Form 10-Q
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 June 30, 2011
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
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(I.R.S. Employer |
incorporation or organization)
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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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark 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 | |
Accelerated filer o | |
Non-accelerated filer o | |
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
July 28, 2011 there were outstanding 445,440,449 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 JUNE 30, 2011
TABLE OF CONTENTS
2
Forward-Looking Statements
Certain of the statements contained herein are forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements can be identified by words such as anticipates, intends, plans, seeks,
believes, estimates, expects, projects, and similar references to future periods.
Forward-looking statements are based on our current expectations and assumptions regarding
economic, competitive, legislative and other developments. Because forward-looking statements
relate to the future, they are subject to inherent uncertainties, risks and changes in
circumstances that are difficult to predict. They have been made based upon managements
expectations and beliefs concerning future developments and their potential effect upon The
Hartford Financial Services Group, Inc. and its subsidiaries (collectively, the Company or The
Hartford). Future developments may not be in line with managements expectations or may have
unanticipated effects. Actual results could differ materially from expectations, depending on the
evolution of various factors, including those set forth in Part I, Item 1A, Risk Factors in The
Hartfords 2010 Form 10-K Annual Report. These important risks and uncertainties include:
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challenges related to the Company’s current operating environment,
including continuing uncertainty about the strength and speed of the recovery
in the United States and other key economies and the impact of governmental
stimulus and austerity initiatives, sovereign credit concerns, including the
potential consequences associated with downgrades to the credit ratings of debt
issued by the United States government, and other developments on financial,
commodity and credit markets and consumer spending and investment; |
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the success of our initiatives relating to the realignment of our business in 2010 and
plans to improve the profitability and long-term growth prospects of our key divisions,
including through opportunistic acquisitions or divestitures, and the impact of regulatory or
other constraints on our ability to complete these initiatives and deploy capital among our
businesses as and when planned; |
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market risks associated with our business, including changes in interest rates, credit
spreads, equity prices, foreign exchange rates, and implied volatility levels, as well as
continuing uncertainty in key sectors such as the global real estate market; |
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volatility in our earnings resulting from our adjustment of our risk management program to
emphasize protection of statutory surplus, and cash flows; |
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the impact on our statutory capital of various factors, including many that are outside the
Companys control, which can in turn affect our credit and financial strength ratings, cost of
capital, regulatory compliance and other aspects of our business and results; |
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risks to our business, financial position, prospects and results associated with negative
rating actions or downgrades in the Companys financial strength and credit ratings or
negative rating actions or downgrades relating to our investments; |
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the potential for differing interpretations of the methodologies, estimations and
assumptions that underlie the valuation of the Companys financial instruments that could
result in changes to investment valuations; |
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the subjective determinations that underlie the Companys evaluation of
other-than-temporary impairments on available-for-sale securities; |
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losses due to nonperformance or defaults by others; |
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the potential for further acceleration of deferred policy acquisition cost amortization; |
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the potential for further impairments of our goodwill or the potential for changes in
valuation allowances against deferred tax assets; |
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the possible occurrence of terrorist attacks and the Companys ability to contain its
exposure, including the effect of the absence or insufficiency of applicable terrorism
legislation on coverage; |
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the difficulty in predicting the Companys potential exposure for asbestos and
environmental claims; |
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the possibility of a pandemic, earthquake, or other natural or man-made disaster that may
adversely affect our businesses and cost and availability of reinsurance; |
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weather and other natural physical events, including the severity and frequency of storms,
hail, winter storms, hurricanes and tropical storms, as well as climate change and its
potential impact on weather patterns; |
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the response of reinsurance companies under reinsurance contracts and the availability,
pricing and adequacy of reinsurance to protect the Company against losses; |
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the possibility of unfavorable loss development; |
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actions by our competitors, many of which are larger or have greater financial resources
than we do; |
3
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the restrictions, oversight, costs and other consequences of being a savings and loan holding
company, including from the supervision, regulation and examination by The Federal Reserve as
the Companys regulator and the Office of the Controller of the Currency as regulator of Federal
Trust Bank; |
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the cost and other effects of increased regulation as a result of the enactment of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act),
which will, among other effects, vest a newly created Financial Services Oversight Council
with the power to designate systemically important institutions, require central clearing
of, and/or impose new margin and capital requirements on, derivatives transactions, and may
affect our ability as a savings and loan holding company to manage our general account by
limiting or eliminating investments in certain private equity and hedge funds; |
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the potential effect of other domestic and foreign regulatory developments, including those
that could adversely impact the demand for the Companys products, operating costs and
required capital levels, including changes to statutory reserves and/or risk-based capital
requirements related to secondary guarantees under universal life and variable annuity
products or changes in U.S. federal or other tax laws that affect the relative attractiveness
of our investment products; |
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the Companys ability to distribute its products through distribution channels, both
current and future; |
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the uncertain effects of emerging claim and coverage issues; |
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regulatory limitations on the ability of the Company and certain of its subsidiaries to
declare and pay dividends; |
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the Companys ability to effectively price its property and casualty policies, including
its ability to obtain regulatory consents to pricing actions or to non-renewal or withdrawal
of certain product lines; |
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the Companys ability to maintain the availability of its systems and safeguard the
security of its data in the event of a disaster or other unanticipated events; |
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the risk that our framework for managing business risks may not be effective in mitigating
material risk and loss; |
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the potential for difficulties arising from outsourcing relationships; |
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the impact of potential changes in federal or state tax laws, including changes affecting
the availability of the separate account dividend received deduction; |
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the impact of potential changes in accounting principles and related financial reporting
requirements; |
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the Companys ability to protect its intellectual property and defend against claims of
infringement; |
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unfavorable judicial or legislative developments; and |
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other factors described in such forward-looking statements. |
Any forward-looking statement made by the Company in this document speaks only as of the date of
the filing of this Form 10-Q. Factors or events that could cause the Companys actual results to
differ may emerge from time to time, and it is not possible for the Company to predict all of them.
The Company undertakes no obligation to publicly update any forward-looking statement, whether as
a result of new information, future developments or otherwise.
4
Part I. FINANCIAL INFORMATION
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Item 1. |
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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 June 30, 2011, and the related
condensed consolidated statements of operations and comprehensive income for the three-month and
six-month periods ended June 30, 2011 and 2010 and statements of changes in stockholders equity,
and cash flows for the six-month periods ended June 30, 2011 and 2010. 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,
2010, and the related consolidated statements of operations, changes in equity, comprehensive
income (loss), and cash flows for the year then ended (not presented herein); and in our report
dated February 25, 2011 (which report includes an explanatory paragraph relating to the Companys
change in its method of accounting and reporting for variable interest entities and embedded credit
derivatives as required by accounting guidance adopted in 2010, for other-than-temporary
impairments as required by accounting guidance adopted in 2009, and for the fair value measurement
of financial instruments as required by accounting guidance adopted in 2008), we 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, 2010 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
August 3, 2011
5
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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(In millions, except for per share data) |
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2011 |
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2010 |
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2011 |
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2010 |
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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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$ |
3,545 |
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$ |
3,506 |
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$ |
7,064 |
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$ |
7,033 |
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Fee income |
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1,219 |
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1,186 |
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2,428 |
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2,366 |
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Net investment income (loss): |
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Securities available-for-sale and other |
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1,104 |
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1,148 |
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2,212 |
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2,202 |
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Equity securities, trading |
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(597 |
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(2,649 |
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206 |
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(1,948 |
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Total net investment income (loss) |
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507 |
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(1,501 |
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2,418 |
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254 |
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Net realized capital gains (losses): |
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Total other-than-temporary impairment (OTTI) losses |
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(31 |
) |
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(292 |
) |
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(150 |
) |
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(632 |
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OTTI losses recognized in other comprehensive income |
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8 |
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184 |
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72 |
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372 |
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Net OTTI losses recognized in earnings |
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(23 |
) |
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(108 |
) |
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(78 |
) |
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(260 |
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Net realized capital gains (losses), excluding net OTTI losses
recognized in earnings |
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92 |
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117 |
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(256 |
) |
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(5 |
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Total net realized capital gains (losses) |
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69 |
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9 |
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(334 |
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(265 |
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Other revenues |
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61 |
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65 |
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125 |
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129 |
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Total revenues |
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5,401 |
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3,265 |
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11,701 |
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9,517 |
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Benefits, losses and expenses |
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Benefits, losses and loss adjustment expenses |
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3,976 |
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3,592 |
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7,154 |
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6,725 |
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Benefits, losses and loss adjustment expenses returns
credited on international variable annuities |
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(597 |
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(2,649 |
) |
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206 |
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(1,948 |
) |
Amortization of deferred policy acquisition costs and
present value of future profits |
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835 |
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935 |
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1,499 |
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1,582 |
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Insurance operating costs and other expenses |
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1,224 |
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|
1,111 |
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2,344 |
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|
2,226 |
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Interest expense |
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128 |
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132 |
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256 |
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252 |
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Total benefits, losses and expenses |
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5,566 |
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3,121 |
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11,459 |
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8,837 |
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Income (loss) from continuing operations before income taxes |
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(165 |
) |
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144 |
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242 |
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|
680 |
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Income tax expense (benefit) |
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(269 |
) |
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(31 |
) |
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(211 |
) |
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185 |
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Income from continuing operations, net of tax |
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104 |
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175 |
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453 |
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495 |
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Income (loss) from discontinued operations, net of tax |
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(80 |
) |
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(99 |
) |
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82 |
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(100 |
) |
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Net income |
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$ |
24 |
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$ |
76 |
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$ |
535 |
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$ |
395 |
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Preferred stock dividends and accretion of discount |
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11 |
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11 |
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21 |
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494 |
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Net income (loss) available to common shareholders |
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$ |
13 |
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$ |
65 |
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$ |
514 |
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$ |
(99 |
) |
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Income from continuing operations, net of tax, available to
common shareholders per common share |
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Basic |
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$ |
0.21 |
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$ |
0.37 |
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$ |
0.97 |
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$ |
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Diluted |
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$ |
0.19 |
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$ |
0.34 |
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$ |
0.89 |
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$ |
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Net income (loss) available to common shareholders per common share |
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Basic |
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$ |
0.03 |
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$ |
0.15 |
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$ |
1.16 |
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$ |
(0.24 |
) |
Diluted |
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$ |
0.03 |
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$ |
0.14 |
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$ |
1.06 |
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$ |
(0.24 |
) |
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Cash dividends declared per common share |
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$ |
0.10 |
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$ |
0.05 |
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$ |
0.20 |
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$ |
0.10 |
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See Notes to Condensed Consolidated Financial Statements.
6
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets
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June 30, |
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December 31, |
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(In millions, except for share and per share data) |
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2011 |
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2010 |
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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 $77,367 and
$78,419) (includes variable interest entity assets, at fair value, of $177 and $406) |
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$ |
78,132 |
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$ |
77,820 |
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Fixed maturities, at fair value using the fair value option (includes variable interest
entity assets of $333 and $323) |
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1,227 |
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|
649 |
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Equity securities, trading, at fair value (cost of $32,774 and $33,899) |
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|
32,278 |
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|
32,820 |
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Equity securities, available-for-sale, at fair value (cost of $1,070 and $1,013) |
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1,081 |
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|
973 |
|
Mortgage loans (net of allowances for loan losses of $171 and $155) |
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5,304 |
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|
4,489 |
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Policy loans, at outstanding balance |
|
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2,188 |
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|
2,181 |
|
Limited partnerships and other alternative investments (includes variable interest
entity assets of $7 and $14) |
|
|
2,028 |
|
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|
1,918 |
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Other investments |
|
|
973 |
|
|
|
1,617 |
|
Short-term investments |
|
|
8,861 |
|
|
|
8,528 |
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|
|
|
|
|
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Total investments |
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132,072 |
|
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|
130,995 |
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Cash |
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|
1,898 |
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|
2,062 |
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Premiums receivable and agents balances, net |
|
|
3,418 |
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|
3,273 |
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Reinsurance recoverables, net |
|
|
4,851 |
|
|
|
4,862 |
|
Deferred policy acquisition costs and present value of future profits |
|
|
9,584 |
|
|
|
9,857 |
|
Deferred income taxes, net |
|
|
3,362 |
|
|
|
3,725 |
|
Goodwill |
|
|
1,036 |
|
|
|
1,051 |
|
Property and equipment, net |
|
|
1,020 |
|
|
|
1,150 |
|
Other assets |
|
|
2,743 |
|
|
|
1,629 |
|
Separate account assets |
|
|
157,485 |
|
|
|
159,742 |
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|
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Total assets |
|
$ |
317,469 |
|
|
$ |
318,346 |
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Liabilities |
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Reserve for future policy benefits and unpaid losses and loss adjustment expenses |
|
$ |
40,184 |
|
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$ |
39,598 |
|
Other policyholder funds and benefits payable |
|
|
44,073 |
|
|
|
44,550 |
|
Other policyholder funds and benefits payable international variable annuities |
|
|
32,237 |
|
|
|
32,793 |
|
Unearned premiums |
|
|
5,315 |
|
|
|
5,176 |
|
Short-term debt |
|
|
400 |
|
|
|
400 |
|
Long-term debt |
|
|
6,214 |
|
|
|
6,207 |
|
Consumer notes |
|
|
368 |
|
|
|
382 |
|
Other liabilities (includes variable interest entity liabilities of $439 and $394) |
|
|
9,518 |
|
|
|
9,187 |
|
Separate account liabilities |
|
|
157,485 |
|
|
|
159,742 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
295,794 |
|
|
|
298,035 |
|
Commitments and Contingencies (Note 9) |
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value 50,000,000 shares authorized, 575,000 shares issued,
liquidation preference $1,000 per share |
|
|
556 |
|
|
|
556 |
|
Common stock, $0.01 par value 1,500,000,000 shares authorized,
469,754,771 shares issued |
|
|
5 |
|
|
|
5 |
|
Additional paid-in capital |
|
|
10,393 |
|
|
|
10,448 |
|
Retained earnings |
|
|
12,503 |
|
|
|
12,077 |
|
Treasury stock, at cost 24,468,484 and 25,205,283 shares |
|
|
(1,705 |
) |
|
|
(1,774 |
) |
Accumulated other comprehensive loss, net of tax |
|
|
(77 |
) |
|
|
(1,001 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
21,675 |
|
|
|
20,311 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
317,469 |
|
|
$ |
318,346 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
7
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
(In millions, except for share data) |
|
2011 |
|
|
2010 |
|
|
|
(Unaudited) |
|
Preferred Stock, at beginning of period |
|
$ |
556 |
|
|
$ |
2,960 |
|
Issuance of mandatory convertible preferred stock |
|
|
|
|
|
|
556 |
|
Accelerated accretion of discount from redemption of preferred stock issued to U.S. Treasury |
|
|
|
|
|
|
440 |
|
Redemption of preferred stock issued to the U.S. Treasury |
|
|
|
|
|
|
(3,400 |
) |
|
|
|
|
|
|
|
Preferred Stock, at end of period |
|
|
556 |
|
|
|
556 |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital, at beginning of period |
|
|
10,448 |
|
|
|
8,985 |
|
Issuance of common shares under public offering |
|
|
|
|
|
|
1,599 |
|
Issuance of shares under incentive and stock compensation plans |
|
|
(45 |
) |
|
|
(108 |
) |
Tax expense on employee stock options and awards |
|
|
(10 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
Additional Paid-in Capital, at end of period |
|
|
10,393 |
|
|
|
10,470 |
|
|
|
|
|
|
|
|
|
|
Retained Earnings, at beginning of period, before cumulative effect of accounting change, net
of tax |
|
|
12,077 |
|
|
|
11,164 |
|
Cumulative effect of accounting change, net of tax |
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
Retained Earnings, at beginning of period, as adjusted |
|
|
12,077 |
|
|
|
11,190 |
|
Net income |
|
|
535 |
|
|
|
395 |
|
Accelerated accretion of discount from redemption of preferred stock issued to U.S. Treasury |
|
|
|
|
|
|
(440 |
) |
Dividends on preferred stock |
|
|
(21 |
) |
|
|
(54 |
) |
Dividends declared on common stock |
|
|
(88 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
Retained Earnings, at end of period |
|
|
12,503 |
|
|
|
11,049 |
|
|
|
|
|
|
|
|
|
|
Treasury Stock, at Cost, at beginning of period |
|
|
(1,774 |
) |
|
|
(1,936 |
) |
Issuance of shares under incentive and stock compensation plans from treasury stock |
|
|
76 |
|
|
|
129 |
|
Return of shares under incentive and stock compensation plans and other to treasury stock |
|
|
(7 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
Treasury Stock, at Cost, at end of period |
|
|
(1,705 |
) |
|
|
(1,810 |
) |
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, Net of Tax, at beginning of period |
|
|
(1,001 |
) |
|
|
(3,312 |
) |
Total other comprehensive income |
|
|
924 |
|
|
|
1,933 |
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, Net of Tax, at end of period |
|
|
(77 |
) |
|
|
(1,379 |
) |
|
|
|
|
|
|
|
|
|
Noncontrolling Interest, at beginning of period |
|
|
|
|
|
|
29 |
|
Recognition of noncontrolling interest in other liabilities |
|
|
|
|
|
|
(29 |
) |
|
|
|
|
|
|
|
Noncontrolling Interest, at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
$ |
21,675 |
|
|
$ |
18,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares Outstanding, at beginning of period (in thousands) |
|
|
575 |
|
|
|
3,400 |
|
Redemption of shares issued to the U.S. Treasury |
|
|
|
|
|
|
(3,400 |
) |
Issuance of mandatory convertible preferred shares |
|
|
|
|
|
|
575 |
|
|
|
|
|
|
|
|
Preferred Shares Outstanding, at end of period |
|
|
575 |
|
|
|
575 |
|
|
|
|
|
|
|
|
Common Shares Outstanding, at beginning of period (in thousands) |
|
|
444,549 |
|
|
|
383,007 |
|
Issuance of shares under public offering |
|
|
|
|
|
|
59,590 |
|
Issuance of shares under incentive and stock compensation plans |
|
|
972 |
|
|
|
1,639 |
|
Return of shares under incentive and stock compensation plans and other to treasury stock |
|
|
(235 |
) |
|
|
(125 |
) |
|
|
|
|
|
|
|
Common Shares Outstanding, at end of period |
|
|
445,286 |
|
|
|
444,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
8
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24 |
|
|
$ |
76 |
|
|
$ |
535 |
|
|
$ |
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain / loss on securities |
|
|
536 |
|
|
|
719 |
|
|
|
846 |
|
|
|
1,578 |
|
Change in OTTI losses recognized in other comprehensive income |
|
|
(4 |
) |
|
|
21 |
|
|
|
1 |
|
|
|
53 |
|
Change in net gain / loss on cash-flow hedging instruments |
|
|
71 |
|
|
|
163 |
|
|
|
3 |
|
|
|
229 |
|
Change in foreign currency translation adjustments |
|
|
58 |
|
|
|
77 |
|
|
|
26 |
|
|
|
41 |
|
Amortization of prior service cost and actuarial net losses
included in net periodic benefit costs |
|
|
26 |
|
|
|
18 |
|
|
|
48 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
687 |
|
|
|
998 |
|
|
|
924 |
|
|
|
1,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
711 |
|
|
$ |
1,074 |
|
|
$ |
1,459 |
|
|
$ |
2,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
9
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
(In millions) |
|
2011 |
|
|
2010 |
|
|
|
(Unaudited) |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
535 |
|
|
$ |
395 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
1,499 |
|
|
|
1,589 |
|
Additions to deferred policy acquisition costs and present value of future profits |
|
|
(1,306 |
) |
|
|
(1,338 |
) |
Change in reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned
premiums |
|
|
651 |
|
|
|
200 |
|
Change in reinsurance recoverables |
|
|
(33 |
) |
|
|
162 |
|
Change in receivables and other assets |
|
|
(339 |
) |
|
|
72 |
|
Change in payables and accruals |
|
|
87 |
|
|
|
(342 |
) |
Change in accrued and deferred income taxes |
|
|
(416 |
) |
|
|
(128 |
) |
Net realized capital losses |
|
|
215 |
|
|
|
265 |
|
Net disbursements from investment contracts related to policyholder funds international variable annuities |
|
|
(556 |
) |
|
|
(2,137 |
) |
Net decrease in equity securities, trading |
|
|
542 |
|
|
|
2,138 |
|
Depreciation and amortization |
|
|
384 |
|
|
|
315 |
|
Goodwill impairment |
|
|
|
|
|
|
153 |
|
Other operating activities, net |
|
|
(299 |
) |
|
|
(144 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
964 |
|
|
|
1,200 |
|
Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from the sale/maturity/prepayment of: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
18,076 |
|
|
|
23,292 |
|
Fixed maturities, fair value option |
|
|
1 |
|
|
|
|
|
Equity securities, available-for-sale |
|
|
122 |
|
|
|
158 |
|
Mortgage loans |
|
|
228 |
|
|
|
1,297 |
|
Partnerships |
|
|
106 |
|
|
|
249 |
|
Payments for the purchase of: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
(17,295 |
) |
|
|
(23,796 |
) |
Fixed maturities, fair value option |
|
|
(534 |
) |
|
|
|
|
Equity securities, available-for-sale |
|
|
(192 |
) |
|
|
(100 |
) |
Mortgage loans |
|
|
(1,075 |
) |
|
|
(69 |
) |
Partnerships |
|
|
(128 |
) |
|
|
(135 |
) |
Proceeds from business sold |
|
|
278 |
|
|
|
130 |
|
Derivatives, net |
|
|
(300 |
) |
|
|
584 |
|
Change in policy loans, net |
|
|
(7 |
) |
|
|
(8 |
) |
Change in payables for collateral under securities lending, net |
|
|
|
|
|
|
(46 |
) |
Other investing activities, net |
|
|
(87 |
) |
|
|
44 |
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities |
|
|
(807 |
) |
|
|
1,600 |
|
Financing Activities |
|
|
|
|
|
|
|
|
Deposits and other additions to investment and universal life-type contracts |
|
|
5,840 |
|
|
|
6,410 |
|
Withdrawals and other deductions from investment and universal life-type contracts |
|
|
(11,701 |
) |
|
|
(11,183 |
) |
Net transfers from separate accounts related to investment and universal life-type contracts |
|
|
5,649 |
|
|
|
4,120 |
|
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
1,090 |
|
Repayments at maturity for long-term debt and payments on capital lease obligations |
|
|
|
|
|
|
(343 |
) |
Repayments at maturity or settlement of consumer notes |
|
|
(14 |
) |
|
|
(684 |
) |
Net proceeds from issuance of mandatory convertible preferred stock |
|
|
|
|
|
|
556 |
|
Net proceeds from issuance of common shares under public offering |
|
|
|
|
|
|
1,600 |
|
Redemption of preferred stock issued to the U.S. Treasury |
|
|
|
|
|
|
(3,400 |
) |
Proceeds from net issuance of shares under incentive and stock compensation plans, excess tax benefit and
other |
|
|
2 |
|
|
|
14 |
|
Dividends paid on preferred stock |
|
|
(21 |
) |
|
|
(64 |
) |
Dividends paid on common stock |
|
|
(64 |
) |
|
|
(40 |
) |
Changes in bank deposits and payments on bank advances |
|
|
(10 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
|
(319 |
) |
|
|
(1,967 |
) |
Foreign exchange rate effect on cash |
|
|
(2 |
) |
|
|
23 |
|
Net increase (decrease) in cash |
|
|
(164 |
) |
|
|
856 |
|
Cash beginning of period |
|
|
2,062 |
|
|
|
2,142 |
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
1,898 |
|
|
$ |
2,998 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
246 |
|
|
$ |
248 |
|
Interest paid |
|
$ |
250 |
|
|
$ |
233 |
|
See Notes to Condensed Consolidated Financial Statements
10
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 holding company for insurance and financial
services subsidiaries that provide investment products and life and property and casualty insurance
to both individual and business customers in the United States (collectively, The Hartford or the
Company). Also, The Hartford continues to administer business previously sold in Japan and the
U.K.
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 June 30, 2011, and for
the three and six months ended June 30, 2011 and 2010 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 2010 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 (VIEs) in which the Company is required
to consolidate. Entities in which the Company has significant influence over the operating and
financing decisions but are not required to consolidate are reported using the equity method.
Material intercompany transactions and balances between The Hartford and its subsidiaries and
affiliates have been eliminated. For further discussions on variable interest entities see Note 5
of the Notes to Condensed Consolidated Financial Statements.
Discontinued Operations
The Company is presenting the operations of certain businesses that meet the criteria for reporting
as discontinued operations. Amounts for prior periods have been retrospectively reclassified. See
Note 12 of the Notes to Condensed Consolidated Financial Statements for information on the specific
subsidiaries and related impacts.
Use of Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The most significant estimates include those used in determining property and casualty insurance
product reserves, net of reinsurance; estimated gross profits used in the valuation and
amortization of assets and liabilities associated with variable annuity and other universal
life-type contracts; evaluation of other-than-temporary impairments on available-for-sale
securities and valuation allowances on investments; living benefits required to be fair valued;
goodwill impairment; valuation of investments and derivative instruments; pension and other
postretirement benefit obligations; valuation allowance on deferred tax assets; and contingencies
relating to corporate litigation and regulatory matters. Certain of these estimates are
particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide
debt or equity markets could have a material impact on the Condensed Consolidated Financial
Statements.
Significant Accounting Policies
For a description of significant accounting policies, see Note 1 of the Notes to Consolidated
Financial Statements included in The Hartfords 2010 Form 10-K Annual Report, which should be read
in conjunction with these accompanying Condensed Consolidated Financial Statements.
11
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Income Taxes
A reconciliation of the tax provision at the U.S. Federal statutory rate to the provision for
income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Tax expense (benefit) at U.S. Federal statutory rate |
|
$ |
(58 |
) |
|
$ |
50 |
|
|
$ |
85 |
|
|
$ |
238 |
|
Tax-exempt interest |
|
|
(38 |
) |
|
|
(38 |
) |
|
|
(75 |
) |
|
|
(78 |
) |
Dividends-received deduction |
|
|
(90 |
) |
|
|
(40 |
) |
|
|
(127 |
) |
|
|
(81 |
) |
Valuation allowance |
|
|
(89 |
) |
|
|
|
|
|
|
(91 |
) |
|
|
86 |
|
Other |
|
|
6 |
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
(269 |
) |
|
$ |
(31 |
) |
|
$ |
(211 |
) |
|
$ |
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The separate account dividends-received deduction (DRD) is estimated for the current year
using information from the prior year-end, adjusted for current year equity market performance and
other appropriate factors, including estimated levels of corporate dividend payments and level of
policy owner equity account balances. The actual current year DRD can vary from estimates based
on, but not limited to, changes in eligible dividends received 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 evaluates its DRD computations on a
quarterly basis.
The Companys unrecognized tax benefits were unchanged during the six months ended June 30, 2011,
remaining at $48 as of June 30, 2011. This entire amount, if it were recognized, would affect the
effective tax rate for the applicable periods.
The Companys federal income tax returns are routinely audited by the Internal Revenue Service
(IRS). Audits have been concluded for all years through 2006. The audit of the years 2007 -
2009 commenced during 2010 and is expected to conclude by the end of 2012. In addition, in the
second quarter of 2011 the Company recorded a tax benefit of $52 as a result of a resolution of a
tax matter with the IRS for the computation of DRD for years 1998, 2000 and 2001.
The Company has recorded a deferred tax asset valuation allowance that is adequate to reduce the
total deferred tax asset to an amount that will more likely than not be realized. The deferred tax
asset valuation allowance was $82, relating mostly to foreign net operating losses, as of June 30,
2011 and was $173 as of December 31, 2010. In assessing the need for a valuation allowance,
management considered future reversals of existing taxable temporary differences, future taxable
income exclusive of reversing temporary differences and carryforwards, and taxable income in prior
carry back years, as well as tax planning strategies that include holding a portion of debt
securities with market value losses until recovery, selling appreciated securities to offset
capital losses, business considerations such as asset-liability matching, and sales of certain
corporate assets. Such tax planning strategies are viewed by management as prudent and feasible and
will be implemented if necessary to realize the deferred tax asset. Based on the availability of
additional tax planning strategies identified in the second quarter of 2011, the Company released
$86, or 100% of the valuation allowance associated with investment realized capital losses during
the three months ended June 30, 2011. Future economic conditions and debt market volatility,
including increases in interest rates, can adversely impact the Companys tax planning strategies
and in particular the Companys ability to utilize tax benefits on previously recognized realized
capital losses.
Included in the Companys June 30, 2011 deferred tax asset of $3.4 billion is $3.0 billion relating
to items treated as ordinary for federal income tax purposes, and $356 for items classified as
capital in nature. The $356 of capital items is comprised of $618 of gross deferred tax assets
related to realized capital losses and $262 of gross deferred tax liabilities related to unrealized
capital gains.
Also, for the six months ended June 30, 2010, the Company incurred a charge of $19 related to a
decrease in deferred tax assets as a result of federal legislation that will reduce the tax
deduction available to the Company related to retiree health care costs beginning in 2013.
12
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Earnings (Loss) Per Common Share
The following table presents a reconciliation of net income and shares used in calculating
basic earnings (loss) per common share to those used in calculating diluted earnings (loss) per
common share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions, except for per share data) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
$ |
104 |
|
|
$ |
175 |
|
|
$ |
453 |
|
|
$ |
495 |
|
Less: Preferred stock dividends and accretion of discount |
|
|
11 |
|
|
|
11 |
|
|
|
21 |
|
|
|
494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax, available
to common shareholders |
|
|
93 |
|
|
|
164 |
|
|
|
432 |
|
|
|
1 |
|
Add: Dilutive effect of preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax, available
to common shareholders and assumed conversion of
preferred shares |
|
$ |
93 |
|
|
$ |
164 |
|
|
$ |
432 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
$ |
(80 |
) |
|
$ |
(99 |
) |
|
$ |
82 |
|
|
$ |
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24 |
|
|
$ |
76 |
|
|
$ |
535 |
|
|
$ |
395 |
|
Less: Preferred stock dividends and accretion of discount |
|
|
11 |
|
|
|
11 |
|
|
|
21 |
|
|
|
494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders |
|
|
13 |
|
|
|
65 |
|
|
|
514 |
|
|
|
(99 |
) |
Add: Dilutive effect of preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders and
assumed conversion of preferred shares |
|
$ |
13 |
|
|
$ |
65 |
|
|
$ |
535 |
|
|
$ |
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic |
|
|
445.1 |
|
|
|
443.9 |
|
|
|
444.9 |
|
|
|
418.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants |
|
|
36.3 |
|
|
|
35.2 |
|
|
|
38.6 |
|
|
|
|
|
Dilutive effect of stock compensation plans |
|
|
1.0 |
|
|
|
1.1 |
|
|
|
1.4 |
|
|
|
|
|
Dilutive effect of mandatory convertible preferred shares |
|
|
|
|
|
|
|
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding and dilutive
potential common shares |
|
|
482.4 |
|
|
|
480.2 |
|
|
|
505.6 |
|
|
|
418.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax, available
to common shareholders |
|
$ |
0.21 |
|
|
$ |
0.37 |
|
|
$ |
0.97 |
|
|
$ |
|
|
Income (loss) from discontinued operations, net of tax |
|
|
(0.18 |
) |
|
|
(0.22 |
) |
|
|
0.19 |
|
|
|
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders |
|
$ |
0.03 |
|
|
$ |
0.15 |
|
|
$ |
1.16 |
|
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax, available
to common shareholders |
|
$ |
0.19 |
|
|
$ |
0.34 |
|
|
$ |
0.89 |
|
|
$ |
|
|
Income (loss) from discontinued operations, net of tax |
|
|
(0.16 |
) |
|
|
(0.20 |
) |
|
|
0.17 |
|
|
|
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders |
|
$ |
0.03 |
|
|
$ |
0.14 |
|
|
$ |
1.06 |
|
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
13
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Earnings (Loss) Per Common Share (continued)
The declaration of a quarterly common stock dividend of $0.10 during the first and second
quarter of 2011 triggered a provision in The Hartfords Warrant Agreement with The Bank of New York
Mellon, relating to warrants to purchase common stock issued in connection with the Companys
participation in the Capital Purchase Program, resulting in an adjustment to the warrant exercise
price. The warrant exercise price at June 30, 2011, March 31, 2011 and December 31, 2010 was
$9.754, $9.773 and $9.790, respectively.
For the three months ended June 30, 2011, 20.7 million shares for mandatory convertible preferred
shares, along with the related dividend adjustment, would have been antidilutive to the earnings
per share calculations. Assuming the impact of the mandatory convertible preferred shares was not
antidilutive, weighted average common shares outstanding and dilutive potential common shares would
have totaled 503.1 million.
For the six months ended June 30, 2011, the diluted earnings per share calculation on income from
continuing operations, net of tax, available to common shareholders was calculated using 484.9
million weighted average common shares outstanding and dilutive potential common shares, as the
inclusion of 20.7 million shares for mandatory convertible preferred shares, along with the related
dividend adjustment, would have been antidilutive.
For the three months ended June 30, 2010, 20.8 million shares for mandatory convertible preferred
shares, along with the related dividend adjustment, would have been antidilutive to the earnings
per share calculations. Assuming the impact of the mandatory convertible preferred shares was not
antidilutive, weighted average common shares outstanding and dilutive potential common shares would
have totaled 501.0 million.
As a result of the net loss available to common shareholders for the six months ended June 30,
2010, the Company is required to use basic weighted average common shares outstanding in the
calculation of the six months ended June 30, 2010 diluted loss per share, since the inclusion of
34.4 million shares for warrants, 1.2 million shares for stock compensation plans and 12.1 million
shares for mandatory convertible preferred shares, along with the related dividend adjustment,
would have been antidilutive to the earnings per share calculations. In the absence of the net
loss available to common shareholders and assuming the impact of the mandatory convertible
preferred shares was not antidilutive, weighted average common shares outstanding and dilutive
potential common shares would have totaled 466.5 million.
14
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information
The Hartford is organized into three customer-oriented divisions, Commercial Markets, Consumer
Markets and Wealth Management, conducting business principally in seven reporting segments. The
Companys seven reporting segments, as well as the Corporate and Other category, are as follows:
Commercial Markets
Property & Casualty Commercial
Property & Casualty Commercial provides workers compensation, property, automobile, marine,
livestock, liability and umbrella coverages primarily throughout the United States (U.S.), along
with a variety of customized insurance products and risk management services including professional
liability, fidelity, surety, specialty casualty coverages and third-party administrator services.
Group Benefits
Group Benefits provides employers, associations, affinity groups and financial institutions with
group life, accident and disability coverage, along with other products and services, including
voluntary benefits and group retiree health.
Consumer Markets
Consumer Markets provides standard automobile, homeowners and home-based business coverages to
individuals across the U.S., including a special program designed exclusively for members of AARP.
Consumer Markets also operates a member contact center for health insurance products offered
through the AARP Health program.
Wealth Management
Global Annuity
Global Annuity offers individual variable, fixed market value adjusted (fixed MVA) and single
premium immediate annuities in the U.S., a range of products to institutional investors, including
but not limited to, stable value contracts, and administers investments, retirement savings and
other insurance and savings products to individuals and groups outside the U.S., primarily in Japan
and Europe.
Life Insurance
Life Insurance sells a variety of life insurance products, including variable universal life,
universal life, and term life, as well as private placement life insurance (PPLI) owned by
corporations and high net worth individuals.
Retirement Plans
Retirement Plans provides products and services to corporations pursuant to Section 401(k) of the
Internal Revenue Code of 1986, as amended (the Code), and products and services to municipalities
and not-for-profit organizations under Sections 457 and 403(b) of the Code, collectively referred
to as government plans.
Mutual Funds
Mutual Funds offers retail mutual funds, investment-only mutual funds and college savings plans
under Section 529 of the Code (collectively referred to as non-proprietary) and proprietary mutual
funds supporting insurance products issued by The Hartford.
Corporate and Other
The Hartford includes in Corporate and Other the Companys debt financing and related interest
expense, as well as other capital raising activities; banking operations; certain fee income and
commission expenses associated with sales of non-proprietary products by broker-dealer
subsidiaries; and certain purchase accounting adjustments and other charges not allocated to the
segments. Also included in Corporate and Other is the Companys management of certain property and
casualty operations that have discontinued writing new business and substantially all of the
Companys asbestos and environmental exposures, collectively referred to as Other Operations.
Financial Measures and Other Segment Information
The following table presents net income (loss) for each reporting segment, as well as the Corporate
and Other category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Property & Casualty Commercial |
|
$ |
121 |
|
|
$ |
270 |
|
|
$ |
448 |
|
|
$ |
476 |
|
Group Benefits |
|
|
41 |
|
|
|
48 |
|
|
|
52 |
|
|
|
99 |
|
Consumer Markets |
|
|
(174 |
) |
|
|
(13 |
) |
|
|
(64 |
) |
|
|
43 |
|
Global Annuity |
|
|
228 |
|
|
|
(114 |
) |
|
|
278 |
|
|
|
(34 |
) |
Life Insurance |
|
|
66 |
|
|
|
103 |
|
|
|
101 |
|
|
|
127 |
|
Retirement Plans |
|
|
30 |
|
|
|
14 |
|
|
|
45 |
|
|
|
8 |
|
Mutual Funds |
|
|
27 |
|
|
|
23 |
|
|
|
55 |
|
|
|
49 |
|
Corporate and Other |
|
|
(315 |
) |
|
|
(255 |
) |
|
|
(380 |
) |
|
|
(373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24 |
|
|
$ |
76 |
|
|
$ |
535 |
|
|
$ |
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment Information (continued)
The following table presents revenues by product line for each reporting segment, as well as
the Corporate and Other category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Earned premiums, fees, and other considerations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Casualty Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers compensation |
|
$ |
685 |
|
|
$ |
573 |
|
|
$ |
1,350 |
|
|
$ |
1,148 |
|
Property |
|
|
134 |
|
|
|
137 |
|
|
|
269 |
|
|
|
277 |
|
Automobile |
|
|
145 |
|
|
|
151 |
|
|
|
291 |
|
|
|
303 |
|
Package business |
|
|
285 |
|
|
|
282 |
|
|
|
568 |
|
|
|
561 |
|
Liability |
|
|
134 |
|
|
|
135 |
|
|
|
269 |
|
|
|
274 |
|
Fidelity and surety |
|
|
54 |
|
|
|
57 |
|
|
|
109 |
|
|
|
113 |
|
Professional liability |
|
|
80 |
|
|
|
80 |
|
|
|
159 |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property & Casualty Commercial |
|
|
1,517 |
|
|
|
1,415 |
|
|
|
3,015 |
|
|
|
2,839 |
|
Group Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group disability |
|
|
516 |
|
|
|
502 |
|
|
|
993 |
|
|
|
1,033 |
|
Group life and accident |
|
|
511 |
|
|
|
514 |
|
|
|
1,028 |
|
|
|
1,026 |
|
Other |
|
|
49 |
|
|
|
58 |
|
|
|
99 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Group Benefits |
|
|
1,076 |
|
|
|
1,074 |
|
|
|
2,120 |
|
|
|
2,176 |
|
Consumer Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
657 |
|
|
|
711 |
|
|
|
1,329 |
|
|
|
1,424 |
|
Homeowners |
|
|
282 |
|
|
|
284 |
|
|
|
566 |
|
|
|
567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Markets [1] |
|
|
939 |
|
|
|
995 |
|
|
|
1,895 |
|
|
|
1,991 |
|
Global Annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity |
|
|
631 |
|
|
|
628 |
|
|
|
1,270 |
|
|
|
1,228 |
|
Fixed / MVA and other annuity |
|
|
17 |
|
|
|
11 |
|
|
|
27 |
|
|
|
23 |
|
Institutional investment products |
|
|
(3 |
) |
|
|
4 |
|
|
|
(2 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Global Annuity |
|
|
645 |
|
|
|
643 |
|
|
|
1,295 |
|
|
|
1,268 |
|
Life Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable life |
|
|
91 |
|
|
|
101 |
|
|
|
182 |
|
|
|
203 |
|
Universal life |
|
|
109 |
|
|
|
104 |
|
|
|
215 |
|
|
|
209 |
|
Term / other life |
|
|
12 |
|
|
|
11 |
|
|
|
24 |
|
|
|
24 |
|
PPLI |
|
|
45 |
|
|
|
43 |
|
|
|
89 |
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Insurance |
|
|
257 |
|
|
|
259 |
|
|
|
510 |
|
|
|
519 |
|
Retirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) |
|
|
88 |
|
|
|
80 |
|
|
|
172 |
|
|
|
156 |
|
Government plans |
|
|
13 |
|
|
|
9 |
|
|
|
26 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retirement Plans |
|
|
101 |
|
|
|
89 |
|
|
|
198 |
|
|
|
176 |
|
Mutual Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-proprietary |
|
|
161 |
|
|
|
152 |
|
|
|
323 |
|
|
|
303 |
|
Proprietary |
|
|
14 |
|
|
|
15 |
|
|
|
30 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mutual Funds |
|
|
175 |
|
|
|
167 |
|
|
|
353 |
|
|
|
334 |
|
Corporate and Other |
|
|
54 |
|
|
|
50 |
|
|
|
106 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earned premiums, fees, and other considerations |
|
|
4,764 |
|
|
|
4,692 |
|
|
|
9,492 |
|
|
|
9,399 |
|
Net investment income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale and other |
|
|
1,104 |
|
|
|
1,148 |
|
|
|
2,212 |
|
|
|
2,202 |
|
Equity securities, trading |
|
|
(597 |
) |
|
|
(2,649 |
) |
|
|
206 |
|
|
|
(1,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income (loss) |
|
|
507 |
|
|
|
(1,501 |
) |
|
|
2,418 |
|
|
|
254 |
|
Net realized capital gains (losses) |
|
|
69 |
|
|
|
9 |
|
|
|
(334 |
) |
|
|
(265 |
) |
Other revenues |
|
|
61 |
|
|
|
65 |
|
|
|
125 |
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
5,401 |
|
|
$ |
3,265 |
|
|
$ |
11,701 |
|
|
$ |
9,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
For the three months ended June 30, 2011 and 2010, AARP members accounted for earned
premiums of $694 and $716, respectively. For the six months ended June 30, 2011 and 2010,
AARP members accounted for earned premiums of $1.4 billion. |
16
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
The following financial instruments are carried at fair value in the Companys Condensed
Consolidated Financial Statements: fixed maturity and equity securities, available-for-sale
(AFS); fixed maturities at fair value using fair value option (FVO); equity securities,
trading; short-term investments; freestanding and embedded derivatives; separate account assets;
and certain other liabilities.
The following section and Note 4a apply the fair value hierarchy and disclosure requirements for
the Companys financial instruments that are carried at fair value. The fair value hierarchy
prioritizes the inputs in the valuation techniques used to measure fair value into three broad
Levels (Level 1, 2 or 3).
Level 1 |
|
Observable inputs that reflect quoted prices for identical assets
or liabilities in active markets that the Company has the ability
to access at the measurement date. Level 1 securities include
highly liquid U.S. Treasuries, money market funds and exchange
traded equity securities, open-ended mutual funds reported in
separate account assets and derivative securities, including
futures and certain option contracts. |
|
Level 2 |
|
Observable inputs, other than quoted prices included in Level 1,
for the asset or liability or prices for similar assets and
liabilities. Most fixed maturities and preferred stocks,
including those reported in separate account assets, are model
priced by vendors using observable inputs and are classified
within Level 2. Also included in the Level 2 category are
exchange traded equity securities, investment grade private
placement securities and derivative instruments that are priced
using models with significant observable market inputs, including
interest rate, foreign currency and certain credit default swap
contracts and have no significant unobservable market inputs. |
|
Level 3 |
|
Valuations that are derived from techniques in which one or more
of the significant inputs are unobservable (including assumptions
about risk). Level 3 securities include less liquid securities
such as lower quality asset-backed securities (ABS), commercial
mortgage-backed securities (CMBS), commercial real estate
(CRE) collateralized debt obligations (CDOs), residential
mortgage-backed securities (RMBS) primarily backed by
below-prime loans and below investment grade private placement
securities. Also included in Level 3 are guaranteed product
embedded and reinsurance derivatives and other complex derivative
securities, including customized guaranteed minimum withdrawal
benefit (GMWB) hedging derivatives (see Note 4a for further
information on GMWB product related financial instruments), equity
derivatives, long dated derivatives, swaps with optionality,
certain complex credit derivatives and certain other liabilities.
Because Level 3 fair values, by their nature, contain one or more
significant unobservable inputs as there is little or no
observable market for these assets and liabilities, considerable
judgment is used to determine the Level 3 fair values. Level 3
fair values represent the Companys best estimate of an amount
that could be realized in a current market exchange absent actual
market exchanges. |
In many situations, inputs used to measure the fair value of an asset or liability position may
fall into different levels of the fair value hierarchy. In these situations, the Company will
determine the level in which the fair value falls based upon the lowest level input that is
significant to the determination of the fair value. Transfers of securities among the levels occur
at the beginning of the reporting period. Transfers between Level 1 and Level 2 were not material
for the three and six months ended June 30, 2011 and 2010. In most cases, both observable (e.g.,
changes in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in
the determination of fair values that the Company has classified within Level 3. Consequently,
these values and the related gains and losses are based upon both observable and unobservable
inputs. The Companys fixed maturities included in Level 3 are classified as such as they are
primarily priced by independent brokers and/or within illiquid markets.
17
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
These disclosures provide information as to the extent to which the Company uses fair value to
measure financial instruments and information about the inputs used to value those financial
instruments to allow users to assess the relative reliability of the measurements. The following
tables present assets and (liabilities) carried at fair value by hierarchy level, excluding those
related to the Companys living benefits and associated hedging programs, which are reported in
Note 4a.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, AFS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS |
|
$ |
3,297 |
|
|
$ |
|
|
|
$ |
2,845 |
|
|
$ |
452 |
|
CDOs |
|
|
2,575 |
|
|
|
|
|
|
|
|
|
|
|
2,575 |
|
CMBS |
|
|
7,277 |
|
|
|
|
|
|
|
6,623 |
|
|
|
654 |
|
Corporate |
|
|
41,629 |
|
|
|
|
|
|
|
39,519 |
|
|
|
2,110 |
|
Foreign government/government agencies |
|
|
1,864 |
|
|
|
|
|
|
|
1,813 |
|
|
|
51 |
|
States, municipalities and political subdivisions (Municipal) |
|
|
12,781 |
|
|
|
|
|
|
|
12,501 |
|
|
|
280 |
|
RMBS |
|
|
5,214 |
|
|
|
|
|
|
|
4,100 |
|
|
|
1,114 |
|
U.S. Treasuries |
|
|
3,495 |
|
|
|
411 |
|
|
|
3,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, AFS |
|
|
78,132 |
|
|
|
411 |
|
|
|
70,485 |
|
|
|
7,236 |
|
Fixed maturities, FVO |
|
|
1,227 |
|
|
|
|
|
|
|
671 |
|
|
|
556 |
|
Equity securities, trading |
|
|
32,278 |
|
|
|
2,227 |
|
|
|
30,051 |
|
|
|
|
|
Equity securities, AFS |
|
|
1,081 |
|
|
|
377 |
|
|
|
604 |
|
|
|
100 |
|
Derivative assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives |
|
|
(3 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
14 |
|
Equity derivatives |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Foreign exchange derivatives |
|
|
428 |
|
|
|
|
|
|
|
428 |
|
|
|
|
|
Interest rate derivatives |
|
|
23 |
|
|
|
|
|
|
|
(25 |
) |
|
|
48 |
|
Other derivative contracts |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets [1] |
|
|
481 |
|
|
|
|
|
|
|
386 |
|
|
|
95 |
|
Short-term investments |
|
|
8,861 |
|
|
|
327 |
|
|
|
8,534 |
|
|
|
|
|
Separate account assets [2] |
|
|
153,140 |
|
|
|
116,044 |
|
|
|
36,028 |
|
|
|
1,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value on a recurring basis |
|
$ |
275,200 |
|
|
$ |
119,386 |
|
|
$ |
146,759 |
|
|
$ |
9,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of level to total |
|
|
100 |
% |
|
|
43 |
% |
|
|
54 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity linked notes |
|
$ |
(10 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(10 |
) |
Derivative liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives |
|
|
(478 |
) |
|
|
|
|
|
|
(62 |
) |
|
|
(416 |
) |
Equity derivatives |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Foreign exchange derivatives |
|
|
214 |
|
|
|
|
|
|
|
214 |
|
|
|
|
|
Interest rate derivatives |
|
|
(254 |
) |
|
|
|
|
|
|
(213 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities [3] |
|
|
(515 |
) |
|
|
|
|
|
|
(61 |
) |
|
|
(454 |
) |
Other liabilities |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
(44 |
) |
Consumer notes [4] |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value on a recurring
basis |
|
$ |
(573 |
) |
|
$ |
|
|
|
$ |
(61 |
) |
|
$ |
(512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge
collateral to the Company. As of June 30, 2011, $410 of a cash collateral liability was netted against the derivative asset value
in the Condensed Consolidated Balance Sheet and is excluded from the table above. See footnote 3 below for derivative liabilities. |
|
[2] |
|
As of June 30, 2011, excludes approximately $4 billion of investment sales receivable that are not subject to fair value accounting. |
|
[3] |
|
Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the Level 3
roll-forward table included below in this Note 4, the derivative asset and liability are referred to as freestanding derivatives
and are presented on a net basis. |
|
[4] |
|
Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes. |
18
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, AFS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS |
|
$ |
2,889 |
|
|
$ |
|
|
|
$ |
2,412 |
|
|
$ |
477 |
|
CDOs |
|
|
2,611 |
|
|
|
|
|
|
|
30 |
|
|
|
2,581 |
|
CMBS |
|
|
7,917 |
|
|
|
|
|
|
|
7,228 |
|
|
|
689 |
|
Corporate |
|
|
39,884 |
|
|
|
|
|
|
|
37,755 |
|
|
|
2,129 |
|
Foreign government/government agencies |
|
|
1,683 |
|
|
|
|
|
|
|
1,627 |
|
|
|
56 |
|
Municipal |
|
|
12,124 |
|
|
|
|
|
|
|
11,852 |
|
|
|
272 |
|
RMBS |
|
|
5,683 |
|
|
|
|
|
|
|
4,398 |
|
|
|
1,285 |
|
U.S. Treasuries |
|
|
5,029 |
|
|
|
434 |
|
|
|
4,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, AFS |
|
|
77,820 |
|
|
|
434 |
|
|
|
69,897 |
|
|
|
7,489 |
|
Fixed maturities, FVO |
|
|
649 |
|
|
|
|
|
|
|
127 |
|
|
|
522 |
|
Equity securities, trading |
|
|
32,820 |
|
|
|
2,279 |
|
|
|
30,541 |
|
|
|
|
|
Equity securities, AFS |
|
|
973 |
|
|
|
298 |
|
|
|
521 |
|
|
|
154 |
|
Derivative assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives |
|
|
3 |
|
|
|
|
|
|
|
(18 |
) |
|
|
21 |
|
Equity derivatives |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Foreign exchange derivatives |
|
|
868 |
|
|
|
|
|
|
|
868 |
|
|
|
|
|
Interest rate derivatives |
|
|
(106 |
) |
|
|
|
|
|
|
(70 |
) |
|
|
(36 |
) |
Other derivative contracts |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets [1] |
|
|
799 |
|
|
|
|
|
|
|
780 |
|
|
|
19 |
|
Short-term investments |
|
|
8,528 |
|
|
|
541 |
|
|
|
7,987 |
|
|
|
|
|
Separate account assets [2] |
|
|
153,727 |
|
|
|
116,717 |
|
|
|
35,763 |
|
|
|
1,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value on a recurring basis |
|
$ |
275,316 |
|
|
$ |
120,269 |
|
|
$ |
145,616 |
|
|
$ |
9,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of level to total |
|
|
100 |
% |
|
|
44 |
% |
|
|
53 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity linked notes |
|
$ |
(9 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(9 |
) |
Derivative liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives |
|
|
(482 |
) |
|
|
|
|
|
|
(71 |
) |
|
|
(411 |
) |
Equity derivatives |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Foreign exchange derivatives |
|
|
(34 |
) |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
Interest rate derivatives |
|
|
(266 |
) |
|
|
|
|
|
|
(249 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities [3] |
|
|
(780 |
) |
|
|
|
|
|
|
(354 |
) |
|
|
(426 |
) |
Other liabilities |
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
(37 |
) |
Consumer notes [4] |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value on a recurring
basis |
|
$ |
(831 |
) |
|
$ |
|
|
|
$ |
(354 |
) |
|
$ |
(477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral
to the Company. As of December 31, 2010, $968 of cash collateral liability was netted against the derivative asset value in the
Condensed Consolidated Balance Sheet and is excluded from the table above. See footnote 3 below for derivative liabilities. |
|
[2] |
|
As of December 31, 2010, excludes approximately $6 billion of investment sales receivable that are not subject to fair value accounting. |
|
[3] |
|
Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the Level 3
roll-forward table included below in this Note 4, the derivative asset and liability are referred to as freestanding derivatives and
are presented on a net basis. |
|
[4] |
|
Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes. |
19
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
Determination of Fair Values
The valuation methodologies used to determine the fair values of assets and liabilities under the
exit price notion reflect market-participant objectives and are based on the application of the
fair value hierarchy that prioritizes relevant observable market inputs over unobservable inputs.
The Company determines the fair values of certain financial assets and financial liabilities based
on quoted market prices where available and where prices represent a reasonable estimate of fair
value. The Company also determines fair value based on future cash flows discounted at the
appropriate current market rate. Fair values reflect adjustments for counterparty credit quality,
the Companys default spreads, liquidity and, where appropriate, risk margins on unobservable
parameters. The following is a discussion of the methodologies used to determine fair values for
the financial instruments listed in the above tables.
Available-for-Sale Securities, Fixed Maturities, FVO, Equity Securities, Trading, and Short-term
Investments
The fair value of AFS securities, fixed maturities, FVO, equity securities, trading, and short-term
investments in an active and orderly market (e.g. not distressed or forced liquidation) are
determined by management after considering one of three primary sources of information: third-party
pricing services, independent broker quotations or pricing matrices. Security pricing is applied
using a waterfall approach whereby publicly available prices are first sought from third-party
pricing services, the remaining unpriced securities are submitted to independent brokers for
prices, or lastly, securities are priced using a pricing matrix. Based on the typical trading
volumes and the lack of quoted market prices for fixed maturities, third-party pricing services
will normally derive the security prices from recent reported trades for identical or similar
securities making adjustments through the reporting date based upon available market observable
information as outlined above. If there are no recently reported trades, the third-party pricing
services and independent brokers may use matrix or model processes to develop a security price
where future cash flow expectations are developed based upon collateral performance and discounted
at an estimated market rate. Included in the pricing of ABS and RMBS are estimates of the rate of
future prepayments of principal over the remaining life of the securities. Such estimates are
derived based on the characteristics of the underlying structure and prepayment speeds previously
experienced at the interest rate levels projected for the underlying collateral. Actual prepayment
experience may vary from these estimates.
Prices from third-party pricing services are often unavailable for securities that are rarely
traded or are traded only in privately negotiated transactions. As a result, certain securities
are priced via independent broker quotations which utilize inputs that may be difficult to
corroborate with observable market based data. Additionally, the majority of these independent
broker quotations are non-binding.
A pricing matrix is used to price private placement securities for which the Company is unable to
obtain a price from a third-party pricing service by discounting the expected future cash flows
from the security by a developed market discount rate utilizing current credit spreads. Credit
spreads are developed each month using market based data for public securities adjusted for credit
spread differentials between public and private securities which are obtained from a survey of
multiple private placement brokers. The appropriate credit spreads determined through this survey
approach are based upon the issuers financial strength and term to maturity, utilizing an
independent public security index and trade information and adjusting for the non-public nature of
the securities.
The Company performs a monthly analysis of the prices and credit spreads received from third
parties to ensure that the prices represent a reasonable estimate of the fair value. As a part of
this analysis, the Company considers trading volume and other factors to determine whether the
decline in market activity is significant when compared to normal activity in an active market, and
if so, whether transactions may not be orderly considering the weight of available evidence. If
the available evidence indicates that pricing is based upon transactions that are stale or not
orderly, the Company places little, if any, weight on the transaction price and will estimate fair
value utilizing an internal pricing model. This process involves quantitative and qualitative
analysis and is overseen by investment and accounting professionals. Examples of procedures
performed include, but are not limited to, initial and on-going review of third-party pricing
services methodologies, review of pricing statistics and trends, back testing recent trades, and
monitoring of trading volumes, new issuance activity and other market activities. In addition, the
Company ensures that prices received from independent brokers represent a reasonable estimate of
fair value through the use of internal and external cash flow models developed based on spreads,
and when available, market indices. As a result of this analysis, if the Company determines that
there is a more appropriate fair value based upon the available market data, the price received
from the third party is adjusted accordingly. The Companys internal pricing model utilizes the
Companys best estimate of expected future cash flows discounted at a rate of return that a market
participant would require. The significant inputs to the model include, but are not limited to,
current market inputs, such as credit loss assumptions, estimated prepayment speeds and market risk
premiums.
20
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
The Company has analyzed the third-party pricing services valuation methodologies and related
inputs, and has also evaluated the various types of securities in its investment portfolio to
determine an appropriate fair value hierarchy level based upon trading activity and the
observability of market inputs. Most prices provided by third-party pricing services are
classified into Level 2 because the inputs used in pricing the securities are market observable.
Due to a general lack of transparency in the process that brokers use to develop prices, most
valuations that are based on brokers prices are classified as Level 3. Some valuations may be
classified as Level 2 if the price can be corroborated with observable market data.
Derivative Instruments, including embedded derivatives within investments
Derivative instruments are fair valued using pricing valuation models that utilize independent
market data inputs, quoted market prices for exchange-traded derivatives, or independent broker
quotations. Excluding embedded and reinsurance related derivatives, as of June 30, 2011 and
December 31, 2010, 98% and 97%, respectively, of derivatives, based upon notional values, were
priced by valuation models or quoted market prices. The remaining derivatives were priced by
broker quotations. The Company performs a monthly analysis on derivative valuations which includes
both quantitative and qualitative analysis. Examples of procedures performed include, but are not
limited to, review of pricing statistics and trends, back testing recent trades, analyzing the
impacts of changes in the market environment, and review of changes in market value for each
derivative including those derivatives priced by brokers.
The Company utilizes derivative instruments to manage the risk associated with certain assets and
liabilities. However, the derivative instrument may not be classified with the same fair value
hierarchy level as the associated assets and liabilities. Therefore the realized and unrealized
gains and losses on derivatives reported in Level 3 may not reflect the offsetting impact of the
realized and unrealized gains and losses of the associated assets and liabilities.
Valuation Techniques and Inputs for Investments
Generally, the Company determines the estimated fair value of its AFS securities, fixed maturities,
FVO, equity securities, trading, and short-term investments using the market approach. The income
approach is used for securities priced using a pricing matrix, as well as for derivative
instruments. For Level 1 investments, which are comprised of on-the-run U.S. Treasuries,
exchange-traded equity securities, short-term investments, and exchange traded futures and option
contracts, valuations are based on observable inputs that reflect quoted prices for identical
assets in active markets that the Company has the ability to access at the measurement date.
For most of the Companys debt securities, the following inputs are typically used in the Companys
pricing methods: reported trades, benchmark yields, bids and/or estimated cash flows. For
securities, except U.S. Treasuries, inputs also include issuer spreads, which may consider credit
default swap curves. Derivative instruments are valued using mid-market inputs that are
predominantly observable in the market.
A description of additional inputs used in the Companys Level 2 and Level 3 measurements is listed below:
Level 2 |
|
The fair values of most of the Companys Level 2 investments are
determined by management after considering prices received from third
party pricing services. These investments include most fixed maturities
and preferred stocks, including those reported in separate account
assets. |
|
|
|
ABS, CDOs, CMBS and RMBS Primary inputs also include monthly payment
information, collateral performance, which varies by vintage year and includes
delinquency rates, collateral valuation loss severity rates, collateral refinancing
assumptions, credit default swap indices and, for ABS and RMBS, estimated prepayment
rates. |
|
|
|
Corporates Primary inputs also include observations of credit default swap
curves related to the issuer. |
|
|
|
Foreign government/government agencies Primary inputs also include observations
of credit default swap curves related to the issuer and political events in emerging
markets. |
|
|
|
Municipals Primary inputs also include Municipal Securities Rulemaking Board
reported trades and material event notices, and issuer financial statements. |
|
|
|
Short-term investments Primary inputs also include material event notices and
new issue money market rates. |
|
|
|
Equity securities, trading Consist of investments in mutual funds. Primary
inputs include net asset values obtained from third party pricing services. |
|
|
|
Credit derivatives Significant inputs primarily include the swap yield curve and
credit curves. |
|
|
|
Foreign exchange derivatives Significant inputs primarily include the swap yield
curve, currency spot and forward rates, and cross currency basis curves. |
|
|
|
Interest rate derivatives Significant input is primarily the swap yield curve. |
21
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
Level 3 |
|
Most of the Companys securities classified as Level 3 are valued based on brokers
prices. Certain long-dated securities are priced based on third party pricing services,
including municipal securities and foreign government/government agencies, as well as bank
loans and below investment grade private placement securities. Primary inputs for these
long-dated securities are consistent with the typical inputs used in Level 1 and Level 2
measurements noted above, but include benchmark interest rate or credit spread assumptions
that are not observable in the marketplace. Also included in Level 3 are certain derivative
instruments that either have significant unobservable inputs or are valued based on broker
quotations. Significant inputs for these derivative contracts primarily include the typical
inputs used in the Level 1 and Level 2 measurements noted above, but also may include the
following: |
|
|
|
Credit derivatives Significant unobservable inputs may include credit
correlation and swap yield curve and credit curve extrapolation beyond observable
limits. |
|
|
|
Equity derivatives Significant unobservable inputs may include equity
volatility. |
|
|
|
Interest rate contracts Significant unobservable inputs may include swap yield
curve extrapolation beyond observable limits and interest rate volatility. |
Separate Account Assets
Separate account assets are primarily invested in mutual funds but also have investments in fixed
maturity and equity securities. The separate account investments are valued in the same manner,
and using the same pricing sources and inputs, as the fixed maturity, equity security, and
short-term investments of the Company.
22
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant
Unobservable Inputs (Level 3)
The tables below provide fair value roll forwards for the three and six months ending June 30, 2011
and 2010, for the financial instruments classified as Level 3, excluding those related to the
Companys living benefits and associated hedging programs, which are reported in Note 4a.
For the three months ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
Total Fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
govt./govt. |
|
|
|
|
|
|
|
|
|
|
Maturities, |
|
Assets |
|
ABS |
|
|
CDOs |
|
|
CMBS |
|
|
Corporate |
|
|
agencies |
|
|
Municipal |
|
|
RMBS |
|
|
AFS |
|
Fair value as of March 31, 2011 |
|
$ |
446 |
|
|
$ |
2,674 |
|
|
$ |
741 |
|
|
$ |
2,096 |
|
|
$ |
63 |
|
|
$ |
276 |
|
|
$ |
1,124 |
|
|
$ |
7,420 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
(1 |
) |
|
|
|
|
|
|
13 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Included in OCI [2] |
|
|
17 |
|
|
|
10 |
|
|
|
34 |
|
|
|
27 |
|
|
|
1 |
|
|
|
9 |
|
|
|
(16 |
) |
|
|
82 |
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
60 |
|
Settlements |
|
|
(7 |
) |
|
|
(43 |
) |
|
|
(20 |
) |
|
|
(42 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
(146 |
) |
Sales |
|
|
(2 |
) |
|
|
(66 |
) |
|
|
(193 |
) |
|
|
(61 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(327 |
) |
Transfers into Level 3 [3] |
|
|
19 |
|
|
|
|
|
|
|
79 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
190 |
|
Transfers out of Level 3 [3] |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
(9 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
452 |
|
|
$ |
2,575 |
|
|
$ |
654 |
|
|
$ |
2,110 |
|
|
$ |
51 |
|
|
$ |
280 |
|
|
$ |
1,114 |
|
|
$ |
7,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1] |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
13 |
|
|
$ |
(6 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding Derivatives [4] |
|
|
|
|
|
|
Fixed |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
Other |
|
|
Total Free- |
|
|
|
|
|
|
Maturities |
|
|
Securities, |
|
|
Credit |
|
|
Equity |
|
|
Rate |
|
|
Derivative |
|
|
Standing |
|
|
Separate |
|
Assets |
|
FVO |
|
|
AFS |
|
|
Derivatives |
|
|
Derivatives |
|
|
Derivatives |
|
|
Contracts |
|
|
Derivatives |
|
|
Accounts |
|
Fair value as of March 31, 2011 |
|
$ |
579 |
|
|
$ |
80 |
|
|
$ |
(382 |
) |
|
$ |
5 |
|
|
$ |
9 |
|
|
$ |
31 |
|
|
$ |
(337 |
) |
|
$ |
1,207 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
(22 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
1 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(19 |
) |
|
|
5 |
|
Included in OCI [2] |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
Settlements |
|
|
(1 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
Sales |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
Transfers into Level 3 [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Transfers out of Level 3 [3] |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
556 |
|
|
$ |
100 |
|
|
$ |
(402 |
) |
|
$ |
6 |
|
|
$ |
7 |
|
|
$ |
30 |
|
|
$ |
(359 |
) |
|
$ |
1,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1] |
|
$ |
(22 |
) |
|
$ |
|
|
|
$ |
(19 |
) |
|
$ |
1 |
|
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
(21 |
) |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
Equity Linked Notes |
|
|
Other Liabilities |
|
|
Consumer Notes |
|
Fair value as of March 31, 2011 |
|
$ |
(10 |
) |
|
$ |
(51 |
) |
|
$ |
(5 |
) |
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
|
|
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
(10 |
) |
|
$ |
(44 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1] |
|
$ |
|
|
|
$ |
7 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
23
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
For the six months ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
Total Fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
govt./govt. |
|
|
|
|
|
|
|
|
|
|
Maturities, |
|
Assets |
|
ABS |
|
|
CDOs |
|
|
CMBS |
|
|
Corporate |
|
|
agencies |
|
|
Municipal |
|
|
RMBS |
|
|
AFS |
|
Fair value as of January 1, 2011 |
|
$ |
477 |
|
|
$ |
2,581 |
|
|
$ |
689 |
|
|
$ |
2,129 |
|
|
$ |
56 |
|
|
$ |
272 |
|
|
$ |
1,285 |
|
|
$ |
7,489 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
(6 |
) |
|
|
(15 |
) |
|
|
11 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(47 |
) |
Included in OCI [2] |
|
|
37 |
|
|
|
123 |
|
|
|
147 |
|
|
|
19 |
|
|
|
1 |
|
|
|
9 |
|
|
|
25 |
|
|
|
361 |
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
2 |
|
|
|
|
|
|
|
25 |
|
|
|
79 |
|
Settlements |
|
|
(18 |
) |
|
|
(78 |
) |
|
|
(30 |
) |
|
|
(73 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(67 |
) |
|
|
(268 |
) |
Sales |
|
|
(2 |
) |
|
|
(66 |
) |
|
|
(315 |
) |
|
|
(134 |
) |
|
|
(5 |
) |
|
|
(2 |
) |
|
|
(16 |
) |
|
|
(540 |
) |
Transfers into Level 3 [3] |
|
|
68 |
|
|
|
30 |
|
|
|
152 |
|
|
|
273 |
|
|
|
11 |
|
|
|
4 |
|
|
|
14 |
|
|
|
552 |
|
Transfers out of Level 3 [3] |
|
|
(104 |
) |
|
|
|
|
|
|
|
|
|
|
(128 |
) |
|
|
(12 |
) |
|
|
(3 |
) |
|
|
(143 |
) |
|
|
(390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
452 |
|
|
$ |
2,575 |
|
|
$ |
654 |
|
|
$ |
2,110 |
|
|
$ |
51 |
|
|
$ |
280 |
|
|
$ |
1,114 |
|
|
$ |
7,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1] |
|
$ |
(6 |
) |
|
$ |
(15 |
) |
|
$ |
11 |
|
|
$ |
(28 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(9 |
) |
|
$ |
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding Derivatives [4] |
|
|
|
|
|
|
Fixed |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
Other |
|
|
Total Free- |
|
|
|
|
|
|
Maturities |
|
|
Securities, |
|
|
Credit |
|
|
Equity |
|
|
Rate |
|
|
Derivative |
|
|
Standing |
|
|
Separate |
|
Assets |
|
FVO |
|
|
AFS |
|
|
Derivatives |
|
|
Derivatives |
|
|
Derivatives |
|
|
Contracts |
|
|
Derivatives |
|
|
Accounts |
|
Fair value as of January 1, 2011 |
|
$ |
522 |
|
|
$ |
154 |
|
|
$ |
(390 |
) |
|
$ |
4 |
|
|
$ |
(53 |
) |
|
$ |
32 |
|
|
$ |
(407 |
) |
|
$ |
1,247 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
36 |
|
|
|
(10 |
) |
|
|
(6 |
) |
|
|
2 |
|
|
|
(5 |
) |
|
|
(2 |
) |
|
|
(11 |
) |
|
|
24 |
|
Included in OCI [2] |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
|
|
|
|
37 |
|
|
|
1 |
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
65 |
|
|
|
34 |
|
Settlements |
|
|
(2 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
Sales |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(169 |
) |
Transfers into Level 3 [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Transfers out of Level 3 [3] |
|
|
|
|
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
556 |
|
|
$ |
100 |
|
|
$ |
(402 |
) |
|
$ |
6 |
|
|
$ |
7 |
|
|
$ |
30 |
|
|
$ |
(359 |
) |
|
$ |
1,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1] |
|
$ |
36 |
|
|
$ |
(10 |
) |
|
$ |
(8 |
) |
|
$ |
2 |
|
|
$ |
(3 |
) |
|
$ |
(2 |
) |
|
$ |
(11 |
) |
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
Equity Linked Notes |
|
|
Other Liabilities |
|
|
Consumer Notes |
|
Fair value as of January 1, 2011 |
|
$ |
(9 |
) |
|
$ |
(37 |
) |
|
$ |
(5 |
) |
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
|
|
|
|
(7 |
) |
|
|
1 |
|
Settlements |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
(10 |
) |
|
$ |
(44 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1] |
|
$ |
|
|
|
$ |
(7 |
) |
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
24
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
For the three months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
Total Fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
govt./ govt. |
|
|
|
|
|
|
|
|
|
|
Maturities, |
|
Assets |
|
ABS |
|
|
CDOs |
|
|
CMBS |
|
|
Corporate |
|
|
agencies |
|
|
Municipal |
|
|
RMBS |
|
|
AFS |
|
Fair value as of March 31, 2010 |
|
$ |
533 |
|
|
$ |
2,749 |
|
|
$ |
442 |
|
|
$ |
8,612 |
|
|
$ |
59 |
|
|
$ |
322 |
|
|
$ |
1,174 |
|
|
$ |
13,891 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
(3 |
) |
|
|
(22 |
) |
|
|
(42 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
|
(82 |
) |
Included in OCI [2] |
|
|
15 |
|
|
|
105 |
|
|
|
189 |
|
|
|
103 |
|
|
|
|
|
|
|
16 |
|
|
|
75 |
|
|
|
503 |
|
Purchases, issuances, and settlements |
|
|
(13 |
) |
|
|
(48 |
) |
|
|
(17 |
) |
|
|
61 |
|
|
|
(2 |
) |
|
|
(21 |
) |
|
|
238 |
|
|
|
198 |
|
Transfers into Level 3 [3] |
|
|
28 |
|
|
|
11 |
|
|
|
139 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
352 |
|
Transfers out of Level 3 [3] |
|
|
(12 |
) |
|
|
(17 |
) |
|
|
(59 |
) |
|
|
(140 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
548 |
|
|
$ |
2,778 |
|
|
$ |
652 |
|
|
$ |
8,816 |
|
|
$ |
51 |
|
|
$ |
317 |
|
|
$ |
1,466 |
|
|
$ |
14,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2010 [1] |
|
$ |
(4 |
) |
|
$ |
(28 |
) |
|
$ |
(39 |
) |
|
$ |
2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(16 |
) |
|
$ |
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding Derivatives [4] |
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
Other |
|
|
Total Free- |
|
|
|
|
|
|
Securities, |
|
|
Credit |
|
|
Equity |
|
|
Rate |
|
|
Derivative |
|
|
Standing |
|
|
Separate |
|
Assets |
|
AFS |
|
|
Derivatives |
|
|
Derivatives |
|
|
Derivatives |
|
|
Contracts |
|
|
Derivatives |
|
|
Accounts |
|
Fair value as of March 31, 2010 |
|
$ |
65 |
|
|
$ |
(491 |
) |
|
$ |
(1 |
) |
|
$ |
(6 |
) |
|
$ |
35 |
|
|
$ |
(463 |
) |
|
$ |
955 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
(1 |
) |
|
|
(47 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
(45 |
) |
|
|
(2 |
) |
Included in OCI [2] |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, and settlements |
|
|
8 |
|
|
|
5 |
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
(39 |
) |
|
|
5 |
|
Transfers into Level 3 [3] |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Transfers out of Level 3 [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
80 |
|
|
$ |
(533 |
) |
|
$ |
|
|
|
$ |
(49 |
) |
|
$ |
35 |
|
|
$ |
(547 |
) |
|
$ |
937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2010 [1] |
|
$ |
(4 |
) |
|
$ |
(47 |
) |
|
$ |
1 |
|
|
$ |
(20 |
) |
|
$ |
|
|
|
$ |
(66 |
) |
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Policyholder Funds and Benefits Payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other |
|
|
|
|
|
|
|
|
|
Institutional |
|
|
Equity Linked |
|
|
Policyholder Funds |
|
|
|
|
|
|
|
Liabilities |
|
Notes |
|
|
Notes |
|
|
and Benefits Payable |
|
|
Other Liabilities |
|
|
Consumer Notes |
|
Fair value as of March 31, 2010 |
|
$ |
(7 |
) |
|
$ |
(9 |
) |
|
$ |
(16 |
) |
|
$ |
(22 |
) |
|
$ |
(5 |
) |
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
9 |
|
|
|
2 |
|
|
|
11 |
|
|
|
6 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2010 |
|
$ |
2 |
|
|
$ |
(7 |
) |
|
$ |
(5 |
) |
|
$ |
(16 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2010 [1] |
|
$ |
9 |
|
|
$ |
2 |
|
|
$ |
11 |
|
|
$ |
|
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
For the six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
Total Fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
govt./ govt. |
|
|
|
|
|
|
|
|
|
|
Maturities, |
|
Assets |
|
ABS |
|
|
CDOs |
|
|
CMBS |
|
|
Corporate |
|
|
agencies |
|
|
Municipal |
|
|
RMBS |
|
|
AFS |
|
Fair value as of January 1, 2010 |
|
$ |
580 |
|
|
$ |
2,835 |
|
|
$ |
307 |
|
|
$ |
8,027 |
|
|
$ |
93 |
|
|
$ |
262 |
|
|
$ |
1,153 |
|
|
$ |
13,257 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
(3 |
) |
|
|
(85 |
) |
|
|
(114 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
|
(228 |
) |
Included in OCI [2] |
|
|
43 |
|
|
|
320 |
|
|
|
275 |
|
|
|
232 |
|
|
|
2 |
|
|
|
34 |
|
|
|
164 |
|
|
|
1,070 |
|
Purchases, issuances, and settlements |
|
|
(23 |
) |
|
|
(67 |
) |
|
|
(23 |
) |
|
|
277 |
|
|
|
(8 |
) |
|
|
25 |
|
|
|
206 |
|
|
|
387 |
|
Transfers into Level 3 [3] |
|
|
28 |
|
|
|
27 |
|
|
|
266 |
|
|
|
510 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
837 |
|
Transfers out of Level 3 [3] |
|
|
(77 |
) |
|
|
(252 |
) |
|
|
(59 |
) |
|
|
(238 |
) |
|
|
(42 |
) |
|
|
(4 |
) |
|
|
(23 |
) |
|
|
(695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
548 |
|
|
$ |
2,778 |
|
|
$ |
652 |
|
|
$ |
8,816 |
|
|
$ |
51 |
|
|
$ |
317 |
|
|
$ |
1,466 |
|
|
$ |
14,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2010 [1] |
|
$ |
(4 |
) |
|
$ |
(91 |
) |
|
$ |
(110 |
) |
|
$ |
2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(29 |
) |
|
$ |
(232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding Derivatives [4] |
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
Other |
|
|
Total Free- |
|
|
|
|
|
|
Securities, |
|
|
Credit |
|
|
Equity |
|
|
Rate |
|
|
Derivative |
|
|
Standing |
|
|
Separate |
|
Assets |
|
AFS |
|
|
Derivatives |
|
|
Derivatives |
|
|
Derivatives |
|
|
Contracts |
|
|
Derivatives |
|
|
Accounts |
|
Fair value as of January 1, 2010 |
|
$ |
58 |
|
|
$ |
(228 |
) |
|
$ |
(2 |
) |
|
$ |
5 |
|
|
$ |
36 |
|
|
$ |
(189 |
) |
|
$ |
962 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
(2 |
) |
|
|
(20 |
) |
|
|
2 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(18 |
) |
|
|
16 |
|
Included in OCI [2] |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, and settlements |
|
|
9 |
|
|
|
5 |
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
(39 |
) |
|
|
82 |
|
Transfers into Level 3 [3] |
|
|
6 |
|
|
|
(290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(290 |
) |
|
|
4 |
|
Transfers out of Level 3 [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
80 |
|
|
$ |
(533 |
) |
|
$ |
|
|
|
$ |
(49 |
) |
|
$ |
35 |
|
|
$ |
(547 |
) |
|
$ |
937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2010 [1] |
|
$ |
(5 |
) |
|
$ |
(20 |
) |
|
$ |
2 |
|
|
$ |
(20 |
) |
|
$ |
(1 |
) |
|
$ |
(39 |
) |
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Policyholder Funds and Benefits Payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other |
|
|
|
|
|
|
|
|
|
Institutional |
|
|
Equity Linked |
|
|
Policyholder Funds |
|
|
|
|
|
|
|
Liabilities |
|
Notes |
|
|
Notes |
|
|
and Benefits Payable |
|
|
Other Liabilities |
|
|
Consumer Notes |
|
Fair value as of January 1, 2010 |
|
$ |
(2 |
) |
|
$ |
(10 |
) |
|
$ |
(12 |
) |
|
$ |
|
|
|
$ |
(5 |
) |
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1] |
|
|
4 |
|
|
|
3 |
|
|
|
7 |
|
|
|
(5 |
) |
|
|
1 |
|
Transfers into Level 3 [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2010 |
|
$ |
2 |
|
|
$ |
(7 |
) |
|
$ |
(5 |
) |
|
$ |
(16 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2010 [1] |
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
7 |
|
|
$ |
|
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
All amounts in these rows are reported in net realized capital
gains/losses. The realized/unrealized gains (losses) included in net
income for separate account assets are offset by an equal amount for
separate account liabilities, which results in a net zero impact on
net income for the Company. All amounts are before income taxes and
amortization of deferred policy acquisition costs and present value of
future profits (DAC). |
|
[2] |
|
All amounts are before income taxes and amortization of DAC. |
|
[3] |
|
Transfers in and/or (out) of Level 3 are primarily attributable to the
availability of market observable information and the re-evaluation of
the observability of pricing inputs.
|
|
[4] |
|
Derivative instruments are reported in this table on a net basis for
asset/(liability) positions and reported in the Condensed Consolidated
Balance Sheet in other investments and other liabilities. |
26
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
Fair Value Option
The Company elected the fair value option for its investments containing an embedded credit
derivative which were not bifurcated as a result of new accounting guidance effective July 1, 2010.
The underlying credit risk of these securities is primarily corporate bonds and commercial real
estate. The Company elected the fair value option given the complexity of bifurcating the economic
components associated with the embedded credit derivative. Additionally, the Company elected the
fair value option for purchases of foreign government securities to align with the accounting for
yen-based fixed annuity liabilities, which are adjusted for changes in spot rates through realized
gains and losses. Similar to other fixed maturities, income earned from these securities is
recorded in net investment income. Changes in the fair value of these securities are recorded in
net realized capital gains and losses.
The Company previously elected the fair value option for one of its consolidated VIEs in order to
apply a consistent accounting model for the VIEs assets and liabilities. The VIE is an investment
vehicle that holds high quality investments, derivative instruments that reference third-party
corporate credit and issues notes to investors that reflect the credit characteristics of the high
quality investments and derivative instruments. The risks and rewards associated with the assets
of the VIE inure to the investors. The investors have no recourse against the Company. As a
result, there has been no adjustment to the market value of the notes for the Companys own credit
risk.
The following table presents the changes in fair value of those assets and liabilities accounted
for using the fair value option reported in net realized capital gains and losses in the Companys
Condensed Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Before-tax) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, FVO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
14 |
|
|
$ |
2 |
|
CRE CDOs |
|
|
(25 |
) |
|
|
(4 |
) |
|
|
21 |
|
|
|
(4 |
) |
Foreign government |
|
|
17 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-linked notes |
|
|
7 |
|
|
|
6 |
|
|
|
(7 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized capital gains (losses) |
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
39 |
|
|
$ |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the fair value of assets and liabilities accounted for using the fair
value option included in the Companys Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
Assets |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Fixed maturities, FVO |
|
|
|
|
|
|
|
|
ABS |
|
$ |
65 |
|
|
$ |
65 |
|
CRE CDOs |
|
|
290 |
|
|
|
270 |
|
Corporate |
|
|
267 |
|
|
|
250 |
|
Foreign government |
|
|
605 |
|
|
|
64 |
|
|
|
|
|
|
|
|
Total fixed maturities, FVO |
|
$ |
1,227 |
|
|
$ |
649 |
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
Credit-linked notes [1] |
|
$ |
44 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
As of June 30, 2011 and December 31, 2010, the outstanding principal balance of
the notes was $243. |
27
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements Financial Instruments Excluding Guaranteed Living Benefits
(continued)
Financial Instruments Not Carried at Fair Value
The following table presents carrying amounts and fair values of The Hartfords financial
instruments not carried at fair value and not included in the above fair value discussion as of
June 30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans |
|
$ |
5,304 |
|
|
$ |
5,393 |
|
|
$ |
4,489 |
|
|
$ |
4,524 |
|
Policy loans |
|
|
2,188 |
|
|
|
2,318 |
|
|
|
2,181 |
|
|
|
2,294 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable [1] |
|
$ |
10,837 |
|
|
$ |
11,141 |
|
|
$ |
11,155 |
|
|
$ |
11,383 |
|
Senior notes [2] |
|
|
4,880 |
|
|
|
5,167 |
|
|
|
4,880 |
|
|
|
5,072 |
|
Junior subordinated debentures [2] |
|
|
1,734 |
|
|
|
2,634 |
|
|
|
1,727 |
|
|
|
2,596 |
|
Consumer notes [3] |
|
|
364 |
|
|
|
377 |
|
|
|
377 |
|
|
|
392 |
|
|
|
|
[1] |
|
Excludes guarantees on variable annuities, group accident and health and universal life insurance contracts, including
corporate owned life insurance. |
|
[2] |
|
Included in long-term debt in the Condensed Consolidated Balance Sheets, except for current maturities, which are
included in short-term debt. |
|
[3] |
|
Excludes amounts carried at fair value and included in disclosures above. |
As of June 30, 2011 and December 31, 2010, included in other liabilities in the Condensed
Consolidated Balance Sheets are carrying amounts of $223 and $233 for deposits, respectively, and
$25, for Federal Home Loan Bank advances, related to Federal Trust Corporation. These liabilities
are held for sale and the carrying amounts approximate fair value.
The Company has not made any changes in its valuation methodologies for the following assets and
liabilities since December 31, 2010.
|
|
Fair values for mortgage loans were estimated using discounted cash flow calculations based
on current lending rates for similar type loans. Current lending rates reflect changes in
credit spreads and the remaining terms of the loans. |
|
|
Fair value for policy loans and consumer notes were estimated using discounted cash flow
calculations using current interest rates. |
|
|
Fair values for other policyholder funds and benefits payable, not carried at fair value,
are determined by estimating future cash flows, discounted at the current market rate. |
|
|
Fair values for senior notes and junior subordinated debentures are based primarily on
market quotations from independent third-party pricing services. |
28
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements Guaranteed Living Benefits
These disclosures provide information as to the extent to which the Company uses fair value to
measure financial instruments related to variable annuity product guaranteed living benefits and
the related variable annuity hedging program and information about the inputs used to value those
financial instruments to allow users to assess the relative reliability of the measurements. The
following tables present assets and (liabilities) related to the guaranteed living benefits program
carried at fair value by hierarchy level.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity hedging derivatives |
|
$ |
144 |
|
|
$ |
|
|
|
$ |
(33 |
) |
|
$ |
177 |
|
Macro hedge program |
|
|
265 |
|
|
|
|
|
|
|
88 |
|
|
|
177 |
|
Reinsurance recoverable for U.S. GMWB |
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value on a recurring basis |
|
$ |
646 |
|
|
$ |
|
|
|
$ |
55 |
|
|
$ |
591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. guaranteed withdrawal benefits |
|
$ |
(1,420 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,420 |
) |
International guaranteed withdrawal benefits |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
Variable annuity hedging derivatives |
|
|
285 |
|
|
|
|
|
|
|
(86 |
) |
|
|
371 |
|
Macro hedge program |
|
|
206 |
|
|
|
|
|
|
|
126 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value on a recurring
basis |
|
$ |
(959 |
) |
|
$ |
|
|
|
$ |
40 |
|
|
$ |
(999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity hedging derivatives |
|
$ |
339 |
|
|
$ |
|
|
|
$ |
(122 |
) |
|
$ |
461 |
|
Macro hedge program |
|
|
386 |
|
|
|
2 |
|
|
|
176 |
|
|
|
208 |
|
Reinsurance recoverable for U.S. GMWB |
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value on a recurring basis |
|
$ |
1,005 |
|
|
$ |
2 |
|
|
$ |
54 |
|
|
$ |
949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. guaranteed withdrawal benefits |
|
$ |
(1,611 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,611 |
) |
International guaranteed withdrawal benefits |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
(36 |
) |
International other guaranteed living benefits |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Variable annuity hedging derivatives |
|
|
128 |
|
|
|
|
|
|
|
(11 |
) |
|
|
139 |
|
Macro hedge program |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value on a recurring
basis |
|
$ |
(1,518 |
) |
|
$ |
(2 |
) |
|
$ |
(11 |
) |
|
$ |
(1,505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
29
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements Guaranteed Living Benefits (continued)
Product Derivatives
The Company currently offers certain variable annuity products with GMWB riders in the U.S., and
formerly offered such products in the U.K. and Japan. The GMWB represents an embedded derivative
in the variable annuity contract. When it is determined that (1) the embedded derivative possesses
economic characteristics that are not clearly and closely related to the economic characteristics
of the host contract, and (2) a separate instrument with the same terms would qualify as a
derivative instrument, the embedded derivative is bifurcated from the host for measurement
purposes. The embedded derivative is carried at fair value, with changes in fair value reported in
net realized capital gains and losses. The Companys GMWB liability is reported in other
policyholder funds and benefits payable in the Consolidated Balance Sheets.
In valuing the embedded derivative, the Company attributes to the derivative a portion of the
expected fees to be collected over the expected life of the contract from the contract holder equal
to the present value of future GMWB claims (the Attributed Fees). The excess of fees collected
from the contract holder in the current period over the current periods Attributed Fees are
associated with the host variable annuity contract and reported in fee income.
U.S. GMWB Reinsurance Derivative
The Company has reinsurance arrangements in place to transfer a portion of its risk of loss due to
GMWB. These arrangements are recognized as derivatives and carried at fair value in reinsurance
recoverables. Changes in the fair value of the reinsurance agreements are reported in net realized
capital gains and losses.
The fair value of the U.S. GMWB reinsurance derivative is calculated as an aggregation of the
components described in the Living Benefits Required to be Fair Valued discussion below and is
modeled using significant unobservable policyholder behavior inputs, identical to those used in
calculating the underlying liability, such as lapses, fund selection, resets and withdrawal
utilization and risk margins.
Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable)
Fair values for GMWB and guaranteed minimum accumulation benefit (GMAB) contracts are calculated
using the income approach based upon internally developed models because active, observable markets
do not exist for those items. The fair value of the Companys guaranteed benefit liabilities,
classified as embedded derivatives, and the related reinsurance and customized freestanding
derivatives is calculated as an aggregation of the following components: Best Estimate Claim
Payments; Credit Standing Adjustment; and Margins. The resulting aggregation is reconciled or
calibrated, if necessary, to market information that is, or may be, available to the Company, but
may not be observable by other market participants, including reinsurance discussions and
transactions. The Company believes the aggregation of these components, as necessary and as
reconciled or calibrated to the market information available to the Company, results in an amount
that the Company would be required to transfer or receive, for an asset, to or from market
participants in an active liquid market, if one existed, for those market participants to assume
the risks associated with the guaranteed minimum benefits and the related reinsurance and
customized derivatives. The fair value is likely to materially diverge from the ultimate
settlement of the liability as the Company believes settlement will be based on our best estimate
assumptions rather than those best estimate assumptions plus risk margins. In the absence of any
transfer of the guaranteed benefit liability to a third party, the release of risk margins is
likely to be reflected as realized gains in future periods net income. Each component described
below is unobservable in the marketplace and require subjectivity by the Company in determining
their value.
Best Estimate
Claim Payments
The Best Estimate Claim Payments is calculated based on actuarial and capital market assumptions
related to projected cash flows, including the present value of benefits and related contract
charges, over the lives of the contracts, incorporating expectations concerning policyholder
behavior such as lapses, fund selection, resets and withdrawal utilization. For the customized
derivatives, policyholder behavior is prescribed in the derivative contract. Because of the
dynamic and complex nature of these cash flows, best estimate assumptions and a Monte Carlo
stochastic process is used in valuation. The Monte Carlo stochastic process involves the
generation of thousands of scenarios that assume risk neutral returns consistent with swap rates
and a blend of observable implied index volatility levels. Estimating these cash flows involves
numerous estimates and subjective judgments regarding a number of variables including expected
market rates of return, market volatility, correlations of market index returns to funds, fund
performance, discount rates and assumptions about policyholder behavior which emerge over time.
At each valuation date, the Company assumes expected returns based on:
|
|
risk-free rates as represented by the Eurodollar futures, LIBOR deposits and swap rates to
derive forward curve rates; |
|
|
market implied volatility assumptions for each underlying index based primarily on a blend
of observed market implied volatility data; |
|
|
correlations of historical returns across underlying well known market indices based on
actual observed returns over the ten years preceding the valuation date; and |
|
|
three years of history for fund indexes compared to separate account fund regression. |
30
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements Guaranteed Living Benefits (continued)
As many guaranteed benefit obligations are relatively new in the marketplace, actual
policyholder behavior experience is limited. As a result, estimates of future policyholder behavior
are subjective and based on analogous internal and external data. As markets change, mature and
evolve and actual policyholder behavior emerges, management continually evaluates the
appropriateness of its assumptions for this component of the fair value model.
On a daily basis, the Company updates capital market assumptions used in the GMWB liability model
such as interest rates and equity indices. On a weekly basis, the blend of implied equity index
volatilities is updated. The Company continually monitors various aspects of policyholder behavior
and may modify certain of its assumptions, including living benefit lapses and withdrawal rates, if
credible emerging data indicates that changes are warranted. At a minimum, all policyholder
behavior assumptions are reviewed and updated, as appropriate, in conjunction with the completion
of the Companys comprehensive study to refine its estimate of future gross profits during the
third quarter of each year.
Credit Standing Adjustment
This assumption makes an adjustment that market participants would make, in determining fair value,
to reflect the risk that guaranteed benefit obligations or the GMWB reinsurance recoverables will
not be fulfilled (nonperformance risk). The Companys estimate of the Credit Standing Adjustment
incorporates a blend of observable Company and reinsurer credit default spreads from capital
markets, adjusted for market recoverability. The credit standing adjustment assumption, net of
reinsurance, and exclusive of the impact of the credit standing adjustment on other market inputs,
resulted in pre-tax realized gains/(losses) of $1 and $54 for the three months ended June 30, 2011
and 2010, respectively. As of June 30, 2011 and December 31, 2010 the credit standing adjustment
was $26, respectively.
Margins
The behavior risk margin adds a margin that market participants would require, in determining fair
value, for the risk that the Companys assumptions about policyholder behavior could differ from
actual experience. The behavior risk margin is calculated by taking the difference between adverse
policyholder behavior assumptions and best estimate assumptions.
The Company did not update any policyholder behavior assumptions, in the three and six months ended
June 30, 2011 or the three and six months ended June 30, 2010. As of June 30, 2011 and December 31,
2010 the behavior risk margin was $525 and $565, respectively.
In addition to the non-market-based updates described above, the Company recognized
non-market-based updates driven by the relative outperformance of the underlying actively managed
funds as compared to their respective indices resulting in pre-tax realized gains of approximately
$4 and $15, for the three months ended June 30, 2011 and 2010, respectively, and $29 and $42 for
the six months ended June 30, 2011 and 2010, respectively.
31
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements Guaranteed Living Benefits (continued)
The tables below provide fair value roll forwards for the three and six months ended June 30,
2011 and 2010, for the financial instruments related to the Guaranteed Living Benefits Program
classified as Levels 1, 2 and 3.
For the three months ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Annuity Hedging Derivatives [5] |
|
|
|
|
|
|
|
|
|
|
|
Total Variable Annuity |
|
Asset/(liability) |
|
Levels 1 and 2 |
|
|
Level 3 |
|
|
Hedging Derivatives |
|
Fair value as of March 31, 2011 |
|
$ |
(142 |
) |
|
$ |
488 |
|
|
$ |
346 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
(17 |
) |
|
|
60 |
|
|
|
43 |
|
Settlements[3] |
|
|
40 |
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
(119 |
) |
|
$ |
548 |
|
|
$ |
429 |
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1], [2], [4] |
|
|
|
|
|
$ |
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guaranteed |
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
Withdrawal Benefits |
|
|
|
Reinsurance |
|
|
U.S. Guaranteed |
|
|
Guaranteed |
|
|
Net of Reinsurance |
|
|
|
Recoverable |
|
|
Withdrawal |
|
|
Withdrawal |
|
|
and Hedging |
|
Asset/(liability) |
|
for GMWB |
|
|
Benefits Level 3 |
|
|
Benefits Level 3 |
|
|
Derivatives |
|
Fair value as of March 31, 2011 |
|
$ |
224 |
|
|
$ |
(1,301 |
) |
|
$ |
(23 |
) |
|
$ |
(754 |
) |
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
4 |
|
|
|
(80 |
) |
|
|
(4 |
) |
|
|
(37 |
) |
Settlements[3] |
|
|
9 |
|
|
|
(39 |
) |
|
|
(3 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
237 |
|
|
$ |
(1,420 |
) |
|
$ |
(30 |
) |
|
$ |
(784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1], [2], [4] |
|
$ |
4 |
|
|
$ |
(80 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Macro Hedge Program [5] |
|
|
International Other |
|
|
|
|
|
|
|
|
|
|
|
Total Macro |
|
|
Guaranteed Living |
|
Asset/(liability) |
|
Levels 1 and 2 |
|
|
Level 3 |
|
|
Hedge Program |
|
|
Benefits Level 3 |
|
Fair value as of March 31, 2011 |
|
$ |
(92 |
) |
|
$ |
125 |
|
|
$ |
33 |
|
|
$ |
3 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
53 |
|
|
|
(18 |
) |
|
|
35 |
|
|
|
(2 |
) |
Purchases [3] |
|
|
99 |
|
|
|
185 |
|
|
|
284 |
|
|
|
|
|
Settlements[3] |
|
|
154 |
|
|
|
(35 |
) |
|
|
119 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
214 |
|
|
$ |
257 |
|
|
$ |
471 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1], [2], [4] |
|
|
|
|
|
$ |
(3 |
) |
|
|
|
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
32
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements Guaranteed Living Benefits Program (continued)
For the six months ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Annuity Hedging Derivatives [5] |
|
|
|
|
|
|
|
|
|
|
|
Total Variable Annuity |
|
Asset/(liability) |
|
Levels 1 and 2 |
|
|
Level 3 |
|
|
Hedging Derivatives |
|
Fair value as of January 1, 2011 |
|
$ |
(133 |
) |
|
$ |
600 |
|
|
$ |
467 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
(125 |
) |
|
|
(59 |
) |
|
|
(184 |
) |
Purchases [3] |
|
|
|
|
|
|
23 |
|
|
|
23 |
|
Settlements[3] |
|
|
139 |
|
|
|
(16 |
) |
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
(119 |
) |
|
$ |
548 |
|
|
$ |
429 |
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1], [2], [4] |
|
|
|
|
|
$ |
(61 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guaranteed |
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
Withdrawal Benefits |
|
|
|
Reinsurance |
|
|
U.S. Guaranteed |
|
|
Guaranteed |
|
|
Net of Reinsurance |
|
|
|
Recoverable |
|
|
Withdrawal |
|
|
Withdrawal |
|
|
and Hedging |
|
Asset/(liability) |
|
for GMWB |
|
|
Benefits Level 3 |
|
|
Benefits Level 3 |
|
|
Derivatives |
|
Fair value as of January 1, 2011 |
|
$ |
280 |
|
|
$ |
(1,611 |
) |
|
$ |
(36 |
) |
|
$ |
(900 |
) |
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
(61 |
) |
|
|
268 |
|
|
|
11 |
|
|
|
34 |
|
Purchases [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
Settlements[3] |
|
|
18 |
|
|
|
(77 |
) |
|
|
(5 |
) |
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
237 |
|
|
$ |
(1,420 |
) |
|
$ |
(30 |
) |
|
$ |
(784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1], [2], [4] |
|
$ |
(61 |
) |
|
$ |
268 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Macro Hedge Program [5] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Other |
|
|
|
|
|
|
|
|
|
|
|
Total Macro |
|
|
Guaranteed Living |
|
Asset/(liability) |
|
Levels 1 and 2 |
|
|
Level 3 |
|
|
Hedge Program |
|
|
Benefits Level 3 |
|
Fair value as of January 1, 2011 |
|
$ |
176 |
|
|
$ |
208 |
|
|
$ |
384 |
|
|
$ |
3 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
(221 |
) |
|
|
(101 |
) |
|
|
(322 |
) |
|
|
(1 |
) |
Purchases [3] |
|
|
99 |
|
|
|
185 |
|
|
|
284 |
|
|
|
|
|
Settlements[3] |
|
|
160 |
|
|
|
(35 |
) |
|
|
125 |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2011 |
|
$ |
214 |
|
|
$ |
257 |
|
|
$ |
471 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at
June 30, 2011 [1], [2], [4] |
|
|
|
|
|
$ |
(85 |
) |
|
|
|
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
33
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements Guaranteed Living Benefits Program (continued)
For the three months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Annuity Hedging Derivatives [5] |
|
|
|
|
|
|
|
|
|
|
|
Total Variable Annuity |
|
Asset/(liability) |
|
Levels 1 and 2 |
|
|
Level 3 |
|
|
Hedging Derivatives |
|
Fair value as of March 31, 2010 |
|
$ |
(166 |
) |
|
$ |
311 |
|
|
$ |
145 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
208 |
|
|
|
617 |
|
|
|
825 |
|
Purchases, issuances, and settlements [3] |
|
|
(133 |
) |
|
|
|
|
|
|
(133 |
) |
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
(91 |
) |
|
$ |
928 |
|
|
$ |
837 |
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at June
30, 2010 [1], [2],[4] |
|
|
|
|
|
$ |
617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guaranteed |
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
Withdrawal Benefits |
|
|
|
Reinsurance |
|
|
U.S. Guaranteed |
|
|
Guaranteed |
|
|
Net of Reinsurance |
|
|
|
Recoverable |
|
|
Withdrawal |
|
|
Withdrawal |
|
|
and Hedging |
|
Asset/(liability) |
|
for GMWB |
|
|
Benefits Level 3 |
|
|
Benefits Level 3 |
|
|
Derivatives |
|
Fair value as of March 31, 2010 |
|
$ |
295 |
|
|
$ |
(1,655 |
) |
|
$ |
(31 |
) |
|
$ |
(1,246 |
) |
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
246 |
|
|
|
(1,458 |
) |
|
|
(39 |
) |
|
|
(426 |
) |
Included in OCI [2] |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Purchases, issuances, and settlements [3] |
|
|
9 |
|
|
|
(35 |
) |
|
|
(1 |
) |
|
|
(160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
550 |
|
|
$ |
(3,148 |
) |
|
$ |
(72 |
) |
|
$ |
(1,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at June
30, 2010 [1], [2], [4] |
|
$ |
246 |
|
|
$ |
(1,458 |
) |
|
$ |
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Macro Hedge Program [5] |
|
|
International Other |
|
|
|
|
|
|
|
|
|
|
|
Total Macro |
|
|
Guaranteed Living |
|
Asset/(liability) |
|
Levels 1 and 2 |
|
|
Level 3 |
|
|
Hedge Program |
|
|
Benefits Level 3 |
|
Fair Value as of March 31, 2010 |
|
$ |
54 |
|
|
$ |
151 |
|
|
$ |
205 |
|
|
$ |
4 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
117 |
|
|
|
280 |
|
|
|
397 |
|
|
|
(5 |
) |
Purchases, issuances, and settlements [3] |
|
|
19 |
|
|
|
232 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
190 |
|
|
$ |
663 |
|
|
$ |
853 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at June
30, 2010 [1], [2],[4] |
|
|
|
|
|
$ |
300 |
|
|
|
|
|
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
34
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4a. Fair Value Measurements Guaranteed Living Benefits Program (continued)
For the six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Annuity Hedging Derivatives [5] |
|
|
|
|
|
|
|
|
|
|
|
Total Variable Annuity |
|
Asset/(liability) |
|
Levels 1 and 2 |
|
|
Level 3 |
|
|
Hedging Derivatives |
|
Fair value as of January 1, 2010 |
|
$ |
(184 |
) |
|
$ |
236 |
|
|
$ |
52 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
123 |
|
|
|
539 |
|
|
|
662 |
|
Purchases, issuances, and settlements [3] |
|
|
(30 |
) |
|
|
153 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
(91 |
) |
|
$ |
928 |
|
|
$ |
837 |
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at June
30, 2010 [1], [2],[4] |
|
|
|
|
|
$ |
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guaranteed |
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
Withdrawal Benefits |
|
|
|
Reinsurance |
|
|
U.S. Guaranteed |
|
|
Guaranteed |
|
|
Net of Reinsurance |
|
|
|
Recoverable |
|
|
Withdrawal |
|
|
Withdrawal |
|
|
and Hedging |
|
Asset/(liability) |
|
for GMWB |
|
|
Benefits Level 3 |
|
|
Benefits Level 3 |
|
|
Derivatives |
|
Fair value as of January 1, 2010 |
|
$ |
347 |
|
|
$ |
(1,957 |
) |
|
$ |
(45 |
) |
|
$ |
(1,603 |
) |
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
185 |
|
|
|
(1,120 |
) |
|
|
(24 |
) |
|
|
(297 |
) |
Purchases, issuances, and settlements [3] |
|
|
18 |
|
|
|
(71 |
) |
|
|
(3 |
) |
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
550 |
|
|
$ |
(3,148 |
) |
|
$ |
(72 |
) |
|
$ |
(1,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at June
30, 2010 [1], [2], [4] |
|
$ |
185 |
|
|
$ |
(1,120 |
) |
|
$ |
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Macro Hedge Program [5] |
|
|
International Other |
|
|
|
|
|
|
|
|
|
|
|
Total Macro |
|
|
Guaranteed Living |
|
Asset/(liability) |
|
Levels 1 and 2 |
|
|
Level 3 |
|
|
Hedge Program |
|
|
Benefits Level 3 |
|
Fair Value as of January 1, 2010 |
|
$ |
28 |
|
|
$ |
290 |
|
|
$ |
318 |
|
|
$ |
2 |
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income [1],[2],[6] |
|
|
92 |
|
|
|
141 |
|
|
|
233 |
|
|
|
(2 |
) |
Purchases, issuances, and settlements [3] |
|
|
70 |
|
|
|
232 |
|
|
|
302 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2010 |
|
$ |
190 |
|
|
$ |
663 |
|
|
$ |
853 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses)
included in net income related to
financial instruments still held at June
30, 2010 [1], [2],[4] |
|
|
|
|
|
$ |
161 |
|
|
|
|
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The Company classifies gains and losses on GMWB reinsurance derivatives and Guaranteed Living Benefit embedded derivatives as
unrealized gains (losses) for purposes of disclosure in this table because it is impracticable to track on a contract-by-contract
basis the realized gains (losses) for these derivatives and embedded derivatives. |
|
[2] |
|
All amounts are before income taxes and amortization of DAC. |
|
[3] |
|
The Purchases, issuances, and settlements primarily relates to the payment and receipt of cash on futures and option contracts
classified as Level 1 and interest rate, currency and credit default swaps classified as Level 2. As of January 1, 2011, for
GMWB reinsurance and guaranteed withdrawal benefits, purchases, issuances and settlements represent the reinsurance premium paid
and the attributed fees collected, respectively. |
|
[4] |
|
Disclosure of changes in unrealized gains (losses) is not required for Levels 1 and 2. Information presented is for Level 3 only. |
|
[5] |
|
The variable annuity hedging derivatives and the macro hedge program derivatives are reported in this table on a net basis for
asset/(liability) positions and reported in the Condensed Consolidated Balance Sheet in other investments and other liabilities. |
|
[6] |
|
Includes both market and non-market impacts in deriving realized and unrealized gains (losses). |
35
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments
Significant Investment Accounting Policies
Recognition and Presentation of Other-Than-Temporary Impairments
The Company deems debt securities and certain equity securities with debt-like characteristics
(collectively debt securities) to be other-than-temporarily impaired (impaired) if a security
meets the following conditions: a) the Company intends to sell or it is more likely than not the
Company will be required to sell the security before a recovery in value, or b) the Company does
not expect to recover the entire amortized cost basis of the security. If the Company intends to
sell or it is more likely than not the Company will be required to sell the security before a
recovery in value, a charge is recorded in net realized capital losses equal to the difference
between the fair value and amortized cost basis of the security. For those impaired debt
securities which do not meet the first condition and for which the Company does not expect to
recover the entire amortized cost basis, the difference between the securitys amortized cost basis
and the fair value is separated into the portion representing a credit other-than-temporary
impairment (impairment), which is recorded in net realized capital losses, and the remaining
impairment, which is recorded in OCI. Generally, the Company determines a securitys credit
impairment as the difference between its amortized cost basis and its best estimate of expected
future cash flows discounted at the securitys effective yield prior to impairment. The remaining
non-credit impairment, which is recorded in OCI, is the difference between the securitys fair
value and the Companys best estimate of expected future cash flows discounted at the securitys
effective yield prior to the impairment, which typically represents current market liquidity and
risk premiums. The previous amortized cost basis less the impairment recognized in net realized
capital losses becomes the securitys new cost basis. The Company accretes the new cost basis to
the estimated future cash flows over the expected remaining life of the security by prospectively
adjusting the securitys yield, if necessary. The following table presents the change in
non-credit impairments recognized in OCI as disclosed in the Companys Condensed Consolidated
Statements of Comprehensive Income for the three and six months ended June 30, 2011 and 2010,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
OTTI losses recognized in OCI |
|
$ |
(8 |
) |
|
$ |
(184 |
) |
|
$ |
(72 |
) |
|
$ |
(372 |
) |
Changes in fair value and/or sales |
|
|
3 |
|
|
|
223 |
|
|
|
67 |
|
|
|
477 |
|
Tax and deferred acquisition costs |
|
|
1 |
|
|
|
(18 |
) |
|
|
6 |
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in non-credit impairments recognized in OCI |
|
$ |
(4 |
) |
|
$ |
21 |
|
|
$ |
1 |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys evaluation of whether a credit impairment exists for debt securities includes but is
not limited to, the following factors: (a) changes in the financial condition of the securitys
underlying collateral, (b) whether the issuer is current on contractually obligated interest and
principal payments, (c) changes in the financial condition, credit rating and near-term prospects
of the issuer, (d) the extent to which the fair value has been less than the amortized cost of the
security and (e) the payment structure of the security. The Companys best estimate of expected
future cash flows used to determine the credit loss amount is a quantitative and qualitative
process that incorporates information received from third-party sources along with certain internal
assumptions and judgments regarding the future performance of the security. The Companys best
estimate of future cash flows involves assumptions including, but not limited to, various
performance indicators, such as historical and projected default and recovery rates, credit
ratings, current and projected delinquency rates, and loan-to-value (LTV) ratios. In addition,
for structured securities, the Company considers factors including, but not limited to, average
cumulative collateral loss rates that vary by vintage year, commercial and residential property
value declines that vary by property type and location and commercial real estate delinquency
levels. These assumptions require the use of significant management judgment and include the
probability of issuer default and estimates regarding timing and amount of expected recoveries
which may include estimating the underlying collateral value. In addition, projections of expected
future debt security cash flows may change based upon new information regarding the performance of
the issuer and/or underlying collateral such as changes in the projections of the underlying
property value estimates.
For equity securities where the decline in the fair value is deemed to be other-than-temporary, a
charge is recorded in net realized capital losses equal to the difference between the fair value
and cost basis of the security. The previous cost basis less the impairment becomes the securitys
new cost basis. The Company asserts its intent and ability to retain those equity securities
deemed to be temporarily impaired until the price recovers. Once identified, these securities are
systematically restricted from trading unless approved by a committee of investment and accounting
professionals (Committee). The Committee will only authorize the sale of these securities based
on predefined criteria that relate to events that could not have been reasonably foreseen.
Examples of the criteria include, but are not limited to, the deterioration in the issuers
financial condition, security price declines, a change in regulatory requirements or a major
business combination or major disposition.
The primary factors considered in evaluating whether an impairment exists for an equity security
include, but are not limited to: (a) the length of time and extent to which the fair value has been
less than the cost of the security, (b) changes in the financial condition, credit rating and
near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated
payments and (d) the intent and ability of the Company to retain the investment for a period of
time sufficient to allow for recovery.
36
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Mortgage Loan Valuation Allowances
The Companys security monitoring process reviews mortgage loans on a quarterly basis to identify
potential credit losses. Commercial mortgage loans are considered to be impaired when management
estimates that, based upon current information and events, it is probable that the Company will be
unable to collect amounts due according to the contractual terms of the loan agreement. Criteria
used to determine if an impairment exists include, but are not limited to: current and projected
macroeconomic factors, such as unemployment rates, and property-specific factors such as rental
rates, occupancy levels, LTV ratios and debt service coverage ratios (DSCR). In addition, the
Company considers historic, current and projected delinquency rates and property values. For
residential mortgage loans, impairments are evaluated based on pools of loans with similar
characteristics including, but not limited to, similar property types and loan performance status.
These assumptions require the use of significant management judgment and include the probability
and timing of borrower default and loss severity estimates. In addition, projections of expected
future cash flows may change based upon new information regarding the performance of the borrower
and/or underlying collateral such as changes in the projections of the underlying property value
estimates.
For mortgage loans that are deemed impaired, a valuation allowance is established for the
difference between the carrying amount and the Companys share of either (a) the present value of
the expected future cash flows discounted at the loans original effective interest rate, (b) the
loans observable market price or, most frequently, (c) the fair value of the collateral.
Additionally, a loss contingency valuation allowance is established for estimated probable credit
losses on certain homogenous groups of residential loans. For commercial loans, a valuation
allowance has been established for either individual loans or as a projected loss contingency for
loans with an LTV ratio of 90% or greater and consideration of other credit quality factors,
including DSCR. Changes in valuation allowances are recorded in net realized capital gains and
losses. Interest income on impaired loans is accrued to the extent it is deemed collectable and
the loans continue to perform under the original or restructured terms. Interest income ceases to
accrue for loans when it is probable that the Company will not receive interest and principal
payments according to the contractual terms of the loan agreement, or if a loan is more than 60
days past due. Loans may resume accrual status when it is determined that sufficient collateral
exists to satisfy the full amount of the loan and interest payments, as well as when it is probable
cash will be received in the foreseeable future. Interest income on defaulted loans is recognized
when received.
Net Realized Capital Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Before-tax) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Gross gains on sales |
|
$ |
261 |
|
|
$ |
343 |
|
|
$ |
322 |
|
|
$ |
475 |
|
Gross losses on sales |
|
|
(98 |
) |
|
|
(94 |
) |
|
|
(231 |
) |
|
|
(205 |
) |
Net OTTI losses recognized in earnings |
|
|
(23 |
) |
|
|
(108 |
) |
|
|
(78 |
) |
|
|
(260 |
) |
Valuation allowances on mortgage loans |
|
|
26 |
|
|
|
(40 |
) |
|
|
23 |
|
|
|
(152 |
) |
Japanese fixed annuity contract hedges, net [1] |
|
|
6 |
|
|
|
27 |
|
|
|
(11 |
) |
|
|
11 |
|
Periodic net coupon settlements on credit derivatives/Japan |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(11 |
) |
Results of variable annuity hedge program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB derivatives, net |
|
|
(37 |
) |
|
|
(426 |
) |
|
|
34 |
|
|
|
(297 |
) |
Macro hedge program |
|
|
35 |
|
|
|
397 |
|
|
|
(322 |
) |
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total results of variable annuity hedge program |
|
|
(2 |
) |
|
|
(29 |
) |
|
|
(288 |
) |
|
|
(64 |
) |
Other, net |
|
|
(99 |
) |
|
|
(86 |
) |
|
|
(62 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
69 |
|
|
$ |
9 |
|
|
$ |
(334 |
) |
|
$ |
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Relates to derivative hedging instruments, excluding periodic net coupon
settlements, and is net of the Japanese fixed annuity product liability adjustment for changes
in the dollar/yen exchange spot rate, as well as Japan FVO securities. |
Net realized capital gains and losses from investment sales, after deducting the life and
pension policyholders share for certain products, are reported as a component of revenues and are
determined on a specific identification basis. Gross gains and losses on sales and impairments
previously reported as unrealized losses in AOCI were $140 and $13 for the three and six months
ended June 30, 2011, respectively, and $141 and $10 for the three and six months ended June 30,
2010, respectively. Proceeds from sales of AFS securities totaled $10.1 billion and $17.5 billion
for the three and six months ended June 30, 2011, respectively, and $16.0 billion and $22.1
billion, respectively, for the three and six months ended June 30, 2010.
37
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Other-Than-Temporary Impairment Losses
The following table presents a roll-forward of the Companys cumulative credit impairments on debt
securities held.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Before-tax) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Balance as of beginning of period |
|
$ |
(2,003 |
) |
|
$ |
(2,341 |
) |
|
$ |
(2,072 |
) |
|
$ |
(2,200 |
) |
Additions for credit impairments recognized on [1]: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities not previously impaired |
|
|
(8 |
) |
|
|
(52 |
) |
|
|
(36 |
) |
|
|
(164 |
) |
Securities previously impaired |
|
|
(8 |
) |
|
|
(52 |
) |
|
|
(25 |
) |
|
|
(91 |
) |
Reductions for credit impairments previously recognized on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities that matured or were sold during the period |
|
|
83 |
|
|
|
151 |
|
|
|
192 |
|
|
|
154 |
|
Securities due to an increase in expected cash flows |
|
|
3 |
|
|
|
13 |
|
|
|
8 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period |
|
$ |
(1,933 |
) |
|
$ |
(2,281 |
) |
|
$ |
(1,933 |
) |
|
$ |
(2,281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
These additions are included in the net OTTI losses recognized in earnings in the
Condensed Consolidated Statements of Operations. |
Available-for-Sale Securities
The following table presents the Companys AFS securities by type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Non- |
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Non- |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Credit |
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Credit |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
OTTI [1] |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
OTTI [1] |
|
ABS |
|
$ |
3,551 |
|
|
$ |
54 |
|
|
$ |
(308 |
) |
|
$ |
3,297 |
|
|
$ |
(11 |
) |
|
$ |
3,247 |
|
|
$ |
38 |
|
|
$ |
(396 |
) |
|
$ |
2,889 |
|
|
$ |
(2 |
) |
CDOs |
|
|
2,928 |
|
|
|
|
|
|
|
(353 |
) |
|
|
2,575 |
|
|
|
(68 |
) |
|
|
3,088 |
|
|
|
1 |
|
|
|
(478 |
) |
|
|
2,611 |
|
|
|
(82 |
) |
CMBS |
|
|
7,360 |
|
|
|
250 |
|
|
|
(333 |
) |
|
|
7,277 |
|
|
|
(28 |
) |
|
|
8,297 |
|
|
|
235 |
|
|
|
(615 |
) |
|
|
7,917 |
|
|
|
(9 |
) |
Corporate [2] |
|
|
39,972 |
|
|
|
2,311 |
|
|
|
(611 |
) |
|
|
41,629 |
|
|
|
|
|
|
|
38,496 |
|
|
|
2,174 |
|
|
|
(747 |
) |
|
|
39,884 |
|
|
|
7 |
|
Foreign govt./govt. agencies |
|
|
1,765 |
|
|
|
107 |
|
|
|
(8 |
) |
|
|
1,864 |
|
|
|
|
|
|
|
1,627 |
|
|
|
73 |
|
|
|
(17 |
) |
|
|
1,683 |
|
|
|
|
|
Municipal |
|
|
12,738 |
|
|
|
278 |
|
|
|
(235 |
) |
|
|
12,781 |
|
|
|
|
|
|
|
12,469 |
|
|
|
150 |
|
|
|
(495 |
) |
|
|
12,124 |
|
|
|
|
|
RMBS |
|
|
5,487 |
|
|
|
144 |
|
|
|
(417 |
) |
|
|
5,214 |
|
|
|
(108 |
) |
|
|
6,036 |
|
|
|
109 |
|
|
|
(462 |
) |
|
|
5,683 |
|
|
|
(124 |
) |
U.S. Treasuries |
|
|
3,566 |
|
|
|
23 |
|
|
|
(94 |
) |
|
|
3,495 |
|
|
|
|
|
|
|
5,159 |
|
|
|
24 |
|
|
|
(154 |
) |
|
|
5,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, AFS |
|
|
77,367 |
|
|
|
3,167 |
|
|
|
(2,359 |
) |
|
|
78,132 |
|
|
|
(215 |
) |
|
|
78,419 |
|
|
|
2,804 |
|
|
|
(3,364 |
) |
|
|
77,820 |
|
|
|
(210 |
) |
Equity securities, AFS |
|
|
1,070 |
|
|
|
112 |
|
|
|
(101 |
) |
|
|
1,081 |
|
|
|
|
|
|
|
1,013 |
|
|
|
92 |
|
|
|
(132 |
) |
|
|
973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS securities |
|
$ |
78,437 |
|
|
$ |
3,279 |
|
|
$ |
(2,460 |
) |
|
$ |
79,213 |
|
|
$ |
(215 |
) |
|
$ |
79,432 |
|
|
$ |
2,896 |
|
|
$ |
(3,496 |
) |
|
$ |
78,793 |
|
|
$ |
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Represents the amount of cumulative non-credit OTTI losses recognized
in OCI on securities that also had credit impairments. These losses
are included in gross unrealized losses as of June 30, 2011 and
December 31, 2010. |
|
[2] |
|
Gross unrealized gains (losses) exclude the change in fair value of
bifurcated embedded derivative features of certain securities.
Subsequent changes in fair value are recorded in net realized capital
gains (losses). |
The following table presents the Companys fixed maturities, AFS, by contractual maturity
year.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
Contractual Maturity |
|
Amortized Cost |
|
|
Fair Value |
|
One year or less |
|
$ |
2,545 |
|
|
$ |
2,573 |
|
Over one year through five years |
|
|
16,181 |
|
|
|
17,009 |
|
Over five years through ten years |
|
|
14,627 |
|
|
|
15,312 |
|
Over ten years |
|
|
24,688 |
|
|
|
24,875 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
58,041 |
|
|
|
59,769 |
|
Mortgage-backed and asset-backed securities |
|
|
19,326 |
|
|
|
18,363 |
|
|
|
|
|
|
|
|
Total fixed maturities, AFS |
|
$ |
77,367 |
|
|
$ |
78,132 |
|
|
|
|
|
|
|
|
Estimated maturities may differ from contractual maturities due to security call or prepayment
provisions. Due to the potential for variability in payment speeds (i.e. prepayments or
extensions), mortgage-backed and asset-backed securities are not categorized by contractual
maturity.
38
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Securities Unrealized Loss Aging
The following tables present the Companys unrealized loss aging for AFS securities by type and
length of time the security was in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Cost |
|
|
Value |
|
|
Losses |
|
|
Cost |
|
|
Value |
|
|
Losses |
|
|
Cost |
|
|
Value |
|
|
Losses |
|
ABS |
|
$ |
264 |
|
|
$ |
257 |
|
|
$ |
(7 |
) |
|
$ |
1,331 |
|
|
$ |
1,030 |
|
|
$ |
(301 |
) |
|
$ |
1,595 |
|
|
$ |
1,287 |
|
|
$ |
(308 |
) |
CDOs |
|
|
337 |
|
|
|
317 |
|
|
|
(20 |
) |
|
|
2,570 |
|
|
|
2,237 |
|
|
|
(333 |
) |
|
|
2,907 |
|
|
|
2,554 |
|
|
|
(353 |
) |
CMBS |
|
|
1,334 |
|
|
|
1,282 |
|
|
|
(52 |
) |
|
|
2,495 |
|
|
|
2,214 |
|
|
|
(281 |
) |
|
|
3,829 |
|
|
|
3,496 |
|
|
|
(333 |
) |
Corporate [1] |
|
|
5,789 |
|
|
|
5,590 |
|
|
|
(194 |
) |
|
|
3,617 |
|
|
|
3,162 |
|
|
|
(417 |
) |
|
|
9,406 |
|
|
|
8,752 |
|
|
|
(611 |
) |
Foreign govt./govt. agencies |
|
|
182 |
|
|
|
180 |
|
|
|
(2 |
) |
|
|
53 |
|
|
|
47 |
|
|
|
(6 |
) |
|
|
235 |
|
|
|
227 |
|
|
|
(8 |
) |
Municipal |
|
|
4,340 |
|
|
|
4,249 |
|
|
|
(91 |
) |
|
|
1,016 |
|
|
|
872 |
|
|
|
(144 |
) |
|
|
5,356 |
|
|
|
5,121 |
|
|
|
(235 |
) |
RMBS |
|
|
810 |
|
|
|
791 |
|
|
|
(19 |
) |
|
|
1,424 |
|
|
|
1,026 |
|
|
|
(398 |
) |
|
|
2,234 |
|
|
|
1,817 |
|
|
|
(417 |
) |
U.S. Treasuries |
|
|
1,289 |
|
|
|
1,228 |
|
|
|
(61 |
) |
|
|
133 |
|
|
|
100 |
|
|
|
(33 |
) |
|
|
1,422 |
|
|
|
1,328 |
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
14,345 |
|
|
|
13,894 |
|
|
|
(446 |
) |
|
|
12,639 |
|
|
|
10,688 |
|
|
|
(1,913 |
) |
|
|
26,984 |
|
|
|
24,582 |
|
|
|
(2,359 |
) |
Equity securities |
|
|
211 |
|
|
|
206 |
|
|
|
(5 |
) |
|
|
569 |
|
|
|
473 |
|
|
|
(96 |
) |
|
|
780 |
|
|
|
679 |
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities in an
unrealized loss |
|
$ |
14,556 |
|
|
$ |
14,100 |
|
|
$ |
(451 |
) |
|
$ |
13,208 |
|
|
$ |
11,161 |
|
|
$ |
(2,009 |
) |
|
$ |
27,764 |
|
|
$ |
25,261 |
|
|
$ |
(2,460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Cost |
|
|
Value |
|
|
Losses |
|
|
Cost |
|
|
Value |
|
|
Losses |
|
|
Cost |
|
|
Value |
|
|
Losses |
|
ABS |
|
$ |
302 |
|
|
$ |
290 |
|
|
$ |
(12 |
) |
|
$ |
1,410 |
|
|
$ |
1,026 |
|
|
$ |
(384 |
) |
|
$ |
1,712 |
|
|
$ |
1,316 |
|
|
$ |
(396 |
) |
CDOs |
|
|
321 |
|
|
|
293 |
|
|
|
(28 |
) |
|
|
2,724 |
|
|
|
2,274 |
|
|
|
(450 |
) |
|
|
3,045 |
|
|
|
2,567 |
|
|
|
(478 |
) |
CMBS |
|
|
556 |
|
|
|
530 |
|
|
|
(26 |
) |
|
|
3,962 |
|
|
|
3,373 |
|
|
|
(589 |
) |
|
|
4,518 |
|
|
|
3,903 |
|
|
|
(615 |
) |
Corporate [1] |
|
|
5,533 |
|
|
|
5,329 |
|
|
|
(199 |
) |
|
|
4,017 |
|
|
|
3,435 |
|
|
|
(548 |
) |
|
|
9,550 |
|
|
|
8,764 |
|
|
|
(747 |
) |
Foreign govt./govt. agencies |
|
|
356 |
|
|
|
349 |
|
|
|
(7 |
) |
|
|
78 |
|
|
|
68 |
|
|
|
(10 |
) |
|
|
434 |
|
|
|
417 |
|
|
|
(17 |
) |
Municipal |
|
|
7,485 |
|
|
|
7,173 |
|
|
|
(312 |
) |
|
|
1,046 |
|
|
|
863 |
|
|
|
(183 |
) |
|
|
8,531 |
|
|
|
8,036 |
|
|
|
(495 |
) |
RMBS |
|
|
1,744 |
|
|
|
1,702 |
|
|
|
(42 |
) |
|
|
1,567 |
|
|
|
1,147 |
|
|
|
(420 |
) |
|
|
3,311 |
|
|
|
2,849 |
|
|
|
(462 |
) |
U.S. Treasuries |
|
|
2,436 |
|
|
|
2,321 |
|
|
|
(115 |
) |
|
|
158 |
|
|
|
119 |
|
|
|
(39 |
) |
|
|
2,594 |
|
|
|
2,440 |
|
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
18,733 |
|
|
|
17,987 |
|
|
|
(741 |
) |
|
|
14,962 |
|
|
|
12,305 |
|
|
|
(2,623 |
) |
|
|
33,695 |
|
|
|
30,292 |
|
|
|
(3,364 |
) |
Equity securities |
|
|
53 |
|
|
|
52 |
|
|
|
(1 |
) |
|
|
637 |
|
|
|
506 |
|
|
|
(131 |
) |
|
|
690 |
|
|
|
558 |
|
|
|
(132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities in an unrealized loss |
|
$ |
18,786 |
|
|
$ |
18,039 |
|
|
$ |
(742 |
) |
|
$ |
15,599 |
|
|
$ |
12,811 |
|
|
$ |
(2,754 |
) |
|
$ |
34,385 |
|
|
$ |
30,850 |
|
|
$ |
(3,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Unrealized losses exclude the change in fair value of bifurcated embedded derivative features
of certain securities. Subsequent changes in fair value are recorded in net realized capital
gains (losses). |
As of June 30, 2011, AFS securities in an unrealized loss position, comprised of 2,615
securities, largely related to commercial real estate, corporate securities primarily within the
financial services sector and RMBS which have experienced price deterioration. As of June 30,
2011, 83% of securities in a gross unrealized loss position were depressed less than 20% of cost or
amortized cost. The improvement in unrealized losses during 2011 was primarily attributable to
declining interest rates and credit spread tightening.
Most of the securities depressed for twelve months or more relate to structured securities
primarily within commercial and residential real estate, including structured securities that have
a floating-rate coupon referenced to a market index such as LIBOR. Also included are financial
services securities that have a floating-rate coupon and/or long-dated maturities. Current market
spreads continue to be significantly wider for these securities as compared to spreads at the
securitys respective purchase date, largely due to the economic and market uncertainties regarding
future performance of commercial and residential real estate. Deteriorations in valuation are also
the result of substantial declines in certain market indexes. The Company reviewed these
securities as part of its impairment analysis and where a credit impairment has not been recorded,
the Companys best estimate is that expected future cash flows are sufficient to recover the
amortized cost basis of the security. Furthermore, the Company neither has an intention to sell
nor does it expect to be required to sell these securities.
39
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Amortized |
|
|
Valuation |
|
|
Carrying |
|
|
Amortized |
|
|
Valuation |
|
|
Carrying |
|
|
|
Cost [1] |
|
|
Allowance |
|
|
Value |
|
|
Cost [1] |
| |
Allowance |
| |
Value |
|
Commercial |
|
$ |
5,324 |
|
|
$ |
(129 |
) |
|
$ |
5,195 |
|
|
$ |
4,492 |
|
|
$ |
(152 |
) |
|
$ |
4,340 |
|
Residential |
|
|
151 |
|
|
|
(42 |
) |
|
|
109 |
|
|
|
152 |
|
|
|
(3 |
) |
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans |
|
$ |
5,475 |
|
|
$ |
(171 |
) |
|
$ |
5,304 |
|
|
$ |
4,644 |
|
|
$ |
(155 |
) |
|
$ |
4,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Amortized cost represents carrying value prior to valuation allowances, if any. |
As of June 30, 2011, the carrying value of mortgage loans associated with the valuation
allowance was $1.0 billion. Included in the table above, are mortgage loans held-for-sale with a
carrying value and valuation allowance of $219 and $58, respectively, as of June 30, 2011, and $87
and $7, respectively, as of December 31, 2010. Mortgage loans held-for-sale include those related
to the divestiture of Federal Trust Corporation with a carrying value and valuation allowance of
$138 and $53, respectively, as of June 30, 2011, and $68 and $3, respectively as of December 31,
2010 (see Note 12). The carrying value of these loans is included in mortgage loans in the
Companys Condensed Consolidated Balance Sheets.
The following table presents the activity within the Companys valuation allowance for mortgage
loans. These loans have been evaluated both individually and collectively for impairment. Loans
evaluated collectively for impairment are immaterial.
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Balance as of January 1 |
|
$ |
(155 |
) |
|
$ |
(366 |
) |
Additions |
|
|
(27 |
) |
|
|
(152 |
) |
Deductions |
|
|
11 |
|
|
|
178 |
|
|
|
|
|
|
|
|
Balance as of June 30 |
|
$ |
(171 |
) |
|
$ |
(340 |
) |
|
|
|
|
|
|
|
The current weighted-average LTV ratio of the Companys commercial mortgage loan portfolio was 71%
as of June 30, 2011, while the weighted-average LTV ratio at origination of these loans was 64%.
LTV ratios compare the loan amount to the value of the underlying property collateralizing the
loan. The loan values are updated no less than annually through property level reviews of the
portfolio. Factors considered in the property valuation include, but are not limited to, actual
and expected property cash flows, geographic market data and capitalization rates. DSCRs compare a
propertys net operating income to the borrowers principal and interest payments. The current
weighted average DSCR of the Companys commercial mortgage loan portfolio was 1.88x as of June 30,
2011. The Company held only five delinquent commercial mortgage loans past due by 90 days or more.
The total carrying value and valuation allowance of these loans totaled $33 and $66, respectively,
as of June 30, 2011, and are not accruing income.
The following table presents the carrying value of the Companys commercial mortgage loans by LTV
and DSCR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgage Loans Credit Quality |
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Carrying |
|
|
Avg. Debt-Service |
|
|
Carrying |
|
|
Avg. Debt-Service |
|
Loan-to-value |
|
Value |
|
|
Coverage Ratio |
|
|
Value |
|
|
Coverage Ratio |
|
Greater than 80% |
|
$ |
1,032 |
|
|
|
1.51x |
|
|
$ |
1,358 |
|
|
|
1.49x |
|
65% - 80% |
|
|
2,379 |
|
|
|
1.71x |
|
|
|
1,829 |
|
|
|
1.93x |
|
Less than 65% |
|
|
1,784 |
|
|
|
2.30x |
|
|
|
1,153 |
|
|
|
2.26x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans |
|
$ |
5,195 |
|
|
|
1.88x |
|
|
$ |
4,340 |
|
|
|
1.87x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the carrying value of the Companys mortgage loans by region and
property type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Region |
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Carrying |
|
|
Percent of |
|
|
Carrying |
|
|
Percent of |
|
|
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
East North Central |
|
$ |
76 |
|
|
|
1.4 |
% |
|
$ |
77 |
|
|
|
1.7 |
% |
Middle Atlantic |
|
|
498 |
|
|
|
9.4 |
% |
|
|
428 |
|
|
|
9.5 |
% |
Mountain |
|
|
127 |
|
|
|
2.4 |
% |
|
|
109 |
|
|
|
2.4 |
% |
New England |
|
|
296 |
|
|
|
5.6 |
% |
|
|
259 |
|
|
|
5.8 |
% |
Pacific |
|
|
1,307 |
|
|
|
24.6 |
% |
|
|
1,147 |
|
|
|
25.6 |
% |
South Atlantic |
|
|
1,150 |
|
|
|
21.7 |
% |
|
|
1,177 |
|
|
|
26.3 |
% |
West North Central |
|
|
34 |
|
|
|
0.6 |
% |
|
|
36 |
|
|
|
0.8 |
% |
West South Central |
|
|
225 |
|
|
|
4.2 |
% |
|
|
231 |
|
|
|
5.1 |
% |
Other [1] |
|
|
1,591 |
|
|
|
30.1 |
% |
|
|
1,025 |
|
|
|
22.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans |
|
$ |
5,304 |
|
|
|
100.0 |
% |
|
$ |
4,489 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Primarily represents loans collateralized by multiple properties in various regions. |
40
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Property Type |
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Carrying |
|
|
Percent of |
|
|
Carrying |
|
|
Percent of |
|
|
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
|
$ |
258 |
|
|
|
4.9 |
% |
|
$ |
315 |
|
|
|
7.0 |
% |
Industrial |
|
|
1,615 |
|
|
|
30.5 |
% |
|
|
1,141 |
|
|
|
25.4 |
% |
Lodging |
|
|
124 |
|
|
|
2.3 |
% |
|
|
132 |
|
|
|
2.9 |
% |
Multifamily |
|
|
974 |
|
|
|
18.4 |
% |
|
|
713 |
|
|
|
15.9 |
% |
Office |
|
|
944 |
|
|
|
17.8 |
% |
|
|
986 |
|
|
|
22.1 |
% |
Retail |
|
|
986 |
|
|
|
18.6 |
% |
|
|
669 |
|
|
|
14.9 |
% |
Other |
|
|
294 |
|
|
|
5.4 |
% |
|
|
384 |
|
|
|
8.5 |
% |
Residential |
|
|
109 |
|
|
|
2.1 |
% |
|
|
149 |
|
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans |
|
$ |
5,304 |
|
|
|
100.0 |
% |
|
$ |
4,489 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Interest Entities
The Company is involved with various special purpose entities and other entities that are deemed to
be VIEs primarily as a collateral manager and as an investor through normal investment activities,
as well as a means of accessing capital. A VIE is an entity that either has investors that lack
certain essential characteristics of a controlling financial interest or lacks sufficient funds to
finance its own activities without financial support provided by other entities.
The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company
has a controlling financial interest in the VIE and therefore is the primary beneficiary. The
Company is deemed to have a controlling financial interest when it has both the ability to direct
the activities that most significantly impact the economic performance of the VIE and the
obligation to absorb losses or right to receive benefits from the VIE that could potentially be
significant to the VIE. Based on the Companys assessment, if it determines it is the primary
beneficiary, the Company consolidates the VIE in the Companys Condensed Consolidated Financial
Statements.
Consolidated VIEs
The following table presents the carrying value of assets and liabilities, and the maximum exposure
to loss relating to the VIEs for which the Company is the primary beneficiary. Creditors have no
recourse against the Company in the event of default by these VIEs nor does the Company have any
implied or unfunded commitments to these VIEs. The Companys financial or other support provided
to these VIEs is limited to its investment management services and original investment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
Total |
|
|
Total |
|
|
Exposure |
|
|
Total |
|
|
Total |
|
|
Exposure |
|
|
|
Assets |
|
|
Liabilities [1] |
|
|
to Loss [2] |
| |
Assets |
| |
Liabilities [1] |
| |
to Loss [2] |
|
CDOs [3] |
|
$ |
510 |
|
|
$ |
439 |
|
|
$ |
48 |
|
|
$ |
729 |
|
|
$ |
393 |
|
|
$ |
289 |
|
Limited partnerships |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
|
14 |
|
|
|
1 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
517 |
|
|
$ |
439 |
|
|
$ |
55 |
|
|
$ |
743 |
|
|
$ |
394 |
|
|
$ |
302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Included in other liabilities in the Companys Condensed Consolidated Balance Sheets. |
|
[2] |
|
The maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment
income or as a realized capital loss and is the cost basis of the Companys investment. |
|
[3] |
|
Total assets included in fixed maturities, AFS, and fixed maturities, FVO, in the Companys Condensed Consolidated Balance Sheets. |
CDOs represent structured investment vehicles for which the Company has a controlling
financial interest as it provides collateral management services, earns a fee for those services
and also holds investments in the securities issued by these vehicles. Limited partnerships
represent a hedge fund for which the Company holds a majority interest in the fund as an
investment.
41
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Non-Consolidated VIEs
The Company holds a significant variable interest for one VIE for which it is not the primary
beneficiary and, therefore, was not consolidated on the Companys Condensed Consolidated Balance
Sheets. This VIE represents a contingent capital facility (facility) that has been held by the
Company for five years for which the Company has no implied or unfunded commitments. Assets and
liabilities recorded for the facility were $30 as of June 30, 2011 and $32 as of December 31, 2010.
Additionally, the Company has a maximum exposure to loss of $4 as of June 30, 2011 and December
31, 2010, which represents the issuance costs that were incurred to establish the facility. The
Company does not have a controlling financial interest as it does not manage the assets of the
facility nor does it have the obligation to absorb losses or the right to receive benefits that
could potentially be significant to the facility, as the asset manager has significant variable
interest in the vehicle. The Companys financial or other support provided to the facility is
limited to providing ongoing support to cover the facilitys operating expenses. For further
information on the facility, see Note 14 of the Notes to Consolidated Financial Statements included
in The Hartfords 2010 Form 10-K Annual Report.
In addition, the Company, through normal investment activities, makes passive investments in
structured securities issued by VIEs for which the Company is not the manager which are included in
ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in
the Companys Condensed Consolidated Balance Sheets. The Company has not provided financial or
other support with respect to these investments other than its original investment. For these
investments, the Company determined it is not the primary beneficiary due to the relative size of
the Companys investment in comparison to the principal amount of the structured securities issued
by the VIEs, the level of credit subordination which reduces the Companys obligation to absorb
losses or right to receive benefits and the Companys inability to direct the activities that most
significantly impact the economic performance of the VIEs. The Companys maximum exposure to loss
on these investments is limited to the amount of the Companys investment.
42
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Derivative Instruments
The Company utilizes a variety of over-the-counter and exchange traded derivative instruments as a
part of its overall risk management strategy, as well as to enter into replication transactions.
Derivative instruments are used to manage risk associated with interest rate, equity market, credit
spread, issuer default, price, and currency exchange rate risk or volatility. Replication
transactions are used as an economical means to synthetically replicate the characteristics and
performance of assets that would otherwise be permissible investments under the Companys
investment policies. The Company also purchases and issues financial instruments and products that
either are accounted for as free-standing derivatives, such as certain reinsurance contracts, or
may contain features that are deemed to be embedded derivative instruments, such as the GMWB rider
included with certain variable annuity products.
Cash flow hedges
Interest rate swaps
Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed maturity
securities or interest payments on floating-rate guaranteed investment contracts to fixed rates.
These derivatives are predominantly used to better match cash receipts from assets with cash
disbursements required to fund liabilities.
The Company also enters into forward starting swap agreements to hedge the interest rate exposure
related to the purchase of fixed-rate securities. These derivatives are primarily structured to
hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign currency swaps
Foreign currency swaps are used to convert foreign currency-denominated cash flows related to
certain investment receipts and liability payments to U.S. dollars in order to minimize cash flow
fluctuations due to changes in currency rates.
Fair value hedges
Interest rate swaps
Interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities
and fixed maturity securities due to fluctuations in interest rates.
Foreign currency swaps
Foreign currency swaps are used to hedge the changes in fair value of certain foreign
currency-denominated fixed rate liabilities due to changes in foreign currency rates by swapping
the fixed foreign payments to floating rate U.S. dollar denominated payments.
Non-qualifying strategies
Interest rate swaps, swaptions, caps, floors, and futures
The Company uses interest rate swaps, swaptions, caps, floors, and futures to manage duration
between assets and liabilities in certain investment portfolios. In addition, the Company enters
into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of
the original swap. As of June 30, 2011 and December 31, 2010, the notional amount of interest rate
swaps in offsetting relationships was $7.1 billion.
Foreign currency swaps and forwards
The Company enters into foreign currency swaps and forwards to convert the foreign currency
exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.
43
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Japan 3Win foreign currency swaps
Prior to the second quarter of 2009, The Company offered certain variable annuity products with a
GMIB rider through a wholly-owned Japanese subsidiary. The GMIB rider is reinsured to a
wholly-owned U.S. subsidiary, which invests in U.S. dollar denominated assets to support the
liability. The U.S. subsidiary entered into pay U.S. dollar, receive yen forward contracts to
hedge the currency and interest rate exposure between the U.S. dollar denominated assets and the
yen denominated fixed liability reinsurance payments.
Japanese fixed annuity hedging instruments
Prior to the second quarter of 2009, The Company offered a yen denominated fixed annuity product
through a wholly-owned Japanese subsidiary and reinsured to a wholly-owned U.S. subsidiary. The
U.S. subsidiary invests in U.S. dollar denominated securities to support the yen denominated fixed
liability payments and entered into currency rate swaps to hedge the foreign currency exchange rate
and yen interest rate exposures that exist as a result of U.S. dollar assets backing the yen
denominated liability.
Japanese variable annuity hedging instruments
The Company enters into foreign currency forward and option contracts to hedge the foreign currency
risk associated with certain Japanese variable annuity liabilities reinsured from a wholly-owned
Japanese subsidiary. Foreign currency risk may arise for some segments of the business where
assets backing the liabilities are denominated in U.S. dollars while the liabilities are
denominated in yen. Foreign currency risk may also arise when certain variable annuity
policyholder accounts are invested in various currencies while the related guaranteed minimum death
benefit (GMDB) and GMIB guarantees are effectively yen-denominated.
The Companys net notional amount relating to Japanese variable annuity hedging instruments as of
June 30, 2011 was $1.7 billion, which consisted of $2.6 billion of long positions offset by short
positions of $937. The Companys net notional amount relating to Japanese variable annuity hedging
instruments as of December 31, 2010 was $1.7 billion which consisted of $1.7 billion of long
positions only.
Credit derivatives that purchase credit protection
Credit default swaps are used to purchase credit protection on an individual entity or referenced
index to economically hedge against default risk and credit-related changes in value on fixed
maturity securities. These contracts require the Company to pay a periodic fee in exchange for
compensation from the counterparty should the referenced security issuers experience a credit
event, as defined in the contract.
Credit derivatives that assume credit risk
Credit default swaps are used to assume credit risk related to an individual entity, referenced
index, or asset pool, as a part of replication transactions. These contracts entitle the Company
to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty
should the referenced security issuers experience a credit event, as defined in the contract. The
Company is also exposed to credit risk due to credit derivatives embedded within certain fixed
maturity securities. These securities are primarily comprised of structured securities that
contain credit derivatives that reference a standard index of corporate securities or particular
securities.
Credit derivatives in offsetting positions
The Company enters into credit default swaps to terminate existing credit default swaps, thereby
offsetting the changes in value of the original swap going forward.
Equity index swaps and options
The Company offers certain equity indexed products, which may contain an embedded derivative that
requires bifurcation. The Company enters into S&P index swaps and options to economically hedge
the equity volatility risk associated with these embedded derivatives.
GMWB product derivatives
The Company offers certain variable annuity products with a GMWB rider in the U.S. and formerly in
the U.K. and Japan. The GMWB is a bifurcated embedded derivative that provides the policyholder
with a guaranteed remaining balance (GRB) if the account value is reduced to zero through a
combination of market declines and withdrawals. The GRB is generally equal to premiums less
withdrawals. Certain contract provisions can increase the GRB at contractholder election or after
the passage of time. The notional value of the embedded derivative is the GRB.
44
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
GMWB reinsurance contracts
The Company has entered into reinsurance arrangements to offset a portion of its risk exposure to
the GMWB for the remaining lives of covered variable annuity contracts. Reinsurance contracts
covering GMWB are accounted for as free-standing derivatives. The notional amount of the
reinsurance contracts is the GRB amount.
GMWB hedging instruments
The Company enters into derivative contracts to partially hedge exposure associated with a portion
of the GMWB liabilities that are not reinsured. These derivative contracts include customized
swaps, interest rate swaps and futures, and equity swaps, options, and futures, on certain indices
including the S&P 500 index, EAFE index, and NASDAQ index.
The following table represents notional and fair value for GMWB hedging instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
Fair Value |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Customized swaps |
|
$ |
9,615 |
|
|
$ |
10,113 |
|
|
$ |
175 |
|
|
$ |
209 |
|
Equity swaps, options, and futures |
|
|
5,239 |
|
|
|
4,943 |
|
|
|
372 |
|
|
|
391 |
|
Interest rate swaps and futures |
|
|
2,752 |
|
|
|
2,800 |
|
|
|
(118 |
) |
|
|
(133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,606 |
|
|
$ |
17,856 |
|
|
$ |
429 |
|
|
$ |
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Macro hedge program
The Company utilizes equity options, swaps, equity futures contracts, currency forwards, and
currency options to partially hedge against a decline in the equity markets or changes in foreign
currency exchange rates and the resulting statutory surplus and capital impact primarily arising
from GMDB, GMIB and GMWB obligations. The Company also enters into foreign currency denominated
interest rate swaps to hedge the interest rate exposure related to the potential annuitization of
certain benefit obligations issued in Japan.
The following table represents notional and fair value for the macro hedge program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
Fair Value |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Long equity options, swaps and futures |
|
$ |
8,650 |
|
|
$ |
13,332 |
|
|
$ |
231 |
|
|
$ |
205 |
|
Short equity options, swaps and futures |
|
|
2,116 |
|
|
|
1,168 |
|
|
|
23 |
|
|
|
|
|
Long currency forward contracts |
|
|
196 |
|
|
|
1,791 |
|
|
|
(4 |
) |
|
|
64 |
|
Short currency forward contracts |
|
|
2,778 |
|
|
|
1,441 |
|
|
|
56 |
|
|
|
29 |
|
Foreign interest rate swaps |
|
|
2,192 |
|
|
|
2,182 |
|
|
|
30 |
|
|
|
21 |
|
Cross-currency equity options |
|
|
121 |
|
|
|
1,000 |
|
|
|
4 |
|
|
|
3 |
|
Long currency options |
|
|
2,155 |
|
|
|
3,075 |
|
|
|
139 |
|
|
|
67 |
|
Short currency options |
|
|
465 |
|
|
|
2,221 |
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,673 |
|
|
$ |
26,210 |
|
|
$ |
471 |
|
|
$ |
384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys net notional amount relating to the macro hedge program as of June 30, 2011 and
December 31, 2010 was $7.9 billion and $16.6 billion, respectively, which consisted of $13.3
billion and $21.4 billion, respectively, of long positions offset by $5.4 billion and $4.8 billion,
respectively, of short positions.
GMAB product derivatives
The GMAB rider associated with certain of the Companys Japanese variable annuity products is
accounted for as a bifurcated embedded derivative. The GMAB provides the policyholder with their
initial deposit in a lump sum after a specified waiting period. The notional amount of the
embedded derivative is the yen denominated GRB converted to U.S. dollars at the current foreign
spot exchange rate as of the reporting period date.
Contingent capital facility put option
The Company entered into a put option agreement that provides the Company the right to require a
third-party trust to purchase, at any time, The Hartfords junior subordinated notes in a maximum
aggregate principal amount of $500. Under the put option agreement, The Hartford will pay premiums
on a periodic basis and will reimburse the trust for certain fees and ordinary expenses.
45
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Derivative Balance Sheet Classification
The table below summarizes the balance sheet classification of the Companys derivative related
fair value amounts, as well as the gross asset and liability fair value amounts. The fair value
amounts presented do not include income accruals or cash collateral held amounts, which are netted
with derivative fair value amounts to determine balance sheet presentation. Derivatives in the
Companys separate accounts are not included because the associated gains and losses accrue
directly to policyholders. The Companys derivative instruments are held for risk management
purposes, unless otherwise noted in the table below. The notional amount of derivative contracts
represents the basis upon which pay or receive amounts are calculated and is presented in the table
to quantify the volume of the Companys derivative activity. Notional amounts are not necessarily
reflective of credit risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Derivatives |
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Notional Amount |
|
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|
|
Jun. 30, |
|
|
Dec. 31, |
|
|
Jun. 30, |
|
|
Dec. 31, |
|
|
Jun. 30, |
|
|
Dec. 31, |
|
|
Jun. 30, |
|
|
Dec. 31, |
|
Hedge Designation/ Derivative Type |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
9,941 |
|
|
$ |
10,290 |
|
|
$ |
183 |
|
|
$ |
115 |
|
|
$ |
206 |
|
|
$ |
188 |
|
|
$ |
(23 |
) |
|
$ |
(73 |
) |
Foreign currency swaps |
|
|
302 |
|
|
|
335 |
|
|
|
7 |
|
|
|
6 |
|
|
|
27 |
|
|
|
29 |
|
|
|
(20 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges |
|
|
10,243 |
|
|
|
10,625 |
|
|
|
190 |
|
|
|
121 |
|
|
|
233 |
|
|
|
217 |
|
|
|
(43 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
1,277 |
|
|
|
1,120 |
|
|
|
(60 |
) |
|
|
(46 |
) |
|
|
1 |
|
|
|
5 |
|
|
|
(61 |
) |
|
|
(51 |
) |
Foreign currency swaps |
|
|
677 |
|
|
|
677 |
|
|
|
15 |
|
|
|
(12 |
) |
|
|
96 |
|
|
|
71 |
|
|
|
(81 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value hedges |
|
|
1,954 |
|
|
|
1,797 |
|
|
|
(45 |
) |
|
|
(58 |
) |
|
|
97 |
|
|
|
76 |
|
|
|
(142 |
) |
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualifying strategies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps, swaptions, caps, floors,
and futures |
|
|
9,044 |
|
|
|
7,938 |
|
|
|
(354 |
) |
|
|
(441 |
) |
|
|
219 |
|
|
|
126 |
|
|
|
(573 |
) |
|
|
(567 |
) |
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swaps and forwards |
|
|
369 |
|
|
|
368 |
|
|
|
(29 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
1 |
|
|
|
(29 |
) |
|
|
(19 |
) |
Japan 3Win foreign currency swaps |
|
|
2,285 |
|
|
|
2,285 |
|
|
|
152 |
|
|
|
177 |
|
|
|
152 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
Japanese fixed annuity hedging instruments |
|
|
2,137 |
|
|
|
2,119 |
|
|
|
487 |
|
|
|
608 |
|
|
|
494 |
|
|
|
608 |
|
|
|
(7 |
) |
|
|
|
|
Japanese variable annuity hedging instruments |
|
|
3,526 |
|
|
|
1,720 |
|
|
|
10 |
|
|
|
73 |
|
|
|
61 |
|
|
|
74 |
|
|
|
(51 |
) |
|
|
(1 |
) |
Credit contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives that purchase credit
protection |
|
|
1,396 |
|
|
|
2,559 |
|
|
|
(10 |
) |
|
|
(9 |
) |
|
|
17 |
|
|
|
29 |
|
|
|
(27 |
) |
|
|
(38 |
) |
Credit derivatives that assume credit risk [1] |
|
|
2,270 |
|
|
|
2,569 |
|
|
|
(444 |
) |
|
|
(434 |
) |
|
|
5 |
|
|
|
8 |
|
|
|
(449 |
) |
|
|
(442 |
) |
Credit derivatives in offsetting positions |
|
|
8,535 |
|
|
|
8,367 |
|
|
|
(70 |
) |
|
|
(75 |
) |
|
|
114 |
|
|
|
98 |
|
|
|
(184 |
) |
|
|
(173 |
) |
Equity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity index swaps and options |
|
|
192 |
|
|
|
189 |
|
|
|
(8 |
) |
|
|
(10 |
) |
|
|
6 |
|
|
|
5 |
|
|
|
(14 |
) |
|
|
(15 |
) |
Variable annuity hedge program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB product derivatives [2] |
|
|
39,593 |
|
|
|
42,739 |
|
|
|
(1,450 |
) |
|
|
(1,647 |
) |
|
|
|
|
|
|
|
|
|
|
(1,450 |
) |
|
|
(1,647 |
) |
GMWB reinsurance contracts |
|
|
7,886 |
|
|
|
8,767 |
|
|
|
237 |
|
|
|
280 |
|
|
|
237 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
GMWB hedging instruments |
|
|
17,606 |
|
|
|
17,856 |
|
|
|
429 |
|
|
|
467 |
|
|
|
575 |
|
|
|
647 |
|
|
|
(146 |
) |
|
|
(180 |
) |
Macro hedge program |
|
|
18,673 |
|
|
|
26,210 |
|
|
|
471 |
|
|
|
384 |
|
|
|
486 |
|
|
|
394 |
|
|
|
(15 |
) |
|
|
(10 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMAB product derivatives [2] |
|
|
237 |
|
|
|
246 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Contingent capital facility put option |
|
|
500 |
|
|
|
500 |
|
|
|
30 |
|
|
|
32 |
|
|
|
30 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-qualifying strategies |
|
|
114,249 |
|
|
|
124,432 |
|
|
|
(549 |
) |
|
|
(610 |
) |
|
|
2,396 |
|
|
|
2,482 |
|
|
|
(2,945 |
) |
|
|
(3,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges, fair value hedges, and
non-qualifying strategies |
|
$ |
126,446 |
|
|
$ |
136,854 |
|
|
$ |
(404 |
) |
|
$ |
(547 |
) |
|
$ |
2,726 |
|
|
$ |
2,775 |
|
|
$ |
(3,130 |
) |
|
$ |
(3,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
$ |
703 |
|
|
$ |
728 |
|
|
$ |
(43 |
) |
|
$ |
(39 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(43 |
) |
|
$ |
(39 |
) |
Other investments |
|
|
27,523 |
|
|
|
55,948 |
|
|
|
890 |
|
|
|
1,524 |
|
|
|
1,223 |
|
|
|
2,105 |
|
|
|
(333 |
) |
|
|
(581 |
) |
Other liabilities |
|
|
50,410 |
|
|
|
28,333 |
|
|
|
(24 |
) |
|
|
(654 |
) |
|
|
1,266 |
|
|
|
387 |
|
|
|
(1,290 |
) |
|
|
(1,041 |
) |
Consumer notes |
|
|
39 |
|
|
|
39 |
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(5 |
) |
Reinsurance recoverables |
|
|
7,886 |
|
|
|
8,767 |
|
|
|
237 |
|
|
|
280 |
|
|
|
237 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable |
|
|
39,885 |
|
|
|
43,039 |
|
|
|
(1,460 |
) |
|
|
(1,653 |
) |
|
|
|
|
|
|
3 |
|
|
|
(1,460 |
) |
|
|
(1,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
126,446 |
|
|
$ |
136,854 |
|
|
$ |
(404 |
) |
|
$ |
(547 |
) |
|
$ |
2,726 |
|
|
$ |
2,775 |
|
|
$ |
(3,130 |
) |
|
$ |
(3,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The derivative instruments related to this strategy are held for other investment purposes. |
|
[2] |
|
These derivatives are embedded within liabilities and are not held for risk management purposes. |
46
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Change in Notional Amount
The net decrease in notional amount of derivatives since December 31, 2010, was primarily due to
the following:
|
|
The notional amount related to the macro hedge program declined $7.5 billion primarily due
to the expiration of certain currency and equity index options. The notional amount was not
replaced given the levels of market risk coverage for both equity and foreign exchange rate
risk were within the Company defined limits. |
|
|
The GMWB product derivative notional declined $3.1 billion primarily as a result of
policyholder lapses and withdrawals. |
|
|
The notional amount related to non-qualifying interest rate contracts increased by $1.1
billion primarily as a result of the Company adding LIBOR swaptions to manage duration between
assets and liabilities. |
Change in Fair Value
The change in the total fair value of derivative instruments since December 31, 2010, was primarily
related to the following:
|
|
The increase in the combined GMWB hedging program, which includes the GMWB product,
reinsurance, and hedging derivatives, was primarily a result of lower implied market
volatility and outperformance of the underlying actively managed funds as compared to their
respective indices. |
|
|
The fair value related to interest rate swaps increased primarily as a result of declining
interest rates. |
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective
portion of the gain or loss on the derivative is reported as a component of OCI and reclassified
into earnings in the same period or periods during which the hedged transaction affects earnings.
Gains and losses on the derivative representing hedge ineffectiveness are recognized in current
period earnings. No components of each derivatives gain or loss were excluded from the assessment
of hedge effectiveness.
The following table presents the components of the gain or loss on derivatives that qualify as cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in |
|
|
|
|
|
Gain (Loss) Recognized in OCI |
|
|
Income on Derivative |
|
|
|
|
|
on Derivative (Effective Portion) |
|
|
(Ineffective Portion) |
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
Three Months |
|
|
Six Months |
|
|
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Interest rate swaps |
|
Net realized capital gains (losses) |
|
$ |
148 |
|
|
$ |
260 |
|
|
$ |
82 |
|
|
$ |
360 |
|
|
$ |
|
|
|
$ |
4 |
|
|
$ |
(2 |
) |
|
$ |
3 |
|
Foreign currency swaps |
|
Net realized capital gains |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
148 |
|
|
$ |
266 |
|
|
$ |
82 |
|
|
$ |
375 |
|
|
$ |
|
|
|
$ |
4 |
|
|
$ |
(2 |
) |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
Gain (Loss) Reclassified from AOCI into Income |
|
|
|
|
|
(Effective Portion) |
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Interest rate swaps |
|
Net realized capital gains |
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
4 |
|
Interest rate swaps |
|
Net investment income |
|
|
31 |
|
|
|
22 |
|
|
|
63 |
|
|
|
34 |
|
Foreign currency swaps |
|
Net realized capital gains (losses) |
|
|
3 |
|
|
|
(11 |
) |
|
|
8 |
|
|
|
(16 |
) |
Foreign currency swaps |
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
36 |
|
|
$ |
15 |
|
|
$ |
75 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
As of June 30, 2011, the before-tax deferred net gains on derivative instruments recorded in
AOCI that are expected to be reclassified to earnings during the next twelve months are $107. This
expectation is based on the anticipated interest payments on hedged investments in fixed maturity
securities that will occur over the next twelve months, at which time the Company will recognize
the deferred net gains (losses) as an adjustment to interest income over the term of the investment
cash flows. The maximum term over which the Company is hedging its exposure to the variability of
future cash flows (for forecasted transactions, excluding interest payments on existing
variable-rate financial instruments) is approximately two years.
During the three and six months ended June 30, 2011, the Company had no net reclassifications from
AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted
transactions that were no longer probable of occurring. For the three and six months ended June
30, 2010, the Company had less than $1 of net reclassifications from AOCI to earnings resulting
from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer
probable of occurring.
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss
on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the
hedged risk are recognized in current earnings. The Company includes the gain or loss on the
derivative in the same line item as the offsetting loss or gain on the hedged item. No components
of each derivatives gain or loss were excluded from the assessment of hedge effectiveness.
The Company recognized in income gains (losses) representing the ineffective portion of fair value
hedges as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Fair Value Hedging Relationships |
|
|
|
Gain (Loss) Recognized in Income [1] |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Hedge |
|
|
|
|
|
|
Hedge |
|
|
|
|
|
|
Hedge |
|
|
|
|
|
|
Hedge |
|
|
|
Derivative |
|
|
Item |
|
|
Derivative |
|
|
Item |
|
|
Derivative |
|
|
Item |
|
|
Derivative |
|
|
Item |
|
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
(27 |
) |
|
$ |
26 |
|
|
$ |
(40 |
) |
|
$ |
37 |
|
|
$ |
(17 |
) |
|
$ |
17 |
|
|
$ |
(52 |
) |
|
$ |
47 |
|
Benefits, losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
3 |
|
Foreign currency swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
|
22 |
|
|
|
(22 |
) |
|
|
(11 |
) |
|
|
11 |
|
|
|
36 |
|
|
|
(36 |
) |
|
|
(40 |
) |
|
|
40 |
|
Benefits, losses and loss adjustment expenses |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
9 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(6 |
) |
|
$ |
5 |
|
|
$ |
(58 |
) |
|
$ |
56 |
|
|
$ |
10 |
|
|
$ |
(10 |
) |
|
$ |
(95 |
) |
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The amounts presented do not include the periodic net coupon settlements of the
derivative or the coupon income (expense) related to the hedged item. The net of the amounts
presented represents the ineffective portion of the hedge. |
48
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Non-qualifying Strategies
For non-qualifying strategies, including embedded derivatives that are required to be bifurcated
from their host contracts and accounted for as derivatives, the gain or loss on the derivative is
recognized currently in earnings within net realized capital gains or losses. The following table
presents the gain or loss recognized in income on non-qualifying strategies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualifying Strategies |
|
Gain (Loss) Recognized within Net Realized Capital Gains (Losses) |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps, swaptions, caps, floors, futures, and forwards |
|
$ |
(4 |
) |
|
$ |
(5 |
) |
|
$ |
1 |
|
|
$ |
(5 |
) |
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swaps, forwards, and swaptions |
|
|
(7 |
) |
|
|
23 |
|
|
|
(12 |
) |
|
|
29 |
|
Japan 3Win hedging derivatives [1] |
|
|
33 |
|
|
|
65 |
|
|
|
(25 |
) |
|
|
9 |
|
Japanese fixed annuity hedging instruments [2] |
|
|
57 |
|
|
|
160 |
|
|
|
(5 |
) |
|
|
141 |
|
Japanese variable annuity hedging instruments |
|
|
6 |
|
|
|
32 |
|
|
|
(56 |
) |
|
|
45 |
|
Credit contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives that purchase credit protection |
|
|
(3 |
) |
|
|
38 |
|
|
|
(20 |
) |
|
|
38 |
|
Credit derivatives that assume credit risk |
|
|
(14 |
) |
|
|
(50 |
) |
|
|
5 |
|
|
|
(13 |
) |
Equity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity index swaps, options, and futures |
|
|
2 |
|
|
|
4 |
|
|
|
2 |
|
|
|
5 |
|
Variable annuity hedge program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB product derivatives |
|
|
(84 |
) |
|
|
(1,497 |
) |
|
|
279 |
|
|
|
(1,144 |
) |
GMWB reinsurance contracts |
|
|
4 |
|
|
|
246 |
|
|
|
(61 |
) |
|
|
185 |
|
GMWB hedging instruments |
|
|
43 |
|
|
|
825 |
|
|
|
(184 |
) |
|
|
662 |
|
Macro hedge program |
|
|
35 |
|
|
|
397 |
|
|
|
(322 |
) |
|
|
233 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMAB product derivatives |
|
|
(2 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Contingent capital facility put option |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
65 |
|
|
$ |
232 |
|
|
$ |
(402 |
) |
|
$ |
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The associated liability is adjusted for changes in spot rates
through realized capital gains and was $(49) and $(103) for the
three months ended June 30, 2011 and 2010, respectively, and $(7)
and $(96) for the six months ended June 30, 2011 and 2010,
respectively.
|
|
|
[2] |
|
The associated liability is adjusted for changes in spot rates
through realized capital gains and was $(63) and $(126) for the
three months ended June 30, 2011 and 2010, respectively, and
$(10) and $(119) for the six months ended June 30, 2011 and 2010,
respectively. |
For the three and six months ended June 30, 2011, the net realized capital gain (loss) related
to derivatives used in non-qualifying strategies was primarily comprised of the following:
|
|
For the three months ended June 30, 2011 the net gain related to the Japanese fixed annuity
hedging instruments is primarily due to the U.S. dollar weakening in comparison to the
Japanese yen. |
|
|
For the three months ended June 30, 2011 the net gain associated with the macro hedge
program is primarily due to a decline in Japanese interest rates and foreign currency
movements. For the six months ended June 30, 2011 the net loss related to the macro hedge
program is primarily the result of foreign currency movements and a higher equity market
valuation. |
|
|
For the three months ended June 30, 2011 the loss related to the combined GMWB hedging
program, which includes the GMWB product, reinsurance, and hedging derivatives, is primarily a
result of a general decrease in long-term interest rates. For the six months ended June 30,
2011 the gain related to the combined GMWB hedging program is primarily due to a lower implied
market volatility and outperformance of the underlying actively managed funds as compared to
their respective indices. |
|
|
For the six months ended June 30, 2011 the net loss associated with the Japan variable
annuity hedging instruments is primarily due to the Japanese yen currency movements in
comparison to the euro and the U.S. dollar. |
49
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
For the three and six months ended June 30, 2010, the net realized capital gain (loss) related
to derivatives used in non-qualifying strategies was primarily comprised of the following:
|
|
The net gain associated with the macro hedge program was primarily due to lower equity
market valuation and appreciation of the Japanese yen. |
|
|
The net gain on the Japanese fixed annuity hedging instruments was primarily due to the
U.S. dollar weakening in comparison to the Japanese yen and the increased demand for the U.S.
dollar. |
|
|
The net gain for the three months ended June 30, 2010, related to the Japan 3 Win hedging
derivatives was primarily due to the strengthening of the Japanese yen in comparison to the
U.S. dollar, partially offset by the decrease in long-term interest rates. |
|
|
The loss related to the combined GMWB hedging program which includes the GMWB product,
reinsurance, and hedging derivatives was primarily driven by higher implied market volatility
and a general decrease in long-term interest rates. |
Refer to Note 9 for additional disclosures regarding contingent credit related features in
derivative agreements.
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity, referenced
index, or asset pool in order to synthetically replicate investment transactions. The Company will
receive periodic payments based on an agreed upon rate and notional amount and will only make a
payment if there is a credit event. A credit event payment will typically be equal to the notional
value of the swap contract less the value of the referenced security issuers debt obligation after
the occurrence of the credit event. A credit event is generally defined as a default on
contractually obligated interest or principal payments or bankruptcy of the referenced entity. The
credit default swaps in which the Company assumes credit risk primarily reference investment grade
single corporate issuers and baskets, which include trades ranging from baskets of up to five
corporate issuers to standard and customized diversified portfolios of corporate issuers. The
diversified portfolios of corporate issuers are established within sector concentration limits and
are typically divided into tranches that possess different credit ratings.
The following tables present the notional amount, fair value, weighted average years to maturity,
underlying referenced credit obligation type and average credit ratings, and offsetting notional
amounts and fair value for credit derivatives in which the Company is assuming credit risk as of
June 30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying Referenced |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Credit Obligation(s) [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Offsetting |
|
|
|
|
Credit Derivative type by derivative |
|
Notional |
|
|
Fair |
|
|
Years to |
|
|
|
|
|
|
Credit |
|
|
Notional |
|
|
Offsetting |
|
risk exposure |
|
Amount [2] |
|
|
Value |
|
|
Maturity |
|
|
Type |
|
|
Rating |
|
|
Amount [3] |
|
|
Fair Value [3] |
|
Single name credit default swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure |
|
$ |
1,585 |
|
|
$ |
(3 |
) |
|
3 years |
|
Corporate Credit/Foreign Gov. |
|
|
A+ |
|
|
$ |
1,446 |
|
|
$ |
(53 |
) |
Below investment grade risk exposure |
|
|
180 |
|
|
|
(4 |
) |
|
2 years |
|
Corporate Credit |
|
BB- |
|
|
144 |
|
|
|
(8 |
) |
Basket credit default swaps [4] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure |
|
|
3,144 |
|
|
|
10 |
|
|
3 years |
|
Corporate Credit |
|
BBB+ |
|
|
2,128 |
|
|
|
(18 |
) |
Investment grade risk exposure |
|
|
525 |
|
|
|
(66 |
) |
|
6 years |
|
CMBS Credit |
|
BBB+ |
|
|
525 |
|
|
|
66 |
|
Below investment grade risk exposure |
|
|
578 |
|
|
|
(396 |
) |
|
4 years |
|
Corporate Credit |
|
BBB+ |
|
|
25 |
|
|
|
1 |
|
Embedded credit derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure |
|
|
25 |
|
|
|
24 |
|
|
3 years |
|
Corporate Credit |
|
BBB- |
|
|
|
|
|
|
|
|
Below investment grade risk exposure |
|
|
500 |
|
|
|
438 |
|
|
6 years |
|
Corporate Credit |
|
BB+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,537 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,268 |
|
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying Referenced |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Credit Obligation(s) [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Offsetting |
|
|
|
|
Credit Derivative type by derivative |
|
Notional |
|
|
Fair |
|
|
Years to |
|
|
|
|
|
|
Credit |
|
|
Notional |
|
|
Offsetting |
|
risk exposure |
|
Amount [2] |
|
|
Value |
|
|
Maturity |
|
|
Type |
|
|
Rating |
|
|
Amount [3] |
|
|
Fair Value [3] |
|
Single name credit default swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure |
|
$ |
1,562 |
|
|
$ |
(14 |
) |
|
3 years |
|
Corporate Credit/Foreign Gov. |
|
|
A+ |
|
|
$ |
1,447 |
|
|
$ |
(41 |
) |
Below investment grade risk exposure |
|
|
204 |
|
|
|
(6 |
) |
|
3 years |
|
Corporate Credit |
|
BB- |
|
|
168 |
|
|
|
(13 |
) |
Basket credit default swaps [4] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure |
|
|
3,145 |
|
|
|
(1 |
) |
|
4 years |
|
Corporate Credit |
|
BBB+ |
|
|
2,019 |
|
|
|
(14 |
) |
Investment grade risk exposure |
|
|
525 |
|
|
|
(50 |
) |
|
6 years |
|
CMBS Credit |
|
BBB+ |
|
|
525 |
|
|
|
50 |
|
Below investment grade risk exposure |
|
|
767 |
|
|
|
(381 |
) |
|
4 years |
|
Corporate Credit |
|
BBB+ |
|
|
25 |
|
|
|
|
|
Embedded credit derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure |
|
|
25 |
|
|
|
25 |
|
|
4 years |
|
Corporate Credit |
|
BBB- |
|
|
|
|
|
|
|
|
Below investment grade risk exposure |
|
|
525 |
|
|
|
463 |
|
|
6 years |
|
Corporate Credit |
|
BB+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,753 |
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,184 |
|
|
$ |
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The average credit ratings are based on availability and the
midpoint of the applicable ratings among Moodys, S&P, and Fitch.
If no rating is available from a rating agency, then an
internally developed rating is used. |
|
[2] |
|
Notional amount is equal to the maximum potential future loss
amount. There is no specific collateral related to these
contracts or recourse provisions included in the contracts to
offset losses. |
|
[3] |
|
The Company has entered into offsetting credit default swaps to
terminate certain existing credit default swaps, thereby
offsetting the future changes in value of, or losses paid related
to, the original swap. |
|
[4] |
|
Includes $3.7 billion and $3.9 billion as of June 30, 2011 and
December 31, 2010, respectively, of standard market indices of
diversified portfolios of corporate issuers referenced through
credit default swaps. These swaps are subsequently valued based
upon the observable standard market index. Also includes $553
and $542 as of June 30, 2011 and December 31, 2010, respectively,
of customized diversified portfolios of corporate issuers
referenced through credit default swaps. |
6. Deferred Policy Acquisition Costs and Present Value of Future Profits
Changes in the DAC balance are as follows:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Balance, January 1 |
|
$ |
9,857 |
|
|
$ |
10,686 |
|
Deferred Costs |
|
|
1,306 |
|
|
|
1,338 |
|
Amortization DAC |
|
|
(1,439 |
) |
|
|
(1,445 |
) |
Amortization DAC from discontinued operations |
|
|
|
|
|
|
(7 |
) |
Amortization Unlock charge, pre-tax |
|
|
(60 |
) |
|
|
(137 |
) |
Adjustments to unrealized gains and losses on securities available-for-sale and other |
|
|
(87 |
) |
|
|
(828 |
) |
Effect of currency translation |
|
|
7 |
|
|
|
82 |
|
|
|
|
|
|
|
|
Balance, June 30 |
|
$ |
9,584 |
|
|
$ |
9,689 |
|
|
|
|
|
|
|
|
The Unlock charge, pre-tax, for the six months ended June 30, 2011 consisted of a charge related to
the impact of the macro hedge program, which includes an extension of existing hedging duration
implemented in the second quarter of 2011 for U.S. annuity business, and a benefit from actual
separate account returns for the six months ended June 30, 2011 being above the Companys
aggregated estimated return. The Unlock charge, pre-tax, for the six months ended June 30, 2010
consisted of a charge due to the macro hedge program and a charge from actual separate account
returns for the six months ended June 30, 2010 being below the Companys aggregated estimated
return.
51
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Separate Accounts, Death Benefits and Other Insurance Benefit Features
U.S. GMDB, International GMDB/GMIB, and UL Secondary Guarantee Benefits
Changes in the gross U.S. GMDB, International GMDB/GMIB, and UL secondary guarantee benefits are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
UL Secondary |
|
|
|
U.S. GMDB |
|
|
GMDB/GMIB |
|
|
Guarantees |
|
Liability balance as of January 1, 2011 |
|
$ |
1,053 |
|
|
$ |
696 |
|
|
$ |
113 |
|
Incurred |
|
|
110 |
|
|
|
61 |
|
|
|
27 |
|
Paid |
|
|
(95 |
) |
|
|
(76 |
) |
|
|
|
|
Unlock |
|
|
(63 |
) |
|
|
2 |
|
|
|
|
|
Currency translation adjustment |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance as of June 30, 2011 |
|
$ |
1,005 |
|
|
$ |
685 |
|
|
$ |
140 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable asset, as of January 1, 2011 |
|
$ |
686 |
|
|
$ |
36 |
|
|
$ |
30 |
|
Incurred |
|
|
65 |
|
|
|
(3 |
) |
|
|
5 |
|
Paid |
|
|
(65 |
) |
|
|
1 |
|
|
|
|
|
Unlock |
|
|
(27 |
) |
|
|
6 |
|
|
|
|
|
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable asset, as of June 30, 2011 |
|
$ |
659 |
|
|
$ |
40 |
|
|
$ |
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
UL Secondary |
|
|
|
U.S. GMDB |
|
|
GMDB/GMIB |
|
|
Guarantees |
|
Liability balance as of January 1, 2010 |
|
$ |
1,233 |
|
|
$ |
599 |
|
|
$ |
76 |
|
Incurred |
|
|
127 |
|
|
|
62 |
|
|
|
20 |
|
Paid |
|
|
(155 |
) |
|
|
(61 |
) |
|
|
|
|
Unlock |
|
|
107 |
|
|
|
32 |
|
|
|
|
|
Currency translation adjustment |
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance as of June 30, 2010 |
|
$ |
1,312 |
|
|
$ |
664 |
|
|
$ |
96 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable asset, as of January 1, 2010 |
|
$ |
787 |
|
|
$ |
51 |
|
|
$ |
22 |
|
Incurred |
|
|
74 |
|
|
|
(2 |
) |
|
|
4 |
|
Paid |
|
|
(94 |
) |
|
|
|
|
|
|
|
|
Unlock |
|
|
65 |
|
|
|
(7 |
) |
|
|
|
|
Currency translation adjustment |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable asset, as of June 30, 2010 |
|
$ |
832 |
|
|
$ |
44 |
|
|
$ |
26 |
|
|
|
|
|
|
|
|
|
|
|
52
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 June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Variable and Group Annuity Account Value by GMDB/GMIB Type |
|
|
|
|
|
|
|
|
|
|
|
Retained Net |
|
|
|
|
|
|
|
|
|
|
Net Amount |
|
|
Amount |
|
|
Weighted Average |
|
|
|
Account |
|
|
at Risk |
|
|
at Risk |
|
|
Attained Age of |
|
Maximum
anniversary value (MAV) [1] |
|
Value (AV) |
|
|
(NAR) [10] |
|
|
(RNAR) [10] |
|
Annuitant |
|
MAV only |
|
$ |
24,081 |
|
|
$ |
4,765 |
|
|
$ |
1,030 |
|
|
|
68 |
|
With 5% rollup [2] |
|
|
1,648 |
|
|
|
416 |
|
|
|
131 |
|
|
|
68 |
|
With Earnings Protection Benefit Rider (EPB) [3] |
|
|
6,228 |
|
|
|
747 |
|
|
|
91 |
|
|
|
65 |
|
With 5% rollup & EPB |
|
|
685 |
|
|
|
142 |
|
|
|
30 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MAV |
|
|
32,642 |
|
|
|
6,070 |
|
|
|
1,282 |
|
|
|
|
|
Asset Protection Benefit (APB) [4] |
|
|
26,268 |
|
|
|
1,820 |
|
|
|
1,171 |
|
|
|
65 |
|
Lifetime Income Benefit (LIB) Death Benefit [5] |
|
|
1,252 |
|
|
|
53 |
|
|
|
53 |
|
|
|
64 |
|
Reset [6] (5-7 years) |
|
|
3,584 |
|
|
|
193 |
|
|
|
191 |
|
|
|
68 |
|
Return of Premium (ROP) [7]/Other |
|
|
23,557 |
|
|
|
462 |
|
|
|
439 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal U.S. GMDB [8] |
|
|
87,303 |
|
|
|
8,598 |
|
|
|
3,136 |
|
|
|
66 |
|
Less: General Account Value with U.S. GMDB |
|
|
7,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Separate Account Liabilities with GMDB |
|
|
80,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Separate Account Liabilities without U.S. GMDB |
|
|
77,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Separate Account Liabilities |
|
$ |
157,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan GMDB [9], [11] |
|
$ |
30,785 |
|
|
$ |
8,469 |
|
|
$ |
7,233 |
|
|
|
69 |
|
Japan GMIB [9], [11] |
|
$ |
28,526 |
|
|
$ |
5,442 |
|
|
$ |
5,442 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
MAV GMDB is the greatest of current AV, net premiums paid and the highest AV on any anniversary before age 80
(adjusted for withdrawals). |
|
[2] |
|
Rollup GMDB is the greatest of the MAV, current AV, net premium paid and premiums (adjusted for withdrawals)
accumulated at generally 5% simple interest up to the earlier of age 80 or 100% of adjusted premiums. |
|
[3] |
|
EPB GMDB is the greatest of the MAV, current AV, or contract value plus a percentage of the contracts growth. The
contracts growth is AV less premiums net of withdrawals, subject to a cap of 200% of premiums net of withdrawals. |
|
[4] |
|
APB GMDB is the greater of current AV or MAV, not to exceed current AV plus 25% times the greater of net premiums and
MAV (each adjusted for premiums in the past 12 months). |
|
[5] |
|
LIB GMDB is the greatest of current AV, net premiums paid, or for certain contracts a benefit amount that ratchets
over time, generally based on market performance. |
|
[6] |
|
Reset GMDB is the greatest of current AV, net premiums paid and the most recent five to seven year anniversary AV
before age 80 (adjusted for withdrawals). |
|
[7] |
|
ROP GMDB is the greater of current AV or net premiums paid. |
|
[8] |
|
AV includes the contract holders investment in the separate account and the general account. |
|
[9] |
|
GMDB includes a ROP and MAV (before age 80) paid in a single lump sum. GMIB is a guarantee to return initial
investment, adjusted for earnings liquidity which allows for free withdrawal of earnings, paid through a fixed payout
annuity, after a minimum deferral period of 10, 15 or 20 years. The GRB related to the Japan GMIB was $33.2 billion
and $33.9 billion as of June 30, 2011 and December 31, 2010, respectively. The GRB related to the Japan GMAB and GMWB
was $687 and $707 as of June 30, 2011 and December 31, 2010, respectively. These liabilities are not included in the
Separate Account as they are not legally insulated from the general account liabilities of the insurance enterprise.
As of June 30, 2011, 55% of the GMDB RNAR and 68% of the GMIB NAR is reinsured to a Hartford affiliate. |
|
[10] |
|
NAR is defined as the guaranteed benefit in excess of the current AV. RNAR represents NAR reduced for reinsurance.
NAR and RNAR are highly sensitive to equity markets movements and increase when equity markets decline. Additionally
Japans NAR and RNAR are highly sensitive to currency movements and increase when the Yen strengthens. |
|
[11] |
|
Policies with a guaranteed living benefit (GMIB in Japan) also have a guaranteed death
benefit. The NAR for each benefit is shown in the table above, however these benefits are
not additive. When a policy terminates due to death, any NAR related to GMWB or GMIB is
released. Similarly, when a policy goes into benefit status on a GMWB or GMIB, its GMDB NAR
is released. |
In the U.S., account balances of contracts with guarantees were invested in variable separate
accounts as follows:
|
|
|
|
|
|
|
|
|
Asset type |
|
As of June 30, 2011 |
|
|
As of December 31, 2010 |
|
Equity securities (including mutual funds) |
|
$ |
72,395 |
|
|
$ |
75,601 |
|
Cash and cash equivalents |
|
|
7,900 |
|
|
|
8,365 |
|
|
|
|
|
|
|
|
Total |
|
$ |
80,295 |
|
|
$ |
83,966 |
|
|
|
|
|
|
|
|
As of June 30, 2011 and December 31, 2010, approximately 16% and 15%, respectively, of the equity
securities above were invested in fixed income securities through these funds and approximately 84%
and 85%, respectively, were invested in equity securities.
See Note 4a for further information on guaranteed living benefits that are accounted for at fair
value, such as GMWB.
53
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Sales Inducements
Changes in deferred sales inducement activity were as follows for the six months ended June
30:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Balance, January 1 |
|
$ |
459 |
|
|
$ |
438 |
|
Sales inducements deferred |
|
|
9 |
|
|
|
15 |
|
Amortization |
|
|
(20 |
) |
|
|
(13 |
) |
Amortization Unlock charge, pre-tax |
|
|
(8 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
Balance, June 30 |
|
$ |
440 |
|
|
$ |
425 |
|
|
|
|
|
|
|
|
9. 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. 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.
Apart from the inherent difficulty of predicting litigation outcomes, particularly those that will
be decided by a jury, many of the matters specifically identified below purport to seek substantial
damages for unsubstantiated conduct spanning a multi-year period based on novel and complex legal
theories and damages models. The alleged damages typically are not quantified or factually
supported in the complaint, and, in any event, the Companys experience shows that demands for
damages often bear little relation to a reasonable estimate of potential loss. Most are in the
earliest stages of litigation, with few or no substantive legal decisions by the court defining the
scope of the claims, the class (if any), or the potentially available damages. In many, the
Company has not yet answered the complaint or asserted its defenses, and fact discovery is still in
progress or has not yet begun. Accordingly, unless otherwise specified below, management cannot
reasonably estimate the possible loss or range of loss, if any, or predict the timing of the
eventual resolution of these matters.
54
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Commitments and Contingencies (continued)
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. Two consolidated amended complaints were filed in the
multidistrict litigation, one related to conduct in connection with the sale of property-casualty
insurance and the other related to alleged conduct in connection with the sale of group benefits
products. The Company and various of its subsidiaries are named in both complaints. The complaints
assert, on behalf of a putative class of persons who purchased insurance through broker defendants,
claims under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act (RICO),
state law, and in the case of the group benefits complaint, claims under the Employee Retirement
Income Security Act of 1974 (ERISA). The claims are predicated upon allegedly undisclosed or
otherwise improper payments of contingent commissions to the broker defendants to steer business to
the insurance company defendants. The district court dismissed the Sherman Act and RICO claims in
both complaints for failure to state a claim and has granted the defendants motions for summary
judgment on the ERISA claims in the group-benefits products complaint. The district court further
declined to exercise supplemental jurisdiction over the state law claims and dismissed those claims
without prejudice. The plaintiffs appealed the dismissal of the claims in both consolidated amended
complaints, except the ERISA claims. In August 2010, the United States Court of Appeals for the
Third Circuit affirmed the dismissal of the Sherman Act and RICO claims against the Company. The
Third Circuit vacated the dismissal of the Sherman Act and RICO claims against some defendants in
the property casualty insurance case and vacated the dismissal of the state-law claims as to all
defendants in light of the reinstatement of the federal claims. In September 2010, the district
court entered final judgment for the defendants in the group benefits case. In March 2011, the
Company reached an agreement in principle to settle on a class basis the property casualty
insurance case for an immaterial amount. The settlement was preliminarily approved in June 2011
and is contingent upon final court approval.
Investment and Savings Plan ERISA and Shareholder Securities Class Action Litigation In November
and December 2008, following a decline in the share price of the Companys common stock, seven
putative class action lawsuits were filed in the United States District Court for the District of
Connecticut on behalf of certain participants in the Companys Investment and Savings Plan (the
Plan), which offers the Companys common stock as one of many investment options. These lawsuits
have been consolidated, and a consolidated amended class-action complaint was filed on March 23,
2009, alleging that the Company and certain of its officers and employees violated ERISA by
allowing the Plans participants to invest in the Companys common stock and by failing to disclose
to the Plans participants information about the Companys financial condition. The lawsuit seeks
restitution or damages for losses arising from the investment of the Plans assets in the Companys
common stock during the period from December 10, 2007 to the present. In January 2010, the
district court denied the Companys motion to dismiss the consolidated amended complaint. In
February 2011, the parties reached an agreement in principle to settle on a class basis for an
immaterial amount. The settlement is contingent upon the execution of a final settlement agreement
and preliminary and final court approval.
The Company and certain of its present or former officers are defendants in a putative securities
class action lawsuit filed in the United States District Court for the Southern District of New
York in March 2010. The operative complaint, filed in October 2010, is brought on behalf of
persons who acquired Hartford common stock during the period of July 28, 2008 through February 5,
2009, and alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5, by making false or misleading statements during the alleged class period about the
Companys valuation of certain asset-backed securities and its effect on the Companys capital
position. The Company disputes the allegations and has moved to dismiss the complaint.
Fair Credit Reporting Act Class Action In February 2007, the United States District Court for
the District of Oregon gave final approval of the 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 Company paid approximately $84.3 to eligible claimants and their counsel in
connection with the settlement, 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, and booked an insurance recoverable for the amount paid under the
settlement plus the cost of settlement administration, less the self-insured retention. Certain
insurance carriers participating in that program disputed coverage for the settlement, and one of
the excess insurers commenced an arbitration that resulted in an award in the Companys favor and
payments to the Company of approximately $30.1, thereby exhausting the primary and first-layer
excess policies. As a result, the Companys insurance recoverable was reduced to $45.5. In June
2009, the second-layer excess carriers commenced an arbitration to resolve the dispute over
coverage for the remainder of the amounts paid by the Company. The Company counterclaimed for
coverage, seeking approximately $50 plus interest. That arbitration concluded in May 2011. A
decision is expected in the third or fourth quarter of 2011. Management believes it is probable
that the Companys coverage position ultimately will be sustained.
55
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Commitments and Contingencies (continued)
Mutual Funds Litigation In October 2010, a derivative action was brought on behalf of six
Hartford retail mutual funds in the United States District Court for the District of Delaware,
alleging that Hartford Investment Financial Services, LLC received excessive advisory and
distribution fees in violation of its statutory fiduciary duty under Section 36(b) of the
Investment Company Act of 1940. In February 2011, a nearly identical derivative action was brought
against Hartford Investment Financial Services, LLC in the United States District Court for the
District of New Jersey on behalf of six additional Hartford retail mutual funds. Both actions are
assigned to the Honorable Renee Marie Bumb, a judge in the District of New Jersey who is sitting by
designation with respect to the Delaware action. Plaintiffs in each action seek to rescind the
investment management agreements and distribution plans between the Company and the mutual funds
and to recover the total fees charged thereunder or, in the alternative, to recover any improper
compensation the Company received. In addition, plaintiff in the New Jersey action seeks recovery
of lost earnings. The Company disputes the allegations and has moved to dismiss both actions.
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 2010 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.
Derivative Commitments
Certain of the Companys derivative agreements contain provisions that are tied to the financial
strength ratings of the individual legal entity that entered into the derivative agreement as set
by nationally recognized statistical rating agencies. If the legal entitys financial strength
were to fall below certain ratings, the counterparties to the derivative agreements could demand
immediate and ongoing full collateralization and in certain instances demand immediate settlement
of all outstanding derivative positions traded under each impacted bilateral agreement. The
settlement amount is determined by netting the derivative positions transacted under each
agreement. If the termination rights were to be exercised by the counterparties, it could impact
the legal entitys ability to conduct hedging activities by increasing the associated costs and
decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair
value of all derivative instruments with credit-risk-related contingent features that are in a net
liability position as of June 30, 2011, is $552. Of this $552 the legal entities have posted
collateral of $487 in the normal course of business. Based on derivative market values as of June
30, 2011, a downgrade of one level below the current financial strength ratings by either Moodys
or S&P could require approximately an additional $63 to be posted as collateral. Based on
derivative market values as of June 30, 2011, a downgrade by either Moodys or S&P of two levels
below the legal entities current financial strength ratings could require approximately an
additional $91 of assets to be posted as collateral. These collateral amounts could change as
derivative market values change, as a result of changes in our hedging activities or to the extent
changes in contractual terms are negotiated. The nature of the collateral that we would post, if
required, would be primarily in the form of U.S. Treasury bills and U.S. Treasury notes.
56
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. 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 June 30, 2011 and 2010 includes the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Service cost |
|
$ |
24 |
|
|
$ |
24 |
|
|
$ |
1 |
|
|
$ |
1 |
|
Interest cost |
|
|
66 |
|
|
|
63 |
|
|
|
5 |
|
|
|
6 |
|
Expected return on plan assets |
|
|
(75 |
) |
|
|
(72 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
Settlement expense |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
Amortization of prior service credit |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Amortization of actuarial loss |
|
|
42 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
54 |
|
|
$ |
60 |
|
|
$ |
2 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost for the six months ended June 30, 2011 and 2010 includes the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Postretirement Benefits |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Service cost |
|
$ |
52 |
|
|
$ |
51 |
|
|
$ |
2 |
|
|
$ |
3 |
|
Interest cost |
|
|
130 |
|
|
|
125 |
|
|
|
10 |
|
|
|
11 |
|
Expected return on plan assets |
|
|
(149 |
) |
|
|
(143 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
Settlement expense |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
Amortization of prior service credit |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
Amortization of actuarial loss |
|
|
79 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
107 |
|
|
$ |
102 |
|
|
$ |
5 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Stock Compensation Plans
The Companys stock-based compensation plans include The Hartford 2010 Incentive Stock Plan,
The Hartford Employee Stock Purchase Plan and The Hartford Deferred Stock Unit Plan. For a
description of these plans, see Note 18 of the Notes to Consolidated Financial Statements included
in The Hartfords 2010 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. The Company typically issues shares from treasury in satisfaction of stock-based
compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Stock-based compensation plans expense |
|
$ |
25 |
|
|
$ |
19 |
|
|
$ |
46 |
|
|
$ |
41 |
|
Income tax benefit |
|
|
(9 |
) |
|
|
(7 |
) |
|
|
(16 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation plans expense, after-tax |
|
$ |
16 |
|
|
$ |
12 |
|
|
$ |
30 |
|
|
$ |
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not capitalize any cost of stock-based compensation. As of June 30, 2011, the
total compensation cost related to non-vested awards not yet recognized was $113, which is expected
to be recognized over a weighted average period of 1.5 years.
57
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Discontinued Operations
On May 22, 2011, the Company announced a definitive merger agreement with CenterState Banks,
Inc. (CBI), pursuant to which Federal Trust Corporation (FTC), a wholly owned subsidiary of the
Company, will be merged with and into CBI, and Federal Trust Bank (FTB), a federally chartered,
FDIC-insured thrift and wholly owned subsidiary of FTC, will be merged with and into CenterState
Bank of Florida, N.A. (CenterState Bank), a wholly owned subsidiary of CBI. The mergers, which
are subject to regulatory approval and customary closing conditions, are expected to close in the
fourth quarter of 2011. At the time of the mergers, FTC and FTB will hold net assets including
cash, certain mortgage loans, property and other assets equivalent to liabilities assumed including
deposits and other liabilities, totaling approximately $240. The Company recorded an after-tax
charge of $74 in the second quarter of 2011 related to the divestiture, including the write off of
remaining goodwill of $10, after-tax, and losses on certain FTC and FTB assets and liabilities
which will not be transferred to CenterState. The Company simultaneously engaged in activities to
purchase certain assets and assume certain liabilities from FTC and FTB that were not part of the
transactions with CBI and CenterState Bank. The Company anticipates disposing of these assets and
liabilities within twelve months after closing, and thus any income or expense related to these
assets and liabilities will be temporary in nature. FTC is included in the Corporate and Other
category for segment reporting.
In the first quarter of 2011, the Company completed the sale of its wholly-owned subsidiary
Specialty Risk Services (SRS). SRS is a third-party claims administration business that provides
self-insured, insured, and alternative market clients with customized claims services. The Company
will continue to provide certain transition services to SRS for up to 24 months. For the six
months ended June 30, 2011, the Company recorded a net realized capital gain of $150, after-tax.
SRS is included in the Property & Casualty Commercial reporting segment. In addition, during the
fourth quarter of 2010, the Company completed the sales of its indirect wholly-owned subsidiaries
Hartford Investments Canada Corporation (HICC) and Hartford Advantage Investment, Ltd. (HAIL).
HICC is included in the Mutual Funds reporting segment and HAIL is included in the Global Annuity
reporting segment.
The following table summarizes the amounts related to discontinued operations in the Condensed
Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income |
|
$ |
1 |
|
|
$ |
9 |
|
|
$ |
1 |
|
|
$ |
18 |
|
Net investment income |
|
|
3 |
|
|
|
5 |
|
|
|
11 |
|
|
|
11 |
|
Net realized capital gains (losses) |
|
|
(1 |
) |
|
|
2 |
|
|
|
(5 |
) |
|
|
|
|
Other revenues |
|
|
|
|
|
|
55 |
|
|
|
47 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
3 |
|
|
|
71 |
|
|
|
54 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs and present value of
future profits |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
7 |
|
Insurance operating costs and other expenses |
|
|
14 |
|
|
|
66 |
|
|
|
46 |
|
|
|
130 |
|
Goodwill impairment |
|
|
|
|
|
|
153 |
|
|
|
|
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
14 |
|
|
|
222 |
|
|
|
46 |
|
|
|
290 |
|
Income (loss) before income taxes |
|
|
(11 |
) |
|
|
(151 |
) |
|
|
8 |
|
|
|
(152 |
) |
Income tax expense (benefit) |
|
|
(5 |
) |
|
|
(52 |
) |
|
|
2 |
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued operations, net of tax |
|
|
(6 |
) |
|
|
(99 |
) |
|
|
6 |
|
|
|
(100 |
) |
Net realized capital gain (loss) on disposal, net of tax |
|
|
(74 |
) |
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
$ |
(80 |
) |
|
$ |
(99 |
) |
|
$ |
82 |
|
|
$ |
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
58
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Goodwill
The carrying amount of goodwill allocated to reporting segments as of June 30, 2011 and
December 31, 2010 is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Carrying |
|
|
|
|
|
|
Accumulated |
|
|
Carrying |
|
|
|
Gross |
|
|
Impairments |
|
|
Value |
|
|
Gross |
|
|
Impairments |
|
|
Value |
|
Commercial Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Casualty Commercial |
|
$ |
30 |
|
|
$ |
|
|
|
$ |
30 |
|
|
$ |
30 |
|
|
$ |
|
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Markets |
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Markets |
|
|
119 |
|
|
|
|
|
|
|
119 |
|
|
|
119 |
|
|
|
|
|
|
|
119 |
|
Wealth Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Annuity |
|
|
422 |
|
|
|
(422 |
) |
|
|
|
|
|
|
422 |
|
|
|
(422 |
) |
|
|
|
|
Life Insurance |
|
|
224 |
|
|
|
|
|
|
|
224 |
|
|
|
224 |
|
|
|
|
|
|
|
224 |
|
Retirement Plans |
|
|
87 |
|
|
|
|
|
|
|
87 |
|
|
|
87 |
|
|
|
|
|
|
|
87 |
|
Mutual Funds |
|
|
159 |
|
|
|
|
|
|
|
159 |
|
|
|
159 |
|
|
|
|
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Wealth Management |
|
|
892 |
|
|
|
(422 |
) |
|
|
470 |
|
|
|
892 |
|
|
|
(422 |
) |
|
|
470 |
|
Corporate and Other |
|
|
940 |
|
|
|
(523 |
) |
|
|
417 |
|
|
|
940 |
|
|
|
(508 |
) |
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
1,981 |
|
|
$ |
(945 |
) |
|
$ |
1,036 |
|
|
$ |
1,981 |
|
|
$ |
(930 |
) |
|
$ |
1,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter, the Company charged off the remaining $15 of goodwill associated with
the FTC reporting unit within Corporate and Other due to the announced divestiture of FTC. The
write-off of the FTC reporting unit goodwill was recorded as a loss on disposal within discontinued
operations, see Note 12.
The Company completed its annual goodwill assessment for the individual reporting units within
Wealth Management and Corporate and Other, except for the FTC reporting unit, as of January 1,
2011, which resulted in no write-downs of goodwill in 2011. The reporting units passed the first
step of their annual impairment tests with a significant margin with the exception of the
Individual Life reporting unit within Life Insurance. The Individual Life reporting unit has a
goodwill balance of $342 and had a margin of less than 10%.
The fair value of the Individual Life reporting unit within Life Insurance is based on discounted
cash flows using earnings projections on in force business and future business growth. There could
be a positive or negative impact on the result of step one in future periods if actual earnings or
business growth assumptions emerge differently than those used in determining fair value for the
first step of the annual goodwill impairment test.
The Company expects to complete the annual impairment test for the reporting units within Property
& Casualty Commercial and Consumer Markets in the fourth quarter of 2011.
59
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 June 30, 2011, compared with
December 31, 2010, and its results of operations for the three and six months ended June 30, 2011,
compared to the equivalent 2010 periods. This discussion should be read in conjunction with the
MD&A in The Hartfords 2010 Form 10-K Annual Report. Certain reclassifications have been made to
prior period financial information to conform to the current period classifications. Also, prior
period amounts have been retrospectively reclassified to reflect discontinued operations, see Note
12 of the Notes to Condensed Consolidated Financial Statements for further information on
discontinued operations. The Hartford defines increases or decreases greater than or equal to
200%, or changes from a net gain to a net loss position, or vice versa, as NM or not meaningful.
INDEX
|
|
|
|
|
Description |
|
Page |
|
|
|
|
|
|
61 |
|
|
|
|
|
|
64 |
|
|
|
|
|
|
65 |
|
|
|
|
|
|
75 |
|
|
|
|
|
|
75 |
|
|
|
|
|
|
84 |
|
|
|
|
|
|
86 |
|
|
|
|
|
|
87 |
|
|
|
|
|
|
90 |
|
|
|
|
|
|
92 |
|
|
|
|
|
|
93 |
|
|
|
|
|
|
95 |
|
|
|
|
|
|
96 |
|
|
|
|
|
|
97 |
|
|
|
|
|
|
97 |
|
|
|
|
|
|
105 |
|
|
|
|
|
|
113 |
|
|
|
|
|
|
119 |
|
60
CONSOLIDATED RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Operating Summary |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Earned premiums |
|
$ |
3,545 |
|
|
$ |
3,506 |
|
|
|
1 |
% |
|
$ |
7,064 |
|
|
$ |
7,033 |
|
|
|
|
|
Fee income |
|
|
1,219 |
|
|
|
1,186 |
|
|
|
3 |
% |
|
|
2,428 |
|
|
|
2,366 |
|
|
|
3 |
% |
Net investment income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale and other |
|
|
1,104 |
|
|
|
1,148 |
|
|
|
(4 |
%) |
|
|
2,212 |
|
|
|
2,202 |
|
|
|
|
|
Equity securities, trading [1] |
|
|
(597 |
) |
|
|
(2,649 |
) |
|
|
77 |
% |
|
|
206 |
|
|
|
(1,948 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income (loss) |
|
|
507 |
|
|
|
(1,501 |
) |
|
NM |
|
|
|
2,418 |
|
|
|
254 |
|
|
NM |
|
Net realized capital gains (losses) |
|
|
69 |
|
|
|
9 |
|
|
NM |
|
|
|
(334 |
) |
|
|
(265 |
) |
|
|
(26 |
%) |
Other revenues |
|
|
61 |
|
|
|
65 |
|
|
|
(6 |
%) |
|
|
125 |
|
|
|
129 |
|
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
5,401 |
|
|
|
3,265 |
|
|
|
65 |
% |
|
|
11,701 |
|
|
|
9,517 |
|
|
|
23 |
% |
Benefits, losses and loss adjustment expenses |
|
|
3,976 |
|
|
|
3,592 |
|
|
|
11 |
% |
|
|
7,154 |
|
|
|
6,725 |
|
|
|
6 |
% |
Benefits, losses and loss adjustment expenses returns
credited on international variable annuities [1] |
|
|
(597 |
) |
|
|
(2,649 |
) |
|
|
77 |
% |
|
|
206 |
|
|
|
(1,948 |
) |
|
NM |
|
Amortization of deferred policy acquisition costs and
present value of future profits (DAC) |
|
|
835 |
|
|
|
935 |
|
|
|
(11 |
%) |
|
|
1,499 |
|
|
|
1,582 |
|
|
|
(5 |
%) |
Insurance operating costs and other expenses |
|
|
1,224 |
|
|
|
1,111 |
|
|
|
10 |
% |
|
|
2,344 |
|
|
|
2,226 |
|
|
|
5 |
% |
Interest expense |
|
|
128 |
|
|
|
132 |
|
|
|
(3 |
%) |
|
|
256 |
|
|
|
252 |
|
|
|
2 |
% |
Total benefits, losses and expenses |
|
|
5,566 |
|
|
|
3,121 |
|
|
|
78 |
% |
|
|
11,459 |
|
|
|
8,837 |
|
|
|
30 |
% |
Income (loss) from continuing operations before
income taxes |
|
|
(165 |
) |
|
|
144 |
|
|
NM |
| |
|
242 |
|
|
|
680 |
|
|
|
(64 |
%) |
Income tax expense (benefit) |
|
|
(269 |
) |
|
|
(31 |
) |
|
NM |
|
|
|
(211 |
) |
|
|
185 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
|
104 |
|
|
|
175 |
|
|
|
(41 |
%) |
|
|
453 |
|
|
|
495 |
|
|
|
(8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
(80 |
) |
|
|
(99 |
) |
|
|
19 |
% |
|
|
82 |
|
|
|
(100 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24 |
|
|
$ |
76 |
|
|
|
(68 |
%) |
|
$ |
535 |
|
|
$ |
395 |
|
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Operating Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations, net of tax,
available to common
shareholders per diluted common
share |
|
$ |
0.19 |
|
|
$ |
0.34 |
|
|
|
|
|
|
$ |
0.89 |
|
|
$ |
|
|
|
|
|
|
Net income (loss)
available to common
shareholders per diluted common
share |
|
|
0.03 |
|
|
|
0.14 |
|
|
|
|
|
|
|
1.06 |
|
|
|
(0.24 |
) |
|
|
|
|
Total revenues, excluding
net investment income on equity
securities, trading |
|
|
5,998 |
|
|
|
5,914 |
|
|
|
|
|
|
|
11,495 |
|
|
|
11,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
Summary of Financial Condition |
|
2011 |
|
|
2010 |
|
Total assets |
|
$ |
317,469 |
|
|
$ |
318,346 |
|
Total investments, excluding equity securities, trading |
|
|
99,794 |
|
|
|
98,175 |
|
Total stockholders equity |
|
|
21,675 |
|
|
|
20,311 |
|
|
|
|
[1] |
|
Includes investment income and mark-to-market effects of equity securities, trading,
supporting the international variable annuity business, which are classified in net
investment income with corresponding amounts credited to policyholders within benefits,
losses and loss adjustment expenses. |
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
|
(Decrease) From |
|
|
|
|
|
|
|
|
|
|
(Decrease) From |
|
Segment Results |
|
2011 |
|
|
2010 |
|
|
2011 to 2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 to 2010 |
|
Property & Casualty Commercial |
|
$ |
121 |
|
|
$ |
270 |
|
|
$ |
(149 |
) |
|
$ |
448 |
|
|
$ |
476 |
|
|
$ |
(28 |
) |
Group Benefits |
|
|
41 |
|
|
|
48 |
|
|
|
(7 |
) |
|
|
52 |
|
|
|
99 |
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Markets |
|
|
162 |
|
|
|
318 |
|
|
|
(156 |
) |
|
|
500 |
|
|
|
575 |
|
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Markets |
|
|
(174 |
) |
|
|
(13 |
) |
|
|
(161 |
) |
|
|
(64 |
) |
|
|
43 |
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Annuity |
|
|
228 |
|
|
|
(114 |
) |
|
|
342 |
|
|
|
278 |
|
|
|
(34 |
) |
|
|
312 |
|
Life Insurance |
|
|
66 |
|
|
|
103 |
|
|
|
(37 |
) |
|
|
101 |
|
|
|
127 |
|
|
|
(26 |
) |
Retirement Plans |
|
|
30 |
|
|
|
14 |
|
|
|
16 |
|
|
|
45 |
|
|
|
8 |
|
|
|
37 |
|
Mutual Funds |
|
|
27 |
|
|
|
23 |
|
|
|
4 |
|
|
|
55 |
|
|
|
49 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth Management |
|
|
351 |
|
|
|
26 |
|
|
|
325 |
|
|
|
479 |
|
|
|
150 |
|
|
|
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other |
|
|
(315 |
) |
|
|
(255 |
) |
|
|
(60 |
) |
|
|
(380 |
) |
|
|
(373 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24 |
|
|
$ |
76 |
|
|
$ |
(52 |
) |
|
$ |
535 |
|
|
$ |
395 |
|
|
$ |
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2011 compared to the three months ended June 30, 2010
The decrease in net income from 2010 to 2011 was primarily due to the following items:
|
|
Current accident year catastrophe losses of $290, after-tax, in 2011, primarily due to
severe tornadoes and wind storms in the Midwest and South, compared to $150, after-tax, in
2010, primarily due to tornadoes, thunderstorms and hail events in the Midwest, plains states
and the Southeast. |
|
|
An asbestos reserve increase of $189, after-tax, in 2011, compared to $110, after-tax, in
2010 resulting from the Companys annual review of its asbestos liabilities within the Other
Operations operating segment. The reserve increase in 2011 was primarily driven by higher
frequency and severity of mesothelioma claims, particularly against certain smaller, more
peripheral insureds, while the reserve increase in 2010 was primarily driven by increases in
claim severity and expenses. For further information, see Other Operations Claims within the
Property and Casualty Insurance Product Reserves, Net of Reinsurance section in Critical
Accounting Estimates. |
|
|
A $73, after-tax, charge in the second quarter of 2011 related to the write-off of
capitalized costs associated with a policy administration software project that was
discontinued. |
|
|
The Company recorded strengthenings of $18, after-tax, in 2011, compared to releases of
$97, after-tax, in 2010, in its property and casualty insurance prior accident years
development, excluding asbestos reserves. For additional information regarding prior accident
years development, see Critical Accounting Estimates within the MD&A. |
Partially offsetting these decreases in net income were the following items:
|
|
The Unlock charge was $77, after-tax, in 2011 as compared to an Unlock charge of $230,
after-tax, in 2010. The charge in both 2011 and 2010 was due to macro hedge program and
actual separate account returns being below our aggregated estimated return. For further
discussion of Unlocks see the Critical Accounting Estimates within the MD&A. |
|
|
For the three months ended June 30, 2011 the Company released $86 of the income tax
valuation allowance associated with investment realized capital losses. See Note 1 of the
Notes to Condensed Consolidated Financial Statements for a reconciliation of the tax provision
at the U.S. Federal statutory rate to the provision for income taxes. |
|
|
For the three months ended June 30, 2011, the Company recorded a $52 income tax benefit
related to a resolution of a tax matter with the Internal Revenue Service (IRS) for the
computation of dividends received deduction for years 1998, 2000 and 2001. For additional
information see Note 1 of the Notes to Condensed Consolidated Financial Statements. |
|
|
For the three months ended June 30, 2011, the loss from discontinued operations, net of
tax, is due to a charge of $74, after-tax, in the second quarter of 2011 related to the
disposition of Federal Trust Corporation. For the three months ended June 30, 2010, loss from
discontinued operations, net of tax, primarily relates to goodwill impairment on Federal Trust
Corporation of approximately $100, after-tax, recorded in the second quarter of 2010. |
See the segment sections of the MD&A for a discussion on their respective performances.
62
Six months ended June 30, 2011 compared to the six months ended June 30, 2010
The increase in net income from 2010 to 2011 was primarily due to the following items:
|
|
Income (loss) from discontinued operations, net of tax, increased due to a realized gain on
the sale of Specialty Risk Services of $150, after-tax, in the first quarter of 2011, which
was partially offset by a loss of $74, after-tax, from the disposition of Federal Trust
Corporation in the second quarter of 2011. In 2010, loss from discontinued operations, net of
tax, primarily relates to goodwill impairment on Federal Trust Corporation of approximately
$100, after-tax, recorded in the second quarter of 2010. |
|
|
The Unlock charge was $15, after-tax, in 2011 as compared to an Unlock charge of $145,
after-tax, in 2010. The Unlock charge for the six months ended June 30, 2011 consisted of a
charge related to the impact of the macro hedge program, which includes an extension of
existing hedging duration implemented in the second quarter of 2011 for U.S. annuity business,
and a benefit from actual separate account returns for the six months ended June 30, 2011
being above the Companys aggregated estimated return. The Unlock charge for the six months
ended June 30, 2010 consisted of a charge due to the macro hedge program and a charge from
actual separate account returns for the six months ended June 30, 2010 being below the
Companys aggregated estimated return. For further discussion of Unlocks see the Critical
Accounting Estimates within the MD&A. |
|
|
The first quarter of 2010 includes an accrual for a litigation settlement of $73,
before-tax, for further information see Structured Settlement Class Action in Note 12 of the
Notes to Consolidated Financial Statements in The Hartfords 2010 Form 10-K Annual Report. |
|
|
Income tax expense (benefit) in 2010 includes a valuation allowance expense of $86 compared
to a benefit of $91 in 2011. See Note 1 of the Notes to Condensed Consolidated Financial
Statements for a reconciliation of the tax provision at the U.S. Federal statutory rate to the
provision for income taxes. |
|
|
For the three months ended June 30, 2011, the Company recorded a $52 income tax benefit
related to a resolution of a tax matter with the IRS for the computation of dividends received
deduction for years 1998, 2000 and 2001. For additional information see Note 1 of the Notes
to Condensed Consolidated Financial Statements. |
Partially offsetting these increases in net income were the following items:
|
|
Current accident year catastrophe losses of $341, after-tax, in 2011, primarily due to
severe tornadoes and wind storms in the Midwest and South, as well as, winter storms in the
Northeast and Midwest, compared to $200, after-tax, in 2010, primarily due to tornadoes,
thunderstorms and hail events in the Midwest, plains states and the Southeast, as well as,
winter storms in the Mid-Atlantic and Northeast. |
|
|
An asbestos reserve increase of $189, after-tax, in 2011, compared to $110, after-tax, in
2010 resulting from the Companys annual review of its asbestos liabilities within the Other
Operations operating segment. The reserve increase in 2011 was primarily driven by higher
frequency and severity of mesothelioma claims, particularly against certain smaller, more
peripheral insureds, while the reserve increase in 2010 was primarily driven by increases in
claim severity and expenses. For further information, see Other Operations Claims within the
Property and Casualty Insurance Product Reserves, Net of Reinsurance section in Critical
Accounting Estimates. |
|
|
A $73, after-tax, charge in the second quarter of 2011 related to the write-off of
capitalized costs associated with a policy administration software project that was
discontinued. |
|
|
Net realized capital losses increased primarily due the results of the variable annuity
hedge program, partially offset by a decline in impairment losses and valuation allowances on
mortgage loans. For further discussion, see Net Realized Capital Gains (Losses) within
Investment Results of Key Performance Measures and Ratios of this MD&A. |
|
|
The Company recorded releases of $16, after-tax, in 2011, compared to releases of $153,
after-tax, in 2010, in its property and casualty insurance prior accident years development,
excluding asbestos reserves. For additional information regarding prior accident years
development, see Critical Accounting Estimates within the MD&A. |
See the segment sections of the MD&A for a discussion on their respective performances.
63
OUTLOOKS
The Hartford provides projections and other forward-looking information in the following
discussions, which 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
on pages 3-4 of this Form 10-Q. Actual results are likely to differ, and in the past have
differed, materially from those forecast by the Company, depending on the outcome of various
factors, including, but not limited to, those set forth in each discussion below and in Part I,
Item 1A, Risk Factors in The Hartfords 2010 Form 10-K Annual Report.
Throughout 2011, The Hartford will continue to focus on growing its three customer-oriented
divisions, Commercial Markets, Consumer Markets, and Wealth Management, through enhanced product
development, leveraging synergies of the divisions product offerings to meet customer needs, and
increased efficiencies throughout the organization. The speed and extent of economic and
employment expansion may impact the insurance protection businesses where insureds may change their
level of insurance, and asset accumulation businesses may see customers changing their level of
savings based on anticipated economic conditions. The performance of The Hartfords divisions is
subject to uncertainty due to market conditions, which impact the earnings of its asset management
businesses and the valuation and earnings on its investment portfolio.
Commercial Markets
Commercial Markets will continue to focus on growth through market-differentiated products and
services while maintaining a disciplined underwriting approach. In the Property & Casualty
Commercial insurance marketplace, improving market conditions have enabled the Company to achieve
price increases in standard commercial lines during the first six months of 2011, while a slowly
recovering economy has resulted in an increase in insurance exposures, both at levels greater than
anticipated. Additionally, standard commercial lines policy counts are growing, particularly for
our small commercial business, led by an increase in workers compensation policies in force.
Favorable trends are expected to continue. As such, the Company has raised its full year 2011
expectations to mid to high single-digit written premium growth for Property & Casualty Commercial.
This growth potential reflects the combination of our current market position, a broadening of
underwriting expertise focused on selected industries, a leveraging of the payroll model, and
numerous initiatives launched in the past several years. Initiatives include programs aimed at
improving policy count retention, the rollout of new product offerings and the introduction of ease
of doing business technology for our small commercial business. The Property & Casualty Commercial
combined ratio before catastrophes and prior accident year development is expected to be slightly
higher for full year 2011 than the 93.4 achieved in 2010, as pricing increases are expected to
somewhat offset loss cost changes. In Group Benefits, the economic downturn, combined with
employees lessening spending on the Companys products and the overall competitive environment,
reduced premium levels in 2010. Premiums are expected to remain relatively flat for full year
2011, or until there is economic expansion with lower unemployment rates, compared to 2010 levels.
Over time, as employers design benefit strategies to attract and retain employees, while attempting
to control their benefit costs, management believes that the need for the 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 continued opportunities for our products and
services. The Company experienced elevated disability loss ratios in 2010, as compared to prior
years, and anticipates loss ratios to remain essentially flat for full year 2011.
Consumer Markets
In 2011, the Company expects written premium to decline, including a decrease in both AARP direct
and Agency business. Management expects written premium from business sold directly to AARP
members to decline in 2011 reflecting the impact of written pricing increases in a price sensitive
market. The Company also expects Agency earned premium to decline in 2011 as a result of continued
pricing and underwriting actions to improve profitability, including efforts to reposition the book
into more preferred market business, including for insureds aged 40+. Partially offsetting the
decreases in 2011, Consumer Markets expects to increase its business written through independent
agents to AARP members and enter into new affinity relationships. In addition, management expects
to generate new business from direct marketing to AARP members, expanding the sale of the Open Road
Advantage auto product and introducing an enhanced homeowners product called Hartford Home
Advantage. The Open Road Advantage product is being rolled out to additional states for direct
business and is being offered through independent agents. As of July 2011, the Open Road Advantage
auto product was available in 42 states and management expects it to be available in 44 states by
the end of 2011. The Company began introducing its Hartford Home Advantage product during the
first quarter of 2011 and will continue rolling out to additional states in the coming quarters.
The Company distributes its discounted AARP Open Road Advantage auto product through those
independent agents who are authorized to offer the AARP product and has begun to distribute its
Hartford Home Advantage product on a discounted basis through those same authorized agents.
Management expects that the combined ratio before catastrophes and prior accident year development
will improve in 2011, as compared to 2010, driven mostly by earned pricing increases for both auto
and home and lower average claim severity for auto liability. For auto, claim frequency is
expected to improve slightly in 2011 as we benefit from a continued shift to a more preferred mix
of business. For home, claim frequency has increased in the first half of 2011 because of an
increase in weather-related claims but is otherwise expected to benefit from the continued shift to
a more preferred book of business. Claim severity increases for home are expected to be modest
throughout 2011.
64
Wealth Management
Wealth Management continues to drive sales momentum through the execution of several key
strategies. Global Annuity is continuing to build out a portfolio of solutions to provide contract
holders guaranteed income. In June 2011, several of these solutions were introduced to the market
place and provide a unique range of options to meet customers retirement accumulation, income and
legacy needs. We continue to diversify our suite of products and explore annuity distribution
avenues that would complement the existing channels we have in place today. Our Mutual Fund
business has been offering new funds to improve our participation in segments where we see growth
opportunities. The success of two new global funds last year were followed by the launch of an
emerging market equity fund, an emerging market debt fund and a global fixed income fund. We are
also seeing strong growth opportunities beyond our core retail distribution specifically with
Registered Investment Advisors and professional buyers. The Retirement Plans business continues to
experience strong sales. In addition to our core 401(k) market, we have seen growth in larger
($5+) corporate plans, as well as with tax exempt plans. The property & casualty channel will
become an increasingly important area of focus for us given our conviction that this channel is
underpenetrated and well suited for this business. Life Insurance continues to differentiate
itself from the industry through the creative offering of riders. The recently launched
LongevityAccess rider, which allows policyholders to begin taking income from a policy at age 90,
in tandem with the increasingly popular LifeAccess rider, which allows policyholders to take
distributions from their policies in cases of chronic illness, gives The Hartford an ability to
help people protect against premature death, outliving ones assets, or deteriorating health. In
addition to building out distribution through property & casualty agents, the Company continues to
expand its distribution into career life insurance professionals through the Monarch program.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America (U.S. GAAP), requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ, and in the past have
differed, from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree
of judgment and are subject to a significant degree of variability:
|
|
property and casualty insurance product reserves, net of reinsurance; |
|
|
estimated gross profits used in the valuation and amortization of assets and liabilities
associated with variable annuity and other universal life-type contracts; |
|
|
evaluation of other-than-temporary impairments on available-for-sale securities and
valuation allowances on investments; |
|
|
living benefits required to be fair valued (in other policyholder funds and benefits
payable); |
|
|
valuation of investments and derivative instruments; |
|
|
pension and other postretirement benefit obligations; |
|
|
valuation allowance on deferred tax assets; and |
|
|
contingencies relating to corporate litigation and regulatory matters. |
Certain of these estimates are particularly sensitive to market conditions, and deterioration
and/or volatility in the worldwide debt or equity markets could have a material impact on the
Condensed Consolidated Financial Statements. In developing these estimates management makes
subjective and complex judgments that are inherently uncertain and subject to material change as
facts and circumstances develop. Although variability is inherent in these estimates, management
believes the amounts provided are appropriate based upon the facts available upon compilation of
the financial statements. The Hartfords critical accounting estimates are discussed in Part II,
Item 7 MD&A in The Hartfords 2010 Form 10-K Annual Report. The following discussion updates
certain of The Hartfords critical accounting estimates for June 30, 2011 results.
65
Property and Casualty Insurance Product Reserves, Net of Reinsurance
Based on the results of the quarterly reserve review process, the Company determines the
appropriate reserve adjustments, if any, to record. Recorded reserve estimates are changed after
consideration of numerous factors, including but not limited to, the magnitude of the difference
between the actuarial indication and the recorded reserves, improvement or deterioration of
actuarial indications in the period, the maturity of the accident year, trends observed over the
recent past and the level of volatility within a particular line of business. In general,
adjustments are made more quickly to more mature accident years and less volatile lines of
business. Such adjustments of reserves are referred to as reserve development. Reserve
development that increases previous estimates of ultimate cost is called reserve strengthening.
Reserve development that decreases previous estimates of ultimate cost is called reserve
releases. Reserve development can influence the comparability of year over year underwriting
results and is set forth in the paragraphs and tables that follow.
Reserve Roll Forwards and Development
A roll-forward follows of property and casualty insurance product liabilities for unpaid losses and
loss adjustment expenses for the six months ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Property & |
|
|
|
|
|
|
|
|
|
|
Property and |
|
|
|
Casualty |
|
|
Consumer |
|
|
Corporate and |
|
|
Casualty |
|
|
|
Commercial |
|
|
Markets |
|
|
Other |
|
|
Insurance |
|
Beginning liabilities for unpaid losses and loss adjustment expenses,
gross |
|
$ |
14,727 |
|
|
$ |
2,177 |
|
|
$ |
4,121 |
|
|
$ |
21,025 |
|
Reinsurance and other recoverables |
|
|
2,361 |
|
|
|
17 |
|
|
|
699 |
|
|
|
3,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net |
|
|
12,366 |
|
|
|
2,160 |
|
|
|
3,422 |
|
|
|
17,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for unpaid losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
1,912 |
|
|
|
1,239 |
|
|
|
1 |
|
|
|
3,152 |
|
Current accident year catastrophes |
|
|
212 |
|
|
|
313 |
|
|
|
|
|
|
|
525 |
|
Prior accident years |
|
|
25 |
|
|
|
(49 |
) |
|
|
290 |
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for unpaid losses and loss adjustment expenses |
|
|
2,149 |
|
|
|
1,503 |
|
|
|
291 |
|
|
|
3,943 |
|
Payments |
|
|
(1,852 |
) |
|
|
(1,494 |
) |
|
|
(198 |
) |
|
|
(3,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, net |
|
|
12,663 |
|
|
|
2,169 |
|
|
|
3,515 |
|
|
|
18,347 |
|
Reinsurance and other recoverables |
|
|
2,356 |
|
|
|
6 |
|
|
|
751 |
|
|
|
3,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross |
|
$ |
15,019 |
|
|
$ |
2,175 |
|
|
$ |
4,266 |
|
|
$ |
21,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
3,015 |
|
|
$ |
1,895 |
|
|
|
|
|
|
|
|
|
Loss and loss expense paid ratio [1] |
|
|
61.4 |
|
|
|
78.8 |
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred ratio |
|
|
71.3 |
|
|
|
79.4 |
|
|
|
|
|
|
|
|
|
Prior accident years development (pts) [2] |
|
|
0.8 |
|
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The loss and loss expense paid ratio represents the ratio of paid losses and loss adjustment expenses to earned premiums. |
|
[2] |
|
Prior accident years development (pts) represents the ratio of prior accident years development to earned premiums. |
66
Prior accident years development recorded in 2011
Included within prior accident years development for the three and six months ended June 30, 2011
were the following reserve strengthenings (releases):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011 |
|
|
|
Property & Casualty |
|
|
Consumer |
|
|
Corporate and |
|
|
Total Property and |
|
|
|
Commercial |
|
|
Markets |
|
|
Other |
|
|
Casualty Insurance |
|
Auto liability |
|
$ |
|
|
|
$ |
(9 |
) |
|
$ |
|
|
|
$ |
(9 |
) |
Homeowners |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Professional liability |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Package business |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Workers compensation |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
General liability |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Fidelity and surety |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Commercial property |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
Net asbestos reserves |
|
|
|
|
|
|
|
|
|
|
290 |
|
|
|
290 |
|
Change in workers compensation
discount, including accretion |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Catastrophes |
|
|
10 |
|
|
|
9 |
|
|
|
|
|
|
|
19 |
|
Other reserve re-estimates, net |
|
|
5 |
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prior accident years development |
|
$ |
31 |
|
|
$ |
|
|
|
$ |
286 |
|
|
$ |
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011 |
|
|
|
Property & Casualty |
|
|
Consumer |
|
|
Corporate and |
|
|
Total Property and |
|
|
|
Commercial |
|
|
Markets |
|
|
Other |
|
|
Casualty Insurance |
|
Auto liability |
|
$ |
(1 |
) |
|
$ |
(64 |
) |
|
$ |
|
|
|
$ |
(65 |
) |
Homeowners |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
(13 |
) |
Professional liability |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
Package business |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Workers compensation |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
General liability |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Fidelity and surety |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Commercial property |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Net asbestos reserves |
|
|
|
|
|
|
|
|
|
|
290 |
|
|
|
290 |
|
Net environmental reserves |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Change in workers compensation
discount, including accretion |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
Catastrophes |
|
|
5 |
|
|
|
28 |
|
|
|
|
|
|
|
33 |
|
Other reserve re-estimates, net |
|
|
7 |
|
|
|
|
|
|
|
(2 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prior accident years development |
|
$ |
25 |
|
|
$ |
(49 |
) |
|
$ |
290 |
|
|
$ |
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2011, the Companys re-estimates of prior
accident years reserves included the following significant reserve changes:
|
|
Released reserves for personal auto liability claims for both the three and six months
ended June 30, 2011, primarily for accident years 2005 through 2010. Favorable trends in
reported severity have persisted over this time period. As these accident years develop, the
uncertainty around the ultimate losses is reduced and management places more weight on the
emerged experience. |
|
|
Released homeowners reserves, for the six months ended June 30, 2011, due to favorable
emergence losses primarily for accident years 2009 and 2010. This was partially driven by an
increase in the speed at which claims are being settled, a trend that is expected to continue
as these accident years develop. |
|
|
Strengthened reserves for general liability and high hazard liability, for both the three
and six months ended June 30, 2011, driven by increasing indications for allocated claim
handling cost primarily in accident years 2006 through 2010. |
|
|
Prior year catastrophe strengthening, for the three and six month period, primarily related
to a severe wind and hail storm event in Arizona during the fourth quarter of 2010. |
|
|
Refer to the Other Operations Claims section for further discussion on strengthening of net
asbestos reserves. |
67
A roll forward follows of property and casualty insurance product liabilities for unpaid losses and
loss adjustment expenses for the six months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Property & Casualty |
|
|
Consumer |
|
|
Corporate and |
|
|
Total Property and |
|
|
|
Commercial |
|
|
Markets |
|
|
Other |
|
|
Casualty Insurance |
|
Beginning liabilities for unpaid losses and loss adjustment expenses,
gross |
|
$ |
15,051 |
|
|
$ |
2,109 |
|
|
$ |
4,491 |
|
|
$ |
21,651 |
|
Reinsurance and other recoverables |
|
|
2,570 |
|
|
|
11 |
|
|
|
860 |
|
|
|
3,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net |
|
|
12,481 |
|
|
|
2,098 |
|
|
|
3,631 |
|
|
|
18,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for unpaid losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
1,746 |
|
|
|
1,353 |
|
|
|
|
|
|
|
3,099 |
|
Current accident year catastrophes |
|
|
121 |
|
|
|
187 |
|
|
|
|
|
|
|
308 |
|
Prior accident years |
|
|
(221 |
) |
|
|
(17 |
) |
|
|
172 |
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for unpaid losses and loss adjustment expenses |
|
|
1,646 |
|
|
|
1,523 |
|
|
|
172 |
|
|
|
3,341 |
|
Payments |
|
|
(1,701 |
) |
|
|
(1,411 |
) |
|
|
(217 |
) |
|
|
(3,329 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, net |
|
|
12,426 |
|
|
|
2,210 |
|
|
|
3,586 |
|
|
|
18,222 |
|
Reinsurance and other recoverables |
|
|
2,431 |
|
|
|
12 |
|
|
|
814 |
|
|
|
3,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross |
|
$ |
14,857 |
|
|
$ |
2,222 |
|
|
$ |
4,400 |
|
|
$ |
21,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
2,839 |
|
|
$ |
1,991 |
|
|
|
|
|
|
|
|
|
Loss and loss expense paid ratio [1] |
|
|
59.9 |
|
|
|
70.9 |
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred ratio |
|
|
57.9 |
|
|
|
76.5 |
|
|
|
|
|
|
|
|
|
Prior accident years development (pts) [2] |
|
|
(7.8 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The loss and loss expense paid ratio represents the ratio of paid losses and loss adjustment expenses to earned premiums. |
|
[2] |
|
Prior accident years development (pts) represents the ratio of prior accident years development to earned premiums. |
Prior accident years development recorded in 2010
Included within prior accident years development for the three and six months ended June 30, 2010
were the following reserve strengthenings (releases):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
|
Property & Casualty |
|
|
Consumer |
|
|
Corporate and |
|
|
Total Property and |
|
|
|
Commercial |
|
|
Markets |
|
|
Other |
|
|
Casualty Insurance |
|
Auto liability |
|
$ |
(16 |
) |
|
$ |
(24 |
) |
|
$ |
|
|
|
$ |
(40 |
) |
Professional liability |
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
(61 |
) |
General liability |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
Commercial property |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Package business |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Workers compensation |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
Fidelity and surety |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Net asbestos reserves |
|
|
|
|
|
|
|
|
|
|
169 |
|
|
|
169 |
|
Homeowners |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Change in workers compensation
discount, including accretion |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Catastrophes |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
8 |
|
Uncollectible reinsurance |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
Other reserve re-estimates, net |
|
|
6 |
|
|
|
1 |
|
|
|
2 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prior accident years development |
|
$ |
(139 |
) |
|
$ |
(10 |
) |
|
$ |
171 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Property & Casualty |
|
|
Consumer |
|
|
Corporate and |
|
|
Total Property and |
|
|
|
Commercial |
|
|
Markets |
|
|
Other |
|
|
Casualty Insurance |
|
Auto liability |
|
$ |
(25 |
) |
|
$ |
(41 |
) |
|
$ |
|
|
|
$ |
(66 |
) |
Professional liability |
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
(79 |
) |
General liability |
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
(47 |
) |
Commercial property |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
Package business |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
(9 |
) |
Workers compensation |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
(19 |
) |
Fidelity and surety |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
(9 |
) |
Net asbestos reserves |
|
|
|
|
|
|
|
|
|
|
169 |
|
|
|
169 |
|
Homeowners |
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
24 |
|
Change in workers compensation
discount, including accretion |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
Catastrophes |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Uncollectible reinsurance |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
Other reserve re-estimates, net |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
3 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prior accident years development |
|
$ |
(221 |
) |
|
$ |
(17 |
) |
|
$ |
172 |
|
|
$ |
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2010, the Companys re-estimates of prior
accident years reserves included the following significant reserve changes:
|
|
Released reserves for professional liability claims in the three and six months ended June
30, 2010, primarily related to directors and officers (D&O) claims in accident years 2008
and prior. For these accident years, reported losses for claims under D&O policies have been
emerging favorably to initial expectations due to lower than expected claim severity. Any
continued favorable emergence of claims under D&O insurance policies for prior accident years
could lead the Company to reduce reserves for these liabilities in future quarters. |
|
|
Released reserves for general liability umbrella claims in the three and six months ended
June 30, 2010. The Company observed that reported losses for general liability umbrella
continue to emerge favorably and this caused management to reduce its estimate of the cost of
future reported claims. In addition, the Company released reserves related to high hazard
liability claims in the three months ended June 30, 2010, primarily related to accident years
2007 and prior. During 2009 and 2010, the Company recognized that loss emergence for high
hazard liability was less than expected, and accordingly, management reduced its reserve
estimate. Partially offsetting the reserve releases in the three months ended June 30, 2010
was strengthenings in commercial general liability, excluding umbrella driven by higher than
expected allocated loss adjustment expenses on claims from accident years 2000 and prior. |
|
|
Released reserves for personal auto liability claims in the three and six months ended June
30, 2010. During 2009, the Company recognized that favorable development in reported
severity, due in part to changes made to claim handling procedures in 2007, was a sustained
trend for accident years 2005 through 2008 and, accordingly, management reduced its reserve
estimate. The reserve releases in the first and second quarters of 2010 are in response to a
continuation of these same favorable trends, primarily affecting accident years 2005 through
2009. |
|
|
Released reserves for specialty programs claims in the three months ended June 30, 2010,
primarily related to accident years 2006 and prior. Over the course of several years, claim
activity on prior accident years has been lower than anticipated. Management now believes
that this lower level of claim activity will continue into the future and has reduced its
reserve estimate. |
|
|
Released reserves for commercial auto liability in the three months ended June 30, 2010,
when the Company lowered its reserve estimate to recognize a lower severity trend during 2009
and 2010 on larger claims in accident years 2002 to 2009. |
|
|
Strengthened reserves for homeowners claims in the three and six months ended June 30,
2010. During 2010, the Company observed a lengthening of the claim reporting period for
homeowners claims for prior accident years which resulted in increasing managements estimate
of the ultimate cost to settle these claims. |
|
|
The Company reviewed its allowance for uncollectible reinsurance for Property & Casualty
Commercial in the three months ended June 30, 2010 and reduced its allowance driven, in part,
by a reduction in gross ceded loss recoverables. |
|
|
Refer to the Other Operations Claims section for further discussion on strengthening of net
asbestos reserves. |
69
Other Operations Claims
Reserve Activity
Reserves and reserve activity in the Other Operations operating segment, within Corporate and
Other, are categorized and reported as asbestos, environmental, or all other. The all other
category of reserves covers a wide range of insurance and assumed reinsurance coverages, including,
but not limited to, potential liability for construction defects, lead paint, silica,
pharmaceutical products, molestation and other long-tail liabilities.
The following table presents reserve activity, inclusive of estimates for both reported and
incurred but not reported claims, net of reinsurance, for Other Operations, categorized by
asbestos, environmental and all other claims, for the three and six months ended June 30, 2011.
Other Operations Losses and Loss Adjustment Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2011 |
|
Asbestos |
|
|
Environmental |
|
|
All Other [1] |
|
|
Total |
|
Beginning liability net [2][3] |
|
$ |
1,731 |
|
|
$ |
323 |
|
|
$ |
1,255 |
|
|
$ |
3,309 |
|
Losses and loss adjustment expenses incurred |
|
|
290 |
|
|
|
|
|
|
|
(4 |
) |
|
|
286 |
|
Losses and loss adjustment expenses paid |
|
|
(44 |
) |
|
|
(8 |
) |
|
|
(27 |
) |
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liability net [2][3] |
|
$ |
1,977 [4] |
|
|
$ |
315 |
|
|
$ |
1,224 |
|
|
$ |
3,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2011 |
|
Asbestos |
|
|
Environmental |
|
|
All Other [1] |
|
|
Total |
|
Beginning liability net [2][3] |
|
$ |
1,787 |
|
|
$ |
334 |
|
|
$ |
1,302 |
|
|
$ |
3,423 |
|
Losses and loss adjustment expenses incurred |
|
|
290 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
290 |
|
Losses and loss adjustment expenses paid |
|
|
(100 |
) |
|
|
(21 |
) |
|
|
(76 |
) |
|
|
(197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liability net [2][3] |
|
$ |
1,977 [4] |
|
|
$ |
315 |
|
|
$ |
1,224 |
|
|
$ |
3,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
All Other includes unallocated loss adjustment expense
reserves. All Other also includes The Companys allowance for
uncollectible reinsurance. When the Company commutes a ceded
reinsurance contract or settles a ceded reinsurance dispute, the
portion of the allowance for uncollectible reinsurance
attributable to that commutation or settlement, if any, is
reclassified to the appropriate cause of loss. |
|
[2] |
|
Excludes amounts reported in Property & Casualty Commercial and
Consumer Markets reporting segments (collectively Ongoing
Operations) for asbestos and environmental net liabilities of
$10 and $10, respectively, as of June 30, 2011, $11 and $10
respectively, as of March 31, 2011 and $11 and $5, respectively,
as of December 31, 2010; total net losses and loss adjustment
expenses incurred for the three and six months ended June 30,
2011 includes $3 and $12, respectively, related to asbestos and
environmental claims; and total net losses and loss adjustment
expenses paid for the three and six months ended June 30, 2011
includes $4 and $8, respectively, related to asbestos and
environmental claims. |
|
[3] |
|
Gross of reinsurance, asbestos and environmental reserves,
including liabilities in Ongoing Operations, were $2,558 and
$368, respectively, as of June 30, 2011, $2,225 and $376,
respectively, as of March 31, 2011, and $2,308 and $378,
respectively, as of December 31, 2010. |
|
[4] |
|
The one year and average three year net paid amounts for asbestos
claims, including Ongoing Operations, are $284 and $233,
respectively, resulting in a one year net survival ratio of 7.0
and a three year net survival ratio of 8.5. Net survival ratio
is the quotient of the net carried reserves divided by the
average annual payment amount and is an indication of the number
of years that the net carried reserve would last (i.e. survive)
if the future annual claim payments were consistent with the
calculated historical average. |
During the second quarter of 2011, 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. Based on this
evaluation, the Company increased its net asbestos reserves by $290. For certain direct
policyholders, the Company experienced increases in claim frequency, severity, and expense largely
driven by mesothelioma claims, particularly against certain smaller, more peripheral insureds. The
Company also experienced unfavorable development on its assumed reinsurance accounts driven largely
by the same factors experienced by the direct policyholders. The Company currently expects to
continue to perform an evaluation of its asbestos liabilities annually.
The Company divides its gross asbestos exposures into Direct, Assumed Reinsurance and London
Market. The Company further divides its direct asbestos exposures into the following categories:
Major Asbestos Defendants (the Top 70 accounts in Tillinghasts published Tiers 1 and 2 and
Wellington accounts), which are subdivided further as: Structured Settlements, Wellington, Other
Major Asbestos Defendants, Accounts with Future Expected Exposures greater than $2.5, Accounts with
Future Expected Exposures less than $2.5, and Unallocated.
|
|
Structured Settlements are those accounts where the Company has reached an agreement with
the insured as to the amount and timing of the claim payments to be made to the insured. |
|
|
The Wellington subcategory includes insureds that entered into the Wellington Agreement
dated June 19, 1985. The Wellington Agreement provided terms and conditions for how the
signatory asbestos producers would access their coverage from the signatory insurers. |
|
|
The Other Major Asbestos Defendants subcategory represents insureds included in Tiers 1 and
2, as defined by Tillinghast that are not Wellington signatories and have not entered into
structured settlements with The Hartford. The Tier 1 and 2 classifications are meant to
capture the insureds for which there is expected to be significant exposure to asbestos
claims. |
|
|
Accounts with future expected exposures greater or less than $2.5 include accounts that are
not major asbestos defendants. |
|
|
The Unallocated category includes an estimate of the reserves necessary for asbestos claims
related to direct insureds that have not previously tendered asbestos claims to the Company
and exposures related to liability claims that may not be subject to an aggregate limit under
the applicable policies. |
70
An account may move between categories from one evaluation to the next. For example, an account
with future expected exposure of greater than $2.5 in one evaluation may be reevaluated due to
changing conditions and recategorized as less than $2.5 in a subsequent evaluation or vice versa.
The following table displays asbestos reserves and other statistics by policyholder category, as of
June 30, 2011:
Summary of Gross Asbestos Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
All Time |
|
|
Total |
|
|
All Time |
|
|
|
Accounts [1] |
|
|
Paid [2] |
|
|
Reserves |
|
|
Ultimate [2] |
|
Major asbestos defendants [4] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured settlements (includes 4 Wellington accounts) [5] |
|
|
8 |
|
|
$ |
331 |
|
|
$ |
438 |
|
|
$ |
769 |
|
Wellington (direct only) |
|
|
29 |
|
|
|
908 |
|
|
|
43 |
|
|
|
951 |
|
Other major asbestos defendants |
|
|
28 |
|
|
|
527 |
|
|
|
28 |
|
|
|
555 |
|
No known policies (includes 3 Wellington accounts) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts with future exposure > $2.5 |
|
|
85 |
|
|
|
929 |
|
|
|
702 |
|
|
|
1,631 |
|
Accounts with future exposure < $2.5 |
|
|
1,075 |
|
|
|
342 |
|
|
|
122 |
|
|
|
464 |
|
Unallocated [6] |
|
|
|
|
|
|
1,895 |
|
|
|
563 |
|
|
|
2,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct |
|
|
|
|
|
|
4,932 |
|
|
|
1,896 |
|
|
|
6,828 |
|
Assumed reinsurance |
|
|
|
|
|
|
1,302 |
|
|
|
379 |
|
|
|
1,681 |
|
London market |
|
|
|
|
|
|
646 |
|
|
|
283 |
|
|
|
929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of June 30, 2011 [3] |
|
|
|
|
|
$ |
6,880 |
|
|
$ |
2,558 |
|
|
$ |
9,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
An account may move between categories from one evaluation to the next. Reclassifications were made as a result of
the reserve evaluation completed in the second quarter of 2011. |
|
[2] |
|
All Time Paid represents the total payments with respect to the indicated claim type that have already been made by
the Company as of the indicated balance sheet date. All Time Ultimate represents the Companys estimate, as of the
indicated balance sheet date, of the total payments that are ultimately expected to be made to fully settle the
indicated payment type. The amount is the sum of the amounts already paid (e.g., All Time Paid) and the estimated
future payments (e.g., the amount shown in the column labeled Total Reserves). |
|
[3] |
|
Survival ratio is a commonly used industry ratio for comparing reserve levels between companies. While the method is
commonly used, it is not a predictive technique. Survival ratios may vary over time for numerous reasons such as
large payments due to the final resolution of certain asbestos liabilities, or reserve re-estimates. The survival
ratio is computed by dividing the recorded reserves by the average of the past three years of payments. The ratio is
the calculated number of years the recorded reserves would survive if future annual payments were equal to the average
annual payments for the past three years. The three-year gross survival ratio of 8.2 as of June 30, 2011 is computed
based on total paid losses of $937 for the period from July 1, 2008 to June 30, 2011. As of June 30, 2011, the one
year gross paid amount for total asbestos claims is $373, resulting in a one year gross survival ratio of 6.9. |
|
[4] |
|
Includes 24 open accounts at June 30, 2011. Included 25 open accounts at June 30, 2010. |
|
[5] |
|
Structured settlements include the Companys reserves related to PPG Industries, Inc. (PPG). In January 2009, the
Company, along with approximately three dozen other insurers, entered into a modified agreement in principle with PPG
to resolve the Companys coverage obligations for all of its PPG asbestos liabilities, including principally those
arising out of its 50% stock ownership of Pittsburgh Corning Corporation (PCC), a joint venture with Corning, Inc.
The agreement is contingent on the fulfillment of certain conditions, including the confirmation of a PCC plan of
reorganization under Section 524(g) of the Bankruptcy Code, which have not yet been met. |
|
[6] |
|
Includes closed accounts (exclusive of Major Asbestos Defendants) and unallocated IBNR. |
For paid and incurred losses and loss adjustment expenses reporting, the Company classifies
its asbestos and environmental reserves into three categories: Direct, Assumed Reinsurance and
London Market. Direct insurance includes primary and excess coverage. Assumed reinsurance includes
both treaty reinsurance (covering broad categories of claims or blocks of business) and
facultative reinsurance (covering specific risks or individual policies of primary or excess
insurance companies). London Market business includes the business written by one or more of the
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 Reinsurance 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.
71
The following table sets forth, for the three and six months ended June 30, 2011, paid and incurred
loss activity by the three categories of claims for asbestos and environmental.
Paid and Incurred Losses and Loss Adjustment Expenses (LAE) Development Asbestos and Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos [1] |
|
|
Environmental [1] |
|
|
|
Paid |
|
|
Incurred |
|
|
Paid |
|
|
Incurred |
|
Three Months Ended June 30, 2011 |
|
Losses & LAE |
|
|
Losses & LAE |
|
|
Losses & LAE |
|
|
Losses & LAE |
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
30 |
|
|
$ |
350 |
|
|
$ |
6 |
|
|
$ |
|
|
Assumed Reinsurance |
|
|
9 |
|
|
|
12 |
|
|
|
1 |
|
|
|
|
|
London Market |
|
|
5 |
|
|
|
16 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
44 |
|
|
|
378 |
|
|
|
8 |
|
|
|
|
|
Ceded |
|
|
|
|
|
|
(88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
44 |
|
|
$ |
290 |
|
|
$ |
8 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid |
|
|
Incurred |
|
|
Paid |
|
|
Incurred |
|
Six Months Ended June 30, 2011 |
|
Losses & LAE |
|
|
Losses & LAE |
|
|
Losses & LAE |
|
|
Losses & LAE |
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
87 |
|
|
$ |
350 |
|
|
$ |
12 |
|
|
$ |
2 |
|
Assumed Reinsurance |
|
|
24 |
|
|
|
12 |
|
|
|
3 |
|
|
|
|
|
London Market |
|
|
14 |
|
|
|
16 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
125 |
|
|
|
378 |
|
|
|
18 |
|
|
|
2 |
|
Ceded |
|
|
(25 |
) |
|
|
(88 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
100 |
|
|
$ |
290 |
|
|
$ |
21 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Excludes asbestos and environmental paid and incurred loss and LAE reported in Ongoing
Operations. Total gross losses and LAE incurred in Ongoing Operations for the three and six
months ended June 30, 2011 includes $4 and $13, respectively, related to asbestos and
environmental claims. Total gross losses and LAE paid in Ongoing Operations for the three and
six months ended June 30, 2011 includes $4 and $9, respectively, related to asbestos and
environmental claims. |
Uncertainties Regarding Adequacy of Asbestos and Environmental Reserves
A number of factors affect the variability of estimates for asbestos and environmental reserves
including assumptions with respect to the frequency of claims, the average severity of those claims
settled with payment, the dismissal rate of claims with no payment and the expense to indemnity
ratio. The uncertainty with respect to the underlying reserve assumptions for asbestos and
environmental adds a greater degree of variability to these reserve estimates than reserve
estimates for more traditional exposures. While this variability is reflected in part in the size
of the range of reserves developed by the Company, that range may still not be indicative of the
potential variance between the ultimate outcome and the recorded reserves. The recorded net
reserves as of June 30, 2011 of $2.31 billion ($1.99 billion and $325 for asbestos and
environmental, respectively) is within an estimated range, unadjusted for covariance, of $1.83
billion to $2.63 billion. The process of estimating asbestos and environmental reserves remains
subject to a wide variety of uncertainties, which are detailed in the Companys 2010 Form 10-K
Annual Report. The Company believes that its current asbestos and environmental reserves are
appropriate. However, analyses of future developments could cause the Company to change its
estimates and ranges of its asbestos and environmental reserves, and the effect of these changes
could be material to the Companys consolidated operating results, financial condition and
liquidity.
The Company provides an allowance for uncollectible reinsurance, reflecting managements best
estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers
unwillingness or inability to pay. During the second quarter of 2011, the Company completed its
annual evaluation of the collectibility 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 change in 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. As of June 30, 2011, the allowance for uncollectible
reinsurance for Other Operations totals $211. The Company currently expects to perform its regular
comprehensive review of Other Operations reinsurance recoverables annually. Due to the inherent
uncertainties as to collection and the length of time before reinsurance recoverables become due,
particularly for older, long-term casualty liabilities, it is possible that future adjustments to
the Companys reinsurance recoverables, net of the allowance, could be required.
Consistent with the Companys long-standing reserve practices, the Company will continue to review
and monitor its reserves in the Other Operations operating segment regularly, including its annual
reviews of asbestos liabilities, reinsurance recoverables and the allowance for uncollectible
reinsurance, and environmental liabilities, and where future developments indicate, make
appropriate adjustments to the reserves. For a discussion of the Companys reserving practices,
see the Critical Accounting EstimatesProperty and Casualty Insurance Product Reserves, Net of
Reinsurance section of the MD&A included in the Companys 2010 Form 10-K Annual Report.
72
Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated
with Variable Annuity and Other Universal Life-Type Contracts
Estimated gross profits (EGPs) are used in the amortization of: the DAC asset, which includes the
present value of future profits; sales inducement assets (SIA); and unearned revenue reserves
(URR). See Note 6 of the Notes to Condensed Consolidated Financial Statements for additional
information on DAC. See Note 8 of the Notes to Condensed Consolidated Financial Statements for
additional information on SIA. Portions of EGPs are also used in the valuation of reserves for
death and other insurance benefit features on variable annuity and universal life-type contracts.
See Note 7 of the Notes to Condensed Consolidated Financial Statements for additional information
on death and other insurance benefit reserves. See The Hartfords 2010 Form 10-K Annual Report for
additional discussion on the Companys critical accounting estimates related to EGPs.
The most significant EGP based balances as of June 30, 2011 and December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Annuity |
|
|
Life Insurance |
|
|
Retirement Plans |
|
|
|
Jun. 30, |
|
|
Dec. 31, |
|
|
Jun. 30, |
|
|
Dec. 31, |
|
|
Jun. 30, |
|
|
Dec. 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
DAC |
|
$ |
4,593 |
|
|
$ |
4,868 |
|
|
$ |
2,742 |
|
|
$ |
2,667 |
|
|
$ |
846 |
|
|
$ |
820 |
|
SIA |
|
|
350 |
|
|
|
370 |
|
|
|
46 |
|
|
|
45 |
|
|
|
23 |
|
|
|
23 |
|
URR |
|
|
127 |
|
|
|
142 |
|
|
|
1,499 |
|
|
|
1,383 |
|
|
|
|
|
|
|
|
|
Death and Other
Insurance Benefit
Reserves |
|
|
1,690 |
|
|
|
1,748 |
|
|
|
140 |
|
|
|
113 |
|
|
|
1 |
|
|
|
1 |
|
Unlocks
The after-tax (charge) benefit to net income by asset and liability as a result of the Unlocks for
the three months ended June 30, 2011 and 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Annuity |
|
|
Life Insurance |
|
|
Retirement Plans |
|
|
Total |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
DAC |
|
$ |
(62 |
) |
|
$ |
(129 |
) |
|
$ |
(3 |
) |
|
$ |
(8 |
) |
|
$ |
(5 |
) |
|
$ |
(5 |
) |
|
$ |
(70 |
) |
|
$ |
(142 |
) |
SIA |
|
|
(7 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(12 |
) |
URR |
|
|
3 |
|
|
|
4 |
|
|
|
1 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
9 |
|
Death and Other
Insurance Benefit
Reserves |
|
|
(4 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(70 |
) |
|
$ |
(222 |
) |
|
$ |
(2 |
) |
|
$ |
(3 |
) |
|
$ |
(5 |
) |
|
$ |
(5 |
) |
|
$ |
(77 |
) |
|
$ |
(230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The after-tax (charge) benefit to net income by asset and liability as a result of the Unlocks for
the six months ended June 30, 2011 and 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Annuity |
|
|
Life Insurance |
|
|
Retirement Plans |
|
|
Total |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
DAC |
|
$ |
(34 |
) |
|
$ |
(80 |
) |
|
$ |
(4 |
) |
|
$ |
(6 |
) |
|
$ |
(1 |
) |
|
$ |
(4 |
) |
|
$ |
(39 |
) |
|
$ |
(90 |
) |
SIA |
|
|
(5 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(10 |
) |
URR |
|
|
2 |
|
|
|
3 |
|
|
|
1 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
9 |
|
Death and Other
Insurance Benefit
Reserves |
|
|
26 |
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(11 |
) |
|
$ |
(141 |
) |
|
$ |
(3 |
) |
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
(4 |
) |
|
$ |
(15 |
) |
|
$ |
(145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The charge in both three months ended June 30, 2011 and 2010 was due to macro hedge program and
actual separate account returns being below our aggregated estimated return.
The Unlock charge for the six months ended June 30, 2011 consisted of a charge related to the
impact of the macro hedge program, which includes an extension of existing hedging duration
implemented in the second quarter of 2011 for U.S. annuity business, and a benefit from actual
separate account returns for the six months ended June 30, 2011 being above the Companys
aggregated estimated return. The Unlock charge for the six months ended June 30, 2010 consisted of
a charge due to the macro hedge program and a charge from actual separate account returns for the
six months ended June 30, 2010 being below the Companys aggregated estimated return.
In the third quarter of 2011, the Company expects to complete a comprehensive non-market related
policyholder behavior assumption study and incorporate the results of the study into its projection
of future gross profits. All assumption changes are considered an Unlock in the period of
revision.
An Unlock revises EGPs, on a quarterly basis, to reflect market updates of policyholder account
value and the Companys current best estimate assumptions. Modifications to the Companys hedging
programs may impact EGPs, and correspondingly impact DAC recoverability. After each quarterly
Unlock, the Company also tests the aggregate recoverability of DAC by comparing the DAC balance to
the present value of future EGPs. The margin between the DAC balance and the present value of
future EGPs for U.S. and Japan individual variable annuities was 28% and 34% as of June 30, 2011,
respectively. If the margin between the DAC asset and the present value of future EGPs is
exhausted, then further reductions in EGPs would cause portions of DAC to be unrecoverable and the
DAC asset would be written down to equal future EGPs.
73
Goodwill Impairment
As of June 30, 2011, the Company had goodwill allocated to the following reporting units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
Goodwill in |
|
|
|
|
|
|
Goodwill |
|
|
Corporate and Other |
|
|
Total |
|
Hartford
Financial Products within Property & Casualty Commercial |
|
$ |
30 |
|
|
$ |
|
|
|
$ |
30 |
|
Group Benefits |
|
|
|
|
|
|
138 |
|
|
|
138 |
|
Consumer Markets |
|
|
119 |
|
|
|
|
|
|
|
119 |
|
Individual Life within Life Insurance |
|
|
224 |
|
|
|
118 |
|
|
|
342 |
|
Retirement Plans |
|
|
87 |
|
|
|
69 |
|
|
|
156 |
|
Mutual Funds |
|
|
159 |
|
|
|
92 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
619 |
|
|
$ |
417 |
|
|
$ |
1,036 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the Company had goodwill allocated to the following reporting units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
Goodwill in |
|
|
|
|
|
|
Goodwill |
|
|
Corporate and Other |
|
|
Total |
|
Hartford
Financial Products within Property & Casualty Commercial |
|
$ |
30 |
|
|
$ |
|
|
|
$ |
30 |
|
Group Benefits |
|
|
|
|
|
|
138 |
|
|
|
138 |
|
Consumer Markets |
|
|
119 |
|
|
|
|
|
|
|
119 |
|
Individual Life within Life Insurance |
|
|
224 |
|
|
|
118 |
|
|
|
342 |
|
Retirement Plans |
|
|
87 |
|
|
|
69 |
|
|
|
156 |
|
Mutual Funds |
|
|
159 |
|
|
|
92 |
|
|
|
251 |
|
Federal Trust Corporation within Corporate and Other |
|
|
|
|
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
619 |
|
|
$ |
432 |
|
|
$ |
1,051 |
|
|
|
|
|
|
|
|
|
|
|
During the second quarter, the Company charged off the remaining $15 of goodwill associated with
the Federal Trust Corporation (FTC) reporting unit within Corporate and Other due to the
announced divestiture of FTC. The write-off of the FTC reporting unit goodwill was recorded as a
loss on disposal within discontinued operations, see Note 12 of the Notes to Condensed Consolidated
Financial Statements.
The Company completed its annual goodwill assessment for the individual reporting units within
Wealth Management and Corporate and Other, except for the FTC reporting unit, as of January 1,
2011, which resulted in no write-downs of goodwill in 2011. The reporting units passed the first
step of their annual impairment tests with a significant margin with the exception of the
Individual Life reporting unit within Life Insurance. The Individual Life reporting unit has a
goodwill balance of $342 and had a margin of less than 10%.
The fair value of the Individual Life reporting unit within Life Insurance is based on discounted
cash flows using earnings projections on in force business and future business growth. There could
be a positive or negative impact on the result of step one in future periods if actual earnings or
business growth assumptions emerge differently than those used in determining fair value for the
first step of the annual goodwill impairment test.
The Company expects to complete the annual impairment test for the reporting units within Property
& Casualty Commercial and Consumer Markets in the fourth quarter of 2011.
74
THE HARTFORDS OPERATIONS OVERVIEW
The Hartford is a holding company for insurance and financial services subsidiaries that
provide investment products and life and property and casualty insurance to both individual and
business customers in the United States. Also, The Hartford continues to administer business
previously sold in Japan and the U.K.
The Company conducts business in three customer focused divisions, Commercial Markets, Consumer
Markets and Wealth Management, each containing reporting segments. The Commercial Markets division
consists of the reporting segments of Property & Casualty Commercial and Group Benefits. The
Consumer Markets division is also the reporting segment. The Wealth Management division consists
of the following reporting segments: Global Annuity, Life Insurance, Retirement Plans and Mutual
Funds. For additional discussion regarding The Hartfords reporting segments, see Note 3 of the
Notes to Condensed Consolidated Financial Statements.
KEY PERFORMANCE MEASURES AND RATIOS
The Company considers several measures and ratios to be the key performance indicators for its
businesses. The following discussions include the more significant ratios and measures of
profitability for the three and six months ended June 30, 2011 and 2010. Management believes that
these ratios and measures are useful in understanding the underlying trends in The Hartfords
businesses. However, these key performance indicators should only be used in conjunction with, and
not in lieu of, the results presented in the segment discussions that follow in this MD&A. These
ratios and measures may not be comparable to other performance measures used by the Companys
competitors.
Definitions of Non-GAAP and other measures and ratios
Account Value
Account value includes policyholders balances for investment contracts and reserves for future
policy benefits for insurance contracts. Account value is a measure used by the Company because a
significant portion of the Companys fee income is based upon the level of account value. These
revenues increase or decrease with a rise or fall in the amount of account value whether caused by
changes in the market or through net flows.
After-tax Margin
After-tax margin, excluding realized gains (losses) and Unlock, is a non-GAAP financial measure
that the Company uses to evaluate, and believes is an important measure of, certain of the
segments operating performance. After-tax margin is the most directly comparable U.S. GAAP
measure. The Hartford believes that the measure after-tax margin, excluding realized gains
(losses) and Unlock provides investors with a valuable measure of the performance of certain of the
Companys on-going businesses because it reveals trends in those businesses that may be obscured by
the effect of realized gains (losses) or quarterly Unlocks. Some realized capital gains and losses
are primarily driven by investment decisions and external economic developments, the nature and
timing of which are unrelated to insurance aspects of our businesses. Accordingly, this non-GAAP
measure excludes the effect of all realized gains and losses that tend to be highly variable from
period to period based on capital market conditions. The Hartford believes, however, that some
realized capital gains and losses are integrally related to our insurance operations, so after-tax
margin, excluding realized gains (losses) and Unlock should include net realized gains and losses
on net periodic settlements on credit derivatives. These net realized gains and losses are
directly related to an offsetting item included in the Condensed Consolidated Statement of
Operations such as net investment income. Unlocks occur when the Company determines based on
actual experience or other evidence, that estimates of future gross profits should be revised. The
Unlock is a reflection of the Companys new best estimates of future gross profits. The result of
the Unlock and its impact distort the trend of after-tax margin. After-tax margin, excluding
realized gains (losses) and Unlock, should not be considered as a substitute for after-tax margin
and does not reflect the overall profitability of our businesses. Therefore, the Company believes
it is important for investors to evaluate both after-tax margin, excluding realized gains (losses)
and Unlock, and after-tax margin when reviewing the Companys performance. After-tax margin is
calculated by dividing the earnings measures described above by Total Revenues adjusted for the
measures described above. For additional information regarding the Unlock, see Critical Accounting
Estimates within the MD&A.
Assets Under Management
Assets under management (AUM) include account values and mutual fund assets. AUM is a measure
used by the Company because a significant portion of the Companys revenues are based upon asset
values. These revenues increase or decrease with a rise or fall in the amount of account value
whether caused by changes in the market or through net flows.
Catastrophe ratio
The catastrophe ratio (a component of the loss and loss adjustment expense ratio) represents the
ratio of catastrophe losses incurred in the current calendar year (net of reinsurance) to earned
premiums and includes catastrophe losses incurred for both the current and prior accident years. A
catastrophe is an event that causes $25 or more in industry insured property losses and affects a
significant number of property and casualty policyholders and insurers. The catastrophe ratio
includes the effect of catastrophe losses, but does not include the effect of reinstatement
premiums.
75
Combined ratio
The combined ratio is the sum of the loss and loss adjustment expense ratio, the expense ratio and
the policyholder dividend ratio. This ratio is a relative measurement that describes the related
cost of losses and expenses for every $100 of earned premiums. A combined ratio below 100.0
demonstrates underwriting profit; a combined ratio above 100.0 demonstrates underwriting losses.
Combined ratio before catastrophes and prior accident year development
The combined ratio before catastrophes and prior accident year development represents the combined
ratio for the current accident year, excluding the impact of catastrophes. The Company believes
this ratio is an important measure of the trend in profitability since it removes the impact of
volatile and unpredictable catastrophe losses and prior accident year reserve development.
DAC amortization ratio
DAC amortization ratio, excluding realized gains (losses) and Unlock, is a non-GAAP financial
measure that the Company uses to evaluate, and believes is an important measure of, certain of the
segments operating performance. DAC amortization ratio is the most directly comparable U.S. GAAP
measure. The Hartford believes that the measure DAC amortization ratio, excluding realized gains
(losses) and Unlock provides investors with a valuable measure of the performance of certain of the
Companys on-going businesses because it reveals trends in our businesses that may be obscured by
the effect of realized gains (losses) or quarterly Unlocks. Some realized capital gains and losses
are primarily driven by investment decisions and external economic developments, the nature and
timing of which are unrelated to insurance aspects of our businesses. Accordingly, this non-GAAP
measure excludes the effect of all realized gains and losses that tend to be highly variable from
period to period based on capital market conditions. The Hartford believes, however, that some
realized capital gains and losses are integrally related to our insurance operations, so DAC
amortization ratio, excluding realized gains (losses) and Unlock should include net realized gains
and losses on net periodic settlements on the Japan fixed annuity cross-currency swap. These net
realized gains and losses are directly related to an offsetting item included in the Condensed
Consolidated Statement of Operations such as net investment income. Unlocks occur when the Company
determines based on actual experience or other evidence, that estimates of future gross profits
should be revised. The Unlock is a reflection of the Companys new best estimates of future gross
profits. The result of the Unlock and its impact distort the trend of DAC amortization ratio. DAC
amortization ratio, excluding realized gains (losses) and Unlock, should not be considered as a
substitute for DAC amortization ratio and does not reflect the overall profitability of our
businesses. Therefore, the Company believes it is important for investors to evaluate both DAC
amortization ratio, excluding realized gains (losses) and Unlock, and DAC amortization ratio when
reviewing the Companys performance. DAC amortization ratio is calculated by dividing DAC
amortization costs adjusted for the measures described above by pre-tax income before DAC
amortization costs adjusted for the measures described above. For additional information regarding
the Unlock, see Critical Accounting Estimates within the MD&A.
Mutual Fund Assets
Mutual fund assets include retail, investment-only and college savings plan assets under Section
529 of the Code, collectively referred to as non-proprietary, and proprietary mutual funds.
Non-proprietary mutual fund assets are owned by the shareholders of those funds and not by the
Company. Proprietary mutual funds include mutual funds sponsored by the Company which are owned by
the separate accounts of the Company to support insurance and investment products sold by the
Company. The non-proprietary mutual fund assets are not reflected in the Companys consolidated
financial statements. Mutual fund assets are a measure used by the Company because a significant
portion of the Companys revenues are based upon asset values. These revenues increase or decrease
with a rise or fall in the amount of account value whether caused by changes in the market or
through net flows.
Net Investment Spread
Management evaluates performance of certain products based on net investment spread. These
products include those that have insignificant mortality risk, such as fixed annuities, certain
general account universal life contracts and certain institutional contracts. Net investment
spread is determined by taking the difference between the annualized earned rate, (excluding the
effects of realized capital gains and losses, including those related to the Companys GMWB product
and related reinsurance and hedging programs), and the related annualized crediting rates on
average general account assets under management. Some realized capital gains and losses are
primarily driven by investment decisions and external economic developments, the nature and timing
of which are unrelated to insurance aspects of our businesses. Accordingly, this non-GAAP measure
excludes the effect of all realized gains and losses that tend to be highly variable from period to
period based on capital market conditions. The Hartford believes, however, that some realized
capital gains and losses are integrally related to our insurance operations and they are included
in the net investment spread calculation. The net investment spreads are for the total portfolio of
relevant contracts in each segment and reflect business written at different times. When pricing
products, the Company considers current investment yields and not the portfolio average. The
determination of credited rates is based upon consideration of current market rates for similar
products, portfolio yields and contractually guaranteed minimum credited rates. Net investment
spread can be volatile period over period, which can have a significant positive or negative effect
on the operating results of each segment. The volatile nature of net investment spread is driven
primarily by earnings on limited partnership and other alternative investments and prepayment
premiums on securities. Investment earnings can also be influenced by factors such as changes in
interest rates, credit spreads and decisions to hold higher levels of short-term investments.
76
Return on Assets (ROA)
ROA, excluding realized gains (losses) and Unlock, is a non-GAAP financial measure that the Company
uses to evaluate, and believes is an important measure of, certain of the segments operating
performance. ROA is the most directly comparable U.S. GAAP measure. The Hartford believes that
the measure ROA, excluding realized gains (losses) and Unlock, provides investors with a valuable
measure of the performance of certain of the Companys on-going businesses because it reveals
trends in our businesses that may be obscured by the effect of realized gains (losses) or quarterly
Unlocks. Some realized capital gains and losses are primarily driven by investment decisions and
external economic developments, the nature and timing of which are unrelated to insurance aspects
of our businesses. Accordingly, this non-GAAP measure excludes the effect of all realized gains
and losses that tend to be highly variable from period to period based on capital market
conditions. The Hartford believes, however, that some realized capital gains and losses are
integrally related to our insurance operations, so ROA, excluding the realized gains (losses) and
Unlock, should include net realized gains and losses on net periodic settlements on the Japan fixed
annuity cross-currency swap. These net realized gains and losses are directly related to an
offsetting item included in the Condensed Consolidated Statement of Operations, such as net
investment income. Unlocks occur when the Company determines based on actual experience or other
evidence, that estimates of future gross profits should be revised. The Unlock is a reflection of
the Companys new best estimates of future gross profits. The result of the Unlock and its impact
distort the trend of ROA. ROA, excluding realized gains (losses) and Unlock, should not be
considered as a substitute for ROA and does not reflect the overall profitability of our
businesses. Therefore, the Company believes it is important for investors to evaluate both ROA,
excluding realized gains (losses) and Unlock, and ROA when reviewing the Companys performance.
ROA is calculated by dividing the earnings measures from continuing operations as described above
by a two-point average AUM from continuing operations.
Underwriting results
Underwriting results is a before-tax measure that represents earned premiums less incurred losses,
loss adjustment expenses, underwriting expenses and policyholder dividends. The Hartford believes
that underwriting results provides investors with a valuable measure of before-tax profitability
derived from underwriting activities, which are managed separately from the Companys investing
activities. The underwriting segments of Property & Casualty Commercial and Consumer Markets are
evaluated by management primarily based upon underwriting results. A reconciliation of
underwriting results to net income for Property & Casualty Commercial and Consumer Markets is set
forth in their respective discussions herein.
Written and earned premiums
Written premium is a statutory accounting financial measure which represents the amount of premiums
charged for policies issued, net of reinsurance, during a fiscal period. Earned premium is a U.S.
GAAP and statutory measure. Premiums are considered earned and are included in the financial
results on a pro rata basis over the policy period. Management believes that written premium is a
performance measure that is useful to investors as it reflects current trends in the Companys sale
of property and casualty insurance products. Written and earned premium are recorded net of ceded
reinsurance premium. The difference between written and earned premium is the change in unearned
premium reserve.
77
Combined ratio before catastrophes and prior year development
Combined ratio before catastrophes and prior accident year development is a key indicator of
overall profitability for the property and casualty underwriting segments of Property & Casualty
Commercial and Consumer Markets since it removes the impact of volatile and unpredictable
catastrophe losses and prior accident year reserve development.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Property & Casualty Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
105.8 |
|
|
|
89.6 |
|
|
|
101.7 |
|
|
|
89.6 |
|
Catastrophe ratio |
|
|
11.6 |
|
|
|
6.2 |
|
|
|
7.2 |
|
|
|
4.3 |
|
Non-catastrophe prior year development |
|
|
1.4 |
|
|
|
(10.1 |
) |
|
|
0.7 |
|
|
|
(7.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes and prior year development |
|
|
92.8 |
|
|
|
93.6 |
|
|
|
93.9 |
|
|
|
93.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
121.5 |
|
|
|
106.9 |
|
|
|
104.1 |
|
|
|
100.7 |
|
Catastrophe ratio |
|
|
30.8 |
|
|
|
15.0 |
|
|
|
18.0 |
|
|
|
9.5 |
|
Non-catastrophe prior year development |
|
|
(1.0 |
) |
|
|
(1.4 |
) |
|
|
(4.1 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes and prior year development |
|
|
91.6 |
|
|
|
93.2 |
|
|
|
90.1 |
|
|
|
92.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010
|
|
Property & Casualty Commercials combined ratio before catastrophes and prior year
development improved for the three-month period primarily due to a less favorable expense
ratio in the 2010 period driven by reserve strengthening for other state funds and taxes. The
change in the expense ratio was partially offset by an increase in current accident year
losses and loss adjustment expenses before catastrophes primarily due to loss costs outpacing
earned pricing increases. For the six-month period, the combined ratio before catastrophes
and prior year development deteriorated, as the change in the expense ratio was more than
offset by an increase in current accident year losses and loss adjustment expenses before
catastrophes, as well as, an increase in the policyholder dividend ratio. The increase in the
policyholder dividend ratio was driven by an increase in the amount of dividends payable to
certain workers compensation policyholders. |
|
|
Consumer Markets combined ratio before catastrophes and prior year development improved
primarily as a result of a lower ratio of current accident year losses and loss adjustment
expenses before catastrophes for auto, partially offset by an increase in the current accident
year losses and loss adjustment expenses before catastrophes home. The decrease for auto was
primarily due to earned pricing increases and lower estimated average severity on auto
liability claims, partially offset by the effect of higher auto physical damage emerged loss
costs. The increase for home was primarily due to an increase in the frequency of
non-catastrophe weather claims, partially offset by the effect of earned pricing increases. |
78
Return on Assets
Return on assets is a key indicator of overall profitability for the Global Annuity, Retirement
Plans and Mutual Funds reporting segments as a significant portion of their earnings is based on
average assets under management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Ratios |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Global Annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA |
|
61.3 bps |
|
(30.3) bps |
|
37.3 bps |
|
(4.5) bps |
Effect of net realized losses, net of tax and DAC on ROA |
|
5.1 bps |
|
(27.9) bps |
|
(21.3) bps |
|
(31.1) bps |
Effect of Unlock on ROA |
|
(4.1) bps |
|
(43.1) bps |
|
5.9 bps |
|
(11.0) bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA, excluding realized losses and Unlock |
|
60.3 bps |
|
40.7 bps |
|
52.7 bps |
|
37.6 bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA |
|
21.6 bps |
|
12.4 bps |
|
16.7 bps |
|
3.6 bps |
Effect of net realized gains (losses), net of tax and
DAC on ROA |
|
10.1 bps |
|
3.5 bps |
|
3.0 bps |
|
(6.0) bps |
Effect of Unlock on ROA |
|
(2.9) bps |
|
(2.6) bps |
|
bps |
|
(0.9) bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA, excluding realized losses and Unlock |
|
14.4 bps |
|
11.5 bps |
|
13.7 bps |
|
10.5 bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA |
|
10.6 bps |
|
9.9 bps |
|
11.0 bps |
|
10.9 bps |
Effect of discontinued operations on ROA |
|
bps |
|
(0.4) bps |
|
bps |
|
(0.4) bps |
Effect of net realized gains (losses), net of tax and
DAC on ROA |
|
bps |
|
0.2 bps |
|
0.2 bps |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
ROA, excluding realized gains (losses ) and Unlock |
|
10.6 bps |
|
10.1 bps |
|
10.8 bps |
|
11.3 bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2011 compared to the three months ended June 30, 2010
|
|
Global Annuitys ROA, excluding realized losses and Unlock, increased primarily due to
lower DAC amortization costs, a DRD tax settlement benefit, lower
benefits, losses and loss adjustment expenses and a release of a reserve related to a product in Japan. |
|
|
Retirement Plans ROA, excluding realized gains (losses) and Unlock, increased due to a DRD
tax settlement benefit and improvements in the equity markets, which led to increased fee
income from higher account values. |
|
|
Mutual Funds ROA, excluding realized gains (losses) and Unlock, increase was primarily
driven by increased fee income and other as a result of increased account values attributed to
improved equity markets. Revenue increased at a lower rate than the increase in AUM due to a
business mix shift, related to sales of funds that have lower management fees or fee waivers. |
Six months ended June 30, 2011 compared to the six months ended June 30, 2010
|
|
Global Annuitys ROA, excluding realized losses and Unlock, increased primarily due to
lower DAC amortization costs, a DRD tax settlement benefit, and lower
benefits, losses and loss adjustment expenses. |
|
|
Retirement Plans ROA, excluding realized gains (losses) and Unlock, increased primarily
due to improvements in the equity markets, which led to increased fee income from higher
account values. |
|
|
Mutual Funds ROA, excluding realized gains (losses) and Unlock, decrease was primarily
driven by a business mix shift, related to sales of funds that have lower management fees or
fee waivers, further offset by higher commission expenses as a result of higher sales. |
79
After-tax margin
After-tax margin is a key indicator of overall profitability for the Life Insurance and Group
Benefits reporting segments as a significant portion of their earnings are a result of the net
margin from losses incurred on earned premiums, fees and other considerations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Life Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax margin |
|
|
16.0 |
% |
|
|
22.6 |
% |
|
|
13.0 |
% |
|
|
15.7 |
% |
Effect of net realized gains (losses), net of tax and DAC |
|
|
1.1 |
% |
|
|
7.4 |
% |
|
|
(1.2 |
%) |
|
|
1.8 |
% |
Effect of Unlock |
|
|
(0.6 |
%) |
|
|
(1.0 |
%) |
|
|
(0.5 |
%) |
|
|
(0.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax margin, excluding realized losses and Unlock |
|
|
15.5 |
% |
|
|
16.2 |
% |
|
|
14.7 |
% |
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax margin (excluding buyouts) |
|
|
3.6 |
% |
|
|
4.0 |
% |
|
|
2.3 |
% |
|
|
4.2 |
% |
Effect of net realized gains, net of tax |
|
|
1.0 |
% |
|
|
1.1 |
% |
|
|
0.2 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax margin (excluding buyouts), excluding realized
gains (losses) |
|
|
2.6 |
% |
|
|
2.9 |
% |
|
|
2.1 |
% |
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010
|
|
The decrease in Life Insurances after-tax margin, excluding realized losses and Unlock,
for the three-month period was primarily due to an increase in benefits, losses, and loss
adjustment expenses, as a result of favorable mortality in the prior year. For the six-month
period, Life Insurances after-tax margin, excluding realized gains (losses) and Unlock
increased primarily due to higher net investment income driven by higher average invested
assets and favorable partnership income, partially offset by favorable mortality in the
comparable prior year period. |
|
|
The decrease in Group Benefits after-tax margin (excluding buyouts), excluding realized
gains (losses), in both periods was primarily due to decreases in fully insured ongoing
premiums driven by lower sales over the past year, as well as, from a challenging economic
environment. |
80
Investment Results
Composition of Invested Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Fixed maturities, AFS, at fair value |
|
$ |
78,132 |
|
|
|
78.3 |
% |
|
$ |
77,820 |
|
|
|
79.2 |
% |
Fixed maturities, at fair value using the fair value option |
|
|
1,227 |
|
|
|
1.2 |
% |
|
|
649 |
|
|
|
0.7 |
% |
Equity securities, AFS, at fair value |
|
|
1,081 |
|
|
|
1.1 |
% |
|
|
973 |
|
|
|
1.0 |
% |
Mortgage loans |
|
|
5,304 |
|
|
|
5.3 |
% |
|
|
4,489 |
|
|
|
4.6 |
% |
Policy loans, at outstanding balance |
|
|
2,188 |
|
|
|
2.2 |
% |
|
|
2,181 |
|
|
|
2.2 |
% |
Limited partnerships and other alternative investments |
|
|
2,028 |
|
|
|
2.0 |
% |
|
|
1,918 |
|
|
|
2.0 |
% |
Other investments [1] |
|
|
973 |
|
|
|
1.0 |
% |
|
|
1,617 |
|
|
|
1.6 |
% |
Short-term investments |
|
|
8,861 |
|
|
|
8.9 |
% |
|
|
8,528 |
|
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments excluding equity securities, trading |
|
|
99,794 |
|
|
|
100.0 |
% |
|
|
98,175 |
|
|
|
100.0 |
% |
Equity securities, trading, at fair value [2] [3] |
|
|
32,278 |
|
|
|
|
|
|
|
32,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
132,072 |
|
|
|
|
|
|
$ |
130,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Primarily relates to derivative instruments. |
|
[2] |
|
These assets primarily support the Global Annuity-International
variable annuity business. Changes in these balances are also
reflected in the respective liabilities.
|
|
[3] |
|
As of June 30, 2011 and December 31, 2010, approximately $30.1
billion and $30.5 billion, respectively, of equity securities,
trading, support Japan variable annuities. Those equity
securities, trading, were invested in mutual funds, which, in
turn, invested in the following asset classes; Japan equity 21%,
Japan fixed income (primarily government securities) 15%, global
equity 21%, global government bonds 42%, and cash and other 1% for
both periods presented. |
Total investments increased since December 31, 2010 primarily due to increases in mortgage
loans, fixed maturities at fair value using the fair value option (FVO) and fixed maturities,
AFS, partially offset by declines in other investments. The increase in mortgage loans related to
the funding of commercial whole loans and the increase in fixed maturities, FVO, related to
purchases of foreign government securities to support yen-based fixed annuity liabilities.
Additionally, the increase in fixed maturities, AFS, was largely the result of improved security
valuations as a result of declining interest rates and credit spread tightening. The decline in
other investments primarily related to decreases in value of derivatives.
Net Investment Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
(Before-tax) |
|
Amount |
|
|
Yield [1] |
|
|
Amount |
|
|
Yield [1] |
|
|
Amount |
|
|
Yield [1] |
|
|
Amount |
|
|
Yield [1] |
|
Fixed maturities [2] |
|
$ |
870 |
|
|
|
4.3 |
% |
|
$ |
887 |
|
|
|
4.5 |
% |
|
$ |
1,716 |
|
|
|
4.3 |
% |
|
$ |
1,761 |
|
|
|
4.4 |
% |
Equity securities, AFS |
|
|
8 |
|
|
|
3.3 |
% |
|
|
13 |
|
|
|
4.3 |
% |
|
|
19 |
|
|
|
3.8 |
% |
|
|
27 |
|
|
|
4.3 |
% |
Mortgage loans |
|
|
67 |
|
|
|
5.2 |
% |
|
|
63 |
|
|
|
5.4 |
% |
|
|
130 |
|
|
|
5.3 |
% |
|
|
129 |
|
|
|
5.2 |
% |
Policy loans |
|
|
34 |
|
|
|
6.2 |
% |
|
|
35 |
|
|
|
6.4 |
% |
|
|
67 |
|
|
|
6.1 |
% |
|
|
68 |
|
|
|
6.2 |
% |
Limited partnerships and
other alternative investments |
|
|
78 |
|
|
|
16.6 |
% |
|
|
86 |
|
|
|
20.0 |
% |
|
|
178 |
|
|
|
18.9 |
% |
|
|
92 |
|
|
|
10.5 |
% |
Other [3] |
|
|
77 |
|
|
|
|
|
|
|
90 |
|
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
174 |
|
|
|
|
|
Investment expense |
|
|
(30 |
) |
|
|
|
|
|
|
(26 |
) |
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities AFS and other |
|
|
1,104 |
|
|
|
4.6 |
% |
|
|
1,148 |
|
|
|
4.8 |
% |
|
|
2,212 |
|
|
|
4.6 |
% |
|
|
2,202 |
|
|
|
4.5 |
% |
Equity securities, trading |
|
|
(597 |
) |
|
|
|
|
|
|
(2,649 |
) |
|
|
|
|
|
|
206 |
|
|
|
|
|
|
|
(1,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income
(loss) |
|
$ |
507 |
|
|
|
|
|
|
$ |
(1,501 |
) |
|
|
|
|
|
$ |
2,418 |
|
|
|
|
|
|
$ |
254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities, AFS and
other excluding limited
partnerships and other
alternative investments |
|
$ |
1,026 |
|
|
|
4.3 |
% |
|
$ |
1,062 |
|
|
|
4.5 |
% |
|
$ |
2,034 |
|
|
|
4.3 |
% |
|
$ |
2,110 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Yields calculated using annualized investment income before investment expenses divided by the monthly average invested
assets at cost, amortized cost, or adjusted carrying value, as applicable, excluding consolidated variable interest
entity noncontrolling interests. Included in the fixed maturity yield is Other, which primarily relates to derivatives
(see footnote [3] below). Included in the total net investment income yield is investment expense. |
|
[2] |
|
Includes net investment income on short-term investments. |
|
[3] |
|
Includes income from derivatives that qualify for hedge accounting and hedge fixed maturities. |
81
Three and six months ended June 30, 2011 compared to the three and six months ended June 30,
2010
Total net investment income increased largely due to increases in equity securities, trading,
resulting from improved market performance of the underlying investment funds supporting the
Japanese variable annuity product. For the three months ended, total net investment income,
excluding equity securities, trading, declined due to lower income on fixed maturities resulting
from a lower interest rate environment and lower limited partnership and other alternative
investment returns. For the six months ended, total net investment income, excluding equity
securities, trading, increased slightly due to improved limited partnership and other alternative
investment returns, mostly offset by lower income on fixed maturities resulting from a lower
interest rate environment. Based on the current interest rate and credit environment, the Company
expects the new investment purchase yield to approximate the yield of those securities maturing in
2011. Therefore, the Company expects the 2011 portfolio yield, excluding limited partnership
investments, to remain stable.
Net Realized Capital Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Before-tax) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Gross gains on sales |
|
$ |
261 |
|
|
$ |
343 |
|
|
$ |
322 |
|
|
$ |
475 |
|
Gross losses on sales |
|
|
(98 |
) |
|
|
(94 |
) |
|
|
(231 |
) |
|
|
(205 |
) |
Net OTTI losses recognized in earnings |
|
|
(23 |
) |
|
|
(108 |
) |
|
|
(78 |
) |
|
|
(260 |
) |
Valuation allowances on mortgage loans |
|
|
26 |
|
|
|
(40 |
) |
|
|
23 |
|
|
|
(152 |
) |
Japanese fixed annuity contract hedges, net [1] |
|
|
6 |
|
|
|
27 |
|
|
|
(11 |
) |
|
|
11 |
|
Periodic net coupon settlements on credit derivatives/Japan |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(11 |
) |
Results of variable annuity hedge program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB derivatives, net |
|
|
(37 |
) |
|
|
(426 |
) |
|
|
34 |
|
|
|
(297 |
) |
Macro hedge program |
|
|
35 |
|
|
|
397 |
|
|
|
(322 |
) |
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total results of variable annuity hedge program |
|
|
(2 |
) |
|
|
(29 |
) |
|
|
(288 |
) |
|
|
(64 |
) |
Other, net |
|
|
(99 |
) |
|
|
(86 |
) |
|
|
(62 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
69 |
|
|
$ |
9 |
|
|
$ |
(334 |
) |
|
$ |
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Relates to derivative hedging instruments, excluding periodic net coupon settlements, and
is net of the Japanese fixed annuity product liability adjustment for changes in the
dollar/yen exchange spot rate, as well as Japan FVO securities. |
Details on the Companys net realized capital gains and losses are as follows:
|
|
|
|
|
Gross gains and losses on sales
|
|
|
|
Gross gains and losses on
sales for the three and six months
ended June 30, 2011 were
predominately from sales of
investment grade corporate
securities and CMBS as the Company
continues to reduce its commercial
real estate exposure. Additionally,
net gain on sales for the six months
ended June 30, 2011 included losses
on sales of U.S. Treasuries. |
|
|
|
|
|
|
|
|
|
Gross gains on sales for the
three and six months ended June 30,
2010 were predominantly from
investment grade corporate
securities and U.S. Treasuries in
order to take advantage of
attractive market opportunities.
Gross losses on sales resulted from
real estate related and subordinated
financial investments due to efforts
to reduce portfolio risk. |
|
|
|
|
|
Net OTTI losses
|
|
|
|
For further information, see
Other-Than-Temporary Impairments
within the Investment Credit Risk
section of the MD&A. |
|
|
|
|
|
Valuation allowances on mortgage
loans
|
|
|
|
For further information, see
Valuation Allowances on Mortgage
Loans within the Investment Credit
Risk section of the MD&A. |
|
|
|
|
|
Variable annuity hedge program
|
|
|
|
The loss on GMWB related
derivatives, net, for the three
months ended June 30, 2011 was
primarily due to a change in
long-term interest rates that
resulted in a charge of $39. The
gain on GMWB related derivatives,
net, for the six months ended June
30, 2011 was primarily due to a gain
of $33 resulting from lower implied
market volatility and a gain of $29
resulting from the outperformance of
the underlying actively managed
funds as compared to their
respective indices. The gain on the
macro hedge program for the three
months ended June 30, 2011 was
primarily the result of a decline in
Japanese interest rates and foreign
currency movements. The loss on the
macro hedge program for the six
months ended June 30, 2011 was
primarily the result of foreign
currency movements and a higher
equity market valuation. |
|
|
|
|
|
|
|
|
|
The loss on GMWB
derivatives, net, for the three and
six months ended June 30, 2010 was
primarily due to losses on higher
implied market volatility of $196
and $82, respectively, and losses
due to a general decrease in
long-term interest rates of $192 and
$214, respectively. The net gain on
the macro hedge program was
primarily the result of lower equity
market valuation and appreciation of
the Japanese yen. |
82
|
|
|
|
|
Other, net
|
|
|
|
Other, net loss for the three months ended June 30,
2011 was primarily due to losses of $52 on transactional
foreign currency re-valuation due to an increase in value of
the Japanese yen versus the U.S. dollar associated with the
internal reinsurance of the Japan variable annuity business,
which is offset in AOCI and losses of $25 on credit derivatives
driven by credit spread widening. Other, net loss for the six
months ended June 30, 2011 was primarily due to losses of $56
related to Japan variable annuity hedging instruments primarily
driven by foreign currency movements and losses of $32 on Japan
3Win foreign currency swaps primarily driven by a decrease in
long-term U.S interest rates. |
|
|
|
|
|
|
|
|
|
Other, net losses for the three and six months ended
June 30, 2010 were primarily due to losses of $121 and $117,
respectively, from a change in spot rates related to
transactional foreign currency re-valuation due to an increase
in the value of the Japanese yen versus the U.S. dollar
associated with the internal reinsurance of the Japan variable
annuity business, which is offset in AOCI. Also included are
losses of $38 and $87, respectively, related to the Japan 3Win
foreign currency swaps driven by a decrease in U.S. interest
rates. These losses are partially offset by gains of $56 and
$74, respectively, related to other foreign currency
strategies. Additional net gains of $48 for the six months
ended June 30, 2010, were related to credit derivatives due to
credit spread widening. |
83
PROPERTY & CASUALTY COMMERCIAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Underwriting Summary |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Written premiums |
|
$ |
1,498 |
|
|
$ |
1,388 |
|
|
|
8 |
% |
|
$ |
3,143 |
|
|
$ |
2,900 |
|
|
|
8 |
% |
Change in unearned premium reserve |
|
|
(19 |
) |
|
|
(27 |
) |
|
|
30 |
% |
|
|
128 |
|
|
|
61 |
|
|
|
110 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
1,517 |
|
|
|
1,415 |
|
|
|
7 |
% |
|
|
3,015 |
|
|
|
2,839 |
|
|
|
6 |
% |
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
950 |
|
|
|
855 |
|
|
|
11 |
% |
|
|
1,912 |
|
|
|
1,746 |
|
|
|
10 |
% |
Current accident year catastrophes |
|
|
166 |
|
|
|
83 |
|
|
|
100 |
% |
|
|
212 |
|
|
|
121 |
|
|
|
75 |
% |
Prior accident years |
|
|
31 |
|
|
|
(139 |
) |
|
NM |
|
|
|
25 |
|
|
|
(221 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss adjustment expenses |
|
|
1,147 |
|
|
|
799 |
|
|
|
44 |
% |
|
|
2,149 |
|
|
|
1,646 |
|
|
|
31 |
% |
Amortization of deferred policy acquisition costs |
|
|
339 |
|
|
|
340 |
|
|
|
|
|
|
|
675 |
|
|
|
680 |
|
|
|
(1 |
%) |
Insurance operating costs and expenses |
|
|
120 |
|
|
|
130 |
|
|
|
(8 |
%) |
|
|
243 |
|
|
|
218 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
|
(89 |
) |
|
|
146 |
|
|
NM |
|
|
|
(52 |
) |
|
|
295 |
|
|
NM |
|
Net servicing income |
|
|
4 |
|
|
|
3 |
|
|
|
33 |
% |
|
|
4 |
|
|
|
3 |
|
|
|
33 |
% |
Net investment income |
|
|
239 |
|
|
|
245 |
|
|
|
(2 |
%) |
|
|
481 |
|
|
|
467 |
|
|
|
3 |
% |
Net realized capital gains (losses) |
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
(10 |
) |
|
|
(16 |
) |
|
|
38 |
% |
Other expenses |
|
|
(38 |
) |
|
|
(35 |
) |
|
|
(9 |
%) |
|
|
(78 |
) |
|
|
(70 |
) |
|
|
(11 |
%) |
Income from continuing operations before income taxes |
|
|
129 |
|
|
|
372 |
|
|
|
(65 |
%) |
|
|
345 |
|
|
|
679 |
|
|
|
(49 |
%) |
Income tax expense |
|
|
5 |
|
|
|
105 |
|
|
|
(95 |
%) |
|
|
54 |
|
|
|
207 |
|
|
|
(74 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
|
124 |
|
|
|
267 |
|
|
|
(54 |
%) |
|
|
291 |
|
|
|
472 |
|
|
|
(38 |
%) |
Income (loss) from discontinued operations, net of tax [1] |
|
|
(3 |
) |
|
|
3 |
|
|
NM |
|
|
|
157 |
|
|
|
4 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
121 |
|
|
$ |
270 |
|
|
|
(55 |
%) |
|
$ |
448 |
|
|
$ |
476 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Represents the income from operations and sale of Specialty Risk Services (SRS). For
additional information, see Note 12 of the Notes to Condensed Consolidated Financial
Statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Premium Measures [1] |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
New business premium |
|
$ |
286 |
|
|
$ |
276 |
|
|
$ |
589 |
|
|
$ |
573 |
|
Standard commercial lines policy count retention |
|
|
82 |
% |
|
|
83 |
% |
|
|
83 |
% |
|
|
84 |
% |
Standard commercial lines renewal written pricing increase |
|
|
3 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
|
1 |
% |
Standard commercial lines renewal earned pricing increase |
|
|
2 |
% |
|
|
|
|
|
|
2 |
% |
|
|
|
|
Standard commercial lines policies in-force as of end of period |
|
|
|
|
|
|
|
|
|
|
1,250,152 |
|
|
|
1,191,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Standard commercial lines represents the Companys small commercial and middle market
property and casualty lines. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Ratios |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
62.6 |
|
|
|
60.3 |
|
|
|
(2.3 |
) |
|
|
63.4 |
|
|
|
61.5 |
|
|
|
(1.9 |
) |
Current accident year catastrophes |
|
|
11.0 |
|
|
|
5.9 |
|
|
|
(5.1 |
) |
|
|
7.0 |
|
|
|
4.3 |
|
|
|
(2.7 |
) |
Prior accident years |
|
|
2.1 |
|
|
|
(9.9 |
) |
|
|
(12.0 |
) |
|
|
0.8 |
|
|
|
(7.8 |
) |
|
|
(8.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense ratio |
|
|
75.6 |
|
|
|
56.4 |
|
|
|
(19.2 |
) |
|
|
71.3 |
|
|
|
57.9 |
|
|
|
(13.4 |
) |
Expense ratio |
|
|
30.0 |
|
|
|
33.0 |
|
|
|
3.0 |
|
|
|
30.2 |
|
|
|
31.8 |
|
|
|
1.6 |
|
Policyholder dividend ratio |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
105.8 |
|
|
|
89.6 |
|
|
|
(16.2 |
) |
|
|
101.7 |
|
|
|
89.6 |
|
|
|
(12.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year |
|
|
11.0 |
|
|
|
5.9 |
|
|
|
(5.1 |
) |
|
|
7.0 |
|
|
|
4.3 |
|
|
|
(2.7 |
) |
Prior accident years |
|
|
0.7 |
|
|
|
0.3 |
|
|
|
(0.4 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe ratio |
|
|
11.6 |
|
|
|
6.2 |
|
|
|
(5.4 |
) |
|
|
7.2 |
|
|
|
4.3 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes |
|
|
94.2 |
|
|
|
83.5 |
|
|
|
(10.7 |
) |
|
|
94.5 |
|
|
|
85.3 |
|
|
|
(9.2 |
) |
Combined ratio before catastrophes and prior
accident year development |
|
|
92.8 |
|
|
|
93.6 |
|
|
|
0.8 |
|
|
|
93.9 |
|
|
|
93.1 |
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues [1] |
|
$ |
26 |
|
|
$ |
25 |
|
|
|
4 |
% |
|
$ |
49 |
|
|
$ |
46 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Represents servicing revenues. |
84
Three and six months ended June 30, 2011 compared to the three and six months ended June 30,
2010
Net income decreased for the three and six months ended June 30, 2011, as compared to the prior
year periods, primarily due to a decrease in underwriting results due to higher current accident
year catastrophes and unfavorable prior accident years development in 2011 compared to favorable
prior accident years development in the same 2010 periods. For the six months ended June 30, 2011,
the decrease in underwriting results was partially offset by the net realized capital gain on the
sale of SRS.
Current accident year catastrophe losses for the three months ended June 30, 2011 of $166, pre-tax,
primarily included severe tornadoes in the Midwest and South. For the six months ended June 30,
2011, pre-tax catastrophes of $212 also included winter storms in the Northeast and Midwest. In
2010, catastrophes primarily included tornadoes, thunderstorms and hail events in the Midwest,
plains states and the Southeast, for the comparable three-month period, and winter storms in the
Mid-Atlantic and Northeast, for the comparable six-month period.
For information regarding prior accident years reserve development, see the Property and Casualty
Insurance Product Reserves, Net of Reinsurance section within Critical Accounting Estimates.
The increase in earned premiums for the three and six months ended June 30, 2011, is primarily due
to improvements in workers compensation, driven by higher new business premium, renewal earned
pricing increases and an increase in policies-in-force. The earned pricing changes were primarily
a reflection of written pricing changes over the last year. Renewal written pricing increased for
all standard commercial lines driven by improving market conditions.
Current accident year losses and loss adjustment expenses before catastrophes increased, due
primarily to the increase in earned premiums for workers compensation, as well as an increase in
the current accident year loss and loss adjustment expense ratio before catastrophes. The ratio
increased due to loss costs outpacing earned pricing increases.
Insurance operating costs and expenses decreased for the three-month period, driven by a $19 of
reserve strengthening for other state funds and taxes in the 2010 period. For the six-month
period, insurance operating costs and expenses increased primarily due to an increase in the
estimated amount of dividends payable to certain workers compensation policyholders of $12, as
well as higher technology costs, partially offset by the decrease in reserve strengthening for
other state funds and taxes.
Net investment income increased for the six-month period, as compared to the prior year, primarily
driven by improved performance of limited partnerships and other alternative investments. For
additional information, see the Investment Results section within Key Performance Measures and
Ratios.
The effective tax rate in both periods differs from the U.S. Federal statutory rate primarily due
to permanent differences related to investments in tax exempt securities. For further discussion,
see Income Taxes within Note 1 of the Notes to Condensed Consolidated Financial Statements.
85
GROUP BENEFITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Operating Summary |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Premiums and other considerations |
|
$ |
1,076 |
|
|
$ |
1,074 |
|
|
|
|
|
|
$ |
2,120 |
|
|
$ |
2,176 |
|
|
|
(3 |
%) |
Net investment income |
|
|
106 |
|
|
|
110 |
|
|
|
(4 |
%) |
|
|
210 |
|
|
|
217 |
|
|
|
(3 |
%) |
Net realized capital gains (losses) |
|
|
10 |
|
|
|
23 |
|
|
|
(57 |
%) |
|
|
(4 |
) |
|
|
32 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,192 |
|
|
|
1,207 |
|
|
|
(1 |
%) |
|
|
2,326 |
|
|
|
2,425 |
|
|
|
(4 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
850 |
|
|
|
846 |
|
|
|
|
|
|
|
1,678 |
|
|
|
1,689 |
|
|
|
(1 |
%) |
Amortization of deferred policy acquisition costs |
|
|
14 |
|
|
|
15 |
|
|
|
(7 |
%) |
|
|
28 |
|
|
|
31 |
|
|
|
(10 |
%) |
Insurance operating costs and other expenses |
|
|
281 |
|
|
|
281 |
|
|
|
|
|
|
|
567 |
|
|
|
564 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
1,145 |
|
|
|
1,142 |
|
|
|
|
|
|
|
2,273 |
|
|
|
2,284 |
|
|
|
|
|
Income before income taxes |
|
|
47 |
|
|
|
65 |
|
|
|
(28 |
%) |
|
|
53 |
|
|
|
141 |
|
|
|
(62 |
%) |
Income tax expense |
|
|
6 |
|
|
|
17 |
|
|
|
(65 |
%) |
|
|
1 |
|
|
|
42 |
|
|
|
(98 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41 |
|
|
$ |
48 |
|
|
|
(15 |
%) |
|
$ |
52 |
|
|
$ |
99 |
|
|
|
(47 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully insured ongoing premiums |
|
$ |
1,013 |
|
|
$ |
1,041 |
|
|
|
(3 |
%) |
|
$ |
2,041 |
|
|
$ |
2,093 |
|
|
|
(2 |
%) |
Buyout premiums |
|
|
49 |
|
|
|
21 |
|
|
|
133 |
% |
|
|
49 |
|
|
|
58 |
|
|
|
(16 |
%) |
Other |
|
|
14 |
|
|
|
12 |
|
|
|
17 |
% |
|
|
30 |
|
|
|
25 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and other considerations |
|
$ |
1,076 |
|
|
$ |
1,074 |
|
|
|
|
|
|
$ |
2,120 |
|
|
$ |
2,176 |
|
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully insured ongoing sales, excluding buyouts |
|
$ |
92 |
|
|
$ |
101 |
|
|
|
(9 |
%) |
|
$ |
336 |
|
|
$ |
397 |
|
|
|
(15 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios, excluding buyouts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
78.0 |
% |
|
|
78.3 |
% |
|
|
|
|
|
|
78.7 |
% |
|
|
77.0 |
% |
|
|
|
|
Loss ratio, excluding financial institutions |
|
|
83.5 |
% |
|
|
84.2 |
% |
|
|
|
|
|
|
84.0 |
% |
|
|
82.6 |
% |
|
|
|
|
Expense ratio |
|
|
28.7 |
% |
|
|
28.1 |
% |
|
|
|
|
|
|
28.7 |
% |
|
|
28.1 |
% |
|
|
|
|
Expense ratio, excluding financial institutions |
|
|
23.9 |
% |
|
|
23.4 |
% |
|
|
|
|
|
|
23.8 |
% |
|
|
23.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010
Net income decreased, relative to the comparable prior year periods, primarily due to lower net
realized capital gains (losses) and a decline in fully insured ongoing premiums. Fully insured
ongoing premiums decreased in both periods, driven by lower sales over the past year, as well as,
from a challenging economic environment. For the six months ended June 30, 2011 the loss ratio,
excluding buyouts, increased compared to the prior year, reflecting higher disability incidence and
less favorable life mortality.
The effective tax rate, in both periods, differs from the U.S. Federal statutory rate primarily due
to permanent differences related to investments in tax exempt securities. For further discussion,
see Income Taxes within Note 1 of the Notes to Condensed Consolidated Financial Statements.
86
CONSUMER MARKETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Operating Summary |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Written premiums |
|
$ |
969 |
|
|
$ |
1,033 |
|
|
|
(6 |
%) |
|
$ |
1,853 |
|
|
$ |
1,976 |
|
|
|
(6 |
%) |
Change in unearned premium reserve |
|
|
30 |
|
|
|
38 |
|
|
|
(21 |
%) |
|
|
(42 |
) |
|
|
(15 |
) |
|
|
(180 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
939 |
|
|
|
995 |
|
|
|
(6 |
%) |
|
|
1,895 |
|
|
|
1,991 |
|
|
|
(5 |
%) |
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
623 |
|
|
|
686 |
|
|
|
(9 |
%) |
|
|
1,239 |
|
|
|
1,353 |
|
|
|
(8 |
%) |
Current accident year catastrophes |
|
|
281 |
|
|
|
146 |
|
|
|
92 |
% |
|
|
313 |
|
|
|
187 |
|
|
|
67 |
% |
Prior accident years |
|
|
|
|
|
|
(10 |
) |
|
|
100 |
% |
|
|
(49 |
) |
|
|
(17 |
) |
|
|
(188 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss adjustment expenses |
|
|
904 |
|
|
|
822 |
|
|
|
10 |
% |
|
|
1,503 |
|
|
|
1,523 |
|
|
|
(1 |
%) |
Amortization of deferred policy acquisition costs |
|
|
160 |
|
|
|
168 |
|
|
|
(5 |
%) |
|
|
321 |
|
|
|
336 |
|
|
|
(4 |
%) |
Insurance operating costs and expenses |
|
|
76 |
|
|
|
73 |
|
|
|
4 |
% |
|
|
148 |
|
|
|
146 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting results |
|
|
(201 |
) |
|
|
(68 |
) |
|
|
(196 |
%) |
|
|
(77 |
) |
|
|
(14 |
) |
|
NM |
|
Net servicing income |
|
|
3 |
|
|
|
6 |
|
|
|
(50 |
%) |
|
|
9 |
|
|
|
15 |
|
|
|
(40 |
%) |
Net investment income |
|
|
49 |
|
|
|
49 |
|
|
|
|
|
|
|
99 |
|
|
|
93 |
|
|
|
6 |
% |
Net realized capital gains (losses) |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
33 |
% |
Other expenses |
|
|
(131 |
) |
|
|
(16 |
) |
|
NM |
|
|
|
(145 |
) |
|
|
(33 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(278 |
) |
|
|
(27 |
) |
|
NM |
|
|
|
(116 |
) |
|
|
58 |
|
|
NM |
|
Income tax expense (benefit) |
|
|
(104 |
) |
|
|
(14 |
) |
|
NM |
|
|
|
(52 |
) |
|
|
15 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(174 |
) |
|
$ |
(13 |
) |
|
NM |
|
|
$ |
(64 |
) |
|
$ |
43 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Written Premiums |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Product Line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
665 |
|
|
$ |
719 |
|
|
|
(8 |
%) |
|
$ |
1,306 |
|
|
$ |
1,415 |
|
|
|
(8 |
%) |
Homeowners |
|
|
304 |
|
|
|
314 |
|
|
|
(3 |
%) |
|
|
547 |
|
|
|
561 |
|
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
969 |
|
|
$ |
1,033 |
|
|
|
(6 |
%) |
|
$ |
1,853 |
|
|
$ |
1,976 |
|
|
|
(6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
657 |
|
|
$ |
711 |
|
|
|
(8 |
%) |
|
$ |
1,329 |
|
|
$ |
1,424 |
|
|
|
(7 |
%) |
Homeowners |
|
|
282 |
|
|
|
284 |
|
|
|
(1 |
%) |
|
|
566 |
|
|
|
567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
939 |
|
|
$ |
995 |
|
|
|
(6 |
%) |
|
$ |
1,895 |
|
|
$ |
1,991 |
|
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Premium Measures |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Policies in-force end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
|
|
|
|
|
|
|
|
2,137,351 |
|
|
|
2,341,594 |
|
Homeowners |
|
|
|
|
|
|
|
|
|
|
1,380,301 |
|
|
|
1,479,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total policies in-force end of period |
|
|
|
|
|
|
|
|
|
|
3,517,652 |
|
|
|
3,821,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New business written premium |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
75 |
|
|
$ |
82 |
|
|
$ |
141 |
|
|
$ |
175 |
|
Homeowners |
|
$ |
23 |
|
|
$ |
30 |
|
|
$ |
42 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy count retention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
82 |
% |
|
|
84 |
% |
|
|
82 |
% |
|
|
84 |
% |
Homeowners |
|
|
84 |
% |
|
|
85 |
% |
|
|
83 |
% |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal written pricing increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
6 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
6 |
% |
Homeowners |
|
|
9 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal earned pricing increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
7 |
% |
|
|
4 |
% |
|
|
7 |
% |
|
|
4 |
% |
Homeowners |
|
|
10 |
% |
|
|
7 |
% |
|
|
10 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Ratios and Supplemental Data |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophes |
|
|
66.5 |
|
|
|
69.0 |
|
|
|
2.5 |
|
|
|
65.4 |
|
|
|
68.0 |
|
|
|
2.6 |
|
Current accident year catastrophes |
|
|
29.9 |
|
|
|
14.6 |
|
|
|
(15.3 |
) |
|
|
16.5 |
|
|
|
9.4 |
|
|
|
(7.1 |
) |
Prior accident years |
|
|
|
|
|
|
(0.9 |
) |
|
|
(0.9 |
) |
|
|
(2.6 |
) |
|
|
(0.8 |
) |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense ratio |
|
|
96.4 |
|
|
|
82.6 |
|
|
|
(13.8 |
) |
|
|
79.4 |
|
|
|
76.5 |
|
|
|
(2.9 |
) |
Expense ratio |
|
|
25.1 |
|
|
|
24.3 |
|
|
|
(0.8 |
) |
|
|
24.7 |
|
|
|
24.2 |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
121.5 |
|
|
|
106.9 |
|
|
|
(14.6 |
) |
|
|
104.1 |
|
|
|
100.7 |
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
29.9 |
|
|
|
14.6 |
|
|
|
(15.3 |
) |
|
|
16.5 |
|
|
|
9.4 |
|
|
|
(7.1 |
) |
Prior years |
|
|
1.0 |
|
|
|
0.5 |
|
|
|
(0.5 |
) |
|
|
1.5 |
|
|
|
0.2 |
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe ratio |
|
|
30.8 |
|
|
|
15.0 |
|
|
|
(15.8 |
) |
|
|
18.0 |
|
|
|
9.5 |
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophes |
|
|
90.6 |
|
|
|
91.8 |
|
|
|
1.2 |
|
|
|
86.1 |
|
|
|
91.2 |
|
|
|
5.1 |
|
Combined ratio before catastrophes and prior
accident years development |
|
|
91.6 |
|
|
|
93.2 |
|
|
|
1.6 |
|
|
|
90.1 |
|
|
|
92.2 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues [1] |
|
$ |
36 |
|
|
$ |
40 |
|
|
|
(10 |
%) |
|
$ |
76 |
|
|
$ |
83 |
|
|
|
(8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Represents servicing revenues. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Product Line Combined Ratios |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Automobile |
|
|
99.5 |
|
|
|
98.7 |
|
|
|
(0.8 |
) |
|
|
92.5 |
|
|
|
96.2 |
|
|
|
3.7 |
|
Homeowners |
|
|
172.8 |
|
|
|
128.8 |
|
|
|
(44.0 |
) |
|
|
130.8 |
|
|
|
112.9 |
|
|
|
(17.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
121.5 |
|
|
|
106.9 |
|
|
|
(14.6 |
) |
|
|
104.1 |
|
|
|
100.7 |
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
Three and six months ended June 30, 2011 compared to the three and six months ended June 30,
2010
Net income decreased relative to the comparable prior year periods, due to higher current accident
year catastrophes and a $73, after-tax, charge related to the write off of capitalized costs
associated with a policy administration software project that was discontinued.
Current accident year catastrophe losses for the three months ended June 30, 2011 of $281, pre-tax,
primarily included severe tornadoes and wind storms in the Midwest and South. For the six months
ended June 30, 2011, pre-tax catastrophes of $313 also included winter storms in the Northeast and
Midwest. In 2010, catastrophes primarily included tornadoes, thunderstorms and hail events in the
Midwest, plains states and the Southeast, for the comparable three-month period, as well as, winter
storms in the Mid-Atlantic and Northeast, for the comparable six-month period.
Other expenses increased resulting from a $113, pre-tax, charge in the three months ended June 30,
2011 for the write-off of the discontinued software project.
Earned premiums decreased in auto and were down modestly for homeowners. Auto earned premiums were
down reflecting a decrease in new business written premium and policy count retention, partially
offset by an increase in average renewal earned premium per policy. Homeowners earned premiums
were down modestly primarily due to decreases in new business written premium and policy count
retention largely offset by the effect of earned pricing increases.
Auto and home new business written premium decreased primarily due to the effect of written pricing
increases and underwriting actions that have lowered the policy issue rate, primarily in Agency.
Policy count retention for auto and home decreased primarily driven by the effect of renewal
written pricing increases and underwriting actions to improve profitability. Compared to 2010, the
number of policies in-force as of June 30, 2011 decreased for both auto and home, driven by the
decreases in both policy count retention and new business.
The higher auto renewal earned pricing in the three and six months ended June 30, 2011 was due to
rate increases and the effect of policyholders purchasing newer vehicle models in place of older
models. Average renewal earned premium per policy for auto increased as renewal earned pricing
increases were partially offset by the effect of a continued shift to more preferred market
business which has lower average earned premium. Homeowners renewal earned pricing increases were
due to rate increases and increased coverage amounts. For both auto and home, the Company has
increased rates in certain states for certain classes of business to maintain profitability in the
face of rising loss costs.
Current accident year losses and loss adjustment expenses before catastrophes decreased primarily
due to lower earned premium and an overall decrease in the current accident year loss and loss
adjustment expense ratio before catastrophes. For the three and six months ended June 30, 2011 the
current accident year loss and loss adjustment expense ratio before catastrophes for auto decreased
4.1 points and 3.8 points, respectively, while the current accident year loss and loss adjustment
expense ratio before catastrophes for home increased 1.7 points and 1.0 points, respectively. The
decrease for auto was primarily due to earned pricing increases and lower estimated average
severity on auto liability claims, partially offset by the effect of higher auto physical damage
emerged loss costs. The increase for home was primarily due to an increase in the frequency of
non-catastrophe weather claims, partially offset by the effect of earned pricing increases.
For information regarding prior accident years reserve development, see the Property and Casualty
Insurance Product Reserves, Net of Reinsurance section within Critical Accounting Estimates.
The effective tax rate, in both periods, differs from the U.S. Federal statutory rate primarily due
to permanent differences related to investments in tax exempt securities. For further discussion,
see Income Taxes within Note 1 of the Notes to Condensed Consolidated Financial Statements.
89
GLOBAL ANNUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Operating Summary |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Fee income and other |
|
$ |
596 |
|
|
$ |
586 |
|
|
|
2 |
% |
|
$ |
1,187 |
|
|
$ |
1,174 |
|
|
|
1 |
% |
Earned premiums |
|
|
49 |
|
|
|
57 |
|
|
|
(14 |
%) |
|
|
108 |
|
|
|
94 |
|
|
|
15 |
% |
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for sale and other |
|
|
414 |
|
|
|
447 |
|
|
|
(7 |
%) |
|
|
831 |
|
|
|
851 |
|
|
|
(2 |
%) |
Equity securities, trading [1] |
|
|
(597 |
) |
|
|
(2,649 |
) |
|
|
77 |
% |
|
|
206 |
|
|
|
(1,948 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income (loss) |
|
|
(183 |
) |
|
|
(2,202 |
) |
|
|
92 |
% |
|
|
1,037 |
|
|
|
(1,097 |
) |
|
NM |
|
Net realized capital gains (losses) |
|
|
15 |
|
|
|
(109 |
) |
|
NM |
|
|
|
(294 |
) |
|
|
(305 |
) |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
477 |
|
|
|
(1,668 |
) |
|
NM |
|
|
|
2,038 |
|
|
|
(134 |
) |
|
NM |
|
Benefits, losses and loss adjustment expenses |
|
|
476 |
|
|
|
683 |
|
|
|
(30 |
%) |
|
|
912 |
|
|
|
1,143 |
|
|
|
(20 |
%) |
Benefits, losses and loss adjustment expenses returns
credited on international variable annuities [1] |
|
|
(597 |
) |
|
|
(2,649 |
) |
|
|
77 |
% |
|
|
206 |
|
|
|
(1,948 |
) |
|
NM |
|
Amortization of DAC |
|
|
237 |
|
|
|
335 |
|
|
|
(29 |
%) |
|
|
338 |
|
|
|
393 |
|
|
|
(14 |
%) |
Insurance operating costs and other expenses |
|
|
189 |
|
|
|
185 |
|
|
|
2 |
% |
|
|
385 |
|
|
|
370 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
305 |
|
|
|
(1,446 |
) |
|
NM |
|
|
|
1,841 |
|
|
|
(42 |
) |
|
NM |
|
Income (loss) before income taxes |
|
|
172 |
|
|
|
(222 |
) |
|
NM |
|
|
|
197 |
|
|
|
(92 |
) |
|
NM |
|
Income tax benefit |
|
|
(56 |
) |
|
|
(108 |
) |
|
|
48 |
% |
|
|
(81 |
) |
|
|
(58 |
) |
|
|
(40 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
228 |
|
|
$ |
(114 |
) |
|
NM |
|
|
$ |
278 |
|
|
$ |
(34 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
112,328 |
|
|
$ |
107,295 |
|
|
|
|
|
Fixed MVA annuity and other account values [2] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,802 |
|
|
|
17,067 |
|
|
|
|
|
Institutional investment products account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,745 |
|
|
|
19,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
146,875 |
|
|
$ |
144,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Value Roll Forward |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Annuities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, beginning of period |
|
$ |
116,004 |
|
|
$ |
118,405 |
|
|
|
|
|
|
$ |
116,520 |
|
|
$ |
119,387 |
|
|
|
|
|
Transfers affecting beginning of period [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Value, beginning of period, as adjusted |
|
|
116,004 |
|
|
|
118,405 |
|
|
|
|
|
|
|
116,520 |
|
|
|
118,032 |
|
|
|
|
|
Net flows |
|
|
(3,806 |
) |
|
|
(2,905 |
) |
|
|
|
|
|
|
(7,461 |
) |
|
|
(5,749 |
) |
|
|
|
|
Change in market value and other |
|
|
(684 |
) |
|
|
(9,761 |
) |
|
|
|
|
|
|
3,069 |
|
|
|
(6,282 |
) |
|
|
|
|
Effect of currency translation |
|
|
814 |
|
|
|
1,556 |
|
|
|
|
|
|
|
200 |
|
|
|
1,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, end of period |
|
$ |
112,328 |
|
|
$ |
107,295 |
|
|
|
|
|
|
$ |
112,328 |
|
|
$ |
107,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Spread |
|
33 bps |
|
32 bps |
|
|
|
|
|
32 bps |
|
14 bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General insurance expense ratio |
|
5.9 bps |
|
5.6 bps |
|
|
|
|
|
11.7 bps |
|
10.9 bps |
|
|
|
|
DAC amortization ratio |
|
|
58 |
% |
|
|
296 |
% |
|
|
|
|
|
|
63 |
% |
|
|
131 |
% |
|
|
|
|
DAC amortization ratio, excluding realized losses and Unlocks |
|
|
43.2 |
% |
|
|
49.9 |
% |
|
|
|
|
|
|
44.0 |
% |
|
|
52.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Includes investment income and mark-to-market effects of equity securities, trading, supporting the international
variable annuity business, which are classified in net investment income with corresponding amounts credited to
policyholders within benefits, losses and loss adjustment expenses. |
|
[2] |
|
Fixed MVA annuity and other account values includes approximately $2.6 billion related to the triggering of the
guaranteed minimum income benefit for the 3Win product as of June 30, 2011 and $1.9 billion as of June 30, 2010. This
account value is not expected to generate material future profit or loss to the Company. |
|
[3] |
|
Canadian mutual funds were transferred from Global Annuity to Mutual Funds effective January 1, 2010. |
90
Three and six months ended June 30, 2011 compared to the three and six months ended June 30,
2010
Global Annuitys net income increased in 2011 as compared to 2010 primarily due to lower DAC
amortization principally driven by changes in the Unlock, a DRD tax
settlement benefit of $45, and lower benefits, losses and loss
adjustment expenses. Also, in the second quarter of 2011, $18, after-tax, of a reserve was released related
to a product in Japan.
The Unlock charge for the three months ended June 30, 2011 was $(70), after-tax, as compared to the
Unlock charge of $(222), after-tax, for the three months ended June 30, 2010. For the six months
ended June 30, 2011 there was an Unlock charge of $(11), after-tax, as compared to the Unlock
charge of $(141), after-tax, for the six months ended June 30, 2010. The charge in both 2011 and
2010 was primarily attributed to the impact of increased hedging costs. For further discussion of
the Unlock see the Critical Accounting Estimates section within the MD&A.
For the three months ended June 30, 2011, there were net realized capital gains in comparison to
net realized capital losses in the comparable prior year period. This is primarily due to gains in
valuation allowances on mortgage loans and the variable annuity hedge program, as well as foreign
currency gains, offset by losses in the Japanese fixed annuity contract hedges. The variable
annuity hedging program losses for the three months ended June 30, 2011 were $(2) compared with
$(29) for the three months ended June 30, 2010. For the six months ended June 30, 2011, there were
lower net realized capital losses as compared to the comparable prior year period. This is
primarily due to fewer net impairment losses in 2011 and foreign currency gains, offset by
increased losses in the variable annuity hedging program. For further discussion on the results of
the variable annuity hedging program see Investment Results, Net Realized Capital Gains (Losses)
within Key Performance Measures and Ratios of the MD&A.
Net investment spreads remained relatively flat for the three months ended June 30, 2011 as
compared to the three months ended June 30, 2010. For the six months ended June 30, 2011 as
compared to June 30, 2010 net investment spread increased primarily due to 20 bps lower interest
credited driven by outflows of older higher interest rate business.
The DAC amortization ratio, excluding net realized capital losses and Unlocks, decreased in the
three and six months ended June 30, 2011 due to increased earnings in 2011 as compared to
the prior year period.
Global Annuitys effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD on U.S. annuity products, as well as varying tax
rates by country. Income taxes include separate account DRD benefits of $72 and $30 for the three
months ended June 30, 2011 and 2010, respectively, and $100 and $60 for the six months ended June
30, 2011 and 2010, respectively. The increase in the benefit is primarily attributed to a
resolution of a tax matter with the IRS for the computation of DRD for years 1998, 2000 and 2001.
In addition, due to the availability of additional tax planning strategies, the Company released
$38 or 100% of the valuation allowance associated with investment realized capital losses during
the three months ended June 30, 2011.
91
LIFE INSURANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Operating Summary |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Fee income and other |
|
$ |
282 |
|
|
$ |
282 |
|
|
|
|
|
|
$ |
559 |
|
|
$ |
564 |
|
|
|
(1 |
%) |
Earned premiums |
|
|
(25 |
) |
|
|
(23 |
) |
|
|
(9 |
%) |
|
|
(49 |
) |
|
|
(45 |
) |
|
|
(9 |
%) |
Net investment income |
|
|
147 |
|
|
|
135 |
|
|
|
9 |
% |
|
|
289 |
|
|
|
259 |
|
|
|
12 |
% |
Net realized capital gains (losses) |
|
|
8 |
|
|
|
61 |
|
|
|
(87 |
%) |
|
|
(23 |
) |
|
|
32 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
412 |
|
|
|
455 |
|
|
|
(9 |
%) |
|
|
776 |
|
|
|
810 |
|
|
|
(4 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
237 |
|
|
|
202 |
|
|
|
17 |
% |
|
|
473 |
|
|
|
419 |
|
|
|
13 |
% |
Amortization of DAC |
|
|
43 |
|
|
|
43 |
|
|
|
|
|
|
|
74 |
|
|
|
91 |
|
|
|
(19 |
%) |
Insurance operating costs and other expenses |
|
|
53 |
|
|
|
57 |
|
|
|
(7 |
%) |
|
|
105 |
|
|
|
110 |
|
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
333 |
|
|
|
302 |
|
|
|
10 |
% |
|
|
652 |
|
|
|
620 |
|
|
|
5 |
% |
Income before income taxes |
|
|
79 |
|
|
|
153 |
|
|
|
(48 |
%) |
|
|
124 |
|
|
|
190 |
|
|
|
(35 |
%) |
Income tax expense |
|
|
13 |
|
|
|
50 |
|
|
|
(74 |
%) |
|
|
23 |
|
|
|
63 |
|
|
|
(63 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
66 |
|
|
$ |
103 |
|
|
|
(36 |
%) |
|
$ |
101 |
|
|
$ |
127 |
|
|
|
(20 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual variable universal life insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,993 |
|
|
$ |
5,507 |
|
|
|
|
|
Universal life, interest sensitive whole |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,373 |
|
|
|
5,873 |
|
|
|
|
|
life, modified guaranteed life insurance and
other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPLI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,700 |
|
|
|
35,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
49,066 |
|
|
$ |
46,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Life Insurance In-Force |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable universal life insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
71,977 |
|
|
$ |
76,445 |
|
|
|
|
|
Universal life insurance, interest sensitive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,759 |
|
|
|
56,571 |
|
|
|
|
|
whole life, modified guaranteed life
insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,714 |
|
|
|
72,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total individual life insurance in-force |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
211,450 |
|
|
$ |
205,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Life Net Investment Spread |
|
175 bps |
|
175 bps |
|
|
|
|
|
161 bps |
|
150 bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death Benefits |
|
$ |
134 |
|
|
$ |
100 |
|
|
|
|
|
|
$ |
263 |
|
|
$ |
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010
Net income decreased in 2011 compared to 2010 primarily due to net realized losses in 2011 and
increased benefits, losses and loss adjustment expenses, as a result of higher mortality in 2011
offset by increases in net investment income driven by higher invested assets and strong
partnership earnings.
Life Insurances individual life business benefited from increased net investment income primarily
related to a higher average invested asset base and favorable partnership income for the six months
ended June 30, 2011 compared to 2010, partially offset by lower portfolio yields on fixed maturity
investments. Net investment spread increased for individual life, primarily due to a change in
business mix towards higher spread business.
Life Insurances effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD. Income taxes include separate account DRD
benefits of $7 and $4 for the three ended June 30, 2011 and 2010, respectively. Income taxes
include separate account DRD benefits of $12 and $9 for the six ended June 30, 2011 and 2010,
respectively. Included in 2011 the separate account benefit above is a tax benefit of $3 related to
a DRD settlement for the three and six months June 30, 2011.
92
RETIREMENT PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Operating Summary |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Fee income and other |
|
$ |
99 |
|
|
$ |
87 |
|
|
|
14 |
% |
|
$ |
193 |
|
|
$ |
172 |
|
|
|
12 |
% |
Earned premiums |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
5 |
|
|
|
4 |
|
|
|
25 |
% |
Net investment income |
|
|
100 |
|
|
|
93 |
|
|
|
8 |
% |
|
|
199 |
|
|
|
174 |
|
|
|
14 |
% |
Net realized capital gains (losses) |
|
|
11 |
|
|
|
6 |
|
|
|
83 |
% |
|
|
2 |
|
|
|
(10 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
212 |
|
|
|
188 |
|
|
|
13 |
% |
|
|
399 |
|
|
|
340 |
|
|
|
17 |
% |
Benefits, losses and loss adjustment expenses |
|
|
75 |
|
|
|
70 |
|
|
|
7 |
% |
|
|
147 |
|
|
|
133 |
|
|
|
11 |
% |
Insurance operating costs and other expenses |
|
|
90 |
|
|
|
81 |
|
|
|
11 |
% |
|
|
180 |
|
|
|
166 |
|
|
|
8 |
% |
Amortization of DAC |
|
|
30 |
|
|
|
21 |
|
|
|
43 |
% |
|
|
39 |
|
|
|
26 |
|
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
195 |
|
|
|
172 |
|
|
|
13 |
% |
|
|
366 |
|
|
|
325 |
|
|
|
13 |
% |
Income before income taxes |
|
|
17 |
|
|
|
16 |
|
|
|
6 |
% |
|
|
33 |
|
|
|
15 |
|
|
|
120 |
% |
Income tax expense (benefit) |
|
|
(13 |
) |
|
|
2 |
|
|
NM |
|
|
|
(12 |
) |
|
|
7 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
30 |
|
|
$ |
14 |
|
|
|
114 |
% |
|
$ |
45 |
|
|
$ |
8 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,963 |
|
|
$ |
16,926 |
|
|
|
|
|
403(b)/457 account values |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,118 |
|
|
|
11,017 |
|
|
|
|
|
401(k)/403(b) mutual funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,474 |
|
|
|
15,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,555 |
|
|
$ |
43,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management Roll Forward |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,518 |
|
|
$ |
43,962 |
|
|
|
|
|
Transfers affecting the beginning of the period [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, beginning of period, as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,785 |
|
|
|
44,156 |
|
|
|
|
|
Net flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487 |
|
|
|
934 |
|
|
|
|
|
Change in market value and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,283 |
|
|
|
(1,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,555 |
|
|
$ |
43,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Spread |
|
124 bps |
|
126 bps |
|
|
|
|
|
132 bps |
|
95 bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Lifetime Income and Maturity Funding business of $194 was transferred from Global Annuity
to Retirement Plans effective January 1, 2010. |
Three months ended June 30, 2011 compared to the three months ended June 30, 2010
Retirement Plans net income increased in 2011 compared to 2010 due largely to a DRD tax settlement
benefit, higher realized capital gains including the release of the valuation allowance, and market
value appreciation in AUM which resulted in increased fee income and other.
Net investment income increased in 2011 compared to 2010 primarily due to higher average general
account invested assets. Net investment spread decreased by 2 bps driven by lower yields of 8 bps
offset by lower crediting rates of 6 bps.
Fee income and other increased primarily due to increases in asset based fees on higher average
account values resulting from positive net flows and market value appreciation.
Retirement Plans effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD. Income taxes include separate account DRD
benefits of $9 in 2011 compared to $4 in 2010. Included in the separate account benefit is a tax
benefit of $4 related to a DRD settlement for the three months June 30, 2011. In addition, due to
the availability of additional tax planning strategies, the Company released $10 or 100% of the
valuation allowance associated with realized capital losses during the three months ended June 30,
2011. For further discussion, see Note 1 of the Notes to Condensed Consolidated Financial
Statements.
93
Six months ended June 30, 2011 compared to the six months ended June 30, 2010
Retirement Plans net income increased in 2011 compared 2010 primarily due to net realized capital
gains, higher net investment income from improvements in equity returns and higher invested assets,
and increased fee income and other as a result of continued positive net flows and market value
appreciation.
Net investment income increased in 2011 compared to 2010 primarily due to the improved performance
of higher average general account invested assets and favorable partnership income compared to
2010. Net investment spread for the six months improved by 38 bps driven by higher yields of 26 bps
offset by decreased crediting rates of 12 bps.
Net realized capital gains increased in 2011 compared to 2010 due to lower losses from impairments
compared to 2010 and due to the release of a valuation allowance on mortgage loans.
Fee income and other increased primarily due to increases in asset based fees on higher average
account values resulting from positive net flows and market value appreciation.
The Unlock charge was $1, after-tax, in 2011 as compared to an Unlock charge of $4, after-tax, in
2010. The charge in both 2011 and 2010 was due to business in-force true-ups and the reversion to
the mean due to equity market performing different than expectations. The Unlock primarily resulted
in an increase to amortization of DAC offset by a decrease in income tax expense. For further
discussion of Unlocks see the Critical Accounting Estimates within the MD&A.
Retirement Plans effective tax rate differs from the statutory rate of 35% primarily due to
permanent differences for the separate account DRD. Income taxes include separate account DRD
benefits of $13 in 2011 compared to $9 in 2010. Included in the separate account benefit is a tax
benefit of $4 related to a DRD settlement for the six months June 30, 2011. In addition, due to the
availability of additional tax planning strategies, the Company released $10 or 100% of the
valuation allowance associated with realized capital losses during the six months ended June 30,
2011. For further discussion, see Note 1 of the Notes to Condensed Consolidated Financial
Statements.
94
MUTUAL FUNDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Operating Summary |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Fee income and other |
|
$ |
175 |
|
|
$ |
167 |
|
|
|
5 |
% |
|
$ |
353 |
|
|
$ |
334 |
|
|
|
6 |
% |
Net investment loss |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
50 |
% |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
50 |
% |
Net realized capital gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
174 |
|
|
|
165 |
|
|
|
5 |
% |
|
|
352 |
|
|
|
331 |
|
|
|
6 |
% |
Insurance operating costs and other expenses |
|
|
120 |
|
|
|
115 |
|
|
|
4 |
% |
|
|
243 |
|
|
|
227 |
|
|
|
7 |
% |
Amortization of DAC |
|
|
12 |
|
|
|
13 |
|
|
|
(8 |
%) |
|
|
24 |
|
|
|
25 |
|
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
132 |
|
|
|
128 |
|
|
|
3 |
% |
|
|
267 |
|
|
|
252 |
|
|
|
6 |
% |
Income from continuing operations, before income taxes |
|
|
42 |
|
|
|
37 |
|
|
|
14 |
% |
|
|
85 |
|
|
|
79 |
|
|
|
8 |
% |
Income tax expense |
|
|
15 |
|
|
|
13 |
|
|
|
15 |
% |
|
|
30 |
|
|
|
28 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
27 |
|
|
|
24 |
|
|
|
13 |
% |
|
|
55 |
|
|
|
51 |
|
|
|
8 |
% |
Loss from discontinued operations, net of tax [1] |
|
|
|
|
|
|
(1 |
) |
|
|
100 |
% |
|
|
|
|
|
|
(2 |
) |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27 |
|
|
$ |
23 |
|
|
|
17 |
% |
|
$ |
55 |
|
|
$ |
49 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail mutual fund assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
49,584 |
|
|
$ |
41,162 |
|
|
|
|
|
Investment Only mutual fund assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,954 |
|
|
|
4,919 |
|
|
|
|
|
529 College Savings Plan and Canadian mutual fund (CMF)
assets [2] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,612 |
|
|
|
2,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-proprietary and Canadian mutual fund assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,150 |
|
|
|
48,759 |
|
|
|
|
|
Proprietary mutual fund assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,204 |
|
|
|
39,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mutual fund assets under management |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100,354 |
|
|
$ |
88,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Proprietary and CMF AUM Roll Forward [2] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Proprietary and CMF AUM, beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,884 |
|
|
$ |
44,031 |
|
|
|
|
|
Transfers affecting the beginning of the period [3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Proprietary and CMF AUM, beginning of period, as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,884 |
|
|
|
49,648 |
|
|
|
|
|
Net flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188 |
) |
|
|
2,362 |
|
|
|
|
|
Change in market value and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,454 |
|
|
|
(3,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Proprietary and CMF AUM, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,150 |
|
|
$ |
48,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary Mutual Fund AUM Roll Forward |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary Mutual Fund AUM, beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
43,602 |
|
|
$ |
|
|
|
|
|
|
Transfers affecting the beginning of the period [4] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary Mutual Fund AUM, beginning of period, as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,602 |
|
|
|
43,890 |
|
|
|
|
|
Net flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,111 |
) |
|
|
(2,464 |
) |
|
|
|
|
Change in market value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,713 |
|
|
|
(2,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary Mutual Fund AUM, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,204 |
|
|
$ |
39,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Represents the loss from operations of Hartford Investments Canada Corporation. (HICC).
For additional information, see Note 12 of the Notes to Condensed Consolidated Financial
Statements. |
|
[2] |
|
Canadian mutual funds representing approximately $1.8 billion in AUM were sold in December
2010, therefore are not included in the 2011 beginning balance. |
|
[3] |
|
In 2010, Investment Only and Canadian mutual fund assets were transferred to Mutual Funds from Global Annuity effective January 1, 2010. |
|
[4] |
|
Proprietary mutual fund assets under management are included in the Mutual Fund reporting segment effective January 1, 2010. |
Three months and six months ended June 30, 2011 compared to the three and six months ended
June 30, 2010
Net income increased in 2011 compared to 2010 due to increased fee income and other as a result of
increased account values attributed to improved equity markets. Sales were concentrated in several
funds with lower management fee rates or current fee waivers resulting in a lower increase in fees
relative to the increase in AUM. These improvements were offset by increased expenses,
specifically commissions on new business deposits and operating expenses.
95
CORPORATE AND OTHER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Operating Summary |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Earned premiums |
|
$ |
1 |
|
|
$ |
(2 |
) |
|
NM |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
|
|
|
Fee income |
|
|
53 |
|
|
|
52 |
|
|
|
2 |
% |
|
|
106 |
|
|
|
97 |
|
|
|
9 |
% |
Net investment income |
|
|
50 |
|
|
|
71 |
|
|
|
(30 |
%) |
|
|
105 |
|
|
|
145 |
|
|
|
(28 |
%) |
Net realized capital gains (losses) |
|
|
10 |
|
|
|
13 |
|
|
|
(23 |
%) |
|
|
(4 |
) |
|
|
4 |
|
|
NM |
|
Other revenues |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
113 |
|
|
|
134 |
|
|
|
(16 |
%) |
|
|
207 |
|
|
|
245 |
|
|
|
(16 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
287 |
|
|
|
170 |
|
|
|
69 |
% |
|
|
292 |
|
|
|
172 |
|
|
|
70 |
% |
Insurance operating costs and other expenses |
|
|
71 |
|
|
|
82 |
|
|
|
(13 |
%) |
|
|
138 |
|
|
|
211 |
|
|
|
(35 |
%) |
Interest expense |
|
|
128 |
|
|
|
132 |
|
|
|
(3 |
%) |
|
|
256 |
|
|
|
252 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses |
|
|
486 |
|
|
|
384 |
|
|
|
27 |
% |
|
|
686 |
|
|
|
635 |
|
|
|
8 |
% |
Loss from continuing operations before
income taxes |
|
|
(373 |
) |
|
|
(250 |
) |
|
|
(49 |
%) |
|
|
(479 |
) |
|
|
(390 |
) |
|
|
(23 |
%) |
Income tax benefit |
|
|
(135 |
) |
|
|
(96 |
) |
|
|
(41 |
%) |
|
|
(174 |
) |
|
|
(119 |
) |
|
|
(46 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of
tax |
|
|
(238 |
) |
|
|
(154 |
) |
|
|
(55 |
%) |
|
|
(305 |
) |
|
|
(271 |
) |
|
|
(13 |
%) |
Loss from discontinued operations, net of tax |
|
|
(77 |
) |
|
|
(101 |
) |
|
|
24 |
% |
|
|
(75 |
) |
|
|
(102 |
) |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(315 |
) |
|
$ |
(255 |
) |
|
|
(24 |
%) |
|
$ |
(380 |
) |
|
$ |
(373 |
) |
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010
The net loss in Corporate and Other increased in the three and six months ended June 30, 2011
primarily due to a reserve increase of $290, pre-tax, in the three months ended June 30, 2011,
resulting from the companys annual review of its asbestos liabilities within the Other Operations
operating segment. In the comparable prior year period, the reserve increase was $169, pre-tax.
For further information, see Other Operations Claims within the Property and Casualty Insurance
Product Reserves, Net of Reinsurance section in Critical Accounting Estimates.
For the six-month period, the increase in Corporate and Others net loss was partially offset by a
decrease in insurance operating costs and other expenses as a result of an accrual for a litigation
settlement of $73 in the first quarter of 2010, for further information see Structured Settlement
Class Action in Note 12 of the Notes to Consolidated Financial Statements in The Hartfords 2010
Form 10-K Annual Report.
For the three and six months ended June 30, 2011, the loss from discontinued operations, net of
tax, is due to a loss of $74, after-tax, from the disposition of Federal Trust Corporation in the
second quarter of 2011. For the three and six months ended June 30, 2010, loss from discontinued
operations, net of tax, primarily relates to goodwill impairment on Federal Trust Corporation of
approximately $100, after-tax, recorded in the second quarter of 2010.
See Note 1 of the Notes to Condensed Consolidated Financial Statements for a reconciliation of the
tax provision at the U.S. Federal statutory rate to the provision (benefit) for income taxes.
96
INSURANCE RISK MANAGEMENT
Use of Reinsurance
The Company has several catastrophe reinsurance programs, including reinsurance treaties that cover
property and workers compensation losses aggregating from single catastrophe events. The
following table summarizes the primary catastrophe treaty reinsurance coverages that the Company
has in place as of July 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of layer(s) |
|
|
|
|
|
|
|
Coverage |
|
Treaty term |
|
reinsured |
|
|
Per occurrence limit |
|
|
Retention |
|
Principal property
catastrophe program
covering property
catastrophe losses
from a single event |
|
1/1/2011 to 1/1/2012 |
|
|
90 |
% |
|
$ |
750 |
|
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance with
the Florida
Hurricane
Catastrophe Fund
(FHCF) covering
Florida Personal
Lines property
catastrophe losses
from a single event |
|
6/1/2011 to 6/1/2012 |
|
|
90 |
% |
|
$ |
174 [1] |
|
|
$ |
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
compensation losses
arising from a
single catastrophe
event |
|
7/1/2011 to 7/1/2012 |
|
|
95 |
% |
|
$ |
350 [2] |
|
|
$ |
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
The estimated per occurrence limit on the FHCF treaty is $174 for
the 6/1/2011 to 6/1/2012 treaty year based on the Companys
election to purchase the required coverage from the FHCF.
Coverage is estimated based upon the best available information
until the FHCF releases actual results in October. |
|
[2] |
|
In addition to the limit shown above, the workers compensation
reinsurance treaty includes a non-catastrophe, industrial accident
layer of $30 excess of a $20 retention. |
Refer to the MD&A in The Hartfords 2010 Form 10-K Annual Report for further explanation of
the Companys Insurance Risk Management Strategy.
INVESTMENT CREDIT RISK MANAGEMENT
The Company has established investment credit policies that focus on the credit quality of
obligors and counterparties, limit credit concentrations, encourage diversification and require
frequent creditworthiness reviews. Investment activity, including setting of policy and defining
acceptable risk levels, is subject to regular review and approval by senior management.
The Company invests primarily in securities which are rated investment grade and has established
exposure limits, diversification standards and review procedures for all credit risks including
borrower, issuer and counterparty. Creditworthiness of specific obligors is determined by
consideration of external determinants of creditworthiness, typically ratings assigned by
nationally recognized ratings agencies and is supplemented by an internal credit evaluation.
Obligor, asset sector and industry concentrations are subject to established Company limits and are
monitored on a regular basis.
The Company is not exposed to any credit concentration risk of a single issuer greater than 10% of
the Companys stockholders equity other than U.S. government and government agencies backed by the
full faith and credit of the U.S. government. For further discussion of concentration of credit
risk, see the Concentration of Credit Risk section in Note 5 of the Notes to Consolidated Financial
Statements in The Hartfords 2010 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 A/A- or
better, which are monitored and evaluated by the Companys risk management team and reviewed by
senior management. In addition, the Company monitors counterparty credit exposure on a monthly
basis to ensure compliance with Company policies and statutory limitations. The Company also
generally requires that derivative contracts, other than exchange traded contracts, certain forward
contracts, and certain embedded and reinsurance derivatives, be governed by an International Swaps
and Derivatives Association Master Agreement, which is structured by legal entity and by
counterparty and permits right of offset.
97
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 contractual thresholds. In accordance with industry
standards and the contractual agreements, collateral is typically settled on the next business day.
The Company has exposure to credit risk for amounts below the exposure thresholds which are
uncollateralized, as well as for market fluctuations that may occur between contractual settlement
periods of collateral movements.
The maximum uncollateralized threshold for a derivative counterparty for a single legal entity is
$10. The Company currently transacts over-the-counter derivatives in five legal entities and
therefore the maximum combined threshold for a single counterparty across all legal entities that
use derivatives is $50. In addition, the Company may have exposure to multiple counterparties in a
single corporate family due to a common credit support provider. As of June 30, 2011, the maximum
combined threshold for all counterparties under a single credit support provider across all legal
entities that use derivatives is $100. Based on the contractual terms of certain collateral
agreements, these thresholds may be immediately reduced due to a downgrade in either partys credit
rating. For further discussion, see the Derivative Commitments Section of Note 9 of the Notes to
Condensed Consolidated Financial Statements.
For the three and six months ended June 30, 2011, the Company has incurred no losses on derivative
instruments due to counterparty default.
In addition to counterparty credit risk, the Company enters into credit default swaps to manage
credit exposure. Credit default swaps involve a transfer of credit risk of one or many referenced
entities from one party to another in exchange for periodic payments. The party that purchases
credit protection will make periodic payments based on an agreed upon rate and notional amount, and
for certain transactions there will also be an upfront premium payment. The second party, who
assumes credit risk, will typically only make a payment if there is a credit event as defined in
the contract and such payment will be typically equal to the notional value of the swap contract
less the value of the referenced security issuers debt obligation. A credit event is generally
defined as default on contractually obligated interest or principal payments or bankruptcy of the
referenced entity.
The Company uses credit derivatives to purchase credit protection and assume credit risk with
respect to a single entity, referenced index, or asset pool. The Company purchases credit
protection through credit default swaps to economically hedge and manage credit risk of certain
fixed maturity investments across multiple sectors of the investment portfolio. The Company also
enters into credit default swaps that assume credit risk as part of replication transactions.
Replication transactions are used as an economical means to synthetically replicate the
characteristics and performance of assets that would otherwise be permissible investments under the
Companys investment policies. These swaps reference investment grade single corporate issuers and
baskets, which include customized diversified portfolios of corporate issuers, which are
established within sector concentration limits and may be divided into tranches which possess
different credit ratings.
Investments
The following table presents the Companys fixed maturities, AFS, by credit quality. The ratings
referenced below are based on the ratings of a nationally recognized rating organization or, if not
rated, assigned based on the Companys internal analysis of such securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities by Credit Quality |
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
Amortized |
|
|
|
|
|
|
Total Fair |
|
|
Amortized |
|
|
|
|
|
|
Total Fair |
|
|
|
Cost |
|
|
Fair Value |
|
|
Value |
|
|
Cost |
|
|
Fair Value |
|
|
Value |
|
United States Government/Government agencies |
|
$ |
7,996 |
|
|
$ |
8,073 |
|
|
|
10.3 |
% |
|
$ |
9,961 |
|
|
$ |
9,918 |
|
|
|
12.7 |
% |
AAA |
|
|
9,180 |
|
|
|
9,409 |
|
|
|
12.0 |
% |
|
|
10,080 |
|
|
|
10,174 |
|
|
|
13.1 |
% |
AA |
|
|
15,890 |
|
|
|
15,900 |
|
|
|
20.4 |
% |
|
|
15,933 |
|
|
|
15,554 |
|
|
|
20.0 |
% |
A |
|
|
19,915 |
|
|
|
20,470 |
|
|
|
26.2 |
% |
|
|
19,265 |
|
|
|
19,460 |
|
|
|
25.0 |
% |
BBB |
|
|
20,009 |
|
|
|
20,568 |
|
|
|
26.3 |
% |
|
|
18,849 |
|
|
|
19,153 |
|
|
|
24.6 |
% |
BB & below |
|
|
4,377 |
|
|
|
3,712 |
|
|
|
4.8 |
% |
|
|
4,331 |
|
|
|
3,561 |
|
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
77,367 |
|
|
$ |
78,132 |
|
|
|
100.0 |
% |
|
$ |
78,419 |
|
|
|
77,820 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The movement in the overall credit quality of the Companys portfolio was primarily attributable to
net purchases of investment grade corporate securities concentrated in high quality industrial,
utility and financial services issuers, partially offset by sales of U.S. Treasuries as the Company
continues to reinvest in spread product. Fixed maturities, FVO, are not included in the above
table. For further discussion on fair value option securities, see Note 4 of the Notes to
Condensed Consolidated Financial Statements.
98
The following table presents the Companys AFS securities by type, as well as fixed maturities,
FVO.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities by Type |
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
of Total |
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
of Total |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Fair |
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Value |
|
Asset-backed
securities (ABS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
$ |
2,729 |
|
|
$ |
26 |
|
|
$ |
(172 |
) |
|
$ |
2,583 |
|
|
|
3.3 |
% |
|
$ |
2,496 |
|
|
$ |
23 |
|
|
$ |
(221 |
) |
|
$ |
2,298 |
|
|
|
2.9 |
% |
Small business |
|
|
449 |
|
|
|
|
|
|
|
(122 |
) |
|
|
327 |
|
|
|
0.4 |
% |
|
|
453 |
|
|
|
|
|
|
|
(141 |
) |
|
|
312 |
|
|
|
0.4 |
% |
Other |
|
|
373 |
|
|
|
28 |
|
|
|
(14 |
) |
|
|
387 |
|
|
|
0.5 |
% |
|
|
298 |
|
|
|
15 |
|
|
|
(34 |
) |
|
|
279 |
|
|
|
0.4 |
% |
CDOs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized loan
obligations (CLOs) |
|
|
2,370 |
|
|
|
|
|
|
|
(159 |
) |
|
|
2,211 |
|
|
|
2.8 |
% |
|
|
2,429 |
|
|
|
1 |
|
|
|
(212 |
) |
|
|
2,218 |
|
|
|
2.9 |
% |
CREs |
|
|
552 |
|
|
|
|
|
|
|
(194 |
) |
|
|
358 |
|
|
|
0.5 |
% |
|
|
653 |
|
|
|
|
|
|
|
(266 |
) |
|
|
387 |
|
|
|
0.5 |
% |
Other |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
CMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed [1] |
|
|
554 |
|
|
|
16 |
|
|
|
(1 |
) |
|
|
569 |
|
|
|
0.7 |
% |
|
|
519 |
|
|
|
9 |
|
|
|
(4 |
) |
|
|
524 |
|
|
|
0.7 |
% |
Bonds |
|
|
6,136 |
|
|
|
162 |
|
|
|
(308 |
) |
|
|
5,990 |
|
|
|
7.7 |
% |
|
|
6,985 |
|
|
|
147 |
|
|
|
(583 |
) |
|
|
6,549 |
|
|
|
8.4 |
% |
Interest only (IOs) |
|
|
670 |
|
|
|
72 |
|
|
|
(24 |
) |
|
|
718 |
|
|
|
0.9 |
% |
|
|
793 |
|
|
|
79 |
|
|
|
(28 |
) |
|
|
844 |
|
|
|
1.1 |
% |
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic industry [2] |
|
|
3,320 |
|
|
|
207 |
|
|
|
(53 |
) |
|
|
3,473 |
|
|
|
4.4 |
% |
|
|
2,993 |
|
|
|
190 |
|
|
|
(24 |
) |
|
|
3,159 |
|
|
|
4.1 |
% |
Capital goods |
|
|
3,244 |
|
|
|
234 |
|
|
|
(19 |
) |
|
|
3,459 |
|
|
|
4.4 |
% |
|
|
3,179 |
|
|
|
223 |
|
|
|
(23 |
) |
|
|
3,379 |
|
|
|
4.3 |
% |
Consumer cyclical |
|
|
1,960 |
|
|
|
123 |
|
|
|
(10 |
) |
|
|
2,073 |
|
|
|
2.7 |
% |
|
|
1,883 |
|
|
|
115 |
|
|
|
(12 |
) |
|
|
1,986 |
|
|
|
2.6 |
% |
Consumer non-cyclical |
|
|
5,948 |
|
|
|
430 |
|
|
|
(22 |
) |
|
|
6,356 |
|
|
|
8.1 |
% |
|
|
6,126 |
|
|
|
444 |
|
|
|
(29 |
) |
|
|
6,541 |
|
|
|
8.4 |
% |
Energy |
|
|
3,554 |
|
|
|
241 |
|
|
|
(15 |
) |
|
|
3,780 |
|
|
|
4.8 |
% |
|
|
3,377 |
|
|
|
212 |
|
|
|
(23 |
) |
|
|
3,566 |
|
|
|
4.6 |
% |
Financial services |
|
|
7,991 |
|
|
|
281 |
|
|
|
(343 |
) |
|
|
7,929 |
|
|
|
10.2 |
% |
|
|
7,545 |
|
|
|
253 |
|
|
|
(470 |
) |
|
|
7,328 |
|
|
|
9.4 |
% |
Tech./comm. |
|
|
4,306 |
|
|
|
283 |
|
|
|
(53 |
) |
|
|
4,536 |
|
|
|
5.8 |
% |
|
|
4,268 |
|
|
|
269 |
|
|
|
(68 |
) |
|
|
4,469 |
|
|
|
5.7 |
% |
Transportation |
|
|
1,118 |
|
|
|
67 |
|
|
|
(9 |
) |
|
|
1,176 |
|
|
|
1.5 |
% |
|
|
1,141 |
|
|
|
69 |
|
|
|
(13 |
) |
|
|
1,197 |
|
|
|
1.5 |
% |
Utilities |
|
|
7,743 |
|
|
|
436 |
|
|
|
(65 |
) |
|
|
8,114 |
|
|
|
10.4 |
% |
|
|
7,099 |
|
|
|
386 |
|
|
|
(58 |
) |
|
|
7,427 |
|
|
|
9.5 |
% |
Other [2] |
|
|
788 |
|
|
|
9 |
|
|
|
(22 |
) |
|
|
733 |
|
|
|
0.9 |
% |
|
|
885 |
|
|
|
13 |
|
|
|
(27 |
) |
|
|
832 |
|
|
|
1.1 |
% |
Foreign govt./govt.
agencies |
|
|
1,765 |
|
|
|
107 |
|
|
|
(8 |
) |
|
|
1,864 |
|
|
|
2.4 |
% |
|
|
1,627 |
|
|
|
73 |
|
|
|
(17 |
) |
|
|
1,683 |
|
|
|
2.2 |
% |
Municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,372 |
|
|
|
27 |
|
|
|
(100 |
) |
|
|
1,299 |
|
|
|
1.7 |
% |
|
|
1,319 |
|
|
|
9 |
|
|
|
(129 |
) |
|
|
1,199 |
|
|
|
1.5 |
% |
Tax-exempt |
|
|
11,366 |
|
|
|
251 |
|
|
|
(135 |
) |
|
|
11,482 |
|
|
|
14.7 |
% |
|
|
11,150 |
|
|
|
141 |
|
|
|
(366 |
) |
|
|
10,925 |
|
|
|
14.0 |
% |
Residential
mortgage-backed
securities (RMBS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
3,876 |
|
|
|
138 |
|
|
|
(5 |
) |
|
|
4,009 |
|
|
|
5.2 |
% |
|
|
4,283 |
|
|
|
109 |
|
|
|
(27 |
) |
|
|
4,365 |
|
|
|
5.6 |
% |
Non-agency |
|
|
68 |
|
|
|
|
|
|
|
(1 |
) |
|
|
67 |
|
|
|
0.1 |
% |
|
|
78 |
|
|
|
|
|
|
|
(3 |
) |
|
|
75 |
|
|
|
0.1 |
% |
Alt-A |
|
|
122 |
|
|
|
|
|
|
|
(17 |
) |
|
|
105 |
|
|
|
0.1 |
% |
|
|
168 |
|
|
|
|
|
|
|
(19 |
) |
|
|
149 |
|
|
|
0.2 |
% |
Sub-prime |
|
|
1,421 |
|
|
|
6 |
|
|
|
(394 |
) |
|
|
1,033 |
|
|
|
1.3 |
% |
|
|
1,507 |
|
|
|
|
|
|
|
(413 |
) |
|
|
1,094 |
|
|
|
1.4 |
% |
U.S. Treasuries |
|
|
3,566 |
|
|
|
23 |
|
|
|
(94 |
) |
|
|
3,495 |
|
|
|
4.5 |
% |
|
|
5,159 |
|
|
|
24 |
|
|
|
(154 |
) |
|
|
5,029 |
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, AFS |
|
|
77,367 |
|
|
|
3,167 |
|
|
|
(2,359 |
) |
|
|
78,132 |
|
|
|
100.0 |
% |
|
|
78,419 |
|
|
|
2,804 |
|
|
|
(3,364 |
) |
|
|
77,820 |
|
|
|
100.0 |
% |
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
515 |
|
|
|
9 |
|
|
|
(96 |
) |
|
|
428 |
|
|
|
|
|
|
|
569 |
|
|
|
4 |
|
|
|
(127 |
) |
|
|
446 |
|
|
|
|
|
Other |
|
|
555 |
|
|
|
103 |
|
|
|
(5 |
) |
|
|
653 |
|
|
|
|
|
|
|
444 |
|
|
|
88 |
|
|
|
(5 |
) |
|
|
527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities, AFS |
|
|
1,070 |
|
|
|
112 |
|
|
|
(101 |
) |
|
|
1,081 |
|
|
|
|
|
|
|
1,013 |
|
|
|
92 |
|
|
|
(132 |
) |
|
|
973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS securities |
|
$ |
78,437 |
|
|
$ |
3,279 |
|
|
$ |
(2,460 |
) |
|
$ |
79,213 |
|
|
|
|
|
|
$ |
79,432 |
|
|
$ |
2,896 |
|
|
$ |
(3,496 |
) |
|
$ |
78,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, FVO |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Represents securities with pools of loans issued by the Small Business
Administration which are backed by the full faith and credit of the
U.S. government. |
|
[2] |
|
Gross unrealized gains (losses) exclude the change in fair value of
bifurcated embedded derivative features of certain securities.
Subsequent changes in fair value are recorded in net realized capital
gains (losses). |
The Company continues to reallocate to investment grade corporate securities concentrated in
high quality industrial, utility and financial services issuers, while reducing its exposure to
U.S. Treasuries, commercial real estate and subordinated financial services securities. The
Companys AFS net unrealized position improved primarily as a result of improved security
valuations largely due to declining interest rates and credit spread tightening. Fixed maturities,
FVO, represents securities containing an embedded credit derivative for which the Company elected
the fair value option. The underlying credit risk of these securities is primarily high quality
corporate bonds and CRE CDOs. For further discussion on fair value option securities, see Note 4
of the Notes to Condensed Consolidated Financial Statements.
99
Included in the table above is the Companys gross European exposure with an amortized cost and
fair value of $7.7 billion and $8.1 billion, respectively, as of June 30, 2011 and $8.0 billion and
$8.3 billion, respectively, as of December 31, 2010. Approximately 71% of this exposure largely
relates to corporate entities, primarily utility and industrial, which are domiciled in or
generated a significant portion of their revenue within the United Kingdom, Germany, the
Netherlands and Switzerland, the majority of which is US dollar-denominated. The securities that
are pound and euro-denominated are hedged to US dollars or support foreign-denominated liabilities.
Included in the Companys gross European exposure were investments in Greece, Ireland, Italy,
Portugal and Spain (GIIPS) with an amortized cost and fair value of $716 and $708, respectively,
as of June 30, 2011 and $922 and $905, respectively, as of December 31, 2010. The Company holds
less than $1 of corporate securities of companies domiciled in Greece. Additionally, the Company
does not hold any sovereign debt exposure in GIIPS.
Not included in the table above is the Companys exposure to equity securities, trading,
supporting the Japan variable annuity products. For further information, see Invested Assets of
the Investment Results Section of this MD&A. The following sections highlight the Companys
significant investment sectors.
Financial Services
The Companys exposure to the financial services sector is predominantly through banking
institutions. The following table presents the Companys exposure to the financial services sector
included in the Securities by Type table above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Amortized |
|
|
|
|
|
|
Net |
|
|
Amortized |
|
|
|
|
|
|
Net |
|
|
|
Cost |
|
|
Fair Value |
|
|
Unrealized |
|
|
Cost |
|
|
Fair Value |
|
|
Unrealized |
|
AAA |
|
$ |
368 |
|
|
$ |
379 |
|
|
$ |
11 |
|
|
$ |
302 |
|
|
$ |
309 |
|
|
$ |
7 |
|
AA |
|
|
2,112 |
|
|
|
2,132 |
|
|
|
20 |
|
|
|
2,085 |
|
|
|
2,095 |
|
|
|
10 |
|
A |
|
|
3,978 |
|
|
|
3,913 |
|
|
|
(65 |
) |
|
|
3,760 |
|
|
|
3,599 |
|
|
|
(161 |
) |
BBB |
|
|
1,799 |
|
|
|
1,698 |
|
|
|
(101 |
) |
|
|
1,677 |
|
|
|
1,518 |
|
|
|
(159 |
) |
BB & below |
|
|
249 |
|
|
|
235 |
|
|
|
(14 |
) |
|
|
290 |
|
|
|
253 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,506 |
|
|
$ |
8,357 |
|
|
$ |
(149 |
) |
|
$ |
8,114 |
|
|
$ |
7,774 |
|
|
$ |
(340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial companies continued to stabilize in 2011 due to positive earnings performance, continued
improvement in asset quality and fewer loan defaults. However, during the second quarter, spread
volatility in the financial sector intensified on heightened concerns around Greece and other
European sovereign risks, uncertainty around additional capital requirements under Basel III and a
weaker U.S. macroenvironment. Financial institutions remain vulnerable to ongoing stress in the
real estate markets including high unemployment and global economic uncertainty, which could
adversely impact the Companys net unrealized position.
Commercial Real Estate
The commercial real estate market continued to show signs of improving fundamentals, such as
increases in market pricing, more readily available financing and new issuances. Although credit
spreads tightened significantly during the first quarter, they were adversely impacted during the
second quarter as the market reacted to an oversupply of sub-prime securities sold by the
government. Additionally, delinquencies still remain at historically high levels but are expected
to move lower in late 2011.
The following table presents the Companys exposure to commercial mortgage backed-securities
(CMBS) bonds by current credit quality and vintage year, included in the Securities by Type table
above. Credit protection represents the current weighted average percentage of the outstanding
capital structure subordinated to the Companys investment holding that is available to absorb
losses before the security incurs the first dollar loss of principal and excludes any equity
interest or property value in excess of outstanding debt.
CMBS Bonds [1]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
BB and Below |
|
|
Total |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
2003 & Prior |
|
$ |
509 |
|
|
$ |
523 |
|
|
$ |
131 |
|
|
$ |
132 |
|
|
$ |
84 |
|
|
$ |
82 |
|
|
$ |
36 |
|
|
$ |
34 |
|
|
$ |
59 |
|
|
$ |
57 |
|
|
$ |
819 |
|
|
$ |
828 |
|
2004 |
|
|
403 |
|
|
|
425 |
|
|
|
33 |
|
|
|
34 |
|
|
|
57 |
|
|
|
54 |
|
|
|
53 |
|
|
|
50 |
|
|
|
12 |
|
|
|
9 |
|
|
|
558 |
|
|
|
572 |
|
2005 |
|
|
527 |
|
|
|
555 |
|
|
|
111 |
|
|
|
106 |
|
|
|
132 |
|
|
|
123 |
|
|
|
261 |
|
|
|
232 |
|
|
|
121 |
|
|
|
112 |
|
|
|
1,152 |
|
|
|
1,128 |
|
2006 |
|
|
597 |
|
|
|
625 |
|
|
|
408 |
|
|
|
404 |
|
|
|
300 |
|
|
|
296 |
|
|
|
489 |
|
|
|
453 |
|
|
|
562 |
|
|
|
500 |
|
|
|
2,356 |
|
|
|
2,278 |
|
2007 |
|
|
207 |
|
|
|
220 |
|
|
|
154 |
|
|
|
159 |
|
|
|
160 |
|
|
|
149 |
|
|
|
295 |
|
|
|
250 |
|
|
|
215 |
|
|
|
183 |
|
|
|
1,031 |
|
|
|
961 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
60 |
|
2010 |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
2011 |
|
|
155 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,408 |
|
|
$ |
2,511 |
|
|
$ |
837 |
|
|
$ |
835 |
|
|
$ |
788 |
|
|
$ |
764 |
|
|
$ |
1,134 |
|
|
$ |
1,019 |
|
|
$ |
969 |
|
|
$ |
861 |
|
|
$ |
6,136 |
|
|
$ |
5,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection |
|
|
|
|
|
|
28.3 |
% |
|
|
|
|
|
|
25.4 |
% |
|
|
|
|
|
|
18.6 |
% |
|
|
|
|
|
|
17.3 |
% |
|
|
|
|
|
|
10.1 |
% |
|
|
|
|
|
|
21.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
BB and Below |
|
|
Total |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
2003 & Prior |
|
$ |
782 |
|
|
$ |
803 |
|
|
$ |
146 |
|
|
$ |
142 |
|
|
$ |
107 |
|
|
$ |
103 |
|
|
$ |
24 |
|
|
$ |
21 |
|
|
$ |
26 |
|
|
$ |
22 |
|
|
$ |
1,085 |
|
|
$ |
1,091 |
|
2004 |
|
|
489 |
|
|
|
511 |
|
|
|
35 |
|
|
|
35 |
|
|
|
68 |
|
|
|
61 |
|
|
|
33 |
|
|
|
27 |
|
|
|
6 |
|
|
|
5 |
|
|
|
631 |
|
|
|
639 |
|
2005 |
|
|
610 |
|
|
|
632 |
|
|
|
131 |
|
|
|
121 |
|
|
|
213 |
|
|
|
177 |
|
|
|
182 |
|
|
|
147 |
|
|
|
123 |
|
|
|
96 |
|
|
|
1,259 |
|
|
|
1,173 |
|
2006 |
|
|
1,016 |
|
|
|
1,050 |
|
|
|
566 |
|
|
|
536 |
|
|
|
256 |
|
|
|
224 |
|
|
|
496 |
|
|
|
416 |
|
|
|
436 |
|
|
|
339 |
|
|
|
2,770 |
|
|
|
2,565 |
|
2007 |
|
|
305 |
|
|
|
320 |
|
|
|
278 |
|
|
|
250 |
|
|
|
71 |
|
|
|
55 |
|
|
|
253 |
|
|
|
200 |
|
|
|
278 |
|
|
|
198 |
|
|
|
1,185 |
|
|
|
1,023 |
|
2008 |
|
|
55 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,257 |
|
|
$ |
3,374 |
|
|
$ |
1,156 |
|
|
$ |
1,084 |
|
|
$ |
715 |
|
|
$ |
620 |
|
|
$ |
988 |
|
|
$ |
811 |
|
|
$ |
869 |
|
|
$ |
660 |
|
|
$ |
6,985 |
|
|
$ |
6,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection |
|
|
|
|
|
|
28.8 |
% |
|
|
|
|
|
|
22.5 |
% |
|
|
|
|
|
|
13.3 |
% |
|
|
|
|
|
|
13.8 |
% |
|
|
|
|
|
|
8.0 |
% |
|
|
|
|
|
|
21.5 |
% |
|
|
|
[1] |
|
The vintage year represents the year the pool of loans was originated. |
The Company also has AFS exposure to commercial real estate (CRE) collateralized debt obligations
(CDOs) with an amortized cost and fair value of $552 and $358, respectively, as of June 30, 2011
and $653 and $387, respectively, as of December 31, 2010. These securities are comprised of
diversified pools of commercial mortgage loans or equity positions of other CMBS securitizations.
Although the Company does not plan to invest in this asset class going forward, we continue to
monitor these investments as economic and market uncertainties regarding future performance impacts
market liquidity and results in higher risk premiums.
In addition to CMBS bonds and CRE CDOs, the Company has exposure to commercial mortgage loans as
presented in the following table. These loans are collateralized by a variety of commercial
properties and are diversified both geographically throughout the United States and by property
type. These loans may be either in the form of a whole loan, where the Company is the sole lender,
or a loan participation. Loan participations are loans where the Company has purchased or retained
a portion of an outstanding loan or package of loans and participates on a pro-rata basis in
collecting interest and principal pursuant to the terms of the participation agreement. In
general, A-Note participations have senior payment priority, followed by B-Note participations and
then mezzanine loan participations. As of June 30, 2011, loans within the Companys mortgage loan
portfolio have had minimal extensions or restructurings other than what is allowable under the
original terms of the contract.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgage Loans |
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Amortized |
|
|
Valuation |
|
|
Carrying |
|
|
Amortized |
|
|
Valuation |
|
|
Carrying |
|
|
|
Cost [1] |
|
|
Allowance |
|
|
Value |
|
|
Cost [1] |
|
|
Allowance |
|
|
Value |
|
Agricultural |
|
$ |
278 |
|
|
$ |
(20 |
) |
|
$ |
258 |
|
|
$ |
339 |
|
|
$ |
(23 |
) |
|
$ |
316 |
|
Whole loans |
|
|
4,321 |
|
|
|
(30 |
) |
|
|
4,291 |
|
|
|
3,326 |
|
|
|
(23 |
) |
|
|
3,303 |
|
A-Note participations |
|
|
267 |
|
|
|
|
|
|
|
267 |
|
|
|
319 |
|
|
|
|
|
|
|
319 |
|
B-Note participations |
|
|
312 |
|
|
|
(72 |
) |
|
|
240 |
|
|
|
327 |
|
|
|
(70 |
) |
|
|
257 |
|
Mezzanine loans |
|
|
146 |
|
|
|
(7 |
) |
|
|
139 |
|
|
|
181 |
|
|
|
(36 |
) |
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total [2] |
|
$ |
5,324 |
|
|
$ |
(129 |
) |
|
$ |
5,195 |
|
|
$ |
4,492 |
|
|
$ |
(152 |
) |
|
$ |
4,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Amortized cost represents carrying value prior to valuation allowances, if any. |
|
[2] |
|
Includes commercial whole loans and excludes residential mortgage loans related to Federal Trust Corporation. For further
information on the total mortgage loan portfolio, see Note 5 of the Notes to Condensed Consolidated Financial Statements. |
Since December 31, 2010, the Company funded $1.1 billion of commercial whole loans with a weighted
average loan-to-value (LTV) ratio of 63% and a weighted average yield of 4.65%. The Company
continues to originate commercial whole loans in primary markets, focusing on loans with strong LTV
ratios and high quality property collateral. As of June 30, 2011, the Company had mortgage loans
held-for-sale with a carrying value and valuation allowance of $110 and $16, respectively.
Municipal Bonds
The Company holds investments in securities backed by states, municipalities and political
subdivisions (municipal) with an amortized cost and fair value of $12.7 billion and $12.8
billion, respectively, as of June 30, 2011 and $12.5 billion and $12.1 billion, respectively, as of
December 31, 2010. The Companys municipal bond portfolio is well diversified and primarily
consists of essential service revenue and general obligation bonds. As of June 30, 2011 and
December 31, 2010, the largest issuer concentrations were the states of California, Massachusetts
and Georgia, which each comprised less than 3% of the municipal bond portfolio and were primarily
comprised of general obligation securities.
101
Limited Partnerships and Other Alternative Investments
The following table presents the Companys investments in limited partnerships and other
alternative investments which include hedge funds, mortgage and real estate funds, mezzanine debt
funds, and private equity and other funds. Hedge funds include investments in funds of funds and
direct funds. Mortgage and real estate funds consist of investments in funds whose assets consist
of mortgage loans, mortgage loan participations, mezzanine loans or other notes which may be below
investment grade, as well as equity real estate and real estate joint ventures. Mezzanine debt
funds include investments in funds whose assets consist of subordinated debt that often
incorporates equity-based options such as warrants and a limited amount of direct equity
investments. Private equity and other funds primarily consist of investments in funds whose assets
typically consist of a diversified pool of investments in small non-public businesses with high
growth potential.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Hedge funds |
|
$ |
435 |
|
|
|
21.4 |
% |
|
$ |
439 |
|
|
|
22.8 |
% |
Mortgage and real estate funds |
|
|
470 |
|
|
|
23.2 |
% |
|
|
406 |
|
|
|
21.2 |
% |
Mezzanine debt funds |
|
|
122 |
|
|
|
6.0 |
% |
|
|
132 |
|
|
|
6.9 |
% |
Private equity and other funds |
|
|
1,001 |
|
|
|
49.4 |
% |
|
|
941 |
|
|
|
49.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,028 |
|
|
|
100.0 |
% |
|
$ |
1,918 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities Unrealized Loss Aging
The total gross unrealized losses were $2.5 billion as of June 30, 2011, which is an improvement of
$1.0 billion, or 30%, from December 31, 2010 as interest rates declined and credit spreads
tightened. As of June 30, 2011, $1.3 billion of the gross unrealized losses were associated with
securities depressed less than 20% of cost or amortized cost.
The remaining $1.1 billion of gross unrealized losses were associated with securities depressed
greater than 20%, which includes $235 associated with securities depressed over 50% for twelve
months or more. These securities are backed primarily by commercial and residential real estate
that have market spreads that continue to be wider than the spreads at the securitys respective
purchase date. Although many of these securities improved in price during the quarter, the
unrealized losses remain largely due to the continued market and economic uncertainties surrounding
residential and certain commercial real estate. Based upon the Companys cash flow modeling and
current market and collateral performance assumptions, these securities have sufficient credit
protection levels to receive contractually obligated principal and interest payments. Also
included in the gross unrealized losses depressed greater than 20% are financial services
securities that have a floating-rate coupon and/or long-dated maturities.
As part of the Companys ongoing security monitoring process, the Company has reviewed its AFS
securities in an unrealized loss position and concluded that there were no additional impairments
as of June 30, 2011 and that these securities are temporarily depressed and are expected to recover
in value as the securities approach maturity or as real estate related market spreads continue to
improve. For these securities in an unrealized loss position where a credit impairment has not
been recorded, the Companys best estimate of expected future cash flows are sufficient to recover
the amortized cost basis of the security. Furthermore, the Company neither has an intention to
sell nor does it expect to be required to sell these securities. For further information regarding
the Companys impairment analysis, see Other-Than-Temporary Impairments in the Investment Credit
Risk Section of this MD&A.
The following table presents the Companys unrealized loss aging for AFS securities by length of
time the security was in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss [1] |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss [1] |
|
Three months or less |
|
|
806 |
|
|
$ |
6,867 |
|
|
$ |
6,727 |
|
|
$ |
(140 |
) |
|
|
1,503 |
|
|
$ |
17,431 |
|
|
$ |
16,783 |
|
|
$ |
(643 |
) |
Greater than three to six months |
|
|
142 |
|
|
|
636 |
|
|
|
600 |
|
|
|
(36 |
) |
|
|
115 |
|
|
|
732 |
|
|
|
690 |
|
|
|
(42 |
) |
Greater than six to nine months |
|
|
567 |
|
|
|
6,569 |
|
|
|
6,312 |
|
|
|
(252 |
) |
|
|
91 |
|
|
|
438 |
|
|
|
397 |
|
|
|
(41 |
) |
Greater than nine to eleven months |
|
|
49 |
|
|
|
484 |
|
|
|
461 |
|
|
|
(23 |
) |
|
|
42 |
|
|
|
185 |
|
|
|
169 |
|
|
|
(16 |
) |
Twelve months or more |
|
|
1,051 |
|
|
|
13,208 |
|
|
|
11,161 |
|
|
|
(2,009 |
) |
|
|
1,231 |
|
|
|
15,599 |
|
|
|
12,811 |
|
|
|
(2,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,615 |
|
|
$ |
27,764 |
|
|
$ |
25,261 |
|
|
$ |
(2,460 |
) |
|
|
2,982 |
|
|
$ |
34,385 |
|
|
$ |
30,850 |
|
|
$ |
(3,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Unrealized losses exclude the fair value of bifurcated embedded derivative features of
certain securities. Subsequent changes in fair value are recorded in net realized capital
gains (losses). |
102
The following tables present the Companys unrealized loss aging for AFS securities continuously
depressed over 20% by length of time (included in the table above).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
100 |
|
|
$ |
757 |
|
|
$ |
584 |
|
|
$ |
(173 |
) |
|
|
99 |
|
|
$ |
771 |
|
|
$ |
582 |
|
|
$ |
(189 |
) |
Greater than three to six months |
|
|
32 |
|
|
|
24 |
|
|
|
17 |
|
|
|
(7 |
) |
|
|
22 |
|
|
|
136 |
|
|
|
104 |
|
|
|
(32 |
) |
Greater than six to nine months |
|
|
38 |
|
|
|
223 |
|
|
|
161 |
|
|
|
(62 |
) |
|
|
28 |
|
|
|
234 |
|
|
|
169 |
|
|
|
(65 |
) |
Greater than nine to eleven months |
|
|
8 |
|
|
|
55 |
|
|
|
42 |
|
|
|
(13 |
) |
|
|
13 |
|
|
|
43 |
|
|
|
32 |
|
|
|
(11 |
) |
Twelve months or more |
|
|
269 |
|
|
|
2,426 |
|
|
|
1,541 |
|
|
|
(885 |
) |
|
|
390 |
|
|
|
4,361 |
|
|
|
2,766 |
|
|
|
(1,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
447 |
|
|
$ |
3,485 |
|
|
$ |
2,345 |
|
|
$ |
(1,140 |
) |
|
|
552 |
|
|
$ |
5,545 |
|
|
$ |
3,653 |
|
|
$ |
(1,892 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the Companys unrealized loss aging for AFS securities continuously
depressed over 50% by length of time (included in the tables above).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
Consecutive Months |
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
|
Items |
|
|
Cost |
|
|
Value |
|
|
Loss |
|
Three months or less |
|
|
23 |
|
|
$ |
39 |
|
|
$ |
17 |
|
|
$ |
(22 |
) |
|
|
20 |
|
|
$ |
27 |
|
|
$ |
12 |
|
|
$ |
(15 |
) |
Greater than three to six months |
|
|
10 |
|
|
|
9 |
|
|
|
4 |
|
|
|
(5 |
) |
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
(1 |
) |
Greater than six to nine months |
|
|
11 |
|
|
|
16 |
|
|
|
6 |
|
|
|
(10 |
) |
|
|
12 |
|
|
|
65 |
|
|
|
29 |
|
|
|
(36 |
) |
Greater than nine to eleven months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months or more |
|
|
65 |
|
|
|
354 |
|
|
|
119 |
|
|
|
(235 |
) |
|
|
94 |
|
|
|
722 |
|
|
|
260 |
|
|
|
(462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
109 |
|
|
$ |
418 |
|
|
$ |
146 |
|
|
$ |
(272 |
) |
|
|
127 |
|
|
$ |
816 |
|
|
$ |
302 |
|
|
$ |
(514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary Impairments
The following table presents the Companys impairments recognized in earnings by security type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
ABS |
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
10 |
|
|
$ |
5 |
|
CRE CDOs |
|
|
|
|
|
|
29 |
|
|
|
15 |
|
|
|
93 |
|
CMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
14 |
|
|
|
39 |
|
|
|
14 |
|
|
|
111 |
|
IOs |
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
Corporate |
|
|
3 |
|
|
|
6 |
|
|
|
21 |
|
|
|
6 |
|
Equity |
|
|
|
|
|
|
4 |
|
|
|
10 |
|
|
|
5 |
|
RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Alt-A |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
9 |
|
Sub-prime |
|
|
|
|
|
|
16 |
|
|
|
3 |
|
|
|
29 |
|
Other |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23 |
|
|
$ |
108 |
|
|
$ |
78 |
|
|
$ |
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and six months ended June 30, 2011
For the three and six months ended June 30, 2011, impairments recognized in earnings were comprised
of credit impairments of $16 and $61, respectively, impairments on equity securities of $0 and $10,
respectively, and securities that the Company intends to sell of $7 for both periods.
Credit impairments were primarily concentrated in structured securities associated with commercial
real estate, as well as direct private equity investments. The structured securities were impaired
primarily due to continued property-specific deterioration of the underlying collateral. The
Company calculated these impairments utilizing both a top down modeling approach and a
security-specific collateral review. The top down modeling approach used discounted cash flow
models that considered losses under current and expected future economic conditions. Assumptions
used over the current period included macroeconomic factors, such as a high unemployment rate, as
well as sector specific factors such as property value declines, commercial real estate delinquency
levels and changes in net operating income. The macroeconomic assumptions considered by the
Company did not materially change from the previous several quarters and, as such, the credit
impairments recognized for the three and six months ended June 30, 2011 were largely driven by
actual or expected collateral deterioration, largely as a result of the Companys security-specific
collateral review.
103
The security-specific collateral review is performed to estimate potential future losses. This
review incorporates assumptions about expected future collateral cash flows, including projected
rental rates and occupancy levels that varied based on property type and sub-market. The results
of the security-specific collateral review allowed the Company to estimate the expected timing of a
securitys first loss, if any, and the probability and severity of potential ultimate losses. The
Company then discounted these anticipated future cash flows at the securitys book yield prior to
impairment.
Included in corporate and equity security types were direct private equity investments that were
impaired primarily due to the likelihood of a disruption in contractual principal and interest
payments due to the restructuring of the debtors obligation. Impairments on equity securities
were related to preferred stock associated with these direct private equity investments.
Impairments on securities for which the Company has the intent to sell consisted of CMBS bonds as
market pricing continues to improve and the Company would like the ability to reduce its exposure
to certain commercial real estate investments.
In addition to the credit impairments recognized in earnings, the Company recognized non-credit
impairments in other comprehensive income of $8 and $72, respectively, for the three and six months
ended June 30, 2011, predominantly concentrated in CRE CDOs and RMBS. These non-credit impairments
represent the difference between fair value and the Companys best estimate of expected future cash
flows discounted at the securitys effective yield prior to impairment, rather than at current
market implied credit spreads. These non-credit impairments primarily represent increases in
market liquidity premiums and credit spread widening that occurred after the securities were
purchased, as well as a discount for variable-rate coupons which are paying less than at purchase
date. In general, larger liquidity premiums and wider credit spreads are the result of
deterioration of the underlying collateral performance of the securities, as well as the risk
premium required to reflect future uncertainty in the real estate market.
Future impairments may develop as the result of changes in intent to sell of specific securities or
if actual results underperform current modeling assumptions, which may be the result of, but are
not limited to, macroeconomic factors and security-specific performance below current expectations.
Continued improvement in commercial real estate property valuations will positively impact future
loss development, with future impairments driven by idiosyncratic security-specific risk.
Three and six months ended June 30, 2010
For the three and six months ended June 30, 2010, impairments recognized in earnings were comprised
of credit impairments of $104 and $255, respectively, primarily concentrated in CMBS bonds and CRE
CDOs due to continued property-specific deterioration of the underlying collateral and increased
delinquencies. Also included were impairments on equity securities of $4 and $5, respectively.
Valuation Allowances on Mortgage Loans
The following table presents (additions) and reductions to valuation allowances on mortgage loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Credit-related concerns |
|
$ |
26 |
|
|
$ |
(34 |
) |
|
$ |
26 |
|
|
$ |
(68 |
) |
Held for sale
Agricultural loans |
|
|
|
|
|
|
(5 |
) |
|
|
(3 |
) |
|
|
(10 |
) |
B-note participations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
Mezzanine loans |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26 |
|
|
$ |
(40 |
) |
|
$ |
23 |
|
|
$ |
(152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2011, valuation allowances on mortgage loans were
largely driven by the release of a reserve associated with the sale of a previously reserved for
mezzanine loan. Excluded from the table above are valuation allowances of $50 for the three and
six months ended June 30, 2011, respectively, of mortgage loans held-for-sale related to the
divestiture of Federal Trust Corporation. For further information regarding the divestiture of
Federal Trust Corporation, see Note 12 of the Notes to the Condensed Consolidated Financial
Statements. Continued improvement in commercial real estate property valuations will positively
impact future loss development, with future impairments driven by idiosyncratic loan-specific risk.
104
CAPITAL MARKETS RISK MANAGEMENT
The Company has a disciplined approach to managing risks associated with its capital markets and
asset/liability management activities. Investment portfolio management is organized to focus
investment management expertise on the specific classes of investments. The Company invests in
various types of investments including derivative instruments, in order to meet its portfolio
objectives. Derivative instruments are utilized in compliance with established Company policy and
regulatory requirements and are monitored internally and reviewed by senior management.
The Company utilizes a variety of over-the-counter and exchange traded derivative instruments as a
part of its overall risk management strategy, as well as to enter into replication transactions.
Derivative instruments are used to manage risk associated with interest rate, equity market, credit
spread, issuer default, price, and currency exchange rate risk or volatility. Replication
transactions are used as an economical means to synthetically replicate the characteristics and
performance of assets that would otherwise be permissible investments under the Companys
investment policies. For further information, see Note 5 of the Notes to Condensed Consolidated
Financial Statements.
Derivative activities are monitored and evaluated by the Companys compliance and risk management
teams and reviewed by senior management. In addition, the Company monitors counterparty credit
exposure on a monthly basis to ensure compliance with Company policies and statutory limitations.
The notional amounts of derivative contracts represent the basis upon which pay or receive amounts
are calculated and are not reflective of credit risk. For further information on the Companys use
of derivatives, see Note 5 of the Notes to Condensed Consolidated Financial Statements.
Market Risk
The Company is exposed to market risk associated with changes in interest rates, credit spreads
including issuer defaults, equity prices or market indices, and foreign currency exchange rates.
The Company is also exposed to credit and counterparty repayment risk. Derivative instruments are
utilized in compliance with established Company policy and regulatory requirements and are
monitored internally and reviewed by senior management. For further discussion of market risk, see
the Capital Markets Risk Management section of the MD&A in The Hartfords 2010 Form 10-K Annual
Report.
Interest Rate Risk
The Company manages its exposure to interest rate risk by constructing investment portfolios that
maintain asset allocation limits and asset/liability duration matching targets which may include
the use of derivatives. The Company analyzes interest rate risk using various models including
parametric models and cash flow simulation under various market scenarios of the liabilities and
their supporting investment portfolios, which may include derivative instruments. 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 2010 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 with
maturities primarily between zero and thirty years. For further discussion of interest rate risk
associated with the benefit obligations, see the Critical Accounting Estimates Section of the MD&A
under Pension and Other Postretirement Benefit Obligations and Note 17 of the Notes to Consolidated
Financial Statements in The Hartfords 2010 Form 10-K Annual Report. In addition, management
evaluates performance of certain Wealth Management products based on net investment spread which
is, in part, influenced by changes in interest rates. For further discussion, see the Global
Annuity, Life Insurance, and Retirement Plans sections of the MD&A.
A decline in interest rates results in certain mortgage-backed securities being more susceptible to
paydowns and prepayments. During such periods, the Company generally will not be able to reinvest
the proceeds at comparable yields. Lower interest rates will also likely result in lower net
investment income, increased hedging cost associated with variable annuities and, if declines are
sustained for a long period of time, it may subject the Company to reinvestment risks, higher
pension costs expense and possibly reduced profit margins associated with guaranteed crediting
rates on certain Wealth Management products. Conversely, the fair value of the investment
portfolio will increase when interest rates decline and the Companys interest expense will be
lower on its variable rate debt obligations.
An increase in interest rates from the current levels is generally a favorable development for the
Company. Rate increases are expected to provide additional net investment income, increase sales
of fixed rate Wealth Management investment products, reduce the cost of the variable annuity
hedging program, limit the potential risk of margin erosion due to minimum guaranteed crediting
rates in certain Wealth Management products and, if sustained, could reduce the Companys
prospective pension expense. Conversely, a rise in interest rates will reduce the fair value of
the investment portfolio, increase interest expense on the Companys variable rate debt obligations
and, if long-term interest rates rise dramatically within a six to twelve month time period,
certain Wealth Management businesses may be exposed to disintermediation risk. Disintermediation
risk refers to the risk that policyholders will surrender their contracts in a rising interest rate
environment requiring the Company to liquidate assets in an unrealized loss position. In
conjunction with the interest rate risk measurement and management techniques, certain of Wealth
Managements fixed income product offerings have market value adjustment provisions at contract
surrender. An increase in interest rates may also impact the Companys tax planning strategies and
in particular its ability to utilize tax benefits to offset certain previously recognized realized
capital losses.
105
Credit Risk
The Company is exposed to credit risk within our investment portfolio and through 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 the Enterprise Risk Management group and senior management. For further
discussion of credit risk, see the Credit Risk section of the MD&A in The Hartfords 2010 Form 10-K
Annual Report.
For further information on credit risk associated with derivatives, see the Investment Credit Risk
section of the MD&A.
The Company is also exposed to credit spread risk related to security market price and cash flows
associated with changes in credit spreads. Credit spread widening will reduce the fair value of
the investment portfolio and will increase net investment income on new purchases. If issuer
credit spreads increase significantly or for an extended period of time, it may result in higher
impairment losses. Credit spread tightening will reduce net investment income associated with new
purchases of fixed maturities and increase the fair value of the investment portfolio. For further
discussion of sectors most significantly impacted, see the Investment Credit Risk Section of the
MD&A. Also, for a discussion of the movement of credit spread impacts on the Companys statutory
financial results as it relates to the accounting and reporting for market value fixed annuities,
see the Capital Resources & Liquidity Section of the MD&A.
Variable Product Equity Risk
The Companys variable products are significantly influenced by the U.S., Japanese, and other
global equity markets. Increases or declines in equity markets impact certain assets and
liabilities related to the Companys variable products and the Companys earnings derived from
those products. The Companys variable products include variable annuity contracts, mutual funds,
and variable life insurance.
Generally, declines in equity markets will:
|
|
reduce the value of assets under management and the amount of fee income generated from
those assets; |
|
|
reduce the value of equity securities trading supporting the international variable
annuities, the related policyholder funds and benefits payable, and the amount of fee income
generated from those variable annuities; |
|
|
increase the liability for GMWB benefits resulting in realized capital losses; |
|
|
increase the value of derivative assets used to hedge product guarantees resulting in
realized capital gains; |
|
|
increase the costs of the hedging instruments we use in our hedging program; |
|
|
increase the Companys net amount at risk for GMDB and GMIB benefits; |
|
|
decrease the Companys actual gross profits, resulting in increased DAC amortization; |
|
|
increase the amount of required assets to be held backing variable annuity guarantees to
maintain required regulatory reserve levels and targeted risk based capital ratios; |
|
|
adversely affect customer sentiment toward equity-linked products, causing a decline in
sales; and |
|
|
decrease the Companys estimated future gross profits. See Estimated Gross Profits Used in
the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and
Other Universal Life-Type Contracts within the Critical Accounting Estimates section of the
MD&A for further information. |
Generally, increases in equity markets will reduce the value of derivative assets used to provide a
macro hedge on statutory surplus, resulting in realized capital losses during periods of market
appreciation.
GMWB
The majority of the Companys U.S. and U.K. variable annuities, and a small portion of Japans
variable annuities, include a GMWB rider. Declines in equity markets will generally increase the
Companys liability for the in-force GMWB riders. As of June 30, 2011, U.S. GMWB account value was
$42.5 billion and International GMWB account value was $2.5 billion. As of December 31, 2010, U.S.
GMWB account value was $44.8 billion and International GMWB account value was $2.5 billion. A GMWB
contract is in the money if the contract holders guaranteed remaining benefit (GRB) is greater
than their current account value. As of June 30, 2011 and December 31, 2010, 19% and 35%,
respectively, of all unreinsured U.S. GMWB contracts were in the money. For those contracts that
were in the money, the average contract was 10% and 9% in the money as of June 30, 2011 and
December 31, 2010, respectively. For U.S. GMWB contracts that were in the money, the Companys
net amount at risk (i.e. GRB less account value), after reinsurance, as of June 30, 2011 and
December 31, 2010, was $0.6 billion and $1.1 billion, respectively. For U.K. and Japan GMWB
contracts that were in the money, the Companys net amount at risk, after reinsurance, as of June
30, 2011 and December 31, 2010, was $80 and $73, respectively. However, the Company expects to
incur these payments in the future only if the policyholder has an in the money GMWB at their
death or their account value is reduced to a specified level, through contractually permitted
withdrawals and/or market declines. If the account value is reduced to the specified level, the
contract holder will receive an annuity equal to the remaining GRB. For the Companys life-time
GMWB products, this annuity can continue beyond the GRB. As the account value fluctuates with
equity market returns on a daily basis and the life-time GMWB payments can exceed the GRB, the
ultimate amount to be paid by the Company, if any, is uncertain and could be significantly more or
less than the Companys current carried liability. For additional information on the Companys
GMWB liability, see Note 4a of the Notes to Condensed Consolidated Financial Statements.
106
GMDB
The majority of the Companys U.S. variable annuity contracts include a GMDB rider. Declines in
the equity markets will increase the Companys liability for GMDB riders. The Companys total
gross exposure (i.e., before reinsurance) to U.S. GMDB as of June 30, 2011 and December 31, 2010 is
$8.6 billion and $10.7 billion, respectively. However, the Company will incur these payments in
the future only if the policyholder has an in the money GMDB at their death. As of June 30, 2011
and December 31, 2010, 63% and 70%, respectively, of all unreinsured U.S. GMDB contracts were in
the money. For those contracts that were in the money, the average contract was 11% and 12% in
the money as of June 30, 2011 and December 31, 2010, respectively. The Company reinsured 64% and
60% of these death benefit guarantees as of June 30, 2011 and December 31, 2010, respectively.
Under certain of these reinsurance agreements, the reinsurers exposure is subject to an annual
cap. The Companys net exposure (i.e., after reinsurance), is $3.1 billion and $4.3 billion, as of
June 30, 2011 and December 31, 2010, respectively.
In the second quarter of 2009, the Company suspended all new product sales in Japan. Prior to
that, the Company offered variable annuity products in Japan with a GMDB. For the in-force block
of Japan business, declines in equity markets, as well as a strengthening of the Japanese yen in
comparison to the U.S. dollar, the euro and other currencies will increase the Companys liability
for GMDB riders. This increase may be significant in extreme market scenarios. In general, the
GMDB riders entitle the policyholder to receive the original investment value at the date of death.
If the original investment value exceeds the account value upon death then the contract is in the
money. As of June 30, 2011 and December 31, 2010, substantially all of the unreinsured Japan GMDB
contracts were in the money. For those contracts that were in the money, the average contract
was 22% and 22% in the money as of June 30, 2011 and December 31, 2010, respectively. The
Companys total gross exposure (i.e., before reinsurance) to the GMDB offered in Japan is $8.5
billion and $8.8 billion as of June 30, 2011 and December 31, 2010, respectively. The Company
reinsured 15% and 14% of the GMDB to a third-party reinsurer as of June 30, 2011 and December 31,
2010, respectively. Under certain of these reinsurance agreements, the reinsurers exposure is
subject to an annual cap. The Companys net GMDB exposure (i.e. after reinsurance) is $7.2 billion
and $7.6 billion as of June 30, 2011 and December 31, 2010, respectively. Many policyholders with
a GMDB also have a GMWB in the U.S. or GMIB in Japan. Policyholders that have a product that offer
both guarantees can only receive the GMDB or the GMIB benefit in Japan or the GMDB or GMWB in the
U.S. For additional information on the Companys GMDB liability, see Note 7 of the Notes to
Condensed Consolidated Financial Statements.
GMIB
In the second quarter of 2009, the Company suspended all new product sales in Japan. Prior to
that, the Company offered variable annuity products in Japan with a GMIB. For GMIB contracts, in
general, the policyholder has the right to elect to annuitize benefits, beginning (for certain
products) on the tenth or fifteenth anniversary year of contract commencement, receive lump sum
payment of account value, or remain in the variable sub-account. For GMIB contracts, the
policyholder is entitled to receive the original investment value over a 10- to 15- year
annuitization period. A small percentage of the contracts will first become eligible to elect
annuitization beginning in 2013. The remainder of the contracts will first become eligible to
elect annuitization from 2014 to 2022. Because policyholders have various contractual rights to
defer their annuitization election, the period over which annuitization election can take place is
subject to policyholder behavior and therefore indeterminate. In addition, upon annuitization the
contractholder surrenders access to the account value and the account value is transferred to the
Companys general account where it is invested and the additional investment proceeds are used
towards payment of the original investment value. If the original investment value exceeds the
account value upon annuitization then the contract is in the money. As of June 30, 2011 and
December 31, 2010, substantially all of the Japan GMIB contracts were in the money. For those
contracts that were in the money, the average contract was 16% and 17% in the money as of June
30, 2011 and December 31, 2010, respectively. In addition, as of June 30, 2011, 68% of retained
net amount at risk is reinsured to an affiliate of The Hartford. For additional information on the
Companys GMIB liability, see Note 9 of the Notes to Condensed Consolidated Financial Statements.
The following table represents the timing of account values eligible for annuitization under the
Japan GMIB as of June 30, 2011, as well as the retained net amount at risk. The account values
reflect 100% annuitization at the earliest point allowed by the contract and no adjustments for
future market returns and policyholder behaviors. Future market returns, changes in the value of
the Japanese yen and policyholder behaviors will impact account values eligible for annuitization
in the years presented.
|
|
|
|
|
|
|
|
|
|
|
GMIB [1] |
|
($ in billions) |
|
Account Value |
|
|
Net Amount at Risk |
|
2013 |
|
$ |
0.3 |
|
|
$ |
|
|
2014 |
|
|
4.7 |
|
|
|
0.6 |
|
2015 |
|
|
7.6 |
|
|
|
1.4 |
|
2016 |
|
|
2.6 |
|
|
|
0.6 |
|
2017 |
|
|
2.9 |
|
|
|
0.7 |
|
2018 & beyond [2] |
|
|
7.2 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
Total |
|
$ |
25.3 |
|
|
$ |
4.8 |
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Excludes certain non-GMIB living benefits of $3.2 billion of account value and $0.6 billion of net amount at risk where
annuitization is based on attained age. |
|
[2] |
|
In 2018 & beyond, $2.7 billion of the $7.2 billion is primarily associated with account value that is eligible in 2021. |
107
Variable Product Equity Risk Management
Market Risk Exposures
The following table summarizes the broad Variable Annuity Guarantees offered by the Company and the
market risks to which the guarantee is most exposed from a U.S. GAAP accounting perspective.
|
|
|
|
|
Variable Annuity Guarantee [1] |
|
U.S. GAAP Treatment [1] |
|
Primary Market Risk Exposures [1] |
U.S. Variable Guarantees |
|
|
|
|
GMDB
|
|
Accumulation of the
portion of fees
required to cover
expected claims, less
accumulation of actual
claims paid
|
|
Equity Market Levels |
GMWB
|
|
Fair Value
|
|
Equity Market Levels / Implied
Volatility / Interest Rates |
For Life Component of GMWB
International
Variable Guarantees
|
|
Accumulation of the
portion of fees
required to cover
expected claims, less
accumulation of actual
claims paid
|
|
Equity Market Levels |
GMDB & GMIB
|
|
Accumulation of the
portion of fees
required to cover
expected claims, less
accumulation of actual
claims paid
|
|
Equity Market Levels / Interest
Rates / Foreign Currency |
GMWB
|
|
Fair Value
|
|
Equity Market Levels / Implied
Volatility / Interest Rates /Foreign
Currency |
GMAB
|
|
Fair Value
|
|
Equity Market Levels / Implied
Volatility / Interest Rates /Foreign
Currency |
|
|
|
[1] |
|
Each of these guarantees and the related U.S. GAAP accounting volatility will also be
influenced by actual and estimated policyholder behavior. |
Risk Management
The Company carefully analyzes GMDB, GMWB, GMIB, GMAB market risk exposures arising from equity
markets, interest rates, implied volatility, foreign currency exchange risk, and correlation
between these market risk exposures. The Company evaluates these risks both individually and in the
aggregate, to determine the financial risk of its products and to judge their potential impacts on
U.S. GAAP earnings, statutory surplus, and ultimately cash flow liability. The Company manages the
equity market, interest rate, implied volatility and foreign currency exchange risks embedded in
its products through reinsurance, customized derivatives, and dynamic hedging and macro hedging
programs. In addition, the Company has increased GMWB rider fees on in-force policies, as
contractually permitted. Depending upon competitors reactions with respect to products and related
rider charges, the Companys strategy of reducing product risk and increasing fees has and may
continue to result in a decline in market share.
The following table depicts the type of risk management strategy being used by the Company to
either partially or fully mitigate market risk exposures, displayed above, by variable annuity
guarantee as of June 30, 2011:
|
|
|
|
|
|
|
|
|
Variable Annuity Guarantee |
|
Reinsurance |
|
Customized Derivative |
|
Dynamic Hedging [1] |
|
Macro Hedging [2] |
GMDB
|
|
ü
|
|
|
|
|
|
ü |
GMWB
|
|
ü
|
|
ü
|
|
ü
|
|
ü |
For Life Component of GMWB
|
|
|
|
|
|
|
|
ü |
GMIB
|
|
|
|
|
|
|
|
ü |
GMAB
|
|
|
|
|
|
|
|
ü |
|
|
|
[1] |
|
Through the second quarter in 2011, the Company continued to maintain
a reduced level of dynamic hedge protection on GMWB while placing a
greater relative emphasis on the protection of statutory surplus
through the inclusion of a macro hedging program. This portion of the
GMWB hedge strategy may include derivatives with maturities of up to
10 years. U.S. GAAP fair value volatility will be driven by a reduced
level of dynamic hedge protection and macro program positions. |
|
[2] |
|
As described below, the Companys macro hedging program is not
designed to provide protection against any one variable annuity
guarantee program, but rather is a broad based hedge designed to
provide protection against multiple guarantees and market risks,
primarily focused on cash flows, statutory liability and surplus
volatility. |
108
Reinsurance
The Company uses reinsurance for a portion of contracts with GMWB riders prior to the third quarter
of 2003 and GMWB risks associated with a block of business sold between the third quarter of 2003
and the second quarter of 2006. The Company also uses reinsurance for a majority of the GMDB issued
in the U.S. and a portion of the GMDB issued in Japan.
Derivative Hedging Strategies
The Company maintains derivative hedging strategies for its product guarantee risk to meet
multiple, and in some cases, competing risk management objectives, including providing protection
against tail scenario market events, providing resources to pay product guarantee claims, and
minimizing U.S. GAAP earnings volatility, statutory surplus volatility and other economic metrics.
Customized Derivatives
The Company holds customized derivative contracts to provide protection from certain capital market
risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized
derivative contracts are based on policyholder behavior and a set of underlying fund mix
assumptions specified at the inception of the derivative contracts. The Company retains the risk
for differences between assumed and actual policyholder behavior and between the performance of the
actively managed funds underlying the separate accounts and their respective indices.
Dynamic Hedging
The Companys dynamic hedging program uses derivative instruments to provide protection against the
risks associated with the GMWB variable annuity product guarantees including equity market
declines, equity implied volatility, and declines in interest rates (See Market Risk on Statutory
Capital below). The Company uses hedging instruments including: interest rate futures and swaps,
variance swaps, S&P 500, NASDAQ and EAFE index put options and futures contracts. While the
Company actively manages this dynamic hedging program, increased U.S. GAAP earnings volatility may
result from factors including, but not limited to: policyholder behavior, capital markets,
divergence between the performance of the underlying funds and the hedging indices, changes in
hedging positions and the relative emphasis placed on various risk management objectives.
Macro Hedging
The Company’s macro hedging
program uses derivative instruments such as options, futures, swaps and
forwards on equities, interest rates, and currencies to provide protection
against the statutory tail scenario risk arising from U.S., U.K. and Japan
GMWB, GMDB, GMIB and GMAB liabilities, on the Company’s cash flows,
statutory surplus and the associated target RBC ratios (see Capital Resources
and Liquidity). These macro hedges cover some of the residual risks not
otherwise covered by specific dynamic hedging programs. Management assesses
this residual risk under various scenarios in designing and executing the macro
hedge program. During the second quarter, the Company has increased its
currency and equity hedging coverage. The macro hedge program, which is
designed to reduce statutory reserve and capital volatility, will result in
additional U.S. GAAP earnings volatility as changes in the fair value of the
macro hedge derivatives will not be closely aligned to changes in U.S. GAAP
liabilities, since the macro hedge derivatives are marked to market and the
non-fair value U.S. GAAP liabilities are not.
109
Based on the construction of the Companys derivative hedging program (both dynamic and macro
hedge), which can change based on capital market conditions, and changes in the hedge strategies,
underlying exposures and other factors, an independent change in the following capital market
factors is likely to have the impacts outlined in the table below. These sensitivities do not
capture the impact of elapsed time on liabilities or hedge assets. Each of the sensitivities set
forth below is estimated individually under the indicated level of market movement and from the
market levels at December 31, 2010 and June 30, 2011, and without consideration of any correlation
among the key assumptions. In addition, there are other factors, including changes to the
underlying hedging program, policyholder behavior and variation in underlying fund performance
relative to the hedged index, which could materially impact the GMWB liability. As a result, these
sensitivities do not necessarily reflect the financial impact from large shifts in the underlying
indices or when multiple risk factors are impacted. Actual net changes in the value of the GMWB
liability, the related dynamic hedging program derivative assets and the macro hedge program
derivative assets may vary materially from those calculated using
only the sensitivities disclosed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP Hedging Program Gain (Loss), Pre-Tax and DAC |
|
|
Net Impact |
|
|
|
|
|
Net Impact |
|
|
|
|
|
|
GMWB Liability |
|
|
|
|
|
GMWB Liability |
|
|
|
|
|
|
and Dynamic |
|
Macro Hedge |
|
Total Net |
|
and Dynamic |
|
Macro Hedge |
|
Total Net |
|
|
Hedge Program |
|
Program [5] |
|
Impact |
|
Hedge Program |
|
Program [5] |
|
Impact |
|
|
Expected for second quarter 2011 based on |
|
Expected for third quarter 2011 based on |
Capital Market Factor |
|
March 31, 2011 |
|
June 30, 2011 |
Equity markets
increase / decrease
1% [1] [2]
|
|
$(0) / $0
|
|
$(23) / $23
|
|
$ (23) / $23
|
|
$ (1) / $1
|
|
$(33) / $33
|
|
$(34) / $34 |
Volatility increases
/ decreases 1% [3]
|
|
$(23) / $23
|
|
$8 / $(8)
|
|
$ (15) / $15
|
|
$ (23) / $23
|
|
$8 / $(8)
|
|
$(15) / $15 |
Interest rates
increase / decrease
1 basis point [4]
|
|
$1 / $(1)
|
|
$(2) / $2
|
|
$(1) / $1
|
|
$ 2 / $(2)
|
|
$(3) / $3
|
|
$(1) / $1 |
Yen strengthens /weakens
1% versus
all other currencies
|
|
N/A
|
|
$48 / $(48)
|
|
$48 / $(48)
|
|
N/A
|
|
$53 / $(53)
|
|
$53 / $(53) |
|
|
|
[1] |
|
Represents the aggregate net impact of a 1% increase or decrease in broadly traded global equity indices. |
|
[2] |
|
Due to the structure of the macro hedging program, the increase in equity sensitivity was primarily due to additional
purchase of equity macro hedges in the second quarter of 2011. |
|
[3] |
|
Represents the aggregate net impact of a 1% increase or decrease in blended implied volatility that is generally skewed
towards longer durations for broadly traded global equity indices. |
|
[4] |
|
Represents the aggregate net impact of a 1 basis point parallel shift on the global LIBOR yield curve. |
For the three months ended
June 30, 2011, the net realized pre-tax gain of $4 related to the
Company’s variable annuity hedge programs was primarily comprised of the following:
• |
|
A net realized pre-tax gain of $41 associated with the macro hedge
program (including other currency hedges) primarily due to a general decline in
Japanese interest rates and a strengthened Yen, partially offset by the impact
of elapsed time from the hedges. |
• |
|
A net realized pre-tax loss of $37 related to the net of GMWB derivatives
primarily as a result of a general decrease in long-term interest rates. |
The table below provides a predicted
pre-tax net realized gain (loss) calculated using the Company’s
sensitivities expected for the second quarter disclosed above, as compared to
the actual net changes:
|
|
|
|
|
|
|
Predicted Earnings Impact |
|
|
|
Three Months Ended |
|
GMWB Net Liability and Dynamic and Global Macro Programs |
|
June 30, 2011 |
|
Equity markets flat |
|
$ |
|
|
Volatility increased approximately 1% |
|
|
(15 |
) |
Interest rates decreased approximately 30 basis points |
|
|
30 |
|
Yen strengthened approximately 3% against USD and 1% against euro |
|
|
96 |
|
|
|
|
|
Total implied pre-tax net realized gain [2] |
|
$ |
111 |
|
|
|
|
|
Actual reported pre-tax net realized gain [1] [2] |
|
$ |
4 |
|
|
|
|
|
|
|
|
[1] |
|
The actual reported pre-tax net realized gain of $4 includes a gain of
$6 from other FX hedges that are disclosed in the Other, net line of
the Net Realized Capital Gains (Losses) within Investment Results of
Key Performance Measures and Ratios of this MD&A. |
|
|
|
[2] |
|
For the three months ended June 30, 2011, the major factors to the
variance in the actual reported result and the implied first order
sensitivities calculation pre-tax net realized gain/(loss) were
attributed to the following: (i) the impact of elapsed time on short
duration hedge assets, (ii) hedging activities including timing of
rebalancing, trading, and changes in the composition of the underlying
hedging instruments, and (iii) partially offset by favorable
policyholder behavior. |
|
|
|
|
|
Additional factors attributed to the variance, the impact of which
cannot be incorporated in the calculation of these simplified
sensitivities, include non-parallel shifts in capital market factors,
specific market index and interest rate movements, interest rate and
currency volatilities, variation in the underlying fund performance
relative to the hedged indices, changes in The Hartfords own credit,
and changes in Non-U.S. GMWB fair value liabilities. This difference
may vary materially from quarter-to-quarter. |
110
Market Risk on Statutory Capital
Statutory surplus amounts and RBC ratios may increase or decrease in any period depending upon a
variety of factors and may be compounded in extreme scenarios or if multiple factors occur at the
same time. At times the impact of changes in certain market factors or a combination of multiple
factors on RBC ratios can be counterintuitive. Factors include:
|
|
In general, as equity market levels and interest rates decline, the amount and volatility
of both our actual potential obligation, as well as the related statutory surplus and capital
margin for death and living benefit guarantees associated with U.S. variable annuity contracts
can be materially negatively affected, sometimes at a greater than linear rate. Other market
factors that can impact statutory surplus, reserve levels and capital margin include
differences in performance of variable subaccounts relative to indices and/or realized equity
and interest rate volatilities. In addition, as equity market levels increase, generally
surplus levels will increase. RBC ratios will also tend to increase when equity markets
increase. However, as a result of a number of factors and market conditions, including the
level of hedging costs and other risk transfer activities, reserve requirements for death and
living benefit guarantees and RBC requirements could increase with rising equity markets,
resulting in lower RBC ratios. Non-market factors, which can also impact the amount and
volatility of both our actual potential obligation, as well as the related statutory surplus
and capital margin, include actual and estimated policyholder behavior experience as it
pertains to lapsation, partial withdrawals, and mortality. |
|
|
Similarly, for guaranteed benefits (GMDB, GMIB and GMWB) reinsured from our international
operations to our U.S. insurance subsidiaries, the amount and volatility of both our actual
potential obligation, as well as the related statutory surplus and capital margin can be
materially affected by a variety of factors, both market and non-market. Market factors
include declines in various equity market indices and interest rates, changes in value of the
yen versus other global currencies, difference in the performance of variable subaccounts
relative to indices, and increases in realized equity, interest rate, and currency
volatilities. Non-market factors include actual and estimated policyholder behavior experience
as it pertains to lapsation, withdrawals, mortality, and annuitization. Risk mitigation
activities, such as hedging, may also result in material and sometimes counterintuitive
impacts on statutory surplus and capital margin. Notably, as changes in these market and
non-market factors occur, both our potential obligation and the related statutory reserves
and/or required capital can increase or decrease at a greater than linear rate. |
|
|
As the value of certain fixed-income and equity securities in our investment portfolio
decreases, due in part to credit spread widening, statutory surplus and RBC ratios may
decrease. |
|
|
As the value of certain derivative instruments that do not get hedge accounting decreases,
statutory surplus and RBC ratios may decrease. |
|
|
The life insurance subsidiaries exposure to foreign currency exchange risk exists with
respect to non-U.S. dollar denominated assets and liabilities. Assets and liabilities
denominated in foreign currencies are accounted for at their U.S. dollar equivalent values
using exchange rates at the balance sheet date. As foreign currency exchange rates vary in
comparison to the U.S. dollar, the remeasured value of those non-dollar denominated assets or
liabilities will also vary, causing an increase or decrease to statutory surplus. |
|
|
Our statutory surplus is also impacted by widening credit spreads as a result of the
accounting for the assets and liabilities in our fixed market value adjusted (MVA)
annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded
at fair value. In determining the statutory reserve for the fixed MVA annuities, we are
required to use current crediting rates in the U.S. and Japanese LIBOR in Japan. In many
capital market scenarios, current crediting rates in the U.S. are highly correlated with
market rates implicit in the fair value of statutory separate account assets. As a result,
the change in statutory reserve from period to period will likely substantially offset the
change in the fair value of the statutory separate account assets. However, in periods of
volatile credit markets, such as we have experienced, actual credit spreads on investment
assets may increase sharply for certain sub-sectors of the overall credit market, resulting in
statutory separate account asset market value losses. As actual credit spreads are not fully
reflected in the current crediting rates in the U.S. or Japanese LIBOR in Japan, the
calculation of statutory reserves will not substantially offset the change in fair value of
the statutory separate account assets resulting in reductions in statutory surplus. This has
resulted and may continue to result in the need to devote significant additional capital to
support the product. |
|
|
With respect to our fixed annuity business, sustained low interest rates may result in a
reduction in statutory surplus and an increase in National Association of Insurance
Commissioners (NAIC) required capital. |
Most of these factors are outside of the 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.
The Company has reinsured approximately 20% of its risk associated with U.S. GMWB and 63% of its
risk associated with the aggregate U.S. GMDB exposure. These reinsurance agreements serve to
reduce the Companys exposure to changes in the statutory reserves and the related capital and RBC
ratios associated with changes in the capital market. The Company also continues to explore other
solutions for mitigating the capital market risk effect on surplus, such as internal and external
reinsurance solutions, modifications to our hedging program, changes in product design, increasing
pricing and expense management.
111
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.
Further downgrades to the credit ratings of The Hartfords insurance operating companies may have
adverse implications for its use of derivatives including those used to hedge benefit guarantees of
variable annuities. In some cases, further downgrades may give derivative counterparties the
unilateral contractual right to cancel and settle outstanding derivative trades or require
additional collateral to be posted. In addition, further downgrades may result in counterparties
becoming unwilling to engage in additional over-the-counter (OTC) derivatives or may require
collateralization before entering into any new trades. This will restrict the supply of derivative
instruments commonly used to hedge variable annuity guarantees, particularly long-dated equity
derivatives and interest rate swaps. Under these circumstances, The Hartfords operating
subsidiaries could conduct hedging activity using a combination of cash and exchange-traded
instruments, in addition to using the available OTC derivatives.
Foreign Currency Exchange Risk
The Companys foreign currency exchange risk is related to nonU.S. dollar denominated
investments, which primarily consist of fixed maturity investments, the investment in and net
income of the Japanese and U.K. operations, and non-U.S. dollar denominated liability contracts,
including its GMDB, GMAB, GMWB and GMIB benefits associated with its Japanese and U.K. variable
annuities, and a yen denominated individual fixed annuity product. Also, foreign currency exchange
rate risk is inherent when the Japan policyholders variable annuity sub-account investments are
non-Japanese yen denominated securities while the related GMDB and GMIB guarantees are effectively
yen-denominated. A portion of the Companys foreign currency exposure is mitigated through the use
of derivatives.
Fixed Maturity Investments
The risk associated with the non-U.S. dollar denominated fixed maturities relates to potential
decreases in value and income resulting from unfavorable changes in foreign exchange rates. In
order to manage its currency exposures, the Company enters into foreign currency swaps and forwards
to hedge the variability in cash flows as fair value associated with certain foreign denominated
fixed maturities declines. These foreign currency swap and forward agreements are structured to
match the foreign currency cash flows of the hedged foreign denominated securities.
Liabilities
The Company issued non-U.S. dollar denominated funding agreement liability contracts, and hedges
the foreign currency risk associated with these liability contracts with currency rate swaps.
The yen based fixed annuity product was written by Hartford Life Insurance K.K. (HLIKK), a
wholly-owned Japanese subsidiary of Hartford Life, Inc. (HLI), and subsequently reinsured to
Hartford Life Insurance Company, a U.S. dollar based wholly-owned indirect subsidiary of HLI. In
2009, the Company suspended new sales of the Japan business. The underlying investment involves
investing in U.S. securities markets, which offer favorable credit spreads. The yen denominated
fixed annuity product (yen fixed annuities) is recorded in the consolidated balance sheets with
invested assets denominated in dollars while policyholder liabilities are denominated in yen and
converted to U.S. dollars based upon the June 30, yen to U.S. dollar spot rate. The difference
between U.S. dollar denominated investments and yen denominated liabilities exposes the Company to
currency risk. The Company manages this currency risk associated with the yen fixed annuities
primarily with pay variable U.S. dollar and receive fixed yen currency swaps.
Prior to 2010, the Company had also issued guaranteed benefits (GMDB and GMIB) that were reinsured
from HLIKK to the U.S. insurance subsidiaries. During 2010, the Company entered into foreign
currency forward contracts that convert U.S. dollars to yen in order to hedge the foreign currency
risk due to U.S. dollar denominated assets backing the yen denominated liabilities. The Company
also enters into foreign currency forward contracts that convert euros to yen in order to
economically hedge the risk arising when the Japan policyholders variable annuity sub-accounts are
invested in non-Japanese yen denominated securities while the related GMDB and GMIB guarantees are
effectively yen-denominated.
112
CAPITAL RESOURCES AND LIQUIDITY
The following section discusses the overall financial strength of The Hartford and its insurance
operations including their ability to generate cash flows from each of their business segments,
borrow funds at competitive rates and raise new capital to meet operating and growth needs over the
next twelve months.
Liquidity Requirements and Sources of Capital
The Hartford Financial Services Group, Inc. (Holding Company)
The liquidity requirements of the holding company of The Hartford Financial Services Group, Inc.
(HFSG Holding Company) have been and will continue to be met by HFSG Holding Companys fixed
maturities, short-term investments and cash of $2.2 billion at June 30, 2011, dividends from its
insurance operations, as well as the issuance of common stock, debt or other capital securities and
borrowings from its credit facilities. Expected liquidity requirements of the HFSG Holding Company
for the next twelve months include interest on debt of approximately $490, maturity of senior notes
of $400, common stockholder dividends, subject to the discretion of the Board of Directors, of
approximately $180, and preferred stock dividends of approximately $42.
In addition, in 2010 The Hartford entered into an intercompany liquidity agreement that allows for
short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2.0
billion for liquidity and other general corporate purposes. The Connecticut Insurance Department
granted approval for the Connecticut domiciled insurance companies that are parties to the
agreement to treat receivables from a parent, including the HFSG Holding Company, as admitted
assets for statutory accounting purposes.
Dividends
On May 19, 2011, The Hartfords Board of Directors declared a quarterly dividend of $0.10 per
common share payable on July 1, 2011 to common shareholders of record as of June 1, 2011 and a
dividend of $18.125 on each share of Series F preferred stock payable on July 1, 2011 to
shareholders of record as of June 15, 2011.
On July 27, 2011, The Hartfords Board of Directors declared a quarterly dividend of $0.10 per
common share payable on October 3, 2011 to common shareholders of record as of September 1, 2011
and a dividend of $18.125 on each share of Series F preferred stock payable on October 3, 2011 to
shareholders of record as of September 15, 2011.
Pension Plans and Other Postretirement Benefits
While the Company has significant discretion in making voluntary contributions to its 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 and further amended by the Worker, Retiree,
and Employer Recovery Act of 2008, and Internal Revenue Code regulations mandate minimum
contributions in certain circumstances. The Company does not have a required minimum funding
contribution for the Plan for 2011 and the funding requirements for all of its pension plans are
expected to be immaterial. The Company contributed approximately $120 to its pension plans and
other postretirement plans in July 2011, and presently anticipates contributing approximately $80
during the remainder of 2011, based upon certain economic and business assumptions. These
assumptions include, but are not limited to, equity market performance, changes in interest rates
and the Companys other capital requirements.
Dividends from Insurance Subsidiaries
Dividends to the HFSG Holding Company from its insurance subsidiaries are restricted. The payment
of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws
of Connecticut. These laws require notice to and approval by the state insurance commissioner for
the declaration or payment of any dividend, which, together with other dividends or distributions
made within the preceding twelve months, exceeds the greater of (i) 10% of the 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 Holding Company 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 $1.5 billion in dividends to HFSG Holding Company
in 2011 without prior approval from the applicable insurance commissioner. The Companys life
insurance subsidiaries are permitted to pay up to a maximum of approximately $83 in dividends to
HLI in 2011 without prior approval from the applicable insurance commissioner. The aggregate of
these amounts, net of amounts required by HLI, is the maximum the insurance subsidiaries could pay
to HFSG Holding Company in 2011 without prior approval from the applicable insurance commissioner.
For the six months ended June 30, 2011, HFSG Holding Company and HLI received no dividends from the
life insurance subsidiaries, and HFSG Holding Company received $631 in dividends from its
property-casualty insurance subsidiaries.
113
Other Sources of Capital for the HFSG Holding Company
The Hartford endeavors to maintain a capital structure that provides financial and operational
flexibility to its insurance subsidiaries, ratings that support its competitive position in the
financial services marketplace (see the Ratings section below for further discussion), and
shareholder returns. As a result, the Company may from time to time raise capital from the
issuance of stock, debt or other capital securities and is continuously evaluating strategic
opportunities. The issuance of common stock, debt or other capital securities could result in the
dilution of shareholder interests or reduced net income due to additional interest expense.
Shelf Registrations
On August 4, 2010, The Hartford filed with the Securities and Exchange Commission (the SEC) an
automatic shelf registration statement (Registration No. 333-168532) for the potential offering and
sale of debt and equity securities. The registration statement allows for the following types of
securities to be offered: debt securities, junior subordinated debt securities, preferred stock,
common stock, depositary shares, warrants, stock purchase contracts, and stock purchase units. In
that The Hartford is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act
of 1933, the registration statement went effective immediately upon filing and The Hartford may
offer and sell an unlimited amount of securities under the registration statement during the
three-year life of the shelf.
Contingent Capital Facility
The Hartford has a put option agreement (the Put Option Agreement) with Glen Meadow ABC Trust, a
Delaware statutory trust (the ABC Trust), and a 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 in a maximum aggregate principal
amount not to exceed $500.
Commercial Paper and Revolving Credit Facility
The table below details the Companys short-term debt programs and the applicable balances
outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Available As of |
|
|
Outstanding As of |
|
|
|
Effective |
|
|
Expiration |
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
December 31, |
|
Description |
|
Date |
|
|
Date |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Commercial Paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Hartford |
|
|
11/10/86 |
|
|
|
N/A |
|
|
$ |
2,000 |
|
|
$ |
2,000 |
|
|
$ |
|
|
|
$ |
|
|
Revolving Credit Facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5-year revolving credit facility |
|
|
8/9/07 |
|
|
|
8/9/12 |
|
|
|
1,900 |
|
|
|
1,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Paper
and Revolving Credit Facility |
|
|
|
|
|
|
|
|
|
$ |
3,900 |
|
|
$ |
3,900 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The revolving credit facility provides for up to $1.9 billion of unsecured credit through August 9,
2012. Of the total availability under the revolving credit facility, up to $100 is available to
support letters of credit issued on behalf of The Hartford or other subsidiaries of The Hartford.
Under the revolving credit facility, the Company must maintain a minimum level of consolidated net
worth of $12.5 billion. At June 30, 2011, the consolidated net worth of the Company as calculated
in accordance with the terms of the credit facility was $23 billion. The definition of
consolidated net worth under the terms of the credit facility, excludes AOCI and includes the
Companys outstanding junior subordinated debentures and perpetual preferred securities, net of
discount. In addition, the Company must not exceed a maximum ratio of debt to capitalization of
40%. At June 30, 2011, as calculated in accordance with the terms of the credit facility, the
Companys debt to capitalization ratio was 17%. Quarterly, the Company certifies compliance with
the financial covenants for the syndicate of participating financial institutions. As of June 30,
2011, the Company was in compliance with all such covenants.
The Hartfords Japan operations also maintain two lines of credit in support of the subsidiary
operations. Both lines of credit are in the amount of $62, or ¥5 billion, and individually have
expiration dates of September 30, 2011 and January 4, 2012.
Derivative Commitments
Certain of the Companys derivative agreements contain provisions that are tied to the financial
strength ratings of the individual legal entity that entered into the derivative agreement as set
by nationally recognized statistical rating agencies. If the legal entitys financial strength
were to fall below certain ratings, the counterparties to the derivative agreements could demand
immediate and ongoing full collateralization and in certain instances demand immediate settlement
of all outstanding derivative positions traded under each impacted bilateral agreement. The
settlement amount is determined by netting the derivative positions transacted under each
agreement. If the termination rights were to be exercised by the counterparties, it could impact
the legal entitys ability to conduct hedging activities by increasing the associated costs and
decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair
value of all derivative instruments with credit-risk-related contingent features that are in a net
liability position as of June 30, 2011, is $552. Of this $552 the legal entities have posted
collateral of $487 in the normal course of business. Based on derivative market values as of June
30, 2011, a downgrade of one level below the current financial strength ratings by either Moodys
or S&P could require approximately an additional $63 to be posted as collateral. Based on
derivative market values as of June 30, 2011, a downgrade by either Moodys or S&P of two levels
below the legal entities current financial strength ratings could require approximately an
additional $91 of assets to be posted as collateral. These collateral amounts could change as
derivative market values change, as a result of changes in our hedging activities or to the extent
changes in contractual terms are negotiated. The nature of the collateral that we would post, if
required, would be primarily in the form of U.S. Treasury bills and U.S. Treasury notes.
The aggregate notional amount of derivative relationships that could be subject to immediate
termination in the event of rating agency downgrades to either BBB+ or Baa1 as of June 30, 2011 was
$15.3 billion with a corresponding fair value of $261. The notional and fair value amounts include
a customized GMWB derivative with a notional amount of $4.8 billion and a fair value of $105, for
which the Company has a contractual right to make a collateral payment in the amount of
approximately $54 to prevent its termination.
114
Insurance Operations
Current and expected patterns of claim frequency and severity or surrenders may change from period
to period but continue to be within historical norms and, therefore, the Companys insurance
operations current liquidity position is considered to be sufficient to meet anticipated demands
over the next twelve months, including any obligations related to the Companys restructuring
activities. For a discussion and tabular presentation of the Companys current contractual
obligations by period, refer to Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations within the Capital Resources and Liquidity section of the MD&A included in The
Hartfords 2010 Form 10-K Annual Report.
The principal sources of operating funds are premiums, fees earned from assets under management and
investment income, while investing cash flows originate from maturities and sales of invested
assets. The primary uses of funds are to pay claims, claim adjustment expenses, commissions and
other underwriting expenses, to purchase new investments and to make dividend payments to the HFSG
Holding Company.
The Companys insurance operations consist of property and casualty insurance products
(collectively referred to as Property & Casualty Operations) and life insurance products
(collectively referred to as Life Operations).
Property & Casualty Operations
Property & Casualty Operations holds fixed maturity securities including a significant short-term
investment position (securities with maturities of one year or less at the time of purchase) to
meet liquidity needs.
The following table summarizes Property & Casualty Operations fixed maturities, short-term
investments, and cash, as of June 30, 2011:
|
|
|
|
|
Fixed maturities |
|
$ |
25,286 |
|
Short-term investments |
|
|
1,022 |
|
Cash |
|
|
255 |
|
Less: Derivative collateral |
|
|
(201 |
) |
|
|
|
|
Total |
|
$ |
26,362 |
|
|
|
|
|
Liquidity requirements that are unable to be funded by Property & Casualty Operations short-term
investments would be satisfied with current operating funds, including premiums received or through
the sale of invested assets. A sale of invested assets could result in significant realized
losses.
Life Operations
Life Operations total general account contractholder obligations are supported by $71 billion of
cash and total general account invested assets, excluding equity securities, trading, which
includes a significant short-term investment position to meet liquidity needs.
The following table summarizes Operations fixed maturities, short-term investments, and cash, as
of June 30, 2011:
|
|
|
|
|
Fixed maturities |
|
$ |
54,048 |
|
Short-term investments |
|
|
5,565 |
|
Cash |
|
|
1,638 |
|
Less: Derivative collateral |
|
|
(1,833 |
) |
Cash associated with Japan variable annuities |
|
|
(721 |
) |
|
|
|
|
Total |
|
$ |
58,697 |
|
|
|
|
|
Capital resources available to fund liquidity, upon contract holder surrender, are a function of
the legal entity in which the liquidity requirement resides. Generally, obligations of Group
Benefits will be funded by Hartford Life and Accident Insurance Company; Global Annuity and Life
Insurance obligations will be generally funded by both Hartford Life Insurance Company and Hartford
Life and Annuity Insurance Company; obligations of Retirement Plans and institutional investment
products will be generally funded by Hartford Life Insurance Company; and obligations of the
Companys international annuity subsidiaries will be generally funded by the legal entity in the
country in which the obligation was generated.
115
|
|
|
|
|
|
|
As of |
|
Contractholder Obligations |
|
June 30, 2011 |
|
Total Life contractholder obligations |
|
$ |
252,887 |
|
Less: Separate account assets [1] |
|
|
(157,485 |
) |
International statutory separate accounts [1] |
|
|
(32,237 |
) |
|
|
|
|
General account contractholder obligations |
|
$ |
63,165 |
|
|
|
|
|
|
|
|
|
|
Composition of General Account Contractholder Obligations |
|
|
|
|
Contracts without a surrender provision and/or fixed payout dates [2] |
|
$ |
28,765 |
|
Fixed MVA annuities [3] |
|
|
10,151 |
|
International fixed MVA annuities |
|
|
2,644 |
|
Guaranteed investment contracts (GIC) [4] |
|
|
767 |
|
Other [5] |
|
|
20,838 |
|
|
|
|
|
General account contractholder obligations |
|
$ |
63,165 |
|
|
|
|
|
|
|
|
[1] |
|
In the event customers elect to surrender separate account assets or
international statutory separate accounts, Life Operations will use
the proceeds from the sale of the assets to fund the surrender, and
Life Operations liquidity position will not be impacted. In many
instances Life Operations will receive a percentage of the surrender
amount as compensation for early surrender (surrender charge),
increasing Life Operations liquidity position. In addition, a
surrender of variable annuity separate account or general account
assets (see below) will decrease Life Operations obligation for
payments on guaranteed living and death benefits. |
|
[2] |
|
Relates to contracts such as payout annuities or institutional notes,
other than guaranteed investment products with an MVA feature
(discussed below) or surrenders of term life, group benefit contracts
or death and living benefit reserves for which surrenders will have no
current effect on Life Operations liquidity requirements. |
|
[3] |
|
Relates to annuities that are held in a statutory separate account,
but under U.S. GAAP are recorded in the general account as Fixed MVA
annuity contract holders are subject to the Companys credit risk. In
the statutory separate account, Life Operations is required to
maintain invested assets with a fair value equal to the MVA surrender
value of the Fixed MVA contract. In the event assets decline in value
at a greater rate than the MVA surrender value of the Fixed MVA
contract, Life Operations is required to contribute additional capital
to the statutory separate account. Life Operations will fund these
required contributions with operating cash flows or short-term
investments. In the event that operating cash flows or short-term
investments are not sufficient to fund required contributions, the
Company may have to sell other invested assets at a loss, potentially
resulting in a decrease in statutory surplus. As the fair value of
invested assets in the statutory separate account are generally equal
to the MVA surrender value of the Fixed MVA contract, surrender of
Fixed MVA annuities will have an insignificant impact on the liquidity
requirements of Life Operations. |
|
[4] |
|
GICs are subject to discontinuance provisions which allow the
policyholders to terminate their contracts prior to scheduled maturity
at the lesser of the book value or market value. Generally, the
market value adjustment reflects changes in interest rates and credit
spreads. As a result, the market value adjustment feature in the GIC
serves to protect the Company from interest rate risks and limit Life
Operations liquidity requirements in the event of a surrender. |
|
[5] |
|
Surrenders of, or policy loans taken from, as applicable, these
general account liabilities, which include the general account option
for Global Annuitys individual variable annuities and Life
Insurances variable life contracts, the general account option for
Retirement Plans annuities and universal life contracts sold by Life
Insurance may be funded through operating cash flows of Life
Operations, available short-term investments, or Life Operations may
be required to sell fixed maturity investments to fund the surrender
payment. Sales of fixed maturity investments could result in the
recognition of significant realized losses and insufficient proceeds
to fully fund the surrender amount. In this circumstance, Life
Operations may need to take other actions, including enforcing certain
contract provisions which could restrict surrenders and/or slow or
defer payouts. |
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements
There have been no material changes to the Companys off-balance sheet arrangements and aggregate
contractual obligations since the filing of the Companys 2010 Form 10-K Annual Report.
116
Capitalization
The capital structure of The Hartford as of June 30, 2011 and December 31, 2010 consisted of debt
and stockholders equity, summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Short-term debt (includes current maturities of long-term debt) |
|
$ |
400 |
|
|
$ |
400 |
|
|
|
|
|
Long-term debt |
|
|
6,214 |
|
|
|
6,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt [1] |
|
|
6,614 |
|
|
|
6,607 |
|
|
|
|
|
Stockholders equity excluding accumulated other comprehensive
loss, net of tax (AOCI) |
|
|
21,752 |
|
|
|
21,312 |
|
|
|
2 |
% |
AOCI, net of tax |
|
|
(77 |
) |
|
|
(1,001 |
) |
|
|
92 |
% |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
21,675 |
|
|
$ |
20,311 |
|
|
|
7 |
% |
Total capitalization including AOCI |
|
$ |
28,289 |
|
|
$ |
26,918 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
Debt to stockholders equity |
|
|
31 |
% |
|
|
33 |
% |
|
|
|
|
Debt to capitalization |
|
|
23 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Total debt of the Company excludes $368 and $382 of consumer notes as of June 30, 2011 and
December 31, 2010, respectively, and $25 of Federal Home Loan Bank advances recorded in other
liabilities as of June 30, 2011 and December 31, 2010. |
The Hartfords total capitalization increased $1.4 billion, or 5%, from December 31, 2010 to June
30, 2011 due to improvements in AOCI and increases in stockholders equity, excluding AOCI. AOCI,
net of tax, improved primarily due to decreases in net unrealized losses on available-for-sale
securities of $847 primarily as a result of improved security valuations largely due to declining
interest rates and credit spread tightening. The increase in stockholders equity, excluding AOCI,
was primarily due to net income of $535.
For additional information on equity and AOCI, net of tax, see Notes 15 and 16, respectively, of
the Notes to Consolidated Financial Statements in The Hartfords 2010 Form 10-K Annual Report.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Net cash provided by operating activities |
|
$ |
964 |
|
|
$ |
1,200 |
|
Net cash provided by (used for) investing activities |
|
$ |
(807 |
) |
|
$ |
1,600 |
|
Net cash used for financing activities |
|
$ |
(319 |
) |
|
$ |
(1,967 |
) |
Cash end of period |
|
$ |
1,898 |
|
|
$ |
2,998 |
|
Cash from operating activities compared to the prior year period decreased as a result of lower net
investment income on available-for-sale securities, excluding limited partnerships and other
alternative investments.
Cash used for investing activities in 2011 primarily relates to net purchases of mortgage loans of
$847, net purchases of fixed maturities, fair value option of $533 and net payments on derivatives
of $300, partially offset by net proceeds of available-for-sale securities of $711. Cash provided
by investing activities in 2010 primarily relates to $1.2 billion of net proceeds from sales of
mortgage loans and net receipts on derivatives of $584, partially offset by $446 of net purchases
of available-for-sale securities.
Cash used for financing activities in 2011 consists primarily of $212 of net outflows on investment
and universal life-type contracts. In the comparable prior period of 2010, cash used for financing
activities was primarily related to the redemption of preferred stock issued to the U.S. Treasury
of $3.4 billion, repayments of consumer notes of $684, repayment of $275 in senior notes in June
2010, and net outflows on investment and universal life-type contracts. Partially offsetting the
outflows in 2010 were proceeds from the issuance of $1.1 billion in aggregate senior notes,
issuance of common stock under a public offering of $1.6 billion and issuance of mandatory
convertible preferred stock of $556.
Operating cash flows for the six months ended June 30, 2011 and 2010 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 of the MD&A under Market Risk above.
117
Ratings
Ratings impact the Companys cost of borrowing and its ability to access financing and are an
important factor in establishing competitive position in the insurance and financial services
marketplace. There can be no assurance that the 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 Companys cost of borrowing and ability to access financing, as well as the level
of revenues or the persistency of its business may be adversely impacted.
The following table summarizes The Hartfords significant member companies financial ratings from
the major independent rating organizations as of July 28, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M. Best |
|
|
Fitch |
|
|
Standard & Poors |
|
|
Moodys |
|
Insurance Financial Strength Ratings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hartford Fire Insurance Company |
|
|
A |
|
|
|
A+ |
|
|
|
A |
|
|
|
A2 |
|
Hartford Life Insurance Company |
|
|
A |
|
|
|
A- |
|
|
|
A |
|
|
|
A3 |
|
Hartford Life and Accident Insurance Company |
|
|
A |
|
|
|
A- |
|
|
|
A |
|
|
|
A3 |
|
Hartford Life and Annuity Insurance Company |
|
|
A |
|
|
|
A- |
|
|
|
A |
|
|
|
A3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Ratings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Hartford Financial Services Group, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt |
|
|
bbb+ |
|
|
|
BBB- |
|
|
|
BBB |
|
|
|
Baa3 |
|
Commercial paper |
|
|
AMB-2 |
|
|
|
F2 |
|
|
|
A-2 |
|
|
|
P-3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Statutory Surplus
The table below sets forth statutory surplus for the Companys insurance companies. The statutory
surplus amount as of December 31, 2010 in the table below is based on actual statutory filings with
the applicable regulatory authorities. The statutory surplus amount as of June 30, 2011 is an
estimate, as the second quarter 2011 statutory filings have not yet been made.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries |
|
$ |
7,951 |
|
|
$ |
7,731 |
|
Property and casualty insurance subsidiaries |
|
|
7,627 |
|
|
|
7,721 |
|
|
|
|
|
|
|
|
Total |
|
$ |
15,578 |
|
|
$ |
15,452 |
|
|
|
|
|
|
|
|
Total statutory capital and surplus increased by $126 primarily due to a combined statutory net
income of $312 for the property and casualty insurance subsidiaries and U.S. life insurance
subsidiaries, including domestic captive insurance subsidiaries, a combined net impact of
unrealized gains of approximately $189 for the property and casualty insurance subsidiaries and
U.S. life insurance subsidiaries, including domestic captive insurance subsidiaries, and a $252
increase in the admitted deferred tax asset for the U.S. life insurance subsidiaries, including
domestic captive insurance subsidiaries, offset by dividends to the HFSG Holding Company of $631.
The Company also holds regulatory capital and surplus for its operations in Japan.
Under the accounting practices and procedures governed by Japanese regulatory authorities, the Companys statutory capital and surplus was $1.3
billion as of June 30, 2011 and December 31, 2010.
Contingencies
Legal Proceedings For a discussion regarding contingencies related to The Hartfords legal
proceedings, please see the information contained under Litigation in Note 9 of the Notes to
Condensed Consolidated Financial Statements, which is incorporated herein by reference.
118
Legislative Developments
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) was
enacted on July 21, 2010, mandating changes to the regulation of the financial services industry.
The Dodd-Frank Act may affect our operations and governance in ways that could adversely affect our
financial condition and results of operations.
In particular, the Dodd-Frank Act vests a newly created Financial Services Oversight Council with
the power to designate systemically important institutions, which will be subject to special
regulatory supervision and other provisions intended to prevent, or mitigate the impact of, future
disruptions in the U.S. financial system. Systemically important institutions are limited to large
bank holding companies and nonbank financial companies that are so important that their potential
failure could pose a threat to the financial stability of the United States. If we are
designated as a systemically important institution, we could be subject to higher capital
requirements and additional regulatory oversight imposed by The Federal Reserve, as well as to
post-event assessments imposed by the Federal Deposit Insurance Corporation (FDIC) to recoup the
costs associated with the orderly liquidation of other systemically important institutions in the
event one or more such institutions fails. Further, the FDIC is authorized to petition a state
court to commence an insolvency proceeding to liquidate an insurance company that fails in the
event the insurers state regulator fails to act. Other provisions will require central clearing
of, and/or impose new margin and capital requirements on, derivatives transactions, which we expect
will increase the costs of our hedging program.
While we expect to file an application to deregister as a savings and loan holding company in
connection with the closing of the sale of FTC in the fourth quarter of 2011, a number of
provisions of the Dodd-Frank Act affect us due to our current status as a savings and loan holding
company. For example, because of our status as a savings and loan holding company or if we are
designated a systemically important institution, the Dodd-Frank Act may restrict us from sponsoring
and investing in private equity and hedge funds, which would limit our discretion in managing our
general account. The Dodd-Frank Act will also impose new minimum capital standards on a
consolidated basis for holding companies that, like us, control insured depository institutions, as
well as additional regulation of compensation.
Other provisions in the Dodd-Frank Act that may impact us, irrespective of whether or not we are a
savings and loan holding company include: the possibility that regulators could break up firms that
are considered too big to fail; a new Federal Insurance Office within Treasury to, among other
things, conduct a study of how to improve insurance regulation in the United States; new means for
regulators to limit the activities of financial firms; discretionary authority for the SEC to
impose a harmonized standard of care for investment advisers and broker-dealers who provide
personalized advice about securities to retail customers; and enhancements to corporate governance,
especially regarding risk management.
The changes resulting from the Dodd-Frank Act could adversely affect our results of operation and
financial condition.
FY 2012, Budget of the United States Government
On February 15, 2011, the Obama Administration released its FY 2012, Budget of the United States
Government (the Budget). Although the Administration has not released proposed statutory
language, the Budget includes proposals which if enacted, would affect the taxation of life
insurance companies and certain life insurance products. In particular, the proposals would affect
the treatment of corporate owned life insurance (COLI) policies by limiting the availability of
certain interest deductions for companies that purchase those policies. The proposals would also
change the method used to determine the amount of dividend income received by a life insurance
company on assets held in separate accounts used to support products, including variable life
insurance and variable annuity contracts, that are eligible for the dividends received deduction
(DRD). The DRD reduces the amount of dividend income subject to tax and is a significant
component of the difference between the Companys actual tax expense and expected amount determined
using the federal statutory tax rate of 35%. If proposals of this type were enacted, the Companys
sale of COLI, variable annuities, and variable life products could be adversely affected and the
Companys actual tax expense could increase, reducing earnings. The Budget also included a proposal
to levy a Financial Crisis Responsibility Fee, of $30 billion, in the aggregate, over 10 years on
large financial institutions, including The Hartford.
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of the Notes to Consolidated Financial
Statements included in The Hartfords 2010 Form 10-K Annual Report and Note 1 of the Notes to
Condensed Consolidated Financial Statements in this Form 10-Q.
|
|
|
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 June 30,
2011.
Changes in internal control over financial reporting
There was no change in the Companys internal control over financial reporting that occurred during
the Companys second fiscal quarter of 2011 that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.
119
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. 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. Two consolidated amended complaints were filed in the
multidistrict litigation, one related to conduct in connection with the sale of property-casualty
insurance and the other related to alleged conduct in connection with the sale of group benefits
products. The Company and various of its subsidiaries are named in both complaints. The complaints
assert, on behalf of a putative class of persons who purchased insurance through broker defendants,
claims under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act (RICO),
state law, and in the case of the group benefits complaint, claims under the Employee Retirement
Income Security Act of 1974 (ERISA). The claims are predicated upon allegedly undisclosed or
otherwise improper payments of contingent commissions to the broker defendants to steer business to
the insurance company defendants. The district court dismissed the Sherman Act and RICO claims in
both complaints for failure to state a claim and has granted the defendants motions for summary
judgment on the ERISA claims in the group-benefits products complaint. The district court further
declined to exercise supplemental jurisdiction over the state law claims and dismissed those claims
without prejudice. The plaintiffs appealed the dismissal of the claims in both consolidated amended
complaints, except the ERISA claims. In August 2010, the United States Court of Appeals for the
Third Circuit affirmed the dismissal of the Sherman Act and RICO claims against the Company. The
Third Circuit vacated the dismissal of the Sherman Act and RICO claims against some defendants in
the property casualty insurance case and vacated the dismissal of the state-law claims as to all
defendants in light of the reinstatement of the federal claims. In September 2010, the district
court entered final judgment for the defendants in the group benefits case. In March 2011, the
Company reached an agreement in principle to settle on a class basis the property casualty
insurance case for an immaterial amount. The settlement was preliminarily approved in June 2011
and is contingent upon final court approval.
Investment and Savings Plan ERISA and Shareholder Securities Class Action Litigation In November
and December 2008, following a decline in the share price of the Companys common stock, seven
putative class action lawsuits were filed in the United States District Court for the District of
Connecticut on behalf of certain participants in the Companys Investment and Savings Plan (the
Plan), which offers the Companys common stock as one of many investment options. These lawsuits
have been consolidated, and a consolidated amended class-action complaint was filed on March 23,
2009, alleging that the Company and certain of its officers and employees violated ERISA by
allowing the Plans participants to invest in the Companys common stock and by failing to disclose
to the Plans participants information about the Companys financial condition. The lawsuit seeks
restitution or damages for losses arising from the investment of the Plans assets in the Companys
common stock during the period from December 10, 2007 to the present. In January 2010, the
district court denied the Companys motion to dismiss the consolidated amended complaint. In
February 2011, the parties reached an agreement in principle to settle on a class basis for an
immaterial amount. The settlement is contingent upon the execution of a final settlement agreement
and preliminary and final court approval.
120
The Company and certain of its present or former officers are defendants in a putative securities
class action lawsuit filed in the United States District Court for the Southern District of New
York in March 2010. The operative complaint, filed in October 2010, is brought on behalf of
persons who acquired Hartford common stock during the period of July 28, 2008 through February 5,
2009, and alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5, by making false or misleading statements during the alleged class period about the
Companys valuation of certain asset-backed securities and its effect on the Companys capital
position. The Company disputes the allegations and has moved to dismiss the complaint.
Fair Credit Reporting Act Class Action In February 2007, the United States District Court for
the District of Oregon gave final approval of the 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 Company paid approximately $84.3 to eligible claimants and their counsel in
connection with the settlement, 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, and booked an insurance recoverable for the amount paid under the
settlement plus the cost of settlement administration, less the self-insured retention. Certain
insurance carriers participating in that program disputed coverage for the settlement, and one of
the excess insurers commenced an arbitration that resulted in an award in the Companys favor and
payments to the Company of approximately $30.1, thereby exhausting the primary and first-layer
excess policies. As a result, the Companys insurance recoverable was reduced to $45.5. In June
2009, the second-layer excess carriers commenced an arbitration to resolve the dispute over
coverage for the remainder of the amounts paid by the Company. The Company counterclaimed for
coverage, seeking approximately $50 plus interest. That arbitration concluded in May 2011. A
decision is expected in the third or fourth quarter of 2011. Management believes it is probable
that the Companys coverage position ultimately will be sustained.
Mutual Funds Litigation In October 2010, a derivative action was brought on behalf of six
Hartford retail mutual funds in the United States District Court for the District of Delaware,
alleging that Hartford Investment Financial Services, LLC received excessive advisory and
distribution fees in violation of its statutory fiduciary duty under Section 36(b) of the
Investment Company Act of 1940. In February 2011, a nearly identical derivative action was brought
against Hartford Investment Financial Services, LLC in the United States District Court for the
District of New Jersey on behalf of six additional Hartford retail mutual funds. Both actions are
assigned to the Honorable Renee Marie Bumb, a judge in the District of New Jersey who is sitting by
designation with respect to the Delaware action. Plaintiffs in each action seek to rescind the
investment management agreements and distribution plans between the Company and the mutual funds
and to recover the total fees charged thereunder or, in the alternative, to recover any improper
compensation the Company received. In addition, plaintiff in the New Jersey action seeks recovery
of lost earnings. The Company disputes the allegations and has moved to dismiss both actions.
Asbestos and Environmental Claims As discussed in Item 2, Managements Discussion and Analysis
of Financial Condition and Results of Operations under the caption Reserving for Asbestos and
Environmental Claims within Other Operations, The Hartford continues to receive asbestos and
environmental claims that involve significant uncertainty regarding policy coverage issues.
Regarding these claims, The Hartford continually reviews its overall reserve levels and reinsurance
coverages, as well as the methodologies it uses to estimate its exposures. Because of the
significant uncertainties that limit the ability of insurers and reinsurers to estimate the
ultimate reserves necessary for unpaid losses and related expenses, particularly those related to
asbestos, the ultimate liabilities may exceed the currently recorded reserves. Any such additional
liability cannot be reasonably estimated now but could be material to The Hartfords consolidated
operating results, financial condition and liquidity.
121
Investing in The Hartford involves risk. In deciding whether to invest in The Hartford, you should
carefully consider the risk factors disclosed in Item 1A of Part I of the Companys Annual Report
on Form 10-K for the year ended December 31, 2010, any of which could have a significant or
material adverse effect on the business, financial condition, operating results or liquidity of The
Hartford. This information should be considered carefully together with the other information
contained in this report and the other reports and materials filed by The Hartford with the SEC.
|
|
|
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 June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Approximate Dollar Value |
|
|
|
Total Number |
|
|
Average Price |
|
|
Part of Publicly |
|
|
of Shares that May Yet Be |
|
|
|
of Shares |
|
|
Paid Per |
|
|
Announced Plans or |
|
|
Purchased Under |
|
Period |
|
Purchased [1] |
|
|
Share |
|
|
Programs |
|
|
the Plans or Programs [2] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
April 1, 2011 April 30, 2011 |
|
|
1,800 |
|
|
$ |
27.57 |
|
|
|
|
|
|
$ |
807 |
|
May 1, 2011 May 31, 2011 |
|
|
64,914 |
|
|
$ |
28.06 |
|
|
|
|
|
|
$ |
807 |
|
June 1, 2011 June 30, 2011 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
66,714 |
|
|
$ |
28.04 |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] |
|
Primarily represents shares acquired from employees of the Company for
tax withholding purposes in connection with the Companys stock
compensation plans. |
|
[2] |
|
On June 10, 2008, the Companys Board of Directors approved a $1
billion stock repurchase program that authorized purchases of the
Companys common stock and derivative transactions to facilitate
future repurchases of the Companys common stock. This repurchase
authorization expired on June 10, 2011. |
See Exhibits Index on page 124.
122
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 hereunto duly authorized.
|
|
|
|
|
|
The Hartford Financial Services Group, Inc.
(Registrant)
|
|
Date: August 3, 2011 |
/s/ Beth A. Bombara
|
|
|
Beth A. Bombara |
|
|
Senior Vice President and
Controller
(Chief accounting officer and duly
authorized signatory) |
|
123
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE QUARTER ENDED JUNE 30, 2011
FORM 10-Q
EXHIBITS INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
*10.01 |
|
|
Written Summary of Compensation-related Arrangement with a Named Executive Officer effective May 18, 2011. |
|
|
|
|
|
|
15.01 |
|
|
Deloitte & Touche LLP Letter of Awareness. |
|
|
|
|
|
|
31.01 |
|
|
Certification of Liam E. McGee pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.02 |
|
|
Certification of Christopher J. Swift pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.01 |
|
|
Certification of Liam E. McGee pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.02 |
|
|
Certification of Christopher J. Swift pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
101.INS |
|
|
XBRL Instance Document. |
|
|
|
|
|
101.SCH |
|
|
XBRL Taxonomy Extension Schema. |
|
|
|
|
|
101.CAL |
|
|
XBRL Taxonomy Extension Calculation Linkbase. |
|
|
|
|
|
101.DEF
|
|
|
XBRL Taxonomy Extension Definition Linkbase. |
|
|
|
|
|
101.LAB
|
|
|
XBRL Taxonomy Extension Label Linkbase. |
|
|
|
|
|
101.PRE
|
|
|
XBRL Taxonomy Extension Presentation Linkbase. |
|
|
|
* |
|
Management compensation-related arrangement. |
124