are expected to impact the loss ratio for the current
accident year. For short-tail lines, IBNR for the current accident year is initially recorded as
the product of the expected loss ratio for the period, earned premium for the period and the
proportion of losses expected to be reported in future calendar periods for the current accident
period. For long-tailed lines, IBNR reserves for the current accident year are initially recorded
as the product of the expected loss ratio for the period and the earned premium for the period,
less reported losses for the period.
40
Table of Contents
In addition to the expected loss ratio, the actuarial techniques or methods used primarily include
paid and reported loss development and frequency / severity techniques as well as the
Bornhuetter-Ferguson method (a combination of the expected loss ratio and paid development or
reported development method). Within any one line of business, the methods that are given more
influence vary based primarily on the maturity of the accident year, the mix of business and the
particular internal and external influences impacting the claims experience or the methods. The
output of the reserve reviews are reserve estimates that are referred to herein as the “actuarial
indication”.
Provided below is a general discussion of which methods are preferred by line of business. Because
the actuarial estimates are generated at a much finer level of detail than line of business (e.g.,
by distribution channel, coverage, accident period), this description should not be assumed to
apply to each coverage and accident year within a line of business. Also, as circumstances change,
the methods that are given more influence will change.
Property and Auto Physical Damage.
These lines are fast-developing and paid and reported
development techniques are used as these methods use historical data to develop paid and reported
loss development patterns, which are then applied to current paid and reported losses by accident
period to estimate ultimate losses. The Company relies primarily on reported development
techniques although a review of frequency and severity and the initial loss expectation based on
the expected loss ratio is used for the most immature accident months. The advantage of frequency
/ severity techniques is that frequency estimates are generally easier to predict and external
information can be used to supplement internal data in making severity estimates.
Auto Liability – Personal Lines.
For auto liability, and bodily injury in particular, the Company
performs a greater number of techniques than it does for property and auto physical damage. In
addition, because the paid development technique is affected by changes in claim closure patterns
and the reported development method is affected by changes in case reserving practices, the Company
uses Berquist-Sherman techniques which adjust these patterns to reflect current settlement rates
and case reserving techniques. The Company generally uses the reported development method for
older accident years as a higher percentage of ultimate losses are reflected in reported losses
than in cumulative paid losses and the frequency/severity and Berquist-Sherman methods for more
recent accident years. Recent periods are influenced by changes in case reserve practices and
changing disposal rates; the frequency/severity techniques are not affected as much by these
changes and the Berquist-Sherman techniques specifically adjust for these changes.
Auto Liability – Commercial Lines and Short-Tailed General Liability.
As with Personal Lines auto
liability, the Company performs a variety of techniques, including the paid and reported
development methods and frequency / severity techniques. For older, more mature accident years,
management finds that reported development techniques are best. For more recent accident years,
management typically prefers frequency / severity techniques that make separate assumptions about
loss activity above and below a selected capping level.
Long-Tailed General Liability, Fidelity and Surety and Large Deductible Workers’ Compensation
. For
these long-tailed lines of business, the Company generally relies on the expected loss ratio and
reported development techniques. Management generally weights these techniques together, relying
more heavily on the expected loss ratio method at early ages of development and more on the
reported development method as an accident year matures.
Workers’ Compensation
. Workers’ compensation is the Company’s single largest reserve line of
business so a wide range of methods are reviewed in the reserve analysis. Methods performed
include paid and reported development, variations on expected loss ratio methods, and an in-depth
analysis on the largest states. Paid development patterns are historically very stable in the
Company’s workers’ compensation business, so paid techniques are preferred for older accident
periods. For more recent periods, paid techniques are less predictive of the ultimate liability
since such a low percentage of ultimate losses are paid in early periods of development.
Accordingly, for more recent accident periods, the Company generally relies more heavily on a
state-by-state analysis and the expected loss ratio approach.
Professional Liability.
Reported and paid loss developments patterns for this line tend to be
volatile. Therefore, the Company typically relies on frequency and severity techniques.
Assumed Reinsurance and All Other within Other Operations.
For these lines, management tends to
rely on the reported development techniques. In assumed reinsurance, assumptions are influenced by
information gained from claim and underwriting audits.
Allocated Loss Adjustment Expenses (ALAE).
For some lines of business (e.g., professional
liability and assumed reinsurance), ALAE and losses are analyzed together. For most lines of
business, however, ALAE is analyzed separately, using paid development techniques and an analysis
of the relationship between ALAE and loss payments.
Unallocated Loss Adjustment Expense (ULAE).
ULAE is analyzed separately from loss and ALAE. For
most lines of business, incurred ULAE costs to be paid in the future are projected based on an
expected cost per claim year and the anticipated claim closure pattern and the ratio of paid ULAE
to paid loss.
The final step in the reserve review process involves a comprehensive review by senior reserving
actuaries who apply their judgment and, in concert with senior management, determine the
appropriate level of reserves based on the information that has been accumulated. Numerous factors
are considered in this process including, but not limited to, the assessed reliability of key loss
trends and assumptions that may be significantly influencing the current actuarial indications, the
maturity of the accident year, pertinent trends observed over the recent past, the level of
volatility within a particular line of business, and the improvement or deterioration of actuarial
indications in the current period as compared to the prior periods. Total recorded net reserves
excluding asbestos and environmental were 3.8% higher than the actuarial indication of the reserves
as of December 31, 2009 and December 31, 2008.
See the Reserve Development Section for a discussion of changes to reserve estimates recorded in
2009.
41
Table of Contents
Current trends contributing to reserve uncertainty
The Hartford is a multi-line company in the property and casualty business. The Hartford is
therefore subject to reserve uncertainty stemming from a number of conditions, including but not
limited to those noted above, any of which could be material at any point in time for any segment.
Certain issues may become more or less important over time as conditions change. As various market
conditions develop, management must assess whether those conditions constitute a long-term trend
that should result in a reserving action (i.e., increasing or decreasing the reserve).
Within the commercial segments and the Other Operations segment, the Company has exposure to claims
asserted for bodily injury as a result of long-term or continuous exposure to harmful products or
substances. Examples include, but are not limited to, pharmaceutical products, silica and lead
paint. The Company also has exposure to claims from construction defects, where property damage or
bodily injury from negligent construction is alleged. In addition, the Company has exposure to
claims asserted against religious institutions and other organizations relating to molestation or
abuse. Such exposures may involve potentially long latency periods and may implicate coverage in
multiple policy periods. These factors make reserves for such claims more uncertain than other
bodily injury or property damage claims. With regard to these exposures, the Company is monitoring
trends in litigation, the external environment, the similarities to other mass torts and the
potential impact on the Company’s reserves.
In Personal Lines, reserving estimates are generally less variable than for the Company’s other
property and casualty segments because of the coverages having relatively shorter periods of loss
emergence. Estimates, however, can still vary due to a number of factors, including
interpretations of frequency and severity trends and their impact on recorded reserve levels.
Severity trends can be impacted by changes in internal claim handling and case reserving practices
in addition to changes in the external environment. These changes in claim practices increase the
uncertainty in the interpretation of case reserve data, which increases the uncertainty in recorded
reserve levels. In addition, the introduction of new products has led to a different mix of
business by type of insured than the Company experienced in the past. Such changes in mix increase
the uncertainty of the reserve projections, since historical data and reporting patterns may not be
applicable to the new business.
In both Small Commercial and Middle Market, workers’ compensation is the Company’s single biggest
line of business and the line of business with the longest pattern of loss emergence. Reserve
estimates for workers’ compensation are particularly sensitive to changes in medical inflation, the
changing use of medical care procedures and changes in state legislative and regulatory
environments. Medical costs make up more than 50% of workers’ compensation payments and it is
possible that federal health care reform will impact medical payments in workers’ compensation.
These changes increase the uncertainty in the application of development patterns. In addition,
over the past several accident years, the Company has experienced favorable claim frequency on
workers’ compensation claims. The Company’s reserve estimates assume that reported losses for
recent accident years will continue to emerge favorably and that severity will not be adversely
impacted by the lower volume of reported claims.
In the Specialty Commercial segment, many lines of insurance are “long-tail”, including large
deductible workers’ compensation insurance, as such, reserve estimates for these lines are more
difficult to determine than reserve estimates for shorter-tail lines of insurance. Estimating
required reserve levels for large deductible workers’ compensation insurance is further complicated
by the uncertainty of whether losses that are attributable to the deductible amount will be paid by
the insured; if such losses are not paid by the insured due to financial difficulties, the Company
would be contractually liable. Another example of reserve variability relates to reserves for
directors’ and officers’ insurance. There is potential volatility in the required level of
reserves due to the continued uncertainty regarding the number and severity of class action suits,
including uncertainty regarding the Company’s exposure to losses arising from the collapse of the
sub-prime mortgage market. Additionally, the Company’s exposure to losses under directors’ and
officers’ insurance policies is primarily in excess layers, making estimates of loss more complex.
The recent financial market turmoil has increased the number of shareholder class action lawsuits
against our insureds or their directors and officers and this trend could continue for some period
of time.
Impact of changes in key assumptions on reserve volatility
As stated above, the Company’s practice is to estimate reserves using a variety of methods,
assumptions and data elements. Within its reserve estimation process for reserves other than
asbestos and environmental, the Company does not consistently use statistical loss distributions or
confidence levels around its reserve estimate and, as a result, does not disclose reserve ranges.
The reserve estimation process includes assumptions about a number of factors in the internal and
external environment. Across most lines of business, the most important assumptions are future loss
development factors applied to paid or reported losses to date. The trend in loss costs is also a
key assumption, particularly in the most recent accident years, where loss development factors are
less credible.
The following discussion includes disclosure of possible variation from current estimates of loss
reserves due to a change in certain key indicators of potential losses. Each of the impacts
described below is estimated individually, without consideration for any correlation among key
indicators or among lines of business. Therefore, it would be inappropriate to take each of the
amounts described below and add them together in an attempt to estimate volatility for the
Company’s reserves in total. The estimated variation in reserves due to changes in key indicators
is a reasonable estimate of possible variation that may occur in the future, likely over a period
of several calendar years. It is important to note that the variation discussed is not meant to be
a worst-case scenario, and therefore, it is possible that future variation may be more than the
amounts discussed below.
42
Table of Contents
Recorded reserves for auto liability, net of reinsurance, are $2.3 billion across all lines, $1.7
billion of which is in Personal Lines. Personal auto liability reserves are shorter-tailed than
other lines of business (such as workers’ compensation) and, therefore, less volatile. However,
the size of the reserve base means that future changes in estimates could be material to the
Company’s results of operations in any given period. The key indicator for Personal Lines auto
liability is the annual loss cost trend, particularly the severity trend component of loss costs.
A 2.5 point change in annual severity for the two most recent accident years would change the
estimated net reserve need by $90, in either direction. A 2.5 point change in annual severity is
within historical variation for the industry and for the Company.
Recorded reserves for workers’ compensation, net of reinsurance, are $6.5 billion in total for
Ongoing Operations. Loss development patterns are a key indicator for this line of business,
particularly for more mature accident years. Historically, loss development patterns have been
impacted by, among other things, medical cost inflation. The Company has reviewed the historical
variation in reported loss development patterns. If the reported loss development patterns change
by 4%, the estimated net reserve need would change by $400, in either direction. A 4% change in
reported loss development patterns is within historical variation, as measured by the variation
around the average development factors as reported in statutory accident year reports.
Recorded reserves for general liability, net of reinsurance, are $2.2 billion in total for Ongoing
Operations. Loss development patterns are a key indicator for this line of business, particularly
for more mature accident years. Historically, loss development patterns have been impacted by,
among other things, emergence of new types of claims (e.g., construction defect claims) or a shift
in the mixture between smaller, more routine claims and larger, more complex claims. The Company
has reviewed the historical variation in reported loss development patterns. If the reported loss
development patterns change by 9%, the estimated net reserve need would change by $200, in either
direction. A 9% change in reported loss development patterns is within historical variation, as
measured by the variation around the average development factors as reported in statutory accident
year reports.
Similar to general liability, assumed casualty reinsurance is affected by reported loss development
patterns. In addition to the items identified above that would affect both direct and reinsurance
liability claim development patterns, there is also an impact to reporting patterns for any changes
in claim notification from ceding companies to the reinsurer. Recorded net reserves for HartRe
assumed reinsurance business, excluding asbestos and environmental liabilities, within Other
Operations were $496 as of December 31, 2009. If the reported loss development patterns underlying
the Company’s net reserves for HartRe assumed casualty reinsurance change by 10%, the estimated net
reserve need would change by $252, in either direction. A 10% change in reported loss development
patterns is within historical variation, as measured by the variation around the average
development factors as reported in statutory accident year reports.
Reserving for Asbestos and Environmental Claims within Other Operations
How A&E reserves are set
In establishing reserves for asbestos claims, the Company evaluates its insureds’ estimated
liabilities for such claims using a ground-up approach. The Company considers a variety of
factors, including the jurisdictions where underlying claims have been brought, past, pending and
anticipated future claim activity, disease mix, past settlement values of similar claims, dismissal
rates, allocated loss adjustment expense, and potential bankruptcy impact.
Similarly, a ground-up exposure review approach is used to establish environmental reserves. The
Company’s evaluation of its insureds’ estimated liabilities for environmental claims involves
consideration of several factors, including historical values of similar claims, the number of
sites involved, the insureds’ alleged activities at each site, the alleged environmental damage at
each site, the respective shares of liability of potentially responsible parties at each site, the
appropriateness and cost of remediation at each site, the nature of governmental enforcement
activities at each site, and potential bankruptcy impact.
Having evaluated its insureds’ probable liabilities for asbestos and/or environmental claims, the
Company then evaluates its insureds’ insurance coverage programs for such claims. The Company
considers its insureds’ total available insurance coverage, including the coverage issued by the
Company. The Company also considers relevant judicial interpretations of policy language and
applicable coverage defenses or determinations, if any.
Evaluation of both the insureds’ estimated liabilities and the Company’s exposure to the insureds
depends heavily on an analysis of the relevant legal issues and litigation environment. This
analysis is conducted by the Company’s lawyers and is subject to applicable privileges.
For both asbestos and environmental reserves, the Company also compares its historical direct net
loss and expense paid and reported experience, and net loss and expense paid and reported
experience year by year, to assess any emerging trends, fluctuations or characteristics suggested
by the aggregate paid and reported activity.
Once the gross ultimate exposure for indemnity and allocated loss adjustment expense is determined
for its insureds by each policy year, the Company calculates its ceded reinsurance projection based
on any applicable facultative and treaty reinsurance and the Company’s experience with reinsurance
collections.
43
Table of Contents
Uncertainties Regarding Adequacy of Asbestos and Environmental Reserves
A number of factors affect the variability of estimates for asbestos and environmental reserves
including assumptions with respect to the frequency of claims, the average severity of those claims
settled with payment, the dismissal rate of claims with no payment and the expense to indemnity
ratio. The uncertainty with respect to the underlying reserve assumptions for asbestos and
environmental adds a greater degree of variability to these reserve estimates than reserve
estimates for more traditional exposures. While this variability is reflected in part in the size
of the range of reserves developed by the Company, that range may still not be indicative of the
potential variance between the ultimate outcome and the recorded reserves. The recorded net
reserves as of December 31, 2009 of $2.21 billion ($1.90 billion and $312 for asbestos and
environmental, respectively) is within an estimated range, unadjusted for covariance, of $1.75
billion to $2.52 billion. The process of estimating asbestos and environmental reserves remains
subject to a wide variety of uncertainties, which are detailed in Note 12 of the Notes to
Consolidated Financial Statements. The Company believes that its current asbestos and
environmental reserves are appropriate. However, analyses of future developments could cause the
Company to change its estimates and ranges of its asbestos and environmental reserves, and the
effect of these changes could be material to the Company’s consolidated operating results,
financial condition and liquidity. Consistent with the Company’s long-standing reserving
practices, the Company will continue to review and monitor its reserves in the Other Operations
segment regularly and, where future developments indicate, make appropriate adjustments to the
reserves.
Total Property & Casualty Reserves, Net of Reinsurance, Results
In the opinion of management, based upon the known facts and current law, the reserves recorded for
the Company’s property and casualty businesses at December 31, 2009 represent the Company’s best
estimate of its ultimate liability for losses and loss adjustment expenses related to losses
covered by policies written by the Company. However, because of the significant uncertainties
surrounding reserves, and particularly asbestos exposures, it is possible that management’s
estimate of the ultimate liabilities for these claims may change and that the required adjustment
to recorded reserves could exceed the currently recorded reserves by an amount that could be
material to the Company’s results of operations, financial condition and liquidity.
Reserve Rollforwards and Development
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 changed 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, changes
are made more quickly to more mature accident years and less volatile lines of business.
As part of its quarterly reserve review process, the Company is closely monitoring reported loss
development in certain lines where the recent emergence of paid losses and case reserves could
indicate a trend that may eventually lead the Company to change its estimate of ultimate losses in
those lines. If, and when, the emergence of reported losses is determined to be a trend that
changes the Company’s estimate of ultimate losses, prior accident years reserves would be adjusted
in the period the change in estimate is made. Such adjustments of reserves are referred to as
“reserve development”. Reserve development that increases previous estimates of ultimate cost is
called “reserve strengthening”. Reserve development that decreases previous estimates of ultimate
cost is called “reserve releases”. Reserve development can influence the comparability of year
over year underwriting results and is set forth in the paragraphs and tables that follow.
44
Table of Contents
A roll-forward follows of Property & Casualty liabilities for unpaid losses and loss adjustment
expenses by segment for the year ended December 31, 2009:
For the Year Ended December 31, 2009
| Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
| Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses-gross
|
$ | 2,052 | $ | 3,572 | $ | 4,744 | $ | 6,981 | $ | 17,349 | $ | 4,584 | $ | 21,933 | ||||||||||||||
|
Reinsurance and other recoverables
|
60 | 176 | 437 | 2,110 | 2,783 | 803 | 3,586 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses-net
|
1,992 | 3,396 | 4,307 | 4,871 | 14,566 | 3,781 | 18,347 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||||||||||||||||||
|
Current accident year before catastrophes
|
2,700 | 1,396 | 1,352 | 842 | 6,290 | — | 6,290 | |||||||||||||||||||||
|
Current accident year catastrophes
|
228 | 44 | 32 | 2 | 306 | — | 306 | |||||||||||||||||||||
|
Prior accident years
|
(33 | ) | (36 | ) | (187 | ) | (172 | ) | (428 | ) | 242 | (186 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
2,895 | 1,404 | 1,197 | 672 | 6,168 | 242 | 6,410 | |||||||||||||||||||||
|
Payments
|
(2,837 | ) | (1,334 | ) | (1,367 | ) | (617 | ) | (6,155 | ) | (392 | ) | (6,547 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses—net
|
2,050 | 3,466 | 4,137 | 4,926 | 14,579 | 3,631 | 18,210 | |||||||||||||||||||||
|
Reinsurance and other recoverables
|
20 | 137 | 305 | 2,118 | 2,580 | 861 | 3,441 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses—gross
|
$ | 2,070 | $ | 3,603 | $ | 4,442 | $ | 7,044 | $ | 17,159 | $ | 4,492 | $ | 21,651 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Earned premiums
|
$ | 3,952 | $ | 2,580 | $ | 2,101 | $ | 1,228 | $ | 9,861 | $ | — | $ | 9,861 | ||||||||||||||
|
Loss and loss expense paid ratio [1]
|
71.8 | 51.7 | 65.1 | 50.4 | 62.5 | |||||||||||||||||||||||
|
Loss and loss expense incurred ratio
|
73.3 | 54.4 | 57.0 | 54.7 | 62.6 | |||||||||||||||||||||||
|
Prior accident years development (pts) [2]
|
(0.8 | ) | (1.4 | ) | (8.9 | ) | (14.0 | ) | (4.3 | ) | ||||||||||||||||||
| [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.
|
Prior accident years development recorded in 2009
Included within prior accident years development for the year ended December 31, 2009 were the
following reserve strengthenings (releases):
| Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
| Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
|
Directors’ and officers’ claims
|
$ | — | $ | — | $ | — | $ | (127 | ) | $ | (127 | ) | $ | — | $ | (127 | ) | |||||||||||
|
General liability
|
— | — | (112 | ) | — | (112 | ) | — | (112 | ) | ||||||||||||||||||
|
Workers’ compensation
|
— | (40 | ) | (52 | ) | — | (92 | ) | — | (92 | ) | |||||||||||||||||
|
Personal auto liability
|
(77 | ) | — | — | — | (77 | ) | — | (77 | ) | ||||||||||||||||||
|
Commercial auto liability
|
— | (33 | ) | (14 | ) | — | (47 | ) | — | (47 | ) | |||||||||||||||||
|
Package business
|
— | 38 | — | — | 38 | — | 38 | |||||||||||||||||||||
|
Surety business
|
— | — | — | 28 | 28 | — | 28 | |||||||||||||||||||||
|
Homeowners’ claims
|
18 | — | — | — | 18 | — | 18 | |||||||||||||||||||||
|
Net asbestos reserves
|
— | — | — | — | — | 138 | 138 | |||||||||||||||||||||
|
Net environmental reserves
|
— | — | — | — | — | 75 | 75 | |||||||||||||||||||||
|
Other Operations’ non-asbestos and non-environmental reserves
|
— | — | — | — | — | 35 | 35 | |||||||||||||||||||||
|
Uncollectible reinsurance
|
— | — | — | (20 | ) | (20 | ) | (20 | ) | (40 | ) | |||||||||||||||||
|
Other reserve re-estimates, net [1]
|
26 | (1 | ) | (9 | ) | (53 | ) | (37 | ) | 14 | (23 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total prior accident years development for the year ended
December 31, 2009
|
$ | (33 | ) | $ | (36 | ) | $ | (187 | ) | $ | (172 | ) | $ | (428 | ) | $ | 242 | $ | (186 | ) | ||||||||
|
|
||||||||||||||||||||||||||||
| [1] |
Includes reserve discount accretion of $24, including $7 in Small Commercial, $9 in Middle Market and $8 in Specialty Commercial.
|
45
Table of Contents
During 2009, the Company’s re-estimates of prior accident years reserves included the following significant reserve changes:
Ongoing Operations
| • |
While the Company expects its losses from the sub-prime mortgage and credit crisis, as well as its exposure to the Madoff and
Stanford cases to be manageable, there is nonetheless the risk that claims under directors’ and officers’ (“D&O”) and errors and
omissions (“E&O”) insurance policies incurred in the 2007 and 2008 accident years may develop adversely as the claims are
settled. However, so far, the Company has seen no evidence of adverse loss experience related to these events. In fact,
reported losses to date for claims under D&O and E&O policies for the 2007 accident year have been emerging favorably to initial
expectations. In addition, for the 2003 to 2006 accident years, reported losses for claims under D&O and E&O policies have been
emerging favorably to initial expectations due to lower than expected claim severity. The Company released a total of $127 of
reserves for D&O and E&O claims in 2009 related to the 2003 to 2008 accident years. Any continued favorable emergence of claims
under D&O and E&O insurance policies for the 2008 and prior accident years could lead the Company to reduce reserves for these
liabilities in future quarters.
|
| • |
Released reserves for general liability claims by $112, primarily related to accident years 2003 to 2007. Beginning in the
third quarter of 2007, the Company observed that reported losses for high hazard and umbrella general liability claims,
primarily related to the 2001 to 2006 accident years, were emerging favorably and this caused management to reduce its estimate
of the cost of future reported claims for these accident years, resulting in a reserve release in each quarter since the third
quarter of 2007. During 2009, management determined that the lower level of loss emergence was also evident in accident year
2007 and had continued for accident years 2003 to 2006 and, as a result, the Company reduced the reserves. In addition, during
the third quarter of 2009, the Company recognized that the cost of late emerging exposures were likely to be higher than
previously expected. Also in the third quarter, the Company recognized additional ceded losses on accident years 1999 and
prior. These third quarter events were largely offsetting.
|
| • |
Released workers’ compensation reserves by $92 in 2009, primarily related to additional ceded losses on accident years 1999 and
prior and lower allocated loss adjustment expense reserves in accident years 2003 to 2007. During the first quarter of 2009,
the Company observed lower than expected allocated loss adjustment expense payments on older accident years. As a result, the
Company reduced its estimate for future expense payments on more recent accident years.
|
| • |
Released reserves for Personal Lines auto liability claims by $77 in 2009. Beginning in the first quarter of 2008, management
observed an improvement in emerged claim severity for the 2005 through 2007 accident years attributed, in part, to changes made
in claim handling procedures in 2007. During 2009, the Company recognized that favorable development in reported severity was a
sustained trend for those accident years and, accordingly, management reduced its reserve estimate. In the third quarter of
2009, management also recognized sustained favorable development trends in AARP for accident year 2008 and released reserves for
that accident year. The fourth quarter 2009 reserve release is in response to a continuation of these same favorable trends,
primarily for accident years 2006 to 2008.
|
| • |
Released reserves for commercial auto liability claims by $47 in 2009 including $33 in Small Commercial, primarily related to
accident years 2003 to 2008. In the fourth quarter of 2009, the Company recognized that the full value of large auto liability
claims was being recognized as case reserves at an earlier age. The increased adequacy of case reserves caused the Company to
decrease its estimate of reserves for IBNR loss and loss adjustment expenses.
|
| • |
The Company reviewed its allowance for uncollectible reinsurance for Ongoing Operations in the second quarter of 2009 and
reduced its allowance for Ongoing Operations by $20 driven, in part, by a reduction in gross ceded loss recoverables. The
allowance for uncollectible reinsurance for Ongoing Operations is recorded within the Specialty Commercial segment.
|
| • |
Strengthened reserves for liability claims under Small Commercial package policies by $38 in 2009, primarily related to
allocated loss adjustment expenses for accident years 2000 to 2005 and 2007 and 2008. During the first quarter of 2009, the
Company identified higher than expected expense payments on older accident years related to the liability coverage. Additional
analysis in the second quarter of 2009 showed that this higher level of loss adjustment expense is likely to continue into more
recent accident years. As a result, in the second quarter of 2009, the Company increased its estimates for future expense
payments for the 2007 and 2008 accident years. In addition, during the third quarter of 2009, the Company recognized the cost
of late emerging exposures were likely to be higher than previously expected. Also in the third quarter, the Company recognized
a lower than expected frequency of high severity claims. These third quarter events were largely offsetting.
|
| • |
Strengthened reserves for surety business by a net of $28 in 2009, primarily related to accident years 2004 to 2007. The net $28
of strengthening consisted of $55 strengthening of reserves for customs bonds, partially offset by a $27 release of reserves for
contract surety claims. During 2008, the Company became aware that there were a large number of late reported surety claims
related to customs bonds. Continued high volume of late reported claims during 2009 caused the Company to strengthen the
reserves. Because the pattern of claim reporting for customs bonds has not been similar to the reporting pattern of other
surety bonds, future claim activity is difficult to predict. It is possible that as additional claim activity emerges, our
estimate of both the number of future claims and the cost of those claims could change substantially.
|
46
Table of Contents
| • |
Strengthened reserves for homeowners’ claims by $18 in 2009, primarily driven by increased claim
settlement costs in recent accident years and increased losses from underground storage tanks in
older accident years. In 2008, the Company began to observe increasing claim settlement
costs for the 2005 to 2008 accident years and, in the first quarter of 2009, determined that
this higher cost level would continue, resulting in a reserve strengthening of $9 for these
accident years. In addition, beginning in 2008, the Company observed unfavorable emergence of
homeowners’ casualty claims for accident years 2003 and prior, primarily related to underground
storage tanks. Following a detailed review of these claims in the first quarter of 2009,
management increased its estimate of the magnitude of this exposure and strengthened homeowners’
casualty claim reserves by $9.
|
Other Operations
See Other Operations Claims Reserve Activity for information concerning the Company’s annual
evaluation of these reserves and related reinsurance.
A rollforward of liabilities for unpaid losses and loss adjustment expenses by segment for Property
& Casualty for the year ended December 31, 2008 follows:
For the year ended December 31, 2008
| Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
| Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses—gross
|
$ | 2,042 | $ | 3,470 | $ | 4,697 | $ | 6,873 | $ | 17,082 | $ | 5,071 | $ | 22,153 | ||||||||||||||
|
Reinsurance and other recoverables
|
81 | 177 | 414 | 2,316 | 2,988 | 934 | 3,922 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses—net
|
1,961 | 3,293 | 4,283 | 4,557 | 14,094 | 4,137 | 18,231 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||||||||||||||||||
|
Current accident year before catastrophes
|
2,542 | 1,447 | 1,460 | 941 | 6,390 | — | 6,390 | |||||||||||||||||||||
|
Current accident year catastrophes
|
258 | 122 | 116 | 47 | 543 | — | 543 | |||||||||||||||||||||
|
Prior accident years
|
(51 | ) | (89 | ) | (134 | ) | (81 | ) | (355 | ) | 129 | (226 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
2,749 | 1,480 | 1,442 | 907 | 6,578 | 129 | 6,707 | |||||||||||||||||||||
|
Payments
|
(2,718 | ) | (1,377 | ) | (1,418 | ) | (593 | ) | (6,106 | ) | (485 | ) | (6,591 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses—net
|
1,992 | 3,396 | 4,307 | 4,871 | 14,566 | 3,781 | 18,347 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Reinsurance and other recoverables
|
60 | 176 | 437 | 2,110 | 2,783 | 803 | 3,586 | |||||||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses—gross
|
$ | 2,052 | $ | 3,572 | $ | 4,744 | $ | 6,981 | $ | 17,349 | $ | 4,584 | $ | 21,933 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Earned premiums
|
$ | 3,926 | $ | 2,724 | $ | 2,299 | $ | 1,382 | $ | 10,331 | $ | 7 | $ | 10,338 | ||||||||||||||
|
Loss and loss expense paid ratio [1]
|
69.2 | 50.5 | 61.6 | 42.8 | 59.1 | |||||||||||||||||||||||
|
Loss and loss expense incurred ratio
|
70.0 | 54.3 | 62.7 | 65.6 | 63.7 | |||||||||||||||||||||||
|
Prior accident year development (pts.) [2]
|
(1.3 | ) | (3.3 | ) | (5.9 | ) | (5.8 | ) | (3.4 | ) | ||||||||||||||||||
| [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 catastrophes
For 2008, net current accident year catastrophe loss and loss adjustment expenses totaled $543, of
which $237 related to hurricane Ike. In addition to the $237 of net catastrophe loss and loss
adjustment expenses from hurricane Ike, the Company incurred $20 of assessments due to hurricane
Ike. The following table shows total current accident year catastrophe impacts in the year ended
December 31, 2008:
For the Year Ended December 31, 2008
| Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
| Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
|
Gross incurred claim and claim adjustment expenses for current accident year catastrophes
|
$ | 260 | $ | 124 | $ | 130 | $ | 58 | $ | 572 | $ | — | $ | 572 | ||||||||||||||
|
Ceded claim and claim adjustment expenses for current accident year catastrophes
|
2 | 2 | 14 | 11 | 29 | — | 29 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net incurred claim and claim adjustment expenses for current accident year catastrophes
|
258 | 122 | 116 | 47 | 543 | — | 543 | |||||||||||||||||||||
|
Assessments owed to Texas Windstorm Insurance Association due to hurricane Ike
|
10 | 7 | 3 | — | 20 | — | 20 | |||||||||||||||||||||
|
Reinstatement premium ceded to reinsurers due to hurricane Ike
|
1 | — | — | — | 1 | — | 1 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total current accident year catastrophe impacts
|
$ | 269 | $ | 129 | $ | 119 | $ | 47 | $ | 564 | $ | — | $ | 564 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
47
Table of Contents
A portion of the gross incurred loss and loss adjustment expenses are recoverable from reinsurers
under the Company’s principal catastrophe reinsurance program in addition to other reinsurance
programs. Reinsurance recoveries under the Company’s principal catastrophe reinsurance program,
which covers multiple lines of business, are allocated to the segments in accordance with a
pre-established methodology that is consistent with the method used to allocate the ceded premium
to each segment.
The Company’s estimate of ultimate loss and loss expenses arising from hurricanes and other
catastrophes is based on covered losses under the terms of the policies. The Company does not
provide residential flood insurance on its Personal Lines homeowners policies so the Company’s
estimate of hurricane losses on Personal Lines homeowners business does not include any provision
for damages arising from flood waters. The Company acts as an administrator for the Write Your Own
flood program on behalf of the National Flood Insurance Program under FEMA, for which it earns a
fee for collecting premiums and processing claims. Under the program, the Company services both
personal lines and commercial lines flood insurance policies and does not assume any underwriting
risk. As a result, catastrophe losses in the above table do not include any losses related to the
Write Your Own flood program.
Prior accident years development recorded in 2008
Included within prior accident years development for the year ended December 31, 2008 were the
following reserve strengthenings (releases):
| Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
| Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
|
Workers’ compensation
|
$ | — | $ | (92 | ) | $ | (64 | ) | $ | — | $ | (156 | ) | $ | — | $ | (156 | ) | ||||||||||
|
General liability
|
— | (15 | ) | (90 | ) | — | (105 | ) | — | (105 | ) | |||||||||||||||||
|
Directors’ and officers’ claims
|
— | — | — | (75 | ) | (75 | ) | — | (75 | ) | ||||||||||||||||||
|
Personal auto liability
|
(46 | ) | — | — | — | (46 | ) | — | (46 | ) | ||||||||||||||||||
|
Commercial auto liability
|
— | — | (27 | ) | — | (27 | ) | — | (27 | ) | ||||||||||||||||||
|
Extra-contractual liability claims under non-standard personal auto policies
|
(24 | ) | — | — | — | (24 | ) | — | (24 | ) | ||||||||||||||||||
|
Construction defect claims
|
— | — | — | (10 | ) | (10 | ) | — | (10 | ) | ||||||||||||||||||
|
General liability and products liability
|
— | 17 | 50 | — | 67 | — | 67 | |||||||||||||||||||||
|
National account general liability allocated loss adjustment expense reserves
|
— | — | — | 25 | 25 | — | 25 | |||||||||||||||||||||
|
Net environmental reserves
|
— | — | — | — | — | 53 | 53 | |||||||||||||||||||||
|
Net asbestos reserves
|
— | — | — | — | — | 50 | 50 | |||||||||||||||||||||
|
Other reserve re-estimates, net [1]
|
19 | 1 | (3 | ) | (21 | ) | (4 | ) | 26 | 22 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total prior accident years development for the year ended December 31, 2008
|
$ | (51 | ) | $ | (89 | ) | $ | (134 | ) | $ | (81 | ) | $ | (355 | ) | $ | 129 | $ | (226 | ) | ||||||||
|
|
||||||||||||||||||||||||||||
| [1] |
Includes reserve discount accretion of $26, including $6 in Small Commercial, $9 in Middle
Market, $8 in Specialty Commercial and $3 in Other Operations.
|
During 2008, the Company’s re-estimates of prior accident year reserves included the following
significant reserve changes:
Ongoing Operations
| • |
Released workers’ compensation reserves primarily related to accident years 2000 to 2007 by
$156. These reserve releases are a continuation of favorable developments first recognized in
2005 and recognized in both 2006 and 2007. The reserve releases in 2008 resulted from a
determination that workers’ compensation losses continue to develop even more favorably from
prior expectations due, in part, to state legal reforms, including in California and Florida,
and underwriting actions as well as cost reduction initiatives first instituted in 2003. In
particular, the state legal reforms and underwriting actions have resulted in lower than
expected medical claim severity. The $156 reserve release represented 3% of the Company’s net
reserves for workers’ compensation claims as of December 31, 2007.
|
| • |
Released reserves for general liability claims primarily related to the 2001 to 2007
accident years by $105. Beginning in the third quarter of 2007, the Company observed that
reported losses for high hazard and umbrella general liability claims, primarily related to
the 2001 to 2006 accident years, were emerging favorably and this caused management to reduce
its estimate of the cost of future reported claims for these accident years, resulting in a
reserve release in each quarter since the third quarter of 2007. During 2008, the Company
observed that this favorable trend continued with the 2007 accident year. The number of
reported claims for this line of business has been lower than expected, a trend first observed
in 2005. Over time, management has come to believe that the lower than expected number of
claims reported to date will not be offset by a higher than expected number of late reported
claims. The $105 reserve release represented 4% of the Company’s net reserves for general
liability claims as of December 31, 2007.
|
48
Table of Contents
| • |
Released reserves for professional liability claims for accident years 2003 to 2006 by $75.
During 2008, the Company updated its analysis of certain professional liability claims and the
new analysis showed that claim severity for directors and officers losses in the 2003 to 2006
accident years were favorable to previous expectations, resulting in a reduction of reserves.
The analysis also showed favorable emergence of claim severity on errors and omission policy
claims for the 2004 and 2005 accident years, resulting in a release of reserves. The $75
reserve release represented 13% of the Company’s net reserves for professional liability claims
as of December 31, 2007.
|
| • |
Released reserves for Personal Lines auto liability claims by $46, principally related to
AARP business for the 2005 through 2007 accident years. Beginning in the first quarter of
2008, management observed an improvement in emerged claim severity for the 2005 through 2007
accident years attributed, in part, to changes made in claim handling procedures in 2007. In
the third and fourth quarter of 2008, the Company recognized that favorable development in
reported severity was a sustained trend and, accordingly, management reduced its reserve
estimate. The $46 reserve release represented 3% of the Company’s net reserves for Personal
Lines auto liability claims as of December 31, 2007.
|
| • |
Released commercial auto liability reserves by $27, primarily related to accident years
2002 to 2007. Management has observed fewer than previously expected large losses in accident
years 2006 and 2007 and lower than previously expected severity on large claims in accident
years 2002 to 2005. In 2008, management recognized that favorable development in reported
claim severity was a sustained trend and, accordingly, management reduced its estimate of the
reserves. The $27 reserve release represented 9% of the Company’s net reserves for Middle
Market commercial auto liability claims as of December 31, 2007.
|
| • |
Released reserves for extra-contractual liability claims under non-standard personal auto
policies by $24. As part of the agreement to sell its non-standard auto insurance business in
November, 2006, the Company continues to be obligated for certain extra-contractual liability
claims arising prior to the date of sale. Reserve estimates for extra-contractual liability
claims are subject to significant variability depending on the expected settlement of
individually large claims and, during 2008, the Company determined that the settlement value
of a number of these claims was expected to be less than previously anticipated, resulting in
a $24 release of reserves. The $24 reserve release represented 1% of the Company’s net
reserves for Personal Lines auto liability claims as of December 31, 2007.
|
| • |
Released reserves for construction defect claims in Specialty Commercial by $10 for
accident years 2005 and prior due to lower than expected reported claim activity. Lower than
expected claim activity was first noted in the first quarter of 2007 and continued throughout
2007. In the first quarter of 2008, management determined that this was a verifiable trend
and reduced reserves accordingly. The $10 reserve release represented 1% of the Company’s net
reserves for Specialty Commercial general liability claims as of December 31, 2007.
|
| • |
Strengthened reserves for general liability and products liability claims primarily for
accident years 2004 and prior by $67 for losses expected to emerge after 20 years of
development. In 2007, management observed that long outstanding general liability claims have
been settling for more than previously anticipated and, during the first quarter of 2008, the
Company increased the estimate of late development of general liability claims. The $67
reserve strengthening represented 3% of the Company’s net reserves for general liability
claims as of December 31, 2007.
|
| • |
Strengthened reserves for allocated loss adjustment expenses on national account general
liability claims within Specialty Commercial by $25. Allocated loss adjustment expense
reserves on general liability excess and umbrella claims were strengthened for accident years
2004 and prior as the Company observed that the cost of settling these claims has exceeded
previous expectations. The $25 reserve strengthening represented 2% of the Company’s net
reserves for Specialty Commercial general liability claims as of December 31, 2007.
|
49
Table of Contents
Other Operations
| • |
See Other Operations Claims Reserve Activity for information concerning the Company’s
annual evaluation of these reserves and related reinsurance.
|
A rollforward of liabilities for unpaid losses and loss adjustment expenses by segment for Property
& Casualty for the year ended December 31, 2007 follows:
For the year ended December 31, 2007
| Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
| Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses-gross
|
$ | 1,959 | $ | 3,421 | $ | 4,536 | $ | 6,359 | $ | 16,275 | $ | 5,716 | $ | 21,991 | ||||||||||||||
|
Reinsurance and other recoverables
|
134 | 214 | 479 | 2,260 | 3,087 | 1,300 | 4,387 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses-net
|
1,825 | 3,207 | 4,057 | 4,099 | 13,188 | 4,416 | 17,604 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||||||||||||||||||
|
Current accident year before catastrophes
|
2,576 | 1,594 | 1,561 | 961 | 6,692 | — | 6,692 | |||||||||||||||||||||
|
Current accident year catastrophes
|
125 | 28 | 15 | 9 | 177 | — | 177 | |||||||||||||||||||||
|
Prior accident years
|
(4 | ) | (209 | ) | (16 | ) | 84 | (145 | ) | 193 | 48 | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
2,697 | 1,413 | 1,560 | 1,054 | 6,724 | 193 | 6,917 | |||||||||||||||||||||
|
Payments
|
(2,503 | ) | (1,222 | ) | (1,248 | ) | (720 | ) | (5,693 | ) | (597 | ) | (6,290 | ) | ||||||||||||||
|
Reallocation of reserves for unallocated loss adjustment expenses [1]
|
(58 | ) | (105 | ) | (86 | ) | 124 | (125 | ) | 125 | — | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses-net
|
1,961 | 3,293 | 4,283 | 4,557 | 14,094 | 4,137 | 18,231 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Reinsurance and other recoverables
|
81 | 177 | 414 | 2,316 | 2,988 | 934 | 3,922 | |||||||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses-gross
|
$ | 2,042 | $ | 3,470 | $ | 4,697 | $ | 6,873 | $ | 17,082 | $ | 5,071 | $ | 22,153 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Earned premiums
|
$ | 3,889 | $ | 2,736 | $ | 2,420 | $ | 1,446 | $ | 10,491 | $ | 5 | $ | 10,496 | ||||||||||||||
|
Loss and loss expense paid ratio [2]
|
64.4 | 44.7 | 51.5 | 49.8 | 54.3 | |||||||||||||||||||||||
|
Loss and loss expense incurred ratio
|
69.3 | 51.6 | 64.5 | 73.0 | 64.1 | |||||||||||||||||||||||
|
Prior accident year development (pts.) [3]
|
(0.1 | ) | (7.6 | ) | (0.7 | ) | 5.8 | (1.4 | ) | |||||||||||||||||||
| [1] |
Prior to the second quarter of 2007, the Company evaluated the adequacy of the reserves for unallocated loss adjustment
expenses on a company-wide basis. During the second quarter of 2007, the Company refined its analysis of the reserves at
the segment level, resulting in the reallocation of reserves among segments, including a reallocation of reserves from
Ongoing Operations to Other Operations.
|
|
| [2] |
The “loss and loss expense paid ratio” represents the ratio of paid loss and loss adjustment expenses to earned premiums.
|
|
| [3] |
“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
|
Prior accident years development recorded in 2007
Included within prior accident years development for the year ended December 31, 2007 were the
following reserve strengthenings (releases).
| Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
| Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
|
Workers’ compensation
|
$ | — | $ | (184 | ) | $ | 40 | $ | 47 | $ | (97 | ) | $ | — | $ | (97 | ) | |||||||||||
|
Package business liability
|
— | (30 | ) | — | — | (30 | ) | — | (30 | ) | ||||||||||||||||||
|
Surety business
|
— | — | — | (22 | ) | (22 | ) | — | (22 | ) | ||||||||||||||||||
|
Commercial auto liability
|
— | — | (18 | ) | — | (18 | ) | — | (18 | ) | ||||||||||||||||||
|
Personal auto liability
|
(16 | ) | — | — | — | (16 | ) | — | (16 | ) | ||||||||||||||||||
|
Errors and omissions
|
— | — | — | (15 | ) | (15 | ) | — | (15 | ) | ||||||||||||||||||
|
Adverse arbitration decision
|
— | — | — | — | — | 99 | 99 | |||||||||||||||||||||
|
General liability
|
— | — | (35 | ) | 59 | 24 | — | 24 | ||||||||||||||||||||
|
Net environmental reserves
|
— | — | — | — | — | 25 | 25 | |||||||||||||||||||||
|
Other reserve re-estimates, net [1]
|
12 | 5 | (3 | ) | 15 | 29 | 69 | 98 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total prior accident years development for the year ended
December 31, 2007
|
$ | (4 | ) | $ | (209 | ) | $ | (16 | ) | $ | 84 | $ | (145 | ) | $ | 193 | $ | 48 | ||||||||||
|
|
||||||||||||||||||||||||||||
| [1] |
Includes reserve discount accretion of $31, including $6 in Small Commercial, $8 in Middle
Market, $11 in Specialty Commercial and $6 in Other Operations.
|
50
Table of Contents
During the year ended December 31, 2007, the Company’s reestimates of prior accident year reserves
included the following significant reserve changes.
Ongoing Operations
| • |
Released Small Commercial workers’ compensation reserves by $151, primarily related to
accident years 2002 to 2006. This reserve release is a continuation of favorable developments
first recognized in 2005 and 2006. The workers’ compensation reserve releases in 2007
resulted from a determination that workers’ compensation losses continue to develop even more
favorably from prior expectations due to the California and Florida legal reforms and
underwriting actions as well as cost reduction initiatives first instituted in 2003. In
particular, the state legal reforms and underwriting actions have resulted in lower than
expected medical claim severity. In addition, the Company determined that paid losses related
to workers’ compensation policies sold through payroll service providers were emerging
favorably, leading to a release of reserves for the 2003 to 2006 accident years. The $151
reserve release represented 9% of the Company’s net reserves for Small Commercial workers’
compensation claims as of December 31, 2006. Released Small Commercial workers’ compensation
reserves related to accident years 2000 and prior by $33. The severity of workers’
compensation medical claims for these accident years has emerged favorably to previous
expectations. As the continued development of these claims has resulted in a sustained
favorable trend, management released reserves in the fourth quarter of 2007. The $33 reserve
release represented 2% of the Company’s net reserves for Small Commercial workers’
compensation claims as of December 31, 2006.
|
| • |
Released reserves for Middle Market general liability claims related to the 2003 to 2006
accident years by $49. Beginning in the third quarter of 2007, the Company observed that
reported losses for high hazard and umbrella general liability claims for the 2003 to 2006
accident years were emerging favorably and this caused management to reduce its estimate of
the cost of future reported claims for these accident years, resulting in a reserve release in
the third and fourth quarter of 2007. This reserve development is unrelated to the reserve
strengthening in 2005 and 2006 of other Middle Market general liability claims which developed
unfavorably due to higher than anticipated loss payments beyond four years of development. The
$49 reserve release represented 6% of the Company’s net reserves for Middle Market general
liability claims as of December 31, 2006.
|
| • |
Recorded a $30 net release of reserves for Small Commercial package business related to the
2003 to 2006 accident years. Reserve reviews completed during 2007 identified that the
frequency of reported liability claims on Small Commercial package business policies for these
accident years was lower than the previously expected frequency. In addition, reported loss
costs on property coverages have emerged favorably for the 2006 accident year. In recognition
of these trends, in the second and fourth quarter of 2007, management reduced reserves by a
total of $30. The $30 reserve release represented 3% of the Company’s net reserves for Small
Commercial package business claims as of December 31, 2006.
|
| • |
Released reserves for commercial surety business by $22 for accident years 2003 to 2006.
Reported losses for commercial surety business have been emerging favorably resulting in the
Company lowering its estimate of ultimate unpaid losses during the third quarter of 2007. The
$22 reserve release represented 14% of the Company’s net reserves for fidelity and surety
claims as of December 31, 2006.
|
| • |
Released Middle Market commercial auto liability reserves by $18 for accident years 2003
and 2004. Since the first quarter of 2007, reported losses for commercial auto liability
claims in these accident years have emerged favorably although management did not determine
that this was a verifiable trend until the third quarter of 2007 when it released the
reserves. The $18 reserve release represented 6% of the Company’s net reserves for Middle
Market auto liability claims as of December 31, 2006.
|
| • |
Released reserves for Personal Lines auto liability claims for accident years 2002 to 2006
by $16. This reserve release was a continuation of trends first observed in 2006. During the
first quarter of 2006, the Company released auto liability reserves related to the 2005
accident year due to frequency emerging favorable to initial expectations. During the second
quarter of 2006, the Company observed that loss cost severity on auto liability claims for the
2004 accident year was emerging favorable to initial expectations and released reserves to
recognize this trend. For each of the 2002 to 2006 accident years, the Company has continued
to observe favorable trends in reported severity and, in the fourth quarter of 2007, the
Company released an additional $16 in reserves. The $16 reserve release represented 1% of the
Company’s net reserves for Personal Lines auto liability claims as of December 31, 2006.
|
| • |
Released reserves for E&O claims for accident year 2005 by $15. During the fourth quarter
of 2007, the Company updated its analysis of certain professional liability claims and the new
analysis showed that claims under E&O policies were emerging favorable to initial
expectations, resulting in this reserve release. The $15 reserve release represented 3% of
the Company’s net reserves for professional liability claims as of December 31, 2006.
|
| • |
Strengthened Specialty Commercial workers’ compensation reserves by $47, primarily related
to accident years 1987 to 2001. Management has been observing larger than expected increases
in loss cost severity, particularly on high deductible and excess policies. The $47 reserve
strengthening represented 2% of the Company’s net reserves for Specialty Commercial workers’
compensation claims as of December 31, 2006.
|
51
Table of Contents
| • |
Strengthened Middle Market workers’ compensation reserves by $40 for accident years 1973 and
prior, primarily driven by a reduction in reinsurance recoverables from the commutation of
certain reinsurance treaties. Due to the commutations, within the past two years, net paid
losses on these claims have begun to emerge unfavorably to initial expectations and, during
2007, the Company determined that this trend in higher paid losses would ultimately result in
unpaid losses settling for more than management’s previous estimates. The $40 reserve
strengthening represented 2% of net reserves for Middle Market workers’ compensation claims as
of December 31, 2006.
|
| • |
Strengthened general liability reserves by $39 for accident years more than 20 years old,
including $25 in Specialty Commercial. The Company has experienced an increase in defense
costs for certain mass tort claims and, during 2007, the Company determined that the increase
in defense costs was a sustained trend that resulted in an increase in reserves. The $39
reserve strengthening represented 2% of the Company’s net reserves for general liability
claims as of December 31, 2006.
|
| • |
Strengthened reserves for Specialty Commercial general and products liability claims by
$34, primarily related to the 1987 to 1997 accident years. Reported losses on general and
products liability claims have been emerging unfavorably to previous expectations and loss
adjustment expenses have been higher than expected on late emerging claims. The $34 reserve
strengthening represented 3% of the Company’s net reserves for Specialty Commercial general
liability claims as of December 31, 2006.
|
| • |
Also during 2007, the Company refined its processes for allocating IBNR reserves by
accident year, resulting in a reclassification of $347 of IBNR reserves from the 2003 to 2006
accident years to the 2002 and prior accident years. This reclassification of reserves by
accident year had no effect on total recorded reserves within any segment or on total recorded
reserves for any line of business within a segment.
|
Other Operations
| • |
See Other Operations Claims Reserve Activity for information concerning the Company’s
annual evaluation of these reserves and related reinsurance.
|
52
Table of Contents
Other Operations Claims
Reserve Activity
Reserves and reserve activity in the Other Operations segment are categorized and reported as
asbestos, environmental, or “all other”. The “all other” category of reserves covers a wide range
of insurance and assumed reinsurance coverages, including, but not limited to, potential liability
for construction defects, lead paint, silica, pharmaceutical products, molestation and other
long-tail liabilities.
The following table presents reserve activity, inclusive of estimates for both reported and
incurred but not reported claims, net of reinsurance, for Other Operations, categorized by
asbestos, environmental and all other claims, for the years ended December 31, 2009, 2008 and 2007.
Other Operations Losses and Loss Adjustment Expenses
| Asbestos | Environmental | All Other [1] | Total | |||||||||||||
|
2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Beginning liability – net [2] [3]
|
$ | 1,884 | $ | 269 | $ | 1,628 | $ | 3,781 | ||||||||
|
Losses and loss adjustment expenses incurred
|
138 | 75 | 29 | 242 | ||||||||||||
|
Losses and loss adjustment expenses paid
|
(181 | ) | (40 | ) | (171 | ) | (392 | ) | ||||||||
|
Reclassification of asbestos and environmental liabilities [4]
|
51 | 3 | (54 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Ending liability – net [2] [3]
|
$ | 1,892 | [6] | $ | 307 | $ | 1,432 | $ | 3,631 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
|
||||||||||||||||
|
Beginning liability – net [2] [3]
|
$ | 1,998 | $ | 251 | $ | 1,888 | $ | 4,137 | ||||||||
|
Losses and loss adjustment expenses incurred
|
68 | 54 | 7 | 129 | ||||||||||||
|
Losses and loss adjustment expenses paid
|
(182 | ) | (36 | ) | (267 | ) | (485 | ) | ||||||||
|
|
||||||||||||||||
|
Ending liability – net [2] [3]
|
$ | 1,884 | $ | 269 | $ | 1,628 | $ | 3,781 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2007
|
||||||||||||||||
|
|
||||||||||||||||
|
Beginning liability – net [2] [3]
|
$ | 2,242 | $ | 316 | $ | 1,858 | $ | 4,416 | ||||||||
|
Losses and loss adjustment expenses incurred
|
43 | 28 | 122 | 193 | ||||||||||||
|
Losses and loss adjustment expenses paid
|
(287 | ) | (93 | ) | (217 | ) | (597 | ) | ||||||||
|
Reallocation of reserves for unallocated loss adjustment expenses [5]
|
— | — | 125 | 125 | ||||||||||||
|
|
||||||||||||||||
|
Ending liability – net [2] [3]
|
$ | 1,998 | $ | 251 | $ | 1,888 | $ | 4,137 | ||||||||
|
|
||||||||||||||||
| [1] |
“All Other” includes unallocated loss adjustment expense reserves.
“All Other” also includes The Company’s allowance for uncollectible
reinsurance. When the Company commutes a ceded reinsurance contract
or settles a ceded reinsurance dispute, the portion of the allowance
for uncollectible reinsurance attributable to that commutation or
settlement, if any, is reclassified to the appropriate cause of loss.
|
|
| [2] |
Excludes asbestos and environmental net liabilities reported in
Ongoing Operations of $10 and $5, respectively, as of December 31,
2009, $12 and $6, respectively, as of December 31, 2008, and $9 and
$6, respectively, as of December 31, 2007. Total net losses and loss
adjustment expenses incurred in Ongoing Operations for the years ended
December 31, 2009, 2008 and 2007 includes $16, $16 and $10,
respectively, related to asbestos and environmental claims. Total net
losses and loss adjustment expenses paid in Ongoing Operations for the
years ended December 31, 2009, 2008 and 2007 includes $19, $13 and
$10, respectively, related to asbestos and environmental claims.
|
|
| [3] |
Gross of reinsurance, asbestos and environmental reserves, including
liabilities in Ongoing Operations, were $2,484 and $367, respectively,
as of December 31, 2009, $2,498 and $309, respectively, as of December
31, 2008, and $2,707 and $290, respectively, as of December 31, 2007.
|
|
| [4] |
During the three months ended June 30, 2009, the Company reclassified
liabilities of $54 that were previously classified as “All Other” to
“Asbestos” and “Environmental”.
|
|
| [5] |
Prior to the second quarter of 2007, the Company evaluated the
adequacy of the reserves for unallocated loss adjustment expenses on a
Company-wide basis. During the second quarter of 2007, the Company
refined its analysis of the reserves at the segment level, resulting
in the reallocation of reserves among segments, including a
reallocation of reserves from Ongoing Operations to Other Operations.
|
|
| [6] |
The one year and average three-year net paid amounts for asbestos
claims, including Ongoing Operations, were $192 and $224,
respectively, resulting in a one year net survival ratio of 9.9 and a
three year net survival ratio of 8.5. Net survival ratio is the
quotient of the net carried reserves divided by the average annual
payment amount and is an indication of the number of years that the
net carried reserve would last (i.e. survive) if the future annual
claim payments were consistent with the calculated historical average.
|
In the fourth quarters of 2009, 2008 and 2007, the Company completed evaluations of certain of its
non-asbestos and non-environmental reserves, including its assumed reinsurance liabilities. Based
on this evaluation in 2009, the Company recognized unfavorable prior year development of $35,
principally driven by higher projected unallocated loss adjustment expenses. The Company
recognized favorable prior year development of $30 and $18 in 2008 and 2007, respectively, for its
HartRe assumed reinsurance liabilities principally driven by lower than expected reported losses.
In 2008 and 2007, the favorable HartRe assumed reinsurance prior year development was offset by
unfavorable other non-asbestos and non-environmental prior year development of $30 and $17 in 2008
and 2007, respectively, including $25 of adverse development in 2008 for assumed reinsurance
obligations of the Company’s Bermuda operations.
53
Table of Contents
During the third quarters of 2009, 2008 and 2007, the Company completed its annual ground-up
environmental reserve evaluations. In each of these evaluations, the Company reviewed all of its
open direct domestic insurance accounts exposed to environmental liability, as well as assumed
reinsurance accounts and its London Market exposures for both direct and assumed reinsurance.
During the third quarters of 2009 and 2008, the Company found estimates for some individual
accounts increased based upon additional sites identified, litigation developments and new damage
and defense cost information obtained on these accounts since the last review. The Company also
found that, during 2008, the decline in the reporting of new accounts and sites has been slower
than anticipated in the previous review. In 2007, the Company found estimates for individual cases
changed based upon the particular circumstances of each account. These changes were case specific
and not as a result of any underlying change in the current environment. The net effect of these
account-specific changes as well as actuarial evaluations of new account emergence and historical
loss and expense paid experience resulted in $75, $53 and $25 increases in net environmental
liabilities in 2009, 2008 and 2007, respectively. The Company currently expects to continue to
perform an evaluation of its environmental liabilities annually.
In reporting environmental results, the Company divides its gross exposure into Direct, which is
subdivided further as: Accounts with future exposure greater than $2.5, Accounts with future
exposure less than $2.5, and Other direct; Assumed Reinsurance; and London Market. The unallocated
amounts in the Other direct category include an estimate of the necessary reserves for
environmental claims related to direct insureds who have not previously tendered environmental
claims to the Company.
An account may move between categories from one evaluation to the next. For example, an account
with future expected exposure of greater than $2.5 in one evaluation may be reevaluated due to
changing conditions and re-categorized as less than $2.5 in a subsequent evaluation or vice versa.
The following table displays gross environmental reserves and other statistics by category as of
December 31, 2009.
Summary of Gross Environmental Reserves
As of December 31, 2009
As of December 31, 2009
| Number of | Total | |||||||
| Gross Environmental Reserves as of September 30, 2009 [1] | Accounts [2] | Reserves | ||||||
|
Accounts with future exposure > $2.5
|
8 | $ | 43 | |||||
|
Accounts with future exposure < $2.5
|
562 | 109 | ||||||
|
Other direct [3]
|
— | 115 | ||||||
|
|
||||||||
|
Total Direct
|
570 | 267 | ||||||
|
|
||||||||
|
Assumed Reinsurance
|
56 | |||||||
|
London Market
|
61 | |||||||
|
|
||||||||
|
Total gross environmental reserves as of September 30, 2009 [1]
|
384 | |||||||
|
Gross paid loss activity for the fourth quarter 2009
|
(18 | ) | ||||||
|
Gross incurred loss activity for the fourth quarter 2009
|
1 | |||||||
|
|
||||||||
|
Total gross environmental reserves as of December 31, 2009 [4] [5]
|
$ | 367 | ||||||
|
|
||||||||
| [1] |
Gross Environmental Reserves based on the third quarter 2009 environmental reserve study.
|
|
| [2] |
Number of accounts established as of June 2009.
|
|
| [3] |
Includes unallocated IBNR.
|
|
| [4] |
The one year gross paid amount for total environmental claims is $54, resulting in a one year gross survival ratio of 6.8.
|
|
| [5] |
The three year average gross paid amount for total environmental claims is $75, resulting in a three year gross survival ratio of 4.9.
|
During the second quarters of 2009, 2008 and 2007, the Company completed its annual ground-up
asbestos reserve evaluations. As part of these evaluations, the Company reviewed all of its open
direct domestic insurance accounts exposed to asbestos liability, as well as assumed reinsurance
accounts and its London Market exposures for both direct insurance and assumed reinsurance. Based
on this evaluation, the Company increased its net asbestos reserves by $138 in second quarter 2009.
For certain direct policyholders, the Company experienced increases in claim severity, expense and
costs associated with litigating asbestos coverage matters. Increases in severity and expense were
most prevalent among certain, peripheral defendant insureds. The Company also experienced
unfavorable development on its assumed reinsurance accounts driven largely by the same factors
experienced by the direct policyholders. In the second quarter of 2008, the Company found
estimates for individual cases changed based upon the particular circumstances of each account.
These changes were case specific and not as a result of any underlying change in the current
environment. The net effect of these changes resulted in a $50 increase in net asbestos reserves.
In 2007, these evaluations resulted in no addition to the Company’s net asbestos reserves. The
Company currently expects to continue to perform an evaluation of its asbestos liabilities
annually.
The Company divides its gross asbestos exposures into Direct, Assumed Reinsurance and London
Market. The Company further divides its direct asbestos exposures into the following categories:
Major Asbestos Defendants (the “Top 70” accounts in Tillinghast’s published Tiers 1 and 2 and
Wellington accounts), which are subdivided further as: Structured Settlements, Wellington, Other
Major Asbestos Defendants, Accounts with Future Expected Exposures greater than $2.5, Accounts with
Future Expected Exposures less than $2.5, and Unallocated.
| • |
Structured Settlements are those accounts where the Company has reached an agreement with
the insured as to the amount and timing of the claim payments to be made to the insured.
|
| • |
The Wellington subcategory includes insureds that entered into the “Wellington Agreement”
dated June 19, 1985. The Wellington Agreement provided terms and conditions for how the
signatory asbestos producers would access their coverage from the signatory insurers.
|
54
Table of Contents
| • |
The Other Major Asbestos Defendants subcategory represents insureds included in Tiers 1 and
2, as defined by Tillinghast that are not Wellington signatories and have not entered into
structured settlements with The Hartford. The Tier 1 and 2 classifications are meant to
capture the insureds for which there is expected to be significant exposure to asbestos
claims.
|
| • |
Accounts with future expected exposures greater or less than $2.5 include accounts that are
not major asbestos defendants.
|
| • |
The Unallocated category includes an estimate of the reserves necessary for asbestos claims
related to direct insureds that have not previously tendered asbestos claims to the Company
and exposures related to liability claims that may not be subject to an aggregate limit under
the applicable policies.
|
An account may move between categories from one evaluation to the next. For example, an account
with future expected exposure of greater than $2.5 in one evaluation may be reevaluated due to
changing conditions and recategorized as less than $2.5 in a subsequent evaluation or vice versa.
The following table displays gross asbestos reserves and other statistics by policyholder category
as of December 31, 2009.
Summary of Gross Asbestos Reserves
As of December 31, 2009
As of December 31, 2009
| Number of | All Time | Total | All Time | |||||||||||||
| Accounts [2] | Paid [3] | Reserves | Ultimate [3] | |||||||||||||
|
Gross Asbestos Reserves as of June 30, 2009 [1]
|
||||||||||||||||
|
Major asbestos defendants [5]
|
||||||||||||||||
|
Structured settlements (includes 4 Wellington accounts) [6]
|
7 | $ | 270 | $ | 475 | $ | 745 | |||||||||
|
Wellington (direct only)
|
29 | 904 | 43 | 947 | ||||||||||||
|
Other major asbestos defendants
|
29 | 474 | 168 | 642 | ||||||||||||
|
No known policies (includes 3 Wellington accounts)
|
5 | — | — | — | ||||||||||||
|
Accounts with future exposure > $2.5
|
73 | 744 | 547 | 1,291 | ||||||||||||
|
Accounts with future exposure < $2.5
|
1,104 | 424 | 119 | 543 | ||||||||||||
|
Unallocated [7]
|
1,687 | 366 | 2,053 | |||||||||||||
|
|
||||||||||||||||
|
Total Direct
|
4,503 | 1,718 | 6,221 | |||||||||||||
|
Assumed Reinsurance
|
1,110 | 557 | 1,667 | |||||||||||||
|
London Market
|
581 | 347 | 928 | |||||||||||||
|
|
||||||||||||||||
|
Total as of June 30, 2009 [1]
|
6,194 | 2,622 | 8,816 | |||||||||||||
|
|
||||||||||||||||
|
Gross paid loss activity for the third quarter and fourth quarter 2009
|
143 | (143 | ) | — | ||||||||||||
|
Gross incurred loss activity for the third quarter and fourth quarter 2009
|
— | 5 | 5 | |||||||||||||
|
|
||||||||||||||||
|
Total as of December 31, 2009 [4]
|
$ | 6,337 | $ | 2,484 | $ | 8,821 | ||||||||||
|
|
||||||||||||||||
| [1] |
Gross Asbestos Reserves based on the second quarter 2009 asbestos reserve study.
|
|
| [2] |
An account may move between categories from one evaluation to the next. Reclassifications were made as a result of the
reserve evaluation completed in the second quarter of 2009.
|
|
| [3] |
“All Time Paid” represents the total payments with respect to the indicated claim type that have already been made by the
Company as of the indicated balance sheet date. “All Time Ultimate” represents the Company’s estimate, as of the indicated
balance sheet date, of the total payments that are ultimately expected to be made to fully settle the indicated payment
type. The amount is the sum of the amounts already paid (e.g. “All Time Paid”) and the estimated future payments (e.g. the
amount shown in the column labeled “Total Reserves”).
|
|
| [4] |
Survival ratio is a commonly used industry ratio for comparing reserve levels between companies. While the method is
commonly used, it is not a predictive technique. Survival ratios may vary over time for numerous reasons such as large
payments due to the final resolution of certain asbestos liabilities, or reserve re-estimates. The survival ratio is
computed by dividing the recorded reserves by the average of the past three years of payments. The ratio is the calculated
number of years the recorded reserves would survive if future annual payments were equal to the average annual payments for
the past three years. The 3-year gross survival ratio of 8.0 as of December 31, 2009 is computed based on total paid
losses of $937 for the period from January 1, 2007 to December 31, 2009. As of December 31, 2009, the one year gross paid
amount for total asbestos claims is $245 resulting in a one year gross survival ratio of 10.1.
|
|
| [5] |
Includes 25 open accounts at both June 30, 2009 and 2008.
|
|
| [6] |
Structured settlements include the Company’s reserves related to PPG Industries, Inc. (“PPG”). In January 2009, the
Company, along with approximately three dozen other insurers, entered into a modified agreement in principle with PPG to
resolve the Company’s coverage obligations for all of its PPG asbestos liabilities, including principally those arising out
of its 50% stock ownership of Pittsburgh Corning Corporation (“PCC”), a joint venture with Corning, Inc. The agreement is
contingent on the fulfillment of certain conditions, including the confirmation of a PCC plan of reorganization under
Section 524(g) of the Bankruptcy Code, which have not yet been met.
|
|
| [7] |
Includes closed accounts (exclusive of Major Asbestos Defendants) and unallocated IBNR.
|
For paid and incurred losses and loss adjustment expenses reporting, the Company classifies its
asbestos and environmental reserves into three categories: Direct, Assumed Reinsurance and London
Market. Direct insurance includes primary and excess coverage. Assumed reinsurance includes both
“treaty” reinsurance (covering broad categories of claims or blocks of business) and “facultative”
reinsurance (covering specific risks or individual policies of primary or excess insurance
companies). London Market business includes the business written by one or more of the Company’s
subsidiaries in the United Kingdom, which are no longer active in the insurance or reinsurance
business. Such business includes both direct insurance and assumed reinsurance.
Of the three categories of claims (Direct, Assumed Reinsurance and London Market), direct policies
tend to have the greatest factual development from which to estimate the Company’s exposures.
55
Table of Contents
Assumed reinsurance exposures are inherently less predictable than direct insurance exposures
because the Company may not receive notice of a reinsurance claim until the underlying direct
insurance claim is mature. This causes a delay in the receipt of information at the reinsurer
level and adds to the uncertainty of estimating related reserves.
London Market exposures are the most uncertain of the three categories of claims. As a participant
in the London Market (comprised of both Lloyd’s of London and London Market companies), certain
subsidiaries of the Company wrote business on a subscription basis, with those subsidiaries’
involvement being limited to a relatively small percentage of a total contract placement. Claims
are reported, via a broker, to the “lead” underwriter and, once agreed to, are presented to the
following markets for concurrence. This reporting and claim agreement process makes estimating
liabilities for this business the most uncertain of the three categories of claims.
The following table sets forth, for the years ended December 31, 2009, 2008 and 2007, paid and
incurred loss activity by the three categories of claims for asbestos and environmental.
Paid and Incurred Losses and Loss Adjustment Expenses (“LAE”) Development — Asbestos and
Environmental
Environmental
| Asbestos [1] | Environmental [1] | |||||||||||||||
| Paid | Incurred | Paid | Incurred | |||||||||||||
| Losses & LAE | Losses & LAE | Losses & LAE | Losses & LAE | |||||||||||||
|
2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross
|
||||||||||||||||
|
Direct
|
$ | 160 | $ | 117 | $ | 29 | $ | 92 | ||||||||
|
Assumed Reinsurance
|
56 | 52 | 7 | — | ||||||||||||
|
London Market
|
18 | — | 10 | 12 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
234 | 169 | 46 | 104 | ||||||||||||
|
Ceded
|
(53 | ) | (31 | ) | (6 | ) | (29 | ) | ||||||||
|
|
||||||||||||||||
|
Net prior to reclassification
|
181 | 138 | 40 | 75 | ||||||||||||
|
Reclassification of asbestos and environmental liabilities [2]
|
— | 51 | — | 3 | ||||||||||||
|
|
||||||||||||||||
|
Net
|
$ | 181 | $ | 189 | $ | 40 | $ | 78 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross
|
||||||||||||||||
|
Direct
|
$ | 207 | $ | 76 | $ | 32 | $ | 69 | ||||||||
|
Assumed Reinsurance
|
61 | — | 9 | (17 | ) | |||||||||||
|
London Market
|
19 | — | 6 | 13 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
287 | 76 | 47 | 65 | ||||||||||||
|
Ceded
|
(105 | ) | (8 | ) | (11 | ) | (11 | ) | ||||||||
|
|
||||||||||||||||
|
Net
|
$ | 182 | $ | 68 | $ | 36 | $ | 54 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2007
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross
|
||||||||||||||||
|
Direct
|
$ | 251 | $ | (289 | ) | $ | 90 | $ | 43 | |||||||
|
Assumed – Domestic
|
112 | 72 | 16 | — | ||||||||||||
|
London Market
|
31 | 76 | 8 | — | ||||||||||||
|
|
||||||||||||||||
|
Total
|
394 | (141 | ) | 114 | 43 | |||||||||||
|
Ceded
|
(107 | ) | 184 | (21 | ) | (15 | ) | |||||||||
|
|
||||||||||||||||
|
Net
|
$ | 287 | $ | 43 | $ | 93 | $ | 28 | ||||||||
|
|
||||||||||||||||
| [1] |
Excludes asbestos and environmental paid and incurred loss and LAE
reported in Ongoing Operations. Total gross losses and LAE incurred
in Ongoing Operations for the years ended December 31, 2009, 2008 and
2007 includes $17, $15 and $9, respectively, related to asbestos and
environmental claims. Total gross losses and LAE paid in Ongoing
Operations for the years ended December 31, 2009, 2008 and 2007
includes $20, $12 and $10, respectively, related to asbestos and
environmental claims.
|
|
| [2] |
During the three months ended June 30, 2009, the Company reclassified
liabilities of $54 that were previously classified as “All Other” to
“Asbestos” and “Environmental”.
|
During the second quarter of 2007, an arbitration panel found that a Hartford subsidiary,
established as a captive reinsurance company in the 1970s by The Hartford’s former parent, ITT, had
additional obligations to ITT’s primary insurance carrier under ITT’s captive insurance program,
which ended in 1993. When ITT spun off The Hartford in 1995, the former captive became a Hartford
subsidiary. The arbitration concerned whether certain claims could be presented to the former
captive in a different manner than ITT’s primary insurance carrier historically had presented them.
Principally as a result of this adverse arbitration decision, the Company recorded a charge of
$99.
56
Table of Contents
The Company provides an allowance for uncollectible reinsurance, reflecting management’s best
estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers’
unwillingness or inability to pay. During the second quarters of 2009, 2008 and 2007, the Company
completed its annual evaluations of the collectability of the reinsurance recoverables and the
adequacy of the allowance for uncollectible reinsurance associated with older, long-term casualty
liabilities reported in the Other Operations segment. In conducting this evaluation, the Company
used its most recent detailed evaluations of ceded liabilities reported in the segment. The
Company analyzed the overall credit quality of the Company’s reinsurers, recent trends in
arbitration and litigation outcomes in disputes between cedants and reinsurers, and recent
developments in commutation activity between reinsurers and cedants. As a result of the second
quarter of 2009 evaluation, the Company reduced its allowance for uncollectible reinsurance by $20
principally to reflect decreased reinsurance recoverable dispute exposure and favorable activity
since the last evaluation. As of December 31, 2009, the allowance for uncollectible reinsurance
for Other Operations totals $226. The evaluations in the second quarters of 2008 and 2007 resulted
in no addition to the allowance for uncollectible reinsurance. The Company currently expects to
perform its regular comprehensive review of Other Operations reinsurance recoverables annually.
Due to the inherent uncertainties as to collection and the length of time before reinsurance
recoverables become due, particularly for older, long-term casualty liabilities, it is possible
that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be
required.
Consistent with the Company’s long-standing reserving practices, the Company will continue to
review and monitor its reserves in the Other Operations segment regularly and, where future
developments indicate, make appropriate adjustments to the reserves.
Impact of Re-estimates
The establishment of Property and Casualty reserves is an estimation process, using a variety of
methods, assumptions and data elements. Ultimate losses may vary significantly from the current
estimates. Many factors can contribute to these variations and the need to change the previous
estimate of required reserve levels. Subsequent changes can generally be thought of as being the
result of the emergence of additional facts that were not known or anticipated at the time of the
prior reserve estimate and/or changes in interpretations of information and trends.
The table below shows the range of annual reserve re-estimates experienced by The Hartford over the
past five years. The amount of prior accident year development (as shown in the reserve
rollforward) for a given calendar year is expressed as a percent of the beginning calendar year
reserves, net of reinsurance. The percentage relationships presented are significantly influenced
by the facts and circumstances of each particular year and by the fact that only the last five
years are included in the range. Accordingly, these percentages are not intended to be a
prediction of the range of possible future variability. See “Impact of key assumptions on reserve
volatility” within this section for further discussion of the potential for variability in recorded
loss reserves.
| Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
| Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
|
Range of prior
accident year
unfavorable
(favorable)
development for the
five years ended
December 31, 2009
[1]
|
(5.2) – (0.2 | ) | (6.5) – (1.0 | ) | (4.3) – 1.6 | (3.5) – 3.1 | (2.9) – 0.3 | 3.1 – 7.4 | (1.2) – 1.5 | |||||||||||||||||||
| [1] |
Over the past ten years, reserve re-estimates for total Property & Casualty ranged from
(1.2)% to 21.5%. Excluding the reserve strengthening for asbestos and environmental reserves,
over the past ten years reserve re-estimates for total Property & Casualty ranged from (3.0)%
to 1.6%.
|
The potential variability of the Company’s Property & Casualty reserves would normally be expected
to vary by segment and the types of loss exposures insured by those segments. Illustrative factors
influencing the potential reserve variability for each of the segments are discussed above.
57
Table of Contents
Life Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities
Associated with Variable Annuity and Other Universal Life-Type Contracts
Estimated gross profits (“EGPs”) are used in the amortization of: Life’s deferred policy
acquisition cost (“DAC”) asset, which includes the present value of future profits; sales
inducement assets (“SIA”); and unearned revenue reserves (“URR”). See Note 7 of the Notes to
Consolidated Financial Statements for additional information on DAC. See Note 10 of the Notes to
Consolidated Financial Statements for additional information on SIA. EGPs are also used in the
valuation of reserves for death and other insurance benefit features on variable annuity and
universal life-type contracts. See Note 9 of the Notes to Consolidated Financial Statements for
additional information on death and other insurance benefit feature reserves.
The specific breakdown of the most significant EGP based balances as of December 31, 2009 and 2008
are as follows:
| Individual Variable | Individual Variable | |||||||||||||||||||||||
| Annuities – U.S. | Annuities – Japan | Individual Life | ||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
|
DAC
|
$ | 3,378 | $ | 4,844 | $ | 1,566 | $ | 1,834 | $ | 2,528 | $ | 2,931 | ||||||||||||
|
SIA
|
$ | 324 | $ | 436 | $ | 28 | $ | 19 | $ | 42 | $ | 36 | ||||||||||||
|
URR
|
$ | 85 | $ | 109 | $ | 1 | $ | — | $ | 1,185 | $ | 1,299 | ||||||||||||
|
Death and Other Insurance Benefit Reserves
|
$ | 1,232 | $ | 867 | $ | 580 | $ | 229 | $ | 76 | $ | 40 | ||||||||||||
For most contracts, the Company estimates gross profits over 20 years as EGPs emerging subsequent
to that timeframe are immaterial. Products sold in a particular year are aggregated into cohorts.
Future gross profits for each cohort are projected over the estimated lives of the underlying
contracts, based on future account value projections for variable annuity and variable universal
life products. The projection of future account values requires the use of certain assumptions
including: separate account returns; separate account fund mix; fees assessed against the contract
holder’s account balance; surrender and lapse rates; interest margin; mortality; and hedging
costs. Changes in these assumptions and, in addition, changes to other policyholder behavior
assumptions such as resets, partial surrenders, reaction to price increases, and asset allocations
causes EGPs to fluctuate which impacts earnings.
Prior to the second quarter of 2009, the Company determined EGPs using the mean derived from
stochastic scenarios that had been calibrated to the estimated separate account return. The
Company also completed a comprehensive assumption study, in the third quarter of each year, and
revised best estimate assumptions used to estimate future gross profits when the EGPs in the
Company’s models fell outside of an independently determined reasonable range of EGPs. The Company
also considered, on a quarterly basis, other qualitative factors such as product, regulatory and
policyholder behavior trends and would revise EGPs if those trends were expected to be significant.
Beginning with the second quarter of 2009, the Company now determines EGPs from a single
deterministic reversion to mean (“RTM”) separate account return projection which is an estimation
technique commonly used by insurance entities to project future separate account returns. Through
this estimation technique, the Company’s DAC model is adjusted to reflect actual account values at
the end of each quarter. Through consideration of recent market returns, the Company will unlock,
or adjust, projected returns over a future period so that the account value returns to the
long-term expected rate of return, providing that those projected returns do not exceed certain
caps or floors. This DAC Unlock for future separate account returns is determined each quarter.
Under RTM, the expected long term weighted average rate of return is 7.1% and 5.6% for U.S. and
Japan, respectively. The expected long-term equity total rate of return is 9.5% and 8.5% for the
U.S. and Japan, respectively, and the expected long-term fixed income rate of return is 6.0% and
4.0% for the U.S. and Japan, respectively.
In the third quarter of each year, the Company completes a comprehensive non-market related
policyholder behavior assumption study and incorporates the results of those studies into its
projection of future gross profits. Additionally, throughout the year, the Company evaluates
various aspects of policyholder behavior and periodically revises its policyholder assumptions as
emerging data indicates that changes are warranted. In the fourth quarter of 2009, recent market
volatility provided the Company additional information regarding policyholder behavior, related to
living benefit lapses, withdrawal rates and GMDB lapses. This information was incorporated into the
Company’s assumptions used in determining estimated gross profits. Upon completion of an
assumption study or evaluation of new information, the Company will revise its assumptions to
reflect its current best estimate. These assumption revisions will change the projected account
values and the related EGPs in the DAC, SIA and URR amortization models, as well as the death and
other insurance benefit reserving model.
All assumption changes that affect the estimate of future EGPs including the update of current
account values, the use of the RTM estimation technique and policyholder behavior assumptions are
considered an Unlock in the period of revision. An Unlock adjusts DAC, SIA, URR and death and
other insurance benefit reserve balances in the Consolidated Balance Sheets with an offsetting
benefit or charge in the Consolidated Statements of Operations in the period of the revision. An
Unlock that results in an after-tax benefit generally occurs as a result of actual experience or
future expectations of product profitability being favorable compared to previous estimates. An
Unlock that results in an after-tax charge generally occurs as a result of actual experience or
future expectations of product profitability being unfavorable compared to previous estimates.
58
Table of Contents
An Unlock revises EGPs, on a quarterly basis, to reflect the Company’s current best estimate
assumptions. After each quarterly Unlock, the Company also tests the aggregate recoverability of
DAC by comparing the DAC balance to the present value of future EGPs. As of December 31, 2009, the
margin between the DAC balance and the present value of future EGPs was 23% and 59% for U.S. and
Japan individual variable annuities, respectively. If the margin between the DAC asset and the
present value of future EGPs is exhausted, further reductions in EGPs would cause portions of DAC
to be unrecoverable.
Estimated gross profits are also used to determine the expected excess benefits and assessments
included in the measurement of death and other insurance benefit reserves. These excess benefits
and assessments are derived from a range of stochastic scenarios that have
been calibrated to the Company’s RTM separate account returns. The determination of death and
other insurance benefit reserves is also impacted by discount rates, lapses, volatilities and
mortality assumptions.
Unlocks
The after-tax impact on the Company’s assets and liabilities as a result of the Unlocks for years
ended 2009, 2008 and 2007, were:
For the year ended 2009:
| Death and | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Insurance | ||||||||||||||||||||
| Segment | Benefit | |||||||||||||||||||
| After-tax (charge) benefit | DAC | URR | Reserves [1] | SIA | Total [2] | |||||||||||||||
|
Retail
|
$ | (429 | ) | $ | 17 | $ | (158 | ) | $ | (36 | ) | $ | (606 | ) | ||||||
|
Retirement Plans
|
(55 | ) | — | — | (1 | ) | (56 | ) | ||||||||||||
|
Individual Life
|
(101 | ) | 54 | (4 | ) | — | (51 | ) | ||||||||||||
|
Institutional
|
(1 | ) | — | — | — | (1 | ) | |||||||||||||
|
International [3]
|
(103 | ) | 6 | (210 | ) | (10 | ) | (317 | ) | |||||||||||
|
Corporate
|
(3 | ) | — | — | — | (3 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | (692 | ) | $ | 77 | $ | (372 | ) | $ | (47 | ) | $ | (1,034 | ) | ||||||
|
|
||||||||||||||||||||
| [1] |
As a result of the Unlock, Retail reserves increased $522, pre-tax, offset by an increase in reinsurance recoverables of $279, pre-tax.
International reserves increased $357, pre-tax, offset by an increase in reinsurance recoverables of $34, pre-tax.
|
|
| [2] |
The most significant contributor to the Unlock was a result of actual separate account returns being significantly below our aggregated
estimated return for the period from October 1, 2008 to March 31, 2009, offset by actual returns being greater than our aggregated
estimated return for the period from April 1, 2009 to December 31, 2009.
|
|
| [3] |
Includes $(49) related to DAC recoverability impairment associated with the decision to suspend sales in the U.K. variable annuity business.
|
For the year ended 2008:
| Death and | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Insurance | ||||||||||||||||||||
| Segment | Benefit | |||||||||||||||||||
| After-tax (charge) benefit | DAC | URR | Reserves [1] | SIA | Total [2] | |||||||||||||||
|
Retail
|
$ | (648 | ) | $ | 18 | $ | (75 | ) | $ | (27 | ) | $ | (732 | ) | ||||||
|
Retirement Plans
|
(49 | ) | — | — | — | (49 | ) | |||||||||||||
|
Individual Life
|
(29 | ) | (12 | ) | (3 | ) | — | (44 | ) | |||||||||||
|
International
|
(23 | ) | (1 | ) | (90 | ) | (2 | ) | (116 | ) | ||||||||||
|
Corporate
|
9 | — | — | — | 9 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | (740 | ) | $ | 5 | $ | (168 | ) | $ | (29 | ) | $ | (932 | ) | ||||||
|
|
||||||||||||||||||||
| [1] |
As a result of the Unlock, Retail reserves increased $389, pre-tax, offset by an increase in reinsurance recoverables of $273, pre-tax.
International reserves increased $164, pre-tax, offset by an increase in reinsurance recoverables of $25, pre-tax.
|
|
| [2] |
The most significant contributors to the Unlock were:
|
| • |
Actual separate account returns were significantly below our aggregated estimated return.
|
| • |
The Company reduced its 20-year projected separate account return assumption from 7.8% to 7.2% in the U.S.
|
| • |
Retirement Plans reduced its estimate of future fees as plans met contractual size
limits (“breakpoints”), causing a lower fee schedule to apply, and the Company increased
its assumption for future deposits by existing plan participants.
|
59
Table of Contents
For the year ended 2007:
| Death and | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Insurance | ||||||||||||||||||||
| Segment | Benefit | |||||||||||||||||||
| After-tax (charge) benefit | DAC | URR | Reserves [1] | SIA | Total [2] | |||||||||||||||
|
Retail
|
$ | 180 | $ | (5 | ) | $ | (4 | ) | $ | 9 | $ | 180 | ||||||||
|
Retirement Plans
|
(9 | ) | — | — | — | (9 | ) | |||||||||||||
|
Institutional
|
1 | — | — | — | 1 | |||||||||||||||
|
Individual Life
|
24 | (8 | ) | — | — | 16 | ||||||||||||||
|
International
|
16 | — | 6 | — | 22 | |||||||||||||||
|
Corporate
|
3 | — | — | — | 3 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 215 | $ | (13 | ) | $ | 2 | $ | 9 | $ | 213 | |||||||||
|
|
||||||||||||||||||||
| [1] |
As a result of the Unlock, Retail reserves decreased $4, pre-tax, offset by a decrease, in reinsurance recoverables of $10, pre-tax.
|
|
| [2] |
The most significant contributors to the Unlock were:
|
| • |
Actual separate account returns were above our aggregated estimated return.
|
| • |
During the third quarter of 2007, the Company estimated gross profits using the mean of
EGPs derived from a set of stochastic scenarios that have been calibrated to our estimated
separate account return as compared to prior year where we used a single deterministic
estimation. The impact of this change in estimation was a benefit of $20, after-tax, for
U.S. variable annuities, and $13, after-tax, for Japan variable annuities.
|
| • |
Dynamic lapse behavior assumptions, reflecting that lapse behavior will be different
depending upon market movements, along with other base lapse rate assumption changes
resulted in an approximate benefit of $40, after-tax, for U.S. variable annuities.
|
Other-Than-Temporary Impairments and Valuation Allowances on Investments
The Company has a monitoring process overseen by a committee of investment and accounting
professionals that identifies investments that are subject to an enhanced evaluation on a quarterly
basis to determine if an other-than-temporary impairment (“impairment”) is present for AFS
securities or a valuation allowance is required for mortgage loans. This evaluation is a
quantitative and qualitative process, which is subject to risks and uncertainties. For further
discussion of the accounting policies, see the Significant Investment Accounting Policies Section
in Note 5 of the Notes to Consolidated Financial Statements. For a discussion of results, see
Other-Than-Temporary Impairments within the Investment Credit Risk section of the MD&A.
60
Table of Contents
Living Benefits Required to be Fair Valued (in Other Policyholder funds and Benefits Payable
)
Fair values for GMWB and GMAB contracts are calculated based upon internally developed models
because active, observable markets do not exist for those items. The fair value of the Company’s
guaranteed benefit liabilities, classified as embedded derivatives, and the related reinsurance and
customized freestanding derivatives is calculated as an aggregation of the following components:
Best Estimate Claims Costs; Credit Standing Adjustment; and Margins. The resulting aggregation is
reconciled or calibrated, if necessary, to market information that is, or may be, available to the
Company, but may not be observable by other market participants, including reinsurance discussions
and transactions. The Company believes the aggregation of these components, as necessary and as
reconciled or calibrated to the market information available to the Company, results in an amount
that the Company would be required to transfer, or receive, to or from market participants in an
active liquid market, if one existed, for those market participants to assume the risks associated
with the guaranteed minimum benefits and the related reinsurance and customized derivatives. The
fair value is likely to materially diverge from the ultimate settlement of the liability as the
Company believes settlement will be based on our best estimate assumptions rather than those best
estimate assumptions plus risk margins. In the absence of any transfer of the guaranteed benefit
liability to a third party, the release of risk margins is likely to be reflected as realized gains
in future periods’ net income. Each of the components described below are unobservable in the
marketplace and require subjectivity by the Company in determining their value.
Best Estimate Claims Costs
The Best Estimate Claims Costs is calculated based on actuarial and capital market assumptions
related to projected cash flows, including benefits and related contract charges, over the lives of
the contracts, incorporating expectations concerning policyholder behavior such as lapses, fund
selection, resets and withdrawal utilization (for the customized derivatives, policyholder behavior
is prescribed in the derivative contract). Because of the dynamic and complex nature of these cash
flows, best estimate assumptions and a Monte Carlo stochastic process involving the generation of
thousands of scenarios that assume risk neutral returns consistent with swap rates and a blend of
observable implied index volatility levels were used. Estimating these cash flows involves
numerous estimates and subjective judgments including those regarding expected markets rates of
return, market volatility, correlations of market index returns to funds, fund performance,
discount rates and policyholder behavior. At each valuation date, the Company assumes expected
returns based on:
| • |
risk-free rates as represented by the current LIBOR forward curve rates;
|
| • |
forward market volatility assumptions for each underlying index based primarily on a blend
of observed market “implied volatility” data;
|
| • |
correlations of market returns across underlying indices based on actual observed market
returns and relationships over the ten years preceding the valuation date;
|
| • |
three years of history for fund regression; and
|
| • |
current risk-free spot rates as represented by the current LIBOR spot curve to determine
the present value of expected future cash flows produced in the stochastic projection process.
|
As many guaranteed benefit obligations are relatively new in the marketplace, actual policyholder
behavior experience is limited. As a result, estimates of future policyholder behavior are
subjective and based on analogous internal and external data. As markets change, mature and evolve
and actual policyholder behavior emerges, management continually evaluates the appropriateness of
its assumptions for this component of the fair value model.
On a daily basis, the Company updates capital market assumptions used in the GMWB liability model
such as interest rates and equity indices. On a weekly basis, the blend of implied equity index
volatilities are updated. The Company continually monitors various aspects of policyholder
behavior and may modify certain of its assumptions, including living benefit lapses and withdrawal
rates, if credible emerging data indicates that changes are warranted. At a minimum, all
policyholder behavior assumptions are reviewed and updated, as appropriate, in conjunction with the
completion of the Company’s comprehensive study to refine its estimate of future gross profits
during the third quarter of each year.
Credit Standing Adjustment
This assumption makes an adjustment that market participants would make to reflect the risk that
guaranteed benefit obligations or the GMWB reinsurance recoverables will not be fulfilled
(“nonperformance risk”). As a result of sustained volatility in the Company’s credit default
spreads, during 2009 the Company changed its estimate of the Credit Standing Adjustment to
incorporate observable Company and reinsurer credit default spreads from capital markets, adjusted
for market recoverability. Prior to the first quarter of 2009, the Company calculated the Credit
Standing Adjustment by using default rates published by rating agencies, adjusted for market
recoverability. For twelve months ended December 31, 2009 and 2008, the credit standing adjustment
resulted in a pre-tax gain of $154 and $6.
61
Table of Contents
Margins
The behavior risk margin adds a margin that market participants would require for the risk that the
Company’s assumptions about policyholder behavior could differ from actual experience. The
behavior risk margin is calculated by taking the difference between adverse policyholder behavior
assumptions and best estimate assumptions. During 2009 and 2008, the Company revised certain
adverse assumptions in the behavior risk margin for withdrawals, lapses and annuitization behavior
as emerging policyholder behavior experience suggested the prior adverse policyholder behavior
assumptions were no longer representative of an appropriate margin for risk.
Assumption updates, including policyholder behavior assumptions, affected best estimates and
margins for a total realized gain pre-tax of $566 and $470 for the years ended December 31, 2009
and 2008, respectively. For the year ended December 31, 2007, these updates affected best estimates
resulting in a pre-tax realized loss of $(158).
For additional information on the Company’s GMWB liability, see Equity Risk within the Capital
Markets Risk Management section of MD&A for additional sensitivities.
In addition to the non-market-based updates described above, for the twelve months ended December
31, 2009, 2008, and 2007, the Company recognized non-market-based updates driven by the relative
outperformance (underperformance) of the underlying actively managed funds as compared to their
respective indices resulting in a gain (loss) of approximately $550, $(355), and $(2),
respectively.
Goodwill 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 has occurred. A reporting unit
is defined as an operating segment or one level below an operating segment. Most of the Company’s
reporting units, for which goodwill has been allocated, are equivalent to the Company’s operating
segments as there is no discrete financial information available for the separate components of the
segment or all of the components of the segment have similar economic characteristics. The 401(k),
457 and 403(b) components of Retirement Plans have been aggregated into one reporting unit; the
variable life, universal life and term life components of Individual Life have been aggregated into
one reporting unit; the private placement life insurance and institutional investment products
components of the Institutional Solutions Group have been aggregated into one reporting unit; the
group disability and group life components of Group Benefits have been aggregated into one
reporting unit; and the homeowners and automobile components of Personal Lines have been aggregated
into one reporting unit. In circumstances where the components of an operating segment constitute
a business for which discrete financial information is available and segment management regularly
reviews the operating results of that component such as with Other Retail, which combined with
Individual Annuity constitutes the Retail operating segment, Hartford Financial Products, and
Federal Trust Corporation, the Company has classified those components as reporting units.
As of December 31, 2009, the Company had goodwill allocated to the following reporting units:
| Segment Goodwill | Goodwill in Corporate | Total | ||||||||||
|
Other Retail
|
$ | 159 | $ | 92 | $ | 251 | ||||||
|
Retirement Plans
|
87 | 69 | 156 | |||||||||
|
Individual Life
|
224 | 118 | 342 | |||||||||
|
Group Benefits
|
— | 138 | 138 | |||||||||
|
Personal Lines
|
119 | — | 119 | |||||||||
|
Hartford Financial Products within Specialty Commercial
|
30 | — | 30 | |||||||||
|
Federal Trust Corporation within Corporate[1]
|
— | 168 | 168 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 619 | $ | 585 | $ | 1,204 | ||||||
|
|
||||||||||||
| [1] |
In 2009, the Company completed the acquisition of Federal Trust Corporation which resulted
in additional goodwill of $168 in Corporate.
|
As of December 31, 2008, the Company had goodwill allocated to the following reporting units:
| Segment Goodwill | Goodwill in Corporate | Total | ||||||||||
|
Other Retail
|
$ | 159 | $ | 92 | $ | 251 | ||||||
|
Retirement Plans
|
79 | 69 | 148 | |||||||||
|
Institutional Solutions Group
|
— | 32 | 32 | |||||||||
|
Individual Life
|
224 | 118 | 342 | |||||||||
|
Group Benefits
|
— | 138 | 138 | |||||||||
|
Personal Lines
|
119 | — | 119 | |||||||||
|
Hartford Financial Products within Specialty Commercial
|
30 | — | 30 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 611 | $ | 449 | $ | 1,060 | ||||||
|
|
||||||||||||
The goodwill impairment test follows a two step process. In the first step, the fair value of a
reporting unit is compared to its carrying value. If the carrying value of a reporting unit
exceeds its fair value, the second step of the impairment test is performed for purposes of
measuring the impairment. In the second step, the fair value of the reporting unit is allocated to
all of the assets and liabilities of the reporting unit to determine an implied goodwill value.
This allocation is similar to a purchase price allocation performed in purchase accounting. If the
carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment
loss shall be recognized in an amount equal to that excess.
62
Table of Contents
Management’s determination of the fair value of each reporting unit incorporates multiple inputs
including discounted cash flow calculations, peer company price to earnings multiples, the level of
the Company’s own share price and assumptions that market participants would make in valuing the
reporting unit. Other assumptions include levels of economic capital, future business growth,
earnings projections, assets under management for Life reporting units and the weighted average
cost of capital used for purposes of discounting. Decreases in the amount of economic capital
allocated to a reporting unit, decreases in business growth, decreases in earnings projections and
increases in the weighted average cost of capital will all cause the reporting unit’s fair value to
decrease.
The Company’s goodwill impairment test performed during the first quarter of 2009 for the Life
reporting units, resulted in a write-down of $32 in the Institutional reporting unit of Corporate.
Goodwill within Corporate is primarily attributed to the Company’s “buy-back” of Life in 2000 and
is allocated to the various Life reporting units. As a result of rating agency downgrades of
Life’s financial strength ratings during the first quarter of 2009 and high credit spreads related
to The Hartford, during the first quarter of 2009, the Company believed its ability to generate new
business in the Institutional reporting unit would remain pressured for ratings-sensitive products.
The Company believed goodwill associated with the Institutional line of business was impaired due
to the pressure on new sales for Institutional’s ratings-sensitive business and the significant
unrealized losses in Institutional’s investment portfolios.
The Company completed its annual goodwill assessment for the remaining individual reporting units
within Life and Property & Casualty as of January 1, 2009 and September 30, 2009, respectively,
which resulted in no additional write-downs of goodwill for the year ended December 31, 2009. All
remaining reporting units substantially passed the first step of their annual impairment tests with
the exception of the Individual Life Division. Individual Life completed the second step of the
annual goodwill impairment test resulting in an implied goodwill value substantially in excess of
its carrying value. The Company will complete their annual impairment test for the Life reporting
units during the first quarter of 2010 and expects to complete the Property & Casualty reporting
units in the fourth quarter of 2010.
The Company acquired Federal Trust Corporation (“FTC”) on June 24, 2009 for $10, resulting in
goodwill of $168. No adverse events or impairment triggers have occurred since acquisition that
would cause the Company to believe the bank’s fair value has declined below its carrying value. The
Company will complete its annual impairment test for FTC’s goodwill in the second quarter of 2010.
See Note 8 of the Notes to Consolidated Financial Statements for information on the results of
goodwill impairment tests performed in 2008 and 2007.
Valuation of Investments and Derivative Instruments
The Hartford’s investments in fixed maturities include bonds, redeemable preferred stock and
commercial paper. These investments, along with certain equity securities, which include common
and non-redeemable preferred stocks, are classified as “available-for-sale” (“AFS”) and are carried
at fair value. The after-tax difference from cost or amortized cost is reflected in stockholders’
equity as a component of Other Comprehensive Income (Loss), after adjustments for the effect of
deducting the life and pension policyholders’ share of the immediate participation guaranteed
contracts and certain life and annuity deferred policy acquisition costs and reserve adjustments.
The equity investments associated with the variable annuity products offered in Japan are recorded
at fair value and are classified as “trading” with changes in fair value recorded in net investment
income. Policy loans are carried at outstanding balance. Mortgage loans are recorded at the
outstanding principal balance adjusted for amortization of premiums or discounts and net of
valuation allowances. Short-term investments are carried at amortized cost, which approximates
fair value. Limited partnerships and other alternative investments are reported at their carrying
value with the change in carrying value accounted for under the equity method and accordingly the
Company’s share of earnings are included in net investment income. Recognition of limited
partnerships and other alternative investment income is delayed due to the availability of the
related financial information, as private equity and other funds are generally on a three-month
delay and hedge funds are on a one-month delay. Accordingly, income for the years ended December
31, 2009, 2008 and 2007 may not include the full impact of current year changes in valuation of the
underlying assets and liabilities, which are generally obtained from the limited partnerships and
other alternative investments’ general partners. Other investments primarily consist of
derivatives instruments which are carried at fair value.
Available-for-Sale Securities and Short-Term Investments
The fair value of AFS securities and short-term investments in an active and orderly market (i.e.,
not distressed or forced liquidation) is determined by management after considering one of three
primary sources of information: third-party pricing services, independent broker quotations or
pricing matrices. Security pricing is applied using a “waterfall” approach whereby prices are
first sought from third-party pricing services, the remaining unpriced securities are submitted to
independent brokers for prices, or lastly, securities are priced using a pricing matrix. Typical
inputs used by these pricing methods include, but are not limited to, reported trades, benchmark
yields, issuer spreads, bids, offers, and/or estimated cash flows and prepayments speeds. Based on
the typical trading volumes and the lack of quoted market prices for fixed maturities, third party
pricing services will normally derive the security prices through recent reported trades for
identical or similar securities making adjustments through the reporting date based upon available
market observable information as outlined above. If there are no recent reported trades, the
third-party pricing services and brokers may use matrix or model processes to develop a security
price where future cash flow expectations are developed based upon collateral performance and
discounted at an estimated market rate. For further discussion, see the Available-for-Sale and
Short-Term Investments section in Note 4 of the Notes to Consolidated Financial Statements.
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The Company has analyzed the third-party pricing services valuation methodologies and related
inputs, and has also evaluated the various types of securities in its investment portfolio to
determine an appropriate fair value hierarchy level based upon trading activity and the
observability of market inputs. For further discussion of fair value measurement, see Note 4 of
the Notes to Consolidated Financial Statements.
The following table presents the fair value of AFS securities and short-term investments by pricing
source and hierarchy level as of December 31, 2009.
| Quoted Prices in | ||||||||||||||||
| Active Markets | Significant | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
|
Priced via third-party pricing services
|
$ | 785 | $ | 58,274 | $ | 1,711 | $ | 60,770 | ||||||||
|
Priced via independent broker quotations
|
— | — | 4,071 | 4,071 | ||||||||||||
|
Priced via matrices
|
— | — | 7,053 | 7,053 | ||||||||||||
|
Priced via other methods [1]
|
— | — | 480 | 480 | ||||||||||||
|
Short-term investments
|
6,846 | 3,511 | — | 10,357 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 7,631 | $ | 61,785 | $ | 13,315 | $ | 82,731 | ||||||||
|
|
||||||||||||||||
|
% of Total
|
9.2 | % | 74.7 | % | 16.1 | % | 100.0 | % | ||||||||
|
|
||||||||||||||||
| [1] |
Represents securities for which adjustments were made to reduce prices received from third
parties and certain private equity investments that are carried at the Company’s determination
of fair value from inception.
|
The fair value is the amount at which the security could be exchanged in a current transaction
between knowledgeable, unrelated willing parties using inputs, including assumptions and estimates,
a market participant would utilize. As the estimated fair value of a security utilizes assumptions
and estimates, the amount that may be realized may differ significantly.
Valuation of Derivative Instruments, excluding embedded derivatives within liability contracts and
reinsurance related derivatives
Derivative instruments are reported on the Consolidated Balance Sheets at fair value and are
reported in Other Investments and Other Liabilities. Derivative instruments are fair valued using
pricing valuation models, which utilize market data inputs or independent broker quotations.
Excluding embedded and reinsurance related derivatives, as of December 31, 2009 and 2008, 97% and
94% of derivatives, respectively, based upon notional values, were priced by valuation models,
which utilize independent market data. The remaining derivatives were priced by broker quotations.
The derivatives are valued using mid-market level inputs that are predominantly observable in the
market, with the exception of the customized swap contracts that hedge guaranteed minimum
withdrawal benefits (“GMWB”) liabilities. Inputs used to value derivatives include, but are not
limited to, swap interest rates, foreign currency forward and spot rates, credit spreads and
correlations, interest and equity volatility and equity index levels. The Company performs a
monthly analysis on derivative valuations which includes both quantitative and qualitative
analysis. Examples of procedures performed include, but are not limited to, review of pricing
statistics and trends, back testing recent trades, analyzing the impacts of changes in the market
environment, and review of changes in market value for each derivative including those derivatives
priced by brokers.
The following table presents the notional value and net fair value of derivative instruments by
hierarchy level as of December 31, 2009.
| Notional Value | Fair Value | |||||||
|
Quoted prices in active markets for identical assets (Level 1)
|
$ | 2,279 | $ | 6 | ||||
|
Significant observable inputs (Level 2)
|
40,871 | (9 | ) | |||||
|
Significant unobservable inputs (Level 3)
|
44,917 | 337 | ||||||
|
|
||||||||
|
Total
|
$ | 88,067 | $ | 334 | ||||
|
|
||||||||
The following table presents the notional value and net fair value of the derivative instruments
within the Level 3 securities classification as of December 31, 2009.
| Notional Value | Fair Value | |||||||
|
Credit derivatives
|
$ | 5,166 | $ | (193 | ) | |||
|
Interest derivatives
|
2,591 | (2 | ) | |||||
|
Equity derivatives
|
37,135 | 532 | ||||||
|
Currency derivatives
|
25 | — | ||||||
|
|
||||||||
|
Total Level 3
|
$ | 44,917 | $ | 337 | ||||
|
|
||||||||
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Derivative instruments classified as Level 3 include complex derivatives, primarily consisting of
equity options and swaps, interest rate derivatives which have interest rate optionality, certain
credit default swaps, and long-dated interest rate swaps. These derivative instruments are valued
using pricing models which utilize both observable and unobservable inputs and, to a lesser extent,
broker quotations. A derivative instrument that is priced using both observable and unobservable
inputs will be classified as a Level 3 financial instrument in its entirety if the unobservable
input is significant in developing the price. The Company utilizes 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 assets and
liabilities.
Pension and Other Postretirement Benefit Obligations
The Company maintains a U.S. qualified defined benefit pension plan (the “Plan”) that covers
substantially all employees, as well as unfunded excess plans to provide benefits in excess of
amounts permitted to be paid to participants of the Plan under the provisions of the Internal
Revenue Code. The Company has also entered into individual retirement agreements with certain
retired directors providing for unfunded supplemental pension benefits. In addition, the Company
provides certain health care and life insurance benefits for eligible retired employees. The
Company maintains international plans which represent an immaterial percentage of total pension
assets, liabilities and expense and, for reporting purposes, are combined with domestic plans.
Pursuant to accounting principles related to the Company’s pension and other postretirement
obligations to employees under its various benefit plans, the Company is required to make a
significant number of assumptions in order to calculate the related liabilities and expenses each
period. The two economic assumptions that have the most impact on pension and other postretirement
expense are the discount rate and the expected long-term rate of return on plan assets. In
determining the discount rate assumption, the Company utilizes a discounted cash flow analysis of
the Company’s pension and other postretirement obligations and currently available market and
industry data. The yield curve utilized in the cash flow analysis is comprised of bonds rated Aa
or higher with maturities primarily between zero and thirty years. Based on all available
information, it was determined that 6.00% and 5.75% were the appropriate discount rates as of
December 31, 2009 to calculate the Company’s pension and other postretirement obligations,
respectively. Accordingly, the 6.00% and 5.75% discount rates will also be used to determine the
Company’s 2010 pension and other postretirement expense, respectively. At December 31, 2008, the
discount rate was 6.25% for both pension and other postretirement expense.
As of December 31, 2009, a 25 basis point increase/decrease in the discount rate would
decrease/increase the pension and other postretirement obligations by $122 and $9, respectively.
The Company determines the expected long-term rate of return assumption based on an analysis of the
Plan portfolio’s historical compound rates of return since 1979 (the earliest date for which
comparable portfolio data is available) and over 5 year and 10 year periods. The Company selected
these periods, as well as shorter durations, to assess the portfolio’s volatility, duration and
total returns as they relate to pension obligation characteristics, which are influenced by the
Company’s workforce demographics. In addition, the Company also applies long-term market return
assumptions to an investment mix that generally anticipates 60% fixed income securities, 20% equity
securities and 20% alternative assets to derive an expected long-term rate of return. Based upon
these analyses, management maintained the long-term rate of return assumption at 7.30% as of
December 31, 2009. This assumption will be used to determine the Company’s 2010 expense. The
long-term rate of return assumption at December 31, 2008, that was used to determine the Company’s
2009 expense, was also 7.30%.
Pension expense reflected in the Company’s results was $137, $122 and $131 in 2009, 2008 and 2007,
respectively. The Company estimates its 2010 pension expense will be approximately $186, based on
current assumptions. To illustrate the impact of these assumptions on annual pension expense for
2010 and going forward, a 25 basis point decrease in the discount rate will increase pension
expense by approximately $14 and a 25 basis point change in the long-term asset return assumption
will increase/decrease pension expense by approximately $10.
The Company uses a five-year averaging method to determine the market-related value of Plan assets,
which is used to determine the expected return component of pension expense. Under this
methodology, asset gains/losses that result from returns that differ from the Company’s long-term
rate of return assumption are recognized in the market-related value of assets on a level basis
over a five year period. The difference between actual asset returns for the plans of $184 and
$(441) for the years ended December 31, 2009 and 2008, respectively, as compared to expected
returns of $276 and $279 for the years ended December 31, 2009 and 2008, respectively, will be
fully reflected in the market-related value of plan assets over the next five years using the
methodology described above. The level of actuarial net loss continues to exceed the allowable
amortization corridor. Based on the 6.00% discount rate selected as of December 31, 2009 and
taking into account estimated future minimum funding, the difference between actual and expected
performance in 2009 will increase annual pension expense in future years. The increase in pension
expense will be approximately $3 in 2010 and will increase ratably to an increase of approximately
$16 in 2015.
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Valuation Allowance on Deferred Tax Assets
Deferred tax assets represent the tax benefit of future deductible temporary differences and
operating loss and tax credit carryforwards. Deferred tax assets are measured using the enacted
tax rates expected to be in effect when such benefits are realized if there is no change in tax
law. Under U.S. GAAP, the Company tests the value of deferred tax assets for impairment on a
quarterly basis at the entity level within each tax jurisdiction, consistent with the Company’s
filed tax returns. Deferred tax assets are reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion, or all, of the deferred
tax assets will not be realized. The determination of the valuation allowance for our deferred tax
assets requires management to make certain judgments and assumptions. In evaluating the ability to
recover deferred tax assets, the Company has considered all available evidence including past
operating results, the existence of cumulative losses in the most recent years, forecasted
earnings, future taxable income, and prudent and feasible tax planning strategies. In the event the
Company determines that it most likely would not be able to realize all or part of the Company’s
deferred tax assets in the future, an increase to the valuation allowance would be charged to
earnings in the period such determination is made. Likewise, if it is later determined that it is
more likely than not that those deferred tax assets would be realized, the previously provided
valuation allowance would be reversed. The Company’s judgment and assumptions are subject to
change given the inherent uncertainty in predicting future performance, which is impacted by such
things as policyholder behavior, competitor pricing, new product introductions, and specific
industry and investment market conditions.
In management’s judgment, the net deferred tax asset will more likely than not be realized.
Included in the deferred tax asset is the expected tax benefit attributable to net operating losses
of $308, consisting of U.S. losses of $18, which expire from 2012-2021, and foreign losses of $290.
The foreign losses have no expiration. A valuation allowance of $86 has been recorded which
consists of $6 related primarily to U.S and $80 related to foreign operations. No valuation
allowance has been recorded for realized or unrealized losses. In assessing the need for a
valuation allowance, management considered taxable income in prior carryback years, future taxable
income and tax planning strategies that include holding debt securities with market value losses
until recovery, selling appreciated securities to offset capital losses, and sales of certain
corporate assets. Such tax planning strategies are viewed by management as prudent and feasible
and will be implemented if necessary to realize the deferred tax asset. However, we anticipate
limited ability, going forward, to recognize a full tax benefit on realized losses, which will
result in additional valuation allowances. If interest rates rise, we may also experience an
increased likelihood of recording a valuation allowance on previously recognized realized capital
losses.
Contingencies Relating to Corporate Litigation and Regulatory Matters
Management evaluates each contingent matter separately. A loss is recorded if probable and
reasonably estimable. Management establishes reserves 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 reserve at the low end of the range of losses.
The Company has a quarterly monitoring process involving legal and accounting professionals. Legal
personnel first identify outstanding corporate litigation and regulatory matters posing a
reasonable possibility of loss. These matters are then jointly reviewed by accounting and legal
personnel to evaluate the facts and changes since the last review in order to determine if a
provision for loss should be recorded or adjusted, the amount that should be recorded, and the
appropriate disclosure. The outcomes of certain contingencies currently being evaluated by the
Company, which relate to corporate litigation and regulatory matters, are inherently difficult to
predict, and the reserves that have been established for the estimated settlement amounts are
subject to significant changes. In view of the uncertainties regarding the outcome of these
matters, as well as the tax-deductibility of payments, it is possible that the ultimate cost to the
Company of these matters could exceed the reserve by an amount that would have a material adverse
effect on the Company’s consolidated results of operations or cash flows in a particular quarterly
or annual period.
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THE HARTFORD’S OPERATIONS OVERVIEW
The Hartford is organized into two major operations: Life and Property & Casualty, each
containing reporting segments. The following discussion describes the Life and Property & Casualty
operations.
The Company considers several measures and ratios in assessing the performance its life and
property and casualty underwriting businesses. The following discussions include the more
significant ratios and measures of profitability for the years ended December 31, 2009, 2008 and
2007. Management believes that these ratios and measures are useful in understanding the
underlying trends in The Hartford’s businesses. However, these performance indicators should only
be used in conjunction with, and not in lieu of, net income for The Hartford as a whole. These
ratios and measures may not be comparable to other performance measures used by the Company’s
competitors.
Life Operations
Life is organized into six reporting segments, Retail Products Group (“Retail”), Individual Life,
Group Benefits, Retirement Plans, International and Institutional Solutions Group
(“Institutional”). Through Life, the Company provides retail and institutional investment products
such as variable and fixed annuities, mutual funds, private placement life insurance and retirement
plan services, individual life insurance products including variable universal life, universal
life, interest sensitive whole life and term life; and group benefit products, such as group life
and group disability insurance.
Life derives its revenues principally from: (a) fee income, including asset management fees, on
separate account and mutual fund assets and mortality and expense fees, as well as cost of
insurance charges; (b) net investment income on general account assets; (c) fully insured premiums;
and (d) certain other fees. Asset management fees and mortality and expense fees are primarily
generated from separate account assets, which are deposited with Life through the sale of variable
annuity and variable universal life products and from mutual funds. Cost of insurance charges are
assessed on the net amount at risk for investment-oriented life insurance products. Premium
revenues are derived primarily from the sale of group life, group disability and individual term
insurance products.
Life’s expenses essentially consist of interest credited to policyholders on general account
liabilities, insurance benefits provided, amortization of deferred policy acquisition costs,
expenses related to selling and servicing the various products offered by the Company, dividends to
policyholders, and other general business expenses.
Life’s financial results in its variable annuity, mutual fund and, to a lesser extent, variable
universal life businesses, depends largely on the amount of the contract holder account value or
assets under management on which it earns fees and the level of fees charged. Changes in account
value or assets under management are driven by two main factors: net flows, which measure the
success of the Company’s asset gathering and retention efforts, and the market return of the funds,
which is heavily influenced by the return realized in the equity markets. Net flows are comprised
of new sales and other deposits less surrenders, death benefits, policy charges and annuitizations
of investment type contracts, such as variable annuity contracts. In the mutual fund business, net
flows are known as net sales. Net sales are comprised of new sales less redemptions by mutual fund
customers. Life uses the average daily value of the S&P 500 Index as an indicator for evaluating
market returns of the underlying account portfolios in the United States. Relative financial
results of variable products are highly correlated to the growth in account values or assets under
management since these products generally earn fee income on a daily basis. Equity market
movements could also result in benefits for or charges against deferred acquisition costs. See the
Critical Accounting Estimates section of MD&A for further information on DAC Unlocks. During 2009,
primarily as a result of current market conditions, the Company recorded an after tax Unlock charge
of $(1,034).
The profitability of Life’s fixed annuities and other “spread-based” products depends largely on
its ability to earn target spreads between earned investment rates on its general account assets
and interest credited to policyholders. Profitability is also influenced by operating expense
management including the benefits of economies of scale in the administration of its United States
variable annuity businesses in particular. In addition, the size and persistency of gross profits
from these businesses is an important driver of earnings as it affects the rate of amortization of
deferred policy acquisition costs.
Life’s profitability in its individual life insurance and group benefits businesses depends largely
on the size of its in force block, the adequacy of product pricing and underwriting discipline,
actual mortality and morbidity experience, and the efficiency of its claims and expense management.
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Definitions of measures and ratios for Life Operations
After-tax Margin
After-tax margin, excluding realized gains (losses) or DAC Unlock is a non-GAAP financial measure
that the Company uses to evaluate, and believes are important measures of, segment operating
performance. After-tax margin is the most directly comparable U.S. GAAP measure. The Hartford
believes that the measure after-tax margin, excluding realized gains (losses) and DAC Unlock
provides investors with a valuable measure of the performance of the Company’s on-going businesses
because it reveals trends in our businesses that may be obscured by the effect of realized gains
(losses) or quarterly DAC Unlocks. 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 insurance aspects of our businesses. Accordingly, these non-GAAP measures exclude 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 after-tax margin, excluding the
realized gains (losses) and DAC Unlock should include net realized gains and losses on net periodic
settlements on the Japan fixed annuity cross-currency swap. These net realized gains and losses
are directly related to an offsetting item included in the statement of operations such as net
investment income. DAC Unlocks occur when the Company determines based on actual experience or
other evidence, that estimates of future gross profits should be revised. As the DAC Unlock is a
reflection of the Company’s new best estimates of future gross profits, the result and its impact
on the DAC amortization ratio is meaningful; however, it does distort the trend of after-tax
margin. After-tax margin, excluding realized gains (losses) and DAC Unlock should not be
considered as a substitute for after-tax margin and does not reflect the overall profitability of
our businesses. Therefore, the Company believes it is important for investors to evaluate both
after-tax margin, excluding realized gains (losses) and DAC Unlock and after-tax margin when
reviewing the Company’s performance.
DAC amortization ratio
DAC amortization ratio, excluding realized gains (losses) and DAC Unlock is a non-GAAP financial
measure that the Company uses to evaluate, and believes is an important measure of, segment
operating performance. DAC amortization ratio is the most directly comparable U.S. GAAP measure.
The Hartford believes that the measure DAC amortization ratio, excluding realized gains (losses)
and DAC Unlock provides investors with a valuable measure of the performance of the Company’s
on-going businesses because it reveals trends in our businesses that may be obscured by the effect
of realized gains (losses) or quarterly DAC Unlocks. 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 insurance aspects of our businesses. Accordingly, these non-GAAP
measures exclude 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
amortization of deferred policy acquisition costs and the present value of future profits (DAC
amortization ratio), which is typically expressed as a percentage of pre-tax income before the cost
of this amortization (an approximation of actual gross profits) and excludes the effects of
realized capital gains and losses, excluding the realized gains (losses) and DAC Unlock should
include net realized gains and losses on net periodic settlements on the Japan fixed annuity
cross-currency swap. These net realized gains and losses are directly related to an offsetting
item included in the statement of operations such as net investment income. DAC Unlocks occur when
the Company determines based on actual experience or other evidence, that estimates of future gross
profits should be revised. As the DAC Unlock is a reflection of the Company’s new best estimates
of future gross profits, the result and its impact on the DAC amortization ratio is meaningful;
however, it does distort the trend of DAC amortization ratio. DAC amortization ratio, excluding
realized gains (losses) and DAC Unlock should not be considered as a substitute for DAC
amortization ratio and does not reflect the overall profitability of our businesses. Therefore,
the Company believes it is important for investors to evaluate both DAC amortization ratio,
excluding realized gains (losses) and DAC Unlock and DAC amortization ratio when reviewing the
Company’s performance.
Fee Income
Fee income is largely driven from amounts collected as a result of contractually defined
percentages of assets under management. These fees are generally collected on a daily basis. For
individual life insurance products, fees are contractually defined as percentages based on levels
of insurance, age, premiums and deposits collected and contract holder value. Life insurance fees
are generally collected on a monthly basis. Therefore, the growth in assets under management
either through positive net flows or net sales, or favorable equity market performance will have a
favorable impact on fee income. Conversely, either negative net flows or net sales, or unfavorable
equity market performance will reduce fee income.
Life Expenses
There are three major categories for expenses. The first major category of expenses is benefits
and losses. These include the costs of mortality and morbidity, particularly in the group benefits
business, and mortality in the individual life businesses, as well as other contractholder benefits
to policyholders. In addition, traditional insurance type products generally use a loss ratio
which is expressed as the amount of benefits incurred during a particular period divided by total
premiums and other considerations, as a key indicator of underwriting performance. 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 underwriting results of the business as buyouts
may distort the loss ratio.
The second major category is insurance operating costs and expenses, which is commonly expressed in
a ratio of a revenue measure depending on the type of business. The third major category is the
DAC amortization ratio. Retail — individual annuity business accounts for the majority of the
amortization of DAC and present value of future profits for Life.
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Life Premiums
Traditional 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 from
the overall investment strategy 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 policies remaining
in-force from year-to-year.
Net Investment Spread
Management evaluates performance of certain products based on net investment spread. These
products include those that have insignificant mortality risk, such as fixed annuities, certain
general account universal life contracts and certain institutional contracts. Net investment
spread is determined by taking the difference between the earned rate, (excluding the effects of
realized capital gains and losses, including those related to the Company’s GMWB product and
related reinsurance and hedging programs), and the related crediting rates on average general
account assets under management. The net investment spreads are for the total portfolio of
relevant contracts in each segment and reflect business written at different times. When pricing
products, the Company considers current investment yields and not the portfolio average. The
determination of credited rates is based upon consideration of current market rates for similar
products, portfolio yields and contractually guaranteed minimum credited rates. Net investment
spread can be volatile period over period, which can have a significant positive or negative effect
on the operating results of each segment. The volatile nature of net investment spread is driven
primarily by earnings on limited partnership and other alternative investments and prepayment
premiums on securities. Investment earnings can also be influenced by factors such as changes in
interest rates, credit spreads and decisions to hold higher levels of short-term investments.
Return on Assets (“ROA”)
ROA, excluding realized gains (losses) or DAC Unlock, is a non-GAAP financial measure that the
Company uses to evaluate, and believes is an important measure of, segment operating performance.
ROA is the most directly comparable U.S. GAAP measure. The Hartford believes that the measure ROA,
excluding realized gains (losses) and DAC Unlock provides investors with a valuable measure of the
performance of the Company’s on-going businesses because it reveals trends in our businesses that
may be obscured by the effect of realized gains (losses) or quarterly DAC Unlocks. 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 insurance aspects of our businesses.
Accordingly, these non-GAAP measures exclude 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 ROA, excluding the realized gains (losses) and DAC Unlock should include
net realized gains and losses on net periodic settlements on the Japan fixed annuity cross-currency
swap. These net realized gains and losses are directly related to an offsetting item included in
the statement of operations such as net investment income. DAC Unlocks occur when the Company
determines based on actual experience or other evidence, that estimates of future gross profits
should be revised. As the DAC Unlock is a reflection of the Company’s new best estimates of future
gross profits, the result and its impact on the DAC amortization ratio is meaningful; however, it
does distort the trend of ROA. ROA, excluding realized gains (losses) and DAC Unlock should not be
considered as a substitute for ROA and does not reflect the overall profitability of our
businesses. Therefore, the Company believes it is important for investors to evaluate both ROA,
excluding realized gains (losses) and DAC Unlock and ROA when reviewing the Company’s performance.
Property & Casualty Operations
Property & Casualty is organized into five reporting segments: the underwriting segments of
Personal Lines, Small Commercial, Middle Market and Specialty Commercial (collectively “Ongoing
Operations”), and the Other Operations segment. Through Property & Casualty the Company provides a
number of coverages, as well as insurance-related services, to businesses throughout the United
States, including workers’ compensation, property, automobile, liability, umbrella, specialty
casualty, marine, livestock, fidelity and surety, professional liability and director’s and
officer’s liability coverages. Property & Casualty also provides automobile, homeowners, and
home-based business coverage to individuals throughout the United States, as well as
insurance-related services to businesses.
Property & Casualty derives its revenues principally from premiums earned for insurance coverages
provided to insureds, investment income, and, to a lesser extent, from fees earned for services
provided to third parties and net realized capital gains and losses. Premiums charged for
insurance coverages are earned principally on a pro rata basis over the terms of the related
policies in-force.
Service fees principally include revenues from third-party claims administration services provided
by Specialty Risk Services and revenues from member contact center services provided through the
AARP Health program.
69
Table of Contents
Net income is a measure of profit or loss used in evaluating the performance of Total Property &
Casualty and the Ongoing Operations and Other Operations segments. Within Ongoing Operations, the
underwriting segments of Personal Lines, Small Commercial, Middle Market and Specialty Commercial
are evaluated by The Hartford’s management primarily based upon underwriting results. Underwriting
results within Ongoing Operations are influenced significantly by changes in earned premium and the
adequacy of the Company’s pricing. Underwriting profitability over time is also 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 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, and expectations about regulatory and
legal developments and expense levels. Property & Casualty 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, Property & Casualty is required
to obtain approval for its premium rates from state insurance departments.
In setting its pricing, Property & Casualty assumes an expected level of losses from natural or
man-made catastrophes that will cover the Company’s exposure to catastrophes over the long-term.
In most years, however, Property & Casualty’s actual losses from catastrophes will be more or less
than that assumed in its pricing due to the significant volatility of catastrophe losses.
For a discussion on how The Hartford establishes property and casualty reserves, see Property and
Casualty Reserves, Net of Reinsurance within the Critical Accounting Estimates section of the MD&A.
The investment return, or yield, on Property & Casualty’s 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 loss and loss adjustment expenses are paid.
For longer tail lines, such as workers’ compensation and general liability, claims are paid over
several years and, therefore, the premiums received for these lines of business can generate
significant investment income. Due to the need to maintain sufficient liquidity to satisfy claim
obligations, the vast majority of Property & Casualty’s invested assets have been held in fixed
maturities, including, among other asset classes, corporate bonds, municipal bonds, government
debt, short-term debt, mortgage-backed securities and asset-backed securities.
Through its Other Operations segment, Property & Casualty is responsible for managing property and
casualty operations of The Hartford that have discontinued writing new or renewal business as well
as managing the claims related to asbestos and environmental exposures.
Definitions of measures and ratios for Property & Casualty Operations
Written and earned premiums
Written premium is a statutory accounting financial measure which represents the amount of premiums
charged for policies issued, net of reinsurance, during a fiscal period. Earned premium is a U.S.
GAAP and statutory measure. 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.
Reinstatement premiums
Reinstatement premium represents additional ceded premium paid for the reinstatement of the amount
of reinsurance coverage that was reduced as a result of a reinsurance loss payment.
Policies in force
Policies in force represent 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, Small
Commercial and Middle Market and is affected by both new business growth and premium renewal
retention.
Renewal written pricing increase (decrease)
Renewal written pricing increase (decrease) represents the combined effect of rate changes, amount
of insurance and individual risk pricing decisions per unit of exposure since the prior year. The
rate component represents the average change in rate filings during the period and the amount of
insurance represents the value of the rating base, such as model year/vehicle symbol for auto,
building replacement costs for property and wage inflation for workers’ compensation. The renewal
written price increase (decrease) does not include other factors that affect average premium per
unit of exposure such as changes in the mix of business by state, territory, class plan and tier of
risk. A number of factors affect renewal written pricing 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 pricing 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.
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Table of Contents
Renewal earned pricing increase (decrease)
Written premiums are earned over the policy term, which is six months for certain Personal Lines
auto business and 12 months for substantially all of the remainder of the Company’s business.
Because the Company earns premiums over the 6 to 12 month term of the policies, renewal earned
pricing increases (decreases) lag renewal written pricing increases (decreases) by 6 to 12 months.
New business written premium
New business written premium represents the amount of premiums charged for policies issues 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.
Policy count retention
Policy count retention represents the ratio of the number of policies renewed during the period
divided by the number of policies from the previous policy term period. The number of policies
available to renew from the previous policy term represents the number of policies written in the
previous policy term net of any cancellations of those policies. 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
count retention is also affected by advertising and rate actions taken by competitors.
Loss and loss adjustment expense ratio
The loss and loss adjustment expense ratio is a measure of the cost of claims incurred in the
calendar year divided by earned premium and includes losses 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 ratemaking process, adjust the assumption as appropriate for
the particular state, product or coverage.
Current accident year loss and loss adjustment expense ratio before catastrophes
The current accident year loss and loss adjustment expense ratio before catastrophes is a measure
of the cost of non-catastrophe claims 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 reserve
development.
Prior accident year loss and loss adjustment expense ratio
The prior 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.
Expense ratio
The expense ratio is the ratio of underwriting expenses, excluding bad debt expense, to earned
premiums. Underwriting expenses include the amortization of deferred policy acquisition costs and
insurance operating costs and expenses. Deferred policy acquisition costs include commissions,
taxes, licenses and fees and other underwriting expenses and are amortized over the policy term.
Policyholder dividend ratio
The policyholder dividend ratio is the ratio of policyholder dividends to earned premium.
Combined ratio
The combined ratio is 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 100.0
demonstrates underwriting profit; a combined ratio above 100.0 demonstrates underwriting losses.
Catastrophe ratio
The catastrophe ratio (a component of the loss and loss adjustment expense ratio) represents the
ratio of catastrophe losses incurred in the current calendar year (net of reinsurance) to earned
premiums and includes catastrophe losses incurred for both the current and prior accident years. A
catastrophe is an event that causes $25 or more in industry insured property losses and affects a
significant number of property and casualty policyholders and insurers. The catastrophe ratio
includes the effect of catastrophe losses, but does not include the effect of reinstatement
premiums.
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Table of Contents
Combined ratio before catastrophes and prior accident year development
The combined ratio before catastrophes and prior accident year development represents the combined
ratio for the current accident year, excluding the impact of catastrophes. 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 reserve development.
Underwriting results
Underwriting results is a before-tax measure that represents earned premiums less incurred losses,
loss adjustment expenses, underwriting expenses and policyholder dividends. The Hartford believes
that underwriting results provides investors with a valuable measure of before-tax profitability
derived from underwriting activities, which are managed separately from the Company’s investing
activities. Within Ongoing Operations, the underwriting segments of Personal Lines, Small
Commercial, Middle Market and Specialty Commercial are evaluated by management primarily based upon
underwriting results. Underwriting results is also presented for Ongoing Operations and Other
Operations. A reconciliation of underwriting results to net income for Ongoing Operations and
Other Operations is set forth in their respective discussions herein.
Investment yield
The investment yield, or return, on the Company’s invested assets primarily includes interest
income on fixed maturity investments. Based upon the fair value of Property & Casualty’s
investments as of December 31, 2009 and 2008, approximately 87% and 82%, respectively, of invested
assets were held in fixed maturities. A number of factors affect the yield on fixed maturity
investments, including fluctuations in interest rates and the level of principal prepayments. The
Company also invests in equity securities, mortgage loans, limited partnership arrangements and
other alternative investments. Total Property & Casualty investment yield, after-tax, was 3.1%,
3.2% and 4.4% for the years ended December 31, 2009, 2008 and 2007, respectively.
72
Table of Contents
KEY PERFORMANCE MEASURES AND RATIOS
Life
Management evaluates the rates of return various businesses can provide as an input in determining
where additional capital should be invested to increase net income and shareholder returns. The
Company uses the return on assets for the Individual Annuity, Retirement Plans and Institutional
businesses for evaluating profitability. In Group Benefits and Individual Life, after-tax margin
is a key indicator of overall profitability.
| Ratios | 2009 | 2008 | 2007 | |||||||||
|
Retail
|
||||||||||||
|
Individual annuity ROA
|
(48.6 | ) bps | (133.5 | ) bps | 58.9 | bps | ||||||
|
Effect of net realized losses, net of tax and DAC on ROA
|
(18.8 | ) bps | (96.5 | ) bps | (13.3 | ) bps | ||||||
|
Effect of DAC Unlock on ROA [1]
|
(67.1 | ) bps | (68.0 | ) bps | 15.6 | bps | ||||||
|
ROA excluding realized losses and DAC Unlock
|
37.3 | bps | 31.0 | bps | 56.6 | bps | ||||||
|
|
||||||||||||
|
Individual Life
|
||||||||||||
|
After-tax margin
|
1.3 | % | (4.7 | %) | 16.0 | % | ||||||
|
Effect of net realized losses, net of tax and DAC on after-tax margin
|
(6.5 | %) | (13.1 | %) | (1.3 | %) | ||||||
|
Effect of DAC Unlock on after-tax margin [1]
|
(4.9 | %) | (4.7 | %) | 1.4 | % | ||||||
|
After-tax margin excluding realized losses and DAC Unlock
|
12.7 | % | 13.1 | % | 15.9 | % | ||||||
|
|
||||||||||||
|
Group Benefits
|
||||||||||||
|
After-tax margin (excluding buyouts)
|
4.2 | % | (0.1 | %) | 6.7 | % | ||||||
|
Effect of net realized losses, net of tax on after-tax margin
(excluding buyouts)
|
(1.6 | %) | (7.3 | %) | (0.4 | %) | ||||||
|
After-tax margin (excluding buyouts) excluding realized losses
|
5.8 | % | 7.2 | % | 7.1 | % | ||||||
|
|
||||||||||||
|
Retirement Plans
|
||||||||||||
|
Retirement ROA
|
(54.8 | ) bps | (47.9 | ) bps | 22.9 | bps | ||||||
|
Effect of net realized losses, net of tax and DAC on ROA
|
(44.8 | ) bps | (51.5 | ) bps | (10.5 | ) bps | ||||||
|
Effect of DAC Unlock on ROA [1]
|
(13.8 | ) bps | (15.0 | ) bps | (3.4 | ) bps | ||||||
|
ROA excluding realized losses and DAC Unlock
|
3.8 | bps | 18.6 | bps | 36.8 | bps | ||||||
|
|
||||||||||||
|
International — Japan
|
||||||||||||
|
International — Japan ROA
|
(16.7 | ) bps | (72.9 | ) bps | 73.4 | bps | ||||||
|
Effect of net realized gains (losses) excluding net periodic
settlements, net of tax and DAC on ROA [2]
|
9.5 | bps | (65.1 | ) bps | (8.1 | ) bps | ||||||
|
Effect of DAC Unlock on ROA [1]
|
(68.3 | ) bps | (31.9 | ) bps | 6.4 | bps | ||||||
|
ROA excluding realized gains (losses) and DAC Unlock
|
42.1 | bps | 24.1 | bps | 75.1 | bps | ||||||
|
|
||||||||||||
|
Institutional
|
||||||||||||
|
Institutional ROA
|
(86.5 | ) bps | (83.3 | ) bps | 3.0 | bps | ||||||
|
Effect of net realized losses, net of tax and DAC on ROA
|
(80.3 | ) bps | (85.0 | ) bps | (21.5 | ) bps | ||||||
|
Effect of DAC Unlock on ROA [1]
|
(0.2 | ) bps | — | 0.2 | bps | |||||||
|
ROA excluding realized losses and DAC Unlock
|
(6.0 | ) bps | 1.7 | bps | 24.3 | bps | ||||||
| [1] |
See Unlocks within the Critical Accounting Estimates section of the MD&A.
|
|
| [2] |
Included in the net realized capital gain (losses) are amounts that represent the net periodic accruals on currency
rate swaps used in the risk management of Japan fixed annuity products.
|
Year ended December 31, 2009 compared to year ended December 31, 2008
| • |
Individual Annuity’s ROA, excluding realized losses and DAC Unlock, increased primarily due
to the impact of the write off of goodwill in 2008 of $274 after-tax or 19.4 bps, partially
offset by higher DAC amortization and lower investment spread in 2009.
|
| • |
The decrease in Individual Life’s after-tax margin, excluding realized losses and DAC
Unlock, was primarily due to a higher DAC amortization rate, partially offset by a lower
effective tax rate and lower operating expenses.
|
| • |
The decrease in Retirement Plans ROA, excluding realized losses and DAC Unlock, was
primarily driven by lower returns on fixed maturities and a full year of activity from the
businesses acquired in 2008, which produce a lower ROA as they are mutual fund businesses.
|
| • |
The decrease in Group Benefits after-tax margin, excluding realized losses, was primarily
due to the unfavorable loss ratio, that resulted from unfavorable morbidity experience, which
was primarily due to unfavorable reserve development from the 2008 incurral loss year and
higher new incurred long-term disability claims in 2009.
|
| • |
International-Japan ROA, excluding realized gains (losses) and DAC Unlock, increased
primarily due to lower 3 Win related charges in 2009 versus 2008 of $40 and $152, after-tax,
respectively. Excluding the effects of the 3 Win charge, ROA, excluding realized gains
(losses) and DAC Unlock, would have been 53.7 bps in 2009 and 66.3 bps in 2008. The decline
of ROA excluding the 3 Win charge is due to lower surrender fees due to a reduction in lapses
and a higher benefit margin, partially offset by a decrease in the DAC amortization rate due
to higher actual gross profits.
|
| • |
The decrease in Institutional’s ROA, excluding realized losses, is primarily due to lower
yields on investments.
|
73
Table of Contents
Year ended December 31, 2008 compared to year ended December 31, 2007
| • |
The decrease in Individual Annuity’s ROA, excluding realized losses and the effect of the
DAC Unlock, reflects the write-off of goodwill of $274 after-tax, or 19.4 bps; lower limited
partnership and other alternative investment income; and the net effect of lower fees.
|
| • |
The decrease in Individual Life’s after-tax margin, excluding realized losses and the
effect of the DAC Unlock, was primarily due to unfavorable mortality expense, partially offset
by a lower effective tax rate.
|
| • |
The decrease in Retirement Plans ROA, excluding realized losses and the effect of the DAC
Unlock, was primarily driven by an increase in assets under management due to the acquired
rights to service $18.7 billion in mutual funds, comprised of $15.8 billion in mutual funds
from Sun Life Retirement Services, Inc., and $2.9 billion in mutual funds from Princeton
Retirement Group, both of which closed in the first quarter of 2008. The acquired blocks of
assets produce a lower ROA as they are comprised of mutual fund assets and assets under
management as opposed to traditional annuity contracts. Also contributing to the decrease was
lower yields on fixed maturity investments and a decline in limited partnership and other
alternative investment income, higher service and technology costs and additional expenses
associated with the acquisitions. Partially offsetting these decreases were tax benefits
primarily associated with DRD.
|
| • |
The Group Benefit increase in after-tax margin was primarily due to the favorable expense
ratio.
|
| • |
International-Japan ROA, excluding realized gains (losses) and the effect of the DAC
Unlock, declined due to lower earned fees as a result of declining account values, lower
surrender fees due to a reduction in lapses and an increase in the DAC amortization rate due
to lower actual gross profits, as well as the accelerated DAC amortization associated with the
3 Win trigger.
|
| • |
The decrease in Institutional’s ROA, excluding realized losses, is primarily due to a
decline in limited partnership and other alternative investment income. The decrease is also
due to unfavorable mortality and lower yields on fixed maturity investments.
|
74
Table of Contents
Property & Casualty
The Company considers several measures and ratios to be the key performance indicators for the
property and casualty underwriting businesses. The following table and the segment discussions
include the more significant ratios and measures of profitability for the years ended December 31,
2009, 2008 and 2007. Management believes that these ratios and measures are useful in
understanding the underlying trends in The Hartford’s property and casualty insurance underwriting
business. However, these key performance indicators should only be used in conjunction with, and
not in lieu of, underwriting income for the underwriting segments of Personal Lines, Small
Commercial, Middle Market and Specialty Commercial and net income for the Property & Casualty
business as a whole, Ongoing Operations and Other Operations. These ratios and measures may not be
comparable to other performance measures used by the Company’s competitors.
| 2009 | 2008 | 2007 | ||||||||||
|
Ongoing Operations earned premium growth
|
||||||||||||
|
Personal Lines
|
1 | % | 1 | % | 3 | % | ||||||
|
Small Commercial
|
(5 | %) | — | 3 | % | |||||||
|
Middle Market
|
(9 | %) | (5 | %) | (4 | %) | ||||||
|
Specialty Commercial
|
(11 | %) | (4 | %) | (3 | %) | ||||||
|
|
||||||||||||
|
Total Ongoing Operations
|
(5 | %) | (2 | %) | 1 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Ongoing Operations combined ratio
|
||||||||||||
|
|
||||||||||||
|
Combined ratio before catastrophes and prior year development
|
91.7 | 88.9 | 90.5 | |||||||||
|
Catastrophe ratio
|
||||||||||||
|
Current year
|
3.1 | 5.3 | 1.7 | |||||||||
|
Prior years
|
(0.2 | ) | (0.2 | ) | 0.1 | |||||||
|
|
||||||||||||
|
Total catastrophe ratio
|
2.9 | 5.0 | 1.8 | |||||||||
|
Non-catastrophe prior year development
|
(4.2 | ) | (3.2 | ) | (1.5 | ) | ||||||
|
|
||||||||||||
|
Combined ratio
|
90.4 | 90.7 | 90.8 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Other Operations net income (loss)
|
$ | (77 | ) | $ | (97 | ) | $ | 30 | ||||
|
|
||||||||||||
Year ended December 31, 2009 compared to the year ended December 31, 2008
Ongoing Operations earned premium growth
|
Personal Lines
|
•
Earned premium grew 1% in
2009, primarily due to new business
growth on both AARP and Agency,
partially offset by lower average
renewal earned premium on auto
business.
|
|
|
|
||
|
Small Commercial
|
•
The change to a 5% earned
premium decline in 2009 was
primarily attributable to lower
earned audit premium on workers’
compensation business and the effect
of non-renewals outpacing new
business in package business and
commercial auto.
|
|
|
|
||
|
Middle Market
|
•
The steeper earned premium
decline in 2009 was primarily driven
by decreases in general liability,
commercial auto and marine due to
renewal earned pricing decreases and
the effect of non-renewals outpacing
new business.
|
|
|
|
||
|
Specialty Commercial
|
•
Earned premium declined in
all lines of business in 2009,
including a larger decrease in
property earned premium due to the
sale of the Company’s core excess
and surplus lines property business.
|
Ongoing Operations combined ratio
|
Combined ratio before catastrophes
and prior accident years development
|
•
In 2009, the 2.8 point
increase in the combined ratio
before catastrophes and prior
accident year development was
primarily driven by a 1.9 point
increase in the current accident
year loss and loss adjustment
expense ratio before catastrophes
and a 1.2 point increase in the
expense ratio.
|
|
|
|
||
|
|
•
Among other factors, the
increase in the current loss and
loss adjustment expense ratio before
catastrophes was driven by an
increase for Personal Lines auto and
homeowners’ business.
|
|
|
|
||
|
|
•
The increase in the expense
ratio in 2009 period includes the
effects of the decrease in earned
premiums, higher amortization of
Personal Lines acquisition costs and
increased IT costs. The increase in
the expense ratio also includes a
$23 increase in taxes, licenses and
fees due to a $6 increase in the
assessment for a second injury fund
and $17 reserve strengthening for
other state funds and taxes.
Partially offsetting these expense
increases was a $34 decrease in
Texas Windstorm Insurance
Association (“TWIA”) assessments
related to hurricane Ike.
|
|
|
|
||
|
Catastrophes
|
•
The catastrophe ratio
decreased 2.1 points in 2009 as
losses from hurricane Ike in 2008
were higher than catastrophe losses
in 2009 from hail and windstorms in
Colorado, the Midwest and the
Southeast.
|
|
|
|
||
|
Non-catastrophe prior accident years
development
|
•
Favorable reserve
development in 2009 included, among
other reserve changes, the release
of reserves for directors’ and
officers’ claims for accident years
2003 to 2008, the release of
reserves for general liability
claims, primarily related to
accident years 2003 to 2007, and the
release of workers’ compensation
reserves, partially offset by
strengthening of reserves for Small
Commercial package business. See
“Reserve Rollforwards and
Development” in the Critical
Accounting Estimates section of the
MD&A for a discussion of prior
accident year reserve development
for Ongoing Operations in 2009.
|
75
Table of Contents
Other Operations net income (loss)
| • |
Other Operations reported a lower net loss in 2009 as compared to 2008 primarily due to a
decrease in net realized capital losses and a decrease in the allowance for uncollectible
reinsurance as a result of the Company’s annual evaluation of reinsurance recoverables.
Partially offsetting these drivers was an increase in net unfavorable prior accident year
reserve development and a decrease in net investment income. See the Other Operations segment
MD&A for further discussion.
|
Year ended December 31, 2008 compared to the year ended December 31, 2007
Ongoing Operations earned premium growth
|
Personal Lines
|
•
The decrease in the earned
premium growth rate from 2007 to
2008 was due to a significantly
lower growth rate on AARP business
and a change to declining earned
premium in Agency, partially offset
by the effect of the sale of Omni in
2006 which lowered the growth rate
in 2007. Excluding Omni, Personal
Lines earned premium grew 7% in
2007. The effects of larger
declines in auto and homeowners’ new
business premium and a change to
declining homeowners’ renewal
retention since the middle of 2007
were largely offset by the effect of
a change to modest earned pricing
increases in auto.
|
|
|
|
||
|
Small Commercial
|
•
The earned premium growth
rate in 2008 was reduced from
moderate earned premium increases in
2007 to no growth in 2008. The
decrease in the growth rate was
primarily attributable to slightly
larger earned pricing decreases in
2008 compared to 2007 and a change
to decreasing premium renewal
retention since the middle of 2007.
|
|
|
|
||
|
Middle Market
|
•
Earned premium declined in
the mid-single digits in both 2007
and 2008. The effect of slightly
larger earned pricing decreases in
2008 has been largely offset by the
effect of a change to new business
growth since the second quarter of
2008.
|
|
|
|
||
|
Specialty Commercial
|
•
Earned premium decreased by
4% in 2008 compared to a decrease of
3% in 2007. A larger earned premium
decrease in property and a change
from earned premium growth in
professional liability, fidelity and
surety in 2007 to no growth in 2008
was partially offset by an
improvement in the rate of earned
premium decline in casualty.
|
Ongoing Operations combined ratio
|
Combined ratio before catastrophes
and prior accident year development
|
•
The combined ratio before
catastrophes and prior accident year
development decreased by 1.6 points
as the effects of a lower loss and
loss adjustment expense ratio for
Small Commercial and Middle Market
workers’ compensation claims, lower
claim frequency on Personal Lines
auto claims and lower
non-catastrophe losses on Small
Commercial package business were
partially offset by earned pricing
decreases across the commercial
lines businesses and higher
non-catastrophe losses on Middle
Market property and Personal Lines
homeowners’ business.
|
|
|
|
||
|
Catastrophes
|
•
The catastrophe ratio
increased by 3.2 points, primarily
due to an increase in current
accident year catastrophes in 2008,
driven by losses from hurricane Ike
and losses from tornadoes and
thunderstorms in the South and
Midwest.
|
|
|
|
||
|
Non-catastrophe prior accident year
development
|
•
Net non-catastrophe prior
accident year reserve development in
Ongoing Operations was more
favorable in 2008 than in 2007.
Favorable non-catastrophe reserve
development of 3.2 points, or $333,
in 2008 included, among other
reserve changes, a $156 release of
reserves for workers’ compensation
claims, primarily related to
accident years 2000 to 2007, a $105
release of general liability claims,
primarily related to accident years
2001 to 2007, and a $75 release of
reserves for professional liability
claims related to accident years
2003 through 2006. See “Reserve
Rollforwards and Development” in the
Critical Accounting Estimates
Section of the MD&A for a discussion
of prior accident year reserve
development for Ongoing Operations
in 2008.
|
Other Operations net income (loss)
| • |
The change from net income in 2007 to a net loss in 2008 was primarily due to an increase
in net realized capital losses and lower net investment income, partially offset by a decrease
in net unfavorable prior accident year reserve development. See the Other Operations segment
MD&A for further discussion.
|
76
Table of Contents
Investment Results
Composition of Invested Assets
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 after-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.
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
|
Fixed maturities, AFS, at fair value
|
$ | 71,153 | 76.3 | % | $ | 65,112 | 72.9 | % | ||||||||
|
Equity securities, AFS, at fair value
|
1,221 | 1.3 | % | 1,458 | 1.6 | % | ||||||||||
|
Mortgage loans
|
5,938 | 6.4 | % | 6,469 | 7.3 | % | ||||||||||
|
Policy loans, at outstanding balance
|
2,174 | 2.3 | % | 2,208 | 2.5 | % | ||||||||||
|
Limited partnerships and other alternative investments
|
1,790 | 1.9 | % | 2,295 | 2.6 | % | ||||||||||
|
Other investments [1]
|
602 | 0.7 | % | 1,723 | 1.9 | % | ||||||||||
|
Short-term investments
|
10,357 | 11.1 | % | 10,022 | 11.2 | % | ||||||||||
|
|
||||||||||||||||
|
Total investments excluding equity securities, trading
|
$ | 93,235 | 100.0 | % | $ | 89,287 | 100.0 | % | ||||||||
|
Equity securities, trading, at fair value [2]
|
32,321 | 30,820 | ||||||||||||||
|
|
||||||||||||||||
|
Total investments
|
$ | 125,556 | $ | 120,107 | ||||||||||||
|
|
||||||||||||||||
| [1] |
Primarily relates to derivative instruments.
|
|
| [2] |
These assets primarily support the International variable annuity
business. Changes in these balances are also reflected in the
respective liabilities.
|
Total investments increased primarily due to fixed maturities and equity securities, trading,
partially offset by a decline in other investments. The increase in fixed maturities was largely
the result of improved security valuations due to credit spread tightening, partially offset by
rising interest rates, and the maturation of the term lending portion of the securities lending
program of approximately $2.9 billion. The increase in equity securities, trading, resulted from
improved market performance of the underlying investments, partially offset by the yen weakening.
The decline in other investments was primarily due to the change in market value of GMWB hedging
derivatives driven by an increase in the equity markets, rising interest rates and a decline in
equity volatility.
Net Investment Income (Loss)
| For the years ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | |||||||||||||||||||
|
Fixed maturities [2]
|
$ | 3,618 | 4.5 | % | $ | 4,310 | 5.2 | % | $ | 4,653 | 5.8 | % | ||||||||||||
|
Equity securities, AFS
|
93 | 6.5 | % | 167 | 6.9 | % | 139 | 6.6 | % | |||||||||||||||
|
Mortgage loans
|
316 | 5.0 | % | 333 | 5.6 | % | 293 | 6.3 | % | |||||||||||||||
|
Policy loans
|
139 | 6.3 | % | 139 | 6.5 | % | 135 | 6.5 | % | |||||||||||||||
|
Limited partnerships and other alternative
investments
|
(341 | ) | (15.6 | %) | (445 | ) | (4.3 | %) | 255 | 13.3 | % | |||||||||||||
|
Other [3]
|
318 | — | (72 | ) | — | (161 | ) | — | ||||||||||||||||
|
Investment expense
|
(112 | ) | — | (97 | ) | — | (100 | ) | — | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total net investment income excluding equity
securities, trading
|
$ | 4,031 | 4.1 | % | $ | 4,335 | 4.6 | % | $ | 5,214 | 5.9 | % | ||||||||||||
|
Equity securities, trading
|
3,188 | — | (10,340 | ) | — | 145 | — | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total net investment income (loss), before-tax
|
$ | 7,219 | $ | (6,005 | ) | $ | 5,359 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Yields calculated using annualized investment income before
investment expenses divided by the monthly average invested assets
at cost, amortized cost, or adjusted carrying value, as
applicable, excluding collateral received associated with the
securities lending program and consolidated variable interest
entity noncontrolling interests. Included in the fixed maturity
yield is other, which primarily relates to fixed maturities (see
footnote [3] below). Included in the total net investment income
yield is investment expense.
|
|
| [2] |
Includes net investment income on short-term investments.
|
|
| [3] |
Includes income from derivatives that qualify for hedge accounting
and hedge fixed maturities. Also includes fees associated with
securities lending activities of $5, $100 and $138, respectively,
for the years ended December 31, 2009, 2008 and 2007. The income
from securities lending activities is included within fixed
maturities.
|
Year ended December 31, 2009 compared to the year ended December 31, 2008
Total net investment income increased primarily due to equity securities, trading, resulting from
improved market performance of the underlying investment funds supporting the Japanese variable
annuity product. Total net investment income, excluding equity securities, trading, decreased
primarily due to lower income on fixed maturities resulting from a decline in average rates and
fixed maturity investments, as well as an increased average asset base of securities with greater
market liquidity. The decrease was partially offset by an increase in other income from interest
rate swaps hedging variable rate bonds due to a decrease in LIBOR. Also offsetting were decreased
losses on limited partnerships and other alternative investments, primarily within hedge funds.
77
Table of Contents
Year ended December 31, 2008 compared to the year ended December 31, 2007
Total net investment income decreased primarily due to equity securities, trading, resulting from a
decline in the value of the underlying investment funds supporting the Japanese variable annuity
product due to negative market performance year over year. Total net investment income, excluding
equity securities, trading, decreased primarily due to lower income on limited partnerships and
other alternative investments and fixed maturities. The decline in limited partnerships and other
alternative investments yield was largely due to negative returns on hedge funds and real estate
partnerships as a result of the lack of liquidity in the financial markets and a wider credit
spread environment. The decline in fixed maturity income was primarily due to lower yield on
variable rate securities due to declines in short-term interest rates and increased allocation to
lower yielding U.S. Treasuries and short-term investments.
Net Realized Capital Losses
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Gross gains on sales
|
$ | 1,056 | $ | 607 | $ | 374 | ||||||
|
Gross losses on sales
|
(1,397 | ) | (856 | ) | (291 | ) | ||||||
|
Net OTTI losses recognized in earnings
|
(1,508 | ) | (3,964 | ) | (483 | ) | ||||||
|
Japanese fixed annuity contract hedges, net [1]
|
47 | 64 | 18 | |||||||||
|
Periodic net coupon settlements on credit derivatives/Japan
|
(49 | ) | (33 | ) | (25 | ) | ||||||
|
Fair value measurement transition impact [2]
|
— | (650 | ) | — | ||||||||
|
Results of variable annuity hedge program
|
||||||||||||
|
GMWB derivatives, net
|
1,526 | (713 | ) | (286 | ) | |||||||
|
Macro hedge program
|
(895 | ) | 74 | (12 | ) | |||||||
|
|
||||||||||||
|
Total results of variable annuity hedge program
|
631 | (639 | ) | (298 | ) | |||||||
|
Other, net
|
(790 | ) | (447 | ) | (289 | ) | ||||||
|
|
||||||||||||
|
Net realized capital losses, before-tax
|
$ | (2,010 | ) | $ | (5,918 | ) | $ | (994 | ) | |||
|
|
||||||||||||
| [1] |
Relates to derivative hedging instruments, excluding periodic net
coupon settlements, and is net of the Japanese fixed annuity
product liability adjustment for changes in the dollar/yen
exchange spot rate.
|
|
| [2] |
See Note 4a of the Notes to Consolidated Financial Statements.
|
The circumstances giving rise to the Company’s net realized capital gains and losses are as
follows:
|
Gross gains and losses on sales
|
•
Gross gains and losses on
sales for the year ended December
31, 2009 were predominantly within
corporate, government and structured
securities. Also included were
gains of $360 related to the sale of
Verisk/ISO securities. Gross gains
and losses on sales primarily
resulted from efforts to reduce
portfolio risk through sales of
subordinated financials and real
estate related securities and from
sales of U.S. Treasuries to manage
liquidity.
|
|
|
|
||
|
|
•
Gross gains and losses on
sales for the year ended December
31, 2008 primarily resulted from the
decision to reallocate the portfolio
to securities with more favorable
risk/return profiles. Also included
was a gain of $141 from the sale of
a synthetic CDO.
|
|
|
|
||
|
|
•
Gross gains and losses on
sales for the year ended December
31, 2007 were primarily comprised of
corporate, foreign government and
municipal securities.
|
|
|
|
||
|
Net OTTI losses
|
•
For further information, see
Other-Than-Temporary Impairments
within the Investment Credit Risk
section of the MD&A.
|
|
|
|
||
|
Variable annuity hedge program
|
•
For the year ended December
31, 2009, the net gain on GMWB
related derivatives was primarily
due to liability model assumption
updates related to favorable
policyholder experience of $566, the
relative outperformance of the
underlying actively managed funds as
compared to their respective indices
of $550, and the impact of the
Company’s own credit standing of
$154. Additional net gains of $56
resulted from lower implied market
volatility and a general increase in
long-term interest rates, partially
offset by rising equity markets.
Increasing equity markets resulted
in a loss of $895 related to the
Company’s macro hedge program. Total
gains related to GMWB hedging in
2009 were $1.5 billion. For further
information, see Note 4a of the
Notes to Consolidated Financial
Statements. In addition, see the
Company’s variable annuity hedging
program sensitivity disclosures
within Capital Markets Risk
Management section of the MD&A.
|
|
|
|
||
|
|
•
For the year ended December
31, 2008, the net loss on GMWB
derivatives was primarily due to
losses of $904 related to
market-based hedge ineffectiveness
due to extremely volatile capital
markets and $355 related to the
relative underperformance of the
underlying actively managed funds as
compared to their respective
indices, partially offset by gains
of $470 in the fourth quarter
related to liability model
assumption updates for lapse rates.
|
|
|
|
||
|
|
•
For the year ended December
31, 2007, the net loss on GMWB
derivatives was primarily due to
losses of $158 related to liability
model assumption updates and model
refinements made during the year,
including those for dynamic lapse
behavior and correlations of market
returns across underlying indices,
as well as updates to reflect newly
reliable market inputs for
volatility.
|
78
Table of Contents
|
Other, net
|
•
Other, net losses for the year ended December 31, 2009
primarily resulted in net losses of $463 on credit derivatives
where the Company purchased credit protection due to credit
spread tightening, $400 related to net additions to valuation
allowances on impaired mortgage loans, and approximately $300
from contingent obligations associated with the Allianz
transaction. These losses were partially offset by gains of
$155 on credit derivatives that assume credit risk due to
credit spread tightening, as well as $140 from a change in spot
rates related to transactional foreign currency predominately
on the internal reinsurance of the Japan variable annuity
business, which is offset in accumulated other comprehensive
income (loss) (“AOCI”).
|
|
|
|
||
|
|
•
Other, net losses for the year ended December 31, 2008
were primarily due to net losses of $291 related to
transactional foreign currency losses predominately on the
internal reinsurance of the Japan variable annuity business,
which is offset in AOCI, resulting from appreciation of the
Yen, as well as credit derivative losses of $312 due to
significant credit spread widening. Also included were
derivative related losses of $46 due to counterparty default
related to the bankruptcy of Lehman Brothers Holdings Inc.
|
|
|
|
||
|
|
•
Other, net losses for the year ended December 31, 2007
were primarily driven by the change in value of non-qualifying
derivatives due to credit spread widening, as well as
fluctuations in interest rates and foreign currency exchange
rates.
|
79
Table of Contents
RETAIL
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Fee income and other
|
$ | 2,139 | $ | 2,757 | $ | 3,117 | ||||||
|
Earned premiums
|
(7 | ) | (4 | ) | (62 | ) | ||||||
|
Net investment income
|
750 | 747 | 801 | |||||||||
|
Net realized capital losses
|
(7 | ) | (1,910 | ) | (381 | ) | ||||||
|
|
||||||||||||
|
Total revenues [1]
|
2,875 | 1,590 | 3,475 | |||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
1,310 | 1,008 | 820 | |||||||||
|
Insurance operating costs and other expenses
|
1,049 | 1,187 | 1,221 | |||||||||
|
Amortization of deferred policy acquisition costs
and present value of future profits
|
1,389 | 1,344 | 406 | |||||||||
|
Goodwill impairment
|
— | 422 | — | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
3,748 | 3,961 | 2,447 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
(873 | ) | (2,371 | ) | 1,028 | |||||||
|
Income tax expense (benefit)
|
(463 | ) | (972 | ) | 216 | |||||||
|
|
||||||||||||
|
Net income (loss) [2]
|
$ | (410 | ) | $ | (1,399 | ) | $ | 812 | ||||
|
|
||||||||||||
| Assets Under Management | 2009 | 2008 | 2007 | |||||||||
|
Individual variable annuity account values
|
$ | 84,679 | $ | 74,578 | $ | 119,071 | ||||||
|
Individual fixed annuity and other account values
|
12,110 | 11,278 | 10,243 | |||||||||
|
Other retail products account values
|
— | 398 | 677 | |||||||||
|
|
||||||||||||
|
Total account values [3]
|
96,789 | 86,254 | 129,991 | |||||||||
|
|
||||||||||||
|
Retail mutual fund assets under management
|
42,829 | 31,032 | 48,383 | |||||||||
|
Other mutual fund assets under management
|
1,202 | 1,678 | 2,113 | |||||||||
|
|
||||||||||||
|
Total mutual fund assets under management
|
44,031 | 32,710 | 50,496 | |||||||||
|
|
||||||||||||
|
Total assets under management
|
$ | 140,820 | $ | 118,964 | $ | 180,487 | ||||||
|
|
||||||||||||
| Account Value and Assets Under Management Roll Forward | 2009 | 2008 | 2007 | |||||||||
|
Individual Variable Annuities
|
||||||||||||
|
Account value, beginning of period
|
$ | 74,578 | $ | 119,071 | $ | 114,365 | ||||||
|
Net flows
|
(7,122 | ) | (6,235 | ) | (2,733 | ) | ||||||
|
Change in market value and other
|
17,223 | (38,258 | ) | 7,439 | ||||||||
|
|
||||||||||||
|
Account value, end of period
|
$ | 84,679 | $ | 74,578 | $ | 119,071 | ||||||
|
|
||||||||||||
|
Retail Mutual Funds
|
||||||||||||
|
Assets under management, beginning of period
|
$ | 31,032 | $ | 48,383 | $ | 38,536 | ||||||
|
Net sales
|
2,004 | 2,840 | 5,545 | |||||||||
|
Change in market value and other
|
9,793 | (20,191 | ) | 4,302 | ||||||||
|
|
||||||||||||
|
Assets under management, end of period
|
$ | 42,829 | $ | 31,032 | $ | 48,383 | ||||||
|
|
||||||||||||
| Net Investment Spread | 2009 | 2008 | 2007 | |||||||||
|
Individual Annuities
|
||||||||||||
|
Individual Annuity
|
28 | bps | 73 | bps | 174 | bps | ||||||
| Expense Ratios | 2009 | 2008 | 2007 | |||||||||
|
Individual Annuities
|
||||||||||||
|
General insurance expense ratio
|
21.0 | bps | 21.0 | bps | 17.9 | bps | ||||||
|
DAC amortization ratio [4]
|
244.3 | % | 218.5 | % | 25.5 | % | ||||||
|
DAC amortization ratio, excluding realized losses and DAC
Unlocks [4] [5]
|
61.6 | % | 65.2 | % | 47.9 | % | ||||||
| [1] |
For the year ended December 31, 2008, the transition impact related to the adoption of fair value accounting guidance was
a reduction in revenues of $616. For further discussion of the fair value guidance transition impact, see Note 4a of the
Notes to Consolidated Financial Statements.
|
|
| [2] |
For the year ended December 31, 2008, the transition impact related to the adoption of fair value accounting guidance was
a reduction in net income of $209. For further discussion of the fair value guidance transition impact, see Note 4a of
the Notes to Consolidated Financial Statements.
|
|
| [3] |
Includes policyholders’ balances for investment contracts and reserves for future policy benefits for insurance contracts.
|
|
| [4] |
Excludes the effects of realized gains and losses.
|
|
| [5] |
See Unlock discussion.
|
Retail focuses on the savings and retirement needs of the growing number of individuals who
are preparing for retirement, or have already retired, through the sale of individual variable and
fixed annuities, mutual funds and other investment products. Life is both a writer of individual
variable annuities and a seller of individual variable annuities through banks in the United
States.
80
Table of Contents
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net loss improved primarily due to lower net realized capital losses as a result of gains in the
variable annuity hedge program in 2009 compared with losses in 2008; 2008 also included the
transition impact related to the adoption of fair value accounting guidance, which resulted in a
reduction in net income of $209. Additionally, impairment losses were higher in 2008. Also
contributing to the lower net loss was the impairment of goodwill attributed to the individual
annuity line of business in 2008. These items were offset partially by lower fee income.
For further discussion of the fair value guidance transition impact, see Note 4 of the Notes to
Consolidated Financial Statements. For further discussion of the 2009 and 2008 Unlocks, see
Unlocks within the Critical Accounting Estimates section of the MD&A. The following other factors
contributed to the changes in net income:
|
Fee income and other
|
•
Fee income and other
decreased primarily as a result of
lower variable annuity and mutual
fund fee income due to a decline in
average account values. Average
variable annuity account values
declined from $99.8 billion in 2008
to $77.3 billion in 2009 driven by
net outflows of $7.1 billion during
2009 as well as the effect of the
equity market declines in 2008 and
the first quarter of 2009. Net
outflows were driven by surrender
activity resulting from the aging of
the variable annuity in-force block
of business; lower deposits driven
by increased competition,
particularly competition related to
guaranteed living benefits, and
volatility in the equity markets.
Average retail mutual fund assets
under management declined from $42.4
billion to $35.5 billion driven
primarily by the effect of the
equity market declines in 2008 and
the first quarter of 2009, partially
offset by net flows of $2.0 billion
during 2009.
|
|
|
|
||
|
Net investment income
|
•
Net investment income in
2009 was relatively consistent with
2008 as increased derivative income
and an increase in general account
assets was largely offset by
maintaining a greater percentage of
assets in short-term investments and
lower yields on fixed maturities.
|
|
|
|
||
|
Net investment spread
|
•
The drop in net investment
spread is primarily related to lower
earnings on fixed maturities of 15
bps, higher average crediting rates
of 14 bps, lower partnership returns
of 8 bps and lower earnings on
equities of 4 bps. The decline in
fixed maturity returns was primarily
related to a higher percentage of
fixed maturities being held in
short-term investments.
|
|
|
|
||
|
Net realized capital losses
|
•
Net realized capital losses
decreased as a result of the
recognition of $1.5 billion of gains
on GMWB derivatives in 2009 compared
with losses of $631 in 2008; the
transition impact related to the
adoption of fair value accounting
guidance, which resulted in losses
of $616 in 2008; and impairment
losses of $263 in 2009 compared with
$474 in 2008. Partially offsetting
these items were losses of $733 in
2009 related to the Company’s macro
hedge program compared with gains of
$40 in 2008 and net losses on sales
of $329 in 2009 compared with net
losses of $31 in 2008.
|
|
|
|
||
|
Benefits, losses and loss adjustment
expenses
|
•
Benefits, losses and loss
adjustment expenses increased
primarily as a result of the net
impact of the Unlocks over the last
twelve months, which increased the
benefit ratio used in the
calculation of GMDB reserves.
|
|
|
|
||
|
Insurance operating costs and other
expenses
|
•
Insurance operating costs
and other expenses decreased
primarily as a result of lower asset
based trail commissions due to
equity market declines, as well as
ongoing efforts to actively reduce
operating expenses.
|
|
|
|
||
|
General insurance expense ratio
|
•
The general expense ratio
has remained flat as a result of
management’s efforts to reduce
expenses, offset by a decline in the
average asset base.
|
|
|
|
||
|
Amortization of DAC
|
•
Amortization of DAC
increased primarily due to the
higher individual annuity DAC
amortization rate in 2009 as
compared to 2008 due primarily to
Unlock assumption changes made in
2008 and 2009 and lower gross
profits in 2009. Additionally, the
adoption of fair value accounting
guidance at the beginning of the
first quarter of 2008 resulted in a
DAC benefit.
|
|
|
|
||
|
DAC amortization ratio, excluding
realized losses and DAC Unlocks
|
•
The Retail DAC amortization
ratio, excluding realized losses and
DAC Unlocks, decreased due to the
impairment of goodwill in the fourth
quarter of 2008, which reduced
pre-tax earnings but did not affect
EGPs. Excluding the impacts of the
goodwill impairment, realized losses
and DAC Unlock, the DAC amortization
ratio was 43.3%. The 61.6% ratio in
2009 reflects lower EGPs driven by
lower fee income due to declines in
average account value and lower net
investment income due to a greater
percentage of fixed maturities being
held in short-term investment and
lower returns on investments in
limited partnerships and other
alternative investments.
|
|
|
|
||
|
Income tax benefit
|
•
The income tax benefit is
primarily due to the pre-tax losses
driven by the factors discussed
previously. 2009 included a higher
DRD benefit than 2008. The
difference from a 35% tax rate is
primarily due to the recognition of
tax benefits associated with the DRD
and foreign tax credits.
|
81
Table of Contents
Year ended December 31, 2008 compared to the year ended December 31, 2007
Net income decreased primarily as a result of increased realized capital losses, the impact of the
2008 Unlock charge, the impairment of goodwill attributed to the individual annuity line of
business and the effect of equity market declines on variable annuity and mutual fund fee income.
For further discussion of the fair value accounting guidance transition impact, see Note 4 of the
Notes to Consolidated Financial Statements. For further discussion of the 2008 and 2007 Unlock,
see Unlocks within the Critical Accounting Estimates section of the MD&A. For further discussion
of goodwill impairments, see Note 8 of the Notes to Consolidated Financial Statements. The
following other factors contributed to the changes in net income:
|
Fee income and other
|
•
Fee income and other
decreased $360 primarily as a result
of lower variable annuity fee income
due to a decline in average account
values. The decrease in average
variable annuity account values can
be attributed to market depreciation
of $38.2 billion and net outflows of
$6.2 billion during the year. Net
outflows were driven by surrender
activity resulting from the aging of
the variable annuity in-force block
of business; increased competition,
particularly competition related to
guaranteed living benefits, and
volatility in the equity markets.
Also contributing to the decrease in
fee income was lower mutual fund
fees due to declining assets under
management primarily driven by
market depreciation of $20.1
billion, partially offset by $2.8
billion of net flows.
|
|
|
|
||
|
Earned premiums
|
•
Earned Premiums increased
primarily due to an increase in life
contingent premiums combined with a
decrease in reinsurance premiums as
a result of the lapsing of business
covered by reinsurance and the
significant decline in the equity
markets.
|
|
|
|
||
|
Net investment income
|
•
Net investment income was
lower primarily due to a $77 decline
in income from limited partnerships
and other alternative investments,
combined with lower yields on fixed
maturity investments due to interest
rate declines, partially offset by
an increase in general account
assets from increased fixed account
sales.
|
|
|
|
||
|
Net investment spread
|
•
The decline in net
investment spread is attributable to
lower fixed income returns of 62 bps
and lower limited partnership
returns of 45 bps, partially offset
by a reduction in the average
credited rate of 3 bps. The decline
in fixed maturity returns was
primarily related to a higher
percentage of fixed maturities being
held in short-term investments.
|
|
|
|
||
|
Net realized capital losses
|
•
Net realized capital losses
increased primarily as a result of
losses on GMWB derivatives of $631
in 2008 compared with losses of $286
in 2007; the transition impact
related to the adoption of fair
value accounting guidance, which
resulted in losses of $616 in 2008;
and impairments of $474 in 2008
compared with $87 in 2007.
|
|
|
|
||
|
Benefits, losses and loss adjustment
expenses
|
•
Benefits, losses and loss
adjustment expenses increased
primarily as a result of the impact
of the 2008 Unlock which increased
the benefit ratio used in the
calculation of GMDB reserves.
|
|
|
|
||
|
Insurance operating costs and other
expenses
|
•
Insurance operating costs
and other expenses decreased
primarily as a result of lower non
deferrable asset based trail
commissions due to equity market
declines.
|
|
|
|
||
|
General insurance expense ratio
|
•
The general insurance
expense ratio increased due to the
impact of a declining asset base on
relatively consistent expenses.
|
|
|
|
||
|
Amortization of DAC
|
•
Amortization of DAC
increased primarily due to the
impact of the 2008 Unlock charge as
compared to the 2007 Unlock benefit.
This was partially offset by a DAC
benefit associated with the adoption
of fair value accounting guidance at
the beginning of the first quarter
of 2008.
|
|
|
|
||
|
DAC amortization ratio, excluding
realized losses and DAC Unlocks
|
•
The Retail DAC amortization
ratio, excluding realized losses and
DAC Unlocks, increased due to the
impairment of goodwill in the fourth
quarter of 2008, which reduced
pre-tax earnings but did not affect
EGPs. Excluding the impacts of the
goodwill impairment, realized
losses, and DAC Unlock, the 2008 DAC
amortization ratio was 43.3%, which
reflects the 2008 effect of changes
in assumptions made as part of the
2007 and 2008 Unlocks.
|
|
|
|
||
|
Goodwill impairment
|
•
As a result of testing
performed during the fourth quarter
of 2008, all goodwill attributed to
the individual annuity business in
Retail was deemed to be impaired and
was written down to $0. For further
discussion of this impairment, see
Note 8 in the Notes to Consolidated
Financial Statements.
|
|
|
|
||
|
Income tax expense (benefit)
|
•
The effective tax rate
increased from 21% to 41% for the
year ended December 31, 2008 as
compared to the prior year primarily
due to losses before income taxes in
2008 compared to pre-tax earnings in
2007. The impact of DRD and other
permanent differences caused an
increase in the tax benefit to above
35% on the 2008 pre-tax loss and a
decrease in the tax expense on the
2007 pre-tax income.
|
82
Table of Contents
INDIVIDUAL LIFE
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Fee income and other
|
$ | 1,027 | $ | 899 | $ | 870 | ||||||
|
Earned premiums
|
(87 | ) | (71 | ) | (62 | ) | ||||||
|
Net investment income
|
335 | 338 | 359 | |||||||||
|
Net realized capital losses
|
(145 | ) | (252 | ) | (28 | ) | ||||||
|
|
||||||||||||
|
Total revenues
|
1,130 | 914 | 1,139 | |||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
640 | 627 | 562 | |||||||||
|
Insurance operating costs and other expenses
|
188 | 202 | 193 | |||||||||
|
Amortization of deferred policy acquisition costs and
present value of future profits
|
314 | 169 | 121 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
1,142 | 998 | 876 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
(12 | ) | (84 | ) | 263 | |||||||
|
Income tax expense (benefit)
|
(27 | ) | (41 | ) | 81 | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 15 | $ | (43 | ) | $ | 182 | |||||
|
|
||||||||||||
| Account Values | 2009 | 2008 | 2007 | |||||||||
|
Variable universal life insurance
|
$ | 5,766 | $ | 4,802 | $ | 7,284 | ||||||
|
Universal life/interest sensitive whole life
|
5,071 | 4,727 | 4,388 | |||||||||
|
Modified guaranteed life and other
|
622 | 653 | 677 | |||||||||
|
|
||||||||||||
|
Total account values
|
$ | 11,459 | $ | 10,182 | $ | 12,349 | ||||||
|
|
||||||||||||
|
Life Insurance In-force
|
||||||||||||
|
Variable universal life insurance
|
$ | 78,671 | $ | 78,853 | $ | 77,566 | ||||||
|
Universal life/interest sensitive whole life
|
55,169 | 52,356 | 48,636 | |||||||||
|
Term life
|
69,932 | 63,334 | 52,298 | |||||||||
|
Modified guaranteed life and other
|
897 | 921 | 983 | |||||||||
|
|
||||||||||||
|
Total life insurance in-force
|
$ | 204,669 | $ | 195,464 | $ | 179,483 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Investment Spread
|
81 | bps | 90 | bps | 130 | bps | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Death Benefits
|
$ | 346 | $ | 359 | $ | 298 | ||||||
|
|
||||||||||||
Individual Life provides life insurance solutions to a wide array of business intermediaries to
solve the wealth protection, accumulation and transfer needs of their affluent, emerging affluent
and small business insurance clients.
83
Table of Contents
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net income increased for the year ended December 31, 2009, driven primarily by lower net realized
capital losses. The following other factors contributed to the changes in net income:
|
Fee income and other
|
•
Fee income and other
increased primarily due to the
impact of the 2009 Unlock
“amortization of” unearned revenue
reserves of $83 and increased cost
of insurance charges of $38 as a
result of growth in guaranteed
universal life insurance in-force,
partially offset by lower variable
life fees as a result of equity
market declines. For further
discussion on the Unlock, see the
Critical Accounting Estimates
section of the MD&A.
|
|
|
|
||
|
Earned premiums
|
•
Earned premiums, which
include premiums for ceded
reinsurance, decreased primarily
due to increased ceded reinsurance
premiums due to aging and growth in
life insurance in-force.
|
|
|
|
||
|
Net investment spread
|
•
Net investment spread was
lower due to a $3 decline in
investment income and a $2 increase
in interest credited. Interest
credited increased due primarily to
increased average account values,
partially offset by a reduction in
the average credited rate of 18
bps.
|
|
|
|
||
|
Net realized capital losses
|
•
Net realized capital losses
improved primarily related to lower
losses from impairments. For
further discussion on impairments,
see Other-Than-Temporary
Impairments within the Investment
Credit Risk section of the MD&A.
|
|
|
|
||
|
Benefits, losses and loss adjustment
expenses
|
•
Benefits, losses and loss
adjustment expenses increased
primarily related to reserve
increases on secondary guaranteed
universal life products due to
aging and growth in life insurance
in-force, partially offset by
favorable mortality experience.
|
|
|
|
||
|
Death benefits
|
•
Death benefits decreased
due to favorable mortality
partially offset by an increase in
net amount at risk for variable
universal life policies caused by
equity market declines.
|
|
|
|
||
|
Insurance operating costs and other
expenses
|
•
Insurance operating costs
and other expenses decreased
primarily as a result of continued
active expense management efforts.
|
|
|
|
||
|
Amortization of DAC
|
•
Amortization of DAC
increased primarily as a result of
the additional Unlock charges in
2009 compared to 2008. DAC
amortization had a partial offset
in amortization of unearned revenue
reserves, which drove the increase
in fee income noted above.
|
|
|
|
||
|
Income tax benefit
|
•
Income tax benefit
decreased as a result of improved
earnings before income taxes
primarily due to lower net realized
capital losses and the effects of
the 2009 Unlocks. The effective
tax rate for 2009 differs from the
statutory rate of 35% primarily due
to the recognition of the DRD.
|
84
Table of Contents
Year ended December 31, 2008 compared to the year ended December 31, 2007
Net income decreased for the year ended December 31, 2008, driven primarily by significantly higher
net realized capital losses and the impacts of the Unlock in 2008 as compared to 2007. For further
discussion on the Unlock, see Unlocks within the Critical Accounting Estimates section of the MD&A.
The following other factors contributed to the changes in net income:
|
Fee income and other
|
•
Fee income and other
increased primarily due to an
increase in cost of insurance
charges of $45 as a result of
growth in guaranteed universal life
insurance in-force and fees on
higher surrenders of $12 due to
internal exchanges from
non-guaranteed universal life
insurance to variable universal
life insurance. Partially
offsetting these increases are the
impacts of the 2008 and 2007
Unlocks as well as lower variable
life fees as a result of equity
market declines.
|
|
|
|
||
|
Earned premiums
|
•
Earned premiums, which
include premiums for ceded
reinsurance, decreased primarily
due to increased ceded reinsurance
premiums due to life insurance
in-force growth.
|
|
|
|
||
|
Net investment income
|
•
Net investment income
decreased primarily due to lower
income from limited partnerships
and other alternative investments,
lower yields on fixed maturity
investments, and reduced net
investment income associated with a
more efficient capital approach for
our secondary guarantee universal
life business, which released
assets supporting capital and the
related net investment income
earned on those assets (described
further in the “Outlook” section),
partially offset by growth in
general account values.
|
|
|
|
||
|
Net investment spread
|
•
The decrease in net
investment spread was attributable
to lower limited partnership
returns of 52 bps and lower fixed
maturity income returns, partially
offset by a reduction in the
credited rate of 23 bps.
|
|
|
|
||
|
Net realized capital losses
|
•
Net realized capital losses
increased primarily related to
losses from impairments. For
further discussion on impairments,
see Other-Than-Temporary
Impairments within the Investment
Credit Risk section of the MD&A.
|
|
|
|
||
|
Benefits, losses and loss adjustment
expenses
|
•
Benefits, losses and loss
adjustment expenses increased as a
result of higher death benefits
consistent with a larger life
insurance in-force and unfavorable
mortality, as well as the impact of
the 2008 Unlock.
|
|
|
|
||
|
Death benefits
|
•
Death benefits increased,
primarily due to growth of life
insurance in-force and unfavorable
mortality.
|
|
|
|
||
|
Insurance operating costs and other
expenses
|
•
Insurance operating costs
and other increased less than the
growth of in-force business as a
result of active expense management
efforts.
|
|
|
|
||
|
Amortization of DAC
|
•
Amortization of DAC
increased primarily as a result of
the Unlock expense in 2008 as
compared to the Unlock benefit in
2007, partially offset by reduced
DAC amortization primarily
attributed to net realized capital
losses. This increase in DAC
amortization had a partial offset
in amortization of unearned revenue
reserves, included in fee income.
|
|
|
|
||
|
Income tax expense (benefit)
|
•
Income tax benefits were a
result of lower income before
income taxes primarily due to an
increase in net realized capital
losses and DAC amortization.
|
85
Table of Contents
GROUP BENEFITS
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Premiums and other considerations
|
$ | 4,350 | $ | 4,391 | $ | 4,301 | ||||||
|
Net investment income
|
403 | 419 | 465 | |||||||||
|
Net realized capital losses
|
(124 | ) | (540 | ) | (30 | ) | ||||||
|
|
||||||||||||
|
Total revenues
|
4,629 | 4,270 | 4,736 | |||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
3,196 | 3,144 | 3,109 | |||||||||
|
Insurance operating costs and other expenses
|
1,120 | 1,128 | 1,131 | |||||||||
|
Amortization of deferred policy acquisition costs
|
61 | 57 | 62 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
4,377 | 4,329 | 4,302 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
252 | (59 | ) | 434 | ||||||||
|
Income tax expense (benefit)
|
59 | (53 | ) | 119 | ||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 193 | $ | (6 | ) | $ | 315 | |||||
|
|
||||||||||||
| Earned Premiums and Other | 2009 | 2008 | 2007 | |||||||||
|
Fully insured — ongoing premiums
|
$ | 4,309 | $ | 4,355 | $ | 4,239 | ||||||
|
Buyout premiums
|
— | 1 | 27 | |||||||||
|
Other
|
41 | 35 | 35 | |||||||||
|
|
||||||||||||
|
Total earned premiums and other
|
$ | 4,350 | $ | 4,391 | $ | 4,301 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Fully insured ongoing sales, excluding buyouts
|
$ | 741 | $ | 820 | $ | 770 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Persistency
|
87 | % | 89 | % | 87 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Ratios, excluding buyouts
|
||||||||||||
|
Loss ratio
|
73.5 | % | 71.6 | % | 72.1 | % | ||||||
|
Loss ratio, excluding financial institutions
|
77.8 | % | 76.3 | % | 77.3 | % | ||||||
|
Expense ratio
|
27.1 | % | 27.0 | % | 27.9 | % | ||||||
|
Expense ratio, excluding financial institutions
|
22.6 | % | 22.4 | % | 23.0 | % | ||||||
The Group Benefits segment provides employers, associations, affinity groups and financial
institutions with group life, accident and disability coverage, along with other products and
services, including voluntary benefits, and group retiree health. The Company also offers
disability underwriting, administration, claims processing services and reinsurance to other
insurers and self-funded employer plans.
Group Benefits has a block of financial institution business that is experience rated. This
business comprised approximately 9% to 10% of the segment’s 2009, 2008 and 2007 premiums and other
considerations (excluding buyouts) respectively, and, on average, 2% to 4% of the segment’s 2009,
2008 and 2007 net income (loss), excluding realized capital losses and the commission accrual
adjustment in 2009 discussed below.
86
Table of Contents
Year ended December 31, 2009 compared to the year ended December 31, 2008
The increase in net income for the year ended December 31, 2009, was primarily due to lower net
realized capital losses in 2009. The following other factors contributed to the changes in net
income:
|
Premiums and other
considerations
|
•
Premiums and other considerations decreased primarily due to reductions in covered lives within
our customer base.
|
|
|
|
||
|
Net investment income
|
•
Net investment income decreased primarily as a result of lower yields on fixed maturity
investments.
|
|
|
|
||
|
Net realized capital losses
|
•
Lower net realized capital losses were primarily driven by fewer impairments in 2009 compared to
2008. For further discussion on impairments, see Other-Than-Temporary Impairments within the Investment
Credit Risk section of the MD&A.
|
|
|
|
||
|
Loss ratio
|
•
The segment’s loss ratio increased primarily due to unfavorable morbidity experience, which was
primarily due to unfavorable reserve development from the 2008 incurral loss year and higher new incurred
long-term disability claims in 2009.
|
|
|
|
||
|
Expense ratio
|
•
The segment’s expense ratio, excluding buyouts increased compared to the prior year due primarily
to a commission accrual adjustment recorded in 2009 on financial institutions business.
|
|
|
|
||
|
Income tax expense
(benefit)
|
•
Income tax expense increased as a result of improved earnings before income taxes primarily due to
lower net realized capital losses. The effective tax rate for 2009 differs from the statutory rate of 35%
primarily due to investments in tax exempt securities.
|
|
|
|
||
|
Fully insured
ongoing sales,
excluding buyouts
|
•
Fully insured ongoing sales, excluding buyouts, decreased in 2009 from 2008 primarily due to the
competitive marketplace and economic environment.
|
Year ended December 31, 2008 compared to the year ended December 31, 2007
The decrease in net income for the year ended December 31, 2008, was primarily due to increased net
realized capital losses.
|
Premiums and other considerations
|
•
Premiums and other
considerations increased largely due
to business growth driven by new
sales and persistency over the last
twelve months.
|
|
|
|
||
|
Net investment income
|
•
Net investment income
decreased primarily as a result of
lower yields on fixed maturity
investments and lower limited
partnership and other alternative
investment returns of $33.
|
|
|
|
||
|
Net realized capital losses
|
•
Higher net realized capital
losses were primarily driven by
higher impairments in 2008 compared
to 2007. For further discussion on
impairments, see
Other-Than-Temporary Impairments
within the Investment Credit Risk
section of the MD&A.
|
|
|
|
||
|
Loss ratio
|
•
The segment’s loss ratio
decreased due to favorable
disability and medical stop loss
experience partially offset by
unfavorable mortality.
|
|
|
|
||
|
Expense ratio
|
•
The segment’s expense ratio,
excluding buyouts decreased compared
to the prior year due primarily to
lower commission expenses.
|
|
|
|
||
|
Income tax expense (benefit)
|
•
2008 had an income tax
benefit compared to an income tax
expense in 2007 as a result of
higher net realized capital losses.
The effective tax rate for 2008
differs from the statutory rate of
35% primarily due to investments in
tax exempt securities.
|
87
Table of Contents
RETIREMENT PLANS
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Fee income and other
|
$ | 321 | $ | 334 | $ | 238 | ||||||
|
Earned premiums
|
3 | 4 | 4 | |||||||||
|
Net investment income
|
315 | 342 | 355 | |||||||||
|
Net realized capital losses
|
(333 | ) | (272 | ) | (41 | ) | ||||||
|
|
||||||||||||
|
Total revenues
|
306 | 408 | 556 | |||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
269 | 271 | 249 | |||||||||
|
Insurance operating costs and other expenses
|
346 | 335 | 170 | |||||||||
|
Amortization of deferred policy acquisition costs and present value of future profits
|
56 | 91 | 58 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
671 | 697 | 477 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
(365 | ) | (289 | ) | 79 | |||||||
|
Income tax expense (benefit)
|
(143 | ) | (132 | ) | 18 | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (222 | ) | $ | (157 | ) | $ | 61 | ||||
|
|
||||||||||||
| Assets Under Management | 2009 | 2008 | 2007 | |||||||||
|
403(b)/457 account values
|
$ | 11,116 | $ | 10,242 | $ | 12,363 | ||||||
|
401(k) account values
|
16,142 | 11,956 | 14,731 | |||||||||
|
|
||||||||||||
|
Total account values [1]
|
27,258 | 22,198 | 27,094 | |||||||||
|
|
||||||||||||
|
403(b)/457 mutual fund assets under management
|
245 | 99 | 26 | |||||||||
|
401(k) mutual fund assets under management [2]
|
16,459 | 14,739 | 1,428 | |||||||||
|
|
||||||||||||
|
Total mutual fund assets under management
|
16,704 | 14,838 | 1,454 | |||||||||
|
|
||||||||||||
|
Total assets under management
|
$ | 43,962 | $ | 37,036 | $ | 28,548 | ||||||
|
|
||||||||||||
|
Total assets under administration — 401(k) [3]
|
$ | 5,588 | $ | 5,122 | $ | — | ||||||
|
|
||||||||||||
| Account Value and Assets Under Management Roll Forward | 2009 | 2008 | 2007 | |||||||||
|
Retirement Plans Group Annuities
|
||||||||||||
|
Account value, beginning of period
|
$ | 22,198 | $ | 27,094 | $ | 23,575 | ||||||
|
Net flows
|
563 | 2,418 | 1,669 | |||||||||
|
Change in market value and other
|
4,497 | (7,314 | ) | 1,850 | ||||||||
|
|
||||||||||||
|
Account value, end of period
|
$ | 27,258 | $ | 22,198 | $ | 27,094 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Retirement Plans Mutual Funds
|
||||||||||||
|
Assets under management, beginning of period
|
$ | 14,838 | $ | 1,454 | $ | 1,140 | ||||||
|
Net sales/(redemptions)
|
(1,705 | ) | (446 | ) | 103 | |||||||
|
Acquisitions
|
— | 18,725 | — | |||||||||
|
Change in market value and other
|
3,571 | (4,895 | ) | 211 | ||||||||
|
|
||||||||||||
|
Assets under management, end of period
|
$ | 16,704 | $ | 14,838 | $ | 1,454 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Investment Spread
|
66 | bps | 92 | bps | 162 | bps | ||||||
|
|
||||||||||||
| [1] |
Includes policyholder balances for investment contracts and reserves for future policy benefits for insurance contracts.
|
|
| [2] |
During the year ended December 31, 2008, Life acquired the rights to service mutual fund assets from Sun Life
Retirement Services, Inc., and Princeton Retirement Group.
|
|
| [3] |
During the year ended December 31, 2008, Life acquired the rights to service assets under administration (“AUA”) from
Princeton Retirement Group. Servicing revenues from AUA are based on the number of plan participants and do not vary
directly with asset levels. As such, they are not included in assets under management upon which asset based returns
are calculated.
|
The Retirement Plans segment primarily offers customized wealth creation and financial
protection for corporate, government and tax-exempt employers through its two business units,
403(b)/457 and 401(k).
88
Table of Contents
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net loss in Retirement Plans increased due to an increase in net realized capital losses, lower net
investment income and lower fee income. For further discussion of the Unlock, see Unlocks within
the Critical Accounting Estimates section of the MD&A. The following other factors contributed to
the changes in net loss:
|
Fee income and other
|
•
Fee income and other decreased primarily due to lower average account values.
Despite equity market improvements during the last nine months of 2009, account values
have not returned to early 2008 levels. Net flows in group annuities and net sales in
mutual funds have declined due primarily to a few large case surrenders.
|
|
|
|
||
|
Net investment
income
|
•
Net investment income decreased primarily as a result of lower yields on fixed
maturity investments partially offset by an increase in derivative income.
|
|
|
|
||
|
Net investment
spread
|
•
The decline in net investment spread is attributable to lower fixed income
returns of 34 bps and lower partnership returns of 3 bps, partially offset by a reduction
in credited rates of 10 bps.
|
|
|
|
||
|
Net realized
capital losses
|
•
Net realized capital losses increased primarily as a result of realized losses of
$56 on non-qualifying derivatives in 2009 compared with $14 of gains in 2008 and mortgage
valuation allowances of $38 in 2009, partially offset by OTTI impairment losses of $178
in 2009 compared with $243 in 2008.
|
|
|
|
||
|
Insurance operating
costs and other
expenses
|
•
Insurance operating costs and other expenses increased primarily due to a full
year of operating expenses associated with the businesses acquired in the latter part of
the first quarter of 2008 and lower deferrable acquisition expenses due to low sales
levels, partially offset by expense management initiatives.
|
|
|
|
||
|
Amortization of DAC
|
•
Amortization of DAC decreased as a result of lower gross profits in 2009 than
2008.
|
|
|
|
||
|
Income tax benefit
|
•
The income tax benefit is greater than the prior year income tax benefit due to a
higher loss before income taxes primarily due to the income items discussed above. The
effective tax rate differs from the statutory rate of 35% primarily due to the
recognition of the DRD.
|
Year ended December 31, 2008 compared to the year ended December 31, 2007
Net income in Retirement Plans decreased due to higher net realized capital losses, the DAC Unlock
in 2008 as compared to 2007 and increased operating expenses partially offset by growth in fee
income. For further discussion of the 2008 and 2007 Unlocks, see Unlocks within the Critical
Accounting Estimates section of the MD&A. The following other factors contributed to the changes
in net income:
|
Fee income and other
|
•
Fee income and other
increased primarily due to $109 of
fees earned on assets relating to
the acquisitions in the first
quarter of 2008. Offsetting this
increase was lower annuity fees
driven by lower average account
values as a result of market
depreciation of $7.3 billion,
partially offset by positive net
flows of $2.4 billion over the past
four quarters. Group annuities had
positive net flows driven by higher
deposits as a result of the expanded
sales force obtained through the
2008 acquisitions.
|
|
|
|
||
|
Net investment income
|
•
Net investment income
declined due to a decrease in the
returns from limited partnerships
and other alternative investments
income of $33, partially offset by
growth in general account assets.
|
|
|
|
||
|
Net investment spread
|
•
The decline in net
investment spread is attributable to
lower limited partnership returns of
50 bps and lower fixed income
returns of 25 bps, partially offset
by a reduction in credited rates of
6 bps.
|
|
|
|
||
|
Net realized capital losses
|
•
Net realized capital losses
increased primarily due to
impairment losses of $243 in 2008
compared with losses of $22 in 2007.
|
|
|
|
||
|
Insurance operating costs and other
expenses
|
•
Insurance operating costs
and other expenses increased
primarily attributable to operating
expenses associated with the
acquired businesses. Also
contributing to higher insurance
operating costs were higher trail
commissions resulting from an aging
portfolio and higher service and
technology costs.
|
|
|
|
||
|
Amortization of DAC
|
•
Amortization of DAC
increased as a result of the higher
Unlock charge in the third quarter
of 2008 of $75 as compared to the
Unlock charge in the third quarter
of 2007 of $14, partially offset by
lower DAC amortization associated
with lower gross profits. For
further discussion, see Unlocks
within the Critical Accounting
Estimates section of the MD&A.
|
|
|
|
||
|
Income tax expense (benefit)
|
•
The income tax benefit for
2008 as compared to the prior year
periods income tax expense was due
to lower income before income taxes
primarily due to increased net
realized capital losses and
increased tax benefits associated
with the dividends received
deduction.
|
89
Table of Contents
INTERNATIONAL
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Fee income
|
$ | 834 | $ | 881 | $ | 843 | ||||||
|
Earned premiums
|
(7 | ) | (9 | ) | (11 | ) | ||||||
|
Net investment income
|
182 | 167 | 131 | |||||||||
|
Net realized capital gains (losses)
|
35 | (422 | ) | (116 | ) | |||||||
|
|
||||||||||||
|
Total revenues [1]
|
1,044 | 617 | 847 | |||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
621 | 270 | 32 | |||||||||
|
Insurance operating costs and other expenses
|
291 | 321 | 246 | |||||||||
|
Amortization of deferred policy acquisition costs
|
364 | 496 | 214 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
1,276 | 1,087 | 492 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
(232 | ) | (470 | ) | 355 | |||||||
|
Income tax expense (benefit)
|
(49 | ) | (145 | ) | 132 | |||||||
|
|
||||||||||||
|
Net income (loss) [2]
|
$ | (183 | ) | $ | (325 | ) | $ | 223 | ||||
|
|
||||||||||||
| Assets Under Management — Japan | 2009 | 2008 | 2007 | |||||||||
|
Japan variable annuity account values
|
$ | 30,521 | $ | 29,726 | $ | 35,793 | ||||||
|
Japan fixed annuity and other account values [3]
|
4,365 | 4,769 | 1,844 | |||||||||
|
|
||||||||||||
|
Total assets under management — Japan
|
$ | 34,886 | $ | 34,495 | $ | 37,637 | ||||||
|
|
||||||||||||
| Account Value and Assets Under Management Roll Forward | 2009 | 2008 | 2007 | |||||||||
|
Japan Annuities
|
||||||||||||
|
Account value, beginning of period
|
$ | 34,495 | $ | 37,637 | $ | 31,343 | ||||||
|
Net flows [4]
|
(1,200 | ) | 714 | 4,525 | ||||||||
|
Change in market value and other
|
2,270 | (10,921 | ) | (608 | ) | |||||||
|
Effect of currency translation
|
(679 | ) | 7,065 | 2,377 | ||||||||
|
|
||||||||||||
|
Account value, end of period
|
$ | 34,886 | $ | 34,495 | $ | 37,637 | ||||||
|
|
||||||||||||
| Expense Ratios | 2009 | 2008 | 2007 | |||||||||
|
International — Japan
|
||||||||||||
|
General insurance expense ratio
|
40.6 | bps | 49.4 | bps | 48.4 | bps | ||||||
|
DAC amortization ratio [5]
|
225.2 | % | 109.3 | % | 35.3 | % | ||||||
|
DAC amortization ratio excluding realized gains (losses) and DAC
Unlocks [5] [6]
|
42.5 | % | 42.4 | % | 40.0 | % | ||||||
| [1] |
The transition impact related to the adoption of fair value
accounting guidance was a reduction in revenues of $34, for the
year ended December 31, 2008. For further discussion of the fair
value guidance transition impact, see Note 4a of the Notes to
Consolidated Financial Statements.
|
|
| [2] |
The transition impact related to the adoption of fair value
accounting guidance was a reduction in net income of $11 the year
ended December 31, 2008. For further discussion of the fair value
guidance transition impact, refer to Note 4a of the Notes to
Consolidated Financial Statements.
|
|
| [3] |
Japan fixed annuity and other account values include a $1.8
billion increase as of December 31, 2009 due to the impact of the
GMIB pay-out annuity account value trigger for the 3 Win product
with a corresponding decrease to Japan variable annuity account
values. This payout annuity account value is not expected to
generate material future profit or loss to the Company.
|
|
| [4] |
Includes the effect of the triggering of the guaranteed minimum
income benefit (“GMIB”) for the 3 Win product in 2008, of which
$(809) relates to policyholders surrendering and $(181) relates to
the current period annuity payments. In 2009, net flows decreased
due to the suspension of sales and an additional $(267) related to
the current period annuity payments for the 3 Win product.
|
|
| [5] |
Excludes the effects of realized gains and losses except for net
periodic settlements. Included in the net realized capital gain
(losses) are amounts that represent the net periodic accruals on
currency rate swaps used in the risk management of Japan fixed
annuity products.
|
|
| [6] |
Excludes the effects of 3 Wins related charges in 2009 and 2008,
of $62 and $237, pre-tax, on net income. Including the effects of
3 Wins related charges DAC amortization would have been 48.9% and
77.8%, respectively.
|
International, which has operations located in Japan, Brazil, Ireland and the United Kingdom,
provides investments, retirement savings and other insurance and savings products to individuals
and groups outside the United States and Canada.
Prior to the second quarter 2009 suspension of new product sales, International focused on the
savings and retirement needs of the growing number of individuals outside the United States who are
preparing for retirement, or have already retired, through the sale of variable annuities, fixed
annuities and other insurance and savings products. The Company’s Japan operation is the largest
component of the International segment.
90
Table of Contents
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net loss decreased for the year ended December 31, 2009 as a result of decreased realized capital
losses, partially offset by an unfavorable 2009 Unlock. For further discussion on the Unlocks, see
Unlocks within the Critical Accounting Estimates section of the MD&A. The following other factors
contributed to the changes in net loss:
|
Fee income
|
•
Fee income decreased primarily due to lower variable annuity fee income due to a decline in
Japan’s average variable annuity account value. Average variable annuity account value declined due to
net outflows driven by the suspension of new sales in the second quarter of 2009 as well as the effect
of equity market declines in 2008 and the first quarter 2009.
|
|
|
|
||
|
Benefits, losses
and loss adjustment
expenses
|
•
Benefits, losses and loss adjustment expense increased, driven by an unfavorable Unlock in the
first quarter of 2009, a charge related to the 3 Win product of $39, after-tax, and increased claim
cost. For further discussion on the Unlocks, see Unlocks within the Critical Accounting Estimates
section of the MD&A.
|
|
|
|
||
|
Net realized
capital gains
(losses)
|
•
Gains for the year ended December 31, 2009 were primarily driven by transactional foreign
currency gains predominately on the internal reinsurance of the Japan variable annuity business, which
is entirely offset in AOCI, resulting from depreciation of the Yen and GMWB derivative gains. These
gains were partially offset by the $51 loss on the pending sale of the joint venture interest in ICATU
Hartford Seguros, S.A and macro hedge program losses of $163.
|
|
|
|
||
|
Insurance operating
costs and other
expenses
|
•
Insurance operating costs and other expenses decreased due to expense savings associated with
the restructuring of the International operations.
|
|
|
|
||
|
General insurance
expense ratio
|
•
Japan general insurance expense ratio decreased due to the restructuring of Japan’s operations.
|
|
|
|
||
|
Amortization of DAC
|
•
Amortization of DAC decreased as a result of a favorable Unlock in the third quarter of 2009.
For further discussion see Unlocks within the Critical Accounting Estimates section of the MD&A.
|
|
|
|
||
|
Income tax benefit
|
•
Income tax benefit declined as a result of fluctuating earnings and varying tax rates by
country.
|
91
Table of Contents
Year ended December 31, 2008 compared to the year ended December 31, 2007
Net income decreased for the year ended December 31, 2008 as a result of the 2008 Unlock versus the
2007 Unlock along with increased realized capital losses from the adoption of fair value guidance,
which resulted in a net realized capital loss of $34 during the first quarter of 2008, impact of
the 3 Win trigger, impairment charges, increases in insurance operating costs and other expenses,
partially offset by an increase in fee income. Due to significant market declines in the fourth
quarter of 2008, approximately 97% of the Company’s in-force 3 Win policies, or $3.1 billion in
account value, had triggered the associated GMIB. 3 Win is a variable annuity product that was
offered in Japan with a GMIB and GMAB rider. The GMIB trigger occurred as a result of policyholder
account values falling below 80% of their initial deposit. As a result of the GMIB trigger, the
majority of the Company’s 3 Win policies annuitized or surrendered free of charge in the fourth
quarter of 2008. For further discussion on the Unlock, see Unlocks within the Critical Accounting
Estimates section of the MD&A. For further discussion of the fair value guidance transition
impact, see Note 4a of the Notes to Consolidated Financial Statements. The following other factors
contributed to the changes in net income:
|
Fee income
|
•
Fee income increased primarily due to growth in Japan’s variable annuity average
assets under management. The increase in average assets under management over the prior year
was driven by deposits of $3.0 billion and a $6.6 billion increase due to foreign currency
exchange translation as the yen strengthened compared to the U.S. dollar. Deposits and
favorable foreign currency exchange were offset by unfavorable market performance of $10.9
billion. Net flows have decreased in Japan annuities due the 3 Win trigger and to increased
competition from domestic and foreign insurers, particularly competition relating to products
offered with living benefit guarantees.
|
|
|
|
||
|
Benefits, losses
and loss adjustment
expenses
|
•
Benefits, losses and loss adjustment expense increased as a result of the impacts of
the Unlock in the third quarter of 2008 as compared to the third quarter of 2007, the impact
of the 3 Win trigger, as well as higher GMDB net amount at risk and increased claims costs.
|
|
|
|
||
|
Net realized
capital gains
(losses)
|
•
Losses for the year ended December 31, 2008 were primarily driven by transactional
foreign currency losses predominately on the internal reinsurance of the Japan variable
annuity business, which is entirely offset in AOCI, resulting from appreciation of the Yen,
fair value measurement transition and impairments.
|
|
|
|
||
|
Insurance operating
costs and other
expenses
|
•
Insurance operating costs and other expenses increased due to the growth and
strategic investment in the Japan and Other International operations, as well as lower
capitalization of deferred policy acquisition costs, as acquisition costs exceeded pricing
allowables.
|
|
|
|
||
|
Amortization of DAC
|
•
Amortization of DAC increased as a result of the impacts of the Unlock in the third
quarter of 2008 as compared to the third quarter of 2007, as well as the accelerated
amortization associated with the 3 Win trigger.
|
|
|
|
||
|
DAC amortization
ratio, excluding
realized gains
(losses) and DAC
Unlocks
|
•
Japan DAC amortization ratio, excluding realized gains (losses) and DAC Unlocks,
increased due to actual gross profits being less than expected as a result of lower fees
earned on declining assets resulting in negative true-ups and a higher DAC amortization rate,
as well as the accelerated amortization associated with the impact of the 3 Win trigger.
|
|
|
|
||
|
Income tax expense
(benefit)
|
•
Income tax expense decreased primarily as a result of a decline in income before
taxes.
|
92
Table of Contents
INSTITUTIONAL
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Fee income and other
|
$ | 143 | $ | 152 | $ | 251 | ||||||
|
Earned premiums
|
352 | 889 | 987 | |||||||||
|
Net investment income
|
833 | 1,004 | 1,241 | |||||||||
|
Net realized capital losses
|
(738 | ) | (789 | ) | (188 | ) | ||||||
|
|
||||||||||||
|
Total revenues
|
590 | 1,256 | 2,291 | |||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
1,301 | 1,907 | 2,074 | |||||||||
|
Insurance operating costs and expenses
|
83 | 120 | 185 | |||||||||
|
Amortization of deferred policy acquisition costs
|
17 | 19 | 23 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
1,401 | 2,046 | 2,282 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
(811 | ) | (790 | ) | 9 | |||||||
|
Income tax benefit
|
(296 | ) | (288 | ) | (8 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (515 | ) | $ | (502 | ) | $ | 17 | ||||
|
|
||||||||||||
| Assets Under Management | 2009 | 2008 | 2007 | |||||||||
|
Institutional account values [1]
|
$ | 22,373 | $ | 24,081 | $ | 25,103 | ||||||
|
Private Placement Life Insurance account values [1]
|
33,356 | 32,459 | 32,792 | |||||||||
|
Mutual fund assets under management
|
4,262 | 2,578 | 3,581 | |||||||||
|
|
||||||||||||
|
Total assets under management
|
$ | 59,991 | $ | 59,118 | $ | 61,476 | ||||||
|
|
||||||||||||
| Net Investment Spread | 2009 | 2008 | 2007 | |||||||||
|
Stable Value (GICs, Funding Agreements, Funding
Agreement Backed Notes and Consumer Notes)
|
(48 | )bps | 21 | bps | 101 | bps | ||||||
| Expense Ratios | 2009 | 2008 | 2007 | |||||||||
|
General insurance expense ratio
|
11.8 | bps | 14.1 | bps | 14.1 | bps | ||||||
| [1] |
Includes policyholder balances for investment contracts and reserves for future policy
benefits for insurance contracts.
|
Institutional has historically provided customized investment, insurance and income solutions
to select markets through a broad range of products including PPLI owned by corporations and high
net worth individuals, institutional annuities, mutual funds owned by institutional investors,
structured settlements, stable value contracts and individual products such as income annuities and
longevity assurance. During 2009, the Company decided to not actively market or sell certain
Institutional products, including: structured settlements, guaranteed investment products, and most
institutional annuities.
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net loss in Institutional increased primarily due to negative net investment spread due to
continued partnership losses and as a result of management’s desire to maintain additional
liquidity by increasing asset allocations in short term and treasury investments. Further
discussion of income is presented below:
|
Fee income and other
|
•
Fee income and other was lower due to lower asset levels through
beginning of the year as well as lower positive flows than prior year, offset by
an increase in market return and higher sales.
|
|
|
|
||
|
Earned premiums
|
•
Earned premiums decreased as ratings downgrades reduced payout annuity
sales. The decrease in earned premiums was offset by a corresponding decrease in
benefits, losses, and loss adjustment expenses.
|
|
|
|
||
|
Net investment
income
|
•
Net investment income declined due to lower income on fixed maturities
resulting from a decline in average rates and fixed maturity investments, as well
as an increased average asset base of securities with greater market liquidity.
This was partially offset by a corresponding decrease in interest credited on
liabilities reported in benefits, losses, and loss adjustment expenses.
|
|
|
|
||
|
Net investment
spread
|
•
Stable Value, net investment spreads were negatively impacted by 166 bps
due to lower yields on variable rate securities and maintaining additional
liquidity in the Institutional portfolios in the form of short term and U.S.
Treasuries. In both periods, the drop in variable rate yields was partially
offset by lower credited rates on floating rate liabilities.
|
|
|
|
||
|
Net realized
capital losses
|
•
Net realized capital losses were slightly lower due to smaller
impairments.
|
93
Table of Contents
|
Benefits, losses
and loss adjustment
expenses
|
•
Benefits, losses and loss adjustment expenses were lower
driven by lower interest credited due to lower rates on floating rate
GIP’s as well as an overall smaller block of business.
|
|
|
|
||
|
Insurance operating
costs and expenses
and general
insurance expense
ratio
|
•
Insurance operating costs and other expenses decreased due to
active expense management efforts and reduced information technology
expenses.
|
|
|
|
||
|
Income tax benefit
|
•
The income tax benefit was flat due to flat income before
taxes.
|
Year ended December 31, 2008 compared to the year ended December 31, 2007
Net income in Institutional decreased primarily due to increased net realized capital losses and
lower net investment income. The following other factors contributed to changes in net income:
|
Fee income and other
|
•
Fee income and other decreased primarily due to lower front-end loads
on private placement life insurance (“PPLI”) cases during 2008. PPLI
collects front-end loads recorded in fee income, offset by corresponding
premium taxes reported in insurance operating costs and other expenses. For
2008 and 2007, PPLI deposits of $247 and $5.2 billion, respectively, resulted
in fee income due to front-end loads of $2 and $107, respectively.
|
|
|
|
||
|
Earned premiums
|
•
Earned premiums decreased as compared to the prior year due to
greater amounts of life contingent business sold in 2007. The decrease in
earned premiums was offset by a corresponding decrease in benefits, losses,
and loss adjustment expenses.
|
|
|
|
||
|
Net investment
income
|
•
Net investment income declined due to losses from limited partnership
and other alternative investments of $(127), lower yields on fixed maturity
investments indexed to LIBOR, and lower assets under management. The decline
in yield on fixed maturities was largely offset by a corresponding decrease
in interest credited on liabilities reported in benefits, losses, and loss
adjustment expense. Assets under management decreased primarily due to
stable value outflows.
|
|
|
|
||
|
Net investment
spread
|
•
Stable Value, net investment spreads were negatively impacted by 158
bps due to lower yields on variable rate securities and maintaining
additional liquidity in the Institutional portfolios in the form of
short-term investments and U.S. Treasuries, and 55 bps attributable to
negative limited partnership returns. In both periods, the drop in variable
rate yields was partially offset by lower credited rates on floating rate
liabilities.
|
|
|
|
||
|
Net realized
capital losses
|
•
Net realized capital losses were higher due to significant
impairments.
|
|
|
|
||
|
Benefits, losses
and loss adjustment
expenses
|
•
Benefits, losses and loss adjustment expenses decreased primarily due
to lower reserve increases as the result of lower sales in life contingent
business, as well as lower interest credited on liabilities indexed to LIBOR.
The decrease was partially offset by an increase in mortality losses of $8.
|
|
|
|
||
|
Insurance operating
costs and expenses
and general
insurance expense
ratio
|
•
Insurance operating costs and other expenses decreased due to a
decline in premium tax, driven by reduced PPLI deposits, partially offset by
discontinued administrative system projects and product development expenses.
|
|
|
|
||
|
Income tax benefit
|
•
The income tax benefit increased compared to the prior year primarily
due to a decline in income before taxes primarily due to increased realized
capital losses.
|
94
Table of Contents
LIFE OTHER
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Fee income and other
|
$ | 58 | $ | 60 | $ | 67 | ||||||
|
Net investment income (loss)
|
||||||||||||
|
Securities available-for-sale and other
|
85 | 28 | 145 | |||||||||
|
Equity securities, trading [1]
|
3,188 | (10,340 | ) | 145 | ||||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
3,273 | (10,312 | ) | 290 | ||||||||
|
Net realized capital gains (losses)
|
(176 | ) | 47 | (35 | ) | |||||||
|
|
||||||||||||
|
Total revenues
|
3,155 | (10,205 | ) | 322 | ||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
84 | 154 | 156 | |||||||||
|
Benefits, losses and loss adjustment expenses — returns
credited on International variable annuities [1]
|
3,188 | (10,340 | ) | 145 | ||||||||
|
Insurance operating costs and other expenses
|
124 | 7 | 84 | |||||||||
|
Total benefits, losses and expenses
|
3,396 | (10,179 | ) | 385 | ||||||||
|
Loss before income taxes
|
(241 | ) | (26 | ) | (63 | ) | ||||||
|
Income tax benefit
|
(76 | ) | (15 | ) | (11 | ) | ||||||
|
|
||||||||||||
|
Net loss
|
$ | (165 | ) | $ | (11 | ) | $ | (52 | ) | |||
|
|
||||||||||||
| [1] |
Includes investment income (loss) and mark-to-market effects of equity securities, trading,
supporting the international variable annuity business, which are classified in net investment
income with corresponding amounts credited to policyholders within benefits, losses and loss
adjustment expenses.
|
Life includes in Other its leveraged PPLI product line of business; corporate items not
directly allocated to any of its reportable operating segments; inter-segment eliminations and the
mark-to-mark adjustment for the International variable annuity assets that are classified as equity
securities held for trading reported in net investment income and the related change in interest
credited reported as a component of benefits, losses and loss adjustment expenses.
Year ended December 31, 2009 compared to the year ended December 31, 2008
|
Net investment income — securities
available-for-sale and other
|
•
Net investment income on
securities available-for-sale and
other increased due to reduced
losses on limited partnerships and
other alternative investments,
partially offset by the effects of
inter-segment eliminations in 2009.
|
|
|
|
||
|
Net realized capital gains (losses)
|
•
Net realized capital losses
increased due to increases in
mortgage loan valuation allowances
in 2009.
|
|
|
|
||
|
Insurance operating costs and other
expenses
|
•
Insurance operating costs
and other expenses increased due to
restructuring costs that include
severance benefits and other costs
associated with the suspension of
sales in International’s Japan and
European operations as well as other
restructuring costs across Life
operations of $119. See Note 23 of
the Notes to Consolidated Financial
Statements for further details on
the Company’s restructuring,
severance and other costs.
|
Year ended December 31, 2008 compared to the year ended December 31, 2007
|
Net investment income — securities
available-for-sale and other
|
•
Net investment income on
securities available-for-sale and
other declined primarily due to
decreases in yields on fixed
maturity investments and declines in
limited partnership and other
alternative investment income.
|
|
|
|
||
|
Net realized capital gains (losses)
|
•
Net realized capital gains
increased due to trading and
valuation gains on derivatives,
partially offset by increased
impairments.
|
|
|
|
||
|
Insurance operating costs and other
expenses
|
•
Insurance operating costs
and other expenses decreased for the
year ended December 31, 2008 as
compared to the prior year period,
primarily due to a charge of $21 for
regulatory matters in the second
quarter of 2007 and reallocation of
expenses to the applicable lines of
business in 2008.
|
95
Table of Contents
PERSONAL LINES
| Underwriting Summary | 2009 | 2008 | 2007 | |||||||||
|
Written premiums
|
$ | 3,987 | $ | 3,925 | $ | 3,947 | ||||||
|
Change in unearned premium reserve
|
35 | (1 | ) | 58 | ||||||||
|
|
||||||||||||
|
Earned premiums
|
3,952 | 3,926 | 3,889 | |||||||||
|
Losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
2,700 | 2,542 | 2,576 | |||||||||
|
Current accident year catastrophes
|
228 | 258 | 125 | |||||||||
|
Prior accident years
|
(33 | ) | (51 | ) | (4 | ) | ||||||
|
|
||||||||||||
|
Total losses and loss adjustment expenses
|
2,895 | 2,749 | 2,697 | |||||||||
|
Amortization of deferred policy acquisition costs
|
674 | 633 | 617 | |||||||||
|
Insurance operating costs and expenses
|
263 | 264 | 253 | |||||||||
|
|
||||||||||||
|
Underwriting results
|
$ | 120 | $ | 280 | $ | 322 | ||||||
|
|
||||||||||||
| Written Premiums | 2009 | 2008 | 2007 | |||||||||
|
Business Unit
|
||||||||||||
|
AARP
|
$ | 2,871 | $ | 2,813 | $ | 2,750 | ||||||
|
Agency
|
1,061 | 1,050 | 1,123 | |||||||||
|
Other
|
55 | 62 | 74 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 3,987 | $ | 3,925 | $ | 3,947 | ||||||
|
|
||||||||||||
|
Product Line
|
||||||||||||
|
Automobile
|
$ | 2,869 | $ | 2,829 | $ | 2,848 | ||||||
|
Homeowners
|
1,118 | 1,096 | 1,099 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 3,987 | $ | 3,925 | $ | 3,947 | ||||||
|
|
||||||||||||
| Earned Premiums | 2009 | 2008 | 2007 | |||||||||
|
Business Unit
|
||||||||||||
|
AARP
|
$ | 2,844 | $ | 2,778 | $ | 2,681 | ||||||
|
Agency
|
1,049 | 1,080 | 1,123 | |||||||||
|
Other
|
59 | 68 | 85 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 3,952 | $ | 3,926 | $ | 3,889 | ||||||
|
|
||||||||||||
|
Product Line
|
||||||||||||
|
Automobile
|
$ | 2,850 | $ | 2,824 | $ | 2,822 | ||||||
|
Homeowners
|
1,102 | 1,102 | 1,067 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 3,952 | $ | 3,926 | $ | 3,889 | ||||||
|
|
||||||||||||
| Premium Measures | 2009 | 2008 | 2007 | |||||||||
|
Policies in force at year end
|
||||||||||||
|
Automobile
|
2,395,421 | 2,323,882 | 2,349,402 | |||||||||
|
Homeowners
|
1,488,408 | 1,455,954 | 1,481,542 | |||||||||
|
|
||||||||||||
|
Total policies in force at year end
|
3,883,829 | 3,779,836 | 3,830,944 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
New business premium
|
||||||||||||
|
Automobile
|
$ | 455 | $ | 364 | $ | 424 | ||||||
|
Homeowners
|
$ | 149 | $ | 106 | $ | 140 | ||||||
|
|
||||||||||||
|
Policy count retention
|
||||||||||||
|
Automobile
|
86 | % | 86 | % | 87 | % | ||||||
|
Homeowners
|
86 | % | 87 | % | 89 | % | ||||||
|
|
||||||||||||
|
Renewal written pricing increase
|
||||||||||||
|
Automobile
|
3 | % | 4 | % | 3 | % | ||||||
|
Homeowners
|
5 | % | 6 | % | 7 | % | ||||||
|
|
||||||||||||
|
Renewal earned pricing increase
|
||||||||||||
|
Automobile
|
4 | % | 4 | % | 3 | % | ||||||
|
Homeowners
|
6 | % | 5 | % | 7 | % | ||||||
|
|
||||||||||||
96
Table of Contents
| Ratios and Supplemental Data | 2009 | 2008 | 2007 | |||||||||
|
Loss and loss adjustment expense ratio
|
||||||||||||
|
Current accident year before catastrophes
|
68.3 | 64.8 | 66.2 | |||||||||
|
Current accident year catastrophes
|
5.8 | 6.6 | 3.2 | |||||||||
|
Prior accident years
|
(0.8 | ) | (1.3 | ) | (0.1 | ) | ||||||
|
|
||||||||||||
|
Total loss and loss adjustment expense ratio
|
73.3 | 70.0 | 69.3 | |||||||||
|
Expense ratio
|
23.7 | 22.8 | 22.4 | |||||||||
|
|
||||||||||||
|
Combined ratio
|
97.0 | 92.9 | 91.7 | |||||||||
|
|
||||||||||||
|
Catastrophe ratio
|
||||||||||||
|
Current accident year
|
5.8 | 6.6 | 3.2 | |||||||||
|
Prior accident years
|
0.1 | 0.2 | 0.2 | |||||||||
|
|
||||||||||||
|
Total catastrophe ratio
|
5.9 | 6.8 | 3.4 | |||||||||
|
|
||||||||||||
|
Combined ratio before catastrophes
|
91.1 | 86.1 | 88.3 | |||||||||
|
Combined ratio before catastrophes and prior accident year development
|
92.0 | 87.6 | 88.6 | |||||||||
|
|
||||||||||||
|
Other revenues [1]
|
$ | 153 | $ | 135 | $ | 141 | ||||||
|
|
||||||||||||
| [1] |
Represents servicing revenues.
|
| Combined Ratios | 2009 | 2008 | 2007 | |||||||||
|
Automobile
|
96.6 | 91.0 | 96.2 | |||||||||
|
Homeowners
|
98.0 | 97.6 | 79.8 | |||||||||
|
|
||||||||||||
|
Total
|
97.0 | 92.9 | 91.7 | |||||||||
|
|
||||||||||||
Underwriting results, premium measures and ratios
Year ended December 31, 2009 compared to the year ended December 31, 2008
Underwriting results decreased by $160, with a corresponding 4.1 point increase in the combined
ratio.
Earned premiums
Earned premiums grew by 1% in 2009, primarily due to earned premium growth in AARP, largely offset
by earned premium decreases in Agency and Other.
| • |
AARP earned premiums grew $66 in 2009, reflecting an increase in new business written
premium over the first nine months of 2009, driven by increased direct marketing spend, higher
auto policy conversion rates and cross-selling homeowners’ insurance to insureds who have auto
policies.
|
| • |
Agency earned premiums decreased by $31, reflecting a decrease in policy count retention
and a decrease in average renewal premium per policy, partially offset by an increase in new
business written premium. The decrease in policy count retention was primarily due to a
decrease in retention on homeowners as a result of the Company’s decision to stop renewing
Florida homeowners’ policies. The increase in new business was primarily due to an increase
in the number of agency appointments, an increase in the number of policy quotes and an
increase in the policy issue rate for auto.
|
| • |
Other earned premiums decreased primarily due to a strategic decision to reduce other
affinity business.
|
Auto earned premiums grew 1% in 2009 as the effect of an increase in new business was largely
offset by a decrease in average renewal premium per policy. Homeowners’ earned premiums were flat
in 2009 as the effect of an increase in new business was largely offset by a decrease in policy
count retention driven by the Company’s decision to stop renewing Florida homeowners’ policies in
Agency. While the Company recognized higher renewal earned pricing in 2009, driven by higher rates
and an increase in the amount of insurance per exposure unit, average renewal premium per policy
decreased for auto and was flat for home. For both auto and home, average renewal premium was
impacted by a shift to more preferred market segment business and growth in states and territories
with lower average premium. In addition, average renewal premium was affected by the impact of the
economic downturn on consumer behavior. Among other actions, insureds have reduced their premiums
by raising deductibles, reducing limits, dropping coverage and reducing mileage.
97
Table of Contents
|
New business premium
|
•
Auto and homeowners’ new
business written premium increased
by $91, or 25% and $43 or 41%,
respectively, in 2009. AARP new
business written premium increased
for both auto and home primarily due
to increased direct marketing spend,
higher auto policy conversion rates
and cross-selling homeowners’
insurance to insureds who have auto
policies. Agency new business
written premium increased for both
auto and home primarily due to an
increase in the number of agency
appointments, an increase in the
number of policy quotes and an
increase in the policy issue rate
for auto.
|
|
|
|
||
|
Policy count retention
|
•
Policy count retention for
auto remained flat in 2009 for both
AARP and Agency policies, primarily
due to stable renewal written
pricing increases and policy
retention initiatives. Policy count
retention for homeowners decreased
slightly in 2009, primarily due to a
decrease in policy retention for
Agency business largely due to the
Company’s decision to stop renewing
Florida homeowners’ policies.
|
|
|
|
||
|
Renewal earned pricing increase
|
•
The increases in renewal
earned pricing during 2009 were
primarily a reflection of written
pricing changes over the last two
years. Renewal written pricing in
2009 increased in auto by 3% due to
rate increases and the effect of
policyholders purchasing newer
vehicle models in place of older
models. Homeowners’ renewal written
pricing increased by 5% due to rate
increases and increased coverage
amounts reflecting higher rebuilding
costs. For both auto and home, the
Company has increased rates in
certain states for certain classes
of business to maintain
profitability in the face of rising
loss costs.
|
|
|
|
||
|
Policies in-force
|
•
The number of policies
in-force increased 3% in auto,
driven by an increase in both AARP
and Agency and increased 2% for
homeowners, driven by an increase in
AARP.
|
Losses and loss adjustment expenses
Current accident year losses and loss adjustment expenses before catastrophes
Personal Lines current accident year losses and loss adjustment expenses before catastrophes
increased by $158, primarily due to the increase in the current accident year loss and loss
adjustment expense ratio before catastrophes. The current accident year loss and loss adjustment
expense ratio before catastrophes increased by 3.5 points, driven by a 3.3 point increase for auto
and a 4.2 point increase for home. The 3.3 point increase for auto was due to an increase in
expected liability loss costs, an increase in physical damage frequency and a decline in average
premium. After a historically low claim frequency in 2008, auto claim frequency increased in 2009,
mostly in bodily injury coverage, driven by an increase in miles driven. The 4.2 point increase for
home was driven by increasing severity in AARP, increasing frequency in Agency and a decline in
average premium in Agency.
Current accident year catastrophes
Current accident year catastrophes decreased by $30 as catastrophe losses in 2008, driven by losses
from hurricane Ike and from wind and thunderstorms, were higher than catastrophe losses in 2009,
driven by losses from hail and windstorms in Colorado, the Midwest and the Southeast.
Prior accident year reserve development
Net favorable reserve development was $18 lower in 2009. Net favorable reserve development of $33
in 2009 included, among other reserve changes, a $77 release of auto liability reserves principally
related to AARP business for the 2006 through 2008 accident years, partially offset by an $18
strengthening of reserves for homeowners’ claims for the 2005 through 2008 accident years. Net
favorable reserve development of $51 in 2008 included a $46 release of auto liability reserves,
primarily related to accident years 2005 to 2007 and a $24 release of reserves for
extra-contractual liability claims under non-standard personal auto policies.
Operating expenses
The expense ratio increased by 0.9 points due largely to higher amortization of deferred
acquisition costs and an increase in other non-deferrable costs, partially offset by a decrease in
TWIA assessments of $17. Amortization of acquisition costs increased for both AARP business and
for business sold direct to the consumer in four pilot states.
98
Table of Contents
Year ended December 31, 2008 compared to the year ended December 31, 2007
Underwriting results decreased by $42, with a corresponding 1.2 point increase in the combined
ratio.
Earned premiums
Earned premiums increased $37, or 1%, due primarily to earned premium growth in AARP, partially
offset by earned premium decreases in Agency and Other.
| • |
AARP earned premium grew $97, reflecting modest renewal earned pricing increases for both
auto and homeowners and the effect of new business premium outpacing non-renewals in the last
nine months of 2007. New business offset non-renewals in 2008 and new business in 2008 was
driven by growth in the size of the AARP target market, the effect of direct marketing
programs and the effect of cross-selling homeowners insurance to insureds who have auto
policies.
|
| • |
Agency earned premium decreased by $43 as the effect of a decline in new business premium
and policy count retention since the middle of 2007 was partially offset by the effect of
modest renewal earned pricing increases. The market environment continued to be intensely
competitive in 2008. The increase in advertising for auto business among the top carriers
also occurred with homeowners’ business, particularly in non-coastal and non-catastrophe prone
areas. In 2008, a number of Personal Lines carriers began to increase rates although a
significant portion of the market continued to compete heavily on price.
|
| • |
Other earned premium decreased by $17, primarily due to a decision to reduce other affinity
business.
|
Auto earned premium was relatively flat in 2008 as the effect of renewal earned pricing increases
of 4% was largely offset by a decrease in new business since the middle of 2007. Homeowners’
earned premium grew 3% largely due to renewal earned pricing increases of 5%.
|
New business premium
|
•
Both auto and homeowners’
new business written premium
decreased in 2008 including
decreases in AARP and Agency. Auto
new business decreased by $60, or
14% and homeowners’ new business
decreased by $34, or 24%. AARP new
business written premium decreased
primarily due to lower auto and
homeowners’ policy conversion rates,
driven by increased competition,
including the effect of price
decreases by some carriers and the
effect of continued advertising
among carriers for new business.
Agency new business written premium
decreased primarily due to price
competition driven, in part, by a
greater number of agents using
comparative rating software to
obtain quotes from multiple
carriers.
|
|
|
|
||
|
Policy count retention
|
•
Policy count retention for
auto decreased, driven primarily by
a decrease in policy retention for
both AARP and Agency business.
Policy count retention for
homeowners decreased for both AARP
and Agency business. The decrease
in policy count retention for AARP
homeowners’ business was driven by
increased price competition by some
carriers. The decrease in policy
count retention for Agency
homeowners’ business was due, in
part, to Florida policyholders
non-renewing as a result of the
Company’s decision to stop renewing
Florida homeowners’ policies sold
through agents.
|
|
|
|
||
|
Renewal earned pricing increase
|
•
Auto renewal earned pricing
increases of 4% represent the
portion of the 4% increase in
renewal written pricing for 2008
that is reflected in earned premium.
In 2008, the Company increased auto
insurance rates in certain states
for certain classes to maintain
profitability in the face of rising
loss costs. Renewal written pricing
increases in 2008 included the
effect of policyholders purchasing
newer vehicle models in place of
older models. Homeowners’ renewal
earned pricing increases of 5%
primarily reflected the earning of a
blend of mid-single digit renewal
written pricing increases recognized
over the last nine months of 2007
and renewal written pricing
increases recognized in the first
nine months of 2008. Renewal
written pricing increases in
homeowners were largely driven by
increases in coverage limits due to
rising replacement costs.
|
|
|
|
||
|
Policies in-force
|
•
The number of policies
in-force decreased slightly for both
auto and homeowners, primarily due
to a 7% decline in the number of
Agency policies in-force, partially
offset by a 1% increase in the
number of AARP policies in-force.
|
Losses and loss adjustment expenses
Current accident year losses and loss adjustment expenses before catastrophes
Personal Lines’ current accident year losses and loss adjustment expenses before catastrophes
decreased by $34 due to a decrease in the current accident year loss and loss adjustment expense
ratio before catastrophes, partially offset by the effect of higher earned premium.
The current accident year loss and loss adjustment expense ratio before catastrophes decreased by
1.4 points, primarily due to favorable expected frequency on auto liability claims and the effect
of renewal earned pricing increases for both auto and homeowners, partially offset by increased
frequency and severity of non-catastrophe losses on homeowners business.
Current accident year catastrophes
Current accident year catastrophe losses of $258 in 2008 were higher than current accident year
catastrophe losses of $125 in 2007, primarily due to losses from hurricane Ike and tornadoes and
thunderstorms in the South and Midwest.
99
Table of Contents
Prior accident year reserve development
Net favorable reserve development of $51 in 2008 included a $46 release of auto liability reserves,
primarily related to accident years 2005 to 2007 and a $24 release of reserves for
extra-contractual liability claims under non-standard personal auto policies. Net favorable
reserve development of $4 in 2007 included a $16 release of reserves for loss and allocated loss
and loss adjustment expenses on Personal Lines auto liability claims for accident years 2002 to
2006.
Operating expenses
Amortization of deferred policy acquisition costs increased by $16, driven primarily by the
increase in earned premium and the amortization of a higher amount of acquisition costs for AARP
business. Insurance operating costs and expenses increased by $11, primarily due to an estimated
$10 of assessments owed to TWIA in 2008. The expense ratio increased 0.4 points due to the
increase in insurance operating costs and expenses and the amortization of a higher amount of
acquisition costs on AARP business.
SMALL COMMERCIAL
| Underwriting Summary | 2009 | 2008 | 2007 | |||||||||
|
Written premiums
|
$ | 2,572 | $ | 2,696 | $ | 2,747 | ||||||
|
Change in unearned premium reserve
|
(8 | ) | (28 | ) | 11 | |||||||
|
|
||||||||||||
|
Earned premiums
|
2,580 | 2,724 | 2,736 | |||||||||
|
Losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
1,396 | 1,447 | 1,594 | |||||||||
|
Current accident year catastrophes
|
44 | 122 | 28 | |||||||||
|
Prior accident years
|
(36 | ) | (89 | ) | (209 | ) | ||||||
|
|
||||||||||||
|
Total losses and loss adjustment expenses
|
1,404 | 1,480 | 1,413 | |||||||||
|
Amortization of deferred policy acquisition costs
|
622 | 636 | 635 | |||||||||
|
Insurance operating costs and expenses
|
159 | 171 | 180 | |||||||||
|
|
||||||||||||
|
Underwriting results
|
$ | 395 | $ | 437 | $ | 508 | ||||||
|
|
||||||||||||
| Premium Measures | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
New business premium
|
$ | 482 | $ | 446 | $ | 481 | ||||||
|
Policy count retention
|
81 | % | 82 | % | 84 | % | ||||||
|
Renewal written pricing increase (decrease)
|
— | (1 | %) | (1 | %) | |||||||
|
Renewal earned pricing increase (decrease)
|
— | (1 | %) | — | ||||||||
|
Policies in-force end of period
|
1,077,189 | 1,055,463 | 1,038,542 | |||||||||
| Ratios | 2009 | 2008 | 2007 | |||||||||
|
Loss and loss adjustment expense ratio
|
||||||||||||
|
Current accident year before catastrophes
|
54.1 | 53.1 | 58.3 | |||||||||
|
Current accident year catastrophes
|
1.7 | 4.5 | 1.0 | |||||||||
|
Prior accident years
|
(1.4 | ) | (3.3 | ) | (7.6 | ) | ||||||
|
|
||||||||||||
|
Total loss and loss adjustment expense ratio
|
54.4 | 54.3 | 51.6 | |||||||||
|
Expense ratio
|
30.2 | 29.1 | 29.2 | |||||||||
|
Policyholder dividend ratio
|
— | 0.5 | 0.6 | |||||||||
|
|
||||||||||||
|
Combined ratio
|
84.7 | 84.0 | 81.4 | |||||||||
|
|
||||||||||||
|
Catastrophe ratio
|
||||||||||||
|
Current accident year
|
1.7 | 4.5 | 1.0 | |||||||||
|
Prior accident years
|
(0.1 | ) | (0.1 | ) | 0.2 | |||||||
|
|
||||||||||||
|
Total catastrophe ratio
|
1.6 | 4.4 | 1.2 | |||||||||
|
|
||||||||||||
|
Combined ratio before catastrophes
|
83.1 | 79.6 | 80.3 | |||||||||
|
Combined ratio before catastrophes and prior accident year development
|
84.4 | 82.8 | 88.0 | |||||||||
100
Table of Contents
Underwriting results, premium measures and ratios
Year ended December 31, 2009 compared to the year ended December 31, 2008
Underwriting results decreased by $42, with a corresponding 0.7 point increase in the combined
ratio.
Earned premiums
Earned premiums for the Small Commercial segment decreased by $144 in 2009 primarily due to lower
earned audit premium on workers’ compensation business and the effect of non-renewals outpacing new
business over the last two years for package business and commercial auto. While the Company has
focused on increasing new business from its agents and expanding writings in certain territories,
the effects of the economic downturn and competitor actions to increase market share and increase
business appetite in certain classes of risks have contributed to the decrease in earned premiums
in 2009.
|
New business premium
|
•
New business written premium
was up $36, or 8%, in 2009 primarily
driven by an increase in workers’
compensation business and the impact
from the rollout of a new business
owners policy product during the
second half of 2009. The Company
continues to increase its new
business for workers’ compensation
through refinement of pricing and
underwriting appetite in certain
markets.
|
|
|
|
||
|
Policy count retention
|
•
Policy count retention
decreased slightly due to the impact
from declining economic conditions
including increased mid-term
cancellations. The impact affected
all lines of business.
|
|
|
|
||
|
Renewal earned pricing increase
(decrease) |
•
Renewal earned pricing was
flat as an increase in renewal
earned pricing for package business
was offset by a decrease for
workers’ compensation. Renewal
earned pricing for the commercial
auto business was essentially flat.
The earned pricing changes were
primarily a reflection of written
pricing changes over the last two
years. In addition to the effect of
written pricing decreases in
workers’ compensation, average
premium per policy in Small
Commercial has declined due to a
reduction in the payrolls of
workers’ compensation insureds and
the effect of declining
endorsements.
|
|
|
|
||
|
Policies in-force
|
•
The number of
policies-in-force increased by 2% in
2009. Despite the growth in
policies, earned premiums have
decreased by 5%, reflecting the
decrease in average premium per
policy. The growth or decline in
policies in-force does not
correspond directly with the change
in earned premiums due to the effect
of changes in earned pricing and
changes in the average premium per
policy.
|
Losses and loss adjustment expenses
Current accident year losses and loss adjustment expenses before catastrophes
Small Commercial’s current accident year losses and loss adjustment expenses before catastrophes
decreased by $51, primarily due to the decrease in earned premiums, partially offset by a 1.0 point
increase in the current accident year loss and loss adjustment expense ratio before catastrophes.
The increase in this ratio was primarily due to a higher loss and loss adjustment expense ratio on
workers’ compensation and package business. The higher loss and loss adjustment expense ratio on
workers’ compensation business reflected the effect of a 2009 decrease in estimated audit premium
related to exposures earned in 2008, partially offset by a continuation of favorable expected
frequency.
Current accident year catastrophes
Current accident year catastrophe losses decreased by $78 in 2009, as losses in 2008 from hurricane
Ike and tornadoes and thunderstorms in the South and Midwest were higher than catastrophe losses in
2009 from hail and windstorms in Colorado, the Midwest and the Southeast.
Prior accident year reserve development
Net favorable prior accident year development decreased by $53 in 2009. Net favorable prior
accident year development of $36 in 2009 included a $40 release of workers’ compensation reserves
related to accident years 2007 and prior, a $33 release of commercial auto liability reserves and a
$38 strengthening of reserves for package business. Net favorable prior accident year development
of $89 in 2008 included a $92 release of workers’ compensation reserves related to accident years
2000 to 2007.
Operating expenses
Insurance operating costs and expenses decreased by $12, driven by a decrease in TWIA assessments
of $12 and an increase in the estimated amount of dividends payable to certain workers’
compensation policyholders due to underwriting profits of $8 recognized in 2008, partially offset
by an increase in compensation-related costs and higher IT costs. Amortization of deferred policy
acquisition costs decreased by $14 in 2009, primarily driven by the decrease in earned premiums,
partially offset by higher amortization of other underwriting expenses. The expense ratio
increased by 1.1 points, primarily due to the decrease in earned premiums, partially offset by the
decrease in TWIA assessments.
101
Table of Contents
Year ended December 31, 2008 compared to the year ended December 31, 2007
Underwriting results decreased by $71, with a corresponding 2.6 point increase in the combined
ratio.
Earned premiums
Earned premiums for the Small Commercial segment were down slightly as a decrease in commercial
auto was largely offset by an increase in worker’s compensation. The earned premium decrease was
largely due to the effect of non-renewals outpacing new business for commercial auto business in
2008 and to earned pricing decreases, largely offset by new business outpacing non-renewals in
workers’ compensation business over the last nine months of 2007 and the first nine months of 2008.
While the Company has focused on increasing new business from its agents and expanding writings in
certain territories, actions taken by some of the Company’s competitors to increase market share
and increase business appetite in certain classes of risks and actions taken by the Company to
reduce workers’ compensation rates in certain states have contributed to the decrease in written
premiums from 2007 to 2008.
|
New business premium
|
•
New business written premium was down $35, or 7%, driven
by a decrease in new package and commercial automobile business.
New business for package and commercial auto business declined
due to increased competition despite the use of lower pricing on
targeted accounts and an increase in commissions paid to agents.
New business written premium for workers’ compensation was up
modestly.
|
|
|
|
||
|
Policy count
retention |
•
Policy count retention decreased in all lines of
business.
|
|
|
|
||
|
Renewal earned
pricing increase (decrease) |
•
Renewal earned pricing decreased for workers’
compensation and commercial auto and was relatively flat for
package business. The earned pricing changes during 2008 were
primarily a reflection of written pricing changes over the last
two years.
|
|
|
|
||
|
Policies in-force
|
•
While earned premium was slightly down for 2008, the
number of policies in-force has increased 2%. The growth in
policies in-force does not correspond directly with the change
in earned premiums due to the effect of changes in earned
pricing and changes in the average premium per policy.
|
Losses and loss adjustment expenses
Current accident year losses and loss adjustment expenses before catastrophes
Small Commercial’s current accident year losses and loss adjustment expenses before catastrophes
decreased by $147 in 2008, primarily due to a 5.2 point decrease in the current accident year loss
and loss adjustment expense ratio before catastrophes. The decrease in this ratio was primarily
due to a lower loss and loss adjustment expense ratio for workers’ compensation business and, to a
lesser extent, a lower loss and loss adjustment expense ratio for package business. Workers’
compensation claim frequency has been trending favorably for recent accident years due to improved
workplace safety and underwriting actions and the lower loss and loss adjustment expense ratio for
the 2008 accident year includes an assumption that this lower claim frequency would continue for
the 2008 accident year. The loss and loss adjustment expense ratio for the 2007 accident year
recorded in 2007 did not give as much credence to this lower level of claim frequency. The effect
of lower claim frequency for workers’ compensation claims was partially offset by the effect of
earned pricing decreases.
Current accident year catastrophes
Current accident year catastrophe losses of $122, in 2008, were higher than current accident year
catastrophe losses of $28, in 2007, primarily due to hurricane Ike and tornadoes and thunderstorms
in the South and Midwest.
Prior accident year reserve development
Net favorable prior accident year development of $89 in 2008 included a $92 release of workers’
compensation reserves related to accident years 2000 to 2007. Net favorable reserve development of
$209 in 2007 included a $151 release of workers’ compensation loss and loss adjustment expense
reserves for accident years 2002 to 2006, a $33 release of workers’ compensation loss reserves for
accident years 1987 to 2000 and a $30 release of loss reserves for package business for accident
years 2003 to 2006.
Operating expenses
Insurance operating costs and expenses decreased by $9, primarily due to lower compensation-related
and servicing costs, partially offset by an estimated $7 of TWIA assessments in 2008. Amortization
of deferred policy acquisition costs was relatively flat consistent with the change in earned
premium. The expense ratio decreased slightly in 2008, driven by the decrease in insurance
operating costs and expenses.
102
Table of Contents
MIDDLE MARKET
| Underwriting Summary | 2009 | 2008 | 2007 | |||||||||
|
Written premiums
|
$ | 2,021 | $ | 2,242 | $ | 2,326 | ||||||
|
Change in unearned premium reserve
|
(80 | ) | (57 | ) | (94 | ) | ||||||
|
|
||||||||||||
|
Earned premiums
|
2,101 | 2,299 | 2,420 | |||||||||
|
Losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
1,352 | 1,460 | 1,561 | |||||||||
|
Current accident year catastrophes
|
32 | 116 | 15 | |||||||||
|
Prior accident years
|
(187 | ) | (134 | ) | (16 | ) | ||||||
|
|
||||||||||||
|
Total losses and loss adjustment expenses
|
1,197 | 1,442 | 1,560 | |||||||||
|
Amortization of deferred policy acquisition costs
|
486 | 513 | 529 | |||||||||
|
Insurance operating costs and expenses
|
160 | 175 | 174 | |||||||||
|
|
||||||||||||
|
Underwriting results
|
$ | 258 | $ | 169 | $ | 157 | ||||||
|
|
||||||||||||
| Premium Measures | 2009 | 2008 | 2007 | |||||||||
|
New business premium
|
$ | 434 | $ | 420 | $ | 394 | ||||||
|
Policy count retention
|
77 | % | 79 | % | 80 | % | ||||||
|
Renewal written pricing decrease
|
(2 | %) | (6 | %) | (5 | %) | ||||||
|
Renewal earned pricing decrease
|
(4 | %) | (6 | %) | (4 | %) | ||||||
|
Policies in-force as of end of period
|
95,540 | 97,308 | 94,828 | |||||||||
| Ratios | 2009 | 2008 | 2007 | |||||||||
|
Loss and loss adjustment expense ratio
|
||||||||||||
|
Current accident year before catastrophes
|
64.3 | 63.5 | 64.5 | |||||||||
|
Current accident year catastrophes
|
1.5 | 5.1 | 0.6 | |||||||||
|
Prior accident years
|
(8.9 | ) | (5.9 | ) | (0.7 | ) | ||||||
|
|
||||||||||||
|
Total loss and loss adjustment expense ratio
|
57.0 | 62.7 | 64.5 | |||||||||
|
Expense ratio
|
30.4 | 29.0 | 28.5 | |||||||||
|
Policyholder dividend ratio
|
0.4 | 0.9 | 0.6 | |||||||||
|
|
||||||||||||
|
Combined ratio
|
87.7 | 92.6 | 93.5 | |||||||||
|
|
||||||||||||
|
Catastrophe ratio
|
||||||||||||
|
Current accident year
|
1.5 | 5.1 | 0.6 | |||||||||
|
Prior accident years
|
(0.7 | ) | (0.5 | ) | (0.1 | ) | ||||||
|
|
||||||||||||
|
Total catastrophe ratio
|
0.9 | 4.6 | 0.5 | |||||||||
|
|
||||||||||||
|
Combined ratio before catastrophes
|
86.9 | 88.1 | 93.0 | |||||||||
|
Combined ratio before catastrophes and prior accident year development
|
95.1 | 93.4 | 93.5 | |||||||||
Underwriting results, premium measures and ratios
Year ended December 31, 2009 compared to the year ended December 31, 2008
Underwriting results increased by $89 with a corresponding decrease in the combined ratio of 4.9
points.
Earned premiums
Earned premiums for the Middle Market segment decreased by $198 in 2009, primarily driven by
decreases in general liability and commercial auto due to earned pricing decreases and the effect
of non-renewals outpacing new business. Middle Market workers’ compensation earned premium
increased modestly as the effect of an increase in new business written premium was partially
offset by lower earned audit premium.
103
Table of Contents
|
New business premium
|
•
New business written premium
increased by $14 primarily due to an
increase in new business written
premium for workers’ compensation,
partially offset by a decrease in
new business for marine, general
liability and commercial auto.
Despite continued pricing
competition, the Company has
increased new business for workers’
compensation by targeting business
in selected industries and regions
of the country where attractive new
business opportunities remain.
|
|
|
|
||
|
Policy count retention
|
•
Policy count retention
decreased largely due to a decrease
in workers’ compensation, property,
general liability and marine.
Policy count retention declined due
to the effects of the downturn in
the economy which caused business
closures and increased shopping of
policies by businesses seeking lower
premiums.
|
|
|
|
||
|
Renewal earned pricing decrease
|
•
Earned pricing decreased in
workers’ compensation, commercial
auto, general liability, property
and marine. The earned pricing
changes were primarily a reflection
of written pricing changes over the
last two years. A number of
carriers have continued to compete
fairly aggressively on price,
particularly on larger accounts
within Middle Market. Beginning in
the second quarter of 2009, however,
written pricing decreases moderated
for workers’ compensation, general
liability and marine and were flat
or slightly positive for property
and commercial auto.
|
|
|
|
||
|
Policies in-force
|
•
The number of policies
in-force decreased by 2%, partially
contributing to the decline in
earned premiums.
|
Losses and loss adjustment expenses
Current accident year losses and loss adjustment expenses before catastrophes
Middle Market current accident year losses and loss adjustment expenses before catastrophes
decreased by $108, primarily due to a decrease in earned premium, partially offset by an increase
in the current accident year loss and loss adjustment expense ratio before catastrophes. The
current accident year loss and loss adjustment expense ratio before catastrophes increased,
primarily due to a higher loss and loss adjustment expense ratio on workers’ compensation and
general liability, partially offset by lower non-catastrophe losses on property and marine
business, driven by favorable claim frequency and severity. The higher loss and loss adjustment
expense ratio
on workers’ compensation and general liability business was primarily due to the effects of
renewal earned pricing decreases in excess of loss cost changes.
Current accident year catastrophes
Current accident year catastrophe losses decreased by $84 as losses in 2008 from hurricane Ike and
tornadoes and thunderstorms in the South and Midwest were higher than losses in 2009 from hail and
windstorms in Colorado, the Midwest and Southeast.
Prior accident year reserve development
Net favorable prior accident year reserve development increased by $53. Net favorable prior
accident year reserve development of $187 in 2009 included, among other reserve changes, general
liability reserve releases of $112 primarily related to accident years 2003 to 2007 and a $52
release of workers’ compensation reserves, primarily related to accident years 2007 and prior. Net
favorable reserve development of $134 in 2008 primarily included a $90 release of reserves for high
hazard and umbrella general liability claims, primarily related to the 2001 to 2007 accident years,
a $64 release of workers’ compensation reserves, primarily related to accident years 2000 to 2007
and a $27 release of commercial auto liability reserves, primarily related to accident years 2002
to 2007, partially offset by a $50 strengthening of reserves for general liability and products
liability claims primarily for accident years 2004 and prior.
Operating expenses
Insurance operating costs and expenses decreased by $15 primarily due to a $14 increase in the
estimated amount of dividends payable to certain workers’ compensation policyholders due to
underwriting profits recognized in 2008. Amortization of deferred policy acquisition costs
decreased by $27 largely due to the decrease in earned premiums. The expense ratio increased by
1.4 points in 2009 as insurance operating costs and expenses other than policyholders dividends did
not decrease commensurate with the decrease in earned premiums.
104
Table of Contents
Year ended December 31, 2008 compared to the year ended December 31, 2007
Underwriting results increased by $12 with a corresponding 0.9 point decrease in the combined
ratio.
Earned premiums
Earned premiums for the Middle Market segment decreased by $121, or 5%, driven primarily by
decreases in commercial auto, workers’ compensation and general liability. Earned premium
decreases were primarily due to a decline in earned pricing in 2008 and the effect of non-renewals
outpacing new business in commercial auto and general liability over the last nine months of 2007
and the first nine months of 2008, partially offset by the effect of new business written premium
outpacing non-renewals in workers’ compensation since the fourth quarter of 2007.
|
New business premium
|
•
New business written premium increased by $26, or 7%, in 2008 as an increase in new business
written premium for workers’ compensation was partially offset by a decrease in new business for
general liability, marine and commercial auto. While continued price competition and the effect of
some state-mandated rate reductions in workers’ compensation has lessened the attractiveness of new
business in certain lines and regions, the Company has increased new business for workers’
compensation due, in part, to the effect of targeting business in selected industries and regions of
the country.
|
|
|
|
||
|
Policy count
retention |
•
Policy count retention decreased due largely to a decrease in retention for general
liability.
|
|
|
|
||
|
Renewal earned
pricing decrease |
•
Renewal earned pricing decreased in workers’ compensation, commercial auto, general
liability, property and marine. The earned pricing decreases in 2008 were primarily a reflection of
written pricing changes over the last two years. A number of carriers have continued to compete
fairly aggressively on price, particularly on larger accounts within Middle Market, which has
contributed to mid-single digit price decreases across the industry.
|
|
|
|
||
|
Policies in-force
|
•
The number of policies in-force increased by 3%, due largely to growth on smaller accounts.
|
Losses and loss adjustment expenses
Current accident year losses and loss adjustment expenses before catastrophes
Middle Market current accident year losses and loss adjustment expenses before catastrophes
decreased by $101 due largely to a decrease in earned premium. Before catastrophes, the current
accident year loss and loss adjustment expense ratio decreased by 1.0 point, primarily due to a
lower loss and loss adjustment expense ratio on workers’ compensation and general liability
business, largely offset by higher non-catastrophe losses on property and marine business and the
effect of earned pricing decreases. The higher non-catastrophe losses on property business were
driven by increased severity, including a number of large individual claims, and the higher
non-catastrophe losses on marine business were primarily driven by increased frequency.
Current accident year catastrophes
Current accident year catastrophe losses of $116 in 2008 were higher than current accident year
catastrophe losses of $15 in 2007, primarily due to losses from hurricane Ike and tornadoes and
thunderstorms in the South and Midwest.
Prior accident year development
Net favorable prior accident year reserve development increased by $118 in 2008. Net favorable
reserve development of $134 in 2008 primarily included a $90 release of reserves for high hazard
and umbrella general liability claims, primarily related to the 2001 to 2007 accident years, a $64
release of workers’ compensation reserves, primarily related to accident years 2000 to 2007 and a
$27 release of commercial auto liability reserves, primarily related to accident years 2002 to
2007, partially offset by a $50 strengthening of reserves for general liability and products
liability claims primarily for accident years 2004 and prior.
Net favorable reserve development of $16 in 2007 primarily included a $49 release of general
liability loss and loss adjustment expense reserves for accident years 2003 to 2006 and an $18
release of commercial auto liability reserves for accident years 2003 and 2004, partially offset by
a $40 strengthening of workers’ compensation reserves for accident years 1973 & prior and a $14
strengthening of general liability reserves for accident years more than 20 years old.
Operating expenses
The $16 decrease in the amortization of deferred policy acquisition costs was largely due to the
decrease in earned premium, partially offset by the amortization of higher underwriting costs.
Insurance operating costs and expenses included policyholder dividends of $21 in 2008 and $14 in
2007 which increased primarily due to a $6 increase in the estimated amount of dividends payable to
certain workers’ compensation policyholders due to underwriting profits. Apart from policyholder
dividends, insurance operating costs and expenses decreased by $6 as the effect of lower
compensation-related costs was partially offset by higher IT costs and an estimated $3 of TWIA
assessments in 2008. The expense ratio increased by 0.5 points due to the amortization of higher
underwriting costs, the TWIA assessments in 2008 and the effect of lower earned premiums, partially
offset by the effect of lower compensation-related costs.
105
Table of Contents
SPECIALTY COMMERCIAL
| Underwriting Summary | 2009 | 2008 | 2007 | |||||||||
|
Written premiums
|
$ | 1,127 | $ | 1,361 | $ | 1,415 | ||||||
|
Change in unearned premium reserve
|
(101 | ) | (21 | ) | (31 | ) | ||||||
|
|
||||||||||||
|
Earned premiums
|
1,228 | 1,382 | 1,446 | |||||||||
|
Losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
842 | 941 | 961 | |||||||||
|
Current accident year catastrophes
|
2 | 47 | 9 | |||||||||
|
Prior accident years
|
(172 | ) | (81 | ) | 84 | |||||||
|
|
||||||||||||
|
Total losses and loss adjustment expenses
|
672 | 907 | 1,054 | |||||||||
|
Amortization of deferred policy acquisition costs
|
284 | 313 | 323 | |||||||||
|
Insurance operating costs and expenses
|
102 | 91 | 87 | |||||||||
|
|
||||||||||||
|
Underwriting results
|
$ | 170 | $ | 71 | $ | (18 | ) | |||||
|
|
||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Written Premiums
|
||||||||||||
|
Property
|
$ | (16 | ) | $ | 50 | $ | 111 | |||||
|
Casualty
|
494 | 538 | 534 | |||||||||
|
Professional liability, fidelity and surety
|
582 | 691 | 689 | |||||||||
|
Other
|
67 | 82 | 81 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 1,127 | $ | 1,361 | $ | 1,415 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earned Premiums
|
||||||||||||
|
Property
|
$ | 21 | $ | 87 | $ | 133 | ||||||
|
Casualty
|
496 | 526 | 543 | |||||||||
|
Professional liability, fidelity and surety
|
643 | 685 | 685 | |||||||||
|
Other
|
68 | 84 | 85 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 1,228 | $ | 1,382 | $ | 1,446 | ||||||
|
|
||||||||||||
| Ratios | 2009 | 2008 | 2007 | |||||||||
|
Loss and loss adjustment expense ratio
|
||||||||||||
|
Current accident year before catastrophes
|
68.6 | 68.1 | 66.6 | |||||||||
|
Current accident year catastrophes
|
0.1 | 3.4 | 0.6 | |||||||||
|
Prior accident years
|
(14.0 | ) | (5.8 | ) | 5.8 | |||||||
|
|
||||||||||||
|
Total loss and loss adjustment expense ratio
|
54.7 | 65.6 | 73.0 | |||||||||
|
Expense ratio
|
31.4 | 28.3 | 27.4 | |||||||||
|
Policyholder dividend ratio
|
0.1 | 0.9 | 0.9 | |||||||||
|
|
||||||||||||
|
Combined ratio
|
86.2 | 94.8 | 101.3 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Catastrophe ratio
|
||||||||||||
|
Current accident year
|
0.1 | 3.4 | 0.6 | |||||||||
|
Prior accident years
|
(0.4 | ) | (1.2 | ) | 0.1 | |||||||
|
|
||||||||||||
|
Total catastrophe ratio
|
(0.3 | ) | 2.2 | 0.7 | ||||||||
|
|
||||||||||||
|
Combined ratio before catastrophes
|
86.5 | 92.6 | 100.6 | |||||||||
|
Combined ratio before catastrophes and prior accident year development
|
100.1 | 97.3 | 94.9 | |||||||||
|
Other revenues [1]
|
$ | 340 | $ | 371 | $ | 354 | ||||||
| [1] |
Represents servicing revenue
|
106
Table of Contents
Underwriting results, premium measures and ratios
Year ended December 31, 2009 compared to the year ended December 31, 2008
Underwriting results increased by $99 with a corresponding decrease in the combined ratio of 8.6
points.
Earned premiums
Earned premiums for the Specialty Commercial segment decreased by $154 due to decreases in all
lines of business.
| • |
Property earned premiums decreased by $66 primarily due to the sale of the Company’s core
excess and surplus lines property business. Effective March 31, 2009, the Company sold its
core excess and surplus lines property business, to Beazley Group PLC. Concurrent with the
sale, the in-force book of business was ceded to Beazley under a separate reinsurance
agreement, whereby the Company ceded $26 of unearned premium, net of $10 in ceding commission.
The ceding of the unearned premium was reflected as a reduction of written premium as of
December 31, 2009.
|
| • |
Casualty earned premiums decreased by $30, primarily due to lower audit premiums and a
decrease in insured exposures driven by the downturn in the economy.
|
| • |
Professional liability, fidelity and surety earned premium decreased by $42 primarily due
to the effects of lower new business and premium renewal retention and earned pricing
decreases. The adverse impact of ratings downgrades early in 2009 and the loss of key
leadership personnel contributed to a decline in new business and renewal retention.
|
| • |
Within the “Other” category, earned premium decreased by $16 in 2009. The “Other” category
of earned premiums includes premiums assumed under inter-segment arrangements.
|
Losses and loss adjustment expenses
Current accident year losses and loss adjustment expenses before catastrophes
Current accident year losses and loss adjustment expenses before catastrophes decreased by $99
primarily due to a decrease in earned premiums.
Current accident year catastrophe losses
Current accident year catastrophe losses were $45 lower in 2009 as compared to prior year primarily
due to losses from hurricane Ike in 2008.
Prior accident year reserve development
Net favorable prior accident year reserve development of $172 in 2009 included, among other reserve
changes, releases of reserves for directors’ and officers’ insurance claims of $127 and a $20
release of reserves for uncollectible reinsurance. Net favorable prior accident year reserve
development of $81 in 2008 primarily included a $75 release of reserves for directors’ and officers
insurance and errors and omissions insurance claims related to accident years 2003 to 2006.
Operating expenses
Amortization of deferred policy acquisition costs decreased by $29 due to the decrease in earned
premiums. Insurance operating costs and expenses increased by $11, primarily due to a $23 increase
in taxes, licenses and fees due to a $6 increase in the assessment for a second injury fund and $17
reserve strengthening for other state funds and taxes, partially offset by a decrease in
policyholder dividends and compensation-related costs. The expense ratio increased by 3.1 points
due to the decrease in earned premiums and the increase in insurance operating costs and expenses.
Year ended December 31, 2008 compared to the year ended December 31, 2007
Underwriting results increased by $89 with a corresponding 6.5 point decrease in the combined
ratio.
Earned premiums
Earned premiums for the Specialty Commercial segment decreased by $64 or 4%, primarily due to a
decrease in property and, to a lesser extent, casualty earned premiums.
| • |
Property earned premiums decreased by $46, primarily due to the Company’s decision to stop
writing specialty property business with large, national accounts and the effect of increased
competition for core excess and surplus lines business. As a result of increased competition
and capacity for core excess and surplus lines business, the Company has experienced a
decrease in earned pricing, lower new business growth and lower premium renewal retention
since the third quarter of 2007, particularly for catastrophe-exposed business.
|
| • |
Casualty earned premiums decreased by $17, primarily because of lower earned premium from
captive programs and a decline in new business premium on loss-sensitive business written with
larger accounts over the last nine months of 2007 and first three months of 2008.
|
107
Table of Contents
| • |
Professional liability, fidelity and surety earned premium was flat. Earned premium for
professional liability was relatively flat as the effect of earned pricing decreases in 2008
and the effect of a decline in new business written premium over the last nine months of 2007
and the first six months of 2008 were largely offset by the effect of a decrease in the
portion of risks ceded to outside
reinsurers. Earned premium for fidelity and surety business was also relatively flat as a
modest decrease in commercial surety was largely offset by a modest increase in contract surety.
|
| • |
Within the “Other” category, earned premium remained relatively flat from 2007 to 2008.
The “Other” category of earned premiums includes premiums assumed under inter-segment
arrangements.
|
Losses and loss adjustment expenses
Current accident year losses and loss adjustment expenses before catastrophes
Specialty Commercial current accident year losses and loss adjustment expenses before catastrophes
decreased by $20, due to a decrease in earned premium, partially offset by an increase in the loss
and loss adjustment expense ratio before catastrophes and prior accident year development. The
loss and loss adjustment expense ratio before catastrophes and prior accident year development
increased by 1.5 points, primarily due to a higher loss and loss adjustment expense ratio for
directors and officers insurance in professional liability, driven by earned pricing decreases, and
a lower mix of property business which has a lower loss and loss adjustment ratio than other
businesses within Specialty Commercial.
Current accident year catastrophe losses
Current accident year catastrophe losses increased $38, primarily due to losses from hurricane Ike.
Prior accident year reserve development
Prior accident year reserve development changed from net unfavorable prior accident year reserve
development of $84 in 2007 to net favorable prior accident year reserve development of $81 in 2008.
Net favorable prior accident year reserve development in 2008 primarily included a $75 release of
reserves for directors’ and officers insurance and errors and omissions insurance claims related to
accident years 2003 to 2006.
Prior accident year reserve development in 2007 consisted primarily of a $47 strengthening of
workers’ compensation loss and loss adjustment expense reserves for accident years 1987 to 2001, a
$34 strengthening of general liability reserves, primarily related to accident years 1987 to 1997,
and a $25 strengthening of general liability reserves for accident years more than 20 years old.
Partially offsetting the unfavorable reserve development in 2007 was a $22 release of reserves for
surety business for accident years 2003 to 2006.
Operating expenses
Amortization of deferred policy acquisition costs decreased by $10 due to the decrease in earned
premium, partially offset by the effect of an increase in net acquisition costs related to writing
a greater mix of higher net commission small commercial and private directors’ and officers’
insurance. Insurance operating costs and expenses increased by $4, primarily due to an increase in
IT costs. The expense ratio increased by 0.9 points, primarily due to the increase in insurance
operating costs and expenses, the increase in net acquisition costs for directors’ and officers’
insurance and the effect of the decrease in earned premium.
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Table of Contents
OTHER OPERATIONS
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Written premiums
|
$ | 4 | $ | 7 | $ | 5 | ||||||
|
Change in unearned premium reserve
|
4 | — | — | |||||||||
|
|
||||||||||||
|
Earned premiums
|
— | 7 | 5 | |||||||||
|
Losses and loss adjustment expenses — prior year
|
242 | 129 | 193 | |||||||||
|
Insurance operating costs and expenses
|
19 | 23 | 22 | |||||||||
|
|
||||||||||||
|
Underwriting results
|
(261 | ) | (145 | ) | (210 | ) | ||||||
|
Net investment income
|
163 | 197 | 248 | |||||||||
|
Net realized capital losses
|
(28 | ) | (208 | ) | (12 | ) | ||||||
|
Other expenses
|
— | (3 | ) | (1 | ) | |||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
(126 | ) | (159 | ) | 25 | |||||||
|
Income tax benefit
|
(49 | ) | (62 | ) | (5 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (77 | ) | $ | (97 | ) | $ | 30 | ||||
|
|
||||||||||||
The Other Operations segment includes operations that are under a single management structure,
Heritage Holdings, which is responsible for two related activities. The first activity is the
management of certain property and casualty subsidiaries and operations of the Company that have
discontinued writing new business. The second is the management of claims (and the associated
reserves) related to asbestos, environmental and other exposures. The Other Operations book of
business contains policies written from approximately the 1940s to 2003. The Company’s experience
has been that this book of run-off business has, over time, produced significantly higher claims
and losses than were contemplated at inception.
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net loss for 2009 decreased by $20 compared to the prior year period, driven primarily by the
following:
| • |
A $180 decrease in net realized capital losses, primarily due to fewer impairments and
stabilizing market and credit conditions.
|
| • |
A $116 decrease in underwriting results, primarily due to a $113 increase in unfavorable
prior year loss development. Reserve development in 2009 included $138 of asbestos reserve
strengthening and $75 of environmental reserve strengthening as a result of the Company’s
annual asbestos and environmental reserve evaluations, partially offset by a decrease of $20
in the allowance for uncollectible reinsurance as a result of the Company’s annual evaluation
of reinsurance recoverables. In 2008, reserve development included $50 of asbestos reserve
strengthening and $53 of environmental reserve strengthening.
|
| • |
A $34 decrease in net investment income, primarily as a result of a decrease in investment
yield for fixed maturities and, to a lesser extent, lower income on limited partnerships and
other alternative investments.
|
| • |
A $13 decrease in income tax benefit due to the pre-tax factors described above.
|
Year ended December 31, 2008 compared to the year ended December 31, 2007
Other Operations reported a net loss of $97 in 2008 compared to net income of $30 in 2007, driven
primarily by the following:
| • |
A $65 increase in underwriting results, primarily due to a $64 decrease in unfavorable
prior year loss development. Reserve development in 2008 included $50 of asbestos reserve
strengthening and $53 of environmental reserve strengthening. In 2007, reserve development
included $99 principally as a result of an adverse arbitration decision and $25 of
environmental reserve strengthening.
|
| • |
A $51 decrease in net investment income, primarily as a result of net losses on limited
partnerships and other alternative investments in 2008 and decreased fixed maturity income.
|
| • |
A $196 increase in net realized capital losses, primarily due to realized losses in 2008
from impairments of subordinated fixed maturities and preferred equity securities in the
financial services sector as well as of securitized assets.
|
| • |
A $57 increase in income tax benefit, primarily as a result of a change from pre-tax income
in 2007 to a pre-tax loss in 2008.
|
109
Table of Contents
CORPORATE
| Operating Summary | 2009 | 2008 | 2007 | |||||||||
|
Fee income
|
$ | 13 | $ | 17 | $ | 16 | ||||||
|
Net investment income
|
22 | 37 | 30 | |||||||||
|
Net realized capital gains (losses)
|
(228 | ) | 97 | (3 | ) | |||||||
|
|
||||||||||||
|
Total revenues
|
(193 | ) | 151 | 43 | ||||||||
|
Amortization of deferred policy acquisition costs and
present value of future profits
|
— | — | 1 | |||||||||
|
Interest expense
|
476 | 341 | 259 | |||||||||
|
Goodwill impairment
|
32 | 323 | — | |||||||||
|
Other expenses
|
53 | (14 | ) | (40 | ) | |||||||
|
|
||||||||||||
|
Total expenses
|
561 | 650 | 220 | |||||||||
|
Loss before income taxes
|
(754 | ) | (499 | ) | (177 | ) | ||||||
|
Income tax benefit
|
(171 | ) | (101 | ) | (61 | ) | ||||||
|
|
||||||||||||
|
Net loss [1]
|
$ | (583 | ) | $ | (398 | ) | $ | (116 | ) | |||
|
|
||||||||||||
| [1] |
The year ended December 31, 2009 includes a net loss from Federal Trust Corporation of $6.
See Note 22 of the Notes to Consolidated Financial Statements for further information on the
Company’s acquisition of Federal Trust Corporation.
|
Year ended December 31, 2009 compared to the year ended December 31, 2008
|
Net realized capital gains (losses)
|
•
The change was primarily due
to approximately $300 in net
realized losses related to the
settlement of a contingent
obligation to Allianz partially
offset by realized gains of $70 on
the change in fair value of the
liability related to warrants issued
to Allianz. Additionally, 2008
included realized gains of $110 on
the change in fair value of the
liability related to warrants issued
to Allianz. See Note 21 of the
Notes to Consolidated Financial
Statements for a further discussion
on Allianz.
|
|
|
|
||
|
Interest expense
|
•
The increase in interest
expense was primarily due to the
issuance of $1.75 billion 10.0%
junior subordinated debentures on
October 17, 2008, partially offset
by a reduction from debt repayments
of $955 in 2008. For further
discussion on the Company’s debt see
Note 14 of the Notes to Consolidated
Financial Statements.
|
|
|
|
||
|
Goodwill impairment
|
•
The Company’s goodwill
impairment test performed during
2009 resulted in a write-down of $32
in Corporate related to the
Institutional segment as compared to
$323 in 2008 related to the
Individual Annuity and International
reporting units. See Note 8 of the
Notes to Consolidated Financial
Statements for a further discussion
on Goodwill.
|
|
|
|
||
|
Other expenses
|
•
The increase in other
expenses was a result of $19 in
expenses incurred in 2009 from
Federal Trust Corporation, a company
The Hartford acquired in June of
2009, restructuring costs of $12 and
an increase of $17 in the DAC Unlock
charge recorded in Corporate.
Additionally, 2008 included a
benefit of $15 from interest charged
by Corporate on the amount of
capital held by the Life and
Property & Casualty operations in
excess of the amount needed to
support the capital requirements of
the respective operations.
|
Year ended December 31, 2008 compared to the year ended December 31, 2007
|
Net realized capital gains (losses)
|
•
The change was primarily due
to a realized gain of approximately
$110 on the change in fair value of
the liability related to warrants
issued to Allianz in 2008. See Note
21 of the Notes to Consolidated
Financial Statements for a further
discussion on Allianz.
|
|
|
|
||
|
Interest expense
|
•
The additional interest
expense was primarily due to $106
related to total debt issuances in
2008 of $3.25 billion, partially
offset by a reduction of $23 from
debt repayments of $955 and $300 in
2008 and 2007, respectively. See
Note 14 of the Notes to Consolidated
Financial Statements for a further
discussion on the Company’s debt.
|
|
|
|
||
|
Goodwill impairment
|
•
The Company’s goodwill
impairment test performed during
2008 resulted in a write-down of
$323 in Corporate related to the
Individual Annuity and International
reporting units. See Note 8 of the
Notes to Consolidated Financial
Statements for a further discussion
on Goodwill.
|
|
|
|
||
|
Other expenses
|
•
The increase in other
expenses was a result of a reduction
of $62 in the benefit received from
interest charged by Corporate on the
amount of capital held by the Life
and Property & Casualty operations
in excess of the amount needed to
support the capital requirements of
the respective operations, which was
offset by an increase of $8 in the
DAC Unlock benefit and a benefit of
$28 related to modifications to
stock option awards and other
compensation.
|
110
Table of Contents
PROPERTY & CASUALTY UNDERWRITING RISK MANAGEMENT STRATEGY
The Hartford’s property and casualty operations have processes to manage risk related to
natural disasters, such as hurricanes and earthquakes, and other perils, such as terrorism. The
Hartford’s risk management processes include, but are not limited to, disciplined underwriting
protocols, exposure controls, sophisticated risk modeling, risk transfer, and capital management
strategies.
In managing risk, The Hartford’s management processes involve establishing underwriting guidelines
for both individual risks, including individual policy limits, and in aggregate, including
aggregate exposure limits by geographic zone and peril. The Company establishes risk limits and
actively monitors the risk exposures as a percent of Property & Casualty statutory surplus. For
natural catastrophe perils, the Company generally limits its estimated loss to natural catastrophes
from a single 250-year event prior to reinsurance to less than 30% of statutory surplus of the
Property & Casualty operations and its estimated loss to natural catastrophes from a single
250-year event after reinsurance to less than 15% of statutory surplus of the Property & Casualty
operations. From time to time, the estimated loss to natural catastrophes from a single 250-year
event prior to reinsurance may fluctuate above or below 30% of statutory surplus due to changes in
modeled loss estimates, exposures, or statutory surplus. Currently, the Company’s estimated
pre-tax loss to a single 250-year natural catastrophe event prior to reinsurance is less than 30%
of the statutory surplus of the Property & Casualty operations and the Company’s estimated pre-tax
loss net of reinsurance is less than 15% of statutory surplus of the Property & Casualty
operations. For terrorism, the Company monitors its exposure in major metropolitan areas to a
single-site conventional terrorism attack scenario, and manages its potential estimated loss,
including exposures resulting from the Company’s Group Life operations, to less than $1.3 billion.
Among the landmark locations specifically monitored by the Company as of December 31, 2009, the
largest estimated modeled loss arising from a single event is approximately $1.1 billion. The
Company monitors exposures monthly and employs both internally developed and vendor-licensed loss
modeling tools as part of its risk management discipline.
Use of Reinsurance
In managing risk, The Hartford utilizes reinsurance to transfer risk to well-established and
financially secure reinsurers. Reinsurance is used to manage aggregations of risk as well as to
transfer certain risks to reinsurance companies based on specific geographic or risk
concentrations. All treaty purchases related to the Company’s property and casualty operations are
administered by a centralized function to support a consistent strategy and ensure that the
reinsurance activities are fully integrated into the organization’s risk management processes.
A variety of traditional reinsurance products are used as part of the Company’s risk management
strategy, including excess of loss occurrence-based products that protect property and workers’
compensation exposures, and individual risk or quota share arrangements, that protect specific
classes or lines of business. The Company has no significant finite risk contracts in place and
the statutory surplus benefit from all such prior year contracts is immaterial. Facultative
reinsurance is used by the Company to manage policy-specific risk exposures based on established
underwriting guidelines. The Hartford also participates in governmentally administered reinsurance
facilities such as the Florida Hurricane Catastrophe Fund (“FHCF”), the Terrorism Risk Insurance
Program established under The Terrorism Risk Insurance Program Reauthorization Act of 2007
(“TRIPRA”) and other reinsurance programs relating to particular risks or specific lines of
business.
The Company has several catastrophe reinsurance programs, including reinsurance treaties that cover
property and workers’ compensation losses aggregating from single catastrophe events. The
following table summarizes the primary catastrophe treaty reinsurance coverages that the Company
has in place as of February 1, 2010:
| % of layer(s) | ||||||||||
| Coverage | Treaty term | reinsured | Per occurrence limit | Retention | ||||||
|
Principal property catastrophe program covering property catastrophe losses from a single event
|
1/1/2010 to 1/1/2011 | Varies by layer, but averages 81% across all layers | Aggregates to $690 across all layers | $ | 250 | |||||
|
|
||||||||||
|
Reinsurance with the FHCF covering Florida Personal Lines property catastrophe losses from a single event
|
6/1/2009 to 6/1/2010 | 90% | 293 [1] | 69 | ||||||
|
|
||||||||||
|
Workers’ compensation losses arising from a single catastrophe event
|
7/1/2009 to 7/1/2010 | 95% | 280 | 20 | ||||||
| [1] |
The per occurrence limit
on the FHCF treaty is $293 for the 6/1/2009 to 6/1/2010 treaty
year based on the Company’s election to purchase additional limits under the “Temporary
Increase in Coverage Limit (TICL)” statutory provision in excess of the coverage the Company
is required to purchase from the FHCF.
|
111
Table of Contents
In addition to the property catastrophe reinsurance coverage described in the above table, the
Company has other treaties and facultative reinsurance agreements that cover property catastrophe
losses on an aggregate excess of loss and on a per risk basis. The principal property catastrophe
reinsurance program and other reinsurance programs include a provision to reinstate limits in the
event that a catastrophe loss exhausts limits on one or more layers under the treaties.
In addition to the reinsurance protection provided by The Hartford’s traditional property
catastrophe reinsurance program described above, the Company has fully collateralized reinsurance
coverages from Foundation Re, Foundation Re II and Foundation Re III for losses sustained from
qualifying hurricane and earthquake loss events and other qualifying catastrophe losses.
Foundation Re, Foundation Re II and Foundation Re III are Cayman Islands reinsurance companies
which financed the provision of the reinsurance through the issuance of catastrophe bonds. Under
the terms of the treaties with Foundation Re, Foundation Re II and Foundation Re III, the Company
is reimbursed for losses from natural disaster events using a customized industry index contract
designed to replicate The Hartford’s own catastrophe losses, with a provision that the actual
losses incurred by the Company for covered events, net of reinsurance recoveries, cannot be less
than zero.
The following table summarizes the terms of the reinsurance treaties with Foundation Re, Foundation
Re II and Foundation Re III that were in place as of February 1, 2010:
| Bond amount issued by | ||||||||
| Foundation Re, | ||||||||
| Foundation Re II or | ||||||||
| Covered perils | Treaty term | Covered losses | Foundation Re III | |||||
|
Hurricane loss events affecting the Gulf and Eastern Coast of the United States and loss events arising from California, Pacific Northwest, and New Madrid earthquakes.
|
2/17/2006 to 2/17/2010 | 26% of $400 in losses in excess of an index loss trigger equating to approximately $1.3 billion in Hartford losses | $ | 105 | ||||
|
|
||||||||
|
Hurricane loss events affecting the Gulf and Eastern Coast of the United States
|
11/17/2006 to 11/17/2010 | 45% of $400 in losses in excess of an index loss trigger equating to approximately $1.85 billion in Hartford losses | 180 | |||||
|
|
||||||||
|
Hurricane loss events affecting the Gulf and Eastern Coast of the United States
|
1/27/2010 to 1/27/2014 | 90% of $200 in losses in excess of an index loss trigger equating to approximately $1.2 billion in Hartford losses | 180 | |||||
As of February 1, 2010, there have been no events that are expected to trigger a recovery
under any of the reinsurance programs with Foundation Re, Foundation Re II or Foundation III and,
accordingly, the Company has not recorded any recoveries from the associated reinsurance treaties.
112
Table of Contents
Estimated Catastrophe Exposures
The Company uses third-party models to estimate the potential loss resulting from various
catastrophe events and the potential financial impact those events would have on the Company’s
financial position and results of operations. The following table shows modeled loss estimates
before expected reinsurance recoveries and after expected reinsurance recoveries. The loss
estimates represent total property losses for hurricane events and property and workers’
compensation losses for earthquake events resulting from a single event. The estimates provided
are based on 250-year return period loss estimates, which have a 0.4% likelihood of being exceeded
in any single year. The net loss estimates assume that the Company would be able to recover all
losses ceded to reinsurers under its reinsurance programs. There are various methodologies used in
the industry to estimate the potential property and workers’ compensation losses that would arise
from various catastrophe events and companies may use different models and assumptions in their
estimates. Therefore, the Company’s estimates of gross and net losses arising from a 250-year
hurricane or earthquake event may not be comparable to estimates provided by other companies.
Furthermore, the Company’s estimates are subject to significant uncertainty and could vary
materially from the actual losses that would arise from these events.
The Company’s modeled loss estimates are derived by averaging 21 modeled loss events representing a
250-year return period loss. For the peril of earthquake, the 21 events averaged to determine the
modeled loss estimate include events occurring in California as well as the Northwestern,
Northeastern, Southeastern and Midwestern regions of the United States with associated magnitudes
ranging from 6.1 to 7.9 on the Moment Magnitude scale. For the peril of hurricane, the 21 events
averaged to determine the modeled loss estimate include category 3, 4 and 5 events in Florida, as
well as other Southeastern and Northeastern region landfalls.
| Hurricane | Earthquake | |||||||||||||||
| Net of | ||||||||||||||||
| Expected | Net of Expected | |||||||||||||||
| Before | Reinsurance | Before | Reinsurance | |||||||||||||
| Reinsurance | Recoveries | Reinsurance | Recoveries | |||||||||||||
|
Estimated 250-year probable maximum loss, before-tax
|
$ | 1,587 | $ | 603 | $ | 686 | $ | 316 | ||||||||
|
|
||||||||||||||||
|
After-tax effect as a percentage of statutory surplus of the Property & Casualty operations as of December 31, 2009
|
7 | % | 3 | % | ||||||||||||
Terrorism
The Company is exposed to losses from terrorist attacks, including losses caused by nuclear,
biological, chemical or radiological weapons (“NBCR”) attacks. For terrorism, private sector
catastrophe reinsurance capacity is limited and generally unavailable for terrorism losses caused
by nuclear, biological, chemical or radiological weapons attacks. As such, the Company’s principal
reinsurance protection against large-scale terrorist attacks is the coverage currently provided
through the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). On December 26, 2007,
the President signed TRIPRA extending the Terrorism Risk Insurance Act of 2002 (“TRIA”) through the
end of 2014. TRIPRA provides a backstop for insurance-related losses resulting from any “act of
terrorism” certified by the Secretary of the Treasury, in concurrence with the Secretary of State
and Attorney General, that result in industry losses in excess of $100. In addition, TRIPRA
revised the TRIA definition of a certified “act of terrorism” by removing the requirement that an
act be committed “on behalf of any foreign person or foreign interest.” As a result, domestic acts
of terrorism can now be certified as “acts of terrorism” under the program, subject to the other
requirements of TRIPRA. Under the program, in any one calendar year, the federal government would
pay 85% of covered losses from a certified act of terrorism after an insurer’s losses exceed 20% of
the company’s eligible direct commercial earned premiums of the prior calendar year, up to a
combined annual aggregate limit for the federal government and all insurers of $100 billion. If an
act of terrorism or acts of terrorism result in covered losses exceeding the $100 billion annual
industry aggregate limit, a future Congress would be responsible for determining how additional
losses in excess of $100 billion will be paid.
Among other items, TRIPRA required that the President’s Working Group on Financial Markets (“PWG”)
continue to perform an analysis regarding the long-term availability and affordability of insurance
for terrorism risk. Among the findings detailed in the PWG’s initial report, released October 2,
2006, were that the high level of uncertainty associated with predicting the frequency of terrorist
attacks, coupled with the unwillingness of some insurance policyholders to purchase insurance
coverage, makes predicting long-term development of the terrorism risk market difficult, and that
there is likely little potential for future market development for NBCR coverage. A December 2008
study by the U.S. Government Accountability Office (“GAO”) found that property and casualty
insurers still generally seek to exclude NBCR coverage from their commercial policies when
permitted. However, while nuclear, pollution and contamination exclusions are contained in many
property and liability insurance policies, the GAO report concluded that such exclusions may be
subject to challenges in court because they were not specifically drafted to address terrorist
attacks. Furthermore, workers’ compensation policies generally have no exclusions or limitations.
The GAO found that commercial property and casualty policyholders, including companies that own
high-value properties in large cities, generally reported that they could not obtain NBCR coverage.
Commercial property and casualty insurers generally remain unwilling to offer NBCR coverage because
of uncertainties about the risk and the potential for catastrophic losses.
113
Table of Contents
The Texas Windstorm Insurance Association (“TWIA”)
The Texas Windstorm Insurance Association provides hail and windstorm coverage to Texas residents
of 14 counties along the Texas Gulf coast who are unable to obtain insurance from other carriers.
Insurance carriers who write property insurance in the state of Texas, including The Hartford, are
required to be members of TWIA and are obligated to pay assessments in the event that TWIA losses
exceed funds on hand, the available funds in the Texas Catastrophe Reserve Trust Fund (“CRTF”) and
any available reinsurance. Assessments are allocated to carriers based on their share of premium
writings in the state of Texas, as defined.
During 2008, the board of directors of TWIA notified its member companies that it would assess them
$430 to cover TWIA losses from hurricane Ike. In the third quarter of 2008, the Company accrued a
liability of $27 for its estimate of assessments it would ultimately get from TWIA. In the first
quarter of 2009, the Company reduced its estimated assessments by $14, from $27 to $13, resulting
in a reduction in insurance operating costs and expenses. The Company estimates that of the $13 of
accrued assessments for Ike, it will ultimately be able to recoup $8 through premium tax credits.
Florida Citizens Assessments
Citizens Property Insurance Corporation in Florida (“Citizens”) provides property insurance to
Florida homeowners and businesses that are unable to obtain insurance from other carriers,
including for properties deemed to be “high risk”. Citizens maintains a Personal Lines account, a
Commercial Lines account and a High Risk account. If Citizens incurs a deficit in any of these
accounts, Citizens may impose a “regular assessment” on other insurance carriers in the state to
fund the deficits, subject to certain restrictions and subject to approval by the Florida Office of
Insurance Regulation. Carriers are then permitted to surcharge policyholders to recover the
assessments over the next few years. Citizens may also opt to finance a portion of the deficits
through issuing bonds and may impose “emergency assessments” on other insurance carriers to fund
the bond repayments. Unlike with regular assessments, however, insurance carriers only serve as a
collection agent for emergency assessments and are not required to remit surcharges for emergency
assessments to Citizens until they collect surcharges from policyholders. Under U.S. GAAP, the
Company is required to accrue for regular assessments in the period the assessments become probable
and estimable and the obligating event has occurred. Surcharges to recover the amount of regular
assessments may not be recorded as an asset until the related premium is written. Emergency
assessments that may be levied by Citizens are not recorded in the income statement.
Reinsurance Recoverables
The following table shows the components of the gross and net reinsurance recoverable as of
December 31, 2009 and 2008:
| Reinsurance Recoverable | December 31, 2009 | December 31, 2008 | ||||||
|
Paid loss and loss adjustment expenses
|
$ | 208 | $ | 326 | ||||
|
Unpaid loss and loss adjustment expenses
|
3,321 | 3,492 | ||||||
|
|
||||||||
|
Gross reinsurance recoverable
|
3,529 | 3,818 | ||||||
|
Less: allowance for uncollectible reinsurance
|
(335 | ) | (379 | ) | ||||
|
|
||||||||
|
Net reinsurance recoverable
|
$ | 3,194 | $ | 3,439 | ||||
|
|
||||||||
Reinsurance recoverables represent loss and loss adjustment expenses recoverable from a number of
entities, including reinsurers and pools. As shown in the following table, a portion of the total
gross reinsurance recoverable relates to the Company’s mandatory participation in various
involuntary assigned risk pools and the value of annuity contracts held under structured settlement
agreements. Reinsurance recoverables due from mandatory pools are backed by the financial strength
of the property and casualty insurance industry. Annuities purchased from third-party life
insurers under structured settlements are recognized as reinsurance recoverables in cases where the
Company has not obtained a release from the claimant. Of the remaining gross reinsurance
recoverable as of December 31, 2009 and 2008, the following table shows the portion of recoverables
due from companies rated by A.M. Best.
| Distribution of gross reinsurance recoverable | December 31, 2009 | December 31, 2008 | ||||||||||||||
|
Gross reinsurance recoverable
|
$ | 3,529 | $ | 3,818 | ||||||||||||
|
Less: mandatory (assigned risk) pools and structured settlements
|
(642 | ) | (638 | ) | ||||||||||||
|
Gross reinsurance recoverable excluding mandatory pools and structured settlements
|
$ | 2,887 | $ | 3,180 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
| % of Total | % of Total | |||||||||||||||
|
Rated A- (Excellent) or better by A.M. Best [1]
|
$ | 2,091 | 72.4 | % | $ | 2,426 | 76.3 | % | ||||||||
|
Other rated by A.M. Best
|
48 | 1.7 | % | 52 | 1.6 | % | ||||||||||
|
|
||||||||||||||||
|
Total rated companies
|
2,139 | 74.1 | % | 2,478 | 77.9 | % | ||||||||||
|
Voluntary pools
|
152 | 5.3 | % | 181 | 5.7 | % | ||||||||||
|
Captives
|
209 | 7.2 | % | 220 | 6.9 | % | ||||||||||
|
Other not rated companies
|
387 | 13.4 | % | 301 | 9.5 | % | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 2,887 | 100 | % | $ | 3,180 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| [1] |
Based on A.M. Best ratings as of December 31, 2009 and 2008, respectively.
|
114
Table of Contents
Where its contracts permit, the Company secures future claim obligations with various forms of
collateral, 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. Due largely to investment losses sustained by reinsurers in 2008, the
financial strength ratings of some reinsurers have been downgraded and the financial strength
ratings of other reinsurers have been put on negative watch. Nevertheless, as indicated in the
above table, approximately 98% of the gross reinsurance recoverables due from reinsurers rated by
A.M. Best were rated A- (excellent) or better as of December 31, 2009. Due to the inherent
uncertainties as to collection and the length of time before such amounts will be 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 quarterly or annual period.
Annually, the Company completes an evaluation of the reinsurance recoverable asset associated with
older, long-term casualty liabilities reported in the Other Operations segment. As a result of
this evaluation, the Company reduced its net reinsurance recoverable by $20 in 2009. See the
“Other Operations” section of the MD&A for further discussion. In addition, the Company reviewed
its allowance for uncollectible reinsurance for Ongoing Operations in the second quarter of 2009
and reduced its allowance for Ongoing Operations by $20 driven, in part, by a reduction in gross
ceded loss recoverables. The allowance for uncollectible reinsurance for Ongoing Operations is
recorded within the Specialty Commercial segment.
Monitoring Reinsurer Security
To manage the potential credit risk resulting from the use of reinsurance, management and ERM
evaluate the credit standing, financial performance, management and operational quality of each
potential reinsurer. Through that process, the Company maintains a list of reinsurers approved for
participation on all treaty and facultative reinsurance placements. The Company’s approval
designations reflect the differing credit exposure associated with various classes of business.
Participation authorizations are categorized along property, short-tail casualty and long-tail
casualty lines. In addition to defining participation eligibility, the Company regularly monitors
each active reinsurer’s credit risk exposure in the aggregate and limits that exposure based upon
independent credit rating levels.
115
Table of Contents
INVESTMENT CREDIT RISK
The Company has established investment credit policies that focus on the credit quality of
obligors and counterparties, limit credit concentrations, encourage diversification and require
frequent creditworthiness reviews. Investment activity, including setting of policy and defining
acceptable risk levels, is subject to regular review and approval by senior management.
The Company invests primarily in securities which are rated investment grade and has established
exposure limits, diversification standards and review procedures for all credit risks including
borrower, issuer and counterparty. Creditworthiness of specific obligors is determined by
consideration of external determinants of creditworthiness, typically ratings assigned by
nationally recognized ratings agencies and is supplemented by an internal credit evaluation.
Obligor, asset sector and industry concentrations are subject to established Company limits and are
monitored on a regular basis.
The Company is not exposed to any credit concentration risk of a single issuer greater than 10% of
the Company’s stockholders’ equity other than U.S. government and government agencies backed by the
full faith and credit of the U.S. government. For further discussion of concentration of credit
risk, see the Concentration of Credit Risk section in Note 5 of the Notes to Consolidated Financial
Statements.
Derivative Instruments
In the normal course of business, the Company uses various derivative counterparties in executing
its derivative transactions. The use of counterparties creates credit risk that the counterparty
may not perform in accordance with the terms of the derivative transaction. The Company has
developed a derivative counterparty exposure policy which limits the Company’s exposure to credit
risk.
The derivative counterparty exposure policy establishes market-based credit limits, favors
long-term financial stability and creditworthiness of the counterparty and typically requires
credit enhancement/credit risk reducing agreements.
The Company minimizes the credit risk of derivative instruments by entering into transactions with
high quality counterparties rated A2/A or better, which are monitored and evaluated by the
Company’s risk management team and reviewed by senior management. In addition, the Company
monitors counterparty credit exposure on a monthly basis to ensure compliance with Company policies
and statutory limitations. The Company also maintains a policy of requiring that derivative
contracts, other than exchange traded contracts, certain currency forward contracts, and certain
embedded and reinsurance derivatives, be governed by an International Swaps and Derivatives
Association Master Agreement which is structured by legal entity and by counterparty and permits
right of offset.
The Company has developed credit exposure thresholds which are based upon counterparty ratings.
Credit exposures are measured using the market value of the derivatives, resulting in amounts owed
to the Company by its counterparties or potential payment obligations from the Company to its
counterparties. Credit exposures are generally quantified daily based on the prior business day’s
market value and collateral is pledged to and held by, or on behalf of, the Company to the extent
the current value of derivatives exceeds the contractual thresholds. In accordance with industry
standards and the contractual agreements, collateral is typically settled on the next business day.
The Company has exposure to credit risk for amounts below the exposure thresholds which are
uncollateralized, as well as for market fluctuations that may occur between contractual settlement
periods of collateral movements.
The maximum uncollateralized threshold for a derivative counterparty for a single legal entity is
$10. The Company currently transacts over-the-counter derivatives in five legal entities and
therefore the maximum combined threshold for a single counterparty over all legal entities that use
derivatives is $50. In addition, the Company may have exposure to multiple counterparties in a
single corporate family due to a common credit support provider. As of December 31, 2009, the
maximum combined threshold for all counterparties under a single credit support provider over all
legal entities that use derivatives is $100. Based on the contractual terms of the collateral
agreements, these thresholds may be immediately reduced due to a downgrade in a counterparty’s
credit rating. For further discussion, see the Derivative Commitments Section of Note 12 of the
Notes to Consolidated Financial Statements.
For the year ended December 31, 2009, the Company has incurred no losses on derivative instruments
due to counterparty default.
In addition to counterparty credit risk, the Company enters into credit default swaps to manage
credit exposure. Credit default swaps involve a transfer of credit risk of one or many referenced
entities from one party to another in exchange for periodic payments. The party that purchases
credit protection will make periodic payments based on an agreed upon rate and notional amount, and
for certain transactions there will also be an upfront premium payment. The second party, who
assumes credit risk, will typically only make a payment if there is a credit event and such payment
will be equal to the notional value of the swap contract less the value of the referenced security
issuer’s debt obligation. A credit event is generally defined as default on contractually
obligated interest or principal payments or bankruptcy of the referenced entity.
116
Table of Contents
The Company uses credit derivatives to purchase credit protection and, to a lesser extent, assume
credit risk with respect to a single entity, referenced index, or asset pool. The Company
purchases credit protection through credit default swaps to economically hedge and manage credit
risk of certain fixed maturity investments across multiple sectors of the investment portfolio.
The Company has also entered into credit default swaps that assume credit risk as part of
replication transactions. Replication transactions are used as an economical means to
synthetically replicate the characteristics and performance of assets that would otherwise be
permissible investments under the Company’s investment policies. These swaps reference investment
grade single corporate issuers and baskets, which include trades ranging from baskets of up to five
corporate issuers to standard and customized diversified portfolios of corporate issuers, which are
established within sector concentration limits and are typically divided into tranches which
possess different credit ratings ranging from AAA through the CCC rated first loss position.
Investments
The following table presents the Company’s fixed maturities by credit quality. The ratings
referenced below are based on the ratings of a nationally recognized rating organization or, if not
rated, assigned based on the Company’s internal analysis of such securities.
Fixed Maturities by Credit Quality
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
| Percent of | Percent of | |||||||||||||||||||||||
| Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
| Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
|
United States Government/Government agencies
|
$ | 7,299 | $ | 7,172 | 10.1 | % | $ | 9,409 | $ | 9,568 | 14.7 | % | ||||||||||||
|
AAA
|
11,974 | 11,188 | 15.7 | % | 17,844 | 13,489 | 20.7 | % | ||||||||||||||||
|
AA
|
14,845 | 13,932 | 19.6 | % | 14,093 | 11,646 | 17.9 | % | ||||||||||||||||
|
A
|
19,822 | 18,664 | 26.2 | % | 18,742 | 15,831 | 24.4 | % | ||||||||||||||||
|
BBB
|
17,886 | 17,071 | 24.0 | % | 15,749 | 12,794 | 19.6 | % | ||||||||||||||||
|
BB & below
|
4,189 | 3,126 | 4.4 | % | 2,401 | 1,784 | 2.7 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total fixed maturities
|
$ | 76,015 | $ | 71,153 | 100.0 | % | $ | 78,238 | $ | 65,112 | 100.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
The movement within the Company’s investment ratings was primarily attributable to rating
agency downgrades across multiple sectors and sales of U.S. Treasuries that were re-deployed to
securities with more favorable risk profiles, in particular investment grade corporate securities.
The ratings associated with the Company’s commercial mortgage-backed securities (“CMBS”),
commercial real estate (“CRE”) collateralized debt obligations (“CDOs”) and residential
mortgage-backed securities (“RMBS”) may be negatively impacted as rating agencies continue to make
changes to their methodologies and monitor security performance.
117
Table of Contents
The following table presents the Company’s AFS securities by type.
Available-for-Sale Securities by Type
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||||||||||
| Percent | Percent | |||||||||||||||||||||||||||||||||||||||
| Cost or | Gross | Gross | of Total | Cost or | Gross | Gross | of Total | |||||||||||||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | Fair | Amortized | Unrealized | Unrealized | Fair | Fair | |||||||||||||||||||||||||||||||
| Cost | Gains | Losses | Value | Value | Cost | Gains | Losses | Value | Value | |||||||||||||||||||||||||||||||
|
Asset-backed securities
(“ABS”)
|
||||||||||||||||||||||||||||||||||||||||
|
Consumer loans
|
$ | 2,087 | $ | 15 | $ | (277 | ) | $ | 1,825 | 2.6 | % | $ | 2,251 | $ | — | $ | (589 | ) | $ | 1,662 | 2.6 | % | ||||||||||||||||||
|
Small business
|
548 | 1 | (232 | ) | 317 | 0.4 | % | 570 | — | (250 | ) | 320 | 0.5 | % | ||||||||||||||||||||||||||
|
Other
|
405 | 20 | (44 | ) | 381 | 0.5 | % | 610 | 6 | (132 | ) | 484 | 0.7 | % | ||||||||||||||||||||||||||
|
CDOs
|
||||||||||||||||||||||||||||||||||||||||
|
CLOs [1]
|
2,727 | — | (288 | ) | 2,439 | 3.5 | % | 2,865 | — | (735 | ) | 2,130 | 3.3 | % | ||||||||||||||||||||||||||
|
CREs
|
1,319 | 21 | (901 | ) | 439 | 0.6 | % | 1,763 | 2 | (1,302 | ) | 463 | 0.7 | % | ||||||||||||||||||||||||||
|
Other
|
8 | 6 | — | 14 | — | 27 | — | (8 | ) | 19 | — | |||||||||||||||||||||||||||||
|
CMBS
|
||||||||||||||||||||||||||||||||||||||||
|
Agency backed [2]
|
62 | 3 | — | 65 | 0.1 | % | 433 | 16 | — | 449 | 0.7 | % | ||||||||||||||||||||||||||||
|
Bonds
|
9,600 | 52 | (2,241 | ) | 7,411 | 10.4 | % | 11,144 | 10 | (4,370 | ) | 6,784 | 10.4 | % | ||||||||||||||||||||||||||
|
Interest only (“IOs”)
|
1,074 | 59 | (65 | ) | 1,068 | 1.5 | % | 1,396 | 17 | (333 | ) | 1,080 | 1.7 | % | ||||||||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||||||||||||||||||||||
|
Basic industry
|
2,642 | 112 | (56 | ) | 2,698 | 3.8 | % | 2,138 | 33 | (338 | ) | 1,833 | 2.8 | % | ||||||||||||||||||||||||||
|
Capital goods
|
3,085 | 140 | (51 | ) | 3,174 | 4.5 | % | 2,480 | 32 | (322 | ) | 2,190 | 3.3 | % | ||||||||||||||||||||||||||
|
Consumer cyclical
|
1,946 | 75 | (45 | ) | 1,976 | 2.8 | % | 2,335 | 34 | (388 | ) | 1,981 | 3.0 | % | ||||||||||||||||||||||||||
|
Consumer non-cyclical
|
4,737 | 281 | (22 | ) | 4,996 | 7.0 | % | 3,435 | 60 | (252 | ) | 3,243 | 5.0 | % | ||||||||||||||||||||||||||
|
Energy
|
3,070 | 163 | (18 | ) | 3,215 | 4.5 | % | 1,669 | 24 | (146 | ) | 1,547 | 2.4 | % | ||||||||||||||||||||||||||
|
Financial services
|
8,059 | 118 | (917 | ) | 7,260 | 10.1 | % | 8,422 | 254 | (1,543 | ) | 7,133 | 10.9 | % | ||||||||||||||||||||||||||
|
Tech./comm.
|
3,984 | 205 | (75 | ) | 4,114 | 5.8 | % | 3,738 | 86 | (400 | ) | 3,424 | 5.3 | % | ||||||||||||||||||||||||||
|
Transportation
|
698 | 22 | (23 | ) | 697 | 1.0 | % | 508 | 8 | (90 | ) | 426 | 0.7 | % | ||||||||||||||||||||||||||
|
Utilities
|
5,755 | 230 | (85 | ) | 5,900 | 8.3 | % | 4,859 | 92 | (578 | ) | 4,373 | 6.7 | % | ||||||||||||||||||||||||||
|
Other [3]
|
1,342 | 22 | (151 | ) | 1,213 | 1.7 | % | 1,475 | — | (444 | ) | 1,031 | 1.6 | % | ||||||||||||||||||||||||||
|
Foreign govt./govt. agencies
|
1,376 | 52 | (20 | ) | 1,408 | 2.0 | % | 2,786 | 100 | (65 | ) | 2,821 | 4.3 | % | ||||||||||||||||||||||||||
|
Municipal
|
||||||||||||||||||||||||||||||||||||||||
|
Taxable
|
1,176 | 4 | (205 | ) | 975 | 1.4 | % | 1,115 | 8 | (229 | ) | 894 | 1.4 | % | ||||||||||||||||||||||||||
|
Tax-exempt
|
10,949 | 314 | (173 | ) | 11,090 | 15.6 | % | 10,291 | 194 | (724 | ) | 9,761 | 15.0 | % | ||||||||||||||||||||||||||
|
RMBS
|
||||||||||||||||||||||||||||||||||||||||
|
Agency
|
3,383 | 99 | (6 | ) | 3,476 | 4.9 | % | 3,092 | 88 | (15 | ) | 3,165 | 4.9 | % | ||||||||||||||||||||||||||
|
Non-agency
|
143 | — | (16 | ) | 127 | 0.2 | % | 213 | — | (48 | ) | 165 | 0.2 | % | ||||||||||||||||||||||||||
|
Alt-A
|
218 | — | (58 | ) | 160 | 0.2 | % | 305 | — | (108 | ) | 197 | 0.3 | % | ||||||||||||||||||||||||||
|
Sub-prime
|
1,768 | 5 | (689 | ) | 1,084 | 1.5 | % | 2,435 | 8 | (862 | ) | 1,581 | 2.4 | % | ||||||||||||||||||||||||||
|
U.S. Treasuries
|
3,854 | 14 | (237 | ) | 3,631 | 5.1 | % | 5,883 | 112 | (39 | ) | 5,956 | 9.2 | % | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total fixed maturities
|
76,015 | 2,033 | (6,895 | ) | 71,153 | 100.0 | % | 78,238 | 1,184 | (14,310 | ) | 65,112 | 100.0 | % | ||||||||||||||||||||||||||
|
Equity securities
|
||||||||||||||||||||||||||||||||||||||||
|
Financial Services
|
836 | 7 | (164 | ) | 679 | 973 | 13 | (196 | ) | 790 | ||||||||||||||||||||||||||||||
|
Other
|
497 | 73 | (28 | ) | 542 | 581 | 190 | (103 | ) | 668 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total equity securities
|
1,333 | 80 | (192 | ) | 1,221 | 1,554 | 203 | (299 | ) | 1,458 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total AFS securities [4]
|
$ | 77,348 | $ | 2,113 | $ | (7,087 | ) | $ | 72,374 | $ | 79,792 | $ | 1,387 | $ | (14,609 | ) | $ | 66,570 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
| [1] |
As of December 31, 2009, 79% of these senior secured bank loan
collateralized loan obligations (“CLOs”) were rated AA and above
with an average subordination of 29%.
|
|
| [2] |
Represents securities with pools of loans by the Small Business
Administration whose issued loans are backed by the full faith and
credit of the U.S. government.
|
|
| [3] |
Includes structured investments with an amortized cost and fair
value of $533 and $433, respectively, as of December 31, 2009 and
$526 and $364, respectively, as of December 31, 2008. The
underlying securities supporting these investments are primarily
diversified pools of investment grade corporate issuers which can
withstand a 15% cumulative default rate, assuming a 35% recovery.
|
|
| [4] |
Gross unrealized gains represent gains of $1,474, $633, and $6 for
Life, Property & Casualty, and Corporate, respectively, as of
December 31, 2009 and $860, $526, and $1, respectively, as of
December 31, 2008. Gross unrealized losses represent losses of
$5,592, $1,491, and $4 for Life, Property & Casualty, and
Corporate, respectively, as of December 31, 2009 and $10,766,
$3,835, and $8, respectively, as of December 31, 2008.
|
The Company reallocated its AFS investment portfolio to securities with more favorable risk
profiles, in particular investment grade corporate securities, while reducing its exposure to real
estate related securities. Additionally, the Company reduced its allocation to U.S. Treasuries in
order to manage liquidity. The Company’s AFS net unrealized loss position decreased primarily as a
result of improved security valuations due to credit spread tightening, partially offset by rising
interest rates and a $1.4 billion before-tax cumulative effect of accounting change related to
impairments. For further discussion on the accounting change, see Note 1 of the Notes to
Consolidated Financial Statements. The following sections highlight the Company’s significant
investment sectors.
118
Table of Contents
Financial Services
Several positive developments occurred in the financial services sectors during the second half of
2009. Earnings for large domestic banks surpassed expectations and losses for banks that underwent
the Supervisory Capital Assessment Program (“SCAP”), or stress test, were less than the Federal
Reserve’s projections. Unrealized losses on banks’ investment portfolios decreased as credit
spreads tightened and the pace of deterioration of the credit quality of certain assets slowed.
Banks and insurance firms were also able to access re-opened debt capital markets, reducing their
dependence on government guarantee programs and enhancing their liquidity positions. In addition,
certain financial institutions were able to improve their junior capital ratios through common
equity capital raises, exchanges and tenders. Despite these positive developments, financial
services companies continue to face a difficult macroeconomic environment and regulatory
uncertainty which could affect future earnings.
The Company has exposure to the financial services sector predominantly through banking and
insurance firms. The following table presents the Company’s exposure to the financial services
sector included in the AFS Securities by Type table above. A comparison of fair value to amortized
cost is not indicative of the pricing of individual securities as impairments have occurred.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
| Percent of | Percent of | |||||||||||||||||||||||
| Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
| Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
|
AAA
|
$ | 299 | $ | 290 | 3.7 | % | $ | 728 | $ | 628 | 7.9 | % | ||||||||||||
|
AA
|
1,913 | 1,867 | 23.5 | % | 2,067 | 1,780 | 22.5 | % | ||||||||||||||||
|
A
|
4,510 | 3,987 | 50.2 | % | 5,479 | 4,606 | 58.1 | % | ||||||||||||||||
|
BBB
|
1,664 | 1,379 | 17.4 | % | 1,015 | 816 | 10.3 | % | ||||||||||||||||
|
BB & below
|
509 | 416 | 5.2 | % | 106 | 93 | 1.2 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total [1]
|
$ | 8,895 | $ | 7,939 | 100.0 | % | $ | 9,395 | $ | 7,923 | 100.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
| [1] |
The credit qualities above include downgrades that have shifted the portfolio from higher
rated assets to lower rated assets since December 31, 2008.
|
Sub-Prime Residential Mortgage Loans
The following table presents the Company’s exposure to RMBS supported by sub-prime mortgage loans
by current credit quality and vintage year included in the AFS Securities by Type table above.
These securities have been affected by deterioration in collateral performance caused by declining
home prices and continued macroeconomic pressures including higher unemployment levels. A
comparison of fair value to amortized cost is not indicative of the pricing of individual
securities as impairments have occurred. Credit protection represents the current weighted average
percentage, excluding wrapped securities, of the outstanding capital structure subordinated to the
Company’s investment holding that is available to absorb losses before the security incurs the
first dollar loss of
principal. The ratings associated with the Company’s RMBS may be negatively impacted as rating
agencies make changes to their methodologies and continue to monitor security performance.
Sub-Prime Residential Mortgage Loans [1] [2] [3] [4] [5]
| December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||
| AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
|
2003 & Prior
|
$ | 40 | $ | 31 | $ | 76 | $ | 58 | $ | 70 | $ | 48 | $ | 18 | $ | 12 | $ | 67 | $ | 41 | $ | 271 | $ | 190 | ||||||||||||||||||||||||
|
2004
|
82 | 68 | 286 | 210 | 61 | 38 | 7 | 4 | 6 | 2 | 442 | 322 | ||||||||||||||||||||||||||||||||||||
|
2005
|
67 | 42 | 270 | 196 | 148 | 90 | 86 | 26 | 153 | 40 | 724 | 394 | ||||||||||||||||||||||||||||||||||||
|
2006
|
8 | 7 | 11 | 8 | 21 | 16 | 27 | 10 | 155 | 79 | 222 | 120 | ||||||||||||||||||||||||||||||||||||
|
2007
|
— | — | — | — | — | — | — | — | 109 | 58 | 109 | 58 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 197 | $ | 148 | $ | 643 | $ | 472 | $ | 300 | $ | 192 | $ | 138 | $ | 52 | $ | 490 | $ | 220 | $ | 1,768 | $ | 1,084 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Credit protection
|
48.2 | % | 53.3 | % | 40.6 | % | 35.8 | % | 25.4 | % | 41.6 | % | ||||||||||||||||||||||||||||||||||||
119
Table of Contents
| December 31, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||
| AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
|
2003 & Prior
|
$ | 49 | $ | 41 | $ | 162 | $ | 136 | $ | 60 | $ | 43 | $ | 32 | $ | 26 | $ | 34 | $ | 20 | $ | 337 | $ | 266 | ||||||||||||||||||||||||
|
2004
|
112 | 81 | 349 | 277 | 8 | 7 | 10 | 7 | — | — | 479 | 372 | ||||||||||||||||||||||||||||||||||||
|
2005
|
90 | 71 | 543 | 367 | 154 | 77 | 24 | 16 | 23 | 18 | 834 | 549 | ||||||||||||||||||||||||||||||||||||
|
2006
|
77 | 69 | 126 | 56 | 18 | 9 | 120 | 50 | 143 | 54 | 484 | 238 | ||||||||||||||||||||||||||||||||||||
|
2007
|
42 | 27 | 40 | 10 | 38 | 18 | 47 | 26 | 134 | 75 | 301 | 156 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 370 | $ | 289 | $ | 1,220 | $ | 846 | $ | 278 | $ | 154 | $ | 233 | $ | 125 | $ | 334 | $ | 167 | $ | 2,435 | $ | 1,581 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Credit protection
|
40.5 | % | 47.6 | % | 31.4 | % | 21.9 | % | 19.9 | % | 41.0 | % | ||||||||||||||||||||||||||||||||||||
| [1] |
The vintage year represents the year the underlying loans in the pool were originated.
|
|
| [2] |
Includes second lien residential mortgages with an amortized cost and fair value of $42 and $34, respectively, as of
December 31, 2009 and $173 and $82, respectively, as of December 31, 2008, which are composed primarily of loans to
prime and Alt-A borrowers.
|
|
| [3] |
As of December 31, 2009, the weighted average life of the sub-prime residential mortgage portfolio was 4.1 years.
|
|
| [4] |
Approximately 93% of the portfolio is backed by adjustable rate mortgages.
|
|
| [5] |
The credit qualities above include downgrades that have shifted the portfolio from higher rated assets to lower rated
assets since December 31, 2008.
|
Commercial Mortgage Loans
The Company observed significant pressure on commercial real estate market fundamentals throughout
2009 including increased vacancies, rising delinquencies and declining property values and expects
continued pressure in the upcoming year. The following tables present the Company’s exposure to
CMBS bonds, CRE CDOs and CMBS IOs by current credit quality and vintage year, included in the AFS
Securities by Type table above. A comparison of fair value to amortized cost is not indicative of
the pricing of individual securities as impairments have occurred. Credit protection represents
the current weighted average percentage of the outstanding capital structure subordinated to the
Company’s investment holding that is available to absorb losses before the security incurs the
first dollar loss of principal. This credit protection does not include any equity interest or
property value in excess of outstanding debt. The ratings associated with the Company’s CMBS and
CRE CDOs may be negatively impacted as rating agencies continue to make changes to their
methodologies and monitor security performance.
CMBS — Bonds [1] [2]
| December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||
| AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
|
2003 & Prior
|
$ | 1,732 | $ | 1,716 | $ | 297 | $ | 230 | $ | 150 | $ | 113 | $ | 20 | $ | 17 | $ | 11 | $ | 7 | $ | 2,210 | $ | 2,083 | ||||||||||||||||||||||||
|
2004
|
639 | 626 | 82 | 52 | 52 | 34 | 15 | 7 | — | — | 788 | 719 | ||||||||||||||||||||||||||||||||||||
|
2005
|
1,011 | 930 | 356 | 230 | 228 | 123 | 100 | 64 | 89 | 54 | 1,784 | 1,401 | ||||||||||||||||||||||||||||||||||||
|
2006
|
1,945 | 1,636 | 430 | 275 | 536 | 247 | 323 | 132 | 231 | 83 | 3,465 | 2,373 | ||||||||||||||||||||||||||||||||||||
|
2007
|
498 | 408 | 139 | 101 | 169 | 68 | 346 | 160 | 201 | 98 | 1,353 | 835 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 5,825 | $ | 5,316 | $ | 1,304 | $ | 888 | $ | 1,135 | $ | 585 | $ | 804 | $ | 380 | $ | 532 | $ | 242 | $ | 9,600 | $ | 7,411 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Credit protection
|
26.5 | % | 21.2 | % | 13.1 | % | 11.6 | % | 8.7 | % | 22.0 | % | ||||||||||||||||||||||||||||||||||||
| December 31, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||
| AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
|
2003 & Prior
|
$ | 2,057 | $ | 1,869 | $ | 455 | $ | 299 | $ | 175 | $ | 102 | $ | 36 | $ | 27 | $ | 37 | $ | 25 | $ | 2,760 | $ | 2,322 | ||||||||||||||||||||||||
|
2004
|
667 | 576 | 85 | 35 | 65 | 22 | 23 | 10 | — | — | 840 | 643 | ||||||||||||||||||||||||||||||||||||
|
2005
|
1,142 | 847 | 475 | 152 | 325 | 127 | 55 | 27 | — | — | 1,997 | 1,153 | ||||||||||||||||||||||||||||||||||||
|
2006
|
2,562 | 1,498 | 385 | 110 | 469 | 168 | 385 | 140 | 40 | 12 | 3,841 | 1,928 | ||||||||||||||||||||||||||||||||||||
|
2007
|
981 | 504 | 438 | 128 | 148 | 45 | 134 | 60 | 5 | 1 | 1,706 | 738 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 7,409 | $ | 5,294 | $ | 1,838 | $ | 724 | $ | 1,182 | $ | 464 | $ | 633 | $ | 264 | $ | 82 | $ | 38 | $ | 11,144 | $ | 6,784 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Credit protection
|
24.4 | % | 16.4 | % | 12.2 | % | 5.3 | % | 4.4 | % | 20.6 | % | ||||||||||||||||||||||||||||||||||||
| [1] |
The vintage year represents the year the pool of loans was originated.
|
|
| [2] |
The credit qualities above include downgrades that have shifted the portfolio from higher rated assets to lower rated
assets since December 31, 2008.
|
120
Table of Contents
CRE CDOs [1] [2] [3] [4]
| December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||
| AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
|
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
|||||||||||||||||||||||||||||||||||||
|
2003 & Prior
|
$ | 60 | $ | 41 | $ | 30 | $ | 15 | $ | 69 | $ | 26 | $ | 165 | $ | 44 | $ | 95 | $ | 14 | $ | 419 | $ | 140 | ||||||||||||||||||||||||
|
2004
|
19 | 11 | 70 | 22 | 37 | 11 | 27 | 4 | 23 | 4 | 176 | 52 | ||||||||||||||||||||||||||||||||||||
|
2005
|
17 | 8 | 72 | 12 | 35 | 14 | 49 | 8 | 26 | 6 | 199 | 48 | ||||||||||||||||||||||||||||||||||||
|
2006
|
23 | 13 | 108 | 33 | 82 | 28 | 69 | 22 | 23 | 12 | 305 | 108 | ||||||||||||||||||||||||||||||||||||
|
2007
|
62 | 33 | 12 | 3 | 20 | 5 | 26 | 9 | 15 | 10 | 135 | 60 | ||||||||||||||||||||||||||||||||||||
|
2008
|
22 | 12 | — | — | 5 | 1 | 15 | 4 | 13 | 3 | 55 | 20 | ||||||||||||||||||||||||||||||||||||
|
2009
|
15 | 8 | — | — | 2 | — | 4 | 1 | 9 | 2 | 30 | 11 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 218 | $ | 126 | $ | 292 | $ | 85 | $ | 250 | $ | 85 | $ | 355 | $ | 92 | $ | 204 | $ | 51 | $ | 1,319 | $ | 439 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Credit protection
|
40.0 | % | 10.5 | % | 25.5 | % | 34.9 | % | 31.6 | % | 28.1 | % | ||||||||||||||||||||||||||||||||||||
| December 31, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||
| AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
|
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
|||||||||||||||||||||||||||||||||||||
|
2003 & Prior
|
$ | 180 | $ | 59 | $ | 96 | $ | 29 | $ | 79 | $ | 17 | $ | 64 | $ | 7 | $ | 31 | $ | 7 | $ | 450 | $ | 119 | ||||||||||||||||||||||||
|
2004
|
129 | 38 | 17 | 6 | 31 | 9 | 11 | 2 | 14 | 3 | 202 | 58 | ||||||||||||||||||||||||||||||||||||
|
2005
|
94 | 37 | 62 | 15 | 65 | 12 | 10 | 2 | 1 | — | 232 | 66 | ||||||||||||||||||||||||||||||||||||
|
2006
|
242 | 76 | 91 | 25 | 81 | 20 | 15 | 2 | — | — | 429 | 123 | ||||||||||||||||||||||||||||||||||||
|
2007
|
139 | 45 | 106 | 19 | 101 | 11 | 12 | 1 | — | — | 358 | 76 | ||||||||||||||||||||||||||||||||||||
|
2008
|
43 | 13 | 22 | 5 | 24 | 3 | 3 | — | — | — | 92 | 21 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 827 | $ | 268 | $ | 394 | $ | 99 | $ | 381 | $ | 72 | $ | 115 | $ | 14 | $ | 46 | $ | 10 | $ | 1,763 | $ | 463 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Credit protection
|
29.7 | % | 21.3 | % | 18.2 | % | 19.4 | % | 57.0 | % | 25.4 | % | ||||||||||||||||||||||||||||||||||||
| [1] |
The vintage year represents the year that the underlying collateral in the pool was originated. Individual CDO fair value is
allocated by the proportion of collateral within each vintage year.
|
|
| [2] |
As of December 31, 2009, approximately 42% of the underlying CRE CDOs collateral are seasoned, below investment grade securities.
|
|
| [3] |
For certain CRE CDOs, the collateral manager has the ability to reinvest proceeds that become available, primarily from
collateral maturities. The increase in the 2008 and 2009 vintage years represents reinvestment under these CRE CDOs.
|
|
| [4] |
The credit qualities above include downgrades that have shifted the portfolio from higher rated assets to lower rated assets
since December 31, 2008.
|
CMBS — IOs [1] [2]
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||||||||||||||||||
| AAA | A | BBB | BB and Below | Total | AAA | |||||||||||||||||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
|
2003 & Prior
|
$ | 331 | $ | 352 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 331 | $ | 352 | $ | 440 | $ | 423 | ||||||||||||||||||||||||
|
2004
|
207 | 217 | — | — | — | — | — | — | 207 | 217 | 268 | 199 | ||||||||||||||||||||||||||||||||||||
|
2005
|
284 | 275 | — | — | 1 | 2 | — | — | 285 | 277 | 354 | 245 | ||||||||||||||||||||||||||||||||||||
|
2006
|
137 | 120 | 3 | 1 | — | — | 1 | 2 | 141 | 123 | 165 | 104 | ||||||||||||||||||||||||||||||||||||
|
2007
|
110 | 99 | — | — | — | — | — | — | 110 | 99 | 169 | 109 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 1,069 | $ | 1,063 | $ | 3 | $ | 1 | $ | 1 | $ | 2 | $ | 1 | $ | 2 | $ | 1,074 | $ | 1,068 | $ | 1,396 | $ | 1,080 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
| [1] |
The vintage year represents the year the pool of loans was originated.
|
|
| [2] |
The credit qualities above include downgrades that have shifted the portfolio from higher rated assets to lower rated
assets since December 31, 2008.
|
In addition to CMBS, the Company has exposure to commercial mortgage loans as presented in the
following table. These loans are collateralized by a variety of commercial properties and are
diversified both geographically throughout the United States and by property type. These loans may
be either in the form of a whole loan, where the Company is the sole lender, or a loan
participation. Loan participations are loans where the Company has purchased or retained a portion
of an outstanding loan or package of loans and participates on a pro-rata basis in collecting
interest and principal pursuant to the terms of the participation agreement. In general, A-Note
participations have senior payment priority, followed by B-Note participations and then mezzanine
loan participations. As of December 31, 2009, loans within the Company’s mortgage loan portfolio
have had minimal extension or restructurings. The recent deterioration in the global real estate
market, as evidenced by increases in property vacancy rates, delinquencies and foreclosures, has
negatively impacted property values and sources of refinancing and should these trends continue,
additional increases in our valuation allowance for mortgage loans may result.
121
Table of Contents
Commercial Mortgage Loans
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
| Amortized | Valuation | Carrying | Amortized | Valuation | Carrying | |||||||||||||||||||
| Cost [1] | Allowance | Value | Cost [1] | Allowance | Value | |||||||||||||||||||
|
Whole loans
|
$ | 3,319 | $ | (40 | ) | $ | 3,279 | $ | 3,557 | $ | (2 | ) | $ | 3,555 | ||||||||||
|
A-Note participations
|
391 | — | 391 | 460 | (13 | ) | 447 | |||||||||||||||||
|
B-Note participations
|
701 | (176 | ) | 525 | 724 | — | 724 | |||||||||||||||||
|
Mezzanine loans
|
1,081 | (142 | ) | 939 | 1,108 | — | 1,108 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total [2]
|
$ | 5,492 | $ | (358 | ) | $ | 5,134 | $ | 5,849 | $ | (15 | ) | $ | 5,834 | ||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Amortized cost represents carrying value prior to valuation allowances, if any.
|
|
| [2] |
Excludes agricultural and residential mortgage loans. For further information on the total mortgage loan portfolio,
see Note 5 of the Notes to Consolidated Financial Statements.
|
Included in the table above are valuation allowances on mortgage loans held for sale
associated with B-note participations and mezzanine loans of $51 and $43, respectively, which had a
carrying value of $47 and $96, respectively, as of December 31, 2009.
At origination, the weighted average loan-to-value (“LTV”) rate of the Company’s commercial
mortgage loan portfolio was approximately 63%. As of December 31, 2009, the current weighted
average LTV rate was approximately 83%. LTV rates compare the loan amount to the value of the
underlying property collateralizing the loan. The loan values are updated periodically through
property level reviews of the portfolio. Factors considered in the property valuation include, but
are not limited to, actual and expected property cash flows, geographic market data and
capitalization rates.
ABS Consumer Loans
The following table presents the Company’s exposure to ABS consumer loans by credit quality,
included in the AFS Securities by Type table above. Currently, the Company expects its ABS
consumer loan holdings will continue to pay contractual principal and interest payments due to the
ultimate expected borrower repayment performance and structural credit enhancements, which remain
sufficient to absorb a significantly higher level of defaults than are currently anticipated.
| December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||
| AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
|
Auto [1]
|
$ | 136 | $ | 137 | $ | 47 | $ | 47 | $ | 96 | $ | 96 | $ | 105 | $ | 103 | $ | 22 | $ | 17 | $ | 406 | $ | 400 | ||||||||||||||||||||||||
|
Credit card
|
703 | 714 | — | — | 26 | 24 | 197 | 186 | — | — | 926 | 924 | ||||||||||||||||||||||||||||||||||||
|
Student loan [2]
|
292 | 186 | 326 | 249 | 137 | 66 | — | — | — | — | 755 | 501 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total [3]
|
$ | 1,131 | $ | 1,037 | $ | 373 | $ | 296 | $ | 259 | $ | 186 | $ | 302 | $ | 289 | $ | 22 | $ | 17 | $ | 2,087 | $ | 1,825 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||
| AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
|
Auto
|
$ | 135 | $ | 109 | $ | 29 | $ | 27 | $ | 142 | $ | 103 | $ | 209 | $ | 162 | $ | 30 | $ | 20 | $ | 545 | $ | 421 | ||||||||||||||||||||||||
|
Credit card
|
419 | 367 | 6 | 3 | 108 | 97 | 351 | 248 | 58 | 39 | 942 | 754 | ||||||||||||||||||||||||||||||||||||
|
Student loan
|
294 | 159 | 332 | 244 | 138 | 84 | — | — | — | — | 764 | 487 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 848 | $ | 635 | $ | 367 | $ | 274 | $ | 388 | $ | 284 | $ | 560 | $ | 410 | $ | 88 | $ | 59 | $ | 2,251 | $ | 1,662 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
| [1] |
As of December 31, 2009, approximately 8% of the auto consumer
loan-backed securities were issued by lenders whose primary
business is to sub-prime borrowers.
|
|
| [2] |
As of December 31, 2009, approximately half of the student
loan-backed exposure is guaranteed by the Federal Family Education
Loan Program, with the remainder comprised of loans to prime
borrowers.
|
|
| [3] |
The credit qualities above include downgrades that have shifted
the portfolio from higher rated assets to lower rated assets since
December 31, 2008.
|
Municipal Bonds
The Company has investments in securities backed by states, municipalities and political
subdivisions issuers (“municipal”) with an amortized cost and fair value of $12.1 billion as of
December 31, 2009 and $11.4 billion and $10.7 billion, respectively, as of December 31, 2008. The
Company’s municipal bond portfolio is diversified across the United States and primarily consists
of general obligation and revenue bonds issued by states, cities, counties, school districts and
similar issuers. As of December 31, 2009, the largest concentrations were in California, Georgia
and Illinois which each comprised less than 3% of the municipal bond portfolio and were primarily
comprised of general obligation securities. Certain of the Company’s municipal bonds were enhanced
by third-party insurance for the payment of principal and interest in the event of an issuer
default. Excluding the benefit of this insurance, the average credit rating was AA- and AA,
respectively, as of December 31, 2009 and 2008.
122
Table of Contents
Limited Partnerships and Other Alternative Investments
The following table presents the Company’s investments in limited partnerships and other
alternative investments which include hedge funds, mortgage and real estate funds, mezzanine debt
funds, and private equity and other funds. Hedge funds include investments in funds of funds and
direct funds. Mortgage and real estate funds consist of investments in funds whose assets consist
of mortgage loans, mortgage loan participations, mezzanine loans or other notes which may be below
investment grade quality, as well as equity real estate and real estate joint ventures. Mezzanine
debt funds include investments in funds whose assets consist of subordinated debt that often
incorporates equity-based options such as warrants and a limited amount of direct equity
investments. Private equity and other funds primarily consist of investments in funds whose assets
typically consist of a diversified pool of investments in small non-public businesses with high
growth potential.
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
|
Hedge funds
|
$ | 596 | 33.3 | % | $ | 834 | 36.3 | % | ||||||||
|
Mortgage and real estate funds
|
302 | 16.9 | % | 551 | 24.0 | % | ||||||||||
|
Mezzanine debt funds
|
133 | 7.4 | % | 156 | 6.8 | % | ||||||||||
|
Private equity and other funds
|
759 | 42.4 | % | 754 | 32.9 | % | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 1,790 | 100.0 | % | $ | 2,295 | 100.0 | % | ||||||||
|
|
||||||||||||||||
Limited partnerships and other alternative investments decreased primarily due to hedge fund
redemptions and negative re-valuations of the underlying investments associated primarily with the
real estate markets.
Security Unrealized Loss Aging
As part of the Company’s ongoing security monitoring process, the Company has reviewed its AFS
securities in an unrealized loss position and concluded that there were no additional impairments
as of December 31, 2009 and 2008 and that these securities have sufficient expected future cash
flows to recover the entire amortized cost basis, are temporarily depressed and are expected to
recover in value as the securities approach maturity or as CMBS and sub-prime RMBS market spreads
return to more normalized levels.
Most of the securities depressed over 20% for nine months or more are supported by real estate
related assets, specifically investment grade CMBS bonds, sub-prime RMBS and CRE CDOs, and have a
weighted average current rating of A. Current market spreads continue to be significantly wider
for securities supported by real estate related assets, as compared to spreads at the security’s
respective purchase date, largely due to the continued effects of the recession and the economic
and market uncertainties regarding future performance of commercial and residential real estate.
The Company reviewed these securities as part of its impairment evaluation process. The Company’s
best estimate of future cash flows utilized in its impairment process involves both macroeconomic
and security specific assumptions that may differ based on asset class, vintage year and property
location including, but not limited to, historical and projected default and recovery rates,
current and expected future delinquency rates, property value declines and the impact of obligor
re-financing. For these securities in an unrealized loss position where a credit impairment has
not been recorded, the Company’s best estimate of expected future cash flows are sufficient to
recover the amortized cost basis of the security.
For further discussion on the Company’s ongoing security monitoring process and the factors
considered in determining whether a credit impairment exists, see the Recognition and Presentation
of Other-Than-Temporary Impairments section in Note 5 of the Notes to Consolidated Financial
Statements.
The following table presents the Company’s unrealized loss aging for AFS securities by length of
time the security was in a continuous unrealized loss position.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||
| Cost or | Cost or | |||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
| Items | Cost | Value | Loss | Items | Cost | Value | Loss | |||||||||||||||||||||||||
|
Three months or less
|
1,237 | $ | 11,197 | $ | 10,838 | $ | (359 | ) | 1,718 | $ | 16,425 | $ | 14,992 | $ | (1,433 | ) | ||||||||||||||||
|
Greater than three to six months
|
105 | 317 | 289 | (28 | ) | 972 | 6,533 | 5,247 | (1,286 | ) | ||||||||||||||||||||||
|
Greater than six to nine months
|
311 | 2,940 | 2,429 | (511 | ) | 764 | 7,053 | 5,873 | (1,180 | ) | ||||||||||||||||||||||
|
Greater than nine to twelve months
|
134 | 2,054 | 1,674 | (380 | ) | 741 | 6,459 | 4,957 | (1,502 | ) | ||||||||||||||||||||||
|
Greater than twelve months
|
2,020 | 22,445 | 16,636 | (5,809 | ) | 2,417 | 25,279 | 16,071 | (9,208 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
3,807 | $ | 38,953 | $ | 31,866 | $ | (7,087 | ) | 6,612 | $ | 61,749 | $ | 47,140 | $ | (14,609 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
123
Table of Contents
The following tables present the Company’s unrealized loss aging for AFS securities
continuously depressed over 20% by length of time.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||
| Cost or | Cost or | |||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
| Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||
|
Three months or less
|
161 | $ | 951 | $ | 672 | $ | (279 | ) | 1,789 | $ | 21,512 | $ | 13,483 | $ | (8,029 | ) | ||||||||||||||||
|
Greater than three to six months
|
51 | 55 | 38 | (17 | ) | 225 | 2,139 | 800 | (1,339 | ) | ||||||||||||||||||||||
|
Greater than six to nine months
|
159 | 2,046 | 1,397 | (649 | ) | 112 | 1,448 | 618 | (830 | ) | ||||||||||||||||||||||
|
Greater than nine to twelve months
|
86 | 1,398 | 913 | (485 | ) | 169 | 1,989 | 610 | (1,379 | ) | ||||||||||||||||||||||
|
Greater than twelve months
|
715 | 8,146 | 4,228 | (3,918 | ) | 33 | 377 | 71 | (306 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
1,172 | $ | 12,596 | $ | 7,248 | $ | (5,348 | ) | 2,328 | $ | 27,465 | $ | 15,582 | $ | (11,883 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
The following tables present the Company’s unrealized loss aging for AFS securities (included
in the tables above) continuously depressed over 50% by length of time.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||
| Cost or | Cost or | |||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
| Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||
|
Three months or less
|
62 | $ | 169 | $ | 61 | $ | (108 | ) | 650 | $ | 8,350 | $ | 2,923 | $ | (5,427 | ) | ||||||||||||||||
|
Greater than three to six months
|
28 | 5 | 2 | (3 | ) | 38 | 352 | 56 | (296 | ) | ||||||||||||||||||||||
|
Greater than six to nine months
|
54 | 190 | 74 | (116 | ) | 28 | 267 | 44 | (223 | ) | ||||||||||||||||||||||
|
Greater than nine to twelve months
|
58 | 592 | 210 | (382 | ) | 3 | 15 | 3 | (12 | ) | ||||||||||||||||||||||
|
Greater than twelve months
|
220 | 2,553 | 735 | (1,818 | ) | — | — | — | — | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
422 | $ | 3,509 | $ | 1,082 | $ | (2,427 | ) | 719 | $ | 8,984 | $ | 3,026 | $ | (5,958 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
Other-Than-Temporary Impairments
The following table presents the Company’s impairments recognized in earnings by security type.
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
ABS
|
$ | 54 | $ | 27 | $ | 19 | ||||||
|
CDOs
|
||||||||||||
|
CREs
|
483 | 398 | — | |||||||||
|
Other
|
28 | — | — | |||||||||
|
CMBS
|
||||||||||||
|
Bonds
|
257 | 141 | 18 | |||||||||
|
IOs
|
25 | 61 | — | |||||||||
|
Corporate
|
||||||||||||
|
Financial services
|
137 | 1,342 | 67 | |||||||||
|
Other
|
61 | 510 | 98 | |||||||||
|
Equity securities
|
||||||||||||
|
Financial services
|
92 | 1,142 | 36 | |||||||||
|
Other
|
53 | 19 | 20 | |||||||||
|
Foreign govt./govt. agencies
|
— | 31 | 13 | |||||||||
|
Municipal
|
18 | 21 | — | |||||||||
|
RMBS
|
||||||||||||
|
Non-agency
|
4 | 13 | — | |||||||||
|
Alt-A
|
62 | 24 | — | |||||||||
|
Sub-prime
|
232 | 235 | 212 | |||||||||
|
U.S. Treasuries
|
2 | — | — | |||||||||
|
|
||||||||||||
|
Total
|
$ | 1,508 | $ | 3,964 | $ | 483 | ||||||
|
|
||||||||||||
124
Table of Contents
Year ended December 31, 2009
Impairments recognized in earnings were comprised of credit impairments of $1,216, impairments on
debt securities for which the Company intended to sell of $156 and impairments on equity securities
of $136.
Credit impairments were primarily concentrated on structured securities, mainly CRE CDOs,
below-prime RMBS and CMBS bonds. These securities were impaired primarily due to increased
severity in macroeconomic assumptions and continued deterioration of the underlying collateral.
The Company determined these impairments utilizing both a top down modeling approach and, for
certain real estate-backed securities, a loan by loan collateral review. The top down modeling
approach used discounted cash flow models that considered losses under current and expected future
economic conditions. Assumptions used over the current recessionary period included macroeconomic
factors, such as a high unemployment rate, as well as sector specific factors including, but not
limited to:
| • |
Commercial property value declines that averaged 40% to 45% from the valuation peak but
differed by property type and location.
|
| • |
Average cumulative CMBS collateral loss rates that varied by vintage year but reached
approximately 12% for the 2007 vintage year.
|
| • |
Residential property value declines that averaged 40% to 45% from the valuation peak but
differed by location.
|
| • |
Average cumulative RMBS collateral loss rates that varied by vintage year but reached
approximately 50% for the 2007 vintage year.
|
In addition to the top down modeling approach, the Company reviewed the underlying collateral of
certain of its real estate-backed securities to estimate potential future losses. This review
included loan by loan underwriting utilizing assumptions about expected future collateral cash
flows discounted at the security’s book yield prior to impairment. The expected future cash flows
included projected rental rates and occupancy levels that varied based on property type and
sub-market. Impairments are recorded to the lower discounted value between the top down modeling
approach and loan by loan collateral review.
Impairments on securities for which the Company had the intent to sell were primarily on corporate
financial services securities where the Company had an active plan to dispose of the securities.
Impairments on equity securities were primarily on below investment grade hybrid securities that
had been depressed 20% for six continuous months.
In addition to the credit impairments recognized in earnings, the Company recognized $683 of
non-credit impairments in other comprehensive income, predominately concentrated in RMBS and CRE
CDOs. These non-credit impairments represent the difference between the fair value and the
Company’s best estimate of expected future cash flows discounted at the security’s effective yield
prior to impairment, rather than at current credit spreads. The non-credit impairments primarily
represent increases in market liquidity premiums and credit spread widening that occurred after the
securities were purchased. In general, larger liquidity premiums and wider credit spreads are the
result of deterioration of the underlying collateral performance of the securities, as well as the
risk premium required to reflect future uncertainty in the real estate market.
Future impairments may develop as the result of changes in intent to sell or if actual results
underperform current modeling assumptions, which may be the result of, but are not limited to,
macroeconomic factors, changes in assumptions used and property performance below current
expectations.
Year ended December 31, 2008
Impairments were primarily concentrated on subordinated fixed maturities and preferred equities
within the financial services sector, as well as in sub-prime RMBS and CRE CDOs. The remaining
impairments were primarily recorded on securities in various sectors that experienced significant
credit spread widening and for which the Company was uncertain of its intent to retain the
investments for a period of time sufficient to allow for recovery.
Year ended December 31, 2007
Impairments were primarily concentrated on structured securities backed by sub-prime RMBS and
corporate securities primarily within the financial services and home builders sectors. The
remaining impairments were primarily recorded on securities in various sectors that had declined in
value for which the Company was uncertain of its intent to retain the investments for a period of
time sufficient to allow for recovery.
125
Table of Contents
CAPITAL MARKETS RISK MANAGEMENT
The Company has a disciplined approach to managing risks associated with its capital markets
and asset/liability management activities. Investment portfolio management is organized to focus
investment management expertise on the specific classes of investments, while asset/liability
management is the responsibility of a dedicated risk management unit supporting Life and Property &
Casualty operations. Derivative instruments are utilized in compliance with established Company
policy and regulatory requirements and are monitored internally and reviewed by senior management.
The Company utilizes a variety of over-the-counter 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 risk or volatility. Replication
transactions are used as an economical means to synthetically replicate the characteristics and
performance of assets that would otherwise be permissible investments under the Company’s
investment policies. For further information, see Note 5 of the Notes to Consolidated Financial
Statements.
Derivative activities are monitored and evaluated by the Company’s risk management team and
reviewed by senior management. In addition, the Company monitors counterparty credit exposure on a
monthly basis to ensure compliance with Company policies and statutory limitations. The notional
amounts of derivative contracts represent the basis upon which pay or receive amounts are
calculated and are not reflective of credit risk. For further information on the Company’s use of
derivatives, see Note 5 of the Notes to Consolidated Financial Statements.
Market Risk
The Company is exposed to market risk, primarily relating to the market price and/or cash flow
variability associated with changes in interest rates, credit spreads including issuer defaults,
equity prices or market indices, and foreign currency exchange rates. The Company is also exposed
to credit and counterparty repayment risk.
Interest Rate Risk
The Company’s exposure to interest rate risk relates to the market price and/or cash flow
variability associated with changes in market interest rates. The Company manages its exposure to
interest rate risk by constructing investment portfolios that maintain asset allocation limits and
asset/liability duration matching targets which include the use of derivatives. The Company
analyzes interest rate risk using various models including parametric models and cash flow
simulation of the liabilities and the supporting investments, including derivative instruments
under various market scenarios. Measures the Company uses to quantify its exposure to interest
rate risk inherent in its invested assets and interest rate sensitive liabilities include duration,
convexity and key rate duration. Duration is the weighted average term-to-maturity of a security’s
cash flows and is used to approximate the percentage change in the price of a security for a given
change in market interest rates. For example, a duration of 5 means the price of the security will
change by approximately 5% for a 1% change in interest rates. Convexity is used to approximate how
the duration of a security changes as interest rates change. As duration in convexity calculations
assume parallel yield curve shifts, key rate duration analysis considers price sensitivity to
changes in various interest rate terms-to-maturity. Key rate duration analysis enables the Company
to estimate the price change of a security assuming non-parallel interest rate movements.
To calculate duration, convexity, and key rate duration, projections of asset and liability cash
flows are discounted to a present value using interest rate assumptions. These cash flows are then
revalued at alternative interest rate levels to determine the percentage change in fair value due
to an incremental change in rates. Cash flows from corporate obligations are assumed to be
consistent with the contractual payment streams on a yield to worst
basis. Yield to worst is the lowest possible yield when all potential
call dates prior to maturity are considered. The primary assumptions used in calculating cash flow projections include expected
asset payment streams taking into account prepayment speeds, issuer call options and contract
holder behavior. Mortgage-backed and asset-backed securities are modeled based on estimates of the
rate of future prepayments of principal over the remaining life of the securities. These estimates
are developed by incorporating collateral surveillance and anticipated future market dynamics.
Actual prepayment experience may vary from these estimates.
The Company is also exposed to interest rate risk based upon the discount rate assumption
associated with the Company’s pension and other postretirement benefit obligations. The discount
rate assumption is based upon an interest rate yield curve comprised of bonds rated Aa with
maturities primarily between zero and thirty years. For further discussion of interest rate risk
associated with the benefit obligations, see Pension and Other Postretirement Benefit Obligations
within the Critical Accounting Estimates section of the MD&A and Note 17 of the Notes to
Consolidated Financial Statements.
In addition, management evaluates performance of certain Life products based on net investment
spread which is, in part, influenced by changes in interest rates. For further discussion, see the
Retail, Individual Life, Retirement Plans, and Institutional sections of the MD&A.
126
Table of Contents
As interest rates decline, certain mortgage-backed securities are more susceptible to paydowns and
prepayments. During such periods, the Company generally will not be able to reinvest the proceeds
at comparable yields. Lower interest rates will also likely result in lower net investment income,
increased hedging cost associated with variable annuities and, if declines are sustained for a long
period of time, it may subject the Company to reinvestment risks, higher pension costs expense and
possibly reduced profit margins associated with guaranteed crediting rates on certain Life
products. Conversely, the fair value of the investment portfolio will increase when interest rates
decline and the Company’s interest expense will be lower on its variable rate debt obligations.
The Company believes that an increase in interest rates from the current levels is generally a
favorable development for the Company. Rate increases are expected to provide additional net
investment income, increase sales of fixed rate Life investment products, reduce the cost of the
variable annuity hedging program, limit the potential risk of margin erosion due to minimum
guaranteed crediting rates in certain Life products and, if sustained, could reduce the Company’s
prospective pension expense. Conversely, a rise in interest rates will reduce the fair value of
the investment portfolio, increase interest expense on the Company’s variable rate debt obligations
and, if long-term interest rates rise dramatically within a six to twelve month time period,
certain Life businesses may be exposed to disintermediation risk. Disintermediation risk refers to
the risk that policyholders will surrender their contracts in a rising interest rate environment
requiring the Company to liquidate assets in an unrealized loss position. In conjunction with the
interest rate risk measurement and management techniques, certain of Life’s fixed income product
offerings have market value adjustment provisions at contract surrender. An increase in interest
rates may also impact the Company’s tax planning strategies and in particular its ability to
utilize tax benefits to offset certain previously recognized realized capital losses.
The investments and liabilities primarily associated with interest rate risk are included in the
following discussion. Certain product liabilities, including those containing GMWB, GMIB, GMAB, or
GMDB, expose the Company to interest rate risk but also have significant equity risk. These
liabilities are discussed as part of the Equity Risk section below.
Fixed Maturity Investments
The Company’s investment portfolios primarily consist of investment grade fixed maturity
securities. The fair value of these investments was $71.2 billion and $65.1 billion at December
31, 2009 and 2008, respectively. The fair value of these and other invested assets fluctuates
depending on the interest rate environment and other general economic conditions. The weighted
average duration of the fixed maturity portfolio was approximately 4.9 and 4.8 years as of December
31, 2009 and 2008, respectively.
Liabilities
The Company’s investment contracts and certain insurance product liabilities, other than
non-guaranteed separate accounts, include asset accumulation vehicles such as fixed annuities,
guaranteed investment contracts, other investment and universal life-type contracts and certain
insurance products such as long-term disability.
Asset accumulation vehicles primarily require a fixed rate payment, often for a specified period of
time. Product examples include fixed rate annuities with a market value adjustment feature and
fixed rate guaranteed investment contracts. The term to maturity of these contracts generally
range from less than one year to ten years. In addition, certain products such as universal life
contracts and the general account portion of Life’s variable annuity products, credit interest to
policyholders subject to market conditions and minimum interest rate guarantees. The term to
maturity of these products is short to intermediate.
While interest rate risk associated with many of these products has been reduced through the use of
market value adjustment features and surrender charges, the primary risk associated with these
products is that the spread between investment return and credited rate may not be sufficient to
earn targeted returns.
The Company also manages the risk of certain insurance liabilities similarly to investment type
products due to the relative predictability of the aggregate cash flow payment streams. Products
in this category may contain significant actuarial (including mortality and morbidity) pricing and
cash flow risks. Product examples include structured settlement contracts, on-benefit annuities
(i.e., the annuitant is currently receiving benefits thereon) and short-term and long-term
disability contracts. The cash outflows associated with these policy liabilities are not interest
rate sensitive but do vary based on the timing and amount of benefit payments. The primary risks
associated with these products are that the benefits will exceed expected actuarial pricing and/or
that the actual timing of the cash flows will differ from those anticipated, resulting in an
investment return lower than that assumed in pricing. Average contract duration can range from
less than one year to typically up to fifteen years.
Derivatives
The Company utilizes a variety of derivative instruments to mitigate interest rate risk. Interest
rate swaps are primarily used to convert interest receipts or payments to a fixed or variable rate.
The use of such swaps enables the Company to customize contract terms and conditions to customer
objectives and satisfies its asset/liability duration matching policy. Interest rate swaps are
also used to hedge the variability in the cash flow of a forecasted purchase or sale of fixed rate
securities due to changes in interest rates. Forward rate agreements are used to convert interest
receipts on floating-rate securities to fixed rates. These derivatives are used to lock in the
forward interest rate curve and reduce income volatility that results from changes in interest
rates. Interest rate caps, floors, swaptions, and futures are primarily used to manage portfolio
duration.
At December 31, 2009 and 2008, notional amounts pertaining to derivatives utilized to manage
interest rate risk totaled $21.3 billion and $19.3 billion, respectively ($19.7 billion and $17.4
billion, respectively, related to investments and $1.6 billion and $1.9 billion, respectively,
related to life liabilities). The fair value of these derivatives was $18 and $457 as of December
31, 2009 and 2008, respectively.
127
Table of Contents
Calculated Interest Rate Sensitivity
The after-tax change in the net economic value of investment contracts (e.g., guaranteed investment
contracts) and certain insurance product liabilities (e.g., short-term and long-term disability
contracts), for which the payment rates are fixed at contract issuance and the investment
experience is substantially absorbed by the Company’s Life operations, are included in the
following table along with the corresponding invested assets. Also included in this analysis are
the interest rate sensitive derivatives used by the Company to hedge its exposure to interest rate
risk. Certain financial instruments, such as limited partnerships and other alternative
investments, have been omitted from the analysis due to the fact that the investments are accounted
for under the equity method and generally lack sensitivity to interest rate changes. Separate
account assets and liabilities, equity securities, trading and the corresponding liabilities
associated with the variable annuity products sold in Japan are excluded from the analysis because
gains and losses in separate accounts accrue to policyholders. The calculation of the estimated
hypothetical change in net economic value below assumes a 100 basis point upward and downward
parallel shift in the yield curve.
| Change in Net Economic Value As of December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
|
Basis point shift
|
- 100 | + 100 | - 100 | + 100 | ||||||||||||
|
|
||||||||||||||||
|
Amount
|
$ | (30 | ) | $ | (9 | ) | $ | (173 | ) | $ | 114 | |||||
|
|
||||||||||||||||
The fixed liabilities included above represented approximately 63% of the Company’s Life
operations’ general account liabilities as of December 31, 2009 and 2008. The assets supporting
the fixed liabilities are monitored and managed within rigorous duration guidelines, and are
evaluated on a monthly basis, as well as annually using scenario simulation techniques in
compliance with regulatory requirements.
The following table provides an analysis showing the estimated after-tax change in the fair value
of the Company’s fixed maturity investments and related derivatives, assuming 100 basis point
upward and downward parallel shifts in the yield curve as of December 31, 2009 and 2008. Certain
financial instruments, such as limited partnerships and other alternative investments, have been
omitted from the analysis due to the fact that the investments are accounted for under the equity
method and generally lack sensitivity to interest rate changes.
| Change in Fair Value As of December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
|
Basis point shift
|
- 100 | + 100 | - 100 | + 100 | ||||||||||||
|
|
||||||||||||||||
|
Amount
|
$ | 2,326 | $ | (2,230 | ) | $ | 2,015 | $ | (1,944 | ) | ||||||
|
|
||||||||||||||||
The selection of the 100 basis point parallel shift in the yield curve was made only as an
illustration of the potential hypothetical impact of such an event and should not be construed as a
prediction of future market events. Actual results could differ materially from those illustrated
above due to the nature of the estimates and assumptions used in the above analysis. The Company’s
sensitivity analysis calculation assumes that the composition of invested assets and liabilities
remain materially consistent throughout the year and that the current relationship between
short-term and long-term interest rates will remain constant over time. As a result, these
calculations may not fully capture the impact of portfolio re-allocations, significant product
sales or non-parallel changes in interest rates.
Credit Risk
The Company is exposed to credit risk within our investment portfolio and through counterparties.
Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in
accordance with the contractual terms of the instrument or contract. The Company manages credit
risk through established investment credit policies which address quality of obligors and
counterparties, credit concentration limits, diversification requirements and acceptable risk
levels under expected and stressed scenarios. These policies are regularly reviewed and approved
by senior management.
The derivative counterparty exposure policy establishes market-based credit limits, favors
long-term financial stability and creditworthiness of the counterparty and typically requires
credit enhancement/credit risk reducing agreements. The Company minimizes the credit risk in
derivative instruments by entering into transactions with high quality counterparties rated A2/A or
better, which are monitored and evaluated by the Company’s risk management team and reviewed by
senior management. In addition, the Company monitors counterparty credit exposure on a monthly
basis to ensure compliance with Company policies and statutory limitations. For further
information on derivative counterparty credit risk, see the Investment Credit Risk section of the
MD&A.
In addition to counterparty credit risk, the Company enters into credit derivative instruments to
manage credit exposure. The Company purchases credit protection through credit default swaps to
economically hedge and manage credit risk of certain fixed maturity investments across multiple
sectors of the investment portfolio. The Company has also entered into credit default swaps that
assume credit risk to synthetically replicate the characteristics and performance of assets that
would otherwise be permissible investments under the Company’s investment policies. Credit spread
widening will generally result in an increase in fair value of derivatives that purchase credit
protection and a decrease in fair value of derivatives that assume credit risk. These derivatives
do not receive hedge accounting treatment and, as such, changes in fair value are reported through
earnings. As of December 31, 2009 and 2008, the notional amount related to credit derivatives that
purchase credit protection was $2.6 billion and $3.7 billion, respectively, while the fair value
was $(50) and $340, respectively. As of December 31, 2009 and 2008, the notional amount related to
credit derivatives that assume credit risk was $1.2 billion, while the fair value was $(240) and
$(403), respectively. For further information on credit derivatives, see the Investment Credit
Risk section of the MD&A and Note 5 of the Notes to Consolidated Financial Statements.
128
Table of Contents
The Company is also exposed to credit spread risk related to security market price and cash flows
associated with changes in credit spreads. Credit spread widening will reduce the fair value of
the investment portfolio and will increase net investment income on new purchases. If issuer
credit spreads increase significantly or for an extended period of time, it may result in higher
impairment losses. Credit spread tightening will reduce net investment income associated with new
purchases of fixed maturities and increase the fair value of the investment portfolio. For further
discussion of sectors most significantly impacted, see the Investment Credit Risk section of the
MD&A. Also, for a discussion of the movement of credit spread impacts on the Company’s statutory
financial results as it relates to the accounting and reporting for market value fixed annuities,
see the Capital Resources & Liquidity section of the MD&A.
Equity Risk
The Company does not have significant equity risk exposure from invested assets. The Company’s
primary exposure to equity risk relates to the potential for lower earnings associated with certain
of the Life’s businesses such as variable annuities where fee income is earned based upon the fair
value of the assets under management. During 2009, Life’s fee income declined $555 or 11%. In
addition, Life offers certain guaranteed benefits, primarily associated with variable annuity
products, which increases the Company’s potential benefit exposure as the equity markets decline.
The Company is also subject to equity risk based upon the assets that support its pension plans.
The asset allocation mix is reviewed on a periodic basis. In order to minimize risk, the pension
plans maintain a listing of permissible and prohibited investments. In addition, the pension plans
have certain concentration limits and investment quality requirements imposed on permissible
investment options. For further discussion of equity risk associated with the pension
plans, see Pension and Other Postretirement Benefit Obligations within the Critical Accounting
Estimates section of the MD&A and Note 17 of the Notes to Consolidated Financial Statements.
Foreign Currency Exchange Risk
The Company’s foreign currency exchange risk is related to non—U.S. dollar denominated
investments, which primarily consist of fixed maturity investments, the investment in and net
income of the Japanese Life and U.K. Life operations, and non-U.S. dollar denominated liability
contracts, including its GMDB, GMAB, GMWB and GMIB benefits associated with its Japanese and U.K.
variable annuities, and a yen denominated individual fixed annuity product. A portion of the
Company’s foreign currency exposure is mitigated through the use of derivatives.
Fixed Maturity Investments
The risk associated with the non-U.S. dollar denominated fixed maturities relates to potential
decreases in value and income resulting from unfavorable changes in foreign exchange rates. The
fair value of the non-U.S. dollar denominated fixed maturities, which are primarily denominated in
euro, sterling, yen and Canadian dollars, at December 31, 2009 and 2008, were approximately $1.2
billion and $3.8 billion, respectively.
In order to manage its currency exposures, the Company enters into foreign currency swaps and
forwards to hedge the variability in cash flows associated with certain foreign denominated fixed
maturities. These foreign currency swap and forward agreements are structured to match the foreign
currency cash flows of the hedged foreign denominated securities. At December 31, 2009 and 2008,
the derivatives used to hedge currency exchange risk related to non-U.S. dollar denominated fixed
maturities had a total notional amount of $480 and $1.6 billion, respectively, and total fair value
of $(26) and $39, respectively.
Based on the fair values of the Company’s non-U.S. dollar denominated securities and derivative
instruments as of December 31, 2009 and 2008, management estimates that a 10% unfavorable change in
exchange rates would decrease the fair values by a before-tax total of approximately $62 and $205,
respectively. The estimated impact was based upon a 10% change in December 31 spot rates. The
selection of the 10% unfavorable change was made only for illustration of the potential
hypothetical impact of such an event and should not be construed as a prediction of future market
events. Actual results could differ materially from those illustrated above due to the nature of
the estimates and assumptions used in the above analysis.
Liabilities
The Company’s Life operations issued non-U.S. dollar denominated funding agreement liability
contracts. The Company hedges the foreign currency risk associated with these liability contracts
with currency rate swaps. At December 31, 2009 and 2008, the derivatives used to hedge foreign
currency exchange risk related to foreign denominated liability contracts had a total notional
amount of $814 and $820, respectively, and a total fair value of $(2) and $(76), respectively.
The Company enters into foreign currency forward and option contracts that convert euros to yen in
order to economically hedge the foreign currency risk associated with certain Japanese variable
annuity products. As of December 31, 2009 and 2008, the derivatives used to hedge foreign currency
risk associated with Japanese variable annuity products had a total notional amount of $257 and
$259, respectively, and a total fair value of ($8) and $35, respectively.
129
Table of Contents
The yen based fixed annuity product is written by Hartford Life Insurance K.K. (“HLIKK”), a
wholly-owned Japanese subsidiary of Hartford Life, Inc. (“HLI”), and subsequently reinsured to
Hartford Life Insurance Company, a U.S. dollar based wholly-owned indirect subsidiary of HLI. The
underlying investment involves investing in U.S. securities markets, which offer favorable credit
spreads. The yen denominated fixed annuity product (“yen fixed annuities”) is recorded in the
consolidated balance sheets with invested assets denominated in dollars while policyholder
liabilities are denominated in yen and converted to U.S. dollars based upon the December 31, yen to
U.S. dollar spot rate. The difference between U.S. dollar denominated investments and yen
denominated liabilities exposes the Company to currency risk. The Company manages this currency
risk associated with the yen fixed annuities primarily with pay variable U.S. dollar and receive
fixed yen currency swaps. As of December 31, 2009 and 2008, the notional value of the currency
swaps was $2.3 billion and the fair value was $316 and $383, respectively. Although economically
an effective hedge, a divergence between the yen denominated fixed annuity product liability and
the currency swaps exists primarily due to the difference in the basis of accounting between the
liability and the derivative instruments (i.e. historical cost versus fair value). The yen
denominated fixed annuity product liabilities are recorded on a historical cost basis and are only
adjusted for changes in foreign spot rates and accrued income. The currency swaps are recorded at
fair value, incorporating changes in value due to changes in forward foreign exchange rates,
interest rates and accrued income. A before-tax net gain of $47 and $64 for the years ended
December 31, 2009 and 2008, respectively, which includes the changes in value of the currency
swaps, excluding net periodic coupon settlements, and the yen fixed annuity contract remeasurement,
was recorded in net realized capital gains and losses.
Life’s Equity Product Risk
The Company’s Life operations are significantly influenced by the U.S., Japanese, and other global
equity markets. Increases or declines in equity markets impact certain assets and liabilities
related to the Company’s variable products and the Company’s earnings derived from those products.
The Company’s variable products include variable annuity contracts, mutual funds, and variable life
insurance.
Generally, declines in equity markets will:
| • |
reduce the value of assets under management and the amount of fee income generated from
those assets;
|
| • |
reduce the value of equity securities, trading, for international variable annuities, the
related policyholder funds and benefits payable, and the amount of fee income generated from
those variable annuities;
|
| • |
increase the liability for GMWB benefits resulting in realized capital losses;
|
| • |
increase the value of derivative assets used to dynamically hedge product guarantees
resulting in realized capital gains;
|
| • |
increase costs under the Company’s hedging program;
|
| • |
increase the Company’s net amount at risk for GMDB and GMIB benefits;
|
| • |
decrease the Company’s actual gross profits, resulting in increased DAC amortization;
|
| • |
increase the amount of required statutory capital necessary to maintain targeted risk based
capital ratios;
|
| • |
turn customer sentiment toward equity-linked products negative, causing a decline in sales;
and
|
| • |
decrease the Company’s estimated future gross profits. See Life Estimated Gross Profits
Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable
Annuity and Other Universal Life-Type Contracts within the Critical Accounting Estimates
section of MD&A for further information.
|
Generally, increases in equity markets will reduce the value of derivative assets used to provide a
macro hedge on statutory surplus, resulting in realized capital losses during periods of market
appreciation.
GMWB
The majority of the Company’s U.S. and U.K. variable annuities, and a portion of Japan’s variable
annuities, include a GMWB rider. In the second quarter of 2009, the Company suspended all new
sales in the U.K. and Japan. The Company’s new variable annuity product, launched in the U.S. in
October 2009 does not offer a GMWB. Declines in equity markets will generally increase the
Company’s liability for the in-force GMWB riders. A GMWB contract is ‘in the money’ if the
contract holder’s guaranteed remaining benefit (“GRB”) is greater than their current account value.
As of December 31, 2009 and December 31, 2008, 48% and 88%, respectively, of all unreinsured U.S.
GMWB ‘in-force’ contracts were ‘in the money’. For U.S., U.K. and Japan GMWB contracts that were
‘in the money’, the Company’s exposure to the GRB, after reinsurance, as of December 31, 2009 and
2008, was $2.7 billion and $7.7 billion, respectively. However, the Company expects to incur these
payments in the future only if the policyholder has an ‘in the money’ GMWB at their death or their
account value is reduced to a specified level through contractually permitted withdrawals and/or
market declines. If the account value is reduced to the specified level, the contract holder will
receive an annuity equal to the remaining GRB. For the Company’s “life-time” GMWB products, this
annuity can continue beyond the GRB. As the account value fluctuates with equity market returns on
a daily basis and the “life-time” GMWB payments can exceed the GRB, the ultimate amount to be paid
by the Company, if any, is uncertain and could be significantly more or less than $2.7 billion.
For additional information on the Company’s GMWB liability, see Note 4a of the Notes to
Consolidated Financial Statements.
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Table of Contents
GMDB and GMIB
The majority of the Company’s U.S. variable annuity contracts include a GMDB rider. Declines in
the equity markets will generally increase the Company’s liability for GMDB riders. The Company’s
total gross exposure (i.e., before reinsurance) to U.S. GMDB as of December 31, 2009 is $18.4
billion. However, the Company will incur these payments in the future only if the policyholder has
an ‘in the money’ GMDB at their death. The Company currently reinsures 53% of these death benefit
guarantees. Under certain of these reinsurance agreements, the reinsurers’ exposure is subject to
an annual cap. The Company’s net exposure (i.e., after reinsurance) is $8.5 billion, as of December
31, 2009.
In the second quarter of 2009, the Company suspended all new product sales in Japan. Prior to
that, the Company offered certain variable annuity products in Japan with both a GMDB and a GMIB.
For the in-force block of Japan business, declines in equity markets, as well as a strengthening of
the Japanese yen in comparison to the U.S. dollar and other currencies, will increase the Company’s
liability for GMDB and GMIB riders. This increase may be significant in extreme market scenarios.
The Company’s total gross exposure (i.e., before reinsurance) to the GMDB and GMIB offered in Japan
as of December 31, 2009 is $6.3 billion. However, the Company will incur these payments in the
future only if the contract holder has an ‘in the money’ GMDB and GMIB at their death or if their
account value is insufficient to fund the benefit. The Company currently reinsures 17% of the GMDB
to a third party reinsurer. Under certain of these reinsurance agreements, the reinsurers’
exposure is subject to an annual cap. The Company’s net exposure (i.e. after reinsurance) is $5.2
billion. In addition, as of December 31, 2009, 59% of the account value and 52% of retained net
amount at risk is reinsured to a Hartford affiliate. For additional information on the Company’s
GMDB and GMIB liability, see Note 9 of the Notes to Consolidated Financial Statements.
Life’s Equity Product Risk Management
The Company has made considerable investment in analyzing market risk exposures arising from: GMDB,
GMWB, and GMIB; equity market and interest rate risks; and foreign currency exchange rates. The
Company evaluates these risks both individually and, in the aggregate, to determine the financial
risk of its products and to judge their potential impacts on U.S. GAAP earnings and statutory
surplus. The Company manages the equity market, interest rate and foreign currency exchange risks
embedded in its products through product design, reinsurance, customized derivatives, and dynamic
hedging and macro hedging programs. The Company recently launched a new variable annuity
product with reduced equity risk and has increased GMWB rider fees on new sales of the Company’s
legacy variable annuities and the related in-force, as contractually permitted. Depending upon
competitors’ reactions with respect to products and related rider charges, the Company’s strategy
of reducing product risk and increasing fees may cause a decline in market share.
Reinsurance
The Company uses reinsurance for a portion of contracts issued with GMWB riders prior to the third
quarter of 2003. The Company also reinsures GMWB risks associated with a block of business sold
between the third quarter of 2003 and the second quarter of 2006. The Company also uses
reinsurance for a majority of the GMDB issued in the U.S. and a portion of the GMDB issued in
Japan.
Derivative Hedging Programs
The Company maintains derivative hedging programs for its product guarantee risk to meet multiple,
and in some cases, competing risk management objectives, including providing protection against
tail scenario equity market events, providing resources to pay product guarantee claims, and
minimizing U.S. GAAP earnings volatility, statutory surplus volatility and other economic metrics.
The Company holds customized derivative contracts to provide protection from certain capital market
risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized
derivative contracts are based on policyholder behavior assumptions specified at the inception of
the derivative contracts. The Company retains the risk for actual policyholder behavior that is
different from assumptions within the customized derivatives.
The Company’s dynamic hedging program uses derivative instruments to manage the U.S. GAAP earnings
volatility associated with variable annuity product guarantees including equity market declines,
equity implied volatility, declines in interest rates and foreign currency exchange risk. The
Company uses hedging instruments including interest rate futures and swaps, variance swaps, S&P
500, NASDAQ and EAFE index put options and futures contracts. While the Company actively manages
this dynamic hedging program, increased U.S. GAAP earnings volatility may result from factors
including, but not limited to, policyholder behavior, capital markets, divergence between the
performance of the underlying funds and the hedging indices, and the relative emphasis placed on
various risk management objectives.
The Company’s macro hedging program uses derivative instruments to partially hedge the statutory
tail scenario risk arising from U.S. and Japan GMWB, GMDB, and GMIB statutory liabilities, on the
Company’s statutory surplus and the associated target RBC ratios (see Capital Resources and
Liquidity). The macro hedge program will result in additional cost and U.S. GAAP earnings
volatility in times of market increases as changes in the value of the macro hedge derivatives
which hedge statutory liabilities may not be closely aligned to changes in U.S. GAAP liabilities.
For additional information on hedging derivatives, see Note 5 of the Notes to Consolidated
Financial Statements.
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Table of Contents
The following table summarizes the Company’s U.S. GMWB account value by type of risk management
strategy, as of December 31, 2009:
| GMWB | ||||||||||||
| Account | % of GMWB | |||||||||||
| Risk Management Strategy | Duration | Value | Account Value | |||||||||
|
Entire GMWB risk reinsured with a third party
|
Life of the product | $ | 11,299 | 25 | % | |||||||
|
Capital markets risk transferred to a third party — behavior risk retained by the Company
|
Designed to cover the effective life of the product | 10,838 | 24 | % | ||||||||
|
Dynamic hedging of capital markets risk using various derivative instruments [1]
|
Weighted average of 4 years [2] | 23,369 | 51 | % | ||||||||
|
|
||||||||||||
|
|
$ | 45,506 | 100 | % | ||||||||
|
|
||||||||||||
| [1] |
During 2009, the Company continued to maintain a reduced level of
dynamic hedge protection on U.S GAAP earnings while placing a
greater relative emphasis on the protection of statutory surplus
including the macro hedging program.
|
|
| [2] |
The weighted average of 4 years reflects varying durations by
hedging strategy and the impact of non parallel shifts will
increase GAAP volatility.
|
Based on the construction of the Company’s derivative hedging program (both dynamic and macro
hedge) as of December 31, 2009, which can change based on capital market conditions, notional
amounts and other factors, an independent change in the following capital market factors is likely
to have the following impacts. These sensitivities do not capture the impact of elapsed time on
liabilities or hedge assets. Additionally, duration varies by hedging strategy and the impact of
non parallel shifts will increase U.S. GAAP volatility. Each of the sensitivities set forth below
is estimated individually, without consideration of any correlation among the key assumptions.
Therefore, it would be inappropriate to take each of the sensitivities below and add them together
in an attempt to estimate the volatility in our variable annuity hedging program. In addition,
there are other factors, including policyholder behavior and variation in underlying fund
performance relative to the hedged index, which could materially impact the GMWB liability. As a
result, actual net changes in the value of the GMWB liability, the related dynamic hedging program
derivative assets and the macro hedge program derivative assets may vary materially from those
calculated using only the sensitivities disclosed below:
| Net Impact on | ||||
| Hedging Program | ||||
| Pre-Tax/DAC | ||||
| Capital Market Factor | Gain (Loss) | |||
|
Equity markets increase 1% [1]
|
$ | (12 | ) | |
|
Equity markets decrease 1% [1]
|
12 | |||
|
Volatility increases 1% [2]
|
(30 | ) | ||
|
Volatility decreases 1% [2]
|
30 | |||
|
Interest rates increase 1 basis point [3]
|
2 | |||
|
Interest rates decrease 1 basis point [3]
|
(2 | ) | ||
| [1] |
Represents the aggregate net impact of a 1% increase or decrease in each of the S&P 500, NASDAQ and EAFE indices.
|
|
| [2] |
Represents the aggregate net impact of a 1% increase or decrease in blended implied volatility that is generally skewed
towards longer durations of each of the S&P 500, NASDAQ and EAFE indices.
|
|
| [3] |
Represents the aggregate net impact of a 1 basis point parallel shift on the LIBOR yield curve.
|
During the quarter ended December 31, 2009, U.S. GMWB liabilities, net of the dynamic and
macro hedging programs, reported a net realized pre-tax gain of $311 primarily driven by model
assumption changes of $260, increases in interest rate of approximately 50 basis points, decreases
in volatility of approximately 1%, and the relative outperformance of the underlying actively
managed funds as compared to their respective indices, partially offset by increases in U.S. equity
markets of approximately 5%. During the year ended December 31, 2009, U.S. GMWB liabilities, net
of the dynamic and macro hedging programs, reported a net realized pre-tax gain of $732 primarily
driven by model assumption changes of $566, increases in interest rates of approximately 100 basis
points, decreases in volatility of approximately 5%, the relative outperformance of the underlying
actively managed funds as compared to their respective indices, and the impact of the Company’s
credit spread, partially offset by increases in U.S. equity markets of approximately 25%. See Note
4a of the Notes to Consolidated Financial Statements for description and impact of the Company’s
credit spread and liability model assumption changes.
Equity Risk Impact on Statutory Capital and Risk Based Capital
See Statutory Surplus within the Capital Resources and Liquidity section of the MD&A for
information on the equity risk impact on statutory results.
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Table of Contents
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of The Hartford and
the Life and Property & Casualty insurance operations and their ability to generate cash flows from
each of their business segments, borrow funds at competitive rates and raise new capital to meet
operating and growth needs over the next twelve months.
Liquidity Requirements and Sources of Capital
The Hartford Financial Services Group, Inc. (Holding Company)
The liquidity requirements of the holding company of The Hartford Financial Services Group, Inc.
(“HFSG Holding Company”) have been and will continue to be met by HFSG Holding Company’s fixed
maturities, short-term investments, and cash of $2.2 billion at December 31, 2009, dividends from
the Life and Property & Casualty insurance operations, as well as the issuance of common stock,
debt or other capital securities and borrowings from its credit facilities. Expected liquidity
requirements of the HFSG Holding Company for the next twelve months include interest on debt of
approximately $450, maturity of senior notes of $275, common stockholder dividends, subject to the
discretion of the Board of Directors, of approximately $80, and preferred stock dividends of
approximately $170.
Debt
HFSG Holding Company’s debt maturities over the next twelve months include $275 aggregate principal
amount of its 7.9% senior notes that mature in June 2010. In addition, HLI has a capital lease
obligation of $73, which was paid in January 2010. For additional information regarding debt, see
Notes 12 and 14 in the Notes to Consolidated Financial Statements.
Dividends
On February 18, 2010, The Hartford’s Board of Directors declared a quarterly dividend of $0.05 per
common share payable on April 1, 2010 to common shareholders of record as of March 1, 2010.
Pension Plans and Other Postretirement Benefits
While the Company has significant discretion in making voluntary contributions to the U. S.
qualified defined benefit pension plan, the Employee Retirement Income Security Act of 1974, as
amended by the Pension Protection Act of 2006 and further amended by the Worker, Retiree, and
Employer Recovery Act of 2008, and Internal Revenue Code regulations mandate minimum contributions
in certain circumstances. The Company made contributions to its pension plans of $201, $2, and
$158 in 2009, 2008 and 2007, respectively, and contributions to its other postretirement plans of
$46 in 2007. No contributions were made to the other postretirement plans in 2009 and 2008. The
Company’s 2009 required minimum funding contribution was immaterial. The Company presently
anticipates contributing approximately $200 to its pension plans and other postretirement plans in
2010, based upon certain economic and business assumptions. These assumptions include, but are not
limited to, equity market performance, changes in interest rates and the Company’s other capital
requirements. The Company does not have a required minimum funding contribution for the U.S.
qualified defined benefit pension plan for 2010 and the funding requirements for all of the pension
plans is expected to be immaterial.
Dividends from Insurance Subsidiaries
Dividends to the HFSG Holding Company from its insurance subsidiaries are restricted. The payment
of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws
of Connecticut. These laws require notice to and approval by the state insurance commissioner for
the declaration or payment of any dividend, which, together with other dividends or distributions
made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s
policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from
operations, if such company is a life insurance company) for the twelve-month period ending on the
thirty-first day of December last preceding, in each case determined under statutory insurance
accounting principles. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the
insurer’s earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner.
The insurance holding company laws of the other jurisdictions in which The Hartford’s insurance
subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar
(although in certain instances somewhat more restrictive) limitations on the payment of dividends.
Dividends paid to HFSG Holding Company by its insurance subsidiaries are further dependent on cash
requirements of HLI and other factors. The Company’s property-casualty insurance subsidiaries are
permitted to pay up to a maximum of approximately $1.4 billion in dividends to HFSG Holding Company
in 2010 without prior approval from the applicable insurance commissioner. Statutory dividends
from the Company’s life insurance subsidiaries in 2010 require prior approval from the applicable
insurance commissioner. The aggregate of these amounts, net of amounts required by HLI, is the
maximum the insurance subsidiaries could pay to HFSG Holding Company in 2010. In 2009, HFSG
Holding Company and HLI received $700 in dividends from the life insurance subsidiaries
representing the movement of a life subsidiary to HFSG Holding Company, and HFSG Holding Company
received $251 in dividends from its property-casualty insurance subsidiaries.
Other Sources of Capital for the HFSG Holding Company
The Hartford endeavors to maintain a capital structure that provides financial and operational
flexibility to its insurance subsidiaries, ratings that support its competitive position in the
financial services marketplace (see the “Ratings” section below for further discussion), and
shareholder returns. As a result, the Company may from time to time raise capital from the
issuance of stock, debt or other capital securities and is continuously evaluating strategic
opportunities. The issuance of common stock, debt or other capital securities could result in the
dilution of shareholder interests or reduced net income due to additional interest expense.
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Table of Contents
Capital Purchase Program
On June 26, 2009, as part of the Capital Purchase Program (“CPP”) established by the U.S.
Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2008 (the
“EESA”), the Company entered into a Private Placement Purchase Agreement with Treasury pursuant to
which the Company issued and sold to the Treasury 3,400,000 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series E, having a liquidation preference of $1,000 per share
(the “Series E Preferred Stock”), and a ten-year warrant to purchase up to 52,093,973 shares of the
Company’s common stock, par value $0.01 per share, at an initial exercise price of $9.79 per share,
for an aggregate purchase price of $3.4 billion. To satisfy a key eligibility requirement for
participation in the CPP, The Hartford acquired Federal Trust Corporation and has agreed with OTS
to serve as a source of strength to its wholly-owned subsidiary Federal Trust Bank (“FTB”), which
included the contribution of $195 of CPP funds to FTB in the second and third quarter of 2009 and
could require further contributions of capital to FTB in the future. In addition, The Hartford has
contributed $1.7 billion of the CPP funds to its indirect wholly-owned subsidiary Hartford Life
Insurance Company and used $500 to purchase a surplus note from a wholly-owned captive insurance
company. The remaining $1.0 billion is held at the HFSG Holding Company in a segregated account.
Cumulative dividends on the Series E Preferred Stock will accrue on the liquidation preference at a
rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter. The Series
E Preferred Stock has no maturity date and ranks senior to the Company’s common stock. The Series
E Preferred Stock is non-voting. Payments on the cumulative dividends are approximately $170 over
the next twelve months. The cumulative dividends on preferred stock and related accretion of
discount on preferred stock will reduce net income available to common shareholders. Pursuant to
the Private Placement Purchase Agreement the Company has certain restrictions on dividends for its
common stock, for further information on common stock dividend restrictions see Note 15 in the
Notes to Consolidated Financial Statements.
Discretionary Equity Issuance Program
On August 6, 2009, the Company completed its discretionary equity issuance program. The Hartford
issued 56.1 million shares of common stock and received net proceeds of $887 under this program.
Additionally, this program triggered an anti-dilution provision in The Hartford’s investment
agreement with Allianz, which resulted in the adjustment to the warrant exercise price to $25.25
from $25.32 and to the number of shares that may be purchased to 69,314,987 from 69,115,324.
Shelf Registrations
On April 11, 2007, The Hartford filed with the SEC an automatic shelf registration statement
(Registration No. 333-142044) for the potential offering and sale of debt and equity securities.
The registration statement allows for the following types of securities to be offered: (i) debt
securities, preferred stock, common stock, depositary shares, warrants, stock purchase contracts,
stock purchase units and junior subordinated deferrable interest debentures of the Company, and
(ii) preferred securities of any of one or more capital trusts organized by The Hartford (“The
Hartford Trusts”). The Company may enter into guarantees with respect to the preferred securities
of any of The Hartford Trusts. In that The Hartford is a well-known seasoned issuer, as defined in
Rule 405 under the Securities Act of 1933, the registration statement went effective immediately
upon filing and The Hartford may offer and sell an unlimited amount of securities under the
registration statement during the three-year life of the shelf.
Contingent Capital Facility
On February 12, 2007, The Hartford entered into a put option agreement (the “Put Option Agreement”)
with Glen Meadow ABC Trust, a Delaware statutory trust (the “ABC Trust”), and LaSalle Bank National
Association, as put option calculation agent. The Put Option Agreement provides The Hartford with
the right to require the ABC Trust, at any time and from time to time, to purchase The Hartford’s
junior subordinated notes in a maximum aggregate principal amount not to exceed $500.
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Table of Contents
Commercial Paper and Revolving Credit Facility
The table below details the Company’s short-term debt programs and the applicable balances
outstanding.
| Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
| Effective | Expiration | December 31, | December 31, | |||||||||||||||||||||
| Description | Date | Date | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
|
Commercial Paper
|
||||||||||||||||||||||||
|
The Hartford
|
11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | — | $ | 374 | ||||||||||||||
|
Revolving Credit Facility
|
||||||||||||||||||||||||
|
5-year revolving credit facility
|
8/9/07 | 8/9/12 | 1,900 | 1,900 | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Commercial Paper and
Revolving Credit Facility
|
$ | 3,900 | $ | 3,900 | $ | — | $ | 374 | ||||||||||||||||
|
|
||||||||||||||||||||||||
While The Hartford’s maximum borrowings available under its commercial paper program are $2.0
billion, the Company is dependent upon market conditions to access short-term financing through the
issuance of commercial paper to investors. As of December 31, 2009, the Company has no commercial
paper outstanding.
The revolving credit facility provides for up to $1.9 billion of unsecured credit through August 9,
2012, which excludes a $100 commitment from an affiliate of Lehman Brothers. Of the total
availability under the revolving credit facility, up to $100 is available to support letters of
credit issued on behalf of The Hartford or other subsidiaries of The Hartford. Under the revolving
credit facility, the Company must maintain a minimum level of consolidated net worth of $12.5
billion. At December 31, 2009, the consolidated net worth of the Company as calculated in
accordance with the terms of the credit facility was $22.9 billion. The definition of consolidated
net worth under the terms of the credit facility, excludes AOCI and includes the Company’s
outstanding junior subordinated debentures and perpetual preferred securities, net of discount. In
addition, the Company must not exceed a maximum ratio of debt to capitalization of 40%. At
December 31, 2009, as calculated in accordance with the terms of the credit facility, the Company’s
debt to capitalization ratio was 15.3%. Quarterly, the Company certifies compliance with the
financial covenants for the syndicate of participating financial institutions. As of December 31,
2009, the Company was in compliance with all such covenants.
The Hartford’s Life Japan operations also maintain a line of credit in the amount of $54, or ¥5
billion, which expires January 4, 2011 in support of the subsidiary operations.
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial
strength ratings of the individual legal entity that entered into the derivative agreement as set
by nationally recognized statistical rating agencies. If the insurance operating 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
demand immediate settlement of all outstanding derivative positions traded under each impacted
bilateral agreement. The settlement amount is determined by netting the derivative positions
transacted under each agreement. If the termination rights were to be exercised by the
counterparties, it could impact the insurance operating entity’s ability to conduct hedging
activities by increasing the associated costs and decreasing the willingness of counterparties to
transact with the insurance operating entity. The aggregate fair value of all derivative
instruments with credit-risk-related contingent features that are in a net liability position as of
December 31, 2009, is $655. Of this $655, the insurance operating entities have posted collateral
of $591 in the normal course of business. Based on derivative market values as of December 31,
2009, a downgrade of one level below the current financial strength ratings by either Moody’s or
S&P could require approximately an additional $50 to be posted as collateral. Based on derivative
market values as of December 31, 2009, a downgrade by either Moody’s or S&P of two levels below the
insurance operating entities’ current financial strength ratings could require approximately an
additional $70 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 collateral that we may be required
to post is primarily in the form of U.S. Treasury bills and U.S. Treasury notes.
The table below presents the aggregate notional amount and fair value of derivative relationships
that could be subject to immediate termination in the event of further rating agency downgrades.
| As of December 31, 2009 | ||||||||
| Ratings levels | Notional Amount | Fair Value | ||||||
|
Either BBB+ or Baa1
|
$ | 4,700 | $ | 211 | ||||
|
Both BBB+ and Baa1 [1] [2]
|
$ | 14,057 | $ | 381 | ||||
| [1] |
The notional amount and fair value include both the scenario where
only one rating agency takes action to this level as well as where
both rating agencies take action to this level.
|
|
| [2] |
The notional and fair value amounts include a customized GMWB
derivative with a notional amount of $5.4 billion and a fair value
of $137, for which the Company has a contractual right to make a
collateral payment in the amount of approximately $61 to prevent
its termination.
|
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Table of Contents
Insurance Operations
Current and expected patterns of claim frequency and severity or surrenders may change from period
to period but continue to be within historical norms and, therefore, the Company’s insurance
operations’ current liquidity position is considered to be sufficient to meet anticipated demands
over the next twelve months, including any obligations related to the Company’s restructuring
activities. For a discussion and tabular presentation of the Company’s current contractual
obligations by period, refer to Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations within the Capital Resources and Liquidity section of the MD&A.
The principal sources of operating funds are premiums, fees earned from assets under management and
investment income, while investing cash flows originate from maturities and sales of invested
assets. The primary uses of funds are to pay claims, claim adjustment expenses, commissions and
other underwriting expenses, to purchase new investments and to make dividend payments to the HFSG
Holding Company.
Property & Casualty
Property & Casualty holds fixed maturity securities including a significant short-term investment
position (securities with maturities of one year or less at the time of purchase) to meet liquidity
needs.
The following table summarizes Property & Casualty’s fixed maturities, short-term investments, and
cash, as of December 31, 2009:
|
Fixed maturities [1]
|
$ | 23,911 | ||
|
Short-term investments
|
1,283 | |||
|
Cash
|
240 | |||
|
Less: Derivative collateral
|
(103 | ) | ||
|
|
||||
|
Total
|
$ | 25,331 | ||
|
|
||||
| [1] |
Includes $829 of U.S. Treasuries.
|
Liquidity requirements that are unable to be funded by Property & Casualty’s short-term
investments would be satisfied with current operating funds, including premiums received or through
the sale of invested assets. A sale of invested assets could result in significant realized
losses.
Life
Life’s total general account contractholder obligations are supported by Life’s total general
account invested assets and cash of $65.0 billion, which includes a significant short-term
investment position, as depicted below, to meet liquidity needs.
The following table summarizes Life’s fixed maturities, short-term investments, and cash, as of
December 31, 2009:
|
Fixed maturities [1]
|
$ | 46,912 | ||
|
Short-term investments
|
7,079 | |||
|
Cash
|
1,898 | |||
|
Less: Derivative collateral
|
(1,591 | ) | ||
|
Cash associated with Japan variable annuities
|
(634 | ) | ||
|
|
||||
|
Total
|
$ | 53,664 | ||
|
|
||||
| [1] |
Includes $2.6 billion of U.S. Treasuries.
|
136
Table of Contents
Capital resources available to fund liquidity, upon contract holder surrender, are a function
of the legal entity in which the liquidity requirement resides. Generally, obligations of Group
Benefits will be funded by Hartford Life and Accident Insurance Company; Individual Annuity and
Individual Life obligations will be generally funded by both Hartford Life Insurance Company and
Hartford Life and Annuity Insurance Company; obligations of Retirement Plans and Institutional will
be generally funded by Hartford Life Insurance Company; and obligations of International will be
generally funded by the legal entity in the country in which the obligation was generated.
| As of | ||||
| December 31, | ||||
| 2009 | ||||
|
Contractholder Obligations
|
||||
|
Total Life contractholder obligations
|
$ | 247,658 | ||
|
Less: Separate account assets [1]
|
(150,394 | ) | ||
|
International statutory separate accounts [1]
|
(32,296 | ) | ||
|
|
||||
|
General account contractholder obligations
|
$ | 64,968 | ||
|
|
||||
|
|
||||
|
Composition of General Account Contractholder Obligations
|
||||
|
|
||||
|
Contracts without a surrender provision and/or fixed payout dates [2]
|
$ | 31,759 | ||
|
Retail fixed MVA annuities [3]
|
11,029 | |||
|
International fixed MVA annuities
|
2,565 | |||
|
Guaranteed investment contracts (“GIC”) [4]
|
1,362 | |||
|
Other [5]
|
18,253 | |||
|
|
||||
|
General account contractholder obligations
|
$ | 64,968 | ||
|
|
||||
| [1] |
In the event customers elect to surrender separate account assets
or international statutory separate accounts, Life will use the
proceeds from the sale of the assets to fund the surrender, and
Life’s liquidity position will not be impacted. In many instances
Life will receive a percentage of the surrender amount as
compensation for early surrender (surrender charge), increasing
Life’s liquidity position. In addition, a surrender of variable
annuity separate account or general account assets (see below)
will decrease Life’s obligation for payments on guaranteed living
and death benefits.
|
|
| [2] |
Relates to contracts such as payout annuities or institutional
notes, other than guaranteed investment products with an MVA
feature (discussed below) or surrenders of term life, group
benefit contracts or death and living benefit reserves for which
surrenders will have no current effect on Life’s liquidity
requirements.
|
|
| [3] |
Relates to annuities that are held in a statutory separate
account, but under U.S. GAAP are recorded in the general account
as Fixed MVA annuity contract holders are subject to the Company’s
credit risk. In the statutory separate account, Life is required
to maintain invested assets with a fair value equal to the MVA
surrender value of the Fixed MVA contract. In the event assets
decline in value at a greater rate than the MVA surrender value of
the Fixed MVA contract, Life is required to contribute additional
capital to the statutory separate account. Life will fund these
required contributions with operating cash flows or short-term
investments. In the event that operating cash flows or short-term
investments are not sufficient to fund required contributions, the
Company may have to sell other invested assets at a loss,
potentially resulting in a decrease in statutory surplus. As the
fair value of invested assets in the statutory separate account
are generally equal to the MVA surrender value of the Fixed MVA
contract, surrender of Fixed MVA annuities will have an
insignificant impact on the liquidity requirements of Life.
|
|
| [4] |
GICs are subject to discontinuance provisions which allow the
policyholders to terminate their contracts prior to scheduled
maturity at the lesser of the book value or market value.
Generally, the market value adjustment reflects changes in
interest rates and credit spreads. As a result, the market value
adjustment feature in the GIC serves to protect the Company from
interest rate risks and limit Life’s liquidity requirements in the
event of a surrender.
|
|
| [5] |
Surrenders of, or policy loans taken from, as applicable, these
general account liabilities, which include the general account
option for Retail’s individual variable annuities and Individual
Life’s variable life contracts, the general account option for
Retirement Plans’ annuities and universal life contracts sold by
Individual Life may be funded through operating cash flows of
Life, available short-term investments, or Life may be required to
sell fixed maturity investments to fund the surrender payment.
Sales of fixed maturity investments could result in the
recognition of significant realized losses and insufficient
proceeds to fully fund the surrender amount. In this
circumstance, Life may need to take other actions, including
enforcing certain contract provisions which could restrict
surrenders and/or slow or defer payouts.
|
Consolidated Liquidity Position
The following table summarizes the liquidity available to The Hartford:
| As of | ||||
| December 31, | ||||
| Liquidity available to The Hartford | 2009 | |||
|
Short-term investments
|
$ | 10,357 | ||
|
U.S. Treasuries
|
3,631 | |||
|
Cash
|
2,142 | |||
|
Less: Derivative collateral
|
(1,694 | ) | ||
|
Cash associated with Japan variable annuities
|
(634 | ) | ||
|
|
||||
|
Total liquidity available
|
$ | 13,802 | ||
|
|
||||
137
Table of Contents
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Company does not have any off-balance sheet arrangements that are reasonably likely to have a
material effect on the financial condition, results of operations, liquidity, or capital resources
of the Company, except for the contingent capital facility described above and the following:
| • |
The Company has unfunded commitments to purchase investments in limited partnerships,
private placements and mortgage loans of about $1.2 billion as disclosed in Note 12 of the
Notes to Consolidated Financial Statements.
|
The following table identifies the Company’s aggregate contractual obligations as of December 31,
2009:
| Payments due by period | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
|
Property and casualty obligations [1]
|
$ | 22,162 | $ | 5,649 | $ | 4,796 | $ | 3,055 | $ | 8,662 | ||||||||||
|
Life, annuity and disability obligations [2]
|
398,035 | 27,387 | 55,721 | 51,925 | 263,002 | |||||||||||||||
|
Operating lease obligations [3]
|
392 | 130 | 168 | 55 | 39 | |||||||||||||||
|
Capital lease obligations [3]
|
73 | 73 | — | — | — | |||||||||||||||
|
Long-term debt obligations [4]
|
18,466 | 727 | 1,262 | 1,342 | 15,135 | |||||||||||||||
|
Consumer notes [5]
|
1,392 | 176 | 471 | 338 | 407 | |||||||||||||||
|
Purchase obligations [6]
|
2,919 | 2,669 | 218 | 32 | — | |||||||||||||||
|
Other long-term liabilities reflected on the balance sheet [7]
|
1,425 | 1,237 | 94 | 31 | 63 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total [8]
|
$ | 444,864 | $ | 38,048 | $ | 62,730 | $ | 56,778 | $ | 287,308 | ||||||||||
|
|
||||||||||||||||||||
| [1] |
The following points are significant to understanding the cash flows estimated for
obligations under property and casualty contracts:
|
| • |
Reserves for Property & Casualty unpaid losses and loss adjustment expenses include IBNR
and case reserves. While payments due on claim reserves are considered contractual
obligations because they relate to insurance policies issued by the Company, the ultimate
amount to be paid to settle both case reserves and IBNR is an estimate, subject to
significant uncertainty. The actual amount to be paid is not finally determined until the
Company reaches a settlement with the claimant. Final claim settlements may vary
significantly from the present estimates, particularly since many claims will not be
settled until well into the future.
|
||
| • |
In estimating the timing of future payments by year, the Company has assumed that its
historical payment patterns will continue. However, the actual timing of future payments
could vary materially from these estimates due to, among other things, changes in claim
reporting and payment patterns and large unanticipated settlements. In particular, there
is significant uncertainty over the claim payment patterns of asbestos and environmental
claims. Also, estimated payments in 2010 do not include payments that will be made on
claims incurred in 2010 on policies that were in force as of December 31, 2009. In
addition, the table does not include future cash flows related to the receipt of premiums
that may be used, in part, to fund loss payments.
|
||
| • |
Under U.S. GAAP, the Company is only permitted to discount reserves for losses and loss
adjustment expenses in cases where the payment pattern and ultimate loss costs are fixed
and determinable on an individual claim basis. For the Company, these include claim
settlements with permanently disabled claimants. As of December 31, 2009, the total
property and casualty reserves in the above table are gross of a reserve discount of $511.
|
| [2] |
Estimated life, annuity and disability obligations include death and disability claims,
policy surrenders, policyholder dividends and trail commissions offset by expected future
deposits and premiums on in-force contracts. Estimated life, annuity and disability
obligations are based on mortality, morbidity and lapse assumptions comparable with Life’s
historical experience, modified for recent observed trends. Life has also assumed market
growth and interest crediting consistent with assumptions used in amortizing deferred
acquisition costs. In contrast to this table, the majority of Life’s obligations are recorded
on the balance sheet at the current account values and do not incorporate an expectation of
future market growth, interest crediting, or future deposits. Therefore, the estimated
obligations presented in this table significantly exceed the liabilities recorded in reserve
for future policy benefits and unpaid losses and loss adjustment expenses, other policyholder
funds and benefits payable and separate account liabilities. Due to the significance of the
assumptions used, the amounts presented could materially differ from actual results.
|
|
| [3] |
Includes future minimum lease payments on operating and capital lease agreements. See Notes
12 and 14 of the Notes to Consolidated Financial Statements for additional discussion on lease
commitments.
|
|
| [4] |
Includes contractual principal and interest payments. Long-term debt obligations primarily have fixed rates of
interest, for the Company’s junior subordinated debentures, where the interest is fixed for a period of time and
then floating, the period of variable interest is computed using prevailing rates at December 31, 2009 and, as
such, does not consider the impact of future rate movements. See Note 14 of the Notes to Consolidated Financial
Statements for additional discussion of long-term debt obligations.
|
|
| [5] |
Consumer notes include principal payments and contractual interest for fixed rate notes and
interest based on current rates for floating rate notes. See Note 14 of the Notes to
Consolidated Financial Statements for additional discussion of consumer notes.
|
|
| [6] |
Includes $1.2 billion in commitments to purchase investments including about $886 of limited
partnership, $284 of private placements and $47 of mortgage loans. Outstanding commitments
under these limited partnerships and mortgage loans are included in payments due in less than
1 year since the timing of funding these commitments cannot be reliably estimated. The
remaining commitments to purchase investments primarily represent payables for securities
purchased which are reflected on the Company’s consolidated balance sheet.
Also included in purchase obligations is $484 relating to contractual commitments to purchase
various goods and services such as maintenance, human resources, information technology, and
transportation in the normal course of business. Purchase obligations exclude contracts that are
cancelable without penalty or contracts that do not specify minimum levels of goods or services
to be purchased.
|
|
| [7] |
Includes cash collateral of $888 which the Company has accepted in connection with the
Company’s derivative instruments. Since the timing of the return of the collateral is
uncertain, the return of the collateral has been included in the payments due in less than 1
year.
Includes deposits and bank advances that were acquired through the purchase of Federal Trust
Corporation in the second quarter of 2009.
Also included in other long-term liabilities is $48 of net unrecognized tax benefits.
|
|
| [8] |
Does not include estimated voluntary contribution of $200 to the Company’s pension plan in 2010.
|
138
Table of Contents
Capitalization
The capital structure of The Hartford as of December 31, 2009 and 2008 consisted of debt and
stockholders’ equity, as follows:
| December 31, | December 31, | |||||||||||
| 2009 | 2008 | Change | ||||||||||
|
Short-term debt (includes current
maturities of long-term debt and
capital lease obligations)
|
$ | 343 | $ | 398 | (14 | %) | ||||||
|
Long-term debt
|
5,496 | 5,823 | (6 | %) | ||||||||
|
|
||||||||||||
|
Total debt [1]
|
5,839 | 6,221 | (6 | %) | ||||||||
|
|
||||||||||||
|
Stockholders’ equity excluding AOCI
|
21,177 | 16,788 | 26 | % | ||||||||
|
AOCI, net of tax
|
(3,312 | ) | (7,520 | ) | 56 | % | ||||||
|
|
||||||||||||
|
Total stockholders’ equity
|
$ | 17,865 | $ | 9,268 | 93 | % | ||||||
|
|
||||||||||||
|
Total capitalization including AOCI
|
$ | 23,704 | $ | 15,489 | 53 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Debt to stockholders’ equity
|
33 | % | 67 | % | ||||||||
|
Debt to capitalization
|
25 | % | 40 | % | ||||||||
| [1] |
Total debt of the Company excludes $1.1 billion and $1.2 billion of consumer notes as of
December 31, 2009 and 2008, respectively, and $78 of Federal Home Loan Bank advances recorded
in other liabilities as of December 31, 2009 that were acquired through the purchase of
Federal Trust Corporation in the second quarter of 2009.
|
The Hartford’s total capitalization increased $8.2 billion, or 53%, from December 31, 2008 to
December 31, 2009 primarily due to the following:
|
Stockholders’ equity excluding AOCI,
net of tax
|
•
Increased primarily due to
the issuance of $3.4 billion in
preferred stock and warrants to
Treasury as a part of the CPP,
cumulative effect of accounting
change of $912, issuance of common
shares of $887, reclassification of
warrants from other liabilities to
equity and extension of certain
warrants’ term of $186 partially
offset by a net loss of $887. See
Notes 1 and 15 of the Notes to
Consolidated Financial Statements
for additional information on the
cumulative effect of accounting
change and issuance of preferred
stock and warrants to Treasury as a
part of the CPP, respectively.
|
|
|
|
||
|
AOCI, net of tax
|
•
Increased primarily due to
decreases in unrealized losses on
available-for-sale securities of
$5.7 billion primarily due to
tightening credit spreads, partially
offset by a cumulative effect of
accounting change of $912, see Note
1 of the Notes to Consolidated
Financial Statements for further
information on the cumulative effect
of accounting change.
|
|
|
|
||
|
Total debt
|
•
Total debt has decreased due
to the repayment of commercial paper
of $375 and payments on capital
lease obligations in 2009.
|
For additional information on stockholders’ equity, AOCI, net of tax, pension and other
postretirement plans and Allianz’s investment in The Hartford see Notes 15, 16, 17 and 21,
respectively, of the Notes to Consolidated Financial Statements.
Cash Flow
| 2009 | 2008 | 2007 | ||||||||||
|
Net cash provided by operating activities
|
$ | 2,974 | $ | 4,192 | $ | 5,991 | ||||||
|
Net cash used for investing activities
|
$ | (3,123 | ) | $ | (8,827 | ) | $ | (6,176 | ) | |||
|
Net cash provided by financing activities
|
$ | 523 | $ | 4,274 | $ | 499 | ||||||
|
Cash — end of year
|
$ | 2,142 | $ | 1,811 | $ | 2,011 | ||||||
Year ended December 31, 2009 compared to the year ended December 31, 2008
The decrease in cash from operating activities compared to the prior year period was primarily the
result of lower premiums, lower fee income and lower net investment income. Net derivative
settlements and pay down of collateral under securities lending account for the majority of cash
used for investing activities. Cash from financing activities decreased primarily due to net flows
decrease in investment and universal life-type contracts of $5.5 billion partially offset by
issuances of preferred stock and warrants to Treasury for $3.4 billion and issuance of common stock
through a discretionary equity issuance plan of $887 in 2009 and treasury stock acquired in 2008,
partially offset by issuance of long-term debt and consumer notes in 2008 and repayments of
commercial paper in 2009.
Year ended December 31, 2008 compared to the year ended December 31, 2007
The decrease in cash from operating activities compared to prior year period was primarily the
result of a decrease in net investment income as a result of lower yields and reduced fee income as
a result of declines in equity markets. Net purchases of available-for-sale securities continue to
account for the majority of cash used for investing activities. Cash from financing activities
increased primarily due to $2.5 billion in investment in The Hartford by Allianz SE, increased
transfers from the separate account to the general account for investment and universal life-type
contracts and net issuances of long-term debt and consumer notes, offset by treasury stock acquired
and dividends paid.
Operating cash flows in each of the last three years have been adequate to meet liquidity
requirements.
139
Table of Contents
Equity Markets
For a discussion of the potential impact of the equity markets on capital and liquidity, see the
Capital Markets Risk Management section under “Market Risk”.
Ratings
Ratings are an important factor in establishing competitive position in the insurance and financial
services marketplace. There can be no assurance that the Company’s ratings will continue for any
given period of time or that they will not be changed. In the event the Company’s ratings are
downgraded, the level of revenues or the persistency of the Company’s business may be adversely
impacted.
On January 29, 2010, Standard & Poor’s Ratings Services withdrew its ‘A’ financial strength ratings
on Hartford Life Insurance K.K. of Japan (“HLIKK”) and Hartford Life Ltd. of Ireland (“HLL”), two
international subsidiaries of The Hartford Financial Services Group Inc., at the parent company’s
request.
The following table summarizes The Hartford’s significant member companies’ financial ratings from
the major independent rating organizations as of February 22, 2010.
| A.M. Best | Fitch | Standard & Poor’s | Moody’s | |||||
|
Insurance Financial Strength Ratings:
|
||||||||
|
Hartford Fire Insurance Company
|
A | A+ | A | A2 | ||||
|
Hartford Life Insurance Company
|
A | A- | A | A3 | ||||
|
Hartford Life and Accident Insurance Company
|
A | A- | A | A3 | ||||
|
Hartford Life and Annuity Insurance Company
|
A | A- | A | A3 | ||||
|
|
||||||||
|
Other Ratings:
|
||||||||
|
The Hartford Financial Services Group, Inc.:
|
||||||||
|
Senior debt
|
bbb+ | BBB- | BBB | Baa3 | ||||
|
Commercial paper
|
AMB-2 | F2 | A-2 | P-3 | ||||
|
Junior subordinated debentures
|
bbb- | BB | BB+ | Ba1 | ||||
|
Hartford Life, Inc.:
|
||||||||
|
Senior debt
|
bbb+ | BBB- | BBB | Baa3 | ||||
|
Hartford Life Insurance Company:
|
||||||||
|
Short term rating
|
— | — | A-1 | P-2 | ||||
|
Consumer notes
|
a | BBB+ | A | Baa1 |
These ratings are not a recommendation to buy or hold any of The Hartford’s securities and they may
be revised or revoked at any time at the sole discretion of the rating organization.
The agencies consider many factors in determining the final rating of an insurance company. One
consideration is the relative level of statutory surplus necessary to support the business written.
Statutory surplus represents the capital of the insurance company reported in accordance with
accounting practices prescribed by the applicable state insurance department.
Statutory Surplus
The table below sets forth statutory surplus for the Company’s insurance companies. The statutory
surplus amount as of December 31, 2008 in the table below is based on actual statutory filings with
the applicable U.S. regulatory authorities. The statutory surplus amount as of December 31, 2009
is an estimate, as the respective 2009 statutory filings have not yet been made.
| 2009 | 2008 | |||||||
|
Life Operations, includes domestic captive insurance subsidiaries
|
$ | 7,287 | $ | 6,046 | ||||
|
Property & Casualty Operations, excluding non-Property & Casualty subsidiaries
|
7,364 | 6,012 | ||||||
|
|
||||||||
|
Total
|
$ | 14,651 | $ | 12,058 | ||||
|
|
||||||||
The Company also holds regulatory capital and surplus for its operations in Japan. Using the
investment in subsidiary accounting requirements defined in the U.S. National Association of
Insurance Commissioners Statements of Statutory Accounting Practices, the Company’s statutory
capital and surplus attributed to the Japan operations was $1,311 and $1,718 as of December 31,
2009 and 2008, respectively. However, under the accounting practices and procedures governed by
Japanese regulatory authorities, the Company’s statutory capital and surplus was $1.1 billion as of
December 31, 2009 and 2008.
140
Table of Contents
The Company received approval from the Connecticut Insurance Department regarding the use of two
permitted practices in the statutory financial statements of its Connecticut-domiciled life
insurance subsidiaries as of December 31, 2008. The first permitted practice related to the
statutory accounting for deferred income taxes. Specifically, this permitted practice modified the
accounting for deferred income taxes prescribed by the NAIC by increasing the realization period
for deferred tax assets from one year to three years and increasing the asset recognition limit
from 10% to 15% of adjusted statutory capital and surplus. The benefits of this permitted practice
were not considered by the Company when determining surplus available for dividends. The second
permitted practice related to the statutory reserving requirements for variable annuities with
guaranteed living benefit riders. Actuarial guidelines prescribed by the NAIC required a
stand-alone asset adequacy analysis reflecting only benefits, expenses and charges that are
associated with the riders for variable annuities with guaranteed living benefits. The permitted
practice allowed for all benefits, expenses and charges associated with the variable annuity
contract to be reflected in the stand-alone asset adequacy test. These permitted practices
resulted in an increase to Life operations statutory surplus of $987 as of December 31, 2008. The
effects of these permitted practices were included in the 2008 Life operations surplus amount in
the table above.
In December, 2009 the NAIC issued SSAP 10R which codified the three year realization period and 15%
of adjusted statutory capital and surplus recognition limits for accounting for deferred tax assets
for both life and property and casualty companies. SSAP 10R will expire for periods after December
31, 2010.
Statutory Capital
The Company’s stockholders’ equity, as prepared using U.S. generally accepted accounting principles
(“U.S. GAAP”) was $17.9 billion as of December 31, 2009. The Company’s estimated aggregate
statutory capital and surplus, as prepared in accordance with the National Association of Insurance
Commissioners’ Accounting Practices and Procedures Manual (“U.S. STAT”) was $14.7 billion as of
December 31, 2009. Significant differences between U.S. GAAP stockholders’ equity and aggregate
statutory capital and surplus prepared in accordance with U.S. STAT include the following:
| • |
Costs incurred by the Company to acquire insurance policies are deferred under U.S. GAAP
while those costs are expensed immediately under U.S. STAT.
|
| • |
Temporary differences between the book and tax basis of an asset or liability which are
recorded as deferred tax assets are evaluated for recoverability under U.S. GAAP while those
amounts deferred are subject to limitations under U.S. STAT.
|
| • |
The assumptions used in the determination of Life benefit reserves is prescribed under U.S.
STAT, while the assumptions used under U.S. GAAP are generally the Company’s best estimates.
The methodologies for determining Life reserve amounts may also be different. For example,
reserving for living benefit reserves under U.S. STAT is generally addressed by the
Commissioners’ Annuity Reserving Valuation Methodology and the related Actuarial Guidelines,
while under U.S. GAAP, those same living benefits may be considered embedded derivatives and
recorded at fair value or they may be considered SOP 03-1 reserves. The sensitivity of these
Life reserves to changes in equity markets, as applicable, will be different between U.S. GAAP
and U.S. STAT.
|
| • |
The difference between the amortized cost and fair value of fixed maturity and other
investments, net of tax, is recorded as an increase or decrease to the carrying value of the
related asset and to equity under U.S. GAAP, while U.S. STAT only records certain securities
at fair value, such as equity securities and certain lower rated bonds required by the NAIC to
be recorded at the lower of amortized cost or fair value.
|
| • |
U.S. STAT for life insurance companies establishes a formula reserve for realized and
unrealized losses due to default and equity risks associated with certain invested assets (the
Asset Valuation Reserve), while U.S. GAAP does not. Also, for those realized gains and losses
caused by changes in interest rates, U.S. STAT for life insurance companies defers and
amortizes the gains and losses, caused by changes in interest rates, into income over the
original life to maturity of the asset sold (the Interest Maintenance Reserve) while U.S. GAAP
does not.
|
| • |
Goodwill arising from the acquisition of a business is tested for recoverability on an
annual basis (or more frequently, as necessary) for U.S. GAAP, while under U.S. STAT goodwill
is amortized over a period not to exceed 10 years and the amount of goodwill is limited.
|
In addition, certain assets, including a portion of premiums receivable and fixed assets, are
non-admitted (recorded at zero value and charged against surplus) under U.S. STAT. U.S. GAAP
generally evaluates assets based on their recoverability.
Risk-Based Capital
State insurance regulators and the NAIC have adopted risk-based capital requirements for life
insurance companies to evaluate the adequacy of statutory capital and surplus in relation to
investment and insurance risks. The requirements provide a means of measuring the minimum amount of
statutory surplus appropriate for an insurance company to support its overall business operations
based on its size and risk profile. Under risk-based capital (“RBC”) requirements, a company’s RBC
is calculated by applying factors and performing calculations relating to various asset, premium,
claim, expense and reserve items. The adequacy of a company’s actual capital is determined by the
ratio of a company’s total adjusted capital, as defined by the insurance regulators, to its company
action level of RBC (known as the RBC ratio), also as defined by insurance regulators. RBC
standards are used by regulators to set in motion appropriate regulatory actions related to
insurers that show indications of inadequate conditions. In addition, rating agencies consider RBC
ratios, along with their proprietary models, in making ratings determinations.
141
Table of Contents
Sensitivity
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending
upon a variety of factors. The amount of change in the statutory surplus or RBC ratios can vary
based on individual factors and may be compounded in extreme scenarios or if multiple factors occur
at the same time. At times the impact of changes in certain market factors or a combination of
multiple factors on RBC ratios can be counterintuitive. Factors include:
| • |
In general, as equity market levels decline, our reserves for death and living benefit
guarantees associated with variable annuity contracts increases, sometimes at a greater than
linear rate, reducing statutory surplus levels. In addition, as equity market levels
increase, generally surplus levels will increase. RBC ratios will also tend to increase when
equity markets increase. However, as a result of a number of factors and market conditions,
including the level of hedging costs and other risk transfer activities, reserve requirements
for death and living benefit guarantees and RBC requirements could increase resulting in lower
RBC ratios.
|
| • |
As the value of certain fixed-income and equity securities in our investment portfolio
decreases, due in part to credit spread widening, statutory surplus and RBC ratios may
decrease.
|
| • |
As the value of certain derivative instruments that do not get hedge accounting decreases,
statutory surplus and RBC ratios may decrease.
|
| • |
Life’s exposure to foreign currency exchange risk exists with respect to non-U.S. dollar
denominated assets and liabilities. Assets and liabilities denominated in foreign currencies
are accounted for at their U.S. dollar equivalent values using exchange rates at the balance
sheet date. As foreign currency exchange rates strengthen in comparison to the U.S. dollar,
the remeasured value of those non-dollar denominated assets or liabilities will increase
causing an increase or decrease to statutory surplus, respectively. In addition, certain of
our Life products offer guaranteed benefits which could substantially increase our potential
obligation and statutory capital exposure should the yen strengthen versus other currencies.
|
| • |
Our statutory surplus is also impacted by widening credit spreads as a result of the
accounting for the assets and liabilities in our fixed market value adjusted (“MVA”)
annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded
at fair value. In determining the statutory reserve for the fixed MVA annuities, we are
required to use current crediting rates in the U.S. and Japanese LIBOR in Japan. In many
capital market scenarios, current crediting rates in the U.S. are highly correlated with
market rates implicit in the fair value of statutory separate account assets. As a result,
the change in statutory reserve from period to period will likely substantially offset the
change in the fair value of the statutory separate account assets. However, in periods of
volatile credit markets, such as we are now experiencing, actual credit spreads on investment
assets may increase sharply for certain sub-sectors of the overall credit market, resulting in
statutory separate account asset market value losses. As actual credit spreads are not fully
reflected in the current crediting rates in the U.S. or Japanese LIBOR in Japan, the
calculation of statutory reserves will not substantially offset the change in fair value of
the statutory separate account assets resulting in reductions in statutory surplus. This has
resulted and may continue to result in the need to devote significant additional capital to
support the product.
|
Most of these factors are outside of the Company’s control. The Company’s financial strength and
credit ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our
insurance company subsidiaries. In addition, rating agencies may implement changes to their
internal models that have the effect of increasing or decreasing the amount of statutory capital we
must hold in order to maintain our current ratings.
The Company has reinsured approximately 25% of its risk associated with U.S. GMWB and 44% of its
risk associated with the aggregate GMDB exposure. These reinsurance agreements serve to reduce the
Company’s exposure to changes in the statutory reserves and the related capital and RBC ratios
associated with changes in the equity markets. The Company also continues to explore other
solutions for mitigating the capital market risk effect on surplus, such as internal and external
reinsurance solutions, migrating towards a more statutory based hedging program, changes in product
design, increasing pricing and expense management.
Statutory capital at the Property & Casualty subsidiaries has historically been maintained at or
above the capital level required to meet “AA level” ratings from rating agencies. The amount of
statutory capital can increase or decrease depending on a number of factors affecting Property &
Casualty results including, among other factors, the level of catastrophe claims incurred, the
amount of reserve development, the effect of changes in interest rates on investment income and the
discounting of loss reserves, and the effect of realized gains and losses on investments.
In addition, the Company can access the $500 Glen Meadow trust contingent capital facility and
maintains the ability to access $1.9 billion of capacity under its revolving credit facility.
Contingencies
Legal Proceedings
— For a discussion regarding contingencies related to The Hartford’s legal
proceedings, please see the information contained under “Litigation” and “Asbestos and
Environmental Claims,” in Note 12 of the Notes to Consolidated Financial Statements, which is
incorporated herein by reference.
Regulatory Developments
— For a discussion regarding contingencies related to regulatory
developments that affect The Hartford, please see the information contained under “Regulatory
Developments” in Note 12 of the Notes to the Consolidated Financial Statements. Legislative
Initiatives.
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For a discussion of terrorism reinsurance legislation and how it affects The Hartford, see
Terrorism within the Property & Casualty Underwriting Risk Management section of the MD&A.
Tax proposals and regulatory initiatives which have been or are being considered by Congress and/or
Treasury could have a material effect on the insurance business. These proposals and initiatives
include, or could include, new taxes or assessments on large financial institutions, changes
pertaining to the income tax treatment of insurance companies and life insurance products and
annuities, repeal or reform of the estate tax and comprehensive federal tax reform, and changes to
the regulatory structure for financial institutions. The nature and timing of any Congressional or
regulatory action with respect to any such efforts is unclear.
Guaranty Fund and Other Insurance-related Assessments
For a discussion regarding Guaranty Fund and Other Insurance-related Assessments, see Note 12 of
the Notes to Consolidated Financial Statements.
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of the Notes to Consolidated Financial
Statements.
The information required by this item is set forth in the Capital Markets Risk Management
section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations and is incorporated herein by reference.
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
None.
Evaluation of disclosure controls and procedures
The Company’s principal executive officer and its principal financial officer, based on their
evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)), have concluded that the Company’s disclosure controls and procedures are effective for
the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of December 31,
2009.
Management’s annual report on internal control over financial reporting
The management of The Hartford Financial Services Group, Inc. and its subsidiaries (“The Hartford”)
is responsible for establishing and maintaining adequate internal control over financial reporting
for The Hartford as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States. A company’s internal control over financial reporting includes policies and
procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States, and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
The Hartford’s management assessed its internal controls over financial reporting as of December
31, 2009 in relation to criteria for effective internal control over financial reporting described
in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this assessment under those criteria, The Hartford’s
management concluded that its internal control over financial reporting was effective as of
December 31, 2009.
Attestation report of the Company’s registered public accounting firm
The Hartford’s independent registered public accounting firm, Deloitte & Touche LLP, has issued
their attestation report on the Company’s internal control over financial reporting which is set
forth below.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
We have audited the internal control over financial reporting of The Hartford Financial Services
Group, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2009, based on
the criteria established in
Internal Control—Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on the criteria established in
Internal
Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedules as
of and for the year ended December 31, 2009 of the Company and our report, dated February 23, 2010,
expressed an unqualified opinion on those financial statements and financial statement schedules
and included an explanatory paragraph regarding the Company’s change in its method of accounting
and reporting for other-than-temporary impairments in 2009.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 23, 2010
Hartford, Connecticut
February 23, 2010
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Changes in internal control over financial reporting
There were no changes in the Company’s internal control over financial reporting that occurred
during the Company’s fourth fiscal quarter of 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
None.
Certain of the information called for by Item 10 will be set forth in the definitive proxy
statement for the 2009 annual meeting of shareholders (the “Proxy Statement”) to be filed by The
Hartford with the Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K under the captions “Item 1 — Election of Directors”, “Common Stock
Ownership of Directors, Executive Officers and Certain Shareholders”, and “Governance of the
Company” and is incorporated herein by reference.
The Company has adopted a Code of Ethics and Business Conduct, which is applicable to all employees
of the Company, including the principal executive officer, the principal financial officer and the
principal accounting officer. The Code of Ethics and Business Conduct is available on the
Company’s website at: www.thehartford.com. Any waiver of, or material amendment to, the Code of Ethics and Business Conduct applicable to the Company’s principal
executive officer, principal financial officer, principal accounting officer or controller or persons performing
similar functions will be posted promptly to our web site in accordance with applicable NYSE and SEC rules.
Executive Officers of The Hartford
Information about the executive officers of The Hartford who are also nominees for election as
directors will be set forth in The Hartford’s Proxy Statement. Set forth below is information
about the other executive officers of the Company:
JUAN C. ANDRADE
(Executive Vice President; President and Chief Operating Officer, Property & Casualty Operations)
(Executive Vice President; President and Chief Operating Officer, Property & Casualty Operations)
Mr. Andrade, 44, has been Executive Vice President of the Company and President and Chief Operating
Officer of the Company’s Property and Casualty Operations since July 15, 2009. Andrade joined the
Company in 2006, assuming leadership of the P&C claims organization and was soon appointed to
executive vice president for sales and distribution in 2008, where he expanded and enhanced the
Company’s relationships with its agents. In February 2009, he assumed the role of Interim
Co-President of the Property and Casualty Operations. Prior to joining the Company in February,
2006, Mr. Andrade held several leadership positions with The Progressive Corporation, serving as
general manager of the company’s Gulf Coast Region and, prior to that, the company’s Southern
California, Colorado and Wyoming business units. He also held management positions with American
International Group (AIG), working with worldwide consumer lines operations and holding
responsibility for personal lines operations and multi-line business development in the Caribbean.
Mr. Andrade began his career as a presidential management intern and went on to work on national
security and foreign policy issues within the executive branch and the Executive Office of The
President.
BETH A. BOMBARA
(Senior Vice President and Controller)
(Senior Vice President and Controller)
Ms. Bombara, 42, has held the positions of Senior Vice President and Controller of the Company
since June 4, 2007. Since joining the Company in April 2004 as a Vice President, with primary
responsibility for the Company’s compliance with the internal control requirements set forth in
Section 404 of the Sarbanes-Oxley Act of 2002, Ms. Bombara has held positions of increasing
responsibility. Prior to assuming the role of Senior Vice President and Controller of the Company,
Ms. Bombara held the position of Vice President, Deputy Controller, with responsibility for
external financial reporting, accounting policy and internal management reporting, while continuing
to oversee Sarbanes-Oxley Section 404 compliance. Prior to joining the Company, Ms. Bombara worked
for the accounting firm of Deloitte & Touche LLP from June 2002 to April 2004, where she served as
a Senior Manager in the audit practice. Ms. Bombara began her career in accounting at the
accounting firm of Arthur Andersen LLP, where she was promoted to audit partner in September 2001.
ALAN KRECZKO
(Executive Vice President and General Counsel)
(Executive Vice President and General Counsel)
Mr. Kreczko, 58, is Executive Vice President and General Counsel of the Company, positions he has
held since June 11, 2007. He previously held the positions of Senior Vice President and Deputy
General Counsel where he oversaw the law department’s property and casualty, life, investment and
compliance units. Prior to joining the Company, Mr. Kreczko held various senior positions within
the United States Government. Until 2002, he was the acting Assistant Secretary of State for
Population, Refugees and Migration, where he led the State Department’s response to humanitarian
crises in conflict situations, including Afghanistan, Timor, Sudan and West Africa. Prior to that
position, he had served as Legal Advisor to President Clinton’s National Security Council. He has
also served as Deputy General Counsel to the Department of State and as legal advisor to the
President of the United States’ personal representatives for Middle East negotiations.
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Table of Contents
GREGORY McGREEVEY
(Executive Vice President and Chief Investment Officer)
(Executive Vice President and Chief Investment Officer)
Mr. McGreevey, 47, is Executive Vice President and Chief Investment Officer of the Company and
President of Hartford Investment Management, a wholly-owned subsidiary of the Company, positions he
has held since October 2008. He previously held the positions of vice chairman and executive vice
president of ING Investment Management — Americas from October 2005 through March 2008 and
executive vice president and chief investment officer of ING Proprietary Fixed Income from October
2003 through October 2005.
JOHN C. WALTERS
(Executive Vice President; President and Chief Operating Officer, Hartford Life Operations)
(Executive Vice President; President and Chief Operating Officer, Hartford Life Operations)
John C. Walters, 47, is an Executive Vice President of the Company and serves as President and
Chief Operating Officer of The Hartford’s life operations. Walters joined Hartford Life in April
2000 from First Union Securities, the brokerage subsidiary of First Union Corp. In that position,
he managed their consulting services group, which provided investment consulting to high net worth
clients. Walters joined First Union through its 1998 acquisition of Wheat First Butcher Singer,
where he had been since 1984.
CONSTANCE K. WEAVER
(Senior Vice President, Marketing and Communications)
(Senior Vice President, Marketing and Communications)
Connie Weaver, 57, is a Senior Vice President, Marketing and Communications for the Company, a role
she assumed when she joined the Company in February 2008. Prior to joining the Company, Ms. Weaver
was an Executive Vice President and Chief Marketing Officer for BearingPoint from July 2005 to
February 2008. Ms. Weaver joined BearingPoint from AT&T Corporation, where she served as Executive
Vice President for public relations, marketing and brand from September 2002 to February 2005 and
as President of the AT&T Foundation from 2003 to 2005.
EILEEN WHELLEY
(Executive Vice President, Human Resources)
(Executive Vice President, Human Resources)
Ms. Whelley, 56, is Executive Vice President for Human Resources, a position she has held since
June 2007. She previously held the position of Executive Vice President, Global Human Resources.
Prior to joining the Company, Ms. Whelley spent 17 years at General Electric where she held a
number of human resources leadership roles. In 2002, she was named executive vice president of
human resources for NBC Universal, responsible for HR and talent negotiations for the NBCU
Television Group and corporate staff functions. Before joining NBCU, Ms. Whelley was the vice
president of human resources excellence for GE Capital in Stamford, Conn., where she oversaw HR for
eight GE Capital businesses, HR Six Sigma and HR talent development. Before joining GE in 1989,
Ms. Whelley worked for Citicorp and Standard Oil of Ohio in a variety of HR roles.
LIZABETH H. ZLATKUS
(Executive Vice President and Chief Financial Officer)
(Executive Vice President and Chief Financial Officer)
Lizabeth H. Zlatkus, 51, is Executive Vice President and Chief Financial Officer of the Company,
positions she has held since May 1, 2008. Ms. Zlatkus joined the Company in 1983 and has held
positions of increasing responsibility in finance, risk management and business operations. In
1996, she became director of The Hartford’s disability and group life business and was elected
senior vice president in 1997. In 1999, she was named head of the Group Benefits Division. Ms.
Zlatkus was named executive vice president of Hartford Life in March 2000, with overall
profit-and-loss responsibility for Hartford Life’s Group Benefits Division. Ms. Zlatkus was named
chief financial officer of Hartford Life in 2003 and was also given responsibility for actuarial,
risk management and Hartford Life’s information technology area. In February 2006, she was named
president of International Wealth Management and Group Benefits and from June 11, 2007 until May 1,
2008 she served as Executive Vice President of the Company and co-chief operating officer of the
Company’s life operations. Ms. Zlatkus’ professional career began at Peat Marwick Mitchell & Co.
(now known as KPMG).
The information called for by Item 11 will be set forth in the Proxy Statement under the
captions “Compensation Discussion and Analysis”, “Executive Compensation”, “Director Compensation”,
“Report of the Compensation and Personnel Committee”, and “Compensation and Personnel Committee
Interlocks and Insider Participation” and is incorporated herein by reference.
Certain of the information called for by Item 12 will be set forth in the Proxy Statement
under the caption “Common Stock Ownership of Directors, Executive Officers and Certain
Shareholders” and is incorporated herein by reference.
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Table of Contents
Equity Compensation Plan Information
The following table provides information as of December 31, 2009 about the securities authorized
for issuance under the Company’s equity compensation plans. The Company maintains The Hartford
1995 Incentive Stock Plan, The Hartford Incentive Stock Plan (the “2000 Stock Plan”), The Hartford
2005 Incentive Stock Plan (the “2005 Stock Plan”), The Hartford Employee Stock Purchase Plan (the
“ESPP”), The Hartford Restricted Stock Plan for Non-Employee Directors (the “Director’s Plan”), and
The Hartford Deferred Stock Unit Plan. On May 18, 2005, the shareholders of the Company approved
the 2005 Stock Plan, which superseded the 2000 Stock Plan and the Director’s Plan. Pursuant to the
provisions of the 2005 Stock Plan, no additional shares may be issued from the 2000 Stock Plan or
the Director’s Plan. To the extent that any awards under the 2000 Stock Plan or the Director’s
Plan are forfeited, terminated, expire unexercised or are settled in cash in lieu of stock, the
shares subject to such awards (or the relevant portion thereof) shall be available for award under
the 2005 Stock Plan and such shares shall be added to the total number of shares available under
the 2005 Stock Plan.
In addition, the Company maintains the 2000 PLANCO Non-employee Option Plan (the “PLANCO Plan”)
pursuant to which it may grant awards to non-employee wholesalers of products of Hartford Life
Distributors, LLC, and its affiliate, PLANCO, LLC (collectively “HLD”).
| (a) | (b) | (c) | ||||||||||
| Number of Securities | Weighted-average | Number of Securities Remaining | ||||||||||
| to be Issued Upon | Exercise Price of | Available for Future Issuance | ||||||||||
| Exercise of | Outstanding | Under Equity Compensation Plans | ||||||||||
| Outstanding Options, | Options, Warrants | (Excluding Securities Reflected in | ||||||||||
| Warrants and Rights | and Rights | Column (a)) | ||||||||||
|
Equity compensation
plans approved by
stockholders
|
6,450,678 | $ | 49.75 | 11,607,634[1] | ||||||||
|
Equity compensation
plans not approved
by stockholders
|
18,188 | 53.52 | 251,309 | |||||||||
|
|
||||||||||||
|
Total
|
6,468,866 | $ | 49.76 | 11,858,943 | ||||||||
|
|
||||||||||||
| [1] |
Of these shares, 7,970,259 shares remain available for purchase under the ESPP.
|
Summary Description of the 2000 PLANCO Non-Employee Option Plan
The Company’s Board of Directors adopted the PLANCO Plan on July 20, 2000, and amended it on
February 20, 2003 to increase the number of shares of the Company’s common stock subject to the
plan to 450,000 shares. The stockholders of the Company have not approved the PLANCO Plan. No
awards have been issued under the PLANCO Plan since 2003.
Eligibility — Any non-employee independent contractor serving on the wholesale sales force as an
insurance agent who is an exclusive agent of the Company or who derives more than 50% of his or her
annual income from the Company is eligible.
Terms of options — Nonqualified stock options (“NQSOs”) to purchase shares of common stock are
available for grant under the PLANCO Plan. The administrator of the PLANCO Plan, the Compensation
and Personnel Committee, (i) determines the recipients of options under the PLANCO Plan, (ii)
determines the number of shares of common stock covered by such options, (iii) determines the dates
and the manner in which options become exercisable (which is typically in three equal annual
installments beginning on the first anniversary of the date of grant), (iv) sets the exercise price
of options (which may be less than, equal to or greater than the fair market value of common stock
on the date of grant) and (v) determines the other terms and conditions of each option. Payment of
the exercise price may be made in cash, other shares of the Company’s common stock or through a
same day sale program. The term of an NQSO may not exceed ten years and two days from the date of
grant.
If an optionee’s required relationship with the Company terminates for any reason, other than for
cause, any exercisable options remain exercisable for a fixed period of four months, not to exceed
the remainder of the option’s term. Any options that are not exercisable at the time of such
termination are cancelled on the date of such termination. If the optionee’s required relationship
is terminated for cause, the options are canceled immediately.
Acceleration in Connection with a Change in Control — Upon the occurrence of a change in control,
each option outstanding on the date of such change in control, and which is not then fully vested
and exercisable, shall immediately vest and become exercisable. In general, a “Change in Control”
will be deemed to have occurred upon the acquisition of 40% or more of the outstanding voting stock
of the Company, a tender or exchange offer to acquire 15% or more of the outstanding voting stock
of the Company, certain mergers or corporate transactions resulting in the shareholders of the
Company before the transactions owning less than 55% of the entity surviving the transactions,
certain transactions involving a transfer of substantially all of the Company’s assets or a change
in greater than 50% of the Board members over a two year period. See Note 18 of the Notes to
Consolidated Financial Statements for a description of the 2005 Stock Plan and the ESPP.
147
Table of Contents
Any information called for by Item 13 will be set forth in the Proxy Statement under the
caption “Governance of the Company” and is incorporated herein by reference.
The information called for by Item 14 will be set forth in the Proxy Statement under the
caption “Audit Committee Charter and Report Concerning Financial Matters — Fees to Independent
Auditor for Years Ended December 31, 2009 and 2008” and is incorporated herein by reference.
(a) Documents filed as a part of this report:
| (1) |
Consolidated Financial Statements.
See Index to Consolidated Financial Statements and
Schedules elsewhere herein.
|
|
| (2) |
Consolidated Financial Statement Schedules.
See Index to Consolidated Financial Statement
and Schedules elsewhere herein.
|
|
| (3) |
Exhibits.
See Exhibit Index elsewhere herein.
|
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
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F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
We have audited the accompanying consolidated balance sheets of The Hartford Financial Services
Group, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2009 and 2008,
and the related consolidated statements of operations, changes in equity, comprehensive income
(loss), and cash flows for each of the three years in the period ended December 31, 2009. Our
audits also included the financial statement schedules listed in the Index at Item 15. These
financial statements and financial statement schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of The Hartford Financial Services Group, Inc. and its subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 of the consolidated financial statements, the Company changed its method of
accounting and reporting for other-than-temporary impairments in 2009 and for the fair value
measurement of financial instruments in 2008.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of December 31,
2009, based on the criteria established in
Internal Control—Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23,
2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 23, 2010
Hartford, Connecticut
February 23, 2010
F-2
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| For the years ended December 31, | ||||||||||||
| (In millions, except for per share data) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Revenues
|
||||||||||||
|
Earned premiums
|
$ | 14,424 | $ | 15,503 | $ | 15,619 | ||||||
|
Fee income
|
4,576 | 5,135 | 5,436 | |||||||||
|
Net investment income (loss):
|
||||||||||||
|
Securities available-for-sale and other
|
4,031 | 4,335 | 5,214 | |||||||||
|
Equity securities, trading
|
3,188 | (10,340 | ) | 145 | ||||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
7,219 | (6,005 | ) | 5,359 | ||||||||
|
|
||||||||||||
|
Net realized capital losses:
|
||||||||||||
|
Total other-than-temporary impairment (“OTTI”) losses
|
(2,191 | ) | (3,964 | ) | (483 | ) | ||||||
|
OTTI losses recognized in other comprehensive income
|
683 | — | — | |||||||||
|
|
||||||||||||
|
Net OTTI losses recognized in earnings
|
(1,508 | ) | (3,964 | ) | (483 | ) | ||||||
|
Net realized capital losses, excluding net OTTI losses recognized in earnings
|
(502 | ) | (1,954 | ) | (511 | ) | ||||||
|
|
||||||||||||
|
Total net realized capital losses
|
(2,010 | ) | (5,918 | ) | (994 | ) | ||||||
|
|
||||||||||||
|
Other revenues
|
492 | 504 | 496 | |||||||||
|
|
||||||||||||
|
Total revenues
|
24,701 | 9,219 | 25,916 | |||||||||
|
|
||||||||||||
|
Benefits, losses and expenses
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
13,831 | 14,088 | 13,919 | |||||||||
|
Benefits, losses and loss adjustment expenses – returns
credited on International variable annuities
|
3,188 | (10,340 | ) | 145 | ||||||||
|
Amortization of deferred policy acquisition costs and
present value of future profits
|
4,267 | 4,271 | 2,989 | |||||||||
|
Insurance operating costs and expenses
|
3,749 | 3,993 | 3,894 | |||||||||
|
Interest expense
|
476 | 343 | 263 | |||||||||
|
Goodwill impairment
|
32 | 745 | — | |||||||||
|
Other expenses
|
886 | 710 | 701 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
26,429 | 13,810 | 21,911 | |||||||||
|
Income (loss) before income taxes
|
(1,728 | ) | (4,591 | ) | 4,005 | |||||||
|
Income tax expense (benefit)
|
(841 | ) | (1,842 | ) | 1,056 | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (887 | ) | $ | (2,749 | ) | $ | 2,949 | ||||
|
|
||||||||||||
|
Preferred stock dividends and accretion of discount
|
127 | 8 | — | |||||||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders
|
$ | (1,014 | ) | $ | (2,757 | ) | $ | 2,949 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings (Loss) per common share
|
||||||||||||
|
Basic
|
$ | (2.93 | ) | $ | (8.99 | ) | $ | 9.32 | ||||
|
Diluted
|
$ | (2.93 | ) | $ | (8.99 | ) | $ | 9.24 | ||||
|
Weighted average common shares outstanding
|
346.3 | 306.7 | 316.3 | |||||||||
|
Weighted average common shares outstanding and
dilutive potential common shares
|
346.3 | 306.7 | 319.1 | |||||||||
|
|
||||||||||||
|
Cash dividends declared per common share
|
$ | 0.20 | $ | 1.91 | $ | 2.03 | ||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
F-3
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| As of December 31, | ||||||||
| (In millions, except for share data) | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Investments
|
||||||||
|
Fixed maturities, available-for-sale, at fair value (amortized cost of $76,015 and
$78,238)
|
$ | 71,153 | $ | 65,112 | ||||
|
Equity securities, trading, at fair value (cost of $33,070 and $35,278)
|
32,321 | 30,820 | ||||||
|
Equity securities, available-for-sale, at fair value (cost of $1,333 and $1,554)
|
1,221 | 1,458 | ||||||
|
Mortgage loans (net of allowances for loan losses of $366 and $26)
|
5,938 | 6,469 | ||||||
|
Policy loans, at outstanding balance
|
2,174 | 2,208 | ||||||
|
Limited partnerships and other alternative investments
|
1,790 | 2,295 | ||||||
|
Other investments
|
602 | 1,723 | ||||||
|
Short-term investments
|
10,357 | 10,022 | ||||||
|
|
||||||||
|
Total investments
|
125,556 | 120,107 | ||||||
|
Cash
|
2,142 | 1,811 | ||||||
|
Premiums receivable and agents’ balances, net
|
3,404 | 3,604 | ||||||
|
Reinsurance recoverables, net
|
5,384 | 6,357 | ||||||
|
Deferred policy acquisition costs and present value of future profits
|
10,686 | 13,248 | ||||||
|
Deferred income taxes, net
|
3,940 | 5,239 | ||||||
|
Goodwill
|
1,204 | 1,060 | ||||||
|
Property and equipment, net
|
1,026 | 1,075 | ||||||
|
Other assets
|
3,981 | 4,898 | ||||||
|
Separate account assets
|
150,394 | 130,184 | ||||||
|
|
||||||||
|
Total assets
|
$ | 307,717 | $ | 287,583 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
|
||||||||
|
Property and casualty
|
$ | 21,651 | $ | 21,933 | ||||
|
Life
|
17,980 | 16,747 | ||||||
|
Other policyholder funds and benefits payable
|
45,852 | 53,753 | ||||||
|
Other policyholder funds and benefits payable – International variable annuities
|
32,296 | 30,799 | ||||||
|
Unearned premiums
|
5,221 | 5,379 | ||||||
|
Short-term debt
|
343 | 398 | ||||||
|
Long-term debt
|
5,496 | 5,823 | ||||||
|
Consumer notes
|
1,136 | 1,210 | ||||||
|
Other liabilities
|
9,454 | 11,997 | ||||||
|
Separate account liabilities
|
150,394 | 130,184 | ||||||
|
|
||||||||
|
Total liabilities
|
289,823 | 278,223 | ||||||
|
|
||||||||
|
Commitments and Contingencies (Note 12)
|
||||||||
|
|
||||||||
|
Equity
|
||||||||
|
Preferred stock, $0.01 par value — 50,000,000 shares authorized,
3,400,000 and 6,048,387 shares issued, liquidation preference
$1,000 and $0.02 per share
|
2,960 | — | ||||||
|
Common stock, $0.01 par value — 1,500,000,000 and 750,000,000
shares authorized, 410,184,182 and 329,920,310 shares issued
|
4 | 3 | ||||||
|
Additional paid-in capital
|
8,985 | 7,569 | ||||||
|
Retained earnings
|
11,164 | 11,336 | ||||||
|
Treasury stock, at cost — 27,177,019 and 29,341,378 shares
|
(1,936 | ) | (2,120 | ) | ||||
|
Accumulated other comprehensive loss, net of tax
|
(3,312 | ) | (7,520 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
17,865 | 9,268 | ||||||
|
Noncontrolling interest
|
29 | 92 | ||||||
|
|
||||||||
|
Total equity
|
17,894 | 9,360 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
$ | 307,717 | $ | 287,583 | ||||
|
|
||||||||
See Notes to Consolidated Financial Statements.
F-4
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Changes in Equity
| For the years ended December 31, | ||||||||||||
| (In millions, except for share data) | 2009 | 2008 | 2007 | |||||||||
|
Preferred Stock
|
||||||||||||
|
Balance at beginning of year
|
$ | — | $ | — | $ | — | ||||||
|
Issuance of shares to U.S. Treasury
|
2,920 | — | — | |||||||||
|
Accretion of preferred stock discount on issuance to U.S. Treasury
|
40 | — | — | |||||||||
|
|
||||||||||||
|
Balance at end of year
|
2,960 | — | — | |||||||||
|
|
||||||||||||
|
Common Stock
|
4 | 3 | 3 | |||||||||
|
Additional Paid-in Capital
|
||||||||||||
|
Balance at beginning of year
|
7,569 | 6,627 | 6,321 | |||||||||
|
Issuance of warrants to U.S. Treasury
|
480 | — | — | |||||||||
|
Issuance of shares under discretionary equity issuance plan
|
887 | — | — | |||||||||
|
Issuance of convertible preferred shares
|
— | 727 | — | |||||||||
|
Issuance of warrants
|
— | 240 | — | |||||||||
|
Reclassification of warrants from other liabilities to equity and extension of
warrants’ term
|
186 | — | — | |||||||||
|
Issuance of shares and compensation expense due to incentive and stock compensation
plans
|
(126 | ) | (36 | ) | 257 | |||||||
|
Tax (expense) benefit on employee stock options and awards and other
|
(11 | ) | 11 | 49 | ||||||||
|
|
||||||||||||
|
Balance at end of year
|
8,985 | 7,569 | 6,627 | |||||||||
|
|
||||||||||||
|
Retained Earnings
|
||||||||||||
|
Balance at beginning of year, before cumulative effect of accounting changes, net of tax
|
11,336 | 14,686 | 12,421 | |||||||||
|
Cumulative effect of accounting changes, net of tax
|
— | (3 | ) | (41 | ) | |||||||
|
|
||||||||||||
|
Balance at beginning of year, as adjusted
|
11,336 | 14,683 | 12,380 | |||||||||
|
Net income (loss)
|
(887 | ) | (2,749 | ) | 2,949 | |||||||
|
Cumulative effect of accounting change, net of tax
|
912 | — | — | |||||||||
|
Accretion of preferred stock discount on issuance to U.S. Treasury
|
(40 | ) | — | — | ||||||||
|
Dividends on preferred stock
|
(87 | ) | (8 | ) | — | |||||||
|
Dividends declared on common stock
|
(70 | ) | (590 | ) | (643 | ) | ||||||
|
|
||||||||||||
|
Balance at end of year
|
11,164 | 11,336 | 14,686 | |||||||||
|
|
||||||||||||
|
Treasury Stock, at Cost
|
||||||||||||
|
Balance at beginning of year
|
(2,120 | ) | (1,254 | ) | (47 | ) | ||||||
|
Treasury stock acquired
|
— | (1,000 | ) | (1,193 | ) | |||||||
|
Issuance of shares under incentive and stock compensation plans from treasury stock
|
187 | 152 | — | |||||||||
|
Return of shares to treasury stock under incentive and stock compensation plans
|
(3 | ) | (18 | ) | (14 | ) | ||||||
|
|
||||||||||||
|
Balance at end of year
|
(1,936 | ) | (2,120 | ) | (1,254 | ) | ||||||
|
|
||||||||||||
|
Accumulated Other Comprehensive Loss, Net of Tax
|
||||||||||||
|
Balance at beginning of year
|
(7,520 | ) | (858 | ) | 178 | |||||||
|
Cumulative effect of accounting change, net of tax
|
(912 | ) | — | — | ||||||||
|
Total other comprehensive income (loss)
|
5,120 | (6,662 | ) | (1,036 | ) | |||||||
|
|
||||||||||||
|
Balance at end of year
|
(3,312 | ) | (7,520 | ) | (858 | ) | ||||||
|
|
||||||||||||
|
Total Stockholders’ Equity
|
17,865 | 9,268 | 19,204 | |||||||||
|
|
||||||||||||
|
Noncontrolling Interest (Note 15)
|
||||||||||||
|
Balance at beginning of year
|
92 | 92 | 78 | |||||||||
|
Change in noncontrolling interest ownership
|
(56 | ) | 57 | 7 | ||||||||
|
Noncontrolling income (loss)
|
(7 | ) | (57 | ) | 7 | |||||||
|
|
||||||||||||
|
Balance at end of year
|
29 | 92 | 92 | |||||||||
|
|
||||||||||||
|
Total Equity
|
$ | 17,894 | $ | 9,360 | $ | 19,296 | ||||||
|
|
||||||||||||
|
Outstanding Preferred Shares (in thousands)
|
||||||||||||
|
Balance at beginning of year
|
6,048 | — | — | |||||||||
|
Issuance of convertible preferred shares
|
— | 6,048 | — | |||||||||
|
Conversion of preferred to common shares
|
(6,048 | ) | — | — | ||||||||
|
Issuance of shares to U.S. Treasury
|
3,400 | — | — | |||||||||
|
|
||||||||||||
|
Balance at end of year
|
3,400 | 6,048 | — | |||||||||
|
|
||||||||||||
|
Outstanding Common Shares (in thousands)
|
||||||||||||
|
Balance at beginning of year
|
300,579 | 313,842 | 323,315 | |||||||||
|
Treasury stock acquired
|
(27 | ) | (14,682 | ) | (12,878 | ) | ||||||
|
Conversion of preferred to common shares
|
24,194 | — | — | |||||||||
|
Issuance of shares under discretionary equity issuance plan
|
56,109 | — | — | |||||||||
|
Issuance of shares under incentive and stock compensation plans
|
2,356 | 1,673 | 3,549 | |||||||||
|
Return of shares to treasury stock under incentive and stock compensation plans
|
(204 | ) | (254 | ) | (144 | ) | ||||||
|
|
||||||||||||
|
Balance at end of year
|
383,007 | 300,579 | 313,842 | |||||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
F-5
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
| For the years ended December 31, | ||||||||||||
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Comprehensive Income (Loss)
|
||||||||||||
|
Net income (loss)
|
$ | (887 | ) | $ | (2,749 | ) | $ | 2,949 | ||||
|
|
||||||||||||
|
Other comprehensive income (loss)
|
||||||||||||
|
Change in net unrealized gain (loss) on securities
|
5,909 | (7,127 | ) | (1,417 | ) | |||||||
|
Change in other-than-temporary impairment losses recognized
in other comprehensive income (loss)
|
(224 | ) | — | — | ||||||||
|
Change in net gain (loss) on cash-flow hedging instruments
|
(387 | ) | 784 | 94 | ||||||||
|
Change in foreign currency translation adjustments
|
(23 | ) | 196 | 146 | ||||||||
|
Changes in pension and other postretirement plan adjustments
|
(155 | ) | (515 | ) | 141 | |||||||
|
|
||||||||||||
|
Total other comprehensive income (loss)
|
5,120 | (6,662 | ) | (1,036 | ) | |||||||
|
|
||||||||||||
|
Total comprehensive income (loss)
|
$ | 4,233 | $ | (9,411 | ) | $ | 1,913 | |||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
F-6
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| For the years ended December 31, | ||||||||||||
| (In millions) | 2009 | 2008 | 2007 | |||||||||
|
Operating Activities
|
||||||||||||
|
Net income (loss)
|
$ | (887 | ) | $ | (2,749 | ) | $ | 2,949 | ||||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
||||||||||||
|
Amortization of deferred policy acquisition costs and present value of future profits
|
4,267 | 4,271 | 2,989 | |||||||||
|
Additions to deferred policy acquisition costs and present value of future profits
|
(2,853 | ) | (3,675 | ) | (4,194 | ) | ||||||
|
Change in reserve for future policy benefits and unpaid losses and loss adjustment expenses
and unearned premiums
|
558 | 1,026 | 1,357 | |||||||||
|
Change in reinsurance recoverables
|
236 | 300 | 487 | |||||||||
|
Change in receivables and other assets
|
380 | (4 | ) | 128 | ||||||||
|
Change in payables and accruals
|
(1,271 | ) | (103 | ) | 306 | |||||||
|
Change in accrued and deferred income taxes
|
(246 | ) | (2,156 | ) | 619 | |||||||
|
Net realized capital losses
|
2,010 | 5,918 | 994 | |||||||||
|
Net receipts (disbursements) from investment contracts related to policyholder funds —
International variable annuities
|
1,498 | (2,276 | ) | 4,695 | ||||||||
|
Net (increase) decrease in equity securities, trading
|
(1,501 | ) | 2,295 | (4,701 | ) | |||||||
|
Depreciation and amortization
|
470 | 361 | 794 | |||||||||
|
Goodwill impairment
|
32 | 745 | — | |||||||||
|
Other operating activities, net
|
281 | 239 | (432 | ) | ||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
2,974 | 4,192 | 5,991 | |||||||||
|
Investing Activities
|
||||||||||||
|
Proceeds from the sale/maturity/prepayment of:
|
||||||||||||
|
Fixed maturities, available-for-sale
|
53,538 | 26,097 | 34,063 | |||||||||
|
Equity securities, available-for-sale
|
949 | 616 | 468 | |||||||||
|
Mortgage loans
|
629 | 386 | 1,365 | |||||||||
|
Partnerships
|
391 | 438 | 324 | |||||||||
|
Payments for the purchase of:
|
||||||||||||
|
Fixed maturities, available-for-sale
|
(54,346 | ) | (32,708 | ) | (37,799 | ) | ||||||
|
Equity securities, available-for-sale
|
(307 | ) | (714 | ) | (1,224 | ) | ||||||
|
Mortgage loans
|
(233 | ) | (1,469 | ) | (3,454 | ) | ||||||
|
Partnerships
|
(274 | ) | (678 | ) | (1,229 | ) | ||||||
|
Derivatives, net
|
(561 | ) | 909 | (271 | ) | |||||||
|
Change in policy loans, net
|
34 | (147 | ) | (10 | ) | |||||||
|
Change in payables for collateral under securities lending, net
|
(2,925 | ) | (1,405 | ) | 2,218 | |||||||
|
Other investing activities, net
|
(18 | ) | (152 | ) | (627 | ) | ||||||
|
|
||||||||||||
|
Net cash used for investing activities
|
(3,123 | ) | (8,827 | ) | (6,176 | ) | ||||||
|
Financing Activities
|
||||||||||||
|
Deposits and other additions to investment and universal life-type contracts
|
14,239 | 21,015 | 32,494 | |||||||||
|
Withdrawals and other deductions from investment and universal life-type contracts
|
(24,341 | ) | (25,793 | ) | (30,443 | ) | ||||||
|
Net transfers from separate accounts related to investment and universal life-type contracts
|
7,203 | 7,353 | (761 | ) | ||||||||
|
Proceeds from issuance of long-term debt
|
— | 2,670 | 495 | |||||||||
|
Repayments at maturity for long-term debt and payments on capital lease obligations
|
(24 | ) | (992 | ) | (300 | ) | ||||||
|
Change in commercial paper
|
(375 | ) | — | 75 | ||||||||
|
Net issuance (repayments) at maturity or settlement of consumer notes
|
(74 | ) | 401 | 551 | ||||||||
|
Proceeds from issuance of convertible preferred shares
|
— | 727 | — | |||||||||
|
Proceeds from issuance of warrants
|
— | 512 | — | |||||||||
|
Proceeds from issuance of preferred stock and warrants to U.S. Treasury
|
3,400 | — | — | |||||||||
|
Net proceeds from issuance of shares under discretionary equity issuance plan
|
887 | — | — | |||||||||
|
Proceeds from net issuance of shares under incentive and stock compensation plans and
excess tax benefit
|
17 | 41 | 217 | |||||||||
|
Treasury stock acquired
|
— | (1,000 | ) | (1,193 | ) | |||||||
|
Dividends paid on preferred stock
|
(73 | ) | — | — | ||||||||
|
Dividends paid on common stock
|
(149 | ) | (660 | ) | (636 | ) | ||||||
|
Changes in bank deposits and payments on bank advances
|
(187 | ) | — | — | ||||||||
|
|
||||||||||||
|
Net cash provided by financing activities
|
523 | 4,274 | 499 | |||||||||
|
Foreign exchange rate effect on cash
|
(43 | ) | 161 | 273 | ||||||||
|
Net increase (decrease) in cash
|
331 | (200 | ) | 587 | ||||||||
|
Cash — beginning of period
|
1,811 | 2,011 | 1,424 | |||||||||
|
|
||||||||||||
|
Cash — end of period
|
$ | 2,142 | $ | 1,811 | $ | 2,011 | ||||||
|
|
||||||||||||
|
Supplemental Disclosure of Cash Flow Information
|
||||||||||||
|
Net Cash Paid (Received) During the Period For:
|
||||||||||||
|
Income taxes
|
$ | (243 | ) | $ | 253 | $ | 451 | |||||
|
Interest
|
$ | 475 | $ | 286 | $ | 257 | ||||||
See Notes to Consolidated Financial Statements.
F-7
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
1. Basis of Presentation and Accounting Policies
Basis of Presentation
The Hartford Financial Services Group, Inc. is a financial holding company for a group of
subsidiaries that provide investment products and life and property and casualty insurance to both
individual and business customers in the United States (collectively, “The Hartford” or the
“Company”). During the second quarter of 2009, the Company acquired Federal Trust Corporation and
became a savings and loan holding company, see Note 22 for further information on the acquisition.
The Consolidated Financial Statements have been prepared on the basis of accounting principles
generally accepted in the United States of America (“U.S. GAAP”), which differ materially from the
accounting practices prescribed by various insurance regulatory authorities.
Consolidation
The Consolidated Financial Statements include the accounts of The Hartford Financial Services
Group, Inc., companies in which the Company directly or indirectly has a controlling financial
interest and those variable interest entities in which the Company is required to consolidate.
Entities in which the Company has significant influence over the operating and financing decisions
but are not required to consolidate are reported using the equity method. Material intercompany
transactions and balances between The Hartford and its subsidiaries and affiliates have been
eliminated. For further discussions on variable interest entities
see Note 5.
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 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 reserves,
net of reinsurance; life estimated gross profits used in the valuation and amortization of assets
and liabilities associated with variable annuity and other universal life-type contracts;
evaluation of other-than-temporary impairments on available-for-sale securities and valuation
allowances on investments; living benefits required to be fair valued; goodwill impairment;
valuation of investments and derivative instruments; pension and other postretirement benefit
obligations; 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 debt or equity markets could have
a material impact on the Consolidated Financial Statements.
Subsequent Events
The Hartford has evaluated events subsequent to December 31, 2009, and through the Consolidated
Financial Statement issuance date of February 23, 2010. The Company has not evaluated subsequent
events after that date for presentation in these Consolidated Financial Statements.
Reclassifications
Certain reclassifications have been made to prior year financial information to conform to the
current year presentation.
F-8
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Adoption of New Accounting Standards
Other-Than-Temporary Impairments
In April 2009, the Financial Accounting Standards Board (“FASB”) updated the guidance related to
the recognition and presentation of other-than-temporary impairments. The Company adopted this
guidance for its interim reporting period ending on June 30, 2009 and recognized a $912, net of tax
and deferred acquisition costs, increase to retained earnings with an offsetting decrease in
Accumulated Other Comprehensive Income (Loss) reported in the Company’s Consolidated Statements of
Operations, Changes in Equity and Comprehensive Income (Loss). See Note 5 for the Company’s
accounting policy and disclosures.
Noncontrolling Interests
A noncontrolling interest refers to the minority interest portion of the equity of a subsidiary
that is not attributable directly or indirectly to a parent. The guidance establishes accounting
and reporting standards that require for-profit entities that prepare consolidated financial
statements to: (a) present noncontrolling interests as a component of equity, separate from the
parent’s equity, (b) separately present the amount of consolidated net income attributable to
noncontrolling interests in the income statement, (c) consistently account for changes in a
parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial
interest as equity transactions, (d) require an entity to measure at fair value its remaining
interest in a subsidiary that is deconsolidated, and (e) require an entity to provide sufficient
disclosures that identify and clearly distinguish between interests of the parent and interests of
noncontrolling owners. This guidance applies to all for-profit entities that prepare consolidated
financial statements, and affects those for-profit entities that have outstanding noncontrolling
interests in one or more subsidiaries or that deconsolidate a subsidiary. This guidance is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008 with earlier adoption prohibited. Upon adoption of this guidance on January 1,
2009, the Company reclassified $78 of noncontrolling interest, recorded in other liabilities, to
equity as of January 1, 2007. The adoption did not have a material effect on the Company’s
Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 5 for the Company’s
accounting policy and disclosures.
Future Adoption of New Accounting Standards
Amendments to Consolidation Guidance for Variable Interest Entities
In June 2009, the FASB issued accounting guidance which amends the current quantitative
consolidation requirements applicable to variable interest entities (“VIE”). Under this new
guidance, an entity would consolidate a VIE when the entity has both (a) the power to direct the
activities of a VIE that most significantly impact the entity’s economic performance and (b) the
obligation to absorb losses of the entity that could potentially be significant to the VIE or the
right to receive benefits from the entity that could potentially be significant to the VIE. The
FASB also issued a proposed amendment to this guidance in January 2010 which defers application of
this guidance to certain entities that apply specialized accounting guidance for investment
companies.
The Company adopted this updated guidance on January 1, 2010, the effective date. As a result of
adoption, in addition to those VIEs the Company currently consolidates under the old guidance, the
Company determined it will consolidate a Company sponsored collateralized debt obligation (“CDO”)
and a Company sponsored collateralized loan obligation (“CLO”) that are VIEs. The Company expects
the impact of these consolidations on its consolidated financial statements to be an increase in
assets and increase in liabilities of approximately $400. The Hartford concluded that the Company
has control over the activities that most significantly impact the economic performance of these
VIEs as they provide collateral management services, earn a fee for these services and also have
investments issued by the entities. These vehicles issued securities which have no recourse to the
general credit of The Hartford. The Hartford’s maximum exposure to loss for these vehicles is
their investment in the entities, fair valued at $263 as of December 31, 2009.
The Company has investments in mutual funds, limited partnerships and other alternative investments
including hedge funds, mortgage and real estate funds, mezzanine debt funds, and private equity and
other funds which may be VIEs. The accounting for these investments will remain unchanged as they
fall within the scope of the proposed deferral of this new consolidation guidance.
F-9
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Significant Accounting Policies
The Company’s significant accounting policies are described below or are referenced below to the
applicable Note where the description is included.
| Accounting Policy | Note | |||
|
Fair Value Measurements – Financial Instruments Excluding Guaranteed Living Benefits
|
4 | |||
|
Fair Value Measurements – Guaranteed Living Benefits
|
4a | |||
|
Investments and Derivative Instruments
|
5 | |||
|
Reinsurance
|
6 | |||
|
Deferred Policy Acquisition Costs and Present Value of Future Profits
|
7 | |||
|
Goodwill and Other Intangible Assets
|
8 | |||
|
Separate Accounts
|
9 | |||
|
Sales Inducements
|
10 | |||
|
Reserve for Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
|
11 | |||
|
Contingencies
|
12 | |||
|
Income Tax
|
13 | |||
|
Pension Plans and Postretirement Healthcare and Life Insurance Benefit Plans
|
17 | |||
Dividends to Policyholders
Policyholder dividends are paid to certain life and property and casualty policies, which are
referred to as participating policies. Such dividends are accrued using an estimate of the amount
to be paid based on underlying contractual obligations under policies and applicable state laws.
Life
— Participating ordinary life insurance in force accounted for 7% as of December 31,
2009, 2008 and 2007 of total life insurance in force. Dividends to policyholders were $13, $14 and
$11 for the years ended December 31, 2009, 2008 and 2007, respectively. There were no additional
amounts of income allocated to participating policyholders. If limitations exist on the amount of
net income from participating life insurance contracts that may be distributed to stockholders, the
policyholder’s share of net income on those contracts that cannot be distributed is excluded from
stockholders’ equity by a charge to operations and a credit to a liability.
Property & Casualty
— Net written premiums for participating property and casualty
insurance policies represented 8% of total net written premiums for each of the years ended
December 31, 2009, 2008 and 2007. Participating dividends to policyholders were $10, $21 and $19
for the years ended December 31, 2009, 2008 and 2007, respectively.
Foreign Currency Translation
Foreign currency translation gains and losses are reflected in stockholders’ equity as a component
of accumulated other comprehensive income (loss). The Company’s foreign subsidiaries’ balance
sheet accounts are translated at the exchange rates in effect at each year end and income statement
accounts are translated at the average rates of exchange prevailing during the year. The national
currencies of the international operations are generally their functional currencies.
Mutual Funds
The Company maintains a retail mutual fund operation, whereby the Company, through wholly-owned
subsidiaries, provides investment management and administrative services to series of The Hartford
Mutual Funds, Inc.; The Hartford Mutual Funds II, Inc.; and The Hartford Income Shares Fund, Inc.
(collectively, “mutual funds”), consisting of 52 mutual funds and 1 closed-end fund, as of December
31, 2009. The Company charges fees to these funds, which are recorded as revenue by the Company.
These mutual funds are registered with the Securities and Exchange Commission under the Investment
Company Act of 1940. The Company, through its wholly-owned subsidiaries, also provides investment
management and administrative services (for which it receives revenue) for 18 mutual funds
established under the laws of the Province of Ontario, Canada, and registered with the Ontario
Securities Commission.
The mutual funds are owned by the shareholders of those funds and not by the Company. As such, the
mutual fund assets and liabilities and related investment returns are not reflected in the
Company’s Consolidated Financial Statements since they are not assets, liabilities and operations
of the Company.
F-10
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Other Policyholder Funds and Benefits Payable
The Company has classified its fixed and variable annuities, 401(k), certain governmental
annuities, private placement life insurance (“PPLI”), variable universal life insurance, universal
life insurance and interest sensitive whole life insurance as universal life-type contracts. The
liability for universal life-type contracts is equal to the balance that accrues to the benefit of
the policyholders as of the financial statement date (commonly referred to as the account value),
including credited interest, amounts that have been assessed to compensate the Company for services
to be performed over future periods, and any amounts previously assessed against policyholders that
are refundable on termination of the contract.
The Company has classified its institutional and governmental products, without life contingencies,
including funding agreements, certain structured settlements and guaranteed investment contracts,
as investment contracts. The liability for investment contracts is equal to the balance that
accrues to the benefit of the contract holder as of the financial statement date, which includes
the accumulation of deposits plus credited interest, less withdrawals and amounts assessed through
the financial statement date. Contract holder funds include funding agreements held by Variable
Interest Entities issuing medium-term notes.
Property and Equipment
Property and equipment is carried at cost net of accumulated depreciation. Depreciation is based
on the estimated useful lives of the various classes of property and equipment and is determined
principally on the straight-line method. Accumulated depreciation was $1.7 billion and $1.6
billion as of December 31, 2009 and 2008, respectively. Depreciation expense was $253, $228 and
$232 for the years ended December 31, 2009, 2008 and 2007, respectively.
Revenue Recognition
Life
— For investment and universal life-type contracts, the amounts collected from
policyholders are considered deposits and are not included in revenue. Fee income for universal
life-type contracts consists of policy charges for policy administration, cost of insurance charges
and surrender charges assessed against policyholders’ account balances and are recognized in the
period in which services are provided. Unearned revenue reserves, representing amounts assessed as
consideration for origination of a universal life-type contract, are deferred and recognized in
income over the period benefited, generally in proportion to estimated gross profits. For the
Company’s traditional life and group disability products premiums are generally recognized as
revenue when due from policyholders.
Property & Casualty
— Property and casualty insurance premiums are earned on a pro rata
basis over the lives of the policies and include accruals for ultimate premium revenue anticipated
under auditable and retrospectively rated policies. Unearned premiums represent the premiums
applicable to the unexpired terms of policies in force. An estimated allowance for doubtful
accounts is recorded on the basis of periodic evaluations of balances due from insureds,
management’s experience and current economic conditions. The allowance for doubtful accounts
included in premiums receivable and agents’ balances in the Consolidated Balance Sheets was $121
and $125 as of December 31, 2009 and 2008, respectively. Other revenue consists primarily of
revenues associated with the Company’s servicing businesses.
F-11
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Earnings (Loss) per Share
The following tables present a reconciliation of net income (loss) and shares used in
calculating basic earnings (loss) per common share to those used in calculating diluted earnings
(loss) per common share.
| For the years ended December 31, | ||||||||||||
| (In millions, except for per share data) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Income (loss)
|
||||||||||||
|
Net income (loss)
|
$ | (887 | ) | $ | (2,749 | ) | $ | 2,949 | ||||
|
Less: Preferred stock dividends and accretion of discount
|
127 | 8 | — | |||||||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders
|
$ | (1,014 | ) | $ | (2,757 | ) | $ | 2,949 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Common shares
|
||||||||||||
|
Basic
|
||||||||||||
|
Weighted average common shares outstanding
|
346.3 | 306.7 | 316.3 | |||||||||
|
|
||||||||||||
|
Diluted
|
||||||||||||
|
Stock compensation plans
|
— | — | 2.8 | |||||||||
|
Weighted average shares outstanding and dilutive potential common shares
|
346.3 | 306.7 | 319.1 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings (loss) per common share
|
||||||||||||
|
Basic [1] [2]
|
$ | (2.93 | ) | $ | (8.99 | ) | $ | 9.32 | ||||
|
Diluted [2]
|
$ | (2.93 | ) | $ | (8.99 | ) | $ | 9.24 | ||||
| [1] |
Due to the net loss for the year ended December 31, 2008, no
allocation of the net loss was made to the preferred shareholders
under the two-class method in the calculation of basic earnings
per share, as the preferred shareholders had no contractual
obligation to fund the net losses of the Company. In the absence
of the net loss, any such income would be allocated to the
preferred shareholders based on the weighted average number of
preferred shares outstanding as of December 31, 2008.
|
|
| [2] |
As a result of the net loss in the years ended December 31, 2009
and 2008, the Company used basic weighted average common shares
outstanding in the calculation of the year ended December 31, 2009
and 2008 diluted loss per share, since the inclusion of shares for
warrants of 14.6 and 0, respectively, stock compensation plans of
0.9 million and 1.3 million, respectively, and the assumed
conversion of the preferred shares to common of 0 and 5.0 million,
respectively, would have been antidilutive to the earnings per
share calculation. In the absence of the net loss, weighted
average common shares outstanding and dilutive potential common
shares would have totaled 361.8 million and 313.0 million for the
years ended December 31, 2009 and 2008, respectively.
|
Basic earnings per share is computed based on the weighted average number of common shares
outstanding during the year. Diluted earnings per share include the dilutive effect of stock
compensation plans, warrants, and assumed conversion of preferred shares to common using the
treasury stock method. Contingently issuable shares are included for the number of shares issuable
assuming the end of the reporting period was the end of the contingency period, if dilutive.
Under the treasury stock method for stock compensation plans, shares are assumed to be issued and
then reduced for the number of shares repurchaseable with theoretical proceeds at the average
market price for the period. Theoretical proceeds for the stock compensation plans include option
exercise price payments, unamortized stock compensation expense and tax benefits realized in excess
of the tax benefit recognized in net income. The difference between the number of shares assumed
issued and number of shares purchased represents the dilutive shares. Upon exercise of outstanding
options or vesting of other stock compensation plan awards, the additional shares issued and
outstanding are included in the calculation of the Company’s weighted average shares from the date
of exercise or vesting.
Under the treasury stock method for the warrants issued to the U.S. Treasury in June of 2009, see
Note 15, exercise shall be assumed at the beginning of the period. The proceeds from exercise of
$9.79 per share shall be assumed to be used to purchase common shares at the average market price
during the period.
Under the treasury stock method for the warrants issued to Allianz, see Note 21, exercise shall be
assumed at the beginning of the period. The proceeds from exercise of $25.25 in 2009 and $25.32 in
2008 per share shall be assumed to be used to purchase common shares at the average market price
during the period. Since the average market price of the common stock from the date of issuance of
the warrants to Allianz through December 31, 2008 did not exceed the exercise price of the
warrants, there is no dilutive effect for the warrants for the year ended December 31, 2008.
F-12
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information
The Hartford is organized into two major operations: Life and Property & Casualty, each
containing reporting segments. Within the Life and Property & Casualty operations, The Hartford
conducts business principally in eleven reporting segments. Corporate primarily includes the
Company’s debt financing and related interest expense, as well as other capital raising activities,
banking operations and certain purchase accounting adjustments.
Life
Life’s business is conducted by Hartford Life, Inc. (“Hartford Life” or “Life”), an indirect
subsidiary of The Hartford, headquartered in Simsbury, Connecticut, and is a financial services and
insurance organization. Life is organized into six reporting segments, Retail Products Group
(“Retail”), Individual Life, Group Benefits, Retirement Plans, International and Institutional
Solutions Group (“Institutional”).
Retail offers individual variable and fixed market value adjusted (“MVA”) annuities, retail mutual
funds, and 529 college savings plans.
Individual Life sells a variety of life insurance products, including variable universal life,
universal life, interest sensitive whole life and term life.
Group Benefits provides individual members of employer groups, associations, affinity groups and
financial institutions with group life, accident and disability coverage, along with other products
and services, including voluntary benefits, and group retiree health.
Retirement Plans provides products and services to corporations pursuant to Section 401(k) and
products and services to municipalities and not-for-profit organizations under Section 457 and
403(b) of the IRS code.
International provides investments, retirement savings and other insurance and savings products to
individuals and groups outside the United States. The Company’s Japan operation is the largest
component of the International segment. In the second quarter 2009, after a strategic review of
the Company’s core business structure, new product sales in International’s Japan and European
operations were suspended. Subsequently, International’s operations were restructured to maximize
profitability and capital efficiency while continuing to focus on risk management and maintain
appropriate service levels.
Institutional primarily offers institutional liability products, such as variable Private Placement
Life Insurance (“PPLI”) owned by corporations and high net worth individuals, and mutual funds to
institutional investors. Institutional continues to service existing customers of its discontinued
businesses which includes stable value products, structured settlements and institutional annuities
(primarily terminal funding cases, single premium immediate annuities and longevity assurance).
Life includes within its Other segment its leveraged PPLI product line of business; corporate items
not directly allocated to any of its reportable operating segments; intersegment eliminations and
the mark-to-mark adjustment for the International variable annuity assets that are classified as
equity securities, trading, reported in net investment income and the related change in interest
credited reported as a component of benefits, losses and loss adjustment expenses.
Life charges direct operating expenses to the appropriate segment and allocates the majority of
indirect expenses to the segments based on an intercompany expense arrangement. Inter-segment
revenues primarily occur between Life’s Other category and the reporting segments. These amounts
primarily include interest income on allocated surplus and interest charges on excess separate
account surplus.
The accounting policies of the reporting segments are the same as those described in the summary of
significant accounting policies in Note 1. Life evaluates performance of its segments based on
revenues, net income and the segment’s return on allocated capital. Each reporting segment is
allocated corporate surplus as needed to support its business.
Property & Casualty
Property & Casualty is organized into five reporting segments: the underwriting segments of
Personal Lines, Small Commercial, Middle Market and Specialty Commercial (collectively “Ongoing
Operations”); and the Other Operations segment.
Personal Lines sells automobile, homeowners and home-based business coverages directly to the
consumer and through a network of independent agents. Most of the Company’s personal lines
business sold directly to the consumer is to the members of AARP through a direct marketing
operation. Personal Lines also operates a member contact center for health insurance products
offered through the AARP Health program. AARP accounts for earned premiums of $2.8 billion, $2.8
billion, and $2.7 billion in 2009, 2008 and 2007, respectively, which represented 29%, 27% and 26%
of total Property & Casualty earned premiums for 2009, 2008 and 2007, respectively.
F-13
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
Small Commercial provides standard commercial insurance coverage to small commercial
businesses primarily throughout the United States. Small commercial businesses generally represent
companies with up to $5 in annual payroll, $15 in annual revenues or $15 in total property values.
This segment offers workers’ compensation, property, automobile, liability and umbrella coverages.
Middle Market provides standard commercial insurance coverage to middle market commercial
businesses primarily throughout the United States. This segment offers workers’ compensation,
property, automobile, liability, umbrella, marine and livestock coverages, primarily to companies
with greater than $5 in annual payroll, $15 in annual revenues or $15 in total property values.
The Specialty Commercial segment offers a variety of customized insurance products and risk
management services. Specialty Commercial provides standard commercial insurance products
including workers’ compensation, automobile and liability coverages to large-sized companies.
Specialty Commercial also provides professional liability, fidelity, surety, specialty casualty
coverages, core property and excess and surplus lines coverages not normally written by standard
lines insurers, and insurance products and services to captive insurance companies, pools and
self-insurance groups. In addition, Specialty Commercial provides third-party administrator
services for claims administration, integrated benefits and loss control through Specialty Risk
Services, a subsidiary of the Company.
The Other Operations segment consists of certain property and casualty insurance operations of The
Hartford which have discontinued writing new business and includes substantially all of the
Company’s asbestos and environmental exposures.
Through inter-segment arrangements, Specialty Commercial reimburses Personal Lines, Small
Commercial and Middle Market for certain losses, including, among other coverages, losses incurred
from uncollectible reinsurance and losses incurred under certain liability claims. In addition,
the Company retains a portion of the risks ceded under the Company’s principal catastrophe
reinsurance program and other reinsurance programs. The amount of premiums ceded to third-party
reinsurers under the principal catastrophe reinsurance program and other reinsurance programs is
allocated to the operating segments based on the risks written by each operating segment that are
subject to the programs.
Earned premiums assumed (ceded) under the inter-segment arrangements and retention were as follows:
| Net assumed (ceded) earned premiums under inter-segment | For the years ended December 31, | |||||||||||
| arrangements and retention | 2009 | 2008 | 2007 | |||||||||
|
Personal Lines
|
$ | (5 | ) | $ | (6 | ) | $ | (7 | ) | |||
|
Small Commercial
|
(24 | ) | (31 | ) | (29 | ) | ||||||
|
Middle Market
|
(21 | ) | (31 | ) | (34 | ) | ||||||
|
Specialty Commercial
|
50 | 68 | 70 | |||||||||
|
|
||||||||||||
|
Total
|
$ | — | $ | — | $ | — | ||||||
|
|
||||||||||||
Financial Measures and Other Segment Information
One of the measures of profit or loss used by The Hartford’s management in evaluating the
performance of its Life segments is net income. Net income is also a measure of profit or loss
used in evaluating the performance of Ongoing Operations and the Other Operations segment. Within
Ongoing Operations, the underwriting segments of Personal Lines, Small Commercial, Middle Market
and Specialty Commercial are evaluated by The Hartford’s management primarily based upon
underwriting results. Underwriting results represent premiums earned less incurred losses, loss
adjustment expenses and underwriting expenses. The sum of underwriting results, net servicing
income, net investment income, net realized capital gains and losses, other expenses, and related
income taxes is net income (loss).
Certain transactions between segments occur during the year that primarily relate to tax
settlements, insurance coverage, expense reimbursements, services provided, security transfers and
capital contributions. In addition, certain reinsurance stop loss arrangements exist between the
segments which specify that one segment will reimburse another for losses incurred in excess of a
predetermined limit. Also, one segment may purchase group annuity contracts from another to fund
pension costs and annuities to settle casualty claims. In addition, certain inter-segment
transactions occur in Life. These transactions include interest income on allocated surplus.
Total Life net investment income is unaffected by such transactions.
F-14
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
| For the years ended December 31, | ||||||||||||
| Revenues by Product Line | 2009 | 2008 | 2007 | |||||||||
|
Life
|
||||||||||||
|
Earned premiums, fees, and other considerations
|
||||||||||||
|
Retail
|
||||||||||||
|
Individual annuity:
|
||||||||||||
|
Individual variable annuity
|
$ | 1,468 | $ | 1,943 | $ | 2,225 | ||||||
|
Fixed / MVA annuity
|
(2 | ) | (6 | ) | 2 | |||||||
|
Retail mutual funds
|
504 | 618 | 642 | |||||||||
|
Other
|
162 | 198 | 186 | |||||||||
|
|
||||||||||||
|
Total Retail
|
2,132 | 2,753 | 3,055 | |||||||||
|
Individual Life
|
||||||||||||
|
Variable life
|
503 | 374 | 379 | |||||||||
|
Universal life
|
390 | 405 | 374 | |||||||||
|
Term/Other life
|
47 | 49 | 55 | |||||||||
|
|
||||||||||||
|
Total Individual Life
|
940 | 828 | 808 | |||||||||
|
Group Benefits
|
||||||||||||
|
Group disability
|
1,975 | 2,020 | 1,920 | |||||||||
|
Group life and accident
|
2,126 | 2,084 | 1,926 | |||||||||
|
Other
|
249 | 287 | 455 | |||||||||
|
|
||||||||||||
|
Total Group Benefits
|
4,350 | 4,391 | 4,301 | |||||||||
|
Retirement Plans
|
||||||||||||
|
401(k)
|
286 | 290 | 187 | |||||||||
|
403(b)/457
|
38 | 48 | 55 | |||||||||
|
|
||||||||||||
|
Total Retirement Plans
|
324 | 338 | 242 | |||||||||
|
International
|
||||||||||||
|
Variable annuity
|
763 | 876 | 820 | |||||||||
|
Fixed MVA annuity
|
31 | (7 | ) | 10 | ||||||||
|
Other
|
33 | 3 | 2 | |||||||||
|
|
||||||||||||
|
Total International [1]
|
827 | 872 | 832 | |||||||||
|
Institutional
|
||||||||||||
|
Institutional investment products
|
381 | 923 | 1,015 | |||||||||
|
PPLI
|
114 | 118 | 223 | |||||||||
|
|
||||||||||||
|
Total Institutional
|
495 | 1,041 | 1,238 | |||||||||
|
Other [1]
|
58 | 60 | 67 | |||||||||
|
|
||||||||||||
|
Total earned premiums, fees, and other considerations
|
9,126 | 10,283 | 10,543 | |||||||||
|
Net investment income (loss)
|
||||||||||||
|
Securities available-for-sale and other
|
2,903 | 3,045 | 3,497 | |||||||||
|
Equity securities, trading
|
3,188 | (10,340 | ) | 145 | ||||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
6,091 | (7,295 | ) | 3,642 | ||||||||
|
Net realized capital losses
|
(1,488 | ) | (4,138 | ) | (819 | ) | ||||||
|
|
||||||||||||
|
Total Life
|
13,729 | (1,150 | ) | 13,366 | ||||||||
|
|
||||||||||||
| [1] |
Included in International’s revenues for the year ended December 31, 2009 is $68 of
investment income from an inter-segment funding agreement with Institutional. This investment
income is eliminated in Life Other.
|
F-15
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
| For the years ended December 31, | ||||||||||||
| Revenues by Product Line (continued) | 2009 | 2008 | 2007 | |||||||||
|
Property & Casualty
|
||||||||||||
|
Ongoing Operations
|
||||||||||||
|
Earned premiums
|
||||||||||||
|
Personal Lines
|
||||||||||||
|
Automobile
|
$ | 2,850 | $ | 2,824 | $ | 2,822 | ||||||
|
Homeowners
|
1,102 | 1,102 | 1,067 | |||||||||
|
|
||||||||||||
|
Total Personal Lines
|
3,952 | 3,926 | 3,889 | |||||||||
|
Small Commercial
|
||||||||||||
|
Workers’ Compensation
|
1,178 | 1,241 | 1,230 | |||||||||
|
Package Business
|
1,123 | 1,167 | 1,169 | |||||||||
|
Automobile
|
279 | 316 | 337 | |||||||||
|
|
||||||||||||
|
Total Small Commercial
|
2,580 | 2,724 | 2,736 | |||||||||
|
Middle Market
|
||||||||||||
|
Workers’ Compensation
|
847 | 847 | 861 | |||||||||
|
Property
|
555 | 611 | 627 | |||||||||
|
Automobile
|
288 | 335 | 382 | |||||||||
|
Liability
|
411 | 506 | 550 | |||||||||
|
|
||||||||||||
|
Total Middle Market
|
2,101 | 2,299 | 2,420 | |||||||||
|
Specialty Commercial
|
||||||||||||
|
Workers’ Compensation
|
250 | 288 | 304 | |||||||||
|
Property
|
42 | 86 | 117 | |||||||||
|
Automobile
|
86 | 84 | 83 | |||||||||
|
Liability
|
208 | 241 | 246 | |||||||||
|
Fidelity and surety
|
250 | 272 | 256 | |||||||||
|
Professional Liability
|
393 | 414 | 429 | |||||||||
|
Other
|
(1 | ) | (3 | ) | 11 | |||||||
|
|
||||||||||||
|
Total Specialty Commercial
|
1,228 | 1,382 | 1,446 | |||||||||
|
|
||||||||||||
|
Total Ongoing Operations
|
9,861 | 10,331 | 10,491 | |||||||||
|
Other Operations
|
— | 7 | 5 | |||||||||
|
|
||||||||||||
|
Total earned premiums
|
9,861 | 10,338 | 10,496 | |||||||||
|
Other revenues [1]
|
492 | 504 | 496 | |||||||||
|
Net investment income
|
1,106 | 1,253 | 1,687 | |||||||||
|
Net realized capital losses
|
(294 | ) | (1,877 | ) | (172 | ) | ||||||
|
|
||||||||||||
|
Total Property & Casualty
|
11,165 | 10,218 | 12,507 | |||||||||
|
Corporate
|
(193 | ) | 151 | 43 | ||||||||
|
|
||||||||||||
|
Total revenues
|
$ | 24,701 | $ | 9,219 | $ | 25,916 | ||||||
|
|
||||||||||||
| [1] |
Represents servicing revenue.
|
| For the years ended December 31, | ||||||||||||
| Geographical Revenue Information | 2009 | 2008 | 2007 | |||||||||
|
United States of America
|
$ | 20,429 | $ | 18,904 | $ | 24,842 | ||||||
|
Japan
|
3,816 | (9,745 | ) | 968 | ||||||||
|
Other
|
456 | 60 | 106 | |||||||||
|
|
||||||||||||
|
Total revenues
|
$ | 24,701 | $ | 9,219 | $ | 25,916 | ||||||
|
|
||||||||||||
F-16
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
The following table presents net income (loss) for each of Life’s reporting segments, total
Property & Casualty Ongoing Operations, Property & Casualty Other Operations and Corporate, while
underwriting results are presented for the Personal Lines, Small Commercial, Middle Market and
Specialty Commercial segments.
| For the years ended December 31, | ||||||||||||
| Net Income (Loss) | 2009 | 2008 | 2007 | |||||||||
|
Life
|
||||||||||||
|
Retail
|
$ | (410 | ) | $ | (1,399 | ) | $ | 812 | ||||
|
Individual Life
|
15 | (43 | ) | 182 | ||||||||
|
Group Benefits
|
193 | (6 | ) | 315 | ||||||||
|
Retirement Plans
|
(222 | ) | (157 | ) | 61 | |||||||
|
International [1]
|
(183 | ) | (325 | ) | 223 | |||||||
|
Institutional [1]
|
(515 | ) | (502 | ) | 17 | |||||||
|
Other [1]
|
(165 | ) | (11 | ) | (52 | ) | ||||||
|
|
||||||||||||
|
Total Life
|
(1,287 | ) | (2,443 | ) | 1,558 | |||||||
|
Property & Casualty
|
||||||||||||
|
Ongoing Operations
|
||||||||||||
|
Underwriting Results
|
||||||||||||
|
Personal Lines
|
120 | 280 | 322 | |||||||||
|
Small Commercial
|
395 | 437 | 508 | |||||||||
|
Middle Market
|
258 | 169 | 157 | |||||||||
|
Specialty Commercial
|
170 | 71 | (18 | ) | ||||||||
|
|
||||||||||||
|
Total Ongoing Operations underwriting results
|
943 | 957 | 969 | |||||||||
|
Net servicing income [2]
|
37 | 31 | 52 | |||||||||
|
Net investment income
|
943 | 1,056 | 1,439 | |||||||||
|
Net realized capital losses
|
(266 | ) | (1,669 | ) | (160 | ) | ||||||
|
Other expenses
|
(223 | ) | (219 | ) | (248 | ) | ||||||
|
|
||||||||||||
|
Income before income taxes
|
1,434 | 156 | 2,052 | |||||||||
|
Income tax expense (benefit)
|
374 | (33 | ) | 575 | ||||||||
|
|
||||||||||||
|
Ongoing Operations
|
1,060 | 189 | 1,477 | |||||||||
|
Other Operations
|
(77 | ) | (97 | ) | 30 | |||||||
|
|
||||||||||||
|
Total Property & Casualty
|
983 | 92 | 1,507 | |||||||||
|
Corporate
|
(583 | ) | (398 | ) | (116 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (887 | ) | $ | (2,749 | ) | $ | 2,949 | ||||
|
|
||||||||||||
| [1] |
Included in net income (loss) of International and Institutional
is investment income and interest expense, respectively, for the
year ended December 31, 2009 of $68 on an inter-segment funding
agreement. This investment income and interest expense is
eliminated in Life Other.
|
|
| [2] |
Net of expenses related to service business.
|
| For the years ended December 31, | ||||||||||||
| Amortization of deferred policy acquisition costs and present value of future profits | 2009 | 2008 | 2007 | |||||||||
|
Life
|
||||||||||||
|
Retail
|
$ | 1,389 | $ | 1,344 | $ | 406 | ||||||
|
Individual Life
|
314 | 169 | 121 | |||||||||
|
Group Benefits
|
61 | 57 | 62 | |||||||||
|
Retirement Plans
|
56 | 91 | 58 | |||||||||
|
International
|
364 | 496 | 214 | |||||||||
|
Institutional
|
17 | 19 | 23 | |||||||||
|
|
||||||||||||
|
Total Life
|
2,201 | 2,176 | 884 | |||||||||
|
Property & Casualty
|
||||||||||||
|
Ongoing Operations
|
||||||||||||
|
Personal Lines
|
674 | 633 | 617 | |||||||||
|
Small Commercial
|
622 | 636 | 635 | |||||||||
|
Middle Market
|
486 | 513 | 529 | |||||||||
|
Specialty Commercial
|
284 | 313 | 323 | |||||||||
|
|
||||||||||||
|
Total Ongoing Operations
|
2,066 | 2,095 | 2,104 | |||||||||
|
|
||||||||||||
|
Total Property & Casualty
|
2,066 | 2,095 | 2,104 | |||||||||
|
Corporate
|
— | — | 1 | |||||||||
|
|
||||||||||||
|
Total amortization of deferred policy acquisition costs and present value of future profits
|
$ | 4,267 | $ | 4,271 | $ | 2,989 | ||||||
|
|
||||||||||||
F-17
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
| For the years ended December 31, | ||||||||||||
| Income tax expense (benefit) | 2009 | 2008 | 2007 | |||||||||
|
Life
|
||||||||||||
|
Retail
|
$ | (463 | ) | $ | (972 | ) | $ | 216 | ||||
|
Individual Life
|
(27 | ) | (41 | ) | 81 | |||||||
|
Group Benefits
|
59 | (53 | ) | 119 | ||||||||
|
Retirement Plans
|
(143 | ) | (132 | ) | 18 | |||||||
|
International
|
(49 | ) | (145 | ) | 132 | |||||||
|
Institutional
|
(296 | ) | (288 | ) | (8 | ) | ||||||
|
Other
|
(76 | ) | (15 | ) | (11 | ) | ||||||
|
|
||||||||||||
|
Total Life
|
(995 | ) | (1,646 | ) | 547 | |||||||
|
Property & Casualty
|
||||||||||||
|
Ongoing Operations
|
374 | (33 | ) | 575 | ||||||||
|
Other Operations
|
(49 | ) | (62 | ) | (5 | ) | ||||||
|
|
||||||||||||
|
Total Property & Casualty
|
325 | (95 | ) | 570 | ||||||||
|
Corporate
|
(171 | ) | (101 | ) | (61 | ) | ||||||
|
|
||||||||||||
|
Total income tax expense (benefit)
|
$ | (841 | ) | $ | (1,842 | ) | $ | 1,056 | ||||
|
|
||||||||||||
| As of December 31, | ||||||||||||
| Assets | 2009 | 2008 | 2007 | |||||||||
|
Life
|
||||||||||||
|
Retail
|
$ | 102,880 | $ | 97,222 | $ | 136,023 | ||||||
|
Individual Life
|
15,089 | 13,770 | 15,590 | |||||||||
|
Group Benefits
|
8,904 | 9,036 | 9,295 | |||||||||
|
Retirement Plans
|
28,180 | 22,581 | 27,986 | |||||||||
|
International
|
41,530 | 41,502 | 41,625 | |||||||||
|
Institutional
|
62,091 | 59,853 | 78,766 | |||||||||
|
Other
|
6,060 | 3,927 | 6,891 | |||||||||
|
|
||||||||||||
|
Total Life
|
264,734 | 247,891 | 316,176 | |||||||||
|
Property & Casualty
|
||||||||||||
|
Ongoing Operations
|
33,437 | 31,484 | 35,899 | |||||||||
|
Other Operations
|
4,965 | 5,196 | 5,942 | |||||||||
|
|
||||||||||||
|
Total Property & Casualty
|
38,402 | 36,680 | 41,841 | |||||||||
|
Corporate
|
4,581 | 3,012 | 2,344 | |||||||||
|
|
||||||||||||
|
Total Assets
|
$ | 307,717 | $ | 287,583 | $ | 360,361 | ||||||
|
|
||||||||||||
F-18
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits
The following financial instruments are carried at fair value in the Company’s Consolidated
Financial Statements: fixed maturities and equity securities, available-for-sale (“AFS”), equity
securities, trading, short-term investments, freestanding and embedded derivatives, and separate
account assets.
The following section and Note 4a apply the fair value hierarchy and disclosure requirements for
the Company’s financial instruments that are carried at fair value. The fair value hierarchy
prioritizes the inputs in the valuation techniques used to measure fair value into three broad
Levels (Level 1, 2 or 3).
| Level 1 |
Observable inputs that reflect quoted prices for identical assets
or liabilities in active markets that the Company has the ability
to access at the measurement date. Level 1 securities include
highly liquid U.S. Treasuries, money market funds and exchange
traded equity, open-ended mutual funds reported in separate
account assets and derivative securities, including futures and
certain option contracts.
|
|
| Level 2 |
Observable inputs, other than quoted prices included in Level 1,
for the asset or liability or prices for similar assets and
liabilities. Most debt securities and preferred stocks, including
those reported in separate account assets, are model priced by
vendors using observable inputs and are classified within Level 2.
Also included in the Level 2 category are derivative instruments
that are priced using models with significant observable market
inputs, including interest rate, foreign currency and certain
credit default swap contracts and have no significant unobservable
market inputs.
|
|
| Level 3 |
Valuations that are derived from techniques in which one or more
of the significant inputs are unobservable (including assumptions
about risk). Level 3 securities include less liquid securities
such as highly structured and/or lower quality asset-backed
securities (“ABS”), commercial mortgage-backed securities
(“CMBS”), commercial real estate (“CRE”) collateralized debt
obligations (“CDOs”), residential mortgage-backed securities
(“RMBS”) primarily backed by below- prime loans, and private
placement securities. Also included in Level 3 are guaranteed
product embedded and reinsurance derivatives and other complex
derivatives securities, including customized GMWB hedging
derivative (see Note 4a for further information of GMWB product
related financial instruments), equity derivatives, long dated
derivatives, swaps with optionality and certain complex credit
derivatives are also included in Level 3. Because Level 3 fair
values, by their nature, contain unobservable market inputs as
there is little or no observable market for these assets and
liabilities, considerable judgment is used to determine the Level
3 fair values. Level 3 fair values represent the Company’s best
estimate of an amount that could be realized in a current market
exchange absent actual market exchanges.
|
In many situations, inputs used to measure the fair value of an asset or liability position may
fall into different levels of the fair value hierarchy. In these situations, the Company will
determine the level in which the fair value falls based upon the lowest level input that is
significant to the determination of the fair value. In most cases, both observable (e.g., changes
in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the
determination of fair values that the Company has classified within Level 3. Consequently, these
values and the related gains and losses are based upon both observable and unobservable inputs.
The Company’s fixed maturities included in Level 3 are classified as such as they are primarily
priced by independent brokers and/or within illiquid markets (i.e., below prime RMBS).
F-19
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits
(continued)
These disclosures provide information as to the extent to which the Company uses fair value to
measure financial instruments and information about the inputs used to value those financial
instruments to allow users to assess the relative reliability of the measurements. The following
tables present assets and (liabilities) carried at fair value by hierarchy level, excluding those
related to the Company’s living benefits and associated hedging programs, which are reported in
Note 4a.
| December 31, 2009 | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Significant | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Assets accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Fixed maturities
|
||||||||||||||||
|
ABS
|
$ | 2,523 | $ | — | $ | 1,943 | $ | 580 | ||||||||
|
CDOs
|
2,892 | — | 57 | 2,835 | ||||||||||||
|
CMBS
|
8,544 | — | 8,237 | 307 | ||||||||||||
|
Corporate
|
35,243 | — | 27,216 | 8,027 | ||||||||||||
|
Foreign government/government agencies
|
1,408 | — | 1,315 | 93 | ||||||||||||
|
States, municipalities and political subdivisions (“Municipal”)
|
12,065 | — | 11,803 | 262 | ||||||||||||
|
RMBS
|
4,847 | — | 3,694 | 1,153 | ||||||||||||
|
U.S. Treasuries
|
3,631 | 526 | 3,105 | — | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturities
|
71,153 | 526 | 57,370 | 13,257 | ||||||||||||
|
Equity securities, trading
|
32,321 | 2,443 | 29,878 | — | ||||||||||||
|
Equity securities, AFS
|
1,221 | 259 | 904 | 58 | ||||||||||||
|
Derivative assets [1]
|
178 | — | 97 | 81 | ||||||||||||
|
Short-term investments
|
10,357 | 6,846 | 3,511 | — | ||||||||||||
|
Separate account assets [2]
|
147,432 | 112,877 | 33,593 | 962 | ||||||||||||
|
|
||||||||||||||||
|
Total assets accounted for at fair value on a recurring basis
|
$ | 262,662 | $ | 122,951 | $ | 125,353 | $ | 14,358 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||
|
Institutional notes
|
$ | (2 | ) | $ | — | $ | — | $ | (2 | ) | ||||||
|
Equity linked notes
|
(10 | ) | — | — | (10 | ) | ||||||||||
|
|
||||||||||||||||
|
Total other policyholder funds and benefits payable
|
(12 | ) | — | — | (12 | ) | ||||||||||
|
Derivative liabilities [3]
|
(214 | ) | — | 56 | (270 | ) | ||||||||||
|
Consumer notes [4]
|
(5 | ) | — | — | (5 | ) | ||||||||||
|
|
||||||||||||||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$ | (231 | ) | $ | — | $ | 56 | $ | (287 | ) | ||||||
|
|
||||||||||||||||
| [1] |
Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral
to the Company. As of December 31, 2009, $149 of cash collateral liability was netted against the derivative asset value in the
Consolidated Balance Sheet and is excluded from the table above. See footnote 3 below for derivative liabilities.
|
|
| [2] |
As of December 31, 2009, excludes approximately $3 billion of investment sales receivable that are not subject to fair value accounting.
|
|
| [3] |
Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the Level 3
roll-forward table included below in this Note 4, the derivative asset and liability are referred to as “freestanding derivatives” and
are presented on a net basis.
|
|
| [4] |
Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes.
|
F-20
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits
(continued)
| December 31, 2008 | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Significant | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Assets accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Fixed maturities
|
$ | 65,112 | $ | 3,541 | $ | 49,761 | $ | 11,810 | ||||||||
|
Equity securities, trading
|
30,820 | 1,634 | 29,186 | — | ||||||||||||
|
Equity securities, AFS
|
1,458 | 246 | 671 | 541 | ||||||||||||
|
Derivative assets [1]
|
976 | — | 1,005 | (29 | ) | |||||||||||
|
Short-term investments
|
10,022 | 7,025 | 2,997 | — | ||||||||||||
|
Separate account assets [2]
|
126,777 | 94,804 | 31,187 | 786 | ||||||||||||
|
|
||||||||||||||||
|
Total assets accounted for at fair value on a recurring basis
|
$ | 235,165 | $ | 107,250 | $ | 114,807 | $ | 13,108 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||
|
Institutional notes
|
$ | (41 | ) | $ | — | $ | — | $ | (41 | ) | ||||||
|
Equity linked notes
|
(8 | ) | — | — | (8 | ) | ||||||||||
|
|
||||||||||||||||
|
Total other policyholder funds and benefits payable
|
(49 | ) | — | — | (49 | ) | ||||||||||
|
Derivative liabilities [3]
|
(339 | ) | — | 76 | (415 | ) | ||||||||||
|
Consumer notes [4]
|
(5 | ) | — | — | (5 | ) | ||||||||||
|
|
||||||||||||||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$ | (393 | ) | $ | — | $ | 76 | $ | (469 | ) | ||||||
|
|
||||||||||||||||
| [1] |
Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to
pledge collateral to the Company. As of December 31, 2008, $574 of cash collateral liability was netted against the
derivative asset value in the Consolidated Balance Sheet and is excluded from the table above. See footnote 3 below
for derivative liabilities.
|
|
| [2] |
As of December 31, 2008, excludes approximately $3 billion of investment sales receivable net of investment purchases
payable that are not subject to fair value accounting.
|
|
| [3] |
Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In
the Level 3 roll-forward table included below in this Note 4, the derivative asset and liability are referred to as
“freestanding derivatives” and are presented on a net basis.
|
|
| [4] |
Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes.
|
Determination of fair values
The valuation methodologies used to determine the fair values of assets and liabilities under the
“exit price” notion, reflect market-participant objectives and are based on the application of the
fair value hierarchy that prioritizes relevant observable market inputs over unobservable inputs.
The Company determines the fair values of certain financial assets and financial liabilities based
on quoted market prices where available and where prices represent a reasonable estimate of fair
value. The Company also determines fair value based on future cash flows discounted at the
appropriate current market rate. Fair values reflect adjustments for counterparty credit quality,
the Company’s default spreads, liquidity and, where appropriate, risk margins on unobservable
parameters. The following is a discussion of the methodologies used to determine fair values for
the financial instruments listed in the above tables.
F-21
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits
(continued)
Available-for-Sale Securities and Short-Term Investments
The fair value of AFS securities and short-term investments in an active and orderly market (e.g.
not distressed or forced liquidation) is determined by management after considering one of three
primary sources of information: third-party pricing services, independent broker quotations or
pricing matrices. Security pricing is applied using a “waterfall” approach whereby publicly
available prices are first sought from third-party pricing services, the remaining unpriced
securities are submitted to independent brokers for prices, or lastly, securities are priced using
a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited
to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows
and prepayments speeds. Based on the typical trading volumes and the lack of quoted market prices
for fixed maturities, third-party pricing services will normally derive the security prices from
recent reported trades for identical or similar securities making adjustments through the reporting
date based upon available market observable information as outlined above. If there are no recent
reported trades, the third-party pricing services and brokers may use matrix or model processes to
develop a security price where future cash flow expectations are developed based upon collateral
performance and discounted at an estimated market rate. Included in the pricing of ABS and RMBS
are estimates of the rate of future prepayments of principal over the remaining life of the
securities. Such estimates are derived based on the characteristics of the underlying structure
and prepayment speeds previously experienced at the interest rate levels projected for the
underlying collateral. Actual prepayment experience may vary from these estimates.
Prices from third-party pricing services are often unavailable for securities that are rarely
traded or are traded only in privately negotiated transactions. As a result, certain securities
are priced via independent broker quotations which utilize inputs that may be difficult to
corroborate with observable market based data. Additionally, the majority of these independent
broker quotations are non-binding. A pricing matrix is used to price securities for which the
Company is unable to obtain either a price from a third-party pricing service or an independent
broker quotation, by discounting the expected future cash flows from the security by a developed
market discount rate utilizing current credit spreads. Credit spreads are developed each month
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 Company performs a monthly analysis of the prices and credit spreads received from third
parties to ensure that the prices represent a reasonable estimate of the fair value. As a part of
this analysis, the Company considers trading volume and other factors to determine whether the
decline in market activity is significant when compared to normal activity in an active market, and
if so, whether transactions may not be orderly considering the weight of available evidence. If
the available evidence indicates that pricing is based upon transactions that are stale or not
orderly, the Company places little, if any, weight on the transaction price and will estimate fair
value utilizing an internal pricing model. This process involves quantitative and qualitative
analysis and is overseen by investment and accounting professionals. Examples of procedures
performed include, but are not limited to, initial and on-going review of third-party pricing
services methodologies, review of pricing statistics and trends, back testing recent trades, and
monitoring of trading volumes, new issuance activity and other market activities. In addition, the
Company ensures that prices received from independent brokers represent a reasonable estimate of
fair value through the use of internal and external cash flow models developed based on spreads,
and when available, market indices. As a result of this analysis, if the Company determines that
there is a more appropriate fair value based upon the available market data, the price received
from the third party is adjusted accordingly. The Company’s internal pricing model utilizes the
Company’s best estimate of expected future cash flows discounted at a rate of return that a market
participant would require. The significant inputs to the model include, but are not limited to,
current market inputs, such as credit loss assumptions, estimated prepayment speeds and market risk
premiums.
The Company has analyzed the third-party pricing services’ valuation methodologies and related
inputs, and has also evaluated the various types of securities in its investment portfolio to
determine an appropriate fair value hierarchy level based upon trading activity and the
observability of market inputs. Most prices provided by third-party pricing services are
classified into Level 2 because the inputs used in pricing the securities are market observable.
Due to a general lack of transparency in the process that brokers use to develop prices, most
valuations that are based on brokers’ prices are classified as Level 3. Some valuations may be
classified as Level 2 if the price can be corroborated. Internal matrix priced securities,
primarily consisting of certain private placement securities, are also classified as Level 3 due to
significant non-observable inputs.
F-22
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits
(continued)
Derivative Instruments, including embedded derivatives within investments
Freestanding derivative instruments are reported in the Consolidated Balance Sheets at fair value
and are reported in other investments and other liabilities. Embedded derivatives are reported
with the host instruments in the Consolidated Balance Sheet. Derivative instruments are fair
valued using pricing valuation models, which utilize market data inputs or independent broker
quotations. Excluding embedded and reinsurance related derivatives, as of December 31, 2009 and
2008, 97% and 94%, respectively, of derivatives, based upon notional values, were priced by
valuation models, which utilize independent market data. The remaining derivatives were priced by
broker quotations. The derivatives are valued using mid-market inputs that are predominantly
observable in the market. Inputs used to value derivatives include, but are not limited to,
interest swap rates, foreign currency forward and spot rates, credit spreads and correlations,
interest and equity volatility and equity index levels. The Company performs a monthly analysis on
derivative valuations which includes both quantitative and qualitative analysis. Examples of
procedures performed include, but are not limited to, review of pricing statistics and trends, back
testing recent trades, analyzing the impacts of changes in the market environment, and review of
changes in market value for each derivative including those derivatives priced by brokers.
The Company utilizes 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 assets and liabilities. Therefore the realized and unrealized
gains and losses on derivatives reported in Level 3 may not reflect the offsetting impact of the
realized and unrealized gains and losses of the associated assets and liabilities.
Separate Account Assets
Separate account assets are primarily invested in mutual funds but also have investments in fixed
maturity and equity securities. The separate account investments are valued in the same manner,
and using the same pricing sources and inputs, as the fixed maturity, equity security, and
short-term investments of the Company.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable
Inputs (Level 3)
The tables below provide a fair value roll forward for the twelve months ending December 31, 2009
and 2008, for the financial instruments classified as Level 3, excluding those related to the
Company’s living benefits and associated hedging programs, which are reported in Note 4a.
F-23
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits
(continued)
Roll-forward of Financial Instruments Measured at Fair Value on a Recurring Basis Using
Significant Unobservable Inputs (Level 3) for the twelve months from January 1, 2009 to December
31, 2009
| Changes in unrealized | ||||||||||||||||||||||||||||
| gains (losses) | ||||||||||||||||||||||||||||
| Fair value | Total realized/unrealized | Purchases, | included in net income | |||||||||||||||||||||||||
| as of | gains (losses) included in: | issuances, | Transfers in | Fair value | related to financial | |||||||||||||||||||||||
| January 1, | Net income | and | and/or (out) | as of | instruments still held at | |||||||||||||||||||||||
| Asset (Liability) | 2009 | [1] | OCI [2] | settlements | of Level 3 [3] | December 31, 2009 | December 31, 2009 [1] | |||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Fixed maturities
|
||||||||||||||||||||||||||||
|
ABS
|
$ | 536 | $ | (44 | ) | $ | 176 | $ | (45 | ) | $ | (43 | ) | $ | 580 | $ | (34 | ) | ||||||||||
|
CDO
|
2,612 | (491 | ) | 827 | (65 | ) | (48 | ) | 2,835 | (447 | ) | |||||||||||||||||
|
CMBS
|
341 | (308 | ) | 338 | (93 | ) | 29 | 307 | (94 | ) | ||||||||||||||||||
|
Corporate
|
6,396 | (73 | ) | 1,192 | 915 | (403 | ) | 8,027 | (52 | ) | ||||||||||||||||||
|
Foreign govt./govt. agencies
|
100 | 2 | — | 11 | (20 | ) | 93 | 2 | ||||||||||||||||||||
|
Municipal
|
163 | — | 3 | 25 | 71 | 262 | — | |||||||||||||||||||||
|
RMBS
|
1,662 | (441 | ) | 214 | (243 | ) | (39 | ) | 1,153 | (264 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Fixed maturities
|
11,810 | (1,355 | ) | 2,750 | 505 | (453 | ) | 13,257 | (889 | ) | ||||||||||||||||||
|
Equity securities, AFS
|
541 | 2 | 6 | (19 | ) | (472 | ) | 58 | (1 | ) | ||||||||||||||||||
|
Freestanding derivatives [4]
|
(281 | ) | 76 | (4 | ) | 29 | (9 | ) | (189 | ) | 131 | |||||||||||||||||
|
Separate accounts [5]
|
786 | (65 | ) | — | 344 | (103 | ) | 962 | (38 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||||||||||||||
|
Institutional notes
|
$ | (41 | ) | $ | 39 | $ | — | $ | — | $ | — | $ | (2 | ) | $ | 39 | ||||||||||||
|
Equity linked notes
|
(8 | ) | (2 | ) | — | — | — | (10 | ) | (2 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total other policyholder funds and benefits payable
|
(49 | ) | 37 | — | — | — | (12 | ) | 37 | |||||||||||||||||||
|
Other derivative liabilities [6]
|
(163 | ) | 70 | — | 93 | — | — | — | ||||||||||||||||||||
|
Consumer notes
|
(5 | ) | — | — | — | — | (5 | ) | — | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| [1] |
All amounts in these columns are reported in net realized capital
gains (losses) except for $3, which is reported in benefits,
losses and loss adjustment expenses. All amounts are before
income taxes and amortization of DAC.
|
|
| [2] |
All amounts are before income taxes and amortization of DAC.
|
|
| [3] |
Transfers in and/or (out) of Level 3 are attributable to a change
in the availability of market observable information and
re-evaluation of the observability of pricing inputs primarily for
certain long-dated corporate bonds and preferred stocks.
|
|
| [4] |
Derivative instruments are reported in this table on a net basis
for asset/(liability) positions and reported in the Consolidated
Balance Sheet in other investments and other liabilities.
|
|
| [5] |
The realized/unrealized gains (losses) included in net income for
separate account assets are offset by an equal amount for separate
account liabilities, which results in a net zero impact on net
income for the Company.
|
|
| [6] |
On March 26, 2009, certain of the Allianz warrants were
reclassified to equity, at their current fair value, as
shareholder approval of the conversion of these warrants to common
shares was received. See Note 21 for further discussion.
|
F-24
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits
(continued)
Roll-forward of Financial Instruments Measured at Fair Value on a Recurring Basis Using
Significant Unobservable Inputs (Level 3) for the twelve months from January 1, 2008 to December
31, 2008
| Changes in unrealized | ||||||||||||||||||||||||||||
| gains (losses) | ||||||||||||||||||||||||||||
| Fair value | Total realized/unrealized | Purchases, | included in net income | |||||||||||||||||||||||||
| as of | gains (losses) included in: | issuances, | Transfers in | Fair value | related to financial | |||||||||||||||||||||||
| January 1, | Net income | and | and/or (out) | as of | instruments still held at | |||||||||||||||||||||||
| Asset (Liability) | 2008 | [1] | OCI [3] | settlements | of Level 3 [5] | December 31, 2008 | December 31, 2008 [1] | |||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Fixed maturities
|
$ | 17,996 | $ | (988 | ) | $ | (4,178 | ) | $ | 858 | $ | (1,878 | ) | $ | 11,810 | $ | (811 | ) | ||||||||||
|
Equity securities, AFS
|
1,339 | (77 | ) | 11 | 64 | (796 | ) | 541 | (67 | ) | ||||||||||||||||||
|
Freestanding derivatives [2]
|
(419 | ) | (471 | ) | 16 | 491 | 102 | (281 | ) | (301 | ) | |||||||||||||||||
|
Separate accounts [4]
|
701 | (204 | ) | — | (26 | ) | 315 | 786 | (73 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||||||||||||||
|
Institutional notes
|
$ | (24 | ) | $ | (17 | ) | $ | — | $ | — | $ | — | $ | (41 | ) | $ | (17 | ) | ||||||||||
|
Equity linked notes
|
(21 | ) | 13 | — | — | — | (8 | ) | 13 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total other policyholder funds and benefits payable
|
(45 | ) | (4 | ) | — | — | — | (49 | ) | (4 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Other Liabilities
|
||||||||||||||||||||||||||||
|
Derivative liability-warrants [6]
|
— | 110 | — | (273 | ) | — | (163 | ) | 110 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Consumer notes
|
(5 | ) | 5 | — | (5 | ) | — | (5 | ) | 5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| [1] |
All amounts in these columns are reported in net realized capital gains/losses except for $6 for the twelve months
ending December 31, 2008, which is reported in benefits, losses and loss adjustment expenses. All amounts are before
income taxes and amortization of DAC.
|
|
| [2] |
The freestanding derivatives are reported in this table on a net basis for asset/(liability) positions and reported in
the Consolidated Balance Sheet in other investments and other liabilities.
|
|
| [3] |
All amounts are before income taxes and amortization of DAC.
|
|
| [4] |
The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on net income for the Company.
[5] Transfers in and/or (out) of Level 3 are attributable to a change in the availability of market observable information
for individual securities within the respective categories.
|
|
| [6] |
These amounts represent certain Allianz warrants. See Note 21 for further discussion.
|
F-25
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| 4. |
Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits
(continued)
|
Financial Instruments Not Carried at Fair Value
The following presents carrying amounts and fair values of The Hartford’s financial instruments not
carried at fair value and not included in the above fair value discussion as of December 31, 2009
and December 31, 2008.
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
Assets
|
||||||||||||||||
|
Policy loans
|
$ | 2,174 | $ | 2,321 | $ | 2,208 | $ | 2,435 | ||||||||
|
Mortgage loans
|
5,938 | 5,091 | 6,469 | 5,654 | ||||||||||||
|
|
||||||||||||||||
|
Liabilities
|
||||||||||||||||
|
Other policyholder funds and benefits payable [1]
|
$ | 12,330 | $ | 12,513 | $ | 14,839 | $ | 14,576 | ||||||||
|
Commercial paper [2]
|
— | — | 374 | 374 | ||||||||||||
|
Senior notes [3]
|
4,054 | 4,037 | 4,052 | 3,119 | ||||||||||||
|
Junior subordinated debentures [3]
|
1,717 | 2,338 | 1,703 | 1,420 | ||||||||||||
|
Consumer notes [4]
|
1,131 | 1,194 | 1,205 | 1,188 | ||||||||||||
| [1] |
Excludes guarantees on variable annuities, group accident and health and universal life insurance contracts, including corporate
owned life insurance.
|
|
| [2] |
Included in short-term debt in the Consolidated Balance Sheets. As of December 31, 2009, The Hartford has no commercial paper
outstanding.
|
|
| [3] |
Included in long-term debt in the Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
|
|
| [4] |
Excludes amounts carried at fair value and included in disclosures above.
|
As of December 31, 2009, included in other liabilities in the Consolidated Balance Sheet are
carrying amounts of $273 and $78 for deposits and Federal Home Loan Bank advances, respectively,
related to Federal Trust Corporation. These carrying amounts approximate fair value.
The Company has not made any changes in its valuation methodologies for the following assets and
liabilities since December 31, 2008.
| • |
Fair value for policy loans and consumer notes were estimated using discounted cash flow
calculations using current interest rates.
|
| • |
Fair values for mortgage loans were estimated using discounted cash flow calculations based
on current lending rates for similar type loans. Current lending rates reflect changes in
credit spreads and the remaining terms of the loans.
|
| • |
Other policyholder funds and benefits payable, not carried at fair value, is determined by
estimating future cash flows, discounted at the current market rate.
|
| • |
Carrying amounts approximate fair value for commercial paper. As of December 31, 2009, the
Company has no outstanding commercial paper.
|
| • |
Fair value for long-term debt is based primarily on market quotations from independent
third-party pricing services.
|
F-26
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements — Guaranteed Living Benefits
These disclosures provide information as to the extent to which the Company uses fair value to
measure financial instruments related to guaranteed living benefits and the related hedging program
and information about the inputs used to value those financial instruments to allow users to assess
the relative reliability of the measurements. The following tables present assets and
(liabilities) related to the guaranteed living benefits program carried at fair value by hierarchy
level.
| December 31, 2009 | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Significant | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Assets accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Variable annuity hedging derivatives
|
$ | 9 | $ | — | $ | — | $ | 9 | ||||||||
|
Macro hedge program
|
203 | 8 | 16 | 179 | ||||||||||||
|
Reinsurance recoverable for U.S. guaranteed minimum withdrawal benefit (“GMWB”)
|
347 | — | — | 347 | ||||||||||||
|
|
||||||||||||||||
|
Total assets accounted for at fair value on a recurring basis
|
$ | 559 | $ | 8 | $ | 16 | $ | 535 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||
|
U.S. guaranteed withdrawal benefits
|
$ | (1,957 | ) | $ | — | $ | — | $ | (1,957 | ) | ||||||
|
International guaranteed withdrawal benefits
|
(45 | ) | — | — | (45 | ) | ||||||||||
|
International other guaranteed living benefits
|
2 | — | — | 2 | ||||||||||||
|
Variable annuity hedging derivatives
|
43 | — | (184 | ) | 227 | |||||||||||
|
Macro hedge program
|
115 | (2 | ) | 6 | 111 | |||||||||||
|
|
||||||||||||||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$ | (1,842 | ) | $ | (2 | ) | $ | (178 | ) | $ | (1,662 | ) | ||||
|
|
||||||||||||||||
| December 31, 2008 | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Significant | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Assets accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Variable annuity hedging derivatives
|
$ | 600 | $ | — | $ | 13 | $ | 587 | ||||||||
|
Reinsurance recoverable for U.S. GMWB
|
1,302 | — | — | 1,302 | ||||||||||||
|
|
||||||||||||||||
|
Total assets accounted for at fair value on a recurring basis
|
$ | 1,902 | $ | — | $ | 13 | $ | 1,889 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||
|
U.S. Guaranteed withdrawal benefits
|
$ | (6,526 | ) | $ | — | $ | — | $ | (6,526 | ) | ||||||
|
International guaranteed withdrawal benefits
|
(94 | ) | — | — | (94 | ) | ||||||||||
|
International other guaranteed living benefits
|
— | — | — | — | ||||||||||||
|
Variable annuity hedging derivatives
|
2,064 | — | 14 | 2,050 | ||||||||||||
|
Macro hedge program
|
137 | — | — | 137 | ||||||||||||
|
|
||||||||||||||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$ | (4,419 | ) | $ | — | $ | 14 | $ | (4,433 | ) | ||||||
|
|
||||||||||||||||
F-27
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements — Guaranteed Living Benefits (continued)
Product Derivatives
The Company currently offers certain variable annuity products with a guaranteed minimum withdrawal
benefit (“GMWB”) rider in the U.S., and formerly offered GMWBs in the U.K. and Japan. The GMWB
represents an embedded derivative in the variable annuity contract. When it is determined that (1)
the embedded derivative possesses economic characteristics that are not clearly and closely related
to the economic characteristics of the host contract, and (2) a separate instrument with the same
terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host
for measurement purposes. The embedded derivative, which is reported with the host instrument in
the consolidated balance sheets, is carried at fair value with changes in fair value reported in
net realized capital gains and losses. The Company’s GMWB liability is reported in other
policyholder funds.
In valuing the embedded derivative, the Company attributes to the derivative a portion of the fees
collected from the contract holder equal to the present value of future GMWB claims (the
“Attributed Fees”). All changes in the fair value of the embedded derivative are recorded in net
realized capital gains and losses. The excess of fees collected from the contract holder over the
Attributed Fees are associated with the host variable annuity contract and reported in fee income.
U.S. GMWB Reinsurance Derivative
The Company has reinsurance arrangements in place to transfer a portion of its risk of loss due to
GMWB. These arrangements are recognized as derivatives and carried at fair value in reinsurance
recoverables. Changes in the fair value of the reinsurance agreements are reported in net realized
capital gains and losses.
The fair value of the U.S. GMWB reinsurance derivative is calculated as an aggregation of the
components described in the Living Benefits Required to be Fair Valued discussion below and is
modeled using significant unobservable policyholder behavior inputs, identical to those used in
calculating the underlying liability, such as lapses, fund selection, resets and withdrawal
utilization and risk margins.
Adoption of Fair Value Accounting
The impact on January 1, 2008 of adopting fair value accounting for guaranteed benefits and the
related reinsurance was a reduction to net income of $220, after the effects of DAC amortization
and income taxes.
Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable)
Fair values for GMWB and guaranteed minimum accumulation benefit (“GMAB”) contracts are calculated
based upon internally developed models because active, observable markets do not exist for those
items. The fair value of the Company’s guaranteed benefit liabilities, classified as embedded
derivatives, and the related reinsurance and customized freestanding derivatives is calculated as
an aggregation of the following components: Best Estimate Claims Costs, calculated based on
actuarial and capital market assumptions related to projected cash flows over the lives of the
contracts; Credit Standing Adjustment; and Margins, representing an amount that market participants
would require for the risk that the Company’s assumptions about policyholder behavior could differ
from actual experience. The resulting aggregation is reconciled or calibrated, if necessary, to
market information that is, or may be, available to the Company, but may not be observable by other
market participants, including reinsurance discussions and transactions. The Company believes the
aggregation of these components, as necessary and as reconciled or calibrated to the market
information available to the Company, results in an amount that the Company would be required to
transfer or receive, for an asset, to or from market participants in an active liquid market, if
one existed, for those market participants to assume the risks associated with the guaranteed
minimum benefits and the related reinsurance and customized derivatives. The fair value is likely
to materially diverge from the ultimate settlement of the liability as the Company believes
settlement will be based on our best estimate assumptions rather than those best estimate
assumptions plus risk margins. In the absence of any transfer of the guaranteed benefit liability
to a third party, the release of risk margins is likely to be reflected as realized gains in future
periods’ net income. Each component is unobservable in the marketplace and requires subjectivity
by the Company in determining their value.
The Company recognized the following realized gains and losses due to updates to the living
benefits models for the U.S. GMWB:
| • |
The relative outperformance (underperformance) of the underlying actively managed funds as
compared to their respective indices resulting in a gain (loss) of approximately $550, $(355)
and $(2) for the years ended December 31, 2009, 2008 and 2007, respectively; and
|
| • |
Assumption updates, including policyholder behavior assumptions, affected best estimates
and margins for a total realized gain pre-tax of $566 and $470 for the years ended December
31, 2009 and 2008, respectively. For the year ended December 31, 2007, these updates affected
best estimates resulting in a pre-tax loss of $(158).
|
| • |
The credit standing adjustment, resulting in a pre-tax gain of approximately $154 and $6
for the years ended December 31, 2009 and 2008, respectively.
|
F-28
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements — Guaranteed Living Benefits (continued)
The tables below provide a fair value roll forward for the twelve months ending December 31,
2009 and 2008, for the financial instruments related to the Guaranteed Living Benefits Program
classified as Levels 1, 2 and 3.
Roll-forward of Financial Instruments related to the Guaranteed Living Benefits Program Measured at
Fair Value on a Recurring Basis for the twelve months from January 1, 2009 to December 31, 2009
| Changes in unrealized | ||||||||||||||||||||||||||||
| gains (losses) | ||||||||||||||||||||||||||||
| Fair value | Total realized/unrealized | Purchases, | included in net income | |||||||||||||||||||||||||
| as of | gains (losses) included in: | issuances, | Transfers in | Fair value | related to financial | |||||||||||||||||||||||
| January 1, | Net income | and | and/or (out) | as of | instruments still held at | |||||||||||||||||||||||
| 2009 | [1] [6] | OCI [2] | Settlements [3] | of Level 3 | December 31, 2009 | December 31, 2009 [1] | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Variable annuity hedging
derivatives [5]
|
||||||||||||||||||||||||||||
|
Levels 1 and 2
|
$ | 27 | $ | (1,175 | ) | $ | — | $ | 964 | $ | — | $ | (184 | ) | $ | [4] | ||||||||||||
|
Level 3
|
2,637 | (1,059 | ) | — | (1,342 | ) | — | 236 | (635 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total variable annuity hedging derivatives
|
2,664 | (2,234 | ) | — | (378 | ) | — | 52 | ||||||||||||||||||||
|
Reinsurance recoverable for
GMWB [1]
|
1,302 | (988 | ) | — | 33 | — | 347 | (988 | ) | |||||||||||||||||||
|
U.S. guaranteed withdrawal
benefits — Level 3
|
(6,526 | ) | 4,686 | — | (117 | ) | — | (1,957 | ) | 4,686 | ||||||||||||||||||
|
International guaranteed
withdrawal benefits — Level 3
|
(94 | ) | 62 | (3 | ) | (10 | ) | — | (45 | ) | 62 | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total Guaranteed withdrawal benefits net of reinsurance and hedging derivatives
|
(2,654 | ) | 1,526 | (3 | ) | (472 | ) | — | (1,603 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Macro hedge program [5]
|
||||||||||||||||||||||||||||
|
Levels 1 and 2
|
— | (311 | ) | — | 339 | — | 28 | [4] | ||||||||||||||||||||
|
Level 3
|
137 | (584 | ) | — | 737 | — | 290 | (535 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total macro hedge program
|
137 | (895 | ) | — | 1,076 | — | 318 | |||||||||||||||||||||
|
International other guaranteed
living benefits — Level 3
|
— | 5 | — | (3 | ) | — | 2 | 5 | ||||||||||||||||||||
| [1] |
The Company classifies gains and losses on GMWB reinsurance derivatives and Guaranteed Living Benefit embedded derivatives as
unrealized gains (losses) for purposes of disclosure in this table because it is impracticable to track on a contract-by-contract
basis the realized gains (losses) for these derivatives and embedded derivatives.
|
|
| [2] |
All amounts are before income taxes and amortization of DAC.
|
|
| [3] |
The ‘Purchases, issuances, and settlements’ primarily relates to the receipt of cash on futures and option contracts classified as
Level 1 and interest rate, currency and credit default swaps classified as Level 2.
|
|
| [4] |
Disclosure of changes in unrealized gains (losses) are not required for Levels 1 and 2. Information presented is for Level 3 only.
|
|
| [5] |
The variable annuity hedging derivatives and the macro hedge program derivatives are reported in this table on a net basis for
asset/(liability) positions and reported on the consolidated balance sheet in other investments and other liabilities.
|
|
| [6] |
Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
|
F-29
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements — Guaranteed Living Benefits Program (continued)
Roll-forward of Financial Instruments related to the Guaranteed Living Benefits Program
Measured at Fair Value on a Recurring Basis for the twelve months from January 1, 2008 to December
31, 2008
| Changes in unrealized | ||||||||||||||||||||||||||||
| gains (losses) | ||||||||||||||||||||||||||||
| Fair value | Total realized/unrealized | Purchases, | included in net income | |||||||||||||||||||||||||
| as of | gains (losses) included in: | issuances, | Transfers in | Fair value | related to financial | |||||||||||||||||||||||
| January 1, | Net income | and | and/or (out) | as of | instruments still held at | |||||||||||||||||||||||
| 2008 | [2] | OCI [3] | Settlements [5] | of Level 3 | December 31, 2008 | December 31, 2008 [2] | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Variable annuity hedging
derivatives [6]
|
||||||||||||||||||||||||||||
|
Levels 1 and 2
|
$ | (12 | ) | $ | 1,363 | $ | — | $ | (1,324 | ) | $ | — | $ | 27 | $ | [7] | ||||||||||||
|
Level 3
|
655 | 2,011 | — | (29 | ) | — | 2,637 | 1,893 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total variable annuity hedging derivatives
|
643 | 3,374 | — | (1,353 | ) | — | 2,664 | |||||||||||||||||||||
|
Total reinsurance recoverable for GMWB [1] [2] [4]
|
238 | 962 | — | 102 | — | 1,302 | 962 | |||||||||||||||||||||
|
U.S. guaranteed withdrawal benefits [2] — Level 3
|
(1,433 | ) | (4,967 | ) | — | (126 | ) | — | (6,526 | ) | (4,967 | ) | ||||||||||||||||
|
International guaranteed withdrawal benefits Level 3
|
(17 | ) | (82 | ) | 11 | (6 | ) | — | (94 | ) | (83 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total Guaranteed withdrawal benefits net of
reinsurance and hedging derivatives
|
(569 | ) | (713 | ) | 11 | (1,383 | ) | — | (2,654 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Macro hedge program [6]
|
||||||||||||||||||||||||||||
|
Levels 1 and 2
|
— | (11 | ) | — | 11 | — | — | [7] | ||||||||||||||||||||
|
Level 3
|
18 | 85 | — | 34 | — | 137 | 102 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total macro hedge program
|
18 | 74 | — | 45 | — | 137 | ||||||||||||||||||||||
|
International other guaranteed living benefits Level 3
|
(22 | ) | 25 | (1 | ) | (2 | ) | — | — | 25 | ||||||||||||||||||
| [1] |
The January 1, 2008 fair value of $238 includes the pre-transition adjustment fair value of $128 and transitional adjustment of $110.
|
|
| [2] |
The Company classifies all the gains and losses on GMWB reinsurance derivatives and GMWB embedded derivatives as unrealized
gains/losses for purposes of disclosure in this table because it is impracticable to track on a contract-by-contract basis the
realized gains/losses for these derivatives and embedded derivatives.
|
|
| [3] |
All amounts are before income taxes and amortization of DAC.
|
|
| [4] |
During July 2008, the Company reinsured, with a third party, U.S. GMWB risks associated with approximately $7.8 billion of account
value sold between 2003 and 2006. The reinsurance agreement is an 80% quota-share agreement. The third party’s financial strength is
rated A+ by A.M. Best, AA- by Standard and Poor’s and Aa2 by Moody’s. The reinsurance agreement is accounted for as a free-standing
derivative.
|
|
| [5] |
The ‘Purchases, issuances, and settlements’ primarily relates to the receipt of cash on futures and option contracts classified as
Level 1 and interest rate, currency and credit default swaps classified as Level 2.
|
|
| [6] |
The variable annuity hedging derivatives and the macro hedge program derivatives are reported in this table on a net basis for
asset/(liability) positions and reported on the consolidated balance sheet in other investments and other liabilities.
|
|
| [7] |
Disclosure of changes in unrealized gains (losses) is not required for Levels 1 and 2. Information presented is for Level 3 only.
|
F-30
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments
Significant Investment Accounting Policies
Overview
The Company’s investments in fixed maturities include bonds, redeemable preferred stock and
commercial paper. These investments, along with certain equity securities, which include common
and non-redeemable preferred stocks, are classified as AFS and are carried at fair value. The
after-tax difference from cost or amortized cost is reflected in stockholders’ equity as a
component of Other Comprehensive Income (Loss) (“OCI”), after adjustments for the effect of
deducting the life and pension policyholders’ share of the immediate participation guaranteed
contracts and certain life and annuity deferred policy acquisition costs and reserve adjustments.
The equity investments associated with the variable annuity products offered in Japan are recorded
at fair value and are classified as trading with changes in fair value recorded in net investment
income. Policy loans are carried at outstanding balance. Mortgage loans are recorded at the
outstanding principal balance adjusted for amortization of premiums or discounts and net of
valuation allowances. Short-term investments are carried at amortized cost, which approximates
fair value. Limited partnerships and other alternative investments are reported at their carrying
value with the change in carrying value accounted for under the equity method and accordingly the
Company’s share of earnings are included in net investment income. Recognition of limited
partnerships and other alternative investment income is delayed due to the availability of the
related financial information, as private equity and other funds are generally on a three-month
delay and hedge funds are on a one-month delay. Accordingly, income for the years ended December
31, 2009, 2008 and 2007 may not include the full impact of current year changes in valuation of the
underlying assets and liabilities, which are generally obtained from the limited partnerships and
other alternative investments’ general partners. Other investments primarily consist of
derivatives instruments which are carried at fair value.
Recognition and Presentation of Other-Than-Temporary Impairments
In April 2009, the FASB updated the guidance related to the recognition and presentation of
other-than-temporary impairments which modifies the recognition of other-than-temporary impairment
(“impairment”) losses for debt securities. This new guidance is also applied to certain equity
securities with debt-like characteristics (collectively “debt securities”). Under the new
guidance, a debt security is deemed to be other-than-temporarily impaired if it meets the following
conditions: 1) the Company intends to sell or it is more likely than not the Company will be
required to sell the security before a recovery in value, or 2) the Company does not expect to
recover the entire amortized cost basis of the security. If the Company intends to sell or it is
more likely than not the Company will be required to sell the security before a recovery in value,
a charge is recorded in net realized capital losses equal to the difference between the fair value
and amortized cost basis of the security. For those other-than-temporarily impaired debt
securities which do not meet the first condition and for which the Company does not expect to
recover the entire amortized cost basis, the difference between the security’s amortized cost basis
and the fair value is separated into the portion representing a credit impairment, which is
recorded in net realized capital losses, and the remaining impairment, which is recorded in OCI.
Generally, the Company determines a security’s credit impairment as the difference between its
amortized cost basis and its best estimate of expected future cash flows discounted at the
security’s effective yield prior to impairment. The remaining non-credit impairment, which is
recorded in OCI, is the difference between the security’s fair value and the Company’s best
estimate of expected future cash flows discounted at the security’s effective yield prior to the
impairment. The remaining non-credit impairment typically represents current market liquidity and
risk premiums. The previous amortized cost basis less the impairment recognized in net realized
capital losses becomes the security’s new cost basis. The Company accretes the new cost basis to
the estimated future cash flows over the expected remaining life of the security by prospectively
adjusting the security’s yield, if necessary. Prior to the adoption of this accounting guidance,
the Company recorded the entire difference between the fair value and cost or amortized cost basis
of the security in net realized capital losses unless the Company could assert the intent and
ability to hold the security for a period sufficient to allow for recovery of fair value to its
amortized cost basis.
The Company evaluates whether a credit impairment exists for debt securities by considering
primarily the following factors: (a) the length of time and extent to which the fair value has been
less than the amortized cost of the security, (b) changes in the financial condition, credit rating
and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated
interest and principal payments, (d) changes in the financial condition of the security’s
underlying collateral and (e) the payment structure of the security. The Company’s best estimate
of expected future cash flows used to determine the credit loss amount is a quantitative and
qualitative process that incorporates information received from third-party sources along with
certain internal assumptions and judgments regarding the future performance of the security. The
Company’s best estimate of future cash flows involves assumptions including, but not limited to,
various performance indicators, such as historical and projected default and recovery rates, credit
ratings, current delinquency rates, loan-to-value ratios and the possibility of obligor
re-financing. In addition, for securitized debt securities, the Company considers factors
including, but not limited to, commercial and residential property value declines that vary by
property type and location and average cumulative collateral loss rates that vary by vintage year.
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. In addition, projections of expected future debt
security cash flows may change based upon new information regarding the performance of the issuer
and/or underlying collateral such as changes in the projections of the underlying property value
estimates.
F-31
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
For equity securities where the decline in the fair value is deemed to be
other-than-temporary, a charge is recorded in net realized capital losses equal to the difference
between the fair value and cost basis of the security. The previous cost basis less the impairment
becomes the security’s new cost basis. The Company asserts its intent and ability to retain those
equity securities deemed to be temporarily impaired until the price recovers. Once identified,
these securities are systematically restricted from trading unless approved by a committee of
investment and accounting professionals (the “Committee”). The Committee will only authorize the
sale of these securities based on predefined criteria that relate to events that could not have
been reasonably foreseen. Examples of the criteria include, but are not limited to, the
deterioration in the issuer’s financial condition, security price declines, a change in regulatory
requirements or a major business combination or major disposition.
The primary factors considered in evaluating whether an impairment exists for an equity security
include, but are not limited to: (a) the length of time and extent to which the fair value has been
less than the cost of the security, (b) changes in the financial condition, credit rating and
near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated
payments and (d) the intent and ability of the Company to retain the investment for a period of
time sufficient to allow for recovery.
Mortgage Loan Valuation Allowances
Mortgage loans are considered to be impaired when management estimates that based upon current
information and events, it is probable that the Company will be unable to collect amounts due
according to the contractual terms of the loan agreement. Criteria used to determine if an
impairment exists include, but are not limited to: current and projected macroeconomic factors,
such as unemployment rates, as well as rental rates, occupancy levels, delinquency rates and
property values, and debt service coverage ratios. These assumptions require the use of
significant management judgment and include the probability and timing of borrower default and loss
severity estimates. In addition, projections of expected future cash flows may change based upon
new information regarding the performance of the borrower and/or underlying collateral such as
changes in the projections of the underlying property value estimates.
For mortgage loans that are deemed impaired, a valuation allowance is established for the
difference between the carrying amount and the Company’s share of either (a) the present value of
the expected future cash flows discounted at the loan’s original effective interest rate, (b) the
loan’s observable market price or (c) the fair value of the collateral. Additionally, a loss
contingency valuation allowance is established for estimated probable credit losses on certain
homogenous groups of loans. Changes in valuation allowances are recorded in net realized capital
gains and losses. Interest income on an impaired loan is accrued to the extent it is deemed
collectable and the loan continues to perform under its original or restructured terms. Interest
income on defaulted loans is recognized when received.
Net Realized Capital Gains and Losses
Net realized capital gains and losses from investment sales, after deducting the life and pension
policyholders’ share for certain products, are reported as a component of revenues and are
determined on a specific identification basis. Net realized capital gains and losses also result
from fair value changes in derivatives contracts (both free-standing and embedded) that do not
qualify, or are not designated, as a hedge for accounting purposes, and the change in value of
derivatives in certain fair-value hedge relationships. Impairments are recognized as net realized
capital losses in accordance with the Company’s impairment policy previously discussed. Foreign
currency transaction remeasurements are also included in net realized capital gains and losses.
Net Investment Income
Interest income from fixed maturities and mortgage loans is recognized when earned on the constant
effective yield method based on estimated timing of cash flows. The amortization of premium and
accretion of discount for fixed maturities also takes into consideration call and maturity dates
that produce the lowest yield. For securitized financial assets subject to prepayment risk, yields
are recalculated and adjusted periodically to reflect historical and/or estimated future repayments
using the retrospective method; however, if these investments are impaired, any yield adjustments
are made using the prospective method. Prepayment fees on fixed maturities and mortgage loans are
recorded in net investment income when earned. For limited partnerships and other alternative
investments, the equity method of accounting is used to recognize the Company’s share of earnings.
For impaired debt securities, the Company accretes the new cost basis to the estimated future cash
flows over the expected remaining life of the security by prospectively adjusting the security’s
yield, if necessary. The Company’s non-income producing investments were not material for the
years ended December 31, 2009, 2008 and 2007.
Net investment income on equity securities, trading, includes dividend income and the changes in
market value of the securities associated with the variable annuity products sold in Japan and the
United Kingdom. The returns on these policyholder-directed investments inure to the benefit of the
variable annuity policyholders but the underlying funds do not meet the criteria for separate
account reporting. Accordingly, these assets are reflected in the Company’s general account and
the returns credited to the policyholders are reflected in interest credited, a component of
benefits, losses and loss adjustment expenses.
F-32
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Significant Derivative Instruments Accounting Policies
Overview
The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards,
futures and options through one of four Company-approved objectives: to hedge risk arising from
interest rate, equity market, credit spread and issuer default, price or currency exchange rate
risk or volatility; to manage liquidity; to control transaction costs; or to enter into replication
transactions.
Interest rate, volatility, dividend, credit default and index swaps involve the periodic exchange
of cash flows with other parties, at specified intervals, calculated using agreed upon rates or
other financial variables and notional principal amounts. Generally, no cash or principal payments
are exchanged at the inception of the contract. Typically, at the time a swap is entered into, the
cash flow streams exchanged by the counterparties are equal in value.
Interest rate cap and floor contracts entitle the purchaser to receive from the issuer at specified
dates, the amount, if any, by which a specified market rate exceeds the cap strike interest rate or
falls below the floor strike interest rate, applied to a notional principal amount. A premium
payment is made by the purchaser of the contract at its inception and no principal payments are
exchanged.
Forward contracts are customized commitments that specify a rate of interest or currency
exchange rate to be paid or received on an obligation beginning on a future start date and
are typically settled in cash.
Financial futures are standardized commitments to either purchase or sell designated financial
instruments, at a future date, for a specified price and may be settled in cash or through delivery
of the underlying instrument. Futures contracts trade on organized exchanges. Margin requirements
for futures are met by pledging securities or cash, and changes in the futures’ contract values are
settled daily in cash.
Option contracts grant the purchaser, for a premium payment, the right to either purchase from or
sell to the issuer a financial instrument at a specified price, within a specified period or on a
stated date.
Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to
re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be a
periodic exchange of payments at specified intervals calculated using the agreed upon rates and
exchanged principal amounts.
The Company’s derivative transactions are used in strategies permitted under the derivative use
plans required by the State of Connecticut, the State of Illinois and the State of New York
insurance departments.
Accounting and Financial Statement Presentation of Derivative Instruments and Hedging Activities
Derivative instruments are recognized on the Consolidated Balance Sheets at fair value. For
balance sheet presentation purposes, the Company offsets the fair value amounts, income accruals,
and cash collateral held, related to 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.
On the date the derivative contract is entered into, the Company designates the derivative as (1) a
hedge of the fair value of a recognized asset or liability (“fair value” hedge), (2) a hedge of the
variability in cash flows of a forecasted transaction or of amounts to be received or paid related
to a recognized asset or liability (“cash flow” hedge), (3) a hedge of a net investment in a
foreign operation (“net investment” hedge) or (4) held for other investment and/or risk management
purposes, which primarily involve managing asset or liability related risks which do not qualify
for hedge accounting.
Fair Value Hedges
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge,
including foreign-currency fair value hedges, along with the changes in the fair value of the
hedged asset or liability that is attributable to the hedged risk, are recorded in current period
earnings with any differences between the net change in fair value of the derivative and the hedged
item representing the hedge ineffectiveness. Periodic cash flows and accruals of income/expense
(“periodic derivative net coupon settlements”) are recorded in the line item of the consolidated
statements of operations in which the cash flows of the hedged item are recorded.
Cash Flow Hedges
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge,
including foreign-currency cash flow hedges, are recorded in AOCI and are reclassified into
earnings when the variability of the cash flow of the hedged item impacts earnings. Gains and
losses on derivative contracts that are reclassified from AOCI to current period earnings are
included in the line item in the consolidated statements of operations in which the cash flows of
the hedged item are recorded. Any hedge ineffectiveness is recorded immediately in current period
earnings as net realized capital gains and losses. Periodic derivative net coupon settlements are
recorded in the line item of the consolidated statements of operations in which the cash flows of
the hedged item are recorded.
F-33
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Net Investment in a Foreign Operation Hedges
Changes in fair value of a derivative used as a hedge of a net investment in a foreign operation,
to the extent effective as a hedge, are recorded in the foreign currency translation adjustments
account within AOCI. Cumulative changes in fair value recorded in AOCI are reclassified into
earnings upon the sale or complete, or substantially complete, liquidation of the foreign entity.
Any hedge ineffectiveness is recorded immediately in current period earnings as net realized
capital gains and losses. Periodic derivative net coupon settlements are recorded in the line item
of the consolidated statements of operations in which the cash flows of the hedged item are
recorded.
Other Investment and/or Risk Management Activities
The Company’s other investment and/or risk management activities primarily relate to strategies
used to reduce economic risk or replicate permitted investments and do not receive hedge accounting
treatment. Changes in the fair value, including periodic derivative net coupon settlements, of
derivative instruments held for other investment and/or risk management purposes are reported in
current period earnings as net realized capital gains and losses.
Hedge Documentation and Effectiveness Testing
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the
designated changes in fair value or cash flow of the hedged item. At hedge inception, the Company
formally documents all relationships between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking each hedge transaction. The documentation
process includes linking derivatives that are designated as fair value, cash flow, or net
investment hedges to specific assets or liabilities on the balance sheet or to specific forecasted
transactions and defining the effectiveness and ineffectiveness testing methods to be used. The
Company also formally assesses both at the hedge’s inception and ongoing on a quarterly basis,
whether the derivatives that are used in hedging transactions have been and are expected to
continue to be highly effective in offsetting changes in fair values or cash flows of hedged items.
Hedge effectiveness is assessed using qualitative and quantitative methods. Qualitative methods
may include comparison of critical terms of the derivative to the hedged item. Quantitative
methods include regression or other statistical analysis of changes in fair value or cash flows
associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships are
measured each reporting period using the “Change in Variable Cash Flows Method”, the “Change in
Fair Value Method”, the “Hypothetical Derivative Method”, or the “Dollar Offset Method”.
Discontinuance of Hedge Accounting
The Company discontinues hedge accounting prospectively when (1) it is determined that the
derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a
hedged item; (2) the derivative is de-designated as a hedging instrument; or (3) the derivative
expires or is sold, terminated or exercised.
When hedge accounting is discontinued because it is determined that the derivative no longer
qualifies as an effective fair-value hedge, the derivative continues to be carried at fair value on
the balance sheet with changes in its fair value recognized in current period earnings.
When hedge accounting is discontinued because the Company becomes aware that it is not probable
that the forecasted transaction will occur, the derivative continues to be carried on the balance
sheet at its fair value, and gains and losses that were accumulated in AOCI are recognized
immediately in earnings.
In other situations in which hedge accounting is discontinued on a cash-flow hedge, including those
where the derivative is sold, terminated or exercised, amounts previously deferred in AOCI are
reclassified into earnings when earnings are impacted by the variability of the cash flow of the
hedged item.
Embedded Derivatives
The Company purchases and issues financial instruments and products that contain embedded
derivative instruments. When it is determined that (1) the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic characteristics of the
host contract, and (2) a separate instrument with the same terms would qualify as a derivative
instrument, the embedded derivative is bifurcated from the host for measurement purposes. The
embedded derivative, which is reported with the host instrument in the consolidated balance sheets,
is carried at fair value with changes in fair value reported in net realized capital gains and
losses.
F-34
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Credit Risk
The Company’s derivative counterparty exposure policy establishes market-based credit limits,
favors long-term financial stability and creditworthiness and typically requires credit
enhancement/credit risk reducing agreements. Credit risk is measured as the amount owed to the
Company based on current market conditions and potential payment obligations between the Company
and its counterparties. For each legal entity of the Company credit exposures are generally
quantified daily, netted by counterparty and collateral is pledged to and held by, or on behalf of,
the Company to the extent the current value of derivatives exceeds the contractual thresholds which
do not exceed $10. The Company also minimizes the credit risk in derivative instruments by
entering into transactions with high quality counterparties rated A2/A or better, which are
monitored and evaluated by the Company’s risk management team and reviewed by senior management.
In addition, the Company monitors counterparty credit exposure on a monthly basis to ensure
compliance with Company policies and statutory limitations. The Company also maintains a policy of
requiring that derivative contracts, other than exchange traded contracts, certain currency forward
contracts, and certain embedded derivatives, be governed by an International Swaps and Derivatives
Association Master Agreement which is structured by legal entity and by counterparty and permits
right of offset.
Net Investment Income (Loss)
| For the years ended December 31, | ||||||||||||
| (Before-tax) | 2009 | 2008 | 2007 | |||||||||
|
Fixed maturities
|
$ | 3,618 | $ | 4,310 | $ | 4,653 | ||||||
|
Equity securities, AFS
|
93 | 167 | 139 | |||||||||
|
Mortgage loans
|
316 | 333 | 293 | |||||||||
|
Policy loans
|
139 | 139 | 135 | |||||||||
|
Limited partnerships and other alternative investments
|
(341 | ) | (445 | ) | 255 | |||||||
|
Other investments
|
318 | (72 | ) | (161 | ) | |||||||
|
Investment expenses
|
(112 | ) | (97 | ) | (100 | ) | ||||||
|
|
||||||||||||
|
Total net investment income excluding equity securities, trading
|
4,031 | 4,335 | 5,214 | |||||||||
|
Equity securities, trading
|
3,188 | (10,340 | ) | 145 | ||||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
$ | 7,219 | $ | (6,005 | ) | $ | 5,359 | |||||
|
|
||||||||||||
The net unrealized gain (loss) on equity securities, trading, included in net investment
income during the years ended December 31, 2009, 2008 and 2007, was $3,391, $(9,626) and $(539),
respectively, substantially all of which have corresponding amounts credited to policyholders.
These amounts were not included in gross unrealized gains (losses).
Net Realized Capital Losses
| For the years ended December 31, | ||||||||||||
| (Before-tax) | 2009 | 2008 | 2007 | |||||||||
|
Gross gains on sales
|
$ | 1,056 | $ | 607 | $ | 374 | ||||||
|
Gross losses on sales
|
(1,397 | ) | (856 | ) | (291 | ) | ||||||
|
Net OTTI losses recognized in earnings
|
(1,508 | ) | (3,964 | ) | (483 | ) | ||||||
|
Japanese fixed annuity contract hedges, net [1]
|
47 | 64 | 18 | |||||||||
|
Periodic net coupon settlements on credit derivatives/Japan
|
(49 | ) | (33 | ) | (25 | ) | ||||||
|
Fair value measurement transition impact
|
— | (650 | ) | — | ||||||||
|
Results of variable annuity hedge program
|
||||||||||||
|
GMWB derivatives, net
|
1,526 | (713 | ) | (286 | ) | |||||||
|
Macro hedge program
|
(895 | ) | 74 | (12 | ) | |||||||
|
|
||||||||||||
|
Total results of variable annuity hedge program
|
631 | (639 | ) | (298 | ) | |||||||
|
Other, net [2]
|
(790 | ) | (447 | ) | (289 | ) | ||||||
|
|
||||||||||||
|
Net realized capital losses
|
$ | (2,010 | ) | $ | (5,918 | ) | $ | (994 | ) | |||
|
|
||||||||||||
| [1] |
Relates to derivative hedging instruments, excluding
periodic net coupon settlements, and is net of the Japanese
fixed annuity product liability adjustment for changes in the
dollar/yen exchange spot rate.
|
|
| [2] |
Consists of changes in fair value on non-qualifying
derivatives, hedge ineffectiveness on qualifying derivatives,
foreign currency gains and losses related to the internal
reinsurance of the Japan variable annuity business, which is
offset in AOCI, valuation allowances, approximately $300 of
losses in 2009 related to contingent obligations associated with
the Allianz transaction, and other investment gains and losses.
|
F-35
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Sales of Available-for-Sale Securities
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Fixed maturities
|
||||||||||||
|
Sale proceeds
|
$ | 41,973 | $ | 19,599 | $ | 21,968 | ||||||
|
Gross gains
|
755 | 511 | 424 | |||||||||
|
Gross losses
|
(1,272 | ) | (873 | ) | (276 | ) | ||||||
|
Equity securities, AFS
|
||||||||||||
|
Sale proceeds
|
$ | 941 | $ | 616 | $ | 468 | ||||||
|
Gross gains
|
429 | 38 | 28 | |||||||||
|
Gross losses
|
(151 | ) | (78 | ) | (15 | ) | ||||||
Sales of AFS securities were the result of the Company’s repositioning of its investment
portfolio throughout 2009.
Other-Than-Temporary Impairment Losses
The following table presents a roll-forward of the Company’s cumulative credit impairments on debt
securities held as of December 31, 2009.
| Credit Impairment | ||||
|
Balance as of January 1, 2009
|
$ | — | ||
|
Credit impairments remaining in retained earnings related to adoption of new accounting guidance in April 2009
|
(1,320 | ) | ||
|
Additions for credit impairments recognized on [1]:
|
||||
|
Securities not previously impaired
|
(840 | ) | ||
|
Securities previously impaired
|
(292 | ) | ||
|
Reductions for credit impairments previously recognized on:
|
||||
|
Securities that matured or were sold during the period
|
245 | |||
|
Securities that the Company intends to sell or more likely than not will be required to sell before recovery
|
3 | |||
|
Securities due to an increase in expected cash flows
|
4 | |||
|
|
||||
|
Balance as of December 31, 2009
|
$ | (2,200 | ) | |
|
|
||||
| [1] |
These additions are included in the net OTTI losses recognized in earnings of $1.5 billion
in the Consolidated Statements of Operations, as well as impairments on debt securities for
which the Company intended to sell and on equity securities.
|
Available-for-Sale Securities
The following table presents the Company’s AFS securities by type.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||||||
| Cost or | Gross | Gross | Non- | Cost or | Gross | Gross | ||||||||||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | Credit | Amortized | Unrealized | Unrealized | Fair | ||||||||||||||||||||||||||||
| Cost | Gains | Losses | Value | OTTI [1] | Cost | Gains | Losses | Value | ||||||||||||||||||||||||||||
|
ABS
|
$ | 3,040 | $ | 36 | $ | (553 | ) | $ | 2,523 | $ | (48 | ) | $ | 3,431 | $ | 6 | $ | (971 | ) | $ | 2,466 | |||||||||||||||
|
CDOs
|
4,054 | 27 | (1,189 | ) | 2,892 | (174 | ) | 4,655 | 2 | (2,045 | ) | 2,612 | ||||||||||||||||||||||||
|
CMBS
|
10,736 | 114 | (2,306 | ) | 8,544 | (6 | ) | 12,973 | 43 | (4,703 | ) | 8,313 | ||||||||||||||||||||||||
|
Corporate
|
35,318 | 1,368 | (1,443 | ) | 35,243 | (23 | ) | 31,059 | 623 | (4,501 | ) | 27,181 | ||||||||||||||||||||||||
|
Foreign govt./govt. agencies
|
1,376 | 52 | (20 | ) | 1,408 | — | 2,786 | 100 | (65 | ) | 2,821 | |||||||||||||||||||||||||
|
Municipal
|
12,125 | 318 | (378 | ) | 12,065 | (3 | ) | 11,406 | 202 | (953 | ) | 10,655 | ||||||||||||||||||||||||
|
RMBS
|
5,512 | 104 | (769 | ) | 4,847 | (185 | ) | 6,045 | 96 | (1,033 | ) | 5,108 | ||||||||||||||||||||||||
|
U.S. Treasuries
|
3,854 | 14 | (237 | ) | 3,631 | — | 5,883 | 112 | (39 | ) | 5,956 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total fixed maturities
|
76,015 | 2,033 | (6,895 | ) | 71,153 | (439 | ) | 78,238 | 1,184 | (14,310 | ) | 65,112 | ||||||||||||||||||||||||
|
Equity securities
|
1,333 | 80 | (192 | ) | 1,221 | — | 1,554 | 203 | (299 | ) | 1,458 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total AFS securities
|
$ | 77,348 | $ | 2,113 | $ | (7,087 | ) | $ | 72,374 | $ | (439 | ) | $ | 79,792 | $ | 1,387 | $ | (14,609 | ) | $ | 66,570 | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| [1] |
Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities
that also had a credit impairment. These losses are included in gross unrealized losses as of
December 31, 2009.
|
F-36
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
The following table presents the Company’s fixed maturities by contractual maturity year.
| December 31, 2009 | ||||||||
| Maturity | Amortized Cost | Fair Value | ||||||
|
One year or less
|
$ | 1,404 | $ | 1,418 | ||||
|
Over one year through five years
|
13,240 | 13,593 | ||||||
|
Over five years through ten years
|
14,165 | 14,366 | ||||||
|
Over ten years
|
23,864 | 22,970 | ||||||
|
|
||||||||
|
Subtotal
|
52,673 | 52,347 | ||||||
|
Mortgage-backed and asset-backed securities
|
23,342 | 18,806 | ||||||
|
|
||||||||
|
Total
|
$ | 76,015 | $ | 71,153 | ||||
|
|
||||||||
Estimated maturities may differ from contractual maturities due to security call or prepayment
provisions. Due to the potential for variability in payment spreads (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.
As of December 31, 2009, the Company was not exposed to any concentration of credit risk of a
single issuer greater than 10% of the Company’s stockholders’ equity other than U.S. government and
certain U.S. government agencies. Other than U.S. government and certain U.S. government agencies,
the Company’s three largest exposures by issuer were JP Morgan Chase & Co., Bank of America
Corporation and Wells Fargo & Co. which each comprised less than 0.5% of total invested assets. As
of December 31, 2008, the Company’s only exposure to any credit concentration risk of a single
issuer greater than 10% of the Company’s stockholders’ equity other than U.S. government and
certain U.S. government agencies was the Government of Japan, which represented $2.3 billion, or
25% of stockholders’ equity, and less than 2.0% of total invested assets. The Company’s second and
third largest exposures by issuer were the Government of Canada and JP Morgan Chase & Co., which
each comprised less than 0.5% of total invested assets.
The Company’s three largest exposures by sector as of December 31, 2009 and 2008 were commercial
real estate, basic industry and municipal investments which comprised approximately 12%, 10% and
10%, respectively, of total invested assets for 2009 and 13%, 9% and 9%, respectively, of total
invested assets for 2008.
F-37
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Security Unrealized Loss Aging
The following tables present the Company’s unrealized loss aging for AFS securities by type and
length of time the security was in a continuous unrealized loss position.
| December 31, 2009 | ||||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | ||||||||||||||||||||||||||||
| Cost | Value | Losses | Cost | Value | Losses | Cost | Value | Losses | ||||||||||||||||||||||||||||
|
ABS
|
$ | 445 | $ | 376 | $ | (69 | ) | $ | 1,574 | $ | 1,090 | $ | (484 | ) | $ | 2,019 | $ | 1,466 | $ | (553 | ) | |||||||||||||||
|
CDOs
|
1,649 | 1,418 | (231 | ) | 2,388 | 1,430 | (958 | ) | 4,037 | 2,848 | (1,189 | ) | ||||||||||||||||||||||||
|
CMBS
|
1,951 | 1,628 | (323 | ) | 6,330 | 4,347 | (1,983 | ) | 8,281 | 5,975 | (2,306 | ) | ||||||||||||||||||||||||
|
Corporate
|
5,715 | 5,314 | (401 | ) | 6,675 | 5,633 | (1,042 | ) | 12,390 | 10,947 | (1,443 | ) | ||||||||||||||||||||||||
|
Foreign govt./govt. agencies
|
543 | 530 | (13 | ) | 43 | 36 | (7 | ) | 586 | 566 | (20 | ) | ||||||||||||||||||||||||
|
Municipal
|
2,339 | 2,283 | (56 | ) | 2,184 | 1,862 | (322 | ) | 4,523 | 4,145 | (378 | ) | ||||||||||||||||||||||||
|
RMBS
|
855 | 787 | (68 | ) | 1,927 | 1,226 | (701 | ) | 2,782 | 2,013 | (769 | ) | ||||||||||||||||||||||||
|
U.S. Treasuries
|
2,592 | 2,538 | (54 | ) | 648 | 465 | (183 | ) | 3,240 | 3,003 | (237 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total fixed maturities
|
16,089 | 14,874 | (1,215 | ) | 21,769 | 16,089 | (5,680 | ) | 37,858 | 30,963 | (6,895 | ) | ||||||||||||||||||||||||
|
Equity securities
|
419 | 356 | (63 | ) | 676 | 547 | (129 | ) | 1,095 | 903 | (192 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total securities in an unrealized loss
|
$ | 16,508 | $ | 15,230 | $ | (1,278 | ) | $ | 22,445 | $ | 16,636 | $ | (5,809 | ) | $ | 38,953 | $ | 31,866 | $ | (7,087 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| December 31, 2008 | ||||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | ||||||||||||||||||||||||||||
| Cost | Value | Losses | Cost | Value | Losses | Cost | Value | Losses | ||||||||||||||||||||||||||||
|
ABS
|
$ | 1,190 | $ | 958 | $ | (232 | ) | $ | 2,092 | $ | 1,353 | $ | (739 | ) | $ | 3,282 | $ | 2,311 | $ | (971 | ) | |||||||||||||||
|
CDOs
|
688 | 440 | (248 | ) | 3,941 | 2,144 | (1,797 | ) | 4,629 | 2,584 | (2,045 | ) | ||||||||||||||||||||||||
|
CMBS
|
5,704 | 4,250 | (1,454 | ) | 6,647 | 3,398 | (3,249 | ) | 12,351 | 7,648 | (4,703 | ) | ||||||||||||||||||||||||
|
Corporate
|
16,604 | 14,145 | (2,459 | ) | 7,028 | 4,986 | (2,042 | ) | 23,632 | 19,131 | (4,501 | ) | ||||||||||||||||||||||||
|
Foreign govt./govt. agencies
|
1,263 | 1,211 | (52 | ) | 43 | 30 | (13 | ) | 1,306 | 1,241 | (65 | ) | ||||||||||||||||||||||||
|
Municipal
|
5,153 | 4,640 | (513 | ) | 2,578 | 2,138 | (440 | ) | 7,731 | 6,778 | (953 | ) | ||||||||||||||||||||||||
|
RMBS
|
731 | 546 | (185 | ) | 2,607 | 1,759 | (848 | ) | 3,338 | 2,305 | (1,033 | ) | ||||||||||||||||||||||||
|
U.S. Treasuries
|
4,120 | 4,083 | (37 | ) | 66 | 64 | (2 | ) | 4,186 | 4,147 | (39 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total fixed maturities
|
35,453 | 30,273 | (5,180 | ) | 25,002 | 15,872 | (9,130 | ) | 60,455 | 46,145 | (14,310 | ) | ||||||||||||||||||||||||
|
Equity securities
|
1,017 | 796 | (221 | ) | 277 | 199 | (78 | ) | 1,294 | 995 | (299 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total securities in an unrealized loss
|
$ | 36,470 | $ | 31,069 | $ | (5,401 | ) | $ | 25,279 | $ | 16,071 | $ | (9,208 | ) | $ | 61,749 | $ | 47,140 | $ | (14,609 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
As of December 31, 2009, AFS securities in an unrealized loss position, comprised of 3,807
securities, primarily related to CMBS, corporate securities primarily within the financial services
sector and CDOs which have experienced significant price deterioration. As of December 31, 2009,
69% of these securities were depressed less than 20% of amortized cost. The decline in unrealized
losses during 2009 was primarily attributable to credit spread tightening, impairments and, to a
lesser extent, sales, partially offset by rising interest rates. The Company neither has an
intention to sell nor does it expect to be required to sell the securities outlined above.
F-38
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Mortgage Loans
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
| Amortized | Valuation | Carrying | Amortized | Valuation | Carrying | |||||||||||||||||||
| Cost [1] | Allowance | Value | Cost [1] | Allowance | Value | |||||||||||||||||||
|
Agricultural
|
$ | 604 | $ | (8 | ) | $ | 596 | $ | 646 | $ | (11 | ) | $ | 635 | ||||||||||
|
Commercial
|
5,492 | (358 | ) | 5,134 | 5,849 | (15 | ) | 5,834 | ||||||||||||||||
|
Residential [2]
|
208 | — | 208 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total mortgage loans
|
$ | 6,304 | $ | (366 | ) | $ | 5,938 | $ | 6,495 | $ | (26 | ) | $ | 6,469 | ||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Amortized cost represents carrying value prior to valuation allowances, if any.
|
|
| [2] |
Represents residential mortgage loans held at Federal Trust Corporation, a company The Hartford acquired in June 2009.
For further information on Federal Trust Corporation, see Note 22.
|
The following table presents the activity within the Company’s valuation allowance for
mortgage loans. Included in the 2009 Additions are valuation allowances of $98 on mortgage loans
held for sale, which have a carrying value of $209 and are included in mortgage loans in the
Company’s Consolidated Balance Sheet as of December 31, 2009.
| 2009 | 2008 | |||||||
|
Balance as of January 1
|
$ | (26 | ) | $ | — | |||
|
Additions
|
(408 | ) | (26 | ) | ||||
|
Deductions
|
68 | — | ||||||
|
|
||||||||
|
Balance as of December 31
|
$ | (366 | ) | $ | (26 | ) | ||
|
|
||||||||
Mortgage Loans by Region
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Carrying | Percent of | Carrying | Percent of | |||||||||||||
| Value | Total | Value | Total | |||||||||||||
|
East North Central
|
$ | 125 | 2.1 | % | $ | 162 | 2.5 | % | ||||||||
|
Middle Atlantic
|
689 | 11.6 | % | 825 | 12.8 | % | ||||||||||
|
Mountain
|
138 | 2.3 | % | 223 | 3.4 | % | ||||||||||
|
New England
|
449 | 7.6 | % | 487 | 7.5 | % | ||||||||||
|
Pacific
|
1,377 | 23.2 | % | 1,495 | 23.1 | % | ||||||||||
|
South Atlantic [1]
|
1,213 | 20.4 | % | 1,102 | 17.0 | % | ||||||||||
|
West North Central
|
51 | 0.9 | % | 64 | 1.0 | % | ||||||||||
|
West South Central
|
297 | 5.0 | % | 333 | 5.2 | % | ||||||||||
|
Other [2]
|
1,599 | 26.9 | % | 1,778 | 27.5 | % | ||||||||||
|
|
||||||||||||||||
|
Total mortgage loans
|
$ | 5,938 | 100.0 | % | $ | 6,469 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| [1] |
Includes mortgage loans held at Federal Trust Corporation as of December 31, 2009.
|
|
| [2] |
Primarily represents multi-regional properties.
|
Mortgage Loans by Property Type
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Carrying | Percent of | Carrying | Percent of | |||||||||||||
| Value | Total | Value | Total | |||||||||||||
|
Agricultural
|
$ | 596 | 10.0 | % | $ | 635 | 9.8 | % | ||||||||
|
Industrial
|
1,068 | 18.0 | % | 1,118 | 17.3 | % | ||||||||||
|
Lodging
|
421 | 7.1 | % | 483 | 7.5 | % | ||||||||||
|
Multifamily
|
835 | 14.1 | % | 1,131 | 17.5 | % | ||||||||||
|
Office
|
1,727 | 29.1 | % | 1,885 | 29.1 | % | ||||||||||
|
Residential
|
208 | 3.5 | % | — | — | |||||||||||
|
Retail
|
712 | 12.0 | % | 858 | 13.3 | % | ||||||||||
|
Other
|
371 | 6.2 | % | 359 | 5.5 | % | ||||||||||
|
|
||||||||||||||||
|
Total mortgage loans
|
$ | 5,938 | 100.0 | % | $ | 6,469 | 100.0 | % | ||||||||
|
|
||||||||||||||||
F-39
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Variable Interest Entities
The Company is involved with VIEs primarily as a collateral manager and as an investor through
normal investment activities, as well as a means of accessing capital. This involvement includes
providing investment management and administrative services for a fee and holding ownership or
other interests as an investor.
Primary Beneficiary
The Company has performed a quantitative analysis and concluded that for those VIEs for which it
will absorb a majority of the expected losses or residual returns, it is the primary beneficiary
and therefore these VIEs were consolidated in the Company’s Consolidated Financial Statements.
Creditors have no recourse against the Company in the event of default by these VIEs. The Company
has no implied or unfunded commitments to these VIEs. The following table presents the carrying
value of assets and liabilities and the maximum exposure to loss relating to these VIEs.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
| Maximum | Maximum | |||||||||||||||||||||||
| Total | Total | Exposure | Total | Total | Exposure | |||||||||||||||||||
| Assets | Liabilities [1] | to Loss [2] | Assets | Liabilities [1] | to Loss [2] | |||||||||||||||||||
|
CDO
|
$ | 226 | $ | 32 | $ | 196 | $ | 339 | $ | 69 | $ | 257 | ||||||||||||
|
Limited partnerships
|
31 | 1 | 30 | 151 | 43 | 108 | ||||||||||||||||||
|
Other investments
|
111 | 20 | 87 | 249 | 59 | 221 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 368 | $ | 53 | $ | 313 | $ | 739 | $ | 171 | $ | 586 | ||||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Includes noncontrolling interest in limited partnerships and other
investments of $11 and $82 as of December 31, 2009 and 2008,
respectively, that is reported as a separate component of equity
in the Company’s Consolidated Balance Sheets.
|
|
| [2] |
The maximum exposure to loss represents the maximum loss amount
that the Company could recognize as a reduction in net investment
income or as a realized capital loss and is the consolidated
assets at cost net of liabilities.
|
The CDO represents a cash flow CLO for which the Company provides collateral management
services, earns a fee for those services and also holds investments in the debt issued by the CLO.
Limited partnerships represent hedge funds for which the Company holds a majority interest in the
equity of the funds as an investment. Other investments primarily represent investment trusts for
which the Company provides investment management services, earns a fee for those services and also
holds investments in the equity issued by the trusts. In 2009, a hedge fund and investment trust
were liquidated and, therefore, the Company was no longer deemed to be the primary beneficiary.
Accordingly, these two VIEs were deconsolidated.
Non-Primary Beneficiary
The Company has performed a quantitative analysis and concluded that for those VIEs, for which it
holds a significant variable interest but will not absorb a majority of the expected losses or
residual returns, the Company is not the primary beneficiary and, therefore, these VIEs were not
consolidated in the Company’s Consolidated Financial Statements. The Company has no implied or
unfunded commitments to these VIEs. Each of these investments has been held by the Company for
three years or less. The following table presents the carrying value of assets and liabilities and
the maximum exposure to loss relating to these VIEs.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
| Maximum | Maximum | |||||||||||||||||||||||
| Exposure | Exposure | |||||||||||||||||||||||
| Assets | Liabilities | to Loss | Assets | Liabilities | to Loss | |||||||||||||||||||
|
CDOs [1]
|
$ | 262 | $ | — | $ | 273 | $ | 311 | $ | — | $ | 364 | ||||||||||||
|
Other [2]
|
36 | 36 | 5 | 42 | 40 | 5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 298 | $ | 36 | $ | 278 | $ | 353 | $ | 40 | $ | 369 | ||||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Maximum exposure to loss represents the Company’s investment in securities issued by CDOs at cost.
|
|
| [2] |
Maximum exposure to loss represents issuance costs that were incurred to establish the contingent capital facility.
|
CDOs represent a cash flow CLO and two CDOs for which the Company provides collateral
management services, earns fees for those services and holds investments in the debt and/or
preferred equity issued by the CDOs. In 2009, one of the CDOs was liquidated. Other represents
the Company’s variable interest in the Glen Meadow ABC Trust. For further information on this
trust, see Note 14.
F-40
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Equity Method Investments
The Company has investments in limited partnerships and other alternative investments which include
hedge funds, mortgage and real estate funds, mezzanine debt funds, and private equity and other
funds (collectively, “limited partnerships”). These investments are accounted for under the equity
method and the Company’s maximum exposure to loss as of December 31, 2009 is limited to the total
carrying value of $1.8 billion. In addition, the Company has outstanding commitments totaling
approximately $886, to fund limited partnership and other alternative investments as of December
31, 2009. The Company’s investments in limited partnerships are generally of a passive nature in
that the Company does not take an active role in the management of the limited partnerships. In
2009, aggregate investment losses from limited partnerships and other alternative investments
exceeded 10% of the Company’s pre-tax consolidated net income. Accordingly, the Company is
disclosing aggregated summarized financial data for the Company’s limited partnership investments.
This aggregated summarized financial data does not represent the Company’s proportionate share of
limited partnership assets or earnings. Aggregate total assets of the limited partnerships in
which the Company invested totaled $80.7 billion and $81.2 billion as of December 31, 2009 and
2008, respectively. Aggregate total liabilities of the limited partnerships in which the Company
invested totaled $24.6 billion and $27.0 billion as of December 31, 2009 and 2008, respectively.
Aggregate net investment income (loss) of the limited partnerships in which the Company invested
totaled $(688), $(228) and $308 for the periods ended December 31, 2009, 2008 and 2007,
respectively. Aggregate net income (loss) of the limited partnerships in which the Company
invested totaled $(9.1) billion, $(19.7) billion and $4.5 billion for the periods ended December
31, 2009, 2008 and 2007, respectively. As of, and for the period ended, December 31, 2009, the
aggregated summarized financial data reflects the latest available financial information.
Derivative Instruments
The Company utilizes a variety of over-the-counter 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 risk or volatility. Replication
transactions are used as an economical means to synthetically replicate the characteristics and
performance of assets that would otherwise be permissible investments under the Company’s
investment policies. The Company also purchases and issues financial instruments and products that
either are accounted for as free-standing derivatives, such as certain reinsurance contracts, or
may contain features that are deemed to be embedded derivative instruments, such as the GMWB rider
included with certain variable annuity products.
Cash flow hedges
Interest rate swaps
Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed maturity
securities or interest payments on floating-rate guaranteed investment contracts to fixed rates.
These derivatives are predominantly used to better match cash receipts from assets with cash
disbursements required to fund liabilities.
The Company also enters into forward starting swap agreements to hedge the interest rate exposure
related to the purchase of fixed-rate securities or the anticipated future cash flows of
floating-rate fixed maturity securities due to changes in interest rates. These derivatives are
primarily structured to hedge interest rate risk inherent in the assumptions used to price certain
liabilities.
Forward rate agreements
Forward rate agreements are used to convert interest receipts on floating-rate securities to fixed
rates. These derivatives are used to lock in the forward interest rate curve and reduce income
volatility that results from changes in interest rates.
Foreign currency swaps
Foreign currency swaps are used to convert foreign denominated cash flows related to certain
investment receipts and liability payments to U.S. dollars in order to minimize cash flow
fluctuations due to changes in currency rates.
Fair value hedges
Interest rate swaps
Interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities
and fixed maturity securities due to fluctuations in interest rates.
Foreign currency swaps
Foreign currency swaps are used to hedge the changes in fair value of certain foreign denominated
fixed rate liabilities due to changes in foreign currency rates by swapping the fixed foreign
payments to floating rate U.S. dollar denominated payments.
F-41
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Non-qualifying strategies
Interest rate swaps, caps, floors, and futures
The Company uses interest rate swaps, caps, floors, and futures to manage duration between assets
and liabilities in certain investment portfolios. In addition, the Company enters into interest
rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original
swap. As of December 31, 2009 and 2008, the notional amount of interest rate swaps in offsetting
relationships was $7.3 billion and $6.8 billion, respectively.
Foreign currency swap and forwards
The Company enters into foreign currency swaps and forwards to convert the foreign currency
exposures to U.S. dollars in certain of its foreign denominated fixed maturity investments. The
Company also enters into foreign currency forward contracts that convert Euros to Yen in order to
economically hedge the foreign currency risk associated with certain assumed Japanese variable
annuity products.
Japan 3Win related foreign currency swaps
During the first quarter of 2009, the Company entered into foreign currency swaps to hedge the
foreign currency exposure related to the Japan 3Win product guaranteed minimum income benefit
(“GMIB”) fixed liability payments.
Japanese fixed annuity hedging instruments
The Company enters into currency rate swaps and forwards to mitigate the foreign currency exchange
rate and Yen interest rate exposures associated with the Yen denominated individual fixed annuity
product.
Credit derivatives that purchase credit protection
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 value on fixed
maturity securities. These contracts require the Company to pay a periodic fee in exchange for
compensation from the counterparty should the referenced security issuers experience a credit
event, as defined in the contract.
Credit derivatives that assume credit risk
Credit default swaps are used to assume credit risk related to an individual entity, referenced
index, or asset pool, as a part of replication transactions. These contracts entitle the Company
to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty
should the referenced security issuers experience a credit event, as defined in the contract. The
Company is also exposed to credit risk due to embedded derivatives associated with credit linked
notes.
Credit derivatives in offsetting positions
The Company enters into credit default swaps to terminate existing credit default swaps, thereby
offsetting the changes in value of the original swap going forward.
Equity index swaps, options, and futures
The Company offers certain equity indexed products, which may contain an embedded derivative that
requires bifurcation. The Company enters into S&P index swaps, futures and options to economically
hedge the equity volatility risk associated with these embedded derivatives. In addition, the
Company is exposed to bifurcated options embedded in certain fixed maturity investments.
Warrants
During the fourth quarter of 2008, the Company issued warrants to purchase the Company’s Series C
Non-Voting Contingent Convertible Preferred Stock, which were required to be accounted for as a
derivative liability at December 31, 2008. For further discussion of Allianz SE’s investment in
The Hartford, see Note 21. As of March 31, 2009, the warrants were no longer required to be
accounted for as derivatives and were reclassified to equity.
GMWB product derivatives
The Company offers certain variable annuity products with a GMWB rider in the U.S. and formerly in
the U.K. and Japan. The GMWB is a bifurcated embedded derivative that provides the policyholder
with a GRB if the account value is reduced to zero through a combination of market declines and
withdrawals. The GRB is generally equal to premiums less withdrawals. Certain contract provisions
can increase the GRB at contractholder election or after the passage of time. The notional value
of the embedded derivative is the GRB balance.
F-42
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
GMWB reinsurance contracts
The Company has entered into reinsurance arrangements to offset a portion of its risk exposure to
the GMWB for the remaining lives of covered variable annuity contracts. Reinsurance contracts
covering GMWB are accounted for as free-standing derivatives. The notional amount of the
reinsurance contracts is the GRB amount.
GMWB hedging instruments
The Company enters into derivative contracts to partially hedge exposure to the income volatility
associated with the portion of the GMWB liabilities which are not reinsured. These derivative
contracts include customized swaps, interest rate swaps and futures, and equity swaps, options, and
futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index. As of
December 31, 2009, the notional amount related to the GMWB hedging instruments is $15.6 billion and
consists of $10.8 billion of customized swaps, $1.8 billion of interest rate swaps and futures, and
$3.0 billion of equity swaps, options, and futures.
Macro hedge program
The Company utilizes equity options, currency options, and equity futures contracts to partially
hedge the statutory reserve impact of equity risk and foreign currency risk arising primarily from
guaranteed minimum death benefit (“GMDB”), GMIB and GMWB obligations against a decline in the
equity markets or changes in foreign currency exchange rates. As of December 31, 2009, the
notional amount related to the macro hedge program is $27.4 billion and consists of $25.1 billion
of equity options, $2.1 billion of currency options, and $0.2 billion of equity futures. The $27.4
billion of notional includes $1.2 billion of short put option contracts, therefore resulting in a
net notional amount for the macro hedge program of approximately $26.2 billion.
GMAB product derivatives
The GMAB rider associated with certain of the Company’s Japanese variable annuity products is
accounted for as a bifurcated embedded derivative. The GMAB provides the policyholder with their
initial deposit in a lump sum after a specified waiting period. The notional amount of the
embedded derivative is the Yen denominated GRB balance converted to U.S. dollars at the current
foreign spot exchange rate as of the reporting period date.
Contingent capital facility put option
The Company entered into a put option agreement that provides the Company the right to require a
third-party trust to purchase, at any time, The Hartford’s junior subordinated notes in a maximum
aggregate principal amount of $500. Under the put option agreement, The Hartford will pay premiums
on a periodic basis and will reimburse the trust for certain fees and ordinary expenses.
F-43
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Derivative Balance Sheet Classification
The table below summarizes the balance sheet classification of the Company’s derivative related
fair value amounts, as well as the gross asset and liability fair value amounts. The fair value
amounts presented do not include income accruals or cash collateral held amounts, which are netted
with derivative fair value amounts to determine balance sheet presentation. Derivatives in the
Company’s separate accounts are not included because the associated gains and losses accrue
directly to policyholders. The Company’s derivative instruments are held for risk management
purposes, unless otherwise noted in the table below. 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.
| Asset | Liability | |||||||||||||||||||||||||||||||
| Net Derivatives | Derivatives | Derivatives | ||||||||||||||||||||||||||||||
| Notional Amount | Fair Value | Fair Value | Fair Value | |||||||||||||||||||||||||||||
| Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |||||||||||||||||||||||||
| Hedge Designation/ Derivative Type | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||
|
Cash flow hedges
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | 11,170 | $ | 9,030 | $ | 123 | $ | 640 | $ | 294 | $ | 643 | $ | (171 | ) | $ | (3 | ) | ||||||||||||||
|
Forward rate agreements
|
6,355 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Foreign currency swaps
|
381 | 1,210 | (3 | ) | (7 | ) | 30 | 154 | (33 | ) | (161 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total cash flow hedges
|
17,906 | 10,240 | 120 | 633 | 324 | 797 | (204 | ) | (164 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Fair value hedges
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
1,745 | 2,138 | (21 | ) | (86 | ) | 16 | 41 | (37 | ) | (127 | ) | ||||||||||||||||||||
|
Foreign currency swaps
|
696 | 696 | (9 | ) | (57 | ) | 53 | 47 | (62 | ) | (104 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total fair value hedges
|
2,441 | 2,834 | (30 | ) | (143 | ) | 69 | 88 | (99 | ) | (231 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Non-qualifying strategies
|
||||||||||||||||||||||||||||||||
|
Interest rate contracts
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps, caps, floors, and futures
|
8,355 | 8,156 | (84 | ) | (97 | ) | 250 | 931 | (334 | ) | (1,028 | ) | ||||||||||||||||||||
|
Foreign exchange contracts
|
||||||||||||||||||||||||||||||||
|
Foreign currency swaps and forwards
|
1,296 | 1,372 | (21 | ) | 56 | 14 | 68 | (35 | ) | (12 | ) | |||||||||||||||||||||
|
Japan 3Win related foreign currency swaps
|
2,514 | — | (19 | ) | — | 35 | — | (54 | ) | — | ||||||||||||||||||||||
|
Japanese fixed annuity hedging instruments
|
2,271 | 2,334 | 316 | 383 | 319 | 383 | (3 | ) | — | |||||||||||||||||||||||
|
Credit contracts
|
||||||||||||||||||||||||||||||||
|
Credit derivatives that purchase credit protection
|
2,606 | 3,668 | (50 | ) | 340 | 45 | 361 | (95 | ) | (21 | ) | |||||||||||||||||||||
|
Credit derivatives that assume credit risk [1]
|
1,158 | 1,199 | (240 | ) | (403 | ) | 2 | — | (242 | ) | (403 | ) | ||||||||||||||||||||
|
Credit derivatives in offsetting positions
|
6,176 | 2,626 | (71 | ) | (11 | ) | 185 | 125 | (256 | ) | (136 | ) | ||||||||||||||||||||
|
Equity contracts
|
||||||||||||||||||||||||||||||||
|
Equity index swaps, options, and futures
|
220 | 256 | (16 | ) | (16 | ) | 3 | 3 | (19 | ) | (19 | ) | ||||||||||||||||||||
|
Warrants [1]
|
— | 869 | — | (163 | ) | — | — | — | (163 | ) | ||||||||||||||||||||||
|
Variable annuity hedge program
|
||||||||||||||||||||||||||||||||
|
GMWB product derivatives [2]
|
47,329 | 48,767 | (2,002 | ) | (6,620 | ) | — | — | (2,002 | ) | (6,620 | ) | ||||||||||||||||||||
|
GMWB reinsurance contracts
|
10,301 | 11,437 | 347 | 1,302 | 347 | 1,302 | — | — | ||||||||||||||||||||||||
|
GMWB hedging instruments
|
15,567 | 18,620 | 52 | 2,664 | 264 | 2,697 | (212 | ) | (33 | ) | ||||||||||||||||||||||
|
Macro hedge program
|
27,448 | 2,188 | 318 | 137 | 558 | 137 | (240 | ) | — | |||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||
|
GMAB product derivatives [2]
|
226 | 206 | 2 | — | 2 | — | — | — | ||||||||||||||||||||||||
|
Contingent capital facility put option
|
500 | 500 | 36 | 42 | 36 | 42 | — | — | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total non-qualifying strategies
|
125,967 | 102,198 | (1,432 | ) | (2,386 | ) | 2,060 | 6,049 | (3,492 | ) | (8,435 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total cash flow hedges, fair value hedges, and
non-qualifying strategies
|
$ | 146,314 | $ | 115,272 | $ | (1,342 | ) | $ | (1,896 | ) | $ | 2,453 | $ | 6,934 | $ | (3,795 | ) | $ | (8,830 | ) | ||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance Sheet Location
|
||||||||||||||||||||||||||||||||
|
Fixed maturities, available-for-sale
|
$ | 269 | $ | 304 | $ | (8 | ) | $ | (3 | ) | $ | — | $ | — | $ | (8 | ) | $ | (3 | ) | ||||||||||||
|
Other investments
|
24,006 | 18,667 | 390 | 1,576 | 492 | 2,172 | (102 | ) | (596 | ) | ||||||||||||||||||||||
|
Other liabilities
|
64,061 | 35,763 | (56 | ) | 1,862 | 1,612 | 3,460 | (1,668 | ) | (1,598 | ) | |||||||||||||||||||||
|
Consumer notes
|
64 | 70 | (5 | ) | (5 | ) | — | — | (5 | ) | (5 | ) | ||||||||||||||||||||
|
Reinsurance recoverables
|
10,301 | 11,437 | 347 | 1,302 | 347 | 1,302 | — | — | ||||||||||||||||||||||||
|
Other policyholder funds and benefits payable
|
47,613 | 49,031 | (2,010 | ) | (6,628 | ) | 2 | — | (2,012 | ) | (6,628 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total derivatives
|
$ | 146,314 | $ | 115,272 | $ | (1,342 | ) | $ | (1,896 | ) | $ | 2,453 | $ | 6,934 | $ | (3,795 | ) | $ | (8,830 | ) | ||||||||||||
|
|
||||||||||||||||||||||||||||||||
| [1] |
The derivative instruments related to these hedging strategies are held for other investment purposes.
|
|
| [2] |
These derivatives are embedded within liabilities and are not held for risk management purposes.
|
F-44
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Change in Notional Amount
The increase in notional amount of derivatives since December 31, 2008, was primarily related to
derivatives associated with the macro hedge program, while GMWB related derivatives decreased, as a
result of the Company rebalancing its risk management strategy to place a greater relative emphasis
on the protection of statutory surplus. Approximately $1.2 billion of the $25.3 billion increase
in the macro hedge notional amount represents short put option contracts therefore resulting in a
net increase in notional of approximately $24.1 billion. In addition, during the fourth quarter of
2009, the Company entered into approximately $6.4 billion notional of forward rate agreements to
hedge short term interest rate exposure. This $6.4 billion notional is comprised of a series of
one month forward contracts that are hedging the variability of cash flows related to coupon
payments on $555 of variable rate securities for consecutive monthly periods during 2010.
Change in Fair Value
The increase in the total fair value of derivative instruments since December 31, 2008, was
primarily related to a net increase in fair value of all GMWB related derivatives, partially offset
by a decline in fair value of interest rate derivatives and credit derivatives.
| • |
The net improvement in the fair value of GMWB related derivatives is primarily due to
liability model assumption updates related to favorable policyholder
experience, the relative outperformance of the underlying actively
managed funds as compared to their respective indices, and the impacts of the Company’s own
credit standing. Additional improvements in the net fair value of GMWB related derivatives
include lower implied market volatility and a general increase in long-term interest rates,
partially offset by rising equity markets. For more information on the policyholder behavior
and liability model assumption updates, see Note 4a.
|
| • |
The fair value of interest rate derivatives used in cash flow hedge relationships declined
due to rising long-term interest rates.
|
| • |
The fair value related to credit derivatives that economically hedge fixed maturity
securities decreased as a result of credit spreads tightening. This decline was partially
offset by an increase in the fair value related to credit derivatives that assume credit risk
as a part of replication transactions.
|
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective
portion of 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.
Gains and losses on the derivative representing hedge ineffectiveness are recognized in current
earnings. All components of each derivative’s gain or loss were included in the assessment of
hedge effectiveness.
The following table presents the components of the gain or loss on derivatives that qualify as cash
flow hedges:
Derivatives in Cash Flow Hedging Relationships
| Net Realized Capital Gains (Losses) | ||||||||||||||||||||||||
| Gain (Loss) Recognized in OCI | Recognized in Income | |||||||||||||||||||||||
| on Derivative (Effective Portion) | on Derivative (Ineffective Portion) | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Interest rate swaps
|
$ | (461 | ) | $ | 908 | $ | 97 | $ | (3 | ) | $ | 9 | $ | 3 | ||||||||||
|
Foreign currency swaps
|
(194 | ) | 233 | (53 | ) | 75 | — | (2 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | (655 | ) | $ | 1,141 | $ | 44 | $ | 72 | $ | 9 | $ | 1 | |||||||||||
|
|
||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships
| Gain (Loss) Reclassified from AOCI | ||||||||||||||
| into Income (Effective Portion) | ||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||
| Interest rate swaps |
Net realized capital gains (losses)
|
$ | 11 | $ | 34 | $ | (3 | ) | ||||||
| Interest rate swaps |
Net investment income (loss)
|
47 | (17 | ) | (20 | ) | ||||||||
| Foreign currency swaps |
Net realized capital gains (losses)
|
(119 | ) | (83 | ) | (79 | ) | |||||||
| Foreign currency swaps |
Net investment income (loss)
|
2 | 1 | — | ||||||||||
|
|
||||||||||||||
| Total |
|
$ | (59 | ) | $ | (65 | ) | $ | (102 | ) | ||||
|
|
||||||||||||||
As of December 31, 2009, 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 $44. This
expectation is based on the anticipated interest 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 interest income over the term of the investment
cash flows. The maximum term over which the Company is hedging its exposure to the variability of
future cash flows (for forecasted transactions, excluding interest payments on existing
variable-rate financial instruments) is 3 years.
F-45
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
For the year ended December 31, 2009 and 2008, the Company had before-tax gains of $1 and
$198, respectively, related to 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. For the year ended December 31, 2007, 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.
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss
on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the
hedged risk are recognized in current earnings. The Company includes the gain or loss on the
derivative in the same line item as the offsetting loss or gain on the hedged item. All components
of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
The Company recognized in income gains (losses) representing the ineffective portion of all fair
value hedges as follows:
Derivatives in Fair Value Hedging Relationships
| Gain (Loss) Recognized in Income [1] | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Hedged | Hedged | Hedged | ||||||||||||||||||||||
| Derivative | Item | Derivative | Item | Derivative | Item | |||||||||||||||||||
|
Interest rate swaps
|
||||||||||||||||||||||||
|
Net realized capital gains (losses)
|
$ | 72 | $ | (68 | ) | $ | (138 | ) | $ | 130 | $ | (103 | ) | $ | 99 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
(37 | ) | 40 | 25 | (18 | ) | 32 | (28 | ) | |||||||||||||||
|
Foreign currency swaps
|
||||||||||||||||||||||||
|
Net realized capital gains (losses)
|
51 | (51 | ) | (124 | ) | 124 | 25 | (25 | ) | |||||||||||||||
|
Benefits, losses and loss adjustment expenses
|
2 | (2 | ) | 42 | (42 | ) | 9 | (9 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 88 | $ | (81 | ) | $ | (195 | ) | $ | 194 | $ | (37 | ) | $ | 37 | |||||||||
|
|
||||||||||||||||||||||||
| [1] |
The amounts presented do not include the periodic net coupon settlements of the derivative
or the coupon income (expense) related to the hedged item. The net of the amounts presented
represents the ineffective portion of the hedge.
|
F-46
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
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 or losses. The following table
presents the gain or loss recognized in income on non-qualifying strategies:
Non-qualifying Strategies
Gain (Loss) Recognized within Net Realized Capital Gains (Losses)
Gain (Loss) Recognized within Net Realized Capital Gains (Losses)
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Interest rate contracts
|
||||||||||||
|
Interest rate swaps, caps, floors, and forwards
|
$ | 31 | $ | 12 | $ | 29 | ||||||
|
Foreign exchange contracts
|
||||||||||||
|
Foreign currency swaps and forwards
|
(66 | ) | 87 | (24 | ) | |||||||
|
Japan 3Win related foreign currency swaps [1]
|
(22 | ) | — | — | ||||||||
|
Japanese fixed annuity hedging instruments [2]
|
(12 | ) | 487 | 53 | ||||||||
|
Credit contracts
|
||||||||||||
|
Credit derivatives that purchase credit protection
|
(533 | ) | 302 | 84 | ||||||||
|
Credit derivatives that assume credit risk
|
167 | (623 | ) | (332 | ) | |||||||
|
Equity contracts
|
||||||||||||
|
Equity index swaps, options, and futures
|
(3 | ) | (25 | ) | 2 | |||||||
|
Warrants
|
70 | 110 | — | |||||||||
|
Variable annuity hedge program
|
||||||||||||
|
GMWB product derivatives
|
4,748 | (5,786 | ) | (670 | ) | |||||||
|
GMWB reinsurance contracts
|
(988 | ) | 1,073 | 127 | ||||||||
|
GMWB hedging instruments
|
(2,234 | ) | 3,374 | 257 | ||||||||
|
Macro hedge program
|
(895 | ) | 74 | (12 | ) | |||||||
|
Other
|
||||||||||||
|
GMAB product derivatives
|
5 | 2 | 2 | |||||||||
|
Contingent capital facility put option
|
(8 | ) | (3 | ) | (4 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 260 | $ | (916 | ) | $ | (488 | ) | ||||
|
|
||||||||||||
| [1] |
The associated liability is adjusted for changes in dollar/yen
exchange spot rates through realized capital gains and losses and
was $64 for the year ended December 31, 2009. There was no Japan
3Win related foreign currency swaps for the years ended December
31, 2008 and 2007.
|
|
| [2] |
The associated liability is adjusted for changes in dollar/yen
exchange spot rates through realized capital gains and losses and
was $67, $450, and $(102) for the years ended December 31, 2009,
2008 and 2007, respectively.
|
For the year ended December 31, 2009, the net realized capital gain (loss) related to
derivatives used in non-qualifying strategies was primarily due to the following:
| • |
The net gain on GMWB related derivatives for the year ended December 31, 2009, was
primarily due to liability model assumption updates given favorable trends in policyholder
experience, the relative outperformance of the underlying actively managed funds as compared
to their respective indices, and the impact of the Company’s own credit standing. Additional
net gains on GMWB related derivatives include lower implied market volatility and a general
increase in long-term interest rates, partially offset by rising equity markets. For more
information on the policyholder behavior and liability model assumption updates, see Note 4a.
|
| • |
The net loss on the macro hedge program was primarily the result of an increase in the
equity markets and the impact of trading activity.
|
| • |
The net loss on credit derivatives that purchase credit protection to economically hedge
fixed maturity securities and the net gain on credit derivatives that assume credit risk as a
part of replication transactions resulted from credit spreads tightening.
|
F-47
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
For the year ended December 31, 2008, the net realized capital loss related to derivatives
used in non-qualifying strategies was primarily due to the following:
| • |
The net loss on GMWB related derivatives was primarily due to liability model assumption updates related to
market-based hedge ineffectiveness due to extremely volatile capital markets, and the relative underperformance of
the underlying actively managed funds as compared to their respective indices, partially offset by gains in the
fourth quarter related to liability model assumption updates for lapse rates.
|
| • |
The net loss on credit default swaps was primarily due to losses on credit derivatives that
assume credit risk as a part of replication transactions, partially offset by gains on credit
derivatives that purchase credit protection, both resulting from credit spreads widening
significantly during the year.
|
| • |
The gain on the Japanese fixed annuity hedging instruments was primarily a result of
weakening of the U.S. dollar against the Japanese Yen.
|
In addition, for the year ended December 31, 2008, the Company incurred losses of $46 on derivative
instruments due to counterparty default related to the bankruptcy of Lehman Brothers Inc. These
losses were a result of the contractual collateral threshold amounts and open collateral calls in
excess of such amounts immediately prior to the bankruptcy filing, as well as interest rate and
credit spread movements from the date of the last collateral call to the date of the bankruptcy
filing.
For the year ended December 31, 2007, net realized capital loss related to derivatives used in
non-qualifying strategies was primarily due to the following:
| • |
The net loss on GMWB related derivatives was primarily due to liability model assumption
updates and model refinements made during the year, including those for dynamic lapse behavior
and correlations of market returns across underlying indices, as well as other assumption
updates made during the second quarter to reflect newly reliable market inputs for volatility.
|
| • |
The net loss on credit derivatives that assume credit risk was due to credit spreads
widening.
|
| • |
The gain on the Japanese fixed annuity hedging instruments was primarily a result of
weakening of the U.S. dollar against the Japanese Yen.
|
See to Note 9 for additional disclosures regarding contingent credit related features in derivative
agreements.
F-48
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk from a single entity,
referenced index, or asset pool in order to synthetically replicate investment transactions. 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. 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 trades ranging from baskets of up to five corporate issuers to standard and
customized diversified portfolios of corporate issuers. The diversified portfolios of corporate
issuers are established within sector concentration limits and are typically divided into tranches
that possess different credit ratings.
The following tables present the notional amount, fair value, weighted average years to maturity,
underlying referenced credit obligation type and average credit ratings, and offsetting notional
amounts and fair value for credit derivatives in which the Company is assuming credit risk as of
December 31, 2009 and 2008.
As of December 31, 2009
| Underlying Referenced | ||||||||||||||||||||||||||||
| Weighted | Credit Obligation(s) [1] | |||||||||||||||||||||||||||
| Average | Average | Offsetting | ||||||||||||||||||||||||||
| Credit Derivative type by derivative | Notional | Fair | Years to | Credit | Notional | Offsetting | ||||||||||||||||||||||
| risk exposure | Amount [2] | Value | Maturity | Type | Rating | Amount [3] | Fair Value [3] | |||||||||||||||||||||
|
Single name credit default swaps
|
||||||||||||||||||||||||||||
|
Investment grade risk exposure
|
$ | 1,226 | $ | 4 | 4 years | Corporate Credit/Foreign Gov. | AA- | $ | 1,201 | $ | (59 | ) | ||||||||||||||||
|
Below investment grade risk exposure
|
156 | (4 | ) | 3 years | Corporate Credit | B+ | 85 | (12 | ) | |||||||||||||||||||
|
Basket credit default swaps [4]
|
||||||||||||||||||||||||||||
|
Investment grade risk exposure
|
2,052 | (54 | ) | 4 years | Corporate Credit | BBB+ | 1,277 | (21 | ) | |||||||||||||||||||
|
Investment grade risk exposure
|
525 | (141 | ) | 7 years | CMBS Credit | A | 525 | 141 | ||||||||||||||||||||
|
Below investment grade risk exposure
|
200 | (157 | ) | 5 years | Corporate Credit | BBB+ | — | — | ||||||||||||||||||||
|
Credit linked notes
|
||||||||||||||||||||||||||||
|
Investment grade risk exposure
|
87 | 83 | 2 years | Corporate Credit | BBB+ | — | — | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total
|
$ | 4,246 | $ | (269 | ) | $ | 3,088 | $ | 49 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
As of December 31, 2008
| Underlying Referenced | ||||||||||||||||||||||||||||
| Weighted | Credit Obligation(s) [1] | |||||||||||||||||||||||||||
| Average | Average | Offsetting | ||||||||||||||||||||||||||
| Credit Derivative type by derivative | Notional | Fair | Years to | Credit | Notional | Offsetting | ||||||||||||||||||||||
| risk exposure | Amount [2] | Value | Maturity | Type | Rating | Amount [3] | Fair Value [3] | |||||||||||||||||||||
|
Single name credit default swaps
|
||||||||||||||||||||||||||||
|
Investment grade risk exposure
|
$ | 60 | $ | (1 | ) | 4 years | Corporate Credit | A- | $ | 35 | $ | (9 | ) | |||||||||||||||
|
Below investment grade risk exposure
|
82 | (19 | ) | 4 years | Corporate Credit | B- | — | — | ||||||||||||||||||||
|
Basket credit default swaps [4]
|
||||||||||||||||||||||||||||
|
Investment grade risk exposure
|
1,778 | (235 | ) | 5 years | Corporate Credit | A- | 1,003 | 21 | ||||||||||||||||||||
|
Investment grade risk exposure
|
275 | (92 | ) | 8 years | CMBS Credit | AAA | 275 | 92 | ||||||||||||||||||||
|
Below investment grade risk exposure
|
200 | (166 | ) | 6 years | Corporate Credit | BB+ | — | — | ||||||||||||||||||||
|
Credit linked notes
|
||||||||||||||||||||||||||||
|
Investment grade risk exposure
|
117 | 106 | 2 years | Corporate Credit | BBB+ | — | — | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total
|
$ | 2,512 | $ | (407 | ) | $ | 1,313 | $ | 104 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| [1] |
The average credit ratings are based on availability and the
midpoint of the applicable 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. There is no 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] |
Includes $2.5 billion and $1.9 billion as of December 31, 2009 and
2008, respectively, of standard market indices of diversified
portfolios of corporate issuers referenced through credit default
swaps. These swaps are subsequently valued based upon the
observable standard market index. Also includes $325 as of
December 31, 2009 and 2008 of customized diversified portfolios of
corporate issuers referenced through credit default swaps.
|
F-49
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Securities Lending and Collateral Arrangements
The Company participates in securities lending programs to generate additional income. Through
these programs, certain domestic fixed income securities are loaned from the Company’s portfolio to
qualifying third-party borrowers in return for collateral in the form of cash or U.S. Treasuries.
Borrowers of these securities provide collateral of 102% of the fair value of the loaned securities
at the time of the loan and can return the securities to the Company for cash at varying maturity
dates. The fair value of the loaned securities is monitored and additional collateral is obtained
if the fair value of the collateral falls below 100% of the fair value of the loaned securities.
As of December 31, 2009 and 2008, under terms of securities lending programs, the fair value of
loaned securities was approximately $45 and $2.9 billion, respectively and the associated
collateral held was $46, and $3.0 billion, respectively. The decrease in both the fair value of
loaned securities and the associated collateral is attributable to the maturation of the loans in
the term lending portion of the securities lending program in 2009. The Company earns income from
the cash collateral or receives a fee from the borrower. The Company recorded before-tax income
from securities lending transactions, net of lending fees, of $24 and $28 for the years ended
December 31, 2009 and 2008, respectively, which was included in net investment income.
The Company enters into various collateral arrangements in connection with its derivative
instruments, which require both the pledging and accepting of collateral. As of December 31, 2009
and 2008, collateral pledged having a fair value of $818 and $1.0 billion, respectively, was
included in fixed maturities in the Consolidated Balance Sheets.
From time to time, the Company enters into secured borrowing arrangements as a means to increase
net investment income. The Company received cash collateral of $42 and $89 as of December 31, 2009
and 2008, respectively.
The following table presents the classification and carrying amount of loaned securities and
derivative instruments collateral pledged.
| December 31, | December 31, | |||||||
| 2009 | 2008 | |||||||
|
Fixed maturities
|
$ | 891 | $ | 3,263 | ||||
|
Equity securities, AFS
|
— | 10 | ||||||
|
Short-term investments
|
14 | 618 | ||||||
|
|
||||||||
|
Total loaned securities and collateral pledged
|
$ | 905 | $ | 3,891 | ||||
|
|
||||||||
As of December 31, 2009 and 2008, the Company had accepted collateral with a fair value of $1.0
billion and $6.9 billion, respectively, of which $931 and $6.3 billion, respectively, was cash
collateral which was invested and recorded in the Consolidated Balance Sheets in fixed maturities
and short-term investments with a corresponding amount predominately recorded in other liabilities.
Included in this cash collateral was $888 and $3.4 billion for derivative cash collateral as of
December 31, 2009 and 2008, respectively. The Company offsets the fair value amounts, income
accruals and cash collateral held related to derivative instruments, as discussed above in the
“Significant Derivative Instruments Accounting Policies” section and accordingly a portion of the
liability associated with the derivative cash collateral was reclassed out of other liabilities and
into other assets of $149 and $574 as of December 31, 2009 and 2008, respectively. The Company is
only permitted by contract to sell or repledge the noncash collateral in the event of a default by
the counterparty. As of December 31, 2009 and 2008, noncash collateral accepted was held in
separate custodial accounts and were not included in the Company’s Consolidated Balance Sheets.
Securities on Deposit with States
The Company is required by law to deposit securities with government agencies in states where it
conducts business. As of December 31, 2009 and 2008, the fair value of securities on deposit was
approximately $1.4 billion and $1.3 billion, respectively.
F-50
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Reinsurance
Accounting Policy
Through both facultative and treaty reinsurance agreements, the Company cedes a share of the risks
it has underwritten to other insurance companies. Assumed reinsurance refers to the Company’s
acceptance of certain insurance risks that other insurance companies have underwritten.
Reinsurance accounting is followed for ceded and assumed transactions when risk transfer provisions
have been met. If the ceded transactions do not provide risk transfer, the Company accounts for
these transactions as financing transactions. To meet risk transfer requirements, a reinsurance
contract must include insurance risk, consisting of both underwriting and timing risk, and a
reasonable possibility of a significant loss to the reinsurer.
Earned premiums and incurred losses and loss adjustment expenses reflect the net effects of ceded
and assumed reinsurance transactions. Included in other assets are prepaid reinsurance premiums,
which represent the portion of premiums ceded to reinsurers applicable to the unexpired terms of
the reinsurance contracts. Reinsurance recoverables include balances due from reinsurance
companies for paid and unpaid losses and loss adjustment expenses and are presented net of an
allowance for uncollectible reinsurance.
The Hartford cedes insurance to other insurers in order to limit its maximum losses and to
diversify its exposures and provide surplus relief. Such transfers do not relieve The Hartford of
its primary liability under policies it wrote and, as such, failure of reinsurers to honor their
obligations could result in losses to The Hartford. The Hartford also is a member of and
participates in several reinsurance pools and associations. The Hartford evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk. The Hartford’s property
and casualty reinsurance is placed with reinsurers that meet strict financial criteria established
by a credit committee. As of December 31, 2009, The Hartford had no reinsurance-related
concentrations of credit risk greater than 10% of the Company’s stockholders’ equity.
Life
In accordance with normal industry practice, Life is involved in both the cession and assumption of
insurance with other insurance and reinsurance companies. As of December 31, 2009 and 2008, the
Company’s policy for the largest amount of life insurance retained on any one life by the life
operations was $10.
Life insurance fees, earned premiums and other were comprised of the following:
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Gross fee income, earned premiums and other
|
$ | 9,448 | $ | 10,441 | $ | 10,675 | ||||||
|
Reinsurance assumed
|
162 | 263 | 273 | |||||||||
|
Reinsurance ceded
|
(484 | ) | (421 | ) | (405 | ) | ||||||
|
|
||||||||||||
|
Net fee income, earned premiums and other
|
$ | 9,126 | $ | 10,283 | $ | 10,543 | ||||||
|
|
||||||||||||
Life reinsures certain of its risks to other reinsurers under yearly renewable term, coinsurance,
and modified coinsurance arrangements. Yearly renewable term and coinsurance arrangements result in
passing all or a portion of the risk to the reinsurer. Generally, the reinsurer receives a
proportionate amount of the premiums less an allowance for commissions and expenses and is liable
for a corresponding proportionate amount of all benefit payments. Modified coinsurance is similar
to coinsurance except that the cash and investments that support the liabilities for contract
benefits are not transferred to the assuming company, and settlements are made on a net basis
between the companies. Coinsurance with funds withheld is a form of coinsurance except that the
investment assets that support the liabilities are withheld by the ceding company.
The cost of reinsurance related to long-duration contracts is accounted for over the life of the
underlying reinsured policies using assumptions consistent with those used to account for the
underlying policies. Life insurance recoveries on ceded reinsurance contracts, which reduce death
and other benefits, were $305, $331 and $89 for the years ended December 31, 2009, 2008 and 2007,
respectively. Life also assumes reinsurance from other insurers.
In addition, the Company reinsures a portion of the U.S minimum death benefit guarantees, Japan’s
guaranteed minimum death and income benefits, as well as guaranteed minimum withdrawal benefits,
offered in connection with its variable annuity contracts.
F-51
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Reinsurance (continued)
The effect of reinsurance on property and casualty premiums written and earned was as follows:
| For the years ended December 31, | ||||||||||||
| Premiums Written | 2009 | 2008 | 2007 | |||||||||
|
Direct
|
$ | 10,185 | $ | 10,831 | $ | 11,281 | ||||||
|
Assumed
|
238 | 218 | 205 | |||||||||
|
Ceded
|
(712 | ) | (818 | ) | (1,046 | ) | ||||||
|
|
||||||||||||
|
Net
|
$ | 9,711 | $ | 10,231 | $ | 10,440 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Premiums Earned
|
||||||||||||
|
Direct
|
$ | 10,386 | $ | 10,999 | $ | 11,396 | ||||||
|
Assumed
|
253 | 216 | 204 | |||||||||
|
Ceded
|
(778 | ) | (877 | ) | (1,104 | ) | ||||||
|
|
||||||||||||
|
Net
|
$ | 9,861 | $ | 10,338 | $ | 10,496 | ||||||
|
|
||||||||||||
Ceded losses, which reduce losses and loss adjustment expenses incurred, were $286, $384, and $187
for the years ended December 31, 2009, 2008, and 2007, respectively.
Reinsurance recoverables include balances due from reinsurance companies for paid and unpaid losses
and loss adjustment expenses and are presented net of an allowance for uncollectible reinsurance.
The reinsurance recoverables balance includes 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 business ceded to the reinsurance contracts. The
Company calculates its ceded reinsurance projection 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 by reinsurance agreement. 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.
The allowance for uncollectible reinsurance was $335 and $379 as of December 31, 2009 and 2008,
respectively. 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 Company analyzes recent developments in commutation activity between
reinsurers and cedants, recent trends in arbitration and litigation outcomes in disputes between
reinsurers and cedants and the overall credit quality of the Company’s reinsurers. Where its
contracts permit, the Company secures future claim obligations with various forms of collateral,
including irrevocable letters of credit, secured trusts, funds held accounts and group-wide
offsets.
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.
F-52
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Deferred Policy Acquisition Costs and Present Value of Future Profits
Life
Accounting Policy
Life capitalizes acquisition costs that vary with and are primarily related to the acquisition of
new and renewal insurance contracts. Life’s deferred policy acquisition cost (“DAC”) asset, which
includes the present value of future profits, related to most universal life-type contracts
(including variable annuities) is amortized over the estimated life of the contracts acquired in
proportion to the present value of estimated gross profits (“EGPs”). EGPs are also used to
amortize other assets and liabilities in the Company’s Consolidated Balance Sheets, such as, sales
inducement assets (“SIA”) and unearned revenue reserves (“URR”). Components of EGPs are used to
determine reserves for universal life type contracts (including variable annuities) with death or
other insurance benefits such as guaranteed minimum death, guaranteed minimum income and universal
life secondary guarantee benefits. These benefits are accounted for and collectively referred to
as death and other insurance benefit reserves and are held in addition to the account value
liability representing policyholder funds.
For most contracts, the Company estimates gross profits over 20 years as EGPs emerging subsequent
to that timeframe are immaterial. Products sold in a particular year are aggregated into cohorts.
Future gross profits for each cohort are projected over the estimated lives of the underlying
contracts, based on future account value projections for variable annuity and variable universal
life products. The projection of future account values requires the use of certain assumptions
including: separate account returns; separate account fund mix; fees assessed against the contract
holder’s account balance; surrender and lapse rates; interest margin; mortality; and hedging costs.
Prior to the second quarter of 2009, the Company determined EGPs using the mean derived from
stochastic scenarios that had been calibrated to the estimated separate account return. The
Company also completed a comprehensive assumption study, in the third quarter of each year, and
revised best estimate assumptions used to estimate future gross profits when the EGPs in the
Company’s models fell outside of an independently determined reasonable range of EGPs. The Company
also considered, on a quarterly basis, other qualitative factors such as product, regulatory and
policyholder behavior trends and would revise EGPs if those trends were expected to be significant.
Beginning with the second quarter of 2009, the Company now determines EGPs from a single
deterministic reversion to mean (“RTM”) separate account return projection which is an estimation
technique commonly used by insurance entities to project future separate account returns. Through
this estimation technique, the Company’s DAC model is adjusted to reflect actual account values at
the end of each quarter. Through consideration of recent market returns, the Company will unlock,
or adjust, projected returns over a future period so that the account value returns to the
long-term expected rate of return, providing that those projected returns do not exceed certain
caps or floors. This DAC Unlock for future separate account returns is determined each quarter.
In the third quarter of each year, the Company completes a comprehensive non-market related
policyholder behavior assumption study and incorporates the results of those studies into its
projection of future gross profits. Additionally, throughout the year, the Company evaluates
various aspects of policyholder behavior and periodically revises its policyholder assumptions as
credible emerging data indicates that changes are warranted. Upon completion of an assumption
study or evaluation of credible new information, the Company will revise its assumptions to reflect
its current best estimate. These assumption revisions will change the projected account values and
the related EGPs in the DAC, SIA and URR amortization models, as well as, the death and other
insurance benefit reserving model.
All assumption changes that affect the estimate of future EGPs including: the update of current
account values; the use of the RTM estimation technique; or policyholder behavior assumptions, are
considered an Unlock in the period of revision. An Unlock adjusts the DAC, SIA, URR and death and
other insurance benefit reserve balances in the Consolidated Balance Sheets with an offsetting
benefit or charge in the Consolidated Statements of Operations in the period of the revision. An
Unlock that results in an after-tax benefit generally occurs as a result of actual experience or
future expectations of product profitability being favorable compared to previous estimates. An
Unlock that results in an after-tax charge generally occurs as a result of actual experience or
future expectations of product profitability being unfavorable compared to previous estimates.
An “Unlock” revises EGPs to reflect current best estimate assumptions. The Company also tests the
aggregate recoverability of DAC by comparing the existing DAC balance to the present value of
future EGPs.
F-53
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Deferred Policy Acquisition Costs and Present Value of Future Profits (continued)
Results
Changes in the DAC balance are as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Balance, January 1
|
$ | 11,988 | $ | 10,514 | $ | 9,071 | ||||||
|
Cumulative effect of accounting change, pre-tax [1] [4]
|
(78 | ) | — | (79 | ) | |||||||
|
|
||||||||||||
|
Balance, January 1, as adjusted
|
11,910 | 10,514 | 8,992 | |||||||||
|
Deferred Costs
|
784 | 1,548 | 2,059 | |||||||||
|
Amortization — DAC
|
(1,191 | ) | (1,023 | ) | (1,212 | ) | ||||||
|
Amortization — Unlock, pre-tax [2]
|
(1,010 | ) | (1,153 | ) | 327 | |||||||
|
Adjustments to unrealized gains and losses on securities available-for-sale and other [3]
|
(1,031 | ) | 1,754 | 230 | ||||||||
|
Effect of currency translation
|
(39 | ) | 348 | 118 | ||||||||
|
|
||||||||||||
|
Balance, December 31
|
$ | 9,423 | $ | 11,988 | $ | 10,514 | ||||||
|
|
||||||||||||
| [1] |
The Company’s cumulative effect of accounting change includes an additional $(1), pre-tax, related to SIA.
|
|
| [2] |
The most significant contributor to the Unlock amount recorded for the year ended 2009 was a result of actual
separate account returns being significantly below our aggregated estimated return for the period from October 1,
2008 to March 31, 2009, offset by actual returns being greater than our aggregated estimated return for the period
from April 1, 2009 to December 31, 2009.
|
|
| [3] |
The adjustment reflects the effect of credit spreads tightening, resulting in unrealized gains on securities in 2009.
|
|
| [4] |
The effect of adopting new accounting guidance for investments other than temporarily impaired resulted in an increase
to retained earnings and, as a result, a DAC charge of $78. In addition, an offsetting amount was recorded in
unrealized losses as unrealized losses increased upon adoption of new accounting guidance for investments
other-than-temporarily impaired.
|
Estimated future net amortization expense of present value of future profits for the
succeeding five years is as follows:
| For the years ended December 31, | ||||
|
2010
|
$ | 38 | ||
|
2011
|
34 | |||
|
2012
|
31 | |||
|
2013
|
28 | |||
|
2014
|
25 |
Property & Casualty
Accounting Policy
The Property & Casualty operations incur costs, including commissions, premium taxes and certain
underwriting and policy issuance costs that vary with and are related primarily to the acquisition
of property and casualty insurance business. These costs are deferred and amortized ratably over
the period the related premiums are earned. Deferred acquisition costs are reviewed to determine
if they are recoverable from future income, and if not, are charged to expense. Anticipated
investment income is considered in the determination of the recoverability of deferred policy
acquisition costs. For the years ended December 31, 2009, 2008 and 2007, no amount of deferred
policy acquisition costs was charged to expense based on the determination of recoverability.
Results
Changes in deferred policy acquisition costs are as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Balance, January 1
|
$ | 1,260 | $ | 1,228 | $ | 1,197 | ||||||
|
Deferred costs
|
2,069 | 2,127 | 2,135 | |||||||||
|
Amortization
|
(2,066 | ) | (2,095 | ) | (2,104 | ) | ||||||
|
|
||||||||||||
|
Balance, December 31
|
$ | 1,263 | $ | 1,260 | $ | 1,228 | ||||||
|
|
||||||||||||
F-54
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of costs over the fair value of net assets acquired. Goodwill is
not amortized but is reviewed for impairment at least annually or more frequently if events occur
or circumstances change that would indicate that a triggering event has occurred. The goodwill
impairment test follows a two step process. In the first step, the fair value of a reporting unit
is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair
value, the second step of the impairment test is performed for purposes of measuring the
impairment. In the second step, the fair value of the reporting unit is allocated to all of the
assets and liabilities of the reporting unit to determine an implied goodwill value. This
allocation is similar to a purchase price allocation performed in purchase accounting. If the
carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment
loss shall be recognized in an amount equal to that excess.
The carrying amount of goodwill allocated to reporting segments as of December 31 is shown below.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
| Accumulated | Carrying | Accumulated | Carrying | |||||||||||||||||||||
| Gross | Impairments | Value | Gross | Impairments | Value | |||||||||||||||||||
|
Life
|
||||||||||||||||||||||||
|
Retail
|
$ | 581 | $ | (422 | ) | $ | 159 | $ | 581 | $ | (422 | ) | $ | 159 | ||||||||||
|
Individual Life
|
224 | — | 224 | 224 | — | 224 | ||||||||||||||||||
|
Retirement Plans
|
87 | — | 87 | 79 | — | 79 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Life
|
892 | (422 | ) | 470 | 884 | (422 | ) | 462 | ||||||||||||||||
|
Property & Casualty
|
||||||||||||||||||||||||
|
Personal Lines
|
119 | — | 119 | 119 | — | 119 | ||||||||||||||||||
|
Specialty Commercial
|
30 | — | 30 | 30 | — | 30 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Property & Casualty
|
149 | — | 149 | 149 | — | 149 | ||||||||||||||||||
|
Corporate
|
940 | (355 | ) | 585 | 772 | (323 | ) | 449 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Goodwill
|
$ | 1,981 | $ | (777 | ) | $ | 1,204 | $ | 1,805 | $ | (745 | ) | $ | 1,060 | ||||||||||
|
|
||||||||||||||||||||||||
The Company’s goodwill impairment test performed during the first quarter of 2009 for the Life
reporting units, resulted in a write-down of $32 in the Institutional reporting unit of Corporate.
Goodwill within Corporate is primarily attributed to the Company’s “buy-back” of Life in 2000 and
is allocated to the various Life reporting units. As a result of rating agency downgrades of
Life’s financial strength ratings during the first quarter of 2009 and high credit spreads related
to The Hartford, during the first quarter of 2009, the Company believed its ability to generate new
business in the Institutional reporting unit would remain pressured for ratings-sensitive products.
The Company believed goodwill associated with the Institutional line of business was impaired due
to the pressure on new sales for Institutional’s ratings-sensitive business and the significant
unrealized losses in Institutional’s investment portfolios.
On June 24, 2009, the Company completed the acquisition of Federal Trust Corporation, which
resulted in additional goodwill of $168 in Corporate.
The Company completed its annual goodwill assessment for the remaining individual reporting units
within Life and Property & Casualty as of January 1, 2009 and September 30, 2009, respectively,
which resulted in no additional write-downs of goodwill for the year ended December 31, 2009.
In 2008, the Company completed three acquisitions that resulted in additional goodwill of $79 in the Retirement Plans
reporting unit. The Company recorded a purchase price adjustment in 2009 associated with these acquisitions resulting
in additional goodwill of $8.
The Company’s interim goodwill impairment test for the year ended December 31, 2008, resulted in a
pre-tax impairment charge of $422 in the Individual Annuity reporting unit within Retail and $323
within the Individual Annuity and International reporting units of Corporate. The impairment
charges taken in 2008 were primarily due to the Company’s estimate of the International and
Individual Annuity reporting units’ fair values falling significantly below the related book
values. The fair values of these reporting units declined as the statutory capital and surplus
risks associated with the death and living benefit guarantees sold with products offered by these
reporting units increased. These concerns had a comparable impact on the Company’s share price.
The determination of fair values for the Individual Annuity and International reporting units
incorporated multiple inputs including discounted cash flow calculations, market participant
assumptions and the Company’s share price.
The Company’s goodwill impairment test performed for the year ended December 31, 2007 resulted in
no write-downs.
F-55
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Goodwill and Other Intangible Assets (continued)
Other Intangible Assets
The following table shows the Company’s acquired intangible assets that continue to be subject to
amortization and aggregate amortization expense, net of interest accretion, if any. Acquired
intangible assets are included in other assets in the Consolidated Balance Sheets. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Accumulated Net | Accumulated Net | |||||||||||||||
| Acquired Intangible Assets | Gross | Amortization | Gross | Amortization | ||||||||||||
|
Renewal rights
|
$ | — | $ | — | $ | 22 | $ | 21 | ||||||||
|
Distribution agreements
|
71 | 16 | 70 | 11 | ||||||||||||
|
Servicing intangibles
|
13 | 1 | 14 | 1 | ||||||||||||
|
Other
|
6 | 1 | 15 | 14 | ||||||||||||
|
|
||||||||||||||||
|
Total Acquired Intangible Assets
|
$ | 90 | $ | 18 | $ | 121 | $ | 47 | ||||||||
|
|
||||||||||||||||
In 2009, the Company completed two acquisitions that resulted in additional acquired intangible
assets of $1 in distribution agreements and $5 in other. In 2009, the Company fully amortized
acquired intangible assets in renewal rights and other of $22 and $14, respectively.
Net amortization expense for the years ended December 31, 2009, 2008 and 2007 was $8, $8 and $9,
respectively, and included in other expense in the Consolidated Statement of Operations. As of
December 31, 2009, the weighted average amortization period was 13 years for distribution
agreements, 20 years for servicing intangibles and 8 years for other and 13 years for total
acquired intangible assets.
The following is detail of the net acquired intangible asset activity for the years ended December
31, 2009, 2008 and 2007, respectively.
| Renewal | Distribution | Servicing | ||||||||||||||||||
| Rights | Agreement | Intangibles | Other | Total | ||||||||||||||||
|
|
||||||||||||||||||||
|
For the year ended December 31, 2009
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Balance, beginning of year
|
$ | 1 | $ | 59 | $ | 13 | $ | 1 | $ | 74 | ||||||||||
|
Acquisition of businesses
|
— | 1 | — | 5 | 6 | |||||||||||||||
|
Amortization, net of the accretion of interest
|
(1 | ) | (5 | ) | (1 | ) | (1 | ) | (8 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Balance, end of year
|
$ | — | $ | 55 | $ | 12 | $ | 5 | $ | 72 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
For the year ended December 31, 2008
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Balance, beginning of year
|
$ | 2 | $ | 65 | $ | — | $ | — | $ | 67 | ||||||||||
|
Acquisition of businesses
|
— | — | 14 | 1 | 15 | |||||||||||||||
|
Amortization, net of the accretion of interest
|
(1 | ) | (6 | ) | (1 | ) | — | (8 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Balance, end of year
|
$ | 1 | $ | 59 | $ | 13 | $ | 1 | $ | 74 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
For the year ended December 31, 2007
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Balance, beginning of year
|
$ | 2 | $ | — | $ | — | $ | 4 | $ | 6 | ||||||||||
|
Distribution agreement
|
— | 70 | — | — | 70 | |||||||||||||||
|
Amortization, net of the accretion of interest
|
— | (5 | ) | — | (4 | ) | (9 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Balance, end of year
|
$ | 2 | $ | 65 | $ | — | $ | — | $ | 67 | ||||||||||
|
|
||||||||||||||||||||
For the years ended December 31, 2009 and 2008, the Company did not capitalize any costs to extend
or renew the term of a recognized intangible asset. For the year ended December 31, 2007, the
Company incurred renewal costs of $70 for the exclusive right to market certain Property & Casualty
insurance business to AARP members for the period January 1, 2007 to January 1, 2020. These costs
were capitalized as an intangible asset and are being amortized over the thirteen year period the
asset is expected to contribute to the Company’s cash flows.
Estimated future net amortization expense for the succeeding five years is as follows:
| For the years ended December 31, | ||||
|
2010
|
$ | 7 | ||
|
2011
|
7 | |||
|
2012
|
8 | |||
|
2013
|
6 | |||
|
2014
|
7 |
For a discussion of present value of future profits that continue to be subject to amortization and
aggregate amortization expense, see Note 7.
F-56
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Separate Accounts, Death Benefits and Other Insurance Benefit Features
Accounting Policy
The Company records the variable portion of individual variable annuities, 401(k), institutional,
403(b)/457, private placement life and variable life insurance products within separate accounts.
Separate account assets are reported at fair value and separate account liabilities are reported at
amounts consistent with separate account assets. Investment income and gains and losses from
those separate account assets accrue directly to the policyholder, who assumes the related
investment risk, and are offset by the related liability changes reported in the same line item in
the Consolidated Statements of Operations. The Company earns fees for investment management,
certain administrative expenses, and mortality and expense risks assumed which are reported in fee
income.
Certain contracts classified as universal life-type include death and other insurance benefit
features including guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income
benefits (“GMIB”), offered with variable annuity contracts, or secondary guarantee benefits offered
with universal life (“UL”) insurance contracts. GMDBs and GMIBs have been written in various forms
as described in this note. UL secondary guarantee benefits ensure that the universal life policy
will not terminate, and will continue to provide a death benefit, even if there is insufficient
policy value to cover the monthly deductions and charges. These death and other insurance benefit
features require an additional liability be held above the account value liability representing the
policyholders’ funds. This liability is reported in reserve for future policy benefits in the
Company’s Consolidated Balance Sheets. Changes in the death and other insurance benefit reserves
are recorded in benefits, losses and loss adjustment expenses in the Company’s Consolidated
Statements of Operations.
The death and other insurance benefit liability is determined by estimating the expected present
value of the benefits in excess of the policyholder’s expected account value in proportion to the
present value of total expected assessments. The liability is accrued as actual assessments are
recorded. The expected present value of benefits and assessments are generally derived from a set
of stochastic scenarios, that have been calibrated to our RTM separate account returns, and
assumptions including market rates of return, volatility, discount rates, lapse rates and mortality
experience. Consistent with the Company’s policy on DAC Unlock, the Company regularly evaluates
estimates used and adjusts the additional liability balance, with a related charge or credit to
benefits, losses and loss adjustment expense. For further information on the DAC Unlock, see Note
7.
The Company reinsures a portion of its in-force GMDB and UL secondary guarantees. The death and
other insurance benefit reserves, net of reinsurance, are established by estimating the expected
value of net reinsurance costs and death and other insurance benefits in excess of the projected
account balance. The additional death and other insurance benefits and net reinsurance costs are
recognized ratably over the accumulation period based on total expected assessments.
U.S. GMDB, Japan GMDB/GMIB, and UL Secondary Guarantee Benefits
Changes in the gross U.S. GMDB, Japan GMDB/GMIB, and UL secondary guarantee benefits are as
follows:
| UL Secondary | ||||||||||||
| U.S. GMDB [1] | Japan GMDB/GMIB [1] | Guarantees [1] | ||||||||||
|
Liability balance as of January 1, 2009
|
$ | 870 | $ | 229 | $ | 40 | ||||||
|
Incurred
|
298 | 91 | 41 | |||||||||
|
Paid
|
(457 | ) | (117 | ) | — | |||||||
|
Unlock
|
522 | 341 | (5 | ) | ||||||||
|
Currency translation adjustment
|
— | 36 | — | |||||||||
|
|
||||||||||||
|
Liability balance as of December 31, 2009
|
$ | 1,233 | $ | 580 | $ | 76 | ||||||
|
|
||||||||||||
| [1] |
The reinsurance recoverable asset related to the U.S. GMDB was $787 as of December 31,
2009. The reinsurance recoverable asset related to the Japan GMDB was $37 as of December 31,
2009. The reinsurance recoverable asset related to the UL Secondary Guarantees was $22 as of
December 31, 2009.
|
| UL Secondary | ||||||||||||
| U.S. GMDB [1] | Japan GMDB/GMIB [1] | Guarantees [1] | ||||||||||
|
Liability balance as of January 1, 2008
|
$ | 529 | $ | 42 | $ | 19 | ||||||
|
Incurred
|
221 | 26 | 21 | |||||||||
|
Paid
|
(269 | ) | (42 | ) | — | |||||||
|
Unlock
|
389 | 164 | — | |||||||||
|
Currency translation adjustment
|
— | 39 | — | |||||||||
|
|
||||||||||||
|
Liability balance as of December 31,
2008
|
$ | 870 | $ | 229 | $ | 40 | ||||||
|
|
||||||||||||
| [1] |
The reinsurance recoverable asset related to the U.S. GMDB was $595 as of December 31,
2008. The reinsurance recoverable asset related to the Japan GMDB was $31 as of December 31,
2008. The reinsurance recoverable asset related to the UL Secondary Guarantees was $16 as of
December 31, 2008.
|
During 2009, 2008 and 2007, there were no gains or losses on transfers of assets from the
general account to the separate account.
F-57
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)
The following table summarizes GMDBs and GMIBs as of December 31, 2009:
Individual Variable and Group Annuity Account Value by GMDB/GMIB Type
| Retained Net | ||||||||||||||||
| Account | Net Amount | Amount | Weighted Average | |||||||||||||
| Value | at Risk | at Risk | Attained Age of | |||||||||||||
| Maximum anniversary value (“MAV”) [1] | (“AV”) | (“NAR”) [10] | (“RNAR”) [10] | Annuitant | ||||||||||||
|
MAV only
|
$ | 27,423 | $ | 8,408 | $ | 2,461 | 67 | |||||||||
|
With 5% rollup [2]
|
1,868 | 664 | 259 | 67 | ||||||||||||
|
With Earnings Protection Benefit Rider (EPB) [3]
|
6,567 | 1,409 | 140 | 63 | ||||||||||||
|
With 5% rollup & EPB
|
784 | 224 | 45 | 66 | ||||||||||||
|
|
||||||||||||||||
|
Total MAV
|
36,642 | 10,705 | 2,905 | |||||||||||||
|
Asset Protection Benefit (“APB”) [4]
|
28,612 | 5,508 | 3,535 | 64 | ||||||||||||
|
Lifetime Income Benefit (“LIB”) — Death Benefit [5]
|
1,330 | 214 | 214 | 62 | ||||||||||||
|
Reset [6] (5-7 years)
|
3,790 | 490 | 486 | 67 | ||||||||||||
|
Return of Premium (“ROP”) [7] /Other
|
21,446 | 1,445 | 1,405 | 64 | ||||||||||||
|
|
||||||||||||||||
|
Subtotal U.S. GMDB [8]
|
91,820 | $ | 18,362 | $ | 8,545 | 65 | ||||||||||
|
Less: General Account Value with U.S. GMDB
|
6,802 | |||||||||||||||
|
|
||||||||||||||||
|
Subtotal Separate Account Liabilities with GMDB
|
85,018 | |||||||||||||||
|
|
||||||||||||||||
|
Separate Account Liabilities without U.S. GMDB
|
65,376 | |||||||||||||||
|
|
||||||||||||||||
|
Total Separate Account Liabilities
|
$ | 150,394 | ||||||||||||||
|
|
||||||||||||||||
|
Japan GMDB and GMIB [9]
|
$ | 30,521 | $ | 6,335 | $ | 5,238 | 68 | |||||||||
|
|
||||||||||||||||
| [1] |
MAV GMDB is the greatest of current AV, net premiums paid and the highest AV on any anniversary before age 80 (adjusted
for withdrawals).
|
|
| [2] |
Rollup GMDB is the greatest of the MAV, current AV, net premium paid and premiums (adjusted for withdrawals)
accumulated at generally 5% simple interest up to the earlier of age 80 or 100% of adjusted premiums.
|
|
| [3] |
EPB GMDB is the greatest of the MAV, current AV, or contract value plus a percentage of the contract’s growth. The
contract’s growth is AV less premiums net of withdrawals, subject to a cap of 200% of premiums net of withdrawals.
|
|
| [4] |
APB GMDB is the greater of current AV or MAV, not to exceed current AV plus 25% times the greater of net premiums and
MAV (each adjusted for premiums in the past 12 months).
|
|
| [5] |
LIB GMDB is the greatest of current AV, net premiums paid, or for certain contracts a benefit amount that ratchets over
time, generally based on market performance.
|
|
| [6] |
Reset GMDB is the greatest of current AV, net premiums paid and the most recent five to seven year anniversary AV
before age 80 (adjusted for withdrawals).
|
|
| [7] |
ROP GMDB is the greater of current AV and net premiums paid.
|
|
| [8] |
AV includes the contract holder’s investment in the separate account and the general account.
|
|
| [9] |
GMDB includes a ROP and MAV (before age 80) paid in a single lump sum. GMIB is a guarantee to return initial
investment, adjusted for earnings liquidity, paid through a fixed annuity, after a minimum deferral period of 10, 15 or
20 years. The guaranteed remaining balance (“GRB”) related to the Japan GMIB was $28.6 billion and $30.6 billion as of
December 31, 2009 and 2008, respectively. The GRB related to the Japan GMAB and GMWB was $(648) and $567 as of December
31, 2009 and 2008, respectively. These liabilities are not included in the Separate Account as they are not legally
insulated from the general account liabilities of the insurance enterprise. As of December 31, 2009, 59% of the AV and
52% of RNAR is reinsured to a Hartford affiliate.
|
|
| [10] |
NAR is defined as the guaranteed benefit in excess of the current AV. RNAR represents NAR reduced for reinsurance.
NAR and RNAR are highly sensitive to equity markets movements and increase when equity markets decline.
|
Account balances of contracts with GMDBs and GMIBs were invested in variable separate accounts
as follows:
| Asset type | As of December 31, 2009 | As of December 31, 2008 | ||||||
|
Equity securities (including mutual funds) [1]
|
$ | 75,720 | $ | 63,114 | ||||
|
Cash and cash equivalents
|
9,298 | 10,174 | ||||||
|
|
||||||||
|
Total
|
$ | 85,018 | $ | 73,288 | ||||
|
|
||||||||
| [1] |
As of December 31, 2009 and December 31, 2008, approximately 16% and 16%, respectively, of
the equity securities above were invested in fixed income securities through these funds and
approximately 84% and 84%, respectively, were invested in equity securities.
|
See Note 4a for further information on guaranteed living benefits that are accounted for at
fair value such as GMWB.
F-58
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Sales Inducements
Accounting Policy
The Company offers enhanced crediting rates or bonus payments to contract holders on certain of its
individual and group annuity products. The expense associated with offering a bonus is deferred
and amortized over the life of the related contract in a pattern consistent with the amortization
of deferred policy acquisition costs. The Company unlocks the amortization of the sales inducement
asset consistent with the DAC Unlock. For further information on the DAC Unlock, see Note 7.
Deferred Sales Inducements
Changes in deferred sales inducement activity were as follows for the year ended December 31:
| 2009 | 2008 | |||||||
|
Balance, January 1
|
$ | 553 | $ | 467 | ||||
|
Sales inducements deferred
|
59 | 151 | ||||||
|
Amortization charged to income
|
(105 | ) | (21 | ) | ||||
|
Amortization — Unlock
|
(69 | ) | (44 | ) | ||||
|
|
||||||||
|
Balance, end of period, December 31
|
$ | 438 | $ | 553 | ||||
|
|
||||||||
11. Reserves for Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
Life Accounting Policy
Liabilities for future policy benefits are calculated by the net level premium method using
interest, withdrawal and mortality assumptions appropriate at the time the policies were issued.
The methods used in determining the liability for unpaid losses and future policy benefits are
standard actuarial methods recognized by the American Academy of Actuaries. For the tabular
reserves, discount rates are based on the Company’s earned investment yield and the
morbidity/mortality tables used are standard industry tables modified to reflect the Company’s
actual experience when appropriate. In particular, for the Company’s group disability known claim
reserves, the morbidity table for the early durations of claim is based exclusively on the
Company’s experience, incorporating factors such as gender, elimination period and diagnosis.
These reserves are computed such that they are expected to meet the Company’s future policy
obligations. Future policy benefits are computed at amounts that, with additions from estimated
premiums to be received and with interest on such reserves compounded annually at certain assumed
rates, are expected to be sufficient to meet the Company’s policy obligations at their maturities
or in the event of an insured’s death. Changes in or deviations from the assumptions used for
mortality, morbidity, expected future premiums and interest can significantly affect the Company’s
reserve levels and related future operations and, as such, provisions for adverse deviation are
built into the long-tailed liability assumptions.
Liabilities for the Company’s group life and disability contracts, as well as its individual term
life insurance policies, include amounts for unpaid losses and future policy benefits. Liabilities
for unpaid losses include estimates of amounts to fully settle known reported claims, as well as
claims related to insured events that the Company estimates have been incurred but have not yet
been reported. These reserve estimates are based on known facts and interpretations of
circumstances, and consideration of various internal factors including The Hartford’s experience
with similar cases, historical trends involving claim payment patterns, loss payments, pending
levels of unpaid claims, loss control programs and product mix. In addition, the reserve estimates
are influenced by consideration of various external factors including court decisions, economic
conditions and public attitudes. The effects of inflation are implicitly considered in the
reserving process.
F-59
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Reserves for Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
(continued)
Life Reserve Development
Life’s reserve development resulting primarily from group disability products is as follow:
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Beginning liabilities for life unpaid losses and loss adjustment
expenses-gross
|
$ | 6,066 | $ | 6,028 | $ | 5,877 | ||||||
|
Reinsurance recoverables
|
231 | 261 | 236 | |||||||||
|
|
||||||||||||
|
Beginning liabilities for life unpaid losses and loss adjustment expenses
|
5,835 | 5,767 | 5,641 | |||||||||
|
Add provision for life unpaid losses and loss adjustment expenses
|
||||||||||||
|
Current year
|
3,244 | 3,243 | 3,186 | |||||||||
|
Prior years
|
(88 | ) | (118 | ) | (125 | ) | ||||||
|
|
||||||||||||
|
Total provision for life unpaid losses and loss adjustment expenses
|
3,156 | 3,125 | 3,061 | |||||||||
|
Less payments
|
||||||||||||
|
Current year
|
1,580 | 1,554 | 1,470 | |||||||||
|
Prior years
|
1,493 | 1,503 | 1,465 | |||||||||
|
|
||||||||||||
|
Total payments
|
3,073 | 3,057 | 2,935 | |||||||||
|
|
||||||||||||
|
Ending liabilities for life unpaid losses and loss adjustment expenses, net
|
5,918 | 5,835 | 5,767 | |||||||||
|
Reinsurance recoverables
|
213 | 231 | 261 | |||||||||
|
|
||||||||||||
|
Ending liabilities for life unpaid losses and loss adjustment expenses-gross
|
$ | 6,131 | $ | 6,066 | $ | 6,028 | ||||||
|
|
||||||||||||
The favorable prior year claim development in 2009, 2008 and 2007 was principally due to continued
disability and waiver claims management.
The liability for future policy benefits and unpaid losses and loss adjustment expenses is as
follows:
| 2009 | 2008 | |||||||
|
Group Life Term, Disability and Accident unpaid losses and loss adjustment expenses
|
$ | 6,131 | $ | 6,066 | ||||
|
Group Life Other unpaid losses and loss adjustment expenses
|
232 | 253 | ||||||
|
Individual Life unpaid losses and loss adjustment expenses
|
123 | 123 | ||||||
|
Future Policy Benefits
|
11,494 | 10,305 | ||||||
|
|
||||||||
|
Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
|
$ | 17,980 | $ | 16,747 | ||||
|
|
||||||||
F-60
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Reserves for Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
(continued)
Property and Casualty Accounting Policy
The Hartford establishes property and casualty reserves to provide for the estimated costs of
paying claims under insurance policies written by the Company. These reserves include estimates
for both claims that have been reported and those that have been incurred but not reported, and
include estimates of all losses and loss adjustment expenses associated with processing and
settling these claims. Estimating the ultimate cost of future losses and loss adjustment expenses
is an uncertain and complex process. This estimation process is based significantly on the
assumption that past developments are an appropriate predictor of future events, and involves a
variety of actuarial techniques that analyze experience, trends and other relevant factors. The
uncertainties involved with the reserving process have become increasingly difficult due to a
number of complex factors including social and economic trends and changes in the concepts of legal
liability and damage awards. Accordingly, final claim settlements may vary from the present
estimates, particularly when those payments may not occur until well into the future.
The Hartford regularly reviews the adequacy of its estimated losses and loss adjustment expense
reserves by line of business within the various reporting segments. Adjustments to previously
established reserves are reflected in the operating results of the period in which the adjustment
is determined to be necessary. Such adjustments could possibly be significant, reflecting any
variety of new and adverse or favorable trends.
Most of the Company’s property and casualty reserves are not discounted. However, the Company has
discounted liabilities funded through structured settlements and has discounted certain reserves
for indemnity payments due to permanently disabled claimants under workers’ compensation policies.
Structured settlements are agreements that provide fixed periodic payments to claimants and include
annuities purchased to fund unpaid losses for permanently disabled claimants and, prior to 2008,
agreements that funded loss run-offs for unrelated parties. Most of the annuities have been
purchased from Life and these structured settlements are recorded at present value as annuity
obligations of Life, either within the reserve for future policy benefits if the annuity benefits
are life-contingent or within other policyholder funds and benefits payable if the annuity benefits
are not life-contingent. If not funded through an annuity, reserves for certain indemnity
payments due to permanently disabled claimants under workers’ compensation policies are recorded as
property and casualty reserves and were discounted to present value at an average interest rate of
5.0% in 2009 and 5.4% in 2008. As of December 31, 2009 and 2008, property and casualty reserves
were discounted by a total of $511 and $488, respectively. The current accident year benefit from
discounting property and casualty reserves was $40 in 2009, $38 in 2008 and $46 in 2007.
Contributing to the decrease in the benefit from discounting over the past three years has been a
reduction in the discount rate, reflecting a lower risk-free rate of return over that period.
Accretion of discounts for prior accident years totaled $24 in 2009, $26 in 2008, and $31 in 2007.
For annuities issued by Life to fund certain P&C workers’ compensation indemnity payments where the
claimant has not released the P&C Company of its obligation, Life has recorded annuity obligations
totaling $924 as of December 31, 2009 and $945 as of December 31, 2008.
F-61
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Reserves for Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
(continued)
Property and Casualty Unpaid Losses and Loss Adjustment Expenses
A rollforward of liabilities for property and casualty unpaid losses and loss adjustment expenses
follows:
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Beginning liabilities for
property and casualty unpaid
losses and loss adjustment
expenses-gross
|
$ | 21,933 | $ | 22,153 | $ | 21,991 | ||||||
|
Reinsurance and other recoverables
|
3,586 | 3,922 | 4,387 | |||||||||
|
|
||||||||||||
|
Beginning liabilities for
property and casualty unpaid
losses and loss adjustment
expenses-net
|
18,347 | 18,231 | 17,604 | |||||||||
|
|
||||||||||||
|
Add provision for property &
casualty unpaid losses and loss
adjustment expenses
|
||||||||||||
|
Current year
|
6,596 | 6,933 | 6,869 | |||||||||
|
Prior years
|
(186 | ) | (226 | ) | 48 | |||||||
|
|
||||||||||||
|
Total provision for property and
casualty unpaid losses and loss
adjustment expenses
|
6,410 | 6,707 | 6,917 | |||||||||
|
|
||||||||||||
|
Less payments
|
||||||||||||
|
Current year
|
2,776 | 2,888 | 2,563 | |||||||||
|
Prior years
|
3,771 | 3,703 | 3,727 | |||||||||
|
|
||||||||||||
|
Total payments
|
6,547 | 6,591 | 6,290 | |||||||||
|
|
||||||||||||
|
Ending liabilities for property
and casualty unpaid losses and
loss adjustment expenses-net
|
18,210 | 18,347 | 18,231 | |||||||||
|
Reinsurance and other recoverables
|
3,441 | 3,586 | 3,922 | |||||||||
|
|
||||||||||||
|
Ending liabilities for property
and casualty unpaid losses and
loss adjustment expenses-gross
|
$ | 21,651 | $ | 21,933 | $ | 22,153 | ||||||
|
|
||||||||||||
In the opinion of management, based upon the known facts and current law, the reserves recorded for
The Hartford’s property and casualty businesses at December 31, 2009 represent the Company’s best
estimate of its ultimate liability for losses and loss adjustment expenses related to losses
covered by policies written by the Company. Based on information or trends that are not presently
known, future reserve re-estimates may result in adjustments to these reserves. Such adjustments
could possibly be significant, reflecting any variety of new and adverse or favorable trends.
Because of the significant uncertainties surrounding environmental and particularly asbestos
exposures, it is possible that management’s estimate of the ultimate liabilities for these claims
may change and that the required adjustment to recorded reserves could exceed the currently
recorded reserves by an amount that could be material to The Hartford’s results of operations,
financial condition and liquidity. For a further discussion, see Note 12.
Examples of current trends affecting frequency and severity include increases in medical cost
inflation rates, the changing use of medical care procedures, the introduction of new products and
changes in internal claim practices. Other trends include changes in the legislative and
regulatory environment over workers’ compensation claims and evolving exposures to claims relating
to molestation or abuse and other mass torts. 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. In the case of the reserves for environmental exposures,
factors contributing to the high degree of uncertainty include expanding theories of liabilities
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.
Net favorable reserve development of $186 in 2009 included, among other reserve changes, a $127
release of reserves for directors’ and officers’ claims and errors and omissions claims for
accident years 2003 to 2008, a $112 release of general liability claims, primarily related to
accident years 2003 to 2007 and a $92 release of workers’ compensation reserves, partially
offset by a $213 strengthening of asbestos and environmental reserves. Net favorable reserve
development of $226 in 2008 included, among other reserve changes, a $156 release of workers’
compensation reserves primarily for accident years 2000 to 2007, a $105 release of general
liability claims, primarily related to accident years 2001 to 2007, and a $75 release of reserves
for directors and officers claims and errors and omissions claims for accident years 2003 to
2006, partially offset by a $103 strengthening of asbestos and environmental reserves. Among
other reserve changes, net unfavorable reserve development of $48 in 2007 included a $151 release
of workers’ compensation reserves for accident years 2002 to 2006, a $79 strengthening
of workers’ compensation and general liability reserves for accident years more than 20 years old
and a charge of $99 principally as a result of an adverse arbitration decision involving claims
owed to an insurer of the Company’s former parent.
F-62
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies
Accounting Policy
Management evaluates each contingent matter separately. A loss is recorded if probable and
reasonably estimable. Management establishes reserves 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 reserve 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 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 below under the caption “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, among others, putative state and federal class actions
seeking certification of a state or national class. Such putative class actions have alleged, for
example, underpayment of claims or improper underwriting practices in connection with various kinds
of insurance policies, such as personal and commercial automobile, property, life and inland
marine; improper sales practices in connection with the sale of life insurance and other investment
products; and improper fee arrangements in connection with investment products. 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. 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, an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the Company’s
consolidated results of operations or cash flows in particular quarterly or annual periods.
Broker Compensation Litigation
— Following the New York Attorney General’s filing of a civil
complaint against Marsh & McLennan Companies, Inc., and Marsh, Inc. (collectively, “Marsh”) in
October 2004 alleging that certain insurance companies, including The Hartford, participated with
Marsh in arrangements to submit inflated bids for business insurance and paid contingent
commissions to ensure that Marsh would direct business to them, private plaintiffs brought several
lawsuits against the Company predicated on the allegations in the Marsh complaint, to which the
Company was not party. Among these is a multidistrict litigation in the United States District
Court for the District of New Jersey. There are two consolidated amended complaints filed in the
multidistrict litigation, one related to conduct in connection with the sale of property-casualty
insurance and the other related to alleged conduct in connection with the sale of group benefits
products. The Company and various of its subsidiaries are named in both complaints. The
complaints assert, on behalf of a putative class of persons who purchased insurance through broker
defendants, claims under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act
(“RICO”), state law, and in the case of the group benefits complaint, claims under the Employee
Retirement Income Security Act of 1971 (“ERISA”). The claims are predicated upon allegedly
undisclosed or otherwise improper payments of contingent commissions to the broker defendants to
steer business to the insurance company defendants. The district court has dismissed the Sherman
Act and RICO claims in both complaints for failure to state a claim and has granted the defendants’
motions for summary judgment on the ERISA claims in the group-benefits products complaint. The
district court further has declined to exercise supplemental jurisdiction over the state law
claims, has dismissed those state law claims without prejudice, and has closed both cases. The
plaintiffs have appealed the dismissal of the claims in both consolidated amended complaints,
except the ERISA claims.
In September 2007, the Ohio Attorney General filed a civil action in Ohio state court alleging that
certain insurance companies, including The Hartford, conspired with Marsh in violation of Ohio’s
antitrust statute. The trial court denied defendants’ motion to dismiss the complaint in July
2008. The Company disputes the allegations and intends to defend this action vigorously.
In May 2009, The Hartford reached an agreement in principle to settle, for an immaterial amount,
two consolidated securities actions filed in the United States District Court for the District of
Connecticut asserting claims on behalf of a putative class of shareholders alleging that the
Company and certain of its executive officers violated Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 by failing to disclose to the investing public that The Hartford’s business
and growth was predicated on the unlawful activity alleged in the New York Attorney General’s
complaint against Marsh. A stipulation of settlement received final court approval in December
2009, and the case was dismissed with prejudice.
F-63
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies (continued)
In July 2009, The Hartford reached an agreement in principle to settle, for an immaterial
amount, two consolidated derivative actions filed in the United States District Court for the
District of Connecticut by shareholders on behalf of the Company against its directors and an
additional executive officer alleging that the defendants knew adverse non-public information about
the activities alleged in the Marsh complaint and concealed and misappropriated that information to
make profitable stock trades in violation of their duties to the Company. The settlement received
preliminary court approval in January 2010. A final approval hearing is scheduled for March 2010.
Investment and Savings Plan ERISA Class Action Litigation —
In November and December 2008,
following a decline in the share price of the Company’s common stock, seven putative class action
lawsuits were filed in the United States District Court for the District of Connecticut on behalf
of certain participants in the Company’s Investment and Savings Plan (the “Plan”), which offers the
Company’s common stock as one of many investment options. These lawsuits have been consolidated,
and a consolidated amended class-action complaint was filed on March 23, 2009, alleging that the
Company and certain of its officers and employees violated ERISA by allowing the Plan’s
participants to invest in the Company’s common stock and by failing to disclose to the Plan’s
participants information about the Company’s financial condition. The lawsuit seeks restitution or
damages for losses arising from the investment of the Plan’s assets in the Company’s common stock
during the period from December 10, 2007 to the present. In January 2010, the district court
denied the Company’s motion to dismiss the consolidated amended complaint. The Company disputes
the allegations and intends to defend this action vigorously.
Structured Settlement Class Action —
In October 2005, a putative nationwide class action was filed
in the United States District Court for the District of Connecticut against the Company and several
of its subsidiaries on behalf of persons who had asserted claims against an insured of a Hartford
property & casualty insurance company that resulted in a settlement in which some or all of the
settlement amount was structured to afford a schedule of future payments of specified amounts
funded by an annuity from a Hartford life insurance company (“Structured Settlements”). The
operative complaint alleges that since 1997 the Company has systematically deprived the settling
claimants of the value of their damages recoveries by secretly deducting 15% of the annuity premium
of every Structured Settlement to cover brokers’ commissions, other fees and costs, taxes, and a
profit for the annuity provider, and asserts claims under the Racketeer Influenced and Corrupt
Organizations Act (“RICO”) and state law. The plaintiffs seek compensatory damages, punitive
damages, pre-judgment interest, attorney’s fees and costs, and injunctive or other equitable
relief. The Company vigorously denies that any claimant was misled or otherwise received less
than the amount specified in the structured-settlement agreements. In March 2009, the district
court certified a class for the RICO and fraud claims composed of all persons, other than those
represented by a plaintiffs’ broker, who entered into a Structured Settlement since 1997 and
received certain written representations about the cost or value of the settlement. The district
court declined to certify a class for the breach-of-contract and unjust-enrichment claims. The
Company’s petition to the United States Court of Appeals for the Second Circuit for permission to
file an interlocutory appeal of the class-certification ruling was denied in October 2009. A trial
on liability and the methodology for computing class-wide damages is scheduled to commence in
September 2010. It is possible that an adverse outcome could have a material adverse effect on the
Company’s financial condition, consolidated results of operations or cash flows. The Company is
defending this litigation vigorously.
Fair Credit Reporting Act Class Action
— In February 2007, the United States District Court for the
District of Oregon gave final approval of the Company’s settlement of a lawsuit brought on behalf
of a class of homeowners and automobile policy holders alleging that the Company willfully violated
the Fair Credit Reporting Act by failing to send appropriate notices to new customers whose initial
rates were higher than they would have been had the customer had a more favorable credit report.
The Company paid approximately $84.3 to eligible claimants and their counsel in connection with the
settlement, and sought reimbursement from the Company’s Excess Professional Liability Insurance
Program for the portion of the settlement in excess of the Company’s $10 self-insured retention.
Certain insurance carriers participating in that program disputed coverage for the settlement, and
one of the excess insurers commenced an arbitration that resulted in an award in the Company’s
favor and payments to the Company of approximately $30.1, thereby exhausting the primary and
first-layer excess policies. In June 2009, the second-layer excess carriers commenced an
arbitration to resolve the dispute over coverage for the remainder of the amounts paid by the
Company. Management believes it is probable that the Company’s coverage position ultimately will
be sustained.
Shareholder Demand
— Like the boards of directors of many other companies, The Hartford’s Board of
Directors (the “Board”) has received a demand from SEIU Pension Plans Master Trust, which purports
to be a current holder of the Company’s common stock. The demand requests the Board to bring suit
to recover alleged excessive compensation paid to senior executives of the Company from 2005
through the present and to change the Company’s executive compensation structure. The Board
investigated the allegations in the demand and, in December 2009, communicated to SEIU the Board’s
determination that there is no basis for the Company to assert the requested claims and such claims
would not be in the best interest of shareholders or the Company.
F-64
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies (continued)
Asbestos and Environmental Claims
The Company continues to receive asbestos and environmental 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.
The Company wrote several different categories of insurance contracts that may cover asbestos and
environmental claims. First, the Company wrote primary policies providing the first layer of
coverage in an insured’s liability program. Second, the Company wrote excess 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 and reinsurance coverages. Fourth, subsidiaries of the Company participated in the
London Market, writing both direct insurance and assumed reinsurance business.
Significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate
reserves necessary for unpaid losses and expenses related to environmental and particularly
asbestos claims. The degree of variability of 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 asbestos
and environmental 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 asbestos and
environmental 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 asbestos and environmental 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 its asbestos and environmental exposures. For this
reason, the Company relies on exposure-based analysis to estimate the ultimate costs of these
claims and regularly evaluates new account information in assessing its potential asbestos and
environmental 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.
As of December 31, 2009 and December 31, 2008, the Company reported $1.9 billion and $1.9 billion
of net asbestos reserves and $312 and $275 of net environmental reserves, respectively. The
Company believes that its current asbestos and environmental reserves are appropriate. However,
analyses of future developments could cause The Hartford to change its estimates and ranges of its
asbestos and environmental reserves, and the effect of these changes could be material to the
Company’s consolidated operating results, financial condition, and liquidity.
F-65
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies (continued)
Regulatory Developments
On July 23, 2007, the Company entered into an agreement (the “Agreement”) with the New York
Attorney General’s Office, the Connecticut Attorney General’s Office, and the Illinois Attorney
General’s Office to resolve (i) the previously disclosed investigations by these Attorneys General
regarding the Company’s compensation agreements with brokers, alleged participation in arrangements
to submit inflated bids, compensation arrangements in connection with the administration of workers
compensation plans and reporting of workers compensation premium, participation in finite
reinsurance transactions, sale of fixed and individual annuities used to fund structured
settlements, and marketing and sale of individual and group variable annuity products and (ii) the
previously disclosed investigation by the New York Attorney General’s Office of aspects of the
Company’s variable annuity and mutual fund operations related to market timing. In light of the
Agreement, the Staff of the Securities and Exchange Commission has informed the Company that it has
determined to conclude its previously disclosed investigation into market timing without
recommending any enforcement action.
Under the terms of the Agreement, the Company paid $115, of which $84 represents restitution for
market timing, $5 represents restitution for issues relating to the compensation of brokers, and
$26 is a civil penalty. After taking into account previously established reserves, the Company
incurred a charge of $30, after-tax, in the second quarter of 2007 for the costs associated with
the settlement. Also pursuant to the terms of the Agreement, the Company agreed to certain conduct
remedies, including, among other things, a ban on paying contingent compensation with respect to
any line of property and casualty insurance in which insurers that do not pay contingent
compensation, together with those that have entered into similar settlement agreements,
collectively represent at least 65% of the market.
Lease Commitments
The total rental expense on operating leases was $154, $172 and $179 in 2009, 2008 and 2007,
respectively, which excludes sublease rental income of $2, $1 and $4 in 2009, 2008 and 2007,
respectively. Future minimum lease commitments are as follows:
| Years ending December 31, | Capital Leases | Operating Leases | ||||||
|
2010
|
$ | 73 | $ | 130 | ||||
|
2011
|
— | 105 | ||||||
|
2012
|
— | 63 | ||||||
|
2013
|
— | 37 | ||||||
|
2014
|
— | 18 | ||||||
|
Thereafter
|
— | 39 | ||||||
|
|
||||||||
|
Total minimum lease payments [1]
|
$ | 73 | $ | 392 | ||||
|
Amounts representing interest
|
(5 | ) | ||||||
|
|
||||||||
|
Present value of net minimum lease payments
|
68 | |||||||
|
Current portion of capital lease obligation
|
(68 | ) | ||||||
|
|
||||||||
|
Total
|
$ | — | ||||||
|
|
||||||||
| [1] |
Excludes expected future minimum sublease rental income of approximately $3, $2 and $1 in
2010, 2011 and 2012, respectively.
|
The Company’s lease commitments consist primarily of lease agreements on office space, data
processing, furniture and fixtures, office equipment, and transportation equipment that expire at
various dates. The leases are predominantly operating leases except for a building lease agreement
that was classified as a capital lease in 2007. Capital lease assets are included in property and
equipment.
In November 2007, the Company entered into a firm commitment to purchase certain furniture and
fixtures which were subject to a sale leaseback agreement and recorded a capital lease of $14.
This purchase was completed in June 2008.
In May 2007, the Company entered into a firm commitment to purchase office buildings and recorded a
capital lease of $114. This purchase was completed in January 2010. See Note 14 for further
information on capital lease obligations.
Unfunded Commitments
As of December 31, 2009, the Company has outstanding commitments totaling approximately $1.2
billion, of which approximately $886 is committed to fund limited partnership and other alternative
investments. These capital commitments may be called by the partnership during the commitment
period (on average two to five years) to fund the purchase of new investments and partnership
expenses. Once the commitment period expires, the Company is under no obligation to fund the
remaining unfunded commitment but may elect to do so. The remaining outstanding commitments are
primarily related to various funding obligations associated with private placement securities and
mortgage loans. These have a commitment period of one month to three years.
F-66
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies (continued)
Guaranty Fund and Other Insurance-related Assessments
In all states, insurers licensed to transact certain classes of insurance are required to become
members of a guaranty fund. In most states, in the event of the insolvency of an insurer writing
any such class of insurance in the state, members of the funds are assessed to pay certain claims
of the insolvent insurer. A particular state’s fund assesses its members based on their respective
written premiums in the state for the classes of insurance in which the insolvent insurer was
engaged. Assessments are generally limited for any year to one or two percent of the premiums
written per year depending on the state.
Liabilities for guaranty fund and other insurance-related assessments are accrued when an
assessment is probable, when it can be reasonably estimated, and when the event obligating the
Company to pay an imposed or probable assessment has occurred. Liabilities for guaranty funds and
other insurance-related assessments are not discounted and are included as part of other
liabilities in the Consolidated Balance Sheets. As of December 31, 2009 and 2008, the liability
balance was $111 and $128, respectively. As of December 31, 2009 and 2008, $18 and $17,
respectively, related to premium tax offsets were included in other assets.
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial
strength ratings of the individual legal entity that entered into the derivative agreement as set
by nationally recognized statistical rating agencies. If the insurance operating 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
demand immediate settlement of all outstanding derivative positions traded under each impacted
bilateral agreement. The settlement amount is determined by netting the derivative positions
transacted under each agreement. If the termination rights were to be exercised by the
counterparties, it could impact the insurance operating entity’s ability to conduct hedging
activities by increasing the associated costs and decreasing the willingness of counterparties to
transact with the insurance operating entity. The aggregate fair value of all derivative
instruments with credit-risk-related contingent features that are in a net liability position as of
December 31, 2009, is $655. Of this $655, the insurance operating entities have posted collateral
of $591 in the normal course of business. Based on derivative market values as of December 31,
2009, a downgrade of one level below the current financial strength ratings by either Moody’s or
S&P could require approximately an additional $50 to be posted as collateral. Based on derivative
market values as of December 31, 2009, a downgrade by either Moody’s or S&P of two levels below the
insurance operating entities’ current financial strength ratings could require approximately an
additional $70 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 collateral that we may be required
to post is primarily in the form of U.S. Treasury bills and U.S. Treasury notes.
F-67
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Income Tax
The Company recognizes taxes payable or refundable for the current year and deferred taxes for
the tax consequences of differences between the financial reporting and tax basis of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years the temporary differences are expected to reverse.
The provision (benefit) for income taxes consists of the following:
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Income Tax Expense (Benefit)
|
||||||||||||
|
Current — U.S. Federal
|
$ | 502 | $ | (247 | ) | $ | 436 | |||||
|
— International
|
— | — | — | |||||||||
|
|
||||||||||||
|
Total current
|
502 | (247 | ) | 436 | ||||||||
|
|
||||||||||||
|
Deferred — U.S. Federal Excluding NOL
Carryforward
|
(1,580 | ) | (1,574 | ) | 473 | |||||||
|
— Net Operating Loss Carryforward
|
712 | (742 | ) | — | ||||||||
|
— International
|
(475 | ) | 721 | 147 | ||||||||
|
|
||||||||||||
|
Total deferred
|
(1,343 | ) | (1,595 | ) | 620 | |||||||
|
|
||||||||||||
|
Total income tax expense (benefit)
|
$ | (841 | ) | $ | (1,842 | ) | $ | 1,056 | ||||
|
|
||||||||||||
Deferred tax assets (liabilities) include the following as of December 31:
| Deferred Tax Assets | 2009 | 2008 | ||||||
|
Tax discount on loss reserves
|
$ | 682 | $ | 725 | ||||
|
Tax basis deferred policy acquisition costs and reserves
|
641 | 703 | ||||||
|
Unearned premium reserve and other underwriting related reserves
|
401 | 405 | ||||||
|
Investment-related items
|
1,718 | 2,000 | ||||||
|
Employee benefits
|
494 | 419 | ||||||
|
Net unrealized losses on investments
|
1,581 | 4,265 | ||||||
|
Minimum tax credit
|
1,102 | 641 | ||||||
|
Capital loss carryover
|
535 | 195 | ||||||
|
Net operating loss carryover
|
86 | 850 | ||||||
|
Other
|
66 | 25 | ||||||
|
|
||||||||
|
Total Deferred Tax Assets
|
7,306 | 10,228 | ||||||
|
Valuation Allowance
|
(86 | ) | (75 | ) | ||||
|
|
||||||||
|
Deferred Tax Assets, Net of Valuation Allowance
|
7,220 | 10,153 | ||||||
|
|
||||||||
|
Deferred Tax Liabilities
|
||||||||
|
Financial statement deferred policy acquisition costs and reserves
|
(3,179 | ) | (4,816 | ) | ||||
|
Other depreciable & amortizable assets
|
(43 | ) | (13 | ) | ||||
|
Other
|
(58 | ) | (85 | ) | ||||
|
|
||||||||
|
Total Deferred Tax Liabilities
|
(3,280 | ) | (4,914 | ) | ||||
|
|
||||||||
|
Net Deferred Tax Asset
|
$ | 3,940 | $ | 5,239 | ||||
|
|
||||||||
The Company had a current income tax payable of $216 as of December 31, 2009 and a current tax
receivable of $539 as of December 31, 2008. The Company’s net deferred tax asset includes a net
deferred tax liability of $849 and $1,458 for Japan in 2009 and 2008, respectively.
F-68
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Income Tax (continued)
In management’s judgment, the net deferred tax asset will more likely than not be realized.
Included in the deferred tax asset is the expected tax benefit attributable to net operating losses
of $308, consisting of U.S. losses of $18, which expire from 2012-2021, and foreign losses of $290.
The foreign losses have no expiration. A valuation allowance of $86 has been recorded which
consists of $6 related primarily to U.S and $80 related to foreign operations. No valuation
allowance has been recorded for realized or unrealized losses. In assessing the need for a
valuation allowance, management considered taxable income in prior carryback years, future taxable
income and tax planning strategies that include holding debt securities with market value losses
until recovery, selling appreciated securities to offset capital losses, and sales of certain
corporate assets. Such tax planning strategies are viewed by management as prudent and feasible
and will be implemented if necessary to realize the deferred tax asset. However, we anticipate
limited ability, going forward, to recognize a full tax benefit on realized losses which will
result in additional valuation allowances. Additionally, if interest rates rise, we may also
experience an increased likelihood of recording a valuation allowance on previously recognized
realized capital losses.
The Company or one or more of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 2004. During the first quarter of 2009, the Company received
notification of the approval by the Joint Committee on Taxation of the results of the 2002 through
2003 examination. As a result, the Company recorded a tax benefit of $7. The IRS examination of
2004 through 2006 was concluded in the fourth quarter of 2009. As a result, the Company recorded a
tax benefit of $20. In addition, the Company is working with the IRS on a possible settlement of a
DRD issue related to prior periods which, if settled, may result in the booking of tax benefits.
Such benefits are not expected to be material to the statement of operations. The Company does not
anticipate that any of these items will result in a significant change in the balance of
unrecognized tax benefits within 12 months. Management believes that adequate provision has been
made in the financial statements for any potential assessments that may result from tax
examinations and other tax-related matters for all open tax years.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Balance, at January 1
|
$ | 91 | $ | 76 | $ | 8 | ||||||
|
Additions based on tax positions related to the current year
|
— | 27 | 33 | |||||||||
|
Additions for tax positions for prior years
|
— | — | 35 | |||||||||
|
Reductions for tax positions for prior years
|
(35 | ) | (12 | ) | — | |||||||
|
Settlements
|
(8 | ) | — | — | ||||||||
|
|
||||||||||||
|
Balance, at December 31
|
$ | 48 | $ | 91 | $ | 76 | ||||||
|
|
||||||||||||
The entire balance, if it were recognized, would affect the effective tax rate.
The Company classifies interest and penalties (if applicable) as income tax expense in the
financial statements. During the years ended December 31, 2009, 2008 and 2007, the Company
recognized approximately $7, $0, and $1 in interest expense. The Company had approximately $8 and
$1 of interest accrued at December 31, 2009 and 2008, respectively. The Company does not believe
it would be subject to any penalties in any open tax years and, therefore, has not booked any
accrual for penalties.
A reconciliation of the tax provision at the U.S. Federal statutory rate to the provision for
income taxes is as follows:
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Tax provision at U.S. Federal statutory rate
|
$ | (605 | ) | $ | (1,607 | ) | $ | 1,402 | ||||
|
Tax-exempt interest
|
(149 | ) | (161 | ) | (157 | ) | ||||||
|
Dividends received deduction
|
(188 | ) | (191 | ) | (170 | ) | ||||||
|
Nondeductible costs associated with warrants
|
78 | — | — | |||||||||
|
Goodwill
|
12 | 113 | — | |||||||||
|
Other
|
11 | 4 | (19 | ) | ||||||||
|
|
||||||||||||
|
Provision for income taxes
|
$ | (841 | ) | $ | (1,842 | ) | $ | 1,056 | ||||
|
|
||||||||||||
F-69
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Debt
The Hartford’s long-term debt securities are issued by either The Hartford Financial Services
Group, Inc. (“HFSG Holding Company”) or Hartford Life, Inc. (“HLI”) and are unsecured obligations
of HFSG Holding Company or HLI and rank on a parity with all other unsecured and unsubordinated
indebtedness of HFSG Holding Company or HLI. In addition to HFSG Holding Company and HLI, The
Hartford acquired $5 in junior subordinated debt of Federal Trust Corporation, see Note 22.
The following table presents short-term and long-term debt by issuance as of December 31, 2009 and
2008.
| Short-Term Debt | 2009 | 2008 | ||||||
|
Commercial paper
|
$ | — | $ | 374 | ||||
|
Current maturities of long-term debt and capital lease obligations
|
343 | 24 | ||||||
|
|
||||||||
|
Total Short-Term Debt
|
$ | 343 | $ | 398 | ||||
|
|
||||||||
|
|
||||||||
|
Long-Term Debt
|
||||||||
|
Senior Notes and Debentures
|
||||||||
|
7.9% Notes, due 2010
|
$ | — | $ | 275 | ||||
|
5.25% Notes, due 2011
|
400 | 400 | ||||||
|
4.625% Notes, due 2013
|
320 | 319 | ||||||
|
4.75% Notes, due 2014
|
199 | 199 | ||||||
|
7.3% Notes, due 2015
|
200 | 200 | ||||||
|
5.5% Notes, due 2016
|
300 | 300 | ||||||
|
5.375% Notes, due 2017
|
499 | 499 | ||||||
|
6.3% Notes, due 2018
|
500 | 500 | ||||||
|
6.0% Notes, due 2019
|
499 | 499 | ||||||
|
7.65% Notes, due 2027
|
149 | 148 | ||||||
|
7.375% Notes, due 2031
|
92 | 92 | ||||||
|
5.95% Notes, due 2036
|
298 | 298 | ||||||
|
6.1% Notes, due 2041
|
323 | 323 | ||||||
|
|
||||||||
|
Total Senior Notes and Debentures
|
3,779 | 4,052 | ||||||
|
|
||||||||
|
Junior Subordinated Debentures
|
||||||||
|
3 month LIBOR plus 295 basis points, Notes due 2033
|
5 | — | ||||||
|
8.125% Notes, due 2068
|
500 | 500 | ||||||
|
10.0% Notes, due 2068
|
1,212 | 1,203 | ||||||
|
|
||||||||
|
Total Junior Subordinated Debentures
|
1,717 | 1,703 | ||||||
|
|
||||||||
|
Capital lease obligations
|
— | 68 | ||||||
|
|
||||||||
|
Total Long-Term Debt
|
$ | 5,496 | $ | 5,823 | ||||
|
|
||||||||
The effective interest rate on the 6.1% senior notes due 2041 is 7.9%, on the 3 month LIBOR plus
295 basis points junior subordinated debentures due 2033 is 3.0%, and on the 10.0% junior
subordinated debentures due 2068 is 15.3%. The effective interest rate on the remaining notes does
not differ materially from the stated rate.
Interest Expense
The following table presents interest expense incurred for 2009, 2008 and 2007, respectively.
| For the years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Short-term debt
|
$ | 3 | $ | 11 | $ | 13 | ||||||
|
Long-term debt
|
473 | 332 | 250 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
$ | 476 | $ | 343 | $ | 263 | ||||||
|
|
||||||||||||
The weighted-average interest rate on commercial paper was 2.4%, 2.9% and 5.1% for 2009, 2008 and
2007, respectively.
Senior Notes
On November 16, 2008, The Hartford repaid its $330, 5.663% senior notes at maturity.
On November 1, 2008, The Hartford repaid its $200, 6.375% senior notes at maturity.
On August 16, 2008, The Hartford repaid its $425, 5.55% senior notes at maturity.
On May 12, 2008, The Hartford issued $500 of 6.0% senior notes due January 15, 2019.
On March 4, 2008, The Hartford issued $500 of 6.3% senior notes due March 15, 2018.
F-70
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Debt (continued)
Junior Subordinated Debentures
On June 6, 2008, the Company issued $500 aggregate principal amount of 8.125% fixed-to-floating
rate junior subordinated debentures (the “debentures”) due June 15, 2068 for net proceeds of
approximately $493, after deducting underwriting discounts and expenses from the offering. The
debentures bear interest at an annual fixed rate of 8.125% from the date of issuance to, but
excluding, June 15, 2018, payable semi-annually in arrears on June 15 and December 15. From and
including June 15, 2018, the debentures will bear interest at an annual rate, reset quarterly,
equal to three-month LIBOR plus 4.6025%, payable quarterly in arrears on March 15, June 15,
September 15 and December 15 of each year. The Company has the right, on one or more occasions, to
defer the payment of interest on the debentures. The Company may defer interest for up to ten
consecutive years without giving rise to an event of default. Deferred interest will accumulate
additional interest at an annual rate equal to the annual interest rate then applicable to the
debentures. If the Company defers interest for five consecutive years or, if earlier, pays current
interest during a deferral period, which may be paid from any source of funds, the Company will be
required to pay deferred interest from proceeds from the sale of certain qualifying securities.
The debentures carry a scheduled maturity date of June 15, 2038 and a final maturity date of June
15, 2068. During the 180-day period ending on a notice date not more than fifteen and not less than
ten business days prior to the scheduled maturity date, the Company is required to use commercially
reasonable efforts to sell certain qualifying replacement securities sufficient to permit repayment
of the debentures at the scheduled maturity date. If any debentures remain outstanding after the
scheduled maturity date, the unpaid amount will remain outstanding until the Company has raised
sufficient proceeds from the sale of qualifying replacement securities to permit the repayment in
full of the debentures. If there are remaining debentures at the final maturity date, the Company
is required to redeem the debentures using any source of funds.
Subject to the replacement capital covenant described below, the Company can redeem the debentures
at its option, in whole or in part, at any time on or after June 15, 2018 at a redemption price of
100% of the principal amount being redeemed plus accrued but unpaid interest. The Company can
redeem the debentures at its option prior to June 15, 2018 (a) in whole at any time or in part from
time to time or (b) in whole, but not in part, in the event of certain tax or rating agency events
relating to the debentures, at a redemption price equal to the greater of 100% of the principal
amount being redeemed and the applicable make-whole amount, in each case plus any accrued and
unpaid interest.
In connection with the offering of the debentures, the Company entered into a “replacement capital
covenant” for the benefit of holders of one or more designated series of the Company’s
indebtedness, initially the Company’s 6.1% notes due 2041. Under the terms of the replacement
capital covenant, if the Company redeems the debentures at any time prior to June 15, 2048 it can
only do so with the proceeds from the sale of certain qualifying replacement securities.
For a discussion of the 10.0% junior subordinated debentures due 2068, see Note 21.
The following table reflects the Company’s long-term debt maturities, excluding capital lease
obligations.
|
2010
|
$ | 275 | ||
|
2011
|
400 | |||
|
2012
|
— | |||
|
2013
|
320 | |||
|
2014
|
200 | |||
|
Thereafter
|
5,205 |
Capital Lease Obligations
The Company recorded capital leases of $68 and $92 in 2009 and 2008, respectively. Capital lease
obligations are included in long-term debt, except for the current maturities, which are included
in short-term debt, in the Consolidated Balance Sheet as of December 31, 2009 and 2008,
respectively. See Note 12 for further information on capital lease commitments.
Shelf Registrations
On April 11, 2007, The Hartford filed with the Securities and Exchange Commission an automatic
shelf registration statement (Registration No. 333-142044) for the potential offering and sale of
debt and equity securities. The registration statement allows for the following types of
securities to be offered: (i) debt securities, preferred stock, common stock, depositary shares,
warrants, stock purchase contracts, stock purchase units and junior subordinated deferrable
interest debentures of the Company, and (ii) preferred securities of any of one or more capital
trusts organized by The Hartford (“The Hartford Trusts”). The Company may enter into guarantees
with respect to the preferred securities of any of The Hartford Trusts. In that The Hartford is a
well-known seasoned issuer, as defined in Rule 405 under the Securities Act of 1933, the
registration statement went effective immediately upon filing and The Hartford may offer and sell
an unlimited amount of securities under the registration statement during the three-year life of
the shelf.
F-71
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Debt (continued)
Contingent Capital Facility
On February 12, 2007, The Hartford entered into a put option agreement (the “Put Option Agreement”)
with Glen Meadow ABC Trust, a Delaware statutory trust (the “ABC Trust”), and LaSalle Bank National
Association, as put option calculation agent. The Put Option Agreement provides The Hartford with
the right to require the ABC Trust, at any time and from time to time, to purchase The Hartford’s
junior subordinated notes (the “Notes”) in a maximum aggregate principal amount not to exceed $500.
Under the Put Option Agreement, The Hartford will pay the ABC Trust premiums on a periodic basis,
calculated with respect to the aggregate principal amount of Notes that The Hartford had the right
to put to the ABC Trust for such period. The Hartford has agreed to reimburse the ABC Trust for
certain fees and ordinary expenses. The Company holds a variable interest in the ABC Trust where
the Company is not the primary beneficiary. As a result, the Company did not consolidate the ABC
Trust. As of December 31, 2009, The Hartford has not exercised its right to require ABC Trust to
purchase the Notes. As a result, the Notes remain a source of capital for the HFSG Holding
Company.
Commercial Paper and Revolving Credit Facility
The table below details the Company’s short-term debt programs and the applicable balances
outstanding.
| Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
| Effective | Expiration | December 31, | December 31, | |||||||||||||||||||||
| Description | Date | Date | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
|
Commercial Paper
|
||||||||||||||||||||||||
|
The Hartford
|
11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | — | $ | 374 | ||||||||||||||
|
Revolving Credit Facility
|
||||||||||||||||||||||||
|
5-year revolving credit facility
|
8/9/07 | 8/9/12 | 1,900 | 1,900 | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Commercial Paper and Revolving Credit Facility
|
$ | 3,900 | $ | 3,900 | $ | — | $ | 374 | ||||||||||||||||
|
|
||||||||||||||||||||||||
While The Hartford’s maximum borrowings available under its commercial paper program are $2.0
billion, the Company is dependent upon market conditions to access short-term financing through the
issuance of commercial paper to investors. As of December 31, 2009, the Company has no commercial
paper outstanding.
The revolving credit facility provides for up to $1.9 billion of unsecured credit through August 9,
2012, which excludes a $100 commitment from an affiliate of Lehman Brothers. Of the total
availability under the revolving credit facility, up to $100 is available to support letters of
credit issued on behalf of The Hartford or other subsidiaries of The Hartford. Under the revolving
credit facility, the Company must maintain a minimum level of consolidated net worth of $12.5
billion. At December 31, 2009, the consolidated net worth of the Company as calculated in
accordance with the terms of the credit facility was $22.9 billion. The definition of consolidated
net worth under the terms of the credit facility, excludes AOCI and includes the Company’s
outstanding junior subordinated debentures and perpetual preferred securities, net of discount. In
addition, the Company must not exceed a maximum ratio of debt to capitalization of 40%. At
December 31, 2009, as calculated in accordance with the terms of the credit facility, the Company’s
debt to capitalization ratio was 15.3%. Quarterly, the Company certifies compliance with the
financial covenants for the syndicate of participating financial institutions. As of December 31,
2009, the Company was in compliance with all such covenants.
The Hartford’s Life Japan operations also maintain a line of credit in the amount of $54, or ¥5
billion, which expires January 4, 2011 in support of the subsidiary operations.
Consumer Notes
In 2008, the Company made the decision to discontinue future issuances of consumer notes; this
decision does not impact consumer notes currently outstanding. Institutional began issuing
consumer notes through its Retail Investor Notes Program in September 2006. A consumer note is an
investment product distributed through broker-dealers directly to retail investors as medium-term,
publicly traded fixed or floating rate, or a combination of fixed and floating rate, notes.
Consumer notes are part of the Company’s spread-based business and proceeds are used to purchase
investment products, primarily fixed rate bonds. Proceeds are not used for general operating
purposes. Consumer notes maturities may extend up to 30 years and have contractual coupons based
upon varying interest rates or indexes (e.g. consumer price index) and may include a call provision
that allows the Company to extinguish the notes prior to its scheduled maturity date. Certain
Consumer notes may be redeemed by the holder in the event of death. Redemptions are subject to
certain limitations, including calendar year aggregate and individual limits. The aggregate limit
is equal to the greater of $1 or 1% of the aggregate principal amount of the notes as of the end of
the prior year. The individual limit is $250 thousand per individual. Derivative instruments are
utilized to hedge the Company’s exposure to market risk in accordance with Company policy.
As of December 31, 2009 and 2008, $1,136 and $1,210, respectively, of consumer notes were
outstanding. As of December 31, 2009, these consumer notes have interest rates ranging from 4% to
6% for fixed notes and, for variable notes, based on December 31, 2009 rates, notes indexed to the
consumer price index plus 80 to 260 basis points, or indexed to the S&P 500, Dow Jones Industrials,
foreign currency, or the Nikkei 225. The aggregate maturities of consumer notes are as follows:
$24 in 2010, $120 in 2011, $274 in 2012, $200 in 2013, and $518 thereafter. For 2009, 2008 and
2007, interest credited to holders of consumer notes was $51, $59 and $11, respectively.
F-72
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Equity
Increase in Authorized Common Shares
On May 27, 2009, at the Company’s annual meeting of shareholders, shareholders approved an increase
in the aggregate authorized number of shares of common stock from 750 million to 1.5 billion.
Preferred Stock
The Company has 50,000,000 shares of preferred stock authorized, see Note 21 for a discussion of
Allianz SE’s investment in The Hartford and discussion below on the Company’s participation in the
Capital Purchase Program.
The Company’s Participation in the Capital Purchase Program
On June 26, 2009, as part of the Capital Purchase Program (“CPP”) established by the U.S.
Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2008 (the
“EESA”), the Company entered into a Private Placement Purchase Agreement with Treasury pursuant to
which the Company issued and sold to Treasury 3,400,000 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series E, having a liquidation preference of $1,000 per share
(the “Series E Preferred Stock”), and a ten-year warrant to purchase up to 52,093,973 shares of the
Company’s common stock, par value $0.01 per share, at an initial exercise price of $9.79 per share,
for an aggregate purchase price of $3.4 billion.
Cumulative dividends on the Series E Preferred Stock will accrue on the liquidation preference at a
rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter. The Series
E Preferred Stock has no maturity date and ranks senior to the Company’s common stock. The Series
E Preferred Stock is non-voting. Pursuant to our agreement with Treasury in connection with
Treasury’s CPP investment in the Company, prior to the earlier of June 26, 2012 and the date on
which the Series E Preferred Stock has been redeemed in whole or Treasury has transferred all of
the Series E Preferred Stock to non-affiliates, the Company may not, without the consent of
Treasury, declare or pay a regular cash dividend for an amount greater than $0.05 per quarter.
The Company may redeem the Series E Preferred Stock with the consent of the Office of Thrift
Supervision, after consultation with Treasury.
Upon issuance, the fair values of the Series E Preferred Stock and the associated warrants were
computed as if the instruments were issued on a stand alone basis. The fair value of the Series E
Preferred stock was estimated based on a five-year holding period and cash flows discounted at a
rate of 13% resulting in a fair value estimate of approximately $2.5 billion. The Company used a
Black-Scholes options pricing model including an adjustment for American-style options to estimate
the fair value of the warrants, resulting in a stand alone fair value of approximately $400. The
most significant and unobservable assumption in this valuation was the Company’s share price
volatility. The Company used a long-term realized volatility of the Company’s stock of 62%. In
addition, the Company assumed a dividend yield of 1.72%.
The individual fair values were then used to record the Preferred Stock and associated warrants on
a relative fair value basis of $2.9 billion and $480, respectively. The warrants of $480 were
recorded to additional paid-in capital as permanent equity. The preferred stock amount was recorded
at the liquidation value of $1,000 per share or $3.4 billion, net of discount of $480. The
discount is being amortized over a five-year period from the date of issuance, using the effective
yield method and is recorded as a direct reduction to retained earnings and deducted from income
available to common stockholders in the calculation of earnings per share. The amortization of
discount totaled $40 for the year ended December 31, 2009.
Discretionary Equity Issuance Program
On June 12, 2009, the Company announced that it had commenced a discretionary equity issuance
program, and in accordance with that program entered into an equity distribution agreement pursuant
to which it would offer up to 60 million shares of its common stock from time to time for aggregate
sales proceeds of up to $750.
On August 5, 2009, the Company increased the aggregate sales proceeds from $750 to $900.
On August 6, 2009, the Company announced the completion of the discretionary equity issuance
program. The Hartford issued 56.1 million shares of common stock and received net proceeds of $887
under this program.
Stock Repurchase Program
The Board has authorized a $1 billion stock repurchase program. The Company’s repurchase
authorization permits purchases of common stock, which may be in the open market or through
privately negotiated transactions. The Company also may enter into derivative transactions to
facilitate future repurchases of common stock. The timing of any future repurchases will be
dependent upon several factors, including the market price of the Company’s securities, the
Company’s capital position, consideration of the effect of any repurchases on the Company’s
financial strength or credit ratings, restrictions arising from the Company’s participation in the
CPP, and other corporate considerations. The repurchase program may be modified, extended or
terminated by the Board at any time. The Hartford has $807 remaining for stock repurchase under
this program.
F-73
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Equity (continued)
Noncontrolling Interests
Noncontrolling interest includes VIEs in which the Company has concluded that it is the primary
beneficiary, see Note 5 for further discussion of the Company’s involvement in VIEs, and general
account mutual funds where the Company holds the majority interest due to seed money investments.
The Company records noncontrolling interest as a component of equity. The noncontrolling interest
within these entities is likely to change, as these entities represent investment vehicles whereby
investors may frequently redeem or contribute to these investments. As such, the change in
noncontrolling ownership interest represented in the Company’s Consolidated Statement of Changes in
Equity will primarily represent redemptions and additional subscriptions within these investment
vehicles.
Statutory Results (unaudited)
The domestic insurance subsidiaries of The Hartford prepare their statutory financial statements in
conformity with statutory accounting practices prescribed or permitted by the applicable state
insurance department which vary materially from U.S. GAAP. Prescribed statutory accounting
practices include publications of the National Association of Insurance Commissioners (“NAIC”), as
well as state laws, regulations and general administrative rules. The differences between
statutory financial statements and financial statements prepared in accordance with U.S. GAAP vary
between domestic and foreign jurisdictions. The principal differences are that statutory financial
statements do not reflect deferred policy acquisition costs and limit deferred income taxes, life
benefit reserves predominately use interest rate and mortality assumptions prescribed by the NAIC,
bonds are generally carried at amortized cost and reinsurance assets and liabilities are presented
net of reinsurance.
The statutory net income (loss) amounts for the years ended December 31, 2008 and 2007, and the
statutory surplus amounts as of December 31, 2008 and 2007 in the table below are based on actual
statutory filings with the applicable U.S. regulatory authorities. The statutory net income
amounts for the year ended December 31, 2009 and the statutory surplus amounts as of December 31,
2009 are estimates, as the respective 2009 statutory filings have not yet been made.
| For the years ended December 31, | ||||||||||||
| Statutory Net Income (Loss) | 2009 | 2008 | 2007 | |||||||||
|
Life operations
|
$ | 1,928 | $ | (4,553 | ) | $ | 729 | |||||
|
Property & Casualty operations
|
889 | 497 | 1,803 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 2,817 | $ | (4,056 | ) | $ | 2,532 | |||||
|
|
||||||||||||
| As of December 31, | ||||||||
| Statutory Surplus | 2009 | 2008 | ||||||
|
Life Operations, includes domestic captive insurance subsidiaries
|
$ | 7,287 | $ | 6,046 | ||||
|
Property & Casualty Operations, excluding non-Property & Casualty subsidiaries
|
7,364 | 6,012 | ||||||
|
|
||||||||
|
Total
|
$ | 14,651 | $ | 12,058 | ||||
|
|
||||||||
The Company also holds regulatory capital and surplus for its operations in Japan. Using the
investment in subsidiary accounting requirements defined in the U.S. National Association of
Insurance Commissioners Statements of Statutory Accounting Practices, the Company’s statutory
capital and surplus attributed to the Japan operations was $1,311 and $1,718 as of December 31,
2009 and 2008, respectively.
The Company received approval from the Connecticut Insurance Department regarding the use of two
permitted practices in the statutory financial statements of its Connecticut-domiciled life
insurance subsidiaries as of December 31, 2008. The first permitted practice related to the
statutory accounting for deferred income taxes. Specifically, this permitted practice modified the
accounting for deferred income taxes prescribed by the NAIC by increasing the realization period
for deferred tax assets from one year to three years and increasing the asset recognition limit
from 10% to 15% of adjusted statutory capital and surplus. The benefits of this permitted practice
were not considered by the Company when determining surplus available for dividends. The second
permitted practice related to the statutory reserving requirements for variable annuities with
guaranteed living benefit riders. Actuarial guidelines prescribed by the NAIC required a
stand-alone asset adequacy analysis reflecting only benefits, expenses and charges that are
associated with the riders for variable annuities with guaranteed living benefits. The permitted
practice allowed for all benefits, expenses and charges associated with the variable annuity
contract to be reflected in the stand-alone asset adequacy test. These permitted practices
resulted in an increase to Life operations statutory surplus of $987 as of December 31, 2008. The
effects of these permitted practices were included in the 2008 Life operations surplus amount in
the table above.
In December, 2009 the NAIC issued SSAP 10R which codified the three year realization period and 15%
of adjusted statutory capital and surplus recognition limits for accounting for deferred tax assets
for both life and property and casualty companies. SSAP 10R will expire for periods after December
31, 2010.
F-74
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Equity (continued)
Dividends from Insurance Subsidiaries
Dividends to the HFSG Holding Company from its insurance subsidiaries are restricted. The payment
of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws
of Connecticut. These laws require notice to and approval by the state insurance commissioner for
the declaration or payment of any dividend, which, together with other dividends or distributions
made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s
policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from
operations, if such company is a life insurance company) for the twelve-month period ending on the
thirty-first day of December last preceding, in each case determined under statutory insurance
accounting principles. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the
insurer’s earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner.
The insurance holding company laws of the other jurisdictions in which The Hartford’s insurance
subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar
(although in certain instances somewhat more restrictive) limitations on the payment of dividends.
Dividends paid to HFSG Holding Company by its insurance subsidiaries are further dependent on cash
requirements of HLI and other factors. The Company’s property-casualty insurance subsidiaries are
permitted to pay up to a maximum of approximately $1.4 billion in dividends to HFSG Holding Company
in 2010 without prior approval from the applicable insurance commissioner. Statutory dividends
from the Company’s life insurance subsidiaries in 2010 require prior approval from the applicable
insurance commissioner. The aggregate of these amounts, net of amounts required by HLI, is the
maximum the insurance subsidiaries could pay to HFSG Holding Company in 2010. In 2009, HFSG
Holding Company and HLI received $700 in dividends from the life insurance subsidiaries
representing the movement of a life subsidiary to HFSG Holding Company, and HFSG Holding Company
received $251 in dividends from its property-casualty insurance subsidiaries.
F-75
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Accumulated Other Comprehensive Income (Loss), Net of Tax
The components of AOCI were as follows:
| Net Gain | Pension and | |||||||||||||||||||
| (Loss) on | Foreign | Other | Accumulated | |||||||||||||||||
| Unrealized | Cash-Flow | Currency | Postretirement | Other | ||||||||||||||||
| Gain (Loss) | Hedging | Translation | Plan | Comprehensive | ||||||||||||||||
| on Securities | Instruments | Adjustments | Adjustment | Income (Loss) | ||||||||||||||||
|
For the year ended December 31, 2009
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Balance, beginning of year
|
$ | (7,486 | ) | $ | 644 | $ | 222 | $ | (900 | ) | $ | (7,520 | ) | |||||||
|
Unrealized gain on securities [1] [2]
|
5,909 | — | — | — | 5,909 | |||||||||||||||
|
Change in other-than-temporary impairment losses
recognized in other comprehensive income [1]
|
(224 | ) | — | — | — | (224 | ) | |||||||||||||
|
Cumulative effect of accounting change
|
(912 | ) | — | — | — | (912 | ) | |||||||||||||
|
Change in net gain on cash-flow hedging instruments [1] [3]
|
— | (387 | ) | — | — | (387 | ) | |||||||||||||
|
Change in foreign currency translation adjustments [1]
|
— | — | (23 | ) | — | (23 | ) | |||||||||||||
|
Change in pension and other postretirement
plan adjustment [1]
|
— | — | — | (155 | ) | (155 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Balance, end of year
|
$ | (2,713 | ) | $ | 257 | $ | 199 | $ | (1,055 | ) | $ | (3,312 | ) | |||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
For the year ended December 31, 2008
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Balance, beginning of year
|
$ | (359 | ) | $ | (140 | ) | $ | 26 | $ | (385 | ) | $ | (858 | ) | ||||||
|
Unrealized loss on securities [1] [2]
|
(7,127 | ) | — | — | — | (7,127 | ) | |||||||||||||
|
Change in net loss on cash-flow hedging instruments [1] [3]
|
— | 784 | — | — | 784 | |||||||||||||||
|
Change in foreign currency translation adjustments [1]
|
— | — | 196 | — | 196 | |||||||||||||||
|
Change in pension and other postretirement
plan adjustment [1]
|
— | — | — | (515 | ) | (515 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Balance, end of year
|
$ | (7,486 | ) | $ | 644 | $ | 222 | $ | (900 | ) | $ | (7,520 | ) | |||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
For the year ended December 31, 2007
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Balance, beginning of year
|
$ | 1,058 | $ | (234 | ) | $ | (120 | ) | $ | (526 | ) | $ | 178 | |||||||
|
Unrealized loss on securities [1] [2]
|
(1,417 | ) | — | — | — | (1,417 | ) | |||||||||||||
|
Change in net loss on cash-flow hedging instruments [1] [3]
|
— | 94 | — | — | 94 | |||||||||||||||
|
Change in foreign currency translation adjustments [1]
|
— | — | 146 | — | 146 | |||||||||||||||
|
Change in pension and other postretirement
plan adjustment [1]
|
— | — | — | 141 | 141 | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance, end of year
|
$ | (359 | ) | $ | (140 | ) | $ | 26 | $ | (385 | ) | $ | (858 | ) | ||||||
|
|
||||||||||||||||||||
| [1] |
Included in the unrealized gain/loss balance as of December 31, 2009, 2008 and 2007 was net
unrealized gains (losses) credited to policyholders of $(82), $(101) and $3, respectively.
Included in the AOCI components were the following:
|
| • |
Unrealized gain/loss on securities is net of tax and Life deferred acquisition costs of
$2,358, $(3,366), and $(718) for the years ended December 31, 2009, 2008 and 2007,
respectively.
|
| • |
Change in other-than-temporary losses recognized in other comprehensive income is net of
changes in the fair value and/or sales of non-credit impaired securities of $244 and net of
tax and Life deferred acquisition costs of $215 for the year ended December 31, 2009.
|
| • |
Net gain (loss) on cash-flow hedging instruments is net of tax of $(208), $422, and $51
for the years ended December 31, 2009, 2008 and 2007, respectively.
|
| • |
Changes in foreign currency translation adjustments are net of tax of $(12), $106 and $79
for the years ended December 31, 2009, 2008 and 2007, respectively.
|
| • |
Change in pension and other postretirement plan adjustment is net of tax of $(86),
$(276), and $48 for the years ended December 31, 2009, 2008 and 2007, respectively.
|
| [2] |
Net of reclassification adjustment for gains/losses realized in net
income of $(1,202), $(2,876), and $(192) for the years ended for the
years ended December 31, 2009, 2008 and 2007, respectively.
|
|
| [3] |
Net of amortization adjustment of $49, $(16), and $(20) to net
investment income for the years ended December 31, 2009, 2008 and
2007, respectively.
|
F-76
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans
The Company maintains a qualified defined benefit pension plan (the “Plan”) that covers
substantially all employees. Effective for all employees who joined the Company on or after
January 1, 2001, a new component or formula was applied under the Plan referred to as the “cash
balance formula”. Effective January 1, 2009, the Company began using a cash balance formula to
calculate future pension benefits for services rendered on or after January 1, 2009 for all
employees hired before January 1, 2001. These amounts are in addition to amounts earned by those
employees through December 31, 2008 under the traditional final average pay formula.
The Company also maintains non-qualified pension plans to accrue retirement benefits in excess of
Internal Revenue Code limitations.
The Company provides certain health care and life insurance benefits for eligible retired
employees. The Company’s contribution for health care benefits will depend upon the retiree’s date
of retirement and years of service. In addition, the plan has a defined dollar cap for certain
retirees which limits average Company contributions. The Hartford has prefunded a portion of the
health care obligations through a trust fund where such prefunding can be accomplished on a tax
effective basis. Effective January 1, 2002, Company-subsidized retiree medical, retiree dental and
retiree life insurance benefits were eliminated for employees with original hire dates with the
Company on or after January 1, 2002.
Assumptions
Pursuant to accounting principles related to the Company’s pension and other postretirement
obligations to employees under its various benefit plans, the Company is required to make a
significant number of assumptions in order to calculate the related liabilities and expenses each
period. The two economic assumptions that have the most impact on pension and other postretirement
expense are the discount rate and the expected long-term rate of return on plan assets. In
determining the discount rate assumption, the Company utilizes a discounted cash flow analysis of
the Company’s pension and other postretirement obligations and currently available market and
industry data. The yield curve utilized in the cash flow analysis is comprised of bonds rated Aa
or higher with maturities primarily between zero and thirty years. Based on all available
information, it was determined that 6.00% and 5.75% were the appropriate discount rates as of
December 31, 2009 to calculate the Company’s pension and other postretirement obligations,
respectively. Accordingly, the 6.00% and 5.75% discount rates will also be used to determine the
Company’s 2010 pension and other postretirement expense, respectively.
The Company determines the expected long-term rate of return assumption based on an analysis of the
Plan portfolio’s historical compound rates of return since 1979 (the earliest date for which
comparable portfolio data is available) and over 5 year and 10 year periods. The Company selected
these periods, as well as shorter durations, to assess the portfolio’s volatility, duration and
total returns as they relate to pension obligation characteristics, which are influenced by the
Company’s workforce demographics. In addition, the Company also applies long-term market return
assumptions to an investment mix that generally anticipates 60% fixed income securities, 20% equity
securities and 20% alternative assets to derive an expected long-term rate of return. Based upon
these analyses, management maintained the long-term rate of return assumption at 7.30% as of
December 31, 2009. This assumption will be used to determine the Company’s 2010 expense.
Weighted average assumptions used in calculating the benefit obligations and the net amount
recognized for the years ended December 31, 2009 and 2008 were as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Discount rate
|
6.00 | % | 6.25 | % | 5.75 | % | 6.25 | % | ||||||||
|
Rate of increase in compensation levels
|
4.00 | % | 4.25 | % | N/A | N/A | ||||||||||
F-77
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans (continued)
Weighted average assumptions used in calculating the net periodic benefit cost for the
Company’s pension and other postretirement plans were as follows:
| For the year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Discount rate
|
6.25 | % | 6.25 | % | 5.75 | % | ||||||
|
Expected long-term rate of return on plan assets
|
7.30 | % | 7.30 | % | 8.00 | % | ||||||
|
Rate of increase in compensation levels
|
4.25 | % | 4.25 | % | 4.25 | % | ||||||
Assumed health care cost trend rates were as follows:
| As of December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Pre-65 Health care cost trend rate
|
9.05 | % | 8.80 | % | 9.30 | % | ||||||
|
Post-65 Health care cost trend rate
|
7.60 | % | 7.00 | % | 7.70 | % | ||||||
|
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate)
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
Year that the rate reaches the ultimate trend rate
|
2018 | 2015 | 2013 | |||||||||
Assumed health care cost trends have an effect on the amounts reported for the postretirement
health care and life insurance benefit plans. Increasing/decreasing the health care trend rates by
one percent each year would have the effect of decreasing/increasing the benefit obligation as of
December 31, 2009 by $5 and the annual net periodic expense for the year then ended by $1.
Obligations and Funded Status
The following tables set forth a reconciliation of beginning and ending balances of the benefit
obligation and fair value of plan assets, as well as the funded status of The Hartford’s defined
benefit pension and postretirement health care and life insurance benefit plans for the years ended
December 31, 2009, and 2008. International plans represent an immaterial percentage of total
pension assets, liabilities and expense and, for reporting purposes, are combined with domestic
plans.
| Other Postretirement | ||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| Change in Benefit Obligation | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Benefit obligation — beginning of year
|
$ | 3,938 | $ | 3,713 | $ | 384 | $ | 364 | ||||||||
|
Service cost (excluding expenses)
|
105 | 121 | 6 | 6 | ||||||||||||
|
Interest cost
|
243 | 230 | 24 | 23 | ||||||||||||
|
Plan participants’ contributions
|
— | — | 16 | 15 | ||||||||||||
|
Actuarial loss (gain)
|
71 | 65 | (5 | ) | 17 | |||||||||||
|
Change in assumptions
|
118 | (2 | ) | 17 | — | |||||||||||
|
Benefits paid
|
(197 | ) | (175 | ) | (46 | ) | (42 | ) | ||||||||
|
Retiree drug subsidy
|
— | — | 5 | 2 | ||||||||||||
|
Foreign exchange adjustment
|
5 | (14 | ) | — | (1 | ) | ||||||||||
|
|
||||||||||||||||
|
Benefit obligation — end of year
|
$ | 4,283 | $ | 3,938 | $ | 401 | $ | 384 | ||||||||
|
|
||||||||||||||||
| Other Postretirement | ||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| Change in Plan Assets | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Fair value of plan assets — beginning of year
|
$ | 3,326 | $ | 3,957 | $ | 154 | $ | 170 | ||||||||
|
Actual return on plan assets
|
184 | (441 | ) | 21 | (16 | ) | ||||||||||
|
Employer contributions
|
201 | 2 | — | — | ||||||||||||
|
Benefits paid
|
(177 | ) | (164 | ) | — | — | ||||||||||
|
Expenses paid
|
(13 | ) | (14 | ) | — | — | ||||||||||
|
Foreign exchange adjustment
|
5 | (14 | ) | — | — | |||||||||||
|
|
||||||||||||||||
|
Fair value of plan assets — end of year
|
$ | 3,526 | $ | 3,326 | $ | 175 | $ | 154 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Funded status — end of year
|
$ | (757 | ) | $ | (612 | ) | $ | (226 | ) | $ | (230 | ) | ||||
|
|
||||||||||||||||
F-78
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans (continued)
The fair value of assets for pension benefits, and hence the funded status, presented in the
table above exclude assets of $140 and $126 held in rabbi trusts and designated for the
non-qualified pension plans as of December 31, 2009 and 2008, respectively. The assets do not
qualify as plan assets and, therefore, have been excluded from the table above. The assets consist
of equity and fixed income investments and are available to pay benefits for certain retired,
terminated and active participants. Such assets are available to the Company’s general creditors
in the event of insolvency. To the extent the fair value of these trusts were included in the
table above, pension plan assets would have been $3,666 and $3,452 as of December 31, 2009 and
2008, respectively, and the funded status of pension benefits would have been $(617) and $(486) as
of December 31, 2009 and 2008, respectively.
The accumulated benefit obligation for all defined benefit pension plans was $4,252 and $3,914 as
of December 31, 2009 and 2008, respectively.
The following table provides information for The Hartford’s defined benefit pension plans with an
accumulated benefit obligation in excess of plan assets as of December 31, 2009 and 2008.
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Projected benefit obligation
|
$ | 4,239 | $ | 3,893 | ||||
|
Accumulated benefit obligation
|
4,209 | 3,869 | ||||||
|
Fair value of plan assets
|
3,471 | 3,275 | ||||||
Amounts recognized in the statement of financial position consist of:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Noncurrent assets
|
$ | 12 | $ | 6 | $ | — | $ | — | ||||||||
|
Current liabilities
|
(54 | ) | (20 | ) | (33 | ) | (32 | ) | ||||||||
|
Noncurrent liabilities
|
(715 | ) | (598 | ) | (193 | ) | (198 | ) | ||||||||
|
|
||||||||||||||||
|
Total
|
$ | (757 | ) | $ | (612 | ) | $ | (226 | ) | $ | (230 | ) | ||||
|
|
||||||||||||||||
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
Total net periodic benefit cost for the years ended December 31, 2009, 2008 and 2007 include the
following components:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Service cost
|
$ | 105 | $ | 121 | $ | 128 | $ | 6 | $ | 6 | $ | 7 | ||||||||||||
|
Interest cost
|
243 | 230 | 209 | 24 | 23 | 21 | ||||||||||||||||||
|
Expected return on plan assets
|
(276 | ) | (279 | ) | (283 | ) | (11 | ) | (12 | ) | (8 | ) | ||||||||||||
|
Amortization of prior service credit
|
(9 | ) | (9 | ) | (13 | ) | (1 | ) | (1 | ) | (6 | ) | ||||||||||||
|
Amortization of actuarial loss
|
74 | 59 | 90 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit cost
|
$ | 137 | $ | 122 | $ | 131 | $ | 18 | $ | 16 | $ | 14 | ||||||||||||
|
|
||||||||||||||||||||||||
Amounts recognized in other comprehensive loss for the years ended December 31, 2009 and 2008 were
as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Amortization of net loss
|
$ | (74 | ) | $ | (59 | ) | $ | — | $ | — | ||||||
|
Amortization of prior service credit
|
9 | 9 | 1 | 1 | ||||||||||||
|
Net loss/(gain) arising during the year
|
302 | 795 | 3 | 45 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 237 | $ | 745 | $ | 4 | $ | 46 | ||||||||
|
|
||||||||||||||||
Amounts in accumulated other comprehensive loss on a before tax basis that have not yet been
recognized as components of net periodic benefit cost consist of:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Net loss/(gain)
|
$ | 1,681 | $ | 1,454 | $ | 9 | $ | 6 | ||||||||
|
Prior service cost/(credit)
|
(39 | ) | (49 | ) | (1 | ) | (2 | ) | ||||||||
|
Transition obligation
|
— | — | 1 | 1 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 1,642 | $ | 1,405 | $ | 9 | $ | 5 | ||||||||
|
|
||||||||||||||||
F-79
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans (continued)
The estimated net loss and prior service credit for the defined benefit pension plans that
will be amortized from accumulated other comprehensive loss into net periodic benefit cost during
2010 are $101 and $(9), respectively. The estimated prior service credit for the other
postretirement benefit plans that will be amortized from accumulated other comprehensive loss into
net periodic benefit cost during 2010 is $(1). The estimated net loss for the other postretirement
plans that will be amortized from accumulated other comprehensive loss into net periodic benefit
cost during 2010 is $0, as the level of the actuarial net loss does not exceed the allowable
amortization corridor.
Plan Assets
Investment Strategy and Target Allocation
The overall goal of the Plan is to maximize total investment returns to provide sufficient funding
for present and anticipated future benefit obligations within the constraints of a prudent level of
portfolio risk and diversification. With respect to asset management, the oversight responsibility
of the Plan rests with the Hartford’s Pension Fund Trust and Investment Committee composed of
individuals whose responsibilities include establishing overall objectives and the setting of
investment policy; selecting appropriate investment options and ranges; reviewing the asset
allocation mix and asset allocation targets on a regular basis; and monitoring performance to
determine whether or not the rate of return objectives are being met and that policy and guidelines
are being followed. The Company believes that the asset allocation decision will be the single
most important factor determining the long-term performance of the Plan.
The Company’s pension plan and other postretirement benefit plans’ target allocation by asset
category is presented in the table below. At the end of 2007, the Company changed the target
allocation for its defined benefit pension plan assets. The Company migrated its asset mix to the
target allocation over a two year period.
| Target Asset Allocation | ||||||||
| Pension Plan | Other Postretirement Plan | |||||||
|
Equity securities
|
10% – 30% | 20% – 40% | ||||||
|
Fixed income securities
|
50% – 70% | 60% – 80% | ||||||
|
Alternative Assets
|
10% – 25% | — | ||||||
Divergent market performance among different asset classes may, from time to time, cause the
asset allocation to deviate from the desired asset allocation ranges. The asset allocation mix is
reviewed on a periodic basis. If it is determined that an asset allocation mix rebalancing is
required, future portfolio additions and withdrawals will be used, as necessary, to bring the
allocation within tactical ranges.
The Company’s pension plan and other postretirement benefit plans’ weighted average asset
allocation at December 31, 2009 and 2008 is presented in the table below.
| Percentage of Pension Plan Assets | Percentage of Other Postretirement Plan | |||||||||||||||
| Fair Value at December 31, | Assets Fair Value at December 31, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Equity securities
|
28 | % | 36 | % | 21 | % | 19 | % | ||||||||
|
Fixed income securities
|
57 | % | 58 | % | 79 | % | 81 | % | ||||||||
|
Alternative Assets
|
15 | % | 6 | % | — | — | ||||||||||
|
|
||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
|
||||||||||||||||
The Plan assets are invested primarily in separate portfolios managed by HIMCO, a wholly-owned
subsidiary of the Company. These portfolios encompass multiple asset classes reflecting the
current needs of the Plan, the investment preferences and risk tolerance of the Plan and the
desired degree of diversification. These asset classes include publicly traded equities, core bonds
and alternative investments and are made up of individual investments in cash and cash equivalents,
equity securities, debt securities, asset-backed securities and hedge funds. Hedge fund
investments represent a diversified portfolio of partnership investments in absolute-return
investment strategies.
In addition, the Company uses U.S. Treasury bond futures contracts in a duration overlay program to
adjust the duration of Plan assets to better match the duration of the benefit obligation.
Investment Valuation
For further discussion on the valuation of investments, see Note 4.
F-80
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans (continued)
Pension Plan Assets
The fair values of the Company’s pension plan assets at December 31, 2009, by asset category are as
follows:
| Pension Plan Assets at Fair Value as of December 31, 2009 | ||||||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Short-term investments [1]
|
$ | 197 | $ | 98 | $ | — | $ | 295 | ||||||||
|
Fixed Income Securities:
|
||||||||||||||||
|
Corporate
|
— | 903 | 12 | 915 | ||||||||||||
|
RMBS
|
— | 368 | 24 | 392 | ||||||||||||
|
U.S. Treasuries
|
9 | 279 | — | 288 | ||||||||||||
|
Foreign government
|
— | 80 | 2 | 82 | ||||||||||||
|
CMBS
|
— | 113 | — | 113 | ||||||||||||
|
Other fixed income [2]
|
— | 19 | 8 | 27 | ||||||||||||
|
Equity Securities:
|
||||||||||||||||
|
Large-Cap Domestic Equities
|
— | 435 | — | 435 | ||||||||||||
|
Mid-Cap Domestic Equities
|
130 | — | — | 130 | ||||||||||||
|
Small-Cap Domestic Equities
|
82 | — | — | 82 | ||||||||||||
|
International Equities
|
313 | — | — | 313 | ||||||||||||
|
Other Equities [3]
|
— | 1 | — | 1 | ||||||||||||
|
Other type of investments:
|
||||||||||||||||
|
Hedge funds
|
— | — | 501 | 501 | ||||||||||||
|
|
||||||||||||||||
|
Total investments at fair value [4]
|
$ | 731 | $ | 2,296 | $ | 547 | $ | 3,574 | ||||||||
|
|
||||||||||||||||
| [1] |
Includes $47 of initial margin requirements related to the Plan’s duration overlay program.
|
|
| [2] |
Includes ABS and municipal bonds.
|
|
| [3] |
Includes private placement bonds with a coupon and preferred stock with a coupon.
|
|
| [4] |
Excludes approximately $67 of investment payables net of investment receivables that are not carried at fair value.
Also excludes approximately $19 interest receivable carried at fair value.
|
The table below provides a fair value level 3 roll forward for the twelve months ended
December 31, 2009 for the Pension Plan Assets for which significant unobservable inputs (Level 3)
are used in the fair value measurement on a recurring basis. The Plan classifies the fair value of
financial instruments within Level 3 if there are no observable markets for the instruments or, in
the absence of active markets, if one or more of the significant inputs used to determine fair
value are based on the Plan’s own assumptions. Therefore, the gains and losses in the tables below
include changes in fair value due partly to observable and unobservable factors.
Pension Plan Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| Actual return on plan assets | ||||||||||||||||||||||||
| Relating to | ||||||||||||||||||||||||
| Beginning | assets still | Relating to | Purchase, | Transfers | Ending | |||||||||||||||||||
| Balance | held at the | assets sold | issuances, | in and / or | balance, | |||||||||||||||||||
| January 1, | reporting | during the | and | out of | December 31, | |||||||||||||||||||
| Asset Category | 2009 | date | period | settlements | Level 3 | 2009 | ||||||||||||||||||
|
Corporate
|
$ | 24 | $ | 7 | $ | (4 | ) | $ | (10 | ) | $ | (5 | ) | $ | 12 | |||||||||
|
RMBS
|
1 | 1 | (1 | ) | 23 | — | 24 | |||||||||||||||||
|
Foreign Government
|
— | — | — | 2 | — | 2 | ||||||||||||||||||
|
Other Fixed Income
|
3 | 1 | — | 4 | — | 8 | ||||||||||||||||||
|
Hedge Funds
|
199 | 57 | (9 | ) | 254 | — | 501 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Totals
|
$ | 227 | $ | 66 | $ | (14 | ) | $ | 273 | $ | (5 | ) | $ | 547 | ||||||||||
|
|
||||||||||||||||||||||||
There was no Company common stock included in the Plan’s assets as of December 31, 2009 and 2008.
F-81
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans (continued)
Other Postretirement Plan Assets
The fair value of the Company’s other postretirement plan assets at December 31, 2009, by asset
category are as follows:
| Other Postretirement Plan Assets at Fair | ||||||||||||||||
| Value as of December 31, 2009 | ||||||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Short-term investments
|
$ | — | $ | 7 | $ | — | $ | 7 | ||||||||
|
Fixed Income Securities:
|
||||||||||||||||
|
Corporate
|
— | 65 | — | 65 | ||||||||||||
|
RMBS
|
— | 39 | — | 39 | ||||||||||||
|
U.S. Government
|
— | 17 | — | 17 | ||||||||||||
|
CMBS
|
— | 12 | — | 12 | ||||||||||||
|
Other Fixed Income
|
— | 1 | — | 1 | ||||||||||||
|
Equity Securities:
|
||||||||||||||||
|
Large-Cap
|
— | 37 | — | 37 | ||||||||||||
|
|
||||||||||||||||
|
Total investments at fair value [1]
|
$ | — | $ | 178 | $ | — | $ | 178 | ||||||||
|
|
||||||||||||||||
| [1] |
Excludes approximately $4 of investment payables net of investment receivables that are not
carried at fair value. Also excludes approximately $1 interest receivable carried at fair
value.
|
There was no Company common stock included in the other postretirement benefit plan assets as
of December 31, 2009 and 2008.
Concentration of Risk
In order to minimize risk, the Plan maintains a listing of permissible and prohibited investments.
In addition, the Plan has certain concentration limits and investment quality requirements imposed
on permissible investment options. Permissible investments include U.S. equity, international
equity, alternative asset and fixed income investments including derivative instruments. Derivative
instruments include future contracts, options, swaps, currency forwards, caps or floors and will be
used to control risk or enhance return but will not be used for leverage purposes.
Securities specifically prohibited from purchase include, but are not limited to: stock in
non-public corporations, private placement or any other non-marketable issues, letter or restricted
stock, short sales of any type within long-only portfolios, share purchases involving the use of
margin, CMO residuals and support tranches, leveraged floaters and inverse floaters, including
money market obligations, tiered-index bonds, range notes and all other forms of structured notes
whose return characteristics are tied to changes in prepayments on mortgages or changes in a
specified interest rate index or market rate, natural resource real properties such as oil, gas or
timber and precious metals.
Other than U.S. government and certain U.S. government agencies backed by the full faith and credit
of the U.S. government, the Plan does not have any material exposure to any concentration risk of a
single issuer.
Cash Flows
The following table illustrates the Company’s prior contributions.
| Employer Contributions | Pension Benefits | Other Postretirement Benefits | ||||||
|
2008
|
$ | 2 | $ | — | ||||
|
2009
|
$ | 201 | — | |||||
In 2009, the Company, at its discretion, made a $201 contribution to the U.S. qualified defined
benefit pension plan. The Company presently anticipates contributing approximately $200 to its
pension plans and other postretirement plans in 2010 based upon certain economic and business
assumptions. These assumptions include, but are not limited to, equity market performance, changes
in interest rates and the Company’s other capital requirements. For 2010, the Company does not have
a required minimum funding contribution for the Plan and the funding requirements for all of the
pension plans are expected to be immaterial.
Employer contributions in 2009 and 2008 were made in cash and did not include contributions of the
Company’s common stock.
F-82
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans (continued)
Benefit Payments
The following table sets forth amounts of benefits expected to be paid over the next ten years from
the Company’s pension and other postretirement plans as of December 31, 2009:
| Pension Benefits | Other Postretirement Benefits | |||||||
|
2010
|
$ | 268 | $ | 37 | ||||
|
2011
|
253 | 40 | ||||||
|
2012
|
275 | 40 | ||||||
|
2013
|
293 | 40 | ||||||
|
2014
|
309 | 41 | ||||||
|
2015–2019
|
1,736 | 196 | ||||||
|
|
||||||||
|
Total
|
$ | 3,134 | $ | 394 | ||||
|
|
||||||||
In addition, the following table sets forth amounts of other postretirement benefits expected to be
received under the Medicare Part D Subsidy over the next ten years as of December 31, 2009:
|
2010
|
$ | 4 | ||
|
2011
|
4 | |||
|
2012
|
4 | |||
|
2013
|
5 | |||
|
2014
|
5 | |||
|
2015–2019
|
32 | |||
|
|
||||
|
Total
|
$ | 54 | ||
|
|
||||
18. Stock Compensation Plans
The Company has three primary stock-based compensation plans which are described below.
Shares issued in satisfaction of stock-based compensation may be made available from authorized but
unissued shares, shares held by the Company in treasury or from shares purchased in the open
market. In 2009 and 2008, the Company issued shares from treasury in satisfaction of stock-based
compensation. In 2007, the Company issued new shares in satisfaction of stock-based compensation.
The compensation expense recognized for the stock-based compensation plans was $72, $62 and $72 for
the years ended December 31, 2009, 2008, and 2007, respectively. The income tax benefit recognized
for stock-based compensation plans was $20, $19 and $23 for the years ended December 31, 2009, 2008
and 2007, respectively. The Company did not capitalize any cost of stock-based compensation. As
of December 31, 2009, the total compensation cost related to non-vested awards not yet recognized
was $100, which is expected to be recognized over a weighted average period of 1.9 years.
Stock Plan
In 2005, the shareholders of The Hartford approved The Hartford 2005 Incentive Stock Plan (the
“2005 Stock Plan”), which superseded and replaced The Hartford Incentive Stock Plan and The
Hartford Restricted Stock Plan for Non-employee Directors. The terms of the 2005 Stock Plan are
substantially similar to the terms of the superseded plans.
The 2005 Stock Plan provides for awards to be granted in the form of non-qualified or incentive
stock options qualifying under Section 422 of the Internal Revenue Code, stock appreciation rights,
performance shares, restricted stock, restricted stock units, restricted units or any combination
of the foregoing. The aggregate number of shares of stock, which may be awarded, is subject to a
maximum limit of seven million shares applicable to all awards for the ten-year period ending May
18, 2015. To the extent that any awards under the 2005 Stock Plan, The Hartford Incentive Stock
Plan or The Hartford Restricted Stock Plan for Non-employee Directors are forfeited, terminated,
expire unexercised or are settled for cash in lieu of stock, the shares subject to such awards (or
the relevant portion thereof) shall be available for awards under the 2005 Stock Plan and shall be
added to the total number of shares available under the 2005 Stock Plan. As of December 31, 2009,
there were 3,637,375 shares available for future issuance.
The fair values of awards granted under the 2005 Stock Plan are generally measured as of the grant
date and expensed ratably over the awards’ vesting periods, generally three years. For stock
option awards granted or modified in 2006 and later, the Company began expensing awards to
retirement-eligible employees hired before January 1, 2002 immediately or over a period
shorter than the stated vesting period because the employees receive accelerated vesting upon
retirement and therefore the vesting period is considered non-substantive. All awards provide for
accelerated vesting upon a change in control of the Company as defined in the 2005 Stock Plan.
F-83
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Stock Compensation Plans (continued)
Stock Option Awards
Under the 2005 Stock Plan, options granted generally have an exercise price equal to the market
price of the Company’s common stock on the date of grant, and an option’s maximum term is ten
years. Certain options become exercisable over a three-year period commencing one year from the
date of grant, while certain other options become exercisable at the later of three years from the
date of grant or upon specified market appreciation of the Company’s common shares. For any year,
no individual employee may receive an award of options for more than 1,000,000 shares.
The Company uses a hybrid lattice/Monte-Carlo based option valuation model (the “valuation model”)
that incorporates the possibility of early exercise of options into the valuation. The valuation
model also incorporates the Company’s historical termination and exercise experience to determine
the option value.
The valuation model incorporates ranges of assumptions for inputs, and therefore, those ranges are
disclosed below. The term structure of volatility is generally constructed utilizing implied
volatilities from exchange-traded options on the Company’s stock, historical volatility of the
Company’s stock and other factors. The Company uses historical data to estimate option exercise
and employee termination within the valuation model, and accommodates variations in employee
preference and risk-tolerance by segregating the grantee pool into a series of behavioral cohorts
and conducting a fair valuation for each cohort individually. The expected term of options granted
is derived from the output of the option valuation model and represents, in a mathematical sense,
the period of time that options are expected to be outstanding. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Constant Maturity Treasury yield
curve in effect at the time of grant.
| For the year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Expected dividend yield
|
3.2% | 2.9% | 2.0% | |||||||||
|
Expected annualized spot volatility
|
57.8% – 57.8% | 37.0% – 32.2% | 21.0% – 31.3% | |||||||||
|
Weighted average annualized volatility
|
57.8% | 33.3% | 29.0% | |||||||||
|
Risk-free spot rate
|
0.3% – 4.2% | 2.0% – 5.0% | 4.4% – 5.2% | |||||||||
|
Expected term
|
7.3 years | 8 years | 8 years | |||||||||
A summary of the status of non-qualified stock options included in the Company’s Stock Plan as of
December 31, 2009 and changes during the year ended December 31, 2009 is presented below:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted | Remaining | |||||||||||||||
| Number of Options | Average | Contractual | Aggregate | |||||||||||||
| (in thousands) | Exercise Price | Term | Intrinsic Value | |||||||||||||
|
Outstanding at beginning of year
|
5,829 | $ | 60.43 | 3.8 | $ | — | ||||||||||
|
Granted
|
1,411 | 7.04 | ||||||||||||||
|
Exercised
|
— | — | ||||||||||||||
|
Forfeited
|
(719 | ) | 57.82 | |||||||||||||
|
Expired
|
(52 | ) | 52.02 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at end of year
|
6,469 | 49.76 | 3.8 | — | ||||||||||||
|
|
||||||||||||||||
|
Exercisable at end of year
|
5,203 | $ | 57.05 | 2.6 | — | |||||||||||
|
Weighted average fair value of options granted
|
$ | 3.06 | ||||||||||||||
The weighted average grant-date fair value of options granted during the years ended December 31,
2009, 2008 and 2007 was $3.06, $21.57 and $31.43, respectively. The total intrinsic value of
options exercised during the years ended December 31, 2009, 2008 and 2007 was zero, $4, and $114,
respectively.
F-84
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Stock Compensation Plans (continued)
Share Awards
Share awards are valued equal to the market price of the Company’s common stock on the date of
grant, less a discount for those awards that do not provide for dividends during the vesting
period. Share awards granted under the 2005 Stock Plan and outstanding include restricted stock
units, restricted stock and performance shares. Generally, restricted stock units vest after three
years and restricted stock vests in three to five years. Performance shares become payable within
a range of 0% to 200% of the number of shares initially granted based upon the attainment of
specific performance goals achieved over a specified period, generally three years. The maximum
award of restricted stock units, restricted stock or performance shares for any individual employee
in any year is 200,000 shares or units.
A summary of the status of the Company’s non-vested share awards as of December 31, 2009, and
changes during the year ended December 31, 2009, is presented below:
| Shares | Weighted-Average | |||||||
| Non-vested Shares | (in thousands) | Grant-Date Fair Value | ||||||
|
Non-vested at beginning of year
|
1,968 | $ | 79.63 | |||||
|
Granted
|
733 | 9.68 | ||||||
|
Decrease for change in estimated performance factors
|
(33 | ) | — | |||||
|
Vested
|
(573 | ) | 80.32 | |||||
|
Forfeited
|
(250 | ) | 69.36 | |||||
|
|
||||||||
|
Non-vested at end of year
|
1,845 | $ | 53.19 | |||||
|
|
||||||||
The total fair value of shares vested during the years ended December 31, 2009, 2008 and 2007 was
$8, $35 and $23, respectively, based on estimated performance factors. The Company did not make
cash payments in settlement of stock compensation during the years ended December 31, 2009 and 2008
and 2007.
Restricted Unit awards
In 2009, The Hartford began issuing restricted units as part of The Hartford’s 2005 Stock Plan.
Restricted stock unit awards under the plan have historically been settled in shares, but under
this award will be settled in cash and are thus referred to as “Restricted Units”. The economic
value recipients will ultimately realize will be identical to the value that would have been
realized if the awards had been settled in shares, i.e., upon settlement, recipients will receive
cash equal to The Hartford’s share price multiplied by the number of restricted units awards.
Because Restricted Units will be settled in cash, the awards are remeasured at the end of each
reporting period until settlement. These awards vest over a three year period.
For the year ended December 31, 2009, 4,963 restricted units were granted. The weighted-average
grant-date fair value was $7.07. At December 31, 2009, 4,613 units were non-vested.
Deferred Stock Unit Plan
Effective July 31, 2009, the Compensation and Personnel Committee of the Board authorized The
Hartford Deferred Stock Unit Plan (“Deferred Stock Unit Plan”), and, on October 22, 2009, it was
amended. The Deferred Stock Unit Plan provides for contractual rights to receive cash payments
based on the value of a specified number of shares of stock. The Deferred Stock Unit Plan provides
for two award types, Deferred Units and Restricted Units. Deferred Units are earned ratably over a
year, based on the number of regular pay periods occurring during such year. Deferred Units are
credited to the participants account on a quarterly basis based on the market price of the
Company’s common stock on the date of grant and are fully vested at all times. Deferred Units
credited to employees prior to January 1, 2010 (other than senior executive officers hired on or
after October 1, 2009) are not paid until after two years from their grant date. Deferred Units
credited on or after January 1, 2010 (and any credited to senior executive officers hired on or
after October 1, 2009) are paid in three equal installments after the first, second and third
anniversaries of their grant date. Restricted Units are intended to be incentive compensation and
unlike Deferred Units, vest over time, generally three years, and are subject to forfeiture. The
Deferred Stock Unit Plan is structured consistent with the limitations and restrictions on employee
compensation arrangements imposed by the Emergency Economic Stabilization Act of 2008 and the TARP
Standards for Compensation and Corporate Governance Interim Final Rule issued by the U.S.
Department of Treasury on June 10, 2009.
A summary of the status of the Company’s non-vested awards under the Deferred Stock Unit Plan as of
December 31, 2009, is presented below:
| Weighted-Average | Weighted-Average | |||||||||||||||
| Deferred Units | Grant-Date Fair | Restricted Units | Grant-Date Fair | |||||||||||||
| Non-vested Units | (in thousands) | Value | (in thousands) | Value | ||||||||||||
|
Non-vested at beginning of year
|
— | $ | — | — | $ | — | ||||||||||
|
Granted
|
36 | 24.12 | 243 | 20.80 | ||||||||||||
|
Vested
|
(36 | ) | 24.12 | (106 | ) | 16.49 | ||||||||||
|
Forfeited
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Non-vested at end of year
|
— | $ | — | 137 | $ | 24.12 | ||||||||||
|
|
||||||||||||||||
F-85
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Stock Compensation Plans (continued)
Employee Stock Purchase Plan
In 1996, the Company established The Hartford Employee Stock Purchase Plan (“ESPP”). In 2009 and
prior years, under this plan, eligible employees of The Hartford purchased common stock of the
Company at a 15% discount from the lower of the closing market price at the beginning or end of the
offering period. Employees purchase a variable number of shares of stock through payroll deductions
elected as of the beginning of the offering period. The Company may sell up to 15,400,000 shares
of stock to eligible employees under the ESPP. As of December 31, 2009, there were 7,970,259
shares available for future issuance. During the years ended December 31, 2009, 2008 and 2007,
2,557,893, 964,365 and 372,993 shares were sold, respectively. The weighted average per share fair
value of the discount under the ESPP was $5.99, $14.12 and $18.98 during the years ended December
31, 2009, 2008 and 2007 respectively. The fair value is estimated based on the 15% discount off of
the beginning stock price plus the value of six-month European call and put options on shares of
stock at the beginning stock price calculated using the Black-Scholes model and the following
weighted average valuation assumptions:
| For the year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Dividend yield
|
1.4 | % | 3.5 | % | 2.1 | % | ||||||
|
Implied volatility
|
91.4 | % | 45.5 | % | 23.2 | % | ||||||
|
Risk-free spot rate
|
0.3 | % | 1.9 | % | 4.7 | % | ||||||
|
Expected term
|
6 months | 3 months | 3 months | |||||||||
Implied volatility was derived from exchange-traded options on the Company’s stock. The risk-free
rate is based on the U.S. Constant Maturity Treasury yield curve in effect at the time of grant.
The total intrinsic value of the discounts at purchase was $5, $5, and $6 for the years ended
December 31, 2009, 2008 and 2007, respectively. Additionally, The Hartford has established
employee stock purchase plans for certain employees of the Company’s international subsidiaries.
Under these plans, participants may purchase common stock of The Hartford at a fixed price. The
activity under these programs is not material.
Effective with the offering period beginning January 2010, the discount rate will change to 5% and
the discounted price will be based on the market price per share on the last trading day of the
offering period.
19. Investment and Savings Plan
Substantially all U.S. employees are eligible to participate in The Hartford’s Investment and
Savings Plan under which designated contributions may be invested in common stock of The Hartford
or certain other investments. These contributions are matched, up to 3% of base salary, by the
Company. In 2009, employees who had earnings of less than $105,000 in the preceding year received
a contribution of 1.5% of base salary and employees who had earnings of $105,000 or more in the
preceding year received a contribution of 0.5% of base salary. The cost to The Hartford for this
plan was approximately $64, $64, and $62 for 2009, 2008 and 2007, respectively. Additionally, The
Hartford has established a defined contribution pension plan for certain employees of the Company’s
international subsidiaries. Under this plan, the Company contributes 5% of base salary to the
participant accounts. The cost to The Hartford in 2009, 2008 and 2007 for this plan was $2, $2 and
$2, respectively.
20. Sale of First State Management Group
On March 31, 2009, the Company sold First State Management Group, Inc. (“FSMG”), its core
excess and surplus lines property business, to Beazley Group PLC (“Beazley”) for $27, resulting in
a gain on sale of $18, before-tax, and $12, after-tax. Included in the sale was approximately $4
in net assets of FSMG. The net assets sold to Beazley did not include invested assets, unearned
premium or deferred policy acquisition costs related to the in-force book of business. Rather, the
in-force book of business was ceded to Beazley under a separate reinsurance agreement, whereby the
Company ceded $26 of unearned premium, net of $10 in ceding commission. Under the terms of the
purchase and sale agreement, the Company continues to be obligated for all losses and loss
adjustment expenses incurred on or before March 31, 2009. The retained net loss and loss
adjustment expense reserves totaled $125 as of December 31, 2009.
F-86
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. Investment by Allianz SE in The Hartford
On October 17, 2008, the Company entered into an Investment Agreement (the “Investment
Agreement”), with Allianz SE (“Allianz”) under which, among other things, the Company agreed to
issue and sell in a private placement to Allianz for aggregate cash consideration of $2.5 billion:
(i) $1.75 billion of the Company’s 10% Fixed-to-Floating Rate Junior Subordinated Debentures due
2068 (the “Debentures”); (ii) 6,048,387 shares of the Company’s Series D Non-Voting Contingent
Convertible Preferred Stock (the “Series D Preferred Stock”), initially convertible (as discussed
below) into 24,193,548 shares of the Company’s common stock at an issue price of $31.00 per share,
resulting in proceeds of $750; and (iii) warrants (the “Warrants”) to purchase the Company’s Series
B Non-Voting Contingent Convertible Preferred Stock (the “Series B Preferred Stock”) and Series C
Non-Voting Contingent Convertible Preferred Stock (the “Series C Preferred Stock” and, together
with the Series B Preferred Stock and the Series D Preferred Stock, the “Preferred Stock”)
structured to entitle Allianz, upon receipt of necessary approvals, to purchase 69,115,324 shares
of common stock at an initial exercise price of $25.32 per share.
The Company agreed that, for the one-year period following October 17, 2008, it would pay certain
amounts to Allianz if the Company effects or agrees to effect any transaction (or series of
transactions) pursuant to which any person or group (within the meaning of the U.S. federal
securities laws) is issued common stock or certain equity-related instruments constituting more
than 5% of the Company’s fully-diluted common stock outstanding at the time for an effective price
per share (determined as provided in the Investment Agreement) of less than $25.32. Amounts so
payable depend on the effective price for the applicable transaction (or the weighted average price
for a series of transactions) and range from $50 if the effective price per share is between $25.31
and $23.00, $150 if the effective price per share is between $22.99 and $20.00, $200 if the
effective price per share is between $19.99 and $15.00 and $300 if the effective price per share is
$14.99 or less.
The issuance of warrants to Treasury, see Note 15, triggered the contingency payment in the
Investment Agreement related to additional investors. Upon receipt of preliminary approval to
participate in the CPP, The Hartford negotiated with Allianz to modify the form of the $300
contingency payment. The settlement of the contingency payment was negotiated to allow Allianz a
one-time extension of the exercise period of its outstanding warrants from seven years to ten years
and $200 in cash paid on October 15, 2009. The Hartford recorded a liability for the cash payment
and an adjustment to additional paid-in capital for the warrant modification resulting in a net
realized capital loss of approximately $300.
Debentures
The 10% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068 bear interest at an annual
fixed rate of 10% from the date of issuance to, but excluding, October 15, 2018, payable
semi-annually in arrears on April 15 and October 15. From and including October 15, 2018, the
Debentures will bear interest at an annual rate, reset quarterly, equal to three-month LIBOR plus
6.824%, payable quarterly in arrears. The Company has the right, on one or more occasions, to defer
the payment of interest on the Debentures. The Company may defer interest for up to ten consecutive
years without giving rise to an event of default. Deferred interest will accumulate additional
interest at an annual rate equal to the annual interest rate then applicable to the Debentures. If
the Company defers interest for five consecutive years or, if earlier, pays current interest during
a deferral period, which may be paid from any source of funds, the Company will be required to pay
deferred interest from proceeds from the sale of certain qualifying securities.
In connection with the offering of the debentures, the Company entered into a “Replacement Capital
Covenant” for the benefit of holders of one or more designated series of the Company’s
indebtedness, initially the Company’s 6.1% notes due 2041. Under the terms of the Replacement
Capital Covenant, if the Company redeems the Debentures at any time prior to October 15, 2048 it
can only do so with the proceeds from the sale of certain qualifying replacement securities.
Subject to the Replacement Capital Covenant, the Company can redeem the Debentures at its option,
in whole or in part, at any time on or after October 15, 2018 at a redemption price of 100% of the
principal amount being redeemed plus accrued but unpaid interest.
The Debentures were issued with the detachable Warrants. The allocation of the $1.75 billion
proceeds between the Debentures and Warrants was based on the relative fair values of these
financial instruments at the time of issuance. As such, the Debentures were recorded at a fair
value of $1,201 and are classified as long-term debt.
F-87
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. Investment by Allianz SE in The Hartford (continued)
Preferred Stock
Each share of Preferred Stock was initially convertible into four shares of common stock, subject
to receipt of specified governmental, regulatory and other approvals (including receipt of
stockholder approval as described above in the case of the Series C Preferred Stock), which vary by
Series. The conversion ratio under the Preferred Stock is subject to adjustment in certain
circumstances. The Preferred Stock was classified as equity and the proceeds of $750 were recorded
net of issuance costs of $23. On January 9, 2009, Allianz converted its 6,048,387 shares of Series
D Preferred Stock into 24,193,548 shares of common stock.
Warrants
The Warrants, which have a term of ten years, are exercisable to purchase to 69,314,987 shares of
common stock at an exercise price of $25.25 per share. The discretionary equity issuance program,
see Note 15, triggered an anti-dilution provision in The Hartford’s investment agreement with
Allianz, which resulted in the adjustment of the warrant exercise price and to the number of shares
that may be purchased. The exercise price under the Warrants is subject to adjustment in certain
circumstances.
The Warrants were immediately exercisable, pending the receipt of specified regulatory approvals,
for the Series B Preferred Stock, which were initially convertible, in the aggregate, into
34,806,452 shares of common stock. The Warrants to purchase the Series B Preferred Stock were
reported as equity and were allocated a relative fair value of $276 at issuance.
In addition to the receipt of specified regulatory approvals, the conversion into 34,308,872 shares
of common stock of the Series C Preferred Stock underlying certain of the Warrants was subject to
the approval of the Company’s stockholders in accordance with applicable regulations of the New
York Stock Exchange. Under the Investment Agreement, the Company was obligated to pay Allianz $75
if such stockholder approval was not obtained at the first stockholder meeting to consider such
approval, and $50 if such stockholder approval was not obtained at a second such meeting. Because
the conversion of the Series C Preferred Stock was subject to stockholder approval and the related
payment provision represents a form of net cash settlement outside the Company’s control, the
Warrants to purchase the Series C Preferred Stock and the stockholder approval payment were
recorded as a derivative liability at a relative fair value of $273 at issuance. As of December
31, 2008, the Warrants to purchase the Series C Preferred Stock had a fair value of $163. The
Company recognized a gain of $110, after-tax, for the year ended December 31, 2008, representing
the change in fair value of the Warrants to purchase the Series C Preferred Stock.
On March 26, 2009, the Company’s shareholders approved the conversion of the Series C Preferred
Stock underlying certain warrants issued to Allianz in October 2008 into 34,308,872 shares of The
Hartford’s common stock. As a result of this shareholder approval, the Company is not obligated to
pay Allianz any cash payment related to these warrants and therefore these warrants no longer
provide for any form of net cash settlement outside the Company’s control. As such, the warrants
to purchase the Series C Preferred Stock were reclassified from other liabilities to equity at
their fair value. As of March 26, 2009, the fair value of these warrants was $93. For the year
ended December 31, 2009, the Company recognized a gain of $70, representing the change in fair
value of the warrants through March 26, 2009.
F-88
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. Acquisition of Federal Trust Corporation
On June 24, 2009, the Company acquired 100% of the equity interests in Federal Trust
Corporation (“FTC”), a savings and loan holding company, for $10, enabling the Company to
participate in the CPP. The acquisition resulted in goodwill of $168. The goodwill generated,
which is tax deductible, was due, in part, to the fair value discount on mortgage loans acquired in
comparison to their expected cash flows. Mortgage loans acquired were fair valued at $288.
Contractual cash flows from the mortgage loans acquired were $450. The Company’s best estimate of
contractual cash flows not expected to be collected at the acquisition date was $129. Other assets
acquired included $27 of fixed maturity securities, $46 of short-term investments and $3 of cash.
Liabilities assumed included other liabilities of $389 in bank deposits and $149 in Federal Home
Loan Bank advances and long-term debt of $25. The acquired assets and liabilities have been stated
at fair value. These fair values are subject to adjustment based upon management’s subsequent
receipt of additional information but are not expected to be material. The Company expects to be
completed with its fair value estimates as of June 30, 2010. The Company contributed $185 to FTC
in June 2009 and received $20 in full repayment of amounts lent to FTC in March 2009. In the third
quarter of 2009, The Hartford contributed an additional $10 to FTC. Revenue and earnings of FTC
are immaterial to the Company’s consolidated financial statements.
Federal Trust Bank, an indirect wholly-owned subsidiary (the “Bank”), is subject to certain
restrictions on the amount of dividends that it may declare and distribute to The Hartford without
prior regulatory notification or approval.
The Bank is also subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
The following tables summarize the capital thresholds for the “minimum” and “well capitalized”
designations at December 31, 2009. An institution’s capital category is based on whether it meets
the threshold for all three capital ratios within the category. At December 31, 2009, the Bank’s
Tier 1 capital ratio was 8.3%. The Bank was designated as a “well capitalized” institution at
December 31, 2009.
| To Be Well Capitalized | ||||||||||||||||||||||||
| Under Prompt | ||||||||||||||||||||||||
| For Minimum Capital | Corrective Action | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||
| At December 31, 2009 | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
|
Total capital (to risk-weighted assets)
|
$ | 32.3 | 13.2 | % | $ | 19.5 | 8 | % | $ | 24.4 | 10 | % | ||||||||||||
|
Tier I capital (to risk-weighted assets)
|
$ | 32.2 | 13.2 | % | $ | 9.8 | 4 | % | $ | 14.6 | 6 | % | ||||||||||||
|
Tier I capital (to average adjusted assets)
|
$ | 32.2 | 8.3 | % | $ | 15.6 | 4 | % | $ | 19.5 | 5 | % | ||||||||||||
23. Restructuring, Severance and Other Costs
During the year ended December 31, 2009, the Company completed a review of several strategic
alternatives with a goal of preserving capital, reducing risk and stabilizing its ratings. These
alternatives included the potential restructuring, discontinuation or disposition of various
business lines. Following that review, the Company announced that it would suspend all new sales
in International’s Japan and European operations. The Company has also executed on plans to change
the management structure of the organization and reorganized the nature and focus of certain of the
Company’s operations. These plans resulted in termination benefits to current employees, costs to
terminate leases and other contracts and asset impairment charges. The Company will complete these
restructuring activities and execute final payment by December 2010.
The following pre-tax charges were incurred during the year ended December 31, 2009 in connection
with these restructuring activities:
|
Severance benefits
|
$ | 52 | ||
|
Asset impairment charges
|
53 | |||
|
Other contract termination charges
|
34 | |||
|
|
||||
|
Total severance and other costs for the year ended December 31, 2009
|
$ | 139 | ||
|
|
||||
As of December 31, 2009 the liability for lease and other contract termination charges was $28 as
there were $6 in payments made during the year ended December 31, 2009 for these charges. The
amounts incurred during the year ended December 31, 2009 were recorded in other expenses with
approximately $119 recorded in the Life Other segment, $12 recorded in the Corporate segment and $8
recorded in the Property & Casualty operations.
F-89
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
24. Sale of Joint Venture Interest in ICATU Hartford Seguros, S.A.
On November 23, 2009, in keeping with the Company’s June 2009 announcement to return to its
historical strengths as a U.S.-centric insurance company, the Company entered into a Share Purchase
Agreement to sell its joint venture interest in ICATU Hartford Seguros, S.A. (“IHS”), its Brazilian
insurance operation, to its partner, ICATU Holding S.A., for $135. The transaction is expected to
close in the first quarter of 2010. IHS primarily sells life insurance policies, capitalization
products and private pension plans. The investment in IHS was reported as an equity method
investment in Other Assets. As a result of the Share Purchase Agreement, the Company recorded in
2009, an asset impairment charge, net of unrealized capital gains and foreign currency translation
adjustments, in net realized capital losses of approximately $51, pre-tax, or $44, after-tax.
25. Quarterly Results For 2009 and 2008 (Unaudited)
| Three Months Ended | ||||||||||||||||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||
|
Revenues [1]
|
$ | 5,394 | $ | 1,544 | $ | 7,637 | $ | 7,503 | $ | 5,230 | $ | (393 | ) | $ | 6,440 | $ | 565 | |||||||||||||||
|
Benefits, losses and expenses
|
$ | 7,411 | $ | 1,453 | $ | 7,619 | $ | 6,851 | $ | 5,687 | $ | 3,790 | $ | 5,712 | $ | 1,716 | ||||||||||||||||
|
Net income (loss) [2]
|
$ | (1,209 | ) | $ | 145 | $ | (15 | ) | $ | 543 | $ | (220 | ) | $ | (2,631 | ) | $ | 557 | $ | (806 | ) | |||||||||||
|
Less: Preferred stock dividends and accretion
of discount
|
— | — | 3 | — | 62 | — | 62 | 8 | ||||||||||||||||||||||||
|
Net income (loss) available to common
shareholders [2]
|
$ | (1,209 | ) | $ | 145 | $ | (18 | ) | $ | 543 | $ | (282 | ) | $ | (2,631 | ) | $ | 495 | $ | (814 | ) | |||||||||||
|
Basic earnings (losses) per common share [3]
|
$ | (3.77 | ) | $ | 0.46 | $ | (0.06 | ) | $ | 1.74 | $ | (0.79 | ) | $ | (8.74 | ) | $ | 1.29 | $ | (2.71 | ) | |||||||||||
|
Diluted earnings (losses) per common share [4]
|
$ | (3.77 | ) | $ | 0.46 | $ | (0.06 | ) | $ | 1.73 | $ | (0.79 | ) | $ | (8.74 | ) | $ | 1.19 | $ | (2.71 | ) | |||||||||||
|
Weighted average common shares outstanding
|
320.8 | 313.8 | 325.4 | 311.7 | 356.1 | 301.1 | 382.7 | 300.2 | ||||||||||||||||||||||||
|
Weighted average common shares outstanding
and dilutive potential common shares
|
320.8 | 315.7 | 325.4 | 313.1 | 356.1 | 301.1 | 416.2 | 300.2 | ||||||||||||||||||||||||
| [1] |
Included in the three months ended March 31, 2008, September 30, 2008 and December 31, 2008 are net investment losses of
$3.6 billion, $3.4 billion and $4.5 billion, respectively, related to the mark-to-market effects of equity securities,
trading, supporting the International variable annuity business and net realized capital losses of $1.4 billion, $3.4
billion and $816, respectively.
|
|
| [2] |
Included in the three months ended March 31, 2008 are net realized capital losses of $648, after-tax.
|
|
|
Included in three months ended September 30, 2008 are net realized capital losses of $2.2
billion, after-tax, and a DAC unlock charge of $932, after-tax.
|
||
|
Included in the three months ended December 31, 2008 is an after-tax charge of $597 related to
goodwill testing and net realized capital losses of $610.
|
||
|
Included in the three months end March 31, 2009 is a DAC unlock charge of $1.5 billion,
after-tax.
|
||
|
Included in the three months ended June 30, 2009 are net realized capital losses of $649,
after-tax, and a DAC unlock benefit of $360, after-tax.
|
||
|
Included in the three months ended September 30, 2009 are net realized capital losses of $885, after-tax.
|
||
| [3] |
Due to the net loss for the three months ended December 31, 2008, no allocation of the net loss was made to the preferred
shareholders under the two-class method in the calculation of basic earnings per share, as the preferred shareholders had
no contractual obligation to fund the net losses of the Company. In the absence of the net loss, any such income would be
allocated to the preferred shareholders based on the weighted average number of preferred shares outstanding as of December
31, 2008.
|
|
| [4] |
In periods of a net loss, the Company uses basic weighted average common shares outstanding in the calculation of diluted
loss per share, since the inclusion of shares for warrants, stock compensation plans and the assumed conversion of the
preferred shares to common would have been antidilutive to the earnings per share calculation. In the absence of the net
loss, weighted average common shares outstanding and dilutive potential common shares would have totaled 302.1 million,
320.9 million, 321.5 million, 326.6 million, and 382.5 million, for the three months ended September 30, 2008, December 31,
2008, March 31, 2009, June 30, 2009 and September 30, 2009, respectively.
|
F-90
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN AFFILIATES
(In millions)
| As of December 31, 2009 | ||||||||||||
| Amount at | ||||||||||||
| which shown on | ||||||||||||
| Type of Investment | Cost | Fair Value | Balance Sheet | |||||||||
|
|
||||||||||||
|
Fixed Maturities
|
||||||||||||
|
Bonds and notes
|
||||||||||||
|
U.S. government and government agencies and
authorities (guaranteed and sponsored)
|
$ | 7,299 | $ | 7,172 | $ | 7,172 | ||||||
|
States, municipalities and political subdivisions
|
12,125 | 12,065 | 12,065 | |||||||||
|
Foreign governments
|
1,376 | 1,408 | 1,408 | |||||||||
|
Public utilities
|
5,755 | 5,900 | 5,900 | |||||||||
|
All other corporate bonds
|
29,563 | 29,343 | 29,343 | |||||||||
|
All other mortgage-backed and asset-backed securities
|
19,897 | 15,265 | 15,265 | |||||||||
|
|
||||||||||||
|
Total fixed maturities
|
76,015 | 71,153 | 71,153 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Equity Securities
|
||||||||||||
|
Common stocks
|
||||||||||||
|
Industrial, miscellaneous and all other
|
248 | 293 | 293 | |||||||||
|
Non-redeemable preferred stocks
|
1,085 | 928 | 928 | |||||||||
|
|
||||||||||||
|
Total equity securities, available-for-sale
|
1,333 | 1,221 | 1,221 | |||||||||
|
Equity securities, trading
|
33,070 | 32,321 | 32,321 | |||||||||
|
|
||||||||||||
|
Total equity securities
|
34,403 | 33,542 | 33,542 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Mortgage loans
|
5,938 | 5,091 | 5,938 | |||||||||
|
Real estate
|
107 | 107 | 107 | |||||||||
|
Policy loans
|
2,174 | 2,321 | 2,174 | |||||||||
|
Investments in partnerships and trusts
|
1,790 | 1,790 | 1,790 | |||||||||
|
Futures, options and miscellaneous
|
1,019 | 495 | 495 | |||||||||
|
Short-term investments
|
10,357 | 10,357 | 10,357 | |||||||||
|
|
||||||||||||
|
Total investments
|
$ | 131,803 | $ | 124,856 | $ | 125,556 | ||||||
|
|
||||||||||||
S-1
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Registrant)
(In millions)
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Registrant)
(In millions)
| As of December 31, | ||||||||
| Condensed Balance Sheets | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Fixed maturities, available-for-sale, at fair value
|
$ | 309 | $ | 149 | ||||
|
Other investments
|
36 | 42 | ||||||
|
Short-term investments
|
1,936 | 1,484 | ||||||
|
Investment in affiliates
|
21,642 | 14,517 | ||||||
|
Deferred income taxes
|
755 | 583 | ||||||
|
Unamortized issue costs
|
51 | 55 | ||||||
|
Other assets
|
368 | 33 | ||||||
|
|
||||||||
|
Total assets
|
$ | 25,097 | $ | 16,863 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Net payable to affiliates
|
$ | 366 | $ | 779 | ||||
|
Short-term debt (includes current maturities of
long-term debt)
|
275 | 374 | ||||||
|
Long-term debt
|
5,250 | 5,514 | ||||||
|
Other liabilities
|
1,341 | 928 | ||||||
|
|
||||||||
|
Total liabilities
|
7,232 | 7,595 | ||||||
|
Total stockholders’ equity
|
17,865 | 9,268 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 25,097 | $ | 16,863 | ||||
|
|
||||||||
| For the years ended December 31, | ||||||||||||
| Condensed Statements of Operations | 2009 | 2008 | 2007 | |||||||||
|
Net investment income
|
$ | 8 | $ | 30 | $ | 24 | ||||||
|
Net realized capital gains (losses)
|
(231 | ) | 103 | (4 | ) | |||||||
|
|
||||||||||||
|
Total revenues
|
(223 | ) | 133 | 20 | ||||||||
|
Interest expense
|
457 | 323 | 241 | |||||||||
|
Other expenses
|
8 | (3 | ) | 18 | ||||||||
|
|
||||||||||||
|
Total expenses
|
465 | 320 | 259 | |||||||||
|
Loss before income taxes and earnings of subsidiaries
|
(688 | ) | (187 | ) | (239 | ) | ||||||
|
Income tax benefit
|
(157 | ) | (102 | ) | (83 | ) | ||||||
|
|
||||||||||||
|
Loss before earnings of subsidiaries
|
(531 | ) | (85 | ) | (156 | ) | ||||||
|
Earnings of subsidiaries
|
(356 | ) | (2,664 | ) | 3,105 | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (887 | ) | $ | (2,749 | ) | $ | 2,949 | ||||
|
|
||||||||||||
Certain reclassifications have been made to prior year financial information to conform to the current year presentation.
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto.
the consolidated financial statements and notes thereto.
S-2
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
| For the years ended December 31, | ||||||||||||
| Condensed Statements of Cash Flows | 2009 | 2008 | 2007 | |||||||||
|
Operating Activities
|
||||||||||||
|
Net income (loss)
|
$ | (887 | ) | $ | (2,749 | ) | $ | 2,949 | ||||
|
Undistributed earnings of subsidiaries
|
1,307 | (4,766 | ) | (1,422 | ) | |||||||
|
Change in operating assets and liabilities
|
(590 | ) | 9,372 | 18 | ||||||||
|
|
||||||||||||
|
Cash provided by (used for) operating activities
|
(170 | ) | 1,857 | 1,545 | ||||||||
|
|
||||||||||||
|
Investing Activities
|
||||||||||||
|
Net sales (purchases) of short-term investments
|
(412 | ) | (892 | ) | (76 | ) | ||||||
|
Purchase price of business acquired
|
(10 | ) | — | — | ||||||||
|
Capital contributions to subsidiaries
|
(3,115 | ) | (2,300 | ) | (127 | ) | ||||||
|
|
||||||||||||
|
Cash used for investing activities
|
(3,537 | ) | (3,192 | ) | (203 | ) | ||||||
|
|
||||||||||||
|
Financing Activities
|
||||||||||||
|
Issuance of long-term debt
|
— | 2,670 | 495 | |||||||||
|
Repayment/maturity of long-term debt
|
— | (955 | ) | (300 | ) | |||||||
|
Change in commercial paper
|
(375 | ) | — | 75 | ||||||||
|
Issuance of convertible preferred shares
|
— | 727 | — | |||||||||
|
Issuance of warrants
|
— | 512 | — | |||||||||
|
Proceeds from issuance of preferred stock and warrants to U.S. Treasury
|
3,400 | — | — | |||||||||
|
Proceeds from issuance of shares under discretionary equity issuance plan
|
887 | — | — | |||||||||
|
Proceeds from issuances of shares under incentive and stock compensation plans, net
|
20 | 54 | 186 | |||||||||
|
Treasury stock acquired
|
— | (1,000 | ) | (1,193 | ) | |||||||
|
Return of shares to treasury stock under incentive and stock compensation plans to
treasury stock
|
(3 | ) | (18 | ) | (14 | ) | ||||||
|
Excess tax benefits on stock-based compensation
|
— | 5 | 45 | |||||||||
|
Dividends Paid — Preferred shares
|
(73 | ) | — | — | ||||||||
|
Dividends Paid — Common Shares
|
(149 | ) | (660 | ) | (636 | ) | ||||||
|
|
||||||||||||
|
Cash provided by (used for) financing activities
|
3,707 | 1,335 | (1,342 | ) | ||||||||
|
Net change in cash
|
— | — | — | |||||||||
|
Cash — beginning of year
|
— | — | — | |||||||||
|
|
||||||||||||
|
Cash — end of year
|
$ | — | $ | — | $ | — | ||||||
|
|
||||||||||||
|
Supplemental Disclosure of Cash Flow Information
|
||||||||||||
|
Interest Paid
|
$ | 454 | $ | 265 | $ | 239 | ||||||
|
Dividends Received from Subsidiaries
|
$ | 243 | $ | 2,279 | $ | 1,668 | ||||||
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto.
the consolidated financial statements and notes thereto.
S-3
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(In millions)
| Deferred Policy | ||||||||||||||||
| Acquisition | Other | |||||||||||||||
| Costs and | Future Policy Benefits, | Policyholder | ||||||||||||||
| Present Value of | Unpaid Losses and Loss | Unearned | Funds and | |||||||||||||
| Segment | Future Profits | Adjustment Expenses | Premiums | Benefits Payable | ||||||||||||
|
|
||||||||||||||||
|
As of December 31, 2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Life
|
||||||||||||||||
|
Retail
|
$ | 3,821 | $ | 1,749 | $ | 10 | $ | 17,950 | ||||||||
|
Individual Life
|
2,623 | 842 | 1 | 6,330 | ||||||||||||
|
Group Benefits
|
78 | 6,403 | 84 | 401 | ||||||||||||
|
Retirement Plans
|
980 | 293 | — | 6,156 | ||||||||||||
|
International
|
1,775 | 659 | — | 37,697 | ||||||||||||
|
Institutional
|
146 | 7,984 | 72 | 9,302 | ||||||||||||
|
Other
|
— | 50 | 1 | 312 | ||||||||||||
|
|
||||||||||||||||
|
Total Life
|
9,423 | 17,980 | 168 | 78,148 | ||||||||||||
|
Property & Casualty
|
||||||||||||||||
|
Personal Lines
|
643 | 2,070 | 1,938 | — | ||||||||||||
|
Small Commercial
|
277 | 3,603 | 1,306 | — | ||||||||||||
|
Middle Market
|
215 | 4,442 | 1,034 | — | ||||||||||||
|
Specialty Commercial
|
128 | 7,044 | 776 | — | ||||||||||||
|
|
||||||||||||||||
|
Total Ongoing Operations
|
1,263 | 17,159 | 5,054 | — | ||||||||||||
|
Other Operations
|
— | 4,492 | 1 | — | ||||||||||||
|
|
||||||||||||||||
|
Total Property &
Casualty
|
1,263 | 21,651 | 5,055 | — | ||||||||||||
|
Corporate
|
— | — | (2 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 10,686 | $ | 39,631 | $ | 5,221 | $ | 78,148 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
As of December
31, 2008
|
||||||||||||||||
|
|
||||||||||||||||
|
Life
|
||||||||||||||||
|
Retail
|
$ | 5,801 | $ | 1,353 | $ | 11 | $ | 22,164 | ||||||||
|
Individual Life
|
3,027 | 781 | 1 | 6,010 | ||||||||||||
|
Group Benefits
|
81 | 6,356 | 85 | 402 | ||||||||||||
|
Retirement Plans
|
877 | 313 | — | 6,437 | ||||||||||||
|
International
|
2,046 | 229 | — | 36,461 | ||||||||||||
|
Institutional
|
156 | 7,667 | 40 | 11,255 | ||||||||||||
|
Other
|
— | 48 | 1 | 1,823 | ||||||||||||
|
|
||||||||||||||||
|
Total Life
|
11,988 | 16,747 | 138 | 84,552 | ||||||||||||
|
Property & Casualty
|
||||||||||||||||
|
Personal Lines
|
606 | 2,052 | 1,904 | — | ||||||||||||
|
Small Commercial
|
282 | 3,572 | 1,318 | — | ||||||||||||
|
Middle Market
|
232 | 4,745 | 1,128 | — | ||||||||||||
|
Specialty Commercial
|
140 | 6,980 | 893 | — | ||||||||||||
|
|
||||||||||||||||
|
Total Ongoing Operations
|
1,260 | 17,349 | 5,243 | — | ||||||||||||
|
Other Operations
|
— | 4,584 | 1 | — | ||||||||||||
|
|
||||||||||||||||
|
Total Property &
Casualty
|
1,260 | 21,933 | 5,244 | — | ||||||||||||
|
Corporate
|
— | — | (3 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 13,248 | $ | 38,680 | $ | 5,379 | $ | 84,552 | ||||||||
|
|
||||||||||||||||
S-4
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION (continued)
| Amortization of | ||||||||||||||||||||||||
| Deferred Policy | ||||||||||||||||||||||||
| Acquisition | ||||||||||||||||||||||||
| Earned | Benefits, Losses | Costs and | ||||||||||||||||||||||
| Premiums, Fee | Net | and Loss | Present Value | |||||||||||||||||||||
| Income and | Investment | Adjustment | of Future | Other | Net Written | |||||||||||||||||||
| Segment | Other | Income | Expenses | Profits | Expenses [1] | Premiums | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
For the year ended
December 31, 2009
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Life
|
||||||||||||||||||||||||
|
Retail
|
$ | 2,132 | $ | 750 | $ | 1,310 | $ | 1,389 | $ | 1,049 | ||||||||||||||
|
Individual Life
|
940 | 335 | 640 | 314 | 188 | |||||||||||||||||||
|
Group Benefits
|
4,350 | 403 | 3,196 | 61 | 1,120 | |||||||||||||||||||
|
Retirement Plans
|
324 | 315 | 269 | 56 | 346 | |||||||||||||||||||
|
International
|
827 | 182 | 621 | 364 | 291 | |||||||||||||||||||
|
Institutional
|
495 | 833 | 1,301 | 17 | 83 | |||||||||||||||||||
|
Other
|
58 | 3,273 | 3,272 | — | 124 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Life
|
9,126 | 6,091 | 10,609 | 2,201 | 3,201 | N/A | ||||||||||||||||||
|
Property & Casualty
|
||||||||||||||||||||||||
|
Personal Lines
|
4,105 | 183 | 2,895 | 674 | 459 | $ | 3,987 | |||||||||||||||||
|
Small Commercial
|
2,580 | 223 | 1,404 | 622 | 217 | 2,572 | ||||||||||||||||||
|
Middle Market
|
2,100 | 258 | 1,197 | 486 | 194 | 2,021 | ||||||||||||||||||
|
Specialty Commercial
|
1,568 | 279 | 672 | 284 | 492 | 1,127 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Ongoing Operations
|
10,353 | 943 | 6,168 | 2,066 | 1,362 | 9,707 | ||||||||||||||||||
|
Other Operations
|
— | 163 | 242 | — | 19 | 4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Property & Casualty
|
10,353 | 1,106 | 6,410 | 2,066 | 1,381 | 9,711 | ||||||||||||||||||
|
Corporate
|
13 | 22 | — | — | 561 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 19,492 | $ | 7,219 | $ | 17,019 | $ | 4,267 | $ | 5,143 | $ | 9,711 | ||||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Includes insurance operating costs, interest, goodwill impairment, and other expenses.
|
|
| N/A |
— Not applicable to life insurance pursuant to Regulation S-X.
|
S-5
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION (continued)
| Amortization of | ||||||||||||||||||||||||
| Deferred Policy | ||||||||||||||||||||||||
| Acquisition | ||||||||||||||||||||||||
| Earned | Benefits, Losses | Costs and | ||||||||||||||||||||||
| Premiums, Fee | Net | and Loss | Present Value | |||||||||||||||||||||
| Income and | Investment | Adjustment | of Future | Other | Net Written | |||||||||||||||||||
| Segment | Other | Income | Expenses | Profits | Expenses [1] | Premiums | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
For the year ended
December 31, 2008
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Life
|
||||||||||||||||||||||||
|
Retail
|
$ | 2,753 | $ | 747 | $ | 1,008 | $ | 1,344 | $ | 1,609 | ||||||||||||||
|
Individual Life
|
828 | 338 | 627 | 169 | 202 | |||||||||||||||||||
|
Group Benefits
|
4,391 | 419 | 3,144 | 57 | 1,128 | |||||||||||||||||||
|
Retirement Plans
|
338 | 342 | 271 | 91 | 335 | |||||||||||||||||||
|
International
|
872 | 167 | 270 | 496 | 321 | |||||||||||||||||||
|
Institutional
|
1,041 | 1,004 | 1,907 | 19 | 120 | |||||||||||||||||||
|
Other
|
60 | (10,312 | ) | (10,186 | ) | — | 7 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Life
|
10,283 | (7,295 | ) | (2,959 | ) | 2,176 | 3,722 | N/A | ||||||||||||||||
|
Property & Casualty
|
||||||||||||||||||||||||
|
Personal Lines
|
4,061 | 209 | 2,749 | 633 | 431 | $ | 3,925 | |||||||||||||||||
|
Small Commercial
|
2,724 | 222 | 1,480 | 636 | 224 | 2,696 | ||||||||||||||||||
|
Middle Market
|
2,297 | 279 | 1,442 | 513 | 208 | 2,242 | ||||||||||||||||||
|
Specialty Commercial
|
1,753 | 346 | 907 | 313 | 530 | 1,361 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Ongoing Operations
|
10,835 | 1,056 | 6,578 | 2,095 | 1,393 | 10,224 | ||||||||||||||||||
|
Other Operations
|
7 | 197 | 129 | — | 26 | 7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Property & Casualty
|
10,842 | 1,253 | 6,707 | 2,095 | 1,419 | 10,231 | ||||||||||||||||||
|
Corporate
|
17 | 37 | — | — | 650 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 21,142 | $ | (6,005 | ) | $ | 3,748 | $ | 4,271 | $ | 5,791 | $ | 10,231 | |||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Includes insurance operating costs, interest, goodwill impairment, and other expenses.
|
|
| N/A |
— Not applicable to life insurance pursuant to Regulation S-X.
|
S-6
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION (continued)
| Amortization of | ||||||||||||||||||||||||
| Deferred Policy | ||||||||||||||||||||||||
| Acquisition | ||||||||||||||||||||||||
| Earned | Benefits, Losses | Costs and | ||||||||||||||||||||||
| Premiums, Fee | Net | and Loss | Present Value | |||||||||||||||||||||
| Income and | Investment | Adjustment | of Future | Other | Net Written | |||||||||||||||||||
| Segment | Other | Income | Expenses | Profits | Expenses [1] | Premiums | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
For the year ended
December 31, 2007
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Life
|
||||||||||||||||||||||||
|
Retail
|
$ | 3,055 | $ | 801 | $ | 820 | $ | 406 | $ | 1,221 | ||||||||||||||
|
Individual Life
|
808 | 359 | 562 | 121 | 193 | |||||||||||||||||||
|
Group Benefits
|
4,301 | 465 | 3,109 | 62 | 1,131 | |||||||||||||||||||
|
Retirement Plans
|
242 | 355 | 249 | 58 | 170 | |||||||||||||||||||
|
International
|
832 | 131 | 32 | 214 | 246 | |||||||||||||||||||
|
Institutional
|
1,238 | 1,241 | 2,074 | 23 | 185 | |||||||||||||||||||
|
Other
|
67 | 290 | 301 | — | 84 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Life
|
10,543 | 3,642 | 7,147 | 884 | 3,230 | N/A | ||||||||||||||||||
|
Property & Casualty
|
||||||||||||||||||||||||
|
Personal Lines
|
4,030 | 249 | 2,697 | 617 | 402 | $ | 3,947 | |||||||||||||||||
|
Small Commercial
|
2,737 | 299 | 1,413 | 635 | 239 | 2,747 | ||||||||||||||||||
|
Middle Market
|
2,420 | 389 | 1,560 | 529 | 208 | 2,326 | ||||||||||||||||||
|
Specialty Commercial
|
1,800 | 502 | 1,054 | 323 | 537 | 1,415 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Ongoing Operations
|
10,987 | 1,439 | 6,724 | 2,104 | 1,386 | 10,435 | ||||||||||||||||||
|
Other Operations
|
5 | 248 | 193 | — | 23 | 5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Property & Casualty
|
10,992 | 1,687 | 6,917 | 2,104 | 1,409 | 10,440 | ||||||||||||||||||
|
Corporate
|
16 | 30 | — | 1 | 219 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 21,551 | $ | 5,359 | $ | 14,064 | $ | 2,989 | $ | 4,858 | $ | 10,440 | ||||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Includes insurance operating costs, interest and other expenses.
|
|
| N/A |
— Not applicable to life insurance pursuant to Regulation S-X.
|
S-7
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE IV
REINSURANCE
(In millions)
| Percentage | ||||||||||||||||||||
| Assumed | of Amount | |||||||||||||||||||
| Gross | Ceded to Other | From Other | Net | Assumed | ||||||||||||||||
| Amount | Companies | Companies | Amount | to Net | ||||||||||||||||
|
|
||||||||||||||||||||
|
For the year ended December 31, 2009
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Life insurance in-force
|
$ | 970,455 | $ | 128,144 | $ | 49,273 | $ | 891,584 | 6 | % | ||||||||||
|
|
||||||||||||||||||||
|
Insurance revenues
|
||||||||||||||||||||
|
Property and casualty insurance
|
$ | 10,386 | $ | 778 | $ | 253 | $ | 9,861 | 3 | % | ||||||||||
|
Life insurance and annuities
|
7,245 | 433 | 91 | 6,903 | 1 | % | ||||||||||||||
|
Accident and health insurance
|
2,203 | 51 | 71 | 2,223 | 3 | % | ||||||||||||||
|
|
||||||||||||||||||||
|
Total insurance revenues
|
$ | 19,834 | $ | 1,262 | $ | 415 | $ | 18,987 | 2 | % | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
For the year ended December 31, 2008
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Life insurance in-force
|
$ | 924,987 | $ | 123,074 | $ | 43,736 | $ | 845,649 | 5 | % | ||||||||||
|
|
||||||||||||||||||||
|
Insurance revenues
|
||||||||||||||||||||
|
Property and casualty insurance
|
$ | 10,999 | $ | 877 | $ | 216 | $ | 10,338 | 2 | % | ||||||||||
|
Life insurance and annuities
|
8,187 | 390 | 173 | 7,970 | 2 | % | ||||||||||||||
|
Accident and health insurance
|
2,254 | 31 | 90 | 2,313 | 4 | % | ||||||||||||||
|
|
||||||||||||||||||||
|
Total insurance revenues
|
$ | 21,440 | $ | 1,298 | $ | 479 | $ | 20,621 | 2 | % | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
For the year ended December 31, 2007
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Life insurance in-force
|
$ | 824,608 | $ | 216,439 | $ | 82,282 | $ | 690,451 | 12 | % | ||||||||||
|
|
||||||||||||||||||||
|
Insurance revenues
|
||||||||||||||||||||
|
Property and casualty insurance
|
$ | 11,396 | $ | 1,104 | $ | 204 | $ | 10,496 | 2 | % | ||||||||||
|
Life insurance and annuities
|
8,360 | 369 | 188 | 8,179 | 2 | % | ||||||||||||||
|
Accident and health insurance
|
2,315 | 36 | 85 | 2,364 | 4 | % | ||||||||||||||
|
|
||||||||||||||||||||
|
Total insurance revenues
|
$ | 22,071 | $ | 1,509 | $ | 477 | $ | 21,039 | 2 | % | ||||||||||
|
|
||||||||||||||||||||
S-8
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
| Charged to | Write-offs/ | |||||||||||||||||||
| Balance | Costs and | Translation | Payments/ | Balance | ||||||||||||||||
| January 1, | Expenses | Adjustment | Other | December 31, | ||||||||||||||||
|
|
||||||||||||||||||||
|
2009
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Allowance for doubtful accounts and other
|
$ | 125 | $ | 53 | $ | — | $ | (57 | ) | $ | 121 | |||||||||
|
Allowance for uncollectible reinsurance
|
379 | 11 | — | (55 | ) | 335 | ||||||||||||||
|
Accumulated depreciation of property and equipment
|
1,601 | 253 | — | (110 | ) | 1,744 | ||||||||||||||
|
Valuation allowance on mortgage loans
|
26 | 408 | — | (68 | ) | 366 | ||||||||||||||
|
Valuation allowance for deferred taxes
|
75 | 11 | — | — | 86 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2008
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Allowance for doubtful accounts and other
|
$ | 126 | $ | 53 | $ | — | $ | (54 | ) | $ | 125 | |||||||||
|
Allowance for uncollectible reinsurance
|
404 | 12 | — | (37 | ) | 379 | ||||||||||||||
|
Accumulated depreciation of property and equipment
|
1,395 | 228 | — | (22 | ) | 1,601 | ||||||||||||||
|
Valuation allowance on mortgage loans
|
— | 26 | — | — | 26 | |||||||||||||||
|
Valuation allowance for deferred taxes
|
43 | 32 | — | — | 75 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2007
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Allowance for doubtful accounts and other
|
$ | 114 | $ | 47 | $ | — | $ | (35 | ) | $ | 126 | |||||||||
|
Allowance for uncollectible reinsurance
|
412 | 12 | — | (20 | ) | 404 | ||||||||||||||
|
Accumulated depreciation of property and equipment
|
1,241 | 232 | — | (78 | ) | 1,395 | ||||||||||||||
|
Valuation allowance for deferred taxes
|
60 | (17 | ) | — | — | 43 | ||||||||||||||
|
|
||||||||||||||||||||
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY AND CASUALTY INSURANCE OPERATIONS
(In millions)
PROPERTY AND CASUALTY INSURANCE OPERATIONS
(In millions)
| Discount | Losses and Loss Adjustment | Paid Losses and | ||||||||||||||
| Deducted From | Expenses Incurred Related to: | Loss Adjustment | ||||||||||||||
| Liabilities [1] | Current Year | Prior Year | Expenses | |||||||||||||
|
Years ended December 31,
|
||||||||||||||||
|
2009
|
$ | 511 | $ | 6,596 | $ | (186 | ) | $ | 6,547 | |||||||
|
2008
|
$ | 488 | $ | 6,933 | $ | (226 | ) | $ | 6,591 | |||||||
|
2007
|
$ | 568 | $ | 6,869 | $ | 48 | $ | 6,290 | ||||||||
| [1] |
Reserves for permanently disabled claimants and certain structured settlement contracts
that fund loss run-offs have been discounted using the weighted average interest rates of 5.0%,
5.4%, and 5.5% for 2009, 2008, and 2007, respectively.
|
S-9
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
|
||||
| By: | /s/ Beth A. Bombara | |||
| Beth A. Bombara | ||||
|
Senior Vice President and Controller
(Chief Accounting Officer and duly authorized signatory) |
||||
Date: February 23, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
|
/s/ Liam E. McGee
|
Chairman, Chief Executive Officer and Director
(Principal Executive Officer) |
February 23, 2010 | ||
|
/s/ Lizabeth H. Zlatkus
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
February 23, 2010 | ||
|
/s/ Beth A. Bombara
|
Senior Vice President and Controller
(Principal Accounting Officer) |
February 23, 2010 | ||
|
*
|
Director | February 23, 2010 | ||
|
*
|
Director | February 23, 2010 | ||
|
*
|
Director | February 23, 2010 | ||
|
*
|
Director | February 23, 2010 | ||
|
*
|
Director | February 23, 2010 | ||
|
*
|
Director | February 23, 2010 | ||
|
*
|
Director | February 23, 2010 |
|
*By:
|
/s/ Alan J. Kreczko | |||||
|
|
||||||
|
|
Alan J. Kreczko | |||||
|
|
As Attorney-in-Fact |
II-1
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
FORM 10-K
EXHIBITS INDEX
The exhibits attached to this Form 10-K are those that are required by Item 601 of Regulation
S-K.
| Exhibit No. | Description | |||
|
|
||||
| 3.01 |
Amended and Restated Certificate of Incorporation of The Hartford Financial Services Group,
Inc. (“The Hartford”), incorporated by reference to Exhibit 3.01 to The Hartford’s Current
Report on Form 8-K, filed June 2, 2009).
|
|||
|
|
||||
| 3.02 |
Certificate of Designations of The Hartford Financial Services Group, Inc. with respect to
Series E Fixed Rate Cumulative Perpetual Preferred Stock, dated June 25, 2009 (incorporated
herein by reference to Exhibit 3.01 to The Hartford’s Current Report on Form 8-K, filed June
26, 2009).
|
|||
|
|
||||
| 3.02 |
Amended and Restated By-Laws of The Hartford, amended effective May 27, 2009 (incorporated
herein by reference to Exhibit 3.01 to The Hartford’s Current Report on Form 8-K, filed June
2, 2009).
|
|||
|
|
||||
| 4.01 |
Warrant to Purchase Shares of Common Stock of The Hartford Financial Services Group, Inc.,
dated June 26, 2009 (incorporated herein by reference to Exhibit 4.01 to The Hartford’s
Current Report on Form 8-K, filed June 26, 2009).
|
|||
|
|
||||
| 4.02 |
Senior Indenture, dated as of October 20, 1995, between The Hartford and The Chase Manhattan
Bank (National Association) as Trustee (incorporated herein by reference to Exhibit 4.03 to
the Registration Statement on Form S-3 (Registration No. 333-103915) of The Hartford, Hartford
Capital IV, Hartford Capital V and Hartford Capital VI).
|
|||
|
|
||||
| 4.03 |
Supplemental Indenture No. 1, dated as of December 27, 2000, to the Senior Indenture filed as
Exhibit 4.02 hereto, between The Hartford and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.30 to The Hartford’s Registration Statement on
Form S-3 (Amendment No. 1) (Registration No. 333-49666) dated December 27, 2000).
|
|||
|
|
||||
| 4.04 |
Supplemental Indenture No. 2, dated as of September 13, 2002, to the Senior Indenture filed
as Exhibit 4.02 hereto, between The Hartford and JPMorgan Chase Bank, as Trustee (incorporated
herein by reference to Exhibit 4.1 to The Hartford’s Current Report on Form 8-K, filed
September 17, 2002).
|
|||
|
|
||||
| 4.05 |
Form of Global Security (included in Exhibit 4.04).
|
|||
|
|
||||
| 4.06 |
Supplemental Indenture No. 3, dated as of May 23, 2003, to the Senior Indenture filed as
Exhibit 4.02 hereto, between The Hartford and JPMorgan Chase Bank, as Trustee (incorporated
herein by reference to Exhibit 4.1 of The Hartford’s Current Report on Form 8-K, filed May
30, 2003).
|
|||
|
|
||||
| 4.07 |
Senior Indenture, dated as of March 9, 2004, between The Hartford and JPMorgan Chase Bank, as
Trustee (incorporated herein by reference to Exhibit 4.1 to The Hartford’s Current Report on
Form 8-K, filed March 12, 2004).
|
|||
|
|
||||
| 4.08 |
Junior Subordinated Indenture, dated as of February 12, 2007, between The Hartford and
LaSalle Bank, N.A., as Trustee (incorporated herein by reference to Exhibit 4.1 to The
Hartford’s Current Report on Form 8-K, filed February 16, 2007).
|
|||
|
|
||||
| 4.09 |
Senior Indenture, dated as of April 11, 2007, between The Hartford and The Bank of New York
Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 4.03 to the
Registration Statement on Form S-3 (Registration No. 333-142044) of The Hartford, Hartford
Capital IV, Hartford Capital V and Hartford Capital VI, filed on April 11, 2007).
|
|||
|
|
||||
| *10.01 |
Separation Agreement and General Release by and between The Hartford and Thomas M. Marra,
dated as of February 24, 2009 (incorporated herein by reference to Exhibit 10.01 to The
Hartford’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009).
|
|||
|
|
||||
| 10.02 |
Letter Agreement, dated as of June 9, 2009, by and between The Hartford Financial Services
Group, Inc., Allianz SE and Allianz Finance II Luxembourg S.a.r.l. (incorporated herein by
reference to Exhibit 10.01 to The Hartford’s Current Report on Form 8-K, filed June 12, 2009).
|
|||
|
|
||||
| 10.03 |
Letter Agreement including the Securities Purchase Agreement-Standard Terms incorporated
therein, between The Hartford Financial Services Group, Inc. and The United States Department
of Treasury, dated June 26, 2009 (incorporated herein by reference to Exhibit 10.01 to The
Hartford’s Current Report on Form 8-K, filed June 26, 2009).
|
|||
II-2
Table of Contents
| Exhibit No. | Description | |||
|
|
||||
| 10.04 |
Letter Agreement between The Hartford Financial Services Group, Inc. and The United States
Department of the Treasury, dated June 26, 2009 (incorporated herein by reference to Exhibit
10.02 to The Hartford’s Current Report on Form 8-K, filed June 26, 2009).
|
|||
|
|
||||
| *10.05 |
Letter Agreement between The Hartford Financial Services Group, Inc. and Liam E McGee, dated September 23, 2009
(incorporated herein by reference to Exhibit 10.01 to The
Hartford Current Report on Form 8-K, filed September 30,
2009).
|
|||
|
|
||||
| *10.06 |
Form of Key Executive Employment Protection Agreement between The Hartford and certain executive officers of The
Hartford, as amended (incorporated herein by reference to Exhibit 10.06 to The Hartford’s Current Report on Form 8-K,
filed September 12, 2006) to which John C. Walters is a signatory as of September 7, 2006.
|
|||
|
|
||||
| *10.07 |
The Hartford Restricted Stock Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10.05 to The
Hartford’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004).
|
|||
|
|
||||
| *10.08 |
The Hartford 1995 Incentive Stock Plan, as amended (incorporated herein by reference to Exhibit 10.09 to The Hartford’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2005).
|
|||
|
|
||||
| *10.09 |
The Hartford Incentive Stock Plan, as amended (incorporated herein by reference to Exhibit 10.10 to The Hartford’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2005).
|
|||
|
|
||||
| *10.10 |
The Hartford 2005 Incentive Stock Plan, as amended. †
|
|||
|
|
||||
| *10.11 |
The Hartford Deferred Restricted Stock Unit Plan, as amended (incorporated herein by reference to Exhibit 10.12 to The
Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005).
|
|||
|
|
||||
| *10.12 |
The Hartford Deferred Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.03 to The Hartford’s
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004).
|
|||
|
|
||||
| *10.13 |
The Hartford Senior Executive Severance Pay Plan, as amended (incorporated herein by reference to Exhibit 10.07 to The
Hartford’s Current Report on Form 8-K, filed September 12, 2006).
|
|||
|
|
||||
| *10.14 |
The Hartford Executive Severance Pay Plan I, as amended (incorporated herein by reference to Exhibit 10.18 to The
Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
|
|||
|
|
||||
| *10.15 |
The Hartford Planco Non-Employee Option Plan, as amended (incorporated herein by reference to Exhibit 10.19 to The
Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
|
|||
|
|
||||
| *10.16 |
Employment Agreement between the Company and Christopher J. Swift dated February 14, 2010.
|
|||
|
|
||||
| *10.17 |
The Hartford Investment and Savings Plan, as amended. †
|
|||
|
|
||||
| *10.18 |
The Hartford 2005 Incentive Stock Plan Forms of Individual Award Agreements (incorporated herein by reference to Exhibit
10.2 to The Hartford’s Current Report on Form 8-K, filed May 24, 2005).
|
|||
|
|
||||
| *10.19 |
The Hartford Deferred Stock Unit Plan, as amended on October 22, 2009 (incorporated by reference to Exhibit 10.02 to The
Hartford’s Current Report on Form 8-K, filed October 22, 2009).
|
|||
|
|
||||
| *10.20 |
Form of Award Letters for Deferred Unit and Restricted Units under The Hartford’s Deferred Stock Unit Plan (incorporated
by reference to Exhibit 10.03 to The Hartford’s Quarterly Report on Form 10-Q for the third quarter ended September 30,
2009).
|
|||
|
|
||||
| *10.21 |
Employment Agreement and amendment thereto dated November 14, 2008, between the Company and John C. Walters
(incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed November 14,
2008).
|
|||
II-3
Table of Contents
| Exhibit No. | Description | |||
|
|
||||
| 10.22 |
Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility, dated
August 9, 2007, among The Hartford and the syndicate of lenders named therein, including Bank
of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citibank, N.A., as
syndication agents, and Wachovia Bank, N.A., as documentation agent, as amended (incorporated
herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed August
10, 2007; Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed July 14, 2008; and
Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed December 18, 2008).
|
|||
|
|
||||
| 10.23 |
Remarketing Agreement, dated as of May 9, 2006, between The Hartford and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co., J.P. Morgan Securities Inc., and
J.P. Morgan Chase Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to The
Hartford’s Current Report on Form 8-K, filed May 15, 2006).
|
|||
|
|
||||
| 10.24 |
Initial Remarketing Agreement, dated as of August 10, 2006, between The Hartford, and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, and
J.P. Morgan Chase Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to The
Hartford’s Current Report on Form 8-K, filed August 11, 2006).
|
|||
|
|
||||
| 10.25 |
Form of Agreement among the Attorney General of the State of Connecticut and the Attorney
General of New York and The Hartford dated May 10, 2006 (incorporated herein by reference to
Exhibit 10.1 of the Hartford’s Current Report on Form 8-K, filed May 11, 2006).
|
|||
|
|
||||
| 10.26 |
Form of Order of the Securities and Exchange Commission dated November 8, 2006 (incorporated
herein by reference to Exhibit 10.26 to The Hartford’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2006).
|
|||
|
|
||||
| 10.27 |
Put Option Agreement, dated February 12, 2007, among The Hartford, Glen Meadow ABC Trust and
LaSalle Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current
Report on Form 8-K, filed February 16, 2007).
|
|||
|
|
||||
| 10.28 |
Form of Assurance of Discontinuance entered into by the New York Attorney General’s Office,
the Illinois Attorney General’s Office and The Hartford, dated July 23, 2007 (incorporated
herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed July
24, 2007).
|
|||
|
|
||||
| 10.29 |
Investment Agreement, dated as of October 17, 2008 between The Hartford and Allianz SE
(incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form
8-K, filed October 17, 2008).
|
|||
|
|
||||
| 12.01 |
Statement Re: Computation of Ratio of Earnings to Fixed Charges. †
|
|||
|
|
||||
| 21.01 |
Subsidiaries of The Hartford Financial Services Group, Inc. †
|
|||
|
|
||||
| 23.01 |
Consent of Deloitte & Touche LLP to the incorporation by reference into The Hartford’s
Registration Statements on Form S-8 and Form S-3 of the report of Deloitte & Touche LLP
contained in this Form 10-K regarding the audited financial statements is filed herewith. †
|
|||
|
|
||||
| 24.01 |
Power of Attorney. †
|
|||
|
|
||||
| 31.01 |
Certification of Liam E. McGee pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
|
|||
|
|
||||
| 31.02 |
Certification of Lizabeth H. Zlatkus pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. †
|
|||
|
|
||||
| 32.01 |
Certification of Liam E. McGee pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
|
|||
|
|
||||
| 32.02 |
Certification of Lizabeth H. Zlatkus pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. †
|
|||
|
|
||||
| 99.01 |
Certification of Liam E. McGee pursuant to Section 111(b)(4) of the Emergency Economic
Stabilization Act of 2008, as Amended by the American Recovery and Reinvestment Act of 2009. †
|
|||
|
|
||||
| 99.02 |
Certification of Lizabeth H. Zlatkus pursuant to Section 111(b)(4) of the Emergency Economic
Stabilization Act of 2008, as Amended by the American Recovery and Reinvestment Act of 2009. †
|
|||
II-4
Table of Contents
| Exhibit No. | Description | |||
|
|
||||
| 101.INS |
XBRL Instance Document. [1]
|
|||
|
|
||||
| 101.SCH |
XBRL Taxonomy Extension Schema.
|
|||
|
|
||||
| 101.CAL |
XBRL Taxonomy Extension Calculation Linkbase.
|
|||
|
|
||||
| 101.DEF |
XBRL Taxonomy Extension Definition Linkbase.
|
|||
|
|
||||
| 101.LAB |
XBRL Taxonomy Extension Label Linkbase.
|
|||
|
|
||||
| 101.PRE |
XBRL Taxonomy Extension Presentation Linkbase.
|
|||
| [1] |
Includes the following materials contained in
this Annual Report on Form 10-K for the year
ended December 31, 2009 formatted in XBRL
(eXtensible Business Reporting Language) (i)
the Consolidated Statements of Operations,
(ii) the Consolidated Balance Sheets, (iii)
the Consolidated Statements of Changes in
Equity, (iv) the Consolidated Statements of
Comprehensive Income (Loss), (v) the
Consolidated Statements of Cash Flows, and
(vi) the Notes to Consolidated Financial
Statements, which is tagged as blocks of text.
|
|
| * |
Management contract, compensatory plan or arrangement.
|
|
| † |
Filed with the Securities and Exchange Commission as an exhibit to this report.
|
II-5
TABLE OF CONTENTS
Part IItem 1. Business (dollar Amounts in Millions, Except For Per Share Data, Unless Otherwise Stated)Item 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For The Hartford S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial Data (in Millions, Except For Per Share Data and Combined Ratios)Item 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, and Executive Officers and Corporate Governance Of The HartfordItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules