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þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 13-3317783 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Common Stock, par value $0.01 per share | ||
6.1% Notes due October 1, 2041 |
4.7% Notes due September 1, 2007 | 4.625% Notes due July 15, 2013 | |
5.55% Notes due August 16, 2008 | 4.75% Notes due March 1, 2014 | |
6.375% Notes due November 1, 2008 | 7.3% Debentures due November 1, 2015 | |
5.663% Notes due November 16, 2008 | 5.50% Notes due October 15, 2016 | |
7.9% Notes due June 15, 2010 | 5.95% Notes due October 15, 2036 | |
5.25% Notes due October 15, 2011 |
Yeso Noþ
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2006
Item | Description | Page | ||||||
1. | 3 | |||||||
1A. | 20 | |||||||
1B. | 27 | |||||||
2. | 27 | |||||||
3. | 27 | |||||||
4. | 30 | |||||||
5. | 30 | |||||||
6. | 31 | |||||||
7. | 32 | |||||||
7A. | 149 | |||||||
8. | 149 | |||||||
9. | 149 | |||||||
9A. | 149 | |||||||
9B. | 151 | |||||||
10. | 151 | |||||||
11. | 152 | |||||||
12. | 152 | |||||||
13. | 153 | |||||||
14. | 153 | |||||||
15. | 153 | |||||||
II-1 | ||||||||
II-2 | ||||||||
EX-10.26: FORM OF ORDER OF THE S.E.C. | ||||||||
EX-12.01: STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES | ||||||||
EX-21.01: SUBSIDIARIES | ||||||||
EX-23.01: CONSENT OF DELOITTE & TOUCHE LLP | ||||||||
EX-24.01: POWER OF ATTORNEY | ||||||||
EX-31.01: CERTIFICATION | ||||||||
EX-31.02: CERTIFICATION | ||||||||
EX-32.01: CERTIFICATION | ||||||||
EX-32.02: CERTIFICATION |
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Property And Casualty Loss And Loss Adjustment Expense Liability Development — Net of Reinsurance
For the years ended December 31, [1]
1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||||||||||||||||||||
Liabilities for unpaid losses and loss adjustment expenses, net of reinsurance | $ | 12,702 | $ | 12,770 | $ | 12,902 | $ | 12,476 | $ | 12,316 | $ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | ||||||||||||||||||||||
Cumulative paid losses and loss expenses | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 2,625 | 2,472 | 2,939 | 2,994 | 3,272 | 3,339 | 3,480 | 4,415 | 3,594 | 3,702 | ||||||||||||||||||||||||||||||||||
Two years later | 4,188 | 4,300 | 4,733 | 5,019 | 5,315 | 5,621 | 6,781 | 6,779 | 6,035 | — | ||||||||||||||||||||||||||||||||||
Three years later | 5,540 | 5,494 | 6,153 | 6,437 | 6,972 | 8,324 | 8,591 | 8,686 | — | — | ||||||||||||||||||||||||||||||||||
Four years later | 6,418 | 6,508 | 7,141 | 7,652 | 9,195 | 9,710 | 10,061 | — | — | — | ||||||||||||||||||||||||||||||||||
Five years later | 7,201 | 7,249 | 8,080 | 9,567 | 10,227 | 10,871 | — | — | — | — | ||||||||||||||||||||||||||||||||||
Six years later | 7,800 | 8,036 | 9,818 | 10,376 | 11,140 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Seven years later | 8,499 | 9,655 | 10,501 | 11,137 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Eight years later | 10,044 | 10,239 | 11,246 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Nine years later | 10,576 | 10,933 | — | ��� | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Ten years later | 11,237 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Liabilities re-estimated | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 12,752 | 12,615 | 12,662 | 12,472 | 12,459 | 13,153 | 15,965 | 16,632 | 16,439 | 17,159 | ||||||||||||||||||||||||||||||||||
Two years later | 12,653 | 12,318 | 12,569 | 12,527 | 12,776 | 16,176 | 16,501 | 17,232 | 16,838 | — | ||||||||||||||||||||||||||||||||||
Three years later | 12,460 | 12,183 | 12,584 | 12,698 | 15,760 | 16,768 | 17,338 | 17,739 | — | — | ||||||||||||||||||||||||||||||||||
Four years later | 12,380 | 12,138 | 12,663 | 15,609 | 16,584 | 17,425 | 17,876 | — | — | — | ||||||||||||||||||||||||||||||||||
Five years later | 12,317 | 12,179 | 15,542 | 16,256 | 17,048 | 17,927 | — | — | — | — | ||||||||||||||||||||||||||||||||||
Six years later | 12,322 | 15,047 | 16,076 | 16,568 | 17,512 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Seven years later | 15,188 | 15,499 | 16,290 | 17,031 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Eight years later | 15,594 | 15,641 | 16,799 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Nine years later | 15,713 | 16,165 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Ten years later | 16,244 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Deficiency (redundancy), net of reinsurance | $ | 3,542 | $ | 3,395 | $ | 3,897 | $ | 4,555 | $ | 5,196 | $ | 5,067 | $ | 4,735 | $ | 1,521 | $ | 647 | $ | 296 | ||||||||||||||||||||||||
[1] | The above table excludes Hartford Insurance, Singapore as a result of its sale in September 2001, Hartford Seguros as a result of its sale in February 2001, Zwolsche as a result of its sale in December 2000 and London & Edinburgh as a result of its sale in November 1998. |
For the years ended December 31, [1]
1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||||||||||||||
Net reserve, as initially estimated | $ | 12,770 | $ | 12,902 | $ | 12,476 | $ | 12,316 | $ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | ||||||||||||||||||||
Reinsurance and other recoverables, as initially estimated | 3,996 | 3,275 | 3,706 | 3,871 | 4,176 | 3,950 | 5,497 | 5,138 | 5,403 | 4,387 | ||||||||||||||||||||||||||||||
Gross reserve, as initially estimated | $ | 16,766 | $ | 16,177 | $ | 16,182 | $ | 16,187 | $ | 17,036 | $ | 17,091 | $ | 21,715 | $ | 21,329 | $ | 22,266 | $ | 21,991 | ||||||||||||||||||||
Net reestimated reserve | $ | 16,165 | $ | 16,799 | $ | 17,031 | $ | 17,512 | $ | 17,927 | $ | 17,876 | $ | 17,739 | $ | 16,838 | $ | 17,159 | ||||||||||||||||||||||
Reestimated and other reinsurance recoverables | 5,051 | 4,552 | 5,465 | 5,502 | 5,684 | 5,052 | 4,964 | 4,906 | 5,417 | |||||||||||||||||||||||||||||||
Gross reestimated reserve | $ | 21,216 | $ | 21,351 | $ | 22,496 | $ | 23,014 | $ | 23,611 | $ | 22,928 | $ | 22,703 | $ | 21,744 | $ | 22,576 | ||||||||||||||||||||||
Gross deficiency (redundancy) | $ | 4,450 | $ | 5,174 | $ | 6,314 | $ | 6,827 | $ | 6,575 | $ | 5,837 | $ | 988 | $ | 415 | $ | 310 | ||||||||||||||||||||||
[1] | The above table excludes Hartford Insurance, Singapore as a result of its sale in September 2001, Hartford Seguros as a result of its sale in February 2001, Zwolsche as a result of its sale in December 2000 and London & Edinburgh as a result of its sale in November 1998. |
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Calendar Year | ||||||||||||||||||||||||||||||||||||||||||||
1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | Total | ||||||||||||||||||||||||||||||||||
By Accident year | ||||||||||||||||||||||||||||||||||||||||||||
1996 & Prior | $ | 50 | $ | (99 | ) | $ | (193 | ) | $ | (80 | ) | $ | (63 | ) | $ | 5 | $ | 2,866 | $ | 406 | $ | 119 | $ | 531 | $ | 3,542 | ||||||||||||||||||
1997 | — | (56 | ) | (104 | ) | (55 | ) | 18 | 36 | 2 | 46 | 23 | (7 | ) | (97 | ) | ||||||||||||||||||||||||||||
1998 | — | — | 57 | 42 | 60 | 38 | 11 | 82 | 72 | (15 | ) | 347 | ||||||||||||||||||||||||||||||||
1999 | — | — | — | 89 | 40 | 92 | 32 | 113 | 98 | (46 | ) | 418 | ||||||||||||||||||||||||||||||||
2000 | — | — | — | — | 88 | 146 | 73 | 177 | 152 | 1 | 637 | |||||||||||||||||||||||||||||||||
2001 | — | — | — | — | — | (24 | ) | 39 | (232 | ) | 193 | 38 | 14 | |||||||||||||||||||||||||||||||
2002 | — | — | — | — | — | — | (199 | ) | (56 | ) | 180 | 36 | (39 | ) | ||||||||||||||||||||||||||||||
2003 | — | — | — | — | — | — | — | (122 | ) | (237 | ) | (31 | ) | (390 | ) | |||||||||||||||||||||||||||||
2004 | — | — | — | — | — | — | — | — | (352 | ) | (108 | ) | (460 | ) | ||||||||||||||||||||||||||||||
2005 | — | — | — | — | — | — | — | — | — | (103 | ) | (103 | ) | |||||||||||||||||||||||||||||||
Total | $ | 50 | $ | (155 | ) | $ | (240 | ) | $ | (4 | ) | $ | 143 | $ | 293 | $ | 2,824 | $ | 414 | $ | 248 | $ | 296 | $ | 3,869 | |||||||||||||||||||
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• | licensing companies and agents to transact business; | |
• | calculating the value of assets to determine compliance with statutory requirements; | |
• | mandating certain insurance benefits; | |
• | regulating certain premium rates; | |
• | reviewing and approving policy forms; | |
• | regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements; | |
• | establishing statutory capital and reserve requirements and solvency standards; | |
• | fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies and annuity contracts; | |
• | approving changes in control of insurance companies; | |
• | restricting the payment of dividends and other transactions between affiliates; | |
• | establishing assessments and surcharges for guaranty funds, second-injury funds and other mandatory pooling arrangements; and | |
• | regulating the types, amounts and valuation of investments. |
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1stQtr. | 2ndQtr. | 3rdQtr. | 4thQtr. | |||||||||||||
2006 | ||||||||||||||||
Common Stock Price | ||||||||||||||||
High | $ | 88.83 | $ | 92.22 | $ | 87.84 | $ | 93.61 | ||||||||
Low | 79.24 | 80.63 | 79.86 | 84.73 | ||||||||||||
Dividends Declared | 0.40 | 0.40 | 0.40 | 0.50 | ||||||||||||
2005 | ||||||||||||||||
Common Stock Price | ||||||||||||||||
High | $ | 73.76 | $ | 77.26 | $ | 81.89 | $ | 89.00 | ||||||||
Low | 66.06 | 65.51 | 73.05 | 73.75 | ||||||||||||
Dividends Declared | 0.29 | 0.29 | 0.29 | 0.30 | ||||||||||||
Total Number of Shares | Maximum Number | |||||||||||||||
Total Number | Purchased as Part of | of Shares that May Yet | ||||||||||||||
of Shares | Average Price | Publicly Announced | Be Purchased as Part | |||||||||||||
Period | Purchased | Paid Per Share | Plans or Programs | of the Plans or Programs | ||||||||||||
October 2006 | [1] 1,832 | $ | 86.96 | N/A | [2] | |||||||||||
November 2006 | — | $ | — | N/A | [2] | |||||||||||
December 2006 | — | $ | — | N/A | [2] | |||||||||||
[1] | Represents shares acquired from employees of the Company for tax withholding purposes in connection with the Company’s benefit plans. | |
[2] | $1 billion of the Company’s securities were eligible for repurchase pursuant to the Company’s repurchase program. |
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2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Income Statement Data | ||||||||||||||||||||
Total revenues | $ | 26,500 | $ | 27,083 | $ | 22,708 | $ | 18,719 | $ | 16,410 | ||||||||||
Income (loss) before cumulative effect of accounting changes[1] | 2,745 | 2,274 | 2,138 | (91 | ) | 1,000 | ||||||||||||||
Net income (loss)[1] [2] | 2,745 | 2,274 | 2,115 | (91 | ) | 1,000 | ||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Total assets | $ | 326,710 | $ | 285,557 | $ | 259,735 | $ | 225,850 | $ | 181,972 | ||||||||||
Long-term debt | 3,504 | 4,048 | 4,308 | 4,610 | 4,061 | |||||||||||||||
Total stockholders’ equity | 18,876 | 15,325 | 14,238 | 11,639 | 10,734 | |||||||||||||||
Earnings (Loss) Per Share Data | ||||||||||||||||||||
Basic earnings (loss) per share[1] | ||||||||||||||||||||
Income (loss) before cumulative effect of accounting changes[1] | $ | 8.89 | $ | 7.63 | $ | 7.32 | $ | (0.33 | ) | $ | 4.01 | |||||||||
Net income (loss)[1] [2] | 8.89 | 7.63 | 7.24 | (0.33 | ) | 4.01 | ||||||||||||||
Diluted earnings (loss) per share[1] [3] | ||||||||||||||||||||
Income (loss) before cumulative effect of accounting changes[1] | 8.69 | 7.44 | 7.20 | (0.33 | ) | 3.97 | ||||||||||||||
Net income (loss)[1] [2] | 8.69 | 7.44 | 7.12 | (0.33 | ) | 3.97 | ||||||||||||||
Dividends declared per common share | 1.70 | 1.17 | 1.13 | 1.09 | 1.05 | |||||||||||||||
Other Data | ||||||||||||||||||||
Mutual fund assets[4] | $ | 43,732 | $ | 32,705 | $ | 28,068 | $ | 22,462 | $ | 15,321 | ||||||||||
Operating Data | ||||||||||||||||||||
Combined ratios | ||||||||||||||||||||
Ongoing Property & Casualty Operations | 89.3 | 93.2 | 95.3 | 96.5 | 99.1 | |||||||||||||||
[1] | 2004 includes a $216 tax benefit related to agreement with the IRS on the resolution of matters pertaining to tax years prior to 2004. 2003 includes an after-tax charge of $1.7 billion related to the Company’s 2003 asbestos reserve addition, $40 of after-tax expense related to the settlement of a certain litigation dispute, $30 of tax benefit in Life primarily related to the favorable treatment of certain tax items arising during the 1996-2002 tax years, and $27 of after-tax severance charges in Property & Casualty. 2002 includes $76 tax benefit in Life, $11 after-tax expense in Life related to a certain litigation dispute and an $8 after-tax benefit in Life’s September 11 exposure. | |
[2] | 2004 includes a $23 after-tax charge related to the cumulative effect of accounting change for the Company’s adoption of the AICPA issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. | |
[3] | As a result of the net loss for the year ended December 31, 2003, Statement of Financial Accounting Standards No. 128,”Earnings per Share“ requires the Company to use basic weighted average common shares outstanding in the calculation of the year ended December 31, 2003 diluted earnings (loss) per share, since the inclusion of options of 1.8 would have been antidilutive to the earnings per share calculation. In the absence of the net loss, weighted average common shares outstanding and dilutive potential common shares would have totaled 274.2. | |
[4] | Mutual funds are owned by the shareholders of those funds and not by the Company. As a result, they are not reflected in total assets on the Company’s balance sheet. |
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AND RESULTS OF OPERATIONS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
Overview | 32 | |||
Critical Accounting Estimates | 33 | |||
Consolidated Results of Operations | 46 | |||
Life | 51 | |||
Retail | 58 | |||
Retirement Plans | 60 | |||
Institutional | 62 | |||
Individual Life | 64 | |||
Group Benefits | 66 | |||
International | 67 | |||
Other | 69 | |||
Property & Casualty | 70 | |||
Total Property & Casualty | 92 | |||
Ongoing Operations | 93 | |||
Business Insurance | 97 | |||
Personal Lines | 102 | |||
Specialty Commercial | 107 | |||
Other Operations (Including Asbestos and | ||||
Environmental Claims) | 111 | |||
Investments | 118 | |||
Investment Credit Risk | 128 | |||
Capital Markets Risk Management | 132 | |||
Capital Resources and Liquidity | 140 | |||
Impact of New Accounting Standards | 149 |
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Business | Personal | Specialty | Other | Total | ||||||||||||||||
Insurance | Lines | Commercial | Operations | P&C | ||||||||||||||||
Reserve Line of Business | ||||||||||||||||||||
Property | $ | 65 | $ | 225 | $ | 63 | $ | — | $ | 353 | ||||||||||
Auto physical damage | 15 | 26 | 9 | — | 50 | |||||||||||||||
Auto liability | 625 | 1,526 | 94 | — | 2,245 | |||||||||||||||
Package business | 2,028 | — | — | — | 2,028 | |||||||||||||||
Workers’ compensation | 3,816 | 7 | 1,830 | — | 5,653 | |||||||||||||||
General liability | 587 | 39 | 1,504 | — | 2,130 | |||||||||||||||
Professional liability | — | — | 556 | — | 556 | |||||||||||||||
Fidelity and surety | — | — | 158 | — | 158 | |||||||||||||||
Assumed Reinsurance [1] | — | — | — | 813 | 813 | |||||||||||||||
All other non-A&E | — | — | — | 1,045 | 1,045 | |||||||||||||||
A&E | 8 | 2 | 5 | 2,558 | 2,573 | |||||||||||||||
Total reserves-net | 7,144 | 1,825 | 4,219 | 4,416 | 17,604 | |||||||||||||||
Reinsurance and other recoverables | 650 | 134 | 2,303 | 1,300 | 4,387 | |||||||||||||||
Total reserves-gross | $ | 7,794 | $ | 1,959 | $ | 6,522 | $ | 5,716 | $ | 21,991 | ||||||||||
[1] | These net loss and loss adjustment expense reserves relate to assumed reinsurance underwritten by Reinsurance operations that were moved into Other Operations (formerly known as “HartRe”). |
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• | The accident period used may vary (e.g., year, quarter, or month) |
• | The Company may analyze the data by coverage (e.g., bodily injury separate from property damage) |
• | There may be adjustments for unusual loss activity |
• | For ALAE, the Company uses patterns of the relationship between paid ALAE and paid losses. |
• | For one sub-set of professional liability business, management estimates frequency, not through historical claim count development, but through an analysis of the securities class actions filed and policy listings |
• | For some methods, management projects severity on only open claims |
• | In the commercial liability lines, the Company performs the frequency / severity technique only on claims over a certain size |
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• | For allocated loss adjustment expenses (ALAE), the Company analyzes ALAE on claims in suit and associated legal expenses separately from ALAE on other claims. |
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Death and | ||||||||||||||||||||
Unearned | Income | Sales | ||||||||||||||||||
Segment | DAC and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total | |||||||||||||||
Retail Products Group | $ | (70 | ) | $ | 5 | $ | (10 | ) | $ | 3 | $ | (72 | ) | |||||||
Retirement Plans | 20 | — | — | — | 20 | |||||||||||||||
Individual Life | (49 | ) | 31 | — | — | (18 | ) | |||||||||||||
International — Japan Annuity | 26 | — | 27 | — | 53 | |||||||||||||||
Life — Other | (46 | ) | — | — | — | (46 | ) | |||||||||||||
Corporate | (13 | ) | — | — | — | (13 | ) | |||||||||||||
Total | $ | (132 | ) | $ | 36 | $ | 17 | $ | 3 | $ | (76 | ) | ||||||||
[1] | As a result of the unlock, death benefit reserves, in the Retail Products Group, increased $294, offset by an increase of $279 in reinsurance recoverables. |
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(Increasing separate account returns and decreasing lapse rates result in benefits. Decreasing separate accounts and increasing lapse rates result in charges.) | Effect on DAC if | |
unlocked (after-tax)[1] | ||
If actual separate account returns were 1% above or below our estimated return | $20 - $30 | |
If actual lapse rates were 1% above or below our estimated aggregate lapse rate | $20 - $30 [2] | |
If we changed our future separate account return rate by 1% from our estimated future return | $60 - $70 | |
If we changed our future lapse rate by 1% from our estimated aggregate future lapse rate | $70 - $80 [2] | |
(Increasing separate account returns and decreasing lapse rates result in benefits. Decreasing separate accounts and increasing lapse rates result in charges.) | Effect on DAC if | |
unlocked (after-tax)[1] | ||
If actual separate account returns were 1% above or below our aggregated estimated return | $1 - $10 | |
If actual lapse rates were 1% above or below our estimated aggregate lapse rate | $1 - $10 [2] | |
If we changed our future separate account return rate by 1% from our aggregated estimated future return | $1 - $10 | |
If we changed our future lapse rate by 1% from our estimated aggregate future lapse rate | $12 - $22 [2] | |
[1] | These sensitivities do not include the estimated impacts on sales inducement assets, unearned revenue reserves and death and income benefit reserves and are not reflective of any future refinements to the Company’s gross profit estimation process. The Company’s DAC models assume that separate account returns are earned linearly and that lapses occur linearly (except for certain dynamic lapse features) throughout the year. Similarly, the sensitivities assume that differential separate account and lapse rates are linear and parallel and persist throughout a full 12 month period. These sensitivities are not perfectly linear nor perfectly symmetrical for increases and decreases and are most accurate for small changes in assumptions. As such, extrapolating results over a wide range will decrease the accuracy of the sensitivities’ predictive ability. Sensitivity results are, in part, based on the current “in-the-moneyness” of various guarantees offered with the products. Future market conditions could significantly change the sensitivity results. | |
[2] | Sensitivity around lapses assumes lapses increase or decrease consistently across all cohort years and products. |
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For the Years Ended December 31, | ||||||||||||
Operating Summary | 2006 | 2005 | 2004 | |||||||||
Earned premiums | $ | 15,023 | $ | 14,359 | $ | 13,566 | ||||||
Fee income | 4,739 | 4,012 | 3,471 | |||||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 4,691 | 4,384 | 4,144 | |||||||||
Equity securities held for trading [1] | 1,824 | 3,847 | 799 | |||||||||
Total net investment income | 6,515 | 8,231 | 4,943 | |||||||||
Other revenues | 474 | 464 | 437 | |||||||||
Net realized capital gains (losses) | (251 | ) | 17 | 291 | ||||||||
Total revenues | 26,500 | 27,083 | 22,708 | |||||||||
Benefits, losses and loss adjustment expenses [1] | 15,042 | 16,776 | 13,640 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 3,558 | 3,169 | 2,843 | |||||||||
Insurance operating costs and expenses | 3,252 | 3,227 | 2,776 | |||||||||
Interest expense | 277 | 252 | 251 | |||||||||
Other expenses | 769 | 674 | 675 | |||||||||
Total benefits, losses and expenses | 22,898 | 24,098 | 20,185 | |||||||||
Income before income taxes and cumulative effect of accounting change | 3,602 | 2,985 | 2,523 | |||||||||
Income tax expense | 857 | 711 | 385 | |||||||||
Income before cumulative effect of accounting change | 2,745 | 2,274 | 2,138 | |||||||||
Cumulative effect of accounting change, net of tax [2] | — | — | (23 | ) | ||||||||
Net income | $ | 2,745 | $ | 2,274 | $ | 2,115 | ||||||
[1] | Includes investment income and mark-to-market effects of equity securities held for trading supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders within benefits, losses and loss adjustment expenses. | |
[2] | For the year ended December 31, 2004, represents the cumulative impact of the Company’s adoption of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). |
Net Income (Loss) by Operation and Life Segment | 2006 | 2005 | 2004 | |||||||||
Life | ||||||||||||
Retail | $ | 628 | $ | 622 | $ | 503 | ||||||
Retirement Plans | 109 | 75 | 66 | |||||||||
Institutional | 99 | 88 | 68 | |||||||||
Individual Life | 170 | 166 | 155 | |||||||||
Group Benefits | 303 | 272 | 229 | |||||||||
International | 246 | 96 | 39 | |||||||||
Other | (114 | ) | (115 | ) | 322 | |||||||
Total Life | 1,441 | 1,204 | 1,382 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | 1,554 | 1,165 | 955 | |||||||||
Other Operations | (35 | ) | 71 | (45 | ) | |||||||
Total Property & Casualty | 1,519 | 1,236 | 910 | |||||||||
Corporate | (215 | ) | (166 | ) | (177 | ) | ||||||
Net income | $ | 2,745 | $ | 2,274 | $ | 2,115 | ||||||
Ongoing Operations Underwriting Results by Segment | 2006 | 2005 | 2004 | |||||||||
Business Insurance | $ | 618 | $ | 396 | $ | 360 | ||||||
Personal Lines | 429 | 460 | 138 | |||||||||
Specialty Commercial | 64 | (165 | ) | (53 | ) | |||||||
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• | Property & Casualty net income increased $283, as a result of a $389 increase in Ongoing Operations’ net income, partially offset by a decrease in Other Operations’ results from net income of $71 in 2005 to a net loss of $35 in 2006. Ongoing Operations’ net income increased due to increases in underwriting results and net investment income, partially offset by a decrease in net realized capital gains. The increase in Ongoing Operations’ underwriting results was principally due to lower current accident year catastrophe losses, lower insurance operating costs and expenses due to a change in estimated Florida Citizens assessments, a change to net favorable prior accident year loss development and the effect of catastrophe treaty reinstatement premium recorded as a reduction of earned premium in 2005. The net loss in Other Operations was primarily a result of prior year reserve development of $243, pre-tax, recorded in 2006, resulting from the agreement with Equitas and the Company’s evaluation of the reinsurance recoverables and allowance for uncollectible reinsurance associated with older, long-term casualty liabilities. | |
• | Life’s net income increased $237 primarily due to growth in assets under management resulting from market growth and strong sales along with higher earned premiums. Also contributing to Life’s increased net income were the following: |
• | During 2006, the Company achieved favorable settlements in several cases brought against the Company by policyholders regarding their purchase of broad-based leveraged corporate owned life insurance policies in the early to mid-1990s. The Company reduced its estimate of the ultimate cost of these cases in 2006. This reserve reduction resulted in an after-tax benefit of $34. | ||
• | A charge of $102, after-tax, recorded in 2005 in Life to reserve for investigations related to market timing by the SEC and New York Attorney General’s Office, directed brokerage by the SEC and single premium group annuities by the New York Attorney General’s Office and the Connecticut Attorney General’s Office. | ||
• | During 2005, the Company recorded an after-tax expense of $46, related to the termination of a provision of an agreement with a mutual fund distribution partner of the Company’s retail mutual funds. | ||
• | Partially offsetting the increase in Life’s net income was a $63, after-tax, charge related to the DAC unlock. See the Critical Accounting Estimates section of the MD&A for further information on the DAC unlock. |
• | A decrease in net investment income of $1.7 billion, driven primarily by a $2.0 billion decrease in net investment income on the Company’s equity securities, held for trading. The underlying fund performance of assets supporting the Company’s Japanese variable annuity business was not as strong in 2006 as compared to 2005, resulting in a decrease in net investment income from equity securities, held for trading. The increase in net investment income on securities available-for-sale and other of $307 was primarily due to income earned on higher average invested assets base, increase in interest rates and a change in asset mix to a greater investment in mortgage loans and limited partnerships. | |
• | Net realized capital losses occurred in 2006 as compared to gains in 2005, primarily as a result of a higher interest rate environment. The components that drove the increase in net losses during the year ended December 31, 2006 included net losses on sales of fixed maturity securities and other-than-temporary impairments. |
• | Fee income increased $727 as a result of increases in the Life operation’s Retail and International segments. The increase in fee income occurred primarily as the result of growth in average account values. | |
• | Earned premium increased $664 as a result of $387 from Life operations and $277 from Property & Casualty operations. The increase in Life earned premiums was primarily related to Group Benefits where the increase was driven by year-to-date sales (excluding buyouts) growth, particularly in group life insurance. Contributing to the growth in Property & Casualty earned premium was a $73 reduction of earned premium in 2005 due to catastrophe treaty reinstatement premium payable to reinsurers as a result of losses from the 2005 hurricanes. Apart from the effect of the reinstatement premium in 2005, the growth was primarily driven by new business premium outpacing non-renewals over the last six months of 2005 and the full year of 2006 and the effect of earned pricing increases in homeowners, partially offset by an increase in reinsurance costs. Growth in Business Insurance and Personal Lines earned premium was partially offset by a decrease in Specialty Commercial earned premium. |
• | An increase in Property & Casualty net income of $326, driven primarily by improved underwriting results in the Personal Lines and Other Operations segments, increased net investment income, and a reduction in other expenses; partially offset by a decrease in net realized capital gains. The improved underwriting results in Personal Lines was driven primarily by a reduction in current year catastrophe losses, a reduction in net unfavorable prior accident year loss reserve development and earned premium growth. |
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• | An increase in net income for Retail of $119, principally driven by higher fee income from growth in the variable annuity and mutual fund businesses as a result of higher assets under management as compared to the prior year periods. | |
• | An increase in net income for International of $57, principally driven by higher fee income and investment spread in Japan derived from a 78% increase in the assets under management. | |
• | An increase in net income for the Group Benefits segment of $43, driven primarily by higher earned premiums and net investment income as well as a favorable loss ratio. |
• | A $216 tax benefit recorded in 2004 to reflect the effect of the IRS audit settlement on tax years prior to 2004. | |
• | A charge of $102, after-tax, recorded in 2005 in Life to reserve for investigations related to market timing by the SEC and New York Attorney General’s Office, directed brokerage by the SEC and single premium group annuities by the New York Attorney General’s Office and the Connecticut Attorney General’s Office. | |
• | An after-tax expense of $46 recorded in Life during 2005, related to the termination of a provision of an agreement with a mutual fund distribution partner of the Company’s retail mutual funds. |
• | An increase of $3.3 billion in net investment income, driven primarily by a $3.0 billion increase in net investment income on the Company’s equity securities, held for trading. Also contributing to the increase was a higher average invested asset base. | |
• | An increase of $793 in earned premiums. Earned premium growth of $486 in Business Insurance was primarily driven by new business premium growth outpacing non-renewals in the prior 12 months. Earned premium growth of $165 in Personal Lines was primarily driven by new business growth outpacing non-renewals in auto and the effect of earned pricing increases in homeowners. Earned premiums and other increased $158 in Group Benefits primarily due to increased sales, particularly in group disability, and continued strong persistency. | |
• | An increase of $541 in fee income primarily driven by increased individual annuity assets under management in the United States and Japan. |
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2006 | 2005 | 2004 | ||||||||||
| | | | ||||||||||||
Basic earnings per share | $ | 8.89 | $ | 7.63 | $ | 7.24 | ||||||
Diluted earnings per share | $ | 8.69 | $ | 7.44 | $ | 7.12 | ||||||
Weighted average common shares outstanding (basic) | 308.8 | 298.0 | 292.3 | |||||||||
Weighted average common shares outstanding and | ||||||||||||
dilutive potential common shares (diluted) | 315.9 | 305.6 | 297.0 | |||||||||
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As of and for the years ended December 31, | ||||||||||||
Product/Key Indicator Information | 2006 | 2005 | 2004 | |||||||||
United States Individual Variable Annuities | ||||||||||||
Account value, beginning of period | $ | 105,314 | $ | 99,617 | $ | 86,501 | ||||||
Net flows | (3,150 | ) | (881 | ) | 5,471 | |||||||
Change in market value and other | 12,201 | 6,578 | 7,645 | |||||||||
Account value, end of period | $ | 114,365 | $ | 105,314 | $ | 99,617 | ||||||
Retail Mutual Funds | ||||||||||||
Assets under management, beginning of period | $ | 29,063 | $ | 25,240 | $ | 20,301 | ||||||
Net sales | 5,659 | 1,335 | 2,505 | |||||||||
Change in market value and other | 3,814 | 2,488 | 2,434 | |||||||||
Assets under management, end of period | $ | 38,536 | $ | 29,063 | $ | 25,240 | ||||||
Retirement Plans | ||||||||||||
Account value, beginning of period | $ | 19,317 | $ | 16,493 | $ | 13,571 | ||||||
Net flows | 2,545 | 1,618 | 1,636 | |||||||||
Change in market value and other | 1,713 | 1,206 | 1,286 | |||||||||
Account value, end of period | $ | 23,575 | $ | 19,317 | $ | 16,493 | ||||||
Individual Life Insurance | ||||||||||||
Variable universal life account value, end of period | $ | 6,637 | $ | 5,902 | $ | 5,356 | ||||||
Total life insurance in-force | 164,227 | 150,801 | 139,889 | |||||||||
S&P 500 Index | ||||||||||||
Year end closing value | 1,418 | 1,248 | 1,212 | |||||||||
Daily average value | 1,310 | 1,208 | 1,131 | |||||||||
Japan Annuities | ||||||||||||
Account value, beginning of period | $ | 26,104 | $ | 14,631 | $ | 6,220 | ||||||
Net flows | 4,393 | 10,857 | 7,249 | |||||||||
Change in market value and other | 846 | 616 | 1,162 | |||||||||
Account value, end of period | $ | 31,343 | $ | 26,104 | $ | 14,631 | ||||||
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• | The increase in U.S. variable annuity account values can be attributed to market growth during 2006. | |
• | Net flows for the U.S. variable annuity business were negative and have worsened from prior year levels resulting from higher surrenders outpacing increased deposits. | |
• | Mutual Fund net sales increased substantially over the prior year as a result of focused wholesaling efforts and favorable fund and equity market performance. | |
• | The increase in Retirement Plans’ account values is due to positive net flows over the past year due to higher deposits and market appreciation. | |
• | Individual Life variable universal life account value increased due primarily to premiums, deposits and market appreciation. Life insurance inforce increased from December 31, 2005 due to business growth. | |
• | Japan annuity account values as of December 31, 2006 were higher as a result of positive net flows and fund performance, offset by the effects of currency translation. Japan net flows have decreased from the prior year due to increased competition. | |
• | Changes in market value were based on market conditions and investment management performance in 2006. |
• | The increase in U.S. variable annuity account values can be attributed to market growth during 2005. | |
• | Net flows and net deposits for the U.S. variable annuity and retail mutual fund businesses decreased in particular, as variable annuity net flows and mutual fund net sales were negatively affected due to lower sales levels and higher surrenders due to increased competition. | |
• | Changes in market value were based on market conditions and investment management performance in 2005. | |
• | Japan annuity account values and net flows grew as a result of strong deposits and significant market growth in 2005. |
For the years ended December 31, | ||||||||||||
Net Investment Income | 2006 | 2005 | 2004 | |||||||||
| | | | ||||||||||||
Retail | $ | 839 | $ | 933 | $ | 1,011 | ||||||
Retirement Plans | 326 | 311 | 306 | |||||||||
Institutional | 1,003 | 802 | 664 | |||||||||
Individual Life | 324 | 305 | 303 | |||||||||
Group Benefits | 415 | 398 | 373 | |||||||||
International | 123 | 75 | 11 | |||||||||
Other | 1,978 | 4,021 | 1,007 | |||||||||
Total net investment income | $ | 5,008 | $ | 6,845 | $ | 3,675 | ||||||
Interest Credited on General Account Assets | ||||||||||||
Retail | $ | 640 | $ | 717 | $ | 841 | ||||||
Retirement Plans | 208 | 197 | 186 | |||||||||
Institutional | 522 | 383 | 300 | |||||||||
Individual Life | 237 | 225 | 216 | |||||||||
International | 21 | 14 | (1 | ) | ||||||||
Other | 1,925 | 4,135 | 939 | |||||||||
Total interest credited on general account assets | $ | 3,553 | $ | 5,671 | $ | 2,481 | ||||||
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• | Net investment income and interest credited on general account assets in Retail declined due to a decline in general account assets as a result of surrenders on market value adjusted (“MVA”) fixed annuity products at the end of the guarantee period. Also contributing to the decline in general account assets were transfers within variable annuity products from the general account to separate account funds. | |
• | Net investment income and interest credited on general account assets in Institutional increased primarily due to an increase in general account assets as a result of sales in the Company’s funding agreement backed Investor Notes program. | |
• | Net investment income and interest credited in Other decreased due to a decrease in the mark-to-market effects of trading account securities supporting the Japanese variable annuity business. | |
• | In addition to interest credited on general account assets, Institutional also had other contract benefits for limited payment contracts of $345 and $212 for the years ended December 31, 2006 and 2005, respectively. These amounts need to be deducted from net investment income to understand the net interest spread on these businesses because these contracts are accounted for as traditional insurance products. |
• | Net investment income and interest credited in Other increased due to $3.8 billion increase in the mark-to-market effects of trading account securities supporting the Japanese variable annuity business. | |
• | Net investment income and interest credited on general account assets in Retail declined due to lower assets under management from surrenders on market value adjusted (“MVA”) fixed annuity products at the end of their guarantee period. | |
• | Net investment income and interest credited on general account assets in Institutional increased as a result of the Company’s funding agreement backed Investor Notes program, partially offset by surrenders in the PPLI business. | |
• | In addition to interest credited on general account assets, Institutional also had other contract benefits for limited payment contracts of $292 and $279 for the years ended December 31, 2005 and 2004, respectively. These amounts need to be deducted from net investment income to understand the net interest spread on these businesses because these contracts are accounted for as traditional insurance products. |
For the years ended December 31, | ||||||||||||
Group Benefits | 2006 | 2005 | 2004 | |||||||||
| | | | ||||||||||||
Total premiums and other considerations | $ | 4,150 | $ | 3,810 | $ | 3,652 | ||||||
Fully insured ongoing sales (excluding buyouts) | 861 | 779 | 632 | |||||||||
Persistency [1] | 87 | % | 87 | % | 85 | % | ||||||
[1] | The persistency rate represents group life and disability business sold to employer groups, which accounts for, on average, 72% to 75% of in-force premiums. |
• | Earned premiums and other considerations include $12, $27 and $4 in buyout premiums for the years ended December 31, 2006, 2005 and 2004 respectively. The increase in premiums and other considerations for Group Benefits in 2006 compared to 2005 was driven by sales growth of 11%. The increase in premiums and other considerations for Group Benefits in 2005 compared to 2004 was driven by sales growth of 23%. |
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For the years ended December 31, | ||||||||||||
Retail | 2006 | 2005 | 2004 | |||||||||
General insurance expense ratio (individual annuity) | 17.2 | bps | 17.9 | bps | 18.3 | bps | ||||||
DAC amortization ratio (individual annuity) | 58.1 | % | 49.6 | % | 50.9 | % | ||||||
Insurance expenses, net of deferrals | $ | 995 | $ | 869 | $ | 687 | ||||||
Individual Life | ||||||||||||
Death benefits | $ | 251 | $ | 241 | $ | 245 | ||||||
Insurance expenses, net of deferrals | $ | 179 | $ | 167 | $ | 164 | ||||||
Group Benefits | ||||||||||||
Total benefits and losses | $ | 3,002 | $ | 2,794 | $ | 2,703 | ||||||
Loss ratio (excluding buyout premiums) | 72.3 | % | 73.1 | % | 74.0 | % | ||||||
Insurance expenses, net of deferrals | $ | 1,102 | $ | 1,022 | $ | 989 | ||||||
Expense ratio (excluding buyout premiums) | 27.6 | % | 27.8 | % | 27.7 | % | ||||||
International — Japan | ||||||||||||
General insurance expense ratio | 49.1 | bps | 68.6 | bps | 92.1 | bps | ||||||
DAC amortization ratio | 29.0 | % | 41.4 | % | 56.6 | % | ||||||
Insurance expenses, net of deferrals | $ | 159 | $ | 148 | $ | 83 | ||||||
• | Individual annuity’s asset growth in 2006 and 2005 decreased individual annuity’s expense ratio to a level lower than prior years. | |
• | The ratio of individual annuity DAC amortization increased due to the DAC unlock in 2006. Excluding the DAC unlock, the ratio was 50.8%, slightly higher than 2005 and consistent with 2004. | |
• | Individual Life death benefits increased 4% in 2006 primarily due to a larger insurance inforce. Individual Life Insurance expenses, net of deferrals increased 7% for 2006 consistent with the growth of life insurance inforce. Death benefits decreased in 2005 as compared to 2004 due to favorable mortality in 2005. | |
• | The Group Benefits loss ratio, excluding buyouts, for 2006 decreased due to favorable mortality experience, partially offset by unfavorable morbidity experience. Loss ratios experience volatility in period over period comparisons due to fluctuations in mortality and morbidity experience. | |
• | The Group Benefits loss ratio, excluding buyouts, for 2005, decreased due to favorable mortality and morbidity experience, as compared to 2004. | |
• | International’s expense ratio continued to decline in 2006 as Japan further leveraged the existing infrastructure as it attains economies of scale. | |
• | The International DAC amortization ratio decreased due to the DAC unlock in 2006. Excluding the DAC unlock, the ratio was down slightly to 38.8%. |
Ratios | 2006 | 2005 | 2004 | |||||||||
Retail | ||||||||||||
Individual annuity return on assets (“ROA”) | 47.6 bps | 54.6 bps | 44.8 bps | |||||||||
Group Benefits | ||||||||||||
After-tax margin (excluding buyouts) | 7.3 | % | 7.2 | % | 6.3 | % | ||||||
International — Japan | ||||||||||||
International return on assets (“ROA”) | 93.0 bps | 59.2 bps | 34.5 bps | |||||||||
• | Individual annuity’s ROA decreased primarily due to the DAC unlock in 2006. Excluding the DAC unlock, ROA was 53.6 bps in 2006. Contributing to the decline was an increase in trail commissions. Individual annuity’s ROA increased for 2005, compared to the prior year. In particular, variable annuity fees and fixed annuity general account spreads each increased for 2005 compared to the prior year. The increase in the ROA can be attributed to the increase in account values and resulting increased fees including GMWB rider fees without a corresponding increase in expenses, while the increase in fixed annuity general account spread resulted |
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• | The improvement in the Group Benefits after-tax margin for 2006 was primarily due to an improvement in the loss and expense ratios partially offset by a lower net investment income rate and higher income tax expense. The improvement in the Group Benefits after tax margin for 2005 as compared to 2004 was primarily due to the favorable loss ratios and higher net investment income. |
• | International’s ROA increased significantly in 2006 primarily due to the DAC unlock and the leveraging of its existing infrastructure through disciplined expense management. Excluding the DAC unlock, ROA was 74 bps in 2006. |
Life Operating Summary | 2006 | 2005 | 2004 | |||||||||
Earned premiums | $ | 4,590 | $ | 4,203 | $ | 4,072 | ||||||
Fee income | 4,726 | 4,000 | 3,464 | |||||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 3,184 | 2,998 | 2,876 | |||||||||
Equity securities held for trading [1] | 1,824 | 3,847 | 799 | |||||||||
Total net investment income | 5,008 | 6,845 | 3,675 | |||||||||
Other revenues | — | — | — | |||||||||
Net realized capital gains (losses) | (260 | ) | (25 | ) | 164 | |||||||
Total revenues | 14,064 | 15,023 | 11,375 | |||||||||
Benefits, losses and loss adjustment expenses [1] | 8,040 | 9,809 | 6,630 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 1,452 | 1,172 | 993 | |||||||||
Insurance operating costs and other expenses | 2,708 | 2,522 | 2,145 | |||||||||
Total benefits, losses and expenses | 12,200 | 13,503 | 9,768 | |||||||||
Income before income taxes and cumulative effect of accounting change | 1,864 | 1,520 | 1,607 | |||||||||
Income tax expense | 423 | 316 | 202 | |||||||||
Income before cumulative effect of accounting change | 1,441 | 1,204 | 1,405 | |||||||||
Cumulative effect of accounting change, net of tax [2] | — | — | (23 | ) | ||||||||
Net income | $ | 1,441 | $ | 1,204 | $ | 1,382 | ||||||
[1] | Includes investment income and mark-to-market effects of equity securities held for trading supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders within benefits, losses and loss adjustment expenses. | |
[2] | For the year ended December 31, 2004, represents the cumulative impact of the Company’s adoption of SOP 03-1. |
• | Net income increased primarily due to growth in assets under management resulting from market growth and sales, along with higher earned premiums in Group Benefits. The increase in net investment income was primarily due to income earned on higher average invested assets base, an increase in interest rates and a change in asset mix (e.g. greater investment in mortgage loans and limited partnerships). The increase in average invested assets base, as compared to the prior year, was primarily due to positive operating cash flows, investment contract sales such as retail and institutional notes, and universal life-type product sales. | |
• | Net realized capital losses were larger in the year ended December 31, 2006 compared to 2005 primarily due to rising interest rates. Components of the increased realized losses included increased other than temporary impairments (see the Other-Than-Temporary Impairments discussion within Investment Results for more information on the increase in impairments), losses on non-qualifying derivatives and net losses on sales of investments. | |
• | During 2006, the Company achieved favorable settlements in several cases brought against the Company by policyholders regarding their purchase of broad-based leveraged corporate owned life insurance (“leveraged COLI”) policies in the early to mid-1990s. The Company ceased offering this product in 1996. Based on the favorable outcome of these cases, together with the Company’s current assessment of the few remaining leveraged COLI cases, the Company reduced its estimate of the ultimate cost of these cases during 2006. This reserve reduction, recorded in insurance operating costs and other expenses, resulted in an after-tax benefit of $34. | |
• | During 2005, the Company recorded an after-tax expense of $46, related to the termination of a provision of an agreement with a mutual fund distribution partner of the Company’s retail mutual funds. | |
• | Life recorded an after-tax charge of $102 in 2005 to establish reserves for regulatory matters for investigations related to market timing by the SEC and New York Attorney General’s Office, directed brokerage by the SEC, and single premium group annuities by the New York Attorney General’s Office and the Connecticut Attorney General’s Office. |
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• | Life recorded an after-tax charge of $102 in 2005 to establish reserves for regulatory matters for investigations related to market timing by the SEC and New York Attorney General’s Office, directed brokerage by the SEC, and single premium group annuities by the New York Attorney General’s Office and the Connecticut Attorney General’s Office. | |
• | Life recorded an after-tax expense of $46 in 2005, which related to the termination of a provision of an agreement with a mutual fund distribution partner. | |
• | The effective tax rate was 21% for Life operations for the current year as compared to an effective tax rate of 13% for Life operations for the respective prior year period. The 2005 higher effective tax rate was attributed to the absence of the 2004 tax benefit of $190 offset by an increase in the DRD tax benefit of $50. |
• | Net income increased due to growth in assets under management resulting from sales as well as higher premium and favorable loss ratios in Group Benefits. | |
• | Net investment income increased for all Life segments during 2005, driven by a higher asset base and increased partnership income, as compared to the prior year. |
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Operating Summary | 2006 | 2005 | 2004 | |||||||||
Fee income and other | $ | 2,697 | $ | 2,325 | $ | 2,019 | ||||||
Earned premiums | (86 | ) | (52 | ) | 5 | |||||||
Net investment income | 839 | 933 | 1,011 | |||||||||
Net realized capital gains | 7 | 9 | — | |||||||||
Total revenues | 3,457 | 3,215 | 3,035 | |||||||||
Benefits, losses and loss adjustment expenses | 819 | 895 | 1,074 | |||||||||
Insurance operating costs and other expenses | 995 | 869 | 687 | |||||||||
Amortization of deferred policy acquisition costs | ||||||||||||
and present value of future profits | 930 | 744 | 647 | |||||||||
Total benefits, losses and expenses | 2,744 | 2,508 | 2,408 | |||||||||
Income before income taxes and cumulative effect of accounting change | 713 | 707 | 627 | |||||||||
Income tax expense | 85 | 85 | 105 | |||||||||
Income before cumulative effect of accounting change | 628 | 622 | 522 | |||||||||
Cumulative effect of accounting change, net of tax [1] | — | — | (19 | ) | ||||||||
Net income | $ | 628 | $ | 622 | $ | 503 | ||||||
Assets Under Management | 2006 | 2005 | 2004 | |||||||||
Individual variable annuity account values | $ | 114,365 | $ | 105,314 | $ | 99,617 | ||||||
Individual fixed annuity and other account values | 9,937 | 10,222 | 11,384 | |||||||||
Other retail products account values | 525 | 336 | 182 | |||||||||
Total account values [2] | 124,827 | 115,872 | 111,183 | |||||||||
Retail mutual fund assets under management | 38,536 | 29,063 | 25,240 | |||||||||
Other mutual fund assets under management | 1,489 | 1,004 | 641 | |||||||||
Total mutual fund assets under management | 40,025 | 30,067 | 25,881 | |||||||||
Total assets under management | $ | 164,852 | $ | 145,939 | $ | 137,064 | ||||||
[1] Represents the cumulative impact of the Company’s adoption of SOP 03-1. | ||
[2] Includes policyholders’ balances for investment contracts and reserve for future policy benefits for insurance contracts. |
• | The increase in fee income in the variable annuity business for the year ended December 31, 2006 was mainly a result of growth in average account values. The year-over-year increase in average account values of 7% or $7.4 billion can be attributed to market appreciation of $12.2 billion during 2006. Variable annuities had net outflows of $3.2 billion for the year ended December 31, 2006 compared to net outflows of $881 for the year ended December 31, 2005. Net outflows from additional surrender activity were due to increased deposits competition, particularly from competitors offering variable annuity products with guaranteed living benefits. | |
• | Mutual fund fee income increased 26% for the year ended December 31, 2006 due to increased assets under management driven by market appreciation of $3.9 billion and net deposits of $5.7 billion during the year. This increase was primarily attributable to focused wholesaling efforts. | |
• | Despite stable general account investment spread during the year, net investment income has steadily declined for the year ended December 31, 2006 due to variable annuity transfers from the fixed account to the separate account combined with surrenders in the fixed MVA contracts. Despite these outflows, a more favorable interest rate environment during 2006 has resulted in increased deposits and a lower surrender rate due to fewer contracts up for renewal for the year ended December 31, 2006 resulting in a decrease in net outflows of $1.3 billion compared to the prior year. |
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• | Benefits, losses and loss adjustment expenses have decreased for the year ended December 31, 2006 due to a decline in interest credited as a result of fixed annuity outflows which decreased fixed annuity account values. | |
• | Insurance operating costs and other expenses increased for the year ended December 31, 2006 primarily due to an increase in mutual fund commissions due to significant growth in deposits. In addition, variable annuity asset based commissions increased due to 9% growth in assets under management, as well as an increase in the number of contracts reaching anniversaries when trail commission payments begin. During 2005, the Company recorded an after-tax expense of $46, for the termination of a provision of an agreement with a distribution partner of the Company’s retail mutual funds. | |
• | Higher amortization of DAC resulted from the DAC unlock during the fourth quarter of 2006. The earnings impact of the DAC unlock was an increase to amortization of $72 after-tax. (For further discussion, see DAC Unlock Analysis in the Critical Accounting Estimates section of the MD&A). | |
• | The effective tax rate remained steady for the year ended December 31, 2006 compared to the prior year. |
• | The increase in fee income in the variable annuity business for the year ended December 31, 2005 was mainly a result of growth in average account values. The year-over-year increase in average account values of 10% can be attributed to market appreciation of $6.6 billion during 2005. Variable annuities had net outflows of $881 for the year ended December 31, 2005 compared to net inflows of $5.5 billion for the year ended December 31, 2004. The net outflows in 2005 were due to increased surrender activity and increased competition for deposits particularly from competitors that offered guaranteed living benefits riders with their variable annuity products. | |
• | Mutual fund fee income increased for the year ended December 31, 2005 due to increased assets under management driven by market appreciation of $2.6 billion and net deposits of $1.3 billion. Despite the increase in assets under management, the amount of net deposits has declined for the year ended December 31, 2005 compared to the prior year. This decrease is attributed to market competition and higher redemption amounts. | |
• | The fixed annuity business contributed $66 of higher investment spread income in 2005 compared to 2004, excluding the cumulative effects of accounting change, due to improved investment spreads from the MVA products. | |
• | Benefits and losses and loss adjustment expenses have decreased for the year ended December 31, 2005 due to an increase in reserves in 2004 related to the acquisition of a block of acquired business from London Pacific Life and Annuity Company in liquidation. The increase in reserves of $62 was offset by an equivalent increase in earned premium. Also contributing to the decrease in benefits expense is a decrease in interest credited as older fixed annuity MVA business with higher credited rates matures and either lapses or renews at lower credited rates. | |
• | The effective tax rate decreased for the year ended December 31, 2005 compared to the prior year end due to an increase in the DRD benefit as a percentage of pre-tax income. |
• | Throughout Retail, insurance operating costs and other expenses increased for the year ended December 31, 2005 compared to the prior year. General insurance expenses increased due to increased costs related to technology services as well as sales and marketing. In addition, the Company recorded an after-tax expense of $46, for the termination of a provision of an agreement with a mutual fund distribution partner. | |
• | There was higher amortization of DAC, which resulted from higher gross profits due to the positive earnings drivers as discussed above. |
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• | Variable annuity deposits of $12.0 billion to $13.0 billion | |
• | Fixed annuity deposits of $500 to $1.0 billion | |
• | Retail mutual fund deposits of $10.5 billion to $12.5 billion | |
• | Variable annuity outflows of $3.0 billion to $4.0 billion | |
• | Fixed annuity outflows of $500 to $1.0 billion | |
• | Retail mutual fund net sales of $4.5 billion to $5.5 billion | |
• | Individual annuity return on assets of 55 to 57 basis points | |
• | Other retail return on assets of 13 to 15 basis points |
Operating Summary | 2006 | 2005 | 2004 | |||||||||
| | | | ||||||||||||
Fee income and other | $ | 192 | $ | 152 | $ | 121 | ||||||
Earned premiums | 19 | 10 | 10 | |||||||||
Net investment income | 326 | 311 | 306 | |||||||||
Net realized capital gains (losses) | 1 | (3 | ) | (3 | ) | |||||||
Total revenues | 538 | 470 | 434 | |||||||||
Benefits, losses and loss adjustment expenses | 250 | 231 | 220 | |||||||||
Insurance operating costs and other expenses | 135 | 115 | 96 | |||||||||
Amortization of deferred policy acquisition costs | 1 | 26 | 29 | |||||||||
Total benefits, losses and expenses | 386 | 372 | 345 | |||||||||
Income before income taxes and cumulative effect of account change | 152 | 98 | 89 | |||||||||
Income tax expense | 43 | 23 | 22 | |||||||||
Income before cumulative effect of accounting change | 109 | 75 | 67 | |||||||||
Cumulative effect of accounting change, net of tax [1] | — | — | (1 | ) | ||||||||
Net income | $ | 109 | $ | 75 | $ | 66 | ||||||
Assets Under Management | 2006 | 2005 | 2004 | |||||||||
Governmental account values | $ | 11,540 | $ | 10,475 | $ | 9,962 | ||||||
401(k) account values | 12,035 | 8,842 | 6,531 | |||||||||
Total account values [2] | 23,575 | 19,317 | 16,493 | |||||||||
Government mutual fund assets under management [3] | — | 163 | 756 | |||||||||
401(k) mutual fund assets under management | 1,140 | 947 | 755 | |||||||||
Total mutual fund assets under management | 1,140 | 1,110 | 1,511 | |||||||||
Total assets under management | $ | 24,715 | $ | 20,427 | $ | 18,004 | ||||||
[1] | Represents the cumulative impact of the Company’s adoption of SOP 03-1. | |
[2] | Includes policyholder balances for investment contracts and reserves for future policy benefits for insurance contracts. | |
[3] | Government Mutual Fund assets declined to zero due to a large case surrender in 2005 and the remaining business being transferred to the Institutional segment. |
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• | Fee income for 401(k) increased 34%, or $37 for the year ended December 31, 2006 compared to the prior year due to the growth in average account values. This growth is primarily driven by positive net flows of $2.0 billion during the year resulting from strong deposits. Total 401(k) deposits and net flows increased by 22% and 16%, respectively, over the prior year. The increase in average account values can also be attributed to market appreciation of $1.1 billion during the year. |
• | General account spread remained stable for the year ended December 31, 2006 compared to the prior year. Overall, net investment income and the associated interest credited within benefits, losses and loss adjustment expenses each increased as a result of the growth in general account assets under management. Additionally, benefits, losses and loss adjustment expenses increased for the year ended December 31, 2006 compared to the prior year due to a large case annuitization in the 401(k) business which also resulted in a corresponding increase in earned premiums of $12. |
• | Insurance operating costs and other expenses increased for the year ended December 31, 2006 primarily driven by the 401(k) business. The additional costs can be attributed to greater assets under management resulting in higher trail commissions and maintenance expenses. |
• | Lower amortization of DAC resulted from a $20 benefit due to the unlocking of Retirement Plans DAC assumptions during the fourth quarter of 2006 in both the 401(k) and Government businesses of $25 and ($5) after-tax, respectively. (For further discussion, see DAC Unlock and Sensitivity Analysis in this section of the MD&A). |
• | Fee income for 401(k) increased 39% or $30 for year ended December 31, 2005 compared to the prior year. This increase is a result of positive net flows from the 401(k) business of $1.8 billion over the prior year driven by strong deposits and increasing ongoing deposits contributing to the growth in 401(k) assets under management of 34% to $9.7 billion. Total 401(k) deposits and net flows increased substantially by 32% and 26%, respectively, over the prior year primarily due to the full year impact of 2004’s expansion of wholesaling capabilities and new product offerings. |
• | The DAC amortization rate decreased in 2005 compared to 2004 as a result of higher profits. |
• | General account spread decreased for both 401(k) and Governmental businesses for December 31, 2005 compared to prior year. The decrease is attributable to a decrease in the net investment income earned rate for both businesses. Average general account assets for the Retirement segment increased approximately 7% in 2005 compared to 2004, while net investment income increased only 2%. Benefits and claims expense, which mainly consists of interest credited, increased 5% for the year ended December 31, 2005 compared to prior year. |
• | An increase in insurance operating costs and other expenses of $19 for the year ended December 31, 2005 was principally driven by the 401(k) business. The additional costs can be attributed to greater deposits and assets under management, resulting in a 20% increase in commissions, technology expenditures, and marketing and servicing costs supporting the segment’s business. However, the increase in 401(k) deposits has driven down the overall general insurance expense per case by over 4% compared to prior year. |
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• | Deposits of $5.5 billion to $6.5 billion |
• | Net flows of $2.0 billion to $3.0 billion |
• | Return on assets of 36 to 38 basis points |
2006 | 2005 | 2004 | ||||||||||
Fee income and other | $ | 124 | $ | 119 | $ | 161 | ||||||
Earned premiums | 607 | 504 | 463 | |||||||||
Net investment income | 1,003 | 802 | 664 | |||||||||
Net realized capital gains (losses) | (5 | ) | (5 | ) | 3 | |||||||
Total revenues | 1,729 | 1,420 | 1,291 | |||||||||
Benefits, losses and loss adjustment expenses | 1,484 | 1,212 | 1,116 | |||||||||
Insurance operating costs and expenses | 78 | 56 | 55 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 32 | 32 | 26 | |||||||||
Total benefits, losses and expenses | 1,594 | 1,300 | 1,197 | |||||||||
Income before income taxes | 135 | 120 | 94 | |||||||||
Income tax expense | 36 | 32 | 26 | |||||||||
Net income | $ | 99 | $ | 88 | $ | 68 | ||||||
Assets Under Management | 2006 | 2005 | 2004 | |||||||||
Institutional account values [1] | $ | 22,214 | $ | 17,917 | $ | 14,599 | ||||||
Private Placement Life Insurance account values | 26,131 | 23,836 | 22,498 | |||||||||
Mutual fund assets under management [2] | 2,567 | 1,528 | 676 | |||||||||
Total assets under management | $ | 50,912 | $ | 43,281 | $ | 37,773 | ||||||
[1] | Institutional investment product account values include transfers from Retirement Plans and Retail of $763 during 2006. | |
[2] | Mutual fund assets under management include transfers from the Retirement Plan segment of $178 during 2006. |
• | Higher net investment income increased in Institutional driven by positive net flows of $2.2 billion during the year, which resulted in higher assets under management. Net flows for IIP were strong primarily as a result of the Company’s funding agreement backed Investor Notes program. Investor Note deposits for the years ended December 31, 2006 and 2005 were $2.3 billion and $2.0 billion, respectively. |
• | General account spread is one of the main drivers of net income for the Institutional line of business. The increase in spread income in 2006 was driven by higher assets under management as noted above, combined with improved partnership income. For the year ended December 31, 2006 and 2005, income from partnership investments were $15 and $6 after-tax, respectively. |
• | For the year ended December 31, 2006, earned premiums increased as a result of two large terminal funding cases that were sold during the period. This increase in earned premiums was offset by a corresponding increase in benefits, losses and loss adjustment expenses. |
• | PPLI’s net income increased compared to prior year primarily due to asset growth in the variable business combined with increased tax benefits. |
• | IIP operating expenses increased in the year ended December 31, 2006 due to higher costs related to the launch of new retirement products targeting the “baby boom” generation in 2006. |
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• | Total revenues increased in Institutional driven by positive net flows of $2.4 billion during 2005, which resulted in higher assets under management. Net flows for Institutional increased for the year ended December 31, 2005 compared to the prior year, primarily as a result of the Company’s funding agreement backed Investor Notes program, which was launched in the third quarter of 2004. Investor Note deposits for the years ended December 31, 2005 and 2004 were $2.0 billion and $643, respectively. |
• | General account spread is one of the main drivers of net income for the Institutional line of business. An increase in spread income in 2005 was driven by higher assets under management noted above, combined with improved partnership income and mortality gains related to terminal funding and structured settlement contracts that include life contingencies. For the year ended December 31, 2005 and 2004, gains related to mortality, investments or other activity were $10 and $3 after-tax, respectively. During 2005, the Company invested in more variable rate assets to back the increasing block of variable rate liabilities sold under the stable value product line. This asset/liability matching strategy decreased portfolio yields, as variable rate assets had lower initial coupon yields then fixed rate assets. At the same time, the stable value variable rate liabilities have lower crediting rates in 2005 than stable value fixed rate liabilities, which allowed the Company to maintain-to-slightly-increase its general account spread on a yield basis. |
• | PPLI’s net income increased $3 or 17% compared to prior year primarily due to asset growth in the variable business combined with favorable mortality experience. |
• | PPLI’s cost of insurance charges has decreased due to reductions in the face amount of certain cases. These face reductions have also resulted in lower death benefits. This impact combined with favorable mortality, which increases the provision for future experience rate credits has led to the year over year decrease in fee income and other. |
• | Deposits (includes mutual funds) | $5.0 billion — $6.0 billion | ||
• | Net flows (excludes mutual funds) | $2.0 billion — $3.0 billion | ||
• | Return on assets (includes mutual funds) | 18 to 20 basis points |
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2006 | 2005 | 2004 | ||||||||||
Fee income and other | $ | 883 | $ | 802 | $ | 767 | ||||||
Earned premiums | (53 | ) | (33 | ) | (21 | ) | ||||||
Net investment income | 324 | 305 | 303 | |||||||||
Net realized capital gains | 5 | 5 | 7 | |||||||||
Total revenues | 1,159 | 1,079 | 1,056 | |||||||||
Benefits, losses and loss adjustment expenses | 497 | 469 | 480 | |||||||||
Insurance operating costs and other expenses | 179 | 167 | 164 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 241 | 205 | 185 | |||||||||
Total benefits, losses and expenses | 917 | 841 | 829 | |||||||||
Income before income taxes andcumulative effect of accounting change | 242 | 238 | 227 | |||||||||
Income tax expense | 72 | 72 | 71 | |||||||||
Income before cumulative effect of accounting change | 170 | 166 | 156 | |||||||||
Cumulative effect of accounting change, net of tax [1] | — | — | (1 | ) | ||||||||
Net income | $ | 170 | $ | 166 | $ | 155 | ||||||
Account Values | 2006 | 2005 | 2004 | |||||||||
Variable universal life insurance | $ | 6,637 | $ | 5,902 | $ | 5,356 | ||||||
Universal life/interest sensitive whole life | 4,035 | 3,696 | 3,402 | |||||||||
Modified guaranteed life and other | 699 | 716 | 729 | |||||||||
Total account values | $ | 11,371 | $ | 10,314 | $ | 9,487 | ||||||
Life Insurance Inforce | ||||||||||||
Variable universal life insurance | $ | 73,770 | $ | 71,365 | $ | 69,089 | ||||||
Universal life/interest sensitive whole life | 45,230 | 41,714 | 39,109 | |||||||||
Modified guaranteed life and other | 45,227 | 37,722 | 31,691 | |||||||||
Total life insurance inforce | $ | 164,227 | $ | 150,801 | $ | 139,889 | ||||||
[1] | Represents the cumulative impact of the Company’s adoption of SOP 03-1. |
• | Cost of insurance charges, the largest component of fee income, increased $30 for the year ended December 31, 2006, driven by growth in the variable universal and universal life insurance inforce. Variable fee income increased, consistent with the growth in the variable universal life insurance account value. Other fee income, another component of total fee income, increased primarily due to additional amortization of deferred revenues of $48 associated with the DAC unlock. |
• | Earned premiums, which include premiums for ceded reinsurance, decreased primarily due to increased ceded reinsurance premiums for the year ended December 31, 2006. |
• | Net investment income increased primarily due to increased general account assets from sales growth. |
• | Benefits, losses and loss adjustment expenses increased for 2006 consistent with the growth in account values and life insurance inforce, and also reflect favorable mortality experience in 2006 compared to 2005. |
• | Insurance operating costs and other expenses increased for the year ended December 31, 2006 consistent with the growth of life insurance inforce. |
• | Amortization of DAC for the year ended December 31, 2006 increased $76 related to the DAC unlock, partially offset by revisions to prior year estimates. Excluding the impacts of the DAC unlock and revisions, the amortization of DAC decreased for the year ended December 31, 2006, consistent with the mix of products and the level and mix of product profitability. |
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• | Fee income increased $35 for the year ended December 31, 2005 compared to 2004. Cost of insurance charges, a component of total fee income, increased $22 in 2005, driven by business growth and aging of the prior year block of variable universal, universal, and interest-sensitive whole life insurance inforce. Other fee income, another component of total fee income, increased $7 in 2005 primarily due to growth and improved product performance primarily in interest-sensitive whole life and variable universal life insurance products. Variable fee income grew $6 in 2005, as equity market performance and premiums in excess of withdrawals added to the variable universal life account value. |
• | Net investment income increased moderately for the year ended December 31, 2005 compared to 2004 due to increased general account assets from business growth, partially offset by lower interest rates on new investments and reduced prepayments on bonds in 2005. |
• | Benefits, losses and loss adjustment expenses decreased for the year ended December 31, 2005 compared to 2004 consistent with growth in account values and life insurance inforce. |
• | Income tax expense and the resulting tax rate for the year ended December 31, 2005 was impacted by a DRD tax benefit of $7, whereas income tax expense for the year ended December 31, 2004 included a DRD tax benefit of $5. |
• | Amortization of DAC increased for the year ended December 31, 2005 compared to 2004 primarily as a result of product mix and higher gross margins within variable universal and interest-sensitive whole life insurance products. |
• | Insurance operating costs and other expenses increased for the year ended December 31, 2005 compared to 2004 as a result of business growth. |
• | Sales of $305 to $315 |
• | Life insurance inforce increase of 8% to 10% |
• | After tax margin on total revenues of 15% to 16% |
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2006 | 2005 | 2004 | ||||||||||
Earned premiums and other | $ | 4,150 | $ | 3,810 | $ | 3,652 | ||||||
Net investment income | 415 | 398 | 373 | |||||||||
Net realized capital gains (losses) | (6 | ) | 1 | 2 | ||||||||
Total revenues | 4,559 | 4,209 | 4,027 | |||||||||
Benefits, losses and loss adjustment expenses | 3,002 | 2,794 | 2,703 | |||||||||
Insurance operating costs and other expenses | 1,102 | 1,022 | 989 | |||||||||
Amortization of deferred policy acquisition costs | 41 | 31 | 23 | |||||||||
Total benefits, losses and expenses | 4,145 | 3,847 | 3,715 | |||||||||
Income before income taxes | 414 | 362 | 312 | |||||||||
Income tax expense | 111 | 90 | 83 | |||||||||
Net income | $ | 303 | $ | 272 | $ | 229 | ||||||
Earned Premiums and Other | 2006 | 2005 | 2004 | |||||||||
Fully insured — ongoing premiums | $ | 4,100 | $ | 3,747 | $ | 3,611 | ||||||
Buyout premiums | 12 | 27 | 4 | |||||||||
Other | 38 | 36 | 37 | |||||||||
Total earned premiums and other | $ | 4,150 | $ | 3,810 | $ | 3,652 | ||||||
• | Earned premiums increased driven by year-to-date sales (excluding buyouts) growth of 11%, particularly in group life insurance. |
• | The loss ratio (defined as benefits, losses and loss adjustment expenses as a percentage of premiums and other considerations excluding buyouts) was 72.3% for the year ended December 31, 2006, down from 73.1% in the prior year period. For the year ended December 31, 2006, the loss ratio excluding financial institutions was 77.2% as compared to 77.3% in the prior year period. |
• | The expense ratio was 27.6% for the year ended December 31, 2006 as compared to 27.8% in the prior year period. Excluding financial institutions, the expense ratio for the year ended December 31, 2006 was 22.9%, down from 24.0% in the prior year period. The decline in expense ratio excluding financial institutions for the year ended December 31, 2006 was due to growth in premiums outpacing growth in expenses. |
• | Earned premiums, excluding buyouts, increased 4% driven by sales growth of 23%, particularly in disability, for the year ended December 31, 2005 and continued strong persistency during 2005. | |
• | Net investment income increased due to higher average asset balances as well as slightly higher average investment yields. |
• | The segment’s loss ratio (defined as benefits, losses and loss adjustment expenses as a percentage of premiums and other considerations excluding buyouts) was 73.1% for the year ended December 31, 2005, down from 74.0% in the prior year due to improved morbidity experience as well as favorable mortality experience. Excluding financial institutions, the loss ratio was 77.3%, down from 78.7% in the prior year. |
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• | Operating costs were higher for the year ended December 31, 2005 as compared to the prior year primarily due to higher operating expenses related to business growth. |
• | Fully insured ongoing premiums (excluding buyout premiums and premium equivalents) $4.4 billion to $4.5 billion |
• | Sales (excluding buyout premiums and premium equivalents) $800 to $850 |
• | Loss ratio (excluding buyout premiums) between 72% and 74% |
• | Expense ratio (excluding buyout premiums) between 27% and 29% |
• | After tax margin, on earned premiums and other (excluding buyout premiums), between 6.8% and 7.2%, which reflects the estimated impact of adopting SOP 05-1 “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connections with Modifications or Exchanges of Insurance Contracts.” |
2006 | 2005 | 2004 | ||||||||||
Fee income and other | $ | 700 | $ | 483 | $ | 240 | ||||||
Net investment income | 123 | 75 | 11 | |||||||||
Net realized capital losses | (64 | ) | (34 | ) | (1 | ) | ||||||
Total revenues | 759 | 524 | 250 | |||||||||
Benefits, losses and loss adjustment expenses | 3 | 42 | 20 | |||||||||
Insurance operating costs and other expenses | 208 | 188 | 98 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 167 | 133 | 77 | |||||||||
Total benefits, losses and expenses | 378 | 363 | 195 | |||||||||
Income before income taxes and cumulative effect of accounting change | 381 | 161 | 55 | |||||||||
Income tax expense | 135 | 65 | 12 | |||||||||
Income before cumulative effect of accounting change | 246 | 96 | 43 | |||||||||
Cumulative effect of accounting change, net of tax [1] | — | — | (4 | ) | ||||||||
Net income | $ | 246 | $ | 96 | $ | 39 | ||||||
Assets Under Management | 2006 | 2005 | 2004 | |||||||||
Japan variable annuity account values | $ | 29,653 | $ | 24,641 | $ | 14,129 | ||||||
Japan MVA fixed annuity account values | 1,690 | 1,463 | 502 | |||||||||
Total Japan assets under management | $ | 31,343 | $ | 26,104 | $ | 14,631 | ||||||
[1] | Represents the cumulative impact of the Company’s adoption of SOP 03-1. |
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• | Fee income increased $217 or 45%, for the year ended December 31, 2006. As of December 31, 2006, Japan’s variable annuity assets under management were $29.7 billion, a 20% increase from the prior year period. The increase in average assets under management was driven by positive net flows of $4.2 billion and market appreciation of $1.2 billion during the year. The amount of variable annuity deposits has declined for the year ended December 31, 2006 by 46%, compared to the prior year periods primarily due to increased competition and changes in key distribution relationships. |
• | Also contributing to the higher fee income was increased surrender activity as some customers surrendered policies in order to lock in favorable market appreciation in their account balances. Surrender fees increased by $19, or 53% from the prior year. |
• | The decrease in benefits, losses and loss adjustment expenses by 93% over prior year can be attributed to the unlock of the GMDB/GMIB reserve of $27 after-tax. For further discussion, see DAC Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
• | Contributing to the increase in net income for the year ended December 31, 2006 was a cumulative tax benefit of $9, that resulted from a change in the effective tax rate on Japan earnings resulting from a change in management’s intent under APB 23. |
• | The increase in fixed annuity assets under management can be attributed to positive net flows of $224 during the year. |
• | DAC amortization was higher due to higher actual gross profits consistent with growth in the Japan operation, off-set by $26 after-tax amortization benefit associated with the DAC amortization “unlock.” For further discussion, see DAC Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
• | Insurance operating costs and other expenses increased for the year ended December 31, 2006 by 11%. These increases are due to higher maintenance costs and non-deferred asset-based commissions resulting from the growth in the Japan operation. |
• | The increase in fee income in 2005 was mainly a result of growth in Japan’s variable annuity assets under management. As of December 31, 2005, Japan’s variable annuity assets under management were $24.6 billion, a 74% increase from the prior year. The increase in assets under management was driven by positive net flow of $9.8 billion and favorable market appreciation of $3.4 billion, partially offset by a ($2.6) billion impact of foreign currency exchange. |
• | Higher fees in 2005 were also the result of increased surrender activity, as customers surrendered policies in order to take advantage of significant appreciation in their account balances. |
• | The Japan MVA fixed annuity business contributed $13 of higher investment spread income, including net periodic coupon settlements included in realized losses, in 2005 compared to 2004. This increase in investment spread was driven by higher assets under management. As of December 31, 2005, Japan’s MVA assets under management increased to $1.5 billion compared to $502 in the prior year. The increase in fixed annuity assets under management can be attributed to deposits of $1.2 billion for the year ending December 31, 2005 as compared to $521 for the prior year. |
• | The increase in operating costs in 2005 was primarily due to the significant growth in the Japan operation and investment in our Ireland operation. |
• | DAC amortization was higher in the current year as compared to the prior year due to higher EGP’s consistent with the growth in the Japan operation. |
• | Tax rates increased in 2005 primarily due to a deferred tax valuation allowance established for losses on the United Kingdom operation. |
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• | Variable annuity deposits of ¥530 billion to ¥825 billion ($4.5 billion to $7.0 billion) |
• | Variable annuity net flows of ¥350 billion to ¥650 billion ($3.0 billion to $5.5 billion) |
• | Return on assets of 68 to 72 basis points |
2006 | 2005 | 2004 | ||||||||||
Fee income and other | $ | 83 | $ | 83 | $ | 119 | ||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 154 | 174 | 208 | |||||||||
Equity securities held for trading [1] | 1,824 | 3,847 | 799 | |||||||||
Total net investment income | 1,978 | 4,021 | 1,007 | |||||||||
Net realized capital gains (losses) | (198 | ) | 2 | 156 | ||||||||
Total revenues | 1,863 | 4,106 | 1,282 | |||||||||
Benefits, losses and loss adjustment expenses [1] | 1,985 | 4,166 | 1,017 | |||||||||
Insurance operating costs and other expenses | 11 | 105 | 56 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 40 | 1 | 6 | |||||||||
Total benefits, losses and expenses | 2,036 | 4,272 | 1,079 | |||||||||
Income (loss) before income taxes and cumulative effect of accounting change | (173 | ) | (166 | ) | 203 | |||||||
Income tax benefit | (59 | ) | (51 | ) | (117 | ) | ||||||
Income (loss) before cumulative effect of accounting change | (114 | ) | (115 | ) | 320 | |||||||
Cumulative effect of accounting change, net of tax [2] | — | — | 2 | |||||||||
Net income (loss) | $ | (114 | ) | $ | (115 | ) | $ | 322 | ||||
[1] | Includes investment income and mark-to-market effects of equity securities held for trading supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders within benefits, losses and loss adjustment expenses. | |
[2] | Represents the cumulative impact of the Company’s adoption of SOP 03-1. |
• | Net realized capital losses occurred in the year ended December 31, 2006 compared to net realized capital gains in the prior year period due primarily to rising interest rates. Components of the increased realized losses included increased other than temporary impairments (see the Other-Than-Temporary Impairments discussion within Investment Results for more information on the increase in impairments), losses on non-qualifying derivatives and net losses on sales of investments. | |
• | Life recorded an after-tax charge of $102 for the year ended December 31, 2005 to establish reserves for regulatory matters for investigations related to market timing by the SEC and New York Attorney General’s Office, directed brokerage by the SEC, and single premium group annuities by the New York Attorney General’s Office and the Connecticut Attorney General’s Office. |
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• | During 2006, the Company achieved favorable settlements in several cases brought against the Company by policyholders regarding their purchase of broad-based leveraged corporate owned life insurance (“leveraged COLI”) policies in the early to mid-1990s. The Company ceased offering this product in 1996. Based on the favorable outcome of these cases, together with the Company’s current assessment of the few remaining leveraged COLI cases, the Company reduced its estimate of the ultimate cost of these cases during 2006. This reserve reduction, recorded in insurance operating costs and other expenses, resulted in an after-tax benefit of $34. | |
• | Also contributing to the insurance operating costs and other expenses decreases for the year ended December 31, 2006 was a lower level of dividends to leveraged COLI policyholders. | |
• | During 2005, the Company recorded a charge of $18, after-tax, related to the settlement of certain annuity contracts. | |
• | The increase in the DAC amortization in 2006 was due to the DAC unlock of $46, after-tax. |
• | Net realized capital gains decreased for the year ended December 31, 2005 due to increasing interest rates and the realized loss associated with the GMWB derivatives. |
• | Income tax benefit decreased for the year ended December 31, 2005 due to the absence of a $190 tax benefit recorded during 2004. |
• | Other than the impact of Japan interest credited, benefits, losses, and loss adjustment expenses increased for the year ended December 31, 2005 primarily due to the establishment of a $102 after-tax reserve for investigations related to market timing by the SEC and the New York Attorney General’s Office, directed brokerage by the SEC and single premium group annuities by the New York Attorney General’s Office and the Connecticut Attorney General’s Office. |
2006 | 2005 | 2004 | ||||||||||
Earned premiums | $ | 10,433 | $ | 10,156 | $ | 9,494 | ||||||
• | A $436 increase in Business Insurance and Personal Lines earned premium before considering catastrophe treaty reinstatement premium, primarily driven by new business outpacing non-renewals in Personal Lines auto, Personal Lines homeowners and small commercial, | |
• | $73 of catastrophe treaty reinstatement premium related to the 2005 hurricanes that depressed 2005 earned premium, and | |
• | Earned pricing increases in Personal Lines homeowners. |
• | Non-renewal of a single captive insurance program in specialty casualty that accounted for $241 of earned premium in 2005, and | |
• | Higher property catastrophe treaty reinsurance costs. |
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• | A $651 increase in Business Insurance and Personal Lines earned premium before considering catastrophe treaty reinstatement premium, primarily driven by new business outpacing non-renewals, | |
• | A $90 decrease in 2004 earned premiums under retrospectively-rated policies, and | |
• | Earned pricing increases in small commercial and Personal Lines homeowners. |
2006 | 2005 | 2004 | ||||||||||
Underwriting results | $ | 745 | $ | 465 | $ | (3 | ) | |||||
Net servicing and other income [1] | 53 | 49 | 42 | |||||||||
Net investment income | 1,486 | 1,365 | 1,248 | |||||||||
Other expenses | (223 | ) | (203 | ) | (235 | ) | ||||||
Net realized capital gains | 9 | 44 | 133 | |||||||||
Income tax expense | (551 | ) | (484 | ) | (275 | ) | ||||||
Net income | $ | 1,519 | $ | 1,236 | $ | 910 | ||||||
[1] | Net of expenses related to service business. |
• | A $152 decrease in current accident year catastrophe losses, |
• | A $121 increase in net investment income, |
• | A $41 reduction of estimated Citizens’ assessments in 2006 related to the 2005 hurricanes compared to a charge of $64 for Citizens assessments in 2005 related to the 2005 and 2004 hurricanes, |
• | $73 of catastrophe treaty reinstatement premium recorded as a reduction of earned premium in 2005, and |
• | A $51 increase in underwriting results from earned premium growth in Business Insurance and Personal Lines before considering catastrophe treaty reinstatement premium. |
• | A $67 increase in income tax expense, reflecting an increase in income before income taxes, partially offset by a $49 income tax benefit resulting from the sale of Omni, |
• | A $48 increase in net unfavorable prior accident year development, |
• | A $35 decrease in net realized capital gains, primarily due to a $24, pre-tax, realized capital loss from the sale of Omni, and |
• | A $20 increase in other expenses, primarily due to lower bad debt expense in 2005. |
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• | A $172 decrease in current accident year catastrophe losses, |
• | A $166 decrease in net unfavorable prior accident year development, |
• | A $117 increase in net investment income, |
• | A $90 decrease in 2004 earned premiums under retrospectively-rated policies, |
• | An improvement in current accident year loss costs before catastrophes, |
• | A $32 decrease in other expenses, primarily due to lower bad debt expense in 2005, and |
• | A $76 increase in underwriting results from earned premium growth in Business Insurance and Personal Lines at a combined ratio less than 100.0. |
• | An $89 decrease in net realized capital gains, |
• | $64 of Citizens assessments in 2005 related to the 2005 and 2004 hurricanes, |
• | A $56 increase in catastrophe treaty reinstatement premium recorded as a reduction of earned premium, and |
• | A $209 increase in income tax expense, reflecting an increase in income before income taxes. |
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Ongoing Operations earned premium growth | 2006 | 2005 | 2004 | |||||||||
Business Insurance | 7 | % | 11 | % | 16 | % | ||||||
Personal Lines | 4 | % | 5 | % | 8 | % | ||||||
Specialty Commercial | (12 | %) | 2 | % | 11 | % | ||||||
Ongoing Operations | 3 | % | 7 | % | 12 | % | ||||||
Ongoing Operations combined ratio | ||||||||||||
Combined ratio before catastrophes and prior year development | 88.0 | 89.4 | 89.7 | |||||||||
Catastrophe ratio | ||||||||||||
Current year | 1.9 | 3.5 | 5.5 | |||||||||
Prior years [1] | (0.7 | ) | 0.1 | (3.3 | ) | |||||||
Total catastrophe ratio | 1.2 | 3.6 | 2.2 | |||||||||
Non-catastrophe prior year development | 0.1 | 0.2 | 3.4 | |||||||||
Combined ratio | 89.3 | 93.2 | 95.3 | |||||||||
Other Operations net income (loss) | $ | (35 | ) | $ | 71 | $ | (45 | ) | ||||
Total Property & Casualty measures of net investment income | ||||||||||||
Investment yield, after-tax | 4.1 | % | 4.1 | % | 4.1 | % | ||||||
Average annual invested assets at cost | $ | 27,324 | $ | 25,148 | $ | 23,437 | ||||||
[1] | Included in the prior year catastrophe ratio is the net reserve release of (3.1) points related to September 11 in 2004. |
• | The lower growth rate in Business Insurance was primarily attributable to a decrease in new business written premium, lower earned pricing increases in small commercial, larger earned pricing decreases in middle market and higher property catastrophe treaty reinsurance costs. | |
• | The lower growth in Personal Lines was primarily due to unfavorable changes in earned pricing and the effect of higher property catastrophe treaty reinsurance costs. Partially offsetting the lower growth rate was the effect of $31 of catastrophe treaty reinstatement premium recorded as a reduction of earned premium in 2005 and an increase in new business written premium in auto and homeowners. During 2006, there was a decline in earned pricing increases in homeowners and a change from slight earned pricing increases for auto in 2005 to flat earned pricing for auto in 2006. | |
• | The decline in Specialty Commercial earned premium primarily resulted from the non-renewal of a single captive insurance program within specialty casualty that accounted for $241 of earned premium in 2005 and a decrease in specialty property earned premium, partially offset by the effect of $26 of catastrophe treaty reinstatement recorded as a reduction of earned premium in 2005 and a higher growth rate in professional liability, fidelity and surety business. |
• | For 2006, the combined ratio before catastrophes and prior accident year development decreased by 1.4 points, to 88.0, driven largely by the effect of $73 of catastrophe treaty reinstatement premium recorded as a reduction of earned premium in 2005 and an improvement in the expense ratio. Before the effect of reinstatement premium in 2005, the combined ratio before catastrophes and prior accident year development decreased by 0.7 points, primarily due to a 0.8 point decrease in the expense ratio and a lower current accident year loss and loss adjustment expense ratio for workers’ compensation business in small commercial, partially offset by an increase in non-catastrophe property loss costs in middle market and Personal Lines homeowners. The decrease in the expense ratio was primarily driven by a reduction of $41 for Citizens’ assessments in 2006 and a charge of $64 for Citizens assessments in 2005. |
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• | The decrease in the current accident year catastrophe ratio for 2006 was primarily due to $264 of net losses incurred in 2005 for hurricanes Katrina, Rita and Wilma, partially offset by an increase in non-hurricane catastrophe losses. Catastrophe losses for 2006 included tornadoes and hail storms in the Midwest and windstorms in Texas and on the East coast. | |
• | Prior accident year catastrophe reserves were reduced by $70 in 2006 primarily due to $83 of favorable development related to the 2005 and 2004 hurricanes. Net prior accident year development for non-catastrophe claims was not significant as reserve strengthenings were largely offset by reserve releases. See the “Reserves” section for a discussion of prior accident year reserve development for Ongoing Operations in 2006. |
• | Other Operations reported a net loss of $35 for 2006 compared to net income of $71 for 2005. The change from net income to a net loss was primarily due to a $148 increase in unfavorable prior accident year development and a $22 decrease in net investment income, partially offset by a change to an income tax benefit in 2006 as a result of a pre-tax loss in 2006. The $148 increase in prior accident year development was primarily due to a $243 reduction in net reinsurance recoverables as a result of the agreement with Equitas and the Company’s evaluation of the reinsurance recoverables and allowance for uncollectible reinsurance associated with older, long-term casualty liabilities. Partially offsetting the increase in prior accident year development in 2006 was $85 of unfavorable reserve development for assumed reinsurance in 2005. The $22 decrease in net investment income was primarily due to lower invested assets as a result of loss and loss adjustment expense payments and the reallocation of capital from Other Operations to Ongoing Operations. |
• | The after-tax investment yield remained flat at 4.1% from 2005 to 2006. An increase in the yield on investments in fixed maturities was offset by a decrease in the yield on limited partnerships. | |
• | The average annual invested assets at cost increased as a result of net underwriting cash inflows and investment income. |
• | Contributing to the decrease in the earned premium growth rate for Business Insurance were lower earned pricing increases in small commercial, earned pricing decreases in middle market and a decrease in new business growth, partially offset by increased renewal retention. | |
• | The decrease in the earned premium growth rate for Personal Lines was primarily due to lower earned pricing increases in both auto and homeowners business, a decrease in premium renewal retention and a decline in Omni and Other Affinity earned premium. | |
• | The decline in the Specialty Commercial earned premium growth rate primarily resulted from a decrease in property business due to a decline in new business and the Company’s exit from the multi-peril crop insurance business. |
• | Before catastrophes and prior accident year development, the combined ratio improved from 2004 to 2005 principally due to improved current accident year performance for auto bodily injury and workers’ compensation claims, partially offset by the effect of an increase in non-catastrophe loss costs for property coverages and an increase in the expense ratio, which was largely due to the hurricane-related assessments of $64 in 2005. | |
• | The decrease in the current accident year catastrophe ratio for 2005 was primarily due to $264 of net losses incurred for hurricanes Katrina, Rita and Wilma in 2005 compared to $394 of losses from Hurricanes Charley, Frances, Ivan and Jeanne in 2004. | |
• | Net prior accident year development was not significant in 2005 as reserve strengthenings were largely offset by reserve releases. In 2004, strengthening of non-catastrophe loss reserves was almost entirely offset by a release of catastrophe reserves. Prior accident year catastrophe reserves related to September 11 were reduced by $298 in 2004. Net prior accident year reserve increases in 2004 for non-catastrophe losses included $190 for construction defects claims, $38 for small commercial package business and $25 for auto liability claims. See the “Reserves” section for a discussion of net favorable prior accident year reserve development for Ongoing Operations in 2006. |
• | Other Operations reported net income of $71 for 2005 compared to a net loss of $45 for 2004. The change from a net loss to net income was primarily due to a $233 decrease in unfavorable prior accident year development, partially offset by a $62 decrease in net investment income and a change to income tax expense due to the pre-tax income in 2005. The $233 decrease in net reserve strengthening was primarily due to $181 of unfavorable development in 2004 related to a reduction in the reinsurance recoverable asset associated with older, long-term casualty liabilities, including asbestos liabilities, as well as $85 more of unfavorable prior accident year reserve development in 2004 on assumed reinsurance reserves. The $62 decrease in net investment income was |
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primarily due to lower invested assets as a result of loss and loss adjustment expense payments and the reallocation of capital from Other Operations to Ongoing Operations. |
• | The after-tax investment yield of 4.1% for 2005 was consistent with the after-tax yield in 2004. | |
• | The average annual invested assets increased over the same period as a result of net underwriting cash inflows and investment income. |
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Property & Casualty maintains one portfolio of invested assets for all business written by the Hartford Fire Insurance Pool companies, including business reported in both the Ongoing Operations and Other Operations segments. Separate investment portfolios are maintained within Other Operations for the runoff of international assumed reinsurance claims and for the runoff business of Heritage Holdings, Inc., including its subsidiaries, Excess Insurance Company Ltd., First State Insurance Company and Heritage Reinsurance Company, Ltd. Within the Hartford Fire Insurance Pool, invested assets are attributed to Ongoing Operations and Other Operations pursuant to the Company’s capital attribution process.
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For the year ended December 31, 2006 | ||||||||||||||||||||||||
Business | Personal | Specialty | Ongoing | Other | Total | |||||||||||||||||||
Insurance | Lines | Commercial | Operations | Operations | P&C | |||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 7,066 | $ | 2,152 | $ | 6,202 | $ | 15,420 | $ | 6,846 | $ | 22,266 | ||||||||||||
Reinsurance and other recoverables | 709 | 385 | 2,354 | 3,448 | 1,955 | 5,403 | ||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 6,357 | 1,767 | 3,848 | 11,972 | 4,891 | 16,863 | ||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||
Current year | 3,127 | 2,516 | 1,063 | 6,706 | — | 6,706 | ||||||||||||||||||
Prior years | (61 | ) | (38 | ) | 35 | (64 | ) | 360 | 296 | |||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 3,066 | 2,478 | 1,098 | 6,642 | 360 | 7,002 | ||||||||||||||||||
Less: Payments | (2,279 | ) | (2,309 | ) | (727 | ) | (5,315 | ) | (835 | ) | (6,150 | ) | ||||||||||||
Less: Net reserves of Omni business sold | — | (111 | ) | — | (111 | ) | — | (111 | ) | |||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 7,144 | 1,825 | 4,219 | 13,188 | 4,416 | 17,604 | ||||||||||||||||||
Reinsurance and other recoverables | 650 | 134 | 2,303 | 3,087 | 1,300 | 4,387 | ||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 7,794 | $ | 1,959 | $ | 6,522 | $ | 16,275 | $ | 5,716 | $ | 21,991 | ||||||||||||
Earned premiums | $ | 5,118 | $ | 3,760 | $ | 1,550 | $ | 10,428 | $ | 5 | $ | 10,433 | ||||||||||||
Loss and loss expense paid ratio [1] | 44.6 | 61.4 | 46.8 | 51.0 | ||||||||||||||||||||
Loss and loss expense incurred ratio | 59.9 | 65.9 | 70.8 | 63.7 | ||||||||||||||||||||
Prior accident year development (pts.) [2] | (1.2 | ) | (1.0 | ) | 2.3 | (0.6 | ) | |||||||||||||||||
[1] | The “loss and loss expense paid ratio” represents the ratio of paid loss and loss adjustment expenses to earned premiums. | |
[2] | “Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums. |
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Business | Personal | Specialty | Ongoing | Other | Total | |||||||||||||||||||
Insurance | Lines | Commercial | Operations | Operations | P&C | |||||||||||||||||||
Net release of catastrophe loss reserves for 2004 and 2005 hurricanes | $ | (25 | ) | $ | (23 | ) | $ | (35 | ) | $ | (83 | ) | $ | — | $ | (83 | ) | |||||||
Release of Personal Lines auto liability reserves for accident year 2005 | — | (31 | ) | — | (31 | ) | — | (31 | ) | |||||||||||||||
Strengthening of Personal Lines auto liability reserves for claims with exposure in excess of policy limits | — | 30 | — | 30 | — | 30 | ||||||||||||||||||
Release of Business Insurance allocated loss adjustment expense reserves for workers’ compensation and package business for accident years 2003 to 2005 | (58 | ) | — | — | (58 | ) | — | (58 | ) | |||||||||||||||
Release of Personal Lines auto liability reserves for accident year 2003 to 2005 | — | (22 | ) | — | (22 | ) | — | (22 | ) | |||||||||||||||
Strengthening of Specialty Commercial construction defect claim reserves for accident years 1997 and prior | — | — | 45 | 45 | — | 45 | ||||||||||||||||||
Strengthening of Specialty Commercial workers’ compensation allocated loss adjustment expense reserves | — | — | 20 | 20 | — | 20 | ||||||||||||||||||
Effect of Equitas agreement and strengthening of allowance for uncollectible reinsurance | — | — | — | — | 243 | 243 | ||||||||||||||||||
Strengthening of environmental reserves | — | — | — | — | 43 | 43 | ||||||||||||||||||
Other reserve re-estimates, net [1] | 22 | 8 | 5 | 35 | 74 | 109 | ||||||||||||||||||
Total prior accident year development for the year ended December 31, 2006 | $ | (61 | ) | $ | (38 | ) | $ | 35 | $ | (64 | ) | $ | 360 | $ | 296 | |||||||||
[1] | Includes reserve discount accretion of $32, including $14 in Business Insurance, $11 in Specialty Commercial and $7 in Other Operations. |
• | Released net reserves related to prior year hurricanes by a total of $83, including $57 for hurricanes Katrina and Rita in 2005 and $26 for hurricanes Charley, Frances and Jeanne in 2004. Initial reserve estimates for the 2005 and 2004 hurricanes were higher because of the difficulty claim adjusters had in accessing the most significantly impacted areas and initially higher estimates of the cost of building materials and contractors due to “demand surge”. As the reported claims have matured, the estimated settlement value of the claims has decreased from the initial estimates. The ultimate estimate for hurricane Katrina was increased in the first quarter of 2006 because of higher than expected claim reporting, particularly in Personal Lines. Net loss reserves within Specialty Commercial decreased, primarily because hurricane Katrina losses on specialty property business were reimbursable under a specialty property reinsurance treaty as well as under the Company’s principal property catastrophe reinsurance program. After the first quarter of 2006, Katrina new claim intake abated and settlement percentages increased, resulting in a reduction of reserves in the last nine months of 2006. In addition, the rate of newly reported compensable claims for Rita and the 2004 hurricanes was less than expected, resulting in a reduction of reserves for these hurricanes. |
• | Released Personal Lines auto liability reserves by $31 related to the fourth accident quarter of 2005 as a result of better than expected frequency trends. During the third and fourth quarter of 2005, the Company had reduced the 2005 accident year loss and loss adjustment expense ratio for Personal Lines auto liability claims related to the first three accident quarters of 2005. Favorable frequency for the fourth accident quarter of 2005 emerged during the fourth quarter of 2005. However, the Company did not release reserves at that time, since reserve indications at only three months of development were not reliable. The Company released reserves in 2006 after further development indicated that early indications of reduced frequency were representative of a real trend. The $31 reserve release represented 2% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2005. |
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• | Strengthened reserves for personal auto liability claims by $30 due to an increase in estimated severity on claims where the Company is exposed to losses in excess of policy limits. From the Company’s reserve review during the first quarter of 2006, the Company determined that the facts and circumstances necessitated an increase in the reserve estimate. The $30 of reserve strengthening represented 2% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2005. |
• | Released Business Insurance allocated loss adjustment expense reserves by $58 for accident years 2003 to 2005, primarily for workers’ compensation business and package business, as a result of cost reduction initiatives implemented by the Company to reduce allocated loss adjustment expenses for both legal and non-legal expenses. The Company began implementing cost reduction initiatives in late 2003. It was initially uncertain what effect those efforts would have on controlling allocated loss adjustment expenses. During 2004, favorable trends started to emerge, particularly on shorter-tailed auto liability claims, but it was not clear if these trends would be sustained. In early 2005, favorable trends continued and the Company analyzed claims involving legal expenses separate from claims that do not involve legal expenses. This analysis included a review of the trends in the number of claims involving legal expenses, the average expenses incurred and trends in legal expenses. During the second quarter of 2005, the Company released allocated loss adjustment expense reserves on shorter-tailed auto liability claims as the favorable trends on shorter-tailed business emerged more quickly and were determined to be reliable. During both the second and fourth quarter of 2006, the Company determined that the favorable development on package business and workers’ compensation business had become a verifiable trend and, accordingly, reserves were reduced. The $58 reserve release represented 1% of Business Insurance net reserves as of December 31, 2005. |
• | Released Personal Lines auto liability reserves related to AARP and other affinity business by $22. AARP auto liability reserves for accident year 2004 were reduced as a result of favorable loss cost severity trends. AARP auto liability severity, as measured by reported data, began declining in 2005; however, the Company was uncertain whether this trend would prove persistent over time since paid loss data did not support a decline. During the second quarter of 2006, the Company determined that all the metrics supported a decline in severity estimates and, therefore, the Company released reserves. Auto liability reserves for other affinity business related to accident years 2003 to 2005 were reduced to recognize favorable developments in loss costs that have emerged. The $22 reserve release represented 1% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2005. |
• | Strengthened Specialty Commercial construction defect claim reserves by $45 for accident years 1997 and prior as a result of an increase in claim severity trends. In 2004, two large construction defects claims were reported, but these were not viewed as an indication of an increase in the severity trend for all claims. In 2005, two additional large cases were reported. Management performed an expanded review of construction defects claims in the second quarter of 2006. Based on the expanded review and additional reported claim experience, management concluded that reported losses would likely continue at a higher level in the future and this resulted in strengthening the recorded reserves. The $45 of reserve strengthening represented 16% of the Company’s net reserves for Specialty Commercial property claims as of December 31, 2005. |
• | Strengthened Specialty Commercial workers’ compensation allocated loss adjustment expense reserves by $20 for loss adjustment expense payments expected to emerge after 20 years of development. During 2005, the Company had done an in-depth study of loss payments expected to emerge after 20 years of development. At that time, it was believed that allocated loss adjustment expenses for a particular subset of business (primary policies on national accounts business) developed more quickly than allocated loss adjustment expenses for smaller insureds and that a similar reserve strengthening for national accounts business was not required. During the second quarter of 2006, the Company’s reserve review indicated that the development pattern for this business should be adjusted to be more consistent with that for smaller insureds. Because the Company has written very little of this business in recent years, the increase in reserves affects accident years 1995 and prior. The $20 of reserve strengthening represented 1% of the Company’s net reserves for Specialty Commercial workers’ compensation claims as of December 31, 2005. |
• | Reduced the reinsurance recoverable asset associated with older, longer-term casualty liabilities by $243. The Company reviewed the reinsurance recoverables and allowance for uncollectible reinsurance associated with older, long-term casualty liabilities in the second quarter 2006. As a result of this study, and the outcome of an agreement that resolved, with minor exception, all of the Company’s ceded and assumed domestic reinsurance exposures with Equitas, Other Operations recorded prior accident year development of $243. |
• | Strengthened environmental reserves by $43 as a result of an environmental reserve evaluation completed in the third quarter of 2006. As part of this evaluation, the Company reviewed all of its domestic direct and assumed reinsurance accounts exposed to environmental liability. The Company also examined its London Market exposures for both direct insurance and assumed reinsurance. The Company found estimates for individual cases changed based upon the particular circumstances of each account, although the review found no underlying cause or change in the claim environment. The $43 of reserve strengthening represented 2% of the Company’s net reserves for asbestos and environmental claims as of December 31, 2005. |
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For the year ended December 31, 2005 | ||||||||||||||||||||||||
Business | Personal | Specialty | Ongoing | Other | Total | |||||||||||||||||||
Insurance | Lines | Commercial | Operations | Operations | P&C | |||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 6,057 | $ | 2,000 | $ | 5,519 | $ | 13,576 | $ | 7,753 | $ | 21,329 | ||||||||||||
Reinsurance and other recoverables | 474 | 190 | 2,091 | 2,755 | 2,383 | 5,138 | ||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 5,583 | 1,810 | 3,428 | 10,821 | 5,370 | 16,191 | ||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||
Current year | 2,949 | 2,389 | 1,377 | 6,715 | — | 6,715 | ||||||||||||||||||
Prior years | 22 | (95 | ) | 109 | 36 | 212 | 248 | |||||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 2,971 | 2,294 | 1,486 | 6,751 | 212 | 6,963 | ||||||||||||||||||
Less: Payments | (2,197 | ) | (2,337 | ) | (1,066 | ) | (5,600 | ) | (691 | ) | (6,291 | ) | ||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 6,357 | 1,767 | 3,848 | 11,972 | 4,891 | 16,863 | ||||||||||||||||||
Reinsurance and other recoverables | 709 | 385 | 2,354 | 3,448 | 1,955 | 5,403 | ||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 7,066 | $ | 2,152 | $ | 6,202 | $ | 15,420 | $ | 6,846 | $ | 22,266 | ||||||||||||
Earned premiums | $ | 4,785 | $ | 3,610 | $ | 1,757 | $ | 10,152 | $ | 4 | $ | 10,156 | ||||||||||||
Loss and loss expense paid ratio [1] | 45.9 | 64.8 | 60.6 | 55.1 | ||||||||||||||||||||
Loss and loss expense incurred ratio | 62.1 | 63.6 | 84.6 | 66.5 | ||||||||||||||||||||
Prior accident year development (pts.) [2] | 0.5 | (2.6 | ) | 6.2 | 0.4 | |||||||||||||||||||
[1] | The “loss and loss expense paid ratio” represents the ratio of paid loss and loss adjustment expenses to earned premiums. | |
[2] | “Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums. |
Year Ended December 31, 2005 | ||||||||||||||||||||||||
Business | Personal | Specialty | Ongoing | Other | Total | |||||||||||||||||||
Insurance | Lines | Commercial | Operations | Operations | P&C | |||||||||||||||||||
Gross incurred loss and loss adjustment expenses for current accident year catastrophes | $ | 337 | $ | 394 | $ | 594 | $ | 1,325 | $ | — | $ | 1,325 | ||||||||||||
Ceded loss and loss adjustment expenses for current accident year catastrophes | 248 | 296 | 430 | 974 | — | 974 | ||||||||||||||||||
Net incurred loss and loss adjustment expenses for current accident year catastrophes | $ | 89 | $ | 98 | $ | 164 | $ | 351 | $ | — | $ | 351 | ||||||||||||
Reinstatement premium ceded to reinsurers | $ | 16 | $ | 31 | $ | 26 | $ | 73 | $ | — | $ | 73 | ||||||||||||
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Business | Personal | Specialty | Ongoing | Other | Total | |||||||||||||||||||
Insurance | Lines | Commercial | Operations | Operations | P&C | |||||||||||||||||||
Strengthening of workers’ compensation reserves for claim payments expected to emerge after 20 years of development | $ | 50 | $ | — | $ | 70 | $ | 120 | $ | — | $ | 120 | ||||||||||||
Release of 2003 and 2004 accident year workers’ compensation reserves | (75 | ) | — | — | (75 | ) | — | (75 | ) | |||||||||||||||
Release of reserves for allocated loss adjustment expenses | (25 | ) | (95 | ) | — | (120 | ) | — | (120 | ) | ||||||||||||||
Strengthening of general liability reserves in Business Insurance | 40 | — | — | 40 | — | 40 | ||||||||||||||||||
Strengthening of reserves for 2004 hurricanes | 20 | 9 | 4 | 33 | — | 33 | ||||||||||||||||||
Strengthening of assumed casualty reinsurance reserves | — | — | — | — | 85 | 85 | ||||||||||||||||||
Strengthening of environmental reserves | — | — | — | — | 37 | 37 | ||||||||||||||||||
Other reserve reestimates, net [1] | 12 | (9 | ) | 35 | 38 | 90 | 128 | |||||||||||||||||
Total prior accident year development for the year ended December 31, 2005 | $ | 22 | $ | (95 | ) | $ | 109 | $ | 36 | $ | 212 | $ | 248 | |||||||||||
[1] | Includes reserve discount accretion of $30, including $13 in Business Insurance, $10 in Specialty Commercial and $7 in Other Operations. |
• | Strengthened workers’ compensation reserves for claim payments expected to emerge after 20 years of development by $120. For workers’ compensation claims involving permanent disability, it is particularly difficult to estimate how such claims will develop more than 20 years after the year the claims were incurred (known as “the tail”). During 2005, the Company’s actuaries performed an actuarial study to re-estimate the required reserves for additional development beyond the 20th year following a claim being incurred. This study involved gathering extensive historical data dating back over 50 years which could be used for making these estimates and incorporated modeling using actuarial techniques that have recently been developed within the actuarial profession. Based on the results of this analysis the Company changed its previous estimate and increased the percentage of ultimate claim costs expected to be paid after 20 years of development. As an example, within Business Insurance this development percentage was increased from 8% to 9%. The $120 of reserve strengthening represented a change in estimate which was 3% of the Company’s net reserves for workers’ compensation claims as of December 31, 2004. |
• | Released reserves for workers’ compensation losses in Business Insurance on accident years 2003 and 2004 by $75. The state of California instituted reforms to its workers’ compensation laws that began in 2003 and continued through 2005. In addition, in this same time frame, the Company was taking underwriting actions to improve workers’ compensation underwriting performance. Management recognized that the combination of the Company’s underwriting initiatives and the state of California changes could, |
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over time, improve the Company’s workers’ compensation experience. Verification of this improvement as a probable outcome, however, would require sufficient supporting evidence. While there appeared to be some favorable trends emerging in late 2004 with respect to accident year 2003 and while early indications on accident year 2004 were favorable, senior reserving actuaries and senior management were uncertain that these favorable trends were real and would be sustained. In the third quarter of 2005, management concluded that sufficient evidence existed in the actuarial data and methods to support a release of reserves. The actuarial work was further supported by a review of underwriting metrics, supporting the effectiveness of the actions taken, and by discussions with claim handlers involved with the California workers’ compensation business. The $75 reserve release represented a change in estimate which was 2% of the Company’s net reserves for workers’ compensation claims as of December 31, 2004. |
• | Released prior accident year reserves for allocated loss adjustment expenses by $120, largely as the result of cost reduction initiatives implemented by the Company to reduce allocated loss adjustment expenses for both legal and non-legal expenses as well as improved actuarial techniques. The improved actuarial techniques included an analysis of claims involving legal expenses separate from claims that do not involve legal expenses. This analysis included a review of the trends in the number of claims involving legal expenses, the average expenses incurred and trends in legal expenses. The release of $95 in Personal Lines represented 5% of Personal Lines net reserves as of December 31, 2004. |
• | Strengthened general liability reserves within Business Insurance by $40 for accident years 2000-2003 due to higher than anticipated loss payments beyond four years of development. The $40 reserve strengthening represented 2% of the Company’s net reserves for general liability claims as of December 31, 2004. |
• | Strengthened reserves for loss and loss adjustment expenses related to the third quarter 2004 hurricanes by a total of $33. The main drivers of the increase were late-reported claims for condominium assessments and increases in the costs of building materials and contracting services. |
• | Within the Specialty Commercial segment, there were other offsetting positive and negative adjustments to prior accident year reserves. The principal offsetting adjustments were a release of reserves for directors and officers insurance related to accident years 2003 and 2004 and strengthening of prior accident year reserves for contracts that provide auto financing gap coverage and auto lease residual value coverage; the release and offsetting strengthening were each approximately $80. |
• | Strengthened assumed reinsurance reserves by $85, principally for accident years 1997 through 2001. In recent years, the Company has seen an increase in reported losses above previous expectations and this increase in reported losses contributed to the reserve re-estimates. 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. The reserve strengthening of $85 represents 6% of the $1.3 billion of net Reinsurance reserves within Other Operations as of December 31, 2004. |
• | Strengthened environmental reserves by $37 as a result of an environmental reserve evaluation completed during the third quarter of 2005. While the review found no underlying cause or change in the claim environment, loss estimates for individual cases changed based upon the particular circumstances of each account. The $37 of reserve strengthening represented 1% of the Company’s net reserves for asbestos and environmental claims as of December 31, 2004. |
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For the year ended December 31, 2004 | ||||||||||||||||||||||||
Business | Personal | Specialty | Ongoing | Other | Total | |||||||||||||||||||
Insurance | Lines | Commercial | Operations | Operations[1] | P&C | |||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 5,296 | $ | 1,733 | $ | 5,148 | $ | 12,177 | $ | 9,538 | $ | 21,715 | ||||||||||||
Reinsurance and other recoverables | 395 | 43 | 2,096 | 2,534 | 2,963 | 5,497 | ||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 4,901 | 1,690 | 3,052 | 9,643 | 6,575 | 16,218 | ||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||
Current year | 2,700 | 2,509 | 1,345 | 6,554 | 36 | 6,590 | ||||||||||||||||||
Prior years | (67 | ) | 3 | 69 | 5 | 409 | 414 | |||||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 2,633 | 2,512 | 1,414 | 6,559 | 445 | 7,004 | ||||||||||||||||||
Payments [1] | (1,951 | ) | (2,392 | ) | (1,038 | ) | (5,381 | ) | (1,650 | ) | (7,031 | ) | ||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 5,583 | 1,810 | 3,428 | 10,821 | 5,370 | 16,191 | ||||||||||||||||||
Reinsurance and other recoverables | 474 | 190 | 2,091 | 2,755 | 2,383 | 5,138 | ||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 6,057 | $ | 2,000 | $ | 5,519 | $ | 13,576 | $ | 7,753 | $ | 21,329 | ||||||||||||
Earned premiums | $ | 4,299 | $ | 3,445 | $ | 1,726 | $ | 9,470 | $ | 24 | $ | 9,494 | ||||||||||||
Loss and loss expense paid ratio [2] | 45.4 | 69.4 | 59.9 | 56.8 | ||||||||||||||||||||
Loss and loss expense incurred ratio | 61.2 | 72.9 | 81.9 | 69.3 | ||||||||||||||||||||
Prior accident year development (pts.) [3] | (1.6 | ) | 0.1 | 4.0 | 0.1 | |||||||||||||||||||
[1] | Other Operations included payments pursuant to the MacArthur settlement. | |
[2] | The “loss and loss expense paid ratio” represents the ratio of paid loss and loss adjustment expenses to earned premiums. | |
[3] | “Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums. |
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Year Ended December 31, 2004 | ||||||||||||||||||||||||
Business | Personal | Specialty | Ongoing | Other | Total | |||||||||||||||||||
Insurance | Lines | Commercial | Operations | Operations | P&C | |||||||||||||||||||
Release of September 11 reserves | $ | (175 | ) | $ | (7 | ) | $ | (116 | ) | $ | (298 | ) | $ | (97 | ) | $ | (395 | ) | ||||||
Strengthening of reserves for construction defects claims | 23 | — | 167 | 190 | — | 190 | ||||||||||||||||||
Strengthening of reserves for auto liability and package business | 63 | — | — | 63 | — | 63 | ||||||||||||||||||
Reduction in the reinsurance recoverable asset associated with older, long-term casualty liabilities, including asbestos liabilities | — | — | — | — | 181 | 181 | ||||||||||||||||||
Strengthening of environmental reserves | — | — | — | — | 75 | 75 | ||||||||||||||||||
Strengthening of reserves for assumed casualty reinsurance | — | — | — | — | 170 | 170 | ||||||||||||||||||
Other reserve re-estimates, net [1] | 22 | 10 | 18 | 50 | 80 | 130 | ||||||||||||||||||
Total prior accident year development for the year ended December 31, 2004 | $ | (67 | ) | $ | 3 | $ | 69 | $ | 5 | $ | 409 | $ | 414 | |||||||||||
[1] | Includes reserve discount accretion of $29, including $13 in Business Insurance, $10 in Specialty Commercial and $6 in Other Operations. |
• | Released September 11 net reserves by $298 due to favorable developments in 2004, including the closure of primary insurance property cases, a high participation rate within the Victim’s Compensation Fund and the expiration of the deadline for filing a liability claim in March 2004. |
• | Strengthened reserves for construction defects claims by $190, representing 11% of the Company’s $1.8 billion of net reserves for general liability claims as of December 31, 2004. The Company’s construction defects claims, which relate primarily to accident years prior to 2000, experienced increasing severity, particularly due to losses from contractors in California. |
• | Strengthened auto liability reserves by $25 and package business reserves by $38 related to accident years 1998 to 2002 as actual reported losses were above previous expectations. In particular, the Company observed a higher frequency of large claims (generally those greater than $100,000) than had been anticipated in prior estimates. The auto liability reserve strengthening of $25 represented 1% of the Company’s net reserves for auto liability claims as of December 31, 2004 and the package business reserve strengthening of $38 represented 3% of the Company’s net reserves for package business as of December 31, 2004. |
• | Within the Specialty Commercial segment there were other offsetting positive and negative adjustments. The principal offsetting adjustments related to a strengthening in specialty large deductible workers’ compensation reserves and a release in other liability reserves, each approximately $150. |
• | Reduced the reinsurance recoverable asset associated with older, long-term casualty liabilities, including asbestos liabilities, by $181. Strengthened environmental reserves by $75. |
• | Strengthened reserves for assumed casualty reinsurance by $170, primarily related to assumed casualty treaty reinsurance for the years 1997 through 2001. The $170 of strengthening represented 13% of the $1.3 billion of net Reinsurance reserves as of December 31, 2004. In recent years, the Company had seen an increase in reported assumed reinsurance claims above previous expectations and this increase in reported claims contributed to the reserve re-estimates. |
• | Released September 11 net reserves by $97 due to favorable developments, including a lack of significant additional loss notices on assumed reinsurance property treaties. |
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Business | Personal | Specialty | Ongoing | Other | Total | |||||||||||||||||||
Insurance | Lines | Commercial | Operations | Operations | P&C | |||||||||||||||||||
Range of prior accident year development for the six years ended December 31, 2006 [1] [2] | (1.4) – 0.5 | (5.2) – 5.1 | 0.8 – 3.2 | (0.5) – 1.4 | 2.9– 67.5 | 1.2 – 21.5 | ||||||||||||||||||
[1] | Bracketed prior accident year development indicates favorable development. Unbracketed amounts represent unfavorable development. | |
[2] | Before the reserve strengthening for asbestos and environmental reserves over the past ten years, reserve re-estimates for total Property & Casualty ranged from (3.0%) to 1.6% . |
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% of layer(s) | ||||||||||||||
Coverage | Treaty term | reinsured | Per occurrence limit | Retention | ||||||||||
Principal property catastrophe program covering property catastrophe losses from a single event | 1/1/2007 to 1/1/2008 | Varies by layer, but averages 87% across all layers | Aggregates to $750 across all layers | $ | 250 | [1] | ||||||||
Layer covering property catastrophe losses from a single wind or earthquake event affecting the northeast of the United States from Virginia to Maine | 6/1/2006 to 6/1/2007 | 90 | % | 300 | 1,000 | |||||||||
Property catastrophe losses from a single event on excess and surplus property business | 1/1/2007 to 1/1/2008 | 95 | % | 330 | 20 | |||||||||
Property catastrophe losses from a single event on property business written with national accounts | 7/1/2006 to 7/1/2007 | 82 | % | 150 | 25 | |||||||||
Reinsurance with the Florida Hurricane Catastrophe Fund covering Florida Personal Lines property catastrophe losses from a single event | 6/1/2006 to 6/1/2007 | 90 | % | 264 | 89 | |||||||||
Workers’ compensation losses arising from a single catastrophe event | 7/1/2006 to 7/1/2007 | 95 | % | 280 | 20 | |||||||||
[1] | Under certain conditions, the Company’s loss retention from a single event could be reduced to $200 for a second or subsequent event. |
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Bond amount | ||||||||
issued by | ||||||||
Foundation Re | ||||||||
or | ||||||||
Covered perils | Treaty term | Covered losses | Foundation Re II | |||||
Hurricane loss events affecting the Gulf and Eastern Coast of the United States | 11/17/2004 to 11/24/2008 | 45% of $400 in losses in excess of an index loss trigger equating to approximately $1.3 billion in Hartford losses. | $ | 180 | ||||
Hurricane and earthquake loss events which occur in the year following a large hurricane or earthquake event that has an estimated occurrence probability of 1-in-100 years | 11/17/2004 to 1/6/2009 | 90% of $75 in losses in excess of an index loss trigger equating to approximately $125 in Hartford losses. | 68 | |||||
Hurricane loss events affecting the Gulf and Eastern Coast of the United States and loss events arising from California, Pacific Northwest, and New Madrid earthquakes. | 2/17/2006 to 2/24/2010 | 26% of $400 in losses in excess of an index loss trigger equating to approximately $1.3 billion in Hartford losses. | 105 | |||||
Hurricane loss events affecting the Gulf and Eastern Coast of the United States | 11/17/2006 to 11/26/2010 | 45% of $400 in losses in excess of an index loss trigger equating to approximately $1.85 billion in Hartford losses. | 180 | |||||
Annual aggregate of hurricane, earthquake and tornado/hail events in the continuous continental United States that result in $100 and $29.5 billion in industry losses | 11/17/2006 to 1/8/2009 | 45% of $150 in losses in excess of an index loss trigger equating to approximately $462 in annual aggregate Hartford losses. | 68 | |||||
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Hurricane | Earthquake | |||||||||||||||
Net of | ||||||||||||||||
Expected | Net of Expected | |||||||||||||||
Before | Reinsurance | Before | Reinsurance | |||||||||||||
Reinsurance | Recoveries | Reinsurance | Recoveries | |||||||||||||
Estimated 250-year probable maximum loss, before-tax | $ | 2,522 | $ | 824 | $ | 1,259 | $ | 290 | ||||||||
Percentage of statutory surplus of the Property & Casualty operations as of December 31, 2006 | 10 | % | 4 | % | ||||||||||||
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December 31, | December 31, | |||||||
2006 | 2005 | |||||||
Reinsurance Recoverable | ||||||||
Paid loss and loss adjustment expenses | $ | 460 | $ | 580 | ||||
Unpaid loss and loss adjustment expenses | 4,417 | 5,393 | ||||||
Gross reinsurance recoverable | 4,877 | 5,973 | ||||||
Less: allowance for uncollectible reinsurance | (412 | ) | (413 | ) | ||||
Net reinsurance recoverable | $ | 4,465 | $ | 5,560 | ||||
December 31, 2006 | December 31, 2005 | |||||||||||||||
Distribution of gross reinsurance recoverable | ||||||||||||||||
Gross reinsurance recoverable | $ | 4,877 | $ | 5,973 | ||||||||||||
Less: mandatory (assigned risk) pools and structured settlements | (673 | ) | (495 | ) | ||||||||||||
Gross reinsurance recoverable excluding mandatory pools and structured settlements | $ | 4,204 | $ | 5,478 | ||||||||||||
% of Total | % of Total | |||||||||||||||
Rated A- (Excellent) or better by A.M. Best [1] | $ | 3,050 | 72.5 | % | $ | 3,629 | 66.2 | % | ||||||||
Other rated by A.M. Best | 162 | 3.9 | % | 233 | 4.3 | % | ||||||||||
Total rated companies | 3,212 | 76.4 | % | 3,862 | 70.5 | % | ||||||||||
Voluntary pools | 223 | 5.3 | % | 291 | 5.3 | % | ||||||||||
Captives | 197 | 4.7 | % | 188 | 3.4 | % | ||||||||||
Other not rated companies | 572 | 13.6 | % | 1,137 | 20.8 | % | ||||||||||
Total | $ | 4,204 | 100.0 | % | $ | 5,478 | 100.0 | % | ||||||||
[1] | Based on A.M. Best ratings as of December 31, 2006 and 2005, respectively. |
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2006 | 2005 | 2004 | ||||||||||
Operating Summary | ||||||||||||
Earned premiums [1] | $ | 10,433 | $ | 10,156 | $ | 9,494 | ||||||
Net investment income | 1,486 | 1,365 | 1,248 | |||||||||
Other revenues [2] | 473 | 463 | 436 | |||||||||
Net realized capital gains | 9 | 44 | 133 | |||||||||
Total revenues | 12,401 | 12,028 | 11,311 | |||||||||
Losses and loss adjustment expenses [3] | ||||||||||||
Current year | 6,706 | 6,715 | 6,590 | |||||||||
Prior year [4] | 296 | 248 | 414 | |||||||||
Total losses and loss adjustment expenses | 7,002 | 6,963 | 7,004 | |||||||||
Amortization of deferred policy acquisition costs | 2,106 | 1,997 | 1,850 | |||||||||
Insurance operating costs and expenses | 580 | 731 | 643 | |||||||||
Other expense | 643 | 617 | 629 | |||||||||
Total benefits, losses and expenses | 10,331 | 10,308 | 10,126 | |||||||||
Income before income taxes | 2,070 | 1,720 | 1,185 | |||||||||
Income tax expense | 551 | 484 | 275 | |||||||||
Net income [5] | $ | 1,519 | $ | 1,236 | $ | 910 | ||||||
Net Income (Loss) | ||||||||||||
Ongoing Operations | $ | 1,554 | $ | 1,165 | $ | 955 | ||||||
Other Operations | (35 | ) | 71 | (45 | ) | |||||||
Total Property & Casualty net income | $ | 1,519 | $ | 1,236 | $ | 910 | ||||||
[1] | Includes reinstatement premiums related to hurricanes of $73 in 2005 and reinstatement premiums related to hurricanes of $17 in 2004. | |
[2] | Primarily servicing revenue. | |
[3] | Includes 2006 catastrophes of $129, 2005 catastrophes of $365 and 2004 catastrophes of $507, before the net reserve release of $395 related to September 11. | |
[4] | Net prior year incurred losses in 2006 includes the effect of reducing net reinsurance recoverables by $243 as a result of an agreement with Equitas and strengthening of the allowance for uncollectible reinsurance. | |
[5] | Includes net realized capital gains, after tax, of$46, $29 and $87 for the years ended December 31, 2006, 2005 and 2004, respectively. |
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2006 | 2005 | 2004 | ||||||||||
Written premiums [1] | ||||||||||||
Business Insurance | $ | 5,185 | $ | 5,001 | $ | 4,575 | ||||||
Personal Lines | 3,877 | 3,676 | 3,557 | |||||||||
Specialty Commercial | 1,596 | 1,806 | 1,840 | |||||||||
Total | $ | 10,658 | $ | 10,483 | $ | 9,972 | ||||||
Earned premiums [1] | ||||||||||||
Business Insurance | $ | 5,118 | $ | 4,785 | $ | 4,299 | ||||||
Personal Lines | 3,760 | 3,610 | 3,445 | |||||||||
Specialty Commercial | 1,550 | 1,757 | 1,726 | |||||||||
Total | $ | 10,428 | $ | 10,152 | $ | 9,470 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
• | Total Ongoing Operations’ earned premiums grew $276, or 3%, due primarily to growth in Business Insurance and Personal Lines, partially offset by a decrease in Specialty Commercial. Contributing to the growth in earned premium was a $73 reduction of earned premium in 2005 due to catastrophe treaty reinstatement premium payable to reinsurers as a result of losses from hurricanes Katrina, Rita and Wilma, including $16 in Business Insurance, $31 in Personal Lines and $26 in Specialty Commercial. Before catastrophe treaty reinstatement premium, Ongoing Operations’ earned premium grew $203, or 2%, for 2006. | |
• | For the year ended December 31, 2006, earned premiums grew $333, or 7%, in Business Insurance and grew $150, or 4%, in Personal Lines. Apart from the effect of catastrophe treaty reinstatement premium in 2005, the growth was primarily driven by new business premium outpacing non-renewals over the last six months of 2005 and the full year of 2006 and the effect of earned pricing increases in homeowners, partially offset by the effect of higher property catastrophe treaty reinsurance costs and earned pricing decreases in middle market. | |
• | Specialty Commercial earned premiums decreased by $207, or 12%, primarily driven by a decrease in casualty, property and other earned premiums, partially offset by an increase in professional liability, fidelity and surety. Casualty earned premiums decreased by $220, primarily because of the non-renewal of a single captive insurance program. The decrease in property earned premium is primarily due to a decline in new business, an increase in catastrophe treaty reinsurance costs and a strategic decision not to renew certain accounts with properties in catastrophe-prone areas. |
• | Total Ongoing Operations’ earned premiums grew $682, or 7%, due primarily to growth in Business Insurance and Personal Lines. Earned premiums were net of third and fourth quarter property catastrophe reinstatement premiums related to hurricanes totaling $73 in 2005 and $17 in 2004. | |
• | Earned premium growth of $486 in Business Insurance was primarily driven by new business premium growth outpacing non-renewals over the last six months of 2004 and the full year of 2005. Earned premium growth of $165 in Personal Lines was primarily driven by new business growth outpacing non-renewals in auto and the effect of earned pricing increases in homeowners. | |
• | Specialty Commercial earned premiums increased by $31, primarily driven by a $90 reduction in earned premiums under retrospectively-rated policies during 2004 and increases in casualty, professional liability, fidelity and surety and other premiums, partially offset by a $216 decrease in property earned premiums, primarily due to a decrease of $127 from exiting the multi-peril crop insurance business during 2004. |
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2006 | 2005 | 2004 | ||||||||||
Operating Summary | ||||||||||||
Written premiums | $ | 10,658 | $ | 10,483 | $ | 9,972 | ||||||
Change in unearned premium reserve | 230 | 331 | 502 | |||||||||
Earned premiums | 10,428 | 10,152 | 9,470 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current year | 6,706 | 6,715 | 6,554 | |||||||||
Prior year | (64 | ) | 36 | 5 | ||||||||
Total losses and loss adjustment expenses | 6,642 | 6,751 | 6,559 | |||||||||
Amortization of deferred policy acquisition costs | 2,106 | 2,000 | 1,845 | |||||||||
Insurance operating costs and expenses | 569 | 710 | 621 | |||||||||
Underwriting results | 1,111 | 691 | 445 | |||||||||
Net servicing income [1] | 53 | 49 | 42 | |||||||||
Net investment income | 1,225 | 1,082 | 903 | |||||||||
Net realized capital gains (losses) | (17 | ) | 19 | 98 | ||||||||
Other expenses | (222 | ) | (202 | ) | (198 | ) | ||||||
Income tax expense | (596 | ) | (474 | ) | (335 | ) | ||||||
Net income | $ | 1,554 | $ | 1,165 | $ | 955 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current year | 64.3 | 66.1 | 69.2 | |||||||||
Prior year | (0.6 | ) | 0.4 | 0.1 | ||||||||
Total loss and loss adjustment expense ratio | 63.7 | 66.5 | 69.3 | |||||||||
Expense ratio | 25.6 | 26.5 | 25.9 | |||||||||
Policyholder dividend ratio | 0.1 | 0.1 | 0.1 | |||||||||
Combined ratio | 89.3 | 93.2 | 95.3 | |||||||||
Catastrophe ratio | ||||||||||||
Current year | 1.9 | 3.5 | 5.5 | |||||||||
Prior year | (0.7 | ) | 0.1 | (3.3 | ) | |||||||
Total catastrophe ratio | 1.2 | 3.6 | 2.2 | |||||||||
Combined ratio before catastrophes | 88.1 | 89.6 | 93.1 | |||||||||
Combined ratio before catastrophes and prior accident year development | 88.0 | 89.4 | 89.7 | |||||||||
[1] Net of expenses related to service business. | ||||||||||||
Current accident year loss and loss adjustment expense ratio | ||||||||||||
Current accident year loss and loss adjustment expense ratio before catastrophes | 62.4 | 62.7 | 63.7 | |||||||||
Current accident year catastrophe ratio | 1.9 | 3.5 | 5.5 | |||||||||
Current accident year loss and loss adjustment expense ratio | 64.3 | 66.1 | 69.2 | |||||||||
• | A $420 increase in underwriting results with a corresponding decrease in the combined ratio of 3.9 points, to 89.3, and | |
• | A $143 increase in net investment income. |
• | Net realized capital losses were $17 in 2006 compared to net realized gains of $19 in 2005, | |
• | A $20 increase in other expenses, due primarily to lower bad debt expense in 2005, and | |
• | A $122 increase in income tax expense, primarily reflecting an increase in income before income taxes, partially offset by a $49 income tax benefit resulting from the sale of Omni. |
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Increase in current accident year underwriting results before catastrophes | $ | 168 | ||
Lower current accident year catastrophe losses | 152 | |||
Change to net favorable prior accident year development | 100 | |||
Increase in underwriting results from 2005 to 2006 | $ | 420 | ||
The catastrophe treaty reinstatement premium that was recorded as a reduction of earned premium in 2005 | $ | 73 | ||
Excluding catastrophe treaty reinstatement premium: | ||||
— A decrease in the combined ratio before catastrophes and prior accident year development | 72 | |||
— A $203 increase in earned premium growth at a combined ratio less than 100.0 | 23 | |||
Increase in current accident year underwriting results before catastrophes from 2005 to 2006 | $ | 168 | ||
• | A 0.9 point decrease in the expense ratio, to 25.6, largely because of a $41 decrease in estimated Citizens’ assessments in 2006 compared to a $64 increase in Citizens assessments in 2005. Almost all of the Citizens assessments are for assessments charged by the Citizens Property Insurance Corporation (Citizens) in Florida, a company established by the State of Florida to provide personal and commercial insurance to individuals and businesses in Florida who are in high risk areas of the state and are unable to obtain insurance through the private insurance markets. | ||
• | A 0.3 point decrease in the current accident year loss and loss adjustment expense ratio before catastrophes, to 62.4, largely due to the effect that catastrophe treaty reinstatement premium had on the ratio in 2005. Apart from the effect of catastrophe treaty reinstatement premium, the current accident year loss and loss adjustment expense ratio before catastrophes increased slightly due to a slight increase in the ratio for both Business Insurance and Personal Lines. The slight deterioration in Business Insurance was primarily due to an increase in non-catastrophe property loss costs in middle market, the effect of earned pricing decreases in middle market and the effect of a shift to more workers’ compensation premium which has a higher loss and loss adjustment expense ratio than other business in the segment. Partially offsetting the deterioration in Business Insurance was a lower loss and loss adjustment expense ratio on small commercial workers’ compensation business. The deterioration in Personal Lines was principally due to an increase in non-catastrophe property loss costs for homeowners and an increase in the loss and loss adjustment expense ratio for auto liability claims due to a shift to more Dimensions product business within Agency. |
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• | A $246 increase in underwriting results with a corresponding 2.1 point improvement in the combined ratio, from 95.3 to 93.2, and | |
• | A $179 increase in net investment income. |
• | A $79 decrease in net realized capital gains due to lower net realized gains on the sale of fixed maturity investments and lower net gains on non-qualifying derivatives, and | |
• | A $139 increase in income tax expense, reflecting an increase in income before income taxes. |
Lower current accident year catastrophe losses | $ | 171 | ||
Increase in current accident year underwriting results before catastrophes | 106 | |||
Increase in net unfavorable prior accident year development | (31 | ) | ||
Increase in underwriting results from 2004 to 2005 | $ | 246 | ||
An increase in catastrophe treaty reinstatement premium recorded as a reduction of earned premium | $ | (56 | ) | |
Excluding catastrophe treaty reinstatement premium: | ||||
— A decrease in the combined ratio before catastrophes and prior accident year development | 85 | |||
— A $738 increase in earned premium at a combined ratio less than 100.0 | 77 | |||
Increase in current accident year underwriting results before catastrophes from 2004 to 2005 | $ | 106 | ||
• | The current accident year loss and loss adjustment expense ratio before catastrophes decreased by 1.0 point, to 62.7, primarily due to improved current accident year performance for auto bodily injury and workers’ compensation claims, partially offset by the effect of an increase in non-catastrophe property loss costs. Non-catastrophe property loss costs increased primarily due to increasing claim severity and, in specialty property, increasing claim frequency as well. | ||
• | The expense ratio increased 0.6 points during 2005, to 26.5, primarily due to $64 of hurricane related assessments incurred in 2005 related to the 2004 and 2005 hurricanes. Apart from the impact of hurricane related assessments, the favorable effects on the expense ratio of an increase in earned premiums, a reduction in contingent commissions and a shift to lower commission workers’ compensation business were offset by the unfavorable effects of an increase in catastrophe treaty reinstatement premiums and reduced catastrophe treaty profit commissions. The reduction in contingent commissions was due, in part, to a decision made by some agents and brokers not to accept contingent commissions after the third quarter of 2004. The hurricane-related assessments were predominantly from Citizens. The third quarter 2004 hurricanes caused a deficit in Citizens’ “high risk” account, which triggered an assessment to the Company of $15. In addition, the Company recorded an estimated Citizens’ assessment of $46 based on losses sustained by Citizens as a result of hurricane Wilma in the fourth quarter of 2005. |
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2006 | 2005 | 2004 | ||||||||||
Premiums | ||||||||||||
Written Premiums [1] | ||||||||||||
Small Commercial | $ | 2,728 | $ | 2,545 | $ | 2,255 | ||||||
Middle Market | 2,457 | 2,456 | 2,320 | |||||||||
Total | $ | 5,185 | $ | 5,001 | $ | 4,575 | ||||||
Earned Premiums [1] | ||||||||||||
Small Commercial | $ | 2,652 | $ | 2,421 | $ | 2,077 | ||||||
Middle Market | 2,466 | 2,364 | 2,222 | |||||||||
Total | $ | 5,118 | $ | 4,785 | $ | 4,299 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve . |
2006 | 2005 | 2004 | ||||||||||
Premium Measures | ||||||||||||
New Business Premium | ||||||||||||
Small Commercial | $ | 533 | $ | 580 | $ | 575 | ||||||
Middle Market | $ | 458 | $ | 596 | $ | 574 | ||||||
Premium Renewal Retention | ||||||||||||
Small Commercial | 87 | % | 88 | % | 87 | % | ||||||
Middle Market | 82 | % | 81 | % | 83 | % | ||||||
Written Pricing Increase (Decrease) | ||||||||||||
Small Commercial | 1 | % | 2 | % | 5 | % | ||||||
Middle Market | (4 | %) | (5 | %) | (1 | %) | ||||||
Earned Pricing Increase (Decrease) | ||||||||||||
Small Commercial | 1 | % | 3 | % | 7 | % | ||||||
Middle Market | (5 | %) | (3 | %) | 3 | % | ||||||
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• | Small commercial earned premium grew $231, or 10%, driven primarily by earned premium growth in workers’ compensation and package business for both Select Xpand and traditional Select business. Premium renewal retention for small commercial decreased slightly for the year ended December 31, 2006, from 88% to 87%, primarily due to commercial auto business. New business written premium for small commercial decreased by $47, or 8%, for the year ended December 31, 2006, primarily due to lower production of new workers’ compensation, auto and package policies. Despite an increase in the number of appointed agents to expand writings in certain territories, actions taken by some of the Company’s competitors to increase commissions for workers’ compensation business may be contributing to the Company’s lower new business growth. | |
• | Middle market earned premium grew $102, or 4%, driven primarily by growth in workers’ compensation and marine earned premium. Premium renewal retention for middle market increased slightly for the year ended December 31, 2006, from 81% to 82%, primarily driven by workers’ compensation business. In response to increased competition, management has focused heavily on premium renewal retention. New business written premium for middle market decreased by $138, or 23%, for the year ended December 31, 2006, primarily due to increased competition for workers’ compensation business. | |
• | As written premium is earned over the 12 month term of the policies, the unfavorable trend in earned pricing during 2006 was primarily a reflection of the written pricing changes over the last six months of 2005 and the year ended December 31, 2006. |
• | Growth in small commercial earned premium was driven primarily by growth in workers’ compensation and package business for both Select Xpand and traditional Select. New business written premium for small commercial increased by $5, or 1%, as an increase in new business for workers’ compensation was largely offset by a decrease in new business for package and commercial auto. Premium renewal retention for small commercial increased from 87% to 88%, primarily due to workers’ compensation and package business, partially offset by lower written pricing increases. | |
• | Growth in middle market earned premium was driven primarily by growth in workers’ compensation and marine, partially offset by a decrease in property and commercial auto. New business written premium for middle market increased by $22, or 4%, for the year ended December 31, 2005, mostly related to workers’ compensation business. Premium renewal retention for middle market decreased from 83% to 81%, primarily due to the effect of larger written pricing decreases and a decrease in retention on larger accounts. |
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2006 | 2005 | 2004 | ||||||||||
Written premiums | $ | 5,185 | $ | 5,001 | $ | 4,575 | ||||||
Change in unearned premium reserve | 67 | 216 | 276 | |||||||||
Earned premiums | 5,118 | 4,785 | 4,299 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current year | 3,127 | 2,949 | 2,700 | |||||||||
Prior year | (61 | ) | 22 | (67 | ) | |||||||
Total losses and loss adjustment expenses | 3,066 | 2,971 | 2,633 | |||||||||
Amortization of deferred policy acquisition costs | 1,184 | 1,138 | 1,058 | |||||||||
Insurance operating costs and expenses | 250 | 280 | 248 | |||||||||
Underwriting results | $ | 618 | $ | 396 | $ | 360 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current year | 61.1 | 61.6 | 62.8 | |||||||||
Prior year | (1.2 | ) | 0.5 | (1.6 | ) | |||||||
Total loss and loss adjustment expense ratio | 59.9 | 62.1 | 61.2 | |||||||||
Expense ratio | 27.7 | 29.5 | 30.1 | |||||||||
Policyholder dividend ratio | 0.3 | 0.1 | 0.2 | |||||||||
Combined ratio | 87.9 | 91.7 | 91.6 | |||||||||
Catastrophe ratio | ||||||||||||
Current year | 1.4 | 1.9 | 3.4 | |||||||||
Prior year | (0.4 | ) | 0.1 | (4.3 | ) | |||||||
Total catastrophe ratio | 1.0 | 2.0 | (0.9 | ) | ||||||||
Combined ratio before catastrophes | 86.9 | 89.7 | 92.5 | |||||||||
Combined ratio before catastrophes and prior accident year development | 87.7 | 89.4 | 89.7 | |||||||||
Current accident year loss and loss adjustment expense ratio | ||||||||||||
Current accident year loss and loss adjustment expense ratio before catastrophes | 59.7 | 59.8 | 59.3 | |||||||||
Current accident year catastrophe ratio | 1.4 | 1.9 | 3.4 | |||||||||
Current accident year loss and loss adjustment expense ratio | 61.1 | 61.6 | 62.8 | |||||||||
Increase in current accident year underwriting results before catastrophes | $ | 121 | ||
Change to net favorable prior accident year development | 83 | |||
Lower current accident year catastrophe losses | 18 | |||
Increase in underwriting results from 2005 to 2006 | $ | 222 | ||
The catastrophe treaty reinstatement premium that was recorded as a reduction of earned premium in 2005 | $ | 16 | ||
Excluding catastrophe treaty reinstatement premium: | ||||
— A decrease in the combined ratio before catastrophes and prior accident year development | 70 | |||
— A $317 increase in earned premium (before catastrophe treaty reinstatement premium) at a combined ratio less than 100.0 | 35 | |||
Increase in current accident year underwriting results before catastrophes from 2005 to 2006 | $ | 121 | ||
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• | The expense ratio decreased by 1.8 points, primarily due to the impact in 2006 and 2005 of changes in the expected assessments from Citizens and a continued shift to lower commission workers’ compensation business. The year ended December 31, 2006 benefited from a $22 reduction in estimated Citizens’ assessments related to the 2005 Florida hurricanes and the year ended December 31, 2005 included a charge of $33 for assessments related to the 2004 and 2005 Florida hurricanes. | ||
• | Before catastrophes, the current accident year loss and loss adjustment expense ratio decreased slightly, to 59.7, primarily due to a lower loss and loss adjustment expense ratio on small commercial workers’ compensation business, a decrease in non-catastrophe property loss costs in small commercial and the effect on the ratio of catastrophe treaty reinstatement premium in 2005. Largely offsetting the improvement was, an increase in non-catastrophe property loss costs in middle market, the effect of earned pricing decreases in middle market and the effect of a shift to more workers’ compensation premium which has a higher loss and loss adjustment expense ratio than other business in the segment. The increase in non-catastrophe property loss costs in middle market was primarily due to increasing claim severity. In small commercial, non-catastrophe property loss costs were favorable due to favorable claim frequency. |
Increase in current accident year underwriting results before catastrophes | $ | 67 | ||
Lower current accident year catastrophe losses | 58 | |||
Change to net unfavorable prior accident year development | (89 | ) | ||
Increase in underwriting results from 2004 to 2005 | $ | 36 | ||
An increase in catastrophe treaty reinstatement premium recorded as a reduction of earned premium | $ | (10 | ) | |
Excluding catastrophe treaty reinstatement premium: | ||||
— A $496 increase in earned premium at a combined ratio less than 100.0 | 52 | |||
— A decrease in the combined ratio before catastrophes and prior accident year development | 25 | |||
Increase in current accident year underwriting results before catastrophes from 2004 to 2005 | $ | 67 | ||
• | Contributing to the 0.6 point decrease in the expense ratio was earned premium growth, a shift to more workers’ compensation business which has lower commissions and a $16 reduction in contingent commissions, partially offset by $20 of hurricane related assessments in 2005. The $16 reduction in contingent commissions was due, in part, to a decision made by some agents and brokers not to accept contingent commissions after the third quarter of 2004. |
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• | The 0.5 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes, to 59.8, was primarily due to earned pricing decreases in middle market and increasing non-catastrophe property claim costs, partially offset by earned pricing increases in small commercial and improved current accident year underwriting results for workers’ compensation business. The improved current accident year performance for workers’ compensation business was consistent with the favorable prior accident year development recorded in 2005 related to accident years 2003 and 2004. |
• | Written premium growth of 2% to 5%, including growth of 4% to 7% in small commercial and no growth in middle market | |
• | A combined ratio before catastrophes and prior accident year development of 88.5 to 91.5 |
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2006 | 2005 | 2004 | ||||||||||
Business Unit | ||||||||||||
AARP | $ | 2,580 | $ | 2,373 | $ | 2,244 | ||||||
Agency | 1,100 | 1,020 | 942 | |||||||||
Other | 197 | 283 | 371 | |||||||||
Total | $ | 3,877 | $ | 3,676 | $ | 3,557 | ||||||
Product Line | ||||||||||||
Automobile | $ | 2,856 | $ | 2,753 | $ | 2,685 | ||||||
Homeowners | 1,021 | 923 | 872 | |||||||||
Total | $ | 3,877 | $ | 3,676 | $ | 3,557 | ||||||
Earned Premiums [1] | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Business Unit | ||||||||||||
AARP | $ | 2,466 | $ | 2,296 | $ | 2,146 | ||||||
Agency | 1,068 | 997 | 907 | |||||||||
Other | 226 | 317 | 392 | |||||||||
Total | $ | 3,760 | $ | 3,610 | $ | 3,445 | ||||||
Product Line | ||||||||||||
Automobile | $ | 2,792 | $ | 2,728 | $ | 2,622 | ||||||
Homeowners | 968 | 882 | 823 | |||||||||
Total | $ | 3,760 | $ | 3,610 | $ | 3,445 | ||||||
[1] The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. | ||||||||||||
Premium Measures | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Policies in force at year end | ||||||||||||
Automobile | 2,276,165 | 2,222,688 | 2,166,922 | |||||||||
Homeowners | 1,460,679 | 1,384,364 | 1,348,573 | |||||||||
Total policies in force at year end | 3,736,844 | 3,607,052 | 3,515,495 | |||||||||
New business premium | ||||||||||||
Automobile | $ | 469 | $ | 426 | $ | 469 | ||||||
Homeowners | $ | 161 | $ | 131 | $ | 115 | ||||||
Premium Renewal Retention | ||||||||||||
Automobile | 87 | % | 87 | % | 89 | % | ||||||
Homeowners | 94 | % | 94 | % | 100 | % | ||||||
Written Pricing Increase (Decrease) | ||||||||||||
Automobile | (1 | %) | — | 3 | % | |||||||
Homeowners | 5 | % | 6 | % | 9 | % | ||||||
Earned Pricing Increase (Decrease) | ||||||||||||
Automobile | (1 | %) | 1 | % | 5 | % | ||||||
Homeowners | 5 | % | 7 | % | 11 | % | ||||||
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• | AARP earned premium grew $170, or 7%, reflecting growth in the size of the AARP target market and the effect of direct marketing programs to increase premium writings of both auto and homeowners. | |
• | Agency earned premium grew $71, or 7%, primarily as a result of an increase in the number of agency appointments and further refinement of the Dimensions class plans first introduced in 2003. Dimensions, which had been rolled out to 42 states for auto and 39 states for homeowners as of December 31, 2006, enables agents to generate a customized price for each policyholder, independent of the risks and rates of other members of the same household. The plan, which is available through the company’s network of independent agents, was enhanced beginning in the third quarter of 2006 as “Dimensions with Auto Packages” and the enhanced plan is now offered in 29 states with four distinct package offerings. | |
• | Other earned premium decreased by $91, or 29%, because of a strategic decision to reduce other affinity business and limit non-standard writings to fewer geographic areas. On November 30, 2006, the Company sold Omni and exited the non-standard auto business. Refer to Note 20 of the Notes to Consolidated Financial Statements for further discussion. |
• | AARP earned premium grew $150, or 7%, reflecting growth in the size of the AARP target market and the effect of direct marketing programs to increase premium writings, particularly in auto. | |
• | Agency earned premium grew $90, or 10%, as a result of continued growth of the Dimensions class plans first introduced in 2004. Dimensions, which had been rolled out to 41 states for auto and 37 states for homeowners as of December 31, 2005, allows Personal Lines to write a broader class of risks. | |
• | Other earned premium decreased by $75, or 19%, primarily because of a strategic decision by management to focus on more profitable non-standard auto business. |
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2006 | 2005 | 2004 | ||||||||||
Underwriting Summary | ||||||||||||
Written premiums | $ | 3,877 | $ | 3,676 | $ | 3,557 | ||||||
Change in unearned premium reserve | 117 | 66 | 112 | |||||||||
Earned premiums | 3,760 | 3,610 | 3,445 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current year | 2,516 | 2,389 | 2,509 | |||||||||
Prior year | (38 | ) | (95 | ) | 3 | |||||||
Total losses and loss adjustment expenses | 2,478 | 2,294 | 2,512 | |||||||||
Amortization of deferred policy acquisition costs | 622 | 581 | 530 | |||||||||
Insurance operating costs and expenses | 231 | 275 | 265 | |||||||||
Underwriting results | $ | 429 | $ | 460 | $ | 138 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current year | 66.9 | 66.2 | 72.8 | |||||||||
Prior year | (1.0 | ) | (2.6 | ) | 0.1 | |||||||
Total loss and loss adjustment expense ratio | 65.9 | 63.6 | 72.9 | |||||||||
Expense ratio | 22.7 | 23.7 | 23.1 | |||||||||
Combined ratio | 88.6 | 87.3 | 96.0 | |||||||||
Catastrophe ratio | ||||||||||||
Current year | 3.2 | 2.7 | 7.7 | |||||||||
Prior year | (0.4 | ) | 0.2 | (0.3 | ) | |||||||
Total catastrophe ratio | 2.8 | 2.9 | 7.4 | |||||||||
Combined ratio before catastrophes | 85.8 | 84.4 | 88.6 | |||||||||
Combined ratio before catastrophes and prior accident year development | 86.4 | 87.2 | 88.2 | |||||||||
Other revenues [1] | $ | 135 | $ | 121 | $ | 123 | ||||||
2006 | 2005 | 2004 | ||||||||||
Current accident year loss and loss adjustment expense ratio | ||||||||||||
Current accident year loss and loss adjustment expense ratio before catastrophes | 63.8 | 63.5 | 65.1 | |||||||||
Current accident year catastrophe ratio | 3.2 | 2.7 | 7.7 | |||||||||
Current accident year loss and loss adjustment expense ratio | 66.9 | 66.2 | 72.8 | |||||||||
Combined Ratios | ||||||||||||
Automobile | 93.6 | 90.7 | 95.7 | |||||||||
Homeowners | 74.0 | 76.6 | 96.8 | |||||||||
Total | 88.6 | 87.3 | 96.0 | |||||||||
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Decrease in net favorable prior accident year development | $ | (57 | ) | |
Higher current accident year catastrophe losses | (22 | ) | ||
Increase in current accident year underwriting results before catastrophes | 48 | |||
Decrease in underwriting results from 2005 to 2006 | $ | (31 | ) | |
The catastrophe treaty reinstatement premium that was recorded as a reduction of earned premium in 2005 | $ | 31 | ||
Excluding catastrophe treaty reinstatement premium | ||||
— A $119 increase in earned premium at a combined ratio less than 100.0 | 16 | |||
— A slight improvement in the combined ratio before catastrophes and prior accident year development | 1 | |||
Increase in current accident year underwriting results before catastrophes from 2005 to 2006 | $ | 48 | ||
• | The 1.0 point improvement in the expense ratio was primarily due to the impact in 2006 and 2005 of changes in the expected assessments from Citizens. The year ended December 31, 2006 benefited from a $19 reduction of estimated Citizens’ assessments related to the 2005 Florida hurricanes whereas the year ended December 31, 2005 included a charge of $30 for assessments related to the 2004 Florida hurricanes. | ||
• | The 0.3 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes was principally due to an increase in non-catastrophe property loss costs for homeowners, primarily driven by an increase in claim severity, and an increase in the loss and loss adjustment expense ratio for auto liability claims, partially due to a shift to more Dimensions product business within Agency. Partially offsetting the increase in the current accident year loss and loss adjustment expense ratio before catastrophes was the effect of catastrophe treaty reinstatement premiums recorded as a reduction of earned premium in 2005. |
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Lower current accident year catastrophe losses | $ | 166 | ||
Change to net favorable prior accident year development of $95 in 2005 | 98 | |||
Increase in current accident year underwriting results before catastrophes | 58 | |||
Increase in underwriting results from 2004 to 2005 | $ | 322 | ||
An increase in catastrophe treaty reinstatement premium recorded as a reduction of earned premium | $ | (24 | ) | |
Excluding catastrophe treaty reinstatement premium: | ||||
— A decrease in the combined ratio before catastrophes and prior accident year development | 58 | |||
— A $189 increase in earned premium at a combined ratio less than 100.0 | 24 | |||
Increase in current accident year underwriting results before catastrophes from 2004 to 2005 | $ | 58 | ||
• | The 1.6 point decrease in the current accident year loss and loss adjustment expense ratio before catastrophes was primarily due to lower current accident year loss costs for auto liability claims and earned pricing increases for homeowners business slightly outpacing increases in non-catastrophe property loss costs, partially offset by the effect on the ratio of an increase in catastrophe treaty reinstatement premium. The lower current accident year loss and loss adjustment expense ratio for auto liability claims was consistent with the favorable prior accident year development on auto liability allocated loss adjustment expense reserves recognized in 2005. Within homeowners, an increase in loss costs was due entirely to increasing claim severity. | ||
• | The expense ratio increased by 0.6 points, to 23.7, primarily due to $31 of hurricane-related assessments in 2005. |
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• | Written premium growth of 4% to 7%, including growth of 3% to 6% in auto and 7% to 10% in homeowners | |
• | A combined ratio before catastrophes and prior accident year development of 84.5 to 87.5 |
2006 | 2005 | 2004 | ||||||||||
Written Premiums [1] | ||||||||||||
Property | $ | 212 | $ | 211 | $ | 443 | ||||||
Casualty | 570 | 815 | 743 | |||||||||
Professional liability, fidelity and surety | 697 | 613 | 539 | |||||||||
Other | 117 | 167 | 115 | |||||||||
Total | $ | 1,596 | $ | 1,806 | $ | 1,840 | ||||||
Earned Premiums [1] | ||||||||||||
Property | $ | 213 | $ | 245 | $ | 461 | ||||||
Casualty | 567 | 787 | 635 | |||||||||
Professional liability, fidelity and surety | 650 | 555 | 523 | |||||||||
Other | 120 | 170 | 107 | |||||||||
Total | $ | 1,550 | $ | 1,757 | $ | 1,726 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
• | Property earned premium decreased by $32, or 13%, primarily due to a decrease in new business and renewals in the latter half of 2005 and the full year of 2006 as well as the effect of an increase in reinsurance costs for 2006 treaties and additional catastrophe reinsurance purchased in the fourth quarter of 2005. Partially offsetting the decrease in earned premiums was $34 of catastrophe treaty reinstatement premiums payable to reinsurers recorded as a reduction of earned premium in 2005 and double digit earned pricing increases during 2006. The reduction in new business and renewals reflects a decision to reduce catastrophe loss exposures in certain geographic areas and a determination that, despite rate increases, rates on some business opportunities were not adequate. Property business has experienced significant rate increases throughout 2006, reflecting a hardening of the market after the 2005 hurricanes. | |
• | Casualty earned premiums decreased by $220, or 28%, primarily because of the non-renewal of a single captive insurance program and a decline in new business written premium growth. Partially offsetting the decrease was an increase in premium retention and the effect of renewing a single large deductible policy as a retrospectively rated policy which bears a higher premium. The single captive insurance program accounted for earned premium of $241 for the year ended December 31, 2005. | |
• | Professional liability, fidelity and surety earned premium grew $95, or 17%, due primarily to a decrease in the portion of risks ceded to outside reinsurers, new business growth in commercial and contract surety business, earned pricing increases in contract surety business and new business growth in middle market and small commercial professional liability business, partially offset by earned pricing decreases in professional liability. The growth in commercial and contract surety was primarily driven by an increase in the number of fidelity and surety bonds issued to existing accounts. | |
• | Within the “other” category, earned premium decreased by $50, or 29%. The “other” category of earned premiums includes premiums assumed and ceded under inter-segment arrangements and co-participations. Under an inter-segment arrangement, beginning in the first quarter of 2006, the Company allocated more of the premiums ceded under the principal property catastrophe |
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reinsurance program to Specialty Commercial and less to Business Insurance and Personal Lines. In addition, beginning in the third quarter of 2006, the Company reduced the premiums assumed by Specialty Commercial under inter-segment arrangements covering certain liability claims. |
• | Property earned premium decreased $216, or 47%, primarily because of a decline in new business and a decrease of $127 due to the decision made in the fourth quarter of 2004 to exit the multi-peril crop insurance (“MPCI”) business, partially offset by an increase in premium renewal retention. Also reducing earned premium was a $22 increase in reinstatement premiums paid to reinstate reinsurance treaty limits as a result of losses ceded from third and fourth quarter hurricanes of 2005 compared to reinstatement premiums paid in 2004 as a result of losses ceded from the third quarter hurricanes of 2004. | |
• | Casualty earned premiums grew $152, or 24%, primarily because earned premium in 2004 included a $90 decrease in earned premiums under retrospectively-rated policies. The remaining growth of $62 was largely attributable to the effect of earned pricing increases, partially offset by a decrease in new business growth. In 2005 and 2004, a single captive insurance program accounted for earned premium of $241 and $226, respectively. | |
• | Professional liability, fidelity and surety earned premium grew $32, or 6%, due to a decrease in the portion of risks ceded to outside reinsurers, new business growth in commercial and contract surety business, an increase in earned pricing for fidelity and surety business, and a decrease in the price of fidelity and surety reinsurance, partially offset by earned pricing decreases in professional liability. | |
• | Within the “other” category, earned premium increased by $63, or 59%, primarily due to increased premiums on inter-segment reinsurance programs. |
2006 | 2005 | 2004 | ||||||||||
Written premiums | $ | 1,596 | $ | 1,806 | $ | 1,840 | ||||||
Change in unearned premium reserve | 46 | 49 | 114 | |||||||||
Earned premiums | 1,550 | 1,757 | 1,726 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current year | 1,063 | 1,377 | 1,345 | |||||||||
Prior year | 35 | 109 | 69 | |||||||||
Total losses and loss adjustment expenses | 1,098 | 1,486 | 1,414 | |||||||||
Amortization of deferred policy acquisition costs | 300 | 281 | 257 | |||||||||
Insurance operating costs and expenses | 88 | 155 | 108 | |||||||||
Underwriting results | $ | 64 | $ | (165 | ) | $ | (53 | ) | ||||
Loss and loss adjustment expense ratio | ||||||||||||
Current year | 68.5 | 78.4 | 77.9 | |||||||||
Prior year | 2.3 | 6.2 | 4.0 | |||||||||
Total loss and loss adjustment expense ratio | 70.8 | 84.6 | 81.9 | |||||||||
Expense ratio | 25.4 | 24.3 | 21.1 | |||||||||
Policyholder dividend ratio | (0.3 | ) | 0.5 | 0.1 | ||||||||
Combined ratio | 95.9 | 109.4 | 103.1 | |||||||||
Catastrophe ratio | ||||||||||||
Current year | 0.6 | 9.3 | 6.3 | |||||||||
Prior year | (2.4 | ) | 0.1 | (6.7 | ) | |||||||
Total catastrophe ratio | (1.9 | ) | 9.5 | (0.4 | ) | |||||||
Combined ratio before catastrophes | 97.8 | 99.9 | 103.5 | |||||||||
Combined ratio before catastrophes and prior accident year development | 93.0 | 93.8 | 92.8 | |||||||||
Other revenues [1] | $ | 338 | $ | 342 | $ | 314 | ||||||
[1] Represents servicing revenue |
Current accident year loss and loss adjustment expense ratio | ||||||||||||
Current accident year loss and loss adjustment expense ratio before catastrophes | 67.9 | 69.0 | 71.6 | |||||||||
Current accident year catastrophe ratio | 0.6 | 9.3 | 6.3 | |||||||||
Current accident year loss and loss adjustment expense ratio | 68.5 | 78.4 | 77.9 | |||||||||
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Decrease in current accident year catastrophe losses | $ | 156 | ||
Decrease in net unfavorable prior accident year development | 74 | |||
Decrease in current accident year underwriting results before catastrophes | (1 | ) | ||
Increase in underwriting results from 2005 to 2006 | $ | 229 | ||
Decrease in current accident year underwriting results before catastrophes losses and catastrophe treaty reinstatement premium | $ | (27 | ) | |
Catastrophe treaty reinstatement premium recorded as a reduction of earned premium in 2005 | 26 | |||
Decrease in current accident year underwriting results before catastrophes from 2005 to 2006 | $ | (1 | ) | |
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Increase in current accident year catastrophe losses | $ | (53 | ) | |
Increase in net unfavorable prior accident year development | (40 | ) | ||
Decrease in current accident year underwriting results before catastrophes | (19 | ) | ||
Decrease in underwriting results from 2004 to 2005 | $ | (112 | ) | |
Effect of lower current accident year underwriting results in property, partially offset by improvement in professional liability | $ | (87 | ) | |
Increase in catastrophe treaty reinstatement premium recorded as a reduction of earned premium | (22 | ) | ||
Decrease in earned premiums under retrospectively rated policies in 2004 | 90 | |||
Decrease in current accident year underwriting results before catastrophes from 2004 to 2005 | $ | (19 | ) | |
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• | Written premium growth of 3% to 6% | |
• | A combined ratio before catastrophes and prior accident year development of 92.0 to 95.0 |
2006 | 2005 | 2004 | ||||||||||
Written premiums | $ | 4 | $ | 4 | $ | (10 | ) | |||||
Change in unearned premium reserve | (1 | ) | — | (34 | ) | |||||||
Earned premiums | 5 | 4 | 24 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current year | — | — | 36 | |||||||||
Prior year | 360 | 212 | 409 | |||||||||
Total losses and loss adjustment expenses | 360 | 212 | 445 | |||||||||
Amortization of deferred policy acquisition costs | — | (3 | ) | 5 | ||||||||
Insurance operating costs and expenses | 11 | 21 | 22 | |||||||||
Underwriting results | (366 | ) | (226 | ) | (448 | ) | ||||||
Net investment income | 261 | 283 | 345 | |||||||||
Net realized capital gains | 26 | 25 | 35 | |||||||||
Other expense | (1 | ) | (1 | ) | (37 | ) | ||||||
Income tax benefit (expense) | 45 | (10 | ) | 60 | ||||||||
Net income (loss) | $ | (35 | ) | $ | 71 | $ | (45 | ) | ||||
• | A $140 decrease in underwriting results, primarily due to a $148 increase in prior year loss development. Reserve development in 2006 included a $243 reduction in net reinsurance recoverables as a result of the agreement with Equitas and the Company’s evaluation of the reinsurance recoverables and allowance for uncollectible reinsurance associated with older, long-term casualty liabilities reported in the Other Operations segment, $43 of environmental reserve strengthening, and $12 of reserve strengthening for assumed reinsurance. In 2005, reserve development included $85 of reserve strengthening for assumed reinsurance, $37 of environmental reserve strengthening, and a $20 increase in the allowance for uncollectible reinsurance. | |
• | A $22 decrease in net investment income, primarily as a result of a decrease in invested assets resulting from net loss and loss adjustment expenses paid. Other Operations’ net investment income includes income earned on the separate portfolios of Heritage Holdings, and its subsidiaries, and on the Hartford Fire invested asset portfolio, which is allocated between Ongoing Operations and Other Operations. The Company attributes capital and invested assets to each segment using an internally developed risk-based capital attribution methodology. | |
• | A change from an income tax expense of $10 in 2005 to an income tax benefit of $45 in 2006, as a result of a pre-tax loss in 2006. |
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• | A $222 increase in underwriting results, primarily due to a $197 decrease in prior year loss development. Reserve development in 2005 included $85 of reserve strengthening for assumed reinsurance, $37 of environmental reserve strengthening, and a $20 increase in the allowance for uncollectible reinsurance. In 2004, reserve development included a $181 provision for the reinsurance recoverable asset associated with older, long-term casualty liabilities, $170 of reserve strengthening for assumed reinsurance, and $75 of environmental reserve strengthening, which was partially offset by a $97 release of September 11 reserves. | |
• | A $62 decrease in net investment income, primarily as a result of a decrease in invested assets resulting from net losses and loss adjustment expenses paid. | |
• | A change from an income tax benefit of $60 in 2004 to an income tax expense of $10 in 2005, as a result of pre-tax income in 2005. |
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Asbestos | Environmental | All Other [1] [5] | Total | |||||||||||||
2006 | ||||||||||||||||
Beginning liability — net [2] [3] | $ | 2,291 | $ | 360 | $ | 2,240 | $ | 4,891 | ||||||||
Losses and loss adjustment expenses incurred | 314 | 62 | (16 | ) | 360 | |||||||||||
Losses and loss adjustment expenses paid | (363 | ) | (106 | ) | (366 | ) | (835 | ) | ||||||||
Ending liability — net [2] [3] | $ | 2,242 | [4] | $ | 316 | $ | 1,858 | $ | 4,416 | |||||||
2005 | ||||||||||||||||
Beginning liability — net [2] [3] | $ | 2,471 | $ | 385 | $ | 2,514 | $ | 5,370 | ||||||||
Losses and loss adjustment expenses incurred | 29 | 52 | 131 | 212 | ||||||||||||
Losses and loss adjustment expenses paid | (209 | ) | (77 | ) | (405 | ) | (691 | ) | ||||||||
Ending liability — net [2] [3] | $ | 2,291 | $ | 360 | $ | 2,240 | $ | 4,891 | ||||||||
2004 | ||||||||||||||||
Beginning liability — net [2] [3] | $ | 3,783 | $ | 400 | $ | 2,392 | $ | 6,575 | ||||||||
Losses and loss adjustment expenses incurred | 217 | 78 | 150 | 445 | ||||||||||||
Losses and loss adjustment expenses paid [6] | (1,199 | ) | (83 | ) | (368 | ) | (1,650 | ) | ||||||||
Reclassification of allowance for uncollectible reinsurance | (330 | ) | (10 | ) | 340 | — | ||||||||||
Ending liability — net [2] [3] | $ | 2,471 | $ | 385 | $ | 2,514 | $ | 5,370 | ||||||||
[1] | “All Other” also includes unallocated loss adjustment expense reserves and the allowance for uncollectible reinsurance. | |
[2] | Excludes asbestos and environmental net liabilities reported in Ongoing Operations of $9 and $6, respectively, as of December 31, 2006, $10 and $6, respectively, as of December 31, 2005, and $13 and $9, respectively, as of December 31, 2004. Total net losses and loss adjustment expenses incurred in Ongoing Operations for the years ended December 31, 2006, 2005 and 2004 includes $11, $11 and $13, respectively, related to asbestos and environmental claims. Total net losses and loss adjustment expenses paid in Ongoing Operations for the years ended December 31, 2006, 2005 and 2004 includes $12, $17 and $11, respectively, related to asbestos and environmental claims. | |
[3] | Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were $3,242 and $362, respectively, as of December 31, 2006, $3,845 and $432, respectively, as of December 31, 2005, and $4,322 and $501, respectively, as of December 31, 2004. | |
[4] | The one year and average three year net paid amounts for asbestos claims, including Ongoing Operations, were $368 and $595, respectively, resulting in a one year net survival ratio of 6.1 and a three year net survival ratio of 3.8 (9.0 excluding the MacArthur payments). 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. | |
[5] | The Company includes its allowance for uncollectible reinsurance in the “All Other” category of reserves. 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. | |
[6] | Asbestos payments include payments pursuant to the MacArthur settlement. |
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As of December 31, 2006
% of | ||||||||||||||||
Number of | Total | Environmental | 3 Year Gross | |||||||||||||
Accounts [2] | Reserves | Reserves | Survival Ratio [4] | |||||||||||||
Gross Environmental Reserves as of September 30, 2006 [1] | ||||||||||||||||
Accounts with future exposure > $2.5 | 14 | $ | 95 | 25 | % | |||||||||||
Accounts with future exposure < $2.5 | 524 | 111 | 29 | % | ||||||||||||
Other direct [3] | — | 25 | 6 | % | ||||||||||||
Total Direct | 538 | 231 | 60 | % | 3.3 | |||||||||||
Assumed Reinsurance | 100 | 26 | % | 3.2 | ||||||||||||
London Market | 56 | 14 | % | 3.8 | ||||||||||||
Total gross environmental reserves as of September 30, 2006 [1] | $ | 387 | 100 | % | 3.3 | |||||||||||
Gross paid loss activity for the fourth quarter 2006 | (25 | ) | ||||||||||||||
Gross incurred loss activity for the fourth quarter 2006 | — | |||||||||||||||
Total gross environmental reserves as of December 31, 2006 | $ | 362 | 3.3 | |||||||||||||
[1] | Gross Environmental Reserves based on the third quarter 2006 environmental reserve study. | |
[2] | Number of accounts established as of June 2006. | |
[3] | Includes unallocated IBNR. | |
[4] | The one year gross paid amount for total environmental claims is $112, resulting in a one year gross survival ratio of 3.2. |
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• | 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. | |
• | 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. |
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As of December 31, 2006
% of | All Time | |||||||||||||||||||||||
Number of | All Time | Total | Asbestos | Ultimate | 3 Year Gross Survival | |||||||||||||||||||
Accounts [2] | Paid [3] | Reserves | Reserves | [3] | Ratio [4] [5] | |||||||||||||||||||
Gross Asbestos Reserves as of June 30, 2006 [1] | ||||||||||||||||||||||||
Major asbestos defendants [6] | ||||||||||||||||||||||||
Structured settlements (includes 4 Wellington accounts) | 7 | $ | 386 | $ | 418 | 12 | % | $ | 804 | 6.9 | ||||||||||||||
Wellington (direct only) | 29 | 692 | 130 | 4 | % | 822 | 5.3 | |||||||||||||||||
Other major asbestos defendants | 29 | 459 | 154 | 4 | % | 613 | 2.4 | |||||||||||||||||
No known policies (includes 3 Wellington accounts) | 5 | — | — | — | — | — | ||||||||||||||||||
Accounts with future exposure > $2.5 | 88 | 663 | 959 | 27 | % | 1,622 | 7.5 | |||||||||||||||||
Accounts with future exposure < $2.5 | 1,015 | 198 | 129 | 4 | % | 327 | 3.8 | |||||||||||||||||
Unallocated [7] | 1,418 | 696 | 20 | % | 2,114 | |||||||||||||||||||
Total Direct | $ | 3,816 | $ | 2,486 | 71 | % | $ | 6,302 | 3.4 | |||||||||||||||
Assumed Reinsurance | 833 | 647 | 19 | % | 1,480 | 6.7 | ||||||||||||||||||
London Market | 495 | 358 | 10 | % | 853 | 7.1 | ||||||||||||||||||
Total as of June 30, 2006 [1] | $ | 5,144 | $ | 3,491 | 100 | % | $ | 8,635 | 4.0 | |||||||||||||||
Gross paid loss activity for the third quarter and fourth quarter 2006 | 257 | (257 | ) | |||||||||||||||||||||
Gross incurred loss activity for the third quarter and fourth quarter 2006 | 8 | 8 | ||||||||||||||||||||||
Total as of December 31, 2006 | $ | 5,401 | 3,242 | 8,643 | 3.6 | |||||||||||||||||||
Total as of December 31, 2006 excluding MacArthur Settlement [8] | $ | 4,251 | 6.3 | |||||||||||||||||||||
[1] | Gross Asbestos Reserves based on the second quarter 2006 asbestos reserve study. | |
[2] | An account may move between categories from one evaluation to the next. Reclassifications were made as a result of the reserve evaluation completed in the second quarter of 2006. | |
[3] | “All Time Paid” represents the total payments with respect to the indicated claim type that have already been made by the Company as of the indicated balance sheet date. “All Time Ultimate” represents the Company’s estimate, as of the indicated balance sheet date, of the total payments that are ultimately expected to be made to fully settle the indicated payment type. The amount is the sum of the amounts already paid (e.g. “All Time Paid”) and the estimated future payments (e.g. the amount shown in the column labeled “Total Reserves”). | |
[4] | Survival ratio is a commonly used industry ratio for comparing reserve levels between companies. While the method is commonly used, it is not a predictive technique. Survival ratios may vary over time for numerous reasons such as large payments due to the final resolution of certain asbestos liabilities, or reserve re-estimates. The survival ratio presented in the above table is computed by dividing the recorded reserves by the average of the past three years of payments. The ratio is the calculated number of years the recorded reserves would survive if future annual payments were equal to the average annual payments for the past three years. The 3-year gross survival ratio as December 31, 2006 is computed based on total paid losses of $2.7 billion for the period from January 1, 2004 to December 31, 2006. | |
[5] | As of December 31, 2006, the one year gross paid amount for total asbestos claims is $616, resulting in a one year gross survival ratio of 5.3. | |
[6] | Includes 28 open accounts at June 30, 2006. Included 32 open accounts at June 30, 2005. | |
[7] | Includes closed accounts (exclusive of Major Asbestos Defendants) and unallocated IBNR. | |
[8] | Excludes the $1.15 billion in payments for the MacArthur settlement in the first quarter of 2004. |
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Asbestos [1] | Environmental [1] | |||||||||||||||
Paid | Incurred | Paid | Incurred | |||||||||||||
Losses & LAE | Losses & LAE | Losses & LAE | Losses & LAE | |||||||||||||
2006 | ||||||||||||||||
Gross | ||||||||||||||||
Direct | $ | 346 | $ | 5 | $ | 45 | $ | 57 | ||||||||
Assumed — Domestic | 199 | 4 | 50 | (25 | ) | |||||||||||
London Market | 66 | — | 9 | 3 | ||||||||||||
Total | 611 | 9 | 104 | 35 | ||||||||||||
Ceded | (248 | ) | 305 | 2 | 27 | |||||||||||
Net | $ | 363 | $ | 314 | $ | 106 | $ | 62 | ||||||||
2005 | ||||||||||||||||
Gross | ||||||||||||||||
Direct | $ | 349 | $ | 10 | $ | 50 | $ | 14 | ||||||||
Assumed — Domestic | 70 | (4 | ) | 21 | — | |||||||||||
London Market | 61 | — | 9 | — | ||||||||||||
Total | 480 | 6 | 80 | 14 | ||||||||||||
Ceded | (271 | ) | 23 | (3 | ) | 38 | ||||||||||
Net | $ | 209 | $ | 29 | $ | 77 | $ | 52 | ||||||||
2004 | ||||||||||||||||
Gross | ||||||||||||||||
Direct [2] | $ | 1,487 | $ | (18 | ) | $ | 79 | $ | 75 | |||||||
Assumed — Domestic | 66 | 30 | 19 | — | ||||||||||||
London Market | 22 | — | 19 | — | ||||||||||||
Total | 1,575 | 12 | 117 | 75 | ||||||||||||
Ceded | (376 | ) | 205 | (34 | ) | 3 | ||||||||||
Net | $ | 1,199 | $ | 217 | $ | 83 | $ | 78 | ||||||||
[1] | Excludes asbestos and environmental paid and incurred losses and LAE reported in Ongoing Operations. Total gross losses and loss adjustment expenses paid in Ongoing Operations for the twelve months ended December 31, 2006, 2005, and 2004 includes $12, $23 and $11, respectively, related to asbestos and environmental claims. Total gross losses and loss adjustment expenses incurred in Ongoing Operations for the twelve months ended December 31, 2006, 2005, and 2004 includes $10, $17 and $14, respectively, related to asbestos and environmental claims. | |
[2] | Reflects payments pursuant to the MacArthur settlement of $1.15 billion. |
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2006 | 2005 | |||||||||||||||
Percentage | Percentage | |||||||||||||||
of Total | of Total | |||||||||||||||
Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||
Priced via independent market quotations | $ | 69,023 | 85.5 | % | $ | 65,986 | 86.3 | % | ||||||||
Priced via broker quotations | 4,309 | 5.3 | % | 2,728 | 3.6 | % | ||||||||||
Priced via matrices | 5,605 | 6.9 | % | 5,452 | 7.1 | % | ||||||||||
Priced via other methods | 137 | 0.2 | % | 211 | 0.3 | % | ||||||||||
Short-term investments [1] | 1,681 | 2.1 | % | 2,063 | 2.7 | % | ||||||||||
Total | $ | 80,755 | 100.0 | % | $ | 76,440 | 100.0 | % | ||||||||
[1] | Short-term investments are primarily valued at amortized cost, which approximates fair value. |
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Composition of Invested Assets | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Fixed maturities, available-for-sale, at fair value | $ | 53,173 | 59.4 | % | $ | 50,812 | 63.7 | % | ||||||||
Equity securities, available-for-sale, at fair value | 811 | 0.9 | % | 800 | 1.0 | % | ||||||||||
Equity securities held for trading, at fair value | 29,393 | 32.9 | % | 24,034 | 30.1 | % | ||||||||||
Policy loans, at outstanding balance | 2,051 | 2.3 | % | 2,016 | 2.5 | % | ||||||||||
Mortgage loans, at amortized cost | 2,909 | 3.3 | % | 1,513 | 1.9 | % | ||||||||||
Limited partnerships | 794 | 0.9 | % | 431 | 0.6 | % | ||||||||||
Other investments | 283 | 0.3 | % | 178 | 0.2 | % | ||||||||||
Total investments | $ | 89,414 | 100.0 | % | $ | 79,784 | 100.0 | % | ||||||||
Composition of Limited Partnerships | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Hedge funds [1] | $ | 427 | 53.8 | % | $ | 127 | 29.5 | % | ||||||||
Private equity funds [2] | 211 | 26.6 | % | 179 | 41.5 | % | ||||||||||
Mortgage and real estate funds [3] | 46 | 5.8 | % | 6 | 1.4 | % | ||||||||||
Mezzanine debt funds [4] | 110 | 13.8 | % | 119 | 27.6 | % | ||||||||||
Total | $ | 794 | 100.0 | % | $ | 431 | 100.0 | % | ||||||||
[1] | Hedge funds include investments in funds of funds as well as direct funds. The hedge funds of funds invest in approximately 40 to 90 different hedge funds within a variety of investment styles. Examples of hedge fund strategies include long/short equity or credit, event driven strategies and structured credit. | |
[2] | Private equity funds consist of investments in funds whose assets typically consist of a diversified pool of investments in small non-public businesses with high growth potential. | |
[3] | Mortgage and real estate funds consist of investments in funds whose assets consist of mortgage loans, participations in mortgage loans, mezzanine loans or other notes which may be below investment grade credit quality as well as equity real estate. |
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[4] | Mezzanine debt funds consist of investments in funds whose assets consist of subordinated debt that often times incorporates equity-based options such as warrants and a limited amount of direct equity investments. |
(Before-tax) | 2006 | 2005 | 2004 | |||||||||
Net investment income — excluding income on policy loans and equity securities held for trading | $ | 3,042 | $ | 2,854 | $ | 2,690 | ||||||
Equity securities held for trading [1] | 1,824 | 3,847 | 799 | |||||||||
Policy loan income | 142 | 144 | 186 | |||||||||
Net investment income — total | $ | 5,008 | $ | 6,845 | $ | 3,675 | ||||||
Yield on average invested assets [2] | 5.8 | % | 5.7 | % | 5.8 | % | ||||||
Gross gains on sale | $ | 215 | $ | 346 | $ | 359 | ||||||
Gross losses on sale | (257 | ) | (254 | ) | (147 | ) | ||||||
Impairments | ||||||||||||
Credit related | (10 | ) | (32 | ) | (16 | ) | ||||||
Other | (66 | ) | (5 | ) | (9 | ) | ||||||
Total impairments | (76 | ) | (37 | ) | (25 | ) | ||||||
Japanese fixed annuity contract hedges, net [3] | (17 | ) | (36 | ) | 3 | |||||||
Periodic net coupon settlements on credit derivatives/Japan | (48 | ) | (32 | ) | 8 | |||||||
GMWB derivatives, net | (26 | ) | (46 | ) | 8 | |||||||
Other, net [4] | (51 | ) | 34 | (42 | ) | |||||||
Net realized capital gains (losses), before-tax | $ | (260 | ) | $ | (25 | ) | $ | 164 | ||||
[1] | Represents dividend income and the change in value of equity securities held for trading. | |
[2] | Represents annualized net investment income (excluding income related to equity securities held for trading) divided by the monthly weighted average invested assets at cost or amortized cost, as applicable, excluding equity securities held for trading, the collateral received associated with securities lending programs and consolidated variable interest entity minority interests. | |
[3] | Relates to the Japanese fixed annuity product (product and related derivative hedging instruments excluding periodic net coupon settlements). | |
[4] | Primarily consists of changes in fair value on non-qualifying derivatives, changes in fair value of certain derivatives in fair value hedge relationships and hedge ineffectiveness on qualifying derivative instruments. |
• | The net losses on fixed maturity sales for the year ended December 31, 2006, were primarily the result of rising interest rates from the date of security purchase and, to a lesser extent, credit spread widening on certain issuers that were sold. For further discussion of gross gains and losses, see below. | |
• | See the Other-Than-Temporary Impairments section that follows for information on impairment losses. | |
• | The periodic net coupon settlements on credit derivatives and the Japan fixed annuity cross currency swaps include the net periodic income/expense or coupon associated with the swap contracts. The net losses for the years ended December 31, 2006 and 2005, |
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were primarily associated with the Japan fixed annuity cross currency swaps and resulted from the interest rate differential between U.S. and Japanese interest rates. The increase in net losses in 2006 was primarily due to higher U.S. interest rates. |
• | Other, net losses were primarily driven from the change in value of non-qualifying derivatives due to fluctuations in interest rates and foreign currency exchange rates. These losses were partially offset by a before-tax benefit of $25 received from the WorldCom security settlement. | |
• | A reduction in losses in 2006 compared to 2005, associated with the GMWB derivatives were primarily driven by a more significant impact from liability model refinements and assumption updates in 2005 as compared to 2006. For further discussion of the GMWB rider valuation assumption, see the Capital Markets Risk Management section of the MD&A under “Market Risk-Life”. | |
• | The Japanese fixed annuity contract hedges net amount consists of the foreign currency transaction remeasurements associated with the Yen denominated fixed annuity contracts offered in Japan and the corresponding offsetting cross currency swaps. Although the Japanese fixed annuity contracts are economically hedged, the net realized capital gains and losses result from the mixed attribute accounting model, which requires fixed annuity liabilities to be recorded at cost and remeasured only for foreign currency exchange rates but the associated derivatives to be reported at fair value. The net realized capital losses for the year ended December 31, 2006, resulted primarily from rising Japan interest rates while net realized capital losses for the year ended December 31, 2005, resulted from declining U.S. interest rates and rising Japan interest rates. The decrease in loss from 2005 to 2006 is primarily due to the hedging instruments used to manage the yen currency risk. Throughout 2006, the Company used pay variable U.S. dollar receive fixed yen, zero coupon currency swap while during the first half of 2005, the Company used pay fixed U.S. dollar receive fixed yen, zero coupon currency swap. This resulted in higher losses in 2005 as a result of declining U.S. interest rates. For additional discussion of the Japanese fixed annuity contract hedges see the Capital Markets Risk Management section of the MD&A under “Market Risk-Life” and Note 4 of Notes to Consolidated Financial Statements. |
• | The lower net gains on fixed maturity sales in 2005 were primarily the result of rising interest rates and losses associated with a major automotive manufacturer. See additional discussion of the gross gains and losses on sales below. |
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• | Higher net realized capital losses in 2005 resulted from rising Japanese interest rates, and in the first half of the year, a decrease in U.S. interest rates. For additional discussion of the Japanese fixed annuity contract hedges see the Capital Markets Risk Management section of the MD&A under “Market Risk-Life” and Note 4 of Notes to Consolidated Financial Statements. | |
• | The increase in net realized losses associated with the GMWB derivatives were primarily driven by the impact of liability model assumption updates in 2005. For further discussion of the GMWB rider valuation assumption, see the Capital Markets Risk Management section of the MD&A under “Market Risk-Life”. | |
• | The periodic net coupon settlements on credit derivatives and the Japan fixed annuity cross currency swaps includes the net periodic income/expense or coupon associated with the swap contracts. The net loss for 2005 is associated with the Japan fixed annuity cross currency swaps and results from the interest rate differential between U.S. and Japanese interest rates. The Japanese fixed annuity product was first offered by the Company in the fourth quarter 2004. The adverse change in 2005 in comparison to 2004 primarily resulted from a full year of the Japanese fixed annuity product swap accruals in 2005. |
Composition of Invested Assets | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Fixed maturities, available-for-sale, at fair value | $ | 27,178 | 92.8 | % | $ | 25,330 | 94.3 | % | ||||||||
Equity securities, available-for-sale, at fair value | 873 | 3.0 | % | 661 | 2.5 | % | ||||||||||
Mortgage loans, at amortized cost | 409 | 1.4 | % | 220 | 0.8 | % | ||||||||||
Limited partnerships | 450 | 1.5 | % | 237 | 0.9 | % | ||||||||||
Other investments | 390 | 1.3 | % | 405 | 1.5 | % | ||||||||||
Total investments | $ | 29,300 | 100.0 | % | $ | 26,853 | 100.0 | % | ||||||||
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Composition of Limited Partnerships | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Hedge funds [1] | $ | 170 | 37.8 | % | $ | 42 | 17.7 | % | ||||||||
Private equity funds [2] | 109 | 24.2 | % | 100 | 42.2 | % | ||||||||||
Mortgage and real estate funds [3] | 80 | 17.8 | % | 37 | 15.6 | % | ||||||||||
Mezzanine debt funds [4] | 91 | 20.2 | % | 58 | 24.5 | % | ||||||||||
Total | $ | 450 | 100.0 | % | $ | 237 | 100.0 | % | ||||||||
[1] | Hedge funds include investments in funds of funds as well as direct funds. The hedge funds of funds invest in approximately 40 to 90 different hedge funds within a variety of investment styles. In addition, Other Investments includes $384 of hedge funds based investments which are not limited partnerships and therefore, not included in the table above. Examples of hedge fund strategies include long/short equity or credit, event driven strategies and structured credit. | |
[2] | Private equity funds consist of investments in funds whose assets typically consist of a diversified pool of investments in small non-public businesses with high growth potential. | |
[3] | Mortgage and real estate funds consist of investments in funds whose assets consist of mortgage loans, participations in mortgage loans, mezzanine loans or other notes which may be below investment grade credit quality as well as equity real estate. | |
[4] | Mezzanine debt funds consist of investments in funds whose assets consist of subordinated debt that often times incorporates equity-based options such as warrants and a limited amount of direct equity investments. |
(Before-tax) | 2006 | 2005 | 2004 | |||||||||
Net investment income, before-tax | $ | 1,486 | $ | 1,365 | $ | 1,248 | ||||||
Net investment income, after-tax [1] | $ | 1,107 | $ | 1,016 | $ | 932 | ||||||
Yield on average invested assets, before-tax [2] | 5.5 | % | 5.5 | % | 5.4 | % | ||||||
Yield on average invested assets, after-tax [1] [2] | 4.1 | % | 4.1 | % | 4.1 | % | ||||||
Gross gains on sale | $ | 205 | $ | 163 | $ | 210 | ||||||
Gross losses on sale | (164 | ) | (110 | ) | (83 | ) | ||||||
Impairments | ||||||||||||
Credit related | — | (9 | ) | (8 | ) | |||||||
Other | (45 | ) | (1 | ) | (5 | ) | ||||||
Total impairments | (45 | ) | (10 | ) | (13 | ) | ||||||
Periodic net coupon settlements on credit derivatives | 4 | — | 9 | |||||||||
Other, net [3] | 9 | 1 | 10 | |||||||||
Net realized capital gains, before-tax | $ | 9 | $ | 44 | $ | 133 | ||||||
[1] | Due to significant holdings in tax-exempt investments, after-tax net investment income and yield are also included. | |
[2] | Represents annualized net investment income divided by the monthly weighted average invested assets at cost or amortized cost, as applicable, excluding the collateral received associated with securities lending programs. | |
[3] | Primarily consists of changes in fair value on non-qualifying derivatives and hedge ineffectiveness on qualifying derivatives. |
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December 31, 2006 | December 31, 2005 | |||||||||||||||||||||||
Maximum | Maximum | |||||||||||||||||||||||
Total | Exposure to | Total | Exposure to | |||||||||||||||||||||
Assets | Liability [4] | Loss[2][3] | Assets | Liability [4] | Loss [2] [3] | |||||||||||||||||||
Collaterized debt obligations (“CDOs”) and other funds [1] [2] | $ | 296 | $ | 99 | $ | 197 | $ | 77 | $ | 42 | $ | 35 | ||||||||||||
Limited partnerships [3] | 103 | 5 | 98 | — | — | — | ||||||||||||||||||
Total [5] | $ | 399 | $ | 104 | $ | 295 | $ | 77 | $ | 42 | $ | 35 | ||||||||||||
[1] | The Company provides collateral management services and earns a fee associated with these structures. | |
[2] | The maximum exposure to loss is the Company’s co-investment in these structures. | |
[3] | The maximum exposure to loss is equal to the carrying value of the investment plus any unfunded commitments. | |
[4] | Creditors have no recourse against the Company in the event of default by the VIE. | |
[5] | As of December 31, 2006 and 2005, the Company had relationships with four and two VIEs, respectively, where the Company was the primary beneficiary. |
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2006 | 2005 | 2004 | ||||||||||
ABS | $ | 8 | $ | 5 | $ | 13 | ||||||
Commercial mortgages | — | — | 3 | |||||||||
CMBS/Collateralized mortgage obligations (“CMOs”) | 2 | 1 | 3 | |||||||||
Corporate | 103 | 32 | 5 | |||||||||
Equity | 8 | 9 | 12 | |||||||||
MBS — interest only securities | — | — | 2 | |||||||||
Total other-than-temporary impairments | $ | 121 | $ | 47 | $ | 38 | ||||||
Credit related | $ | 10 | $ | 41 | $ | 24 | ||||||
Other | 111 | 6 | 14 | |||||||||
Total other-than-temporary impairments | $ | 121 | $ | 47 | $ | 38 | ||||||
• | Approximately $15 of other-than-temporary impairments recorded on corporate securities related to three Canadian paper companies. These companies’ operations have recently suffered from high energy prices and falling demand, in part due to the appreciation of the Canadian dollar in comparison to the U.S. dollar. These investments continue to perform in accordance with the contractual terms of the securities. As of December 31, 2005, the Company held approximately $96 of securities issued by these three companies in a total net unrealized loss position of $5. Substantially all of the securities in an unrealized loss position, as of December 31, 2005, were depressed only to a minor extent and, as a result, the unrealized losses were deemed to be temporary in nature. | |
• | Also included in the corporate securities other-than-temporary impairment amount for 2005 was $9 recorded on securities related to two major automotive manufacturers. The market values of these securities had fallen due to a downward adjustment in earnings and cash flow guidance primarily due to sluggish sales, rising employee and retiree benefit costs and an increased debt |
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service burden. Through 2005, these investments performed in accordance with the contractual terms of the securities. As of December 31, 2005, the Company held approximately $137 of securities issued by these two companies in a total net unrealized loss position of $7. Substantially all of the securities in an unrealized loss position, as of December 31, 2005, were depressed only to a minor extent and, as a result, the unrealized losses were deemed to be temporary in nature. |
• | Total return swaps and credit spreadlocks involve the periodic exchange of payments with other parties, at specified intervals, calculated using the agreed upon index and notional principal amounts. Generally, no cash or principal payments are exchanged at the inception of the contract. Typically, at the time a swap is entered into, the cash flow streams exchanged by the counterparties are equal in value. As of December 31, 2006 and 2005, the notional value of total return swaps and credit spreadlocks, which exposed the Company to credit risk, totaled $2.7 billion and $1.9 billion, respectively, and the fair value totaled $1 and $5, respectively. | |
• | 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. One party to the contract will make a payment based on an agreed upon rate and a notional amount. The second party, who assumes credit exposure, will typically make a payment when there is a credit event and such payment will be |
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equal to the notional value of the swap contract less the value of the referenced security issuer debt obligation. A credit event is generally defined as default on contractually obligated interest or principal payments or bankruptcy. Certain credit default swaps require an upfront premium to be paid at inception of the contract. During 2006, the Company began using credit default swaps to replicate residual CDO interests. These transactions involve the receipt of cash upon entering into the transaction as well as coupon payments throughout the life of the contract. The upfront cash receipts for positions at December 31, 2006, totaled $201, which represents the original liability value of the credit default swaps. For credit default swaps in which the Company is exposed to credit risk, as of December 31, 2006 and 2005, the notional value totaled $1.8 billion and $700, respectively, and the fair value totaled $(184) and $(4), respectively. As of December 31, 2006, the average S&P rating for these referenced security issuer debt obligations is BBB+. For credit default swaps in which the Company has reduced its credit exposure, as of December 31, 2006 and 2005, the notional value totaled $3.1 billion and $254, respectively, and the fair value totaled $(11) and $2, respectively. As of December 31, 2006, the average S&P rating for these referenced security issuers debt obligations is BBB. The increase in notional value of risk reducing credit default swaps since December 31, 2005, primarily related to negative basis trades. These trades involve the purchase of a cash bond along with credit protection on the issuer through a credit default swap in order to lock in a positive spread to LIBOR. |
Consolidated Fixed Maturities by Type | ||||||||||||||||||||||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||||||||||||||||||
of Total | of Total | |||||||||||||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Fair | Amortized | Unrealized | Unrealized | Fair | Fair | |||||||||||||||||||||||||||||||
Cost | Gains | Losses | Value | Value | Cost | Gains | Losses | Value | Value | |||||||||||||||||||||||||||||||
ABS | $ | 7,924 | $ | 54 | $ | (53 | ) | $ | 7,925 | 9.8 | % | $ | 7,907 | $ | 60 | $ | (89 | ) | $ | 7,878 | 10.3 | % | ||||||||||||||||||
CMBS | 16,579 | 232 | (145 | ) | 16,666 | 20.6 | % | 12,930 | 234 | (162 | ) | 13,002 | 17.0 | % | ||||||||||||||||||||||||||
Collateralized mortgage obligations (“CMOs”) | 1,300 | 17 | (9 | ) | 1,308 | 1.6 | % | 993 | 3 | (6 | ) | 990 | 1.3 | % | ||||||||||||||||||||||||||
Corporate | ||||||||||||||||||||||||||||||||||||||||
Basic industry | 2,801 | 83 | (32 | ) | 2,852 | 3.6 | % | 3,086 | 107 | (49 | ) | 3,144 | 4.1 | % | ||||||||||||||||||||||||||
Capital goods | 2,568 | 111 | (20 | ) | 2,659 | 3.3 | % | 2,308 | 103 | (28 | ) | 2,383 | 3.1 | % | ||||||||||||||||||||||||||
Consumer cyclical | 3,279 | 94 | (34 | ) | 3,339 | 4.1 | % | 2,910 | 91 | (56 | ) | 2,945 | 3.8 | % | ||||||||||||||||||||||||||
Consumer non-cyclical | 3,465 | 84 | (47 | ) | 3,502 | 4.4 | % | 3,164 | 139 | (37 | ) | 3,266 | 4.3 | % | ||||||||||||||||||||||||||
Energy | 1,779 | 73 | (21 | ) | 1,831 | 2.3 | % | 1,545 | 118 | (12 | ) | 1,651 | 2.2 | % | ||||||||||||||||||||||||||
Financial services | 10,276 | 307 | (78 | ) | 10,505 | 13.1 | % | 9,413 | 350 | (84 | ) | 9,679 | 12.7 | % | ||||||||||||||||||||||||||
Technology and communications | 4,136 | 191 | (44 | ) | 4,283 | 5.3 | % | 4,256 | 239 | (58 | ) | 4,437 | 5.8 | % | ||||||||||||||||||||||||||
Transportation | 730 | 17 | (10 | ) | 737 | 0.9 | % | 850 | 33 | (9 | ) | 874 | 1.1 | % | ||||||||||||||||||||||||||
Utilities | 4,588 | 195 | (66 | ) | 4,717 | 5.8 | % | 4,043 | 182 | (44 | ) | 4,181 | 5.5 | % | ||||||||||||||||||||||||||
Other | 1,447 | 38 | (19 | ) | 1,466 | 1.8 | % | 1,444 | 33 | (19 | ) | 1,458 | 1.9 | % | ||||||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||||||||||
Foreign | 1,213 | 87 | (6 | ) | 1,294 | 1.6 | % | 1,378 | 96 | (7 | ) | 1,467 | 1.9 | % | ||||||||||||||||||||||||||
United States | 848 | 5 | (7 | ) | 846 | 1.0 | % | 877 | 27 | (6 | ) | 898 | 1.2 | % | ||||||||||||||||||||||||||
MBS — agency | 2,742 | 5 | (45 | ) | 2,702 | 3.3 | % | 3,914 | 7 | (60 | ) | 3,861 | 5.0 | % | ||||||||||||||||||||||||||
Municipal | ||||||||||||||||||||||||||||||||||||||||
Taxable | 1,342 | 25 | (23 | ) | 1,344 | 1.7 | % | 1,155 | 52 | (8 | ) | 1,199 | 1.6 | % | ||||||||||||||||||||||||||
Tax-exempt | 10,555 | 511 | (4 | ) | 11,062 | 13.7 | % | 10,486 | 549 | (16 | ) | 11,019 | 14.4 | % | ||||||||||||||||||||||||||
Redeemable preferred stock | 36 | — | — | 36 | — | 44 | 1 | ¾ | 45 | 0.1 | % | |||||||||||||||||||||||||||||
Short-term | 1,681 | — | — | 1,681 | 2.1 | % | 2,063 | ¾ | ¾ | 2,063 | 2.7 | % | ||||||||||||||||||||||||||||
Total fixed maturities | $ | 79,289 | $ | 2,129 | $ | (663 | ) | $ | 80,755 | 100.0 | % | $ | 74,766 | $ | 2,424 | $ | (750 | ) | $ | 76,440 | 100.0 | % | ||||||||||||||||||
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Consolidated Fixed Maturities by Credit Quality | ||||||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
AAA | $ | 23,216 | $ | 23,629 | 29.2 | % | $ | 19,414 | $ | 19,837 | 26.0 | % | ||||||||||||
AA | 10,107 | 10,298 | 12.8 | % | 9,901 | 10,143 | 13.3 | % | ||||||||||||||||
A | 17,696 | 18,251 | 22.6 | % | 18,232 | 18,914 | 24.7 | % | ||||||||||||||||
BBB | 17,402 | 17,655 | 21.9 | % | 16,560 | 16,892 | 22.1 | % | ||||||||||||||||
United States Government/Government agencies | 5,529 | 5,507 | 6.8 | % | 5,720 | 5,686 | 7.4 | % | ||||||||||||||||
BB & below | 3,658 | 3,734 | 4.6 | % | 2,876 | 2,905 | 3.8 | % | ||||||||||||||||
Short-term | 1,681 | 1,681 | 2.1 | % | 2,063 | 2,063 | 2.7 | % | ||||||||||||||||
Total fixed maturities | $ | 79,289 | $ | 80,755 | 100.0 | % | $ | 74,766 | $ | 76,440 | 100.0 | % | ||||||||||||
Consolidated Unrealized Loss Aging of Total Available-for-Sale Securities | ||||||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||
Cost | Value | Loss | Cost | Value | Loss | |||||||||||||||||||
Three months or less | $ | 12,601 | $ | 12,500 | $ | (101 | ) | $ | 17,986 | $ | 17,704 | $ | (282 | ) | ||||||||||
Greater than three months to six months | 1,261 | 1,242 | (19 | ) | 5,143 | 5,013 | (130 | ) | ||||||||||||||||
Greater than six months to nine months | 1,239 | 1,210 | (29 | ) | 1,061 | 1,036 | (25 | ) | ||||||||||||||||
Greater than nine months to twelve months | 1,992 | 1,959 | (33 | ) | 3,001 | 2,907 | (94 | ) | ||||||||||||||||
Greater than twelve months | 15,402 | 14,911 | (491 | ) | 5,053 | 4,826 | (227 | ) | ||||||||||||||||
Total | $ | 32,495 | $ | 31,822 | $ | (673 | ) | $ | 32,244 | $ | 31,486 | $ | (758 | ) | ||||||||||
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Consolidated Total Available-for-Sale Securities with Unrealized Loss Greater Than Six Months by Type | ||||||||||||||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||||||||||
Total | Total | |||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Unrealized | Amortized | Fair | Unrealized | Unrealized | |||||||||||||||||||||||||
Cost | Value | Loss | Loss | Cost | Value | Loss | Loss | |||||||||||||||||||||||||
ABS | ||||||||||||||||||||||||||||||||
Aircraft lease receivables | $ | 107 | $ | 79 | $ | (28 | ) | 5.1 | % | $ | 204 | $ | 152 | $ | (52 | ) | 15.0 | % | ||||||||||||||
CDOs | 133 | 129 | (4 | ) | 0.7 | % | 25 | 24 | (1 | ) | 0.3 | % | ||||||||||||||||||||
Credit card receivables | 150 | 148 | (2 | ) | 0.4 | % | 162 | 160 | (2 | ) | 0.6 | % | ||||||||||||||||||||
Other ABS | 777 | 760 | (17 | ) | 3.1 | % | 727 | 713 | (14 | ) | 4.0 | % | ||||||||||||||||||||
CMBS | 4,694 | 4,575 | (119 | ) | 21.5 | % | 1,961 | 1,902 | (59 | ) | 17.1 | % | ||||||||||||||||||||
Corporate | ||||||||||||||||||||||||||||||||
Basic industry | 859 | 834 | (25 | ) | 4.5 | % | 501 | 480 | (21 | ) | 6.1 | % | ||||||||||||||||||||
Consumer cyclical | 752 | 724 | (28 | ) | 5.1 | % | 459 | 434 | (25 | ) | 7.2 | % | ||||||||||||||||||||
Consumer non-cyclical | 1,106 | 1,068 | (38 | ) | 6.9 | % | 418 | 401 | (17 | ) | 4.9 | % | ||||||||||||||||||||
Financial services | 2,749 | 2,689 | (60 | ) | 10.8 | % | 1,847 | 1,796 | (51 | ) | 14.7 | % | ||||||||||||||||||||
Technology and communications | 912 | 877 | (35 | ) | 6.3 | % | 481 | 458 | (23 | ) | 6.7 | % | ||||||||||||||||||||
Transportation | 225 | 216 | (9 | ) | 1.6 | % | 40 | 39 | (1 | ) | 0.3 | % | ||||||||||||||||||||
Utilities | 1,384 | 1,331 | (53 | ) | 9.6 | % | 246 | 235 | (11 | ) | 3.2 | % | ||||||||||||||||||||
Other | 1,454 | 1,404 | (50 | ) | 9.0 | % | 553 | 526 | (27 | ) | 7.8 | % | ||||||||||||||||||||
Other securities | 3,331 | 3,246 | (85 | ) | 15.4 | % | 1,491 | 1,449 | (42 | ) | 12.1 | % | ||||||||||||||||||||
Total | $ | 18,633 | $ | 18,080 | $ | (553 | ) | 100.0 | % | $ | 9,115 | $ | 8,769 | $ | (346 | ) | 100.0 | % | ||||||||||||||
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Change in Net Economic Value As of December 31, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Basis point shift | - 100 | + 100 | - 100 | + 100 | ||||||||||||
Amount | $ | 1 | $ | (33 | ) | $ | (48 | ) | $ | 10 | ||||||
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Change in Fair Value As of December 31, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Basis point shift | - 100 | + 100 | - 100 | + 100 | ||||||||||||
Amount | $ | 422 | $ | (415 | ) | $ | 471 | $ | (451 | ) | ||||||
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Change in Fair Value As of December 31, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Basis point shift | - 100 | + 100 | - 100 | + 100 | ||||||||||||
Amount | $ | 857 | $ | (829 | ) | $ | 861 | $ | (760 | ) | ||||||
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Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
Description | Effective Date | Expiration Date | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Commercial Paper | ||||||||||||||||||||||||
The Hartford | 11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | 299 | $ | 471 | ||||||||||||||
HLI [1] | 2/7/97 | N/A | 250 | 250 | — | — | ||||||||||||||||||
Total commercial paper | 2,250 | 2,250 | 299 | 471 | ||||||||||||||||||||
Revolving Credit Facility | ||||||||||||||||||||||||
5-year revolving credit facility | 9/7/05 | 9/7/10 | 1,600 | 1,600 | — | — | ||||||||||||||||||
Line of Credit | ||||||||||||||||||||||||
Life Japan Operations [2] | 9/18/02 | 1/4/08 | 42 | 17 | — | — | ||||||||||||||||||
Total Commercial Paper, Revolving Credit Facility and Line of Credit | $ | 3,892 | $ | 3,867 | $ | 299 | $ | 471 | ||||||||||||||||
[1] | In January 2007, the commercial paper program of HLI was terminated. | |
[2] | As of December 31, 2006 and 2005, the Company’s Japanese operation line of credit in yen was ¥5 billion and ¥2 billion, respectively. |
• | The Company has unfunded commitments to purchase investments in limited partnerships, mortgage and construction loans of about $1.4 billion as disclosed in Note 12 of Notes to Consolidated Financial Statements. |
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Payments due by period | ||||||||||||||||||||
Less than 1 | More than 5 | |||||||||||||||||||
Total | Year | 1-3 years | 3-5 years | years | ||||||||||||||||
Property and casualty obligations [1] | $ | 22,596 | $ | 5,936 | $ | 6,001 | $ | 3,098 | $ | 7,561 | ||||||||||
Life, annuity and disability obligations [2] | 408,700 | 25,478 | 54,750 | 56,064 | 272,408 | |||||||||||||||
Operating lease obligations | 524 | 169 | 221 | 110 | 24 | |||||||||||||||
Long-term debt obligations [3] | 6,902 | 528 | 1,746 | 1,077 | 3,551 | |||||||||||||||
Consumer notes [4] | 289 | 14 | 255 | 20 | — | |||||||||||||||
Purchase obligations [5] | 1,872 | 1,740 | 83 | 24 | 25 | |||||||||||||||
Other long-term liabilities reflected on the balance sheet [6], [7] | 2,364 | 2,322 | — | — | 42 | |||||||||||||||
Total [8] | $ | 443,247 | $ | 36,187 | $ | 63,056 | $ | 60,393 | $ | 283,611 | ||||||||||
[1] | The following points are significant to understanding the cash flows estimated for obligations under property and casualty contracts: |
• | Reserves for Property & Casualty unpaid losses and loss adjustment expenses include case reserves for reported claims and reserves for claims incurred but not reported (IBNR). While payments due on claim reserves are considered contractual obligations because they relate to insurance policies issued by the Company, the ultimate amount to be paid to settle both case reserves and IBNR is an estimate, subject to significant uncertainty. The actual amount to be paid is not finally determined until the Company reaches a settlement with the claimant. Final claim settlements may vary significantly from the present estimates, particularly since many claims will not be settled until well into the future. | ||
• | In estimating the timing of future payments by year, the Company has assumed that its historical payment patterns will continue. However, the actual timing of future payments could vary materially from these estimates due to, among other things, changes in claim reporting and payment patterns and large unanticipated settlements. In particular, there is significant uncertainty over the claim payment patterns of asbestos and environmental claims. Also, estimated payments in 2007 do not include payments that will be made on claims incurred in 2007 on policies that were in force as of December 31, 2006. In addition, the table does not include future cash flows related to the receipt of premiums that may be used, in part, to fund loss payments. | ||
• | Under generally accepted accounting principles, the Company is only permitted to discount reserves for losses and loss adjustment expenses in cases where the payment pattern and ultimate loss costs are fixed and determinable on an individual claim basis. For the Company, these include claim settlements with permanently disabled claimants and certain structured settlement contracts that fund loss runoffs for unrelated parties. As of December 31, 2006, the total property and casualty reserves in the above table are gross of a reserve discount of $605. |
[2] | Estimated life, annuity and disability obligations include death and disability claims, policy surrenders, policyholder dividends and trail commissions offset by expected future deposits and premiums on in-force contracts. Estimated contractual policyholder obligations are based on mortality, morbidity and lapse assumptions comparable with Life’s historical experience, modified for recent observed trends. Life has also assumed market growth and interest crediting consistent with assumptions used in amortizing deferred acquisition costs. In contrast to this table, the majority of Life’s obligations are recorded on the balance sheet at the current account values and do not incorporate an expectation of future market growth, interest crediting, or future deposits. Therefore, the estimated contractual policyholder obligations presented in this table significantly exceed the liabilities recorded in reserve for future policy benefits and unpaid losses and loss adjustment expenses, other policyholder funds and benefits payable and separate account liabilities. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. As separate account obligations are legally insulated from general account obligations, the separate account obligations will be fully funded by cash flows from separate account assets. Life expects to fully fund the general account obligations from cash flows from general account investments and future deposits and premiums. | |
[3] | Includes contractual principal and interest payments. All long-term debt obligations have fixed rates of interest. Long-term debt obligations shown above include principal and interest payments. See Note 14 of Notes to Consolidated Financial Statements for additional discussion of long-term debt obligations. | |
[4] | Consumer notes include principal payments and contractual interest for fixed rate notes and interest based on current rates for floating rate notes. See Note 14 of Notes to Consolidated Financial Statements for additional discussion of consumer notes. | |
[5] | Includes $1.7 billion in commitments to purchase investments including about $1 billion of limited partnership and $333 of mortgage and construction loans. Outstanding commitments under these limited partnerships and mortgage and construction loans are included in payments due in less than 1 year since the timing of funding these commitments cannot be estimated. The remaining $314 relates to payables for securities purchased which are reflected on the Company’s consolidated balance sheet. | |
[6] | As of December 31, 2006, the Company has accepted cash collateral of $2.3 billion in connection with the Company’s securities lending program and derivative instruments. Since the timing of the return of the collateral is uncertain, the return of the collateral has been included in the payments due in less than 1 year. | |
[7] | Includes $42 in collateralized debt obligations (“CDOs”) issued to third-party investors by consolidated investment management entities sponsored by the Company in connection with synthetic CDO transactions. The CDO investors have no recourse to the Company’s assets other than the dedicated assets collateralizing the CDOs. Refer to Note 4 of Notes to Consolidated Financial Statements for additional discussion of CDOs. | |
[8] | Does not include estimated voluntary contribution of $200 to the Company’s pension plan in 2007. |
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As of December 31, | ||||||||
2006 | 2005 | |||||||
Short-term debt (includes current maturities of long-term debt) | $ | 599 | $ | 719 | ||||
Long-term debt [1] | 3,504 | 4,048 | ||||||
Total debt [2] | 4,103 | 4,767 | ||||||
Equity excluding accumulated other comprehensive income, net of tax (“AOCI”) | 18,698 | 15,235 | ||||||
AOCI | 178 | 90 | ||||||
Total stockholders’ equity | $ | 18,876 | $ | 15,325 | ||||
Total capitalization including AOCI | $ | 22,979 | $ | 20,092 | ||||
Debt to equity | 22 | % | 31 | % | ||||
Debt to capitalization | 18 | % | 24 | % | ||||
[1] | Includes junior subordinated debentures of $0 and $691 and debt associated with equity units of $0 and $1,020 as of December 31, 2006 and 2005, respectively. | |
[2] | Total debt of the Company excludes $258 and $0 of consumer notes as of December 31, 2006 and 2005, respectively. |
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• | For the other postretirement plans, an increase in AOCI of $24, after-tax, which coincided with a before-tax decrease in the liability of $37. This was driven by reflecting actuarial gains as a result of the adoption of SFAS 158. | |
• | For the pension plans, an increase of $70, after-tax, which coincided with a $108 before-tax reduction in the liability. This was driven by: |
• | $135 after-tax increase in AOCI due to favorable experience in pension assumptions which resulted in a gain (increase in the discount rate, actual asset returns exceeding expected asset returns), combined with | ||
• | $48 after-tax increase in AOCI due to the amortization of actuarial losses into expense. |
These changes were offset by: |
• | $113 after-tax decrease in AOCI to recognize the effects of future salary increases into The Hartford’s obligation (the spread between the 2005 PBO and ABO, consistent with the adoption of SFAS 158). |
Cash Flow | 2006 | 2005 | 2004 | |||||||||
Net cash provided by operating activities | $ | 5,638 | $ | 3,732 | $ | 2,634 | ||||||
Net cash used for investing activities | $ | (7,410 | ) | $ | (4,860 | ) | $ | (2,401 | ) | |||
Net cash provided by financing activities | $ | 1,915 | $ | 1,280 | $ | 477 | ||||||
Cash — end of year | $ | 1,424 | $ | 1,273 | $ | 1,148 | ||||||
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Insurance Financial Strength Ratings: | A.M. Best | Fitch | Standard & Poor’s | Moody’s | ||||||||||||
Hartford Fire Insurance Company | A+ | AA | AA- | Aa3 | ||||||||||||
Hartford Life Insurance Company | A+ | AA | AA- | Aa3 | ||||||||||||
Hartford Life and Accident Insurance Company | A+ | AA | AA- | Aa3 | ||||||||||||
Hartford Life and Annuity Insurance Company | A+ | AA | AA- | Aa3 | ||||||||||||
Hartford Life Insurance KK (Japan) | — | — | AA- | — | ||||||||||||
Hartford Life Limited (Ireland) | — | — | AA- | — | ||||||||||||
Other Ratings: | ||||||||||||||||
The Hartford Financial Services Group, Inc.: | ||||||||||||||||
Senior debt | a- | A | A | A2 | ||||||||||||
Commercial paper | AMB-2 | F1 | A-1 | P-1 | ||||||||||||
Hartford Life, Inc.: | ||||||||||||||||
Senior debt | a- | A | A | A2 | ||||||||||||
Hartford Life Insurance Company: | ||||||||||||||||
Short Term Rating | — | — | A-1+ | P-1 | ||||||||||||
Consumer Notes | a+ | AA- | AA- | A1 | ||||||||||||
2006 | 2005 | |||||||
Life Operations | $ | 4,734 | $ | 4,364 | ||||
Japan Life Operations | 1,380 | 1,017 | ||||||
Property & Casualty Operations | 8,230 | 6,981 | ||||||
Total | $ | 14,344 | $ | 12,362 | ||||
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The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Hartford, Connecticut
February 21, 2007
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(Executive Vice President, Human Resources)
(Executive Vice President and Chief Financial Officer)
(Senior Vice President and Controller)
(Executive Vice President and General Counsel)
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(Executive Vice President and Chief Investment Officer)
(a) | (b) | (c) | ||||||||||
Weighted-average | Number of Securities Remaining | |||||||||||
Number of Securities to | Exercise Price of | Available for Future Issuance Under | ||||||||||
be Issued Upon Exercise | Outstanding | Equity Compensation Plans | ||||||||||
of Outstanding Options, | Options, Warrants | (Excluding Securities Reflected in | ||||||||||
Warrants and Rights | and Rights | Column (a)) | ||||||||||
Equity compensation plans approved by stockholders | 8,852,771 | $ | 56.49 | 8,307,585 | [1] | |||||||
Equity compensation plans not approved by stockholders | 45,229 | 54.29 | 225,858 | |||||||||
Total | 8,898,000 | $ | 56.48 | 8,533,443 | ||||||||
[1] | Of these shares, 2,006,422 shares remain available for purchase under the ESPP. |
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(a) | Documents filed as a part of this report: |
(1) | Consolidated Financial Statements.See Index to Consolidated Financial Statements elsewhere herein. | ||
(2) | Consolidated Financial Statement Schedules.See Index to Consolidated Financial Statement Schedules elsewhere herein. | ||
(3) | Exhibits.See Exhibit Index elsewhere herein. |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
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Table of Contents
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Hartford, Connecticut
February 21, 2007
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For the years ended December 31, | ||||||||||||
(In millions, except for per share data) | 2006 | 2005 | 2004 | |||||||||
Revenues | ||||||||||||
Earned premiums | $ | 15,023 | $ | 14,359 | $ | 13,566 | ||||||
Fee income | 4,739 | 4,012 | 3,471 | |||||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 4,691 | 4,384 | 4,144 | |||||||||
Equity securities held for trading | 1,824 | 3,847 | 799 | |||||||||
Total net investment income | 6,515 | 8,231 | 4,943 | |||||||||
Other revenues | 474 | 464 | 437 | |||||||||
Net realized capital gains (losses) | (251 | ) | 17 | 291 | ||||||||
Total revenues | 26,500 | 27,083 | 22,708 | |||||||||
Benefits, losses and expenses | ||||||||||||
Benefits, losses and loss adjustment expenses | 15,042 | 16,776 | 13,640 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 3,558 | 3,169 | 2,843 | |||||||||
Insurance operating costs and expenses | 3,252 | 3,227 | 2,776 | |||||||||
Interest expense | 277 | 252 | 251 | |||||||||
Other expenses | 769 | 674 | 675 | |||||||||
Total benefits, losses and expenses | 22,898 | 24,098 | 20,185 | |||||||||
Income before income taxes and cumulative effect of accounting change | 3,602 | 2,985 | 2,523 | |||||||||
Income tax expense | 857 | 711 | 385 | |||||||||
Income before cumulative effect of accounting change | 2,745 | 2,274 | 2,138 | |||||||||
Cumulative effect of accounting change, net of tax | — | — | (23 | ) | ||||||||
Net income | $ | 2,745 | $ | 2,274 | $ | 2,115 | ||||||
Basic earnings per share | ||||||||||||
Income before cumulative effect of accounting change | $ | 8.89 | $ | 7.63 | $ | 7.32 | ||||||
Cumulative effect of accounting change, net of tax | — | — | (0.08 | ) | ||||||||
Net income | $ | 8.89 | $ | 7.63 | $ | 7.24 | ||||||
Diluted earnings per share | ||||||||||||
Income before cumulative effect of accounting change | $ | 8.69 | $ | 7.44 | $ | 7.20 | ||||||
Cumulative effect of accounting change, net of tax | — | — | (0.08 | ) | ||||||||
Net income | $ | 8.69 | $ | 7.44 | $ | 7.12 | ||||||
Weighted average common shares outstanding | 308.8 | 298.0 | 292.3 | |||||||||
Weighted average common shares outstanding and dilutive potential common shares | 315.9 | 305.6 | 297.0 | |||||||||
Cash dividends declared per share | $ | 1.70 | $ | 1.17 | $ | 1.13 | �� | |||||
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As of December 31, | ||||||||
(In millions, except for share data) | 2006 | 2005 | ||||||
Assets | ||||||||
Investments | ||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost of $79,289 and $74,766) | $ | 80,755 | $ | 76,440 | ||||
Equity securities, held for trading, at fair value (cost of $23,668 and $19,570) | 29,393 | 24,034 | ||||||
Equity securities, available-for-sale, at fair value (cost of $1,535 and $1,330) | 1,739 | 1,461 | ||||||
Policy loans, at outstanding balance | 2,051 | 2,016 | ||||||
Mortgage loans on real estate | 3,318 | 1,731 | ||||||
Other investments | 1,917 | 1,253 | ||||||
Total investments | 119,173 | 106,935 | ||||||
Cash | 1,424 | 1,273 | ||||||
Premiums receivable and agents’ balances | 3,675 | 3,734 | ||||||
Reinsurance recoverables | 5,571 | 6,360 | ||||||
Deferred policy acquisition costs and present value of future profits | 10,268 | 9,702 | ||||||
Deferred income taxes | 284 | 675 | ||||||
Goodwill | 1,717 | 1,720 | ||||||
Property and equipment, net | 791 | 683 | ||||||
Other assets | 3,323 | 3,600 | ||||||
Separate account assets | 180,484 | 150,875 | ||||||
Total assets | $ | 326,710 | $ | 285,557 | ||||
Liabilities | ||||||||
Reserve for future policy benefits and unpaid losses and loss adjustment expenses | ||||||||
Property and casualty | $ | 21,991 | $ | 22,266 | ||||
Life | 14,016 | 12,987 | ||||||
Other policyholder funds and benefits payable | 71,311 | 64,452 | ||||||
Unearned premiums | 5,620 | 5,566 | ||||||
Short-term debt | 599 | 719 | ||||||
Long-term debt | 3,504 | 4,048 | ||||||
Consumer notes | 258 | — | ||||||
Other liabilities | 10,051 | 9,319 | ||||||
Separate account liabilities | 180,484 | 150,875 | ||||||
Total liabilities | 307,834 | $ | 270,232 | |||||
Commitments and Contingencies (Note 12) | ||||||||
Stockholders’ Equity | ||||||||
Common stock – 750,000,000 shares authorized, 326,401,820 and 305,188,238 shares issued, $0.01 par value | 3 | 3 | ||||||
Additional paid-in capital | 6,321 | 5,067 | ||||||
Retained earnings | 12,421 | 10,207 | ||||||
Treasury stock, at cost 3,086,429 and 3,035,916 shares | (47 | ) | (42 | ) | ||||
Accumulated other comprehensive income | 178 | 90 | ||||||
Total stockholders’ equity | 18,876 | 15,325 | ||||||
Total liabilities and stockholders’ equity | $ | 326,710 | $ | 285,557 | ||||
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For the years ended December 31, | ||||||||||||
(In millions, except for share data) | 2006 | 2005 | 2004 | |||||||||
Common Stock/Additional Paid-in Capital | ||||||||||||
Balance at beginning of year | $ | 5,070 | $ | 4,570 | $ | 3,932 | ||||||
Issuance of common stock in underwritten offerings | — | — | 411 | |||||||||
Issuance of shares from equity unit contracts | 1,020 | — | — | |||||||||
Issuance of shares and compensation expense associated with incentive and stock compensation plans | 190 | 443 | 200 | |||||||||
Tax benefit on employee stock options and awards and other | 44 | 57 | 27 | |||||||||
Balance at end of year | 6,324 | 5,070 | 4,570 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year | 10,207 | 8,283 | 6,499 | |||||||||
Net income | 2,745 | 2,274 | 2,115 | |||||||||
Dividends declared on common stock | (531 | ) | (350 | ) | (331 | ) | ||||||
Balance at end of year | 12,421 | 10,207 | 8,283 | |||||||||
Treasury Stock, at Cost | ||||||||||||
Balance at beginning of year | (42 | ) | (40 | ) | (38 | ) | ||||||
Return of shares to treasury stock under incentive and stock compensation plans | (5 | ) | (2 | ) | (2 | ) | ||||||
Balance at end of year | (47 | ) | (42 | ) | (40 | ) | ||||||
Accumulated Other Comprehensive Income, Net of Tax | ||||||||||||
Balance at beginning of year | 90 | 1,425 | 1,246 | |||||||||
Change in unrealized gain/loss on securities | ||||||||||||
Change in unrealized gain/loss on securities | 89 | (1,193 | ) | 106 | ||||||||
Cumulative effect of accounting change | — | — | 292 | |||||||||
Change in net gain/loss on cash-flow hedging instruments | (124 | ) | 105 | (173 | ) | |||||||
Change in foreign currency translation adjustments | 29 | (107 | ) | 59 | ||||||||
Change in minimum pension liability | 560 | (140 | ) | (105 | ) | |||||||
Total other comprehensive income (loss) | 554 | (1,335 | ) | 179 | ||||||||
SFAS 158 adjustment | (466 | ) | — | — | ||||||||
Balance at end of year | 178 | 90 | 1,425 | |||||||||
Total stockholders’ equity | $ | 18,876 | $ | 15,325 | $ | 14,238 | ||||||
Outstanding Shares (in thousands) | ||||||||||||
Balance at beginning of year | 302,152 | 294,208 | 283,380 | |||||||||
Issuance of common stock in underwritten offerings | — | — | 6,703 | |||||||||
Issuance of shares from equity unit contracts | 17,856 | — | — | |||||||||
Issuance of shares under incentive and stock compensation plans | 3,358 | 7,988 | 4,157 | |||||||||
Return of shares to treasury stock under incentive and stock compensation plans | (51 | ) | (44 | ) | (32 | ) | ||||||
Balance at end of year | 323,315 | 302,152 | 294,208 | |||||||||
For the years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Comprehensive Income | ||||||||||||
Net income | $ | 2,745 | $ | 2,274 | $ | 2,115 | ||||||
Other Comprehensive Income (Loss), Net of Tax | ||||||||||||
Change in unrealized gain/loss on securities | ||||||||||||
Change in unrealized gain/loss on securities | 89 | (1,193 | ) | 106 | ||||||||
Cumulative effect of accounting change | — | — | 292 | |||||||||
Change in net gain/loss on cash-flow hedging instruments | (124 | ) | 105 | (173 | ) | |||||||
Change in foreign currency translation adjustments | 29 | (107 | ) | 59 | ||||||||
Change in minimum pension liability adjustment | 560 | (140 | ) | (105 | ) | |||||||
Total other comprehensive income (loss) | 554 | (1,335 | ) | 179 | ||||||||
Total comprehensive income | $ | 3,299 | $ | 939 | $ | 2,294 | ||||||
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For the years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Operating Activities | ||||||||||||
Net income | $ | 2,745 | $ | 2,274 | $ | 2,115 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 3,558 | 3,169 | 2,843 | |||||||||
Additions to deferred policy acquisition costs and present value of future profits | (4,092 | ) | (4,131 | ) | (3,914 | ) | ||||||
Change in: | ||||||||||||
Reserve for future policy benefits, unpaid losses and loss adjustment expenses and unearned premiums | 975 | 2,163 | 877 | |||||||||
Reinsurance recoverables | 1,071 | (361 | ) | 128 | ||||||||
Receivables | (34 | ) | (682 | ) | (395 | ) | ||||||
Payables and accruals | (287 | ) | (267 | ) | (11 | ) | ||||||
Accrued and deferred income taxes | 657 | 168 | 529 | |||||||||
Net realized capital (gains) losses | 251 | (17 | ) | (291 | ) | |||||||
Net increase in equity securities, held for trading | (5,609 | ) | (12,872 | ) | (7,409 | ) | ||||||
Net receipts from investment contracts credited to policyholder accounts associated with equity securities, held for trading | 5,594 | 13,087 | 7,909 | |||||||||
Depreciation and amortization | 606 | 561 | 274 | |||||||||
Cumulative effect of accounting change, net of tax | — | — | 23 | |||||||||
Other, net | 203 | 640 | (44 | ) | ||||||||
Net cash provided by operating activities | 5,638 | 3,732 | 2,634 | |||||||||
Investing Activities | ||||||||||||
Proceeds from the sale/maturity/prepayment of: | ||||||||||||
Fixed maturities, available-for-sale | 35,432 | 36,895 | 34,981 | |||||||||
Equity securities, available-for-sale | 514 | 105 | 127 | |||||||||
Mortgage loans | 392 | 511 | 292 | |||||||||
Partnerships | 154 | 226 | 249 | |||||||||
Payments for the purchase of: | ||||||||||||
Fixed maturities, available-for-sale | (40,368 | ) | (40,580 | ) | (36,527 | ) | ||||||
Equity securities, available-for-sale | (924 | ) | (598 | ) | (278 | ) | ||||||
Mortgage loans | (1,974 | ) | (1,068 | ) | (636 | ) | ||||||
Partnerships | (809 | ) | (439 | ) | (483 | ) | ||||||
Change in policy loans, net | (36 | ) | 646 | (149 | ) | |||||||
Change in payables for collateral under securities lending, net | 970 | (367 | ) | (36 | ) | |||||||
Change in all other securities, net | (454 | ) | 12 | 297 | ||||||||
Purchase price adjustment of business acquired | — | 8 | (58 | ) | ||||||||
Sale of subsidiary, net of cash transferred | (112 | ) | — | — | ||||||||
Additions to property and equipment, net | (195 | ) | (211 | ) | (180 | ) | ||||||
Net cash used for investing activities | (7,410 | ) | (4,860 | ) | (2,401 | ) | ||||||
Financing Activities | ||||||||||||
Deposits and other additions to investment and universal life-type contracts | 27,450 | 25,780 | 27,877 | |||||||||
Withdrawals and other deductions from investment and universal life-type contracts | (27,096 | ) | (25,099 | ) | (22,178 | ) | ||||||
Transfers from (to) separate accounts related to investment and universal life-type contracts | 1,189 | 706 | (4,737 | ) | ||||||||
Issuance of shares from equity unit contracts | 1,020 | — | — | |||||||||
Issuance of common stock in underwritten offering | — | — | 411 | |||||||||
Issuance of long-term debt | 990 | — | 197 | |||||||||
Repayment/maturity of long-term debt | (1,415 | ) | (250 | ) | (450 | ) | ||||||
Change in short-term debt | (173 | ) | 100 | (477 | ) | |||||||
Proceeds from issuance of consumer notes | 258 | — | — | |||||||||
Proceeds from issuances of shares under incentive and stock compensation plans, net | 147 | 390 | 161 | |||||||||
Excess tax benefits on stock-based compensation | 10 | — | — | |||||||||
Return of shares under incentive and stock compensation plans | (5 | ) | (2 | ) | (2 | ) | ||||||
Dividends paid | (460 | ) | (345 | ) | (325 | ) | ||||||
Net cash provided by financing activities | 1,915 | 1,280 | 477 | |||||||||
Foreign exchange rate effect on cash | 8 | (27 | ) | (24 | ) | |||||||
Net increase in cash | 151 | 125 | 686 | |||||||||
Cash – beginning of year | 1,273 | 1,148 | 462 | |||||||||
Cash – end of year | $ | 1,424 | $ | 1,273 | $ | 1,148 | ||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||
Net Cash Paid During the Year for: | ||||||||||||
Income taxes | $ | 179 | $ | 447 | $ | 32 | ||||||
Interest | $ | 274 | $ | 248 | $ | 246 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | Recognizing expenses for a variety of contracts and contract features, including guaranteed minimum death benefits (“GMDB”), certain death benefits on universal-life type contracts and annuitization options, on an accrual basis versus the previous method of recognition upon payment; | |
• | Reporting and measuring assets and liabilities of certain separate account products as general account assets and liabilities when specified criteria are not met; | |
• | Reporting and measuring the Company’s interest in its separate accounts as general account assets based on the insurer’s proportionate beneficial interest in the separate account’s underlying assets; and | |
• | Capitalizing sales inducements that meet specified criteria and amortizing such amounts over the life of the contracts using the same methodology as used for amortizing deferred acquisition costs (“DAC”). |
Components of Cumulative Effect of Adoption | Net Income | Other Comprehensive Income | ||||||
Establishing GMDB and other benefit reserves for annuity contracts | $ | (54 | ) | $ | — | |||
Reclassifying certain separate accounts to general account | 30 | 294 | ||||||
Other | 1 | (2 | ) | |||||
Total cumulative effect of adoption | $ | (23 | ) | $ | 292 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2006 | 2005 | |||||||||||||||
Percentage | Percentage | |||||||||||||||
of Total | of Total | |||||||||||||||
Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||
Priced via independent market quotations | $ | 69,023 | 85.5 | % | $ | 65,986 | 86.3 | % | ||||||||
Priced via broker quotations | 4,309 | 5.3 | % | 2,728 | 3.6 | % | ||||||||||
Priced via matrices | 5,605 | 6.9 | % | 5,452 | 7.1 | % | ||||||||||
Priced via other methods | 137 | 0.2 | % | 211 | 0.3 | % | ||||||||||
Short-term investments [1] | 1,681 | 2.1 | % | 2,063 | 2.7 | % | ||||||||||
Total | $ | 80,755 | 100.0 | % | $ | 76,440 | 100.0 | % | ||||||||
[1] | Short-term investments are primarily valued at amortized cost, which approximates fair value. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Death and | ||||||||||||||||||||
Unearned | Income | Sales | ||||||||||||||||||
Segment | DAC and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total | |||||||||||||||
Retail Products Group | $ | (70 | ) | $ | 5 | $ | (10 | ) | $ | 3 | $ | (72 | ) | |||||||
Retirement Plans | 20 | — | — | — | 20 | |||||||||||||||
Individual Life | (49 | ) | 31 | — | — | (18 | ) | |||||||||||||
International — Japan Annuity | 26 | — | 27 | — | 53 | |||||||||||||||
Life — Other | (46 | ) | — | — | — | (46 | ) | |||||||||||||
Corporate | (13 | ) | — | — | — | (13 | ) | |||||||||||||
Total | $ | (132 | ) | $ | 36 | $ | 17 | $ | 3 | $ | (76 | ) | ||||||||
[1] | As a result of the unlock, death benefit reserves, in the Retail Products Group, increased $294, offset by an increase of $279 in reinsurance recoverables. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net | Per Share | |||||||||||
2006 | Income | Shares | Amount | |||||||||
Basic Earnings per Share | ||||||||||||
Net income available to common shareholders | $ | 2,745 | 308.8 | $ | 8.89 | |||||||
Diluted Earnings per Share | ||||||||||||
Stock compensation plans | — | 3.0 | ||||||||||
Equity Units | — | 4.1 | ||||||||||
Net income available to common shareholders plus assumed conversions | $ | 2,745 | 315.9 | $ | 8.69 | |||||||
2005 | ||||||||||||
Basic Earnings per share | ||||||||||||
Net income available to common shareholders | $ | 2,274 | 298.0 | $ | 7.63 | |||||||
Diluted Earnings per Share | ||||||||||||
Stock compensation plans | — | 3.3 | ||||||||||
Equity Units | — | 4.3 | ||||||||||
Net income available to common shareholders plus assumed conversions | $ | 2,274 | 305.6 | $ | 7.44 | |||||||
2004 | ||||||||||||
Basic Earnings per Share | ||||||||||||
Net income available to common shareholders | $ | 2,115 | 292.3 | $ | 7.24 | |||||||
Diluted Earnings per Share | ||||||||||||
Stock compensation plans | — | 2.8 | ||||||||||
Equity Units | — | 1.9 | ||||||||||
Net income available to common shareholders plus assumed conversions | $ | 2,115 | 297.0 | $ | 7.12 | |||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2006 | 2005 | 2004 | ||||||||||
Retail | ||||||||||||
Realized gains (losses) | $ | 32 | $ | 34 | $ | 24 | ||||||
Credit risk fees | (26 | ) | (26 | ) | (22 | ) | ||||||
Retirement Plans | ||||||||||||
Realized gains (losses) | 10 | 6 | 5 | |||||||||
Credit risk fees | (9 | ) | (8 | ) | (8 | ) | ||||||
Institutional | ||||||||||||
Realized gains (losses) | 17 | 13 | 9 | |||||||||
Credit risk fees | (23 | ) | (19 | ) | (17 | ) | ||||||
Individual Life | ||||||||||||
Realized gains (losses) | 11 | 11 | 13 | |||||||||
Credit risk fees | (7 | ) | (6 | ) | (6 | ) | ||||||
Group Benefits | ||||||||||||
Realized gains (losses) | 3 | 10 | 8 | |||||||||
Credit risk fees | (9 | ) | (9 | ) | (9 | ) | ||||||
International | ||||||||||||
Realized gains (losses) | 1 | — | — | |||||||||
Credit risk fees | (2 | ) | — | — | ||||||||
Other | ||||||||||||
Realized gains (losses) | (74 | ) | (74 | ) | (59 | ) | ||||||
Credit risk fees | 76 | 68 | 62 | |||||||||
Total | $ | — | $ | — | $ | — | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net assumed (ceded) earned premiums under inter-segment | For the years ended December 31, | |||||||||||
arrangements and retention | 2006 | 2005 | 2004 | |||||||||
Business Insurance | $ | (73 | ) | $ | (78 | ) | $ | (34 | ) | |||
Personal Lines | (21 | ) | (25 | ) | (21 | ) | ||||||
Specialty Commercial | 94 | 103 | 55 | |||||||||
Total | $ | — | $ | — | $ | — | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenues by Product Line | For the years ended December 31, | |||||||||||
Revenues | 2006 | 2005 | 2004 | |||||||||
Life | ||||||||||||
Earned premiums, fees, and other considerations | ||||||||||||
Retail | ||||||||||||
Individual annuity | $ | 1,959 | $ | 1,780 | $ | 1,618 | ||||||
Retail mutual funds | 524 | 416 | 393 | |||||||||
Other | 128 | 77 | 13 | |||||||||
Total Retail | 2,611 | 2,273 | 2,024 | |||||||||
Retirement Plans | ||||||||||||
401(k) | 159 | 111 | 81 | |||||||||
Governmental | 52 | 51 | 50 | |||||||||
Total Retirement Plans | 211 | 162 | 131 | |||||||||
Institutional | ||||||||||||
Institutional | 630 | 518 | 474 | |||||||||
PPLI | 101 | 105 | 150 | |||||||||
Total Institutional | 731 | 623 | 624 | |||||||||
Individual Life | ||||||||||||
Total Individual Life | 830 | 769 | 746 | |||||||||
Group Benefits | ||||||||||||
Group disability | 1,850 | 1,749 | 1,602 | |||||||||
Group life | 1,830 | 1,643 | 1,655 | |||||||||
Other | 470 | 418 | 395 | |||||||||
Total Group Benefits | 4,150 | 3,810 | 3,652 | |||||||||
International | ||||||||||||
Total International | 700 | 483 | 240 | |||||||||
Other | 83 | 83 | 119 | |||||||||
Total Life premiums, fees, and other considerations | 9,316 | 8,203 | 7,536 | |||||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 3,184 | 2,998 | 2,876 | |||||||||
Equity securities held for trading | 1,824 | 3,847 | 799 | |||||||||
Net investment income | 5,008 | 6,845 | 3,675 | |||||||||
Net realized capital gains (losses) | (260 | ) | (25 | ) | 164 | |||||||
Total Life | 14,064 | 15,023 | 11,375 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | ||||||||||||
Earned premiums | ||||||||||||
Business Insurance | ||||||||||||
Workers’ Compensation | 2,001 | 1,791 | 1,512 | |||||||||
Property | 1,427 | 1,348 | 1,235 | |||||||||
Automobile | 772 | 780 | 754 | |||||||||
Liability | 454 | 453 | 445 | |||||||||
Other | 464 | 413 | 353 | |||||||||
Total Business Insurance | 5,118 | 4,785 | 4,299 | |||||||||
Personal Lines | ||||||||||||
Automobile | 2,792 | 2,728 | 2,622 | |||||||||
Homeowners | 968 | 882 | 823 | |||||||||
Total Personal Lines | 3,760 | 3,610 | 3,445 | |||||||||
Specialty Commercial | ||||||||||||
Workers’ Compensation | 79 | 72 | 61 | |||||||||
Property | 113 | 136 | 201 | |||||||||
Automobile | 19 | 18 | 21 | |||||||||
Liability | 40 | 51 | 46 | |||||||||
Fidelity and surety | 231 | 210 | 188 | |||||||||
Professional Liability | 419 | 345 | 335 | |||||||||
Other | 649 | 925 | 874 | |||||||||
Total Specialty Commercial | 1,550 | 1,757 | 1,726 | |||||||||
Total Ongoing Operations | 10,428 | 10,152 | 9,470 | |||||||||
Other Operations | 5 | 4 | 24 | |||||||||
Total earned premiums | 10,433 | 10,156 | 9,494 | |||||||||
Servicing revenue | 473 | 463 | 436 | |||||||||
Net investment income | 1,486 | 1,365 | 1,248 | |||||||||
Net realized capital gains | 9 | 44 | 133 | |||||||||
Total Property & Casualty | 12,401 | 12,028 | 11,311 | |||||||||
Corporate | 35 | 32 | 22 | |||||||||
Total revenues | $ | 26,500 | $ | 27,083 | $ | 22,708 | ||||||
F-25
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Net Income (Loss) | 2006 | 2005 | 2004 | |||||||||
Life | ||||||||||||
Retail | $ | 628 | $ | 622 | $ | 503 | ||||||
Retirement Plans | 109 | 75 | 66 | |||||||||
Institutional | 99 | 88 | 68 | |||||||||
Individual Life | 170 | 166 | 155 | |||||||||
Group Benefits | 303 | 272 | 229 | |||||||||
International | 246 | 96 | 39 | |||||||||
Other [1] [2] | (114 | ) | (115 | ) | 322 | |||||||
Total Life | 1,441 | 1,204 | 1,382 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | ||||||||||||
Underwriting Results | ||||||||||||
Business Insurance | 618 | 396 | 360 | |||||||||
Personal Lines | 429 | 460 | 138 | |||||||||
Specialty Commercial | 64 | (165 | ) | (53 | ) | |||||||
Total Ongoing Operations underwriting results | 1,111 | 691 | 445 | |||||||||
Net servicing and other income [3] | 53 | 49 | 42 | |||||||||
Net investment income | 1,225 | 1,082 | 903 | |||||||||
Net realized capital gains (losses) | (17 | ) | 19 | 98 | ||||||||
Other expenses | (222 | ) | (202 | ) | (198 | ) | ||||||
Income tax expense [1] | (596 | ) | (474 | ) | (335 | ) | ||||||
Ongoing Operations | 1,554 | 1,165 | 955 | |||||||||
Other Operations | (35 | ) | 71 | (45 | ) | |||||||
Total Property & Casualty | 1,519 | 1,236 | 910 | |||||||||
Corporate | (215 | ) | (166 | ) | (177 | ) | ||||||
Net income | $ | 2,745 | $ | 2,274 | $ | 2,115 | ||||||
[1] | For the year ended December 31, 2004 Life includes a $190 tax benefit recorded in its Other category, and Property & Casualty includes a $26 tax benefit, which relate to an agreement with the IRS on the resolution of matters pertaining to tax years prior to 2004. For further discussion of this tax benefit, see Note 12. | |
[2] | Amount for the year ended December 31, 2005, reflects an after-tax charge of $102 to reserve for investigations related to market timing by the SEC and New York Attorney General’s Office, directed brokerage by the SEC and single premium group annuities by the New York Attorney General’s Office and the Connecticut Attorney General’s Office, as discussed in Note 12. | |
[3] | Amount is net of expenses related to service business. |
Amortization of deferred policy acquisition costs and present value of | For the years ended December 31, | |||||||||||
future profits | 2006 | 2005 | 2004 | |||||||||
Life | ||||||||||||
Retail | $ | 930 | $ | 744 | $ | 647 | ||||||
Retirement Plans | 1 | 26 | 29 | |||||||||
Institutional | 32 | 32 | 26 | |||||||||
Individual Life | 241 | 205 | 185 | |||||||||
Group Benefits | 41 | 31 | 23 | |||||||||
International | 167 | 133 | 77 | |||||||||
Other | 40 | 1 | 6 | |||||||||
Total Life | 1,452 | 1,172 | 993 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | ||||||||||||
Business Insurance | 1,184 | 1,138 | 1,058 | |||||||||
Personal Lines | 622 | 581 | 530 | |||||||||
Specialty Commercial | 300 | 281 | 257 | |||||||||
Total Ongoing Operations | 2,106 | 2,000 | 1,845 | |||||||||
Other Operations | — | (3 | ) | 5 | ||||||||
Total Property & Casualty | 2,106 | 1,997 | 1,850 | |||||||||
Total amortization of deferred policy acquisition costs and present value of future profits | $ | 3,558 | $ | 3,169 | $ | 2,843 | ||||||
F-26
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Income tax expense | 2006 | 2005 | 2004 | |||||||||
Life | ||||||||||||
Retail | $ | 85 | $ | 85 | $ | 105 | ||||||
Retirement Plans | 43 | 23 | 22 | |||||||||
Institutional | 36 | 32 | 26 | |||||||||
Individual Life | 72 | 72 | 71 | |||||||||
Group Benefits | 111 | 90 | 83 | |||||||||
International | 135 | 65 | 12 | |||||||||
Other [1] | (59 | ) | (51 | ) | (117 | ) | ||||||
Total Life | 423 | 316 | 202 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations [1] | 596 | 474 | 335 | |||||||||
Other Operations | (45 | ) | 10 | (60 | ) | |||||||
Total Property & Casualty | 551 | 484 | 275 | |||||||||
Corporate | (117 | ) | (89 | ) | (92 | ) | ||||||
Total income tax expense | $ | 857 | $ | 711 | $ | 385 | ||||||
[1] | For the year ended December 31, 2004 Life includes a $190 tax benefit recorded in its Other category, and Property & Casualty includes a $26 tax benefit, which relate to an agreement with the IRS on the resolution of matters pertaining to tax years prior to 2004. For further discussion of this tax benefit, see Note 12. |
Geographical Segment Information | For the years ended December 31, | |||||||||||
Revenues | 2006 | 2005 | 2004 | |||||||||
North America | $ | 23,840 | $ | 22,349 | $ | 21,328 | ||||||
Other | 2,660 | 4,734 | 1,380 | |||||||||
Total revenues | $ | 26,500 | $ | 27,083 | $ | 22,708 | ||||||
As of December 31, | ||||||||
Assets | 2006 | 2005 | ||||||
Life | ||||||||
Retail | $ | 130,138 | $ | 120,438 | ||||
Retirement Plans | 24,394 | 20,064 | ||||||
Institutional | 66,383 | 48,825 | ||||||
Individual Life | 14,306 | 12,950 | ||||||
Group Benefits | 9,056 | 8,438 | ||||||
International | 33,890 | 27,822 | ||||||
Other | 5,581 | 5,283 | ||||||
Total Life | 283,748 | 243,820 | ||||||
Property & Casualty | ||||||||
Ongoing Operations | 34,167 | 31,780 | ||||||
Other Operations | 6,852 | 8,502 | ||||||
Total Property & Casualty | 41,019 | 40,282 | ||||||
Corporate | 1,943 | 1,455 | ||||||
Total Assets | $ | 326,710 | $ | 285,557 | ||||
F-27
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Components of Net Investment Income | 2006 | 2005 | 2004 | |||||||||
Fixed maturities | $ | 4,266 | $ | 3,952 | $ | 3,689 | ||||||
Equity securities held for trading | 1,824 | 3,847 | 799 | |||||||||
Policy loans | 142 | 144 | 186 | |||||||||
Mortgage loans on real estate | 158 | 84 | 59 | |||||||||
Other investments | 212 | 267 | 265 | |||||||||
Gross investment income | 6,602 | 8,294 | 4,998 | |||||||||
Less: Investment expenses | 87 | 63 | 55 | |||||||||
Net investment income | $ | 6,515 | $ | 8,231 | $ | 4,943 | ||||||
Components of Net Realized Capital Gains (Losses) | ||||||||||||
Fixed maturities | $ | (113 | ) | $ | 95 | $ | 297 | |||||
Equity securities | (11 | ) | 3 | 3 | ||||||||
Foreign currency transaction remeasurements | 17 | 162 | (7 | ) | ||||||||
Derivatives and other [1] | (144 | ) | (243 | ) | (2 | ) | ||||||
Net realized capital gains (losses) | $ | (251 | ) | $ | 17 | $ | 291 | |||||
[1] | Primarily consists of changes in fair value on non-qualifying derivatives, changes in fair value of certain derivatives in fair value hedge relationships and hedge ineffectiveness on qualifying derivative instruments. |
Components of Net Unrealized Gains (Losses) on | ||||||||||||
Available-for-Sale Securities | ||||||||||||
Fixed maturities | $ | 1,466 | $ | 1,674 | $ | 3,741 | ||||||
Equity securities | 204 | 131 | 90 | |||||||||
Net unrealized gains credited to policyholders | (4 | ) | (9 | ) | (20 | ) | ||||||
Net unrealized gains | 1,666 | 1,796 | 3,811 | |||||||||
Deferred income taxes | 608 | 827 | 1,649 | |||||||||
Net unrealized gains, net of tax — end of year | 1,058 | 969 | 2,162 | |||||||||
Net unrealized gains, net of tax — beginning of year | 969 | 2,162 | 1,764 | |||||||||
Change in unrealized gains (losses) on available-for-sale securities | $ | 89 | $ | (1,193 | ) | $ | 398 | |||||
F-28
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2006 | As of December 31, 2005 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||
Bonds and Notes | ||||||||||||||||||||||||||||||||
ABS | $ | 7,924 | $ | 54 | $ | (53 | ) | $ | 7,925 | $ | 7,907 | $ | 60 | $ | (89 | ) | $ | 7,878 | ||||||||||||||
Collateralized mortgage obligations (“CMOs”) | ||||||||||||||||||||||||||||||||
Agency backed | 1,184 | 17 | (8 | ) | 1,193 | 860 | 3 | (6 | ) | 857 | ||||||||||||||||||||||
Non-agency backed | 116 | — | (1 | ) | 115 | 133 | — | — | 133 | |||||||||||||||||||||||
CMBS | ||||||||||||||||||||||||||||||||
Agency backed | 756 | 12 | (1 | ) | 767 | 70 | 1 | — | 71 | |||||||||||||||||||||||
Non-agency backed | 15,823 | 220 | (144 | ) | 15,899 | 12,860 | 233 | (162 | ) | 12,931 | ||||||||||||||||||||||
Corporate | 35,069 | 1,193 | (371 | ) | 35,891 | 33,019 | 1,395 | (396 | ) | 34,018 | ||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||
Foreign | 1,213 | 87 | (6 | ) | 1,294 | 1,378 | 96 | (7 | ) | 1,467 | ||||||||||||||||||||||
United States | 848 | 5 | (7 | ) | 846 | 877 | 27 | (6 | ) | 898 | ||||||||||||||||||||||
Mortgage-backed securities (“MBS”) —agency backed | 2,742 | 5 | (45 | ) | 2,702 | 3,914 | 7 | (60 | ) | 3,861 | ||||||||||||||||||||||
States, municipalities and political subdivisions | 11,897 | 536 | (27 | ) | 12,406 | 11,641 | 601 | (24 | ) | 12,218 | ||||||||||||||||||||||
Redeemable preferred stock | 36 | — | — | 36 | 44 | 1 | — | 45 | ||||||||||||||||||||||||
Short-term investments | 1,681 | — | — | 1,681 | 2,063 | — | — | 2,063 | ||||||||||||||||||||||||
Total fixed maturities | $ | 79,289 | $ | 2,129 | $ | (663 | ) | $ | 80,755 | $ | 74,766 | $ | 2,424 | $ | (750 | ) | $ | 76,440 | ||||||||||||||
Maturity | Amortized Cost | Fair Value | ||||||
One year or less | $ | 3,220 | $ | 3,276 | ||||
Over one year through five years | 12,368 | 12,728 | ||||||
Over five years through ten years | 13,382 | 13,570 | ||||||
Over ten years | 38,353 | 39,246 | ||||||
Subtotal | 67,323 | 68,820 | ||||||
Mortgage- and asset-backed securities | 11,966 | 11,935 | ||||||
Total | $ | 79,289 | $ | 80,755 | ||||
For the years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Sale of Fixed Maturities | ||||||||||||
Sale proceeds | $ | 32,307 | $ | 25,470 | $ | 21,339 | ||||||
Gross gains | 427 | 497 | 525 | |||||||||
Gross losses | (407 | ) | (364 | ) | (202 | ) | ||||||
Sale of Available-for-Sale Equity Securities | ||||||||||||
Sale proceeds | $ | 514 | $ | 105 | $ | 127 | ||||||
Gross gains | 11 | 12 | 21 | |||||||||
Gross losses | (14 | ) | — | (6 | ) | |||||||
F-29
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2006 | ||||||||||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | ||||||||||||||||||||||||||||
Cost | Value | Losses | Cost | Value | Losses | Cost | Value | Losses | ||||||||||||||||||||||||||||
ABS | $ | 1,115 | $ | 1,105 | $ | (10 | ) | $ | 994 | $ | 951 | $ | (43 | ) | $ | 2,109 | $ | 2,056 | $ | (53 | ) | |||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||||||
Agency backed | 131 | 130 | (1 | ) | 360 | 353 | (7 | ) | 491 | 483 | (8 | ) | ||||||||||||||||||||||||
Non-agency backed | 37 | 37 | — | 50 | 49 | (1 | ) | 87 | 86 | (1 | ) | |||||||||||||||||||||||||
CMBS | ||||||||||||||||||||||||||||||||||||
Agency backed | 101 | 101 | — | 10 | 9 | (1 | ) | 111 | 110 | (1 | ) | |||||||||||||||||||||||||
Non-agency backed | 3,741 | 3,711 | (30 | ) | 4,226 | 4,112 | (114 | ) | 7,967 | 7,823 | (144 | ) | ||||||||||||||||||||||||
Corporate | 8,478 | 8,365 | (113 | ) | 7,425 | 7,167 | (258 | ) | 15,903 | 15,532 | (371 | ) | ||||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||||||
Foreign | 255 | 251 | (4 | ) | 86 | 84 | (2 | ) | 341 | 335 | (6 | ) | ||||||||||||||||||||||||
United States | 515 | 511 | (4 | ) | 147 | 144 | (3 | ) | 662 | 655 | (7 | ) | ||||||||||||||||||||||||
MBS — U.S. Government/Government agencies | 450 | 446 | (4 | ) | 1,626 | 1,585 | (41 | ) | 2,076 | 2,031 | (45 | ) | ||||||||||||||||||||||||
States, municipalities and political subdivisions | 924 | 913 | (11 | ) | 393 | 377 | (16 | ) | 1,317 | 1,290 | (27 | ) | ||||||||||||||||||||||||
Short-term investments | 1,081 | 1,081 | — | — | — | — | 1,081 | 1,081 | — | |||||||||||||||||||||||||||
Total fixed maturities | 16,828 | 16,651 | (177 | ) | 15,317 | 14,831 | (486 | ) | 32,145 | 31,482 | (663 | ) | ||||||||||||||||||||||||
Common stock | 49 | 47 | (2 | ) | 3 | 3 | — | 52 | 50 | (2 | ) | |||||||||||||||||||||||||
Non-redeemable preferred stock | 216 | 213 | (3 | ) | 82 | 77 | (5 | ) | 298 | 290 | (8 | ) | ||||||||||||||||||||||||
Total equity | 265 | 260 | (5 | ) | 85 | 80 | (5 | ) | 350 | 340 | (10 | ) | ||||||||||||||||||||||||
Total temporarily impaired securities | $ | 17,093 | $ | 16,911 | $ | (182 | ) | $ | 15,402 | $ | 14,911 | $ | (491 | ) | $ | 32,495 | $ | 31,822 | $ | (673 | ) | |||||||||||||||
F-30
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-31
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 | December 31, 2005 | |||||||||||||||||||||||
Maximum | Maximum | |||||||||||||||||||||||
Exposure to | Total | Exposure to | ||||||||||||||||||||||
Total Assets | Liability [4] | Loss[2][3] | Assets | Liability [4] | Loss[2][3] | |||||||||||||||||||
Collaterized debt obligations (“CDOs”) and other funds [1] [2] | $ | 296 | $ | 99 | $ | 197 | $ | 77 | $ | 42 | $ | 35 | ||||||||||||
Limited partnerships [3] | 103 | 5 | 98 | — | — | — | ||||||||||||||||||
Total [5] | $ | 399 | $ | 104 | $ | 295 | $ | 77 | $ | 42 | $ | 35 | ||||||||||||
[1] | The Company provides collateral management services and earns a fee associated with these structures. | |
[2] | The maximum exposure to loss is the Company’s co-investment in these structures. | |
[3] | The maximum exposure to loss is equal to the carrying value of the investment plus any unfunded commitments. | |
[4] | Creditors have no recourse against the Company in the event of default by the VIE. | |
[5] | As of December 31, 2006 and 2005, the Company had relationships with four and two VIEs, respectively, where the Company was the primary beneficiary. |
Asset Values | Liability Values | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Other investments | $ | 287 | $ | 181 | $ | — | $ | — | ||||||||
Reinsurance recoverables | — | — | 22 | 17 | ||||||||||||
Other policyholder funds and benefits payable | 53 | 8 | 1 | — | ||||||||||||
Other liabilities | — | — | 772 | 450 | ||||||||||||
Total | $ | 340 | $ | 189 | $ | 795 | $ | 467 | ||||||||
F-32
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hedge | ||||||||||||||||||||||||
Ineffectiveness, | ||||||||||||||||||||||||
Notional Amount | Fair Value | After-tax | ||||||||||||||||||||||
Hedging Strategy | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Cash-Flow Hedges | ||||||||||||||||||||||||
Interest rate swaps | ||||||||||||||||||||||||
Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed maturity securities 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 of anticipated future cash flows on floating-rate fixed maturity securities due to changes in the benchmark interest rate, London-Interbank Offered Rate (“LIBOR”). These derivatives were structured to hedge interest rate exposure inherent in the assumptions used to price primarily certain long-term disability products. | ||||||||||||||||||||||||
Interest rate swaps are also used to hedge a portion of the Company’s floating-rate guaranteed investment contracts. These derivatives convert the floating rate guaranteed investment contract payments to a fixed rate to better match the cash receipts earned from the supporting investment portfolio. | $ | 6,093 | $ | 5,753 | $ | (22 | ) | $ | (18 | ) | $ | (9 | ) | $ | (11 | ) | ||||||||
Foreign currency swaps | ||||||||||||||||||||||||
Foreign currency swaps are used to convert foreign denominated cash flows associated with certain foreign denominated fixed maturity investments to U.S. dollars. The foreign fixed maturities are primarily denominated in euros and are swapped to minimize cash flow fluctuations due to changes in currency rates. In addition, foreign currency swaps are also used to convert foreign denominated cash flows associated with certain liability payments in order to minimize cash flow fluctuations due to changes in currency rates. | 1,871 | 1,758 | (370 | ) | (242 | ) | (4 | ) | 4 | |||||||||||||||
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 changes in the benchmark interest rate, LIBOR. In addition, a portion of the Company’s fixed debt was hedged against increases in LIBOR, the designated benchmark interest rate. | 3,846 | 2,476 | 10 | (12 | ) | (1 | ) | 2 | ||||||||||||||||
Foreign currency swaps | ||||||||||||||||||||||||
Foreign currency swaps are used to hedge the changes in fair value of certain foreign denominated fixed rate liabilities due to changes in foreign currency rates. | 492 | — | (9 | ) | — | — | — | |||||||||||||||||
Total cash-flow and fair-value hedges | $ | 12,302 | $ | 9,987 | $ | (391 | ) | $ | (272 | ) | $ | (14 | ) | $ | (5 | ) | ||||||||
F-33
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative | ||||||||||||||||||||||||
Change in Value, | ||||||||||||||||||||||||
Notional Amount | Fair Value | After-tax | ||||||||||||||||||||||
Hedging Strategy | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Other Investment and Risk Management Activities | ||||||||||||||||||||||||
Interest rate caps and swaption contracts | ||||||||||||||||||||||||
The Company is exposed to policyholder surrenders during a rising interest rate environment. Interest rate cap and swaption contracts are used to mitigate the Company’s loss in a rising interest rate environment. The increase in yield from the cap and swaption contracts in a rising interest rate environment may be used to raise credited rates, thereby increasing the Company’s competitiveness and reducing the policyholder’s incentive to surrender. | ||||||||||||||||||||||||
The Company also may use an interest rate cap as an economic hedge of the interest rate risk related to Company issued debt. In a rising interest rate environment, the cap will limit the net interest expense on the hedged fixed rate debt. | $ | 1,100 | $ | 1,616 | $ | — | $ | 3 | $ | (1 | ) | $ | (1 | ) | ||||||||||
Interest rate swaps, caps and floors | ||||||||||||||||||||||||
The Company uses interest rate swaps and floors to manage duration risk between assets and liabilities in certain portfolios. In addition, the Company enters into interest rate swaps to terminate existing swaps in hedging relationships, thereby offsetting the changes in value of the original swap. The Company also enters into interest rate caps to manage the duration risk in certain investment portfolios. | 5,460 | 2,223 | (30 | ) | (4 | ) | (33 | ) | 1 | |||||||||||||||
Interest rate forwards | ||||||||||||||||||||||||
The Company uses interest rate forwards to replicate the purchase of mortgage-backed securities to manage duration risk and liquidity. | 1,269 | — | (7 | ) | — | 10 | — | |||||||||||||||||
Foreign currency swaps and forwards | ||||||||||||||||||||||||
The Company enters into foreign currency swaps and forwards to hedge the foreign currency exposures in certain of its foreign fixed maturity investments. | 663 | 766 | (14 | ) | (9 | ) | (8 | ) | 20 | |||||||||||||||
Credit default and total return swaps | ||||||||||||||||||||||||
The Company enters into swap agreements in which the Company assumes credit exposure of an individual entity, referenced index or asset pool. These contracts entitle the company to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty should a credit event occur on the part of the referenced security issuers. The maximum potential future exposure to the Company is the notional value of the swap contracts, which is $1,203 and $455, after-tax, as of December 31, 2006 and 2005, respectively. | ||||||||||||||||||||||||
The Company also assumes exposure to the change in value of indices or asset pools through total return swaps and credit spreadlocks. As of December 31, 2006 and 2005, the maximum potential future exposure to the Company from such contracts is $1,386 and $899, after-tax, respectively. | ||||||||||||||||||||||||
The Company enters into credit default swap agreements, in which the Company pays a derivative counterparty a periodic fee in exchange for compensation from the counterparty should a credit event occur on the part of the referenced security issuer. The Company entered into these agreements as an efficient means to reduce credit exposure to specified issuers or sectors. In addition, the Company enters into option contracts to receive protection should a credit event occur on the part of the referenced security issuer. | 7,611 | 2,839 | (194 | ) | 3 | 25 | 13 | |||||||||||||||||
F-34
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative | ||||||||||||||||||||||||
Change in Value, | ||||||||||||||||||||||||
Notional Amount | Fair Value | After-tax | ||||||||||||||||||||||
Hedging Strategy | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Yen fixed annuity hedging instruments | ||||||||||||||||||||||||
The Company enters into currency rate swaps and forwards to mitigate the foreign currency exchange rate and yen interest rate exposures associated with the yen denominated individual fixed annuity product. The associated liability is adjusted for changes in spot rates which was $12 and $102, after-tax, as of December 31, 2006 and 2005, respectively, and partially offset the derivative change in value. | $ | 1,869 | $ | 1,675 | $ | (225 | ) | $ | (179 | ) | $ | (64 | ) | $ | (143 | ) | ||||||||
GMWB product derivatives | ||||||||||||||||||||||||
The Company offers certain variable annuity products with a GMWB rider. The GMWB is a bifurcated embedded derivative that provides the policyholder with a GRB if the account value is reduced to zero through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. The policyholder also has the option, after a specified time period, to reset the GRB to the then-current account value, if greater. For a further discussion, see the Derivative Instruments section of Note 1. The notional value of the embedded derivative is the GRB balance. | 37,769 | 31,803 | 53 | 8 | 79 | (42 | ) | |||||||||||||||||
GMWB reinsurance contracts | ||||||||||||||||||||||||
Reinsurance arrangements are used to offset the Company’s exposure to the GMWB embedded derivative for the lives of the host variable annuity contracts. The notional amount of the reinsurance contracts is the GRB amount. | 7,172 | 8,575 | (22 | ) | (17 | ) | (19 | ) | 19 | |||||||||||||||
GMWB hedging instruments | ||||||||||||||||||||||||
The Company enters into interest rate futures, S&P 500 and NASDAQ index futures contracts and put and call options, as well as interest rate, EAFE index and equity volatility swap contracts to economically hedge exposure to the volatility associated with the portion of the GMWB liabilities which are not reinsured. | ||||||||||||||||||||||||
In addition, the Company periodically enters into forward starting S&P 500 put options as well as S&P index futures and interest rate swap contracts to economically hedge the equity volatility risk exposure associated with anticipated future sales of the GMWB rider. [1] | 8,379 | 5,086 | 346 | 175 | (77 | ) | 1 | |||||||||||||||||
Equity index swaps and options | ||||||||||||||||||||||||
The Company offers certain equity indexed products, which may contain an embedded derivative that requires bifurcation. The Company enters into S&P index swaps and options to economically hedge the equity volatility risk associated with these embedded derivatives. In addition, the Company is exposed to bifurcated options embedded in certain fixed maturity investments. | 30 | 16 | — | — | — | (1 | ) | |||||||||||||||||
Statutory reserve hedging instruments | ||||||||||||||||||||||||
The Company purchases one and two year S&P 500 put option contracts to economically hedge the statutory reserve impact of equity exposure arising primarily from GMDB and GMWB obligations against a decline in the equity markets. | 2,220 | 1,142 | 29 | 14 | (9 | ) | (20 | ) | ||||||||||||||||
Total other investment and risk management activities | $ | 73,542 | $ | 55,741 | $ | (64 | ) | $ | (6 | ) | $ | (97 | ) | $ | (153 | ) | ||||||||
Total derivatives [2] | $ | 85,844 | $ | 65,728 | $ | (455 | ) | $ | (278 | ) | $ | (111 | ) | $ | (158 | ) | ||||||||
[1] | The after-tax net gain related to derivatives purchased to hedge the anticipatory sales of the GMWB rider is $0 and $8 for the years ended December 31, 2006 and 2005, respectively. | |
[2] | Derivative change in value includes hedge ineffectiveness for cash-flow hedges, fair-value hedges, and total change in value, including periodic derivative net coupon settlements, of other investment and risk management activities. |
F-35
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-36
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loaned Securities and Collateral Pledged | 2006 | 2005 | ||||||
ABS | $ | 20 | $ | 29 | ||||
CMBS | 216 | 198 | ||||||
Corporate | 1,867 | 889 | ||||||
MBS | 152 | 138 | ||||||
Government/Government Agencies | ||||||||
Foreign | 19 | 63 | ||||||
United States | 463 | 285 | ||||||
Total | $ | 2,737 | $ | 1,602 | ||||
F-37
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2006 | 2005 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Assets | ||||||||||||||||
Fixed maturities | $ | 80,755 | $ | 80,755 | $ | 76,440 | $ | 76,440 | ||||||||
Equity securities | 31,132 | 31,132 | 25,495 | 25,495 | ||||||||||||
Policy loans | 2,051 | 2,051 | 2,016 | 2,016 | ||||||||||||
Mortgage loans on real estate | 3,318 | 3,298 | 1,731 | 1,718 | ||||||||||||
Other investments [1] | 673 | 673 | 583 | 583 | ||||||||||||
Liabilities | ||||||||||||||||
Other policyholder funds and benefits payable [2] | $ | 14,233 | $ | 13,488 | $ | 11,691 | $ | 11,278 | ||||||||
Commercial paper [3] | 299 | 299 | 471 | 471 | ||||||||||||
Long-term debt [4] | 3,804 | 3,974 | 4,296 | 5,073 | ||||||||||||
Consumer notes | 258 | 260 | — | — | ||||||||||||
Derivative related liabilities [5] | 772 | 772 | 450 | 450 | ||||||||||||
[1] | 2006 and 2005 include $287 and $181 of derivative related assets, respectively. | |
[2] | Excludes group accident and health and universal life insurance contracts, including corporate owned life insurance. | |
[3] | Included in short-term debt in the consolidated balance sheets. | |
[4] | Includes current maturities of long-term debt. | |
[5] | Included in other liabilities in the consolidated balance sheets. |
For the years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Gross fee income, earned premiums and other | $ | 9,372 | $ | 8,194 | $ | 7,223 | ||||||
Reinsurance assumed | 313 | 464 | 811 | |||||||||
Reinsurance ceded | (369 | ) | (455 | ) | (498 | ) | ||||||
Net fee income, earned premiums and other | $ | 9,316 | $ | 8,203 | $ | 7,536 | ||||||
F-38
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Premiums Written | ||||||||||||
Direct | $ | 11,600 | $ | 11,653 | $ | 11,181 | ||||||
Assumed | 265 | 233 | 231 | |||||||||
Ceded | (1,203 | ) | (1,399 | ) | (1,450 | ) | ||||||
Net | $ | 10,662 | $ | 10,487 | $ | 9,962 | ||||||
Premiums Earned | ||||||||||||
Direct | $ | 11,465 | $ | 11,356 | $ | 10,811 | ||||||
Assumed | 259 | 218 | 218 | |||||||||
Ceded | (1,291 | ) | (1,418 | ) | (1,535 | ) | ||||||
Net | $ | 10,433 | $ | 10,156 | $ | 9,494 | ||||||
F-39
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2006 | 2005 | 2004 | ||||||||||
Balance, January 1 | $ | 8,568 | $ | 7,438 | $ | 6,624 | ||||||
Deferred Costs | 1,923 | 2,071 | 1,968 | |||||||||
Amortization – Deferred Policy Acquisitions Costs and Present Value of Future Profits | (1,269 | ) | (1,172 | ) | (993 | ) | ||||||
Amortization – Unlock | (183 | ) | — | — | ||||||||
Adjustments to unrealized gains and losses on securities available-for-sale and other | 47 | 380 | (75 | ) | ||||||||
Cumulative effect of accounting change (SOP 03-1) | — | — | (105 | ) | ||||||||
Effect of currency translation | (15 | ) | (149 | ) | 72 | |||||||
Acquisition of Hartford Life Group Insurance Company [1] | — | — | (53 | ) | ||||||||
Balance, December 31 | $ | 9,071 | $ | 8,568 | $ | 7,438 | ||||||
[1] | For the year ended December 31, 2004, reflects the purchase price adjustment related to the acquisition of CNA Group Life Assurance Company. |
For the years ended December 31, | ||||
2007 | $ | 64 | ||
2008 | 64 | |||
2009 | 56 | |||
2010 | 49 | |||
2011 | 44 |
2006 | 2005 | 2004 | ||||||||||
Balance, January 1 | $ | 1,134 | $ | 1,071 | $ | 975 | ||||||
Deferred costs | 2,169 | 2,060 | 1,946 | |||||||||
Amortization | (2,106 | ) | (1,997 | ) | (1,850 | ) | ||||||
Balance, December 31 | $ | 1,197 | $ | 1,134 | $ | 1,071 | ||||||
F-40
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2006 | 2005 | |||||||
Life | ||||||||
Retail | $ | 572 | $ | 572 | ||||
Individual Life | 224 | 224 | ||||||
Total Life | 796 | 796 | ||||||
Property & Casualty | ||||||||
Personal Lines | 119 | 122 | ||||||
Specialty Commercial | 30 | 30 | ||||||
Total Property & Casualty | 149 | 152 | ||||||
Corporate | 772 | 772 | ||||||
Total Goodwill | $ | 1,717 | $ | 1,720 | ||||
2006 | 2005 | |||||||||||||||
Gross Carrying | Accumulated Net | Gross Carrying | Accumulated Net | |||||||||||||
Acquired Intangible Assets | Amount | Amortization | Amount | Amortization | ||||||||||||
Renewal rights | $ | 22 | $ | 20 | $ | 22 | $ | 17 | ||||||||
Other | 14 | 10 | 14 | 7 | ||||||||||||
Total Acquired Intangible Assets | $ | 36 | $ | 30 | $ | 36 | $ | 24 | ||||||||
Renewal | ||||||||||||
For the year ended December 31, 2006 | Rights | Other | Total | |||||||||
Balance, beginning of year | $ | 5 | $ | 7 | $ | 12 | ||||||
Amortization, net of the accretion of interest | (3 | ) | (3 | ) | (6 | ) | ||||||
Balance, ending of year | $ | 2 | $ | 4 | $ | 6 | ||||||
For the year ended December 31, 2005 | ||||||||||||
Balance, beginning of year | $ | 9 | $ | 9 | $ | 18 | ||||||
Acquisition of business | — | 1 | 1 | |||||||||
Amortization, net of the accretion of interest | (4 | ) | (3 | ) | (7 | ) | ||||||
Balance, ending of year | $ | 5 | $ | 7 | $ | 12 | ||||||
For the year ended December 31, 2004 | ||||||||||||
Balance, beginning of year | $ | 13 | $ | 10 | $ | 23 | ||||||
Acquisition of business | — | 2 | 2 | |||||||||
Amortization, net of the accretion of interest | (4 | ) | (3 | ) | (7 | ) | ||||||
Balance, ending of year | $ | 9 | $ | 9 | $ | 18 | ||||||
For the years ended December 31, | ||||
2007 | $ | 3 | ||
2008 | 2 | |||
2009 | 1 | |||
2010 | — | |||
2011 | — |
F-41
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. GMDB [1] | Japan GMDB/GMIB | |||||||||||
Liability balance as of January 1, 2006 | $ | 158 | $ | 50 | ||||||||
Incurred | 129 | 28 | ||||||||||
Paid | (106 | ) | (1 | ) | ||||||||
Unlock | 294 | (41 | ) | |||||||||
Currency translation adjustment | — | (1 | ) | |||||||||
Liability balance as of December 31, 2006 | $ | 475 | $ | 35 | ||||||||
[1] | The reinsurance recoverable asset related to the U.S. GMDB was $316 as of December 31, 2006. The reinsurance recoverable asset related to the Japan GMDB was $4 as of December 31, 2006. |
U.S. GMDB [1] | Japan GMDB/GMIB | |||||||
Liability balance as of January 1, 2005 | $ | 174 | $ | 28 | ||||
Incurred | 123 | 29 | ||||||
Paid | (139 | ) | (1 | ) | ||||
Currency translation adjustment | — | (6 | ) | |||||
Liability balance as of December 31, 2005 | $ | 158 | $ | 50 | ||||
[1] | The reinsurance recoverable asset related to the U.S. GMDB was $40 as of December 31, 2005. |
• | 1000 stochastically generated investment performance scenarios for all issue years. |
• | For all issue years, the weighted average return is 8%; it varies by asset class with a low of 3% for cash and a high of 10% for aggressive equities. |
• | Discount rate of 7.5% for issue year 2002 & prior; discount rate of 7% for issue year 2003 & 2004 and discount rate of 5.6% for issue year 2005 and 2006. |
• | Volatilities also vary by asset class with a low of 1% for cash, a high of 12% for aggressive equities, and a weighted average of 11%. |
• | 100% of the Hartford experience mortality table was used for the mortality assumptions. |
• | Lapse rates by calendar year vary from a low of 8% to a high of 14%, with an average of 12%. |
F-42
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | 1,000 stochastically generated investment performance scenarios. |
• | Separate account returns, representing the Company’s long-term assumptions, varied by asset class with a low of 2.7% for Japan bonds, a high of 9.3% for foreign equities and a weighted average of 5.0%. |
• | Volatilities also varied by asset class with a low of 5.6% for Japan bonds, a high of 21.3% for foreign equities and a weighted average of 13.4%. |
• | 70% of the 1996 Japan Standard Mortality Table was used for mortality assumptions. |
• | Lapse rates by age vary from a low of 1% to a high of 6%, with an average of 4%. |
• | Average discount rate of 2.7%. |
Retained Net | Weighted Average | |||||||||||||||
Account | Net Amount | Amount | Attained Age of | |||||||||||||
Maximum anniversary value (MAV) [1] | Value | at Risk | at Risk | Annuitant | ||||||||||||
MAV only | $ | 53,358 | $ | 3,664 | $ | 343 | 65 | |||||||||
With 5% rollup [2] | 3,830 | 349 | 67 | 63 | ||||||||||||
With Earnings Protection Benefit Rider (EPB) [3] | 5,576 | 471 | 77 | 61 | ||||||||||||
With 5% rollup & EPB | 1,411 | 149 | 28 | 63 | ||||||||||||
Total MAV | 64,175 | 4,633 | 515 | |||||||||||||
Asset Protection Benefit (APB) [4] | 36,710 | 61 | 32 | 62 | ||||||||||||
Lifetime Income Benefit (LIB) — Death Benefit [5] | 4,045 | 9 | 9 | 61 | ||||||||||||
Reset [6] (5-7 years) | 6,862 | 243 | 243 | 65 | ||||||||||||
Return of Premium [7] /Other | 10,015 | 28 | 25 | 54 | ||||||||||||
Subtotal U.S. Guaranteed Minimum Death Benefits | 121,807 | 4,974 | 824 | |||||||||||||
Japan Guaranteed Minimum Death and Income Benefit [8] | 29,653 | 54 | 19 | 66 | ||||||||||||
Total at December 31, 2006 | $ | 151,460 | $ | 5,028 | $ | 843 | ||||||||||
[1] | MAV: the death benefit is the greatest of current account value, net premiums paid and the highest account value on any anniversary before age 80 (adjusted for withdrawals). | |
[2] | Rollup: the death benefit is the greatest of the MAV, current account value, net premium paid and premiums (adjusted for withdrawals) accumulated at generally 5% simple interest up to the earlier of age 80 or 100% of adjusted premiums. | |
[3] | EPB: the death benefit is the greatest of the MAV, current account value, or contract value plus a percentage of the contract’s growth. The contract’s growth is account value less premiums net of withdrawals, subject to a cap of 200% of premiums net of withdrawals. | |
[4] | APB: the death benefit is the greater of current account value or MAV, not to exceed current account value plus 25% times the greater of net premiums and MAV (each adjusted for premiums in the past 12 months). | |
[5] | LIB: the death benefit is the greater of current account value or MAV, net premiums paid, or a benefit amount that rachets over time, generally based on market performance. | |
[6] | Reset: the death benefit is the greatest of current account value, net premiums paid and the most recent five to seven year anniversary account value before age 80 (adjusted for withdrawals). | |
[7] | Return of premium: the death benefit is the greater of current account value and net premiums paid. | |
[8] | Death benefits include a Return of Premium and MAV (before age 75) death benefit and income benefits include a guarantee to return initial investment, which is adjusted for earnings liquidity or a maximum annual withdrawal of 3% of premiums, depending on product, through a fixed annuity, after a minimum deferral period of 10, 15, or 20 years. The guaranteed remaining account value balance related to the Japan GMIB was $19.7 billion and $15.2 billion as of December 31, 2006 and 2005, respectively. |
F-43
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Asset type | As of December 31, 2006 | |||
Equity securities (including mutual funds) | $ | 104,687 | ||
Cash and cash equivalents | 8,931 | |||
Total | $ | 113,618 | ||
F-44
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2006 | 2005 | |||||||
Balance, beginning of period | $ | 355 | $ | 309 | ||||
Sales inducements deferred | 88 | 85 | ||||||
Amortization charged to income | (42 | ) | (39 | ) | ||||
Amortization – DAC unlock | (4 | ) | — | |||||
Balance, end of period | $ | 397 | $ | 355 | ||||
For the years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Beginning loss reserves-gross | $ | 4,832 | $ | 4,714 | $ | 4,480 | ||||||
Purchase of CNA Group Life Assurance Company | — | — | 20 | |||||||||
Reinsurance recoverables | 238 | 297 | 250 | |||||||||
Beginning loss reserves-net | 4,594 | 4,417 | 4,210 | |||||||||
Incurred expenses related to | ||||||||||||
Current year | 2,140 | 1,994 | 1,864 | |||||||||
Prior years | (128 | ) | (112 | ) | (73 | ) | ||||||
Total incurred expenses | 2,012 | 1,882 | 1,791 | |||||||||
Paid expenses related to | ||||||||||||
Current year | 724 | 645 | 564 | |||||||||
Prior years | 1,130 | 1,060 | 1,020 | |||||||||
Total paid expenses | 1,854 | 1,705 | 1,584 | |||||||||
Ending loss reserves-net | 4,752 | 4,594 | 4,417 | |||||||||
Reinsurance recoverable, December 31 | 233 | 238 | 297 | |||||||||
Ending loss reserves-gross | $ | 4,985 | $ | 4,832 | $ | 4,714 | ||||||
2006 | 2005 | |||||||
Group Disability and Accident and Other unpaid losses and loss adjustment expenses | $ | 4,985 | $ | 4,832 | ||||
Group Life unpaid losses and loss adjustment expenses | 1,132 | 910 | ||||||
Individual Life unpaid losses and loss adjustment expenses | 110 | 84 | ||||||
Future Policy Benefits | 7,789 | �� | 7,161 | |||||
Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses | $ | 14,016 | $ | 12,987 | ||||
F-45
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2006 | 2005 | |||||||
Life | ||||||||
Retail | ||||||||
Individual annuity — variable | $ | 372 | $ | 171 | ||||
Individual annuity — fixed | 488 | 575 | ||||||
Other | 3 | 1 | ||||||
Total Retail | 863 | 747 | ||||||
Retirement Plans | ||||||||
401(k) | 67 | 56 | ||||||
Governmental | 290 | 310 | ||||||
Total Retirement Plans | 357 | 366 | ||||||
Institutional | ||||||||
Structured settlements | 3,285 | 3,028 | ||||||
Institutional annuities | 2,317 | 2,167 | ||||||
SPIA | 206 | — | ||||||
PPLI | 117 | 120 | ||||||
Total Institutional | 5,925 | 5,315 | ||||||
Individual Life | ||||||||
Variable universal life | 16 | 15 | ||||||
Universal life/other interest sensitive | 87 | 81 | ||||||
Term insurance and other | 520 | 490 | ||||||
Total Individual Life | 623 | 586 | ||||||
Group Benefits | ||||||||
Group disability | 4,695 | 4,544 | ||||||
Group life and accident | 1,236 | 1,058 | ||||||
Other | 219 | 226 | ||||||
Total Group Benefits | 6,150 | 5,828 | ||||||
International | ||||||||
Variable | 38 | 51 | ||||||
Total International | 38 | 51 | ||||||
Other | 60 | 94 | ||||||
Total Life | $ | 14,016 | $ | 12,987 | ||||
F-46
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2006 | 2005 | |||||||
Life | ||||||||
Retail | ||||||||
Individual annuity — variable | $ | 9,425 | $ | 6,861 | ||||
Individual annuity — fixed | 5,663 | 9,539 | ||||||
Other | 7 | 10 | ||||||
Total Retail | 15,095 | 16,410 | ||||||
Retirement Plans | ||||||||
401(k) | 1,257 | 1,181 | ||||||
Governmental | 4,287 | 4,013 | ||||||
Total Retirement Plans | 5,544 | 5,194 | ||||||
Institutional | ||||||||
Structured settlements | 1,973 | 1,731 | ||||||
Stable value/Funding agreements | 6,169 | 4,142 | ||||||
GICs | 2,875 | 3,117 | ||||||
SPIA | 140 | — | ||||||
PPLI | 235 | 232 | ||||||
Institutional annuities | 13 | 11 | ||||||
Total Institutional | 11,405 | 9,233 | ||||||
Individual Life | ||||||||
Variable universal life | 515 | 474 | ||||||
Universal life/other interest sensitive | 4,599 | 4,284 | ||||||
Other | 229 | 232 | ||||||
Total Individual Life | 5,343 | 4,990 | ||||||
Group Benefits | ||||||||
Group life and accident | 352 | 535 | ||||||
Total Group Benefits | 352 | 535 | ||||||
International | ||||||||
Variable | 30,085 | 24,641 | ||||||
Fixed | 1,697 | 1,461 | ||||||
Total International | 31,782 | 26,102 | ||||||
Other | 1,790 | 1,988 | ||||||
Total Life | $ | 71,311 | $ | 64,452 | ||||
F-47
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Beginning liabilities for property and casualty unpaid losses and loss adjustment expenses-gross | $ | 22,266 | $ | 21,329 | $ | 21,715 | ||||||
Reinsurance and other recoverables | 5,403 | 5,138 | 5,497 | |||||||||
Beginning liabilities for property and casualty unpaid losses and loss adjustment expenses-net | 16,863 | 16,191 | 16,218 | |||||||||
Add provision for property & casualty unpaid losses and loss adjustment expenses | ||||||||||||
Current year | 6,706 | 6,715 | 6,590 | |||||||||
Prior years | 296 | 248 | 414 | |||||||||
Total provision for property and casualty unpaid losses and loss adjustment expenses | 7,002 | 6,963 | 7,004 | |||||||||
Less payments | ||||||||||||
Current year | 2,448 | 3,593 | 2,616 | |||||||||
Prior years | 3,702 | 2,698 | 4,415 | |||||||||
Total payments | 6,150 | 6,291 | 7,031 | |||||||||
Less net reserves for Omni business sold | 111 | — | — | |||||||||
Ending liabilities for property and casualty unpaid losses and loss adjustment expenses-net | 17,604 | 16,863 | 16,191 | |||||||||
Reinsurance and other recoverables | 4,387 | 5,403 | 5,138 | |||||||||
Ending liabilities for property and casualty unpaid losses and loss adjustment expenses-gross | $ | 21,991 | $ | 22,266 | $ | 21,329 | ||||||
F-48
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-49
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-50
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-51
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-52
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-53
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2007 | $ | 169 | ||
2008 | 125 | |||
2009 | 96 | |||
2010 | 79 | |||
2011 | 31 | |||
Thereafter | 24 | |||
Total | $ | 524 | ||
F-54
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||
Income Tax Expense (Benefit) | ||||||||||||||||
Current — U.S. Federal | $ | 519 | $ | 301 | $ | (24 | ) | |||||||||
International | — | 4 | 5 | |||||||||||||
Total current | $ | 519 | $ | 305 | $ | (19 | ) | |||||||||
Deferred — U.S. Federal | $ | 169 | $ | 377 | $ | 383 | ||||||||||
International | 169 | 29 | 21 | |||||||||||||
Total deferred | $ | 338 | $ | 406 | $ | 404 | ||||||||||
Total income tax expense (benefit) | $ | 857 | $ | 711 | $ | 385 | ||||||||||
F-55
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred Tax Assets | 2006 | 2005 | ||||||
Tax discount on loss reserves | $ | 801 | $ | 730 | ||||
Tax basis deferred policy acquisition costs and reserves | 605 | 622 | ||||||
Unearned premium reserve and other underwriting related reserves | 471 | 455 | ||||||
Investment-related items | 240 | — | ||||||
Employee benefits | 141 | 303 | ||||||
Minimum tax credit | 807 | 598 | ||||||
Net operating loss carryover | 108 | 460 | ||||||
Other | 103 | 136 | ||||||
Total Deferred Tax Assets | 3,276 | 3,304 | ||||||
Valuation Allowance | (60 | ) | (44 | ) | ||||
Net Deferred Tax Assets | 3,216 | 3,260 | ||||||
Deferred Tax Liabilities | ||||||||
Financial statement deferred policy acquisition costs and reserves | (2,222 | ) | (1,741 | ) | ||||
Investment-related items | — | (73 | ) | |||||
Net unrealized gain on investments | (463 | ) | (588 | ) | ||||
Other depreciable & amortizable assets | (135 | ) | (132 | ) | ||||
Other | (112 | ) | (51 | ) | ||||
Total Deferred Tax Liabilities | (2,932 | ) | (2,585 | ) | ||||
Total | $ | 284 | $ | 675 | ||||
For the years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Tax provision at U.S. Federal statutory rate | $ | 1,261 | $ | 1,045 | $ | 883 | ||||||
Tax-exempt interest | (153 | ) | (149 | ) | (145 | ) | ||||||
Dividends received deduction | (186 | ) | (188 | ) | (136 | ) | ||||||
Internal Revenue Service audit settlement (see Note 12) | — | — | (216 | ) | ||||||||
Sale of Omni Insurance Group, Inc. | (40 | ) | — | — | ||||||||
Other | (25 | ) | 3 | (1 | ) | |||||||
Provision (benefit) for income tax | $ | 857 | $ | 711 | $ | 385 | ||||||
F-56
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Short-Term Debt | 2006 | 2005 | ||||||
Commercial paper | $ | 299 | $ | 471 | ||||
Current maturities of long-term debt | 300 | 248 | ||||||
Total Short-Term Debt | $ | 599 | $ | 719 | ||||
Long –Term Debt | ||||||||
Senior Notes and Debentures | ||||||||
7.1% Notes, due 2007 | — | 200 | ||||||
4.7% Notes, due 2007 | — | 300 | ||||||
6.375% Notes, due 2008 | 200 | 200 | ||||||
4.1% Equity Units Notes, due 2008 | — | 330 | ||||||
5.663% Notes, due 2008 | 330 | — | ||||||
2.56% Equity Units Notes, due 2008 | — | 690 | ||||||
5.55% Notes, due 2008 | 425 | — | ||||||
7.9% Notes, due 2010 | 274 | 274 | ||||||
5.25% Notes, due 2011 | 399 | — | ||||||
4.625% Notes, due 2013 | 319 | 319 | ||||||
4.75% Notes, due 2014 | 199 | 199 | ||||||
7.3% Notes, due 2015 | 200 | 200 | ||||||
5.5% Notes, due 2016 | 299 | — | ||||||
7.65% Notes, due 2027 | 147 | 247 | ||||||
7.375% Notes, due 2031 | 92 | 398 | ||||||
5.95% Notes, due 2036 | 298 | — | ||||||
6.1% Notes, due 2041 | 322 | — | ||||||
Total Senior Notes and Debentures | $ | 3,504 | $ | 3,357 | ||||
Junior Subordinated Debentures | ||||||||
7.625% Notes, due 2050 | — | 200 | ||||||
7.45% Notes, due 2050 | — | 491 | ||||||
Total Junior Subordinated Debentures | — | 691 | ||||||
Total Long-Term Debt | $ | 3,504 | $ | 4,048 | ||||
Consumer Notes | ||||||||
Retail notes payable, interest rates ranging from 5.0% to 6.0% for fixed notes and consumer price index plus 175 basis points to 225 basis points for variable notes, due in varying amounts to 2031, callable beginning in 2008 | $ | 258 | $ | — | ||||
Total Consumer Notes | $ | 258 | $ | — | ||||
F-57
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2007 | $ | 300 | |
2008 | 955 | ||
2009 | — | ||
2010 | 275 | ||
2011 | 400 | ||
Thereafter | 1,970 | ||
F-58
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
Effective | Expiration | December 31, | December 31, | |||||||||||||||||||||
Description | Date | Date | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Commercial Paper | ||||||||||||||||||||||||
The Hartford | 11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | 299 | $ | 471 | ||||||||||||||
HLI [1] | 2/7/97 | N/A | 250 | 250 | — | — | ||||||||||||||||||
Total commercial paper | 2,250 | 2,250 | 299 | 471 | ||||||||||||||||||||
Revolving Credit Facility | ||||||||||||||||||||||||
5-year revolving credit facility | 9/7/05 | 9/7/10 | 1,600 | 1,600 | — | — | ||||||||||||||||||
Line of Credit | ||||||||||||||||||||||||
Life Japan Operations [2] | 9/18/02 | 1/4/08 | 42 | 17 | — | — | ||||||||||||||||||
Total Commercial Paper, Revolving Credit Facility and Line of Credit | $ | 3,892 | $ | 3,867 | $ | 299 | $ | 471 | ||||||||||||||||
[1] | In January 2007, the commercial paper program of HLI was terminated. | |
[2] | As of December 31, 2006 and 2005, the Company’s Japanese operation line of credit in yen was ¥5 billion and ¥ 2 billion, respectively. |
For the years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Short-term debt | $ | 31 | $ | 13 | $ | 6 | ||||||
Long-term debt [1] | 246 | 239 | 245 | |||||||||
Total interest expense | $ | 277 | $ | 252 | $ | 251 | ||||||
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
used to purchase investment products, primarily fixed rate bonds. Proceeds are not used for general operating purposes. Consumer Notes are offered weekly with maturities up to 30 years and varying interest rates and may include a call provision. Certain Consumer Notes may be redeemed by the holder in the event of death. Redemptions are subject to certain limitations, including calendar year aggregate and individual limits equal to the greater of $1 or 1% of the aggregate principal amount of the notes and $250 thousand per individual, respectively. Derivative instruments will be utilized to hedge the Company’s exposure to interest rate risk in accordance with Company policy.
For the years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Statutory Net Income | ||||||||||||
Life operations | $ | 1,123 | $ | 821 | $ | 1,048 | ||||||
Property & Casualty operations | 1,326 | 1,382 | 356 | |||||||||
Total | $ | 2,449 | $ | 2,203 | $ | 1,404 | ||||||
As of December 31, | ||||||||
Statutory Surplus | 2006 | 2005 | ||||||
Life operations | $ | 4,734 | $ | 4,364 | ||||
Japan life operations | 1,380 | 1,017 | ||||||
Property & Casualty operations | 8,230 | 6,981 | ||||||
Total | $ | 14,344 | $ | 12,362 | ||||
F-60
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pension and | ||||||||||||||||||||||||
Net Gain (Loss) | Foreign | Other | Accumulated | |||||||||||||||||||||
Unrealized | on Cash-Flow | Currency | Postretirement | Other | ||||||||||||||||||||
Gain (Loss) | Hedging | Translation | Plan | Comprehensive | ||||||||||||||||||||
For the year ended December 31, 2006 | on Securities | Instruments | Adjustments | Adjustment | Income (Loss) | |||||||||||||||||||
Balance, beginning of year | $ | 969 | $ | (110 | ) | $ | (149 | ) | $ | (620 | ) | $ | 90 | |||||||||||
Unrealized gain on securities [1] [2] | 89 | — | — | — | 89 | |||||||||||||||||||
Net gain on cash-flow hedging instruments [1] [3] | — | (124 | ) | — | — | (124 | ) | |||||||||||||||||
Change in foreign currency translation adjustments [1] | — | — | 29 | — | 29 | |||||||||||||||||||
Change in pension and other postretirement plan adjustment [1] | — | — | — | 94 | 94 | |||||||||||||||||||
Balance, end of year | $ | 1,058 | $ | (234 | ) | $ | (120 | ) | $ | (526 | ) | $ | 178 | |||||||||||
For the year ended December 31, 2005 | ||||||||||||||||||||||||
Balance, beginning of year | $ | 2,162 | $ | (215 | ) | $ | (42 | ) | $ | (480 | ) | $ | 1,425 | |||||||||||
Unrealized loss on securities [1] [2] | (1,193 | ) | — | — | — | (1,193 | ) | |||||||||||||||||
Net loss on cash-flow hedging instruments [1] [3] | — | 105 | — | — | 105 | |||||||||||||||||||
Change in foreign currency translation adjustments [1] | — | — | (107 | ) | — | (107 | ) | |||||||||||||||||
Change in minimum pension liability adjustment [1] | — | — | — | (140 | ) | (140 | ) | |||||||||||||||||
Balance, end of year | $ | 969 | $ | (110 | ) | $ | (149 | ) | $ | (620 | ) | $ | 90 | |||||||||||
For the year ended December 31, 2004 | ||||||||||||||||||||||||
Balance, beginning of year | $ | 1,764 | $ | (42 | ) | $ | (101 | ) | $ | (375 | ) | $ | 1,246 | |||||||||||
Unrealized gain on securities [1] [2] | 106 | — | — | — | 106 | |||||||||||||||||||
Net loss on cash-flow hedging instruments [1] [3] | — | (173 | ) | — | — | (173 | ) | |||||||||||||||||
Change in foreign currency translation adjustments [1] | — | — | 59 | — | 59 | |||||||||||||||||||
Change in minimum pension liability adjustment [1] | — | — | — | (105 | ) | (105 | ) | |||||||||||||||||
Cumulative effect of accounting change [4] | 292 | — | — | — | 292 | |||||||||||||||||||
Balance, end of year | $ | 2,162 | $ | (215 | ) | $ | (42 | ) | $ | (480 | ) | $ | 1,425 | |||||||||||
[1] | Unrealized gain on securities is net of tax and Life deferred acquisition costs of $137, $(644), and $234 for the years ended December 31, 2006, 2005 and 2004, respectively. Net gain (loss) on cash-flow hedging instruments is net of tax of $(67), $57, and $(93) for the years ended December 31, 2006, 2005 and 2004, respectively. Change in foreign currency translation adjustments are net of tax of $16, $(58) and $32 for the years ended December 31, 2006, 2005 and 2004, respectively. Change in pension and other postretirement plan adjustment is net of tax of $51, $(75) and $(57) for the years ended December 31, 2006, 2005 and 2004, respectively. | |
[2] | Net of reclassification adjustment for gains realized in net income of $(74), $45 and $170 for the years ended December 31, 2006, 2005 and 2004, respectively. | |
[3] | Net of amortization adjustment of $(38), $5 and $20 to net investment income for the years ended December 31, 2006, 2005 and 2004, respectively. | |
[4] | Cumulative effect of accounting change related to the Company’s adoption of SOP 03-1 is net of tax of $157 for the year ended December 31, 2004. |
F-61
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred Tax | AOCI, net | |||||||||||
Increases/(Decreases) to Balance | Asset | Liability | of tax | |||||||||
SFAS 158 adjustment | $ | (754 | ) | $ | 264 | $ | (490 | ) | ||||
Reversal of previously recorded minimum pension liability | 862 | (302 | ) | 560 | ||||||||
Net change | $ | 108 | $ | (38 | ) | $ | 70 | |||||
Accrued | Deferred Tax | AOCI, net | ||||||||||
Liability | Asset | of tax | ||||||||||
Pre-SFAS 158 | $ | 291 | $ | 102 | $ | — | ||||||
SFAS 158 adjustment | (37 | ) | (13 | ) | 24 | |||||||
Post-SFAS 158 | $ | 254 | $ | 89 | $ | 24 | ||||||
F-62
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, | ||||||||||||
2006 | 2005 | |||||||||||
Discount rate | 5.75 | % | 5.50 | % | ||||||||
Rate of increase in compensation levels | 4.25 | % | 4.00 | % | ||||||||
Twelve Months Ended | ||||||||||||
December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Discount rate | 5.50 | % | 5.75 | % | 6.25 | % | ||||||
Expected long-term rate of return on plan assets | 8.00 | % | 8.50 | % | 8.50 | % | ||||||
Rate of increase in compensation levels | 4.00 | % | 4.00 | % | 4.00 | % | ||||||
As of December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Health care cost trend rate | 10.00 | % | 10.00 | % | 10.00 | % | ||||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 4.50 | % | 4.50 | % | 4.50 | % | ||||||
Year that the rate reaches the ultimate trend rate | 2013 | 2012 | 2011 | |||||||||
F-63
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Change in Benefit Obligation | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Benefit obligation — beginning of year | $ | 3,534 | $ | 3,162 | $ | 521 | $ | 500 | ||||||||
Service cost (excluding expenses) | 125 | 113 | 8 | 12 | ||||||||||||
Interest cost | 193 | 182 | 20 | 27 | ||||||||||||
Plan participants’ contributions | — | — | 12 | 10 | ||||||||||||
Amendments | — | 6 | — | — | ||||||||||||
Actuarial loss/(gain) | 59 | 76 | (59 | ) | (24 | ) | ||||||||||
Change in assumptions | (161 | ) | 128 | (97 | ) | 25 | ||||||||||
Benefits paid | (145 | ) | (134 | ) | (34 | ) | (29 | ) | ||||||||
Other / Foreign exchange adjustment | (1 | ) | 1 | — | — | |||||||||||
Benefit obligation — end of year | $ | 3,604 | $ | 3,534 | $ | 371 | $ | 521 | ||||||||
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Change in Plan Assets | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Fair value of plan assets — beginning of year | $ | 3,047 | $ | 2,496 | $ | 109 | $ | 106 | ||||||||
Actual return on plan assets | 356 | 176 | 8 | 3 | ||||||||||||
Employer contributions | 402 | 504 | — | — | ||||||||||||
Benefits paid | (136 | ) | (126 | ) | — | — | ||||||||||
Expenses paid | (11 | ) | (4 | ) | — | — | ||||||||||
Other / Foreign exchange adjustment | (3 | ) | 1 | — | — | |||||||||||
Fair value of plan assets — end of year | $ | 3,655 | $ | 3,047 | $ | 117 | $ | 109 | ||||||||
Funded status — end of year | $ | 51 | $ | (487 | ) | $ | (254 | ) | $ | (412 | ) | |||||
December 31, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Projected benefit obligation | $ | 223 | $ | 3,510 | ||||||||||||
Accumulated benefit obligation | 211 | 3,335 | ||||||||||||||
Fair value of plan assets | — | 3,017 | ||||||||||||||
F-64
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
Service cost | $ | 128 | $ | 116 | $ | 101 | $ | 8 | $ | 12 | $ | 12 | ||||||||||||
Interest cost | 193 | 182 | 171 | 20 | 27 | 28 | ||||||||||||||||||
Expected return on plan assets | (244 | ) | (221 | ) | (201 | ) | (8 | ) | (9 | ) | (8 | ) | ||||||||||||
Amortization of prior service cost | (13 | ) | (13 | ) | (13 | ) | (23 | ) | (23 | ) | (23 | ) | ||||||||||||
Amortization of unrecognized net losses | 88 | 73 | 46 | — | 5 | 4 | ||||||||||||||||||
Net periodic benefit cost | $ | 152 | $ | 137 | $ | 104 | $ | (3 | ) | $ | 12 | $ | 13 | |||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net loss/(gain) | $ | 947 | $ | — | $ | (30 | ) | $ | — | |||||||
Prior service cost/(credit) | (102 | ) | — | (9 | ) | — | ||||||||||
Transition obligation | — | — | 2 | — | ||||||||||||
Total | $ | 845 | $ | — | $ | (37 | ) | $ | — | |||||||
Percentage of Pension Plan Assets Fair | ||||||||||||||||
Value at December 31, | Target | |||||||||||||||
2006 | 2005 | Allocation | ||||||||||||||
Equity securities | 68 | % | 66 | % | 50% - 70 | % | ||||||||||
Debt securities | 32 | % | 32 | % | 30% - 50 | % | ||||||||||
Real estate | — | — | 2% maximum | |||||||||||||
Other | — | 2 | % | 5% maximum | ||||||||||||
Total | 100 | % | 100 | % | ||||||||||||
Percentage of Other Postretirement Benefit | ||||||||||||
Plan Assets Fair Value at December 31, | Target | |||||||||||
2006 | 2005 | Allocation | ||||||||||
Equity securities | 26 | % | 24 | % | 20% - 65 | % | ||||||
Debt securities | 74 | % | 76 | % | 35% - 80 | % | ||||||
Total | 100 | % | 100 | % | ||||||||
F-65
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Employer Contributions | Pension Benefits | Other Postretirement Benefits | ||||||||||
2005 | $ | 504 | $ | — | ||||||||
2006 | 402 | — | ||||||||||
2007 (best estimate) | 200 | — | ||||||||||
Other | ||||||||
Pension | Postretirement | |||||||
Benefits | Benefits | |||||||
2007 | $ | 158 | $ | 31 | ||||
2008 | 173 | 32 | ||||||
2009 | 190 | 33 | ||||||
2010 | 207 | 34 | ||||||
2011 | 222 | 35 | ||||||
2012-2016 | 1,319 | 179 | ||||||
Total | $ | 2,269 | $ | 344 | ||||
2007 | $ | 3 | ||
2008 | 3 | |||
2009 | 3 | |||
2010 | 4 | |||
2011 | 4 | |||
2012-2016 | 26 | |||
Total | $ | 43 | ||
F-66
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-67
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Twelve Months Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Expected dividend yield | 1.9% | 1.9% | 2.1% | |||||||||
Expected annualized spot volatility | 20.2% - 32.3% | 19.5% - 33.4% | 25.2% - 34.7% | |||||||||
Weighted average annualized volatility | 28.9% | 29.4% | 31.5% | |||||||||
Risk-free spot rate | 4.4% - 4.6% | 2.4% - 4.7% | 1.1% - 4.3% | |||||||||
Expected term | 7 years | 7 years | 7 years | |||||||||
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | Remaining | |||||||||||||||
Number of Options | Average | Contractual | Aggregate | |||||||||||||
(in thousands) | Exercise Price | Term | Intrinsic Value | |||||||||||||
Outstanding at beginning of year | 11,471 | $ | 54.16 | 5.3 | ||||||||||||
Granted | 329 | 83.14 | ||||||||||||||
Exercised | (2,789 | ) | 50.13 | |||||||||||||
Forfeited | (76 | ) | 57.83 | |||||||||||||
Expired | (37 | ) | 53.84 | |||||||||||||
Outstanding at end of year | 8,898 | 56.48 | 4.8 | $ | 328 | |||||||||||
Exercisable at end of year | 7,801 | 54.23 | 4.3 | $ | 305 | |||||||||||
Weighted average fair value of options granted | $ | 27.66 | ||||||||||||||
Weighted-Average | ||||||||
Shares | Grant-Date | |||||||
Non-vested Shares | (in thousands) | Fair Value | ||||||
Non-vested at beginning of year | 1,080 | $ | 67.94 | |||||
Granted | 751 | 82.98 | ||||||
Increase for change in estimated performance factors | 139 | 66.08 | ||||||
Vested | (312 | ) | 64.94 | |||||
Forfeited | (53 | ) | 72.98 | |||||
Non-vested at end of year | 1,605 | $ | 75.23 | |||||
F-68
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Twelve Months Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Dividend yield | 2.0 | % | 1.6 | % | 1.6 | % | ||||||
Implied volatility | 19.0 | % | 20.5 | % | 19.3 | % | ||||||
Risk-free spot rate | 4.7 | % | 2.9 | % | 1.2 | % | ||||||
Expected term | 3 months | 3 months | 3 months | |||||||||
F-69
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended | ||||||||||||||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
Revenues | $ | 6,543 | $ | 6,002 | $ | 4,971 | $ | 6,064 | $ | 7,407 | $ | 7,307 | $ | 7,579 | $ | 7,710 | ||||||||||||||||
Benefits, losses and expenses | $ | 5,559 | $ | 5,088 | $ | 4,366 | $ | 5,237 | $ | 6,396 | $ | 6,611 | $ | 6,577 | $ | 7,162 | ||||||||||||||||
Net income | $ | 728 | $ | 666 | $ | 476 | $ | 602 | $ | 758 | $ | 539 | $ | 783 | $ | 467 | ||||||||||||||||
Basic earnings per share | $ | 2.41 | $ | 2.26 | $ | 1.57 | $ | 2.03 | $ | 2.45 | $ | 1.80 | $ | 2.45 | $ | 1.55 | ||||||||||||||||
Diluted earnings per share | $ | 2.34 | $ | 2.21 | $ | 1.52 | $ | 1.98 | $ | 2.39 | $ | 1.76 | $ | 2.42 | $ | 1.51 | ||||||||||||||||
Weighted average common shares outstanding | 302.2 | 294.8 | 303.3 | 297.1 | 310.0 | 299.2 | 319.7 | 300.7 | ||||||||||||||||||||||||
Weighted average common shares outstanding and dilutive potential common shares | 310.9 | 301.3 | 312.3 | 303.9 | 316.7 | 307.0 | 323.9 | 310.0 | ||||||||||||||||||||||||
F-70
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(In millions) | As of December 31, 2006 | |||||||||||
Amount at | ||||||||||||
which shown on | ||||||||||||
Type of Investment | Cost | Fair Value | Balance Sheet | |||||||||
Fixed Maturities | ||||||||||||
Bonds and Notes | ||||||||||||
U.S. Government and Government agencies and authorities (guaranteed and sponsored) | $ | 848 | $ | 846 | $ | 846 | ||||||
U.S. Government and Government agencies and authorities (guaranteed and sponsored) — asset-backed | 4,682 | 4,662 | 4,662 | |||||||||
States, municipalities and political subdivisions | 11,897 | 12,406 | 12,406 | |||||||||
International governments | 1,213 | 1,294 | 1,294 | |||||||||
Public utilities | 4,588 | 4,717 | 4,717 | |||||||||
All other corporate including international | 30,481 | 31,174 | 31,174 | |||||||||
All other corporate — asset-backed | 23,863 | 23,939 | 23,939 | |||||||||
Short-term investments | 1,681 | 1,681 | 1,681 | |||||||||
Redeemable preferred stock | 36 | 36 | 36 | |||||||||
Total fixed maturities | 79,289 | 80,755 | 80,755 | |||||||||
Equity Securities | ||||||||||||
Common stocks | ||||||||||||
Utilities | 2 | 2 | 2 | |||||||||
Banks, trusts & insurance companies | 6 | 6 | 6 | |||||||||
Industrial, miscellaneous and all other | 23,993 | 29,885 | 29,885 | |||||||||
Non-redeemable preferred stocks | 1,202 | 1,239 | 1,239 | |||||||||
Total equity securities | 25,203 | 31,132 | 31,132 | |||||||||
Total fixed maturities and equity securities | 104,492 | 111,887 | 111,887 | |||||||||
Real Estate | 2 | 2 | 2 | |||||||||
Other Investments | ||||||||||||
Mortgage loans on real estate | 3,318 | 3,298 | 3,318 | |||||||||
Policy loans | 2,051 | 2,051 | 2,051 | |||||||||
Investments in partnerships and trusts | 1,244 | 1,244 | 1,244 | |||||||||
Futures, options and miscellaneous | 717 | 671 | 671 | |||||||||
Total other investments | 7,330 | 7,264 | 7,284 | |||||||||
Total investments | $ | 111,824 | $ | 119,153 | $ | 119,173 | ||||||
S-1
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Registrant)
(In millions) | As of December 31, | |||||||
Condensed Balance Sheets | 2006 | 2005 | ||||||
Assets | ||||||||
Other assets | $ | 1,037 | $ | 411 | ||||
Investment in affiliates | 22,761 | 19,235 | ||||||
Total assets | 23,798 | 19,646 | ||||||
Liabilities and Stockholders’ Equity | ||||||||
Net payable to affiliates | 596 | 278 | ||||||
Short-term debt (includes current maturities of long-term debt) | 599 | 719 | ||||||
Long-term debt | 3,265 | 3,003 | ||||||
Other liabilities | 462 | 321 | ||||||
Total liabilities | 4,922 | 4,321 | ||||||
Total stockholders’ equity | 18,876 | 15,325 | ||||||
Total liabilities and stockholders’ equity | $ | 23,798 | $ | 19,646 | ||||
(In millions) | For the years ended December 31, | |||||||||||
Condensed Statements of Operations | 2006 | 2005 | 2004 | |||||||||
Interest expense (net of interest income) | $ | 198 | $ | 169 | $ | 161 | ||||||
Other expenses | 44 | 14 | 19 | |||||||||
Loss before income taxes and earnings of subsidiaries | (242 | ) | (183 | ) | (180 | ) | ||||||
Income tax benefit | (84 | ) | (63 | ) | (62 | ) | ||||||
Loss before earnings of subsidiaries | (158 | ) | (120 | ) | (118 | ) | ||||||
Earnings of subsidiaries | 2,903 | 2,394 | 2,233 | |||||||||
Net income | $ | 2,745 | $ | 2,274 | $ | 2,115 | ||||||
S-2
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
(In millions) | For the years ended December 31, | |||||||||||
Condensed Statements of Cash Flows | 2006 | 2005 | 2004 | |||||||||
Operating Activities | ||||||||||||
Net income | $ | 2,745 | $ | 2,274 | $ | 2,115 | ||||||
Undistributed earnings of subsidiaries | (2,366 | ) | (1,904 | ) | (1,506 | ) | ||||||
Change in operating assets and liabilities | (74 | ) | (304 | ) | 183 | |||||||
Cash provided by operating activities | 305 | 66 | 792 | |||||||||
Investing Activities | ||||||||||||
Net sale (purchase) of short-term investments | (292 | ) | 63 | (111 | ) | |||||||
Capital contributions to subsidiaries | (527 | ) | (22 | ) | (646 | ) | ||||||
Cash provided by (used for) investing activities | (819 | ) | 41 | (757 | ) | |||||||
Financing Activities | ||||||||||||
Issuance of shares from equity unit contracts | 1,020 | — | — | |||||||||
Issuance of common stock in underwritten offering | — | — | 411 | |||||||||
Issuance of long-term debt | 990 | — | 197 | |||||||||
Repayment/maturity of long-term debt | (1,015 | ) | (250 | ) | — | |||||||
Change in short-term debt | (173 | ) | 100 | (477 | ) | |||||||
Proceeds from issuances of shares under incentive and stock compensation plans, net | 147 | 390 | 161 | |||||||||
Return of shares to treasury stock under incentive and stock compensation plans | (5 | ) | (2 | ) | (2 | ) | ||||||
Excess tax benefits on stock-based compensation | 10 | — | — | |||||||||
Dividends paid | (460 | ) | (345 | ) | (325 | ) | ||||||
Cash provided by (used for) financing activities | 514 | (107 | ) | (35 | ) | |||||||
Net change in cash | — | — | — | |||||||||
Cash — beginning of year | — | — | — | |||||||||
Cash — end of year | $ | — | $ | — | $ | — | ||||||
Supplemental Disclosure of Cash Flow Information | ||||||||||||
Interest Paid | $ | 198 | $ | 170 | $ | 154 | ||||||
Dividends Received from Subsidiaries | $ | 441 | $ | 454 | $ | 667 |
S-3
Table of Contents
Future Policy | ||||||||||||||||
Benefits, | Other | |||||||||||||||
Unpaid Losses | �� | Policyholder | ||||||||||||||
Deferred Policy | and | Funds and | ||||||||||||||
Acquisition | Loss Adjustment | Unearned | Benefits | |||||||||||||
Segment [1] | Costs [2] | Expenses | Premiums | Payable | ||||||||||||
As of December 31, 2006 | ||||||||||||||||
Life | ||||||||||||||||
Retail Products Group | $ | 4,706 | $ | 863 | $ | 6 | $ | 15,095 | ||||||||
Retirement Plans | 538 | 357 | — | 5,544 | ||||||||||||
Institutional Solutions Group | 111 | 5,925 | 20 | 11,405 | ||||||||||||
Individual Life | 2,113 | 623 | 3 | 5,343 | ||||||||||||
Group Benefits | 118 | 6,150 | 74 | 352 | ||||||||||||
International | 1,509 | 38 | — | 31,782 | ||||||||||||
Other | (25 | ) | 60 | — | 1,790 | |||||||||||
Total Life | 9,070 | 14,016 | 103 | 71,311 | ||||||||||||
Property & Casualty | ||||||||||||||||
Ongoing Operations | ||||||||||||||||
Business Insurance | 542 | 7,794 | 2,646 | — | ||||||||||||
Personal Lines | 510 | 1,959 | 1,863 | — | ||||||||||||
Specialty Commercial | 145 | 6,522 | 1,010 | — | ||||||||||||
Total Ongoing Operations | 1,197 | 16,275 | 5,519 | — | ||||||||||||
Other Operations | — | 5,716 | 3 | — | ||||||||||||
Total Property & Casualty | 1,197 | 21,991 | 5,522 | — | ||||||||||||
Corporate | 1 | — | (5 | ) | — | |||||||||||
Consolidated | $ | 10,268 | $ | 36,007 | $ | 5,620 | $ | 71,311 | ||||||||
As of December 31, 2005 | ||||||||||||||||
Life | ||||||||||||||||
Retail Products Group | $ | 4,714 | $ | 747 | $ | — | $ | 16,410 | ||||||||
Retirement Plans | 405 | 366 | — | 5,194 | ||||||||||||
Institutional Solutions Group | 81 | 5,315 | — | 9,233 | ||||||||||||
Individual Life | 1,975 | 586 | 5 | 4,990 | ||||||||||||
Group Benefits | 95 | 5,828 | 64 | 535 | ||||||||||||
International | 1,281 | 51 | — | 26,102 | ||||||||||||
Other | 16 | 94 | — | 1,988 | ||||||||||||
Total Life | 8,567 | 12,987 | 69 | 64,452 | ||||||||||||
Property & Casualty | ||||||||||||||||
Ongoing Operations | ||||||||||||||||
Business Insurance | 531 | 7,066 | 2,566 | — | ||||||||||||
Personal Lines | 468 | 2,152 | 1,809 | — | ||||||||||||
Specialty Commercial | 135 | 6,202 | 1,076 | — | ||||||||||||
Total Ongoing Operations | 1,134 | 15,420 | 5,451 | — | ||||||||||||
Other Operations | — | 6,846 | 51 | — | ||||||||||||
Total Property & Casualty | 1,134 | 22,266 | 5,502 | — | ||||||||||||
Corporate | 1 | — | (5 | ) | — | |||||||||||
Consolidated | $ | 9,702 | $ | 35,253 | $ | 5,566 | $ | 64,452 | ||||||||
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Earned | Benefits, Losses | Amortization of | ||||||||||||||||||||||
Premiums, | Net | and Loss | Deferred Policy | |||||||||||||||||||||
Fee Income | Investment | Adjustment | Acquisition | Other | Net Written | |||||||||||||||||||
Segment [1] | and Other | Income | Expenses | Costs | Expenses [3] | Premiums | ||||||||||||||||||
For the year ended December 31, 2006 | ||||||||||||||||||||||||
Life | ||||||||||||||||||||||||
Retail Products Group | $ | 2,611 | $ | 839 | $ | 819 | $ | 930 | $ | 995 | $ | |||||||||||||
Retirement Plans | 211 | 326 | 250 | 1 | 135 | |||||||||||||||||||
Institutional Solutions Group | 731 | 1,003 | 1,484 | 32 | 78 | |||||||||||||||||||
Individual Life | 830 | 324 | 497 | 241 | 179 | |||||||||||||||||||
Group Benefits | 4,150 | 415 | 3,002 | 41 | 1,102 | |||||||||||||||||||
International | 700 | 123 | 3 | 167 | 208 | |||||||||||||||||||
Other | 83 | 1,978 | 1,985 | 40 | 11 | |||||||||||||||||||
Total Life | 9,316 | 5,008 | 8,040 | 1,452 | 2,708 | N/A | ||||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Business Insurance | 5,118 | 3,066 | 1,184 | 5,185 | ||||||||||||||||||||
Personal Lines | 3,895 | 2,478 | 622 | 3,877 | ||||||||||||||||||||
Specialty Commercial | 1,888 | 1,098 | 300 | 1,596 | ||||||||||||||||||||
Total Ongoing Operations | 10,901 | 1,225 | 6,642 | 2,106 | 1,211 | 10,658 | ||||||||||||||||||
Other Operations | 5 | 261 | 360 | — | 12 | 4 | ||||||||||||||||||
Total Property & Casualty | 10,906 | 1,486 | 7,002 | 2,106 | 1,223 | 10,662 | ||||||||||||||||||
Corporate | 14 | 21 | — | — | 367 | N/A | ||||||||||||||||||
Consolidated | $ | 20,236 | $ | 6,515 | $ | 15,042 | $ | 3,558 | $ | 4,298 | $ | 10,662 | ||||||||||||
For the year ended December 31, 2005 | ||||||||||||||||||||||||
Life | ||||||||||||||||||||||||
Retail Products Group | $ | 2,273 | $ | 933 | $ | 895 | $ | 744 | $ | 869 | $ | |||||||||||||
Retirement Plans | 162 | 311 | 231 | 26 | 115 | |||||||||||||||||||
Institutional Solutions Group | 623 | 802 | 1,212 | 32 | 56 | |||||||||||||||||||
Individual Life | 769 | 305 | 469 | 205 | 167 | |||||||||||||||||||
Group Benefits | 3,810 | 398 | 2,794 | 31 | 1,022 | |||||||||||||||||||
International | 483 | 75 | 42 | 133 | 188 | |||||||||||||||||||
Other | 83 | 4,021 | 4,166 | 1 | 105 | |||||||||||||||||||
Total Life | 8,203 | 6,845 | 9,809 | 1,172 | 2,522 | N/A | ||||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Business Insurance | 4,785 | 2,971 | 1,138 | 5,001 | ||||||||||||||||||||
Personal Lines | 3,731 | 2,294 | 581 | 3,676 | ||||||||||||||||||||
Specialty Commercial | 2,099 | 1,486 | 281 | 1,806 | ||||||||||||||||||||
Total Ongoing Operations | 10,615 | 1,082 | 6,751 | 2,000 | 1,326 | 10,483 | ||||||||||||||||||
Other Operations | 4 | 283 | 212 | (3 | ) | 22 | 4 | |||||||||||||||||
Total Property & Casualty | 10,619 | 1,365 | 6,963 | 1,997 | 1,348 | 10,487 | ||||||||||||||||||
Corporate | 13 | 21 | 4 | — | 283 | N/A | ||||||||||||||||||
Consolidated | $ | 18,835 | $ | 8,231 | $ | 16,776 | $ | 3,169 | $ | 4,153 | $ | 10,487 | ||||||||||||
For the year ended December 31, 2004 | ||||||||||||||||||||||||
Life | ||||||||||||||||||||||||
Retail Products Group | $ | 2,024 | $ | 1,011 | $ | 1,074 | $ | 647 | $ | 687 | $ | |||||||||||||
Retirement Plans | 131 | 306 | 220 | 29 | 96 | |||||||||||||||||||
Institutional Solutions Group | 624 | 664 | 1,116 | 26 | 55 | |||||||||||||||||||
Individual Life | 746 | 303 | 480 | 185 | 164 | |||||||||||||||||||
Group Benefits | 3,652 | 373 | 2,703 | 23 | 989 | |||||||||||||||||||
International | 240 | 11 | 20 | 77 | 98 | |||||||||||||||||||
Other | 119 | 1,007 | 1,017 | 6 | 56 | |||||||||||||||||||
Total Life | 7,536 | 3,675 | 6,630 | 993 | 2,145 | N/A | ||||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Business Insurance | 4,298 | 2,633 | 1,058 | 4,575 | ||||||||||||||||||||
Personal Lines | 3,568 | 2,512 | 530 | 3,557 | ||||||||||||||||||||
Specialty Commercial | 2,040 | 1,414 | 257 | 1,840 | ||||||||||||||||||||
Total Ongoing Operations | 9,906 | 903 | 6,559 | 1,845 | 1,213 | 9,972 | ||||||||||||||||||
Other Operations | 24 | 345 | 445 | 5 | 59 | (10 | ) | |||||||||||||||||
Total Property & Casualty | 9,930 | 1,248 | 7,004 | 1,850 | 1,272 | 9,962 | ||||||||||||||||||
Corporate | 8 | 20 | 6 | — | 285 | N/A | ||||||||||||||||||
Consolidated | $ | 17,474 | $ | 4,943 | $ | 13,640 | $ | 2,843 | $ | 3,702 | $ | 9,962 | ||||||||||||
[1] | Segment information is presented in a manner by which The Hartford’s chief operating decision maker views and manages the business. | |
[2] | Also includes present value of future profits. | |
[3] | Includes insurance operating costs, interest and other expenses. | |
N/A | - Not applicable to life insurance pursuant to Regulation S-X. |
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Gross | Ceded to Other | Assumed From Other | Percentage of Amount | |||||||||||||||||
(In millions) | Amount | Companies | Companies | Net Amount | Assumed to Net | |||||||||||||||
For the year ended December 31, 2006 | ||||||||||||||||||||
Life insurance in force | $ | 872,536 | $ | 218,795 | $ | 48,428 | $ | 702,169 | 7 | % | ||||||||||
Insurance revenues | ||||||||||||||||||||
Property and casualty insurance | $ | 11,465 | $ | 1,291 | $ | 259 | $ | 10,433 | 2 | % | ||||||||||
Life insurance and annuities | 7,092 | 333 | 247 | 7,006 | 3 | % | ||||||||||||||
Accident and health insurance | 2,280 | 36 | 66 | 2,310 | 3 | % | ||||||||||||||
Total insurance revenues | $ | 20,837 | $ | 1,660 | $ | 572 | $ | 19,749 | 3 | % | ||||||||||
For the year ended December 31, 2005 | ||||||||||||||||||||
Life insurance in force | $ | 764,293 | $ | 251,853 | $ | 51,274 | $ | 563,714 | 9 | % | ||||||||||
Insurance revenues | ||||||||||||||||||||
Property and casualty insurance | $ | 11,356 | $ | 1,418 | $ | 218 | $ | 10,156 | 2 | % | ||||||||||
Life insurance and annuities | 6,072 | 403 | 348 | 6,017 | 6 | % | ||||||||||||||
Accident and health insurance | 2,122 | 52 | 116 | 2,186 | 5 | % | ||||||||||||||
Total insurance revenues | $ | 19,550 | $ | 1,873 | $ | 682 | $ | 18,359 | 4 | % | ||||||||||
For the year ended December 31, 2004 | ||||||||||||||||||||
Life insurance in force | $ | 778,134 | $ | 300,627 | $ | 75,050 | $ | 552,557 | 14 | % | ||||||||||
Insurance revenues | ||||||||||||||||||||
Property and casualty insurance | $ | 10,811 | $ | 1,535 | $ | 218 | $ | 9,494 | 2 | % | ||||||||||
Life insurance and annuities | 5,392 | 415 | 542 | 5,519 | 10 | % | ||||||||||||||
Accident and health insurance | 1,831 | 83 | 269 | 2,017 | 13 | % | ||||||||||||||
Total insurance revenues | $ | 18,034 | $ | 2,033 | $ | 1,029 | $ | 17,030 | 6 | % | ||||||||||
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Write-offs/ | ||||||||||||||||||||
Balance | Charged to Costs | Translation | Payments/ | |||||||||||||||||
(In millions) | January 1, | and Expenses | Adjustment | Other | Balance December 31, | |||||||||||||||
2006 | ||||||||||||||||||||
Allowance for doubtful accounts and other | $ | 120 | $ | 35 | $ | — | $ | (41 | ) | $ | 114 | |||||||||
Allowance for uncollectible reinsurance | 413 | 284 | — | (285 | ) | 412 | ||||||||||||||
Accumulated depreciation of property and equipment | 1,150 | 193 | — | (102 | ) | 1,241 | ||||||||||||||
Valuation allowance for deferred taxes | 44 | 16 | — | — | 60 | |||||||||||||||
2005 | ||||||||||||||||||||
Allowance for doubtful accounts and other | $ | 175 | $ | 28 | $ | — | $ | (83 | ) | $ | 120 | |||||||||
Allowance for uncollectible reinsurance | 374 | 38 | — | 1 | 413 | |||||||||||||||
Accumulated depreciation of property and equipment | 1,051 | 206 | — | (107 | ) | 1,150 | ||||||||||||||
Valuation allowance for deferred taxes | 35 | 9 | — | — | 44 | |||||||||||||||
2004 | ||||||||||||||||||||
Allowance for doubtful accounts and other | $ | 150 | $ | 71 | $ | — | $ | (46 | ) | $ | 175 | |||||||||
Allowance for uncollectible reinsurance | 381 | 40 | — | (47 | ) | 374 | ||||||||||||||
Accumulated depreciation of property and equipment | 958 | 156 | — | (63 | ) | 1,051 | ||||||||||||||
Valuation allowance for deferred taxes | 36 | — | — | (1 | ) | 35 | ||||||||||||||
AND CASUALTY INSURANCE OPERATIONS
Discount | Losses and Loss Adjustment | Paid Losses and | ||||||||||||||
Deducted From | Expenses Incurred Related to: | Loss Adjustment | ||||||||||||||
(In millions) | Liabilities [1] | Current Year | Prior Year | Expenses | ||||||||||||
Years ended December 31, | ||||||||||||||||
2006 | $ | 605 | $ | 6,706 | $ | 296 | $ | 6,150 | ||||||||
2005 | $ | 608 | $ | 6,715 | $ | 248 | $ | 6,291 | ||||||||
2004 | $ | 556 | $ | 6,590 | $ | 414 | $ | 7,031 | ||||||||
[1] | Reserves for permanently disabled claimants and certain structured settlement contracts that fund loss run-offs have been discounted using the weighted average interest rates of 5.6%, 5.6% and 5.7% for 2006, 2005 and 2004, respectively. |
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THE HARTFORD FINANCIAL SERVICES GROUP, INC. | ||||||
By: | /s/ Robert J. Price | |||||
Robert J. Price | ||||||
Senior Vice President and Controller | ||||||
Date: February 23, 2007 |
Signature | Title | Date | ||||
/s/ Ramani Ayer | Chairman, President, Chief | February 23, 2007 | ||||
Executive Officer and Director (Principal Executive Officer) | ||||||
* | Executive Vice President and Director | February 23, 2007 | ||||
* | Executive Vice President and Director | February 23, 2007 | ||||
/s/ David M. Johnson | Executive Vice President and Chief Financial Officer | February 23, 2007 | ||||
(Principal Financial Officer) | ||||||
/s/ Robert J. Price | Senior Vice President and Controller | February 23, 2007 | ||||
(Principal Accounting Officer) | ||||||
* | Director | February 23, 2007 | ||||
* | Director | February 23, 2007 | ||||
* | Director | February 23, 2007 | ||||
* | Director | February 23, 2007 | ||||
* | Director | February 23, 2007 | ||||
* | Director | February 23, 2007 | ||||
* | Director | February 23, 2007 | ||||
* | Director | February 23, 2007 | ||||
* | Director | February 23, 2007 | ||||
*By: | /s/ Neal S. Wolin | |||||
As Attorney-in-Fact |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
FORM 10-K
Exhibit No. | Description | |
3.01 | Corrected Amended and Restated Certificate of Incorporation of The Hartford Financial Services Group, Inc. (“The Hartford”), effective May 21, 1998, as amended by Amendment No. 1, effective May 1, 2002 (incorporated herein by reference to Exhibit 3.01 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004). | |
3.02 | Amended and Restated By-Laws of The Hartford, amended effective May 19, 2005 (incorporated herein by reference to Exhibit 3.1 to The Hartford’s Current Report on Form 8-K, filed May 24, 2005). | |
4.01 | Corrected Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of The Hartford (incorporated herein by reference as indicated in Exhibits 3.01 and 3.02 hereto, respectively). | |
4.02 | Senior Indenture, dated as of October 20, 1995, between The Hartford and The Chase Manhattan Bank (National Association) as Trustee (incorporated herein by reference to Exhibit 4.03 to the Registration Statement on Form S-3 (Registration No. 333-103915) of The Hartford, Hartford Capital IV, Hartford Capital V and Hartford Capital VI). | |
4.03 | Supplemental Indenture No. 1, dated as of December 27, 2000, to the Senior Indenture filed as Exhibit 4.02 hereto, between The Hartford and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.30 to The Hartford’s Registration Statement on Form S-3 (Amendment No. 1) (Registration No. 333-49666) dated December 27, 2000). | |
4.04 | Supplemental Indenture No. 2, dated as of September 13, 2002, to the Senior Indenture filed as Exhibit 4.02 hereto, between The Hartford and JPMorgan Chase Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Hartford’s Current Report on Form 8-K, filed September 17, 2002). | |
4.05 | Form of Global Security (included in Exhibit 4.04). | |
4.06 | Supplemental Indenture No. 3, dated as of May 23, 2003, to the Senior Indenture filed as Exhibit 4.02 hereto, between The Hartford and JPMorgan Chase Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 of The Hartford’s Current Report on Form 8-K, filed May 30, 2003). | |
4.07 | Senior Indenture, dated as of March 9, 2004, between The Hartford and JPMorgan Chase Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Hartford’s Current Report on Form 8-K, filed March 12, 2004). | |
4.08 | Junior Subordinated Indenture, dated as of February 12, 2007, between The Hartford and LaSalle Bank, N.A., as Trustee (incorporated herein by reference to Exhibit 4.1 to The Hartford’s Current Report on Form 8-K, filed February 16, 2007). | |
4.09 | 5.25% Senior Note due October 15, 2011 (incorporated by reference to Exhibit 4.2 of The Hartford’s Current Report on Form 8-K, filed October 3, 2006). | |
4.10 | 5.50% Senior Note due October 15, 2016 (incorporated by reference to Exhibit 4.3 of The Hartford’s Current Report on Form 8-K, filed October 3, 2006). | |
4.11 | 5.95% Senior Note due October 15, 2036 (incorporated by reference to Exhibit 4.4 of The Hartford’s Current Report on Form 8-K, filed October 3, 2006). | |
4.12 | 6.10% Senior Note due October 1, 2041 (incorporated by reference to Exhibit 4.1 of The Hartford’s Current Report on Form 8-K, filed October 11, 2006). |
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Table of Contents
Exhibit No. | Description | |
*10.01 | Employment Agreement, amended and restated as of September 7, 2006, between The Hartford and Ramani Ayer (incorporated herein by reference to Exhibit 10.01 to The Hartford’s Current Report on Form 8-K, filed September 12, 2006). | |
*10.02 | Employment Agreement, amended and restated as of September 7, 2006, between The Hartford and David K. Zwiener (incorporated herein by reference to Exhibit 10.02 to The Hartford’s Current Report on Form 8-K, filed September 12, 2006). | |
*10.03 | Employment Agreement, amended and restated as of September 7, 2006, between The Hartford and Thomas M. Marra (incorporated herein by reference to Exhibit 10.03 to The Hartford’s Current Report on Form 8-K, filed September 12, 2006). | |
*10.04 | Employment Agreement, amended and restated as of September 7, 2006, between The Hartford and Neal S. Wolin (incorporated herein by reference to Exhibit 10.05 to The Hartford’s Current Report on Form 8-K, filed September 12, 2006). | |
*10.05 | Employment Agreement, amended and restated as of September 7, 2006, between The Hartford and David M. Johnson (incorporated herein by reference to Exhibit 10.04 to The Hartford’s Current Report on Form 8-K, filed September 12, 2006). | |
*10.06 | Form of Key Executive Employment Protection Agreement between The Hartford and certain executive officers of The Hartford, as amended (incorporated herein by reference to Exhibit 10.06 to The Hartford’s Current Report on Form 8-K, filed September 12, 2006). | |
*10.07 | The Hartford Restricted Stock Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10.05 to The Hartford’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004). | |
*10.08 | The Hartford 1995 Incentive Stock Plan, as amended (incorporated herein by reference to Exhibit 10.09 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005). | |
*10.09 | The Hartford Incentive Stock Plan, as amended (incorporated herein by reference to Exhibit 10.10 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005). | |
*10.10 | The Hartford 2005 Incentive Stock Plan, as amended (incorporated herein by reference to Exhibit 10.11 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005). | |
*10.11 | The Hartford Deferred Restricted Stock Unit Plan, as amended (incorporated herein by reference to Exhibit 10.12 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005). | |
*10.12 | The Hartford Deferred Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.03 to The Hartford’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004). | |
*10.13 | The Hartford Senior Executive Severance Pay Plan, as amended (incorporated herein by reference to Exhibit 10.07 to The Hartford’s Current Report on Form 8-K, filed September 12, 2006). | |
*10.14 | The Hartford Executive Severance Pay Plan I, as amended (incorporated herein by reference to Exhibit 10.18 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002). | |
*10.15 | The Hartford Planco Non-Employee Option Plan, as amended (incorporated herein by reference to Exhibit 10.19 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002). | |
*10.16 | The Hartford Employee Stock Purchase Plan, as amended (incorporated herein by reference to Exhibit 10.17 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005). | |
*10.17 | The Hartford Investment and Savings Plan, as amended (incorporated herein by reference to Exhibit 10.18 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005). | |
*10.18 | The Hartford 2005 Incentive Stock Plan Forms of Individual Award Agreements (incorporated herein by reference to Exhibit 10.2 to The Hartford’s Current Report on Form 8-K, filed May 24, 2005). | |
*10.19 | Summary of Annual Executive Bonus Program (incorporated herein by reference to Exhibit 10.3 to The Hartford’s Current Report on Form 8-K, filed May 24, 2005). | |
*10.20 | Summary of Certain 2006-2007 Compensation for Named Executive Officers (incorporated herein by reference to Exhibit 99.1 to The Hartford’s Current Report on Form 8-K, filed February 23, 2007). |
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Table of Contents
Exhibit No. | Description | |
*10.21 | Summary of 2007-2008 Compensation for Non-Employee Directors (incorporated herein by reference to Exhibit 99.2 to The Hartford’s Current Report on Form 8-K, filed February 23, 2007). | |
10.22 | Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility, dated December 19, 2006, among The Hartford and the syndicate of lenders named therein, including Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citibank, N.A., as syndication agents, and Wachovia Bank, N.A., as documentation agent (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed December 22, 2006). | |
10.23 | Remarketing Agreement, dated as of May 9, 2006, between The Hartford and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co., J.P. Morgan Securities Inc., and J.P. Morgan Chase Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed May 15, 2006). | |
10.24 | Initial Remarketing Agreement, dated as of August 10, 2006, between The Hartford, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, and J.P. Morgan Chase Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed August 11, 2006). | |
10.25 | Form of Agreement among the Attorney General of the State of Connecticut and the Attorney General of New York and The Hartford dated May 10, 2006 (incorporated herein by reference to Exhibit 10.1 of the Hartford’s Current Report on Form 8-K, filed May 11, 2006). | |
10.26 | Form of Order of the Securities and Exchange Commission dated November 8, 2006. † | |
10.27 | Put Option Agreement, dated February 12, 2007, among The Hartford, Glen Meadow ABC Trust and LaSalle Bank, N.A. (incorporated herein by reference to Exhibit 10.1 of The Hartford’s Current Report on Form 8-K, filed February 16, 2007). | |
12.01 | Statement Re: Computation of Ratio of Earnings to Fixed Charges. † | |
21.01 | Subsidiaries of The Hartford Financial Services Group, Inc. † | |
23.01 | Consent of Deloitte & Touche LLP to the incorporation by reference into The Hartford’s Registration Statements on Form S-8 and Form S-3 of the report of Deloitte & Touche LLP contained in this Form 10-K regarding the audited financial statements is filed herewith. † | |
24.01 | Power of Attorney. † | |
31.01 | Certification of Ramani Ayer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. † | |
31.02 | Certification of David M. Johnson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. † | |
32.01 | Certification of Ramani Ayer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † | |
32.02 | Certification of David M. Johnson pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † |
* | Management contract, compensatory plan or arrangement. | |
† | Filed with the Securities and Exchange Commission as an exhibit to this report. |
II-4