HARTFORD FINANCIAL SERVICES GROUP, INC.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
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
(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
(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
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
None
None
| Indicate by check mark: | Yes | No | ||||
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if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | þ | ||||
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if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. | þ | ||||
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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. | þ | ||||
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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). | þ | ||||
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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. | þ | ||||
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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. | |||||
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Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o | |||||
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whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) | þ | ||||
The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant
as of June 30, 2011 was approximately $11.7 billion, based on the closing price of $26.37 per share
of the Common Stock on the New York Stock Exchange on June 30, 2011.
As of
February 17, 2012, there were outstanding 440,237,475 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 2012 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, 2011
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
TABLE OF CONTENTS
2
Table of Contents
Forward-Looking Statements
Certain of the statements contained herein are forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,”
“believes,” “estimates,” “expects,” “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 and those identified from time to time in our other filings
with the Securities and Exchange Commission. These important risks and uncertainties include:
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challenges related to the Company’s current operating environment, including continuing
uncertainty about the strength and speed of the recovery in the United States and other key
economies and the impact of governmental stimulus and austerity initiatives, sovereign credit
concerns, including the potential consequences associated with recent and further potential
downgrades to the credit ratings of debt issued by the United States government, European
sovereigns and other adverse developments on financial, commodity and credit markets and
consumer spending and investment, including in respect of Europe, and the effect of these
events on our returns in our life and property and casualty investment portfolios and our
hedging costs associated with our variable annuities business;
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the potential impact or consequences of our ongoing evaluation of the Company’s strategy
and business portfolio, which may lead us to pursue one or more transactions or take other
actions, including the discontinuance or placing in run-off of certain lines of business
and/or the pursuit of strategic acquisitions, divestitures or restructurings, and the
potential that any of the foregoing transactions or actions may not be achievable or that the
benefits anticipated to be gained thereby may not be obtained;
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the success of our initiatives relating to the realignment of our business, including the
continuing realignment of our hedge program for our variable annuity business, and plans to
improve the profitability and long-term growth prospects of our key divisions, including
through opportunistic acquisitions or divestitures or other actions or initiatives, and the
impact of regulatory or other constraints on our ability to complete these initiatives and
deploy capital among our businesses as and when planned;
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market risks associated with our business, including changes in interest rates, credit
spreads, equity prices, market volatility and foreign exchange rates, and implied volatility
levels, as well as continuing uncertainty in key sectors such as the global real estate
market;
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the impact on our investment portfolio if our investment portfolio is concentrated in any
particular segment of the economy;
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volatility in our earnings and potential material changes to our results resulting from our
adjustment of our risk management program to emphasize protection of statutory surplus and
cash flows;
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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 possibility of unfavorable loss development including with respect to long-tailed
exposures;
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the difficulty in predicting the Company’s potential exposure for asbestos and
environmental claims;
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3
Table of Contents
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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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actions by our competitors, many of which are larger or have greater financial resources
than we do;
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the Company’s ability to distribute its products through distribution channels, both
current and future;
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the cost and other effects of increased regulation as a result of the enactment of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”),
which, among other effects, has resulted in the establishment of a newly created Financial
Services Oversight Council with the power to designate “systemically important” institutions,
will require central clearing of, and/or impose new margin and capital requirements on,
derivatives transactions, and created a new “Federal Insurance Office” within the U.S.
Department of the Treasury (“Treasury”);
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unfavorable judicial or legislative developments;
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the uncertain effects of emerging claim and coverage issues;
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the potential effect of other 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 or changes in U.S. federal or other tax laws that affect the relative attractiveness
of our investment products;
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regulatory limitations on the ability of the Company and certain of its subsidiaries to
declare and pay dividends;
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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, cyber or other information security incident
or other unanticipated event;
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the risk that our framework for managing business risks may not be effective in mitigating
material risk and loss to the Company;
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the potential for difficulties arising from outsourcing relationships;
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the impact of potential changes in federal or state tax laws, including changes affecting
the availability of the separate account dividend received deduction;
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the impact of potential changes in accounting principles and related financial reporting
requirements;
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the Company’s ability to protect its intellectual property and defend against claims of
infringement; and
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other factors described in such forward-looking statements.
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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.
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Table of Contents
| Item 1. |
BUSINESS
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(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”, the
“Company”, “we”, or “our”) 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, 2011, total assets and total stockholders’ equity of The Hartford
were $304.1 billion and $22.9 billion, respectively.
Organization
The Hartford strives to maintain and enhance its position as a market leader within the financial
services industry. The Company sells diverse and innovative products through multiple distribution
channels to consumers and businesses. The Company is continuously seeking to develop and expand its
distribution channels, achieving cost efficiencies through economies of scale and improved
technology, and capitalizes on its brand name and The Hartford Stag Logo, one of the most
recognized symbols in the financial services industry.
The Company is currently focused on a customer-oriented strategy and organized around four
divisions: Commercial Markets, Consumer Markets, Wealth Management and Runoff Operations. In the
last two years, the Company announced the sales of certain businesses that are not core to its
focus and strategy. The Company continues to evaluate its strategy and business portfolio with the
goal of delivering shareholder value. As this review is ongoing and no decisions have yet been
made, the following discussions of the Company’s business and any forward-looking statements
contained herein assume a continuation of the Company’s current business focus and, as such, are
subject to change based on any actions taken as a result of the Company’s ongoing review.
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 57
non-proprietary mutual funds, as of December 31, 2011. 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. In the fourth quarter of
2011, the Company entered into a preferred partnership agreement with Wellington Management
Company, LLP (“Wellington Management”) and announced that Wellington Management will serve as the
sole sub-advisor for The Hartford’s mutual funds, including equity and fixed income funds, pending
a fund-by-fund review by The Hartford’s mutual funds board of directors. As of December 31, 2011,
Wellington Management served as the sub-advisor for 29 of The Hartford’s non-proprietary mutual
funds and has been the primary manager for the Company’s equity funds.
Reporting Segments
The Hartford is organized into four divisions: Commercial Markets, Consumer Markets, Wealth
Management and Runoff Operations. In 2011, the Runoff Operations division was formed to reflect
the manner in which the Company is currently organized for purposes of making operating decisions
and assessing performance. As a result, the Company conducts business principally in nine
reporting segments, and segment data for prior reporting periods has been adjusted accordingly.
The Hartford includes in its Corporate category 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.
The following discussion describes the principal products and services, marketing and distribution,
and competition of Commercial Markets, Consumer Markets and Wealth Management. For further
discussion on the reporting segments, including 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.
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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 United States, 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, livestock 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 and marine
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.
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, Commercial Markets offers 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 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.
The Company is engaged in a nationwide joint sales initiative across standard commercial lines,
specialty lines and Group Benefits, facilitating the marketing of both integrated and traditional
products and services across commercial markets.
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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 begun to rebound, while
underwriting margins have been pressured by increases in loss costs, particularly in workers’
compensation, and higher catastrophes. 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, 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 firms,
more insureds may opt for loss-sensitive products in lieu of guaranteed cost policies.
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 effect on the financial
strength ratings of some insurers.
In the surety business, favorable underwriting results over the past couple of years have 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, the 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.
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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. The Hartford has individual customer
relationships with AARP Program policyholders and as a group these customers represent a
significant portion of the total Consumer Markets’ business. Business sold to AARP members, either
direct or through independent agents, amounted to earned premiums of $2.8 billion, $2.9 billion and
$2.8 billion in 2011, 2010 and 2009, 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 mail and ecommerce marketing,
television and advertising, both digitally and in publications. Most of Consumer Markets’ direct
sales to the consumer are associated with its exclusive licensing arrangement with AARP, which
continues until January 1, 2020, to market automobile, homeowners and home-based business insurance
products to AARP’s nearly 37 million members. 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.
Consumer Markets is focused on targeting specific customer groups and writing business through
partnerships and affinities other than AARP. During 2011, the Company entered into affinity
agreements with the American Kennel Club, Sierra Club and the National Wildlife Federation. In
addition to selling product through its relationship with AARP and other affinities, beginning in
2012, the Company will market direct to the consumer within select underwriting markets, acquired
through partnerships or list acquisitions, and to consumers in geographies where it is especially
competitive.
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. During 2011, the Company substantially completed the rollout of its Open Road Advantage
product and, as of December 31, 2011, this product was available in 44 states across the Company’s
distribution channels, including direct and through independent agents. In addition, as of December
31, 2011, the Hartford Home Advantage product was available in 38 states across similar
distribution channels as the Open Road Advantage product.
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 compete by offering agents 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. In addition, a number of companies have invested in telematics — the use of devices in
insured vehicles to transmit information about driving behavior such as miles driven, speed,
acceleration, deceleration — and are using that information to price the risk. Companies that are
the first to introduce telematics may enjoy a competitive advantage through favorable risk
selection.
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Table of Contents
Wealth Management
The Wealth Management division consists of the following reporting segments: Individual Annuity,
Individual Life, Retirement Plans and Mutual Funds. Wealth Management provides investment products
for over 7 million customers and life insurance for approximately 711,000 customers.
In the fourth quarter of 2011, the Company announced that Wellington Management Company, LLP
(“Wellington Management”) will serve as the sole sub-advisor for The Hartford’s non-proprietary
mutual funds, including equity and fixed income funds, pending a fund-by-fund review by The
Hartford’s mutual funds board of directors. As of December 31, 2011, Wellington Management served
as the sub-advisor for 29 of The Hartford’s non-proprietary mutual funds and has been the primary
manager for the Company’s equity funds.
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.
Runoff businesses, including International Annuity, Institutional Annuity and the Private Placement
Life Insurance business, previously reported as part of Wealth Management are now included in the
Life Other Operations segment of the Runoff Operations division formed in 2011.
Principal Products and Services
Individual Annuity offers individual variable, fixed market value adjusted (“fixed MVA”), fixed
index and single premium immediate annuities in the U.S.
Individual Life sells a variety of life insurance products, including variable universal life,
universal life, and term life.
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
Individual 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.
Individual Life’s distribution network includes national and regional broker-dealer organizations,
banks, independent agents, independent life and property-casualty agents, and Woodbury Financial
Services, an indirect, wholly-owned subsidiary retail broker-dealer.
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 markets 529 college savings
plans 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-dealers, consultants,
record keepers, and bank trust groups.
Competition
Individual 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. Individual Annuity’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 2011, the Company continued to enhance
its variable annuity product designed to meet customers future income needs while abiding by the
risk tolerances of the Company.
Individual Life 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. Individual Life’s regional sales office system is a differentiator in the market
and allows it to compete effectively across multiple distribution outlets.
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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.
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 life 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 to affiliated and unaffiliated insurers for both its property and
casualty and life insurance products. Such arrangements do not relieve The Hartford of its primary
liability to policyholders. Failure of reinsurers to honor their obligations could result in
losses to The Hartford.
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 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, 2011, 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. For the years ended December 31, 2011, 2010 and 2009, 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. variable
annuities and the associated guaranteed minimum death benefit (“GMDB”) and guaranteed minimum
withdrawal benefit (“GMWB”) riders, Hartford Life Insurance K.K.’s (“HLIKK”), an indirect wholly
owned subsidiary, variable annuity contract and rider benefits, and Hartford Life Limited Ireland’s
(“HLL”), an indirect wholly owned subsidiary, GMDB and GMWB annuity contract and rider benefits.
For further discussion on reinsurance, see Part II, Item 7, MD&A — Enterprise Risk Management.
Additional discussion may be found in the Company’s accounting policies for reinsurance within Note
6 of the Notes to Consolidated Financial Statements.
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 limits for below
investment grade holdings and foreign currency exposure limits. The Company attempts to minimize
adverse impacts to the portfolio and the Company’s results of operations from changes in economic
conditions through asset allocation limits, asset/liability duration matching and through the use
of derivatives. For further discussion of HIMCO’s portfolio management approach, see Part II, Item
7, MD&A — Enterprise Risk Management — Credit Risk.
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 portfolio
management within a disciplined risk framework that seeks to provide value added returns versus
peers and benchmarks. As of December 31, 2011
and 2010, the fair value of HIMCO’s total assets under management was approximately $165.0 billion
and $159.7 billion, respectively, of which $7.1 billion and $8.7 billion, respectively, were held
in HIMCO managed third party accounts.
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Enterprise Risk Management
The Company has an enterprise risk management function (“ERM”) that is charged with providing
analysis of the Company’s risks on an individual and aggregated basis and with ensuring that the
Company’s risks remain within its risk appetite and tolerances. ERM plays an integral role at The
Hartford by fostering a strong risk management culture and discipline. The mission of ERM is to
support the Company in achieving its strategic priorities by:
| • |
Providing a comprehensive view of the risks facing the Company, including risk
concentrations and correlations;
|
| • |
Helping management define the Company’s overall capacity and appetite for risk by
evaluating the risk return profile of the business relative to the Company’s strategic
intent and financial underpinning;
|
| • |
Assisting management in setting specific risk tolerances and limits that are measurable,
actionable, and comply with the Company’s overall risk philosophy;
|
| • |
Communicating and monitoring the firm’s risk exposures relative to set limits and
recommending, or implementing as appropriate, mitigating strategies; and
|
| • |
Providing valuable insight to assist leaders in growing the businesses and achieving
optimal risk-adjusted returns within established guidelines.
|
Enterprise Risk Management Structure and Governance
At The Hartford, the Board of Directors (“the Board”) 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. In addition, the Finance, Investment and Risk Management Committee
(“FIRMCo”), which is comprised of all members of the Board, has responsibility for oversight of all
financial risk exposures facing the Company, and all risks that do not fall within the oversight
responsibility of any other standing committee. The Audit Committee is responsible for
discussing with management risk assessment policies and overseeing enterprise operational risk.
At the corporate level, the Company’s Enterprise Chief Risk Officer (“ECRO” or “Chief Risk
Officer”) leads ERM. The Chief Risk Officer reports directly to the Company’s Chief Executive
Officer (“CEO”). Reporting to the ECRO are the Chief Insurance Risk Officer (“CIRO”), Chief
Operational Risk Officer (“CORO”), and the Chief Market Risk Officer (“CMRO”). The Company has
established the Enterprise Risk and Capital Committee (“ERCC”) that includes the Company’s CEO,
Chief Financial Officer (“CFO”), Chief Investment Officer (“CIO”), Chief Risk Officer, the
divisional Presidents and the General Counsel. The ERCC is responsible for managing the Company’s
risks and overseeing the enterprise risk management program. The ERCC reports to the Board
primarily through FIRMCo and through interactions with the Audit Committee.
The Company also has committees that manage specific risks and recommend risk mitigation strategies
to the ERCC. These committees include, the Company and Division Asset Liability Committees,
Catastrophe Risk Committee, Emerging Risk Committees, and Operational Risk Committee (“ORC”).
Risk Management Framework
At the Company, risk is managed at multiple levels. The first line of risk management is generally
the responsibility of the lines of business. Senior business leaders are responsible for taking
and managing risks specific to their business objectives and business environment. In many cases,
the second line of risk management is the principal responsibility of ERM. ERM has the responsibility to ensure the
Company has insight into its aggregate risk and that risks are managed within the Company’s overall
risk tolerance. Internal Audit forms the third line of risk management by helping assess and ensure
that risk controls are present and effective.
The Company’s Risk Management Framework consists of four core elements:
| 1. |
Risk Culture and Governance: The Company has established policies for its major risks
and a formal governance structure with leadership oversight and an assignment of
accountability and authority. The governance structure starts at the Board and cascades to
a central executive risk management committee and then to individual risk committees across
the Company. In addition, the Company promotes a strong risk management culture and high
expectations around ethical behavior.
|
| 2. |
Risk Identification and Assessment: Through its ERM organization, the Company has
developed processes for the identification, assessment, and, when appropriate, response to
internal and external risks to the Company’s operations and business objectives. Risk
identification and prioritization has been established within each area, including
processes around emerging risks.
|
| 3. |
Risk Appetite and Limits: The Company has a formal risk appetite statement that is
approved by the Company’s ERCC and reviewed by the Board. Based on its risk appetite, the
Company has implemented stated risk tolerances and an associated limit structure for each
of its major insurance and financial risks. These formal limits are encapsulated in formal
risk policies that are reviewed at least annually by the ERCC.
|
| 4. |
Risk Monitoring, Controls and Communication: The Company monitors its major risks at
the enterprise level through a number of enterprise reports, including but not limited to,
a monthly risk dashboard, tracking the return on risk-capital across products,
and regular stress testing. ERM communicates the Company’s risk exposures to senior and
executive management and the Board, and reviews key business performance metrics, risk
indicators, audit reports, risk/control self assessments and risk event data.
|
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Risk Exposures and Quantification
The Company quantifies its enterprise
insurance and financial risk exposures using multiple lenses including statutory, economic and, where appropriate, U.S. GAAP.
ERM leverages various modeling techniques and metrics to provide a view of the Company’s risk exposure in both normal and stressed environments. ERM regularly
monitors the Company’s risk exposure as compared to defined statutory limits and provides regular
reporting to the ERCC.
In order to quantify group capital levels, risk correlations and concentrations, and the potential
benefits of risk diversification at an enterprise level, the Company performs stress
testing and scenario analysis. The Company uses its Economic Capital Model (“ECM”) to quantify the
value of risk management across the business lines and to advance its risk-based
decision-making and optimization across risk and business. The Company also uses the ECM to
inform the attribution of risk capital to each line of business. ERM supports the attribution of risk capital by line of business and the analysis of
returns on risk capital in conjunction with the Chief Financial Officer.
The Company categorizes its main risks as follows in order to achieve a consistent and disciplined
approach to quantifying, evaluating, and managing risk:
| • |
Insurance Risk
|
| • |
Operational Risk
|
| • |
Financial Risk
|
| • |
Business Risk
|
Insurance Risk
The Company defines insurance risk as its exposure to loss due to property, liability, mortality,
morbidity, disability, longevity and other perils and risks covered under its policies, including
adverse development on loss reserves supporting its products and geographic accumulations of loss
over time due to property or casualty catastrophes.
Operational Risk
The Company defines operational risk as the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events.
Financial Risk
Financial risk is broadly defined by the Company to include liquidity, interest rate, equity,
foreign exchange, and credit risks, all of which have the potential to materially impact the
Company’s financial condition. Financial risk also includes exposure to events that may cause
correlated movement in the above risk factors.
Business Risk
The Company manages its business risk at all levels of the organization. The Company categorizes
its business risk as strategic risk and management risk. Strategic risk is defined as the risk to
the defined company objectives from adverse developments in the Company’s strategy vis-à-vis
changing market conditions and competitor actions. Management risk is defined as the risk to
defined company objectives from the ineffective or inefficient execution of the Company’s strategic
and business decisions. Enterprise strategic and management risks are assessed through strategic,
business and operating plan reviews, as well as through management self-assessment processes and
benchmarking.
For further discussion on risk management, see Part II, Item 7, MD&A — Enterprise Risk Management.
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.
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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, as amended (the “1940
Act”) 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, each of which invests in an underlying mutual fund that is also registered as an
investment company under the 1940 Act (“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 1940 Act. 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.
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 addition, as described under “Legislative Developments,” we are subject to a number of
Dodd-Frank Act provisions. 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 has approximately 24,400 employees as of December 31, 2011.
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. None of the information made
available on The Hartford’s Internet website shall be deemed to be incorporated by reference
herein. Information filed or furnished to the SEC 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, results of operations, or liquidity
of The Hartford and could also cause the trading price of our securities, including our common
stock and other equity-related securities, to experience significant fluctuations and volatility.
The Hartford may also be subject to other general risks that are not specifically enumerated. 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”). The following risk factors are not necessarily listed in order of importance.
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.
The decline of certain global economies, including Europe, and the possible contagion effect, cast
uncertainty regarding the timing and strength of an economic recovery, which negatively affected
our operating environment in 2011. Continued 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 interest rates and 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 (in particular with respect to our variable annuities businesses) will
remain higher than historical levels. If global economies continue to decline, economic conditions
do not broadly improve and real estate valuations do not stabilize and over time increase, we would
expect to experience additional realized and unrealized investment losses, particularly in the real
estate and financial services sectors. 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 refinement of our hedge programs for
our variable annuity businesses. 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 to protect economic value, while being mindful of
statutory surplus, may result in greater earnings volatility under generally accepted accounting
principles 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 that creates
an anticipation of the Company issuing additional common stock or equity linked instruments,
trading prices for our common stock could decline.
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As a result of our ongoing evaluation of the Company’s strategy and business portfolio, we may
pursue one or more transactions or take other actions, which may include discontinuance or placing
in run-off certain lines of business and/or pursuing strategic acquisitions, divestitures or
restructurings, any of which could subject the Company to a number of challenges, uncertainties and
risks or negatively impact our business, financial condition, results of operations or liquidity.
As previously announced, we are evaluating our strategy and business portfolio with the goal of
delivering greater shareholder value. In particular, we noted that while we recognize there are
potential benefits to a separation of our P&C and life companies, there are challenges to
successfully executing such a separation.
As a result of these or other evaluations of the Company’s strategy and business portfolio, we may
pursue one or more transactions or take other actions, which may include discontinuing or placing
in run-off certain lines of business and/or pursuing strategic acquisitions, divestitures or
restructurings. Because these transactions involve a number of challenges, uncertainties and
risks, we may not be able to consummate any such transaction or, if concluded, achieve some or all
of the benefits, including in respect of shareholder value,
that we expect to derive from it. Pursuit of these initiatives may also, among
other things, divert management’s attention and resources or result in a loss of employees or clients,
surrenders, withdrawals, contract terminations or potential adverse capital or tax impacts.
Completion of certain divestitures or restructurings might require consents under the covenants of
our indentures (including in respect of allocation of our indebtedness), might require actions to
satisfy certain rating agency criteria and could result in our retaining insurance or reinsurance
obligations or result in recognition of other contingent liabilities (including in respect of
intercompany guarantees). Any such transactions could
also involve related financing transactions, including the issuance of equity or equity-related
securities that could have a dilutive effect on our shareholders. In addition, the
completion of an acquisition may require use of our capital and may involve difficulty integrating
acquired businesses into our existing operations. Moreover, completion of an acquisition,
divestiture or restructuring may require regulatory approvals or other third-party approvals
(including the consents noted above), and these may not be able to be obtained or may involve
significant additional cost, time, regulatory capital commitments and other regulatory conditions
and obligations. Any such transactions may also be subject to additional significant execution
risks, costs and delays. As a result of any of the foregoing, our business, financial condition, results of
operations and liquidity could be negatively impacted.
We are exposed to significant financial and capital markets risk, including changes in interest
rates, credit spreads, equity prices, market volatility, foreign exchange rates and global real
estate market deterioration that may have a material adverse effect on our business, financial
condition, results of operations, and liquidity.
One important exposure to equity risk relates to the potential for lower earnings associated with
certain of our businesses in Wealth Management and Runoff Operations, such as U.S. and
international 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. Such a decline would also place greater stress
on the variable annuities businesses, which requires significant allocated capital due to rating
agencies and regulatory requirements, including with respect to stress scenarios. Furthermore,
certain of our products offer guaranteed benefits that increase our potential obligation and
statutory capital exposure should equity markets continue to 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. Prolonged low interest rates or market returns are likely to have a negative effect on
the funded status of these plans.
Our exposure to interest rate risk relates primarily to the market price and cash flow variability
associated with changes in interest rates. A rise in interest rates, in the absence of other
countervailing changes, will increase the net unrealized loss position of our investment portfolio
and, if long-term interest rates were to rise dramatically within a six-to-twelve month time
period, certain of our Wealth Management businesses might 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 business, financial condition, results of
operations or liquidity.
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Our statutory surplus is also affected by widening credit spreads as a result of the accounting for
the assets and liabilities on our fixed market value adjusted (“MVA”) annuities. Statutory separate
account assets supporting the fixed MVA annuities are recorded at fair value. In determining the
statutory reserve for the fixed MVA annuities we are required to use current crediting rates in the
U.S. and Japanese LIBOR in Japan. In many capital market scenarios, current crediting rates in the
U.S. are highly correlated with market rates implicit in the fair value of statutory separate
account assets. As a result, the change in the statutory reserve from period to period will likely
substantially offset the change in the fair value of the statutory separate account assets.
However, in periods of volatile credit markets, actual credit spreads on investment assets may
increase sharply for certain sub-sectors of the overall credit market, resulting in statutory
separate account asset market value losses. As actual credit spreads are not fully reflected in
current crediting rates in the U.S. or Japanese LIBOR in Japan, the calculation of statutory
reserves will not substantially offset the change in fair value of the statutory separate account
assets resulting in reductions in statutory surplus. This has resulted and may continue to result
in the need to devote significant additional capital to support the 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 recent past has 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 business, financial condition, results of operations and liquidity.
Concentration of our investment portfolio in any particular segment of the economy may have adverse
effects on our business, financial condition, results of operations and liquidity.
The concentration of our investment portfolios in any particular industry, collateral type, group
of related industries or geographic sector could have an adverse effect on our investment
portfolios and consequently on our business, financial condition, results of operations and
liquidity. Events or developments that have a negative impact on any particular industry, group of
related industries or geographic region may have a greater adverse effect on our investment
portfolio to the extent that the portfolio is concentrated rather than diversified.
Our adjustment of our risk management program relating to products we offer with guaranteed
benefits to emphasize protection of statutory surplus and cash flows 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 and previously offered by our Life
Other Operations business, 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
starting in the fourth quarter of 2008, we have adjusted our risk management program to place
greater relative emphasis on the protection of statutory surplus and cash flows. This shift in
relative emphasis has resulted in greater U.S. GAAP earnings volatility 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 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 business, financial condition, results of operations and liquidity.
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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. Our
international operations are subject to regulation in the relevant jurisdiction in which they
operate, which in many ways is similar to the state regulation outlined above, with similar related
restrictions and obligations.
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. For example, while our property and casualty
companies are expected to generate statutory surplus in 2012, our life companies’ statutory surplus
is expected to be flat to negative in 2012, as compared to 2011, primarily due to high variable annuity hedge losses
compared to fees earned and a depression on statutory earnings in other life businesses due largely
to continued low interest rates and high loss cost trends in Group Benefits. 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, financial condition, results of operations
and liquidity.
Financial strength and credit ratings, including commercial paper ratings, are important in
establishing the competitive position of insurance companies. Rating agencies assign ratings based
upon several factors. While most of the factors relate to the rated company, some of the factors
relate to the views of the rating agency, general economic conditions, and circumstances outside
the rated company’s control. In addition, rating agencies may employ different models and formulas
to assess the financial strength of a rated company, and from time to time rating agencies have, at
their discretion, altered these models. Changes to the models, general economic conditions, or
circumstances outside our control could impact a rating agency’s judgment of its rating and the
rating it assigns us. We cannot predict what actions rating agencies may take, or what actions we
may take in response to the actions of rating agencies, which may adversely affect us.
Our financial strength ratings, which are intended to measure our ability to meet policyholder
obligations, are an important factor affecting public confidence in most of our products and, as a
result, our competitiveness. A downgrade or 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,
financial condition, results of operations and liquidity.
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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 or 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:
| • |
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.
|
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, European private and sovereign issuers, 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, business, financial condition, results of
operations and liquidity.
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 business, financial condition, results of operations and liquidity.
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, high unemployment rates and the
associated property value declines, ultimately resulting in a reduction in expected future cash
flows for certain securities. The Company also has exposure to European based issuers of
securities and providers of reinsurance, as well as indirect European exposure resulting from the
variable annuity products that it has sold in Japan and the United Kingdom. Further details of the
European private and sovereign issuers held within the investment portfolio and indirect variable
annuity exposures can be found in Part II, Item 7, MD&A — Enterprise Risk Management — Investment
Portfolio Risks and Risk Management. The Company’s European based reinsurance arrangements are
further described in Part II, Item 7, MD&A — Enterprise Risk Management — Investment Portfolio
Risks and Risk Management — European Exposure.
Further property value declines and loss rates that exceed our current estimates, as outlined in
Part II, Item 7, MD&A — Enterprise Risk Management — Other-Than-Temporary Impairments, a
worsening of general economic conditions, including the European financial crisis, could have a
material adverse effect on our business, financial condition, results of operations and liquidity.
To the extent the investment portfolio is not adequately diversified, concentrations of credit risk
may exist which could negatively impact the Company if significant adverse events or developments
occur in any particular industry, group of related industries or geographic regions. 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.
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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. As previously announced, we are evaluating our strategy and
business portfolios with the goal of delivering greater shareholder value. Certain strategic
transactions may adversely affect our ability to realize our deferred tax assets.
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, financial condition,
results of operations 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 results during the period or periods
affected and, could adversely affect our business, financial condition, results of operations and
liquidity. 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
or other geopolitical or military crises, 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, financial condition, results of
operations and liquidity.
Our business, financial condition, results of operations and liquidity 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 business, financial condition, results of operations and liquidity.
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It is difficult for us to predict our potential exposure for asbestos and environmental claims, and
our ultimate liability may exceed our currently recorded reserves, which may have a material
adverse effect on our business, financial condition, results of operations 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 longer-tailed 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. Increases in reserves would be recognized as an expense during the
periods in which these determinations are made, thereby adversely affecting our results of
operations for the related periods. Any such additional liability cannot be reasonably estimated
now, but could have a material adverse effect on our business, financial condition, results of
operations and liquidity.
We are particularly vulnerable to losses from catastrophes, both natural and man-made, which could
materially and adversely affect our business, 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, tornadoes in the Midwest
and Southeast, 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 business, financial condition, results of operations and liquidity.
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 pricing
of our products or result in additional risk-shifting to the insurance industry.
We may incur losses due to our reinsurers’ unwillingness or inability to meet their obligations
under reinsurance contracts and the availability, pricing and adequacy of reinsurance may not be
sufficient to protect us against losses.
As an insurer, we frequently seek to reduce the losses that may arise from catastrophes, or 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 results of operations. In addition, market conditions beyond our
control determine the availability and cost of the reinsurance we are able to purchase.
Historically, reinsurance pricing has changed significantly from time to time. No assurances can
be made that reinsurance will remain continuously available to us to the same extent and on the
same terms as are currently available. If we were unable to maintain our current level of
reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at
prices that we consider acceptable, we would have to either accept an increase in our net liability
exposure, reduce the amount of business we write, or develop other alternatives to reinsurance.
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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. 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. 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.
We may experience difficulty in marketing, distributing and providing investment advisory services
in relation to our products through current and future distribution channels and advisory firms.
We distribute our annuity, life, property and casualty insurance products and mutual funds 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. In addition, we work with a
number of key investment advisers in managing our products and mutual funds. In December 2011, for
example, we entered into a 5-year agreement with Wellington Management Company as the preferred
sub-advisor for The Hartford Mutual Funds. 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, including potentially as a result of a strategic transaction, could materially affect our
ability to market our products and could have a material adverse effect on our business, financial
condition, results of operations and liquidity.
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 business, financial condition, 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 Federal Reserve, the Federal Deposit Insurance
Corporation (“FDIC”), 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 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.
Certain provisions of the Dodd-Frank Act 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. Other provisions in the Dodd-Frank Act that may impact us include: a new
“Federal Insurance Office” within Treasury; 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; possible adverse impact on the pricing and liquidity of the
securities in which we invest resulting from the proprietary trading and market making limitation of the Volcker Rule; possible prohibition of certain asset-backed
securities transactions that could adversely impact our ability to offer insurance-linked
securities; and enhancements to corporate governance, especially regarding risk management.
In particular, the Dodd-Frank Act vests a newly created Financial Services Oversight Council
(“FSOC”) 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 large bank holding companies and nonbank financial companies that are so important that
their potential failure could “pose a threat to the financial stability of the United States.” The
FSOC released a second notice of proposed rulemaking setting forth the process they propose to
follow when designating systemically important nonbank financial companies in October 2011, but has
not yet released a final rule or indicated when the FSOC will begin designating systemically
important nonbank financial companies.
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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 FDIC to recoup the costs associated with the orderly
liquidation 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. We may also be restricted from sponsoring and investing in private equity and hedge
funds, which would limit our discretion in managing our general account. The Federal Reserve
issued a proposed rule in December 2011 that would apply capital and liquidity requirements,
single-counterparty credit limits, and stress testing and risk management requirements to
systemically important institutions, and subject such institutions to an early remediation regime
based on these requirements. The Federal Reserve has noted that they may tailor the application of
the proposed rule to the particular attributes of systemically important nonbank financial
companies. If The Hartford were to be designated as systemically important by the FSOC, these
requirements could apply to The Hartford. However, it is not yet clear how or to what extent these
requirements would be applied to systemically important nonbank financial companies.
We may experience unfavorable judicial or legislative developments involving claim litigation that
could have a material adverse effect on our business, financial condition, results of operations
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 business, financial condition, results of operations and liquidity
could also be adversely affected if judicial or legislative developments cause our ultimate
liabilities to increase from current expectations.
Our business, financial condition, results of operations 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, financial condition, results
of operations and liquidity at the time it becomes known.
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, financial condition,
results of operations 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.
State insurance laws regulate most aspects of our U.S. insurance businesses, and our insurance
subsidiaries are regulated by the insurance departments of the states in which they are domiciled,
licensed or authorized to conduct business. U.S. state laws grant insurance regulatory authorities
broad administrative powers with respect to, among other things:
| • |
licensing companies and agents to transact business;
|
||
| • |
calculating the value of assets to determine compliance with statutory requirements;
|
||
| • |
mandating certain insurance benefits;
|
||
| • |
regulating certain premium rates;
|
||
| • |
reviewing and approving policy forms;
|
||
| • |
regulating unfair trade and claims practices, including through the imposition of
restrictions on marketing and sales practices, distribution arrangements and payment of
inducements;
|
||
| • |
protecting privacy;
|
||
| • |
establishing statutory capital and reserve requirements and solvency standards;
|
||
| • |
fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed
crediting rates on life insurance policies and annuity contracts;
|
||
| • |
approving changes in control of insurance companies;
|
||
| • |
approving acquisitions, divestitures and similar transactions;
|
||
| • |
restricting the payment of dividends to the parent company and other transactions
between affiliates;
|
||
| • |
establishing assessments and surcharges for guaranty funds, second-injury funds and
other mandatory pooling arrangements;
|
||
| • |
requiring insurers to dividend any excess profits to policy holders; and
|
||
| • |
regulating the types, amounts and valuation of investments.
|
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Because these laws and regulations are complex and sometimes inexact, there is also a risk that any
particular regulator’s or enforcement authority’s interpretation of a legal, accounting, or
reserving issue may change over time to our detriment, or expose us to different or additional
regulatory risks. For example, certain of our domestic life insurance subsidiaries use the NAIC’s
Model Regulation entitled “Valuation of Life Insurance Policies,” commonly known as Regulation XXX,
in setting statutory reserves for term life insurance policies with long-term premium guarantees
and universal life policies with secondary guarantees
.
In addition, Actuarial Guideline 38 (“AG38”
or “AXXX”) clarifies the application of Regulation XXX with respect to universal life insurance
policies with secondary guarantees, i.e., a guaranteed death benefit for a specified period of
time, often for life. Virtually all of our in force universal life insurance products are now
affected by Regulation XXX and AXXX. The application of these regulations and guidelines by
insurers involves interpretations and judgments that may not be consistent with the opinion of
state insurance departments. We cannot provide assurance that such differences of opinion will not
result in regulatory, tax or other challenges to the actions we have taken to date. The result of
those potential challenges could require us to increase statutory reserves or incur higher
operating and/or tax costs. Moreover, it is possible that the reinsurance and capital management
actions we have taken to mitigate the impact of Regulation XXX and AXXX on our universal life
insurance business may face regulatory, rating agency or other challenges. Furthermore, we may be
unable to continue to implement actions to mitigate the impact of these regulations on future sales
of term life insurance and universal life policies, resulting in lower returns on such products
than we currently anticipate or reduce our sales of these products.
Furthermore, our international operations are subject to regulation in the relevant jurisdictions
in which they operate (primarily the Japan Financial Services Agency and the United Kingdom Financial Services Authority), 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.
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, financial condition, results of
operations and liquidity. See the risk factor, “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 business, financial condition, results of operations and
liquidity.”
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 which, together with 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, or
|
| • |
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. Dividends paid to us by our
insurance subsidiaries are further dependent on their cash requirements. For further discussion on
dividends from insurance subsidiaries, see Part II, Item 7, MD&A — Capital Resources & Liquidity.
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, 2011, claims by policyholders
for benefits payable amounting to $117.1 billion, claims by separate account holders of $143.9
billion, and other liabilities including claims of trade creditors, claims from guaranty
associations and claims from holders of debt obligations, amounting to $13.0 billion.
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, 2011, 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.
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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 business, financial
condition, results of operations and liquidity.
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
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 business, financial condition, results
of operations and liquidity.
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 all
of our property and casualty insurance product lines and states, there is a risk that the premium
we charge may ultimately prove to be inadequate as reported losses emerge. In addition, 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
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 a cyber or other information security incident, our ability
to conduct business may be compromised, we may incur substantial costs and suffer other negative
consequences, all of which may have a material adverse effect on our business, financial condition,
results of operations and liquidity.
We use computer systems to process, 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 third parties, to access these systems to perform necessary business
functions, including, without limitation, conducting our financial reporting and analysis,
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, a pandemic, an industrial
accident, a blackout, a terrorist attack or war, systems upon which we rely may be inaccessible to
our employees, customers or business partners for an extended period of time. Even if our
employees and business partners 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 used to conduct our business are
disabled or destroyed.
Moreover, our systems may be subject to a computer virus or other malicious code, unauthorized
access, a cyber-attack or other computer related violation. Such an event could compromise our
confidential information as well as that of our clients and third parties with whom we interact,
impede or interrupt our business operations and may result in other negative consequences,
including remediation costs, loss of revenue, additional regulatory scrutiny and litigation and
reputational damage.
In addition, we routinely transmit, receive and store personal, confidential and proprietary
information by email and other electronic means. Although we attempt to keep such information
confidential, we may be unable to utilize such capabilities in all events, especially with clients,
vendors, service providers, counterparties and other third parties who may not have or use
appropriate controls to protect confidential information. Furthermore, certain of our businesses
are subject to compliance with regulations enacted by U.S. federal and state governments, the
European Union, Japan or other jurisdictions or enacted by various regulatory organizations or
exchanges relating to the privacy of the information of clients, employees or others. A misuse or
mishandling of confidential or proprietary information being sent to or received from an employee
or third party could result in legal liability, regulatory action and reputational harm.
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Third parties to whom we outsource certain of our functions are also subject to the risks outlined
above, any one of which may result in our incurring substantial costs and other negative
consequences, including a material adverse effect on our business, financial condition, results of
operations and liquidity.
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, cyber security attacks 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 results of operations. For other risks associated with our
outsourcing of certain functions, see the risk factor, “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 a cyber or other information security incident, our ability to conduct business may be
compromised, we may incur substantial costs and suffer other negative consequences, all of which
may have a material adverse effect on our business, financial condition, results of operation and
liquidity.”
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, financial
condition, results of operations and 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. For example, on February 13, 2012,
the Obama Administration released its “FY 2013, Budget of the United States Government” that
includes proposals which, if enacted, would adversely affect the Company’s sale of variable
annuities and variable life products and its profits on corporate owned life insurance policies.
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 have a material
adverse effect on our profitability and financial condition, and 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.
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We may not be able to protect our intellectual property and may be subject to infringement claims.
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret
laws to establish and protect our intellectual property. Although we use a broad range of measures
to protect our intellectual property rights, third parties may infringe or misappropriate our
intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks,
patents, trade secrets and know-how or to determine their scope, validity or enforceability, which
represents a diversion of resources that may be significant in amount and may not prove successful.
The loss of intellectual property protection or the inability to secure or enforce the protection
of our intellectual property assets could have a material adverse effect on our business and our
ability to compete.
We also may be subject to costly litigation in the event that another party alleges our operations
or activities infringe upon another party’s intellectual property rights. Third parties may have,
or may eventually be issued, patents that could be infringed by our products, methods, processes or
services. Any party that holds such a patent could make a claim of infringement against us. We may
also be subject to claims by third parties for breach of copyright, trademark, trade secret or
license usage rights. Any such claims and any resulting litigation could result in significant
liability for damages. If we were found to have infringed a third-party patent or other
intellectual property rights, we could incur substantial liability, and in some circumstances could
be enjoined from providing certain products or services to our customers or utilizing and
benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses, or
alternatively could be required to enter into costly licensing arrangements with third parties, all
of which could have a material adverse effect on our business, results of operations and financial
condition.
| Item 1B. |
UNRESOLVED STAFF COMMENTS
|
None.
| Item 2. |
PROPERTIES
|
As of December 31, 2011, The Hartford owned building space of approximately 2.9 million square
feet, of which approximately 2.6 million square feet comprised its Hartford, Connecticut location
and other properties within the greater Hartford, Connecticut area. In addition, as of December
31, 2011, The Hartford leased approximately 3.2 million square feet, throughout the United States
of America, and approximately 68 thousand square feet, in other countries. All of the properties
owned or leased are used by one or more of all nine 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.
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| 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, and in addition to the matters described
below, 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, the outcome in certain matters could,
from time to time, have a material adverse effect on the Company’s 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, 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 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. In March 2011, the
Company reached an agreement in principle to settle on a class basis the property casualty
insurance case for an immaterial amount. The settlement was preliminarily approved by the court in June 2011,
and is contingent upon final court approval.
28
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 was preliminarily approved by the court in January 2012, and is contingent upon final
court approval.
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 (“HIFSCO”), an indirect subsidiary of the
Company, received excessive advisory and distribution fees in violation of its statutory fiduciary
duty under Section 36(b) of the Investment Company Act of 1940. In February 2011, a nearly
identical derivative action was brought against HIFSCO in the United States District Court for the
District of New Jersey on behalf of six additional Hartford retail mutual funds. Both actions were
assigned to the Honorable Renee Marie Bumb, a judge in the District of New Jersey who was sitting
by designation with respect to the Delaware action. Plaintiffs in each action seek to rescind the
investment management agreements and distribution plans between HIFSCO and the Hartford mutual
funds and to recover the total fees charged thereunder or, in the alternative, to recover any
improper compensation HIFSCO received. In addition, plaintiffs in the New Jersey action seek
recovery of lost earnings. HIFSCO moved to dismiss both actions and, in September 2011, the
motions to dismiss were granted in part and denied in part, with leave to amend the complaints. In
November 2011, a stipulation of voluntary dismissal was filed in the Delaware action and plaintiffs
in the New Jersey action filed an amended complaint on behalf of six Hartford mutual funds, seeking
the same relief as in their original complaint. HIFSCO disputes the allegations and has filed a
partial motion to dismiss.
Asbestos and Environmental Claims
— As discussed in Part II, Item 7, MD&A — Critical Accounting
Estimates — Property and Casualty Insurance Product Reserves, Net of Reinsurance — Reserving for
Asbestos and Environmental Claims within Property & Casualty 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.
| Item 4. |
MINE SAFETY DISCLOSURES
|
Not applicable.
29
Table of Contents
| 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. | |||||||||||||
|
2011
|
||||||||||||||||
|
Common Stock Price
|
||||||||||||||||
|
High
|
$ | 30.80 | $ | 28.97 | $ | 27.05 | $ | 20.27 | ||||||||
|
Low
|
$ | 24.75 | $ | 23.81 | $ | 15.82 | $ | 14.92 | ||||||||
|
Dividends Declared
|
$ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | ||||||||
|
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 | ||||||||
On February 23, 2012, The Hartford’s Board of Directors declared a quarterly dividend of $0.10 per
common share payable on April 2, 2012 to common shareholders of
record as of March 5, 2012.
As of
February 17, 2012, the Company had approximately 269,700 shareholders. The closing price of
The Hartford’s common stock on the NYSE on February 17, 2012 was $21.65.
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, 2011:
| Approximate Dollar | ||||||||||||||||
| Total Number of | Value of Shares that | |||||||||||||||
| Shares Purchased | May Yet Be | |||||||||||||||
| Average | as Part of Publicly | Purchased Under | ||||||||||||||
| Total Number of | Price Paid | Announced Plans | the Plans or | |||||||||||||
| Period | Shares Purchased | Per Share | or Programs | Programs | ||||||||||||
| (in millions) | ||||||||||||||||
|
October 1, 2011 – October 31, 2011
|
8,014 | [1] | $ | 18.36 | — | $ | 500 | |||||||||
|
November 1, 2011 – November 30, 2011
|
12,649 | [1] | $ | 19.25 | — | $ | 500 | |||||||||
|
December 1, 2011 – December 31, 2011
|
3,226,945 | $ | 15.93 | 3,225,000 | $ | 449 | ||||||||||
|
|
||||||||||||||||
|
Total
|
3,247,608 | $ | 15.95 | 3,225,000 | N/A | |||||||||||
|
|
||||||||||||||||
| [1] |
Primarily represents shares acquired from employees of the Company for tax withholding
purposes in connection with the Company’s stock compensation plans.
|
On July 27, 2011 the Company’s Board of Directors authorized a $500 stock repurchase program.
The Company’s repurchase authorization, which expires on August 5, 2014, permits purchases of
common stock, as well as warrants or other derivative securities. Repurchases may be made in the
open market, through derivative, accelerated share repurchase and other privately negotiated
transactions, and through plans designed to comply with Rule 10b5-1(c) under the Securities
Exchange Act of 1934, as amended. 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 Hartford has repurchased $94 of
its common stock under this program through February 17, 2012.
30
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 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||
|
The Hartford Financial Services Group, Inc.
|
(4.55 | %) | (79.99 | %) | 43.91 | % | 14.89 | % | (37.55 | %) | ||||||||||
|
S&P 500 Index
|
5.49 | % | (37.00 | %) | 26.46 | % | 15.06 | % | 2.11 | % | ||||||||||
|
S&P Insurance Composite Index
|
(6.31 | %) | (58.14 | %) | 13.90 | % | 15.80 | % | (8.28 | %) | ||||||||||
| Cumulative Five-Year Total Return | ||||||||||||||||||||||||
| Base | ||||||||||||||||||||||||
| Period | For the Years Ended | |||||||||||||||||||||||
| Company/Index | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||||
|
The Hartford Financial Services Group, Inc.
|
$ | 100 | 95.45 | 19.10 | 27.48 | 31.57 | 19.72 | |||||||||||||||||
|
S&P 500 Index
|
$ | 100 | 105.49 | 66.46 | 84.05 | 96.71 | 98.76 | |||||||||||||||||
|
S&P Insurance Composite Index
|
$ | 100 | 93.69 | 39.22 | 44.67 | 51.72 | 47.44 | |||||||||||||||||
31
Table of Contents
| Item 6. |
SELECTED FINANCIAL DATA
|
(In millions, except for per share data and combined ratios)
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
|
Income Statement Data
|
||||||||||||||||||||
|
Earned premiums
|
$ | 14,088 | $ | 14,055 | $ | 14,424 | $ | 15,503 | $ | 15,619 | ||||||||||
|
Fee income
|
4,750 | 4,748 | 4,547 | 5,103 | 5,408 | |||||||||||||||
|
Net investment income (loss):
|
||||||||||||||||||||
|
Securities available-for-sale and other
|
4,272 | 4,364 | 4,017 | 4,327 | 5,203 | |||||||||||||||
|
Equity securities, trading
|
(1,359 | ) | (774 | ) | 3,188 | (10,340 | ) | 145 | ||||||||||||
|
|
||||||||||||||||||||
|
Total net investment income (loss)
|
2,913 | 3,590 | 7,205 | (6,013 | ) | 5,348 | ||||||||||||||
|
|
||||||||||||||||||||
|
Net realized capital losses:
|
||||||||||||||||||||
|
Total other-than-temporary impairment (“OTTI”) losses
|
(263 | ) | (852 | ) | (2,191 | ) | (3,964 | ) | (483 | ) | ||||||||||
|
OTTI losses recognized in other comprehensive income
|
89 | 418 | 683 | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net OTTI losses recognized in earnings
|
(174 | ) | (434 | ) | (1,508 | ) | (3,964 | ) | (483 | ) | ||||||||||
|
Net realized capital losses, excluding net OTTI losses recognized in earnings
|
29 | (177 | ) | (496 | ) | (1,941 | ) | (512 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Total net realized capital gains (losses)
|
(145 | ) | (611 | ) | (2,004 | ) | (5,905 | ) | (995 | ) | ||||||||||
|
Other revenues
|
253 | 267 | 261 | 249 | 243 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total revenues
|
21,859 | 22,049 | 24,433 | 8,937 | 25,623 | |||||||||||||||
|
Benefits, losses and loss adjustment expenses
|
14,625 | 13,025 | 13,831 | 14,088 | 13,919 | |||||||||||||||
|
Benefits, losses and loss adjustment expenses — returns credited on international
variable annuities
|
(1,359 | ) | (774 | ) | 3,188 | (10,340 | ) | 145 | ||||||||||||
|
Amortization of deferred policy acquisition costs and present value of future profits
|
3,427 | 2,527 | 4,257 | 4,260 | 2,982 | |||||||||||||||
|
Insurance operating costs and other expenses
|
4,398 | 4,407 | 4,370 | 4,448 | 4,357 | |||||||||||||||
|
Interest expense
|
508 | 508 | 476 | 343 | 263 | |||||||||||||||
|
Goodwill impairment
|
30 | — | 32 | 745 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total benefits, losses and expenses
|
21,629 | 19,693 | 26,154 | 13,544 | 21,666 | |||||||||||||||
|
Income (loss) from continuing operations before income taxes
|
230 | 2,356 | (1,721 | ) | (4,607 | ) | 3,957 | |||||||||||||
|
Income tax expense (benefit)
|
(346 | ) | 612 | (838 | ) | (1,848 | ) | 1,040 | ||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing operations, net of tax
|
576 | 1,744 | (883 | ) | (2,759 | ) | 2,917 | |||||||||||||
|
Income (loss) from discontinued operations, net of tax
|
86 | (64 | ) | (4 | ) | 10 | 32 | |||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss)
|
662 | 1,680 | (887 | ) | (2,749 | ) | 2,949 | |||||||||||||
|
Preferred stock dividends and accretion of discount
|
42 | 515 | 127 | 8 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss) available to common shareholders
|
$ | 620 | $ | 1,165 | $ | (1,014 | ) | $ | (2,757 | ) | $ | 2,949 | ||||||||
|
|
||||||||||||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||
|
Separate account assets
|
$ | 143,870 | $ | 159,742 | $ | 150,394 | $ | 130,184 | $ | 199,946 | ||||||||||
|
Total assets
|
304,064 | 318,346 | 307,717 | 287,583 | 360,361 | |||||||||||||||
|
Total debt (including capital lease obligations)
|
6,216 | 6,607 | 5,839 | 6,221 | 4,507 | |||||||||||||||
|
Separate account liabilities
|
143,870 | 159,742 | 150,394 | 130,184 | 199,946 | |||||||||||||||
|
Common equity, excluding AOCI
|
21,197 | 20,756 | 18,217 | 16,788 | 20,062 | |||||||||||||||
|
Preferred Stock
|
556 | 556 | 2,960 | — | — | |||||||||||||||
|
AOCI, net of tax
|
1,157 | (1,001 | ) | (3,312 | ) | (7,520 | ) | (858 | ) | |||||||||||
|
Total stockholders’ equity
|
22,910 | 20,311 | 17,865 | 9,268 | 19,204 | |||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing operations, net of tax, available to common
shareholders per common share
|
||||||||||||||||||||
|
Basic
|
$ | 1.20 | $ | 2.85 | $ | (2.92 | ) | $ | (9.02 | ) | $ | 9.22 | ||||||||
|
Diluted
|
1.12 | 2.62 | (2.92 | ) | (9.02 | ) | 9.14 | |||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss) available to common shareholders per common share
|
||||||||||||||||||||
|
Basic
|
$ | 1.39 | $ | 2.70 | $ | (2.93 | ) | $ | (8.99 | ) | $ | 9.32 | ||||||||
|
Diluted
|
1.30 | 2.49 | (2.93 | ) | (8.99 | ) | 9.24 | |||||||||||||
|
Cash dividends declared per common share
|
0.40 | 0.20 | 0.20 | 1.91 | 2.03 | |||||||||||||||
|
|
||||||||||||||||||||
|
Other Data
|
||||||||||||||||||||
|
Total revenues, excluding net investment income on equity securities, trading
|
$ | 23,218 | $ | 22,823 | $ | 21,245 | $ | 19,277 | $ | 25,478 | ||||||||||
|
Unlock benefit (charge), after-tax
|
$ | (530 | ) | $ | 111 | $ | (1,034 | ) | $ | (932 | ) | $ | 213 | |||||||
|
Total investments, excluding equity securities, trading
|
$ | 104,449 | $ | 98,175 | $ | 93,235 | $ | 89,287 | $ | 94,904 | ||||||||||
|
|
||||||||||||||||||||
32
Table of Contents
AND RESULTS OF OPERATIONS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
addresses the financial condition of The Hartford Financial Services Group, Inc. and its
subsidiaries (collectively, “The Hartford” or the “Company”) as of December 31, 2011, compared with
December 31, 2010, and its results of operations for each of the three years in the period ended
December 31, 2011. 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 2011 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.
INDEX
| Description | Page | |||
|
|
||||
| 34 | ||||
|
|
||||
| 37 | ||||
|
|
||||
| 39 | ||||
|
|
||||
| 64 | ||||
|
|
||||
| 70 | ||||
|
|
||||
| 76 | ||||
|
|
||||
| 79 | ||||
|
|
||||
| 80 | ||||
|
|
||||
| 83 | ||||
|
|
||||
| 85 | ||||
|
|
||||
| 87 | ||||
|
|
||||
| 89 | ||||
|
|
||||
| 90 | ||||
|
|
||||
| 92 | ||||
|
|
||||
| 93 | ||||
|
|
||||
| 94 | ||||
|
|
||||
| 121 | ||||
|
|
||||
| 131 | ||||
33
Table of Contents
CONSOLIDATED RESULTS OF OPERATIONS
| Increase | Increase | |||||||||||||||||||
| (Decrease) From | (Decrease) From | |||||||||||||||||||
| Net income (loss) by segment | 2011 | 2010 | 2009 | 2010 to 2011 | 2009 to 2010 | |||||||||||||||
|
Property & Casualty Commercial
|
$ | 528 | $ | 995 | $ | 899 | $ | (467 | ) | $ | 96 | |||||||||
|
Group Benefits
|
90 | 185 | 193 | (95 | ) | (8 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Commercial Markets
|
618 | 1,180 | 1,092 | (562 | ) | 88 | ||||||||||||||
|
|
||||||||||||||||||||
|
Consumer Markets
|
5 | 143 | 140 | (138 | ) | 3 | ||||||||||||||
|
|
||||||||||||||||||||
|
Individual Annuity
|
(14 | ) | 527 | (444 | ) | (541 | ) | 971 | ||||||||||||
|
Individual Life
|
133 | 229 | 15 | (96 | ) | 214 | ||||||||||||||
|
Retirement Plans
|
15 | 47 | (222 | ) | (32 | ) | 269 | |||||||||||||
|
Mutual Funds
|
98 | 132 | 34 | (34 | ) | 98 | ||||||||||||||
|
|
||||||||||||||||||||
|
Wealth Management
|
232 | 935 | (617 | ) | (703 | ) | 1,552 | |||||||||||||
|
Life Other Operations
|
358 | (90 | ) | (698 | ) | 448 | 608 | |||||||||||||
|
|
||||||||||||||||||||
|
Property & Casualty Other Operations
|
(117 | ) | (53 | ) | (78 | ) | (64 | ) | 25 | |||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Corporate
|
(434 | ) | (435 | ) | (726 | ) | 1 | 291 | ||||||||||||
|
|
||||||||||||||||||||
|
Total net income (loss)
|
$ | 662 | $ | 1,680 | $ | (887 | ) | $ | (1,018 | ) | $ | 2,567 | ||||||||
|
|
||||||||||||||||||||
Year ended December 31, 2011 compared to the year ended December 31, 2010
The decrease in net income from 2010 to 2011 was primarily due to the following items:
| • |
An Unlock charge of $530, after-tax, in 2011 compared to an Unlock benefit of $111,
after-tax, in 2010. The charge in 2011 was primarily driven by assumption changes which
reduced expected future gross profits including additional costs associated with implementing
the Japan hedging strategy and the U.S. variable annuity macro hedge program, as well as
actual separate account returns below our aggregated estimated return. The Unlock benefit for
2010 was attributable to actual separate account returns being above our aggregated estimated
return and the impact of assumption updates primarily related to decreasing lapse and
withdrawal rates and lower hedge costs. For further discussion of Unlocks see the Critical
Accounting Estimates within the MD&A.
|
| • |
Current accident year catastrophe losses of $484, after-tax, in 2011 compared to $294,
after-tax, in 2010. The losses in 2011 primarily relate to more severe tornadoes and wind
storms in the Midwest and Southeast, Hurricane Irene, and winter storms in the Northeast and
Midwest. The losses in 2010 include severe windstorm events, including a hail storm in
Arizona, tornadoes and hail in the Midwest, Plains States and the Southeast and winter storms
in the Mid-Atlantic and Northeast.
|
| • |
The Company recorded reserve strengthening of $31, after-tax, in 2011, compared to reserve
releases of $294, after-tax, in 2010, in its property and casualty insurance prior accident
years development, excluding asbestos and environmental reserves. For additional information
regarding prior accident years development, see Critical Accounting Estimates within the MD&A.
|
| • |
An asbestos reserve strengthening of $189, after-tax, in 2011, compared to $110, after-tax,
in 2010 resulting from the Company’s annual review of its asbestos liabilities in Property &
Casualty Other Operations. The reserve strengthening in 2011 was primarily driven by higher
frequency and severity of mesothelioma claims, particularly against certain smaller, more
peripheral insureds, while the reserve strengthening in 2010 was primarily driven by increases
in claim severity and expenses. For further information, see Property & Casualty Other
Operations Claims within the Property and Casualty Insurance Product Reserves, Net of
Reinsurance section in Critical Accounting Estimates.
|
| • |
A $73, after-tax, charge in the second quarter of 2011 related to the write-off of
capitalized costs associated with a policy administration software project that was
discontinued.
|
Partially offsetting these decreases in net income were following items:
| • |
Income (loss) from discontinued operations, net of tax, increased due to a realized gain on
the sale of Specialty Risk Services of $150, after-tax, in the first quarter of 2011, which
was partially offset by a loss of $74, after-tax, from the disposition of Federal Trust
Corporation in the second quarter of 2011. In 2010, loss from discontinued operations, net of
tax, primarily relates to goodwill impairment on Federal Trust Corporation of approximately
$100, after-tax, recorded in the second quarter of 2010.
|
| • |
The first quarter of 2010 includes an accrual for a litigation settlement of $73,
before-tax, for a class action lawsuit related to structured settlements.
|
34
Table of Contents
| • |
Income tax expense (benefit) in 2010 includes a valuation allowance expense of $87 compared to a
benefit of $78 in 2011. See Note 13 of the Notes to Consolidated Financial Statements for a
reconciliation of the tax provision at the U.S. Federal statutory rate to the provision for
income taxes.
|
| • |
In the second quarter of 2011, the Company recorded a $52 income tax benefit related to a
resolution of a tax matter with the IRS for the computation of dividends received deduction
(“DRD”) for years 1998, 2000 and 2001. For additional information see Note 13 of the Notes to
Consolidated Financial Statements.
|
| • |
See the segment sections of the MD&A for a discussion on their respective performances.
|
Year ended December 31, 2010 compared to the year ended December 31, 2009
The change from net loss in 2009 to net income in 2010 was primarily due to the following items:
| • |
An Unlock benefit of $111, after-tax, in 2010 compared to an Unlock charge of $1.0 billion,
after-tax, in 2009. The Unlock benefit for 2010 was attributable to actual separate account
returns being above our aggregated estimated return and the impact of assumption updates
primarily related to decreasing lapse and withdrawal rates, partially offset by hedging,
annuitization estimates on Japan products, and long-term expected rate of return updates. The
Unlock charge for 2009 was primarily driven by 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 remainder
of 2009. For further discussion of Unlocks see the Critical Accounting Estimates within the
MD&A.
|
| • |
Net realized capital losses decreased primarily due to lower impairment losses, lower
valuation allowances on mortgage loans, and net gains on sales in 2010 compared to net losses
on sales in 2009. These changes were partially offset by losses on the variable annuity hedge
program in 2010 compared to gains in 2009. For further discussion, see Net Realized Capital
Gains (Losses) within Investment Results of Key Performance Measures and Ratios of this MD&A.
|
Partially offsetting these changes in net income (loss) were the following items:
| • |
An asbestos reserve strengthening of $110, after-tax, in 2010, compared to $90, after-tax,
in 2009 resulting from the Company’s annual review of its asbestos liabilities within Property
& Casualty Other Operations. The reserve strengthening in 2010 and 2009 was primarily driven
by increases in claim severity and expenses, particularly attributed to litigation in certain
jurisdictions, and, to a lesser extent, development on primarily peripheral accounts. For
further information, see Property & Casualty Other Operations Claims within the Property and
Casualty Insurance Product Reserves, Net of Reinsurance section in Critical Accounting
Estimates.
|
| • |
Current accident year catastrophe losses of $294, after-tax, in 2010 compared to $199,
after-tax, in 2009. The losses in 2010, primarily relate to severe windstorm events,
particularly from hail in the Midwest, Plains States and the Southeast and from winter storms
in the Mid-Atlantic and Northeast. The losses in 2009, primarily relate to ice storms,
windstorms, and tornadoes across many states.
|
| • |
The first quarter of 2010 includes an accrual for a litigation settlement of $73,
before-tax, for a class action lawsuit related to structured settlements.
|
| • |
The loss from discontinued operations, net of tax, increased in 2010 primarily due to a
goodwill impairment on Federal Trust Corporation of approximately $100, after-tax, partially
offset by a net realized capital gain of $41, after-tax, on the sale of the Hartford
Investments Canada Corporation (“HICC”).
|
| • |
Income tax expense (benefit) in 2010 includes a valuation allowance expense of $87 compared
to an expense of $30 in 2009. In addition, 2009 included nondeductible costs associated with
warrants of $78. See Note 13 of the Notes to Consolidated Financial Statements for a
reconciliation of the tax provision at the U.S. Federal statutory rate to the provision for
income taxes.
|
See the segment sections of the MD&A for a discussion on their respective performances.
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Table of Contents
Income Taxes
The effective tax rates for 2011, 2010 and 2009 were (150%), 26%, and 49%, respectively. The
differences between the effective rate and the U.S. statutory rate of 35% for 2011, 2010 and 2009
were due principally to tax-exempt interest earned on invested assets and the DRD. These items
decreased tax expense on the 2011 and 2010 pre-tax income and increased the tax benefit on the 2009
pre-tax loss. The 2011 effective tax rate also includes a deferred tax asset valuation allowance
decrease, and the 2010 and 2009 effective tax rates include a deferred tax asset valuation
allowance increase. The 2009 effective tax rate also includes the tax effect of non-deductible
costs associated with warrants.
The separate account DRD is estimated for the current year using information from the most recent
return, adjusted for current year equity market performance and other appropriate factors,
including estimated levels of corporate dividend payments and level of policy owner equity account
balances. The actual current year DRD can vary from estimates based on, but not limited to,
changes in eligible dividends received in the mutual funds, amounts of distributions 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 $201, $145 and $181 related to the
DRD in the years ended December 31, 2011, 2010 and 2009, respectively. These amounts included
benefits (charges) related to prior years’ tax returns of $3, $(3) and $29 in 2011, 2010 and 2009,
respectively.
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. No regulations have been
issued to date. 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 for foreign taxes paid including payments from its
separate account assets. This credit reduces the Company’s U.S. tax liability. 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 from the mutual funds.
The Company recorded benefits of $11, $4 and $16 related to the separate account foreign tax
credit in the years ended December 31, 2011, 2010 and 2009, respectively. These amounts included
benefits (charges) related to prior years’ tax returns of $2, $(4) and $3 in 2011, 2010 and 2009,
respectively.
The Company’s unrecognized tax benefits were unchanged during 2011 and 2010, remaining at $48 as of
December 31, 2011, 2010 and 2009. This entire amount, if it were recognized, would affect the
effective tax rate in the period it is released.
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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 and the risk factors set forth under Item 1A and other similar
information contained in this Form 10-K and in other filings made from time to time by the Company
with the SEC. 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.
Overview
As previously announced, we are evaluating our strategy and business portfolio with the goal of
delivering shareholder value. As this review is ongoing and no decisions have yet been made, the
following discussion of our outlooks and the forward-looking statements contained therein assume a
continuation of our current business focus and, as such, are subject to change based on any actions
taken as a result of our ongoing review.
The Hartford focuses 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. Slow economic and employment expansion may adversely impact the performance of The
Hartford’s insurance 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. In addition, the performance of The Hartford’s divisions is
subject to uncertainty due to capital market conditions, which impact the earnings of its asset
management businesses and valuations and earnings in its investment portfolio. The current and
future interest rate environment also affects the performance of the Company’s divisions. A
sustained low interest rate environment would result in lower net investment income, lower
estimated gross profits on certain Wealth Management products, lower margins and increased pension
expense.
Commercial Markets
Commercial Markets focuses on growth through market-differentiated products and services while
maintaining a disciplined underwriting approach. In Property & Casualty Commercial, improving
market conditions are expected to continue, which should enable the Company to achieve price
increases, while a slowly recovering economy is anticipated to drive an increase in insurance
exposures. As such, the Company expects low to mid single-digit written premium growth in 2012.
This growth 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. More specifically, this growth is anticipated to
be driven by continued momentum in small commercial, including programs aimed at growing total
policy counts, the rollout of new product enhancements and the continued expansion of ease of doing
business technology, while management expects middle market and specialty growth to be tempered as
a result of pricing actions taken to restore returns to adequate levels. The Property & Casualty
Commercial combined ratio before catastrophes and prior accident year development is expected to
remain in the mid to upper 90s for 2012 as compared to the 97.2% achieved in 2011. Earned price
increases are expected to flow through the book, while loss costs are not expected to change
dramatically. In Group Benefits, premiums are expected to decline in 2012, as compared to 2011,
reflecting the competitive environment coupled with pricing actions implemented with the goal of
improving profitability. 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 expand. The Company believes that 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 expects Group Benefits’ loss
ratio in 2012 to improve from the 2011 loss ratio of 79.5% as a result of the pricing actions
taken, given the expectation of persistent elevated disability incidence.
Consumer Markets
The Company expects written premium to decline in 2012, compared to 2011, including a decrease in
both AARP direct and Agency business. Despite an improvement in policy retention in 2011 and an
expected further increase in new business in 2012, management expects that non-renewed premium will
exceed new business in 2012 resulting in an overall decline in written premium. In 2012,
management expects that policy retention will improve but continue to be affected by the impact of
renewal written pricing increases in a price sensitive market. Within the Agency channel, policy
retention will also be affected by continued pricing and underwriting actions to improve
profitability, including efforts to reposition the book into more mature, preferred market
business. The Company expects new business to increase in 2012, primarily driven by AARP member
business, both direct and through independent agents, as well as new business from affinities other
than AARP and other targeted consumer direct marketing. New business is expected to benefit from
the introduction of the Open Road Advantage auto product and the Hartford Home Advantage
product. As of January 2012, the Open Road Advantage auto product was available in 44 states and
the Hartford Home Advantage product was available in 38 states. Management expects that the
combined ratio before catastrophes and prior accident year development will be flat to slightly
lower in 2012, as compared to 2011, as an improvement in the current accident year loss and loss
adjustment expense ratio before catastrophes will be largely offset by an expected increase in the
underwriting expense ratio. For both auto and home, the current accident year loss and loss
adjustment expense ratio before catastrophes is expected to improve in 2012, driven by earned
pricing increases and lower claim frequency, partially offset by an expected modest increase in
average claim severity. While management expects that industry non-catastrophe claim frequency will
be relatively flat to slightly increasing in 2012, management expects The Hartford will have
slightly lower claim frequency given its continued shift to a more preferred book of business.
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Table of Contents
Wealth Management
Wealth Management currently focuses on driving profitable growth through innovation, product
diversification and multichannel distribution. Additionally, management is focused on improving profit margins and generating
statutory surplus in each of its operating segments. Individual Annuity continues to build out a
portfolio of solutions to meet the needs of consumers planning for and living in retirement. In
2011, several of these solutions were incorporated in the Personal Retirement Manager II (“PRM
II”). While initial indicators of sales activity have improved, the product’s ultimate
success in contributing to Individual Annuity growth will depend on, among other things, our
ability to market and distribute the product through new and existing distribution channels and
market receptivity to the new product features. Further, Individual Annuity diversified its suite
of product solutions through the introduction of a new fixed indexed annuity product. In addition,
the Individual Annuity hedge program may contribute to earnings volatility since the program
generates mark to market gains and losses, while not all the underlying liabilities being hedged
are marked to market. Individual Life continues to differentiate itself through the creative
offering of riders. The recently launched LongevityAccess rider, which allows policyholders to
begin taking income from a policy at age 90, in tandem with the increasingly popular LifeAccess
rider, which allows policyholders to take distributions from their policies in cases of chronic
illness, gives The Hartford an ability to help people protect against premature death, outliving
one’s assets, or deteriorating health. In addition to building out distribution through property &
casualty agents, the Company continues to expand its distribution into career life insurance
professionals through the Monarch program. The Retirement Plans business continues to experience
strong sales. In addition to our core 401(k) market, we have seen growth in larger ($5-$25)
corporate plans. The property & casualty channel will become an increasingly important area of
focus for us given our conviction that this channel is underpenetrated and well suited for this
business. In the fourth quarter, we introduced The Hartford Lifetime Income product, a patented
income solution delivered through 401(k) plans, which provides a guaranteed paycheck for life and
has been a major catalyst for growth in this business. Our Mutual Fund business has been offering
new funds to improve our participation in asset classes where we see potential growth
opportunities. In addition, the Company announced in the fourth quarter of 2011 that Wellington
Management Company, LLP (“Wellington Management”) will serve as the sole sub-advisor for The
Hartford’s mutual funds, including equity and fixed income funds, pending a fund-by-fund review by
The Hartford’s mutual funds board of directors.
Runoff Operations
In the fourth quarter of 2011, The
Hartford established a new Runoff Operations division consisting
of Life Other Operations and Property & Casualty Other Operations in order to better differentiate
between our ongoing and runoff businesses. The objective of the Runoff Operations division is to focus on
managing profitability, improving capital efficiency and
effectiveness, and limiting and managing risk associated with the businesses residing in the division.
Life Other Operations consists of the Hartford’s
international variable annuity business, institutional annuities business and Private Placement
Life Insurance business. The international variable annuity business within Life Other Operations
will continue to be a significant driver of earnings and earnings variability as a result of the
hedge program associated with the Company’s international annuities. This hedge program generates
mark to market gains and losses while the underlying liabilities being hedged are primarily not
marked to market resulting in unpredictable earnings volatility period to period. Property &
Casualty Other Operations, is focused on managing our asbestos environmental and other legacy
liabilities. The results of the annual ground up study of asbestos reserves and the annual
environmental reserve update will be the primary driver impacting the results for this business.
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CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America (“U.S. GAAP”), requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ, and in the past have
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 mortgage loans;
|
| • |
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.
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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, often 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, 2011,
including $83 related to Property & Casualty Commercial and $207 related to Property & Casualty
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, Property & Casualty Other Operations categorizes reserves as asbestos and
environmental (“A&E”), whereby the Company reviews these reserve levels by type of event,
rather than by line of business. 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, 2011, net of reinsurance:
| Property & Casualty | Consumer | Property & Casualty | Total Property and | |||||||||||||
| Commercial | Markets | Other Operations | Casualty Insurance | |||||||||||||
|
Reserve Line of Business
|
||||||||||||||||
|
Commercial property
|
$ | 187 | $ | — | $ | — | $ | 187 | ||||||||
|
Homeowners’
|
— | 467 | — | 467 | ||||||||||||
|
Auto physical damage
|
16 | 29 | — | 45 | ||||||||||||
|
Auto liability
|
564 | 1,523 | — | 2,087 | ||||||||||||
|
Package business
|
1,282 | — | — | 1,282 | ||||||||||||
|
Workers’ compensation
|
7,471 | — | — | 7,471 | ||||||||||||
|
General liability
|
2,641 | 31 | — | 2,672 | ||||||||||||
|
Professional liability
|
702 | — | — | 702 | ||||||||||||
|
Fidelity and surety
|
210 | — | — | 210 | ||||||||||||
|
Assumed reinsurance
|
— | — | 349 | 349 | ||||||||||||
|
All other non-A&E
|
— | — | 810 | 810 | ||||||||||||
|
A&E
|
21 | 2 | 2,212 | 2,235 | ||||||||||||
|
|
||||||||||||||||
|
Total reserves-net
|
13,094 | 2,052 | 3,371 | 18,517 | ||||||||||||
|
Reinsurance and other recoverables
|
2,343 | 9 | 681 | 3,033 | ||||||||||||
|
|
||||||||||||||||
|
Total reserves-gross
|
$ | 15,437 | $ | 2,061 | $ | 4,052 | $ | 21,550 | ||||||||
|
|
||||||||||||||||
Reserving Methodology
(See Reserving for Asbestos and Environmental Claims within Property & Casualty 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
The Company’s 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 in accident years older than twelve and twenty years, for Consumer Markets and
Property & Casualty Commercial, respectively, assumed reinsurance, latent exposures, such as
construction defects and unallocated loss adjustment expense. 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, 2011 and 2010, 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, the Company finds that reported development
techniques are best. For more recent accident years, the Company typically prefers frequency /
severity techniques that make separate assumptions about loss activity above and below a selected
capping level.
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Table of Contents
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. The Company generally weights these techniques together, relying
more heavily on the expected loss ratio method at early ages of development and more on the
reported development method as an accident year matures.
Workers’ Compensation
. Workers’ compensation is the Company’s single largest reserve line of
business so a wide range of methods are reviewed in the reserve analysis. Methods performed
include paid and reported development, variations on expected loss ratio methods, and an in-depth
analysis on the largest states. Historically, paid development patterns in the Company’s workers’
compensation business have been stable, so paid techniques are preferred. Although paid techniques
may be less predictive of the ultimate liability when a low percentage of ultimate losses are paid
as in early periods of development, recent changes in the frequency of workers’ compensation claims
have caused the Company to place greater reliance in paid methods with continued consideration of
the 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, the Company 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 1.8% higher than the actuarial indication of the reserves as of December 31, 2011.
See the Reserve Development section for a discussion of changes to reserve estimates recorded in
2011.
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 Property & Casualty 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. Medical costs make
up more than 50% of workers’ compensation payments. As such, 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. In addition,
a changing economic environment can affect the ability of an injured worker to return to work and
the length of time a worker receives disability benefits. The Company has recently experienced a
sharp increase in workers’ compensation claim frequency, while only seeing a partial offset from
moderating severity trends. These factors increase the uncertainty in the estimate of reserves.
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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 $2.1 billion across all lines, $1.5
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 $80, 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 $7.5 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 $2.7 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,
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 Property &
Casualty Other Operations were $349 as of December 31, 2011. If the reported loss development
patterns underlying the Company’s net reserves for HartRe assumed casualty reinsurance change by
5%, the estimated net reserve need would change by approximately $95, in either direction. A 5%
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.
43
Table of Contents
Reserving for Asbestos and Environmental Claims within Property & Casualty 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, 2011 of $2.24 billion ($1.90 billion and $328 for asbestos and
environmental, respectively) is within an estimated range, unadjusted for covariance, of $1.75
billion to $2.59 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 the Property & Casualty Other Operations segment
regularly and, where future developments indicate, make appropriate adjustments to the reserves.
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Table of Contents
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, 2011 represent the Company’s best
estimate of its ultimate liability for losses and loss adjustment expenses related to losses
covered by policies written by the Company. However, because of the significant uncertainties
surrounding reserves, and particularly asbestos exposures, it is possible that management’s
estimate of the ultimate liabilities for these claims may change and that the required adjustment
to recorded reserves could exceed the currently recorded reserves by an amount that could be
material to the Company’s results of operations, financial condition and liquidity.
Reserve 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, 2011:
| For the year ended December 31, 2011 | ||||||||||||||||
| Property & | Total | |||||||||||||||
| Property & | Casualty | Property and | ||||||||||||||
| Casualty | Consumer | Other | Casualty | |||||||||||||
| Commercial | Markets | Operations | Insurance | |||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$ | 14,727 | $ | 2,177 | $ | 4,121 | $ | 21,025 | ||||||||
|
Reinsurance and other recoverables
|
2,361 | 17 | 699 | 3,077 | ||||||||||||
|
|
||||||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
12,366 | 2,160 | 3,422 | 17,948 | ||||||||||||
|
|
||||||||||||||||
|
Provision for unpaid losses and loss adjustment expenses
|
||||||||||||||||
|
Current accident year before catastrophes
|
4,139 | 2,536 | — | 6,675 | ||||||||||||
|
Current accident year catastrophes
|
320 | 425 | — | 745 | ||||||||||||
|
Prior accident years
|
125 | (75 | ) | 317 | 367 | |||||||||||
|
|
||||||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
4,584 | 2,886 | 317 | 7,787 | ||||||||||||
|
Payments
|
(3,856 | ) | (2,994 | ) | (368 | ) | (7,218 | ) | ||||||||
|
|
||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
13,094 | 2,052 | 3,371 | 18,517 | ||||||||||||
|
Reinsurance and other recoverables
|
2,343 | 9 | 681 | 3,033 | ||||||||||||
|
|
||||||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$ | 15,437 | $ | 2,061 | $ | 4,052 | $ | 21,550 | ||||||||
|
|
||||||||||||||||
|
Earned premiums
|
$ | 6,127 | $ | 3,747 | ||||||||||||
|
Loss and loss expense paid ratio [1]
|
62.9 | 79.9 | ||||||||||||||
|
Loss and loss expense incurred ratio
|
74.8 | 77.0 | ||||||||||||||
|
Prior accident years development (pts) [2]
|
2.0 | (2.0 | ) | |||||||||||||
| [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.
|
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Table of Contents
Prior accident years development recorded in 2011
Included within prior accident years development for the year ended December 31, 2011 were the
following loss and loss adjustment expense reserve strengthenings (releases):
| For the year ended December 31, 2011 | ||||||||||||||||
| Property & | ||||||||||||||||
| Casualty | ||||||||||||||||
| Property & Casualty | Consumer | Other | Total Property and | |||||||||||||
| Commercial | Markets | Operations | Casualty Insurance | |||||||||||||
|
|
||||||||||||||||
|
Auto liability
|
$ | (4 | ) | $ | (93 | ) | $ | — | $ | (97 | ) | |||||
|
Homeowners
|
— | (1 | ) | — | (1 | ) | ||||||||||
|
Professional liability
|
29 | — | — | 29 | ||||||||||||
|
Package business
|
(76 | ) | — | — | (76 | ) | ||||||||||
|
Workers’ compensation
|
171 | — | — | 171 | ||||||||||||
|
General liability
|
(40 | ) | — | — | (40 | ) | ||||||||||
|
Fidelity and surety
|
(7 | ) | — | — | (7 | ) | ||||||||||
|
Commercial property
|
(4 | ) | — | — | (4 | ) | ||||||||||
|
Net asbestos reserves
|
— | — | 294 | 294 | ||||||||||||
|
Net environmental reserves
|
— | — | 26 | 26 | ||||||||||||
|
Change in workers’ compensation discount, including accretion
|
38 | — | — | 38 | ||||||||||||
|
Catastrophes
|
12 | 25 | — | 37 | ||||||||||||
|
Other reserve re-estimates, net
|
6 | (6 | ) | (3 | ) | (3 | ) | |||||||||
|
|
||||||||||||||||
|
Total prior accident years development
|
$ | 125 | $ | (75 | ) | $ | 317 | $ | 367 | |||||||
|
|
||||||||||||||||
During 2011, the Company’s re-estimates of prior accident years reserves included the following
significant reserve changes:
| • |
Released reserves for personal auto liability claims, primarily for accident years 2006
through 2010. Favorable trends in reported severity have persisted or improved over this time
period. As these accident years develop, the uncertainty around the ultimate losses is
reduced and management places more weight on the emerged experience.
|
| • |
Strengthened reserves in professional liability for accident years 2007 through 2008,
primarily in the directors and officers (“D&O”) line of business. Detailed reviews of claims
involving the sub-prime mortgage market collapse, and shareholder class action lawsuits,
resulted in a higher estimate of future claim costs for these exposures.
|
| • |
Released reserves in package business liability coverages and general liability, in
accident years 2005 through 2009. As these accident years developed, claim severity has
emerged lower than expected.
|
| • |
Strengthened reserves in workers’ compensation in accident years 2008 through 2010.
Accident year 2010 loss costs trends were higher than expected as an increase in frequency
outpaced a moderation of severity trends. Strengthening in accident years 2009 and 2008 was
the result of higher than expected loss emergence for these years. Strengthening in more
recent years is partially offset by releases in accident years 2007 and prior. Severity
emergence in these older accident years continues to be favorable.
|
| • |
Strengthened prior year catastrophe reserves, primarily related to a severe wind and hail
storm in Arizona during the fourth quarter of 2010. Severity of property damage associated
with this event increased more than expected.
|
| • |
Refer to the Property & Casualty Other Operations Claims section for discussion
concerning the Company’s annual evaluations of net environmental and net asbestos reserves,
and related reinsurance.
|
46
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, 2010:
| For the year ended December 31, 2010 | ||||||||||||||||
| Property & | Total | |||||||||||||||
| Property & | Casualty | Property and | ||||||||||||||
| Casualty | Consumer | Other | Casualty | |||||||||||||
| Commercial | Markets | Operations | 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.
|
Prior accident years development recorded in 2010
Included within prior accident years development for the year ended December 31, 2010 were the
following loss and loss adjustment expense reserve strengthenings (releases):
| For the year ended December 31, 2010 | ||||||||||||||||
| Property & | ||||||||||||||||
| Casualty | ||||||||||||||||
| Property & Casualty | Consumer | Other | Total Property and | |||||||||||||
| Commercial | Markets | Operations | Casualty Insurance | |||||||||||||
|
Auto liability
|
$ | (54 | ) | $ | (115 | ) | $ | — | $ | (169 | ) | |||||
|
Professional liability
|
(88 | ) | — | — | (88 | ) | ||||||||||
|
Workers’ compensation
|
(70 | ) | — | — | (70 | ) | ||||||||||
|
General liability
|
(108 | ) | — | — | (108 | ) | ||||||||||
|
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
|
— | — | 11 | 11 | ||||||||||||
|
Uncollectible reinsurance
|
(30 | ) | — | — | (30 | ) | ||||||||||
|
Change in workers’ compensation
discount, including accretion
|
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 liability 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. In addition, reserves were released for personal auto
liability claims for accident years 2004 to 2009, as 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.
|
| • |
Released reserves for professional liability claims, primarily related to D&O claims in
accident years 2004 to 2008. For these accident years, reported losses for claims under D&O
policies have emerged 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.
|
47
Table of Contents
| • |
Released reserves for general liability claims, primarily related to accident years 2005
through 2008. The Company observed that claim emergence for these accident years continued to
be lower than anticipated and believed this would continue, and therefore reduced its reserve
estimate in response. Partially offsetting this release was 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. The Company observed that claim emergence within the liability portion of the
package coverage for these accident years continued to be lower than anticipated and believed
this lower level of claim activity would continue, and therefore reduced its reserve estimate
in response.
|
| • |
Strengthened reserves for homeowners’ claims, as the Company observed a lengthening of the
claim reporting period for homeowners’ claims which resulted in increasing management’s
estimate of the ultimate cost to settle these claims. The Company also began 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 Property & Casualty Other Operations Claims section for discussion
concerning the Company’s annual evaluations of net environmental and net asbestos reserves,
and related reinsurance.
|
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 | ||||||||||||||||
| Property & | Total | |||||||||||||||
| Property & | Casualty | Property and | ||||||||||||||
| Casualty | Consumer | Other | Casualty | |||||||||||||
| Commercial | Markets | Operations | 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.
|
48
Table of Contents
Prior accident years development recorded in 2009
Included within prior accident years development for the year ended December 31, 2009 were the
following loss and loss adjustment expense reserve strengthenings (releases):
| For the year ended December 31, 2009 | ||||||||||||||||
| Property & | ||||||||||||||||
| Casualty | ||||||||||||||||
| Property & Casualty | Consumer | Other | Total Property and | |||||||||||||
| Commercial | Markets | Operations | 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
|
— | — | 35 | 35 | ||||||||||||
|
Uncollectible reinsurance
|
(20 | ) | — | (20 | ) | (40 | ) | |||||||||
|
Change in workers’ compensation discount, including
accretion
|
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, for accident years 2005 to 2007, as
the Company recognized that favorable development in reported severity, first observed in
early 2008, which was attributed, in part, to changes made in claim handling procedures in
2007, was a sustained trend for those accident years. 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.
|
| • |
The Company released reserves for D&O and errors and omissions (“E&O”) claims in 2009
related to the 2003 to 2008 accident years. For these accident years, reported losses for
claims under D&O and E&O policies had been emerging favorably to initial expectations due to
lower than expected claim severity.
|
| • |
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 reserve releases
from the third quarter of 2007 through 2009. 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. Largely
offsetting the releases, the Company recognized that the cost of late emerging exposures were
likely to be higher than previously expected, and also recognized additional ceded losses on
accident years 1999 and prior.
|
| • |
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 business, 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 was 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. Largely offsetting the strengthenings, the Company recognized the cost of late
emerging exposures were likely to be higher than previously expected, and also recognized a
lower than expected frequency of high severity claims.
|
49
Table of Contents
| • |
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 homeowners’ claims. 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 in the second quarter of
2009 and reduced its allowance driven, in part, by a reduction in gross ceded loss
recoverables.
|
| • |
Refer to the Property & Casualty Other Operations Claims section for discussion
concerning the Company’s annual evaluations of net environmental and net asbestos reserves,
and related reinsurance.
|
50
Table of Contents
Property & Casualty Other Operations Claims
Reserve Activity
Reserves and reserve activity in Property & Casualty Other Operations 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 Property & Casualty Other Operations,
categorized by asbestos, environmental and all other claims, for the years ended December 31, 2011,
2010 and 2009.
Property & Casualty Other Operations Losses and Loss Adjustment Expenses
| Asbestos | Environmental | All Other [1] | Total | |||||||||||||
|
2011
|
||||||||||||||||
|
Beginning liability — net [2] [3]
|
$ | 1,787 | $ | 334 | $ | 1,302 | $ | 3,423 | ||||||||
|
Losses and loss adjustment expenses incurred
|
294 | 26 | (3 | ) | 317 | |||||||||||
|
Losses and loss adjustment expenses paid
|
(189 | ) | (40 | ) | (140 | ) | (369 | ) | ||||||||
|
|
||||||||||||||||
|
Ending liability — net [2] [3]
|
$ | 1,892 | [4] | $ | 320 | $ | 1,159 | $ | 3,371 | |||||||
|
|
||||||||||||||||
|
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 | $ | 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 | ||||||||
|
|
||||||||||||||||
| [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 (collectively “Ongoing
Operations”) for asbestos and environmental net liabilities of $15
and $8, respectively, as of December 31, 2011, $11 and $5,
respectively, as of December 31, 2010, and $10 and $5,
respectively, as of December 31, 2009; total net losses and loss
adjustment expenses incurred for the years ended December 31,
2011, 2010 and 2009 of $27, $15 and $16, respectively, related to
asbestos and environmental claims; and total net losses and loss
adjustment expenses paid for the years ended December 31, 2011,
2010 and 2008 of $20, $14 and $19, 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 $2,442 and $367, respectively, as of
December 31, 2011; $2,308 and $378, respectively, as of December
31, 2010; and $2,484 and $367, respectively, as of December 31,
2009.
|
|
| [4] |
The one year and average three year net paid amounts for asbestos
claims, including Ongoing Operations, were $198 and $230,
respectively, resulting in a one year net survival ratio of 9.6
and a three year net survival ratio of 8.3. 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.
51
Table of Contents
The following table sets forth, for the years ended December 31, 2011, 2010 and 2009, 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 | |||||||||||||
|
2011
|
||||||||||||||||
|
Gross
|
||||||||||||||||
|
Direct
|
$ | 170 | $ | 350 | $ | 32 | $ | 25 | ||||||||
|
Assumed Reinsurance
|
55 | 12 | 8 | — | ||||||||||||
|
London Market
|
23 | 16 | 6 | 4 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
248 | 378 | 46 | 29 | ||||||||||||
|
Ceded
|
(59 | ) | (84 | ) | (6 | ) | (3 | ) | ||||||||
|
|
||||||||||||||||
|
Net
|
$ | 189 | $ | 294 | $ | 40 | $ | 26 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
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 — Domestic
|
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 | ||||||||
|
|
||||||||||||||||
| [1] |
Excludes asbestos and environmental paid and incurred loss and LAE
reported in Ongoing Operations. Total gross losses and LAE
incurred in Ongoing Operations for the years ended December 31,
2011, 2010 and 2009 includes $30, $15 and $17, respectively,
related to asbestos and environmental claims. Total gross losses
and LAE paid in Ongoing Operations for the years ended December
31, 2011, 2010 and 2009 includes $22, $14 and $20, 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 2011, 2010 and 2009, the Company completed evaluations of certain of
its non-asbestos and environmental reserves, including its assumed reinsurance liabilities. In
2011, the Company recognized no prior year development. 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.
During the third quarters of 2011, 2010 and 2009, the Company completed its annual ground up
environmental reserve evaluations. In each of these evaluations, the Company reviewed all of its
open direct domestic insurance accounts exposed to environmental liability as well as assumed
reinsurance accounts and its London Market exposures for both direct and assumed reinsurance.
During the third quarters of 2011 and 2010, the Company found estimates for some individual account
exposures 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. 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 $19, $62 and $75 increases in net environmental liabilities in 2011, 2010
and 2009, respectively. The Company currently expects to continue to perform an evaluation of its
environmental liabilities annually.
52
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, 2011.
Summary of Environmental Reserves
As of December 31, 2011
As of December 31, 2011
| Total Reserves | ||||
|
Gross [1] [2]
|
||||
|
Direct
|
$ | 271 | ||
|
Assumed Reinsurance
|
39 | |||
|
London Market
|
57 | |||
|
|
||||
|
Total
|
367 | |||
|
Ceded
|
(47 | ) | ||
|
|
||||
|
Net
|
$ | 320 | ||
|
|
||||
| [1] |
The one year gross paid amount for total environmental claims is $58, resulting in a
one year gross survival ratio of 6.4.
|
|
| [2] |
The three year average gross paid amount for total environmental claims is $58, resulting
in a three year gross survival ratio of 6.4.
|
During the second quarters of 2011, 2010 and 2009, 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 strengthened its net asbestos reserves by $290 in second quarter
2011. During 2011, for certain direct policyholders, the Company experienced increases in claim
frequency, severity and expense which were driven by mesothelioma claims, particularly against
certain smaller, more peripheral insureds. The Company also experienced unfavorable development on
its assumed reinsurance accounts driven largely by the same factors experienced by the direct
policyholders. 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 2010 and 2009 resulted in $169 and $138 increases in net asbestos reserves,
respectively. The Company currently expects to continue to perform an evaluation of its asbestos
liabilities annually.
The Company divides its gross asbestos exposures into Direct, Assumed Reinsurance and London
Market. The Company further divides its direct asbestos exposures into the following categories:
Major Asbestos Defendants (the “Top 70” accounts in Tillinghast’s published Tiers 1 and 2 and
Wellington accounts), which are subdivided further as: Structured Settlements, Wellington, Other
Major Asbestos Defendants, Accounts with Future Expected Exposures greater than $2.5, Accounts with
Future Expected Exposures less than $2.5, and Unallocated.
| • |
Structured Settlements are those accounts where the Company has reached an agreement with
the insured as to the amount and timing of the claim payments to be made to the insured.
|
| • |
The Wellington subcategory includes insureds that entered into the “Wellington Agreement”
dated June 19, 1985. The Wellington Agreement provided terms and conditions for how the
signatory asbestos producers would access their coverage from the signatory insurers.
|
| • |
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.
53
Table of Contents
The following table displays gross asbestos reserves and other statistics by policyholder category
as of December 31, 2011.
Summary of Gross Asbestos Reserves
As of December 31, 2011
As of December 31, 2011
| Number of | All Time | Total | All Time | |||||||||||||
| Accounts [2] | Paid [3] | Reserves | Ultimate [3] | |||||||||||||
|
Gross Asbestos Reserves as of June 30, 2011 [1]
|
||||||||||||||||
|
Major asbestos defendants [5]
|
||||||||||||||||
|
Structured settlements (includes 4 Wellington accounts) [6]
|
8 | $ | 331 | $ | 438 | $ | 769 | |||||||||
|
Wellington (direct only)
|
29 | 908 | 43 | 951 | ||||||||||||
|
Other major asbestos defendants
|
28 | 527 | 28 | 555 | ||||||||||||
|
No known policies (includes 3 Wellington accounts)
|
5 | — | — | — | ||||||||||||
|
Accounts with future exposure > $2.5
|
85 | 929 | 702 | 1,631 | ||||||||||||
|
Accounts with future exposure < $2.5
|
1,075 | 342 | 122 | 464 | ||||||||||||
|
Unallocated [7]
|
1,895 | 563 | 2,458 | |||||||||||||
|
|
||||||||||||||||
|
Total Direct
|
4,932 | 1,896 | 6,828 | |||||||||||||
|
Assumed Reinsurance
|
1,302 | 379 | 1,681 | |||||||||||||
|
London Market
|
646 | 283 | 929 | |||||||||||||
|
|
||||||||||||||||
|
Total as of June 30, 2011 [1]
|
6,880 | 2,558 | 9,438 | |||||||||||||
|
|
||||||||||||||||
|
Gross paid loss activity for the third quarter and fourth quarter 2011
|
127 | (127 | ) | — | ||||||||||||
|
Gross incurred loss activity for the third quarter and fourth quarter 2011
|
— | 11 | 11 | |||||||||||||
|
|
||||||||||||||||
|
Total as of December 31, 2011 [4]
|
$ | 7,007 | $ | 2,442 | $ | 9,449 | ||||||||||
|
|
||||||||||||||||
| [1] |
Gross Asbestos Reserves based on the second quarter 2011 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 2011.
|
|
| [3] |
“All Time Paid” represents the total payments with respect to the indicated claim type that have already been made by
the Company as of the indicated balance sheet date. “All Time Ultimate” represents the Company’s estimate, as of the
indicated balance sheet date, of the total payments that are ultimately expected to be made to fully settle the
indicated payment type. The amount is the sum of the amounts already paid (e.g. “All Time Paid”) and the estimated
future payments (e.g. the amount shown in the column labeled “Total Reserves”).
|
|
| [4] |
Survival ratio is a commonly used industry ratio for comparing reserve levels between companies. While the method is
commonly used, it is not a predictive technique. Survival ratios may vary over time for numerous reasons such as large
payments due to the final resolution of certain asbestos liabilities, or reserve re-estimates. The survival ratio is
computed by dividing the recorded reserves by the average of the past three years of payments. The ratio is the
calculated number of years the recorded reserves would survive if future annual payments were equal to the average
annual payments for the past three years. The 3-year gross survival ratio of 8.3 as of December 31, 2011 is computed
based on total paid losses of $881 for the period from January 1, 2009 to December 31, 2011. As of December 31, 2011,
the one year gross paid amount for total asbestos claims is $258 resulting in a one year gross survival ratio of 9.5.
|
|
| [5] |
Includes 24 open accounts at June 30, 2011. Included 25 open accounts at June 30, 2010.
|
|
| [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 2011, 2010 and 2009, 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 Property & Casualty Other Operations. 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
quarters of 2010 and 2011 resulted in no adjustment to the allowance for uncollectible reinsurance.
As of December 31, 2011 and 2010, the allowance for uncollectible reinsurance for Property &
Casualty Other Operations totals $207. 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
Company currently expects to perform its regular comprehensive review of Property & Casualty 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 Property & Casualty Other Operations segment regularly and,
where future developments indicate, make appropriate adjustments to the reserves. The company will
complete both its annual ground-up asbestos and environmental reserve studies during the second
quarter of 2012.
54
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 & | ||||||||||||||||
| Property & Casualty | Consumer | Casualty Other | Total Property and | |||||||||||||
| Commercial | Markets | Operations | Casualty Insurance | |||||||||||||
|
Range of prior
accident year
unfavorable
(favorable)
development for the
ten years ended
December 31, 2011
[1] [2]
|
(3.1) – 1.5 | (5.2) – 5.1 | 3.0 – 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]
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||||||||||||||||||||
|
Liabilities for unpaid
losses and loss
adjustment expenses,
net of reinsurance
|
$ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | $ | 18,347 | $ | 18,210 | $ | 17,948 | $ | 18,517 | ||||||||||||||||||||||
|
Cumulative paid losses
and loss expenses
|
||||||||||||||||||||||||||||||||||||||||||||
|
One year later
|
3,339 | 3,480 | 4,415 | 3,594 | 3,702 | 3,727 | 3,703 | 3,771 | 3,882 | 4,037 | ||||||||||||||||||||||||||||||||||
|
Two years later
|
5,621 | 6,781 | 6,779 | 6,035 | 6,122 | 5,980 | 5,980 | 6,273 | 6,401 | |||||||||||||||||||||||||||||||||||
|
Three years later
|
8,324 | 8,591 | 8,686 | 7,825 | 7,755 | 7,544 | 7,752 | 8,074 | — | |||||||||||||||||||||||||||||||||||
|
Four years later
|
9,710 | 10,061 | 10,075 | 9,045 | 8,889 | 8,833 | 9,048 | — | — | |||||||||||||||||||||||||||||||||||
|
Five years later
|
10,871 | 11,181 | 11,063 | 9,928 | 9,903 | 9,778 | — | — | — | |||||||||||||||||||||||||||||||||||
|
Six years later
|
11,832 | 12,015 | 11,821 | 10,798 | 10,674 | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Seven years later
|
12,563 | 12,672 | 12,601 | 11,448 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Eight years later
|
13,166 | 13,385 | 13,193 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Nine years later
|
13,829 | 13,935 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Ten years later
|
14,345 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Liabilities re-estimated
|
||||||||||||||||||||||||||||||||||||||||||||
|
One year later
|
13,153 | 15,965 | 16,632 | 16,439 | 17,159 | 17,652 | 18,005 | 18,161 | 18,014 | 18,315 | ||||||||||||||||||||||||||||||||||
|
Two years later
|
16,176 | 16,501 | 17,232 | 16,838 | 17,347 | 17,475 | 17,858 | 18,004 | 18,136 | |||||||||||||||||||||||||||||||||||
|
Three years later
|
16,768 | 17,338 | 17,739 | 17,240 | 17,318 | 17,441 | 17,700 | 18,139 | — | |||||||||||||||||||||||||||||||||||
|
Four years later
|
17,425 | 17,876 | 18,367 | 17,344 | 17,497 | 17,439 | 17,866 | — | — | |||||||||||||||||||||||||||||||||||
|
Five years later
|
17,927 | 18,630 | 18,554 | 17,570 | 17,613 | 17,676 | — | — | — | |||||||||||||||||||||||||||||||||||
|
Six years later
|
18,686 | 18,838 | 18,836 | 17,777 | 17,895 | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Seven years later
|
18,892 | 19,126 | 19,063 | 18,064 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Eight years later
|
19,192 | 19,373 | 19,351 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Nine years later
|
19,452 | 19,671 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Ten years later
|
19,751 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Deficiency
(redundancy), net of
reinsurance
|
$ | 6,891 | $ | 6,530 | $ | 3,133 | $ | 1,873 | $ | 1,032 | $ | 72 | $ | (365 | ) | $ | (208 | ) | $ | (74 | ) | $ | 367 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
55
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,
For the Years Ended December 31,
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||||||||||||||||||
|
Net reserve, as initially estimated
|
$ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | $ | 18,347 | $ | 18,210 | $ | 17,948 | $ | 18,517 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Reinsurance and other
recoverables, as initially
estimated
|
3,950 | 5,497 | 5,138 | 5,403 | 4,387 | 3,922 | 3,586 | 3,441 | 3,077 | 3,033 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross reserve, as initially
estimated
|
$ | 17,091 | $ | 21,715 | $ | 21,329 | $ | 22,266 | $ | 21,991 | $ | 22,153 | $ | 21,933 | $ | 21,651 | $ | 21,025 | $ | 21,550 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Net re-estimated reserve
|
$ | 19,671 | $ | 19,351 | $ | 18,064 | $ | 17,895 | $ | 17,676 | $ | 17,866 | $ | 18,139 | $ | 18,136 | $ | 18,315 | ||||||||||||||||||||||
|
Re-estimated and other reinsurance
recoverables
|
5,693 | 5,592 | 5,469 | 5,792 | 4,193 | 3,910 | 3,585 | 3,064 | 2,799 | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross re-estimated reserve
|
$ | 25,364 | $ | 24,943 | $ | 23,533 | $ | 23,687 | $ | 21,869 | $ | 21,776 | $ | 21,724 | $ | 21,200 | $ | 21,114 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Gross deficiency (redundancy)
|
$ | 8,273 | $ | 3,228 | $ | 2,204 | $ | 1,421 | $ | (122 | ) | $ | (377 | ) | $ | (209 | ) | $ | (451 | ) | $ | 89 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
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, 2011. 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, 2011 for the indicated accident year(s).
Effect of Net Reserve Re-estimates on Calendar Year Operations
| Calendar Year | ||||||||||||||||||||||||||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | Total | ||||||||||||||||||||||||||||||||||
|
By Accident year
|
||||||||||||||||||||||||||||||||||||||||||||
|
2001 & Prior
|
$ | 293 | $ | 3,023 | $ | 592 | $ | 657 | $ | 502 | $ | 759 | $ | 206 | $ | 300 | $ | 260 | $ | 299 | $ | 6,891 | ||||||||||||||||||||||
|
2002
|
— | (199 | ) | (56 | ) | 180 | 36 | (5 | ) | 2 | (12 | ) | (13 | ) | (1 | ) | (68 | ) | ||||||||||||||||||||||||||
|
2003
|
— | — | (122 | ) | (237 | ) | (31 | ) | (126 | ) | (21 | ) | (6 | ) | (20 | ) | (10 | ) | (573 | ) | ||||||||||||||||||||||||
|
2004
|
— | — | — | (352 | ) | (108 | ) | (226 | ) | (83 | ) | (56 | ) | (20 | ) | (1 | ) | (846 | ) | |||||||||||||||||||||||||
|
2005
|
— | — | — | — | (103 | ) | (214 | ) | (133 | ) | (47 | ) | (91 | ) | (5 | ) | (593 | ) | ||||||||||||||||||||||||||
|
2006
|
— | — | — | — | — | (140 | ) | (148 | ) | (213 | ) | (118 | ) | (45 | ) | (664 | ) | |||||||||||||||||||||||||||
|
2007
|
— | — | — | — | — | — | (49 | ) | (113 | ) | (156 | ) | (71 | ) | (389 | ) | ||||||||||||||||||||||||||||
|
2008
|
— | — | — | — | — | — | — | (39 | ) | 1 | (31 | ) | (69 | ) | ||||||||||||||||||||||||||||||
|
2009
|
— | — | — | — | — | — | — | — | (39 | ) | (13 | ) | (52 | ) | ||||||||||||||||||||||||||||||
|
2010
|
— | — | — | — | — | — | — | — | — | 245 | 245 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 293 | $ | 2,824 | $ | 414 | $ | 248 | $ | 296 | $ | 48 | $ | (226 | ) | $ | (186 | ) | $ | (196 | ) | $ | 367 | $ | 3,882 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
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 2001 & Prior
The largest impacts of net reserve re-estimates are shown in the “2001 & Prior” accident years.
The reserve deterioration is driven, in part, by deterioration of reserves for asbestos,
environmental, assumed casualty reinsurance, workers’ compensation, and general liability 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.
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 through 2006 were largely attributable to
reductions in the reinsurance recoverable asset associated with older, long-term casualty
liabilities, and unexpected development on mature claims in both general liability and workers’
compensation.
The reserve re-estimates during calendar year 2008 are largely driven by increases in asbestos,
environmental and general liability reserves. The reserve re-estimates in calendar years 2009,
2010 and 2011 are largely due to increases in asbestos and environmental reserves, resulting from
the Company’s annual evaluations of these liabilities. These reserve evaluations reflect
deterioration in the litigation environment surrounding asbestos and environmental liabilities
during this period.
56
Table of Contents
Reserve changes for accident year 2002
Accident year 2002 is reasonably close to original estimates. However, it shows swings by calendar
period, with some favorable development prior to calendar year 2005, largely offset by unfavorable
development in calendar years 2005 through 2008. Reserve releases 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 during calendar year 2005
were a result of unfavorable development on accident years prior to 2002 leading the Company to
increase its estimate of unpaid losses for the 2002 accident year.
Reserve changes for accident years 2003 through 2007
Even after considering the 2007 calendar year reclassification of $347 IBNR reserves from accident
years 2003 to 2006 to accident years 2002 and prior, accident years 2003 through 2007 show
favorable development in calendar years 2004 through 2011. 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
regulatory reforms in California and Florida, underwriting actions, and expense reduction
initiatives that had a greater impact in controlling costs than originally estimated. In 2007, the
Company released reserves for package business claims as reported losses 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.
Reserve changes for accident years 2008 through 2009
Accident years 2008 through 2009 remain reasonably close to original estimates. Modest favorable
reserve re-estimates during calendar periods 2009 through 2011 are primarily related to liability
lines of business.
Reserve changes for accident year 2010
Unfavorable reserve re-estimates in calendar year 2011 are largely driven by workers’ compensation.
Loss cost trends were higher than initially expected as an increase in frequency outpaced a
moderation of severity trends.
57
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.
The most significant EGP based balances as of December 31, 2011 and 2010 are as follows:
| Individual Annuity | Individual Life | Retirement Plans | Life Other Operations | |||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
|
DAC
|
$ | 2,815 | $ | 3,251 | $ | 2,755 | $ | 2,633 | $ | 813 | $ | 820 | $ | 1,256 | $ | 1,652 | ||||||||||||||||
|
SIA
|
$ | 291 | $ | 329 | $ | 47 | $ | 45 | $ | 22 | $ | 23 | $ | 54 | $ | 41 | ||||||||||||||||
|
URR
|
$ | 90 | $ | 99 | $ | 1,570 | $ | 1,367 | $ | — | $ | — | $ | 39 | $ | 59 | ||||||||||||||||
|
Death and Other
Insurance Benefit
Reserves
|
$ | 1,103 | $ | 1,052 | $ | 228 | $ | 113 | $ | 1 | $ | 1 | $ | 975 | $ | 696 | ||||||||||||||||
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 the extent
and duration of hedging activities 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.
The Company 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 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, mortality assumptions and benefit utilization,
including assumptions around annuitization rates.
An Unlock revises EGPs, on a quarterly basis, to reflect market updates of policyholder account
value and the Company’s current best estimate assumptions. Modifications to the Company’s hedging
programs may impact EGPs, and correspondingly impact DAC recoverability. 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 23% and 40% as of December 31,
2011, respectively. If the margin between the DAC asset and the present value of future EGPs is
exhausted, then further reductions in EGPs would cause portions of DAC to be unrecoverable and the
DAC asset would be written down to equal future EGPs.
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Unlocks
The after-tax (charge) benefit to net income (loss) by asset and liability as a result of the
Unlocks for 2011, 2010 and 2009, were:
For the year ended December 31, 2011:
| Death and Other | ||||||||||||||||||||
| Segment | Insurance | |||||||||||||||||||
| After-tax (Charge) Benefit | DAC | URR | Benefit Reserves | SIA | Total | |||||||||||||||
|
Individual Annuity
|
$ | (162 | ) | $ | 6 | $ | — | $ | (16 | ) | $ | (172 | ) | |||||||
|
Individual Life
|
(50 | ) | 21 | (40 | ) | — | (69 | ) | ||||||||||||
|
Retirement Plans
|
(44 | ) | — | — | (1 | ) | (45 | ) | ||||||||||||
|
Life Other Operations
|
(74 | ) | — | (173 | ) | 3 | (244 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | (330 | ) | $ | 27 | $ | (213 | ) | $ | (14 | ) | $ | (530 | ) | ||||||
|
|
||||||||||||||||||||
The Unlock charge for the year ended December 31, 2011 was driven primarily by assumption changes
which reduced expected future gross profits including additional costs associated with implementing
the Japan hedging strategy and the U.S. variable annuity macro hedge program, as well as actual
separate account returns below our aggregated estimated return.
For the year ended December 31, 2010:
| Death and Other | ||||||||||||||||||||
| Segment | Insurance Benefit | |||||||||||||||||||
| After-tax (charge) benefit | DAC | URR | Reserves | SIA | Total | |||||||||||||||
|
Individual Annuity
|
$ | 104 | $ | 1 | $ | 39 | $ | (1 | ) | $ | 143 | |||||||||
|
Individual Life
|
23 | 5 | 1 | (1 | ) | 28 | ||||||||||||||
|
Retirement Plans
|
18 | — | — | — | 18 | |||||||||||||||
|
Life Other Operations
|
(62 | ) | 6 | (23 | ) | 1 | (78 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 83 | $ | 12 | $ | 17 | $ | (1 | ) | $ | 111 | |||||||||
|
|
||||||||||||||||||||
The Unlock benefit for the year ended December 31, 2010 was driven primarily by actual separate
account returns above our aggregated estimated return. Also included in the benefit are assumption
changes 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 | ||||||||||||||||||||
| Segment | Other Insurance | |||||||||||||||||||
| After-tax (charge) benefit | DAC | URR | Benefit Reserves | SIA | Total [1] | |||||||||||||||
|
Individual Annuity
|
$ | (429 | ) | $ | 17 | $ | (158 | ) | $ | (36 | ) | $ | (606 | ) | ||||||
|
Individual Life
|
(101 | ) | 54 | (4 | ) | — | (51 | ) | ||||||||||||
|
Retirement Plans
|
(55 | ) | — | — | (1 | ) | (56 | ) | ||||||||||||
|
Life Other Operations
|
(104 | ) | 6 | (210 | ) | (10 | ) | (318 | ) | |||||||||||
|
Corporate
|
(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 Unlock charge for the year ended December 31, 2009 was driven primarily by actual
separate account returns 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.
Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities and Valuation
Allowances on Mortgage Loans
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 impairments
recorded, see the Other-Than-Temporary Impairments within the Investment Portfolio Risks and Risk
Management section of the MD&A.
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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 4 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 Guarantee Risks and 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. During the fourth quarter of 2011, the Company changed the date of its annual impairment
test for all reporting units to October 31
st
from January 1
st
for Wealth
Management reporting units, June 30
th
for Federal Trust Corporation
within Corporate, and October 1
st
for Property & Casualty Commercial and
Consumer Markets. As a result, all reporting units performed an impairment test on October 31,
2011 in addition to the annual impairment tests performed on January 1
st
or October
1
st
as applicable. The change was made to be consistent across all reporting units and
to more closely align the impairment testing date with the long-range planning and forecasting
process. The Company has determined that this change in accounting principle is preferable under
the circumstances and does not result in any delay, acceleration or avoidance of impairment. As it
was impracticable to objectively determine projected cash flows and related valuation estimates as
of each October 31 for periods prior to October 31, 2011, without applying information that has been learned since those periods, the Company has prospectively applied the
change in the annual goodwill impairment testing date from October 31, 2011.
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. If
the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an
impairment loss is recognized in an amount equal to that excess.
Management’s determination of the fair value of each reporting unit incorporates multiple inputs
into discounted cash flow calculations including assumptions that market participants would make in
valuing the reporting unit. Assumptions include levels of economic capital, future business
growth, earnings projections, and assets under management for certain Wealth Management reporting
units and the weighted average cost of capital used for purposes of discounting. In the case of
one business unit, a market comparison approach is used to determine fair value. 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 a
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 2011 and 2010, The Hartford changed its reporting segments with no change to
reporting units. The group disability and group life components of Group Benefits have been
aggregated into one reporting unit; the homeowners and automobile components of Consumer Markets
have been aggregated into one reporting unit; the variable life, universal life and term life
components of Individual Life have been aggregated into one reporting unit; the 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. 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 for segment reporting.
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Table of Contents
As of December 31, 2011, goodwill has been allocated to the following reporting units:
| Segment | Goodwill in | |||||||||||
| Goodwill | Corporate | Total | ||||||||||
|
Group Benefits
|
$ | — | $ | 138 | $ | 138 | ||||||
|
Consumer Markets
|
119 | — | 119 | |||||||||
|
Individual Life
|
224 | 118 | 342 | |||||||||
|
Retirement Plans
|
87 | 69 | 156 | |||||||||
|
Mutual Funds
|
159 | 92 | 251 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 589 | $ | 417 | $ | 1,006 | ||||||
|
|
||||||||||||
As of December 31, 2010, goodwill has been allocated to the following reporting units:
| Segment | Goodwill in | |||||||||||
| Goodwill | Corporate | Total | ||||||||||
|
Hartford Financial Products within
Property & Casualty Commercial
|
$ | 30 | $ | — | $ | 30 | ||||||
|
Group Benefits
|
— | 138 | 138 | |||||||||
|
Consumer Markets
|
119 | — | 119 | |||||||||
|
Individual Life
|
224 | 118 | 342 | |||||||||
|
Retirement Plans
|
87 | 69 | 156 | |||||||||
|
Mutual Funds
|
159 | 92 | 251 | |||||||||
|
Federal Trust Corporation within Corporate
|
— | 15 | 15 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 619 | $ | 432 | $ | 1,051 | ||||||
|
|
||||||||||||
During the second quarter of 2011, the Company wrote off the remaining $15 of goodwill associated
with the Federal Trust Corporation (“FTC”) reporting unit within Corporate due to the announced
divestiture of FTC. The write-off of the FTC reporting unit goodwill was recorded as a loss on
disposal within discontinued operations.
The Company completed its annual goodwill assessment for the reporting units within the Property &
Casualty Commercial and Consumer Markets operating segments on October 1, 2011. The Consumer
Markets reporting unit completed its annual goodwill assessment on October 1, 2011 and again on
October 31, 2011 which resulted in no impairment of goodwill. In both tests, the reporting unit
passed the first step of their annual impairment tests with a significant margin. The annual
goodwill assessment for the Property & Casualty Commercial reporting unit that was performed on
October 1, 2011 resulted in a write-down of goodwill of $30, pre-tax leaving no remaining goodwill.
The results of the discounted cash flow calculations indicated that the fair value of the
reporting unit was less than the carrying value; this was due primarily to a decrease in future
expected underwriting cash flows. The decrease in future expected underwriting cash flows is
driven by an expected reduction in written premium in the short term as the Company maintains
pricing discipline in a downward market cycle, while retaining long term capabilities for future
opportunities.
The Company completed its annual goodwill assessment for the individual reporting units within the
Wealth Management operating segment and Corporate, except for the FTC reporting unit, as noted
above, on January 1, 2011 and October 31, 2011, which resulted in no impairment of goodwill. In
both tests, 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 at the January 1, 2011
test. The Individual Life reporting unit had a margin of less than 10% between fair value and book
value on January 1, 2011. As of the October 31, 2011 impairment test, the Individual Life
reporting unit had a fair value in excess of book value of approximately 15%, a modest improvement from the January
1, 2011 results due to improving cost of capital.
The fair value of the Individual Life reporting unit 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 assumptions change about the level
of economic capital, future business growth, earnings projections or the weighted average cost of
capital.
See Note 8 of the Notes to Consolidated Financial Statements for information on the results of
goodwill impairment tests performed in 2010 and 2009.
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, prepayments speeds and default
rates. 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.
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Table of Contents
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. The fair value of derivative instruments is
determined using pricing valuation models, which utilize market data inputs or independent broker
quotations. Excluding embedded and reinsurance related derivatives, as of December 31, 2011 and
2010, 98% and 97%, respectively, of derivatives based upon notional values, were priced by
valuation models, which utilize independent market data. The remaining derivatives were priced by
broker quotations. The derivatives are valued using mid-market 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. For further discussion,
see the Derivative Instruments, including embedded derivatives within the investments section in
Note 4 of the Notes to Consolidated Financial Statements.
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 4.75% and 4.50% were the appropriate discount rates as of
December 31, 2011 to calculate the Company’s pension and other postretirement obligations,
respectively. Accordingly, the 4.75% and 4.50% discount rates will also be used to determine the
Company’s 2012 pension and other postretirement expense, respectively. At December 31, 2010, the
discount rate was 5.50% and 5.25% for pension and other postretirement expense, respectively.
As of December 31, 2011, a 25 basis point increase/decrease in the discount rate would
decrease/increase the pension and other postretirement obligations by $157 and $10, 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, 2011. This assumption will be used to determine the Company’s 2012 expense. The
long-term rate of return assumption at December 31, 2010, that was used to determine the Company’s
2010 expense, was 7.30%.
Pension expense reflected in the Company’s results was $213, $186 and $137 in 2011, 2010 and 2009,
respectively. The Company estimates its 2012 pension expense will be approximately $246, based on
current assumptions. To illustrate the impact of these assumptions on annual pension expense for
2012 and going forward, a 25 basis point decrease in the discount rate will increase pension
expense by approximately $18 and a 25 basis point change in the long-term asset return assumption
will increase/decrease pension expense by approximately $11.
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 $613 and
$434 for the years ended December 31, 2011 and 2010, respectively, as compared to expected returns
of $298 and $286 for the years ended December 31, 2011 and 2010, 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 4.75% discount rate selected as of December 31, 2011 and taking into
account estimated future minimum funding, the difference between actual and expected performance in
2011 will decrease annual pension expense in future years. The decrease in pension expense will be
approximately $13 in 2012 and will increase ratably to a decrease of approximately $95 in 2017.
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Table of Contents
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, 2011, 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 be more likely than not realized. The deferred tax
asset valuation allowance was $95, relating mostly to foreign net operating losses, as of December
31, 2011 and was $173 as of December 31, 2010. In assessing the need for a valuation allowance,
management considered future taxable temporary difference reversals, future taxable income
exclusive of reversing temporary differences and carryforwards, taxable income in open carry back
years, as well as other tax planning strategies. These tax planning strategies include holding a
portion of debt securities with market value losses until recovery, altering the level of tax
exempt securities held, selling appreciated securities to offset capital losses, business
considerations such as asset-liability matching, and the sales of certain corporate assets.
Management views such tax planning strategies as prudent and feasible, and would implement them, if
necessary, to realize the deferred tax asset. Based on the availability of additional tax planning
strategies identified in the second quarter of 2011, the Company released $86, or 100% of the
valuation allowance associated with investment realized capital losses. 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. 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 Company. 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 results of operations or
liquidity in a particular quarterly or annual period.
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Table of Contents
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 four divisions, Commercial Markets, Consumer Markets, Wealth
Management and Runoff Operations, 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: Individual Annuity, Individual Life, Retirement Plans
and Mutual Funds. The Runoff division consists of Life Other Operations and Property & Casualty
Other Operations. 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 member contact center services provided
through the AARP Health program.
Profitability 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 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, Core Earnings excluding Unlock
After-tax margin, core earnings excluding 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, core earnings excluding 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)
and quarterly Unlocks. Unlocks occur when the Company determines based on actual experience or
other evidence, that estimates of future gross profits should be revised. As the Unlock is a
reflection of the Company’s new best estimates of future gross profits, the result of the Unlock
and its impact distort the trend of after-tax margin. After-tax margin, excluding realized gains
(losses) and 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, core earnings excluding Unlock, and
after-tax margin when reviewing the Company’s performance. After-tax margin, core earnings
excluding Unlock is calculated by dividing core earnings excluding Unlocks by total core revenues
excluding Unlocks. A reconciliation of After-tax margin to After-tax margin, core earnings
excluding Unlock for the year ended December 31, 2011, 2010 and 2009 is set forth in the After-tax
Margin section within Key Performance Measures and Ratios. For additional information regarding
the Unlock, see Critical Accounting Estimates within the MD&A.
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, a non-GAAP measure,
represents the combined ratio for the current accident year, excluding the impact of catastrophes.
Combined ratio is the most directly comparable U.S. GAAP measure. 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. A reconciliation of
combined ratio to combined ratio before prior accident year reserve development for the years ended
December 31, 2011, 2010 and 2009 is set forth in the Combined ratio before catastrophes and prior
year development section within Key Performance Measures and Ratios.
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Core Earnings
Core earnings, a non-GAAP measure is an important measure of the Company’s operating performance.
The Hartford believes that the measure core earnings provides investors with a valuable measure of
the performance of the Company’s ongoing businesses because it reveals trends in our insurance and
financial services businesses that may be obscured by including the net effect of certain realized
capital gains and losses and discontinued operations. 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 the insurance and underwriting aspects of our business. Accordingly, core
earnings excludes the effect of all realized gains and losses (net of tax and the effects of
deferred policy acquisition costs (“DAC”) 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 core earnings includes net
realized gains and losses such as net periodic settlements on credit derivatives and 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 income statement such as net investment
income. Core earnings is also used by management to assess our operating performance and is one of
the measures considered in determining incentive compensation for the Company’s managers. Net
income is the most directly comparable U.S. GAAP measure. Core earnings should not be considered as
a substitute for net income and does not reflect the overall profitability of the Company’s
business. Therefore, The Hartford believes that it is useful for investors to evaluate both net
income and core earnings when reviewing the Company’s performance. A reconciliation of net income
to core earnings for the years ended December 31, 2011, 2010 and 2009 is set forth below
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Core earnings
|
$ | 970 | $ | 1,972 | $ | 797 | ||||||
|
Less: Realized gains (losses) excluded from core earnings
|
(394 | ) | (228 | ) | (1,680 | ) | ||||||
|
Less: Discontinued operations
|
86 | (64 | ) | (4 | ) | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 662 | $ | 1,680 | $ | (887 | ) | |||||
|
|
||||||||||||
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.
DAC amortization ratio, Core Earnings excluding Unlock
DAC amortization ratio, core earnings excluding 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, core earnings excluding 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 Unlocks. Unlocks occur when the Company determines, based on
actual experience or other evidence, that estimates of future gross profits should be revised. The
Unlock is a reflection of the Company’s new best estimates of future gross profits. The result of
the Unlock and is impact distort the trend of DAC amortization ratio. DAC amortization ratio, core
earnings excluding 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, core earnings excluding Unlock,
and DAC amortization ratio when reviewing the Company’s performance. DAC amortization ratio, core
earnings excluding Unlock is calculated by dividing Core DAC amortization costs by pre-tax core
earnings before DAC amortization costs. A reconciliation of DAC amortization ratio to DAC
amortization ratio, core earnings excluding Unlock for the years ended December 31, 2011, 2010 and
2009 is set forth in the Individual Annuity Operating Summary with MD&A. For additional
information regarding the 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.
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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.
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.
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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 property and
casualty 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.
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”), Core Earnings excluding Unlock
ROA, core earnings excluding 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,
core earnings excluding 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 Unlocks. Unlocks occur when the
Company determines, based on actual experience or other evidence, that estimates of future gross
profits should be revised. As the Unlock is a reflection of the Company’s new best estimates of
future gross profits. The result and its impact distort the trend of ROA. ROA, core earnings
excluding 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, core earnings excluding Unlock, and ROA when reviewing the Company’s
performance. ROA is calculated by dividing core earnings excluding Unlocks by a two-point average
AUM. A reconciliation of ROA to ROA, core earnings excluding Unlock for the years ended December
31, 2011, 2010 and 2009 is set forth in the ROA section within Key Performance Measures and Ratios.
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Table of Contents
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.
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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, 2011, 2010 and 2009. 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.
| 2011 | 2010 | 2009 | ||||||||||
|
Property & Casualty Commercial
|
||||||||||||
|
Combined ratio
|
104.5 | 89.7 | 85.9 | |||||||||
|
Catastrophe ratio
|
5.4 | 2.7 | 0.9 | |||||||||
|
Non-catastrophe prior year development
|
1.8 | (6.3 | ) | (6.3 | ) | |||||||
|
|
||||||||||||
|
Combined ratio before catastrophes and prior year development
|
97.2 | 93.4 | 91.2 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Consumer Markets
|
||||||||||||
|
Combined ratio
|
101.5 | 99.0 | 97.2 | |||||||||
|
Catastrophe ratio
|
12.0 | 7.8 | 5.9 | |||||||||
|
Non-catastrophe prior year development
|
(2.7 | ) | (2.4 | ) | (1.0 | ) | ||||||
|
|
||||||||||||
|
Combined ratio before catastrophes and prior year development
|
92.2 | 93.6 | 92.3 | |||||||||
|
|
||||||||||||
Year ended December 31, 2011 compared to the year ended December 31, 2010
| • |
Property & Casualty Commercial’s combined ratio before catastrophes and prior year
development deteriorated primarily due to an increase in current accident year losses and loss
adjustment expenses ratio before catastrophes, largely due to loss costs outpacing earned
pricing increases predominantly related to workers compensation business.
|
| • |
Consumer Markets combined ratio before catastrophes and prior year development decreased
primarily due to changes in the current accident year loss and loss adjustment expenses ratio
before catastrophes, as a decrease for auto was partially offset by an increase for home. The
decrease for auto was driven by the effect of earned pricing increases and lower estimated
frequency on auto liability claims, which was partially offset by higher auto physical damage
loss costs. The increase for home was primarily due to an increase in the frequency of
non-catastrophe weather claims, partially offset by the effect of earned pricing increases.
|
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.
|
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Table of Contents
Return on Assets
Return on assets is a key indicator of overall profitability for the Individual Annuity, Retirement
Plans, Mutual Funds and Life Other Operations reporting segments as a significant portion of their
earnings is based on average assets under management.
| Ratios | 2011 | 2010 | 2009 | |||||||||
|
Individual Annuity [1]
|
||||||||||||
|
ROA
|
(1.6 | ) bps | 54.7 | bps | (48.6 | ) bps | ||||||
|
Effect of net realized losses, net of tax and DAC on ROA
|
(41.3 | ) bps | 0.2 | bps | (38.5 | ) bps | ||||||
|
Effect of Unlock on ROA
|
(7.2 | ) bps | 15.8 | bps | (47.0 | ) bps | ||||||
|
|
||||||||||||
|
ROA, core earnings excluding Unlock
|
46.9 | bps | 38.7 | bps | 36.9 | bps | ||||||
|
|
||||||||||||
|
Retirement Plans [1]
|
||||||||||||
|
ROA
|
2.9 | bps | 9.7 | bps | (54.8 | ) bps | ||||||
|
Effect of net realized losses, net of tax and DAC on ROA
|
(0.7 | ) bps | (4.8 | ) bps | (46.4 | ) bps | ||||||
|
Effect of Unlock on ROA
|
(7.5 | ) bps | 5.4 | bps | (11.4 | ) bps | ||||||
|
|
||||||||||||
|
ROA, core earnings excluding Unlock
|
11.1 | bps | 9.1 | bps | 3.0 | bps | ||||||
|
|
||||||||||||
|
Mutual Funds [1]
|
||||||||||||
|
ROA
|
10.5 | bps | 13.7 | bps | 8.8 | bps | ||||||
|
Effect of net realized gains/(losses), net of tax and DAC on ROA
|
— | bps | 3.9 | bps | — | bps | ||||||
|
|
||||||||||||
|
ROA, core earnings excluding Unlock
|
10.5 | bps | 9.8 | bps | 8.8 | bps | ||||||
|
|
||||||||||||
|
Life Other Operations [1]
|
||||||||||||
|
ROA
|
39.2 | bps | (9.6 | ) bps | (74.5 | ) bps | ||||||
|
Effect of net realized gains/(losses), net of tax and DAC on ROA
|
1.7 | bps | (32.0 | ) bps | (51.7 | ) bps | ||||||
|
Effect of Unlock on ROA
|
3.5 | bps | (7.7 | ) bps | (32.4 | ) bps | ||||||
|
|
||||||||||||
|
ROA, core earnings excluding Unlock
|
34.0 | bps | 30.1 | bps | 9.6 | bps | ||||||
|
|
||||||||||||
| [1] |
Proprietary mutual funds, Investment-Only mutual funds, Canadian mutual funds, and 529
college savings plans are reported in Mutual Funds in 2011 and 2010. Prior to 2010,
proprietary mutual fund assets were included in Individual Annuity, Retirement Plans, and
Mutual Funds, as those same assets generate earnings for each of these segments.
|
Year ended December 31, 2011 compared to year ended December 31, 2010
| • |
Individual Annuity’s ROA, core earnings excluding Unlock, increased in 2011 primarily due
to the favorable impact of a flat DAC amortization rate on 2011 earnings and a DRD tax
settlement benefit in 2011.
|
| • |
Retirement Plans’ ROA, core earnings excluding Unlock, increased in 2011 primarily due to
increased fee and investment income resulting from higher average general account invested
assets and favorable partnership income as well as a DRD tax settlement benefit.
|
| • |
Mutual Funds’ ROA, core earnings excluding Unlock, increased in 2011 primarily due to
higher earnings from continuing operations resulting primarily from lower operating expenses
in 2011. Assets under management and asset-based fee income were unfavorably impacted by
declining equity market performance and increasing outflows over the course of 2011.
|
| • |
Life Other Operations’ ROA, core earnings excluding Unlock, increased in 2011 primarily due
to a lower DAC amortization rate, as earnings increased in 2011 compared to 2010, and a DRD
tax settlement benefit, offset in part by decreased investment income due to lower average
account values in 2011 as compared to 2010.
|
Year ended December 31, 2010 compared to year ended December 31, 2009
| • |
Individual Annuity’s ROA, core earnings excluding Unlock, increased in 2010 primarily due
to improved net investment income on limited partnerships and other alternative investments, a
lower DAC amortization rate, lower operating expenses associated with the restructuring of
operations.
|
| • |
Retirement Plans’ ROA, core earnings excluding Unlock, increased in 2010 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, core earnings excluding Unlock, increased in 2010 primarily due to
improvement in the equity markets, which enabled this line of 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 mutual fund business.
|
| • |
Life Other Operations’ ROA, core earnings excluding Unlock, increased in 2010 primarily due
to lower operating expenses in 2010 and the absence of 3 Win charges recognized in the first
quarter of 2009.
|
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Table of Contents
After-tax margin
After-tax margin is a key indicator of overall profitability for the Individual Life 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.
| 2011 | 2010 | 2009 | ||||||||||
|
Individual Life
|
||||||||||||
|
After-tax margin
|
9.6 | % | 17.9 | % | 1.3 | % | ||||||
|
Effect of net realized gains (losses), net of tax and DAC on after-tax margin
|
1.3 | % | 1.3 | % | (6.6 | %) | ||||||
|
Effect of Unlock on after-tax margin
|
(5.5 | %) | 1.7 | % | (4.7 | %) | ||||||
|
|
||||||||||||
|
After-tax margin, core earnings excluding Unlock
|
13.8 | % | 14.9 | % | 12.6 | % | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Group Benefits
|
||||||||||||
|
After-tax margin (excluding buyouts)
|
2.0 | % | 3.9 | % | 4.2 | % | ||||||
|
Effect of net realized gains (losses), net of tax on after-tax margin
|
0.1 | % | 0.5 | % | (1.5 | %) | ||||||
|
|
||||||||||||
|
After-tax margin (excluding buyouts), excluding realized gains (losses)
|
1.9 | % | 3.4 | % | 5.7 | % | ||||||
|
|
||||||||||||
Year ended December 31, 2011 compared to year ended December 31, 2010
| • |
Individual Life’s after-tax margin, core earnings excluding Unlock, decrease was primarily
due to increased benefits, losses and expenses and increased mortality costs, partially offset
by increased net investment income.
|
| • |
The decrease in Group Benefits’ after-tax margin (excluding buyouts), excluding realized
gains (losses), was primarily due to higher mortality and morbidity driven by elevated incidence and lower claim terminations, and to a lesser extent, a
decrease in fully insured ongoing premiums, driven by lower sales over the past year, as well
as from a challenging economic environment.
|
Year ended December 31, 2010 compared to year ended December 31, 2009
| • |
Individual Life’s after-tax margin, core earnings excluding Unlock, increase was primarily
due to lower DAC amortization and net realized capital gains in 2010 compared to net realized
capital losses in 2009.
|
| • |
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.
|
72
Table of Contents
Investment Results
Composition of Invested Assets
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
|
Fixed maturities, AFS, at fair value
|
$ | 81,809 | 78.3 | % | $ | 77,820 | 79.2 | % | ||||||||
|
Fixed maturities, at fair value using the fair value option
|
1,328 | 1.3 | % | 649 | 0.7 | % | ||||||||||
|
Equity securities, AFS, at fair value
|
921 | 0.9 | % | 973 | 1.0 | % | ||||||||||
|
Mortgage loans
|
5,728 | 5.5 | % | 4,489 | 4.6 | % | ||||||||||
|
Policy loans, at outstanding balance
|
2,001 | 1.9 | % | 2,181 | 2.2 | % | ||||||||||
|
Limited partnerships and other alternative investments
|
2,532 | 2.4 | % | 1,918 | 2.0 | % | ||||||||||
|
Other investments [1]
|
2,394 | 2.3 | % | 1,617 | 1.6 | % | ||||||||||
|
Short-term investments
|
7,736 | 7.4 | % | 8,528 | 8.7 | % | ||||||||||
|
|
||||||||||||||||
|
Total investments excluding equity securities, trading
|
104,449 | 100.0 | % | 98,175 | 100.0 | % | ||||||||||
|
Equity securities, trading, at fair value [2]
|
30,499 | 32,820 | ||||||||||||||
|
|
||||||||||||||||
|
Total investments
|
$ | 134,948 | $ | 130,995 | ||||||||||||
|
|
||||||||||||||||
| [1] |
Primarily relates to derivative instruments.
|
|
| [2] |
As of December 31, 2011 and 2010, approximately $28.5 billion and
$30.5 billion, respectively, of equity securities, trading,
support Japan variable annuities. Those equity securities,
trading, were invested in mutual funds, which, in turn, invested
in the following asset classes, Japan equity 21%, Japan fixed
income (primarily government securities) 15%, global equity 21%,
global government bonds 42%, and cash and other 1% for both
periods presented.
|
Total investments increased since December 31, 2010 primarily due to increases in fixed
maturities, AFS, mortgage loans and other investments, partially offset by a decline in equity
securities, trading and short-term investments. The increase in fixed maturities, AFS, was largely
the result of improved valuations as a result of declining interest rates, partially offset by
credit spread widening. The increase in mortgage loans related to the funding of commercial whole
loans, and the increase in other investments primarily related to increases in value of derivatives
largely due to a decline in the equity market, strengthening of the Japanese yen in comparison to
the U.S. dollar and a decline in interest rates. These increases were partially offset by a
decline in equity securities, trading, primarily due to deteriorations in market performance of the
underlying investments and net outflows, partially offset by the Japanese yen strengthening in
comparison to the euro. The decline in short-term investments primarily relates to increased
allocations to mortgage loans and limited partnerships and other alternative investments.
Net Investment Income (Loss)
| For the years ended December 31, | ||||||||||||||||||||||||
| 2011 | 2010 | 2009 | ||||||||||||||||||||||
| Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | |||||||||||||||||||
|
Fixed maturities [2]
|
$ | 3,396 | 4.2 | % | $ | 3,489 | 4.3 | % | $ | 3,617 | 4.5 | % | ||||||||||||
|
Equity securities, AFS
|
36 | 3.8 | % | 53 | 4.8 | % | 93 | 6.5 | % | |||||||||||||||
|
Mortgage loans
|
281 | 5.4 | % | 260 | 5.2 | % | 307 | 4.8 | % | |||||||||||||||
|
Policy loans
|
131 | 6.1 | % | 132 | 6.1 | % | 139 | 6.3 | % | |||||||||||||||
|
Limited partnerships and other alternative
investments
|
243 | 12.0 | % | 216 | 12.6 | % | (341 | ) | (15.6 | %) | ||||||||||||||
|
Other [3]
|
301 | 329 | 314 | |||||||||||||||||||||
|
Investment expense
|
(116 | ) | (115 | ) | (112 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total securities AFS and other
|
$ | 4,272 | 4.4 | % | $ | 4,364 | 4.5 | % | $ | 4,017 | 4.1 | % | ||||||||||||
|
Equity securities, trading
|
(1,359 | ) | (774 | ) | 3,188 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total net investment income (loss), before-tax
|
$ | 2,913 | $ | 3,590 | $ | 7,205 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total securities, AFS and other excluding
limited partnerships and other alternative
investments
|
4,029 | 4.2 | % | 4,148 | 4.3 | % | 4,358 | 4.5 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
| [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 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.
|
73
Table of Contents
Year ended December 31, 2011 compared to the year ended December 31, 2010
Total net investment income declined largely due to equity securities, trading, resulting from a
market decline of the underlying investment funds supporting the Japanese variable annuity product
and net outflows, partially offset by the Japanese yen strengthening in comparison to the euro.
Also contributing to the decline was lower income on fixed maturities resulting from the proceeds
from sales being reinvested at lower rates. These declines were partially offset by an increase in limited
partnership and other alternative investment income due to additional allocations to this asset
class and strong private equity and real estate returns, as well as an increase in mortgage loan
income due to additional investments in commercial whole loans. The Company’s expectation for
2012, based on the current interest rate and credit environment, is that reinvestment rates will be
slightly lower than maturing securities; however, the Company has increased its investment in
certain higher yielding asset classes, such as commercial mortgage loans and a modest amount of
high-yield securities. Therefore, the Company expects the 2012 portfolio yield, excluding limited
partnerships, to be relatively consistent with 2011.
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.
Net Realized Capital Gains (Losses)
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Gross gains on sales
|
$ | 693 | $ | 836 | $ | 1,056 | ||||||
|
Gross losses on sales
|
(384 | ) | (522 | ) | (1,397 | ) | ||||||
|
Net OTTI losses recognized in earnings
|
(174 | ) | (434 | ) | (1,508 | ) | ||||||
|
Valuation allowances on mortgage loans
|
24 | (154 | ) | (403 | ) | |||||||
|
Japanese fixed annuity contract hedges, net [1]
|
3 | 27 | 47 | |||||||||
|
Periodic net coupon settlements on credit derivatives/Japan
|
(10 | ) | (17 | ) | (49 | ) | ||||||
|
Results of variable annuity hedge program
|
||||||||||||
|
U.S. GMWB derivatives, net
|
(397 | ) | 89 | 1,464 | ||||||||
|
U.S. macro hedge program
|
(216 | ) | (445 | ) | (733 | ) | ||||||
|
|
||||||||||||
|
Total U.S. program
|
(613 | ) | (356 | ) | 731 | |||||||
|
International program
|
775 | 11 | (112 | ) | ||||||||
|
|
||||||||||||
|
Total results of variable annuity hedge program
|
162 | (345 | ) | 619 | ||||||||
|
Other, net [2]
|
(459 | ) | (2 | ) | (369 | ) | ||||||
|
|
||||||||||||
|
Net realized capital gains (losses), before-tax
|
$ | (145 | ) | $ | (611 | ) | $ | (2,004 | ) | |||
|
|
||||||||||||
| [1] |
Relates to the Japanese fixed annuity product (adjustment
of product liability for changes in spot currency exchange
rates, related derivative hedging instruments, excluding net
period coupon settlements, and Japan FVO securities).
|
|
| [2] |
Primarily consists of gains and losses on non-qualifying
derivatives and fixed maturities, FVO, Japan 3Win related
foreign currency swaps, 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, 2011 were predominately
from investment grade corporate
securities, U.S. Treasuries,
municipal bonds and commercial real
estate related securities. These
sales were the result of
reinvestment into spread product
well-positioned for modest economic
growth, as well as the purposeful
reduction of certain exposures.
•
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.
|
|
|
|
||
|
Net OTTI losses
|
•
For further
information, see
Other-Than-Temporary Impairments
within the Investment Portfolio
Risks and Risk Management section of
the MD&A.
|
|
|
|
||
|
Valuation allowances on mortgage
loans |
•
For further
information, see Valuation
Allowances on Mortgage Loans within
the Investment Portfolio Risks and
Risk Management section of the MD&A.
|
74
Table of Contents
|
Variable annuity hedge program
|
•
For the year ended
December 31, 2011, the loss on U.S.
GMWB related derivatives, net, was
primarily due to a decrease in
long-term interest rates that
resulted in a charge of ($283) and a
higher interest rate volatility that
resulted in a charge of ($84). The
loss on U.S. macro hedge program for
the year ended December 31, 2011 was
primarily driven by time decay and a
decrease in equity market volatility
since the purchase date of certain
options during the fourth quarter.
The gain associated with the
international program for the year
ended December 31, 2011 was
primarily driven by the Japanese yen
strengthening, lower global equity
markets, and a decrease in interest
rates.
•
For the year ended
December 31, 2010, the gain on U.S.
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 U.S.
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.
The net loss on the U.S. macro hedge
program was primarily the result of
a higher equity market valuation.
|
|
|
|
||
|
Other, net
|
•
Other, net loss for
the year ended December 31, 2011,
was primarily due to losses of
($148) on credit derivatives and
fair value option securities driven
by credit spread widening and losses
of ($141) on transactional foreign
currency re-valuation associated
with the internal reinsurance of the
Japan variable annuity business,
which is offset in AOCI, due to
appreciation of the Japanese yen
versus the U.S. dollar.
Additionally, losses of ($94) for
the year ended December 31, 2011
resulted from equity futures and
options used to hedge equity market
risk in the investment portfolio due
to an increase in the equity market
during the hedged period. Also
included were losses of ($69) on
Japan 3Win foreign currency swaps
primarily driven by a decrease in
long-term U.S. interest rates.
•
Other, net loss for
the year ended December 31, 2010 was
primarily due to a loss 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. This loss was
partially offset by gains of $217 on
credit derivatives driven by credit
spread tightening, and gains of $59
on interest rate derivatives used to
manage portfolio duration driven by
a decline in long-term interest
rates.
•
Other, net loss 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.
|
75
Table of Contents
PROPERTY & CASUALTY COMMERCIAL
| Underwriting Summary | 2011 | 2010 | 2009 | |||||||||
|
Written premiums
|
$ | 6,176 | $ | 5,796 | $ | 5,715 | ||||||
|
Change in unearned premium reserve
|
49 | 52 | (188 | ) | ||||||||
|
|
||||||||||||
|
Earned premiums
|
6,127 | 5,744 | 5,903 | |||||||||
|
Losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
4,139 | 3,579 | 3,582 | |||||||||
|
Current accident year catastrophes
|
320 | 152 | 78 | |||||||||
|
Prior accident years
|
125 | (361 | ) | (394 | ) | |||||||
|
|
||||||||||||
|
Total losses and loss adjustment expenses
|
4,584 | 3,370 | 3,266 | |||||||||
|
Amortization of deferred policy acquisition costs
|
1,356 | 1,353 | 1,393 | |||||||||
|
Underwriting expenses
|
443 | 426 | 399 | |||||||||
|
Dividends to policyholders
|
18 | 5 | 10 | |||||||||
|
|
||||||||||||
|
Underwriting results
|
(274 | ) | 590 | 835 | ||||||||
|
Net servicing income
|
13 | 9 | 6 | |||||||||
|
Net investment income
|
910 | 935 | 755 | |||||||||
|
Net realized capital gains (losses)
|
(50 | ) | 3 | (209 | ) | |||||||
|
Goodwill impairment
|
(30 | ) | — | — | ||||||||
|
Other expenses
|
(151 | ) | (147 | ) | (139 | ) | ||||||
|
|
||||||||||||
|
Income from continuing operations before income taxes
|
418 | 1,390 | 1,248 | |||||||||
|
Income tax expense
|
40 | 407 | 356 | |||||||||
|
|
||||||||||||
|
Income from continuing operations, net of tax
|
378 | 983 | 892 | |||||||||
|
Income from discontinued operations, net of tax [1]
|
150 | 12 | 7 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 528 | $ | 995 | $ | 899 | ||||||
|
|
||||||||||||
| [1] |
Represents the income from operations and sale of Specialty Risk Services (“SRS”). For
additional information, see Note 20 of the Notes to Consolidated Financial Statements.
|
| Premium Measures [1] | 2011 | 2010 | 2009 | |||||||||
|
New business premium
|
$ | 1,097 | $ | 1,122 | $ | 1,101 | ||||||
|
Standard commercial lines policy count retention
|
82 | % | 84 | % | 81 | % | ||||||
|
Standard commercial lines renewal written pricing increase (decrease)
|
4 | % | 1 | % | (1 | %) | ||||||
|
Standard commercial lines renewal earned pricing increase (decrease)
|
2 | % | — | (2 | %) | |||||||
|
Standard commercial lines policies in-force as of end of period
|
1,252,820 | 1,211,047 | 1,159,759 | |||||||||
| [1] |
Standard commercial lines represents the Company’s small commercial and middle market
property and casualty lines.
|
| Ratios | 2011 | 2010 | 2009 | |||||||||
|
Loss and loss adjustment expense ratio
|
||||||||||||
|
Current accident year before catastrophes
|
67.6 | 62.3 | 60.7 | |||||||||
|
Current accident year catastrophes
|
5.2 | 2.7 | 1.3 | |||||||||
|
Prior accident years
|
2.0 | (6.3 | ) | (6.7 | ) | |||||||
|
|
||||||||||||
|
Total loss and loss adjustment expense ratio
|
74.8 | 58.7 | 55.3 | |||||||||
|
Expense ratio
|
29.4 | 31.0 | 30.4 | |||||||||
|
Policyholder dividend ratio
|
0.3 | 0.1 | 0.2 | |||||||||
|
|
||||||||||||
|
Combined ratio
|
104.5 | 89.7 | 85.9 | |||||||||
|
|
||||||||||||
|
Catastrophe ratio
|
||||||||||||
|
Current accident year
|
5.2 | 2.7 | 1.3 | |||||||||
|
Prior accident years
|
0.2 | — | (0.4 | ) | ||||||||
|
|
||||||||||||
|
Total catastrophe ratio
|
5.4 | 2.7 | 0.9 | |||||||||
|
|
||||||||||||
|
Combined ratio before catastrophes
|
99.1 | 87.1 | 84.9 | |||||||||
|
Combined ratio before catastrophes and prior
accident year development
|
97.2 | 93.4 | 91.2 | |||||||||
|
|
||||||||||||
|
Other revenues [1]
|
$ | 97 | $ | 96 | $ | 103 | ||||||
|
|
||||||||||||
| [1] |
Represents servicing revenues.
|
76
Table of Contents
Year ended December 31, 2011 compared to the year ended December 31, 2010
Net income decreased in 2011, as compared to the prior year, primarily due to a decrease in
underwriting results due to higher current accident year losses, including catastrophes, and
unfavorable prior accident years development in 2011 compared to favorable prior accident years
development in 2010. The decrease in underwriting results was partially offset by the net realized
capital gain on the sale of SRS. The annual goodwill assessment for the Property & Casualty
Commercial reporting unit resulted in a write-down of goodwill of $30, pre-tax for the year ended
December 31, 2011. For further discussion, see Goodwill and Other Intangible Assets within Note 8
of the Notes to Consolidated Financial Statements.
Current accident year catastrophe losses increased $168, pre-tax, from 2010 to 2011. In 2011,
catastrophes primarily included severe thunderstorms and tornadoes in the Midwest and Southeast,
Hurricane Irene in the Northeast, Tropical Storm Lee, and winter storms, earlier in the year, in
the Northeast and Midwest. In 2010, catastrophes primarily included tornadoes, thunderstorms and
hail events in the Midwest, Plains States and the Southeast and winter storms in the Mid-Atlantic
and Northeast.
For information regarding prior accident years reserve development, including reserve (releases)
strengthenings by reserve line, see the Property and Casualty Insurance Product Reserves, Net of
Reinsurance section within Critical Accounting Estimates.
The increase in earned premiums in 2011, is primarily due to improvements in workers’ compensation,
driven by higher new business premium, renewal earned pricing increases and an increase in
policies-in-force. The earned pricing changes were primarily a reflection of written pricing
changes over the last year. Renewal written pricing increased for all standard commercial lines
driven by improving market conditions.
Current accident year losses and loss adjustment expenses before catastrophes increased, due
primarily to the increase in earned premiums for workers’ compensation, as well as an increase in
the current accident year loss and loss adjustment expense ratio before catastrophes. The ratio
increased primarily due to loss costs outpacing earned pricing increases driven by an increase in
workers’ compensation claim frequency, partially offset by moderating severity, resulting in an
increase in current accident year reserve strengthening.
Underwriting expenses increased in 2011, driven by an increase in technology costs, partially
offset by a decrease in compensation related costs. The year ended December 31, 2011 included a
$12 release of reserves for other state funds and taxes, while the year ended December 31, 2010
included strengthening of $20, which was due to an increase in the assessment for New York state
funds and taxes. The change in dividends to policyholders is due to a decrease in 2010 of
dividends payable primarily for workers’ compensation policyholders.
Net realized capital losses increased primarily due to losses on derivatives, partially offset by
lower impairments. 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. In addition, due to the
availability of additional tax planning strategies, the Company released $22, or 100%, of the
valuation allowance associated with investment realized capital losses in 2011. For further
discussion, see Income Taxes within Note 13 of the Notes to Consolidated Financial Statements.
77
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 contributed to the decrease in earned
premiums during 2010. Although earned premiums declined, several key measures showed 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 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.
For information regarding prior accident years reserve development, including reserve (releases)
strengthenings by reserve line, see the Property and Casualty Insurance Product Reserves, Net of
Reinsurance section within Critical Accounting Estimates.
Underwriting 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 technology costs, partially offset by lower compensation-related costs.
Amortization of deferred policy acquisition costs decreased, largely due to the decrease in earned
premiums. The change in dividends to policyholders is due to a decrease in 2010 of dividends
payable primarily for workers’ compensation policyholders.
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.
78
Table of Contents
GROUP BENEFITS
| Operating Summary | 2011 | 2010 | 2009 | |||||||||
|
Premiums and other considerations
|
$ | 4,147 | $ | 4,278 | $ | 4,350 | ||||||
|
Net investment income
|
411 | 429 | 403 | |||||||||
|
Net realized capital gains (losses)
|
(3 | ) | 46 | (124 | ) | |||||||
|
|
||||||||||||
|
Total revenues
|
4,555 | 4,753 | 4,629 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
3,306 | 3,331 | 3,196 | |||||||||
|
Amortization of deferred policy acquisition costs
|
55 | 61 | 61 | |||||||||
|
Insurance operating costs and other expenses
|
1,104 | 1,111 | 1,120 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
4,465 | 4,503 | 4,377 | |||||||||
|
Income before income taxes
|
90 | 250 | 252 | |||||||||
|
Income tax expense
|
— | 65 | 59 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 90 | $ | 185 | $ | 193 | ||||||
|
|
||||||||||||
| Premiums and other considerations | 2011 | 2010 | 2009 | |||||||||
|
Fully insured — ongoing premiums
|
$ | 4,036 | $ | 4,166 | $ | 4,309 | ||||||
|
Buyout premiums
|
49 | 58 | — | |||||||||
|
Other
|
62 | 54 | 41 | |||||||||
|
|
||||||||||||
|
Total premiums and other considerations
|
$ | 4,147 | $ | 4,278 | $ | 4,350 | ||||||
|
|
||||||||||||
|
Fully insured ongoing sales, excluding buyouts
|
$ | 505 | $ | 583 | $ | 741 | ||||||
|
|
||||||||||||
| Ratios, excluding buyouts | 2011 | 2010 | 2009 | |||||||||
|
Loss ratio
|
79.5 | % | 77.6 | % | 73.5 | % | ||||||
|
Loss ratio, excluding financial institutions
|
84.5 | % | 82.8 | % | 77.8 | % | ||||||
|
Expense ratio
|
28.3 | % | 27.8 | % | 27.1 | % | ||||||
|
Expense ratio, excluding financial institutions
|
23.7 | % | 23.3 | % | 22.6 | % | ||||||
Group Benefits has a block of financial institution business that is experience rated. This
business comprised approximately 9% to 10% of the segment’s 2011, 2010 and 2009 premiums and other
considerations (excluding buyouts). With respect to the segment’s core earnings, the financial
institution business comprised 2% for 2011, 6% for 2010, 2% for 2009, excluding a one-time payment
to a third party administrator in 2011 and a commission accrual adjustment in 2009.
Year ended December 31, 2011 compared to the year ended December 31, 2010
Net income decreased, relative to prior year,
primarily due to higher mortality and morbidity driven by elevated
incidence and lower claim terminations, and
to a lesser extent, a decrease in fully insured ongoing premiums, driven by lower sales over the
past year, as well as, from a challenging economic environment.
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. In addition, due to the
availability of additional tax planning strategies, the Company released $5 or 100% of the
valuation allowance associated with investment realized capital losses in 2011. For further
discussion, see Income Taxes within Note 13 of the Notes to Consolidated Financial Statements.
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.
79
Table of Contents
CONSUMER MARKETS
| Operating Summary | 2011 | 2010 | 2009 | |||||||||
|
Written premiums
|
$ | 3,675 | $ | 3,886 | $ | 3,995 | ||||||
|
Change in unearned premium reserve
|
(72 | ) | (61 | ) | 36 | |||||||
|
|
||||||||||||
|
Earned premiums
|
3,747 | 3,947 | 3,959 | |||||||||
|
Losses and loss adjustment expenses
|
||||||||||||
|
Current accident year before catastrophes
|
2,536 | 2,737 | 2,707 | |||||||||
|
Current accident year catastrophes
|
425 | 300 | 228 | |||||||||
|
Prior accident years
|
(75 | ) | (86 | ) | (33 | ) | ||||||
|
|
||||||||||||
|
Total losses and loss adjustment expenses
|
2,886 | 2,951 | 2,902 | |||||||||
|
Amortization of deferred policy acquisition costs
|
639 | 667 | 674 | |||||||||
|
Underwriting expenses
|
279 | 290 | 273 | |||||||||
|
|
||||||||||||
|
Underwriting results
|
(57 | ) | 39 | 110 | ||||||||
|
Net servicing income
|
19 | 35 | 29 | |||||||||
|
Net investment income
|
187 | 187 | 178 | |||||||||
|
Net realized capital gains (losses)
|
(11 | ) | — | (52 | ) | |||||||
|
Other expenses
|
(162 | ) | (66 | ) | (77 | ) | ||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
(24 | ) | 195 | 188 | ||||||||
|
Income tax expense (benefit)
|
(29 | ) | 52 | 48 | ||||||||
|
|
||||||||||||
|
Net income
|
$ | 5 | $ | 143 | $ | 140 | ||||||
|
|
||||||||||||
| Written Premiums | 2011 | 2010 | 2009 | |||||||||
|
Product Line
|
||||||||||||
|
Automobile
|
$ | 2,562 | $ | 2,745 | $ | 2,877 | ||||||
|
Homeowners
|
1,113 | 1,141 | 1,118 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 3,675 | $ | 3,886 | $ | 3,995 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earned Premiums
|
||||||||||||
|
Product Line
|
||||||||||||
|
Automobile
|
$ | 2,619 | $ | 2,806 | $ | 2,857 | ||||||
|
Homeowners
|
1,128 | 1,141 | 1,102 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 3,747 | $ | 3,947 | $ | 3,959 | ||||||
|
|
||||||||||||
| Premium Measures | 2011 | 2010 | 2009 | |||||||||
|
Policies in force at year end
|
||||||||||||
|
Automobile
|
2,080,535 | 2,226,351 | 2,395,421 | |||||||||
|
Homeowners
|
1,338,676 | 1,426,107 | 1,488,408 | |||||||||
|
|
||||||||||||
|
Total policies in force at year end
|
3,419,211 | 3,652,458 | 3,883,829 | |||||||||
|
|
||||||||||||
|
New business premium
|
||||||||||||
|
Automobile
|
$ | 298 | $ | 311 | $ | 455 | ||||||
|
Homeowners
|
$ | 91 | $ | 106 | $ | 149 | ||||||
|
Policy count retention
|
||||||||||||
|
Automobile
|
83 | % | 83 | % | 86 | % | ||||||
|
Homeowners
|
84 | % | 85 | % | 86 | % | ||||||
|
Renewal written pricing increase
|
||||||||||||
|
Automobile
|
5 | % | 6 | % | 3 | % | ||||||
|
Homeowners
|
8 | % | 10 | % | 5 | % | ||||||
|
Renewal earned pricing increase
|
||||||||||||
|
Automobile
|
6 | % | 5 | % | 4 | % | ||||||
|
Homeowners
|
9 | % | 7 | % | 6 | % | ||||||
80
Table of Contents
| Ratios and Supplemental Data | 2011 | 2010 | 2009 | |||||||||
|
Loss and loss adjustment expense ratio
|
||||||||||||
|
Current accident year before catastrophes
|
67.7 | 69.4 | 68.4 | |||||||||
|
Current accident year catastrophes
|
11.3 | 7.6 | 5.8 | |||||||||
|
Prior accident years
|
(2.0 | ) | (2.2 | ) | (0.8 | ) | ||||||
|
|
||||||||||||
|
Total loss and loss adjustment expense ratio
|
77.0 | 74.8 | 73.3 | |||||||||
|
Expense ratio
|
24.5 | 24.2 | 23.9 | |||||||||
|
|
||||||||||||
|
Combined ratio
|
101.5 | 99.0 | 97.2 | |||||||||
|
|
||||||||||||
|
Catastrophe ratio
|
||||||||||||
|
Current accident year
|
11.3 | 7.6 | 5.8 | |||||||||
|
Prior accident years
|
0.7 | 0.3 | 0.1 | |||||||||
|
|
||||||||||||
|
Total catastrophe ratio
|
12.0 | 7.8 | 5.9 | |||||||||
|
|
||||||||||||
|
Combined ratio before catastrophes
|
89.5 | 91.2 | 91.3 | |||||||||
|
Combined ratio before catastrophes and prior accident years development
|
92.2 | 93.6 | 92.3 | |||||||||
|
|
||||||||||||
|
Other revenues [1]
|
$ | 156 | $ | 172 | $ | 154 | ||||||
|
|
||||||||||||
| [1] |
Represents servicing revenues.
|
| Product Combined Ratios | 2011 | 2010 | 2009 | |||||||||
|
Automobile
|
96.4 | 97.1 | 96.9 | |||||||||
|
Homeowners
|
113.7 | 104.0 | 98.2 | |||||||||
|
|
||||||||||||
|
Total
|
101.5 | 99.0 | 97.2 | |||||||||
|
|
||||||||||||
Year ended December 31, 2011 compared to the year ended December 31, 2010
Net income decreased in 2011, as compared to the prior year, due to higher current accident year
catastrophes and a $113, pre-tax, charge, recorded in other expenses, related to the write off of
capitalized costs associated with a discontinued policy administration software project.
Current accident year catastrophe losses increased from 2010 to 2011, driven by an increase in
tornado and thunderstorm losses in the Midwest and Southeast of approximately $140, pre-tax. In
2011, catastrophes primarily included severe tornadoes, hail and thunderstorm events in the Midwest
and Southeast and Hurricane Irene. In 2010, catastrophes primarily included tornadoes, hail and
thunderstorm events in the Midwest, Plains States and the Southeast, as well as, a severe wind and
hail storm event in Arizona.
Earned premiums decreased in auto and were down modestly for homeowners. For both auto and
homeowners, non-renewal of existing policies more than offset the impacts of new business written
premium and renewal earned pricing increases. Compared to 2010, the number of policies in-force
as of December 31, 2011 decreased for both auto and home, driven by non-renewals.
Auto new business written premium decreased, primarily due to the effect of written pricing
increases and underwriting actions that lowered the policy issue rate in Agency. Home new business
written premium decreased in both AARP and Agency driven largely by the effect of written pricing
increases. While auto and home new business written premium declined for the full year, new
business increased in the latter part of the year with new business growth in both channels in the
fourth quarter of 2011.
The higher auto renewal earned pricing in 2011 was due to rate increases and the effect of
policyholders purchasing newer vehicle models in place of older models. Average renewal earned
premium per policy for auto increased modestly as renewal earned pricing increases were partially
offset by the effect of a continued shift to more preferred market business which has lower average
earned premium. Homeowners’ renewal earned pricing increases were due to rate increases and
increased coverage amounts. 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.
Current accident year losses and loss adjustment expenses before catastrophes decreased primarily
due to lower earned premiums. The overall current accident year loss and loss adjustment expense
ratio before catastrophes decreased during 2011 as a 2.6 point decrease for auto was partially
offset by a 1.2 point increase for home. For auto, the effect of earned pricing increases and
lower estimated frequency on auto liability claims was partially offset by higher auto physical
damage loss costs. For home, an increase in the frequency of non-catastrophe weather claims was
partially offset by the effect of earned pricing increases.
Amortization of deferred acquisition costs decreased largely due to a decline in commissions paid
to agents due to lower Agency earned premium. The decrease in underwriting expenses was primarily
driven by a decrease in reserves for other state funds and taxes. The decline in net servicing
income in 2011 was largely due to lower contact center transaction volumes handled as a third party
administrator under the AARP Health program.
For information regarding prior accident years reserve development, including reserve (releases)
strengthenings by reserve line, see the Property and Casualty Insurance Product Reserves, Net of
Reinsurance section within Critical Accounting Estimates.
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.
81
Table of Contents
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.
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 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 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.
For information regarding prior accident years reserve development, including reserve (releases)
strengthenings by reserve line, see the Property and Casualty Insurance Product Reserves, Net of
Reinsurance section within Critical Accounting Estimates.
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 flat 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.
The expense ratio increased due largely to an 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
reduction of TWIA hurricane assessments in 2009 largely offset by an 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.
82
Table of Contents
INDIVIDUAL ANNUITY
| Operating Summary | 2011 | 2010 | 2009 | |||||||||
|
Fee income and other
|
$ | 1,411 | $ | 1,493 | $ | 1,472 | ||||||
|
Earned premiums
|
249 | 223 | (7 | ) | ||||||||
|
Net investment income
|
768 | 814 | 771 | |||||||||
|
Net realized capital losses
|
(591 | ) | (339 | ) | (7 | ) | ||||||
|
|
||||||||||||
|
Total revenues
|
1,837 | 2,191 | 2,229 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
1,106 | 1,054 | 1,310 | |||||||||
|
Amortization of DAC
|
483 | (56 | ) | 1,339 | ||||||||
|
Insurance operating costs and other expenses
|
536 | 542 | 505 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
2,125 | 1,540 | 3,154 | |||||||||
|
Income (loss) before income taxes
|
(288 | ) | 651 | (925 | ) | |||||||
|
Income tax expense (benefit)
|
(274 | ) | 124 | (481 | ) | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (14 | ) | $ | 527 | $ | (444 | ) | ||||
|
|
||||||||||||
| Assets Under Management [1] | 2011 | 2010 | 2009 | |||||||||
|
Fixed MVA annuity and other account values
|
$ | 11,631 | 12,223 | 12,110 | ||||||||
|
Variable annuity account values
|
68,760 | 83,013 | 84,679 | |||||||||
|
|
||||||||||||
|
Total assets under management
|
$ | 80,391 | $ | 95,236 | $ | 96,789 | ||||||
|
|
||||||||||||
| Account Value Roll Forward | 2011 | 2010 | 2009 | |||||||||
|
Variable Annuities
|
||||||||||||
|
Account value, beginning of period
|
$ | 83,013 | $ | 119,387 | $ | 105,921 | ||||||
|
Transfers affecting beginning of period [1]
|
— | (34,708 | ) | (31,343 | ) | |||||||
|
|
||||||||||||
|
Account value, beginning of period, as adjusted
|
$ | 83,013 | $ | 84,679 | $ | 74,578 | ||||||
|
Net flows
|
(11,552 | ) | (9,966 | ) | (7,122 | ) | ||||||
|
Change in market value and other
|
(2,701 | ) | 8,300 | 17,223 | ||||||||
|
|
||||||||||||
|
Account value, end of period
|
$ | 68,760 | $ | 83,013 | $ | 84,679 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Investment Spread
|
17 | bps | 27 | bps | 1 | bps | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Expense Ratios
|
||||||||||||
|
General insurance expense ratio
|
23.5 | bps | 22.4 | bps | 24.1 | bps | ||||||
|
|
||||||||||||
|
DAC amortization ratio
|
247.7 | % | (9.4 | %) | 323.4 | % | ||||||
|
Effect of realized gains (losses) on DAC amortization
|
(183.3 | %) | 39.3 | % | (141.4 | %) | ||||||
|
Effect of Unlocks on DAC amortization
|
(12.0 | %) | 22.4 | % | (120.1 | %) | ||||||
|
|
||||||||||||
|
DAC amortization ratio, core earnings, excluding Unlock
|
52.4 | % | 52.3 | % | 62.0 | % | ||||||
|
|
||||||||||||
| [1] |
International and institutional annuities were transferred retrospectively to Life Other Operations.
|
83
Table of Contents
Year ended December 31, 2011 compared to the year ended December 31, 2010
Net income decreased in 2011 compared to 2010 primarily due to an Unlock charge taken in 2011
compared to an Unlock benefit in 2010 and increased net realized capital losses in 2011.
Additionally, lower account values driven by equity performance and net outflows resulted in lower
fee income.
The Unlock charge was $172, after-tax, in 2011 as compared to an Unlock benefit of $143, after-tax,
in 2010. The Unlock charge in 2011 was due to the annual assumption update which reflected
additional hedging costs incurred in 2011 resulting in increased benefits losses and loss
adjustment expenses and DAC amortization. For further discussion of the Unlock see the Critical
Accounting Estimates within the MD&A.
The higher net realized capital losses in 2011 were primarily due to increased losses on the
variable annuity hedging program. The variable annuity hedging program losses were $613 in 2011
compared with losses of $356 in 2010. 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.
Net investment spread decreased by 10 bps in 2011 compared to 2010 primarily due to lower returns
on partnership, derivative and other alternative investments. Yields decreased by 28 bps due to a
lower interest rate environment, however, this decrease was offset by a benefit of 18 bps from
lower crediting rates related to maturities of older contracts with higher crediting rates or
contract renewals with current lower crediting rates.
Individual Annuity’s effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD on annuity products. Income taxes include
separate account DRD benefits of $155 in 2011 compared to $108 in 2010. Included in the 2011
separate account benefit is a tax benefit of $51 including $6 interest related to a DRD settlement.
For further discussion, see Note 13 of the Notes to Consolidated Financial Statements.
Year ended December 31, 2010 compared to the year ended December 31, 2009
Net income increased in 2010 compared to 2009 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.
The Unlock benefit was $143, after-tax, in 2010 as compared to an Unlock charge of $606, 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.
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 $356 in 2010 compared with gains of $731 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.
Net investment income on securities available-for-sale and other increased slightly due to
improving investments results on limited partnership and other alternative investments.
Net investment spread increased by 26 bps in 2010 compared to 2009 primarily due to an increase in
partnership returns, partially offset by declines in fixed maturities. Yields decreased by 7 bps
due to a lower interest rate environment, however, this decrease was offset by a benefit of 33 bps
from lower crediting rates related to maturities of older contracts with higher crediting rates or
contract renewals with current lower crediting rates.
Individual 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. For further
discussion, see Note 13 of the Notes to Consolidated Financial Statements.
84
Table of Contents
INDIVIDUAL LIFE
| Operating Summary | 2011 | 2010 | 2009 | |||||||||
|
Fee income and other
|
$ | 1,001 | $ | 952 | $ | 1,027 | ||||||
|
Earned premiums
|
(102 | ) | (96 | ) | (87 | ) | ||||||
|
Net investment income
|
456 | 400 | 335 | |||||||||
|
Net realized capital gains (losses)
|
30 | 24 | (145 | ) | ||||||||
|
|
||||||||||||
|
Total revenues
|
1,385 | 1,280 | 1,130 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
816 | 644 | 640 | |||||||||
|
Insurance operating costs and other expenses
|
182 | 181 | 188 | |||||||||
|
Amortization of DAC
|
221 | 119 | 314 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
1,219 | 944 | 1,142 | |||||||||
|
Income (loss) before income taxes
|
166 | 336 | (12 | ) | ||||||||
|
Income tax expense (benefit)
|
33 | 107 | (27 | ) | ||||||||
|
|
||||||||||||
|
Net income
|
$ | 133 | $ | 229 | $ | 15 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Account
Values
|
||||||||||||
|
Individual variable universal life insurance
|
$ | 5,535 | $ | 6,115 | $ | 5,766 | ||||||
|
Universal life, interest sensitive whole life, modified guaranteed life insurance and other
|
6,765 | 6,128 | 5,693 | |||||||||
|
|
||||||||||||
|
Total account values
|
$ | 12,300 | $ | 12,243 | $ | 11,459 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Individual Life Insurance In-force
|
||||||||||||
|
Variable universal life insurance
|
$ | 69,716 | $ | 74,044 | $ | 78,671 | ||||||
|
Universal life, interest sensitive whole life, modified guaranteed life insurance
|
64,006 | 58,789 | 56,030 | |||||||||
|
Term life
|
81,494 | 75,797 | 69,968 | |||||||||
|
|
||||||||||||
|
Total life insurance in-force
|
$ | 215,216 | $ | 208,630 | $ | 204,669 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Investment Spread
|
153 | bps | 145 | bps | 81 | bps | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Death Benefits
|
$ | 423 | $ | 362 | $ | 346 | ||||||
|
|
||||||||||||
Year ended December 31, 2011 compared to the year ended December 31, 2010
Net income decreased in 2011 compared to 2010 largely due to an Unlock charge taken in 2011
compared to an Unlock benefit in 2010 and unfavorable mortality in 2011, partially offset by an
increase in net investment income driven by higher invested assets and favorable partnership
income.
The Unlock charge was $69, after-tax, for 2011 compared to an Unlock benefit of $28, after-tax, for
2010. The Unlock charge in 2011 was due to the annual assumption update completed in the third
quarter and resulted in an increase in fee income, benefit and claim expense and DAC amortization.
For further discussion of Unlocks see the Critical Accounting Estimates within the MD&A.
Net investment spread increased by 8 bps in 2011 compared to 2010. While yields were down slightly
compared to 2010, the increase in spread was driven by lower crediting rates on new business
written relative to in-force business with higher crediting rates.
The increase in death benefits for 2011 compared to 2010 was due to unfavorable mortality
experience due to higher reinsurance retention relative to 2010 but within expected levels of
volatility for 2011.
Individual Life’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 $17 and $13 for the years ended December 31, 2011 and 2010, respectively. The separate
account DRD benefit for the year ended December 31, 2011 includes $5 related to a DRD settlement.
85
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, Individual Life’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.
Individual Life’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.
Net investment income increased primarily due to improved performance of limited partnerships and
other alternative investments 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
increased by 64 bps in 2010 compared to 2009 driven by improved investment yields of 33 bps and
decreased crediting rates of 31 bps. The lower crediting rates related to maturities of older
contracts with higher crediting rates or contract renewals with current lower crediting rates.
Individual Life’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. For further discussion, see Note
13 of the Notes to Consolidated Financial Statements.
86
Table of Contents
RETIREMENT PLANS
| Operating Summary | 2011 | 2010 | 2009 | |||||||||
|
Fee income and other
|
$ | 373 | $ | 352 | $ | 321 | ||||||
|
Earned premiums
|
7 | 7 | 3 | |||||||||
|
Net investment income
|
396 | 364 | 315 | |||||||||
|
Net realized capital losses
|
(10 | ) | (18 | ) | (333 | ) | ||||||
|
|
||||||||||||
|
Total revenues
|
766 | 705 | 306 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
308 | 278 | 269 | |||||||||
|
Insurance operating costs and other expenses
|
354 | 340 | 346 | |||||||||
|
Amortization of DAC
|
134 | 27 | 56 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
796 | 645 | 671 | |||||||||
|
Income (loss) before income taxes
|
(30 | ) | 60 | (365 | ) | |||||||
|
Income tax expense (benefit)
|
(45 | ) | 13 | (143 | ) | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 15 | $ | 47 | $ | (222 | ) | |||||
|
|
||||||||||||
| Assets Under Management | 2011 | 2010 | 2009 | |||||||||
|
401(k) account values
|
$ | 21,124 | $ | 20,291 | $ | 16,142 | ||||||
|
403(b)/457 account values
|
12,775 | 12,649 | 11,116 | |||||||||
|
401(k)/403(b) mutual funds
|
18,403 | 19,578 | 16,704 | |||||||||
|
|
||||||||||||
|
Total assets under management
|
$ | 52,302 | $ | 52,518 | $ | 43,962 | ||||||
|
|
||||||||||||
| Assets Under Management Roll Forward | 2011 | 2010 | 2009 | |||||||||
|
Assets under management, beginning of period
|
$ | 52,518 | $ | 43,962 | $ | 37,036 | ||||||
|
Net flows
|
761 | 1,545 | (1,142 | ) | ||||||||
|
Transfers in and reclassifications [1]
|
267 | 1,488 | — | |||||||||
|
Change in market value and other
|
(1,244 | ) | 5,523 | 8,068 | ||||||||
|
|
||||||||||||
|
Assets under management, end of period
|
$ | 52,302 | $ | 52,518 | $ | 43,962 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Investment Spread
|
98 | bps | 99 | bps | 66 | bps | ||||||
|
|
||||||||||||
| [1] |
Lifetime Income and Maturity Funding business of $194 was transferred from Individual
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.
|
Year ended December 31, 2011 compared to the year ended December 31, 2010
Net income decreased in 2011 compared to 2010 due largely to the Unlock charge taken in the third
quarter compared to an Unlock benefit in 2010, partially offset by a favorable one-time true up in
tax expense.
The Unlock charge was $45, after-tax, in 2011 as compared to an Unlock benefit of $18, after-tax,
in 2010. The Unlock charge in 2011 was primarily due to the annual assumption update completed in
the third quarter. The most significant assumption changes related to reduced investment spread in
the general account delayed projected expense benefits and increased trail commissions due to the
mix of business. Each of these items reduces expected future gross profits. 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 further discussion of Unlocks see the Critical
Accounting Estimates within the MD&A.
Net investment income increased in 2011 compared to 2010 although portfolio yields were lower in
2011. Net investment spread decreased by 1 bps driven by lower yields of 12 bps on higher average
general account invested assets and favorable partnership income, offset by lower crediting rates
of 11 bps.
Retirement Plans’ effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD. For 2011 and 2010 income taxes include
separate account DRD benefits of $25 and $18, respectively. Included in the separate account
benefit for 2011 is a $4 benefit related to a DRD settlement and a $2 benefit related to a true up
the 2010 tax year provision. In addition, due to the availability of additional tax planning
strategies, the Company released $10 or 100% of the valuation allowance associated with realized
capital losses during 2011. For further discussion, see Note 13 of the Notes to Consolidated
Financial Statements.
87
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 was 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 an Unlock benefit in 2010 as compared to
an 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 33
bps, partially offset by lower returns on fixed maturity securities. Net investment spread also
improved due to lower crediting rates of 8 bps.
The Unlock benefit was $18, after-tax, in 2010 as compared to an 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 Unlock primarily
resulted in a decrease to amortization of DAC. For further discussion of the 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. For further discussion, see Note 13 of the
Notes to Consolidated Financial Statements.
88
Table of Contents
MUTUAL FUNDS
| Operating Summary | 2011 | 2010 | 2009 | |||||||||
|
Fee income and other
|
$ | 649 | $ | 664 | $ | 518 | ||||||
|
Net investment loss
|
(3 | ) | (8 | ) | (21 | ) | ||||||
|
Net realized capital gains (loss)
|
1 | — | — | |||||||||
|
|
||||||||||||
|
Total revenues
|
647 | 656 | 497 | |||||||||
|
Insurance operating costs and other expenses
|
448 | 458 | 395 | |||||||||
|
Amortization of DAC
|
47 | 51 | 50 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
495 | 509 | 445 | |||||||||
|
Income from continuing operations, before income taxes
|
152 | 147 | 52 | |||||||||
|
Income tax expense
|
54 | 52 | 18 | |||||||||
|
|
||||||||||||
|
Income from continuing operations
|
98 | 95 | 34 | |||||||||
|
Income from discontinued operations, net of tax [1]
|
— | 37 | — | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 98 | $ | 132 | $ | 34 | ||||||
|
|
||||||||||||
| Assets Under Management | 2011 | 2010 | 2009 | |||||||||
|
Retail mutual fund assets
|
$ | 40,228 | $ | 48,753 | $ | 42,829 | ||||||
|
Investment Only mutual fund assets
|
6,983 | 6,659 | — | |||||||||
|
529 College Savings Plan and Canadian mutual fund assets
|
1,557 | 1,472 | 1,202 | |||||||||
|
|
||||||||||||
|
Total non-proprietary and Canadian mutual fund assets
|
48,768 | 56,884 | 44,031 | |||||||||
|
Proprietary mutual fund assets
|
36,770 | 43,602 | — | |||||||||
|
|
||||||||||||
|
Total mutual fund assets under management
|
$ | 85,538 | $ | 100,486 | $ | 44,031 | ||||||
|
|
||||||||||||
| Non-Proprietary and Canadian Mutual Fund AUM Roll Forward | 2011 | 2010 | 2009 | |||||||||
|
Non-Proprietary and Canadian Mutual Fund AUM, beginning of period
|
$ | 56,884 | $ | 44,031 | $ | 32,710 | ||||||
|
Transfers in (out) [2]
|
— | 5,617 | (826 | ) | ||||||||
|
Net flows
|
(4,378 | ) | 2,750 | 2,115 | ||||||||
|
Change in market value and other
|
(3,738 | ) | 4,486 | 10,032 | ||||||||
|
|
||||||||||||
|
Non-Proprietary and Canadian Mutual Fund AUM, end of period
|
$ | 48,768 | $ | 56,884 | $ | 44,031 | ||||||
|
|
||||||||||||
| Proprietary Mutual Fund AUM Roll Forward | 2011 | 2010 | 2009 | |||||||||
|
Proprietary Mutual Fund AUM, beginning of period
|
$ | 43,602 | $ | — | $ | — | ||||||
|
Transfers in [3]
|
— | 43,890 | — | |||||||||
|
Net flows
|
(5,797 | ) | (5,334 | ) | — | |||||||
|
Change in market value
|
(1,035 | ) | 5,046 | — | ||||||||
|
|
||||||||||||
|
Proprietary Mutual Fund AUM, end of period
|
$ | 36,770 | $ | 43,602 | $ | — | ||||||
|
|
||||||||||||
| [1] |
Represents income from discontinued operations, net of tax of Hartford Investments Canada
Corporation (“HICC”). For additional information, see Note 20 of the Notes to Consolidated
Financial Statements.
|
|
| [2] |
Canadian and Offshore businesses were transferred to International Annuity within Life Other
Operations effective January 1, 2009. Investment-only and Canadian mutual fund assets were
transferred from Life Other Operations effective January 1, 2010.
|
|
| [3] |
Proprietary mutual fund assets under management are included in the Mutual Fund reporting
segment effective January 1, 2010.
|
Year ended December 31, 2011 compared to the year ended December 31, 2010
Net income decreased in 2011 primarily due to discontinued operations. The decline in income from
discontinued operations in 2011 compared to 2010 is due to the sale of the Canadian mutual fund
operations, which closed in December 2010. Net income from continuing operations increased
compared to 2010 due to a decline in expenses largely due to a capital infusion to the Money Market
Funds in the third quarter of 2010.
Year ended December 31, 2010 compared to the year ended December 31, 2009
Net income increased in 2010 compared to 2009 due to the inclusion of a net realized gain on the
sale of Canadian mutual fund operations of $41 after-tax, within income from discontinued
operations. In addition higher overall account balances attributed to the improved equity markets,
and positive net flows on non-proprietary and Canadian mutual fund assets, resulted 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.
89
Table of Contents
LIFE OTHER OPERATIONS
| Operating Summary | 2011 | 2010 | 2009 | |||||||||
|
Fee income and other
|
$ | 1,045 | $ | 1,046 | $ | 948 | ||||||
|
Earned premiums
|
(25 | ) | 3 | 345 | ||||||||
|
Net investment income (loss)
|
||||||||||||
|
Securities available-for-sale and other
|
973 | 999 | 947 | |||||||||
|
Equity securities trading [1]
|
(1,359 | ) | (774 | ) | 3,188 | |||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
(386 | ) | 225 | 4,135 | ||||||||
|
Net realized capital gains (losses)
|
586 | (417 | ) | (702 | ) | |||||||
|
|
||||||||||||
|
Total revenues
|
1,220 | 857 | 4,726 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
1,305 | 1,148 | 1,854 | |||||||||
|
Benefits, losses and loss adjustment expenses — returns credited on international
variable annuities [1]
|
(1,359 | ) | (774 | ) | 3,188 | |||||||
|
Amortization of DAC
|
492 | 305 | 370 | |||||||||
|
Insurance operating costs and other expenses
|
274 | 262 | 350 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
712 | 941 | 5,762 | |||||||||
|
Income (loss) from continuing operations, before income taxes
|
508 | (84 | ) | (1,036 | ) | |||||||
|
Income tax expense (benefit)
|
150 | — | (343 | ) | ||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations
|
358 | (84 | ) | (693 | ) | |||||||
|
Loss from discontinued operations, net of tax [2]
|
— | (6 | ) | (5 | ) | |||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 358 | $ | (90 | ) | $ | (698 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Assets Under Management [3]
|
||||||||||||
|
Variable annuity account values [4]
|
$ | 31,162 | $ | 33,507 | $ | 32,948 | ||||||
|
Fixed MVA annuity and other account values [5]
|
4,786 | 4,596 | 4,365 | |||||||||
|
Institutional annuity account values [6]
|
19,330 | 19,674 | 22,373 | |||||||||
|
Private Placement Life Insurance (“PPLI”)
|
36,335 | 36,042 | 35,146 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Account Value Roll Forward
|
||||||||||||
|
Variable Annuities
|
||||||||||||
|
Account value, beginning of period
|
$ | 33,507 | $ | 32,948 | $ | 31,335 | ||||||
|
Net flows
|
(1,848 | ) | (1,946 | ) | (606 | ) | ||||||
|
Change in market value and other
|
(2,130 | ) | (1,531 | ) | 2,545 | |||||||
|
Effect of currency translation
|
1,633 | 4,036 | (326 | ) | ||||||||
|
|
||||||||||||
|
Account value, end of period
|
$ | 31,162 | $ | 33,507 | $ | 32,948 | ||||||
|
|
||||||||||||
| [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] |
Represents loss from discontinued operations, net of tax of
Hartford Advantage investment, Ltd. (“HAIL”). For additional
information, see Note 20 of the Notes to Consolidated Financial
Statements.
|
|
| [3] |
International and institutional annuities were transferred
retrospectively from Individual Annuity; PPLI was transferred
retrospectively from Individual Life.
|
|
| [4] |
Canadian and Offshore businesses were transferred from Mutual
Funds effective January 1, 2009. Investment-only and Canadian
mutual fund assets were transferred to Mutual Funds effective
January 1, 2010.
|
|
| [5] |
Includes approximately $1.9 billion, $1.9 billion and $1.8
billion related to the triggering of the guaranteed minimum
income benefit for the 3 Win product as of December 31, 2011,
2010 and 2009, respectively. This account value is not expected
to generate material future profit or loss to the Company.
|
|
| [6] |
Included in the balance is approximately $1.3 billion for the year ended December 31, 2011
and approximately $1.4 billion for the year ended December 31, 2010 related to an
intrasegment funding agreement which is eliminated in consolidation.
|
90
Table of Contents
Year ended December 31, 2011 compared to the year ended December 31, 2010
Net income increased in 2011 compared to
2010 primarily due to the change in net realized capital gains (losses), offset in part by increases in 2011 in
the Unlock charge and DAC amortization resulting from assumption changes reflecting the declining performance of the
equity markets in 2011. Benefits, losses and loss adjustment expenses increased in 2011
reflecting the decline in equity market performance however, these expenses were partially offset by the release
of a reserve related to a Japan product. In addition, insurance operating costs and other expenses increased in
2011 due to costs associated with expected assessments related to the Executive Life Insurance Company of New
York (“ELNY”) insolvency.
The net realized capital gains in 2011 compared to net realized capital losses in 2010 were
primarily due to gains in the variable annuity hedging program and lower net impairment losses.
Variable annuity hedging program gains were $775 in 2011 compared to $11 in 2010; net impairment
losses were $54 and $172, respectively, in 2011 and 2010. 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.
The Unlock charge was $244, after-tax, in 2011 compared to an Unlock charge of $78, after-tax, in
2010. The Unlock charge in 2011 was primarily a result of the impact of the annual assumption
update. Including expected Japan hedging costs, and actual separate account returns below our
aggregated estimated returns. Benefits, losses and loss adjustment expenses as well as DAC
amortization increased accordingly. For further discussion of the Unlock see the Critical
Accounting Estimates within the MD&A.
Life Other Operations effective tax rate differs from the statutory rate of 35% primarily due to
varying tax rates by country and the valuation allowance on deferred tax benefits related to
certain realized losses on securities that back certain institutional annuities. For further
discussion, see Note 13 of the Notes to Consolidated Financial Statements.
Year ended December 31, 2010 compared to the year ended December 31, 2009
Net income increased in 2010 compared to 2009 primarily due to the change in net realized capital
gains (losses), a lower Unlock charge and lower DAC amortization, as well as continued expense
reduction efforts.
The Unlock charge was $78, after-tax, in 2010 compared to an Unlock charge of $318, after-tax, in
2009. The Unlock charge in 2010 was primarily due to equity market improvements that were less
than expected for 2010, while the Unlock charge in 2009 was primarily due to equity market
performance significantly below expectations for the first quarter of 2009. Benefits, losses and
loss adjustment expenses, as well as DAC amortization decreased in 2010 due to the lower Unlock
charge. For further discussion of the Unlock see the Critical Accounting Estimates within the MD&A.
The lower net realized capital losses in 2010 compared to 2009 were primarily due to lower
impairment losses and net realized gains on sales of securities as compared with net realized
losses in 2009. Variable annuity hedging program gains were were $11 in 2010 compared to losses of
$112 in 2009; net impairment losses were $172 and $619, respectively, in 2010 and 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 annuities driven by the Company’s execution on its call and
buyback strategy associated with stable value products, which reduced the related liabilities.
Life Other Operations effective tax rate differs from the statutory rate of 35% primarily due to
varying tax rates by country and the valuation allowance on deferred tax benefits related to
certain realized losses on securities that back certain institutional annuities. For further
discussion, see Note 13 of the Notes to Consolidated Financial Statements.
91
Table of Contents
PROPERTY & CASUALTY OTHER OPERATIONS
| Operating Summary | 2011 | 2010 | 2009 | |||||||||
|
Earned premiums
|
$ | — | $ | 1 | $ | — | ||||||
|
Net investment income
|
151 | 163 | 161 | |||||||||
|
Net realized capital gains (losses)
|
(1 | ) | 24 | (26 | ) | |||||||
|
|
||||||||||||
|
Total revenues
|
150 | 188 | 135 | |||||||||
|
Benefits, losses and loss adjustment expenses
|
317 | 251 | 241 | |||||||||
|
Insurance operating costs and other expenses
|
24 | 30 | 23 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
341 | 281 | 264 | |||||||||
|
Loss before income taxes
|
(191 | ) | (93 | ) | (129 | ) | ||||||
|
Income tax benefit
|
(74 | ) | (40 | ) | (51 | ) | ||||||
|
|
||||||||||||
|
Net loss
|
$ | (117 | ) | $ | (53 | ) | $ | (78 | ) | |||
|
|
||||||||||||
Year ended December 31, 2011 compared to the year ended December 31, 2010
The net loss in Property & Casualty Other Operations increased in 2011, as compared to 2010,
primarily due to reserve strengthening of $290, pre-tax, in 2011, resulting from the company’s
annual review of its asbestos liabilities. In the comparable prior year period, the reserve
strengthening was $169, pre-tax.
Partially offsetting the increase in asbestos reserve strengthening was lower reserve strengthening
of net environmental reserves of $19, pre-tax, in 2011 compared to $62, pre-tax, in 2010, resulting
from the company’s annual review of its environmental liabilities.
For further information, see Property & Casualty Other Operations Claims within the Property and
Casualty Insurance Product Reserves, Net of Reinsurance section in Critical Accounting Estimates.
Year ended December 31, 2010 compared to the year ended December 31, 2009
The net loss in Property & Casualty Other Operations improved in 2010, as compared to 2009,
primarily due to a change from net realized capital losses in 2009 to net realized capital gains in
2010. The change in net realized capital gains (losses) is a result of impairments in 2009. In
addition, the net loss improved due to lower reserve strengthening of $62, pre-tax, in 2010,
compared to $75, pre-tax, in 2009, resulting from the company’s annual review of its environmental
liabilities.
Partially offsetting the improvements in net realized capital gains (losses) and environmental
reserve actions was increased reserve strengthening of $169, pre-tax, in 2010, compared to $138,
pre-tax, in 2009, resulting from the company’s annual review of its asbestos liabilities.
For further information, see Property & Casualty Other Operations Claims within the Property and
Casualty Insurance Product Reserves, Net of Reinsurance section in Critical Accounting Estimates.
92
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CORPORATE
| Operating Summary [1] | 2011 | 2010 | 2009 | |||||||||
|
Earned premiums
|
$ | — | $ | 2 | $ | (1 | ) | |||||
|
Fee income [2]
|
209 | 187 | 220 | |||||||||
|
Net investment income
|
23 | 81 | 173 | |||||||||
|
Net realized capital gains (losses)
|
(96 | ) | 66 | (406 | ) | |||||||
|
Other revenue
|
— | (1 | ) | 4 | ||||||||
|
|
||||||||||||
|
Total revenues
|
136 | 335 | (10 | ) | ||||||||
|
Benefits, losses and loss adjustment expenses
|
(3 | ) | (2 | ) | 153 | |||||||
|
Insurance operating costs and other expenses
|
202 | 325 | 323 | |||||||||
|
Interest expense
|
508 | 508 | 476 | |||||||||
|
Goodwill impairment
|
— | — | 32 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
707 | 831 | 984 | |||||||||
|
Loss from continuing operations before income taxes
|
(571 | ) | (496 | ) | (994 | ) | ||||||
|
Income tax benefit
|
(201 | ) | (168 | ) | (274 | ) | ||||||
|
|
||||||||||||
|
Loss from continuing operations, net of tax
|
(370 | ) | (328 | ) | (720 | ) | ||||||
|
Loss from discontinued operations, net of tax [3]
|
(64 | ) | (107 | ) | (6 | ) | ||||||
|
|
||||||||||||
|
Net loss
|
$ | (434 | ) | $ | (435 | ) | $ | (726 | ) | |||
|
|
||||||||||||
| [1] |
Leveraged corporate owned life insurance was transferred from Corporate to Life Other Operations, effective January 1, 2010.
|
|
| [2] |
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.
|
|
| [3] |
Represents the loss from operations and sale of Federal Trust Corporation. For additional information, see Note 20 of the
Notes to Consolidated Financial Statements.
|
Year ended December 31, 2011 compared to the year ended December 31, 2010
The net loss in Corporate remained flat due to net realized capital losses in 2011, compared to
gains in 2010, partially offset by a decrease in insurance operating costs and other expenses. The
net realized capital losses in 2011 primarily relate to losses on derivatives.
Insurance operating costs and other expenses decreased primarily as a result of an accrual for a
litigation settlement of $73, before-tax, in 2010, for a class action lawsuit related to structured
settlements.
The loss from discontinued operations, net of tax, in 2011, is due to a net realized capital loss
of $74, after-tax, from the disposition of Federal Trust Corporation. Loss from discontinued
operations, net of tax, in 2010, primarily relates to goodwill impairment on Federal Trust
Corporation of approximately $100, after-tax.
See Note 13 of the Notes to Consolidated Financial Statements for a reconciliation of the tax
provision at the U.S. Federal statutory rate to the provision (benefit) for income taxes.
Year ended December 31, 2010 compared to the year ended December 31, 2009
The net loss in Corporate decreased primarily due to improvements in net realized capital gains
(losses), partially offset by an increase in interest expense.
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 15 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.
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.
93
Table of Contents
ENTERPRISE RISK MANAGEMENT
The Company has an enterprise risk management function (“ERM”) that is charged with providing
analysis of the Company’s risks on an individual and aggregated basis and with ensuring that the
Company’s risks remain within its risk appetite and tolerances. The Company has established the
Enterprise Risk and Capital Committee (“ERCC”) that includes the Company’s CEO, Chief Financial
Officer (“CFO”), Chief Investment Officer (“CIO”), Chief Risk Officer, the divisional Presidents
and the General Counsel. The ERCC is responsible for managing the Company’s risks and overseeing
the enterprise risk management program. The Company categorizes its main risks as follows:
| • |
Insurance Risk
|
||
| • |
Operational Risk
|
||
| • |
Financial Risk
|
||
| • |
Business Risk
|
Insurance Risk Management
The Company categorizes its insurance risks across both property-casualty and life products. The
Company’s insurance operations are vested in the ability to add value through the effective
underwriting, pooling, and pricing of insurance risks. As such, working under the direction of the
Company’s Chief Insurance Risk Officer (“CIRO”), the Company has developed a disciplined approach
to insurance risk management that is well integrated into the organization’s underwriting, pricing,
reinsurance, claims, and capital management processes.
At the same time, the Company has policies and procedures to manage concentrations or correlations
of insurance risk, including ERM policies governing the risks related to natural and man-made
property catastrophes such as hurricanes, earthquakes, tornado/hailstorms, winter storms,
pandemics, terrorism, and casualty catastrophes. The Company establishes risk limits to control
potential loss and actively monitors the risk exposures as a percent of statutory surplus. The
Company also uses reinsurance to transfer insurance risk to well-established and financially secure
reinsurers (see Reinsurance Section). The Company’s CIRO has enterprise responsibility for
establishing and maintaining the framework, principles and guidelines of The Hartford’s insurance
risk management program.
Non-Catastrophic Insurance Risks
Non-catastrophic insurance risks exist within each of the Company’s divisions and include, but are
not limited to, the following:
| • |
Property:
Risk of loss to personal or commercial property from automobile related
accidents, weather, explosions, smoke, shaking, fire, theft, vandalism, inadequate
installation, faulty equipment, collisions and falling objects, and/or machinery
mechanical breakdown resulting in physical damage and other covered perils.
|
| • |
Liability:
Risk of loss from automobile related accidents, uninsured and
underinsured drivers, lawsuits from accidents, defective products, breach of warranty,
negligent acts by professional practitioners, environmental claims, latent exposures,
fraud, coercion, forgery, failure to fulfill obligations per contract surety, liability
from errors and omissions, derivative lawsuits, and other securities actions and covered
perils.
|
| • |
Mortality:
Risk of loss from unexpected trends in insured deaths impacting timing of
payouts from life insurance or annuity products, personal or commercial automobile
related accidents, and death of employees or executives during the course of employment,
while on disability, or while collecting worker’s compensation benefits.
|
| • |
Morbidity
: Risk of loss to an insured from illness incurred during the course of
employment or illness from other covered perils.
|
| • |
Disability:
Risk of loss incurred from personal or commercial automobile related
losses, accidents arising outside of the workplace, injuries or accidents incurred
during the course of employment, or from equipment each loss resulting short term or
long term disability payments.
|
| • |
Longevity:
Risk of loss from increase life expectancy trends among policyholders
receiving long term benefit payments or annuity payouts.
|
The Company’s processes for managing these risks include disciplined underwriting protocols,
exposure controls, sophisticated risk based pricing, risk modeling, risk transfer, and capital
management strategies. The Company has established underwriting guidelines for both individual
risks, including individual policy limits, and risks in the aggregate, including aggregate exposure
limits by geographic zone and peril. Pricing indications for each line of business are set
independent of the business by corporate actuarial and are integrated into the reserve review
process to ensure consistency between pricing and reserving. Monthly reports track loss cost
trends relative to pricing objectives within each state and product, and corporate actuarial
provides an independent report to the Board on the Company’s reserve position and loss cost trends.
94
Table of Contents
Natural Catastrophe Risk
Natural catastrophe risk is defined as the exposure arising from natural phenomena (e.g., weather,
earthquakes, wildfires, etc.) that create a concentration or aggregation of loss across the
Company’s insurance or asset portfolios. The Company uses both internal and 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 across
the property-casualty, life, and asset management businesses. For natural catastrophe perils, the
Company generally limits its estimated pre-tax loss as a result of natural catastrophes for
property & casualty exposures from a single 250-year event to less than 30% of statutory surplus
prior to reinsurance and to less than 15% of statutory surplus after reinsurance. 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 Northeastern, Southeastern and
Midwestern regions of the United States with associated magnitudes ranging from 5.9 to 7.7 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 Gulf 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 $1.7 billion and $632,
before and after reinsurance, respectively. The estimated 250 year pre-tax probable maximum loss
from earthquake events is estimated to be $793 before reinsurance and $482 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 that 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 Risk
The Company defines terrorism risk as the risk of 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”). The Company monitors
aggregations of terrorism risk 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 a terrorism loss scenario to less than $1.3
billion. In addition, the Company monitors exposures monthly and employs both internally developed
and vendor-licensed loss modeling tools as part of its risk management discipline.
Pandemic Risk
Pandemic risk is the exposure to loss 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 Company assesses exposure to pandemics by
analyzing the potential impact from a variety of pandemic scenarios based on conditions consistent
with historical outbreaks of flu-like viruses such as the “Severe” 1918 Spanish Flu, the Asian flu
of 1957, the Hong Kong flu of 1968, and the 2009 outbreak of the swine flu. For pandemic risk, the
Company generally limits its estimated pre-tax loss from a single 250 year event to less than 12.5%
of the statutory surplus for the enterprise. In evaluating these scenarios, the Company 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 with market
declines in the event of a widespread pandemic.
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Table of Contents
Reinsurance as a Risk Management Strategy
The Hartford utilizes reinsurance to transfer risk to affiliated and unaffiliated insurers.
Reinsurance is used to manage aggregation of risk as well as to transfer certain risk to
reinsurance companies based on specific geographic or risk concentrations. All reinsurance
processes are aligned under a single enterprise reinsurance risk management policy. Reinsurance
purchasing is a centralized function within Commercial, 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 worker’s
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.
Reinsurance for Catastrophes
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 coverage’s that the Company
has in place as of February 1, 2012:
| % of layer(s) | ||||||||||||||
| Coverage | Treaty term | reinsured | Per occurrence limit | Retention | ||||||||||
|
Principal property
catastrophe program
covering property
catastrophe losses
from a single event
|
1/1/2012 to 1/1/2013 | 90 | % | $ | 750 | $ | 350 | |||||||
|
Reinsurance with
the FHCF covering
Florida Personal
Lines property
catastrophe losses
from a single event
|
6/1/2011 to 6/1/2012 | 90 | % | 145 | [1] | 55 | ||||||||
|
Workers
compensation losses
arising from a
single catastrophe
event [2]
|
7/1/2011 to 7/1/2012 | 95 | % | 350 | 100 | |||||||||
| [1] |
The per occurrence limit on the FHCF treaty is $145 for the 6/1/2011 to 6/1/2012 treaty
year based on the Company’s election to purchase the required coverage from FHCF. For
6/1/2010 to 6/1/2011, the Company elected not to purchase additional limits under the
Temporary Increase in Coverage Limit (TICL) statutory provision.
|
|
| [2] |
In addition, to the limit shown above, the workers compensation reinsurance includes a
non-catastrophe, industrial accident layer, 80% of $30 excess a $20 retention.
|
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 Hartford has fully collateralized reinsurance
coverage’s 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.
The following table summarizes the terms of the reinsurance treaties with Foundation Re III that
were in place as of December 31, 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 December 31, 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 treaties.
96
Table of Contents
Reinsurance for Terrorism
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 exclusion 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 reinsurer credit risk, a security review committee evaluates the credit standing,
financial performance, management and operational quality of each potential reinsurer. Through
this process, the Company maintains a centralized list of reinsurers approved for participation in
reinsurance transactions. Only reinsurers approved through this process are eligible to
participate in new reinsurance transactions. The Company’s approval designations reflect the
differing credit exposure associated with various classes of business. Participation eligibility
is categorized based upon the nature of the risk reinsured, including the expected liability payout
duration. In addition to defining participation eligibility, the Company regularly monitors credit
risk exposure to each reinsurance counterparty and has established limits tiered by counterparty
credit rating. For further discussions on how the Company manages and mitigates third party credit
risk, refer to the Credit Risk section.
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, 2011 and 2010:
| Reinsurance Recoverable | December 31, 2011 | December 31, 2010 | ||||||
|
Paid loss and loss adjustment expenses
|
$ | 153 | $ | 198 | ||||
|
Unpaid loss and loss adjustment expenses
|
2,884 | 2,963 | ||||||
|
|
||||||||
|
Gross reinsurance recoverable
|
3,037 | 3,161 | ||||||
|
Less: allowance for uncollectible reinsurance
|
(290 | ) | (290 | ) | ||||
|
|
||||||||
|
Net reinsurance recoverable
|
$ | 2,747 | $ | 2,871 | ||||
|
|
||||||||
97
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, 2011 and 2010, the
following table shows the portion of recoverables due from companies rated by A.M. Best.
| Distribution of gross reinsurance recoverable | December 31, 2011 | December 31, 2010 | ||||||||||||||
|
Gross reinsurance recoverable
|
$ | 3,037 | $ | 3,161 | ||||||||||||
|
Less: mandatory (assigned risk) pools and
structured settlements
|
(617 | ) | (614 | ) | ||||||||||||
|
|
||||||||||||||||
|
Gross reinsurance recoverable excluding
mandatory pools and structured settlements
|
$ | 2,420 | $ | 2,547 | ||||||||||||
|
|
||||||||||||||||
|
|
% of Total | % of Total | ||||||||||||||
|
Rated A- (Excellent) or better by A.M. Best [1]
|
$ | 1,774 | 73.3 | % | $ | 1,869 | 73.3 | % | ||||||||
|
Other rated by A.M. Best
|
52 | 2.2 | % | 43 | 1.7 | % | ||||||||||
|
|
||||||||||||||||
|
Total rated companies
|
1,826 | 75.5 | % | 1,912 | 75.0 | % | ||||||||||
|
Voluntary pools
|
100 | 4.1 | % | 107 | 4.2 | % | ||||||||||
|
Captives
|
242 | 10.0 | % | 226 | 8.9 | % | ||||||||||
|
Other not rated companies
|
252 | 10.4 | % | 302 | 11.9 | % | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 2,420 | 100.0 | % | $ | 2,547 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| [1] |
Based on A.M. Best ratings as of December 31, 2011 and 2010, 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 along
with significant catastrophe losses and European sovereign debt concerns in 2011, 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 73% of the gross reinsurance recoverables due from reinsurers rated by A.M. Best were
rated A- (excellent) or better as of December 31, 2011. 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 Property & Casualty Other Operations
reporting 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
As part of its risk management strategy, the Company regularly monitors the financial wherewithal
of other insurers and, in particular, activity by insurance regulators and various state guaranty
associations relations to troubled insurers. 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”), a non-affiliate insurer, 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, such as the Company, 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.
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Operational Risk Management
The Hartford has an Operational Risk Management (“ORM”) function whose responsibility is to provide
a comprehensive and enterprise-wide view of the Company’s operational risk on an aggregate basis.
The Company defines operational risk as the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events. This inadequacy or failure may
come from internal or external events. It includes legal risk and considers reputational risk as
an impact. The Company has developed a library of operational risks which have been classified
into the following seven risk categories:
| • |
Internal Fraud
|
| • |
External Fraud
|
| • |
Employment Practices & Workplace Safety
|
| • |
Business Disruption & Systems Failures
|
| • |
Clients, Products & Business Practice
|
| • |
Damage to Physical Assets
|
| • |
Execution, Delivery & Process Management
|
ORM is led by the Chief Operational Risk Officer (“CORO”) who is responsible for establishing,
maintaining and communicating the framework, principles and guidelines of The Hartford’s
operational risk management program. Responsibility for day-to-day management of operational risk
lies within each business unit and functional area..
ORM works closely with the Operational Risk Committee (“ORC”), an enterprise wide governance body
comprised of senior leaders from functional areas such as ORM, Enterprise Services, Enterprise
Operations, Claims, Information Technology, Compliance and Internal Audit. The ORC meets regularly
and provides a forum for ensuring the effective management of operational risks across the
enterprise. The ORC’s responsibilities include reviewing and approving: policies governing
operational risk, functional risk tolerances, and risk mitigation strategies. This group also
identifies emerging operational risks, prioritizes them, and determines action plans. Individual
committees, such as the Enterprise Sourcing Board, Enterprise Privacy and Security Committee and
the Enterprise Health, Environment and Safety Committee, focus on specific operational risk issues
and report to the ORC.
ORM is responsible for ensuring controls and providing a framework for managing operational risks.
ORM has various tools and processes for identifying, monitoring, measuring, prioritizing, and
reporting operational risks. ORM uses a centralized Governance, Risk, and Compliance (GRC) system
to help manage operational risk across the Company’s finance, legal, data security, and information
technology functions. The Company’s business risk assessment process is used to identify
operational risks and evaluate controls to mitigate those risks.
Financial Risk Management
The Company identifies the following categories of financial risk:
| • |
Liquidity Risk
|
| • |
Interest Rate Risk
|
| • |
Equity Risk
|
| • |
Foreign Currency Exchange Risk
|
| • |
Credit Risk
|
Financial risks include direct, and indirect risks to the Company’s financial objectives coming
from events that impact market conditions or prices. Financial risk also includes exposure to
events that may cause correlated movement in multiple risk factors. The primary source of financial
risks are the Company’s general account assets and the liabilities which those assets back,
together with the guarantees which the company has written over various liability products,
particularly its portfolio of variable annuities. The Company assesses its financial risk on a
U.S. GAAP, statutory and economic basis. The Hartford has developed a disciplined approach to
financial risk management that is well integrated into the Company’s underwriting, pricing,
hedging, claims, asset and liability management, new product, and capital management processes.
Consistent with its risk appetite, the Company establishes financial risk limits to control
potential loss. Exposures are actively monitored, and mitigated where appropriate. The Company
uses various risk management strategies, including reinsurance and over-the-counter and exchange
traded derivatives to transfer risk to well-established and financially secure counterparties. The
Company’s Chief Market Risk Officer has enterprise responsibility for establishing and maintaining
the framework, principles, and guidelines of The Hartford’s financial risk management program.
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Liquidity Risk
Liquidity risk is the risk to current or prospective earnings or capital arising from the company’s
inability or perceived inability to meet its contractual cash obligations at the legal entity level
when they come due over given horizons without incurring unacceptable costs and without relying on
uncommitted funding sources. Liquidity risk includes the inability to manage unplanned increases
or accelerations in cash outflows, decreases or changes in funding sources, and changes in market
conditions that affect the ability to liquidate assets quickly to meet obligations with minimal
loss in value. Components of liquidity risk include funding risk, transaction risk and market
liquidity risk. Funding risk is the gap between sources and uses of cash under normal and stressed
conditions taking into consideration structural, regulatory and legal entity constraints. Changes
in institution-specific conditions that affect the Company’s ability to sell assets or otherwise
transact business without incurring a significant loss in value is transaction risk. Changes in
general market conditions that affect the institution’s ability to sell assets or otherwise
transact business without incurring a significant loss in value is market liquidity risk.
The Company has defined ongoing monitoring and reporting requirements to assess liquidity across
the enterprise. The Company measures and manages liquidity risk exposures and funding needs within
prescribed limits and across legal entities, business lines and currencies, taking into account
legal, regulatory and operational limitations to the transferability of liquidity. The Company
also monitors internal and external conditions, identifies material risk changes and emerging risks
that may impact liquidity. The Company’s CFO has primary responsibility for liquidity risk.
For further discussion on liquidity see the section on Capital Resources and Liquidity.
Interest Rate Risk
Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and
liabilities arising from movements in interest rates. Interest rate risk encompasses exposures
with respect to changes in the level of interest rates, the shape of the term structure of rates
and the volatility of interest rates. Interest rate risk does not include exposure to changes in
credit spreads. The Company has exposure to interest rates arising from its fixed securities,
interest sensitive liabilities and discount rate assumptions associated with the Company’s pension
and other post retirement benefit obligations.
An increase in interest rates from 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 and Life Other Operations 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 and Life Other Operations 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 and Life Other Operations 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 and Life Other Operation’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 and Life Other Operations products. Conversely, the fair value
of the investment portfolio will increase when interest rates decline and the Company’s interest
expense will be lower on its variable rate debt obligations.
The Company 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.
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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
and Life Other Operations products based on net investment spread which is, in part, influenced by
changes in interest rates. For further discussion, see the Individual Annuity, Individual Life,
and Retirement Plans sections of the MD&A.
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 $83.1 billion and $78.4 billion at December
31, 2011 and 2010, 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 5.3 years and 5.1 years as of
December 31, 2011 and 2010, 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, such as fixed rate annuities with a market value adjustment feature. 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 and Life Other Operation’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 manage the interest rate risk profile
within established tolerances. 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.
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At December 31, 2011 and 2010, notional amounts pertaining to derivatives utilized to manage
interest rate risk totaled $19.8 billion and $19.3 billion, respectively ($19.5 billion and $18.9
billion, respectively, related to investments and $0.3 billion and $0.4 billion, respectively,
related to Wealth Management and Life Other Operations liabilities). The fair value of these
derivatives was ($332) and ($372) as of December 31, 2011 and 2010, respectively
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 and Life Other Operations, as well as 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, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
|
Basis point shift
|
- 100 | + 100 | - 100 | + 100 | ||||||||||||
|
Amount
|
$ | (494 | ) | $ | 287 | $ | (190 | ) | $ | 96 | ||||||
The fixed liabilities included above represented approximately 43% and 47% of the Company’s general
account liabilities as of December 31, 2011 and 2010, 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, not included in the table
above, assuming 100 basis point upward and downward parallel shifts in the yield curve as of
December 31, 2011 and 2010. 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, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
|
Basis point shift
|
- 100 | + 100 | - 100 | + 100 | ||||||||||||
|
Amount
|
$ | 3,248 | $ | (2,985 | ) | $ | 2,988 | $ | (2,774 | ) | ||||||
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.
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Table of Contents
Equity Risk
Equity risk is defined as the risk of financial loss due to changes in the value of global equities
or equity indices. The Company has exposure to equity risk from assets under management, embedded
derivatives within the Company’s variable annuities and assets that support the Company’s pension
plans. Equity Risk on the Company’s Variable Annuity products is mitigated through various hedging programs. (See the
Variable Annuity Hedge Program Section)
The Company’s exposure to equity risk includes 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 Guarantee Risks and Risk Management 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 Guarantee Risks and Risk Management
The Company’s variable products are significantly influenced by the U.S., Japanese, and other
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 the dynamic hedge program and macro
hedge derivative assets, resulting in realized capital losses, and will generally have the inverse impact of
those listed above. See section on Variable Annuity Hedging Program for more information.
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Table of Contents
Variable Annuity Guaranteed Benefits
The majority of the Company’s U.S., Japan, and U.K. variable annuities include optional living
benefit and guaranteed minimum death benefit features. The net amount at risk (“NAR”) is
generally defined as the guaranteed minimum benefit amount in excess of the contractholder’s
current account value. Global variable annuity account values with guarantee features were
$99.8 billion and $116.7 billion as of December 31, 2011 and December 31, 2010, respectively.
The following table summarizes the account values of the Company’s U.S. and Japan variable
annuities with guarantee features and the NAR split between various guarantee features:
| Total Variable Annuity Guarantees | ||||||||||||||||||||
| As of December 31, 2011 | ||||||||||||||||||||
| % of | ||||||||||||||||||||
| Account | Gross Net | Retained Net | Contracts In | % In the | ||||||||||||||||
| ($ in billions) | Value | Amount at Risk | Amount at Risk | the Money | Money[4] | |||||||||||||||
|
U. S Variable Annuity [1]
|
||||||||||||||||||||
|
GMDB [2]
|
$ | 68.7 | $ | 12.0 | $ | 5.1 | 77 | % | 15 | % | ||||||||||
|
GMWB
|
36.6 | 1.9 | 1.6 | 45 | % | 12 | % | |||||||||||||
|
Japan Variable Annuity [1]
|
||||||||||||||||||||
|
GMDB
|
29.2 | 10.9 | 9.4 | 99 | % | 27 | % | |||||||||||||
|
GMIB [3]
|
27.3 | 7.5 | 7.5 | 99 | % | 22 | % | |||||||||||||
|
UK Variable Annuity [1]
|
||||||||||||||||||||
|
GMDB
|
1.9 | 0.08 | 0.08 | 100 | % | 4 | % | |||||||||||||
|
GMWB
|
1.8 | 0.07 | 0.07 | 57 | % | 3 | % | |||||||||||||
| Total Variable Annuity Guarantees | ||||||||||||||||||||
| As of December 31, 2010 | ||||||||||||||||||||
| % of | ||||||||||||||||||||
| Account | Gross Net | Retained Net | Contracts In | % In the | ||||||||||||||||
| ($ in billions) | Value | Amount at Risk | Amount at Risk | the Money | Money[4] | |||||||||||||||
|
U. S Variable Annuity [1]
|
||||||||||||||||||||
|
GMDB [2]
|
$ | 83.0 | $ | 10.7 | $ | 4.3 | 70 | % | 12 | % | ||||||||||
|
GMWB
|
44.8 | 1.3 | 1.1 | 35 | % | 9 | % | |||||||||||||
|
Japan Variable Annuity [1]
|
||||||||||||||||||||
|
GMDB
|
31.2 | 8.8 | 7.6 | 98 | % | 22 | % | |||||||||||||
|
GMIB [3]
|
29.7 | 6.1 | 6.1 | 99 | % | 17 | % | |||||||||||||
|
UK Variable Annuity [1]
|
||||||||||||||||||||
|
GMDB
|
2.2 | 0.04 | 0.04 | 100 | % | 1 | % | |||||||||||||
|
GMWB
|
2.5 | 0.03 | 0.03 | 25 | % | 1 | % | |||||||||||||
| [1] |
Policies with a guaranteed living benefits (a GMWB in the US or UK, or a GMIB in Japan)
also have a guaranteed death benefit. The net amount at risk (“NAR”) for each benefit is
shown; 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, by contract, the GMDB NAR is reduced to $0. When a policy goes into benefit status
on a GMIB, its GMDB NAR is released
|
|
| [2] |
Excludes group annuity contracts with GMDB benefits.
|
|
| [3] |
Includes small amount of GMWB
|
|
| [4 |
For all contracts that are “in the money”, this represents the percentage by which the average contract was in the money.
|
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 guaranteed remaining
benefit (“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 4 of the Notes to
Consolidated Financial Statements.
Many policyholders with a GMDB also have a GMWB in the U.S. 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.
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Table of Contents
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 the then current account value, or remain in the variable
sub-account. For GMIB contracts, if the policyholder makes the election, 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, 2011, 65% of
retained NAR 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, 2011, as well as the NAR. 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
|
4.5 | 0.9 | ||||||
|
2015
|
7.3 | 2.0 | ||||||
|
2016
|
2.5 | 0.8 | ||||||
|
2017
|
2.8 | 0.9 | ||||||
|
2018 & beyond [2]
|
6.9 | 2.0 | ||||||
|
|
||||||||
|
Total
|
$ | 24.3 | $ | 6.6 | ||||
|
|
||||||||
| [1] |
Excludes certain non-GMIB living benefits of $2.9 billion of account value and $0.9 billion of NAR.
|
|
| [2] |
In 2018 & beyond, $2.6 billion of the $6.9 billion is primarily associated with account value that is eligible in 2021.
|
Variable Annuity 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 Guarantees [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.
|
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Risk Hedging
Variable Annuity Hedging Program
The Company’s variable annuity hedging is primarily focused on reducing the economic exposure to
market risks associated with guaranteed benefits that are embedded in our global VA contracts
through the use of reinsurance and capital market derivative instruments. The variable annuity
hedging also considers the potential impacts on Statutory accounting results.
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.
Capital Market Derivatives
GMWB Hedge Program
The Company enters into derivative contracts to hedge market risk exposures associated with 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.
Additionally, 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.
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.
Macro Hedge Program
The Company’s macro hedging program uses derivative instruments such as options, futures, swaps,
and forwards on equities and interest rates to provide protection against the statutory tail
scenario risk arising from U.S., GMWB and GMDB liabilities, on the Company’s statutory surplus.
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. 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.
International Hedge Programs
The Company enters into derivative contracts to hedge market risk exposures associated with the
guaranteed benefits which are embedded in the international variable annuity contracts. These
derivative contracts include foreign currency forwards and options, interest rate swaps and
futures, and equity swaps, options, and futures on certain broadly traded global equity indices
including the S&P500 index, Nikkei 225 index, FTSE 100 index, and Euro Stoxx 50. During 2011, the
Company increased its equity, currency, and interest rate hedge cover.
While the Company actively manages these dynamic hedging programs, increased U.S. GAAP earnings
volatility may result from factors including, but not limited to: focus on reducing the economic
exposure to market risks associated with guaranteed benefits, capital markets, changes in hedging
positions and the relative emphasis placed on various risk management objectives.
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Table of Contents
Variable Annuity Hedging Program Sensitivities
The following table presents the accounting treatment of the underlying guaranteed living
benefits and the related hedge assets by hedge program.
| U.S. Programs | International Programs | |||||||||
| GMWB | Macro | Japan/UK | ||||||||
| Hedge Assets | Liabilities | Hedge Assets | Liabilities | Hedge Assets | Liabilities [1] | |||||
|
Fair Value
|
Fair Value | Fair Value | Not Fair Value | Fair Value | Not Fair Value | |||||
| [1] |
The liabilities for international variable annuity are primarily not measured on a fair
value basis. However there is an immaterial portion of the international variable annuity
with a GMWB or GMAB which is measured on a fair value basis.
|
The following table presents our estimates of the potential instantaneous impacts from sudden
market stresses related to equity market prices, interest rates, implied market volatilities, and
foreign currency exchange rates. The sensitivities below represent: (1) the net estimated
difference between the change in the fair value of GMWB liabilities and the underlying hedge
instruments and (2) the estimated change in fair value of the hedge instruments for the macro and
international hedge programs, before the impacts of amortization of DAC, and taxes. As noted in
the table above, certain hedge assets are used to hedge liabilities that are not carried at fair
value and will not have a liability offset in the U.S. GAAP sensitivity analysis. All sensitivities
are measured as of December 30, 2011, and are related to the fair value of liabilities and hedge
instruments in place as of that date for the Company’s variable annuity hedge programs. The
impacts presented in the table below are estimated individually as of December 30, 2011, and
performed without consideration of any correlation among market risk factors.
| U.S. GAAP Sensitivity Analysis | U.S. Programs | International Programs | ||||||||||||||||||||||||||||||||||
| (pre Tax/DAC) [1] | GMWB | Macro | Japan/UK | |||||||||||||||||||||||||||||||||
|
Equity Market Return
|
-20 | % | -10 | % | +10 | % | -20 | % | -10 | % | +10 | % | -20 | % | -10 | % | +10 | % | ||||||||||||||||||
|
Potential Net Fair Value Impact
|
$ | (35 | ) | $ | (4 | ) | $ | (20 | ) | $ | 380 | $ | 141 | $ | (89 | ) | $ | 908 | $ | 456 | $ | (451 | ) | |||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest Rates
|
-50 | bps | -25 | bps | +25 | bps | -50 | bps | -25 | bps | +25 | bps | -50 | bps | -25 | bps | +25 | bps | ||||||||||||||||||
|
Potential Net Fair Value Impact
|
$ | (221 | ) | $ | (106 | ) | $ | 99 | $ | 12 | $ | 6 | $ | (6 | ) | $ | 477 | $ | 235 | $ | (240 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Implied Volatilities
|
+10 | % | +2 | % | -10 | % | +10 | % | +2 | % | -10 | % | +10 | % | +2 | % | -10 | % | ||||||||||||||||||
|
Potential Net Fair Value Impact
|
$ | (565 | ) | $ | (110 | ) | $ | 509 | $ | 90 | $ | 19 | $ | (111 | ) | $ | 30 | $ | 6 | $ | (26 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Yen Strengthens +/ Weakens -
|
+20 | % | +10 | % | -10 | % | +20 | % | +10 | % | -10 | % | +20 | % | +10 | % | -10 | % | ||||||||||||||||||
|
Potential Net Fair Value Impact
|
N/A | N/A | N/A | N/A | N/A | N/A | $ | 2,875 | $ | 1,197 | $ | (749 | ) | |||||||||||||||||||||||
| [1] |
These sensitivities are based on the following key market levels as of
December 30, 2011: 1) S&P of 1,257.60; 2) 10yr US swap rate of 2.03%; 3) S&P 10yr volatility of 30.15% and 4)
FX rates of USDJPY @ 76.91 and EURJPY @99.66.
|
The above sensitivity analysis is an estimate and should not be used to predict the Company’s
future financial performance of its variable annuity hedge programs. The actual net changes in
the fair value liability and the hedging assets illustrated in the above table may vary
materially depending on a variety of factors which include but are not limited to:
| • |
The sensitivity analysis is only valid as of the measurement date and assumes instantaneous
changes in the capital market factors and no ability to rebalance hedge positions prior to the
market changes;
|
| • |
Changes to the underlying hedging program, policyholder behavior, and variation in
underlying fund performance relative to the hedged index, which could materially impact the
liability; and
|
| • |
The impact of elapsed time on liabilities or hedge assets, any non-parallel shifts in
capital market factors, or correlated moves across the sensitivities.
|
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Table of Contents
Foreign Currency Exchange Risk
Foreign currency exchange risk is defined as the risk of financial loss due to changes in the
relative value between currencies. The Company’s foreign currency exchange risk is related to
non-U.S. dollar denominated liability contracts, including its GMDB, GMAB, GMWB and GMIB benefits
associated with its Japanese and U.K. variable annuities, the investment in and net income of the
Japanese and U.K. operations, non-U.S. dollar denominated investments, which primarily consist of
fixed maturity investments, and a yen denominated individual fixed annuity product. In addition,
the Company’s Life Other Operations issued non-U.S. dollar denominated funding agreement liability
contracts. A portion of the Company’s foreign currency exposure is mitigated through the use of
derivatives.
The company manages the market risk, including foreign currency exchange risk, associated with the
guaranteed benefits related to the Japanese and U.K. variable annuities through its comprehensive
International Hedge Program. For more information on the International Hedge Program, including
the foreign currency exchange risk sensitivity analysis, see the Variable Product Guarantee Risks
and Risk Management section.
In order to manage the currency exposure related to non-U.S. dollar denominated investments and the
non-U.S. dollar denominated funding agreement liability contracts, the Company enters into foreign
currency swaps and forwards to hedge the variability in cash flows or fair value. These foreign
currency swap and forward agreements are structured to match the foreign currency cash flows of the
hedged foreign denominated securities and liabilities.
The yen denominated individual 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 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.
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 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, 2011 and 2010, were approximately $2.3
billion and $1.4 billion, respectively. Included in these amounts are $1.9 billion and $1.0
billion at December 31, 2011 and 2010, respectively, related to non-U.S. dollar denominated fixed
maturity securities that directly support liabilities denominated in the same currencies. At
December 31, 2011 and 2010, the derivatives used to hedge currency exchange risk related to the
remaining non-U.S. dollar denominated fixed maturities had a total notional amount of $399 and
$431, respectively, and total fair value of $12 and ($6), respectively.
Based on the fair values of the Company’s non-U.S. dollar denominated securities, including the
associated yen denominated fixed annuity product liabilities, and derivative instruments as of
December 31, 2011 and 2010, management estimates that a 10% unfavorable change in exchange rates
would decrease the fair values by a before-tax total of approximately $113 and $87, respectively.
The estimated impact was based upon a 10% change in December 31 spot rates. The selection of the
10% unfavorable change was made only for illustration of the potential hypothetical impact of such
an event and should not be construed as a prediction of future market events. Actual results could
differ materially from those illustrated above due to the nature of the estimates and assumptions
used in the above analysis.
Liabilities
The Company’s 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, 2011 and 2010, the derivatives used to hedge
foreign currency exchange risk related to foreign denominated liability contracts had a total
notional amount of $771 and a total fair value of ($57) and ($17), respectively.
The Company uses currency swaps to manage the foreign currency risk associated with the yen
denominated individual fixed annuity product. As of December 31, 2011 and 2010, the notional value
of the currency swaps was $1.9 billion and $2.1 billion and the fair value was $514 and $608,
respectively. 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 $3 and $27 for the years ended December 31, 2011 and 2010, 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.
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Table of Contents
Financial 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 affected, 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 18% of its risk associated with U.S. GMWB and 58% 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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Table of Contents
Credit Risk
Credit risk is defined as the risk of financial loss due to uncertainty of obligor’s or
counterparty’s ability or willingness to meet its obligations in accordance with agreed upon terms.
The majority of the Company’s credit risk is concentrated in its investment holdings but is also
present in reinsurance and insurance portfolios. Credit risk is comprised of three major factors:
the risk of change in credit quality, or credit migration risk; the risk of default; and the risk
of a change in value of a financial instrument due to changes in credit spread that are unrelated
to changes in obligor credit quality. A decline in creditworthiness is typically associated with
an increase in an investment’s credit spread, potentially resulting in an increase in
other-than-temporary impairments and an increased probability of a realized loss upon sale.
The objective of the Company’s enterprise credit risk management strategy is to identify, quantify,
and manage credit risk on an aggregate portfolio basis and to limit potential losses in accordance
with an established credit risk appetite. The Company manages to its risk appetite by primarily
holding a diversified mix of investment grade issuers and counterparties across its investment,
reinsurance, and insurance portfolios. Potential losses are also limited within portfolios by
diversifying across geographic regions, asset types, and sectors.
The Company manages a credit exposure from its inception to its maturity or sale. Both the
investment and reinsurance areas have formulated procedures for counterparty approvals and
authorizations. Although approval processes may vary by area and type of credit risk, approval
processes establish minimum levels of creditworthiness and financial stability. Eligible credits
are subjected to prudent and conservative underwriting reviews. Within the investment portfolio,
private securities, such as commercial mortgages, and private placements, must be presented to
their respective review committees for approval.
Credit risks are managed on an on-going basis through the use of various processes and analyses.
At the investment, reinsurance, and insurance product levels, fundamental credit analyses are
performed at the issuer/counterparty level on a regular basis. To provide a holistic review within
the investment portfolio, fundamental analyses are supported by credit ratings, assigned by
nationally recognized rating agencies or internally assigned, and by quantitative credit analyses.
The Company utilizes a credit VaR to measure default and migration risk on a monthly basis. Issuer
and security level risk measures are also utilized. In the event of deterioration in credit
quality, the Company maintains watch lists of problem counterparties within the investment and
reinsurance portfolios. The watch lists are updated based on regular credit examinations and
management reviews. The Company also performs quarterly assessments of probable expected losses in
the investment portfolio. The process is conducted on a sector basis and is intended to promptly
assess and identify potential problems in the portfolio and to recognize necessary impairments.
Credit risk policies at the enterprise and operation level ensure comprehensive and consistent
approaches to quantifying, evaluating, and managing credit risk under expected and stressed
conditions. These policies define the scope of the risk, authorities, accountabilities, terms, and
limits, and are regularly reviewed and approved by senior management and ERM. Aggregate
counterparty credit quality and exposure is monitored on a daily basis utilizing an enterprise-wide
credit exposure information system that contains data on issuers, ratings, exposures, and credit
limits. Exposures are tracked on a current and potential basis. Credit exposures are reported
regularly to the ERCC and to the Finance, Investment and Risk Management Committee (“FIRMCo”).
Exposures are aggregated by ultimate parent across investments, reinsurance receivables, insurance
products with credit risk, and derivative counterparties. The credit database and reporting system
are available to all key credit practitioners in the enterprise.
The Company exercises various and differing methods to mitigate its credit risk exposure within its
investment and reinsurance portfolios. Some of the reasons for mitigating credit risk include
financial instability or poor credit, avoidance of arbitration or litigation, future uncertainty,
and exposure in excess of risk tolerances. Credit risk within the investment portfolio is most
commonly mitigated through the use of derivative instruments or asset sales. Counterparty credit
risk is mitigated through the practice of entering into contracts only with highly creditworthy
institutions and through the practice of holding and posting of collateral. Systemic credit risk
is mitigated through the construction of high-quality, diverse portfolios that are subject to
regular underwriting of credit risks. For further discussion of the Company’s investment and
derivative instruments, see the Investment Management section and Note 5 of the Notes to
Consolidated Financial Statements. Further discussion on managing and mitigating credit risk from
the use of reinsurance via an enterprise security review process, see the Reinsurance section.
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.
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Table of Contents
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. For further information on the Company’s use of derivatives, 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. 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, 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,
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 Company’s operating subsidiaries could conduct hedging activity using a
combination of cash and exchange-traded instruments, in addition to using the available OTC
derivatives.
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 primarily rated 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 the derivatives exceed the contractual thresholds. In accordance with
industry standard 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.
For the company’s domestic derivative programs, the maximum uncollateralized threshold for a
derivative counterparty for a single legal entity is $10. The Company currently transacts OTC
derivatives in five legal entities that have a threshold greater than zero 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, 2011, for the
company’s domestic derivative programs, 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. Beginning in the fourth quarter of 2011, the
Company began hedging its Japan exposures within the legal entity HLIKK. The counterparty credit
exposures at HLIKK generally follow the maximum uncollateralized threshold of the domestic program
however, for two counterparties, collateralization requirements are currently not in place. These
two counterparties maintain credit ratings of A or better and the Company actively monitors their
credit standing. For further discussion, see the Derivative Commitments section of Note 12 of the
Notes to Consolidated Financial Statements.
For the year ended December 31, 2011, the Company has incurred no losses on derivative instruments
due to counterparty default.
In addition to counterparty credit risk, the Company may also introduce credit risk through the use
of credit default swaps that are entered into 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.
111
Table of Contents
The Company uses credit derivatives to purchase credit protection and to 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.
As of December 31, 2011 and 2010, the notional amount related to credit derivatives that purchase
credit protection was $1.7 billion and $2.6 billion, respectively, while the fair value was $36 and
($9), respectively. As of December 31, 2011 and 2010, the notional amount related to credit
derivatives that assume credit risk was $3.0 billion and $2.6 billion, respectively, while the fair
value was ($648) and ($434), 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.
Investment Portfolio Risks and Risk Management
Investment Portfolio Composition
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, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Percent of | Percent of | |||||||||||||||||||||||
| Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
| Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
|
United States Government/Government agencies
|
$ | 8,901 | $ | 9,364 | 11.4 | % | $ | 9,961 | $ | 9,918 | 12.7 | % | ||||||||||||
|
AAA
|
9,631 | 10,113 | 12.4 | % | 10,080 | 10,174 | 13.1 | % | ||||||||||||||||
|
AA
|
15,471 | 15,844 | 19.4 | % | 15,933 | 15,554 | 20.0 | % | ||||||||||||||||
|
A
|
19,501 | 21,053 | 25.7 | % | 19,265 | 19,460 | 25.0 | % | ||||||||||||||||
|
BBB
|
20,972 | 21,760 | 26.6 | % | 18,849 | 19,153 | 24.6 | % | ||||||||||||||||
|
BB & below
|
4,502 | 3,675 | 4.5 | % | 4,331 | 3,561 | 4.6 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total fixed maturities
|
$ | 78,978 | 81,809 | 100.0 | % | $ | 78,419 | 77,820 | 100.0 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
The movement in the overall credit quality of the Company’s portfolio was primarily attributable to
sales of U.S. Treasuries as the Company continues to reinvest in spread product and purchase
investment grade corporate securities concentrated in industrial and utility issuers. Fixed
maturities, FVO, are not included in the above table. For further discussion on fair value option
securities, see Note 4 of the Notes to Consolidated Financial Statements.
112
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, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||
| 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
|
$ | 2,688 | 34 | $ | (208 | ) | $ | 2,514 | 3.1 | % | $ | 2,496 | $ | 23 | $ | (221 | ) | $ | 2,298 | 2.9 | % | |||||||||||||||||||
|
Small business
|
418 | 1 | (123 | ) | 296 | 0.4 | % | 453 | — | (141 | ) | 312 | 0.4 | % | ||||||||||||||||||||||||||
|
Other
|
324 | 20 | (1 | ) | 343 | 0.4 | % | 298 | 15 | (34 | ) | 279 | 0.4 | % | ||||||||||||||||||||||||||
|
CDOs
|
||||||||||||||||||||||||||||||||||||||||
|
Collateralized loan
obligations (“CLOs”)
|
2,334 | — | (181 | ) | 2,153 | 2.6 | % | 2,429 | 1 | (212 | ) | 2,218 | 2.9 | % | ||||||||||||||||||||||||||
|
CREs
|
485 | 16 | (167 | ) | 334 | 0.4 | % | 653 | — | (266 | ) | 387 | 0.5 | % | ||||||||||||||||||||||||||
|
Other
|
— | — | — | — | — | 6 | — | — | 6 | — | ||||||||||||||||||||||||||||||
|
CMBS
|
||||||||||||||||||||||||||||||||||||||||
|
Agency backed [1]
|
637 | 40 | — | 677 | 0.8 | % | 519 | 9 | (4 | ) | 524 | 0.7 | % | |||||||||||||||||||||||||||
|
Bonds
|
5,992 | 182 | (487 | ) | 5,687 | 7.0 | % | 6,985 | 147 | (583 | ) | 6,549 | 8.4 | % | ||||||||||||||||||||||||||
|
Interest only (“IOs”)
|
563 | 49 | (25 | ) | 587 | 0.7 | % | 793 | 79 | (28 | ) | 844 | 1.1 | % | ||||||||||||||||||||||||||
|
Corporate
|
||||||||||||||||||||||||||||||||||||||||
|
Basic industry [2]
|
3,690 | 309 | (19 | ) | 3,979 | 4.9 | % | 2,993 | 190 | (24 | ) | 3,159 | 4.1 | % | ||||||||||||||||||||||||||
|
Capital goods
|
3,327 | 331 | (33 | ) | 3,625 | 4.4 | % | 3,179 | 223 | (23 | ) | 3,379 | 4.3 | % | ||||||||||||||||||||||||||
|
Consumer cyclical
|
2,277 | 206 | (8 | ) | 2,475 | 3.0 | % | 1,883 | 115 | (12 | ) | 1,986 | 2.6 | % | ||||||||||||||||||||||||||
|
Consumer non-cyclical
|
5,985 | 644 | (13 | ) | 6,616 | 8.1 | % | 6,126 | 444 | (29 | ) | 6,541 | 8.4 | % | ||||||||||||||||||||||||||
|
Energy
|
3,338 | 381 | (15 | ) | 3,704 | 4.5 | % | 3,377 | 212 | (23 | ) | 3,566 | 4.6 | % | ||||||||||||||||||||||||||
|
Financial services
|
7,763 | 334 | (526 | ) | 7,571 | 9.3 | % | 7,545 | 253 | (470 | ) | 7,328 | 9.4 | % | ||||||||||||||||||||||||||
|
Tech./comm.
|
4,357 | 443 | (61 | ) | 4,739 | 5.8 | % | 4,268 | 269 | (68 | ) | 4,469 | 5.7 | % | ||||||||||||||||||||||||||
|
Transportation
|
1,285 | 123 | (6 | ) | 1,402 | 1.7 | % | 1,141 | 69 | (13 | ) | 1,197 | 1.5 | % | ||||||||||||||||||||||||||
|
Utilities
|
8,236 | 857 | (38 | ) | 9,055 | 11.2 | % | 7,099 | 386 | (58 | ) | 7,427 | 9.5 | % | ||||||||||||||||||||||||||
|
Other [2]
|
903 | 33 | (20 | ) | 845 | 1.0 | % | 885 | 13 | (27 | ) | 832 | 1.1 | % | ||||||||||||||||||||||||||
|
Foreign govt./govt.
agencies
|
2,030 | 141 | (10 | ) | 2,161 | 2.6 | % | 1,627 | 73 | (17 | ) | 1,683 | 2.2 | % | ||||||||||||||||||||||||||
|
Municipal
|
||||||||||||||||||||||||||||||||||||||||
|
Taxable
|
1,688 | 120 | (51 | ) | 1,757 | 2.1 | % | 1,319 | 9 | (129 | ) | 1,199 | 1.5 | % | ||||||||||||||||||||||||||
|
Tax-exempt
|
10,869 | 655 | (21 | ) | 11,503 | 14.1 | % | 11,150 | 141 | (366 | ) | 10,925 | 14.0 | % | ||||||||||||||||||||||||||
|
Residential
mortgage-backed
securities (“RMBS”)
|
||||||||||||||||||||||||||||||||||||||||
|
Agency
|
4,436 | 222 | — | 4,658 | 5.7 | % | 4,283 | 109 | (27 | ) | 4,365 | 5.6 | % | |||||||||||||||||||||||||||
|
Non-agency
|
62 | — | (2 | ) | 60 | 0.1 | % | 78 | — | (3 | ) | 75 | 0.1 | % | ||||||||||||||||||||||||||
|
Alt-A
|
115 | 5 | (21 | ) | 99 | 0.1 | % | 168 | — | (19 | ) | 149 | 0.2 | % | ||||||||||||||||||||||||||
|
Sub-prime
|
1,348 | 25 | (433 | ) | 940 | 1.1 | % | 1,507 | — | (413 | ) | 1,094 | 1.4 | % | ||||||||||||||||||||||||||
|
U.S. Treasuries
|
3,828 | 203 | (2 | ) | 4,029 | 4.9 | % | 5,159 | 24 | (154 | ) | 5,029 | 6.5 | % | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Fixed maturities, AFS
|
78,978 | 5,374 | (2,471 | ) | 81,809 | 100 | % | 78,419 | 2,804 | (3,364 | ) | 77,820 | 100.0 | % | ||||||||||||||||||||||||||
|
Equity securities
|
||||||||||||||||||||||||||||||||||||||||
|
Financial services
|
479 | 10 | (187 | ) | 302 | 569 | 4 | (127 | ) | 446 | ||||||||||||||||||||||||||||||
|
Other
|
577 | 58 | (16 | ) | 619 | 444 | 88 | (5 | ) | 527 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Equity securities, AFS
|
1,056 | 68 | (203 | ) | 921 | 1,013 | 92 | (132 | ) | 973 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total AFS securities
|
$ | 80,034 | 5,442 | $ | (2,674 | ) | $ | 82,730 | $ | 79,432 | $ | 2,896 | $ | (3,496 | ) | $ | 78,793 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Fixed maturities, FVO
|
$ | 1,328 | $ | 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 invest in a diversified portfolio with a focus on investment grade
basic industry and utility issuers, while reducing its exposure to U.S. Treasuries, commercial real
estate securities and subordinated financial services securities. The Company’s AFS net unrealized
position improved primarily as a result of improved security valuations largely due to declining
interest rates, partially offset by credit spread widening. Fixed maturities, FVO, represents
Japan government securities supporting the Japan fixed annuity product, as well as securities
containing an embedded credit derivative for which the Company elected the fair value option. The
underlying credit risk of the securities containing credit derivatives are primarily investment
grade CRE CDOs and a subordinated position on a basket of corporate bonds. For further discussion
on fair value option securities, see Note 4 of the Notes to Consolidated Financial Statements.
113
Table of Contents
European Exposure
Many economies within Europe continue to experience significant adverse economic conditions which
have been precipitated in part by high unemployment rates and government debt levels. As a result,
issuers in several European countries have experienced credit deterioration and rating downgrades
and a reduced ability to access capital markets and/or higher borrowing costs. The concerns
regarding the European countries have impacted the capital markets which, in turn, has made it more
difficult to contain the European financial crisis. Austerity measures aimed at reducing sovereign
debt levels, along with steps taken by the European Central Bank to provide liquidity and credit
support to certain countries issuing debt, have helped to stabilize markets recently. However,
risks remain elevated.
The Company manages the credit risk associated with the European securities within the investment
portfolio on an on-going basis using several processes which are supported by macroeconomic
analysis and issuer credit analysis. For additional details regarding the Company’s management of
credit risk, see the Credit Risk section of this MD&A. The Company considers alternate
scenarios, including a base-case and both a positive and negative “tail” scenario that includes a
partial or full break-up of the Eurozone. The outlook for key factors is evaluated, including the
economic prospects for key countries, the potential for the spread of sovereign debt contagion, and
the likelihood that policymakers and politicians pursue sufficient fiscal discipline and introduce
appropriate backstops. Given the inherent uncertainty in the outcome of developments in the
Eurozone, however, the Company has been focused on controlling both absolute levels of exposure and
the composition of that exposure through both bond and derivative transactions.
The Company has limited direct European exposure, totaling only 5% of total invested assets as of
December 31, 2011. The following tables present the Company’s European securities included in the
Securities by Type table above. The Company identifies exposures with the issuers’ ultimate parent
country of domicile, which may not be the country of the security issuer. Certain European
countries were separately listed below, Greece, Italy, Ireland, Portugal and Spain (“GIIPS”),
because of the current significant economic strains persisting in these countries. The criteria
used for indentifying the countries separately listed includes credit default spreads that exceed
the iTraxx SovX index level and an S&P credit quality rating of A or lower.
The following tables present the Company’s European securities included in the Securities by Type
table above.
| December 31, 2011 | ||||||||||||||||||||||||||||||||
| Corporate & Equity, | Corporate & Equity, | Foreign Govt./ | ||||||||||||||||||||||||||||||
| AFS Non-Finan. [1] | AFS Financials | Govt. Agencies | Total | |||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||
|
Italy
|
$ | 314 | $ | 255 | $ | — | $ | — | $ | — | $ | — | $ | 314 | $ | 255 | ||||||||||||||||
|
Spain
|
191 | 189 | 20 | 19 | — | — | 211 | 208 | ||||||||||||||||||||||||
|
Ireland
|
163 | 162 | — | — | — | — | 163 | 162 | ||||||||||||||||||||||||
|
Portugal
|
15 | 15 | — | — | — | — | 15 | 15 | ||||||||||||||||||||||||
|
Greece
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Higher risk
|
683 | 621 | 20 | 19 | — | — | 703 | 640 | ||||||||||||||||||||||||
|
Europe excluding higher risk
|
4,277 | 4,698 | 1,255 | 1,135 | 901 | 970 | 6,433 | 6,800 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total Europe
|
$ | 4,960 | $ | 5,316 | $ | 1,275 | $ | 1,154 | $ | 901 | $ | 970 | $ | 7,136 | $ | 7,440 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Europe exposure net of
credit default swap
protection [2]
|
$ | 6,439 | $ | 7,467 | ||||||||||||||||||||||||||||
114
Table of Contents
| December 31, 2010 | ||||||||||||||||||||||||||||||||
| Corporate & Equity, AFS | Corporate & Equity, AFS | Foreign Govt./ | ||||||||||||||||||||||||||||||
| Non-Finan. [1] | Financials | Govt. Agencies | Total | |||||||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||
|
Italy
|
$ | 374 | $ | 359 | $ | 17 | $ | 17 | $ | — | $ | — | $ | 391 | $ | 376 | ||||||||||||||||
|
Spain
|
263 | 279 | 54 | 46 | — | — | 317 | 325 | ||||||||||||||||||||||||
|
Ireland
|
178 | 173 | 4 | 3 | — | — | 182 | 176 | ||||||||||||||||||||||||
|
Portugal
|
31 | 28 | — | — | — | — | 31 | 28 | ||||||||||||||||||||||||
|
Greece
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Higher risk
|
846 | 839 | 75 | 66 | — | — | 921 | 905 | ||||||||||||||||||||||||
|
Europe excluding higher risk
|
4,837 | 5,229 | 1,682 | 1,623 | 592 | 606 | 7,111 | 7,458 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total Europe
|
$ | 5,683 | $ | 6,068 | $ | 1,757 | $ | 1,689 | $ | 592 | $ | 606 | $ | 8,032 | $ | 8,363 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Europe exposure net of
credit default swap
protection [2]
|
$ | 6,695 | $ | 8,358 | ||||||||||||||||||||||||||||
| [1] |
Includes amortized cost and fair value of $67 and $67 as of
December 31, 2011 and $27 and $27, respectively, as of December
31, 2010 related to limited partnerships and other alternative
investments, the majority of which is domiciled in the United
Kingdom.
|
|
| [2] |
Includes a notional amount and fair value of $697 and $27,
respectively, as of December 31, 2011 and $1.3 billion and ($5),
respectively, as of December 31, 2010 related to credit default
swap protection. This includes a notional amount of $89 and $42
as of December 31, 2011 and 2010, respectively, related to single
name corporate issuers in the financial services sector.
|
The Company’s European investment exposure largely relates to corporate entities which are
domiciled in or generated a significant portion of its revenue within the United Kingdom, Germany,
the Netherlands and Switzerland. As of December 31, 2011 and 2010, exposure to the United Kingdom
totals less than 2% of total invested assets. The majority of investments are U.S.
dollar-denominated, and those securities that are pound and euro-denominated are hedged to U.S.
dollars or support foreign-denominated liabilities. For a discussion of foreign currency risks,
see the Foreign Currency Exchange Risk section of this MD&A. The Company does not hold any
sovereign exposure to the higher risk countries and does not hold any exposure to issuers in
Greece. As of December 31, 2011 and 2010, the
Company’s unfunded commitments associated with its investment portfolio was immaterial, and the
weighted average credit quality of European investments was A and A-, respectively.
As of December 31, 2011 and 2010, the Company’s total credit default swaps that provide credit
protection had a notional amount of $697 and $1.3 billion, respectively, and a fair value of $27
and ($5), respectively. Included in those notional amounts as of December 31, 2011 and 2010 were
$407 and $532, respectively, on credit default swaps that reference single name corporate and
financial European issuers, of which $125 and $57, respectively, related to the higher risk
countries. The maturity dates of credit defaults swaps are primarily consistent with the hedged
bonds. Also included are credit default swaps with a notional amount of $290 and $805,
respectively, as of December 31, 2011 and 2010 which reference a standard basket of European
corporate and financial issuers. For further information on the use of the Company’s credit
derivatives and counterparty credit quality, see Derivative Instruments within the Credit Risk
section of this MD&A.
In
addition to the credit risk associated with the investment portfolio,
the Company has $247 of
reinsurance recoverables due from legal entity counterparties domiciled within Europe. For a more detail discussion
of the Company’s reinsurance arrangements, see Note 6 of the Notes to the Consolidated Financial
Statements.
Included in the Company’s equity securities, trading, portfolio are investments in World Government
Bond Index Funds (“WGBI funds”). The fair value of the WGBI funds at December 31, 2011 and 2010
was $12.5 billion and $12.9 billion, respectively. Because several of these funds are managed by
third party asset managers, the Company does not have access to detailed holdings; however, the
WGBI funds investment mandate follows the Citigroup non-Japan World Government Fund Index (“the
index”) and includes allocations to certain European sovereign debt. The estimated fair value of
the European allocation based upon the index benchmark allocation was $5.4 billion and $5.8 billion
as of December 31, 2011 and 2010, respectively. Included in this estimated European exposure were
investments in Ireland, Italy, Portugal and Spain with an estimated fair value of $1.7 billion and
$2.0 billion as of December 31, 2011 and 2010, respectively. The index guidelines allow investment in issuers
rated BBB- or higher by Standard and Poors or Baa3 or higher by Moodys. Should an issuer’s credit rating
fall below both of these rating levels they will be removed from the Index and the holdings will be
liquidated. Because these assets support the international variable annuity business, changes in
the value of these investments are reflected in the corresponding policyholder liabilities. The
Company’s indirect exposure to these holdings is through any guarantees issued on the underlying
variable annuity policies.
115
Table of Contents
Financial Services
The Company’s exposure to the financial services sector is predominantly through banking and
insurance institutions. The following table presents the Company’s exposure to the financial
services sector included in the Securities by Type table above.
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Amortized | Net | Amortized | Net | |||||||||||||||||||||
| Cost | Fair Value | Unrealized | Cost | Fair Value | Unrealized | |||||||||||||||||||
|
AAA
|
$ | 240 | $ | 245 | $ | 5 | $ | 302 | $ | 309 | $ | 7 | ||||||||||||
|
AA
|
1,698 | 1,675 | (23 | ) | 2,085 | 2,095 | 10 | |||||||||||||||||
|
A
|
3,664 | 3,685 | 21 | 3,760 | 3,599 | (161 | ) | |||||||||||||||||
|
BBB
|
2,335 | 1,998 | (337 | ) | 1,677 | 1,518 | (159 | ) | ||||||||||||||||
|
BB & below
|
305 | 270 | (35 | ) | 290 | 253 | (37 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 8,242 | $ | 7,873 | $ | (369 | ) | $ | 8,114 | $ | 7,774 | $ | (340 | ) | ||||||||||
|
|
||||||||||||||||||||||||
Domestic financial companies continued to stabilize throughout 2011 due to improved earnings
performance, strengthening of asset quality and capital retention. However, spread volatility
remains high due to concerns around European sovereign risks and potential contagion, regulatory
pressures and a weaker U.S. macroeconomic environment. Financial institutions remain vulnerable to
these concerns, as well as ongoing stress in the real estate markets which could adversely impact
the Company’s net unrealized position. Included in the table above as of December 31, 2011, is an
amortized cost and fair value of $1.3 billion and $1.2 billion, respectively, related to European
investment exposure, of which only $20 and $19, respectively, relates to GIIPS. As of December 31,
2010, amortized cost and fair value includes $1.8 billion and $1.7 billion, respectively, of
European exposure, of which only $75 and $66, respectively, relates to GIIPS.
Commercial Real Estate
The commercial real estate market continued to show signs of improving fundamentals, such as
increases in transaction activities, more readily available financing and new issuances. While
delinquencies still remain at historically high levels, they are expected to move lower in 2012.
The following table presents the Company’s exposure to commercial mortgage backed-securities
(“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, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 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
|
$ | 408 | $ | 415 | $ | 148 | $ | 144 | $ | 83 | $ | 81 | $ | 16 | $ | 13 | $ | 33 | $ | 30 | $ | 688 | $ | 683 | ||||||||||||||||||||||||
|
2004
|
333 | 349 | 68 | 75 | 45 | 41 | 30 | 28 | 26 | 21 | 502 | 514 | ||||||||||||||||||||||||||||||||||||
|
2005
|
520 | 556 | 101 | 96 | 178 | 151 | 177 | 138 | 71 | 57 | 1,047 | 998 | ||||||||||||||||||||||||||||||||||||
|
2006
|
713 | 762 | 516 | 493 | 180 | 159 | 362 | 298 | 430 | 302 | 2,201 | 2,014 | ||||||||||||||||||||||||||||||||||||
|
2007
|
245 | 267 | 296 | 275 | 123 | 97 | 166 | 130 | 195 | 149 | 1,025 | 918 | ||||||||||||||||||||||||||||||||||||
|
2008
|
55 | 60 | — | — | — | — | — | — | — | — | 55 | 60 | ||||||||||||||||||||||||||||||||||||
|
2009
|
28 | 29 | — | — | — | — | — | — | — | — | 28 | 29 | ||||||||||||||||||||||||||||||||||||
|
2010
|
29 | 31 | — | — | — | — | — | — | — | — | 29 | 31 | ||||||||||||||||||||||||||||||||||||
|
2011
|
417 | 440 | — | — | — | — | — | — | — | — | 417 | 440 | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 2,748 | $ | 2,909 | $ | 1,129 | $ | 1,083 | $ | 609 | $ | 529 | $ | 751 | $ | 607 | $ | 755 | $ | 559 | $ | 5,992 | $ | 5,687 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Credit protection
|
27.3 | % | 22.7 | % | 19.7 | % | 13.8 | % | 8.2 | % | 21.6 | % | ||||||||||||||||||||||||||||||||||||
116
Table of Contents
| 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 | % | ||||||||||||||||||||||||||||||||||||
| [1] |
The vintage year represents the year the pool of loans was originated.
|
The Company also has AFS exposure to commercial real estate (“CRE”) collateralized debt
obligations (“CDOs”) with an amortized cost and fair value of $485 and $334, respectively, as of
December 31, 2011 and $653 and $387, respectively, as of December 31, 2010. These securities are
comprised of diversified pools of commercial mortgage loans or equity positions of other CMBS
securitizations. Although the Company does not plan to invest in this asset class going forward,
we continue to monitor these investments as economic and market uncertainties regarding future
performance impacts market liquidity and results in higher risk premiums.
In addition to CMBS bonds and CRE CDOs, 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, 2011, loans within the Company’s mortgage
loan portfolio that have had extensions or restructurings other than what is allowable under the
original terms of the contract are immaterial.
| Commercial Mortgage Loans | ||||||||||||||||||||||||
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Amortized | Valuation | Carrying | Amortized | Valuation | Carrying | |||||||||||||||||||
| Cost [1] | Allowance | Value | Cost [1] | Allowance | Value | |||||||||||||||||||
|
Agricultural
|
$ | 268 | $ | (19 | ) | $ | 249 | $ | 339 | $ | (23 | ) | $ | 316 | ||||||||||
|
Whole loans
|
4,892 | (17 | ) | 4,875 | 3,326 | (23 | ) | 3,303 | ||||||||||||||||
|
A-Note participations
|
265 | — | 265 | 319 | — | 319 | ||||||||||||||||||
|
B-Note participations
|
296 | (66 | ) | 230 | 327 | (70 | ) | 257 | ||||||||||||||||
|
Mezzanine loans
|
109 | — | 109 | 181 | (36 | ) | 145 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 5,830 | $ | (102 | ) | $ | 5,728 | $ | 4,492 | $ | (152 | ) | $ | 4,340 | ||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Amortized cost represents carrying value prior to valuation allowances, if any.
|
Since December 31, 2010, the Company funded $1.8 billion of commercial whole loans with a
weighted average loan-to-value (“LTV”) ratio of 62% and a weighted average yield of 4.5%. The
Company continues to originate commercial whole loans in primary markets, such as multi-family and
retail, focusing on loans with strong LTV ratios and high quality property collateral. As of
December 31, 2011, the Company had mortgage loans held-for-sale with a carrying value and valuation
allowance of $74 and $4, respectively, and $87 and $7, respectively, as of December 31, 2010.
Municipal Bonds
The Company holds investments in securities backed by states, municipalities and political
subdivisions (“municipal”) with an amortized cost and fair value of $12.6 billion and $13.3
billion, respectively, as of December 31, 2011 and $12.5 billion and $12.1 billion, respectively,
as of December 31, 2010. The Company’s municipal bond portfolio primarily consists of high quality
essential service revenue and general obligation bonds. As of December 31, 2011, the largest
issuer concentrations were the states of California, Massachusetts and Illinois, which each
comprised less than 3% of the municipal bond portfolio and were primarily comprised of general
obligation bonds. As of December 31, 2010, the largest issuer concentrations were the states of
California, Massachusetts and Georgia, which each comprised less than 3% of the municipal bond
portfolio and were primarily comprised of general obligation bonds.
117
Table of Contents
Limited Partnerships and Other Alternative Investments
The following table presents the Company’s investments in limited partnerships and other
alternative investments which include hedge funds, mortgage and real estate funds, mezzanine debt
funds, and private equity and other funds. Hedge funds include investments in funds of funds and
direct funds. These hedge funds invest in a variety of strategies including global macro and
long/short credit and equity. 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 to mid-sized non-public businesses
with high growth potential.
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
|
Hedge funds
|
$ | 896 | 35.4 | % | $ | 439 | 22.8 | % | ||||||||
|
Mortgage and real estate funds
|
479 | 18.9 | % | 406 | 21.2 | % | ||||||||||
|
Mezzanine debt funds
|
118 | 4.7 | % | 132 | 6.9 | % | ||||||||||
|
Private equity and other funds
|
1,039 | 41.0 | % | 941 | 49.1 | % | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 2,532 | 100.0 | % | $ | 1,918 | 100.0 | % | ||||||||
|
|
||||||||||||||||
Since December 31, 2010, the increase in hedge funds relates to additional investments in the type
of fund strategies that the Company expects to generate superior risk-adjusted returns over time.
Available-for-Sale Securities — Unrealized Loss Aging
The total gross unrealized losses were $2.7 billion as of December 31, 2011, which have improved
$822, or 24%, from December 31, 2010 as interest rates declined, partially offset by credit spread
widening. As of December 31, 2011, $743 of the gross unrealized losses were associated with
securities depressed less than 20% of cost or amortized cost.
The remaining $1.9 billion of gross unrealized losses were associated with securities depressed
greater than 20%, which includes $156 associated with securities depressed over 50% for twelve
months or more. These securities are backed primarily by commercial and residential real estate
that have market spreads that continue to be wider than the spreads at the security’s respective
purchase date. The unrealized losses remain largely due to the continued market and economic
uncertainties surrounding residential and certain commercial real estate and lack of liquidity.
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. Also included in the gross unrealized losses depressed
greater than 20% are financial services securities that have a floating-rate coupon and/or
long-dated maturities.
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, 2011 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
continue to improve. 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. For further
information regarding the Company’s impairment analysis, see Other-Than-Temporary Impairments in
the Investment Portfolio Risks and Risk Management section of this MD&A.
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, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
| Cost or | Cost or | |||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
| Items | Cost | Value | Loss [1] | Items | Cost | Value | Loss [1] | |||||||||||||||||||||||||
|
Three months or less
|
855 | $ | 3,933 | $ | 3,672 | $ | (261 | ) | 1,503 | $ | 17,431 | $ | 16,783 | $ | (643 | ) | ||||||||||||||||
|
Greater than three to six months
|
485 | 2,617 | 2,517 | (100 | ) | 115 | 732 | 690 | (42 | ) | ||||||||||||||||||||||
|
Greater than six to nine months
|
224 | 1,181 | 1,097 | (84 | ) | 91 | 438 | 397 | (41 | ) | ||||||||||||||||||||||
|
Greater than nine to eleven months
|
42 | 106 | 95 | (11 | ) | 42 | 185 | 169 | (16 | ) | ||||||||||||||||||||||
|
Greater than twelve months
|
943 | 11,613 | 9,324 | (2,218 | ) | 1,231 | 15,599 | 12,811 | (2,754 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
2,549 | $ | 19,450 | $ | 16,705 | $ | (2,674 | ) | 2,982 | $ | 34,385 | $ | 30,850 | $ | (3,496 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| [1] |
Unrealized losses exclude the fair value of bifurcated embedded derivative features of
certain securities as changes in value are recorded in net realized capital gains (losses).
|
118
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, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
| Cost or | Cost or | |||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
| Consecutive Months | Items | Cost | Value | Loss [1] | Items | Cost | Value | Loss | ||||||||||||||||||||||||
|
Three months or less
|
206 | $ | 1,823 | $ | 1,289 | $ | (500 | ) | 99 | $ | 771 | $ | 582 | $ | (189 | ) | ||||||||||||||||
|
Greater than three to six months
|
134 | 1,749 | 1,205 | (544 | ) | 22 | 136 | 104 | (32 | ) | ||||||||||||||||||||||
|
Greater than six to nine months
|
42 | 406 | 269 | (137 | ) | 28 | 234 | 169 | (65 | ) | ||||||||||||||||||||||
|
Greater than nine to eleven months
|
9 | 1 | — | (1 | ) | 13 | 43 | 32 | (11 | ) | ||||||||||||||||||||||
|
Greater than twelve months
|
239 | 1,806 | 1,057 | (749 | ) | 390 | 4,361 | 2,766 | (1,595 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
630 | $ | 5,785 | $ | 3,820 | $ | (1,931 | ) | 552 | $ | 5,545 | $ | 3,653 | $ | (1,892 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| [1] |
Unrealized losses exclude the fair value of bifurcated embedded derivative features of
certain securities as changes in value are recorded in net realized capital gains (losses).
|
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, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
| Cost or | Cost or | |||||||||||||||||||||||||||||||
| Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
| Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||
|
Three months or less
|
50 | $ | 152 | $ | 55 | $ | (97 | ) | 20 | $ | 27 | $ | 12 | $ | (15 | ) | ||||||||||||||||
|
Greater than three to six months
|
26 | 110 | 46 | (64 | ) | 1 | 2 | 1 | (1 | ) | ||||||||||||||||||||||
|
Greater than six to nine months
|
7 | 33 | 11 | (22 | ) | 12 | 65 | 29 | (36 | ) | ||||||||||||||||||||||
|
Greater than nine to eleven months
|
5 | 5 | 1 | (4 | ) | — | — | — | — | |||||||||||||||||||||||
|
Greater than twelve months
|
54 | 227 | 71 | (156 | ) | 94 | 722 | 260 | (462 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
142 | $ | 527 | $ | 184 | $ | (343 | ) | 127 | $ | 816 | $ | 302 | $ | (514 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
Other-Than-Temporary Impairments
The following table presents the Company’s impairments recognized in earnings by security type.
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
ABS
|
$ | 27 | $ | 13 | $ | 54 | ||||||
|
CDOs
|
41 | 164 | 511 | |||||||||
|
CMBS
|
||||||||||||
|
Bonds
|
16 | 157 | 257 | |||||||||
|
IOs
|
5 | 3 | 25 | |||||||||
|
Corporate
|
50 | 33 | 198 | |||||||||
|
Equity
|
17 | 14 | 145 | |||||||||
|
RMBS
|
||||||||||||
|
Non-agency
|
— | 2 | 4 | |||||||||
|
Alt-A
|
1 | 10 | 62 | |||||||||
|
Sub-prime
|
15 | 37 | 232 | |||||||||
|
Other
|
2 | 1 | 20 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 174 | $ | 434 | $ | 1,508 | ||||||
|
|
||||||||||||
Year ended December 31, 2011
For the year ended December 31, 2011, impairments recognized in earnings were comprised of credit
impairments of $125, securities that the Company intends to sell of $32 and impairments on equity
securities of $17.
Credit impairments were primarily concentrated in structured securities associated with commercial
real estate, as well as direct private investments. The structured securities were impaired
primarily due to property-specific deterioration of the underlying collateral. The Company
calculated these impairments utilizing both a top down modeling approach and a security-specific
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. The macroeconomic assumptions considered by the Company did not materially
change during 2011 and, as such, the credit impairments recognized for the year ended December 31,
2011 were primarily driven by actual or expected collateral deterioration, largely as a result of
the Company’s security-specific collateral review.
119
Table of Contents
The security-specific 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 security-specific 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.
Included in corporate and equity security types were direct private investments that were impaired
primarily due to the likelihood of a disruption in contractual principal and interest payments due
to the restructuring of the debtor’s obligation. Impairments on equity securities were primarily
related to preferred stock associated with these direct private investments.
Impairments on securities for which the Company has the intent to sell were primarily on corporate
bonds, certain ABS aircraft bonds and CMBS as market pricing continues to improve and the Company
would like the ability to reduce certain exposures.
In addition to the credit impairments recognized in earnings, the Company recognized non-credit
impairments in other comprehensive income of $89 for the year ended December 31, 2011,
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 security-specific performance below current expectations.
Ultimate loss formation will be a function of macroeconomic factors and idiosyncratic
security-specific performance.
Year ended December 31, 2010
For the year ended December 31, 2010, impairments recognized in earnings were comprised of credit
impairments of $372 primarily concentrated on structured securities associated with commercial and
residential real estate. Also included were impairments on debt securities for which the Company
intended to sel1 of $54, mainly comprised of CMBS bonds in order to take advantage of price
appreciation, as well as impairments on equity securities of $8 primarily on below investment grade
securities depressed 20% for more than six months.
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. 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.
Valuation Allowances on Mortgage Loans
The following table presents (additions)/reversals to valuation allowances on mortgage loans.
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Credit-related concerns
|
$ | 27 | $ | (70 | ) | $ | (310 | ) | ||||
|
Held for sale
|
||||||||||||
|
Agricultural loans
|
(3 | ) | (10 | ) | (4 | ) | ||||||
|
B-note participations
|
— | (22 | ) | (51 | ) | |||||||
|
Mezzanine loans
|
— | (52 | ) | (43 | ) | |||||||
|
|
||||||||||||
|
Total
|
$ | 24 | $ | (154 | ) | $ | (408 | ) | ||||
|
|
||||||||||||
Year ended December 31, 2011
For the year ended December 31, 2011, valuation allowances on mortgage loan reversals of $24 were
largely driven by the release of a reserve associated with the sale of a previously reserved for
mezzanine loan. Continued improvement in commercial real estate property valuations will
positively impact future loss development, with future impairments driven by idiosyncratic
loan-specific performance. Excluded from the table above are valuation allowances associated with
mortgage loans related to the divestiture of Federal Trust Corporation. For further information
regarding the divestiture of Federal Trust Corporation, see Note 20 of the Notes to the
Consolidated Financial Statements.
Years ended December 31, 2010 and 2009
For the years ended December 31, 2010 and 2009, valuation allowances on mortgage loan additions of
($154) and ($408), respectively, primarily related to B-Note participant and mezzanine loan sales.
Also included were additions for expected credit losses due to borrower financial difficulty and/or
collateral deterioration.
120
Table of Contents
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.
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 $1.6 billion at December 31, 2011, 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 $480, common
stockholder dividends, subject to the discretion of the Board of Directors, of approximately $170,
and preferred stock dividends of approximately $42.
Furthermore, the Company’s Board of Directors has authorized a $500 stock repurchase program that
permits purchases of common stock, as well as warrants and other derivative securities. The
Hartford has repurchased $94 of its common stock under this program through February 17, 2012.
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 certain affiliated 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
On October 17, 2011, The Hartford repaid its $400, 5.25% senior notes at maturity. For additional
information regarding debt, see Note 14 of the Notes to Consolidated Financial Statements.
Dividends
On
February 23, 2012, The Hartford’s Board of Directors declared a quarterly dividend of $0.10 per
common share payable on April 2, 2012 to common shareholders of
record as of March 5, 2012 and
a dividend of $18.125 on each share of Series F preferred stock
payable on April 2, 2012 to
shareholders of record as of March 15, 2012.
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 the U. S. qualified defined benefit
pension plan of $200, $200, and $200 in 2011, 2010 and 2009. No contributions were made to the
other postretirement plans in 2011, 2010 and 2009. The Company’s 2011 required minimum funding
contribution was immaterial. The Company presently anticipates contributing approximately $200 to
its U. S. qualified defined benefit pension plan in 2012, 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 2012
and the funding requirements for all of the pension plans is expected to be immaterial.
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Table of Contents
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 life insurance subsidiaries are further dependent on
cash requirements of HLI and other factors. The Company’s property-casualty insurance subsidiaries
are permitted to pay up to a maximum of approximately $1.4 billion in dividends to HFSG Holding
Company in 2012 without prior approval from the applicable insurance commissioner. The Company’s
life insurance subsidiaries are permitted to pay up to a maximum of approximately $625 in dividends
to HLI in 2012 without prior approval from the applicable insurance commissioner. The aggregate of
these amounts is the maximum the insurance subsidiaries could pay to HFSG Holding Company in 2012
without prior approval from the applicable insurance commissioner. In addition to statutory
limitations on paying dividends, the Company also takes other items into consideration when
determining dividends from subsidiaries. These considerations include, but are not limited to
expected earnings and capitalization of the subsidiary, regulatory capital requirements and
liquidity requirements of the individual operating company. In 2012, HFSG Holding Company
anticipates receiving $800 in dividends from its property-casualty insurance subsidiaries, net of
dividends to fund interest payments on an intercompany note between Hartford Holdings, Inc. and
Hartford Fire Insurance Company, and no dividends from the life insurance subsidiaries. In 2011,
HFSG Holding Company and HLI received $80 in dividends from the life insurance subsidiaries, and
HFSG Holding Company received $1.1 billion in dividends from its property-casualty insurance
subsidiaries, including $150 reflecting the net realized capital gain on the sale of SRS, $160
related to funding interest payments on an intercompany note between Hartford Holdings Inc. and
Hartford Fire Insurance Company and $800 used in conjunction with other resources at the HFSG
Holding Company principally to fund dividends, interest, capital contributions to subsidiaries and
debt maturities.
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 equity, equity-related debt or other capital securities and is continuously evaluating strategic
opportunities. The issuance of common equity, equity-related debt or other capital securities could result in the
dilution of shareholder interests or reduced net income due to additional interest expense.
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 registration statement.
Contingent Capital Facility
The Hartford is party to a put option agreement that provides The Hartford with the right to
require the Glen Meadow ABC Trust, a Delaware statutory trust, at any time and from time to time,
to purchase The Hartford’s junior subordinated notes in a maximum aggregate principal amount not to
exceed $500. Under the Put Option Agreement, The Hartford will pay the Glen Meadow 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 Glen Meadow ABC Trust for such period. The Hartford
has agreed to reimburse the Glen Meadow ABC Trust for certain fees and ordinary expenses. The
Company holds a variable interest in the Glen Meadow ABC Trust where the Company is not the primary
beneficiary. As a result, the Company did not consolidate the Glen Meadow ABC Trust. As of
December 31, 2011, The Hartford has not exercised its right to require Glen Meadow ABC Trust to
purchase the Notes. As a result, the Notes remain a source of capital for the HFSG Holding
Company.
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Table of Contents
Commercial Paper and Revolving Credit Facility
The table below details the Company’s short-term debt programs and the applicable balances
outstanding.
| Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
| Effective | Expiration | December 31, | December 31, | |||||||||||||||||||||
| Description | Date | Date | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
|
Commercial Paper
|
||||||||||||||||||||||||
|
The Hartford
|
11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | — | $ | — | ||||||||||||||
|
Revolving Credit Facility
|
||||||||||||||||||||||||
|
5-year revolving credit facility [1]
|
8/9/07 | 8/9/12 | 1,900 | 1,900 | — | — | ||||||||||||||||||
|
Total Commercial Paper and Revolving
Credit Facility
|
$ | 3,900 | $ | 3,900 | $ | — | $ | — | ||||||||||||||||
| [1] |
Terminated in January 2012, see discussion that follows.
|
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, 2011, the Company has no commercial
paper outstanding.
In January 2012, the Company entered into a senior unsecured revolving credit facility (the “Credit
Facility”) that provides for borrowing capacity up to $1.75 billion (which is available in U.S.
dollars, and in Euro, Sterling, Canadian dollars and Japanese Yen) through January 6, 2016 and
terminated its $1.9 billion unsecured revolving credit facility due August 9, 2012. As of December
31, 2011, the Company was in compliance with all financial covenants under the terminated credit
facility.
Of the total availability under the Credit Facility, up to $250 is available to support letters of
credit issued on behalf of the Company or subsidiaries of the Company. Under the Credit Facility,
the Company must maintain a minimum level of consolidated net worth of $16 billion. The minimum level of consolidated net worth,
as defined, will be adjusted in the first
quarter of 2012 upon the adoption of a new DAC accounting standard, see Note 1 of the Notes to Consolidated Financial Statements, by the lesser of approximately
$1.0 billion, after-tax representing 70% of the adoption-related estimated DAC charge, or $1.7
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’s maximum ratio of consolidated total debt to consolidated total
capitalization is 35%, and the ratio of consolidated total debt of subsidiaries to consolidated
total capitalization is limited to 10%. The Company will certify compliance with the financial
covenants for the syndicate of participating financial institutions on a quarterly basis.
The Hartford’s Japan operations also maintain two lines of credit in support of operations. Both
lines of credit are in the amount of $65, or ¥5 billion, and individually have expiration dates of
September 30, 2012 and January 3, 2013.
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, 2011, is $725. Of this $725 the legal entities have posted
collateral of $716 in the normal course of business. Based on derivative market values as of
December 31, 2011, a downgrade of one level below the current financial strength ratings by either
Moody’s or S&P could require approximately an additional $37 to be posted as collateral. Based on
derivative market values as of December 31, 2011, 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 $48 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 would post, if
required, would be primarily in the form of U.S. Treasury bills and U.S. Treasury notes.
The aggregate notional amount of derivative relationships that could be subject to immediate
termination in the event of rating agency downgrades to either BBB+ or Baa1 as of December 31, 2011
was $14.5 billion with a corresponding fair value of $418. The notional and fair value amounts
include a customized GMWB derivative with a notional amount of $4.2 billion and a fair value of
$207, for which the Company has a contractual right to make a collateral payment in the amount of
approximately $45 to prevent its termination. This customized GMWB derivative contains an early
termination trigger such that if the unsecured, unsubordinated debt of the counterparty’s related
party guarantor is downgraded two levels or more below the current ratings by Moody’s and one or
more levels by S&P, the counterparty could terminate all transactions under the applicable
International Swaps and Derivatives Association Master Agreement. As of December 31, 2011, the
gross fair value of the affected derivative contracts is $223, which would approximate the
settlement value.
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Table of Contents
Insurance Operations
Current and expected patterns of claim frequency and severity or surrenders may change from period
to period but continue to be within historical norms and, therefore, the Company’s insurance
operations’ current liquidity position is considered to be sufficient to meet anticipated demands
over the next twelve months, including any obligations related to the Company’s restructuring
activities. For a discussion and tabular presentation of the Company’s current contractual
obligations by period, refer to Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations within the Capital Resources and Liquidity section of the MD&A.
The principal sources of operating funds are premiums, fees earned from assets under management and
investment income, while investing cash flows originate from maturities and sales of invested
assets. The primary uses of funds are to pay claims, claim adjustment expenses, commissions and
other underwriting expenses, to purchase new investments and to make dividend payments to the HFSG
Holding Company.
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 Operations
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 Operations’ fixed maturities, short-term
investments, and cash, as of December 31, 2011:
|
Fixed maturities
|
$ | 26,034 | ||
|
Short-term investments
|
658 | |||
|
Cash
|
203 | |||
|
Less: Derivative collateral
|
(222 | ) | ||
|
|
||||
|
Total
|
$ | 26,673 | ||
|
|
||||
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 Operations’ total general account contractholder obligations are supported by $76 billion of
cash and total general account invested assets, excluding equity securities, trading, which
includes a significant short-term investment position to meet liquidity needs.
The following table summarizes Life Operations’ fixed maturities, short-term investments, and cash,
as of December 31, 2011:
|
Fixed maturities
|
$ | 56,950 | ||
|
Short-term investments
|
5,641 | |||
|
Cash
|
2,377 | |||
|
Less: Derivative collateral
|
(2,836 | ) | ||
|
Cash associated with Japan variable annuities
|
(684 | ) | ||
|
|
||||
|
Total
|
$ | 61,448 | ||
|
|
||||
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; obligations of Individual
Annuity, Individual Life and private placement life insurance products 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.
Hartford Life Insurance Company (“HLIC”), an indirect wholly owned subsidiary, became a member of
the Federal Home Loan Bank of Boston (“FHLBB”) in May 2011. Membership allows HLIC access to
collateralized advances, which may be used to support various spread-based business and enhance
liquidity management. The Connecticut Department of Insurance (“CTDOI”) will permit HLIC to pledge
up to $1.48 billion in qualifying assets to secure FHLBB advances for 2012. The amount of advances
that can be taken are dependent on the asset types pledged to secure the advances. The pledge
limit is recalculated annually based on statutory admitted assets and capital and surplus. HLIC
would need to seek the prior approval of the CTDOI if there were a desire to exceed these limits.
As of December 31, 2011, HLIC had no advances outstanding under the FHLBB facility.
124
Table of Contents
| As of | ||||
| December 31, | ||||
| Contractholder Obligations | 2011 | |||
|
Total Life contractholder obligations
|
$ | 239,723 | ||
|
Less: Separate account assets [1]
|
(143,870 | ) | ||
|
International statutory separate accounts [1]
|
(30,461 | ) | ||
|
|
||||
|
General account contractholder obligations
|
$ | 65,392 | ||
|
|
||||
|
|
||||
|
Composition of General Account Contractholder Obligations
|
||||
|
Contracts without a surrender provision and/or fixed payout dates [2]
|
$ | 30,339 | ||
|
Fixed MVA annuities [3]
|
9,727 | |||
|
International fixed MVA annuities
|
2,642 | |||
|
Guaranteed investment contracts (“GIC”) [4]
|
567 | |||
|
Other [5]
|
22,117 | |||
|
|
||||
|
General account contractholder obligations
|
$ | 65,392 | ||
|
|
||||
| [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 Operations’ 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 Operations’
liquidity position. In addition, a surrender of variable annuity
separate account or general account assets (see below) will
decrease Life Operations’ 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 Operations’
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 Operations
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 Operations is required to
contribute additional capital to the statutory separate account.
Life Operations 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 Operations.
|
|
| [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 Operations’ 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 Individual Annuity’s individual variable annuities and
Individual Life variable life contracts, the general account
option for Retirement Plans’ annuities and universal life
contracts sold by Individual Life may be funded through operating
cash flows of Life 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.
|
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 $1.4 billion as disclosed in Note 12 of
Notes to Consolidated Financial Statements.
|
125
Table of Contents
The following table identifies the Company’s aggregate contractual obligations as of December 31,
2011:
| Payments due by period | ||||||||||||||||||||
| Less than | 1-3 | 3-5 | More than | |||||||||||||||||
| Total | 1 year | years | years | 5 years | ||||||||||||||||
|
Property and casualty obligations [1]
|
$ | 22,093 | $ | 5,721 | $ | 4,384 | $ | 2,818 | $ | 9,170 | ||||||||||
|
Life, annuity and disability obligations [2]
|
341,984 | 22,894 | 34,895 | 30,701 | 253,494 | |||||||||||||||
|
Operating lease obligations [3]
|
242 | 58 | 81 | 47 | 56 | |||||||||||||||
|
Long-term debt obligations [4]
|
19,202 | 480 | 1,460 | 1,678 | 15,584 | |||||||||||||||
|
Consumer notes [5]
|
348 | 168 | 104 | 55 | 21 | |||||||||||||||
|
Purchase obligations [6]
|
3,484 | 2,693 | 544 | 214 | 33 | |||||||||||||||
|
Other long-term liabilities reflected on the balance sheet [7]
|
2,505 | 1,986 | 379 | 140 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total [8]
|
$ | 389,858 | $ | 34,000 | $ | 41,847 | $ | 35,653 | $ | 278,358 | ||||||||||
|
|
||||||||||||||||||||
| [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. 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, 2011, the total
property and casualty reserves in the above table are gross of a reserve discount of $542.
|
| [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 the
Company’s historical experience, modified for recent observed trends. The Company has also
assumed market growth and interest crediting consistent with other assumptions. In contrast
to this table, the majority of the Company’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 Note 12 of Notes
to Consolidated Financial Statements for additional discussion on lease commitments.
|
|
| [4] |
Includes contractual
principal and interest payments. 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 $1.4 billion in commitments to purchase investments including approximately $700 of
limited partnership, $108 of private placements and $553 of mortgage loans. Outstanding
commitments under these limited partnerships and mortgage loans are included in payments due
in less than 1 year since the timing of funding these commitments cannot be reliably
estimated. The remaining commitments to purchase investments primarily represent payables for
securities purchased which are reflected on the Company’s consolidated balance sheet.
|
|
|
Also included in purchase obligations is $1.1 billion 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 $2 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.
|
|
|
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 2012.
|
126
Table of Contents
Capitalization
The capital structure of The Hartford as of December 31, 2011 and December 31, 2010 consisted of
debt and stockholders’ equity, summarized as follows:
| December 31, | December 31, | |||||||||||
| 2011 | 2010 | Change | ||||||||||
|
Short-term debt (includes current maturities of long-term debt)
|
$ | — | $ | 400 | (100 | %) | ||||||
|
Long-term debt
|
6,216 | 6,207 | — | |||||||||
|
|
||||||||||||
|
Total debt [1]
|
6,216 | 6,607 | (6 | %) | ||||||||
|
Stockholders’ equity excluding accumulated other comprehensive loss,
net of tax (“AOCI”)
|
21,753 | 21,312 | 2 | % | ||||||||
|
AOCI, net of tax
|
1,157 | (1,001 | ) | NM | ||||||||
|
|
||||||||||||
|
Total stockholders’ equity
|
$ | 22,910 | $ | 20,311 | 13 | % | ||||||
|
Total capitalization including AOCI
|
$ | 29,126 | $ | 26,918 | 8 | % | ||||||
|
|
||||||||||||
|
Debt to stockholders’ equity
|
27 | % | 33 | % | ||||||||
|
Debt to capitalization
|
21 | % | 25 | % | ||||||||
| [1] |
Total debt of the Company excludes $314 and $382 billion of consumer notes as of December
31, 2011 and December 31, 2010, respectively.
|
The Hartford’s total capitalization increased $2.2 billion, or 8%, from December 31, 2010 to
December 31, 2011 due to improvements in AOCI, net of tax, and increases in stockholders’ equity,
excluding AOCI. AOCI, net of tax, improved primarily due to improvements in the Company’s net
unrealized position on available-for-sale securities of $2.0 billion primarily as a result of
improved security valuations largely due to declining interest rates, partially offset by credit
spread widening. The increase in stockholders’ equity, excluding AOCI, was primarily due to net
income of $662.
For additional information on equity and AOCI, net of tax, see Notes 15 and 16, respectively, of
the Notes to Consolidated Financial Statements.
Cash Flow
| 2011 | 2010 | 2009 | ||||||||||
|
Net cash provided by operating activities
|
$ | 2,274 | $ | 3,309 | $ | 2,974 | ||||||
|
Net cash used for investing activities
|
$ | (1,182 | ) | $ | (434 | ) | $ | (3,123 | ) | |||
|
Net cash provided by (used for) financing activities
|
$ | (609 | ) | $ | (2,955 | ) | $ | 523 | ||||
|
Cash — end of year
|
$ | 2,581 | $ | 2,062 | $ | 2,142 | ||||||
Year ended December 31, 2011 compared to the year ended December 31, 2010
The decrease in cash provided by operating activities compared to the prior year period reflected
an increase in losses paid on property and casualty insurance products, and to a lesser extent,
lower net investment income on available-for-sale securities, excluding limited partnerships and
other alternative investments.
Cash used for investing activities in 2011 primarily relates to net purchases of mortgage loans of
$1.3 billion and net purchases of fixed maturities, fair value option of $627, partially offset by
net receipts on derivatives of $720 and net proceeds of available-for-sale securities of $256.
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 financing activities in 2011 primarily consists of repayment of long-term debt and
dividends paid on common and preferred stock, partially offset by net inflows on investment and
universal life-type contracts. In the comparable prior period of 2010, cash used for financing
activities increased primarily due to repayments of consumer notes of $754, repayment of $275 in
senior notes and net outflows on investment and universal life-type contracts.
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 $561of net payments on derivatives, partially offset
by net proceeds from sales of mortgage loans of $396.
Cash used for financing activities in 2010 primarily consists of repayments of consumer notes of
$754, repayment of $275 in senior notes and net outflows on investment and universal life-type
contracts. Cash provided by financing activities in 2009 primarily consists of proceeds from the
issuance of preferred stock and warrants to U.S. Treasury of $3.4 billion, partially offset by net
outflows on investment and universal life-type contracts.
Operating cash flows in each of the last three years have been adequate to meet liquidity
requirements.
127
Table of Contents
Equity Markets
For a discussion of the potential impact of the equity markets on capital and liquidity, see the
Financial Risk on Statutory Capital and Liquidity Risk section in this MD&A.
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 17, 2012.
| 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.
See Part I, Item 1A. Risk Factors —
“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, financial condition, results of operations and liquidity.”
Statutory Surplus
The table below sets forth statutory surplus for the Company’s insurance companies. The
statutory
surplus amounts as of December 31, 2011 and 2010 in the table below are based on actual statutory filings with
the applicable regulatory authorities.
| 2011 | 2010 | |||||||
|
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries
|
$ | 7,388 | $ | 7,731 | ||||
|
Property and casualty insurance subsidiaries
|
7,412 | 7,721 | ||||||
|
|
||||||||
|
Total
|
$ | 14,800 | $ | 15,452 | ||||
|
|
||||||||
Total statutory capital and surplus for the U.S. life insurance subsidiaries, including domestic
captive insurance subsidiaries, decreased by $343, primarily due to variable annuity surplus
impacts of $470 and an increase in the asset valuation reserve of $323, partially offset by an
increase in capital contributions of $287 and an increase in statutory admitted deferred tax assets
of $268. Total statutory capital and surplus for the property and casualty insurance subsidiaries
decreased by $309, primarily due to dividends to the HFSG Holding Company of $1.1 billion,
partially offset by statutory net income, after tax, of $514, an increase in statutory admitted
assets of $145, unrealized gains of $90, and an increase in statutory admitted deferred tax assets
of $26.
The Company also holds regulatory capital and surplus for its operations in Japan. Under the
accounting practices and procedures governed by Japanese regulatory authorities, the Company’s
statutory capital and surplus was $1.3 billion as of December 31, 2011 and 2010.
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Statutory Capital
The Company’s stockholders’ equity, as prepared using U.S. generally accepted accounting principles
(“U.S. GAAP”) was $22.9 billion as of December 31, 2011. The Company’s estimated aggregate
statutory capital and surplus, as prepared in accordance with the National Association of Insurance
Commissioners’ Accounting Practices and Procedures Manual (“U.S.STAT”) was $14.8 billion as of
December 31, 2011. Significant differences between U.S.GAAP stockholders’ equity and aggregate
statutory capital and surplus prepared in accordance with U.S.STAT include the following:
| • |
Costs incurred by the Company to acquire insurance policies are deferred under U.S.GAAP
while those costs are expensed immediately under U.S.STAT.
|
| • |
Temporary differences between the book and tax basis of an asset or liability which are
recorded as deferred tax assets are evaluated for recoverability under U.S.GAAP while those
amounts deferred are subject to limitations under U.S.STAT.
|
| • |
The assumptions used in the determination of Life benefit reserves is prescribed under
U.S.STAT, while the assumptions used under U.S.GAAP are generally the Company’s best
estimates. The methodologies for determining life insurance reserve amounts may also be
different. For example, reserving for living benefit reserves under U.S.STAT is generally
addressed by the Commissioners’ Annuity Reserving Valuation Methodology and the related
Actuarial Guidelines, while under U.S.GAAP, those same living benefits may be considered
embedded derivatives and recorded at fair value or they may be considered SOP 03-1 reserves.
The sensitivity of these life insurance reserves to changes in equity markets, as applicable,
will be different between U.S.GAAP and U.S.STAT.
|
| • |
The difference between the amortized cost and fair value of fixed maturity and other
investments, net of tax, is recorded as an increase or decrease to the carrying value of the
related asset and to equity under U.S.GAAP, while U.S.STAT only records certain securities at
fair value, such as equity securities and certain lower rated bonds required by the NAIC to be
recorded at the lower of amortized cost or fair value.
|
| • |
U.S.STAT for life insurance companies establishes a formula reserve for realized and
unrealized losses due to default and equity risks associated with certain invested assets (the
Asset Valuation Reserve), while U.S.GAAP does not. Also, for those realized gains and losses
caused by changes in interest rates, U.S.STAT for life insurance companies defers and
amortizes the gains and losses, caused by changes in interest rates, into income over the
original life to maturity of the asset sold (the Interest Maintenance Reserve) while U.S.GAAP
does not.
|
| • |
Goodwill arising from the acquisition of a business is tested for recoverability on an
annual basis (or more frequently, as necessary) for U.S.GAAP, while under U.S.STAT goodwill is
amortized over a period not to exceed 10 years and the amount of goodwill is limited.
|
In addition, certain assets, including a portion of premiums receivable and fixed assets, are
non-admitted (recorded at zero value and charged against surplus) under U.S.STAT. U.S.GAAP
generally evaluates assets based on their recoverability.
Risk-Based Capital
State insurance regulators and the NAIC have adopted risk-based capital requirements for life
insurance companies to evaluate the adequacy of statutory capital and surplus in relation to
investment and insurance risks. The requirements provide a means of measuring the minimum amount of
statutory surplus appropriate for an insurance company to support its overall business operations
based on its size and risk profile. Under risk-based capital (“RBC”) requirements, a company’s RBC
is calculated by applying factors and performing calculations relating to various asset, premium,
claim, expense and reserve items. The adequacy of a company’s actual capital is determined by the
ratio of a company’s total adjusted capital, as defined by the insurance regulators, to its company
action level of RBC (known as the RBC ratio), also as defined by insurance regulators. RBC
standards are used by regulators to set in motion appropriate regulatory actions related to
insurers that show indications of inadequate conditions. In addition, rating agencies consider RBC
ratios, along with their proprietary models, in making ratings determinations.
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 these factors
and the potential impacts to the life insurance subsidiaries, see the Financial Risk on Statutory Capital section within Enterprise Risk Management.
Statutory capital at the property and 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 and 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 and 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 Insurance 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
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 large
bank holding companies and 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 liquidation 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.
The Hartford is subject to a number of applicable Dodd-Frank Act provisions. For example, if we are
designated a systemically important financial institution, the Dodd-Frank Act may restrict us from
sponsoring and investing in private equity and hedge funds, which would limit our discretion in
managing our general account. Other provisions in the Dodd-Frank Act that may impact us include:
a new “Federal Insurance Office” within Treasury; 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; possible adverse impact on the pricing and liquidity
of the securities in which we invest resulting from the proprietary trading and market making
limitation of the Volcker Rule; possible prohibition of certain asset-backed securities
transactions that could adversely impact our ability to offer insurance-linked securities; and
enhancements to corporate governance, especially regarding risk management.
FY 2013, Budget of the United States Government
On February 13, 2012, the Obama Administration released its “FY 2013, 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 variable annuities and variable life products and its profits on COLI policies could be
adversely affected and the Company’s actual tax expense could increase, reducing earnings.
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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Table of Contents
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,
2011.
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, 2011 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, 2011.
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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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
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, 2011, 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 consolidated 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 consolidated 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 consolidated 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, 2011, 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, 2011 of the Company and our report, dated February 24, 2012,
expressed an unqualified opinion on those consolidated 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, and for other-than temporary impairments as required by
accounting guidance adopted in 2009.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 24, 2012
February 24, 2012
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Table of Contents
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 2011 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
| Item 9B. |
OTHER INFORMATION
|
None.
| 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 2012 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 “Nominee for Directorships”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Corporate Governance” and “Board of Directors” 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:
| Position with The Hartford and Business Experience | ||||||
| Name | Age | During the Past Five Years | ||||
|
Jonathan R. Bennett
|
47 | Executive Vice President, Digital Commerce & Customer Analytics (July 2010-Present); Executive Vice President of Personal & Small Business Insurance (2005-July 2010) | ||||
|
Beth A. Bombara
|
44 | Senior Vice President and Controller (June 2007-Present); Vice President (2004-June 2007) | ||||
|
James M. Eckerle
|
52 | Executive Vice President of Strategic Initiatives and Enterprise Technology (October 2010-Present); Senior Vice President of Global Transition, Quality and Change, Bank of America (2004-October 2010) | ||||
|
Douglas Elliot
|
51 | Executive Vice President and President of Commercial Markets (April 2011-Present); President and Chief Executive Officer, HSB Group (July 2007-March 2011); President and Chief Operating Officer, HSB Group (January 2007-June 2007); Senior Advisor, Aspen Insurance Holdings (2006); Chief Executive Officer of General Commercial and Personal Lines, St. Paul Travelers Companies (2004-2007) | ||||
|
Alan J. Kreczko
|
60 | Executive Vice President and General Counsel (June 2007-Present); Senior Vice President and Deputy General Counsel (2002-June 2007) | ||||
|
David N. Levenson
|
45 | Executive Vice President and President of Wealth Management (July 2010-Present); Executive Vice President of Legacy Holdings (June 2009-July 2010); Head of Product Distribution, President and CEO of Hartford Life K.K. 1 (2006-2009) | ||||
|
André A. Napoli
|
46 | Executive Vice President and President of Consumer Markets (August 2010-Present); Executive Vice President and Chief Administrative Officer, CUNA Mutual Group (July 2009-August 2010 ); Senior Vice President, Consumer Products, CUNA Mutual Group (August 2007-July 2009); Vice President, Standard Auto Product and Pricing, Nationwide (October 2006-August 2007); Vice President, Personal Lines Pricing and Research, Nationwide (July 2005-October 2006) | ||||
|
Robert Rupp
|
59 | Executive Vice President and Chief Risk Officer (October 2011-Present); Executive Vice President, Head of Enterprise-Wide Market Risk, BONY Mellon (September 2008-October 2011); Managing Director, Risk Management, JP Morgan Chase (2004-2008) | ||||
|
Christopher J. Swift
|
51 | Executive Vice President and Chief Financial Officer (March 2010-Present); Vice President and CFO, American Life Insurance Company (March 2009-April 2010); Vice President and CFO, AIG’s Global Life Insurance and Retirement Services Division (July 2005-March 2009) | ||||
133
Table of Contents
| Position with The Hartford and Business Experience | ||||||
| Name | Age | During the Past Five Years | ||||
|
Karen C. Tripp
|
56 | Executive Vice President of Marketing and Communications (September 2010-Present); Vice President of Corporate Communications, L3 Communications (2007-September 2010); General Manager of Global Communications, General Electric (2002-2007) | ||||
|
Hugh M. Whelan
|
51 | Acting President of Hartford Investment Management Company 1 (October 2011-Present), Executive Vice President, Hartford Investment Management Company (2005-2011) | ||||
|
Eileen G. Whelley
|
57 | Executive Vice President of Human Resources (June 2007-Present); Executive Vice President of Global HR (December 2006-June 2007); GE Vice President and Executive Vice President of Human Resources, NBC Universal (2004-December 2006) | ||||
| 1 |
Denotes a subsidiary of The Hartford
|
| 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 “Information on Stock Ownership” and is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2011 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
|
4,833,390 | $ | 47.89 | 21,124,460 | [1] | |||||||
|
Equity compensation
plans not approved
by stockholders
|
5,956 | 47.12 | 264,388 | |||||||||
|
|
||||||||||||
|
Total
|
4,839,346 | $ | 47.89 | 21,388,848 | ||||||||
|
|
||||||||||||
| [1] |
Of these shares, 6,472,280 shares remain available for purchase under the ESPP.
|
134
Table of Contents
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.
| 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 “Corporate Governance” and “Board of Directors” 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 “Report of the Audit Committee” and is incorporated herein by reference.
| 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.
|
135
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, 2011 and 2010,
and the related consolidated statements of operations, changes in stockholders’ equity,
comprehensive income (loss), and cash flows for each of the three years in the period ended
December 31, 2011. Our audits also included the consolidated financial statement schedules listed
in the Index at Item 15. These consolidated financial statements and financial statement schedules
are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall consolidated 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, 2011 and 2010, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2011, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such consolidated
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, and for other-than-temporary impairments as required by
accounting guidance adopted in 2009.
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,
2011, 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 24,
2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 24, 2012
Hartford, Connecticut
February 24, 2012
F-2
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| For the years ended December 31, | ||||||||||||
| (In millions, except for per share data) | 2011 | 2010 | 2009 | |||||||||
|
|
||||||||||||
|
Revenues
|
||||||||||||
|
Earned premiums
|
$ | 14,088 | $ | 14,055 | $ | 14,424 | ||||||
|
Fee income
|
4,750 | 4,748 | 4,547 | |||||||||
|
Net investment income:
|
||||||||||||
|
Securities available-for-sale and other
|
4,272 | 4,364 | 4,017 | |||||||||
|
Equity securities, trading
|
(1,359 | ) | (774 | ) | 3,188 | |||||||
|
|
||||||||||||
|
Total net investment income
|
2,913 | 3,590 | 7,205 | |||||||||
|
Net realized capital gains (losses):
|
||||||||||||
|
Total other-than-temporary impairment (“OTTI”) losses
|
(263 | ) | (852 | ) | (2,191 | ) | ||||||
|
OTTI losses recognized in other comprehensive income (“OCI”)
|
89 | 418 | 683 | |||||||||
|
|
||||||||||||
|
Net OTTI losses recognized in earnings
|
(174 | ) | (434 | ) | (1,508 | ) | ||||||
|
Net realized capital gains (losses), excluding net OTTI losses
recognized in earnings
|
29 | (177 | ) | (496 | ) | |||||||
|
|
||||||||||||
|
Total net realized capital losses
|
(145 | ) | (611 | ) | (2,004 | ) | ||||||
|
Other revenues
|
253 | 267 | 261 | |||||||||
|
|
||||||||||||
|
Total revenues
|
21,859 | 22,049 | 24,433 | |||||||||
|
|
||||||||||||
|
Benefits, losses and expenses
|
||||||||||||
|
Benefits, losses and loss adjustment expenses
|
14,625 | 13,025 | 13,831 | |||||||||
|
Benefits, losses and loss adjustment expenses — returns
credited on international variable annuities
|
(1,359 | ) | (774 | ) | 3,188 | |||||||
|
Amortization of deferred policy acquisition costs and
present value of future profits
|
3,427 | 2,527 | 4,257 | |||||||||
|
Insurance operating costs and other expenses
|
4,398 | 4,407 | 4,370 | |||||||||
|
Interest expense
|
508 | 508 | 476 | |||||||||
|
Goodwill impairment
|
30 | — | 32 | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
21,629 | 19,693 | 26,154 | |||||||||
|
Income (loss) from continuing operations before income taxes
|
230 | 2,356 | (1,721 | ) | ||||||||
|
Income tax expense (benefit)
|
(346 | ) | 612 | (838 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations, net of tax
|
576 | 1,744 | (883 | ) | ||||||||
|
Income (loss) from discontinued operations, net of tax
|
86 | (64 | ) | (4 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 662 | $ | 1,680 | $ | (887 | ) | |||||
|
|
||||||||||||
|
Preferred stock dividends and accretion of discount
|
42 | 515 | 127 | |||||||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders
|
$ | 620 | $ | 1,165 | $ | (1,014 | ) | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations, net of tax, available to
common shareholders per common share
|
||||||||||||
|
Basic
|
$ | 1.20 | $ | 2.85 | $ | (2.92 | ) | |||||
|
Diluted
|
$ | 1.12 | $ | 2.62 | $ | (2.92 | ) | |||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders per common share
|
||||||||||||
|
Basic
|
$ | 1.39 | $ | 2.70 | $ | (2.93 | ) | |||||
|
Diluted
|
$ | 1.30 | $ | 2.49 | $ | (2.93 | ) | |||||
|
|
||||||||||||
|
Cash dividends declared per common share
|
$ | 0.40 | $ | 0.20 | $ | 0.20 | ||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
F-3
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Comprehensive Income
| For the years ended December 31, | ||||||||||||
| (In millions) | 2011 | 2010 | 2009 | |||||||||
|
Comprehensive Income
|
||||||||||||
|
Net income (loss)
|
$ | 662 | $ | 1,680 | $ | (887 | ) | |||||
|
|
||||||||||||
|
Other comprehensive income
|
||||||||||||
|
Change in net unrealized gain/loss on securities
|
1,979 | 1,707 | 5,909 | |||||||||
|
Change in OTTI losses recognized in other comprehensive income
|
9 | 116 | (224 | ) | ||||||||
|
Change in net gain/loss on cash-flow hedging instruments
|
131 | 128 | (387 | ) | ||||||||
|
Change in foreign currency translation adjustments
|
112 | 289 | (23 | ) | ||||||||
|
Change in pension and other postretirement plan adjustments
|
(73 | ) | (123 | ) | (155 | ) | ||||||
|
|
||||||||||||
|
Total other comprehensive income
|
2,158 | 2,117 | 5,120 | |||||||||
|
|
||||||||||||
|
Total comprehensive income
|
$ | 2,820 | $ | 3,797 | $ | 4,233 | ||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
F-4
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| As of December 31, | ||||||||
| (In millions, except for share and per share data) | 2011 | 2010 | ||||||
|
Assets
|
||||||||
|
Investments:
|
||||||||
|
Fixed maturities, available-for-sale, at fair value (amortized cost of $78,978 and $78,419) (includes variable interest entity assets, at fair value,
of $153 and $406)
|
$ | 81,809 | $ | 77,820 | ||||
|
Fixed maturities, at fair value using the fair value option (includes variable interest entity assets, at fair value, of $338 and $323)
|
1,328 | 649 | ||||||
|
Equity securities, trading, at fair value (cost of $32,928 and $33,899)
|
30,499 | 32,820 | ||||||
|
Equity securities, available-for-sale, at fair value (cost of $1,056 and $1,013)
|
921 | 973 | ||||||
|
Mortgage loans (net of allowances for loan losses of $102 and $155)
|
5,728 | 4,489 | ||||||
|
Policy loans, at outstanding balance
|
2,001 | 2,181 | ||||||
|
Limited partnerships and other alternative investments (includes variable interest entity assets of $7 and $14)
|
2,532 | 1,918 | ||||||
|
Other investments
|
2,394 | 1,617 | ||||||
|
Short-term investments
|
7,736 | 8,528 | ||||||
|
|
||||||||
|
Total investments
|
134,948 | 130,995 | ||||||
|
Cash
|
2,581 | 2,062 | ||||||
|
Premiums receivable and agents’ balances, net
|
3,446 | 3,273 | ||||||
|
Reinsurance recoverables, net
|
4,768 | 4,862 | ||||||
|
Deferred policy acquisition costs and present value of future profits
|
8,744 | 9,857 | ||||||
|
Deferred income taxes, net
|
1,398 | 3,725 | ||||||
|
Goodwill
|
1,006 | 1,051 | ||||||
|
Property and equipment, net
|
1,029 | 1,150 | ||||||
|
Other assets
|
2,274 | 1,629 | ||||||
|
Separate account assets
|
143,870 | 159,742 | ||||||
|
|
||||||||
|
Total assets
|
$ | 304,064 | $ | 318,346 | ||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
|
$ | 41,016 | $ | 39,598 | ||||
|
Other policyholder funds and benefits payable
|
45,612 | 44,550 | ||||||
|
Other policyholder funds and benefits payable — international variable annuities
|
30,461 | 32,793 | ||||||
|
Unearned premiums
|
5,222 | 5,176 | ||||||
|
Short-term debt
|
— | 400 | ||||||
|
Long-term debt
|
6,216 | 6,207 | ||||||
|
Consumer notes
|
314 | 382 | ||||||
|
Other liabilities (includes variable interest entity liabilities of $471 and $394)
|
8,443 | 9,187 | ||||||
|
Separate account liabilities
|
143,870 | 159,742 | ||||||
|
|
||||||||
|
Total liabilities
|
281,154 | 298,035 | ||||||
|
Commitments and Contingencies (Note 12)
|
||||||||
|
|
||||||||
|
Stockholders’ Equity
|
||||||||
|
Preferred stock, $0.01 par value — 50,000,000 shares authorized, 575,000 shares issued, liquidation
preference $1,000 per share
|
556 | 556 | ||||||
|
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 469,750,171 and 469,754,771 shares issued
|
5 | 5 | ||||||
|
Additional paid-in capital
|
10,391 | 10,448 | ||||||
|
Retained earnings
|
12,519 | 12,077 | ||||||
|
Treasury stock, at cost — 27,211,115 and 25,205,283 shares
|
(1,718 | ) | (1,774 | ) | ||||
|
Accumulated other comprehensive income (loss), net of tax
|
1,157 | (1,001 | ) | |||||
|
|
||||||||
|
Total stockholders’ equity
|
22,910 | 20,311 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 304,064 | $ | 318,346 | ||||
|
|
||||||||
See Notes to Consolidated Financial Statements.
F-5
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Changes in Stockholders’ Equity
| For the years ended December 31, | ||||||||||||
| (In millions, except for share data) | 2011 | 2010 | 2009 | |||||||||
|
Preferred Stock, at beginning of period
|
$ | 556 | $ | 2,960 | $ | — | ||||||
|
Issuance of mandatory convertible preferred stock
|
— | 556 | — | |||||||||
|
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 | ||||||||
|
Accretion of preferred stock discount on issuance to U.S. Treasury
|
— | — | 40 | |||||||||
|
|
||||||||||||
|
Preferred Stock, at end of period
|
556 | 556 | 2,960 | |||||||||
|
|
||||||||||||
|
Common Stock
|
5 | 5 | 4 | |||||||||
|
|
||||||||||||
|
Additional Paid-in Capital, at beginning of period
|
10,448 | 8,985 | 7,569 | |||||||||
|
Issuance of common shares under public offering
|
— | 1,599 | — | |||||||||
|
Issuance of shares under incentive and stock compensation plans
|
(50 | ) | (130 | ) | (126 | ) | ||||||
|
Tax expense on employee stock options and awards
|
(7 | ) | (6 | ) | (11 | ) | ||||||
|
Issuance of shares under discretionary equity issuance plan
|
— | — | 887 | |||||||||
|
Issuance of warrants to U.S. Treasury
|
— | — | 480 | |||||||||
|
Reclassification of warrants from other liabilities to equity and extension of warrants’ term
|
— | — | 186 | |||||||||
|
|
||||||||||||
|
Additional Paid-in Capital, at end of period
|
10,391 | 10,448 | 8,985 | |||||||||
|
|
||||||||||||
|
Retained Earnings, at beginning of period, before cumulative effect of accounting change, net
of tax
|
12,077 | 11,164 | 11,336 | |||||||||
|
Cumulative effect of accounting change, net of tax
|
— | 26 | — | |||||||||
|
|
||||||||||||
|
Retained Earnings, at beginning of period, as adjusted
|
12,077 | 11,190 | 11,336 | |||||||||
|
Net income (loss)
|
662 | 1,680 | (887 | ) | ||||||||
|
Cumulative effect of accounting changes, net of tax
|
— | (194 | ) | 912 | ||||||||
|
Accelerated accretion of discount from redemption of preferred stock issued to U.S. Treasury
|
— | (440 | ) | — | ||||||||
|
Dividends on preferred stock
|
(42 | ) | (75 | ) | (87 | ) | ||||||
|
Dividends declared on common stock
|
(178 | ) | (84 | ) | (70 | ) | ||||||
|
Accretion of preferred stock discount on issuance to U.S. Treasury
|
— | — | (40 | ) | ||||||||
|
|
||||||||||||
|
Retained Earnings, at end of period
|
12,519 | 12,077 | 11,164 | |||||||||
|
|
||||||||||||
|
Treasury Stock, at Cost, at beginning of period
|
(1,774 | ) | (1,936 | ) | (2,120 | ) | ||||||
|
Issuance of shares under incentive and stock compensation plans from treasury stock
|
115 | 165 | 187 | |||||||||
|
Treasury stock acquired
|
(51 | ) | — | — | ||||||||
|
Return of shares under incentive and stock compensation plans to treasury stock
|
(8 | ) | (3 | ) | (3 | ) | ||||||
|
|
||||||||||||
|
Treasury Stock, at Cost, at end of period
|
(1,718 | ) | (1,774 | ) | (1,936 | ) | ||||||
|
|
||||||||||||
|
Accumulated Other Comprehensive Loss, Net of Tax, at beginning of period
|
(1,001 | ) | (3,312 | ) | (7,520 | ) | ||||||
|
Cumulative effect of accounting changes, net of tax
|
— | 194 | (912 | ) | ||||||||
|
Total other comprehensive income
|
2,158 | 2,117 | 5,120 | |||||||||
|
|
||||||||||||
|
Accumulated Other Comprehensive Income (Loss), Net of Tax, at end of period
|
1,157 | (1,001 | ) | (3,312 | ) | |||||||
|
|
||||||||||||
|
Noncontrolling Interest, at beginning of period
|
— | 29 | 92 | |||||||||
|
Recognition of noncontrolling interest in other liabilities
|
— | (29 | ) | — | ||||||||
|
Change in noncontrolling interest ownership
|
— | — | (56 | ) | ||||||||
|
Noncontrolling loss
|
— | — | (7 | ) | ||||||||
|
|
||||||||||||
|
Noncontrolling Interest, at end of period
|
— | — | 29 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total Stockholders’ Equity
|
$ | 22,910 | $ | 20,311 | $ | 17,894 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Preferred Shares Outstanding, at beginning of period (in thousands)
|
575 | 3,400 | 6,048 | |||||||||
|
Redemption of preferred shares issued to the U.S. Treasury
|
— | (3,400 | ) | — | ||||||||
|
Issuance of mandatory convertible preferred shares
|
— | 575 | — | |||||||||
|
Conversion of preferred to common shares
|
— | — | (6,048 | ) | ||||||||
|
Issuance of shares to U.S. Treasury
|
— | — | 3,400 | |||||||||
|
|
||||||||||||
|
Preferred Shares Outstanding, at end of period
|
575 | 575 | 3,400 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Common Shares Outstanding, at beginning of period (in thousands)
|
444,549 | 383,007 | 300,579 | |||||||||
|
Issuance of shares under public offering
|
— | 59,590 | — | |||||||||
|
Issuance of shares under incentive and stock compensation plans
|
1,476 | 2,095 | 2,356 | |||||||||
|
Return of shares under incentive and stock compensation plans and other to treasury stock
|
(261 | ) | (143 | ) | (204 | ) | ||||||
|
Treasury stock acquired
|
(3,225 | ) | — | (27 | ) | |||||||
|
Conversion of preferred to common shares
|
— | — | 24,194 | |||||||||
|
Issuance of shares under discretionary equity issuance plan
|
— | — | 56,109 | |||||||||
|
|
||||||||||||
|
Common Shares Outstanding, at end of period
|
442,539 | 444,549 | 383,007 | |||||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
F-6
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| For the years ended December 31, | ||||||||||||
| (In millions) | 2011 | 2010 | 2009 | |||||||||
|
Operating Activities
|
||||||||||||
|
Net income (loss)
|
$ | 662 | $ | 1,680 | $ | (887 | ) | |||||
|
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
|
3,427 | 2,544 | 4,267 | |||||||||
|
Additions to deferred policy acquisition costs and present value of future profits
|
(2,608 | ) | (2,648 | ) | (2,853 | ) | ||||||
|
Change in reserve for future policy benefits and unpaid losses and loss adjustment expenses
and unearned premiums
|
1,451 | (93 | ) | 558 | ||||||||
|
Change in reinsurance recoverables
|
(31 | ) | 353 | 236 | ||||||||
|
Change in receivables and other assets
|
(211 | ) | 437 | 380 | ||||||||
|
Change in payables and accruals
|
(491 | ) | (612 | ) | (1,271 | ) | ||||||
|
Change in accrued and deferred income taxes
|
(103 | ) | 561 | (246 | ) | |||||||
|
Net realized capital losses
|
24 | 554 | 2,010 | |||||||||
|
Net receipts (disbursements) from investment contracts related to policyholder funds —
international variable annuities
|
(2,332 | ) | 497 | 1,498 | ||||||||
|
Net (increase) decrease in equity securities, trading
|
2,321 | (499 | ) | (1,501 | ) | |||||||
|
Depreciation and amortization
|
668 | 596 | 470 | |||||||||
|
Goodwill impairment
|
30 | 153 | 32 | |||||||||
|
Other operating activities, net
|
(533 | ) | (214 | ) | 281 | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
2,274 | 3,309 | 2,974 | |||||||||
|
Investing Activities
|
||||||||||||
|
Proceeds from the sale/maturity/prepayment of:
|
||||||||||||
|
Fixed maturities, available-for-sale
|
37,914 | 49,155 | 53,538 | |||||||||
|
Fixed maturities, fair value option
|
37 | 20 | — | |||||||||
|
Equity securities, available-for-sale
|
239 | 325 | 949 | |||||||||
|
Mortgage loans
|
515 | 1,723 | 629 | |||||||||
|
Partnerships
|
237 | 367 | 391 | |||||||||
|
Payments for the purchase of:
|
||||||||||||
|
Fixed maturities, available-for-sale
|
(37,627 | ) | (50,807 | ) | (54,346 | ) | ||||||
|
Fixed maturities, fair value option
|
(664 | ) | (75 | ) | — | |||||||
|
Equity securities, available-for-sale
|
(270 | ) | (163 | ) | (307 | ) | ||||||
|
Mortgage loans
|
(1,800 | ) | (291 | ) | (233 | ) | ||||||
|
Partnerships
|
(784 | ) | (348 | ) | (274 | ) | ||||||
|
Proceeds from business sold
|
278 | 241 | (7 | ) | ||||||||
|
Derivatives, net
|
720 | (338 | ) | (561 | ) | |||||||
|
Change in policy loans, net
|
180 | (7 | ) | 34 | ||||||||
|
Change in payables for collateral under securities lending, net
|
— | (46 | ) | (2,925 | ) | |||||||
|
Other investing activities, net
|
(157 | ) | (190 | ) | (11 | ) | ||||||
|
|
||||||||||||
|
Net cash used for investing activities
|
(1,182 | ) | (434 | ) | (3,123 | ) | ||||||
|
Financing Activities
|
||||||||||||
|
Deposits and other additions to investment and universal life-type contracts
|
11,531 | 12,602 | 14,239 | |||||||||
|
Withdrawals and other deductions from investment and universal life-type contracts
|
(21,022 | ) | (22,476 | ) | (24,341 | ) | ||||||
|
Net transfers from separate accounts related to investment and universal life-type contracts
|
9,843 | 8,409 | 7,203 | |||||||||
|
Proceeds from issuance of long-term debt
|
— | 1,090 | — | |||||||||
|
Repayments at maturity for long-term debt and payments on capital lease obligations
|
(405 | ) | (343 | ) | (24 | ) | ||||||
|
Change in commercial paper
|
— | — | (375 | ) | ||||||||
|
Repayments at maturity or settlement of consumer notes
|
(68 | ) | (754 | ) | (74 | ) | ||||||
|
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 | ) | — | ||||||||
|
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
|
10 | 25 | 17 | |||||||||
|
Treasury stock acquired
|
(46 | ) | — | — | ||||||||
|
Dividends paid on preferred stock
|
(42 | ) | (85 | ) | (73 | ) | ||||||
|
Dividends paid on common stock
|
(153 | ) | (85 | ) | (149 | ) | ||||||
|
Changes in bank deposits and payments on bank advances
|
(257 | ) | (94 | ) | (187 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by (used for) financing activities
|
(609 | ) | (2,955 | ) | 523 | |||||||
|
Foreign exchange rate effect on cash
|
36 | — | (43 | ) | ||||||||
|
Net increase (decrease) in cash
|
519 | (80 | ) | 331 | ||||||||
|
Cash — beginning of period
|
2,062 | 2,142 | 1,811 | |||||||||
|
|
||||||||||||
|
Cash — end of period
|
$ | 2,581 | $ | 2,062 | $ | 2,142 | ||||||
|
|
||||||||||||
|
Supplemental Disclosure of Cash Flow Information
|
||||||||||||
|
Income taxes paid (received)
|
$ | 179 | $ | 308 | $ | (243 | ) | |||||
|
Interest paid
|
$ | 501 | $ | 485 | $ | 475 | ||||||
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
services 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”, the
“Company”, “we” or “our”). 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 (“VIEs”) 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. For
further discussions on VIEs see Note 5 of the Notes to Consolidated Financial Statements. Material
intercompany transactions and balances between The Hartford and its subsidiaries and affiliates
have been eliminated.
Discontinued Operations
The results of operations of a component of the Company that either has been disposed of or is
classified as held-for-sale are reported in discontinued operations if the operations and cash
flows of the component have been or will be eliminated from the ongoing operations of the Company
as a result of the disposal transaction and the Company will not have any significant continuing
involvement in the operations of the component after the disposal transaction.
The Company is presenting the operations of certain businesses that meet the criteria for reporting
as discontinued operations. Amounts for prior periods have been retrospectively reclassified. See
Note 20 of the Notes to Consolidated Financial Statements for information on the specific
subsidiaries and related impacts.
Use of Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The most significant estimates include those used in determining property and casualty 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;
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.
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 57
non-proprietary mutual funds, as of December 31, 2011. 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. In the fourth quarter of
2011, the Company entered into a preferred partnership agreement with Wellington Management
Company, LLP (“Wellington Management”) and announced that Wellington Management will serve as the
sole sub-advisor for The Hartford’s non-proprietary mutual funds, including equity and fixed income
funds, pending a fund-by-fund review by The Hartford’s mutual funds board of directors. As of
December 31, 2011, Wellington Management served as the sub-advisor for 29 of The Hartford’s
non-proprietary mutual funds and has been the primary manager for the Company’s equity funds.
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
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)
1. Basis of Presentation and Accounting Policies (continued)
Future Adoption of New Accounting Standards
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued a standard 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 standard is effective for fiscal years beginning after December 15, 2011, and interim periods
within those years. This standard may be applied prospectively upon the date of adoption, with
retrospective application permitted, but not required. Early adoption as of the beginning of a
fiscal year is permitted.
The Company elected to adopt this standard retrospectively on January 1, 2012, resulting in a write
down of the Company’s deferred acquisition costs relating to those costs which no longer meet the
revised standard as summarized above. The Company estimates the cumulative effect of the
retrospective adoption of this standard, when reflected in future financial statements, will reduce
stockholders’ equity as of December 31, 2011 by approximately $1.5 billion, after-tax and increase
2011 net income by approximately $45. Excluding the effects of the DAC Unlock and amortization related
to realized gains and losses, the estimated effect would be a decrease to 2011 net income of
approximately $10. Future income statement impacts will reflect higher non-deferrable expenses and
lower amortization due to the lower DAC balance, before the effect of any DAC Unlock and amortization
related to realized gains and losses.
Significant Accounting Policies
The Company’s significant accounting policies are described below or are referenced below to the
applicable Note where the description is included.
| Accounting Policy | Note | |||
|
Fair Value Measurements
|
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, Death Benefits and Other Insurance Benefit Features
|
9 | |||
|
Sales Inducements
|
10 | |||
|
Reserve for Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
|
11 | |||
|
Commitments and Contingencies
|
12 | |||
|
Income Taxes
|
13 | |||
|
Employee 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 as of December 31, 2011 and 2010.
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.
F-9
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
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 9%, 8% and 8% of
total net written premiums for the years ended December 31, 2011, 2010 and 2009, respectively.
Participating dividends to policyholders were $18, $5 and $10 for the years ended December 31,
2011, 2010 and 2009, respectively.
Total participating policies in-force represented 1% of the total life insurance policies in-force
as of December 31, 2011, 2010, and 2009. Dividends to policyholders were $17, $21 and $13 for the
years ended December 31, 2011, 2010, and 2009, 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 $2.1 billion and $1.9
billion as of December 31, 2011 and 2010, respectively. Depreciation expense was $216, $276, and
$253 for the years ended December 31, 2011, 2010, and 2009, respectively.
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.
F-10
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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) | 2011 | 2010 | 2009 | |||||||||
|
Earnings
|
||||||||||||
|
Income (loss) from continuing operations
|
||||||||||||
|
Income (loss) from continuing operations, net of tax
|
$ | 576 | $ | 1,744 | $ | (883 | ) | |||||
|
Less: Preferred stock dividends and accretion of discount
|
42 | 515 | 127 | |||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations, net of tax, available to common shareholders
|
534 | 1,229 | (1,010 | ) | ||||||||
|
Add: Dilutive effect of preferred stock dividends
|
— | 33 | — | |||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations, net of tax, available to common
shareholders and assumed conversion of preferred shares
|
$ | 534 | $ | 1,262 | $ | (1,010 | ) | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from discontinued operations, net of tax
|
$ | 86 | $ | (64 | ) | $ | (4 | ) | ||||
|
|
||||||||||||
|
Net income
|
||||||||||||
|
Net income
|
$ | 662 | $ | 1,680 | $ | (887 | ) | |||||
|
Less: Preferred stock dividends and accretion of discount
|
42 | 515 | 127 | |||||||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders
|
620 | 1,165 | (1,014 | ) | ||||||||
|
Add: Dilutive effect of preferred stock dividends
|
— | 33 | — | |||||||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders and assumed conversion of
preferred shares
|
$ | 620 | $ | 1,198 | $ | (1,014 | ) | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Shares
|
||||||||||||
|
Weighted average common shares outstanding, basic
|
445.0 | 431.5 | 346.3 | |||||||||
|
|
||||||||||||
|
Dilutive effect of warrants
|
31.9 | 32.3 | — | |||||||||
|
Dilutive effect of stock compensation plans
|
1.1 | 1.3 | — | |||||||||
|
Dilutive effect of mandatory convertible preferred shares
|
— | 16.4 | — | |||||||||
|
|
||||||||||||
|
Weighted average shares outstanding and dilutive potential common shares
|
478.0 | 481.5 | 346.3 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings (loss) per common share
|
||||||||||||
|
Basic
|
||||||||||||
|
Income (loss) from continuing operations, net of tax, available to common shareholders
|
$ | 1.20 | $ | 2.85 | $ | (2.92 | ) | |||||
|
Income (loss) from discontinued operations, net of tax
|
0.19 | (0.15 | ) | (0.01 | ) | |||||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders
|
$ | 1.39 | $ | 2.70 | $ | (2.93 | ) | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted
|
||||||||||||
|
Income (loss) from continuing operations, net of tax, available to common shareholders
|
$ | 1.12 | $ | 2.62 | $ | (2.92 | ) | |||||
|
Income (loss) from discontinued operations, net of tax
|
0.18 | (0.13 | ) | (0.01 | ) | |||||||
|
|
||||||||||||
|
Net income (loss) available to common shareholders
|
$ | 1.30 | $ | 2.49 | $ | (2.93 | ) | |||||
|
|
||||||||||||
F-11
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Earnings (Loss) per Share (continued)
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, see Note 15, exercise shall be assumed at the beginning of the
period. The proceeds from exercise of $9.699 per share in 2011 and 9.790 per share in 2010 and
2009 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 15, exercise shall be
assumed at the beginning of the period. The proceeds from exercise of $25.23 in 2011, $25.23 in
2010 and $25.25 in 2009 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 stock compensation plans, shares are assumed to be issued and
then reduced for the number of shares repurchaseable with theoretical proceeds at the average
market price for the period. Theoretical proceeds for the stock compensation plans include option
exercise price payments, unamortized stock compensation expense and tax benefits realized in excess
of the tax benefit recognized in net income. The difference between the number of shares assumed
issued and number of shares purchased represents the dilutive shares. Upon exercise of outstanding
options or vesting of other stock compensation plan awards, the additional shares issued and
outstanding are included in the calculation of the Company’s weighted average shares from the date
of exercise or vesting.
Under the if-converted method for mandatory convertible preferred stock, see Note 15, the
conversion to common shares is assumed if the inclusion of these shares and the related dividend
adjustment are dilutive to the earnings per share calculation. For the year ended December 31,
2011, 20.7 million shares and the related dividend adjustment would have been antidilutive to the
earnings per share calculations and therefore are excluded. Assuming the impact of the mandatory
convertible preferred shares was dilutive, weighted average common shares outstanding and dilutive
potential common shares would have totaled 498.7 million shares. For the year ended December 31,
2010, these shares and the related dividend adjustment are included in the diluted earnings per
share calculation.
As a result of the net loss in the year ended December 31, 2009, the Company used basic weighted
average common shares outstanding in the calculation of diluted loss per share, since the inclusion
of shares for warrants of 14.6 million, stock compensation plans of 0.9 million, would have been
antidilutive to the earnings per share calculation. In the absence of the net loss, weighted
average common shares outstanding and dilutive potential common shares would have totaled 361.8
million for the year ended December 31, 2009.
F-12
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information
The Company is organized into four divisions: Commercial Markets, Consumer Markets, Wealth
Management and Runoff Operations. In 2011, the Runoff Operations division was formed to reflect the
manner in which the Company is currently organized for purposes of making operating decisions and
assessing performance. As a result, the Company conducts business principally in nine reporting
segments, and segment data for prior reporting periods has been adjusted accordingly.
The Company’s reporting segments, as well as the Corporate 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, and specialty casualty coverages.
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
Individual Annuity
Individual Annuity offers individual variable, fixed market value adjusted (“fixed MVA”), fixed
index and single premium immediate annuities in the U.S.
Individual Life
Individual Life sells a variety of life insurance products, including variable universal life,
universal life, and term life.
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.
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.
F-13
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
Runoff Operations
Life Other Operations
Life Other Operations consists of the international annuity business of the former Global Annuity
reporting segment as well as certain product offerings previously included in the former Global
Annuity and Life Insurance reporting segments. Life Other Operations encompasses the
administration of investment retirement savings and other insurance and savings products to
individuals and groups outside of the U.S., primarily in Japan and Europe, as well as institutional
annuity products and private placement life insurance.
Property & Casualty Other Operations
Property & Casualty Other Operations, previously included in the former Corporate and Other
category, includes 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.
Corporate
The Company includes in the Corporate category 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. The former Corporate and Other category was renamed for 2011 segment reporting due to
the inclusion of the Property & Casualty Other Operations as a separate reporting segment in the
new Runoff Operations division.
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 category.
| For the years ended December 31, | ||||||||||||
| Net income (loss) | 2011 | 2010 | 2009 | |||||||||
|
Property & Casualty Commercial
|
$ | 528 | $ | 995 | $ | 899 | ||||||
|
Group Benefits
|
90 | 185 | 193 | |||||||||
|
Consumer Markets
|
5 | 143 | 140 | |||||||||
|
Individual Annuity
|
(14 | ) | 527 | (444 | ) | |||||||
|
Individual Life
|
133 | 229 | 15 | |||||||||
|
Retirement Plans
|
15 | 47 | (222 | ) | ||||||||
|
Mutual Funds
|
98 | 132 | 34 | |||||||||
|
Life Other Operations
|
358 | (90 | ) | (698 | ) | |||||||
|
Property & Casualty Other Operations
|
(117 | ) | (53 | ) | (78 | ) | ||||||
|
Corporate
|
(434 | ) | (435 | ) | (726 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 662 | $ | 1,680 | $ | (887 | ) | |||||
|
|
||||||||||||
F-14
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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 category.
| For the years ended December 31, | ||||||||||||
| Revenues | 2011 | 2010 | 2009 | |||||||||
|
Earned premiums, fees, and other considerations
|
||||||||||||
|
Property & Casualty Commercial
|
||||||||||||
|
Workers’ compensation
|
$ | 2,809 | $ | 2,387 | $ | 2,275 | ||||||
|
Property
|
528 | 547 | 597 | |||||||||
|
Automobile
|
583 | 598 | 646 | |||||||||
|
Package business
|
1,145 | 1,124 | 1,123 | |||||||||
|
Liability
|
540 | 540 | 619 | |||||||||
|
Fidelity and surety
|
215 | 224 | 250 | |||||||||
|
Professional liability
|
307 | 324 | 393 | |||||||||
|
|
||||||||||||
|
Total Property & Casualty Commercial
|
6,127 | 5,744 | 5,903 | |||||||||
|
Group Benefits
|
||||||||||||
|
Group disability
|
1,929 | 2,004 | 1,975 | |||||||||
|
Group life and accident
|
2,024 | 2,052 | 2,126 | |||||||||
|
Other
|
194 | 222 | 249 | |||||||||
|
|
||||||||||||
|
Total Group Benefits
|
4,147 | 4,278 | 4,350 | |||||||||
|
Consumer Markets
|
||||||||||||
|
Automobile
|
2,619 | 2,806 | 2,857 | |||||||||
|
Homeowners
|
1,128 | 1,141 | 1,102 | |||||||||
|
|
||||||||||||
|
Total Consumer Markets [1]
|
3,747 | 3,947 | 3,959 | |||||||||
|
Individual Annuity
|
||||||||||||
|
Variable annuity
|
1,604 | 1,702 | 1,468 | |||||||||
|
Fixed / MVA and other annuity
|
56 | 14 | (3 | ) | ||||||||
|
|
||||||||||||
|
Total Individual Annuity
|
1,660 | 1,716 | 1,465 | |||||||||
|
Individual Life
|
||||||||||||
|
Variable life
|
396 | 416 | 503 | |||||||||
|
Universal life
|
455 | 391 | 390 | |||||||||
|
Term / Other life
|
48 | 49 | 47 | |||||||||
|
|
||||||||||||
|
Total Individual Life
|
899 | 856 | 940 | |||||||||
|
Retirement Plans
|
||||||||||||
|
401(k)
|
332 | 318 | 286 | |||||||||
|
Government plans
|
48 | 41 | 38 | |||||||||
|
|
||||||||||||
|
Total Retirement Plans
|
380 | 359 | 324 | |||||||||
|
Mutual Funds
|
||||||||||||
|
Non-Proprietary
|
590 | 603 | 518 | |||||||||
|
|
||||||||||||
|
Proprietary
|
59 | 61 | — | |||||||||
|
|
||||||||||||
|
Total Mutual Funds
|
649 | 664 | 518 | |||||||||
|
|
||||||||||||
|
Life Other Operations
|
1,020 | 1,049 | 1,293 | |||||||||
|
Property & Casualty Other Operations
|
— | 1 | — | |||||||||
|
Corporate
|
209 | 189 | 219 | |||||||||
|
|
||||||||||||
|
Total earned premiums, fees, and other considerations
|
18,838 | 18,803 | 18,971 | |||||||||
|
Net investment income (loss):
|
||||||||||||
|
Securities available-for-sale and other
|
4,272 | 4,364 | 4,017 | |||||||||
|
Equity securities, trading
|
(1,359 | ) | (774 | ) | 3,188 | |||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
2,913 | 3,590 | 7,205 | |||||||||
|
Net realized capital gains (losses)
|
(145 | ) | (611 | ) | (2,004 | ) | ||||||
|
Other revenues
|
253 | 267 | 261 | |||||||||
|
|
||||||||||||
|
Total revenues
|
$ | 21,859 | $ | 22,049 | $ | 24,433 | ||||||
|
|
||||||||||||
| [1] |
For 2011, 2010 and 2009, AARP members accounted for earned premiums of $2.8 billion, $2.9
billion and $2.8 billion, respectively.
|
F-15
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
| Geographical Revenue Information | For the years ended December 31, | |||||||||||
| Revenues | 2011 | 2010 | 2009 | |||||||||
|
United States of America
|
$ | 21,561 | $ | 22,140 | $ | 20,189 | ||||||
|
Japan
|
135 | (329 | ) | 3,816 | ||||||||
|
Other
|
163 | 238 | 428 | |||||||||
|
|
||||||||||||
|
Total revenues
|
$ | 21,859 | $ | 22,049 | $ | 24,433 | ||||||
|
|
||||||||||||
| Amortization of deferred policy acquisition costs and | For the years ended December 31, | |||||||||||
| present value of future profits | 2011 | 2010 | 2009 | |||||||||
|
Property & Casualty Commercial
|
$ | 1,356 | $ | 1,353 | $ | 1,393 | ||||||
|
Group Benefits
|
55 | 61 | 61 | |||||||||
|
Consumer Markets
|
639 | 667 | 674 | |||||||||
|
Individual Annuity
|
483 | (56 | ) | 1,339 | ||||||||
|
Individual Life
|
221 | 119 | 314 | |||||||||
|
Retirement Plans
|
134 | 27 | 56 | |||||||||
|
Mutual Funds
|
47 | 51 | 50 | |||||||||
|
Life Other Operations
|
492 | 305 | 370 | |||||||||
|
|
||||||||||||
|
Total amortization of
deferred policy acquisition
costs and present value of
future profits
|
$ | 3,427 | $ | 2,527 | $ | 4,257 | ||||||
|
|
||||||||||||
| For the years ended December 31, | ||||||||||||
| Income tax expense (benefit) | 2011 | 2010 | 2009 | |||||||||
|
Property & Casualty Commercial
|
$ | 40 | $ | 407 | $ | 356 | ||||||
|
Group Benefits
|
— | 65 | 59 | |||||||||
|
Consumer Markets
|
(29 | ) | 52 | 48 | ||||||||
|
Individual Annuity
|
(274 | ) | 124 | (481 | ) | |||||||
|
Individual Life
|
33 | 107 | (27 | ) | ||||||||
|
Retirement Plans
|
(45 | ) | 13 | (143 | ) | |||||||
|
Mutual Funds
|
54 | 52 | 18 | |||||||||
|
Life Other Operations
|
150 | — | (343 | ) | ||||||||
|
Property & Casualty Other Operations
|
(74 | ) | (40 | ) | (51 | ) | ||||||
|
Corporate
|
(201 | ) | (168 | ) | (274 | ) | ||||||
|
|
||||||||||||
|
Total income tax expense (benefit)
|
$ | (346 | ) | $ | 612 | $ | (838 | ) | ||||
|
|
||||||||||||
| As of December 31, | ||||||||
| Assets | 2011 | 2010 | ||||||
|
Property & Casualty Commercial
|
$ | 24,692 | $ | 23,736 | ||||
|
Group Benefits
|
9,485 | 9,028 | ||||||
|
Consumer Markets
|
6,513 | 6,778 | ||||||
|
Individual Annuity
|
87,055 | 101,144 | ||||||
|
Individual Life
|
17,930 | 16,538 | ||||||
|
Retirement Plans
|
35,410 | 34,152 | ||||||
|
Mutual Funds
|
307 | 301 | ||||||
|
Life Other Operations
|
111,407 | 113,065 | ||||||
|
Property & Casualty Other Operations
|
4,639 | 4,733 | ||||||
|
Corporate
|
6,626 | 8,871 | ||||||
|
|
||||||||
|
Total assets
|
$ | 304,064 | $ | 318,346 | ||||
|
|
||||||||
F-16
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements
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 applies 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.
|
|
|
|
||
|
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.
|
|
|
|
||
|
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,
guaranteed product embedded and reinsurance derivatives and other
complex derivative securities. 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, 2011. 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 because these securities 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)
4. Fair Value Measurements (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.
| December 31, 2011 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Significant | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Assets accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Fixed maturities, AFS
|
||||||||||||||||
|
ABS
|
$ | 3,153 | $ | — | $ | 2,792 | $ | 361 | ||||||||
|
CDOs
|
2,487 | — | 2,119 | 368 | ||||||||||||
|
CMBS
|
6,951 | — | 6,363 | 588 | ||||||||||||
|
Corporate
|
44,011 | — | 41,756 | 2,255 | ||||||||||||
|
Foreign government/government agencies
|
2,161 | — | 2,112 | 49 | ||||||||||||
|
States, municipalities and political subdivisions (“Municipal”)
|
13,260 | — | 12,823 | 437 | ||||||||||||
|
RMBS
|
5,757 | — | 4,694 | 1,063 | ||||||||||||
|
U.S. Treasuries
|
4,029 | 750 | 3,279 | — | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturities
|
81,809 | 750 | 75,938 | 5,121 | ||||||||||||
|
Fixed maturities, FVO
|
1,328 | — | 833 | 495 | ||||||||||||
|
Equity securities, trading
|
30,499 | 1,967 | 28,532 | — | ||||||||||||
|
Equity securities, AFS
|
921 | 352 | 476 | 93 | ||||||||||||
|
Derivative assets
|
||||||||||||||||
|
Credit derivatives
|
(24 | ) | — | (11 | ) | (13 | ) | |||||||||
|
Equity derivatives
|
31 | — | — | 31 | ||||||||||||
|
Foreign exchange derivatives
|
519 | — | 519 | — | ||||||||||||
|
Interest rate derivatives
|
195 | — | 147 | 48 | ||||||||||||
|
U.S. GMWB hedging instruments
|
494 | — | 11 | 483 | ||||||||||||
|
U.S. macro hedge program
|
357 | — | — | 357 | ||||||||||||
|
International program hedging instruments
|
731 | — | 692 | 39 | ||||||||||||
|
Other derivative contracts
|
28 | — | — | 28 | ||||||||||||
|
|
||||||||||||||||
|
Total derivative assets [1]
|
2,331 | — | 1,358 | 973 | ||||||||||||
|
Short-term investments
|
7,736 | 750 | 6,986 | — | ||||||||||||
|
Reinsurance recoverable for U.S. GMWB
|
443 | — | — | 443 | ||||||||||||
|
Separate account assets [2]
|
139,432 | 101,644 | 36,757 | 1,031 | ||||||||||||
|
|
||||||||||||||||
|
Total assets accounted for at fair value on a recurring basis
|
$ | 264,499 | $ | 105,463 | $ | 150,880 | $ | 8,156 | ||||||||
|
|
||||||||||||||||
|
Percentage of level to total
|
100 | % | 40 | % | 57 | % | 3 | % | ||||||||
|
|
||||||||||||||||
|
Liabilities accounted for at fair value on a recurring basis
|
||||||||||||||||
|
Other policyholder funds and benefits payable
|
||||||||||||||||
|
U.S guaranteed withdrawal benefits
|
$ | (2,538 | ) | $ | — | $ | — | $ | (2,538 | ) | ||||||
|
International guaranteed withdrawal benefits
|
(66 | ) | — | — | (66 | ) | ||||||||||
|
International other guaranteed living benefits
|
(5 | ) | — | — | (5 | ) | ||||||||||
|
Equity linked notes
|
(9 | ) | — | — | (9 | ) | ||||||||||
|
|
||||||||||||||||
|
Total other policyholder funds and benefits payable
|
(2,618 | ) | — | — | (2,618 | ) | ||||||||||
|
Derivative liabilities
|
||||||||||||||||
|
Credit derivatives
|
(573 | ) | — | (25 | ) | (548 | ) | |||||||||
|
Equity derivatives
|
9 | — | — | 9 | ||||||||||||
|
Foreign exchange derivatives
|
134 | — | 134 | — | ||||||||||||
|
Interest rate derivatives
|
(527 | ) | — | (421 | ) | (106 | ) | |||||||||
|
U.S. GMWB hedging instruments
|
400 | — | — | 400 | ||||||||||||
|
International program hedging instruments
|
19 | — | 23 | (4 | ) | |||||||||||
|
|
||||||||||||||||
|
Total derivative liabilities [3]
|
(538 | ) | — | (289 | ) | (249 | ) | |||||||||
|
Other Liabilities
|
(9 | ) | — | — | (9 | ) | ||||||||||
|
Consumer notes [4]
|
(4 | ) | — | — | (4 | ) | ||||||||||
|
|
||||||||||||||||
|
Total liabilities accounted for at fair value on a recurring basis
|
$ | (3,169 | ) | $ | — | $ | (289 | ) | $ | (2,880 | ) | |||||
|
|
||||||||||||||||
F-18
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
| December 31, 2010 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Significant | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| 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 | ||||||||||||
|
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
|
795 | — | 795 | — | ||||||||||||
|
Interest rate derivatives
|
(106 | ) | — | (70 | ) | (36 | ) | |||||||||
|
U.S. GMWB hedging instruments
|
339 | — | (122 | ) | 461 | |||||||||||
|
U.S. macro hedge program
|
203 | — | — | 203 | ||||||||||||
|
International program hedging instruments
|
256 | 2 | 249 | 5 | ||||||||||||
|
Other derivative contracts
|
32 | — | — | 32 | ||||||||||||
|
|
||||||||||||||||
|
Total derivative assets [1]
|
1,524 | 2 | 834 | 688 | ||||||||||||
|
Short-term investments
|
8,528 | 541 | 7,987 | — | ||||||||||||
|
Reinsurance recoverable for U.S. GMWB
|
280 | — | — | 280 | ||||||||||||
|
Separate account assets [2]
|
153,727 | 116,717 | 35,763 | 1,247 | ||||||||||||
|
|
||||||||||||||||
|
Total assets accounted for at fair value on a recurring basis
|
$ | 276,321 | $ | 120,271 | $ | 145,670 | $ | 10,380 | ||||||||
|
|
||||||||||||||||
|
Percentage of level to total
|
100 | % | 43 | % | 53 | % | 4 | % | ||||||||
|
|
||||||||||||||||
F-19
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
| December 31, 2010 | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Significant | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
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 | ||||||||||||
|
Equity linked notes
|
(9 | ) | — | — | (9 | ) | ||||||||||
|
|
||||||||||||||||
|
Total other policyholder funds and benefits payable
|
(1,653 | ) | — | — | (1,653 | ) | ||||||||||
|
Derivative liabilities
|
||||||||||||||||
|
Credit derivatives
|
(482 | ) | — | (71 | ) | (411 | ) | |||||||||
|
Equity derivatives
|
2 | — | — | 2 | ||||||||||||
|
Foreign exchange derivatives
|
(34 | ) | — | (34 | ) | — | ||||||||||
|
Interest rate derivatives
|
(266 | ) | — | (249 | ) | (17 | ) | |||||||||
|
U.S. GMWB hedging instruments
|
128 | — | (11 | ) | 139 | |||||||||||
|
International program hedging instruments
|
(2 | ) | (2 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
Total derivative liabilities [3]
|
(654 | ) | (2 | ) | (365 | ) | (287 | ) | ||||||||
|
Other liabilities
|
(37 | ) | — | — | (37 | ) | ||||||||||
|
Consumer notes [4]
|
(5 | ) | — | — | (5 | ) | ||||||||||
|
|
||||||||||||||||
|
Total liabilities accounted for at fair value on a
recurring basis
|
$ | (2,349 | ) | $ | (2 | ) | $ | (365 | ) | $ | (1,982 | ) | ||||
|
|
||||||||||||||||
| [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, 2011 and 2010, $1.4 billion and $968, respectively, 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] |
Approximately $4.0 and $6.0 billion of investment sales receivable that are not subject to fair value accounting are
excluded as of December 31, 2011 and 2010, respectively.
|
|
| [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.
The fair valuation process is monitored by the Valuation Committee, which is a cross-functional
group of senior management within HIMCO that meets at least quarterly. The Valuation Committee is
co-chaired by the Heads of Investment Operations and Accounting, and has representation from
various investment sector professionals, accounting, operations, legal, compliance and risk
management. The purpose of the committee is to oversee the pricing policy and procedures by
ensuring objective and reliable valuation practices and pricing of financial instruments, as well
as addressing fair valuation issues and approving changes to valuation methodologies and pricing
sources. There is also a Fair Value Working Group (“Working Group”) which includes the Heads of
Investment Operations and Accounting, as well as other investment, operations, accounting and risk
management professionals that meet monthly to review market data trends, pricing and trading
statistics and results, and any proposed pricing methodology changes described in more detail in
the following paragraphs.
F-20
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (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.
The Working Group performs ongoing analysis of the prices and credit spreads received from third
parties to ensure that the prices represent a reasonable estimate of the fair value. This process
involves quantitative and qualitative analysis and is overseen by investment and accounting
professionals. As a part of this analysis, the Company considers trading volume, new issuance
activity and other factors to determine whether the market activity is significantly different than
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. 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 and approved by the Valuation Committee. 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 conducts other specific activities to monitor controls around pricing. Daily analyses
identify price changes over 3-5%, sale trade prices that differ over 3% from the prior day’s price
and purchase trade prices that differ more than 3% from the current day’s price. Weekly analyses
identify prices that differ more than 5% from published bond prices of a corporate bond index.
Monthly analyses identify price changes over 3%, prices that haven’t changed, missing prices and
second source validation on most sectors. Analyses are conducted by a dedicated pricing unit who
follows up with trading and investment sector professionals and challenges prices with vendors when
the estimated assumptions used differ from what the Company feels a market participant would use.
Any changes from the identified pricing source are verified by further confirmation of assumptions
used. Examples of other 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 and
back testing recent trades. For a sample of structured securities, a comparison of the vendor’s
assumptions to our internal econometric models is also performed; any differences are challenged in
accordance with the process described above.
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-21
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (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, 2011 and
2010, 98% and 97%, respectively, 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 various controls on derivative valuations which include both quantitative and
qualitative analysis. Analyses are conducted by a dedicated derivative pricing team that works
directly with investment sector professionals to analyze impacts of changes in the market
environment and investigate variances. There is a monthly analysis to identify market value
changes greater than pre-defined thresholds, stale prices, missing prices and zero prices. Also on
a monthly basis, a second source validation, typically to broker quotations, is performed for
certain of the more complex derivatives, as well as for all new deals during the month. A model
validation review is performed on any new models, which typically includes detailed documentation
and validation to a second source. The model validation documentation and results of validation
are presented to the Valuation Committee for approval. There is a monthly control to review
changes in pricing sources to ensure that new models are not moved to production until formally
approved.
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, including investment grade private placements
— 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 — S
ignificant 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-22
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
|
Level 3
|
Most of the Company’s securities classified as Level 3 are valued based on brokers’
prices. This includes less liquid securities such as lower quality asset-backed securities
(“ABS”), commercial mortgage-backed securities (“CMBS”), commercial real estate (“CRE”) CDOs
and residential mortgage-backed securities (“RMBS”) primarily backed by below-prime loans.
Primary inputs for these structured securities are consistent with the typical inputs used in
Level 2 measurements noted above, but are Level 3 due to their illiquid markets.
Additionally, certain long-dated securities are priced based on third party pricing services,
including municipal securities, foreign government/government agencies, 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.
|
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.
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.
F-23
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
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.
|
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, equity indices and the blend of implied equity index volatilities. The
Company 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, resulted in pre-tax realized gains (losses) of $55, ($10) and $26, for the years ended
December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011 the credit standing
adjustment was $80.
F-24
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
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 total pre-tax realized gains of $52, $159 and $566 for the years ended December 31,
2011, 2010 and 2009, respectively. As of December 31, 2011 the behavior risk margin was $419.
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 gains
(losses) of approximately $(72), $104 and $550 for the years ended December 31, 2011, 2010 and
2009, respectively.
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, 2011 and 2010,
for the financial instruments classified as Level 3.
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, 2011 to December 31, 2011.
| Fixed Maturities, AFS | ||||||||||||||||||||||||||||||||||||
| Foreign | Total Fixed | Fixed | ||||||||||||||||||||||||||||||||||
| govt./govt | Maturities, | Maturities, | ||||||||||||||||||||||||||||||||||
| Assets | ABS | CDOs | CMBS | Corporate | agencies | Municipal | RMBS | AFS | FVO | |||||||||||||||||||||||||||
|
Fair value as of January 1, 2011
|
$ | 477 | $ | 2,581 | $ | 689 | $ | 2,129 | $ | 56 | $ | 272 | $ | 1,285 | $ | 7,489 | $ | 522 | ||||||||||||||||||
|
Total realized/unrealized gains (losses)
|
||||||||||||||||||||||||||||||||||||
|
Included in net income [1], [2], [6]
|
(27 | ) | (41 | ) | 11 | (40 | ) | — | — | (21 | ) | (118 | ) | 22 | ||||||||||||||||||||||
|
Included in OCI [3]
|
22 | 126 | 52 | (31 | ) | 1 | 48 | 3 | 221 | — | ||||||||||||||||||||||||||
|
Purchases
|
58 | — | 29 | 108 | 3 | 131 | 25 | 354 | — | |||||||||||||||||||||||||||
|
Settlements
|
(37 | ) | (151 | ) | (86 | ) | (121 | ) | (4 | ) | — | (135 | ) | (534 | ) | (3 | ) | |||||||||||||||||||
|
Sales
|
(10 | ) | (66 | ) | (317 | ) | (162 | ) | (7 | ) | (2 | ) | (16 | ) | (580 | ) | (42 | ) | ||||||||||||||||||
|
Transfers into Level 3 [4]
|
82 | 30 | 268 | 774 | 39 | 4 | 82 | 1,279 | — | |||||||||||||||||||||||||||
|
Transfers out of Level 3 [4]
|
(204 | ) | (2,111 | ) | (58 | ) | (402 | ) | (39 | ) | (16 | ) | (160 | ) | (2,990 | ) | (4 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Fair value as of December 31, 2011
|
$ | 361 | $ | 368 | $ | 588 | $ | 2,255 | $ | 49 | $ | 437 | $ | 1,063 | $ | 5,121 | $ | 495 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
December 31, 2011 [2] [7]
|
$ | (16 | ) | $ | (41 | ) | $ | (17 | ) | $ | (17 | ) | $ | — | $ | — | $ | (15 | ) | $ | (106 | ) | $ | 19 | ||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| Freestanding Derivatives [5] | ||||||||||||||||||||||||||||||||||||
| U.S. | Intl. | |||||||||||||||||||||||||||||||||||
| Equity | U.S. | Macro | Program | Total Free- | ||||||||||||||||||||||||||||||||
| Securities, | Interest | GMWB | Hedge | Hedging | Other | Standing | ||||||||||||||||||||||||||||||
| Assets (Liabilities) | AFS | Credit | Equity | Rate | Hedging | Program | Instr. | Contracts | Derivatives [5] | |||||||||||||||||||||||||||
|
Fair value as of January 1, 2011
|
$ | 154 | $ | (390 | ) | $ | 4 | $ | (53 | ) | $ | 600 | $ | 203 | $ | 5 | $ | 32 | $ | 401 | ||||||||||||||||
|
Total realized/unrealized gains (losses)
|
||||||||||||||||||||||||||||||||||||
|
Included in net income [1], [2], [6]
|
(12 | ) | (170 | ) | (9 | ) | (21 | ) | 279 | (128 | ) | (3 | ) | (4 | ) | (56 | ) | |||||||||||||||||||
|
Included in OCI [3]
|
(4 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Purchases
|
39 | 1 | 45 | 64 | 23 | 347 | 33 | — | 513 | |||||||||||||||||||||||||||
|
Settlements
|
— | (2 | ) | — | (48 | ) | (19 | ) | (65 | ) | — | — | (134 | ) | ||||||||||||||||||||||
|
Sales
|
(10 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Transfers into Level 3 [4]
|
7 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Transfers out of Level 3 [4]
|
(81 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Fair value as of December 31, 2011
|
$ | 93 | $ | (561 | ) | $ | 40 | $ | (58 | ) | $ | 883 | $ | 357 | $ | 35 | $ | 28 | $ | 724 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
December 31, 2011 [2] [7]
|
$ | (10 | ) | $ | (163 | ) | $ | (8 | ) | $ | (19 | ) | $ | 278 | $ | (107 | ) | $ | (5 | ) | $ | (4 | ) | $ | (28 | ) | ||||||||||
|
|
||||||||||||||||||||||||||||||||||||
F-25
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
| Reinsurance Recoverable | ||||||||
| Assets | for U.S. GMWB | Separate Accounts | ||||||
|
Fair value as of January 1, 2011
|
$ | 280 | $ | 1,247 | ||||
|
Total realized/unrealized gains (losses)
|
||||||||
|
Included in net income [1], [2], [6]
|
131 | 25 | ||||||
|
Included in OCI [3]
|
— | — | ||||||
|
Purchases
|
— | 292 | ||||||
|
Settlements
|
32 | — | ||||||
|
Sales
|
— | (171 | ) | |||||
|
Transfers into Level 3 [4]
|
— | 14 | ||||||
|
Transfers out of Level 3 [4]
|
— | (376 | ) | |||||
|
|
||||||||
|
Fair value as of December 31, 2011
|
$ | 443 | $ | 1,031 | ||||
|
|
||||||||
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
December 31, 2011 [2] [7]
|
$ | 131 | $ | (1 | ) | |||
|
|
||||||||
| Other Policyholder Funds and Benefits Payable | ||||||||||||||||||||||||||||
| Total Other | ||||||||||||||||||||||||||||
| U.S. | International | Policyholder | ||||||||||||||||||||||||||
| Guaranteed | Guaranteed | International | Equity | Funds and | ||||||||||||||||||||||||
| Withdrawal | Living | Other Living | Linked | Benefits | Other | Consumer | ||||||||||||||||||||||
| Liabilities | Benefits | Benefits | Benefits | Notes | Payable | Liabilities | Notes | |||||||||||||||||||||
|
Fair value as of January 1, 2011
|
$ | (1,611 | ) | $ | (36 | ) | $ | 3 | $ | (9 | ) | $ | (1,653 | ) | $ | (37 | ) | $ | (5 | ) | ||||||||
|
Total realized/unrealized gains (losses)
|
||||||||||||||||||||||||||||
|
Included in net income [1], [2], [6]
|
(780 | ) | (21 | ) | (4 | ) | — | (805 | ) | 28 | 1 | |||||||||||||||||
|
Included in OCI [3]
|
— | — | — | — | 0 | — | — | |||||||||||||||||||||
|
Settlements
|
(147 | ) | (9 | ) | (4 | ) | — | (160 | ) | — | — | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Fair value as of December 31, 2011
|
$ | (2,538 | ) | $ | (66 | ) | $ | (5 | ) | $ | (9 | ) | $ | (2,618 | ) | $ | (9 | ) | $ | (4 | ) | |||||||
|
|
||||||||||||||||||||||||||||
|
Changes in unrealized gains (losses)
included in net income related to financial
instruments still held at December 31, 2011
[2] [7]
|
$ | (780 | ) | $ | (21 | ) | $ | (4 | ) | $ | — | $ | (805 | ) | $ | 28 | $ | 1 | ||||||||||
|
|
||||||||||||||||||||||||||||
F-26
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (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.
| Fixed Maturities, AFS | ||||||||||||||||||||||||||||||||||||
| Foreign | Total Fixed | Fixed | ||||||||||||||||||||||||||||||||||
| govt./govt. | Maturities, | Maturities, | ||||||||||||||||||||||||||||||||||
| Assets | ABS | CDOs | CMBS | Corporate | agencies | Municipal | RMBS | AFS | FVO | |||||||||||||||||||||||||||
|
Fair value as of January 1, 2010
|
$ | 580 | $ | 2,835 | $ | 307 | $ | 8,027 | $ | 93 | $ | 262 | $ | 1,153 | $ | 13,257 | $ | — | ||||||||||||||||||
|
Total realized/unrealized gains (losses)
|
||||||||||||||||||||||||||||||||||||
|
Included in net income [1], [2], [6]
|
(17 | ) | (151 | ) | (132 | ) | (14 | ) | — | 1 | (43 | ) | (356 | ) | 80 | |||||||||||||||||||||
|
Included in OCI [3]
|
92 | 533 | 409 | 320 | 5 | 24 | 254 | 1,637 | — | |||||||||||||||||||||||||||
|
Purchases, issuances, and settlements
|
(74 | ) | (234 | ) | (186 | ) | 78 | (8 | ) | 14 | (161 | ) | (571 | ) | (11 | ) | ||||||||||||||||||||
|
Transfers into Level 3 [4]
|
40 | 42 | 443 | 967 | 8 | 11 | 146 | 1,657 | 453 | |||||||||||||||||||||||||||
|
Transfers out of Level 3 [4]
|
(144 | ) | (444 | ) | (152 | ) | (7,249 | ) | (42 | ) | (40 | ) | (64 | ) | (8,135 | ) | — | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Fair value as of December 31, 2010
|
$ | 477 | $ | 2,581 | $ | 689 | $ | 2,129 | $ | 56 | $ | 272 | $ | 1,285 | $ | 7,489 | $ | 522 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
December 31, 2010 [2] [7]
|
$ | (8 | ) | $ | (158 | ) | $ | (73 | ) | $ | (24 | ) | $ | — | $ | — | $ | (38 | ) | $ | (301 | ) | $ | 76 | ||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| Freestanding Derivatives [5] | ||||||||||||||||||||||||||||||||||||
| U.S. | Intl. | |||||||||||||||||||||||||||||||||||
| Equity | U.S. | Macro | Program | Total Free- | ||||||||||||||||||||||||||||||||
| Securities, | Interest | GMWB | Hedge | Hedging | Other | Standing | ||||||||||||||||||||||||||||||
| Assets (Liabilities) | AFS | Credit | Equity | Rate | Hedging | Program | Instr. | Contracts | Derivatives [5] | |||||||||||||||||||||||||||
|
Fair value as of January 1, 2010
|
$ | 58 | $ | (228 | ) | $ | (2 | ) | $ | 5 | $ | 236 | $ | 278 | $ | 12 | $ | 36 | $ | 337 | ||||||||||||||||
|
Total realized/unrealized gains (losses)
|
||||||||||||||||||||||||||||||||||||
|
Included in net income [1], [2], [6]
|
(6 | ) | 124 | 6 | (4 | ) | (74 | ) | (312 | ) | (29 | ) | (4 | ) | (293 | ) | ||||||||||||||||||||
|
Included in OCI [3]
|
9 | — | — | 1 | — | — | — | — | 1 | |||||||||||||||||||||||||||
|
Purchases, issuances, and settlements
|
16 | 4 | — | (44 | ) | 442 | 237 | 22 | — | 661 | ||||||||||||||||||||||||||
|
Transfers into Level 3 [4]
|
98 | (290 | ) | — | — | — | — | — | — | (290 | ) | |||||||||||||||||||||||||
|
Transfers out of Level 3 [4]
|
(21 | ) | — | — | (11 | ) | (4 | ) | — | — | — | (15 | ) | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Fair value as of December 31, 2010
|
$ | 154 | $ | (390 | ) | $ | 4 | $ | (53 | ) | $ | 600 | $ | 203 | $ | 5 | $ | 32 | $ | 401 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
December 31, 2010 [2] [7]
|
$ | (8 | ) | $ | 116 | $ | 6 | $ | (24 | ) | $ | (61 | ) | $ | (292 | ) | $ | (29 | ) | $ | (4 | ) | $ | (288 | ) | |||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| Reinsurance Recoverable | ||||||||
| Assets | for U.S. GMWB | Separate Accounts | ||||||
|
Fair value as of January 1, 2010
|
$ | 347 | $ | 962 | ||||
|
Total realized/unrealized gains (losses)
|
||||||||
|
Included in net income [1], [2], [6]
|
(102 | ) | 142 | |||||
|
Purchases, issuances, and settlements
|
35 | 314 | ||||||
|
Transfers into Level 3 [4]
|
— | 14 | ||||||
|
Transfers out of Level 3 [4]
|
— | (185 | ) | |||||
|
|
||||||||
|
Fair value as of December 31, 2010
|
$ | 280 | $ | 1,247 | ||||
|
|
||||||||
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
December 31, 2010 [2] [7]
|
$ | (102 | ) | $ | 20 | |||
|
|
||||||||
F-27
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
| Other Policyholder Funds and Benefits Payable | ||||||||||||||||||||||||||||||||
| Total Other | ||||||||||||||||||||||||||||||||
| U.S. | International | Policyholder | ||||||||||||||||||||||||||||||
| Guaranteed | Guaranteed | International | Equity | Funds and | ||||||||||||||||||||||||||||
| Withdrawal | Living | Other Living | Linked | Institutional | Benefits | Other | Consumer | |||||||||||||||||||||||||
| Liabilities | Benefits | Benefits | Benefits | Notes | Notes | Payable | Liabilities | Notes | ||||||||||||||||||||||||
|
Fair value as of January 1, 2010
|
$ | (1,957 | ) | $ | (45 | ) | $ | 2 | $ | (10 | ) | $ | (2 | ) | $ | (2,012 | ) | $ | — | $ | (5 | ) | ||||||||||
|
Total realized/unrealized gains
(losses)
|
||||||||||||||||||||||||||||||||
|
Included in net income [1], [2], [6]
|
486 | 22 | 4 | — | 2 | 514 | (26 | ) | — | |||||||||||||||||||||||
|
Included in OCI [3]
|
— | (4 | ) | — | — | — | (4 | ) | — | — | ||||||||||||||||||||||
|
Purchases, issuances, and settlements
|
(140 | ) | (9 | ) | (3 | ) | 1 | — | (151 | ) | — | — | ||||||||||||||||||||
|
Transfers into Level 3 [4]
|
— | — | — | — | — | — | (11 | ) | — | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Fair value as of December 31, 2010
|
$ | (1,611 | ) | $ | (36 | ) | $ | 3 | $ | (9 | ) | $ | — | $ | (1,653 | ) | $ | (37 | ) | $ | (5 | ) | ||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
December 31, 2010 [2] [7]
|
$ | 486 | $ | 22 | $ | 4 | $ | — | $ | 2 | $ | 514 | $ | — | $ | — | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| [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 in these rows are reported in net realized capital gains/losses. 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. All amounts are before income taxes and amortization
DAC.
|
|
| [3] |
All amounts are before income taxes and amortization of DAC.
|
|
| [4] |
Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information
and the re-evaluation of the observability of pricing inputs.
|
|
| [5] |
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.
|
|
| [6] |
Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
|
|
| [7] |
Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
|
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. Additionally, the Company elected the
fair value option for purchases of foreign government securities to align with the accounting for
yen-based fixed annuity liabilities, which are adjusted for changes in spot rates through realized
gains and losses. 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 reference 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.
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 years ended December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Assets
|
||||||||
|
Fixed maturities, FVO
|
||||||||
|
ABS
|
$ | — | $ | (5 | ) | |||
|
Corporate
|
10 | (7 | ) | |||||
|
CRE CDOs
|
(33 | ) | 83 | |||||
|
Foreign government
|
45 | — | ||||||
|
RMBS
|
— | (1 | ) | |||||
|
Other liabilities
|
||||||||
|
Credit-linked notes
|
28 | (26 | ) | |||||
|
|
||||||||
|
Total realized capital gains
|
$ | 50 | $ | 44 | ||||
|
|
||||||||
F-28
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
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, | ||||||||
| 2011 | 2010 | |||||||
|
Assets
|
||||||||
|
Fixed maturities, FVO
|
||||||||
|
ABS
|
$ | 65 | $ | 65 | ||||
|
CRE CDOs
|
225 | 270 | ||||||
|
Corporate
|
272 | 250 | ||||||
|
Foreign government
|
766 | 64 | ||||||
|
|
||||||||
|
Total fixed maturities, FVO
|
$ | 1,328 | $ | 649 | ||||
|
Other liabilities
|
||||||||
|
Credit-linked notes [1]
|
$ | 9 | $ | 37 | ||||
| [1] |
As of December 31, 2011 and 2010, the outstanding principal balance of the notes was $243.
|
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, 2011 and December 31, 2010.
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
Assets
|
||||||||||||||||
|
Policy loans
|
$ | 2,001 | $ | 2,153 | $ | 2,181 | $ | 2,294 | ||||||||
|
Mortgage loans
|
5,728 | 5,977 | 4,489 | 4,524 | ||||||||||||
|
|
||||||||||||||||
|
Liabilities
|
||||||||||||||||
|
Other policyholder funds and benefits payable [1]
|
$ | 10,343 | $ | 11,238 | $ | 11,155 | $ | 11,383 | ||||||||
|
Senior notes [2]
|
4,481 | 4,623 | 4,880 | 5,072 | ||||||||||||
|
Junior subordinated debentures [2]
|
1,735 | 2,430 | 1,727 | 2,596 | ||||||||||||
|
Consumer notes [3]
|
310 | 305 | 377 | 392 | ||||||||||||
| [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.
|
The Company has not made any changes in its valuation methodologies for the following assets
and liabilities since December 31, 2010.
| • |
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-29
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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, 2011, 2010 and 2009 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 by prospectively
adjusting the security’s yield, if necessary. 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, 2011 and 2010, respectively.
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
OTTI losses recognized in OCI
|
$ | (89 | ) | $ | (418 | ) | $ | (683 | ) | |||
|
Changes in fair value and/or sales
|
112 | 647 | 244 | |||||||||
|
Tax and deferred acquisition costs
|
(14 | ) | (113 | ) | 215 | |||||||
|
|
||||||||||||
|
Change in non-credit impairments recognized in OCI
|
$ | 9 | $ | 116 | $ | (224 | ) | |||||
|
|
||||||||||||
F-30
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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 (“LTV”) 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 preferred stock dividends
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, LTV ratios and debt service coverage ratios (“DSCR”). In addition, the
Company considers historic, current and projected delinquency rates and property values. 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 effective interest rate, (b) the loan’s
observable market price or, most frequently, (c) the fair value of the collateral. 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 collectible and
the loans continue to perform under the original or restructured terms. Interest income ceases to
accrue for loans when it is probable that the Company will not 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-31
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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 and mortgage loan valuation
allowances are recognized as net realized capital losses in accordance with the Company’s
impairment and mortgage loan valuation allowance policies previously discussed above. Foreign
currency transaction remeasurements are also included in net realized capital gains and losses.
Net Investment Income
Interest income from fixed maturities and mortgage loans is recognized when earned on the constant
effective yield method based on estimated timing of cash flows. The amortization of premium and
accretion of discount for fixed maturities also takes into consideration call and maturity dates
that produce the lowest yield. For securitized financial assets subject to prepayment risk, yields
are recalculated and adjusted periodically to reflect historical and/or estimated future repayments
using the retrospective method; however, if these investments are impaired, any yield adjustments
are made using the prospective method. Prepayment fees on fixed maturities and mortgage loans are
recorded in net investment income when earned. For limited partnerships and other alternative
investments, the equity method of accounting is used to recognize the Company’s share of earnings.
For impaired debt securities, the Company accretes the new cost basis to the estimated future cash
flows over the expected remaining life of the security by prospectively adjusting the security’s
yield, if necessary. The Company’s non-income producing investments were not material for the
years ended December 31, 2011, 2010 and 2009.
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-32
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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-33
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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
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. For
the company’s domestic derivative programs, the maximum uncollateralized threshold for a derivative
counterparty for a single level entity is generally $10. The Company also minimizes the credit
risk of derivative instruments by entering into transactions with high quality counterparties rated
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.
Net Investment Income (Loss)
| For the years ended December 31, | ||||||||||||
| (Before-tax) | 2011 | 2010 | 2009 | |||||||||
|
Fixed maturities
|
$ | 3,396 | $ | 3,489 | $ | 3,617 | ||||||
|
Equity securities, AFS
|
36 | 53 | 93 | |||||||||
|
Mortgage loans
|
281 | 260 | 307 | |||||||||
|
Policy loans
|
131 | 132 | 139 | |||||||||
|
Limited partnerships and other alternative investments
|
243 | 216 | (341 | ) | ||||||||
|
Other investments
|
301 | 329 | 314 | |||||||||
|
Investment expenses
|
(116 | ) | (115 | ) | (112 | ) | ||||||
|
|
||||||||||||
|
Total securities AFS and other
|
4,272 | 4,364 | 4,017 | |||||||||
|
Equity securities, trading
|
(1,359 | ) | (774 | ) | 3,188 | |||||||
|
|
||||||||||||
|
Total net investment income (loss)
|
$ | 2,913 | $ | 3,590 | $ | 7,205 | ||||||
|
|
||||||||||||
The net unrealized gain (loss) on equity securities, trading, included in net investment income
during the years ended December 31, 2011, 2010 and 2009, was ($1.3) billion, ($68) and $3.4
billion, respectively, substantially all of which have corresponding amounts credited to
policyholders. These amounts were not included in gross unrealized gains (losses).
F-34
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Net Realized Capital Gains (Losses)
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Gross gains on sales
|
$ | 693 | $ | 836 | $ | 1,056 | ||||||
|
Gross losses on sales
|
(384 | ) | (522 | ) | (1,397 | ) | ||||||
|
Net OTTI losses recognized in earnings
|
(174 | ) | (434 | ) | (1,508 | ) | ||||||
|
Valuation allowances on mortgage loans
|
24 | (154 | ) | (403 | ) | |||||||
|
Japanese fixed annuity contract hedges, net [1]
|
3 | 27 | 47 | |||||||||
|
Periodic net coupon settlements on credit derivatives/Japan
|
(10 | ) | (17 | ) | (49 | ) | ||||||
|
Results of variable annuity hedge program
|
||||||||||||
|
U.S. GMWB derivatives, net
|
(397 | ) | 89 | 1,464 | ||||||||
|
U.S. macro hedge program
|
(216 | ) | (445 | ) | (733 | ) | ||||||
|
|
||||||||||||
|
Total U.S. program
|
(613 | ) | (356 | ) | 731 | |||||||
|
International program
|
775 | 11 | (112 | ) | ||||||||
|
|
||||||||||||
|
Total results of variable annuity hedge program
|
162 | (345 | ) | 619 | ||||||||
|
Other, net [2]
|
(459 | ) | (2 | ) | (369 | ) | ||||||
|
|
||||||||||||
|
Net realized capital losses, before-tax
|
$ | (145 | ) | $ | (611 | ) | $ | (2,004 | ) | |||
|
|
||||||||||||
| [1] |
Relates to the Japanese fixed annuity product (adjustment of
product liability for changes in spot currency exchange rates,
related derivative hedging instruments, excluding net period
coupon settlements, and Japan FVO securities).
|
|
| [2] |
Primarily consists of gains and losses on non-qualifying
derivatives and fixed maturities, FVO, Japan 3Win related
foreign currency swaps, and other investment gains and losses.
|
Sales of Available-for-Sale Securities
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Fixed maturities, AFS
|
||||||||||||
|
Sale proceeds
|
$ | 36,956 | $ | 46,482 | $ | 41,973 | ||||||
|
Gross gains
|
617 | 706 | 755 | |||||||||
|
Gross losses
|
(381 | ) | (452 | ) | (1,272 | ) | ||||||
|
Equity securities, AFS
|
||||||||||||
|
Sale proceeds
|
$ | 239 | $ | 325 | $ | 941 | ||||||
|
Gross gains
|
59 | 24 | 429 | |||||||||
|
Gross losses
|
— | (16 | ) | (151 | ) | |||||||
Sales of AFS securities in 2011 were the result of the reinvestment into spread product
well-positioned for modest economic growth, as well as the purposeful reduction of certain
exposures.
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, 2011, 2010 and 2009.
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Balance as of beginning of period
|
$ | (2,072 | ) | $ | (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
|
(56 | ) | (211 | ) | (840 | ) | ||||||
|
Securities previously impaired
|
(69 | ) | (161 | ) | (292 | ) | ||||||
|
Reductions for credit impairments previously recognized on:
|
||||||||||||
|
Securities that matured or were sold during the period
|
505 | 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
|
16 | 32 | 4 | |||||||||
|
|
||||||||||||
|
Balance as of end of period
|
$ | (1,676 | ) | $ | (2,072 | ) | $ | (2,200 | ) | |||
|
|
||||||||||||
| [1] |
These additions are included in the net OTTI losses recognized in earnings in the
Consolidated Statements of Operations.
|
F-35
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Available-for-Sale Securities
The following table presents the Company’s AFS securities by type.
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||
| 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
|
$ | 3,430 | $ | 55 | $ | (332 | ) | $ | 3,153 | $ | (7 | ) | $ | 3,247 | $ | 38 | $ | (396 | ) | $ | 2,889 | $ | (2 | ) | ||||||||||||||||
|
CDOs
|
2,819 | 16 | (348 | ) | 2,487 | (44 | ) | 3,088 | 1 | (478 | ) | 2,611 | (82 | ) | ||||||||||||||||||||||||||
|
CMBS
|
7,192 | 271 | (512 | ) | 6,951 | (31 | ) | 8,297 | 235 | (615 | ) | 7,917 | (9 | ) | ||||||||||||||||||||||||||
|
Corporate [2]
|
41,161 | 3,661 | (739 | ) | 44,011 | — | 38,496 | 2,174 | (747 | ) | 39,884 | 7 | ||||||||||||||||||||||||||||
|
Foreign govt./govt. agencies
|
2,030 | 141 | (10 | ) | 2,161 | — | 1,627 | 73 | (17 | ) | 1,683 | — | ||||||||||||||||||||||||||||
|
Municipal
|
12,557 | 775 | (72 | ) | 13,260 | — | 12,469 | 150 | (495 | ) | 12,124 | — | ||||||||||||||||||||||||||||
|
RMBS
|
5,961 | 252 | (456 | ) | 5,757 | (105 | ) | 6,036 | 109 | (462 | ) | 5,683 | (124 | ) | ||||||||||||||||||||||||||
|
U.S. Treasuries
|
3,828 | 203 | (2 | ) | 4,029 | — | 5,159 | 24 | (154 | ) | 5,029 | — | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total fixed maturities, AFS
|
78,978 | 5,374 | (2,471 | ) | 81,809 | (187 | ) | 78,419 | 2,804 | (3,364 | ) | 77,820 | (210 | ) | ||||||||||||||||||||||||||
|
Equity securities, AFS
|
1,056 | 68 | (203 | ) | 921 | — | 1,013 | 92 | (132 | ) | 973 | — | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total AFS securities
|
$ | 80,034 | $ | 5,442 | $ | (2,674 | ) | $ | 82,730 | $ | (187 | ) | $ | 79,432 | $ | 2,896 | $ | (3,496 | ) | $ | 78,793 | $ | (210 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
| [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, 2011 and
2010.
|
|
| [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, 2011 | ||||||||
| Maturity | Amortized Cost | Fair Value | ||||||
|
One year or less
|
$ | 3,206 | $ | 3,240 | ||||
|
Over one year through five years
|
16,140 | 16,790 | ||||||
|
Over five years through ten years
|
15,041 | 16,111 | ||||||
|
Over ten years
|
25,189 | 27,320 | ||||||
|
|
||||||||
|
Subtotal
|
59,576 | 63,461 | ||||||
|
Mortgage-backed and asset-backed securities
|
19,402 | 18,348 | ||||||
|
|
||||||||
|
Total
|
$ | 78,978 | $ | 81,809 | ||||
|
|
||||||||
Estimated maturities may differ from contractual maturities due to security call or prepayment
provisions. Due to the potential for variability in payment spreads (i.e. prepayments or
extensions), mortgage-backed and asset-backed securities are not categorized by contractual
maturity.
Concentration of Credit Risk
The Company aims to maintain a diversified investment portfolio including issuer, sector and
geographic stratification, where applicable, and has established certain exposure limits,
diversification standards and review procedures to mitigate credit risk.
As of December 31, 2011 and 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. As of December 31, 2011, other than U.S.
government and certain U.S. government agencies, the Company’s three largest exposures by issuer
were the Government of Japan, Government of the United Kingdom and AT&T Inc. which each comprised less
than 0.8% of total invested assets. As of December 31, 2010, 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.
The Company’s three largest exposures by sector as of December 31, 2011 were commercial real
estate, municipal investments and U.S. Treasuries which comprised approximately 10%, 10% and 7%,
respectively, 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.
F-36
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Security Unrealized Loss Aging
The following tables present the Company’s unrealized loss aging for AFS securities by type and
length of time the security was in a continuous unrealized loss position.
| December 31, 2011 | ||||||||||||||||||||||||||||||||||||
| 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
|
$ | 629 | $ | 594 | $ | (35 | ) | $ | 1,169 | $ | 872 | $ | (297 | ) | $ | 1,798 | $ | 1,466 | $ | (332 | ) | |||||||||||||||
|
CDOs
|
81 | 59 | (22 | ) | 2,709 | 2,383 | (326 | ) | 2,790 | 2,442 | (348 | ) | ||||||||||||||||||||||||
|
CMBS
|
1,297 | 1,194 | (103 | ) | 2,144 | 1,735 | (409 | ) | 3,441 | 2,929 | (512 | ) | ||||||||||||||||||||||||
|
Corporate [1]
|
4,388 | 4,219 | (169 | ) | 3,268 | 2,627 | (570 | ) | 7,656 | 6,846 | (739 | ) | ||||||||||||||||||||||||
|
Foreign govt./govt. agencies
|
218 | 212 | (6 | ) | 51 | 47 | (4 | ) | 269 | 259 | (10 | ) | ||||||||||||||||||||||||
|
Municipal
|
299 | 294 | (5 | ) | 627 | 560 | (67 | ) | 926 | 854 | (72 | ) | ||||||||||||||||||||||||
|
RMBS
|
415 | 330 | (85 | ) | 1,206 | 835 | (371 | ) | 1,621 | 1,165 | (456 | ) | ||||||||||||||||||||||||
|
U.S. Treasuries
|
343 | 341 | (2 | ) | — | — | — | 343 | 341 | (2 | ) | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total fixed maturities
|
7,670 | 7,243 | (427 | ) | 11,174 | 9,059 | (2,044 | ) | 18,844 | 16,302 | (2,471 | ) | ||||||||||||||||||||||||
|
Equity securities
|
167 | 138 | (29 | ) | 439 | 265 | (174 | ) | 606 | 403 | (203 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total securities in an unrealized loss
|
$ | 7,837 | $ | 7,381 | $ | (456 | ) | $ | 11,613 | $ | 9,324 | $ | (2,218 | ) | $ | 19,450 | $ | 16,705 | $ | (2,674 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| 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
|
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 change in fair value of bifurcated embedded derivative features
of certain securities. Subsequent changes in fair value are recorded in net realized capital
gains (losses).
|
As of December 31, 2011, AFS securities in an unrealized loss position, comprised of 2,549
securities, primarily related to corporate securities within the financial services sector, CMBS,
and RMBS which have experienced significant price deterioration. As of December 31, 2011, 75% of
these securities were depressed less than 20% of cost or amortized cost. The decline in unrealized
losses during 2011 was primarily attributable to a decline in interest rates, partially offset by
credit spread widening.
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.
F-37
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Mortgage Loans
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Amortized | Valuation | Carrying | Amortized | Valuation | Carrying | |||||||||||||||||||
| Cost [1] | Allowance | Value | Cost [1] | Allowance | Value | |||||||||||||||||||
|
Commercial
|
$ | 5,830 | $ | (102 | ) | $ | 5,728 | $ | 4,492 | $ | (152 | ) | $ | 4,340 | ||||||||||
|
Residential
|
— | — | — | 152 | (3 | ) | 149 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total mortgage loans
|
$ | 5,830 | $ | (102 | ) | $ | 5,728 | $ | 4,644 | $ | (155 | ) | $ | 4,489 | ||||||||||
|
|
||||||||||||||||||||||||
| [1] |
Amortized cost represents carrying value prior to valuation allowances, if any.
|
As of December 31, 2011, the carrying value of mortgage loans associated with the valuation
allowance was $621. Included in the table above are mortgage loans held-for-sale with a carrying
value and valuation allowance of $74 and $4, respectively, as of December 31, 2011, and $87 and $7,
respectively, as of December 31, 2010. The carrying value of these loans is included in mortgage
loans in the Company’s Consolidated Balance Sheets. These amounts do not include mortgage loans
related to the divestiture of Federal Trust Corporation. For further information on Federal Trust
Corporation, see Note 20. As of December 31, 2011, loans within the Company’s mortgage loan
portfolio that have had extensions or restructurings other than what is allowable under the
original terms of the contract are immaterial.
The following table presents the activity within the Company’s valuation allowance for mortgage
loans. These loans have been evaluated both individually and collectively for impairment. Loans
evaluated collectively for impairment are immaterial.
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Balance as of January 1
|
$ | (155 | ) | $ | (366 | ) | $ | (26 | ) | |||
|
Additions
|
(26 | ) | (157 | ) | (408 | ) | ||||||
|
Deductions
|
79 | 368 | 68 | |||||||||
|
|
||||||||||||
|
Balance as of December 31
|
$ | (102 | ) | $ | (155 | ) | $ | (366 | ) | |||
|
|
||||||||||||
The current weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was 68%
as of December 31, 2011, while the weighted-average LTV ratio at origination of these loans was
64%. 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 1.94x as of December
31, 2011. The Company held only two delinquent commercial mortgage loans past due by 90 days or
more. The total carrying value and valuation allowance of these loans totaled $14 and $60,
respectively, as of December 31, 2011, 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, 2011 | December 31, 2010 | |||||||||||||||
| Carrying | Avg. Debt-Service | Carrying | Avg. Debt-Service | |||||||||||||
| Loan-to-value | Value | Coverage Ratio | Value | Coverage Ratio | ||||||||||||
|
Greater than 80%
|
$ | 707 | 1.45 | x | $ | 1,358 | 1.49 | x | ||||||||
|
65% – 80%
|
2,384 | 1.60 | x | 1,829 | 1.93 | x | ||||||||||
|
Less than 65%
|
2,637 | 2.40 | x | 1,153 | 2.26 | x | ||||||||||
|
|
||||||||||||||||
|
Total commercial mortgage loans
|
$ | 5,728 | 1.94 | x | $ | 4,340 | 1.87 | x | ||||||||
|
|
||||||||||||||||
F-38
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
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, 2011 | December 31, 2010 | |||||||||||||||
| Carrying | Percent of | Carrying | Percent of | |||||||||||||
| Value | Total | Value | Total | |||||||||||||
|
East North Central
|
$ | 94 | 1.6 | % | $ | 77 | 1.7 | % | ||||||||
|
Middle Atlantic
|
508 | 8.9 | % | 428 | 9.5 | % | ||||||||||
|
Mountain
|
125 | 2.2 | % | 109 | 2.4 | % | ||||||||||
|
New England
|
294 | 5.1 | % | 259 | 5.8 | % | ||||||||||
|
Pacific
|
1,690 | 29.5 | % | 1,147 | 25.6 | % | ||||||||||
|
South Atlantic
|
1,149 | 20.1 | % | 1,177 | 26.3 | % | ||||||||||
|
West North Central
|
30 | 0.5 | % | 36 | 0.8 | % | ||||||||||
|
West South Central
|
224 | 3.9 | % | 231 | 5.1 | % | ||||||||||
|
Other [1]
|
1,614 | 28.2 | % | 1,025 | 22.8 | % | ||||||||||
|
|
||||||||||||||||
|
Total mortgage loans
|
$ | 5,728 | 100.0 | % | $ | 4,489 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| [1] |
Primarily represents loans collateralized by multiple properties in various regions.
|
| Mortgage Loans by Property Type | ||||||||||||||||
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| Carrying | Percent of | Carrying | Percent of | |||||||||||||
| Value | Total | Value | Total | |||||||||||||
|
Commercial
|
||||||||||||||||
|
Agricultural
|
$ | 249 | 4.3 | % | $ | 315 | 7.0 | % | ||||||||
|
Industrial
|
1,747 | 30.5 | % | 1,141 | 25.4 | % | ||||||||||
|
Lodging
|
93 | 1.6 | % | 132 | 2.9 | % | ||||||||||
|
Multifamily
|
1,070 | 18.7 | % | 713 | 15.9 | % | ||||||||||
|
Office
|
1,078 | 18.8 | % | 986 | 22.1 | % | ||||||||||
|
Retail
|
1,234 | 21.5 | % | 669 | 14.9 | % | ||||||||||
|
Other
|
257 | 4.6 | % | 384 | 8.5 | % | ||||||||||
|
Residential
|
— | — | 149 | 3.3 | % | |||||||||||
|
|
||||||||||||||||
|
Total mortgage loans
|
$ | 5,728 | 100.0 | % | $ | 4,489 | 100.0 | % | ||||||||
|
|
||||||||||||||||
F-39
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
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.
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.
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Maximum | Maximum | |||||||||||||||||||||||
| Total | Total | Exposure | Total | Total | Exposure | |||||||||||||||||||
| Assets | Liabilities [1] | to Loss [2] | Assets | Liabilities [1] | to Loss [2] | |||||||||||||||||||
|
CDOs [3]
|
$ | 491 | $ | 471 | $ | 29 | $ | 729 | $ | 393 | $ | 289 | ||||||||||||
|
Limited partnerships
|
7 | — | 7 | 14 | 1 | 13 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 498 | $ | 471 | $ | 36 | $ | 743 | $ | 394 | $ | 302 | ||||||||||||
|
|
||||||||||||||||||||||||
| [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 one hedge fund for which the Company holds a majority interest in the fund as an
investment.
Non-Consolidated VIEs
The Company holds a significant variable interest for one VIE for which it is not the primary
beneficiary and, therefore, was not consolidated on the Company’s Consolidated Balance Sheets.
This VIE represents a contingent capital facility (“facility”) that has been held by the Company
since February 2007 for which the Company has no implied or unfunded commitments. Assets and
liabilities recorded for the facility were $28 as of December 31, 2011 and $32 as of December 31,
2010. Additionally, the Company has a maximum exposure to loss of $3 as of December 31, 2011 and
$4 as of December 31, 2010, which represents the issuance costs that were incurred to establish the
facility. 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.
For further information on the facility, see Note 14.
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.
F-40
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Equity Method Investments
The Company has investments in limited partnerships and other alternative investments which include
hedge funds, mortgage and real estate funds, mezzanine debt funds, and private equity and other
funds (collectively, “limited partnerships”). These investments are accounted for under the equity
method and the Company’s maximum exposure to loss as of December 31, 2011 is limited to the total
carrying value of $2.5 billion. In addition, the Company has outstanding commitments totaling $700
to fund limited partnership and other alternative investments as of December 31, 2011. 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 2011, 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 $91.3 billion and $93.9 billion as of December 31, 2011 and
2010, respectively. Aggregate total liabilities of the limited partnerships in which the Company
invested totaled $20.6 billion and $22.3 billion as of December 31, 2011 and 2010, respectively.
Aggregate net investment income (loss) of the limited partnerships in which the Company invested
totaled $1.3 billion, $857 and ($688) for the periods ended December 31, 2011, 2010 and 2009,
respectively. Aggregate net income (loss) of the limited partnerships in which the Company
invested totaled $9.1 billion, $10.3 billion and ($9.1) billion for the periods ended December 31,
2011, 2010 and 2009, respectively. As of, and for the period ended, December 31, 2011, 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 reduce cash flow
fluctuations due to changes in currency rates.
Fair value hedges
Interest rate swaps
Interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities
and fixed maturity securities due to fluctuations in interest rates.
Foreign currency swaps
Foreign currency swaps are used to hedge the changes in fair value of certain foreign
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.
F-41
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Non-qualifying strategies
Interest rate swaps, swaptions, caps, floors, and futures
The Company uses interest rate swaps, swaptions, 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, 2011 and 2010, the notional amount of interest rate swaps in
offsetting relationships was $7.8 billion and $7.1 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 swap 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.
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.
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. In addition, during the
third quarter of 2011, the Company entered into equity index options and futures with the purpose
of hedging the impact of an adverse equity market environment on the investment portfolio.
U.S GMWB product derivatives
The Company offers certain variable annuity products with a GMWB rider in the U.S. 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.
U.S. 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.
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)
U.S. 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 U.S. GMWB hedging instruments.
| Notional Amount | Fair Value | |||||||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Customized swaps
|
$ | 8,389 | $ | 10,113 | $ | 385 | $ | 209 | ||||||||
|
Equity swaps, options, and futures
|
5,320 | 4,943 | 498 | 391 | ||||||||||||
|
Interest rate swaps and futures
|
2,697 | 2,800 | 11 | (133 | ) | |||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 16,406 | $ | 17,856 | $ | 894 | $ | 467 | ||||||||
|
|
||||||||||||||||
U.S. macro hedge program
The Company utilizes equity options and futures contracts to partially hedge against a decline in
the equity markets and the resulting statutory surplus and capital impact primarily arising from
guaranteed minimum death benefit (“GMDB”), GMIB and GMWB obligations.
The following table represents notional and fair value for the U.S. macro hedge program.
| Notional Amount | Fair Value | |||||||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Equity futures
|
$ | 59 | $ | 166 | $ | — | $ | — | ||||||||
|
Equity options
|
6,760 | 12,891 | 357 | 203 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 6,819 | $ | 13,057 | $ | 357 | $ | 203 | ||||||||
|
|
||||||||||||||||
International program product derivatives
The Company formerly offered certain variable annuity products with GMWB or GMAB riders in the U.K.
and Japan. The GMWB and GMAB are bifurcated embedded derivatives. The GMWB provides the
policyholder with a GRB if the account value is reduced to zero through a combination of market
declines and withdrawals. The GRB is generally equal to premiums less withdrawals. Certain
contract provisions can increase the GRB at contractholder election or after the passage of time.
The GMAB provides the policyholder with their initial deposit in a lump sum after a specified
waiting period. The notional amount of the embedded derivatives are the foreign currency
denominated GRBs converted to U.S. dollars at the current foreign spot exchange rate as of the
reporting period date.
International program hedging instruments
The Company utilizes equity futures, options and swaps, and currency forwards and options to
partially hedge against a decline in the debt and equity markets or changes in foreign currency
exchange rates and the resulting statutory surplus and capital impact primarily arising from GMDB,
GMIB and GMWB obligations issued in the U.K. and Japan. The Company also enters into foreign
currency denominated interest rate swaps and swaptions 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 international program hedging
instruments.
| Notional Amount | Fair Value | |||||||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Currency forwards
|
$ | 8,622 | $ | 4,951 | $ | 446 | $ | 166 | ||||||||
|
Currency options [1]
|
7,357 | 5,296 | 127 | 62 | ||||||||||||
|
Equity futures
|
3,835 | 1,002 | — | — | ||||||||||||
|
Equity options
|
1,565 | 1,073 | 74 | 4 | ||||||||||||
|
Equity swaps
|
392 | 369 | (8 | ) | 1 | |||||||||||
|
Interest rate futures
|
739 | — | — | — | ||||||||||||
|
Interest rate swaps and swaptions
|
11,216 | 2,182 | 111 | 21 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 33,726 | $ | 14,873 | $ | 750 | $ | 254 | ||||||||
|
|
||||||||||||||||
| [1] |
As of December 31, 2011 and 2010, notional amounts include $5.3 billion and $3.1 billion,
respectively, related to long positions and $2.1 billion and $2.2 billion, respectively,
related to short positions.
|
Contingent capital facility put option
The Company entered into a put option agreement that provides the Company the right to require a
third-party trust to purchase, at any time, The Hartford’s junior subordinated notes in a maximum
aggregate principal amount of $500. Under the put option agreement, The Hartford will pay premiums
on a periodic basis and will reimburse the trust for certain fees and ordinary expenses.
F-43
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Derivative Balance Sheet Classification
The table below summarizes the balance sheet classification of the Company’s derivative related
fair value amounts, as well as the gross asset and liability fair value amounts. The fair value
amounts presented do not include income accruals or cash collateral held amounts, which are netted
with derivative fair value amounts to determine balance sheet presentation. Derivatives in the
Company’s separate accounts are not included because the associated gains and losses accrue
directly to policyholders. The Company’s derivative instruments are held for risk management
purposes, unless otherwise noted in the table below. The notional amount of derivative contracts
represents the basis upon which pay or receive amounts are calculated and is presented in the table
to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily
reflective of credit risk.
| 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 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
Cash flow hedges
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | 8,652 | $ | 10,290 | $ | 329 | $ | 115 | $ | 329 | $ | 188 | $ | — | $ | (73 | ) | |||||||||||||||
|
Foreign currency swaps
|
291 | 335 | 6 | 6 | 30 | 29 | (24 | ) | (23 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total cash flow hedges
|
8,943 | 10,625 | 335 | 121 | 359 | 217 | (24 | ) | (96 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Fair value hedges
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
1,007 | 1,120 | (78 | ) | (46 | ) | — | 5 | (78 | ) | (51 | ) | ||||||||||||||||||||
|
Foreign currency swaps
|
677 | 677 | (39 | ) | (12 | ) | 63 | 71 | (102 | ) | (83 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total fair value hedges
|
1,684 | 1,797 | (117 | ) | (58 | ) | 63 | 76 | (180 | ) | (134 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Non-qualifying strategies
|
||||||||||||||||||||||||||||||||
|
Interest rate contracts
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps, caps, floors, and futures
|
10,144 | 7,938 | (583 | ) | (441 | ) | 531 | 126 | (1,114 | ) | (567 | ) | ||||||||||||||||||||
|
Foreign exchange contracts
|
||||||||||||||||||||||||||||||||
|
Foreign currency swaps and forwards
|
380 | 368 | (12 | ) | (18 | ) | 6 | 1 | (18 | ) | (19 | ) | ||||||||||||||||||||
|
Japan 3Win foreign currency swaps
|
2,054 | 2,285 | 184 | 177 | 184 | 177 | — | — | ||||||||||||||||||||||||
|
Japanese fixed annuity hedging instruments
|
1,945 | 2,119 | 514 | 608 | 540 | 608 | (26 | ) | — | |||||||||||||||||||||||
|
Credit contracts
|
||||||||||||||||||||||||||||||||
|
Credit derivatives that purchase credit
protection
|
1,721 | 2,559 | 36 | (9 | ) | 56 | 29 | (20 | ) | (38 | ) | |||||||||||||||||||||
|
Credit derivatives that assume credit risk [1]
|
2,952 | 2,569 | (648 | ) | (434 | ) | 2 | 8 | (650 | ) | (442 | ) | ||||||||||||||||||||
|
Credit derivatives in offsetting positions
|
8,189 | 8,367 | (57 | ) | (75 | ) | 164 | 98 | (221 | ) | (173 | ) | ||||||||||||||||||||
|
Equity contracts
|
||||||||||||||||||||||||||||||||
|
Equity index swaps and options
|
1,501 | 189 | 27 | (10 | ) | 40 | 5 | (13 | ) | (15 | ) | |||||||||||||||||||||
|
Variable annuity hedge program
|
||||||||||||||||||||||||||||||||
|
U.S. GMWB product derivatives [2]
|
34,569 | 40,255 | (2,538 | ) | (1,611 | ) | — | — | (2,538 | ) | (1,611 | ) | ||||||||||||||||||||
|
U.S. GMWB reinsurance contracts
|
7,193 | 8,767 | 443 | 280 | 443 | 280 | — | — | ||||||||||||||||||||||||
|
U.S. GMWB hedging instruments
|
16,406 | 17,856 | 894 | 467 | 1,022 | 647 | (128 | ) | (180 | ) | ||||||||||||||||||||||
|
U.S. macro hedge program
|
6,819 | 13,057 | 357 | 203 | 357 | 203 | — | — | ||||||||||||||||||||||||
|
International program product derivatives [2]
|
2,710 | 2,730 | (71 | ) | (33 | ) | — | 3 | (71 | ) | (36 | ) | ||||||||||||||||||||
|
International program hedging instruments
|
33,726 | 14,873 | 750 | 254 | 887 | 265 | (137 | ) | (11 | ) | ||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||
|
Contingent capital facility put option
|
500 | 500 | 28 | 32 | 28 | 32 | — | — | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total non-qualifying strategies
|
130,809 | 124,432 | (676 | ) | (610 | ) | 4,260 | 2,482 | (4,936 | ) | (3,092 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total cash flow hedges, fair value hedges, and
non-qualifying strategies
|
$ | 141,436 | $ | 136,854 | $ | (458 | ) | $ | (547 | ) | $ | 4,682 | $ | 2,775 | $ | (5,140 | ) | $ | (3,322 | ) | ||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance Sheet Location
|
||||||||||||||||||||||||||||||||
|
Fixed maturities, available-for-sale
|
$ | 703 | $ | 728 | $ | (72 | ) | $ | (39 | ) | $ | — | $ | — | $ | (72 | ) | $ | (39 | ) | ||||||||||||
|
Other investments
|
60,227 | 55,948 | 2,331 | 1,524 | 3,165 | 2,105 | (834 | ) | (581 | ) | ||||||||||||||||||||||
|
Other liabilities
|
35,944 | 28,333 | (538 | ) | (654 | ) | 1,074 | 387 | (1,612 | ) | (1,041 | ) | ||||||||||||||||||||
|
Consumer notes
|
35 | 39 | (4 | ) | (5 | ) | — | — | (4 | ) | (5 | ) | ||||||||||||||||||||
|
Reinsurance recoverables
|
7,193 | 8,767 | 443 | 280 | 443 | 280 | — | — | ||||||||||||||||||||||||
|
Other policyholder funds and benefits payable
|
37,334 | 43,039 | (2,618 | ) | (1,653 | ) | — | 3 | (2,618 | ) | (1,656 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total derivatives
|
$ | 141,436 | $ | 136,854 | $ | (458 | ) | $ | (547 | ) | $ | 4,682 | $ | 2,775 | $ | (5,140 | ) | $ | (3,322 | ) | ||||||||||||
|
|
||||||||||||||||||||||||||||||||
| [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-44
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Change in Notional Amount
The net increase in notional amount of derivatives since December 31, 2010, was primarily due to
the following:
| • |
During 2011, the Company significantly strengthened its hedge protection of variable
annuity products offered in Japan. As such, the notional amount related to the international
program hedging instruments increased by $18.9 billion as the Company entered into additional
foreign currency denominated interest rate swaps and swaptions, currency forwards, currency
options and equity futures.
|
| • |
The decrease of $8.7 billion in the combined GMWB hedging program, which includes the GMWB
product, reinsurance, and hedging derivatives, was primarily a result of policyholder lapses
and withdrawals.
|
| • |
The U.S. macro hedge program notional decreased $6.2 billion primarily due to the
expiration of certain out of the money options in January of 2011.
|
Change in Fair Value
The improvement in the total fair value of derivative instruments since December 31, 2010, was
primarily related to the following:
| • |
The fair value related to the international program hedging instruments increased as a
result of the additional notional added during the year, as well as strengthening of the
Japanese yen, lower global equity markets, and a decrease in interest rates.
|
| • |
The decrease in the combined GMWB hedging program, which includes the GMWB product,
reinsurance, and hedging derivatives, was primarily a result of a general decrease in
long-term interest rates and higher interest rate volatility.
|
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) | |||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
|
Interest rate swaps
|
$ | 337 | $ | 294 | $ | (461 | ) | $ | (4 | ) | $ | 2 | $ | (3 | ) | |||||||||
|
Foreign currency swaps
|
(3 | ) | 8 | (194 | ) | — | (1 | ) | 75 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 334 | $ | 302 | $ | (655 | ) | $ | (4 | ) | $ | 1 | $ | 72 | ||||||||||
|
|
||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | ||||||||||||||
| Gain (Loss) Reclassified from AOCI | ||||||||||||||
| into Income (Effective Portion) | ||||||||||||||
| 2011 | 2010 | 2009 | ||||||||||||
|
Interest rate swaps
|
Net realized capital gains (losses) | $ | 9 | $ | 18 | $ | 11 | |||||||
|
Interest rate swaps
|
Net investment income (loss) | 126 | 94 | 47 | ||||||||||
|
Foreign currency swaps
|
Net realized capital gains (losses) | (3 | ) | (7 | ) | (119 | ) | |||||||
|
Foreign currency swaps
|
Net investment income (loss) | — | — | 2 | ||||||||||
|
|
||||||||||||||
|
Total
|
$ | 132 | $ | 105 | $ | (59 | ) | |||||||
|
|
||||||||||||||
As of December 31, 2011, 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 $111. 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 approximately two years.
During the year ended December 31, 2011, the Company had no net reclassifications from AOCI to
earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that
were no longer probable of occurring. For the years ended December 31, 2010 and 2009, the Company
had less than $1 and $1 of net reclassifications, respectively, from AOCI to earnings resulting
from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer
probable of occurring.
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
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] | ||||||||||||||||||||||||
| 2011 | 2010 | 2009 | ||||||||||||||||||||||
| Hedged | Hedged | Hedged | ||||||||||||||||||||||
| Derivative | Item | Derivative | Item | Derivative | Item | |||||||||||||||||||
|
Interest rate swaps
|
||||||||||||||||||||||||
|
Net realized capital gains (losses)
|
$ | (73 | ) | $ | 70 | $ | (43 | ) | $ | 36 | $ | 72 | $ | (68 | ) | |||||||||
|
Benefits, losses and loss adjustment expenses
|
— | — | (1 | ) | 3 | (37 | ) | 40 | ||||||||||||||||
|
Foreign currency swaps
|
||||||||||||||||||||||||
|
Net realized capital gains (losses)
|
(1 | ) | 1 | 8 | (8 | ) | 51 | (51 | ) | |||||||||||||||
|
Benefits, losses and loss adjustment expenses
|
(22 | ) | 22 | (12 | ) | 12 | 2 | (2 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | (96 | ) | $ | 93 | $ | (48 | ) | $ | 43 | $ | 88 | $ | (81 | ) | |||||||||
|
|
||||||||||||||||||||||||
| [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.
|
Non-qualifying Strategies
For non-qualifying strategies, including embedded derivatives that are required to be bifurcated
from their host contracts and accounted for as derivatives, the gain or loss on the derivative is
recognized currently in earnings within net realized capital gains (losses). 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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Interest rate contracts
|
||||||||||||
|
Interest rate swaps, caps, floors, and forwards
|
$ | (22 | ) | $ | 45 | $ | 31 | |||||
|
Foreign exchange contracts
|
||||||||||||
|
Foreign currency swaps and forwards
|
3 | (1 | ) | (49 | ) | |||||||
|
Japan 3Win foreign currency swaps [1]
|
31 | 215 | (22 | ) | ||||||||
|
Japanese fixed annuity hedging instruments [2]
|
109 | 385 | (12 | ) | ||||||||
|
Credit contracts
|
||||||||||||
|
Credit derivatives that purchase credit protection
|
(10 | ) | (23 | ) | (533 | ) | ||||||
|
Credit derivatives that assume credit risk
|
(174 | ) | 196 | 167 | ||||||||
|
Equity contracts
|
||||||||||||
|
Equity index swaps and options
|
(89 | ) | 5 | (3 | ) | |||||||
|
Warrants
|
— | — | 70 | |||||||||
|
Variable annuity hedge program
|
||||||||||||
|
U.S. GMWB product derivatives
|
(780 | ) | 486 | 4,686 | ||||||||
|
U.S. GMWB reinsurance contracts
|
131 | (102 | ) | (988 | ) | |||||||
|
U.S. GMWB hedging instruments
|
252 | (295 | ) | (2,234 | ) | |||||||
|
U.S. macro hedge program
|
(216 | ) | (445 | ) | (733 | ) | ||||||
|
International program product derivatives
|
(25 | ) | 26 | 67 | ||||||||
|
International program hedging instruments
|
800 | (15 | ) | (179 | ) | |||||||
|
Other
|
||||||||||||
|
Contingent capital facility put option
|
(5 | ) | (6 | ) | (8 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 5 | $ | 471 | $ | 260 | ||||||
|
|
||||||||||||
| [1] |
The associated liability is adjusted for changes in spot rates
through realized capital gains and was ($100), ($273) and $64 for
the years ended December 31, 2011, 2010 and 2009, respectively.
|
|
| [2] |
The associated liability is adjusted for changes in spot rates
through realized capital gains and losses and was ($129), ($332)
and $67 for the years ended December 31, 2011, 2010 and 2009,
respectively.
|
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)
For the year ended December 31, 2011, the net realized capital gain (loss) related to
derivatives used in non-qualifying strategies was primarily comprised of the following:
| • |
The net gain associated with the international program hedging instruments was primarily
driven by strengthening of the Japanese yen, lower global equity markets, and a decrease in
interest rates.
|
| • |
The loss related to the combined GMWB hedging program, which includes the GMWB product,
reinsurance, and hedging derivatives, was primarily a result of a general decrease in
long-term interest rates and higher interest rate volatility.
|
| • |
The net loss on the U.S. macro hedge program was primarily driven by time decay and a
decrease in equity market volatility since the purchase date of certain options during the
fourth quarter.
|
| • |
The loss on credit derivatives that assume credit risk as a part of replication
transactions resulted from credit spread widening.
|
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 U.S. macro hedge program was primarily due to a higher
equity market valuation, time decay, and lower implied market volatility.
|
| • |
The net gain on the Japanese fixed annuity hedging instruments was 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 was 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 as a part of
replication transactions resulted from credit spread 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.
|
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.
|
| • |
The net loss on the U.S. 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.
|
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 standard and customized diversified portfolios
of corporate issuers. The diversified portfolios of corporate issuers are established within
sector concentration limits and may be divided into tranches that possess different credit ratings.
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)
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, 2011 and 2010.
| As of December 31, 2011 | ||||||||||||||||||||||
| Weighted | Underlying Referenced | |||||||||||||||||||||
| Average | Credit Obligation(s) [1] | Offsetting | ||||||||||||||||||||
| Credit Derivative type by derivative | Notional | Fair | Years to | Average 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
|
$ | 1,628 | $ | (34 | ) | 3 years | Corporate Credit/ Foreign Gov. | A+ | $ | 1,424 | $ | (15 | ) | |||||||||
|
Below investment grade risk
exposure
|
170 | (7 | ) | 2 years | Corporate Credit | BB- | 144 | (5 | ) | |||||||||||||
|
Basket credit default swaps [4]
|
||||||||||||||||||||||
|
Investment grade risk exposure
|
3,645 | (92 | ) | 3 years | Corporate Credit | BBB+ | 2,001 | 29 | ||||||||||||||
|
Investment grade risk exposure
|
525 | (98 | ) | 5 years | CMBS Credit | BBB+ | 525 | 98 | ||||||||||||||
|
Below investment grade risk
exposure
|
553 | (509 | ) | 3 years | Corporate Credit | BBB+ | — | — | ||||||||||||||
|
Embedded credit derivatives
|
||||||||||||||||||||||
|
Investment grade risk exposure
|
25 | 24 | 3 years | Corporate Credit | BBB- | — | — | |||||||||||||||
|
Below investment grade risk
exposure
|
500 | 411 | 5 years | Corporate Credit | BB+ | — | — | |||||||||||||||
|
|
||||||||||||||||||||||
|
Total
|
$ | 7,046 | $ | (305 | ) | $ | 4,094 | $ | 107 | |||||||||||||
|
|
||||||||||||||||||||||
| As of December 31, 2010 | |||||||||||||||||||||||
| Underlying Referenced | |||||||||||||||||||||||
| Weighted | Credit Obligation(s) [1] | ||||||||||||||||||||||
| Average | Average | Offsetting | |||||||||||||||||||||
| Credit Derivative type by derivative | Notional | Years to | Credit | Notional | Offsetting | ||||||||||||||||||
| risk exposure | Amount [2] | Fair 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 | ) | ||||||||||||||
|
|
|||||||||||||||||||||||
| [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 $4.2 billion and $3.9 billion as of December 31, 2011 and
2010, 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 $553 and $542 as
of December 31, 2011 and 2010, respectively, of customized
diversified portfolios of corporate issuers referenced through
credit default swaps.
|
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)
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, 2011
and 2010, collateral pledged having a fair value of $1.1 billion and $790, 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 as of December 31, 2011 and
2010.
The following table presents the classification and carrying amount of loaned securities and
derivative instruments collateral pledged.
| December 31, 2011 | December 31, 2010 | |||||||
|
Fixed maturities, AFS
|
$ | 1,086 | $ | 823 | ||||
|
Short-term investments
|
199 | — | ||||||
|
|
||||||||
|
Total collateral pledged
|
$ | 1,285 | $ | 823 | ||||
|
|
||||||||
As of December 31, 2011 and 2010, the Company had accepted collateral with a fair value of $2.6
billion and $1.5 billion, respectively, of which $2.0 billion and $1.1 billion, respectively, was
cash collateral which was invested and recorded in the Consolidated Balance Sheets in fixed
maturities and short-term investments with corresponding amounts recorded in other assets and other
liabilities. 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, 2011 and 2010, noncash
collateral accepted was held in separate custodial accounts and was 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, 2011 and 2010, the fair value of securities on deposit was
approximately $1.6 billion and $1.4 billion, respectively.
F-49
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
The Company cedes insurance to affiliated and unaffiliated insurers in order to limit its maximum
losses and to diversify its exposures and provide statutory surplus relief. Such arrangements do
not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company. The Company also assumes reinsurance from
other insurers and is a member of and participates in reinsurance pools and associations. 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 that provide indemnification
against loss or liability relating to insurance risk (i.e. risk transfer). To meet risk transfer
requirements, a reinsurance agreement must include insurance risk, consisting of underwriting,
investment, and timing risk, and a reasonable possibility of a significant loss to the reinsurer.
If the ceded and assumed transactions do not meet risk transfer requirements, the Company accounts
for these transactions as financing transactions.
Premiums, benefits, 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. Included in reinsurance recoverables are 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 Company also is a member of and participates in several reinsurance pools and associations.
The Company evaluates the financial condition of its reinsurers and concentrations of credit risk.
Reinsurance is placed with reinsurers that meet strict financial criteria established by the
Company. As of December 31, 2011, 2010 and 2009, the Company had no reinsurance-related
concentrations of credit risk greater than 10% of the Company’s stockholders’ equity.
Results
The Company is involved in both the cession and assumption of insurance with affiliated and
unaffiliated insurers. As of December 31, 2011, 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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Gross fee income, earned premiums and other
|
$ | 9,342 | $ | 9,482 | $ | 9,419 | ||||||
|
Reinsurance assumed
|
134 | 192 | 162 | |||||||||
|
Reinsurance ceded
|
(524 | ) | (576 | ) | (484 | ) | ||||||
|
|
||||||||||||
|
Net fee income, earned premiums and other
|
$ | 8,952 | $ | 9,098 | $ | 9,097 | ||||||
|
|
||||||||||||
The Company reinsures certain of its risks to other reinsurers under yearly renewable term,
coinsurance, and modified coinsurance arrangements, and variations thereto. 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 agreements were $224, $275 and
$305 for the years ended December 31, 2011, 2010, and 2009, respectively.
In addition, the Company has reinsured a portion of
the risk associated with GMDB and GMWB riders of U.S. variable annuities, variable annuity contract and rider
benefits of Hartford Life Insurance KK (“HLIKK”), an indirect wholly owned subsidiary, and GMDB and GMWB annuity
contract and rider benefits of Hartford Life Limited Ireland (“HLL”), an indirect wholly owned subsidiary.
F-50
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Reinsurance (continued)
The effect of reinsurance on property and casualty premiums written and earned was as follows:
| For the years ended December 31, | ||||||||||||
| Premiums Written | 2011 | 2010 | 2009 | |||||||||
|
Direct
|
$ | 10,368 | $ | 10,070 | $ | 10,185 | ||||||
|
Assumed
|
226 | 234 | 238 | |||||||||
|
Ceded
|
(742 | ) | (619 | ) | (712 | ) | ||||||
|
|
||||||||||||
|
Net
|
$ | 9,852 | $ | 9,685 | $ | 9,711 | ||||||
|
|
||||||||||||
| Premiums Earned | ||||||||||||
|
Direct
|
$ | 10,337 | $ | 10,105 | $ | 10,386 | ||||||
|
Assumed
|
225 | 256 | 253 | |||||||||
|
Ceded
|
(688 | ) | (668 | ) | (778 | ) | ||||||
|
|
||||||||||||
|
Net
|
$ | 9,874 | $ | 9,693 | $ | 9,861 | ||||||
|
|
||||||||||||
Ceded losses, which reduce losses and loss adjustment expenses incurred, were $385, $598, and $286
for the years ended December 31, 2011, 2010, and 2009, 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 agreements. 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 as of December 31, 2011 and 2010. 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-51
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; and the extent and
duration of hedging activities and hedging costs.
The Company 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 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 models.
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 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 the Company’s 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, 2011, 2010 and, 2009 no amount of DAC was charged to expense based on the
determination of recoverability.
F-52
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Deferred Policy Acquisition Costs and Present Value of Future Profits (continued)
Results
Changes in the DAC balance are as follows:
| 2011 | 2010 | 2009 | ||||||||||
|
Balance, January 1
|
$ | 9,857 | $ | 10,686 | $ | 13,248 | ||||||
|
Deferred Costs
|
2,608 | 2,648 | 2,853 | |||||||||
|
Amortization — DAC
|
(2,920 | ) | (2,665 | ) | (3,247 | ) | ||||||
|
Amortization — DAC from discontinued operations
|
— | (17 | ) | (10 | ) | |||||||
|
Amortization — Unlock benefit (charge), pre-tax [1]
|
(507 | ) | 138 | (1,010 | ) | |||||||
|
Adjustments to unrealized gains and losses on securities available-for-sale and other [2]
|
(377 | ) | (1,159 | ) | (1,031 | ) | ||||||
|
Effect of currency translation
|
83 | 215 | (39 | ) | ||||||||
|
Cumulative effect of accounting change, pre-tax [3]
|
— | 11 | (78 | ) | ||||||||
|
|
||||||||||||
|
Balance, December 31
|
$ | 8,744 | $ | 9,857 | $ | 10,686 | ||||||
|
|
||||||||||||
| [1] |
The most significant contributors to the Unlock charge recorded during the year ended
December 31, 2011 were assumption changes which reduced expected future gross profits including
additional costs associated with implementing the Japan hedging strategy and the U.S. variable
annuity macro hedge program, as well as actual separate account returns below our aggregated
estimated return.
|
|
|
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.
|
||
|
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.
|
||
| [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 Investment Canadian
Canada in 2010.
|
|
| [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.
|
As of December 31, 2011, estimated future net amortization expense of present value of future
profits for the succeeding five years is $39, $58, $24, $23 and $22 in 2012, 2013, 2014, 2015 and
2016, respectively.
F-53
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 for a potential impairment has
occurred.
During the fourth quarter of 2011, the Company changed the date of its annual impairment
test for all reporting units to October 31
st
from January 1
st
for Wealth
Management reporting units, June 30
th
for Federal Trust Corporation within Corporate, and October 1
st
for Property & Casualty Commercial and
Consumer Markets. As a result, all reporting units performed an impairment test on October 31,
2011 in addition to the annual impairment tests performed on January 1
st
or October
1
st
as applicable. The change was made to be consistent across all reporting units and
to more closely align the impairment testing date with the long-range planning and forecasting
process. The Company has determined that this change in accounting principle is preferable under
the circumstances and does not result in any delay, acceleration or avoidance of impairment. As it
was impracticable to objectively determine projected cash flows and related valuation estimates as
of each October 31 for periods prior to October 31, 2011, without applying information that has been learned since those periods, the Company has prospectively applied the
change in the annual goodwill impairment testing date from October 31, 2011.
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. If the
carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment
loss is recognized in an amount equal to that excess.
Management’s determination of the fair value of each reporting unit incorporates multiple inputs
into discounted cash flow calculations, including assumptions that market participants would make
in valuing the reporting unit. Assumptions include levels of economic capital, future business
growth, earnings projections and assets under management for certain Wealth Management reporting
units and the weighted average cost of capital used for purposes of discounting. In the case of
one business unit a market comparison approach is used to determine fair value. 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 a
reporting unit’s fair value to decrease.
Goodwill within Corporate 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
unit’s fair value of in-force business at the buy-back date. Although this goodwill was allocated
to each reporting unit, it is held in Corporate for segment reporting.
Results
The carrying amount of goodwill allocated to reporting segments is as follows:
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
| Accumulated | Discontinued | Carrying | Accumulated | Discontinued | Carrying | |||||||||||||||||||||||||||
| Gross | Impairments | Operations[1] | Value | Gross | Impairments | Operations[1] | Value | |||||||||||||||||||||||||
|
Commercial Markets
|
||||||||||||||||||||||||||||||||
|
Property
& Casualty Commercial
|
$ | 30 | $ | (30 | ) | $ | — | $ | — | $ | 30 | $ | — | $ | — | $ | 30 | |||||||||||||||
|
Consumer Markets
|
119 | — | — | 119 | 119 | — | — | 119 | ||||||||||||||||||||||||
|
Wealth Management
|
||||||||||||||||||||||||||||||||
|
Individual Life
|
224 | — | — | 224 | 224 | — | — | 224 | ||||||||||||||||||||||||
|
Retirement Plans
|
87 | — | — | 87 | 87 | — | — | 87 | ||||||||||||||||||||||||
|
Mutual Funds
|
159 | — | — | 159 | 159 | — | — | 159 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total Wealth
Management
|
470 | — | — | 470 | 470 | — | — | 470 | ||||||||||||||||||||||||
|
Corporate
|
787 | (355 | ) | (15 | ) | 417 | 940 | (355 | ) | (153 | ) | 432 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total Goodwill
|
$ | 1,406 | $ | (385 | ) | $ | (15 | ) | $ | 1,006 | $ | 1,559 | $ | (355 | ) | $ | (153 | ) | $ | 1,051 | ||||||||||||
|
|
||||||||||||||||||||||||||||||||
| [1] |
Represents goodwill written off related to Federal Trust Corporation which is currently
recorded in discontinued operations.
|
F-54
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Goodwill and Other Intangible Assets (continued)
During the second quarter of 2011, the Company wrote off the remaining $15 of goodwill
associated with the Federal Trust Corporation (“FTC”) reporting unit within Corporate due to the
announced divestiture of FTC. The write-off of the FTC reporting unit goodwill was recorded as a
loss on disposal within discontinued operations.
The Consumer
Markets reporting unit completed its annual goodwill assessment on October 1, 2011 and again on
October 31, 2011, which resulted in no impairment of goodwill. In both tests, the Consumer Markets reporting unit
passed the first step of the annual impairment tests with a significant margin. The annual
goodwill assessment for the Property & Casualty Commercial reporting unit that was performed on
October 1, 2011 resulted in a write-down of goodwill of $30, pre-tax leaving no remaining goodwill.
The results of the discounted cash flow calculations indicated that the fair value of the
reporting unit was less than the carrying value; this was due primarily to a decrease in future
expected underwriting cash flows. The decrease in future expected underwriting cash flows is
driven by an expected reduction in written premium in the short term as the Company maintains
pricing discipline in a downward market cycle, while retaining long term capabilities for future
opportunities.
The Company completed its annual goodwill assessment for the individual reporting units within the
Wealth Management operating segment and Corporate, except for the FTC reporting unit, as noted
above, on January 1, 2011 and October 31, 2011, which resulted in no impairment of goodwill. In
both tests, 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 at the January 1, 2011
test. The Individual Life reporting unit had a margin of less than 10% between fair value and book
value on January 1, 2011. As of the October 31, 2011 impairment test, the Individual Life
reporting unit had a fair value in excess of book value of approximately 15%, modest improvement from January
1, 2011 results due to improving cost of capital.
The fair value of the Individual Life reporting unit 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 assumptions change about the level
of economic capital, future business growth, earnings projections or the weighted average cost of
capital.
The annual goodwill assessment for the reporting units within Property & Casualty Commercial and
Consumer Markets was completed on October 1, 2010, which resulted in no write-downs of goodwill for
the year ended December 31, 2010.
The Company completed its annual goodwill assessment for the individual reporting units within
Wealth Management and Corporate, except for the FTC reporting unit, on 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 Retirement Plans and
Individual Life reporting units.
The Retirement Plans reporting unit passed with a margin of less than 10% between fair value and
book value. The fair value 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 assumptions change about the level of economic capital,
future business growth assumptions, earnings projections or the weighted average cost of capital.
The Individual Life reporting unit 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 hypothetical purchase
accounting required by the step two of the 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 hypothetical purchase accounting, implied goodwill exceeded the carrying amount of goodwill.
The Company completed its annual goodwill assessment for the Federal Trust Corporation (“FTC”)
reporting unit within Corporate on June 30, 2010. Downward pressure on valuations in general and
depressed prices in the banking sector in particular resulted in very few unassisted bank deals
taking place. Thus, the Company’s annual assessment resulted in an impairment charge of $153
pre-tax. This amount was reclassified to discontinued operations during the second quarter of 2011.
The Company’s goodwill impairment test on January 1, 2009 for the individual reporting units within
Wealth Management and Corporate resulted in a write-down of $32. 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 within Corporate would remain pressured for ratings-sensitive
products. The Company believed the associated goodwill 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 individual
reporting units within Property & Casualty Commercial and Consumer Markets on October 1, 2009,
which resulted in no write-downs of goodwill for the year ended December 31, 2009.
F-55
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Goodwill and Other Intangible Assets
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
Activity in acquired intangible assets that are subject to amortization is as follows:
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Gross carrying amount, beginning of year
|
$ | 89 | $ | 90 | $ | 121 | ||||||
|
Accumulated net amortization
|
25 | 18 | 47 | |||||||||
|
|
||||||||||||
|
Net carrying amount, beginning of year
|
64 | 72 | 74 | |||||||||
|
Acquisition of business
|
— | (1 | ) | 6 | ||||||||
|
Amortization, net of the accretion of interest
|
(9 | ) | (7 | ) | (8 | ) | ||||||
|
|
||||||||||||
|
Net carrying amount, end of year
|
55 | 64 | 72 | |||||||||
|
Accumulated net amortization
|
34 | 25 | 18 | |||||||||
|
|
||||||||||||
|
Gross carrying amount, end of year
|
$ | 89 | $ | 89 | $ | 90 | ||||||
|
|
||||||||||||
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, 2011, 2010 and 2009, the Company did not capitalize any costs to
extend or renew the term of a recognized intangible asset. As of December 31, 2011, the weighted
average amortization period was 13 years for total acquired intangible assets. Net amortization
expense for other intangibles is expected to be approximately $6 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-56
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Separate Accounts, Death Benefits and Other Insurance Benefit Features
Accounting Policy
The Company records the variable portion of individual variable annuities, 401(k), institutional,
403(b)/457, private placement life and variable life insurance products within separate accounts.
Separate account assets are reported at fair value and separate account liabilities are reported at
amounts consistent with separate account assets. Investment income and gains and losses from
those separate account assets accrue directly to the policyholder, who assumes the related
investment risk, and are offset by the related liability changes reported in the same line item in
the Consolidated Statements of Operations. The Company earns fees for investment management,
certain administrative expenses, and mortality and expense risks assumed which are reported in fee
income.
Certain contracts classified as universal life-type include death and other insurance benefit
features including 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 the 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 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-57
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)
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, 2011
|
$ | 1,053 | $ | 696 | $ | 113 | ||||||
|
Incurred
|
220 | 122 | 53 | |||||||||
|
Paid
|
(222 | ) | (165 | ) | — | |||||||
|
Unlock
|
53 | 287 | 62 | |||||||||
|
Currency translation adjustment
|
— | 35 | — | |||||||||
|
|
||||||||||||
|
Liability balance as of December 31, 2011
|
$ | 1,104 | $ | 975 | $ | 228 | ||||||
|
|
||||||||||||
|
Reinsurance recoverable asset, as of January 1, 2011
|
$ | 686 | $ | 36 | $ | 30 | ||||||
|
Incurred
|
128 | 18 | (8 | ) | ||||||||
|
Paid
|
(143 | ) | (30 | ) | — | |||||||
|
Unlock
|
53 | 15 | — | |||||||||
|
Currency translation adjustment
|
— | 1 | — | |||||||||
|
|
||||||||||||
|
Reinsurance recoverable asset, as of December 31,
2011
|
$ | 724 | $ | 40 | $ | 22 | ||||||
|
|
||||||||||||
| 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 | ||||||
|
|
||||||||||||
F-58
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,
2011:
| 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”) [8] | (“NAR”) [10] | (“RNAR”) [10] | Annuitant | ||||||||||||
|
MAV only
|
$ | 20,718 | $ | 5,998 | $ | 1,500 | 68 | |||||||||
|
With 5% rollup [2]
|
1,469 | 521 | 181 | 68 | ||||||||||||
|
With Earnings Protection Benefit Rider (“EPB”) [3]
|
5,378 | 940 | 104 | 65 | ||||||||||||
|
With 5% rollup & EPB
|
585 | 169 | 35 | 68 | ||||||||||||
|
|
||||||||||||||||
|
Total MAV
|
28,150 | 7,628 | 1,820 | |||||||||||||
|
Asset Protection Benefit (“APB”) [4]
|
22,343 | 3,139 | 2,042 | 66 | ||||||||||||
|
Lifetime Income Benefit (“LIB”) — Death Benefit [5]
|
1,095 | 120 | 120 | 64 | ||||||||||||
|
Reset [6] (5-7 years)
|
3,139 | 307 | 304 | 68 | ||||||||||||
|
Return of Premium (“ROP”) [7]/Other
|
21,512 | 876 | 850 | 65 | ||||||||||||
|
|
||||||||||||||||
|
Subtotal U.S. GMDB
|
76,239 | 12,070 | 5,136 | 67 | ||||||||||||
|
Less: General Account Value with U.S. GMDB
|
7,251 | |||||||||||||||
|
|
||||||||||||||||
|
Subtotal Separate Account Liabilities with GMDB
|
68,988 | |||||||||||||||
|
Separate Account Liabilities without U.S. GMDB
|
74,882 | |||||||||||||||
|
|
||||||||||||||||
|
Total Separate Account Liabilities
|
$ | 143,870 | ||||||||||||||
|
|
||||||||||||||||
|
Japan GMDB [9], [11]
|
$ | 29,234 | $ | 10,857 | $ | 9,413 | 70 | |||||||||
|
Japan GMIB [9], [11]
|
$ | 27,282 | $ | 7,502 | $ | 7,502 | 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 or 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 $34.1 billion
and $33.9 billion as of December 31, 2011 and December 31, 2010, respectively. The GRB related to the Japan GMAB and
GMWB was $701 as of December 31, 2011 and $707 as of December 31, 2010. 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, 2011, 55% of the GMDB RNAR and 65% of the GMIB NAR is reinsured to a Hartford affiliate.
|
|
| [10] |
NAR is defined as the guaranteed benefit in excess of the current AV. RNAR represents NAR reduced for reinsurance.
NAR and RNAR are highly sensitive to equity markets movements and increase when equity markets decline. Additionally
Japan’s NAR and RNAR are highly sensitive to currency movements and increase when the Yen strengthens.
|
|
| [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, 2011 | As of December 31, 2010 | ||||||
|
Equity securities (including mutual funds)
|
$ | 61,472 | $ | 75,601 | ||||
|
Cash and cash equivalents
|
7,516 | 8,365 | ||||||
|
|
||||||||
|
Total
|
$ | 68,988 | $ | 83,966 | ||||
|
|
||||||||
As of December 31, 2011 and December 31, 2010, approximately 17% and 15%, respectively, of the
equity securities above were invested in fixed income securities through these funds and
approximately 83% and 85%, respectively, were invested in equity securities.
See Note 4 for further information on guaranteed living benefits that are accounted for at fair
value, such as GMWB.
F-59
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
Unlock, the Company unlocked the amortization of the sales inducement asset. See Note 7 for more
information concerning the Unlock.
Changes in deferred sales inducement activity were as follows for the years ended December 31:
| 2011 | 2010 | 2009 | ||||||||||
|
Balance, beginning of year
|
$ | 459 | $ | 438 | $ | 553 | ||||||
|
Sales inducements deferred
|
20 | 31 | 59 | |||||||||
|
Amortization charged to income
|
(17 | ) | (8 | ) | (105 | ) | ||||||
|
Amortization — Unlock
|
(28 | ) | (2 | ) | (69 | ) | ||||||
|
|
||||||||||||
|
Balance, end of year
|
$ | 434 | $ | 459 | $ | 438 | ||||||
|
|
||||||||||||
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-60
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Reserves for Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
(continued)
Life Insurance Products Unpaid Losses and Loss Adjustment Expenses
A rollforward of liabilities, primarily from group disability products, for unpaid losses and loss
adjustment expenses follows:
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$ | 6,388 | $ | 6,131 | $ | 6,066 | ||||||
|
Reinsurance recoverables
|
209 | 213 | 231 | |||||||||
|
|
||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
6,179 | 5,918 | 5,835 | |||||||||
|
Add provision for unpaid losses and loss adjustment expenses
|
||||||||||||
|
Current year
|
3,196 | 3,260 | 3,244 | |||||||||
|
Prior years
|
98 | 70 | (88 | ) | ||||||||
|
|
||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
3,294 | 3,330 | 3,156 | |||||||||
|
Less payments
|
||||||||||||
|
Current year
|
1,524 | 1,552 | 1,580 | |||||||||
|
Prior years
|
1,635 | 1,517 | 1,493 | |||||||||
|
|
||||||||||||
|
Total payments
|
3,159 | 3,069 | 3,073 | |||||||||
|
|
||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
6,314 | 6,179 | 5,918 | |||||||||
|
Reinsurance recoverables
|
233 | 209 | 213 | |||||||||
|
|
||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$ | 6,547 | $ | 6,388 | $ | 6,131 | ||||||
|
|
||||||||||||
The unfavorable prior year development in both 2011 and 2010 is a result of lower claim
terminations, particularly in long-term disability. The favorable prior year development in 2009
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:
| 2011 | 2010 | |||||||
|
Group Life Term, Disability and Accident unpaid losses and loss adjustment expenses
|
$ | 6,547 | $ | 6,388 | ||||
|
Group Life Other unpaid losses and loss adjustment expenses
|
213 | 216 | ||||||
|
Individual Life unpaid losses and loss adjustment expenses
|
134 | 110 | ||||||
|
Future Policy Benefits
|
12,572 | 11,859 | ||||||
|
|
||||||||
|
Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
|
$ | 19,466 | $ | 18,573 | ||||
|
|
||||||||
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.
F-61
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Reserves for Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses
(continued)
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 4.4% in 2011 and 4.8% in 2010.
As of December 31, 2011 and 2010, property and casualty insurance products reserves were discounted
by a total of $542 and $524, respectively. The current accident year benefit from discounting
property and casualty insurance products reserves was $58 in 2011, $46 in 2010 and $40 in 2009. The
growth in discounting benefit over the past three years is due to growth in the workers’
compensation line of business, tempered by a reduction in the discount rate, reflecting a lower
risk-free rate of return over this period. Accretion of discounts for prior accident years totaled
$38 in 2011, $26 in 2010, and $24 in 2009. 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 $867 as of December 31, 2011 and
$896 as of December 31, 2010.
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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses,
gross
|
$ | 21,025 | $ | 21,651 | $ | 21,933 | ||||||
|
Reinsurance and other recoverables
|
3,077 | 3,441 | 3,586 | |||||||||
|
|
||||||||||||
|
Beginning liabilities for unpaid losses and loss adjustment expenses,
net
|
17,948 | 18,210 | 18,347 | |||||||||
|
|
||||||||||||
|
Add provision for unpaid losses and loss adjustment expenses
|
||||||||||||
|
Current year
|
7,420 | 6,768 | 6,596 | |||||||||
|
Prior years
|
367 | (196 | ) | (186 | ) | |||||||
|
|
||||||||||||
|
Total provision for unpaid losses and loss adjustment expenses
|
7,787 | 6,572 | 6,410 | |||||||||
|
|
||||||||||||
|
Less payments
|
||||||||||||
|
Current year
|
3,181 | 2,952 | 2,776 | |||||||||
|
Prior years
|
4,037 | 3,882 | 3,771 | |||||||||
|
|
||||||||||||
|
Total payments
|
7,218 | 6,834 | 6,547 | |||||||||
|
|
||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
18,517 | 17,948 | 18,210 | |||||||||
|
Reinsurance and other recoverables
|
3,033 | 3,077 | 3,441 | |||||||||
|
|
||||||||||||
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$ | 21,550 | $ | 21,025 | $ | 21,651 | ||||||
|
|
||||||||||||
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, 2011 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.
F-62
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)
The following table presents prior accident years reserve development:
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Auto liability
|
$ | (97 | ) | $ | (169 | ) | $ | (124 | ) | |||
|
Professional liability
|
29 | (88 | ) | (127 | ) | |||||||
|
Workers’ compensation
|
171 | (70 | ) | (92 | ) | |||||||
|
General liability
|
(40 | ) | (108 | ) | (112 | ) | ||||||
|
Package business
|
(76 | ) | (19 | ) | 38 | |||||||
|
Commercial property
|
(4 | ) | (16 | ) | — | |||||||
|
Fidelity and surety
|
(7 | ) | (5 | ) | 28 | |||||||
|
Homeowners
|
(1 | ) | 23 | 18 | ||||||||
|
Net environmental reserves
|
26 | 67 | 75 | |||||||||
|
Net asbestos reserves
|
294 | 189 | 138 | |||||||||
|
All other non-A&E
|
— | 11 | 35 | |||||||||
|
Uncollectible reinsurance
|
— | (30 | ) | (40 | ) | |||||||
|
Change in workers’ compensation discount,
including accretion
|
38 | 26 | 24 | |||||||||
|
Catastrophes
|
37 | 11 | (23 | ) | ||||||||
|
Other reserve re-estimates, net
|
(3 | ) | (18 | ) | (24 | ) | ||||||
|
|
||||||||||||
|
Total prior accident years development
|
$ | 367 | $ | (196 | ) | $ | (186 | ) | ||||
|
|
||||||||||||
Net unfavorable reserve development in 2011 primarily included the following:
| • |
a strengthening of reserves for workers’ compensation reserves, for accident years 2008
to 2010;
|
||
| • |
a strengthening of asbestos and environmental reserves;
|
||
| • |
partially offset by a release of auto liability claims for accident years 2006 to
2010; and
|
||
| • |
also offset by a release of package business liability coverages in accident years 2005
to 2009.
|
Net favorable reserve development in 2010 primarily included the following:
| • |
a release of reserves for auto liability, claims, for accident years 2002 to 2009;
|
||
| • |
a release of reserves for professional liability claims, for accident years
2004 to 2008;
|
||
| • |
a release of general liability claims, primarily related to accident years 2005 to
2008;
|
||
| • |
a release of workers’ compensation reserves related to accident years 2006 and 2007; and
|
||
| • |
partially offset by a strengthening of asbestos and environmental reserves.
|
Net favorable reserve development in 2009 primarily included the following:
| • |
a release of reserves for professional liability claims, for accident years 2003
to 2008;
|
||
| • |
a release of general liability claims, primarily related to accident years 2003 to
2007;
|
||
| • |
a release of workers’ compensation reserves; and
|
||
| • |
partially offset by a strengthening of asbestos and environmental reserves.
|
F-63
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies
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, and in addition to the matters described
below, 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, the outcome in certain matters
could, from time to time, have a material adverse effect on the Company’s 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. In March 2011, the
Company reached an agreement in principle to settle on a class basis the property casualty
insurance case for an immaterial amount. The settlement was preliminarily approved by the court in
June 2011, and is contingent upon final court approval.
F-64
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies (continued)
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 was preliminarily approved by the court in January 2012, and is
contingent upon final court approval.
The Company and certain of its present or former officers were 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, was brought on behalf of
persons who acquired Hartford common stock during the period of July 28, 2008 through February 5,
2009, and alleged 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. In September 2011, the district court dismissed the lawsuit with prejudice. The
plaintiffs did not appeal.
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, 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, and booked
an insurance recoverable for the amount paid under the settlement plus the cost of settlement
administration, less the 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. As a result,
the Company’s insurance recoverable was reduced to $45.5. 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 Company counterclaimed for coverage. In September 2011, the
arbitrators ruled in the Company’s favor and awarded approximately $50 plus interest of $3.
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 (“HIFSCO”), an indirect subsidiary of the
Company, received excessive advisory and distribution fees in violation of its statutory fiduciary
duty under Section 36(b) of the Investment Company Act of 1940. In February 2011, a nearly
identical derivative action was brought against HIFSCO in the United States District Court for the
District of New Jersey on behalf of six additional Hartford retail mutual funds. Both actions were
assigned to the Honorable Renee Marie Bumb, a judge in the District of New Jersey who was sitting
by designation with respect to the Delaware action. Plaintiffs in each action seek to rescind the
investment management agreements and distribution plans between HIFSCO and the Hartford mutual
funds and to recover the total fees charged thereunder or, in the alternative, to recover any
improper compensation HIFSCO received. In addition, plaintiffs in the New Jersey action seek
recovery of lost earnings. HIFSCO moved to dismiss both actions and, in September 2011, the
motions to dismiss were granted in part and denied in part, with leave to amend the complaints. In
November 2011, a stipulation of voluntary dismissal was filed in the Delaware action and plaintiffs
in the New Jersey action filed an amended complaint on behalf of six Hartford mutual funds, seeking
the same relief as in their original complaint. HIFSCO disputes the allegations and has filed a
partial motion to dismiss.
F-65
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies (continued)
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, 2011 and December 31, 2010, the Company reported $1.9 billion and $1.8 billion
of net asbestos reserves and $328 and $339 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-66
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies (continued)
Lease Commitments
The total rental expense on operating leases was $122, $132, and $154 in 2011, 2010, and 2009,
respectively, which excludes sublease rental income of $13, $4, and $2 in 2011, 2010 and 2009,
respectively. Future minimum lease commitments are as follows:
| Years ending December 31, | Operating Leases | |||
|
2012
|
$ | 58 | ||
|
2013
|
47 | |||
|
2014
|
34 | |||
|
2015
|
26 | |||
|
2016
|
21 | |||
|
Thereafter
|
56 | |||
|
|
||||
|
Total minimum lease payments [1]
|
$ | 242 | ||
|
|
||||
| [1] |
Excludes expected future minimum sublease income of approximately $7and $3 in 2012 and 2013,
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, 2011, the Company has outstanding commitments totaling $1.4 billion, of which
$700 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 four 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.
Additionally, $553 is largely related to commercial whole loans expected to fund in the first half
of 2012. The remaining outstanding commitments are related to various funding obligations
associated with private placement securities. These have a commitment period of one month to one
year.
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 insurers. 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 Hartford accounts for guaranty fund and other related assessments in accordance with Accounting
Standards Codification 405-30, “Insurance-Related Assessments.” 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, 2011 and 2010, the liability balance was $145 and $118 respectively.
As of December 31, 2011 and 2010, $31 and $14 related to premium tax offsets were included in other
assets. In 2011, The Company recognized $22 for expected assessments related to the Executive
Life Insurance Company of New York (ELNY) insolvency.
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, 2011, is $725. Of this $725 the legal entities have posted
collateral of $716 in the normal course of business. Based on derivative market values as of
December 31, 2011, a downgrade of one level below the current financial strength ratings by either
Moody’s or S&P could require approximately an additional $37 to be posted as collateral. Based on
derivative market values as of December 31, 2011, 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 $48 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 would post, if
required, would be primarily in the form of U.S. Treasury bills and U.S. Treasury notes.
F-67
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Income Tax
The Company recognizes taxes payable or refundable for the current year and deferred taxes for
the tax consequences of differences between the financial reporting and tax basis of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years the temporary differences are expected to reverse.
Income (loss) from continuing operations before income taxes included income (loss) from domestic
operations of $466, $2,133 and $(1,365) for 2011, 2010 and 2009, and income (loss) from foreign
operations of $(236), $224 and $(356) for 2011, 2010 and 2009. Substantially all of the income
(loss) from foreign operations is earned by a Japanese subsidiary.
The provision (benefit) for income taxes consists of the following:
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Income Tax Expense (Benefit)
|
||||||||||||
|
Current - U.S. Federal
|
$ | (495 | ) | $ | 106 | $ | 509 | |||||
|
- International
|
22 | 69 | — | |||||||||
|
|
||||||||||||
|
Total current
|
(473 | ) | 175 | 509 | ||||||||
|
|
||||||||||||
|
Deferred -
U.S. Federal Excluding NOL Carryforward
|
900 | 133 | (1,584 | ) | ||||||||
|
- Net Operating Loss Carryforward
|
(652 | ) | 1 | 712 | ||||||||
|
- International
|
(121 | ) | 303 | (475 | ) | |||||||
|
|
||||||||||||
|
Total deferred
|
127 | 437 | (1,347 | ) | ||||||||
|
|
||||||||||||
|
Total income tax expense (benefit)
|
$ | (346 | ) | $ | 612 | $ | (838 | ) | ||||
|
|
||||||||||||
Deferred tax assets (liabilities) include the following as of December 31:
| Deferred Tax Assets | 2011 | 2010 | ||||||
|
Tax discount on loss reserves
|
$ | 632 | $ | 647 | ||||
|
Tax basis deferred policy acquisition costs
|
528 | 579 | ||||||
|
Unearned premium reserve and other underwriting related reserves
|
421 | 401 | ||||||
|
Investment-related items
|
1,159 | 1,454 | ||||||
|
Insurance product derivatives
|
913 | 1,792 | ||||||
|
Employee benefits
|
523 | 555 | ||||||
|
Net unrealized losses on investments
|
— | 4 | ||||||
|
Minimum tax credit
|
868 | 1,183 | ||||||
|
Net operating loss carryover
|
747 | 88 | ||||||
|
Other
|
149 | 63 | ||||||
|
|
||||||||
|
Total Deferred Tax Assets
|
5,940 | 6,766 | ||||||
|
Valuation Allowance
|
(95 | ) | (173 | ) | ||||
|
|
||||||||
|
Deferred Tax Assets, Net of Valuation Allowance
|
5,845 | 6,593 | ||||||
|
|
||||||||
|
Deferred Tax Liabilities
|
||||||||
|
Financial statement deferred policy acquisition costs and reserves
|
(3,094 | ) | (2,721 | ) | ||||
|
Net unrealized gains on investments
|
(1,210 | ) | — | |||||
|
Other depreciable & amortizable assets
|
(104 | ) | (42 | ) | ||||
|
Other
|
(39 | ) | (105 | ) | ||||
|
|
||||||||
|
Total Deferred Tax Liabilities
|
(4,447 | ) | (2,868 | ) | ||||
|
|
||||||||
|
Net Deferred Tax Asset
|
$ | 1,398 | $ | 3,725 | ||||
|
|
||||||||
As of December 31, 2011 and 2010, the net deferred tax asset included the expected tax benefit
attributable to net operating losses of $2,239 and $327, respectively, consisting of U.S. losses of
$1,880 and $17, respectively, and foreign losses of $359 and $310. The U.S. losses expire from
2013-2031 and the foreign losses have no expiration.
F-68
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Income Tax (continued)
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 be more likely than not realized. The deferred
tax asset valuation allowance was $95, relating mostly to foreign net operating losses as of
December 31, 2011 and was $173 as of December 31, 2010. In assessing the need for a valuation
allowance, management considered future taxable temporary difference reversals, future taxable
income exclusive of reversing temporary differences and carryforwards, taxable income in open carry
back years, as well as other tax planning strategies. These tax planning strategies include
holding a portion of debt securities with market value losses until recovery, altering the level of
tax exempt securities, selling appreciated securities to offset capital losses, business
considerations such as asset-liability matching, and the sales of certain corporate assets.
Management views such tax planning strategies as prudent and feasible, and would implement them, if
necessary, to realize the deferred tax asset. Based on the availability of additional tax planning
strategies identified in the second quarter of 2011, the Company released $86, or 100% of the
valuation allowance associated with investment realized capital losses. 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.
Included in the Company’s December 31, 2011 $1.4 billion net deferred tax asset is $1.8 billion
relating to items treated as ordinary for federal income tax purposes, and a $361 net deferred tax
liability for items classified as capital in nature. The $361 capital items are comprised of $847
of gross deferred tax assets related to realized capital losses and $1,208 of gross deferred tax
liabilities related to net unrealized capital gains.
As of December 31, 2011 the Company had a current income tax receivable of $459, which is net of a
$46 payable related to Japan and due to a foreign jurisdiction. As of December 31, 2010 the
company had a current income tax payable of $78, of which $30 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. The Company is no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations for years prior to 2007. The
audit of the years 2007-2009 commenced during 2010 and is expected to conclude by the end of 2012,
with no material impact on the consolidated financial condition or results of operations. In
addition, in the second quarter of 2011 the Company recorded a tax benefit of $52 as a result of a
resolution of a tax matter with the IRS for the computation of the dividends-received deduction
(“DRD”) for years 1998, 2000 and 2001. 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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Balance, at January 1
|
$ | 48 | $ | 48 | 91 | |||||||
|
Additions based on tax positions related to the current year
|
— | — | — | |||||||||
|
Additions for tax positions for prior years
|
— | — | — | |||||||||
|
Reductions for tax positions for prior years
|
— | — | (35 | ) | ||||||||
|
Settlements
|
— | — | (8 | ) | ||||||||
|
|
||||||||||||
|
Balance, at December 31
|
$ | 48 | $ | 48 | 48 | |||||||
|
|
||||||||||||
The entire balance of the unrecognized tax benefit, if it were recognized, would affect the
effective tax rate in the period it is released.
The Company classifies interest and penalties (if applicable) as income tax expense in the
financial statements. During the year ended December 31, 2011, the Company recognized interest
income of $5, and during the years ended December 31, 2010 and 2009, the Company recognized
interest expense of $2, and $7, respectively. The Company had approximately $6 and $1 of interest
receivable accrued at December 31, 2011 and 2010, 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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Tax provision at U.S. Federal statutory rate
|
$ | 81 | 825 | (602 | ) | |||||||
|
Tax-exempt interest
|
(148 | ) | (152 | ) | (149 | ) | ||||||
|
Dividends received deduction
|
(206 | ) | (154 | ) | (188 | ) | ||||||
|
Nondeductible costs associated with warrants
|
— | — | 78 | |||||||||
|
Valuation allowance
|
(78 | ) | 87 | 30 | ||||||||
|
Goodwill
|
— | — | 12 | |||||||||
|
Other
|
5 | 6 | (19 | ) | ||||||||
|
|
||||||||||||
|
Provision for income taxes
|
$ | (346 | ) | 612 | (838 | ) | ||||||
|
|
||||||||||||
F-69
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Debt
The Hartford’s long-term debt securities are issued by either The Hartford Financial Services
Group, Inc. (“HFSG Holding Company”) or Hartford Life, Inc. (“HLI”), an indirect wholly owned
subsidiary, 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.
Debt is carried net of discount. The following table presents short-term and long-term debt by
issuance as of December 31, 2011 and 2010.
| Short-Term Debt | 2011 | 2010 | ||||||
|
Current maturities of long-term debt and capital lease obligations
|
$ | — | $ | 400 | ||||
|
|
||||||||
|
Total Short-Term Debt
|
$ | — | $ | 400 | ||||
|
|
||||||||
|
|
||||||||
|
Long-Term Debt
|
||||||||
|
Senior Notes and Debentures
|
||||||||
|
4.625% Notes, due 2013
|
320 | 320 | ||||||
|
4.75% Notes, due 2014
|
200 | 200 | ||||||
|
4.0% Notes, due 2015
|
300 | 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 | 500 | ||||||
|
5.5% Notes, due 2020
|
499 | 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 | 299 | ||||||
|
6.1% Notes, due 2041
|
325 | 324 | ||||||
|
|
||||||||
|
Total Senior Notes and Debentures
|
4,481 | 4,480 | ||||||
|
|
||||||||
|
Junior Subordinated Debentures
|
||||||||
|
3 month LIBOR plus 295 basis points, Notes due 2033
|
— | 5 | ||||||
|
8.125% Notes, due 2068
|
500 | 500 | ||||||
|
10.0% Notes, due 2068
|
1,235 | 1,222 | ||||||
|
|
||||||||
|
Total Junior Subordinated Debentures
|
1,735 | 1,727 | ||||||
|
|
||||||||
|
Total Long-Term Debt
|
$ | 6,216 | $ | 6,207 | ||||
|
|
||||||||
The effective interest rates on the 6.1% senior notes due 2041 and the 10.0% junior subordinated
debentures due 2068 are 7.9% and 15.3%, respectively. 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 2011, 2010, and 2009, respectively.
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Short-term debt
|
$ | — | $ | — | $ | 3 | ||||||
|
Long-term debt
|
508 | 508 | 473 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
$ | 508 | $ | 508 | $ | 476 | ||||||
|
|
||||||||||||
Hartford Life Insurance Company (“HLIC”), an indirect wholly owned subsidiary, became a member of
the Federal Home Loan Bank of Boston (“FHLBB”) in May 2011. Membership allows HLIC access to
collateralized advances, which may be used to support various spread-based business and enhance
liquidity management. The Connecticut Department of Insurance (“CTDOI”) will permit HLIC to pledge
up to $1.48 billion in qualifying assets to secure FHLBB advances for 2012. The amount of advances
that can be taken are dependent on the asset types pledged to secure the advances. The pledge
limit is recalculated annually based on statutory admitted assets and capital and surplus. HLIC
would need to seek the prior approval of the CTDOI if there were a desire to exceed these limits.
As of December 31, 2011, HLIC had no advances outstanding under the FHLBB facility.
F-70
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Debt (continued)
Senior Notes
On October 17, 2011, The Hartford repaid its $400, 5.25% senior notes at maturity.
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 “8.125% 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
8.125% 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 8.125% 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 8.125% 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 8.125% debentures at the final
maturity date, the Company is required to redeem the 8.125% debentures using any source of funds.
Subject to the replacement capital covenant described below, the Company can redeem the 8.125%
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 8.125% 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 8.125% 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 8.125% 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 8.125% 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.
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
$1.75 billion of the Company’s 10% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068
(the “10% debentures”) in a private placement to Allianz.
The 10% 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 10% 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 10% 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 10% 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 10% 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 10% 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 10% 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.
F-71
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Debt (continued)
Long-Term Debt Maturities
The following table reflects the Company’s long-term debt maturities.
|
2012
|
$ | — | ||
|
2013
|
320 | |||
|
2014
|
200 | |||
|
2015
|
500 | |||
|
2016
|
300 | |||
|
Thereafter
|
5,500 | |||
|
|
||||
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 registration statement.
Contingent Capital Facility
The Hartford is party to a put option agreement that provides The Hartford with the right to
require the Glen Meadow ABC Trust, a Delaware statutory trust, at any time and from time to time,
to purchase The Hartford’s junior subordinated notes in a maximum aggregate principal amount not to
exceed $500. Under the Put Option Agreement, The Hartford will pay the Glen Meadow 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 Glen Meadow ABC Trust for such period. The Hartford
has agreed to reimburse the Glen Meadow ABC Trust for certain fees and ordinary expenses. The
Company holds a variable interest in the Glen Meadow ABC Trust where the Company is not the primary
beneficiary. As a result, the Company did not consolidate the Glen Meadow ABC Trust. As of
December 31, 2011, The Hartford has not exercised its right to require Glen Meadow 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 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
|
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 Company’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, 2011, the Company has no commercial
paper outstanding.
In January 2012, the Company entered into a senior unsecured revolving credit facility (the “Credit
Facility”) that provides for borrowing capacity up to $1.75 billion (which is available in U.S.
dollars, and in Euro, Sterling, Canadian dollars and Japanese Yen) through January 6, 2016 and
terminated its $1.9 billion unsecured revolving credit facility due August 9, 2012. As of December
31, 2011, the Company was in compliance with all financial covenants under the terminated credit
facility.
Of the total availability under the Credit Facility, up to $250 is available to support letters of
credit issued on behalf of the Company or subsidiaries of the Company. Under the Credit Facility,
the Company must maintain a minimum level of consolidated net worth of $16 billion. The minimum level of consolidated net worth, as defined, will be adjusted, upon the
adoption of new DAC guidance, see Note 1, in the first quarter of 2012, by the lesser of approximately $1.0
billion, after-tax representing 70% of the adoption-related estimated DAC charge or $1.7 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’s maximum ratio of consolidated total debt to consolidated total
capitalization is 35%, and the ratio of consolidated total debt of subsidiaries to consolidated
total capitalization is limited to 10%. The Company will certify compliance with the financial
covenants for the syndicate of participating financial institutions on a quarterly basis.
The Hartford’s Japan operations also maintain two lines of credit in support of the subsidiary
operations. Both lines of credit are in the amount of $65, or ¥5 billion, and individually have
expiration dates of September 30, 2012 and January 3, 2013.
F-72
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Debt (continued)
Consumer Notes
The Company issued consumer notes through its Retail Investor Notes Program prior to 2009. 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, 2011, these consumer notes have interest rates
ranging from 4% to 5% for fixed notes and, for variable notes, based on December 31, 2011 rates,
either consumer price index plus 100 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: $155 in 2012, $78 in 2013, $13 in 2014, $30 in 2015, $18 in 2016, and $20 thereafter.
For 2011, 2010 and 2009, interest credited to holders of consumer notes was $15, $25, and $51,
respectively.
15. Equity
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.
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.
Preferred Stock
The Company has 50,000,000 shares of preferred stock authorized. See discussion below on the
Company’s participation in the Capital Purchase Program.
In connection with the Company’s investment agreement with Allianz SE, Allianz was issued 6,048,387
shares of the Company’s Series D Non-Voting Contingent Convertible Preferred Stock. Each share of
preferred stock was initially convertible into four shares of common stock. On January 9, 2009,
Allianz converted its 6,048,387 shares of Series D Preferred Stock into 24,193,548 shares of common
stock.
F-73
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Equity (continued)
Allianz SE Warrants
In connection with the Company’s October 17, 2008 investment agreement with Allianz SE, Allianz was
issued warrants, with an initial term of seven years, to purchase the Company’s Series B Non-Voting
Contingent Convertible Preferred Stock and Series C Non-Voting Contingent Convertible 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 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.
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 a cash
payment to Allianz if such stockholder approval was not obtained at the first or second stockholder
meetings to consider such approval. 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 issuance.
On March 26, 2009, the Company’s shareholders approved the conversion of the Series C Preferred
Stock. As a result of this shareholder approval, the Company was 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.
The discretionary equity issuance program that the Company announced on June12, 2009 triggered an
anti-dilution provision in the investment agreement with Allianz, which resulted in an adjustment
of the warrant exercise price to $25.25 from $25.32 and to the number of shares that may be
purchased to 69,314,987 from 69,115,324. The exercise price under the warrants is subject to
adjustment in certain circumstances.
The issuance of warrants to the U.S. Department of the Treasury triggered a contingency payment in
the investment agreement related to additional investors. Upon receipt of preliminary approval to
participate in the Capital Purchase Program, The Hartford negotiated with Allianz to modify the
form of the 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 a $200 cash payment 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 for the year ended December 31, 2009.
Additionally, the issuance of common and preferred stock during the first quarter of 2010 triggered
an anti-dilution provision in investment agreement with Allianz, which resulted in an 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.
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%.
F-74
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Equity (continued)
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.
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.
Subsequently, the declaration of a quarterly common stock dividend of $0.10 during the first,
second, third and fourth quarters of 2011 triggered a provision in The Hartford’s Warrant Agreement
with The Bank of New York Mellon, resulting in an adjustment to the warrant exercise price. The
warrant exercise price was $9.699 at December 31, 2011.
Stock Repurchase Program
On July 27, 2011 the Company’s Board of Directors authorized a $500 stock repurchase program. The
Company’s repurchase authorization, which expires on August 5, 2014, permits purchases of common
stock, as well as warrants or other derivative securities. Repurchases may be made in the open
market, through derivative, accelerated share repurchase and other privately negotiated
transactions, and through plans designed to comply with Rule 10b5-1(c) under the Securities
Exchange Act of 1934, as amended. 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 Hartford repurchased $51 of its
common stock, or 3.2 million shares, under this program for the year ended December 31, 2011.
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.
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.
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-75
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 (Unaudited)
The domestic insurance subsidiaries of The Hartford prepare their statutory financial statements in
conformity with statutory accounting practices prescribed or permitted by the applicable state
insurance department which vary materially from U.S. GAAP. Prescribed statutory accounting
practices include publications of the National Association of Insurance Commissioners (“NAIC”), as
well as state laws, regulations and general administrative rules. The differences between
statutory financial statements and financial statements prepared in accordance with U.S. GAAP vary
between domestic and foreign jurisdictions. The principal differences are that statutory financial
statements do not reflect deferred policy acquisition costs and limit deferred income taxes, life
benefit reserves predominately use interest rate and mortality assumptions prescribed by the NAIC,
bonds are generally carried at amortized cost and reinsurance assets and liabilities are presented
net of reinsurance.
The statutory net
income amounts for the years ended December 31, 2011, 2010 and 2009, and the statutory
surplus amounts as of December 31, 2011 and 2010 in the table below are based on actual statutory filings
with the applicable U.S. regulatory authorities.
| For the years ended December 31, | ||||||||||||
| Statutory Net Income (Loss) | 2011 | 2010 | 2009 | |||||||||
|
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries
|
$ | (1,272 | ) | $ | (140 | ) | $ | 1,714 | ||||
|
Property and casualty insurance subsidiaries
|
514 | 1,477 | 889 | |||||||||
|
|
||||||||||||
|
Total
|
$ | (758 | ) | $ | 1,337 | $ | 2,603 | |||||
|
|
||||||||||||
| As of December 31, | ||||||||
| Statutory Surplus | 2011 | 2010 | ||||||
|
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries
|
$ | 7,388 | $ | 7,731 | ||||
|
Property and casualty insurance subsidiaries
|
7,412 | 7,721 | ||||||
|
|
||||||||
|
Total
|
$ | 14,800 | $ | 15,452 | ||||
|
|
||||||||
The Company also holds regulatory capital and surplus for its operations in Japan. Under the
accounting practices and procedures governed by Japanese regulatory authorities, the Company’s
statutory capital and surplus was $1.3 billion, as of December 31, 2011 and 2010.
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 life insurance subsidiaries are further dependent on
cash requirements of HLI and other factors. The Company’s property-casualty insurance subsidiaries
are permitted to pay up to a maximum of approximately $1.4 billion in dividends to HFSG Holding
Company in 2012 without prior approval from the applicable insurance commissioner. The Company’s
life insurance subsidiaries are permitted to pay up to a maximum of approximately $625 in dividends
to HLI in 2012 without prior approval from the applicable insurance commissioner. The aggregate of
these amounts is the maximum the insurance subsidiaries could pay to HFSG Holding Company in 2012
without prior approval from the applicable insurance commissioner. In addition to statutory
limitations on paying dividends, the Company also takes other items into consideration when
determining dividends from subsidiaries. These considerations include, but are not limited to
expected earnings and capitalization of the subsidiary, regulatory capital requirements and
liquidity requirements of the individual operating company. In 2012, HFSG Holding Company
anticipates receiving $800 in dividends from its property-casualty insurance subsidiaries, net of
dividends to fund interest payments on an intercompany note between Hartford Holdings, Inc. and
Hartford Fire Insurance Company, and no dividends from the life insurance subsidiaries. In 2011,
HFSG Holding Company and HLI received $80 in dividends from the life insurance subsidiaries, and
HFSG Holding Company received $1.1 billion in dividends from its property-casualty insurance
subsidiaries, including $150 reflecting the net realized capital gain on the sale of SRS, $160
related to funding interest payments on an intercompany note between Hartford Holdings Inc. and
Hartford Fire Insurance Company and $800 used in conjunction with other resources at the HFSG
Holding Company principally to fund dividends, interest, capital contributions to subsidiaries and
debt maturities.
F-76
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, 2011
|
||||||||||||||||||||
|
Balance, beginning of year
|
$ | (696 | ) | $ | 385 | $ | 488 | $ | (1,178 | ) | $ | (1,001 | ) | |||||||
|
Unrealized gain on securities [1] [2]
|
1,979 | — | — | — | 1,979 | |||||||||||||||
|
Change in other-than-temporary impairment losses
recognized in other comprehensive income [1]
|
9 | — | — | — | 9 | |||||||||||||||
|
Change in net loss on cash-flow hedging instruments [1] [3]
|
— | 131 | — | — | 131 | |||||||||||||||
|
Change in foreign currency translation adjustments [1]
|
— | — | 112 | — | 112 | |||||||||||||||
|
Change in pension and other postretirement
plan adjustment [1]
|
— | — | — | (73 | ) | (73 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Balance, end of year
|
$ | 1,292 | $ | 516 | $ | 600 | $ | (1,251 | ) | $ | 1,157 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
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 | ) | |||||||
|
|
||||||||||||||||||||
| [1] |
Included in the unrealized gain (loss) balance as of December 31, 2011, 2010 and 2009 was net
unrealized gains (losses) credited to policyholders of $(65), $(87), and $(82), respectively.
Included in the AOCI components were the following:
|
| • |
Unrealized gain (loss) on securities is net of tax and deferred acquisition costs of
$1,217, $3,574, and $2,358, for the years ended December 31, 2011, 2010 and 2009,
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 $112, $647 and $244
for the years ended December 31, 2011, 2010 and 2009, respectively, and net of tax and
deferred acquisition costs of $(14). $(113) and $215 for the years ended December 31, 2011,
2010 and 2009, respectively.
|
||
| • |
Net gain (loss) on cash-flow hedging instruments is net of tax of $71, $69, and $(208)
for the years ended December 31, 2011, 2010 and 2009, respectively.
|
||
| • |
Changes in foreign currency translation adjustments are net of tax of $60, $156 and $(12)
for the years ended December 31, 2011, 2010 and 2009, respectively.
|
||
| • |
Change in pension and other postretirement plan adjustment is net of tax of $(39), $(66),
and $(86) for the years ended December 31, 2011, 2010 and 2009, respectively.
|
| [2] |
Net of reclassification adjustment for gains (losses) realized in net
income of $88, $(78), and $(1,202) for the years ended for the years
ended December 31, 2011, 2010 and 2009, respectively.
|
|
| [3] |
Net of amortization adjustment of $125, $94, and $49 to net investment
income for the years ended December 31, 2011, 2010 and 2009,
respectively.
|
F-77
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Employee 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”. The Company began using the 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 4.75% and 4.50% were the appropriate discount rates as of
December 31, 2011 to calculate the Company’s pension and other postretirement obligations,
respectively. Accordingly, the 4.75% and 4.50% discount rates will also be used to determine the
Company’s 2012 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, 2011. This assumption will be used to determine the Company’s 2012 expense.
Weighted average assumptions used in calculating the benefit obligations and the net amount
recognized for the years ended December 31, 2011 and 2010 were as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Discount rate
|
4.75 | % | 5.50 | % | 4.50 | % | 5.25 | % | ||||||||
|
Rate of increase in compensation levels
|
3.75 | % | 4.00 | % | N/A | N/A | ||||||||||
F-78
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Employee Benefit Plans (continued)
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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Discount rate
|
5.50 | % | 6.00 | % | 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 | % | 4.00 | % | 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, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Discount rate
|
5.25 | % | 5.75 | % | 6.25 | % | ||||||
|
Expected long-term rate of return on plan assets
|
7.30 | % | 7.30 | % | 7.30 | % | ||||||
Assumed health care cost trend rates were as follows:
| As of December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Pre-65 health care cost trend rate
|
8.95 | % | 9.70 | % | 9.05 | % | ||||||
|
Post-65 health care cost trend rate
|
7.75 | % | 8.25 | % | 7.60 | % | ||||||
|
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
|
2019 | 2018 | 2018 | |||||||||
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.
F-79
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Employee Benefit Plans (continued)
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, 2011 and 2010. 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 | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Benefit obligation — beginning of year
|
$ | 4,795 | $ | 4,283 | $ | 408 | $ | 401 | ||||||||
|
Service cost (excluding expenses)
|
102 | 102 | 5 | 7 | ||||||||||||
|
Interest cost
|
259 | 252 | 20 | 22 | ||||||||||||
|
Plan participants’ contributions
|
— | — | 18 | 15 | ||||||||||||
|
Actuarial loss (gain)
|
43 | 86 | (15 | ) | (7 | ) | ||||||||||
|
Settlements
|
— | (43 | ) | — | — | |||||||||||
|
Change in assumptions
|
497 | 348 | 37 | 17 | ||||||||||||
|
Benefits paid
|
(230 | ) | (234 | ) | (52 | ) | (49 | ) | ||||||||
|
Retiree drug subsidy
|
— | — | 3 | 2 | ||||||||||||
|
Foreign exchange adjustment
|
(1 | ) | 1 | — | ||||||||||||
|
|
||||||||||||||||
|
Benefit obligation — end of year
|
$ | 5,465 | $ | 4,795 | $ | 424 | $ | 408 | ||||||||
|
|
||||||||||||||||
| Other Postretirement | ||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| Change in Plan Assets | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Fair value of plan assets — beginning of year
|
$ | 3,922 | $ | 3,526 | $ | 190 | $ | 175 | ||||||||
|
Actual return on plan assets
|
613 | 434 | 13 | 15 | ||||||||||||
|
Employer contributions
|
201 | 201 | — | — | ||||||||||||
|
Benefits paid
|
(210 | ) | (228 | ) | — | — | ||||||||||
|
Expenses paid
|
(12 | ) | (12 | ) | — | — | ||||||||||
|
Foreign exchange adjustment
|
(1 | ) | 1 | — | — | |||||||||||
|
|
||||||||||||||||
|
Fair value of plan assets — end of year
|
$ | 4,513 | $ | 3,922 | $ | 203 | $ | 190 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Funded status — end of year
|
$ | (952 | ) | $ | (873 | ) | $ | (221 | ) | $ | (218 | ) | ||||
|
|
||||||||||||||||
F-80
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Employee Benefit Plans (continued)
The fair value of assets for pension benefits, and hence the funded status, presented in the
table above exclude assets of $109 and $107 held in rabbi trusts and designated for the
non-qualified pension plans as of December 31, 2011 and 2010, 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 $4,622 and $4,029 as of December 31, 2011 and 2010, respectively, and the funded
status of pension benefits would have been $(843) and $(766) as of December 31, 2011 and 2010,
respectively.
The accumulated benefit obligation for all defined benefit pension plans was $5,413 and $4,753 as
of December 31, 2011 and 2010, 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, 2011 and 2010.
| December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Projected benefit obligation
|
$ | 5,441 | $ | 4,771 | ||||
|
Accumulated benefit obligation
|
5,394 | 4,733 | ||||||
|
Fair value of plan assets
|
4,492 | 3,901 | ||||||
Amounts recognized in the Consolidated Balance Sheets consist of:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Other Assets
|
||||||||||||||||
|
Noncurrent assets
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Other Liabilities
|
||||||||||||||||
|
Current liabilities
|
21 | 19 | 34 | 34 | ||||||||||||
|
Noncurrent liabilities
|
931 | 854 | 187 | 184 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 952 | $ | 873 | $ | 221 | $ | 218 | ||||||||
|
|
||||||||||||||||
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, 2011, 2010 and 2009 include the
following components:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
|
Service cost
|
$ | 102 | $ | 102 | $ | 105 | $ | 5 | $ | 7 | $ | 6 | ||||||||||||
|
Interest cost
|
259 | 252 | 243 | 20 | 22 | 24 | ||||||||||||||||||
|
Expected return on plan assets
|
(298 | ) | (286 | ) | (276 | ) | (14 | ) | (13 | ) | (11 | ) | ||||||||||||
|
Amortization of prior service credit
|
(9 | ) | (9 | ) | (9 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||||
|
Amortization of actuarial loss
|
159 | 107 | 74 | — | — | — | ||||||||||||||||||
|
Settlements
|
— | 20 | — | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit cost
|
$ | 213 | $ | 186 | $ | 137 | $ | 10 | $ | 15 | $ | 18 | ||||||||||||
|
|
||||||||||||||||||||||||
Amounts recognized in other comprehensive income (loss) for the years ended December 31, 2011 and
2010 were as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Amortization of actuarial loss
|
$ | (159 | ) | $ | (107 | ) | $ | — | $ | — | ||||||
|
Settlement loss
|
— | (20 | ) | — | — | |||||||||||
|
Amortization of prior service credit
|
9 | 9 | 1 | 1 | ||||||||||||
|
Net loss arising during the year
|
237 | 298 | 24 | 7 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 87 | $ | 180 | $ | 25 | $ | 8 | ||||||||
|
|
||||||||||||||||
F-81
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Employee Benefit Plans (continued)
Amounts in accumulated other comprehensive income (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 | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Net loss
|
$ | 1,930 | $ | 1,852 | $ | 39 | $ | 17 | ||||||||
|
Prior service credit
|
(21 | ) | (30 | ) | 1 | — | ||||||||||
|
Transition obligation
|
— | — | 2 | — | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 1,909 | $ | 1,822 | $ | 42 | $ | 17 | ||||||||
|
|
||||||||||||||||
The estimated net loss and prior service credit for the defined benefit pension plans that will be
amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during
2012 are $216 and $(9), respectively. The estimated net loss for the other postretirement benefit
plans that will be amortized from accumulated other comprehensive income (loss) into net periodic
benefit cost during 2012 is $(1). The estimated prior service credit for the other postretirement
plans that will be amortized from accumulated other comprehensive income into net periodic benefit
cost during 2012 is an insignificant amount.
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% – 32 | % | 15% – 35 | % | ||||
|
Fixed income securities
|
50% – 70 | % | 55% – 85 | % | ||||
|
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, 2011 and 2010 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, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Equity securities
|
20 | % | 22 | % | 22 | % | 22 | % | ||||||||
|
Fixed income securities
|
62 | % | 61 | % | 78 | % | 78 | % | ||||||||
|
Alternative Assets
|
18 | % | 17 | % | — | — | ||||||||||
|
|
||||||||||||||||
|
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, 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 and U.S. Treasury STRIPS in a
duration overlay program to adjust the duration of Plan assets to better match the duration of the
benefit obligation.
Investment Valuation
For further discussion on the valuation of investments, see Note 4.
F-82
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Employee Benefit Plans (continued)
Pension Plan Assets
The fair values of the Company’s pension plan assets at December 31, 2011, by asset category are as
follows:
| Pension Plan Assets at Fair Value as of December 31, 2011 | ||||||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Short-term investments:
|
$ | 119 | $ | 549 | $ | — | $ | 668 | ||||||||
|
Fixed Income Securities:
|
||||||||||||||||
|
Corporate
|
— | 741 | 3 | 744 | ||||||||||||
|
RMBS
|
— | 334 | 11 | 345 | ||||||||||||
|
U.S. Treasuries
|
59 | 819 | — | 878 | ||||||||||||
|
Foreign government
|
— | 53 | 3 | 56 | ||||||||||||
|
CMBS
|
— | 117 | — | 117 | ||||||||||||
|
Other fixed income [1]
|
— | 70 | 4 | 74 | ||||||||||||
|
Equity Securities:
|
||||||||||||||||
|
Large-cap domestic
|
— | 570 | — | 570 | ||||||||||||
|
Mid-cap domestic
|
52 | — | — | 52 | ||||||||||||
|
Small-cap domestic
|
38 | — | — | 38 | ||||||||||||
|
International
|
217 | — | — | 217 | ||||||||||||
|
Other equities
|
— | 1 | — | 1 | ||||||||||||
|
Other investments:
|
||||||||||||||||
|
Hedge funds
|
— | — | 759 | 759 | ||||||||||||
|
|
||||||||||||||||
|
Total pension plan
assets at fair
value [2]
|
$ | 485 | $ | 3,254 | $ | 780 | $ | 4,519 | ||||||||
|
|
||||||||||||||||
| [1] |
Includes ABS and municipal bonds.
|
|
| [2] |
Excludes approximately $43 of investment payables net of investment receivables that are not
carried at fair value. Also excludes approximately $37 of interest receivable carried at fair
value.
|
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 | $ | — | $ | 481 | ||||||||
|
Fixed Income Securities:
|
||||||||||||||||
|
Corporate
|
— | 882 | 3 | 885 | ||||||||||||
|
RMBS
|
— | 450 | 9 | 459 | ||||||||||||
|
U.S. Treasuries
|
7 | 330 | — | 337 | ||||||||||||
|
Foreign government
|
— | 61 | 2 | 63 | ||||||||||||
|
CMBS
|
— | 174 | 1 | 175 | ||||||||||||
|
Other fixed income [2]
|
— | 56 | 7 | 63 | ||||||||||||
|
Equity Securities:
|
||||||||||||||||
|
Large-cap domestic
|
— | 496 | — | 496 | ||||||||||||
|
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.
|
F-83
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Employee Benefit Plans (continued)
The tables below provide a fair value level 3 roll forward for the twelve months ended
December 31, 2011 and 2010 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) | ||||||||||||||||||||||||
| Foreign | Other fixed | Hedge | ||||||||||||||||||||||
| Assets | Corporate | RMBS | government | income | funds | Totals | ||||||||||||||||||
|
Fair Value as of January 1, 2011
|
$ | 3 | $ | 9 | $ | 2 | $ | 8 | $ | 635 | $ | 657 | ||||||||||||
|
Actual return on plan assets
|
||||||||||||||||||||||||
|
Relating to assets still held
at the reporting date
|
1 | — | — | 2 | 21 | 24 | ||||||||||||||||||
|
Purchases
|
2 | 10 | 3 | 1 | 223 | 239 | ||||||||||||||||||
|
Sales
|
(1 | ) | (9 | ) | (2 | ) | (4 | ) | (120 | ) | (136 | ) | ||||||||||||
|
Transfers into Level 3
|
1 | 1 | 6 | 2 | — | 10 | ||||||||||||||||||
|
Transfers out of Level 3
|
(3 | ) | — | (6 | ) | (5 | ) | — | (14 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Fair Value as of December 31, 2011
|
$ | 3 | $ | 11 | $ | 3 | $ | 4 | $ | 759 | $ | 780 | ||||||||||||
|
|
||||||||||||||||||||||||
The transfers in and out of level 3 were due to a change in the pricing source.
| Pension Plan Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| Other fixed | ||||||||||||||||||||||||
| Foreign | income and | Hedge | ||||||||||||||||||||||
| Assets | Corporate | RMBS | government | CMBS | funds | Totals | ||||||||||||||||||
|
Fair Value as of January 1, 2010
|
$ | 12 | $ | 24 | $ | 2 | $ | 8 | $ | 501 | $ | 547 | ||||||||||||
|
Actual return on plan assets
|
||||||||||||||||||||||||
|
Relating to assets still held
at the reporting date
|
(1 | ) | — | — | 1 | 29 | 29 | |||||||||||||||||
|
Relating to assets sold during
the period
|
1 | — | — | — | 4 | 5 | ||||||||||||||||||
|
Purchases
|
6 | 62 | 2 | 9 | 200 | 279 | ||||||||||||||||||
|
Sales
|
(12 | ) | (77 | ) | — | (5 | ) | (99 | ) | (193 | ) | |||||||||||||
|
Transfers into Level 3
|
2 | — | — | 2 | — | 4 | ||||||||||||||||||
|
Transfers out of Level 3
|
(5 | ) | — | (2 | ) | (7 | ) | — | (14 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Fair Value as of December 31, 2010
|
$ | 3 | $ | 9 | $ | 2 | $ | 8 | $ | 635 | $ | 657 | ||||||||||||
|
|
||||||||||||||||||||||||
There was no Company common stock included in the Plan’s assets as of December 31, 2011 and 2010.
F-84
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Employee Benefit Plans (continued)
Other Postretirement Plan Assets
The fair value of the Company’s other postretirement plan assets at December 31, 2011, by asset
category are as follows:
| Other Postretirement Plan Assets | ||||||||||||||||
| at Fair Value as of December 31, 2011 | ||||||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Short-term investments
|
$ | — | $ | 9 | $ | — | $ | 9 | ||||||||
|
Fixed Income Securities:
|
||||||||||||||||
|
Corporate
|
— | 53 | — | 53 | ||||||||||||
|
RMBS
|
— | 48 | — | 48 | ||||||||||||
|
U.S. Treasuries
|
— | 28 | — | 28 | ||||||||||||
|
Foreign government
|
— | 2 | — | 2 | ||||||||||||
|
CMBS
|
— | 18 | — | 18 | ||||||||||||
|
Other fixed income
|
— | 4 | — | 4 | ||||||||||||
|
Equity Securities:
|
||||||||||||||||
|
Large-cap
|
— | 43 | — | 43 | ||||||||||||
|
|
||||||||||||||||
|
Total other postretirement plan assets at fair value [1]
|
$ | — | $ | 205 | $ | — | $ | 205 | ||||||||
|
|
||||||||||||||||
| [1] |
Excludes approximately $3 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, 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 | — | 57 | ||||||||||||
|
RMBS
|
— | 44 | — | 44 | ||||||||||||
|
U.S. Treasuries
|
— | 19 | — | 19 | ||||||||||||
|
CMBS
|
— | 17 | — | 17 | ||||||||||||
|
Other fixed income
|
— | 6 | — | 6 | ||||||||||||
|
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.
|
There was no Company common stock included in the other postretirement benefit plan assets as
of December 31, 2011 and 2010.
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: shares or fixed
income instruments issued by The Hartford, short sales of any type within long-only portfolios,
non-derivative securities involving the use of margin, leveraged floaters and inverse floaters,
including money market obligations, 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-85
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Employee Benefit Plans (continued)
Cash Flows
The following table illustrates the Company’s prior contributions.
| Employer Contributions | Pension Benefits | Other Postretirement Benefits | ||||||
|
2011
|
$ | 201 | $ | — | ||||
|
2010
|
$ | 201 | — | |||||
In 2011, 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 2012 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 2012, 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 2011 and 2010 were made in cash and did not include contributions of the
Company’s common stock.
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, 2011:
| Pension Benefits | Other Postretirement Benefits | |||||||
|
|
||||||||
|
2012
|
$ | 272 | $ | 38 | ||||
|
2013
|
291 | 40 | ||||||
|
2014
|
309 | 40 | ||||||
|
2015
|
325 | 40 | ||||||
|
2016
|
341 | 39 | ||||||
|
2017-2021
|
1,888 | 183 | ||||||
|
|
||||||||
|
Total
|
$ | 3,426 | $ | 380 | ||||
|
|
||||||||
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, 2011:
|
2012
|
$ | 4 | ||
|
2013
|
4 | |||
|
2014
|
5 | |||
|
2015
|
4 | |||
|
2016
|
5 | |||
|
2017-2021
|
31 | |||
|
|
||||
|
Total
|
$ | 53 | ||
|
|
||||
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 2011, 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 $59, $62, and $64 for 2011, 2010, and 2009, 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 2011, 2010, and 2009 for this plan was $1, $1 and
$2, respectively.
F-86
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 2011 and 2010, the Company issued shares from treasury in satisfaction of stock-based
compensation.
| For the year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Stock-based compensation plans expense
|
$ | 53 | $ | 94 | $ | 72 | ||||||
|
Income tax benefit
|
(19 | ) | (33 | ) | (20 | ) | ||||||
|
|
||||||||||||
|
Total stock-based compensation plans expense, after-tax
|
$ | 34 | $ | 61 | $ | 52 | ||||||
|
|
||||||||||||
The Company did not capitalize any cost of stock-based compensation. As of December 31, 2011, the
total compensation cost related to non-vested awards not yet recognized was $60, which is expected
to be recognized over a weighted average period of 1.5 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, 2011, there were 14,652,180 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 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.
F-87
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Stock Compensation Plans (continued)
Stock Option Awards
Under the 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.
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 and CPP warrants related to 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, | ||||||
| 2011 | 2009 | |||||
|
Expected dividend yield
|
1.3% | 3.2% | ||||
|
Expected annualized spot volatility
|
35.8% – 47.1% | 57.8% – 57.8% | ||||
|
Weighted average annualized volatility
|
41.7% | 57.8% | ||||
|
Risk-free spot rate
|
0.1% – 3.5% | 0.3% – 4.2% | ||||
|
Expected term
|
5.7 years | 7.3 years | ||||
A summary of the status of non-qualified stock options included in the Company’s Stock Plans as of
December 31, 2011 and changes during the year ended December 31, 2011 is presented below:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted | Remaining | |||||||||||||||
| Number of Options | Average | Contractual | Aggregate | |||||||||||||
| (in thousands) | Exercise Price | Term | Intrinsic Value | |||||||||||||
|
Outstanding at beginning of year
|
5,279 | $ | 52.90 | 2.9 | $ | — | ||||||||||
|
Granted
|
1,189 | 27.90 | ||||||||||||||
|
Exercised
|
(232 | ) | 15.41 | |||||||||||||
|
Forfeited
|
(537 | ) | 44.09 | |||||||||||||
|
Expired
|
(860 | ) | 62.11 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at end of year
|
4,839 | 47.89 | 3.7 | — | ||||||||||||
|
|
||||||||||||||||
|
Exercisable at end of year
|
3,641 | $ | 55.52 | 2.0 | — | |||||||||||
The weighted average grant-date fair value of options granted during the years ended December 31,
2011, 2010 and 2009 was $10.76, $0 and $3.06, respectively. The total intrinsic value of options
exercised during the years ended December 31, 2011, 2010 and 2009 was $2, $1, and $0, respectively.
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 (continued)
Share Awards
Share awards are valued equal to the market price of the Company’s common stock on the date of
grant, less a discount for those awards that do not provide for dividends during the vesting
period. Share awards granted under the Stock Plans and outstanding include restricted stock units,
restricted stock and performance shares. Generally, restricted stock units vest at or over 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, 2011, and
changes during the year ended December 31, 2011, is presented below:
| Shares | Weighted-Average | |||||||
| Non-vested Shares | (in thousands) | Grant-Date Fair Value | ||||||
|
Non-vested at beginning of year
|
1,889 | $ | 35.83 | |||||
|
Granted
|
3,400 | 28.22 | ||||||
|
Decrease for change in estimated performance factors
|
(232 | ) | — | |||||
|
Vested
|
(637 | ) | 46.00 | |||||
|
Forfeited
|
(256 | ) | 34.14 | |||||
|
|
||||||||
|
Non-vested at end of year
|
4,164 | $ | 27.60 | |||||
|
|
||||||||
The total fair value of shares vested during the years ended December 31, 2011, 2010 and 2009 was
$20, $13 and $8, respectively, based on estimated performance factors. The Company did not make
cash payments in settlement of stock compensation during the years ended December 31, 2011 and 2010
and 2009.
Restricted Unit awards
In 2010 and 2009, The Hartford issued restricted units as part of The Hartford’s 2005 Stock Plan.
Restricted stock unit awards under the plan have historically been settled in shares, but under
this award will be settled in cash and are thus referred to as “Restricted Units”. The economic
value recipients will ultimately realize will be identical to the value that would have been
realized if the awards had been settled in shares, i.e., upon settlement, recipients will receive
cash equal to The Hartford’s share price multiplied by the number of restricted units awarded.
Because Restricted Units will be settled in cash, the awards are remeasured at the end of each
reporting period until settlement. 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.
There were no restricted units awarded for 2011. For the year ended December 31, 2010, 2,983
restricted units were granted, and the weighted-average grant-date fair value was $24.34. As of
December 31, 2011 and 2010, 5,319 and 6,812 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.
There were no deferred stock units awarded in 2011.
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)
A summary of the status of the Company’s non-vested awards under the Deferred Stock Unit Plan
as of December 31, 2011, is presented below:
| Restricted Units | Weighted-Average | |||||||
| Non-vested Units | (in thousands) | Grant-Date Fair Value | ||||||
|
Non-vested at beginning of year
|
648 | $ | 24.70 | |||||
|
Granted
|
— | — | ||||||
|
Vested
|
(49 | ) | 24.27 | |||||
|
Forfeited
|
(108 | ) | 24.31 | |||||
|
|
||||||||
|
Non-vested at end of year
|
491 | $ | 24.84 | |||||
|
|
||||||||
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 purchased 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, 2011, there were 6,472,280
shares available for future issuance. During the years ended December 31, 2011, 2010 and 2009,
768,380, 729,598, and 2,557,893 shares were sold, respectively. The weighted average per share
fair value of the discount under the ESPP was $1.03, $1.24 and $5.99 during the years ended
December 31, 2011, 2010 and 2009, respectively. In 2011 and 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 | ||||
|
Dividend yield
|
1.4 | % | ||
|
Implied volatility
|
91.4 | % | ||
|
Risk-free spot rate
|
0.3 | % | ||
|
Expected term
|
6 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 for the year ended December 31, 2009.
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.
F-90
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Sale of Assets, Joint Venture and Subsidiary
Servicing Agreement of Hartford Life Private Placement LLC
On November 22, 2011, the Company entered into an agreement with Philadelphia Financial Group, Inc.
(“Philadelphia Financial”) whereby Philadelphia Financial will acquire certain assets that are used
to administer the Company’s private placement life insurance (“PPLI”) businesses currently
administered by Hartford Life Private Placement, LLC (“HLPP”), a subsidiary of the Company. The
PPLI business administered by HLPP includes life insurance owned by banks, corporations and high
net worth individuals, and group annuity policies. The transaction is expected to close in the
second quarter of 2012, subject to regulatory approvals and closing conditions. Upon closing,
Philadelphia Financial and the Company will enter into a servicing agreement whereby Philadelphia
Financial will service the PPLI businesses administered by HLPP. The Company will retain certain
corporate functions associated with this business as well as the mortality risk on the insurance
policies. Under the terms of the transaction, Philadelphia Financial will receive certain future
income from the policies and pay the Company $118 at closing, resulting in an estimated deferred
gain between $65and $75 after-tax, which will be amortized over the estimated life of the
underlying insurance policies. The actual amount may be different. The deferred gain is not
expected to have a material impact on the Company’s results of operations in future periods. The
assets and liabilities of the PPLI business are included in the Life Other Operations segment.
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 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 $66 and $87 as of December 31, 2011 and 2010, respectively.
See Note 20 for sale of subsidiaries that met the criteria for discontinued operations.
F-91
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. Discontinued Operations
On November 1, 2011, the Company completed a merger with CenterState Banks, Inc. (“CBI”),
pursuant to which Federal Trust Corporation (“FTC”), a wholly owned subsidiary of the Company, was
merged with and into CBI, and Federal Trust Bank (“FTB”), a federally chartered, FDIC-insured
thrift and wholly owned subsidiary of FTC, was merged with and into CenterState Bank of Florida,
N.A. (“CenterState Bank”), a wholly owned subsidiary of CBI. At the time of the mergers, FTC and
FTB held net assets including cash, certain mortgage loans, property and other assets equivalent to
liabilities assumed including deposits and other liabilities, totaling approximately $200. The
Company recorded an after-tax charge of $74 to net realized capital losses in the second quarter of
2011 for the estimated loss on disposal, including the write off of remaining goodwill of $10,
after-tax, and losses on certain FTC and FTB assets and liabilities, which were not transferred to
CenterState Bank. Upon final closing with CBI, the Company recorded a benefit of $6, after tax, in
the fourth quarter of 2011 related to the divestiture. The Company purchased certain assets and
assumed certain liabilities from FTC and FTB that were not part of the transactions with CBI and
CenterState Bank on November 1, 2011. As of December 31, 2011, the carrying value of those assets
and liabilities were $3, and $19, respectively and included in other assets and other liabilities.
The Company anticipates disposing of these assets and liabilities within twelve months after
closing, and thus any income or expense related to these assets and liabilities will be temporary
in nature. FTC is included in the Corporate category for segment reporting.
In the first quarter of 2011, the Company completed the sale of its wholly-owned subsidiary
Specialty Risk Services (“SRS”) and recorded a net realized capital gain of $150, after-tax. SRS
is a third-party claims administration business that provides self-insured, insured, and
alternative market clients with customized claims services. The Company is required to provide
certain services to SRS for up to 24 months under a Transition Services Agreement. During the
fourth quarter 2011 the Company recorded a charge of $4, after-tax, attributed to asset disposals.
SRS is included in the Property & Casualty Commercial reporting segment.
In addition, during the fourth quarter of 2010, the Company completed the sales of its indirect
wholly-owned subsidiaries Hartford Investments Canada Corporation (“HICC”) and Hartford Advantage
Investment, Ltd. (“HAIL”) and recorded net realized gains (losses) of $41 and $(4), respectively.
HICC and HAIL were transferred from Mutual Funds to Life Other Operations, effective January 1,
2009. HICC was transferred from Life Other Operations to Mutual Funds, effective January 1, 2010.
The following table summarizes the amounts related to discontinued operations in the Consolidated
Statements of Operations.
| For the years ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Revenues
|
||||||||||||
|
Fee income and other
|
$ | — | $ | 36 | $ | 29 | ||||||
|
Net investment income
|
17 | 28 | 14 | |||||||||
|
Net realized capital gains (losses)
|
(6 | ) | (5 | ) | (6 | ) | ||||||
|
Other revenues
|
48 | 213 | 231 | |||||||||
|
|
||||||||||||
|
Total revenues
|
59 | 272 | 268 | |||||||||
|
Benefits, losses and expenses
|
||||||||||||
|
Amortization of deferred policy acquisition costs and present value of future profits
|
— | 17 | 10 | |||||||||
|
Insurance operating and other expenses
|
54 | 256 | 265 | |||||||||
|
Goodwill Impairment
|
— | 153 | — | |||||||||
|
|
||||||||||||
|
Total benefits, losses and expenses
|
54 | 426 | 275 | |||||||||
|
Income (loss) before income taxes
|
5 | (154 | ) | (7 | ) | |||||||
|
Income tax expense (benefit)
|
1 | (53 | ) | (3 | ) | |||||||
|
|
||||||||||||
|
Income (loss) from operations of discontinued operations, net of tax
|
4 | (101 | ) | (4 | ) | |||||||
|
Net realized capital gain on disposal, net of tax
|
82 | 37 | — | |||||||||
|
|
||||||||||||
|
Income (loss) from discontinued operations, net of tax
|
$ | 86 | $ | (64 | ) | $ | (4 | ) | ||||
|
|
||||||||||||
F-92
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. Restructuring, Severance and Other Costs
During the year ended December 31, 2011, the Company implemented restructuring activities
across several areas aimed at reducing overall expense levels.
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 the Japanese and European operations currently included in the Life Other Operations segment.
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 activities 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, 2011, 2010 and 2009
in connection with these restructuring activities:
| 2011 | 2010 | 2009 | ||||||||||
|
Severance benefits
|
$ | 17 | $ | 25 | $ | 52 | ||||||
|
Asset impairment charges
|
— | 1 | 53 | |||||||||
|
Other contract termination charges
|
8 | — | 34 | |||||||||
|
|
||||||||||||
|
Total restructuring, severance and other costs
|
$ | 25 | $ | 26 | $ | 139 | ||||||
|
|
||||||||||||
The amounts incurred during the year ended December 31, 2011, 2010 and 2009 were recorded in
Insurance operating costs and other expenses within Corporate.
22. Quarterly Results For 2011 and 2010 (Unaudited)
| Three Months Ended | ||||||||||||||||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
|
Revenues
|
$ | 6,308 | $ | 6,257 | $ | 5,401 | $ | 3,265 | $ | 4,520 | $ | 6,602 | $ | 5,638 | $ | 5,930 | ||||||||||||||||
|
Benefits, losses and expenses
|
5,898 | 5,722 | 5,566 | 3,121 | 4,624 | 5,685 | 5,546 | 5,171 | ||||||||||||||||||||||||
|
Income (loss) from continuing operations,
net of tax
|
351 | 319 | 104 | 175 | (3 | ) | 665 | 126 | 584 | |||||||||||||||||||||||
|
Income (loss) from discontinued operations, net
of tax
|
160 | — | (80 | ) | (99 | ) | 3 | 1 | 1 | 35 | ||||||||||||||||||||||
|
Net income (loss) [1]
|
511 | 319 | 24 | 76 | — | 666 | 127 | 619 | ||||||||||||||||||||||||
|
Less: Preferred stock dividends and accretion of
discount
|
10 | 483 | 11 | 11 | 10 | 10 | 11 | 11 | ||||||||||||||||||||||||
|
Net income (loss) available to common shareholders
|
$ | 501 | $ | (164 | ) | $ | 13 | $ | 65 | $ | (10 | ) | $ | 656 | $ | 116 | $ | 608 | ||||||||||||||
|
Basic earnings (losses) per common share
|
$ | 1.13 | $ | (0.42 | ) | $ | 0.03 | $ | 0.15 | $ | (0.02 | ) | $ | 1.48 | $ | 0.26 | $ | 1.37 | ||||||||||||||
|
Diluted earnings (losses) per common share [1]
|
$ | 1.01 | $ | (0.42 | ) | $ | 0.03 | $ | 0.14 | $ | (0.02 | ) | $ | 1.34 | $ | 0.25 | $ | 1.24 | ||||||||||||||
|
Weighted average common shares outstanding, basic
|
444.6 | 393.7 | 445.1 | 443.9 | 445.3 | 444.1 | 445.1 | 444.3 | ||||||||||||||||||||||||
|
Weighted average shares outstanding and dilutive
potential common shares
|
508.2 | 393.7 | 482.4 | 480.2 | 445.3 | 495.3 | 468.9 | 497.8 | ||||||||||||||||||||||||
| [1] |
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
428.5 million and 473.4 million for the three months ended March 31, 2010 and September 30,
2011, 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, 503.1 million, 501.0 million, 494.1 million,
and 489.6 for the three months ended March 31, 2010, June 30, 2011, June 30, 2010, September
30, 2011 and December 31, 2011, respectively.
|
F-93
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN AFFILIATES
(In millions)
| As of December 31, 2011 | ||||||||||||
| 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)
|
$ | 8,901 | $ | 9,364 | $ | 9,364 | ||||||
|
States, municipalities and political subdivisions
|
12,557 | 13,260 | 13,260 | |||||||||
|
Foreign governments
|
2,030 | 2,161 | 2,161 | |||||||||
|
Public utilities
|
8,236 | 9,055 | 9,055 | |||||||||
|
All other corporate bonds
|
32,925 | 34,956 | 34,956 | |||||||||
|
All other mortgage-backed and asset-backed securities
|
14,329 | 13,013 | 13,013 | |||||||||
|
|
||||||||||||
|
Total fixed maturities, available-for-sale
|
78,978 | 81,809 | 81,809 | |||||||||
|
Fixed maturities, at fair value using fair value option
|
1,501 | 1,328 | 1,328 | |||||||||
|
|
||||||||||||
|
Total fixed maturities
|
80,479 | 83,137 | 83,137 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Equity Securities
|
||||||||||||
|
Common stocks
|
||||||||||||
|
Industrial, miscellaneous and all other
|
420 | 443 | 443 | |||||||||
|
Non-redeemable preferred stocks
|
636 | 478 | 478 | |||||||||
|
|
||||||||||||
|
Total equity securities, available-for-sale
|
1,056 | 921 | 921 | |||||||||
|
Equity securities, trading
|
32,928 | 30,499 | 30,499 | |||||||||
|
|
||||||||||||
|
Total equity securities
|
33,984 | 31,420 | 31,420 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Mortgage loans
|
5,728 | 5,977 | 5,728 | |||||||||
|
Policy loans
|
2,001 | 2,153 | 2,001 | |||||||||
|
Investments in partnerships and trusts
|
2,532 | 2,532 | 2,532 | |||||||||
|
Futures, options and miscellaneous
|
1,316 | 2,394 | 2,394 | |||||||||
|
Short-term investments
|
7,736 | 7,736 | 7,736 | |||||||||
|
|
||||||||||||
|
Total investments
|
$ | 133,776 | $ | 135,349 | $ | 134,948 | ||||||
|
|
||||||||||||
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)
| As of December 31, | ||||||||
| Condensed Balance Sheets | 2011 | 2010 | ||||||
|
Assets
|
||||||||
|
Fixed maturities, available-for-sale, at fair value
|
$ | 152 | $ | 251 | ||||
|
Other investments
|
28 | 31 | ||||||
|
Short-term investments
|
1,425 | 1,762 | ||||||
|
Investment in affiliates
|
27,575 | 25,227 | ||||||
|
Deferred income taxes
|
1,109 | 885 | ||||||
|
Unamortized Issue Costs
|
51 | 55 | ||||||
|
Other assets
|
31 | 22 | ||||||
|
|
||||||||
|
Total assets
|
$ | 30,371 | $ | 28,233 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Net payable to affiliates
|
$ | 283 | $ | 430 | ||||
|
Short-term debt (includes current maturities of long-term debt)
|
— | 400 | ||||||
|
Long-term debt
|
5,975 | 5,961 | ||||||
|
Other liabilities
|
1,203 | 1,131 | ||||||
|
|
||||||||
|
Total liabilities
|
7,461 | 7,922 | ||||||
|
Total stockholders’ equity
|
22,910 | 20,311 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 30,371 | $ | 28,233 | ||||
|
|
||||||||
| For the years ended December 31, | ||||||||||||
| Condensed Statements of Operations | 2011 | 2010 | 2009 | |||||||||
|
Net investment income
|
$ | 2 | $ | 5 | $ | 8 | ||||||
|
Net realized capital gains (losses)
|
(5 | ) | (5 | ) | (231 | ) | ||||||
|
|
||||||||||||
|
Total revenues
|
(3 | ) | — | (223 | ) | |||||||
|
Interest expense
|
490 | 489 | 457 | |||||||||
|
Other expenses
|
(41 | ) | 11 | 8 | ||||||||
|
|
||||||||||||
|
Total expenses
|
449 | 500 | 465 | |||||||||
|
Loss before income taxes and earnings (losses) of subsidiaries
|
(452 | ) | (500 | ) | (688 | ) | ||||||
|
Income tax benefit
|
(154 | ) | (170 | ) | (157 | ) | ||||||
|
|
||||||||||||
|
Loss before earnings (losses)of subsidiaries
|
(298 | ) | (330 | ) | (531 | ) | ||||||
|
Earnings (losses) of subsidiaries
|
960 | 2,010 | (356 | ) | ||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 662 | $ | 1,680 | $ | (887 | ) | |||||
|
|
||||||||||||
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto.
the consolidated financial statements and notes thereto.
S-2
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
(In millions)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
(In millions)
| For the years ended December 31, | ||||||||||||
| Condensed Statements of Cash Flows | 2011 | 2010 | 2009 | |||||||||
|
Operating Activities
|
||||||||||||
|
Net income (loss)
|
$ | 662 | $ | 1,680 | $ | (887 | ) | |||||
|
Undistributed earnings (losses) of subsidiaries
|
(961 | ) | (1,004 | ) | 1,307 | |||||||
|
Change in operating assets and liabilities
|
625 | (21 | ) | (590 | ) | |||||||
|
|
||||||||||||
|
Cash provided by (used for) operating activities
|
326 | 655 | (170 | ) | ||||||||
|
|
||||||||||||
|
Investing Activities
|
||||||||||||
|
Net sales (purchases) of short-term investments
|
432 | 233 | (412 | ) | ||||||||
|
Purchase price of business acquired
|
— | — | (10 | ) | ||||||||
|
Capital contributions to subsidiaries
|
(126 | ) | (311 | ) | (3,115 | ) | ||||||
|
|
||||||||||||
|
Cash provided by (used for) investing activities
|
306 | (78 | ) | (3,537 | ) | |||||||
|
|
||||||||||||
|
Financing Activities
|
||||||||||||
|
Issuance of long-term debt
|
— | 1,090 | — | |||||||||
|
Repayments at maturity of long-term debt
|
(400 | ) | (275 | ) | — | |||||||
|
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 | — | |||||||||
|
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 | |||||||||
|
Treasury stock acquired
|
(46 | ) | — | — | ||||||||
|
Proceeds from net issuances of common shares under incentive and stock
compensation plans and excess tax benefits
|
9 | 22 | 17 | |||||||||
|
Dividends paid — Preferred shares
|
(42 | ) | (85 | ) | (73 | ) | ||||||
|
Dividends paid — Common Shares
|
(153 | ) | (85 | ) | (149 | ) | ||||||
|
|
||||||||||||
|
Cash provided by (used for) financing activities
|
(632 | ) | (577 | ) | 3,707 | |||||||
|
Net change in cash
|
— | — | — | |||||||||
|
Cash — beginning of year
|
— | — | — | |||||||||
|
|
||||||||||||
|
Cash — end of year
|
$ | — | $ | — | $ | — | ||||||
|
|
||||||||||||
|
Supplemental Disclosure of Cash Flow Information
|
||||||||||||
|
Interest Paid
|
$ | 483 | $ | 465 | $ | 454 | ||||||
|
Dividends Received from Subsidiaries
|
$ | 976 | $ | 1,006 | $ | 243 | ||||||
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
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, 2011
|
||||||||||||||||
|
Property & Casualty Commercial
|
$ | 611 | $ | 15,438 | $ | 3,235 | $ | — | ||||||||
|
Group Benefits
|
60 | 6,796 | 76 | 266 | ||||||||||||
|
Consumer Markets
|
650 | 2,060 | 1,803 | — | ||||||||||||
|
Individual Annuity
|
2,802 | 2,538 | 29 | 17,017 | ||||||||||||
|
Individual Life
|
2,558 | 1,061 | 1 | 7,413 | ||||||||||||
|
Retirement Plans
|
714 | 436 | 2 | 7,959 | ||||||||||||
|
Mutual Funds
|
27 | — | — | 4 | ||||||||||||
|
Life Other Operations
|
1,322 | 8,635 | 74 | 43,414 | ||||||||||||
|
Property & Casualty Other Operations
|
— | 4,053 | 1 | — | ||||||||||||
|
Corporate
|
— | (1 | ) | 1 | — | |||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 8,744 | $ | 41,016 | $ | 5,222 | $ | 76,073 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
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 | — | ||||||||||||
|
Individual Annuity
|
3,216 | 2,270 | 22 | 16,871 | ||||||||||||
|
Individual Life
|
2,627 | 898 | 1 | 6,765 | ||||||||||||
|
Retirement Plans
|
842 | 458 | 3 | 6,841 | ||||||||||||
|
Mutual Funds
|
43 | — | — | 4 | ||||||||||||
|
Life Other Operations
|
1,799 | 8,307 | 72 | 46,542 | ||||||||||||
|
Property & Casualty Other Operations
|
— | 4,122 | 1 | — | ||||||||||||
|
Corporate
|
— | (1 | ) | — | — | |||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 9,857 | $ | 39,598 | $ | 5,176 | $ | 77,343 | ||||||||
|
|
||||||||||||||||
S-4
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION (continued)
(In millions)
| Amortization of | Insurance | |||||||||||||||||||||||
| Deferred Policy | Operating | |||||||||||||||||||||||
| Earned | Benefits, Losses | Acquisition Costs | Costs and | |||||||||||||||||||||
| Premiums, | Net | and Loss | and Present | Other | ||||||||||||||||||||
| Fee Income | Investment | Adjustment | Value of Future | Expenses | Net Written | |||||||||||||||||||
| Segment | and Other | Income | Expenses | Profits | [1] | Premiums | ||||||||||||||||||
|
For the year ended December 31, 2011
|
||||||||||||||||||||||||
|
Property & Casualty Commercial
|
$ | 6,224 | $ | 910 | $ | 4,584 | $ | 1,356 | $ | 726 | $ | 6,176 | ||||||||||||
|
Group Benefits
|
4,147 | 411 | 3,306 | 55 | 1,104 | N/A | ||||||||||||||||||
|
Consumer Markets
|
3,903 | 187 | 2,886 | 639 | 578 | 3,675 | ||||||||||||||||||
|
Individual Annuity
|
1,660 | 768 | 1,106 | 483 | 536 | N/A | ||||||||||||||||||
|
Individual Life
|
899 | 456 | 816 | 221 | 182 | N/A | ||||||||||||||||||
|
Retirement Plans
|
380 | 396 | 308 | 134 | 354 | N/A | ||||||||||||||||||
|
Mutual Funds
|
649 | (3 | ) | — | 47 | 448 | N/A | |||||||||||||||||
|
Life Other Operations
|
1,020 | (386 | ) | (54 | ) | 492 | 274 | N/A | ||||||||||||||||
|
Property & Casualty Other Operations
|
— | 151 | 317 | — | 24 | 1 | ||||||||||||||||||
|
Corporate
|
209 | 23 | (3 | ) | — | 710 | N/A | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 19,091 | $ | 2,913 | $ | 13,266 | $ | 3,427 | $ | 4,936 | $ | 9,852 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
For the year ended December 31, 2010
|
||||||||||||||||||||||||
|
Property & Casualty Commercial
|
$ | 5,840 | $ | 935 | $ | 3,370 | $ | 1,353 | $ | 665 | $ | 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 | ||||||||||||||||||
|
Individual Annuity
|
1,716 | 814 | 1,054 | (56 | ) | 542 | N/A | |||||||||||||||||
|
Individual Life
|
856 | 400 | 644 | 119 | 181 | N/A | ||||||||||||||||||
|
Retirement Plans
|
359 | 364 | 278 | 27 | 340 | N/A | ||||||||||||||||||
|
Mutual Funds
|
664 | (8 | ) | — | 51 | 458 | N/A | |||||||||||||||||
|
Life Other Operations
|
1,049 | 225 | 374 | 305 | 262 | N/A | ||||||||||||||||||
|
Property & Casualty Other Operations
|
1 | 163 | 251 | — | 30 | 2 | ||||||||||||||||||
|
Corporate
|
188 | 81 | (2 | ) | — | 833 | 1 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 19,070 | $ | 3,590 | $ | 12,251 | $ | 2,527 | $ | 4,915 | $ | 9,685 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
For the year ended December 31, 2009
|
||||||||||||||||||||||||
|
Property & Casualty Commercial
|
$ | 6,006 | $ | 755 | $ | 3,266 | 1,393 | 645 | 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 | ||||||||||||||||||
|
Individual Annuity
|
1,465 | 771 | 1,310 | 1,339 | 505 | N/A | ||||||||||||||||||
|
Individual Life
|
940 | 335 | 640 | 314 | 188 | N/A | ||||||||||||||||||
|
Retirement Plans
|
324 | 315 | 269 | 56 | 346 | N/A | ||||||||||||||||||
|
Mutual Funds
|
518 | (21 | ) | — | 50 | 395 | N/A | |||||||||||||||||
|
Life Other Operations
|
1,293 | 4,135 | 5,042 | 370 | 350 | N/A | ||||||||||||||||||
|
Property & Casualty Other Operations
|
— | 161 | 241 | — | 23 | 4 | ||||||||||||||||||
|
Corporate
|
223 | 173 | 153 | — | 831 | (3 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 19,232 | $ | 7,205 | $ | 17,019 | $ | 4,257 | $ | 4,878 | $ | 9,711 | ||||||||||||
|
|
||||||||||||||||||||||||
| [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, 2011
|
||||||||||||||||||||
|
Life insurance in-force
|
$ | 992,921 | $ | 139,590 | $ | 47,365 | $ | 900,696 | 5 | % | ||||||||||
|
|
||||||||||||||||||||
|
Insurance revenues
|
||||||||||||||||||||
|
Property and casualty insurance
|
$ | 10,337 | 688 | 225 | 9,874 | 2 | % | |||||||||||||
|
Life insurance and annuities
|
7,220 | 463 | 71 | 6,828 | 1 | % | ||||||||||||||
|
Accident and health insurance
|
2,122 | 61 | 63 | 2,124 | 3 | % | ||||||||||||||
|
|
||||||||||||||||||||
|
Total insurance revenues
|
$ | 19,679 | $ | 1,212 | $ | 359 | $ | 18,826 | 2 | % | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
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
|
7,261 | 518 | 128 | 6,871 | 2 | % | ||||||||||||||
|
Accident and health insurance
|
2,221 | 58 | 64 | 2,227 | 3 | % | ||||||||||||||
|
|
||||||||||||||||||||
|
Total insurance revenues
|
$ | 19,587 | $ | 1,244 | $ | 448 | $ | 18,791 | 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
|
7,216 | 433 | 91 | 6,874 | 1 | % | ||||||||||||||
|
Accident and health insurance
|
2,203 | 51 | 71 | 2,223 | 3 | % | ||||||||||||||
|
|
||||||||||||||||||||
|
Total insurance revenues
|
$ | 19,805 | $ | 1,262 | $ | 415 | $ | 18,958 | 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, | ||||||||||||||||
|
|
||||||||||||||||||||
|
2011
|
||||||||||||||||||||
|
Allowance for doubtful accounts and
other
|
$ | 119 | $ | 45 | $ | — | $ | (45 | ) | $ | 119 | |||||||||
|
Allowance for uncollectible reinsurance
|
290 | 5 | — | (5 | ) | 290 | ||||||||||||||
|
Valuation allowance on mortgage loans
|
155 | 26 | — | (79 | ) | 102 | ||||||||||||||
|
Valuation allowance for deferred taxes
|
173 | (78 | ) | — | — | 95 | ||||||||||||||
|
|
||||||||||||||||||||
|
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 | |||||||||||||||
|
|
||||||||||||||||||||
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY AND CASUALTY INSURANCE OPERATIONS
(In millions)
| Discount | Losses and Loss Adjustment | Paid Losses and | ||||||||||||||
| Deducted From | Expenses Incurred Related to: | Loss Adjustment | ||||||||||||||
| Liabilities [1] | Current Year | Prior Year | Expenses | |||||||||||||
|
Years ended December 31,
|
||||||||||||||||
|
2011
|
$ | 542 | $ | 7,420 | $ | 367 | $ | 7,218 | ||||||||
|
2010
|
$ | 524 | $ | 6,768 | $ | (196 | ) | $ | 6,834 | |||||||
|
2009
|
$ | 511 | $ | 6,596 | $ | (186 | ) | $ | 6,547 | |||||||
| [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
4.4%, 4.8%, and 5.0% for 2011, 2010, and 2009, 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,
thereunto duly authorized.
|
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
|
||||
| By: | /s/ Beth A. Bombara | |||
| Beth A. Bombara | ||||
|
Senior Vice President and Controller
(Chief Accounting Officer and duly authorized signatory) |
||||
Date: February 24, 2012
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 | February 24, 2012 | |||
|
|
||||||
|
|
Liam E. McGee | (Principal Executive Officer) | ||||
|
|
||||||
|
|
/s/ Christopher J. Swift | Executive Vice President and Chief Financial Officer | February 24, 2012 | |||
|
|
||||||
|
|
Christopher J. Swift | (Principal Financial Officer) | ||||
|
|
||||||
|
|
/s/ Beth A. Bombara | Senior Vice President and Controller | February 24, 2012 | |||
|
|
||||||
|
|
Beth A. Bombara | (Principal Accounting Officer) | ||||
|
|
||||||
|
|
* | Director | February 24, 2012 | |||
|
|
||||||
|
|
Robert B. Allardice III | |||||
|
|
||||||
|
|
* | Director | February 24, 2012 | |||
|
|
||||||
|
|
Trevor Fetter | |||||
|
|
||||||
|
|
* | Director | February 24, 2012 | |||
|
|
||||||
|
|
Paul G. Kirk, Jr. | |||||
|
|
||||||
|
|
* | Director | February 24, 2012 | |||
|
|
||||||
|
|
Kathryn A. Mikells | |||||
|
|
||||||
|
|
* | Director | February 24, 2012 | |||
|
|
||||||
|
|
Michael G. Morris | |||||
|
|
||||||
|
|
* | Director | February 24, 2012 | |||
|
|
||||||
|
|
Thomas A. Renyi | |||||
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* | Director | February 24, 2012 | |||
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Charles B. Strauss | |||||
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* | Director | February 24, 2012 | |||
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H. Patrick Swygert | |||||
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*By:
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/s/ Alan J. Kreczko | |||||
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Alan J. Kreczko | |||||
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As Attorney-in-Fact | |||||
II-1
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
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.
|
|||
|
|
||||
| 3.04 |
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 3.04 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 |
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).
|
|||
|
|
||||
| 4.06 |
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).
|
|||
|
|
||||
| 4.07 |
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).
|
|||
|
|
||||
| 4.08 |
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).
|
|||
|
|
||||
| 4.09 |
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).
|
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|
||||
| 4.10 |
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).
|
|||
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|
||||
| 4.11 |
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).
|
|||
|
|
||||
| 4.12 |
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).
|
|||
|
|
||||
| 4.13 |
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 | |||
| 4.14 |
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).
|
|||
|
|
||||
| 4.15 |
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).
|
|||
|
|
||||
| 4.16 |
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).
|
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|
||||
| 4.17 |
Warrant to Purchase Shares of Common Stock of The Hartford Financial Services Group, Inc., dated June 26, 2009 (incorporated herein by reference to Exhibit 4.1 to The Hartford’s Current Report on Form 8-K, filed June 26, 2009).
|
|||
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|
||||
| 10.01 |
Form of Depository Receipt for the Depositary Shares (included as Exhibit A to Exhibit 4.06) (incorporated herein by reference to Exhibit 4.7 to The Hartford’s Current Report on Form 8-K, filed on March 9, 2010).
|
|||
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|
||||
| 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).
|
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|
||||
| 10.03 |
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 10.1 to The Hartford’s Current Report on Form 8-K, filed June 12, 2009).
|
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|
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| 10.04 |
Preferred Partnership Agreement dated December 5, 2011 by and between The Hartford Financial Services Group, Inc., Hartford Life, Inc., Hartford Investment Financial Services, LLC, HL Investment Advisors, LLC and Wellington Management Company, LLP. †**
|
|||
|
|
||||
| 10.05 |
Four-Year Revolving Credit Facility Agreement, dated January 6, 2012, among The Hartford Financial Services Group, Inc., Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citibank, N.A., as syndication agents, and the lenders referred to therein (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed January 6, 2012).
|
|||
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|
||||
| 10.06 |
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).
|
|||
|
|
||||
| 10.07 |
Written Summary of Compensation-related Arrangement with a Named Executive Officer effective May 18, 2011 (incorporated by reference to Exhibit 10.01 to The Hartford’s Quarterly Report on Form 10-Q for the second quarter ended June 30, 2011).
|
|||
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|
||||
| *10.08 |
The Hartford Senior Executive Officer Severance Pay Plan (incorporated by reference to Exhibit 10.07 of The Hartford’s Annual Report on Form 10-K for the fiscal year ended 2010).
|
|||
|
|
||||
| *10.09 |
Amended and Restated The Hartford Senior Executive Severance Pay Plan, amended effective February 22, 2011 (incorporated by reference to Exhibit 10.08 of The Hartford’s Annual Report on Form 10-K for the fiscal year ended 2010).
|
|||
|
|
||||
| *10.10 |
2010 Incentive Stock Plan, as amended effective January 27, 2011 (incorporated by reference to Exhibit 10.09 of The Hartford’s Annual Report on Form 10-K for the fiscal year ended 2010).
|
|||
|
|
||||
| *10.11 |
The Hartford 2010 Incentive Stock Plan Administrative Rules Related to Awards for Key Employees, as amended effective December 15, 2010 (incorporated by reference to Exhibit 10.10 of The Hartford’s Annual Report on Form 10-K for the fiscal year ended 2010).
|
|||
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|
||||
| *10.12 |
The Hartford 2010 Incentive Stock Plan Administrative Rules Related to Awards for Non-Employee Directors, as amended effective December 15, 2010 (incorporated by reference to Exhibit 10.11 of The Hartford’s Annual Report on Form 10-K for the fiscal year ended 2010).
|
|||
|
|
||||
| *10.13 |
The Hartford 2010 Incentive Stock Plan Forms of Individual Award Agreements (incorporated by reference to Exhibit 10.12 of The Hartford’s Quarterly Report on Form 10-Q for the second quarter ended June 30, 2010).
|
|||
|
|
||||
| *10.14 |
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).
|
|||
|
|
||||
| *10.15 |
Written Summary of Compensation-related Arrangement with a Named Executive Officer effective May 18, 2011 (incorporated by reference to Exhibit 10.01 of The Hartford’s Quarterly Report on Form 10-Q for the second quarter ended June 30, 2011)
|
|||
|
|
||||
| *10.16 |
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).
|
|||
|
|
||||
| *10.17 |
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).
|
|||
II-3
Table of Contents
| Exhibit No. | Description | |||
| *10.18 |
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).
|
|||
|
|
||||
| *10.19 |
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).
|
|||
|
|
||||
| *10.20 |
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).
|
|||
|
|
||||
| *10.21 |
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).
|
|||
|
|
||||
| *10.22 |
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).
|
|||
|
|
||||
| *10.23 |
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).
|
|||
|
|
||||
| *10.24 |
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).
|
|||
|
|
||||
| *10.25 |
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).
|
|||
|
|
||||
| *10.26 |
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).
|
|||
|
|
||||
| *10.27 |
The Hartford Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.16 of The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).
|
|||
|
|
||||
| *10.28 |
The Hartford Investment and Savings Plan, as amended effective February 1, 2012. **
|
|||
|
|
||||
| 10.29 |
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).
|
|||
|
|
||||
| 18.01 |
Preferability letter from Deloitte & Touche LLP regarding change in accounting principle.**
|
|||
|
|
||||
| 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. **
|
|||
|
|
||||
| 101.INS |
XBRL Instance Document.
|
|||
|
|
||||
| 101.SCH |
XBRL Taxonomy Extension Schema.
|
|||
|
|
||||
| 101.CAL |
XBRL Taxonomy Extension Calculation Linkbase.
|
|||
|
|
||||
| 101.DEF |
XBRL Taxonomy Extension Definition Linkbase.
|
|||
|
|
||||
| 101.LAB |
XBRL Taxonomy Extension Label Linkbase.
|
|||
|
|
||||
| 101.PRE |
XBRL Taxonomy Extension Presentation Linkbase.
|
|||
| * |
Management contract, compensatory plan or arrangement.
|
|
| ** |
Filed with the Securities and Exchange Commission as an exhibit to this report.
|
|
| † |
Confidential treatment has been requested for the redacted portions of this agreement. A
complete copy of this agreement, including the redacted portions, has been filed separately
with the Securities and Exchange Commission.
|
II-4
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For The Hartford S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, and Executive Officers and Corporate Governance Of The HartfordItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules