Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended September 30, 2008
OR
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o |
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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)
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Delaware
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13-3317783 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
One Hartford Plaza, Hartford, Connecticut 06155
(Address of principal executive offices) (Zip Code)
(860) 547-5000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the 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
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of October 22, 2008, there were outstanding 300,570,776 shares of Common Stock, $0.01 par
value per share, of the registrant.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial
Services Group, Inc. and subsidiaries (the Company) as of September 30, 2008, and the related
condensed consolidated statements of operations and comprehensive income (loss) for the three-month
and nine-month periods ended September 30, 2008 and 2007, and changes in stockholders equity, and
cash flows for the nine-month periods ended September 30, 2008 and 2007. These interim financial
statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of the Company as of December 31,
2007, and the related consolidated statements of operations, changes in stockholders equity,
comprehensive income, and cash flows for the year then ended (not presented herein); and in our
report dated February 20, 2008 (which report includes an explanatory paragraph relating to the
Companys change in its method of accounting and reporting for defined benefit pension and other
postretirement plans in 2006), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2007 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
October 28, 2008
3
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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(In millions, except for per share data) |
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2008 |
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2007 |
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2008 |
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2007 |
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(Unaudited) |
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(Unaudited) |
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Revenues |
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Earned premiums |
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$ |
3,903 |
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$ |
4,062 |
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$ |
11,637 |
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$ |
11,760 |
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Fee income |
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1,333 |
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1,398 |
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4,056 |
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4,026 |
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Net investment income (loss) |
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Securities available-for-sale and other |
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1,103 |
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1,298 |
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3,526 |
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3,907 |
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Equity securities held for trading |
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(3,415 |
) |
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(698 |
) |
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(5,840 |
) |
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746 |
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Total net investment income (loss) |
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(2,312 |
) |
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600 |
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(2,314 |
) |
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4,653 |
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Other revenues |
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132 |
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126 |
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377 |
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368 |
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Net realized capital losses |
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(3,449 |
) |
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(363 |
) |
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(5,102 |
) |
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(565 |
) |
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Total revenues |
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(393 |
) |
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5,823 |
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8,654 |
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20,242 |
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Benefits, losses and expenses |
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Benefits, losses and loss adjustment expenses |
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3,994 |
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3,666 |
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10,937 |
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10,543 |
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Benefits, losses and loss adjustment
expenses returns credited on
International variable annuities |
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(3,415 |
) |
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(698 |
) |
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(5,840 |
) |
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746 |
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Amortization of deferred policy acquisition
costs and present value of future profits |
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1,927 |
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476 |
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3,201 |
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2,185 |
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Insurance operating costs and expenses |
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1,029 |
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973 |
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3,026 |
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2,826 |
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Interest expense |
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84 |
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67 |
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228 |
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196 |
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Other expenses |
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171 |
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164 |
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542 |
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522 |
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Total benefits, losses and expenses |
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3,790 |
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4,648 |
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12,094 |
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17,018 |
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Income (loss) before income taxes |
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(4,183 |
) |
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1,175 |
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(3,440 |
) |
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3,224 |
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Income tax expense (benefit) |
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(1,552 |
) |
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324 |
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(1,497 |
) |
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870 |
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Net income (loss) |
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$ |
(2,631 |
) |
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$ |
851 |
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$ |
(1,943 |
) |
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$ |
2,354 |
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Earnings (Loss) per share |
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Basic |
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$ |
(8.74 |
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$ |
2.70 |
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$ |
(6.29 |
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$ |
7.42 |
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Diluted |
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$ |
(8.74 |
) |
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$ |
2.68 |
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$ |
(6.29 |
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$ |
7.35 |
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Weighted average common shares outstanding |
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301.1 |
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315.4 |
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308.8 |
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317.3 |
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Weighted average common shares outstanding
and dilutive potential common shares |
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301.1 |
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318.0 |
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308.8 |
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320.1 |
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Cash dividends declared per share |
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$ |
0.53 |
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$ |
0.50 |
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$ |
1.59 |
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$ |
1.50 |
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See Notes to Condensed Consolidated Financial Statements.
4
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets
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September 30, |
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December 31, |
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(In millions, except for share and per share data) |
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2008 |
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2007 |
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(Unaudited) |
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Assets |
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Investments |
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Fixed maturities, available-for-sale, at fair value (amortized cost of $77,007 and $80,724) |
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$ |
70,091 |
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$ |
80,055 |
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Equity securities, held for trading, at fair value (cost of $33,974 and $30,489) |
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33,655 |
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36,182 |
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Equity securities, available-for-sale, at fair value (cost of $1,645 and $2,611) |
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1,730 |
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2,595 |
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Policy loans, at outstanding balance |
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2,159 |
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2,061 |
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Mortgage loans on real estate |
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6,222 |
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5,410 |
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Limited partnerships and other alternative investments |
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2,817 |
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2,566 |
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Other investments |
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1,410 |
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615 |
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Short-term investments |
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5,353 |
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1,602 |
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Total investments |
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123,437 |
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131,086 |
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Cash |
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1,963 |
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2,011 |
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Premiums receivable and agents balances |
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3,627 |
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3,681 |
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Reinsurance recoverables |
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5,675 |
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5,150 |
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Deferred policy acquisition costs and present value of future profits |
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12,272 |
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11,742 |
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Deferred income taxes |
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3,560 |
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308 |
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Goodwill |
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1,801 |
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1,726 |
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Property and equipment, net |
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1,038 |
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|
972 |
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Other assets |
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4,083 |
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|
3,739 |
|
Separate account assets |
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154,029 |
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|
199,946 |
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Total assets |
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$ |
311,485 |
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$ |
360,361 |
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Liabilities |
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Reserve for future policy benefits and unpaid losses and loss adjustment expenses |
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Property and casualty |
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$ |
22,605 |
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$ |
22,153 |
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Life |
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16,602 |
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15,331 |
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Other policyholder funds and benefits payable |
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47,208 |
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44,190 |
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Other policyholder funds and benefits payable International variable annuities |
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33,629 |
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36,152 |
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Unearned premiums |
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5,523 |
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|
5,545 |
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Short-term debt |
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|
927 |
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|
1,365 |
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Long-term debt |
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4,620 |
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|
3,142 |
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Consumer notes |
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1,225 |
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|
809 |
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Other liabilities |
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12,560 |
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|
12,524 |
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Separate account liabilities |
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154,029 |
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|
199,946 |
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Total liabilities |
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298,928 |
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341,157 |
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Commitments and Contingencies (Note 8) |
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Stockholders Equity |
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Common stock, $0.01 par value 750,000,000 shares authorized,
329,923,910 and 329,951,138 shares issued |
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3 |
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|
3 |
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Additional paid-in capital |
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6,598 |
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|
6,627 |
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Retained earnings |
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|
12,249 |
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|
14,686 |
|
Treasury stock, at cost 29,569,622 and 16,108,895 shares |
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(2,138 |
) |
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|
(1,254 |
) |
Accumulated other comprehensive loss, net of tax |
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(4,155 |
) |
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(858 |
) |
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Total stockholders equity |
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12,557 |
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|
19,204 |
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Total liabilities and stockholders equity |
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$ |
311,485 |
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$ |
360,361 |
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See Notes to Condensed Consolidated Financial Statements.
5
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders Equity
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Nine Months Ended |
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September 30, |
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(In millions, except for share data) |
|
2008 |
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2007 |
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(Unaudited) |
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Common Stock and Additional Paid-in Capital |
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Balance at beginning of period |
|
$ |
6,630 |
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|
$ |
6,324 |
|
Issuance of shares under incentive and stock compensation plans |
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(39 |
) |
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|
219 |
|
Tax benefit on employee stock options and awards |
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|
10 |
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|
45 |
|
|
|
|
|
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|
Balance at end of period |
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6,601 |
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|
6,588 |
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Retained Earnings |
|
|
|
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|
Balance at beginning of period, before cumulative effect of accounting
changes, net of tax |
|
|
14,686 |
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|
12,421 |
|
Cumulative effect of accounting changes, net of tax |
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(3 |
) |
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(41 |
) |
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Balance at beginning of period, as adjusted |
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|
14,683 |
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|
|
12,380 |
|
Net income (loss) |
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|
(1,943 |
) |
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|
2,354 |
|
Dividends declared on common stock |
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|
(491 |
) |
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|
(474 |
) |
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Balance at end of period |
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|
12,249 |
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|
14,260 |
|
|
|
|
|
|
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Treasury Stock, at Cost |
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Balance at beginning of period |
|
|
(1,254 |
) |
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|
(47 |
) |
Treasury stock acquired |
|
|
(1,000 |
) |
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|
(1,172 |
) |
Issuance of shares under incentive and stock compensation plans from treasury
stock |
|
|
133 |
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|
Return of shares under incentive and stock compensation plans to treasury stock |
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|
(17 |
) |
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|
(13 |
) |
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|
|
|
|
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|
Balance at end of period |
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|
(2,138 |
) |
|
|
(1,232 |
) |
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, Net of Tax |
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|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(858 |
) |
|
|
178 |
|
Total other comprehensive loss |
|
|
(3,297 |
) |
|
|
(844 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(4,155 |
) |
|
|
(666 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
12,557 |
|
|
$ |
18,950 |
|
|
|
|
|
|
|
|
Outstanding Shares (in thousands) |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
313,842 |
|
|
|
323,315 |
|
Treasury stock acquired |
|
|
(14,682 |
) |
|
|
(12,643 |
) |
Issuance of shares under incentive and stock compensation plans |
|
|
1,442 |
|
|
|
3,185 |
|
Return of shares under incentive and stock compensation plans to treasury stock |
|
|
(248 |
) |
|
|
(135 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
300,354 |
|
|
|
313,722 |
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,631 |
) |
|
$ |
851 |
|
|
$ |
(1,943 |
) |
|
$ |
2,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain/loss on securities |
|
|
(1,483 |
) |
|
|
(224 |
) |
|
|
(3,509 |
) |
|
|
(970 |
) |
Change in net gain/loss on cash-flow hedging instruments |
|
|
163 |
|
|
|
48 |
|
|
|
177 |
|
|
|
(20 |
) |
Change in foreign currency translation adjustments |
|
|
(63 |
) |
|
|
100 |
|
|
|
11 |
|
|
|
111 |
|
Amortization of prior service cost and actuarial net
losses included in net periodic benefit costs |
|
|
8 |
|
|
|
11 |
|
|
|
24 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
|
|
(1,375 |
) |
|
|
(65 |
) |
|
|
(3,297 |
) |
|
|
(844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(4,006 |
) |
|
$ |
786 |
|
|
$ |
(5,240 |
) |
|
$ |
1,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
6
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
(In millions) |
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,943 |
) |
|
$ |
2,354 |
|
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 |
|
|
3,201 |
|
|
|
2,185 |
|
Additions to deferred policy acquisition costs and present value of future profits |
|
|
(2,837 |
) |
|
|
(3,177 |
) |
Change in: |
|
|
|
|
|
|
|
|
Reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned
premiums |
|
|
1,689 |
|
|
|
1,216 |
|
Reinsurance recoverables |
|
|
(19 |
) |
|
|
417 |
|
Receivables and other assets |
|
|
646 |
|
|
|
(234 |
) |
Payables and accruals |
|
|
(673 |
) |
|
|
437 |
|
Accrued and deferred income taxes |
|
|
(1,604 |
) |
|
|
538 |
|
Net realized capital losses |
|
|
5,102 |
|
|
|
565 |
|
Net receipts (to) from investment contracts related to policyholder funds -
International variable annuities |
|
|
1,740 |
|
|
|
4,446 |
|
Net (increase) decrease in equity securities, held for trading |
|
|
(1,799 |
) |
|
|
(4,288 |
) |
Depreciation and amortization |
|
|
263 |
|
|
|
484 |
|
Other, net |
|
|
(828 |
) |
|
|
(376 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,938 |
|
|
|
4,567 |
|
Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from the sale/maturity/prepayment of: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
17,523 |
|
|
|
26,816 |
|
Equity securities, available-for-sale |
|
|
995 |
|
|
|
450 |
|
Mortgage loans |
|
|
351 |
|
|
|
1,245 |
|
Partnerships |
|
|
130 |
|
|
|
250 |
|
Payments for the purchase of: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
(19,392 |
) |
|
|
(30,127 |
) |
Equity securities, available-for-sale |
|
|
(689 |
) |
|
|
(865 |
) |
Mortgage loans |
|
|
(1,161 |
) |
|
|
(3,161 |
) |
Partnerships |
|
|
(556 |
) |
|
|
(929 |
) |
Purchase price of businesses acquired |
|
|
(94 |
) |
|
|
|
|
Change in policy loans, net |
|
|
(98 |
) |
|
|
1 |
|
Change in payables for collateral under securities lending, net |
|
|
(339 |
) |
|
|
2,046 |
|
Change in all other securities, net |
|
|
(524 |
) |
|
|
(379 |
) |
Additions to property and equipment, net |
|
|
(195 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(4,049 |
) |
|
|
(4,904 |
) |
Financing Activities |
|
|
|
|
|
|
|
|
Deposits and other additions to investment and universal life-type contracts |
|
|
15,752 |
|
|
|
26,315 |
|
Withdrawals and other deductions from investment and universal life-type contracts |
|
|
(20,276 |
) |
|
|
(22,678 |
) |
Net transfers from (to) separate accounts related to investment and universal life-type contracts |
|
|
5,584 |
|
|
|
(2,226 |
) |
Issuance of long-term debt |
|
|
1,487 |
|
|
|
495 |
|
Repayments at maturity of long-term debt |
|
|
(425 |
) |
|
|
(300 |
) |
Payments on capital lease obligations |
|
|
(37 |
) |
|
|
|
|
Change in short-term debt |
|
|
|
|
|
|
75 |
|
Proceeds from issuance of consumer notes |
|
|
445 |
|
|
|
465 |
|
Repayments at maturity of consumer notes |
|
|
(29 |
) |
|
|
|
|
Proceeds from issuance of shares under incentive and stock compensation plans |
|
|
47 |
|
|
|
166 |
|
Excess tax benefits on stock-based compensation |
|
|
4 |
|
|
|
29 |
|
Treasury stock acquired |
|
|
(1,000 |
) |
|
|
(1,172 |
) |
Return of shares under incentive and stock compensation plans to treasury stock |
|
|
(17 |
) |
|
|
(13 |
) |
Dividends paid |
|
|
(501 |
) |
|
|
(481 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,034 |
|
|
|
675 |
|
Foreign exchange rate effect on cash |
|
|
29 |
|
|
|
190 |
|
Net increase (decrease) in cash |
|
|
(48 |
) |
|
|
528 |
|
Cash beginning of period |
|
|
2,011 |
|
|
|
1,424 |
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
1,963 |
|
|
$ |
1,952 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
Net Cash Paid During the Period For: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
232 |
|
|
$ |
366 |
|
Interest |
|
$ |
186 |
|
|
$ |
172 |
|
See Notes to Condensed Consolidated Financial Statements.
7
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
(Unaudited)
1. Basis of Presentation and Accounting Policies
Basis of Presentation
The Hartford Financial Services Group, Inc. is a financial holding company for a group of
subsidiaries that provide investment products and life and property and casualty insurance to both
individual and business customers in the United States and internationally (collectively, The
Hartford or the Company).
The condensed 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.
The accompanying condensed consolidated financial statements and notes as of September 30, 2008,
and for the three and nine months ended September 30, 2008 and 2007 are unaudited. These financial
statements reflect all adjustments (consisting only of normal accruals) which are, in the opinion
of management, necessary for the fair presentation of the financial position, results of
operations, and cash flows for the interim periods. These condensed consolidated financial
statements and notes should be read in conjunction with the consolidated financial statements and
notes thereto included in The Hartfords 2007 Form 10-K Annual Report. The results of operations
for the interim periods should not be considered indicative of the results to be expected for the
full year.
Consolidation
The condensed consolidated financial statements include the accounts of The Hartford Financial
Services Group, Inc., companies in which the Company directly or indirectly has a controlling
financial interest and those variable interest entities in which the Company is the primary
beneficiary. The Company determines if it is the primary beneficiary using both qualitative and
quantitative analyses. Entities in which The Hartford does not have a controlling financial
interest but in which the Company has significant influence over the operating and financing
decisions are reported using the equity method. All material intercompany transactions and
balances between The Hartford and its subsidiaries and affiliates have been eliminated.
Use of Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The most significant estimates include those used in determining property and casualty reserves,
net of reinsurance; life estimated gross profits used in the valuation and amortization of assets
and liabilities associated with variable annuity and other universal life-type contracts; living
benefits required to be fair valued; valuation of investments and derivative instruments;
evaluation of other-than-temporary impairments on available-for-sale securities; pension and other
postretirement benefit obligations; and contingencies relating to corporate litigation and
regulatory matters.
Significant Accounting Policies
For a description of significant accounting policies, see Note 1 of Notes to Consolidated Financial
Statements included in The Hartfords 2007 Form 10-K Annual Report.
Adoption of New Accounting Standards
Fair Value Measurements
On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements (SFAS 157), which was issued by the Financial Accounting Standards
Board (FASB) in September 2006. The Company also adopted on January 1, 2008 the SFAS 157 related
FASB Staff Positions (FSPs) described below. For financial statement elements currently required
to be measured at fair value, SFAS 157 redefines fair value, establishes a framework for measuring
fair value under U.S. GAAP and enhances disclosures about fair value measurements. The new
definition of fair value focuses on the price that would be received to sell the asset or paid to
transfer the liability regardless of whether an observable liquid market price existed (an exit
price). SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels (Level 1, 2, and 3).
8
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
The Company applied the provisions of SFAS 157 prospectively to financial assets and financial
liabilities that are required to be measured at fair value under existing U.S. GAAP. The Company
also recorded in opening retained earnings the cumulative effect of applying SFAS 157 to certain
customized derivatives measured at fair value in accordance with Emerging Issues Task Force
(EITF) Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Involved in Energy Trading and Risk Management Activities (EITF 02-3). See Note 4
for additional information regarding SFAS 157. Specifically, see the SFAS 157 Transition discussion
within Note 4 for information regarding the effects of applying SFAS 157 on the Companys condensed
consolidated financial statements in the first quarter of 2008.
In February 2008, the FASB issued FSP No. FAS 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13 (FSP FAS 157-1). FSP FAS
157-1 provides a scope exception from SFAS 157 for the evaluation criteria on lease classification
and capital lease measurement under SFAS No. 13, Accounting for Leases and other related
accounting pronouncements. Accordingly, the Company did not apply the provisions of SFAS 157 in
determining the classification of and accounting for leases and the adoption of FSP FAS 157-1 did
not have an impact on the Companys condensed consolidated financial statements.
In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157
(FSP FAS 157-2) which delays the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008 for certain nonfinancial assets and nonfinancial liabilities. Examples of
applicable nonfinancial assets and nonfinancial liabilities to which FSP FAS 157-2 applies include,
but are not limited to:
|
|
Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a
business combination that are not subsequently remeasured at fair value; |
|
|
|
Reporting units measured at fair value in the goodwill impairment test as described in SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142), and nonfinancial assets and
nonfinancial liabilities measured at fair value in the SFAS 142 goodwill impairment test, if
applicable; and |
|
|
|
Nonfinancial long-lived assets measured at fair value for impairment assessment under SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. |
As a result of the issuance of FSP FAS 157-2, the Company did not apply the provisions of SFAS 157
to the nonfinancial assets and nonfinancial liabilities within the scope of FSP FAS 157-2.
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active (FSP FAS 157-3). This FSP clarifies the
application of SFAS 157 in a market that is not active and provides an example to illustrate key
considerations in the determination of the fair value of a financial asset when the market for that
asset is not active. The key considerations illustrated in the FSP FAS 157-3 example include the
use of an entitys own assumptions about future cash flows and appropriately risk-adjusted discount
rates, appropriate risk adjustments for nonperformance and liquidity risks, and the reliance that
an entity should place on quotes that do not reflect the result of market transactions. FSP FAS
157-3 was preceded by a press release that was jointly issued by the Office of the Chief Accountant
of the SEC and the FASB staff on September 30, 2008 which provides immediate clarification on fair
value accounting based on the measurement guidance of SFAS 157. FSP FAS 157-3 was effective upon
issuance. FSP FAS 157-3 did not have an impact on the Companys consolidated financial statements.
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an amendment of FASB Statement No. 115 (SFAS 159). The
objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity
to mitigate volatility in reported net income caused by measuring related assets and liabilities
differently. This statement permits entities to choose, at specified election dates, to measure
eligible items at fair value (i.e., the fair value option). Items eligible for the fair value
option include certain recognized financial assets and liabilities, rights and obligations under
certain insurance contracts that are not financial instruments, host financial instruments
resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial
hybrid instrument, and certain commitments. Business entities shall report unrealized gains and
losses on items for which the fair value option has been elected in net income. The fair value
option: (a) may be applied instrument by instrument, with certain exceptions; (b) is irrevocable (unless a
new election date occurs); and (c) is applied only to entire instruments and not to portions of
instruments. SFAS 159 is effective as of the beginning of an entitys first fiscal year that
begins after November 15, 2007. Companies shall report the effect of the first remeasurement to
fair value as a cumulative-effect adjustment to the opening balance of retained earnings. On
January 1, 2008, the Company did not elect to apply the provisions of SFAS 159 to financial assets
and liabilities.
9
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Future Adoption of New Accounting Standards
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). The FSP
addresses whether instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share (EPS) under the two-class method described in SFAS No. 128,
Earnings per Share (SFAS 128). The FSP requires that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of EPS pursuant to the two-class
method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those years. All prior-period EPS data
presented shall be adjusted retrospectively (including interim financial statements, summaries of
earnings, and selected financial data) to conform with the provisions of this FSP. Early
application is not permitted. The Company expects to adopt FSP EITF 03-6-1 on January 1, 2009, and
does not expect the adoption to have a material effect on the Companys earnings per share.
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock
In June 2008, the FASB issued EITF No. 07-5, Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 addresses the determination
of whether an instrument (or an embedded feature) is indexed to an entitys own stock for the
purposes of determining whether an instrument is a derivative. To the extent a derivative
instrument or embedded derivative feature is deemed indexed to an entitys own stock, it may be
exempt from the requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). EITF 07-5 concluded that an entity should determine whether an
equity-linked financial instrument (or embedded feature) is indexed to its own stock first by
evaluating the instruments contingent exercise provisions, if any, and then by evaluating the
instruments settlement provisions. EITF 07-5 will be effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.
Earlier application is not permitted. EITF 07-5 shall be applied to outstanding instruments as of
the beginning of the fiscal year in which the EITF is adopted. The Company expects to adopt EITF
07-5 on January 1, 2009, and the adoption is not expected to have a material effect on the
Companys consolidated financial condition and results of operations.
Accounting for Financial Guarantee Insurance Contractsan interpretation of FASB Statement No. 60
In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance
Contractsan interpretation of FASB Statement No. 60 (SFAS 163). The scope of SFAS 163 is
limited to financial guarantee insurance (and reinsurance) contracts issued by enterprises that are
included within the scope of SFAS No. 60, Accounting and Reporting by Insurance Enterprises
(SFAS 60) and that are not accounted for as derivative instruments. SFAS 163 excludes from its
scope insurance contracts that are similar to financial guarantee insurance such as mortgage
guaranty insurance and credit insurance on trade receivables. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all interim periods
within those fiscal years, except for certain disclosures about the insurance enterprises
risk-management activities, which are effective for the first period (including interim periods)
beginning after May 2008. Except for certain disclosures, earlier application is not permitted.
The Company does not have financial guarantee insurance products, and, accordingly does not expect
the issuance of SFAS 163 to have an effect on the Companys consolidated financial condition and
results of operations.
Accounting for Convertible Debt Instruments That May Be Settled In Cash upon Conversion (Including
Partial Cash Settlement)
In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). FSP
APB 14-1 specifies that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entitys nonconvertible debt borrowing rate
when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. FSP APB 14-1 shall be applied retrospectively to all periods presented unless
instruments were not outstanding during any period included in the financial statements. The
Company expects to adopt FSP APB 14-1 on January 1, 2009. The Company does not have any
instruments outstanding that are within the scope of FSP APB 14-1, and, accordingly, does not expect the issuance of FSP APB 14-1 to have any effect on the
Companys consolidated financial condition and results of operations.
10
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible
Assets (FSP FAS
142-3). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS 142. FSP FAS 142-3 amends paragraph 11(d) of SFAS 142 to require an
entity to use its own assumptions about renewal or extension of an arrangement, adjusted for the
entity-specific factors in paragraph 11 of SFAS 142, even when there is likely to be substantial
cost or material modifications. FSP FAS 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, with
early adoption prohibited. The provisions of FSP FAS 142-3 are to be applied prospectively to
intangible assets acquired after January 1, 2009 for the Company, although the disclosure
provisions are required for all intangible assets recognized as of or subsequent to January 1,
2009. The Company expects to adopt FSP FAS 142-3 on January 1, 2009, and does not expect the
adoption to have a material effect on the Companys consolidated financial condition and results of
operations.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 amends and expands
disclosures about an entitys derivative and hedging activities with the intent of providing users
of financial statements with an enhanced understanding of (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS
133 and its related interpretations, and (c) how derivative instruments and related hedged items
affect an entitys financial position, financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require,
comparative disclosures. The Company expects to adopt SFAS 161 on January 1, 2009.
Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133
and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161
In September 2008, the FASB issued FSP No. FAS 133-1 and FIN 45-4 Disclosures about Credit
Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation
No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN
45-4). This FSP amends SFAS 133 to require disclosures by entities that assume credit risk through
the sale of credit derivatives including credit derivatives embedded in a hybrid instrument. The
intent of these enhanced disclosures is to enable users of financial statements to assess the
potential effect on its financial position, financial performance, and cash flows from these credit
derivatives. This FSP also amends FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
to require an additional disclosure about the current status of the payment/performance risk of a
guarantee. FSP FAS 133-1 and FIN 45-4 are effective for financial statements issued for fiscal
years and interim periods ending after November 15, 2008, with early application encouraged. FSP
FAS 133-1 and FIN 45-4 encourages, but does not require, comparative disclosures. The Company
expects to adopt FSP FAS 133-1 and FIN 45-4 on December 31, 2008.
Income Taxes
The effective tax rate for the three months ended September 30, 2008 and 2007 was 37% and 28%,
respectively. The effective tax rate for the nine months ended September 30, 2008 and 2007 was 44%
and 27%, respectively. The principal causes of the difference between the effective rate and the
U.S. statutory rate of 35% were tax-exempt interest earned on invested assets and the separate
account dividends received deduction (DRD). This caused an increase in the tax benefit on the
2008 pretax loss and a decrease in the tax expense on the 2007 pretax income.
The separate account DRD is estimated for the current year using information from the prior
year-end, adjusted for current year equity market performance. The actual current year DRD can
vary from estimates based on, but not limited to, changes in eligible dividends received by the
mutual funds, amounts of distribution from these mutual funds, amounts of short-term capital gains
at the mutual fund level and the Companys taxable income before the DRD. The Company recorded
benefits related to the separate account DRD of $50 and $27 in the three months ended September 30,
2008 and 2007, and $158 and $115 in the nine months ended September 30, 2008 and 2007,
respectively. The benefit recorded in the nine months ended September 30, 2008 included prior
period adjustments of $9 related to the 2007 tax return.
11
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
In Revenue Ruling 2007-61, issued on September 25, 2007, the Internal Revenue Service (IRS)
announced its intention to issue regulations with respect to certain computational aspects of 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 had purported to change
accepted industry and IRS interpretations of the statutes governing these computational questions.
Any regulations that the IRS ultimately proposes 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 (FTC) against its U.S. tax liability for foreign taxes
paid by the Company including payments from its separate account assets. The separate account FTC
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 FTC can vary from the estimates due to actual
FTCs passed through by the mutual funds. During the second quarter of 2008, the Company booked a
tax benefit of $4 related to the 2007 provision to filed return adjustment. The Company recorded
benefits related to separate account FTC of $3 and $3 in the three months ended September 30, 2008
and 2007, and $14 and $7 in the nine months ended September 30, 2008 and 2007, respectively.
In total, there was no net change in the Companys unrecognized tax benefits during the nine months
ended September 30, 2008. Unrecognized tax benefits increased by $12 as a result of tax positions
expected to be taken on the Companys 2008 tax return and decreased by $12 with respect to tax
positions taken on the 2007 tax return. Total unrecognized tax benefits as of September 30, 2008
were $76. This entire amount, if it were recognized, would lower the effective tax rate for the
applicable periods.
The Companys federal income tax returns are routinely audited by the IRS. The examination of the
Companys tax returns for 2002 through 2003 is anticipated to be completed during 2008. The 2004
through 2006 examination began during the second quarter of 2008, and is expected to close by the
end of 2010. In addition, the Company is working with the IRS on a possible settlement of a DRD
issue related to prior periods which, if settled, may result in the booking of tax benefits in
early 2009. Such benefits are not expected to be material to the statement of operations.
2. Earnings (Loss) Per Share
The following tables present a reconciliation of net income (loss) and shares used in calculating
basic earnings (loss) per share to those used in calculating diluted earnings (loss) per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2008 |
|
|
September 30, 2008 |
|
|
|
Net Income |
|
|
|
|
|
|
Per Share |
|
|
Net Income |
|
|
|
|
|
|
Per Share |
|
|
|
(Loss) |
|
|
Shares |
|
|
Amount |
|
|
(Loss) |
|
|
Shares |
|
|
Amount |
|
Basic Earnings (Loss) per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
(2,631 |
) |
|
|
301.1 |
|
|
$ |
(8.74 |
) |
|
$ |
(1,943 |
) |
|
|
308.8 |
|
|
$ |
(6.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Share [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders plus assumed conversions |
|
$ |
(2,631 |
) |
|
|
301.1 |
|
|
$ |
(8.74 |
) |
|
$ |
(1,943 |
) |
|
|
308.8 |
|
|
$ |
(6.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2007 |
|
|
|
Net |
|
|
|
|
|
|
Per Share |
|
|
Net |
|
|
|
|
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
851 |
|
|
|
315.4 |
|
|
$ |
2.70 |
|
|
$ |
2,354 |
|
|
|
317.3 |
|
|
$ |
7.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plans |
|
|
|
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders plus assumed conversions |
|
$ |
851 |
|
|
|
318.0 |
|
|
$ |
2.68 |
|
|
$ |
2,354 |
|
|
|
320.1 |
|
|
$ |
7.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
As a result of the net loss in the three and nine months ended September 30, 2008, SFAS 128
requires the Company to use basic weighted average common shares outstanding in the
calculation of the three and nine months ended September 30, 2008 diluted earnings (loss) per
share, since the inclusion of shares for stock compensation plans of 1.0 and 1.5,
respectively, would have been antidilutive to the earnings per share calculation. In the
absence of the net loss, weighted average common shares outstanding and dilutive potential
common shares would have totaled 302.1 and 310.3, respectively. |
12
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information
The Hartford is organized into two major operations: Life and Property & Casualty, each containing
reporting segments. Within the Life and Property & Casualty operations, The Hartford conducts
business principally in eleven reporting segments. Corporate primarily includes the Companys debt
financing and related interest expense, as well as other capital raising activities and purchase
accounting adjustments.
Life
Life is organized into four groups which are comprised of six reporting segments: The Retail
Products Group (Retail) and Individual Life segments make up the Individual Markets Group. The
Retirement Plans and Group Benefits segments make up the Employer Markets Group. The Institutional
Solutions Group (Institutional) and International segments each make up their own group.
The accounting policies of the reporting segments are the same as those described in the summary of
significant accounting policies in Note 1. Life primarily evaluates performance of its segments
based on revenues, net income and the segments return on allocated capital. Each reporting
segment is allocated corporate surplus as needed to support its business. The Company charges
direct operating expenses to the appropriate segment and allocates the majority of indirect
expenses to the segments based on an intercompany expense arrangement. Inter-segment revenues
primarily occur between Lifes Other category and the reporting segments. These amounts primarily
include interest income on allocated surplus and interest charges on excess separate account
surplus. Consolidated Life net investment income is unaffected by such transactions.
Property & Casualty
Property & Casualty is organized into five reporting segments: the underwriting segments of
Personal Lines, Small Commercial, Middle Market and Specialty Commercial (collectively, Ongoing
Operations); and the Other Operations segment. For the three months ended September 30, 2008 and
2007, AARP accounted for earned premiums of $695 and $680, respectively, in Personal Lines. For
the nine months ended September 30, 2008 and 2007, AARP accounted for earned premiums of $2.1
billion and $2.0 billion, respectively, in Personal Lines.
Through inter-segment arrangements, Specialty Commercial reimburses Personal Lines, Small
Commercial and Middle Market for losses incurred from uncollectible reinsurance and losses incurred
under certain liability claims. Earned premiums assumed (ceded) under the inter-segment
arrangements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
Net assumed (ceded) earned premiums under |
|
September 30, |
|
|
September 30, |
|
inter-segment arrangements |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Personal Lines |
|
$ |
(1 |
) |
|
$ |
(2 |
) |
|
$ |
(4 |
) |
|
$ |
(5 |
) |
Small Commercial |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(23 |
) |
|
|
(22 |
) |
Middle Market |
|
|
(8 |
) |
|
|
(8 |
) |
|
|
(24 |
) |
|
|
(25 |
) |
Specialty Commercial |
|
|
17 |
|
|
|
17 |
|
|
|
51 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Measures and Other Segment Information
For further discussion of the types of products offered by each segment, see Note 3 of Notes to
Consolidated Financial Statements included in The Hartfords 2007 Form 10-K Annual Report.
One of the measures of profit or loss used by The Hartfords management in evaluating the
performance of its Life segments is net income. Within Property & Casualty, net income is a
measure of profit or loss used in evaluating the performance of Ongoing Operations and the Other
Operations segment. Within Ongoing Operations, the underwriting segments of Personal Lines, Small
Commercial, Middle Market and Specialty Commercial are evaluated by The Hartfords management
primarily based upon underwriting results. Underwriting results represent premiums earned less
incurred losses, loss adjustment expenses and underwriting expenses. The sum of underwriting
results, net investment income, net realized capital gains and losses, net servicing and other
income, other expenses, and related income taxes is net income.
Certain transactions between segments occur during the year that primarily relate to tax
settlements, insurance coverage, expense reimbursements, services provided, security transfers and
capital contributions. In addition, certain reinsurance stop loss arrangements exist between the
segments which specify that one segment will reimburse another for losses incurred in excess of a
predetermined limit. Also, one segment may purchase group annuity contracts from another to fund
pension costs and annuities to settle casualty claims.
13
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
The following tables present revenues and net income (loss) by segment. Underwriting results are
presented for the Personal Lines, Small Commercial, Middle Market and Specialty Commercial
segments, while net income (loss) is presented for each of Lifes reporting segments, total
Property & Casualty, Ongoing Operations, Other Operations, and Corporate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Revenues |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Life [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail [2] |
|
$ |
435 |
|
|
$ |
806 |
|
|
$ |
1,483 |
|
|
$ |
2,550 |
|
Individual Life |
|
|
119 |
|
|
|
267 |
|
|
|
660 |
|
|
|
853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Individual Markets Group |
|
|
554 |
|
|
|
1,073 |
|
|
|
2,143 |
|
|
|
3,403 |
|
Retirement Plans |
|
|
1 |
|
|
|
130 |
|
|
|
293 |
|
|
|
426 |
|
Group Benefits |
|
|
779 |
|
|
|
1,166 |
|
|
|
3,099 |
|
|
|
3,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Employer Markets Group |
|
|
780 |
|
|
|
1,296 |
|
|
|
3,392 |
|
|
|
3,999 |
|
International [2] |
|
|
190 |
|
|
|
247 |
|
|
|
603 |
|
|
|
643 |
|
Institutional |
|
|
(84 |
) |
|
|
782 |
|
|
|
692 |
|
|
|
1,831 |
|
Other |
|
|
(29 |
) |
|
|
25 |
|
|
|
28 |
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life segment revenues [1] [2] |
|
|
1,411 |
|
|
|
3,423 |
|
|
|
6,858 |
|
|
|
10,033 |
|
Net investment income (loss) on equity
securities, held for trading [3] |
|
|
(3,415 |
) |
|
|
(698 |
) |
|
|
(5,840 |
) |
|
|
746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life [1] [2] |
|
|
(2,004 |
) |
|
|
2,725 |
|
|
|
1,018 |
|
|
|
10,779 |
|
Property & Casualty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines |
|
|
978 |
|
|
|
984 |
|
|
|
2,941 |
|
|
|
2,904 |
|
Small Commercial |
|
|
678 |
|
|
|
683 |
|
|
|
2,048 |
|
|
|
2,048 |
|
Middle Market |
|
|
553 |
|
|
|
582 |
|
|
|
1,688 |
|
|
|
1,779 |
|
Specialty Commercial |
|
|
358 |
|
|
|
377 |
|
|
|
1,087 |
|
|
|
1,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations earned premiums |
|
|
2,567 |
|
|
|
2,626 |
|
|
|
7,764 |
|
|
|
7,870 |
|
Net investment income |
|
|
285 |
|
|
|
346 |
|
|
|
929 |
|
|
|
1,082 |
|
Other revenues [4] |
|
|
132 |
|
|
|
126 |
|
|
|
377 |
|
|
|
368 |
|
Net realized capital losses |
|
|
(1,268 |
) |
|
|
(72 |
) |
|
|
(1,455 |
) |
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ongoing Operations |
|
|
1,716 |
|
|
|
3,026 |
|
|
|
7,615 |
|
|
|
9,247 |
|
Other Operations |
|
|
(109 |
) |
|
|
60 |
|
|
|
(10 |
) |
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property & Casualty |
|
|
1,607 |
|
|
|
3,086 |
|
|
|
7,605 |
|
|
|
9,431 |
|
Corporate |
|
|
4 |
|
|
|
12 |
|
|
|
31 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues [1] [2] |
|
$ |
(393 |
) |
|
$ |
5,823 |
|
|
$ |
8,654 |
|
|
$ |
20,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
For the three and nine months ended September 30, 2008, Life segment
revenues includes other-than-temporary impairments of $1.8 billion and
$2.1 billion, respectively. |
|
[2] |
|
For the nine months ended September 30, 2008, the transition impact
related to the SFAS 157 adoption was a reduction in revenues of $616
and $34 for Retail and International, respectively. For further
discussion of the SFAS 157 adoption impact, refer to Note 4. |
|
[3] |
|
Management does not include net investment income (loss) and the
mark-to-market effects of equity securities held for trading
supporting the international variable annuity business in its segment
revenues since corresponding amounts are credited to policyholders. |
|
[4] |
|
Represents servicing revenue. |
14
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Net Income (Loss) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Life [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail [2] |
|
$ |
(822 |
) |
|
$ |
294 |
|
|
$ |
(729 |
) |
|
$ |
616 |
|
Individual Life |
|
|
(102 |
) |
|
|
55 |
|
|
|
(52 |
) |
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Individual Markets Group |
|
|
(924 |
) |
|
|
349 |
|
|
|
(781 |
) |
|
|
767 |
|
Retirement Plans |
|
|
(160 |
) |
|
|
4 |
|
|
|
(134 |
) |
|
|
54 |
|
Group Benefits |
|
|
(186 |
) |
|
|
83 |
|
|
|
(78 |
) |
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Employer Markets Group |
|
|
(346 |
) |
|
|
87 |
|
|
|
(212 |
) |
|
|
289 |
|
International [2] |
|
|
(107 |
) |
|
|
90 |
|
|
|
(27 |
) |
|
|
185 |
|
Institutional |
|
|
(393 |
) |
|
|
8 |
|
|
|
(543 |
) |
|
|
60 |
|
Other |
|
|
(45 |
) |
|
|
(9 |
) |
|
|
(73 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life [1] [2] |
|
|
(1,815 |
) |
|
|
525 |
|
|
|
(1,636 |
) |
|
|
1,281 |
|
Property & Casualty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines |
|
|
(45 |
) |
|
|
78 |
|
|
|
78 |
|
|
|
292 |
|
Small Commercial |
|
|
82 |
|
|
|
119 |
|
|
|
270 |
|
|
|
304 |
|
Middle Market |
|
|
(38 |
) |
|
|
22 |
|
|
|
14 |
|
|
|
89 |
|
Specialty Commercial |
|
|
(43 |
) |
|
|
6 |
|
|
|
20 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ongoing Operations underwriting results |
|
|
(44 |
) |
|
|
225 |
|
|
|
382 |
|
|
|
735 |
|
Net servicing income [3] |
|
|
14 |
|
|
|
16 |
|
|
|
21 |
|
|
|
41 |
|
Net investment income |
|
|
285 |
|
|
|
346 |
|
|
|
929 |
|
|
|
1,082 |
|
Net realized capital losses |
|
|
(1,268 |
) |
|
|
(72 |
) |
|
|
(1,455 |
) |
|
|
(73 |
) |
Other expenses |
|
|
(58 |
) |
|
|
(63 |
) |
|
|
(180 |
) |
|
|
(179 |
) |
Income tax (expense) benefit |
|
|
405 |
|
|
|
(111 |
) |
|
|
195 |
|
|
|
(452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations |
|
|
(666 |
) |
|
|
341 |
|
|
|
(108 |
) |
|
|
1,154 |
|
Other Operations |
|
|
(108 |
) |
|
|
12 |
|
|
|
(91 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property & Casualty |
|
|
(774 |
) |
|
|
353 |
|
|
|
(199 |
) |
|
|
1,158 |
|
Corporate |
|
|
(42 |
) |
|
|
(27 |
) |
|
|
(108 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) [1] [2] |
|
$ |
(2,631 |
) |
|
$ |
851 |
|
|
$ |
(1,943 |
) |
|
$ |
2,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
For the three and nine months ended September 30, 2008, Life segment
net income includes other-than-temporary impairments, after-tax and
DAC, of $1.1 billion and $1.3 billion, respectively. |
|
[2] |
|
For the nine months ended September 30, 2008, the transition impact
related to the SFAS 157 adoption was a reduction in net income of $209
and $11 for Retail and International, respectively. For further
discussion of the SFAS 157 adoption impact, refer to Note 4. |
|
[3] |
|
Net of expenses related to service business. |
15
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
Total
assets of The Hartford decreased primarily due to market declines impacting Life separate
account assets and reductions in the fair value of investments. Total assets of The Hartford
by reporting segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Assets |
|
2008 |
|
|
2007 |
|
Life |
|
|
|
|
|
|
|
|
Retail |
|
$ |
112,145 |
|
|
$ |
136,023 |
|
Individual Life |
|
|
14,516 |
|
|
|
15,590 |
|
|
|
|
|
|
|
|
Total Individual Markets Group |
|
|
126,661 |
|
|
|
151,613 |
|
Retirement Plans |
|
|
25,743 |
|
|
|
27,986 |
|
Group Benefits |
|
|
9,203 |
|
|
|
9,295 |
|
|
|
|
|
|
|
|
Total Employer Markets Group |
|
|
34,946 |
|
|
|
37,281 |
|
International |
|
|
40,298 |
|
|
|
41,625 |
|
Institutional |
|
|
62,598 |
|
|
|
78,766 |
|
Other |
|
|
4,364 |
|
|
|
6,891 |
|
|
|
|
|
|
|
|
Total Life |
|
|
268,867 |
|
|
|
316,176 |
|
Property & Casualty |
|
|
|
|
|
|
|
|
Ongoing Operations |
|
|
34,582 |
|
|
|
35,899 |
|
Other Operations |
|
|
5,377 |
|
|
|
5,942 |
|
|
|
|
|
|
|
|
Total Property & Casualty |
|
|
39,959 |
|
|
|
41,841 |
|
Corporate |
|
|
2,659 |
|
|
|
2,344 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
311,485 |
|
|
$ |
360,361 |
|
|
|
|
|
|
|
|
4. Fair Value Measurements
The following financial instruments are carried at fair value in the Companys condensed
consolidated financial statements: fixed maturities, equity securities, short-term investments,
freestanding and embedded derivatives, and separate account assets. These fair value disclosures
include information regarding the valuation of the Companys guaranteed benefits products and the
impact of the adoption of SFAS 157, followed by the fair value measurement and disclosure
requirements of SFAS 157.
Accounting for Guaranteed Benefits Offered With Variable Annuities
Many of the variable annuity contracts issued by the Company offer various guaranteed minimum
death, withdrawal, income and accumulation benefits. Those benefits are accounted for under SFAS
133 or AICPA Statement of Position No. 03-1 Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1). Guaranteed
minimum benefits often meet the definition of an embedded derivative under SFAS 133 as they have
notional amounts (the guaranteed balance) and underlyings (the investment fund options), they
require no initial net investment and they have terms that require or permit net settlement.
However, certain guaranteed minimum benefits settle only upon a single insurable event, such as
death (guaranteed minimum death benefits or GMDB) or living (life contingent portion of
guaranteed minimum withdrawal benefits or GMWB), and as such are outside of the scope of SFAS 133
under the insurance contract exception. Other guaranteed minimum benefits require settlement in
the form of a long-term financing transaction, such as is typical with guaranteed minimum income
benefits (GMIB), and as such do not meet the net settlement requirement in SFAS 133. Guaranteed
minimum benefits that are outside of the scope of SFAS 133 or do not meet the net settlement
requirements of SFAS 133 are accounted for as insurance benefits under SOP 03-1.
Guaranteed Benefits Accounted for at Fair Value Prior to SFAS 157
The non-life-contingent portion of the Companys GMWBs and guaranteed minimum accumulation benefits
(GMAB) meet the definition of an embedded derivative under SFAS 133, and as such are recorded at
fair value with changes in fair value recorded in net realized capital gains (losses) in net
income. In bifurcating the embedded derivative, the Company attributes to the derivative a portion
of total fees, in basis points, to be collected from the contract holder (the Attributed Fees).
Attributed Fees are set equal to the present value of future claims, in basis points, (excluding
margins for risk) expected to be paid for the guaranteed living benefit embedded derivative at the
inception of the contract. The excess of total fees collected from the contract holder over the
Attributed Fees are associated with the host variable annuity contract and are recorded in fee
income. In subsequent valuations, both the present value of future claims expected to be paid and
the present value of Attributed Fees expected to be collected are revalued based on current market
conditions and policyholder behavior assumptions. The difference between each of the two
components represents the fair value of the embedded derivative.
GMWBs provide the policyholder with a guaranteed remaining balance (GRB) if the account value is
reduced to a contractually specified minimum level, through a combination of market declines and
withdrawals. The GRB is generally equal to premiums less withdrawals. If the GRB exceeds the
account value for any policy, the contract is in-the-money by the difference between the GRB and
the account value.
16
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
During the first quarter of 2007, the Company launched its 3Win product with a GMAB rider
attached to certain Japanese variable annuity contracts. The GMAB provides the policyholder with
the GRB if the account value is less than premiums after an accumulation period, generally 10
years, and if the account value has not dropped below 80% of the initial deposit, at which point a
GMIB must either be exercised or the policyholder can elect to surrender
the contract and receive 80% of the initial deposit
without a surrender charge. The GRB is generally equal to premiums less surrenders.
A GMWB and/or GMAB contract is in the money if the contract holders guaranteed remaining benefit
becomes greater than the account value. As of September 30, 2008 and December 31, 2007, 57.9% and
19.4%, respectively, of all unreinsured U.S. GMWB in-force contracts were in the money. For
U.S. and U.K. GMWB contracts that were in the money the Companys exposure to the guaranteed
remaining benefit, after reinsurance, as of September 30, 2008 and December 31, 2007, was $3.4
billion and $146, respectively. For GMAB contracts that were in the money the Companys
exposure, as of September 30, 2008 and December 31, 2007, was $500 and $38, respectively.
Significant declines in equity markets since September 30, 2008 have significantly increased our
exposure to these guarantees.
However, the only ways the GMWB contract holder can monetize the excess of the GRB over the account
value of the contract is upon death or if their account value is reduced to a contractually
specified minimum level, through a combination of a series of withdrawals that do not exceed a
specific percentage of the premiums paid per year and market declines. If the account value is
reduced to the contractually specified minimum level, the contract holder will receive an annuity
equal to the remaining GRB and for the Companys lifetime GMWB products, payments can continue
beyond the GRB. As the amount of the excess of the GRB over the account value can fluctuate with
equity market returns on a daily basis and the ultimate lifetime 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 $3.4 billion.
For GMAB contracts, the only ways the contract holder can monetize the excess of the GRB over the
account value of the contract is upon death or by waiting until the end of the contractual deferral
period of 10 years. As the amount of the excess of the GRB over the account value can fluctuate
with equity market returns on a daily basis, the ultimate amount to be paid by the Company, if any,
is uncertain and could be significantly more or less than $500.
Derivatives That Hedge Capital Markets Risk for Guaranteed Minimum Benefits Accounted for as
Derivatives
Changes in capital markets or policyholder behavior may increase or decrease the Companys exposure
to benefits under the guarantees. The Company uses derivative transactions, including GMWB
reinsurance (described below) which meets the definition of a derivative under SFAS 133 and
customized derivative transactions, to mitigate some of that exposure. Derivatives are recorded at
fair value with changes in fair value recorded in net realized capital gains (losses) in net
income.
GMWB Reinsurance
The Company has entered into reinsurance arrangements to offset a portion of its exposure to the
GMWB for the remaining lives of covered contracts. Reinsurance contracts covering GMWB are
considered freestanding derivatives that are recorded at fair value, with changes in fair value
recorded in net realized gains/losses in net income.
17
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
Customized Derivatives
The Company has entered into customized swap contracts to hedge certain risk components for the
remaining term of certain blocks of non-reinsured U.S. GMWB riders. These customized derivative
contracts provide protection from capital markets risks based on policyholder behavior assumptions
specified by the Company at the inception of the derivative transactions. Due to the significance
of the non-observable inputs associated with pricing swap contracts entered into in 2007, the
initial difference between the transaction price and modeled value of $51 was deferred in
accordance with EITF 02-3 and included in other assets in the condensed consolidated balance
sheets. The swap contract entered into in 2008 resulted in a loss at inception of approximately
$20 before the effects of DAC amortization and income taxes, as market values on similar
instruments were lower than the transaction price.
Other Derivative Instruments
The Company uses other hedging instruments to hedge its unreinsured GMWB exposure. These
instruments include interest rate futures and swaps, variance swaps, S&P 500 and NASDAQ index put
options and futures contracts. The Company also uses EAFE Index swaps to hedge GMWB exposure to
international equity markets.
Adoption of SFAS 157 for Guaranteed Benefits Offered With Variable Annuities That are Required to
be Fair Valued
Fair values for GMWB and GMAB contracts and the related reinsurance and customized derivatives that
hedge certain equity markets exposure for GMWB contracts are calculated based upon internally
developed models because active, observable markets do not exist for those items. Below is a
description of the Companys fair value methodologies for guaranteed benefit liabilities, the
related reinsurance and customized derivatives, all accounted for under SFAS 133, prior to the
adoption of SFAS 157 and subsequent to adoption of SFAS 157.
Pre-SFAS 157 Fair Value
Prior to January 1, 2008, the Company used the guidance prescribed in SFAS 133 and other related
accounting literature on fair value which represented the amount for which a financial instrument
could be exchanged in a current transaction between knowledgeable, unrelated willing parties.
However, under that accounting literature, when an estimate of fair value was made for liabilities
where no market observable transactions existed for that liability or similar liabilities, market
risk margins were only included in the valuation if the margin was identifiable, measurable and
significant. If a reliable estimate of market risk margins was not obtainable, the present value
of expected future cash flows under a risk neutral framework, discounted at the risk free rate of
interest, was the best available estimate of fair value in the circumstances (Pre-SFAS 157 Fair
Value).
The Pre-SFAS 157 Fair Value was calculated based on actuarial and capital market assumptions
related to projected cash flows, including benefits and related contract charges, over the lives of
the contracts, incorporating expectations concerning policyholder behavior such as lapses, fund
selection, resets and withdrawal utilization (for the customized derivatives, policyholder behavior
is prescribed in the derivative contract). Because of the dynamic and complex nature of these cash
flows, best estimate assumptions and a Monte Carlo stochastic process involving the generation of
thousands of scenarios that assume risk neutral returns consistent with swap rates and a blend of
observable implied index volatility levels were used. Estimating these cash flows involved
numerous estimates and subjective judgments including those regarding expected markets rates of
return, market volatility, correlations of market index returns to funds, fund performance,
discount rates and policyholder behavior. At each valuation date, the Company assumed expected
returns based on:
|
|
risk-free rates as represented by the current LIBOR forward curve rates; |
|
|
|
forward market volatility assumptions for each underlying index based primarily on a blend
of observed market implied volatility data; |
|
|
|
correlations of market returns across underlying indices based on actual observed market
returns and relationships over the ten years preceding the valuation date; |
|
|
|
three years of history for fund regression; and |
|
|
|
current risk-free spot rates as represented by the current LIBOR spot curve to determine
the present value of expected future cash flows produced in the stochastic projection process. |
As many guaranteed benefit obligations are relatively new in the marketplace, actual policyholder
behavior experience is limited. As a result, estimates of future policyholder behavior are
subjective and based on analogous internal and external data. As markets change, mature and evolve
and actual policyholder behavior emerges, management continually evaluates the appropriateness of
its assumptions for this component of the fair value model.
18
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
Fair Value Under SFAS 157
The Companys SFAS 157 fair value is calculated as an aggregation of the following components:
Pre-SFAS 157 Fair Value; Actively-Managed Volatility Adjustment; Credit Standing Adjustment; Market
Illiquidity Premium; and Behavior Risk Margin. 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 each 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, for a liability or receive for an asset, to
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 required to be fair valued. The SFAS 157 fair value is likely to materially
diverge from the ultimate settlement of the liability as the Company believes settlement will be
based on our best estimate assumptions rather than those best estimate assumptions plus risk
margins. In the absence of any transfer of the guaranteed benefit liability to a third party, the
release of risk margins is likely to be reflected as realized gains in future periods net income.
Each of the components described below are unobservable in the marketplace and require subjectivity
by the Company in determining their value.
|
|
Actively-Managed Volatility Adjustment. This component incorporates the basis differential
between the observable index implied volatilities used to calculate the Pre-SFAS 157 component
and the actively-managed funds underlying the variable annuity product. The Actively-Managed
Volatility Adjustment is calculated using historical fund and weighted index volatilities. |
|
|
|
Credit Standing Adjustment. This component makes an adjustment that market participants
would make to reflect the risk that guaranteed benefit obligations or the GMWB reinsurance
recoverables will not be fulfilled (nonperformance risk). SFAS 157 explicitly requires
nonperformance risk to be reflected in fair value. The Company calculates the Credit Standing
Adjustment by using default rates provided by rating agencies, adjusted for market
recoverability, reflecting the long-term nature of living benefit obligations and the priority
of payment on these obligations versus long-term debt. |
|
|
|
Market Illiquidity Premium. This component makes an adjustment that market participants
would require to reflect that guaranteed benefit obligations are illiquid and have no market
observable exit prices in the capital markets. |
|
|
|
Behavior Risk Margin. This component adds a margin that market participants would require
for the risk that the Companys assumptions about policyholder behavior used in the Pre-SFAS
157 model could differ from actual experience. The Behavior Risk Margin is calculated by
taking the difference between adverse policyholder behavior assumptions and the best estimate
assumptions used in the Pre-SFAS 157 model using interest rate and volatility assumptions that
the Company believes market participants would use in developing risk margins. |
SFAS 157 Transition
The Company applied the provisions of SFAS 157 prospectively to financial instruments that are
recorded at fair value including guaranteed living benefits that are required to be fair valued.
The Company also applied the provisions of SFAS 157 using limited retrospective application (i.e.,
cumulative effect adjustment through opening retained earnings) to certain customized derivatives
historically measured at fair value in accordance with EITF 02-3.
The impact on January 1, 2008 of adopting SFAS 157 for guaranteed benefits accounted for under SFAS
133 and the related reinsurance was a reduction to net income of $220, after the effects of DAC
amortization and income taxes. In addition, net realized capital gains and losses that will be
recorded in 2008 and future years are also likely to be more volatile than amounts recorded in
prior years.
Moreover, the adoption of SFAS 157 has resulted in lower variable annuity fee income for new
business issued in 2008 as Attributed Fees have increased consistent with incorporating additional
risk margins and other indicia of exit value in the valuation of the embedded derivative. The
level of Attributed Fees for new business each quarter also depends on the level of equity index
volatility, as well as other factors, including interest rates. As equity index volatility has
risen, interest rates have declined, and the Company adopted SFAS 157, the fees ascribed to the new
business cohorts issued in 2008 have risen to levels above the rider fee for most products. The
extent of any excess of Attributed Fee over rider fee will vary by product. The Company does not
believe it is likely that todays level of Attributed Fees will persist over the long-term.
The Company also recognized a decrease in opening retained earnings of $51 in relation to the loss
deferred in accordance with EITF 02-3 on customized derivatives purchased in 2007, and used to
hedge a portion of the U.S. GMWB risk. In addition, the change in value of the customized
derivatives due to the initial adoption of SFAS 157 of $41 was recorded as an increase in opening
retained earnings with subsequent changes in fair value recorded in net realized capital gains
(losses) in net income. After amortization of DAC and the effect of income taxes, the impact on
opening retained earnings is a decrease of $3.
The Companys adoption of SFAS 157 did not materially impact the fair values of other financial
instruments, including, but not limited to, other derivative instruments used to hedge guaranteed
minimum benefits.
19
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
The SFAS 157 transition amounts, before the effects of DAC amortization and income taxes, as of
January 1, 2008 are shown below by type of guaranteed benefit liability and derivative asset.
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS 157 Transition Adjustment for Guaranteed Benefit Liabilities and Derivative Assets
As of January 1, 2008 |
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
|
|
|
|
|
|
|
Adjustment |
|
|
|
SFAS 157 |
|
|
Pre-SFAS 157 |
|
|
Gain (Loss) |
|
|
|
Fair Value |
|
|
Fair Value |
|
|
[Before tax and |
|
|
|
Asset (Liability) |
|
|
Asset (Liability) |
|
|
DAC amortization] |
|
Guaranteed Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Guaranteed Minimum Withdrawal Benefits |
|
$ |
(1,114 |
) |
|
$ |
(553 |
) |
|
$ |
(561 |
) |
Non-Life
Contingent Portion of for Life Guaranteed |
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Withdrawal Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Riders |
|
|
(319 |
) |
|
|
(154 |
) |
|
|
(165 |
) |
International Riders |
|
|
(17 |
) |
|
|
(7 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(336 |
) |
|
|
(161 |
) |
|
|
(175 |
) |
International Guaranteed Minimum Accumulation Benefits |
|
|
(22 |
) |
|
|
2 |
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
Total Guaranteed Benefits |
|
|
(1,472 |
) |
|
|
(712 |
) |
|
|
(760 |
) |
GMWB Reinsurance |
|
|
238 |
|
|
|
128 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,234 |
) |
|
$ |
(584 |
) |
|
$ |
(650 |
) |
|
|
|
|
|
|
|
|
|
|
The transition adjustment as of January 1, 2008 was comprised of the following amounts by
transition component:
|
|
|
|
|
|
|
Transition |
|
|
|
Adjustment |
|
|
|
Gain (Loss) |
|
|
|
[Before tax and |
|
|
|
DAC amortization] |
|
Actively-Managed Volatility Adjustment |
|
$ |
(100 |
) |
Credit Standing Adjustment |
|
|
4 |
|
Market Illiquidity Premium |
|
|
(194 |
) |
Behavior Risk Margin |
|
|
(360 |
) |
|
|
|
|
Total SFAS 157 Transition Adjustment before tax and DAC amortization |
|
$ |
(650 |
) |
|
|
|
|
Fair Value Disclosures
The following section applies the SFAS 157 fair value hierarchy and disclosure requirements to the
Companys financial instruments that are carried at fair value. SFAS 157 establishes a fair value
hierarchy that 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. Treasury securities, certain mortgage backed
securities, and exchange traded equity 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 debt securities and some preferred stocks are
model priced by vendors using observable inputs and are classified
within Level 2. Also
included in the Level 2 category are derivative instruments that are priced
using models with observable market inputs, including interest rate, foreign
currency and certain credit swap contracts. |
|
|
|
Level 3
|
|
Valuations that are derived from techniques in which
one or more of the significant inputs are
unobservable (including assumptions about risk).
Level 3 securities include less liquid securities
such as highly structured and/or lower quality
asset-backed securities (ABS) and commercial
mortgage-backed securities (CMBS), including ABS
backed by sub-prime loans, and private placement debt
and equity securities. Embedded derivatives and
complex derivatives securities, including equity
derivatives, longer dated interest rate swaps and
certain complex credit derivatives are also included
in Level 3. Because Level 3 fair values, by their
nature, contain unobservable market inputs as there
is no observable market for these assets and
liabilities, considerable judgment is used to
determine the SFAS 157 Level 3 fair values. Level 3
fair values represent the Companys best estimate of
an amount that could be realized in a current market
exchange absent actual market exchanges. |
20
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
The following table presents the Companys assets and liabilities that are carried at fair value,
by SFAS 157 hierarchy level, as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
$ |
70,091 |
|
|
$ |
648 |
|
|
$ |
53,206 |
|
|
$ |
16,237 |
|
Equity securities, held for trading |
|
|
33,655 |
|
|
|
1,717 |
|
|
|
31,938 |
|
|
|
|
|
Equity securities, available-for-sale |
|
|
1,730 |
|
|
|
269 |
|
|
|
348 |
|
|
|
1,113 |
|
Other investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customized derivatives used to hedge US GMWB |
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
201 |
|
Other derivatives used to hedge US GMWB |
|
|
872 |
|
|
|
|
|
|
|
11 |
|
|
|
861 |
|
Other investments [1] |
|
|
190 |
|
|
|
|
|
|
|
116 |
|
|
|
74 |
|
Total Other Investments |
|
|
1,263 |
|
|
|
|
|
|
|
127 |
|
|
|
1,136 |
|
Short-term investments |
|
|
5,353 |
|
|
|
837 |
|
|
|
4,516 |
|
|
|
|
|
Reinsurance recoverables for US GMWB |
|
|
438 |
|
|
|
|
|
|
|
|
|
|
|
438 |
|
Separate account assets [2] [5] |
|
|
149,679 |
|
|
|
117,897 |
|
|
|
30,769 |
|
|
|
1,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value on a recurring basis |
|
$ |
262,209 |
|
|
$ |
121,368 |
|
|
$ |
120,904 |
|
|
$ |
19,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US GMWB |
|
$ |
(2,397 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,397 |
) |
UK GMWB [6] |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
Japan GMAB |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
Japan GMWB |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Institutional Notes |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
(9 |
) |
Equity Linked Notes |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
(12 |
) |
Total other policyholder funds and benefits payable |
|
|
(2,472 |
) |
|
|
|
|
|
|
|
|
|
|
(2,472 |
) |
Other liabilities [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other derivatives used to hedge US GMWB |
|
|
80 |
|
|
|
|
|
|
|
(10 |
) |
|
|
90 |
|
Other liabilities |
|
|
(741 |
) |
|
|
|
|
|
|
(205 |
) |
|
|
(536 |
) |
Total Other Liabilities |
|
|
(661 |
) |
|
|
|
|
|
|
(215 |
) |
|
|
(446 |
) |
Consumer notes [4] |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value on a recurring
basis |
|
$ |
(3,139 |
) |
|
$ |
|
|
|
$ |
(215 |
) |
|
$ |
(2,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge
collateral to the Company. At September 30, 2008, $725 was the amount of cash collateral liability that was netted against the
derivative asset value on the condensed consolidated balance sheet and is excluded from the table above. See footnote 3 below for
derivative liabilities. |
|
[2] |
|
Pursuant to the conditions set forth in SOP 03-1, the value of separate account liabilities is set to equal the fair value for
separate account assets. |
|
[3] |
|
Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the SFAS 157
Level 3 roll forward table included below in this Note, 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. |
|
[5] |
|
Excludes
approximately $4 billion of investment sales receivable net of investment
purchases payable that are not subject to SFAS 157. |
|
[6] |
|
Includes a foreign currency translation adjustment of $2. |
In many situations, inputs used to measure the fair value of an asset or liability position may
fall into different levels of the fair value hierarchy. In these situations, the Company will
determine the level in which the fair value falls based upon the lowest level input that is
significant to the determination of the fair value. In most cases, both observable (e.g., changes
in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the
determination of fair values that the Company has classified within Level 3. Consequently, these
values and the related gains and losses are based upon both observable and unobservable inputs.
21
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
Determination of fair values
The valuation methodologies used to determine the fair values of assets and liabilities under the
exit price notion of SFAS 157 reflect market-participant objectives and are based on the
application of the fair value hierarchy that prioritizes 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. 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 Companys credit standing, 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
table.
Fixed Maturity, Short-Term, and Equity Securities, Available- for-Sale
The fair value of fixed maturity, short term, and equity securities, available for sale, is
determined by management after considering one of three primary sources of information: third party
pricing services, independent broker quotations, or pricing matrices. Security pricing is applied
using a waterfall approach whereby publicly available prices are first sought from third party
pricing services, the remaining unpriced securities are submitted to independent brokers for
prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these
three pricing methods include, but are not limited to, reported trades, benchmark yields, issuer
spreads, bids, offers, and/or estimated cash flows and prepayments speeds. Based on the typical
trading volumes and the lack of quoted market prices for fixed maturities, third party pricing
services 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 outlined above. If there are no recent reported trades, the third party
pricing services and brokers may use matrix or model processes to develop a security price where
future cash flow expectations are developed based upon collateral performance and discounted at an
estimated market rate. Included in the pricing of ABS, collateralized mortgage obligations
(CMOs), and mortgage-backed securities (MBS) 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 traded only in privately negotiated transactions. As a result, certain securities are
priced via independent broker quotations which utilize inputs that may be difficult to corroborate
with observable market based data. Additionally, the majority of these independent broker
quotations are non-binding. A pricing matrix is used to price securities for which the Company is
unable to obtain either a price from a third party pricing service or an independent broker
quotation. The pricing matrix used by the Company begins with current spread levels to determine
the market price for the security. The credit spreads, as assigned by a knowledgeable private
placement broker, incorporate the issuers credit rating and a risk premium, if warranted, due to
the issuers industry and the securitys time to maturity. The issuer-specific yield adjustments,
which can be positive or negative, are updated twice per year, as of June 30 and December 31, by
the private placement broker and are intended to adjust security prices for issuer-specific
factors. The Company assigns a credit rating to these securities based upon an internal analysis
of the issuers financial strength.
The Company performs a monthly analysis on 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. Examples of procedures performed include, but are not limited to, initial and
on-going review of third party pricing services methodologies, review of pricing statistics and
trends, back testing recent trades, and monitoring of trading volumes. In addition, the Company
ensures whether 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 there is a
more appropriate fair value based upon the available market data, the price received from the third
party is adjusted accordingly. During the third quarter, the Company made fair value determinations
which lowered prices received from third party pricing services and brokers by a total of $487. The
securities adjusted had an amortized cost and fair value after adjustment, of $4.3 and 2.8 billion,
respectively, and were primarily CMBS securities.
In accordance with SFAS 157, 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 SFAS 157 fair value hierarchy level based upon trading
activity and the observability of market inputs. Based on this evaluation and investment class
analysis, each price was classified into Level 1, 2 or 3. 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 the brokers use to develop prices, most
valuations that are based on brokers prices are classified as Level 3. Some valuations may be
classified as Level 2 if the price can be corroborated. Internal matrix-priced securities,
primarily consisting of certain private placement debt, are also classified as Level 3. The matrix
pricing of certain private placement debt includes significant non-observable inputs, the
internally determined credit rating of the security and an externally provided credit spread.
22
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
The following table presents the fair value of the significant asset sectors within the SFAS 157
Level 3 securities classification as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
Fair Value |
|
|
Fair Value |
|
ABS |
|
|
|
|
|
|
|
|
Below Prime |
|
$ |
1,983 |
|
|
|
11.4 |
% |
Collateralized Loan Obligations (CLOs) |
|
|
2,472 |
|
|
|
14.3 |
% |
Other |
|
|
908 |
|
|
|
5.2 |
% |
Corporate |
|
|
|
|
|
|
|
|
Matrix priced private placements |
|
|
5,035 |
|
|
|
29.0 |
% |
Other |
|
|
2,830 |
|
|
|
16.3 |
% |
Commercial mortgage-backed securities (CMBS) |
|
|
2,688 |
|
|
|
15.5 |
% |
Preferred stock |
|
|
887 |
|
|
|
5.1 |
% |
Other |
|
|
547 |
|
|
|
3.2 |
% |
|
|
|
|
|
|
|
Total Level 3 securities |
|
$ |
17,350 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
ABS below prime primarily represents sub-prime and Alt-A securities which are classified as
Level 3 due to the lack of liquidity in the market. |
|
|
|
ABS CLOs represent senior secured bank loan CLOs which are primarily priced by independent
brokers. |
|
|
|
ABS Other primarily represents broker priced securities. |
|
|
|
Corporate-matrix priced represents private placement securities that are thinly traded and
priced using a pricing matrix which includes significant non-observable inputs. |
|
|
|
Corporate-other primarily represents broker-priced securities which are thinly traded and
privately negotiated transactions. |
|
|
|
CMBS primarily represents CMBS bonds and commercial real estate collateralized debt
obligations (CRE CDOs) which were either fair valued by the Company or by independent
brokers due to the illiquidity of this sector. |
|
|
|
Preferred
stock primarily represents perpetual preferred securities
that are currently illiquid due to market conditions. |
Derivative Instruments, including embedded derivatives within investments
Derivative instruments are reported on the condensed consolidated balance sheets at fair value and
are reported in Other Investments and Other Liabilities. Embedded derivatives are reported with
the host instruments on the condensed consolidated balance sheet. Derivative instruments are fair
valued using pricing valuation models, which utilize market data inputs or independent broker
quotations. Excluding embedded derivatives, as of September 30, 2008, 97% of derivatives based
upon notional values were priced by valuation models, which utilize independent market data. The
remaining derivatives were priced by broker quotations. The derivatives are valued using
mid-market inputs that are predominantly observable in the market. Inputs used to value
derivatives include, but are not limited to, interest swap rates, foreign currency forward and spot
rates, credit spreads and correlations, interest and equity volatility and equity index levels.
The Company performs a monthly analysis on derivative valuations which includes both quantitative
and qualitative analysis. Examples of procedures performed include, but are not limited to, review
of pricing statistics and trends, back testing recent trades, analyzing the impacts of changes in
the market environment, and review of changes in market value for each derivative including those
derivatives priced by brokers.
Derivative instruments classified as Level 1 include futures and certain option contracts which are
traded on active exchange markets.
Derivative instruments classified as Level 2 primarily include interest rate, currency and certain
credit default swaps. The derivative valuations are determined using pricing models with inputs
that are observable in the market or can be derived principally from or corroborated by observable
market data.
Derivative instruments classified as Level 3 include complex derivatives, such as equity options
and swaps, interest rate derivatives which have interest rate optionality, certain credit default
swaps, and long-dated interest rate swaps. Also included in Level 3 classification for derivatives
are customized equity swaps that hedge the U.S. GMWB liabilities. Additional information on the
customized transactions is provided under the Accounting for Guaranteed Benefits Offered With
Variable Annuities section of this Note 4. These derivative instruments are valued using pricing
models which utilize both observable and unobservable inputs and, to a lesser extent, broker
quotations. A derivative instrument containing Level 1 or Level 2
inputs will be classified as a Level 3 financial instrument in its entirety if it has as least one
significant Level 3 input.
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.
23
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
U.S. GMWB Reinsurance Derivative
The fair value of the U.S. GMWB reinsurance derivative is calculated as an aggregation of the
components described in the SFAS 157 Transition section of this Note. The fair value of the U.S.
GMWB reinsurance derivative 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. As a result, the U.S. GMWB reinsurance
derivative is categorized as Level 3.
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. Open-ended mutual funds are included in Level 1. Most debt
securities and short-term investments are included in Level 2. Level 3 assets include less liquid
securities, such as highly structured and/or lower quality ABS and CMBS, ABS backed by sub-prime
loans, and any investment priced solely by broker quotes.
GMWB and GMAB Embedded Derivatives (in Other Policyholder Funds and Benefits Payable)
The fair value of GMWB and GMAB embedded derivatives, reported in Other Policyholder Funds and
Benefits Payable on the Companys condensed consolidated balance sheet, are calculated as an
aggregation of the components described in the SFAS 157 Transition section of this Note. The fair
value of GMWB and GMAB embedded derivatives are modeled using significant unobservable policyholder
behavior inputs, such as lapses, fund selection, resets and withdrawal utilization, and risk
margins. As a result, the GMWB and GMAB embedded derivatives are categorized as Level 3.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable
Inputs (Level 3)
The tables below provide a fair value roll forward for the three and nine months ending September
30, 2008 for the financial instruments for which significant unobservable inputs (Level 3) are used
in the fair value measurement on a recurring basis. The Company classifies the fair values of
financial instruments within Level 3 if there are no observable markets for the instruments or, in
the absence of active markets, the majority of the inputs used to determine fair value are based on
the Companys own assumptions about market participant assumptions. However, the Company
prioritizes the use of market-based inputs over entity-based assumptions in determining Level 3
fair values in accordance with SFAS 157. Therefore, the gains and losses in the tables below
include changes in fair value due partly to observable and unobservable factors.
24
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED 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 three months from July 1, 2008 to September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net |
|
|
|
|
|
|
realized/unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income related |
|
|
|
SFAS 157 |
|
|
gains (losses) |
|
|
|
|
|
|
|
|
SFAS 157 |
|
|
to financial |
|
|
|
Fair value |
|
|
included in: |
|
|
Purchases, |
|
|
Transfers |
|
|
Fair value |
|
|
instruments |
|
|
|
as of |
|
|
Net |
|
|
|
|
|
issuances, |
|
|
in and/or |
|
|
as of |
|
|
still held at |
|
|
|
July 1, |
|
|
income |
|
|
AOCI |
|
|
and |
|
|
(out) of |
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
[2], [3] |
|
|
[5] |
|
|
settlements |
|
|
Level 3 [7] |
|
|
2008 |
|
|
2008 [3] |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
16,512 |
|
|
$ |
(683 |
) |
|
$ |
(596 |
) |
|
$ |
77 |
|
|
$ |
927 |
|
|
$ |
16,237 |
|
|
$ |
(680 |
) |
Equity securities,
available-for-sale |
|
|
1,367 |
|
|
|
(229 |
) |
|
|
122 |
|
|
|
(232 |
) |
|
|
85 |
|
|
|
1,113 |
|
|
|
(217 |
) |
Freestanding derivatives [4] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customized derivatives used
to hedge US GMWB |
|
|
85 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
116 |
|
Other freestanding
derivatives used to hedge US
GMWB |
|
|
686 |
|
|
|
293 |
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
951 |
|
|
|
269 |
|
Other freestanding derivatives |
|
|
(382 |
) |
|
|
(146 |
) |
|
|
(4 |
) |
|
|
68 |
|
|
|
2 |
|
|
|
(462 |
) |
|
|
(165 |
) |
Total Freestanding Derivatives |
|
|
389 |
|
|
|
263 |
|
|
|
(4 |
) |
|
|
40 |
|
|
|
2 |
|
|
|
690 |
|
|
|
220 |
|
Reinsurance recoverable for US
GMWB [2][9] |
|
|
250 |
|
|
|
106 |
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
438 |
|
|
|
106 |
|
Separate accounts [6] |
|
|
665 |
|
|
|
(53 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
426 |
|
|
|
1,013 |
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Asset Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freestanding derivatives
used to hedge US GMWB including
those in Levels 1, 2 and 3 |
|
|
784 |
|
|
|
475 |
|
|
|
|
|
|
|
(106 |
) |
|
|
|
|
|
|
1,153 |
|
|
|
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and
benefits payable accounted for
at fair value [2] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US GMWB |
|
$ |
(1,664 |
) |
|
$ |
(697 |
) |
|
$ |
|
|
|
$ |
(36 |
) |
|
$ |
|
|
|
$ |
(2,397 |
) |
|
$ |
(697 |
) |
UK GMWB |
|
|
(17 |
) |
|
|
(13 |
) |
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
(30 |
) |
|
|
(13 |
) |
Japan GMWB |
|
|
1 |
|
|
|
(4 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
Japan GMAB |
|
|
(23 |
) |
|
|
4 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(20 |
) |
|
|
4 |
|
Institutional Notes |
|
|
(21 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
12 |
|
Equity Linked Notes |
|
|
(15 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
3 |
|
Total other policyholder funds
and benefits payable accounted
for at fair value[2] |
|
|
(1,739 |
) |
|
|
(695 |
) |
|
|
2 |
|
|
|
(40 |
) |
|
|
|
|
|
|
(2,472 |
) |
|
|
(695 |
) |
Consumer notes |
|
|
(3 |
) |
|
|
2 |
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net US GMWB (Embedded
derivatives, freestanding
derivatives including those in
Levels 1, 2 and 3 and
reinsurance recoverable)[8] |
|
|
(630 |
) |
|
|
(116 |
) |
|
|
|
|
|
|
(60 |
) |
|
|
|
|
|
|
(806 |
) |
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED 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 nine months from January 1, 2008 to September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net |
|
|
|
|
|
|
realized/unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income related |
|
|
|
SFAS 157 |
|
|
gains (losses) |
|
|
|
|
|
|
|
|
SFAS 157 |
|
|
to financial |
|
|
|
Fair value |
|
|
included in: |
|
|
Purchases, |
|
|
Transfers |
|
|
Fair value |
|
|
instruments |
|
|
|
as of |
|
|
Net |
|
|
|
|
|
issuances, |
|
|
in and/or |
|
|
as of |
|
|
still held at |
|
|
|
January 1, |
|
|
income |
|
|
AOCI |
|
|
and |
|
|
(out) of |
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
[2], [3] |
|
|
[5] |
|
|
settlements |
|
|
Level 3 [7] |
|
|
2008 |
|
|
2008 [3] |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
17,996 |
|
|
$ |
(860 |
) |
|
$ |
(1,992 |
) |
|
$ |
1,355 |
|
|
$ |
(262 |
) |
|
$ |
16,237 |
|
|
$ |
(824 |
) |
Equity securities, available-for-sale |
|
|
1,339 |
|
|
|
(230 |
) |
|
|
(7 |
) |
|
|
95 |
|
|
|
(84 |
) |
|
|
1,113 |
|
|
|
(228 |
) |
Freestanding derivatives [4] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customized derivatives used to
hedge US GMWB |
|
|
91 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
110 |
|
Other freestanding derivatives
used to hedge US GMWB |
|
|
564 |
|
|
|
360 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
951 |
|
|
|
334 |
|
Other freestanding derivatives |
|
|
(401 |
) |
|
|
(411 |
) |
|
|
(2 |
) |
|
|
249 |
|
|
|
103 |
|
|
|
(462 |
) |
|
|
(303 |
) |
Total Freestanding Derivatives |
|
|
254 |
|
|
|
59 |
|
|
|
(2 |
) |
|
|
276 |
|
|
|
103 |
|
|
|
690 |
|
|
|
141 |
|
Reinsurance recoverable for US GMWB
[1], [2] [9] |
|
|
238 |
|
|
|
108 |
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
438 |
|
|
|
108 |
|
Separate accounts [6] |
|
|
701 |
|
|
|
(109 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
426 |
|
|
|
1,013 |
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Asset Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freestanding derivatives used
to hedge US GMWB including those in
Levels 1, 2 and 3 |
|
|
643 |
|
|
|
520 |
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
1,153 |
|
|
|
520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and
benefits payable accounted for at
fair value [2] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US GMWB |
|
$ |
(1,433 |
) |
|
$ |
(869 |
) |
|
$ |
|
|
|
$ |
(95 |
) |
|
$ |
|
|
|
$ |
(2,397 |
) |
|
$ |
(869 |
) |
UK GMWB |
|
|
(17 |
) |
|
|
(12 |
) |
|
|
1 |
|
|
|
(2 |
) |
|
|
|
|
|
|
(30 |
) |
|
|
(12 |
) |
Japan GMWB |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(3 |
) |
Japan GMAB |
|
|
(22 |
) |
|
|
4 |
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(20 |
) |
|
|
4 |
|
Institutional Notes |
|
|
(24 |
) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
15 |
|
Equity Linked Notes |
|
|
(21 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
9 |
|
Total other policyholder funds
and
benefits payable
accounted for at
fair value [2] |
|
|
(1,517 |
) |
|
|
(856 |
) |
|
|
1 |
|
|
|
(100 |
) |
|
|
|
|
|
|
(2,472 |
) |
|
|
(856 |
) |
Consumer notes |
|
|
(5 |
) |
|
|
4 |
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net US GMWB (Embedded derivatives,
freestanding derivatives including
those in Levels 1, 2 and 3 and
reinsurance recoverable)[8] |
|
|
(552 |
) |
|
|
(241 |
) |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
(806 |
) |
|
|
(241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The January 1, 2008 fair value of $238 includes the pre-SFAS 157 fair value of $128 and transitional adjustment of $110. |
|
[2] |
|
The Company classifies all the gains and losses on GMWB reinsurance derivatives and GMWB embedded derivatives as unrealized
gains/losses for purposes of disclosure in this table because it is impracticable to track on a contract-by-contract basis
the realized gains/losses for these derivatives and embedded derivatives.
|
|
[3] |
|
All amounts in these columns are reported in net realized capital gains/losses except for $2 and $3 for the three and nine
months ending September 30, 2008 respectively, which are reported in benefits, losses and loss adjustment expenses. All
amounts are before income taxes and amortization of DAC.
|
|
[4] |
|
The freestanding derivatives, excluding reinsurance derivatives instruments, are reported in this table on a net basis for
asset/(liability) positions and reported on the condensed consolidated balance sheet in other investments and other
liabilities.
|
|
[5] |
|
AOCI refers to Accumulated other comprehensive income in the condensed consolidated statement of comprehensive income
(loss). All amounts are before income taxes and amortization of DAC. |
26
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
|
|
|
[6] |
|
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.
|
|
[7] |
|
Transfers in and/or (out) of Level 3 during the three and nine months
ended September 30, 2008 are attributable to a change in the
availability of market observable information for individual
securities with the respective categories.
|
|
[8] |
|
The net loss on US GMWB since January 1, 2008 was primarily related to
liability model assumption updates for mortality in the first quarter
and market-based hedge ineffectiveness in the third quarter due to
extremely volatile capital markets in September.
|
|
[9] |
|
During July 2008, the Company reinsured, with a third party, U.S. GMWB
risks associated with approximately $7.8 billion of account value sold
between 2003 and 2006. The reinsurance agreement is an 80% quota-share
agreement. The third partys financial strength is rated A+ by A.M.
Best, AA- by Standard and Poors and Aa2 by Moodys. The reinsurance
agreement will be accounted for as a free-standing derivative. |
For comparative and informational purposes only, the following tables rollforward the customized
and free standing derivatives used to hedge US GMWB, the reinsurance recoverable for US GMWB and
the embedded derivatives reported in other policyholder funds and benefits payable for the three
and nine months periods ended September 30, 2007. The fair value amounts in these following tables
are the Pre-SFAS 157 fair values.
Roll-forward for the three months from July 1, 2007 to September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized/unrealized |
|
|
|
|
|
|
Fair value |
|
|
|
Fair value |
|
|
gains (losses) |
|
|
Purchases, |
|
|
as of |
|
|
|
as of |
|
|
included in: |
|
|
issuances, and |
|
|
September 30, |
|
|
|
July 1, 2007 |
|
|
Net income |
|
|
settlements |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customized derivatives used to hedge US GMWB |
|
$ |
(21 |
) |
|
$ |
29 |
|
|
$ |
|
|
|
$ |
8 |
|
Other freestanding derivatives used to hedge US GMWB |
|
|
265 |
|
|
|
104 |
|
|
|
6 |
|
|
|
375 |
|
Reinsurance recoverable for US GMWB |
|
|
20 |
|
|
|
54 |
|
|
|
6 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable
accounted for at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US GMWB |
|
$ |
(56 |
) |
|
$ |
(326 |
) |
|
$ |
(25 |
) |
|
$ |
(407 |
) |
UK GMWB |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
Institutional Notes |
|
|
18 |
|
|
|
(25 |
) |
|
|
|
|
|
|
(7 |
) |
Equity Linked Notes |
|
|
|
|
|
|
1 |
|
|
|
(22 |
) |
|
|
(21 |
) |
Total other policyholder funds and benefits payable
accounted for at fair value |
|
|
(38 |
) |
|
|
(352 |
) |
|
|
(47 |
) |
|
|
(437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net US GMWB (Embedded derivatives, freestanding
derivatives and reinsurance recoverable) [1] |
|
|
208 |
|
|
|
(139 |
) |
|
|
(13 |
) |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The net loss on US GMWB was primarily due to liability model assumption updates made during the
third quarter to reflect model refinements. |
27
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
Roll-forward for the nine months from January 1, 2007 to September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
Realized/unrealized |
|
|
|
|
|
|
Fair value |
|
|
|
as of |
|
|
gains (losses) |
|
|
Purchases, |
|
|
as of |
|
|
|
January 1, |
|
|
included in: |
|
|
issuances, and |
|
|
September 30, |
|
|
|
2007 |
|
|
Net income |
|
|
settlements |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customized derivatives used to hedge US GMWB |
|
$ |
|
|
|
$ |
8 |
|
|
$ |
|
|
|
$ |
8 |
|
Other freestanding derivatives used to hedge US GMWB |
|
|
346 |
|
|
|
46 |
|
|
|
(17 |
) |
|
|
375 |
|
Reinsurance recoverable for US GMWB |
|
|
(22 |
) |
|
|
85 |
|
|
|
17 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable
accounted for at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US GMWB |
|
$ |
53 |
|
|
$ |
(389 |
) |
|
$ |
(71 |
) |
|
$ |
(407 |
) |
UK GMWB |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
Institutional Notes |
|
|
4 |
|
|
|
(11 |
) |
|
|
|
|
|
|
(7 |
) |
Equity Linked Notes |
|
|
|
|
|
|
1 |
|
|
|
(22 |
) |
|
|
(21 |
) |
Total other policyholder funds and benefits payable
accounted for at fair value |
|
|
57 |
|
|
|
(401 |
) |
|
|
(93 |
) |
|
|
(437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net US GMWB (Embedded derivative, freestanding
derivatives and reinsurance recoverable) [1] |
|
|
377 |
|
|
|
(250 |
) |
|
|
(71 |
) |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The net loss on US GMWB was primarily due to liability model assumption updates made during
the second and third quarter to reflect newly reliable market inputs for volatility and model
refinements. |
The following table summarizes the notional amount and fair value of freestanding derivatives in
other investments, reinsurance recoverables, embedded derivatives in other policyholder funds and
benefits payable and consumer notes as of September 30, 2008, and December 31, 2007. The notional
amount of derivative contracts represents the basis upon which pay or receive amounts are
calculated and are not necessarily reflective of credit risk. The fair value amounts of derivative
assets and liabilities are presented on a net basis in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Notional |
|
|
Fair |
|
|
Notional |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Reinsurance recoverables for US GMWB |
|
$ |
11,815 |
|
|
$ |
438 |
|
|
$ |
6,579 |
|
|
$ |
128 |
|
Customized derivatives used to hedge US GMWB |
|
|
12,862 |
|
|
|
201 |
|
|
|
12,784 |
|
|
|
50 |
|
Freestanding derivatives used to hedge US GMWB |
|
|
10,751 |
|
|
|
952 |
|
|
|
8,573 |
|
|
|
592 |
|
US GMWB |
|
|
47,022 |
|
|
|
(2,397 |
) |
|
|
44,852 |
|
|
|
(707 |
) |
UK GMWB |
|
|
1,768 |
|
|
|
(30 |
) |
|
|
1,048 |
|
|
|
(8 |
) |
Japan GMWB |
|
|
253 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
Japan GMAB |
|
|
3,674 |
|
|
|
(20 |
) |
|
|
2,768 |
|
|
|
2 |
|
Consumer Notes |
|
|
70 |
|
|
|
(6 |
) |
|
|
19 |
|
|
|
(5 |
) |
Equity Linked Notes |
|
|
50 |
|
|
|
(12 |
) |
|
|
50 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
88,265 |
|
|
$ |
(878 |
) |
|
$ |
76,673 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in notional of embedded derivatives associated with GMWB and GMAB riders is primarily
due to additional product sales.
The increase in the reinsurance
recoverables for U.S. GMWB was primarily due to the execution of a reinsurance transaction in July
2008. The increase in customized derivatives used to hedge U.S. GMWB
was primarily related to a customized swap contract that was entered into during the three months
ended June 30, 2008, with a notional value of $3.2 billion. The decrease in the net fair value of the derivative instruments in the table above was
primarily due to the adoption of SFAS 157 and the net effects of capital market movements during
the third quarter of 2008.
28
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized
Cost |
|
|
Unrealized
Gains |
|
|
Unrealized
Losses |
|
|
Fair
Value |
|
|
Amortized
Cost |
|
|
Unrealized
Gains |
|
|
Unrealized
Losses |
|
|
Fair Value |
|
Bonds and Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS |
|
$ |
9,200 |
|
|
$ |
12 |
|
|
$ |
(1,588 |
) |
|
$ |
7,624 |
|
|
$ |
9,515 |
|
|
$ |
33 |
|
|
$ |
(633 |
) |
|
$ |
8,915 |
|
CMBS |
|
|
15,053 |
|
|
|
56 |
|
|
|
(2,827 |
) |
|
|
12,282 |
|
|
|
17,625 |
|
|
|
244 |
|
|
|
(838 |
) |
|
|
17,031 |
|
CMOs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
856 |
|
|
|
14 |
|
|
|
(6 |
) |
|
|
864 |
|
|
|
1,191 |
|
|
|
32 |
|
|
|
(4 |
) |
|
|
1,219 |
|
Non-agency backed |
|
|
425 |
|
|
|
1 |
|
|
|
(55 |
) |
|
|
371 |
|
|
|
525 |
|
|
|
4 |
|
|
|
(3 |
) |
|
|
526 |
|
Corporate |
|
|
33,438 |
|
|
|
425 |
|
|
|
(2,331 |
) |
|
|
31,532 |
|
|
|
34,118 |
|
|
|
1,022 |
|
|
|
(942 |
) |
|
|
34,198 |
|
Government/Government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
886 |
|
|
|
26 |
|
|
|
(37 |
) |
|
|
875 |
|
|
|
999 |
|
|
|
59 |
|
|
|
(5 |
) |
|
|
1,053 |
|
United States |
|
|
1,824 |
|
|
|
35 |
|
|
|
(7 |
) |
|
|
1,852 |
|
|
|
836 |
|
|
|
22 |
|
|
|
(3 |
) |
|
|
855 |
|
MBS |
|
|
2,726 |
|
|
|
16 |
|
|
|
(20 |
) |
|
|
2,722 |
|
|
|
2,757 |
|
|
|
26 |
|
|
|
(20 |
) |
|
|
2,763 |
|
States, municipalities and
political subdivisions |
|
|
12,599 |
|
|
|
195 |
|
|
|
(825 |
) |
|
|
11,969 |
|
|
|
13,152 |
|
|
|
427 |
|
|
|
(90 |
) |
|
|
13,489 |
|
Redeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
77,007 |
|
|
|
780 |
|
|
|
(7,696 |
) |
|
|
70,091 |
|
|
|
80,724 |
|
|
|
1,869 |
|
|
|
(2,538 |
) |
|
|
80,055 |
|
Equity securities, available-for-sale |
|
|
1,645 |
|
|
|
197 |
|
|
|
(112 |
) |
|
|
1,730 |
|
|
|
2,611 |
|
|
|
218 |
|
|
|
(234 |
) |
|
|
2,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities, available-for-sale |
|
$ |
78,652 |
|
|
$ |
977 |
|
|
$ |
(7,808 |
) |
|
$ |
71,821 |
|
|
$ |
83,335 |
|
|
$ |
2,087 |
|
|
$ |
(2,772 |
) |
|
$ |
82,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Lending
The Company participates in securities lending programs to generate additional income, whereby
certain domestic fixed income securities are loaned from the Companys portfolio to qualifying
third party borrowers, in return for collateral in the form of cash or U.S. government securities.
Borrowers of these securities provide collateral of 102% of the market value of the loaned
securities and can return the securities to the Company for cash at varying maturity dates. As of
September 30, 2008 and December 31, 2007, under terms of securities lending programs, the fair
value of loaned securities was approximately $3.9 billion and $4.3 billion, respectively, which was
included in fixed maturities in the condensed consolidated balance sheets.
As of September 30, 2008, the Company held
collateral against the loaned securities in the amount of $4.0 billion.
Security Unrealized Loss Aging
As part of the Companys ongoing security monitoring process by a committee of investment and
accounting professionals, the Company has identified securities in an unrealized loss position that
could potentially be other-than-temporarily impaired. For further discussion regarding the
Companys other-than-temporary impairment policy, see the Investments section of Note 1 in The
Hartfords 2007 Form 10-K Annual Report. Due to the issuers continued satisfaction of the
securities obligations in accordance with their contractual terms and the expectation that they
will continue to do so, managements intent and ability to hold these securities for a period of
time sufficient to allow for any anticipated recovery in market value, as well as the evaluation of
the fundamentals of the issuers financial condition and other objective evidence, the Company
believes that the prices of the securities in the sectors identified in the tables below were
temporarily depressed as of September 30, 2008 and December 31, 2007.
The following tables present the Companys unrealized loss aging for total fixed maturity and
equity securities classified as available-for-sale as of September 30, 2008 and December 31, 2007,
by investment category and length of time the security was in a continuous unrealized loss
position.
29
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Cost |
|
|
Value |
|
|
Losses |
|
|
Cost |
|
|
Value |
|
|
Losses |
|
|
Cost |
|
|
Value |
|
|
Losses |
|
ABS |
|
$ |
4,548 |
|
|
$ |
3,873 |
|
|
$ |
(675 |
) |
|
$ |
4,228 |
|
|
$ |
3,315 |
|
|
$ |
(913 |
) |
|
$ |
8,776 |
|
|
$ |
7,188 |
|
|
$ |
(1,588 |
) |
CMOs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
309 |
|
|
|
304 |
|
|
|
(5 |
) |
|
|
29 |
|
|
|
28 |
|
|
|
(1 |
) |
|
|
338 |
|
|
|
332 |
|
|
|
(6 |
) |
Non-agency backed |
|
|
265 |
|
|
|
226 |
|
|
|
(39 |
) |
|
|
64 |
|
|
|
48 |
|
|
|
(16 |
) |
|
|
329 |
|
|
|
274 |
|
|
|
(55 |
) |
CMBS |
|
|
6,600 |
|
|
|
5,629 |
|
|
|
(971 |
) |
|
|
7,144 |
|
|
|
5,288 |
|
|
|
(1,856 |
) |
|
|
13,744 |
|
|
|
10,917 |
|
|
|
(2,827 |
) |
Corporate |
|
|
18,491 |
|
|
|
17,157 |
|
|
|
(1,334 |
) |
|
|
6,458 |
|
|
|
5,461 |
|
|
|
(997 |
) |
|
|
24,949 |
|
|
|
22,618 |
|
|
|
(2,331 |
) |
Government/Government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
555 |
|
|
|
522 |
|
|
|
(33 |
) |
|
|
56 |
|
|
|
52 |
|
|
|
(4 |
) |
|
|
611 |
|
|
|
574 |
|
|
|
(37 |
) |
United States |
|
|
505 |
|
|
|
498 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
505 |
|
|
|
498 |
|
|
|
(7 |
) |
MBS |
|
|
849 |
|
|
|
842 |
|
|
|
(7 |
) |
|
|
441 |
|
|
|
428 |
|
|
|
(13 |
) |
|
|
1,290 |
|
|
|
1,270 |
|
|
|
(20 |
) |
States, municipalities and political
subdivisions |
|
|
6,044 |
|
|
|
5,528 |
|
|
|
(516 |
) |
|
|
2,120 |
|
|
|
1,811 |
|
|
|
(309 |
) |
|
|
8,164 |
|
|
|
7,339 |
|
|
|
(825 |
) |
Redeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
38,166 |
|
|
|
34,579 |
|
|
|
(3,587 |
) |
|
|
20,540 |
|
|
|
16,431 |
|
|
|
(4,109 |
) |
|
|
58,706 |
|
|
|
51,010 |
|
|
|
(7,696 |
) |
Equity securities, available-for-sale |
|
|
605 |
|
|
|
518 |
|
|
|
(87 |
) |
|
|
170 |
|
|
|
145 |
|
|
|
(25 |
) |
|
|
775 |
|
|
|
663 |
|
|
|
(112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
38,771 |
|
|
$ |
35,097 |
|
|
$ |
(3,674 |
) |
|
$ |
20,710 |
|
|
$ |
16,576 |
|
|
$ |
(4,134 |
) |
|
$ |
59,481 |
|
|
$ |
51,673 |
|
|
$ |
(7,808 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
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 |
|
$ |
7,811 |
|
|
$ |
7,222 |
|
|
$ |
(589 |
) |
|
$ |
671 |
|
|
$ |
627 |
|
|
$ |
(44 |
) |
|
$ |
8,482 |
|
|
$ |
7,849 |
|
|
$ |
(633 |
) |
CMOs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
324 |
|
|
|
321 |
|
|
|
(3 |
) |
|
|
89 |
|
|
|
88 |
|
|
|
(1 |
) |
|
|
413 |
|
|
|
409 |
|
|
|
(4 |
) |
Non-agency backed |
|
|
120 |
|
|
|
118 |
|
|
|
(2 |
) |
|
|
54 |
|
|
|
53 |
|
|
|
(1 |
) |
|
|
174 |
|
|
|
171 |
|
|
|
(3 |
) |
CMBS |
|
|
8,138 |
|
|
|
7,453 |
|
|
|
(685 |
) |
|
|
3,400 |
|
|
|
3,247 |
|
|
|
(153 |
) |
|
|
11,538 |
|
|
|
10,700 |
|
|
|
(838 |
) |
Corporate |
|
|
13,849 |
|
|
|
13,165 |
|
|
|
(684 |
) |
|
|
4,873 |
|
|
|
4,615 |
|
|
|
(258 |
) |
|
|
18,722 |
|
|
|
17,780 |
|
|
|
(942 |
) |
Government/Government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
226 |
|
|
|
221 |
|
|
|
(5 |
) |
|
|
66 |
|
|
|
66 |
|
|
|
|
|
|
|
292 |
|
|
|
287 |
|
|
|
(5 |
) |
United States |
|
|
216 |
|
|
|
213 |
|
|
|
(3 |
) |
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
230 |
|
|
|
227 |
|
|
|
(3 |
) |
MBS |
|
|
56 |
|
|
|
56 |
|
|
|
|
|
|
|
1,033 |
|
|
|
1,013 |
|
|
|
(20 |
) |
|
|
1,089 |
|
|
|
1,069 |
|
|
|
(20 |
) |
States, municipalities and political
subdivisions |
|
|
3,157 |
|
|
|
3,081 |
|
|
|
(76 |
) |
|
|
342 |
|
|
|
328 |
|
|
|
(14 |
) |
|
|
3,499 |
|
|
|
3,409 |
|
|
|
(90 |
) |
Redeemable preferred stock |
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
33,903 |
|
|
|
31,856 |
|
|
|
(2,047 |
) |
|
|
10,542 |
|
|
|
10,051 |
|
|
|
(491 |
) |
|
|
44,445 |
|
|
|
41,907 |
|
|
|
(2,538 |
) |
Equity securities, available-for-sale |
|
|
1,675 |
|
|
|
1,442 |
|
|
|
(233 |
) |
|
|
21 |
|
|
|
20 |
|
|
|
(1 |
) |
|
|
1,696 |
|
|
|
1,462 |
|
|
|
(234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
35,578 |
|
|
$ |
33,298 |
|
|
$ |
(2,280 |
) |
|
$ |
10,563 |
|
|
$ |
10,071 |
|
|
$ |
(492 |
) |
|
$ |
46,141 |
|
|
$ |
43,369 |
|
|
$ |
(2,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
The following tables present the Companys unrealized loss aging for total fixed maturity and
equity securities classified as available-for-sale depressed over 20% as of September 30, 2008 and
December 31, 2007, by length of time the security was in an unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized Assets Depressed over 20% |
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
437 |
|
|
$ |
6,003 |
|
|
$ |
3,975 |
|
|
$ |
(2,028 |
) |
|
|
138 |
|
|
$ |
1,263 |
|
|
$ |
835 |
|
|
$ |
(428 |
) |
Greater than three to six months |
|
|
120 |
|
|
|
1,381 |
|
|
|
780 |
|
|
|
(601 |
) |
|
|
12 |
|
|
|
146 |
|
|
|
91 |
|
|
|
(55 |
) |
Greater than six to nine months |
|
|
106 |
|
|
|
1,125 |
|
|
|
682 |
|
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than nine to twelve months |
|
|
4 |
|
|
|
24 |
|
|
|
16 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
3 |
|
|
|
13 |
|
|
|
7 |
|
|
|
(6 |
) |
|
|
6 |
|
|
|
40 |
|
|
|
26 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
670 |
|
|
$ |
8,546 |
|
|
$ |
5,460 |
|
|
$ |
(3,086 |
) |
|
|
156 |
|
|
$ |
1,449 |
|
|
$ |
952 |
|
|
$ |
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Securities Depressed over 20% |
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
391 |
|
|
$ |
3,084 |
|
|
$ |
2,300 |
|
|
$ |
(784 |
) |
|
|
116 |
|
|
$ |
635 |
|
|
$ |
492 |
|
|
$ |
(143 |
) |
Greater than three to six months |
|
|
27 |
|
|
|
331 |
|
|
|
230 |
|
|
|
(101 |
) |
|
|
9 |
|
|
|
74 |
|
|
|
21 |
|
|
|
(53 |
) |
Greater than six to nine months |
|
|
31 |
|
|
|
301 |
|
|
|
205 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than nine to twelve months |
|
|
6 |
|
|
|
31 |
|
|
|
21 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
455 |
|
|
$ |
3,747 |
|
|
$ |
2,756 |
|
|
$ |
(991 |
) |
|
|
125 |
|
|
$ |
709 |
|
|
$ |
513 |
|
|
$ |
(196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized Assets
The majority of securitized assets depressed over 20% for six consecutive months are primarily
related to CMBS and sub-prime RMBS. Based upon the Companys cash flow modeling in a severe
negative economic outlook, which shows no loss of principle and interest, and the Companys
assertion of its ability and intent to retain the securities until recovery, it has been determined
that these securities are temporarily impaired as of September 30, 2008.
All Other Securities
The majority of all other securities depressed over 20% for six consecutive months or greater in
the tables above primarily relate to Corporate Financial Services securities that include corporate
bonds as well as preferred equity issued by large high quality financial institutions that are
lower in the capital structure, and as a result have incurred greater price depressions. Based
upon the Companys analysis of these securities and current macroeconomic conditions, the Company
expects to see significant price recovery on these securities within a reasonable period of time,
generally two years.
Variable Interest Entities (VIEs)
The Company is involved with variable interest entities as a collateral manager and as an investor
through normal investment activities. The Companys involvement includes providing investment
management and administrative services for a fee, and holding ownership or other investment
interests in the entities.
VIEs may or may not be consolidated on the Companys condensed consolidated financial statements.
When the Company is the primary beneficiary of the VIE, all of the assets of the VIE are
consolidated into the Companys financial statements. The Company also reports a liability for the
portion of the VIE that represents the minority interest of other investors in the VIE. When the
Company concludes that it is not the primary beneficiary of the VIE, the fair value of the
Companys investment in the VIE is recorded in the Companys financial statements.
The Companys 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.
31
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
As of September 30, 2008 and December 31, 2007, the Company had relationships with four and seven
VIEs, respectively, where the Company was the primary beneficiary. The following table sets forth
the carrying value of assets and liabilities, and the Companys maximum exposure to loss on these
consolidated VIEs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
Total |
|
|
Total |
|
|
Exposure |
|
|
Total |
|
|
Total |
|
|
Exposure |
|
|
|
Assets |
|
|
Liabilities [1] |
|
|
to Loss |
|
|
Assets |
|
|
Liabilities [1] |
|
|
to Loss |
|
CLOs [2] |
|
$ |
336 |
|
|
$ |
41 |
|
|
$ |
291 |
|
|
$ |
128 |
|
|
$ |
47 |
|
|
$ |
107 |
|
Limited partnerships |
|
|
301 |
|
|
|
51 |
|
|
|
251 |
|
|
|
309 |
|
|
|
47 |
|
|
|
262 |
|
Other investments [3] |
|
|
261 |
|
|
|
107 |
|
|
|
148 |
|
|
|
377 |
|
|
|
71 |
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
898 |
|
|
$ |
199 |
|
|
$ |
690 |
|
|
$ |
814 |
|
|
$ |
165 |
|
|
$ |
686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Creditors have no recourse against the Company in the event of default by the VIE. |
|
[2] |
|
The Company provides collateral management services and earns a fee associated with these structures. |
|
[3] |
|
Other investments include one unlevered investment bank loan fund for which the Company provides collateral management
services and earns an associated fee. As of December 31, 2007, two investment structures were also included that were
backed by preferred securities. |
As of September 30, 2008 and December 31, 2007, the Company also held variable interests in four
and five VIEs, respectively, where the Company is not the primary beneficiary. These investments
have been held by the Company for two years. The Companys maximum exposure to loss from these
non-consolidated VIEs as of September 30, 2008 and December 31, 2007 was $410 and $150,
respectively.
As of December 31, 2007, Hartford Investment Management Company (HIMCO) was the collateral
manager of four VIEs with provisions that allowed for termination if the fair value of the
aggregate referenced bank loan portfolio declined below a stated level. These VIEs were market
value CLOs that invested in senior secured bank loans through total return swaps. Two of these
market value CLOs were consolidated, and two were not consolidated. During the first quarter of
2008, the fair value of the aggregate referenced bank loan portfolio declined below the stated
level in all four market value CLOs and the total return swap counterparties terminated the
transactions. Three of these CLOs were restructured from market value CLOs to cash flow CLOs
without market value triggers and the remaining CLO is expected to terminate by the end of 2008.
The Company realized a capital loss of $90, before-tax, from the termination of these CLOs. In
connection with the restructurings, the Company purchased interests in two of the resulting VIEs,
one of which the Company is the primary beneficiary. These purchases resulted in an increase in
the Companys maximum exposure to loss for both consolidated and non-consolidated VIEs.
Derivative Instruments
The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards,
futures and options through one of four Company-approved objectives: to hedge risk arising from
interest rate, equity market, credit spread including issuer default, price or currency exchange
rate risk or volatility; to manage liquidity; to control transaction costs; or to enter into
replication transactions.
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 of 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 foreign-currency fair-value or
cash-flow hedge (foreign-currency hedge), (4) a hedge of a net investment in a foreign operation
(net investment hedge), or (5) held for other investment and/or risk management purposes, which
primarily involve managing asset or liability related risks that do not qualify for hedge
accounting.
The Companys 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.
For a detailed discussion of the Companys use of derivative instruments, see Notes 1 and 4 of
Notes to Consolidated Financial Statements included in The Hartfords 2007 Form 10-K Annual Report.
32
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value and
are presented as assets or liabilities as determined by calculating the net position, taking into
account income accruals and cash collateral held, for each derivative counterparty by legal entity.
The fair value of derivative instruments, excluding income accruals and cash collateral held, are
presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
Fixed maturities, available-for-sale |
|
$ |
|
|
|
$ |
4 |
|
|
$ |
|
|
|
$ |
|
|
Other investments |
|
|
1,263 |
|
|
|
|
|
|
|
528 |
|
|
|
|
|
Reinsurance recoverables |
|
|
438 |
|
|
|
|
|
|
|
128 |
|
|
|
|
|
Other policyholder funds and benefits payable |
|
|
|
|
|
|
2,463 |
|
|
|
2 |
|
|
|
737 |
|
Consumer notes |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
5 |
|
Other liabilities |
|
|
|
|
|
|
661 |
|
|
|
|
|
|
|
617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,701 |
|
|
$ |
3,134 |
|
|
$ |
658 |
|
|
$ |
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the notional amount and fair value of derivatives by hedge
designation as of September 30, 2008, and December 31, 2007. The notional amount of derivative
contracts represents the basis upon which pay or receive amounts are calculated and are not
necessarily reflective of credit risk. The fair value amounts of derivative assets and liabilities
are presented on a net basis in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Notional |
|
|
Fair |
|
|
Notional |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Cash-flow hedges |
|
$ |
8,442 |
|
|
$ |
(79 |
) |
|
$ |
6,637 |
|
|
$ |
(205 |
) |
Fair-value hedges |
|
|
2,886 |
|
|
|
(20 |
) |
|
|
4,922 |
|
|
|
(41 |
) |
Other investment and risk management activities |
|
|
113,602 |
|
|
|
(1,334 |
) |
|
|
99,796 |
|
|
|
(455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
124,930 |
|
|
$ |
(1,433 |
) |
|
$ |
111,355 |
|
|
$ |
(701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The notional amount of derivatives in cash-flow hedge relationships increased since December 31,
2007, primarily due to an increase in interest rate swaps used to hedge changes in cash flows
associated with variable rate bonds due to changes in interest rates.
The notional amount of derivatives in fair-value hedge relationships decreased since December 31,
2007, primarily due to a decline in interest rate swaps used to hedge changes in fair value of
fixed rate bonds due to changes in interest rates.
The notional amount of derivatives used for other investment and risk management activities
increased since December 31, 2007, primarily due to an increase in notional of derivatives
associated with GMWB riders (See Note 4) and statutory reserve hedging instruments, partially
offset by a decline in notional of credit derivatives. During the three months ended September 30,
2008, the Company entered into two additional hedges on the S&P 500 index to economically hedge the
statutory reserve impact of equity exposure arising primarily from GMDB and GMWB obligations
against a decline in the equity markets to certain levels. The notional value and fair value of
these derivatives as of September 30, 2008, is $5.3 billion and $49. The notional amount related
to credit derivatives declined since December 31, 2007, primarily due to terminations and
maturities of credit derivatives, which reduced the overall net credit exposure assumed by the
Company through credit derivatives.
The decrease in net fair value of derivative instruments since December 31, 2007, was primarily
related to GMWB derivatives (See Note 4).
33
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Ineffectiveness on hedges that qualify for hedge accounting and the total change in value for
derivative-based strategies that do not qualify for hedge accounting treatment (non-qualifying
strategies), including periodic derivative net coupon settlements, are reported in earnings and
are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Ineffectiveness on cash-flow hedges |
|
$ |
|
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
1 |
|
Ineffectiveness on fair-value hedges |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(3 |
) |
Total change in value for non-qualifying strategies |
|
|
(1,203 |
) |
|
|
(125 |
) |
|
|
(185 |
) |
|
|
(368 |
) |
Other |
|
|
(46 |
) |
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings impact, before tax |
|
$ |
(1,249 |
) |
|
$ |
(123 |
) |
|
$ |
(228 |
) |
|
$ |
(370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The total change in value for non-qualifying strategies, including periodic derivative net coupon
settlements, are reported in net realized capital gains (losses). The circumstances giving rise to
the changes in these non-qualifying strategies are as follows:
|
|
For the three months ended September 30, 2008, net losses were primarily comprised of net
losses on credit default swaps and GMWB related hedging derivatives (See Note 4), partially
offset by net gains on foreign currency swaps and forwards. The net losses on credit default
swaps were primarily due to losses on credit derivatives that assume credit exposure as a
result of credit spread widening. The Company uses foreign currency swaps and forwards to
hedge the currency risk related to certain foreign currency bonds and liabilities. These
swaps resulted in net gains primarily due to weakening of the Euro. |
|
|
|
For the nine months ended
September 30, 2008, net losses were primarily comprised of net
losses on GMWB related derivatives (See Note 4) and credit derivatives, partially offset by
net gains on the Japan fixed annuity hedging instruments. The net losses on credit
derivatives were primarily comprised of losses on credit derivatives that assume credit
exposure as a result of credit spread widening. The gains on the Japanese fixed annuity
hedging instruments were primarily due to the Japanese yen strengthening against the U.S.
dollar. |
|
|
|
For the three and nine months ended September 30, 2007, net losses were primarily comprised
of net losses on GMWB related derivatives (See Note 4) and credit default swaps, partially
offset by gains on the Japan fixed annuity hedging instruments. The net losses on credit
default swaps were a result of credit spread widening. The gains on the Japanese fixed
annuity hedging instruments were primarily due to the Japanese yen strengthening against the
U.S. dollar. |
For
the three and nine months ended September 30, 2008, the Company has incurred Other losses of
$(46) on derivative instruments due to counterparty default related to the bankruptcy of Lehman
Brothers Holdings Inc. These losses were a result of the contractual collateral threshold amounts
and open collateral calls in excess of such amounts immediately prior to the bankruptcy filing, as
well as interest rate and credit spread movements from the date of the last collateral call to the
date of the bankruptcy filing.
As of
September 30, 2008, 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 $1. 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 all forecasted transactions, excluding interest payments on existing
variable-rate financial instruments) is five years. For the three months ended September 30, 2008,
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
nine months ended September 30, 2008, the Company had $(4), before-tax, of net reclassifications
from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted
transactions that were no longer probable of occurring. For the three and nine months ended
September 30, 2007, the Company had no net reclassifications from AOCI to earnings resulting from
the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable
of occurring.
34
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Deferred Policy Acquisition Costs and Present Value of Future Profits
Changes in deferred policy acquisition costs and present value of future profits by Life and
Property & Casualty were as follows:
Life
Unlock Results
During the third quarter of 2008, the Company completed a comprehensive study of assumptions
underlying estimated gross profits (EGPs), resulting in an unlock of future estimated gross
profits (the Unlock). The study covered all assumptions, including mortality, lapses, expenses,
and separate account returns, in substantially all product lines. The new best estimate
assumptions were applied to the current policy related in-force or account values to project future
gross profits. The after-tax impact on the Companys assets and liabilities as a result of the
unlock during the third quarter was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Income |
|
|
Sales |
|
|
|
|
|
Segment |
|
DAC and |
|
|
Revenue |
|
|
Benefit |
|
|
Inducement |
|
|
|
|
|
After-tax (charge) benefit |
|
PVFP |
|
|
Reserves |
|
|
Reserves [1] |
|
|
Assets |
| |
Total |
|
Retail |
|
$ |
(648 |
) |
|
$ |
18 |
|
|
$ |
(75 |
) |
|
$ |
(27 |
) |
|
$ |
(732 |
) |
Retirement Plans |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49 |
) |
Individual Life |
|
|
(29 |
) |
|
|
(12 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(44 |
) |
International |
|
|
(23 |
) |
|
|
(1 |
) |
|
|
(90 |
) |
|
|
(2 |
) |
|
|
(116 |
) |
Corporate |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(740 |
) |
|
$ |
5 |
|
|
$ |
(168 |
) |
|
$ |
(29 |
) |
|
$ |
(932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
As a result of the unlock, death benefit reserves, in Retail, increased $389, pre-tax,
offset by an increase of $273, pre-tax, in reinsurance recoverables. In International, death
benefit reserves increased $164 pre-tax, offset by an increase of $25, pre-tax, in
reinsurance recoverables. |
Changes in deferred policy acquisition costs and present value of future profits were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Balance, January 1, before cumulative effect of accounting change, pre-tax |
|
$ |
10,514 |
|
|
$ |
9,071 |
|
Cumulative
effect of accounting change, pre-tax (SOP 05-1) [1] |
|
|
|
|
|
|
(79 |
) |
|
|
|
|
|
|
|
Balance, January 1, as adjusted |
|
|
10,514 |
|
|
|
8,992 |
|
Deferred costs |
|
|
1,238 |
|
|
|
1,570 |
|
Amortization Deferred policy acquisition costs and present value of future profits [2] |
|
|
(481 |
) |
|
|
(931 |
) |
Amortization Unlock, pre-tax |
|
|
(1,153 |
) |
|
|
327 |
|
Adjustments to unrealized gains and losses on securities, available-for-sale and other |
|
|
820 |
|
|
|
257 |
|
Effect of currency translation adjustment |
|
|
74 |
|
|
|
61 |
|
|
|
|
|
|
|
|
Balance, September 30 |
|
$ |
11,012 |
|
|
$ |
10,276 |
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The Companys cumulative effect of accounting change includes an additional $(1), pre-tax, related to sales inducements. |
|
[2] |
|
The decrease in amortization from the prior year period is due to lower actual gross profits resulting from increased
realized capital losses primarily from the adoption of SFAS 157 at the beginning of the first quarter of 2008 and
impairment charges taken during 2008. For further discussion of the SFAS 157 transition impact, see Note 4. |
Property & Casualty
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Balance, January 1 |
|
$ |
1,228 |
|
|
$ |
1,197 |
|
Deferred costs |
|
|
1,599 |
|
|
|
1,607 |
|
Amortization Deferred policy acquisition costs |
|
|
(1,567 |
) |
|
|
(1,581 |
) |
|
|
|
|
|
|
|
Balance, September 30 |
|
$ |
1,260 |
|
|
$ |
1,223 |
|
|
|
|
|
|
|
|
35
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Separate Accounts, Death Benefits and Other Insurance Benefit Features
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 account
assets and liabilities. Separate account assets are reported at fair value. Separate account
liabilities are set equal to separate account assets. Separate account assets are segregated from
other investments. Investment income and gains and losses from those separate account assets, which
accrue directly to, and whereby investment risk is borne by the policyholder, are offset by the
related liability changes within the same line item in the condensed consolidated statements of
operations. The fees earned for administrative and contract holder maintenance services performed
for these separate accounts are included in fee income. For the three and nine months ended
September 30, 2008 and 2007, there were no gains or losses on transfers of assets from the general
account to the separate account.
Many of the variable annuity and universal life (UL) contracts issued by the Company offer
various guaranteed minimum death, withdrawal, income, accumulation, and UL secondary guarantee
benefits. UL secondary guarantee benefits ensure that the 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. Guaranteed minimum death and income benefits are offered in
various forms as described in further detail throughout this Note 7. The Company currently
reinsures a portion of the death benefit guarantees associated with its in-force block of business.
Changes in the gross U.S. guaranteed minimum death benefit (GMDB), Japan GMDB/guaranteed minimum
income benefits (GMIB), and UL secondary guarantee benefits sold with annuity and/or UL products
accounted for and collectively known as SOP 03-1 reserve liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UL Secondary |
|
|
|
U.S. GMDB [1] |
|
|
Japan GMDB/GMIB [1] |
|
|
Guarantees [1] |
|
Liability balance as of January 1, 2008 |
|
$ |
529 |
|
|
$ |
42 |
|
|
$ |
19 |
|
Incurred |
|
|
127 |
|
|
|
21 |
|
|
|
16 |
|
Paid |
|
|
(127 |
) |
|
|
(19 |
) |
|
|
|
|
Unlock |
|
|
389 |
|
|
|
164 |
|
|
|
|
|
Currency translation adjustment |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance as of September 30, 2008 |
|
$ |
918 |
|
|
$ |
212 |
|
|
$ |
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The reinsurance recoverable asset related to the U.S. GMDB was $613 as of September 30,
2008. The reinsurance recoverable asset related to the Japan GMDB was $34 as of September
30, 2008. The reinsurance recoverable asset related to the UL Secondary Guarantees was $14
as of September 30, 2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UL Secondary |
|
|
|
U.S. GMDB [1] |
|
|
Japan GMDB/GMIB [1] |
|
|
Guarantees [1] |
|
Liability balance as of January 1, 2007 |
|
$ |
475 |
|
|
$ |
35 |
|
|
$ |
7 |
|
Incurred |
|
|
108 |
|
|
|
12 |
|
|
|
2 |
|
Paid |
|
|
(67 |
) |
|
|
(1 |
) |
|
|
|
|
Unlock |
|
|
(4 |
) |
|
|
(9 |
) |
|
|
|
|
Currency translation adjustment |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance as of September 30, 2007 |
|
$ |
512 |
|
|
$ |
38 |
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The reinsurance recoverable asset related to the U.S. GMDB was $320 as of September 30,
2007. The reinsurance recoverable asset related to the Japan GMDB was $8 as of September 30,
2007. The reinsurance recoverable asset related to the UL Secondary Guarantees was $8 as of
September 30, 2007. |
The net SOP 03-1 reserve liabilities are established by estimating the expected value of net
reinsurance costs and death and income benefits in excess of the projected account balance. The
excess death and income benefits and net reinsurance costs are recognized ratably over the
accumulation period based on total expected assessments. The SOP 03-1 reserve liabilities are
recorded in reserve for future policy benefits in the Companys condensed consolidated balance
sheets. Changes in the SOP 03-1 reserve liabilities are recorded in benefits, losses and loss
adjustment expenses in the Companys condensed consolidated statements of operations. In a manner
consistent with the Companys accounting policy for deferred acquisition costs, the Company
regularly evaluates estimates used and adjusts the additional liability balances, with a related
charge or credit to benefit expense if actual experience or other evidence suggests that earlier
assumptions should be revised.
36
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)
The following table provides details concerning GMDB and GMIB exposure as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breakdown of Individual Variable and Group Annuity Account Value by GMDB/GMIB Type |
|
|
|
|
|
|
|
|
|
|
|
Retained Net |
|
|
Weighted Average |
|
|
|
Account |
|
|
Net Amount |
|
|
Amount |
|
|
Attained Age of |
|
Maximum anniversary value (MAV) [1] |
|
Value |
|
|
at Risk [9] |
|
|
at Risk [9] |
|
|
Annuitant |
|
MAV only |
|
$ |
32,985 |
|
|
$ |
9,699 |
|
|
$ |
2,967 |
|
|
|
66 |
|
With 5% rollup [2] |
|
|
2,363 |
|
|
|
782 |
|
|
|
304 |
|
|
|
65 |
|
With Earnings Protection Benefit Rider (EPB) [3] |
|
|
3,417 |
|
|
|
768 |
|
|
|
130 |
|
|
|
62 |
|
With 5% rollup & EPB |
|
|
946 |
|
|
|
247 |
|
|
|
46 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MAV |
|
|
39,711 |
|
|
|
11,496 |
|
|
|
3,447 |
|
|
|
|
|
Asset Protection Benefit (APB) [4] |
|
|
33,685 |
|
|
|
7,339 |
|
|
|
4,081 |
|
|
|
63 |
|
Lifetime Income Benefit (LIB) Death Benefit [5] |
|
|
9,813 |
|
|
|
246 |
|
|
|
246 |
|
|
|
63 |
|
Reset [6] (5-7 years) |
|
|
4,378 |
|
|
|
619 |
|
|
|
618 |
|
|
|
66 |
|
Return of Premium [7]/Other |
|
|
11,531 |
|
|
|
321 |
|
|
|
173 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal U.S. Guaranteed Minimum Death Benefits |
|
|
99,118 |
|
|
|
20,021 |
|
|
|
8,565 |
|
|
|
63 |
|
Japan Guaranteed Minimum Death and Income Benefit
[8] |
|
|
32,706 |
|
|
|
4,538 |
|
|
|
3,716 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at September 30, 2008 |
|
$ |
131,824 |
|
|
$ |
24,559 |
|
|
$ |
12,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
MAV: the death benefit is the greatest of current account value, net premiums paid and the highest account value on any
anniversary before age 80 (adjusted for withdrawals). |
|
[2] |
|
Rollup: the death benefit is the greatest of the MAV, current account value, 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: the death benefit is the greatest of the MAV, current account value, or contract value plus a percentage of the
contracts growth. The contracts growth is account value less premiums net of withdrawals, subject to a cap of 200% of
premiums net of withdrawals. |
|
[4] |
|
APB: the death benefit is the greater of current account value or MAV, not to exceed current account value plus 25% times
the greater of net premiums and MAV (each adjusted for premiums in the past 12 months). |
|
[5] |
|
LIB: the death benefit is the greatest of current account value, net premiums paid, or for certain contracts a benefit
amount that ratchets over time, generally based on market performance. |
|
[6] |
|
Reset: the death benefit is the greatest of current account value, net premiums paid and the most recent five to seven
year anniversary account value before age 80 (adjusted for withdrawals). |
|
[7] |
|
Return of premium: the death benefit is the greater of current account value and net premiums paid. |
|
[8] |
|
Death benefits include a Return of Premium and MAV (before age 80) paid in a single lump sum. The income benefit is a
guarantee to return initial investment, adjusted for earnings liquidity, paid through a fixed annuity, after a minimum
deferral period of 10, 15 or 20 years. The guaranteed remaining balance related to the Japan GMIB was $29.8 billion and
$26.8 billion as of September 30, 2008 and December 31, 2007, respectively. |
|
[9] |
|
Net amount
at risk and retained net amount at risk are highly sensitive to equity markets movements.
For example, as equity
markets decline, net amount at risk and retained net amount at risk will generally increase. |
See Note 4 for a description of the Companys guaranteed living benefits that are accounted for at
fair value.
37
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Commitments and Contingencies
Litigation
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a
liability insurer defending or providing indemnity for third-party claims brought against insureds
and as an insurer defending coverage claims brought against it. The Hartford accounts for such
activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to
the uncertainties discussed below under the caption Asbestos and Environmental Claims, management
expects that the ultimate liability, if any, with respect to such ordinary-course claims
litigation, after consideration of provisions made for potential losses and costs of defense, will
not be material to the consolidated financial condition, results of operations or cash flows of The
Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for
substantial amounts. These actions include, among others, putative state and federal class actions
seeking certification of a state or national class. Such putative class actions have alleged, for
example, underpayment of claims or improper underwriting practices in connection with various kinds
of insurance policies, such as personal and commercial automobile, property, life and inland
marine; improper sales practices in connection with the sale of life insurance and other investment
products; and improper fee arrangements in connection with investment products and structured
settlements. The Hartford also is involved in individual actions in which punitive damages are
sought, such as claims alleging bad faith in the handling of insurance claims. Like many other
insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among
other things, that insurers had a duty to protect the public from the dangers of asbestos and that
insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in
the underlying asbestos cases. Management expects that the ultimate liability, if any, with
respect to such lawsuits, after consideration of provisions made for estimated losses, will not be
material to the consolidated financial condition of The Hartford. Nonetheless, given the large or
indeterminate amounts sought in certain of these actions, and the inherent unpredictability of
litigation, an adverse outcome in certain matters could, from time to time, have a material adverse
effect on the Companys consolidated results of operations or cash flows in particular quarterly or
annual periods.
Broker Compensation Litigation Following the New York Attorney Generals filing of a civil
complaint against Marsh & McLennan Companies, Inc., and Marsh, Inc. (collectively, Marsh) in
October 2004 alleging that certain insurance companies, including The Hartford, participated with
Marsh in arrangements to submit inflated bids for business insurance and paid contingent
commissions to ensure that Marsh would direct business to them, private plaintiffs brought several
lawsuits against the Company predicated on the allegations in the Marsh complaint, to which the
Company was not party. Among these is a multidistrict litigation in the United States District
Court for the District of New Jersey. There are two consolidated amended complaints filed in the
multidistrict litigation, one related to conduct in connection with the sale of property-casualty
insurance and the other related to alleged conduct in connection with the sale of group benefits
products. The Company and various of its subsidiaries are named in both complaints. The
complaints assert, on behalf of a putative class of persons who purchased insurance through broker
defendants, claims under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act
(RICO), state law, and in the case of the group-benefits products 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 has dismissed
the Sherman Act and RICO claims in both complaints for failure to state a claim and has granted the
defendants motions for summary judgment on the ERISA claims in the group-benefits products
complaint. The district court further has declined to exercise supplemental jurisdiction over the
state law claims, has dismissed those state law claims without prejudice, and has closed both
cases. The plaintiffs have appealed the dismissal of claims in both consolidated amended
complaints, except the ERISA claims.
The Company is also a defendant in two consolidated securities actions and two consolidated
derivative actions filed in the United States District Court for the District of Connecticut. The
consolidated securities actions assert claims on behalf of a putative class of shareholders
alleging that the Company and certain of its executive officers violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 by failing to disclose to the investing public that
The Hartfords business and growth was predicated on the unlawful activity alleged in the New York
Attorney Generals complaint against Marsh. The consolidated derivative actions, brought by
shareholders on behalf of the Company against its directors and an additional executive officer,
allege that the defendants knew adverse non-public information about the activities alleged in the
Marsh complaint and concealed and misappropriated that information to make profitable stock trades
in violation of their duties to the Company. In July 2006, the district court granted defendants
motion to dismiss the consolidated securities actions. The plaintiffs have appealed that decision.
Defendants filed a motion to dismiss the consolidated derivative actions in May 2005, and the
plaintiffs have agreed to stay further proceedings until after the resolution of the appeal from
the dismissal of the securities action.
In September 2007, the Ohio Attorney General filed a civil action in Ohio state court alleging that
certain insurance companies, including The Hartford, conspired with Marsh in violation of Ohios
antitrust statute. The trial court denied the defendants motion to dismiss the complaint in July
2008. The Company disputes the allegations and intends to defend this action vigorously.
38
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Commitments and Contingencies (continued)
Fair Credit Reporting Act Class Action In February 2007, the United States District Court for the
District of Oregon gave final approval of the Companys 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 settlement was made on a claim-in, nationwide-class basis and required eligible class members
to return valid claim forms postmarked no later than June 28, 2007. The Company has paid
approximately $84.3 to eligible claimants in connection with the settlement. The Company has
sought reimbursement from the Companys Excess Professional Liability Insurance Program for the
portion of the settlement in excess of the Companys $10 self-insured retention. Certain insurance
carriers participating in that program have disputed coverage for the settlement, and one of the
excess insurers has commenced an arbitration to resolve the dispute. Management believes it is
probable that the Companys coverage position ultimately will be sustained.
Call-Center Patent Litigation In June 2007, the holder of twenty-one patents related to automated
call flow processes, Ronald A. Katz Technology Licensing, LP (Katz), brought an action against
the Company and various of its subsidiaries in the United States District Court for the Southern
District of New York. The action alleges that the Companys call centers use automated processes
that willfully infringe the Katz patents. Katz previously has brought similar patent-infringement
actions against a wide range of other companies, none of which has reached a final adjudication of
the merits of the plaintiffs claims, but many of which have resulted in settlements under which
the defendants agreed to pay licensing fees. The case has been transferred to a multidistrict
litigation in the United States District Court for the Central District of California, which is
currently presiding over other Katz patent cases. In August 2008, the Company reached a settlement
under which the Company purchased a license under the patent portfolio held by Katz in exchange for
a payment of an immaterial amount.
Asbestos and Environmental Claims As discussed in Note 12, Commitments and Contingencies, of the
Notes to Consolidated Financial Statements under the caption Asbestos and Environmental Claims,
included in the Companys 2007 Form 10-K Annual Report, 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 Hartfords consolidated
operating results, financial condition and liquidity.
39
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans
Components of Net Periodic Benefit Cost
Total net periodic benefit cost for the three months ended September 30, 2008 and 2007 include the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
30 |
|
|
$ |
30 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest cost |
|
|
57 |
|
|
|
52 |
|
|
|
5 |
|
|
|
5 |
|
Expected return on plan assets |
|
|
(69 |
) |
|
|
(70 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
Amortization of prior service cost |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(1 |
) |
Amortization of actuarial loss |
|
|
15 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
31 |
|
|
$ |
32 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost for the nine months ended September 30, 2008 and 2007 include the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
90 |
|
|
$ |
91 |
|
|
$ |
5 |
|
|
$ |
5 |
|
Interest cost |
|
|
171 |
|
|
|
155 |
|
|
|
17 |
|
|
|
16 |
|
Expected return on plan assets |
|
|
(207 |
) |
|
|
(210 |
) |
|
|
(9 |
) |
|
|
(6 |
) |
Amortization of prior service cost |
|
|
(7 |
) |
|
|
(9 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
Amortization of actuarial loss |
|
|
44 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
91 |
|
|
$ |
100 |
|
|
$ |
12 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Stock Compensation Plans
The Company has two primary stock-based compensation plans, The Hartford 2005 Incentive Stock Plan
and The Hartford Employee Stock Purchase Plan. For a description of these plans, see Note 18 of
Notes to Consolidated Financial Statements included in The Hartfords 2007 Form 10-K Annual Report.
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 2008, the Company issues shares from treasury in satisfaction of stock-based
compensation. In 2007, the Company issued new shares in satisfaction of stock-based compensation.
The compensation expense recognized for the stock-based compensation plans was $11 and $17 for the
three months ended September 30, 2008 and 2007, respectively, and $49 and $56 for the nine months
ended September 30, 2008 and 2007, respectively. The income tax benefit recognized for stock-based
compensation plans was $3 and $5 for the three months ended September 30, 2008 and 2007,
respectively, and $15 and $18 for the nine months ended September 30, 2008 and 2007, respectively.
The Company did not capitalize any cost of stock-based compensation. As of September 30, 2008, the
total compensation cost related to non-vested awards not yet recognized was $82, which is expected
to be recognized over a weighted average period of 2.0 years.
40
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Debt
Senior Notes
On August 16, 2008, The Hartford repaid its $425, 5.55% senior notes at maturity.
On May 12, 2008, The Hartford issued $500 of 6.0% senior notes due January 15, 2019.
On March 4, 2008, The Hartford issued $500 of 6.3% senior notes due March 15, 2018.
Junior Subordinated Debentures
On June 6, 2008, the Company issued $500 aggregate principal amount of 8.125% fixed-to-floating
rate junior subordinated debentures (the debentures) due June 15, 2068 for net proceeds of
approximately $493, after deducting underwriting discounts and expenses from the offering. The
debentures bear interest at an annual fixed rate of 8.125% from the date of issuance to, but
excluding, June 15, 2018, payable semi-annually in arrears on June 15 and December 15. From and
including June 15, 2018, the debentures will bear interest at an annual rate, reset quarterly,
equal to three-month LIBOR plus 4.6025%, payable quarterly in arrears on March 15, June 15,
September 15 and December 15 of each year. The Company has the right, on one or more occasions, to
defer the payment of interest on the debentures. The Company may defer interest for up to ten
consecutive years without giving rise to an event of default. Deferred interest will accumulate
additional interest at an annual rate equal to the annual interest rate then applicable to the
debentures. If the Company defers interest for five consecutive years or, if earlier, pays current
interest during a deferral period, which may be paid from any source of funds, the Company will be
required to pay deferred interest from proceeds from the sale of certain qualifying securities.
The debentures carry a scheduled maturity date of June 15, 2038 and a final maturity date of June
15, 2068. During the 180-day period ending on a notice date not more than fifteen and not less than
ten business days prior to the scheduled maturity date, the Company is required to use commercially
reasonable efforts to sell certain qualifying replacement securities sufficient to permit repayment
of the debentures at the scheduled maturity date. If any debentures remain outstanding after the
scheduled maturity date, the unpaid amount will remain outstanding until the Company has raised
sufficient proceeds from the sale of qualifying replacement securities to permit the repayment in
full of the debentures. If there are remaining debentures at the final maturity date, the Company
is required to redeem the debentures using any source of funds.
Subject to the replacement capital covenant described below, the Company can redeem the debentures
at its option, in whole or in part, at any time on or after June 15, 2018 at a redemption price of
100% of the principal amount being redeemed plus accrued but unpaid interest. The Company can
redeem the debentures at its option prior to June 15, 2018 (a) in whole at any time or in part from
time to time or (b) in whole, but not in part, in the event of certain tax or rating agency events
relating to the debentures, at a redemption price equal to the greater of 100% of the principal
amount being redeemed and the applicable make-whole amount, in each case plus any accrued and
unpaid interest.
In connection with the offering of the debentures, the Company entered into a replacement capital
covenant for the benefit of holders of one or more designated series of the Companys
indebtedness, initially the Companys 6.1% notes due 2041. Under the terms of the replacement
capital covenant, if the Company redeems the debentures at any time prior to June 15, 2048 it can
only do so with the proceeds from the sale of certain qualifying replacement securities.
Consumer Notes
As of September 30, 2008 and December 31, 2007, $1,225 and $809, respectively, of consumer notes
were outstanding. As of September 30, 2008, these consumer notes have interest rates ranging from
4.0% to 6.3% for fixed notes and, for variable notes, either consumer price index plus 80 to 267
basis points, or indexed to the S&P 500, Dow Jones Industrials or the Nikkei 225. For the three
months ended September 30, 2008 and 2007, interest credited to holders of consumer notes was $16
and $10, respectively. For the nine months ended September 30, 2008 and 2007, interest credited to
holders of consumer notes was $43 and $21, respectively.
For additional information regarding consumer notes, see Note 14 of Notes to Consolidated Financial
Statements in The Hartfords 2007 Form 10-K Annual Report.
41
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Stockholders Equity
Common Stock
For the nine months ended September 30, 2008, The Hartford repurchased $1.0 billion (14.7 million
shares), of which $500 (7.3 million shares) were repurchased under an accelerated share repurchase
transaction described below.
On June 4, 2008, the Company entered into a collared accelerated share repurchase agreement (ASR)
with a major financial institution. Under the terms of the agreement, The Hartford paid $500 and
initially received a minimum number of shares based on a maximum or capped share price. The
Company funded this payment with proceeds from the offering of the junior subordinated debentures
(see Note 11). The Hartford initially received 6.3 million shares of common stock based on the
cap. The actual per share purchase price and the final number of shares to be repurchased were
based on the volume weighted average price, or VWAP, of the Companys common stock, not to be fixed
above a cap price nor fall lower than a floor price. The contract settled on September 3, 2008,
and the Company received an additional 1.0 million shares. The Company has accounted for this
transaction in accordance with EITF Issue No. 99-7, Accounting for an Accelerated Share Repurchase
Program.
Also in June 2008, The Hartfords Board of Directors authorized a new $1 billion stock repurchase
program which is in addition to the previously announced $2 billion program. The Companys
repurchase authorization permits purchases of common stock, which may be in the open market or
through privately negotiated transactions. The Company also may enter into derivative transactions
to facilitate future repurchases of common stock. The timing of any future repurchases will be
dependent upon several factors, including the market price of the Companys securities, the
Companys capital position, consideration of the effect of any repurchases on the Companys
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. As of September 30,
2008, The Hartford has completed the $2 billion stock repurchase program and has $807 remaining for
stock repurchase under the new $1 billion repurchase program.
13. Investment by Allianz SE in The Hartford
On October 17, 2008, the Company entered into an Investment Agreement (the Investment Agreement),
with Allianz SE (Allianz) under which, among other things, the Company agreed to issue and sell
in a private placement to Allianz for aggregate cash consideration of $2.5 billion: (i) $1.75
billion of the Companys 10% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068 (the
Debentures); (ii) 6,048,387 shares of the Companys Series D Non-Voting Contingent Convertible
Preferred Stock (the Series D Preferred Stock), initially convertible (as discussed below) into
24,193,548 shares of the Companys common stock at an issue price of $31.00 per share; and (iii)
warrants (the Warrants) to purchase the Companys Series B Non-Voting Contingent Convertible
Preferred Stock (the Series B Preferred Stock) and Series C Non-Voting Contingent Convertible
Preferred Stock (the Series C Preferred Stock and, together with the Series B Preferred Stock and
the Series D Preferred Stock, the Preferred Stock) structured to entitle Allianz, upon receipt of
necessary approvals, to purchase 69,115,324 shares of Common Stock at an initial exercise price of
$25.32 per share. The private placement closed on October 17, 2008.
Exercise of the Warrants and conversion of the Preferred Stock are subject to receipt of specified
governmental and regulatory approvals. In addition, the conversion into 34,308,872 shares of Common
Stock of the Series C Preferred Stock underlying certain of the Warrants is subject to the approval
of the Companys stockholders in accordance with applicable regulations of the New York Stock
Exchange. Under the Investment Agreement, the Company is obligated to pay Allianz $75 if such
stockholder approval is not obtained at the first stockholder meeting to consider such approval,
and $50 if such stockholder approval is not obtained at a second such meeting.
If such stockholder approval is not obtained at such record meeting, the Company would be obligated
to use its reasonable best efforts to list the Series C Preferred Stock on a public securities
exchange.
The Company has also agreed that, for the one-year period following October 17, 2008, it will pay
certain amounts to Allianz if the Company effects or agrees to effect any transaction (or series of
transactions) pursuant to which any person or group (within the meaning of the U.S. federal
securities laws) is issued Common Stock or certain equity-related instruments constituting more
than 5% of the Companys fully-diluted Common Stock outstanding at the time for an effective price
per share (determined as provided in the Investment Agreement) of less than $25.32. Amounts so
payable depend on the effective price for the applicable transaction (or the weighted average price
for a series of transactions) and range from $50 if the effective price per share is between $25.31
and $23.00, $150 if between $22.99 and $20.00, $200 if between $19.99 and $15.00 and $300 if $14.99
or less.
Under the Investment Agreement,
Allianz has agreed to certain standstill provisions that are also applicable to
its subsidiaries and affiliates lasting until October 6, 2018, including
limitations or prohibitions, among other things, on the acquisition of shares
of Common Stock that would result in its beneficially owning more than 25% of
the outstanding Common Stock, making or proposing a merger or change of control
transaction or soliciting proxies, subject in each case to certain exceptions
for a change of control and other matters, as specified in the Investment
Agreement.
The Company has also agreed under
the Investment Agreement that, prior to entering into any binding agreement to
effect a merger or similar business combination with a third party or to pay a
break-up fee or similar compensation to a third party with respect to such a
potential transaction, it will permit Allianz a reasonable period of time to
conduct due diligence and make a bona fide competing proposal to the Company.
Debentures
The 10% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068 bear interest at an annual
fixed rate of 10% from the date of issuance to, but excluding, October 15, 2018, payable
semi-annually in arrears on April 15 and October 15. From and including October 15, 2018, the
debentures will bear interest at an annual rate, reset quarterly, equal to three-month LIBOR plus
6.824%, payable quarterly in arrears. The Company has the right, on one or more occasions, to defer
the payment of interest on the debentures. The Company may defer interest for up to ten consecutive
years without giving rise to an event of default. Deferred interest will accumulate additional
interest at an annual rate equal to the annual interest rate then applicable to the debentures. If
the Company defers interest for five consecutive years or, if earlier, pays current interest during
a deferral period, which may be paid from any source of funds, the Company will be required to pay
deferred interest from proceeds from the sale of certain qualifying securities.
42
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Investment by Allianz SE in The Hartford (continued)
In connection with the offering of the debentures, the Company entered into a replacement capital
covenant for the benefit of holders of one or more designated series of the Companys
indebtedness, initially the Companys 6.1% notes due 2041. Under the terms of the replacement
capital covenant, if the Company redeems the debentures at any time prior to October 15, 2048 it
can only do so with the proceeds from the sale of certain qualifying replacement securities.
Subject to the replacement capital covenant, the Company can redeem the debentures at its option,
in whole or in part, at any time on or after October 15, 2018 at a redemption price of 100% of the
principal amount being redeemed plus accrued but unpaid interest.
Preferred Stock
Each share of Preferred Stock is initially convertible into four shares of Common Stock, subject to
receipt of specified governmental, regulatory and other approvals (including receipt of stockholder
approval as described above in the case of the Series C Preferred Stock), which vary by Series. The
conversion ratio under the Preferred Stock is subject to adjustment in certain circumstances.
Warrants
Subject to receipt of specified governmental, regulatory and other approvals, the Warrants are
exercisable to purchase 69,115,324 shares of Common Stock at an initial exercise price of $25.32
per share. Pending receipt of such approvals, the Warrants are immediately exercisable for the
Series B Preferred Stock and the Series C Preferred Stock, which are initially convertible, in the
aggregate, into such number of shares of Common Stock. The exercise price under the Warrants is
subject to adjustment in certain circumstances. The Warrants have a term of seven years.
14. Subsequent Event
Due to significant market declines since September 30, 2008, approximately 95% of the in-force
policies of the Companys 3 Win product in Japan, equaling approximately $3.0 billion of account
value, have declined to 80% or less of their initial deposit, thus triggering the associated GMIB.
This GMIB requires the policyholder to elect one of two options; either receive 80% of their
initial deposit without surrender penalty immediately or receive 100% of the initial deposit via a
15 year pay out annuity. In either case these actions effectively eliminate all future profits on
these policies. As a result of triggering the GMIB for these policies, the Company will record a
DAC charge in the fourth quarter of 2008 of at least $124, after-tax. Additionally, to the extent
policyholders elect the annuity option, the Company will establish a reserve for future annuity
payments. Based on current assumptions about the percentage of policyholders who will elect the
annuity option and expected investment returns, which could be higher or lower than todays investment returns and a yen to dollar exchange rate of ¥93 to $1 dollar, the Company estimates that
establishing this reserve will reduce net income in the fourth quarter by $60-$100, after-tax.
43
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions except share data unless otherwise stated)
Managements 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 September 30, 2008, compared
with December 31, 2007, and its results of operations for the three and nine months ended September
30, 2008, compared to the equivalent 2007 periods. This discussion should be read in conjunction
with the MD&A in The Hartfords 2007 Form 10-K Annual Report.
Certain of the statements contained herein are forward-looking statements. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic, competitive and
legislative developments. These forward-looking statements are subject to change and uncertainty
which are, in many instances, beyond the Companys control and have been made based upon
managements expectations and beliefs concerning future developments and their potential effect
upon the Company. There can be no assurance that future developments will be in accordance with
managements expectations or that the effect of future developments on The Hartford will be those
anticipated by management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors, including, but not limited to, those set
forth in Part II, Item 1A, Risk Factors as well as Part I, Item 1A, Risk Factors in The Hartfords
2007 Form 10-K Annual Report. These factors include: the difficulty in predicting the potential
effect from the legislation and other governmental initiatives taken in response to the current
financial crisis; the difficulty in predicting the Companys potential exposure for asbestos and
environmental claims; the possible occurrence of terrorist attacks; the response of reinsurance
companies under reinsurance contracts and the availability, pricing and adequacy of reinsurance to
protect the Company against losses; changes in financial and capital markets, including changes in
interest rates, credit spreads, equity prices and foreign exchange rates; the inability to
effectively mitigate the impact of equity market volatility on the Companys financial position and
results of operations arising from obligations under annuity product guarantees; the possibility of
unfavorable loss development; the incidence and severity of catastrophes, both natural and
man-made; stronger than anticipated competitive activity; unfavorable judicial or legislative
developments; the potential effect of domestic and foreign regulatory developments, including those
which could increase the Companys business costs and required capital levels; the possibility of
general economic and business conditions that are less favorable than anticipated; the Companys
ability to distribute its products through distribution channels, both current and future; the
uncertain effects of emerging claim and coverage issues; the amount of statutory capital that the
Company has and the Companys ability to hold sufficient statutory capital to maintain financial
strength and credit ratings; a downgrade in the Companys financial strength or credit ratings; the
ability of the Companys subsidiaries to pay dividends to the Company; the Companys ability to
adequately price its property and casualty policies; the ability to recover the Companys systems
and information in the event of a disaster or other unanticipated event; potential for difficulties
arising from outsourcing relationships; potential changes in federal or state tax laws, including
changes impacting the availability of the separate account dividend received deduction; losses due
to defaults by others; the Companys ability to protect its intellectual property and defend
against claims of infringement; and other factors
described in such forward-looking statements.
INDEX
|
|
|
|
|
Overview |
|
|
45 |
|
Critical Accounting Estimates |
|
|
45 |
|
Consolidated Results of Operations |
|
|
53 |
|
Life |
|
|
57 |
|
Retail |
|
|
67 |
|
Individual Life |
|
|
70 |
|
Retirement Plans |
|
|
73 |
|
Group Benefits |
|
|
76 |
|
International |
|
|
78 |
|
Institutional |
|
|
81 |
|
Other |
|
|
84 |
|
Property & Casualty |
|
|
85 |
|
Total Property & Casualty |
|
|
99 |
|
Ongoing Operations |
|
|
100 |
|
Personal Lines |
|
|
105 |
|
Small Commercial |
|
|
111 |
|
Middle Market |
|
|
116 |
|
Specialty Commercial |
|
|
121 |
|
Other Operations (Including Asbestos and
Environmental Claims) |
|
|
126 |
|
Investments |
|
|
131 |
|
Investment Credit Risk |
|
|
140 |
|
Capital Markets Risk Management |
|
|
151 |
|
Capital Resources and Liquidity |
|
|
155 |
|
Accounting Standards |
|
|
161 |
|
44
OVERVIEW
The Hartford is a diversified insurance and financial services company with operations dating back
to 1810. The Company is headquartered in Connecticut and is organized into two major operations:
Life and Property & Casualty, each containing reporting segments. Within the Life and Property &
Casualty operations, The Hartford conducts business principally in eleven reporting segments.
Corporate primarily includes the Companys debt financing and related interest expense, as well as
other capital raising activities and purchase accounting adjustments. To present its operations in
a more meaningful and organized way, management has included separate overviews within the Life and
Property & Casualty sections of MD&A. For further overview of Lifes profitability and analysis,
see page 57. For further overview of Property & Casualtys profitability and analysis, see page
85.
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 from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree
of judgment and are subject to a significant degree of variability: property and casualty reserves,
net of reinsurance; life estimated gross profits used in the valuation and amortization of assets
and liabilities associated with variable annuity and other universal life-type contracts; living
benefits required to be fair valued; valuation of investments and derivative instruments;
evaluation of other-than-temporary impairments on available-for-sale securities; pension and other
postretirement benefit obligations; and contingencies relating to corporate litigation and
regulatory matters. 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. For a discussion of the critical accounting estimates not discussed below, see MD&A in
The Hartfords 2007 Form 10-K Annual Report.
Life Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities
Associated with Variable Annuity and Other Universal Life-Type Contracts
Accounting Policy and Assumptions
Lifes deferred policy acquisition costs asset and present value of future profits (PVFP)
intangible asset (hereafter, referred to collectively as DAC) related to investment contracts and
universal life-type contracts (including variable annuities) are amortized in the same way, over
the estimated life of the contracts acquired using the retrospective deposit method. Under the
retrospective deposit method, acquisition costs are amortized in proportion to the present value of
estimated gross profits (EGPs). EGPs are also used to amortize other assets and liabilities on
the Companys balance sheet, such as sales inducement assets and unearned revenue reserves (URR).
Components of EGPs are used to determine reserves for guaranteed minimum death, income and
universal life secondary guarantee benefits accounted for and collectively referred to as SOP 03-1
reserves. The specific breakdown of the most significant EGP based balances by segment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Variable Annuities - |
|
|
Individual Variable Annuities - |
|
|
Individual |
|
|
|
U.S. |
|
|
Japan |
|
|
Life |
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
DAC |
|
$ |
4,632 |
|
|
$ |
4,982 |
|
|
$ |
1,816 |
|
|
$ |
1,760 |
|
|
$ |
2,618 |
|
|
$ |
2,309 |
|
Sales Inducements |
|
$ |
454 |
|
|
$ |
390 |
|
|
$ |
15 |
|
|
$ |
8 |
|
|
$ |
39 |
|
|
$ |
20 |
|
URR |
|
$ |
108 |
|
|
$ |
124 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,102 |
|
|
$ |
816 |
|
SOP 03-1 reserves |
|
$ |
915 |
|
|
$ |
527 |
|
|
$ |
212 |
|
|
$ |
42 |
|
|
$ |
35 |
|
|
$ |
19 |
|
For most contracts, the Company estimates gross profits over a 20 year horizon as estimated profits
emerging subsequent to that timeframe are immaterial. The Company uses other amortization bases
for amortizing DAC, such as gross costs (net of reinsurance), as a replacement for EGPs when EGPs
are expected to be negative for multiple years of the contracts life. Actual gross profits, in a
given reporting period, that vary from managements initial estimates result in increases or
decreases in the rate of amortization, commonly referred to as a true-up, which are recorded in
the current period. The true-up recorded for the three and nine months ended September 30, 2008
was an increase to amortization of $47, and $105, respectively. The true-up recorded for the three
and nine months ended September 30, 2007 was an increase (decrease) to amortization of $4 and ($10),
respectively.
45
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, and are, to a large
extent, a function of future account value projections for variable annuity products and to a
lesser extent for variable universal life products. The projection of future account values
requires the use of certain assumptions. The assumptions considered to be important in the
projection of future account value, and hence the EGPs, include separate account fund performance,
which is impacted by separate account fund mix, less fees assessed against the contract holders
account balance, surrender and lapse rates, interest margin, mortality, and hedging costs. The
assumptions are developed as part of an annual process and are dependent upon the Companys current
best estimates of future events. The Companys current 20 year separate account return assumption
is approximately 7.2% (after fund fees, but before mortality and expense charges) for U.S. products
and 4.2% (after fund fees, but before mortality and expense charges) in aggregate for all Japanese
products, but varies from product to product. The Company estimates gross profits using the mean
of EGPs derived from a set of stochastic scenarios that have been calibrated to our estimated
separate account return.
Estimating future gross profits is a complex process requiring considerable judgment and the
forecasting of events well into the future. The estimation process, the underlying assumptions and
the resulting EGPs, are evaluated regularly.
The Company plans to complete a comprehensive assumption study and refine its estimate of future
gross profits during the third quarter of each year. Upon completion of an assumption study, the
Company revises its assumptions to reflect its current best estimate, thereby changing its estimate
of projected account values and the related EGPs in the DAC, sales inducement and unearned revenue
reserve amortization models as well as SOP 03-1 reserving models. The DAC asset, as well as the
sales inducement asset, unearned revenue reserves and SOP 03-1 reserves are adjusted with an
offsetting benefit or charge to income to reflect such changes in the period of the revision, a
process known as Unlocking. 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.
In addition to when a comprehensive assumption study is completed, revisions to best estimate
assumptions used to estimate future gross profits are necessary when the EGPs in the Companys
models fall outside of an independently determined reasonable range of EGPs. The Company performs
a quantitative process each quarter to determine the reasonable range of EGPs. This process
involves the use of internally developed models, which run a large number of stochastically
determined scenarios of separate account fund performance. Incorporated in each scenario are
assumptions with respect to lapse rates, mortality and expenses, based on the Companys most recent
assumption study. These scenarios are run for the Companys individual variable annuity businesses
in the United States and Japan, the Companys Retirement Plans businesses, and for the Companys
individual variable universal life business and are used to calculate statistically significant
ranges of reasonable EGPs. The statistical ranges produced from the stochastic scenarios are
compared to the present value of EGPs used in the Companys models. If EGPs used in the Companys
models fall outside of the statistical ranges of reasonable EGPs, an Unlock would be necessary.
If EGPs used in the Companys models fall inside of the statistical ranges of reasonable EGPs, the
Company will not solely rely on the results of the quantitative analysis to determine the necessity
of an Unlock. In addition, the Company considers, on a quarterly basis, other qualitative factors
such as product, regulatory and policyholder behavior trends and may also revise EGPs if those
trends are expected to be significant and were not or could not be included in the statistically
significant ranges of reasonable EGPs.
46
Unlock and Sensitivity Analysis
As described above, as of September 30 2008, the Company completed a comprehensive study of
assumptions underlying EGPs, resulting in an Unlock.
The study covered all assumptions, including mortality, lapses, expenses, interest rate spreads, hedging
costs, and separate account returns, in substantially all product lines. The new best estimate
assumptions were applied to the current policy related in-force or account values to project future
gross profits. The after-tax impact on the Companys assets and liabilities as a result of the
Unlock during the third quarter of 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Income |
|
|
Sales |
|
|
|
|
Segment |
|
DAC and |
|
|
Revenue |
|
|
Benefit |
|
|
Inducement |
|
|
|
|
After-tax (charge) benefit |
|
PVFP |
|
|
Reserves |
|
|
Reserves
[1] |
|
|
Assets |
|
|
Total
[2] |
|
Retail |
|
$ |
(648 |
) |
|
$ |
18 |
|
|
$ |
(75 |
) |
|
$ |
(27 |
) |
|
$ |
(732 |
) |
Retirement Plans |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49 |
) |
Individual Life |
|
|
(29 |
) |
|
|
(12 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(44 |
) |
International |
|
|
(23 |
) |
|
|
(1 |
) |
|
|
(90 |
) |
|
|
(2 |
) |
|
|
(116 |
) |
Corporate |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(740 |
) |
|
$ |
5 |
|
|
$ |
(168 |
) |
|
$ |
(29 |
) |
|
$ |
(932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
As a result of the Unlock, death benefit reserves in Retail, increased $389, pre-tax, offset by an increase of $273,
pre-tax, in reinsurance recoverables. In International, death benefit reserves increased $164, pre-tax, offset by an
increase of $25, pre-tax, in reinsurance recoverables. |
|
[2] |
|
The following were the most significant contributors to the Unlock amounts recorded during the third quarter of 2008: |
|
|
|
Actual separate account returns from the period ending July 31, 2007 to September 30,
2008 were significantly below our aggregated estimated return. |
|
|
|
|
The Company
reduced its 20 year projected separate account return assumption from
7.8% to 7.2% in the U.S. |
|
|
|
|
In Retirement Plans, the Company reduced its estimate of future fees as plans meet
contractual size limits (breakpoints) causing a lower fee schedule to apply and the
Company increased its assumption for future deposits by existing plan participants. |
As a result of the Unlock in the third quarter of 2008, the Company expects a reduction to Life DAC amortization dollars in 2009.
The after-tax impact on the Companys assets and liabilities as a result of the Unlock during
the third quarter of 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Income |
|
|
Sales |
|
|
|
|
Segment |
|
DAC and |
|
|
Revenue |
|
|
Benefit |
|
|
Inducement |
|
|
|
|
After-tax (charge) benefit |
|
PVFP |
|
|
Reserves |
|
|
Reserves
[1] |
|
|
Assets |
|
|
Total
[2] |
|
Retail |
|
$ |
180 |
|
|
$ |
(5 |
) |
|
$ |
(4 |
) |
|
$ |
9 |
|
|
$ |
180 |
|
Retirement Plans |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
Institutional |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Individual Life |
|
|
24 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
16 |
|
International Japan |
|
|
16 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
22 |
|
Corporate |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
215 |
|
|
$ |
(13 |
) |
|
$ |
2 |
|
|
$ |
9 |
|
|
$ |
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
As a result of the Unlock, death benefit reserves, in Retail, decreased $4, pre-tax, offset by a decrease of $10, pre-tax, in reinsurance
recoverables. |
|
[2] |
|
The following were the most significant contributors to the Unlock amounts recorded during the third quarter of 2007: |
|
|
|
Actual separate account returns were above our aggregated estimated return. |
|
|
|
|
During the third quarter of 2007, the Company estimated gross profits using the mean of
EGPs derived from a set of stochastic scenarios that have been calibrated to our estimated
separate account return as compared to prior year where we used a single deterministic
estimation. The impact of this change in estimation was a benefit of $13, after-tax, for
Japan variable annuities and $20, after-tax, for U.S. variable annuities. |
|
|
|
|
As part of its continual enhancement to its assumption setting processes and in
connection with its assumption study, the Company included dynamic lapse behavior
assumptions. Dynamic lapses reflect that lapse behavior will be different depending upon
market movements. The impact of this assumption change along with other base lapse rate
changes was an approximate benefit of $40, after-tax, for U.S. variable annuities. |
47
The Company performs sensitivity analyses with respect to the effect certain assumptions have on
EGPs and the related DAC, sales inducement, unearned revenue reserve and SOP 03-1 reserve balances.
Each of the sensitivities illustrated below are estimated individually, without consideration for
any correlation among the key assumptions. Therefore, it would be inappropriate to take each of
the sensitivity amounts below and add them together in an attempt to estimate volatility for the
respective EGP-related balances in total. In addition, the tables below only provide sensitivities
on separate account returns and lapses. While those two assumptions are critical in projecting
EGPs, as described above, many additional assumptions are necessary to project EGPs and to
determine an Unlock amount. As a result, actual Unlock amounts may vary from those calculated by
using the sensitivities below. The following tables depict the estimated sensitivities for U.S.
variable annuities and Japan variable annuities:
U.S. Variable Annuities
(Increasing separate account returns and decreasing lapse rates generally result in benefits.
Decreasing separate account returns and increasing lapse rates
generally result in charges.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on EGP-related |
|
|
|
balances if Unlocked |
|
|
|
(after-tax) [1] |
|
If actual separate account returns were 1% above or below our aggregated estimated return |
|
$ |
20 |
|
|
|
|
|
|
$ |
40 |
[3] |
If actual lapse rates were 1% above or below our estimated aggregate lapse rate |
|
$ |
10 |
|
|
|
|
|
|
$ |
25 |
[2] |
If we changed our future separate account return rate by 1% from our aggregated
estimated future return |
|
$ |
90 |
|
|
|
|
|
|
$ |
120 |
|
If we changed our future lapse rate by 1% from our estimated aggregate future lapse rate |
|
$ |
50 |
|
|
|
|
|
|
$ |
80 |
[2] |
|
Japan Variable Annuities |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increasing separate account returns and decreasing lapse rates generally result in benefits.
Decreasing separate account returns and increasing lapse rates
generally result in charges.) |
|
|
|
Effect on EGP-related |
|
|
|
balances if Unlocked |
|
|
|
(after-tax) [1] |
|
If actual separate account returns were 1% above or below our aggregated estimated return |
|
$ |
5 |
|
|
|
|
|
|
$ |
20 |
[4][5] |
If actual lapse rates were 1% above or below our estimated aggregate lapse rate |
|
$ |
1 |
|
|
|
|
|
|
$ |
10 |
[2] |
If we
changed our future separate account return rate by 1% from our aggregated estimated future return |
|
$ |
50 |
|
|
|
|
|
|
$ |
70 |
|
If we changed our future lapse rate by 1% from our estimated aggregate future lapse rate |
|
$ |
10 |
|
|
|
|
|
|
$ |
25 |
[2] |
|
|
|
[1] |
|
These sensitivities are reflective of the results of our 2008 assumption studies. The Companys EGP models assume that
separate account returns are earned linearly and that lapses occur linearly (except for certain dynamic lapse features)
throughout the year. Similarly, the sensitivities assume that differential separate account and lapse rates are linear and
parallel and persist for one year from September 30, 2008, the date of our third quarter 2008 Unlock, and reflect all
current in-force and account value data, including the corresponding market levels, allocation of funds, policyholder
behavior and actuarial assumptions. These sensitivities are not perfectly linear nor perfectly symmetrical for increases
and decreases. As such, extrapolating results over a wide range will decrease the accuracy of the sensitivities
predictive ability. Sensitivity results are, in part, based on the current in-the-moneyness of various guarantees
offered with the products. Future market conditions could significantly change the sensitivity results. |
|
[2] |
|
Sensitivity around lapses assumes lapses increase or decrease consistently across all cohort years and products. |
|
[3] |
|
The overall actual return generated by the U.S. variable annuity separate accounts is dependent on several factors,
including the relative mix of the underlying sub-accounts among bond funds and equity funds as well as equity sector
weightings and as a result of the large proportion of separate account assets invested in U.S. equity markets, the
Companys overall U.S. separate account fund performance has been reasonably correlated to the overall performance of the
S&P 500 although no assurance can be provided that this correlation will continue in the future. |
|
[4] |
|
The overall actual return generated by the Japan variable annuity separate accounts is influenced by the variable annuity
products offered in Japan as well as the wide variety of funds offered within the sub-accounts of those products. The
actual return is also dependent upon the relative mix of the underlying sub-accounts among the funds. Unlike in the U.S.,
there is no global index or market that reasonably correlates with the overall Japan actual separate account fund
performance. |
|
[5] |
|
For the Companys 3Win product in Japan, which represented
approximately $3.2 billion account values as of September 30, 2008,
significant movements in the contract holders account value, (which
is partially dependent upon equity market movements due to fixed
contractual investment allocations) down by more than 20% of the
initial deposit, require the contract holder to withdraw 80% of
their initial deposit without penalty or recover their initial
investment through a payout annuity. The exercise of these options
will result in an acceleration of the amount of DAC amortization in
a specific reporting period. As of September 30, 2008, the contract
holder with the largest account value decline was 17.4% down from
their initial deposit. The average for all contract holders was 13%
down from initial deposits. As of September 30, 2008, the Company
had $219 of DAC associated with the Japan 3Win product. Subsequent
to September 30, 2008, equity markets further declined from their
September 30, 2008 levels. As a result, as of October 27, 2008,
approximately 95% of all 3Win contractholders now have account
values that are 20% down from their initial deposit. This will
result in accelerated amortization of DAC in the fourth quarter of
2008 of at least $124, after-tax. Additionally, to the extent
policyholders elect the annuity option, the Company will establish a reserve for future annuity
payments. Based on current assumptions about the percentage of policyholders who will elect the
annuity option and expected investment returns, which could be higher or lower than todays investment returns and a yen to dollar exchange rate of ¥93 to $1 dollar, the Company estimates that
establishing this reserve will reduce net income in the fourth quarter by $60-$100, after-tax. Further declines in
equity markets during the fourth quarter of 2008 or thereafter could
cause the entire DAC balance of $219 to be amortized. |
48
An Unlock only revises EGPs to reflect current best estimate assumptions. With or without an
Unlock, and even after an Unlock occurs, the Company must also test the aggregate recoverability of
the DAC and sales inducement assets by comparing the original amounts deferred to the present value
of total EGPs (both actual past gross profits and estimates of future gross profits). In addition,
the Company routinely stress tests its DAC and sales inducement assets for recoverability against
severe declines in its separate account assets, which could occur if the equity markets experienced
a significant sell-off, as the majority of policyholders funds in the separate accounts is
invested in the equity market. As of September 30, 2008, the Company believed U.S. individual and
Japan individual variable annuity separate account assets could fall, through a combination of
negative market returns, lapses and mortality, by at least 39% and 64%, respectively, before
portions of its DAC and sales inducement assets would be unrecoverable.
However, because equity markets have continued to decline since September 30, 2008, this margin has been reduced.
Valuation of Investments and Derivative Instruments
The Hartfords investments in fixed maturities include bonds, redeemable preferred stock and
commercial paper. These investments, along with certain equity securities, which include common
and non-redeemable preferred stocks, are classified as available-for-sale and are carried at fair
value. The after-tax difference from cost or amortized cost is reflected in stockholders equity
as a component of AOCI, after adjustments for the effect of deducting the life and pension
policyholders share of the immediate participation guaranteed contracts and certain life and
annuity deferred policy acquisition costs and reserve adjustments. The equity investments
associated with the variable annuity products offered in Japan are recorded at fair value and are
classified as trading with changes in fair value recorded in net investment income. Policy loans
are carried at outstanding balance, which approximates fair value. Mortgage loans on real estate
are recorded at the outstanding principal balance adjusted for amortization of premiums or
discounts and net of valuation allowances, if any. 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
Companys share of earnings are included in net investment income. Other investments primarily
consist of derivatives instruments which are carried at fair value.
Valuation of Fixed Maturity, Short-term, and Equity Securities, Available-for-Sale
The fair value for fixed maturity, short-term, and equity securities, available-for-sale, is
determined by management after considering one of three primary sources of information: third party
pricing services, independent broker quotations, or pricing matrices. Security pricing is applied
using a waterfall approach whereby publicly available prices are first sought from third party
pricing services, the remaining unpriced securities are submitted to independent brokers for
prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these
three pricing methods include, but are not limited to, reported trades, benchmark yields, issuer
spreads, bids, offers, and/or estimated cash flows and prepayments speeds. Based on the typical
trading volumes and the lack of quoted market prices for fixed maturities, third party pricing
services will normally derive the security prices 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. Included in the pricing of asset-backed securities (ABS), collateralized
mortgage obligations (CMOs), and mortgage-backed securities (MBS) are estimates of the rate of
future prepayments of principal over the remaining life of the securities. Such estimates are
derived based on the characteristics of the underlying structure and prepayment speeds previously
experienced at the interest rate levels projected for the underlying collateral. Actual prepayment
experience may vary from these estimates.
Prices from third party pricing services are often unavailable for securities that are rarely
traded or are traded only in privately negotiated transactions. As a result, certain securities
are priced via independent broker quotations which utilize inputs that may be difficult to
corroborate with observable market based data. Additionally, the majority of these independent
broker quotations are non-binding. A pricing matrix is used to price securities for which the
Company is unable to obtain either a price from a third party pricing service or an independent
broker quotation. The pricing matrix used by the Company begins with current spread levels to
determine the market price for the security. The credit spreads, as assigned by a knowledgeable
private placement broker, incorporate the issuers credit rating and a risk premium, if warranted,
due to the issuers industry and the securitys time to maturity. The issuer-specific yield
adjustments, which can be positive or negative, are updated twice per year, as of June 30 and
December 31, by the private placement broker and are intended to adjust security prices for
issuer-specific factors. The Company assigns a credit rating to these securities based upon an
internal analysis of the issuers financial strength.
The Company performs a monthly analysis on 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. Examples of procedures performed include, but are not limited to, initial and
on-going review of third party pricing services methodologies, review of pricing statistics and
trends, back testing recent trades, and monitoring of trading volumes. In addition, the Company
ensures whether 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. During the third quarter, the Company made fair value
determinations which lowered prices received from third party pricing services and brokers by a
total of $487. The securities adjusted had an amortized cost and fair value after the adjustment
of $4.3 billion and $2.8 billion, respectively, and were primarily CMBS securities.
49
In accordance with SFAS 157, 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 SFAS 157 fair value hierarchy level based upon
trading activity and the observability of market inputs. For further discussion of SFAS 157, see
Note 4 in the Notes to the Condensed Consolidated Financial Statements. Based on this, each price
was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are
classified into Level 2 because the inputs used in pricing the securities are market observable.
Due to a general lack of transparency in the process that brokers use to develop prices, most
valuations that are based on brokers prices are classified as Level 3. Some valuations may be
classified as Level 2 if the price can be corroborated. Internal matrix priced securities,
primarily consisting of certain private placement debt, are also classified as Level 3. The matrix
pricing of certain private placement debt includes significant non-observable inputs, the
internally determined credit rating of the security and an externally provided credit spread.
The following table presents the fair value of fixed maturity, short-term and equity securities,
available-for-sale, by pricing source and SFAS 157 hierarchy level as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Priced via third party pricing services |
|
$ |
917 |
|
|
$ |
53,183 |
|
|
$ |
3,869 |
|
|
$ |
57,969 |
|
Priced via independent broker quotations |
|
|
|
|
|
|
|
|
|
|
4,178 |
|
|
|
4,178 |
|
Priced via matrices |
|
|
|
|
|
|
367 |
|
|
|
5,495 |
|
|
|
5,862 |
|
Priced via other methods [1] |
|
|
|
|
|
|
4 |
|
|
|
3,808 |
|
|
|
3,812 |
|
Short-term investments [2] |
|
|
837 |
|
|
|
4,516 |
|
|
|
|
|
|
|
5,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,754 |
|
|
$ |
58,070 |
|
|
$ |
17,350 |
|
|
$ |
77,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
2.3 |
% |
|
|
75.2 |
% |
|
|
22.5 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Primarily represents
securities for which adjustments were made to reduce prices received from third parties. |
|
[2] |
|
Short-term investments are primarily valued at amortized cost, which approximates fair value. |
The fair value of a financial instrument is the amount at which the instrument could be exchanged
in a current transaction between knowledgeable, unrelated willing parties using inputs, including
assumptions and estimates, a market participant would utilize. As such, the estimated fair value
of a financial instrument may differ significantly from the amount that could be realized if the
security was sold immediately.
The following table presents the fair value of the significant asset sectors within the SFAS 157
Level 3 securities classification as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
Fair Value |
|
|
Fair Value |
|
ABS |
|
|
|
|
|
|
|
|
Below prime |
|
$ |
1,983 |
|
|
|
11.4 |
% |
Collateralized loan obligations (CLOs) |
|
|
2,472 |
|
|
|
14.3 |
% |
Other |
|
|
908 |
|
|
|
5.2 |
% |
Corporate |
|
|
|
|
|
|
|
|
Matrix priced private placements |
|
|
5,035 |
|
|
|
29.0 |
% |
Other |
|
|
2,830 |
|
|
|
16.3 |
% |
Commercial mortgage-backed securities (CMBS) |
|
|
2,688 |
|
|
|
15.5 |
% |
Preferred stock |
|
|
887 |
|
|
|
5.1 |
% |
Other |
|
|
547 |
|
|
|
3.2 |
% |
|
|
|
|
|
|
|
Total Level 3 securities |
|
$ |
17,350 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
ABS below prime primarily represents sub-prime and Alt-A securities which are classified as
Level 3 due to the lack of liquidity in the market. |
|
|
|
ABS CLOs represent senior secured bank loan CLOs which are primarily priced by independent
brokers. |
|
|
|
ABS Other primarily represents broker priced securities. |
|
|
|
Corporate matrix priced represents private placement securities that are thinly traded and
priced using a pricing matrix which includes significant non-observable inputs. |
|
|
|
Corporate other primarily represents broker priced securities which are thinly traded and
privately negotiated transactions. |
|
|
|
CMBS primarily represents CMBS bonds and commercial real estate collateralized debt
obligations (CRE CDOs) which were either fair valued by the Company or by independent
brokers due to the illiquidity of this sector. |
|
|
|
Preferred stock primarily represents
perpetual preferred securities that are currently illiquid due to market conditions. |
50
Valuation of Derivative Instruments, excluding embedded derivatives within liability contracts
Derivative instruments are reported on the condensed consolidated balance sheets at fair value and
are reported in Other Investments and Other Liabilities. Derivative instruments are fair valued
using pricing valuation models, which utilize market data inputs or independent broker quotations.
As of September 30, 2008 and December 31, 2007, 97% and 89% of derivatives, respectively, based
upon notional values, were priced by valuation models, which utilize independent market data. The
remaining derivatives were priced by broker quotations. The derivatives are valued using
mid-market level inputs, with the exception of the customized swap contracts that hedge GMWB
liabilities, that are predominantly observable in the market. Inputs used to value derivatives
include, but are not limited to, interest swap rates, foreign currency forward and spot rates,
credit spreads and correlations, interest and equity volatility and equity index levels. The
Company performs a monthly analysis on derivative valuations which includes both quantitative and
qualitative analysis. Examples of procedures performed include, but are not limited to, review of
pricing statistics and trends, back testing recent trades, analyzing the impacts of changes in the
market environment, and review of changes in market value for each derivative including those
derivatives priced by brokers.
The following table presents the fair value and notional value of derivatives instruments by SFAS
157 hierarchy level as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Notional Value |
|
|
Fair Value |
|
Quoted prices in active markets for identical assets (Level 1) |
|
$ |
3,084 |
|
|
$ |
|
|
Significant observable inputs (Level 2) |
|
|
25,509 |
|
|
|
(88 |
) |
Significant unobservable inputs (Level 3) |
|
|
31,376 |
|
|
|
690 |
|
|
|
|
|
|
|
|
Total |
|
$ |
59,969 |
|
|
$ |
602 |
|
|
|
|
|
|
|
|
The following table presents the fair value and notional value of the derivative instruments within
the SFAS 157 Level 3 securities classification as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Notional Value |
|
|
Fair Value |
|
Credit derivatives |
|
$ |
3,945 |
|
|
$ |
(568 |
) |
Interest derivatives |
|
|
3,384 |
|
|
|
(23 |
) |
Equity derivatives |
|
|
23,517 |
|
|
|
1,241 |
|
Other |
|
|
530 |
|
|
|
40 |
|
|
|
|
|
|
|
|
Total Level 3 |
|
$ |
31,376 |
|
|
$ |
690 |
|
|
|
|
|
|
|
|
Derivative instruments classified as Level 3 include complex derivatives, primarily consisting of
equity options and swaps, interest rate derivatives which have interest rate optionality, certain
credit default swaps, and long-dated interest rate swaps. These derivative instruments are valued
using pricing models which utilize both observable and unobservable inputs and, to a lesser extent,
broker quotations. A derivative instrument that is priced using both observable and unobservable
inputs will be classified as a Level 3 financial instrument in its entirety if the unobservable
input is significant in developing the price.
The Company utilizes derivative instruments to manage the risk associated with certain assets and
liabilities. However, the derivative instrument may not be classified with the same fair value
hierarchy level as the associated assets and liabilities.
Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities
One of the significant estimates related to available-for-sale securities is the evaluation of
investments for other-than-temporary impairments. If a decline in the fair value of an
available-for-sale security is judged to be other-than-temporary, a charge is recorded in net
realized capital losses equal to the difference between the fair value and cost or amortized cost
basis of the security. In addition, for securities expected to be sold, an other-than-temporary
impairment charge is recognized if the Company does not expect the fair value of a security to
recover to cost or amortized cost prior to the expected date of sale. The fair value of the
other-than-temporarily impaired investment becomes its new cost basis. For fixed maturities, the
Company accretes the new cost basis to par or to the estimated future value over the expected
remaining life of the security by adjusting the securitys yield.
The evaluation of impairments is a quantitative and qualitative process, which is subject to risks
and uncertainties and is intended to determine whether declines in the fair value of investments
should be recognized in current period earnings. The risks and uncertainties include changes in
general economic conditions, the issuers financial condition or near term recovery prospects, the
effects of changes in interest rates or credit spreads and the recovery period. The Company has a
security monitoring process overseen by a committee of investment and accounting professionals
(the committee) that identifies securities that, due to certain characteristics, as described
below, are subjected to an enhanced analysis on a quarterly basis. Based on this evaluation, as of
September 30, 2008, the Company concluded $3.1 billion of unrealized losses were
other-than-temporarily impaired and as of September 30, 2008, the Companys unrealized losses for
fixed maturity and available-for-sale equity securities of $7.8 billion were temporarily impaired.
51
Securities not subject to Emerging Issues Task Force (EITF) Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continued to Be Held by a Transferor in Securitized Financial Assets (non-EITF Issue No. 99-20
securities) that are in an unrealized loss position, are reviewed at least quarterly to determine
if an other-than-temporary impairment is present based on certain quantitative and qualitative
factors. The primary factors considered in evaluating whether a decline in value for non-EITF
Issue No. 99-20 securities is other-than-temporary include: (a) the length of time which the fair
value has been less than cost or amortized cost and the expected recovery period of the security,
generally two years, (b) the financial condition, credit rating and near-term prospects of the
issuer, (c) whether the debtor is current on contractually obligated interest and principal
payments and (d) the intent and ability of the Company to retain the investment for a period of
time sufficient to allow for recovery.
For securitized financial assets with contractual cash flows, including those subject to EITF Issue
No. 99-20, the Company periodically updates its best estimate of cash flows over the life of the
security. Currently the Companys best estimate of cash flows uses severe economic assumptions due
to market uncertainty. If the fair value of a securitized financial asset is less than its cost or
amortized cost and there has been an adverse change in timing or amount of anticipated future cash
flows since the last revised estimate, an other-than-temporary impairment charge is recognized.
The Company also considers its intent and ability to retain a temporarily depressed security until
recovery. Estimating future cash flows 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 underlying collateral. In addition, projections of
expected future cash flows may change based upon new information regarding the performance of the
underlying collateral.
Each quarter, during this analysis, the Company asserts its intent and ability to retain until
recovery those securities judged to be temporarily impaired. Once identified, these securities are
systematically restricted from trading unless approved by the committee. The committee will only
authorize the sale of these securities based on predefined criteria that relate to events that
could not have been foreseen. Examples of the criteria include, but are not limited to, the
deterioration in the issuers creditworthiness, a change in regulatory requirements or a major
business combination or major disposition.
In light of recent regulatory comments by the Securities and Exchange Commission on
other-than-temporary impairments along with expected deliberations at the Financial Accounting
Standards Board, the Company will continue to evaluate its policy on other-than-temporary
impairments.
52
CONSOLIDATED RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
Earned premiums |
|
$ |
3,903 |
|
|
$ |
4,062 |
|
|
|
(4 |
%) |
|
$ |
11,637 |
|
|
$ |
11,760 |
|
|
|
(1 |
%) |
Fee income |
|
|
1,333 |
|
|
|
1,398 |
|
|
|
(5 |
%) |
|
|
4,056 |
|
|
|
4,026 |
|
|
|
1 |
% |
Net investment income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale and other |
|
|
1,103 |
|
|
|
1,298 |
|
|
|
(15 |
%) |
|
|
3,526 |
|
|
|
3,907 |
|
|
|
(10 |
%) |
Equity securities held for trading [1] |
|
|
(3,415 |
) |
|
|
(698 |
) |
|
NM |
|
|
|
(5,840 |
) |
|
|
746 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income (loss) |
|
|
(2,312 |
) |
|
|
600 |
|
|
NM |
|
|
|
(2,314 |
) |
|
|
4,653 |
|
|
NM |
|
Other revenues |
|
|
132 |
|
|
|
126 |
|
|
|
5 |
% |
|
|
377 |
|
|
|
368 |
|
|
|
2 |
% |
Net realized capital losses |
|
|
(3,449 |
) |
|
|
(363 |
) |
|
NM |
|
|
|
(5,102 |
) |
|
|
(565 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
(393 |
) |
|
|
5,823 |
|
|
NM |
|
|
|
8,654 |
|
|
|
20,242 |
|
|
|
(57 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
3,994 |
|
|
|
3,666 |
|
|
|
9 |
% |
|
|
10,937 |
|
|
|
10,543 |
|
|
|
4 |
% |
Benefits, losses and loss adjustment
expenses returns credited on International variable annuities [1] |
|
|
(3,415 |
) |
|
|
(698 |
) |
|
NM |
|
|
|
(5,840 |
) |
|
|
746 |
|
|
NM |
|
Amortization of deferred policy acquisition
costs and present value of future profits |
|
|
1,927 |
|
|
|
476 |
|
|
NM |
|
|
|
3,201 |
|
|
|
2,185 |
|
|
|
46 |
% |
Insurance operating costs and expenses |
|
|
1,029 |
|
|
|
973 |
|
|
|
6 |
% |
|
|
3,026 |
|
|
|
2,826 |
|
|
|
7 |
% |
Interest expense |
|
|
84 |
|
|
|
67 |
|
|
|
25 |
% |
|
|
228 |
|
|
|
196 |
|
|
|
16 |
% |
Other expenses |
|
|
171 |
|
|
|
164 |
|
|
|
4 |
% |
|
|
542 |
|
|
|
522 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
3,790 |
|
|
|
4,648 |
|
|
|
(18 |
%) |
|
|
12,094 |
|
|
|
17,018 |
|
|
|
(29 |
%) |
Income (loss) before income taxes |
|
|
(4,183 |
) |
|
|
1,175 |
|
|
NM |
|
|
|
(3,440 |
) |
|
|
3,224 |
|
|
NM |
|
Income tax expense (benefit) |
|
|
(1,552 |
) |
|
|
324 |
|
|
NM |
|
|
|
(1,497 |
) |
|
|
870 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,631 |
) |
|
$ |
851 |
|
|
NM |
|
|
$ |
(1,943 |
) |
|
$ |
2,354 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Includes investment income and mark-to-market effects of equity securities held for 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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Results |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail [1] |
|
$ |
(822 |
) |
|
$ |
294 |
|
|
NM |
|
|
$ |
(729 |
) |
|
$ |
616 |
|
|
NM |
|
Individual Life |
|
|
(102 |
) |
|
|
55 |
|
|
NM |
|
|
|
(52 |
) |
|
|
151 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Individual Markets Group |
|
|
(924 |
) |
|
|
349 |
|
|
NM |
|
|
|
(781 |
) |
|
|
767 |
|
|
NM |
|
Retirement Plans |
|
|
(160 |
) |
|
|
4 |
|
|
NM |
|
|
|
(134 |
) |
|
|
54 |
|
|
NM |
|
Group Benefits |
|
|
(186 |
) |
|
|
83 |
|
|
NM |
|
|
|
(78 |
) |
|
|
235 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Employer Markets Group |
|
|
(346 |
) |
|
|
87 |
|
|
NM |
|
|
|
(212 |
) |
|
|
289 |
|
|
NM |
|
International [1] |
|
|
(107 |
) |
|
|
90 |
|
|
NM |
|
|
|
(27 |
) |
|
|
185 |
|
|
NM |
|
Institutional |
|
|
(393 |
) |
|
|
8 |
|
|
NM |
|
|
|
(543 |
) |
|
|
60 |
|
|
NM |
|
Other |
|
|
(45 |
) |
|
|
(9 |
) |
|
NM |
|
|
|
(73 |
) |
|
|
(20 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life [1] |
|
|
(1,815 |
) |
|
|
525 |
|
|
NM |
|
|
|
(1,636 |
) |
|
|
1,281 |
|
|
NM |
|
Property & Casualty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines |
|
|
(45 |
) |
|
|
78 |
|
|
NM |
|
|
|
78 |
|
|
|
292 |
|
|
|
(73 |
%) |
Small Commercial |
|
|
82 |
|
|
|
119 |
|
|
|
(31 |
%) |
|
|
270 |
|
|
|
304 |
|
|
|
(11 |
%) |
Middle Market |
|
|
(38 |
) |
|
|
22 |
|
|
NM |
|
|
|
14 |
|
|
|
89 |
|
|
|
(84 |
%) |
Specialty Commercial |
|
|
(43 |
) |
|
|
6 |
|
|
NM |
|
|
|
20 |
|
|
|
50 |
|
|
|
(60 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations underwriting results |
|
|
(44 |
) |
|
|
225 |
|
|
NM |
|
|
|
382 |
|
|
|
735 |
|
|
|
(48 |
%) |
Net servicing income [2] |
|
|
14 |
|
|
|
16 |
|
|
|
(13 |
%) |
|
|
21 |
|
|
|
41 |
|
|
|
(49 |
%) |
Net investment income |
|
|
285 |
|
|
|
346 |
|
|
|
(18 |
%) |
|
|
929 |
|
|
|
1,082 |
|
|
|
(14 |
%) |
Net realized losses |
|
|
(1,268 |
) |
|
|
(72 |
) |
|
NM |
|
|
|
(1,455 |
) |
|
|
(73 |
) |
|
NM |
|
Other expenses |
|
|
(58 |
) |
|
|
(63 |
) |
|
|
8 |
% |
|
|
(180 |
) |
|
|
(179 |
) |
|
|
(1 |
%) |
Income taxes |
|
|
405 |
|
|
|
(111 |
) |
|
NM |
|
|
|
195 |
|
|
|
(452 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations |
|
|
(666 |
) |
|
|
341 |
|
|
NM |
|
|
|
(108 |
) |
|
|
1,154 |
|
|
NM |
|
Other Operations |
|
|
(108 |
) |
|
|
12 |
|
|
NM |
|
|
|
(91 |
) |
|
|
4 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property & Casualty |
|
|
(774 |
) |
|
|
353 |
|
|
NM |
|
|
|
(199 |
) |
|
|
1,158 |
|
|
NM |
|
Corporate |
|
|
(42 |
) |
|
|
(27 |
) |
|
|
(56 |
%) |
|
|
(108 |
) |
|
|
(85 |
) |
|
|
(27 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) [1] |
|
$ |
(2,631 |
) |
|
$ |
851 |
|
|
NM |
|
|
$ |
(1,943 |
) |
|
$ |
2,354 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
For the nine months ended September 30, 2008, the transition impact
related to the SFAS 157 adoption was a reduction in net income of $209
and $11 for Retail and International, respectively. For further
discussion of the SFAS 157 adoption impact, refer to Note 4. |
|
[2] |
|
Net of expenses related to service business. |
53
The Hartford defines NM as not meaningful for increases or decreases greater than 200%, or
changes from a net gain to a net loss position, or vice versa.
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Net income decreased $3.5 billion primarily due to a decrease of $2.3 billion from Life and $1.1
billion from Property & Casualty.
The decrease in Lifes net income was due to the following:
|
|
Realized losses
increased $1,724 as compared to the comparable prior year period primarily
due to increased impairments in 2008. For further
discussion, please refer to the Realized Capital Gains and Losses by Segment table under
Lifes Operating Section of the MD&A. |
|
|
|
Life recorded a DAC unlock charge of $941, after-tax, during the third quarter of 2008 as
compared to a DAC unlock benefit of $210, after-tax, during the third quarter of 2007. See
Critical Accounting Estimates within MD&A for a further discussion on the DAC unlock. |
|
|
|
Declines in assets under management in Retail, primarily due to equity market declines
during 2008, drove fee income in that segment down $65 as compared to the third quarter of
2007. |
|
|
|
Declines in net investment income on securities, available for sale and other of $124, due
to a decrease in investment yield for fixed maturities and declines in limited partnership and
other alternative investments income. |
Property & Casualty results for the three month period changed from net income of $353 in 2007 to a
net loss of $774 in 2008, largely due to an $880 after-tax increase in net realized capital losses
on investments and a $190 after-tax increase in current accident year catastrophes.
|
|
Ongoing Operations results changed from net income of $341 for the three months ended
September 30, 2007 to a net loss of $666 for the three months ended September 30, 2008.
Before income taxes, Ongoing Operations results deteriorated by $1.5 billion, primarily due
to a $1.2 billion increase in net realized capital losses on investments and, to a lesser
extent, a $293 increase in current accident year catastrophes and a $61 decrease in net
investment income, partially offset by a $59 increase in net favorable prior accident year
reserve development. The increase in net realized capital losses of $1.2 billion in 2008 was
primarily due to impairments of corporate debt and equity securities in the financial services
sector. The $293 increase in current accident year catastrophes was largely due to losses
incurred from hurricane Ike in September of 2008. Contributing to the $61 decrease in net
investment income was a decrease in investment yield for limited partnerships and other
alternative investments and, to a lesser extent, a decrease in yield on fixed maturity
investments. Net favorable reserve development for Ongoing Operations in 2008 was largely
driven by releases of reserves for workers compensation, personal auto liability and
professional liability claims. |
|
|
|
Other Operations results changed from net income of $12 for the three months ended
September 30, 2007 to a net loss of $108 for the three months ended September 30, 2008.
Before income taxes, Other Operations results deteriorated by $184, primarily due to a $157
increase in net realized capital losses on investments, largely driven by impairments of
corporate debt and equity securities in the financial services sector. |
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Net income decreased $4.3 billion primarily due to a decrease of $2.9 billion from Life and $1.4
billion from Property & Casualty.
The decrease in Lifes net income was due to the following:
|
|
Realized losses increased as compared to the comparable prior year period primarily due to
net losses from the adoption of SFAS 157 and impairments. For further discussion, please refer
to the Realized Capital Gains and Losses by Segment table under Lifes Operating Section of
the MD&A. |
|
|
|
Life recorded a DAC unlock charge of $941, after-tax, during the third quarter of 2008 as
compared to a DAC unlock benefit of $210, after-tax, during the third quarter of 2007. See
Critical Accounting Estimates with Managements Discussion and Analysis for a further
discussion on the DAC unlock. |
|
|
|
Declines in assets under management in Retail, primarily due to equity market declines
during 2008, drove fee income in that segment down $70 as compared to the nine months ended
September 30, 2007. |
|
|
|
Declines in net investment income on securities, available-for-sale, and other of $212,
primarily due to a decrease in investment yield for fixed maturities and declines in limited
partnership and other alternative investments income. |
|
|
|
Death benefits in Individual Life increased $43 due to growth in in-force and unfavorable
mortality. |
Partially offsetting the decrease in Lifes net income were the following:
|
|
Increased fee income of $72 on asset growth in International businesses. |
|
|
|
Benefits of $13 from provision to filed return adjustments and revisions to estimates of
the separate account dividends received deduction and foreign tax credit. |
|
|
|
A charge of $21 recorded in the second quarter of 2007 for regulatory matters. |
54
Property & Casualty results for the nine month period changed from net income of $1.2 billion in
2007 to a net loss of $199 in 2008, largely due to a $1 billion after-tax increase in net realized
capital losses on investments and a $282 after-tax increase in current accident year catastrophes.
|
|
Ongoing Operations results changed from net income of $1.2 billion for the nine months
ended September 30, 2007 to a net loss of $108 for the nine months ended September 30, 2008.
Before income taxes, Ongoing Operations results deteriorated by $1.9 billion, primarily due
to a $1.4 billion increase in net realized capital losses on investments and, to a lesser
extent, a $434 increase in current accident year catastrophes and a $153 decrease in net
investment income, partially offset by a $141 increase in net favorable prior accident year
reserve development. The increase in net realized capital losses of $1.4 billion in 2008 was
primarily due to impairments of corporate debt and equity securities in the financial services
sector. The $434 increase in current accident year catastrophes was largely due to losses
incurred from hurricane Ike in September of 2008 and an increase in losses from tornadoes and
thunderstorms in the South and Midwest. Contributing to the $153 decrease in net investment
income was a decrease in investment yield for limited partnerships and other alternative
investments and, to a lesser extent, a decrease in yield on fixed maturity investments. Net
favorable reserve development for Ongoing Operations in 2008 was largely driven by releases of
reserves for workers compensation and professional liability claims. |
|
|
Other Operations results changed from net income of $4 for the nine months ended September
30, 2007 to a net loss of $91 for the nine months ended September 30, 2008. Before income
taxes, Other Operations results deteriorated by $144, primarily due to a $173 increase in net
realized capital losses on investments, largely driven by impairments of corporate debt and
equity securities in the financial services sector. Partially offsetting the increase in net
realized capital losses was a $47 decrease in net unfavorable prior accident year reserve
development. |
Income Taxes
The effective tax rate for the three months ended September 30, 2008 and 2007 was 37% and 28%,
respectively. The effective tax rate for the nine months ended September 30, 2008 and 2007 was 44%
and 27%, respectively. The principal causes of the difference between the effective rate and the
U.S. statutory rate of 35% were tax-exempt interest earned on invested assets and the separate
account dividends received deduction (DRD). This caused an increase in the tax benefit on the
2008 pretax loss and a decrease in the tax expense on the 2007 pretax income.
The separate account DRD is estimated for the current year using information from the prior
year-end, adjusted for current year equity market performance. The actual current year DRD can
vary from estimates based on, but not limited to, changes in eligible dividends received by the
mutual funds, amounts of distribution from these mutual funds, amounts of short-term capital gains
at the mutual fund level and the Companys taxable income before the DRD. The Company recorded
benefits related to the separate account DRD of $50 and $27 in the three months ended September 30,
2008 and 2007, and $158 and $115 in the nine months ended September 30, 2008 and 2007,
respectively. The benefit recorded in the nine months ended September 30, 2008 included prior
period adjustments of $9 related to the 2007 tax return.
In Revenue Ruling 2007-61, issued on September 25, 2007, the Internal Revenue Service (IRS)
announced its intention to issue regulations with respect to certain computational aspects of 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 had purported to change
accepted industry and IRS interpretations of the statutes governing these computational questions.
Any regulations that the IRS ultimately proposes 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 (FTC) against its U.S. tax liability for foreign taxes
paid by the Company including payments from its separate account assets. The separate account FTC
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 FTC can vary from the estimates due to actual
FTCs passed through by the mutual funds. During the second quarter of 2008, the Company booked a
tax benefit of $4 related to the 2007 provision to filed return adjustment. The Company recorded
benefits related to separate account FTC of $3 and $3 in the three months ended September 30, 2008
and 2007, and $14 and $7 in the nine months ended September 30, 2008 and 2007, respectively.
55
In total, there was no net change in the Companys unrecognized tax benefits during the nine months
ended September 30, 2008. Unrecognized tax benefits increased by $12 as a result of tax positions
expected to be taken on the Companys 2008 tax return and decreased by $12 with respect to tax
positions taken on the 2007 tax return. Total unrecognized tax benefits as of September 30, 2008
were $76. This entire amount, if it were recognized, would lower the effective tax rate for the
applicable periods.
The Companys federal income tax returns are routinely audited by the IRS. The examination of the
Companys tax returns for 2002 through 2003 is anticipated to be completed during 2008. The 2004
through 2006 examination began during the second quarter of 2008, and is expected to close by the
end of 2010. In addition, the Company is working with the IRS on a possible settlement of a DRD
issue related to prior periods which, if settled, may result in the booking of tax benefits in
early 2009. Such benefits are not expected to be material to the statement of operations.
Outlook
The Hartford provides projections and other forward-looking information in the Outlook section of
each segment discussion within MD&A. The Outlook sections contain many forward-looking
statements, particularly relating to the Companys 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 in the introduction to MD&A above.
Actual results are likely to differ materially from those forecast by the Company, depending on the
outcome of various factors, including, but not limited to, those set forth in each Outlook
section, in Part I, Item 1A, Risk Factors in The Hartfords 2007 Form 10-K Annual Report, and in
Part II, Item 1A, Risk Factors in this Form 10-Q.
56
LIFE
Executive Overview
Life is organized into four groups which are comprised of six reporting segments: The Retail
Products Group (Retail) and Individual Life segments make up the Individual Markets Groups. The
Retirement Plans and Group Benefits segments make up the Employer Markets Group. The Institutional
Solutions Group (Institutional) and International segments each make up their own group. Life
provides investment and retirement products, such as variable and fixed annuities, mutual funds and
retirement plan services and other institutional investment products, such as structured
settlements; individual and private-placement life insurance and products including variable
universal life, universal life, interest sensitive whole life and term life; and group benefit
products, such as group life and group disability insurance.
The following provides a summary of the significant factors used by management to assess the
performance of the business. For a complete discussion of these factors, see MD&A in The
Hartfords 2007 Form 10-K Annual Report.
Performance Measures
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.
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the |
|
|
As of and For the |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Product/Key Indicator Information |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail U.S. Individual Variable Annuities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, beginning of period |
|
$ |
105,345 |
|
|
$ |
121,529 |
|
|
$ |
119,071 |
|
|
$ |
114,365 |
|
Net flows |
|
|
(1,540 |
) |
|
|
(633 |
) |
|
|
(4,357 |
) |
|
|
(1,635 |
) |
Change in market value and other |
|
|
(11,555 |
) |
|
|
2,155 |
|
|
|
(22,464 |
) |
|
|
10,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, end of period |
|
$ |
92,250 |
|
|
$ |
123,051 |
|
|
$ |
92,250 |
|
|
$ |
123,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Mutual Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, beginning of period |
|
$ |
47,239 |
|
|
$ |
45,644 |
|
|
$ |
48,383 |
|
|
$ |
38,536 |
|
Net sales |
|
|
816 |
|
|
|
651 |
|
|
|
3,838 |
|
|
|
4,285 |
|
Change in market value and other |
|
|
(7,152 |
) |
|
|
1,490 |
|
|
|
(11,318 |
) |
|
|
4,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, end of period |
|
$ |
40,903 |
|
|
$ |
47,785 |
|
|
$ |
40,903 |
|
|
$ |
47,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Life Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable universal life account value, end of period |
|
$ |
5,848 |
|
|
$ |
7,402 |
|
|
$ |
5,848 |
|
|
$ |
7,402 |
|
Total life insurance in-force |
|
$ |
191,361 |
|
|
$ |
175,723 |
|
|
$ |
191,361 |
|
|
$ |
175,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans Group Annuities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, beginning of period |
|
$ |
27,029 |
|
|
$ |
26,255 |
|
|
$ |
27,094 |
|
|
$ |
23,575 |
|
Net flows |
|
|
587 |
|
|
|
370 |
|
|
|
2,098 |
|
|
|
1,447 |
|
Change in market value and other |
|
|
(2,448 |
) |
|
|
546 |
|
|
|
(4,024 |
) |
|
|
2,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, end of period |
|
$ |
25,168 |
|
|
$ |
27,171 |
|
|
$ |
25,168 |
|
|
$ |
27,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans Mutual Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, beginning of period |
|
$ |
19,854 |
|
|
$ |
1,329 |
|
|
$ |
1,454 |
|
|
$ |
1,140 |
|
Net sales |
|
|
39 |
|
|
|
18 |
|
|
|
(69 |
) |
|
|
71 |
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
18,725 |
|
|
|
|
|
Change in market value and other |
|
|
(1,767 |
) |
|
|
62 |
|
|
|
(1,984 |
) |
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, end of period |
|
$ |
18,126 |
|
|
$ |
1,409 |
|
|
$ |
18,126 |
|
|
$ |
1,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan Annuities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, beginning of period |
|
$ |
38,122 |
|
|
$ |
33,708 |
|
|
$ |
37,637 |
|
|
$ |
31,343 |
|
Net flows |
|
|
579 |
|
|
|
1,398 |
|
|
|
1,839 |
|
|
|
3,874 |
|
Change in market value and other |
|
|
(3,499 |
) |
|
|
(900 |
) |
|
|
(6,241 |
) |
|
|
192 |
|
Effect of currency translation |
|
|
(80 |
) |
|
|
2,467 |
|
|
|
1,887 |
|
|
|
1,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, end of period |
|
$ |
35,122 |
|
|
$ |
36,673 |
|
|
$ |
35,122 |
|
|
$ |
36,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end closing value |
|
|
1,165 |
|
|
|
1,527 |
|
|
|
1,165 |
|
|
|
1,527 |
|
Daily average value |
|
|
1,252 |
|
|
|
1,489 |
|
|
|
1,324 |
|
|
|
1,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, across all businesses except Retirement Plans Mutual Funds, declined from
prior year results, primarily due to declines in equity markets during 2008. In addition:
|
|
Retail U.S. individual variable annuity recorded increased negative net flows as a result
of increased competition and equity market volatility. |
|
|
|
Retail Mutual funds has seen positive net sales as a result of diversified sales growth. |
|
|
|
Individual Life in-force growth has occurred across multiple product lines, including
variable universal life, guaranteed universal life and term. |
|
|
|
Retirement Plans group annuities has seen positive net flows driven by strong sales. |
|
|
|
Retirement Plans mutual funds reflects an increase of $18.7 billion in Retirement Plans
mutual funds from the acquisition of servicing rights of Sun Life Retirement Services, Inc and
Princeton Retirement Group, both of which closed in the first quarter of 2008. Net sales for
the nine months ended September 30, 2008 reflect expected outflows on the acquired business. |
|
|
|
International Japan Annuities has seen positive net flows and favorable effects from
currency exchange rates for the nine months ended September 30, 2008. Net flows for the three
and nine months ended have decreased in Japan annuities due to increased competition in Japan,
particularly competition relating to products offered with living benefit guarantees. |
58
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 and the related crediting
rates on average general account assets under management. The net investment spreads shown below
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. 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. Investment earnings can also be
influenced by factors such as the actions of the Federal Reserve and a decision
to hold higher levels of short-term investments. The volatile
nature of net investment spread is driven primarily by prepayment premiums on securities and
earnings on limited partnership and other alternative investments.
Net investment spread is calculated as a percentage of general account assets and expressed in
basis points (bps):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Retail Individual Annuity |
|
73bps |
|
169bps |
|
169bps |
|
266bps |
Individual Life |
|
86bps |
|
137bps |
|
116bps |
|
131bps |
Retirement Plans |
|
106bps |
|
161bps |
|
127bps |
|
166bps |
Institutional (GICs,
Funding Agreements,
Funding Agreement Backed
Notes and Consumer Notes) |
|
20bps |
|
113bps |
|
63bps |
|
100bps |
|
|
Retail individual annuity, Retirement Plans and Institutional net investment spreads
decreased primarily due to lower yields on limited partnerships and alternative investment
income. Retail individual annuity and Retirement Plans declines also are impacted by
decreases in interest rates. |
|
|
|
Individual Life net investment spread decreased primarily due to lower yields on fixed
maturities and declines on limited partnership and other alternative investment income,
partially offset by reduced credited rates. |
Premiums
Traditional insurance type products, such as those sold by Group Benefits, collect premiums from
policyholders in exchange for financial protection for the policyholder from a specified insurable
loss, such as death or disability. These premiums together with net investment income earned from
the overall investment strategy are used to pay the contractual obligations under these insurance
contracts. Two major factors, new sales and persistency, impact premium growth. Sales can
increase or decrease in a given year based on a number of factors, including but not limited to,
customer demand for the Companys product offerings, pricing competition, distribution channels and
the Companys reputation and ratings. A majority of new sales correspond with the open enrollment
periods of employers benefits, typically January 1 or July 1. Persistency refers to the
percentage of policies remaining in-force from year-to-year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Group Benefits |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Total premiums and other considerations |
|
$ |
1,109 |
|
|
$ |
1,061 |
|
|
$ |
3,283 |
|
|
$ |
3,237 |
|
Fully insured ongoing sales (excluding buyouts) |
|
$ |
158 |
|
|
$ |
125 |
|
|
$ |
674 |
|
|
$ |
630 |
|
|
|
Total premiums and other considerations include $0 and $26, in buyout premiums for the
three and nine months ended September 30, 2007, respectively, and $1 of buyout premiums for
the three and nine months ended September 30, 2008. Total premiums and other considerations,
excluding buyouts, increased for the three and nine months ended September 30, 2008 as
increases in sales and persistency were offset by lower premiums in the medical stop loss
business as a result of the renewal rights transaction that closed during the second quarter
of 2007. |
59
Expenses
There are three major categories for expenses. The first major category of expenses is benefits
and losses. These include the costs of mortality and morbidity, particularly in the group benefits
business, and mortality in the individual life businesses, as well as other contractholder benefits
to policyholders. In addition, traditional insurance type products generally use a loss ratio
which is expressed as the amount of benefits incurred during a particular period divided by total
premiums and other considerations, as a key indicator of underwriting performance. Since Group
Benefits occasionally buys a block of claims for a stated premium amount, the Company excludes this
buyout from the loss ratio used for evaluating the underwriting results of the business as buyouts
may distort the loss ratio.
The second major category is insurance operating costs and expenses, which is commonly expressed in
a ratio of a revenue measure depending on the type of business. The third major category is the
amortization of deferred policy acquisition costs and the present value of future profits, which is
typically expressed as a percentage of pre-tax income before the cost of this amortization (an
approximation of actual gross profits). Retail individual annuity business accounts for the
majority of the amortization of deferred policy acquisition costs and present value of future
profits for Life.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
insurance expense ratio (individual annuity) |
|
20.5 |
bps |
|
16.6 |
bps |
|
19.5 |
bps |
|
17.2 |
bps |
DAC amortization ratio (individual annuity) [1] |
|
|
555.9 |
% |
|
|
(26.0 |
%) |
|
|
154.6 |
% |
|
|
21.4 |
% |
DAC
amortization ratio (individual annuity) excluding DAC Unlock [1], [3] |
|
|
42.3 |
% |
|
|
47.0 |
% |
|
|
42.8 |
% |
|
|
46.3 |
% |
Insurance expenses, net of deferrals |
|
$ |
294 |
|
|
$ |
305 |
|
|
$ |
933 |
|
|
$ |
889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death benefits |
|
$ |
86 |
|
|
$ |
78 |
|
|
$ |
265 |
|
|
$ |
222 |
|
Insurance expenses, net of deferrals |
|
|
49 |
|
|
|
44 |
|
|
|
147 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and loss adjustment expenses |
|
$ |
780 |
|
|
$ |
765 |
|
|
$ |
2,379 |
|
|
$ |
2,364 |
|
Loss ratio (excluding buyout premiums) |
|
|
70.3 |
% |
|
|
72.1 |
% |
|
|
72.5 |
% |
|
|
72.8 |
% |
Insurance expenses, net of deferrals |
|
$ |
283 |
|
|
$ |
273 |
|
|
$ |
838 |
|
|
$ |
836 |
|
Expense ratio (excluding buyout premiums) |
|
|
26.9 |
% |
|
|
27.0 |
% |
|
|
26.8 |
% |
|
|
27.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Japan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General insurance expense ratio |
|
47.0 |
bps | |
52.3 |
bps |
|
47.3 |
bps |
|
45.9 |
bps |
DAC amortization ratio [2] |
|
|
605.6 |
% |
|
|
20.0 |
% |
|
|
68.2 |
% |
|
|
31.2 |
% |
DAC amortization ratio excluding DAC Unlock [2],
[3] |
|
|
40.6 |
% |
|
|
36.6 |
% |
|
|
40.3 |
% |
|
|
37.2 |
% |
Insurance expenses, net of deferrals |
|
$ |
60 |
|
|
$ |
51 |
|
|
$ |
171 |
|
|
$ |
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Excludes the effects of realized gains and losses. |
|
[2] |
|
Excludes the effects of realized gains and losses except for net periodic settlements. Included in the net realized
capital gain (losses) are amounts that represent the net periodic accruals on currency rate swaps used in the risk
management of Japan fixed annuity products. |
|
[3] |
|
See Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
|
|
The Retail DAC amortization ratio
(individual annuity), excluding the effects of the 2008 Unlock and realized losses,
decreased for the three and nine months ended September 30, 2008,
due to amortization rates declining as a result of
the 2007 Unlock. |
|
|
|
Retail insurance expenses, net of deferrals, increased during the nine months ended September 30, 2008 primarily due to
increasing non-deferrable commissions on strong mutual fund deposits, while insurance expenses, net of deferrals
decreased for the three months ended September 30, 2008 as trail commissions on declining individual annuity account
values decreased. |
|
|
|
Retail individual annuitys general insurance expense ratio has increased primarily due to individual annuity assets
declining due to declining equity markets. |
|
|
|
Individual Life death benefits increased, primarily due to a larger life insurance in-force for the three and nine
months ended September 30, 2008 and unfavorable mortality for the nine months ended September 30, 2008. |
|
|
|
Individual Life
insurance expenses, net of deferrals increased
in line with growth of in-force business. |
|
|
|
Group Benefits loss ratio decreased due to favorable morbidity and favorable medical stop loss experience partially
offset by unfavorable mortality. |
|
|
|
Group Benefits
expense ratio, excluding buyouts decreased for the nine months
ended September 30, 2008 due primarily
to lower commission expense. |
|
|
|
International Japan DAC amortization ratio, excluding DAC Unlock and certain realized gains or losses, increased due
to actual gross profits being less than expected as a result of lower fees earned on declining assets resulting in
negative true-ups and a higher DAC amortization rate. |
|
|
|
International Japan
insurance expenses, net of deferrals increased due to growth and strategic investment in the
Japan operation. |
60
Profitability
Management evaluates the rates of return various businesses can provide as an input in determining
where additional capital should be invested to increase net income and shareholder returns. The
Company uses the return on assets for the individual annuity business for evaluating profitability.
In Group Benefits and Individual Life, after-tax margin is a key indicator of overall
profitability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Ratios |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual annuity return on assets (ROA) |
|
(305.1 |
)bps |
|
83.7 |
bps |
|
(88.2 |
)bps |
|
58.8 |
bps |
Effect of net realized gains (losses), net of tax and DAC on ROA
[1] |
|
(99.5 |
)bps |
|
(21.2 |
)bps |
|
(65.1 |
)bps |
|
(14.2 |
)bps |
Effect of DAC Unlock on ROA [3] |
|
(267.4 |
)bps |
|
54.7 |
bps |
|
(84.0 |
)bps |
|
18.6 |
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA excluding realized gains (losses) and DAC Unlock |
|
61.8 |
bps |
|
50.2 |
bps |
|
60.9 |
bps |
|
54.4 |
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax margin |
|
|
(85.7 |
)% |
|
|
20.6 |
% |
|
|
(7.9 |
)% |
|
|
17.7 |
% |
Effect of net realized gains (losses), net of tax and DAC on
after-tax margin [1] |
|
|
(68.4 |
)% |
|
|
(1.3 |
)% |
|
|
(15.6 |
)% |
|
|
(0.2 |
)% |
Effect of DAC Unlock on after-tax margin [3] |
|
|
(31.9 |
)% |
|
|
5.7 |
% |
|
|
(6.5 |
)% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax margin excluding realized gains (losses) and DAC Unlock |
|
|
14.6 |
% |
|
|
16.2 |
% |
|
|
14.2 |
% |
|
|
16.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans ROA |
|
(141.9 |
)bps |
|
5.7 |
bps |
|
(49.7 |
)bps |
|
27.0 |
bps |
Effect of net realized gains (losses), net of tax and DAC on ROA
[1] |
|
(109.1 |
)bps |
|
(20.0 |
)bps |
|
(55.1 |
)bps |
|
(6.5 |
)bps |
Effect of DAC Unlock on ROA [3] |
|
(43.4 |
)bps |
|
(12.8 |
)bps |
|
(18.1 |
)bps |
|
(4.5 |
)bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA excluding realized gains (losses) and DAC Unlock |
|
10.6 |
bps |
|
38.5 |
bps |
|
23.5 |
bps |
|
38.0 |
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax margin (excluding buyouts) |
|
|
(23.9 |
)% |
|
|
7.1 |
% |
|
|
(2.5 |
)% |
|
|
6.6 |
% |
Effect of net realized gains (losses), net of tax on after-tax
margin [1] |
|
|
(32.2 |
)% |
|
|
(0.5 |
)% |
|
|
(9.6 |
)% |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax margin excluding realized gains (losses) |
|
|
8.3 |
% |
|
|
7.6 |
% |
|
|
7.1 |
% |
|
|
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Japan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Japan ROA |
|
(88.5 |
)bps |
|
111.4 |
bps |
|
0.7 |
bps |
|
80.4 |
bps |
Effect of net realized gains (losses) excluding net periodic
settlements, net of tax and DAC on ROA [1] [2] |
|
(32.8 |
)bps |
|
11.4 |
bps |
|
(29.7 |
)bps |
|
(3.2 |
)bps |
Effect of DAC Unlock on ROA [3] |
|
(125.6 |
)bps |
|
25.0 |
bps |
|
(42.2 |
)bps |
|
8.7 |
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA excluding realized gains (losses) and DAC Unlock |
|
69.9 |
bps |
|
75.0 |
bps |
|
72.6 |
bps |
|
74.9 |
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional ROA |
|
(255.6 |
)bps |
|
5.5 |
bps |
|
(118.5 |
)bps |
|
14.4 |
bps |
Effect of net realized gains (losses), net of tax and DAC on ROA
[1] |
|
(255.6 |
)bps |
|
(19.9 |
)bps |
|
(129.2 |
)bps |
|
(10.6 |
)bps |
Effect of DAC Unlock on ROA [3] |
|
|
|
|
|
0.7 |
bps |
|
|
|
|
|
0.3 |
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA excluding realized gains (losses) and DAC Unlock |
|
|
|
|
|
24.7 |
bps |
|
10.7 |
bps |
|
24.7 |
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
See Realized Capital Gains and Losses by Segment table within the Life Section of the MD&A. |
|
[2] |
|
Included in the net realized capital gain (losses) are amounts that represent the net periodic accruals on currency
rate swaps used in the risk management of Japan fixed annuity products. |
|
[3] |
|
See Unlock and Sensitivity Analysis within the Critical Accounting Estimates section of the MD&A. |
|
|
The increase in Retail individual annuity ROA, excluding realized gains (losses) and the effect of the DAC Unlock,
was primarily due to declining DAC amortization in 2008, and a higher DRD benefit. |
|
|
|
The decrease in Individual Lifes after-tax margin,
excluding realized gains (losses) and the effect of the DAC Unlock,
was primarily due to the implementation of a more efficient capital approach for our secondary
guarantee universal life
business which drove down assets supporting capital and the related net investment income earned
on those assets,
described further in Individual Lifes Outlook section of the MD&A, lower
net investment income from limited partnership and
other alternative investments and lower fees from equity market declines, partially offset by life
insurance in-force growth, lower
credited rates and higher surrender charges for the three months and nine months ended
September 30, 2008, as well as
unfavorable mortality for the nine months ended September 30, 2008. |
|
|
|
The decrease in Retirement Plans ROA, excluding realized gains (losses) and the effect of the DAC Unlock, was primarily
driven by an increase in assets under management due to the acquired rights to service $18.7 billion in mutual funds,
comprised of $15.8 billion in mutual funds from Sun Life Retirement Services, Inc., and $2.9 billion in mutual funds
from Princeton Retirement Group, both of which closed in the first quarter of 2008. The acquired blocks of assets
produce a lower ROA as they are comprised of larger cases that tend to have institutional pricing. Also contributing to
the decrease was lower yields on fixed maturity investments and a decline in
limited partnership and other alternative investment income, higher service and
technology costs and additional expenses associated with the acquisitions.
Offsetting the decrease for the nine months ended September 30, 2008, were benefits associated
with DRD provision to filed return adjustments and changes in estimates. |
61
|
|
The Group Benefit increase in after-tax margin for the three months ended September 30,
2008 was primarily due to a favorable loss ratio. |
|
|
|
International-Japan ROA, excluding realized gains (losses) and the effect of the DAC
Unlock, declined due to lower earned fees as a result of declining account values, lower
surrender fees due to a reduction in lapses and an increase in the DAC amortization rate due
to lower actual gross profits. |
|
|
|
The decrease
in Institutionals ROA, excluding realized gains (losses), is primarily due to
a decrease in limited partnership and other
alternative investment income. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Earned premiums |
|
$ |
1,335 |
|
|
$ |
1,434 |
|
|
|
(7 |
%) |
|
$ |
3,869 |
|
|
$ |
3,887 |
|
|
|
|
|
Fee income |
|
|
1,329 |
|
|
|
1,394 |
|
|
|
(5 |
%) |
|
|
4,042 |
|
|
|
4,013 |
|
|
|
1 |
% |
Net investment income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities, available-for-sale and other |
|
|
759 |
|
|
|
883 |
|
|
|
(14 |
%) |
|
|
2,407 |
|
|
|
2,619 |
|
|
|
(8 |
%) |
Equity securities, held for trading [1] |
|
|
(3,415 |
) |
|
|
(698 |
) |
|
NM |
|
|
|
(5,840 |
) |
|
|
746 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income (loss) |
|
|
(2,656 |
) |
|
|
185 |
|
|
NM |
|
|
|
(3,433 |
) |
|
|
3,365 |
|
|
NM |
|
Net realized capital losses |
|
|
(2,012 |
) |
|
|
(288 |
) |
|
NM |
|
|
|
(3,460 |
) |
|
|
(486 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues [2] |
|
|
(2,004 |
) |
|
|
2,725 |
|
|
NM |
|
|
|
1,018 |
|
|
|
10,779 |
|
|
|
(91 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
2,045 |
|
|
|
1,911 |
|
|
|
7 |
% |
|
|
5,523 |
|
|
|
5,293 |
|
|
|
4 |
% |
Benefits, losses and loss adjustment
expenses returns credited on
International variable annuities [1] |
|
|
(3,415 |
) |
|
|
(698 |
) |
|
NM |
|
|
|
(5,840 |
) |
|
|
746 |
|
|
NM |
|
Amortization of deferred policy acquisition
costs and present value of future profits |
|
|
1,404 |
|
|
|
(49 |
) |
|
NM |
|
|
|
1,634 |
|
|
|
604 |
|
|
|
171 |
% |
Insurance operating costs and other expenses |
|
|
838 |
|
|
|
811 |
|
|
|
3 |
% |
|
|
2,518 |
|
|
|
2,379 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
872 |
|
|
|
1,975 |
|
|
|
(56 |
%) |
|
|
3,835 |
|
|
|
9,022 |
|
|
|
(57 |
%) |
Income (loss) before income taxes |
|
|
(2,876 |
) |
|
|
750 |
|
|
NM |
|
|
|
(2,817 |
) |
|
|
1,757 |
|
|
NM |
|
Income (loss) tax expense (benefit) |
|
|
(1,061 |
) |
|
|
225 |
|
|
NM |
|
|
|
(1,181 |
) |
|
|
476 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) [3] |
|
$ |
(1,815 |
) |
|
$ |
525 |
|
|
NM |
|
|
$ |
(1,636 |
) |
|
$ |
1,281 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Net investment income includes investment income and mark-to-market
effects of equity securities, held for trading, supporting the
international variable annuity business, which are classified in net
investment income with corresponding amounts credited to
policyholders. |
|
[2] |
|
The transition impact related to the SFAS 157 adoption was a reduction
in revenues of $650 for the nine months ended September 30, 2008. For
further discussion of the SFAS 157 transition impact, refer to Note 4
in the Notes to the Condensed Consolidated Financial Statements |
|
[3] |
|
The transition impact related to the SFAS 157 adoption was a reduction
in net income of $220 for the nine months ended September 30, 2008.
For further discussion of the SFAS 157 transition impact, refer to
Note 4 in the Notes to the Condensed Consolidated Financial
Statements. |
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
The decrease in Lifes net income was due to the following:
|
|
Realized losses increased $1,724 as compared to the comparable prior year period primarily
due to increased impairments and realized losses on credit default swaps in 2008. For further
discussion, please refer to the Realized Capital Gains and Losses by Segment table under
Lifes Operating Section of the MD&A. |
|
|
|
Life recorded a DAC Unlock charge of $941, after-tax during, the third quarter of 2008 as
compared to a DAC Unlock benefit of $210, after-tax, during the third quarter of 2007. See
Critical Accounting Estimates within Managements Discussion and Analysis for a further
discussion on the DAC Unlock. |
|
|
|
Declines in assets under management in Retail, primarily due to equity market declines
during 2008, drove fee income in that segment down $65 as compared to the third quarter of
2007. |
|
|
|
Declines in net investment income on securities, available for sale and other of $124, due
to a decrease in investment yield for fixed maturities and declines in limited partnership and
other alternative investment income. |
62
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
The decrease in Lifes net income was due to the following:
|
|
Realized losses increased as compared to the comparable prior year period primarily due to
net losses from the adoption of SFAS 157 and impairments. For further discussion, please refer
to the Realized Capital Gains and Losses by Segment table under Lifes Operating Section of
the MD&A. |
|
|
|
Life recorded a DAC Unlock charge of $941, after-tax, during the third quarter of 2008 as
compared to a DAC Unlock benefit of $210, after-tax, during the third quarter of 2007. See
Critical Accounting Estimates with Managements Discussion and Analysis for a further
discussion on the DAC Unlock. |
|
|
|
Declines in assets under management in Retail, primarily due to equity market declines
during 2008, drove fee income in that segment down $70 as compared to the nine months ended
September 30, 2007. |
|
|
|
Declines in net investment income on securities, available-for-sale and other of $212,
primarily due to a decrease in investment yield for fixed maturities and declines in limited
partnership and other alternative investments income. |
|
|
|
Death benefits in Individual Life increased $43 due to growth in in-force and unfavorable
mortality. |
Partially offsetting the decrease in Lifes net income were the following:
|
|
Increased fee income of $72 on asset growth in International businesses. |
|
|
|
Benefits of $13 from provision to filed return adjustments and revisions to estimates of
the separate account dividends received deduction and foreign tax credit. |
|
|
|
A charge of $21 recorded in the second quarter of 2007 for regulatory matters. |
63
Realized Capital Gains and Losses by Segment
Life includes net realized capital gains and losses in each reporting segment. Following is a
summary of the types of realized gains and losses by segment:
Net realized gains (losses) for three months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity |
|
|
Periodic net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains/ |
|
|
|
|
|
|
|
|
|
|
|
contract |
|
|
coupon |
|
|
GMWB |
|
|
|
|
|
|
|
|
|
|
losses, net |
|
|
|
Gains/losses |
|
|
|
|
|
|
hedges, |
|
|
settlements on |
|
|
derivatives, |
|
|
Other, |
|
|
|
|
|
|
of tax and |
|
|
|
on sales, net |
|
|
Impairments |
|
|
net |
|
|
credit derivatives |
|
|
net |
|
|
net |
|
|
Total |
|
|
DAC |
|
Retail |
|
$ |
(16 |
) |
|
$ |
(329 |
) |
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
(116 |
) |
|
$ |
(21 |
) |
|
$ |
(483 |
) |
|
$ |
(283 |
) |
Individual Life |
|
|
|
|
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
(170 |
) |
|
|
(111 |
) |
Retirement Plans |
|
|
(11 |
) |
|
|
(174 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
5 |
|
|
|
(181 |
) |
|
|
(123 |
) |
Group Benefits |
|
|
|
|
|
|
(428 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(12 |
) |
|
|
(441 |
) |
|
|
(287 |
) |
International |
|
|
1 |
|
|
|
(84 |
) |
|
|
36 |
|
|
|
(8 |
) |
|
|
(17 |
) |
|
|
5 |
|
|
|
(67 |
) |
|
|
(36 |
) |
Institutional |
|
|
(10 |
) |
|
|
(498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97 |
) |
|
|
(605 |
) |
|
|
(394 |
) |
Other |
|
|
(9 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
13 |
|
|
|
(65 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(45 |
) |
|
$ |
(1,760 |
) |
|
$ |
36 |
|
|
$ |
(8 |
) |
|
$ |
(133 |
) |
|
$ |
(102 |
) |
|
$ |
(2,012 |
) |
|
$ |
(1,277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) for three months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
annuity |
|
|
Periodic net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains/ |
|
|
|
|
|
|
|
|
|
|
|
contract |
|
|
coupon |
|
|
GMWB |
|
|
|
|
|
|
|
|
|
|
losses, net |
|
|
|
Gains/losses |
|
|
|
|
|
|
hedges, |
|
|
settlements on |
|
|
derivatives, |
|
|
Other, |
|
|
|
|
|
|
of tax and |
|
|
|
on sales, net |
|
|
Impairments |
|
|
net |
|
|
credit derivatives |
|
|
net |
|
|
net |
|
|
Total |
|
|
DAC |
|
Retail |
|
$ |
(9 |
) |
|
$ |
(22 |
) |
|
$ |
|
|
|
$ |
1 |
|
|
$ |
(139 |
) |
|
$ |
(5 |
) |
|
$ |
(174 |
) |
|
$ |
(87 |
) |
Individual Life |
|
|
(6 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(16 |
) |
|
|
(11 |
) |
Retirement Plans |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(21 |
) |
|
|
(16 |
) |
Group Benefits |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(10 |
) |
|
|
(6 |
) |
International |
|
|
1 |
|
|
|
(3 |
) |
|
|
15 |
|
|
|
(16 |
) |
|
|
(2 |
) |
|
|
5 |
|
|
|
|
|
|
|
1 |
|
Institutional |
|
|
2 |
|
|
|
(36 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(13 |
) |
|
|
(46 |
) |
|
|
(29 |
) |
Other |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
(23 |
) |
|
|
(21 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(20 |
) |
|
$ |
(75 |
) |
|
$ |
15 |
|
|
$ |
(9 |
) |
|
$ |
(141 |
) |
|
$ |
(58 |
) |
|
$ |
(288 |
) |
|
$ |
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
Net realized gains (losses) for the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
annuity |
|
|
Periodic net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains/ |
|
|
|
|
|
|
|
|
|
|
|
contract |
|
|
coupon |
|
|
GMWB |
|
|
SFAS 157 |
|
|
|
|
|
|
|
|
|
|
losses, net |
|
|
|
Gains/losses |
|
|
|
|
|
|
hedges, |
|
|
settlements on |
|
|
derivatives, |
|
|
Transition |
|
|
Other, |
|
|
|
|
|
|
of tax and |
|
|
|
on sales, net |
|
|
Impairments |
|
|
net |
|
|
credit derivatives |
|
|
net |
|
|
Impact |
|
|
net |
|
|
Total |
|
|
DAC |
|
Retail |
|
$ |
(24 |
) |
|
$ |
(393 |
) |
|
$ |
|
|
|
$ |
(3 |
) |
|
$ |
(241 |
) |
|
$ |
(616 |
) |
|
$ |
(34 |
) |
|
$ |
(1,311 |
) |
|
$ |
(576 |
) |
Individual Life |
|
|
(13 |
) |
|
|
(207 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(227 |
) |
|
|
(145 |
) |
Retirement Plans |
|
|
(25 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
(236 |
) |
|
|
(149 |
) |
Group Benefits |
|
|
(2 |
) |
|
|
(468 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(43 |
) |
|
|
(514 |
) |
|
|
(334 |
) |
International |
|
|
(10 |
) |
|
|
(106 |
) |
|
|
13 |
|
|
|
(26 |
) |
|
|
(15 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
(178 |
) |
|
|
(97 |
) |
Institutional |
|
|
(44 |
) |
|
|
(649 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(219 |
) |
|
|
(911 |
) |
|
|
(592 |
) |
Other |
|
|
2 |
|
|
|
(82 |
) |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(83 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(116 |
) |
|
$ |
(2,115 |
) |
|
$ |
13 |
|
|
$ |
(26 |
) |
|
$ |
(256 |
) |
|
$ |
(650 |
) |
|
$ |
(310 |
) |
|
$ |
(3,460 |
) |
|
$ |
(1,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) for the nine months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
annuity |
|
|
Periodic net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains/ |
|
|
|
|
|
|
|
|
|
|
|
contract |
|
|
coupon |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses, net |
|
|
|
Gains/losses |
|
|
|
|
|
|
hedges, |
|
|
settlements on |
|
|
GMWB |
|
|
|
|
|
|
|
|
|
|
of tax |
|
|
|
on sales, net |
|
|
Impairments |
|
|
net |
|
|
credit derivatives |
|
|
derivatives, net |
|
|
Other, net |
|
|
Total |
|
|
and DAC |
|
Retail |
|
$ |
(9 |
) |
|
$ |
(28 |
) |
|
$ |
|
|
|
$ |
1 |
|
|
$ |
(250 |
) |
|
$ |
(17 |
) |
|
$ |
(303 |
) |
|
$ |
(156 |
) |
Individual Life |
|
|
5 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(10 |
) |
|
|
(7 |
) |
Retirement Plans |
|
|
(11 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(19 |
) |
|
|
(14 |
) |
Group Benefits |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
(14 |
) |
|
|
(9 |
) |
International |
|
|
1 |
|
|
|
(3 |
) |
|
|
3 |
|
|
|
(52 |
) |
|
|
(2 |
) |
|
|
(10 |
) |
|
|
(63 |
) |
|
|
(40 |
) |
Institutional |
|
|
7 |
|
|
|
(56 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(21 |
) |
|
|
(69 |
) |
|
|
(44 |
) |
Other |
|
|
4 |
|
|
|
(1 |
) |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
(27 |
) |
|
|
(8 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(4 |
) |
|
$ |
(109 |
) |
|
$ |
3 |
|
|
$ |
(34 |
) |
|
$ |
(252 |
) |
|
$ |
(90 |
) |
|
$ |
(486 |
) |
|
$ |
(278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
For the three months ended September 30, 2008, net realized capital losses increased as a result of
impairments and increases in Other, net losses. For the nine months ended September 30, 2008, net
realized capital losses increased primarily due to the SFAS 157 transition impact in the first
quarter of 2008 and higher net losses on both impairments and other net losses. A more expanded
discussion of these components is as follows:
|
|
|
Gross Gains and
Losses on Sale
|
|
Gross gains on sales for the three and nine months ended September 30, 2008 were
predominantly within fixed maturities and were primarily comprised of corporate securities.
Gross losses on sales for the three and nine months ended September 30, 2008 were primarily
comprised of corporate securities, CMBS, and municipal securities, as well as $17 of CLOs in
the first quarter for which HIMCO is the collateral manager. Gross gains and losses on sale,
excluding the loss on CLOs, primarily resulted from the decision to reallocate the portfolio
to securities with more favorable risk/return profiles. During the three and nine months
ended September 30, 2008, securities sold at a loss were depressed, on average, approximately
7% and 2%, respectively, at the respective periods impairment review date and were deemed to
be temporarily impaired. |
|
|
|
|
|
Gross gains and losses on sales for three and nine months ended September 30, 2007
were primarily comprised of corporate securities. During the three and nine months ended
September 30, 2007, securities sold at a loss were depressed, on average, approximately 2%
and 1%, respectively, at the respective periods impairment review date and were deemed to be
temporarily impaired. |
65
|
|
|
Impairments
|
|
See the Other-Than-Temporary Impairments section for information on impairment losses. |
|
|
|
SFAS 157
|
|
See Note 4 in the Notes to the Condensed Consolidated
Financial Statements for a discussion of the SFAS 157 transition
impact. |
|
|
|
GMWB
|
|
See Note 4 in the Notes to the Condensed Consolidated
Financial Statements for a discussion of GMWB gains and losses. |
|
|
|
Other
|
|
Other, net losses for the three and nine months ended
September 30, 2008 were primarily related to net losses on credit
derivatives of $106 and $314, respectively. The net losses on
credit derivatives were primarily due to significant credit
spread widening on credit derivatives that assume credit
exposure. Included in the nine months ended September 30, 2008
were losses incurred in the first quarter on HIMCO managed CLOs.
Also included were derivative related losses of $39 for the three
and nine months ended September 30, 2008 due to counterparty
default related to the bankruptcy of Lehman Brothers Holdings
Inc. |
|
|
|
|
|
Other, net losses for the three and nine months ended
September 30, 2007 were primarily driven by the change in value
of non-qualifying derivatives due to credit spread widening as
well as fluctuations in interest rates and foreign currency
exchange rates. |
66
RETAIL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Fee income and other |
|
$ |
723 |
|
|
$ |
788 |
|
|
|
(8 |
%) |
|
$ |
2,229 |
|
|
$ |
2,299 |
|
|
|
(3 |
%) |
Earned premiums |
|
|
11 |
|
|
|
(13 |
) |
|
NM |
|
|
|
(2 |
) |
|
|
(48 |
) |
|
|
96 |
% |
Net investment income |
|
|
184 |
|
|
|
205 |
|
|
|
(10 |
%) |
|
|
567 |
|
|
|
602 |
|
|
|
(6 |
%) |
Net realized capital losses |
|
|
(483 |
) |
|
|
(174 |
) |
|
|
(178 |
%) |
|
|
(1,311 |
) |
|
|
(303 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues [1] |
|
|
435 |
|
|
|
806 |
|
|
|
(46 |
%) |
|
|
1,483 |
|
|
|
2,550 |
|
|
|
(42 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
351 |
|
|
|
210 |
|
|
|
67 |
% |
|
|
741 |
|
|
|
609 |
|
|
|
22 |
% |
Insurance operating costs and other expenses |
|
|
294 |
|
|
|
305 |
|
|
|
(4 |
%) |
|
|
933 |
|
|
|
889 |
|
|
|
5 |
% |
Amortization of deferred policy acquisition
costs and present value of future profits |
|
|
1,118 |
|
|
|
(126 |
) |
|
NM |
|
|
|
1,130 |
|
|
|
262 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
1,763 |
|
|
|
389 |
|
|
NM |
|
|
|
2,804 |
|
|
|
1,760 |
|
|
|
59 |
% |
Income (loss) before income taxes |
|
|
(1,328 |
) |
|
|
417 |
|
|
NM |
|
|
|
(1,321 |
) |
|
|
790 |
|
|
NM |
Income tax expense (benefit) |
|
|
(506 |
) |
|
|
123 |
|
|
NM |
|
|
|
(592 |
) |
|
|
174 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) [2] |
|
$ |
(822 |
) |
|
$ |
294 |
|
|
NM |
|
|
$ |
(729 |
) |
|
$ |
616 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual variable annuity account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92,250 |
|
|
$ |
123,051 |
|
|
|
(25 |
%) |
Individual fixed annuity and other account
values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,687 |
|
|
|
10,263 |
|
|
|
4 |
% |
Other retail products account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
671 |
|
|
|
(25 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total account values [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,437 |
|
|
|
133,985 |
|
|
|
(23 |
%) |
Retail mutual fund assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,903 |
|
|
|
47,785 |
|
|
|
(14 |
%) |
Other mutual fund assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,084 |
|
|
|
2,039 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mutual fund assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,987 |
|
|
|
49,824 |
|
|
|
(14 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
146,424 |
|
|
$ |
183,809 |
|
|
|
(20 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
For the nine months ended September 30, 2008, the transition impact
related to the SFAS 157 adoption was a reduction in revenues of $616.
For further discussion of the SFAS 157 transition impact, refer to
Note 4 in the Notes to the Condensed Consolidated Financial
Statements. |
|
[2] |
|
For the nine months ended September 30, 2008, the transition impact
related to the SFAS 157 adoption was a reduction in net income of
$209. For further discussion of the SFAS 157 transition impact, refer
to Note 4 in the Notes to the Condensed Consolidated Financial
Statements. |
|
[3] |
|
For the nine months ended September 30, 2008, includes policyholders
balances for investment contracts and reserves for future policy
benefits for insurance contracts. |
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Net income decreased for the three and nine months ended September 30, 2008, primarily due to
increased realized capital losses due to other than temporary impairment charges and the 2008
Unlock charge as compared to the 2007 Unlock benefit. The nine months ended September 30, 2008
also included the adoption of SFAS 157 during the first quarter of 2008, which resulted in realized
capital losses of $616. For further discussion of the SFAS 157 transition impact, see Note 4 in
the Notes to the Condensed Consolidated Financial Statements. For further discussion of realized
capital losses, see the Realized Capital Gains and Losses by Segment table under Lifes Operating
Section of the MD&A. For further discussion of the 2008 and 2007 Unlock, see the Critical
Accounting Estimates section of the MD&A. The following other factors contributed to the changes
in net income:
|
|
|
|
|
Fee income and other
decreased for the three and nine
months ended September 30, 2008
primarily as a result of lower
variable annuity fee income of $94
and $151, respectively. Variable
annuity fee income decreased for the
three and nine months ended
September 30, 2008 due to a decline
in average variable annuity account
values. The decrease in average
variable annuity account values can
be attributed to market depreciation
of $25 billion and net outflows of
$5 billion over the past four
quarters. Net outflows were driven
by surrender activity due to the
aging of the variable annuity
in-force block of business;
increased sales competition,
particularly competition related to
guaranteed living benefits and
volatility in the equity markets. |
|
|
|
Earned Premiums
|
|
Earned Premiums increased
for the three and nine months ended
September 30, 2008 primarily due to
an increase in life contingent
premiums combined with a decrease in
reinsurance premiums as a result of
significant decline in equity
markets values. |
67
|
|
|
|
|
Net investment income was
lower primarily due to decreased
yields on limited partnership and other
alternative investments, combined
with lower yields on fixed maturity
investments due to interest rate
declines. |
|
|
|
Benefits, losses and loss adjustment
expenses
|
|
Benefits, losses and loss
adjustment expenses increased for
the three and nine months ended
September 30, 2008 primarily as a
result of the impact of the 2008
Unlock of the GMDB reserve and sales
inducement asset. |
|
|
|
Insurance operating costs and other
expenses
|
|
Insurance operating costs
and other expenses declined for the
three months ended September 30,
2008, principally driven by lower
trail commissions as a result of the
significant market declines at the
end of the third quarter. Insurance
operating costs increased for the
nine months ended September 30, 2008
primarily as a result of increased
non-deferrable commissions on higher
sales of retail mutual funds. |
|
|
|
Amortization of deferred policy
acquisition costs and present value
of future profits (DAC)
|
|
Amortization of DAC
increased for the three and nine
months ended September 30, 2008,
primarily due to the impact of the
2008 Unlock charge as compared to
the 2007 Unlock benefit, offset by
DAC amortization benefits associated
with increased realized capital
losses. The nine months ended
September 30, 2008 also includes a
DAC benefit associated with the
adoption of SFAS 157 at the
beginning of the first quarter of
2008. |
|
|
|
Income tax expense (benefit)
|
|
For the nine months ended
September 30, 2008, the income tax
benefits are caused by the
pre-tax
losses driven by the factors
previously discussed. Differences
from tax rates of 35% are caused by
the recognition of tax benefits
associated with the dividends
received deduction and foreign tax
credits. |
68
Outlook
Management believes the market for retirement products continues to expand as individuals
increasingly save and plan for retirement. Demographic trends suggest that as the baby boom
generation matures, a significant portion of the United States population will allocate a greater
percentage of their disposable incomes to saving for their retirement years due to uncertainty
surrounding the Social Security system and increases in average life expectancy.
Near-term, the industry and the Company are experiencing lower variable annuity sales as a result
of recent market turbulence and uncertainty in the U.S. financial system. Current market pressures
are also increasing the expected claim costs, the cost and effectiveness of hedging programs, and
the level of capital needed to support living benefit guarantees. Some competitors may eventually
revise pricing for living benefit guarantees or change the guarantees offered, but there is no
assurance that this will happen.
Significant
declines in equity markets and increased equity market volatility are also likely to
continue to impact the cost and effectiveness of our GMWB hedging program. The significant
declines and increased volatility in the equity markets caused a realized capital loss of $116 during the third quarter. As of the date of this
filing, equity markets have experienced a sharp decline from September 30, 2008 levels and market
volatility has increased dramatically. While the hedging program has performed as expected given the market conditions, hedge losses to date have
significantly exceeded those sustained in the third quarter given the absolute level of liability movements. Continued equity market volatility
could result in material losses in our hedging program. For more information on the GMWB
hedging program, see the Equity Risk Management section within Capital Markets
Risk Management.
During periods of volatile equity markets, policyholders may allocate more of their variable
account assets to the fixed account options and fixed annuities may see increased sales.
For the retail mutual fund business net sales can vary significantly depending on market
conditions. As this business continues to evolve, success will be driven by diversifying net sales
across the mutual fund platform, delivering superior investment performance and creating new
investment solutions for current and future mutual fund shareholders.
Based on results to date, managements current full year projections for 2008 are as follows:
|
|
Variable annuity sales of $8 billion to $8.5 billion |
|
|
|
Fixed annuity sales of $1.1 billion to $1.3 billion |
|
|
|
Retail mutual fund sales of $14 billion to $14.8 billion |
|
|
|
Variable annuity outflows of $6.2 billion to $6.9 billion |
|
|
|
Fixed annuity flows of $(100) to $300 |
|
|
|
Retail mutual fund net sales of $2 billion to $2.5 billion |
69
INDIVIDUAL LIFE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Fee income and other |
|
$ |
220 |
|
|
$ |
206 |
|
|
|
7 |
% |
|
$ |
675 |
|
|
$ |
638 |
|
|
|
6 |
% |
Earned premiums |
|
|
(15 |
) |
|
|
(14 |
) |
|
|
(7 |
%) |
|
|
(52 |
) |
|
|
(42 |
) |
|
|
(24 |
%) |
Net investment income |
|
|
84 |
|
|
|
91 |
|
|
|
(8 |
%) |
|
|
264 |
|
|
|
267 |
|
|
|
(1 |
%) |
Net realized capital losses |
|
|
(170 |
) |
|
|
(16 |
) |
|
NM |
|
|
|
(227 |
) |
|
|
(10 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
119 |
|
|
|
267 |
|
|
|
(55 |
%) |
|
|
660 |
|
|
|
853 |
|
|
|
(23 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
159 |
|
|
|
143 |
|
|
|
11 |
% |
|
|
466 |
|
|
|
415 |
|
|
|
12 |
% |
Insurance operating costs and other expenses |
|
|
49 |
|
|
|
44 |
|
|
|
11 |
% |
|
|
147 |
|
|
|
141 |
|
|
|
4 |
% |
Amortization of deferred policy acquisition
costs and present value of future profits |
|
|
73 |
|
|
|
(1 |
) |
|
NM |
|
|
|
142 |
|
|
|
78 |
|
|
|
82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
281 |
|
|
|
186 |
|
|
|
51 |
% |
|
|
755 |
|
|
|
634 |
|
|
|
19 |
% |
Income (loss) before income taxes |
|
|
(162 |
) |
|
|
81 |
|
|
NM |
|
|
|
(95 |
) |
|
|
219 |
|
|
NM |
Income tax expense (benefit) |
|
|
(60 |
) |
|
|
26 |
|
|
NM |
|
|
|
(43 |
) |
|
|
68 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(102 |
) |
|
$ |
55 |
|
|
NM |
|
|
$ |
(52 |
) |
|
$ |
151 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable universal life insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,848 |
|
|
$ |
7,402 |
|
|
|
(21 |
%) |
Universal life/interest sensitive whole life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,663 |
|
|
|
4,285 |
|
|
|
9 |
% |
Modified guaranteed life and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
660 |
|
|
|
683 |
|
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,171 |
|
|
$ |
12,370 |
|
|
|
(10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance In-force |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable universal life insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
78,809 |
|
|
$ |
76,498 |
|
|
|
3 |
% |
Universal life/interest sensitive whole life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,355 |
|
|
|
47,581 |
|
|
|
8 |
% |
Term Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,261 |
|
|
|
50,641 |
|
|
|
19 |
% |
Modified guaranteed life and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936 |
|
|
|
1,003 |
|
|
|
(7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total life insurance in-force |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
191,361 |
|
|
$ |
175,723 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
Three and nine months ended September 30, 2008 compared to the three months and nine months ended
September 30, 2007
Net income decreased for the three and nine months ended September 30, 2008, driven primarily by
significantly higher realized capital losses and the impacts of the Unlock in the third quarter of
2007 as compared to the third quarter of 2008. For further discussion on the Unlock, see Unlock
and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. For further
discussion of net realized capital losses, see Realized Capital Gains and Losses by Segment table
under Lifes Operating Section of the MD&A. The following other factors contributed to the changes
in net income:
|
|
|
|
|
Fee income and other
increased for the three and nine
months ended September 30, 2008
primarily due to growth in variable
universal and universal life
insurance in-force and fees on
higher surrenders of $9 and $14,
respectively, partially offset by
impacts of the Unlock in the third
quarter of 2008 compared to 2007 as
well as equity market declines. |
|
|
|
Earned premiums
|
|
Earned premiums, which
include premiums for ceded
reinsurance, decreased primarily due
to increased ceded reinsurance
premiums due to life insurance
in-force growth. |
|
|
|
|
|
Net investment income
decreased due to lower investment
yields driven primarily by lower
yields on fixed maturity
investments, lower income from
limited partnership and other
alternative investments and reduced
net investment income associated
with the capital approach for our
secondary guarantee universal life
business, described further in the
Outlook section below, partially
offset by growth in general account
values. |
|
|
|
Benefits, losses and loss adjustment
expenses
|
|
Benefits, losses and loss
adjustment expenses increased for
the three and nine months ended
September 30, 2008 as a result of
increased death benefits consistent
with a larger life insurance
in-force and the impacts of the
Unlock in the third quarter of 2008
along with unfavorable mortality
volatility for the nine months ended
September 30, 2008. |
|
|
|
Insurance operating costs and other
expenses
|
|
Insurance operating costs
and other increased for the three
and nine months ended September 30,
2008 in line with growth of in-force
business. |
|
|
|
Amortization of deferred policy
acquisition costs and present value
of future profits (DAC)
|
|
Amortization of DAC
increased primarily as a result of
the Unlock in the third quarter of
2008 compared to 2007, partially
offset by reduced DAC amortization
primarily attributed to net realized
capital losses. This increase had a
partial offset in amortization of
deferred revenues, included in fee
income. |
|
|
|
Income tax expense (benefit)
|
|
For the three and nine
months ended September 30, 2008, the
income tax benefits were a result of
lower income before income taxes
primarily due to an increase in
realized capital losses and DAC
amortization in the third quarter of
2008 as compared to the third
quarter of 2007. |
71
Outlook
Individual Life operates in a mature and competitive marketplace with customers desiring products
with guarantees and distribution requiring highly trained insurance professionals. Individual Life
continues to expand its core distribution model of sales through financial advisors and banks,
while also pursuing growth opportunities through other distribution sources such as independent
life brokerage. The Company is looking to broaden the reach of its field sales system and
wholesaling capabilities, take advantage of cross selling opportunities, and extend its penetration
in the private wealth management services areas. The Company is committed to maintaining a
competitive product portfolio; it refreshed its variable universal life insurance products in the
second quarter of 2008 and its universal life product with secondary guarantees in the third
quarter of 2008.
Sales results for the three months ended September 30, 2008 were consistent with the three months
ended September 30, 2007. Sales for the nine months ended September 30, 2008 increased 4%. Year
to date sales results were driven by increased sales in the independent channels of 11% and steady
performance in the wirehouse channel. Sales within the bank channel have been impacted in the
first nine months of 2008 by restructurings and acquisitions within certain of Individual Lifes
banking distribution relationships and the liquidity and capital issues throughout the banking
industry. The variable universal life mix was 32% and 36% of total sales for the three and nine
months ended September 30, 2008, respectively.
Sales and
account values for variable universal life products have been under pressure due to
continued equity market volatility and declines. For the nine months ended, and as of September 30,
2008, variable universal life sales and account values have both decreased 21% compared to prior
year. Continued volatility and declines in the equity markets may reduce the attractiveness of
variable universal life products and put additional strain on future earnings as variable life fees
earned by the Company are driven by the level of assets under management.
Future sales for all products will be influenced by the Companys management of current
distribution relationships, including recent merger and consolidation activity, and the development
of new sources of distribution, while offering competitive and innovative new products and product
features. The current economic environment poses both opportunities and challenges for future
sales; while life insurance products respond well to consumer demand for financial security and
wealth accumulation solutions, individuals may be reluctant to transfer funds when market
volatility has recently resulted in significant declines in investment values. In addition, the
availability and terms of capital solutions in the marketplace, as discussed below, to support
universal life products with secondary guarantees, may influence future growth.
Effective November 1, 2007, Individual Life reinsured the policy liability related to statutory
reserves in universal life with secondary guarantees to a captive reinsurance subsidiary. These
reserves are calculated under prevailing statutory reserving requirements as promulgated under
Actuarial Guideline 38, The Application of the Valuation of Life Insurance Policies Model
Regulation. An unaffiliated standby third party letter of credit supports a portion of the
statutory reserves that have been ceded to this subsidiary. As of September 30, 2008, the
transaction provided approximately $383 of statutory capital relief associated with the Companys
universal life products with secondary guarantees. The Company expects this transaction to
accommodate future statutory capital needs for in-force business and new business written through
approximately December 31, 2008. The use of the letter of credit will result in a decline in net
investment income and increased expenses in future periods for Individual Life. The additional
statutory capital provided by the use of the letter of credit is available to the Company for
general corporate purposes. As its business grows in this product line, Individual Life will
evaluate the need for, and availability of, an additional capital transaction.
For risk management purposes, Individual Life accepts and maintains up to $10 in risk on any one
life. Individual Life uses reinsurance where appropriate to mitigate earnings volatility; however,
death claim experience may lead to periodic short-term earnings volatility.
Individual Life continues to face uncertainty surrounding estate tax legislation, aggressive
competition from other life insurance providers, reduced availability and higher price of
reinsurance, and the current regulatory environment related to reserving for term insurance and
universal life products with no-lapse guarantees. These risks may have a negative impact on
Individual Lifes future earnings.
Based on results to date, managements current full year life insurance in-force projection for
2008 is an increase of 8% to 9%.
72
RETIREMENT PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Fee income and other |
|
$ |
94 |
|
|
$ |
62 |
|
|
|
52 |
% |
|
$ |
259 |
|
|
$ |
175 |
|
|
|
48 |
% |
Earned premiums |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
Net investment income |
|
|
87 |
|
|
|
89 |
|
|
|
(2 |
%) |
|
|
267 |
|
|
|
267 |
|
|
|
|
|
Net realized capital losses |
|
|
(181 |
) |
|
|
(21 |
) |
|
NM |
|
|
|
(236 |
) |
|
|
(19 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1 |
|
|
|
130 |
|
|
|
(99 |
%) |
|
|
293 |
|
|
|
426 |
|
|
|
(31 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
69 |
|
|
|
62 |
|
|
|
11 |
% |
|
|
200 |
|
|
|
186 |
|
|
|
8 |
% |
Insurance operating costs and other expenses |
|
|
95 |
|
|
|
40 |
|
|
|
138 |
% |
|
|
248 |
|
|
|
125 |
|
|
|
98 |
% |
Amortization of deferred policy acquisition
costs and present value of future profits |
|
|
94 |
|
|
|
26 |
|
|
NM |
|
|
|
93 |
|
|
|
44 |
|
|
|
111 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
258 |
|
|
|
128 |
|
|
|
102 |
% |
|
|
541 |
|
|
|
355 |
|
|
|
52 |
% |
Income (loss) before income taxes |
|
|
(257 |
) |
|
|
2 |
|
|
NM |
|
|
|
(248 |
) |
|
|
71 |
|
|
NM |
Income tax expense (benefit) |
|
|
(97 |
) |
|
|
(2 |
) |
|
NM |
|
|
|
(114 |
) |
|
|
17 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(160 |
) |
|
$ |
4 |
|
|
NM |
|
|
$ |
(134 |
) |
|
$ |
54 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403(b)/457 account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,432 |
|
|
$ |
12,486 |
|
|
|
(8 |
%) |
401(k) account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,736 |
|
|
|
14,685 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total account values [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,168 |
|
|
|
27,171 |
|
|
|
(7 |
%) |
403(b)/457 mutual fund assets under
management [2] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
|
20 |
|
|
NM |
|
401(k) mutual fund assets under management [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,022 |
|
|
|
1,389 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mutual fund assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,126 |
|
|
|
1,409 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
43,294 |
|
|
$ |
28,580 |
|
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets under administration
401(k) [4] |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,853 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Includes policyholder balances for investment contracts and reserves for future policy benefits for insurance contracts. |
|
[2] |
|
In 2007, Life began selling mutual fund based products in the 403(b) market. |
|
[3] |
|
During the nine months ended September 30, 2008, Life acquired the rights to service $18.7 billion in mutual funds from Sun
Life Retirement Services, Inc., and Princeton Retirement Group. |
|
[4] |
|
During the nine months ended September 30, 2008, Life acquired the rights to service $5.7 billion of assets under
administration (AUA) from Princeton Retirement Group. Servicing revenues from AUA are based on the number of plan
participants and do not vary directly with asset levels. As such, they are not included in AUM upon which asset based
returns are calculated. |
73
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Net income in Retirement Plans decreased for the three and nine months ended September 30, 2008 due
to higher net realized capital losses, the DAC Unlock in 2008 as compared to 2007 and increased
operating expenses partially offset by growth in fee income. For further discussion of net
realized capital losses, see Realized Capital Gains and Losses by Segment table under Lifes
Operating section of the MD&A. For further discussion of 2008 and 2007 Unlocks see Critical
Accounting Estimates section of the MD&A. The following other factors contributed to the changes
in net income:
|
|
|
Fee income and other
|
|
For the three and nine
months ended September 30, 2008, fee
income and other increased primarily
due to $35 and $79, respectively, of
fees earned on assets relating to
the acquisitions in the first
quarter of 2008. Offsetting this
increase was lower annuity fees
driven by lower average account
values as market depreciation of
$4.3 billion was partially offset by
positive net flows of $2.3 billion
over the past four quarters. |
|
|
|
Net investment income
|
|
Net investment income
remained relatively consistent, for
the three and nine months ended
September 30, 2008, with growth in
general account assets offset by a
decrease in yields on fixed maturity
investments and a decrease in
limited partnership and other
alternative investment income,
particularly during the three months
ended September 30, 2008. |
|
|
|
Insurance operating costs and other
expenses
|
|
Insurance operating costs
and other expenses increased for the
three and nine months ended
September 30, 2008, primarily
attributable to operating expenses
associated with the acquired
businesses. Also contributing to
higher insurance operating costs
were higher trail commissions
resulting from an aging portfolio
and higher service and technology
costs. |
|
|
|
Amortization of deferred policy
acquisition costs and present value
of future profits
|
|
Amortization of deferred
policy acquisition costs and present
value of future profits increased
for the three and nine months ended
September 30, 2008 as a result of
the higher Unlock in the third
quarter of 2008 as compared to the
Unlock in the third quarter of 2007,
partially offset by DAC amortization
benefits associated with increased
realized capital losses. For
further discussion, see Unlock and
Sensitivity Analysis in the Critical
Accounting Estimates section of the
MD&A. |
|
|
|
Income tax expense (benefit)
|
|
For the three and nine
months ended September 30, 2008 the
income tax benefit as compared to
the prior year periods income tax
balances was due to lower income
before income taxes primarily due to
increased realized capital losses
and increased tax benefits
associated with the dividends
received deduction. |
74
Outlook
The future profitability of this segment will depend on Lifes ability to increase assets under
management across all businesses, achieve scale in areas with a high degree of fixed costs and
maintain its investment spread earnings on the general account products sold largely in the
403(b)/457 business. Disciplined expense management will continue to be a focus; however, as Life
expands its reach, additional investments in service and technology will occur.
As the baby boom generation approaches retirement, management believes that over the long term
these individuals, as well as younger individuals, will contribute more of their income to
retirement plans due to the uncertainty of the Social Security system and the increase in average
life expectancy.
During 2008, the Company completed three acquisitions. The acquisition of part of the defined
contribution record keeping business of Princeton Retirement Group gives Life a foothold in the
business of providing recordkeeping services to large financial firms which offer defined
contribution plans to their clients and added $2.9 billion in mutual funds to Retirement Plans
assets under management and $5.7 billion of assets under administration. The acquisition of Sun
Life Retirement Services, Inc., added $15.8 billion in Retirement Plans assets under management
across 6,000 plans and provides new service locations in Boston, Massachusetts and Phoenix,
Arizona. The acquisition of TopNoggin LLC., provides web-based technology to address data
management, administration and benefit calculations. These three acquisitions illustrate Lifes
commitment to increase scale in the Retirement Plans segment and grow its offering to serve
additional markets, customers and types of retirement plans across the defined contribution and
defined benefit spectrum. These three acquisitions will not be accretive to 2008 net income.
Furthermore, net income as a percentage of assets is expected to be lower in 2008 reflecting the
new business mix represented by the acquisitions, which includes larger, more institutionally priced
plans, predominantly executed on a mutual fund platform, and the cost of maintaining multiple
technology platforms during the integration period.
Given the
recent market declines and volatility, we expect that growth in Retirement
deposits may be somewhat affected as small businesses potentially reduce their workforces and offer
more modest salary increases and as workers potentially allocate less to retirement accounts in
the near term.
Based on results to date, managements current full-year projections for 2008 (including the
impacts of the acquisitions) are as follows:
|
|
Deposits of $8.9 billion to $9.3 billion |
|
|
|
Net flows of $2.25 billion to $2.75 billion |
75
GROUP BENEFITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Premiums and other considerations |
|
$ |
1,109 |
|
|
$ |
1,061 |
|
|
|
5 |
% |
|
$ |
3,283 |
|
|
$ |
3,237 |
|
|
|
1 |
% |
Net investment income |
|
|
111 |
|
|
|
115 |
|
|
|
(3 |
%) |
|
|
330 |
|
|
|
350 |
|
|
|
(6 |
%) |
Net realized capital losses |
|
|
(441 |
) |
|
|
(10 |
) |
|
NM |
|
|
|
(514 |
) |
|
|
(14 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
779 |
|
|
|
1,166 |
|
|
|
(33 |
%) |
|
|
3,099 |
|
|
|
3,573 |
|
|
|
(13 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
780 |
|
|
|
765 |
|
|
|
2 |
% |
|
|
2,379 |
|
|
|
2,364 |
|
|
|
1 |
% |
Insurance operating costs and other expenses |
|
|
283 |
|
|
|
273 |
|
|
|
4 |
% |
|
|
838 |
|
|
|
836 |
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
15 |
|
|
|
13 |
|
|
|
15 |
% |
|
|
42 |
|
|
|
48 |
|
|
|
(13 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
1,078 |
|
|
|
1,051 |
|
|
|
3 |
% |
|
|
3,259 |
|
|
|
3,248 |
|
|
|
|
|
Income (loss) before income taxes |
|
|
(299 |
) |
|
|
115 |
|
|
NM |
|
|
|
(160 |
) |
|
|
325 |
|
|
NM |
Income tax expense (benefit) |
|
|
(113 |
) |
|
|
32 |
|
|
NM |
|
|
|
(82 |
) |
|
|
90 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(186 |
) |
|
$ |
83 |
|
|
NM |
|
|
$ |
(78 |
) |
|
$ |
235 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Premiums and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully insured ongoing premiums |
|
$ |
1,099 |
|
|
$ |
1,053 |
|
|
|
4 |
% |
|
$ |
3,255 |
|
|
$ |
3,186 |
|
|
|
2 |
% |
Buyout premiums |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
26 |
|
|
|
(96 |
%) |
Other |
|
|
9 |
|
|
|
8 |
|
|
|
13 |
% |
|
|
27 |
|
|
|
25 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earned premiums and other |
|
$ |
1,109 |
|
|
$ |
1,061 |
|
|
|
5 |
% |
|
$ |
3,283 |
|
|
$ |
3,237 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios, excluding buyouts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
70.3 |
% |
|
|
72.1 |
% |
|
|
|
|
|
|
72.5 |
% |
|
|
72.8 |
% |
|
|
|
|
Loss ratio, excluding financial institutions |
|
|
74.8 |
% |
|
|
76.6 |
% |
|
|
|
|
|
|
77.1 |
% |
|
|
78.1 |
% |
|
|
|
|
Expense ratio |
|
|
26.9 |
% |
|
|
27.0 |
% |
|
|
|
|
|
|
26.8 |
% |
|
|
27.5 |
% |
|
|
|
|
Expense ratio, excluding financial institutions |
|
|
22.1 |
% |
|
|
22.6 |
% |
|
|
|
|
|
|
22.3 |
% |
|
|
22.6 |
% |
|
|
|
|
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
The decrease in net income for the three and nine months ended September 30, 2008, was primarily
due to increased realized capital losses. For further discussion, see Realized Capital Gains and
Losses by Segment table under Lifes Operating Section of the MD&A. The following other factors
contributed to the changes in net income:
|
|
|
Net investment income
|
|
For the three and nine
months ended September 30, 2008, net
investment income decreased
primarily as a result of lower
yields on fixed maturity investments
and lower limited partnership and
other alternative investment
returns. |
|
|
|
Loss ratio
|
|
The segments loss ratio
(defined as benefits, losses and
loss adjustment expenses as a
percentage of premiums and other
considerations excluding buyouts)
for the three and nine months ended
September 30, 2008, decreased due to
favorable morbidity and favorable
medical stop loss experience
partially offset by unfavorable
mortality. |
|
|
|
Expense ratio
|
|
The segments expense ratio,
excluding buyouts, for the nine
months ended September 30, 2008,
decreased compared to the prior year
due to lower commission expenses. |
76
Outlook
Management is committed to selling competitively priced products that meet the Companys internal
rate of return guidelines and as a result, sales may fluctuate based on the competitive pricing
environment in the marketplace. In 2007, the Company generated premium growth due to the increased
scale of the group life and disability operations. Also in 2007, the Company completed a renewal
rights transaction associated with its medical stop loss business, which will cause lower earned
premium and sales growth in 2008. The Company anticipates relatively stable loss ratios and
expense ratios based on underlying trends in the in-force business and disciplined new business and
renewal underwriting. The Company has not seen a meaningful impact in disability loss ratios as a
result of the recent economic downturn. While claims incidence may increase during a recession,
the Company would expect the impact to the disability loss ratio to be within the normal range of
volatility.
The economic downturn may have a negative impact on future premium growth if unemployment rises
significantly above current levels or if employees lessen spending on the Companys products.
However, despite the current economic downturn and other market conditions, including rising
medical costs, the changing regulatory environment and cost containment pressure on employers, the
Company continues to leverage its strength in claim practices risk management, service and
distribution, enabling the Company to capitalize on market opportunities. Additionally, employees
continue to look to the workplace for a broader and ever expanding array of insurance products. As
employers design benefit strategies to attract and retain employees, while attempting to control
their benefit costs, management believes that the need for the Companys products will continue to
expand. This, combined with the significant number of employees who currently do not have coverage
or adequate levels of coverage, creates opportunities for our products and services.
Based on results to date, managements current full year projections for 2008 are as follows:
|
|
Fully insured ongoing premiums (excluding buyout premiums and premium equivalents) of $4.3
billion to $4.4 billion |
|
|
|
Loss ratio (excluding buyout premiums) between 71% and 74% |
|
|
|
Expense ratio (excluding buyout premiums) between 26% and 28% |
77
INTERNATIONAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Fee income |
|
$ |
225 |
|
|
$ |
216 |
|
|
|
4 |
% |
|
$ |
684 |
|
|
$ |
612 |
|
|
|
12 |
% |
Earned premiums |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
33 |
% |
|
|
(7 |
) |
|
|
(8 |
) |
|
|
13 |
% |
Net investment income |
|
|
34 |
|
|
|
34 |
|
|
|
|
|
|
|
104 |
|
|
|
102 |
|
|
|
2 |
% |
Net realized capital losses |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
(178 |
) |
|
|
(63 |
) |
|
|
(183 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues [1] |
|
|
190 |
|
|
|
247 |
|
|
|
(23 |
%) |
|
|
603 |
|
|
|
643 |
|
|
|
(6 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
157 |
|
|
|
1 |
|
|
NM |
|
|
|
188 |
|
|
|
18 |
|
|
NM |
|
Insurance operating costs and other expenses |
|
|
84 |
|
|
|
69 |
|
|
|
22 |
% |
|
|
234 |
|
|
|
179 |
|
|
|
31 |
% |
Amortization of deferred policy acquisition
costs and present value of future profits |
|
|
99 |
|
|
|
36 |
|
|
|
175 |
% |
|
|
211 |
|
|
|
153 |
|
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
340 |
|
|
|
106 |
|
|
NM |
|
|
|
633 |
|
|
|
350 |
|
|
|
81 |
% |
Income (loss) before income taxes |
|
|
(150 |
) |
|
|
141 |
|
|
NM |
|
|
|
(30 |
) |
|
|
293 |
|
|
NM |
Income tax expense (benefit) |
|
|
(43 |
) |
|
|
51 |
|
|
NM |
|
|
|
(3 |
) |
|
|
108 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) [2] |
|
$ |
(107 |
) |
|
$ |
90 |
|
|
NM |
|
|
$ |
(27 |
) |
|
$ |
185 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management Japan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan variable annuity account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,706 |
|
|
$ |
34,888 |
|
|
|
(6 |
%) |
Japan MVA fixed annuity account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,416 |
|
|
|
1,785 |
|
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets under management Japan |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,122 |
|
|
$ |
36,673 |
|
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The transition impact related to the SFAS 157 adoption was a reduction
in revenues of $34 during the nine months ended September 30, 2008.
For further discussion of the SFAS 157 transition impact, refer to
Note 4 in the Notes to the Condensed Consolidated Financial
Statements. |
|
[2] |
|
The transition impact related to the SFAS 157 adoption was a reduction
in net income of $11 during the nine months ended September 30, 2008.
For further discussion of the SFAS 157 transition impact, refer to
Note 4 in the Notes to the Condensed Consolidated Financial
Statements. |
78
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Net income decreased for the three months ended September 30, 2008, as a result of the impacts of
the Unlock charge in the third quarter of 2008 as compared to the Unlock benefit in the third
quarter of 2007 and an increase in realized capital losses primarily due to impairment charges
within the third quarter of 2008. Net income decreased for the nine months ended September 30,
2008 as a result of the 2008 Unlock versus the 2007 Unlock along with increased realized capital
losses from the adoption of SFAS 157, which resulted in a net realized capital loss of $34 during
the first quarter of 2008, impairment charges, increases in insurance operating costs and other
expenses, partially offset by an increase in fee income. For further discussion on the Unlock, see
Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. For
further discussion of the SFAS 157 transition impact, see Note 4 in the Notes to the Condensed
Consolidated Financial Statements. For further discussion of realized capital losses, see Realized
Capital Gains and losses by Segment table under Lifes Operating Section of the MD&A. The
following other factors contributed to the changes in net income:
|
|
|
Fee income
|
|
Fee income increased for the
three and nine months ended
September 30, 2008, primarily due to
growth in Japans variable annuity
average assets under management
offset by lower fees on lower
surrenders. The increase in average
assets under management over the
past four quarters was driven by
positive net flows of $2.0 billion
and a $2.9 billion increase due to
foreign currency exchange
translation as the yen strengthened
compared to the U.S. dollar.
Positive net flows and favorable
foreign currency exchange were
offset by unfavorable market
performance of $7.0 billion. |
|
|
|
Benefits, losses and loss adjustment
expenses
|
|
Benefits, losses and loss
adjustment expense increased for the
three and nine months ended
September 30, 2008, as a result of
the impacts of the Unlock in the
third quarter of 2008 as compared to
the third quarter of 2007, as well
as higher GMDB net amount at risk
and increased claims costs resulting
from declining markets between
customers date of death and date of
payment. |
|
|
|
Insurance operating costs and other
expenses
|
|
Insurance operating costs
and other expenses increased for the
three and nine months ended
September 30, 2008 due to the growth
and strategic investment in the
Japan and Other International
operations. |
|
|
|
Amortization of deferred policy
acquisition costs and present value
of future profits
|
|
Amortization of deferred
policy acquisition costs and present
value of future profits increased
for the three and nine months ended
September 30, 2008 as a result of
the impacts of the Unlock in the
third quarter of 2008 as compared to
the third quarter of 2007. |
|
|
|
Income Tax expense
|
|
Income tax expense decreased
for the three and nine months ended
September 30, 2008 primarily as a
result of a decline in income before
taxes. |
79
Outlook
Management continues to be optimistic about the long-term growth potential of the retirement
savings market in Japan. Several trends, such as an aging population, longer life expectancies and
declining birth rates leading to a smaller number of younger workers to support each retiree, have
resulted in greater need for an individual to plan and adequately fund retirement savings.
Profitability depends on the account values of our customers, which are affected by equity, bond
and currency markets. Periods of favorable market performance will increase assets under
management and thus increase fee income earned on those assets, while unfavorable market
performance will have the reverse effect. In addition, higher or lower account value levels will
generally reduce or increase, respectively, certain costs for individual annuities to the Company,
such as guaranteed minimum death benefits (GMDB), guaranteed minimum income benefits (GMIB),
guaranteed minimum accumulation benefits (GMAB) and guaranteed minimum withdrawal benefits
(GMWB). Prudent expense management is also an important component of product profitability.
Due to
significant market declines between September 30th and October 27, 2008, approximately 95%
of our in-force 3 Win policies, or $3 billion in account value, have triggered the associated
GMIB. In the event that the policyholders account value declines to 80% or less of the initial
deposit, this GMIB requires the policyholder to elect one of two options, either receive 80%
of their initial deposit value without surrender penalty immediately or a full return of the
initial deposit via a 15 year payout annuity. As a result of the GMIB trigger, the majority of our
3 Win policies will surrender free of charge or annuitize in the fourth quarter of 2008. This will
significantly impact fourth quarter net flows as well as current and future profitability. For
further details on the trigger of the GMIB associated with the 3 Win product, see Unlock and
Sensitivity Analysis within Critical Accounting Estimates and Note 4 in the Notes to the Condensed
Consolidated Financial Statements.
Competition has increased dramatically in the Japanese market from both domestic and foreign
insurers. This increase in competition has impacted current deposits and is expected to negatively
impact future deposit levels. In addition, the Company continues to evaluate product designs that meet
customers needs while maintaining prudent risk management. During the second and third quarters
of 2008, the Company launched a new product called Rising Income/Care Story, which is a GMWB
variable annuity combined with a nursing care rider, as well as the new product Plus 5, which is
a 10-year GMAB variable annuity with a 5% bonus at year 10. The success of the Companys product
offerings will ultimately be based on customer acceptance in an increasingly competitive
environment.
During the nine months ended of 2008, the Company has experienced lower than expected surrenders
and related surrender fees. In addition, the Company has experienced significant market declines
and therefore some of the product guarantees have increased in cost. Specifically, the 3 Win
product, referenced above, will have a significant impact on future net flows and profitability.
Lower surrender fees, net flows and market returns are consequently expected to result in a lower
return on assets than in prior years.
Based on the results to date and the items discussed above, management has lowered its full year
projections for Japan in 2008 as follows (using ¥100/$1 exchange rate for the remainder of 2008):
|
|
Variable annuity deposits of ¥310 billion to ¥350 billion ($2.9 billion to $3.3 billion) |
|
|
|
Variable annuity outflows of ¥210 billion
to ¥110 billion ($2.1 billion to $1.1
billion) [1] |
|
|
|
[1] |
|
Variable annuity net flows projection
includes approximately ¥300 billion ($3.0 billion) of outflows due to the 3 Win
trigger. |
80
INSTITUTIONAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Fee income and other |
|
$ |
40 |
|
|
$ |
97 |
|
|
|
(59 |
%) |
|
$ |
119 |
|
|
$ |
211 |
|
|
|
(44 |
%) |
Earned premiums |
|
|
241 |
|
|
|
411 |
|
|
|
(41 |
%) |
|
|
671 |
|
|
|
770 |
|
|
|
(13 |
%) |
Net investment income |
|
|
240 |
|
|
|
320 |
|
|
|
(25 |
%) |
|
|
813 |
|
|
|
919 |
|
|
|
(12 |
%) |
Net realized capital losses |
|
|
(605 |
) |
|
|
(46 |
) |
|
NM |
|
|
|
(911 |
) |
|
|
(69 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
(84 |
) |
|
|
782 |
|
|
NM |
|
|
|
692 |
|
|
|
1,831 |
|
|
|
(62 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
485 |
|
|
|
692 |
|
|
|
(30 |
%) |
|
|
1,431 |
|
|
|
1,583 |
|
|
|
(10 |
%) |
Insurance operating costs and other expenses |
|
|
35 |
|
|
|
81 |
|
|
|
(57 |
%) |
|
|
93 |
|
|
|
149 |
|
|
|
(38 |
%) |
Amortization of deferred policy acquisition
costs and present value of future profits |
|
|
5 |
|
|
|
2 |
|
|
|
150 |
% |
|
|
16 |
|
|
|
19 |
|
|
|
(16 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
525 |
|
|
|
775 |
|
|
|
(32 |
%) |
|
|
1,540 |
|
|
|
1,751 |
|
|
|
(12 |
%) |
Income (loss) before income taxes |
|
|
(609 |
) |
|
|
7 |
|
|
NM |
|
|
|
(848 |
) |
|
|
80 |
|
|
NM |
Income tax expense (benefit) |
|
|
(216 |
) |
|
|
(1 |
) |
|
NM |
|
|
|
(305 |
) |
|
|
20 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(393 |
) |
|
$ |
8 |
|
|
NM |
|
|
$ |
(543 |
) |
|
$ |
60 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional account values [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,496 |
|
|
$ |
25,041 |
|
|
|
(2 |
%) |
Bank Owned Life Insurance account values [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,866 |
|
|
|
32,041 |
|
|
|
3 |
% |
Mutual fund assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,325 |
|
|
|
3,398 |
|
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
60,687 |
|
|
$ |
60,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] Includes policyholder balances for investment contracts and reserves for future policy
benefits for insurance contracts.
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Net income in Institutional decreased for the three and nine months ended September 30, 2008,
primarily due to increased net realized capital losses. For further discussion, see Realized
Capital Gains and Losses by Segment table under Lifes Operating Section of the MD&A. Further
discussion of income is presented below:
|
|
|
Fee income and other
|
|
Fee income and other
decreased for the three and nine
months ended September 30, 2008,
primarily due to large Private
Placement Life Insurance (PPLI)
cases sold during the three and nine
months ended September 30, 2007.
PPLI collects front-end loads
recorded in fee income, offset by
corresponding premium taxes reported
in insurance operating costs and
other expenses. For the three
months ended September 30, 2008 and
2007, PPLI had deposits of $33 and
$2.6 billion, respectively, which
resulted in fee income due to
front-end loads of $1 and $55,
respectively. For the nine months
ended September 30, 2008 and 2007,
PPLI had deposits of $189 and $4.8
billion, respectively, which
resulted in fee income due to
front-end loads of $2 and $100,
respectively. |
|
|
|
Earned premiums
|
|
For the three and nine
months ended September 30, 2008,
earned premiums decreased as
compared to the comparable prior
year periods due to one large
terminal funding life contingent
case sold in the third quarter of
2007. The decrease in earned
premiums was offset by a
corresponding decrease in benefits,
losses, and loss adjustment
expenses. |
|
|
|
Net investment income
|
|
Net investment income
decreased for the three and nine
months ended September 30, 2008, due
to decreased returns on limited
partnership and other alternative
investments, as well as lower income
yields on fixed maturity
investments. For the three and nine
months ended September 30, 2008,
limited partnership and other alternative investment losses were ($24) and
($15), respectively. For the
comparable three and nine month
periods in 2007, limited partnership and other alternative investment income
was $13 and $42, respectively. The
decline in yield on fixed maturities
was largely offset by a
corresponding decrease in interest
credited on liabilities reported in
benefits, losses, and loss
adjustment expenses. |
81
|
|
|
Benefits, losses and loss adjustment
expenses
|
|
Benefits, losses and loss
adjustment expenses decreased for
the three and nine months ended
September 30, 2008 as compared to
the comparable prior year periods
primarily due to lower changes in
reserve, driven by one large
terminal funding life contingent
case sold in the third quarter of
2007. The decrease was also caused
by lower interest credited on
liabilities indexed to LIBOR. |
|
|
|
Insurance operating costs and other
expenses
|
|
Insurance operating costs
and other expenses decreased for the
three and nine months ended
September 30, 2008, due to a decline
in PPLI premium tax, driven by
reduced PPLI deposits. |
|
|
|
Income tax expense (benefit)
|
|
The income tax benefit for
the three and nine month periods
ended September 30, 2008 increased
compared to the prior year primarily
due to a decline in income before
taxes primarily due to increased
realized capital losses. For
further discussion of net realized
capital losses, see Realized Capital
Gains and Losses by Segment table
under the Operating section of the
MD&A. |
82
Outlook
As the baby boom generation approaches retirement, management believes these individuals will
seek investment and insurance vehicles that will give them steady streams of income throughout
retirement. IIP recently has launched new products to provide solutions that deal specifically
with longevity risk. Longevity risk is defined as the likelihood of an individual outliving their
assets. Institutional is also designing innovative solutions to corporations defined benefit
liabilities.
Institutionals markets are highly competitive from a pricing perspective, and a small number of
cases often account for a significant portion of deposits. Therefore, the Company does not expect
to be able to sustain the level of assets under management growth attained in 2007.
Variable life policies purchased by a company or a trust named as beneficiary under the insurance
policy on the lives of key employees and variable life products continue to be used to fund
non-qualified benefits or other post-employment benefit liabilities, due to the opportunity to
select from a range of tax deferred investment options. However, financial institutions comprise a
large portion of the customer base. The financial services
industry have experienced significant financial
distress in 2008, and as a result sales, deposits and net flows have declined relative to
the prior year and the Company expects that trend to continue for the remainder of 2008 or until
the general economic climate improves.
Hartford Income Notes and other stable value products (collectively stable value products) are sold in
markets which are highly
competitive and the Companys success depends in part on the level of credited interest rates and
the Companys credit rating. The turmoil in the credit and financial markets has negatively
impacted the Companys stable value product deposits in 2008. The Company expects deposit activity
to increase once the market environment improves. Stable value products net flows can be impacted
by contractual maturities and rights which can include an investors option to accelerate principal
repayments after a defined notice period of typically thirteen months (such contracts represent
approximately $3 billion of account value), as well as certain fixed rate contracts for which the
Company has the option to accelerate the repayment of principal and has exercised this option in
certain cases. Considering these factors, as well as the interest rate and credit spread
environment as of September 30, 2008, the Company expects increased outflows, and has reflected
that expectation in its projection for net flows for full year 2008. Outflows in the fourth
quarter 2008 for the Companys stable value products, including normal contract maturities and
investor accelerated principal repayments, are expected to total approximately $650. Additionally,
in light of changes in the credit spread environment, the Company expects virtually all of these
contracts that include an investors option to accelerate to be surrendered and paid out by the end of 2009.
The future net income of this segment will depend on Institutionals ability to increase assets
under management, mix of business and net investment spread. Market conditions are expected to negatively impact Institutionals net flows and net income over the near term. The net investment spread, as
previously discussed in the Performance Measures section of this MD&A, has declined relative to the
prior year and we expect the remainder of 2008 to continue to be lower than prior year levels,
primarily due to lower income amounts from limited partnerships and
other alternative investments as well as the
aforementioned factors impacting net flows.
Based on results to date, managements current full year projections for 2008 are as follows:
|
|
Deposits (including mutual funds) of $4.5 billion to $5.5 billion |
|
|
|
Net flows (including mutual funds) of ($500) to $500 |
83
OTHER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Fee income and other |
|
$ |
17 |
|
|
$ |
17 |
|
|
|
|
|
|
$ |
49 |
|
|
$ |
53 |
|
|
|
(8 |
%) |
Net investment income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for sale and other |
|
|
19 |
|
|
|
29 |
|
|
|
(34 |
%) |
|
|
62 |
|
|
|
112 |
|
|
|
(45 |
%) |
Equity securities, held for trading [1] |
|
|
(3,415 |
) |
|
|
(698 |
) |
|
NM |
|
|
|
(5,840 |
) |
|
|
746 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income (loss) |
|
|
(3,396 |
) |
|
|
(669 |
) |
|
NM |
|
|
|
(5,778 |
) |
|
|
858 |
|
|
NM |
|
Net realized capital losses |
|
|
(65 |
) |
|
|
(21 |
) |
|
NM |
|
|
|
(83 |
) |
|
|
(8 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
(3,444 |
) |
|
|
(673 |
) |
|
NM |
|
|
|
(5,812 |
) |
|
|
903 |
|
|
NM |
Benefits, losses and loss adjustment expenses |
|
|
44 |
|
|
|
38 |
|
|
|
16 |
% |
|
|
118 |
|
|
|
118 |
|
|
|
|
|
Benefits, losses and loss adjustment
expenses returns credited on
International variable annuities [1] |
|
|
(3,415 |
) |
|
|
(698 |
) |
|
NM |
|
|
|
(5,840 |
) |
|
|
746 |
|
|
NM |
|
Insurance operating costs and other expenses |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
25 |
|
|
|
60 |
|
|
|
(58 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
(3,373 |
) |
|
|
(660 |
) |
|
NM |
|
|
|
(5,697 |
) |
|
|
924 |
|
|
NM |
Loss before income taxes |
|
|
(71 |
) |
|
|
(13 |
) |
|
NM |
|
|
|
(115 |
) |
|
|
(21 |
) |
|
NM |
Income tax benefit |
|
|
(26 |
) |
|
|
(4 |
) |
|
NM |
|
|
|
(42 |
) |
|
|
(1 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(45 |
) |
|
$ |
(9 |
) |
|
NM |
|
|
$ |
(73 |
) |
|
$ |
(20 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Includes investment income and mark-to-market effects of equity securities held for trading
supporting the international variable annuity business, which are classified in net investment
income with corresponding amounts credited to policyholders. |
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
|
|
|
Net investment income
|
|
Net investment income on
securities available-for-sale
declined primarily due to decreases
in yields on fixed maturity
investments and declines in limited
partnerships and other alternative
investment income. |
|
|
|
Realized capital gains (losses)
|
|
See Realized Capital Gains
and Losses by Segment table under
Lifes Operating section of the
MD&A. |
|
|
|
Insurance operating costs and other
expenses
|
|
Insurance operating costs
and other expenses decreased for
the nine months ended September 30,
2008 as compared to the prior year
period, primarily due to a charge
of $21 for regulatory matters in
the second quarter of 2007 and for
the three and nine months ended
September 30, 2008 due to a
reallocation of expenses to the
applicable lines of business in
2008. |
84
PROPERTY & CASUALTY
Executive Overview
Property & Casualty is organized into five reporting segments: the underwriting segments of
Personal Lines, Small Commercial, Middle Market and Specialty Commercial (collectively, Ongoing
Operations); and the Other Operations segment.
Property & Casualty provides a number of coverages, as well as insurance related services, to
businesses throughout the United States, including workers compensation, property, automobile,
liability, umbrella, specialty casualty, marine, livestock, fidelity, surety, professional
liability and directors and officers liability coverages. Property & Casualty also provides
automobile, homeowners and home-based business coverage to individuals throughout the United States
as well as insurance-related services to businesses.
Property & Casualty derives its revenues principally from premiums earned for insurance coverages
provided to insureds, investment income, and, to a lesser extent, from fees earned for services
provided to third parties and net realized capital gains and losses. Premiums charged for
insurance coverages are earned principally on a pro rata basis over the terms of the related
policies in-force.
Service fees principally include revenues from third party claims administration services provided
by Specialty Risk Services and revenues from member contact center services provided through the
AARP Health program.
Total Property & Casualty Financial Highlights
The following discusses Property & Casualty financial highlights for the three and nine months
ended September 30, 2008 compared to the three and nine months ended September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Premium revenue |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Written Premiums [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines |
|
$ |
1,024 |
|
|
$ |
1,035 |
|
|
$ |
2,989 |
|
|
$ |
3,013 |
|
Small Commercial |
|
|
652 |
|
|
|
664 |
|
|
|
2,074 |
|
|
|
2,098 |
|
Middle Market |
|
|
555 |
|
|
|
573 |
|
|
|
1,616 |
|
|
|
1,666 |
|
Specialty Commercial |
|
|
361 |
|
|
|
356 |
|
|
|
1,080 |
|
|
|
1,147 |
|
Other Operations |
|
|
1 |
|
|
|
2 |
|
|
|
5 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,593 |
|
|
$ |
2,630 |
|
|
$ |
7,764 |
|
|
$ |
7,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Premiums [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines |
|
$ |
978 |
|
|
$ |
984 |
|
|
$ |
2,941 |
|
|
$ |
2,904 |
|
Small Commercial |
|
|
678 |
|
|
|
683 |
|
|
|
2,048 |
|
|
|
2,048 |
|
Middle Market |
|
|
553 |
|
|
|
582 |
|
|
|
1,688 |
|
|
|
1,779 |
|
Specialty Commercial |
|
|
358 |
|
|
|
377 |
|
|
|
1,087 |
|
|
|
1,139 |
|
Other Operations |
|
|
1 |
|
|
|
2 |
|
|
|
4 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,568 |
|
|
$ |
2,628 |
|
|
$ |
7,768 |
|
|
$ |
7,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The difference between written premiums and earned premiums is attributable to the change in
unearned premium reserve. |
85
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Earned Premiums
Total Property & Casualty earned premiums decreased $60, or 2%, primarily due to lower earned
premiums in Middle Market and Specialty Commercial.
|
|
|
Personal Lines
|
|
Earned premium decreased
slightly, by $6, as a $21, or 7%,
decrease in Agency and Other earned
premiums was largely offset by a
$15, or 2%, increase in AARP earned
premiums. AARP earned premiums grew
primarily due to an increase in the
size of the AARP target market, the
effect of direct marketing programs
and the effect of cross selling
homeowners insurance to insureds who
have auto policies. Agency earned
premium decreased $17, or 6%,
largely due to a decline in new
business premium and premium renewal
retention since the middle of 2007,
partially offset by the effect of
modest earned pricing increases. |
|
|
|
Small Commercial
|
|
Earned premium decreased by
$5, or 1%, primarily due to the
effect of modest earned pricing
decreases, partially offset by new
business outpacing non-renewals over
the last six months of 2007 and the
first three months of 2008. |
|
|
|
Middle Market
|
|
Earned premium decreased by
$29, or 5%, driven by decreases in
commercial auto, general liability,
property and marine. Earned premium
decreases were driven primarily by
earned pricing decreases. |
|
|
|
Specialty Commercial
|
|
Earned premium decreased by
$19, or 5%, driven primarily by a
decrease in property due largely to
the Companys decision to stop
writing specialty property business
with large, national accounts and
the effect of decreases in earned
pricing and new business written
premium. |
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Earned Premiums
Total Property & Casualty earned premiums decreased $105, or 1%, primarily due to lower earned
premiums in Middle Market and Specialty Commercial, partially offset by increased earned premiums
in Personal Lines.
|
|
|
Personal Lines
|
|
Earned premium grew by $37,
or 1%, due to a $77, or 4%, increase
in AARP earned premiums, partially
offset by a $40, or 4%, decrease in
Agency and other earned premiums.
AARP earned premiums grew primarily
due to an increase in the size of
the AARP target market, the effect
of direct marketing programs and the
effect of cross selling homeowners
insurance to insureds who have auto
policies. Agency earned premium
decreased $26, or 3%, largely due to
a decline in new business premium
and premium renewal retention since
the middle of 2007, partially offset
by the effect of modest earned
pricing increases. |
|
|
|
Small Commercial
|
|
Earned premium was flat, at
$2,048, primarily due to new
business outpacing non-renewals in
workers compensation business over
the last six months of 2007 and
first three months of 2008, largely
offset by the effect of earned
pricing decreases. |
|
|
|
Middle Market
|
|
Earned premium decreased by
$91, or 5%, driven by decreases in
commercial auto, workers
compensation and general liability.
Earned premium decreases were driven
primarily by a decline in earned
pricing in 2008 and the effect of
non-renewals outpacing new business
over the last six months of 2007. |
|
|
|
Specialty Commercial
|
|
Earned premium decreased by
$52, or 5%, driven primarily by a
decrease in property due largely to
the Companys decision to stop
writing specialty property business
with large, national accounts and
the effect of decreases in earned
pricing and new business written
premium. |
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Net income |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Underwriting results before catastrophes and prior accident year
development |
|
$ |
206 |
|
|
$ |
242 |
|
|
$ |
756 |
|
|
$ |
814 |
|
Current accident year catastrophes |
|
|
325 |
|
|
|
32 |
|
|
|
546 |
|
|
|
112 |
|
Prior accident year reserve development |
|
|
(14 |
) |
|
|
28 |
|
|
|
(34 |
) |
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
|
(105 |
) |
|
|
182 |
|
|
|
244 |
|
|
|
548 |
|
Net servicing and other income [1] |
|
|
14 |
|
|
|
16 |
|
|
|
21 |
|
|
|
41 |
|
Net investment income |
|
|
335 |
|
|
|
407 |
|
|
|
1,091 |
|
|
|
1,266 |
|
Net realized capital losses |
|
|
(1,428 |
) |
|
|
(75 |
) |
|
|
(1,631 |
) |
|
|
(76 |
) |
Other expenses |
|
|
(57 |
) |
|
|
(64 |
) |
|
|
(181 |
) |
|
|
(182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,241 |
) |
|
|
466 |
|
|
|
(456 |
) |
|
|
1,597 |
|
Income tax (expense) benefit |
|
|
467 |
|
|
|
(113 |
) |
|
|
257 |
|
|
|
(439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(774 |
) |
|
$ |
353 |
|
|
$ |
(199 |
) |
|
$ |
1,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Net of expenses related to service business. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Net realized capital gains (losses) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Gross gains on sales |
|
$ |
12 |
|
|
$ |
31 |
|
|
$ |
95 |
|
|
$ |
121 |
|
Gross losses on sales |
|
|
(82 |
) |
|
|
(36 |
) |
|
|
(195 |
) |
|
|
(98 |
) |
Impairments |
|
|
(1,312 |
) |
|
|
(35 |
) |
|
|
(1,425 |
) |
|
|
(56 |
) |
Periodic net coupon settlements on credit derivatives |
|
|
2 |
|
|
|
5 |
|
|
|
5 |
|
|
|
11 |
|
Other, net |
|
|
(48 |
) |
|
|
(40 |
) |
|
|
(111 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital losses, before-tax |
|
$ |
(1,428 |
) |
|
$ |
(75 |
) |
|
$ |
(1,631 |
) |
|
$ |
(76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Net income decreased by $1,127, from net income of $353 in 2007 to a net loss of $774 in 2008,
primarily driven by an increase in net realized capital losses.
|
|
|
Realized capital gains
(losses)
|
|
Gross gains (losses) on sales, net |
|
|
|
|
|
Gross gains on sales in 2008 were
predominantly within fixed maturities and
were comprised of sales of corporate and
municipal securities. Gross gains in 2007
were primarily from sales of municipal and
foreign government securities. |
|
|
|
|
|
Gross losses on sales in 2008 were
predominantly from sales of financial
services securities. Gross losses on sales
in 2007 were primarily from sales of
corporate and municipal securities. |
|
|
|
|
|
Impairments |
|
|
|
|
|
Impairments of $1.3 billion in 2008
primarily consisted of impairments of
corporate debt and equity securities in the
financial services sector and impairments
of previously impaired
sub-prime ABS and
CMBS securities. (See the
Other-Than-Temporary Impairments discussion
within Investment Results in the
Investments section of the MD&A for more
information on the impairments recorded in
2008). |
|
|
|
|
|
Other, net |
|
|
|
|
|
Other, net realized losses in 2008
were primarily related to $42 of net losses
on credit derivatives. The net losses on
credit derivatives were primarily due to
significant credit spread widening on
credit derivatives that assume credit
exposure. Also included in other, net
realized losses for 2008 were $7 of
derivative related losses due to
counterparty default related to the Lehman
Brothers Holdings bankruptcy. |
|
|
|
|
|
Other, net realized losses in 2007
were primarily driven by the change in
value of non-qualifying derivatives due to
credit spread widening. |
|
|
|
|
|
Primarily driving the $72 decrease
in net investment income was a decrease in
investment yield for limited partnerships
and other alternative investments and, to a
lesser extent, a decrease in investment
yield for fixed maturities. |
87
|
|
|
Underwriting results
|
|
Contributing to the $36
decrease in underwriting results
before catastrophes and prior
accident year reserve development
was a $35 increase in insurance
operating costs and expenses,
primarily driven by $20 of hurricane
Ike-related assessments and an $11
increase in the estimated amount of
dividends payable to certain
workers compensation policyholders
due to underwriting profits. Apart
from the increase in insurance
operating costs and expenses,
current accident year underwriting
results before catastrophes were
relatively flat as the effect of a
lower loss and loss adjustment
expense ratio for Small Commercial
workers compensation and Personal
Lines auto liability and physical
damage claims was largely offset by
the effects of lower earned premium
in Middle Market and higher
non-catastrophe losses on Middle
Market property, marine and Personal
Lines homeowners business. |
|
|
|
|
|
The $293 increase in current
accident year catastrophe losses was
primarily due to losses from
hurricane Ike in September 2008. |
|
|
|
|
|
The change from net
unfavorable prior accident year
reserve development in 2007 to net
favorable reserve development in
2008 was largely due to an increase
in net favorable reserve development
in Ongoing Operations, partially
offset by a larger environmental
reserve increase in 2008 than in
2007. Net favorable reserve
development for Ongoing Operations
in 2008 was largely due to releases
of reserves for workers
compensation, personal auto
liability and professional liability
claims. Refer to the Reserves
section of the MD&A for further
discussion. |
|
|
|
Income tax expense
|
|
Income taxes decreased by
$580, from income tax expense of
$113 in 2007 to an income tax
benefit of $467 in 2008 primarily
reflecting the change from pre-tax
income of $466 in 2007 to a pre-tax
loss of $1,241 in 2008. |
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Net income decreased by $1,357, from net income of $1,158 in 2007 to a net loss of $199 in 2008,
primarily driven by an increase in net realized capital losses.
|
|
|
Realized capital gains
(losses)
|
|
Gross gains (losses) on sales, net |
|
|
|
|
|
Gross gains on sales in 2008 were
predominantly within fixed maturities and
were comprised of sales of corporate and
municipal securities. Gross gains in 2007
were primarily from sales of corporate and
foreign government securities. |
|
|
|
|
|
Gross losses on sales in 2008 were
predominantly from sales of financial
services securities and included $19 of
losses on CLOs in the first quarter for
which HIMCO is the collateral manager. For
more information regarding losses on the
sale of HIMCO managed CLOs, refer to the
Variable Interest Entities section within
Investment Results in the Investments
section of the MD&A. Gross losses on sales
in 2007 were primarily from sales of
corporate securities. |
|
|
|
|
|
Impairments |
|
|
|
|
|
Impairments of $1.4 billion in 2008
primarily consisted of impairments of
corporate debt and equity securities in the
financial services sector and impairments
of previously impaired
sub-prime ABS and
CMBS securities. (See the
Other-Than-Temporary Impairments discussion
within Investment Results in the
Investments section of the MD&A for more
information on the impairments recorded in
2008). |
|
|
|
|
|
Other, net |
|
|
|
|
|
Other, net realized losses in 2008
were primarily related to $118 of net
losses on credit derivatives. The net
losses on credit derivatives were primarily
due to significant credit spread widening
on credit derivatives that assume credit
exposure. Also included in other, net
realized losses for 2008 were losses on
HIMCO managed CLOs as well as $7 of
derivative related losses due to
counterparty default related to the Lehman
Brothers Holdings bankruptcy. For more
information regarding losses on HIMCO
managed CLOs, refer to the Variable
Interest Entities section within
Investment Results in the Investments
section of the MD&A. |
|
|
|
|
|
Other, net realized losses in 2007
were primarily driven by the change in
value of non-qualifying derivatives due to
credit spread widening. |
|
|
|
|
|
Primarily driving the $175 decrease
in net investment income was a decrease in
investment yield for limited partnerships and other
alternative investments and, to a lesser
extent, a decrease in investment yield for
fixed maturities. |
88
|
|
|
Underwriting results
|
|
Contributing to the $58
decrease in underwriting results
before catastrophes and prior
accident year reserve development
was a $49 increase in insurance
operating costs and expenses,
primarily driven by $20 of hurricane
Ike-related assessments and a $26
increase in the estimated amount of
dividends payable to certain
workers compensation policyholders
due to underwriting profits. Apart
from the increase in insurance
operating costs and expenses,
current accident year underwriting
results before catastrophes
decreased as the effects of lower
earned premium in Middle Market and
higher non-catastrophe losses on
Middle Market property, marine and
Personal Lines homeowners business
were partially offset by a lower
loss and loss adjustment expense
ratio for Small Commercial workers
compensation and Personal Lines auto
physical damage claims. |
|
|
|
|
|
The $434 increase in current
accident year catastrophe losses was
primarily due to more severe
catastrophes in 2008, including
losses from hurricane Ike, tornadoes
and thunderstorms in the South and
Midwest. |
|
|
|
|
|
The change from net
unfavorable prior accident year
reserve development in 2007 to net
favorable reserve development in
2008 was largely due to an increase
in net favorable reserve development
in Ongoing Operations, partially
offset by a decrease in unfavorable
reserve development in Other
Operations. Net favorable reserve
development for Ongoing Operations
in 2008 was largely due to releases
of reserves for workers
compensation and professional
liability claims. Refer to the
Reserves section of the MD&A for
further discussion. |
|
|
|
Net servicing and
other income
|
|
The $20 decrease in net
servicing income was primarily
driven by a decrease in servicing
income from the AARP Health program
and the Write Your Own flood program
and the write-off of software used
in administering policies for third
parties. |
|
|
|
Income tax expense
|
|
Income taxes decreased by
$696, from income tax expense of
$439 in 2007 to an income tax
benefit of $257 in 2008, reflecting
the change from pre-tax income of
$1,597 in 2007 to a pre-tax loss of
$456 in 2008. |
Key Performance Ratios and Measures
The Company considers several measures and ratios to be the key performance indicators for the
property and casualty underwriting businesses. For a detailed discussion of the Companys key
performance and profitability ratios and measures, see the Property & Casualty Executive Overview
section of the MD&A included in The Hartfords 2007 Form 10-K Annual Report. The following table
and the segment discussions include the more significant ratios and measures of profitability for
the three and nine months ended September 30, 2008 and 2007. Management believes that these ratios
and measures are useful in understanding the underlying trends in The Hartfords property and
casualty insurance underwriting business. However, these key performance indicators should only be
used in conjunction with, and not in lieu of, underwriting income for the underwriting segments of
Personal Lines, Small Commercial, Middle Market and Specialty Commercial and net income for the
Property & Casualty business as a whole, Ongoing Operations and Other Operations. These ratios and
measures may not be comparable to other performance measures used by the Companys competitors.
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Ongoing Operations earned premium growth |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Personal Lines |
|
|
(1 |
%) |
|
|
3 |
% |
|
|
1 |
% |
|
|
3 |
% |
Small Commercial |
|
|
(1 |
%) |
|
|
2 |
% |
|
|
|
|
|
|
4 |
% |
Middle Market |
|
|
(5 |
%) |
|
|
(6 |
%) |
|
|
(5 |
%) |
|
|
(4 |
%) |
Specialty Commercial |
|
|
(5 |
%) |
|
|
(3 |
%) |
|
|
(5 |
%) |
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ongoing Operations |
|
|
(2 |
%) |
|
|
|
|
|
|
(1 |
%) |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations combined ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes and prior year development |
|
|
91.8 |
|
|
|
90.6 |
|
|
|
90.1 |
|
|
|
89.5 |
|
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
12.7 |
|
|
|
1.2 |
|
|
|
7.0 |
|
|
|
1.4 |
|
Prior years |
|
|
(0.2 |
) |
|
|
0.3 |
|
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe ratio |
|
|
12.5 |
|
|
|
1.5 |
|
|
|
6.8 |
|
|
|
1.5 |
|
Non-catastrophe prior year development |
|
|
(2.6 |
) |
|
|
(0.7 |
) |
|
|
(1.9 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
101.7 |
|
|
|
91.4 |
|
|
|
95.1 |
|
|
|
90.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operations net income (loss) |
|
$ |
(108 |
) |
|
$ |
12 |
|
|
$ |
(91 |
) |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property & Casualty measures of net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment yield, after-tax |
|
|
3.4 |
% |
|
|
4.1 |
% |
|
|
3.7 |
% |
|
|
4.4 |
% |
Average invested assets at cost |
|
$ |
30,134 |
|
|
$ |
30,227 |
|
|
$ |
30,380 |
|
|
$ |
29,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Ongoing Operations earned premium growth
|
|
|
|
|
Personal Lines
|
|
|
|
The decrease in the earned
premium growth rate from 2007 to
2008 was due to a significantly
lower growth rate on AARP business
and a change to declining earned
premium in Agency, partially offset
by the effect of the sale of Omni in
2006 which lowered the growth rate
in 2007. Excluding Omni, Personal
Lines earned premium grew 7% in both
the three and nine month periods
ended September 30, 2007. By
contrast, earned premiums were
relatively flat in 2008, declining
1% in the third quarter and
increasing 1% in the nine month
period. The effects of a change to
declining auto and homeowners new
business premium and declining
homeowners renewal retention since
the middle of 2007 were largely
offset by the effect of a change to
modest earned pricing increases in
auto. |
|
|
|
|
|
Small Commercial
|
|
|
|
The earned premium growth
rate in 2008 was reduced from
moderate earned premium increases in
2007, declining by 1% for the third
quarter of 2008 and remaining flat
for the nine month period. The
decrease in the growth rate was
primarily attributable to slightly
larger earned pricing decreases in
2008 compared to 2007 and because of
a change to decreasing premium
renewal retention since the middle
of 2007. |
|
|
|
|
|
Middle Market
|
|
|
|
Earned premium declined in
the mid-single digits in both 2007
and 2008. The effect of slightly
larger earned pricing decreases in
2008 has been largely offset by the
effect of a change to new business
growth and increasing premium
renewal retention in the three and
nine months ended September 30,
2008. |
|
|
|
|
|
Specialty Commercial
|
|
|
|
For both the three and nine
month periods, earned premium
decreased by 5% in 2008 compared to
3% in 2007. A larger earned premium
decrease in property and a change
from earned premium growth in
professional liability, fidelity and
surety in 2007 to flat or declining
earned premium in 2008, was
partially offset by an improvement
in the rate of earned premium
decline in casualty. Property
earned premium decreased more
significantly in 2008 than in 2007
due, in part, to a decision to stop
writing specialty property business
with large, national accounts. Also
contributing to the larger decrease
in property earned premium in 2008
were the effects of a change to
earned pricing decreases in 2008 and
a change to declining new business
and premium renewal retention since
the third quarter of 2007. |
Ongoing Operations combined ratio
For the three months ended September 30, 2008, the Ongoing Operations combined ratio increased
10.3 points, to 101.7, primarily due to an 11.5 point increase in the current accident year
catastrophe ratio driven by losses from hurricane Ike. For the nine months ended September 30,
2008, the Ongoing Operations combined ratio increased by 4.4 points, to 95.1, primarily due to a
5.6 point increase in the current accident year catastrophe ratio driven by an increase in losses
from hurricanes, tornadoes and windstorms, including losses from hurricane Ike.
90
|
|
|
|
|
Combined ratio
before catastrophes
and prior accident
year development
|
|
|
|
For the three and nine month
periods, there was an increase in
the combined ratio before
catastrophes and prior accident year
development of 1.2 points and 0.6
points, respectively. Contributing
to the increase was an increase in
insurance operating costs and
expenses of 1.5 points and 0.7
points, respectively, primarily
driven by hurricane Ike-related
assessments and an increase in the
estimated amount of dividends
payable to certain workers
compensation policyholders due to
underwriting profits. Apart from the
increase in insurance operating
costs and expenses, the combined
ratio before catastrophes and prior
accident year development improved
slightly as the effect of a lower
loss and loss adjustment expense
ratio for Small Commercial workers
compensation and Personal Lines auto
physical damage claims was largely
offset by higher non-catastrophe
losses on Middle Market property,
marine and Personal Lines
homeowners business and earned
pricing decreases in Middle Market. |
|
|
|
|
|
Catastrophes
|
|
|
|
The catastrophe ratio
increased for both the three and
nine month periods due to an
increase in current accident year
catastrophes in 2008 primarily due
to losses from hurricane Ike and,
for the nine month period, losses
from tornadoes and thunderstorms in
the South and Midwest. |
|
|
|
|
|
Non-catastrophe prior accident year
development
|
|
|
|
For both the three and nine
month periods, net non-catastrophe
prior accident year reserve
development was more favorable in
2008 than in 2007. Favorable
reserve development in 2008
included, among other reserve
changes, a release of reserves for
workers compensation claims,
primarily related to accident years
2000 to 2007, and a release of
reserves for professional liability
claims related to accident years
2003 through 2006. See the
Reserves section for a discussion
of prior accident year reserve
development for Ongoing Operations
in 2008. |
Other Operations net income
|
|
Other Operations reported a net loss of $108 in the three months ended September 30, 2008
compared to net income of $12 for the comparable period in 2007 and a net loss of $91 in the
nine months ended September 30, 2008 compared to net income of $4 for the comparable period in
2007. The change from net income to a net loss for the three months ended September 30, 2008
was primarily due to an increase in net realized capital losses, a larger environmental
reserve increase in 2008 than in 2007 and lower net investment income. The change from net
income to a net loss for the nine month period was primarily due to an increase in net
realized capital losses and a decrease in net investment income, partially offset by a
decrease in unfavorable prior accident year reserve development. See the Other Operations
segment MD&A for further discussion. |
Investment yield and average invested assets
|
|
For both the three and nine months ended September 30, 2008, the after-tax investment yield
decreased due to a lower investment yield for limited partnerships and other alternative investments
and, to a lesser extent, a lower investment yield for fixed maturities. |
|
|
|
For the three month period, the average annual invested assets at cost decreased as a
result of impairments of securities and dividends paid to Corporate, partially offset by the
effect of positive operating cash flows. For the nine month period, average annual invested
assets at cost increased due to positive operating cash flows, partially offset by the effects
of impairments of securities and dividends paid to Corporate. |
91
Reserves
Reserving for property and casualty losses is an estimation process. As additional experience and
other relevant claim data become available, reserve levels are adjusted accordingly. Such
adjustments of reserves related to claims incurred in prior years are a natural occurrence in the
loss reserving process and 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. The prior accident year development (pts) in
the following table represents the ratio of reserve development to earned premiums. For a detailed
discussion of the Companys reserve policies, see Notes 1, 11 and 12 of Notes to Consolidated
Financial Statements and the Critical Accounting Estimates section of the MD&A included in The
Hartfords 2007 Form 10-K Annual Report.
Based on the results of the quarterly reserve review process, the Company determines the
appropriate reserve adjustments, if any, to record. Recorded reserve estimates are changed after
consideration of numerous factors, including but not limited to, the magnitude of the difference
between the actuarial indication and the recorded reserves, improvement or deterioration of
actuarial indications in the period, the maturity of the accident year, trends observed over the
recent past and the level of volatility within a particular line of business. In general, changes
are made more quickly to more mature accident years and less volatile lines of business. For
information regarding reserving for asbestos and environmental claims within Other Operations,
refer to the Other Operations segment discussion.
As part of its quarterly reserve review process, the Company is closely monitoring reported loss
development in certain lines where the recent emergence of paid losses and case reserves could
indicate a trend that may eventually lead the Company to change its estimate of ultimate losses in
those lines. If, and when, the emergence of reported losses is determined to be a trend that
changes the Companys estimate of ultimate losses, prior accident year reserves would be adjusted
in the period the change in estimate is made.
For example, the Company has experienced favorable emergence of reported workers compensation
claims for recent accident years and, during the first nine months of 2008, released workers
compensation reserves in Small Commercial and Middle Market by a total of $106. If reported losses
on workers compensation claims for recent accident years continue to emerge favorably, reserves
could be reduced further.
The Company has also seen favorable emergence over the first three quarters of 2008 on Personal
Lines auto liability claims. Severity of reported claims for accidents years 2006 and 2007 has
been lower than expected and reserves were released in the third quarter as a result. If these
favorable trends continue, future releases are possible. For the 2008 accident year, lower than
expected auto liability frequency has led to a $9 release of prior quarter reserves in the third
quarter. If frequency continues to emerge favorably in the fourth quarter, further reserve
reductions for the current accident year may result.
In addition, reported losses for claims under directors and officers and errors and omissions
insurance policies are emerging favorably to initial expectations although it is too early to tell
if this trend will be sustained. Up until the fourth quarter of 2007, there had been a decrease in
the number of shareholders class action suits under directors and officers insurance policies
and emerged claim severity has been favorable to previous expectations for the 2003 to 2006
accident years. The Company released a total of $45 of reserves for directors and officers and
errors and omissions claims in the first nine months of 2008. Any continued favorable emergence of
claims under directors and officers or errors and omissions insurance policies for the 2006 and
prior accident years could lead the Company to reduce reserves for these liabilities in future
quarters.
Incurred allocated loss adjustment expenses for casualty business within Specialty Commercial have
been emerging unfavorable to previous expectations and, in the third quarter of 2008, the Company
strengthened reserves for allocated loss adjustment expenses by $15 related to accident years 2004
and prior. Should allocated loss adjustment expenses continue to emerge unfavorably, the Company
may be required to further increase reserves in the future.
92
A rollforward follows of Property & Casualty liabilities for unpaid losses and loss adjustment
expenses by segment for the three and nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
|
Personal |
|
|
Small |
|
|
Middle |
|
|
Specialty |
|
|
Ongoing |
|
|
Other |
|
|
Total |
|
|
|
Lines |
|
|
Commercial |
|
|
Market |
|
|
Commercial |
|
|
Operations |
|
|
Operations |
|
|
P&C |
|
Beginning liabilities for unpaid
losses and loss adjustment
expenses-gross |
|
$ |
2,091 |
|
|
$ |
3,619 |
|
|
$ |
4,791 |
|
|
$ |
6,888 |
|
|
$ |
17,389 |
|
|
$ |
4,926 |
|
|
$ |
22,315 |
|
Reinsurance and other recoverables |
|
|
62 |
|
|
|
191 |
|
|
|
431 |
|
|
|
2,164 |
|
|
|
2,848 |
|
|
|
919 |
|
|
|
3,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning liabilities for unpaid
losses and loss adjustment
expenses-net |
|
|
2,029 |
|
|
|
3,428 |
|
|
|
4,360 |
|
|
|
4,724 |
|
|
|
14,541 |
|
|
|
4,007 |
|
|
|
18,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for unpaid losses and loss
adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before
catastrophes |
|
|
634 |
|
|
|
380 |
|
|
|
377 |
|
|
|
247 |
|
|
|
1,638 |
|
|
|
|
|
|
|
1,638 |
|
Current accident year catastrophes |
|
|
168 |
|
|
|
49 |
|
|
|
64 |
|
|
|
44 |
|
|
|
325 |
|
|
|
|
|
|
|
325 |
|
Prior accident years |
|
|
(9 |
) |
|
|
(46 |
) |
|
|
(17 |
) |
|
|
2 |
|
|
|
(70 |
) |
|
|
56 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for unpaid losses and
loss adjustment expenses |
|
|
793 |
|
|
|
383 |
|
|
|
424 |
|
|
|
293 |
|
|
|
1,893 |
|
|
|
56 |
|
|
|
1,949 |
|
Payments |
|
|
(704 |
) |
|
|
(354 |
) |
|
|
(357 |
) |
|
|
(135 |
) |
|
|
(1,550 |
) |
|
|
(103 |
) |
|
|
(1,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liabilities for unpaid losses
and loss adjustment expenses-net |
|
|
2,118 |
|
|
|
3,457 |
|
|
|
4,427 |
|
|
|
4,882 |
|
|
|
14,884 |
|
|
|
3,960 |
|
|
|
18,844 |
|
Reinsurance and other recoverables |
|
|
87 |
|
|
|
189 |
|
|
|
423 |
|
|
|
2,158 |
|
|
|
2,857 |
|
|
|
904 |
|
|
|
3,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liabilities for unpaid losses
and loss adjustment expenses-gross |
|
$ |
2,205 |
|
|
$ |
3,646 |
|
|
$ |
4,850 |
|
|
$ |
7,040 |
|
|
$ |
17,741 |
|
|
$ |
4,864 |
|
|
$ |
22,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
978 |
|
|
$ |
678 |
|
|
$ |
553 |
|
|
$ |
358 |
|
|
$ |
2,567 |
|
|
$ |
1 |
|
|
$ |
2,568 |
|
Loss and loss expense paid ratio [1] |
|
|
71.9 |
|
|
|
52.4 |
|
|
|
64.3 |
|
|
|
37.3 |
|
|
|
60.3 |
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred ratio |
|
|
81.1 |
|
|
|
56.5 |
|
|
|
76.5 |
|
|
|
81.7 |
|
|
|
73.7 |
|
|
|
|
|
|
|
|
|
Prior accident year development (pts)
[2] |
|
|
(0.9 |
) |
|
|
(6.8 |
) |
|
|
(3.2 |
) |
|
|
0.5 |
|
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The loss and loss expense paid ratio represents the ratio of paid losses and loss adjustment expenses to earned premiums. |
|
[2] |
|
Prior accident year development (pts) represents the ratio of prior accident year development to earned premiums. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
|
Personal |
|
|
Small |
|
|
Middle |
|
|
Specialty |
|
|
Ongoing |
|
|
Other |
|
|
Total |
|
|
|
Lines |
|
|
Commercial |
|
|
Market |
|
|
Commercial |
|
|
Operations |
|
|
Operations |
|
|
P&C |
|
Beginning liabilities for unpaid
losses and loss adjustment
expenses-gross |
|
$ |
2,042 |
|
|
$ |
3,470 |
|
|
$ |
4,687 |
|
|
$ |
6,883 |
|
|
$ |
17,082 |
|
|
$ |
5,071 |
|
|
$ |
22,153 |
|
Reinsurance and other recoverables |
|
|
81 |
|
|
|
177 |
|
|
|
413 |
|
|
|
2,317 |
|
|
|
2,988 |
|
|
|
934 |
|
|
|
3,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning liabilities for unpaid
losses and loss adjustment
expenses-net |
|
|
1,961 |
|
|
|
3,293 |
|
|
|
4,274 |
|
|
|
4,566 |
|
|
|
14,094 |
|
|
|
4,137 |
|
|
|
18,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for unpaid losses and loss
adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before
catastrophes |
|
|
1,914 |
|
|
|
1,130 |
|
|
|
1,118 |
|
|
|
740 |
|
|
|
4,902 |
|
|
|
|
|
|
|
4,902 |
|
Current accident year catastrophes |
|
|
295 |
|
|
|
93 |
|
|
|
106 |
|
|
|
52 |
|
|
|
546 |
|
|
|
|
|
|
|
546 |
|
Prior accident years |
|
|
(16 |
) |
|
|
(50 |
) |
|
|
(55 |
) |
|
|
(39 |
) |
|
|
(160 |
) |
|
|
126 |
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for unpaid losses and
loss adjustment expenses |
|
|
2,193 |
|
|
|
1,173 |
|
|
|
1,169 |
|
|
|
753 |
|
|
|
5,288 |
|
|
|
126 |
|
|
|
5,414 |
|
Payments |
|
|
(2,036 |
) |
|
|
(1,009 |
) |
|
|
(1,016 |
) |
|
|
(437 |
) |
|
|
(4,498 |
) |
|
|
(303 |
) |
|
|
(4,801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liabilities for unpaid losses
and loss adjustment expenses-net |
|
|
2,118 |
|
|
|
3,457 |
|
|
|
4,427 |
|
|
|
4,882 |
|
|
|
14,884 |
|
|
|
3,960 |
|
|
|
18,844 |
|
Reinsurance and other recoverables |
|
|
87 |
|
|
|
189 |
|
|
|
423 |
|
|
|
2,158 |
|
|
|
2,857 |
|
|
|
904 |
|
|
|
3,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liabilities for unpaid losses
and loss adjustment expenses-gross |
|
$ |
2,205 |
|
|
$ |
3,646 |
|
|
$ |
4,850 |
|
|
$ |
7,040 |
|
|
$ |
17,741 |
|
|
$ |
4,864 |
|
|
$ |
22,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
2,941 |
|
|
$ |
2,048 |
|
|
$ |
1,688 |
|
|
$ |
1,087 |
|
|
$ |
7,764 |
|
|
$ |
4 |
|
|
$ |
7,768 |
|
Loss and loss expense paid ratio [1] |
|
|
69.2 |
|
|
|
49.2 |
|
|
|
60.1 |
|
|
|
40.1 |
|
|
|
57.9 |
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred ratio |
|
|
74.6 |
|
|
|
57.2 |
|
|
|
69.2 |
|
|
|
69.3 |
|
|
|
68.1 |
|
|
|
|
|
|
|
|
|
Prior accident year development (pts)
[2] |
|
|
(0.6 |
) |
|
|
(2.4 |
) |
|
|
(3.3 |
) |
|
|
(3.6 |
) |
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The loss and loss expense paid ratio represents the ratio of paid losses and loss adjustment expenses to earned premiums. |
|
[2] |
|
Prior accident year development (pts) represents the ratio of prior accident year development to earned premiums. |
93
Current accident year catastrophes
For the three months ended September 30, 2008, net current accident year catastrophe loss and loss
adjustment expenses totaled $325, of which $246 related to hurricane Ike. In addition to the $246
of net catastrophe loss and loss adjustment expenses from hurricane Ike, the Company incurred $20
of assessments and $11 of reinstatement premium due to hurricane Ike. The following table shows
total current accident year catastrophe impacts in the three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2008 |
|
|
|
Personal |
|
|
Small |
|
|
Middle |
|
|
Specialty |
|
|
Ongoing |
|
|
Other |
|
|
Total |
|
|
|
Lines |
|
|
Commercial |
|
|
Market |
|
|
Commercial |
|
|
Operations |
|
|
Operations |
|
|
P&C |
|
Gross incurred
claim and claim
adjustment expenses
for current
accident year
catastrophes |
|
$ |
194 |
|
|
$ |
56 |
|
|
$ |
73 |
|
|
$ |
57 |
|
|
$ |
380 |
|
|
$ |
|
|
|
$ |
380 |
|
Ceded claim and
claim adjustment
expenses for
current accident
year catastrophes |
|
|
26 |
|
|
|
7 |
|
|
|
9 |
|
|
|
13 |
|
|
|
55 |
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred claim
and claim
adjustment expenses
for current
accident year
catastrophes |
|
|
168 |
|
|
|
49 |
|
|
|
64 |
|
|
|
44 |
|
|
|
325 |
|
|
|
|
|
|
|
325 |
|
Assessments owed to
Texas Windstorm
Insurance
Association due to
hurricane Ike |
|
|
10 |
|
|
|
7 |
|
|
|
3 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
20 |
|
Reinstatement
premium ceded to
reinsurers due to
hurricane Ike |
|
|
7 |
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
accident year
catastrophe impacts |
|
$ |
185 |
|
|
$ |
58 |
|
|
$ |
68 |
|
|
$ |
45 |
|
|
$ |
356 |
|
|
$ |
|
|
|
$ |
356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A portion of the gross incurred loss and loss adjustment expenses are recoverable from
reinsurers under the Companys principal catastrophe reinsurance program in addition to other
reinsurance programs. Reinsurance recoveries under the Companys principal catastrophe reinsurance
program, which covers multiple lines of business, are allocated to the segments in accordance with
a pre-established methodology that is consistent with the method used to allocate the ceded premium
to each segment. In the third quarter of 2008, the Company reinstated the limits under its
reinsurance programs that were partially exhausted by hurricane Ike, resulting in additional ceded
premium of $11, which is reflected as a reduction in earned premium.
The Companys estimate of loss and loss expenses arising from hurricanes and other catastrophes is
based on covered losses under the terms of the policies. The Company does not provide residential
flood insurance on its Personal Lines homeowners policies so the Companys estimate of hurricane
losses on Personal Lines homeowners business does not include any provision for damages arising
from flood waters. The Company acts as an administrator for the Write Your Own flood program on
behalf of the National Flood Insurance Program under FEMA, for which it earns a fee for collecting
premiums and processing claims. Under the program, the Company services both personal lines and
commercial lines flood insurance policies and does not assume any underwriting risk. As a result,
catastrophe losses in the above table do not include any losses related to the Write Your Own flood
program.
94
Prior accident year development recorded in 2008
Included within prior accident year development for the nine months ended September 30, 2008 were
the following reserve strengthenings (releases):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal |
|
|
Small |
|
|
Middle |
|
|
Specialty |
|
|
Ongoing |
|
|
Other |
|
|
Total |
|
|
|
Lines |
|
|
Commercial |
|
|
Market |
|
|
Commercial |
|
|
Operations |
|
|
Operations |
|
|
P&C |
|
Released reserves for personal
auto liability claims related to
accident years 2000 to 2007 |
|
$ |
(23 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(23 |
) |
|
$ |
|
|
|
$ |
(23 |
) |
Released workers compensation
reserves, primarily related to
accident years 2000 to 2007 |
|
|
|
|
|
|
(33 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
(48 |
) |
|
|
|
|
|
|
(48 |
) |
Released reserves for directors
and officers claims and errors and
omissions claims for accident
years 2004 to 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) |
Strengthened reserves for national
account general liability claims
related to accident years 2004 and
prior |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
15 |
|
Strengthening of net environmental
reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
53 |
|
Other reserve re-estimates, net [1] |
|
|
14 |
|
|
|
(13 |
) |
|
|
(2 |
) |
|
|
12 |
|
|
|
11 |
|
|
|
3 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prior accident year
development for the three months
ended September 30, 2008 |
|
$ |
(9 |
) |
|
$ |
(46 |
) |
|
$ |
(17 |
) |
|
$ |
2 |
|
|
$ |
(70 |
) |
|
$ |
56 |
|
|
$ |
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strengthened reserves for claims
under Small Commercial package
policies related to accident year
2007 |
|
$ |
|
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
10 |
|
Released reserves for
extra-contractual liability claims
under non-standard personal auto
policies |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
(9 |
) |
Released workers compensation
reserves, primarily related to
accident years 2000 to 2007 |
|
|
|
|
|
|
(39 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
(58 |
) |
Strengthened reserves for general
liability and products liability
claims primarily for accident
years 2004 and prior |
|
|
|
|
|
|
17 |
|
|
|
30 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
47 |
|
Released reserves for general
liability claims, primarily
related to accident years 2001 to
2006 |
|
|
|
|
|
|
(5 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
(42 |
) |
|
|
|
|
|
|
(42 |
) |
Released reserves for directors
and officers claims and errors and
omissions claims for accident
years 2003, 2004 and 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
(20 |
) |
Strengthening of net asbestos
reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
50 |
|
Released reserves for construction
defect claims for accident years
2001 and prior |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
(10 |
) |
Other reserve re-estimates, net [2] |
|
|
2 |
|
|
|
13 |
|
|
|
(12 |
) |
|
|
(11 |
) |
|
|
(8 |
) |
|
|
20 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prior accident year
development for the six months
ended June 30, 2008 |
|
$ |
(7 |
) |
|
$ |
(4 |
) |
|
$ |
(38 |
) |
|
$ |
(41 |
) |
|
$ |
(90 |
) |
|
$ |
70 |
|
|
$ |
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prior accident year
development for the nine months
ended September 30, 2008 |
|
$ |
(16 |
) |
|
$ |
(50 |
) |
|
$ |
(55 |
) |
|
$ |
(39 |
) |
|
$ |
(160 |
) |
|
$ |
126 |
|
|
$ |
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Includes reserve discount accretion of $6, including $2 in Small Commercial, $2 in Middle Market and $2 in Specialty Commercial. |
|
[2] |
|
Includes reserve discount accretion of $15, including $3 in Small Commercial, $4 in Middle Market, $5 in Specialty Commercial and $3 in Other Operations. |
95
During the three and nine months ended September 30, 2008, the Companys re-estimates of prior
accident year reserves included the following significant reserve changes:
Ongoing Operations
|
|
Released workers compensation reserves related to accident years 2000 to 2007 by $106 in
the nine months ended September 30, 2008, including $48 in the third quarter of 2008. These
reserve releases are a continuation of favorable developments first recognized in 2005 and
recognized in both 2006 and 2007. The reserve releases in 2008 resulted from a determination
that workers compensation losses continue to develop even more favorably from prior
expectations due to the California and Florida legal reforms and underwriting actions as well
as cost reduction initiatives first instituted in 2003. In particular, the state legal
reforms and underwriting actions have resulted in lower than expected medical claim severity. |
|
|
|
Released reserves for professional liability claims for accident years 2003 to 2006 by $45
in the nine months ended September 30, 2008, including $25 in the third quarter of 2008.
During the first nine months of 2008, the Company updated its analysis of certain professional
liability claims and the new analysis showed that claim severity for directors and officers
losses in the 2003 to 2006 accident years were favorable to previous expectations, resulting
in a $10 reduction of reserves in the first quarter, a $4 reduction of reserves in the second
quarter, and a $25 reduction of reserves in the third quarter. The analysis in the second
quarter also showed favorable emergence of claim severity on errors and omission policy claims
for the 2004 and 2005 accident years, resulting in a release of $6 in reserves in the second
quarter. |
|
|
|
During the third quarter of 2008, released reserves for Personal Lines auto liability
claims by $23, principally related to AARP business for the 2006 and 2007 accident years.
Beginning in the first quarter of 2008, management observed an improvement in emerged claim
severity for the 2006 and 2007 accident years attributed, in part, to changes made in claim
handling procedures in 2007. In the third quarter of 2008, the Company recognized that
favorable trends in reported severity were a sustained trend and accordingly, management
reduced its reserve estimate in the third quarter. |
|
|
|
During the third quarter of 2008, strengthened reserves for allocated loss adjustment
expenses on national account general liability claims within Specialty Commercial by $15.
Allocated loss adjustment expense reserves on general liability excess and umbrella claims
were strengthened for accident years 2004 and prior as the Company observed that the cost of
settling these claims has exceeded previous expectations. |
|
|
|
Released reserves for general liability claims primarily related to the 2001 to 2006
accident years by $42 in the first six months of 2008. Beginning in the third quarter of
2007, the Company observed that reported losses for high hazard and umbrella general liability
claims, primarily related to the 2001 to 2006 accident years, were emerging favorably and this
caused management to reduce its estimate of the cost of future reported claims for these
accident years, resulting in a reserve release in each quarter since the third quarter of
2007. The number of reported claims for this line of business has been lower than expected, a
trend first observed in 2005. Over time, management has come to believe that the lower than
expected number of claims reported to date will not be offset by a higher than expected number
of late reported claims. |
|
|
|
During the second quarter of 2008, strengthened reserves for claims under Small Commercial
package policies by $10. Beginning in the first quarter of 2008, the Company observed an
increase in the emerged severity of package business claims for the 2007 accident year, under
both property and liability coverages, driven by a higher than initially expected number of
large-sized claims. In the second quarter of 2008, the Company recognized that this trend in
increasing severity was a verifiable trend and, accordingly, increased reserves in the second
quarter of 2008. |
|
|
|
During the first quarter of 2008, released reserves for extra-contractual liability claims
under non-standard personal auto policies by $9. As part of the agreement to sell its
non-standard auto insurance business in November, 2006, the Company continues to be obligated
for certain extra-contractual liability claims arising prior to the date of sale. Reserve
estimates for extra-contractual liability claims are subject to significant variability
depending on the expected settlement of individually large claims and, during the first
quarter of 2008, the Company determined that the settlement value of a number of these claims
was expected to be less than previously anticipated, resulting in a $9 release of reserves. |
|
|
|
During the first quarter of 2008, strengthened reserves for general liability and products
liability claims primarily for accident years 2004 and prior by $47 for losses expected to
emerge after 20 years of development, including $17 in Small Commercial and $30 in Middle
Market. In 2007, management observed that long outstanding general liability claims have been
settling for more than previously anticipated and, during the first quarter of 2008, the
Company increased the estimate of late development of general liability claims. |
|
|
|
During the first quarter of 2008, released reserves for construction defect claims in
Specialty Commercial by $10 for accident years 2001 and prior due to lower than expected
reported claim activity. Lower than expected claim activity was first noted in the first
quarter of 2007 and continued throughout 2007. In the first quarter of 2008, management
determined that this was a verifiable trend and reduced reserves accordingly. |
96
Other Operations
|
|
During the third quarter of 2008, the Company completed its annual ground up environmental
reserve evaluation, resulting in a $53 increase in net environmental reserves. As part of
this evaluation, 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. The Company found estimates for
some individual accounts increased based upon new damage and defense cost information obtained
on these accounts since the last review. In addition, the decline in the reporting of new
accounts and sites has been slower than anticipated in our previous review. |
|
|
|
During the second quarter of 2008, the Company completed its annual ground up asbestos
reserve evaluation. As part of this evaluation, 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.
The Company found estimates for individual cases changed based upon the particular
circumstances of each account. These changes were case specific and not as a result of any
underlying change in the current environment. The net effect of these changes resulted in a
$50 increase in net asbestos reserves. |
Risk Management Strategy
Refer to the MD&A in The Hartfords 2007 Form 10-K Annual Report for an explanation of Property &
Casualtys risk management strategy.
Use of Reinsurance
In managing risk, The Hartford utilizes reinsurance to transfer risk to well-established and
financially secure reinsurers. Reinsurance is used to manage aggregations of risk as well as
specific risks based on accumulated property and casualty liabilities in certain geographic zones.
All treaty purchases related to the Companys property and casualty operations are administered by
a centralized function to support a consistent strategy and ensure that the reinsurance activities
are fully integrated into the organizations risk management processes.
A variety of traditional reinsurance products are used as part of the Companys risk management
strategy, including excess of loss occurrence-based products that protect property and workers
compensation exposures, and individual risk or quota share arrangements, that protect specific
classes or lines of business. There are no significant finite risk contracts in place and the
statutory surplus benefit from all such prior year contracts is immaterial. Facultative
reinsurance is also used to manage policy-specific risk exposures based on established underwriting
guidelines. The Hartford also participates in governmentally administered reinsurance facilities
such as the Florida Hurricane Catastrophe Fund (FHCF), the Terrorism Risk Insurance Program
established under The Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) and
other reinsurance programs relating to particular risks or specific lines of business.
The Company has several catastrophe reinsurance programs, including reinsurance treaties that cover
property and workers compensation losses aggregating from single catastrophe events. The
following table summarizes the primary catastrophe treaty reinsurance coverages that the Company
has renewed subsequent to January 1, 2008. Refer to the MD&A in The Hartfords 2007 Form 10-K
Annual Report for an explanation of the Companys primary catastrophe program, including the
treaties that renewed January 1, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of layer(s) |
|
|
|
|
|
|
|
Coverage |
|
Treaty term |
|
|
reinsured |
|
|
Per occurrence limit |
|
|
Retention |
|
Layer covering
property
catastrophe losses
from a single wind
or earthquake event
affecting the
northeast of the
United States from
Virginia to Maine |
|
6/1/2008 to 6/1/2009 |
|
|
|
90 |
% |
|
$ |
300 |
|
|
$ |
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance with
the FHCF covering
Florida Personal
Lines property
catastrophe losses
from a single event |
|
6/1/2008 to 6/1/2009 |
|
|
|
90 |
% |
|
|
436 |
[1] |
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
compensation losses
arising from a
single catastrophe
event |
|
7/1/2008 to 7/1/2009 |
| |
|
95 |
% |
|
|
280 |
|
|
|
20 |
|
|
|
|
[1] |
|
The per occurrence limit on the FHCF treaty is $436 for the 6/1/2008 to 6/1/2009 treaty year
based on the Companys election to purchase additional limits under the Temporary Increase in
Coverage Limit (TCIL) statutory provision in excess of the coverage the Company is required
to purchase from the FHCF. |
97
The Texas Windstorm Insurance Association (TWIA)
The Texas Windstorm Insurance Association (TWIA) provides hail and windstorm coverage to Texas
residents of 14 counties along the Texas Gulf coast who are unable to obtain insurance from other
carriers. Insurance carriers who write property insurance in the state of Texas, including The
Hartford, are required to be members of TWIA and are obligated to pay assessments in the event that
TWIA losses exceed the available funds in the Texas Catastrophe Reserve Trust Fund (CRTF).
Assessments are allocated to carriers based on their share of premium writings in the state of
Texas, as defined.
During the third quarter of 2008, the board of directors of TWIA notified its member companies that
it would assess them $100 to cover TWIA losses from hurricane Dolly and a total of $430 for
hurricane Ike. For hurricane Dolly, the Companys share of the assessment was $4, which was
recorded as incurred losses within current accident year catastrophes in the third quarter of 2008.
For hurricane Ike, the TWIA board indicated that the first $370 of TWIA losses from hurricane Ike
would be covered by the CRTF, but that the cost of TWIA losses and reinstatement premium above that
amount would be funded by assessments. Of the $430 in assessments, $230 is to fund the first $230
of TWIA losses in excess of the $370 available in the CRTF and $200 is to fund additional
reinsurance premiums that TWIA must pay to reinstate a layer of coverage that reimburses TWIA for
up to $1.5 billion of TWIA losses in excess of $600 per occurrence. Thus, TWIAs assessment notice
for $430 is based on an estimate that TWIA losses from hurricane Ike will total approximately $2.1
billion. If TWIA losses exceed $2.1 billion, the entire amount in excess of $2.1 billion would be
recovered from assessing member companies according to their market share. In notifying member
companies, TWIAs board of directors stated that actual TWIA losses will likely be greater than
$2.1 billion and management has accrued a total of $27 in assessments for Ike based on an estimate
that TWIAs Ike losses will be approximately $2.5 billion and that TWIA assessments to the industry
will ultimately be approximately $830. Of the $27 in assessments for Ike recorded in the third
quarter of 2008, $7 has been recorded as incurred losses within current accident year catastrophes
and $20 has been recorded as insurance operating costs and expenses.
Through premium tax credits, member companies may recoup a portion of Ike-related assessments made
to cover the first $2.1 billion of TWIA losses and may recoup all of the Ike-related assessments
made to fund losses in excess of that amount. None of the assessments for hurricane Dolly may be
recouped. Under generally accepted accounting principles, the Company is required to accrue the
assessments in the period the assessments become probable and estimable and the obligating event
has occurred. However, premium tax credits may not be recorded as an asset until the related
premium is earned and TWIA requires that premium tax credits be spread over a period of at least
five years. The Company estimates that of the $27 of accrued assessments for Ike, it will
ultimately be able to recoup $20 through premium tax credits.
Reinsurance Recoverables
Refer to the MD&A in The Hartfords 2007 Form 10-K Annual Report for an explanation of Property &
Casualtys reinsurance recoverables.
Premium Measures
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
measure under both U.S. GAAP and statutory accounting principles. 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 Companys sale of property and casualty insurance products. Written and
earned premium are recorded net of ceded reinsurance premium. 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.
Unless otherwise specified, the following discussion speaks to changes in the third quarter of 2008
compared to the third quarter of 2007 and the nine months ended September 30, 2008 compared to the
nine months ended September 30, 2007.
98
TOTAL PROPERTY & CASUALTY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Earned premiums |
|
$ |
2,568 |
|
|
$ |
2,628 |
|
|
|
(2 |
%) |
|
$ |
7,768 |
|
|
$ |
7,873 |
|
|
|
(1 |
%) |
Net investment income |
|
|
335 |
|
|
|
407 |
|
|
|
(18 |
%) |
|
|
1,091 |
|
|
|
1,266 |
|
|
|
(14 |
%) |
Other revenues [1] |
|
|
132 |
|
|
|
126 |
|
|
|
5 |
% |
|
|
377 |
|
|
|
368 |
|
|
|
2 |
% |
Net realized capital losses |
|
|
(1,428 |
) |
|
|
(75 |
) |
|
NM |
|
|
|
(1,631 |
) |
|
|
(76 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,607 |
|
|
|
3,086 |
|
|
|
(48 |
%) |
|
|
7,605 |
|
|
|
9,431 |
|
|
|
(19 |
%) |
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
1,638 |
|
|
|
1,695 |
|
|
|
(3 |
%) |
|
|
4,902 |
|
|
|
4,984 |
|
|
|
(2 |
%) |
Current accident year catastrophes |
|
|
325 |
|
|
|
32 |
|
|
NM |
|
|
|
546 |
|
|
|
112 |
|
|
NM |
|
Prior accident years |
|
|
(14 |
) |
|
|
28 |
|
|
NM |
|
|
|
(34 |
) |
|
|
154 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss adjustment expenses |
|
|
1,949 |
|
|
|
1,755 |
|
|
|
11 |
% |
|
|
5,414 |
|
|
|
5,250 |
|
|
|
3 |
% |
Amortization of deferred policy acquisition costs |
|
|
523 |
|
|
|
525 |
|
|
|
|
|
|
|
1,567 |
|
|
|
1,581 |
|
|
|
(1 |
%) |
Insurance operating costs and expenses |
|
|
201 |
|
|
|
166 |
|
|
|
21 |
% |
|
|
543 |
|
|
|
494 |
|
|
|
10 |
% |
Other expenses |
|
|
175 |
|
|
|
174 |
|
|
|
1 |
% |
|
|
537 |
|
|
|
509 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
2,848 |
|
|
|
2,620 |
|
|
|
9 |
% |
|
|
8,061 |
|
|
|
7,834 |
|
|
|
3 |
% |
Income (loss) before income taxes |
|
|
(1,241 |
) |
|
|
466 |
|
|
NM |
|
|
|
(456 |
) |
|
|
1,597 |
|
|
NM |
|
Income tax expense (benefit) |
|
|
(467 |
) |
|
|
113 |
|
|
NM |
|
|
|
(257 |
) |
|
|
439 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) [2] |
|
$ |
(774 |
) |
|
$ |
353 |
|
|
NM |
|
|
$ |
(199 |
) |
|
$ |
1,158 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations |
|
$ |
(666 |
) |
|
$ |
341 |
|
|
NM |
|
|
$ |
(108 |
) |
|
$ |
1,154 |
|
|
NM |
|
Other Operations |
|
|
(108 |
) |
|
|
12 |
|
|
NM |
|
|
|
(91 |
) |
|
|
4 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property & Casualty net income (loss) |
|
$ |
(774 |
) |
|
$ |
353 |
|
|
NM |
|
|
$ |
(199 |
) |
|
$ |
1,158 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Represents servicing revenue. |
|
[2] |
|
Includes net realized capital losses, after-tax, of $(929) and $(49)
for the three months ended September 30, 2008 and 2007, respectively,
and $(1,061) and $(50) for the nine months ended September 30, 2008
and 2007, respectively. |
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Net income decreased by $1,127, from net income of $353 in 2007 to a net loss of $774 in 2008. The
decrease in net income was driven by a $1,007 decrease in Ongoing Operations results, from net
income of $341 in 2007 to a net loss of $666 in 2008 and a $120 decrease in Other Operations
results, from net income of $12 in 2007 to a net loss of $108 in 2008. See the Ongoing Operations
and Other Operations segment MD&A discussions for an analysis of the underwriting results and
investment performance driving the decrease in net income.
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Net income decreased by $1,357, from net income of $1,158 in 2007 to a net loss of $199 in 2008.
The decrease in net income was due to a $1,262 decrease in Ongoing Operations results, from net
income of $1,154 in 2007 to a net loss of $108 in 2008 and a $95 decrease in Other Operations
results, from net income of $4 in 2007 to a net loss of $91 in 2008. See the Ongoing Operations
and Other Operations segment MD&A discussions for an analysis of the underwriting results and
investment performance driving the decrease in net income.
99
ONGOING OPERATIONS
Ongoing Operations includes the four underwriting segments of Personal Lines, Small Commercial,
Middle Market and Specialty Commercial.
Operating Summary
Net income for Ongoing Operations includes underwriting results for each of its segments, income
from servicing businesses, net investment income, other expenses and net realized capital gains
(losses), net of related income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Written premiums |
|
$ |
2,592 |
|
|
$ |
2,628 |
|
|
|
(1 |
%) |
|
$ |
7,759 |
|
|
$ |
7,924 |
|
|
|
(2 |
%) |
Change in unearned premium reserve |
|
|
25 |
|
|
|
2 |
|
|
NM |
|
|
|
(5 |
) |
|
|
54 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
2,567 |
|
|
|
2,626 |
|
|
|
(2 |
%) |
|
|
7,764 |
|
|
|
7,870 |
|
|
|
(1 |
%) |
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
1,638 |
|
|
|
1,695 |
|
|
|
(3 |
%) |
|
|
4,902 |
|
|
|
4,984 |
|
|
|
(2 |
%) |
Current accident year catastrophes |
|
|
325 |
|
|
|
32 |
|
|
NM |
|
|
|
546 |
|
|
|
112 |
|
|
NM |
|
Prior accident years |
|
|
(70 |
) |
|
|
(11 |
) |
|
NM |
|
|
|
(160 |
) |
|
|
(19 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss adjustment expenses |
|
|
1,893 |
|
|
|
1,716 |
|
|
|
10 |
% |
|
|
5,288 |
|
|
|
5,077 |
|
|
|
4 |
% |
Amortization of deferred policy acquisition costs |
|
|
523 |
|
|
|
525 |
|
|
|
|
|
|
|
1,567 |
|
|
|
1,581 |
|
|
|
(1 |
%) |
Insurance operating costs and expenses |
|
|
195 |
|
|
|
160 |
|
|
|
22 |
% |
|
|
527 |
|
|
|
477 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
|
(44 |
) |
|
|
225 |
|
|
NM |
|
|
|
382 |
|
|
|
735 |
|
|
|
(48 |
%) |
Net servicing income [1] |
|
|
14 |
|
|
|
16 |
|
|
|
(13 |
%) |
|
|
21 |
|
|
|
41 |
|
|
|
(49 |
%) |
Net investment income |
|
|
285 |
|
|
|
346 |
|
|
|
(18 |
%) |
|
|
929 |
|
|
|
1,082 |
|
|
|
(14 |
%) |
Net realized capital losses |
|
|
(1,268 |
) |
|
|
(72 |
) |
|
NM |
|
|
|
(1,455 |
) |
|
|
(73 |
) |
|
NM |
|
Other expenses |
|
|
(58 |
) |
|
|
(63 |
) |
|
|
8 |
% |
|
|
(180 |
) |
|
|
(179 |
) |
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,071 |
) |
|
|
452 |
|
|
NM |
|
|
|
(303 |
) |
|
|
1,606 |
|
|
NM |
|
Income tax (expense) benefit |
|
|
405 |
|
|
|
(111 |
) |
|
NM |
|
|
|
195 |
|
|
|
(452 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(666 |
) |
|
$ |
341 |
|
|
NM |
|
|
$ |
(108 |
) |
|
$ |
1,154 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
63.8 |
|
|
|
64.5 |
|
|
|
0.7 |
|
|
|
63.1 |
|
|
|
63.3 |
|
|
|
0.2 |
|
Current accident year catastrophes |
|
|
12.7 |
|
|
|
1.2 |
|
|
|
(11.5 |
) |
|
|
7.0 |
|
|
|
1.4 |
|
|
|
(5.6 |
) |
Prior accident years |
|
|
(2.8 |
) |
|
|
(0.4 |
) |
|
|
2.4 |
|
|
|
(2.1 |
) |
|
|
(0.2 |
) |
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense ratio |
|
|
73.7 |
|
|
|
65.3 |
|
|
|
(8.4 |
) |
|
|
68.1 |
|
|
|
64.5 |
|
|
|
(3.6 |
) |
Expense ratio |
|
|
27.3 |
|
|
|
25.9 |
|
|
|
(1.4 |
) |
|
|
26.4 |
|
|
|
25.9 |
|
|
|
(0.5 |
) |
Policyholder dividend ratio |
|
|
0.7 |
|
|
|
0.2 |
|
|
|
(0.5 |
) |
|
|
0.5 |
|
|
|
0.2 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
101.7 |
|
|
|
91.4 |
|
|
|
(10.3 |
) |
|
|
95.1 |
|
|
|
90.7 |
|
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year |
|
|
12.7 |
|
|
|
1.2 |
|
|
|
(11.5 |
) |
|
|
7.0 |
|
|
|
1.4 |
|
|
|
(5.6 |
) |
Prior accident years |
|
|
(0.2 |
) |
|
|
0.3 |
|
|
|
0.5 |
|
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe ratio |
|
|
12.5 |
|
|
|
1.5 |
|
|
|
(11.0 |
) |
|
|
6.8 |
|
|
|
1.5 |
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes |
|
|
89.2 |
|
|
|
89.9 |
|
|
|
0.7 |
|
|
|
88.2 |
|
|
|
89.2 |
|
|
|
1.0 |
|
Combined ratio before catastrophes and prior
accident year development |
|
|
91.8 |
|
|
|
90.6 |
|
|
|
(1.2 |
) |
|
|
90.1 |
|
|
|
89.5 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Net of expenses related to service business. |
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Net income
Net income decreased by $1,007, from net income of $341 in 2007 to a net loss of $666 in 2008, due
primarily to a $1,196 increase in net realized capital losses, a $269 decrease in underwriting
results and a $61 decrease in net investment income.
Net realized capital losses increased by $1,196
The increase in net realized capital losses of $1,196 in 2008 was primarily due to realized losses
in 2008 from impairments of corporate debt and equity securities in the financial services sector.
(See the Other-Than-Temporary Impairments discussion within Investment Results in the
Investments section of the MD&A for more information on the impairments recorded in 2008).
100
Underwriting results decreased by $269
Underwriting results decreased by $269 with a corresponding 10.3 point increase in the combined
ratio, from 91.4 to 101.7, due to:
|
|
|
|
|
Change in underwriting results |
|
|
|
|
Decrease in earned premiums |
|
$ |
(59 |
) |
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
Volume change Decrease in current accident year losses and loss adjustment expenses before
catastrophes due to the decrease in earned premium |
|
|
38 |
|
Ratio change A decrease in the current accident year loss and loss adjustment expense ratio
before catastrophes |
|
|
19 |
|
|
|
|
|
Decrease in current accident year losses and loss adjustment expenses before catastrophes |
|
|
57 |
|
Catastrophes Increase
in current accident year catastrophe losses |
|
|
(293 |
) |
Reserve changes An increase in net favorable prior accident year reserve development |
|
|
59 |
|
|
|
|
|
Net increase in losses and loss adjustment expenses |
|
|
(177 |
) |
|
|
|
|
|
Operating expenses |
|
|
|
|
Decrease in amortization of deferred policy acquisition costs |
|
|
2 |
|
Increase in insurance operating costs and expenses |
|
|
(35 |
) |
|
|
|
|
Net increase in operating expenses |
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(269 |
) |
|
|
|
|
Earned premium decreased by $59
Ongoing Operations earned premium decreased by $59, or 2%, primarily due to a 5% decrease in both
Middle Market and Specialty Commercial. Refer to the earned premium discussion in the Executive
Overview section of the Property & Casualty MD&A for further discussion of the decrease in earned
premium.
Losses and loss adjustment expenses increased by $177
Current accident year losses and loss adjustment expenses before catastrophes decreased by $57
Ongoing Operations current accident year losses and loss adjustment expenses before catastrophes
decreased by $57 due to a decrease in earned premium and a decrease in the current accident year
loss and loss adjustment expense ratio before catastrophes. The current accident year loss and
loss adjustment expense ratio before catastrophes decreased by 0.7 points, to 63.8, driven by a
decrease in Personal Lines and Small Commercial, partially offset by an increase in Middle Market
and Specialty Commercial.
|
|
|
|
|
Personal
Lines
|
|
|
|
The current accident year
loss and loss adjustment expense
ratio before catastrophes in
Personal Lines decreased by 2.2
points, primarily due to a lower
current accident year loss and loss
adjustment expense ratio for auto
claims, partially offset by
increased severity of
non-catastrophe losses on
homeowners business. Contributing
to the lower loss and loss
adjustment expense ratio for auto
claims was the effect of a $9
release of current accident year
auto liability reserves and
favorable frequency on auto physical
damage claims as well as the effect
of earned pricing increases. |
|
|
|
|
|
Small Commercial
|
|
|
|
The current accident year
loss and loss adjustment expense
ratio before catastrophes in Small
Commercial decreased by 3.1 points,
primarily due to a lower loss and
loss adjustment expense ratio for
workers compensation business. The
lower loss and loss adjustment
expense ratio for workers
compensation business was primarily
due to lower claim frequency,
partially offset by the effect of
earned pricing decreases. |
|
|
|
|
|
Middle
Market
|
|
|
|
The current accident year
loss and loss adjustment expense
ratio before catastrophes in Middle
Market increased by 2.0 points due
primarily to earned pricing
decreases and higher non-catastrophe
losses on property and marine
business, driven by increased claim
severity. |
|
|
|
|
|
Specialty Commercial
|
|
|
|
The current accident year
loss and loss adjustment expense
ratio before catastrophes in
Specialty Commercial increased by
3.1 points, primarily due to a
higher loss and loss adjustment
ratio on directors and officers
insurance for professional liability
business, driven by earned pricing
decreases. |
Current accident year catastrophes increased by $293
Current accident year catastrophe losses of $325, or 12.7 points, in 2008 were higher than current
accident year catastrophe losses of $32, or 1.2 points, in 2007, primarily due to losses from
hurricane Ike.
101
Net favorable prior accident year reserve development increased by $59
Net favorable prior accident year reserve development increased from net favorable development of
$11, or 0.4 points, in 2007, to net favorable development of $70, or 2.8 points, in 2008. Among
other reserve changes, net favorable reserve development of $70 in 2008 included a $48 release of
workers compensation reserves, primarily related to accident years 2006 and 2007, a $25 release of
reserves on directors and officers insurance claims related to accident years 2004 to 2006 and a
$23 release of Personal Lines auto liability reserves related to accident years 2006 and 2007,
partially offset by a $28 strengthening of reserves for allocated loss adjustment expenses on
specialty casualty business, including $15 on national accounts business. Refer to the Reserves
section of the MD&A for further discussion of the prior accident year reserve development in 2008.
Net favorable reserve development of $11 in 2007 primarily included a $58 release of workers
compensation reserves for accident years 2003 through 2006, partially offset by a $40 strengthening
of Middle Market workers compensation reserves for accident years 1973 and prior.
Operating expenses increased by $33
Insurance operating costs and expenses increased by $35 primarily due to a $12 increase in
policyholder dividends and an estimated $20 of assessments owed to TWIA to fund Texas Gulf Coast
losses sustained by TWIA due to hurricane Ike. The increase in policyholder dividends was
primarily due to an $11 increase in the estimated amount of dividends payable to certain workers
compensation policyholders due to underwriting profits. The expense ratio increased by 1.4 points,
to 27.3, primarily because of the TWIA assessments coupled with a reduction in earned premium.
Amortization of deferred policy acquisition costs decreased slightly reflecting the decrease in
earned premium.
Net investment income decreased by $61
Primarily
driving the $61 decrease in net investment income was a decrease in investment yield for limited
partnerships and other alternative investments and, to a lesser extent, a decrease in investment
yield for fixed maturities. The lower yield on limited partnerships and other alternative
investments was largely driven by lower returns on hedge funds and real estate partnerships. The
lower yield on fixed maturities primarily resulted from lower income on variable rate securities
due to a decrease in short-term interest rates.
A $516 change from income tax expense to an income tax benefit
Income taxes changed by $516, from income tax expense of $111 in 2007 to an income tax benefit of
$405 in 2008, reflecting the change from pre-tax income of $452 in 2007 to a pre-tax loss of $1,071
in 2008.
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Net income
Net income decreased by $1,262, from net income of $1,154 in 2007 to a net loss of $108 in 2008,
due primarily to a $1,382 increase in net realized capital losses, a $353 decrease in underwriting
results and a $153 decrease in net investment income.
Net realized capital losses increased by $1,382
The increase in net realized capital losses of $1,382 in 2008 was primarily due to realized losses
in 2008 from impairments of corporate debt and equity securities in the financial services sector.
(See the Other-Than-Temporary Impairments discussion within Investment Results in the
Investments section of the MD&A for more information on the impairments recorded in 2008).
102
Underwriting results decreased by $353
Underwriting results decreased by $353 with a corresponding 4.4 point increase in the combined
ratio, from 90.7 to 95.1, due to:
|
|
|
|
|
Change in underwriting results
|
Decrease in earned premiums |
|
$ |
(106 |
) |
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
Volume change Decrease in current accident year losses and loss adjustment expenses before
catastrophes due to the decrease in earned premium |
|
|
67 |
|
Ratio change A decrease in the current accident year loss and loss adjustment expense ratio
before catastrophes |
|
|
15 |
|
|
|
|
|
Net decrease in current accident year losses and loss adjustment expenses before catastrophes |
|
|
82 |
|
Catastrophes Increase
in current accident year catastrophe losses |
|
|
(434 |
) |
Reserve changes An increase in net favorable prior accident year reserve development |
|
|
141 |
|
|
|
|
|
Net increase in losses and loss adjustment expenses |
|
|
(211 |
) |
|
|
|
|
|
Operating expenses |
|
|
|
|
Decrease in amortization of deferred policy acquisition costs |
|
|
14 |
|
Increase in insurance operating costs and expenses |
|
|
(50 |
) |
|
|
|
|
Net increase in operating expenses |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(353 |
) |
|
|
|
|
Earned premium decreased by $106
Ongoing Operations earned premium decreased by $106, or 1%, due to a 5% decrease in both Middle
Market and Specialty Commercial. Refer to the earned premium discussion in the Executive Overview
section of the Property & Casualty MD&A for further discussion of the decrease in earned premium.
Losses and loss adjustment expenses increased by $211
Current accident year losses and loss adjustment expenses before catastrophes decreased by $82
Ongoing Operations current accident year losses and loss adjustment expenses before catastrophes
decreased by $82 due primarily to a decrease in earned premium. The current accident year loss and
loss adjustment expense ratio before catastrophes decreased by 0.2 points, to 63.1, due to a
decrease in Small Commercial, partially offset by an increase in Personal Lines, Middle Market and
Specialty Commercial.
|
|
|
|
|
Personal
Lines
|
|
|
|
The current accident year
loss and loss adjustment expense
ratio before catastrophes in
Personal Lines increased by 0.4
points, primarily due to increased
severity of non-catastrophe losses
on homeowners business, partially
offset by favorable frequency on
auto physical damage claims and the
effect of earned pricing increases
for both auto and homeowners. |
|
|
|
|
|
Small Commercial
|
|
|
|
The current accident year
loss and loss adjustment expense
ratio before catastrophes in Small
Commercial decreased by 3.5 points,
primarily due to a lower loss and
loss adjustment expense ratio for
workers compensation business and,
to a lesser extent, a lower loss and
loss adjustment expense ratio for
package business. The lower loss
and loss adjustment expense ratio
for workers compensation business
was primarily due to lower claim
frequency, partially offset by the
effect of earned pricing decreases. |
|
|
|
|
|
Middle
Market
|
|
|
|
The current accident year
loss and loss adjustment expense
ratio before catastrophes in Middle
Market increased by 1.9 points,
primarily due to higher
non-catastrophe losses on property
and marine business, driven by a
number of large individual claims,
and the effect of earned pricing
decreases. |
|
|
|
|
|
Specialty Commercial
|
|
|
|
The current accident year
loss and loss adjustment expense
ratio before catastrophes in
Specialty Commercial increased by
1.5 points, primarily due to a
higher loss and loss adjustment
ratio on directors and officers
insurance in professional liability,
driven by earned pricing decreases. |
Current accident year catastrophes increased by $434
Current accident year catastrophe losses of $546, or 7.0 points, in 2008 were higher than current
accident year catastrophe losses of $112, or 1.4 points, in 2007, primarily due to losses from
hurricane Ike and tornadoes and thunderstorms in the South and Midwest.
103
An increase in net favorable prior accident year reserve development of $141
Net favorable prior accident year reserve development increased from net favorable development of
$19, or 0.2 points, in 2007, to net favorable development of $160, or 2.1 points, in 2008. Among
other reserve developments, net favorable development in 2008 included a $106 release of workers
compensation reserves, primarily related to accident years 2000 to 2007 and a $45 release of
reserves for directors and officers insurance and errors and omissions insurance claims related to
accident years 2003 to 2006. Refer to the Reserves section of the MD&A for further discussion of
the prior accident year reserve development in 2008. Net favorable reserve development of $19 in
2007 included an $85 release of workers compensation reserves for accident years 2003 through
2006, partially offset by a $40 strengthening of Middle Market workers compensation reserves for
accident years 1973 and prior and other reserve increases.
Operating expenses increased by $36
Insurance operating costs and expenses increased by $50, primarily due a $23 increase in
policyholder dividends and an estimated $20 of assessments owed to TWIA to fund Texas Gulf Coast
losses sustained by TWIA due to hurricane Ike. The increase in policyholder dividends was
primarily due to a $26 increase in the estimated amount of dividends payable to certain workers
compensation policyholders due to underwriting profits. The expense ratio increased by 0.5 points,
to 26.4, primarily due to the TWIA assessments coupled with a reduction in earned premium. The $14
decrease in the amortization of deferred policy acquisition costs was largely due to the decrease
in earned premium.
Net investment income decreased by $153
Primarily
driving the $153 decrease in net investment income was a decrease in investment yield for
limited partnerships and other alternative investments and, to a lesser extent, a decrease in investment
yield for fixed maturities. The lower yield on limited partnerships and other alternative
investments was largely driven by lower returns on hedge funds and real estate partnerships. The
lower yield on fixed maturities primarily resulted from lower income on variable rate securities
due to a decrease in short-term interest rates.
Net servicing income decreased by $20
The decrease in net servicing income was primarily driven by a decrease in servicing income from
the AARP Health program and the Write Your Own flood program and the write-off of software used in
administering policies for third parties.
A $647 change from income tax expense to an income tax benefit
Income taxes changed by $647, from income tax expense of $452 in 2007 to an income tax benefit of
$195, reflecting the change from pre-tax income of $1,606 in 2007 to a pre-tax loss of $303 in
2008.
104
PERSONAL LINES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Written Premiums [1] |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Business Unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AARP |
|
$ |
741 |
|
|
$ |
724 |
|
|
|
2 |
% |
|
$ |
2,144 |
|
|
$ |
2,101 |
|
|
|
2 |
% |
Agency |
|
|
269 |
|
|
|
294 |
|
|
|
(9 |
%) |
|
|
798 |
|
|
|
856 |
|
|
|
(7 |
%) |
Other |
|
|
14 |
|
|
|
17 |
|
|
|
(18 |
%) |
|
|
47 |
|
|
|
56 |
|
|
|
(16 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,024 |
|
|
$ |
1,035 |
|
|
|
(1 |
%) |
|
$ |
2,989 |
|
|
$ |
3,013 |
|
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
726 |
|
|
$ |
732 |
|
|
|
(1 |
%) |
|
$ |
2,153 |
|
|
$ |
2,170 |
|
|
|
(1 |
%) |
Homeowners |
|
|
298 |
|
|
|
303 |
|
|
|
(2 |
%) |
|
|
836 |
|
|
|
843 |
|
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,024 |
|
|
$ |
1,035 |
|
|
|
(1 |
%) |
|
$ |
2,989 |
|
|
$ |
3,013 |
|
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Premiums [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AARP |
|
$ |
695 |
|
|
$ |
680 |
|
|
|
2 |
% |
|
$ |
2,073 |
|
|
$ |
1,996 |
|
|
|
4 |
% |
Agency |
|
|
266 |
|
|
|
283 |
|
|
|
(6 |
%) |
|
|
816 |
|
|
|
842 |
|
|
|
(3 |
%) |
Other |
|
|
17 |
|
|
|
21 |
|
|
|
(19 |
%) |
|
|
52 |
|
|
|
66 |
|
|
|
(21 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
978 |
|
|
$ |
984 |
|
|
|
(1 |
%) |
|
$ |
2,941 |
|
|
$ |
2,904 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
707 |
|
|
$ |
712 |
|
|
|
(1 |
%) |
|
$ |
2,120 |
|
|
$ |
2,110 |
|
|
|
|
|
Homeowners |
|
|
271 |
|
|
|
272 |
|
|
|
|
|
|
|
821 |
|
|
|
794 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
978 |
|
|
$ |
984 |
|
|
|
(1 |
%) |
|
$ |
2,941 |
|
|
$ |
2,904 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The difference between written premiums and earned premiums is attributable to the change in
unearned premium reserve. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Measures |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Policies in-force end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
|
|
|
|
|
|
|
|
2,324,124 |
|
|
|
2,359,246 |
|
Homeowners |
|
|
|
|
|
|
|
|
|
|
1,465,907 |
|
|
|
1,484,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total policies in-force end of period |
|
|
|
|
|
|
|
|
|
|
3,790,031 |
|
|
|
3,843,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New business premium |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
97 |
|
|
$ |
108 |
|
|
$ |
268 |
|
|
$ |
340 |
|
Homeowners |
|
$ |
29 |
|
|
$ |
36 |
|
|
$ |
80 |
|
|
$ |
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Renewal Retention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
86 |
% |
|
|
88 |
% |
|
|
87 |
% |
|
|
88 |
% |
Homeowners |
|
|
90 |
% |
|
|
94 |
% |
|
|
90 |
% |
|
|
97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written Pricing Increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
2 |
% |
|
|
|
|
|
|
2 |
% |
|
|
|
|
Homeowners |
|
|
3 |
% |
|
|
5 |
% |
|
|
2 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Pricing Increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
1 |
% |
|
|
|
|
|
|
1 |
% |
|
|
|
|
Homeowners |
|
|
2 |
% |
|
|
6 |
% |
|
|
3 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Premiums
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Earned premiums decreased $6, or 1%, for the three months ended September 30, 2008 and increased
$37, or 1%, for the nine months ended September 30, 2008. In both periods, growth in AARP earned
premiums was largely or more than offset by earned premium decreases in Agency and Other.
|
|
AARP earned premium grew $15 and $77, respectively, for the three and nine months ended
September 30, 2008, reflecting growth in the size of the AARP target market, the effect of
direct marketing programs and the effect of cross selling homeowners insurance to insureds who
have auto policies. In the three month period, the earned premium growth in AARP was
primarily due to modest increases in earned pricing for both auto and homeowners. In the nine
month period, the earned premium growth in AARP was largely due to new business written
premium outpacing non-renewals over the last six months of 2007 and to modest earned pricing
increases for both auto and homeowners. In the first nine months of 2008, non-renewals have
outpaced new business due largely to a decline in new business written premium and renewal
retention driven by increased competition. |
105
|
|
Agency earned premium decreased by $17 and $26, respectively, for the three and nine months
ended September 30, 2008 as the effect of a decline in new business premium and premium
renewal retention since the middle of 2007 was partially offset by the effect of modest earned
pricing increases. The market environment continues to be intensely competitive. The
increase in advertising for auto business among the top carriers is also occurring with
homeowners business, particularly in non-coastal and non-catastrophe prone areas. In 2008, a
number of Personal Lines carriers have begun to increase rates although a significant portion
of the market continues to compete heavily on price. |
|
|
|
Other earned premium decreased by $4 and $14, respectively, for the three and nine months
ended September 30, 2008, primarily due to a decision to reduce other affinity
business. |
While auto earned premium grew slightly for the nine months ended September 30, 2008, auto earned
premium decreased by 1% for the three months then ended as non-renewals began to outpace new
business in 2008. Homeowners earned premium was relatively flat for the three months ended
September 30, 2008 and grew 3% for the nine month period, as earned pricing increases of 2% and 3%
for the three and nine months ended September 30, 2008, respectively, were largely offset by the
effect of a decline in new business since the middle of 2007 and a decline in policy retention
since the beginning of 2008.
|
|
|
|
|
New business premium
|
|
|
|
Both auto and homeowners
new business written premium
decreased in the three and nine
months ended September 30, 2008.
Auto new business decreased by $11,
or 10%, for the three month period
and by $72, or 21%, for the nine
month period, including decreases in
both AARP and Agency. Homeowners
new business decreased by $7, or
19%, for the three month period and
by $32, or 29%, for the nine month
period, including decreases in both
AARP and Agency. AARP new business
written premium decreased primarily
due to lower auto and homeowners
policy conversion rates, driven by
increased competition, including the
effect of price decreases by some
carriers and the effect of continued
advertising among carriers for new
business. Agency new business
written premium decreased primarily
due to price competition driven, in
part, by a greater number of agents
using comparative rating software to
obtain quotes from multiple
carriers. |
|
|
|
|
|
Premium renewal retention
|
|
|
|
Premium renewal retention
for auto decreased from 88% to 86%
in the three month period and from
88% to 87% in the nine month period,
driven primarily by a decrease in
policy retention for both AARP and
Agency business, partially offset by
the effect of modest written pricing
increases in 2008. Premium renewal
retention for homeowners decreased
from 94% to 90% in the three month
period and from 97% to 90% in the
nine month period driven by a
decrease in retention for both AARP
and Agency business. The decrease
in premium renewal retention for
AARP homeowners business was driven
by increased price competition by
some carriers and mandated
homeowners rate declines in Florida
for AARP policies. The decrease in
premium renewal retention for Agency
homeowners business was due, in
part, to Florida policyholders
non-renewing in advance of the
Companys decision to stop renewing
Florida homeowners policies sold
through agents which took effect at
the end of August 2008. |
|
|
|
|
|
Earned pricing increase (decrease)
|
|
|
|
Auto earned pricing
increases of 1% in the three and
nine months ended September 30, 2008
represents the portion of the 2%
increase in written pricing for the
first nine months of 2008 that is
reflected in earned premium. While
auto written pricing was flat in
2007, in 2008 the Company has
increased auto insurance rates in
certain states for certain classes
to maintain profitability in the
face of rising loss costs. In
addition, written pricing increases
included the effect of policyholders
purchasing newer vehicle models in
place of older models. Homeowners
earned pricing increases of 2% and
3% in the three and nine months
ended September 30, 2008,
respectively, primarily reflect the
earning of a blend of mid-single
digit written pricing increases
recognized over the last six months
of 2007 and 2% written pricing
increases recognized in the first
six months of 2008. Written pricing
increases in homeowners were largely
driven by increases in coverage
limits due to rising replacement
costs. |
|
|
|
|
|
Policies in-force
|
|
|
|
The number of policies
in-force decreased slightly for both
auto and homeowners, primarily due
to a 7% decline in the number of
Agency policies in-force, partially
offset by a 1% increase in the
number of AARP policies in-force. |
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Personal Lines Underwriting Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Written premiums |
|
$ |
1,024 |
|
|
$ |
1,035 |
|
|
|
(1 |
%) |
|
$ |
2,989 |
|
|
$ |
3,013 |
|
|
|
(1 |
%) |
Change in unearned premium reserve |
|
|
46 |
|
|
|
51 |
|
|
|
(10 |
%) |
|
|
48 |
|
|
|
109 |
|
|
|
(56 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
978 |
|
|
|
984 |
|
|
|
(1 |
%) |
|
|
2,941 |
|
|
|
2,904 |
|
|
|
1 |
% |
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
634 |
|
|
|
659 |
|
|
|
(4 |
%) |
|
|
1,914 |
|
|
|
1,880 |
|
|
|
2 |
% |
Current accident year catastrophes |
|
|
168 |
|
|
|
26 |
|
|
NM |
|
|
|
295 |
|
|
|
75 |
|
|
NM |
|
Prior accident years |
|
|
(9 |
) |
|
|
7 |
|
|
NM |
|
|
|
(16 |
) |
|
|
15 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss adjustment expenses |
|
|
793 |
|
|
|
692 |
|
|
|
15 |
% |
|
|
2,193 |
|
|
|
1,970 |
|
|
|
11 |
% |
Amortization of deferred policy acquisition costs |
|
|
159 |
|
|
|
155 |
|
|
|
3 |
% |
|
|
470 |
|
|
|
461 |
|
|
|
2 |
% |
Insurance operating costs and expenses |
|
|
71 |
|
|
|
59 |
|
|
|
20 |
% |
|
|
200 |
|
|
|
181 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
$ |
(45 |
) |
|
$ |
78 |
|
|
NM |
|
|
$ |
78 |
|
|
$ |
292 |
|
|
|
(73 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
64.7 |
|
|
|
66.9 |
|
|
|
2.2 |
|
|
|
65.1 |
|
|
|
64.7 |
|
|
|
(0.4 |
) |
Current accident year catastrophes |
|
|
17.2 |
|
|
|
2.6 |
|
|
|
(14.6 |
) |
|
|
10.0 |
|
|
|
2.6 |
|
|
|
(7.4 |
) |
Prior accident years |
|
|
(0.9 |
) |
|
|
0.7 |
|
|
|
1.6 |
|
|
|
(0.6 |
) |
|
|
0.5 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense ratio |
|
|
81.1 |
|
|
|
70.1 |
|
|
|
(11.0 |
) |
|
|
74.6 |
|
|
|
67.8 |
|
|
|
(6.8 |
) |
Expense ratio |
|
|
23.5 |
|
|
|
21.9 |
|
|
|
(1.6 |
) |
|
|
22.8 |
|
|
|
22.1 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
104.6 |
|
|
|
92.0 |
|
|
|
(12.6 |
) |
|
|
97.3 |
|
|
|
89.9 |
|
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
17.2 |
|
|
|
2.6 |
|
|
|
(14.6 |
) |
|
|
10.0 |
|
|
|
2.6 |
|
|
|
(7.4 |
) |
Prior years |
|
|
0.8 |
|
|
|
0.4 |
|
|
|
(0.4 |
) |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe ratio |
|
|
18.1 |
|
|
|
3.0 |
|
|
|
(15.1 |
) |
|
|
10.2 |
|
|
|
2.8 |
|
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes |
|
|
86.5 |
|
|
|
89.0 |
|
|
|
2.5 |
|
|
|
87.2 |
|
|
|
87.1 |
|
|
|
(0.1 |
) |
Combined ratio before catastrophes and prior
accident years development |
|
|
88.3 |
|
|
|
88.7 |
|
|
|
0.4 |
|
|
|
87.9 |
|
|
|
86.9 |
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues [1] |
|
$ |
33 |
|
|
$ |
33 |
|
|
|
|
|
|
$ |
96 |
|
|
$ |
102 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Represents servicing revenues. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Combined Ratios |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Automobile |
|
|
90.5 |
|
|
|
95.9 |
|
|
|
5.4 |
|
|
|
92.5 |
|
|
|
94.2 |
|
|
|
1.7 |
|
Homeowners |
|
|
141.2 |
|
|
|
81.9 |
|
|
|
(59.3 |
) |
|
|
109.9 |
|
|
|
78.6 |
|
|
|
(31.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
104.6 |
|
|
|
92.0 |
|
|
|
(12.6 |
) |
|
|
97.3 |
|
|
|
89.9 |
|
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
Underwriting results and ratios
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Underwriting results decreased by $123, from underwriting income of $78 in 2007 to an underwriting
loss of $45 in 2008, with a corresponding 12.6 point increase in the combined ratio, from 92.0 to
104.6, due to:
|
|
|
|
|
Change in underwriting results |
|
|
|
|
Decrease in earned premiums |
|
$ |
(6 |
) |
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
Ratio change A decrease in the current accident loss and loss adjustment expense ratio
before catastrophes |
|
|
21 |
|
Volume change Decrease in current accident year losses and loss adjustment expenses before
catastrophes due to the decrease in earned premium |
|
|
4 |
|
|
|
|
|
Decrease in current accident year losses and loss adjustment expenses before catastrophes |
|
|
25 |
|
Catastrophes Increase in current accident year catastrophes |
|
|
(142 |
) |
Reserve changes A change to net favorable prior accident year reserve development |
|
|
16 |
|
|
|
|
|
Net increase in losses and loss adjustment expenses |
|
|
(101 |
) |
|
|
|
|
|
Operating expenses |
|
|
|
|
Increase in amortization of deferred policy acquisition costs |
|
|
(4 |
) |
Increase in insurance operating costs and expenses |
|
|
(12 |
) |
|
|
|
|
Increase in operating expenses |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(123 |
) |
|
|
|
|
Earned premium decreased by $6
Earned premiums decreased $6, as earned premium decreases in Agency and Other were largely offset
by growth in AARP. Refer to the earned premium section above for further discussion.
Losses and loss adjustment expenses increased by $101
Current accident year losses and loss adjustment expenses before catastrophes decreased by $25
Personal Lines current accident year losses and loss adjustment expenses before catastrophes
decreased by $25, to $634, due largely to a decrease in the current accident year loss and loss
adjustment expense ratio before catastrophes. The current accident year loss and loss adjustment
expense ratio before catastrophes decreased by 2.2 points, to 64.7. The decrease was primarily due
to a lower current accident year loss and loss adjustment expense ratio for auto claims, partially
offset by increased severity of non-catastrophe losses on homeowners business. Contributing to
the lower loss and loss adjustment expense ratio for auto claims was the effect of a $9 release of
current accident year auto liability reserves, favorable frequency on auto physical damage claims
and the effect of earned pricing increases. As with auto physical damage claims, claim frequency
for auto liability claims has emerged favorably to initial expectations for the 2008 accident year
and, accordingly, management reduced its estimate of loss and loss adjustment expenses on auto
liability claims during the third quarter of 2008.
Current accident year catastrophes increased by $142
Current accident year catastrophe losses of $168, or 17.2 points, in 2008 were higher than current
accident year catastrophe losses of $26, or 2.6 points, in 2007, primarily due to losses from
hurricane Ike.
Prior accident year reserve development changed by $16, from net unfavorable to net favorable
development
Net favorable reserve development of $9 in 2008 included a $23 release of auto liability reserves
primarily related to accident years 2000 to 2007, partially offset by reserve increases for
homeowners business. There were no significant prior accident year reserve developments in 2007.
Operating expenses increased by $16
The expense ratio increased 1.6 points, to 23.5, due largely to the increase in insurance operating
costs and expenses. Insurance operating costs and expenses increased by $12, primarily due to an
estimated $10 of assessments owed to TWIA to fund Texas Gulf Coast losses sustained by TWIA due to
hurricane Ike and an increase in insurance operating costs and expenses to achieve earned premium
growth, including higher IT costs. Amortization of deferred policy acquisition costs increased by
$4 driven primarily by the amortization of a higher amount of direct marketing costs, partially
offset by the effect of a slight decline in earned premium.
108
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Underwriting results decreased by $214, from $292 in 2007 to $78 in 2008, with a corresponding 7.4
point increase in the combined ratio, from 89.9 to 97.3 due to:
|
|
|
|
|
Change in underwriting results |
|
|
|
|
Increase in earned premiums |
|
$ |
37 |
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
Volume change Increase in current accident year losses and loss adjustment expenses before
catastrophes due to the increase in earned premium |
|
|
(24 |
) |
Ratio change An increase in the current accident loss and loss adjustment expense ratio
before catastrophes |
|
|
(10 |
) |
|
|
|
|
Increase in current accident year losses and loss adjustment expenses before catastrophes |
|
|
(34 |
) |
Catastrophes Increase in current accident year catastrophes |
|
|
(220 |
) |
Reserve changes A change to net favorable prior accident year reserve development |
|
|
31 |
|
|
|
|
|
Net increase in losses and loss adjustment expenses |
|
|
(223 |
) |
|
|
|
|
|
Operating expenses |
|
|
|
|
Increase in amortization of deferred policy acquisition costs |
|
|
(9 |
) |
Increase in insurance operating costs and expenses |
|
|
(19 |
) |
|
|
|
|
Increase in operating expenses |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(214 |
) |
|
|
|
|
Earned premium increased by $37
Earned premiums increased $37, or 1%, primarily due to earned premium growth in AARP, partially
offset by a decrease in Agency and Other earned premium. Refer to the earned premium section above
for further discussion.
Losses and loss adjustment expenses increased by $223
Current accident year losses and loss adjustment expenses before catastrophes increased by $34
Personal Lines current accident year losses and loss adjustment expenses before catastrophes
increased by $34, to $1,914, due to an increase in earned premium and an increase in the current
accident year loss and loss adjustment expense ratio before catastrophes. The current accident
year loss and loss adjustment expense ratio before catastrophes increased by 0.4 points, to 65.1.
The increase was primarily due to increased severity of non-catastrophe losses on homeowners
business and auto liability claims, partially offset by favorable frequency on auto physical damage
claims and the effect of earned pricing increases for both auto and homeowners.
Current accident year catastrophes increased by $220
Current accident year catastrophe losses of $295, or 10.0 points, in 2008 were higher than current
accident year catastrophe losses of $75, or 2.6 points, in 2007, primarily due to losses from
hurricane Ike and tornadoes and thunderstorms in the South and Midwest.
Prior accident year reserve development changed by $31, from net unfavorable to net favorable
development
Net favorable reserve development of $16 in 2008 included a $23 release of auto liability reserves
primarily related to accident years 2000 to 2007. There were no significant prior accident year
reserve developments in 2007.
Operating expenses increased by $28
The expense ratio increased 0.7 points, to 22.8, due largely to the increase in insurance operating
costs and expenses. Insurance operating costs and expenses increased by $19, primarily due to an
estimated $10 of assessments owed to TWIA and an increase in insurance operating costs and expenses
to achieve earned premium growth. Amortization of deferred policy acquisition costs increased by
$9, driven primarily by the increase in earned premium and the amortization of a higher amount of
direct marketing costs.
109
Outlook
Management expects written premium for the Personal Lines segment to be flat to 2% lower in 2008
than in 2007. New business written premium began to decline in the third quarter of 2007 and this
trend continued in the first nine months of 2008 for both AARP and Agency. Based on competitive
market conditions, written premium is expected to be flat to 2% lower in both auto and homeowners
with growth in AARP offset by declines in Agency and other. For AARP business, management expects
to achieve its written premium growth primarily through continued direct marketing to AARP members
and an expansion of underwriting appetite through the continued roll-out of the Next Gen Auto
product. Through improvements in technology, the Company seeks to increase AARP new business flow
from the internet and increase the percentage of AARP new business submissions that can be quoted
real-time. In addition to marketing directly to AARP members, the Company is increasing its media
spend to enhance brand awareness.
For the Agency business in 2008, management expects written premium to decrease as competition for
business has increased, in part, driven by more agencies using comparative raters to obtain quotes
from multiple carriers. The Company seeks to increase its new business by appointing more agents,
increasing the flow of new business from recently appointed agents and improving its price
competitiveness across a spectrum of risks through continued enhancements of the Dimensions Auto
class plan.
In April of 2008, the Company launched a brand and channel expansion pilot in four states: Arizona,
Illinois, Tennessee and Minnesota. In those four states, the Company increased Personal Lines brand
advertising and has launched direct marketing efforts beyond its existing AARP program. In
addition, certain agents in the four target states will be authorized to offer the Companys AARP
product. The Company is in the process of rolling out the agent-sold AARP product in these four
states.
Margins for both auto and homeowners are under pressure as carriers have generally been willing to
allow their combined ratios to increase in order to grow written premium. For auto, written
pricing was flat for 2007 and did not keep pace with loss costs which increased due to a higher
frequency of auto claims. In response to rising loss costs, in 2008 the Company began to increase
auto insurance rates in certain states for certain classes of business to maintain profitability.
While carriers in the personal lines industry will continue to compete on price, management expects
that auto pricing in the industry will continue to firm a bit in 2008 as combined ratios have risen
in the past couple of years and eroded profitability. For auto business, loss cost severity has
continued to increase while loss cost frequency has emerged favorable to previous expectations. In
the third quarter of 2008, the Company reduced its estimate of current accident year loss costs for
auto liability claims, due primarily to lower than anticipated frequency on AARP business.
For homeowners, written pricing increased 5% for the 2007 full year and 2% in the first nine months
of 2008, primarily reflecting an increase in coverage limits due to rising replacement costs.
Non-catastrophe loss costs of homeowners claims increased in both 2007 and the first nine months of
2008 due to higher claim severity and management expects this trend to continue.
For Personal Lines, the Company expects a 2008 combined ratio before catastrophes and prior
accident year development in the range of 87.5 to 89.5. The combined ratio before catastrophes and
prior accident year development was 88.6 in 2007. To help maintain profitability, the Company is
seeking to achieve greater economy of scale, enhance its products, improve its pricing structure
and expand market access.
To summarize, managements outlook in Personal Lines for the 2008 full year is:
|
|
Written premium flat to 2% lower, with both auto and homeowners written premium flat to 2%
lower |
|
|
|
A combined ratio before catastrophes and prior accident year development of 87.5 to 89.5 |
110
SMALL COMMERCIAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Premiums [1] |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Written premiums |
|
$ |
652 |
|
|
$ |
664 |
|
|
|
(2 |
%) |
|
$ |
2,074 |
|
|
$ |
2,098 |
|
|
|
(1 |
%) |
Earned premiums |
|
|
678 |
|
|
|
683 |
|
|
|
(1 |
%) |
|
|
2,048 |
|
|
|
2,048 |
|
|
|
|
|
|
|
|
[1] |
|
The difference between written premiums and earned premiums is attributable to the change in
unearned premium reserve. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Measures |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
New business premium |
|
$ |
105 |
|
|
$ |
116 |
|
|
$ |
349 |
|
|
$ |
371 |
|
Premium renewal retention |
|
|
83 |
% |
|
|
84 |
% |
|
|
82 |
% |
|
|
84 |
% |
Written pricing decrease |
|
|
(2 |
%) |
|
|
(1 |
%) |
|
|
(2 |
%) |
|
|
(1 |
%) |
Earned pricing decrease |
|
|
(2 |
%) |
|
|
(1 |
%) |
|
|
(2 |
%) |
|
|
|
|
Policies in-force end of period |
|
|
|
|
|
|
|
|
|
|
1,062,291 |
|
|
|
1,031,855 |
|
Earned Premiums
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Earned premiums for the Small Commercial segment were flat to slightly down for the three and nine
month periods, due to the effect of earned pricing decreases, partially offset by the effect of new
business outpacing non-renewals over the last six months of 2007 and the first three months of
2008. While the Company has focused on increasing new business from its agents and expanding
writings in certain territories, actions taken by some of the Companys competitors to increase
market share and increase business appetite in certain classes of risks and actions taken by the
Company to reduce workers compensation rates in certain states have contributed to the decrease in
written premiums from 2007 to 2008.
|
|
|
|
|
New business premium
|
|
|
|
New business written premium
was down $11, or 9%, in the three
months ended September 30, 2008 and
down $22, or 6%, for the nine months
then ended, primarily driven by a
decrease in new package and
commercial automobile business. New
business declined due to increased
competition despite the use of lower
pricing on targeted accounts and an
increase in commissions paid to
agents. |
|
|
|
|
|
Premium renewal retention
|
|
|
|
Premium renewal retention
decreased from 84% to 83% in the
three month period and decreased
from 84% to 82% in the nine month
period due largely to the effect of
a decrease in retention of workers
compensation business and the effect
of larger written pricing decreases
for workers compensation business. |
|
|
|
|
|
Earned pricing increase (decrease)
|
|
|
|
For both the three and nine
month periods, earned pricing
decreased for workers compensation
and commercial auto and was flat for
package business. As written
premium is earned over the 12-month
term of the policies, the earned
pricing changes during the three and
nine month periods ended September
30, 2008 were primarily a reflection
of written pricing decreases of 2%
over the last six months of 2007 and
3% over the first six months of
2008. |
|
|
|
|
|
Policies in-force
|
|
|
|
While earned premium was
flat to slightly down for the three
and nine month periods, the number
of policies in-force has increased
3% from September 30, 2007 to
September 30, 2008. 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. |
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Small Commercial Underwriting Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Written premiums |
|
$ |
652 |
|
|
$ |
664 |
|
|
|
(2 |
%) |
|
$ |
2,074 |
|
|
$ |
2,098 |
|
|
|
(1 |
%) |
Change in unearned premium reserve |
|
|
(26 |
) |
|
|
(19 |
) |
|
|
(37 |
%) |
|
|
26 |
|
|
|
50 |
|
|
|
(48 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
678 |
|
|
|
683 |
|
|
|
(1 |
%) |
|
|
2,048 |
|
|
|
2,048 |
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
380 |
|
|
|
406 |
|
|
|
(6 |
%) |
|
|
1,130 |
|
|
|
1,202 |
|
|
|
(6 |
%) |
Current accident year catastrophes |
|
|
49 |
|
|
|
6 |
|
|
NM |
|
|
|
93 |
|
|
|
25 |
|
|
NM |
|
Prior accident years |
|
|
(46 |
) |
|
|
(47 |
) |
|
|
2 |
% |
|
|
(50 |
) |
|
|
(79 |
) |
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss adjustment expenses |
|
|
383 |
|
|
|
365 |
|
|
|
5 |
% |
|
|
1,173 |
|
|
|
1,148 |
|
|
|
2 |
% |
Amortization of deferred policy acquisition costs |
|
|
159 |
|
|
|
158 |
|
|
|
1 |
% |
|
|
477 |
|
|
|
477 |
|
|
|
|
|
Insurance operating costs and expenses |
|
|
54 |
|
|
|
41 |
|
|
|
32 |
% |
|
|
128 |
|
|
|
119 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
$ |
82 |
|
|
$ |
119 |
|
|
|
(31 |
%) |
|
$ |
270 |
|
|
$ |
304 |
|
|
|
(11 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
56.3 |
|
|
|
59.4 |
|
|
|
3.1 |
|
|
|
55.2 |
|
|
|
58.7 |
|
|
|
3.5 |
|
Current accident year catastrophes |
|
|
7.0 |
|
|
|
0.8 |
|
|
|
(6.2 |
) |
|
|
4.5 |
|
|
|
1.2 |
|
|
|
(3.3 |
) |
Prior accident years |
|
|
(6.8 |
) |
|
|
(6.9 |
) |
|
|
(0.1 |
) |
|
|
(2.4 |
) |
|
|
(3.9 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense ratio |
|
|
56.5 |
|
|
|
53.3 |
|
|
|
(3.2 |
) |
|
|
57.2 |
|
|
|
56.0 |
|
|
|
(1.2 |
) |
Expense ratio |
|
|
30.1 |
|
|
|
28.8 |
|
|
|
(1.3 |
) |
|
|
28.9 |
|
|
|
28.8 |
|
|
|
(0.1 |
) |
Policyholder dividend ratio |
|
|
1.3 |
|
|
|
0.3 |
|
|
|
(1.0 |
) |
|
|
0.6 |
|
|
|
0.2 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
87.9 |
|
|
|
82.4 |
|
|
|
(5.5 |
) |
|
|
86.8 |
|
|
|
85.1 |
|
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
7.0 |
|
|
|
0.8 |
|
|
|
(6.2 |
) |
|
|
4.5 |
|
|
|
1.2 |
|
|
|
(3.3 |
) |
Prior years |
|
|
(0.5 |
) |
|
|
0.1 |
|
|
|
0.6 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe ratio |
|
|
6.5 |
|
|
|
1.0 |
|
|
|
(5.5 |
) |
|
|
4.4 |
|
|
|
1.4 |
|
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes |
|
|
81.4 |
|
|
|
81.5 |
|
|
|
0.1 |
|
|
|
82.4 |
|
|
|
83.7 |
|
|
|
1.3 |
|
Combined ratio before catastrophes and prior
accident years development |
|
|
87.7 |
|
|
|
88.5 |
|
|
|
0.8 |
|
|
|
84.7 |
|
|
|
87.8 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results and ratios
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Underwriting results decreased by $37, from $119 to $82, with a corresponding 5.5 point increase in
the combined ratio, from 82.4 to 87.9, due to:
|
|
|
|
|
Change in underwriting results |
|
|
|
|
Decrease in earned premiums |
|
$ |
(5 |
) |
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
Ratio change A decrease in the current accident loss and loss adjustment expense ratio
before catastrophes |
|
|
23 |
|
Volume change Decrease in current accident year losses and loss adjustment expenses before
catastrophes due to the decrease in earned premium |
|
|
3 |
|
|
|
|
|
Net decrease in current accident year losses and loss adjustment expenses before catastrophes |
|
|
26 |
|
Catastrophes Increase in current accident year catastrophes |
|
|
(43 |
) |
Reserve changes Decrease in net favorable prior accident year reserve development |
|
|
(1 |
) |
|
|
|
|
Net increase in losses and loss adjustment expenses |
|
|
(18 |
) |
|
|
|
|
|
Operating expenses |
|
|
|
|
Increase in amortization of deferred policy acquisition costs |
|
|
(1 |
) |
Increase in insurance operating costs and expenses |
|
|
(13 |
) |
|
|
|
|
Increase in operating expenses |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(37 |
) |
|
|
|
|
112
Earned premium decreased by $5
For the three months ended September 30, 2008, earned premiums for the Small Commercial segment
decreased by $5, to $678. Refer to the earned premium section above for discussion.
Losses and loss adjustment expenses increased by $18
Current accident year losses and loss adjustment expenses before catastrophes decreased by
$26
Small Commercials current accident year losses and loss adjustment expenses before catastrophes
decreased by $26 in 2008, to $380, primarily due to a 3.1 point decrease in the current accident
year loss and loss adjustment expense ratio before catastrophes, to 56.3. The decrease in this
ratio was primarily due to a lower loss and loss adjustment expense ratio for workers compensation
business. Workers compensation claim frequency has been trending favorably for recent accident
years due to improved workplace safety and underwriting actions and the lower loss and loss
adjustment expense ratio for the 2008 accident year includes an assumption that this decreasing
level of claim frequency will continue. The loss and loss adjustment expense ratio for the 2007
accident year recorded in 2007 did not give as much credence to this lower level of claim
frequency. The effect of lower claim frequency for workers compensation claims was partially
offset by the effect of earned pricing decreases.
Current accident year catastrophes increased by $43
Current accident year catastrophe losses of $49, or 7.0 points, in 2008 were higher than current
accident year catastrophe losses of $6, or 0.8 points, in 2007, primarily due to losses from
hurricane Ike.
Net favorable prior accident year development decreased by $1
Net favorable prior accident year development of $46 in 2008 included a $33 release of workers
compensation reserves related to accident years 2000 to 2007. Net favorable reserve development of
$47 in 2007 included a $47 release of workers compensation reserves for accident years 2003
through 2006.
Operating expense increased by $14
Amortization of deferred policy acquisition costs remained relatively flat, consistent with earned
premium. Insurance operating costs and expenses increased by $13, primarily due to a $7 increase
in policyholder dividends and an estimated $7 of assessments owed to TWIA to fund Texas Gulf Coast
losses sustained by TWIA due to hurricane Ike. The increase in policyholder dividends was
primarily due to a $6 increase in the estimated amount of dividends payable to certain workers
compensation policyholders due to underwriting profits. The expense ratio increased by 1.3 points,
to 30.1, primarily because of the TWIA assessments and, to a lesser extent, increased IT costs.
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Underwriting results decreased by $34, from $304 to $270, with a corresponding 1.7 point increase
in the combined ratio, from 85.1 to 86.8, due to:
|
|
|
|
|
Change in underwriting results |
|
|
|
|
No change in earned premiums |
|
$ |
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
Ratio change A decrease in the current accident loss and loss adjustment expense
ratio before catastrophes |
|
|
72 |
|
Catastrophes Increase in current accident year catastrophes |
|
|
(68 |
) |
Reserve changes Decrease in net favorable prior accident year reserve development |
|
|
(29 |
) |
|
|
|
|
Net increase in losses and loss adjustment expenses |
|
|
(25 |
) |
|
|
|
|
|
Operating expenses |
|
|
|
|
No change in amortization of deferred policy acquisition costs |
|
|
|
|
Increase in insurance operating costs and expenses |
|
|
(9 |
) |
|
|
|
|
Increase in operating expenses |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(34 |
) |
|
|
|
|
113
Earned premium no change
Refer to the earned premium section above for discussion.
Losses and loss adjustment expenses increased by $25
Current accident year losses and loss adjustment expenses before catastrophes decreased by
$72
Small Commercials current accident year losses and loss adjustment expenses before catastrophes
decreased by $72 in 2008, to $1,130, primarily due to a 3.5 point decrease in the current accident
year loss and loss adjustment expense ratio before catastrophes, to 55.2. The decrease in this
ratio was primarily due to a lower loss and loss adjustment expense ratio for workers compensation
business and, to a lesser extent, a lower loss and loss adjustment expense ratio for package
business. Workers compensation claim frequency has been trending favorably for recent accident
years due to improved workplace safety and underwriting actions and the lower loss and loss
adjustment expense ratio for the 2008 accident year includes an assumption that this decreasing
level of claim frequency will continue. The loss and loss adjustment expense ratio for the 2007
accident year recorded in 2007 did not give as much credence to this lower level of claim
frequency. The effect of lower claim frequency for workers compensation claims was partially
offset by the effect of earned pricing decreases. The lower current accident year loss and loss
adjustment expense ratio for package business was due to lower non-catastrophe property losses,
primarily driven by lower claim severity.
Current accident year catastrophes increased by $68
Current accident year catastrophe losses of $93, or 4.5 points, in 2008 were higher than current
accident year catastrophe losses of $25, or 1.2 points, in 2007, primarily due to hurricane Ike and
tornadoes and thunderstorms in the South and Midwest.
Net favorable prior accident year development decreased by $29
Net favorable prior accident year development of $50 in 2008 included a $72 release of workers
compensation reserves related to accident years 2000 to 2007, largely offset by a $17 strengthening
of reserves for general liability and products liability claims primarily for accident years 2004
and prior. Net favorable reserve development of $79 in 2007 included a $74 release of workers
compensation reserves for accident years 2003 through 2006.
Operating expenses increased by $9
Amortization of deferred policy acquisition costs remained flat, consistent with earned premium.
Insurance operating costs and expenses increased by $9, primarily due to an $8 increase in
policyholder dividends and an estimated $7 of TWIA assessments partially offset by lower expenses
for guaranty fund assessments. The increase in policyholder dividends was primarily due to an $8
increase in the estimated amount of dividends payable to certain workers compensation
policyholders due to underwriting profits. The expense ratio in 2008 was relatively flat at 28.9,
as insurance operating costs and expenses other than policyholder dividends were relatively flat
compared to 2007.
114
Outlook
Management expects written premium in 2008 to be 0.5% to 2.5% lower than in 2007 as it seeks to
increase the flow of new business from its agents. Small Commercial expects to increase written
premium by selectively expanding its underwriting appetite, refining its pricing models and
upgrading product features. The Company expects to provide more pricing flexibility in 2008 by
adding a pricing tier for workers compensation business. In addition, beginning in the fourth
quarter of 2008, the Company plans to introduce an enhanced renewal pricing model for the Companys
Spectrum business owners package product. Despite an increased flow of new business submissions
from producers, new business written premium has declined in the first nine months of 2008.
Including supplemental commissions, the Company has increased commissions paid to agents and
expects that this will help it write new business.
Through technology and process improvements, in 2008, the Company plans to improve efficiency and
service levels in its underwriting centers and enhance the agents on-line experience. Average
premium per policy is expected to continue to decline due to the sale of more liability-only
policies, workers compensation rate reductions and a lower average premium on Next Generation Auto
business. (Refer to the Business Section in The Hartfords 2007 Form 10-K Annual Report for further
discussion on Small Commercials Next Generation Auto Business). Written pricing for Small
Commercial business has declined modestly, by 2%, in the first nine months of 2008, as carriers
have competed for new business through new product features and expanded coverage. In 2008, the
Company will continue to focus on renewal retention, particularly in the mid-Western states, where
competition has been particularly strong.
Reflecting favorable trends in workers compensation frequency in recent accident years, Small
Commercial recognized a lower 2008 accident year loss and loss adjustment expense ratio for
workers compensation business in the first nine months of 2008. Management believes that the
expected favorable frequency on workers compensation claims will continue for the balance of the
year. While the Company experienced favorable non-catastrophe property losses on package business
and commercial auto claims in the first six months of 2008 due to favorable severity,
non-catastrophe property losses were not as favorable in the third quarter of 2008 and management
expects this recent trend to continue for the balance of the year. Based on anticipated trends in
earned pricing and loss costs, the combined ratio before catastrophes and prior accident year
development is expected to be in the range of 84.0 to 86.0 in 2008. The combined ratio before
catastrophes and prior accident year development was 88.0 in 2007.
To summarize, managements outlook in Small Commercial for the 2008 full year is:
|
|
Written premium 0.5% to 2.5% lower |
|
|
A combined ratio before catastrophes and prior accident year development of 84.0 to 86.0 |
115
MIDDLE MARKET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Premiums [1] |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Written premiums |
|
$ |
555 |
|
|
$ |
573 |
|
|
|
(3 |
%) |
|
$ |
1,616 |
|
|
$ |
1,666 |
|
|
|
(3 |
%) |
Earned premiums |
|
|
553 |
|
|
|
582 |
|
|
|
(5 |
%) |
|
|
1,688 |
|
|
|
1,779 |
|
|
|
(5 |
%) |
|
|
|
[1] |
|
The difference between written premiums and earned premiums is attributable to the change in
unearned premium reserve. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Measures |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
New business premium |
|
$ |
111 |
|
|
$ |
93 |
|
|
$ |
315 |
|
|
$ |
296 |
|
Premium renewal retention |
|
|
78 |
% |
|
|
77 |
% |
|
|
79 |
% |
|
|
77 |
% |
Written pricing decrease |
|
|
(5 |
%) |
|
|
(3 |
%) |
|
|
(6 |
%) |
|
|
(4 |
%) |
Earned pricing decrease |
|
|
(6 |
%) |
|
|
(5 |
%) |
|
|
(6 |
%) |
|
|
(5 |
%) |
Policies in-force end of period |
|
|
|
|
|
|
|
|
|
|
83,188 |
|
|
|
79,813 |
|
Earned Premiums
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Earned premiums for the Middle Market segment decreased by $29, or 5%, for the three months ended
September 30, 2008 and decreased by $91, or 5%, for the nine months ended September 30, 2008. The
decrease was primarily due to earned pricing decreases in 2008 and, for the nine month period, the
effect of non-renewals outpacing new business written premium over the last six months of 2007.
|
|
|
|
|
New business premium
|
|
|
|
New business written premium
increased by $18, or 19%, to $111 in
the third quarter of 2008 and
increased by $19, or 6%, for the
first nine months of 2008. An
increase in new business written
premium for workers compensation
was partially offset by a decrease
in new business for general
liability and marine. While
continued price competition and the
effect of some state-mandated rate
reductions in workers compensation
has lessened the attractiveness of
new business in certain lines and
regions, the Company has increased
new business for workers
compensation due, in part, to the
effect of targeting business in
selected industries and regions of
the country. |
|
|
|
|
|
Premium renewal retention
|
|
|
|
Premium renewal retention
increased from 77% to 78% for the
three month period and increased
from 77% to 79% for the nine month
period due largely to an increase in
retention of workers compensation,
property and marine, partially
offset by a decrease in retention of
auto business for the three month
period and the effect of larger
written pricing decreases. The
Company continued to take actions to
protect renewals in the first nine
months of 2008, including the use of
reduced pricing on targeted
accounts. |
|
|
|
|
|
Earned pricing increase (decrease)
|
|
|
|
Earned pricing decreased in
all lines of business, including
workers compensation, commercial
auto, general liability, property
and marine. As written premium is
earned over the 12-month term of the
policies, the earned pricing
decreases during the third quarter
and first nine months of 2008 were
primarily a reflection of mid-single
digit written pricing decreases over
the last six months of 2007 and the
first three months of 2008. A
number of carriers have continued to
compete fairly aggressively on
price, particularly on larger
accounts within Middle Market, which
has contributed to mid-single digit
price decreases across the industry. |
|
|
|
|
|
Policies in-force
|
|
|
|
While the number of policies
in-force increased by 4% from
September 30, 2007 to September 30,
2008, due largely to growth on
smaller accounts, earned premium
declined due to the reduction in the
average premium per policy. |
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Middle Market Underwriting Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Written premiums |
|
$ |
555 |
|
|
$ |
573 |
|
|
|
(3 |
%) |
|
$ |
1,616 |
|
|
$ |
1,666 |
|
|
|
(3 |
%) |
Change in unearned premium reserve |
|
|
2 |
|
|
|
(9 |
) |
|
NM |
|
|
|
(72 |
) |
|
|
(113 |
) |
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
553 |
|
|
|
582 |
|
|
|
(5 |
%) |
|
|
1,688 |
|
|
|
1,779 |
|
|
|
(5 |
%) |
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
377 |
|
|
|
384 |
|
|
|
(2 |
%) |
|
|
1,118 |
|
|
|
1,145 |
|
|
|
(2 |
%) |
Current accident year catastrophes |
|
|
64 |
|
|
|
(1 |
) |
|
NM |
|
|
|
106 |
|
|
|
9 |
|
|
NM |
|
Prior accident years |
|
|
(17 |
) |
|
|
11 |
|
|
NM |
|
|
|
(55 |
) |
|
|
27 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss adjustment expenses |
|
|
424 |
|
|
|
394 |
|
|
|
8 |
% |
|
|
1,169 |
|
|
|
1,181 |
|
|
|
(1 |
%) |
Amortization of deferred policy acquisition costs |
|
|
127 |
|
|
|
132 |
|
|
|
(4 |
%) |
|
|
385 |
|
|
|
401 |
|
|
|
(4 |
%) |
Insurance operating costs and expenses |
|
|
40 |
|
|
|
34 |
|
|
|
18 |
% |
|
|
120 |
|
|
|
108 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
$ |
(38 |
) |
|
$ |
22 |
|
|
NM |
|
|
$ |
14 |
|
|
$ |
89 |
|
|
|
(84 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
68.1 |
|
|
|
66.1 |
|
|
|
(2.0 |
) |
|
|
66.3 |
|
|
|
64.4 |
|
|
|
(1.9 |
) |
Current accident year catastrophes |
|
|
11.5 |
|
|
|
|
|
|
|
(11.5 |
) |
|
|
6.3 |
|
|
|
0.5 |
|
|
|
(5.8 |
) |
Prior accident years |
|
|
(3.2 |
) |
|
|
1.8 |
|
|
|
5.0 |
|
|
|
(3.3 |
) |
|
|
1.5 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense ratio |
|
|
76.5 |
|
|
|
67.9 |
|
|
|
(8.6 |
) |
|
|
69.2 |
|
|
|
66.4 |
|
|
|
(2.8 |
) |
Expense ratio |
|
|
29.6 |
|
|
|
28.2 |
|
|
|
(1.4 |
) |
|
|
28.8 |
|
|
|
28.1 |
|
|
|
(0.7 |
) |
Policyholder dividend ratio |
|
|
0.8 |
|
|
|
0.3 |
|
|
|
(0.5 |
) |
|
|
1.1 |
|
|
|
0.5 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
106.8 |
|
|
|
96.3 |
|
|
|
(10.5 |
) |
|
|
99.2 |
|
|
|
95.0 |
|
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
11.5 |
|
|
|
|
|
|
|
(11.5 |
) |
|
|
6.3 |
|
|
|
0.5 |
|
|
|
(5.8 |
) |
Prior years |
|
|
(1.1 |
) |
|
|
(0.3 |
) |
|
|
0.8 |
|
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe ratio |
|
|
10.4 |
|
|
|
(0.3 |
) |
|
|
(10.7 |
) |
|
|
5.8 |
|
|
|
0.2 |
|
|
|
(5.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes |
|
|
96.4 |
|
|
|
96.6 |
|
|
|
0.2 |
|
|
|
93.3 |
|
|
|
94.8 |
|
|
|
1.5 |
|
Combined ratio before catastrophes and prior
accident years development |
|
|
98.5 |
|
|
|
94.5 |
|
|
|
(4.0 |
) |
|
|
96.2 |
|
|
|
93.0 |
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results and ratios
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Underwriting results decreased by $60, from underwriting income of $22 in 2007 to an underwriting
loss of $38 in 2008 with a corresponding 10.5 point increase in the combined ratio, from 96.3 to
106.8, due to:
|
|
|
|
|
Change in underwriting results |
|
|
|
|
Decrease in earned premiums |
|
$ |
(29 |
) |
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
Volume change Decrease in current accident year loss and loss adjustment expenses before
catastrophes due to the decrease in earned premium |
|
|
19 |
|
Ratio change An increase in the current accident year loss and loss adjustment expense ratio
before catastrophes |
|
|
(12 |
) |
|
|
|
|
Net decrease in current accident year losses and loss adjustment expenses before catastrophes |
|
|
7 |
|
Catastrophes Increase in current accident year catastrophes |
|
|
(65 |
) |
Reserve changes A change to net favorable prior accident year reserve development |
|
|
28 |
|
|
|
|
|
Net increase in losses and loss adjustment expenses |
|
|
(30 |
) |
Operating expenses |
|
|
|
|
Decrease in amortization of deferred policy acquisition costs |
|
|
5 |
|
Increase in insurance operating costs and expenses |
|
|
(6 |
) |
|
|
|
|
Net increase in operating expenses |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(60 |
) |
|
|
|
|
117
Earned premium decreased by $29
Earned premiums for the Middle Market segment decreased by $29, or 5%, driven primarily by
decreases in commercial auto, general liability, property and marine. Refer to the earned premium
section for further discussion.
Losses and loss adjustment expenses increased by $30
Current accident year losses and loss adjustment expenses before catastrophes decreased by
$7
Middle Market current accident year losses and loss adjustment expenses before catastrophes
decreased by $7 due to a decrease in earned premium, partially offset by the effect of an increase
in the current accident year loss and loss adjustment expense ratio before catastrophes. Before
catastrophes, the current accident year loss and loss adjustment expense ratio increased by 2.0
points, to 68.1, primarily due to higher non-catastrophe losses on property and marine business,
driven by an increase in claim severity, and the effect of earned pricing decreases.
Current accident year catastrophes increased by $65
Current accident year catastrophe losses increased $65, or 11.5 points, primarily due to losses
from hurricane Ike.
A $28 change to net favorable prior accident year development
Prior accident year reserve development changed from net unfavorable prior accident year reserve
development of $11, or 1.8 points, in 2007 to net favorable prior accident year reserve development
of $17, or 3.2 points, in 2008. Net favorable reserve development of $17 in 2008 primarily
included a $15 release of workers compensation reserves, primarily for the 2007 accident year.
Net unfavorable reserve development of $11 in 2007 primarily included a $40 strengthening of
workers compensation reserves for accident years 1973 & prior, partially offset by an $18 release
of commercial auto liability reserves for accident years 2003 and 2004.
Operating expenses remained relatively flat
The $5 decrease in the amortization of deferred policy acquisition costs was largely due to the
decrease in earned premium. Insurance operating costs and expenses increased by $6 primarily due
to a $3 increase in policyholder dividends, higher IT costs and an estimated $3 of assessments owed
to TWIA to fund Texas Gulf Coast losses sustained by TWIA due to hurricane Ike. The increase in
policyholder dividends was primarily due to a $2 increase in the estimated amount of dividends
payable to certain workers compensation policyholders due to underwriting profits. The expense
ratio increased by 1.4 points, to 29.6, because of an increase in insurance operating costs and
expenses other than policyholder dividends, including the TWIA assessments and higher IT costs, and
the effect of lower earned premiums.
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Underwriting results decreased by $75, from $89 to $14, with a corresponding 4.2 point increase in
the combined ratio, from 95.0 to 99.2, due to:
|
|
|
|
|
Change in underwriting results |
|
|
|
|
Decrease in earned premiums |
|
$ |
(91 |
) |
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
Volume change Decrease in current accident year loss and loss adjustment expenses before
catastrophes due to the decrease in earned premium |
|
|
59 |
|
Ratio change An increase in the current accident year loss and loss adjustment expense ratio
before catastrophes |
|
|
(32 |
) |
|
|
|
|
Net decrease in current accident year losses and loss adjustment expenses before catastrophes |
|
|
27 |
|
Catastrophes Increase in current accident year catastrophes |
|
|
(97 |
) |
Reserve changes Change to net favorable prior accident year reserve development |
|
|
82 |
|
|
|
|
|
Net decrease in losses and loss adjustment expenses |
|
|
12 |
|
Operating expenses |
|
|
|
|
Decrease in amortization of deferred policy acquisition costs |
|
|
16 |
|
Increase in insurance operating costs and expenses |
|
|
(12 |
) |
|
|
|
|
Net decrease in operating expenses |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(75 |
) |
|
|
|
|
118
Earned premium decreased by $91
Earned premiums for the Middle Market segment decreased by $91, or 5%, driven primarily by
decreases in commercial auto, workers compensation, general liability and marine. Refer to the
earned premium section for further discussion.
Losses and loss adjustment expenses decreased by $12
Current accident year losses and loss adjustment expenses before catastrophes decreased by
$27
Middle Market current accident year losses and loss adjustment expenses before catastrophes
decreased by $27 due to a decrease in earned premium, partially offset by the effect of an increase
in the current accident year loss and loss adjustment expense ratio before catastrophes. Before
catastrophes, the current accident year loss and loss adjustment expense ratio increased by 1.9
points, to 66.3, primarily due to higher non-catastrophe losses on property and marine business,
driven by a number of large individual claims, and the effect of earned pricing decreases.
Current accident year catastrophes increased by $97
Current accident year catastrophe losses of $106, or 6.3 points, in 2008 were higher than current
accident year catastrophe losses of $9, or 0.5 points, in 2007, primarily due to losses from
hurricane Ike and tornadoes and thunderstorms in the South and Midwest.
An $82 change to net favorable prior accident year development
Prior accident year reserve development changed from net unfavorable prior accident year reserve
development of $27, or 1.5 points, in 2007 to net favorable prior accident year reserve development
of $55, or 3.3 points, in 2008. Net favorable reserve development of $55 in 2008 primarily
included a $37 release of reserves for high hazard and umbrella general liability claims, primarily
related to the 2001 to 2006 accident years and a $34 release of workers compensation reserves
primarily related to accident years 2000 to 2007, partially offset by a $30 strengthening of
general liability and products liability claims, primarily related to accident years 2004 and
prior. Net unfavorable reserve development of $27 in 2007 primarily included a $40 strengthening
of workers compensation reserves for accident years 1973 and prior, partially offset by an $18
release of commercial auto liability reserves for accident years 2003 and 2004.
Operating expenses decreased by $4
The $16 decrease in the amortization of deferred policy acquisition costs was largely due to the
decrease in earned premium. Insurance operating costs and expenses increased by $12 primarily due
to a $10 increase in policyholder dividends, higher IT costs and an estimated $3 of TWIA
assessments. The increase in policyholder dividends was primarily due to a $14 increase in the
estimated amount of dividends payable to certain workers compensation policyholders due to
underwriting profits. The expense ratio increased by 0.7 points, to 28.8, due to an increase in
insurance operating costs and expenses other than policyholder dividends, including the TWIA
assessments and higher IT costs, and the effect of lower earned premiums.
119
Outlook
Management expects written premium to be 3% to 5% lower in 2008 as the Company takes a disciplined
approach to evaluating and pricing risks in the face of declines in written pricing. Contributing
to the expected decline in Middle Market written premium is the effect of state-mandated rate
reductions in workers compensation and increased competition in specific geographic markets and
lines. For both workers compensation and commercial auto products, the Company is improving the
sophistication of its pricing models in order to target business in selected industries and regions
of the country. Including supplemental commissions, the Company has modestly increased commissions
paid to agents and expects that this will help it achieve its new business and renewal retention
objectives in 2008.
Written pricing has been affected by increased competition for new business as evidenced by written
pricing decreases of 5% in 2007 and 6% in the first nine months of 2008. Market conditions in the
commercial lines industry continue to be soft with written pricing likely to continue to decline in
2008, more so on the larger accounts. Through the end of 2007, The Hartfords new business had
been declining due to the increased competition and written pricing decreases. However, new
business written premium increased in the first nine months of 2008 for workers compensation and
property business. In 2008, the Company will continue to focus on protecting its renewals.
Consistent with claims experience for the 2007 accident year, during 2008, management expects an
increase in claim cost severity. Loss costs are expected to continue to increase across many lines
of business in Middle Market, including non-catastrophe property claims covered under property and
marine policies. Based on anticipated trends in earned pricing and loss costs, the combined ratio
before catastrophes and prior accident year development is expected to be in the range of 95.5 to
97.5 in 2008. The combined ratio before catastrophes and prior accident year development was 93.8
in 2007.
To summarize, managements outlook in Middle Market for the 2008 full year is:
|
|
Written premium 3% to 5% lower |
|
|
A combined ratio before catastrophes and prior accident year development of 95.5 to 97.5 |
120
SPECIALTY COMMERCIAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written Premiums [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
$ |
30 |
|
|
$ |
44 |
|
|
|
(32 |
%) |
|
$ |
84 |
|
|
$ |
144 |
|
|
|
(42 |
%) |
Casualty |
|
|
134 |
|
|
|
119 |
|
|
|
13 |
% |
|
|
428 |
|
|
|
431 |
|
|
|
(1 |
%) |
Professional liability, fidelity and surety |
|
|
178 |
|
|
|
173 |
|
|
|
3 |
% |
|
|
506 |
|
|
|
510 |
|
|
|
(1 |
%) |
Other |
|
|
19 |
|
|
|
20 |
|
|
|
(5 |
%) |
|
|
62 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
361 |
|
|
$ |
356 |
|
|
|
1 |
% |
|
$ |
1,080 |
|
|
$ |
1,147 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Premiums [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
$ |
35 |
|
|
$ |
52 |
|
|
|
(33 |
%) |
|
$ |
119 |
|
|
$ |
153 |
|
|
|
(22 |
%) |
Casualty |
|
|
131 |
|
|
|
130 |
|
|
|
1 |
% |
|
|
395 |
|
|
|
409 |
|
|
|
(3 |
%) |
Professional liability, fidelity and surety |
|
|
173 |
|
|
|
176 |
|
|
|
(2 |
%) |
|
|
512 |
|
|
|
514 |
|
|
|
|
|
Other |
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
61 |
|
|
|
63 |
|
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
358 |
|
|
$ |
377 |
|
|
|
(5 |
%) |
|
$ |
1,087 |
|
|
$ |
1,139 |
|
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The difference between written premiums and earned premiums is attributable to the change in
unearned premium reserve. |
Earned premiums
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Earned premiums for the Specialty Commercial segment decreased by $19, or 5% for the three month
period and by $52, or 5%, for the nine month period, primarily due to a decrease in property earned
premiums.
|
|
Property earned premiums decreased by $17, or 33%, for the three month period and by $34,
or 22%, for the nine month period, primarily due to the Companys decision to stop writing
specialty property business with large, national accounts, the effect of increased competition
for core excess and surplus lines business and the effect of an arrangement with Berkshire
Hathaway to share premiums written under subscription policies sold in the excess and surplus
lines market. Under the arrangement with Berkshire Hathaway that commenced in the second
quarter of 2007, a share of excess and surplus lines business that was previously written
entirely by the Company is now being written in conjunction with Berkshire Hathaway under
subscription policies, whereby both companies share, or participate, in the business written.
As a result of increased competition and capacity for core excess and surplus lines business,
the Company has experienced a decrease in earned pricing, lower new business growth and lower
premium renewal retention since the third quarter of 2007, particularly for
catastrophe-exposed business. |
|
|
Casualty earned premiums were relatively flat for the three month period and decreased by
$14, or 3%, for the nine month period, primarily because of earned pricing decreases and, for
the nine month period, a decline in new business premium on loss-sensitive business written
with larger accounts. |
|
|
Professional liability, fidelity and surety earned premium decreased $3, or 2%, for the
three month period due to a slight decrease in contract surety earned premium and decreased $2
in the nine month period due to a slight decrease in professional liability earned premium.
The decrease in contract surety earned premium for the three month period was primarily due to
increased competition for public construction projects and reduced private construction
activity. The decrease in earned premium from professional liability business in the nine
month period was primarily due to earned pricing decreases in 2008 and the effect of a decline
in new business written premium over the last six months of 2007 and first six months of 2008,
partially offset by the effect of a decrease in the portion of risks ceded to outside
reinsurers. |
|
|
Within the Other category, earned premium remained relatively flat from 2007 to 2008 in
both the three and nine month periods. The Other category of earned premiums includes
premiums assumed under inter-segment arrangements. |
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Specialty Commercial Underwriting Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Written premiums |
|
$ |
361 |
|
|
$ |
356 |
|
|
|
1 |
% |
|
$ |
1,080 |
|
|
$ |
1,147 |
|
|
|
(6 |
%) |
Change in unearned premium reserve |
|
|
3 |
|
|
|
(21 |
) |
|
NM |
|
|
|
(7 |
) |
|
|
8 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
358 |
|
|
|
377 |
|
|
|
(5 |
%) |
|
|
1,087 |
|
|
|
1,139 |
|
|
|
(5 |
%) |
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
247 |
|
|
|
246 |
|
|
|
|
|
|
|
740 |
|
|
|
757 |
|
|
|
(2 |
%) |
Current accident year catastrophes |
|
|
44 |
|
|
|
1 |
|
|
NM |
|
|
|
52 |
|
|
|
3 |
|
|
NM |
|
Prior accident years |
|
|
2 |
|
|
|
18 |
|
|
|
(89 |
%) |
|
|
(39 |
) |
|
|
18 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss adjustment expenses |
|
|
293 |
|
|
|
265 |
|
|
|
11 |
% |
|
|
753 |
|
|
|
778 |
|
|
|
(3 |
%) |
Amortization of deferred policy acquisition costs |
|
|
78 |
|
|
|
80 |
|
|
|
(3 |
%) |
|
|
235 |
|
|
|
242 |
|
|
|
(3 |
%) |
Insurance operating costs and expenses |
|
|
30 |
|
|
|
26 |
|
|
|
15 |
% |
|
|
79 |
|
|
|
69 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
$ |
(43 |
) |
|
$ |
6 |
|
|
NM |
|
|
$ |
20 |
|
|
$ |
50 |
|
|
|
(60 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
68.6 |
|
|
|
65.5 |
|
|
|
(3.1 |
) |
|
|
67.9 |
|
|
|
66.4 |
|
|
|
(1.5 |
) |
Current accident year catastrophes |
|
|
12.6 |
|
|
|
0.2 |
|
|
|
(12.4 |
) |
|
|
4.9 |
|
|
|
0.3 |
|
|
|
(4.6 |
) |
Prior accident years |
|
|
0.5 |
|
|
|
5.0 |
|
|
|
4.5 |
|
|
|
(3.6 |
) |
|
|
1.7 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense ratio |
|
|
81.7 |
|
|
|
70.7 |
|
|
|
(11.0 |
) |
|
|
69.3 |
|
|
|
68.4 |
|
|
|
(0.9 |
) |
Expense ratio |
|
|
29.0 |
|
|
|
27.7 |
|
|
|
(1.3 |
) |
|
|
28.0 |
|
|
|
26.9 |
|
|
|
(1.1 |
) |
Policyholder dividend ratio |
|
|
1.3 |
|
|
|
0.3 |
|
|
|
(1.0 |
) |
|
|
0.9 |
|
|
|
0.4 |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
111.9 |
|
|
|
98.6 |
|
|
|
(13.3 |
) |
|
|
98.1 |
|
|
|
95.7 |
|
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
12.6 |
|
|
|
0.2 |
|
|
|
(12.4 |
) |
|
|
4.9 |
|
|
|
0.3 |
|
|
|
(4.6 |
) |
Prior years |
|
|
(0.7 |
) |
|
|
1.2 |
|
|
|
1.9 |
|
|
|
(1.0 |
) |
|
|
0.1 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe ratio |
|
|
11.9 |
|
|
|
1.4 |
|
|
|
(10.5 |
) |
|
|
3.9 |
|
|
|
0.4 |
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes |
|
|
100.0 |
|
|
|
97.2 |
|
|
|
(2.8 |
) |
|
|
94.3 |
|
|
|
95.3 |
|
|
|
1.0 |
|
Combined ratio before catastrophes and prior
accident years development |
|
|
98.8 |
|
|
|
93.5 |
|
|
|
(5.3 |
) |
|
|
96.8 |
|
|
|
93.7 |
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues [1] |
|
$ |
99 |
|
|
$ |
91 |
|
|
|
9 |
% |
|
$ |
281 |
|
|
$ |
264 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Represents servicing revenue. |
Underwriting results and ratios
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Underwriting results decreased by $49, from underwriting income of $6 in 2007 to an underwriting
loss of $43 in 2008 with a corresponding 13.3 point increase in the combined ratio, from 98.6 to
111.9, due to:
|
|
|
|
|
Change in underwriting results |
|
|
|
|
Decrease in earned premiums |
|
$ |
(19 |
) |
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
Ratio change An increase in the current accident year loss and loss adjustment expense ratio
before catastrophes |
|
|
(13 |
) |
Volume change Decrease in current accident year loss and loss adjustment expenses before
catastrophes due to the decrease in earned premium |
|
|
12 |
|
|
|
|
|
Net increase in current accident year losses and loss adjustment expenses before catastrophes |
|
|
(1 |
) |
Catastrophes Increase in current accident year catastrophe losses |
|
|
(43 |
) |
Reserve changes Decrease in net unfavorable prior accident year reserve development |
|
|
16 |
|
|
|
|
|
Net increase in losses and loss adjustment expenses |
|
|
(28 |
) |
|
|
|
|
|
Operating expenses |
|
|
|
|
Decrease in amortization of deferred policy acquisition costs |
|
|
2 |
|
Increase in insurance operating costs and expenses |
|
|
(4 |
) |
|
|
|
|
Net increase in operating expenses |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(49 |
) |
|
|
|
|
122
Earned premium decreased by $19
Earned premiums for the Specialty Commercial segment decreased by $19, or 5%, primarily due to a
decrease in property earned premiums. Refer to the earned premium section above for further
discussion.
Losses and loss adjustment expenses increased by $28
Current accident year losses and loss adjustment expenses before catastrophes increased
slightly
Specialty Commercial current accident year losses and loss adjustment expenses before catastrophes
increased slightly in 2008, to $247, primarily due to an increase in the loss and loss adjustment
expense ratio before catastrophes and prior accident year development, largely offset by a decrease
in earned premium. The loss and loss adjustment expense ratio before catastrophes and prior
accident year development increased by 3.1 points, to 68.6, primarily due to a higher loss and loss
adjustment ratio on directors and officers insurance for professional liability business, driven by
earned pricing decreases, and, to a lesser extent, higher non-catastrophe property losses.
Current accident year catastrophes increased by $43
Current accident year catastrophe losses increased $43, or 12.4 points, primarily due to losses
from hurricane Ike.
Prior accident year net unfavorable reserve development decreased by $16
Prior accident year reserve development decreased from net unfavorable development of $18, or 5.0
points, in 2007 to net unfavorable development of $2, or 0.5 points, in 2008. Net unfavorable
reserve development of $2 in the third quarter of 2008 primarily included $28 of reserve
strengthening for allocated loss adjustment expenses on casualty business, including a $15
strengthening of reserves on national account business, partially offset by a $25 release of
reserves for directors and officers insurance for the 2004 to 2006 accident years. Net unfavorable
reserve development of $18 in the third quarter of 2007 primarily consisted of a $25 strengthening
of reserves for general liability claims on large deductible policies within casualty business,
partially offset by a release of reserves on surety business.
Operating expenses increased by $2
Insurance operating costs and expenses increased by $4, primarily due to a $2 increase in
non-deferrable expenses and a $2 increase in policyholder dividends. Amortization of deferred
policy acquisition costs did not decrease as much as the decrease in earned premium because of an
increase in net acquisition costs related to writing a greater mix of higher net commission small
commercial and private directors and officers insurance. The expense ratio increased by 1.3
points, to 29.0, primarily due to the increase in net acquisition costs for directors and
officers insurance and the effect of the decrease in earned premium.
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Underwriting results decreased by $30, with a corresponding 2.4 point increase in the combined
ratio, from 95.7 to 98.1, due to:
|
|
|
|
|
Change in underwriting results |
|
|
|
|
Decrease in earned premiums |
|
$ |
(52 |
) |
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
Volume change Decrease in current accident year loss and loss adjustment expenses before
catastrophes due to the decrease in earned premium |
|
|
34 |
|
Ratio change Increase in the current accident year non-catastrophe loss and loss adjustment
expense ratio before catastrophes |
|
|
(17 |
) |
|
|
|
|
Net decrease in current accident year losses and loss adjustment expenses before catastrophes |
|
|
17 |
|
Catastrophes Increase in current accident year catastrophe losses |
|
|
(49 |
) |
Reserve changes A change to net favorable prior accident year reserve development |
|
|
57 |
|
|
|
|
|
Net decrease in losses and loss adjustment expenses |
|
|
25 |
|
|
|
|
|
|
Operating expenses |
|
|
|
|
Decrease in amortization of deferred policy acquisition costs |
|
|
7 |
|
Increase in insurance operating costs and expenses |
|
|
(10 |
) |
|
|
|
|
Net increase in operating expenses |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Decrease in underwriting results from 2007 to 2008 |
|
$ |
(30 |
) |
|
|
|
|
123
Earned premium decreased by $52
Earned premiums for the Specialty Commercial segment decreased by $52, or 5%, primarily due to a
decrease in property earned premiums. Refer to the earned premium section above for further
discussion.
Losses and loss adjustment expenses decreased by $25
Current accident year losses and loss adjustment expenses before catastrophes decreased by
$17
Specialty Commercial current accident year losses and loss adjustment expenses before catastrophes
decreased by $17 in 2008, to $740, primarily due to a decrease in earned premium, partially offset
by an increase in the loss and loss adjustment expense ratio before catastrophes and prior accident
year development. The loss and loss adjustment expense ratio before catastrophes and prior
accident year development increased by 1.5 points, to 67.9, primarily due to a higher loss and loss
adjustment ratio on directors and officers insurance in professional liability, driven by earned
pricing decreases.
Current accident year catastrophes increased by $49
Current accident year catastrophe losses increased $49, or 4.6 points, primarily due to losses from
hurricane Ike.
Change to net favorable prior accident year development by $57
Prior accident year reserve development changed from net unfavorable prior accident year reserve
development of $18, or 1.7 points, in 2007 to net favorable prior accident year reserve development
of $39, or 3.6 points, in 2008. Net favorable prior accident year reserve development of $39 in
2008 primarily included a $45 release of reserves for directors and officers insurance and errors
and omissions insurance claims related to accident years 2003 to 2006. Prior accident year reserve
development in the first nine months of 2007 primarily consisted of a $25 strengthening of general
liability reserves for accident years more than 20 years old.
Operating expenses increased by $3
Insurance operating costs and expenses increased by $10, primarily due to a $5 increase in
non-deferrable expenses and a $5 increase in policyholder dividends, driven by an increase in the
estimated amount of dividends payable to certain workers compensation policyholders due to
underwriting profits. Amortization of deferred policy acquisition costs did not decrease as much
as the decrease in earned premium because of an increase in net acquisition costs related to
writing a greater mix of higher net commission small commercial and private directors and
officers insurance. The expense ratio increased by 1.1 point, to 28.0, primarily due to the
increase in net acquisition costs for directors and officers insurance and the effect of the
decrease in earned premium.
124
Outlook
In 2008, the Company expects written premium for the Specialty Commercial segment to be 4% to 6%
lower. For property business, the Company expects written premium to decrease, largely because of
the decision to stop writing specialty property business with large, national accounts. Also
contributing to the expected decline in property written premium is a decrease in written premium
for the Companys core excess and surplus lines property business. Under an arrangement with
Berkshire Hathaway that commenced in the second quarter of 2007, a share of core excess and surplus
lines business that was previously written entirely by the Company is now being written in
conjunction with Berkshire Hathaway under subscription policies, whereby both companies share, or
participate, in the business written. While the arrangement with Berkshire Hathaway enables the
Company to offer its insureds larger policy limits and thereby enhance its competitive position,
marketplace capacity and competition have increased significantly, particularly for
catastrophe-exposed business. In addition, standard admitted markets have expanded their appetite
for core excess and surplus lines business which has significantly increased competition.
Management expects a slight decrease in casualty written premium in 2008 due largely to lower
written pricing and a decrease in new business premium in construction, larger loss-sensitive
accounts, and captive programs. Despite the expected decrease in written premiums within the
specialty casualty business, the Company will continue to focus on improving interaction with
agents by reducing the number of internal touch points through the underwriting process and will
realign the field office organization to better serve specialty construction accounts.
Within professional liability, fidelity and surety, management expects written premium to be
relatively flat for 2008 as an increase in professional liability written premium will be offset by
a decrease in surety written premium. The increase in professional liability written premium will
largely be driven by reducing the portion of risks ceded to outside reinsurers, partially offset by
the effect of declines in written pricing. The near-dormant IPO market coupled with incumbent
carriers competing to keep existing business hindered production during the first nine months of
2008. The Company will focus on D&O and E&O new business opportunities with both large and middle
market private companies and seeks to grow its business in Europe through its new underwriting
office in the United Kingdom. In addition, the Company will continue to cross-sell professional
liability coverage to small businesses that purchase business owners package policies and
capitalize on the increased demand for separate Side-A D&O insurance limits of liability that
provide protection to individual directors and officers to the extent their company is unwilling or
unable to indemnify them against litigation. In the face of written pricing decreases, the Company
will maintain underwriting discipline when writing professional liability coverage for larger
public companies.
Written premium from surety business is expected to be down as this segment of the market has been
affected by increased competition for public construction projects and reduced private construction
activity. The Company will seek to diversify its portfolio of commercial surety business,
including a focus on growing our small bond book of business. Written premium growth could be
lower than planned in any one or all of the Specialty Commercial businesses if written pricing is
less favorable than anticipated and management determines that new and renewal business is not
adequately priced.
Written pricing has been decreasing in professional liability and property lines of business.
Since 2006, competition has intensified for professional liability business, particularly for
directors and officers insurance coverage. A lower frequency of shareholder class action cases
in 2005 and 2006 has put downward pressure on rates. Increased volatility in the equity and debt
markets along with the evolving fall out of the sub-prime mortgage market led to a rebound of such
cases in 2007 and a stabilization of rates in affected industries. It is possible that the current
financial market turmoil could increase the number of shareholder class action lawsuits against our
insureds or their directors and officers. Approximately 13% of the Companys professional
liability in-force net written premium is from financial services firms, the area most directly
affected by the turmoil in the financial markets.
Written pricing for property business began to decline in the second half of 2007, primarily due to
price competition which has resulted in lower pricing in the standard core excess and surplus lines
markets. The industry has increased its capacity and appetite to write business in
catastrophe-prone markets and this has increased competition in those markets.
As a percentage of earned premiums, management expects that losses and loss adjustment expenses
will increase in 2008 for professional liability, casualty and property business with the increase
driven primarily by lower earned pricing. The Company expects its sub-prime loss activity to be
manageable based on several factors. Principal among them is the diversified nature of the product
and customer portfolio with the majority of the Companys total in-force professional liability net
written premium derived from policyholders with privately-held ownership and, therefore, relatively
low shareholder class action exposure. The Companys average net limit exposed is $8 at an average
attachment point of $74 on
reported claims or notices of potential claims on sub-prime exposed policies. Given the
anticipated trends in pricing and loss costs in Specialty Commercial, management expects a combined
ratio before catastrophes and prior accident year development in the range of 96.5 to 98.5 for
2008. The combined ratio before catastrophes and prior accident year development was 94.4 in 2007.
To summarize, managements outlook in Specialty Commercial for the 2008 full year is:
|
|
Written premium 4% to 6% lower |
|
|
A combined ratio before catastrophes and prior accident year development of 96.5 to 98.5 |
125
OTHER OPERATIONS (INCLUDING ASBESTOS AND ENVIRONMENTAL CLAIMS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Summary |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Written premiums |
|
$ |
1 |
|
|
$ |
2 |
|
|
|
(50 |
%) |
|
$ |
5 |
|
|
$ |
3 |
|
|
|
67 |
% |
Change in unearned premium reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
1 |
|
|
|
2 |
|
|
|
(50 |
%) |
|
|
4 |
|
|
|
3 |
|
|
|
33 |
% |
Losses and loss adjustment
expenses prior years |
|
|
56 |
|
|
|
39 |
|
|
|
44 |
% |
|
|
126 |
|
|
|
173 |
|
|
|
(27 |
%) |
Insurance operating costs and expenses |
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
16 |
|
|
|
17 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
|
(61 |
) |
|
|
(43 |
) |
|
|
(42 |
%) |
|
|
(138 |
) |
|
|
(187 |
) |
|
|
26 |
% |
Net investment income |
|
|
50 |
|
|
|
61 |
|
|
|
(18 |
%) |
|
|
162 |
|
|
|
184 |
|
|
|
(12 |
%) |
Net realized capital losses |
|
|
(160 |
) |
|
|
(3 |
) |
|
NM |
|
|
|
(176 |
) |
|
|
(3 |
) |
|
NM |
|
Other expenses |
|
|
1 |
|
|
|
(1 |
) |
|
NM |
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(170 |
) |
|
|
14 |
|
|
NM |
|
|
|
(153 |
) |
|
|
(9 |
) |
|
NM |
|
Income tax (expense) benefit |
|
|
62 |
|
|
|
(2 |
) |
|
NM |
|
|
|
62 |
|
|
|
13 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(108 |
) |
|
$ |
12 |
|
|
NM |
|
|
$ |
(91 |
) |
|
$ |
4 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Other Operations segment includes operations that are under a single management structure,
Heritage Holdings, which is responsible for two related activities. The first activity is the
management of certain subsidiaries and operations of the Company that have discontinued writing new
business. The second is the management of claims (and the associated reserves) related to
asbestos, environmental and other exposures. The Other Operations book of business contains
policies written from approximately the 1940s to 2003. The Companys experience has been that this
book of run-off business has, over time, produced significantly higher claims and losses than were
contemplated at inception.
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Net income for the three months ended September 30, 2008 decreased $120 compared to the prior year
period, driven primarily by the following:
|
|
An $18 decrease in underwriting results, primarily due to a $17 increase in unfavorable
prior year loss development. Reserve development in the three months ended September 30, 2008
included $53 of environmental reserve strengthening as a result of the Companys annual
environmental reserve evaluation. For the comparable three month period ended September 30,
2007, reserve development included $25 of environmental reserve strengthening. |
|
|
An $11 decrease in net investment income, primarily as a result of a decrease in investment
yield for limited partnerships and other alternative investments and, to a lesser extent, a decrease
in investment yield for fixed maturities and a decrease in invested assets resulting from net
losses and loss adjustment expenses paid. |
|
|
A $157 increase in net realized capital losses in 2008, primarily due to realized losses in
2008 from impairments of corporate debt and equity securities in the financial services
sector. (See the Other-Than-Temporary Impairments discussion within Investment Results in
the Investments section of the MD&A for more information on the impairments recorded in
2008). |
|
|
A change from $2 income tax expense to $62 income tax benefit, primarily as a result of an
increase in net realized capital losses. |
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Net income for the nine months ended September 30, 2008 decreased $95 compared to the prior year
period, driven primarily by the following:
|
|
A $49 increase in underwriting results, primarily due to a $47 decrease in unfavorable
prior year loss development. Reserve development in the nine months ended September 30, 2008
included $53 of environmental reserve strengthening as a result of the Companys annual
environmental reserve evaluation and $50 of asbestos reserve strengthening as a result of the
Companys annual asbestos reserve evaluation. For the comparable nine month period ended
September 30, 2007, reserve development included $99 principally as a result of an adverse
arbitration decision and $25 of environmental reserve strengthening. |
|
|
A $22 decrease
in net investment income, primarily as a result of a decrease in investment
yield for limited partnerships and other alternative investments and, to a lesser extent, a decrease
in investment yield for fixed maturities and a decrease in invested assets resulting from net
losses and loss adjustment expenses paid. |
|
|
A $173 increase in net realized capital losses in 2008, primarily due to realized losses in
2008 from impairments of corporate debt and equity securities in the financial services
sector. (See the Other-Than-Temporary Impairments discussion within Investment Results in the Investments section
of the MD&A for more information on the impairments recorded in 2008). |
|
|
A $49 increase in income tax benefit, primarily as a result of an increase in net realized
capital losses. |
126
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 insureds 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.
With regard to both environmental and particularly asbestos claims, significant uncertainty limits
the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid
losses and related expenses. Traditional actuarial reserving techniques cannot reasonably estimate
the ultimate cost of these claims, particularly during periods where theories of law are in flux.
The degree of variability of reserve estimates for these exposures is significantly greater than
for other more traditional exposures. In particular, the Company believes there is a high degree
of uncertainty inherent in the estimation of asbestos loss reserves.
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 Companys 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.
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. Although potential Federal
asbestos-related legislation was considered by the Senate in 2006, it is uncertain whether such
legislation will be reconsidered or enacted in the future and, if enacted, what its effect would be
on the Companys aggregate asbestos liabilities.
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 policyholders 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.
Given the factors described above, the Company believes the actuarial tools and other techniques it
employs to estimate the ultimate cost of claims for more traditional kinds of insurance exposure
are less precise in estimating reserves for its asbestos and environmental exposures. For this
reason, the Company relies on exposure-based analysis to estimate the ultimate costs of these
claims and regularly evaluates new information in assessing its potential asbestos and
environmental exposures.
127
Reserve Activity
Reserves and reserve activity in the Other Operations segment are categorized and reported as
asbestos, environmental, or all other. The all other category of reserves covers a wide range
of insurance and assumed reinsurance coverages, including, but not limited to, potential liability
for construction defects, lead paint, silica, pharmaceutical products, molestation and other
long-tail liabilities. In addition, within the all other category of reserves, Other Operations
records its allowance for future reinsurer insolvencies and disputes that might affect reinsurance
collectability associated with asbestos, environmental, and other claims recoverable from
reinsurers.
The following table presents reserve activity, inclusive of estimates for both reported and
incurred but not reported claims, net of reinsurance, for Other Operations, categorized by
asbestos, environmental and all other claims, for the three and nine months ended September 30,
2008.
Other Operations Losses and Loss Adjustment Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2008 |
|
Asbestos |
|
|
Environmental |
|
|
All Other [1] |
|
Total |
|
Beginning liability net [2][3] |
|
$ |
1,967 |
|
|
$ |
237 |
|
|
$ |
1,803 |
|
|
$ |
4,007 |
|
Losses and loss adjustment expenses incurred |
|
|
3 |
|
|
|
53 |
|
|
|
|
|
|
|
56 |
|
Losses and loss adjustment expenses paid |
|
|
(35 |
) |
|
|
(9 |
) |
|
|
(59 |
) |
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liability net [2][3] |
|
$ |
1,935 |
[4] |
|
$ |
281 |
|
|
$ |
1,744 |
|
|
$ |
3,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2008 |
|
Asbestos |
|
|
Environmental |
|
|
All Other [1] |
|
Total |
|
Beginning liability net [2][3] |
|
$ |
1,998 |
|
|
$ |
251 |
|
|
$ |
1,888 |
|
|
$ |
4,137 |
|
Losses and loss adjustment expenses incurred |
|
|
59 |
|
|
|
53 |
|
|
|
14 |
|
|
|
126 |
|
Losses and loss adjustment expenses paid |
|
|
(122 |
) |
|
|
(23 |
) |
|
|
(158 |
) |
|
|
(303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liability net [2][3] |
|
$ |
1,935 |
[4] |
|
$ |
281 |
|
|
$ |
1,744 |
|
|
$ |
3,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
All Other includes unallocated loss adjustment expense reserves and the allowance for uncollectible reinsurance. |
|
|
|
[2] |
|
Excludes asbestos and environmental net liabilities reported in Ongoing Operations of $15 and $6, respectively, as of
September 30, 2008, $12 and $6, respectively, as of June 30, 2008, and $9 and $6, respectively, as of December 31, 2007.
Total net losses and loss adjustment expenses incurred in Ongoing Operations for the three and nine months ended September
30, 2008 includes $5 and $13, respectively, related to asbestos and environmental claims. Total net losses and loss
adjustment expenses paid in Ongoing Operations for the three and nine months ended September 30, 2008 includes $2 and $7,
respectively, related to asbestos and environmental claims. |
|
|
|
[3] |
|
Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were $2,625 and
$323, respectively, as of September 30, 2008, $2,676 and $271, respectively, as of June 30, 2008, and $2,707 and $290,
respectively, as of December 31, 2007. |
|
|
|
[4] |
|
The one year and average three year net paid amounts for asbestos claims, including Ongoing Operations, are $237 and $277,
respectively, resulting in a one year net survival ratio of 8.2 and a three year net survival ratio of 7.0. 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. |
During the third quarter of 2008, the Company completed its annual ground up environmental reserve
evaluation. As part of this evaluation, 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. The Company found estimates
for some individual accounts increased based upon new damage and defense cost information obtained
on these accounts since the last review. In addition, the decline in the reporting of new accounts
and sites has been slower than anticipated in our previous review. The net effect of these changes
resulted in a $53 increase in net environmental reserves. The Company currently expects to
continue to perform an evaluation of its environmental liabilities annually.
In reporting environmental results, the Company divides its gross exposure into Direct, which is
subdivided further as: Accounts with future exposure greater than $2.5, Accounts with future
exposure less than $2.5, and Other direct; Assumed Reinsurance; and London Market. The unallocated
amounts in the Other direct category include an estimate of the necessary reserves for
environmental claims related to direct insureds who have not previously tendered environmental
claims to the Company.
An account may move between categories from one evaluation to the next. For example, an account
with future expected exposure of greater than $2.5 in one evaluation may be reevaluated due to
changing conditions and re-categorized as less than $2.5 in a subsequent evaluation or vice versa.
128
The following table displays gross environmental reserves and other statistics by category as of
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Number of Accounts [1] |
|
|
Reserves |
|
Accounts with future exposure > $2.5 |
|
|
9 |
|
|
$ |
44 |
|
Accounts with future exposure < $2.5 |
|
|
565 |
|
|
|
100 |
|
Other direct [2] |
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
Total Direct |
|
|
574 |
|
|
$ |
206 |
|
Assumed Reinsurance |
|
|
|
|
|
|
61 |
|
London Market |
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
Total as of September 30, 2008 [3] [4] |
|
|
|
|
|
$ |
323 |
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Number of accounts established as of June 2008. |
|
|
|
[2] |
|
Includes unallocated IBNR. |
|
|
|
[3] |
|
The one year gross paid amount for total environmental claims is $47, resulting in a one
year gross survival ratio of 6.9. |
|
|
|
[4] |
|
The three year average annual gross paid amount for total environmental claims is $96,
resulting in a three year gross survival ratio of 3.4. |
During the second quarter of 2008, the Company completed its annual ground up asbestos reserve
evaluation. As part of this evaluation, 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. The Company found
estimates for individual cases changed based upon the particular circumstances of each account.
These changes were case specific and not as a result of any underlying change in the current
environment. The net effect of these changes resulted in a $50 increase in net asbestos reserves.
The Company currently expects to continue to perform an evaluation of its asbestos liabilities
annually.
For paid and incurred losses and loss adjustment expenses reporting, the Company classifies its
asbestos and environmental reserves into three categories: Direct, Assumed Domestic 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 Companys
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 Domestic and London Market), direct policies
tend to have the greatest factual development from which to estimate the Companys 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 Lloyds 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.
129
The following table sets forth, for the three and nine months ended September 30, 2008, paid and
incurred loss activity by the three categories of claims for asbestos and environmental.
Paid and Incurred Losses and Loss Adjustment Expense (LAE) Development Asbestos and Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos [1] |
|
|
Environmental [1] |
|
|
|
Paid |
|
|
Incurred |
|
|
Paid |
|
|
Incurred |
|
Three Months Ended September 30, 2008 |
|
Losses & LAE |
|
|
Losses & LAE |
|
|
Losses & LAE |
|
|
Losses & LAE |
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
28 |
|
|
$ |
|
|
|
$ |
9 |
|
|
$ |
69 |
|
Assumed Domestic |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
London Market |
|
|
10 |
|
|
|
|
|
|
|
1 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
55 |
|
|
|
|
|
|
|
10 |
|
|
|
65 |
|
Ceded |
|
|
(20 |
) |
|
|
3 |
|
|
|
(1 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
35 |
|
|
$ |
3 |
|
|
$ |
9 |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
97 |
|
|
$ |
76 |
|
|
$ |
23 |
|
|
$ |
69 |
|
Assumed Domestic |
|
|
51 |
|
|
|
|
|
|
|
5 |
|
|
|
(17 |
) |
London Market |
|
|
16 |
|
|
|
|
|
|
|
3 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
164 |
|
|
|
76 |
|
|
|
31 |
|
|
|
65 |
|
Ceded |
|
|
(42 |
) |
|
|
(17 |
) |
|
|
(8 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
122 |
|
|
$ |
59 |
|
|
$ |
23 |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Excludes asbestos and environmental paid and incurred loss and LAE reported in Ongoing
Operations. Total gross loss and LAE incurred in Ongoing Operations for the three and nine
months ended September 30, 2008 includes $4 and $12, respectively, related to asbestos and
environmental claims. Total gross loss and LAE paid in Ongoing Operations for the three and
nine months ended September 30, 2008 includes $3 and $7, respectively, related to asbestos
and environmental claims. |
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 September 30, 2008 of $2.24 billion ($1.95 billion and $287 for asbestos and
environmental, respectively) is within an estimated range, unadjusted for covariance, of $1.87
billion to $2.49 billion. The process of estimating asbestos and environmental reserves remains
subject to a wide variety of uncertainties, which are detailed in the Companys 2007 Form 10-K
Annual Report. The Company believes that its current asbestos and environmental reserves are
reasonable and 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 Companys consolidated operating results, financial condition and
liquidity.
During the second quarter of 2008, the Company completed its annual evaluation of the
collectability of the reinsurance recoverables and the adequacy of the allowance for uncollectible
reinsurance associated with older, long-term casualty liabilities reported in the Other Operations
segment. The evaluation resulted in no addition to the allowance for uncollectible reinsurance.
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
Companys 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 allowance for uncollectible reinsurance reflects managements current estimate of
reinsurance cessions that may be uncollectible in the future due to reinsurers unwillingness or
inability to pay. As of September 30, 2008, the allowance for uncollectible reinsurance for Other
Operations totals $265. The Company currently expects to perform its regular comprehensive review
of Other Operations reinsurance recoverables annually. Uncertainties regarding the factors that
affect the allowance for uncollectible reinsurance could cause the Company to change its estimates,
and the effect of these changes could be material to the Companys consolidated results of
operations or cash flows.
The Company expects to perform reviews of its assumed reinsurance and unallocated loss adjustment
expense reserves in the fourth quarter of 2008. Consistent with the Companys long-standing
reserve practices, the Company will continue to review and monitor its reserves in the Other
Operations segment
regularly, and where future developments indicate, make appropriate adjustments to the reserves.
For a discussion of the Companys reserving practices, see the Critical Accounting
EstimatesProperty & Casualty Reserves, Net of Reinsurance and Other Operations (Including Asbestos
and Environmental Claims) sections of the MD&A included in the Companys 2007 Form 10-K Annual
Report.
130
INVESTMENTS
General
The Hartfords investment portfolios are primarily divided between Life and Property & Casualty.
The investment portfolios of Life and Property & Casualty are managed by HIMCO, a wholly-owned
subsidiary of The Hartford. HIMCO manages the portfolios to maximize economic value, while
attempting to generate the income necessary to support the Companys various product obligations
within internally established objectives, guidelines and risk tolerances. The portfolio objectives
and guidelines are developed based upon the asset/liability profile, including duration, convexity
and other characteristics within specified risk tolerances. The risk tolerances considered
include, for example, asset and credit issuer allocation limits, maximum portfolio below investment
grade (BIG) holdings and foreign currency exposure. The Company attempts to minimize adverse
impacts to the portfolio and the Companys results of operations due to changes in economic
conditions through asset allocation limits, asset/liability duration matching and through the use
of derivatives. For a further discussion of how HIMCO manages the investment portfolios, see the
Investments section of the MD&A under the General section in The Hartfords 2007 Form 10-K Annual
Report. For a further discussion of how the investment portfolios credit and market risks are
assessed and managed, see the Investment Credit Risk and Capital Markets Risk Management sections
of the MD&A.
Return on general account invested assets is an important element of The Hartfords financial
results. Significant fluctuations in the fixed income or equity markets could weaken the Companys
financial condition or its results of operations. Additionally, changes in market interest rates
may impact the period of time over which certain investments, such as MBS, are repaid and whether
certain investments are called by the issuers. Such changes may, in turn, impact the yield on
these investments and also may result in re-investment of funds received from calls and prepayments
at rates below the average portfolio yield. For the three and nine months ended September 30, net
investment income and net realized capital losses reduced the Companys consolidated revenues by
$5,761 and $7,416, respectively, for 2008 and contributed $237 and $4,088, respectively, for 2007.
For the three and nine months ended September 30, net investment income and net realized capital
losses, excluding net investment income from trading securities, reduced consolidated revenues by
$2,346 and $1,576, respectively, for 2008 and contributed $935 and $3,342, respectively, for 2007.
The reduction to consolidated revenues for 2008, as compared to the prior year period contribution,
is primarily due to a net loss in the value of equity securities held for trading and realized
capital losses in 2008.
Fluctuations in interest rates affect the Companys return on, and the fair value of, fixed
maturity investments, which comprised approximately 57% and 61% of the fair value of its invested
assets as of September 30, 2008 and December 31, 2007, respectively. Other events beyond the
Companys control, including changes in credit spreads, a downgrade of an issuers credit rating or
default of payment by an issuer, could also adversely impact the fair value of these investments.
A decrease in the fair value of any investment that is deemed other-than-temporary would result in
the Companys recognition of a net realized capital loss in its financial results prior to the
actual sale of the investment. Following the recognition of the other-than-temporary impairment
for fixed maturities, the Company accretes the new cost basis to par or to estimated future value
over the remaining life of the security based on future estimated cash flows by adjusting the
securitys yields. For a further discussion of the evaluation of other-than-temporary impairments,
see the Critical Accounting Estimates section of the MD&A under Evaluation of Other-Than-Temporary
Impairments on Available-for-Sale Securities section.
131
Life
The primary investment objective of Lifes general account 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 support
policyholder and corporate obligations.
The following table identifies the invested assets by type held in the general account as of
September 30, 2008 and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of Invested Assets |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Fixed maturities, available-for-sale, at fair value |
|
$ |
46,292 |
|
|
|
75.5 |
% |
|
$ |
52,542 |
|
|
|
82.6 |
% |
Equity securities, available-for-sale, at fair value |
|
|
908 |
|
|
|
1.5 |
% |
|
|
1,284 |
|
|
|
2.0 |
% |
Policy loans, at outstanding balance |
|
|
2,159 |
|
|
|
3.5 |
% |
|
|
2,061 |
|
|
|
3.2 |
% |
Mortgage loans, at amortized cost [1] |
|
|
5,460 |
|
|
|
8.9 |
% |
|
|
4,739 |
|
|
|
7.5 |
% |
Limited partnerships and other alternative investments [2] |
|
|
1,410 |
|
|
|
2.3 |
% |
|
|
1,306 |
|
|
|
2.1 |
% |
Short-term investments |
|
|
3,793 |
|
|
|
6.2 |
% |
|
|
1,158 |
|
|
|
1.8 |
% |
Other investments [3] |
|
|
1,308 |
|
|
|
2.1 |
% |
|
|
534 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments excl. equity securities, held for
trading |
|
$ |
61,330 |
|
|
|
100.0 |
% |
|
$ |
63,624 |
|
|
|
100.0 |
% |
Equity securities, held for trading, at fair value [4] |
|
|
33,655 |
|
|
|
|
|
|
|
36,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
94,985 |
|
|
|
|
|
|
$ |
99,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Consist of commercial and agricultural loans. |
|
[2] |
|
Includes a real estate joint venture. |
|
[3] |
|
Primarily relates to derivative instruments. |
|
[4] |
|
These assets primarily support the International variable annuity
business. Changes in these balances are also reflected in the
respective liabilities. |
Total
investments decreased $4.8 billion since December 31, 2007 primarily as a result of a
decrease in value of equity securities, held for trading, and increased unrealized losses associated
with fixed maturities primarily due to a widening of credit spreads, partially offset by positive
operating cash flows. Short-term investments as a percentage of total investments, excluding
equity securities, held for trading, increased in preparation for funding liability outflows and in
anticipation of investing in more favorable risk/return opportunities. The decrease in value of
equity securities, held for trading, of $2.5 billion primarily resulted from a decline in value of
the underlying investment funds supporting the Japanese variable annuity product due to negative
market performance partially offset by positive cash flows generated from sales and deposits.
Lifes limited partnerships and other alternative investment composition has not significantly
changed since December 31, 2007. Life is currently evaluating its allocation to limited
partnerships and other alternative investments and plans to decrease its investment in hedge funds. The following table summarizes Lifes limited partnerships and other
alternative investments as of September 30, 2008 and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of Limited Partnerships and Other Alternative Investments |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Hedge funds [1] |
|
$ |
514 |
|
|
|
36.4 |
% |
|
$ |
506 |
|
|
|
38.7 |
% |
Mortgage and real estate [2] |
|
|
300 |
|
|
|
21.3 |
% |
|
|
309 |
|
|
|
23.7 |
% |
Mezzanine debt [3] |
|
|
93 |
|
|
|
6.6 |
% |
|
|
72 |
|
|
|
5.5 |
% |
Private equity and other [4] |
|
|
503 |
|
|
|
35.7 |
% |
|
|
419 |
|
|
|
32.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,410 |
|
|
|
100.0 |
% |
|
$ |
1,306 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Hedge funds include investments in funds of funds as well as direct
funds. The hedge funds of funds invest in approximately 25 to 50
different hedge funds within a variety of investment styles. Examples
of hedge fund strategies include long/short equity or credit, event
driven strategies and structured credit. |
|
[2] |
|
Mortgage and real estate funds consist of investments in funds whose
assets consist of mortgage loans, participations in mortgage loans,
mezzanine loans or other notes which may be below investment grade
credit quality as well as equity real estate. Also included is the
investment in a real estate joint venture. |
|
[3] |
|
Mezzanine debt funds consist of investments in funds whose assets
consist of subordinated debt that often times incorporates
equity-based options such as warrants and a limited amount of direct
equity investments. |
|
[4] |
|
Private equity and other funds primarily consist of investments in
funds whose assets typically consist of a diversified pool of
investments in small non-public businesses with high growth potential. |
132
Investment Results
The following table summarizes Lifes net investment income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Amount |
|
|
Yield [1] |
|
|
Amount |
|
|
Yield [1] |
|
|
Amount |
|
|
Yield [1] |
|
|
Amount |
|
|
Yield [1] |
|
Fixed maturities [2] |
|
$ |
718 |
|
|
|
5.4 |
% |
|
$ |
794 |
|
|
|
5.9 |
% |
|
$ |
2,184 |
|
|
|
5.4 |
% |
|
$ |
2,313 |
|
|
|
5.9 |
% |
Equity securities, available-for-sale |
|
|
17 |
|
|
|
5.2 |
% |
|
|
23 |
|
|
|
6.8 |
% |
|
|
73 |
|
|
|
7.0 |
% |
|
|
63 |
|
|
|
7.0 |
% |
Mortgage loans |
|
|
71 |
|
|
|
5.4 |
% |
|
|
68 |
|
|
|
6.2 |
% |
|
|
214 |
|
|
|
5.7 |
% |
|
|
184 |
|
|
|
6.3 |
% |
Policy loans |
|
|
34 |
|
|
|
6.3 |
% |
|
|
32 |
|
|
|
6.3 |
% |
|
|
101 |
|
|
|
6.3 |
% |
|
|
102 |
|
|
|
6.6 |
% |
Limited partnerships and other
alternative investments |
|
|
(59 |
) |
|
|
(16.8 |
%) |
|
|
23 |
|
|
|
9.3 |
% |
|
|
(67 |
) |
|
|
(6.7 |
%) |
|
|
101 |
|
|
|
14.7 |
% |
Other [3] |
|
|
(3 |
) |
|
|
|
|
|
|
(39 |
) |
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
Investment expense |
|
|
(19 |
) |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income excl.
equity securities held for trading |
|
$ |
759 |
|
|
|
4.8 |
% |
|
$ |
883 |
|
|
|
6.0 |
% |
|
$ |
2,407 |
|
|
|
5.2 |
% |
|
$ |
2,619 |
|
|
|
6.0 |
% |
Equity securities, held for trading
[4] |
|
|
(3,415 |
) |
|
|
|
|
|
|
(698 |
) |
|
|
|
|
|
|
(5,840 |
) |
|
|
|
|
|
|
746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income (loss) |
|
$ |
(2,656 |
) |
|
|
|
|
|
$ |
185 |
|
|
|
|
|
|
$ |
(3,433 |
) |
|
|
|
|
|
$ |
3,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Yields calculated using investment income before investment expenses divided by the monthly weighted average invested
assets at cost, amortized cost, or adjusted carrying value, as applicable excluding collateral received associated with the
securities lending program and consolidated variable interest entity minority interests. Included in the fixed maturity
yield is Other income (loss) as it primarily relates to fixed maturities (see footnote [3] below). Included in the total
net investment income yield is investment expense. |
|
[2] |
|
Includes net investment income on short-term bonds. |
|
[3] |
|
Includes fees associated with securities lending activities of $11 and $50, respectively, for the three and nine months
ended September 30, 2008, and $29 and $67, respectively, for the three and nine months ended September 30, 2007. The
income from securities lending activities is included within fixed maturities. Also included are derivatives that qualify
for hedge accounting under SFAS 133. These derivatives hedge fixed maturities. |
|
[4] |
|
Includes investment income and mark-to-market effects of equity securities, held for trading. |
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Net investment income, excluding equity securities, held for trading, decreased $124, or 14%, and
$212, or 8%, for the three and nine months ended September 30, 2008, respectively, compared to the
prior year period. The decrease in net investment income for both periods was primarily due to a
decrease in investment yield for fixed maturities and limited partnership and other alternative
investments. The decrease in the fixed maturity yield primarily resulted from lower income on
variable rate securities due to decreases in short-term interest rates year over year. The
decrease in limited partnerships and other alternative investments yield was largely due to lower
returns on hedge funds and real estate partnerships as a result of the lack of liquidity in the
financial markets and a wider credit spread environment. Based upon the current interest rate and
credit environment, Life expects a lower average portfolio yield for 2008 as compared to 2007
levels primarily driven by lower yields on both fixed maturities and limited partnership and other
alternative investments.
The decrease in net investment income on equity securities, held for trading, for the three and
nine months ended September 30, 2008 compared to the prior year periods was primarily attributed to
a decline in the value of the underlying investment funds supporting the Japanese variable annuity
product due to negative market performance year over year.
The following table summarizes Lifes net realized capital gains and losses results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Gross gains on sale |
|
$ |
44 |
|
|
$ |
25 |
|
|
$ |
128 |
|
|
$ |
133 |
|
Gross losses on sale |
|
|
(89 |
) |
|
|
(45 |
) |
|
|
(244 |
) |
|
|
(137 |
) |
Impairments |
|
|
(1,760 |
) |
|
|
(75 |
) |
|
|
(2,115 |
) |
|
|
(109 |
) |
Japanese fixed annuity contract hedges, net [1] |
|
|
36 |
|
|
|
15 |
|
|
|
13 |
|
|
|
3 |
|
Periodic net coupon settlements on credit derivatives/Japan |
|
|
(8 |
) |
|
|
(9 |
) |
|
|
(26 |
) |
|
|
(34 |
) |
SFAS 157 transition impact [2] |
|
|
|
|
|
|
|
|
|
|
(650 |
) |
|
|
|
|
GMWB derivatives, net |
|
|
(133 |
) |
|
|
(141 |
) |
|
|
(256 |
) |
|
|
(252 |
) |
Other, net [3] |
|
|
(102 |
) |
|
|
(58 |
) |
|
|
(310 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital losses, before-tax |
|
$ |
(2,012 |
) |
|
$ |
(288 |
) |
|
$ |
(3,460 |
) |
|
$ |
(486 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Relates to the Japanese fixed annuity product (product and related derivative hedging instruments excluding periodic net coupon settlements). |
|
[2] |
|
Includes losses from SFAS 157 transition impact of $616, $10 and $24 related to the embedded derivatives within GMWB-US, GMWB-UK and GMAB
liabilities, respectively. |
|
[3] |
|
Primarily consists of changes in fair value on non-qualifying derivatives and other investment gains and losses. |
133
The circumstances giving rise to the net realized capital gains and losses in these components are
as follows:
|
|
|
|
|
Gross Gains and
Losses on Sale
|
|
|
|
Gross gains on sales for the three and nine months ended September 30, 2008 were predominantly
within fixed maturities and were primarily comprised of corporate securities. Gross losses on sales for
the three and nine months ended September 30, 2008 were primarily comprised of corporate securities, CMBS,
and municipal securities, as well as $17 of CLOs in the first quarter for which HIMCO is the collateral
manager. Gross gains and losses on sale, excluding the loss on CLOs, primarily resulted from the decision
to reallocate the portfolio to securities with more favorable risk/return profiles. For more information
regarding losses on the sale of HIMCO managed CLOs, refer to the Variable Interest Entities section below.
During the three and nine months ended September 30, 2008, securities sold at a loss were depressed, on
average, approximately 7% and 2%, respectively, at the respective periods impairment review date and were
deemed to be temporarily impaired. |
|
|
|
|
|
Gross gains and losses on sales for three and nine months ended September 30, 2007 were primarily
comprised of corporate securities. During the three and nine months ended September 30, 2007, securities
sold at a loss were depressed, on average, approximately 2% and 1%, respectively, at the respective
periods impairment review date and were deemed to be
temporarily impaired. |
|
|
|
|
|
Impairments
|
|
|
|
See the
Other-Than-Temporary Impairments section that follows for information
on impairment losses. |
|
|
|
|
|
SFAS 157
|
|
|
|
See Note 4 in the Notes to the Condensed Consolidated Financial Statements for a discussion of the
SFAS 157 transition impact. |
|
|
|
|
|
GMWB
|
|
|
|
See Note 4 in the Notes to the Condensed Consolidated Financial Statements for a discussion of
GMWB gains and losses. |
|
|
|
|
|
Other
|
|
|
|
Other, net losses for the three and nine months ended September 30, 2008 were primarily related to
net losses on credit derivatives of $106 and $314, respectively. The net losses on credit derivatives
were primarily due to significant credit spread widening on credit derivatives that assume credit
exposure. Included in the nine months ended September 30, 2008 were losses incurred in the first quarter
on HIMCO managed CLOs. For more information regarding these losses, refer to the Variable Interest
Entities section below. Also included were derivative related losses of $39 for the three and nine months
ended September 30, 2008 due to counterparty default related to the bankruptcy of Lehman Brothers Holdings
Inc. |
|
|
|
|
|
|
|
|
|
Other, net losses for the three and nine months ended September 30, 2007 were primarily driven by
the change in value of non-qualifying derivatives due to credit spread widening as well as fluctuations in
interest rates and foreign currency exchange rates. |
134
Property & Casualty
The primary investment objective for Property & Casualtys Ongoing Operations segment is to
maximize economic value while generating sufficient after-tax income to meet policyholder and
corporate obligations. For Property & Casualtys Other Operations segment, the investment
objective is to ensure the full and timely payment of all liabilities. Property & Casualtys
investment strategies are developed based on a variety of factors including business needs,
regulatory requirements and tax considerations.
The following table identifies the invested assets by type held as of September 30, 2008 and
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of Invested Assets |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Fixed maturities, available-for-sale, at fair value |
|
$ |
23,727 |
|
|
|
86.2 |
% |
|
$ |
27,205 |
|
|
|
88.8 |
% |
Equity securities, available-for-sale, at fair value |
|
|
741 |
|
|
|
2.7 |
% |
|
|
1,208 |
|
|
|
3.9 |
% |
Mortgage loans, at amortized cost [1] |
|
|
762 |
|
|
|
2.8 |
% |
|
|
671 |
|
|
|
2.2 |
% |
Limited partnerships and other alternative investments [2] |
|
|
1,407 |
|
|
|
5.1 |
% |
|
|
1,260 |
|
|
|
4.1 |
% |
Short-term investments |
|
|
827 |
|
|
|
3.0 |
% |
|
|
284 |
|
|
|
0.9 |
% |
Other investments |
|
|
62 |
|
|
|
0.2 |
% |
|
|
38 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
27,526 |
|
|
|
100.0 |
% |
|
$ |
30,666 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Consist of commercial and agricultural loans. |
|
[2] |
|
Includes hedge fund investments outside of limited partnerships and a real estate joint venture. |
Total investments decreased $3.1 billion since December 31, 2007, primarily as a result of
increased unrealized losses primarily due to a widening of credit spreads associated with fixed
maturities, partially offset by positive operating cash flows. Short-term investments increased as
a result of the investment of proceeds received from fixed maturities sold in anticipation of
investing in favorable risk/return opportunities.
Property & Casualtys limited partnerships and other alternative investment composition has not
significantly changed since December 31, 2007. Property & Casualty is currently evaluating its
allocation to limited partnerships and other alternative investments and plans to decrease its
investment in hedge funds over the next few years. The following table summarizes Property &
Casualtys limited partnerships and other alternative investments as of September 30, 2008 and
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of Limited Partnerships and Other Alternative Investments |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Hedge funds [1] |
|
$ |
780 |
|
|
|
55.4 |
% |
|
$ |
728 |
|
|
|
57.8 |
% |
Mortgage and real estate [2] |
|
|
318 |
|
|
|
22.6 |
% |
|
|
291 |
|
|
|
23.1 |
% |
Mezzanine debt [3] |
|
|
60 |
|
|
|
4.3 |
% |
|
|
48 |
|
|
|
3.8 |
% |
Private equity and other [4] |
|
|
249 |
|
|
|
17.7 |
% |
|
|
193 |
|
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,407 |
|
|
|
100.0 |
% |
|
$ |
1,260 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Hedge funds include investments in funds of funds as well as direct
funds. The hedge funds of funds invest in approximately 25 to 50
different hedge funds within a variety of investment styles. Examples
of hedge fund strategies include long/short equity or credit, event
driven strategies and structured credit. |
|
[2] |
|
Mortgage and real estate funds consist of investments in funds whose
assets consist of mortgage loans, participations in mortgage loans,
mezzanine loans or other notes which may be below investment grade
credit quality as well as equity real estate. Also included is the
investment in a real estate joint venture. |
|
[3] |
|
Mezzanine debt funds consist of investments in funds whose assets
consist of subordinated debt that often times incorporates
equity-based options such as warrants and a limited amount of direct
equity investments. |
|
[4] |
|
Private equity and other funds primarily consist of investments in
funds whose assets typically consist of a diversified pool of
investments in small non-public businesses with high growth potential. |
135
Investment Results
The following table below summarizes Property & Casualtys net investment income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Amount |
|
|
Yield [1] |
|
|
Amount |
|
|
Yield [1] |
|
|
Amount |
|
|
Yield [1] |
|
|
Amount |
|
|
Yield [1] |
|
Fixed maturities [2] |
|
$ |
364 |
|
|
|
5.5 |
% |
|
$ |
383 |
|
|
|
5.7 |
% |
|
$ |
1,092 |
|
|
|
5.5 |
% |
|
$ |
1,126 |
|
|
|
5.6 |
% |
Equity securities, available-for-sale |
|
|
17 |
|
|
|
5.8 |
% |
|
|
12 |
|
|
|
5.6 |
% |
|
|
56 |
|
|
|
6.2 |
% |
|
|
34 |
|
|
|
5.9 |
% |
Mortgage loans |
|
|
11 |
|
|
|
5.8 |
% |
|
|
11 |
|
|
|
6.7 |
% |
|
|
30 |
|
|
|
5.6 |
% |
|
|
28 |
|
|
|
6.4 |
% |
Limited partnerships and other
alternative investments |
|
|
(42 |
) |
|
|
(11.8 |
%) |
|
|
19 |
|
|
|
7.2 |
% |
|
|
(45 |
) |
|
|
(4.4 |
%) |
|
|
114 |
|
|
|
16.4 |
% |
Other [3] |
|
|
(8 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
Investment expense |
|
|
(7 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income, before-tax |
|
$ |
335 |
|
|
|
4.6 |
% |
|
$ |
407 |
|
|
|
5.6 |
% |
|
$ |
1,091 |
|
|
|
4.9 |
% |
|
$ |
1,266 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income,
after-tax [4] |
|
$ |
248 |
|
|
|
3.4 |
% |
|
$ |
296 |
|
|
|
4.1 |
% |
|
$ |
810 |
|
|
|
3.7 |
% |
|
$ |
933 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Yields calculated using investment income before investment expenses divided by the monthly weighted average invested
assets at cost, amortized cost, or adjusted carrying value, as applicable excluding collateral received associated with the
securities lending program. Included in the fixed maturity yield is Other income (loss) as it primarily relates to fixed
maturities (see footnote [3] below). Included in the total net investment income yield is investment expense. |
|
[2] |
|
Includes net investment income on short-term bonds. |
|
[3] |
|
Includes fees associated with securities lending activities of $4 and $22, respectively, for the three and nine months
ended September 30, 2008 and $14 and $28, respectively, for the three and nine months ended September 30, 2007. Also
included are derivatives that qualify for hedge accounting under SFAS 133. These derivatives hedge fixed maturities. |
|
[4] |
|
Due to significant holdings in tax-exempt investments, after-tax net investment income and yield are also included. |
Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
Before-tax net investment income decreased $72, or 18%, and $175, or 14%, and after-tax net
investment income decreased $48, or 16%, and $123, or 13%, for the three and nine months ended
September 30, 2008, respectively, compared to the prior year period. The decrease in net
investment income for both periods was primarily due to a decrease in investment yield for fixed
maturities and limited partnership and other alternative investments in 2008. The decrease in
fixed maturity yield primarily resulted from lower income on variable rate securities due to a
decrease in short-term interest rates year over year. The decrease in limited partnerships and
other alternative investments yield was largely due to lower returns on hedge funds and real estate
partnerships as a result of the lack of liquidity in the financial markets and a wider credit
spread environment. Based upon the current interest rate and credit environment, Property &
Casualty expects a lower average portfolio yield for 2008 as compared to 2007 levels primarily
driven by lower yields on both fixed maturities and limited partnership and other alternative
investments.
The following table summarizes Property & Casualtys net realized capital gains and losses results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Gross gains on sale |
|
$ |
12 |
|
|
$ |
31 |
|
|
$ |
95 |
|
|
$ |
121 |
|
Gross losses on sale |
|
|
(82 |
) |
|
|
(36 |
) |
|
|
(195 |
) |
|
|
(98 |
) |
Impairments |
|
|
(1,312 |
) |
|
|
(35 |
) |
|
|
(1,425 |
) |
|
|
(56 |
) |
Periodic net coupon settlements on credit derivatives |
|
|
2 |
|
|
|
5 |
|
|
|
5 |
|
|
|
11 |
|
Other, net [1] |
|
|
(48 |
) |
|
|
(40 |
) |
|
|
(111 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital losses, before-tax |
|
$ |
(1,428 |
) |
|
$ |
(75 |
) |
|
$ |
(1,631 |
) |
|
$ |
(76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Primarily consists of changes in fair value on non-qualifying derivatives and other
investment gains and losses. |
136
The circumstances giving rise to the net realized capital gains and losses in these components are
as follows:
|
|
|
|
|
Gross Gains and
Losses on Sale
|
|
|
|
Gross gains on sales for the three and nine months ended September 30, 2008 were predominantly
within fixed maturities and were comprised of corporate and municipal securities. Gross losses on sales
for the three and nine months ended September 30, 2008, were primarily comprised of financial services
securities, as well as $19 of CLOs in the first quarter for which HIMCO is the collateral manager. Gross
gains and losses on sale, excluding the loss on CLOs, primarily resulted from the decision to reallocate
the portfolio to securities with more favorable risk/return profiles. For more information regarding
losses on the sale of HIMCO managed CLOs, refer to the Variable Interest Entities section below. During
the three and nine months ended September 30, 2008, securities sold at a loss were depressed, on average,
approximately 6% and 3%, respectively at the respective periods impairment review date and were deemed
to be temporarily impaired. |
|
|
|
|
|
Gross gains and losses on sales for three and nine months ended September 30, 2007 were primarily
comprised of foreign government, corporate, and municipal securities. During the three and nine months
ended September 30, 2007, securities sold at a loss were depressed, on average, approximately 1% and 2%,
respectively, at the respective periods impairment review date and were deemed to be temporarily
impaired. |
|
|
|
|
|
Impairments
|
|
|
|
See the
Other-Than-Temporary Impairments section that follows for information
on impairment losses. |
|
|
|
|
|
Other
|
|
|
|
Other, net losses for the three and nine months ended September 30, 2008 were primarily related
to net losses on credit derivatives of $42 and $118, respectively. The net losses on credit derivatives
were primarily due to significant credit spread widening on credit derivatives that assume credit
exposure. Included in the nine months ended September 30, 2008 were losses incurred in the first quarter
on HIMCO managed CLOs. For more information regarding these losses, refer to the Variable Interest
Entities section below. Also included were derivative related losses of $7 for the three and nine months
ended September 30, 2008 due to counterparty default related to the bankruptcy of Lehman Brothers
Holdings Inc. |
|
|
|
|
|
|
|
|
|
Other, net losses for the three and nine months ended September 30, 2007 were primarily driven by
the change in value of non-qualifying derivatives due to credit
spread widening. |
Corporate
The investment objective of Corporate is to raise capital through financing activities to support
the Life and Property & Casualty operations of the Company and to maintain sufficient funds to
support the cost of those financing activities including the payment of interest for The Hartford
Financial Services Group, Inc. (HFSG) issued debt and dividends to shareholders of The Hartfords
common stock. As of September 30, 2008 and December 31, 2007, Corporate held $72 and $308,
respectively, of fixed maturity investments, $733 and $160, respectively, of short-term investments
and $81 and $103, respectively, of equity securities. Short-term investments increased in
anticipation of repayment of approximately $530 of senior notes that will mature during the
fourth quarter of 2008. For further information on these notes, see Capital Resources and
Liquidity section under Liquidity Requirements. As of September 30, 2008 and December 31, 2007, a
put option agreement for the Companys contingent capital facility with a fair value of $40 and $43
was included in Other invested assets.
Securities Lending
The Company participates in securities lending programs to generate additional income, whereby
certain domestic fixed income securities are loaned from the Companys portfolio to qualifying
third party borrowers, in return for collateral in the form of cash or U.S. government securities.
Borrowers of these securities provide collateral of 102% of the market value of the loaned
securities and can return the securities to the Company for cash at varying maturity dates. As of
September 30, 2008, the Company loaned securities with a fair value of $3.9 billion and held
collateral against the loaned securities in the amount of $4.0 billion. The following table
represents when the borrowers can return the loaned securities to the Company and, in turn, when
the cash collateral would be returned to the borrower.
|
|
|
|
|
|
|
Cash Collateral |
|
Thirty days or less |
|
$ |
992 |
|
Thirty one to 90 days |
|
|
598 |
|
Over three to six months |
|
|
1,322 |
|
Over six to nine months |
|
|
692 |
|
Over nine months to one year |
|
|
417 |
|
|
|
|
|
Total |
|
$ |
4,021 |
|
|
|
|
|
137
Variable Interest Entities (VIEs)
The Company is involved with variable interest entities as a collateral manager and as an investor
through normal investment activities. The Companys involvement includes providing investment
management and administrative services for a fee, and holding ownership or other investment
interests in the entities.
VIEs may or may not be consolidated on the Companys condensed consolidated financial statements.
When the Company is the primary beneficiary of the VIE, all of the assets of the VIE are
consolidated into the Companys financial statements. The Company also reports a liability for the
portion of the VIE that represents the minority interest of other investors in the VIE. When the
Company concludes that it is not the primary beneficiary of the VIE, the fair value of the
Companys investment in the VIE is recorded in the Companys financial statements.
The Companys 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.
As of September 30, 2008 and December 31, 2007, the Company had relationships with four and seven
VIEs, respectively, where the Company was the primary beneficiary. The following table sets forth
the carrying value of assets and liabilities, and the Companys maximum exposure to loss on these
consolidated VIEs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Total |
|
|
Total |
|
|
Maximum
Exposure |
|
|
Total |
|
|
Total |
|
|
Maximum
Exposure |
|
|
|
Assets |
|
|
Liabilities
[1] |
|
|
to Loss |
|
|
Assets |
|
|
Liabilities
[1] |
|
|
to Loss |
|
CLOs [2] |
|
$ |
336 |
|
|
$ |
41 |
|
|
$ |
291 |
|
|
$ |
128 |
|
|
$ |
47 |
|
|
$ |
107 |
|
Limited partnerships |
|
|
301 |
|
|
|
51 |
|
|
|
251 |
|
|
|
309 |
|
|
|
47 |
|
|
|
262 |
|
Other investments [3] |
|
|
261 |
|
|
|
107 |
|
|
|
148 |
|
|
|
377 |
|
|
|
71 |
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
898 |
|
|
$ |
199 |
|
|
$ |
690 |
|
|
$ |
814 |
|
|
$ |
165 |
|
|
$ |
686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Creditors have no recourse against the Company in the event of default by the VIE. |
|
[2] |
|
The Company provides collateral management services and earns a fee associated with these structures. |
|
[3] |
|
Other investments include one unlevered investment bank loan fund for which the Company provides collateral management
services and earns an associated fee. As of December 31, 2007, two investment structures were also included that were
backed by preferred securities. |
As of September 30, 2008 and December 31, 2007, the Company also held variable interests in four
and five VIEs, respectively, where the Company is not the primary beneficiary. These investments
have been held by the Company for two years. The Companys maximum exposure to loss from these
non-consolidated VIEs as of September 30, 2008 and December 31, 2007 was $410 and $150,
respectively.
As of December 31, 2007, Hartford Investment Management Company (HIMCO) was the collateral
manager of four VIEs with provisions that allowed for termination if the fair value of the
aggregate referenced bank loan portfolio declined below a stated level. These VIEs were market
value CLOs that invested in senior secured bank loans through total return swaps. Two of these
market value CLOs were consolidated, and two were not consolidated. During the first quarter of
2008, the fair value of the aggregate referenced bank loan portfolio declined below the stated
level in all four market value CLOs and the total return swap counterparties terminated the
transactions. Three of these CLOs were restructured from market value CLOs to cash flow CLOs
without market value triggers and the remaining CLO is expected to terminate by the end of 2008.
The Company realized a capital loss of $90, before-tax, from the termination of these CLOs. In
connection with the restructurings, the Company purchased interests in two of the resulting VIEs,
one of which the Company is the primary beneficiary. These purchases resulted in an increase in
the Companys maximum exposure to loss for both consolidated and non-consolidated VIEs.
138
Other-Than-Temporary Impairments
The following table identifies the Companys other-than-temporary impairments by type of security.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
ABS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-prime residential mortgages |
|
$ |
117 |
|
|
$ |
54 |
|
|
$ |
198 |
|
|
$ |
54 |
|
Other |
|
|
27 |
|
|
|
5 |
|
|
|
27 |
|
|
|
17 |
|
CMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
70 |
|
|
|
|
|
|
|
93 |
|
|
|
|
|
IOs |
|
|
59 |
|
|
|
|
|
|
|
59 |
|
|
|
|
|
CRE CDOs |
|
|
225 |
|
|
|
|
|
|
|
357 |
|
|
|
|
|
CMOs/MBS |
|
|
37 |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services |
|
|
1,198 |
|
|
|
7 |
|
|
|
1,293 |
|
|
|
9 |
|
Other |
|
|
286 |
|
|
|
26 |
|
|
|
344 |
|
|
|
56 |
|
Equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services |
|
|
1,052 |
|
|
|
3 |
|
|
|
1,119 |
|
|
|
11 |
|
Other |
|
|
2 |
|
|
|
2 |
|
|
|
5 |
|
|
|
5 |
|
Other |
|
|
4 |
|
|
|
13 |
|
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments |
|
$ |
3,077 |
|
|
$ |
110 |
|
|
$ |
3,545 |
|
|
$ |
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a comprehensive security monitoring process to identify and evaluate individual
securities that may be other-than-temporarily impaired. The process includes a quarterly review of
the entire portfolio using a screening process to identify specific securities where the fair value
compared to the amortized cost or cost, as applicable, is below established thresholds. In
addition, the Company uses other monitoring criteria, such as ratings, ratings downgrades, payment
defaults and internal credit monitoring watch lists. The unrealized losses on securities
identified are then evaluated based on individual facts and circumstances to determine if the
impairment is other-than-temporary.
For the three and nine months ended September 30, 2008, impairments of $3,077 and $3,545,
respectively, were concentrated in subordinated fixed maturities and preferred equities within the
financial services sector as well as in structured securities.
Of the $2,250 and $2,412 of impairments on financial services companies for the three and nine
months ended September 30, 2008, we do not anticipate substantial recovery on $785 of securities
due to bankruptcy, financial restructurings, or concerns about the issuers ability to continue to
make contractual payments. The remaining balance primarily
relates to securities that experienced
extensive credit spread widening and the Company could not reasonably assert that the security
would recover in value in a reasonable period of time, generally two years.
For these securities, the Company expects to recover principal and interest in
accordance with the securitys contractual terms.
Impairments for structured securities totaled $535 and $771, respectively, for the three and nine
months ended September 30, 2008. For these securities, the Company determines impairments by
modeling cash flows in a severe negative economic outlook scenario. If the results of this cash
flow modeling indicate an economic loss, the Company takes an impairment. During the third quarter
the economic assumptions used in this modeling worsened from the second quarter modeling. In CMBS,
for example, the third quarter model anticipates higher unemployment and a more severe contraction
of GDP. Primarily as a result of these aforementioned negative changes in economic outlook along
with further price deterioration on previously impaired securities, the Company recognized
impairments of $117 on sub-prime residential mortgages and $354 on CMBS. Currently, almost all
CMBS and sub-prime ABS securities continue to receive contractual principal and interest payments.
The remaining impairments for the three and nine months ended September 30, 2008 of $292 and $362,
respectively, were comprised of securities in various sectors, primarily non-financial services
corporate securities, that experienced significant credit spread widening and for which the Company
was uncertain of its intent to retain the investments for a period of time sufficient to allow for
recovery.
For the three and nine months ended September 30, 2007, impairments of $110 and $165, respectively,
were recorded on securities that had declined in value for which the Company was uncertain of its
intent to retain the investments for a period of time sufficient to allow for recovery.
139
INVESTMENT CREDIT RISK
The Company has established investment credit policies that focus on the credit quality of obligors
and counterparties, limit credit concentrations, encourage diversification and require frequent
creditworthiness reviews. Investment activity, including setting of policy and defining acceptable
risk levels, is subject to review and approval by senior management.
The Company invests primarily in securities which are rated investment grade and has established
exposure limits, diversification standards and review procedures for all credit risks including
borrower, issuer and counterparty. Creditworthiness of specific obligors is determined by
consideration of external determinants of creditworthiness, typically ratings assigned by
nationally recognized ratings agencies and is supplemented by an internal credit evaluation.
Obligor, asset sector and industry concentrations are subject to established Company limits and are
monitored on a regular basis.
The Company is not exposed to any credit concentration risk of a single issuer greater than 10% of
the Companys stockholders equity other than U.S. government and U.S. 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 4 of Notes to Consolidated
Financial Statements in The Hartfords 2007 Form 10-K Annual Report.
Derivative Instruments
In the normal course of business, the Company uses various derivative counterparties in executing
its derivative transactions. The use of counterparties creates credit risk that the counterparty
may not perform in accordance with the terms of the derivative transaction. The Company has
developed a derivative counterparty exposure policy which limits the Companys exposure to credit
risk.
The derivative counterparty exposure policy establishes market-based credit limits, favors
long-term financial stability and creditworthiness of the counterparty and typically requires
credit enhancement/credit risk reducing agreements.
The Company minimizes the credit risk of derivative instruments by entering into transactions with
high quality counterparties rated A2/A or better, which are monitored by the Companys internal
compliance unit and reviewed frequently by senior management. In addition, the compliance unit
monitors counterparty credit exposure on a monthly basis to ensure compliance with Company policies
and statutory limitations. The Company also maintains a policy of requiring that derivative
contracts, other than exchange traded contracts, currency forward contracts, and certain embedded
derivatives, be governed by an International Swaps and Derivatives Association Master Agreement
which is structured by legal entity and by counterparty and permits right of offset.
For each counterparty, 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 days 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 exposure policy thresholds.
In accordance with industry standards and the contractual agreements, collateral is typically
settled on the next business day. The Company has exposure to credit risk for amounts below the
exposure thresholds which are uncollateralized as well as for market fluctuations that may occur
between contractual settlement periods of collateral movements.
The maximum uncollateralized threshold for a derivative counterparty for a single legal entity is
$10. The Company currently transacts derivatives in five legal entities and therefore the maximum
combined threshold for a single counterparty over all legal entities that use derivatives is $50.
In addition, the Company may have exposure to multiple counterparties in a single corporate family
due to a common credit support provider. As of September 30, 2008, the maximum combined threshold
for all counterparties under a single credit support provider over all legal entities that use
derivatives is $100. Based on the contractual terms of the collateral agreements, these thresholds
may be immediately reduced due to a downgrade in a counterpartys credit rating.
For the three and nine months ended September 30, 2008, the Company has incurred losses of $46 on
derivative instruments due to counterparty default related to the bankruptcy of Lehman Brothers
Holdings Inc. These losses were a result of the contractual collateral threshold amounts and open
collateral calls in excess of such amounts immediately prior to the bankruptcy filing, as well as
interest rate and credit spread movements from the date of the last collateral call to the date of
the bankruptcy filing.
In addition to counterparty credit risk, the Company enters into credit derivative instruments to
manage credit exposure. Credit derivatives used by the Company include credit default swaps,
credit index swaps, and total return swaps.
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
exposure, will typically only make a payment if there is a credit event and such payment will be
equal to the notional value of the swap contract less the value of the referenced security issuers
debt obligation. A credit event is generally defined as default on contractually obligated
interest or principal payments or bankruptcy of the referenced entity.
Credit index swaps and total return swaps involve the periodic exchange of payments with other
parties, at specified intervals, calculated using the agreed upon index and notional principal
amounts. Generally, no cash or principal payments are exchanged at the inception of the contract.
140
The Company uses credit derivatives to assume credit risk from and reduce credit risk to a single
entity, referenced index, or asset pool. The credit default swaps in which the Company assumes
credit risk reference investment grade single corporate issuers, baskets of up to five corporate
issuers and diversified portfolios of corporate issuers. The diversified portfolios of corporate
issuers are established within sector concentration limits and are typically divided into tranches
which possess different credit ratings ranging from AAA through the CCC rated first loss position.
In addition to the credit default swaps that assume credit exposure, the Company also 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 credit default swaps are carried on the balance sheet at fair value. The Company received
upfront premium payments on certain credit default swaps, which reduces the Companys overall
credit exposure. The following table summarizes the credit default swaps used by the Company to
manage credit risk within the portfolio, excluding credit default swaps with offsetting positions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Default Swaps |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Initial |
|
|
|
|
|
|
|
|
|
|
Initial |
|
|
|
|
|
|
Notional |
|
|
Premium |
|
|
Fair |
|
|
Notional |
|
|
Premium |
|
|
Fair |
|
|
|
Amount |
|
|
Received |
|
|
Value |
|
|
Amount |
|
|
Received |
|
|
Value |
|
Assuming credit risk |
|
$ |
1,392 |
|
|
$ |
(157 |
) |
|
$ |
(592 |
) |
|
$ |
2,715 |
|
|
$ |
(203 |
) |
|
$ |
(416 |
) |
Reducing credit risk |
|
|
3,596 |
|
|
|
33 |
|
|
|
133 |
|
|
|
5,166 |
|
|
|
(1 |
) |
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit default swaps |
|
$ |
4,988 |
|
|
$ |
(124 |
) |
|
$ |
(459 |
) |
|
$ |
7,881 |
|
|
$ |
(204 |
) |
|
$ |
(335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, the Company continued to reduce overall credit risk exposure to general credit spread
movements by both reducing and rebalancing the total notional amount of the credit default swap
portfolio. The Companys credit default swap portfolio has experienced and may continue to
experience market value fluctuations based upon certain market conditions, including credit spread
movement of specific referenced entities. For the three and nine months ended September 30, 2008,
the Company realized losses of $148 and $266, respectively, on credit default swaps.
Subsequent to September 30, 2008, the Company terminated its $310 of notional amount related to
credit derivatives that reference the first loss position of a basket of corporate issuers, which
resulted in a realized loss of $21 in October 2008.
Prior to the first quarter of 2008, the Company also assumed credit exposure through credit index
swaps referencing AAA rated CMBS indices. During the first and second quarter of 2008, the Company
realized a loss of $100 and $3, before-tax, respectively, as a result of these swaps maturing as
well as the Company eliminating exposure to the remaining swaps by entering into offsetting
positions. As of September 30, 2008, the Company does not have exposure to CMBS through credit
derivatives.
Available-for-Sale Securities
The following table identifies fixed maturities by credit quality on a consolidated basis as of
September 30, 2008 and December 31, 2007. The ratings referenced below are based on the ratings of
a nationally recognized rating organization or, if not rated, assigned based on the Companys
internal analysis of such securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Fixed Maturities by Credit Quality |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
Amortized |
|
|
|
|
|
|
Total Fair |
|
|
Amortized |
|
|
|
|
|
|
Total Fair |
|
|
|
Cost |
|
|
Fair Value |
|
|
Value |
|
|
Cost |
|
|
Fair Value |
|
|
Value |
|
AAA |
|
$ |
19,886 |
|
|
$ |
17,613 |
|
|
|
25.1 |
% |
|
$ |
28,547 |
|
|
$ |
28,318 |
|
|
|
35.4 |
% |
AA |
|
|
13,929 |
|
|
|
12,410 |
|
|
|
17.7 |
% |
|
|
11,326 |
|
|
|
10,999 |
|
|
|
13.7 |
% |
A |
|
|
18,710 |
|
|
|
17,069 |
|
|
|
24.3 |
% |
|
|
16,999 |
|
|
|
17,030 |
|
|
|
21.3 |
% |
BBB |
|
|
14,992 |
|
|
|
13,794 |
|
|
|
19.7 |
% |
|
|
15,093 |
|
|
|
14,974 |
|
|
|
18.7 |
% |
United States Government/Government agencies |
|
|
5,754 |
|
|
|
5,785 |
|
|
|
8.3 |
% |
|
|
5,165 |
|
|
|
5,229 |
|
|
|
6.5 |
% |
BB & below |
|
|
3,736 |
|
|
|
3,420 |
|
|
|
4.9 |
% |
|
|
3,594 |
|
|
|
3,505 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
77,007 |
|
|
$ |
70,091 |
|
|
|
100.0 |
% |
|
$ |
80,724 |
|
|
$ |
80,055 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investment ratings as a percentage of total fixed maturities experienced a shift from
AAA rated to AA and A rated since December 31, 2007 primarily due to rating agency downgrades of
monoline insurers.
141
The following table identifies fixed maturity and equity securities classified as
available-for-sale on a consolidated basis as of September 30, 2008 and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Available-for-Sale Securities by Type |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
ABS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto |
|
$ |
580 |
|
|
$ |
|
|
|
$ |
(57 |
) |
|
$ |
523 |
|
|
|
0.8 |
% |
|
$ |
692 |
|
|
$ |
|
|
|
$ |
(16 |
) |
|
$ |
676 |
|
|
|
0.9 |
% |
CLOs [1] |
|
|
2,908 |
|
|
|
2 |
|
|
|
(438 |
) |
|
|
2,472 |
|
|
|
3.5 |
% |
|
|
2,590 |
|
|
|
|
|
|
|
(114 |
) |
|
|
2,476 |
|
|
|
3.1 |
% |
Credit cards |
|
|
1,047 |
|
|
|
|
|
|
|
(77 |
) |
|
|
970 |
|
|
|
1.4 |
% |
|
|
957 |
|
|
|
3 |
|
|
|
(22 |
) |
|
|
938 |
|
|
|
1.2 |
% |
RMBS [2] |
|
|
2,614 |
|
|
|
3 |
|
|
|
(623 |
) |
|
|
1,994 |
|
|
|
2.8 |
% |
|
|
2,999 |
|
|
|
10 |
|
|
|
(343 |
) |
|
|
2,666 |
|
|
|
3.3 |
% |
Student loan |
|
|
766 |
|
|
|
|
|
|
|
(168 |
) |
|
|
598 |
|
|
|
0.9 |
% |
|
|
786 |
|
|
|
1 |
|
|
|
(40 |
) |
|
|
747 |
|
|
|
0.9 |
% |
Other [3] |
|
|
1,285 |
|
|
|
7 |
|
|
|
(225 |
) |
|
|
1,067 |
|
|
|
1.5 |
% |
|
|
1,491 |
|
|
|
19 |
|
|
|
(98 |
) |
|
|
1,412 |
|
|
|
1.7 |
% |
CMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
11,766 |
|
|
|
25 |
|
|
|
(1,809 |
) |
|
|
9,982 |
|
|
|
14.2 |
% |
|
|
13,641 |
|
|
|
126 |
|
|
|
(421 |
) |
|
|
13,346 |
|
|
|
16.7 |
% |
CRE CDOs |
|
|
1,834 |
|
|
|
|
|
|
|
(937 |
) |
|
|
897 |
|
|
|
1.3 |
% |
|
|
2,243 |
|
|
|
1 |
|
|
|
(390 |
) |
|
|
1,854 |
|
|
|
2.3 |
% |
Interest only (IOs) |
|
|
1,453 |
|
|
|
31 |
|
|
|
(81 |
) |
|
|
1,403 |
|
|
|
2.0 |
% |
|
|
1,741 |
|
|
|
117 |
|
|
|
(27 |
) |
|
|
1,831 |
|
|
|
2.3 |
% |
CMOs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
856 |
|
|
|
14 |
|
|
|
(6 |
) |
|
|
864 |
|
|
|
1.3 |
% |
|
|
1,191 |
|
|
|
32 |
|
|
|
(4 |
) |
|
|
1,219 |
|
|
|
1.5 |
% |
Non-agency backed [4] |
|
|
425 |
|
|
|
1 |
|
|
|
(55 |
) |
|
|
371 |
|
|
|
0.5 |
% |
|
|
525 |
|
|
|
4 |
|
|
|
(3 |
) |
|
|
526 |
|
|
|
0.7 |
% |
Corporate [5] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic industry |
|
|
2,719 |
|
|
|
36 |
|
|
|
(110 |
) |
|
|
2,645 |
|
|
|
3.8 |
% |
|
|
2,508 |
|
|
|
61 |
|
|
|
(34 |
) |
|
|
2,535 |
|
|
|
3.2 |
% |
Capital goods |
|
|
2,393 |
|
|
|
27 |
|
|
|
(122 |
) |
|
|
2,298 |
|
|
|
3.3 |
% |
|
|
2,194 |
|
|
|
86 |
|
|
|
(26 |
) |
|
|
2,254 |
|
|
|
2.8 |
% |
Consumer cyclical |
|
|
2,689 |
|
|
|
29 |
|
|
|
(150 |
) |
|
|
2,568 |
|
|
|
3.7 |
% |
|
|
3,011 |
|
|
|
87 |
|
|
|
(60 |
) |
|
|
3,038 |
|
|
|
3.8 |
% |
Consumer non-cyclical |
|
|
3,551 |
|
|
|
37 |
|
|
|
(126 |
) |
|
|
3,462 |
|
|
|
4.9 |
% |
|
|
3,008 |
|
|
|
89 |
|
|
|
(37 |
) |
|
|
3,060 |
|
|
|
3.8 |
% |
Energy |
|
|
1,727 |
|
|
|
22 |
|
|
|
(106 |
) |
|
|
1,643 |
|
|
|
2.3 |
% |
|
|
1,595 |
|
|
|
71 |
|
|
|
(12 |
) |
|
|
1,654 |
|
|
|
2.1 |
% |
Financial services |
|
|
8,967 |
|
|
|
106 |
|
|
|
(879 |
) |
|
|
8,194 |
|
|
|
11.7 |
% |
|
|
11,153 |
|
|
|
227 |
|
|
|
(512 |
) |
|
|
10,868 |
|
|
|
13.5 |
% |
Technology and
communications |
|
|
4,156 |
|
|
|
74 |
|
|
|
(284 |
) |
|
|
3,946 |
|
|
|
5.6 |
% |
|
|
3,763 |
|
|
|
181 |
|
|
|
(40 |
) |
|
|
3,904 |
|
|
|
4.9 |
% |
Transportation |
|
|
558 |
|
|
|
6 |
|
|
|
(45 |
) |
|
|
519 |
|
|
|
0.8 |
% |
|
|
401 |
|
|
|
12 |
|
|
|
(13 |
) |
|
|
400 |
|
|
|
0.5 |
% |
Utilities |
|
|
5,022 |
|
|
|
86 |
|
|
|
(319 |
) |
|
|
4,789 |
|
|
|
6.8 |
% |
|
|
4,500 |
|
|
|
181 |
|
|
|
(104 |
) |
|
|
4,577 |
|
|
|
5.7 |
% |
Other [6] |
|
|
1,656 |
|
|
|
2 |
|
|
|
(190 |
) |
|
|
1,468 |
|
|
|
2.1 |
% |
|
|
1,985 |
|
|
|
27 |
|
|
|
(104 |
) |
|
|
1,908 |
|
|
|
2.4 |
% |
Government/Government
agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
886 |
|
|
|
26 |
|
|
|
(37 |
) |
|
|
875 |
|
|
|
1.2 |
% |
|
|
999 |
|
|
|
59 |
|
|
|
(5 |
) |
|
|
1,053 |
|
|
|
1.3 |
% |
United States |
|
|
1,824 |
|
|
|
35 |
|
|
|
(7 |
) |
|
|
1,852 |
|
|
|
2.6 |
% |
|
|
836 |
|
|
|
22 |
|
|
|
(3 |
) |
|
|
855 |
|
|
|
1.1 |
% |
MBS |
|
|
2,726 |
|
|
|
16 |
|
|
|
(20 |
) |
|
|
2,722 |
|
|
|
3.9 |
% |
|
|
2,757 |
|
|
|
26 |
|
|
|
(20 |
) |
|
|
2,763 |
|
|
|
3.5 |
% |
Municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,113 |
|
|
|
7 |
|
|
|
(91 |
) |
|
|
1,029 |
|
|
|
1.5 |
% |
|
|
1,376 |
|
|
|
33 |
|
|
|
(23 |
) |
|
|
1,386 |
|
|
|
1.7 |
% |
Tax-exempt |
|
|
11,486 |
|
|
|
188 |
|
|
|
(734 |
) |
|
|
10,940 |
|
|
|
15.6 |
% |
|
|
11,776 |
|
|
|
394 |
|
|
|
(67 |
) |
|
|
12,103 |
|
|
|
15.1 |
% |
Redeemable preferred
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
77,007 |
|
|
$ |
780 |
|
|
$ |
(7,696 |
) |
|
$ |
70,091 |
|
|
|
100.0 |
% |
|
$ |
80,724 |
|
|
$ |
1,869 |
|
|
$ |
(2,538 |
) |
|
$ |
80,055 |
|
|
|
100.0 |
% |
Equity securities,
available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services |
|
|
1,042 |
|
|
|
|
|
|
|
(66 |
) |
|
|
976 |
|
|
|
|
|
|
|
2,062 |
|
|
|
13 |
|
|
|
(224 |
) |
|
|
1,851 |
|
|
|
|
|
Other |
|
|
603 |
|
|
|
197 |
|
|
|
(46 |
) |
|
|
754 |
|
|
|
|
|
|
|
549 |
|
|
|
205 |
|
|
|
(10 |
) |
|
|
744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities,
available-for-sale [7] |
|
$ |
78,652 |
|
|
$ |
977 |
|
|
$ |
(7,808 |
) |
|
$ |
71,821 |
|
|
|
|
|
|
$ |
83,335 |
|
|
$ |
2,087 |
|
|
$ |
(2,772 |
) |
|
$ |
82,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
As of September 30, 2008, 99% of these senior secured bank loan CLOs were AAA rated with an average subordination of 29%. |
|
[2] |
|
Includes securities with an amortized cost and fair value of $14 and $11, respectively, as of September 30, 2008, and $40
and $37, respectively, as of December 31, 2007, which were backed by pools of loans issued to prime borrowers. Includes
securities with an amortized cost and fair value of $92 and $69, respectively, as of September 30, 2008, and $96 and $87,
respectively, as of December 31, 2007, which were backed by pools of loans issued to Alt-A borrowers. |
|
[3] |
|
Includes CDO securities with an amortized cost and fair value of $17 and $5, respectively, as of September 30, 2008, and
$16 and $15, respectively, as of December 31, 2007, that contain a below-prime residential mortgage loan component.
Typically these CDOs are also backed by assets other than below-prime loans. |
|
[4] |
|
Includes securities with an amortized cost and fair value of $221 and $185, respectively, as of September 30, 2008, and
$270 as of December 31, 2007, which were backed by pools of loans issued to Alt-A borrowers. |
|
[5] |
|
As of September 30, 2008 and December 31, 2007, 92% of corporate securities were rated investment grade. |
|
[6] |
|
Includes structured investments with an amortized cost and fair value of $682 and $586, respectively, as of September 30,
2008 and $782 and $730, respectively, as of December 31, 2007. The underlying securities supporting these investments are
primarily diversified pools of investment grade corporate issuers which can withstand a 15% cumulative default rate,
assuming a 35% recovery. |
|
[7] |
|
Gross unrealized gains represent gains of $535, $436, and $6 for Life, Property & Casualty, and Corporate, respectively, as
of September 30, 2008 and $1,339, $734, and $14, respectively, as of December 31, 2007. Gross unrealized losses represent
losses of $5,620, $2,183, and $5 for Life, Property & Casualty, and Corporate, respectively, as of September 30, 2008 and
$1,985, $781, and $6, respectively, as of December 31, 2007. |
142
The Companys investment sector allocations as a percentage of total fixed maturities have changed
since December 31, 2007 due to portfolio reallocations. These reallocations have led to the
Company reducing its exposure to CMBS, financial services, and consumer cyclical, while increasing
allocations to consumer non-cyclical and short-term investments. The available-for-sale net
unrealized loss position increased $6.1 billion since December 31, 2007. The increase since
December 31, 2007 primarily resulted from credit spread widening, partially offset by interest
rates declining. Credit spreads widened primarily due to the continued deterioration in the U.S.
housing market, tightened lending conditions and the markets flight to quality securities as well
as the increased likelihood of a U.S. recession which has caused significant market strain. Early
steps taken by the government to stabilize the financial system have proven ineffective and
pressures continued to build throughout the third quarter. The sectors most significantly impacted
include financial services, residential and commercial mortgage backed investments, and consumer
loan backed investments. The following sections illustrate the Companys holdings and provide
commentary on the sectors identified above.
Financial Services
Financial companies are under severe stress driven initially by the housing market collapse which
has led to massive asset write-downs, concerns over capital adequacy, funding pressures and an
overall loss of confidence. The Company has exposure to the financial services sector
predominantly through banking, insurance, and brokerage firms. A comparison of fair value to
amortized cost is not indicative of the pricing of individual securities as rating downgrades and
impairments have occurred. The following table represents the Companys exposure to the financial
services sector included in the corporate and equity securities, available-for-sale lines in the
Consolidated Available-for-Sale Securities by Type table above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services by Credit Quality |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
Amortized |
|
|
|
|
|
|
Total Fair |
|
|
Amortized |
|
|
|
|
|
|
Total Fair |
|
|
|
Cost |
|
|
Fair Value |
|
|
Value |
|
|
Cost |
|
|
Fair Value |
|
|
Value |
|
AAA |
|
$ |
743 |
|
|
$ |
658 |
|
|
|
7.2 |
% |
|
$ |
635 |
|
|
$ |
614 |
|
|
|
4.8 |
% |
AA |
|
|
2,726 |
|
|
|
2,510 |
|
|
|
27.4 |
% |
|
|
4,141 |
|
|
|
4,008 |
|
|
|
31.5 |
% |
A |
|
|
5,471 |
|
|
|
5,019 |
|
|
|
54.7 |
% |
|
|
6,755 |
|
|
|
6,525 |
|
|
|
51.3 |
% |
BBB |
|
|
931 |
|
|
|
846 |
|
|
|
9.2 |
% |
|
|
1,378 |
|
|
|
1,283 |
|
|
|
10.1 |
% |
BB & below |
|
|
138 |
|
|
|
137 |
|
|
|
1.5 |
% |
|
|
306 |
|
|
|
289 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,009 |
|
|
$ |
9,170 |
|
|
|
100.0 |
% |
|
$ |
13,215 |
|
|
$ |
12,719 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
Sub-prime Residential Mortgage Loans
The Company has exposure to sub-prime and Alt-A residential mortgage backed securities included in
the Consolidated Available-for-Sale Securities by Type table above. These securities continue to
be affected by uncertainty surrounding the decline in home prices, negative technical factors,
along with deterioration in collateral performance.
The following table presents the Companys exposure to ABS supported by sub-prime mortgage loans by
current credit quality and vintage year, including direct investments in CDOs that contain a
sub-prime loan component, included in the RMBS and ABS other line in the Consolidated
Available-for-Sale Securities by Type table above. A comparison of fair value to amortized cost is
not indicative of the pricing of individual securities as rating downgrades and impairments have
occurred. Credit protection represents the current weighted average percentage, excluding wrapped
securities, of the outstanding capital structure subordinated to the Companys investment holding
that is available to absorb losses before the security incurs the first dollar loss of principal.
The table below does not include the Companys exposure to Alt-A residential mortgage loans, with
an amortized cost and fair value of $313 and $254, respectively, as of September 30, 2008, and $366
and $357, respectively, as of December 31, 2007. These securities were primarily rated AAA and
backed by 2007 vintage year collateral.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-Prime Residential Mortgage Loans [1] [2] [3] [4] |
|
|
September 30, 2008 [5] |
|
|
|
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 |
|
$ |
59 |
|
|
$ |
51 |
|
|
$ |
177 |
|
|
$ |
153 |
|
|
$ |
59 |
|
|
$ |
46 |
|
|
$ |
31 |
|
|
$ |
20 |
|
|
$ |
28 |
|
|
$ |
16 |
|
|
$ |
354 |
|
|
$ |
286 |
|
2004 |
|
|
114 |
|
|
|
101 |
|
|
|
361 |
|
|
|
298 |
|
|
|
6 |
|
|
|
5 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
483 |
|
|
|
405 |
|
2005 |
|
|
93 |
|
|
|
83 |
|
|
|
683 |
|
|
|
544 |
|
|
|
55 |
|
|
|
42 |
|
|
|
3 |
|
|
|
3 |
|
|
|
9 |
|
|
|
9 |
|
|
|
843 |
|
|
|
681 |
|
2006 |
|
|
221 |
|
|
|
178 |
|
|
|
142 |
|
|
|
71 |
|
|
|
21 |
|
|
|
13 |
|
|
|
75 |
|
|
|
38 |
|
|
|
53 |
|
|
|
14 |
|
|
|
512 |
|
|
|
314 |
|
2007 |
|
|
133 |
|
|
|
94 |
|
|
|
15 |
|
|
|
6 |
|
|
|
54 |
|
|
|
27 |
|
|
|
30 |
|
|
|
26 |
|
|
|
101 |
|
|
|
80 |
|
|
|
333 |
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
620 |
|
|
$ |
507 |
|
|
$ |
1,378 |
|
|
$ |
1,072 |
|
|
$ |
195 |
|
|
$ |
133 |
|
|
$ |
141 |
|
|
$ |
88 |
|
|
$ |
191 |
|
|
$ |
119 |
|
|
$ |
2,525 |
|
|
$ |
1,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection |
|
35.9% |
|
|
47.9% |
|
|
26.9% |
|
|
22.9% |
|
|
13.8% |
|
|
41.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
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 |
|
$ |
93 |
|
|
$ |
92 |
|
|
$ |
213 |
|
|
$ |
199 |
|
|
$ |
113 |
|
|
$ |
94 |
|
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
7 |
|
|
$ |
7 |
|
|
$ |
434 |
|
|
$ |
399 |
|
2004 |
|
|
133 |
|
|
|
131 |
|
|
|
358 |
|
|
|
324 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
495 |
|
|
|
458 |
|
2005 |
|
|
113 |
|
|
|
107 |
|
|
|
796 |
|
|
|
713 |
|
|
|
8 |
|
|
|
5 |
|
|
|
10 |
|
|
|
3 |
|
|
|
33 |
|
|
|
23 |
|
|
|
960 |
|
|
|
851 |
|
2006 |
|
|
457 |
|
|
|
413 |
|
|
|
67 |
|
|
|
55 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
8 |
|
|
|
2 |
|
|
|
537 |
|
|
|
475 |
|
2007 |
|
|
280 |
|
|
|
241 |
|
|
|
71 |
|
|
|
39 |
|
|
|
56 |
|
|
|
47 |
|
|
|
21 |
|
|
|
20 |
|
|
|
25 |
|
|
|
27 |
|
|
|
453 |
|
|
|
374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,076 |
|
|
$ |
984 |
|
|
$ |
1,505 |
|
|
$ |
1,330 |
|
|
$ |
181 |
|
|
$ |
151 |
|
|
$ |
44 |
|
|
$ |
33 |
|
|
$ |
73 |
|
|
$ |
59 |
|
|
$ |
2,879 |
|
|
$ |
2,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection |
|
32.7% |
|
|
47.3% |
|
|
21.1% |
|
|
19.6% |
|
|
17.1% |
|
|
39.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The vintage year represents the year the underlying loans in the pool were originated. |
|
[2] |
|
The Companys exposure to second lien residential mortgages is composed primarily of loans to prime and Alt-A borrowers, of
which approximately over half were wrapped by monoline insurers. These securities are included in the table above and have
an amortized cost and fair value of $183 and $110, respectively, as of September 30, 2008 and $260 and $217, respectively,
as of December 31, 2007. |
|
[3] |
|
As of September 30, 2008, the weighted average life of the sub-prime residential mortgage portfolio was 3.9 years. |
|
[4] |
|
As of September 30, 2008, approximately 83% of the portfolio is backed by adjustable rate mortgages. |
|
[5] |
|
The credit qualities above include downgrades since December 31, 2007. |
144
Commercial Mortgage Loans
The Company has observed some weakness in commercial real estate market fundamentals and expects
continued pressure on these fundamentals including increased vacancies, rising delinquencies, lower
rent growth, and declining property values. The following tables represent the Companys exposure
to CMBS bonds, commercial real estate CDOs, and IOs by current credit quality and vintage year. A
comparison of fair value to amortized cost is not indicative of the pricing of individual
securities as rating downgrades and impairments have occurred. Credit protection represents the
current weighted average percentage of the outstanding capital structure subordinated to the
Companys investment holding that is available to absorb losses before the security incurs the
first dollar loss of principal. This credit protection does not include any equity interest or
property value in excess of outstanding debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS Bonds [1] |
|
|
September 30, 2008 |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
BB and Below |
|
|
Total |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
2003 & Prior |
|
$ |
2,226 |
|
|
$ |
2,186 |
|
|
$ |
463 |
|
|
$ |
436 |
|
|
$ |
181 |
|
|
$ |
157 |
|
|
$ |
36 |
|
|
$ |
35 |
|
|
$ |
37 |
|
|
$ |
36 |
|
|
$ |
2,943 |
|
|
$ |
2,850 |
|
2004 |
|
|
725 |
|
|
|
691 |
|
|
|
85 |
|
|
|
72 |
|
|
|
65 |
|
|
|
50 |
|
|
|
23 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
898 |
|
|
|
829 |
|
2005 |
|
|
1,200 |
|
|
|
1,087 |
|
|
|
475 |
|
|
|
356 |
|
|
|
325 |
|
|
|
240 |
|
|
|
56 |
|
|
|
42 |
|
|
|
23 |
|
|
|
10 |
|
|
|
2,079 |
|
|
|
1,735 |
|
2006 |
|
|
2,757 |
|
|
|
2,307 |
|
|
|
411 |
|
|
|
297 |
|
|
|
481 |
|
|
|
342 |
|
|
|
389 |
|
|
|
262 |
|
|
|
43 |
|
|
|
20 |
|
|
|
4,081 |
|
|
|
3,228 |
|
2007 |
|
|
1,036 |
|
|
|
849 |
|
|
|
439 |
|
|
|
301 |
|
|
|
148 |
|
|
|
103 |
|
|
|
139 |
|
|
|
86 |
|
|
|
3 |
|
|
|
1 |
|
|
|
1,765 |
|
|
|
1,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,944 |
|
|
$ |
7,120 |
|
|
$ |
1,873 |
|
|
$ |
1,462 |
|
|
$ |
1,200 |
|
|
$ |
892 |
|
|
$ |
643 |
|
|
$ |
441 |
|
|
$ |
106 |
|
|
$ |
67 |
|
|
$ |
11,766 |
|
|
$ |
9,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection |
|
24.7% |
|
16.2% |
|
11.7% |
|
5.2% |
|
4.3% |
|
20.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
BB and Below |
|
|
Total |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
2003 & Prior |
|
$ |
2,666 |
|
|
$ |
2,702 |
|
|
$ |
495 |
|
|
$ |
502 |
|
|
$ |
289 |
|
|
$ |
292 |
|
|
$ |
30 |
|
|
$ |
32 |
|
|
$ |
46 |
|
|
$ |
49 |
|
|
$ |
3,526 |
|
|
$ |
3,577 |
|
2004 |
|
|
709 |
|
|
|
708 |
|
|
|
89 |
|
|
|
87 |
|
|
|
130 |
|
|
|
128 |
|
|
|
23 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
951 |
|
|
|
944 |
|
2005 |
|
|
1,280 |
|
|
|
1,258 |
|
|
|
479 |
|
|
|
454 |
|
|
|
404 |
|
|
|
389 |
|
|
|
85 |
|
|
|
76 |
|
|
|
24 |
|
|
|
21 |
|
|
|
2,272 |
|
|
|
2,198 |
|
2006 |
|
|
2,975 |
|
|
|
2,910 |
|
|
|
415 |
|
|
|
395 |
|
|
|
763 |
|
|
|
739 |
|
|
|
456 |
|
|
|
400 |
|
|
|
24 |
|
|
|
22 |
|
|
|
4,633 |
|
|
|
4,466 |
|
2007 |
|
|
1,365 |
|
|
|
1,342 |
|
|
|
461 |
|
|
|
431 |
|
|
|
240 |
|
|
|
220 |
|
|
|
190 |
|
|
|
165 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2,259 |
|
|
|
2,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,995 |
|
|
$ |
8,920 |
|
|
$ |
1,939 |
|
|
$ |
1,869 |
|
|
$ |
1,826 |
|
|
$ |
1,768 |
|
|
$ |
784 |
|
|
$ |
694 |
|
|
$ |
97 |
|
|
$ |
95 |
|
|
$ |
13,641 |
|
|
$ |
13,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection |
|
23.8% |
|
16.4% |
|
13.6% |
|
6.8% |
|
3.7% |
|
20.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The vintage year represents the year the pool of loans was originated. |
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS CRE CDOs [1] [2] [3] |
|
|
September 30, 2008 [4] |
|
|
|
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 |
|
$ |
184 |
|
|
$ |
113 |
|
|
$ |
97 |
|
|
$ |
48 |
|
|
$ |
84 |
|
|
$ |
26 |
|
|
$ |
64 |
|
|
$ |
17 |
|
|
$ |
33 |
|
|
$ |
7 |
|
|
$ |
462 |
|
|
$ |
211 |
|
2004 |
|
|
127 |
|
|
|
68 |
|
|
|
18 |
|
|
|
10 |
|
|
|
30 |
|
|
|
12 |
|
|
|
11 |
|
|
|
3 |
|
|
|
14 |
|
|
|
3 |
|
|
|
200 |
|
|
|
96 |
|
2005 |
|
|
93 |
|
|
|
58 |
|
|
|
67 |
|
|
|
36 |
|
|
|
65 |
|
|
|
22 |
|
|
|
11 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
236 |
|
|
|
119 |
|
2006 |
|
|
262 |
|
|
|
150 |
|
|
|
96 |
|
|
|
53 |
|
|
|
85 |
|
|
|
35 |
|
|
|
22 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
465 |
|
|
|
242 |
|
2007 |
|
|
147 |
|
|
|
97 |
|
|
|
108 |
|
|
|
48 |
|
|
|
112 |
|
|
|
36 |
|
|
|
28 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
395 |
|
|
|
189 |
|
2008 |
|
|
34 |
|
|
|
24 |
|
|
|
16 |
|
|
|
8 |
|
|
|
20 |
|
|
|
6 |
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
76 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
847 |
|
|
$ |
510 |
|
|
$ |
402 |
|
|
$ |
203 |
|
|
$ |
396 |
|
|
$ |
137 |
|
|
$ |
142 |
|
|
$ |
37 |
|
|
$ |
47 |
|
|
$ |
10 |
|
|
$ |
1,834 |
|
|
$ |
897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection |
|
28.3% |
|
22.6% |
|
18.9% |
|
18.3% |
|
57.2% |
|
25.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
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 |
|
$ |
378 |
|
|
$ |
320 |
|
|
$ |
88 |
|
|
$ |
73 |
|
|
$ |
64 |
|
|
$ |
42 |
|
|
$ |
13 |
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
543 |
|
|
$ |
445 |
|
2004 |
|
|
170 |
|
|
|
149 |
|
|
|
17 |
|
|
|
15 |
|
|
|
24 |
|
|
|
17 |
|
|
|
8 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
219 |
|
|
|
188 |
|
2005 |
|
|
178 |
|
|
|
153 |
|
|
|
63 |
|
|
|
52 |
|
|
|
60 |
|
|
|
42 |
|
|
|
6 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
307 |
|
|
|
252 |
|
2006 |
|
|
517 |
|
|
|
436 |
|
|
|
178 |
|
|
|
136 |
|
|
|
149 |
|
|
|
118 |
|
|
|
46 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
890 |
|
|
|
724 |
|
2007 |
|
|
107 |
|
|
|
97 |
|
|
|
92 |
|
|
|
80 |
|
|
|
72 |
|
|
|
58 |
|
|
|
13 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
284 |
|
|
|
245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,350 |
|
|
$ |
1,155 |
|
|
$ |
438 |
|
|
$ |
356 |
|
|
$ |
369 |
|
|
$ |
277 |
|
|
$ |
86 |
|
|
$ |
66 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,243 |
|
|
$ |
1,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection |
|
31.5% |
|
27.1% |
|
16.7% |
|
10.4% |
|
|
|
27.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The vintage year represents the year that the underlying collateral in the pool was originated. Individual CDO market value is
allocated by the proportion of collateral within each vintage year. |
|
[2] |
|
As of September 30, 2008, approximately 36% of the underlying CMBS CRE CDO collateral are seasoned, below investment grade securities. |
|
[3] |
|
For certain CDOs, the collateral manager has the ability to reinvest proceeds that become available, primarily from collateral
maturities. The increase in the 2008 vintage year represents reinvestment under these CDOs. |
|
[4] |
|
The credit qualities above include downgrades since December 31, 2007. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS IOs [1] |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
AAA |
|
|
AAA |
|
|
|
Amortized |
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
2003 & Prior |
|
$ |
462 |
|
|
$ |
462 |
|
|
$ |
548 |
|
|
$ |
606 |
|
2004 |
|
|
283 |
|
|
|
272 |
|
|
|
360 |
|
|
|
374 |
|
2005 |
|
|
366 |
|
|
|
339 |
|
|
|
422 |
|
|
|
430 |
|
2006 |
|
|
169 |
|
|
|
163 |
|
|
|
194 |
|
|
|
205 |
|
2007 |
|
|
173 |
|
|
|
167 |
|
|
|
217 |
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,453 |
|
|
$ |
1,403 |
|
|
$ |
1,741 |
|
|
$ |
1,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The vintage year represents the year the pool of loans was originated. |
In addition to commercial mortgage-backed securities, the Company has whole loan commercial real
estate investments. The carrying value of these investments was $6.2 billion and $5.4 billion as
of September 30, 2008 and December 31, 2007, respectively. The Companys mortgage loans are
collateralized by a variety of commercial and agricultural properties. The mortgage loans are
geographically dispersed throughout the United States and by property type. At September 30, 2008,
the Company held one delinquent mortgage loan with a carrying value of $60, however, the value of
the underlying collateral exceeds the carrying value. Accordingly, the Company had no valuation
allowance for mortgage loans at September 30, 2008.
146
Consumer Loans
The Company continues to see weakness in consumer credit fundamentals. Rising delinquency and loss
rates have been driven by the softening economy and higher unemployment rates. Delinquencies and
losses on consumer loans rose during the third quarter of 2008 and the Company expects this trend
to continue throughout the year. However, the Company expects its ABS consumer loan holdings to
face limited credit concerns, as the borrower collateral quality and structural credit enhancement
of the securities is sufficient to absorb a significantly higher level of defaults than are
currently anticipated. The following table presents the Companys exposure to ABS consumer loans
by credit quality.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS Consumer Loans |
|
|
September 30, 2008 |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
BB and Below |
|
|
Total |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Credit card [1] |
|
$ |
438 |
|
|
$ |
416 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
128 |
|
|
$ |
125 |
|
|
$ |
417 |
|
|
$ |
378 |
|
|
$ |
58 |
|
|
$ |
46 |
|
|
$ |
1,047 |
|
|
$ |
970 |
|
Auto [2] |
|
|
160 |
|
|
|
150 |
|
|
|
30 |
|
|
|
29 |
|
|
|
154 |
|
|
|
137 |
|
|
|
205 |
|
|
|
181 |
|
|
|
31 |
|
|
|
26 |
|
|
|
580 |
|
|
|
523 |
|
Student loan [3] |
|
|
294 |
|
|
|
220 |
|
|
|
332 |
|
|
|
278 |
|
|
|
140 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
766 |
|
|
|
598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
892 |
|
|
$ |
786 |
|
|
$ |
368 |
|
|
$ |
312 |
|
|
$ |
422 |
|
|
$ |
362 |
|
|
$ |
622 |
|
|
$ |
559 |
|
|
$ |
89 |
|
|
$ |
72 |
|
|
$ |
2,393 |
|
|
$ |
2,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
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 |
|
Credit card [1] |
|
$ |
166 |
|
|
$ |
166 |
|
|
$ |
19 |
|
|
$ |
19 |
|
|
$ |
162 |
|
|
$ |
162 |
|
|
$ |
610 |
|
|
$ |
591 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
957 |
|
|
$ |
938 |
|
Auto [2] |
|
|
274 |
|
|
|
270 |
|
|
|
27 |
|
|
|
27 |
|
|
|
151 |
|
|
|
148 |
|
|
|
198 |
|
|
|
192 |
|
|
|
42 |
|
|
|
39 |
|
|
|
692 |
|
|
|
676 |
|
Student loan [3] |
|
|
313 |
|
|
|
297 |
|
|
|
333 |
|
|
|
317 |
|
|
|
140 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
786 |
|
|
|
747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
753 |
|
|
$ |
733 |
|
|
$ |
379 |
|
|
$ |
363 |
|
|
$ |
453 |
|
|
$ |
443 |
|
|
$ |
808 |
|
|
$ |
783 |
|
|
$ |
42 |
|
|
$ |
39 |
|
|
$ |
2,435 |
|
|
$ |
2,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
As of September 30, 2008, approximately 9% of the securities were issued by lenders that lend primarily to sub-prime borrowers. |
|
[2] |
|
Includes monoline insured securities with an amortized cost and fair value of $53 and $50, respectively, at September 30,
2008, and amortized cost and fair value of $49 at December 31, 2007. Additionally, approximately 5% of the auto consumer
loan-backed securities were issued by lenders whose primary business is to sub-prime borrowers. |
|
[3] |
|
Includes monoline insured securities with an amortized cost and fair value of $102 and $55, respectively, at September 30,
2008, and amortized cost and fair value of $102 and $93, respectively, at December 31, 2007. Additionally, approximately half
of the student loan-backed exposure is guaranteed by the Federal Family Education Loan Program, with the remainder comprised
of loans to prime-borrowers. |
Monoline Insured Securities
Monoline insurers guarantee the timely payment of principal and interest of certain securities.
Municipalities will often purchase monoline insurance to wrap a security issuance in order to
benefit from better market execution. Recent rating agency downgrades of bond insurers have not
had a significant impact on the fair value of the Companys insured portfolio; however, these
downgrades have caused a shift in rating quality from AAA rated to AA and A rated since December
31, 2007. As of September 30, 2008, the fair value of the Companys total monoline insured
securities was $7.3 billion, with the fair value of the insured municipal securities totaling $6.6
billion. At September 30, 2008 and December 31, 2007, the overall credit quality of the municipal
bond portfolio, including the benefits of monoline insurance, was AA and AA+, respectively, and
excluding the benefits of monoline insurance, the overall credit quality was AA-. In addition to
the insured municipal securities, as of September 30, 2008, the Company has other insured
securities with a fair value of $682. These securities include the below prime mortgage-backed
securities and other consumer loan receivables discussed above and corporate securities. The
Company also has direct investments in monoline insurers with a fair value of approximately $76 as
of September 30, 2008.
147
Fixed Maturity and Equity Securities, Available-for-Sale, Consolidated Unrealized Loss
The following table presents the Companys unrealized loss aging for total fixed maturity and
equity securities classified as available-for-sale as of September 30, 2008 and December 31, 2007,
by length of time the security was in an unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Securities |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
2,777 |
|
|
$ |
19,417 |
|
|
$ |
18,324 |
|
|
$ |
(1,093 |
) |
|
|
1,581 |
|
|
$ |
10,879 |
|
|
$ |
10,445 |
|
|
$ |
(434 |
) |
Greater than three to six months |
|
|
1,002 |
|
|
|
8,280 |
|
|
|
7,575 |
|
|
|
(705 |
) |
|
|
1,052 |
|
|
|
11,857 |
|
|
|
10,954 |
|
|
|
(903 |
) |
Greater than six to nine months |
|
|
746 |
|
|
|
5,899 |
|
|
|
5,047 |
|
|
|
(852 |
) |
|
|
813 |
|
|
|
10,086 |
|
|
|
9,354 |
|
|
|
(732 |
) |
Greater than nine to twelve months |
|
|
459 |
|
|
|
5,175 |
|
|
|
4,151 |
|
|
|
(1,024 |
) |
|
|
262 |
|
|
|
2,756 |
|
|
|
2,545 |
|
|
|
(211 |
) |
Greater than twelve months |
|
|
2,136 |
|
|
|
20,710 |
|
|
|
16,576 |
|
|
|
(4,134 |
) |
|
|
1,735 |
|
|
|
10,563 |
|
|
|
10,071 |
|
|
|
(492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,120 |
|
|
$ |
59,481 |
|
|
$ |
51,673 |
|
|
$ |
(7,808 |
) |
|
|
5,443 |
|
|
$ |
46,141 |
|
|
$ |
43,369 |
|
|
$ |
(2,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the Companys unrealized loss aging for total fixed maturity and
equity securities classified as available-for-sale depressed over 20% as of September 30, 2008 and
December 31, 2007, by length of time the security was in an unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized Assets Depressed over 20% |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
437 |
|
|
$ |
6,003 |
|
|
$ |
3,975 |
|
|
$ |
(2,028 |
) |
|
|
138 |
|
|
$ |
1,263 |
|
|
$ |
835 |
|
|
$ |
(428 |
) |
Greater than three to six months |
|
|
120 |
|
|
|
1,381 |
|
|
|
780 |
|
|
|
(601 |
) |
|
|
12 |
|
|
|
146 |
|
|
|
91 |
|
|
|
(55 |
) |
Greater than six to nine months |
|
|
106 |
|
|
|
1,125 |
|
|
|
682 |
|
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than nine to twelve months |
|
|
4 |
|
|
|
24 |
|
|
|
16 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
3 |
|
|
|
13 |
|
|
|
7 |
|
|
|
(6 |
) |
|
|
6 |
|
|
|
40 |
|
|
|
26 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
670 |
|
|
$ |
8,546 |
|
|
$ |
5,460 |
|
|
$ |
(3,086 |
) |
|
|
156 |
|
|
$ |
1,449 |
|
|
$ |
952 |
|
|
$ |
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Securities Depressed over 20% |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
391 |
|
|
$ |
3,084 |
|
|
$ |
2,300 |
|
|
$ |
(784 |
) |
|
|
116 |
|
|
$ |
635 |
|
|
$ |
492 |
|
|
$ |
(143 |
) |
Greater than three to six months |
|
|
27 |
|
|
|
331 |
|
|
|
230 |
|
|
|
(101 |
) |
|
|
9 |
|
|
|
74 |
|
|
|
21 |
|
|
|
(53 |
) |
Greater than six to nine months |
|
|
31 |
|
|
|
301 |
|
|
|
205 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than nine to twelve months |
|
|
6 |
|
|
|
31 |
|
|
|
21 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
455 |
|
|
$ |
3,747 |
|
|
$ |
2,756 |
|
|
$ |
(991 |
) |
|
|
125 |
|
|
$ |
709 |
|
|
$ |
513 |
|
|
$ |
(196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Securities Depressed over 20% |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
828 |
|
|
$ |
9,087 |
|
|
$ |
6,275 |
|
|
$ |
(2,812 |
) |
|
|
254 |
|
|
$ |
1,898 |
|
|
$ |
1,327 |
|
|
$ |
(571 |
) |
Greater than three to six months |
|
|
147 |
|
|
|
1,712 |
|
|
|
1,010 |
|
|
|
(702 |
) |
|
|
21 |
|
|
|
220 |
|
|
|
112 |
|
|
|
(108 |
) |
Greater than six to nine months |
|
|
137 |
|
|
|
1,426 |
|
|
|
887 |
|
|
|
(539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than nine to twelve months |
|
|
10 |
|
|
|
55 |
|
|
|
37 |
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
3 |
|
|
|
13 |
|
|
|
7 |
|
|
|
(6 |
) |
|
|
6 |
|
|
|
40 |
|
|
|
26 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,125 |
|
|
$ |
12,293 |
|
|
$ |
8,216 |
|
|
$ |
(4,077 |
) |
|
|
281 |
|
|
$ |
2,158 |
|
|
$ |
1,465 |
|
|
$ |
(693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
The following tables present the Companys unrealized loss aging for total fixed maturity and
equity securities classified as available-for-sale depressed over 50% (included in the tables
above) as of September 30, 2008 and December 31, 2007, by length of time the security was in an
unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized Assets Depressed over 50%
(included in the depressed over 20% table above) |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
108 |
|
|
$ |
1,095 |
|
|
$ |
388 |
|
|
$ |
(707 |
) |
|
|
27 |
|
|
$ |
124 |
|
|
$ |
47 |
|
|
$ |
(77 |
) |
Greater than three to six months |
|
|
38 |
|
|
|
338 |
|
|
|
118 |
|
|
|
(220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than six to nine months |
|
|
8 |
|
|
|
44 |
|
|
|
12 |
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than nine to twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
154 |
|
|
$ |
1,477 |
|
|
$ |
518 |
|
|
$ |
(959 |
) |
|
|
27 |
|
|
$ |
124 |
|
|
$ |
47 |
|
|
$ |
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Securities Depressed over 50%
(included in the depressed over 20% table above) |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
23 |
|
|
$ |
51 |
|
|
$ |
16 |
|
|
$ |
(35 |
) |
|
|
9 |
|
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
(2 |
) |
Greater than three to six months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
17 |
|
|
|
1 |
|
|
|
(16 |
) |
Greater than six to nine months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than nine to twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
23 |
|
|
$ |
51 |
|
|
$ |
16 |
|
|
$ |
(35 |
) |
|
|
13 |
|
|
$ |
20 |
|
|
$ |
2 |
|
|
$ |
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Securities Depressed over 50%
(included in the depressed over 20% table above) |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
131 |
|
|
$ |
1,146 |
|
|
$ |
404 |
|
|
$ |
(742 |
) |
|
|
36 |
|
|
$ |
127 |
|
|
$ |
48 |
|
|
$ |
(79 |
) |
Greater than three to six months |
|
|
38 |
|
|
|
338 |
|
|
|
118 |
|
|
|
(220 |
) |
|
|
4 |
|
|
|
17 |
|
|
|
1 |
|
|
|
(16 |
) |
Greater than six to nine months |
|
|
8 |
|
|
|
44 |
|
|
|
12 |
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than nine to twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
177 |
|
|
$ |
1,528 |
|
|
$ |
534 |
|
|
$ |
(994 |
) |
|
|
40 |
|
|
$ |
144 |
|
|
$ |
49 |
|
|
$ |
(95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized Assets
The majority of securitized assets depressed over 20% as well as over 50% for six consecutive
months are primarily related to CMBS and sub-prime RMBS. Based upon the Companys cash flow
modeling in a severe negative economic outlook, which shows no loss of principle and interest, and
the Companys assertion of its ability and intent to retain the securities until recovery, it has
been determined that these securities are temporarily impaired as of September 30, 2008.
149
All Other Securities
The majority of all other securities depressed over 20% for six consecutive months or greater in
the tables above primarily relate to Corporate Financial Services securities that include corporate
bonds as well as preferred equity issued by large high quality financial institutions that are
lower in the capital structure, and as a result have incurred greater price depressions. Based
upon the Companys analysis of these securities and current macroeconomic conditions, the Company
expects to see significant price recovery on these securities within a reasonable period of time,
generally two years. For further discussion on these securities, see the discussion below the
Consolidated Available-for-Sale Securities by Type table in this section above.
Future changes in the fair value of the investment portfolio are primarily dependent on the extent
of future issuer credit losses, return of liquidity, and changes in general market conditions,
including interest rates and credit spread movements.
As part of the Companys ongoing security monitoring process by a committee of investment and
accounting professionals, the Company has reviewed its investment portfolio and concluded that
there were no additional other-than-temporary impairments as of September 30, 2008 and December 31,
2007. During this analysis, the Company asserts its intent and ability to retain until recovery
those securities judged to be temporarily impaired. Once identified, these securities are
systematically restricted from trading unless approved by the committee. The committee will only
authorize the sale of these securities based on predefined criteria that relate to events that
could not have been foreseen at the time the committee rendered its judgment on the Companys
intent and ability to retain such securities until recovery. Examples of the criteria include, but
are not limited to, the deterioration in the issuers creditworthiness, a change in regulatory
requirements or a major business combination or major disposition.
The evaluation for other-than-temporary impairments is a quantitative and qualitative process,
which is subject to risks and uncertainties in the determination of whether declines in the fair
value of investments are other-than-temporary. The risks and uncertainties include changes in
general economic conditions, the issuers financial condition or near term recovery prospects and
the effects of changes in interest rates and credit spreads. In addition, for securitized
financial assets with contractual cash flows (e.g., ABS and CMBS), projections of expected future
cash flows may change based upon new information regarding the performance of the underlying
collateral. As of September 30, 2008 and December 31, 2007, managements expectation of the
discounted future cash flows on these securities was in excess of the associated securities
amortized cost. For a further discussion, see Evaluation of Other-Than-Temporary Impairments on
Available-for-Sale Securities included in the Critical Accounting Estimates section of the MD&A
and Other-Than-Temporary Impairments on Available-for-Sale Securities section in Note 1 of Notes
to Consolidated Financial Statements both of which are included in The Hartfords 2007 Form 10-K
Annual Report.
150
CAPITAL MARKETS RISK MANAGEMENT
The Hartford has a disciplined approach to managing risks associated with its capital markets and
asset/liability management activities. Investment portfolio management is organized to focus
investment management expertise on the specific classes of investments, while asset/liability
management is the responsibility of a dedicated risk management unit supporting Life and Property &
Casualty operations. Derivative instruments are utilized in compliance with established Company
policy and regulatory requirements and are monitored internally and reviewed by senior management.
Market Risk
The Hartford is exposed to market risk, primarily relating to the market price and/or cash flow
variability associated with changes in interest rates, credit spreads, including issuer defaults,
equity prices or market indices, and foreign currency exchange rates. The Hartford is also exposed
to credit and counterparty repayment risk. The Company analyzes interest rate risk using various
models including parametric models that forecast cash flows of the liabilities and the supporting
investments, including derivative instruments, under various market scenarios. For further
discussion of market risk, see the Capital Markets Risk Management section of the MD&A in The
Hartfords 2007 Form 10-K Annual Report.
Interest Rate Risk
The Companys exposure to interest rate risk relates to the market price and/or cash flow
variability associated with the changes in market interest rates. The Company manages its exposure
to interest rate risk through asset allocation limits, asset/liability duration matching and
through the use of derivatives. For further discussion of interest rate risk, see the Interest
Rate Risk discussion within the Capital Markets Risk Management section of the MD&A in The
Hartfords 2007 Form 10-K Annual Report.
The Company is also exposed to interest rate risk based upon the discount rate assumption
associated with the Companys pension and other postretirement benefit obligations. The discount
rate assumption is based upon an interest rate yield curve comprised of bonds rated AA or higher
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 Notes to
Consolidated Financial Statements in The Hartfords 2007 Form 10-K Annual Report.
Credit Risk
The Company is exposed to credit risk within our investment portfolio and through derivative
counterparties. Credit risk relates to the uncertainty of an obligors continued ability to make
timely payments in accordance with the contractual terms of the instrument or contract. The
Company manages credit risk through established investment credit policies which address quality of
obligors and counterparties, credit concentration limits, diversification requirements and
acceptable risk levels under expected and stressed scenarios. These policies are regularly
reviewed and approved by senior management and by the Companys Board of Directors.
The derivative counterparty exposure policy establishes market-based credit limits, favors
long-term financial stability and creditworthiness of the counterparty and typically requires
credit enhancement/credit risk reducing agreements. The Company minimizes the credit risk in
derivative instruments by entering into transactions with high quality counterparties rated A2/A or
better, which are monitored by the Companys internal compliance unit and reviewed frequently by
senior management.
Derivative counterparty credit risk is measured as the amount owed to the Company based upon
current market conditions and potential payment obligations between the Company and its
counterparties. Credit exposures are generally quantified daily based on the prior business days
market value and collateral is pledged to and held by, or on behalf of, the Company to the extent
the current value of derivative instruments exceeds the exposure policy thresholds. In accordance
with industry standards and the contractual agreements, collateral is typically settled on the next
business day. The Company has exposure to credit risk for amounts below the exposure thresholds
which are uncollateralized as well as for market fluctuations that may occur between contractual
settlement periods of collateral movements.
Counterparty exposure thresholds are developed for each of the counterparties based upon their
ratings. The maximum uncollateralized threshold for a derivative counterparty for a single legal
entity is $10. The Company currently transacts derivatives in five legal entities and therefore
the maximum combined threshold for a single counterparty over all legal entities that use
derivatives is $50. In addition, the Company may have exposure to multiple counterparties in a
single corporate family due to a common credit support provider. As of September 30, 2008, the
maximum combined threshold for all counterparties under a single credit support provider over all
legal entities that use derivatives is $100. Based on the contractual terms of the collateral
agreements, these thresholds may be immediately reduced due to a downgrade in a counterpartys
credit rating.
In addition to counterparty credit risk, the Company enters into credit derivative instruments,
including credit default, index and total return swaps, in which the Company assumes credit risk
from or reduces credit risk to a single entity, referenced index, or asset pool, in exchange for
periodic payments. For further information on credit derivatives, see the Investment Credit Risk
section.
151
The Company is also exposed to credit spreads risk related to security market price and cash flows
associated with changes in credit spreads. Credit spread widening will reduce the fair value of
the investment portfolio and will increase net investment income on new purchases. This will also
result in losses associated with credit based non-qualifying derivatives where the Company assumes
credit exposure. If issuer credit spreads increase significantly or for an extended period of
time, it would likely result in higher other-than-temporary impairments. Credit spreads tightening
will reduce net investment income associated with new purchases of fixed maturities and increase
the fair value of the investment portfolio. During 2008, credit spread widening resulted in a
significant increase in the Companys unrealized losses and other-than-temporary impairments. For
further discussion of sectors most significantly impacted, see the Investment Credit Risk
section.
Lifes Equity Products Risk
The Companys Life operations are significantly influenced by changes in the U.S., Japanese, and
other global equity markets. Appreciation or depreciation in equity markets impacts certain assets
and liabilities related to the Companys variable products and the Companys net income derived
from those products. The Companys variable products include variable annuities, mutual funds, and
variable life insurance sold to retail and institutional customers.
Generally, declines in equity markets will:
1) |
|
reduce the value of assets under management and the amount of fee income generated from those
assets; |
|
2) |
|
reduce the value of equity securities, held for trading, for international variable
annuities, the related policyholder funds and benefits payable, and the amount of fee income
generated from those annuities; |
|
3) |
|
increase the liability for guaranteed minimum withdrawal and accumulation benefits (GMWB and
GMAB) resulting in realized capital losses; |
|
4) |
|
increase the value of derivative assets used to hedge GMWB resulting in realized capital
gains; |
|
5) |
|
increase the Companys net amount at risk for guaranteed death benefits and guaranteed income
benefits; and |
|
6) |
|
decrease the Companys actual gross profits, resulting in a negative true-up to current
period DAC amortization |
A prolonged or precipitous market decline may:
1) |
|
turn customer sentiment toward equity-linked products negative, causing a decline in sales; |
|
2) |
|
cause a significant decrease in the range of reasonable estimates of future gross profits
used in the Companys quantitative assessment of its modeled estimates of gross profits.
If, in a given financial statement period, the modeled estimates of gross profits are
determined to be unreasonable, the Company will accelerate the amount of DAC amortization in
that period. Particularly in the case of variable annuities, an acceleration of DAC
amortization could potentially cause a material adverse deviation in that periods net income,
but it would not affect the Companys cash flow or liquidity position. See Life Estimated
Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with
Variable Annuity and Other Universal Life-Type Contracts within Critical Accounting Estimates
for further information on DAC and related equity market sensitivities; and increase costs under the Companys hedging programs. |
In addition to the impact on U.S. GAAP results, Lifes statutory financial results also have material exposure to
equity market volatility due to the issuance of variable annuity contracts with guarantees. Specifically, in scenarios
where equity markets decline substantially, as we have seen during 2008, we would expect statutory net losses or lower
statutory net income and significant increases in the amount of statutory surplus Life would have to devote to maintain
targeted rating agency, regulatory risk based capital (RBC) ratios and other similar solvency margin ratios. In
addition, extreme declines in equity market levels can result in dramatic increases in required reserves and diminish
the Companys statutory capital. In an attempt to mitigate these risks, in addition to the Companys use of
reinsurance, hedging instruments and other risk management techniques, described below, the Company maintains capital
resources to mitigate the statutory net income and surplus risks associated with equity market declines. For general
information on this topic, see Variable Annuity Equity Risk Impact on Statutory Distributable Earnings in The Companys
Form 10-K for further information.
Equity Risk Management
The Company has made considerable investment in analyzing current and potential future market risk
exposures arising from a number of factors, including but not limited to, product guarantees (GMDB,
GMWB, GMAB, and GMIB), equity market and interest rate risks (in both the U.S. and Japan) and
foreign currency exchange rates. The Company evaluates these risks individually and, increasingly,
in the aggregate to determine the risk profiles of all of its products and to judge their potential
impacts on financial metrics including U.S. GAAP net income and statutory capital. The Company
manages the equity market risks embedded in these product guarantees through product design,
reinsurance, and hedging programs. The accounting for various benefit guarantees offered with
variable annuity contracts can be significantly different and may influence the form of risk
management employed by the Company.
Many benefit guarantees meet the definition of an embedded derivative under SFAS 133 (GMWB and
GMAB) and are recorded at fair value, incorporating changes in equity indices and equity index
volatility, with changes in fair value recorded in net income. However, for other benefit
guarantees, certain contract features that define how the contract holder can access the value and
substance of the guaranteed benefit change the accounting from SFAS 133 to SOP 03-1. For contracts
where the contract holder can only obtain the value of the guaranteed benefit upon the occurrence
of an insurable event such as death (GMDB) or when the benefit received is in substance a long-term
financing (GMIB) the accounting for the benefit is prescribed by
SOP 03-1.
152
As a result of these significant accounting differences, the liability for guarantees recorded
under SOP 03-1 may be significantly different than if it was recorded under SFAS 133 and vice
versa. In addition, the conditions in the capital markets in Japan vs. those in the U.S. are
sufficiently different that if the Companys GMWB product currently offered in the U.S. were
offered in Japan, the capital market conditions in Japan would have a significant impact on the
valuation of the GMWB, irrespective of the accounting model. The same would hold true if the
Companys GMIB product currently offered in Japan were to be offered in the U.S. Capital market
conditions in the U.S. would have a significant impact on the valuation of the GMIB.
The Company believes its long-term success in the variable annuity market will continue to be aided
by successful innovation that allows the Company to offer attractive product features in tandem
with prudent equity market risk management. The Companys variable annuity market share in the U.S.
has generally increased during periods when it has recently introduced new products to the market.
In contrast, the Companys market share has generally decreased when competitors introduce products
that cause an issuer to assume larger amounts of equity and other market risk than the Company is
confident it can prudently manage. In the absence of this innovation, the Companys market share
in one or more of its markets could decline.
The Company expects to evolve its risk management strategies over time to mitigate its aggregate
exposures to market-driven changes in U.S. GAAP equity, statutory capital and other economic
metrics. Because these strategies target a reduction of a combination of exposures rather than a
single one, further risk management changes could cause volatility of U.S. GAAP net income to
increase, particularly if the Company places an increased relative weight on protection of
statutory surplus in future strategies.
The Company employs additional strategies to manage equity market risk in addition to the
derivative and reinsurance strategy described above that economically hedges the fair value of the
U.S. GMWB rider. Notably, the Company purchases one and two year S&P 500 Index put option contracts
to partially economically hedge certain other liabilities that could increase if the equity markets decline.
During the three months ended September 30, 2008, the Company also entered into two hedges on the
S&P 500 index to partially economically hedge the statutory reserve impact of equity exposure arising
primarily from GMDB and GMWB obligations against a decline in the equity markets to certain levels.
Because these strategies are intended to partially hedge certain equity-market sensitive
liabilities calculated under statutory accounting (see Capital Resources and Liquidity), changes in
the value of the options may not be closely aligned to changes in liabilities determined in
accordance with U.S. GAAP, causing volatility in U.S. GAAP net income.
Guaranteed Minimum Withdrawal Benefits and Guaranteed Minimum Accumulation Benefits
The majority of the Companys U.S. and U.K. variable annuities are sold with a GMWB living benefit
rider, which is accounted for under SFAS 133. Declines in the equity market may increase the
Companys exposure to benefits under the GMWB contracts and will increase the Companys existing
liability for those benefits.
For example, a GMWB and/or GMAB contract is in the money if the contract holders guaranteed
remaining benefit becomes greater than the account value. As of September 30, 2008 and December 31,
2007, 57.9% and 19.4%, respectively, of all unreinsured U.S. GMWB in-force contracts were in the
money. For U.S. and U.K. GMWB contracts that were in the money the Companys exposure to the
guaranteed remaining benefit, after reinsurance, as of September 30, 2008 and December 31, 2007,
was $3.4 billion and $146, respectively. For GMAB contracts that were in the money the Companys
exposure, as of September 30, 2008 and December 31, 2007, was $500 and $38, respectively.
Significant declines in equity markets since September 30, 2008, have significantly increased our
exposure to these guarantees.
However, the only ways the GMWB contract holder can monetize the excess of the GRB over the account
value of the contract is upon death or if their account value is reduced to a contractually
specified minimum level, through a combination of a series of withdrawals that do not exceed a
specific percentage of the premiums paid per year and market declines. If the account value is
reduced to the contractually specified minimum level, the contract holder will receive an annuity
equal to the remaining GRB and for the Companys life-time GMWB products can continue beyond the
GRB. As the amount of the excess of the GRB over the account value can fluctuate with equity
market returns on a daily basis, and the ultimate 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 $3.4 billion.
For GMAB benefits, the only ways the contract holder can monetize the excess of the GRB over the
account value of the contract is upon death or by waiting until the end of the contractual deferral
period of 10 years. As the amount of the excess of the GRB over the account value can fluctuate
with equity market returns on a daily basis, the ultimate amount to be paid by the Company, if any,
is uncertain and could be significantly more or less than $500.
The Company uses reinsurance to manage the risk exposure for a portion of contracts issued with
GMWB riders. Contracts not covered by reinsurance generate volatility in net income each quarter
as the underlying embedded derivative liabilities are recorded at fair value. In order to minimize
the volatility associated with the non-reinsured GMWB liabilities, the Company established a
dynamic hedging program.
The Company uses hedging instruments to hedge its non-reinsured GMWB exposure. These instruments
include interest rate futures and swaps, variance swaps, S&P 500 and NASDAQ index put options and
futures contracts. The Company also uses EAFE Index swaps to hedge GMWB exposure to international
equity markets. The hedging program involves a detailed monitoring of policyholder behavior and
capital markets conditions on a daily basis and rebalancing of the hedge position as needed. While
the Company actively manages this hedge position within defined risk parameters, hedge
ineffectiveness may also result from factors including, but not limited to, policyholder behavior,
capital markets dislocation or discontinuity and divergence between the performance of the
underlying funds and the hedging indices.
153
The Company is continually exploring new ways and new markets to manage or layoff the capital
markets and policyholder behavior risks associated with its living benefits. During 2007 and in
April of 2008, the Company entered into customized swap contracts to hedge certain capital market
risk components for the remaining term of specific blocks of non-reinsured GMWB riders. In
addition, during July 2008, the Company entered into a reinsurance agreement with a third party to
reinsure GMWB risks associated with approximately $7.8 billion of account value sold between 2003
and 2006. The reinsurance agreement is an 80% quota-share agreement. The reinsurance agreement
is accounted for as a free-standing derivative. The third partys financial strength is rated
A+ by A.M. Best, AA- by Standard and Poors and Aa2 by Moodys.
The following table illustrates the Companys U.S. GMWB account value by type of SFAS 133/157 risk
management strategy as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
Risk Management Strategy |
|
Duration |
|
Account Value |
|
|
% |
|
Entire risk
reinsured with a third party |
|
Life of Product |
|
$ |
12,787 |
|
|
|
28 |
% |
Capital markets risk transferred to a
third party behavior risk retained by the Company |
|
Designed to cover
the
effective life of the
product |
|
|
12,862 |
|
|
|
28 |
% |
Dynamic hedging of capital markets risk
using various derivative instruments |
|
Weighted average of 7 years |
|
|
20,685 |
|
|
|
44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
46,334 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Guaranteed Minimum Death Benefits and Guaranteed Minimum Income Benefits
In the U.S., the Company sells variable annuity contracts that offer various guaranteed death
benefits. Declines in the equity market may increase the Companys exposure to death benefits
under these contracts.
The Companys total gross exposure (i.e., before reinsurance) to U.S. guaranteed death benefits as
of September 30, 2008 is $20.0 billion. The Company will incur these guaranteed death benefit
payments in the future only if the policyholder has an in-the-money guaranteed death benefit at
their time of death. The Company currently reinsures 57% of these death benefit guarantees. Under
certain of these reinsurance agreements, the reinsurers exposure is subject to an annual cap. The
Companys net exposure (i.e. after reinsurance) is $8.6 billion, as of September 30, 2008. This
amount is often referred to as the retained net amount at risk.
In Japan, the Company offers certain variable annuity products with both a guaranteed death benefit
and a guaranteed income benefit. Declines in equity markets as well as a strengthening of the
Japanese yen in comparison to the U.S. dollar and other currencies may increase the Companys
exposure to these guaranteed benefits. This increased exposure may be significant in extreme
market scenarios.
The Companys total gross exposure (i.e., before reinsurance) to these guaranteed death benefits
and income benefits offered in Japan as of September 30, 2008 is $4.5 billion. However, the
Company will incur these guaranteed death or income benefits in the future only if the contract
holder has an in-the-money guaranteed benefit at either the time of their death or if the account
value is insufficient to fund the guaranteed living benefits. The Company currently reinsures 18%
of the death benefit guarantees. Under certain of these reinsurance agreements, the reinsurers
exposure is subject to an annual cap. For these products, the Companys retained net amount at
risk is $3.7 billion.
Derivative Instruments
The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards,
futures and options, in compliance with Company policy and regulatory requirements, designed to
achieve one of four Company approved objectives: to hedge risk arising from interest rate, equity
market, credit spreads including issuer defaults, price or foreign currency exchange rate risk or
volatility; to manage liquidity; to control transaction costs; or to enter into replication
transactions.
154
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of The Hartford and its
ability to generate strong cash flows from each of the business segments, borrow funds at
competitive rates and raise new capital to meet operating and growth needs.
Liquidity Requirements
The liquidity requirements of The Hartford have been and will continue to be met by funds from
operations as well as the issuance of commercial paper, common stock, debt or other capital
securities and borrowings from its credit facilities. Current and expected patterns of claim
frequency and severity may change from period to period but continue to be within historical norms
and, therefore, the Companys current liquidity position is considered to be sufficient to meet
anticipated demands over the next twelve months. However, if an unanticipated demand was placed on
the Company, it is likely that the Company would either sell certain of its investments to fund
claims which could result in larger than usual realized capital gains and losses or the Company
would enter the capital markets to raise further funds to provide the requisite liquidity. For a
discussion and tabular presentation of the Companys current contractual obligations by period,
including those related to its Life and Property & Casualty insurance operations, refer to
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations within the Capital Resources
and Liquidity section of the MD&A included in The Hartfords 2007 Form 10-K Annual Report.
In June 2008, The Hartfords Board of Directors authorized a new $1 billion stock repurchase
program which is in addition to the previously announced $2 billion program. The Companys
repurchase authorization permits purchases of common stock, which may be in the open market or
through privately negotiated transactions. The Company also may enter into derivative transactions
to facilitate future repurchases of common stock. The timing of any future repurchases will be
dependent upon several factors, including the market price of the Companys securities, the
Companys capital position, consideration of the effect of any repurchases on the Companys
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. As of September 30,
2008, The Hartford has completed the $2 billion stock repurchase program and has $807 remaining for
stock repurchase under the new $1 billion repurchase program. For further discussion of common
stock acquired in 2008, refer to the Stockholders Equity section below.
HFSG and Hartford Life, Inc. (HLI) are holding companies which rely upon operating cash flow in
the form of dividends from their subsidiaries, which enable them to service debt, pay dividends,
and pay certain business expenses. Dividends to the 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 insurers 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 insurers earned surplus, it requires the prior approval
of the Connecticut Insurance Commissioner. The insurance holding company laws of the other
jurisdictions in which The Hartfords 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 by its insurance
subsidiaries are further dependent on cash requirements of HLI and other factors. The Companys
property-casualty insurance subsidiaries are permitted to pay up to a maximum of approximately $1.6
billion in dividends to HFSG in 2008 without prior approval from the applicable insurance
commissioner. The Companys life insurance subsidiaries are permitted to pay up to a maximum of
approximately $784 in dividends to HLI in 2008 without prior approval from the applicable insurance
commissioner. The aggregate of these amounts, net of amounts required by HLI, is the maximum the
insurance subsidiaries could pay to HFSG in 2008. From January 1, 2008 through September 30, 2008,
HFSG and HLI received a combined total of $1.3 billion from their insurance subsidiaries. From
October 1, 2008 through October 24, 2008, HFSG and HLI received a combined total of $466 from their
insurance subsidiaries.
The principal sources of operating funds are premiums and investment income, while investing cash
flows originate from maturities and sales of invested assets. The primary uses of funds are to pay
claims, policy benefits, operating expenses and commissions and to purchase new investments. In
addition, The Hartford has a policy of carrying a significant short-term investment position to
meet liquidity needs. As of September 30, 2008 and December 31, 2007, HFSG held total fixed
maturity investments of $743 and $457, of which $692 and $154 were short-term investments,
respectively. HFSG intends to use $200 to repay its 6.375% notes at maturity on November 1, 2008
and $330 to repay its 5.663% notes at maturity on November 16, 2008. HFSG issued senior notes
during the first half of 2008 to pre-fund payment of these maturities. For a discussion of the
Companys investment objectives and strategies, see the Investments and Capital Markets Risk
Management sections above.
155
As of September 30, 2008, the Companys key sources of liquidity included $7.3 billion of cash and
short-term investments (which includes securities with maturities of one year or less at the time
of purchase), of which $725 was collateral received from, and held on behalf of, derivative
counterparties and $137 was collateral pledged to derivative counterparties.
The Company also held $1.9 billion of treasury securities, of which $506 had been
pledged to derivative counterparties. These figures do not include the proceeds from the $2.5
billion Allianz SE investment received on October 17, 2008, see Note 13 in the Notes to the
Condensed Consolidated Financial Statements. The Company intends to utilize the proceeds to
support capital and liquidity requirements across The Hartford as appropriate.
Sources of Capital
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 strong
shareholder returns. As a result, the Company may from time to time raise capital from the
issuance of stock, debt or other capital securities and is continuously evaluating strategic
opportunities. The issuance of common stock, debt or other capital securities could result in the
dilution of shareholder interests or reduced net income due to additional interest expense.
Shelf Registrations
On April 11, 2007, The Hartford filed an automatic shelf registration statement (Registration No.
333-142044) for the potential offering and sale of debt and equity securities with the Securities
and Exchange Commission. The registration statement allows for the following types of securities
to be offered: (i) debt securities, preferred stock, common stock, depositary shares, warrants,
stock purchase contracts, stock purchase units and junior subordinated deferrable interest
debentures of the Company, and (ii) preferred securities of any of one or more capital trusts
organized by The Hartford (The Hartford Trusts). The Company may enter into guarantees with
respect to the preferred securities of any of The Hartford Trusts. In that The Hartford is a
well-known seasoned issuer, as defined in Rule 405 under the Securities Act of 1933, the
registration statement went effective immediately upon filing and The Hartford may offer and sell
an unlimited amount of securities under the registration statement during the three-year life of
the shelf.
Contingent Capital Facility
On February 12, 2007, The Hartford entered into a put option agreement (the Put Option Agreement)
with Glen Meadow ABC Trust, a Delaware statutory trust (the ABC Trust), and LaSalle Bank National
Association, as put option calculation agent. The Put Option Agreement provides The Hartford with
the right to require the ABC Trust, at any time and from time to time, to purchase The Hartfords
junior subordinated notes (the Notes) in a maximum aggregate principal amount not to exceed $500.
Under the Put Option Agreement, The Hartford will pay the ABC Trust premiums on a periodic basis,
calculated with respect to the aggregate principal amount of Notes that The Hartford had the right
to put to the ABC Trust for such period. The Hartford has agreed to reimburse the ABC Trust for
certain fees and ordinary expenses. The Company holds a variable interest in the ABC Trust where
the Company is not the primary beneficiary. As a result, the Company did not consolidate the ABC
Trust, as they did not meet the consolidation requirements under FASB Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest Entities, an interpretation of ARB No.
51 (FIN 46(R)).
Commercial Paper, Revolving Credit Facility and Line of Credit
The table below details the Companys short-term debt programs and the applicable balances
outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Available As of |
|
|
Outstanding As of |
|
|
|
Effective |
|
|
Expiration |
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
Description |
|
Date |
|
|
Date |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Commercial Paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Hartford |
|
|
11/10/86 |
|
|
|
N/A |
|
|
$ |
2,000 |
|
|
$ |
2,000 |
|
|
$ |
373 |
|
|
$ |
373 |
|
Revolving Credit Facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5-year revolving credit facility |
|
|
8/9/07 |
|
|
|
8/9/12 |
|
|
|
1,900 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Line of Credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Japan Operations [1] |
|
|
9/18/02 |
|
|
|
1/5/09 |
|
|
|
47 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Paper, Revolving
Credit Facility and Line of Credit |
|
|
|
|
|
|
|
|
|
$ |
3,947 |
|
|
$ |
4,045 |
|
|
$ |
373 |
|
|
$ |
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
As of September 30, 2008 and December 31, 2007, the line of credit in yen was ¥5 billion. |
The revolving credit facility provides for up to $1.9 billion of unsecured credit, which excludes a
$100 commitment from an affiliate of Lehman Brothers. Of the total availability under the revolving
credit facility, up to $100 is available to support letters of credit issued on behalf of The
Hartford or other subsidiaries of The Hartford. Under the revolving credit facility, the Company
must maintain a minimum level of consolidated net worth. In addition, the Company must not exceed
a maximum ratio of debt to capitalization. Quarterly, the Company certifies compliance with the
financial covenants for the syndicate of participating financial institutions. As of September 30,
2008, the Company was in compliance with all such covenants.
The Federal Reserve Board authorized the Commercial Paper Funding Facility (CPFF) on October 7,
2008 under Section 13(3) of the Federal Reserve Act to provide a liquidity backstop to U.S. issuers
of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets by
increasing the availability of term commercial paper funding to issuers and by providing greater
assurance to both issuers and investors that firms will be able to roll over their maturing
commercial paper.
The Company registered with the CPFF in order to sell up to a maximum of $375 to the facility. The
Companys commercial paper must be rated A-1/P-1/F1 by at least two ratings agencies to be eligible
for the program. If ratings are downgraded below this level, outstanding commercial paper held by
CPFF will continue to be held until maturity, however, no additional commercial paper may be sold
to CPFF. The Company may sell commercial paper to other investors in excess of the maximum of
$375, but the CPFF will not purchase additional commercial paper from the Company if total
commercial paper outstanding to all investors (including the CPFF) equals or exceeds the issuers
limit.
156
While The Hartfords maximum borrowings available under its commercial paper program are $2.0
billion, which includes the $375 from the CPFF, the Company is dependent upon market conditions,
including recent market conditions, to finance the remaining available commercial paper with
investors.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
There have been no material changes to the Companys off-balance sheet arrangements and aggregate
contractual obligations since the filing of the Companys 2007 Form 10-K Annual Report.
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 Plan), the Employee Retirement Income Security Act of
1974 as amended by the Pension Protection Act of 2006 mandates minimum contributions in certain
circumstances. For 2008, the Company does not expect to have a required minimum funding
contribution for the Plan and the funding requirements for all of the pension plans are expected to
be immaterial.
Capitalization
The capital structure of The Hartford as of September 30, 2008 and December 31, 2007 consisted of
debt and equity, summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Short-term debt (includes current maturities of long-term debt and
capital lease obligations) |
|
$ |
927 |
|
|
$ |
1,365 |
|
|
|
(32 |
%) |
Long-term debt |
|
|
4,620 |
|
|
|
3,142 |
|
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
Total debt [1] |
|
|
5,547 |
|
|
|
4,507 |
|
|
|
23 |
% |
Equity excluding accumulated other comprehensive loss, net of tax (AOCI) |
|
|
16,712 |
|
|
|
20,062 |
|
|
|
(17 |
%) |
AOCI, net of tax |
|
|
(4,155 |
) |
|
|
(858 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
12,557 |
|
|
$ |
19,204 |
|
|
|
(35 |
%) |
|
|
|
|
|
|
|
|
|
|
Total capitalization including AOCI |
|
$ |
18,104 |
|
|
$ |
23,711 |
|
|
|
(24 |
%) |
|
|
|
|
|
|
|
|
|
|
Debt to equity |
|
|
44 |
% |
|
|
23 |
% |
|
|
|
|
Debt to capitalization |
|
|
31 |
% |
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Total debt of the Company excludes $1.2 billion and $809 of consumer notes as of September
30, 2008 and December 31, 2007, respectively. |
The Hartfords total capitalization decreased $5.6 billion, or 24%, from December 31, 2007 to
September 30, 2008 primarily due to the following:
|
|
|
|
|
AOCI, net of tax
|
|
|
|
Decreased $3.3 billion primarily due to increases in unrealized losses on securities of $3.5 billion. |
|
|
|
|
|
Equity excluding
AOCI, net of tax
|
|
|
|
Decreased $3.4 billion primarily due to a net loss of $1.9 billion and share repurchases of $1.0
billion. |
|
|
|
|
|
Total Debt
|
|
|
|
Increased from issuance of $1.0 billion in senior notes and $500 in junior subordinated debentures,
partially offset by repayment of The Hartfords $425 5.55% senior notes. |
Recent Developments
In order to strengthen its capital and liquidity position, the Company on October 17, 2008 closed
on a $2.5 billion investment by Allianz SE (Allianz).
Allianz purchased $1.75 billion of the Companys 10% Fixed-to-Floating Rate Junior Subordinated
Debentures due 2068, and $750 of the Companys Series D Non-Voting Contingent Convertible Preferred
Stock (the Convertible Preferred) initially convertible into 24,193,548 shares of the Companys
common stock (the Common Stock), upon receipt of applicable approvals, at an issue price of
$31.00 per share of Common Stock.
Allianz additionally received warrants to purchase
an aggregate of $1.75 billion of the Companys Series B and Series C Convertible Preferred at an
initial exercise price of $25.32 per share. Conversion of the Convertible Preferred referred to
above into Common Stock is subject to receipt of certain governmental and regulatory approvals and,
in the case of the Series C Convertible Preferred, to the approval of the Companys stockholders in
accordance with the rules of the New York Stock Exchange. For further detail about the Allianz
investment, please see Note 13 in the Notes to the Condensed Consolidated Financial Statements.
Debt
Senior Notes
On August 16, 2008, The Hartford repaid its $425, 5.55% senior notes at maturity.
On May 12, 2008, The Hartford issued $500 of 6.0% senior notes due January 15, 2019. The issuance
was made pursuant to the Companys shelf registration statement (Registration No. 333-142044).
On March 4, 2008, The Hartford issued $500 of 6.3% senior notes due March 15, 2018. The issuance
was made pursuant to the Companys shelf registration statement (Registration No. 333-142044).
157
HFSG used a portion of the proceeds from the total $1 billion in issuances of senior notes to repay
its $425 5.55% notes at maturity on August 16, 2008, and intends to use the remaining proceeds to
repay its $200 6.375% notes at maturity on November 1, 2008 and $330 5.663% notes at maturity on
November 16, 2008.
For additional information regarding debt, see Note 14 of Notes to Consolidated Financial
Statements in The Hartfords 2007 Form 10-K Annual Report.
Junior Subordinated Debentures
On June 6, 2008, the Company issued $500 aggregate principal amount of 8.125% fixed-to-floating
rate junior subordinated debentures (the debentures) due June 15, 2068 for net proceeds of
approximately $493, after deducting underwriting discounts and expenses from the offering. The
debentures bear interest at an annual fixed rate of 8.125% from the date of issuance to, but
excluding, June 15, 2018, payable semi-annually in arrears on June 15 and December 15. From and
including June 15, 2018, the debentures will bear interest at an annual rate, reset quarterly,
equal to three-month LIBOR plus 4.6025%, payable quarterly in arrears on March 15, June 15,
September 15 and December 15 of each year. The Company has the right, on one or more occasions, to
defer the payment of interest on the debentures. The Company may defer interest for up to ten
consecutive years without giving rise to an event of default. Deferred interest will accumulate
additional interest at an annual rate equal to the annual interest rate then applicable to the
debentures. If the Company defers interest for five consecutive years or, if earlier, pays current
interest during a deferral period, which may be paid from any source of funds, the Company will be
required to pay deferred interest from proceeds from the sale of certain qualifying securities.
The debentures carry a scheduled maturity date of June 15, 2038 and a final maturity date of June
15, 2068. During the 180-day period ending on a notice date not more than fifteen and not less than
ten business days prior to the scheduled maturity date, the Company is required to use commercially
reasonable efforts to sell certain qualifying replacement securities sufficient to permit repayment
of the debentures at the scheduled maturity date. If any debentures remain outstanding after the
scheduled maturity date, the unpaid amount will remain outstanding until the Company has raised
sufficient proceeds from the sale of qualifying replacement securities to permit the repayment in
full of the debentures. If there are remaining debentures at the final maturity date, the Company
is required to redeem the debentures using any source of funds.
Subject to the replacement capital covenant described below, the Company can redeem the debentures
at its option, in whole or in part, at any time on or after June 15, 2018 at a redemption price of
100% of the principal amount being redeemed plus accrued but unpaid interest. The Company can
redeem the debentures at its option prior to June 15, 2018 (a) in whole at any time or in part from
time to time or (b) in whole, but not in part, in the event of certain tax or rating agency events
relating to the debentures, at a redemption price equal to the greater of 100% of the principal
amount being redeemed and the applicable make-whole amount, in each case plus any accrued and
unpaid interest.
In connection with the offering of the debentures, the Company entered into a replacement capital
covenant for the benefit of holders of one or more designated series of the Companys
indebtedness, initially the Companys 6.1% notes due 2041. Under the terms of the replacement
capital covenant, if the Company redeems the debentures at any time prior to June 15, 2048 it can
only do so with the proceeds from the sale of certain qualifying replacement securities.
158
Consumer Notes
As of September 30, 2008 and December 31, 2007, $1,225 and $809, respectively, of consumer notes
were outstanding. As of September 30, 2008, these consumer notes have interest rates ranging from
4.0% to 6.3% for fixed notes and, for variable notes, either consumer price index plus 80 to 267
basis points, or indexed to the S&P 500, Dow Jones Industrials or the Nikkei 225. For the three
months ended September 30, 2008 and 2007, interest credited to holders of consumer notes was $16
and $10, respectively. For the nine months ended September 30, 2008 and 2007, interest credited to
holders of consumer notes was $43 and $21, respectively.
For additional information regarding consumer notes, see Note 14 of Notes to Consolidated Financial
Statements in The Hartfords 2007 Form 10-K Annual Report.
Stockholders Equity
Treasury stock acquired For the nine months ended September 30, 2008, The Hartford repurchased
$1.0 billion (14.7 million shares), of which $500 (7.3 million shares) were repurchased under an
accelerated share repurchase transaction described below.
On June 4, 2008, the Company entered into a collared accelerated share repurchase agreement (ASR)
with a major financial institution. Under the terms of the agreement, The Hartford paid $500 and
initially received a minimum number of shares based on a maximum or capped share price. The
Company funded this payment with proceeds from the offering of the junior subordinated debentures,
see Note 11 in the Notes to the Condensed Consolidated Financial Statements. The Hartford initially received 6.3 million shares of common stock based on the
cap. The actual per share purchase price and the final number of shares to be repurchased were
based on the volume weighted average price, or VWAP, of the Companys common stock, not to be fixed
above a cap price nor fall lower than a floor price. The contract settled on September 3, 2008,
and the Company received an additional 1.0 million shares. The Company has accounted for this
transaction in accordance with EITF Issue No. 99-7, Accounting for an Accelerated Share Repurchase
Program.
Dividends On October 15, 2008, The Hartfords Board of Directors declared a quarterly dividend of
$0.32 per share payable on January 2, 2009 to shareholders of record as of December 1, 2008.
AOCI AOCI, net of tax, decreased by $3.3 billion as of September 30, 2008 compared with December
31, 2007. The decrease in AOCI includes unrealized losses on securities of $3.5 billion, primarily
due to widening credit spreads associated with fixed maturities. Because The Hartfords investment
portfolio has a duration of approximately 5 years, a 100 basis point parallel movement in rates
would result in approximately a 5% change in fair value. Movements in short-term interest rates
without corresponding changes in long-term rates will impact the fair value of our fixed maturities
to a lesser extent than parallel interest rate movements.
For additional information on stockholders equity and AOCI, see Notes 15 and 16, respectively, of
Notes to Consolidated Financial Statements in The Hartfords 2007 Form 10-K Annual Report.
Cash Flow
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Net cash provided by operating activities |
|
$ |
2,938 |
|
|
$ |
4,567 |
|
Net cash used for investing activities |
|
$ |
(4,049 |
) |
|
$ |
(4,904 |
) |
Net cash provided by financing activities |
|
$ |
1,034 |
|
|
$ |
675 |
|
Cash end of period |
|
$ |
1,963 |
|
|
$ |
1,952 |
|
|
|
|
|
|
|
|
The decrease in cash from operating activities compared to prior year period was primarily the
result of an increase in payments on payables and accrual balances and a decrease in collections on
reinsurance recoverables. Net purchases of available-for-sale securities continue to account for
the majority of cash used for investing activities. Cash from financing activities increased
primarily due to $1.5 billion in issuances of long-term debt in 2008 and short-term debt repayments
reflected in the prior year period activity, partially offset by repayments of long-term debt in
2008 and decreased proceeds on investment and universal life-type contracts.
Operating cash flows for the nine months ended September 30, 2008 and 2007 have been adequate to
meet liquidity requirements.
Equity Markets
For a discussion of the potential impact of the equity markets on capital and liquidity, see the
Capital Markets Risk Management section under Market Risk above.
159
Ratings
Ratings are an important factor in establishing the competitive position in the insurance and
financial services marketplace. There can be no assurance that the Companys ratings will continue
for any given period of time or that they will not be changed. In the event the Companys ratings
are downgraded, the level of revenues, the liquidity or the persistency of the Companys business may be adversely
impacted.
On September 29, 2008, Fitch Ratings revised its rating outlook on our issuer default ratings,
senior debt and insurer financial strength, and on our primary life and property/casualty insurance
subsidiaries to negative.
On October 6, 2008, S&P revised its outlook the Companys debt to
negative. At the same time, S&P affirmed the financial strength ratings on the core insurance
subsidiaries with a stable outlook.
On October 6, 2008, A.M. Best placed the debt and financial strength ratings under review with
negative implications.
On October 8, 2008, Moodys placed the Companys debt rating on review for possible downgrade. In
the same action, Moodys affirmed the insurance financial strength ratings for the life and
property/casualty subsidiaries. The outlook for the life subsidiaries remains negative.
The following table summarizes The Hartfords significant member companies financial ratings from
the major independent rating organizations as of October 22, 2008.
|
|
|
|
|
|
|
|
|
Insurance Financial Strength Ratings: |
|
A.M. Best |
|
Fitch |
|
Standard & Poors |
|
Moodys |
Hartford Fire Insurance Company |
|
A+ |
|
AA |
|
AA- |
|
Aa3 |
Hartford Life Insurance Company |
|
A+ |
|
AA |
|
AA- |
|
Aa3 |
Hartford Life and Accident Insurance Company |
|
A+ |
|
AA |
|
AA- |
|
Aa3 |
Hartford Life and Annuity Insurance Company |
|
A+ |
|
AA |
|
AA- |
|
Aa3 |
Hartford Life Insurance KK (Japan) |
|
|
|
|
|
AA- |
|
|
Hartford Life Limited (Ireland) |
|
|
|
|
|
AA- |
|
|
|
Other Ratings: |
|
|
|
|
|
|
|
|
The Hartford Financial Services Group, Inc.: |
|
|
|
|
|
|
|
|
Senior debt |
|
a |
|
A |
|
A |
|
A2 |
Commercial paper |
|
AMB-1 |
|
F1 |
|
A-1 |
|
P-1 |
Junior subordinated debentures |
|
bbb+ |
|
A- |
|
BBB+ |
|
A3 |
Hartford Life, Inc.: |
|
|
|
|
|
|
|
|
Senior debt |
|
a |
|
A |
|
A |
|
A2 |
Hartford Life Insurance Company: |
|
|
|
|
|
|
|
|
Short term rating |
|
|
|
|
|
A-1+ |
|
P-1 |
Consumer notes |
|
a+ |
|
AA- |
|
AA- |
|
A1 |
|
|
|
|
|
These ratings are not a recommendation to buy or hold any of The Hartfords 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.
The table below sets forth statutory surplus for the Companys insurance companies.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Life Operations |
|
$ |
4,691 |
|
|
$ |
5,786 |
|
Japan Life Operations |
|
|
1,546 |
|
|
|
1,620 |
|
Property & Casualty Operations |
|
|
6,883 |
|
|
|
8,509 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,120 |
|
|
$ |
15,915 |
|
|
|
|
|
|
|
|
Contingencies
Legal Proceedings For a discussion regarding contingencies related to The Hartfords legal
proceedings, see Part II, Item 1, Legal Proceedings.
160
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial Statements
included in The Hartfords 2007 Form 10-K Annual Report and Note 1 of Notes to Condensed
Consolidated Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of Managements Discussion
and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Companys principal executive officer and its principal financial officer, based on their
evaluation of the Companys disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) have concluded that the Companys disclosure controls and procedures are effective for
the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of September 30,
2008.
Changes in internal control over financial reporting
There was no change in the Companys internal control over financial reporting that occurred during
the Companys third fiscal quarter of 2008 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Litigation
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a
liability insurer defending or providing indemnity for third-party claims brought against insureds
and as an insurer defending coverage claims brought against it. The Hartford accounts for such
activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to
the uncertainties discussed below under the caption Asbestos and Environmental Claims, management
expects that the ultimate liability, if any, with respect to such ordinary-course claims
litigation, after consideration of provisions made for potential losses and costs of defense, will
not be material to the consolidated financial condition, results of operations or cash flows of The
Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for
substantial amounts. These actions include, among others, putative state and federal class actions
seeking certification of a state or national class. Such putative class actions have alleged, for
example, underpayment of claims or improper underwriting practices in connection with various kinds
of insurance policies, such as personal and commercial automobile, property, life and inland
marine; improper sales practices in connection with the sale of life insurance and other investment
products; and improper fee arrangements in connection with investment products and structured
settlements. The Hartford also is involved in individual actions in which punitive damages are
sought, such as claims alleging bad faith in the handling of insurance claims. Like many other
insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among
other things, that insurers had a duty to protect the public from the dangers of asbestos and that
insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in
the underlying asbestos cases. Management expects that the ultimate liability, if any, with
respect to such lawsuits, after consideration of provisions made for estimated losses, will not be
material to the consolidated financial condition of The Hartford. Nonetheless, given the large or
indeterminate amounts sought in certain of these actions, and the inherent unpredictability of
litigation, an adverse outcome in certain matters could, from time to time, have a material adverse
effect on the Companys consolidated results of operations or cash flows in particular quarterly or
annual periods.
Broker Compensation Litigation Following the New York Attorney Generals filing of a civil
complaint against Marsh & McLennan Companies, Inc., and Marsh, Inc. (collectively, Marsh) in
October 2004 alleging that certain insurance companies, including The Hartford, participated with
Marsh in arrangements to submit inflated bids for business insurance and paid contingent
commissions to ensure that Marsh would direct business to them, private plaintiffs brought several
lawsuits against the Company predicated on the allegations in the Marsh complaint, to which the
Company was not party. Among these is a multidistrict litigation in the United States District
Court for the District of New Jersey. There are two consolidated amended complaints filed in the
multidistrict litigation, one related to conduct in connection with the sale of property-casualty
insurance and the other related to alleged conduct in connection with the sale of group benefits
products. The Company and various of its subsidiaries are named in both complaints. The
complaints assert, on behalf of a putative class of persons who purchased insurance through broker
defendants, claims under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act
(RICO), state law, and in the case of the group-benefits products 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 has dismissed
the Sherman Act and RICO claims in both complaints for failure to state a claim and has granted the
defendants motions for summary judgment on the ERISA claims in the group-benefits products
complaint. The district court further has declined to exercise supplemental jurisdiction over the
state law claims, has dismissed those state law claims without prejudice, and has closed both
cases. The plaintiffs have appealed the dismissal of claims in both consolidated amended
complaints, except the ERISA claims.
161
The Company is also a defendant in two consolidated securities actions and two consolidated
derivative actions filed in the United States District Court for the District of Connecticut. The
consolidated securities actions assert claims on behalf of a putative class of shareholders
alleging that the Company and certain of its executive officers violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 by failing to disclose to the investing public that
The Hartfords business and growth was predicated on the unlawful activity alleged in the New York
Attorney Generals complaint against Marsh. The consolidated derivative actions, brought by
shareholders on behalf of the Company against its directors and an additional executive officer,
allege that the defendants knew adverse non-public information about the activities alleged in the
Marsh complaint and concealed and misappropriated that information to make profitable stock trades
in violation of their duties to the Company. In July 2006, the district court granted defendants
motion to dismiss the consolidated securities actions. The plaintiffs have appealed that decision.
Defendants filed a motion to dismiss the consolidated derivative actions in May 2005, and the
plaintiffs have agreed to stay further proceedings until after the resolution of the appeal from
the dismissal of the securities action.
In September 2007, the Ohio Attorney General filed a civil action in Ohio state court alleging that
certain insurance companies, including The Hartford, conspired with Marsh in violation of Ohios
antitrust statute. The trial court denied the defendants motion to dismiss the complaint in July
2008. The Company disputes the allegations and intends to defend this action vigorously.
Fair Credit Reporting Act Class Action In February 2007, the United States District Court for the
District of Oregon gave final approval of the Companys 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 settlement was made on a claim-in, nationwide-class basis and required eligible class members
to return valid claim forms postmarked no later than June 28, 2007. The Company has paid
approximately $84.3 to eligible claimants in connection with the settlement. The Company has
sought reimbursement from the Companys Excess Professional Liability Insurance Program for the
portion of the settlement in excess of the Companys $10 self-insured retention. Certain insurance
carriers participating in that program have disputed coverage for the settlement, and one of the
excess insurers has commenced an arbitration to resolve the dispute. Management believes it is
probable that the Companys coverage position ultimately will be sustained.
Call-Center Patent Litigation In June 2007, the holder of twenty-one patents related to automated
call flow processes, Ronald A. Katz Technology Licensing, LP (Katz), brought an action against
the Company and various of its subsidiaries in the United States District Court for the Southern
District of New York. The action alleges that the Companys call centers use automated processes
that willfully infringe the Katz patents. Katz previously has brought similar patent-infringement
actions against a wide range of other companies, none of which has reached a final adjudication of
the merits of the plaintiffs claims, but many of which have resulted in settlements under which
the defendants agreed to pay licensing fees. The case has been transferred to a multidistrict
litigation in the United States District Court for the Central District of California, which is
currently presiding over other Katz patent cases. In August 2008, the Company reached a settlement
under which the Company purchased a license under the patent portfolio held by Katz in exchange for
a payment of an immaterial amount.
Asbestos and Environmental Claims As discussed in Note 12, Commitments and Contingencies, of the
Notes to Consolidated Financial Statements under the caption Asbestos and Environmental Claims,
included in the Companys 2007 Form 10-K Annual Report, 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 Hartfords consolidated
operating results, financial condition and liquidity.
162
Item 1A. RISK FACTORS
The risk factors set forth below update the risk factors section previously disclosed in Item 1A of
Part I of the Companys Annual Report on Form 10-K for the year ended December 31, 2007.
The current financial crisis has resulted in unprecedented levels of market volatility.
Governmental initiatives intended to alleviate the crisis that have been adopted may not be
effective and, in any event, may be accompanied by other initiatives, including new capital
requirements or other regulations, that could materially affect our results of operations,
financial condition and liquidity in ways that we cannot predict.
Markets in the United States and elsewhere have been experiencing extreme volatility and disruption
for more than 12 months, due in part to the financial stresses affecting the liquidity of the
banking system and the financial markets generally. In recent weeks, this volatility and
disruption has reached unprecedented levels. These circumstances have also exerted downward
pressure on stock prices and reduced access to the debt markets for certain issuers, including us.
This unprecedented market volatility and general decline in the equity markets has directly and
materially affected our results of operations and our investment portfolio.
Legislation has been passed in an attempt to stabilize the financial markets. This legislation
includes a provision to grant the U.S. Treasury Department the authority to, among other things,
purchase up to $700 billion of mortgage-backed and other securities from financial institutions.
This legislation or similar proposals, as well as companion actions such as monetary or fiscal
actions of the U.S. Federal Reserve Board or comparable authorities in other countries, may fail to
stabilize the financial markets. This legislation and other proposals or actions may also have
other consequences, including material effects on interest rates and foreign exchange rates, which
could materially affect our investments, results of operations and liquidity in ways that we cannot
predict. The failure to effectively implement this legislation and related proposals or actions
could also result in material adverse effects, notably increased constraints on the liquidity
available in the banking system and financial markets and increased pressure on stock prices, any
of which could materially and adversely affect our results of operations, financial condition and
liquidity. In the event of future material deterioration in business conditions, we may need to
raise additional capital or consider other transactions to manage our capital position or our
liquidity.
In addition, we are subject to extensive laws and regulations that are administered and enforced by
a number of different governmental authorities and non-governmental self-regulatory agencies,
including foreign regulators, state insurance regulators, state securities administrators, the
Securities and Exchange Commission, the New York Stock Exchange, the Financial Industry Regulatory
Authority, the Financial Services Agency in Japan, the Financial Services Authority in the U.K.,
the U.S. Department of Justice and state attorneys general. In light of the current financial
crisis, some of these authorities are or may in the future consider enhanced or new regulatory
requirements intended to prevent future crises or otherwise assure the stability of institutions
under their supervision. These authorities may also seek to exercise their supervisory or
enforcement authority in new or more robust ways. All of these possibilities, if they occurred,
could affect the way we conduct our business and manage our capital, and may require us to satisfy
increased capital requirements, any of which in turn could materially affect our results of
operations, financial condition and liquidity.
The markets in the United States and elsewhere have been experiencing extreme and unprecedented
volatility and disruption. We are exposed to significant financial and capital markets risk,
including changes in interest rates, credit spreads, equity prices, and foreign exchange rates
which may adversely affect our results of operations, financial condition or liquidity.
The markets in the United States and elsewhere have been experiencing extreme and unprecedented
volatility and disruption. We are exposed to significant financial and capital markets risk,
including changes in interest rates, credit spreads, equity prices and foreign currency exchange
rates.
Our exposure to interest rate risk relates primarily to the market price and cash flow variability
associated with changes in interest rates. A rise in interest rates, in the absence of other
countervailing changes, will increase the net unrealized loss position of our investment portfolio
and, if long-term interest rates rise dramatically within a six to twelve month time period,
certain of our Life businesses may be exposed to disintermediation risk. Disintermediation risk
refers to the risk that our policyholders may surrender their contracts in a rising interest rate
environment, requiring us to liquidate assets in an unrealized loss position. Due to the long-term
nature of the liabilities associated with certain of our Life businesses, such as structured
settlements and guaranteed benefits on variable annuities, sustained declines in long term interest
rates may subject us to reinvestment risks and increased hedging costs. In other situations,
declines in interest rates or changes in credit spreads may result in reducing the duration of
certain Life liabilities, creating asset liability duration mismatches and possibly lower spread
income.
Our exposure to credit spreads primarily relates to market price and cash flow variability
associated with changes in credit spreads. With the recent widening of credit spreads, the net
unrealized loss position of our investment portfolio has increased, as have other than temporary
impairments. If issuer credit spreads continue to widen or increase significantly over an extended
period of time, it would likely exacerbate these effects, resulting in greater and additional
other-than-temporary impairments. Increased losses have also occurred associated with credit based
non-qualifying derivatives where the Company assumes credit exposure. If credit spreads tighten
significantly, it will reduce net investment income associated with new purchases of fixed
maturities. In addition, a reduction in market liquidity has made it difficult to value certain of
our securities as trading has become less frequent. As such, valuations may include assumptions or
estimates that may be more susceptible to significant period to period changes which could have a
material adverse effect on our consolidated results of operations or financial condition.
163
Our statutory surplus is also impacted 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, such as we are now
experiencing, actual credit spreads on investment assets may
increase sharply for certain sub-sectors of the overall credit market, resulting in statutory
separate account asset market value losses. As actual credit spreads are not fully reflected in
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.
One
important primary exposure to equity risk relates to the potential for lower earnings associated with
certain of our Life businesses, such as variable annuities, where fee income is earned based upon
the fair value of the assets under management. During the course of 2008, the declines in equity
markets have negatively impacted assets under management. As a result, fee income earned off of
those assets has also been negatively impacted. In addition, certain of our Life products offer
guaranteed benefits which increase our potential benefit exposure should equity markets decline.
Due to declines in equity markets during 2008, our liability for these guaranteed benefits has
increased. We are also exposed to interest rate and equity risk based upon the discount rate and
expected long-term rate of return assumptions associated with our pension and other post-retirement
benefit obligations. Sustained declines in long-term interest rates or equity returns likely would
have a negative effect on the funded status of these plans.
Our primary foreign currency exchange risks are related to net income from foreign operations,
nonU.S. dollar denominated investments, investments in foreign subsidiaries, our yen-denominated
individual fixed annuity product, and certain guaranteed benefits associated with the Japan
variable annuity. These risks relate to potential decreases in value and income resulting from a
strengthening or weakening in foreign exchange rates versus the U.S. dollar. In general, the
weakening of foreign currencies versus the U.S. dollar will unfavorably affect net income from
foreign operations, the value of non-U.S. dollar denominated investments, investments in foreign
subsidiaries and realized gains or losses on the yen denominated individual fixed annuity product.
In comparison, a strengthening of the Japanese yen in comparison to the U.S. dollar and other
currencies may increase our exposure to the guarantee benefits associated with the Japan variable
annuity.
If significant, declines in equity prices, changes in U.S. interest rates, changes in credit
spreads and the strengthening or weakening of foreign currencies against the U.S. dollar or in
combination, could have a material adverse effect on our consolidated results of operations,
financial condition or liquidity.
In addition, in the conduct of our
business, there could be scenarios where in order to fulfill our obligations
and to raise incremental liquidity, we would need to sell assets at a loss due
to the unrealized loss position in our overall investment portfolio and the
lack of liquidity in the credit markets.
Declines in equity markets and changes in interest rates and credit spreads can also negatively
impact the fair values of each of our segments. If a significant decline in the fair value of a
segment occurred and this resulted in an excess of that segments book value over fair value, the
goodwill assigned to that segment might be impaired and could cause the Company to record a charge
to impair a part or all of the related goodwill assets.
We may be unable to effectively mitigate the impact of equity market volatility on our financial
position and results of operations arising from obligations under annuity product guarantees, which
may affect our consolidated results of operations, financial condition or cash flows.
Some of the products offered by our life businesses, especially variable annuities, offer certain
guaranteed benefits which, as a result of any decline in equity markets would not only result in
potentially lower earnings, but may also increase our exposure to liability for benefit claims.
During the course of 2008, as equity markets have declined, our liability for guaranteed benefits
has increased. We are also subject to equity market volatility related to these benefits,
especially the guaranteed minimum death benefit (GMDB), guaranteed minimum withdrawal benefit
(GMWB), guaranteed minimum accumulation benefit (GMAB) 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 derivative instruments to minimize the claim exposure and the volatility of net
income associated with the GMWB liability. While we believe that these and other actions we have
taken mitigate the risks 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, and are
subject to the risk that other management procedures prove ineffective or that unanticipated
policyholder behavior, combined with adverse market events, produces economic losses beyond the
scope of the risk management techniques employed, which individually or collectively may have a
material adverse effect on our consolidated results of operations, financial condition or cash
flows.
164
Losses due to defaults by others, including issuers of investment securities (which include
structured securities such as commercial mortgage backed securities and residential mortgage backed
securities or other high yielding bonds) or reinsurance and derivative instrument counterparties,
could adversely affect the value of our investments, results of operations, financial condition or
cash flows.
Issuers or borrowers whose securities or loans we hold, customers, trading counterparties,
counterparties under swaps and other derivative contracts, reinsurers, clearing agents, exchanges,
clearing houses and other financial intermediaries and guarantors may default on their obligations
to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational
failure, fraud or other reasons. Such defaults could have a material adverse effect on our
results of operations, financial condition and cash flows. Additionally, the underlying
assets supporting our structured securities may deteriorate causing these securities to incur
losses.
Our investment portfolio includes investment securities in the financial services sector that have
experienced defaults recently. Further defaults could have a material adverse effect on our
results of operations, financial condition or cash flows.
The Company is not exposed to any credit concentration risk of a single issuer greater than 10% of
the Companys 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 the Companys creditors are
acquired, merge or otherwise consolidate with other creditors of the Companys, the Companys
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.
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 and credit
market conditions 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). The NAIC has established regulations that provide minimum capitalization
requirements based on risk-based capital (RBC) formulas for both life and property and casualty
companies. The RBC formula for life companies establishes capital requirements relating to
insurance, business, asset and interest rate risks, including equity, interest rate and expense
recovery risks associated with variable annuities and group annuities that contain death benefits
or certain living benefits. The RBC formula for property and casualty companies adjusts statutory
surplus levels for certain underwriting, asset, credit and off-balance sheet risks.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of
factors the amount of statutory income or losses generated by our insurance subsidiaries (which itself is sensitive
to equity market and credit market conditions), the amount of additional capital our insurance subsidiaries must hold
to support business growth, changes in equity market levels, the value of certain fixed-income and equity securities in
our investment portfolio, the value of certain derivative instruments that do not get hedge accounting, changes in
interest rates and foreign currency exchange rates, as well as changes to the NAIC RBC formulas. Most of these factors
are outside of the Companys control. The Companys 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. In addition, in extreme scenarios of equity market
declines, the amount of additional statutory reserves that we are required to hold for our variable annuity guarantees
increases at a greater than linear rate. This reduces the statutory surplus used in calculating our RBC ratios. To
the extent that our statutory capital resources are deemed to be insufficient to maintain a particular rating by one or
more rating agencies, we may seek to raise additional capital through public or private equity or debt financing.
Alternatively, if we were not to raise additional capital in such a scenario, 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.
We may experience a downgrade in our financial strength or credit ratings, which may make our
products less attractive, increase our cost of capital and inhibit our ability to refinance our
debt, which would have an adverse effect on our business, results of operations, financial
condition and liquidity.
Financial strength and credit ratings, including commercial paper ratings, are an important factor in establishing the competitive position of insurance companies.
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 companys 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, in their discretion, altered these models. Changes to the
models, general economic conditions, or circumstances outside our control could impact a rating
agencys judgment of its rating and the rating it assigns us. We cannot predict what actions
rating agencies may take, or what actions we may be required to take in response to the actions of
rating agencies, which may adversely affect us.
Our financial strength ratings, which are intended to measure our ability to meet policyholder
obligations, are an important factor affecting public confidence in most of our products and, as a
result, our competitiveness. A downgrade, or an announced potential downgrade in the rating of our
financial strength or of one of our principal insurance subsidiaries could affect our competitive
position in the insurance industry and make it more difficult for us to market our products, as
potential customers may select companies with higher financial strength ratings.
165
A downgrade of our credit ratings, or an announced potential downgrade, could affect our ability to
raise additional debt with terms and conditions similar to our current debt, and accordingly, would
likely increase our cost of capital. A downgrade of our credit ratings could also make it more
difficult to raise capital to refinance any maturing debt obligations, to support business growth
at our insurance subsidiaries and to maintain or improve the current financial strength ratings of
our principal insurance subsidiaries described above. As of September 30, 2008, a downgrade of
four levels below our current insurance financial strength levels could begin to trigger material
collateral calls on certain of our derivative instruments. If any of these negative events were to
occur, our business, results of operations, financial condition and liquidity could be materially
and adversely affected.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
The following table summarizes the Companys repurchases of its common stock for the three months
ended September 30, 2008:
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|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
|
|
|
Approximate Dollar |
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|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Value of Shares that |
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|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
May Yet Be |
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|
|
Total Number |
|
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Average Price |
|
|
Part of Publicly |
|
|
Purchased Under |
|
|
|
of Shares |
|
|
Paid Per |
|
|
Announced Plans or |
|
|
the Plans or |
|
|
|
Purchased |
|
|
Share |
|
|
Programs |
|
|
Programs |
|
Period |
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
July 1, 2008 July 31, 2008 |
|
|
2,011,315 |
[1] |
|
$ |
64.08 |
|
|
|
2,007,835 |
|
|
$ |
807 |
|
August 1, 2008 August 31, 2008 |
|
|
73 |
[1] |
|
$ |
62.94 |
|
|
|
|
|
|
$ |
807 |
|
September 1, 2008 September 30, 2008 |
|
|
1,000,224 |
[1] [2] |
|
$ |
68.18 |
|
|
|
999,944 |
|
|
$ |
807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total |
|
|
3,011,612 |
|
|
$ |
65.44 |
|
|
|
3,007,779 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Includes 3,480, 73 and 280 shares in July, August, and September,
respectively, acquired from employees of the Company for tax
withholding purposes in connection with the Companys stock
compensation plans. |
|
[2] |
|
Includes 1.0 million shares delivered to the Companys treasury stock
account pursuant to the terms of a collared accelerated stock
repurchase confirmation agreement between the Company and a major
financial institution (see Note 12 to the Condensed Consolidated
Financial Statements). |
In June 2008, The Hartfords Board of Directors authorized a new $1 billion stock repurchase
program which is in addition to the previously announced $2 billion program. The Companys
repurchase authorization permits purchases of common stock, which may be in the open market or
through privately negotiated transactions. The Company also may enter into derivative transactions
to facilitate future repurchases of common stock. The timing of any future repurchases will be
dependent upon several factors, including the market price of the Companys securities, the
Companys capital position, consideration of the effect of any repurchases on the Companys
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. As of September 30,
2008, The Hartford has completed the $2 billion stock repurchase program and has $807 remaining for
stock repurchase under the new $1 billion repurchase program. For the nine months ended September
30, 2008, The Hartford repurchased $1.0 billion (14.7 million shares).
Item 6. EXHIBITS
See Exhibits Index on page 168.
166
SIGNATURE
Pursuant to the requirements 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.
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The Hartford Financial Services Group, Inc. |
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(Registrant) |
Date: October 29, 2008
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/s/ Beth A. Bombara |
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|
Beth A. Bombara |
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Senior Vice President and Controller |
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(Chief accounting officer and duly |
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|
authorized signatory) |
167
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
FORM 10-Q
EXHIBITS INDEX
Exhibit No. |
|
Description |
|
3.01 |
|
Amended and Restated By-Laws of the Company, effective September 18, 2008 (incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form 8-K, filed on September
24, 2008). |
|
3.02 |
|
Certificate of Designation with respect to Series B Non-Voting Contingent Convertible
Preferred Stock, including form of stock certificate (incorporated by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K/A filed on October 17, 2008). |
|
3.03 |
|
Certificate of Designation with respect to Series C Non-Voting Contingent Convertible
Preferred Stock, including form of stock certificate (incorporated by reference to Exhibit
3.2 to the Companys Current Report on Form 8-K/A filed on October 17, 2008). |
|
3.04 |
|
Certificate of Designation with respect to Series D Non-Voting Contingent Convertible
Preferred Stock, including form of stock certificate (incorporated by reference to Exhibit
3.3 to the Companys Current Report on Form 8-K/A filed on October 17, 2008). |
|
4.01 |
|
Second Supplemental Indenture, dated as of October 17, 2008, between the Company 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 Companys Current Report on Form 8-K/A
filed on October 17, 2008). |
|
4.02 |
|
Form of Series B Warrant to Purchase Shares of Non-Voting Contingent Convertible Preferred
Stock (incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form
8-K/A filed on October 17, 2008). |
|
4.03 |
|
Form of Series C Warrant to Purchase Shares of Non-Voting Contingent Convertible Preferred
Stock (incorporated by reference to Exhibit 4.3 to the Companys Current Report on Form
8-K/A filed on October 17, 2008). |
|
4.04 |
|
Registration Rights Agreement, dated as of October 17, 2008, between the Company and
Allianz SE (incorporated by reference to Exhibit 4.4 to the Companys Current Report on
Form 8-K/A filed on October 17, 2008). |
|
10.01 |
|
First Amendment, dated July 10, 2008, to the Amended and Restated Five-Year Competitive
Advance and Revolving Credit Facility Agreement, dated as of August 9, 2007, by and among
the Company and the Lenders, including Bank of America, N.A., as administrative agent,
JPMorgan Chase Bank, N.A. and Citibank, N.A., as syndication agents, and Wachovia Bank,
N.A., as documentation agent (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed on July 14, 2008). |
|
10.02 |
|
Investment Agreement, dated as of October 17, 2008, between the Company and Allianz SE
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K/A
filed on October 17, 2008). |
|
10.03 |
|
Replacement Capital Covenant, dated as of October 17, 2008 (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K/A filed on October 17, 2008). |
|
15.01 |
|
Deloitte & Touche LLP Letter of Awareness. |
|
31.01 |
|
Certification of Ramani Ayer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.02 |
|
Certification of Lizabeth H. Zlatkus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.01 |
|
Certification of Ramani Ayer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.02 |
|
Certification of Lizabeth H. Zlatkus pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
168