HARTFORD FINANCIAL SERVICES GROUP, INC.
10-Qs and 10-Ks
PROXIES
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, 2010
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
Depositary shares, representing interests in 7.25% Mandatory Convertible Preferred Stock, Series F, par value $0.01 per share
Warrants (expiring June 26, 2019)
6.10% Notes due October 1, 2041
Depositary shares, representing interests in 7.25% Mandatory Convertible Preferred Stock, Series F, par value $0.01 per share
Warrants (expiring June 26, 2019)
6.10% Notes due October 1, 2041
Securities registered pursuant to Section 12(g) of the Act: None
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
o
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, 2010 was approximately $9.8 billion, based on the closing price of $22.13 per share
of the Common Stock on the New York Stock Exchange on June 30, 2010.
As of February 18, 2011, there were outstanding 444,734,147 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 2011 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, 2010
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
TABLE OF CONTENTS
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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,” “projects,” 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. Risk Factors. These important risks and uncertainties include:
| • |
uncertainties related to the Company’s current operating environment, which reflects
constrained capital and credit markets and uncertainty about the timing and strength of an
economic recovery, and whether management’s efforts to identify and address these risks will
be timely and 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 take other actions;
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market risks associated with our business, including changes in interest rates, credit
spreads, equity prices, foreign exchange rates, and implied volatility levels, as well as
uncertainty in key sectors such as the global real estate market, that continued to pressure
our results in 2010;
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volatility in our earnings resulting from our 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 negative
rating actions or downgrades in the Company’s financial strength and credit ratings or
negative rating actions or downgrades 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 changes in
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, earthquake, or other natural or man-made disaster that may
adversely affect our 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, winter storms, hurricanes and tropical storms, as well as climate change and its
potential impact on weather patterns;
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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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3
Table of Contents
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the restrictions, oversight, costs and other consequences of being a savings and loan holding
company, including from the supervision, regulation and examination by the Office of Thrift
Supervision (the “OTS”), and in the future, as a result of the enactment of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), The Federal Reserve as
the Company’s regulator and the Office of the Controller of the Currency as regulator of Federal
Trust Bank;
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the cost and other effects of increased regulation as a result of the enactment of the
Dodd-Frank Act, which will, among other effects, vest a newly created Financial Services
Oversight Council with the power to designate “systemically important” institutions, require
central clearing of, and/or impose new margin and capital requirements on, derivatives
transactions, and may affect our ability as a savings and loan holding company to manage our
general account by limiting or eliminating investments in certain private equity and hedge
funds;
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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 to declare and pay dividends is subject to limitations;
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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 risk that our framework for managing business risks may not be effective in mitigating
risk and loss to us that could adversely affect our business;
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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;
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unfavorable judicial or legislative developments; and
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other factors described in such forward-looking statements.
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Any forward-looking statement made by the Company in this document speaks only as of the date of
the filing of this Form 10-K. Factors or events that could cause the Company’s actual results to
differ may emerge from time to time, and it is not possible for the Company to predict all of them.
The Company undertakes no obligation to publicly update any forward-looking statement, whether as
a result of new information, future developments or otherwise.
4
Table of Contents
PART I
Item 1. BUSINESS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
(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 and life, property, and casualty
insurance to both individual and business customers in the United States of America. Also, The
Hartford continues to administer business previously sold in Japan and the United Kingdom.
Hartford Fire Insurance Company, founded in 1810, is the oldest of The Hartford’s subsidiaries. At
December 31, 2010, total assets and total stockholders’ equity of The Hartford were $318.3 billion
and $20.3 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. In 2009, the Company announced it would
focus on its U.S. businesses and suspended sales in Japan and the United Kingdom. In 2010, the
Company announced a customer-oriented strategy and established three divisions Commercial Markets,
Consumer Markets, and Wealth Management. In 2010, the Company announced the sale of two businesses
that are not core to its focus and strategy: its Canadian mutual fund business, Hartford
Investments Canada Corporation, and Specialty Risk Services, LLC, a third-party administrator for
claims administration (scheduled to close in 2011). Going forward, the Company intends to continue
evaluating its businesses and may make additional divestitures of businesses and assets that are
outside its focus or not necessary to the implementation of its strategy.
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 The Hartford Mutual
Funds, Inc. and The Hartford Mutual Funds II, Inc. (collectively, “mutual funds”), consisting of 52
mutual funds, as of December 31, 2010. The Company charges fees to these mutual 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 mutual funds are owned
by the shareholders of those funds and not by the Company.
Reporting Segments
The Hartford made changes to its reporting segments in 2010 to reflect the manner in which the
Company is currently organized for purposes of making operating decisions and assessing
performance. Accordingly, segment data for prior reporting periods has been adjusted to reflect
the new segment reporting. As a result, the Company created three customer-oriented divisions,
Commercial Markets, Consumer Markets and Wealth Management, conducting business principally in
seven reporting segments. The Hartford includes in Corporate and Other the Company’s debt
financing and related interest expense, as well as other capital raising activities; banking
operations; certain fee income and commission expenses associated with sales of non-proprietary
products by broker-dealer subsidiaries; and certain purchase accounting adjustments and other
charges not allocated to the reporting segments. Also included in Corporate and Other is the
Company’s management of certain property and casualty operations that have discontinued writing new
business and substantially all of the Company’s asbestos and environmental exposures, collectively
referred to as Other Operations.
The following discussion describes the principal products and services, marketing and distribution,
and competition of each of the three divisions of The Hartford. For further discussion on changes
to reporting segments in 2010, as well as financial disclosures on revenues by product, net income
(loss), and assets for each reporting segment, see Note 3 of the Notes to Consolidated Financial
Statements.
5
Table of Contents
Commercial Markets
The Commercial Markets division is organized into two reporting segments; Property & Casualty
Commercial and Group Benefits.
Principal Products and Services
Property & Casualty Commercial provides workers’ compensation, property, automobile, liability and
umbrella coverages under several different products, primarily throughout the U.S, within its
standard commercial lines, which consists of The Hartford’s small commercial and middle market
lines of business. Additionally, a variety of customized insurance products and risk management
services including workers’ compensation, automobile, general liability, professional liability,
fidelity, surety and specialty casualty coverages are offered to large companies through the
segment’s specialty lines.
Standard commercial lines seeks to offer products with more coverage options and customized pricing
based on the policyholder’s individualized risk characteristics. For small businesses, those
businesses whose annual payroll is under $5 and whose revenue and property values are less than $15
each, coverages are bundled as part of a single multi-peril package policy marketed under the
Spectrum name. Medium-sized businesses, companies whose payroll, revenue and property values
exceed the small business definition, are served within middle market. The middle market line of
business provides workers’ compensation, property, automobile, liability, umbrella, marine and
livestock coverages. The sale of Spectrum business owners’ package policies and workers’
compensation policies accounts for the majority of the written premium in the standard commercial
lines.
Within the specialty lines, a significant portion of the 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 provide insurance products and services
primarily to captive insurance companies, pools and self-insurance groups. In addition, specialty
lines has provided third-party administrator services for claims administration, integrated
benefits and loss control through Specialty Risk Services, LLC (“SRS”), an indirect wholly-owned
subsidiary of the Company. The Company signed a definitive agreement on December 17, 2010 to sell
SRS.
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 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.
In addition to the products and services traditionally offered within each of its lines of
business, in 2010 Commercial Markets launched The Hartford Productivity Advantage (“THPA”), a
single-company solution for leave management, integrating the insurer’s short- and long-term group
disability and workers’ compensation insurance with its leave management administration services.
Marketing and Distribution
Standard commercial lines 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 products are marketed 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 proportion of written premium will likely be
concentrated among fewer agents and brokers. Additionally the Company offers insurance products to
customers of the payroll service providers through its relationships with major national payroll
companies.
Specialty lines also provide insurance products and services through its home office located in
Hartford, Connecticut and multiple domestic office locations. Specialty lines markets its products
nationwide utilizing a variety of distribution networks including independent retail agents,
brokers and wholesalers.
The 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.
During 2010 the Company launched a nationwide joint sales management effort across standard
commercial lines, specialty lines and Group Benefits, facilitating the marketing of both integrated
and traditional products and services across commercial markets.
6
Table of Contents
Competition
In the small commercial marketplace, 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 small commercial market has
become increasingly competitive as favorable loss costs in the past few years have led carriers to
differentiate themselves through product expansion, price reduction, enhanced service and
cutting-edge technology. Larger carriers such as The Hartford have improved their pricing
sophistication and ease of doing business with agents through the use of predictive modeling tools
and automation which speeds up the process of evaluating a risk and quoting new business.
Written premium growth rates in the small commercial market have slowed and underwriting margins
have deteriorated due to earned pricing decreases, economy-related exposure reductions 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. Also, carriers serving middle market-sized accounts are more aggressively competing for
small commercial accounts as small commercial business has generally been less price-sensitive.
Middle market business is characterized as “high touch” and involves case-by-case underwriting and
pricing decisions. Compared to small commercial lines, the pricing of middle market accounts is
prone to more significant variation or cyclicality over time, with more sensitivity to legislative
and macro-economic forces. The economic downturn which began in 2008 has driven a reduction in
average premium size as shrinking company payrolls, smaller auto fleets, and fewer business
locations depress insurance exposures. Additionally, various state legislative reforms in recent
years designed to control workers compensation indemnity costs have led to rate reductions in many
states. 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. In the face of this competitive environment, The
Hartford continues to maintain a disciplined underwriting approach. To gain a competitive
advantage in this environment, carriers are improving automation with agents and brokers,
increasing pricing sophistication, and enhancing their product offerings. These enhancements
include industry specialization, with The Hartford and other national carriers tailoring products
and services to specific industry verticals such as technology, health care and renewable energy.
Specialty lines 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 lines competes on an account- by-account basis due to the
complex nature of each transaction. Competition in this market includes other stock companies,
mutual companies, alternative risk sharing groups and other underwriting organizations. The
relatively large size and underwriting capacity of The Hartford provides opportunities not
available to smaller companies. Disciplined underwriting and targeted returns are the objectives
of specialty lines since premium writings may fluctuate based on the segment’s view of perceived
market opportunity.
For specialty casualty businesses, written pricing competition continues to be significant,
particularly for the larger individual accounts. Carriers are protecting their in-force casualty
business by initiating the renewal process well in advance of the policy renewal date, effectively
preventing other carriers from quoting on the business and resulting in fewer new business
opportunities within the marketplace. Within the 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 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. Also, carriers’ new business opportunities in the marketplace for directors & officers
and errors & omissions insurance have been significantly influenced by customer perceptions of
financial strength, as investment portfolio losses have had a negative affect on the financial
strength ratings of some insurers.
In the surety business, favorable underwriting results over the past couple of years has led to
increased competition for market share, setting the stage for potential 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.
Group Benefits competes with numerous other insurance companies and other financial intermediaries
marketing insurance products. This line of business focuses on both its risk management expertise
and economies of scale to derive a competitive advantage. Competitive factors affecting Group
Benefits include the variety and quality of products and services offered, the price quoted for
coverage and services, the Company’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.
In the commercial marketplace, generally soft market conditions and a weak economy has prompted
carriers to offer differentiated products and services as a means of gaining a competitive
advantage. In addition to the initiatives specific to each of The Hartford’s Commercial Markets’
lines of business noted above, the Company is leveraging its diverse product, service and
distribution capabilities to deliver differentiated value in the market, while simultaneously
increasing its ability to access to its own diverse customer base.
7
Table of Contents
Consumer Markets
The Consumer Markets division constitutes the reporting segment.
Principal Products and Services
Consumer Markets 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 (“AARP Program”). The Hartford’s auto and homeowners products provide coverage options and
customized pricing tailored to a customer’s individual risk Although The Hartford has individual
customer relationships with AARP Program policyholders, as a group these customers represent a
significant portion of the total Consumer Markets business. Business sold direct to AARP members
amounted to earned premiums of $2.9 billion, $2.8 billion and $2.8 billion in 2010, 2009 and 2008,
respectively. Consumer Markets also operates a member contact center for health insurance products
offered through the AARP Health program, which is in place through 2018.
Marketing and Distribution
Consumer Markets reaches diverse customers 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 Consumer Markets’ direct sales to the consumer are associated
with 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 Consumer Markets with an important competitive
advantage given the number of “baby boomers” over age 50 many of whom become AARP members during
this period.
The agency channel provides customized products and services to customers through a network of
independent agents in the standard personal lines market. 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 2010, the Company continued the rollout of its new Open Road Advantage Product and,
as of December 31, 2010, this product was sold in 33 states 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 2009, Consumer Markets piloted mass marketing direct
to the consumer without the benefit of an affinity partnership. In 2010, Consumer Markets changed
its strategy away from mass marketing to targeting specific customer groups, including individuals
in the over 40 age group, and writing business through affinities other than AARP. The Company
entered into an affinity agreement with American Kennel Club effective January 1, 2011 and expects
to enter into additional affinity arrangements in 2011.
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 recent 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. Industry sales of personal lines insurance direct to
the consumer have been growing faster than sales through agents, particularly for auto insurance.
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. Some companies, including The Hartford, have written a greater
percentage of their new business in preferred market segments which tend to have better loss
experience but also lower average premiums.
Wealth Management
The Wealth Management division consists of the following reporting segments: Global Annuity, Life
Insurance, Retirement Plans and Mutual Funds. Wealth Management provides investment products for
over 7 million customers and life insurance for approximately 716,000 customers.
As part of the Company’s strategic decision to focus on its U.S. businesses, the Company suspended
all new sales in its Japan and European operations in the second quarter of 2009 and divested its
Brazil joint venture, Canadian mutual fund business and its offshore insurance business in 2010.
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Principal Products and Services
Global Annuity offers individual variable, fixed market value adjusted (“fixed MVA”) and single
premium immediate annuities in the U.S., a range of products to institutional investors, including
but not limited to, stable value contracts and institutional annuities, and administers
investments, retirement savings and other insurance and savings products to individuals and groups
outside the U.S., primarily in Japan and Europe.
Life Insurance sells a variety of life insurance products, including variable universal life,
universal life, and term life, as well as variable private placement life insurance (“PPLI”) owned
by corporations and high net worth individuals.
Retirement Plans provides products and services to corporations, municipalities, and not-for-profit
organizations pursuant to Sections 401(k), 457 and 403(b) of the Internal Revenue Code of 1986, as
amended (the “Code”), respectively.
Mutual Funds offers retail mutual funds, investment-only mutual funds and college savings plans
under Section 529 of the Code (collectively referred to as non-proprietary) and proprietary mutual
funds.
Marketing and Distribution
Global Annuity’s distribution network includes national and regional broker-dealer organizations,
banks and other financial institutions and independent financial advisors. The Company
periodically negotiates provisions and terms of its relationships with unaffiliated parties. The
Company’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, Inc. HLD provides sales support to registered representatives, financial planners
and broker-dealers at brokerage firms and banks across the United States.
Life Insurance’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. PPLI’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 The
Hartford employees.
Retirement Plans distribution network includes Company employees with extensive retirement
experience selling its products and services through national and regional broker-dealer firms,
banks and other financial institutions.
Mutual Fund sales professionals are segmented into two teams; a retail team and an institutional
team. The retail team distributes The Hartford’s open-end funds and 529 College Savings funds to
national and regional broker-dealer organizations, banks and other financial institutions,
independent financial advisors and registered investment advisors. The institutional team
distributes The Hartford’s funds to professional buyers, such as broker-dealer wrap, consultants,
record keepers, and bank trust groups.
Competition
Global Annuity competes with other life insurance companies, as well as certain banks, securities
brokerage firms, independent financial advisors, asset managers, 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. Global Annuity’s U.S. annuity deposits continue
to decline due to competitive activity and the Company’s product and risk decisions. Many
competitors have responded to the 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. In 2010, the Company transitioned to a new
variable annuity product designed to meet customers future income needs while abiding by the risk
tolerances of the Company.
Life Insurance competes with other life insurance companies in the United States, as well as other
financial intermediaries marketing insurance products. Product sales are affected primarily by the
availability and price of reinsurance, volatility in the equity markets, breadth and quality of
life insurance products being offered, pricing, relationships with third-party distributors,
effectiveness of wholesaling support, 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. Life Insurance’s regional sales office system is a differentiator in the market and
allows it to compete effectively across multiple distribution outlets.
Retirement Plans compete with other insurance carriers, large investment brokerage companies and
large mutual fund companies. The 401(k), 457, and 403(b) products offer mutual funds wrapped in
variable annuities, variable funding agreements, or mutual fund retirement products. Plan sponsors
seek a diversity of available funds and favorable fund performance. Consolidation among industry
providers has continued as competitors increase scale advantages.
Mutual Funds compete with other mutual fund companies along with investment brokerage companies and
differentiate themselves through product solutions, performance, and service. In this
non-proprietary broker sold market, the Company and its competitors compete aggressively for net
sales.
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Reserves
The Hartford establishes and carries as liabilities reserves for its insurance products to estimate
for the following:
| • |
a liability for unpaid losses, including those that have been incurred but not yet
reported, as well as estimates of all expenses associated with processing and settling these
claims;
|
| • |
a liability equal to the balance that accrues to the benefit of the Wealth Management
insurance policyholder as of the consolidated financial statement date, otherwise known as the
account value;
|
| • |
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;
|
| • |
fair value reserves for living benefits embedded derivative guarantees; and
|
| • |
death and living benefit reserves which are computed based on a percentage of revenues less
actual claim costs.
|
Further discussion of The Hartford’s property and casualty insurance product reserves, including
asbestos and environmental claims reserves, may be found in Part II, Item 7, MD&A — Critical
Accounting Estimates — Property and Casualty Insurance Product Reserves, Net of Reinsurance.
Additional discussion may be found in the Company’s accounting policies for insurance product
reserves within Note 11 of the Notes to Consolidated Financial Statements.
Reinsurance
The Hartford cedes insurance risk to reinsurance companies for both its property and casualty and
life insurance products. Ceded 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. For further discussion, see Note 6 of the Notes to Consolidated Financial Statements.
For property and casualty insurance products, 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 insurance product
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. For further discussion on
property and casualty insurance product reinsurance, see Part II, Item 7, MD&A — Insurance Risk —
Reinsurance.
For life insurance products, The Hartford is involved in both the cession and assumption of
insurance with other insurance and reinsurance companies. As of December 31, 2010 and 2009, the
Company’s policy for the largest amount of life insurance retained on any one life by any one of
its operations was $10. The Company also assumes reinsurance from other insurers. For the years
ended December 31, 2010, 2009 and 2008, the Company did not make any significant changes in the
terms under which reinsurance is ceded to other insurers. In addition, the Company has reinsured a
portion of the risk associated with U.S. minimum death benefit guarantees, Japan’s guaranteed
minimum death, as well as U.S. guaranteed minimum withdrawal benefits offered in connection with
its variable annuity contracts. For further discussion on reinsurance, see Part II, Item 7, MD&A
— Market Risk — Variable Product Equity Risk.
Investment Operations
The majority of the Company’s investment portfolios 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 the Investment Credit Risk Section
of the MD&A.
In addition to managing the general account assets of the Company, HIMCO is also a SEC registered
investment adviser 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 that seeks to provide value added returns versus peers and
benchmarks. As of December 31, 2010 and 2009, the fair value of HIMCO’s total assets under
management was approximately $159.7 billion and $144.0 billion, respectively, of which $8.7 billion
and $8.1 billion, respectively, were held in HIMCO managed third party accounts.
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Risk Management
The Company has an independent enterprise risk management function (“ERM”) whose responsibility it
is to provide a comprehensive, in depth, and transparent view of the Company’s risk on an
aggregated basis and to ensure the Company’s risks remain within tolerance. ERM is led by the
Chief Risk Officer who reports to the Chief Executive Officer. ERM is staffed with risk
professionals focused on insurance risk, investment risk, market risk, and operational risk. The
mission of ERM is to support the Company in achieving its strategic priorities within an agreed
upon risk profile by providing a comprehensive view of the risks facing the Company, including risk
concentrations and correlations; helping management define the Company’s risk tolerances through
the evaluation of the risk return profile of the business relative to the Company’s strategic
intent and financial underpinnings; and monitoring and communicating the Company’s risk exposures
relative to set tolerances and recommending/implementing appropriate mitigation where applicable.
The Company maintains an internal Enterprise Risk and Capital Committee (“ERCC”), which includes
the Company’s Chief Executive Officer (“CEO”), Chief Risk Officer, Chief Financial Officer, Chief
Investment Officer, the Presidents and Chief Operating Officers of Commercial Markets, Consumer
Markets, and Wealth Management and the Company’s General Counsel. The ERCC, which is chaired by the
CEO, meets regularly to manage the Company’s strategic risk profile and risk management activities
across the organization; approve financial and investment strategies along with the methodology to
attribute capital among business lines; determine the Company’s capital structure; and establish
the Company’s risk management framework, limits, and standards.
The Board as a whole has ultimate responsibility for risk oversight. It exercises its oversight
function through its standing committees, each of which has primary risk oversight responsibility
with respect to all matters within the scope of its duties as contemplated by its charter. The
Finance, Investment and Risk Management Committee (“FIRMCo”), which consists of all members of the
Board, has responsibility for oversight of all risks that do not fall within the oversight
responsibility of any other standing committee. Together, these committees oversee and assess
general risk management activities, investment activities and financial management of the Company
and its subsidiaries. They review the Company’s risk management framework and enterprise policies
related to governance and provide a forum for discussion between management and the Board on risk
and risk-related matters.
Regulation
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.
Certain of the Company’s life insurance subsidiaries sell variable life insurance, variable
annuity, and some fixed guaranteed products that are “securities” registered with the SEC under the
Securities Act of 1933, as amended. Some of the products have separate accounts that are
registered as investment companies under the Investment Company Act of 1940 and/or are regulated by
state law. Separate account investment products are also subject to state insurance regulation.
Moreover, each separate account is generally divided into sub-accounts, some of which invest in
underlying mutual funds which are themselves registered as investment companies under the
Investment Company Act of 1940 (“Underlying Funds”). The Company offers these Underlying Funds and
retail mutual funds that are registered with and regulated by the SEC.
In addition, other subsidiaries of the Company are involved in the offering, selling and
distribution of the Company’s variable insurance products, Underlying Funds and retail mutual funds
as broker dealers and are subject to regulation promulgated and enforced by the Financial Industry
Regulatory Authority (“FINRA”), the SEC and/or in, some instances, state securities administrators.
Other entities operate as investment advisers registered with the SEC under the Investment
Advisers Act of 1940 and are registered as investment advisers under certain state laws, as
applicable. One subsidiary is an investment company registered under the Investment Company Act of
1940. Because federal and state laws and regulations are primarily intended to protect investors
in securities markets, they generally grant regulators broad rulemaking and enforcement authority.
Some of these regulations include among other things regulations impacting sales methods, trading
practices, suitability of investments, use and safekeeping of customers’ funds, corporate
governance, capital, record keeping, and reporting requirements.
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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 (“OTS”). Under the Dodd-Frank Act,
the OTS will be dissolved. The Federal Reserve will assume regulatory authority over our holding
company, and our thrift subsidiary, Federal Trust Bank, will be regulated by the Office of
Controller of the Currency (“OCC”).
Failure to comply with federal and state laws and regulations may result in censure, fines, the
issuance of cease-and-desist orders or suspension, termination or limitation of the activities of
our operations and/or our employees. We cannot predict the impact of these actions on our
businesses, results of operations or financial condition.
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 26,800 employees as of December 31, 2010.
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. These reports may be read and
copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling
the SEC at 1-800-SEC-0330. In addition the SEC maintains an internet website (http://sec.gov) that
contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC.
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Item 1A. RISK FACTORS
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
Securities and Exchange Commission (“SEC”).
Our operating environment remains subject to uncertainty about the timing and strength of an
economic recovery. 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 which could adversely affect our business and results of operations.
Uncertainty about the timing and strength of a recovery in the global economy continued 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 effects of foreign currency, and we expect that market conditions will put pressure
on returns in our life and property and casualty investment portfolios and that our hedging costs
will remain higher than historical levels. Unless all economic conditions continue to improve, we
would expect to experience realized and unrealized investment losses, particularly in the
commercial real estate sector where market value declines and risk premiums still exist, which
reflects the future uncertainty in the real estate market. Negative rating agency actions with
respect to our investments could also indirectly adversely affect our statutory capital and
risk-based capital (“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 continue to improve in line with our forecasts. These steps
include ongoing initiatives, particularly the execution risk relating to the continued
repositioning of our investment portfolios and the continuing realignment of our macro hedge
programs for our variable annuity business. In addition, we modified our variable annuity product
offerings, launching a new variable annuity product in October 2009, and a second variable annuity
product launch expected in the second quarter of 2011. However, the future success of these new
variable annuity products will be dependent on market acceptance. The level of market acceptance of
these new products will directly affect the level of variable annuity sales of the Company in the
future. In addition, as the Company and our distribution partners transition to these new
products, there will be downward pressure on new deposits, and management expects to continue to be
in a net outflow position. 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 and the capital position
of the Company.
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 result
in greater earnings volatility under accounting principles generally accepted in the U.S. (“U.S.
GAAP”). We could be required to consider actions to manage our capital position and liquidity or
further reduce our exposure to market and financial risks. 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 distribution for our products. Additionally, if there
was concern over the Company’s capital position creating an anticipation of the Company issuing
additional common stock or equity linked instruments, trading prices for our common stock could
decline.
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 that 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.
One important exposure to equity risk relates to the potential for lower earnings associated with
certain of our wealth management businesses, such as variable annuities, where fee income is earned
based upon the fair value of the assets under management. Should equity markets decline from
current levels, assets under management and related fee income will be reduced. In addition,
certain of our products offer guaranteed benefits that increase our potential obligation and
statutory capital exposure should equity markets decline. 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.
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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 wealth management 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.
Although our products have features such as surrender charges, market-value adjustments and put
options on certain retirement plans, we are subject to disintermediation risk. 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. In a declining rate
environment, 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, increased hedging costs,
spread compression and capital volatility. 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 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 fixed MVA product.
Our primary foreign currency exchange risk is related to certain guaranteed benefits associated
with the Japan and U.K. variable annuities. The strengthening of the yen compared with other
currencies will substantially increase our exposure to pay yen denominated obligations. In
addition our foreign currency exchange risk relates to net income from foreign operations, non-U.S.
dollar denominated investments, investments in foreign subsidiaries, and our yen-denominated
individual fixed annuity product. 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 annuity products. A strengthening of the U.S. dollar compared to foreign
currencies will increase our exposure to the U.S. variable annuity guarantee benefits where
policyholders have elected to invest in international funds, generating losses and statutory
surplus strain.
Our real estate market exposure includes investments in commercial mortgage-backed securities,
residential mortgage-backed securities, commercial real estate collateralized debt obligations,
mortgage and real estate partnerships, and mortgage loans. Significant deterioration in the real
estate market in the past couple of years adversely affected our business and results of
operations. Further deterioration in the real estate market, including increases in property
vacancy rates, delinquencies and foreclosures, could have a negative impact on property values and
sources of refinancing resulting in reduced market liquidity and higher risk premiums. This could
result in impairments of real estate backed securities, a reduction in net investment income
associated with real estate partnerships, and increases in our valuation allowance for mortgage
loans.
Significant declines in equity prices, changes in U.S. interest rates, changes in credit spreads,
inflation, the strengthening or weakening of foreign currencies against the U.S. dollar, or global
real estate market deterioration, individually or in combination, could have a material adverse
effect on our consolidated results of operations, financial condition and liquidity.
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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 Wealth Management businesses, especially variable annuities,
offer 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, including 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. 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 2010 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, lower interest rates, rises in implied volatility and
weakening of the yen against other currencies. 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 these 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 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, including 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, the impact of internal reinsurance arrangements, and 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 and other capital market volatility, 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. This may be offset, 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 also increase, lowering RBC ratios. Due to these factors, projecting statutory
capital and the related RBC ratios is complex. If our statutory capital resources are insufficient
to maintain a particular rating by one or more rating agencies, we may seek to raise 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 downgraded by one or more rating agencies.
Downgrades in our financial strength or credit ratings, which may make our products less
attractive, could 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 important 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.
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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 a potential 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 a 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 determination of fair values is 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, securities may require more subjectivity and management judgment in
determining their fair values and those fair values 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 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.
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.
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:
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the length of time and the extent to which the fair value has been less than cost or
amortized cost;
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changes in the financial condition, credit rating and near-term prospects of the issuer;
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whether the issuer is current on contractually obligated interest and principal
payments;
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changes in the financial condition of the security’s underlying collateral;
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the payment structure of the security;
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the potential for impairments in an entire industry sector or sub-sector;
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the potential for impairments in certain economically depressed geographic locations;
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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;
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unfavorable changes in forecasted cash flows on mortgage-backed and asset-backed
securities;
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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;
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other subjective factors, including concentrations and information obtained from
regulators and rating agencies;
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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
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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.
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Impairment losses in earnings could materially adversely affect our results of operation and
financial condition.
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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 the value of which have
been adversely impacted by the recent recessionary period and the associated property value
declines, resulting in a reduction in expected future cash flow for certain securities. Further
property value declines and loss rates that 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.
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 evaluates the EGPs compared to the DAC asset to determine if an
impairment exists. The Company also establishes reserves for GMDB and GMIB using components of
EGPs. The projection of estimated gross profits or components 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, benefit utilization, annuitization 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, including lapse rates, benefit utilization, surrenders, and
annuitization, hedging costs or costs to employ other risk mitigating techniques prove to be
inaccurate or if significant or sustained equity market declines occur, 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.
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. If based on available information, it is
more likely than not that we are unable to recognize a full tax benefit on realized capital losses,
then a valuation allowance will be established with a corresponding charge to net income. Charges
to increase our valuation allowance could have a material adverse effect on our results of
operations and financial condition.
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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.
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. For some asbestos
and environmental 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. 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 catastrophes, both natural and man-made, which could
materially and adversely affect our financial condition, results of operations and liquidity.
Our 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, pandemics and other natural or man-made disasters.
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
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 operations are also exposed to risk of loss from catastrophes associated
with pandemics and other events that could significantly increase our mortality and morbidity
exposures. 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, liquidity
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.
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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 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
regularly evaluate 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.
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. 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 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 affected by
similar ratings actions, 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.
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As a savings and loan holding company, we remain subject to certain restrictions, oversight and
costs that could materially affect our business, results and prospects.
We are a savings and loan holding company by virtue of our ownership of Federal Trust Bank (“FTB”),
a federally chartered, FDIC-insured thrift. As a savings and loan holding company, we are subject
to various restrictions, oversight and costs and other potential consequences that could materially
affect our business, results and prospects. For example, we are subject to regulation, supervision
and examination by the OTS, including with respect to required capital, cash flow, organizational
structure, risk management and earnings at the parent company level, and to the OTS reporting
requirements. All of our activities must be financially-related activities as defined by federal
law (which includes insurance activities), and the 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 the OTS to be a serious risk to FTB. We must also be a source of strength
to FTB, which could require further capital contributions. We will be subject to similar,
potentially stricter, requirements when regulatory authority over us transfers to The Federal
Reserve (for our holding company) and the Office of the Controller of the Currency (“OCC”) (for
FTB).
We cannot predict the scope or impact of future regulatory initiatives, including, but not limited
to, the impact on required levels of regulatory capital or the cost and complexity of our
compliance programs.
The impact of regulatory initiatives, including the enactment of The Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), could have a material adverse impact on
our results of operations and liquidity.
Regulatory developments relating to the recent financial crisis may significantly affect our
operations and prospects in ways that we cannot predict. U.S. and overseas governmental and
regulatory authorities, including the SEC, the OTS, The Federal Reserve, the Office of the
Controller of the Currency (“OCC”), the New York Stock Exchange and the Financial Industry
Regulatory Authority are considering enhanced or new regulatory requirements intended to prevent
future crises or otherwise stabilize the institutions under their supervision. Such measures are
likely to lead to stricter regulation of financial institutions generally, and heightened
prudential requirements for systemically important companies in particular. Such measures could
include taxation of financial transactions and restrictions on employee compensation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was
enacted on July 21, 2010, mandating changes to the regulation of the financial services industry.
The Dodd-Frank Act may affect our operations and governance in ways that could adversely affect our
financial condition and results of operations.
In particular, the Dodd-Frank Act vests a newly created Financial Services Oversight Council with
the power to designate “systemically important” institutions, which will be subject to special
regulatory supervision and other provisions intended to prevent, or mitigate the impact of, future
disruptions in the U.S. financial system. Systemically important institutions are limited to
nonbank financial companies that are so important that their potential failure could “pose a threat
to the financial stability of the United States.” If we are designated as a systemically important
institution, we could be subject to higher capital requirements and additional regulatory oversight
imposed by The Federal Reserve, as well as to post-event assessments imposed by the Federal Deposit
Insurance Corporation (“FDIC”) to recoup the costs associated with the orderly resolution of other
systemically important institutions in the event one or more such institutions fails. Further, the
FDIC is authorized to petition a state court to commence an insolvency proceeding to liquidate an
insurance company that fails in the event the insurer’s state regulator fails to act. Other
provisions will require central clearing of, and/or impose new margin and capital requirements on,
derivatives transactions, which we expect will increase the costs of our hedging program.
A number of provisions of the Dodd-Frank Act affect us solely due to our status as a savings & loan
holding company. For example, under the Dodd-Frank Act, the OTS will be dissolved. The Federal
Reserve will regulate us as a holding company, and the OCC will regulate our thrift subsidiary,
Federal Trust Bank. Because of our status as a savings and loan holding company or if we are
designated a systemically important institution, the Dodd-Frank Act may also restrict us from
sponsoring and investing in private equity and hedge funds, which would limit our discretion in
managing our general account. The Dodd-Frank Act will also impose new minimum capital standards on
a consolidated basis for holding companies that, like us, control insured depository institutions.
Other provisions in the Dodd-Frank Act that may impact us, irrespective of whether or not we are a
savings and loan holding company include: the possibility that regulators could break up firms that
are considered “too big to fail;” a new “Federal Insurance Office” within Treasury to, among other
things, conduct a study of how to improve insurance regulation in the United States; new means for
regulators to limit the activities of financial firms; discretionary authority for the SEC to
impose a harmonized standard of care for investment advisers and broker-dealers who provide
personalized advice about securities to retail customers; additional regulation of compensation in
the financial services industry; and enhancements to corporate governance, especially regarding
risk management.
The changes resulting from the Dodd-Frank Act could adversely affect our results of operation and
financial condition.
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We may experience unfavorable judicial or legislative developments involving claim litigation 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:
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licensing companies and agents to transact business;
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calculating the value of assets to determine compliance with statutory requirements;
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mandating certain insurance benefits;
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regulating certain premium rates;
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reviewing and approving policy forms;
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regulating unfair trade and claims practices, including through the imposition of
restrictions on marketing and sales practices, distribution arrangements and payment of
inducements;
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establishing statutory capital and reserve requirements and solvency standards;
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fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed
crediting rates on life insurance policies and annuity contracts;
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approving changes in control of insurance companies;
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restricting the payment of dividends and other transactions between affiliates;
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establishing assessments and surcharges for guaranty funds, second-injury funds and other
mandatory pooling arrangements;
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requiring insurers to dividend to policy holders any excess profits; and
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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 and obligations. Our asset
management businesses are also subject to extensive regulation in the various jurisdictions where
they operate.
In addition, future regulatory initiatives could be adopted at the federal or state level that
could impact the profitability of our businesses. For example, the Obama administration has
proposed a financial crisis responsibility tax that would be levied on the largest financial
institutions in terms of assets.
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. Compliance with these laws and regulations is costly, time consuming and personnel
intensive, and may have an adverse effect on our business, consolidated operating results,
financial condition and liquidity.
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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 or in connection with
individual third-party arrangements. For example, we market our Consumer Markets products in part
through an exclusive licensing arrangement with AARP that continues through January 2020. Our
ability to distribute products through affinity partners may be adversely impacted by membership
levels and the pace of membership growth. Moreover, 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.
Our ability to declare and pay dividends is subject to limitations.
The payment of future dividends on our capital stock is subject to the discretion of our board of
directors, which considers, among other factors our operating results, overall financial condition,
credit-risk considerations and capital requirements, as well as general business and market
conditions.
Moreover, as a holding company that is separate and distinct from our insurance subsidiaries, we
have no significant business operations of our own. Therefore, we rely on dividends from our
insurance company subsidiaries and other subsidiaries as the principal source of cash flow to meet
our obligations. These obligations include payments on our debt securities and the payment of
dividends on our capital stock. The Connecticut insurance holding company laws limit the payment of
dividends by Connecticut-domiciled insurers. In addition, these laws require notice to and approval
by the state insurance commissioner for the declaration or payment by those subsidiaries of any
dividend if the dividend and other dividends or distributions made within the preceding 12 months
exceeds the greater of:
| • |
10% of the insurer’s policyholder surplus as of December 31 of the preceding year, and
|
| • |
net income, or net gain from operations if the subsidiary is a life insurance company, for
the previous calendar year, 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 our insurance subsidiaries
are incorporated, or deemed commercially domiciled, generally contain similar, and in some
instances more restrictive, limitations on the payment of dividends. Our property-casualty
insurance subsidiaries are permitted to pay up to a maximum of approximately $1.5 billion in
dividends to us in 2011 without prior approval from the applicable insurance commissioner. The
Company’s life insurance subsidiaries are permitted to pay up to
a maximum of approximately $83 in
dividends to Hartford Life, Inc. (“HLI”) in 2011 without 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 2011. In 2010, HFSG
Holding Company and HLI received no dividends from the life insurance subsidiaries, and HFSG
Holding Company received $1.0 billion in dividends from its property-casualty insurance
subsidiaries.
Our rights to participate in any distribution of the assets of any of our subsidiaries, for
example, upon their liquidation or reorganization, and the ability of holders of our common stock
to benefit indirectly from a distribution, are subject to the prior claims of creditors of the
applicable subsidiary, except to the extent that we may be a creditor of that subsidiary. Claims on
these subsidiaries by persons other than us include, as of December, 2010, claims by policyholders
for benefits payable amounting to $116.9 billion, claims by separate account holders of $159.7
billion, and other liabilities including claims of trade creditors, claims from guaranty
associations and claims from holders of debt obligations, amounting to $13.9 billion.
In addition, as a savings and loan holding company, we are subject to regulation, supervision and
examination by the OTS, including with respect to required capital, cash flow, organization
structure, risk management and earnings at the parent company level. We will be subject to
similar, potentially stricter, requirements when regulatory authority over us transfers to The
Federal Reserve (for our holding company) and the OCC (for FTB).
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Holders of our capital stock are only entitled to receive such dividends as our board of directors
may declare out of funds legally available for such payments. Moreover, our common stockholders are
subject to the prior dividend rights of any holders of our preferred stock or depositary shares
representing such preferred stock then outstanding. As of December 31, 2010, there were 575,000
shares of our Series F Preferred Stock issued and outstanding. Under the terms of the Series F
Preferred Stock, our ability to declare and pay dividends on or repurchase our common stock will be
subject to restrictions in the event we fail to declare and pay (or set aside for payment) full
dividends on the Series F Preferred Stock.
The terms of our outstanding junior subordinated debt securities also prohibit us from declaring or
paying any dividends or distributions on our capital stock or purchasing, acquiring, or making a
liquidation payment on such stock, if we have given notice of our election to defer interest
payments but the related deferral period has not yet commenced or a deferral period is continuing.
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,
financial condition and cash flows.
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 and hedging programs. 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 cash flows.
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Our framework for managing business risks may not be effective in mitigating risk and loss to us
that could adversely affect our businesses.
Our business performance is highly dependent on our ability to manage risks that arise from a large
number of day-to-day business activities, including insurance underwriting, claims processing,
servicing, investment, financial and tax reporting, compliance with regulatory requirements and
other activities, many of which are very complex and for some of which we rely on third parties. We
seek to monitor and control our exposure to risks arising out of these activities through a risk
control framework encompassing a variety of reporting systems, internal controls, management review
processes and other mechanisms. We cannot be completely confident that these processes and
procedures will effectively control all known risks or effectively identify unforeseen risks, or
that our employees and third-party agents will effectively implement them. Management of business
risks can fail for a number of reasons, including design failure, systems failure, failures to
perform or unlawful activities on the part of employees or third parties. In the event that our
controls are not effective or not properly implemented, we could suffer financial or other loss,
disruption of our businesses, regulatory sanctions or damage to our reputation. Losses resulting
from these failures can vary significantly in size, scope and scale and may have material adverse
effects on our financial condition or results of operations.
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, inability to meet obligations, including,
but not limited to, policyholder obligations, 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
items, 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.
Moreover, the SEC is currently evaluating International Financial Reporting Standards (“IFRS”) to
determine whether IFRS should be incorporated into the financial reporting system for U.S. issuers.
Certain of these standards could result in material changes to our reported results of operation.
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.
24
Table of Contents
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
As of December 31, 2010, The Hartford owned building space of approximately 3.2 million square
feet, of which approximately 2.9 million square feet, comprised its Hartford, Connecticut location
and other properties within the greater Hartford, Connecticut area. In addition, as of December
31, 2010, The Hartford leased approximately 3.5 million square feet, throughout the United States
of America, and approximately 203 thousand square feet, in other countries. All of the properties
owned or leased are used by one or more of all seven 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.
Item 3. LEGAL PROCEEDINGS
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. Two consolidated amended complaints were 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 1974 (“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 dismissed the Sherman Act
and RICO claims in both complaints for failure to state a claim and granted the defendants’ motions
for summary judgment on the ERISA claims in the group-benefits products complaint. The district
court further declined to exercise supplemental jurisdiction over the state law claims and
dismissed those claims without prejudice. The plaintiffs appealed the dismissal of the claims in
both consolidated amended complaints, except the ERISA claims. In August 2010, the United States
Court of Appeals for the Third Circuit affirmed the dismissal of the Sherman Act and RICO claims
against the Company. The Third Circuit vacated the dismissal of the Sherman Act and RICO claims
against some defendants in the property casualty insurance case and vacated the dismissal of the
state-law claims as to all defendants in light of the reinstatement of the federal claims. In
September 2010, the district court entered final judgment for the defendants in the group benefits
case. The defendants have moved to dismiss the remaining claims in the property casualty insurance
case.
25
Table of Contents
Investment and Savings Plan ERISA and Shareholder Securities 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. In
February 2011, the parties reached an agreement in principle to settle on a class basis for an
immaterial amount. The settlement is contingent upon the execution of a final settlement agreement
and preliminary and final court approval.
The Company and certain of its present or former officers are defendants in a putative securities
class action lawsuit filed in the United States District Court for the Southern District of New
York in March 2010. The operative complaint, filed in October 2010, is brought on behalf of
persons who acquired Hartford common stock during the period of July 28, 2008 through February 5,
2009, and alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5, by making false or misleading statements during the alleged class period about the
Company’s valuation of certain asset-backed securities and its effect on the Company’s capital
position. The Company disputes the allegations and has moved to dismiss the complaint.
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. The arbitration hearing is scheduled for May 2011. Management believes it is
probable that the Company’s coverage position ultimately will be sustained.
Mutual Funds Litigation
— In October 2010, a derivative action was brought on behalf of six
Hartford retail mutual funds in the United States District Court for the District of Delaware,
alleging that Hartford Investment Financial Services, LLC received excessive advisory and
distribution fees in violation of its statutory fiduciary duty under Section 36(b) of the
Investment Company Act of 1940. Plaintiff seeks to rescind the investment management agreements
and distribution plans between the Company and the six mutual funds and to recover the total fees charged
thereunder or, in the alternative, to recover any improper compensation the Company received. The
Company disputes the allegations and has moved to dismiss the complaint.
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 alleged that since 1997 the Company 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 asserted claims under the Racketeer Influenced and Corrupt Organizations
Act (“RICO”) and state law. The district court certified a class for the RICO and fraud claims in
March 2009, and 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. In April 2010, the parties reached an agreement in principle to settle on a
nationwide class basis, under which the Company would pay $72.5 in exchange for a full
release and dismissal of the litigation. The $72.5 was accrued in the first quarter of
2010. The settlement received final court approval in September 2010 and was paid in the third
quarter of 2010.
Asbestos and Environmental Claims
— As discussed in Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations under the caption “Reserving for Asbestos and
Environmental Claims within Other Operations,” The Hartford continues to receive asbestos and
environmental claims that involve significant uncertainty regarding policy coverage issues.
Regarding these claims, The Hartford continually reviews its overall reserve levels and reinsurance
coverages, as well as the methodologies it uses to estimate its exposures. 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, particularly those related to
asbestos, the ultimate liabilities may exceed the currently recorded reserves. Any such additional
liability cannot be reasonably estimated now but could be material to The Hartford’s consolidated
operating results, financial condition and liquidity.
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Item 4. (Removed and Reserved)
PART II
| 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. | |||||||||||||
|
2010
|
||||||||||||||||
|
Common Stock Price
|
||||||||||||||||
|
High
|
$ | 28.58 | $ | 29.64 | $ | 24.12 | $ | 27.43 | ||||||||
|
Low
|
$ | 22.34 | $ | 22.13 | $ | 19.09 | $ | 22.26 | ||||||||
|
Dividends Declared
|
$ | 0.05 | $ | 0.05 | $ | 0.05 | $ | 0.05 | ||||||||
|
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 | ||||||||
On February 2, 2011, The Hartford’s Board of Directors declared a quarterly dividend of $0.10 per
common share payable on April 1, 2011 to common shareholders of record as of March 1, 2011.
As of February 18, 2011, the Company had approximately
223,500
shareholders. The closing price of
The Hartford’s common stock on the NYSE on February 18, 2011 was $30.80.
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, 2010:
| Total Number of | Approximate Dollar | |||||||||||||||
| Shares Purchased as | Value of Shares that | |||||||||||||||
| Total Number | Average Price | Part of Publicly | May Yet Be | |||||||||||||
| of Shares | Paid Per | Announced Plans or | Purchased Under | |||||||||||||
| Period | Purchased [1] | Share | Programs | the Plans or Programs | ||||||||||||
| (in millions) | ||||||||||||||||
|
October 1, 2010 – October 31, 2010
|
6,351 | $ | 23.53 | — | $ | 807 | ||||||||||
|
November 1, 2010 – November 30, 2010
|
4,820 | $ | 23.95 | — | $ | 807 | ||||||||||
|
December 1, 2010 – December 31, 2010
|
— | $ | — | — | $ | 807 | ||||||||||
|
|
||||||||||||||||
|
Total
|
11,171 | $ | 23.71 | — | N/A | |||||||||||
|
|
||||||||||||||||
| [1] |
Represents 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, 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 | ||||||||||||||||||||
| Company/Index | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||
|
The Hartford Financial Services Group, Inc.
|
10.82 | % | (4.55 | %) | (79.99 | %) | 43.91 | % | 14.89 | % | ||||||||||
|
S&P 500 Index
|
15.79 | % | 5.49 | % | (37.00 | %) | 26.46 | % | 15.06 | % | ||||||||||
|
S&P Insurance Composite Index
|
10.91 | % | (6.31 | %) | (58.14 | %) | 13.90 | % | 15.80 | % | ||||||||||
Cumulative Five-Year Total Return
| Base Period | For the Years Ended | |||||||||||||||||||||||
| Company/Index | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
|
The Hartford Financial Services Group, Inc.
|
$ | 100 | $ | 110.82 | $ | 105.77 | $ | 21.16 | $ | 30.46 | $ | 34.99 | ||||||||||||
|
S&P 500 Index
|
$ | 100 | $ | 115.79 | $ | 122.16 | $ | 76.96 | $ | 97.33 | $ | 111.99 | ||||||||||||
|
S&P Insurance Composite Index
|
$ | 100 | $ | 110.91 | $ | 103.92 | $ | 43.50 | $ | 49.54 | $ | 57.37 | ||||||||||||
28
Table of Contents
Item 6. SELECTED FINANCIAL DATA
(In millions, except for per share data and combined ratios)
(In millions, except for per share data and combined ratios)
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Income Statement Data
|
||||||||||||||||||||
|
Earned premiums
|
$ | 14,055 | $ | 14,424 | $ | 15,503 | $ | 15,619 | $ | 15,023 | ||||||||||
|
Fee income
|
4,784 | 4,576 | 5,135 | 5,436 | 4,739 | |||||||||||||||
|
Net investment income (loss):
|
||||||||||||||||||||
|
Securities available-for-sale and other
|
4,392 | 4,031 | 4,335 | 5,214 | 4,691 | |||||||||||||||
|
Equity securities, trading
|
(774 | ) | 3,188 | (10,340 | ) | 145 | 1,824 | |||||||||||||
|
|
||||||||||||||||||||
|
Total net investment income (loss)
|
3,618 | 7,219 | (6,005 | ) | 5,359 | 6,515 | ||||||||||||||
|
Net realized capital losses:
|
||||||||||||||||||||
|
Total other-than-temporary impairment (“OTTI”) losses
|
(852 | ) | (2,191 | ) | (3,964 | ) | (483 | ) | (121 | ) | ||||||||||
|
OTTI losses recognized in other comprehensive income
|
418 | 683 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net OTTI losses recognized in earnings
|
(434 | ) | (1,508 | ) | (3,964 | ) | (483 | ) | (121 | ) | ||||||||||
|
Net realized capital losses, excluding net OTTI
losses recognized in earnings
|
(120 | ) | (502 | ) | (1,954 | ) | (511 | ) | (130 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Total net realized capital gains (losses)
|
(554 | ) | (2,010 | ) | (5,918 | ) | (994 | ) | (251 | ) | ||||||||||
|
Other revenues
|
480 | 492 | 504 | 496 | 474 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total revenues
|
22,383 | 24,701 | 9,219 | 25,916 | 26,500 | |||||||||||||||
|
Benefits, losses and loss adjustment expenses
|
13,025 | 13,831 | 14,088 | 13,919 | 13,218 | |||||||||||||||
|
Benefits, losses and loss adjustment expenses —
returns credited on international variable annuities
|
(774 | ) | 3,188 | (10,340 | ) | 145 | 1,824 | |||||||||||||
|
Amortization of deferred policy acquisition costs and
present value of future profits
|
2,544 | 4,267 | 4,271 | 2,989 | 3,558 | |||||||||||||||
|
Insurance operating costs and other expenses
|
4,663 | 4,635 | 4,703 | 4,595 | 4,021 | |||||||||||||||
|
Interest expense
|
508 | 476 | 343 | 263 | 277 | |||||||||||||||
|
Goodwill impairment
|
153 | 32 | 745 | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total benefits, losses and expenses
|
20,119 | 26,429 | 13,810 | 21,911 | 22,898 | |||||||||||||||
|
Income (loss) before income taxes
|
2,264 | (1,728 | ) | (4,591 | ) | 4,005 | 3,602 | |||||||||||||
|
Income tax expense (benefit)
|
584 | (841 | ) | (1,842 | ) | 1,056 | 857 | |||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss)
|
1,680 | (887 | ) | (2,749 | ) | 2,949 | 2,745 | |||||||||||||
|
Preferred stock dividends and accretion of discount
|
515 | 127 | 8 | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss) available to common shareholders
|
$ | 1,165 | $ | (1,014 | ) | $ | (2,757 | ) | $ | 2,949 | $ | 2,745 | ||||||||
|
|
||||||||||||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||
|
Separate account assets
|
$ | 159,742 | $ | 150,394 | $ | 130,184 | $ | 199,946 | $ | 180,484 | ||||||||||
|
Total assets
|
318,346 | 307,717 | 287,583 | 360,361 | 326,544 | |||||||||||||||
|
Short-term debt
|
400 | 343 | 398 | 1,365 | 599 | |||||||||||||||
|
Long-term debt
|
6,207 | 5,496 | 5,823 | 3,142 | 3,504 | |||||||||||||||
|
Separate account liabilities
|
159,742 | 150,394 | 130,184 | 199,946 | 180,484 | |||||||||||||||
|
Stockholders’ equity, excluding AOCI
|
21,312 | 21,177 | 16,788 | 20,062 | 18,698 | |||||||||||||||
|
AOCI, net of tax
|
(1,001 | ) | (3,312 | ) | (7,520 | ) | (858 | ) | 178 | |||||||||||
|
Total stockholders’ equity
|
20,311 | 17,865 | 9,268 | 19,204 | 18,876 | |||||||||||||||
|
|
||||||||||||||||||||
|
Earnings (Loss) Per Common Share Data
|
||||||||||||||||||||
|
Basic
|
$ | 2.70 | $ | (2.93 | ) | $ | (8.99 | ) | $ | 9.32 | $ | 8.89 | ||||||||
|
Diluted
|
2.49 | (2.93 | ) | (8.99 | ) | 9.24 | 8.69 | |||||||||||||
|
Cash dividends declared per common share
|
0.20 | 0.20 | 1.91 | 2.03 | 1.70 | |||||||||||||||
|
|
||||||||||||||||||||
|
Other Data
|
||||||||||||||||||||
|
Total revenues, excluding net investment income on
equity securities, trading, and total OTTI losses
|
$ | 24,009 | $ | 23,704 | $ | 23,523 | $ | 26,254 | $ | 24,797 | ||||||||||
|
DAC Unlock benefit (charge), after-tax
|
$ | 111 | $ | (1,034 | ) | $ | (932 | ) | $ | 213 | $ | (76 | ) | |||||||
|
Total investments, excluding equity securities, trading
|
$ | 98,175 | $ | 93,235 | $ | 89,287 | $ | 94,904 | $ | 89,778 | ||||||||||
|
|
||||||||||||||||||||
29
Table of Contents
| Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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, 2010, compared with
December 31, 2009, and its results of operations for each of the three years in the period ended
December 31, 2010. This discussion should be read in conjunction with the Consolidated Financial
Statements and related Notes beginning on page F-1. The Hartford made changes to its reporting
segments in 2010 to reflect the manner in which the Company is currently organized for purposes of
making operating decisions and assessing performance. Accordingly, segment data for prior
reporting periods has been adjusted to reflect the new segment reporting, see Note 3 of the Notes
to Consolidated Financial Statement for further discussion. Additionally, certain
reclassifications have been made to prior year financial information to conform to the current year
presentation. The Hartford defines increases or decreases greater than or equal to 200%, or
changes from a net gain to a net loss position, or vice versa, as “NM” or not meaningful.
INDEX
| Description | Page | |||
|
|
||||
| 31 | ||||
|
|
||||
| 33 | ||||
|
|
||||
| 35 | ||||
|
|
||||
| 61 | ||||
|
|
||||
| 66 | ||||
|
|
||||
| 72 | ||||
|
|
||||
| 75 | ||||
|
|
||||
| 76 | ||||
|
|
||||
| 79 | ||||
|
|
||||
| 82 | ||||
|
|
||||
| 84 | ||||
|
|
||||
| 86 | ||||
|
|
||||
| 87 | ||||
|
|
||||
| 88 | ||||
|
|
||||
| 92 | ||||
|
|
||||
| 100 | ||||
|
|
||||
| 111 | ||||
|
|
||||
| 121 | ||||
|
|
||||
30
Table of Contents
CONSOLIDATED RESULTS OF OPERATIONS
| Increase | Increase | |||||||||||||||||||
| (Decrease) From | (Decrease) From | |||||||||||||||||||
| Segment Results | 2010 | 2009 | 2008 | 2009 to 2010 | 2008 to 2009 | |||||||||||||||
|
Property & Casualty Commercial
|
$ | 995 | $ | 899 | $ | 133 | $ | 96 | $ | 766 | ||||||||||
|
Group Benefits
|
185 | 193 | (6 | ) | (8 | ) | 199 | |||||||||||||
|
|
||||||||||||||||||||
|
Commercial Markets
|
1,180 | 1,092 | 127 | 88 | 965 | |||||||||||||||
|
|
||||||||||||||||||||
|
Consumer Markets
|
143 | 140 | 102 | 3 | 38 | |||||||||||||||
|
|
||||||||||||||||||||
|
Global Annuity
|
404 | (1,166 | ) | (2,287 | ) | 1,570 | 1,121 | |||||||||||||
|
Life Insurance
|
262 | 39 | (19 | ) | 223 | 58 | ||||||||||||||
|
Retirement Plans
|
47 | (222 | ) | (157 | ) | 269 | (65 | ) | ||||||||||||
|
Mutual Funds
|
132 | 34 | 37 | 98 | (3 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Wealth Management
|
845 | (1,315 | ) | (2,426 | ) | 2,160 | 1,111 | |||||||||||||
|
|
||||||||||||||||||||
|
Corporate and Other
|
(488 | ) | (804 | ) | (552 | ) | 316 | (252 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Net income (loss)
|
$ | 1,680 | $ | (887 | ) | $ | (2,749 | ) | $ | 2,567 | $ | 1,862 | ||||||||
|
|
||||||||||||||||||||
Year ended December 31, 2010 compared to the year ended December 31, 2009
The change from consolidated net loss to consolidated net income was primarily due to a DAC Unlock
charge of $1.0 billion, after-tax, in 2009 compared to a benefit of $111, after-tax, in 2010, net
realized capital losses of $1.7 billion, after-tax, in 2009 compared to losses of $184, after-tax,
in 2010, partially offset by a goodwill impairment of approximately $32, after-tax, in 2009,
compared to approximately $100, after-tax, in 2010.
Excluding the after-tax impacts of net realized capital losses, DAC Unlocks and goodwill
impairments, earnings decreased $46 from 2009 to 2010. See the segment sections of the MD&A for a
discussion on their respective performances.
Year ended December 31, 2009 compared to the year ended December 31, 2008
The decrease in consolidated net loss was primarily due to a decrease in net realized losses, which
included other-than-temporary impairments of $1.5 billion in 2009 compared to $4.0 billion in 2008,
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 of $32, after-tax, in 2009 compared to impairments of $597,
after-tax, in 2008 also contributed to the decrease in net loss.
Excluding the after-tax impacts of net realized capital losses and goodwill impairments, earnings
decreased $608 from 2008 to 2009 driven by decreases in fee income due to lower average assets
under management primarily in Global Annuity, lower net investment income on available-for-sale and
other securities primarily due to lower income on fixed maturities, and restructuring costs. See
the segment sections of the MD&A for a discussion on their respective performances.
Income Taxes
The effective tax rates for 2010, 2009 and 2008 were 26%, 49%, and 40%, respectively. The
principal causes of the differences between the effective rate and the U.S. statutory rate of 35%
for 2010, 2009 and 2008 were tax-exempt interest earned on invested assets and the separate account
dividends received deduction (“DRD”). This caused a decrease in the tax expense on the 2010
pre-tax income and an increase in the tax benefit on the 2009 and 2008 pre-tax losses. The
effective tax rate for 2010 also includes the effect of an increase in the valuation allowance on
the deferred tax asset and the effective tax rate for 2009 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 $145, $181 and $176 related to the separate account DRD in the years ended December 31, 2010,
2009 and 2008, respectively. These amounts included benefits (charges) related to prior years’ tax
returns of $(3), $29 and $9 in 2010, 2009 and 2008, respectively.
31
Table of Contents
In Revenue Ruling 2007-61, issued on September 25, 2007, the 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 $4, $16 and $16 related to the separate account foreign tax credit in the
years ended December 31, 2010, 2009 and 2008, respectively. These amounts included benefits
(charges) related to prior years’ tax returns of $(4), $3 and $4 in 2010, 2009 and 2008,
respectively.
The Company’s unrecognized tax benefits were unchanged during 2010, remaining at $48 as of December
31, 2010. This entire amount, if it were recognized, would affect the effective tax rate.
32
Table of Contents
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.
In 2011, The Hartford will continue to focus on growing its three customer-oriented divisions,
Commercial Markets, Consumer Markets, and Wealth Management, through enhanced product development,
leveraging synergies of the divisions’ product offerings to meet customer needs, and increased
efficiencies throughout the organization. The speed and extent of economic and employment
expansion may impact the asset protection businesses where insureds may change their level of
insurance, and asset accumulation businesses may see customers changing their level of savings
based on anticipated economic conditions. The performance of The Hartford’s divisions is subject
to uncertainty due to market conditions, which impact the earnings of its asset management
businesses and the valuation and earnings on its investment portfolio.
Commercial Markets
Commercial Markets will continue to focus on growth through market-differentiated products and
services while maintaining a disciplined underwriting approach. In the Property & Casualty
Commercial insurance marketplace, improving market conditions are expected to allow for moderate
price increases, while a slowly-recovering economy will result in an increase in insurance
exposures. Within Property & Casualty Commercial, the Company expects low to mid single-digit
written premium growth in 2011, due to an increase in pricing, higher new business premium and an
increase in premium retention. Additionally, Property & Casualty Commercial is expected to
continue to grow policy counts, particularly for our small commercial business, led by an increase
in workers’ compensation in force. This growth potential reflects the combination of our current
market position, a broadening of underwriting expertise focused on selected industries, a
leveraging of the payroll model, and numerous initiatives launched in the past several years.
Initiatives include programs aimed at improving policy count retention, the rollout of new product
offerings and the introduction of ease of doing business technology for our small commercial
business. The Property & Casualty Commercial combined ratio before catastrophes and prior accident
year development is expected to be slightly higher in 2011 than the 93.4 achieved in 2010 as
pricing increases are expected to largely offset loss cost changes. In the Group Benefits, the
economic downturn, combined with the potential for employees to lessen spending on the Company’s
products and the overall competitive environment, reduced premium levels in 2010. Premium levels
are expected to remain relatively flat in 2011, or until there is economic expansion with lower
unemployment rates compared to 2010 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. The Company experienced higher
disability loss ratios in 2010. The Company anticipates loss ratios to remain essentially flat in
2011.
Consumer Markets
In 2011, Consumer Markets expects to increase its business written with AARP members and enter into
new affinity relationships. Management expects new business will primarily be generated from
continued direct marketing to AARP members, marketing to households associated with other affinity
groups, expanding the sale of the Open Road Advantage auto product through independent agents and
introducing an enhanced homeowners product called Hartford Home Advantage. The Company distributes
its discounted AARP Open Road Advantage auto product through those independent agents who are
authorized to offer the AARP product and, beginning in 2011, will distribute its Hartford Home
Advantage product on a discounted basis through those same authorized agents. The Company expects
non-AARP member Agency earned premium to decline in 2011 as the result of continued pricing and
underwriting actions to improve profitability, including efforts to reposition the book into more
business for insureds aged 40+. As of December 31, 2010, the Open Road Advantage auto product was
available in 33 states and the Company expects the product to be available to authorized agents in
42 states by the end of the second quarter of 2011. The Company began rolling out its Hartford
Home Advantage product during the first quarter of 2011 and expects the product to be available in
39 states by the end of 2011. Management expects that the combined ratio before catastrophes and
prior accident year development will improve in 2011, driven by earned pricing increases, slightly
improving claim frequency and modest claim severity in both auto and home as the Company expects to
benefit from a continued shift to a more preferred mix of business.
33
Table of Contents
Wealth Management
The partial equity market recovery over the last eighteen months has driven an increase in deposits
and assets under management; however profitability rates are not consistent with historical levels.
The current market conditions and market volatility have increased the cost and volatility of
hedging programs, and the level of capital needed to support living benefit guarantees when
compared to historical levels. Management is committed to the U.S. variable annuity marketplace
and will continue to evaluate the benefits offered within its variable annuities, and ensure the
product portfolio meets customer needs within the risk tolerances of The Hartford. Wealth
Management seeks to achieve scale through increased deposits and market improvements along with a
focus on expense reductions. Wealth Management will focus on product development to increase sales
of its products and services to the “baby boomer” generation. The Company expects that many “baby
boomers” will be looking to provide more stability to the value of their accumulated wealth and
will focus more on identifying and creating dependable and certain income streams that can provide
known payments throughout their retirement. As the mutual fund 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. Wealth Management will increase future sales of its
Life Insurance products by implementing strategies to expand distribution capabilities, including
utilizing independent agents and continuing to build on the strong relationships within the
financial institution marketplace. Retirement Plans looks to continue to focus on our clients’
increasing needs for retirement income security given the recent volatility in the financial
markets and to provide products that respond to the needs of plan sponsors to manage risk and
stretch their benefit dollars.
34
Table of Contents
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 insurance product reserves, net of reinsurance;
|
| • |
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 (in other policyholder funds and benefits
payable);
|
| • |
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 Insurance Product Reserves, Net of Reinsurance
The Hartford establishes reserves on its property and casualty insurance products 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 lead paint, construction defects and tainted Chinese-made drywall.
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.
35
Table of Contents
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 $290 as of December 31, 2010,
including $79 related to Property & Casualty Commercial and $211 related to Other 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.
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, the Other Operations operating segment, within Corporate and Other,
includes 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 as of
December 31, 2010, net of reinsurance:
| Property & Casualty | Consumer | Corporate and | Total Property and | |||||||||||||
| Commercial | Markets | Other | Casualty Insurance | |||||||||||||
|
Reserve Line of Business
|
||||||||||||||||
|
Commercial property
|
$ | 162 | $ | — | $ | — | $ | 162 | ||||||||
|
Homeowners’
|
— | 435 | — | 435 | ||||||||||||
|
Auto physical damage
|
13 | 15 | — | 28 | ||||||||||||
|
Auto liability
|
587 | 1,674 | — | 2,261 | ||||||||||||
|
Package business
|
1,256 | — | — | 1,256 | ||||||||||||
|
Workers’ compensation
|
6,701 | — | — | 6,701 | ||||||||||||
|
General liability
|
2,720 | 34 | — | 2,754 | ||||||||||||
|
Professional liability
|
644 | — | — | 644 | ||||||||||||
|
Fidelity and surety
|
269 | — | — | 269 | ||||||||||||
|
Assumed reinsurance [1]
|
— | — | 400 | 400 | ||||||||||||
|
All other non-A&E
|
— | — | 901 | 901 | ||||||||||||
|
A&E
|
14 | 2 | 2,121 | 2,137 | ||||||||||||
|
|
||||||||||||||||
|
Total reserves-net
|
12,366 | 2,160 | 3,422 | 17,948 | ||||||||||||
|
Reinsurance and other recoverables
|
2,361 | 17 | 699 | 3,077 | ||||||||||||
|
|
||||||||||||||||
|
Total reserves-gross
|
$ | 14,727 | $ | 2,177 | $ | 4,121 | $ | 21,025 | ||||||||
|
|
||||||||||||||||
| [1] |
These net loss and loss adjustment expense reserves relate to assumed reinsurance that was
moved into Other Operations (formerly known as “HartRe”).
|
Reserving Methodology
(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 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. The Company’s shortest-tail lines of business are property and auto physical damage. The
longest tail lines of business include workers’ compensation, general liability, professional
liability and assumed reinsurance. 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.
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Table of Contents
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 and loss adjustment expense 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 1990, assumed reinsurance, latent exposures such as construction defects,
unallocated loss adjustment expense and all other non-A&E exposures. 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.
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”.
As of December 31, 2010 and 2009, net property and casualty insurance product 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. Most of the
Company’s property and casualty insurance product 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.
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.
Personal Auto Liability.
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 for Commercial Lines and Short-Tailed General 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.
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Table of Contents
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. Historically, paid development patterns in the Company’s workers’
compensation business have been stable, 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.
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,
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 3.2% higher than the actuarial indication of the reserves as of December 31, 2010.
See the Reserve Development section for a discussion of changes to reserve estimates recorded in
2010.
Current trends contributing to reserve uncertainty
The Hartford is a multi-line company in the property and casualty insurance 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. 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 Property & Casualty Commercial and Other Operations, 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 Consumer Markets, 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 standard commercial lines, 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 severity will not be adversely
impacted by the lower volume of reported claims.
38
Table of Contents
In specialty lines, 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.
Recorded reserves for auto liability, net of reinsurance, are $2.3 billion across all lines, $1.7
billion of which is in Consumer Markets. 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 Consumer Markets 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 the Company’s historical variation.
Recorded reserves for workers’ compensation, net of reinsurance, are $6.7 billion. 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 3%, the estimated net
reserve need would change by $400, in either direction. A 3% change in reported loss development
patterns is within the Company’s 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 $2.8 billion. 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 the Company’s 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 $400 as of December 31, 2010. 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 $215, in either direction. A 10% change in reported loss development
patterns is within the Company’s historical variation, as measured by the variation around the
average development factors as reported in statutory accident year reports.
39
Table of Contents
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.
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, 2010 of $2.14 billion ($1.80 billion and $339 for asbestos and
environmental, respectively) is within an estimated range, unadjusted for covariance, of $1.67
billion to $2.44 billion. The process of estimating asbestos and environmental reserves remains
subject to a wide variety of uncertainties, which are detailed in Note 12 of 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 Other Operations regularly and, where future
developments indicate, make appropriate adjustments to the reserves.
Total Property and Casualty Insurance Product 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, 2010 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.
40
Table of Contents
Reserve Roll-forwards 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,
adjustments are made more quickly to more mature accident years and less volatile lines of
business. 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.
A roll-forward follows of property and casualty insurance product liabilities for unpaid losses and
loss adjustment expenses for the year ended December 31, 2010:
For the year ended December 31, 2010
| Total | ||||||||||||||||
| Property & | Property and | |||||||||||||||
| Casualty | Consumer | Corporate and | Casualty | |||||||||||||
| Commercial | Markets | Other | Insurance | |||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses,
gross
|
$ | 15,051 | $ | 2,109 | $ | 4,491 | $ | 21,651 | ||||||||
|
Reinsurance and other recoverables
|
2,570 | 11 | 860 | 3,441 | ||||||||||||
|
|
||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
12,481 | 2,098 | 3,631 | 18,210 | ||||||||||||
|
|
||||||||||||||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||||||
|
Current accident year before catastrophes
|
3,579 | 2,737 | — | 6,316 | ||||||||||||
|
Current accident year catastrophes
|
152 | 300 | — | 452 | ||||||||||||
|
Prior accident years
|
(361 | ) | (86 | ) | 251 | (196 | ) | |||||||||
|
|
||||||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
3,370 | 2,951 | 251 | 6,572 | ||||||||||||
|
Payments
|
(3,485 | ) | (2,889 | ) | (460 | ) | (6,834 | ) | ||||||||
|
|
||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
12,366 | 2,160 | 3,422 | 17,948 | ||||||||||||
|
Reinsurance and other recoverables
|
2,361 | 17 | 699 | 3,077 | ||||||||||||
|
|
||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$ | 14,727 | $ | 2,177 | $ | 4,121 | $ | 21,025 | ||||||||
|
|
||||||||||||||||
|
Earned premiums
|
$ | 5,744 | $ | 3,947 | ||||||||||||
|
Loss and loss expense paid ratio [1]
|
60.7 | 73.2 | ||||||||||||||
|
Loss and loss expense incurred ratio
|
58.7 | 74.8 | ||||||||||||||
|
Prior accident years development (pts) [2]
|
(6.3 | ) | (2.2 | ) | ||||||||||||
| [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.
|
41
Table of Contents
Prior accident years development recorded in 2010
Included within prior accident years development for the year ended December 31, 2010 were the
following reserve strengthenings (releases):
For the year ended December 31, 2010
| Property & Casualty | Consumer | Corporate and | Total Property and | |||||||||||||
| Commercial | Markets | Other | Casualty Insurance | |||||||||||||
|
Auto liability
|
$ | (54 | ) | $ | (115 | ) | $ | — | $ | (169 | ) | |||||
|
Professional liability
|
(88 | ) | — | — | (88 | ) | ||||||||||
|
Workers’ compensation
|
(70 | ) | — | — | (70 | ) | ||||||||||
|
General liability, umbrella and high hazard liability
|
(66 | ) | — | — | (66 | ) | ||||||||||
|
General liability, excluding umbrella and high hazard liability
|
(42 | ) | — | — | (42 | ) | ||||||||||
|
Package business
|
(19 | ) | — | — | (19 | ) | ||||||||||
|
Commercial property
|
(16 | ) | — | — | (16 | ) | ||||||||||
|
Fidelity and surety
|
(5 | ) | — | — | (5 | ) | ||||||||||
|
Homeowners
|
— | 23 | — | 23 | ||||||||||||
|
Net environmental reserves
|
— | — | 67 | 67 | ||||||||||||
|
Net asbestos reserves
|
— | — | 189 | 189 | ||||||||||||
|
All other non-A&E within Other Operations
|
— | — | 11 | 11 | ||||||||||||
|
Uncollectible reinsurance
|
(30 | ) | — | — | (30 | ) | ||||||||||
|
Discount accretion on workers’ compensation
|
26 | — | — | 26 | ||||||||||||
|
Catastrophes
|
1 | 10 | — | 11 | ||||||||||||
|
Other reserve re-estimates, net
|
2 | (4 | ) | (16 | ) | (18 | ) | |||||||||
|
|
||||||||||||||||
|
Total prior accident years development
|
$ | (361 | ) | $ | (86 | ) | $ | 251 | $ | (196 | ) | |||||
|
|
||||||||||||||||
During 2010, the Company’s re-estimates of prior accident years reserves included the following
significant reserve changes:
| • |
Released reserves for commercial auto claims as the Company lowered its reserve estimate to
recognize a lower severity trend during 2009 that continued into 2010 on larger claims in
accident years 2002 to 2009.
|
|
| • |
Released reserves for personal auto liability claims. Favorable trends in reported
severity have persisted, most notably for accident years 2008 and 2009. As these accident
years develop, the uncertainty around the ultimate losses is reduced and management places
more weight on the emerged experience. The reserve releases impact accident years 2004
through 2009, as some of the older years are also showing improvements in reported severity.
|
|
| • |
Released reserves for professional liability claims, primarily related to directors’ and
officers’ (“D&O”) claims in accident years 2008 and prior. For these accident years, reported
losses for claims under D&O policies have been emerging favorably to initial expectations due
to lower than expected claim severity.
|
|
| • |
Released reserves for workers’ compensation business, primarily related to accident years
2006 and 2007. Management updated reviews of state reforms affecting these accident years and
determined impacts to be more favorable than previously estimated. Accordingly, management
reduced reserve estimates for these years.
|
|
| • |
Released reserves for general liability claims, primarily related to accident years 2005
through 2008. Claim emergence for these accident years continues to be lower than
anticipated. Management now believes this lower level of claim activity will continue into
the future and has reduced its reserve estimate in response to these favorable trends.
Partially offsetting this reserve release is strengthening on loss adjustment expense reserves
during the second quarter of 2010 due to higher than expected allocated loss expenses for
claims in accident years 2000 and prior.
|
|
| • |
Released reserves for package business claims, primarily related to accident years 2005
through 2009. Claim emergence within the liability portion of the package coverage for these
accident years continues to be lower than anticipated. Management now believes this lower
level of claim activity will continue into the future and has reduced its reserve estimate in
response to these favorable trends.
|
|
| • |
Strengthened reserves for homeowners’ claims. During 2010, the Company observed a
lengthening of the claim reporting period for homeowners’ claims for prior accident years
which resulted in increasing management’s estimate of the ultimate cost to settle these
claims. The Company is also spending more on independent adjuster fees to better assess
property damages.
|
|
| • |
The Company reviewed its allowance for uncollectible reinsurance in the second quarter of
2010 and reduced its allowance, in part, by a reduction in gross ceded loss recoverables.
|
|
| • |
Refer to the Other Operations Claims section for further discussion concerning the
Company’s annual evaluations of net environmental and net asbestos reserves, and related
reinsurance.
|
42
Table of Contents
A roll-forward follows of property and casualty insurance product liabilities for unpaid losses and
loss adjustment expenses for the year ended December 31, 2009:
For the year ended December 31, 2009
| Total | ||||||||||||||||
| Property & | Property and | |||||||||||||||
| Casualty | Consumer | Corporate and | Casualty | |||||||||||||
| Commercial | Markets | Other | Insurance | |||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses,
gross
|
$ | 15,273 | $ | 2,083 | $ | 4,577 | $ | 21,933 | ||||||||
|
Reinsurance and other recoverables
|
2,742 | 46 | 798 | 3,586 | ||||||||||||
|
|
||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
12,531 | 2,037 | 3,779 | 18,347 | ||||||||||||
|
|
||||||||||||||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||||||
|
Current accident year before catastrophes
|
3,582 | 2,707 | 1 | 6,290 | ||||||||||||
|
Current accident year catastrophes
|
78 | 228 | — | 306 | ||||||||||||
|
Prior accident years
|
(394 | ) | (33 | ) | 241 | (186 | ) | |||||||||
|
|
||||||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
3,266 | 2,902 | 242 | 6,410 | ||||||||||||
|
Payments
|
(3,316 | ) | (2,841 | ) | (390 | ) | (6,547 | ) | ||||||||
|
|
||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
12,481 | 2,098 | 3,631 | 18,210 | ||||||||||||
|
Reinsurance and other recoverables
|
2,570 | 11 | 860 | 3,441 | ||||||||||||
|
|
||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$ | 15,051 | $ | 2,109 | $ | 4,491 | $ | 21,651 | ||||||||
|
|
||||||||||||||||
|
Earned premiums
|
$ | 5,903 | $ | 3,959 | ||||||||||||
|
Loss and loss expense paid ratio [1]
|
56.2 | 71.8 | ||||||||||||||
|
Loss and loss expense incurred ratio
|
55.3 | 73.3 | ||||||||||||||
|
Prior accident years development (pts) [2]
|
(6.7 | ) | (0.8 | ) | ||||||||||||
| [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):
For the year ended December 31, 2009
| Property & Casualty | Consumer | Corporate and | Total Property and | |||||||||||||
| Commercial | Markets | Other | Casualty Insurance | |||||||||||||
|
Auto liability
|
$ | (47 | ) | $ | (77 | ) | $ | — | $ | (124 | ) | |||||
|
Professional liability
|
(127 | ) | — | — | (127 | ) | ||||||||||
|
General liability, umbrella and high hazard liability
|
(112 | ) | — | — | (112 | ) | ||||||||||
|
Workers’ compensation
|
(92 | ) | — | — | (92 | ) | ||||||||||
|
Package business
|
38 | — | — | 38 | ||||||||||||
|
Fidelity and surety
|
28 | — | — | 28 | ||||||||||||
|
Homeowners
|
— | 18 | — | 18 | ||||||||||||
|
Net environmental reserves
|
— | — | 75 | 75 | ||||||||||||
|
Net asbestos reserves
|
— | — | 138 | 138 | ||||||||||||
|
All other non-A&E within Other Operations
|
— | — | 35 | 35 | ||||||||||||
|
Uncollectible reinsurance
|
(20 | ) | — | (20 | ) | (40 | ) | |||||||||
|
Discount accretion on workers’ compensation
|
24 | — | — | 24 | ||||||||||||
|
Catastrophes
|
(23 | ) | — | — | (23 | ) | ||||||||||
|
Other reserve re-estimates, net
|
(63 | ) | 26 | 13 | (24 | ) | ||||||||||
|
|
||||||||||||||||
|
Total prior accident years development
|
$ | (394 | ) | $ | (33 | ) | $ | 241 | $ | (186 | ) | |||||
|
|
||||||||||||||||
During 2009, the Company’s re-estimates of prior accident years reserves included the following
significant reserve changes:
| • |
Released reserves for personal auto liability claims, as in the 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 and fourth quarters of 2009, management also recognized
sustained favorable development trends in AARP for accident years 2006 to 2008 and released
reserves for those accident years.
|
|
| • |
Released reserves for commercial auto liability claims, 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.
|
43
Table of Contents
| • |
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 professional liability, otherwise known as 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 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, 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, 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.
|
|
| • |
Strengthened reserves for liability claims under package policies, 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, primarily related to accident years 2004 to
2007. The net 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.
|
|
| • |
Strengthened reserves for property in personal homeowners’ claims, 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 reserve
strengthening 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.
|
|
| • |
The Company reviewed its allowance for uncollectible reinsurance for Property & Casualty
Commercial in the second quarter of 2009 and reduced its allowance for Property & Casualty
Commercial driven, in part, by a reduction in gross ceded loss recoverables.
|
|
| • |
Refer to the Other Operations Claims section for further discussion concerning the
Company’s annual evaluations of net environmental and net asbestos reserves, and related
reinsurance.
|
44
Table of Contents
A roll-forward follows of property and casualty insurance product liabilities for unpaid losses and
loss adjustment expenses for the year ended December 31, 2008:
For the year ended December 31, 2008
| Total | ||||||||||||||||
| Property & | Property and | |||||||||||||||
| Casualty | Consumer | Corporate and | Casualty | |||||||||||||
| Commercial | Markets | Other | Insurance | |||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses,
gross
|
$ | 15,020 | 2,065 | 5,068 | 22,153 | |||||||||||
|
Reinsurance and other recoverables
|
2,917 | 67 | 938 | 3,922 | ||||||||||||
|
|
||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
12,103 | 1,998 | 4,130 | 18,231 | ||||||||||||
|
|
||||||||||||||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||||||
|
Current accident year before catastrophes
|
3,835 | 2,552 | 3 | 6,390 | ||||||||||||
|
Current accident year catastrophes
|
285 | 258 | — | 543 | ||||||||||||
|
Prior accident years
|
(298 | ) | (52 | ) | 124 | (226 | ) | |||||||||
|
|
||||||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
3,822 | 2,758 | 127 | 6,707 | ||||||||||||
|
Payments
|
(3,394 | ) | (2,719 | ) | (478 | ) | (6,591 | ) | ||||||||
|
|
||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
12,531 | 2,037 | 3,779 | 18,347 | ||||||||||||
|
Reinsurance and other recoverables
|
2,742 | 46 | 798 | 3,586 | ||||||||||||
|
|
||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$ | 15,273 | $ | 2,083 | $ | 4,577 | $ | 21,933 | ||||||||
|
|
||||||||||||||||
|
Earned premiums
|
$ | 6,395 | $ | 3,935 | ||||||||||||
|
Loss and loss expense paid ratio [1]
|
53.0 | 69.1 | ||||||||||||||
|
Loss and loss expense incurred ratio
|
59.8 | 70.1 | ||||||||||||||
|
Prior accident years development (pts) [2]
|
(4.7 | ) | (1.3 | ) | ||||||||||||
| [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.
|
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
| Property & Casualty | Consumer | Corporate and | Total Property and | |||||||||||||
| Commercial | Markets | Other | Casualty Insurance | |||||||||||||
|
Gross incurred claim and claim adjustment
expenses for current accident year
catastrophes
|
$ | 312 | $ | 260 | $ | — | $ | 572 | ||||||||
|
Ceded claim and claim adjustment expenses for
current accident year catastrophes
|
27 | 2 | — | 29 | ||||||||||||
|
|
||||||||||||||||
|
Net incurred claim and claim adjustment
expenses for current accident year
catastrophes
|
285 | 258 | — | 543 | ||||||||||||
|
Assessments owed to Texas Windstorm Insurance
Association due to hurricane Ike
|
10 | 10 | — | 20 | ||||||||||||
|
Reinstatement premium ceded to reinsurers due
to hurricane Ike
|
— | 1 | — | 1 | ||||||||||||
|
|
||||||||||||||||
|
Total current accident year catastrophe impacts
|
$ | 295 | $ | 269 | $ | — | $ | 564 | ||||||||
|
|
||||||||||||||||
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 homeowners policies so the Company’s estimate of
hurricane losses on 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.
45
Table of Contents
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):
For the year ended December 31, 2008
| Property & Casualty | Consumer | Corporate and | Total Property and | |||||||||||||
| Commercial | Markets | Other | Casualty Insurance | |||||||||||||
|
Auto liability
|
$ | (27 | ) | $ | (46 | ) | $ | — | $ | (73 | ) | |||||
|
Workers’ compensation
|
(156 | ) | — | — | (156 | ) | ||||||||||
|
General liability, umbrella and high hazard liability
|
(105 | ) | — | — | (105 | ) | ||||||||||
|
General liability and products liability
|
67 | — | 67 | |||||||||||||
|
Professional liability
|
(75 | ) | — | — | (75 | ) | ||||||||||
|
Extra-contractual liability claims under
non-standard personal auto policies
|
— | (24 | ) | — | (24 | ) | ||||||||||
|
Construction defect claims
|
(10 | ) | — | — | (10 | ) | ||||||||||
|
National account general liability allocated loss
adjustment expense reserves
|
25 | — | — | 25 | ||||||||||||
|
Net environmental reserves
|
— | — | 53 | 53 | ||||||||||||
|
Net asbestos reserves
|
— | — | 50 | 50 | ||||||||||||
|
Discount accretion on workers’ compensation
|
26 | — | — | 26 | ||||||||||||
|
Catastrophes
|
(27 | ) | — | — | (27 | ) | ||||||||||
|
Other reserve re-estimates, net
|
(16 | ) | 18 | 21 | 23 | |||||||||||
|
|
||||||||||||||||
|
Total prior accident years development
|
$ | (298 | ) | $ | (52 | ) | $ | 124 | $ | (226 | ) | |||||
|
|
||||||||||||||||
During 2008, the Company’s re-estimates of prior accident year reserves included the following
significant reserve changes:
| • |
Released commercial auto liability reserves, 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.
|
|
| • |
Released reserves for personal auto liability claims, 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.
|
|
| • |
Released workers’ compensation reserves primarily related to accident years 2000 to 2007.
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.
|
|
| • |
Released reserves for general liability claims primarily related to the 2001 to 2007
accident years. 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.
|
|
| • |
Strengthened reserves for general liability and products liability claims primarily for
accident years 2004 and prior 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.
|
|
| • |
Released reserves for professional liability claims for accident years 2003 to 2006.
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.
|
46
Table of Contents
| • |
Released reserves for extra-contractual liability claims under non-standard personal auto
policies. 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.
|
|
| • |
Released reserves for construction defect claims 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.
|
|
| • |
Strengthened reserves for allocated loss adjustment expenses on national account general
liability claims. 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.
|
|
| • |
Refer to the Other Operations Claims section for further discussion concerning the
Company’s annual evaluations of net environmental and net asbestos reserves, and related
reinsurance.
|
47
Table of Contents
Other Operations Claims
Reserve Activity
Reserves and reserve activity in the Other Operations operating segment, within Corporate and
Other, 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, 2010, 2009 and 2008.
Other Operations Losses and Loss Adjustment Expenses
| Asbestos | Environmental | All Other [1] | Total | |||||||||||||
|
2010
|
||||||||||||||||
|
Beginning liability — net [2] [3]
|
$ | 1,892 | $ | 307 | $ | 1,432 | $ | 3,631 | ||||||||
|
Losses and loss adjustment expenses incurred
|
189 | 67 | (5 | ) | 251 | |||||||||||
|
Losses and loss adjustment expenses paid
|
(294 | ) | (40 | ) | (125 | ) | (459 | ) | ||||||||
|
|
||||||||||||||||
|
Ending liability — net [2] [3]
|
$ | 1,787 | [4] | $ | 334 | $ | 1,302 | $ | 3,423 | |||||||
|
|
||||||||||||||||
|
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
|
51 | 3 | (54 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Ending liability — net [2] [3]
|
$ | 1,892 | $ | 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 | ||||||||
|
|
||||||||||||||||
| [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 amounts reported in Property & Casualty Commercial and
Consumer Markets reporting segments for asbestos and environmental net
liabilities of $11 and $5, respectively, as of December 31, 2010, $10
and $5, respectively, as of December 31, 2009, and $12 and $6,
respectively, as of December 31, 2008; total net losses and loss
adjustment expenses incurred for the years ended December 31, 2010,
2009 and 2008 of $15, $16 and $16, respectively, related to asbestos
and environmental claims; and total net losses and loss adjustment
expenses paid for the years ended December 31, 2010, 2009 and 2008 of
$14, $19 and $13, respectively, related to asbestos and environmental
claims.
|
|
| [3] |
Gross of reinsurance, asbestos and environmental reserves, including
liabilities in Property & Casualty Commercial and Commercial Markets,
were $2,308 and $378, respectively, as of December 31, 2010; $2,484
and $367, respectively, as of December 31, 2009; and $2,498 and $309,
respectively, as of December 31, 2008.
|
|
| [4] |
The one year and average three year net paid amounts for asbestos
claims, including Ongoing Operations, were $300 and $227,
respectively, resulting in a one year net survival ratio of 6.0 and a
three year net survival ratio of 7.9. 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.
|
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.
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.
48
Table of Contents
The following table sets forth, for the years ended December 31, 2010, 2009 and 2008, 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
| Asbestos [1] | Environmental [1] | |||||||||||||||
| Paid | Incurred | Paid | Incurred | |||||||||||||
| Losses & LAE | Losses & LAE | Losses & LAE | Losses & LAE | |||||||||||||
|
2010
|
||||||||||||||||
|
Gross
|
||||||||||||||||
|
Direct
|
$ | 201 | $ | 209 | $ | 35 | $ | 50 | ||||||||
|
Assumed Reinsurance
|
128 | — | 12 | 5 | ||||||||||||
|
London Market
|
42 | (15 | ) | 7 | 10 | |||||||||||
|
|
||||||||||||||||
|
Total
|
371 | 194 | 54 | 65 | ||||||||||||
|
Ceded
|
(77 | ) | (5 | ) | (14 | ) | 2 | |||||||||
|
|
||||||||||||||||
|
Net
|
$ | 294 | $ | 189 | $ | 40 | $ | 67 | ||||||||
|
|
||||||||||||||||
|
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 — Domestic
|
61 | — | 9 | (17 | ) | |||||||||||
|
London Market
|
19 | — | 6 | 13 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
287 | 76 | 47 | 65 | ||||||||||||
|
Ceded
|
(105 | ) | (8 | ) | (11 | ) | (11 | ) | ||||||||
|
|
||||||||||||||||
|
Net
|
$ | 182 | $ | 68 | $ | 36 | $ | 54 | ||||||||
|
|
||||||||||||||||
| [1] |
Excludes asbestos and environmental paid and incurred loss and LAE
reported in Property & Casualty Commercial. Total gross losses and
LAE incurred in Property & Casualty Commercial for the years ended
December 31, 2010, 2009 and 2008 includes $15, $17 and $15,
respectively, related to asbestos and environmental claims. Total
gross losses and LAE paid in Property & Casualty Commercial for the
years ended December 31, 2010, 2009 and 2008 includes $14, $20 and
$12, 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”.
|
In the fourth quarters of 2010, 2009 and 2008, the Company completed evaluations of certain of its
non-asbestos and environmental reserves, including its assumed reinsurance liabilities. Based on
this evaluation in 2010, the Company recognized unfavorable prior year development of $11. 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 in 2008 for its HartRe assumed reinsurance liabilities principally driven by
lower than expected reported losses. In 2008, the favorable HartRe assumed reinsurance prior year
development was offset by unfavorable other non-asbestos and environmental prior year development
of $30, including $25 of adverse development for assumed reinsurance obligations of the Company’s
Bermuda operations.
During the third quarters of 2010, 2009 and 2008, 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 quarter of 2010, the Company found estimates for some individual accounts
increased based upon unfavorable litigation results and increased clean-up or expense costs, with
the vast majority of this deterioration emanating from a limited number of insureds. In 2009, 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. In 2008, the Company found that the decline in the reporting of
new accounts and sites has been slower than anticipated in the previous review. 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 $62, $75 and $53 increases in net
environmental liabilities in 2010, 2009 and 2008, respectively. The Company currently expects to
continue to perform an evaluation of its environmental liabilities annually.
49
Table of Contents
In reporting environmental results, the Company classifies its gross exposure into Direct, Assumed
Reinsurance, and London Market. The following table displays gross environmental reserves and other
statistics by category as of December 31, 2010.
Summary of Environmental Reserves
As of December 31, 2010
As of December 31, 2010
| Total Reserves | ||||
|
Gross [1] [2]
|
||||
|
Direct
|
$ | 273 | ||
|
Assumed Reinsurance
|
47 | |||
|
London Market
|
58 | |||
|
|
||||
|
Total
|
378 | |||
|
Ceded
|
(39 | ) | ||
|
|
||||
|
Net
|
$ | 339 | ||
|
|
||||
| [1] |
The one year gross paid amount for total environmental claims is $61, resulting in a one year
gross survival ratio of 6.2.
|
|
| [2] |
The three year average gross paid amount for total environmental claims is $56, resulting in
a three year gross survival ratio of 6.8.
|
During the second quarters of 2010, 2009 and 2008, 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 $169 in second quarter 2010.
During 2010 and 2009, for certain direct policyholders, the Company experienced increases in claim
severity and expense. Increases in severity and expense were driven by litigation in certain
jurisdictions and, to a lesser extent, development on primarily peripheral accounts. The Company
also experienced unfavorable development on its assumed reinsurance accounts driven largely by the
same factors experienced by the direct policyholders. The net effect of these changes in 2009
resulted in a $138 increase in net asbestos reserves. 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. The Company currently expects to continue to perform an evaluation of its asbestos
liabilities annually.
The Company classifies its gross asbestos exposures into Direct, Assumed Reinsurance and London
Market. The Company further classifies 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.
|
|
| • |
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.
50
Table of Contents
The following table displays gross asbestos reserves and other statistics by policyholder category
as of December 31, 2010.
Summary of Gross Asbestos Reserves
As of December 31, 2010
As of December 31, 2010
| Number of | All Time | Total | All Time | |||||||||||||
| Accounts [2] | Paid [3] | Reserves | Ultimate [3] | |||||||||||||
|
Gross Asbestos Reserves as of June 30, 2010 [1]
|
||||||||||||||||
|
Major asbestos defendants [5]
|
||||||||||||||||
|
Structured settlements (includes 4 Wellington accounts) [6]
|
7 | $ | 312 | $ | 428 | $ | 740 | |||||||||
|
Wellington (direct only)
|
29 | 908 | 44 | 952 | ||||||||||||
|
Other major asbestos defendants
|
29 | 476 | 132 | 608 | ||||||||||||
|
No known policies (includes 3 Wellington accounts)
|
5 | — | — | — | ||||||||||||
|
Accounts with future exposure > $2.5
|
77 | 832 | 585 | 1,417 | ||||||||||||
|
Accounts with future exposure < $2.5
|
1,122 | 409 | 133 | 542 | ||||||||||||
|
Unallocated [7]
|
1,766 | 446 | 2,212 | |||||||||||||
|
|
||||||||||||||||
|
Total Direct
|
4,703 | 1,768 | 6,471 | |||||||||||||
|
Assumed Reinsurance
|
1,199 | 469 | 1,668 | |||||||||||||
|
London Market
|
605 | 308 | 913 | |||||||||||||
|
|
||||||||||||||||
|
Total as of June 30, 2010 [1]
|
6,507 | 2,545 | 9,052 | |||||||||||||
|
|
||||||||||||||||
|
Gross paid loss activity for the third quarter and fourth quarter 2010
|
242 | (242 | ) | — | ||||||||||||
|
Gross incurred loss activity for the third quarter and fourth quarter 2010
|
5 | 5 | ||||||||||||||
|
|
||||||||||||||||
|
Total as of December 31, 2010 [4]
|
$ | 6,749 | $ | 2,308 | $ | 9,057 | ||||||||||
|
|
||||||||||||||||
| [1] |
Gross Asbestos Reserves based on the second quarter 2010 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 2010.
|
|
| [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 7.5 as of December 31, 2010 is computed based on total paid
losses of $917 for the period from January 1, 2008 to December 31, 2010. As of December 31, 2010, the one year gross paid
amount for total asbestos claims is $378 resulting in a one year gross survival ratio of 6.1.
|
|
| [5] |
Includes 25 open accounts at June 30, 2010. Included 25 open accounts at June 30, 2009.
|
|
| [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.
|
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 2010, 2009 and 2008, 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. The evaluation in the second
quarter of 2010 resulted in no addition to the allowance for uncollectible reinsurance. As of
December 31, 2010, the allowance for uncollectible reinsurance for Other Operations totals $211.
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. The evaluation in the second quarter of
2008 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.
51
Table of Contents
Impact of Re-estimates
The establishment of property and casualty insurance product 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 ten 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 ten 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.
| Property & Casualty | Consumer | Corporate and | Total Property and | |||||||||||||
| Commercial | Markets | Other | Casualty Insurance | |||||||||||||
|
Range of prior
accident year
unfavorable
(favorable)
development for the
ten years ended
December 31, 2010
[1] [2]
|
(3.1) – 1.5 | (5.2) – 5.1 | 2.9 – 67.5 | (1.2) – 21.5 | ||||||||||||
| [1] |
Excluding the reserve strengthening for asbestos and environmental reserves, over the past ten years reserve re-estimates
for total property and casualty insurance ranged from (3.0)% to 1.6%.
|
|
| [2] |
Development for Corporate is included in Property & Casualty Commercial and Consumer Markets in 2007 and prior.
|
The potential variability of the Company’s property and casualty insurance product 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.
A table depicting the historical development of the liabilities for unpaid losses and loss
adjustment expenses, net of reinsurance, follows.
Loss Development Table
Loss And Loss Adjustment Expense Liability Development — Net of Reinsurance
For the Years Ended December 31, [1]
Loss And Loss Adjustment Expense Liability Development — Net of Reinsurance
For the Years Ended December 31, [1]
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||||||||||||||||||
|
Liabilities for unpaid
losses and loss
adjustment expenses,
net of reinsurance
|
$ | 12,316 | $ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | $ | 18,347 | $ | 18,210 | $ | 17,948 | ||||||||||||||||||||||
|
Cumulative paid losses
and loss expenses
|
||||||||||||||||||||||||||||||||||||||||||||
|
One year later
|
3,272 | 3,339 | 3,480 | 4,415 | 3,594 | 3,702 | 3,727 | 3,703 | 3,771 | 3,882 | ||||||||||||||||||||||||||||||||||
|
Two years later
|
5,315 | 5,621 | 6,781 | 6,779 | 6,035 | 6,122 | 5,980 | 5,980 | 6,273 | |||||||||||||||||||||||||||||||||||
|
Three years later
|
6,972 | 8,324 | 8,591 | 8,686 | 7,825 | 7,755 | 7,544 | 7,752 | — | |||||||||||||||||||||||||||||||||||
|
Four years later
|
9,195 | 9,710 | 10,061 | 10,075 | 9,045 | 8,889 | 8,833 | — | — | |||||||||||||||||||||||||||||||||||
|
Five years later
|
10,227 | 10,871 | 11,181 | 11,063 | 9,928 | 9,903 | — | — | — | |||||||||||||||||||||||||||||||||||
|
Six years later
|
11,140 | 11,832 | 12,015 | 11,821 | 10,798 | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Seven years later
|
11,961 | 12,563 | 12,672 | 12,601 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Eight years later
|
12,616 | 13,166 | 13,385 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Nine years later
|
13,167 | 13,829 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Ten years later
|
13,779 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Liabilities re-estimated
|
||||||||||||||||||||||||||||||||||||||||||||
|
One year later
|
12,459 | 13,153 | 15,965 | 16,632 | 16,439 | 17,159 | 17,652 | 18,005 | 18,161 | 18,014 | ||||||||||||||||||||||||||||||||||
|
Two years later
|
12,776 | 16,176 | 16,501 | 17,232 | 16,838 | 17,347 | 17,475 | 17,858 | 18,004 | |||||||||||||||||||||||||||||||||||
|
Three years later
|
15,760 | 16,768 | 17,338 | 17,739 | 17,240 | 17,318 | 17,441 | 17,700 | — | |||||||||||||||||||||||||||||||||||
|
Four years later
|
16,584 | 17,425 | 17,876 | 18,367 | 17,344 | 17,497 | 17,439 | — | — | |||||||||||||||||||||||||||||||||||
|
Five years later
|
17,048 | 17,927 | 18,630 | 18,554 | 17,570 | 17,613 | — | — | — | |||||||||||||||||||||||||||||||||||
|
Six years later
|
17,512 | 18,686 | 18,838 | 18,836 | 17,777 | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Seven years later
|
18,216 | 18,892 | 19,126 | 19,063 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Eight years later
|
18,410 | 19,192 | 19,373 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Nine years later
|
18,649 | 19,452 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Ten years later
|
18,922 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Deficiency
(redundancy), net of
reinsurance
|
$ | 6,606 | $ | 6,592 | $ | 6,232 | $ | 2,845 | $ | 1,586 | $ | 750 | $ | (165 | ) | $ | (531 | ) | $ | (343 | ) | $ | (196 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
| [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.
|
52
Table of Contents
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.
Loss And Loss Adjustment Expense Liability Development — Gross
For the Years Ended December 31, [1]
For the Years Ended December 31, [1]
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||||||||||||||
|
Net reserve, as initially estimated
|
$ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | $ | 18,347 | $ | 18,210 | $ | 17,948 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Reinsurance and other
recoverables, as initially
estimated
|
4,176 | 3,950 | 5,497 | 5,138 | 5,403 | 4,387 | 3,922 | 3,586 | 3,441 | 3,077 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross reserve, as initially
estimated
|
$ | 17,036 | $ | 17,091 | $ | 21,715 | $ | 21,329 | $ | 22,266 | $ | 21,991 | $ | 22,153 | $ | 21,933 | $ | 21,651 | $ | 21,025 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Net re-estimated reserve
|
$ | 19,452 | $ | 19,373 | $ | 19,063 | $ | 17,777 | $ | 17,613 | $ | 17,439 | $ | 17,700 | $ | 18,004 | $ | 18,014 | ||||||||||||||||||||||
|
Re-estimated and other reinsurance
recoverables
|
5,908 | 5,511 | 5,423 | 5,311 | 5,646 | 4,069 | 3,785 | 3,459 | 2,959 | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross re-estimated reserve
|
$ | 25,360 | $ | 24,884 | $ | 24,486 | $ | 23,088 | $ | 23,259 | $ | 21,508 | $ | 21,485 | $ | 21,463 | $ | 20,973 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross deficiency (redundancy)
|
$ | 8,324 | $ | 7,793 | $ | 2,771 | $ | 1,759 | $ | 993 | $ | (483 | ) | $ | (668 | ) | $ | (470 | ) | $ | (678 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
| [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.
|
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, 2010. 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, 2010 for the indicated accident year(s).
Effect of Net Reserve Re-estimates on Calendar Year Operations
| Calendar Year | ||||||||||||||||||||||||||||||||||||||||||||
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | Total | ||||||||||||||||||||||||||||||||||
|
By Accident year
|
||||||||||||||||||||||||||||||||||||||||||||
|
2000 & Prior
|
$ | 143 | $ | 317 | $ | 2,984 | $ | 824 | $ | 464 | $ | 464 | $ | 704 | $ | 194 | $ | 239 | $ | 273 | $ | 6,606 | ||||||||||||||||||||||
|
2001
|
— | (24 | ) | 39 | (232 | ) | 193 | 38 | 55 | 12 | 61 | (13 | ) | 129 | ||||||||||||||||||||||||||||||
|
2002
|
— | — | (199 | ) | (56 | ) | 180 | 36 | (5 | ) | 2 | (12 | ) | (13 | ) | (67 | ) | |||||||||||||||||||||||||||
|
2003
|
— | — | — | (122 | ) | (237 | ) | (31 | ) | (126 | ) | (21 | ) | (6 | ) | (20 | ) | (563 | ) | |||||||||||||||||||||||||
|
2004
|
— | — | — | — | (352 | ) | (108 | ) | (226 | ) | (83 | ) | (56 | ) | (20 | ) | (845 | ) | ||||||||||||||||||||||||||
|
2005
|
— | — | — | — | — | (103 | ) | (214 | ) | (133 | ) | (47 | ) | (91 | ) | (588 | ) | |||||||||||||||||||||||||||
|
2006
|
— | — | — | — | — | — | (140 | ) | (148 | ) | (213 | ) | (118 | ) | (619 | ) | ||||||||||||||||||||||||||||
|
2007
|
— | — | — | — | — | — | — | (49 | ) | (113 | ) | (156 | ) | (318 | ) | |||||||||||||||||||||||||||||
|
2008
|
— | — | — | — | — | — | — | — | (39 | ) | 1 | (38 | ) | |||||||||||||||||||||||||||||||
|
2009
|
— | — | — | — | — | — | — | — | — | (39 | ) | (39 | ) | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 143 | $ | 293 | $ | 2,824 | $ | 414 | $ | 248 | $ | 296 | $ | 48 | $ | (226 | ) | $ | (186 | ) | $ | (196 | ) | $ | 3,658 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
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 2000 & Prior
The largest impacts of net reserve re-estimates are shown in the “2000 & Prior” accident years.
Reserve deterioration was related to calendar years, 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.
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.
53
Table of Contents
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 the terrorist attack
on September 11, 2001. 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.
Reserve changes for accident years 2003 through 2009
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 2010. 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 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 package business claims as reported losses
have emerged favorably to previous expectations. In 2007 through 2009, the Company released
reserves for 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 auto liability claims, within Consumer Markets, were released in 2008 due
largely to an improvement in emerged claim severity for the 2005 to 2007 accident years.
54
Table of Contents
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 the 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. Portions of 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
reserves.
As of December 31, 2010 and 2009 the most significant EGP based balances that are amortized were as
follows:
| U.S. Annuity | International Annuity | Retirement Plans | Life Insurance | |||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
|
DAC
|
$ | 3,251 | $ | 3,114 | $ | 1,617 | $ | 1,693 | $ | 820 | $ | 701 | $ | 2,667 | $ | 2,490 | ||||||||||||||||
|
SIA
|
$ | 329 | $ | 324 | $ | 41 | $ | 28 | $ | 23 | $ | 23 | $ | 45 | $ | 42 | ||||||||||||||||
|
URR
|
$ | 99 | $ | 96 | $ | 43 | $ | 70 | $ | — | $ | — | $ | 1,383 | $ | 1,182 | ||||||||||||||||
|
Death and Other
Insurance Benefit
Reserves
|
$ | 1,052 | $ | 1,232 | $ | 696 | $ | 584 | $ | 1 | $ | 1 | $ | 113 | $ | 76 | ||||||||||||||||
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 8.3% and 5.9% for 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
credible emerging data indicates that changes are warranted. Upon completion of the 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 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.
EGPs 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.
55
Table of Contents
An Unlock revises EGPs, on a quarterly basis, to reflect market updates of policyholder account
value and 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. The margin between the DAC balance and the present
value of future EGPs for U.S. and Japan individual variable annuities was 29% and 38% as of
December 31, 2010, 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 and the DAC asset would be written down to equal future EGPs.
Unlocks
The after-tax impact on the Company’s assets and liabilities as a result of the Unlocks for years
ended 2010, 2009 and 2008, were:
For the year ended December 31, 2010:
| Death and Other | ||||||||||||||||||||
| Segment | Insurance | |||||||||||||||||||
| After-tax (Charge) Benefit | DAC | URR | Benefit Reserves | SIA | Total | |||||||||||||||
|
Global Annuity
|
$ | 42 | $ | 7 | $ | 16 | $ | — | $ | 65 | ||||||||||
|
Life Insurance
|
23 | 5 | 1 | (1 | ) | 28 | ||||||||||||||
|
Retirement Plans
|
18 | — | — | — | 18 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 83 | $ | 12 | $ | 17 | $ | (1 | ) | $ | 111 | |||||||||
|
|
||||||||||||||||||||
The most significant contributors to the Unlock benefit recorded during the year ended December 31,
2010 were actual separate account returns being above our aggregated estimated return. Also
included in the benefit are assumption updates related to benefits from withdrawals and lapses,
offset by hedging, annuitization estimates on Japan products, and long-term expected rate of return
updates.
For the year ended December 31, 2009:
| Death and Other | ||||||||||||||||||||
| Segment | Insurance | |||||||||||||||||||
| After-tax (Charge) Benefit | DAC | URR | Benefit Reserves | SIA | Total [1] | |||||||||||||||
|
Global Annuity
|
$ | (533 | ) | $ | 23 | $ | (368 | ) | $ | (46 | ) | $ | (924 | ) | ||||||
|
Life Insurance
|
(101 | ) | 54 | (4 | ) | — | (51 | ) | ||||||||||||
|
Retirement Plans
|
(55 | ) | — | — | (1 | ) | (56 | ) | ||||||||||||
|
Corporate and Other
|
(3 | ) | — | — | — | (3 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | (692 | ) | $ | 77 | $ | (372 | ) | $ | (47 | ) | $ | (1,034 | ) | ||||||
|
|
||||||||||||||||||||
| [1] |
Includes $(49) related to DAC recoverability impairment associated with the decision to
suspend sales in the U.K variable annuity business.
|
The most significant contributors to the Unlock was a result of actual separate account returns
being significantly below our aggregated estimated return for the first quarter of 2009,
partially offset by actual returns being greater than our aggregated estimated return for the
period from April 1, 2009 to December 31, 2009.
For the year ended December 31, 2008:
| Death and Other | ||||||||||||||||||||
| Segment | Insurance Benefit | |||||||||||||||||||
| After-tax (Charge) Benefit | DAC | URR | Reserves | SIA | Total | |||||||||||||||
|
Global Annuity
|
$ | (671 | ) | $ | 17 | $ | (165 | ) | $ | (29 | ) | $ | (848 | ) | ||||||
|
Life Insurance
|
(29 | ) | (12 | ) | (3 | ) | — | (44 | ) | |||||||||||
|
Retirement Plans
|
(49 | ) | — | — | — | (49 | ) | |||||||||||||
|
Corporate and Other
|
9 | — | — | — | 9 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | (740 | ) | $ | 5 | $ | (168 | ) | $ | (29 | ) | $ | (932 | ) | ||||||
|
|
||||||||||||||||||||
The most significant contributors to the Unlock was a result of actual separate account returns
were significantly below our aggregated estimated return. Furthermore, the Company reduced its 20
year projected separate account return assumption from 7.8% to 7.2% in the U.S. In addition,
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.
Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities 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 the
Other-Than-Temporary Impairments within the Investment Credit Risk section of the MD&A.
56
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 using the income approach 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 Payments; 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, 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. For further discussion
on the impact of fair value changes from living benefits see Note 4a of the Notes to Consolidated
Financial Statements and for a discussion on the sensitivities of certain living benefits due to
capital market factors see Variable Product Equity Risk within Capital Markets Risk Management.
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 for a potential impairment 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.
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 Wealth Management 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.
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. In 2010, The Hartford has changed its reporting segments with no change to
reporting units. The homeowners and automobile components of Consumer Markets have been aggregated
into one reporting unit; the variable life, universal life and term life components within Life
Insurance have been aggregated into one reporting unit of Individual Life; the 401(k), 457 and
403(b) components of Retirement Plans have been aggregated into one reporting unit; the retail
mutual funds component of Mutual Funds has been aggregated into one reporting unit; and the group
disability and group life components of Group Benefits 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 Hartford Financial Products, the Company has classified
those components as reporting units. Goodwill associated with the June 30, 2000 buyback of
Hartford Life, Inc. was allocated to each of Hartford Life’s reporting units based on the reporting
units’ fair value of in-force business at the time of the buyback. Although this goodwill was
allocated to each reporting unit, it is held in Corporate and Other for segment reporting. In
addition Federal Trust Corporation is an immaterial operating segment where the goodwill has been
included in the Corporate and Other.
57
Table of Contents
As of December 31, 2010, the Company had goodwill allocated to the following reporting units:
| Segment | Goodwill in | |||||||||||
| Goodwill | Corporate and Other | Total | ||||||||||
|
Hartford Financial Products within Property & Casualty Commercial
|
$ | 30 | $ | — | $ | 30 | ||||||
|
Group Benefits
|
— | 138 | 138 | |||||||||
|
Consumer Markets
|
119 | — | 119 | |||||||||
|
Individual Life within Life Insurance
|
224 | 118 | 342 | |||||||||
|
Retirement Plans
|
87 | 69 | 156 | |||||||||
|
Mutual Funds
|
159 | 92 | 251 | |||||||||
|
Federal Trust Corporation within Corporate and Other
|
— | 15 | 15 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 619 | $ | 432 | $ | 1,051 | ||||||
|
|
||||||||||||
As of December 31, 2009, the Company had goodwill allocated to the following reporting units:
| Segment | Goodwill in | |||||||||||
| Goodwill | Corporate and Other | Total | ||||||||||
|
Hartford Financial Products within Property & Casualty Commercial
|
$ | 30 | $ | — | $ | 30 | ||||||
|
Group Benefits
|
— | 138 | 138 | |||||||||
|
Consumer Markets
|
119 | — | 119 | |||||||||
|
Individual Life within Life Insurance
|
224 | 118 | 342 | |||||||||
|
Retirement Plans
|
87 | 69 | 156 | |||||||||
|
Mutual Funds
|
159 | 92 | 251 | |||||||||
|
Federal Trust Corporation within Corporate and Other
|
— | 168 | 168 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 619 | $ | 585 | $ | 1,204 | ||||||
|
|
||||||||||||
The Company completed its annual goodwill assessment for the Federal Trust Corporation reporting
unit within Corporate and Other during the second quarter of 2010, resulting in a goodwill
impairment of $153, pre-tax.
The Company completed its annual goodwill assessment for the individual reporting units within
Wealth Management and Corporate and Other, except for the Federal Trust Corporation reporting unit,
as of January 1, 2010, which resulted in no write-downs of goodwill in 2010. The reporting units
passed the first step of their annual impairment tests with a significant margin with the exception
of the Individual Life reporting unit within Life Insurance.
Individual Life completed the second step of the annual goodwill impairment test resulting in an
implied goodwill value that was in excess of its carrying value. Even though the fair value of the
reporting unit was lower than its carrying value, the implied level of goodwill in Individual Life
exceeded the carrying amount of goodwill. In the implied purchase accounting required by the step
two goodwill impairment test, the implied present value of future profits was substantially lower
than that of the DAC asset removed in purchase accounting. A higher discount rate was used for
calculating the present value of future profits as compared to that used for calculating the
present value of estimated gross profits for DAC. As a result, in the implied purchase accounting,
implied goodwill exceeded the carrying amount of goodwill. The fair value of the Individual Life
reporting unit within Life Insurance is based on discounted cash flows using earnings projections
on in force business and future business growth. There could be a positive or negative impact on
the result of step one in future periods if actual earnings or business growth assumptions emerge
differently than those used in determining fair value for the first step of the annual goodwill
impairment test.
The annual goodwill assessment for the reporting units within Property & Casualty Commercial and
Consumer Markets was completed during the fourth quarter of 2010, which resulted in no write-downs
of goodwill for the year ended December 31, 2010. Consumer Markets passed the first step of its
annual impairment test with a significant margin while the Hartford Financial Products reporting
unit within Property & Casualty Commercial passed the first step of its annual impairment test with
less than a 5% margin. The fair value of the Hartford Financial Products reporting unit is based
on discounted cash flows using earnings projections on existing business and future business
growth. To the extent that actual earnings or business growth assumptions emerge differently than
those used in determining fair value for the first step of the annual goodwill impairment test, it
could have a positive or negative impact on the results of step one in future periods.
See Note 8 of the Notes to Consolidated Financial Statements for information on the results of
goodwill impairment tests performed in 2009 and 2008.
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Valuation of Investments and Derivative Instruments
The fair value of AFS securities, fixed maturities, at fair value using the fair value option
(“FVO”), equity securities, trading, 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, Fixed Maturities,
FVO, Equity Securities, Trading, and Short-Term Investments Section in Note 4 of the Notes to
Consolidated Financial Statements.
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.
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, 2010 and 2009, 97% 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 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.
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 5.50% and 5.25% were the appropriate discount rates as of
December 31, 2010 to calculate the Company’s pension and other postretirement obligations,
respectively. Accordingly, the 5.50% and 5.25% discount rates will also be used to determine the
Company’s 2011 pension and other postretirement expense, respectively. At December 31, 2009, the
discount rate was 6.00% and 5.75% for pension and other postretirement expense, respectively.
As of December 31, 2010, a 25 basis point increase/decrease in the discount rate would
decrease/increase the pension and other postretirement obligations by $137 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, 2010. This assumption will be used to determine the Company’s 2011 expense. The
long-term rate of return assumption at December 31, 2009, that was used to determine the Company’s
2010 expense, was 7.30%.
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Pension expense reflected in the Company’s results was $186, $137 and $122 in 2010, 2009 and 2008,
respectively. The Company estimates its 2011 pension expense will be approximately $210, based on
current assumptions. To illustrate the impact of these assumptions on annual pension expense for
2011 and going forward, a 25 basis point decrease in the discount rate will increase pension
expense by approximately $15 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 $434 and
$184 for the years ended December 31, 2010 and 2009, respectively, as compared to expected returns
of $286 and $276 for the years ended December 31, 2010 and 2009, 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 5.50% discount rate selected as of December 31, 2010 and taking into
account estimated future minimum funding, the difference between actual and expected performance in
2010 will decrease annual pension expense in future years. The decrease in pension expense will be
approximately $7 in 2011 and will increase ratably to a decrease of approximately $50 in 2016.
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, we test the value of deferred tax assets for impairment on a quarterly basis
at the entity level within each tax jurisdiction, consistent with our 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,
we have considered all available evidence as of December 31, 2010, 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 we determine it is
not more likely than not that we will be able to realize all or part of our 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. Our judgments and assumptions are subject to change given the inherent uncertainty in
predicting future performance and specific industry and investment market conditions.
The Company has recorded a deferred tax asset valuation allowance that is adequate to reduce the
total deferred tax asset to an amount that will more likely than not be realized. The deferred tax
asset valuation allowance was $173 as of December 31, 2010 and $86 as of December 31, 2009. The
increase in the valuation allowance during 2010 was triggered by the recognition of additional
realized losses on investment securities which were incurred in the first quarter. In assessing
the need for a valuation allowance, management considered future reversals of existing taxable
temporary differences, future taxable income exclusive of reversing temporary differences and
carryforwards, and taxable income in prior carryback years, as well as tax planning strategies that
include holding a portion of debt securities with market value losses until recovery, selling
appreciated securities to offset capital losses, business considerations, such as asset-liability
matching, and the sales of certain corporate assets, including a subsidiary. Such tax planning
strategies are viewed by management as prudent and feasible and will be implemented if necessary to
realize the deferred tax asset. Future economic conditions and debt market volatility, including
increases in interest rates, can adversely impact the Company’s tax planning strategies and in
particular the Company’s ability to utilize tax benefits 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 a financial holding company for a group of subsidiaries that provide property and
casualty and life insurance and investment products to both individual and business customers in
the United States and continues to administer business previously sold in Japan and the U.K.
The Company conducts business in three customer-oriented divisions, Commercial Markets, Consumer
Markets and Wealth Management, each containing reporting segments. The Commercial Markets division
consists of the reporting segments of Property & Casualty Commercial and Group Benefits. The
Consumer Markets division is also the reporting segment. The Wealth Management division consists
of the following reporting segments: Global Annuity, Life Insurance, Retirement Plans and Mutual
Funds. For additional discussion regarding The Hartford’s reporting segments, see Note 3 of the
Notes to Consolidated Financial Statements.
The Company derives its revenues principally from: (a) premiums earned for insurance coverages
provided to insureds; (b) 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; (c) net
investment income; (d) fees earned for services provided to third parties; and (e) 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. Asset management fees and mortality
and expense fees are primarily generated from separate account assets, which are deposited 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. Service fees principally include revenues from third party claims administration
services and revenues from member contact center services provided through the AARP Health program.
Profitability of Commercial and Consumer Markets operations over time is 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, the size of its in
force block, actual mortality and morbidity experience, 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. The Company 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, the Company is required to obtain
approval for its premium rates from state insurance departments.
The financial results in the Company’s variable annuity, mutual fund and, to a lesser extent,
variable universal life businesses, depend 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. The Company 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.
The profitability of fixed annuities and other “spread-based” products depends largely on the
Company’s ability to earn target spreads between earned investment rates on its general account
assets and interest credited to policyholders. 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.
The investment return, or yield, on 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 benefits, loss and loss adjustment expenses are paid. Due to
the need to maintain sufficient liquidity to satisfy claim obligations, the majority of the
Company’s invested assets have been held in available-for-sale securities, including, among other
asset classes, corporate bonds, municipal bonds, government debt, short-term debt, mortgage-backed
securities and asset-backed securities.
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.
For a discussion on how The Hartford establishes property and casualty insurance product reserves,
see “Property and Casualty Insurance Product Reserves, Net of Reinsurance” in the Critical
Accounting Estimates section of MD&A and for further information on DAC Unlocks, see “Estimated
Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with
Variable Annuity and Other Universal Life-Type Contracts” also in the Critical Accounting Estimates
section of MD&A.
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Definitions of Non-GAAP and other measures and ratios
Account Value
Account value includes policyholders’ balances for investment contracts and reserves for future
policy benefits for insurance contracts. Account value is a measure used by the Company because a
significant portion of the Company’s fee income is based upon the level of account value. These
revenues increase or decrease with a rise or fall in the amount of account value whether caused by
changes in the market or through net flows.
After-tax Margin
After-tax margin, 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, certain of the
segment’s 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 certain
of the Company’s on-going businesses because it reveals trends in those 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 realized gains (losses) and DAC Unlock, should include net realized
gains and losses on net periodic settlements on credit derivatives. 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. After Tax Margin is calculated by dividing the earnings
measures described above by Total Revenues adjusted for the measures described above. For
additional information regarding the DAC Unlock, see Critical Accounting Estimates within the MD&A.
Assets Under Administration
Assets under administration (“AUA”) represents the client asset base of the Company’s recordkeeping
business for which revenues are predominately based on the number of plan participants. Unlike
assets under management, increases or decreases in AUA do not have a direct corresponding increase
or decrease to the Company’s revenues, and therefore are not included in assets under management.
Assets Under Management
Assets under management (“AUM”) include account values and mutual fund assets. AUM is a measure
used by the Company because a significant portion of the Company’s revenues are based upon asset
values. These revenues increase or decrease with a rise or fall in the amount of account value
whether caused by changes in the market or through net flows.
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.
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.
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.
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.
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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, certain of the
segment’s 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 certain
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 and DAC Unlock, however 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. For additional
information regarding the DAC Unlock, see Critical Accounting Estimates within the MD&A.
Expense ratio
The expense ratio for the underwriting segments of Property & Casualty Commercial and Consumer
Markets 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.
The expense ratio for the remaining segments is expressed as a ratio of insurance operating costs
and expenses to a revenue measure, depending on the type of business. This calculation excludes
the amortization of deferred policy acquisition costs, which is calculated as a separate ratio, and
is discussed below.
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.
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, as well as the costs of mortality and morbidity and other contractholder benefits
to policyholders. 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. 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.
Loss ratio, excluding buyouts
The loss ratio is utilized for the Group Benefits segment and is expressed as a ratio of benefits,
losses and loss adjustment expenses to premiums and other considerations, excluding buyout
premiums. Buyout premiums represent takeover of open claim liabilities and other non-recurring
premium amounts.
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Mutual Fund Assets
Mutual fund assets include retail, investment-only and college savings plan assets under Section
529 of the Code, collectively referred to as non-proprietary, and proprietary mutual funds.
Non-proprietary mutual fund assets are owned by the shareholders of those funds and not by the
Company. Proprietary mutual funds include mutual funds sponsored by the Company which are owned by
the separate accounts of the Company to support insurance and investment products sold by the
Company. The non-proprietary mutual fund assets are not reflected in the Company’s consolidated
financial statements. Mutual fund assets are a measure used by the Company because a significant
portion of the Company’s revenues are based upon asset values. These revenues increase or decrease
with a rise or fall in the amount of account value whether caused by changes in the market or
through net flows.
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. Net
investment spread is calculated by dividing net investment earnings by average reserves using a
13-point average, less interest credited divided by average account value using a 13-point average.
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.
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 Consumer Markets and standard
commercial lines within Property & Casualty Commercial and is affected by both new business growth
and premium renewal retention.
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.
Policyholder dividend ratio
The policyholder dividend ratio is the ratio of policyholder dividends to earned premium.
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.
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.
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.
64
Table of Contents
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.
Return on Assets (“ROA”)
ROA, 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, certain of the segment’s
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 certain 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, this 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. ROA is calculated by dividing the
earnings measures described above by a two-point average AUM.
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. The underwriting segments of Property & Casualty Commercial and Consumer Markets are
evaluated by management primarily based upon underwriting results. A reconciliation of
underwriting results to net income for Property & Casualty Commercial and Consumer Markets is set
forth in their respective discussions herein.
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.
Traditional life 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.
65
Table of Contents
KEY PERFORMANCE MEASURES AND RATIOS
The Hartford considers several measures and ratios to be the key performance indicators for its
businesses. The following discussions include the more significant ratios and measures of
profitability for the years ended December 31, 2010, 2009 and 2008. Management believes that these
ratios and measures are useful in understanding the underlying trends in The Hartford’s businesses.
However, these key performance indicators should only be used in conjunction with, and not in lieu
of, the results presented in the segment discussions that follow in this MD&A. These ratios and
measures may not be comparable to other performance measures used by the Company’s competitors.
Combined ratio before catastrophes and prior year development
Combined ratio before catastrophes and prior accident year development is a key indicator of
overall profitability for the property and casualty underwriting segments of Property & Casualty
Commercial and Consumer Markets since it removes the impact of volatile and unpredictable
catastrophe losses and prior accident year reserve development.
| Property & Casualty Commercial | 2010 | 2009 | 2008 | |||||||||
|
Combined ratio
|
89.7 | 85.9 | 89.4 | |||||||||
|
Catastrophe ratio
|
2.7 | 0.9 | 4.0 | |||||||||
|
Non-catastrophe prior year development
|
(6.3 | ) | (6.3 | ) | (4.2 | ) | ||||||
|
|
||||||||||||
|
Combined ratio before catastrophes and prior year development
|
93.4 | 91.2 | 89.6 | |||||||||
|
|
||||||||||||
|
Consumer Markets
|
||||||||||||
|
Combined ratio
|
99.0 | 97.2 | 92.9 | |||||||||
|
Catastrophe ratio
|
7.8 | 5.9 | 6.7 | |||||||||
|
Non-catastrophe prior year development
|
(2.4 | ) | (1.0 | ) | (1.5 | ) | ||||||
|
|
||||||||||||
|
Combined ratio before catastrophes and prior year development
|
93.6 | 92.3 | 87.7 | |||||||||
|
|
||||||||||||
Year ended December 31, 2010 compared to the year ended December 31, 2009
| • |
Property & Casualty Commercial’s combined ratio before catastrophes and prior year
development increased primarily due to higher severity on package business and workers’
compensation, as well as an increased ratio for specialty casualty, and to a lesser extent an
increase in the expense ratio due to increased expenses for taxes, licenses and fees.
|
|
| • |
Consumer Markets combined ratio before catastrophes and prior year development increased
primarily due to an increase in the current accident year loss and loss adjustment expense
ratio before catastrophes for auto of 1.3 points due to higher auto physical damage emerged
frequency and higher expected auto liability loss costs relative to average premium. The
current accident year loss and loss adjustment expense ratio before catastrophes for home
increased 0.7 points primarily due to an increase in loss adjustment expenses, partially
offset by the effect of earned pricing increases.
|
Year ended December 31, 2009 compared to the year ended December 31, 2008
| • |
Property & Casualty Commercial’s combined ratio before catastrophes and prior year
development for the year increased, primarily due a decrease in earned premium and an increase
in the current accident year loss and loss adjustment expense ratio before catastrophes. The
increase in the current accident year loss and loss adjustment expense ratio before
catastrophes was primarily due to a higher loss and loss adjustment expense ratio on workers’
compensation, package business and general liability, partially offset by lower
non-catastrophe losses on property and marine business driven by favorable claim frequency and
severity.
|
|
| • |
Consumer Markets combined ratio before catastrophes and prior year development for the year
increased, primarily due to an increase in the current accident year loss and loss adjustment
expense ratio before catastrophes for both auto and home. The 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. The increase for home was driven by increasing severity and
frequency, offset by a decline in average premium.
|
66
Table of Contents
Return on Assets
Return on assets is a key indicator of overall profitability for the Global Annuity, Retirement
Plans and Mutual Funds reporting segments as a significant portion of their earnings is based on
average assets under management.
| Ratios | 2010 | 2009 | 2008 | |||||||||
|
Global Annuity [1]
|
||||||||||||
|
ROA
|
26.1 | bps | (75.0 | ) bps | (132.9 | ) bps | ||||||
|
Effect of net realized losses, net of tax and DAC on ROA
|
(19.0 | ) bps | (53.3 | ) bps | (106.3 | ) bps | ||||||
|
Effect of DAC Unlock on ROA
|
4.9 | bps | (47.0 | ) bps | (49.1 | ) bps | ||||||
|
|
||||||||||||
|
ROA, excluding realized losses and DAC Unlock
|
40.2 | bps | 25.3 | bps | 22.5 | bps | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Retirement Plans [1]
|
||||||||||||
|
ROA
|
9.7 | bps | (54.8 | ) bps | (47.9 | ) bps | ||||||
|
Effect of net realized losses, net of tax and DAC on ROA
|
(4.8 | ) bps | (46.4 | ) bps | (51.3 | ) bps | ||||||
|
Effect of DAC Unlock on ROA
|
5.4 | bps | (11.4 | ) bps | (14.6 | ) bps | ||||||
|
|
||||||||||||
|
ROA, excluding realized losses and DAC Unlock
|
9.1 | bps | 3.0 | bps | 18.0 | bps | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Mutual Funds [1]
|
||||||||||||
|
ROA
|
13.6 | bps | 8.8 | bps | 8.8 | bps | ||||||
|
Effect of net realized gains (losses), net of tax and DAC on ROA
|
4.3 | bps | — | bps | (0.2 | ) bps | ||||||
|
Effect of DAC Unlock on ROA
|
— | bps | — | bps | (0.3 | ) bps | ||||||
|
|
||||||||||||
|
ROA, excluding realized gains and DAC Unlock
|
9.3 | bps | 8.8 | bps | 9.3 | bps | ||||||
|
|
||||||||||||
| [1] |
Proprietary mutual funds, Investment-Only mutual funds, Canadian mutual funds, and 529
college savings plans effective January 1, 2010, are reported in the mutual fund business mix
in 2010. Prior to 2010, proprietary mutual fund assets were included in Global Annuity,
Retirement Plans, and Mutual Funds, as those same assets generate earnings for each of these
segments.
|
Year ended December 31, 2010 compared to year ended December 31, 2009
| • |
Global Annuity’s ROA, excluding realized losses and DAC Unlock, increased primarily due to
improved net investment income on limited partnerships and other alternative investments, a
lower DAC amortization rate, improved operating expenses associated with the restructuring of
the international annuity operations and the absence of 3 Win charges recognized in the first
quarter of 2009 of $40, after-tax.
|
|
| • |
Retirement Plans’ ROA, excluding realized losses and DAC Unlock, increased primarily due
to improved performance on limited partnerships and other alternative investments in 2010, and
was driven by improvement in the equity markets, which led to increased account values and
increased deposit activity.
|
|
| • |
Mutual Funds’ ROA, excluding realized gains, increase was primarily driven by improvement
in the equity markets, which enabled this business to partially return to scale, and the
impact of lower operating expenses, partially offset by the addition of proprietary mutual
fund assets to this line of business, which has a lower ROA level than the non-proprietary
business.
|
Year ended December 31, 2009 compared to year ended December 31, 2008
| • |
Global 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, partially offset by higher
DAC amortization and lower investment spread in 2009. In addition, Global Annuity’s ROA,
excluding realized losses and DAC Unlock, for the year ended December 31, 2009 improved due to
lower 3 Win related charges in 2009 versus 2008 of $40 and $152, after-tax, respectively.
|
|
| • |
Retirement Plans’ ROA, excluding realized losses and DAC Unlock, decreased primarily due to
lower returns on fixed maturities and a full year of activity from the business acquired in
2008, which had produced a lower ROA.
|
|
| • |
Mutual Funds’ ROA, excluding realized losses, decreased primarily due to lower account
values, despite improvements in the equity markets in 2009, account values did not return to
2008 levels.
|
67
Table of Contents
After-tax margin
After-tax margin is a key indicator of overall profitability for the Life Insurance and Group
Benefits reporting segments as a significant portion of their earnings are a result of the net
margin from losses incurred on earned premiums, fees and other considerations.
| 2010 | 2009 | 2008 | ||||||||||
|
Life Insurance
|
||||||||||||
|
After-tax margin
|
16.6 | % | 3.1 | % | (1.8 | %) | ||||||
|
Effect of net realized gains (losses), net of tax and DAC on after-tax margin
|
0.9 | % | (6.0 | %) | (13.0 | %) | ||||||
|
Effect of DAC Unlock on after-tax margin
|
1.4 | % | (4.3 | %) | (2.6 | %) | ||||||
|
|
||||||||||||
|
After-tax margin, excluding realized gains (losses) and DAC Unlock
|
14.3 | % | 13.4 | % | 13.8 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Group Benefits
|
||||||||||||
|
After-tax margin (excluding buyouts)
|
3.9 | % | 4.2 | % | (0.1 | %) | ||||||
|
Effect of net realized gains (losses), net of tax on after-tax margin
|
0.5 | % | (1.5 | %) | (7.3 | %) | ||||||
|
|
||||||||||||
|
After-tax margin (excluding buyouts), excluding realized gains (losses)
|
3.4 | % | 5.7 | % | 7.2 | % | ||||||
|
|
||||||||||||
Year ended December 31, 2010 compared to year ended December 31, 2009
| • |
Life Insurance’s after-tax margin, excluding realized gains (losses) and DAC Unlock,
increase was primarily due to lower DAC amortization, favorable operating expenses and
investment margin, partially offset by higher mortality.
|
|
| • |
Group Benefits’ after-tax margin (excluding buyouts), excluding realized gains (losses),
decrease was primarily due to a higher loss ratio from unfavorable morbidity driven by lower
claim terminations on disability business.
|
Year ended December 31, 2009 compared to year ended December 31, 2008
| • |
Life Insurance’s after-tax margin, excluding realized gains (losses) and DAC Unlock,
decrease was primarily due to a higher DAC amortization, partially offset by a lower effective
rate and lower operating expenses.
|
|
| • |
Group Benefits after-tax margin (excluding buyouts), excluding realized gains (losses),
decrease 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.
|
68
Table of Contents
Investment Results
Composition of Invested Assets
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
|
Fixed maturities, AFS, at fair value
|
$ | 77,820 | 79.2 | % | $ | 71,153 | 76.3 | % | ||||||||
|
Fixed maturities, at fair value using the fair value option
|
649 | 0.7 | % | — | — | |||||||||||
|
Equity securities, AFS, at fair value
|
973 | 1.0 | % | 1,221 | 1.3 | % | ||||||||||
|
Mortgage loans
|
4,489 | 4.6 | % | 5,938 | 6.4 | % | ||||||||||
|
Policy loans, at outstanding balance
|
2,181 | 2.2 | % | 2,174 | 2.3 | % | ||||||||||
|
Limited partnerships and other alternative investments
|
1,918 | 2.0 | % | 1,790 | 1.9 | % | ||||||||||
|
Other investments [1]
|
1,617 | 1.6 | % | 602 | 0.7 | % | ||||||||||
|
Short-term investments
|
8,528 | 8.7 | % | 10,357 | 11.1 | % | ||||||||||
|
|
||||||||||||||||
|
Total investments excluding equity securities, trading
|
98,175 | 100.0 | % | 93,235 | 100.0 | % | ||||||||||
|
Equity securities, trading, at fair value [2]
|
32,820 | 32,321 | ||||||||||||||
|
|
||||||||||||||||
|
Total investments
|
$ | 130,995 | $ | 125,556 | ||||||||||||
|
|
||||||||||||||||
| [1] |
Primarily relates to derivative instruments.
|
|
| [2] |
These assets primarily support the Global Annuity-International
variable annuity business. Changes in these balances are also
reflected in the respective liabilities.
|
Total investments increased since December 31, 2009 primarily due to increases in fixed maturities,
AFS, and other investments, partially offset by declines in short-term investments and mortgage
loans. The increase in fixed maturities, AFS, was largely the result of improved security
valuations as a result of a decline in interest rates and, to a lesser extent, credit spread
tightening, as well as the reallocation of short-term investment and mortgage loan proceeds. The
increase in other investments primarily related to increases in value related to derivatives. The
decline in mortgage loans was primarily related to sales of B-Note and mezzanine exposures.
Net Investment Income (Loss)
| For the years ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | |||||||||||||||||||
|
Fixed maturities [2]
|
$ | 3,490 | 4.3 | % | $ | 3,618 | 4.5 | % | $ | 4,310 | 5.2 | % | ||||||||||||
|
Equity securities, AFS
|
53 | 4.8 | % | 93 | 6.5 | % | 167 | 6.9 | % | |||||||||||||||
|
Mortgage loans
|
283 | 5.7 | % | 316 | 5.0 | % | 333 | 5.6 | % | |||||||||||||||
|
Policy loans
|
132 | 6.1 | % | 139 | 6.3 | % | 139 | 6.5 | % | |||||||||||||||
|
Limited partnerships and other alternative
investments
|
216 | 12.6 | % | (341 | ) | (15.6 | %) | (445 | ) | (16.3 | %) | |||||||||||||
|
Other [3]
|
333 | 318 | (72 | ) | ||||||||||||||||||||
|
Investment expense
|
(115 | ) | (112 | ) | (97 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total securities AFS and other
|
$ | 4,392 | 4.5 | % | $ | 4,031 | 4.1 | % | $ | 4,335 | 4.6 | % | ||||||||||||
|
Equity securities, trading
|
(774 | ) | 3,188 | (10,340 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total net investment income (loss), before-tax
|
$ | 3,618 | $ | 7,219 | $ | (6,005 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
| [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 securities lending collateral and
consolidated variable interest entity noncontrolling interests. Included in the fixed maturity yield is Other, which
primarily relates to derivatives (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.
|
Year ended December 31, 2010 compared to the year ended December 31, 2009
Total net investment income decreased largely due to equity securities, trading, resulting
primarily from declines in market performance of the underlying investment funds supporting the
Japanese variable annuity product. Total net investment income, excluding equity securities,
trading, increased primarily due to improved performance of limited partnerships and other
alternative investments primarily within real estate and private equity funds, partially offset by
lower income on fixed maturities resulting from a decline in average short-term interest rates and
lower reinvestment rates. The Company’s expectation, based on the current interest rate and credit
environment, is that upcoming maturities will be reinvested at a similar rate. Therefore, the
Company expects the 2011 portfolio yield, excluding limited partnership investments, to be
relatively consistent with the 2010 portfolio yield excluding limited partnerships.
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.
69
Table of Contents
Net Realized Capital Gains (Losses)
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Gross gains on sales
|
$ | 836 | $ | 1,056 | $ | 607 | ||||||
|
Gross losses on sales
|
(522 | ) | (1,397 | ) | (856 | ) | ||||||
|
Net OTTI losses recognized in earnings
|
(434 | ) | (1,508 | ) | (3,964 | ) | ||||||
|
Valuation allowances on mortgage loans
|
(157 | ) | (403 | ) | (26 | ) | ||||||
|
Japanese fixed annuity contract hedges, net [1]
|
27 | 47 | 64 | |||||||||
|
Periodic net coupon settlements on credit derivatives/Japan
|
(17 | ) | (49 | ) | (33 | ) | ||||||
|
Fair value measurement transition impact
|
— | — | (650 | ) | ||||||||
|
Results of variable annuity hedge program
|
||||||||||||
|
GMWB derivatives, net
|
111 | 1,526 | (713 | ) | ||||||||
|
Macro hedge program
|
(562 | ) | (895 | ) | 74 | |||||||
|
|
||||||||||||
|
Total results of variable annuity hedge program
|
(451 | ) | 631 | (639 | ) | |||||||
|
Other, net [2]
|
164 | (387 | ) | (421 | ) | |||||||
|
|
||||||||||||
|
Net realized capital losses, before-tax
|
$ | (554 | ) | $ | (2,010 | ) | $ | (5,918 | ) | |||
|
|
||||||||||||
| [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] |
Primarily consists of losses on Japan 3Win related foreign currency
swaps, changes in fair value on non-qualifying derivatives and fixed
maturities, FVO, and other investment gains and losses.
|
Details on 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, 2010 were predominantly from sales of investment grade corporate securities in order to take advantage of attractive market opportunities, as well as, sales of U.S. Treasuries related to tactical repositioning of the portfolio. | ||
|
|
||||
|
|
• | 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. | ||
|
|
||||
|
Net OTTI losses
|
• | For further information, see Other-Than-Temporary Impairments within the Investment Credit Risk section of the MD&A. | ||
|
|
||||
|
Valuation allowances on mortgage
loans |
• | For further information, see Valuation Allowances on Mortgage Loans within the Investment Credit Risk section of the MD&A. |
70
Table of Contents
|
Variable annuity hedge program
|
• | For the year ended December 31, 2010, the gain on GMWB derivatives, net, was primarily due to liability model assumption updates of $159 and lower implied market volatility of $118, and outperformance of the underlying actively managed funds as compared to their respective indices of $104, partially offset by losses due to a general decrease in long-term rates of $(158) and rising equity markets of $(90). The net loss on the macro hedge program was primarily the result of a higher equity market valuation and the impact of trading activity. | ||
|
|
||||
|
|
• | For the year ended December 31, 2009, the gain on GMWB derivatives, net, 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 loss on GMWB derivatives, net, was primarily due to losses of $904 related to market-base hedge ineffectiveness due to extremely volatile capital markets and $355 related to the relative outperformance 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. | ||
|
|
||||
|
Other, net
|
• | Other, net gains for the year ended December 31, 2010 was primarily due to gains of $217 on credit derivatives driven by credit spreads tightening, gains of $102 related to Japan variable annuity hedges due to the appreciation of the Japanese yen, gains of $62 related to the sale of Hartford Investments Canada Corporation mutual fund business and gains of $59 on interest rate derivatives used to manage portfolio duration driven by a decline in long-term interest rates, partially offset by losses of $(326) on transactional foreign currency re-valuation due to an increase in value of the Japanese yen versus the U.S. dollar associated with the internal reinsurance of the Japan variable annuity business, which is offset in AOCI. | ||
|
|
||||
|
|
• | 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 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 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. |
71
Table of Contents
PROPERTY & CASUALTY COMMERCIAL
| Underwriting Summary | 2010 | 2009 | 2008 | |||||||||
|
Written premiums
|
$ | 5,796 | $ | 5,715 | $ | 6,291 | ||||||
|
Change in unearned premium reserve
|
52 | (188 | ) | (104 | ) | |||||||
|
|
||||||||||||
|
Earned premiums
|
5,744 | 5,903 | 6,395 | |||||||||
|
Losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
3,579 | 3,582 | 3,835 | |||||||||
|
Current accident year catastrophes
|
152 | 78 | 285 | |||||||||
|
Prior accident years
|
(361 | ) | (394 | ) | (298 | ) | ||||||
|
|
||||||||||||
|
Total losses and loss adjustment expenses
|
3,370 | 3,266 | 3,822 | |||||||||
|
Amortization of deferred policy acquisition costs
|
1,353 | 1,393 | 1,461 | |||||||||
|
Insurance operating costs and expenses
|
431 | 409 | 434 | |||||||||
|
|
||||||||||||
|
Underwriting results
|
590 | 835 | 678 | |||||||||
|
|
||||||||||||
|
Net servicing income
|
— | 9 | 13 | |||||||||
|
Net investment income
|
939 | 759 | 803 | |||||||||
|
Net realized capital gains (losses)
|
5 | (213 | ) | (1,277 | ) | |||||||
|
Other expenses
|
(127 | ) | (132 | ) | (119 | ) | ||||||
|
|
||||||||||||
|
Income before income taxes
|
1,407 | 1,258 | 98 | |||||||||
|
Income tax expense (benefit)
|
412 | 359 | (35 | ) | ||||||||
|
|
||||||||||||
|
Net income
|
$ | 995 | $ | 899 | $ | 133 | ||||||
|
|
||||||||||||
|
|
||||||||||||
| Premium Measures | 2010 | 2009 | 2008 | |||||||||
|
New business premium
|
$ | 1,122 | $ | 1,101 | $ | 1,089 | ||||||
|
Standard commercial lines policy count retention
|
84 | % | 81 | % | 82 | % | ||||||
|
Standard commercial lines renewal written pricing increase (decrease)
|
1 | % | (1 | %) | (4 | %) | ||||||
|
Standard commercial lines renewal earned pricing increase (decrease)
|
— | (2 | %) | (3 | %) | |||||||
|
Standard commercial lines policies in-force as of end of period
|
1,211,047 | 1,159,759 | 1,138,483 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
| Ratios | 2010 | 2009 | 2008 | |||||||||
|
Loss and loss adjustment expense ratio
|
||||||||||||
|
Current accident year before catastrophes
|
62.3 | 60.7 | 60.0 | |||||||||
|
Current accident year catastrophes
|
2.7 | 1.3 | 4.5 | |||||||||
|
Prior accident years
|
(6.3 | ) | (6.7 | ) | (4.7 | ) | ||||||
|
|
||||||||||||
|
Total loss and loss adjustment expense ratio
|
58.7 | 55.3 | 59.8 | |||||||||
|
Expense ratio
|
31.0 | 30.4 | 28.9 | |||||||||
|
Policyholder dividend ratio
|
0.1 | 0.2 | 0.7 | |||||||||
|
|
||||||||||||
|
Combined ratio
|
89.7 | 85.9 | 89.4 | |||||||||
|
|
||||||||||||
|
Catastrophe ratio
|
||||||||||||
|
Current accident year
|
2.7 | 1.3 | 4.5 | |||||||||
|
Prior accident years
|
— | (0.4 | ) | (0.4 | ) | |||||||
|
|
||||||||||||
|
Total catastrophe ratio
|
2.7 | 0.9 | 4.0 | |||||||||
|
|
||||||||||||
|
Combined ratio before catastrophes
|
87.1 | 84.9 | 85.4 | |||||||||
|
Combined ratio before catastrophes and prior
accident year development
|
93.4 | 91.2 | 89.6 | |||||||||
|
|
||||||||||||
|
Other revenues [1]
|
$ | 308 | $ | 334 | $ | 363 | ||||||
|
|
||||||||||||
| [1] |
Represents servicing revenues.
|
72
Table of Contents
Year ended December 31, 2010 compared to the year ended December 31, 2009
Net income increased in 2010, as compared to the prior year, driven by improvements in net realized
capital gains (losses) and higher net investment income, despite a decrease in underwriting
results. The primary causes of the decrease in underwriting results were lower earned premiums and
higher current accident year catastrophe losses.
Earned premiums decreased across most product lines, with the exception of workers compensation and
specialty casualty. The effects of the economic downturn have contributed to the decrease in
earned premiums during 2010. Although earned premiums declined, several key measures have shown
improvement. New business written premium increased, driven by increases in specialty casualty and
package business, partially offset by decreases in general liability, professional liability and
marine. In addition, for standard commercial lines, policy count retention has increased in all
lines of business, due in part by an improvement in mid-term cancellations in 2010. Renewal earned
pricing was flat for standard commercial lines, as an increase in package business and property was
offset by a decrease in all other lines. The earned pricing changes were primarily a reflection of
written pricing changes over the last year. Renewal written pricing increased for standard
commercial lines driven by increases in property and workers compensation, partially offset by
decreases in all other lines. Lastly, the number of policies-in-force increased, primarily due to
the increase in policy count retention. 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.
Current accident year losses and loss adjustment expenses before catastrophes decreased slightly,
due to the decrease in earned premiums, which was mostly offset by an increase in the current
accident year loss and loss adjustment expense ratio before catastrophes. The ratio increased,
primarily due to higher severity on package business and workers’ compensation, as well as an
increased ratio for specialty casualty.
Current accident year catastrophe losses in 2010 were higher than in 2009 primarily due to more
severe windstorm events, particularly from hail in the West, Midwest, plains states and the
Southeast, and from winter storms in the Mid-Atlantic and Northeast. Losses in 2009 were primarily
incurred from ice storms, windstorms and tornadoes across many states.
Net favorable prior accident year reserve development, in both periods, included reserve releases
in the following: general liability, professional liability, workers’ compensation, auto liability
and uncollectible reinsurance. Reserve development in 2010 also included a release in package
business, while reserve development in 2009 also included strengthening in both package business
and fidelity and surety. For a discussion on prior accident year reserve development, see the
Property and Casualty Insurance Product Reserves, Net of Reinsurance section within Critical
Accounting Estimates.
Insurance operating costs and expenses increased in 2010, driven by an increase in taxes, licenses
and fees of $19, which included a $5 increase in reserve strengthening for other state funds and
taxes and a $7 reduction in TWIA assessments recognized in 2009 related to hurricane Ike. Also
contributing to the increase were higher IT costs. The increased expenses were partially offset by
a decrease of $5 in dividends payable primarily for workers’ compensation policyholders, and lower
compensation-related costs. Amortization of deferred policy acquisition costs decreased, largely
due to the decrease in earned premiums.
Net realized capital gains (losses) improved as compared to the prior year, as did net investment
income. The improvements in net realized capital gains (loss) were primarily driven by lower
impairments in 2010 compared to 2009 and realized gains on derivatives in 2010 compared to losses
in 2009. Net investment income increased in 2010, primarily as a result of improvements in limited
partnerships and other alternative investments, partially offset by lower returns on taxable fixed
maturities due to declining interest rates. For additional information, see the Investment Results
section within Key Performance Measures and Ratios.
The effective tax rate, in both periods, differs from the U.S. Federal statutory rate primarily due
to permanent differences related to investments in tax exempt securities. For further discussion,
see Income Taxes within Note 13 of the Notes to Consolidated Financial Statements.
73
Table of Contents
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net income increased significantly in 2009, compared to 2008, driven by an increase in underwriting
results coupled with improvements in net realized capital losses. Underwriting results increased
primarily due to lower losses and loss adjustment expenses for the current accident year before
catastrophes, lower current accident year catastrophe losses, and more favorable prior accident
year development, partially offset by decreases in earned premiums.
Earned premiums decreased in 2009, in nearly all lines of businesses. The decrease was 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. Property
earned premiums decreased, primarily due to the sale of the Company’s core excess and surplus lines
property business. For additional information on this sale, see Note 20 of the Notes to
Consolidated Financial Statements.
New business written premium increased, primarily driven by the increase in workers’ compensation
and package business, partially offset by a decrease in new business for professional liability,
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. For standard
commercial lines, earned pricing decreased, primarily driven by decreases in workers’ compensation,
commercial auto, general liability, property and marine, partially offset by an increase in package
business. 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 aggressively on price,
particularly on larger accounts. In addition to the effect of written pricing decreases in
workers’ compensation, average premium per policy has declined due to a reduction in the payrolls
of workers’ compensation insureds and the effect of declining endorsements.
Also, for standard commercial lines, policy count retention decreased slightly as the effects of
the downturn in the economy caused business closures and increased shopping of policies by
businesses seeking lower premiums. The number of policies in-force increased in 2009, as 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.
Current accident year losses and loss adjustment expenses before catastrophes decreased, primarily
due to a decrease in earned premium, partially offset by a slight increase in the current accident
year loss and loss adjustment expense ratio before catastrophes. The increase in the ratio was
primarily due to a higher loss and loss adjustment expense ratio on workers’ compensation, package
business 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 change.
Current accident year catastrophe losses decreased as losses in 2008 from hurricane Ike and
tornadoes and thunderstorms in the South and Midwest were higher than losses in 2009. Losses in
2009 were primarily incurred from ice storms, windstorms, and tornadoes across Colorado, the
Midwest and Southeast.
Net favorable prior accident year reserve development, in both periods, included reserve releases
in the following: workers’ compensation, general liability, including umbrella and high hazard
liability, professional liability and auto liability. Reserve development in 2009 also included
strengthening in both package business and fidelity and surety, and releases in uncollectible
reinsurance and catastrophes, while reserve development in 2008 also included strengthening in
general liability, including product liability and national accounts. For a discussion on prior
accident year reserve development, see the Property and Casualty Insurance Product Reserves, Net of
Reinsurance section within Critical Accounting Estimates.
Insurance operating costs and expenses decreased primarily due to a $37 decrease in the estimated
amount of dividends payable to certain workers’ compensation policyholders and a decrease in TWIA
assessments of $17, partially offset by increase in taxes, license and fees of $23 and higher
compensation-related costs. The increase in taxes, license and fees included, a $6 increase in the
assessment for a second injury fund and $9 reserve strengthening for other state funds and taxes.
Amortization of deferred policy acquisition costs decreased largely due to the decrease in earned
premiums.
Net realized capital gains (losses) improved significantly in 2009. The improvements were driven
primarily by lower impairments in 2009 compared to 2008. Net investment income decreased in 2009,
primarily due to lower income on fixed maturities resulting from a decline in average rates,
partially offset by decreased losses on limited partnerships and other alternative investments.
For additional information, see the Investment Results section within Key Performance Measures and
Ratios.
The effective tax rate, in both periods, differs from the U.S. Federal statutory rate. In 2009,
this is primarily due to permanent differences related to investments in tax exempt securities. In
2008, there was a net income tax benefit despite having pre-tax income due to an income tax benefit
on realized capital losses that was greater than the income tax expense on all other components of
pre-tax income. For further discussion, see Income Taxes within Note 13 of the Notes to
Consolidated Financial Statements.
74
Table of Contents
GROUP BENEFITS
| Operating Summary | 2010 | 2009 | 2008 | |||||||||
|
Premiums and other considerations
|
$ | 4,278 | $ | 4,350 | $ | 4,391 | ||||||
|
Net investment income
|
429 | 403 | 419 | |||||||||
|
Net realized capital gains (losses)
|
46 | (124 | ) | (540 | ) | |||||||
|
|
||||||||||||
|
Total revenues
|
4,753 | 4,629 | 4,270 | |||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
3,331 | 3,196 | 3,144 | |||||||||
|
Amortization of deferred policy acquisition costs
|
61 | 61 | 57 | |||||||||
|
Insurance operating costs and other expenses
|
1,111 | 1,120 | 1,128 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
4,503 | 4,377 | 4,329 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
250 | 252 | (59 | ) | ||||||||
|
Income tax expense (benefit)
|
65 | 59 | (53 | ) | ||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 185 | $ | 193 | $ | (6 | ) | |||||
|
|
||||||||||||
| Premiums and other considerations | 2010 | 2009 | 2008 | |||||||||
|
Fully insured — ongoing premiums
|
$ | 4,166 | $ | 4,309 | $ | 4,355 | ||||||
|
Buyout premiums
|
58 | — | 1 | |||||||||
|
Other
|
54 | 41 | 35 | |||||||||
|
|
||||||||||||
|
Total premiums and other considerations
|
$ | 4,278 | $ | 4,350 | $ | 4,391 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Fully insured ongoing sales, excluding buyouts
|
$ | 583 | $ | 741 | $ | 820 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Ratios, excluding buyouts
|
||||||||||||
|
Loss ratio
|
77.6 | % | 73.5 | % | 71.6 | % | ||||||
|
Loss ratio, excluding financial institutions
|
82.8 | % | 77.8 | % | 76.3 | % | ||||||
|
Expense ratio
|
27.8 | % | 27.1 | % | 27.0 | % | ||||||
|
Expense ratio, excluding financial institutions
|
23.3 | % | 22.6 | % | 22.4 | % | ||||||
Group Benefits has a block of financial institution business that is experience rated. This
business comprised approximately 9% to 10% of the segment’s 2010, 2009 and 2008 premiums and other
considerations (excluding buyouts). With respect to the segment’s net income (loss), excluding net
realized capital gains (losses), the financial institution business comprised 6% for 2010, and on
average, 2% to 4% for 2009 and 2008, excluding the commission accrual adjustment in 2009 discussed
below.
Year ended December 31, 2010 compared to the year ended December 31, 2009
Net income decreased as compared to prior year, as a decrease in premiums and other considerations
and higher claim costs offset the improvements in net realized capital gains (losses) and net
investment income. Premiums and other considerations decreased due to a 3% decline in fully
insured ongoing premiums which was driven by lower sales due to the competitive marketplace, and
the pace of the economic recovery. The loss ratio, excluding buyouts, increased compared to the
prior year, particularly in group disability, primarily due to unfavorable morbidity experience
from higher incidence and lower claim terminations.
The favorable change to net realized capital gains in 2010, from net realized capital losses in
2009, was due to impairments on investment securities recorded in 2009. For further discussion on
impairments, see Other-Than-Temporary Impairments within the Investment Credit Risk section of the
MD&A. Net investment income increased as a result of higher weighted average portfolio yields
primarily due to improved performance on limited partnerships and other alternative investments.
The effective tax rate, in both periods, differs from the U.S. Federal statutory rate primarily due
to permanent differences related to investments in tax exempt securities. For further discussion,
see Income Taxes within Note 13 of the Notes to Consolidated Financial Statements.
Year ended December 31, 2009 compared to the year ended December 31, 2008
The change to net income in 2009, from a net loss in 2008, was primarily due to lower net realized
capital losses in 2009, partially offset by higher claim costs, and decreases in premiums and other
considerations and net investment income.
The 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.
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. In addition, premiums and other considerations
decreased primarily due to reductions in covered lives within our customer base, and to a lesser
extent, lower sales. Fully insured ongoing sales, excluding buyouts, were lower as compared to the
prior year due to the competitive marketplace and the economic environment. Net investment income
decreased primarily as a result of lower yields on fixed maturity investments.
The effective tax rate, in both periods, differs from the U.S. Federal statutory rate primarily due
to permanent differences related to investments in tax exempt securities. For further discussion,
see Income Taxes within Note 13 of the Notes to Consolidated Financial Statements.
75
Table of Contents
CONSUMER MARKETS
| Operating Summary | 2010 | 2009 | 2008 | |||||||||
|
Written premiums
|
$ | 3,886 | $ | 3,995 | $ | 3,933 | ||||||
|
Change in unearned premium reserve
|
(61 | ) | 36 | (2 | ) | |||||||
|
|
||||||||||||
|
Earned premiums
|
3,947 | 3,959 | 3,935 | |||||||||
|
Losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
2,737 | 2,707 | 2,552 | |||||||||
|
Current accident year catastrophes
|
300 | 228 | 258 | |||||||||
|
Prior accident years
|
(86 | ) | (33 | ) | (52 | ) | ||||||
|
|
||||||||||||
|
Total losses and loss adjustment expenses
|
2,951 | 2,902 | 2,758 | |||||||||
|
Amortization of deferred policy acquisition costs
|
667 | 674 | 633 | |||||||||
|
Insurance operating costs and expenses
|
290 | 273 | 266 | |||||||||
|
|
||||||||||||
|
Underwriting results
|
39 | 110 | 278 | |||||||||
|
Net servicing income
|
35 | 29 | 26 | |||||||||
|
Net investment income
|
187 | 178 | 207 | |||||||||
|
Net realized capital gains (losses)
|
— | (52 | ) | (319 | ) | |||||||
|
Other expenses
|
(66 | ) | (77 | ) | (63 | ) | ||||||
|
|
||||||||||||
|
Income before income taxes
|
195 | 188 | 129 | |||||||||
|
Income tax expense
|
52 | 48 | 27 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 143 | $ | 140 | $ | 102 | ||||||
|
|
||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Written Premiums
|
||||||||||||
|
Product Line
|
||||||||||||
|
Automobile
|
$ | 2,745 | $ | 2,877 | $ | 2,837 | ||||||
|
Homeowners
|
1,141 | 1,118 | 1,096 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 3,886 | $ | 3,995 | $ | 3,933 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earned Premiums
|
||||||||||||
|
Product Line
|
||||||||||||
|
Automobile
|
$ | 2,806 | $ | 2,857 | $ | 2,833 | ||||||
|
Homeowners
|
1,141 | 1,102 | 1,102 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 3,947 | $ | 3,959 | $ | 3,935 | ||||||
|
|
||||||||||||
| Premium Measures | 2010 | 2009 | 2008 | |||||||||
|
Policies in force at year end
|
||||||||||||
|
Automobile
|
2,226,351 | 2,395,421 | 2,323,882 | |||||||||
|
Homeowners
|
1,426,107 | 1,488,408 | 1,455,954 | |||||||||
|
|
||||||||||||
|
Total policies in force at year end
|
3,652,458 | 3,883,829 | 3,779,836 | |||||||||
|
|
||||||||||||
|
New business premium
|
||||||||||||
|
Automobile
|
$ | 311 | $ | 455 | $ | 364 | ||||||
|
Homeowners
|
$ | 106 | $ | 149 | $ | 106 | ||||||
|
Policy count retention
|
||||||||||||
|
Automobile
|
83 | % | 86 | % | 86 | % | ||||||
|
Homeowners
|
85 | % | 86 | % | 87 | % | ||||||
|
Renewal written pricing increase
|
||||||||||||
|
Automobile
|
6 | % | 3 | % | 4 | % | ||||||
|
Homeowners
|
10 | % | 5 | % | 6 | % | ||||||
|
Renewal earned pricing increase
|
||||||||||||
|
Automobile
|
5 | % | 4 | % | 4 | % | ||||||
|
Homeowners
|
7 | % | 6 | % | 5 | % | ||||||
76
Table of Contents
| Ratios and Supplemental Data | 2010 | 2009 | 2008 | |||||||||
|
Loss and loss adjustment expense ratio
|
||||||||||||
|
Current accident year before catastrophes
|
69.4 | 68.4 | 64.8 | |||||||||
|
Current accident year catastrophes
|
7.6 | 5.8 | 6.5 | |||||||||
|
Prior accident years
|
(2.2 | ) | (0.8 | ) | (1.3 | ) | ||||||
|
|
||||||||||||
|
Total loss and loss adjustment expense ratio
|
74.8 | 73.3 | 70.1 | |||||||||
|
Expense ratio
|
24.2 | 23.9 | 22.8 | |||||||||
|
|
||||||||||||
|
Combined ratio
|
99.0 | 97.2 | 92.9 | |||||||||
|
|
||||||||||||
|
Catastrophe ratio
|
||||||||||||
|
Current accident year
|
7.6 | 5.8 | 6.5 | |||||||||
|
Prior accident years
|
0.3 | 0.1 | 0.2 | |||||||||
|
|
||||||||||||
|
Total catastrophe ratio
|
7.8 | 5.9 | 6.7 | |||||||||
|
|
||||||||||||
|
Combined ratio before catastrophes
|
91.2 | 91.3 | 86.2 | |||||||||
|
Combined ratio before catastrophes and prior accident year development
|
93.6 | 92.3 | 87.7 | |||||||||
|
|
||||||||||||
|
Other revenues [1]
|
$ | 172 | $ | 154 | $ | 135 | ||||||
|
|
||||||||||||
| [1] |
Represents servicing revenues.
|
| Product Combined Ratios | 2010 | 2009 | 2008 | |||||||||
|
Automobile
|
97.1 | 96.9 | 91.1 | |||||||||
|
Homeowners
|
104.0 | 98.2 | 97.6 | |||||||||
|
|
||||||||||||
|
Total
|
99.0 | 97.2 | 92.9 | |||||||||
|
|
||||||||||||
Year ended December 31, 2010 compared to the year ended December 31, 2009
Net income increased slightly in 2010, as compared to the prior year, despite a decrease in
underwriting results. The primary causes of the decrease in underwriting results were higher
current accident year losses and loss adjustment expenses, including catastrophes, partially offset
by more favorable prior accident year reserve development. The lower underwriting results were
offset by improvements in net realized capital gains (losses) and higher net investment income.
Earned premiums decreased in 2010, as lower earned premiums in auto were partially offset by an
increase in homeowners’. Auto earned premiums were down reflecting a decrease in new business
written premium and policy count retention since the fourth quarter of 2009 and a decrease in
average renewal earned premium per policy. Homeowners’ earned premiums grew primarily due to the
effect of increases in earned pricing, partially offset by a decrease in new business written
premium and policy count retention.
Auto and home new business written
premium decreased primarily due to the effect of written pricing
increases and underwriting actions that lowered the policy issue rate. Also contributing to the
decrease in new business were fewer responses from direct marketing on AARP business and fewer
quotes from independent agents driven by increased competition. Partially offsetting the decrease
in auto new business was the effect of an increase in policies sold to AARP members through agents.
Partially offsetting the decrease in home new business was an increase in the cross-sale of
homeowners’ insurance to insureds that have auto policies.
The change in auto renewal earned
pricing was due to rate increases and the effect of
policyholders purchasing newer vehicle models in place of older models. Despite auto renewal
earned pricing increasing, average renewal earned premium per policy for auto declined due to a
shift to more preferred market segments and a greater concentration of business in states and
territories with lower average premium. Homeowners’ renewal earned pricing increased 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.
Policy count retention for auto and home decreased primarily driven by the effect of renewal
written pricing increases and underwriting actions to improve profitability. The decrease in the
policy count retention for homeowners was partially offset by the effect of the Company’s
non-renewal of Florida homeowners’ agency business in 2009. Compared to 2009, the number of
policies in-force as of 2010 decreased for both auto and home, driven by the decreases in policy
retention and new business.
Current accident year losses and loss adjustment expenses before catastrophes increased primarily
due to an increase in the current accident year loss and loss adjustment expense ratio before
catastrophes for auto of 1.3 points due to higher auto physical damage emerged frequency and higher
expected auto liability loss costs relative to average premium. The current accident year loss and
loss adjustment expense ratio before catastrophes for home increased 0.7 points primarily due to an
increase in loss adjustment expenses, partially offset by the effect of earned pricing increases.
Current accident year catastrophes were higher in 2010 than in 2009 primarily due to a severe wind
and hail storm event in Arizona during the fourth quarter of 2010. Losses in 2010 were also
incurred from tornadoes, thunderstorms and hail events in the Midwest, plains states and the
Southeast, as well as from winter storms in the Mid-Atlantic and Northeast. Catastrophe losses in
2009 were primarily incurred from windstorms in Texas and the Midwest as well as the two large
Colorado hail and windstorm events.
Net favorable reserve development was higher in 2010 due to more favorable development of auto
liability reserves. Net favorable reserve development in both 2010 and 2009 included a release of
personal auto liability reserves, partially offset by a strengthening of reserves for
non-catastrophe homeowners’ claims. For additional information on prior accident year reserve
development, see the Property and Casualty Insurance Product Reserves, Net of Reinsurance section
within Critical Accounting Estimates.
77
Table of Contents
The expense ratio increased due largely to an $8 increase in legal settlement costs in 2010 and
higher amortization of acquisition costs on AARP business, partially offset by lower direct
marketing spend for consumer direct business. Also contributing to the increase in the expense
ratio was a $7 reduction of TWIA hurricane assessments in 2009 largely offset by an $8 increase in
reserves for other state funds and taxes in 2009.
Net realized capital gains (losses) improved, as compared to prior year. The improvements were
primarily driven by lower impairments in 2010 compared to 2009, and realized gains on derivatives
in 2010 compared to losses in 2009. Net investment income increased, primarily as a result of
increased income from limited partnerships and other alternative investments, partially offset by
lower returns on taxable fixed maturities due to declining interest rates. For additional
information, see the Investment Results section within Key Performance Measures and Ratios.
The effective tax rate, in both periods, differs from the U.S. Federal statutory rate primarily due
to permanent differences related to investments in tax exempt securities. For further discussion,
see Income Taxes within Note 13 of the Notes to Consolidated Financial Statements.
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net income increased as a result of lower net realized capital losses, partially offset by a
decrease in underwriting results and lower net investment income.
Earned premiums grew in 2009, as a result of an increase in auto, while homeowners remained flat.
The increase in auto earned premiums was primarily due to the effect of an increase in new
business, largely offset by a decrease in average renewal premium per policy. Homeowners’ earned
premiums were flat as the effect of an increase in new business was largely offset by a decrease in
policy count retention.
Auto and homeowners’ new business written premium increased in 2009 primarily due to increased
direct marketing spend, increased agency appointments, higher auto policy conversion rates and
cross-selling homeowners’ insurance to insureds that have auto policies. This increase in new
business helped drive an increase in the number of policies in-force in both auto and homeowners.
Policy count retention for auto remained flat in 2009, primarily due to stable renewal written
pricing increases and policy retention initiatives. Policy count retention for homeowners
decreased slightly in 2009, primarily due to the Company’s decision to stop renewing Florida
homeowners’ policies written through independent agents.
The increases in renewal earned pricing during 2009 were primarily a reflection of written pricing
in the second half of 2008 and first half of 2009. Renewal written pricing in 2009 increased in
auto due to rate increases and the effect of policyholders purchasing newer vehicle models in place
of older models. Homeowners’ renewal written pricing increased 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. 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, in
2009 insureds reduced their premiums by raising deductibles, reducing limits, dropping coverage and
reducing mileage.
Current accident year losses and loss adjustment expenses before catastrophes increased, primarily
due to an increase in the current accident year loss and loss adjustment expense ratio before
catastrophes, driven by a 3.3 point increase for auto and a 4.2 point increase for home. The
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 increase for home was driven by increasing frequency and severity
coupled with a decline in average premium.
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.
Net favorable reserve development was lower in 2009 than in 2008. Net favorable reserve
development in 2009 included a release of personal auto liability reserves, partially offset by a
strengthening of reserves for homeowners’ claims. Net favorable reserve development in 2008
included a release of personal auto liability reserves. For additional information on prior
accident year reserve development, see the Property and Casualty Insurance Product Reserves, Net of
Reinsurance section within Critical Accounting Estimates.
The expense ratio increased 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.
Also contributing to the increase in the expense ratio was an $8 increase in reserves for other
state funds and taxes in 2009. Amortization of acquisition costs increased due to an increase in
direct marketing costs.
Net realized capital gains (losses) improved significantly in 2009. The improvements were
primarily driven by lower impairments in 2009 compared to 2008. Net investment income decreased in
2009, primarily as a result of lower returns on taxable fixed maturities due to declining interest
rates. For additional information, see the Investment Results section within Key Performance
Measures and Ratios.
The effective tax rate, in both periods, differs from the U.S. Federal statutory rate. In 2009,
this is primarily due to permanent differences related to investments in tax exempt securities. In
2008, there was an income tax benefit on realized capital losses that partially offset the income
tax expense on all other components of pre-tax income. For further discussion, see Income Taxes
within Note 13 of the Notes to Consolidated Financial Statements.
78
Table of Contents
GLOBAL ANNUITY
| Operating Summary | 2010 | 2009 | 2008 | |||||||||
|
Fee income and other
|
$ | 2,376 | $ | 2,335 | $ | 2,856 | ||||||
|
Earned premiums
|
226 | 338 | 876 | |||||||||
|
Net investment income (loss):
|
||||||||||||
|
Securities available-for sale and other
|
1,691 | 1,706 | 1,935 | |||||||||
|
Equity securities, trading [1]
|
(774 | ) | 3,188 | (10,340 | ) | |||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
917 | 4,894 | (8,405 | ) | ||||||||
|
Net realized capital losses
|
(762 | ) | (706 | ) | (3,115 | ) | ||||||
|
|
||||||||||||
|
Total revenues
|
2,757 | 6,861 | (7,788 | ) | ||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
1,997 | 3,089 | 3,120 | |||||||||
|
Benefits, losses and loss adjustment expenses — returns credited on
international variable annuities [1]
|
(774 | ) | 3,188 | (10,340 | ) | |||||||
|
Amortization of DAC
|
253 | 1,716 | 1,762 | |||||||||
|
Insurance operating costs and other expenses
|
768 | 860 | 960 | |||||||||
|
Goodwill impairment
|
— | — | 422 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
2,244 | 8,853 | (4,076 | ) | ||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
513 | (1,992 | ) | (3,712 | ) | |||||||
|
Income tax expense (benefit)
|
109 | (826 | ) | (1,425 | ) | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 404 | $ | (1,166 | ) | $ | (2,287 | ) | ||||
|
|
||||||||||||
| Assets Under Management | 2010 | 2009 | 2008 | |||||||||
|
Variable annuity account values [2]
|
$ | 116,520 | $ | 119,387 | $ | 105,921 | ||||||
|
Fixed MVA annuity and other account values [3]
|
16,819 | 16,475 | 16,047 | |||||||||
|
Institutional investment products account values
|
19,674 | 22,373 | 24,081 | |||||||||
|
Investment-Only mutual funds assets [4]
|
— | 4,262 | 2,578 | |||||||||
|
|
||||||||||||
|
Total assets under management
|
$ | 153,013 | $ | 162,497 | $ | 148,627 | ||||||
|
|
||||||||||||
| Account Value Roll Forward | 2010 | 2009 | 2008 | |||||||||
|
Variable Annuities
|
||||||||||||
|
Account value, beginning of period
|
$ | 119,387 | $ | 105,921 | $ | 156,084 | ||||||
|
Net flows
|
(11,980 | ) | (7,506 | ) | (6,750 | ) | ||||||
|
Change in market value and other
|
6,432 | 19,943 | (49,447 | ) | ||||||||
|
Transfers [2]
|
(1,355 | ) | 1,188 | — | ||||||||
|
Effect of currency translation
|
4,036 | (159 | ) | 6,034 | ||||||||
|
|
||||||||||||
|
Account value, end of period
|
$ | 116,520 | $ | 119,387 | $ | 105,921 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Investment Spread
|
18 | bps | (7 | ) bps | 46 | bps | ||||||
|
|
||||||||||||
|
Expense Ratios
|
||||||||||||
|
General insurance expense ratio
|
22.4 | 29.7 | 32.5 | |||||||||
|
DAC amortization ratio
|
33.0 | % | (624.4 | %) | (90.3 | %) | ||||||
|
DAC amortization ratio, excluding realized losses and DAC Unlocks
|
48.3 | % | 66.0 | % | 73.6 | % | ||||||
| [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.
|
|
| [2] |
Canadian and Offshore businesses were transferred from Mutual Funds to Global Annuity, effective January 1, 2009. Canadian
mutual funds were transferred from Global Annuity to Mutual Funds effective January 1, 2010.
|
|
| [3] |
Fixed MVA annuity and other account values includes approximately $1.9 billion, $1.8 billion and $2.2 billion related to
the triggering of the guaranteed minimum income benefit for the 3 Win product as of December 31, 2010, 2009 and 2008,
respectively. This account value is not expected to generate material future profit or loss to the Company.
|
|
| [4] |
Investment-Only mutual fund assets were transferred to Mutual Funds effective January 1, 2010.
|
79
Table of Contents
Year ended December 31, 2010 compared to the year ended December 31, 2009
Global Annuity’s net income in 2010 compared to a net loss in 2009 is primarily due to significant
improvements in the equity markets, which resulted in an Unlock benefit in 2010 as compared to an
Unlock charge in 2009, as well as continued market value appreciation in account value resulting in
increased fee income, and due to continued expense reduction efforts in 2010. Additionally, 2009
includes a charge of $60, pre-tax, related to 3 Wins within benefits, losses and loss adjustment
expenses. Partially offsetting these improvements were higher net realized capital losses.
The Unlock benefit was $65, after-tax, in 2010 as compared to an Unlock charge of $924, after-tax,
in 2009. The benefit in 2010 was primarily due to equity market improvements that were greater
than expectations for the year ended December 31, 2010, while 2009’s charge was primarily the
result of equity market performance significantly below expectations for the first quarter of 2009.
The Unlock resulted in decreases to both benefits, losses and loss adjustment expenses and
amortization of DAC. For further discussion of the Unlock see the Critical Accounting Estimates
within the MD&A.
Insurance operating costs and other expenses have continued to decline as a result of lower
operating and wholesaling expenses driven by management’s active efforts to reduce operating
expenses and management’s efforts to match distribution costs with the Company’s current lower
sales levels. These efforts have also resulted in a decline in the general insurance expense
ratio, primarily associated with the U.S. annuity product and the restructuring and active expense
management of Japan’s operations, which have been partially offset by an increase in the average
asset base from continued improvements in equity markets.
The higher net realized capital losses in 2010 were primarily due to losses on the variable annuity
hedging program compared to gains in 2009, partially offset by lower impairment losses in 2010 and
net realized gains on sales of securities in 2010 compared to net realized losses in 2009. The
variable annuity hedging program losses were $451 in 2010 compared with gains of $631 in 2009. For
further discussion on the results of the variable annuity hedging program see Investment Results,
Net Realized Capital Gains (Losses) within Key Performance Measures and Ratios of the MD&A.
Management’s decision to suspend sales of structured settlements and terminal funding products
resulted in decreased earned premiums in 2010 as compared to 2009 with a corresponding decrease in
benefits, losses and loss adjustment expenses. In addition, benefits, losses and loss adjustment
expenses were lower for institutional investment products driven by the Company’s execution on its
call and buyback strategy associated with stable value products, which reduced the related
liabilities.
Net investment income on securities available-for-sale and other decreased slightly in 2010 as
compared to the comparable prior year primarily as a result of significant net outflow activity
since 2009 and declines on returns from fixed maturity securities driven by a lower interest rate
environment, partially offset by improving investments results on limited partnership and other
alternative investments.
Net investment spread improved in 2010 compared to 2009 primarily due to improved performance on
limited partnership and other alternative investments of 48 bps, partially offset by a decline in
yields on fixed maturity assets of 15 bps, along with lower earnings on other investing activities
of 6 bps. The decline in fixed maturity returns was primarily related to a lower interest rate
environment.
The DAC amortization ratio, excluding net realized capital losses and DAC Unlocks, improved due to
rising gross profits driven by equity market appreciation, and improved returns from limited
partnerships and other alternative investments.
Global Annuity’s effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD on U.S. annuity products, as well as varying tax
rates by country, and the valuation allowance on deferred tax benefits related to certain realized
losses on securities that back certain institutional investment products. Income taxes include
separate account DRD benefits of $108 in 2010 compared to $142 in 2009. For further discussion,
see Note 13 of the Notes to Consolidated Financial Statements.
80
Table of Contents
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net loss improved in 2009 as compared to 2008 primarily due to lower net realized capital losses,
goodwill impairment in 2008 and lower insurance operating and other expenses, partially offset by
decreases in fee income and other, earned premiums and net investment income on securities
available-for-sale and other, as well as a higher Unlock charge in 2009.
The net realized capital losses declined significantly in 2009 primarily due to gains of $631 on
the variable annuity hedging program compared to losses of $639 in 2008, realized losses recorded
in 2008 of $650 related to the fair value measurement transition impact, and lower impairment
losses in 2009 compared to 2008. For further discussion on these results see Investment Results,
Net Realized Capital Gains (Losses) within Key Performance Measures and Ratios of the MD&A.
Insurance operating costs and other expenses have decreased as compared to 2008 as a result of
lower asset based trail commissions due to equity market declines, as well as management’s active
efforts to reduce operating expenses including the restructuring of international operations.
These efforts have also resulted in a decline in the general insurance expense ratio.
Fee income and other decreased in 2009 primarily due to a decline in average account values of
variable annuities driven by significant declines in market value during 2008, continued net
outflows in 2009 and the decision in the second quarter of 2009 to suspend new sales in Japan and
European operations.
Earned premiums decreased as ratings downgrades reduced payout annuity sales, which was offset by a
corresponding decrease in benefits, losses, and loss adjustment expenses.
Net investment income declined primarily in institutional products due to lower income on fixed
maturities resulting from a decline in average interest rates on fixed maturity investments, as
well as increased average assets held in short-term investment pools used to fund the calls and
buyback strategy and increased partnership losses. The declines in the institutional products net
investment income were partially offset by a corresponding decrease in interest credited on
liabilities reported in benefits, losses, and loss adjustment expenses.
Net investment spread declined in 2009 compared to 2008 primarily due to the decrease in earnings
on fixed maturities, including the impact of interest rate hedges. Partnership earnings and other
investing activities also declined lowering total spread by 7 bps. The decline in fixed maturity
returns was primarily related to a higher percentage of fixed maturities being held in short-term
investments and an overall decline in interest rates. Partially offsetting these declines in
spread were decreases in crediting rates.
The DAC amortization ratio, excluding net realized capital losses and DAC Unlocks, improved due to
lower gross profits driven by decreases in equity market in 2008, and lower returns on limited
partnerships and other alternative investments.
Global Annuity’s effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD on U.S. annuity products, as well as varying tax
rates by country, and the valuation allowance on deferred tax benefits related to certain realized
losses on securities that back certain institutional investment products. Income taxes include
separate account DRD benefits of $142 in 2009 compared to $130 in 2008. For further discussion,
see Note 13 of the Notes to Consolidated Financial Statements.
81
Table of Contents
LIFE INSURANCE
| Operating Summary | 2010 | 2009 | 2008 | |||||||||
|
Fee income and other
|
$ | 1,125 | $ | 1,141 | $ | 1,017 | ||||||
|
Earned premiums
|
(96 | ) | (87 | ) | (71 | ) | ||||||
|
Net investment income
|
522 | 347 | 343 | |||||||||
|
Net realized capital gains (losses)
|
23 | (149 | ) | (257 | ) | |||||||
|
|
||||||||||||
|
Total revenues
|
1,574 | 1,252 | 1,032 | |||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
849 | 715 | 692 | |||||||||
|
Insurance operating costs and other expenses
|
223 | 208 | 228 | |||||||||
|
Amortization of DAC
|
121 | 317 | 171 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
1,193 | 1,240 | 1,091 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
381 | 12 | (59 | ) | ||||||||
|
Income tax expense (benefit)
|
119 | (27 | ) | (40 | ) | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 262 | $ | 39 | $ | (19 | ) | |||||
|
|
||||||||||||
| Account Values | 2010 | 2009 | 2008 | |||||||||
|
Individual variable universal life insurance
|
$ | 6,115 | $ | 5,766 | $ | 4,802 | ||||||
|
Universal life, interest sensitive whole life, modified guaranteed life insurance and other
|
6,128 | 5,693 | 5,380 | |||||||||
|
PPLI [1]
|
36,042 | 33,356 | 32,459 | |||||||||
|
|
||||||||||||
|
Total account values
|
$ | 48,285 | $ | 44,815 | $ | 42,641 | ||||||
|
|
||||||||||||
| Individual Life Insurance In-force | 2010 | 2009 | 2008 | |||||||||
|
Variable universal life insurance
|
$ | 74,044 | $ | 78,671 | $ | 78,853 | ||||||
|
Universal life, interest sensitive whole life, modified guaranteed life insurance
|
58,789 | 56,030 | 52,980 | |||||||||
|
Term life
|
75,797 | 69,968 | 63,631 | |||||||||
|
|
||||||||||||
|
Total life insurance in-force
|
$ | 208,630 | $ | 204,669 | $ | 195,464 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Investment Spread
|
||||||||||||
|
Individual variable universal and individual universal life insurance
|
145 | bps | 81 | bps | 90 | bps | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Death Benefits
|
$ | 461 | $ | 407 | $ | 416 | ||||||
|
|
||||||||||||
| [1] |
Includes $1.8 billion of leveraged COLI business transferred from Corporate and Other to Life
Insurance effective January 1, 2010.
|
82
Table of Contents
Year ended December 31, 2010 compared to the year ended December 31, 2009
Net income increased in 2010 compared to 2009 primarily due to net realized capital gains and
Unlock benefit in 2010. In addition, Life Insurance’s net income increased, excluding the
improvements to net realized gains and an Unlock benefit, due to improvements in the segment’s
individual life business.
Life Insurance’s net realized gains in 2010 compared to net realized capital losses in 2009 were
primarily due 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.
The Unlock benefit was $28, after-tax, in 2010 as compared to an Unlock charge of $51, after-tax,
in 2009. The benefit in 2010 was primarily due to assumption updates related to lapse rates,
investment margin and mortality, partially offset by persistency, while 2009’s charge was primarily
the result of assumption updates related to investment margin and expenses, as well as equity
market performance significantly below expectations in 2009, partially offset by assumption updates
on lapse rates. The Unlock primarily resulted in decreases to amortization of DAC and fee income
and other. For further discussion of the Unlock see the Critical Accounting Estimates within the
MD&A.
Life Insurance’s individual life business increased driven by improvements in net investment income
primarily related to improved performance of limited partnerships and other alternative investment
and earnings on a higher average invested asset base in 2010 compared to 2009, partially offset by
lower yields on fixed maturity investments. Net investment spread for individual life’s variable
universal life and universal life products increased primarily due to the improved performance of
limited partnerships and other alternative investments for the year ended December 31, 2010.
Life Insurance’s effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD, partially offset by a valuation allowance on
deferred tax benefits related to certain realized losses in 2010. Income taxes include separate
account DRD benefits of $19 in 2010 compared to $24 in 2009. For further discussion, see Note 13
of the Notes to Consolidated Financial Statements.
Year ended December 31, 2009 compared to the year ended December 31, 2008
Life Insurance’s net income in 2009 compared to a net loss in 2008 is primarily due increased fee
income and other and lower net realized capital losses, as well as the impact of the effective tax
rate, partially offset by the impact of the Unlock during the first quarter of 2009.
Fee income and other increased primarily due to the impact of the amortization of unearned revenue
reserves of $83 within the 2009 Unlock and increased cost of insurance charges of $38 for
individual life products, 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.
Life Insurance’s net realized losses decreased in 2009 compared to net realized losses in 2008
primarily due to lower impairments. For further discussion on impairments, see
Other-Than-Temporary Impairments within the Investment Credit Risk section of the MD&A.
The Unlock charge was $51, after-tax, in 2009 as compared to an Unlock charge of $44, after-tax, in
2008. The charges related to assumption updates and the impact from equity market performance that
was less than expectations was greater in 2009 than 2008. The Unlock primarily resulted in
increases to amortization of DAC and an increase in fee income and other as discussed above. For
further discussion of DAC Unlock see the Critical Accounting Estimates within the MD&A.
Life Insurance’s effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD. Income taxes include separate account DRD
benefits of $24 in 2009 compared to $14 in 2008. For further discussion, see Note 13 of the Notes
to Consolidated Financial Statements.
Net investment spread for individual variable universal life and universal life products was lower
due to a decline in investment income and an 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.
83
Table of Contents
RETIREMENT PLANS
| Operating Summary | 2010 | 2009 | 2008 | |||||||||
|
Fee income and other
|
$ | 352 | $ | 321 | $ | 334 | ||||||
|
Earned premiums
|
7 | 3 | 4 | |||||||||
|
Net investment income
|
364 | 315 | 342 | |||||||||
|
Net realized capital losses
|
(18 | ) | (333 | ) | (272 | ) | ||||||
|
|
||||||||||||
|
Total revenues
|
705 | 306 | 408 | |||||||||
|
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
278 | 269 | 271 | |||||||||
|
Insurance operating costs and other expenses
|
340 | 346 | 335 | |||||||||
|
Amortization of DAC
|
27 | 56 | 91 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
645 | 671 | 697 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
60 | (365 | ) | (289 | ) | |||||||
|
Income tax expense (benefit)
|
13 | (143 | ) | (132 | ) | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 47 | $ | (222 | ) | $ | (157 | ) | ||||
|
|
||||||||||||
| Assets Under Management | 2010 | 2009 | 2008 | |||||||||
|
401(k) account values
|
$ | 20,291 | $ | 16,142 | $ | 11,956 | ||||||
|
403(b)/457 account values
|
12,649 | 11,116 | 10,242 | |||||||||
|
401(k)/403(b) mutual funds
|
19,578 | 16,704 | 14,838 | |||||||||
|
|
||||||||||||
|
Total assets under management
|
$ | 52,518 | $ | 43,962 | $ | 37,036 | ||||||
|
|
||||||||||||
|
Total assets under administration — 401(k)
|
$ | 4,448 | $ | 5,588 | $ | 5,122 | ||||||
|
|
||||||||||||
| Assets Under Management Roll Forward | 2010 | 2009 | 2008 | |||||||||
|
Assets under management, beginning of period
|
$ | 43,962 | $ | 37,036 | $ | 28,548 | ||||||
|
Net flows
|
1,545 | (1,142 | ) | 1,972 | ||||||||
|
Acquisitions [1]
|
— | — | 18,725 | |||||||||
|
Transfers in and reclassifications [2]
|
1,488 | — | — | |||||||||
|
Change in market value and other
|
5,523 | 8,068 | (12,209 | ) | ||||||||
|
|
||||||||||||
|
Assets under management, end of period
|
$ | 52,518 | $ | 43,962 | $ | 37,036 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Investment Spread
|
110 | bps | 66 | bps | 92 | bps | ||||||
|
|
||||||||||||
| [1] |
In 2008, the Company acquired the rights to service mutual fund assets
from Sun Life Retirement Services, Inc., and Princeton Retirement
Group.
|
|
| [2] |
Lifetime Income and Maturity Funding business of $194 was transferred
from Global Annuity to Retirement Plans effective January 1, 2010.
Also in 2010, the Company identified specific plans that required
reclassification of $1.3 billion from AUA to AUM.
|
84
Table of Contents
Year ended December 31, 2010 compared to the year ended December 31, 2009
Retirement Plans’ net income in 2010 compared to a net loss in 2009 primarily due to significant
improvements in net realized capital losses, as well as higher net investment income and
improvements in the equity markets which resulted in a DAC Unlock benefit in 2010 as compared to a
DAC Unlock charge in 2009 and continued market value appreciation in AUM which resulted in
increased fee income and other.
Net realized capital losses were lower in 2010 compared to 2009 due to lower losses from
impairments, derivatives, and trading losses compared to 2009.
Net investment income increased in 2010 compared to 2009 primarily due to the improved performance
from limited partnerships and other alternative investments and higher average general account
invested assets compared to 2009. Correspondingly, the improvements in performance on limited
partnerships and other alternative investments drove an increase in the net investment spread of 39
bps, partially offset by lower returns on fixed maturity securities. Net investment spread also
improved due to lower crediting rates of 10 bps.
The DAC Unlock benefit was $18, after-tax, in 2010 as compared to a DAC Unlock charge of $56,
after-tax, in 2009. The benefit in 2010 was primarily due to assumption changes based on actual
experience and to a lesser extent from the market performance variance to expectations for the year
ended December 31, 2010, while 2009’s charge was primarily the result assumption changes based on
actual experience and equity market performance significantly below expectations. The DAC Unlock
primarily resulted in a decrease to amortization of DAC. For further discussion of DAC Unlock see
the Critical Accounting Estimates within the MD&A.
Fee income and other increased primarily due to increases in asset based fees on higher average
account values resulting from improvements in equity markets and increased net flows.
Retirement Plans’ effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD. Income taxes include separate account DRD
benefits of $18 in 2010 compared to $15 in 2009. For further discussion, see Note 13 of the Notes
to Consolidated Financial Statements.
Year ended December 31, 2009 compared to the year ended December 31, 2008
Retirement Plans’ net loss increased due to an increase in net realized capital losses, lower net
investment income, lower fee income and other and insurance operating costs and other expenses,
partially offset by lower amortization of DAC.
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.
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’s decline
is attributable to lower fixed maturity returns of 34 bps and lower returns on limited partnerships
and other alternative investments of 3 bps, partially offset by a reduction in credited rates of 10
bps.
Fee income and other decreased primarily due to lower asset based fees on lower average account
values. Despite equity market improvements during the last nine months of 2009, account values did
not return to early 2008 levels. Additionally, net flows declined due to a few large case
surrenders in 2009.
Insurance operating costs and other expenses increased primarily due to a full year of operating
expenses associated with the businesses acquired in 2008 and lower deferrable acquisition expenses
due to low sales levels, partially offset by expense management initiatives.
The DAC Unlock charge was $56, after-tax, in 2009 as compared to a DAC Unlock charge of $49,
after-tax, in 2008. The charges in both periods primarily related to assumption changes based on
actual experience and the variance in market performance compared to expectations. The DAC Unlock
primarily resulted in a decrease to amortization of DAC and an increase in net realized capital
losses. For further discussion of DAC Unlock see the Critical Accounting Estimates within the
MD&A. Additionally, amortization of DAC decreased as a result of lower gross profits in 2009 than
in 2008.
Retirement Plans’ effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD. Income taxes include separate account DRD
benefits of $15 in 2009 compared to $32 in 2008. For further discussion, see Note 13 of the Notes
to Consolidated Financial Statements.
85
Table of Contents
MUTUAL FUNDS
| Operating Summary | 2010 | 2009 | 2008 | |||||||||
|
Fee income and other
|
$ | 690 | $ | 518 | $ | 666 | ||||||
|
Net investment loss
|
(8 | ) | (21 | ) | (22 | ) | ||||||
|
Net realized capital gains (loss)
|
69 | — | (1 | ) | ||||||||
|
|
||||||||||||
|
Total revenues
|
751 | 497 | 643 | |||||||||
|
|
||||||||||||
|
Insurance operating costs and other expenses
|
480 | 395 | 491 | |||||||||
|
Amortization of DAC
|
62 | 50 | 96 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
542 | 445 | 587 | |||||||||
|
|
||||||||||||
|
Income before income taxes
|
209 | 52 | 56 | |||||||||
|
Income tax expense
|
77 | 18 | 19 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 132 | $ | 34 | $ | 37 | ||||||
|
|
||||||||||||
| Assets Under Management | 2010 | 2009 | 2008 | |||||||||
|
Retail mutual fund assets
|
$ | 48,753 | $ | 42,829 | $ | 31,032 | ||||||
|
Investment Only mutual fund assets [1]
|
6,659 | — | — | |||||||||
|
529 College Savings Plan and Canadian mutual fund assets [1]
|
1,472 | 1,202 | 1,678 | |||||||||
|
|
||||||||||||
|
Total non-proprietary and Canadian mutual fund assets
|
56,884 | 44,031 | 32,710 | |||||||||
|
Proprietary mutual fund assets [2]
|
43,602 | — | — | |||||||||
|
|
||||||||||||
|
Total mutual fund assets under management
|
$ | 100,486 | $ | 44,031 | $ | 32,710 | ||||||
|
|
||||||||||||
| Non-Proprietary and Canadian Mutual Fund AUM Roll Forward | 2010 | 2009 | 2008 | |||||||||
|
Non-Proprietary and Canadian Mutual Fund AUM, beginning of period
|
$ | 44,031 | $ | 32,710 | $ | 50,496 | ||||||
|
Transfers in (out) [1]
|
5,617 | (826 | ) | — | ||||||||
|
Net flows
|
2,750 | 2,115 | 3,171 | |||||||||
|
Change in market value and other [3]
|
4,486 | 10,032 | (20,957 | ) | ||||||||
|
|
||||||||||||
|
Non-Proprietary and Canadian Mutual Fund AUM, end of period
|
$ | 56,884 | $ | 44,031 | $ | 32,710 | ||||||
|
|
||||||||||||
| Proprietary Mutual Fund AUM Roll Forward | 2010 | 2009 | 2008 | |||||||||
|
Proprietary Mutual Fund AUM, beginning of period
|
$ | — | $ | — | $ | — | ||||||
|
Transfers in [2]
|
43,890 | — | — | |||||||||
|
Net flows
|
(5,334 | ) | — | — | ||||||||
|
Change in market value
|
5,046 | — | — | |||||||||
|
|
||||||||||||
|
Proprietary Mutual Fund AUM, end of period
|
$ | 43,602 | $ | — | $ | — | ||||||
|
|
||||||||||||
| [1] |
In 2009, Canadian mutual fund assets were transferred from Mutual Funds to Global Annuity effective January 1, 2009. In
2010, Investment Only and Canadian mutual fund assets were transferred to Mutual Funds from Global Annuity effective
January 1, 2010.
|
|
| [2] |
Proprietary mutual fund assets under management are included in the Mutual Fund reporting segment effective January 1, 2010.
|
|
| [3] |
Change in market value and other in 2010 includes the sale of Canadian mutual fund assets of approximately $1.8 billion.
|
Year ended December 31, 2010 compared to the year ended December 31, 2009
Net income increased in 2010 compared to 2009 primarily due to net realized gain on the sale of
Canadian mutual fund operations of $69, pre-tax, and higher overall account balances attributed to
the improved equity markets, and positive net flows on non-proprietary and Canadian mutual fund
assets, resulting in higher fee income, partially offset by higher trail commissions, as well as
capital infusions to the money market funds. Also contributing to the net income in 2010 is the
increase in scale of the reporting segment’s businesses.
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net income decreased in 2009 compared to 2008 primarily due to lower fee income and other driven by
lower average account values. Despite equity market improvements during the last nine months of
2009, account values did not return to early 2008 levels. Also contributing to the net income in
2009 is the decrease in scale of the reporting segment’s businesses.
86
Table of Contents
CORPORATE AND OTHER
| Operating Summary | 2010 | 2009 | 2008 | |||||||||
|
Earned premiums
|
$ | 3 | $ | (1 | ) | $ | 8 | |||||
|
Fee income [1]
|
187 | 220 | 227 | |||||||||
|
Net investment income
|
268 | 344 | 308 | |||||||||
|
Net realized capital gains (losses)
|
83 | (433 | ) | (137 | ) | |||||||
|
Other revenues
|
— | 4 | 6 | |||||||||
|
|
||||||||||||
|
Total revenues
|
541 | 134 | 412 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
249 | 394 | 281 | |||||||||
|
Insurance operating costs and other expenses [1]
|
382 | 365 | 220 | |||||||||
|
Interest expense
|
508 | 476 | 343 | |||||||||
|
Goodwill impairment
|
153 | 32 | 323 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
1,292 | 1,267 | 1,167 | |||||||||
|
Loss before income taxes
|
(751 | ) | (1,133 | ) | (755 | ) | ||||||
|
Income tax benefit
|
(263 | ) | (329 | ) | (203 | ) | ||||||
|
|
||||||||||||
|
Net loss
|
$ | (488 | ) | $ | (804 | ) | $ | (552 | ) | |||
|
|
||||||||||||
| [1] |
Fee income includes the income associated with the sales of non-proprietary insurance
products in the Company’s broker-dealer subsidiaries that has an offsetting commission expense
in insurance operating costs and other expenses.
|
Year ended December 31, 2010 compared to the year ended December 31, 2009
The net loss in Corporate and Other decreased primarily due to improvements in net realized capital
gains (losses), partially offset by an increase in interest expense and goodwill impairments.
The change to net realized capital gains, from net realized capital losses was due to impairments
on investment securities recorded in 2009. In addition, 2009 included a net realized capital loss
of approximately $300 as a result of a contingency payment made to Allianz due to the Company’s
participation in the Capital Purchase Program. See Note 21 of the Notes to Consolidated Financial
Statements for a further discussion on Allianz.
Interest expense increased primarily due to the issuance of $1.1 billion of senior notes in the
first quarter of 2010. For further information, see Senior Notes within Note 14 of the Notes to
Consolidated Financial Statements.
Goodwill impairments were recorded for Federal Trust Corporation goodwill in 2010 of $100,
after-tax, in 2010 compared to impairments for the Institutional reporting unit in 2009 of $32,
after-tax, see Note 8 of the Notes to Consolidated Financial Statements for additional information
regarding goodwill impairments.
The effective tax rate in 2009 differed from the U.S. Federal statutory rate due to nondeductible
costs associated with the contingency payment to Allianz and goodwill impairments.
Year ended December 31, 2009 compared to the year ended December 31, 2008
The net loss in Corporate and Other increased primarily due to higher net realized capital losses
and increases in interest expense and benefits, losses and loss adjustment expenses, partially
offset by a decrease in goodwill impairments.
The net realized capital loss increased primarily due to approximately $300 in net realized losses
a result of a contingency payment made to Allianz due to the Company’s participation in the Capital
Purchase Program. 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 increased primarily due to the issuance of $1.75 billion of 10.0% junior
subordinated debentures on October 17, 2008 partially offset by a reduction from debt repayments of
$955 in 2008.
Benefits, losses and loss adjustment expenses increased as the unfavorable prior year loss
development in 2009 was higher than 2008. The 2009 reserve development included asbestos and
environmental reserve strengthening of $138 and $75, respectively, while the 2008 reserve
development included asbestos and environmental reserve strengthening of $50 and $53, respectively.
Goodwill impairments were recorded for the Institutional reporting unit in 2009 of $32, after-tax,
compared to impairments for the Individual Annuity and International reporting units in 2008 of
$323, after-tax, see Note 8 of the Notes to Consolidated Financial Statements for additional
information regarding goodwill impairments.
The effective tax rate differs from the U.S. Federal statutory rate due to nondeductible costs
associated with the contingency payment to Allianz in 2009, and with goodwill impairments in both
2009 and 2008. Also 2008 included tax exemption for the realized gains on the change in fair value
of the liability related to warrants issued to Allianz.
87
Table of Contents
INSURANCE RISK MANAGEMENT
The Hartford has a robust set of enterprise risk management processes and controls around the
management of insurance risks that are integrated into such core activities as underwriting,
pricing, reinsurance, claims management, and capital management. In addition, to manage
aggregations of insurance risk across the portfolio, The Hartford has policies and processes to
manage risk related to natural catastrophes, such as hurricanes and earthquakes and pandemics, as
well as man-made disasters 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 risk exposures
as a percent of statutory surplus.
Natural Catastrophes
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 and 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 and
casualty operations. 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 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.
While Enterprise Risk Management has a process to track and manage these limits, from time to time,
the estimated loss to natural catastrophes from a single 250-year event prior to reinsurance may
fluctuate above or below these limits 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
and casualty insurance subsidiaries and the Company’s estimated pre-tax loss net of reinsurance is
less than 15% of statutory surplus of the property and casualty operations. The estimated 250 year
pre-tax probable maximum losses from hurricane events are estimated to be $1.5 billion and $582
before and after reinsurance, respectively. The estimated 250 year pre-tax probable maximum loss
from earthquake events are estimated to be $666 before reinsurance and $434 net of reinsurance.
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 provided above assume that the Company is 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 and the loss estimates provided by other
Companies. The company also manages natural catastrophe risk for group life, group disability, and
individual life insurance, which in combination with property and workers compensation loss
estimates, are subject to separate enterprise risk management net aggregate loss limits as a
percent of enterprise surplus.
Terrorism
The Company is exposed to losses from terrorist attacks, including losses caused by single-site and
multi-site conventional attacks, as well as the potential for attacks using nuclear, biological,
chemical or radiological weapons (“NBCR”) attacks. For terrorism, the Company monitors
aggregations of exposure around key landmarks primarily in major metropolitan areas that span the
Company’s insurance portfolio. Enterprise limits for terrorism apply to aggregations of risk
across property-casualty, group benefits, life insurance and specific asset portfolios and are
defined based on a deterministic, single-site conventional terrorism attack scenario. The Company
manages its potential estimated loss from this terrorism loss scenario to less than $1.3 billion.
Among the landmark locations specifically monitored by the Company as of December 31, 2010, 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. The risk of terrorism presents unique
challenges to any insurance company given the fact that the frequency and severity of terrorist
attacks are highly uncertain and potentially unknowable. As such, modeled terrorism losses could
differ materially from scenarios employed to manage the Company’s overall terrorism risk loss
exposure.
88
Table of Contents
Pandemic
Pandemic risk is the exposure to loss in the Company’s market value, earnings or surplus arising
from widespread influenza or other pathogens or bacterial infections that create an aggregation of
loss across the Company’s insurance or asset portfolios. Consistent with industry practice, The
Hartford assesses exposure to pandemics by analyzing the potential impact from a variety of
pandemic scenarios based on conditions consistent with earlier outbreaks of flu-like viruses,
including the “Severe” 1918 Spanish Flu, the Asian flu in 1957, the Hong Kong flu in 1968, and the
2009 outbreak of swine flu. In evaluating these scenarios, The Hartford assesses the impact on
group and individual life policies, short-term and long-term disability, annuities, COLI, property
& casualty claims, and losses in the investment portfolio associated market declines in the event
of a widespread pandemic. Given the evolving science around the risk of pandemics, the Company has
not adopted formal limits for pandemic but continues to manage the risk of pandemic exposures
within acceptable management tolerances.
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 reinsurance processes are aligned under a single enterprise reinsurance
governance policy with treaty purchases administered by a centralized function within Commercial
and Consumer Markets and Wealth Management to support a consistent strategy and to 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 18, 2011:
| % of layer(s) | ||||||||||||||||
| Coverage | Treaty term | reinsured | Per occurrence limit | Retention | ||||||||||||
|
Principal property
catastrophe program
covering property
catastrophe losses
from a single event
|
1/1/2011 to 1/1/2012 | 90 | % | $ | 750 | $ | 350 | |||||||||
|
Reinsurance with
the FHCF covering
Florida Personal
Lines property
catastrophe losses
from a single event
|
6/1/2010 to 6/1/2011 | 90 | % | 175[ | 1] | 64 | ||||||||||
|
Workers
compensation losses
arising from a
single catastrophe
event [2]
|
7/1/2010 to 7/1/2011 | 95 | % | 300 | 50 | |||||||||||
| [1] |
The per occurrence limit on the FHCF treaty is $175 for the 6/1/2010
to 6/1/2011 treaty year based on the Company’s election to purchase
the required coverage from FHCF. For 2010/11, the Company elected not
to purchase additional limits under the Temporary Increase in Coverage
Limit (TICL) statutory provision.
|
|
| [2] |
In addition, the Company also purchased an industrial accident only WC
coverage for the 7/1/2010 to 7/1/2011 treaty year providing
reinsurance of 80% of $30 of per occurrence limit in excess of
$20.
|
In addition to the property catastrophe reinsurance coverage described in the above table, the
Company has other catastrophe and working layer 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 III for losses sustained from qualifying hurricane loss events. Under
the terms of the treaties, the Company is reimbursed for losses from hurricanes using customized
industry index contracts 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.
89
Table of Contents
The following table summarizes the terms of the reinsurance treaties with Foundation Re III that
were in place as of February 21, 2011:
| Bond amount issued | ||||||||||||
| Covered perils | Treaty term | Covered losses | by Foundation Re III | |||||||||
|
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 losses to The Hartford | $ | 180 | ||||||||
|
Hurricane loss events affecting the Gulf and Eastern Coast of the United States
|
2/18/2011 to 2/18/2015 | 67.5% of $200 in losses in excess of an index loss trigger equating to approximately $1.4 billion in losses to The Hartford | 135 | |||||||||
As of February 21, 2011, there have been no events that are expected to trigger a recovery under
the Foundation Re III reinsurance program and, accordingly, the Company has not recorded any
recoveries from the associated reinsurance treaty.
For the risk of terrorism, private sector catastrophe reinsurance capacity is generally limited and
largely 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 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. The January 2011
PWG report notes some improvements in capacity and modeling, but also noted that take-up rates for
terrorism coverage remained relatively flat over the past three years and that insurers remain
uncertain about the ability of models to predict the frequency and severity of terrorist attacks.
With respect to 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.
Reinsurance Recoverables
Reinsurance 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 a regular enterprise security review committee. Through this process,
the Company maintains a centralized list of reinsurers approved for participation on all treaty and
facultative reinsurance placements. Only reinsurance companies approved through this process are
eligible to participate on new reinsurance cessions. The Company’s approval designations reflect
the differing credit exposure associated with various classes of business. Participation
authorizations are categorized based upon the nature of the reinsurance risk and the expected
liability payout duration. In addition to defining participation eligibility, the Company regularly
monitors each active reinsurer’s credit risk exposure in the aggregate relative to expected and
stressed levels of exposure and has established limits tiered by credit rating.
Property and Casualty Insurance Product Reinsurance Recoverable
Property and casualty insurance product reinsurance recoverables represent loss and loss adjustment
expense recoverable from a number of entities, including reinsurers and pools. The following table
shows the components of the gross and net reinsurance recoverable as of December 31, 2010 and 2009:
| Reinsurance Recoverable | December 31, 2010 | December 31, 2009 | ||||||
|
Paid loss and loss adjustment expenses
|
$ | 198 | $ | 208 | ||||
|
Unpaid loss and loss adjustment expenses
|
2,963 | 3,321 | ||||||
|
|
||||||||
|
Gross reinsurance recoverable
|
3,161 | 3,529 | ||||||
|
Less: allowance for uncollectible reinsurance
|
(290 | ) | (335 | ) | ||||
|
|
||||||||
|
Net reinsurance recoverable
|
$ | 2,871 | $ | 3,194 | ||||
|
|
||||||||
90
Table of Contents
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, 2010 and 2009, the
following table shows the portion of recoverables due from companies rated by A.M. Best.
| Distribution of gross reinsurance recoverable | December 31, 2010 | December 31, 2009 | ||||||||||||||
|
Gross reinsurance recoverable
|
$ | 3,161 | $ | 3,529 | ||||||||||||
|
Less: mandatory (assigned risk) pools and
structured settlements
|
(614 | ) | (642 | ) | ||||||||||||
|
|
||||||||||||||||
|
Gross reinsurance recoverable excluding
mandatory pools and structured settlements
|
$ | 2,547 | $ | 2,887 | ||||||||||||
|
|
||||||||||||||||
|
|
% of Total | % of Total | ||||||||||||||
|
Rated A- (Excellent) or better by A.M. Best [1]
|
$ | 1,869 | 73.3 | % | $ | 2,091 | 72.4 | % | ||||||||
|
Other rated by A.M. Best
|
43 | 1.7 | % | 48 | 1.7 | % | ||||||||||
|
|
||||||||||||||||
|
Total rated companies
|
1,912 | 75.0 | % | 2,139 | 74.1 | % | ||||||||||
|
Voluntary pools
|
107 | 4.2 | % | 152 | 5.3 | % | ||||||||||
|
Captives
|
226 | 8.9 | % | 209 | 7.2 | % | ||||||||||
|
Other not rated companies
|
302 | 11.9 | % | 387 | 13.4 | % | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 2,547 | 100 | % | $ | 2,887 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| [1] |
Based on A.M. Best ratings as of December 31, 2010 and 2009, respectively.
|
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, 2010. 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 evaluations of the reinsurance recoverable asset associated with
older, long-term casualty liabilities reported in the Other Operations operating segment, and the
allowance for uncollectible reinsurance reported in the Property & Casualty Commercial reporting
segment. For a discussion regarding the results of these evaluations, see Property and Casualty
Insurance Product Reserves, Net of Reinsurance within the Critical Accounting Estimates section of
the MD&A.
Guaranty Funds and Other Insurance 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. The amount and timing of assessments related to past
insolvencies is unpredictable.
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.
91
Table of Contents
INVESTMENT CREDIT RISK MANAGEMENT
Investment credit risk is viewed by the Company as the set of credit risks that can impair the value of the investment
portfolio. This includes default risk, credit transition risk, systemic credit risk, idiosyncratic risk, and counterparty
risk. Default risk is the risk of loss of principal and/or interest income stemming from a debt issuer’s failure to meet
their contractual obligations. Credit transition risk is the risk that an investment declines in creditworthiness after
purchase. Typically, the decline in creditworthiness is associated with an increase in credit spreads associated with
the investment, potentially resulting in increases in other-than –temporary impairments and the increased probability
of a realized loss. Counterparty credit risk is the risk that the financial institution, clearing exchange, or other
party with whom the Company has entered into a financial contract will default on the obligation and fail to meet their
contractual obligations. This is a significant risk in over-the-counter derivatives trading, and futures trading.
The Company has established an enterprise credit policy that views credit risk across the enterprise both at the single
obligor level and at the portfolio level across multiple lenses. The portfolio view includes measures of the exposure to
loss of statutory surplus, and the exposure to changes in economy. The single obligor measures are also aggregated across
the enterprise, and include exposures generated from the investment portfolio, the insurance and reinsurance businesses,
and any collateral short-falls. Limits are set prudentially, and size of limit is impacted by an institution’s probability to default.
Counterparty credit risk is mitigated both through the practice of entering into contracts only with highly creditworthy
institutions, but also through the practice of holding and posting of collateral, and including collateral short-falls in
the exposure calculations. Systemic credit risk is mitigated through the construction of a high-quality, diverse portfolio
of investments that are subject to regular underwriting of the risks. Additional limits on investment activity, including
setting of policy and defining acceptable risk levels, is subject to regular review and approval by Enterprise Risk
Management and 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
generally requires that derivative contracts, other than exchange traded contracts, certain 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 across 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, 2010, the
maximum combined threshold for all counterparties under a single credit support provider across 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 either party’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, 2010, 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 as defined in
the contract and such payment will be typically 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.
The Company uses credit derivatives to purchase credit protection and 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 also
enters 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 customized diversified portfolios of corporate issuers, which are
established within sector concentration limits and may be divided into tranches which possess
different credit ratings.
92
Table of Contents
As of December 31, 2010 and 2009, the notional amount related to credit derivatives that purchase
credit protection was $2.6 billion, while the fair value was $(9) and $(50), respectively. As of
December 31, 2010 and 2009, the notional amount related to credit derivatives that assume credit
risk was $2.6 and $1.2 billion, respectively, while the fair value was $(434) and $(240),
respectively. For further information on credit derivatives, see the Capital Markets Risk
Management section of the MD&A and Note 5 of the Notes to Consolidated Financial Statements.
Investments
The following table presents the Company’s fixed maturities, AFS, 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, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Percent of | Percent of | |||||||||||||||||||||||
| Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
| Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
|
United States Government/Government agencies
|
$ | 9,961 | $ | 9,918 | 12.7 | % | $ | 7,299 | $ | 7,172 | 10.1 | % | ||||||||||||
|
AAA
|
10,080 | 10,174 | 13.1 | % | 11,974 | 11,188 | 15.7 | % | ||||||||||||||||
|
AA
|
15,933 | 15,554 | 20.0 | % | 14,845 | 13,932 | 19.6 | % | ||||||||||||||||
|
A
|
19,265 | 19,460 | 25.0 | % | 19,822 | 18,664 | 26.2 | % | ||||||||||||||||
|
BBB
|
18,849 | 19,153 | 24.6 | % | 17,886 | 17,071 | 24.0 | % | ||||||||||||||||
|
BB & below
|
4,331 | 3,561 | 4.6 | % | 4,189 | 3,126 | 4.4 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total fixed maturities
|
$ | 78,419 | 77,820 | 100.0 | % | $ | 76,015 | 71,153 | 100.0 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
The movement in the overall credit quality of the Company’s portfolio was primarily attributable to
purchases of U.S. Treasuries and investment grade corporate securities. This was partially offset
by rating agency downgrades primarily associated with commercial real estate (“CRE”) collateralized
debt obligations (“CDOs”), commercial mortgage-backed securities (“CMBS”) and securities in the
financial services sector. Fixed maturities, FVO, are not included in the above table as of
December 31, 2010. For further discussion on the election of fair value option, see Note 4 of the
Notes to Consolidated Financial Statements.
93
Table of Contents
The following table presents the Company’s AFS securities by type, as well as fixed maturities,
FVO.
Securities by Type
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||||||||||
| 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
|
$ | 2,496 | $ | 23 | $ | (221 | ) | $ | 2,298 | 2.9 | % | $ | 2,087 | $ | 15 | $ | (277 | ) | $ | 1,825 | 2.6 | % | ||||||||||||||||||
|
Small business
|
453 | — | (141 | ) | 312 | 0.4 | % | 548 | 1 | (232 | ) | 317 | 0.4 | % | ||||||||||||||||||||||||||
|
Other
|
298 | 15 | (34 | ) | 279 | 0.4 | % | 405 | 20 | (44 | ) | 381 | 0.5 | % | ||||||||||||||||||||||||||
|
CDOs
|
||||||||||||||||||||||||||||||||||||||||
|
Collateralized loan
obligations (“CLOs”)
|
2,429 | 1 | (212 | ) | 2,218 | 2.9 | % | 2,727 | — | (288 | ) | 2,439 | 3.5 | % | ||||||||||||||||||||||||||
|
CREs
|
653 | — | (266 | ) | 387 | 0.5 | % | 1,319 | 21 | (901 | ) | 439 | 0.6 | % | ||||||||||||||||||||||||||
|
Other
|
6 | — | — | 6 | — | 8 | 6 | — | 14 | — | ||||||||||||||||||||||||||||||
|
CMBS
|
||||||||||||||||||||||||||||||||||||||||
|
Agency backed [1]
|
519 | 9 | (4 | ) | 524 | 0.7 | % | 62 | 3 | — | 65 | 0.1 | % | |||||||||||||||||||||||||||
|
Bonds
|
6,985 | 147 | (583 | ) | 6,549 | 8.4 | % | 9,600 | 52 | (2,241 | ) | 7,411 | 10.4 | % | ||||||||||||||||||||||||||
|
Interest only (“IOs”)
|
793 | 79 | (28 | ) | 844 | 1.1 | % | 1,074 | 59 | (65 | ) | 1,068 | 1.5 | % | ||||||||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||||||||||||||||||||||
|
Basic industry
|
2,993 | 190 | (24 | ) | 3,159 | 4.1 | % | 2,642 | 112 | (56 | ) | 2,698 | 3.8 | % | ||||||||||||||||||||||||||
|
Capital goods
|
3,179 | 223 | (23 | ) | 3,379 | 4.3 | % | 3,085 | 140 | (51 | ) | 3,174 | 4.5 | % | ||||||||||||||||||||||||||
|
Consumer cyclical
|
1,883 | 115 | (12 | ) | 1,986 | 2.6 | % | 1,946 | 75 | (45 | ) | 1,976 | 2.8 | % | ||||||||||||||||||||||||||
|
Consumer non-cyclical
|
6,126 | 444 | (29 | ) | 6,541 | 8.4 | % | 4,737 | 281 | (22 | ) | 4,996 | 7.0 | % | ||||||||||||||||||||||||||
|
Energy
|
3,377 | 212 | (23 | ) | 3,566 | 4.6 | % | 3,070 | 163 | (18 | ) | 3,215 | 4.5 | % | ||||||||||||||||||||||||||
|
Financial services
|
7,545 | 253 | (470 | ) | 7,328 | 9.4 | % | 8,059 | 118 | (917 | ) | 7,260 | 10.1 | % | ||||||||||||||||||||||||||
|
Tech./comm.
|
4,268 | 269 | (68 | ) | 4,469 | 5.7 | % | 3,984 | 205 | (75 | ) | 4,114 | 5.8 | % | ||||||||||||||||||||||||||
|
Transportation
|
1,141 | 69 | (13 | ) | 1,197 | 1.5 | % | 698 | 22 | (23 | ) | 697 | 1.0 | % | ||||||||||||||||||||||||||
|
Utilities
|
7,099 | 386 | (58 | ) | 7,427 | 9.5 | % | 5,755 | 230 | (85 | ) | 5,900 | 8.3 | % | ||||||||||||||||||||||||||
|
Other [2]
|
885 | 13 | (27 | ) | 832 | 1.1 | % | 1,342 | 22 | (151 | ) | 1,213 | 1.7 | % | ||||||||||||||||||||||||||
|
Foreign govt./govt.
agencies
|
1,627 | 73 | (17 | ) | 1,683 | 2.2 | % | 1,376 | 52 | (20 | ) | 1,408 | 2.0 | % | ||||||||||||||||||||||||||
|
Municipal
|
||||||||||||||||||||||||||||||||||||||||
|
Taxable
|
1,319 | 9 | (129 | ) | 1,199 | 1.5 | % | 1,176 | 4 | (205 | ) | 975 | 1.4 | % | ||||||||||||||||||||||||||
|
Tax-exempt
|
11,150 | 141 | (366 | ) | 10,925 | 14.0 | % | 10,949 | 314 | (173 | ) | 11,090 | 15.6 | % | ||||||||||||||||||||||||||
|
Residential
mortgage-backed
securities (“RMBS”)
|
||||||||||||||||||||||||||||||||||||||||
|
Agency
|
4,283 | 109 | (27 | ) | 4,365 | 5.6 | % | 3,383 | 99 | (6 | ) | 3,476 | 4.9 | % | ||||||||||||||||||||||||||
|
Non-agency
|
78 | — | (3 | ) | 75 | 0.1 | % | 143 | — | (16 | ) | 127 | 0.2 | % | ||||||||||||||||||||||||||
|
Alt-A
|
168 | — | (19 | ) | 149 | 0.2 | % | 218 | — | (58 | ) | 160 | 0.2 | % | ||||||||||||||||||||||||||
|
Sub-prime
|
1,507 | — | (413 | ) | 1,094 | 1.4 | % | 1,768 | 5 | (689 | ) | 1,084 | 1.5 | % | ||||||||||||||||||||||||||
|
U.S. Treasuries
|
5,159 | 24 | (154 | ) | 5,029 | 6.5 | % | 3,854 | 14 | (237 | ) | 3,631 | 5.1 | % | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Fixed maturities, AFS
|
78,419 | 2,804 | (3,364 | ) | 77,820 | 100.0 | % | 76,015 | 2,033 | (6,895 | ) | 71,153 | 100.0 | % | ||||||||||||||||||||||||||
|
Equity securities
|
||||||||||||||||||||||||||||||||||||||||
|
Financial services
|
569 | 4 | (127 | ) | 446 | 836 | 7 | (164 | ) | 679 | ||||||||||||||||||||||||||||||
|
Other
|
444 | 88 | (5 | ) | 527 | 497 | 73 | (28 | ) | 542 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Equity securities, AFS
|
1,013 | 92 | (132 | ) | 973 | 1,333 | 80 | (192 | ) | 1,221 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total AFS securities
|
$ | 79,432 | $ | 2,896 | $ | (3,496 | ) | $ | 78,793 | $ | 77,348 | $ | 2,113 | $ | (7,087 | ) | $ | 72,374 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Fixed maturities, FVO
|
$ | 649 | $ | — | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
| [1] |
Represents securities with pools of loans issued by the Small Business
Administration which are backed by the full faith and credit of the
U.S. government.
|
|
| [2] |
Gross unrealized gains (losses) exclude the fair value of bifurcated
embedded derivative features of certain securities. Subsequent
changes in value will be recorded in net realized capital gains
(losses).
|
The Company continues to rebalance its AFS investment portfolio to securities with more favorable
risk/return profiles, in particular investment grade corporate securities, while reducing its
exposure to real estate related securities. The Company’s AFS net unrealized position improved
primarily as a result of improved security valuations largely due to a decline in interest rates
and, to a lesser extent, credit spread tightening. Fixed maturities, FVO, represents securities
containing an embedded credit derivative for which the Company elected the fair value option. The
underlying credit risk of these securities is primarily high quality corporate bonds and CRE CDOs.
For further discussion on the election of fair value option, see Note 4 of the Notes to
Consolidated Financial Statements. The following sections highlight the Company’s significant
investment sectors.
94
Table of Contents
Financial Services
The Company’s exposure to the financial services sector is predominantly through banking
institutions. The following table presents the Company’s exposure to the financial services sector
included in the Securities by Type table above.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Amortized | Net | Amortized | Net | |||||||||||||||||||||
| Cost | Fair Value | Unrealized | Cost | Fair Value | Unrealized | |||||||||||||||||||
|
AAA
|
$ | 302 | $ | 309 | $ | 7 | $ | 299 | $ | 290 | $ | (9 | ) | |||||||||||
|
AA
|
2,085 | 2,095 | 10 | 1,913 | 1,867 | (46 | ) | |||||||||||||||||
|
A
|
3,760 | 3,599 | (161 | ) | 4,510 | 3,987 | (523 | ) | ||||||||||||||||
|
BBB
|
1,677 | 1,518 | (159 | ) | 1,664 | 1,379 | (285 | ) | ||||||||||||||||
|
BB & below
|
290 | 253 | (37 | ) | 509 | 416 | (93 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 8,114 | $ | 7,774 | $ | (340 | ) | $ | 8,895 | $ | 7,939 | $ | (956 | ) | ||||||||||
|
|
||||||||||||||||||||||||
The improvement in the net unrealized loss position was attributed to improved security valuations
resulting from increasing confidence in this sector. During the second half of 2010, companies
within the financial sectors generally continued to stabilize with improved earnings performance,
positive credit trends and strengthened capital and liquidity positions. Both the Dodd-Frank Act
and clarification around Basel III capital requirements will strengthen capital standards
prospectively. Despite these positive impacts, the financial sector remains vulnerable to ongoing
stress in the real estate markets including mortgage put-back and foreclosure risks, high
unemployment and global economic uncertainty, which could potentially result in declines in the
Company’s net unrealized position. In 2011, the Company expects a continuation of stabilizing
trends seen in 2010 as the regulatory landscape becomes more visible, credit quality continues on
an improving path, although likely at a slower rate, and capital and liquidity management remains
conservative.
Commercial Real Estate
During the fourth quarter, the commercial real estate market continued to show signs of improving
fundamentals, such as increases in market pricing, tightening credit spreads and more readily
available financing. Although delinquencies remain high, they are expected to increase at a slower
pace before moving lower in late 2011. The Company continues to reduce its exposure to real estate
related securities through sales and maturities.
The following table presents the Company’s exposure to CMBS bonds by current credit quality and
vintage year, included in the Securities by Type table above. 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 and excludes any equity interest or property value in excess of
outstanding debt.
CMBS — Bonds [1]
December 31, 2010
| 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
|
$ | 782 | $ | 803 | $ | 146 | $ | 142 | $ | 107 | $ | 103 | $ | 24 | $ | 21 | $ | 26 | $ | 22 | $ | 1,085 | $ | 1,091 | ||||||||||||||||||||||||
|
2004
|
489 | 511 | 35 | 35 | 68 | 61 | 33 | 27 | 6 | 5 | 631 | 639 | ||||||||||||||||||||||||||||||||||||
|
2005
|
610 | 632 | 131 | 121 | 213 | 177 | 182 | 147 | 123 | 96 | 1,259 | 1,173 | ||||||||||||||||||||||||||||||||||||
|
2006
|
1,016 | 1,050 | 566 | 536 | 256 | 224 | 496 | 416 | 436 | 339 | 2,770 | 2,565 | ||||||||||||||||||||||||||||||||||||
|
2007
|
305 | 320 | 278 | 250 | 71 | 55 | 253 | 200 | 278 | 198 | 1,185 | 1,023 | ||||||||||||||||||||||||||||||||||||
|
2008
|
55 | 58 | — | — | — | — | — | — | — | — | 55 | 58 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 3,257 | $ | 3,374 | $ | 1,156 | $ | 1,084 | $ | 715 | $ | 620 | $ | 988 | $ | 811 | $ | 869 | $ | 660 | $ | 6,985 | $ | 6,549 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Credit protection
|
28.8% | 22.5% | 13.3% | 13.8% | 8.0% | 21.5% | ||||||||||||||||||||||||||||||||||||||||||
| 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
|
$ | 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% | ||||||||||||||||||||||||||||||||||||||||||
| [1] |
The vintage year represents the year the pool of loans was originated.
|
95
Table of Contents
In addition to CMBS bonds, 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, 2010, loans within the Company’s mortgage loan portfolio
have had minimal extension or restructurings.
Commercial Mortgage Loans
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Amortized | Valuation | Carrying | Amortized | Valuation | Carrying | |||||||||||||||||||
| Cost [1] | Allowance | Value | Cost [1] | Allowance | Value | |||||||||||||||||||
|
Agricultural
|
$ | 339 | $ | (23 | ) | $ | 316 | $ | 604 | $ | (8 | ) | $ | 596 | ||||||||||
|
Whole loans
|
3,326 | (23 | ) | 3,303 | 3,319 | (40 | ) | 3,279 | ||||||||||||||||
|
A-Note participations
|
319 | — | 319 | 391 | — | 391 | ||||||||||||||||||
|
B-Note participations
|
327 | (70 | ) | 257 | 701 | (176 | ) | 525 | ||||||||||||||||
|
Mezzanine loans
|
181 | (36 | ) | 145 | 1,081 | (142 | ) | 939 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total [2]
|
$ | 4,492 | $ | (152 | ) | $ | 4,340 | $ | 6,096 | $ | (366 | ) | $ | 5,730 | ||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Amortized cost represents carrying value prior to valuation allowances, if any.
|
|
| [2] |
Excludes residential mortgage loans. For further information on the total mortgage loan portfolio, see Note 5 of the Notes
to Consolidated Financial Statements.
|
Since December 31, 2009, the Company significantly reduced its exposure to B-Note participations
and mezzanine loans by $1.1 billion primarily through sales. As of December 31, 2010, the Company
had mortgage loans held-for-sale with a carrying value and valuation allowance of $87 and $7,
respectively.
During 2010, the Company funded $255 of commercial whole loans focusing on loans with strong
loan-to-value (“LTV”) ratios and high quality property collateral. At origination, these loans had
a weighted average LTV of 60% and a weighted average yield of 5.0%. For a discussion of
outstanding mortgage loan commitments, see Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations within the Capital Resources and Liquidity section of the MD&A and Note 12 of the Notes
to Consolidated Financial Statements.
Municipal Bonds
The Company holds investments in securities backed by states, municipalities and political
subdivisions (“municipal”) with an amortized cost and fair value of $12.5 billion and $12.1
billion, respectively, as of December 31, 2010 and $12.1 billion and $12.1 billion, respectively,
as of December 31, 2009. The Company’s municipal bond portfolio is well diversified and primarily
consists of essential service revenue and general obligation bonds.
During 2010, purchases in this sector were concentrated in essential service revenue bonds and
general obligation bonds with an average credit quality rating of AA. Sales during 2010 were
concentrated in lower quality bonds or to reduce exposure in higher risk states such as California,
Illinois and Florida. As of December 31, 2010, the largest issuer concentrations were in
California, Georgia and Massachusetts, which each comprised less than 3% of the municipal bond
portfolio and were primarily comprised of general obligation securities. As of December 31, 2009,
the largest issuer 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.
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, 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, 2010 | December 31, 2009 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
|
Hedge funds
|
$ | 439 | 22.8 | % | $ | 596 | 33.3 | % | ||||||||
|
Mortgage and real estate funds
|
406 | 21.2 | % | 302 | 16.9 | % | ||||||||||
|
Mezzanine debt funds
|
132 | 6.9 | % | 133 | 7.4 | % | ||||||||||
|
Private equity and other funds
|
941 | 49.1 | % | 759 | 42.4 | % | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 1,918 | 100.0 | % | $ | 1,790 | 100.0 | % | ||||||||
|
|
||||||||||||||||
96
Table of Contents
The decline in hedge funds since December 31, 2009 was primarily attributable to redemptions, while
private equity and other funds increased primarily due to market value appreciation. The increase
in mortgage and real estate funds was mainly attributed to additional funding of existing
partnerships.
Available-for-Sale Securities — 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, 2010 and that these securities are temporarily depressed and are expected to
recover in value as the securities approach maturity or as real estate related market spreads
return to more normalized levels.
Most of the securities depressed over 20% for greater than nine months are structured securities
with exposure to commercial and residential real estate, as well as certain floating rate corporate
securities or those securities with greater than 10 years to maturity, concentrated in the
financial services sector. Both financial and structured securities have a weighted average
current rating of BBB. Current market spreads continue to be significantly wider for structured
securities with exposure to commercial and residential real estate, as compared to spreads at the
security’s respective purchase date, largely due to the economic and market uncertainties regarding
future performance of commercial and residential real estate. The Company reviewed these
securities as part of its impairment analysis. The Company’s best estimate of future cash flows
utilized in its impairment analysis involves both macroeconomic and security specific assumptions
that may differ based on security type, vintage year and property location including, but not
limited to, historical and projected default and recovery rates, current and expected future
delinquency rates and property value declines. 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. Furthermore, the
Company neither has an intention to sell nor does it expect to be required to sell these
securities.
The same market conditions noted above also apply to AFS securities depressed over 50% for greater
than twelve months, which consist primarily of structured securities with exposure to commercial
and residential real estate. Based upon the Company’s cash flow modeling and current market and
collateral performance assumptions, these securities have sufficient credit protection levels to
receive contractually obligated principal and interest payments, and accordingly the Company has
concluded that no credit impairment exists on these securities. Furthermore, the Company neither
has an intention to sell nor does it expect to be required to sell these securities.
For the CRE CDOs and CMBS which are included in the AFS securities depressed over 50% for greater
than twelve months, current market pricing reflects market illiquidity and higher risk premiums.
The illiquidity and risk premiums are the result of the underlying collateral performance to date
and the potential uncertainty in the securities’ future cash flows. Because of the uncertainty
surrounding the future performance of commercial real estate, market participants in many cases are
requiring substantially greater returns, in comparison to the securities’ stated coupon rate, to
assume the associated securities’ credit risk. If the securities’ collateral underperforms
macroeconomic and collateral assumptions in the future, loss severities may be significant as a
result of the security’s contractual terms. In addition, the majority of these securities have a
floating-rate coupon referenced to a market index such as LIBOR. When the reference rate declines,
the valuation of the respective security may also decline. LIBOR rates have declined substantially
after these CRE CDOs and CMBS were purchased. For further information regarding the Company’s
security valuation process, see Note 4 of the Notes to Consolidated Financial Statements. For
further information regarding the future collateral cash flows assumptions included in the
Company’s impairment analysis, see Other-Than-Temporary Impairments in the Investment Credit Risk
section of this MD&A. 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, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| Cost or | Cost or | |||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
| Items | Cost | Value | Loss [1] | Items | Cost | Value | Loss | |||||||||||||||||||||||||
|
Three months or less
|
1,503 | $ | 17,431 | $ | 16,783 | $ | (643 | ) | 1,237 | $ | 11,197 | $ | 10,838 | $ | (359 | ) | ||||||||||||||||
|
Greater than three to six months
|
115 | 732 | 690 | (42 | ) | 105 | 317 | 289 | (28 | ) | ||||||||||||||||||||||
|
Greater than six to nine months
|
91 | 438 | 397 | (41 | ) | 311 | 2,940 | 2,429 | (511 | ) | ||||||||||||||||||||||
|
Greater than nine to twelve months
|
42 | 185 | 169 | (16 | ) | 134 | 2,054 | 1,674 | (380 | ) | ||||||||||||||||||||||
|
Greater than twelve months
|
1,231 | 15,599 | 12,811 | (2,754 | ) | 2,020 | 22,445 | 16,636 | (5,809 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
2,982 | $ | 34,385 | $ | 30,850 | $ | (3,496 | ) | 3,807 | $ | 38,953 | $ | 31,866 | $ | (7,087 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| [1] |
Unrealized losses exclude the fair value of bifurcated embedded derivative features of
certain securities. Subsequent changes in value will be recorded in net realized capital
gains (losses).
|
97
Table of Contents
The following tables present the Company’s unrealized loss aging for AFS securities continuously
depressed over 20% by length of time (included in the table above).
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| Cost or | Cost or | |||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
| Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||
|
Three months or less
|
99 | $ | 771 | $ | 582 | $ | (189 | ) | 161 | $ | 951 | $ | 672 | $ | (279 | ) | ||||||||||||||||
|
Greater than three to six months
|
22 | 136 | 104 | (32 | ) | 51 | 55 | 38 | (17 | ) | ||||||||||||||||||||||
|
Greater than six to nine months
|
28 | 234 | 169 | (65 | ) | 159 | 2,046 | 1,397 | (649 | ) | ||||||||||||||||||||||
|
Greater than nine to twelve months
|
13 | 43 | 32 | (11 | ) | 86 | 1,398 | 913 | (485 | ) | ||||||||||||||||||||||
|
Greater than twelve months
|
390 | 4,361 | 2,766 | (1,595 | ) | 715 | 8,146 | 4,228 | (3,918 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
552 | $ | 5,545 | $ | 3,653 | $ | (1,892 | ) | 1,172 | $ | 12,596 | $ | 7,248 | $ | (5,348 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
The following tables present the Company’s unrealized loss aging for AFS securities continuously
depressed over 50% by length of time (included in the tables above).
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| Cost or | Cost or | |||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
| Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||
|
Three months or less
|
20 | $ | 27 | $ | 12 | $ | (15 | ) | 62 | $ | 169 | $ | 61 | $ | (108 | ) | ||||||||||||||||
|
Greater than three to six months
|
1 | 2 | 1 | (1 | ) | 28 | 5 | 2 | (3 | ) | ||||||||||||||||||||||
|
Greater than six to nine months
|
12 | 65 | 29 | (36 | ) | 54 | 190 | 74 | (116 | ) | ||||||||||||||||||||||
|
Greater than nine to twelve months
|
— | — | — | — | 58 | 592 | 210 | (382 | ) | |||||||||||||||||||||||
|
Greater than twelve months
|
94 | 722 | 260 | (462 | ) | 220 | 2,553 | 735 | (1,818 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
127 | $ | 816 | $ | 302 | $ | (514 | ) | 422 | $ | 3,509 | $ | 1,082 | $ | (2,427 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
Other-Than-Temporary Impairments
The following table presents the Company’s impairments recognized in earnings by security type.
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
ABS
|
$ | 13 | $ | 54 | $ | 27 | ||||||
|
CDOs
|
||||||||||||
|
CREs
|
164 | 483 | 398 | |||||||||
|
Other
|
— | 28 | — | |||||||||
|
CMBS
|
||||||||||||
|
Bonds
|
157 | 257 | 141 | |||||||||
|
IOs
|
3 | 25 | 61 | |||||||||
|
Corporate
|
33 | 198 | 1,852 | |||||||||
|
Equity
|
14 | 145 | 1,161 | |||||||||
|
Foreign govt./govt. agencies
|
— | — | 31 | |||||||||
|
Municipal
|
1 | 18 | 21 | |||||||||
|
RMBS
|
||||||||||||
|
Non-agency
|
2 | 4 | 13 | |||||||||
|
Alt-A
|
10 | 62 | 24 | |||||||||
|
Sub-prime
|
37 | 232 | 235 | |||||||||
|
U.S. Treasuries
|
— | 2 | — | |||||||||
|
|
||||||||||||
|
Total
|
$ | 434 | $ | 1,508 | $ | 3,964 | ||||||
|
|
||||||||||||
Year ended December 31, 2010
For the year ended December 31, 2010, impairments recognized in earnings were comprised of credit
impairments of $372, impairments on debt securities for which the Company intends to sel1 of $54
and impairments on equity securities of $8.
Credit impairments were primarily concentrated in structured securities associated with commercial
and residential real estate which were impaired primarily due to continued property-specific
deterioration of the underlying collateral and increased delinquencies. The Company calculated
these impairments utilizing both a top down modeling approach and, for certain commercial 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 period included macroeconomic factors, such as a
high unemployment rate, as well as sector specific factors such as property value declines,
commercial real estate delinquency levels and changes in net operating income. Those assumptions
included CMBS peak-to-trough property value declines, on average, of 36% and RMBS peak-to-trough
property value declines, on average, of 35%. The macroeconomic assumptions considered by the
Company did not materially change from the previous several quarters and, as such, the credit
impairments recognized for the year ended December 31, 2010 were largely driven by actual or
expected collateral deterioration, largely as a result of the Company’s loan-by-loan collateral
review.
98
Table of Contents
The loan-by-loan collateral review is performed to estimate potential future losses. This review
incorporates assumptions about expected future collateral cash flows, including projected rental
rates and occupancy levels that varied based on property type and sub-market. The results of the
loan by loan collateral review allowed the Company to estimate the expected timing of a security’s
first loss, if any, and the probability and severity of potential ultimate losses. The Company
then discounted these anticipated future cash flows at the security’s book yield prior to
impairment. The results of cash flow modeling utilized by the Company result in cumulative
collateral loss rates that vary by vintage year. For the 2007 vintage year, the Company’s cash
flow modeling resulted in cumulative collateral loss rates for CMBS and sub-prime RMBS of
approximately 12% and 44%, respectively.
Impairments on securities for which the Company had the intent to sell were primarily on CMBS bonds
in order to take advantage of price appreciation. Impairments on equity securities were primarily
on below investment grade securities that have been depressed 20% for more than six months.
In addition to the credit impairments recognized in earnings, the Company recognized non-credit
impairments in other comprehensive income of $418 for the year ended December 31, 2010,
predominantly concentrated in CRE CDOs and RMBS. These non-credit impairments represent the
difference between 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 market
implied credit spreads. These non-credit impairments primarily represent increases in market
liquidity premiums and credit spread widening that occurred after the securities were purchased, as
well as a discount for variable-rate coupons which are paying less than at purchase date. 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 of specific securities or
if actual results underperform current modeling assumptions, which may be the result of, but are
not limited to, macroeconomic factors, and property performance below current expectations. Recent
improvements in commercial real estate property valuations will positively impact future loss
development, with future impairments driven by idiosyncratic security specific risk.
Year ended December 31, 2009
Impairments recognized in earnings were comprised of credit impairments of $1.2 billion primarily
concentrated on CRE CDOs, below-prime RMBS and CMBS bonds. Also included were impairments on debt
securities for which the Company intended to sell of $156, mainly comprised of corporate financial
services securities, as well as impairments on equity securities of $136 related to below
investment grade hybrid securities.
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.
Valuation Allowances on Mortgage Loans
The following table presents additions to valuation allowances on mortgage loans.
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Credit-related concerns
|
$ | 70 | $ | 310 | $ | 26 | ||||||
|
Held for sale
|
||||||||||||
|
Agricultural loans
|
10 | 4 | — | |||||||||
|
B-note participations
|
22 | 51 | — | |||||||||
|
Mezzanine loans
|
52 | 43 | — | |||||||||
|
Residential
|
3 | — | — | |||||||||
|
|
||||||||||||
|
Total
|
$ | 157 | $ | 408 | $ | 26 | ||||||
|
|
||||||||||||
For the year ended December 31, 2010, additions of $157 primarily related to anticipated, and since
executed, B-Note participant and mezzanine loan sales. Also included were additions for expected
credit losses due to borrower financial difficulty and/or collateral deterioration. Recent
improvements in commercial real estate property valuations will positively impact future loss
development, with future impairments driven by idiosyncratic security specific risk.
99
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 specific classes of investments. The Company invests in various types of
investments, including derivative instruments, in order to meet its portfolio objectives. 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 compliance and risk management
teams 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 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. Derivative instruments are
utilized in compliance with established Company policy and regulatory requirements and are
monitored internally and reviewed by senior management.
Interest Rate Risk
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 may include
the use of derivatives. The Company analyzes interest rate risk using various models including
parametric models and cash flow simulation under various market scenarios of the liabilities and
their supporting investment portfolios, which may include derivative instruments. 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 price sensitivity of a financial instrument or series of cash flows to a parallel change in the
underlying yield curve used to value the financial instrument or series of cash flows. For
example, a duration of 5 means the price of the security will change by approximately 5% for a 100
basis point change in interest rates. Convexity is used to approximate how the duration of a
security changes as interest rates change in a parallel manner. Key rate duration analysis
measures the price sensitivity of a security or series of cash flows to each point along the yield
curve and enables the Company to estimate the price change of a security assuming non-parallel
interest rate movements.
To calculate duration, convexity, and key rate durations, 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 the entire yield curve for duration and convexity, or a particular
point on the yield curve for key rate duration. 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
a basis that represents the lowest potential yield that can be received without the issuer actually
defaulting. 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 the Critical Accounting Estimates Section of the MD&A
under Pension and Other Postretirement Benefit Obligations and Note 17 of the Notes to Consolidated
Financial Statements. In addition, management evaluates performance of certain Wealth Management
products based on net investment spread which is, in part, influenced by changes in interest rates.
For further discussion, see the Global Annuity, Life Insurance, and Retirement Plans sections of
the MD&A.
100
Table of Contents
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 Wealth Management 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 Wealth Management 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 Wealth Management 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 Wealth
Management’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.
A decline in interest rates results in certain mortgage-backed securities being 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 Wealth Management 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 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 $78.4 billion and $71.2 billion at December
31, 2010 and 2009, 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 5.4 and 4.9 years as of December
31, 2010 and 2009, 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 Wealth Management’s variable annuity products, credit
interest to policyholders subject to market conditions and minimum interest rate guarantees. The
term to maturity of the asset portfolio supporting these products may range from 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 reliance upon actuarial (including mortality and
morbidity) pricing assumptions and do have some element of cash flow uncertainty. 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, or interest rate levels may deviate from those assumed in
product pricing, ultimately resulting in an investment return lower than that assumed in pricing.
The average duration of the liability cash flow payments can range from less than one year to in
excess of fifteen years.
Derivatives
The Company utilizes a variety of derivative instruments to mitigate interest rate risk associated
with its investment portfolio. 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
may be used to manage portfolio duration.
At December 31, 2010 and 2009, notional amounts pertaining to derivatives utilized to manage
interest rate risk totaled $19.3 billion and $21.3 billion, respectively ($18.9 billion and $19.7
billion, respectively, related to investments and $0.4 billion and $1.6 billion, respectively,
related to Wealth Management liabilities). The fair value of these derivatives was $(372) and $18
as of December 31, 2010 and 2009, respectively.
101
Table of Contents
Interest Rate Sensitivity
The before-tax change in the net economic value of investment contracts (e.g., fixed annuity
contracts) issued by the Company’s Wealth Management operations and certain insurance product
liabilities (e.g., short-term and long-term disability contracts) issued by the Company’s
Commercial Markets operations, for which the payment rates are fixed at contract issuance and the
investment experience is substantially absorbed by the Company’s operations, along with the
corresponding invested assets are included in the following table. Also included in this analysis
are the interest rate sensitive derivatives used by the Company to hedge its exposure to interest
rate risk in the investment portfolios supporting these contracts.
This analysis does not include the assets and corresponding liabilities of certain insurance products,
such as auto, property, whole and term life insurance, and certain life contingent annuities.
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, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Basis point shift | - 100 | + 100 | - 100 | + 100 | ||||||||||||
|
Amount
|
$ | (190 | ) | $ | 96 | $ | (30 | ) | $ | (9 | ) | |||||
The fixed liabilities included above represented approximately 47% and 63%
of the Company’s
general account liabilities as of December 31, 2010 and 2009,
respectively. The assets supporting the fixed liabilities are monitored and managed within set
duration guidelines, and are evaluated on a daily basis, as well as annually using scenario
simulation techniques in compliance with regulatory requirements.
The following table provides an analysis showing the estimated before-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, 2010 and 2009. 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, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Basis point shift | - 100 | + 100 | - 100 | + 100 | ||||||||||||
|
Amount
|
$ | 2,988 | $ | (2,774 | ) | $ | 2,326 | $ | (2,230 | ) | ||||||
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 the Enterprise Risk Management group and senior management.
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 tightening will reduce net investment
income associated with new purchases of fixed maturities and increase the fair value of the
investment portfolio. 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. 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.
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Table of Contents
Equity Risk
The Company’s primary exposure to equity risk relates to the potential for lower earnings
associated with certain of the Wealth Management’s businesses such as variable annuities where fee
income is earned based upon the fair value of the assets under management. For further discussion
of equity risk, see the Variable Product Equity Risk section below. In addition, Wealth Management
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
the Critical Accounting Estimates section of the MD&A under “Pension and Other Postretirement
Benefit Obligations” and Note 17 of the Notes to Consolidated Financial Statements.
Variable Product Equity Risk
The Company’s variable products 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 supporting the 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 hedge product guarantees resulting in
realized capital gains;
|
|
| • |
increase the costs of the hedging instruments we use in our 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 assets to be held backing variable annuity guarantees to
maintain required regulatory reserve levels and targeted risk based capital ratios;
|
|
| • |
adversely affect customer sentiment toward equity-linked products, causing a decline in
sales; and
|
|
| • |
decrease the Company’s estimated future gross profits. See 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 the
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 small 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. As of December 31, 2010, U.S. GMWB
account value
was $44.8 billion and International GMWB account value was $2.5 billion. As of
December 31, 2009,
U.S. GMWB account value was $45.5 billion and International GMWB account value was
$2.7 billion. 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, 2010 and December 31,
2009, 35% and
48%, respectively, of all unreinsured U.S. GMWB contracts were “in the money”. For those
contracts
that were “in the money”, the average contract was 9% and 13% “in the money”
as of
December 31, 2010 and 2009, respectively. For U.S. GMWB contracts that were “in the
money”, the
Company’s net amount at risk (i.e. GRB less account value), after reinsurance, as of
December 31,
2010 and December 31, 2009, was $1.1 billion and $2.6 billion, respectively. For
U.K. and Japan
GMWB contracts that were “in the money”, the Company’s net amount at risk, after
reinsurance, as of
December 31, 2010 and December 31, 2009, was $73 and $125, 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 the Company’s current carried liability. For
additional information on the Company’s GMWB liability, see Note 4a of the Notes to
Consolidated
Financial Statements.
103
Table of Contents
GMDB
The majority of the Company’s U.S. variable annuity contracts include a GMDB rider. Declines in
the equity markets will 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, 2010 and December 31,
2009 is $10.7 billion and $18.4 billion, respectively. However, the Company will incur these
payments in the future only if the policyholder has an “in the money” GMDB at their death. As of
December 31, 2010 and December 31, 2009, 70% and 82%, respectively, of all unreinsured U.S. GMDB
contracts were “in the money”. For those contracts that were “in the money”, the average contract
was 12% and 18% “in the money” as of December 31, 2010 and 2009, respectively. The
Company reinsured 60% and 53% of these death benefit guarantees as of December 31, 2010 and
December 31, 2009, respectively. 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
$4.3 billion and $8.5 billion, as of December 31, 2010 and December 31, 2009, respectively.
In the second quarter of 2009, the Company suspended all new product sales in Japan. Prior to
that, the Company offered variable annuity products in Japan with a GMDB. 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, the euro and other currencies will increase the Company’s liability
for GMDB riders. This increase may be significant in extreme market scenarios. In general, the
GMDB riders entitle the policyholder to receive the original investment value at the date of death.
If the original investment value exceeds the account value upon death then the contract is “in the
money”. As of December 31, 2010 and 2009, substantially all of the unreinsured Japan GMDB
contracts were “in the money”. For those contracts that were “in the money”, the
average contract was 22% and 18% “in the money” as of December 31, 2010 and 2009,
respectively. The Company’s total gross exposure (i.e., before reinsurance) to the GMDB offered in
Japan is $8.8 billion and $6.3 billion as of December 31, 2010 and December 31, 2009, respectively.
The Company reinsured 14% and 17% of the GMDB to a third-party reinsurer as of December 31, 2010
and 2009, respectively. Under certain of these reinsurance agreements, the reinsurers’ exposure is
subject to an annual cap. The Company’s net GMDB exposure (i.e. after reinsurance) is $7.6 billion
and $5.2 billion as of December 31, 2010 and 2009, respectively. Many policyholders with a GMDB
also have a GMWB in the US or GMIB in Japan. Policyholders that have a product that offer both
guarantees can only receive the GMDB or the GMIB benefit in Japan or the GMDB or GMWB in the U.S.
For additional information on the Company’s GMDB liability, see Note 9 of the Notes to Consolidated
Financial Statements.
GMIB
In the second quarter of 2009, the Company suspended all new product sales in Japan. Prior to
that, the Company offered variable annuity products in Japan with a GMIB. For GMIB contracts, in
general, the policyholder has the right to elect to annuitize benefits, beginning (for certain
products) on the tenth or fifteenth anniversary year of contract commencement, receive lump sum
payment of account value, or remain in the variable sub-account. For GMIB contracts, the
policyholder is entitled to receive the original investment value over a 10- to 15- year
annuitization period. A small percentage of the contracts will first become eligible to elect
annuitization beginning in 2013. The remainder of the contracts will first become eligible to
elect annuitization from 2014 to 2022. Because policyholders have various contractual rights to
defer their annuitization election, the period over which annuitization election can take place is
subject to policyholder behavior and therefore indeterminate. In addition, upon annuitization the
contractholder surrenders access to the account value and the account value is transferred to the
Company’s general account where it is invested and the additional investment proceeds are used
towards payment of the original investment value. If the original investment value exceeds the
account value upon annuitization then the contract is “in the money”. As of December 31, 2010 and
2009, substantially all of the Japan GMIB contracts were “in the money”. For those contracts that
were “in the money”, the average contract was 17% and 12% “in the money” as of December 31,
2010 and 2009, respectively. In addition, as of December 31, 2010, 54% of retained net amount at
risk is reinsured to an affiliate of The Hartford. For additional information on the Company’s
GMIB liability, see Note 9 of the Notes to Consolidated Financial Statements.
The following table represents the timing of account values eligible for annuitization under the
Japan GMIB as of December 31, 2010, as well as the retained net amount at risk. The account values
reflect 100% annuitization at the earliest point allowed by the contract and no adjustments for
future market returns and policyholder behaviors. Future market returns, changes in the value of
the Japanese yen and policyholder behaviors will impact account values eligible for annuitization
in the years presented.
| GMIB [1] | ||||||||
| ($ in billions) | Account Value | Net Amount at Risk | ||||||
|
2013
|
$ | 0.3 | $ | — | ||||
|
2014
|
4.7 | 0.7 | ||||||
|
2015
|
7.6 | 1.4 | ||||||
|
2016
|
2.6 | 0.6 | ||||||
|
2017
|
2.9 | 0.7 | ||||||
|
2018 & beyond [2]
|
7.3 | 2.0 | ||||||
|
|
||||||||
|
Total
|
$ | 25.4 | $ | 5.4 | ||||
|
|
||||||||
| [1] |
Excludes certain GMIB products where annuitization eligibility is based on attained age.
|
|
| [2] |
In 2018 & beyond, $2.8 billion of the $7.3 billion is primarily associated with account value that is eligible in 2021.
|
104
Table of Contents
Variable Product Equity Risk Management
Market Risk Exposures
The following table summarizes the broad Variable Annuity Guarantees offered by the Company and the
market risks to which the guarantee is most exposed from a U.S. GAAP accounting perspective.
| Variable Annuity Guarantee [1] | U.S. GAAP Treatment [1] | Primary Market Risk Exposures [1] | ||
|
|
||||
|
U.S Variable Guarantees
|
||||
|
|
||||
|
GMDB
|
Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid | Equity Market Levels | ||
|
|
||||
|
GMWB
|
Fair Value |
Equity Market Levels / Implied
Volatility / Interest Rates |
||
|
|
||||
|
For Life Component of GMWB
|
Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid | Equity Market Levels | ||
|
|
||||
|
International Variable Guarantees
|
||||
|
|
||||
|
GMDB & GMIB
|
Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid |
Equity Market Levels / Interest
Rates / Foreign Currency |
||
|
|
||||
|
GMWB
|
Fair Value |
Equity Market Levels / Implied
Volatility / Interest Rates /Foreign Currency |
||
|
|
||||
|
GMAB
|
Fair Value |
Equity Market Levels / Implied
Volatility / Interest Rates /Foreign Currency |
||
|
|
| [1] |
Each of these guarantees and the related U.S. GAAP accounting volatility will also be
influenced by actual and estimated policyholder behavior.
|
Risk Management
The Company carefully analyzes GMDB, GMWB, GMIB, and GMAB market risk exposures arising from equity
markets, interest rates, implied volatility, foreign currency exchange risk, and correlation
between these market risk exposures. 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, statutory surplus, and ultimately cash flow liability. The Company manages the
equity market, interest rate, implied volatility and foreign currency exchange risks embedded in
its products through reinsurance, customized derivatives, and dynamic hedging and macro hedging
programs. In addition, 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 policies, 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 has and may continue to result in a decline in market
share.
The following table depicts the type of risk management strategy being used by the Company to
either partially or fully mitigate market risk exposures, displayed above, by variable annuity
guarantee as of December 31, 2010:
| Variable Annuity Guarantee | Reinsurance | Customized Derivative | Dynamic Hedging [1] | Macro Hedging [2] | ||||
|
GMDB
|
ü | ü | ||||||
|
GMWB
|
ü | ü | ü | ü | ||||
|
For Life Component of GMWB
|
ü | |||||||
|
GMIB
|
ü | |||||||
|
GMAB
|
ü |
| [1] |
Through the year ended 2010, the Company continued to maintain a
reduced level of dynamic hedge protection on GMWB while placing a
greater relative emphasis on the protection of statutory surplus
through the inclusion of a macro hedging program. This portion of the
GMWB hedge strategy may include derivatives with maturities of up to
10 years. U.S. GAAP fair value volatility will be driven by a reduced
level of dynamic hedge protection and macro program positions.
|
|
| [2] |
As described below, the Company’s macro hedging program is not
designed to provide protection against any one variable annuity
guarantee program, but rather is a broad based hedge designed to
provide protection against multiple guarantees and market risks,
primarily focused on statutory liability and surplus volatility.
|
105
Table of Contents
Reinsurance
The Company uses reinsurance for a portion of contracts with GMWB riders issued prior to the third
quarter of 2003 and 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 Strategies
The Company maintains derivative hedging strategies for its product guarantee risk to meet
multiple, and in some cases, competing risk management objectives, including providing protection
against tail scenario market events, providing resources to pay product guarantee claims, and
minimizing U.S. GAAP earnings volatility, statutory surplus volatility and other economic metrics.
Customized Derivatives
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 differences between assumed and actual
policyholder behavior and between the performance of the actively managed funds underlying the
separate accounts and their respective indices.
Dynamic Hedging
The Company’s dynamic hedging program uses derivative instruments to provide protection against the
risks associated with the GMWB variable annuity product guarantees including equity market
declines, equity implied volatility, and declines in interest rates (See Market Risk on Statutory
Capital below). 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. During the year,
the Company added additional volatility protection. 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, changes in hedging positions and the relative
emphasis placed on various risk management objectives.
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Macro Hedging
The Company’s macro hedging program uses derivative instruments such as options, futures, swaps,
and forwards on equities, interest rates, and currencies to provide protection against the
statutory tail scenario risk arising from U.S., U.K. and Japan GMWB, GMDB, GMIB and GMAB
liabilities, on the Company’s statutory surplus and the associated target RBC ratios (see Capital
Resources and Liquidity). These macro hedges cover some of the residual risks not otherwise covered
by specific dynamic hedging programs. Management assesses this residual risk under various
scenarios in designing and executing the macro hedge program. During the year, the Company
increased its equity macro hedge coverage including currency protection. The macro hedge program
will result in additional U.S. GAAP earnings volatility as changes in the value of the macro hedge
derivatives, which are designed to reduce statutory reserve and capital volatility, may not be
closely aligned to changes in U.S. GAAP liabilities.
Based on the construction of the Company’s derivative hedging program (both dynamic and macro
hedge), which can change based on capital market conditions, and changes in the hedging program,
underlying exposures 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. Each of the sensitivities set forth below is
estimated individually under the indicated level of market movement and from the market levels at
September 30, 2010 and December 31, 2010, and without consideration of any correlation among the
key assumptions. In addition, there are other factors, including changes to the underlying hedging
program, policyholder behavior and variation in underlying fund performance relative to the hedged
index, which could materially impact the GMWB liability. As a result, these sensitivities do not
necessarily reflect the financial impact from large shifts in the underlying indices or when
multiple risk factors are impacted. 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:
| Pre-Tax/DAC Gain (Loss) | ||||||||||||||||||||||||
| Net Impact | Net Impact | |||||||||||||||||||||||
| GMWB | GMWB | |||||||||||||||||||||||
| Liability and | Liability and | |||||||||||||||||||||||
| Dynamic | Macro | Dynamic | Macro | |||||||||||||||||||||
| Hedge | Hedge | Total Net | Hedge | Hedge | Total Net | |||||||||||||||||||
| Program | Program [5] | Impact | Program | Program [5] | Impact | |||||||||||||||||||
| Expected for fourth quarter based on | Expected for first quarter based on | |||||||||||||||||||||||
| Capital Market Factor | September 30, 2010 | December 31, 2010 | ||||||||||||||||||||||
|
Equity markets increase / decrease 1% [1] [2]
|
$ | (0) / 0 | $ | (34) / 34 | $ | (34) / 34 | $ | (0) / 0 | $ | (26) / 26 | $ | (26) / 26 | ||||||||||||
|
Volatility increases / decreases 1% [3]
|
$ | (41) / 41 | $ | 16 / (16 | ) | $ | (25) / 25 | $ | (26) / 26 | $ | 15 / (15 | ) | $ | (11) / 11 | ||||||||||
|
Interest rates increase / decrease 1 basis
point [4]
|
$ | 2 / (2 | ) | $ | (1) / 1 | $ | 1 / (1 | ) | $ | 2 / (2 | ) | $ | (2) / 2 | $ | 0 / 0 | |||||||||
|
Yen strengthens / weakens 1% versus all
other currencies [5]
|
$ | — | $ | 44 / (44 | ) | $ | 44 / (44 | ) | $ | — | $ | 57 / (57 | ) | $ | 57 / (57 | ) | ||||||||
| [1] |
Represents the aggregate net impact of a 1% increase or decrease in broadly traded global equity indices.
|
|
| [2] |
The decrease in equity sensitivity in the macro hedge program was
primarily due to equity markets rallying during the fourth quarter of
2010 and the equity Futures macro hedge that was added in the third
quarter of 2010 which was subsequently rebalanced and reduced in the
fourth quarter 2010.
|
|
| [3] |
Represents the aggregate net impact of a 1% increase or decrease in
blended implied volatility that is generally skewed towards longer
durations for broadly traded global equity indices. The decrease in
volatility sensitivity was primarily due to additional purchases of
volatility coverage in our dynamic hedge program.
|
|
| [4] |
Represents the aggregate net impact of a 1 basis point parallel shift
on the global LIBOR yield curve. The increase in interest rate
sensitivity in the macro hedge program was primarily due to additional
purchases of interest rate coverage during the quarter.
|
|
| [5] |
Represents the aggregate net impact, which includes other non-Macro FX
hedges, of a 1% strengthening or weakening in the yen compared to all
other currencies. Due to the structure of the macro hedging program,
the increase in currency sensitivity was primarily due to the
additional purchases of currency protection and a strengthened Yen
during the quarter.
|
For the year ended December 31, 2010, the Company incurred a net realized pre-tax loss of $349 on
GMWB liabilities, net of reinsurance and the dynamic and macro hedging programs, driven primarily
by increases in equity levels of approximately 13% and decreases in interest rates of approximately
60 basis points, partially offset by decreases in volatility of approximately 2%, a strengthened
yen of approximately 12% against USD and 19% against Euro, favorable assumption updates, and
underlying fund performance relative to the hedge indices. As a result of the rebalancing of the
hedging programs throughout 2010, the full year hedging results are not indicative of the
sensitivities outlined above.
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Market Risk on Statutory Capital
Statutory surplus amounts and risk-based capital (“RBC”) ratios may increase or decrease in any
period depending upon a variety of 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 and interest rates decline, the amount and volatility
of both our actual potential obligation, as well as the related statutory surplus and capital
margin for death and living benefit guarantees associated with U.S. variable annuity contracts
can be materially negatively effected, sometimes at a greater than linear rate. Other market
factors that can impact statutory surplus, reserve levels and capital margin include
differences in performance of variable subaccounts relative to indices and/or realized equity
and interest rate volatilities. 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 with rising equity markets,
resulting in lower RBC ratios. Non-market factors, which can also impact the amount and
volatility of both our actual potential obligation, as well as the related statutory surplus
and capital margin, include actual and estimated policyholder behavior experience as it
pertains to lapsation, partial withdrawals, and mortality.
|
|
| • |
Similarly, for guaranteed benefits (GMDB, GMIB, and GMWB) reinsured from our international
operations to our U.S. insurance subsidiaries, the amount and volatility of both our actual
potential obligation, as well as the related statutory surplus and capital margin can be
materially affected by a variety of factors, both market and non-market. Market factors
include declines in various equity market indices and interest rates, changes in value of the
yen versus other global currencies, difference in the performance of variable subaccounts
relative to indices, and increases in realized equity, interest rate, and currency
volatilities. Non-market factors include actual and estimated policyholder behavior experience
as it pertains to lapsation, withdrawals, mortality, and annuitization. Risk mitigation
activities, such as hedging, may also result in material and sometimes counterintuitive
impacts on statutory surplus and capital margin. Notably, as changes in these market and
non-market factors occur, both our potential obligation and the related statutory reserves
and/or required capital can increase or decrease at a greater than linear rate.
|
|
| • |
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.
|
|
| • |
The life insurance subsidiaries’ 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 vary in
comparison to the U.S. dollar, the remeasured value of those non-dollar denominated assets or
liabilities will also vary, causing an increase or decrease to statutory surplus.
|
|
| • |
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 have experienced, 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.
|
|
| • |
With respect to our fixed annuity business, sustained low interest rates may result in a
reduction in statutory surplus and an increase in National Association of Insurance
Commissioners (“NAIC”) required capital.
|
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 17% of its risk associated with U.S.
GMWB and 60% of its risk
associated with the aggregate U.S. 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 capital 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, modifications to our hedging program, changes in product design, increasing
pricing and expense management.
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Derivative Instruments
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 including issuer default, price or currency exchange
rate risk or volatility; to manage liquidity; to control transaction costs; or to enter into
replication transactions.
Downgrades to the credit ratings of The Hartford’s insurance operating companies may have adverse
implications for its use of derivatives including those used to hedge benefit guarantees of
variable annuities. In some cases, further downgrades may give derivative counterparties the
unilateral contractual right to cancel and settle outstanding derivative trades or require
additional collateral to be posted. In addition, further downgrades may result in counterparties
becoming unwilling to engage in additional over-the-counter (“OTC”) derivatives or may require
collateralization before entering into any new trades. This will restrict the supply of derivative
instruments commonly used to hedge variable annuity guarantees, particularly long-dated equity
derivatives and interest rate swaps. Under these circumstances, The Hartford’s operating
subsidiaries could conduct hedging activity using a combination of cash and exchange-traded
instruments, in addition to using the available OTC derivatives.
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 and U.K. 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. Also, foreign currency exchange
rate risk is inherent when the Japan policyholders’ variable annuity sub-account investments are
non-Japanese yen denominated securities while the related GMDB and GMIB guarantees are effectively
yen-denominated. 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, 2010 and 2009, were approximately $1.4
billion and $1.2 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 as fair value 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, 2010 and 2009, the derivatives used to hedge currency exchange risk related to non-U.S. dollar
denominated fixed maturities had a total notional amount of $431 and $480, respectively, and total
fair value of $(6) and $(26), respectively.
Based on the fair values of the Company’s non-U.S. dollar denominated securities and derivative
instruments as of December 31, 2010 and 2009, management estimates that a 10% unfavorable change in
exchange rates would decrease the fair values by a before-tax total of approximately $87 and $62,
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.
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Liabilities
The Company’s Wealth Management 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, 2010 and 2009, the derivatives used to hedge
foreign currency exchange risk related to foreign denominated liability contracts had a total
notional amount of $771 and $814, respectively, and a total fair value of $(17) and $(2),
respectively.
The yen based fixed annuity product was 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.
During 2009, the Company has since suspended new sales of the Japan business. 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, 2010 and 2009, the notional value of the currency swaps was
$2.1 billion and $2.3 billion and the fair value was $608 and $316, 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 $27 and $47 for the years ended
December 31, 2010 and 2009, 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.
Prior to 2010, the Company had also issued guaranteed benefits (GMDB and GMIB) that were reinsured
from HLIKK to the U.S. insurance subsidiaries. During 2010, the Company entered into foreign
currency forward contracts that convert U.S. dollars to yen in order to hedge the foreign currency
risk due to U.S. dollar denominated assets backing the yen denominated liabilities. The Company
also enters into foreign currency forward contracts that convert euros to yen in order to
economically hedge the risk arising when the Japan policyholders’ variable annuity sub-accounts are
invested in non-Japanese yen denominated securities while the related GMDB and GMIB guarantees are
effectively yen-denominated. As of December 31, 2010 and 2009, the derivatives used to hedge
foreign currency risk associated with Japanese variable annuity products had a total notional
amount of $1.7 billion and $257, respectively, and a total fair value of $73 and $(8),
respectively.
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CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of The Hartford and its
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 $2.0 billion at December 31, 2010, dividends from
its 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 $500, common
stockholder dividends, subject to the discretion of the Board of Directors, of approximately $158,
and preferred stock dividends of approximately $42.
In addition, in 2010 The Hartford entered into an intercompany liquidity agreement that allows for
short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2.0
billion for liquidity and other general corporate purposes. The Connecticut Insurance Department
granted approval for the Connecticut domiciled insurance companies that are parties to
the agreement to treat receivables from a parent, including the
HFSG Holding Company, as admitted assets for statutory accounting purposes.
Debt
HFSG Holding Company’s debt maturities over the next twelve months include $400 aggregate principal
amount of its 5.25% senior notes that mature in October 2011.
On June 15, 2010, The Hartford repaid its $275, 7.9% senior notes at maturity with funds from its
capital raise in the first quarter of 2010.
On March 23, 2010, The Hartford issued $1.1 billion aggregate principal amount of its senior notes.
The issuance consisted of $300 of 4.0% senior notes due March 30, 2015, $500 of 5.5% senior notes
due March 30, 2020 and $300 of 6.625% senior notes due March 30, 2040. The senior notes bear
interest at their respective rate, payable semi-annually in arrears on March 30 and September 30 of
each year, beginning September 30, 2010. The issuance was made pursuant to the Company’s shelf
registration statement (Registration No. 333-142044). The Hartford used approximately $425 of the
net proceeds from the debt issuances to repurchase the Series E Preferred Stock issued to the U.S.
Treasury as a part of its participation in the Capital Purchase Program, $275 to repay senior notes
at maturity in 2010, and intends to use the remaining proceeds to repay senior notes at maturity in
2011. For further discussion on the repurchase of the Series E Preferred Stock see the Capital
Purchase Program discussion below.
For additional information regarding debt, see Note 14 of the Notes to Consolidated Financial
Statements.
Preferred Stock Issuance
On March 23, 2010, The Hartford issued 23 million depositary shares, each representing 1/40th
interest in the Series F Preferred Stock, at a price of $25 per depositary share and received net
proceeds of $556 under the program. The Hartford used the net proceeds from the preferred stock
issuance to repurchase the Series E Preferred Stock issued to the U.S. Treasury as a part of its
participation in the Capital Purchase Program. For further discussion on the repurchase of the
Series E Preferred Stock see the Capital Purchase Program discussion below.
Common Stock Issuance
On March 23, 2010, The Hartford issued approximately 59.6 million shares of common stock at a price
to the public of $27.75 per share and received net proceeds of $1.6 billion. The Hartford used the
net proceeds from the common stock issuance to repurchase the Series E Preferred Stock issued to
the U.S. Treasury as a part of its participation in the Capital Purchase Program. For further
discussion on the repurchase of the Series E Preferred Stock see the Capital Purchase Program
discussion below.
Preferred and Common Stock Dividends
On February 2, 2011, The Hartford’s Board of Directors declared a quarterly dividend of $0.10 per
common share payable on April 1, 2011 to common shareholders of record as of March 1, 2011.
On February 24, 2011, The Hartford’s Board of Directors declared a dividend of $18.125 on each
share of Series F preferred stock payable on April 1, 2011 to shareholders of record as of March
15, 2011.
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, $201, and $2
in 2010, 2009 and 2008. No contributions were made to the other postretirement plans in 2010, 2009
and 2008. The Company’s 2010 required minimum funding contribution was immaterial. The Company
presently anticipates contributing approximately $201 to its pension plans in 2011, 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 2011 and the funding
requirements for all of the pension plans is expected to be immaterial.
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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 $1.5 billion in dividends to HFSG Holding Company
in 2011 without prior approval from the applicable insurance commissioner. The Company’s life
insurance subsidiaries are permitted to pay up to a maximum of
approximately $83 in dividends to
HLI in 2011 without 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 2011. In 2010, HFSG Holding Company and HLI received no dividends from
the life insurance subsidiaries, and HFSG Holding Company received $1.0 billion 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.
Capital Purchase Program
On March 31, 2010, the Company repurchased all 3.4 million shares of Series E Preferred Stock
issued to the U.S. Department of the Treasury (the “Treasury”) for an aggregate purchase price of
$3.4 billion. The Hartford used approximately $425 of the net proceeds from the debt issuance,
$1.6 billion from the common stock issuance, $556 from the preferred stock issuance together with
available funds at the HFSG Holding Company to repurchase the Series E Preferred Stock. The
Company recorded a $440 charge to retained earnings representing the acceleration of the accretion
of the remaining discount on the preferred stock.
On September 27, 2010, the Treasury sold its warrants to purchase approximately 52 million shares
of The Hartford’s common stock in a secondary public offering for net proceeds of approximately
$706. The Hartford did not receive any proceeds from this sale. The warrants are exercisable, in
whole or in part, at any time and from time to time until June 26, 2019 at an initial exercise
price of $9.79. The exercise price will be paid by the withholding by The Hartford of a number of
shares of common stock issuable upon exercise of the warrants equal to the value of the aggregate
exercise price of the warrants so exercised determined by reference to the closing price of The
Hartford’s common stock on the trading day on which the warrants are exercised and notice is
delivered to the warrant agent. The Hartford did not purchase any of the warrants sold by the
Treasury.
During the Company’s participation in the Capital Purchase Program (“CPP”), the Company was subject
to numerous additional regulations, including restrictions on the ability to increase the common
stock dividend, limitations on the compensation arrangements for senior executives and additional
corporate governance standards. As a result of the redemption of Series E Preferred Stock, the
Company is no longer subject to these regulations other than certain reporting and certification
obligations to U.S. regulatory agencies.
To satisfy a key eligibility requirement for participation in the CPP, The Hartford acquired
Federal Trust Corporation and has agreed with the OTS to serve as a source of strength to its
wholly-owned subsidiary Federal Trust Bank (“FTB”), which included capital contributions of $5 and
$195 in 2010 and 2009, respectively, and could require further contributions of capital to FTB in
the future. At December 31, 2010 and 2009, FTB’s Tier 1 capital ratio was 11.4% and 8.3%,
respectively. FTB was designated as a “well capitalized” institution at December 31, 2010 and
2009.
Shelf Registrations
On August 4, 2010, The Hartford filed with the Securities and Exchange Commission (the “SEC”) an
automatic shelf registration statement (Registration No. 333-168532) for the potential offering and
sale of debt and equity securities. The registration statement allows for the following types of
securities to be offered: debt securities, junior subordinated debt securities, preferred stock,
common stock, depositary shares, warrants, stock purchase contracts, and stock purchase units. 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.
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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, 2010, 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 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Commercial Paper
|
||||||||||||||||||||||||
|
The Hartford
|
11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | — | $ | — | ||||||||||||||
|
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 | $ | — | $ | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
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, 2010, 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. 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, 2010, the consolidated net worth of the Company as
calculated in accordance with the terms of the credit facility was $23 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, 2010, as calculated in accordance with the terms of the credit facility, the
Company’s debt to capitalization ratio was 17%. Quarterly, the Company certifies compliance with
the financial covenants for the syndicate of participating financial institutions. As of December
31, 2010, the Company was in compliance with all such covenants.
The Hartford’s Japan operation also maintains lines of credit in support of the subsidiary
operations. As of December 31, 2010 there was a line of credit in the amount of $62, or ¥5
billion, which expires January 4, 2012. On February 14, 2011 an additional line of credit was
executed in the amount of $60, or ¥5 billion, which expires September 30, 2011.
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 legal 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 legal entity’s ability to conduct hedging activities by increasing the associated costs and
decreasing the willingness of counterparties to transact with the legal 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, 2010, is $557. Of this $557 the legal entities have posted
collateral of $530 in the normal course of business. Based on derivative market values as of
December 31, 2010, a downgrade of one level below the current financial strength ratings by either
Moody’s or S&P could require approximately an additional $29 to be posted as collateral. Based on
derivative market values as of December 31, 2010, a downgrade by either Moody’s or S&P of two
levels below the legal entities’ current financial strength ratings could require approximately an
additional $56 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, 2010 | ||||||||
| Ratings levels | Notional Amount | Fair Value | ||||||
|
Either BBB+ or Baa1 [1]
|
$ | 16,117 | $ | 307 | ||||
| [1] |
The notional and fair value amounts include a customized GMWB derivative with a notional
amount of $5.1 billion and a fair value of $122, for which the Company has a contractual right
to make a collateral payment in the amount of approximately $60 to prevent its termination.
|
113
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.
The Company’s insurance operations consist of property and casualty insurance products
(collectively referred to as “Property & Casualty Operations”) and life insurance products
(collectively referred to as “Life Operations”).
Property & Casualty
Property & Casualty Operations 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 Operation’s fixed maturities, short-term
investments, and cash, as of December 31, 2010:
|
Fixed maturities [1]
|
$ | 25,124 | ||
|
Short-term investments
|
1,117 | |||
|
Cash
|
250 | |||
|
Less: Derivative collateral
|
(174 | ) | ||
|
|
||||
|
Total
|
$ | 26,317 | ||
|
|
||||
| [1] |
Includes $1.4 billion of U.S. Treasuries.
|
Liquidity requirements that are unable to be funded by Property & Casualty Operation’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 Operations
Life Operation’s total general account contractholder obligations are supported by $70 billion, of
cash and total general account invested assets, excluding equity securities, trading, which
includes a significant short-term investment position, as depicted below, to meet liquidity needs.
The following table summarizes Life Operation’s fixed maturities, short-term investments, and cash,
as of December 31, 2010:
|
Fixed maturities [1]
|
$ | 53,068 | ||
|
Short-term investments
|
5,631 | |||
|
Cash
|
1,809 | |||
|
Less: Derivative collateral
|
(1,725 | ) | ||
|
Cash associated with Japan variable annuities
|
(702 | ) | ||
|
|
||||
|
Total
|
$ | 58,081 | ||
|
|
||||
| [1] |
Includes $3.4 billion of U.S. Treasuries.
|
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; Global Annuity and Life
Insurance obligations will be generally funded by both Hartford Life Insurance Company and Hartford
Life and Annuity Insurance Company; obligations of Retirement Plans and institutional investment
products will be generally funded by Hartford Life Insurance Company; and obligations of the
Company’s international annuity subsidiaries will be generally funded by the legal entity in the
country in which the obligation was generated.
114
Table of Contents
| As of | ||||
| December 31, | ||||
| Contractholder Obligations | 2010 | |||
|
Total Life contractholder obligations
|
$ | 256,040 | ||
|
Less: Separate account assets [1]
|
(159,742 | ) | ||
|
International statutory separate accounts [1]
|
(32,793 | ) | ||
|
|
||||
|
General account contractholder obligations
|
$ | 63,505 | ||
|
|
||||
|
|
||||
|
Composition of General Account Contractholder Obligations
|
||||
|
Contracts without a surrender provision and/or fixed payout dates [2]
|
$ | 29,303 | ||
|
Fixed MVA annuities [3]
|
10,467 | |||
|
International fixed MVA annuities
|
2,723 | |||
|
Guaranteed investment contracts (“GIC”) [4]
|
912 | |||
|
Other [5]
|
20,100 | |||
|
|
||||
|
General account contractholder obligations
|
$ | 63,505 | ||
|
|
||||
| [1] |
In the event customers elect to surrender separate account assets or
international statutory separate accounts, Life Operations will use
the proceeds from the sale of the assets to fund the surrender, and
Life Operation’s liquidity position will not be impacted. In many
instances Life Operations will receive a percentage of the surrender
amount as compensation for early surrender (surrender charge),
increasing Life Operation’s liquidity position. In addition, a
surrender of variable annuity separate account or general account
assets (see below) will decrease Life Operation’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 Operation’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 Operation 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 Operation is required to contribute additional capital to the
statutory separate account. Life Operation 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 Operation.
|
|
| [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
Operation’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 Global Annuity’s individual variable annuities and Life
Insurance’s variable life contracts, the general account option for
Retirement Plans’ annuities and universal life contracts sold by Life
Insurance may be funded through operating cash flows of Life
Operations, available short-term investments, or Life Operations 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
Operations 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 | 2010 | |||
|
Short-term investments
|
$ | 8,528 | ||
|
U.S. Treasuries
|
5,029 | |||
|
Cash
|
2,062 | |||
|
Less: Derivative collateral
|
(1,899 | ) | ||
|
Cash associated with Japan variable annuities
|
(702 | ) | ||
|
|
||||
|
Total liquidity available
|
$ | 13,018 | ||
|
|
||||
115
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 approximately $1.5 billion as disclosed in Note 12 of
Notes to Consolidated Financial Statements.
|
The following table identifies the Company’s aggregate contractual obligations as of December 31,
2010:
| Payments due by period | ||||||||||||||||||||
| Less than | 1-3 | 3-5 | More than | |||||||||||||||||
| Total | 1 year | years | years | 5 years | ||||||||||||||||
|
Property and casualty obligations [1]
|
$ | 21,549 | $ | 5,732 | $ | 4,471 | $ | 2,857 | $ | 8,489 | ||||||||||
|
Life, annuity and disability obligations [2]
|
386,382 | 26,697 | 56,139 | 51,192 | 252,354 | |||||||||||||||
|
Operating lease obligations [3]
|
307 | 114 | 118 | 42 | 33 | |||||||||||||||
|
Long-term debt obligations [4]
|
19,799 | 901 | 1,280 | 1,610 | 16,008 | |||||||||||||||
|
Consumer notes [5]
|
419 | 79 | 250 | 50 | 40 | |||||||||||||||
|
Purchase obligations [6]
|
2,338 | 1,972 | 209 | 114 | 43 | |||||||||||||||
|
Other long-term liabilities reflected on the balance sheet [7]
|
1,848 | 1,357 | 345 | 146 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total [8]
|
$ | 432,642 | $ | 36,852 | $ | 62,812 | $ | 56,011 | $ | 276,967 | ||||||||||
|
|
||||||||||||||||||||
| [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, 2010, the total
property and casualty reserves in the above table are gross of a reserve discount of $524.
|
| [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 other assumptions. 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 lease agreements. See Notes 12 and 14 of
Notes to Consolidated Financial Statements for additional discussion on lease commitments.
|
|
| [4] |
Includes contractual principal and interest payments. All long-term debt obligations have
fixed rates of interest. See Note 14 of 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 Notes to Consolidated
Financial Statements for additional discussion of consumer notes.
|
|
| [6] |
Includes $1.5 billion in commitments to purchase investments including about $693 of limited
partnership, $99 of private placements and $729 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. In January 2011 the
Company executed an extension of its’ existing information technology outsourcing arrangement
with a third party vendor. This extension is effective February 1, 2011 and runs through
January 31, 2016. The approximate annual cost/outlay is $96 per year and is not included in
the table above.
|
|
|
Also included in purchase obligations is $642 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 $1.1 billion 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 2011.
|
116
Table of Contents
Capitalization
The capital structure of The Hartford as of December 31, 2010 and December 31, 2009 consisted of
debt and stockholders’ equity, summarized as follows:
| December 31, | December 31, | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Short-term debt (includes current
maturities of long-term debt and
capital lease obligations)
|
$ | 400 | $ | 343 | 17 | % | ||||||
|
Long-term debt
|
6,207 | 5,496 | 13 | % | ||||||||
|
|
||||||||||||
|
Total debt [1]
|
6,607 | 5,839 | 13 | % | ||||||||
|
Stockholders’ equity excluding
accumulated other comprehensive loss,
net of tax (“AOCI”)
|
21,312 | 21,177 | 1 | % | ||||||||
|
AOCI, net of tax
|
(1,001 | ) | (3,312 | ) | 70 | % | ||||||
|
|
||||||||||||
|
Total stockholders’ equity
|
$ | 20,311 | $ | 17,865 | 14 | % | ||||||
|
Total capitalization including AOCI
|
$ | 26,918 | $ | 23,704 | 14 | % | ||||||
|
|
||||||||||||
|
Debt to stockholders’ equity
|
33 | % | 33 | % | ||||||||
|
Debt to capitalization
|
25 | % | 25 | % | ||||||||
| [1] |
Total debt of the Company excludes $382 and $1.1 billion of consumer notes as of December 31,
2010 and December 31, 2009, respectively, and $25 and $78 of Federal Home Loan Bank advances
recorded in other liabilities as of December 31, 2010 and December 31, 2009, respectively.
|
The Hartford’s total capitalization increased $3.2 billion, or 14%, from December 31, 2009 to
December 31, 2010 due to increases in debt, improvements in AOCI and increases in stockholders’
equity, excluding AOCI.
Total debt increased primarily due to the issuance of $1.1 billion in senior notes in March 2010
partially offset by the repayment of $275 in senior notes in June 2010 and payment of capital lease
obligations in January 2010.
AOCI, net of tax, improved primarily due to increases in net unrealized available-for-sale
securities of $2.0 billion primarily as a result of improved security valuations due to declining
interest rates and an increase of $128 in cash flow hedging instruments.
The increase in stockholders’ equity, excluding AOCI, was primarily due to net income available to
common shareholders of $1.2 billion, issuance of common shares under public offering of $1.6
billion, and issuance of mandatory convertible preferred stock of $556, partially offset by the
redemption of $3.4 billion in preferred stock issued to the U.S. Treasury. See Note 15 of the
Notes to Consolidated Financial Statements for additional information on the redemption of the
preferred stock and issuances of stock in 2010.
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
| 2010 | 2009 | 2008 | ||||||||||
|
Net cash provided by operating activities
|
$ | 3,309 | $ | 2,974 | $ | 4,192 | ||||||
|
Net cash used for investing activities
|
$ | (434 | ) | $ | (3,123 | ) | $ | (8,827 | ) | |||
|
Net cash provided by (used for) financing activities
|
$ | (2,955 | ) | $ | 523 | $ | 4,274 | |||||
|
Cash — end of year
|
$ | 2,062 | $ | 2,142 | $ | 1,811 | ||||||
Year ended December 31, 2010 compared to the year ended December 31, 2009
The increase in cash provided by operating activities, compared to the prior year period, was
primarily the result of increases in fee income. Cash used for investing activities in 2010
primarily relates to net purchases of available-for-sale securities of $1.5 billion and net
payments on derivatives of $338, partially offset by net proceeds from sales of mortgage loans of
$1.4 billion. Cash used for investing activities in 2009 consisted of net outflows of $2.9 billion
from changes in payables on securities lending, net purchases of available-for-sale securities and
$561 of net payments on derivatives, partially offset by net proceeds from sales of mortgage loans
of $396.
Cash provided by (used for) financing activities decreased primarily due to the redemption of
preferred stock issued to the U.S. Treasury of $3.4 billion, repayments of consumer notes of $754
in 2010, repayment of $275 in senior notes in June 2010 and net outflows on investment and
universal life-type contracts in 2010. Partially offsetting the decreases were proceeds from the
issuance of $1.1 billion in aggregate senior notes, issuance of common stock under a public
offering of $1.6 billion and issuance of mandatory convertible preferred stock of $556.
Year ended December 31, 2009 compared to the year ended December 31, 2008
The decrease in cash provided by 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 provided by 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 the U.S. 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.
Operating cash flows in each of the last three years have been adequate to meet liquidity
requirements.
117
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 impact the Company’s cost of borrowing and its ability to access financing and 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 Company’s cost of borrowing and ability to access financing, as well as the level
of revenues or the persistency of its business may be adversely impacted.
The following table summarizes The Hartford’s significant member companies’ financial ratings from
the major independent rating organizations as of February 18, 2011.
| Insurance Financial Strength Ratings: | A.M. Best | Fitch | Standard & Poor’s | Moody’s | ||||
|
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 |
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, 2009 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, 2010
is an estimate, as the respective 2010 statutory filings have not yet been made.
| 2010 | 2009 | |||||||
|
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries
|
$ | 7,731 | $ | 7,324 | ||||
|
Property and casualty insurance subsidiaries
|
7,721 | 7,364 | ||||||
|
|
||||||||
|
Total
|
$ | 15,452 | $ | 14,688 | ||||
|
|
||||||||
Total statutory capital and surplus increased by $764 primarily due statutory net income, after
tax, for property and casualty subsidiaries of $1.5 billion, offset by statutory net losses of $140
in our life insurance subsidiaries, including domestic captive insurance subsidiaries and
dividends to the HFSG Holding Company of $1.0 billion.
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 $1.2 billion and $1.3 billion as of
December 31, 2010 and December 31, 2009, respectively. However, under the accounting practices and
procedures governed by Japanese regulatory authorities, the Company’s statutory capital and surplus
was $1.3 billion and $1.1 billion as of December 31, 2010 and 2009, respectively.
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Statutory Capital
The Company’s stockholders’ equity, as prepared using U.S. generally accepted accounting principles
(“US GAAP”) was $20.3 billion as of December 31, 2010. 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 (“US STAT”) was $15.5 billion as of
December 31, 2010. Significant differences between US GAAP stockholders’ equity and aggregate
statutory capital and surplus prepared in accordance with US STAT include the following:
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Costs incurred by the Company to acquire insurance policies are deferred under US GAAP
while those costs are expensed immediately under US STAT.
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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 US GAAP while those
amounts deferred are subject to limitations under US STAT.
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The assumptions used in the determination of Life benefit reserves is prescribed under US
STAT, while the assumptions used under US GAAP are generally the Company’s best estimates.
The methodologies for determining life insurance reserve amounts may also be different. For
example, reserving for living benefit reserves under US STAT is generally addressed by the
Commissioners’ Annuity Reserving Valuation Methodology and the related Actuarial Guidelines,
while under US 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 insurance reserves to changes in equity markets, as applicable, will be different between
US GAAP and US STAT.
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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 US GAAP, while US 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.
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US 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 US GAAP does not. Also, for those realized gains and losses
caused by changes in interest rates, US 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 US GAAP does not.
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Goodwill arising from the acquisition of a business is tested for recoverability on an
annual basis (or more frequently, as necessary) for US GAAP, while under US STAT goodwill is
amortized over a period not to exceed 10 years and the amount of goodwill is limited.
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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 US STAT. US 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.
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. For further discussion on the factors see
the Market Risk on Statutory Capital section within Capital Markets Risk Management of the MD&A.
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. Statutory
capital generated by the Property & Casualty subsidiaries in excess of the capital level required
to meet “AA level” ratings is available for use by the enterprise or for corporate purposes. 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.
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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.
For a discussion of terrorism reinsurance legislation and how it affects The Hartford, see
“Terrorism” under the Property and 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
the United States Treasury Department 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.
Legislative Developments
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was
enacted on July 21, 2010, mandating changes to the regulation of the financial services industry.
The Dodd-Frank Act may affect our operations and governance in ways that could adversely affect our
financial condition and results of operations.
In particular, the Dodd-Frank Act vests a newly created Financial Services Oversight Council with
the power to designate “systemically important” institutions, which will be subject to special
regulatory supervision and other provisions intended to prevent, or mitigate the impact of, future
disruptions in the U.S. financial system. Systemically important institutions are limited to
nonbank financial companies that are so important that their potential failure could “pose a threat
to the financial stability of the United States.” If we are designated as a systemically important
institution, we could be subject to higher capital requirements and additional regulatory oversight
imposed by The Federal Reserve, as well as to post-event assessments imposed by the Federal Deposit
Insurance Corporation (“FDIC”) to recoup the costs associated with the orderly resolution of other
systemically important institutions in the event one or more such institutions fails. Further, the
FDIC is authorized to petition a state court to commence an insolvency proceeding to liquidate an
insurance company that fails in the event the insurer’s state regulator fails to act. Other
provisions will require central clearing of, and/or impose new margin and capital requirements on,
derivatives transactions, which we expect will increase the costs of our hedging program.
A number of provisions of the Dodd-Frank Act affect us solely due to our status as a savings & loan
holding company. For example, under the Dodd-Frank Act, the OTS will be dissolved. The Federal
Reserve will regulate us as a holding company, and the OCC will regulate our thrift subsidiary,
Federal Trust Bank. Because of our status as a savings and loan holding company or if we are
designated a systemically important institution, the Dodd-Frank Act may also restrict us from
sponsoring and investing in private equity and hedge funds, which would limit our discretion in
managing our general account. The Dodd-Frank Act will also impose new minimum capital standards on
a consolidated basis for holding companies that, like us, control insured depository institutions.
Other provisions in the Dodd-Frank Act that may impact us, irrespective of whether or not we are a
savings and loan holding company include: the possibility that regulators could break up firms that
are considered “too big to fail;” a new “Federal Insurance Office” within Treasury to, among other
things, conduct a study of how to improve insurance regulation in the United States; new means for
regulators to limit the activities of financial firms; discretionary authority for the SEC to
impose a harmonized standard of care for investment advisers and broker-dealers who provide
personalized advice about securities to retail customers; additional regulation of compensation in
the financial services industry; and enhancements to corporate governance, especially regarding
risk management.
The changes resulting from the Dodd-Frank Act could adversely affect our results of operation and
financial condition.
FY 2012, Budget of the United States Government
On February 15, 2011, the Obama Administration released its “FY 2012, Budget of the United States
Government” (the “Budget”). Although the Administration has not released proposed statutory
language, the Budget includes proposals which if enacted, would affect the taxation of life
insurance companies and certain life insurance products. In particular, the proposals would affect
the treatment of corporate owned life insurance (“COLI”) policies by limiting the availability of
certain interest deductions for companies that purchase those policies. The proposals would also
change the method used to determine the amount of dividend income received by a life insurance
company on assets held in separate accounts used to support products, including variable life
insurance and variable annuity contracts, that are eligible for the dividends received deduction
(“DRD”). The DRD reduces the amount of dividend income subject to tax and is a significant
component of the difference between the Company’s actual tax expense and expected amount determined
using the federal statutory tax rate of 35%. If proposals of this type were enacted, the Company’s
sale of COLI, variable annuities, and variable life products could be adversely affected and the
Company’s actual tax expense could increase, reducing earnings. The Budget also included a proposal
to levy a $30 billion “Financial Crisis Responsibility Fee,” in the aggregate, on large financial
institutions, including The Hartford.
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.
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IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of the Notes to Consolidated Financial
Statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
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,
2010.
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, 2010 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, 2010.
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, 2010, 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, 2010, 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, 2010 of the Company and our report, dated February 25, 2011,
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 variable interest entities and embedded credit derivatives as required by
accounting guidance adopted in 2010.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 25, 2011
February 25, 2011
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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 2010 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. OTHER INFORMATION
On February 22, 2011 (the “Effective Date”), The Hartford Financial Services Group, Inc. (“The
Hartford”) adopted The Hartford Senior Executive Officer Severance Pay Plan (the “Tier 1 Plan”),
providing for specified payments and benefits to participants upon termination of employment as a
result of severance eligible events. The Tier 1 Plan applies to such of The Hartford’s Tier 1
executive officers, including named executive officers, as the Executive Vice President, Human
Resources (the “Plan Administrator”) has approved for participation in the Plan and who are
otherwise eligible, as described below. Liam E. McGee, Chairman, President and Chief Executive
Officer, and Christopher J. Swift, Executive Vice President and Chief Financial Officer, will
participate in the Tier 1 Plan as of the Effective Date. The Hartford’s other named executive
officers, Lizabeth H. Zlatkus, Executive Vice President and Chief Risk Officer, Alan J. Kreczko,
Executive Vice President and General Counsel, and Gregory G. McGreevey, Executive Vice President
and Chief Investment Officer, are anticipated to participate in the Tier 1 Plan after their current
individual employment agreements expire (May 1, 2012, June 7, 2012 and October 8, 2011,
respectively), provided that they then meet the conditions set forth below.
The Tier 1 Plan provides benefits to Tier 1 executives who the Plan Administrator has approved for
participation in the Plan and who have agreed to such non-competition, non-solicitation,
non-disparagement and other restrictive covenants as are required by the Plan Administrator. The
Plan does not apply to an executive who is party to an individual employment agreement that
provides for the payment of severance pay. (The Company has ceased the practice of entering into
such individual employment agreements.)
A participant is generally eligible for severance pay under the Tier 1 Plan if (1) the Company
terminates the employee’s employment; and (2) the employee signs a Separation and Release
Agreement, unless:
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termination is for misconduct or other disciplinary action;
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the employee is under investigation for misconduct at the time severance would be due;
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the employee refuses a “Comparable Position” defined as a position (i) with materially the
same base salary rate and annual incentive opportunity, (ii) with similar duties or having
different duties that, in management’s judgment, the employee is able to perform and are
consistent with the employee’s experience, and (iii) that is located within a 50 miles radius
of the employee’s previous place of employment or does not entail a substantially longer
commute from home;
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in connection with a sale, divestiture or outsourcing that is not deemed a change of
control, the employee accepts employment or continued employment with the buyer or vendor,
declines an interview or an invitation to apply for a Comparable Position with the buyer or
vendor, or is offered a Comparable Position; or
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the employee’s employment terminates due to mandatory retirement at or after the employee
has attained his/her 65th birthday, subject to applicable law.
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A participating Tier 1 executive will receive severance pay in an amount equal to two times the sum
of the executive’s annual base salary plus the target annual bonus, both determined as of the
termination date. The severance pay will be payable in a lump sum within 60 days of termination.
In addition, a Tier 1 executive will be eligible to receive a pro-rata annual bonus under the
Company’s annual incentive plan for the year in which the termination occurs, payable no later than
the March 15 following the calendar year of termination. The participating executive will also
vest pro-rata in any outstanding unvested long term incentive awards, unless prohibited by
applicable law, provided that at least one full year of the performance or restriction period of
the applicable award has elapsed as of the termination date.
The Tier 1 Plan provides for continued medical and dental coverage and outplacement services for up
to twelve months.
If, within the two year period following a Change of Control (as defined in the Company’s 2010
Incentive Stock Plan), (1) a participant is involuntarily terminated by the Company other than for
cause, or (2) the participant voluntarily terminates employment with the Company for Good Reason
(as defined below), then the participant will receive the same severance pay, and will be eligible
for a pro-rata annual bonus as set forth above, except that the pro-rata annual bonus payable will
be at least the same percentage of the target level of payout as is generally applicable to
executives whose employment did not terminate. In addition, as provided in the 2010 Incentive
Stock Plan, any outstanding unvested long term incentive awards will be fully vested upon a Change
of Control. No gross-up is provided for any excise taxes that apply to a participant. Following a
Change of Control, the term “Company” includes The Hartford, Hartford Fire Insurance Company or any
successor in interest to either of these entities and any affiliate of such a successor. Good
Reason means:
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the assignment of duties inconsistent in any material adverse respect with the executive’s
position, duties, authority or responsibilities, or any other material adverse change in
position, including titles, authority or responsibilities;
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a material reduction in base pay or target bonus;
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being based at any office or location more than 50 miles from the location at which
services were performed immediately prior to the Change of Control (provided that such change
of office or location also entails a substantially longer commute);
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a failure by the Company to obtain the assumption and agreement to perform the provisions
of the Plan by a successor; or
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a termination asserted by the Company to be for cause that is subsequently determined not
to constitute a termination for cause.
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PART III
Item 10. DIRECTORS, AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE HARTFORD
Certain of the information called for by Item 10 will be set forth in the definitive proxy
statement for the 2011 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:
JONATHAN BENNETT
(Executive Vice President, Digital Commerce & Customer Analytics)
(Executive Vice President, Digital Commerce & Customer Analytics)
Mr. Bennett, 47, is Executive Vice President, Digital Commerce & Customer Analytics, a
newly-created position he assumed in July 2010. In this role, he directs all digital strategy and
execution for the enterprise, and is accountable for developing customer insights that drive the
Company’s business direction and growth. Most recently, Mr. Bennett was the Executive Vice
President of Personal & Small Business Insurance for the Company, a position he held from 2005 to
2010. Mr. Bennett joined The Hartford in April 1999 as the Staff Assistant to the Chairman and
CEO. In March 2000, he was named Vice President of Corporate Development, and subsequently, he led
the Property and Casualty eBusiness Ventures team. In January 2002, Mr. Bennett joined the
Personal Lines organization to lead the Product Management department. And in April 2003, he was
named Senior Vice President, Personal Lines Division, with overall responsibility for the Company’s
auto and homeowners business. Mr. Bennett worked at CIGNA from 1994 to 1999, serving as Vice
President and Product Manager in charge of the institutional fund strategy at CIGNA’s Retirement
Division. He also held positions in Strategy and Marketing and as a Product Manager for
corporate-owned life insurance. Prior to CIGNA, Mr. Bennett worked at Arthur Andersen LLP as an
auditor and consultant.
BETH A. BOMBARA
(Senior Vice President and Controller)
(Senior Vice President and Controller)
Ms. Bombara, 43, 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.
JAMES ECKERLE
(Executive Vice President, Strategic Initiatives and Enterprise Technology)
(Executive Vice President, Strategic Initiatives and Enterprise Technology)
Mr. Eckerle, 51, has been Executive Vice President of Strategic Initiatives and Enterprise
Technology since he joined the Company in October 2010. In his role, Mr. Eckerle leads an
enterprise-wide initiative to simplify and transform the Company’s core processes and operating
mechanisms to improve efficiency and effectiveness. Mr. Eckerle has more than 30 years of
financial services industry experience, with a specific focus on change management and process
improvement. Prior to joining the Company, Mr. Eckerle served as senior vice president of Global
Transition, Quality and Change at Bank of America, a position he held since 2004. Mr. Eckerle
joined Bank of America in 1986 and held a number of leadership roles in Enterprise Initiative
Delivery, Senior Change Management Technology and Operations.
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ALAN J. KRECZKO
(Executive Vice President and General Counsel)
(Executive Vice President and General Counsel)
Mr. Kreczko, 59, is Executive Vice President and General Counsel of the Company, positions he has
held since June 2007. He was previously 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 in 2002, Mr. Kreczko held various senior positions within the United States
Government. He served as acting Assistant Secretary of State for Population, Refugees and
Migration, where he led the State Department’s humanitarian response in conflict situations,
including Afghanistan, Timor, Sudan and West Africa. Prior to that position, he 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.
DAVID N. LEVENSON
(Executive Vice President; President Wealth Management)
(Executive Vice President; President Wealth Management)
Mr. Levenson, 44, is Executive Vice President of the Company and serves as President of the Company’s
Wealth Management business, positions he has held since July 2010. Between June 2009 and July 2010, he served
as Executive Vice President of Legacy Holdings, which included the Company’s in-force domestic variable annuity
business as well as international and institutional business segments. From 2006 to 2009, Mr. Levenson was with Hartford
Life Insurance K.K., the Company’s Japan subsidiary, where he initially was charged with leading a turnaround as head
of product and distribution and ultimately was named President and CEO. Prior to assuming this role, Mr. Levenson was managing
director at Hartford Investment Management Company (“HIMCO”) responsible for sales and marketing, a position he held from 2005 to
2006. Prior to joining HIMCO in 2005, he held a number of leadership roles with the Company’s life insurance operations. Mr.
Levenson joined the Company in 1995 and was responsible for building the Company’s retail mutual fund business which was launched
in July 1996. In 1999, he added responsibilities for 401(k) sales management and, in 2000, assumed responsibility for the 401(k)
business line management. In 2002, he became head of the retail product management group and was responsible for the Company’s
annuities, U.S. and Canadian mutual funds, 401(k), 529 college savings plans, and offshore products; he held this position until 2005
when he joined HIMCO.
GREGORY McGREEVEY
(Executive Vice President and Chief Investment Officer)
(Executive Vice President and Chief Investment Officer)
Mr. McGreevey, 48, is Executive Vice President and Chief Investment Officer of the Company and
President of Hartford Investment Management Company, a wholly-owned subsidiary of the Company,
positions he has held since October 2008. Prior to joining the Company, he served as vice chairman
and executive vice president of ING Investment Management — Americas Region, including business
head and chief investment officer for ING’s North American proprietary investments and chief
executive officer of ING Institutional Markets, positions he held from October 2005 through March
2008. He also served as executive vice president and chief investment officer of ING Proprietary
Fixed Income from October 2003 through October 2005. Before joining ING, Mr. McGreevey was
president and chief investment officer of Laughlin Asset Management and president and chief
operating officer of both Laughlin Educational Services and Laughlin Analytics, Inc. in Portland,
Oregon.
ANDRE NAPOLI
(Executive Vice President; President Consumer Markets)
(Executive Vice President; President Consumer Markets)
Mr. Napoli, 46, is Executive Vice President of the Company and President of the Company’s Consumer
Markets business, positions he has held since August 2010. He was most recently Executive Vice
President and Chief Administrative Officer with the CUNA Mutual Group, an insurance company focused
on serving credit unions across the country. While at CUNA Mutual, Mr. Napoli gained experience
developing affinity markets. He initially led CUNA Mutual’s consumer products division and was
promoted to chief administrative officer. In this role, Mr. Napoli was responsible for claims,
information technology and customer operations in support of CUNA Mutual’s business. Mr. Napoli
also has more than a decade of experience managing consumer insurance businesses and operations,
including serving in a variety of product, pricing and claims roles at Progressive and Nationwide.
ANDREW J. PINKES
(Executive Vice President; Acting Head of Commercial Markets)
(Executive Vice President; Acting Head of Commercial Markets)
Mr. Pinkes, 48, is acting head of the Commercial Markets business of the Company, a position he
assumed in October 2010, as well as Executive Vice President of P&C Claims and President of
Heritage Holdings, Inc. Mr. Pinkes became Executive Vice President of P&C Claims in 2008 and, as
such, is responsible for managing the Company’s P&C Claims Department, including Worker’s
Compensation, Auto, Liability, Property, Specialty, and as of August 2010, Group Benefits claims.
Since 2006, he has also served as President of Heritage Holdings, an entity that manages the
Company’s domestic and international P&C run-off operations, including direct and assumed claims,
reinsurance collections, and commutations. Prior to that, Mr. Pinkes was Senior Vice President and
Chief Operating Officer of Heritage Holdings, a position he assumed in 2005. Mr. Pinkes joined the
Company in 2003 as Senior Vice President of the Complex Claim Group. As such, he was responsible
for over 200 claims, legal, and actuarial professionals who handled the Company’s direct exposures
arising out of asbestos, environmental, and other complex tort claims.
125
Table of Contents
CHRISTOPHER J. SWIFT
(Executive Vice President and Chief Financial Officer)
(Executive Vice President and Chief Financial Officer)
Mr. Swift, 50
,
is Executive Vice President and Chief Financial Officer of the Company, positions he
has held since March 1, 2010. As the Company’s CFO, Mr. Swift is responsible for finance,
treasury, capital, accounting and investor relations. Prior to joining the Company, Mr. Swift was
Vice Chairman and CFO of American Life Insurance Company (“ALICO”), an operating company of
American International Group (“AIG”), a position he assumed in March 2009. From July 2005 to March
2009, he served as Vice President and Chief Financial Officer of AIG’s Global Life Insurance and
Retirement Services division; and from August 2003 to July 2005, he served as Executive Vice
President, Chief Financial Officer and Head of Annuity Operations of AIG American General Life
Companies. Before joining AIG in 2003, he was a partner with KPMG and head of the Global Insurance
Industry Practice.
KAREN C. TRIPP
(Executive Vice President, Marketing and Communications)
(Executive Vice President, Marketing and Communications)
Ms. Tripp, 55, is Executive Vice President of Marketing and Communications, a position she assumed
in September 2010. In her role, Ms. Tripp has oversight of brand management and advertising, media
relations, philanthropy and executive and employee communications. Prior to joining the Company,
Ms. Tripp served as vice president of Corporate Communications for L3 Communications since 2007.
Prior to that, she was general manager of Global Communications for General Electric’s
Infrastructure business, a position she held from 2002 to 2007. She also served as vice president
of Corporate Communications for Rockwell Collins, a position she held from 1997 to 2002.
EILEEN G. WHELLEY
(Executive Vice President, Human Resources)
(Executive Vice President, Human Resources)
Ms. Whelley, 57, 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 and in 2004 was named GE Vice President and executive vice president of
human resources for NBC Universal, responsible for HR integration 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 Risk Officer)
(Executive Vice President and Chief Risk Officer)
Ms. Zlatkus, 52, is Executive Vice President and Chief Risk Officer of the Company, roles she
assumed in March 2010. 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. On May
1, 2008, Ms. Zlatkus became Executive Vice President and Chief Financial Officer of the Company.
Item 11. EXECUTIVE COMPENSATION
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 Management Development Committee”, and “Compensation and Management
Development Committee Interlocks and Insider Participation” and is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
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.
126
Table of Contents
Equity Compensation Plan Information
The following table provides information as of December 31, 2010 about the securities authorized
for issuance under the Company’s equity compensation plans. The Company maintains The Hartford
Incentive Stock Plan (the “2000 Stock Plan”), The Hartford 2005 Incentive Stock Plan (the “2005
Stock Plan”), The Hartford 2010 Incentive Stock Plan (the “2010 Stock Plan”), and The Hartford
Employee Stock Purchase Plan (the “ESPP”). On May 19, 2010, the shareholders of the Company
approved the 2010 Stock Plan, which superseded the 2005 Stock Plan. Pursuant to the provisions of
the 2010 Stock Plan, no additional shares may be issued from the 2005 Stock Plan. To the extent
that any awards under the 2005 Stock 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 2010 Stock Plan and such shares shall be added to
the total number of shares available under the 2010 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
|
5,266,634 | $ | 52.91 | 24,624,318 | [1] | |||||||
|
Equity compensation
plans not approved
by stockholders
|
12,821 | 50.23 | 256,676 | |||||||||
|
|
||||||||||||
|
Total
|
5,279,455 | $ | 52.90 | 24,880,994 | ||||||||
|
|
||||||||||||
| [1] |
Of these shares, 7,240,661 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 Management Development 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 2010 Stock Plan and the ESPP.
127
Table of Contents
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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, 2010 and 2009” and is incorporated herein by reference.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(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.
|
128
Table of Contents
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, 2010 and 2009,
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, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010, 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 variable interest entities and embedded credit derivatives as required
by accounting guidance adopted in 2010, for other-than-temporary impairments as required by
accounting guidance adopted in 2009, and for the fair value measurement of financial instruments as
required by accounting guidance adopted 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,
2010, 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 25,
2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 25, 2011
Hartford, Connecticut
February 25, 2011
F-2
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Operations
| For the years ended December 31, | ||||||||||||
| (In millions, except for per share data) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Revenues
|
||||||||||||
|
Earned premiums
|
$ | 14,055 | $ | 14,424 | $ | 15,503 | ||||||
|
Fee income
|
4,784 | 4,576 | 5,135 | |||||||||
|
Net investment income (loss):
|
||||||||||||
|
Securities available-for-sale and other
|
4,392 | 4,031 | 4,335 | |||||||||
|
Equity securities, trading
|
(774 | ) | 3,188 | (10,340 | ) | |||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
3,618 | 7,219 | (6,005 | ) | ||||||||
|
|
||||||||||||
|
Net realized capital losses:
|
||||||||||||
|
Total other-than-temporary impairment (“OTTI”) losses
|
(852 | ) | (2,191 | ) | (3,964 | ) | ||||||
|
OTTI losses recognized in other comprehensive income
|
418 | 683 | — | |||||||||
|
|
||||||||||||
|
Net OTTI losses recognized in earnings
|
(434 | ) | (1,508 | ) | (3,964 | ) | ||||||
|
Net realized capital losses, excluding net OTTI losses recognized in earnings
|
(120 | ) | (502 | ) | (1,954 | ) | ||||||
|
|
||||||||||||
|
Total net realized capital losses
|
(554 | ) | (2,010 | ) | (5,918 | ) | ||||||
|
|
||||||||||||
|
Other revenues
|
480 | 492 | 504 | |||||||||
|
|
||||||||||||
|
Total revenues
|
22,383 | 24,701 | 9,219 | |||||||||
|
|
||||||||||||
|
Benefits, losses and expenses
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
13,025 | 13,831 | 14,088 | |||||||||
|
Benefits, losses and loss adjustment expenses — returns
credited on international variable annuities
|
(774 | ) | 3,188 | (10,340 | ) | |||||||
|
Amortization of deferred policy acquisition costs and
present value of future profits
|
2,544 | 4,267 | 4,271 | |||||||||
|
Insurance operating costs and other expenses
|
4,663 | 4,635 | 4,703 | |||||||||
|
Interest expense
|
508 | 476 | 343 | |||||||||
|
Goodwill impairment
|
153 | 32 | 745 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
20,119 | 26,429 | 13,810 | |||||||||
|
Income (loss) before income taxes
|
2,264 | (1,728 | ) | (4,591 | ) | |||||||
|
Income tax expense (benefit)
|
584 | (841 | ) | (1,842 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 1,680 | $ | (887 | ) | $ | (2,749 | ) | ||||
|
|
||||||||||||
|
Preferred stock dividends and accretion of discount
|
515 | 127 | 8 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders
|
$ | 1,165 | $ | (1,014 | ) | $ | (2,757 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings (Loss) per common share
|
||||||||||||
|
Basic
|
$ | 2.70 | $ | (2.93 | ) | $ | (8.99 | ) | ||||
|
Diluted
|
$ | 2.49 | $ | (2.93 | ) | $ | (8.99 | ) | ||||
|
|
||||||||||||
|
Cash dividends declared per common share
|
$ | 0.20 | $ | 0.20 | $ | 1.91 | ||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
F-3
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
| As of December 31, | ||||||||
| (In millions, except for share data) | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Investments
|
||||||||
|
Fixed maturities, available-for-sale, at fair value (amortized cost of $78,419 and
$76,015) (includes variable interest entity assets, at fair value, of $406 as of
December 31, 2010)
|
$ | 77,820 | $ | 71,153 | ||||
|
Fixed maturities, at fair value using the fair value option (includes variable
interest entity assets, at fair value, of $323 as of December 31, 2010)
|
649 | — | ||||||
|
Equity securities, trading, at fair value
(cost of $33,899 and $33,070)
|
32,820 | 32,321 | ||||||
|
Equity securities, available-for-sale, at fair value (cost of $1,013 and $1,333)
|
973 | 1,221 | ||||||
|
Mortgage loans (net of allowances for loan losses of $155 and $366)
|
4,489 | 5,938 | ||||||
|
Policy loans, at outstanding balance
|
2,181 | 2,174 | ||||||
|
Limited partnerships and other alternative investments (includes variable interest
entity assets of $14 as of December 31, 2010)
|
1,918 | 1,790 | ||||||
|
Other investments
|
1,617 | 602 | ||||||
|
Short-term investments
|
8,528 | 10,357 | ||||||
|
|
||||||||
|
Total investments
|
130,995 | 125,556 | ||||||
|
Cash
|
2,062 | 2,142 | ||||||
|
Premiums receivable and agents’ balances, net
|
3,273 | 3,404 | ||||||
|
Reinsurance recoverables, net
|
4,862 | 5,384 | ||||||
|
Deferred policy acquisition costs and present value of future profits
|
9,857 | 10,686 | ||||||
|
Deferred income taxes, net
|
3,725 | 3,940 | ||||||
|
Goodwill
|
1,051 | 1,204 | ||||||
|
Property and equipment, net
|
1,150 | 1,026 | ||||||
|
Other assets
|
1,629 | 3,981 | ||||||
|
Separate account assets
|
159,742 | 150,394 | ||||||
|
|
||||||||
|
Total assets
|
$ | 318,346 | $ | 307,717 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
|
||||||||
|
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
|
$ | 39,598 | $ | 39,631 | ||||
|
Other policyholder funds and benefits payable
|
44,550 | 45,852 | ||||||
|
Other policyholder funds and benefits payable — international variable annuities
|
32,793 | 32,296 | ||||||
|
Unearned premiums
|
5,176 | 5,221 | ||||||
|
Short-term debt
|
400 | 343 | ||||||
|
Long-term debt
|
6,207 | 5,496 | ||||||
|
Consumer notes
|
382 | 1,136 | ||||||
|
Other liabilities (includes variable interest entity liabilities of $394 as of
December 31, 2010)
|
9,187 | 9,454 | ||||||
|
Separate account liabilities
|
159,742 | 150,394 | ||||||
|
|
||||||||
|
Total liabilities
|
298,035 | 289,823 | ||||||
|
|
||||||||
|
Commitments and Contingencies (Note 12)
|
||||||||
|
|
||||||||
|
Equity
|
||||||||
|
Preferred stock, $0.01 par value — 50,000,000 shares
authorized, 575,000 and 3,400,000 shares issued, liquidation
preference $1,000 per share
|
556 | 2,960 | ||||||
|
Common stock, $0.01 par value — 1,500,000,000 shares
authorized, 469,754,771 and 410,184,182 shares issued
|
5 | 4 | ||||||
|
Additional paid-in capital
|
10,448 | 8,985 | ||||||
|
Retained earnings
|
12,077 | 11,164 | ||||||
|
Treasury stock, at cost — 25,205,283 and 27,177,019 shares
|
(1,774 | ) | (1,936 | ) | ||||
|
Accumulated other comprehensive loss, net of tax
|
(1,001 | ) | (3,312 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
20,311 | 17,865 | ||||||
|
Noncontrolling interest
|
— | 29 | ||||||
|
|
||||||||
|
Total equity
|
20,311 | 17,894 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
$ | 318,346 | $ | 307,717 | ||||
|
|
||||||||
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) | 2010 | 2009 | 2008 | |||||||||
|
Preferred Stock, at beginning of period
|
$ | 2,960 | $ | — | $ | — | ||||||
|
Issuance of mandatory convertible preferred stock
|
556 | — | — | |||||||||
|
Accretion of preferred stock discount on issuance to U.S. Treasury
|
— | 40 | — | |||||||||
|
Accelerated accretion of discount from redemption of preferred stock issued to U.S. Treasury
|
440 | — | — | |||||||||
|
Issuance (redemption) of preferred stock to the U.S. Treasury
|
(3,400 | ) | 2,920 | — | ||||||||
|
|
||||||||||||
|
Preferred Stock, at end of period
|
556 | 2,960 | — | |||||||||
|
|
||||||||||||
|
Common Stock
|
5 | 4 | 3 | |||||||||
|
Additional Paid-in Capital, at beginning of period
|
8,985 | 7,569 | 6,627 | |||||||||
|
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 | |||||||||
|
Issuance of shares under public offering
|
1,599 | — | — | |||||||||
|
Issuance of shares under incentive and stock compensation plans
|
(130 | ) | (126 | ) | (36 | ) | ||||||
|
Reclassification of warrants from other liabilities to equity and extension of warrants’ term
|
— | 186 | — | |||||||||
|
Tax expense on employee stock options and awards
|
(6 | ) | (11 | ) | 11 | |||||||
|
|
||||||||||||
|
Additional Paid-in Capital, at end of period
|
10,448 | 8,985 | 7,569 | |||||||||
|
|
||||||||||||
|
Retained Earnings, at beginning of period, before cumulative effect of accounting change, net
of tax
|
11,164 | 11,336 | 14,686 | |||||||||
|
Cumulative effect of accounting change, net of tax
|
26 | — | (3 | ) | ||||||||
|
|
||||||||||||
|
Retained Earnings, at beginning of period, as adjusted
|
11,190 | 11,336 | 14,683 | |||||||||
|
Net income (loss)
|
1,680 | (887 | ) | (2,749 | ) | |||||||
|
Cumulative effect of accounting changes, net of tax
|
(194 | ) | 912 | — | ||||||||
|
Accretion of preferred stock discount on issuance to U.S. Treasury
|
— | (40 | ) | — | ||||||||
|
Accelerated accretion of discount from redemption of preferred stock issued to U.S. Treasury
|
(440 | ) | — | — | ||||||||
|
Dividends on preferred stock
|
(75 | ) | (87 | ) | (8 | ) | ||||||
|
Dividends declared on common stock
|
(84 | ) | (70 | ) | (590 | ) | ||||||
|
|
||||||||||||
|
Retained Earnings, at end of period
|
12,077 | 11,164 | 11,336 | |||||||||
|
|
||||||||||||
|
Treasury Stock, at Cost, at beginning of period
|
(1,936 | ) | (2,120 | ) | (1,254 | ) | ||||||
|
Treasury stock acquired
|
— | — | (1,000 | ) | ||||||||
|
Issuance of shares under incentive and stock compensation plans from treasury stock
|
165 | 187 | 152 | |||||||||
|
Return of shares under incentive and stock compensation plans to treasury stock
|
(3 | ) | (3 | ) | (18 | ) | ||||||
|
|
||||||||||||
|
Treasury Stock, at Cost, at end of period
|
(1,774 | ) | (1,936 | ) | (2,120 | ) | ||||||
|
|
||||||||||||
|
Accumulated Other Comprehensive Loss, Net of Tax, at beginning of period
|
(3,312 | ) | (7,520 | ) | (858 | ) | ||||||
|
Cumulative effect of accounting change, net of tax
|
194 | (912 | ) | — | ||||||||
|
Total other comprehensive income
|
2,117 | 5,120 | (6,662 | ) | ||||||||
|
|
||||||||||||
|
Accumulated Other Comprehensive Loss, Net of Tax, at end of period
|
(1,001 | ) | (3,312 | ) | (7,520 | ) | ||||||
|
|
||||||||||||
|
Total Stockholders’ Equity
|
20,311 | 17,865 | 9,268 | |||||||||
|
|
||||||||||||
|
Noncontrolling Interest, at beginning of period (Note 15)
|
29 | 92 | 92 | |||||||||
|
Change in noncontrolling interest ownership
|
— | (56 | ) | 57 | ||||||||
|
Noncontrolling loss
|
— | (7 | ) | (57 | ) | |||||||
|
Recognition of noncontrolling interest in other liabilities
|
(29 | ) | — | — | ||||||||
|
|
||||||||||||
|
Noncontrolling Interest, at end of period
|
— | 29 | 92 | |||||||||
|
|
||||||||||||
|
Total Equity
|
$ | 20,311 | $ | 17,894 | $ | 9,360 | ||||||
|
Preferred Shares Outstanding, at beginning of period (in thousands)
|
3,400 | 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 | — | |||||||||
|
Issuance of mandatory convertible preferred shares
|
575 | — | — | |||||||||
|
Redemption of preferred shares issued to the U.S. Treasury
|
(3,400 | ) | — | — | ||||||||
|
|
||||||||||||
|
Preferred Shares Outstanding, at end of period
|
575 | 3,400 | 6,048 | |||||||||
|
Common Shares Outstanding, at beginning of period (in thousands)
|
383,007 | 300,579 | 313,842 | |||||||||
|
Treasury stock acquired
|
— | (27 | ) | (14,682 | ) | |||||||
|
Conversion of preferred to common shares
|
— | 24,194 | — | |||||||||
|
Issuance of shares under discretionary equity issuance plan
|
— | 56,109 | — | |||||||||
|
Issuance of shares under public offering
|
59,590 | — | — | |||||||||
|
Issuance of shares under incentive and stock compensation plans
|
2,095 | 2,356 | 1,673 | |||||||||
|
Return of shares under incentive and stock compensation plans to treasury stock
|
(143 | ) | (204 | ) | (254 | ) | ||||||
|
|
||||||||||||
|
Common Shares Outstanding, at end of period
|
444,549 | 383,007 | 300,579 | |||||||||
|
|
||||||||||||
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) | 2010 | 2009 | 2008 | |||||||||
|
Comprehensive Income (Loss)
|
||||||||||||
|
Net income (loss)
|
$ | 1,680 | $ | (887 | ) | $ | (2,749 | ) | ||||
|
|
||||||||||||
|
Other comprehensive income (loss)
|
||||||||||||
|
Change in net unrealized gain (loss) on securities
|
1,707 | 5,909 | (7,127 | ) | ||||||||
|
Change in other-than-temporary impairment losses recognized
in other comprehensive income (loss)
|
116 | (224 | ) | — | ||||||||
|
Change in net gain (loss) on cash-flow hedging instruments
|
128 | (387 | ) | 784 | ||||||||
|
Change in foreign currency translation adjustments
|
289 | (23 | ) | 196 | ||||||||
|
Changes in pension and other postretirement plan adjustments
|
(123 | ) | (155 | ) | (515 | ) | ||||||
|
|
||||||||||||
|
Total other comprehensive income (loss)
|
2,117 | 5,120 | (6,662 | ) | ||||||||
|
|
||||||||||||
|
Total comprehensive income (loss)
|
$ | 3,797 | $ | 4,233 | $ | (9,411 | ) | |||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
F-6
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
| For the years ended December 31, | ||||||||||||
| (In millions) | 2010 | 2009 | 2008 | |||||||||
|
Operating Activities
|
||||||||||||
|
Net income (loss)
|
$ | 1,680 | $ | (887 | ) | $ | (2,749 | ) | ||||
|
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
|
2,544 | 4,267 | 4,271 | |||||||||
|
Additions to deferred policy acquisition costs and present value of future profits
|
(2,648 | ) | (2,853 | ) | (3,675 | ) | ||||||
|
Change in reserve for future policy benefits and unpaid losses and loss adjustment expenses
and unearned premiums
|
(93 | ) | 558 | 1,026 | ||||||||
|
Change in reinsurance recoverables
|
353 | 236 | 300 | |||||||||
|
Change in receivables and other assets
|
437 | 380 | (4 | ) | ||||||||
|
Change in payables and accruals
|
(612 | ) | (1,271 | ) | (103 | ) | ||||||
|
Change in accrued and deferred income taxes
|
561 | (246 | ) | (2,156 | ) | |||||||
|
Net realized capital losses
|
554 | 2,010 | 5,918 | |||||||||
|
Net receipts (disbursements) from investment contracts related to policyholder funds —
international variable annuities
|
497 | 1,498 | (2,276 | ) | ||||||||
|
Net (increase) decrease in equity securities, trading
|
(499 | ) | (1,501 | ) | 2,295 | |||||||
|
Depreciation and amortization
|
596 | 470 | 361 | |||||||||
|
Goodwill impairment
|
153 | 32 | 745 | |||||||||
|
Other operating activities, net
|
(214 | ) | 281 | 239 | ||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
3,309 | 2,974 | 4,192 | |||||||||
|
Investing Activities
|
||||||||||||
|
Proceeds from the sale/maturity/prepayment of:
|
||||||||||||
|
Fixed maturities, available-for-sale
|
49,155 | 53,538 | 26,097 | |||||||||
|
Fixed maturities, fair value option
|
20 | — | — | |||||||||
|
Equity securities, available-for-sale
|
325 | 949 | 616 | |||||||||
|
Mortgage loans
|
1,723 | 629 | 386 | |||||||||
|
Partnerships
|
367 | 391 | 438 | |||||||||
|
Payments for the purchase of:
|
||||||||||||
|
Fixed maturities, available-for-sale
|
(50,807 | ) | (54,346 | ) | (32,708 | ) | ||||||
|
Fixed maturities, fair value option
|
(75 | ) | — | — | ||||||||
|
Equity securities, available-for-sale
|
(163 | ) | (307 | ) | (714 | ) | ||||||
|
Mortgage loans
|
(291 | ) | (233 | ) | (1,469 | ) | ||||||
|
Partnerships
|
(348 | ) | (274 | ) | (678 | ) | ||||||
|
Proceeds from business sold
|
241 | (7 | ) | (94 | ) | |||||||
|
Derivatives, net
|
(338 | ) | (561 | ) | 909 | |||||||
|
Change in policy loans, net
|
(7 | ) | 34 | (147 | ) | |||||||
|
Change in payables for collateral under securities lending, net
|
(46 | ) | (2,925 | ) | (1,405 | ) | ||||||
|
Other investing activities, net
|
(190 | ) | (11 | ) | (58 | ) | ||||||
|
|
||||||||||||
|
Net cash used for investing activities
|
(434 | ) | (3,123 | ) | (8,827 | ) | ||||||
|
Financing Activities
|
||||||||||||
|
Deposits and other additions to investment and universal life-type contracts
|
12,602 | 14,239 | 21,015 | |||||||||
|
Withdrawals and other deductions from investment and universal life-type contracts
|
(22,476 | ) | (24,341 | ) | (25,793 | ) | ||||||
|
Net transfers from separate accounts related to investment and universal life-type contracts
|
8,409 | 7,203 | 7,353 | |||||||||
|
Proceeds from issuance of long-term debt
|
1,090 | — | 2,670 | |||||||||
|
Repayments at maturity for long-term debt and payments on capital lease obligations
|
(343 | ) | (24 | ) | (992 | ) | ||||||
|
Change in commercial paper
|
— | (375 | ) | — | ||||||||
|
Net Issuance (repayment) at maturity or settlement of consumer notes
|
(754 | ) | (74 | ) | 401 | |||||||
|
Net proceeds from issuance of mandatory convertible preferred stock
|
556 | — | — | |||||||||
|
Net proceeds from issuance of common shares under public offering
|
1,600 | — | — | |||||||||
|
Redemption of preferred stock issued to the U.S. Treasury
|
(3,400 | ) | — | — | ||||||||
|
Net proceeds from issuance of convertible preferred stock and warrants
|
— | — | 1,239 | |||||||||
|
Proceeds from issuance of preferred stock and warrants to U.S. Treasury
|
— | 3,400 | — | |||||||||
|
Net proceeds from issuance of common shares under discretionary equity issuance plan
|
— | 887 | — | |||||||||
|
Proceeds from net issuance of shares under incentive and stock compensation plans and
excess tax benefit
|
25 | 17 | 41 | |||||||||
|
Treasury stock acquired
|
— | — | (1,000 | ) | ||||||||
|
Dividends paid on preferred stock
|
(85 | ) | (73 | ) | — | |||||||
|
Dividends paid on common stock
|
(85 | ) | (149 | ) | (660 | ) | ||||||
|
Changes in bank deposits and payments on bank advances
|
(94 | ) | (187 | ) | — | |||||||
|
|
||||||||||||
|
Net cash provided by (used for) financing activities
|
(2,955 | ) | 523 | 4,274 | ||||||||
|
Foreign exchange rate effect on cash
|
— | (43 | ) | 161 | ||||||||
|
Net increase (decrease) in cash
|
(80 | ) | 331 | (200 | ) | |||||||
|
Cash — beginning of period
|
2,142 | 1,811 | 2,011 | |||||||||
|
|
||||||||||||
|
Cash — end of period
|
$ | 2,062 | $ | 2,142 | $ | 1,811 | ||||||
|
|
||||||||||||
|
Supplemental Disclosure of Cash Flow Information
|
||||||||||||
|
Income taxes paid (received)
|
$ | 308 | $ | (243 | ) | $ | 253 | |||||
|
Interest paid
|
$ | 485 | $ | 475 | $ | 286 | ||||||
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 holding company for insurance and financial
service 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”). Also, The Hartford continues to administer business previously sold in Japan and the
U.K.
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.
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
Variable Interest Entities
In June 2009, the Financial Accounting Standards Board (“FASB”) updated the guidance which amends
the 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 an amendment to this guidance in February 2010 which defers application of this
guidance to certain entities that apply specialized accounting guidance for investment companies.
The Company adopted this guidance on January 1, 2010. As a result of adoption, in addition to
those VIEs the Company consolidates under the previous guidance, the Company consolidated a Company
sponsored Collateralized Debt Obligation (“CDO”), electing the fair value option, and a Company
sponsored Collateralized Loan Obligation, at carrying values carried forward as if the Company had
been the primary beneficiary from the date the Company entered into the VIE arrangement. The
impact on the Company’s Consolidated Balance Sheet as a result of adopting this guidance was an
increase in assets of $432, an increase in liabilities of $406, and an increase in January 1, 2010
retained earnings, net of tax, of $26. 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 deferral of this
new consolidation guidance. See Note 5 for further discussion.
Embedded Credit Derivatives
In March 2010, the FASB issued guidance clarifying the scope exception for certain credit
derivatives embedded within structured securities which may result in bifurcation of these credit
derivatives. Embedded credit derivatives resulting only from subordination of one financial
instrument to another continue to qualify for the exemption. As a result, investments with an
embedded credit derivative in a form other than the above mentioned subordination may need to be
separately accounted for as an embedded credit derivative resulting in recognition of the change in
the fair value of the embedded credit derivative in current period earnings. Upon adoption, an
entity may elect the fair value option prospectively, with changes in fair value of the investment
in its entirety recognized in earnings, rather than bifurcate the embedded credit derivative. The
guidance is effective, on a prospective basis only, for fiscal years and interim periods within
those fiscal years, beginning on or after June 15, 2010. The Company adopted this guidance on July
1, 2010 and identified securities with an amortized cost and fair value of $971 and $639,
respectively, which were impacted by the scope of this standard. Upon adoption, the Company
elected the fair value option for securities having an amortized cost and fair value of $447 and
$214, respectively. For further discussion of fair value option, see Note 4. For the remainder of
securities that were impacted by the scope of this standard, upon adoption, the embedded credit
derivatives were bifurcated but are reported with the host instrument in the consolidated balance
sheets. As of July 1, 2010, these securities had an amortized cost and fair value of $524 and
$425, respectively, with an associated embedded derivative notional value of $525. For further
discussion of embedded derivatives, see Note 5. The adoption, on July 1, 2010 resulted in the
reclassification of $194, after-tax and after deferred policy acquisition costs (“DAC”), net
unrealized losses from accumulated other comprehensive loss to retained earnings, including $211 of
unrealized capital losses and $17 of unrealized capital gains.
Future Adoption of New Accounting Standards
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued guidance clarifying the definition of acquisition costs that are
eligible for deferral. Acquisition costs are to include only those costs that are directly related
to the successful acquisition or renewal of insurance contracts; incremental direct costs of
contract acquisition that are incurred in transactions with either independent third parties or
employees; and advertising costs meeting the capitalization criteria for direct-response
advertising.
This guidance will be effective for fiscal years beginning after December 15, 2011, and interim
periods within those years. This guidance may be applied prospectively upon the date of adoption,
with retrospective application permitted, but not required. Early adoption is permitted.
The Company will adopt this guidance on January 1, 2012. The Company has not yet determined if it
will apply the guidance on a prospective or retrospective basis or the effect of the adoption on
the Company’s Consolidated Financial Statements. If retrospective application is elected, the
adoption could have a material impact on stockholders’ equity. If prospective application is
elected, there could be a material impact to the Company’s Consolidated Statement of Operations as
non-deferrable acquisition costs will increase while amortization would continue on the existing
DAC balance.
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
|
4 | |||
|
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 Taxes
|
13 | |||
|
Pension Plans and Postretirement Healthcare and Life Insurance Benefit Plans
|
17 | |||
Revenue Recognition
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 Company charges off any balances that are determined to be
uncollectible. The allowance for doubtful accounts included in premiums receivable and agents’
balances in the Consolidated Balance Sheets was $119 and $121 as of December 31, 2010 and 2009,
respectively.
Traditional life and group disability products premiums are generally recognized as revenue when
due from policyholders.
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. The amounts collected from
policyholders for investment and universal life-type contracts are considered deposits and are not
included in revenue. 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.
Other revenue consists primarily of revenues associated with the Company’s servicing businesses.
Dividends to Policyholders
Policyholder dividends are paid to certain property and casualty and life insurance policyholders.
Policies that receive dividends 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.
Net written premiums for participating property and casualty insurance policies represented 8% of
total net written premiums for the years ended December 31, 2010, 2009 and 2008, respectively.
Participating dividends to policyholders were $5, $10 and $21 for the years ended December 31,
2010, 2009 and 2008, respectively.
Total participating policies in-force represented 1% of the total life insurance policies in-force
as of December 31, 2010, 2009, and 2008. Dividends to policyholders were $21, $13 and $14 for the
years ended December 31, 2010, 2009, and 2008, 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 stockholder’s, the
policyholder’s share of net income on those contracts that cannot be distributed is excluded from
stockholder’s equity by a charge to operations and a credit to a liability.
Cash
Cash represents cash on hand and demand deposits with banks or other financial institutions.
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 $1.9 billion and $1.7
billion as of December 31, 2010 and 2009, respectively. Depreciation expense was $276, $253, and
$228 for the years ended December 31, 2010, 2009, and 2008, respectively.
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
Other policyholder funds and benefits payable consist of universal life-type contracts and
investment contracts.
Universal life-type contracts consist of 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. 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.
Investment contracts consist of institutional and governmental products, without life
contingencies, including funding agreements, certain structured settlements and guaranteed
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.
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 The Hartford Mutual
Funds, Inc. and The Hartford Mutual Funds II, Inc. (collectively, “mutual funds”), consisting of 52
mutual funds, as of December 31, 2010. The Company charges fees to these mutual 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 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-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) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Income (loss)
|
||||||||||||
|
Net income (loss)
|
$ | 1,680 | $ | (887 | ) | $ | (2,749 | ) | ||||
|
Less: Preferred stock dividends and accretion of discount
|
515 | 127 | 8 | |||||||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders
|
$ | 1,165 | $ | (1,014 | ) | $ | (2,757 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Common shares
|
||||||||||||
|
Basic
|
||||||||||||
|
Weighted average common shares outstanding
|
431.5 | 346.3 | 306.7 | |||||||||
|
|
||||||||||||
|
Diluted
|
||||||||||||
|
Warrants
|
32.3 | — | — | |||||||||
|
Stock compensation plans
|
1.3 | — | — | |||||||||
|
Mandatory convertible preferred shares
|
16.4 | — | — | |||||||||
|
|
||||||||||||
|
Weighted average shares outstanding and dilutive potential common shares
|
481.5 | 346.3 | 306.7 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings (loss) per common share
|
||||||||||||
|
Basic
|
$ | 2.70 | $ | (2.93 | ) | $ | (8.99 | ) | ||||
|
Diluted
|
$ | 2.49 | $ | (2.93 | ) | $ | (8.99 | ) | ||||
Basic earnings per share is computed based on the weighted average number of common shares
outstanding during the year. Diluted earnings per share includes the dilutive effect of warrants,
stock compensation plans, 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 the warrants issued as a result of the Company’s participation
in the Capital Purchase Program (“CPP”), 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 $25.23 in 2010, $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 during
the year ended December 31, 2008 exceeded the exercise price of the warrants, there is no dilutive
effect for the warrants for the year ended December 31, 2008.
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.
On March 23, 2010, The Hartford issued 23 million depositary shares, each representing a 1/40th
interest in The Hartford’s 7.25% mandatory convertible preferred stock, Series F. For the year
ended December 31, 2010, these shares and the related dividend adjustment are included in diluted
earnings per share, using the if converted method. For additional information on the mandatory
convertible preferred stock see Note 15.
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 and
313.0 million for the years ended December 31, 2009 and 2008, respectively.
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.
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
Effective for 2010 reporting, The Hartford made changes to its reporting segments to reflect
the manner in which the Company is currently organized for purposes of making operating decisions
and assessing performance. Accordingly, segment data for prior reporting periods has been adjusted
to reflect the new segment reporting. As a result, the Company created three customer-oriented
divisions, Commercial Markets, Consumer Markets and Wealth Management, conducting business
principally in seven reporting segments. The following discussion describes the significant
changes to the reporting segments:
The Commercial Markets division consists of the reporting segments of Property & Casualty
Commercial and Group Benefits. The Property & Casualty Commercial reporting segment includes the
former Small Commercial, Middle Market and Specialty Commercial reporting segments. Group Benefits
is now included in the Commercial Markets division and is otherwise unchanged from 2009.
The Consumer Markets division and reporting segment includes the former Personal Lines reporting
segment.
The Wealth Management division consists of the following reporting segments: Global Annuity, Life
Insurance, Retirement Plans and Mutual Funds. Global Annuity includes the individual variable,
fixed market value adjusted (“MVA”), and single premium immediate annuities formerly within the
Retail Products Groups and International reporting segments, as well as institutional investment
products (“IIP”) which was within the former Institutional Solutions Group (“Institutional”)
reporting segment. Life Insurance includes the former Individual Life reporting segment and
private placement life insurance (“PPLI”) operations formerly within Institutional and Life Other.
Mutual Funds includes mutual fund businesses within the former Retail Products Group.
Corporate and Other includes Property & Casualty Other Operations and the former Life Other,
excluding the PPLI operations now included in Life Insurance. In addition, certain fee income and
commission expenses associated with sales of non-proprietary products by broker-dealer subsidiaries
have been moved from Global Annuity to Corporate and Other, with no impact on net income in either
Global Annuity or Corporate and Other.
Certain inter-segment arrangements have been terminated retrospectively whereby the former
Specialty Commercial reporting segment was reimbursing the former Personal Lines, Small Commercial
and Middle Market reporting segments for certain losses incurred from uncollectible reinsurance and
under certain liability claims.
As a result of this reorganization, the Company’s seven reporting segments, as well as the
Corporate and Other category, are as follows:
Commercial Markets
Property & Casualty Commercial
Property & Casualty Commercial provides workers’ compensation, property, automobile, marine,
livestock, liability and umbrella coverages primarily throughout the United States (“U.S.”), along
with a variety of customized insurance products and risk management services including professional
liability, fidelity, surety, specialty casualty coverages and third-party administrator services.
Group Benefits
Group Benefits 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.
Consumer Markets
Consumer Markets provides standard automobile, homeowners and home-based business coverages to
individuals across the U.S., including a special program designed exclusively for members of AARP.
Consumer Markets also operates a member contact center for health insurance products offered
through the AARP Health program.
Wealth Management
Global Annuity
Global Annuity offers individual variable, fixed market value adjusted (“fixed MVA”) and single
premium immediate annuities in the U.S., a range of products to institutional investors, including
but not limited to, stable value contracts, and administers investments, retirement savings and
other insurance and savings products to individuals and groups outside the U.S., primarily in Japan
and Europe.
Life Insurance
Life Insurance sells a variety of life insurance products, including variable universal life,
universal life, and term life, as well as variable PPLI owned by corporations and high net worth
individuals.
Retirement Plans
Retirement Plans provides products and services to corporations pursuant to Section 401(k) of the
Internal Revenue Code of 1986, as amended (the “Code”), and products and services to municipalities
and not-for-profit organizations under Sections 457 and 403(b) of the Code, collectively referred
to as government plans.
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)
Mutual Funds
Mutual Funds offers retail mutual funds, investment-only mutual funds and college savings plans
under Section 529 of the Code (collectively referred to as non-proprietary) and proprietary mutual
fund supporting insurance products issued by The Hartford.
Corporate and Other
The Hartford includes in Corporate and Other the Company’s debt financing and related interest
expense, as well as other capital raising activities; banking operations; certain fee income and
commission expenses associated with sales of non-proprietary products by broker-dealer
subsidiaries; and certain purchase accounting adjustments and other charges not allocated to the
segments. Also included in Corporate and Other is the Company’s management of certain property and
casualty operations that have discontinued writing new business and substantially all of the
Company’s asbestos and environmental exposures, collectively referred to as Other Operations.
Financial Measures and Other Segment Information
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. 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 that relate to interest income on allocated surplus. Consolidated net
investment income is unaffected by such transactions.
The following table presents net income (loss) for each reporting segment, as well as the
Corporate and Other category.
| For the years ended December 31, | ||||||||||||
| Net Income (Loss) | 2010 | 2009 | 2008 | |||||||||
|
Property & Casualty Commercial
|
$ | 995 | $ | 899 | $ | 133 | ||||||
|
Group Benefits
|
185 | 193 | (6 | ) | ||||||||
|
Consumer Markets
|
143 | 140 | 102 | |||||||||
|
Global Annuity
|
404 | (1,166 | ) | (2,287 | ) | |||||||
|
Life Insurance
|
262 | 39 | (19 | ) | ||||||||
|
Retirement Plans
|
47 | (222 | ) | (157 | ) | |||||||
|
Mutual Funds
|
132 | 34 | 37 | |||||||||
|
Corporate and Other
|
(488 | ) | (804 | ) | (552 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 1,680 | $ | (887 | ) | $ | (2,749 | ) | ||||
|
|
||||||||||||
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)
The following table presents revenues by product line for each reporting segment, as well as
the Corporate and Other category.
| For the years ended December 31, | ||||||||||||
| Revenues | 2010 | 2009 | 2008 | |||||||||
|
Earned premiums, fees, and other considerations
|
||||||||||||
|
Property & Casualty Commercial
|
||||||||||||
|
Workers’ compensation
|
$ | 2,387 | $ | 2,275 | $ | 2,376 | ||||||
|
Property
|
547 | 597 | 697 | |||||||||
|
Automobile
|
598 | 646 | 726 | |||||||||
|
Package business
|
1,124 | 1,123 | 1,167 | |||||||||
|
Liability
|
540 | 619 | 747 | |||||||||
|
Fidelity and surety
|
224 | 250 | 272 | |||||||||
|
Professional liability
|
324 | 393 | 410 | |||||||||
|
|
||||||||||||
|
Total Property & Casualty Commercial
|
5,744 | 5,903 | 6,395 | |||||||||
|
Group Benefits
|
||||||||||||
|
Group disability
|
2,004 | 1,975 | 2,020 | |||||||||
|
Group life and accident
|
2,052 | 2,126 | 2,084 | |||||||||
|
Other
|
222 | 249 | 287 | |||||||||
|
|
||||||||||||
|
Total Group Benefits
|
4,278 | 4,350 | 4,391 | |||||||||
|
Consumer Markets
|
||||||||||||
|
Automobile
|
2,806 | 2,857 | 2,833 | |||||||||
|
Homeowners
|
1,141 | 1,102 | 1,102 | |||||||||
|
|
||||||||||||
|
Total Consumer Markets [1]
|
3,947 | 3,959 | 3,935 | |||||||||
|
Global Annuity
|
||||||||||||
|
Variable annuity
|
2,506 | 2,231 | 2,819 | |||||||||
|
Fixed / MVA and other annuity
|
74 | 61 | (10 | ) | ||||||||
|
IIP
|
22 | 381 | 923 | |||||||||
|
|
||||||||||||
|
Total Global Annuity
|
2,602 | 2,673 | 3,732 | |||||||||
|
Life Insurance
|
||||||||||||
|
Variable life
|
416 | 503 | 374 | |||||||||
|
Universal life
|
391 | 390 | 405 | |||||||||
|
Term / Other life
|
49 | 47 | 49 | |||||||||
|
PPLI
|
173 | 114 | 118 | |||||||||
|
|
||||||||||||
|
Total Life Insurance
|
1,029 | 1,054 | 946 | |||||||||
|
Retirement Plans
|
||||||||||||
|
401(k)
|
318 | 286 | 290 | |||||||||
|
Government plans
|
41 | 38 | 48 | |||||||||
|
|
||||||||||||
|
Total Retirement Plans
|
359 | 324 | 338 | |||||||||
|
Mutual Funds
|
||||||||||||
|
Non-Proprietary
|
629 | 518 | 666 | |||||||||
|
Proprietary
|
61 | — | — | |||||||||
|
|
||||||||||||
|
Total Mutual Funds
|
690 | 518 | 666 | |||||||||
|
Corporate and Other
|
190 | 219 | 235 | |||||||||
|
|
||||||||||||
|
Total earned premiums, fees, and other considerations
|
18,839 | 19,000 | 20,638 | |||||||||
|
Net investment income (loss):
|
||||||||||||
|
Securities available-for-sale and other
|
4,392 | 4,031 | 4,335 | |||||||||
|
Equity securities, trading
|
(774 | ) | 3,188 | (10,340 | ) | |||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
3,618 | 7,219 | (6,005 | ) | ||||||||
|
Net realized capital gains (losses)
|
(554 | ) | (2,010 | ) | (5,918 | ) | ||||||
|
Other revenues
|
480 | 492 | 504 | |||||||||
|
|
||||||||||||
|
Total revenues
|
$ | 22,383 | $ | 24,701 | $ | 9,219 | ||||||
|
|
||||||||||||
| [1] |
For 2010, 2009 and 2008, AARP members accounted for earned premiums of $2.9 billion, $2.8
billion and $2.8 billion, respectively.
|
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)
| Geographical Revenue Information | For the years ended December 31, | |||||||||||
| Revenues | 2010 | 2009 | 2008 | |||||||||
|
United States of America
|
$ | 22,376 | $ | 20,429 | $ | 18,904 | ||||||
|
Japan
|
(329 | ) | 3,816 | (9,745 | ) | |||||||
|
Other
|
336 | 456 | 60 | |||||||||
|
|
||||||||||||
|
Total Revenues
|
$ | 22,383 | $ | 24,701 | $ | 9,219 | ||||||
|
|
||||||||||||
| Amortization of deferred policy acquisition costs and | For the years ended December 31, | |||||||||||
| present value of future profits | 2010 | 2009 | 2008 | |||||||||
|
Property & Casualty Commercial
|
$ | 1,353 | $ | 1,393 | $ | 1,461 | ||||||
|
Group Benefits
|
61 | 61 | 57 | |||||||||
|
Consumer Markets
|
667 | 674 | 633 | |||||||||
|
Global Annuity
|
253 | 1,716 | 1,762 | |||||||||
|
Life Insurance
|
121 | 317 | 171 | |||||||||
|
Retirement Plans
|
27 | 56 | 91 | |||||||||
|
Mutual Funds
|
62 | 50 | 96 | |||||||||
|
|
||||||||||||
|
Total Amortization of
deferred policy acquisition
costs and present value of
future profits
|
$ | 2,544 | $ | 4,267 | $ | 4,271 | ||||||
|
|
||||||||||||
| For the years ended December 31, | ||||||||||||
| Income tax expense (benefit) | 2010 | 2009 | 2008 | |||||||||
|
Property & Casualty Commercial
|
$ | 412 | $ | 359 | $ | (35 | ) | |||||
|
Group Benefits
|
65 | 59 | (53 | ) | ||||||||
|
Consumer Markets
|
52 | 48 | 27 | |||||||||
|
Global Annuity
|
109 | (826 | ) | (1,425 | ) | |||||||
|
Life Insurance
|
119 | (27 | ) | (40 | ) | |||||||
|
Retirement Plans
|
13 | (143 | ) | (132 | ) | |||||||
|
Mutual Funds
|
77 | 18 | 19 | |||||||||
|
Corporate and Other
|
(263 | ) | (329 | ) | (203 | ) | ||||||
|
|
||||||||||||
|
Total Income tax expense (benefit)
|
$ | 584 | $ | (841 | ) | $ | (1,842 | ) | ||||
|
|
||||||||||||
| As of December 31, | ||||||||
| Assets | 2010 | 2009 | ||||||
|
Property & Casualty Commercial
|
$ | 23,736 | $ | 24,225 | ||||
|
Group Benefits
|
9,028 | 8,904 | ||||||
|
Consumer Markets
|
6,778 | 6,737 | ||||||
|
Global Annuity
|
166,684 | 164,837 | ||||||
|
Life Insurance
|
64,063 | 54,939 | ||||||
|
Retirement Plans
|
34,152 | 28,180 | ||||||
|
Mutual Funds
|
301 | 159 | ||||||
|
Corporate and Other
|
13,604 | 19,736 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 318,346 | $ | 307,717 | ||||
|
|
||||||||
F-16
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 maturity and equity securities, available-for-sale (“AFS”), fixed
maturities at fair value using fair value option (“FVO”), equity securities, trading, short-term
investments, freestanding and embedded derivatives, separate account assets and certain other
liabilities.
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 securities, 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 fixed maturities 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
exchange traded equity securities, investment grade private
placement securities and 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 lower quality asset-backed securities (“ABS”), commercial
mortgage-backed securities (“CMBS”), commercial real estate
(“CRE”) CDOs, residential mortgage-backed securities (“RMBS”)
primarily backed by below-prime loans and below investment grade
private placement securities. Also included in Level 3 are
guaranteed product embedded and reinsurance derivatives and other
complex derivative securities, including customized guaranteed
minimum withdrawal benefit (“GMWB”) hedging derivatives (see Note
4a for further information on GMWB product related financial
instruments), equity derivatives, long dated derivatives, swaps
with optionality, certain complex credit derivatives and certain
other liabilities. Because Level 3 fair values, by their nature,
contain one or more significant unobservable 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. Transfers of securities among the levels occur
at the beginning of the reporting period. Transfers between Level 1 and Level 2 were not material
for the year ended December 31, 2010. 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.
F-17
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, 2010 | ||||||||||||||||
| 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, AFS
|
||||||||||||||||
|
ABS
|
$ | 2,889 | $ | — | $ | 2,412 | $ | 477 | ||||||||
|
CDOs
|
2,611 | — | 30 | 2,581 | ||||||||||||
|
CMBS
|
7,917 | — | 7,228 | 689 | ||||||||||||
|
Corporate
|
39,884 | — | 37,755 | 2,129 | ||||||||||||
|
Foreign government/government agencies
|
1,683 | — | 1,627 | 56 | ||||||||||||
|
States, municipalities and political subdivisions (“Municipal”)
|
12,124 | — | 11,852 | 272 | ||||||||||||
|
RMBS
|
5,683 | — | 4,398 | 1,285 | ||||||||||||
|
U.S. Treasuries
|
5,029 | 434 | 4,595 | — | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturities
|
77,820 | 434 | 69,897 | 7,489 | ||||||||||||
|
Fixed maturities, FVO
|
649 | — | 127 | 522 | ||||||||||||
|
Equity securities, trading
|
32,820 | 2,279 | 30,541 | — | ||||||||||||
|
Equity securities, AFS
|
973 | 298 | 521 | 154 | ||||||||||||
|
Derivative assets
|
||||||||||||||||
|
Credit derivatives
|
3 | — | (18 | ) | 21 | |||||||||||
|
Equity derivatives
|
2 | — | — | 2 | ||||||||||||
|
Foreign exchange derivatives
|
868 | — | 868 | — | ||||||||||||
|
Interest rate derivatives
|
(106 | ) | — | (70 | ) | (36 | ) | |||||||||
|
Other derivative contracts
|
32 | — | — | 32 | ||||||||||||
|
|
||||||||||||||||
|
Total derivative assets [1]
|
799 | — | 780 | 19 | ||||||||||||
|
Short-term investments
|
8,528 | 541 | 7,987 | — | ||||||||||||
|
Separate account assets [2]
|
153,727 | 116,717 | 35,763 | 1,247 | ||||||||||||
|
|
||||||||||||||||
|
Total assets accounted for at fair value on a recurring basis
|
$ | 275,316 | $ | 120,269 | $ | 145,616 | $ | 9,431 | ||||||||
|
|
||||||||||||||||
|
Percentage of level to total
|
100 | % | 44 | % | 53 | % | 3 | % | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||
|
Institutional notes
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Equity linked notes
|
(9 | ) | — | — | (9 | ) | ||||||||||
|
|
||||||||||||||||
|
Total other policyholder funds and benefits payable
|
(9 | ) | (9 | ) | ||||||||||||
|
Derivative liabilities
|
||||||||||||||||
|
Credit derivatives
|
(482 | ) | — | (71 | ) | (411 | ) | |||||||||
|
Equity derivatives
|
2 | — | — | 2 | ||||||||||||
|
Foreign exchange derivatives
|
(34 | ) | — | (34 | ) | — | ||||||||||
|
Interest rate derivatives
|
(266 | ) | — | (249 | ) | (17 | ) | |||||||||
|
|
||||||||||||||||
|
Total derivative liabilities [3]
|
(780 | ) | — | (354 | ) | (426 | ) | |||||||||
|
Other liabilities
|
(37 | ) | — | — | (37 | ) | ||||||||||
|
|
||||||||||||||||
|
Consumer notes [4]
|
(5 | ) | — | — | (5 | ) | ||||||||||
|
|
||||||||||||||||
|
Total liabilities accounted for at fair value on a recurring
basis
|
$ | (831 | ) | $ | — | $ | (354 | ) | $ | (477 | ) | |||||
|
|
||||||||||||||||
| [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, 2010, $968 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, 2010, excludes approximately $6 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-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
(continued)
| 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, AFS
|
||||||||||||||||
|
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 | ||||||||||||
|
Municipal
|
12,065 | — | 11,803 | 262 | ||||||||||||
|
RMBS
|
4,847 | — | 3,694 | 1,153 | ||||||||||||
|
U.S. Treasuries
|
3,631 | 526 | 3,105 | — | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturities, AFS
|
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 | ||||||||
|
|
||||||||||||||||
|
Percentage of level to total
|
100 | % | 47 | % | 48 | % | 5 | % | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
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 a 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.
|
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-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)
Available-for-Sale Securities, Fixed Maturities, FVO, Equity Securities, Trading, and
Short-term Investments
The fair value of AFS securities, fixed maturities, FVO, equity securities, trading, and short-term
investments in an active and orderly market (e.g. not distressed or forced liquidation) are
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. 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 recently reported trades, the third-party pricing
services and independent 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 private placement securities for which the Company is unable to
obtain a price from a third-party pricing service 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 appropriate credit spreads determined through this survey
approach are based upon the issuer’s financial strength and term to maturity, utilizing an
independent public security index and trade information and adjusting for the non-public nature of
the securities. For the quarter ended September 30, 2010, the Company compared the results of the
private placement pricing model to actual trades, as well as to third party broker quotes and
determined that the pricing model results were consistent with market observable data for
investment grade private placement securities. As a result, the Company reclassified investment
grade private placement securities from Level 3 to Level 2. Below investment grade private
placement securities remain classified as Level 3.
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 with observable market data.
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)
Derivative Instruments, including embedded derivatives within investments
Derivative instruments are fair valued using pricing valuation models; that utilize independent
market data inputs, quoted market prices for exchange-traded derivatives, or independent broker
quotations. Excluding embedded and reinsurance related derivatives, as of December 31, 2010 and
2009, 97% of derivatives, based upon notional values, were priced by valuation models or quoted
market prices. The remaining derivatives were priced by broker quotations. 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.
Valuation Techniques and Inputs for Investments
Generally, the Company determines the estimated fair value of its AFS securities, fixed maturities,
FVO, equity securities, trading, and short-term investments using the market approach. The income
approach is used for securities priced using a pricing matrix, as well as for derivative
instruments. For Level 1 investments, which are comprised of on-the-run U.S. Treasuries,
exchange-traded equity securities, short-term investments, and exchange traded futures and option
contracts, valuations are based on observable inputs that reflect quoted prices for identical
assets in active markets that the Company has the ability to access at the measurement date.
For most of the Company’s debt securities, the following inputs are typically used in the Company’s
pricing methods: reported trades, benchmark yields, bids and/or estimated cash flows. For
securities except U.S. Treasuries, inputs also include issuer spreads, which may consider credit
default swaps. Derivative instruments are valued using mid-market inputs that are predominantly
observable in the market.
A description of additional inputs used in the Company’s Level 2 and Level 3 measurements is listed below:
| Level 2 |
The fair values of most of the Company’s Level 2 investments are
determined by management after considering prices received from third
party pricing services. These investments include most fixed maturities
and preferred stocks, including those reported in separate account
assets.
|
| • |
ABS, CDOs, CMBS and RMBS
— Primary inputs also include monthly payment
information, collateral performance, which varies by vintage year and includes
delinquency rates, collateral valuation loss severity rates, collateral refinancing
assumptions, credit default swap indices and, for ABS and RMBS, estimated prepayment
rates.
|
| • |
Corporates
— Primary inputs also include observations of credit default swap
curves related to the issuer.
|
| • |
Foreign government/government agencies
- Primary inputs also include observations
of credit default swap curves related to the issuer and political events in emerging
markets.
|
| • |
Municipals
— Primary inputs also include Municipal Securities Rulemaking Board
reported trades and material event notices, and issuer financial statements.
|
| • |
Short-term investments
— Primary inputs also include material event notices and
new issue money market rates.
|
| • |
Equity securities, trading
— Consist of investments in mutual funds. Primary
inputs include net asset values obtained from third party pricing services.
|
| • |
Credit derivatives
— Significant inputs primarily include the swap yield curve and
credit curves.
|
| • |
Foreign exchange derivatives —
Significant inputs primarily include the swap yield
curve, currency spot and forward rates, and cross currency basis curves.
|
| • |
Interest rate derivatives —
Significant input is primarily the swap yield curve.
|
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)
| Level 3 |
Most of the Company’s securities classified as Level 3 are valued based on brokers’
prices. Certain long-dated securities are priced based on third party pricing services,
including municipal securities and foreign government/government agencies, as well as bank
loans and below investment grade private placement securities. Primary inputs for these
long-dated securities are consistent with the typical inputs used in Level 1 and Level 2
measurements noted above, but include benchmark interest rate or credit spread assumptions
that are not observable in the marketplace. Also included in Level 3 are certain derivative
instruments that either have significant unobservable inputs or are valued based on broker
quotations. Significant inputs for these derivative contracts primarily include the typical
inputs used in the Level 1 and Level 2 measurements noted above, but also may include the
following:
|
| • |
Credit derivatives-
Significant unobservable inputs may include credit correlation
and swap yield curve and credit curve extrapolation beyond observable limits.
|
| • |
Equity derivatives —
Significant unobservable inputs may include equity
volatility.
|
| • |
Interest rate contracts —
Significant unobservable inputs may include swap yield
curve extrapolation beyond observable limits and interest rate volatility.
|
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 fair value roll-forwards for the year ended December 31, 2010 and 2009,
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-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)
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, 2010 to December 31, 2010
| Changes in unrealized | ||||||||||||||||||||||||||||||||
| gains (losses) | ||||||||||||||||||||||||||||||||
| included in | ||||||||||||||||||||||||||||||||
| Total | net income | |||||||||||||||||||||||||||||||
| realized/unrealized | related to | |||||||||||||||||||||||||||||||
| Fair value | gains (losses) | Purchases, | Fair value | financial instruments | ||||||||||||||||||||||||||||
| as of | included in: | issuances, | Transfers | Transfers | as of | still held at | ||||||||||||||||||||||||||
| January 1, | Net | and | in to | out of | December 31, | December 31, | ||||||||||||||||||||||||||
| Asset (Liability) | 2010 | income [1] | OCI [2] | settlements | Level 3 [3] | Level 3 [3] | 2010 | 2010 [1] | ||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Fixed maturities, AFS
|
||||||||||||||||||||||||||||||||
|
ABS
|
$ | 580 | $ | (17 | ) | $ | 92 | $ | (74 | ) | $ | 40 | $ | (144 | ) | $ | 477 | $ | (8 | ) | ||||||||||||
|
CDOs
|
2,835 | (151 | ) | 533 | (234 | ) | 42 | (444 | ) | 2,581 | (158 | ) | ||||||||||||||||||||
|
CMBS
|
307 | (132 | ) | 409 | (186 | ) | 443 | (152 | ) | 689 | (73 | ) | ||||||||||||||||||||
|
Corporate
|
8,027 | (14 | ) | 320 | 78 | 967 | (7,249 | ) | 2,129 | (24 | ) | |||||||||||||||||||||
|
Foreign govt./govt. agencies
|
93 | — | 5 | (8 | ) | 8 | (42 | ) | 56 | — | ||||||||||||||||||||||
|
Municipal
|
262 | 1 | 24 | 14 | 11 | (40 | ) | 272 | — | |||||||||||||||||||||||
|
RMBS
|
1,153 | (43 | ) | 254 | (161 | ) | 146 | (64 | ) | 1,285 | (38 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total fixed maturities, AFS
|
13,257 | (356 | ) | 1,637 | (571 | ) | 1,657 | (8,135 | ) | 7,489 | (301 | ) | ||||||||||||||||||||
|
Fixed maturities, FVO
|
— | 80 | — | (11 | ) | 453 | — | 522 | 76 | |||||||||||||||||||||||
|
Equity securities, AFS
|
58 | (6 | ) | 9 | 16 | 98 | (21 | ) | 154 | (8 | ) | |||||||||||||||||||||
|
Freestanding derivatives
|
||||||||||||||||||||||||||||||||
|
Credit derivatives
|
(228 | ) | 124 | — | 4 | (290 | ) | — | (390 | ) | 116 | |||||||||||||||||||||
|
Equity derivatives
|
(2 | ) | 6 | — | — | — | — | 4 | 6 | |||||||||||||||||||||||
|
Interest rate derivatives
|
5 | (4 | ) | 1 | (44 | ) | — | (11 | ) | (53 | ) | (24 | ) | |||||||||||||||||||
|
Other derivative contracts
|
36 | (4 | ) | — | — | — | — | 32 | (4 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total freestanding derivatives [4]
|
(189 | ) | 122 | 1 | (40 | ) | (290 | ) | (11 | ) | (407 | ) | 94 | |||||||||||||||||||
|
Separate accounts [5]
|
962 | 142 | — | 314 | 14 | (185 | ) | 1,247 | 20 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||||||||||||||||||
|
Institutional notes
|
$ | (2 | ) | $ | 2 | $ | $ | $ | $ | $ | — | $ | 2 | |||||||||||||||||||
|
Equity linked notes
|
(10 | ) | — | — | 1 | — | — | (9 | ) | — | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total other policyholder funds and benefits
payable
|
(12 | ) | 2 | — | 1 | — | — | (9 | ) | 2 | ||||||||||||||||||||||
|
Other liabilities
|
— | (26 | ) | — | — | (11 | ) | — | (37 | ) | — | |||||||||||||||||||||
|
Consumer notes
|
(5 | ) | — | — | — | — | — | (5 | ) | — | ||||||||||||||||||||||
| [1] |
All amounts in these columns are reported in net realized capital gains (losses) except for less than $1, 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 primarily attributable to the reclassification of investment grade private placement securities, changes in the availability of market observable
information, the re-evaluation of the observability of pricing inputs and the election of fair value option for investments containing an embedded credit derivative. Transfers in also
include the consolidation of additional VIEs due to the adoption of new accounting guidance on January 1, 2010.
|
|
| [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.
|
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, AFS
|
||||||||||||||||||||||||||||
|
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 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total fixed maturities, AFS
|
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 | Purchases, | included in net income | ||||||||||||||||||||||||||
| as of | Total realized/unrealized | issuances, | Transfers in | Fair value | related to financial | |||||||||||||||||||||||
| January 1, | gains (losses) included in: | and | and/or (out) | as of | instruments still held at | |||||||||||||||||||||||
| Asset (Liability) | 2008 | Net income [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)
Fair Value Option
The Company elected the fair value option for its investments containing an embedded credit
derivative which were not bifurcated as a result of new accounting guidance effective July 1, 2010.
The underlying credit risk of these securities is primarily corporate bonds and commercial real
estate. The Company elected the fair value option given the complexity of bifurcating the economic
components associated with the embedded credit derivative. Similar to other fixed maturities,
income earned from these securities is recorded in net investment income. Changes in the fair
value of these securities are recorded in net realized capital gains and losses.
The Company previously elected the fair value option for one of its consolidated VIEs in order to
apply a consistent accounting model for the VIE’s assets and liabilities. The VIE is an investment
vehicle that holds high quality investments, derivative instruments that references third-party
corporate credit and issues notes to investors that reflect the credit characteristics of the high
quality investments and derivative instruments. The risks and rewards associated with the assets
of the VIE inure to the investors. The investors have no recourse against the Company. As a
result, there has been no adjustment to the market value of the notes for the Company’s own credit
risk. Electing the fair value option for the VIE resulted in lowering other liabilities with an
offsetting impact to the cumulative effect adjustment to retained earnings of $232, representing
the difference between the fair value and outstanding principal of the notes as of January 1, 2010.
The following table presents the changes in fair value of those assets and liabilities accounted
for using the fair value option reported in net realized capital gains and losses in the Company’s
Consolidated Statements of Operations.
| For the year ended | ||||
| December 31, 2010 | ||||
|
Assets
|
||||
|
Fixed maturities, FVO
|
||||
|
ABS
|
$ | (5 | ) | |
|
Corporate
|
(7 | ) | ||
|
CRE CDOs
|
83 | |||
|
RMBS
|
(1 | ) | ||
|
Other liabilities
|
||||
|
Credit-linked notes
|
(26 | ) | ||
|
|
||||
|
Total realized capital gains (losses)
|
$ | 44 | ||
|
|
||||
The following table presents the fair value of assets and liabilities accounted for using the fair
value option included in the Company’s Consolidated Balance Sheets.
| As of December 31, 2010 | ||||
|
Assets
|
||||
|
Fixed maturities, FVO
|
||||
|
ABS
|
$ | 65 | ||
|
CRE CDOs
|
270 | |||
|
Corporate
|
250 | |||
|
Foreign government
|
64 | |||
|
|
||||
|
Total fixed maturities, FVO
|
649 | |||
|
Other liabilities
|
||||
|
Credit-linked notes [1]
|
37 | |||
| [1] |
As of December 31, 2010, the outstanding principal balance of the notes was $243. Also not
included in the table above was $250 of derivative instruments in the Company’s Consolidated
Balance Sheets.
|
F-26
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 table 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, 2010 and December 31, 2009.
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
Assets
|
||||||||||||||||
|
Policy loans
|
$ | 2,181 | $ | 2,294 | $ | 2,174 | $ | 2,321 | ||||||||
|
Mortgage loans
|
4,489 | 4,524 | 5,938 | 5,091 | ||||||||||||
|
|
||||||||||||||||
|
Liabilities
|
||||||||||||||||
|
Other policyholder funds and benefits payable [1]
|
$ | 11,155 | $ | 11,383 | $ | 12,330 | $ | 12,513 | ||||||||
|
Senior notes [2]
|
4,880 | 5,072 | 4,054 | 4,037 | ||||||||||||
|
Junior subordinated debentures [2]
|
1,727 | 2,596 | 1,717 | 2,338 | ||||||||||||
|
Consumer notes [3]
|
377 | 392 | 1,131 | 1,194 | ||||||||||||
| [1] |
Excludes guarantees on variable annuities, group accident and health and universal life insurance contracts, including corporate owned life insurance.
|
|
| [2] |
Included in long-term debt in the Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
|
|
| [3] |
Excludes amounts carried at fair value and included in disclosures above.
|
As of December 31, 2010 and 2009, included in other liabilities in the Consolidated Balance Sheets
are carrying amounts of $233 and $273 for deposits, respectively, and $25 and $78 for 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, 2009.
| • |
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.
|
| • |
Fair values for other policyholder funds and benefits payable, not carried at fair value,
are determined by estimating future cash flows, discounted at the current market rate.
|
| • |
Fair values for senior notes and junior subordinated debentures are based primarily on
market quotations from independent third party pricing services.
|
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
These disclosures provide information as to the extent to which the Company uses fair value to
measure financial instruments related to variable annuity product guaranteed living benefits and
the related variable annuity 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, 2010 | ||||||||||||||||
| 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
|
339 | — | (122 | ) | 461 | |||||||||||
|
Macro hedge program
|
386 | 2 | 176 | 208 | ||||||||||||
|
Reinsurance recoverable for U.S. GMWB
|
280 | — | — | 280 | ||||||||||||
|
|
||||||||||||||||
|
Total assets accounted for at fair value on a recurring basis
|
$ | 1,005 | $ | 2 | $ | 54 | $ | 949 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||
|
U.S. guaranteed withdrawal benefits
|
$ | (1,611 | ) | $ | — | $ | — | $ | (1,611 | ) | ||||||
|
International guaranteed withdrawal benefits
|
(36 | ) | — | — | (36 | ) | ||||||||||
|
International other guaranteed living benefits
|
3 | — | — | 3 | ||||||||||||
|
Variable annuity hedging derivatives
|
128 | — | (11 | ) | 139 | |||||||||||
|
Macro hedge program
|
(2 | ) | (2 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$ | (1,518 | ) | $ | (2 | ) | $ | (11 | ) | $ | (1,505 | ) | ||||
|
|
||||||||||||||||
| 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. 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
|
||||||||||||||||
|
US 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 | ) | ||||
|
|
||||||||||||||||
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)
Product Derivatives
The Company currently offers certain variable annuity products with GMWB riders in the U.S., and
formerly offered such products 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 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 and benefits payable in the Consolidated Balance Sheets.
In valuing the embedded derivative, the Company attributes to the derivative a portion of the
expected fees to be collected over the expected life of the contract from the contract holder equal
to the present value of future GMWB claims (the “Attributed Fees”). The excess of fees collected
from the contract holder in the current period over the current period’s 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.
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
using the income approach 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 Claim
Payments; 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, 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 described
below is unobservable in the marketplace and require subjectivity by the Company in determining
their value.
Best Estimate
Claim Payments
The Best Estimate Claim Payments is calculated based on actuarial and capital market assumptions
related to projected cash flows, including the present value of 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 is used in valuation. The Monte Carlo stochastic process involves the
generation of thousands of scenarios that assume risk neutral returns consistent with swap rates
and a blend of observable implied index volatility levels. Estimating these cash flows involves
numerous estimates and subjective judgments regarding a number of variables — including expected
market rates of return, market volatility, correlations of market index returns to funds, fund
performance, discount rates and assumptions about policyholder behavior which emerge over time.
At each valuation date, the Company assumes expected returns based on:
| • |
risk-free rates as represented by the eurodollar futures, LIBOR deposits and swap rates to
derive forward curve rates;
|
| • |
market implied volatility assumptions for each underlying index based primarily on a blend
of observed market “implied volatility” data;
|
| • |
correlations of historical returns across underlying well known market indices based on
actual observed returns over the ten years preceding the valuation date; and
|
| • |
three years of history for fund indexes compared to separate account fund regression.
|
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 (continued)
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 is 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, in determining fair value,
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 a blend of 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. The credit standing adjustment assumption, net of
reinsurance, and exclusive of the impact of the credit standing adjustment on other market inputs,
resulted in pre-tax realized gains/(losses) of $(10), $26 and $10, for the years ended
December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010 the credit standing
adjustment was $26.
Margins
The behavior risk margin adds a margin that market participants would require, in determining fair
value, 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.
Assumption updates, including policyholder behavior assumptions, affected best estimates and
margins for a total pre-tax realized gain of $159, $566 and $470 for the years ended December 31,
2010, 2009 and 2008, respectively. As of December 31, 2010 the behavior risk margin was $565.
In addition to the non-market-based updates described above, 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 pre-tax realized gain
(loss) of approximately $104, $550 and $(355) for the years ended December 31, 2010, 2009 and 2008,
respectively.
F-30
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, 2010,
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, 2010 to December 31, 2010
| Changes in unrealized | ||||||||||||||||||||||||||||||||
| gains (losses) | ||||||||||||||||||||||||||||||||
| included in | ||||||||||||||||||||||||||||||||
| net income | ||||||||||||||||||||||||||||||||
| related to | ||||||||||||||||||||||||||||||||
| Fair value | Total realized/unrealized | Purchases, | Fair value | financial instruments | ||||||||||||||||||||||||||||
| as of | gains (losses) included in: | issuances, | Transfers | Transfers | as of | still held at | ||||||||||||||||||||||||||
| January 1, | Net income | and | in to | out of | December 31, | December 31, | ||||||||||||||||||||||||||
| Asset (Liability) | 2010 | [1] [2] [6] | OCI [2] | settlements [3] | Level 3 | Level 3 | 2010 | 2010 [1] [2] | ||||||||||||||||||||||||
|
Variable annuity hedging derivatives [5]
|
||||||||||||||||||||||||||||||||
|
Levels 1 and 2
|
$ | (184 | ) | $ | (221 | ) | $ | — | $ | 272 | $ | — | $ | — | $ | (133 | ) | [4 | ] | |||||||||||||
|
Level 3
|
236 | (74 | ) | — | 442 | — | (4 | ) | 600 | $ | (61 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total variable annuity hedging derivatives
|
52 | (295 | ) | — | 714 | — | (4 | ) | 467 | [4 | ] | |||||||||||||||||||||
|
Reinsurance recoverable for GMWB
|
347 | (102 | ) | — | 35 | — | — | 280 | (102 | ) | ||||||||||||||||||||||
|
U.S. guaranteed withdrawal benefits — Level 3
|
(1,957 | ) | 486 | — | (140 | ) | — | — | (1,611 | ) | 486 | |||||||||||||||||||||
|
International guaranteed withdrawal benefits
— Level 3
|
(45 | ) | 22 | (4 | ) | (9 | ) | — | — | (36 | ) | 22 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total guaranteed withdrawal benefits net of
reinsurance and hedging derivatives
|
(1,603 | ) | 111 | (4 | ) | 600 | — | (4 | ) | (900 | ) | [4 | ] | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Macro hedge program [5]
|
||||||||||||||||||||||||||||||||
|
Levels 1 and 2
|
28 | (221 | ) | — | 369 | — | — | 176 | [4 | ] | ||||||||||||||||||||||
|
Level 3
|
290 | (341 | ) | — | 259 | — | — | 208 | (321 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total macro hedge program
|
318 | (562 | ) | — | 628 | — | — | 384 | [4 | ] | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
International other guaranteed living
benefits — Level 3
|
2 | 4 | — | (3 | ) | — | — | 3 | 4 | |||||||||||||||||||||||
| [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. For GMWB reinsurance and guaranteed
withdrawal benefits, purchases, issuances and settlements represent the reinsurance premium paid and the attributed fees
collected, respectively.
|
|
| [4] |
Disclosure of changes in unrealized gains (losses) is 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 in 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-31
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, 2009 to December 31, 2009
| Changes in unrealized | ||||||||||||||||||||||||||||
| gains (losses) | ||||||||||||||||||||||||||||
| Fair value | Purchases, | included in net income | ||||||||||||||||||||||||||
| as of | Total realized/unrealized | issuances, | Transfers in | Fair value | related to financial | |||||||||||||||||||||||
| January 1, | gains (losses) included in: | and | and/or (out) | as of | instruments still held at | |||||||||||||||||||||||
| 2009 | Net income [1] | 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 | ) | [4 | ] | ||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
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. For GMWB reinsurance and guaranteed withdrawal
benefits, purchases, issuances and settlements represent the reinsurance premium paid and the attributed fees collected,
respectively.
|
|
| [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 in the Consolidated Balance Sheet in other investments and other liabilities.
|
F-32
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 | Purchases, | included in net income | ||||||||||||||||||||||||||
| as of | Total realized/unrealized | issuances, | Transfers in | Fair value | related to financial | |||||||||||||||||||||||
| January 1, | gains (losses) included in: | and | and/or (out) | as of | instruments still held at | |||||||||||||||||||||||
| 2008 | Net income [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 | |||||||||||||||||||||
|
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 | ) | [4 | ] | ||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
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-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
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.
Fixed maturities for which the Company elected the fair value option are classified as FVO and are
carried at fair value. 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, 2010, 2009 and 2008 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
The Company deems debt securities and certain equity securities with debt-like characteristics
(collectively “debt securities”) to be other-than-temporarily impaired (“impaired”) if a security
meets the following conditions: a) 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 b) 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 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 other-than-temporary
impairment (“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, which 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.
If the Company’s best estimate of expected future cash flows increases, the security’s yield is prospectively adjusted higher.
Conversely, if the Company’s best estimate of expected future cash flows worsens, the securities are reviewed for potential additional impairments.
The following table presents the change in
non-credit impairments recognized in OCI as disclosed in the Company’s Consolidated Statements of
Comprehensive Income (Loss) for the years ended December 31, 2010 and 2009, respectively.
| December 31, | ||||||||
| 2010 | 2009[1] | |||||||
|
OTTI losses recognized in OCI
|
$ | (418 | ) | $ | (683 | ) | ||
|
Changes in fair value and/or sales
|
647 | 244 | ||||||
|
Tax and deferred acquisition costs
|
(113 | ) | 215 | |||||
|
|
||||||||
|
Change in non-credit impairments recognized in OCI
|
$ | 116 | $ | (224 | ) | |||
|
|
||||||||
| [1] |
The Company adopted the other-than-temporary impairment guidance as of April 1, 2009.
|
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)
The Company’s evaluation of whether a credit impairment exists for debt securities includes but is
not limited to, the following factors: (a) changes in the financial condition of the security’s
underlying collateral, (b) whether the issuer is current on contractually obligated interest and
principal payments, (c) changes in the financial condition, credit rating and near-term prospects
of the issuer, (d) the extent to which the fair value has been less than the amortized cost of the
security 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 and projected delinquency rates, and loan-to-value ratios. In addition, for
structured securities, the Company considers factors including, but not limited to, average
cumulative collateral loss rates that vary by vintage year, commercial and residential property
value declines that vary by property type and location and commercial real estate delinquency
levels. 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.
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 (“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
The Company’s security monitoring process reviews mortgage loans on a quarterly basis to identify
potential credit losses. Commercial 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, and property-specific factors such as rental
rates, occupancy levels, loan-to-value (“LTV”) ratios and debt service coverage ratios (“DSCR”).
In addition, the Company considers historic, current and projected delinquency rates and property
values. For residential mortgage loans, impairments are evaluated based on pools of loans with
similar characteristics including, but not limited to, similar property types and loan performance
status. 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, most frequently, (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 residential loans. For commercial loans, a valuation
allowance has been established for either individual loans or as a projected loss contingency for
loans with an LTV ratio of 90% or greater and consideration of other credit quality factors,
including DSCR. Changes in valuation allowances are recorded in net realized capital gains and
losses. Interest income on impaired loans is accrued to the extent it is deemed collectable and
the loans continue to perform under the original or restructured terms. Interest income ceases to
accrue for loans when it is not probable that the Company will receive interest and principal
payments according to the contractual terms of the loan agreement, or if a loan is more than 60
days past due. Loans may resume accrual status when it is determined that sufficient collateral
exists to satisfy the full amount of the loan and interest payments, as well as when it is probable
cash will be received in the foreseeable future. Interest income on defaulted loans is recognized
when received.
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)
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, as well as changes in value associated with fixed
maturities for which the fair value option was elected. 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 as
well as one-time items.
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, 2010, 2009 and 2008.
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.
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.
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)
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.
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”.
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)
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.
Credit Risk
The Company’s 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. 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 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 for every counterparty. The maximum uncollateralized threshold for a
derivative counterparty for a single level entity is $10. The Company also 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
generally requires that derivative contracts, other than exchange traded contracts, certain 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.
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)
Net Investment Income (Loss)
| For the years ended December 31, | ||||||||||||
| (Before-tax) | 2010 | 2009 | 2008 | |||||||||
|
Fixed maturities
|
$ | 3,490 | $ | 3,618 | $ | 4,310 | ||||||
|
Equity securities, AFS
|
53 | 93 | 167 | |||||||||
|
Mortgage loans
|
283 | 316 | 333 | |||||||||
|
Policy loans
|
132 | 139 | 139 | |||||||||
|
Limited partnerships and other alternative investments
|
216 | (341 | ) | (445 | ) | |||||||
|
Other investments
|
333 | 318 | (72 | ) | ||||||||
|
Investment expenses
|
(115 | ) | (112 | ) | (97 | ) | ||||||
|
|
||||||||||||
|
Total securities AFS and other
|
4,392 | 4,031 | 4,335 | |||||||||
|
Equity securities, trading
|
(774 | ) | 3,188 | (10,340 | ) | |||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
$ | 3,618 | $ | 7,219 | $ | (6,005 | ) | |||||
|
|
||||||||||||
The net unrealized gain (loss) on equity securities, trading, included in net investment income
during the years ended December 31, 2010, 2009 and 2008, was $(68), $3,391 and $(9,626),
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) | 2010 | 2009 | 2008 | |||||||||
|
Gross gains on sales
|
$ | 836 | $ | 1,056 | $ | 607 | ||||||
|
Gross losses on sales
|
(522 | ) | (1,397 | ) | (856 | ) | ||||||
|
Net OTTI losses recognized in earnings
|
(434 | ) | (1,508 | ) | (3,964 | ) | ||||||
|
Valuation allowances on mortgage loans
|
(157 | ) | (403 | ) | (26 | ) | ||||||
|
Japanese fixed annuity contract hedges, net [1]
|
27 | 47 | 64 | |||||||||
|
Periodic net coupon settlements on credit derivatives/Japan
|
(17 | ) | (49 | ) | (33 | ) | ||||||
|
Fair value measurement transition impact
|
— | — | (650 | ) | ||||||||
|
Results of variable annuity hedge program
|
||||||||||||
|
GMWB derivatives, net
|
111 | 1,526 | (713 | ) | ||||||||
|
Macro hedge program
|
(562 | ) | (895 | ) | 74 | |||||||
|
|
||||||||||||
|
Total results of variable annuity hedge program
|
(451 | ) | 631 | (639 | ) | |||||||
|
Other, net [2]
|
164 | (387 | ) | (421 | ) | |||||||
|
|
||||||||||||
|
Net realized capital losses
|
$ | (554 | ) | $ | (2,010 | ) | $ | (5,918 | ) | |||
|
|
||||||||||||
| [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] |
Primarily consists of losses on Japan 3Win related foreign currency swaps, changes in fair value on non-qualifying derivatives and fixed maturities, FVO, and other investment gains and losses.
|
Sales of Available-for-Sale Securities
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Fixed maturities, AFS
|
||||||||||||
|
Sale proceeds
|
$ | 46,482 | $ | 41,973 | $ | 19,599 | ||||||
|
Gross gains
|
706 | 755 | 511 | |||||||||
|
Gross losses
|
(452 | ) | (1,272 | ) | (873 | ) | ||||||
|
Equity securities, AFS
|
||||||||||||
|
Sale proceeds
|
$ | 325 | $ | 941 | $ | 616 | ||||||
|
Gross gains
|
24 | 429 | 38 | |||||||||
|
Gross losses
|
(16 | ) | (151 | ) | (78 | ) | ||||||
Sales of AFS securities were the result of the Company’s repositioning of its investment portfolio
throughout 2010.
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)
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, 2010 and 2009.
| For the years ended December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Balance as of beginning of period
|
$ | (2,200 | ) | $ | — | |||
|
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
|
(211 | ) | (840 | ) | ||||
|
Securities previously impaired
|
(161 | ) | (292 | ) | ||||
|
Reductions for credit impairments previously recognized on:
|
||||||||
|
Securities that matured or were sold during the period
|
468 | 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
|
32 | 4 | ||||||
|
|
||||||||
|
Balance as of end of period
|
$ | (2,072 | ) | $ | (2,200 | ) | ||
|
|
||||||||
| [1] |
These additions are included in the net OTTI losses recognized in earnings in the
Consolidated Statements of Operations.
|
Available-for-Sale Securities
The following table presents the Company’s AFS securities by type.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||||||||||
| Cost or | Gross | Gross | Non- | Cost or | Gross | Gross | Non- | |||||||||||||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | Credit | Amortized | Unrealized | Unrealized | Fair | Credit | |||||||||||||||||||||||||||||||
| Cost | Gains | Losses | Value | OTTI [1] | Cost | Gains | Losses | Value | OTTI [1] | |||||||||||||||||||||||||||||||
|
ABS
|
$ | 3,247 | $ | 38 | $ | (396 | ) | $ | 2,889 | $ | (2 | ) | $ | 3,040 | $ | 36 | $ | (553 | ) | $ | 2,523 | $ | (48 | ) | ||||||||||||||||
|
CDOs
|
3,088 | 1 | (478 | ) | 2,611 | (82 | ) | 4,054 | 27 | (1,189 | ) | 2,892 | (174 | ) | ||||||||||||||||||||||||||
|
CMBS
|
8,297 | 235 | (615 | ) | 7,917 | (9 | ) | 10,736 | 114 | (2,306 | ) | 8,544 | (6 | ) | ||||||||||||||||||||||||||
|
Corporate [2]
|
38,496 | 2,174 | (747 | ) | 39,884 | 7 | 35,318 | 1,368 | (1,443 | ) | 35,243 | (23 | ) | |||||||||||||||||||||||||||
|
Foreign govt./govt. agencies
|
1,627 | 73 | (17 | ) | 1,683 | — | 1,376 | 52 | (20 | ) | 1,408 | — | ||||||||||||||||||||||||||||
|
Municipal
|
12,469 | 150 | (495 | ) | 12,124 | — | 12,125 | 318 | (378 | ) | 12,065 | (3 | ) | |||||||||||||||||||||||||||
|
RMBS
|
6,036 | 109 | (462 | ) | 5,683 | (124 | ) | 5,512 | 104 | (769 | ) | 4,847 | (185 | ) | ||||||||||||||||||||||||||
|
U.S. Treasuries
|
5,159 | 24 | (154 | ) | 5,029 | — | 3,854 | 14 | (237 | ) | 3,631 | — | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total fixed maturities, AFS
|
78,419 | 2,804 | (3,364 | ) | 77,820 | (210 | ) | 76,015 | 2,033 | (6,895 | ) | 71,153 | (439 | ) | ||||||||||||||||||||||||||
|
Equity securities, AFS
|
1,013 | 92 | (132 | ) | 973 | — | 1,333 | 80 | (192 | ) | 1,221 | — | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total AFS securities
|
$ | 79,432 | $ | 2,896 | $ | (3,496 | ) | $ | 78,793 | $ | (210 | ) | $ | 77,348 | $ | 2,113 | $ | (7,087 | ) | $ | 72,374 | $ | (439 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
| [1] |
Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of December 31, 2010
and 2009.
|
|
| [2] |
Gross unrealized gains (losses) exclude the fair value of bifurcated embedded derivative features of certain securities. Subsequent changes in value will be recorded in net realized capital gains (losses).
|
The following table presents the Company’s fixed maturities, AFS, by contractual maturity year.
| December 31, 2010 | ||||||||
| Maturity | Amortized Cost | Fair Value | ||||||
|
One year or less
|
$ | 1,886 | $ | 1,905 | ||||
|
Over one year through five years
|
17,151 | 17,817 | ||||||
|
Over five years through ten years
|
14,563 | 15,180 | ||||||
|
Over ten years
|
24,151 | 23,818 | ||||||
|
|
||||||||
|
Subtotal
|
57,751 | 58,720 | ||||||
|
Mortgage-backed and asset-backed securities
|
20,668 | 19,100 | ||||||
|
|
||||||||
|
Total
|
$ | 78,419 | $ | 77,820 | ||||
|
|
||||||||
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.
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)
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, 2010, 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., Wells Fargo & Co. and
AT&T Inc. which each comprised less than 0.5% of total invested assets. 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.
The Company’s three largest exposures by sector as of December 31, 2010 were commercial real
estate, municipal investments and U.S. Treasuries which comprised approximately 10%, 9% and 9%,
respectively, of total invested assets. The Company’s three largest exposures by sector as of
December 31, 2009 were commercial real estate, basic industry and municipal investments which
comprised approximately 12%, 10% and 10%, respectively, of total invested assets.
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, 2010 | ||||||||||||||||||||||||||||||||||||
| 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
|
$ | 302 | $ | 290 | $ | (12 | ) | $ | 1,410 | $ | 1,026 | $ | (384 | ) | $ | 1,712 | $ | 1,316 | $ | (396 | ) | |||||||||||||||
|
CDOs
|
321 | 293 | (28 | ) | 2,724 | 2,274 | (450 | ) | 3,045 | 2,567 | (478 | ) | ||||||||||||||||||||||||
|
CMBS
|
556 | 530 | (26 | ) | 3,962 | 3,373 | (589 | ) | 4,518 | 3,903 | (615 | ) | ||||||||||||||||||||||||
|
Corporate [1]
|
5,533 | 5,329 | (199 | ) | 4,017 | 3,435 | (548 | ) | 9,550 | 8,764 | (747 | ) | ||||||||||||||||||||||||
|
Foreign govt./govt. agencies
|
356 | 349 | (7 | ) | 78 | 68 | (10 | ) | 434 | 417 | (17 | ) | ||||||||||||||||||||||||
|
Municipal
|
7,485 | 7,173 | (312 | ) | 1,046 | 863 | (183 | ) | 8,531 | 8,036 | (495 | ) | ||||||||||||||||||||||||
|
RMBS
|
1,744 | 1,702 | (42 | ) | 1,567 | 1,147 | (420 | ) | 3,311 | 2,849 | (462 | ) | ||||||||||||||||||||||||
|
U.S. Treasuries
|
2,436 | 2,321 | (115 | ) | 158 | 119 | (39 | ) | 2,594 | 2,440 | (154 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total fixed maturities
|
18,733 | 17,987 | (741 | ) | 14,962 | 12,305 | (2,623 | ) | 33,695 | 30,292 | (3,364 | ) | ||||||||||||||||||||||||
|
Equity securities
|
53 | 52 | (1 | ) | 637 | 506 | (131 | ) | 690 | 558 | (132 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total securities in an unrealized loss
|
$ | 18,786 | $ | 18,039 | $ | (742 | ) | $ | 15,599 | $ | 12,811 | $ | (2,754 | ) | $ | 34,385 | $ | 30,850 | $ | (3,496 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| [1] |
Unrealized losses exclude the fair value of bifurcated embedded derivative features of
certain securities. Subsequent changes in value will be recorded in net realized capital
gains (losses).
|
| 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 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
As of December 31, 2010, AFS securities in an unrealized loss position, comprised of 2,982
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, 2010,
81% of these securities were depressed less than 20% of cost or amortized cost. The decline in
unrealized losses during 2010 was primarily attributable to a decline in interest rates and, to a
lesser extent, credit spread tightening.
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)
Most of the securities depressed for twelve months or more relate to structured securities with
exposure to commercial and residential real estate, as well as certain floating rate corporate
securities or those securities with greater than 10 years to maturity, concentrated in the
financial services sector. Current market spreads continue to be significantly wider for
structured securities with exposure to commercial and residential real estate, as compared to
spreads at the security’s respective purchase date, largely due to the economic and market
uncertainties regarding future performance of commercial and residential real estate. In addition,
the majority of securities have a floating-rate coupon referenced to a market index where rates
have declined substantially. The Company neither has an intention to sell nor does it expect to be
required to sell the securities outlined above.
Mortgage Loans
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Amortized | Valuation | Carrying | Amortized | Valuation | Carrying | |||||||||||||||||||
| Cost [1] | Allowance | Value | Cost [1] | Allowance | Value | |||||||||||||||||||
|
Commercial
|
$ | 4,492 | $ | (152 | ) | $ | 4,340 | $ | 6,096 | $ | (366 | ) | $ | 5,730 | ||||||||||
|
Residential
|
152 | (3 | ) | 149 | 208 | — | 208 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total mortgage loans
|
$ | 4,644 | $ | (155 | ) | $ | 4,489 | $ | 6,304 | $ | (366 | ) | $ | 5,938 | ||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Amortized cost represents carrying value prior to valuation allowances, if any.
|
As of December 31, 2010, the carrying value of mortgage loans associated with the valuation
allowance was $959. Included in the table above, are mortgage loans held-for-sale with a carrying
value and valuation allowance of $87 and $7, respectively, as of December 31, 2010, and $209 and
$98, respectively, as of December 31, 2009. The carrying value of these loans is included in
mortgage loans in the Company’s Consolidated Balance Sheets as of December 31, 2010.
The following table presents the activity within the Company’s valuation allowance for mortgage
loans.
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Balance as of January 1
|
$ | (366 | ) | $ | (26 | ) | $ | — | ||||
|
Additions
|
(157 | ) | (408 | ) | (26 | ) | ||||||
|
Deductions
|
368 | 68 | — | |||||||||
|
|
||||||||||||
|
Balance as of December 31
|
$ | (155 | ) | $ | (366 | ) | $ | (26 | ) | |||
|
|
||||||||||||
For the year ended December 31, 2010, deductions of $368 had a carrying value at time of sale of
$732 primarily related to sales of B-Note participants and mezzanine loans. Additions of $157
primarily related to anticipated, and since executed, B-Note participant and mezzanine loan sales,
as well as additions for expected credit losses due to borrower financial difficulty and/or
collateral value deterioration.
The current weighted average LTV ratio of the Company’s commercial mortgage loan portfolio was
approximately 77% as of December 31, 2010. At origination, the weighted-average LTV ratio was
approximately 64% as of December 31, 2010. LTV ratios compare the loan amount to the value of the
underlying property collateralizing the loan. The loan values are updated no less than annually
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. DSCRs compare a property’s net operating income to the borrower’s
principal and interest payments. The current weighted average DSCR of the Company’s commercial
mortgage loan portfolio was approximately 1.87x as of December 31, 2010. The Company held only
two delinquent commercial mortgage loans, both past due by 90 days or more. The total carrying
value and valuation allowance of these loans totaled $5 and $54, respectively, as of December 31,
2010, and are not accruing income.
The following table presents the carrying value of the Company’s commercial mortgage loans by LTV
and DSCR.
| Commercial Mortgage Loans Credit Quality | ||||||||
| December 31, 2010 | ||||||||
| Avg. Debt-Service | ||||||||
| Loan-to-value | Carrying Value | Coverage Ratio | ||||||
|
Greater than 80%
|
$ | 1,358 | 1.49 | x | ||||
|
65% – 80%
|
1,829 | 1.93 | x | |||||
|
Less than 65%
|
1,153 | 2.26 | x | |||||
|
|
||||||||
|
Total commercial mortgage loans
|
$ | 4,340 | 1.87 | x | ||||
|
|
||||||||
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)
The following tables present the carrying value of the Company’s mortgage loans by region and
property type.
| Mortgage Loans by Region | ||||||||||||||||
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying | Percent of | Carrying | Percent of | |||||||||||||
| Value | Total | Value | Total | |||||||||||||
|
East North Central
|
$ | 77 | 1.7 | % | $ | 125 | 2.1 | % | ||||||||
|
Middle Atlantic
|
428 | 9.5 | % | 689 | 11.6 | % | ||||||||||
|
Mountain
|
109 | 2.4 | % | 138 | 2.3 | % | ||||||||||
|
New England
|
259 | 5.8 | % | 449 | 7.6 | % | ||||||||||
|
Pacific
|
1,147 | 25.6 | % | 1,377 | 23.2 | % | ||||||||||
|
South Atlantic
|
1,177 | 26.3 | % | 1,213 | 20.4 | % | ||||||||||
|
West North Central
|
36 | 0.8 | % | 51 | 0.9 | % | ||||||||||
|
West South Central
|
231 | 5.1 | % | 297 | 5.0 | % | ||||||||||
|
Other [1]
|
1,025 | 22.8 | % | 1,599 | 26.9 | % | ||||||||||
|
|
||||||||||||||||
|
Total mortgage loans
|
$ | 4,489 | 100.0 | % | $ | 5,938 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| [1] |
Primarily represents loans collateralized by multiple properties in various regions.
|
| Mortgage Loans by Property Type | ||||||||||||||||
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying | Percent of | Carrying | Percent of | |||||||||||||
| Value | Total | Value | Total | |||||||||||||
|
Commercial
|
||||||||||||||||
|
Agricultural
|
$ | 315 | 7.0 | % | $ | 596 | 10.0 | % | ||||||||
|
Industrial
|
1,141 | 25.4 | % | 1,068 | 18.0 | % | ||||||||||
|
Lodging
|
132 | 2.9 | % | 421 | 7.1 | % | ||||||||||
|
Multifamily
|
713 | 15.9 | % | 835 | 14.1 | % | ||||||||||
|
Office
|
986 | 22.1 | % | 1,727 | 29.1 | % | ||||||||||
|
Retail
|
669 | 14.9 | % | 712 | 12.0 | % | ||||||||||
|
Other
|
384 | 8.5 | % | 371 | 6.2 | % | ||||||||||
|
Residential
|
149 | 3.3 | % | 208 | 3.5 | % | ||||||||||
|
|
||||||||||||||||
|
Total mortgage loans
|
$ | 4,489 | 100.0 | % | $ | 5,938 | 100.0 | % | ||||||||
|
|
||||||||||||||||
Variable Interest Entities
The Company is involved with various special purpose entities and other entities that are deemed to
be VIEs primarily as a collateral manager and as an investor through normal investment activities,
as well as a means of accessing capital. A VIE is an entity that either has investors that lack
certain essential characteristics of a controlling financial interest or lacks sufficient funds to
finance its own activities without financial support provided by other entities.
The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company
has a controlling financial interest in the VIE and therefore is the primary beneficiary. The
Company is deemed to have a controlling financial interest when it has both the ability to direct
the activities that most significantly impact the economic performance of the VIE and the
obligation to absorb losses or right to receive benefits from the VIE that could potentially be
significant to the VIE. Based on the Company’s assessment, if it determines it is the primary
beneficiary, the Company consolidates the VIE in the Company’s Consolidated Financial Statements.
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)
Consolidated VIEs
The following table presents the carrying value of assets and liabilities, and the maximum exposure
to loss relating to the VIEs for which the Company is the primary beneficiary. Creditors have no
recourse against the Company in the event of default by these VIEs nor does the Company have any
implied or unfunded commitments to these VIEs. The Company’s financial or other support provided
to these VIEs is limited to its investment management services and original investment. As a
result of accounting guidance adopted on January 1, 2010, certain CDO VIEs were consolidated in
2010 and are included in the following table, while in prior periods they were reported in the
Non-Consolidated VIEs table further below. For further information on the adoption, see Note 1.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Maximum | Maximum | |||||||||||||||||||||||
| Total | Total | Exposure | Total | Total | Exposure | |||||||||||||||||||
| Assets | Liabilities [1] | to Loss [2] | Assets | Liabilities [1] | to Loss [2] | |||||||||||||||||||
|
CDOs [3]
|
$ | 729 | $ | 393 | $ | 289 | $ | 226 | $ | 32 | $ | 196 | ||||||||||||
|
Limited partnerships
|
14 | 1 | 13 | 31 | 1 | 30 | ||||||||||||||||||
|
Other investments [3]
|
— | — | — | 111 | 20 | 87 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 743 | $ | 394 | $ | 302 | $ | 368 | $ | 53 | $ | 313 | ||||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Included in other liabilities 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 cost basis of the Company’s investment.
|
|
| [3] |
Total assets included in fixed maturities, AFS, and fixed maturities, FVO, in the Company’s Consolidated Balance Sheets.
|
CDOs represent structured investment vehicles for which the Company has a controlling financial
interest as it provides collateral management services, earns a fee for those services and also
holds investments in the securities issued by these vehicles. Limited partnerships represent a
hedge fund for which the Company holds a majority interest in the fund as an investment. Other
investments represent an investment trust for which the Company has a controlling financial
interest as it provides investment management services, earns a fee for those services and also
holds investments in the securities issued by the trusts. During 2010, the Company liquidated this
investment trust.
Non-Consolidated VIEs
The following table presents the carrying value of assets and liabilities, and the maximum exposure
to loss relating to significant VIEs for which the Company is not the primary beneficiary. The
Company has no implied or unfunded commitments to these VIEs.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Maximum | Maximum | |||||||||||||||||||||||
| Exposure | Exposure | |||||||||||||||||||||||
| Assets | Liabilities | to Loss | Assets | Liabilities | to Loss | |||||||||||||||||||
|
CDOs [1]
|
$ | — | $ | — | $ | — | $ | 262 | $ | — | $ | 273 | ||||||||||||
|
Other [2]
|
32 | 32 | 4 | 36 | 36 | 5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 32 | $ | 32 | $ | 4 | $ | 298 | $ | 36 | $ | 278 | ||||||||||||
|
|
||||||||||||||||||||||||
| [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 a contingent capital facility.
|
Other represents the Company’s variable interest in a contingent capital facility (“facility”),
which has been held for four years. For further information on the facility, see Note 14. The
Company does not have a controlling financial interest as it does not manage the assets of the
facility nor does it have the obligation to absorb losses or the right to receive benefits that
could potentially be significant to the facility, as the asset manager has significant variable
interest in the vehicle. The Company’s financial or other support provided to the facility is
limited to providing ongoing support to cover the facility’s operating expenses.
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)
In addition, the Company, through normal investment activities, makes passive investments in
structured securities issued by VIEs for which the Company is not the manager which are included in
ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in
the Company’s Consolidated Balance Sheets. The Company has not provided financial or other support
with respect to these investments other than its original investment. For these investments, the
Company determined it is not the primary beneficiary due to the relative size of the Company’s
investment in comparison to the principal amount of the structured securities issued by the VIEs,
the level of credit subordination which reduces the Company’s obligation to absorb losses or right
to receive benefits and the Company’s inability to direct the activities that most significantly
impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these
investments is limited to the amount of the Company’s investment.
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, 2010 is limited to the total
carrying value of $1.9 billion. In addition, the Company has outstanding commitments totaling
approximately $693, to fund limited partnership and other alternative investments as of December
31, 2010. 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 income (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 $93.9 billion and $80.7 billion as of
December 31, 2010 and 2009, respectively. Aggregate total liabilities of the limited partnerships
in which the Company invested totaled $22.3 billion and $24.6 billion as of December 31, 2010 and
2009, respectively. Aggregate net investment income (loss) of the limited partnerships in which
the Company invested totaled $857, $(688) and $(228) for the periods ended December 31, 2010, 2009
and 2008, respectively. Aggregate net income (loss) of the limited partnerships in which the
Company invested totaled $10.3 billion, $(9.1) billion and $(19.7) billion for the periods ended
December 31, 2010, 2009 and 2008, respectively. As of, and for the period ended, December 31,
2010, 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. These derivatives are primarily structured to
hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign currency swaps
Foreign currency swaps are used to convert foreign currency-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.
Forward rate agreements
Forward rate agreements may be 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. As of December 31, 2010, the
Company does not have any forward rate agreements.
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)
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
currency-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.
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, 2010 and 2009, the notional amount of interest rate swaps in offsetting
relationships was $7.1 billion and $7.3 billion, respectively.
Foreign currency swaps and forwards
The Company enters into foreign currency swaps and forwards to convert the foreign currency
exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.
Japan 3Win foreign currency swaps
Prior to the second quarter of 2009, The Company offered certain variable annuity products with a
GMIB rider through a wholly-owned Japanese subsidiary. The GMIB rider is reinsured to a
wholly-owned U.S. subsidiary, which invests in U.S. dollar denominated assets to support the
liability. The U.S. subsidiary entered into pay U.S. dollar, receive yen forward contracts to
hedge the currency and interest rate exposure between the U.S. dollar denominated assets and the
yen denominated fixed liability reinsurance payments.
Japanese fixed annuity hedging instruments
Prior to the second quarter of 2009, The Company offered a yen denominated fixed annuity product
through a wholly-owned Japanese subsidiary and reinsured to a wholly-owned U.S. subsidiary. The
U.S. subsidiary invests in U.S. dollar denominated securities to support the yen denominated fixed
liability payments and entered into currency rate swaps to hedge the foreign currency exchange rate
and yen interest rate exposures that exist as a result of U.S. dollar assets backing the yen
denominated liability.
Japanese variable annuity hedging instruments
The Company enters into foreign currency forward and option contracts to hedge the foreign currency
risk associated with certain Japanese variable annuity liabilities reinsured from a wholly-owned
Japanese subsidiary. Foreign currency risk may arise for some segments of the business where
assets backing the liabilities are denominated in U.S. dollars while the liabilities are
denominated in yen. Foreign currency risk may also arise when certain variable annuity
policyholder accounts are invested in various currencies while the related GMDB and GMIB guarantees
are effectively yen-denominated.
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 credit derivatives embedded within certain fixed
maturity securities. These securities are primarily comprised of structured securities that
contain credit derivatives that reference a standard index of corporate securities.
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.
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)
Equity index swaps and options
The Company offers certain equity indexed products, which may contain an embedded derivative that
requires bifurcation. The Company enters into S&P index swaps and options to economically hedge
the equity volatility risk associated with these embedded derivatives.
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. 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 guaranteed remaining balance (“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.
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 associated with a portion
of the GMWB liabilities that 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.
The following table represents notional and fair value for GMWB hedging instruments.
| Notional Amount | Fair Value | |||||||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Customized swaps
|
$ | 10,113 | $ | 10,838 | $ | 209 | $ | 234 | ||||||||
|
Equity swaps, options, and futures
|
4,943 | 2,994 | 391 | 9 | ||||||||||||
|
Interest rate swaps and futures
|
2,800 | 1,735 | (133 | ) | (191 | ) | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 17,856 | $ | 15,567 | $ | 467 | $ | 52 | ||||||||
|
|
||||||||||||||||
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)
Macro hedge program
The Company utilizes equity options, equity futures contracts, currency forwards, and currency
options to partially hedge against a decline in the equity markets or changes in foreign currency
exchange rates and the resulting statutory surplus and capital impact primarily arising from
guaranteed minimum death benefit (“GMDB”), GMIB and GMWB obligations. The Company also enters into
foreign currency denominated interest rate swaps to hedge the interest rate exposure related to the
potential annuitization of certain benefit obligations.
The following table represents notional and fair value for the macro hedge program.
| Notional Amount | Fair Value | |||||||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Equity options and futures
|
$ | 14,500 | $ | 25,373 | $ | 205 | $ | 296 | ||||||||
|
Currency forward contracts
|
3,232 | — | 93 | — | ||||||||||||
|
Foreign interest rate swaps
|
2,182 | — | 21 | — | ||||||||||||
|
Cross-currency equity options
|
1,000 | — | 3 | — | ||||||||||||
|
Long currency options
|
3,075 | 1,000 | 67 | 22 | ||||||||||||
|
Short currency options
|
2,221 | 1,075 | (5 | ) | — | |||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 26,210 | $ | 27,448 | $ | 384 | $ | 318 | ||||||||
|
|
||||||||||||||||
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 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-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)
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.
| Net Derivatives | Asset Derivatives | Liability 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 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Cash flow hedges
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | 10,290 | $ | 11,170 | $ | 115 | $ | 123 | $ | 188 | $ | 294 | $ | (73 | ) | $ | (171 | ) | ||||||||||||||
|
Forward rate agreements
|
— | 6,355 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Foreign currency swaps
|
335 | 381 | 6 | (3 | ) | 29 | 30 | (23 | ) | (33 | ) | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total cash flow hedges
|
10,625 | 17,906 | 121 | 120 | 217 | 324 | (96 | ) | (204 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Fair value hedges
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
1,120 | 1,745 | (46 | ) | (21 | ) | 5 | 16 | (51 | ) | (37 | ) | ||||||||||||||||||||
|
Foreign currency swaps
|
677 | 696 | (12 | ) | (9 | ) | 71 | 53 | (83 | ) | (62 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total fair value hedges
|
1,797 | 2,441 | (58 | ) | (30 | ) | 76 | 69 | (134 | ) | (99 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Non-qualifying strategies
|
||||||||||||||||||||||||||||||||
|
Interest rate contracts
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps, caps, floors, and futures
|
7,938 | 8,355 | (441 | ) | (84 | ) | 126 | 250 | (567 | ) | (334 | ) | ||||||||||||||||||||
|
Foreign exchange contracts
|
||||||||||||||||||||||||||||||||
|
Foreign currency swaps and forwards
|
368 | 1,039 | (18 | ) | (13 | ) | 1 | 14 | (19 | ) | (27 | ) | ||||||||||||||||||||
|
Japan 3Win foreign currency swaps
|
2,285 | 2,514 | 177 | (19 | ) | 177 | 35 | — | (54 | ) | ||||||||||||||||||||||
|
Japanese fixed annuity hedging instruments
|
2,119 | 2,271 | 608 | 316 | 608 | 319 | — | (3 | ) | |||||||||||||||||||||||
|
Japanese variable annuity hedging instruments
|
1,720 | 257 | 73 | (8 | ) | 74 | — | (1 | ) | (8 | ) | |||||||||||||||||||||
|
Credit contracts
|
||||||||||||||||||||||||||||||||
|
Credit derivatives that purchase credit
protection
|
2,559 | 2,606 | (9 | ) | (50 | ) | 29 | 45 | (38 | ) | (95 | ) | ||||||||||||||||||||
|
Credit derivatives that assume credit risk [1]
|
2,569 | 1,158 | (434 | ) | (240 | ) | 8 | 2 | (442 | ) | (242 | ) | ||||||||||||||||||||
|
Credit derivatives in offsetting positions
|
8,367 | 6,176 | (75 | ) | (71 | ) | 98 | 185 | (173 | ) | (256 | ) | ||||||||||||||||||||
|
Equity contracts
|
||||||||||||||||||||||||||||||||
|
Equity index swaps and options
|
189 | 220 | (10 | ) | (16 | ) | 5 | 3 | (15 | ) | (19 | ) | ||||||||||||||||||||
|
Variable annuity hedge program
|
||||||||||||||||||||||||||||||||
|
GMWB product derivatives [2]
|
42,739 | 47,329 | (1,647 | ) | (2,002 | ) | — | — | (1,647 | ) | (2,002 | ) | ||||||||||||||||||||
|
GMWB reinsurance contracts
|
8,767 | 10,301 | 280 | 347 | 280 | 347 | — | — | ||||||||||||||||||||||||
|
GMWB hedging instruments
|
17,856 | 15,567 | 467 | 52 | 647 | 264 | (180 | ) | (212 | ) | ||||||||||||||||||||||
|
Macro hedge program
|
26,210 | 27,448 | 384 | 318 | 394 | 558 | (10 | ) | (240 | ) | ||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||
|
GMAB product derivatives [2]
|
246 | 226 | 3 | 2 | 3 | 2 | — | — | ||||||||||||||||||||||||
|
Contingent capital facility put option
|
500 | 500 | 32 | 36 | 32 | 36 | — | — | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total non-qualifying strategies
|
124,432 | 125,967 | (610 | ) | (1,432 | ) | 2,482 | 2,060 | (3,092 | ) | (3,492 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total cash flow hedges, fair value hedges, and
non-qualifying strategies
|
$ | 136,854 | $ | 146,314 | $ | (547 | ) | $ | (1,342 | ) | $ | 2,775 | $ | 2,453 | $ | (3,322 | ) | $ | (3,795 | ) | ||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance Sheet Location
|
||||||||||||||||||||||||||||||||
|
Fixed maturities, available-for-sale
|
$ | 728 | $ | 269 | $ | (39 | ) | $ | (8 | ) | $ | — | $ | — | $ | (39 | ) | $ | (8 | ) | ||||||||||||
|
Other investments
|
55,948 | 24,006 | 1,524 | 390 | 2,105 | 492 | (581 | ) | (102 | ) | ||||||||||||||||||||||
|
Other liabilities
|
28,333 | 64,061 | (654 | ) | (56 | ) | 387 | 1,612 | (1,041 | ) | (1,668 | ) | ||||||||||||||||||||
|
Consumer notes
|
39 | 64 | (5 | ) | (5 | ) | — | — | (5 | ) | (5 | ) | ||||||||||||||||||||
|
Reinsurance recoverables
|
8,767 | 10,301 | 280 | 347 | 280 | 347 | — | — | ||||||||||||||||||||||||
|
Other policyholder funds and benefits payable
|
43,039 | 47,613 | (1,653 | ) | (2,010 | ) | 3 | 2 | (1,656 | ) | (2,012 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total derivatives
|
$ | 136,854 | $ | 146,314 | $ | (547 | ) | $ | (1,342 | ) | $ | 2,775 | $ | 2,453 | $ | (3,322 | ) | $ | (3,795 | ) | ||||||||||||
|
|
||||||||||||||||||||||||||||||||
| [1] |
The derivative instruments related to this strategy are held for other investment purposes.
|
|
| [2] |
These derivatives are embedded within liabilities and are not held for risk management purposes.
|
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)
Change in Notional Amount
The net decrease in notional amount of derivatives since December 31, 2009, was primarily due to
the following:
| • |
The Company terminated $6.4 billion notional of forward rate agreements as a result of the
sale of the hedged variable rate securities. The $6.4 billion notional was comprised of a
series of one month forward contracts that were hedging the variability of cash flows related
to coupon payments on $555 of variable rate securities for consecutive monthly periods during
2010.
|
| • |
The GMWB product derivative notional declined $4.6 billion primarily as a result of
policyholder lapses and withdrawals, partially offset by an increase in the equity market.
|
| • |
The notional amount related to interest rate swaps that qualify for cash flow hedge
accounting, which are used to convert interest receipts on floating-rate fixed maturity
securities to fixed rates, declined $1.3 billion due to swap maturities.
|
| • |
The notional amount related to the macro hedge program declined $1.2 billion primarily due
to the expiration of certain equity index options during the first quarter.
|
| • |
The notional amount related to credit derivatives in offsetting positions increased by $2.2
billion primarily due to purchases and terminations during the year of credit derivatives that
were purchasing credit protection.
|
| • |
The notional amount related to credit derivatives that assume credit risk increased by $1.4
billion as a result of the Company adding $676 notional which reference to a standard market
basket of corporate issuers to manage credit spread duration, $463 notional related to the
bifurcation of certain embedded credit derivatives as a result of new accounting guidance, and
$342 related to the consolidation of a VIE as a result of new accounting guidance. For
further discussion of the new accounting guidance on embedded credit derivatives and VIEs
adopted during 2010, see Adoption of New Accounting Standards in Note 1.
|
Change in Fair Value
The change in the total fair value of derivative instruments since December 31, 2009, was primarily
related to the following:
| • |
The increase in the combined GMWB hedging program, which includes the GMWB product,
reinsurance, and hedging derivatives, was primarily a result of purchases of equity options,
liability model assumption updates during third quarter, lower implied market volatility, and
outperformance of the underlying actively managed funds as compared to their respective
indices, partially offset by a general decrease in long-term interest rates and rising equity
markets.
|
| • |
The increase in fair value related to the Japanese fixed annuity hedging instruments and
Japan 3 Win foreign currency swaps was primarily due to the U.S. dollar weakening in
comparison to the Japanese yen, partially offset by a decrease in fair value of the Japan 3
Win foreign currency swaps due to a decrease in long-term U.S. interest rates.
|
| • |
The fair value related to interest rate swaps decreased as a result of a portfolio
rebalancing program.
|
| • |
The fair value related to credit derivatives that assume credit risk primarily decreased as
a result of the Company adopting new accounting guidance related to the consolidation of VIEs;
see Adoption of New Accounting Standards in Note 1. As a result of this new guidance, the
Company has consolidated a Company sponsored CDO that included credit default swaps with a
notional amount of $342 and a fair value of $(250) as of December 31, 2010. These swaps
reference a basket of corporate issuers.
|
F-50
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)
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
period 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) | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Interest rate swaps
|
$ | 294 | $ | (461 | ) | $ | 908 | $ | 2 | $ | (3 | ) | $ | 9 | ||||||||||
|
Foreign currency swaps
|
8 | (194 | ) | 233 | (1 | ) | 75 | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 302 | $ | (655 | ) | $ | 1,141 | $ | 1 | $ | 72 | $ | 9 | |||||||||||
|
|
||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | ||||||||||||||
| Gain (Loss) Reclassified from AOCI | ||||||||||||||
| into Income (Effective Portion) | ||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||
|
Interest rate swaps
|
Net realized capital gains (losses) | $ | 18 | $ | 11 | $ | 34 | |||||||
|
Interest rate swaps
|
Net investment income (loss) | 94 | 47 | (17 | ) | |||||||||
|
Foreign currency swaps
|
Net realized capital gains (losses) | (7 | ) | (119 | ) | (83 | ) | |||||||
|
Foreign currency swaps
|
Net investment income (loss) | — | 2 | 1 | ||||||||||
|
|
||||||||||||||
|
Total
|
$ | 105 | $ | (59 | ) | $ | (65 | ) | ||||||
|
|
||||||||||||||
As of December 31, 2010, 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 $123. 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 three years.
During the year ended December 31, 2010, the Company had less than $1 of 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 years 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.
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 fair value
hedges as follows:
| Derivatives in Fair Value Hedging Relationships | ||||||||||||||||||||||||
| Gain (Loss) Recognized in Income [1] | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Derivative | Hedged Item | Derivative | Hedged Item | Derivative | Hedged Item | |||||||||||||||||||
|
Interest rate swaps
|
||||||||||||||||||||||||
|
Net realized capital gains (losses)
|
$ | (43 | ) | $ | 36 | $ | 72 | $ | (68 | ) | $ | (138 | ) | $ | 130 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
(1 | ) | 3 | (37 | ) | 40 | 25 | (18 | ) | |||||||||||||||
|
Foreign currency swaps
|
||||||||||||||||||||||||
|
Net realized capital gains (losses)
|
8 | (8 | ) | 51 | (51 | ) | (124 | ) | 124 | |||||||||||||||
|
Benefits, losses and loss adjustment expenses
|
(12 | ) | 12 | 2 | (2 | ) | 42 | (42 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | (48 | ) | $ | 43 | $ | 88 | $ | (81 | ) | $ | (195 | ) | $ | 194 | |||||||||
|
|
||||||||||||||||||||||||
| [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-51
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) |
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Interest rate contracts
|
||||||||||||
|
Interest rate swaps, caps, floors, and forwards
|
$ | 45 | $ | 31 | $ | 12 | ||||||
|
Foreign exchange contracts
|
||||||||||||
|
Foreign currency swaps and forwards
|
(1 | ) | (49 | ) | 47 | |||||||
|
Japan 3Win foreign currency swaps [1]
|
215 | (22 | ) | — | ||||||||
|
Japanese fixed annuity hedging instruments [2]
|
385 | (12 | ) | 487 | ||||||||
|
Japanese variable annuity hedging instruments
|
102 | (17 | ) | 40 | ||||||||
|
Credit contracts
|
||||||||||||
|
Credit derivatives that purchase credit protection
|
(23 | ) | (533 | ) | 302 | |||||||
|
Credit derivatives that assume credit risk
|
196 | 167 | (623 | ) | ||||||||
|
Equity contracts
|
||||||||||||
|
Equity index swaps and options
|
5 | (3 | ) | (25 | ) | |||||||
|
Warrants
|
— | 70 | 110 | |||||||||
|
Variable annuity hedge program
|
||||||||||||
|
GMWB product derivatives
|
508 | 4,748 | (5,786 | ) | ||||||||
|
GMWB reinsurance contracts
|
(102 | ) | (988 | ) | 1,073 | |||||||
|
GMWB hedging instruments
|
(295 | ) | (2,234 | ) | 3,374 | |||||||
|
Macro hedge program
|
(562 | ) | (895 | ) | 74 | |||||||
|
Other
|
||||||||||||
|
GMAB product derivatives
|
4 | 5 | 2 | |||||||||
|
Contingent capital facility put option
|
(6 | ) | (8 | ) | (3 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 471 | $ | 260 | $ | (916 | ) | |||||
|
|
||||||||||||
| [1] |
The associated liability is adjusted for changes in spot rates through
realized capital gains and losses and was $(273) and $64 for the years
ended December 31, 2010 and 2009, respectively. There were no Japan
3Win foreign currency swaps as of December 31, 2008.
|
|
| [2] |
The associated liability is adjusted for changes in spot rates through
realized capital gains and losses and was $(332), $67, and $450 for
the years ended December 31, 2010, 2009 and 2008, respectively. In
addition, included are gains of $1 for the year ended December 31,
2010 related to Japan FVO fixed maturity securities. There were no
Japan FVO fixed maturity securities as of December 31, 2009 and
December 31, 2008.
|
For the year ended December 31, 2010, the net realized capital gain (loss) related to derivatives
used in non-qualifying strategies was primarily comprised of the following:
| • |
The net loss associated with the macro hedge program is primarily due to a higher equity
market valuation, time decay, and lower implied market volatility, partially offset by gains
due to the strengthening of the Japanese yen.
|
| • |
The net gain on the Japanese fixed annuity hedging instruments is primarily due to the
strengthening of the Japanese yen in comparison to the U.S. dollar.
|
| • |
The net gain related to the Japan 3Win foreign currency swaps is primarily due to the
strengthening of the Japanese yen in comparison to the U.S. dollar, partially offset by the
decrease in long-term U.S. interest rates.
|
| • |
The net gain associated with credit derivatives that assume credit risk is primarily due to
credit spreads tightening.
|
| • |
The gain related to the combined GMWB hedging program, which includes the GMWB product,
reinsurance, and hedging derivatives, was primarily a result of liability model assumption
updates during third quarter, lower implied market volatility, and outperformance of the
underlying actively managed funds as compared to their respective indices, partially offset by
a general decrease in long-term interest rates and rising equity markets.
|
F-52
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, the net realized capital gain (loss) related to derivatives
used in non-qualifying strategies was primarily due to the following:
| • |
The gain related to the net GMWB product, reinsurance, and hedging derivatives 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 a higher equity market
valuation 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.
|
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 loss related to the net GMWB product, reinsurance, and hedging derivatives was
primarily due to liability model assumption updates and 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 as compared to 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.
Refer to Note 12 for additional disclosures regarding contingent credit related features in
derivative agreements.
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of 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 after
the occurrence of the credit event. A credit event is generally defined as a default on
contractually obligated interest or principal payments or bankruptcy of the referenced entity. The
credit default swaps in which the Company assumes credit risk primarily reference investment grade
single corporate issuers and baskets, which include 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.
F-53
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 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, 2010 and 2009.
| As of December 31, 2010 | ||||||||||||||||||||||||||||
| 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
|
$ | 1,562 | $ | (14 | ) | 3 years |
Corporate Credit/
Foreign Gov. |
A+ | $ | 1,447 | $ | (41 | ) | |||||||||||||||
|
Below investment grade risk exposure
|
204 | (6 | ) | 3 years | Corporate Credit | BB- | 168 | (13 | ) | |||||||||||||||||||
|
Basket credit default swaps [4]
|
||||||||||||||||||||||||||||
|
Investment grade risk exposure
|
3,145 | (1 | ) | 4 years | Corporate Credit | BBB+ | 2,019 | (14 | ) | |||||||||||||||||||
|
Investment grade risk exposure
|
525 | (50 | ) | 6 years | CMBS Credit | BBB+ | 525 | 50 | ||||||||||||||||||||
|
Below investment grade risk exposure
|
767 | (381 | ) | 4 years | Corporate Credit | BBB+ | 25 | — | ||||||||||||||||||||
|
Embedded credit derivatives
|
||||||||||||||||||||||||||||
|
Investment grade risk exposure
|
25 | 25 | 4 years | Corporate Credit | BBB- | — | — | |||||||||||||||||||||
|
Below investment grade risk exposure
|
525 | 463 | 6 years | Corporate Credit | BB+ | — | — | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total
|
$ | 6,753 | $ | 36 | $ | 4,184 | $ | (18 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| [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 $3.9 billion and $2.5 billion as of December 31, 2010 and
2009, 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 $542 and $325 as of December 31,
2010 and 2009, respectively, of customized diversified portfolios of
corporate issuers referenced through credit default swaps.
|
F-54
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)
Collateral Arrangements
The Company enters into various collateral arrangements in connection with its derivative
instruments, which require both the pledging and accepting of collateral. As of December 31, 2010
and 2009, collateral pledged having a fair value of $790 and $818, respectively, was included in
fixed maturities, AFS, 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 $33 and $42 as of December 31, 2010
and 2009, respectively.
The following table presents the classification and carrying amount of loaned securities and
derivative instruments collateral pledged.
| December 31, 2010 | December 31, 2009 | |||||||
|
Fixed maturities, AFS
|
$ | 823 | $ | 891 | ||||
|
Short-term investments
|
— | 14 | ||||||
|
|
||||||||
|
Total collateral pledged
|
$ | 823 | $ | 905 | ||||
|
|
||||||||
As of December 31, 2010 and
2009, the Company had accepted collateral with a fair value of $1.5
billion and $1.0 billion, respectively, of which $1.1 billion and $931, respectively,
was cash
collateral which was invested and recorded in the Consolidated Balance Sheets in fixed maturities
and short-term investments with a corresponding liability recorded.
Included in this cash collateral was $1.1 billion and $888 for derivative cash collateral as
of
December 31, 2010 and 2009, 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,
2010 and 2009, 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, 2010 and 2009, the fair value of securities on deposit was
approximately $1.4 billion.
F-55
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. 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 reinsurance
is placed with reinsurers that meet strict financial criteria established by The Hartford. As of
December 31, 2010 and 2009, The Hartford had no reinsurance-related concentrations of credit risk
greater than 10% of the Company’s stockholders’ equity.
Results
In accordance with normal industry practice, the Company is involved in both the cession and
assumption of insurance with other insurance and reinsurance companies. As of December 31, 2010
and 2009, the Company’s policy for the largest amount of life insurance retained on any one life by
any company was $10.
Life insurance fees, earned premiums and other were comprised of the following:
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Gross fee income, earned premiums and other
|
$ | 9,518 | $ | 9,448 | $ | 10,441 | ||||||
|
Reinsurance assumed
|
192 | 162 | 263 | |||||||||
|
Reinsurance ceded
|
(576 | ) | (484 | ) | (421 | ) | ||||||
|
|
||||||||||||
|
Net fee income, earned premiums and other
|
$ | 9,134 | $ | 9,126 | $ | 10,283 | ||||||
|
|
||||||||||||
The Company 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 $275, $305 and $331 for the years ended December 31, 2010, 2009 and 2008,
respectively. The Company 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-56
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 | 2010 | 2009 | 2008 | |||||||||
|
Direct
|
$ | 10,070 | $ | 10,185 | $ | 10,831 | ||||||
|
Assumed
|
234 | 238 | 218 | |||||||||
|
Ceded
|
(619 | ) | (712 | ) | (818 | ) | ||||||
|
|
||||||||||||
|
Net
|
$ | 9,685 | $ | 9,711 | $ | 10,231 | ||||||
|
|
||||||||||||
| Premiums Earned | ||||||||||||
|
Direct
|
$ | 10,105 | $ | 10,386 | $ | 10,999 | ||||||
|
Assumed
|
256 | 253 | 216 | |||||||||
|
Ceded
|
(668 | ) | (778 | ) | (877 | ) | ||||||
|
|
||||||||||||
|
Net
|
$ | 9,693 | $ | 9,861 | $ | 10,338 | ||||||
|
|
||||||||||||
Ceded losses, which reduce losses and loss adjustment expenses incurred, were $598, $286, and $384
for the years ended December 31, 2010, 2009, and 2008, 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 $290 and $335 as of December 31, 2010 and 2009,
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. Based on this
analysis, the Company may adjust the allowance for uncollectible reinsurance or charge off
reinsurer balances that are determined to be uncollectible. 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-57
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
Accounting Policy
The Company capitalizes acquisition costs that vary with and are primarily related to the
acquisition of new and renewal insurance business. For life insurance products, the 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; the extent and
duration of hedging activities 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.
For property and casualty insurance products, 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 DACs. For the years
ended December 31, 2010, 2009 and, 2008 no amount of DACs was charged to expense based on the
determination of recoverability.
F-58
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:
| 2010 | 2009 | 2008 | ||||||||||
|
Balance, January 1
|
$ | 10,686 | $ | 13,248 | $ | 11,742 | ||||||
|
Deferred Costs
|
2,648 | 2,853 | 3,675 | |||||||||
|
Amortization — DAC
|
(2,682 | ) | (3,257 | ) | (3,118 | ) | ||||||
|
Amortization — Unlock benefit (charge), pre-tax [1]
|
138 | (1,010 | ) | (1,153 | ) | |||||||
|
Adjustments to unrealized gains and losses on securities available-for-sale and other [2]
|
(1,159 | ) | (1,031 | ) | 1,754 | |||||||
|
Effect of currency translation
|
215 | (39 | ) | 348 | ||||||||
|
Cumulative effect of accounting change, pre-tax [3]
|
11 | (78 | ) | — | ||||||||
|
|
||||||||||||
|
Balance, December 31
|
$ | 9,857 | $ | 10,686 | $ | 13,248 | ||||||
|
|
||||||||||||
| [1] |
The most significant contributors to the Unlock benefit recorded during the year ended
December 31, 2010 were actual separate account returns being above our aggregated estimated
return. Also included in the benefit are assumption updates related by benefits from
withdrawals and lapses, offset by hedging, annuitization estimates on Japan products, and
long-term expected rate of return updates.
|
|
|
The most significant contributors to the Unlock charge recorded during the year ended December
31, 2009 were the results of actual separate account returns being significantly below our
aggregated estimated return for the first quarter of 2009, partially offset by actual returns
being greater than our aggregated estimated return for the period from April 1, 2009 to December
31, 2009.
|
||
|
The most significant contributors to the Unlock charge recorded during the year ended December
31, 2008 were the results of actual separate account returns were significantly below our
aggregated estimated return. Furthermore, the Company reduced its 20 year projected separate
account return assumption from 7.8% to 7.2% in the U.S.
|
||
| [2] |
The most significant contributor to the adjustments was the effect of
declining interest rates, resulting in unrealized gains on securities
classified in AOCI. Other includes a $34 decrease as a result of the
disposition of DAC from the sale of the Hartford Investments Canada
Corporation.
|
|
| [3] |
For the year ended December 31, 2010 the effect of adopting new
accounting guidance for embedded credit derivatives resulted in a
decrease to retained earnings and, as a result, a DAC benefit. In
addition, an offsetting amount was recorded in unrealized losses as
unrealized losses decreased upon adoption of the new accounting
guidance.
|
|
|
For the year ended December 31, 2009 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. In addition, an offsetting amount was recorded in unrealized
losses as unrealized losses increased upon adoption of the new
accounting guidance.
|
Estimated future net amortization expense of present value of future profits for the succeeding
five years is $36, $33, $30, $28, and $27 in 2011, 2012, 2013, 2014, and 2015, respectively.
F-59
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
Accounting Policy
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.
Results
The Hartford has changed its reporting segments effective for 2010 reporting with no changes to
reporting units. Accordingly, the goodwill by segment data for prior reporting periods has been
adjusted to reflect the new reporting segments. See Note 3 for further description of the changes
to the reporting segments. The carrying amount of goodwill allocated to reporting segments as of
December 31 is shown below.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Accumulated | Carrying | Accumulated | Carrying | |||||||||||||||||||||
| Gross | Impairments | Value | Gross | Impairments | Value | |||||||||||||||||||
|
Commercial Markets
|
||||||||||||||||||||||||
|
Property & Casualty Commercial
|
$ | 30 | $ | — | $ | 30 | $ | 30 | $ | — | $ | 30 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Total Commercial Markets
|
30 | — | 30 | 30 | — | 30 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consumer Markets
|
119 | — | 119 | 119 | — | 119 | ||||||||||||||||||
|
Wealth Management
|
||||||||||||||||||||||||
|
Global Annuity
|
422 | (422 | ) | — | 422 | (422 | ) | — | ||||||||||||||||
|
Life Insurance
|
224 | — | 224 | 224 | — | 224 | ||||||||||||||||||
|
Retirement Plans
|
87 | — | 87 | 87 | — | 87 | ||||||||||||||||||
|
Mutual Funds
|
159 | — | 159 | 159 | — | 159 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Wealth Management
|
892 | (422 | ) | 470 | 892 | (422 | ) | 470 | ||||||||||||||||
|
Corporate and Other
|
940 | (508 | ) | 432 | 940 | (355 | ) | 585 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Goodwill
|
$ | 1,981 | $ | (930 | ) | $ | 1,051 | $ | 1,981 | $ | (777 | ) | $ | 1,204 | ||||||||||
|
|
||||||||||||||||||||||||
The Company completed its annual goodwill assessment for the Federal Trust Corporation (“FTC”)
reporting unit within Corporate and Other during the second quarter of 2010, resulting in a
goodwill impairment of $153, pre-tax.
The Company completed its annual goodwill assessment for the individual reporting units within
Wealth Management and Corporate and Other, except for the FTC reporting unit, as of January 1,
2010, which resulted in no write-downs of goodwill in 2010. Goodwill within Corporate and Other is
primarily attributed to the Company’s “buy-back” of Hartford Life, Inc. in 2000 and was allocated
to each of Hartford Life’s reporting units based on the reporting units’ fair value of in-force
business. Although this goodwill was allocated to each reporting unit, it is held in Corporate and
Other for segment reporting. The reporting units passed the first step of their annual impairment
tests with a significant margin with the exception of the Individual Life reporting unit within
Life Insurance. Individual Life completed the second step of the annual goodwill impairment test
resulting in an implied goodwill value that was in excess of its carrying value. Even though the
fair value of the reporting unit was lower than its carrying value, the implied level of goodwill
in Individual Life exceeded the carrying amount of goodwill. In the implied purchase accounting
required by the step two goodwill impairment test, the implied present value of future profits was
substantially lower than that of the DAC asset removed in purchase accounting. A higher discount
rate was used for calculating the present value of future profits as compared to that used for
calculating the present value of estimated gross profits for DAC. As a result, in the implied
purchase accounting, implied goodwill exceeded the carrying amount of goodwill.
The annual goodwill assessment for the reporting units within Property & Casualty Commercial and
Consumer Markets was completed during the fourth quarter of 2010, which resulted in no write-downs
of goodwill for the year ended December 31, 2010.
F-60
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)
On June 24, 2009, the Company acquired 100% of the equity interests in FTC, a savings and loan
holding company, for $10, enabling the Company to participate in the Capital Purchase Program. 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. As of
December 31, 2009, these fair values were subject to adjustment based upon management’s subsequent
receipt of additional information. The Company completed its fair value estimates as of June 30,
2010 with no material changes.
The Company’s goodwill impairment test performed during the first quarter of 2009 for the
individual reporting units within Wealth Management and Corporate and Other, resulted in a
write-down of $32 in the Institutional reporting unit within Corporate and Other. As a result of
rating agency downgrades of the Company’s financial strength ratings during the first quarter of
2009 and high credit spreads related to the Company, 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 reporting unit was
impaired due to the pressure on new sales for ratings-sensitive business and the significant
unrealized losses on investment portfolios. In addition, the Company completed its annual goodwill
assessment for the remaining individual reporting units within Property & Casualty Commercial and
Consumer Markets as of September 30, 2009, which resulted in no write-downs of goodwill for the
year ended December 31, 2009.
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 Global Annuity
and $323 within the Individual Annuity and International reporting units of Corporate and Other.
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.
Other Intangible Assets
Accounting Policy
Net amortization expense for other intangible assets is included in other insurance operating and
other expenses in the Consolidated Statement of Operations. Acquired intangible assets primarily
consist of distribution agreements and servicing intangibles, and are included in other assets in
the Consolidated Balance Sheets. With the exception of goodwill, the Company has no intangible
assets with indefinite useful lives.
Results
The following table shows the Company’s acquired intangible assets that are subject to amortization
and aggregate amortization expense, net of interest accretion.
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Gross carrying amount, beginning of year
|
$ | 90 | $ | 121 | $ | 106 | ||||||
|
Accumulated net amortization
|
18 | 47 | 39 | |||||||||
|
|
||||||||||||
|
Net carrying amount, beginning of year
|
72 | 74 | 67 | |||||||||
|
Acquisition of business
|
(1 | ) | 6 | 15 | ||||||||
|
Amortization, net of the accretion of interest
|
(7 | ) | (8 | ) | (8 | ) | ||||||
|
|
||||||||||||
|
Net carrying amount, end of year
|
64 | 72 | 74 | |||||||||
|
Accumulated net amortization
|
25 | 18 | 47 | |||||||||
|
|
||||||||||||
|
Gross carrying amount, end of year
|
$ | 89 | $ | 90 | $ | 121 | ||||||
|
|
||||||||||||
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 for renewal rights and other of $22 and $14, respectively.
For the years ended December 31, 2010, 2009 and 2008, the Company did not capitalize any costs to
extend or renew the term of a recognized intangible asset. As of December 31, 2010, the weighted
average amortization period was 13 years for total acquired intangible assets. Net amortization
expense for other intangibles is expected to be approximately $7 in each of the succeeding five
years.
For a discussion of present value of future profits that continue to be subject to amortization and
aggregate amortization expense, see Note 7.
F-61
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 GMDB and 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 Deferred Policy Acquisition Costs and Present Value of Future Benefits.
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.
F-62
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)
U.S. GMDB, International GMDB/GMIB, and UL Secondary Guarantee Benefits
Changes in the gross U.S. GMDB, International GMDB/GMIB, and UL secondary guarantee benefits are as
follows:
| International | UL Secondary | |||||||||||
| U.S. GMDB | GMDB/GMIB | Guarantees | ||||||||||
|
Liability balance as of January 1, 2010
|
$ | 1,233 | $ | 599 | $ | 76 | ||||||
|
Incurred
|
239 | 103 | 39 | |||||||||
|
Paid
|
(294 | ) | (134 | ) | — | |||||||
|
Unlock
|
(125 | ) | 39 | (2 | ) | |||||||
|
Currency translation adjustment
|
— | 89 | — | |||||||||
|
|
||||||||||||
|
Liability balance as of December 31, 2010
|
$ | 1,053 | $ | 696 | $ | 113 | ||||||
|
|
||||||||||||
|
Reinsurance recoverable asset, as of January 1, 2010
|
$ | 787 | $ | 51 | $ | 22 | ||||||
|
Incurred
|
139 | (26 | ) | 8 | ||||||||
|
Paid
|
(176 | ) | 1 | — | ||||||||
|
Unlock
|
(64 | ) | 5 | — | ||||||||
|
Currency translation adjustment
|
— | 5 | — | |||||||||
|
|
||||||||||||
|
Reinsurance recoverable asset, as of December 31,
2010
|
$ | 686 | $ | 36 | $ | 30 | ||||||
|
|
||||||||||||
| International | UL Secondary | |||||||||||
| U.S. GMDB | GMDB/GMIB | Guarantees | ||||||||||
|
Liability balance as of January 1, 2009
|
$ | 870 | $ | 232 | $ | 40 | ||||||
|
Incurred
|
298 | 109 | 41 | |||||||||
|
Paid
|
(457 | ) | (121 | ) | — | |||||||
|
Unlock
|
522 | 342 | (5 | ) | ||||||||
|
Currency translation adjustment
|
— | 37 | — | |||||||||
|
|
||||||||||||
|
Liability balance as of December 31, 2009
|
$ | 1,233 | $ | 599 | $ | 76 | ||||||
|
|
||||||||||||
|
Reinsurance recoverable asset, as of January 1, 2009
|
$ | 595 | $ | 33 | $ | 16 | ||||||
|
Incurred
|
166 | (6 | ) | 6 | ||||||||
|
Paid
|
(253 | ) | (2 | ) | — | |||||||
|
Unlock
|
279 | 26 | — | |||||||||
|
Currency translation adjustment
|
— | — | — | |||||||||
|
|
||||||||||||
|
Reinsurance recoverable asset, as of December 31,
2009
|
$ | 787 | $ | 51 | $ | 22 | ||||||
|
|
||||||||||||
During 2010, 2009 and 2008, there were no gains or losses on transfers of assets from the general
account to the separate account.
F-63
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 provides details concerning GMDB and GMIB exposure as of December 31,
2010:
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
|
$ | 25,546 | $ | 5,526 | $ | 1,327 | 68 | |||||||||
|
With 5% rollup [2]
|
1,752 | 472 | 160 | 68 | ||||||||||||
|
With Earnings Protection Benefit Rider (EPB) [3]
|
6,524 | 883 | 99 | 64 | ||||||||||||
|
With 5% rollup & EPB
|
724 | 157 | 33 | 67 | ||||||||||||
|
|
||||||||||||||||
|
Total MAV
|
34,546 | 7,038 | 1,619 | |||||||||||||
|
Asset Protection Benefit (APB) [4]
|
27,840 | 2,703 | 1,736 | 65 | ||||||||||||
|
Lifetime Income Benefit (LIB) — Death Benefit [5]
|
1,319 | 88 | 88 | 63 | ||||||||||||
|
Reset [6] (5-7 years)
|
3,699 | 243 | 241 | 68 | ||||||||||||
|
Return of Premium (“ROP”) [7] /Other
|
23,427 | 674 | 647 | 65 | ||||||||||||
|
|
||||||||||||||||
|
Subtotal U.S. GMDB [8]
|
$ | 90,831 | $ | 10,746 | $ | 4,331 | 66 | |||||||||
|
Less: General Account Value with U.S. GMDB
|
6,865 | |||||||||||||||
|
|
||||||||||||||||
|
Subtotal Separate Account Liabilities with GMDB
|
83,966 | |||||||||||||||
|
|
||||||||||||||||
|
Separate Account Liabilities without U.S. GMDB
|
75,776 | |||||||||||||||
|
|
||||||||||||||||
|
Total Separate Account Liabilities
|
$ | 159,742 | ||||||||||||||
|
|
||||||||||||||||
|
Japan GMDB [9], [11]
|
$ | 31,249 | $ | 8,847 | $ | 7,593 | 69 | |||||||||
|
|
||||||||||||||||
|
Japan GMIB [9], [11]
|
$ | 28,835 | 5,777 | 5,777 | 69 | |||||||||||
|
|
||||||||||||||||
| [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, which allows for free withdrawal of earnings, paid through a fixed payout
annuity, after a minimum deferral period of 10, 15 or 20 years. The GRB related to the Japan GMIB was $33.9 billion and
$28.6 billion as of December 31, 2010 and December 31, 2009, respectively. The GRB related to the Japan GMAB and GMWB
was $707 and $648 as of December 31, 2010 and December 31, 2009, 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, 2010, 54% of RNAR is reinsured to a Hartford affiliate.
|
|
| [10] |
NAR is defined as the guaranteed benefit in excess of the current AV for all accounts that are in the money. RNAR
represents NAR reduced for reinsurances. NAR and RNAR are highly sensitive to equity markets movements and increase
when equity markets declines.
|
|
| [11] |
Policies with a guaranteed living benefit (GMIB in Japan) also have a guaranteed death
benefit. The NAR for each benefit is shown in the table above, however these benefits are
not additive. When a policy terminates due to death, any NAR related to GMWB or GMIB is
released. Similarly, when a policy goes into benefit status on a GMWB or GMIB, its GMDB NAR
is released.
|
In the U.S. , account balances of contracts with guarantees were invested in variable separate
accounts as follows:
| Asset type | As of December 31, 2010 | As of December 31, 2009 | ||||||
|
Equity securities (including mutual funds) [1]
|
$ | 75,601 | $ | 75,720 | ||||
|
Cash and cash equivalents
|
8,365 | 9,298 | ||||||
|
|
||||||||
|
Total
|
$ | 83,966 | $ | 85,018 | ||||
|
|
||||||||
| [1] |
As of December 31, 2010 and December 31, 2009, approximately 15% and 16%, respectively, of
the equity securities above were invested in fixed income securities through these funds and
approximately 85% 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-64
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 currently 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. Amortization expense associated with expenses
previously deferred is recorded over the remaining life of the contract. Consistent with the
Company’s Unlock, the Company unlocked the amortization of the sales inducement asset. See Note 1,
for more information concerning the Unlock.
Changes in deferred sales inducement activity were as follows for the year ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
|
Balance, January 1
|
$ | 438 | $ | 553 | $ | 467 | ||||||
|
Sales inducements deferred
|
31 | 59 | 151 | |||||||||
|
Amortization charged to income
|
(8 | ) | (105 | ) | (21 | ) | ||||||
|
Amortization — Unlock
|
(2 | ) | (69 | ) | (44 | ) | ||||||
|
|
||||||||||||
|
Balance, end of period, December 31
|
$ | 459 | $ | 438 | $ | 553 | ||||||
|
|
||||||||||||
11. Reserves for Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
Life Insurance Products 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-65
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 Insurance Products Reserve Development
Reserve development resulting primarily from group disability products is as follow:
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Beginning liabilities for life unpaid losses and loss adjustment
expenses-gross
|
$ | 6,131 | $ | 6,066 | $ | 6,028 | ||||||
|
Reinsurance recoverables
|
213 | 231 | 261 | |||||||||
|
|
||||||||||||
|
Beginning liabilities for life unpaid losses and loss adjustment expenses
|
5,918 | 5,835 | 5,767 | |||||||||
|
Add provision for life unpaid losses and loss adjustment expenses
|
||||||||||||
|
Current year
|
3,260 | 3,244 | 3,243 | |||||||||
|
Prior years
|
70 | (88 | ) | (118 | ) | |||||||
|
|
||||||||||||
|
Total provision for life unpaid losses and loss adjustment expenses
|
3,330 | 3,156 | 3,125 | |||||||||
|
Less payments
|
||||||||||||
|
Current year
|
1,552 | 1,580 | 1,554 | |||||||||
|
Prior years
|
1,517 | 1,493 | 1,503 | |||||||||
|
|
||||||||||||
|
Total payments
|
3,069 | 3,073 | 3,057 | |||||||||
|
|
||||||||||||
|
Ending liabilities for life unpaid losses and loss adjustment expenses, net
|
6,179 | 5,918 | 5,835 | |||||||||
|
Reinsurance recoverables
|
209 | 213 | 231 | |||||||||
|
|
||||||||||||
|
Ending liabilities for life unpaid losses and loss adjustment expenses-gross
|
$ | 6,388 | $ | 6,131 | $ | 6,066 | ||||||
|
|
||||||||||||
The unfavorable prior year development in 2010 is a result of lower claim terminations,
particularly in long-term disability. The favorable prior year development in 2009 and 2008 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:
| 2010 | 2009 | |||||||
|
Group Life Term, Disability and Accident unpaid losses and loss adjustment expenses
|
$ | 6,388 | $ | 6,131 | ||||
|
Group Life Other unpaid losses and loss adjustment expenses
|
216 | 232 | ||||||
|
Individual Life unpaid losses and loss adjustment expenses
|
110 | 123 | ||||||
|
Future Policy Benefits
|
11,859 | 11,494 | ||||||
|
|
||||||||
|
Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
|
$ | 18,573 | $ | 17,980 | ||||
|
|
||||||||
Property and Casualty Insurance Products Accounting Policy
The Hartford establishes property and casualty insurance products 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 insurance products insurance 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 issued by the Company and these structured
settlements are recorded at present value as annuity obligations, 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 insurance products reserves
and were discounted to present value at an average interest rate of 4.8% in 2010 and 5.0% in 2009.
As of December 31, 2010 and 2009, property and casualty insurance products reserves were discounted
by a total of $524 and $511, respectively. The current accident year benefit from
F-66
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)
discounting
property and casualty insurance products reserves was $46 in 2010, $40 in 2009 and $38 in
2008. 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 $26 in 2010, $24 in 2009, and $26
in 2008. For annuities issued by the Company to fund certain workers’ compensation indemnity
payments where the claimant has not released the Company of its obligation, the Company has
recorded annuity obligations totaling $896 as of December 31, 2010 and $924 as of December 31,
2009.
Property and Casualty Insurance products Unpaid Losses and Loss Adjustment Expenses
A rollforward of liabilities for unpaid losses and loss adjustment expenses follows:
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses,
gross
|
$ | 21,651 | $ | 21,933 | $ | 22,153 | ||||||
|
Reinsurance and other recoverables
|
3,441 | 3,586 | 3,922 | |||||||||
|
|
||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses,
net
|
18,210 | 18,347 | 18,231 | |||||||||
|
|
||||||||||||
|
Add provision for unpaid losses and loss adjustment expenses
|
||||||||||||
|
Current year
|
6,768 | 6,596 | 6,933 | |||||||||
|
Prior years
|
(196 | ) | (186 | ) | (226 | ) | ||||||
|
|
||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
6,572 | 6,410 | 6,707 | |||||||||
|
|
||||||||||||
|
Less payments
|
||||||||||||
|
Current year
|
2,952 | 2,776 | 2,888 | |||||||||
|
Prior years
|
3,882 | 3,771 | 3,703 | |||||||||
|
|
||||||||||||
|
Total payments
|
6,834 | 6,547 | 6,591 | |||||||||
|
|
||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
17,948 | 18,210 | 18,347 | |||||||||
|
Reinsurance and other recoverables
|
3,077 | 3,441 | 3,586 | |||||||||
|
|
||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$ | 21,025 | $ | 21,651 | $ | 21,933 | ||||||
|
|
||||||||||||
In the opinion of management, based upon the known facts and current law, the reserves recorded for
The Hartford’s property and casualty insurance products at December 31, 2010 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 $196 in 2010 included, among other reserve changes, a $169
release of reserves for auto liability, claims, for accident years 2002 to 2009, $88
release of reserves for professional liability claims, for accident years 2008 and prior,
a $136 release of general liability claims, primarily related to accident years 2005 to 2008
and a $70 release of workers’ compensation reserves, partially offset by a $256 strengthening
of asbestos and environmental reserves. Net favorable reserve development of $186 in 2009
included, among other reserve changes, a $127 release of reserves for professional liability
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 professional liability claims for accident years 2003 to 2006, partially offset
by a $103 strengthening of asbestos and environmental reserves.
F-67
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.
Apart from the inherent difficulty of predicting litigation outcomes, particularly those that will
be decided by a jury, many of the matters specifically identified below purport to seek substantial
damages for unsubstantiated conduct spanning a multi-year period based on novel and complex legal
theories and damages models. The alleged damages typically are not quantified or factually
supported in the complaint, and, in any event, the Company’s experience shows that demands for
damages often bear little relation to a reasonable estimate of potential loss. Most are in the
earliest stages of litigation, with few or no substantive legal decisions by the court defining the
scope of the claims, the class (if any), or the potentially available damages. In many, the
Company has not yet answered the complaint or asserted its defenses, and fact discovery is still in
progress or has not yet begun. Accordingly, unless otherwise specified below, management cannot
reasonably estimate the possible loss or range of loss, if any, or predict the timing of the
eventual resolution of these matters.
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. Two consolidated amended complaints were 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 1974 (“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 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 declined to exercise supplemental jurisdiction over the state law claims and
dismissed those claims without prejudice. The plaintiffs appealed the dismissal of the claims in
both consolidated amended complaints, except the ERISA claims. In August 2010, the United States
Court of Appeals for the Third Circuit affirmed the dismissal of the Sherman Act and RICO claims
against the Company. The Third Circuit vacated the dismissal of the Sherman Act and RICO claims
against some defendants in the property casualty insurance case and vacated the dismissal of the
state-law claims as to all defendants in light of the reinstatement of the federal claims. In
September 2010, the district court entered final judgment for the defendants in the group benefits
case. The defendants have moved to dismiss the remaining claims in the property casualty insurance
case.
F-68
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)
Investment and Savings Plan ERISA and Shareholder Securities 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.
In February 2011, the Parties reached an agreement in principle to settle on a class basis for an
immaterial amount. The settlement is contingent upon the execution of a final settlement agreement
and preliminary and final court approval.
The Company and certain of its present or former officers are defendants in a putative securities
class action lawsuit filed in the United States District Court for the Southern District of New
York in March 2010. The operative complaint, filed in October 2010, is brought on behalf of
persons who acquired Hartford common stock during the period of July 28, 2008 through February 5,
2009, and alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5, by making false or misleading statements during the alleged class period about the
Company’s valuation of certain asset-backed securities and its effect on the Company’s capital
position. The Company disputes the allegations and has moved to dismiss the complaint.
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. The arbitration hearing is scheduled for May 2011. Management believes it is
probable that the Company’s coverage position ultimately will be sustained.
Mutual Funds Litigation
— In October 2010, a derivative action was brought on behalf of six
Hartford retail mutual funds in the United States District Court for the District of Delaware, alleging
that Hartford Investment Financial Services, LLC received excessive advisory and distribution fees
in violation of its statutory fiduciary duty under Section 36(b) of the Investment Company Act of
1940. Plaintiff seeks to rescind the investment management agreements and distribution plans
between the Company and the six mutual funds and to recover the total fees charged thereunder or, in the
alternative, to recover any improper compensation the Company received. The Company disputes the
allegations and has moved to dismiss the complaint.
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 alleged that since 1997 the Company 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 asserted claims under the Racketeer Influenced and Corrupt Organizations
Act (“RICO”) and state law. The district court certified a class for the RICO and fraud claims in
March 2009, and 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. In April 2010, the parties reached an agreement in principle to settle on a
nationwide class basis, under which the Company would pay $72.5 in exchange for a full release and
dismissal of the litigation. The $72.5 was accrued in the first quarter of 2010. The settlement
received final court approval in September 2010 and was paid in the third quarter of 2010.
F-69
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 certain of its asbestos and environmental exposures.
For this reason, the Company principally 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, 2010 and December 31, 2009, the Company reported $1.8 billion and $1.9 billion
of net asbestos reserves and $339 and $312 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-70
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)
Lease Commitments
The total rental expense on operating leases was $132, $154, and $172 in 2010, 2009, and 2008,
respectively, which excludes sublease rental income of $4, $2, and $1 in 2010, 2009 and 2008,
respectively. Future minimum lease commitments are as follows:
| Years ending December 31, | Operating Leases | |||
|
2011
|
$ | 114 | ||
|
2012
|
71 | |||
|
2013
|
47 | |||
|
2014
|
26 | |||
|
2015
|
16 | |||
|
Thereafter
|
33 | |||
|
|
||||
|
Total minimum lease payments [1]
|
$ | 307 | ||
|
|
||||
| [1] |
Excludes expected future minimum sublease rental income of approximately $9 and $2 in 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. Capital lease assets are included in property and equipment.
Unfunded Commitments
As of December 31, 2010, the Company has outstanding commitments totaling approximately $1.5 billion,
of which $729 is committed to fund mortgage loans, largely commercial whole loans expected to fund in the
first half of 2011. Additionally, $693 is committed to fund limited partnership and other alternative investments,
which 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. These have a commitment period of one month to three years.
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. The amount and timing of assessments related to past
insolvencies is unpredictable.
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, 2010 and 2009, the liability
balance was $118 and $111, respectively. As of December 31, 2010 and 2009, $14 and $18,
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 legal 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 legal entity’s ability to conduct hedging activities by increasing the associated costs and
decreasing the willingness of counterparties to transact with the legal 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, 2010, is $557. Of this $557 the legal entities have posted
collateral of $530 in the normal course of business. Based on derivative market values as of
December 31, 2010, a downgrade of one level below the current financial strength ratings by either
Moody’s or S&P could require approximately an additional $29 to be posted as collateral. Based on
derivative market values as of December 31, 2010, a downgrade by either Moody’s or S&P of two
levels below the legal entities’ current financial strength ratings could require approximately an
additional $56 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-71
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Income Tax Expense (Benefit)
|
||||||||||||
|
Current — U.S. Federal
|
$ | 134 | 502 | $ | (247 | ) | ||||||
|
— International
|
69 | — | — | |||||||||
|
|
||||||||||||
|
Total current
|
203 | 502 | (247 | ) | ||||||||
|
|
||||||||||||
|
Deferred — U.S. Federal Excluding NOL Carryforward
|
77 | (1,580 | ) | (1,574 | ) | |||||||
|
|
||||||||||||
|
— Net Operating Loss Carryforward
|
1 | 712 | (742 | ) | ||||||||
|
— International
|
303 | (475 | ) | 721 | ||||||||
|
|
||||||||||||
|
Total deferred
|
381 | (1,343 | ) | (1,595 | ) | |||||||
|
|
||||||||||||
|
Total income tax expense (benefit)
|
$ | 584 | (841 | ) | $ | (1,842 | ) | |||||
|
|
||||||||||||
Deferred tax assets (liabilities) include the following as of December 31:
| Deferred Tax Assets | 2010 | 2009 | ||||||
|
Tax discount on loss reserves
|
$ | 647 | $ | 682 | ||||
|
Tax basis deferred policy acquisition costs
|
579 | 641 | ||||||
|
Unearned premium reserve and other underwriting related reserves
|
401 | 401 | ||||||
|
Investment-related items
|
3,246 | 1,718 | ||||||
|
Employee benefits
|
555 | 494 | ||||||
|
Net unrealized losses on investments
|
4 | 1,581 | ||||||
|
Minimum tax credit
|
1,183 | 1,102 | ||||||
|
Capital loss carryover
|
— | 535 | ||||||
|
Net operating loss carryover
|
88 | 86 | ||||||
|
Other
|
63 | 66 | ||||||
|
|
||||||||
|
Total Deferred Tax Assets
|
6,766 | 7,306 | ||||||
|
Valuation Allowance
|
(173 | ) | (86 | ) | ||||
|
|
||||||||
|
Deferred Tax Assets, Net of Valuation Allowance
|
6,593 | 7,220 | ||||||
|
|
||||||||
|
Deferred Tax Liabilities
|
||||||||
|
Financial statement deferred policy acquisition costs and reserves
|
(2,721 | ) | (3,179 | ) | ||||
|
Other depreciable & amortizable assets
|
(42 | ) | (43 | ) | ||||
|
Other
|
(105 | ) | (58 | ) | ||||
|
|
||||||||
|
Total Deferred Tax Liabilities
|
(2,868 | ) | (3,280 | ) | ||||
|
|
||||||||
|
Net Deferred Tax Asset
|
$ | 3,725 | $ | 3,940 | ||||
|
|
||||||||
As of December 31, 2010 and 2009, the deferred tax asset included the expected tax benefit
attributable to net operating losses of $327 and $308, respectively, consisting of U.S. losses of
$17 and $18, respectively, and foreign losses of $310 and $290, respectively. The U.S. losses
expire from 2013-2021 and the foreign losses have no expiration.
In 2010 the Japan net deferred tax liability of $1,465 (consisting of $1,216 for investment-related
items and $249 for financial statement deferred policy acquisition costs and reserves) was included
in other liabilities. In 2009, the Company’s net deferred tax asset (as itemized above) includes a
Japan deferred tax liability of $849 (consisting of $658 for investment-related items and $191 for
financial statement deferred policy acquisition costs and reserves).
F-72
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)
The Company has recorded a deferred tax asset valuation allowance that is adequate to reduce
the total deferred tax asset to an amount that will more likely than not be realized. The deferred
tax asset valuation allowance was $173 as of December 31, 2010 and $86 as of December 31, 2009.
The increase in the valuation allowance during 2010 was triggered by the recognition of additional
realized losses on investment securities which were incurred in the first quarter. In assessing
the need for a valuation allowance, management considered future reversals of existing taxable
temporary differences, future taxable income exclusive of reversing temporary differences and
carryforwards, and taxable income in prior carryback years, as well as tax planning strategies that
include holding a portion of debt securities with market value losses until recovery, selling
appreciated securities to offset capital losses, business considerations, such as asset-liability
matching, and the sales of certain corporate assets, including a subsidiary. Such tax planning
strategies are viewed by management as prudent and feasible and will be implemented if necessary to
realize the deferred tax asset. Future economic conditions and debt market volatility, including
increases in interest rates, can adversely impact the Company’s tax planning strategies and in
particular the Company’s ability to utilize tax benefits on previously recognized realized capital
losses.
As of December 31, 2010 and 2009, the Company had a current income tax payable of $78 and $216,
respectively, of which $30 and $0, respectively, was related to Japan and payable to a foreign
jurisdiction.
The Company or one or more of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various state 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 2007. The IRS examination of the years 2007 — 2009 commenced during
2010 and is expected to conclude by the end of 2012. 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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Balance, at January 1
|
$ | 48 | $ | 91 | 76 | |||||||
|
Additions based on tax positions related to the current year
|
— | — | 27 | |||||||||
|
Additions for tax positions for prior years
|
— | — | — | |||||||||
|
Reductions for tax positions for prior years
|
— | (35 | ) | (12 | ) | |||||||
|
Settlements
|
— | (8 | ) | — | ||||||||
|
|
||||||||||||
|
Balance, at December 31
|
$ | 48 | $ | 48 | 91 | |||||||
|
|
||||||||||||
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, 2010, 2009 and 2008, the Company
recognized interest expense of approximately $2, $7, and $0. The Company had approximately $1 of
interest receivable and $8 of interest payable accrued at December 31, 2010 and 2009, 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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Tax provision at U.S. Federal statutory rate
|
$ | 792 | (605 | ) | $ | (1,607 | ) | |||||
|
Tax-exempt interest
|
(152 | ) | (149 | ) | (161 | ) | ||||||
|
Dividends received deduction
|
(154 | ) | (188 | ) | (191 | ) | ||||||
|
Nondeductible costs associated with warrants
|
— | 78 | — | |||||||||
|
Valuation allowance
|
87 | 30 | 32 | |||||||||
|
Goodwill
|
— | 12 | 113 | |||||||||
|
Other
|
11 | (19 | ) | (28 | ) | |||||||
|
|
||||||||||||
|
Provision for income taxes
|
$ | 584 | (841 | ) | $ | (1,842 | ) | |||||
|
|
||||||||||||
F-73
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.
Debt is carried net of discount. The following table presents short-term and long-term debt by
issuance as of December 31, 2010 and 2009.
| Short-Term Debt | 2010 | 2009 | ||||||
|
Current maturities of long-term debt and capital lease obligations
|
$ | 400 | $ | 343 | ||||
|
|
||||||||
|
Total Short-Term Debt
|
$ | 400 | $ | 343 | ||||
|
|
||||||||
|
|
||||||||
|
Long-Term Debt
|
||||||||
|
|
||||||||
|
Senior Notes and Debentures
|
||||||||
|
5.25% Notes, due 2011
|
— | 400 | ||||||
|
4.625% Notes, due 2013
|
320 | 320 | ||||||
|
4.75% Notes, due 2014
|
200 | 199 | ||||||
|
4.0% Notes, due 2015
|
300 | — | ||||||
|
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
|
500 | 499 | ||||||
|
5.5% Notes, due 2020
|
499 | — | ||||||
|
7.65% Notes, due 2027
|
149 | 149 | ||||||
|
7.375% Notes, due 2031
|
92 | 92 | ||||||
|
5.95% Notes, due 2036
|
298 | 298 | ||||||
|
6.625% Notes, due 2040
|
299 | — | ||||||
|
6.1% Notes, due 2041
|
324 | 323 | ||||||
|
|
||||||||
|
Total Senior Notes and Debentures
|
4,480 | 3,779 | ||||||
|
|
||||||||
|
|
||||||||
|
Junior Subordinated Debentures
|
||||||||
|
3 month LIBOR plus 295 basis points, Notes due 2033
|
5 | 5 | ||||||
|
8.125% Notes, due 2068
|
500 | 500 | ||||||
|
10.0% Notes, due 2068
|
1,222 | 1,212 | ||||||
|
|
||||||||
|
Total Junior Subordinated Debentures
|
1,727 | 1,717 | ||||||
|
|
||||||||
|
|
||||||||
|
Total Long-Term Debt
|
$ | 6,207 | $ | 5,496 | ||||
|
|
||||||||
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 2010, 2009, and 2008, respectively.
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Short-term debt
|
$ | — | $ | 3 | $ | 11 | ||||||
|
Long-term debt
|
508 | 473 | 332 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
$ | 508 | $ | 476 | $ | 343 | ||||||
|
|
||||||||||||
The weighted-average interest rate on commercial paper was 2.4% and 2.9% for 2009, and 2008,
respectively. The Company did not hold commercial paper in 2010.
Senior Notes
On June 15, 2010, The Hartford repaid its $275, 7.9% senior notes at maturity.
On March 23, 2010, The Hartford issued $1.1 billion aggregate principal amount of its senior notes.
The issuance consisted of $300 of 4.0% senior notes due March 30, 2015, $500 of 5.5% senior notes
due March 30, 2020 and $300 of 6.625% senior notes due March 30, 2040. The senior notes bear
interest at their respective rate, payable semi-annually in arrears on March 30 and September 30 of
each year, beginning September 30, 2010.
F-74
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.
Long-Term Debt Maturities
The following table reflects the Company’s long-term debt maturities.
|
2011
|
$ | 400 | ||
|
2012
|
— | |||
|
2013
|
320 | |||
|
2014
|
200 | |||
|
2015
|
500 | |||
|
Thereafter
|
5,805 |
Capital Lease Obligations
The Company recorded capital leases of $0 and $68 in 2010 and 2009, 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, 2010 and 2009,
respectively. 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.
Shelf Registrations
On August 4, 2010, The Hartford filed with the Securities and Exchange Commission (the “SEC”) an
automatic shelf registration statement (Registration No. 333-168532) for the potential offering and
sale of debt and equity securities. The registration statement allows for the following types of
securities to be offered: debt securities, junior subordinated debt securities, preferred stock,
common stock, depositary shares, warrants, stock purchase contracts, and stock purchase units. 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-75
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, 2010, 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 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Commercial Paper
|
||||||||||||||||||||||||
|
The Hartford
|
11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | — | $ | — | ||||||||||||||
|
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 | $ | — | $ | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
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, 2010, 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. 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, 2010, the consolidated net worth of the Company as
calculated in accordance with the terms of the credit facility was $23 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, 2010, as calculated in accordance with the terms of the credit facility, the
Company’s debt to capitalization ratio was 17%. Quarterly, the Company certifies compliance with
the financial covenants for the syndicate of participating financial institutions. As of December
31, 2010, the Company was in compliance with all such covenants.
The Hartford’s Japan operations also maintain a line of credit in the amount of $62, or ¥5 billion,
which expires January 4, 2012 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. The Company issued consumer notes
through its Retail Investor Notes Program. 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 risks in accordance with Company policy. As of December 31, 2010, these
consumer notes have interest rates ranging from 4% to 6% for fixed notes and, for variable notes,
based on December 31, 2010 rates, either 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: $62 in 2011, $155 in 2012, $78 in 2013, $17 in 2014
and $70 thereafter. For 2010, 2009 and 2008, interest credited to holders of consumer notes was
$25, $51 and $59, respectively.
F-76
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.
Issuance of Common Stock
On March 23, 2010, The Hartford issued approximately 59.6 million shares of common stock at a price
to the public of $27.75 per share and received net proceeds of $1.6 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.
Issuance of Series F Preferred Stock
On March 23, 2010, The Hartford issued 23 million depositary shares, each representing a 1/40th
interest in The Hartford’s 7.25% mandatory convertible preferred stock, Series F, at a price of $25
per depositary share and received net proceeds of approximately $556. The Company will pay
cumulative dividends on each share of the mandatory convertible preferred stock at a rate of 7.25%
per annum on the initial liquidation preference of $1,000 per share. Dividends will accrue and
cumulate from the date of issuance and, to the extent that the Company is legally permitted to pay
dividends and its board of directors declares a dividend payable, the Company will, from July 1,
2010 until and including January 1, 2013 pay dividends on each January 1, April 1, July 1 and
October 1, in cash and (whether or not declared prior to that date) on April 1, 2013 will pay or
deliver, as the case may be, dividends in cash, shares of its common stock, or a combination
thereof, at its election. Dividends on and repurchases of the Company’s common stock will be
subject to restrictions in the event that the Company fails to declare and pay, or set aside for
payment, dividends on the Series F preferred stock.
The 575,000 shares of mandatory convertible preferred stock, Series F, will automatically convert
into shares of common stock on April 1, 2013, if not earlier converted at the option of the holder,
at any time, or upon the occurrence of a fundamental change. The number of shares issuable upon
mandatory conversion of each share of mandatory convertible preferred stock will be a variable
amount based on the average of the daily volume weighted average price per share of the Company’s
common stock during a specified period of 20 consecutive trading days with the number of shares of
common stock ranging from 29.536 to 36.036 per share of mandatory convertible preferred stock,
subject to anti-dilution adjustments.
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 exercise price of $9.79 per share, for an
aggregate purchase price of $3.4 billion.
Cumulative dividends on the Series E Preferred Stock accrued on the liquidation preference at a
rate of 5% per annum. The Series E Preferred Stock had no maturity date and ranked senior to the
Company’s common stock. The Series E Preferred Stock was non-voting.
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 was amortized from the date of issuance, using the effective yield method and 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.
F-77
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Equity (continued)
On March 31, 2010, the Company repurchased all 3.4 million shares of Series E preferred stock
issued to the Treasury for an aggregate purchase price of $3.4 billion and made a final dividend
payment of $22 on the Series E preferred stock. The Company recorded a $440 charge to retained
earnings representing the acceleration of the accretion of the remaining discount on the Series E
preferred stock.
On September 27, 2010, the Treasury sold its warrants to purchase approximately 52 million shares
of The Hartford’s common stock in a secondary public offering for net proceeds of approximately
$706. The Hartford did not receive any proceeds from this sale. The warrants are exercisable, in
whole or in part, at any time and from time to time until June 26, 2019 at an initial exercise
price of $9.79. The exercise price will be paid by the withholding by The Hartford of a number of
shares of common stock issuable upon exercise of the warrants equal to the value of the aggregate
exercise price of the warrants so exercised determined by reference to the closing price of The
Hartford’s common stock on the trading day on which the warrants are exercised and notice is
delivered to the warrant agent. The Hartford did not purchase any of the warrants sold by the
Treasury.
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 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, and other corporate considerations. The repurchase
program may be modified, extended or terminated by the Board of Directors at any time. The Company
has $807 remaining under this stock repurchase program.
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.
In 2009, the Company recorded 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.
In 2010, the Company recognized the noncontrolling interest in these entities in other liabilities
since these entities represent investment vehicles whereby the noncontrolling interests may redeem
these investments at any time.
F-78
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Equity (continued)
Statutory Results
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 amounts for the years ended December 31, 2009 and 2008, and the statutory
surplus amount as of December 31, 2009 in the table below are based on actual statutory filings
with the applicable U.S. regulatory authorities. The statutory net income (loss) amounts for the
year ended December 31, 2010 and the statutory surplus amounts as of December 31, 2010 are
estimates, as the respective 2010 statutory filings have not yet been made.
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Statutory Net Income (Loss)
|
||||||||||||
|
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries
|
$ | (140 | ) | $ | 1,714 | $ | (4,669 | ) | ||||
|
Property and casualty insurance subsidiaries
|
1,477 | 889 | 497 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 1,337 | $ | 2,603 | $ | (4,172 | ) | |||||
|
|
||||||||||||
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Statutory Surplus
|
||||||||
|
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries
|
$ | 7,731 | $ | 7,324 | ||||
|
Property and casualty insurance subsidiaries
|
7,721 | 7,364 | ||||||
|
|
||||||||
|
Total
|
$ | 15,452 | $ | 14,688 | ||||
|
|
||||||||
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 $1.2 billion and $1.3 billion as of
December 31, 2010 and 2009, respectively. However, under the accounting practices and procedures
governed by Japanese regulatory authorities, the Company’s statutory capital and surplus was $1.3
billion and $1.1 billion, as of December 31, 2010 and 2009, respectively.
Dividends from Insurance Subsidiaries
Dividends to The Hartford Financial Services Group, Inc. holding company (“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 $1.5 billion in dividends to HFSG Holding Company in 2011 without
prior approval from the applicable insurance commissioner. The Company’s life insurance
subsidiaries are permitted to pay up to a maximum of approximately $83 in dividends to HLI in 2011
without 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 2011. In 2010, HFSG Holding Company and HLI received no dividends from the life
insurance subsidiaries, and HFSG Holding Company received $1.0 billion in dividends from its
property-casualty insurance subsidiaries.
F-79
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, 2010
|
||||||||||||||||||||
|
Balance, beginning of year
|
$ | (2,713 | ) | $ | 257 | $ | 199 | $ | (1,055 | ) | $ | (3,312 | ) | |||||||
|
Unrealized gain on securities [1] [2]
|
1,707 | — | — | — | 1,707 | |||||||||||||||
|
Change in other-than-temporary impairment losses
recognized in other comprehensive income [1]
|
116 | — | — | — | 116 | |||||||||||||||
|
Cumulative effect of accounting change
|
194 | — | — | — | 194 | |||||||||||||||
|
Change in net loss on cash-flow hedging instruments [1] [3]
|
— | 128 | — | — | 128 | |||||||||||||||
|
Change in foreign currency translation adjustments [1]
|
— | — | 289 | — | 289 | |||||||||||||||
|
Change in pension and other postretirement
plan adjustment [1]
|
— | — | — | (123 | ) | (123 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Balance, end of year
|
$ | (696 | ) | $ | 385 | $ | 488 | $ | (1,178 | ) | $ | (1,001 | ) | |||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
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 loss 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 gain 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 | ) | |||||||
|
|
||||||||||||||||||||
| [1] |
Included in the unrealized gain/loss balance as of December 31, 2010, 2009 and 2008 was net
unrealized gains (losses) credited to policyholders of $(87), $(82), and $(101), respectively.
Included in the AOCI components were the following:
|
| • |
Unrealized gain/loss on securities is net of tax and deferred acquisition costs of
$3,574, $2,358, and $(3,366), for the years ended December 31, 2010, 2009 and 2008,
respectively.
|
||
| • |
Change in other-than-temporary impairment losses recognized in other comprehensive
income is net of changes in the fair value of non-credit impaired
securities of $647 and $244 for the
years ended December 31, 2010 and 2009, respectively, and net of tax and deferred acquisition costs of $(113)
and $215 for the years ended December 31, 2010 and 2009, respectively.
|
||
| • |
Net gain (loss) on cash-flow hedging instruments is net of tax of $69, $(208), and $422
for the years ended December 31, 2010, 2009 and 2008, respectively.
|
||
| • |
Changes in foreign currency translation adjustments are net of tax of $156, $(12) and
$106 for the years ended December 31, 2010, 2009 and 2008, respectively.
|
||
| • |
Change in pension and other postretirement plan adjustment is net of tax of $(66), $(86),
and $(276) for the years ended December 31, 2010, 2009 and 2008, respectively.
|
| [2] |
Net of reclassification adjustment for gains/losses realized in net
income of $(78), $(1,202), and $(2,876) for the years ended for the
years ended December 31, 2010, 2009 and 2008, respectively.
|
|
| [3] |
Net of amortization adjustment of $94, $49, and $(16) to net
investment income for the years ended December 31, 2010, 2009 and
2008, respectively.
|
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
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 5.50% and 5.25% were the appropriate discount rates as of
December 31, 2010 to calculate the Company’s pension and other postretirement obligations,
respectively. Accordingly, the 5.50% and 5.25% discount rates will also be used to determine the
Company’s 2011 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, 2010. This assumption will be used to determine the Company’s 2011 expense.
Weighted average assumptions used in calculating the benefit obligations and the net amount
recognized for the years ended December 31, 2010 and 2009 were as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Discount rate
|
5.50 | % | 6.00 | % | 5.25 | % | 5.75 | % | ||||||||
|
Rate of increase in compensation levels
|
4.00 | % | 4.00 | % | N/A | N/A | ||||||||||
Weighted average assumptions used in calculating the net periodic benefit cost for the Company’s
pension plans were as follows:
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Discount rate
|
6.00 | % | 6.25 | % | 6.25 | % | ||||||
|
Expected long-term rate of return on plan assets
|
7.30 | % | 7.30 | % | 7.30 | % | ||||||
|
Rate of increase in compensation levels
|
4.00 | % | 4.25 | % | 4.25 | % | ||||||
Weighted average assumptions used in calculating the net periodic benefit cost for the Company’s
other postretirement plans were as follows:
| For the years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Discount rate
|
5.75 | % | 6.25 | % | 6.25 | % | ||||||
|
Expected long-term rate of return on plan assets
|
7.30 | % | 7.30 | % | 7.30 | % | ||||||
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)
Assumed health care cost trend rates were as follows:
| As of December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Pre-65 health care cost trend rate
|
9.70 | % | 9.05 | % | 8.80 | % | ||||||
|
Post-65 health care cost trend rate
|
8.25 | % | 7.60 | % | 7.00 | % | ||||||
|
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 | 2018 | 2015 | |||||||||
A one-percentage point change in assumed health care cost trend rates would have an insignificant
effect on the amounts reported for other postretirement plans.
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, 2010 and 2009. International plans represent an immaterial percentage of total
pension assets, liabilities and expense and, for reporting purposes, are combined with domestic
plans.
During 2010 the amount of lump sum benefit payments exceeded the amount of service and interest
cost in the Company’s non-qualified pension plan resulting in a settlement. The settlement below
represents lump sum payments made from the non-qualified pension plan in 2010.
In addition to the discount rate change, the Company’s benefit obligation also increased due to the
use of an updated mortality table.
| Other Postretirement | ||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| Change in Benefit Obligation | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Benefit obligation — beginning of year
|
$ | 4,283 | $ | 3,938 | $ | 401 | $ | 384 | ||||||||
|
Service cost (excluding expenses)
|
102 | 105 | 7 | 6 | ||||||||||||
|
Interest cost
|
252 | 243 | 22 | 24 | ||||||||||||
|
Plan participants’ contributions
|
— | — | 15 | 16 | ||||||||||||
|
Actuarial loss (gain)
|
86 | 71 | (7 | ) | (5 | ) | ||||||||||
|
Settlements
|
(43 | ) | — | — | — | |||||||||||
|
Change in assumptions
|
348 | 118 | 17 | 17 | ||||||||||||
|
Benefits paid
|
(234 | ) | (197 | ) | (49 | ) | (46 | ) | ||||||||
|
Retiree drug subsidy
|
— | — | 2 | 5 | ||||||||||||
|
Foreign exchange adjustment
|
1 | 5 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Benefit obligation — end of year
|
$ | 4,795 | $ | 4,283 | $ | 408 | $ | 401 | ||||||||
|
|
||||||||||||||||
| Other Postretirement | ||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| Change in Plan Assets | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Fair value of plan assets — beginning of year
|
$ | 3,526 | $ | 3,326 | $ | 175 | $ | 154 | ||||||||
|
Actual return on plan assets
|
434 | 184 | 15 | 21 | ||||||||||||
|
Employer contributions
|
201 | 201 | — | — | ||||||||||||
|
Benefits paid
|
(228 | ) | (177 | ) | — | — | ||||||||||
|
Expenses paid
|
(12 | ) | (13 | ) | — | — | ||||||||||
|
Foreign exchange adjustment
|
1 | 5 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Fair value of plan assets — end of year
|
$ | 3,922 | $ | 3,526 | $ | 190 | $ | 175 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Funded status — end of year
|
$ | (873 | ) | $ | (757 | ) | $ | (218 | ) | $ | (226 | ) | ||||
|
|
||||||||||||||||
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)
The fair value of assets for pension benefits, and hence the funded status, presented in the
table above exclude assets of $107 and $140 held in rabbi trusts and designated for the
non-qualified pension plans as of December 31, 2010 and 2009, respectively. The assets do not
qualify as plan assets, however, the assets 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. The assets consist of equity and fixed income investments. To the
extent the fair value of these rabbi trusts were included in the table above, pension plan assets
would have been $4,029 and $3,666 as of December 31, 2010 and 2009, respectively, and the funded
status of pension benefits would have been $(766) and $(617) as of December 31, 2010 and 2009,
respectively.
The accumulated benefit obligation for all defined benefit pension plans was $4,753 and $4,252 as
of December 31, 2010 and 2009, 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, 2010 and 2009.
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Projected benefit obligation
|
$ | 4,771 | $ | 4,239 | ||||
|
Accumulated benefit obligation
|
4,733 | 4,209 | ||||||
|
Fair value of plan assets
|
3,901 | 3,471 | ||||||
Amounts recognized in the Consolidated Balance Sheet consist of:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Other Assets
|
||||||||||||||||
|
Noncurrent assets
|
$ | — | $ | 12 | $ | — | $ | — | ||||||||
|
Other Liabilities
|
||||||||||||||||
|
Current liabilities
|
(19 | ) | (54 | ) | (34 | ) | (33 | ) | ||||||||
|
Noncurrent liabilities
|
(854 | ) | (715 | ) | (184 | ) | (193 | ) | ||||||||
|
|
||||||||||||||||
|
Total
|
$ | (873 | ) | $ | (757 | ) | $ | (218 | ) | $ | (226 | ) | ||||
|
|
||||||||||||||||
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
(Loss)
In the Company’s non-qualified pension plan the amount of lump sum benefit payments exceeded the
amount of service and interest cost for the year ended December 31, 2010. As a result, the Company
recorded settlement expense of $20 to recognize the actuarial loss associated with the pro-rata
portion of the obligation that has been settled.
Total net periodic benefit cost for the years ended December 31, 2010, 2009 and 2008 include the
following components:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Service cost
|
$ | 102 | $ | 105 | $ | 121 | $ | 7 | $ | 6 | $ | 6 | ||||||||||||
|
Interest cost
|
252 | 243 | 230 | 22 | 24 | 23 | ||||||||||||||||||
|
Expected return on plan assets
|
(286 | ) | (276 | ) | (279 | ) | (13 | ) | (11 | ) | (12 | ) | ||||||||||||
|
Amortization of prior service credit
|
(9 | ) | (9 | ) | (9 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||||
|
Amortization of actuarial loss
|
107 | 74 | 59 | |||||||||||||||||||||
|
Settlements
|
20 | — | — | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit cost
|
$ | 186 | $ | 137 | $ | 122 | $ | 15 | $ | 18 | $ | 16 | ||||||||||||
|
|
||||||||||||||||||||||||
Amounts recognized in other comprehensive (income) loss for the years ended December 31, 2010 and
2009 were as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Amortization of actuarial loss
|
$ | (107 | ) | $ | (74 | ) | $ | — | $ | — | ||||||
|
Settlement loss
|
(20 | ) | — | — | — | |||||||||||
|
Amortization of prior service credit
|
9 | 9 | 1 | 1 | ||||||||||||
|
Net loss arising during the year
|
298 | 302 | 7 | 3 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 180 | $ | 237 | $ | 8 | $ | 4 | ||||||||
|
|
||||||||||||||||
F-83
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)
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 | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Net loss
|
$ | 1,852 | $ | 1,681 | $ | 17 | $ | 9 | ||||||||
|
Prior service credit
|
(30 | ) | (39 | ) | — | (1 | ) | |||||||||
|
Transition obligation
|
— | — | — | 1 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 1,822 | $ | 1,642 | $ | 17 | $ | 9 | ||||||||
|
|
||||||||||||||||
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 2011 are
$149 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 2011 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
2011 is an insignificant amount, as the level of the actuarial net loss does not exceed the
allowable amortization corridor.
Plan Assets
Investment Strategy and Target Allocation
The overall investment strategy 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.
| Target Asset Allocation | ||||
| Pension Plans | Other Postretirement Plans | |||
|
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, 2010 and 2009 is presented in the table below.
| Percentage of Pension Plans Assets | Percentage of Other Postretirement Plans | |||||||||||||||
| At Fair Value as of December 31, | Assets at Fair Value as of December 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Equity securities
|
22 | % | 28 | % | 22 | % | 21 | % | ||||||||
|
Fixed income securities
|
61 | % | 57 | % | 78 | % | 79 | % | ||||||||
|
Alternative Assets
|
17 | % | 15 | % | — | — | ||||||||||
|
|
||||||||||||||||
|
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.
F-84
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)
Investment Valuation
For further discussion on the valuation of investments, see Note 4.
Pension Plan Assets
The fair values of the Company’s pension plan assets at December 31, 2010, by asset category are as
follows:
| Pension Plan Assets at Fair Value as of December 31, 2010 | ||||||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Short-term investments [1]
|
$ | 75 | $ | 406 | $ | — | $ | 477 | ||||||||
|
Fixed Income Securities:
|
||||||||||||||||
|
Corporate
|
— | 882 | 3 | 906 | ||||||||||||
|
RMBS
|
— | 450 | 9 | 459 | ||||||||||||
|
U.S. Treasuries
|
7 | 330 | — | 336 | ||||||||||||
|
Foreign government
|
— | 61 | 2 | 42 | ||||||||||||
|
CMBS
|
— | 174 | 1 | 175 | ||||||||||||
|
Other fixed income [2]
|
— | 56 | 7 | 63 | ||||||||||||
|
Equity Securities:
|
||||||||||||||||
|
Large-cap domestic
|
— | 496 | — | 501 | ||||||||||||
|
Mid-cap domestic
|
62 | — | — | 62 | ||||||||||||
|
Small-cap domestic
|
47 | — | — | 47 | ||||||||||||
|
International
|
248 | — | — | 248 | ||||||||||||
|
Other investments:
|
||||||||||||||||
|
Hedge funds
|
— | — | 635 | 635 | ||||||||||||
|
|
||||||||||||||||
|
Total pension plan assets at fair value [3]
|
$ | 439 | $ | 2,855 | $ | 657 | $ | 3,951 | ||||||||
|
|
||||||||||||||||
| [1] |
Includes $30 of initial margin requirements related to the Plan’s duration overlay program.
|
|
| [2] |
Includes ABS and municipal bonds.
|
|
| [3] |
Excludes approximately $61 of investment payables net of investment receivables that are not
carried at fair value. Also excludes approximately $32 of interest receivable carried at fair
value.
|
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
|
— | 435 | — | 435 | ||||||||||||
|
Mid-cap domestic
|
130 | — | — | 130 | ||||||||||||
|
Small-cap domestic
|
82 | — | — | 82 | ||||||||||||
|
International
|
313 | — | — | 313 | ||||||||||||
|
Other equity securities [3]
|
— | 1 | — | 1 | ||||||||||||
|
Other investments:
|
||||||||||||||||
|
Hedge funds
|
— | — | 501 | 501 | ||||||||||||
|
|
||||||||||||||||
|
Total pension plan assets 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 of interest receivable carried at fair value.
|
F-85
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 tables below provide a fair value level 3 roll forward for the twelve months ended
December 31, 2010 and 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 Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| Actual return on plan assets | ||||||||||||||||||||||||
| Relating to | ||||||||||||||||||||||||
| Fair Value | assets still | Relating to | Purchase, | Transfers | Fair Value as | |||||||||||||||||||
| as of | held at the | assets sold | issuances, | in and / or | of | |||||||||||||||||||
| January 1, | reporting | during the | and | out of | December 31, | |||||||||||||||||||
| Asset Category | 2010 | date | period | settlements | Level 3 | 2010 | ||||||||||||||||||
|
Corporate
|
$ | 12 | $ | (1 | ) | $ | 1 | $ | (6 | ) | $ | (3 | ) | $ | 3 | |||||||||
|
RMBS
|
24 | — | — | (15 | ) | — | 9 | |||||||||||||||||
|
Foreign government
|
2 | — | — | 2 | (2 | ) | 2 | |||||||||||||||||
|
Other fixed income
|
8 | 1 | — | 4 | (5 | ) | 8 | |||||||||||||||||
|
Hedge funds
|
501 | 29 | 4 | 101 | — | 635 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Totals
|
$ | 547 | $ | 29 | $ | 5 | $ | 86 | $ | (10 | ) | $ | 657 | |||||||||||
|
|
||||||||||||||||||||||||
| Pension Plan Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| Actual return on plan assets | ||||||||||||||||||||||||
| Relating to | ||||||||||||||||||||||||
| Fair Value | assets still | Relating to | Purchase, | Transfers | Fair Value as | |||||||||||||||||||
| as of | held at the | assets sold | issuances, | in and / or | of | |||||||||||||||||||
| 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, 2010 and 2009.
F-86
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, 2010, by asset
category are as follows:
| Other Postretirement Plan Assets | ||||||||||||||||
| at Fair Value as of December 31, 2010 | ||||||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Short-term investments
|
$ | — | $ | 10 | $ | — | $ | 10 | ||||||||
|
Fixed Income Securities:
|
||||||||||||||||
|
Corporate
|
— | 57 | — | 60 | ||||||||||||
|
RMBS
|
— | 44 | — | 44 | ||||||||||||
|
U.S. Treasuries
|
— | 19 | — | 19 | ||||||||||||
|
CMBS
|
— | 17 | — | 17 | ||||||||||||
|
Other fixed income
|
— | 6 | — | 3 | ||||||||||||
|
Equity Securities:
|
||||||||||||||||
|
Large-cap
|
— | 43 | — | 43 | ||||||||||||
|
|
||||||||||||||||
|
Total other postretirement plan assets at fair value [1]
|
$ | — | $ | 196 | $ | — | $ | 196 | ||||||||
|
|
||||||||||||||||
| [1] |
Excludes approximately $7 of investment payables net of investment receivables that are not
carried at fair value. Also excludes approximately $1 of interest receivable carried at fair
value.
|
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. Treasuries
|
— | 17 | — | 17 | ||||||||||||
|
CMBS
|
— | 12 | — | 12 | ||||||||||||
|
Other fixed income
|
— | 1 | — | 1 | ||||||||||||
|
Equity Securities:
|
||||||||||||||||
|
Large-cap
|
— | 37 | — | 37 | ||||||||||||
|
|
||||||||||||||||
|
Total other postretirement plan assets 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 of interest receivable carried at fair
value.
|
There was no Company common stock included in the other postretirement benefit plan assets as
of December 31, 2010 and 2009.
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.
F-87
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)
Cash Flows
The following table illustrates the Company’s prior contributions.
| Employer Contributions | Pension Benefits | Other Postretirement Benefits | ||||||
|
2010
|
$ | 201 | $ | — | ||||
|
2009
|
$ | 201 | — | |||||
In 2010, the Company, at its discretion, made $200 in contributions to the U.S. qualified defined
benefit pension plan. The Company presently anticipates contributing approximately $200 to its
U.S. qualified defined benefit pension plan in 2011 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 2011, 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 2010 and 2009 were made in cash and did not include contributions of the
Company’s common stock.
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, 2010:
| Pension Benefits | Other Postretirement Benefits | |||||||
|
|
||||||||
|
2011
|
$ | 257 | $ | 37 | ||||
|
2012
|
280 | 39 | ||||||
|
2013
|
298 | 40 | ||||||
|
2014
|
315 | 39 | ||||||
|
2015
|
330 | 39 | ||||||
|
2016-2020
|
1,826 | 178 | ||||||
|
|
||||||||
|
Total
|
$ | 3,306 | $ | 372 | ||||
|
|
||||||||
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, 2010:
|
2011
|
$ | 3 | ||
|
2012
|
4 | |||
|
2013
|
4 | |||
|
2014
|
4 | |||
|
2015
|
4 | |||
|
2016-2020
|
25 | |||
|
|
||||
|
Total
|
$ | 44 | ||
|
|
||||
F-88
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
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 2010 and 2009, the Company issued shares from treasury in satisfaction of stock-based
compensation.
| For the year ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Stock-based compensation plans expense
|
$ | 94 | $ | 72 | $ | 62 | ||||||
|
Income tax benefit
|
(33 | ) | (20 | ) | (19 | ) | ||||||
|
|
||||||||||||
|
Total stock-based compensation plans expense, after-tax
|
$ | 61 | $ | 52 | $ | 43 | ||||||
|
|
||||||||||||
The Company did not capitalize any cost of stock-based compensation. As of December 31, 2010, the
total compensation cost related to non-vested awards not yet recognized was $102, which is expected
to be recognized over a weighted average period of 1.6 years.
Stock Plan
On May 19, 2010 at the Company’s Annual Meeting of Shareholders, the shareholders of The Hartford
approved The Hartford 2010 Incentive Stock Plan (the “2010 Stock Plan”), which supersedes and
replaces The Hartford 2005 Incentive Stock Plan. The terms of the 2010 Stock Plan are
substantially similar to the terms of the superseded plan. However, the 2010 Stock Plan provides
for an increased maximum number of shares that may be awarded to employees of the Company, to
non-employee members of the Board of Directors of the Company and also permits awards to be made to
third party service providers, and permits additional forms of stock-based awards.
The 2010 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 or restricted stock units, or any other form of stock-based
award. The aggregate number of shares of stock, which may be awarded, is subject to a maximum
limit of 18,000,000 shares applicable to all awards for the ten-year duration of the 2010 Stock
Plan. If any award under the prior The Hartford Incentive Stock Plan (as approved by the Company’s
shareholders in 2000) or under the prior The Hartford 2005 Incentive Stock Plan (as approved by the
Company’s shareholders in 2005) that was outstanding as of March 31, 2010, is forfeited,
terminated, surrendered, exchanged, expires unexercised, or is settled in cash in lieu of stock
(including to effect tax withholding) or for the net issuance of a lesser number of shares than the
number subject to the award, the shares of stock subject to such award (or the relevant portion
thereof) shall be available for awards under the 2010 Stock Plan and such shares shall be added to
the maximum limit. As of December 31, 2010, there were 17,383,657 shares available for future
issuance.
The fair values of awards granted under the 2010 Stock Plan are 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 2010 Stock Plan.
Stock Option Awards
Under the 2010 Stock Plan, all options granted have an exercise price at least equal to the market
price of the Company’s common stock on the date of grant, and an option’s maximum term is not to
exceed ten years. Under the 2010 Stock Plan, options will generally become exercisable as
determined at the time of grant. For any year, no individual employee may receive an award of
options for more than 2,000,000 shares under the 2010 Stock Plan. Under the 2005 Stock Plan,
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.
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.
F-89
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)
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. There were no stock option awards granted in 2010.
| For the year ended December 31, | ||||
| 2009 | 2008 | |||
|
Expected dividend yield
|
3.2% | 2.9% | ||
|
Expected annualized spot volatility
|
57.8% - 57.8% | 37.0% - 32.2% | ||
|
Weighted average annualized volatility
|
57.8% | 33.3% | ||
|
Risk-free spot rate
|
0.3% - 4.2% | 2.0% - 5.0% | ||
|
Expected term
|
7.3 years | 8 years | ||
A summary of the status of non-qualified stock options included in the Company’s Stock Plans as of
December 31, 2010 and changes during the year ended December 31, 2010 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
|
6,469 | $ | 49.76 | 3.8 | $ | — | ||||||||||
|
Granted
|
— | |||||||||||||||
|
Exercised
|
(36 | ) | 7.04 | |||||||||||||
|
Forfeited
|
(486 | ) | 39.57 | |||||||||||||
|
Expired
|
(668 | ) | 35.88 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at end of year
|
5,279 | 52.90 | 2.9 | — | ||||||||||||
|
|
||||||||||||||||
|
Exercisable at end of year
|
4,541 | $ | 58.01 | 2.2 | — | |||||||||||
|
|
||||||||||||||||
The weighted average grant-date fair value of options granted during the years ended December 31,
2010, 2009 and 2008 was $0, $3.06 and $21.57, respectively. The total intrinsic value of options
exercised during the years ended December 31, 2010, 2009 and 2008 was $1, $0, and $4, respectively.
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 Stock Plans and outstanding include restricted stock units,
restricted stock and performance shares. Generally, restricted stock units fully 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 under the 2010 Stock Plan is 500,000 shares or units.
A summary of the status of the Company’s non-vested share awards as of December 31, 2010, and
changes during the year ended December 31, 2010, is presented below:
| Shares | Weighted-Average | |||||||
| Non-vested Shares | (in thousands) | Grant-Date Fair Value | ||||||
|
Non-vested at beginning of year
|
1,845 | $ | 53.19 | |||||
|
Granted
|
1,022 | 22.93 | ||||||
|
Decrease for change in estimated performance factors
|
(78 | ) | — | |||||
|
Vested
|
(437 | ) | 78.81 | |||||
|
Forfeited
|
(463 | ) | 27.46 | |||||
|
|
||||||||
|
Non-vested at end of year
|
1,889 | $ | 35.83 | |||||
|
|
||||||||
The total fair value of shares vested during the years ended December 31, 2010, 2009 and 2008 was
$13, $8 and $35, respectively, based on estimated performance factors. The Company did not make
cash payments in settlement of stock compensation during the years ended December 31, 2010 and 2009
and 2008.
F-90
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)
Restricted Unit awards
In 2010 and 2009, The Hartford issued awards under the 2005 Stock Plan that will ultimately be
settled in cash. As a result, these awards are referred to as “Restricted Units,” and the awards
are remeasured at the end of each reporting period until settlement. 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 awarded. Awards granted in
2009 vest after a three year period. Awards granted in 2010 include both graded and cliff vesting
restricted units which vest over a three year period. The graded vesting attribution method is
used to recognize the expense of the award over the requisite service period. For example, the
graded vesting attribution method views one three-year grant with annual graded vesting as three
separate sub-grants, each representing one third of the total number of awards granted. The first
sub-grant vests over one year, the second sub-grant vests over two years and the third sub-grant
vests over three years.
For the years ended December 31, 2010 and 2009, 2,983 and 4,963 restricted units were granted,
respectively. The weighted-average grant-date fair value was $24.34 and $7.07 at December 31, 2010
and 2009, respectively. As of December 31, 2010 and 2009, 6,812 and 4,613 were non-vested,
respectively.
Deferred Stock Unit Plan
Effective July 31, 2009, the Compensation and Management Development 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, 2010, 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
|
— | $ | — | 137 | $ | 24.12 | ||||||||||
|
Granted
|
265 | 26.12 | 625 | 24.76 | ||||||||||||
|
Vested
|
(265 | ) | 26.12 | — | — | |||||||||||
|
Forfeited
|
— | — | (114 | ) | 24.29 | |||||||||||
|
|
||||||||||||||||
|
Non-vested at end of year
|
— | $ | — | 648 | $ | 24.70 | ||||||||||
|
|
||||||||||||||||
F-91
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”).
Beginning in 2010, under this
plan, eligible employees of The Hartford purchase common stock of the Company at a discount rate of
5% of the market price per share on the last trading day of the offering period. In 2009 and prior
years, 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, 2010, there were 7,240,661 shares available
for future issuance. During the years ended December 31, 2010, 2009 and 2008, 729,598, 2,557,893
and 964,365 shares were sold, respectively. The weighted average per share fair value of the
discount under the ESPP was $1.24, $5.99 and $14.12 during the years ended December 31, 2010, 2009
and 2008, respectively. In 2010, the fair value is estimated based on the 5% discount off the market price
per share on the last trading day of the offering period. In 2009 and prior years, the fair value
was 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 | |||||||
|
Dividend yield
|
1.4 | % | 3.5 | % | ||||
|
Implied volatility
|
91.4 | % | 45.5 | % | ||||
|
Risk-free spot rate
|
0.3 | % | 1.9 | % | ||||
|
Expected term
|
6 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 and $5 for the years ended December
31, 2009 and 2008, 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.
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 2010, employees who had earnings of less than $110,000 in the preceding year received
a contribution of 1.5% of base salary and employees who had earnings of $110,000 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 $62, $64, and $64 for 2010, 2009, and 2008, respectively. Additionally, The
Hartford has established defined contribution pension plans 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 2010, 2009, and 2008 for this plan was $1, $2 and
$2, respectively.
F-92
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. Sale of Subsidiaries and Joint Venture
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 $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 $87 and $125 as of December 31, 2010 and 2009, respectively.
Sale of Joint Venture Interest in ICATU Hartford Seguros, S.A.
On November 23, 2009, 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 closed in 2010, and the Company received
cash proceeds of $130, which was net of capital gains tax withheld of $5. 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 $44,
after-tax.
Sale of Hartford Investments Canada Corporation
In October 2010, the Company announced the sale of Hartford Investments Canada Corporation. This
sale of The Hartford’s Canadian mutual fund business closed in fourth quarter 2010. The Hartford
recognized a net realized gain on the sale of approximately $41, after-tax, and does not expect
this sale to have a material impact on the Company’s future earnings.
Sale of Specialty Risk Services
In December 2010, the Company entered into an agreement to sell its wholly-owned subsidiary
Specialty Risk Services (“SRS”). SRS is a third-party claims administration business that provides
self-insured, insured, and alternative market clients with customized claims services. This
agreement to sell SRS is expected to close in the first quarter of 2011, subject to regulatory
approvals. The Company will continue to provide certain transition services to SRS for up to 24
months. The agreement to sell in December 2010 did not have an impact to the 2010 consolidated
results. The Company expects to realize a capital gain of approximately $150, after-tax, upon
closing of the transaction.
F-93
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 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-94
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 was subject to adjustment in certain
circumstances. The Preferred Stock is 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.
Additionally, the issuance of common and preferred stock during the first quarter of 2010 triggered
an anti-dilution provision in The Hartford’s Investment Agreement with Allianz, which resulted in
the adjustment to the warrant exercise price to $25.23 from $25.25 and to the number of shares that
may be purchased to 69,351,806 from 69,314,987.
F-95
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. 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 completed these
restructuring activities and executed final payment during the year ended December 31, 2010.
The following pre-tax charges were incurred during the years ended December 31, 2010 and 2009 in
connection with these restructuring activities:
| 2010 | 2009 | |||||||
|
Severance benefits
|
$ | 25 | $ | 52 | ||||
|
Asset impairment charges
|
1 | 53 | ||||||
|
Other contract termination charges
|
— | 34 | ||||||
|
|
||||||||
|
Total severance and other costs
|
$ | 26 | $ | 139 | ||||
|
|
||||||||
The amounts incurred during the year ended December 31, 2010 and 2009 were recorded in Insurance
operating costs and other expenses within Corporate and Other.
23. Quarterly Results For 2010 and 2009
(Unaudited)
| Three Months Ended | ||||||||||||||||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
|
Revenues
|
$ | 6,319 | $ | 5,394 | $ | 3,336 | $ | 7,637 | $ | 6,673 | $ | 5,230 | $ | 6,055 | $ | 6,440 | ||||||||||||||||
|
Benefits, losses and expenses
|
$ | 5,784 | $ | 7,411 | $ | 3,343 | $ | 7,619 | $ | 5,751 | $ | 5,687 | $ | 5,241 | $ | 5,712 | ||||||||||||||||
|
Net income (loss) [1]
|
$ | 319 | $ | (1,209 | ) | $ | 76 | $ | (15 | ) | $ | 666 | $ | (220 | ) | $ | 619 | $ | 557 | |||||||||||||
|
Less: Preferred stock dividends and accretion of
discount
|
483 | — | 11 | 3 | 10 | 62 | 11 | 62 | ||||||||||||||||||||||||
|
Net income (loss) available to common
shareholders [1]
|
$ | (164 | ) | $ | (1,209 | ) | $ | 65 | $ | (18 | ) | $ | 656 | $ | (282 | ) | $ | 608 | $ | 495 | ||||||||||||
|
Basic earnings (losses) per common share
|
$ | (0.42 | ) | $ | (3.77 | ) | $ | 0.15 | $ | (0.06 | ) | $ | 1.48 | $ | (0.79 | ) | $ | 1.37 | $ | 1.29 | ||||||||||||
|
Diluted earnings (losses) per common share [2] [3]
|
$ | (0.42 | ) | $ | (3.77 | ) | $ | 0.14 | $ | (0.06 | ) | $ | 1.34 | $ | (0.79 | ) | $ | 1.24 | $ | 1.19 | ||||||||||||
|
Weighted average common shares outstanding
|
393.7 | 320.8 | 443.9 | 325.4 | 444.1 | 356.1 | 444.3 | 382.7 | ||||||||||||||||||||||||
|
Weighted average common shares outstanding and
dilutive potential common shares
|
393.7 | 320.8 | 480.2 | 325.4 | 495.3 | 356.1 | 497.8 | 416.2 | ||||||||||||||||||||||||
| [1] |
Included in the three months ended 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.
|
||
| [2] |
In periods of a net loss available to common shareholders, the Company uses basic weighted average common shares
outstanding in the calculation of diluted loss per common 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 common share calculation. In the absence of the net loss available to common shareholders, weighted average
common shares outstanding and dilutive potential common shares would have totaled 321.5 million, 326.6 million, 382.5
million and 428.5 million for the three months ended March 31, 2009, June 30, 2009, September 30, 2009, and March 31, 2010
respectively. In addition, assuming the impact of mandatory convertible preferred shares was not antidilutive, weighted
average common shares outstanding and dilutive potential common shares would have totaled 431.9 million and 501.0 million
for the three months ended March 31, 2010 and June 30, 2010, respectively.
|
F-96
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN AFFILIATES
(In millions)
SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN AFFILIATES
(In millions)
| As of December 31, 2010 | ||||||||||||
| 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)
|
$ | 9,961 | $ | 9,918 | $ | 9,918 | ||||||
|
States, municipalities and political subdivisions
|
12,469 | 12,124 | 12,124 | |||||||||
|
Foreign governments
|
1,627 | 1,683 | 1,683 | |||||||||
|
Public utilities
|
7,099 | 7,427 | 7,427 | |||||||||
|
All other corporate bonds
|
31,397 | 32,457 | 32,457 | |||||||||
|
All other mortgage-backed and asset-backed securities
|
15,866 | 14,211 | 14,211 | |||||||||
|
|
||||||||||||
|
Total fixed maturities, available-for-sale
|
78,419 | 77,820 | 77,820 | |||||||||
|
Fixed maturities, at fair value using fair value option
|
845 | 649 | 649 | |||||||||
|
|
||||||||||||
|
Total fixed maturities
|
79,264 | 78,469 | 78,469 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Equity Securities
|
||||||||||||
|
Common stocks
|
||||||||||||
|
Industrial, miscellaneous and all other
|
271 | 345 | 345 | |||||||||
|
Non-redeemable preferred stocks
|
742 | 628 | 628 | |||||||||
|
|
||||||||||||
|
Total equity securities, available-for-sale
|
1,013 | 973 | 973 | |||||||||
|
Equity securities, trading
|
33,875 | 32,820 | 32,820 | |||||||||
|
|
||||||||||||
|
Total equity securities
|
34,888 | 33,793 | 33,793 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Mortgage loans
|
4,489 | 4,524 | 4,489 | |||||||||
|
Policy loans
|
2,181 | 2,294 | 2,181 | |||||||||
|
Investments in partnerships and trusts
|
1,918 | 1,918 | 1,918 | |||||||||
|
Futures, options and miscellaneous
|
1,240 | 1,617 | 1,617 | |||||||||
|
Short-term investments
|
8,528 | 8,528 | 8,528 | |||||||||
|
|
||||||||||||
|
Total investments
|
$ | 132,508 | $ | 131,143 | $ | 130,995 | ||||||
|
|
||||||||||||
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)
(Registrant)
(In millions)
| As of December 31, | ||||||||
| Condensed Balance Sheets | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Fixed maturities, available-for-sale, at fair value
|
$ | 251 | $ | 309 | ||||
|
Other investments
|
31 | 36 | ||||||
|
Short-term investments
|
1,762 | 1,936 | ||||||
|
Investment in affiliates
|
25,227 | 21,642 | ||||||
|
Deferred income taxes
|
885 | 755 | ||||||
|
Unamortized Issue Costs
|
55 | 51 | ||||||
|
Other assets
|
22 | 368 | ||||||
|
|
||||||||
|
Total assets
|
$ | 28,233 | $ | 25,097 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Net payable to affiliates
|
$ | 430 | $ | 366 | ||||
|
Short-term debt (includes current maturities of long-term debt)
|
400 | 275 | ||||||
|
Long-term debt
|
5,961 | 5,250 | ||||||
|
Other liabilities
|
1,131 | 1,341 | ||||||
|
|
||||||||
|
Total liabilities
|
7,922 | 7,232 | ||||||
|
Total stockholders’ equity
|
20,311 | 17,865 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 28,233 | $ | 25,097 | ||||
|
|
||||||||
| For the years ended December 31, | ||||||||||||
| Condensed Statements of Operations | 2010 | 2009 | 2008 | |||||||||
|
Net investment income
|
$ | 5 | $ | 8 | $ | 30 | ||||||
|
Net realized capital gains (losses)
|
(5 | ) | (231 | ) | 103 | |||||||
|
|
||||||||||||
|
Total revenues
|
— | (223 | ) | 133 | ||||||||
|
Interest expense
|
489 | 457 | 323 | |||||||||
|
Other expenses
|
11 | 8 | (3 | ) | ||||||||
|
|
||||||||||||
|
Total expenses
|
500 | 465 | 320 | |||||||||
|
Loss before income taxes and earnings (losses) of subsidiaries
|
(500 | ) | (688 | ) | (187 | ) | ||||||
|
Income tax benefit
|
(170 | ) | (157 | ) | (102 | ) | ||||||
|
|
||||||||||||
|
Loss before earnings (losses)of subsidiaries
|
(330 | ) | (531 | ) | (85 | ) | ||||||
|
Earnings (losses) of subsidiaries
|
2,010 | (356 | ) | (2,664 | ) | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 1,680 | $ | (887 | ) | $ | (2,749 | ) | ||||
|
|
||||||||||||
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
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
(In millions)
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
(In millions)
| For the years ended December 31, | ||||||||||||
| Condensed Statements of Cash Flows | 2010 | 2009 | 2008 | |||||||||
|
Operating Activities
|
||||||||||||
|
Net income (loss)
|
$ | 1,680 | $ | (887 | ) | $ | (2,749 | ) | ||||
|
Undistributed earnings (losses) of subsidiaries
|
(1,004 | ) | 1,307 | (4,766 | ) | |||||||
|
Change in operating assets and liabilities
|
(21 | ) | (590 | ) | 9,372 | |||||||
|
|
||||||||||||
|
Cash provided by (used for) operating activities
|
655 | (170 | ) | 1,857 | ||||||||
|
|
||||||||||||
|
Investing Activities
|
||||||||||||
|
Net sales (purchases) of short-term investments
|
233 | (412 | ) | (892 | ) | |||||||
|
Purchase price of business acquired
|
— | (10 | ) | — | ||||||||
|
Capital contributions to subsidiaries
|
(311 | ) | (3,115 | ) | (2,300 | ) | ||||||
|
|
||||||||||||
|
Cash used for investing activities
|
(78 | ) | (3,537 | ) | (3,192 | ) | ||||||
|
|
||||||||||||
|
Financing Activities
|
||||||||||||
|
Issuance of long-term debt
|
1,090 | — | 2,670 | |||||||||
|
Repayments at maturity of long-term debt
|
(275 | ) | — | (955 | ) | |||||||
|
Change in commercial paper
|
— | (375 | ) | — | ||||||||
|
Net proceeds from issuance of mandatory convertible preferred stock
|
556 | — | — | |||||||||
|
Net proceeds from issuance of common shares under public offering
|
1,600 | — | — | |||||||||
|
Issuance of convertible preferred shares
|
— | — | 727 | |||||||||
|
Issuance of warrants
|
— | — | 512 | |||||||||
|
Proceeds from net issuance of preferred stock and warrants to U.S. Treasury
|
— | 3,400 | — | |||||||||
|
Redemption of preferred stock issued to the U.S. Treasury
|
(3,400 | ) | — | — | ||||||||
|
Net proceeds from issuance of common shares under discretionary equity
issuance plan
|
— | 887 | — | |||||||||
|
Proceeds from net issuances of common shares under incentive and stock
compensation plans and excess tax benefits
|
22 | 17 | 41 | |||||||||
|
Treasury stock acquired
|
— | — | (1,000 | ) | ||||||||
|
Dividends paid — Preferred shares
|
(85 | ) | (73 | ) | — | |||||||
|
Dividends paid — Common Shares
|
(85 | ) | (149 | ) | (660 | ) | ||||||
|
|
||||||||||||
|
Cash provided by (used for) financing activities
|
(577 | ) | 3,707 | 1,335 | ||||||||
|
Net change in cash
|
— | — | — | |||||||||
|
Cash — beginning of year
|
— | — | — | |||||||||
|
|
||||||||||||
|
Cash — end of year
|
$ | — | $ | — | $ | — | ||||||
|
|
||||||||||||
|
Supplemental Disclosure of Cash Flow Information
|
||||||||||||
|
Interest Paid
|
$ | 465 | $ | 454 | $ | 265 | ||||||
|
Dividends Received from Subsidiaries
|
$ | 1,006 | $ | 243 | $ | 2,279 | ||||||
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 Costs | Other | |||||||||||||||
| and Present | Future Policy Benefits, | Policyholder | ||||||||||||||
| Value of Future | Unpaid Losses and Loss | Unearned | Funds and | |||||||||||||
| Segment | Profits | Adjustment Expenses | Premiums | Benefits Payable | ||||||||||||
|
As of December 31, 2010
|
||||||||||||||||
|
Property & Casualty Commercial
|
$ | 603 | $ | 14,727 | $ | 3,126 | $ | — | ||||||||
|
Group Benefits
|
67 | 6,640 | 76 | 320 | ||||||||||||
|
Consumer Markets
|
660 | 2,177 | 1,875 | — | ||||||||||||
|
Global Annuity
|
4,981 | 10,427 | 80 | 61,251 | ||||||||||||
|
Life Insurance
|
2,661 | 1,048 | 14 | 8,927 | ||||||||||||
|
Retirement Plans
|
842 | 458 | 3 | 6,841 | ||||||||||||
|
Mutual Funds
|
43 | — | — | 4 | ||||||||||||
|
Corporate and Other
|
— | 4,121 | 2 | — | ||||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 9,857 | $ | 39,598 | $ | 5,176 | $ | 77,343 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
As of December 31, 2009
|
||||||||||||||||
|
Property & Casualty Commercial
|
$ | 619 | $ | 15,051 | $ | 3,114 | $ | — | ||||||||
|
Group Benefits
|
78 | 6,403 | 84 | 401 | ||||||||||||
|
Consumer Markets
|
644 | 2,109 | 1,938 | — | ||||||||||||
|
Global Annuity
|
5,650 | 10,290 | 70 | 63,122 | ||||||||||||
|
Life Insurance
|
2,658 | 944 | 13 | 6,620 | ||||||||||||
|
Retirement Plans
|
980 | 293 | — | 6,156 | ||||||||||||
|
Mutual Funds
|
57 | — | — | — | ||||||||||||
|
Corporate and Other
|
— | 4,541 | 2 | 1,849 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 10,686 | $ | 39,631 | $ | 5,221 | $ | 78,148 | ||||||||
|
|
||||||||||||||||
S-4
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION (continued)
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION (continued)
(In millions)
| Amortization of | Insurance | |||||||||||||||||||||||
| Earned | Benefits, Losses | Deferred Policy | Operating | |||||||||||||||||||||
| Premiums, Fee | Net | and Loss | Acquisition Costs | Costs and | ||||||||||||||||||||
| Income and | Investment | Adjustment | and Present Value | Other | Net Written | |||||||||||||||||||
| Segment | Other | Income | Expenses | of Future Profits | Expenses [1] | Premiums | ||||||||||||||||||
|
For the year ended
December 31, 2010
|
||||||||||||||||||||||||
|
Property & Casualty Commercial
|
$ | 6,052 | $ | 939 | $ | 3,370 | $ | 1,353 | $ | 866 | $ | 5,796 | ||||||||||||
|
Group Benefits
|
4,278 | 429 | 3,331 | 61 | 1,111 | N/A | ||||||||||||||||||
|
Consumer Markets
|
4,119 | 187 | 2,951 | 667 | 493 | 3,886 | ||||||||||||||||||
|
Global Annuity
|
2,602 | 917 | 1,223 | 253 | 768 | N/A | ||||||||||||||||||
|
Life Insurance
|
1,029 | 522 | 849 | 121 | 223 | N/A | ||||||||||||||||||
|
Retirement Plans
|
359 | 364 | 278 | 27 | 340 | N/A | ||||||||||||||||||
|
Mutual Funds
|
690 | (8 | ) | — | 62 | 480 | N/A | |||||||||||||||||
|
Corporate and Other
|
190 | 268 | 249 | — | 1,043 | 3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 19,319 | $ | 3,618 | $ | 12,251 | $ | 2,544 | $ | 5,324 | $ | 9,685 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
For the year ended
December 31, 2009
|
||||||||||||||||||||||||
|
Property & Casualty Commercial
|
$ | 6,237 | $ | 759 | $ | 3,266 | $ | 1,393 | $ | 866 | $ | 5,715 | ||||||||||||
|
Group Benefits
|
4,350 | 403 | 3,196 | 61 | 1,120 | N/A | ||||||||||||||||||
|
Consumer Markets
|
4,113 | 178 | 2,902 | 674 | 475 | 3,995 | ||||||||||||||||||
|
Global Annuity
|
2,673 | 4,894 | 6,277 | 1,716 | 860 | N/A | ||||||||||||||||||
|
Life Insurance
|
1,054 | 347 | 715 | 317 | 208 | N/A | ||||||||||||||||||
|
Retirement Plans
|
324 | 315 | 269 | 56 | 346 | N/A | ||||||||||||||||||
|
Mutual Funds
|
518 | (21 | ) | — | 50 | 395 | N/A | |||||||||||||||||
|
Corporate and Other
|
223 | 344 | 394 | — | 873 | 1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 19,492 | $ | 7,219 | $ | 17,019 | $ | 4,267 | $ | 5,143 | $ | 9,711 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
For the year ended
December 31, 2008
|
||||||||||||||||||||||||
|
Property & Casualty Commercial
|
$ | 6,758 | $ | 803 | $ | 3,822 | $ | 1,461 | $ | 903 | $ | 6,291 | ||||||||||||
|
Group Benefits
|
4,391 | 419 | 3,144 | 57 | 1,128 | N/A | ||||||||||||||||||
|
Consumer Markets
|
4,070 | 207 | 2,758 | 633 | 438 | 3,933 | ||||||||||||||||||
|
Global Annuity
|
3,732 | (8,405 | ) | (7,220 | ) | 1,762 | 1,382 | N/A | ||||||||||||||||
|
Life Insurance
|
946 | 343 | 692 | 171 | 228 | N/A | ||||||||||||||||||
|
Retirement Plans
|
338 | 342 | 271 | 91 | 335 | N/A | ||||||||||||||||||
|
Mutual Funds
|
666 | (22 | ) | — | 96 | 491 | N/A | |||||||||||||||||
|
Corporate and Other
|
241 | 308 | 281 | — | 886 | 7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 21,142 | $ | (6,005 | ) | $ | 3,748 | $ | 4,271 | $ | 5,791 | $ | 10,231 | |||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Includes interest expense and goodwill impairment.
|
|
| N/A |
— Not applicable to life insurance pursuant to Regulation S-X.
|
S-5
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, 2010
|
||||||||||||||||||||
|
Life insurance in-force
|
$ | 987,104 | $ | 135,269 | $ | 43,999 | $ | 895,834 | 5 | % | ||||||||||
|
|
||||||||||||||||||||
|
Insurance revenues
|
||||||||||||||||||||
|
Property and casualty insurance
|
$ | 10,105 | 668 | 256 | 9,693 | 3 | % | |||||||||||||
|
Life insurance and annuities
|
7,297 | 518 | 128 | 6,907 | 2 | % | ||||||||||||||
|
Accident and health insurance
|
2,221 | 58 | 64 | 2,227 | 3 | % | ||||||||||||||
|
|
||||||||||||||||||||
|
Total insurance revenues
|
$ | 19,623 | $ | 1,244 | $ | 448 | $ | 18,827 | 2 | % | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
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 | % | ||||||||||
|
|
||||||||||||||||||||
S-6
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, | ||||||||||||||||
|
|
||||||||||||||||||||
|
2010
|
||||||||||||||||||||
|
Allowance for doubtful accounts and other
|
$ | 121 | $ | 53 | $ | — | $ | (55 | ) | $ | 119 | |||||||||
|
Allowance for uncollectible reinsurance
|
335 | 11 | — | (56 | ) | 290 | ||||||||||||||
|
Valuation allowance on mortgage loans
|
366 | 157 | — | (368 | ) | 155 | ||||||||||||||
|
Valuation allowance for deferred taxes
|
86 | 87 | — | — | 173 | |||||||||||||||
|
|
||||||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Allowance for doubtful accounts and other
|
$ | 125 | $ | 53 | $ | — | $ | (57 | ) | $ | 121 | |||||||||
|
Allowance for uncollectible reinsurance
|
379 | 11 | — | (55 | ) | 335 | ||||||||||||||
|
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 | ||||||||||||||
|
Valuation allowance on mortgage loans
|
— | 26 | — | — | 26 | |||||||||||||||
|
Valuation allowance for deferred taxes
|
43 | 32 | — | — | 75 | |||||||||||||||
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY AND CASUALTY INSURANCE OPERATIONS
(In millions)
(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,
|
||||||||||||||||
|
|
||||||||||||||||
|
2010
|
$ | 524 | $ | 6,768 | $ | (196 | ) | $ | 6,834 | |||||||
|
|
||||||||||||||||
|
2009
|
$ | 511 | $ | 6,596 | $ | (186 | ) | $ | 6,547 | |||||||
|
|
||||||||||||||||
|
2008
|
$ | 488 | $ | 6,933 | $ | (226 | ) | $ | 6,591 | |||||||
| [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
4.8%, 5.0%, and 5.4% for 2010, 2009, and 2008, respectively.
|
S-7
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,
hereunto 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 25, 2011
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 25, 2011 | |||
|
|
||||||
|
|
/s/ Christopher J. Swift
|
Executive Vice President and Chief Financial Officer (Principal Financial Officer) | February 25, 2011 | |||
|
|
||||||
|
|
/s/ Beth A. Bombara
|
Senior Vice President and Controller (Principal Accounting Officer) | February 25, 2011 | |||
|
|
||||||
|
|
*
|
Director | February 25, 2011 | |||
|
|
||||||
|
|
*
|
Director | February 25, 2011 | |||
|
|
||||||
|
|
*
|
Director | February 25, 2011 | |||
|
|
||||||
|
|
*
|
Director | February 25, 2011 | |||
|
|
||||||
|
|
*
|
Director | February 25, 2011 | |||
|
|
||||||
|
|
*
|
Director | February 25, 2011 | |||
|
|
||||||
|
|
*
|
Director | February 25, 2011 | |||
|
|
||||||
|
|
*
|
Director | February 25, 2011 | |||
|
|
||||||
|
*By:
|
/s/ 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, 2010
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
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”), as amended by Certificate of Designations with respect to 7.25%
Mandatory Convertible Preferred Stock Series F dated March 23, 2010 and the Certificate of
Elimination of the Series A Participating Cumulative Preferred Stock, Series D Non-Voting
Contingent Convertible Preferred Stock and Fixed Rate Cumulative Perpetual Preferred Stock,
Series E, dated April 26, 2010 (incorporated by reference to Exhibit 3.01 to The Hartford’s
Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2010).
|
|||
|
|
||||
| 3.02 |
Amended and Restated By-Laws of The Hartford, amended effective October 21, 2010
(incorporated herein by reference to Exhibit 3.1 to The Hartford’s Current Report on Form
8-K, filed October 27, 2010).
|
|||
|
|
||||
| 4.01 |
Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of The
Hartford (incorporated by reference as indicated in Exhibits 3.01 and 3.02 hereto,
respectively).
|
|||
|
|
||||
| 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).
|
|||
|
|
||||
| 4.10 |
Junior Subordinated Indenture, dated as of June 6, 2008, between The Hartford Financial
Services Group, Inc. and The Bank of New York Trust Company, N.A., as Trustee (incorporated
herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on
June 6, 2008).
|
|||
|
|
||||
| 4.11 |
First Supplemental Indenture, dated as of June 6, 2008, between The Hartford Financial
Services Group, Inc. and The Bank of New York Trust Company, N.A., as Trustee (incorporated
herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on
June 6, 2008).
|
|||
|
|
||||
| 4.12 |
Replacement Capital Covenant, dated as of June 6, 2008 (incorporated herein by reference
to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on June 6, 2008).
|
|||
|
|
||||
| 4.13 |
Second Supplemental Indenture, dated as of October 17, 2008, between The Hartford and The
Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 10%
Fixed-to-Floating Rate Junior Subordinated Debentures due 2068, including form of Debenture
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A
filed on October 17, 2008).
|
|||
|
|
||||
| 4.14 |
Form of Series B Warrant to Purchase Shares of Non-Voting Contingent Convertible Preferred
Stock (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form
8-K/A filed on October 17, 2008).
|
|||
II-2
Table of Contents
| Exhibit No. | Description | |||
|
|
||||
| 4.15 |
Form of Series C Warrant to Purchase Shares of Non-Voting Contingent Convertible Preferred
Stock (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form
8-K/A filed on October 17, 2008).
|
|||
|
|
||||
| 4.16 |
Registration Rights Agreement, dated as of October 17, 2008, between The Hartford and Allianz
SE (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K/A
filed on October 17, 2008).
|
|||
|
|
||||
| 4.17 |
Deposit Agreement, dated as of March 23, 2010, among The Hartford Financial Services
Group, Inc., The Bank of New York Mellon, as Depository, and holders from time to time of
the Receipt issued thereunder (including form of Depository Receipt) (incorporated herein
by reference to (incorporated by reference to Exhibit 4.6 to The Hartford’s Current Report
on Form 8-K, filed March 23, 2010).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).
|
|||
|
|
||||
| 10.01 |
Form of Depository Receipt for the Depositary Shares (included as Exhibit A to Exhibit
4.17) (incorporated herein by reference to Exhibit 4.7 to The Hartford’s Current Report on
Form 8-K, filed on March 9, 2010).
|
|||
|
|
||||
| 10.02 |
Letter Agreement, dated as of March 13, 2010, by and between The Hartford Financial
Services Group, Inc., Allianz SE (including letter of Allianz SE of March 12, 2010 attached
thereto) (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report
on Form 8-K, filed March 16, 2010).
|
|||
|
|
||||
| 10.03 |
Repurchase Letter Agreement, dated as of March 31, 2010, between The Hartford Financial
Services Group, Inc. and the United States Department of Treasury (incorporated herein by
reference to Exhibit 99.1 to The Hartford’s Current Report on Form 8-K, filed on March 31,
2010).
|
|||
|
|
||||
| 10.04 |
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).
|
|||
|
|
||||
| 10.05 |
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).
|
|||
|
|
||||
| 10.06 |
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).
|
|||
|
|
||||
| *10.07 |
The Hartford Senior Executive Officer Severance Pay Plan.
|
|||
|
|
||||
| *10.08 |
Amended and Restated The Hartford Senior Executive Severance Pay Plan, amended effective February 22, 2011.
|
|||
|
|
||||
| *10.09 |
2010 Incentive Stock Plan, amended effective January 27, 2011.
|
|||
|
|
||||
| *10.10 |
The Hartford 2010 Incentive Stock Plan Administrative Rules Related to Awards for Key Employees, amended effective
December 15, 2010.
|
|||
|
|
||||
| *10.11 |
The Hartford 2010 Incentive Stock Plan Administrative Rules Related to Awards for Non-Employee Directors, amended
December 15, 2010.
|
|||
|
|
||||
| *10.12 |
The Hartford 2010 Incentive Stock Plan Forms of Individual Award Agreements.
|
|||
|
|
||||
| *10.13 |
Summary of Annual Executive Bonus Program (incorporated herein by reference to Exhibit 10.2 to the Current Report on
Form 8-K, filed on May 25, 2010).
|
|||
|
|
||||
| *10.14 |
Loss on Sale Reimbursement Payback Agreement between the Company and Gregory McGreevey dated July 22, 2010 (incorporated
by reference to Exhibit 10.06 of The Hartford’s Quarterly Report on Form 10-Q for the second quarter ended June 30,
2010).
|
|||
|
|
||||
| *10.15 |
The Hartford 2005 Incentive Stock Plan, as amended (incorporated by reference to Exhibit 10.10 of The Hartford’s Annual
Report on Form 10-K for the fiscal year ended 2009).
|
|||
|
|
||||
| *10.16 |
Employment Agreement between The Hartford and Christopher J. Swift dated February 14, 2010 (incorporated by reference to
Exhibit 10.16 of The Hartford’s Annual Report on Form 10-K for the fiscal year ended 2009).
|
|||
|
|
||||
| *10.17 |
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).
|
|||
|
|
||||
| *10.18 |
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).
|
|||
|
|
||||
| *10.19 |
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).
|
|||
|
|
||||
| *10.20 |
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 Annual Report on Form 10-K for
the fiscal year ended December 31, 2008).
|
|||
II-3
Table of Contents
| Exhibit No. | Description | |||
|
|
||||
| *10.21 |
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).
|
|||
|
|
||||
| *10.22 |
The Hartford 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, 2008).
|
|||
|
|
||||
| *10.23 |
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).
|
|||
|
|
||||
| *10.24 |
The Hartford Deferred Compensation 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, 2008).
|
|||
|
|
||||
| *10.25 |
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).
|
|||
|
|
||||
| *10.26 |
The Hartford Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.01 of The Hartford’s
Quarterly Report on Form 10-Q for the third quarter ended September 30, 2009).
|
|||
|
|
||||
| *10.27 |
The Hartford Investment and Savings Plan, amended effective January 1, 2011.
|
|||
|
|
||||
| *10.28 |
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).
|
|||
|
|
||||
| 10.29 |
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).
|
|||
|
|
||||
| 10.30 |
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).
|
|||
|
|
||||
| 10.31 |
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).
|
|||
|
|
||||
| 10.32 |
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 Christopher J. Swift 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 Christopher J. Swift 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 Christopher J. Swift 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. †
|
|||
| * |
Management contract, compensatory plan or arrangement.
|
|
| † |
Filed with the Securities and Exchange Commission as an exhibit to this report.
|
II-4
TABLE OF CONTENTS
Part IprintItem 1. Business (dollar Amounts in Millions, Except For Per Share Data, Unless Otherwise Stated)printItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. (removed and Reserved)printPart IIprintItem 5. Market For The Hartford S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial Data (in Millions, Except For Per Share Data and Combined Ratios)printItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, and Executive Officers and Corporate Governance Of The HartfordprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accounting Fees and ServicesprintPart IVprintItem 15. Exhibits, Financial Statement Schedulesprint