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SECURITIES AND EXCHANGE COMMISSION
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 (State or other jurisdiction of incorporation or organization) | 13-3317783 (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
6.1% Notes due October 1, 2041
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 | 5.5% Notes due October 15, 2016 | |
7.9% Notes due June 15, 2010 | 5.375% Notes due March 15, 2017 | |
5.25% Notes due October 15, 2011 | 5.95% Notes due October 15, 2036 | |
4.625% Notes due July 15, 2013 |
Yeso Noþ
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
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(Dollar amounts in millions, except for per share data, unless otherwise stated)
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Property And Casualty Loss And Loss Adjustment Expense Liability Development — Net of Reinsurance
For the Years Ended December 31, [1]
1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||||||||||||||||||||
Liabilities for unpaid losses and loss adjustment expenses, net of reinsurance | $ | 12,770 | $ | 12,902 | $ | 12,476 | $ | 12,316 | $ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | ||||||||||||||||||||||
Cumulative paid losses and loss expenses | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 2,472 | 2,939 | 2,994 | 3,272 | 3,339 | 3,480 | 4,415 | 3,594 | 3,702 | 3,727 | ||||||||||||||||||||||||||||||||||
Two years later | 4,300 | 4,733 | 5,019 | 5,315 | 5,621 | 6,781 | 6,779 | 6,035 | 6,122 | — | ||||||||||||||||||||||||||||||||||
Three years later | 5,494 | 6,153 | 6,437 | 6,972 | 8,324 | 8,591 | 8,686 | 7,825 | — | — | ||||||||||||||||||||||||||||||||||
Four years later | 6,508 | 7,141 | 7,652 | 9,195 | 9,710 | 10,061 | 10,075 | — | — | — | ||||||||||||||||||||||||||||||||||
Five years later | 7,249 | 8,080 | 9,567 | 10,227 | 10,871 | 11,181 | — | — | — | — | ||||||||||||||||||||||||||||||||||
Six years later | 8,036 | 9,818 | 10,376 | 11,140 | 11,832 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Seven years later | 9,655 | 10,501 | 11,137 | 11,961 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Eight years later | 10,239 | 11,246 | 11,856 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Nine years later | 10,933 | 11,964 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Ten years later | 11,586 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Liabilities re-estimated | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 12,615 | 12,662 | 12,472 | 12,459 | 13,153 | 15,965 | 16,632 | 16,439 | 17,159 | 17,652 | ||||||||||||||||||||||||||||||||||
Two years later | 12,318 | 12,569 | 12,527 | 12,776 | 16,176 | 16,501 | 17,232 | 16,838 | 17,347 | — | ||||||||||||||||||||||||||||||||||
Three years later | 12,183 | 12,584 | 12,698 | 15,760 | 16,768 | 17,338 | 17,739 | 17,240 | — | — | ||||||||||||||||||||||||||||||||||
Four years later | 12,138 | 12,663 | 15,609 | 16,584 | 17,425 | 17,876 | 18,367 | — | — | — | ||||||||||||||||||||||||||||||||||
Five years later | 12,179 | 15,542 | 16,256 | 17,048 | 17,927 | 18,630 | — | — | — | — | ||||||||||||||||||||||||||||||||||
Six years later | 15,047 | 16,076 | 16,568 | 17,512 | 18,686 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Seven years later | 15,499 | 16,290 | 17,031 | 18,216 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Eight years later | 15,641 | 16,799 | 17,655 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Nine years later | 16,165 | 17,440 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Ten years later | 16,768 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Deficiency (redundancy), net of reinsurance | $ | 3,998 | $ | 4,538 | $ | 5,179 | $ | 5,900 | $ | 5,826 | $ | 5,489 | $ | 2,149 | $ | 1,049 | $ | 484 | $ | 48 | ||||||||||||||||||||||||
[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]
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |||||||||||||||||||||||||||||||
Net reserve, as initially estimated | $ | 12,902 | $ | 12,476 | $ | 12,316 | $ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | ||||||||||||||||||||
Reinsurance and other recoverables, as initially estimated | 3,275 | 3,706 | 3,871 | 4,176 | 3,950 | 5,497 | 5,138 | 5,403 | 4,387 | 3,922 | ||||||||||||||||||||||||||||||
Gross reserve, as initially estimated | $ | 16,177 | $ | 16,182 | $ | 16,187 | $ | 17,036 | $ | 17,091 | $ | 21,715 | $ | 21,329 | $ | 22,266 | $ | 21,991 | $ | 22,153 | ||||||||||||||||||||
Net re-estimated reserve | $ | 17,440 | $ | 17,655 | $ | 18,216 | $ | 18,686 | $ | 18,630 | $ | 18,367 | $ | 17,240 | $ | 17,347 | $ | 17,652 | ||||||||||||||||||||||
Re-estimated and other reinsurance recoverables | 4,140 | 5,124 | 5,245 | 5,434 | 5,061 | 5,003 | 4,950 | 5,307 | 3,958 | |||||||||||||||||||||||||||||||
Gross re-estimated reserve | $ | 21,580 | $ | 22,779 | $ | 23,461 | $ | 24,120 | $ | 23,691 | $ | 23,370 | $ | 22,190 | $ | 22,654 | $ | 21,610 | ||||||||||||||||||||||
Gross deficiency (redundancy) | $ | 5,403 | $ | 6,597 | $ | 7,274 | $ | 7,084 | $ | 6,600 | $ | 1,655 | $ | 861 | $ | 388 | $ | (381 | ) | |||||||||||||||||||||
[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 | ||||||||||||||||||||||||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | Total | ||||||||||||||||||||||||||||||||||
By Accident year | ||||||||||||||||||||||||||||||||||||||||||||
1997 & Prior | $ | (155 | ) | $ | (297 | ) | $ | (135 | ) | $ | (45 | ) | $ | 41 | $ | 2,868 | $ | 452 | $ | 142 | $ | 524 | $ | 603 | $ | 3,998 | ||||||||||||||||||
1998 | — | 57 | 42 | 60 | 38 | 11 | 82 | 72 | (15 | ) | 38 | 385 | ||||||||||||||||||||||||||||||||
1999 | — | — | 89 | 40 | 92 | 32 | 113 | 98 | (46 | ) | (17 | ) | 401 | |||||||||||||||||||||||||||||||
2000 | — | — | — | 88 | 146 | 73 | 177 | 152 | 1 | 80 | 717 | |||||||||||||||||||||||||||||||||
2001 | — | — | — | — | (24 | ) | 39 | (232 | ) | 193 | 38 | 55 | 69 | |||||||||||||||||||||||||||||||
2002 | — | — | — | — | — | (199 | ) | (56 | ) | 180 | 36 | (5 | ) | (44 | ) | |||||||||||||||||||||||||||||
2003 | — | — | — | — | — | — | (122 | ) | (237 | ) | (31 | ) | (126 | ) | (516 | ) | ||||||||||||||||||||||||||||
2004 | — | — | — | — | — | — | — | (352 | ) | (108 | ) | (226 | ) | (686 | ) | |||||||||||||||||||||||||||||
2005 | — | — | — | — | — | — | — | — | (103 | ) | (214 | ) | (317 | ) | ||||||||||||||||||||||||||||||
2006 | — | — | — | — | — | — | — | — | — | (140 | ) | (140 | ) | |||||||||||||||||||||||||||||||
Total | $ | (155 | ) | $ | (240 | ) | $ | (4 | ) | $ | 143 | $ | 293 | $ | 2,824 | $ | 414 | $ | 248 | $ | 296 | $ | 48 | $ | 3,867 | |||||||||||||||||||
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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; | |
• | requiring insurers to dividend to policy holders any excess profits; and | |
• | regulating the types, amounts and valuation of investments. |
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PURCHASES OF EQUITY SECURITIES
1st Qtr. | 2nd Qtr. | 3rd Qtr. | 4th Qtr. | |||||||||||||
2007 | ||||||||||||||||
Common Stock Price | ||||||||||||||||
High | $ | 97.75 | $ | 106.02 | $ | 99.87 | $ | 98.56 | ||||||||
Low | 90.77 | 95.82 | 85.44 | 86.78 | ||||||||||||
Dividends Declared | 0.50 | 0.50 | 0.50 | 0.53 | ||||||||||||
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 | ||||||||||||
Approximate Dollar | ||||||||||||||||
Value of Shares | ||||||||||||||||
Total Number of Shares | that May Yet Be | |||||||||||||||
Total Number | Purchased as Part of | Purchased Under | ||||||||||||||
of Shares | Average Price | Publicly Announced Plans | the Plans or | |||||||||||||
Period | Purchased | Paid Per Share | or Programs | Programs | ||||||||||||
(in millions) | ||||||||||||||||
October 1, 2007 — October 31, 2007 | 5,429 | [1] | $ | 92.10 | — | $ | 827 | |||||||||
November 1, 2007 — November 30, 2007 | 236,185 | [1] | $ | 87.11 | 233,900 | $ | 807 | |||||||||
December 1, 2007 — December 31, 2007 | 3,179 | [1] | $ | 90.55 | 1,700 | $ | 807 | |||||||||
Total | 244,793 | $ | 87.27 | 235,600 | N/A | |||||||||||
[1] | Includes 5,429, 2,285 and 1,479 shares in October, November and December, respectively, acquired from employees of the Company for tax withholding purposes in connection with the Company’s stock compensation plans. |
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2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Income Statement Data | ||||||||||||||||||||
Total revenues | $ | 25,916 | $ | 26,500 | $ | 27,083 | $ | 22,708 | $ | 18,719 | ||||||||||
Income (loss) before cumulative effect of accounting changes [1] | 2,949 | 2,745 | 2,274 | 2,138 | (91 | ) | ||||||||||||||
Net income (loss) [1] [2] | 2,949 | 2,745 | 2,274 | 2,115 | (91 | ) | ||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Total assets [3] | $ | 360,361 | $ | 326,544 | $ | 285,412 | $ | 259,585 | $ | 225,764 | ||||||||||
Long-term debt | 3,142 | 3,504 | 4,048 | 4,308 | 4,610 | |||||||||||||||
Total stockholders’ equity | 19,204 | 18,876 | 15,325 | 14,238 | 11,639 | |||||||||||||||
Earnings (Loss) Per Share Data Basic earnings (loss) per share [1] | ||||||||||||||||||||
Income (loss) before cumulative effect of accounting change [1] | $ | 9.32 | $ | 8.89 | $ | 7.63 | $ | 7.32 | $ | (0.33 | ) | |||||||||
Net income (loss) [1] [2] | 9.32 | 8.89 | 7.63 | 7.24 | (0.33 | ) | ||||||||||||||
Diluted earnings (loss) per share [1] [4] | ||||||||||||||||||||
Income (loss) before cumulative effect of accounting change [1] | 9.24 | 8.69 | 7.44 | 7.20 | (0.33 | ) | ||||||||||||||
Net income (loss) [1] [2] | 9.24 | 8.69 | 7.44 | 7.12 | (0.33 | ) | ||||||||||||||
Dividends declared per common share | 2.03 | 1.70 | 1.17 | 1.13 | 1.09 | |||||||||||||||
Other Data | ||||||||||||||||||||
Mutual fund assets [5] | $ | 55,531 | $ | 43,732 | $ | 32,705 | $ | 28,068 | $ | 22,462 | ||||||||||
Operating Data | ||||||||||||||||||||
Combined ratios | ||||||||||||||||||||
Ongoing Property & Casualty Operations | 90.8 | 89.3 | 93.2 | 95.3 | 96.5 | |||||||||||||||
[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. | |
[2] | 2004 includes a $23 after-tax charge related to the cumulative effect of accounting change for the Company’s adoption of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. | |
[3] | In 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN 39-1”). The Company recorded the effect of adopting FSP FIN 39-1 as a change in accounting principle through retrospective application. The effect on total assets as of December 31, 2006, 2005, 2004, and 2003 was a decrease of $166, $145, $150 and $86, respectively. | |
[4] | As a result of the net loss for the year ended December 31, 2003, FASB 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. | |
[5] | 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 in the Company’s balance sheet. |
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AND RESULTS OF OPERATIONS
Overview | 32 | |||
Critical Accounting Estimates | 33 | |||
Consolidated Results of Operations | 48 | |||
Life | 54 | |||
Retail | 62 | |||
Retirement Plans | 65 | |||
Institutional | 67 | |||
Individual Life | 69 | |||
Group Benefits | 71 | |||
International | 73 | |||
Other | 75 | |||
Property & Casualty | 76 | |||
Total Property & Casualty | 99 | |||
Ongoing Operations | 100 | |||
Personal Lines | 106 | |||
Small Commercial | 113 | |||
Middle Market | 118 | |||
Specialty Commercial | 123 | |||
Other Operations (Including Asbestos and Environmental Claims) | 128 | |||
Investments | 136 | |||
Investment Credit Risk | 145 | |||
Capital Markets Risk Management | 155 | |||
Capital Resources and Liquidity | 164 | |||
Impact of New Accounting Standards | 170 |
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Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Reserve Line of Business | ||||||||||||||||||||||||||||
Property | $ | 257 | $ | 5 | $ | 54 | $ | 39 | $ | 355 | $ | — | $ | 355 | ||||||||||||||
Auto physical damage | 32 | 6 | 7 | 11 | 56 | — | 56 | |||||||||||||||||||||
Auto liability | 1,636 | 286 | 285 | 119 | 2,326 | — | 2,326 | |||||||||||||||||||||
Package business | — | 1,088 | 843 | 134 | 2,065 | — | 2,065 | |||||||||||||||||||||
Workers’ compensation | 6 | 1,815 | 2,214 | 2,115 | 6,150 | — | 6,150 | |||||||||||||||||||||
General liability | 27 | 91 | 865 | 1,399 | 2,382 | — | 2,382 | |||||||||||||||||||||
Professional liability | — | — | — | 564 | 564 | — | 564 | |||||||||||||||||||||
Fidelity and surety | — | — | — | 181 | 181 | — | 181 | |||||||||||||||||||||
Assumed reinsurance [1] | — | — | — | — | — | 724 | 724 | |||||||||||||||||||||
All other non-A&E | — | — | — | — | — | 1,164 | 1,164 | |||||||||||||||||||||
A&E | 3 | 2 | 6 | 4 | 15 | 2,249 | 2,264 | |||||||||||||||||||||
Total reserves-net | 1,961 | 3,293 | 4,274 | 4,566 | 14,094 | 4,137 | 18,231 | |||||||||||||||||||||
Reinsurance and other recoverables | 81 | 177 | 413 | 2,317 | 2,988 | 934 | 3,922 | |||||||||||||||||||||
Total reserves-gross | $ | 2,042 | $ | 3,470 | $ | 4,687 | $ | 6,883 | $ | 17,082 | $ | 5,071 | $ | 22,153 | ||||||||||||||
[1] | These net loss and loss adjustment expense reserves relate to assumed reinsurance that was 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 | |
• | For ALAE, the Company analyzes ALAE on claims in suit and associated legal expenses separately from ALAE on other claims. |
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Individual Variable Annuities — | Individual Variable Annuities — | |||||||||||||||||||||||
U.S. | Japan | Individual Life | ||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||||||
DAC | $ | 4,982 | $ | 4,420 | $ | 1,760 | $ | 1,430 | $ | 2,309 | $ | 2,013 | ||||||||||||
Sales Inducements | $ | 390 | $ | 352 | $ | 8 | $ | 2 | $ | 20 | $ | 8 | ||||||||||||
URR | $ | 124 | $ | 98 | $ | — | $ | — | $ | 816 | $ | 605 | ||||||||||||
SOP 03-1 reserves | $ | 527 | $ | 475 | $ | 42 | $ | 35 | $ | 19 | $ | 7 | ||||||||||||
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Death and | ||||||||||||||||||||
DAC | Unearned | Income | Sales | |||||||||||||||||
Segment | and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total [2] | |||||||||||||||
Retail | $ | 180 | $ | (5 | ) | $ | (4 | ) | $ | 9 | $ | 180 | ||||||||
Retirement Plans | (9 | ) | — | — | — | (9 | ) | |||||||||||||
Institutional | 1 | — | — | — | 1 | |||||||||||||||
Individual Life | 24 | (8 | ) | — | — | 16 | ||||||||||||||
International — Japan | 16 | — | 6 | — | 22 | |||||||||||||||
Corporate | 3 | — | — | — | 3 | |||||||||||||||
Total | $ | 215 | $ | (13 | ) | $ | 2 | $ | 9 | $ | 213 | |||||||||
[1] | As a result of the unlock, death benefit reserves, in Retail, decreased $4, pre-tax, offset by a decrease of $10, pre-tax, in reinsurance recoverables. | |
[2] | The following were the most significant contributors to the unlock amounts recorded during the third quarter of 2007: |
• | Actual separate account returns were above our aggregated estimated return. | ||
• | During the third quarter of 2007, the Company estimated gross profits using the mean of EGPs derived from a set of stochastic scenarios that have been calibrated to our estimated separate account return as compared to prior year where we used a single deterministic estimation. The impact of this change in estimation was a benefit of $13, after-tax, for Japan variable annuities and $20, after-tax, for U.S. variable annuities. | ||
• | As part of its continual enhancement to its assumption setting processes and in connection with its assumption study, the Company included dynamic lapse behavior assumptions. Dynamic lapses reflect that lapse behavior will be different depending upon market movements. The impact of this assumption change along with other base lapse rate changes was an approximate benefit of $40, after-tax, for U.S. variable annuities. |
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Death and | ||||||||||||||||||||
DAC | Unearned | Income | Sales | |||||||||||||||||
Segment | and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total | |||||||||||||||
Retail | $ | (116 | ) | $ | 5 | $ | (10 | ) | $ | 3 | $ | (118 | ) | |||||||
Retirement Plans | 20 | — | — | — | 20 | |||||||||||||||
Individual Life | (49 | ) | 31 | — | — | (18 | ) | |||||||||||||
International — Japan | 26 | — | 27 | — | 53 | |||||||||||||||
Corporate | (13 | ) | — | — | — | (13 | ) | |||||||||||||
Total | $ | (132 | ) | $ | 36 | $ | 17 | $ | 3 | $ | (76 | ) | ||||||||
[1] | As a result of the unlock, death benefit reserves, in Retail, increased $294, pre-tax, offset by an increase of $279, pre-tax, in reinsurance recoverables. |
Effect on | ||||
EGP-related | ||||
(Increasing separate account returns and decreasing lapse rates generally result in | balances if | |||
benefits. Decreasing separate account returns and increasing lapse rates generally | unlocked | |||
result in charges.) | (after-tax) [1] | |||
If actual separate account returns were 1% above or below our aggregated estimated return | $ | 15 — $30 [3] | ||
If actual lapse rates were 1% above or below our estimated aggregate lapse rate | $ | 10 — $25 [2] | ||
If we changed our future separate account return rate by 1% from our aggregated estimated future return | $ | 80 — $100 | ||
If we changed our future lapse rate by 1% from our estimated aggregate future lapse rate | $ | 70 — $90 [2] | ||
Effect on | ||||
EGP-related | ||||
(Increasing separate account returns and decreasing lapse rates generally result in | balances if | |||
benefits. Decreasing separate account returns and increasing lapse rates generally | unlocked | |||
result in charges.) | (after-tax) [1] | |||
If actual separate account returns were 1% above or below our aggregated estimated return | $ | 1 — $5 [4] | ||
If actual lapse rates were 1% above or below our estimated aggregate lapse rate | $ | 1 — $5 [2] | ||
If we changed our future separate account return rate by 1% from our aggregated estimated future return | $ | 15 — $25 | ||
If we changed our future lapse rate by 1% from our estimated aggregate future lapse rate | $ | 10 — $20 [2] | ||
[1] | These sensitivities are reflective of the results of our 2007 assumption studies. The Company’s EGP models assume that separate account returns are earned linearly and that lapses occur linearly (except for certain dynamic lapse features) throughout the year. Similarly, the sensitivities assume that differential separate account and lapse rates are linear and parallel and persist for one year from the date of our third quarter unlock, which reflects all in-force and account value data as of July 31, 2007, including the corresponding market levels, allocation of funds, policyholder behavior and actuarial assumptions at that same date. 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. | |
[3] | The overall actual return generated by the U.S. variable annuity separate accounts is dependent on several factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds as well as equity sector weightings and as a result of the large proportion of separate account assets invested in U.S. equity markets, the Company’s overall U.S. separate account fund performance has been reasonably correlated to the overall performance of the S&P 500 although no assurance can be provided that this correlation will continue in the future. | |
[4] | The overall actual return generated by the Japan variable annuity separate accounts is influenced by the variable annuity products offered in Japan as well as the wide variety of funds offered within the sub-accounts of those products. The actual return is also dependent upon the relative mix of the underlying sub-accounts among the funds. Unlike in the U.S., there is no global index or market that reasonably correlates with the overall Japan actual separate account fund performance. |
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2007 | 2006 | |||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||
of Total | of Total | |||||||||||||||||||
Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||||||
Priced via third party pricing services | $ | 66,771 | 83.4 | % | $ | 69,023 | 87.3 | % | ||||||||||||
Priced via independent broker quotations | 7,561 | 9.4 | % | 4,309 | 5.4 | % | ||||||||||||||
Priced via matrices | 5,426 | 6.8 | % | 5,605 | 7.1 | % | ||||||||||||||
Priced via other methods | 297 | 0.4 | % | 137 | 0.2 | % | ||||||||||||||
Total | $ | 80,055 | 100.0 | % | $ | 79,074 | 100.0 | % | ||||||||||||
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For the Years Ended December 31, | ||||||||||||
Operating Summary | 2007 | 2006 | 2005 | |||||||||
Earned premiums | $ | 15,619 | $ | 15,023 | $ | 14,359 | ||||||
Fee income | 5,436 | 4,739 | 4,012 | |||||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 5,214 | 4,691 | 4,384 | |||||||||
Equity securities held for trading [1] | 145 | 1,824 | 3,847 | |||||||||
Total net investment income | 5,359 | 6,515 | 8,231 | |||||||||
Other revenues | 496 | 474 | 464 | |||||||||
Net realized capital gains (losses) | (994 | ) | (251 | ) | 17 | |||||||
Total revenues | 25,916 | 26,500 | 27,083 | |||||||||
Benefits, losses and loss adjustment expenses [1] | 14,064 | 15,042 | 16,776 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 2,989 | 3,558 | 3,169 | |||||||||
Insurance operating costs and expenses | 3,894 | 3,252 | 3,227 | |||||||||
Interest expense | 263 | 277 | 252 | |||||||||
Other expenses | 701 | 769 | 674 | |||||||||
Total benefits, losses and expenses | 21,911 | 22,898 | 24,098 | |||||||||
Income before income taxes | 4,005 | 3,602 | 2,985 | |||||||||
Income tax expense | 1,056 | 857 | 711 | |||||||||
Net income | $ | 2,949 | $ | 2,745 | $ | 2,274 | ||||||
[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. |
Net Income (Loss) by Operation and Life Segment | 2007 | 2006 | 2005 | |||||||||
Life | ||||||||||||
Retail | $ | 812 | $ | 536 | $ | 595 | ||||||
Retirement Plans | 61 | 101 | 82 | |||||||||
Institutional | 17 | 78 | 115 | |||||||||
Individual Life | 182 | 150 | 173 | |||||||||
Group Benefits | 315 | 298 | 266 | |||||||||
International | 223 | 231 | 75 | |||||||||
Other | (52 | ) | 47 | (102 | ) | |||||||
Total Life | 1,558 | 1,441 | 1,204 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | 1,477 | 1,554 | 1,165 | |||||||||
Other Operations | 30 | (35 | ) | 71 | ||||||||
Total Property & Casualty | 1,507 | 1,519 | 1,236 | |||||||||
Corporate | (116 | ) | (215 | ) | (166 | ) | ||||||
Net income | $ | 2,949 | $ | 2,745 | $ | 2,274 | ||||||
Ongoing Operations Underwriting Results by Segment | 2007 | 2006 | 2005 | |||||||||
Personal Lines | $ | 322 | $ | 429 | $ | 460 | ||||||
Small Commercial | 508 | 422 | 232 | |||||||||
Middle Market | 144 | 207 | 163 | |||||||||
Specialty Commercial | (5 | ) | 53 | (164 | ) | |||||||
Total Ongoing Operations | $ | 969 | $ | 1,111 | $ | 691 | ||||||
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• | The DAC unlock benefit of $210 recorded in the third quarter of 2007. | |
• | Increased income on asset growth in the variable annuity, mutual fund, retirement and institutional businesses. | |
• | Increased net investment income, primarily due to strong partnership income. |
• | Increased non-deferrable individual annuity asset based commissions. | |
• | Unfavorable mortality in Individual Life. | |
• | Increased DAC amortization in Group Benefits due to the adoption of Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). | |
• | During the first quarter of 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 and therefore, released a reserve for these matters of $34, after-tax. | |
• | Realized losses increased for the year ended December 31, 2007 as compared to the comparable prior year periods primarily due to net losses on GMWB derivatives and impairments. |
• | Ongoing Operations’ net income decreased by $77, primarily due to a $92 after-tax decrease in underwriting results and a change from net realized capital gains of $29, after-tax, in 2006 to net realized capital losses of $104, after-tax, in 2007. The decrease in underwriting results and the change to net realized capital losses was partially offset by a $150 after-tax increase in net investment income. The decrease in underwriting results was primarily driven by an increase in the loss and loss adjustment expense ratio before catastrophes and prior accident year development and an increase in insurance and operating costs and dividends, partially offset by a reduction in prior accident year reserves for workers’ compensation business. | |
• | Other Operations reported net income of $30 in 2007 compared to a net loss of $35 in 2006. The improvement in results was primarily due to a decrease in unfavorable prior accident year reserve development, partially offset by a change from net realized gains in 2006 to net realized losses in 2007 and a decrease in net investment income. |
• | 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. |
• | 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. |
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• | 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 unlock. See Unlock and Sensitivity Analysis within the Critical Accounting Estimates section of the MD&A for further information on the unlock. |
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2007 | 2006 | 2005 | ||||||||||
Basic earnings per share | $ | 9.32 | $ | 8.89 | $ | 7.63 | ||||||
Diluted earnings per share | $ | 9.24 | $ | 8.69 | $ | 7.44 | ||||||
Weighted average common shares outstanding (basic) | 316.3 | 308.8 | 298.0 | |||||||||
Weighted average common shares outstanding and dilutive potential common shares (diluted) | 319.1 | 315.9 | 305.6 | |||||||||
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As of and for the years ended December 31, | ||||||||||||
Product/Key Indicator Information | 2007 | 2006 | 2005 | |||||||||
Retail U.S. Individual Variable Annuities | ||||||||||||
Account value, beginning of period | $ | 114,365 | $ | 105,314 | $ | 99,617 | ||||||
Net flows | (2,733 | ) | (3,150 | ) | (881 | ) | ||||||
Change in market value and other | 7,439 | 12,201 | 6,578 | |||||||||
Account value, end of period | $ | 119,071 | $ | 114,365 | $ | 105,314 | ||||||
Retail Mutual Funds | ||||||||||||
Assets under management, beginning of period | $ | 38,536 | $ | 29,063 | $ | 25,240 | ||||||
Net sales | 5,545 | 5,659 | 1,335 | |||||||||
Change in market value and other | 4,302 | 3,814 | 2,488 | |||||||||
Assets under management, end of period | $ | 48,383 | $ | 38,536 | $ | 29,063 | ||||||
Retirement Plans | ||||||||||||
Account value, beginning of period | $ | 23,575 | $ | 19,317 | $ | 16,493 | ||||||
Net flows | 1,669 | 2,545 | 1,618 | |||||||||
Change in market value and other | 1,850 | 1,713 | 1,206 | |||||||||
Account value, end of period | $ | 27,094 | $ | 23,575 | $ | 19,317 | ||||||
Individual Life | ||||||||||||
Variable universal life account value, end of period | $ | 7,284 | $ | 6,637 | $ | 5,902 | ||||||
Total life insurance in-force | 179,483 | 164,227 | 150,801 | |||||||||
International — Japan Annuities | ||||||||||||
Account value, beginning of period | $ | 31,343 | $ | 26,104 | $ | 14,631 | ||||||
Net flows | 4,525 | 4,393 | 10,857 | |||||||||
Change in market value, currency translation and other | 1,769 | 846 | 616 | |||||||||
Account value, end of period | $ | 37,637 | $ | 31,343 | $ | 26,104 | ||||||
S&P 500 Index | ||||||||||||
Year end closing value | 1,468 | 1,418 | 1,248 | |||||||||
Daily average value | 1,477 | 1,310 | 1,208 | |||||||||
• | Increases in Retail U.S. individual variable annuity account values as of December 31, 2007 can be primarily attributed to market growth during the year and improved net flows due to an increase in sales. | |
• | In addition to strong positive net flows, market appreciation and diversified sales growth during the year contributed to Retail mutual funds assets under management growth. | |
• | Retirement Plans account values increased for the year ended December 31, 2007 due to positive net flows driven by ongoing contributions and market appreciation during the year. | |
• | Individual Life variable universal life account values increased primarily due to market appreciation and positive net flows. Life insurance in-force increased from the prior periods due to business growth. | |
• | International — Japan annuity account values continue to grow as a result of positive net flows and a strengthening of the yen versus the dollar offset by a decline in market performance throughout the year. |
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• | The increase in Retail U.S. individual variable annuity account values can be attributed primarily to market growth during 2006. | |
• | Net flows for the Retail U.S. individual variable annuity business were negative and have worsened from prior year levels resulting from higher surrenders outpacing increased deposits due primarily to increased competition in the living benefit market. | |
• | 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 in-force increased from December 31, 2005 due to business growth. | |
• | International — 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. |
For the years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Retail — Individual Annuity | 181.1 bps | 160.3 bps | 160.4 bps | |||||||||
Retirement Plans | 161.0 bps | 146.0 bps | 149.2 bps | |||||||||
Institutional (GIC’s, Funding Agreements, Funding Agreement Backed Notes and Consumer Notes) | 124.0 bps | 82.0 bps | 60.0 bps | |||||||||
Individual Life | 136.7 bps | 124.7 bps | 123.3 bps | |||||||||
• | Retail individual annuity, Retirement Plans, Institutional and Individual Life net investment spreads increased primarily due to a higher allocation of investments in higher yield/higher risk investment classes, including limited partnerships and alternative investments and relative strong performance of this asset class in 2007. |
• | Net investment spreads were virtually unchanged in 2006 as compared to 2005 with the exception of Institutional where increased partnership income increased spread from 2005 to 2006. |
For the years ended December 31, | ||||||||||||
Group Benefits | 2007 | 2006 | 2005 | |||||||||
Total premiums and other considerations | $ | 4,301 | $ | 4,149 | $ | 3,811 | ||||||
Fully insured ongoing sales (excluding buyouts) | 770 | 861 | 779 | |||||||||
Persistency | 87 | % | 87 | % | 87 | % | ||||||
• | Earned premiums and other considerations include $27, $12 and $27 in buyout premiums for the years ended December 31, 2007, 2006 and 2005, respectively. The increase in premiums and other considerations for Group Benefits in 2007 compared to 2006 was driven by growth in the block of business. The increase in premiums and other considerations for Group Benefits in 2006 compared to 2005 was driven by a sales growth of 11%. | |
• | Fully insured ongoing sales, excluding buyouts, declined in 2007 from 2006 primarily due to fewer large national account sales, and the small case competitive environment remained intense. The Company also completed a renewal rights arrangement |
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associated with its medical stop loss business during the second quarter of 2007 eliminating new sales related to this business. In addition, there was an anticipated decrease in association life sales from an unusually high comparable prior year period. The increase in 2006 from 2005 was primarily due to strong national account and association life sales. |
For the years ended December 31, | ||||||||||||
Retail | 2007 | 2006 | 2005 | |||||||||
General insurance expense ratio (individual annuity) | 17.9 | bps | 17.2 | bps | 17.9 | bps | ||||||
DAC amortization ratio (individual annuity) | 25.5 | % | 65.3 | % | 51.1 | % | ||||||
DAC amortization ratio (individual annuity) excluding DAC unlock [1] | 47.9 | % | 52.4 | % | 51.1 | % | ||||||
Insurance expenses, net of deferrals | $ | 1,221 | $ | 994 | $ | 867 | ||||||
Individual Life | ||||||||||||
Death benefits | $ | 298 | $ | 251 | $ | 241 | ||||||
Insurance expenses, net of deferrals | $ | 193 | $ | 179 | $ | 166 | ||||||
Group Benefits | ||||||||||||
Total benefits and losses | $ | 3,109 | $ | 3,002 | $ | 2,794 | ||||||
Loss ratio (excluding buyout premiums) | 72.1 | % | 72.3 | % | 73.1 | % | ||||||
Insurance expenses, net of deferrals | $ | 1,131 | $ | 1,101 | $ | 1,022 | ||||||
Expense ratio (excluding buyout premiums) | 27.9 | % | 27.6 | % | 27.8 | % | ||||||
International — Japan | ||||||||||||
General insurance expense ratio | 48.4 | bps | 49.1 | bps | 68.2 | bps | ||||||
DAC amortization ratio | 35.3 | % | 30.2 | % | 45.5 | % | ||||||
DAC amortization ratio excluding DAC unlock [1] | 40.0 | % | 40.7 | % | 45.5 | % | ||||||
Insurance expenses, net of deferrals | $ | 192 | $ | 160 | $ | 148 | ||||||
[1] | See Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A |
• | Retail individual annuity general insurance expense ratio increased in 2007 primarily due to higher service and technology costs. | |
• | The Retail DAC amortization ratio (individual annuity) excluding DAC unlock declined in 2007, primarily due to the unlock charge recorded in 2006. DAC unlock charges generally have the effect of reducing future DAC amortization rates. Retail expects the DAC amortization ratio to be between 41% and 46% until the next unlock in 2008. | |
• | Retail insurance expenses, net of deferrals, increased due to increasing trail commissions on growing variable annuity assets as well as increasing non-deferrable commissions on strong mutual fund deposits. | |
• | Individual Life death benefits increased in 2007 primarily due to a larger life insurance in-force and unfavorable mortality. | |
• | Group Benefits expense ratio, excluding buyouts, increased in 2007 primarily due to higher DAC amortization. | |
• | International — Japan general insurance expense ratio declined in 2007 as Japan further leveraged the existing infrastructure as it attains economies of scale. |
• | Retail individual annuity asset growth in 2006 decreased it’s expense ratio to a level lower than prior years. | |
• | Individual Life death benefits increased 4% in 2006 primarily due to a larger insurance in-force. Individual Life insurance expenses, net of deferrals increased 8% for 2006 consistent with the growth of life insurance in-force. | |
• | 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. | |
• | International — Japan’s expense ratio declined in 2006 as Japan further leveraged the existing infrastructure as it attains economies of scale. |
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Ratios | 2007 | 2006 | 2005 | |||||||||
Retail | ||||||||||||
Individual annuity return on assets (“ROA”) | 58.9 bps | 39.9 bps | 51.9 bps | |||||||||
Effect of net realized gains (losses), net of tax and DAC on ROA [1] | (13.3) bps | (7.4) bps | (2.2) bps | |||||||||
Effect of DAC unlock on ROA [2] | 15.6 bps | (6.0) bps | — | |||||||||
ROA excluding realized gains (losses) and DAC unlock | 56.6 bps | 53.3 bps | 54.1 bps | |||||||||
Retirement Plans | ||||||||||||
Retirement Plans return on assets (“ROA”) | 22.9 bps | 44.7 bps | 42.7 bps | |||||||||
Effect of net realized gains (losses), net of tax and DAC on ROA [1] | (10.5) bps | (3.1) bps | 3.1 bps | |||||||||
Effect of DAC unlock on ROA [2] | (3.4) bps | 8.9 bps | — | |||||||||
ROA excluding realized gains (losses) and DAC unlock | 36.8 bps | 38.9 bps | 39.6 bps | |||||||||
Institutional | ||||||||||||
Institutional return on assets (“ROA”) | 3.0 bps | 16.6 bps | 28.4 bps | |||||||||
Effect of net realized gains (losses), net of tax and DAC on ROA [1] | (21.5) bps | (5.1) bps | 5.7 bps | |||||||||
Effect of DAC unlock on ROA [2] | 0.2 bps | — | — | |||||||||
ROA excluding realized gains (losses) and DAC unlock | 24.3 bps | 21.7 bps | 22.7 bps | |||||||||
Individual Life | ||||||||||||
After-tax margin | 16.0 | % | 13.3 | % | 15.9 | % | ||||||
Effect of net realized gains (losses), net of tax and DAC on after-tax margin [1] | (1.3 | %) | (1.5 | %) | 1.0 | % | ||||||
Effect of DAC unlock on after-tax margin [2] | 1.4 | % | (1.6 | %) | — | |||||||
After-tax margin excluding realized gains (losses) and DAC unlock | 15.9 | % | 16.4 | % | 14.9 | % | ||||||
Group Benefits | ||||||||||||
After-tax margin (excluding buyouts) | 6.7 | % | 6.6 | % | 6.4 | % | ||||||
Effect of net realized gains (losses), net of tax on after-tax margin (excluding buyouts) [1] | (0.4 | %) | (0.1 | %) | (0.1 | %) | ||||||
After-tax margin (excluding buyouts) excluding realized gains (losses) | 7.1 | % | 6.7 | % | 6.5 | % | ||||||
International — Japan | ||||||||||||
International — Japan return on assets (“ROA”) | 73.4 bps | 87.7 bps | 49.6 bps | |||||||||
Effect of net realized gains (losses) excluding net periodic settlements, net of tax and DAC on ROA [1] [3] | (8.1) bps | (5.6) bps | (9.3) bps | |||||||||
Effect of DAC unlock on ROA [2] | 6.4 bps | 18.5 bps | — | |||||||||
ROA excluding realized gains (losses) and DAC unlock | 75.1 bps | 74.8 bps | 58.9 bps | |||||||||
[1] | See “Realized Capital Gains and Losses by Segment” table within the Life Section of the MD&A. | |
[2] | See Unlock and Sensitivity Analysis within the Critical Accounting Estimates section of the MD&A. | |
[3] | Included in net realized gain (losses) are amounts that represent the net periodic accruals on currency rate swaps used in the risk management of Japan fixed annuity products. |
• | The increase in Retail individual annuity’s ROA, excluding realized gain (losses) and DAC unlock, was primarily due to increased net investment income on allocated capital and an increase in partnership income. This was partially offset by an increase in the effective tax rate as a result of revisions in the estimates of the separate account DRD and FTC. |
• | The decrease in Retirement Plan’s ROA, excluding realized gains (losses) and DAC unlock, was primarily due to a shift in product mix resulting in lower fees as a percent of assets. |
• | The increase in Institutional’s ROA, excluding realized gains (losses) and DAC unlock, is primarily due to an increase in partnership income and increased net investment income on allocated capital. |
• | Individual Life’s decrease in after-tax margin, excluding realized gains (losses) and DAC unlock, is primarily due to unfavorable mortality experience in 2007 compared to 2006. |
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• | The increase in the Group Benefits after-tax margin, excluding buyouts, excluding realized gains (losses), was due to an improvement in the loss ratio, partially offset by higher DAC amortization. |
• | The decrease in Retail individual annuity’s ROA, excluding realized gain (losses) and DAC unlock, was primarily due to an increase in trail commissions in 2006. |
• | The decrease in Retirement Plan’s ROA, excluding realized gains (losses) and DAC unlock, was primarily due to higher maintenance expenses in 2006. |
• | The decrease in Institutional’s ROA, excluding realized gains (losses) and DAC unlock, is primarily due to higher maintenance expense in 2006. |
• | Individual Life’s after-tax margin, excluding realized gains (losses) and DAC unlock, increased primarily due to favorable mortality experience in 2006 compared to 2005 as well as favorable revisions to DAC estimates reflected in the first half of 2006. |
• | The improvement in the Group Benefits after-tax margin, excluding realized gains (losses) and DAC unlock, for 2006 was primarily due to an improvement in the loss ratio, including the release of certain life reserves, partially offset by higher income tax expense. |
• | International’s ROA, excluding realized gains (losses) and DAC unlock, increased significantly in 2006 primarily due to the leveraging of its existing infrastructure through disciplined expense management. |
Life Operating Summary | 2007 | 2006 | 2005 | |||||||||
Earned premiums | $ | 5,123 | $ | 4,590 | $ | 4,203 | ||||||
Fee income | 5,420 | 4,726 | 4,000 | |||||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 3,497 | 3,184 | 2,998 | |||||||||
Equity securities held for trading [1] | 145 | 1,824 | 3,847 | |||||||||
Total net investment income | 3,642 | 5,008 | 6,845 | |||||||||
Net realized capital losses | (819 | ) | (260 | ) | (25 | ) | ||||||
Total revenues | 13,366 | 14,064 | 15,023 | |||||||||
Benefits, losses and loss adjustment expenses [1] | 7,147 | 8,040 | 9,809 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 884 | 1,452 | 1,172 | |||||||||
Insurance operating costs and other expenses | 3,230 | 2,708 | 2,522 | |||||||||
Total benefits, losses and expenses | 11,261 | 12,200 | 13,503 | |||||||||
Income before income taxes | 2,105 | 1,864 | 1,520 | |||||||||
Income tax expense | 547 | 423 | 316 | |||||||||
Net income | $ | 1,558 | $ | 1,441 | $ | 1,204 | ||||||
[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. |
• | The DAC unlock benefit of $210 recorded in the third quarter of 2007. |
• | Increased income on asset growth in the variable annuity, mutual fund, retirement and institutional businesses. |
• | Increased net investment income, primarily due to strong partnership income. |
• | Increased non-deferrable individual annuity asset based commissions. |
• | Unfavorable mortality in Individual Life. |
• | Increased DAC amortization in Group Benefits due to the adoption of SOP 05-1. |
• | During the first quarter of 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 and therefore, released a reserve for these matters of $34, after-tax. |
• | Realized losses increased for the year ended December 31, 2007 as compared to the comparable prior year periods primarily due to net losses on GMWB derivatives and impairments. |
• | 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. |
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• | 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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Japanese | Periodic net | ||||||||||||||||||||||||||||||||
fixed | coupon | Total | |||||||||||||||||||||||||||||||
annuity | settlements | U.S. GMWB | gains/losses, | ||||||||||||||||||||||||||||||
Gains/losses | contract | on credit | derivatives, | Other, | net of tax | ||||||||||||||||||||||||||||
on sales, net | Impairments | hedges, net | derivatives/Japan | net | net | Total | and DAC | ||||||||||||||||||||||||||
Retail | $ | 17 | $ | (87 | ) | $ | — | $ | 1 | $ | (277 | ) | $ | (35 | ) | $ | (381 | ) | $ | (169 | ) | ||||||||||||
Retirement Plans | (11 | ) | (22 | ) | — | — | — | (8 | ) | (41 | ) | (28 | ) | ||||||||||||||||||||
Institutional | 13 | (148 | ) | — | 3 | — | (56 | ) | (188 | ) | (121 | ) | |||||||||||||||||||||
Individual Life | 7 | (21 | ) | — | — | — | (14 | ) | (28 | ) | (15 | ) | |||||||||||||||||||||
Group Benefits | 8 | (19 | ) | — | — | — | (19 | ) | (30 | ) | (18 | ) | |||||||||||||||||||||
International | — | (48 | ) | 18 | (68 | ) | — | (18 | ) | (116 | ) | (64 | ) | ||||||||||||||||||||
Other | 11 | (13 | ) | — | 24 | — | (57 | ) | (35 | ) | (31 | ) | |||||||||||||||||||||
Total | $ | 45 | $ | (358 | ) | $ | 18 | $ | (40 | ) | $ | (277 | ) | $ | (207 | ) | $ | (819 | ) | $ | (446 | ) | |||||||||||
Japanese | |||||||||||||||||||||||||||||||||
fixed | Periodic net | Total | |||||||||||||||||||||||||||||||
annuity | coupon settlements | U.S. GMWB | gains/losses, | ||||||||||||||||||||||||||||||
Gains/losses | contract | on credit | derivatives, | Other, | net of tax | ||||||||||||||||||||||||||||
on sales, net | Impairments | hedges, net | derivatives/Japan | net | net | Total | and DAC | ||||||||||||||||||||||||||
Retail | $ | (44 | ) | $ | (6 | ) | $ | — | $ | 3 | $ | (26 | ) | $ | (14 | ) | $ | (87 | ) | $ | (90 | ) | |||||||||||
Retirement Plans | (9 | ) | (6 | ) | — | — | — | (1 | ) | (16 | ) | (7 | ) | ||||||||||||||||||||
Institutional | 23 | (32 | ) | — | 1 | — | (29 | ) | (37 | ) | (24 | ) | |||||||||||||||||||||
Individual Life | (1 | ) | (18 | ) | — | (1 | ) | — | (5 | ) | (25 | ) | (17 | ) | |||||||||||||||||||
Group Benefits | (6 | ) | (3 | ) | — | 1 | — | (5 | ) | (13 | ) | (8 | ) | ||||||||||||||||||||
International | (4 | ) | (2 | ) | (17 | ) | (63 | ) | — | (2 | ) | (88 | ) | (47 | ) | ||||||||||||||||||
Other | (1 | ) | (9 | ) | — | 11 | — | 5 | 6 | 5 | |||||||||||||||||||||||
Total | $ | (42 | ) | $ | (76 | ) | $ | (17 | ) | $ | (48 | ) | $ | (26 | ) | $ | (51 | ) | $ | (260 | ) | $ | (188 | ) | |||||||||
Japanese | |||||||||||||||||||||||||||||||||
fixed | Periodic net | Total | |||||||||||||||||||||||||||||||
annuity | coupon settlements | U.S. GMWB | gains/losses, | ||||||||||||||||||||||||||||||
Gains/losses | contract | on credit | derivatives, | Other, | net of tax | ||||||||||||||||||||||||||||
on sales, net | Impairments | hedges, net | derivatives/Japan | net | net | Total | and DAC | ||||||||||||||||||||||||||
Retail | $ | 50 | $ | (15 | ) | $ | — | $ | 1 | $ | (46 | ) | $ | (28 | ) | $ | (38 | ) | $ | (24 | ) | ||||||||||||
Retirement Plans | 19 | (3 | ) | — | — | — | (2 | ) | 14 | 6 | |||||||||||||||||||||||
Institutional | 23 | (7 | ) | — | 1 | — | 19 | 36 | 23 | ||||||||||||||||||||||||
Individual Life | 14 | (4 | ) | — | — | — | 7 | 17 | 11 | ||||||||||||||||||||||||
Group Benefits | (2 | ) | (8 | ) | — | — | — | — | (10 | ) | (7 | ) | |||||||||||||||||||||
International | (13 | ) | — | (36 | ) | (34 | ) | — | 19 | (64 | ) | (37 | ) | ||||||||||||||||||||
Other | 1 | — | — | — | — | 19 | 20 | 14 | |||||||||||||||||||||||||
Total | $ | 92 | $ | (37 | ) | $ | (36 | ) | $ | (32 | ) | $ | (46 | ) | $ | 34 | $ | (25 | ) | $ | (14 | ) | |||||||||||
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• | Across all lines of business, impairments increased $282 in 2007 primarily due to an increase in credit related other than temporary impairments taken on ABS securities backed by subprime residential mortgage loans and securities in the financial services and building sectors. For further discussion, see the Other-Than-Temporary Impairments discussion within Investment section of the MD&A. |
• | Retail losses on GMWB rider embedded derivatives increased $251 primarily due to liability model assumption updates and modeling refinements made in 2007, including those for dynamic lapse behavior and correlations of market returns across underlying indices, as well as those to reflect newly reliable market inputs for volatility. |
• | Across all lines of business, Other net losses increased $156 in 2007 primarily resulted from the change in value of non-qualifying derivatives due to fluctuations in credit spreads, interest rates, and equity markets. The increase in net losses in 2007 compared to the prior year was primarily due to changes in value associated with credit derivatives due to credit spreads widening. Credit spreads widened primarily due to the deterioration in the US housing market, tightened lending conditions, reduction of risk appetite as well as increased likelihood of a U.S. recession. For further discussion, see the “Capital Market Risk Management” section of the MD&A. | |
• | The net gains on sales resulted primarily from changes in credit spreads, foreign currency exchanges rates and interest rates from the date of purchase. For further discussion of gross gains and losses, see “Investment Results” in the Investments section of the MD&A. |
• | Retail losses decreased $20 on GMWB derivatives, 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”. |
• | International losses on periodic net coupons from currency swaps increased $29 primarily due to increased fixed annuity assets. |
• | 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 pre-tax benefit of $25 received from the WorldCom security settlement. |
• | Across all lines of business, other-than-temporary impairments were primarily recorded on corporate fixed maturities. For further discussion, see the Other-Than-Temporary Impairments section within the Investments section of the MD&A. |
• | The net losses on sales were derived by fixed maturities for the year ended December 31, 2006 and 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 “Investment Results” in the Investments section of the MD&A. |
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Operating Summary | 2007 | 2006 | 2005 | |||||||||
Fee income and other | $ | 3,117 | $ | 2,695 | $ | 2,324 | ||||||
Earned premiums | (62 | ) | (86 | ) | (52 | ) | ||||||
Net investment income | 801 | 839 | 933 | |||||||||
Net realized capital losses | (381 | ) | (87 | ) | (38 | ) | ||||||
Total revenues | 3,475 | 3,361 | 3,167 | |||||||||
Benefits, losses and loss adjustment expenses | 820 | 819 | 895 | |||||||||
Insurance operating costs and other expenses | 1,221 | 994 | 867 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 406 | 973 | 740 | |||||||||
Total benefits, losses and expenses | 2,447 | 2,786 | 2,502 | |||||||||
Income before income taxes | 1,028 | 575 | 665 | |||||||||
Income tax expense | 216 | 39 | 70 | |||||||||
Net income | $ | 812 | $ | 536 | $ | 595 | ||||||
Assets Under Management | 2007 | 2006 | 2005 | |||||||||
Individual variable annuity account values | $ | 119,071 | $ | 114,365 | $ | 105,314 | ||||||
Individual fixed annuity and other account values | 10,243 | 9,937 | 10,222 | |||||||||
Other retail products account values | 677 | 525 | 336 | |||||||||
Total account values [1] | 129,991 | 124,827 | 115,872 | |||||||||
Retail mutual fund assets under management | 48,383 | 38,536 | 29,063 | |||||||||
Other mutual fund assets under management | 2,113 | 1,489 | 1,004 | |||||||||
Total mutual fund assets under management | 50,496 | 40,025 | 30,067 | |||||||||
Total assets under management | $ | 180,487 | $ | 164,852 | $ | 145,939 | ||||||
[1] | Includes policyholders’ balances for investment contracts and reserve for future policy benefits for insurance contracts. |
• | Fee income increased for the year ended December 31, 2007 primarily as a result of growth in variable annuity average account values. The year-over-year increase in average variable annuity account values can be attributed to market appreciation of $7.4 billion during the year. Variable annuities had net outflows of $2.7 billion in 2007. Net outflows were driven by surrender activity due to the aging of the variable annuity inforce block of business and increased sales competition, particularly competition related to guaranteed living benefits. |
• | Mutual fund fee income increased 23% for the year ended December 31, 2007 due to increased assets under management driven by net sales of $5.5 billion and market appreciation of $4.4 billion during 2007. |
• | Net investment income has declined for the year ended December 31, 2007 due to a decrease in variable annuity fixed option account values of 11% or $635. The decrease in these account values can be attributed to a combination of transfers into separate accounts and surrender activity. Offsetting this decrease in net investment income was an increase in the returns on partnership income of $14 for the year ended December 31, 2007. |
• | Insurance operating costs and other expenses increased for the year ended December 31, 2007. These increases were principally driven by mutual fund commission increases of $75 for the year ended December 31, 2007 due to growth in deposits of 29%. In addition, non-deferrable variable annuity asset based commissions increased $67 for the year ended December 31, 2007 due to a 4% growth in assets under management, as well as an increase in the number of contracts reaching anniversaries when trail commission payments begin. |
• | Lower amortization of DAC resulted from the unlock benefit during the third quarter of 2007 as compared to an unlock expense during the fourth quarter of 2006. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
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• | The effective tax rate increased from 7% to 21% for the year ended December 31, 2007 from the prior year due to an increase in income before income taxes and revisions in the estimates of the separate account DRD which resulted in an incremental tax of $17, and foreign tax credits. |
• | 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 variable annuity account values 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. |
• | 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 unlock during the fourth quarter of 2006. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
• | The effective tax rate declined due to separate account DRD and foreign tax credit true-up benefits recorded in 2006. |
• | Variable annuity sales of $12.0 billion to $13.0 billion |
• | Fixed annuity sales of $750 to $1.25 billion |
• | Retail mutual fund sales of $13.5 billion to $15.5 billion |
• | Variable annuity outflows of $4.2 billion to $5.2 billion |
• | Fixed annuity outflows of $0 to $500 |
• | Retail mutual fund net sales of $4.0 billion to $6.0 billion |
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Operating Summary | 2007 | 2006 | 2005 | |||||||||
Fee income and other | $ | 238 | $ | 193 | $ | 152 | ||||||
Earned premiums | 4 | 19 | 10 | |||||||||
Net investment income | 355 | 326 | 311 | |||||||||
Net realized capital gains (losses) | (41 | ) | (16 | ) | 14 | |||||||
Total revenues | 556 | 522 | 487 | |||||||||
Benefits, losses and loss adjustment expenses | 249 | 250 | 231 | |||||||||
Insurance operating costs and other expenses | 170 | 136 | 117 | |||||||||
Amortization of deferred policy acquisition costs | 58 | (4 | ) | 30 | ||||||||
Total benefits, losses and expenses | 477 | 382 | 378 | |||||||||
Income before income taxes | 79 | 140 | 109 | |||||||||
Income tax expense | 18 | 39 | 27 | |||||||||
Net income | $ | 61 | $ | 101 | $ | 82 | ||||||
Assets Under Management | 2007 | 2006 | 2005 | |||||||||
403(b)/457 account values | $ | 12,363 | $ | 11,540 | $ | 10,475 | ||||||
401(k) account values | 14,731 | 12,035 | 8,842 | |||||||||
Total account values [1] | 27,094 | 23,575 | 19,317 | |||||||||
403(b)/457 mutual fund assets under management [2] | 26 | — | 163 | |||||||||
401(k) mutual fund assets under management | 1,428 | 1,140 | 947 | |||||||||
Total mutual fund assets under management | 1,454 | 1,140 | 1,110 | |||||||||
Total assets under management | $ | 28,548 | $ | 24,715 | $ | 20,427 | ||||||
[1] | Includes policyholder balances for investment contracts and reserves for future policy benefits for insurance contracts. | |
[2] | In 2006, 403(b)/457 mutual fund assets declined to zero due to remaining business being transferred to the Institutional segment. In 2007, Life began selling mutual fund based products in the 403(b) market. |
• | Fee income increased for the year ended December 31, 2007 primarily due to an increase in 401(k) average account values. This growth in 401(k) business is primarily driven by positive net flows of $1.8 billion over the past four quarters resulting from strong sales and increased ongoing deposits. Market appreciation contributed an additional $888 to assets under management over the past year. |
• | Net investment income increased for the year ended December 31, 2007 for 403(b)/457 business due to growth in general account assets along with an increase in return on partnership investments. |
• | Insurance operating costs and other expenses increased for the year ended December 31, 2007, primarily attributable to greater assets under management aging beyond their first year resulting in higher trail commissions. Also contributing to higher insurance operating costs for the year ended December 31, 2007 were higher service and technology costs. |
• | Benefits, losses and loss adjustment expenses and earned premiums decreased for the year ended December 31, 2007 primarily due to a large case annuitization in the 401(k) business of $12 which occurred in the first quarter of 2006. This decrease was partially offset by an increase in interest credited resulting from the growth in general account assets. |
• | Higher amortization of DAC resulted from the unlock expense in the third quarter of 2007 as compared to an unlock benefit in the fourth quarter of 2006. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
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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) annuity 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 net investment 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 an unlock benefit in the fourth quarter of 2006. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
• | Deposits of $6.5 billion to $7.5 billion |
• | Net flows of $1.5 billion to $2.5 billion |
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Operating Summary | 2007 | 2006 | 2005 | |||||||||
Fee income and other | $ | 251 | $ | 125 | $ | 120 | ||||||
Earned premiums | 987 | 607 | 504 | |||||||||
Net investment income | 1,241 | 1,003 | 802 | |||||||||
Net realized capital gains (losses) | (188 | ) | (37 | ) | 36 | |||||||
Total revenues | 2,291 | 1,698 | 1,462 | |||||||||
Benefits, losses and loss adjustment expenses | 2,074 | 1,484 | 1,212 | |||||||||
Insurance operating costs and expenses | 185 | 78 | 56 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 23 | 32 | 32 | |||||||||
Total benefits, losses and expenses | 2,282 | 1,594 | 1,300 | |||||||||
Income before income taxes | 9 | 104 | 162 | |||||||||
Income tax expense (benefit) | (8 | ) | 26 | 47 | ||||||||
Net income | $ | 17 | $ | 78 | $ | 115 | ||||||
Assets Under Management | 2007 | 2006 | 2005 | |||||||||
Institutional account values [1] [3] | $ | 25,103 | $ | 22,214 | $ | 17,917 | ||||||
Private Placement Life Insurance account values [3] | 32,792 | 26,131 | 23,836 | |||||||||
Mutual fund assets under management [2] | 3,581 | 2,567 | 1,528 | |||||||||
Total assets under management | $ | 61,476 | $ | 50,912 | $ | 43,281 | ||||||
[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 Plans segment of $178 during 2006. | |
[3] | Includes policyholder balances for investment contracts and reserves for future policy benefits for insurance contracts. |
• | Fee income increased for the year ended December 31, 2007 primarily driven by higher Mutual Fund and PPLI assets under management due to net flows and change in market appreciation of $5.8 billion and $2.1 billion, respectively, during the year. In addition, PPLI collects front-end loads, recorded in fee income, to subsidize premium tax payments. Premium taxes are recorded as an expense in insurance operating costs and other expenses. During the year ended December 31, 2007, PPLI had deposits of $5.2 billion, which resulted in an increase in fee income due to front-end loads of $107 offset by a corresponding increase in insurance operating costs and other expenses. |
• | Earned premiums increased for the year ended December 31, 2007 primarily as a result of increased structured settlement life contingent sales, and one large terminal funding life contingent case sold in the third quarter. This increase in earned premiums was offset by a corresponding increase in benefits, losses and loss adjustment expenses. |
• | General account net investment spread is the main driver of net income for IIP. An increase in spread income for the year ended December 31, 2007, was driven principally by higher assets under management in IIP resulting from positive net flows of $1.5 billion during the year. Net flows for IIP were favorable primarily as a result of the Company’s funding agreement backed Investor Notes program. Investor Notes deposits for the year ended December 31, 2007 were $1.5 billion. General account net investment spread also increased for the year ended December 31, 2007 due to improved returns on partnership investments. For the year ended December 31, 2007 and 2006, partnership income was $32 and $15, after-tax, respectively. |
• | The change in income taxes for the year ended December 31, 2007 over the prior year was due to a decrease in income before income taxes primarily driven by the increase in realized capital losses. |
• | 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 |
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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 was $15 and $6 after-tax, respectively. |
• | Earned premiums increased as a result of two large terminal funding cases that were sold during 2006. 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. |
• | Deposits (including mutual funds) of $7.0 billion to $8.5 billion |
• | Net flows (excluding mutual funds) of $3.25 billion to $4.75 billion |
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Operating Summary | 2007 | 2006 | 2005 | |||||||||
Fee income and other | $ | 870 | $ | 885 | $ | 801 | ||||||
Earned premiums | (62 | ) | (53 | ) | (33 | ) | ||||||
Net investment income | 359 | 324 | 305 | |||||||||
Net realized capital gains (losses) | (28 | ) | (25 | ) | 17 | |||||||
Total revenues | 1,139 | 1,131 | 1,090 | |||||||||
Benefits, losses and loss adjustment expenses | 562 | 497 | 469 | |||||||||
Insurance operating costs and other expenses | 193 | 179 | 166 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 121 | 243 | 206 | |||||||||
Total benefits, losses and expenses | 876 | 919 | 841 | |||||||||
Income before income taxes | 263 | 212 | 249 | |||||||||
Income tax expense | 81 | 62 | 76 | |||||||||
Net income | $ | 182 | $ | 150 | $ | 173 | ||||||
Account Values | 2007 | 2006 | 2005 | |||||||||
Variable universal life insurance | $ | 7,284 | $ | 6,637 | $ | 5,902 | ||||||
Universal life/interest sensitive whole life | 4,388 | 4,035 | 3,696 | |||||||||
Modified guaranteed life and other | 677 | 699 | 716 | |||||||||
Total account values | $ | 12,349 | $ | 11,371 | $ | 10,314 | ||||||
Life Insurance In-force | ||||||||||||
Variable universal life insurance | $ | 77,566 | $ | 73,770 | $ | 71,365 | ||||||
Universal life/interest sensitive whole life | 48,636 | 45,230 | 41,714 | |||||||||
Modified guaranteed life and other | 53,281 | 45,227 | 37,722 | |||||||||
Total life insurance in-force | $ | 179,483 | $ | 164,227 | $ | 150,801 | ||||||
• | Fee income and other decreased for the year ended December 31, 2007 primarily due to the impacts of the 2007 and 2006 unlocks. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. Offsetting the impacts of the 2007 and 2006 unlocks, fee income increased for the year ended December 31, 2007. Cost of insurance charges, the largest component of fee income, increased $35 primarily driven by growth in variable universal and universal life insurance account value. Variable fee income increased consistent with the growth in variable universal life insurance account value. |
• | Earned premiums, which include premiums for ceded reinsurance, decreased primarily due to increased ceded reinsurance premiums for the year ended December 31, 2007. |
• | Net investment income increased for the year ended December 31, 2007 substantially consistent with growth in general account account values. Individual Life earned additional net investment income throughout 2007 associated with higher returns from partnership investments. |
• | Benefits, losses and loss adjustment expenses increased due to life insurance in-force growth and unfavorable mortality for the year ended December 31, 2007 compared to the corresponding 2006 period. |
• | Insurance operating costs and other expenses increased for the year ended December 31, 2007 substantially consistent with life insurance in-force growth. |
• | Lower amortization of DAC resulted from the unlock benefit in the third quarter of 2007 as compared to an unlock expense in the fourth quarter of 2006. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
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• | 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 in-force. 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 associated with the 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 in-force, 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 in-force. |
• | Amortization of DAC for the year ended December 31, 2006 increased related to the unlock expense, partially offset by revisions to prior year estimates. Excluding the impacts of the unlock expense and revisions, the amortization of DAC decreased for the year ended December 31, 2006, consistently with the mix of products and the level and mix of product profitability. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
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Operating Summary | 2007 | 2006 | 2005 | |||||||||
Earned premiums and other | $ | 4,301 | $ | 4,149 | $ | 3,811 | ||||||
Net investment income | 465 | 415 | 398 | |||||||||
Net realized capital losses | (30 | ) | (13 | ) | (10 | ) | ||||||
Total revenues | 4,736 | 4,551 | 4,199 | |||||||||
Benefits, losses and loss adjustment expenses | 3,109 | 3,002 | 2,794 | |||||||||
Insurance operating costs and other expenses | 1,131 | 1,101 | 1,022 | |||||||||
Amortization of deferred policy acquisition costs | 62 | 41 | 31 | |||||||||
Total benefits, losses and expenses | 4,302 | 4,144 | 3,847 | |||||||||
Income before income taxes | 434 | 407 | 352 | |||||||||
Income tax expense | 119 | 109 | 86 | |||||||||
Net income | $ | 315 | $ | 298 | $ | 266 | ||||||
Earned Premiums and Other | 2007 | 2006 | 2005 | |||||||||
Fully insured — ongoing premiums | $ | 4,239 | $ | 4,100 | $ | 3,747 | ||||||
Buyout premiums | 27 | 12 | 27 | |||||||||
Other | 35 | 37 | 37 | |||||||||
Total earned premiums and other | $ | 4,301 | $ | 4,149 | $ | 3,811 | ||||||
Ratios, excluding buyouts | ||||||||||||
Loss ratio | 72.1 | % | 72.3 | % | 73.1 | % | ||||||
Loss ratio, excluding financial institutions | 77.3 | % | 77.2 | % | 77.3 | % | ||||||
Expense ratio | 27.9 | % | 27.6 | % | 27.8 | % | ||||||
Expense ratio, excluding financial institutions | 23.0 | % | 22.9 | % | 24.0 | % | ||||||
• | Premiums and other considerations increased largely due to business growth driven by new sales and persistency over the last twelve months. |
• | Net investment income increased due to a higher invested asset base and increased interest income on allocated surplus. |
• | The segment’s loss ratio (defined as benefits, losses and loss adjustment expenses as a percentage of premiums and other considerations excluding buyouts) for the year ended December 31, 2007, decreased slightly. Loss ratios experience volatility in period over period comparisons due to fluctuation in mortality and morbidity experience. Additionally there was a change in assumptions underlying the valuation of long term disability claims incurred in 2007. |
• | The segment’s expense ratio, excluding buyouts, for the year ended December 31, 2007, increased primarily due to higher DAC amortization resulting from a shorter amortization period following the adoption of SOP 05-1. |
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• | 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. |
• | Fully insured ongoing premiums (excluding buyout premiums and premium equivalents) of $4.25 billion to $4.35 billion |
• | Loss ratio (excluding buyout premiums) between 71% and 74% |
• | Expense ratio (excluding buyout premiums) between 27% and 29% |
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Operating Summary | 2007 | 2006 | 2005 | |||||||||
Fee income and other | $ | 832 | $ | 701 | $ | 483 | ||||||
Net investment income | 131 | 123 | 75 | |||||||||
Net realized capital losses | (116 | ) | (88 | ) | (64 | ) | ||||||
Total revenues | 847 | 736 | 494 | |||||||||
Benefits, losses and loss adjustment expenses | 32 | 3 | 42 | |||||||||
Insurance operating costs and other expenses | 246 | 208 | 188 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 214 | 167 | 133 | |||||||||
Total benefits, losses and expenses | 492 | 378 | 363 | |||||||||
Income before income taxes | 355 | 358 | 131 | |||||||||
Income tax expense | 132 | 127 | 56 | |||||||||
Net income | $ | 223 | $ | 231 | $ | 75 | ||||||
Assets Under Management | 2007 | 2006 | 2005 | |||||||||
Japan variable annuity account values | $ | 35,793 | $ | 29,653 | $ | 24,641 | ||||||
Japan MVA fixed annuity account values | 1,844 | 1,690 | 1,463 | |||||||||
Total Japan assets under management | $ | 37,637 | $ | 31,343 | $ | 26,104 | ||||||
• | Fee income increased for the year ended December 31, 2007 primarily due to growth in Japan’s variable annuity assets under management. As of December 31, 2007, Japan’s variable annuity assets under management were $35.8 billion, an increase of $6.1 billion or 21% from the prior year period. The increase in assets under management was driven by positive net flows of $4.5 billion, partially offset by unfavorable market performance of $620, which includes the impact of foreign currency movements on the Japanese customer’s foreign assets and a $2.3 billion increase due to foreign currency exchange translation as the yen strengthened compared to the U.S. dollar. |
• | The increase in benefits, losses and loss adjustment expenses for the year ended December 31, 2007 over the prior year period was due to the unlock benefit in the fourth quarter of 2006 exceeding the unlock benefit in the third quarter of 2007. For further discussion, see 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, 2007 due to the growth in the Japan operation. |
• | Higher amortization of DAC resulted primarily from a decrease in the 2007 unlock benefit compared with the prior year period, as well as overall growth of operations. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
• | Fee income increased $218 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. |
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• | 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 Accounting Principles Board Opinion No. 23 “Accounting for Income Taxes”. |
• | 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 an unlock benefit. For further discussion, see 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. |
• | Variable annuity deposits of ¥550 billion to ¥770 billion ($5.0 billion to $7.0 billion) |
• | Variable annuity net flows of ¥275 billion to ¥500 billion ($2.5 billion to $4.5 billion) |
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Operating Summary | 2007 | 2006 | 2005 | |||||||||
Fee income and other | $ | 67 | $ | 81 | $ | 83 | ||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 145 | 154 | 174 | |||||||||
Equity securities held for trading [1] | 145 | 1,824 | 3,847 | |||||||||
Total net investment income | 290 | 1,978 | 4,021 | |||||||||
Net realized capital gains (losses) | (35 | ) | 6 | 20 | ||||||||
Total revenues | 322 | 2,065 | 4,124 | |||||||||
Benefits, losses and loss adjustment expenses [1] | 301 | 1,985 | 4,166 | |||||||||
Insurance operating costs and other expenses | 84 | 12 | 106 | |||||||||
Total benefits, losses and expenses | 385 | 1,997 | 4,272 | |||||||||
Income (loss) before income taxes | (63 | ) | 68 | (148 | ) | |||||||
Income tax expense (benefit) | (11 | ) | 21 | (46 | ) | |||||||
Net income (loss) | $ | (52 | ) | $ | 47 | $ | (102 | ) | ||||
[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. |
• | During the first quarter of 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 as of June 30, 2006. This reserve reduction, recorded in insurance operating costs and other expenses, resulted in an after-tax benefit of $34. |
• | Also contributing to the increase in insurance operating costs and other expenses was $18, after-tax, of interest charged by Corporate on the amount of capital held by the Life operations in excess of the amount needed to support the capital requirements of the Life Operations for the year ended December 31, 2007. |
• | The Company recorded a reserve in the second quarter of 2007 for market regulatory matters of $21, after-tax. During the year, the Company recorded an insurance recovery of $9, after-tax, against the litigation costs associated with the regulatory matters. |
• | Refer to Realized Capital Gains and Losses by Segment table under Life’s Operating section of the MD&A. |
• | 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. |
• | 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. |
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Written premiums [1] | 2007 | 2006 | 2005 | |||||||||
Personal Lines | $ | 3,947 | $ | 3,877 | $ | 3,676 | ||||||
Small Commercial | 2,747 | 2,728 | 2,545 | |||||||||
Middle Market | 2,257 | 2,445 | 2,445 | |||||||||
Specialty Commercial | 1,484 | 1,608 | 1,817 | |||||||||
Other Operations | 5 | 4 | 4 | |||||||||
Total | $ | 10,440 | $ | 10,662 | $ | 10,487 | ||||||
Earned premiums [1] | ||||||||||||
Personal Lines | $ | 3,889 | $ | 3,760 | $ | 3,610 | ||||||
Small Commercial | 2,736 | 2,652 | 2,421 | |||||||||
Middle Market | 2,351 | 2,454 | 2,355 | |||||||||
Specialty Commercial | 1,515 | 1,562 | 1,766 | |||||||||
Other Operations | 5 | 5 | 4 | |||||||||
Total | $ | 10,496 | $ | 10,433 | $ | 10,156 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
• | In Personal Lines, earned premium grew by $129, or 3%, primarily due to an increase in AARP and Agency earned premiums. AARP earned premium grew primarily due to an increase in the size of the AARP target market, the effect of direct marketing programs and the effect of cross selling homeowners insurance to insureds who have auto policies. Agency earned premium grew as a result of an increase in the number of agency appointments and further refinement of the Dimensions class plans. Partially offsetting this growth was the effect of the sale of the Omni non-standard auto business in the fourth quarter of 2006 which accounted for $127 of earned premium in 2006. Excluding Omni, Personal Lines’ earned premiums grew $251, or 7%, for the year ended December 31, 2007. |
• | In Small Commercial, earned premiums increased $84, or 3%, primarily due to new business premiums outpacing non-renewals for workers’ compensation business over the last six months of 2006 and the first six months of 2007. |
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• | Middle Market earned premium decreased by $103, or 4%, driven by decreases in all lines, including commercial auto, general liability, workers’ compensation and property. Earned premium decreases were driven by declines in earned pricing and premium renewal retention in all lines and a decline in new business premiums in all lines except workers’ compensation. |
• | Specialty Commercial earned premium decreased by $47, or 3%, primarily driven by a decrease in casualty and property and a decrease in earned premiums assumed under inter-segment arrangements, partially offset by an increase in professional liability, fidelity and surety. |
• | Total Property & Casualty earned premiums grew $277, or 3%, due primarily to growth in Personal Lines, Small Commercial and Middle Market, 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 $31 in Personal Lines, $7 in Small Commercial, $8 in Middle Market and $27 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 $231, or 10%, in Small Commercial, $150, or 4%, in Personal Lines and $99, or 4%, in Middle Market. 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 $204, 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 $217, primarily because of the non-renewal of a single captive insurance program. The decrease in property earned premium was 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. |
2007 | 2006 | 2005 | ||||||||||
Underwriting results | $ | 759 | $ | 745 | $ | 465 | ||||||
Net servicing and other income [1] | 52 | 53 | 49 | |||||||||
Net investment income | 1,687 | 1,486 | 1,365 | |||||||||
Other expenses | (249 | ) | (223 | ) | (203 | ) | ||||||
Net realized capital gains (losses) | (172 | ) | 9 | 44 | ||||||||
Income before income taxes | 2,077 | 2,070 | 1,720 | |||||||||
Income tax expense | (570 | ) | (551 | ) | (484 | ) | ||||||
Net income | $ | 1,507 | $ | 1,519 | $ | 1,236 | ||||||
[1] | Net of expenses related to service business. |
Income | ||||||||
before | Net | |||||||
income tax | income | |||||||
2006 | $ | 2,070 | $ | 1,519 | ||||
Excluding Omni, a decrease in Ongoing Operations’ current accident year underwriting results before catastrophes | (267 | ) | (174 | ) | ||||
A change to net realized capital losses | (181 | ) | (158 | ) | ||||
An increase in net investment income | 201 | 139 | ||||||
A decrease in Other Operations’ net unfavorable prior accident year reserve development | 167 | 110 | ||||||
An increase in net favorable prior accident year reserve development in Ongoing Operations | 81 | 52 | ||||||
An increase in other expenses | (26 | ) | (17 | ) | ||||
Benefit from a tax true-up | — | 20 | ||||||
An increase in current accident year underwriting results due to the sale of the Omni non-standard auto business, which generated a current accident year underwriting loss before catastrophes in 2006 | 22 | 14 | ||||||
A decrease in current accident year catastrophe losses | 22 | 14 | ||||||
Other changes, net | (12 | ) | (12 | ) | ||||
Net change in income for 2007 | 7 | (12 | ) | |||||
2007 | $ | 2,077 | $ | 1,507 | ||||
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• | Excluding Omni, the $267 decrease in Ongoing Operations’ current accident year underwriting results before catastrophes was primarily due to an increase in the loss and loss adjustment expense ratio before catastrophes and prior accident year development and an increase in insurance and operating costs and dividends. The increase in the loss and loss adjustment expense ratio before catastrophes and prior accident year development was primarily due to increased severity on Personal Lines auto liability claims, increased frequency on Personal Lines auto property damage claims and, to a lesser extent, increased severity on Personal Lines homeowners claims and a higher loss and loss adjustment expense ratio for both Small Commercial package business and Middle Market workers’ compensation claims. |
• | The change to net realized capital losses during 2007 was primarily due to an increase in credit-related impairments and decreases in the fair value of non-qualifying derivatives attributable to changes in value associated with credit derivatives due to credit spreads widening. Credit-related impairments in 2007 primarily consisted of impairments of asset-backed securities backed by sub-prime residential mortgage loans and impairments of corporate securities in the financial services and homebuilders sectors. (See the Other-Than-Temporary Impairments discussion within Investment Results for more information on the impairments recorded in 2007). |
• | Primarily driving the $201 increase in net investment income was a higher average invested asset base and income earned from a higher portfolio yield. The increase in the average invested asset base contributing to the increase in investment income was primarily due to positive operating cash flows, partially offset by the return of capital to Corporate. Contributing to the increase in net investment income was an increase in income from limited partnerships and other alternative investments, driven by a higher yield on these investments and shifting a greater allocation of investments to these asset classes. |
• | The $167 decrease in net unfavorable prior accident year development in Other Operations was primarily due to a $243 charge in 2006 to recognize the effect of the Equitas agreement and strengthening of the allowance for uncollectible reinsurance, partially offset by a $99 strengthening of reserves in 2007, primarily related to an adverse arbitration decision. See the Other Operations segment discussion of the MD&A for further information of the prior accident year reserve development in each year. |
• | The $81 increase in net favorable prior accident year development in Ongoing Operations was primarily due to $151 release of workers’ compensation loss and loss adjustment expenses reserves in 2007, partially offset by an $83 net release of prior accident year hurricane reserves in 2006. Refer to the “Reserves” section of the MD&A for further discussion. |
• | The $26 increase in other expenses was primarily due to $49 of interest charged by Corporate on the amount of capital held by the Property & Casualty operation in excess of the amount needed to support the capital requirements of the Property & Casualty operation, partially offset by a reduction in the estimated cost of legal settlements in 2007. |
Income | ||||||||
before | Net | |||||||
income tax | income | |||||||
2005 | $ | 1,720 | $ | 1,236 | ||||
A decrease in current accident year catastrophe losses | 152 | 99 | ||||||
An increase in Other Operations’ net unfavorable prior accident year reserve development | (148 | ) | (96 | ) | ||||
An increase in net investment income | 121 | 91 | ||||||
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 | 105 | 68 | ||||||
A change to $64 of net favorable prior accident year reserve development in Ongoing Operations | 100 | 65 | ||||||
An increase in current accident year underwriting results due to catastrophe treaty reinstatement premium recorded as a reduction of earned premium in 2005 | 73 | 47 | ||||||
Gain from the sale of Omni, including income tax benefit of $49 | (24 | ) | 25 | |||||
An increase in other expenses, primarily due to lower bad debt expense in 2005 | (20 | ) | (13 | ) | ||||
Excluding the gain from the sale of Omni, a decrease in net realized capital gains from $44 in 2005 to $33 in 2006 | (11 | ) | (8 | ) | ||||
Excluding the change in Citizens assessments and catastrophe treaty reinstatement premium, a decrease in Ongoing Operations’ current accident year underwriting results before catastrophes | (10 | ) | (7 | ) | ||||
Other changes, net | 12 | 12 | ||||||
Net increase in income for 2006 | 350 | 283 | ||||||
2006 | $ | 2,070 | $ | 1,519 | ||||
• | The $152 decrease in current accident year catastrophe losses was largely due to $264 of losses in 2005 related to hurricanes Katrina, Rita and Wilma, partially offset by an increase in non-hurricane catastrophe losses in 2006. |
• | The $148 increase in net unfavorable prior accident year development in Other Operations was primarily due to a $243 reduction of reinsurance recoverables in 2006 resulting from an agreement with Equitas and the Company’s evaluation of the reinsurance recoverables and allowance for uncollectible reinsurance associated with older, long-term casualty liabilities. |
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• | Primarily driving the $121 increase in net investment income was a larger investment base due to increased cash flows from underwriting as well as an increase in interest rates and a change in asset mix (i.e., a greater share of investments in mortgage loans and limited partnerships). |
• | The change to $64 of net favorable prior accident year development in 2006 for Ongoing Operations was primarily due to an $83 release of prior accident year hurricane reserves and a $58 release of allocated loss adjustment expense reserves for workers’ compensation and package business, partially offset by reserve strengthenings in Specialty Commercial. See the “Reserves” section for a discussion of prior accident year reserve development. |
• | Net realized capital gains decreased by $35 in total, primarily due to a $24, pre-tax, realized capital loss from the sale of Omni, an increase in other-than-temporary-impairments and losses on the sale of fixed maturity investments, partially offset by an increase in income from other sources. |
• | Excluding the change in Citizens assessments and catastrophe treaty reinstatement premium, Ongoing Operations’ current accident year underwriting results before catastrophes were down $10 from 2005 to 2006. The current accident year loss and loss adjustment expense ratio before catastrophes of 62.4 for Ongoing Operations was relatively flat from 2005 to 2006 as a lower current accident year loss and loss adjustment expense ratio for workers’ compensation business in Small Commercial was largely offset by an increase in non-catastrophe property loss costs in Middle Market and Personal Lines homeowners. |
Ongoing Operations earned premium growth | 2007 | 2006 | 2005 | |||||||||
Personal Lines | 3 | % | 4 | % | 5 | % | ||||||
Small Commercial | 3 | % | 10 | % | 17 | % | ||||||
Middle Market | (4 | %) | 4 | % | 6 | % | ||||||
Specialty Commercial | (3 | %) | (12 | %) | 2 | % | ||||||
Ongoing Operations | 1 | % | 3 | % | 7 | % | ||||||
Ongoing Operations combined ratio | ||||||||||||
Combined ratio before catastrophes and prior year development | 90.5 | 88.0 | 89.4 | |||||||||
Catastrophe ratio | ||||||||||||
Current year | 1.7 | 1.9 | 3.5 | |||||||||
Prior years | 0.1 | (0.7 | ) | 0.1 | ||||||||
Total catastrophe ratio | 1.8 | 1.2 | 3.6 | |||||||||
Non-catastrophe prior year development | (1.5 | ) | 0.1 | 0.2 | ||||||||
Combined ratio | 90.8 | 89.3 | 93.2 | |||||||||
Other Operations net income (loss) | $ | 30 | $ | (35 | ) | $ | 71 | |||||
Total Property & Casualty measures of net investment income | ||||||||||||
Investment yield, after-tax | 4.4 | % | 4.1 | % | 4.1 | % | ||||||
Average annual invested assets at cost | $ | 29,760 | $ | 27,324 | $ | 25,148 | ||||||
• | Within Personal Lines, the decrease in the earned premium growth rate from 2006 to 2007 was due to the Company’s exit from the Omni non-standard auto business. Omni, which was sold in the fourth quarter of 2006, accounted for $127 of earned premium in 2006. Excluding Omni, the Personal Lines earned premium growth rate was 7% in both 2006 and 2007. In 2007, an increase in the growth rate of AARP earned premium was offset by the effect of a decrease in the growth rate of Agency earned premium. |
• | Within Small Commercial, the decrease in the earned premium growth rate was primarily attributable to a decrease in new business written premium and premium renewal retention over the last six months of 2006 and the first six months of 2007. Also contributing to the lower growth rate was a decrease in earned pricing. |
• | Within Middle Market, the change from an increase in earned premium in 2006 to a decrease in earned premium in 2007 was primarily attributable to earned pricing decreases, a decrease in new business written premium over the last six months of 2006 and the first six months of 2007 and a decrease in premium renewal retention over the first six months of 2007. |
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• | The rate of decline in Specialty Commercial earned premium slowed in 2007, primarily due to a lower earned premium decrease in casualty and property, partially offset by a lower earned premium increase in professional liability, fidelity and surety. Casualty earned premium experienced a larger decrease in 2006, primarily because of a decrease in 2006 earned premium from a single captive insured program that expired in 2005. Earned premium decreases in property were larger in 2006 than in 2007 as a result of a strategic decision in 2006 not to renew certain accounts with properties in catastrophe-prone areas. The growth rate in professional liability, fidelity and surety earned premium slowed in 2007 due to a decrease in earned pricing and a decline in new business growth and premium renewal retention. |
• | The increase in the combined ratio before catastrophes and prior accident year development, from 88.0 to 90.5, was primarily due to a 1.4 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes and, to a lesser extent, an increase in the expense ratio. The increase in the loss and loss adjustment expense ratio before catastrophes and prior accident year development was primarily due to increased severity on Personal Lines auto liability claims, increased frequency on Personal Lines auto property damage claims and, to a lesser extent, increased severity on Personal Lines homeowners claims and a higher loss and loss adjustment expense ratio for both Small Commercial package business and Middle Market workers’ compensation claims. Contributing to the increase in the expense ratio was the effect of a $41 reduction of estimated Florida Citizens’ assessments in 2006 related to the 2005 Florida hurricanes. |
• | The catastrophe ratio increased, primarily due to the effect of net favorable reserve development of prior accident year catastrophe losses in 2006. In 2006, the Company recognized $83 of net reserve releases related to the 2005 and 2004 hurricanes. |
• | Net non-catastrophe prior accident year reserve development was slightly unfavorable in 2006, but favorable in 2007. Favorable reserve development in 2007 was largely attributable to the release of reserves for workers’ compensation claims, primarily related to accident years 2002 to 2006. See the “Reserves” section for a discussion of prior accident year reserve development for Ongoing Operations in 2007. |
• | Other Operations reported net income of $30 in 2007 compared to a net loss of $35 in 2006. The improvement in results was primarily due to a decrease in unfavorable prior accident year reserve development, partially offset by a change from net realized gains in 2006 to net realized losses in 2007 and a decrease in net investment income. See the Other Operations segment MD&A for further discussion. |
• | In 2007, the after-tax investment yield increased due to a higher yield on limited partnerships, hedge funds and mortgage loans as well as due to a change in asset mix, including shifting a greater share of investments to these asset classes. |
• | The average annual invested assets at cost increased as a result of positive operating cash flows and an increase in collateral held from increased securities lending activities. |
• | The lower growth rate 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 lower growth rate in Small Commercial was primarily attributable to a decrease in new business written premium, lower earned pricing increases and higher property catastrophe treaty reinsurance costs. |
• | The lower growth rate in Middle Market was primarily attributable to a decrease in new business written premium in the first six months of 2006, larger earned pricing decreases and higher property catastrophe treaty reinsurance costs. |
• | The decline in Specialty Commercial earned premium in 2006 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 premium 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 |
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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. |
• | 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. |
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For the year ended December 31, 2007 | ||||||||||||||||||||||||||||
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 1,959 | $ | 3,421 | $ | 4,517 | $ | 6,378 | $ | 16,275 | $ | 5,716 | $ | 21,991 | ||||||||||||||
Reinsurance and other recoverables | 134 | 214 | 477 | 2,262 | 3,087 | 1,300 | 4,387 | |||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 1,825 | 3,207 | 4,040 | 4,116 | 13,188 | 4,416 | 17,604 | |||||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||||||
Current accident year before catastrophes | 2,576 | 1,594 | 1,523 | 999 | 6,692 | — | 6,692 | |||||||||||||||||||||
Current accident year catastrophes | 125 | 28 | 15 | 9 | 177 | — | 177 | |||||||||||||||||||||
Prior accident years | (4 | ) | (209 | ) | (14 | ) | 82 | (145 | ) | 193 | 48 | |||||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 2,697 | 1,413 | 1,524 | 1,090 | 6,724 | 193 | 6,917 | |||||||||||||||||||||
Payments | (2,503 | ) | (1,222 | ) | (1,204 | ) | (764 | ) | (5,693 | ) | (597 | ) | (6,290 | ) | ||||||||||||||
Reallocation of reserves for unallocated loss adjustment expenses [1] | (58 | ) | (105 | ) | (86 | ) | 124 | (125 | ) | 125 | — | |||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 1,961 | 3,293 | 4,274 | 4,566 | 14,094 | 4,137 | 18,231 | |||||||||||||||||||||
Reinsurance and other recoverables | 81 | 177 | 413 | 2,317 | 2,988 | 934 | 3,922 | |||||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,042 | $ | 3,470 | $ | 4,687 | $ | 6,883 | $ | 17,082 | $ | 5,071 | $ | 22,153 | ||||||||||||||
Earned premiums | $ | 3,889 | $ | 2,736 | $ | 2,351 | $ | 1,515 | $ | 10,491 | $ | 5 | $ | 10,496 | ||||||||||||||
Loss and loss expense paid ratio [2] | 64.4 | 44.7 | 51.3 | 50.3 | 54.3 | |||||||||||||||||||||||
Loss and loss expense incurred ratio | 69.3 | 51.6 | 64.8 | 72.0 | 64.1 | |||||||||||||||||||||||
Prior accident year development (pts.) | (0.1 | ) | (7.6 | ) | (0.6 | ) | 5.4 | (1.4 | ) | |||||||||||||||||||
[1] | Prior to the second quarter of 2007, the Company evaluated the adequacy of the reserves for unallocated loss adjustment expenses on a company-wide basis. During the second quarter of 2007, the Company refined its analysis of the reserves at the segment level, resulting in the reallocation of reserves among segments, including a reallocation of reserves from Ongoing Operations to Other Operations. | |
[2] | The “loss and loss expense paid ratio” represents the ratio of paid loss and loss adjustment expenses to earned premiums. |
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Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Release of workers’ compensation loss and loss adjustment expense reserves, primarily for accident years 2002 to 2006 | $ | — | $ | (151 | ) | $ | — | $ | — | $ | (151 | ) | $ | — | $ | (151 | ) | |||||||||||
Release of general liability loss and loss adjustment expense reserves for accident years 2003 to 2006 | — | — | (49 | ) | — | (49 | ) | — | (49 | ) | ||||||||||||||||||
Release of workers’ compensation loss reserves for accident years 1987 to 2000 | — | (33 | ) | — | — | (33 | ) | — | (33 | ) | ||||||||||||||||||
Release of loss reserves for package business for accident years 2003 to 2006 | — | (30 | ) | — | — | (30 | ) | — | (30 | ) | ||||||||||||||||||
Release of reserves for surety business for accident years 2003 to 2006 | — | — | — | (22 | ) | (22 | ) | — | (22 | ) | ||||||||||||||||||
Release of commercial auto liability reserves for accident years 2003 and 2004 | — | — | (18 | ) | — | (18 | ) | — | (18 | ) | ||||||||||||||||||
Release of reserves on Personal Lines auto liability claims for accident years 2002 to 2006 | (16 | ) | — | — | — | (16 | ) | — | (16 | ) | ||||||||||||||||||
Release of reserves on errors & omissions policies for accident year 2005 | — | — | — | (15 | ) | (15 | ) | — | (15 | ) | ||||||||||||||||||
Strengthening of workers’ compensation loss and loss adjustment expense reserves for accident years 1987 to 2001 | — | — | — | 47 | 47 | — | 47 | |||||||||||||||||||||
Strengthening of workers’ compensation reserves for accident years 1973 & prior | — | — | 40 | — | 40 | — | 40 | |||||||||||||||||||||
Strengthening of general liability reserves for accident years more than 20 years old | — | — | 14 | 25 | 39 | — | 39 | |||||||||||||||||||||
Strengthening of general liability reserves primarily related to accident years 1987 to 1997 | — | — | — | 34 | 34 | — | 34 | |||||||||||||||||||||
Strengthening or reserves primarily as a result of an adverse arbitration decision | — | — | — | — | — | 99 | 99 | |||||||||||||||||||||
Strengthening of environmental reserves | — | — | — | — | — | 25 | 25 | |||||||||||||||||||||
Other reserve re-estimates, net [1] | 12 | 5 | (1 | ) | 13 | 29 | 69 | 98 | ||||||||||||||||||||
Total prior accident year development for the year ended December 31, 2007 | $ | (4 | ) | $ | (209 | ) | $ | (14 | ) | $ | 82 | $ | (145 | ) | $ | 193 | $ | 48 | ||||||||||
[1] | Includes reserve discount accretion of $31, including $6 in Small Commercial, $8 in Middle Market, $11 in Specialty Commercial and $6 in Other Operations. |
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• | Released Small Commercial workers’ compensation reserves by $151, primarily related to accident years 2002 to 2006. This reserve release is a continuation of favorable developments first recognized in 2005 and 2006. The workers’ compensation reserve releases in 2007 resulted from a determination that workers’ compensation losses continue to develop even more favorably from prior expectations due to the California and Florida legal reforms and underwriting actions as well as cost reduction initiatives first instituted in 2003. In particular, the state legal reforms and underwriting actions have resulted in lower than expected medical claim severity. In addition, the Company determined that paid losses related to workers’ compensation policies sold through payroll service providers were emerging favorably, leading to a release of reserves for the 2003 to 2006 accident years. The $151 reserve release represented 9% of the Company’s net reserves for Small Commercial workers’ compensation claims as of December 31, 2006. | |
• | Released reserves for Middle Market general liability claims related to the 2003 to 2006 accident years by $49. Beginning in the third quarter of 2007, the Company observed that reported losses for high hazard and umbrella general liability claims for the 2003 to 2006 accident years were emerging favorably and this caused management to reduce its estimate of the cost of future reported claims for these accident years, resulting in a reserve release in the third and fourth quarter of 2007. This reserve development is unrelated to the reserve strengthening in 2005 and 2006 of other Middle Market general liability claims which developed unfavorably due to higher than anticipated loss payments beyond four years of development. The $49 reserve release represented 6% of the Company’s net reserves for Middle Market general liability claims as of December 31, 2006. | |
• | Released Small Commercial workers’ compensation reserves related to accident years 2000 and prior by $33. The severity of workers’ compensation medical claims for these accident years has emerged favorably to previous expectations. As the continued development of these claims has resulted in a sustained favorable trend, management released reserves in the fourth quarter of 2007. The $33 reserve release represented 2% of the Company’s net reserves for Small Commercial workers’ compensation claims as of December 31, 2006. | |
• | Recorded a $30 net release of reserves for Small Commercial package business related to the 2003 to 2006 accident years. Reserve reviews completed during 2007 identified that the frequency of reported liability claims on Small Commercial package business policies for these accident years was lower than the previously expected frequency. In addition, reported loss costs on property coverages have emerged favorably for the 2006 accident year. In recognition of these trends, in the second and fourth quarter of 2007, management reduced reserves by a total of $30. The $30 reserve release represented 3% of the Company’s net reserves for Small Commercial package business claims as of December 31, 2006. | |
• | Released reserves for commercial surety business by $22 for accident years 2003 to 2006. Reported losses for commercial surety business have been emerging favorably resulting in the Company lowering its estimate of ultimate unpaid losses during the third quarter of 2007. The $22 reserve release represented 14% of the Company’s net reserves for fidelity and surety claims as of December 31, 2006. | |
• | Released Middle Market commercial auto liability reserves by $18 for accident years 2003 and 2004. Since the first quarter of 2007, reported losses for commercial auto liability claims in these accident years have emerged favorably although management did not determine that this was a verifiable trend until the third quarter of 2007 when it released the reserves. The $18 reserve release represented 6% of the Company’s net reserves for Middle Market auto liability claims as of December 31, 2006. | |
• | Released reserves for Personal Lines auto liability claims for accident years 2002 to 2006 by $16. This reserve release was a continuation of trends first observed in 2006. During the first quarter of 2006, the Company released auto liability reserves related to the 2005 accident year due to frequency emerging favorable to initial expectations. During the second quarter of 2006, the Company observed that loss cost severity on auto liability claims for the 2004 accident year was emerging favorable to initial expectations and released reserves to recognize this trend. For each of the 2002 to 2006 accident years, the Company has continued to observe favorable trends in reported severity and, in the fourth quarter of 2007, the Company released an additional $16 in reserves. The $16 reserve release represented 1% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2006. | |
• | Released reserves for errors and omissions claims for accident year 2005 by $15. During the fourth quarter of 2007, the Company updated its analysis of certain professional liability claims and the new analysis showed that claims under errors and omissions policies were emerging favorable to initial expectations, resulting in this reserve release. The $15 reserve release represented 3% of the Company’s net reserves for professional liability claims as of December 31, 2006. | |
• | Strengthened Specialty Commercial workers’ compensation reserves by $47, primarily related to accident years 1987 to 2001. Management has been observing larger than expected increases in loss cost severity, particularly on high deductible and excess policies. The $47 reserve strengthening represented 2% of the Company’s net reserves for Specialty Commercial workers’ compensation claims as of December 31, 2006. | |
• | Strengthened Middle Market workers’ compensation reserves by $40 for accident years 1973 and prior, primarily driven by a reduction in reinsurance recoverables from the commutation of certain reinsurance treaties. Due to the commutations, within the past two years, net paid losses on these claims have begun to emerge unfavorably to initial expectations and, during 2007, the Company determined that this trend in higher paid losses would ultimately result in unpaid losses settling for more than management’s previous estimates. The $40 reserve strengthening represented 2% of net reserves for Middle Market workers’ compensation claims as of December 31, 2006. |
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• | Strengthened general liability reserves by $39 for accident years more than 20 years old. The Company has experienced an increase in defense costs for certain mass tort claims and, during 2007, the Company determined that the increase in defense costs was a sustained trend that resulted in an increase in reserves. The $39 reserve strengthening represented 2% of the Company’s net reserves for general liability claims as of December 31, 2006. | |
• | Strengthened reserves for Specialty Commercial general and products liability claims by $34, primarily related to the 1987 to 1997 accident years. Reported losses on general and products liability claims have been emerging unfavorably to previous expectations and loss adjustment expenses have been higher than expected on late emerging claims. The $34 reserve strengthening represented 3% of the Company’s net reserves for Specialty Commercial general liability claims as of December 31, 2006. |
• | During the second quarter of 2007, an arbitration panel found that a Hartford subsidiary, established as a captive reinsurance company in the 1970s by The Hartford’s former parent, ITT Corporation (“ITT”), had additional obligations to ITT’s primary insurance carrier under ITT’s captive insurance program, which ended in 1993. When ITT spun off The Hartford in 1995, the former captive became a Hartford subsidiary. The arbitration concerned whether certain claims could be presented to the former captive in a different manner than ITT’s primary insurance carrier historically had presented them. The Company recorded a charge of $99 principally as a result of this adverse arbitration decision. | |
• | The Company completed its environmental reserve evaluation and increased its environmental reserves by $25. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to environmental liability as well as assumed reinsurance accounts and its London Market exposures for both direct and assumed reinsurance. The Company found estimates for individual cases changed based upon the particular circumstances of each account. These changes were case specific and not as a result of any underlying change in the current environment. |
For the year ended December 31, 2006 | ||||||||||||||||||||||||||||
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,152 | $ | 3,023 | $ | 4,172 | $ | 6,073 | $ | 15,420 | $ | 6,846 | $ | 22,266 | ||||||||||||||
Reinsurance and other recoverables | 385 | 192 | 565 | 2,306 | 3,448 | 1,955 | 5,403 | |||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 1,767 | 2,831 | 3,607 | 3,767 | 11,972 | 4,891 | 16,863 | |||||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||||||
Current accident year before catastrophes | 2,396 | 1,509 | 1,533 | 1,069 | 6,507 | — | 6,507 | |||||||||||||||||||||
Current accident year catastrophes | 120 | 34 | 36 | 9 | 199 | — | 199 | |||||||||||||||||||||
Prior years | (38 | ) | (75 | ) | 15 | 34 | (64 | ) | 360 | 296 | ||||||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 2,478 | 1,468 | 1,584 | 1,112 | 6,642 | 360 | 7,002 | |||||||||||||||||||||
Payments | (2,309 | ) | (1,092 | ) | (1,151 | ) | (763 | ) | (5,315 | ) | (835 | ) | (6,150 | ) | ||||||||||||||
Net reserves of Omni business sold | (111 | ) | — | — | — | (111 | ) | — | (111 | ) | ||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 1,825 | 3,207 | 4,040 | 4,116 | 13,188 | 4,416 | 17,604 | |||||||||||||||||||||
Reinsurance and other recoverables | 134 | 214 | 477 | 2,262 | 3,087 | 1,300 | 4,387 | |||||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 1,959 | $ | 3,421 | $ | 4,517 | $ | 6,378 | $ | 16,275 | $ | 5,716 | $ | 21,991 | ||||||||||||||
Earned premiums | $ | 3,760 | $ | 2,652 | $ | 2,454 | $ | 1,562 | $ | 10,428 | $ | 5 | $ | 10,433 | ||||||||||||||
Loss and loss expense paid ratio [1] | 61.4 | 41.1 | 47.1 | 48.6 | 51.0 | |||||||||||||||||||||||
Loss and loss expense incurred ratio | 65.9 | 55.3 | 64.7 | 71.1 | 63.7 | |||||||||||||||||||||||
Prior accident year development (pts.) | (1.0 | ) | (2.8 | ) | 0.6 | 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. |
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Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Net release of catastrophe loss reserves for 2004 and 2005 hurricanes | $ | (23 | ) | $ | (22 | ) | $ | (3 | ) | $ | (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 | |||||||||||||||||||||
Strengthening of general liability loss and loss adjustment expense reserves for accident years 1998 to 2005 | — | — | 20 | — | 20 | — | 20 | |||||||||||||||||||||
Release of allocated loss adjustment expense reserves for workers’ compensation and package business for accident years 2003 to 2005 | — | (33 | ) | (25 | ) | — | (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 | — | — | 10 | 35 | 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] | 8 | (20 | ) | 13 | 14 | 15 | 74 | 89 | ||||||||||||||||||||
Total prior accident year development for the year ended December 31, 2006 | $ | (38 | ) | $ | (75 | ) | $ | 15 | $ | 34 | $ | (64 | ) | $ | 360 | $ | 296 | |||||||||||
[1] | Includes reserve discount accretion of $32, including $6 in Small Commercial, $8 in Middle Market, $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. | |
• | 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 |
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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. |
• | Strengthened Middle Market general liability loss and loss adjustment expense reserves by $20 for accident years 1998 to 2005, primarily as a result of increasing allocated loss adjustment expenses associated with closing older claims. The $20 of reserve strengthening represented 2% of the Company’s net reserves for general liability claims as of December 31, 2005. | |
• | Released 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 release represented 1% of total net reserves for workers’ compensation and package business 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 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 $35 of reserve strengthening in Specialty Commercial represented 4% of the Company’s net reserves for Specialty Commercial general liability claims as of December 31, 2005. The $10 of strengthening in Middle Market represented 1% of net reserves for Middle Market general liability 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 | ||||||||||||||||||||||||||||
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,000 | $ | 2,532 | $ | 3,638 | $ | 5,406 | $ | 13,576 | $ | 7,753 | $ | 21,329 | ||||||||||||||
Reinsurance and other recoverables | 190 | 115 | 413 | 2,037 | 2,755 | 2,383 | 5,138 | |||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 1,810 | 2,417 | 3,225 | 3,369 | 10,821 | 5,370 | 16,191 | |||||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||||||
Current year before catastrophes | 2,291 | 1,426 | 1,431 | 1,216 | 6,364 | — | 6,364 | |||||||||||||||||||||
Current accident years | 98 | 50 | 38 | 165 | 351 | — | 351 | |||||||||||||||||||||
Prior years | (95 | ) | (24 | ) | 52 | 103 | 36 | 212 | 248 | |||||||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 2,294 | 1,452 | 1,521 | 1,484 | 6,751 | 212 | 6,963 | |||||||||||||||||||||
Payments | (2,337 | ) | (1,038 | ) | (1,139 | ) | (1,086 | ) | (5,600 | ) | (691 | ) | (6,291 | ) | ||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 1,767 | 2,831 | 3,607 | 3,767 | 11,972 | 4,891 | 16,863 | |||||||||||||||||||||
Reinsurance and other recoverables | 385 | 192 | 565 | 2,306 | 3,448 | 1,955 | 5,403 | |||||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,152 | $ | 3,023 | $ | 4,172 | $ | 6,073 | $ | 15,420 | $ | 6,846 | $ | 22,266 | ||||||||||||||
Earned premiums | $ | 3,610 | $ | 2,421 | $ | 2,355 | $ | 1,766 | $ | 10,152 | $ | 4 | $ | 10,156 | ||||||||||||||
Loss and loss expense paid ratio [1] | 64.7 | 42.9 | 48.3 | 61.6 | 55.1 | |||||||||||||||||||||||
Loss and loss expense incurred ratio | 63.6 | 60.0 | 64.6 | 84.1 | 66.5 | |||||||||||||||||||||||
Prior accident year development (pts.) | (2.6 | ) | (1.0 | ) | 2.2 | 5.8 | 0.4 | |||||||||||||||||||||
[1] | The “loss and loss expense paid ratio” represents the ratio of paid loss and loss adjustment expenses to earned premiums. |
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Strengthening of workers’ compensation reserves for claim payments expected to emerge after 20 years of development | $ | — | $ | 15 | $ | 35 | $ | 70 | $ | 120 | $ | — | $ | 120 | ||||||||||||||
Release of 2003 and 2004 accident year workers’ compensation reserves | — | (37 | ) | (38 | ) | — | (75 | ) | — | (75 | ) | |||||||||||||||||
Release of reserves for allocated loss adjustment expenses | (95 | ) | (23 | ) | (2 | ) | — | (120 | ) | — | (120 | ) | ||||||||||||||||
Strengthening of general liability reserves in Middle Market | — | — | 40 | — | 40 | — | 40 | |||||||||||||||||||||
Strengthening of reserves for 2004 hurricanes | 9 | 20 | — | 4 | 33 | — | 33 | |||||||||||||||||||||
Strengthening of assumed casualty reinsurance reserves | — | — | — | — | — | 85 | 85 | |||||||||||||||||||||
Strengthening of environmental reserves | — | — | — | — | — | 37 | 37 | |||||||||||||||||||||
Other reserve re-estimates, net [1] | (9 | ) | 1 | 17 | 29 | 38 | 90 | 128 | ||||||||||||||||||||
Total prior accident year development for the year ended December 31, 2005 | $ | (95 | ) | $ | (24 | ) | $ | 52 | $ | 103 | $ | 36 | $ | 212 | $ | 248 | ||||||||||||
[1] | Includes reserve discount accretion of $30, including $6 in Small Commercial, $7 in Middle Market, $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 |
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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 Small Commercial and Middle Market, 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 Small Commercial and Middle Market by $75 related to accident years 2003 and 2004. 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, 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 Middle Market 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 assumed 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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Small | Middle | Specialty | Ongoing | Other | Total | |||||||||||||||||||||||
Personal Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Range of prior accident year development for the three years ended December 31, 2007 [1] [2] | (5.2) — (0.2 | ) | (6.5) — (1.0 | ) | (0.3) — 1.6 | 0.9 — 3.1 | (1.1) — 0.3 | 3.9 — 7.4 | (0.6) — 1.5 | |||||||||||||||||||
[1] | Bracketed prior accident year development indicates favorable development. Unbracketed amounts represent unfavorable development. | |
[2] | Over the past ten years, reserve re-estimates for total Property & Casualty ranged from (1.3)% to 21.5%. 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 | 1/1/2008 to 1/1/2009 | Varies by layer, but averages 89% across all layers | Aggregates to $750 across all layers | $ | 250 | |||||||||
Layer covering property catastrophe losses from a single wind or earthquake event affecting the northeast of the United States from Virginia to Maine | 6/1/2007 to 6/1/2008 | 90 | % | 300 | 1,000 | |||||||||
Property catastrophe losses from a single event on excess and surplus property business | 1/1/2008 to 1/1/2009 | 95 | % | Aggregates to $280 across all layers | 20 | |||||||||
Property catastrophe losses from a single event on property business written with national accounts | 7/1/2007 to 7/1/2008 | 91 | % | 160 | 15 | |||||||||
Reinsurance with the Florida Hurricane Catastrophe Fund covering Florida Personal Lines property catastrophe losses from a single event | 6/1/2007 to 6/1/2008 | 90 | % | 423 | [1] | 83 | ||||||||
Workers’ compensation losses arising from a single catastrophe event | 7/1/2007 to 7/1/2008 | 95 | % | 280 | 20 | |||||||||
[1] | The per occurrence limit on the FHCF treaty increased from $264 for the 6/1/2006 to 6/1/2007 treaty year to $423 for the 6/1/2007 to 6/1/2008 treaty year due to the Company’s election to purchase additional limits under the “Temporary Increase in Coverage Limit (TCIL)” statutory provision in excess of the coverage the Company is required to purchase from the FHCF. |
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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 | Net of | |||||||
Expected | Expected | |||||||
Before | Reinsurance | Before | Reinsurance | |||||
Reinsurance | Recoveries | Reinsurance | Recoveries | |||||
Estimated 250-year probable maximum loss, before-tax | $2,202 | $683 | $1,099 | $286 | ||||
Percentage of statutory surplus of the Property & Casualty operations as of December 31, 2007 | 8% | 3% | ||||||
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Reinsurance Recoverable | December 31, 2007 | December 31, 2006 | ||||||
Paid loss and loss adjustment expenses | $ | 347 | $ | 460 | ||||
Unpaid loss and loss adjustment expenses | 3,788 | 4,417 | ||||||
Gross reinsurance recoverable | 4,135 | 4,877 | ||||||
Less: allowance for uncollectible reinsurance | (404 | ) | (412 | ) | ||||
Net reinsurance recoverable | $ | 3,731 | $ | 4,465 | ||||
Distribution of gross | ||||||||||||||||
reinsurance recoverable | December 31, 2007 | December 31, 2006 | ||||||||||||||
Gross reinsurance recoverable | $ | 4,135 | $ | 4,877 | ||||||||||||
Less: mandatory (assigned risk) pools and structured settlements | (635 | ) | (673 | ) | ||||||||||||
Gross reinsurance recoverable excluding mandatory pools and structured settlements | $ | 3,500 | $ | 4,204 | ||||||||||||
% of Total | % of Total | |||||||||||||||
Rated A — (Excellent) or better by A.M. Best [1] | $ | 2,614 | 74.7 | % | $ | 3,050 | 72.5 | % | ||||||||
Other rated by A.M. Best | 90 | 2.6 | % | 162 | 3.9 | % | ||||||||||
Total rated companies | 2,704 | 77.3 | % | 3,212 | 76.4 | % | ||||||||||
Voluntary pools | 195 | 5.6 | % | 223 | 5.3 | % | ||||||||||
Captives | 231 | 6.6 | % | 197 | 4.7 | % | ||||||||||
Other not rated companies | 370 | 10.5 | % | 572 | 13.6 | % | ||||||||||
Total | $ | 3,500 | 100.0 | % | $ | 4,204 | 100.0 | % | ||||||||
[1] | Based on A.M. Best ratings as of December 31, 2007 and 2006, respectively. |
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Operating Summary | 2007 | 2006 | 2005 | |||||||||
Earned premiums [1] | $ | 10,496 | $ | 10,433 | $ | 10,156 | ||||||
Net investment income | 1,687 | 1,486 | 1,365 | |||||||||
Other revenues [2] | 496 | 473 | 463 | |||||||||
Net realized capital gains (losses) | (172 | ) | 9 | 44 | ||||||||
Total revenues | 12,507 | 12,401 | 12,028 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 6,692 | 6,507 | 6,364 | |||||||||
Current accident year catastrophes | 177 | 199 | 351 | |||||||||
Prior accident years [3] | 48 | 296 | 248 | |||||||||
Total losses and loss adjustment expenses | 6,917 | 7,002 | 6,963 | |||||||||
Amortization of deferred policy acquisition costs | 2,104 | 2,106 | 1,997 | |||||||||
Insurance operating costs and expenses | 716 | 580 | 731 | |||||||||
Other expense | 693 | 643 | 617 | |||||||||
Total benefits, losses and expenses | 10,430 | 10,331 | 10,308 | |||||||||
Income before income taxes | 2,077 | 2,070 | 1,720 | |||||||||
Income tax expense | 570 | 551 | 484 | |||||||||
Net income [4] | $ | 1,507 | $ | 1,519 | $ | 1,236 | ||||||
Net Income (Loss) | ||||||||||||
Ongoing Operations | $ | 1,477 | $ | 1,554 | $ | 1,165 | ||||||
Other Operations | 30 | (35 | ) | 71 | ||||||||
Total Property & Casualty net income | $ | 1,507 | $ | 1,519 | $ | 1,236 | ||||||
[1] | Includes reinstatement premiums related to hurricanes of $73 in 2005. | |
[2] | Primarily servicing revenue. | |
[3] | 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. | |
[4] | Includes net realized capital gains (losses), after tax, of $(112), $46 and $29 for the years ended December 31, 2007, 2006 and 2005, respectively. |
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Ongoing Operations | 2007 | 2006 | 2005 | |||||||||
Written premiums | $ | 10,435 | $ | 10,658 | $ | 10,483 | ||||||
Change in unearned premium reserve | (56 | ) | 230 | 331 | ||||||||
Earned premiums | 10,491 | 10,428 | 10,152 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 6,692 | 6,507 | 6,364 | |||||||||
Current accident year catastrophes | 177 | 199 | 351 | |||||||||
Prior accident years | (145 | ) | (64 | ) | 36 | |||||||
Total losses and loss adjustment expenses | 6,724 | 6,642 | 6,751 | |||||||||
Amortization of deferred policy acquisition costs | 2,104 | 2,106 | 2,000 | |||||||||
Insurance operating costs and expenses | 694 | 569 | 710 | |||||||||
Underwriting results | 969 | 1,111 | 691 | |||||||||
Net servicing income [1] | 52 | 53 | 49 | |||||||||
Net investment income | 1,439 | 1,225 | 1,082 | |||||||||
Net realized capital gains (losses) | (160 | ) | (17 | ) | 19 | |||||||
Other expenses | (248 | ) | (222 | ) | (202 | ) | ||||||
Income before income taxes | 2,052 | 2,150 | 1,639 | |||||||||
Income tax expense | (575 | ) | (596 | ) | (474 | ) | ||||||
Net income | $ | 1,477 | $ | 1,554 | $ | 1,165 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 63.8 | 62.4 | 62.7 | |||||||||
Current accident year catastrophes | 1.7 | 1.9 | 3.5 | |||||||||
Prior accident years | (1.4 | ) | (0.6 | ) | 0.4 | |||||||
Total loss and loss adjustment expense ratio | 64.1 | 63.7 | 66.5 | |||||||||
Expense ratio | 26.3 | 25.6 | 26.5 | |||||||||
Policyholder dividend ratio | 0.4 | 0.1 | 0.1 | |||||||||
Combined ratio | 90.8 | 89.3 | 93.2 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 1.7 | 1.9 | 3.5 | |||||||||
Prior accident years | 0.1 | (0.7 | ) | 0.1 | ||||||||
Total catastrophe ratio | 1.8 | 1.2 | 3.6 | |||||||||
Combined ratio before catastrophes | 89.0 | 88.1 | 89.6 | |||||||||
Combined ratio before catastrophes and prior accident year development | 90.5 | 88.0 | 89.4 | |||||||||
[1] | Net of expenses related to service business. |
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Change in underwriting results | ||||
Earned premiums | ||||
Excluding Omni, a 2% increase in earned premium | $ | 185 | ||
Decrease in earned premium due to the sale of Omni in the fourth quarter of 2006 | (122 | ) | ||
Net increase in earned premiums | 63 | |||
Losses and loss adjustment expenses | ||||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes, excluding Omni | (176 | ) | ||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premium, excluding Omni | (114 | ) | ||
Sale of Omni — Decrease in current accident year loss and loss adjustment expenses before catastrophes as a result of the sale of Omni | 105 | |||
Net increase in current accident year loss and loss adjustment expenses before catastrophes | (185 | ) | ||
Catastrophes — Decrease in current accident year catastrophe losses | 22 | |||
Reserve changes — Increase in net favorable prior accident year reserve development | 81 | |||
Net increase in losses and loss adjustment expenses | (82 | ) | ||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 2 | |||
Increase in insurance operating costs and expenses | (125 | ) | ||
Net increase in operating expenses | (123 | ) | ||
Decrease in underwriting results from 2006 to 2007 | $ | (142 | ) | |
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Personal Lines | Excluding the effect of Omni, the 3.3 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes in Personal Lines was primarily due to increased severity on auto liability claims, increased frequency on auto property damage claims and, to a lesser extent, increased severity on homeowners claims, partially offset by the effect of earned pricing increases in homeowners. | |
Small Commercial | The 1.4 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes in Small Commercial was primarily due to a higher loss ratio and loss adjustment expense ratio for package business and commercial auto claims, partially offset by a lower loss and loss adjustment expense ratio for workers’ compensation claims. | |
Middle Market | The 2.2 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes in Middle Market was primarily due to a higher loss and loss adjustment expense ratio for workers’ compensation, general liability and commercial auto claims driven, in part, by earned pricing decreases. For commercial auto, loss costs increased for both liability and property damage claims. | |
Specialty Commercial | The 2.2 point decrease in the current accident year loss and loss adjustment expense ratio before catastrophes in Specialty Commercial was primarily due to a lower loss and loss adjustment ratio on directors and officers insurance in professional liability, partially offset by a higher loss and loss adjustment expense ratio on casualty business. |
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Change in underwriting results | ||||
Earned premiums | ||||
An increase in earned premium, excluding a decrease in catastrophe treaty reinstatement premium | $ | 203 | ||
An increase in earned premium due to a decrease in catastrophe treaty reinstatement premium | 73 | |||
Increase in earned premiums | 276 | |||
Losses and loss adjustment expenses | ||||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premium | (127 | ) | ||
Ratio change — Excluding the effect of catastrophe treaty reinstatement premium, an increase in the current accident year non-catastrophe loss and loss adjustment expense ratio | (16 | ) | ||
Total increase in current accident year loss and loss adjustment expenses before catastrophes | (143 | ) | ||
Catastrophes — Decrease in current accident year catastrophe losses | 152 | |||
Reserve changes — Change in net favorable prior accident year reserve development | 100 | |||
Net decrease in losses and loss adjustment expenses | 109 | |||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (106 | ) | ||
Decrease in insurance operating costs and expenses | 141 | |||
Net decrease in operating expenses | 35 | |||
Increase in underwriting results from 2005 to 2006 | $ | 420 | ||
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Personal Lines | Excluding the effect of catastrophe treaty reinstatement premium, the 0.9 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes in Personal Lines was primarily 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. | |
Small Commercial | Excluding the effect of catastrophe treaty reinstatement premium, the 1.8 point decrease in the current accident year loss and loss adjustment expense ratio before catastrophes in Small Commercial was primarily due to a lower loss and loss adjustment expense ratio on workers’ compensation business and a decrease in non-catastrophe property loss costs, partially offset by a shift to more workers’ compensation premium which has a higher loss and loss adjustment expense ratio than other business in the segment. Non-catastrophe property loss costs were favorable primarily due to favorable claim frequency. | |
Middle Market | Excluding the effect of catastrophe treaty reinstatement premium, the 2.1 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes in Middle Market was primarily due to an increase in non-catastrophe property loss costs, the effect of earned pricing decreases 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 was primarily due to increasing claim severity. | |
Specialty Commercial | Excluding the effect of catastrophe treaty reinstatement premium, the 0.3 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes in Specialty Commercial was primarily due to a higher loss and loss adjustment expense ratio on casualty and professional liability business and the effect of an increase in the allocation to Specialty Commercial of premiums ceded under the Company’s principal property catastrophe reinsurance program, partially offset by lower non-catastrophe property loss costs. |
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Written Premiums [1] | 2007 | 2006 | 2005 | |||||||||
Business Unit | ||||||||||||
AARP | $ | 2,750 | $ | 2,580 | $ | 2,373 | ||||||
Agency | 1,123 | 1,100 | 1,020 | |||||||||
Other | 74 | 197 | 283 | |||||||||
Total | $ | 3,947 | $ | 3,877 | $ | 3,676 | ||||||
Product Line | ||||||||||||
Automobile | $ | 2,848 | $ | 2,856 | $ | 2,753 | ||||||
Homeowners | 1,099 | 1,021 | 923 | |||||||||
Total | $ | 3,947 | $ | 3,877 | $ | 3,676 | ||||||
Earned Premiums [1] | 2007 | 2006 | 2005 | |||||||||
Business Unit | ||||||||||||
AARP | $ | 2,681 | $ | 2,466 | $ | 2,296 | ||||||
Agency | 1,123 | 1,068 | 997 | |||||||||
Other | 85 | 226 | 317 | |||||||||
Total | $ | 3,889 | $ | 3,760 | $ | 3,610 | ||||||
Product Line | ||||||||||||
Automobile | $ | 2,822 | $ | 2,792 | $ | 2,728 | ||||||
Homeowners | 1,067 | 968 | 882 | |||||||||
Total | $ | 3,889 | $ | 3,760 | $ | 3,610 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Premium Measures | 2007 | 2006 | 2005 | |||||||||
Policies in-force at year end | ||||||||||||
Automobile | 2,349,402 | 2,276,165 | 2,222,689 | |||||||||
Homeowners | 1,481,542 | 1,440,399 | 1,365,585 | |||||||||
Total policies in-force at year end | 3,830,944 | 3,716,564 | 3,588,274 | |||||||||
New business premium | ||||||||||||
Automobile | $ | 424 | $ | 469 | $ | 426 | ||||||
Homeowners | $ | 140 | $ | 161 | $ | 131 | ||||||
Premium Renewal Retention | ||||||||||||
Automobile | 88 | % | 87 | % | 87 | % | ||||||
Homeowners | 96 | % | 94 | % | 94 | % | ||||||
Written Pricing Increase (Decrease) | ||||||||||||
Automobile | — | (1 | %) | — | ||||||||
Homeowners | 5 | % | 5 | % | 6 | % | ||||||
Earned Pricing Increase (Decrease) | ||||||||||||
Automobile | (1 | %) | (1 | %) | 1 | % | ||||||
Homeowners | 6 | % | 5 | % | 7 | % | ||||||
• | AARP earned premium grew $215, or 9%, reflecting growth in the size of the AARP target market, the effect of direct marketing programs and the effect of cross selling homeowners insurance to insureds who have auto policies. |
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• | Agency earned premium grew $55, or 5%, 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 allows Personal Lines to write a broader class of risks. 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 34 states with four distinct package offerings as of December 31, 2007. |
• | Other earned premium decreased by $141, primarily due to the sale of Omni on November 30, 2006 and a strategic decision to reduce other affinity business. Omni accounted for earned premiums of $127 for the year ended December 31, 2006. |
• | 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 was offered in 29 states with four distinct package offerings as of the year ended December 31, 2006. |
• | 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. |
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Personal Lines — Underwriting Summary | 2007 | 2006 | 2005 | |||||||||
Written premiums | $ | 3,947 | $ | 3,877 | $ | 3,676 | ||||||
Change in unearned premium reserve | 58 | 117 | 66 | |||||||||
Earned premiums | 3,889 | 3,760 | 3,610 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 2,576 | 2,396 | 2,291 | |||||||||
Current accident year catastrophes | 125 | 120 | 98 | |||||||||
Prior accident years | (4 | ) | (38 | ) | (95 | ) | ||||||
Total losses and loss adjustment expenses | 2,697 | 2,478 | 2,294 | |||||||||
Amortization of deferred policy acquisition costs | 617 | 622 | 581 | |||||||||
Insurance operating costs and expenses | 253 | 231 | 275 | |||||||||
Underwriting results | $ | 322 | $ | 429 | $ | 460 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 66.2 | 63.8 | 63.5 | |||||||||
Current accident year catastrophes | 3.2 | 3.2 | 2.7 | |||||||||
Prior accident years | (0.1 | ) | (1.0 | ) | (2.6 | ) | ||||||
Total loss and loss adjustment expense ratio | 69.3 | 65.9 | 63.6 | |||||||||
Expense ratio | 22.4 | 22.7 | 23.7 | |||||||||
Combined ratio | 91.7 | 88.6 | 87.3 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 3.2 | 3.2 | 2.7 | |||||||||
Prior accident years | 0.2 | (0.4 | ) | 0.2 | ||||||||
Total catastrophe ratio | 3.4 | 2.8 | 2.9 | |||||||||
Combined ratio before catastrophes | 88.3 | 85.8 | 84.4 | |||||||||
Combined ratio before catastrophes and prior accident year development | 88.6 | 86.4 | 87.2 | |||||||||
Other revenues [1] | $ | 141 | $ | 135 | $ | 121 | ||||||
[1] | Represents servicing revenue |
Combined Ratios | ||||||||||||
Automobile | 96.2 | 93.6 | 90.7 | |||||||||
Homeowners | 79.8 | 74.0 | 76.6 | |||||||||
Total | 91.7 | 88.6 | 87.3 | |||||||||
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Change in underwriting results | ||||
Earned premiums | ||||
Excluding Omni, a 7% increase in earned premium | $ | 251 | ||
Decrease in earned premium due to the sale of Omni in the fourth quarter of 2006 | (122 | ) | ||
Net increase in earned premiums | 129 | |||
Losses and loss adjustment expenses | ||||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premiums, excluding Omni | (160 | ) | ||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes, excluding Omni | (125 | ) | ||
Sale of Omni — Decrease in current accident year loss and loss adjustment expenses before catastrophes as a result of the sale of Omni | 105 | |||
Net increase in current accident year loss and loss adjustment expenses before catastrophes | (180 | ) | ||
Catastrophes — Increase in current accident year catastrophe losses | (5 | ) | ||
Reserve changes — A decrease in net favorable prior accident year reserve development | (34 | ) | ||
Net increase in losses and loss adjustment expenses | (219 | ) | ||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 5 | |||
Increase in insurance operating costs and expenses | (22 | ) | ||
Net increase in operating expenses | (17 | ) | ||
Decrease in underwriting results from 2006 to 2007 | $ | (107 | ) | |
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Change in underwriting results | ||||
Earned premiums | ||||
An increase in earned premium, excluding a decrease in catastrophe treaty reinstatement premium | $ | 119 | ||
An increase in earned premium due to a decrease in catastrophe treaty reinstatement premium | 31 | |||
Increase in earned premiums | 150 | |||
Losses and loss adjustment expenses | ||||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premium | (75 | ) | ||
Ratio change — Excluding the effect of catastrophe treaty reinstatement premium, an increase in the current accident year non-catastrophe loss and loss adjustment expense ratio before catastrophes | (30 | ) | ||
Total increase in current accident year loss and loss adjustment expenses before catastrophes | (105 | ) | ||
Catastrophes — Increase in current accident year catastrophe losses | (22 | ) | ||
Reserve changes — Decrease in net favorable prior accident year reserve development | (57 | ) | ||
Increase in losses and loss adjustment expenses | (184 | ) | ||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (41 | ) | ||
Decrease in insurance operating costs and expenses | 44 | |||
Net decrease in operating expenses | 3 | |||
Decrease in underwriting results from 2005 to 2006 | $ | (31 | ) | |
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• | Written premium growth of 2% to 5%, with auto written premium 3% to 6% higher and homeowners written premium flat to 3.0% higher |
• | A combined ratio before catastrophes and prior accident year development of 88.5 to 91.5 |
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Premiums [1] | 2007 | 2006 | 2005 | |||||||||
Written premiums | $ | 2,747 | $ | 2,728 | $ | 2,545 | ||||||
Earned premiums | $ | 2,736 | $ | 2,652 | $ | 2,421 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Premium Measures | 2007 | 2006 | 2005 | |||||||||
New business premium | $ | 481 | $ | 533 | $ | 581 | ||||||
Premium renewal retention | 84 | % | 87 | % | 88 | % | ||||||
Written pricing increase (decrease) | (2 | %) | 1 | % | 2 | % | ||||||
Earned pricing increase (decrease) | (1 | %) | 1 | % | 3 | % | ||||||
Policies in-force end of period | 1,038,542 | 991,979 | 921,952 | |||||||||
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Small Commercial — Underwriting Summary | 2007 | 2006 | 2005 | |||||||||
Written premiums | $ | 2,747 | $ | 2,728 | $ | 2,545 | ||||||
Change in unearned premium reserve | 11 | 76 | 124 | |||||||||
Earned premiums | 2,736 | 2,652 | 2,421 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 1,594 | 1,509 | 1,426 | |||||||||
Current accident year catastrophes | 28 | 34 | 50 | |||||||||
Prior accident years | (209 | ) | (75 | ) | (24 | ) | ||||||
Total losses and loss adjustment expenses | 1,413 | 1,468 | 1,452 | |||||||||
Amortization of deferred policy acquisition costs | 635 | 634 | 596 | |||||||||
Insurance operating costs and expenses | 180 | 128 | 141 | |||||||||
Underwriting results | $ | 508 | $ | 422 | $ | 232 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 58.3 | 56.9 | 58.9 | |||||||||
Current accident year catastrophes | 1.0 | 1.3 | 2.1 | |||||||||
Prior accident years | (7.6 | ) | (2.8 | ) | (1.0 | ) | ||||||
Total loss and loss adjustment expense ratio | 51.6 | 55.3 | 60.0 | |||||||||
Expense ratio | 29.2 | 28.5 | 30.2 | |||||||||
Policyholder dividend ratio | 0.6 | 0.2 | 0.2 | |||||||||
Combined ratio | 81.4 | 84.1 | 90.4 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 1.0 | 1.3 | 2.1 | |||||||||
Prior accident years | 0.2 | (0.7 | ) | 0.4 | ||||||||
Total catastrophe ratio | 1.2 | 0.6 | 2.5 | |||||||||
Combined ratio before catastrophes | 80.3 | 83.5 | 87.9 | |||||||||
Combined ratio before catastrophes and prior accident year development | 88.0 | 85.6 | 89.3 | |||||||||
Change in underwriting results | ||||
Increase in earned premiums | $ | 84 | ||
Losses and loss adjustment expenses | ||||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premium | (47 | ) | ||
Ratio change — An increase in the current accident year non-catastrophe loss and loss adjustment expense ratio before catastrophes | (38 | ) | ||
Net increase in current accident year loss and loss adjustment expenses before catastrophes | (85 | ) | ||
Catastrophes — Decrease in current accident year catastrophe losses | 6 | |||
Reserve changes — Increase in net favorable prior accident year reserve development | 134 | |||
Net decrease in losses and loss adjustment expenses | 55 | |||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (1 | ) | ||
Increase in insurance operating costs and expenses | (52 | ) | ||
Increase in operating expenses | (53 | ) | ||
Increase in underwriting results from 2006 to 2007 | $ | 86 | ||
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Change in underwriting results | ||||
Earned premiums | ||||
An increase in earned premium, excluding a decrease in catastrophe treaty reinstatement premium | $ | 224 | ||
An increase in earned premium due to a decrease in catastrophe treaty reinstatement premium | 7 | |||
Increase in earned premiums | 231 | |||
Losses and loss adjustment expenses | ||||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premium | (132 | ) | ||
Ratio change — Excluding the effect of catastrophe treaty reinstatement premium, a decrease in the current accident year non-catastrophe loss and loss adjustment expense ratio before catastrophes | 49 | |||
Net increase in current accident year loss and loss adjustment expenses before catastrophes | (83 | ) | ||
Catastrophes — Decrease in current accident year catastrophe losses | 16 | |||
Reserve changes — Increase in net favorable prior accident year reserve development | 51 | |||
Net increase in losses and loss adjustment expenses | (16 | ) | ||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (38 | ) | ||
Decrease in insurance operating costs and expenses | 13 | |||
Net increase in operating expenses | (25 | ) | ||
Increase in underwriting results from 2005 to 2006 | $ | 190 | ||
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• | Written premium flat to 3% higher |
• | A combined ratio before catastrophes and prior accident year development of 86.0 to 89.0 |
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Premiums [1] | 2007 | 2006 | 2005 | |||||||||
Written premiums | $ | 2,257 | $ | 2,445 | $ | 2,445 | ||||||
Earned premiums | $ | 2,351 | $ | 2,454 | $ | 2,355 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Premium Measures | 2007 | 2006 | 2005 | |||||||||
New business premium | $ | 390 | $ | 462 | $ | 600 | ||||||
Premium renewal retention | 77 | % | 82 | % | 81 | % | ||||||
Written pricing increase (decrease) | (5 | %) | (5 | %) | (5 | %) | ||||||
Earned pricing increase (decrease) | (5 | %) | (5 | %) | (3 | %) | ||||||
Policies in-force as of end of period | 80,377 | 78,747 | 77,350 | |||||||||
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Middle Market — Underwriting Summary | 2007 | 2006 | 2005 | |||||||||
Written premiums | $ | 2,257 | $ | 2,445 | $ | 2,445 | ||||||
Change in unearned premium reserve | (94 | ) | (9 | ) | 90 | |||||||
Earned premiums | 2,351 | 2,454 | 2,355 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 1,523 | 1,533 | 1,431 | |||||||||
Current accident year catastrophes | 15 | 36 | 38 | |||||||||
Prior accident years | (14 | ) | 15 | 52 | ||||||||
Total losses and loss adjustment expenses | 1,524 | 1,584 | 1,521 | |||||||||
Amortization of deferred policy acquisition costs | 529 | 544 | 537 | |||||||||
Insurance operating costs and expenses | 154 | 119 | 134 | |||||||||
Underwriting results | $ | 144 | $ | 207 | $ | 163 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 64.8 | 62.6 | 60.7 | |||||||||
Current accident year catastrophes | 0.7 | 1.5 | 1.6 | |||||||||
Prior accident years | (0.6 | ) | 0.6 | 2.2 | ||||||||
Total loss and loss adjustment expense ratio | 64.8 | 64.7 | 64.6 | |||||||||
Expense ratio | 28.4 | 26.7 | 28.5 | |||||||||
Policyholder dividend ratio | 0.6 | 0.2 | 0.1 | |||||||||
Combined ratio | 93.9 | 91.6 | 93.2 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 0.7 | 1.5 | 1.6 | |||||||||
Prior accident years | (0.1 | ) | — | (0.2 | ) | |||||||
Total catastrophe ratio | 0.5 | 1.5 | 1.4 | |||||||||
Combined ratio before catastrophes | 93.4 | 90.1 | 91.7 | |||||||||
Combined ratio before catastrophes and prior accident year development | 93.8 | 89.5 | 89.3 | |||||||||
Change in underwriting results | ||||
Decrease in earned premiums | $ | (103 | ) | |
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year loss and loss adjustment expenses before catastrophes due to the decrease in earned premium | 61 | |||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes | (51 | ) | ||
Net decrease in current accident year loss and loss adjustment expenses before catastrophes | 10 | |||
Catastrophes — Decrease in current accident year catastrophe losses | 21 | |||
Reserve changes — Change to net favorable prior accident year reserve development | 29 | |||
Net decrease in losses and loss adjustment expenses | 60 | |||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 15 | |||
Increase in insurance operating costs and expenses | (35 | ) | ||
Net increase in operating expenses | (20 | ) | ||
Decrease in underwriting results from 2006 to 2007 | $ | (63 | ) | |
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Change in underwriting results | ||||
Earned premiums | ||||
An increase in earned premium, excluding a decrease in catastrophe treaty reinstatement premium | $ | 91 | ||
An increase in earned premium due to a decrease in catastrophe treaty reinstatement premium | 8 | |||
Increase in earned premiums | 99 | |||
Losses and loss adjustment expenses | ||||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premium | (50 | ) | ||
Ratio change — Excluding the effect of catastrophe treaty reinstatement premium, an increase in the current accident year non-catastrophe loss and loss adjustment expense ratio before catastrophes | (52 | ) | ||
Total increase in current accident year loss and loss adjustment expenses before catastrophes | (102 | ) | ||
Catastrophes — Decrease in current accident year catastrophe losses | 2 | |||
Reserve changes — Decrease in net unfavorable prior accident year reserve development | 37 | |||
Net increase in losses and loss adjustment expenses | (63 | ) | ||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (7 | ) | ||
Decrease in insurance operating costs and expenses | 15 | |||
Net decrease in operating expenses | 8 | |||
Increase in underwriting results from 2005 to 2006 | $ | 44 | ||
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• | Written premium 1% to 4% lower |
• | A combined ratio before catastrophes and prior accident year development of 94.5 to 97.5 |
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Written Premiums [1] | 2007 | 2006 | 2005 | |||||||||
Property | $ | 180 | $ | 212 | $ | 211 | ||||||
Casualty | 534 | 582 | 826 | |||||||||
Professional liability, fidelity and surety | 689 | 697 | 613 | |||||||||
Other | 81 | 117 | 167 | |||||||||
Total | $ | 1,484 | $ | 1,608 | $ | 1,817 | ||||||
Earned Premiums [1] | ||||||||||||
Property | $ | 202 | $ | 213 | $ | 245 | ||||||
Casualty | 543 | 579 | 796 | |||||||||
Professional liability, fidelity and surety | 685 | 650 | 555 | |||||||||
Other | 85 | 120 | 170 | |||||||||
Total | $ | 1,515 | $ | 1,562 | $ | 1,766 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
• | Property earned premiums decreased by $11, or 5%, primarily due to lower premium renewal retention and the effect of an arrangement with Berkshire Hathaway to share premiums written under subscription policies. Under the arrangement with Berkshire Hathaway that commenced in the second quarter of 2007, a share of excess and surplus lines business that was previously written entirely by the Company is now being written in conjunction with Berkshire Hathaway under subscription policies, whereby both companies share, or participate, in the business written. The arrangement with Berkshire Hathaway enables the Company to offer its insureds larger policy limits and thereby enhance its competitive position in the marketplace. The decrease in earned premium was partially offset by the effect of earned pricing increases, new business growth, lower reinsurance costs and a decrease in reinstatement premium payable to reinsurers. Renewal retention has decreased in 2007, primarily due to increased competition on national account business as well as in the standard excess and surplus lines market. After experiencing significant rate increases throughout 2006 and smaller rate increases for the first six months of 2007, written pricing decreased in the last six months of the year. While new business decreased in the fourth quarter of 2007, new business increased for the full year, largely because the Company had significantly curtailed new business in 2006 in order to reduce catastrophe loss exposures in certain geographic areas. |
• | Casualty earned premiums decreased by $36, or 6%, for the year ended December 31, 2007, primarily because of a decline in new business written premium and lower premium renewal retention on business written through industry trade groups. Also contributing to the decrease in earned premiums was an increase in the estimated return premium due to insureds under retrospectively-rated policies. |
• | Professional liability, fidelity and surety earned premium grew $35, or 5%, for the year ended December 31, 2007 due to an increase in earned premiums in professional liability and surety business. The increase in earned premium from professional liability business was primarily due to a decrease in the portion of risks ceded to outside reinsurers and an increase in the mix of lower limit middle market professional liability premium, partially offset by the effect of earned pricing decreases and a decrease in new business written premium. A lower frequency of class action cases in the past couple of years has put downward pressure on rates during 2006 and 2007. The increase in earned premium from surety business was primarily due to an increase in public construction spending and construction costs, resulting in more bonded work programs for current clients and larger bond limits. |
• | Within the “other” category, earned premium decreased by $35, or 29%. The “Other” category of earned premiums includes premiums assumed under inter-segment arrangements. Beginning in the third quarter of 2006, the Company reduced the premiums assumed by Specialty Commercial under inter-segment arrangements covering certain liability claims. |
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• | 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 the non-recurrence of $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 $217, or 27%, 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 reinsurance program to Specialty Commercial and less to Personal Lines, Small Commercial and Middle Market. 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. |
Specialty Commercial — Underwriting Summary | 2007 | 2006 | 2005 | |||||||||
Written premiums | $ | 1,484 | $ | 1,608 | $ | 1,817 | ||||||
Change in unearned premium reserve | (31 | ) | 46 | 51 | ||||||||
Earned premiums | 1,515 | 1,562 | 1,766 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 999 | 1,069 | 1,216 | |||||||||
Current accident year catastrophes | 9 | 9 | 165 | |||||||||
Prior accident years | 82 | 34 | 103 | |||||||||
Total losses and loss adjustment expenses | 1,090 | 1,112 | 1,484 | |||||||||
Amortization of deferred policy acquisition costs | 323 | 306 | 286 | |||||||||
Insurance operating costs and expenses | 107 | 91 | 160 | |||||||||
Underwriting results | $ | (5 | ) | $ | 53 | $ | (164 | ) | ||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 66.0 | 68.2 | 68.9 | |||||||||
Current accident year catastrophes | 0.6 | 0.6 | 9.3 | |||||||||
Prior accident years | 5.4 | 2.3 | 5.8 | |||||||||
Total loss and loss adjustment expense ratio | 72.0 | 71.1 | 84.1 | |||||||||
Expense ratio | 27.5 | 25.7 | 24.6 | |||||||||
Policyholder dividend ratio | 0.9 | (0.1 | ) | 0.5 | ||||||||
Combined ratio | 100.4 | 96.7 | 109.2 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 0.6 | 0.6 | 9.3 | |||||||||
Prior accident years | 0.1 | (2.5 | ) | 0.1 | ||||||||
Total catastrophe ratio | 0.7 | (1.9 | ) | 9.5 | ||||||||
Combined ratio before catastrophes | 99.7 | 98.5 | 99.7 | |||||||||
Combined ratio before catastrophes and prior accident year development | 94.4 | 93.8 | 94.1 | |||||||||
Other revenues [1] | $ | 354 | $ | 337 | $ | 343 | ||||||
[1] | Represents servicing revenue |
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Change in underwriting results | ||||
Decrease in earned premiums | $ | (47 | ) | |
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year loss and loss adjustment expenses before catastrophes due to the decrease in earned premium | 37 | |||
Ratio change — Decrease in the current accident year non-catastrophe loss and loss adjustment expense ratio before catastrophes | 33 | |||
Total decrease in current accident year loss and loss adjustment expenses before catastrophes | 70 | |||
Reserve changes — Increase in net unfavorable prior accident year reserve development | (48 | ) | ||
Net decrease in losses and loss adjustment expenses | 22 | |||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (17 | ) | ||
Increase in insurance operating costs and expenses | (16 | ) | ||
Increase in operating expenses | (33 | ) | ||
Decrease in underwriting results from 2006 to 2007 | $ | (58 | ) | |
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Change in underwriting results | ||||
Earned premiums | ||||
A decrease in earned premium, excluding a decrease in catastrophe treaty reinstatement premium | $ | (231 | ) | |
An increase in earned premium due to a decrease in catastrophe treaty reinstatement premium | 27 | |||
Net decrease in earned premiums | (204 | ) | ||
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year loss and loss adjustment expenses before catastrophes due to the decrease in earned premium | 152 | |||
Ratio change — Excluding the effect of catastrophe treaty reinstatement premium, a slight increase in the current accident year non-catastrophe loss and loss adjustment expense ratio before catastrophes | (5 | ) | ||
Net decrease in current accident year loss and loss adjustment expenses before catastrophes | 147 | |||
Catastrophes — Decrease in current accident year catastrophe losses | 156 | |||
Reserve changes — Decrease in net unfavorable prior accident year reserve development | 69 | |||
Decrease in losses and loss adjustment expenses | 372 | |||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (20 | ) | ||
Decrease in insurance operating costs and expenses | 69 | |||
Net decrease in operating expenses | 49 | |||
Improvement in underwriting results from 2005 to 2006 | $ | 217 | ||
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• | Written premium flat to 3% higher |
• | A combined ratio before catastrophes and prior accident year development of 96.0 to 99.0 |
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2007 | 2006 | 2005 | ||||||||||
Written premiums | $ | 5 | $ | 4 | $ | 4 | ||||||
Change in unearned premium reserve | — | (1 | ) | — | ||||||||
Earned premiums | 5 | 5 | 4 | |||||||||
Losses and loss adjustment expenses — prior year | 193 | 360 | 212 | |||||||||
Amortization of deferred policy acquisition costs | — | — | (3 | ) | ||||||||
Insurance operating costs and expenses | 22 | 11 | 21 | |||||||||
Underwriting results | (210 | ) | (366 | ) | (226 | ) | ||||||
Net investment income | 248 | 261 | 283 | |||||||||
Net realized capital gains (losses) | (12 | ) | 26 | 25 | ||||||||
Other expenses | (1 | ) | (1 | ) | (1 | ) | ||||||
Income tax benefit (expense) | 5 | 45 | (10 | ) | ||||||||
Net income (loss) | $ | 30 | $ | (35 | ) | $ | 71 | |||||
• | A $156 increase in underwriting results, primarily due to a $167 decrease in unfavorable prior year loss development. Reserve development in 2007 included $99 principally as a result of an adverse arbitration decision and $25 of environmental reserve strengthening. In 2006, reserve development included a $243 reduction in net reinsurance recoverables, $43 of environmental reserve strengthening and $12 of reserve strengthening for assumed reinsurance. |
• | A $13 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 $26 of net realized capital gains in 2006 to $12 of net realized capital losses in 2007, primarily due to an increase in credit-related impairments and decreases in the fair value of non-qualifying derivatives attributable to changes in value associated with credit derivatives due to credit spreads widening. |
• | A $40 decrease in income tax benefit, primarily as a result of a change from a pre-tax loss in 2006 to pre-tax income in 2007. |
• | 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. |
• | 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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Asbestos | Environmental | All Other [1][6] | Total | |||||||||||||
2007 | ||||||||||||||||
Beginning liability — net [2] [3] | $ | 2,242 | $ | 316 | $ | 1,858 | $ | 4,416 | ||||||||
Losses and loss adjustment expenses incurred | 43 | 28 | 122 | 193 | ||||||||||||
Losses and loss adjustment expenses paid | (287 | ) | (93 | ) | (217 | ) | (597 | ) | ||||||||
Reallocation of reserves for unallocated loss adjustment expenses [4] | — | — | 125 | 125 | ||||||||||||
Ending liability — net [2] [3] | $ | 1,998 | [5] | $ | 251 | $ | 1,888 | $ | 4,137 | |||||||
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 | $ | 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 | ||||||||
[1] | “All Other” includes unallocated loss adjustment expense reserves and the allowance for uncollectible reinsurance. | |
[2] | Excludes asbestos and environmental net liabilities reported in Ongoing Operations of $9 and $6, respectively, as of December 31, 2007, $9 and $6, respectively, as of December 31, 2006, and $10 and $6, respectively, as of December 31, 2005. Total net losses and loss adjustment expenses incurred in Ongoing Operations for the years ended December 31, 2007, 2006 and 2005 includes $10, $11 and $11, respectively, related to asbestos and environmental claims. Total net losses and loss adjustment expenses paid in Ongoing Operations for the years ended December 31, 2007, 2006 and 2005 includes $10, $12 and $17, respectively, related to asbestos and environmental claims. | |
[3] | Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were $2,707 and $290, respectively, as of December 31, 2007, $3,242 and $362, respectively, as of December 31, 2006, and $3,845 and $432, respectively, as of December 31, 2005. | |
[4] | Prior to the second quarter of 2007, the Company evaluated the adequacy of the reserves for unallocated loss adjustment expenses on a company-wide basis. During the second quarter of 2007, the Company refined its analysis of the reserves at the segment level, resulting in the reallocation of reserves among segments, including a reallocation of reserves from Ongoing Operations to Other Operations. | |
[5] | The one year and average three year net paid amounts for asbestos claims, including Ongoing Operations, were $291 and $291, respectively, resulting in a one year net survival ratio of 6.9 and a three year net survival ratio of 6.9. Net survival ratio is the quotient of the net carried reserves divided by the average annual payment amount and is an indication of the number of years that the net carried reserve would last (i.e. survive) if the future annual claim payments were consistent with the calculated historical average. | |
[6] | 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. |
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As of December 31, 2007
Gross Environmental Reserves as of September 30, 2007 [1] | Number of Accounts [2] | Total Reserves | |||||||||
Accounts with future exposure > $2.5 | 8 | $ | 38 | ||||||||
Accounts with future exposure < $2.5 | 520 | 100 | |||||||||
Other direct [3] | — | 29 | |||||||||
Total Direct | 528 | 167 | |||||||||
Assumed Reinsurance | 87 | ||||||||||
London Market | 47 | ||||||||||
Total gross environmental reserves as of September 30, 2007 [1] | 301 | ||||||||||
Gross paid loss activity for the fourth quarter 2007 | (12 | ) | |||||||||
Gross incurred loss activity for the fourth quarter 2007 | 1 | ||||||||||
Total gross environmental reserves as of December 31, 2007 [4] [5] | $ | 290 | |||||||||
[1] | Gross Environmental Reserves based on the third quarter 2007 environmental reserve study. | |
[2] | Number of accounts established as of June 2007. | |
[3] | Includes unallocated IBNR. | |
[4] | The one year gross paid amount for total environmental claims is $121, resulting in a one year gross survival ratio of 2.4. | |
[5] | The three year average gross paid amount for total environmental claims is $108, resulting in a three year gross survival ratio of 2.7. |
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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, 2007
Number of | All Time | Total | All Time | |||||||||||||
Accounts [2] | Paid [3] | Reserves | Ultimate [3] | |||||||||||||
Gross Asbestos Reserves as of June 30, 2007 [1] | ||||||||||||||||
Major asbestos defendants [5] | ||||||||||||||||
Structured settlements (includes 3 Wellington accounts) | 6 | $ | 260 | $ | 443 | $ | 703 | |||||||||
Wellington (direct only) | 30 | 858 | 75 | 933 | ||||||||||||
Other major asbestos defendants | 29 | 478 | 163 | 641 | ||||||||||||
No known policies (includes 3 Wellington accounts) | 5 | — | — | — | ||||||||||||
Accounts with future exposure > $2.5 | 72 | 724 | 705 | 1,429 | ||||||||||||
Accounts with future exposure < $2.5 | 1,077 | 443 | 130 | 573 | ||||||||||||
Unallocated [6] | 1,318 | 418 | 1,736 | |||||||||||||
Total Direct | 4,081 | 1,934 | 6,015 | |||||||||||||
Assumed Reinsurance | 1,003 | 552 | 1,555 | |||||||||||||
London Market | 547 | 381 | 928 | |||||||||||||
Total as of June 30, 2007 [1] | 5,631 | 2,867 | 8,498 | |||||||||||||
Gross paid loss activity for the third quarter and fourth quarter 2007 | 167 | (167 | ) | — | ||||||||||||
Gross incurred loss activity for the third quarter and fourth quarter 2007 | — | 7 | 7 | |||||||||||||
Total as of December 31, 2007 [4] | $ | 5,798 | $ | 2,707 | $ | 8,505 | ||||||||||
[1] | Gross Asbestos Reserves based on the second quarter 2007 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 2007. | |
[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 of 5.4 as December 31, 2007 is computed based on total paid losses of $1.506 billion for the period from January 1, 2005 to December 31, 2007. As of December 31, 2007, the one year gross paid amount for total asbestos claims is $397 resulting in a one year gross survival ratio of 6.8. | |
[5] | Includes 26 open accounts at June 30, 2007. Included 28 open accounts at June 30, 2006. | |
[6] | Includes closed accounts (exclusive of Major Asbestos Defendants) and unallocated IBNR. |
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Environmental
Asbestos [1] | Environmental [1] | |||||||||||||||
Paid | Incurred | Paid | Incurred | |||||||||||||
2007 | Losses & LAE | Losses & LAE | Losses & LAE | Losses & LAE | ||||||||||||
Gross | ||||||||||||||||
Direct | $ | 251 | $ | (289 | ) | $ | 90 | $ | 43 | |||||||
Assumed — Domestic | 112 | 72 | 16 | — | ||||||||||||
London Market | 31 | 76 | 8 | — | ||||||||||||
Total | 394 | (141 | ) | 114 | 43 | |||||||||||
Ceded | (107 | ) | 184 | (21 | ) | (15 | ) | |||||||||
Net | $ | 287 | $ | 43 | $ | 93 | $ | 28 | ||||||||
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 | ||||||||
[1] | Excludes asbestos and environmental paid and incurred loss and LAE reported in Ongoing Operations. Total gross losses and LAE incurred in Ongoing Operations for the twelve months ended December 31, 2007, 2006, and 2005 includes $9, $10 and $17, respectively, related to asbestos and environmental claims. Total gross losses and LAE paid in Ongoing Operations for the twelve months ended December 31, 2007, 2006, and 2005 includes $10, $12 and $23, respectively, related to asbestos and environmental claims. |
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Composition of Invested Assets | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Fixed maturities, available-for-sale, at fair value | $ | 52,542 | 52.6 | % | $ | 52,081 | 58.2 | % | ||||||||
Equity securities, available-for-sale, at fair value | 1,284 | 1.3 | % | 811 | 0.9 | % | ||||||||||
Equity securities held for trading, at fair value | 36,182 | 36.3 | % | 29,393 | 32.9 | % | ||||||||||
Policy loans, at outstanding balance | 2,061 | 2.1 | % | 2,051 | 2.3 | % | ||||||||||
Mortgage loans, at amortized cost [1] | 4,739 | 4.7 | % | 2,909 | 3.3 | % | ||||||||||
Limited partnerships and other alternative investments [2] | 1,306 | 1.3 | % | 794 | 0.9 | % | ||||||||||
Short-term investments | 1,158 | 1.2 | % | 1,092 | 1.2 | % | ||||||||||
Other investments [3] | 534 | 0.5 | % | 281 | 0.3 | % | ||||||||||
Total investments | $ | 99,806 | 100.0 | % | $ | 89,412 | 100.0 | % | ||||||||
[1] | Consist of commercial and agricultural loans. | |
[2] | Includes real estate joint venture. | |
[3] | Primarily relates to derivative instruments. |
Composition of Limited Partnerships and Other Alternative Investments | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Hedge funds [1] | $ | 506 | 38.7 | % | $ | 397 | 50.0 | % | ||||||||
Private equity [2] | 419 | 32.1 | % | 241 | 30.3 | % | ||||||||||
Mortgage and real estate [3] | 309 | 23.7 | % | 88 | 11.1 | % | ||||||||||
Mezzanine debt [4] | 72 | 5.5 | % | 68 | 8.6 | % | ||||||||||
Total | $ | 1,306 | 100.0 | % | $ | 794 | 100.0 | % | ||||||||
[1] | Hedge funds include investments in funds of funds as well as direct funds. The hedge funds of funds invest in approximately 30 to 60 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. Also included is the investment in real estate joint ventures. | |
[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. |
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2007 | 2006 | 2005 | ||||||||||||||||||||||
(Before-tax) | Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | ||||||||||||||||||
Fixed maturities [2] | $ | 3,114 | 5.9 | % | $ | 2,860 | 5.8 | % | $ | 2,659 | 5.7 | % | ||||||||||||
Equity securities, available-for-sale | 86 | 7.0 | % | 56 | 7.3 | % | 40 | 5.8 | % | |||||||||||||||
Mortgage loans | 255 | 6.2 | % | 142 | 6.3 | % | 73 | 6.4 | % | |||||||||||||||
Limited partnerships and other alternative investments | 115 | 12.0 | % | 69 | 12.6 | % | 59 | 20.2 | % | |||||||||||||||
Policy loans | 135 | 6.5 | % | 142 | 6.9 | % | 144 | 6.8 | % | |||||||||||||||
Other [3] | (133 | ) | — | (22 | ) | — | 69 | — | ||||||||||||||||
Investment expense | (75 | ) | — | (63 | ) | — | (46 | ) | — | |||||||||||||||
Total net investment income excluding equity securities held for trading | $ | 3,497 | 6.0 | % | $ | 3,184 | 5.8 | % | $ | 2,998 | 5.7 | % | ||||||||||||
Equity securities held for trading [4] | 145 | 1,824 | 3,847 | |||||||||||||||||||||
Total net investment income | $ | 3,642 | $ | 5,008 | $ | 6,845 | ||||||||||||||||||
[1] | Yields calculated using investment income before investment expenses (excluding income related to equity securities held for trading) divided by the monthly weighted average invested assets at cost, amortized cost, or adjusted carrying value, as applicable excluding equity securities held for trading, collateral received associated with the securities lending program and consolidated variable interest entity minority interests. Included in the fixed maturity yield is Other income (loss) as it primarily relates to fixed maturities, see footnote [3] below. Included in the total net investment income yield is investment expense. | |
[2] | Includes net investment income on short-term bonds. | |
[3] | Primarily represents fees associated with securities lending activities. The income from securities lending activities is included within fixed maturities. Also included are derivatives that qualify for hedge accounting under SFAS 133. These derivatives hedge fixed maturities. | |
[4] | Includes investment income and mark-to-market effects of equity securities, held for trading. |
(Before-tax) | 2007 | 2006 | 2005 | |||||||||
Gross gains on sale | $ | 213 | $ | 215 | $ | 346 | ||||||
Gross losses on sale | (168 | ) | (257 | ) | (254 | ) | ||||||
Impairments | ||||||||||||
Credit related [1] | (241 | ) | (10 | ) | (32 | ) | ||||||
Other [2] | (117 | ) | (66 | ) | (5 | ) | ||||||
Total impairments | (358 | ) | (76 | ) | (37 | ) | ||||||
Japanese fixed annuity contract hedges, net [3] | 18 | (17 | ) | (36 | ) | |||||||
Periodic net coupon settlements on credit derivatives/Japan | (40 | ) | (48 | ) | (32 | ) | ||||||
U.S. GMWB derivatives, net | (277 | ) | (26 | ) | (46 | ) | ||||||
Other, net [4] | (207 | ) | (51 | ) | 34 | |||||||
Net realized capital losses, before-tax | $ | (819 | ) | $ | (260 | ) | $ | (25 | ) | |||
[1] | Relates to impairments for which the Company has current concerns regarding the issuers ability to pay future interest and principal amounts based upon the securities contractual terms or the depression in security value is primarily related to significant issuer specific or sector credit spread widening. | |
[2] | Primarily relates to impairments of securities that had declined in value primarily due to changes in interest rate or general or modest spread widening and for which the Company was uncertain of its intent to retain the investment for a period of time sufficient to allow recovery to cost or amortized cost. | |
[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 and hedge ineffectiveness on qualifying derivative instruments and other investment gains. |
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• | See the Other-Than-Temporary Impairments section that follows for information on impairment losses. | |
• | An increase in losses in 2007 compared to 2006 on GMWB rider embedded derivatives was primarily due to liability model assumption updates and modeling refinements made in 2007, including those for dynamic lapse behavior and correlations of market returns across underlying indices, as well as those to reflect newly reliable market inputs for volatility. For a further discussion of the GMWB rider valuation assumption, see the Capital Markets Risk management section of the MD&A under “Market Risk — Life”. | |
• | Other, net losses in both 2007 and 2006 primarily resulted from the change in value of non-qualifying derivatives due to fluctuations in credit spreads, interest rates, and equity markets. The increase in net losses in 2007 compared to the prior year was primarily due to changes in value associated with credit derivatives due to credit spreads widening. Credit spreads widened primarily due to the deterioration in the U.S. housing market, tightened lending conditions, the market’s flight to quality securities as well as increased likelihood of a U.S. recession. For further discussion, see the “Capital Market Risk Management” section of the MD&A. |
• | 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 the following discussion below. | |
• | 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. | |
• | See the Other-Than-Temporary Impairments section that follows for information on impairment losses. |
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Composition of Invested Assets | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Fixed maturities, available-for-sale, at fair value | $ | 27,205 | 88.8 | % | $ | 26,734 | 91.3 | % | ||||||||
Equity securities, available-for-sale, at fair value | 1,208 | 3.9 | % | 873 | 3.0 | % | ||||||||||
Mortgage loans, at amortized cost [1] | 671 | 2.2 | % | 409 | 1.4 | % | ||||||||||
Limited partnerships and other alternative investments [2] | 1,260 | 4.1 | % | 802 | 2.7 | % | ||||||||||
Short-term investments | 284 | 0.9 | % | 444 | 1.5 | % | ||||||||||
Other investments | 38 | 0.1 | % | 38 | 0.1 | % | ||||||||||
Total investments | $ | 30,666 | 100.0 | % | $ | 29,300 | 100.0 | % | ||||||||
[1] | Consist of commercial and agricultural loans. | |
[2] | Includes hedge fund investments outside of limited partnerships and real estate joint ventures. |
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Composition of Limited Partnerships and Other Alternative Investments | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Hedge funds [1] | $ | 728 | 57.8 | % | $ | 508 | 63.3 | % | ||||||||
Private equity [2] | 193 | 15.3 | % | 123 | 15.3 | % | ||||||||||
Mortgage and real estate [3] | 291 | 23.1 | % | 124 | 15.5 | % | ||||||||||
Mezzanine debt [4] | 48 | 3.8 | % | 47 | 5.9 | % | ||||||||||
Total | $ | 1,260 | 100.0 | % | $ | 802 | 100.0 | % | ||||||||
[1] | Hedge funds include investments in funds of funds as well as direct funds. The hedge funds of funds invest in approximately 30 to 60 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. Also included is the investment in real estate joint venture. | |
[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. |
2007 | 2006 | 2005 | ||||||||||||||||||||||
(Before-tax) | Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | ||||||||||||||||||
Fixed maturities [2] | $ | 1,511 | 5.7 | % | $ | 1,386 | 5.5 | % | $ | 1,280 | 5.5 | % | ||||||||||||
Equity securities, available-for-sale | 50 | 6.0 | % | 35 | 5.5 | % | 18 | 4.0 | % | |||||||||||||||
Mortgage loans | 38 | 6.2 | % | 16 | 5.6 | % | 11 | 5.6 | % | |||||||||||||||
Limited partnerships and other alternative investments | 140 | 14.5 | % | 64 | 9.9 | % | 63 | 13.0 | % | |||||||||||||||
Other [3] | (27 | ) | — | 9 | — | 10 | — | |||||||||||||||||
Investment expense | (25 | ) | — | (24 | ) | — | (17 | ) | — | |||||||||||||||
Net investment income, before-tax | $ | 1,687 | 5.9 | % | $ | 1,486 | 5.5 | % | $ | 1,365 | 5.5 | % | ||||||||||||
Net investment income, after-tax [4] | $ | 1,246 | 4.4 | % | $ | 1,107 | 4.1 | % | $ | 1,016 | 4.1 | % | ||||||||||||
[1] | Yields calculated using investment income before investment expenses divided by the monthly weighted average invested assets at cost, amortized cost, or adjusted carrying value, as applicable, and collateral received associated with the securities lending program. Included in the fixed maturity yield is Other income (loss) as it primarily relates to fixed maturities, see footnote [3] below. Included in the total net investment income yield is investment expense. | |
[2] | Includes net investment income on short-term bonds. | |
[3] | Primarily represents fees associated with securities lending activities. The income from securities lending activities is included within fixed maturities. Also included are derivatives that qualify for hedge accounting under SFAS 133. These derivatives hedge fixed maturities. | |
[4] | Due to significant holdings in tax-exempt investments, after-tax net investment income and yield are also included. |
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2007 | 2006 | 2005 | ||||||||||
Gross gains on sale | $ | 159 | $ | 205 | $ | 163 | ||||||
Gross losses on sale | (121 | ) | (164 | ) | (110 | ) | ||||||
Impairments | ||||||||||||
Credit related [1] | (63 | ) | — | (9 | ) | |||||||
Other [2] | (62 | ) | (45 | ) | (1 | ) | ||||||
Total impairments | (125 | ) | (45 | ) | (10 | ) | ||||||
Periodic net coupon settlements on credit derivatives | 15 | 4 | — | |||||||||
Other, net [3] | (100 | ) | 9 | 1 | ||||||||
Net realized capital gains (losses), before-tax | $ | (172 | ) | $ | 9 | $ | 44 | |||||
[1] | Relates to impairments for which the Company has current concerns regarding the issuers ability to pay future interest and principal amounts based upon the securities contractual terms or the depression in security value is primarily related to significant issuer specific or sector credit spread widening. | |
[2] | Primarily relates to impairments of securities that had declined in value primarily due to changes in interest rate or general or modest spread widening and for which the Company was uncertain of its intent to retain the investment for a period of time sufficient to allow recovery to cost or amortized cost. | |
[3] | Primarily consists of changes in fair value on non-qualifying derivatives, hedge ineffectiveness on qualifying derivative instruments and other investment gains. |
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December 31, 2007 | December 31, 2006 | |||||||||||||||||||||||
Maximum | Maximum | |||||||||||||||||||||||
Carrying | Exposure to | Carrying | Exposure to | |||||||||||||||||||||
Value [1] | Liability [2] | Loss [3] | Value [1] | Liability [2] | Loss [3] | |||||||||||||||||||
Collateralized loan obligations (“CLOs”) and other funds [4] | $ | 359 | $ | 118 | $ | 258 | $ | 296 | $ | 99 | $ | 189 | ||||||||||||
Limited partnerships | 309 | 47 | 220 | 103 | 5 | 85 | ||||||||||||||||||
Other investments [5] | 146 | — | 166 | — | — | — | ||||||||||||||||||
Total [6] | $ | 814 | $ | 165 | $ | 644 | $ | 399 | $ | 104 | $ | 274 | ||||||||||||
[1] | The carrying value of CLOs and other funds and Other investments is equal to fair value. Limited partnerships are accounted for under the equity method. | |
[2] | Creditors have no recourse against the Company in the event of default by the VIE. | |
[3] | The maximum exposure to loss does not include changes in fair value or the Company’s proportionate shares of earnings associated with limited partnerships accounted for under the equity method. The Company’s maximum exposure to loss as of December 31, 2007 and 2006 based on the carrying value was $649 and $295, respectively. The Company’s maximum exposure to loss as of December 31, 2007 and 2006 based on the Company’s initial co-investment or amortized cost basis was $644 and $274, respectively. | |
[4] | The Company provides collateral management services and earns a fee associated with these structures. | |
[5] | Other investments include investment structures that are backed by preferred securities. | |
[6] | As of December 31, 2007 and 2006, the Company had relationships with seven and four VIEs, respectively, where the Company was the primary beneficiary. |
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2007 | 2006 | 2005 | ||||||||||
ABS | ||||||||||||
Sub-prime residential mortgages | $ | 212 | $ | 1 | $ | 1 | ||||||
Other | 19 | 7 | 4 | |||||||||
CMBS/CMOs | 18 | 2 | 1 | |||||||||
Corporate | 165 | 103 | 32 | |||||||||
Foreign government/Government agency | 13 | — | — | |||||||||
Equity | 56 | 8 | 9 | |||||||||
Total other-than-temporary impairments | $ | 483 | $ | 121 | $ | 47 | ||||||
Credit related | $ | 304 | $ | 10 | $ | 41 | ||||||
Other | 179 | 111 | 6 | |||||||||
Total other-than-temporary impairments | $ | 483 | $ | 121 | $ | 47 | ||||||
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December 31, 2007 | ||||||||||||||||||||
Underlying Referenced Asset(s) | ||||||||||||||||||||
Notional | Average Credit | Average | ||||||||||||||||||
Amount | Fair Value | Risk Exposure | Type | Credit Rating | ||||||||||||||||
Credit default swaps [1] | ||||||||||||||||||||
Investment grade risk exposure | $ | 2,263 | $ | (135 | ) | AA | Corporate Credit | BBB+ | ||||||||||||
Below investment grade risk exposure [2] | 594 | (281 | ) | CCC+ | Corporate Credit | BBB- | ||||||||||||||
Credit index swaps | 1,456 | (29 | ) | AAA | Lehman CMBS Index | AAA | ||||||||||||||
Total return swaps | 850 | (41 | ) | NR to A | Bank Loans | B | ||||||||||||||
Total | $ | 5,163 | $ | (486 | ) | |||||||||||||||
[1] | Includes $2.0 billion, as of December 31, 2007, of a standard market index of diversified portfolios of corporate issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. | |
[2] | The fair value includes cash payments received at the inception of certain contracts of $201. The net loss for the year ended December 31, 2007, was $92, before-tax. |
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Consolidated Fixed Maturities by Type | ||||||||||||||||||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||
Auto | $ | 692 | $ | — | $ | (16 | ) | $ | 676 | 0.9 | % | $ | 740 | $ | 1 | $ | (4 | ) | $ | 737 | 0.9 | % | ||||||||||||||||||
Collateralized debt obligations (“CDOs”) [1] | 2,633 | 1 | (118 | ) | 2,516 | 3.1 | % | 957 | 6 | (1 | ) | 962 | 1.2 | % | ||||||||||||||||||||||||||
Credit cards | 957 | 3 | (22 | ) | 938 | 1.2 | % | 1,205 | 8 | (3 | ) | 1,210 | 1.5 | % | ||||||||||||||||||||||||||
Residential mortgage backed (“RMBS”) [2] | 2,999 | 10 | (343 | ) | 2,666 | 3.3 | % | 2,805 | 12 | (9 | ) | 2,808 | 3.6 | % | ||||||||||||||||||||||||||
Student loan | 786 | 1 | (40 | ) | 747 | 0.9 | % | 805 | 5 | — | 810 | 1.0 | % | |||||||||||||||||||||||||||
Other | 1,448 | 18 | (94 | ) | 1,372 | 1.7 | % | 1,175 | 22 | (33 | ) | 1,164 | 1.5 | % | ||||||||||||||||||||||||||
CMBS | ||||||||||||||||||||||||||||||||||||||||
Bonds | 13,641 | 126 | (421 | ) | 13,346 | 16.7 | % | 13,336 | 155 | (116 | ) | 13,375 | 16.9 | % | ||||||||||||||||||||||||||
Commercial real estate (“CRE”) CDOs | 2,243 | 1 | (390 | ) | 1,854 | 2.3 | % | 1,596 | 2 | (10 | ) | 1,588 | 2.0 | % | ||||||||||||||||||||||||||
Interest only (“IOs”) | 1,741 | 117 | (27 | ) | 1,831 | 2.3 | % | 1,884 | 75 | (22 | ) | 1,937 | 2.5 | % | ||||||||||||||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||||||||||
Agency backed | 1,191 | 32 | (4 | ) | 1,219 | 1.5 | % | 1,184 | 17 | (8 | ) | 1,193 | 1.5 | % | ||||||||||||||||||||||||||
Non-agency backed [3] | 525 | 4 | (3 | ) | 526 | 0.7 | % | 116 | — | (1 | ) | 115 | 0.2 | % | ||||||||||||||||||||||||||
Corporate | ||||||||||||||||||||||||||||||||||||||||
Basic industry | 2,508 | 61 | (34 | ) | 2,535 | 3.2 | % | 2,801 | 83 | (32 | ) | 2,852 | 3.6 | % | ||||||||||||||||||||||||||
Capital goods | 2,194 | 86 | (26 | ) | 2,254 | 2.8 | % | 2,568 | 111 | (20 | ) | 2,659 | 3.4 | % | ||||||||||||||||||||||||||
Consumer cyclical | 3,011 | 87 | (60 | ) | 3,038 | 3.8 | % | 3,279 | 94 | (34 | ) | 3,339 | 4.2 | % | ||||||||||||||||||||||||||
Consumer non-cyclical | 3,008 | 89 | (37 | ) | 3,060 | 3.8 | % | 3,465 | 84 | (47 | ) | 3,502 | 4.4 | % | ||||||||||||||||||||||||||
Energy | 1,595 | 71 | (12 | ) | 1,654 | 2.1 | % | 1,779 | 73 | (21 | ) | 1,831 | 2.3 | % | ||||||||||||||||||||||||||
Financial services | 11,934 | 230 | (568 | ) | 11,596 | 14.4 | % | 10,276 | 307 | (78 | ) | 10,505 | 13.3 | % | ||||||||||||||||||||||||||
Technology and communications | 3,763 | 181 | (40 | ) | 3,904 | 4.9 | % | 4,136 | 191 | (44 | ) | 4,283 | 5.4 | % | ||||||||||||||||||||||||||
Transportation | 401 | 12 | (13 | ) | 400 | 0.5 | % | 730 | 17 | (10 | ) | 737 | 0.9 | % | ||||||||||||||||||||||||||
Utilities | 4,500 | 181 | (104 | ) | 4,577 | 5.7 | % | 4,588 | 195 | (66 | ) | 4,717 | 6.0 | % | ||||||||||||||||||||||||||
Other | 1,204 | 24 | (48 | ) | 1,180 | 1.5 | % | 1,447 | 38 | (19 | ) | 1,466 | 1.9 | % | ||||||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||||||||||
Foreign | 999 | 59 | (5 | ) | 1,053 | 1.3 | % | 1,213 | 87 | (6 | ) | 1,294 | 1.6 | % | ||||||||||||||||||||||||||
United States | 836 | 22 | (3 | ) | 855 | 1.1 | % | 848 | 5 | (7 | ) | 846 | 1.1 | % | ||||||||||||||||||||||||||
MBS | 2,757 | 26 | (20 | ) | 2,763 | 3.5 | % | 2,742 | 5 | (45 | ) | 2,702 | 3.4 | % | ||||||||||||||||||||||||||
Municipal | ||||||||||||||||||||||||||||||||||||||||
Taxable | 1,376 | 33 | (23 | ) | 1,386 | 1.7 | % | 1,342 | 25 | (23 | ) | 1,344 | 1.7 | % | ||||||||||||||||||||||||||
Tax-exempt | 11,776 | 394 | (67 | ) | 12,103 | 15.1 | % | 10,555 | 511 | (4 | ) | 11,062 | 14.0 | % | ||||||||||||||||||||||||||
Redeemable preferred stock | 6 | — | — | 6 | — | 36 | — | — | 36 | — | ||||||||||||||||||||||||||||||
Total fixed maturities | $ | 80,724 | $ | 1,869 | $ | (2,538 | ) | $ | 80,055 | 100.0 | % | $ | 77,608 | $ | 2,129 | $ | (663 | ) | $ | 79,074 | 100.0 | % | ||||||||||||||||||
[1] | Includes securities with an amortized cost and fair value of $16 and $15, respectively, as of December 31, 2007, and $59 and $61, respectively, as of December 31, 2006, that contain a below-prime residential mortgage loan component. Typically these CDOs are also backed by assets other than below-prime loans. | |
[2] | Includes securities with an amortized cost and fair value of $40 and $37, respectively, as of December 31, 2007, and $21 as of December 31, 2006, which were backed by pools of loans issued to prime borrowers. Includes securities with an amortized cost and fair value of $96 and $87, respectively, as of December 31, 2007, and $27 as of December 31, 2006, which were backed by pools of loans issued to Alt-A borrowers. | |
[3] | Includes securities with an amortized cost and fair value of $270 as of December 31, 2007, and $72 as of December 31, 2006, which were backed by pools of loans issued to Alt-A borrowers. |
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December 31, 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 93 | $ | 92 | $ | 213 | $ | 199 | $ | 113 | $ | 94 | $ | 8 | $ | 7 | $ | 7 | $ | 7 | $ | 434 | $ | 399 | ||||||||||||||||||||||||
2004 | 133 | 131 | 358 | 324 | 2 | 2 | 2 | 1 | — | — | 495 | 458 | ||||||||||||||||||||||||||||||||||||
2005 | 113 | 107 | 796 | 713 | 8 | 5 | 10 | 3 | 33 | 23 | 960 | 851 | ||||||||||||||||||||||||||||||||||||
2006 | 457 | 413 | 67 | 55 | 2 | 3 | 3 | 2 | 8 | 2 | 537 | 475 | ||||||||||||||||||||||||||||||||||||
2007 | 280 | 241 | 71 | 39 | 56 | 47 | 21 | 20 | 25 | 27 | 453 | 374 | ||||||||||||||||||||||||||||||||||||
Total | $ | 1,076 | $ | 984 | $ | 1,505 | $ | 1,330 | $ | 181 | $ | 151 | $ | 44 | $ | 33 | $ | 73 | $ | 59 | $ | 2,879 | $ | 2,557 | ||||||||||||||||||||||||
Credit protection [6] | 32.7% | 47.3% | 21.1% | 19.6% | 17.1% | 39.8% | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2006 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 130 | $ | 131 | $ | 300 | $ | 302 | $ | 211 | $ | 211 | $ | 15 | $ | 15 | $ | 5 | $ | 8 | $ | 661 | $ | 667 | ||||||||||||||||||||||||
2004 | 279 | 279 | 411 | 412 | 3 | 3 | 11 | 11 | — | — | 704 | 705 | ||||||||||||||||||||||||||||||||||||
2005 | 171 | 171 | 807 | 810 | — | — | — | — | 55 | 49 | 1,033 | 1,030 | ||||||||||||||||||||||||||||||||||||
2006 | 361 | 361 | 45 | 46 | 4 | 4 | 3 | 3 | 5 | 5 | 418 | 419 | ||||||||||||||||||||||||||||||||||||
Total | $ | 941 | $ | 942 | $ | 1,563 | $ | 1,570 | $ | 218 | $ | 218 | $ | 29 | $ | 29 | $ | 65 | $ | 62 | $ | 2,816 | $ | 2,821 | ||||||||||||||||||||||||
[1] | The vintage year represents the year the underlying loans in the pool were originated. | |
[2] | Securities backed by Alt-A residential mortgages, including CMOs, have an amortized cost and fair value of $366 and $357, respectively, as of December 31, 2007, and $99 as of December 31, 2006. These amounts are not included in the table. | |
[3] | The Company’s exposure to second lien residential mortgages is composed primarily of loans to prime and Alt-A borrowers, of which approximately half were wrapped by monoline insurers. These securities are included in the table above and have an amortized cost and fair value of $260 and $217, respectively, as of December 31, 2007 and $160 and $161, respectively, as of December 31, 2006. | |
[4] | As of December 31, 2007, the weighted average life of the sub-prime residential mortgage portfolio was 3.3 years. | |
[5] | Approximately 80% of the portfolio is backed by adjustable rate mortgages. | |
[6] | Represents the current weighted average percentage, excluding wrapped securities, of the capital structure subordinated to the Company’s investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. |
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December 31, 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 2,666 | $ | 2,702 | $ | 495 | $ | 502 | $ | 289 | $ | 292 | $ | 30 | $ | 32 | $ | 46 | $ | 49 | $ | 3,526 | $ | 3,577 | ||||||||||||||||||||||||
2004 | 709 | 708 | 89 | 87 | 130 | 128 | 23 | 21 | — | — | 951 | 944 | ||||||||||||||||||||||||||||||||||||
2005 | 1,280 | 1,258 | 479 | 454 | 404 | 389 | 85 | 76 | 24 | 21 | 2,272 | 2,198 | ||||||||||||||||||||||||||||||||||||
2006 | 2,975 | 2,910 | 415 | 395 | 763 | 739 | 456 | 400 | 24 | 22 | 4,633 | 4,466 | ||||||||||||||||||||||||||||||||||||
2007 | 1,365 | 1,342 | 461 | 431 | 240 | 220 | 190 | 165 | 3 | 3 | 2,259 | 2,161 | ||||||||||||||||||||||||||||||||||||
Total | $ | 8,995 | $ | 8,920 | $ | 1,939 | $ | 1,869 | $ | 1,826 | $ | 1,768 | $ | 784 | $ | 694 | $ | 97 | $ | 95 | $ | 13,641 | $ | 13,346 | ||||||||||||||||||||||||
Credit protection | 23.8% | 16.4% | 13.6% | 6.8% | 3.7% | 20.6% | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2006 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 3,435 | $ | 3,463 | $ | 617 | $ | 623 | $ | 525 | $ | 529 | $ | 91 | $ | 96 | $ | 53 | $ | 65 | $ | 4,721 | $ | 4,776 | ||||||||||||||||||||||||
2004 | 882 | 867 | 103 | 100 | 129 | 127 | 27 | 27 | — | — | 1,141 | 1,121 | ||||||||||||||||||||||||||||||||||||
2005 | 1,473 | 1,457 | 694 | 687 | 555 | 551 | 237 | 237 | 5 | 5 | 2,964 | 2,937 | ||||||||||||||||||||||||||||||||||||
2006 | 2,471 | 2,489 | 462 | 465 | 1,046 | 1,055 | 496 | 497 | 35 | 35 | 4,510 | 4,541 | ||||||||||||||||||||||||||||||||||||
Total | $ | 8,261 | $ | 8,276 | $ | 1,876 | $ | 1,875 | $ | 2,255 | $ | 2,262 | $ | 851 | $ | 857 | $ | 93 | $ | 105 | $ | 13,336 | $ | 13,375 | ||||||||||||||||||||||||
[1] | The vintage year represents the year the pool of loans was originated. |
December 31, 2007 | ||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | Total | ||||||||||||||||||||||||||||||||||||
Amortized | Amortized | Amortized | Amortized | Amortized | ||||||||||||||||||||||||||||||||||||
Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | |||||||||||||||||||||||||||||||
2003 & Prior | $ | 361 | $ | 288 | $ | 119 | $ | 95 | $ | 44 | $ | 36 | $ | 8 | $ | 6 | $ | 532 | $ | 425 | ||||||||||||||||||||
2004 | 97 | 77 | 32 | 25 | 12 | 9 | 2 | 2 | 143 | 113 | ||||||||||||||||||||||||||||||
2005 | 120 | 99 | 30 | 24 | 10 | 8 | 2 | 1 | 162 | 132 | ||||||||||||||||||||||||||||||
2006 | 521 | 472 | 136 | 112 | 222 | 160 | 51 | 40 | 930 | 784 | ||||||||||||||||||||||||||||||
2007 | 251 | 219 | 121 | 100 | 81 | 64 | 23 | 17 | 476 | 400 | ||||||||||||||||||||||||||||||
Total | $ | 1,350 | $ | 1,155 | $ | 438 | $ | 356 | $ | 369 | $ | 277 | $ | 86 | $ | 66 | $ | 2,243 | $ | 1,854 | ||||||||||||||||||||
Credit protection | 31.5% | 27.1% | 16.7% | 10.4% | 27.5% | |||||||||||||||||||||||||||||||||||
December 31, 2006 | ||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | Total | ||||||||||||||||||||||||||||||||||||
Amortized | Amortized | Amortized | Amortized | Amortized | ||||||||||||||||||||||||||||||||||||
Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | |||||||||||||||||||||||||||||||
2003 & Prior | $ | 324 | $ | 320 | $ | 106 | $ | 105 | $ | 40 | $ | 40 | $ | 6 | $ | 6 | $ | 476 | $ | 471 | ||||||||||||||||||||
2004 | 86 | 86 | 28 | 28 | 11 | 11 | 2 | 2 | 127 | 127 | ||||||||||||||||||||||||||||||
2005 | 111 | 111 | 28 | 28 | 9 | 9 | 1 | 1 | 149 | 149 | ||||||||||||||||||||||||||||||
2006 | 539 | 537 | 97 | 96 | 154 | 154 | 54 | 54 | 844 | 841 | ||||||||||||||||||||||||||||||
Total | $ | 1,060 | $ | 1,054 | $ | 259 | $ | 257 | $ | 214 | $ | 214 | $ | 63 | $ | 63 | $ | 1,596 | $ | 1,588 | ||||||||||||||||||||
[1] | The vintage year represents the year the underlying loans in the pool were originated. | |
[2] | Approximately 50% of the underlying CMBS CRE CDO collateral are seasoned, below investment grade securities. However, the Company primarily invests in the AAA tranche of the CDO capital structure. |
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Commercial Mortgage Loans on Real Estate by Region | ||||||||||||||||
December 31, 2007 | December 31, 2006 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Carrying Value | Total | Carrying Value | Total | |||||||||||||
East North Central | $ | 120 | 2.2 | % | $ | 135 | 4.1 | % | ||||||||
East South Central | 9 | 0.2 | % | 10 | 0.3 | % | ||||||||||
Middle Atlantic | 674 | 12.4 | % | 598 | 18.0 | % | ||||||||||
Mountain | 200 | 3.7 | % | 88 | 2.6 | % | ||||||||||
New England | 404 | 7.5 | % | 212 | 6.4 | % | ||||||||||
Pacific | 1,200 | 22.2 | % | 669 | 20.2 | % | ||||||||||
South Atlantic | 1,104 | 20.4 | % | 766 | 23.1 | % | ||||||||||
West North Central | 32 | 0.6 | % | 6 | 0.2 | % | ||||||||||
West South Central | 286 | 5.3 | % | 113 | 3.4 | % | ||||||||||
Other [1] | 1,381 | 25.5 | % | 721 | 21.7 | % | ||||||||||
Total | $ | 5,410 | 100.0 | % | $ | 3,318 | 100.0 | % | ||||||||
[1] | Includes multi-regional properties. |
Commercial Mortgage Loans on Real Estate by Property Type | ||||||||||||||||
December 31, 2007 | December 31, 2006 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Carrying Value | Total | Carrying Value | Total | |||||||||||||
Industrial | $ | 649 | 12.0 | % | $ | 479 | 14.5 | % | ||||||||
Lodging | 524 | 9.7 | % | 510 | 15.4 | % | ||||||||||
Agricultural | 362 | 6.7 | % | 94 | 2.8 | % | ||||||||||
Multifamily | 991 | 18.3 | % | 300 | 9.0 | % | ||||||||||
Office | 1,929 | 35.6 | % | 1,358 | 40.9 | % | ||||||||||
Retail | 806 | 14.9 | % | 419 | 12.6 | % | ||||||||||
Other | 149 | 2.8 | % | 158 | 4.8 | % | ||||||||||
Total | $ | 5,410 | 100.0 | % | $ | 3,318 | 100.0 | % | ||||||||
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AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
Credit card [1] | $ | 166 | $ | 166 | $ | 19 | $ | 19 | $ | 162 | $ | 162 | $ | 610 | $ | 591 | $ | — | $ | — | $ | 957 | $ | 938 | ||||||||||||||||||||||||
Auto [2] | 274 | 270 | 27 | 27 | 151 | 148 | 198 | 192 | 42 | 39 | 692 | 676 | ||||||||||||||||||||||||||||||||||||
Student loan [3] | 313 | 297 | 333 | 317 | 140 | 133 | — | — | — | — | 786 | 747 | ||||||||||||||||||||||||||||||||||||
Total | $ | 753 | $ | 733 | $ | 379 | $ | 363 | $ | 453 | $ | 443 | $ | 808 | $ | 783 | $ | 42 | $ | 39 | $ | 2,435 | $ | 2,361 | ||||||||||||||||||||||||
December 31, 2006 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
Credit card [1] | $ | 203 | $ | 202 | $ | 45 | $ | 45 | $ | 249 | $ | 252 | $ | 708 | $ | 711 | $ | — | $ | — | $ | 1,205 | $ | 1,210 | ||||||||||||||||||||||||
Auto [2] | 193 | 193 | 82 | 81 | 175 | 174 | 270 | 269 | 20 | 20 | 740 | 737 | ||||||||||||||||||||||||||||||||||||
Student loan [3] | 365 | 366 | 253 | 255 | 166 | 168 | 21 | 21 | — | — | 805 | 810 | ||||||||||||||||||||||||||||||||||||
Total | $ | 761 | $ | 761 | $ | 380 | $ | 381 | $ | 590 | $ | 594 | $ | 999 | $ | 1,001 | $ | 20 | $ | 20 | $ | 2,750 | $ | 2,757 | ||||||||||||||||||||||||
[1] | Approximately 13% of the securities were issued by lenders that lend primarily to sub-prime borrowers. | |
[2] | The AAA rated securities include monoline insured securities with an amortized cost and fair value of $49 at December 31, 2007 and $45 at December 31, 2006. Additionally, approximately 11% of the auto consumer loan-backed securities were issued by lenders whose primary business is to sub-prime borrowers. | |
[3] | The AAA rated securities include monoline insured securities with an amortized cost and fair value of $102 and $93, respectively, at December 31, 2007 and $102 at December 31, 2006. Additionally, approximately half of the student loan-backed exposure is guaranteed by the Federal Family Education Loan Program, with the remainder comprised of loans to prime-borrowers. |
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Consolidated Fixed Maturities by Credit Quality | ||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
AAA | $ | 28,547 | $ | 28,318 | 35.4 | % | $ | 23,216 | $ | 23,629 | 29.9 | % | ||||||||||||
AA | 11,326 | 10,999 | 13.7 | % | 10,107 | 10,298 | 13.0 | % | ||||||||||||||||
A | 16,999 | 17,030 | 21.3 | % | 17,696 | 18,251 | 23.1 | % | ||||||||||||||||
BBB | 15,093 | 14,974 | 18.7 | % | 17,402 | 17,655 | 22.3 | % | ||||||||||||||||
United States Government/Government agencies | 5,165 | 5,229 | 6.5 | % | 5,529 | 5,507 | 7.0 | % | ||||||||||||||||
BB & below | 3,594 | 3,505 | 4.4 | % | 3,658 | 3,734 | 4.7 | % | ||||||||||||||||
Total fixed maturities | $ | 80,724 | $ | 80,055 | 100.0 | % | $ | 77,608 | $ | 79,074 | 100.0 | % | ||||||||||||
Consolidated Unrealized Loss Aging of Total Available-for-Sale Securities | ||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||
Cost | Value | Loss | Cost | Value | Loss | |||||||||||||||||||
Three months or less | $ | 10,879 | $ | 10,445 | $ | (434 | ) | $ | 12,601 | $ | 12,500 | $ | (101 | ) | ||||||||||
Greater than three months to six months | 11,857 | 10,954 | (903 | ) | 1,261 | 1,242 | (19 | ) | ||||||||||||||||
Greater than six months to nine months | 10,086 | 9,354 | (732 | ) | 1,239 | 1,210 | (29 | ) | ||||||||||||||||
Greater than nine months to twelve months | 2,756 | 2,545 | (211 | ) | 1,992 | 1,959 | (33 | ) | ||||||||||||||||
Greater than twelve months | 10,563 | 10,071 | (492 | ) | 15,402 | 14,911 | (491 | ) | ||||||||||||||||
Total | $ | 46,141 | $ | 43,369 | $ | (2,772 | ) | $ | 32,495 | $ | 31,822 | $ | (673 | ) | ||||||||||
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Consolidated Total Available-for-Sale Securities with Unrealized Loss Greater Than Six Months by Type | ||||||||||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||||||||||
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 | $ | 99 | $ | 79 | $ | (20 | ) | 1.4 | % | $ | 107 | $ | 79 | $ | (28 | ) | 5.1 | % | ||||||||||||||
CDOs | 514 | 490 | (24 | ) | 1.7 | % | 133 | 129 | (4 | ) | 0.7 | % | ||||||||||||||||||||
RMBS | 781 | 677 | (104 | ) | 7.2 | % | 224 | 216 | (8 | ) | 1.4 | % | ||||||||||||||||||||
Other ABS | 865 | 814 | (51 | ) | 3.6 | % | 715 | 704 | (11 | ) | 2.0 | % | ||||||||||||||||||||
CMBS | ||||||||||||||||||||||||||||||||
Bonds | 5,926 | 5,679 | (247 | ) | 17.2 | % | 3,987 | 3,887 | (100 | ) | 18.1 | % | ||||||||||||||||||||
CRE CDOs | 1,279 | 1,010 | (269 | ) | 18.8 | % | 252 | 247 | (5 | ) | 0.9 | % | ||||||||||||||||||||
IOs | 287 | 272 | (15 | ) | 1.0 | % | 443 | 429 | (14 | ) | 2.5 | % | ||||||||||||||||||||
Corporate | ||||||||||||||||||||||||||||||||
Basic industry | 625 | 604 | (21 | ) | 1.5 | % | 859 | 834 | (25 | ) | 4.5 | % | ||||||||||||||||||||
Consumer cyclical | 682 | 651 | (31 | ) | 2.2 | % | 752 | 724 | (28 | ) | 5.1 | % | ||||||||||||||||||||
Consumer non-cyclical | 881 | 854 | (27 | ) | 1.9 | % | 1,106 | 1,068 | (38 | ) | 6.9 | % | ||||||||||||||||||||
Financial services | 4,002 | 3,670 | (332 | ) | 23.1 | % | 2,749 | 2,689 | (60 | ) | 10.8 | % | ||||||||||||||||||||
Technology and communications | 611 | 590 | (21 | ) | 1.5 | % | 912 | 877 | (35 | ) | 6.3 | % | ||||||||||||||||||||
Transportation | 140 | 132 | (8 | ) | 0.6 | % | 225 | 216 | (9 | ) | 1.6 | % | ||||||||||||||||||||
Utilities | 1,555 | 1,477 | (78 | ) | 5.4 | % | 1,384 | 1,331 | (53 | ) | 9.6 | % | ||||||||||||||||||||
Other | 1,311 | 1,258 | (53 | ) | 3.7 | % | 1,454 | 1,404 | (50 | ) | 9.1 | % | ||||||||||||||||||||
MBS | 1,051 | 1,031 | (20 | ) | 1.4 | % | 1,793 | 1,748 | (45 | ) | 8.1 | % | ||||||||||||||||||||
Municipals | 2,026 | 1,965 | (61 | ) | 4.2 | % | 490 | 473 | (17 | ) | 3.1 | % | ||||||||||||||||||||
Other securities | 770 | 717 | (53 | ) | 3.6 | % | 1,048 | 1,025 | (23 | ) | 4.2 | % | ||||||||||||||||||||
Total | $ | 23,405 | $ | 21,970 | $ | (1,435 | ) | 100.0 | % | $ | 18,633 | $ | 18,080 | $ | (553 | ) | 100.0 | % | ||||||||||||||
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Change in Net Economic Value As of December 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Basis point shift | -100 | +100 | -100 | +100 | ||||||||||||
Amount | $ | (160 | ) | $ | 60 | $ | 1 | $ | (33 | ) | ||||||
Change in Fair Value As of December 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Basis point shift | -100 | +100 | -100 | +100 | ||||||||||||
Amount | $ | 375 | $ | (364 | ) | $ | 422 | $ | (415 | ) | ||||||
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• | Capital market levels at the date of the projections. |
• | A decision to buy hedging instruments would mitigate the exposure in the tail scenario. Such decisions are made based on a variety of factors including the price of the instrument versus the protection afforded. |
• | Life’s ability to organically generate surplus in excess of that required to maintain financial strength ratings would reduce the exposure in a tail scenario. |
• | Increases or decreases in surplus due to the impact capital market movements can have on the valuation of GMWB hedging instruments. Under statutory accounting, there is no fair value recognition of an embedded derivative; however, changes in value of the GMWB hedging instruments are recorded in capital and surplus. The tail scenario estimates described above incorporate the dynamic hedging of GMWB. Generally, increases in the value of GMWB hedging instruments will reduce the exposure in the tail scenario. |
• | Each year, Life writes new variable annuity business with existing or new living benefit guarantees, while older business, often without living benefit guarantees, is naturally lapsing. As a result the exposure in the tail scenario is likely to increase over time. |
• | Changes in statutory reserving requirements, which can ultimately impact the level of capital and surplus at a point in time, can impact the estimate of exposure in the tail scenario. |
• | Changes in estimates of policyholder behavior can impact the estimates of statutory distributable earnings. |
• | Changes in rating agency, regulatory risk based capital (“RBC”) ratios and other similar solvency margin ratios can impact the estimate of exposure in the tail scenario. |
• | Management regularly evaluates the model used to produce projections of distributable earnings and incorporates changes deemed necessary to improve the relevance and reliability of this estimate. |
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Change in Fair Value As of December 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Basis point shift | -100 | +100 | -100 | +100 | ||||||||||||
Amount | $ | 925 | $ | (894 | ) | $ | 857 | $ | (829 | ) | ||||||
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Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
Effective | Expiration | December 31, | December 31, | |||||||||||||||||||||
Description | Date | Date | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
Commercial Paper | ||||||||||||||||||||||||
The Hartford | 11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | 373 | $ | 299 | ||||||||||||||
HLI [1] | 2/7/97 | N/A | — | 250 | — | — | ||||||||||||||||||
Total commercial paper | 2,000 | 2,250 | 373 | 299 | ||||||||||||||||||||
Revolving Credit Facility | ||||||||||||||||||||||||
5-year revolving credit facility | 8/9/07 | 8/9/12 | 2,000 | 1,600 | — | — | ||||||||||||||||||
Line of Credit | ||||||||||||||||||||||||
Life Japan Operations [2] | 9/18/02 | 1/5/09 | 45 | 42 | — | — | ||||||||||||||||||
Total Commercial Paper, Revolving Credit Facility and Line of Credit | $ | 4,045 | $ | 3,892 | $ | 373 | $ | 299 | ||||||||||||||||
[1] | In January 2007, the commercial paper program of HLI was terminated. | |
[2] | As of December 31, 2007 and 2006, the Company’s Japanese operation line of credit in yen was ¥5 billion. |
• | The Company has unfunded commitments to purchase investments in limited partnerships, mortgage and construction loans of about $1.6 billion as disclosed in Note 12 of Notes to Consolidated Financial Statements. |
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Payments due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3years | 3-5 years | 5 years | ||||||||||||||||
Property and casualty obligations [1] | $ | 22,721 | $ | 5,575 | $ | 5,638 | $ | 3,197 | $ | 8,311 | ||||||||||
Life, annuity and disability obligations [2] | 457,882 | 29,588 | 60,778 | 65,671 | 301,845 | |||||||||||||||
Operating lease obligations [3] | 482 | 147 | 199 | 105 | 31 | |||||||||||||||
Capital lease obligations [3] | 141 | 41 | 100 | — | — | |||||||||||||||
Long-term debt obligations [4] | 6,709 | 1,191 | 638 | 708 | 4,172 | |||||||||||||||
Consumer notes [5] | 874 | 257 | 555 | 49 | 13 | |||||||||||||||
Purchase obligations [6] | 2,713 | 2,144 | 349 | 167 | 53 | |||||||||||||||
Other long-term liabilities reflected on the balance sheet [7] | 4,914 | 4,821 | 68 | — | 25 | |||||||||||||||
Total [8] | $ | 496,436 | $ | 43,764 | $ | 68,325 | $ | 69,897 | $ | 314,450 | ||||||||||
[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 2008 do not include payments that will be made on claims incurred in 2008 on policies that were in-force as of December 31, 2007. In addition, the table does not include future cash flows related to the receipt of premiums that may be used, in part, to fund loss payments. | ||
• | Under U.S. GAAP, the Company is only permitted to discount reserves for losses and loss adjustment expenses in cases where the payment pattern and ultimate loss costs are fixed and determinable on an individual claim basis. For the Company, these include claim settlements with permanently disabled claimants and certain structured settlement contracts that fund loss runoffs for unrelated parties. As of December 31, 2007, the total property and casualty reserves in the above table are gross of a reserve discount of $568. |
[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 future minimum lease payments on operating and capital lease agreements. See Notes 12 and 14 of Notes to Consolidated Financial Statements for additional discussion on lease commitments. |
[4] | Includes contractual principal and interest payments. All long-term debt obligations have fixed rates of interest. See Note 14 of Notes to Consolidated Financial Statements for additional discussion of long-term debt obligations. |
[5] | Consumer notes include principal payments and contractual interest for fixed rate notes and interest based on current rates for floating rate notes. See Note 14 of Notes to Consolidated Financial Statements for additional discussion of consumer notes. |
[6] | Includes $1.8 billion in commitments to purchase investments including about $1.2 billion of limited partnership and $330 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 reliably estimated. The remaining commitments to purchase investments primarily represent payables for securities purchased which are reflected on the Company’s consolidated balance sheet. | |
Also included in purchase obligations is $790 relating to contractual commitments to purchase various goods and services such as maintenance, human resources, information technology, and transportation in the normal course of business. Purchase obligations exclude contracts that are cancelable without penalty or contracts that do not specify minimum levels of goods or services to be purchased. |
[7] | Includes cash collateral of $4.7 billion which the Company has accepted 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. |
[8] | Does not include estimated voluntary contribution of $200 to the Company’s pension plan in 2008. |
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As of December 31, | ||||||||
2007 | 2006 | |||||||
Short-term debt (includes current maturities of long-term debt and capital lease obligations) | $ | 1,365 | $ | 599 | ||||
Long-term debt | 3,142 | 3,504 | ||||||
Total debt [1] | 4,507 | 4,103 | ||||||
Equity excluding accumulated other comprehensive income (loss), net of tax (“AOCI”) | 20,062 | 18,698 | ||||||
AOCI, net of tax | (858 | ) | 178 | |||||
Total stockholders’ equity | $ | 19,204 | $ | 18,876 | ||||
Total capitalization including AOCI, net of tax | $ | 23,711 | $ | 22,979 | ||||
Debt to equity | 23 | % | 22 | % | ||||
Debt to capitalization | 19 | % | 18 | % | ||||
[1] | Total debt of the Company excludes $809 and $258 of consumer notes as of December 31, 2007 and 2006, respectively. |
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2007 | 2006 | 2005 | ||||||||||
Net cash provided by operating activities | $ | 5,991 | �� | $ | 5,638 | $ | 3,732 | |||||
Net cash used for investing activities | $ | (6,176 | ) | $ | (7,410 | ) | $ | (4,860 | ) | |||
Net cash provided by financing activities | $ | 499 | $ | 1,915 | $ | 1,280 | ||||||
Cash — end of year | $ | 2,011 | $ | 1,424 | $ | 1,273 | ||||||
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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-1 | 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 | ||||
2007 | 2006 | |||||||
Life Operations | $ | 5,786 | $ | 4,733 | ||||
Japan Life Operations | 1,620 | 1,380 | ||||||
Property & Casualty Operations | 8,509 | 8,230 | ||||||
Total | $ | 15,915 | $ | 14,343 | ||||
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The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Hartford, Connecticut
February 20, 2008
172
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(Senior Vice President and Controller)
(Executive Vice President and Chief Financial Officer)
(Executive Vice President and General Counsel)
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(Executive Vice President; Co-Chief Operating Officer, Hartford Life Operations; President, U.S. Wealth Management)
(Executive Vice President, Human Resources)
(Executive Vice President; President and Chief Operating Officer, Property & Casualty Operations)
(Executive Vice President; Co-Chief Operating Officer, Hartford Life Operations; President, International Wealth Management and Group Benefits Operations)
(Executive Vice President and Chief Investment Officer)
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(a) | (b) | (c) | ||||||||||
Number of Securities | Weighted-average | Number of Securities Remaining | ||||||||||
to be Issued Upon | Exercise Price of | Available for Future Issuance Under | ||||||||||
Exercise of | Outstanding | Equity Compensation Plans | ||||||||||
Outstanding Options, | Options, Warrants | (Excluding Securities | ||||||||||
Warrants and Rights | and Rights | Reflected in Column (a)) | ||||||||||
Equity compensation plans approved by stockholders | 6,298,018 | $ | 58.78 | 7,247,541 | [1] | |||||||
Equity compensation plans not approved by stockholders | 25,357 | 53.80 | 225,858 | |||||||||
Total | 6,323,375 | $ | 58.76 | 7,473,399 | ||||||||
[1] | Of these shares, 1,629,003 shares remain available for purchase under the ESPP. |
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(1) | Consolidated Financial Statements.See Index to Consolidated Financial Statements and Schedules elsewhere herein. | |
(2) | Consolidated Financial Statement Schedules.See Index to Consolidated Financial Statement and Schedules elsewhere herein. | |
(3) | Exhibits.See Exhibit Index elsewhere herein. |
176
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
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The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Hartford, Connecticut
February 20, 2008
F-2
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Consolidated Statements of Operations
For the years ended December 31, | ||||||||||||
(In millions, except for per share data) | 2007 | 2006 | 2005 | |||||||||
Revenues | ||||||||||||
Earned premiums | $ | 15,619 | $ | 15,023 | $ | 14,359 | ||||||
Fee income | 5,436 | 4,739 | 4,012 | |||||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 5,214 | 4,691 | 4,384 | |||||||||
Equity securities held for trading | 145 | 1,824 | 3,847 | |||||||||
Total net investment income | 5,359 | 6,515 | 8,231 | |||||||||
Other revenues | 496 | 474 | 464 | |||||||||
Net realized capital gains (losses) | (994 | ) | (251 | ) | 17 | |||||||
Total revenues | 25,916 | 26,500 | 27,083 | |||||||||
Benefits, losses and expenses | ||||||||||||
Benefits, losses and loss adjustment expenses | 14,064 | 15,042 | 16,776 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 2,989 | 3,558 | 3,169 | |||||||||
Insurance operating costs and expenses | 3,894 | 3,252 | 3,227 | |||||||||
Interest expense | 263 | 277 | 252 | |||||||||
Other expenses | 701 | 769 | 674 | |||||||||
Total benefits, losses and expenses | 21,911 | 22,898 | 24,098 | |||||||||
Income before income taxes | 4,005 | 3,602 | 2,985 | |||||||||
Income tax expense | 1,056 | 857 | 711 | |||||||||
Net income | $ | 2,949 | $ | 2,745 | $ | 2,274 | ||||||
Earnings per share | ||||||||||||
Basic | $ | 9.32 | $ | 8.89 | $ | 7.63 | ||||||
Diluted | $ | 9.24 | $ | 8.69 | $ | 7.44 | ||||||
Weighted average common shares outstanding | 316.3 | 308.8 | 298.0 | |||||||||
Weighted average common shares outstanding and dilutive potential common shares | 319.1 | 315.9 | 305.6 | |||||||||
Cash dividends declared per share | $ | 2.03 | $ | 1.70 | $ | 1.17 | ||||||
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Consolidated Balance Sheets
As of December 31, | ||||||||
(In millions, except for share data) | 2007 | 2006 | ||||||
Assets | ||||||||
Investments | ||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost of $80,724 and $77,608) | $ | 80,055 | $ | 79,074 | ||||
Equity securities, held for trading, at fair value (cost of $30,489 and $23,668) | 36,182 | 29,393 | ||||||
Equity securities, available-for-sale, at fair value (cost of $2,611 and $1,535) | 2,595 | 1,739 | ||||||
Policy loans, at outstanding balance | 2,061 | 2,051 | ||||||
Mortgage loans on real estate | 5,410 | 3,318 | ||||||
Other investments | 3,181 | 1,915 | ||||||
Short-term investments | 1,602 | 1,681 | ||||||
Total investments | 131,086 | 119,171 | ||||||
Cash | 2,011 | 1,424 | ||||||
Premiums receivable and agents’ balances | 3,681 | 3,675 | ||||||
Reinsurance recoverables | 5,150 | 5,571 | ||||||
Deferred policy acquisition costs and present value of future profits | 11,742 | 10,268 | ||||||
Deferred income taxes | 308 | 284 | ||||||
Goodwill | 1,726 | 1,717 | ||||||
Property and equipment, net | 972 | 791 | ||||||
Other assets | 3,739 | 3,159 | ||||||
Separate account assets | 199,946 | 180,484 | ||||||
Total assets | $ | 360,361 | $ | 326,544 | ||||
Liabilities | ||||||||
Reserve for future policy benefits and unpaid losses and loss adjustment expenses | ||||||||
Property and casualty | $ | 22,153 | $ | 21,991 | ||||
Life | 15,331 | 14,016 | ||||||
Other policyholder funds and benefits payable | 80,342 | 71,311 | ||||||
Unearned premiums | 5,545 | 5,620 | ||||||
Short-term debt | 1,365 | 599 | ||||||
Long-term debt | 3,142 | 3,504 | ||||||
Consumer notes | 809 | 258 | ||||||
Other liabilities | 12,524 | 9,885 | ||||||
Separate account liabilities | 199,946 | 180,484 | ||||||
Total liabilities | 341,157 | 307,668 | ||||||
Commitments and Contingencies (Note 12) | ||||||||
Stockholders’ Equity | ||||||||
Common stock, $0.01 par value — 750,000,000 shares authorized, 329,951,138 and 326,401,820 shares issued | 3 | 3 | ||||||
Additional paid-in capital | 6,627 | 6,321 | ||||||
Retained earnings | 14,686 | 12,421 | ||||||
Treasury stock, at cost — 16,108,895 and 3,086,429 shares | (1,254 | ) | (47 | ) | ||||
Accumulated other comprehensive income (loss) | (858 | ) | 178 | |||||
Total stockholders’ equity | 19,204 | 18,876 | ||||||
Total liabilities and stockholders’ equity | $ | 360,361 | $ | 326,544 | ||||
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Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, | ||||||||||||
(In millions, except for share data) | 2007 | 2006 | 2005 | |||||||||
Common Stock/Additional Paid-in Capital | ||||||||||||
Balance at beginning of year | $ | 6,324 | $ | 5,070 | $ | 4,570 | ||||||
Issuance of shares from equity unit contracts | — | 1,020 | — | |||||||||
Issuance of shares and compensation expense associated with incentive and stock compensation plans | 257 | 190 | 443 | |||||||||
Tax benefit on employee stock options and awards and other | 49 | 44 | 57 | |||||||||
Balance at end of year | 6,630 | 6,324 | 5,070 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year, before cumulative effect of accounting changes, net of tax | 12,421 | 10,207 | 8,283 | |||||||||
Cumulative effect of accounting changes, net of tax | (41 | ) | — | — | ||||||||
Balance at beginning of year, as adjusted | 12,380 | 10,207 | 8,283 | |||||||||
Net income | 2,949 | 2,745 | 2,274 | |||||||||
Dividends declared on common stock | (643 | ) | (531 | ) | (350 | ) | ||||||
Balance at end of year | 14,686 | 12,421 | 10,207 | |||||||||
Treasury Stock, at Cost | ||||||||||||
Balance at beginning of year | (47 | ) | (42 | ) | (40 | ) | ||||||
Treasury stock acquired | (1,193 | ) | — | — | ||||||||
Return of shares to treasury stock under incentive and stock compensation plans | (14 | ) | (5 | ) | (2 | ) | ||||||
Balance at end of year | (1,254 | ) | (47 | ) | (42 | ) | ||||||
Accumulated Other Comprehensive Income (Loss), Net of Tax | ||||||||||||
Balance at beginning of year | 178 | 90 | 1,425 | |||||||||
Total other comprehensive income (loss) | (1,036 | ) | 554 | (1,335 | ) | |||||||
Adjustment to initially apply SFAS 158, net of tax | — | (466 | ) | — | ||||||||
Balance at end of year | (858 | ) | 178 | 90 | ||||||||
Total stockholders’ equity | $ | 19,204 | $ | 18,876 | $ | 15,325 | ||||||
Outstanding Shares (in thousands) | ||||||||||||
Balance at beginning of year | 323,315 | 302,152 | 294,208 | |||||||||
Issuance of shares from equity unit contracts | — | 17,856 | — | |||||||||
Issuance of shares under incentive and stock compensation plans | 3,549 | 3,358 | 7,988 | |||||||||
Treasury stock acquired | (12,878 | ) | — | — | ||||||||
Return of shares to treasury stock under incentive and stock compensation plans | (144 | ) | (51 | ) | (44 | ) | ||||||
Balance at end of year | 313,842 | 323,315 | 302,152 | |||||||||
For the years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Comprehensive Income | ||||||||||||
Net income | $ | 2,949 | $ | 2,745 | $ | 2,274 | ||||||
Other Comprehensive Income (Loss), Net of Tax | ||||||||||||
Change in unrealized gain/loss on securities | (1,417 | ) | 89 | (1,193 | ) | |||||||
Change in net gain/loss on cash-flow hedging instruments | 94 | (124 | ) | 105 | ||||||||
Change in foreign currency translation adjustments | 146 | 29 | (107 | ) | ||||||||
Changes in pension and other postretirement plan adjustments | 141 | 560 | (140 | ) | ||||||||
Total other comprehensive income (loss) | (1,036 | ) | 554 | (1,335 | ) | |||||||
Total comprehensive income | $ | 1,913 | $ | 3,299 | $ | 939 | ||||||
F-5
Table of Contents
Consolidated Statements of Cash Flows
For the years ended December 31, | ||||||||||||
(In millions) | 2007 | 2006 | 2005 | |||||||||
Operating Activities | ||||||||||||
Net income | $ | 2,949 | $ | 2,745 | $ | 2,274 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 2,989 | 3,558 | 3,169 | |||||||||
Additions to deferred policy acquisition costs and present value of future profits | (4,194 | ) | (4,092 | ) | (4,131 | ) | ||||||
Change in: | ||||||||||||
Reserve for future policy benefits, unpaid losses and loss adjustment expenses and unearned premiums | 1,357 | 975 | 2,163 | |||||||||
Reinsurance recoverables | 487 | 1,071 | (361 | ) | ||||||||
Receivables | 128 | (34 | ) | (682 | ) | |||||||
Payables and accruals | 306 | (287 | ) | (267 | ) | |||||||
Accrued and deferred income taxes | 619 | 657 | 168 | |||||||||
Net realized capital (gains) losses | 994 | 251 | (17 | ) | ||||||||
Net increase in equity securities, held for trading | (4,701 | ) | (5,609 | ) | (12,872 | ) | ||||||
Net receipts from investment contracts credited to policyholder accounts associated with equity securities, held for trading | 4,695 | 5,594 | 13,087 | |||||||||
Depreciation and amortization | 794 | 606 | 561 | |||||||||
Other, net | (432 | ) | 203 | 640 | ||||||||
Net cash provided by operating activities | 5,991 | 5,638 | 3,732 | |||||||||
Investing Activities | ||||||||||||
Proceeds from the sale/maturity/prepayment of: | ||||||||||||
Fixed maturities, available-for-sale, including short-term investments | 34,063 | 35,432 | 36,895 | |||||||||
Equity securities, available-for-sale | 468 | 514 | 105 | |||||||||
Mortgage loans | 1,365 | 392 | 511 | |||||||||
Partnerships | 324 | 154 | 226 | |||||||||
Payments for the purchase of: | ||||||||||||
Fixed maturities, available-for-sale, including short-term investments | (37,799 | ) | (40,368 | ) | (40,580 | ) | ||||||
Equity securities, available-for-sale | (1,224 | ) | (924 | ) | (598 | ) | ||||||
Mortgage loans | (3,454 | ) | (1,974 | ) | (1,068 | ) | ||||||
Partnerships | (1,229 | ) | (809 | ) | (439 | ) | ||||||
Change in policy loans, net | (10 | ) | (36 | ) | 646 | |||||||
Change in payables for collateral under securities lending, net | 2,218 | 970 | (367 | ) | ||||||||
Change in all other securities, net | (623 | ) | (454 | ) | 12 | |||||||
Purchase price adjustment of business acquired | — | — | 8 | |||||||||
Sale of subsidiary, net of cash transferred | — | (112 | ) | — | ||||||||
Additions to property and equipment, net | (275 | ) | (195 | ) | (211 | ) | ||||||
Net cash used for investing activities | (6,176 | ) | (7,410 | ) | (4,860 | ) | ||||||
Financing Activities | ||||||||||||
Deposits and other additions to investment and universal life-type contracts | 32,494 | 27,450 | 25,780 | |||||||||
Withdrawals and other deductions from investment and universal life-type contracts | (30,443 | ) | (27,096 | ) | (25,099 | ) | ||||||
Transfers from (to) separate accounts related to investment and universal life-type contracts | (761 | ) | 1,189 | 706 | ||||||||
Issuance of shares from equity unit contracts | — | 1,020 | — | |||||||||
Issuance of long-term debt | 495 | 990 | — | |||||||||
Repayment/maturity of long-term debt | (300 | ) | (1,415 | ) | (250 | ) | ||||||
Change in short-term debt | 75 | (173 | ) | 100 | ||||||||
Proceeds from issuance of consumer notes | 551 | 258 | — | |||||||||
Proceeds from issuances of shares under incentive and stock compensation plans, net | 186 | 147 | 390 | |||||||||
Excess tax benefits on stock-based compensation | 45 | 10 | — | |||||||||
Treasury stock acquired | (1,193 | ) | — | — | ||||||||
Return of shares under incentive and stock compensation plans to treasury stock | (14 | ) | (5 | ) | (2 | ) | ||||||
Dividends paid | (636 | ) | (460 | ) | (345 | ) | ||||||
Net cash provided by financing activities | 499 | 1,915 | 1,280 | |||||||||
Foreign exchange rate effect on cash | 273 | 8 | (27 | ) | ||||||||
Net increase in cash | 587 | 151 | 125 | |||||||||
Cash — beginning of year | 1,424 | 1,273 | 1,148 | |||||||||
Cash — end of year | $ | 2,011 | $ | 1,424 | $ | 1,273 | ||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||
Net Cash Paid During the Year for: | ||||||||||||
Income taxes | $ | 451 | $ | 179 | $ | 447 | ||||||
Interest | $ | 257 | $ | 274 | $ | 248 |
F-6
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
F-7
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-8
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-9
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | Most of the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree shall be measured at their acquisition-date fair values rather than SFAS 141’s requirement to allocate the cost of an acquisition to individual assets acquired and liabilities assumed based on their estimated fair values; | |
• | Acquisition-related costs incurred by the acquirer shall be expensed in the periods in which the costs are incurred rather than included in the cost of the acquired entity; | |
• | Goodwill shall be measured as the excess of the consideration transferred, including the fair value of any contingent consideration, plus the fair value of any noncontrolling interest in the acquiree, over the fair values of the acquired identifiable net assets, rather than measured as the excess of the cost of the acquired entity over the estimated fair values of the acquired identifiable net assets; | |
• | Contractual pre-acquisition contingencies are to be recognized at their acquisition date fair values and noncontractual pre-acquisition contingencies are to be recognized at their acquisition date fair values only if it is more likely than not that the contingency gives rise to an asset or liability, whereas SFAS 141 generally permits the deferred recognition of pre-acquisition contingencies until the recognition criteria of SFAS No. 5, “Accounting for Contingencies” are met; and | |
• | Contingent consideration shall be recognized at the acquisition date rather than when the contingency is resolved and consideration is issued or becomes issuable. |
F-10
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-11
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Level 1 | Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. | |
Level 2 | Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities. | |
Level 3 | Unobservable inputs reflecting the reporting entity’s estimates of the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). |
F-12
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Account | Net Amount at | SOP 03-1 | ||||||||||
Value [1] | Risk [2] | Reserve [2] | ||||||||||
U.S. Guaranteed Minimum Death Benefits | $ | 126,834 | $ | 5,106 | $ | 529 | ||||||
Japan Guaranteed Minimum Death and Income Benefits | 35,793 | 649 | 42 | |||||||||
Life Contingent Portion of “for Life” GMWBs | 10,272 | — | — | |||||||||
Total | $ | 172,899 | $ | 5,755 | $ | 571 | ||||||
[1] | Policies with “for Life” GMWB riders include both benefits accounted for under SFAS 133 and SOP 03-1 and thus are included this table and the SFAS 133 table below. However, benefits payable are generally mutually exclusive (e.g., for a given contract, only the death or living benefits, but not both are payable at one time) (See Note 6). | |
[2] | Before reinsurance. The Company uses reinsurance to manage its exposure to the mortality and equity risk associated with GMDB. Reinsurance of GMDB is accounted for under SOP 03-1. After reinsurance, the net amount at risk for U.S. GMDB and Japan GMDB and GMIB is $976 and $419, respectively. After reinsurance, the net SOP 03-1 reserve for U.S. GMDB and Japan GMDB and GMIB is $202 and $34, respectively. |
F-13
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SFAS 133 | |||||||||||||
Fair Value[2] | Guaranteed | ||||||||||||
Account | of the | Remaining | |||||||||||
Value [1] | Liability (Asset) | Balance | |||||||||||
U.S. Guaranteed Minimum Withdrawal Benefits | $ | 46,088 | $ | 553 | $ | 34,622 | |||||||
Non-Life Contingent Portion of “for Life” Guaranteed Minimum Withdrawal Benefits | |||||||||||||
U.S. Products | 10,272 | 154 | 10,230 | ||||||||||
International Products | 1,038 | 8 | 1,048 | ||||||||||
Total | 11,310 | 162 | 11,278 | ||||||||||
International Guaranteed Minimum Accumulation Benefits | 2,734 | (2 | ) | 2,768 | |||||||||
Total | $ | 60,132 | $ | 713 | $ | 48,668 | |||||||
[1] | “For life” GMWB policies, and their related account values, include both benefits accounted for under SFAS 133 and SOP 03-1 and thus are included in this SFAS 133 table and the SOP 03-1 table above. However, benefits payable are generally mutually exclusive (e.g., for a given contract, only the death or living benefits, but not both are payable at one time). | |
[2] | The magnitude of the SFAS 133 fair value, at December 31, 2007, was highly dependent upon the size of the block of business for guaranteed living benefits that are required to be fair valued, and the market conditions at the date of valuation, in particular high implied volatilities and low risk-free interest rates. If implied volatilities were lower and risk-free interest rates were higher at December 31, 2007, the SFAS 133 fair value would have been lower and vice versa. |
F-14
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value | ||||||||
Notional Amount | of the Assets[1] | |||||||
Reinsurance | $ | 6,579 | $ | 128 | ||||
Customized derivatives | 12,784 | 50 | ||||||
Other derivative instruments | 8,573 | 592 | ||||||
Total | $ | 27,936 | $ | 770 | ||||
[1] | The fair value of assets exceeds the SFAS 133 fair value of the liabilities in the table above. This is not an indication of hedge effectiveness and does not suggest that the Company is over-hedged. Hedge results and the effectiveness of our hedging program is better measured as the difference between the change in fair value of the assets and liabilities, both of which are highly dependent upon capital market movements. |
F-15
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | Actively-Managed Volatility Adjustment.This component incorporates the basis differential between the observable index implied volatilities used to calculate the Pre-SFAS 157 component and the actively-managed funds underlying the variable annuity product. The Actively-Managed Volatility Adjustment is calculated using historical fund and weighted index volatilities. | |
• | Credit Standing Adjustment.This component makes an adjustment that market participants would make to reflect the risk that GMWB obligations or the GMWB reinsurance recoverables will not be fulfilled (“nonperformance risk”). SFAS 157 explicitly requires nonperformance risk to be reflected in fair value. The Company calculates the Credit Standing Adjustment by using default rates provided by rating agencies, adjusted for market recoverability. | |
• | Market Illiquidity Premium.This component makes an adjustment that market participants would require to reflect that GMWB obligations are illiquid and have no market observable exit prices in the capital markets. The Market Illiquidity Premium was determined using inputs that are identified in customized derivative transactions that the Company has entered into to hedge GMWB related risks. | |
• | Behavior Risk Margin.This component adds a margin that market participants would require for the risk that the Company’s assumptions about policyholder behavior used in the Pre-SFAS 157 model could differ from actual experience. The Behavior Risk Margin is calculated by taking the difference between adverse policyholder behavior assumptions and the best estimate assumptions used in the Pre-SFAS 157 model using the Company’s long-term view on interest rates and volatility. The adverse assumptions incorporate adverse dynamic lapse behavior, greater utilization of the withdrawal features, and the potential for contract holders to shift their investment funds into more aggressive investments when allowed. |
F-16
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-17
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2007 | 2006 | |||||||||||||||
Percentage | Percentage | |||||||||||||||
of Total | of Total | |||||||||||||||
Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||
Priced via third party pricing services | $ | 66,771 | 83.4 | % | $ | 69,023 | 87.3 | % | ||||||||
Priced via independent broker quotations | 7,561 | 9.4 | % | 4,309 | 5.4 | % | ||||||||||
Priced via matrices | 5,426 | 6.8 | % | 5,605 | 7.1 | % | ||||||||||
Priced via other methods | 297 | 0.4 | % | 137 | 0.2 | % | ||||||||||
Total | $ | 80,055 | 100.0 | % | $ | 79,074 | 100.0 | % | ||||||||
F-18
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-19
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-20
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-21
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-22
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Individual Variable Annuities — | Individual Variable Annuities — | |||||||||||||||||||||||
U.S. | Japan | Individual Life | ||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||||||
DAC | $ | 4,982 | $ | 4,420 | $ | 1,760 | $ | 1,430 | $ | 2,309 | $ | 2,013 | ||||||||||||
Sales Inducements | $ | 390 | $ | 352 | $ | 8 | $ | 2 | $ | 20 | $ | 8 | ||||||||||||
URR | $ | 124 | $ | 98 | $ | — | $ | — | $ | 816 | $ | 605 | ||||||||||||
SOP 03-1 reserves | $ | 527 | $ | 475 | $ | 42 | $ | 35 | $ | 19 | $ | 7 | ||||||||||||
F-23
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Death and | ||||||||||||||||||||
DAC | Unearned | Income | Sales | |||||||||||||||||
Segment | and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total [2] | |||||||||||||||
Retail | $ | 180 | $ | (5 | ) | $ | (4 | ) | $ | 9 | $ | 180 | ||||||||
Retirement Plans | (9 | ) | — | — | — | (9 | ) | |||||||||||||
Institutional | 1 | — | — | — | 1 | |||||||||||||||
Individual Life | 24 | (8 | ) | — | — | 16 | ||||||||||||||
International — Japan | 16 | — | 6 | — | 22 | |||||||||||||||
Corporate | 3 | — | — | — | 3 | |||||||||||||||
Total | $ | 215 | $ | (13 | ) | $ | 2 | $ | 9 | $ | 213 | |||||||||
[1] | As a result of the unlock, death benefit reserves, in Retail, decreased $4, pre-tax, offset by a decrease of $10, pre-tax, in reinsurance recoverables. | |
[2] | The following were the most significant contributors to the unlock amounts recorded during the third quarter of 2007: |
• | Actual separate account returns were above our aggregated estimated return. | ||
• | During the third quarter of 2007, the Company estimated gross profits using the mean of EGPs derived from a set of stochastic scenarios that have been calibrated to our estimated separate account return as compared to prior year where we used a single deterministic estimation. The impact of this change in estimation was a benefit of $13, after-tax, for Japan variable annuities and $20, after-tax, for U.S. variable annuities. | ||
• | As part of its continual enhancement to its assumption setting processes and in connection with its assumption study, the Company included dynamic lapse behavior assumptions. Dynamic lapses reflect that lapse behavior will be different depending upon market movements. The impact of this assumption change along with other base lapse rate changes was an approximate benefit of $40, after-tax, for U.S. variable annuities. |
F-24
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Death and Income | ||||||||||||||||||||
Segment | Unearned Revenue | Benefit Reserves | Sales Inducement | |||||||||||||||||
After-tax (charge) benefit | DAC and PVFP | Reserves | [1] | Assets | Total | |||||||||||||||
Retail | $ | (116 | ) | $ | 5 | $ | (10 | ) | $ | 3 | $ | (118 | ) | |||||||
Retirement Plans | 20 | — | — | — | 20 | |||||||||||||||
Individual Life | (49 | ) | 31 | — | — | (18 | ) | |||||||||||||
International — Japan | 26 | — | 27 | — | 53 | |||||||||||||||
Corporate | (13 | ) | — | — | — | (13 | ) | |||||||||||||
Total | $ | (132 | ) | $ | 36 | $ | 17 | $ | 3 | $ | (76 | ) | ||||||||
[1] | As a result of the unlock, death benefit reserves, in the Retail, increased $294, pre-tax, offset by an increase of $279, pre-tax, in reinsurance recoverables. |
F-25
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-26
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-27
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net | Per Share | |||||||||||
2007 | Income | Shares | Amount | |||||||||
Basic Earnings per Share | ||||||||||||
Net income available to common shareholders | $ | 2,949 | 316.3 | $ | 9.32 | |||||||
Diluted Earnings per Share | ||||||||||||
Stock compensation plans | — | 2.8 | ||||||||||
Net income available to common shareholders plus assumed conversions | $ | 2,949 | 319.1 | $ | 9.24 | |||||||
2006 | ||||||||||||
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 | |||||||
F-28
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-29
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Net assumed (ceded) earned premiums under inter-segment arrangements and retention | 2007 | 2006 | 2005 | |||||||||
Personal Lines | $ | (7 | ) | $ | (21 | ) | $ | (25 | ) | |||
Small Commercial | (29 | ) | (31 | ) | (26 | ) | ||||||
Middle Market | (34 | ) | (45 | ) | (49 | ) | ||||||
Specialty Commercial | 70 | 97 | 100 | |||||||||
Total | $ | — | $ | — | $ | — | ||||||
F-30
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Revenues by Product Line Revenues | 2007 | 2006 | 2005 | |||||||||
Life | ||||||||||||
Earned premiums, fees, and other considerations | ||||||||||||
Retail | ||||||||||||
Individual annuity: | ||||||||||||
Individual variable annuity | $ | 2,225 | $ | 1,957 | $ | 1,784 | ||||||
Fixed MVA annuity | 2 | 1 | (2 | ) | ||||||||
Retail mutual funds | 642 | 524 | 416 | |||||||||
Other | 186 | 127 | 74 | |||||||||
Total Retail | 3,055 | 2,609 | 2,272 | |||||||||
Retirement Plans | ||||||||||||
401(k) | 187 | 160 | 111 | |||||||||
403(b)/457 | 55 | 52 | 51 | |||||||||
Total Retirement Plans | 242 | 212 | 162 | |||||||||
Institutional | ||||||||||||
Institutional investment products | 1,015 | 630 | 518 | |||||||||
PPLI | 223 | 102 | 106 | |||||||||
Total Institutional | 1,238 | 732 | 624 | |||||||||
Individual Life | ||||||||||||
Total Individual Life | 808 | 832 | 768 | |||||||||
Group Benefits | ||||||||||||
Group disability | 1,920 | 1,849 | 1,750 | |||||||||
Group life and accident | 1,926 | 1,830 | 1,643 | |||||||||
Other | 455 | 470 | 418 | |||||||||
Total Group Benefits | 4,301 | 4,149 | 3,811 | |||||||||
International | ||||||||||||
Variable annuity | 820 | 691 | 477 | |||||||||
Fixed MVA annuity | 10 | 10 | 6 | |||||||||
Other | 2 | — | — | |||||||||
Total International | 832 | 701 | 483 | |||||||||
Other | 67 | 81 | 83 | |||||||||
Total Life premiums, fees, and other considerations | 10,543 | 9,316 | 8,203 | |||||||||
Net investment income | ||||||||||||
Securities available-for-sale and other | 3,497 | 3,184 | 2,998 | |||||||||
Equity securities held for trading | 145 | 1,824 | 3,847 | |||||||||
Net investment income | 3,642 | 5,008 | 6,845 | |||||||||
Net realized capital losses | (819 | ) | (260 | ) | (25 | ) | ||||||
Total Life | 13,366 | 14,064 | 15,023 | |||||||||
F-31
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenues by Product Line (continued) | For the years ended December 31, | |||||||||||||
Revenues | 2007 | 2006 | 2005 | |||||||||||
Property & Casualty | ||||||||||||||
Ongoing Operations | ||||||||||||||
Earned premiums | ||||||||||||||
Personal Lines | ||||||||||||||
Automobile | $ | 2,822 | $ | 2,792 | $ | 2,728 | ||||||||
Homeowners | 1,067 | 968 | 882 | |||||||||||
Total Personal Lines | 3,889 | 3,760 | 3,610 | |||||||||||
Small Commercial | ||||||||||||||
Workers’ Compensation | 1,197 | 1,123 | 973 | |||||||||||
Property | 1,155 | 1,122 | 1,042 | |||||||||||
Automobile | 336 | 353 | 353 | |||||||||||
Liability | (8 | ) | 2 | 8 | ||||||||||
Other | 56 | 52 | 45 | |||||||||||
Total Small Commercial | 2,736 | 2,652 | 2,421 | |||||||||||
Middle Market | ||||||||||||||
Workers’ Compensation | 837 | 862 | 801 | |||||||||||
Property | 543 | 554 | 528 | |||||||||||
Automobile | 382 | 408 | 416 | |||||||||||
Liability | 552 | 591 | 574 | |||||||||||
Other | 37 | 39 | 36 | |||||||||||
Total Middle Market | 2,351 | 2,454 | 2,355 | |||||||||||
Specialty Commercial | ||||||||||||||
Workers’ Compensation | 80 | 95 | 89 | |||||||||||
Property | 186 | 188 | 211 | |||||||||||
Automobile | 28 | 30 | 29 | |||||||||||
Liability | 44 | 55 | 64 | |||||||||||
Fidelity and surety | 256 | 231 | 210 | |||||||||||
Professional Liability | 429 | 419 | 345 | |||||||||||
Other | 492 | 544 | 818 | |||||||||||
Total Specialty Commercial | 1,515 | 1,562 | 1,766 | |||||||||||
Total Ongoing Operations | 10,491 | 10,428 | 10,152 | |||||||||||
Other Operations | 5 | 5 | 4 | |||||||||||
Total earned premiums | 10,496 | 10,433 | 10,156 | |||||||||||
Servicing revenue | 496 | 473 | 463 | |||||||||||
Net investment income | 1,687 | 1,486 | 1,365 | |||||||||||
Net realized capital gains (losses) | (172 | ) | 9 | 44 | ||||||||||
Total Property & Casualty | 12,507 | 12,401 | 12,028 | |||||||||||
Corporate | 43 | 35 | 32 | |||||||||||
Total revenues | $ | 25,916 | $ | 26,500 | $ | 27,083 | ||||||||
F-32
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Net Income (Loss) | 2007 | 2006 | 2005 | |||||||||
Life | ||||||||||||
Retail | $ | 812 | $ | 536 | $ | 595 | ||||||
Retirement Plans | 61 | 101 | 82 | |||||||||
Institutional | 17 | 78 | 115 | |||||||||
Individual Life | 182 | 150 | 173 | |||||||||
Group Benefits | 315 | 298 | 266 | |||||||||
International | 223 | 231 | 75 | |||||||||
Other [1] | (52 | ) | 47 | (102 | ) | |||||||
Total Life | 1,558 | 1,441 | 1,204 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | ||||||||||||
Underwriting Results | ||||||||||||
Personal Lines | 322 | 429 | 460 | |||||||||
Small Commercial | 508 | 422 | 232 | |||||||||
Middle Market | 144 | 207 | 163 | |||||||||
Specialty Commercial | (5 | ) | 53 | (164 | ) | |||||||
Total Ongoing Operations underwriting results | 969 | 1,111 | 691 | |||||||||
Net servicing and other income [2] | 52 | 53 | 49 | |||||||||
Net investment income | 1,439 | 1,225 | 1,082 | |||||||||
Net realized capital (losses) gains | (160 | ) | (17 | ) | 19 | |||||||
Other expenses | (248 | ) | (222 | ) | (202 | ) | ||||||
Income tax expense | (575 | ) | (596 | ) | (474 | ) | ||||||
Ongoing Operations | 1,477 | 1,554 | 1,165 | |||||||||
Other Operations | 30 | (35 | ) | 71 | ||||||||
Total Property & Casualty | 1,507 | 1,519 | 1,236 | |||||||||
Corporate | (116 | ) | (215 | ) | (166 | ) | ||||||
Net income | $ | 2,949 | $ | 2,745 | $ | 2,274 | ||||||
[1] | 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. | |
[2] | Amount is net of expenses related to service business. |
For the years ended December 31, | ||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 2007 | 2006 | 2005 | |||||||||
Life | ||||||||||||
Retail | $ | 406 | $ | 973 | $ | 740 | ||||||
Retirement Plans | 58 | (4 | ) | 30 | ||||||||
Institutional | 23 | 32 | 32 | |||||||||
Individual Life | 121 | 243 | 206 | |||||||||
Group Benefits | 62 | 41 | 31 | |||||||||
International | 214 | 167 | 133 | |||||||||
Total Life | 884 | 1,452 | 1,172 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | ||||||||||||
Personal Lines | 617 | 622 | 581 | |||||||||
Small Commercial | 635 | 634 | 596 | |||||||||
Middle Market | 529 | 544 | 537 | |||||||||
Specialty Commercial | 323 | 306 | 286 | |||||||||
Total Ongoing Operations | 2,104 | 2,106 | 2,000 | |||||||||
Other Operations | — | — | (3 | ) | ||||||||
Total Property & Casualty | 2,104 | 2,106 | 1,997 | |||||||||
Corporate | 1 | — | — | |||||||||
Total amortization of deferred policy acquisition costs and present value of future profits | $ | 2,989 | $ | 3,558 | $ | 3,169 | ||||||
F-33
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Income tax expense (benefit) | 2007 | 2006 | 2005 | |||||||||
Life | ||||||||||||
Retail | $ | 216 | $ | 39 | $ | 70 | ||||||
Retirement Plans | 18 | 39 | 27 | |||||||||
Institutional | (8 | ) | 26 | 47 | ||||||||
Individual Life | 81 | 62 | 76 | |||||||||
Group Benefits | 119 | 109 | 86 | |||||||||
International | 132 | 127 | 56 | |||||||||
Other | (11 | ) | 21 | (46 | ) | |||||||
Total Life | 547 | 423 | 316 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | 575 | 596 | 474 | |||||||||
Other Operations | (5 | ) | (45 | ) | 10 | |||||||
Total Property & Casualty | 570 | 551 | 484 | |||||||||
Corporate | (61 | ) | (117 | ) | (89 | ) | ||||||
Total income tax expense | $ | 1,056 | $ | 857 | $ | 711 | ||||||
For the years ended December 31, | ||||||||||||
Geographical Segment Information Revenues | 2007 | 2006 | 2005 | |||||||||
North America | $ | 24,865 | $ | 23,840 | $ | 22,349 | ||||||
Other | 1,051 | 2,660 | 4,734 | |||||||||
Total revenues | $ | 25,916 | $ | 26,500 | $ | 27,083 | ||||||
As of December 31, | ||||||||
Assets | 2007 | 2006 | ||||||
Life | ||||||||
Retail | $ | 136,023 | $ | 130,033 | ||||
Retirement Plans | 27,986 | 24,387 | ||||||
Institutional | 78,766 | 66,222 | ||||||
Individual Life | 15,590 | 14,245 | ||||||
Group Benefits | 9,295 | 8,979 | ||||||
International | 41,625 | 33,837 | ||||||
Other | 6,891 | 5,873 | ||||||
Total Life | 316,176 | 283,576 | ||||||
Property & Casualty | ||||||||
Ongoing Operations | 35,899 | 34,159 | ||||||
Other Operations | 5,942 | 6,866 | ||||||
Total Property & Casualty | 41,841 | 41,025 | ||||||
Corporate | 2,344 | 1,943 | ||||||
Total Assets | $ | 360,361 | $ | 326,544 | ||||
F-34
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Components of Net Investment Income | 2007 | 2006 | 2005 | |||||||||
Fixed maturities [1] | $ | 4,653 | $ | 4,266 | $ | 3,952 | ||||||
Equity securities held for trading | 145 | 1,824 | 3,847 | |||||||||
Policy loans | 135 | 142 | 144 | |||||||||
Mortgage loans on real estate | 293 | 158 | 84 | |||||||||
Other investments | 233 | 212 | 267 | |||||||||
Gross investment income | 5,459 | 6,602 | 8,294 | |||||||||
Less: Investment expenses | 100 | 87 | 63 | |||||||||
Net investment income | $ | 5,359 | $ | 6,515 | $ | 8,231 | ||||||
Components of Net Realized Capital Gains (Losses) | ||||||||||||
Fixed maturities | $ | (357 | ) | $ | (113 | ) | $ | 95 | ||||
Equity securities | (43 | ) | (11 | ) | 3 | |||||||
Foreign currency transaction remeasurements | (109 | ) | 17 | 162 | ||||||||
Derivatives and other [2] | (485 | ) | (144 | ) | (243 | ) | ||||||
Net realized capital gains (losses) | $ | (994 | ) | $ | (251 | ) | $ | 17 | ||||
[1] | Includes income on short-term bonds. | |
[2] | 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. |
For the years ended December 31, | ||||||||||||
Components of Net Unrealized Gains (Losses) on Available-for-Sale Securities | 2007 | 2006 | 2005 | |||||||||
Fixed maturities | $ | (669 | ) | $ | 1,466 | $ | 1,674 | |||||
Equity securities | (16 | ) | 204 | 131 | ||||||||
Net unrealized gains credited to policyholders | 3 | (4 | ) | (9 | ) | |||||||
Net unrealized gains (losses) | (682 | ) | 1,666 | 1,796 | ||||||||
Deferred income taxes and other items | (323 | ) | 608 | 827 | ||||||||
Net unrealized gains (losses), net of tax — end of year | (359 | ) | 1,058 | 969 | ||||||||
Net unrealized gains, net of tax — beginning of year | 1,058 | 969 | 2,162 | |||||||||
Change in unrealized gains (losses) on available-for-sale securities | $ | (1,417 | ) | $ | 89 | $ | (1,193 | ) | ||||
F-35
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2007 | As of December 31, 2006 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||
Bonds and Notes | ||||||||||||||||||||||||||||||||
ABS | $ | 9,515 | $ | 33 | $ | (633 | ) | $ | 8,915 | $ | 7,687 | $ | 54 | $ | (50 | ) | $ | 7,691 | ||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||
Agency backed | 1,191 | 32 | (4 | ) | 1,219 | 1,184 | 17 | (8 | ) | 1,193 | ||||||||||||||||||||||
Non-agency backed | 525 | 4 | (3 | ) | 526 | 116 | — | (1 | ) | 115 | ||||||||||||||||||||||
Commercial mortgage-backed securities (“CMBS”) | 17,625 | 244 | (838 | ) | 17,031 | 16,816 | 232 | (148 | ) | 16,900 | ||||||||||||||||||||||
Corporate | 34,118 | 1,022 | (942 | ) | 34,198 | 35,069 | 1,193 | (371 | ) | 35,891 | ||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||
Foreign | 999 | 59 | (5 | ) | 1,053 | 1,213 | 87 | (6 | ) | 1,294 | ||||||||||||||||||||||
United States | 836 | 22 | (3 | ) | 855 | 848 | 5 | (7 | ) | 846 | ||||||||||||||||||||||
MBS | 2,757 | 26 | (20 | ) | 2,763 | 2,742 | 5 | (45 | ) | 2,702 | ||||||||||||||||||||||
States, municipalities and political subdivisions | 13,152 | 427 | (90 | ) | 13,489 | 11,897 | 536 | (27 | ) | 12,406 | ||||||||||||||||||||||
Redeemable preferred stock | 6 | — | — | 6 | 36 | — | — | 36 | ||||||||||||||||||||||||
Total fixed maturities | $ | 80,724 | $ | 1,869 | $ | (2,538 | ) | $ | 80,055 | $ | 77,608 | $ | 2,129 | $ | (663 | ) | $ | 79,074 | ||||||||||||||
Maturity | Amortized Cost | Fair Value | ||||||
One year or less | $ | 1,486 | $ | 1,556 | ||||
Over one year through five years | 12,208 | 12,570 | ||||||
Over five years through ten years | 12,583 | 12,585 | ||||||
Over ten years | 40,459 | 39,921 | ||||||
Subtotal | 66,736 | 66,632 | ||||||
ABS, MBS, and CMOs | 13,988 | 13,423 | ||||||
Total | $ | 80,724 | $ | 80,055 | ||||
For the years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Sale of Fixed Maturities | ||||||||||||
Sale proceeds | $ | 21,968 | $ | 26,827 | $ | 25,385 | ||||||
Gross gains | 424 | 427 | 497 | |||||||||
Gross losses | (276 | ) | (407 | ) | (364 | ) | ||||||
Sale of Available-for-Sale Equity Securities | ||||||||||||
Sale proceeds | $ | 468 | $ | 514 | $ | 105 | ||||||
Gross gains | 28 | 11 | 12 | |||||||||
Gross losses | (15 | ) | (14 | ) | — | |||||||
F-36
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2007 | ||||||||||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | ||||||||||||||||||||||||||||
Cost | Value | Losses | Cost | Value | Losses | Cost | Value | Losses | ||||||||||||||||||||||||||||
ABS | $ | 7,811 | $ | 7,222 | $ | (589 | ) | $ | 671 | $ | 627 | $ | (44 | ) | $ | 8,482 | $ | 7,849 | $ | (633 | ) | |||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||||||
Agency backed | 324 | 321 | (3 | ) | 89 | 88 | (1 | ) | 413 | 409 | (4 | ) | ||||||||||||||||||||||||
Non-agency backed | 120 | 118 | (2 | ) | 54 | 53 | (1 | ) | 174 | 171 | (3 | ) | ||||||||||||||||||||||||
CMBS | 8,138 | 7,453 | (685 | ) | 3,400 | 3,247 | (153 | ) | 11,538 | 10,700 | (838 | ) | ||||||||||||||||||||||||
Corporate | 13,849 | 13,165 | (684 | ) | 4,873 | 4,615 | (258 | ) | 18,722 | 17,780 | (942 | ) | ||||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||||||
Foreign | 226 | 221 | (5 | ) | 66 | 66 | — | 292 | 287 | (5 | ) | |||||||||||||||||||||||||
United States | 216 | 213 | (3 | ) | 14 | 14 | — | 230 | 227 | (3 | ) | |||||||||||||||||||||||||
MBS | 56 | 56 | — | 1,033 | 1,013 | (20 | ) | 1,089 | 1,069 | (20 | ) | |||||||||||||||||||||||||
States, municipalities and political subdivisions | 3,157 | 3,081 | (76 | ) | 342 | 328 | (14 | ) | 3,499 | 3,409 | (90 | ) | ||||||||||||||||||||||||
Redeemable preferred stock | 6 | 6 | — | — | — | — | 6 | 6 | — | |||||||||||||||||||||||||||
Total fixed maturities | 33,903 | 31,856 | (2,047 | ) | 10,542 | 10,051 | (491 | ) | 44,445 | 41,907 | (2,538 | ) | ||||||||||||||||||||||||
Common stock | 128 | 121 | (7 | ) | — | — | — | 128 | 121 | (7 | ) | |||||||||||||||||||||||||
Non-redeemable preferred stock | 1,547 | 1,321 | (226 | ) | 21 | 20 | (1 | ) | 1,568 | 1,341 | (227 | ) | ||||||||||||||||||||||||
Total equity | 1,675 | 1,442 | (233 | ) | 21 | 20 | (1 | ) | 1,696 | 1,462 | (234 | ) | ||||||||||||||||||||||||
Total temporarily impaired securities | $ | 35,578 | $ | 33,298 | $ | (2,280 | ) | $ | 10,563 | $ | 10,071 | $ | (492 | ) | $ | 46,141 | $ | 43,369 | $ | (2,772 | ) | |||||||||||||||
F-37
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-38
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Mortgage Loans on Real Estate by Region | ||||||||||||||||
December 31, 2007 | December 31, 2006 | |||||||||||||||
Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||||
East North Central | $ | 120 | 2.2 | % | $ | 135 | 4.1 | % | ||||||||
East South Central | 9 | 0.2 | % | 10 | 0.3 | % | ||||||||||
Middle Atlantic | 674 | 12.4 | % | 598 | 18.0 | % | ||||||||||
Mountain | 200 | 3.7 | % | 88 | 2.6 | % | ||||||||||
New England | 404 | 7.5 | % | 212 | 6.4 | % | ||||||||||
Pacific | 1,200 | 22.2 | % | 669 | 20.2 | % | ||||||||||
South Atlantic | 1,104 | 20.4 | % | 766 | 23.1 | % | ||||||||||
West North Central | 32 | 0.6 | % | 6 | 0.2 | % | ||||||||||
West South Central | 286 | 5.3 | % | 113 | 3.4 | % | ||||||||||
Other [1] | 1,381 | 25.5 | % | 721 | 21.7 | % | ||||||||||
Total | $ | 5,410 | 100.0 | % | $ | 3,318 | 100.0 | % | ||||||||
[1] | Includes multi-regional properties. |
Mortgage Loans on Real Estate by Property Type | ||||||||||||||||
December 31, 2007 | December 31, 2006 | |||||||||||||||
Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||||
Industrial | $ | 649 | 12.0 | % | $ | 479 | 14.5 | % | ||||||||
Lodging | 524 | 9.7 | % | 510 | 15.4 | % | ||||||||||
Agricultural | 362 | 6.7 | % | 94 | 2.8 | % | ||||||||||
Multifamily | 991 | 18.3 | % | 300 | 9.0 | % | ||||||||||
Office | 1,929 | 35.6 | % | 1,358 | 40.9 | % | ||||||||||
Retail | 806 | 14.9 | % | 419 | 12.6 | % | ||||||||||
Other | 149 | 2.8 | % | 158 | 4.8 | % | ||||||||||
Total | $ | 5,410 | 100.0 | % | $ | 3,318 | 100.0 | % | ||||||||
F-39
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2007 | December 31, 2006 | |||||||||||||||||||||||
Maximum | Maximum | |||||||||||||||||||||||
Carrying | Exposure to | Carrying | Exposure to | |||||||||||||||||||||
Value[1] | Liability[2] | Loss[3] | Value[1] | Liability[2] | Loss[3] | |||||||||||||||||||
Collateralized loan obligations (“CLOs”)and other funds [4] | $ | 359 | $ | 118 | $ | 258 | $ | 296 | $ | 99 | $ | 189 | ||||||||||||
Limited partnerships | 309 | 47 | 220 | 103 | 5 | 85 | ||||||||||||||||||
Other investments [5] | 146 | — | 166 | — | — | — | ||||||||||||||||||
Total [6] | $ | 814 | $ | 165 | $ | 644 | $ | 399 | $ | 104 | $ | 274 | ||||||||||||
[1] | The carrying value of CLOs and other funds and Other investments is equal to fair value. Limited partnerships are accounted for under the equity method. | |
[2] | Creditors have no recourse against the Company in the event of default by the VIE. | |
[3] | The maximum exposure to loss does not include changes in fair value or the Company’s proportionate shares of earnings associated with limited partnerships accounted for under the equity method. The Company’s maximum exposure to loss as of December 31, 2007 and 2006 based on the carrying value was $649 and $295, respectively. The Company’s maximum exposure to loss as of December 31, 2007 and 2006 based on the Company’s initial co-investment or amortized cost basis was $644 and $274, respectively. | |
[4] | The Company provides collateral management services and earns a fee associated with these structures. | |
[5] | Other investments include investment structures that are backed by preferred securities. | |
[6] | As of December 31, 2007 and 2006, the Company had relationships with seven and four VIEs, respectively, where the Company was the primary beneficiary. |
F-40
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Asset Values | Liability Values | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Other investments | $ | 528 | $ | 285 | $ | — | $ | — | ||||||||
Reinsurance recoverables | 128 | — | — | 22 | ||||||||||||
Other policyholder funds and benefits payable | 2 | 53 | 737 | — | ||||||||||||
Consumer notes | — | — | 5 | 1 | ||||||||||||
Other liabilities | — | — | 617 | 770 | ||||||||||||
Total | $ | 658 | $ | 338 | $ | 1,359 | $ | 793 | ||||||||
F-41
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hedge | ||||||||||||||||||||||||
Ineffectiveness, | ||||||||||||||||||||||||
Notional Amount | Fair Value | After-tax | ||||||||||||||||||||||
Hedging Strategy | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
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 risk inherent in the assumptions used to price primarily certain liabilities. | ||||||||||||||||||||||||
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. | $ | 5,049 | $ | 6,093 | $ | 113 | $ | (22 | ) | $ | 2 | $ | (9 | ) | ||||||||||
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 to U.S. dollars in order to minimize cash flow fluctuations due to changes in currency rates. | 1,588 | 1,871 | (318 | ) | (370 | ) | (1 | ) | (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, in 2006 the Company closed the hedge of fixed rate debt. | 4,226 | 3,846 | (66 | ) | 10 | — | (1 | ) | ||||||||||||||||
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. | 696 | 492 | 25 | (9 | ) | — | — | |||||||||||||||||
Total cash-flow and fair-value hedges | $ | 11,559 | $ | 12,302 | $ | (246 | ) | $ | (391 | ) | $ | 1 | $ | (14 | ) | |||||||||
F-42
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Change in | ||||||||||||||||||||||||
Notional Amount | Fair Value | Value, After-tax | ||||||||||||||||||||||
Hedging Strategy | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
Other Investment and/or Risk Management Activities | ||||||||||||||||||||||||
Interest rate swaps, caps and floors | ||||||||||||||||||||||||
The Company uses interest rate swaps, caps 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. | $ | 9,287 | $ | 6,560 | $ | (17 | ) | $ | (30 | ) | $ | 20 | $ | (34 | ) | |||||||||
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 | ) | (1 | ) | 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. | 412 | 663 | (14 | ) | (14 | ) | (9 | ) | (8 | ) | ||||||||||||||
Credit default and total return swaps | ||||||||||||||||||||||||
The Company enters into credit default swap agreements in which the Company assumes credit risk 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 $1,857 and $1,203, after-tax, as of December 31, 2007 and 2006, respectively. | 2,857 | 1,852 | (416 | ) | (184 | ) | (134 | ) | 30 | |||||||||||||||
The Company also assumes credit risk through total return and credit index swaps which reference a specific index or collateral portfolio. The maximum potential future exposure to the Company for the credit index swaps is the notional value and for the total return swaps is the cash collateral associated with the transaction, which has termination triggers that limit investment losses. As of December 31, 2007 and 2006, the maximum potential future exposure to the Company from such contracts is $1,013 and $1,386, after-tax, respectively. | 2,306 | 2,674 | (70 | ) | 1 | (83 | ) | 1 | ||||||||||||||||
The Company enters into credit default swap agreements, in which the Company reduces credit risk to an individual entity. These contracts require the Company to pay 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. | 5,166 | 3,085 | 81 | (11 | ) | 55 | (6 | ) | ||||||||||||||||
Contingent Capital Facility | ||||||||||||||||||||||||
During the first quarter of 2007, the Company entered into a put option agreement that provides the Company the right to require a third party trust to purchase, at any time, The Hartford’s junior subordinated notes in a maximum aggregate principal amount of $500. Under the put option agreement, The Hartford will pay premiums on a periodic basis and will reimburse the trust for certain fees and ordinary expenses. The instrument is accounted for as a derivative. | 500 | — | 43 | — | (2 | ) | — | |||||||||||||||||
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 $(66) and $12, after-tax, as of December 31, 2007 and 2006, respectively, and offsets the derivative change in value. | 1,849 | 1,869 | (115 | ) | (225 | ) | 34 | (64 | ) | |||||||||||||||
F-43
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Change | ||||||||||||||||||||||||
Notional Amount | Fair Value | in Value, After-tax | ||||||||||||||||||||||
Hedging Strategy | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
Guaranteed Minimum Accumulation Benefit (“GMAB”) product derivatives | ||||||||||||||||||||||||
The Company offers certain variable annuity products in Japan that may have a GMAB rider. The GMAB is a bifurcated embedded derivative that provides the policyholder with their initial deposit in a lump sum after a specified waiting period. The notional value of the embedded derivative is the yen denominated GRB balance converted to U.S. dollars at the current December 31, 2007 foreign spot exchange rate. | $ | 2,768 | $ | — | $ | 2 | $ | — | $ | 1 | $ | — | ||||||||||||
GMWB product derivatives | ||||||||||||||||||||||||
The Company offers certain variable annuity products with a GMWB rider primarily in the U.S. and, to a lesser extent, the U.K. 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. The notional value of the embedded derivative is the GRB balance. For a further discussion, see the Derivative Instruments section of Note 1. | 45,900 | 37,769 | (715 | ) | 53 | (435 | ) | 79 | ||||||||||||||||
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. | 6,579 | 7,172 | 128 | (22 | ) | 83 | (19 | ) | ||||||||||||||||
GMWB hedging instruments | ||||||||||||||||||||||||
The Company enters into derivative contracts to economically hedge exposure to the volatility associated with the portion of the GMWB liabilities which are not reinsured. These derivative contracts include customized swaps, interest rate swaps and futures, and equity swaps, put and call options, and futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index. | 21,357 | 8,379 | 642 | 346 | 167 | (77 | ) | |||||||||||||||||
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. | 154 | 30 | (22 | ) | — | 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 risk arising primarily from GMDB and GMWB obligations against a decline in the equity markets. | 661 | 2,220 | 18 | 29 | (14 | ) | (9 | ) | ||||||||||||||||
Total other investment and/or risk management activities | $ | 99,796 | $ | 73,542 | $ | (455 | ) | $ | (64 | ) | $ | (317 | ) | $ | (97 | ) | ||||||||
Total derivatives [1] | $ | 111,355 | $ | 85,844 | $ | (701 | ) | $ | (455 | ) | $ | (316 | ) | $ | (111 | ) | ||||||||
[1] | Derivative change in value includes hedge ineffectiveness for cash-flow and fair-value hedges and total change in value, including periodic derivative net coupon settlements, derivatives held for other investment and/or risk management activities. |
F-44
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-45
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loaned Securities and Collateral Pledged | 2007 | 2006 | ||||||
ABS | $ | 18 | $ | 20 | ||||
CMO | 45 | — | ||||||
CMBS | 450 | 216 | ||||||
Corporate | 3,164 | 1,867 | ||||||
MBS | 492 | 152 | ||||||
Government/Government Agencies | ||||||||
Foreign | 47 | 19 | ||||||
United States | 650 | 463 | ||||||
Short-term | 1 | — | ||||||
Preferred stock | 77 | — | ||||||
Total | $ | 4,944 | $ | 2,737 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2007 | 2006 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Assets | Amount | Value | Amount | Value | ||||||||||||
Fixed maturities | $ | 80,055 | $ | 80,055 | $ | 79,074 | $ | 79,074 | ||||||||
Equity securities | 38,777 | 38,777 | 31,132 | 31,132 | ||||||||||||
Policy loans | 2,061 | 2,061 | 2,051 | 2,051 | ||||||||||||
Mortgage loans on real estate | 5,410 | 5,407 | 3,318 | 3,298 | ||||||||||||
Other investments [1] | 569 | 569 | 287 | 287 | ||||||||||||
Short-term investments | 1,602 | 1,602 | 1,681 | 1,681 | ||||||||||||
Liabilities | ||||||||||||||||
Other policyholder funds and benefits payable [2] | $ | 15,480 | $ | 15,429 | $ | 14,233 | $ | 13,488 | ||||||||
Commercial paper [3] | 373 | 373 | 299 | 299 | ||||||||||||
Long-term debt [4] | 4,100 | 4,118 | 3,804 | 3,974 | ||||||||||||
Consumer notes | 809 | 814 | 258 | 260 | ||||||||||||
Derivative related liabilities [5] | 617 | 617 | 770 | 770 | ||||||||||||
[1] | 2007 and 2006 include $528 and $285 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] | Excludes capital lease obligations and includes current maturities of long-term debt. | |
[5] | Included in other liabilities in the consolidated balance sheets. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Gross fee income, earned premiums and other | $ | 10,675 | $ | 9,372 | $ | 8,194 | ||||||
Reinsurance assumed | 273 | 313 | 464 | |||||||||
Reinsurance ceded | (405 | ) | (369 | ) | (455 | ) | ||||||
Net fee income, earned premiums and other | $ | 10,543 | $ | 9,316 | $ | 8,203 | ||||||
F-48
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Premiums Written | 2007 | 2006 | 2005 | |||||||||
Direct | $ | 11,281 | $ | 11,600 | $ | 11,653 | ||||||
Assumed | 205 | 265 | 233 | |||||||||
Ceded | (1,046 | ) | (1,203 | ) | (1,399 | ) | ||||||
Net | $ | 10,440 | $ | 10,662 | $ | 10,487 | ||||||
Premiums Earned | ||||||||||||
Direct | $ | 11,396 | $ | 11,465 | $ | 11,356 | ||||||
Assumed | 204 | 259 | 218 | |||||||||
Ceded | (1,104 | ) | (1,291 | ) | (1,418 | ) | ||||||
Net | $ | 10,496 | $ | 10,433 | $ | 10,156 | ||||||
F-49
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2007 | 2006 | 2005 | ||||||||||
Balance, January 1 | $ | 9,071 | $ | 8,568 | $ | 7,438 | ||||||
Cumulative effect of accounting change, pre-tax (SOP 05-1) | (79 | ) | — | — | ||||||||
Balance, January 1, as adjusted | 8,992 | 8,568 | 7,438 | |||||||||
Deferred Costs | 2,059 | 1,923 | 2,071 | |||||||||
Amortization — Deferred policy acquisitions costs and present value of future profits | (1,212 | ) | (1,269 | ) | (1,172 | ) | ||||||
Amortization — Unlock, pre-tax [1] | 327 | (183 | ) | — | ||||||||
Adjustments to unrealized gains and losses on securities available-for-sale and other | 230 | 47 | 380 | |||||||||
Effect of currency translation | 118 | (15 | ) | (149 | ) | |||||||
Balance, December 31 | $ | 10,514 | $ | 9,071 | $ | 8,568 | ||||||
[1] | For discussion of unlock effects, see Unlock Results in Note 1. |
For the years ended December 31, | ||||
2008 | $ | 64 | ||
2009 | 58 | |||
2010 | 52 | |||
2011 | 47 | |||
2012 | 42 | |||
2007 | 2006 | 2005 | ||||||||||
Balance, January 1 | $ | 1,197 | $ | 1,134 | $ | 1,071 | ||||||
Deferred costs | 2,135 | 2,169 | 2,060 | |||||||||
Amortization | (2,104 | ) | (2,106 | ) | (1,997 | ) | ||||||
Balance, December 31 | $ | 1,228 | $ | 1,197 | $ | 1,134 | ||||||
Life | 2007 | 2006 | ||||||
Retail | $ | 581 | $ | 572 | ||||
Individual Life | 224 | 224 | ||||||
Total Life | 805 | 796 | ||||||
Property & Casualty | ||||||||
Personal Lines | 119 | 119 | ||||||
Specialty Commercial | 30 | 30 | ||||||
Total Property & Casualty | 149 | 149 | ||||||
Corporate | 772 | 772 | ||||||
Total Goodwill | $ | 1,726 | $ | 1,717 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2007 | 2006 | |||||||||||||||
Gross Carrying | Accumulated Net | Gross Carrying | Accumulated Net | |||||||||||||
Acquired Intangible Assets | Amount | Amortization | Amount | Amortization | ||||||||||||
Renewal rights | $ | 22 | $ | 20 | $ | 22 | $ | 20 | ||||||||
Distribution agreement | 70 | 5 | — | — | ||||||||||||
Other | 14 | 14 | 14 | 10 | ||||||||||||
Total Acquired Intangible Assets | $ | 106 | $ | 39 | $ | 36 | $ | 30 | ||||||||
Distribution | ||||||||||||||||
Renewal Rights | Agreement | Other | Total | |||||||||||||
For the year ended December 31, 2007 | ||||||||||||||||
Balance, beginning of year | $ | 2 | $ | — | $ | 4 | $ | 6 | ||||||||
Distribution agreement | — | 70 | — | 70 | ||||||||||||
Amortization, net of the accretion of interest | — | (5 | ) | (4 | ) | (9 | ) | |||||||||
Balance, end of year | $ | 2 | $ | 65 | $ | — | $ | 67 | ||||||||
For the year ended December 31, 2006 | ||||||||||||||||
Balance, beginning of year | $ | 5 | $ | — | $ | 7 | $ | 12 | ||||||||
Amortization, net of the accretion of interest | (3 | ) | — | (3 | ) | (6 | ) | |||||||||
Balance, end 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, end of year | $ | 5 | $ | — | $ | 7 | $ | 12 | ||||||||
For the years ended December 31, | ||||
2008 | $ | 7 | ||
2009 | 6 | |||
2010 | 6 | |||
2011 | 6 | |||
2012 | 5 | |||
F-51
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
UL Secondary | ||||||||||||
U.S. GMDB [1] | Japan GMDB/GMIB [1] | Guarantees [1] | ||||||||||
Liability balance as of January 1, 2007 | $ | 475 | $ | 35 | $ | 7 | ||||||
Incurred | 142 | 16 | 12 | |||||||||
Paid | (84 | ) | (3 | ) | — | |||||||
Unlock | (4 | ) | (9 | ) | — | |||||||
Currency translation adjustment | — | 3 | — | |||||||||
Liability balance as of December 31, 2007 | $ | 529 | $ | 42 | $ | 19 | ||||||
[1] | The reinsurance recoverable asset related to the U.S. GMDB was $327 as of December 31, 2007. The reinsurance recoverable asset related to the Japan GMDB was $8 as of December 31, 2007. The reinsurance recoverable asset related to the UL Secondary Guarantees was $10 as of December 31, 2007. |
UL Secondary | ||||||||||||
U.S. GMDB [1] | Japan GMDB/GMIB [1] | Guarantees [1] | ||||||||||
Liability balance as of January 1, 2006 | $ | 158 | $ | 50 | $ | 5 | ||||||
Incurred | 129 | 28 | 2 | |||||||||
Paid | (106 | ) | (1 | ) | — | |||||||
Unlock | 294 | (41 | ) | — | ||||||||
Currency translation adjustment | — | (1 | ) | — | ||||||||
Liability balance as of December 31, 2006 | $ | 475 | $ | 35 | $ | 7 | ||||||
[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. The reinsurance recoverable asset related to the UL Secondary Guarantees was $6 as of December 31, 2006. |
F-52
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | 1000 stochastically generated investment performance scenarios for all issue years. |
• | For all issue years, the weighted average return is 8%, after fund fees, but before mortality and expense charges; it varies by asset class with a low of 3% for cash and a high of 11% 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 — 2007. |
• | Volatilities also vary by asset class with a low of 1% for cash, a high of 15% for aggressive equities, and a weighted average of 12%. | |
• | 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 13%, with an average of 11%. |
• | 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 8.9% for foreign equities and a weighted average of 5.1%. |
• | 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 2.6%. |
• | Discount rate of 4.75% for issue year 2004, discount rate of 4.50% for issue year 2005 & 2006, and discount rate of 4.25% for issue year 2007. | |
• | 100% of The Hartford pricing mortality table for mortality assumptions. |
• | Lapse rates for single life policies average 3% in policy years 1-10, declining to 0% by age 95. Lapse rate for last survivor policies is 0.4%. |
F-53
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Retained Net | Weighted Average | |||||||||||||||
Account | Net Amount | Amount | Attained Age of | |||||||||||||
Maximum anniversary value (MAV) [1] | Value | at Risk | at Risk | Annuitant | ||||||||||||
MAV only | $ | 47,463 | $ | 3,557 | $ | 419 | 65 | |||||||||
With 5% rollup [2] | 3,360 | 285 | 67 | 64 | ||||||||||||
With Earnings Protection Benefit Rider (EPB) [3] | 5,463 | 530 | 85 | 62 | ||||||||||||
With 5% rollup & EPB | 1,333 | 155 | 30 | 64 | ||||||||||||
Total MAV | 57,619 | 4,527 | 601 | |||||||||||||
Asset Protection Benefit (APB) [4] | 42,489 | 446 | 242 | 62 | ||||||||||||
Lifetime Income Benefit (LIB) — Death Benefit [5] | 10,273 | 25 | 25 | 62 | ||||||||||||
Reset [6] (5-7 years) | 6,132 | 80 | 80 | 66 | ||||||||||||
Return of Premium [7] /Other | 10,321 | 28 | 28 | 54 | ||||||||||||
Subtotal U.S. Guaranteed Minimum Death Benefits | 126,834 | 5,106 | 976 | 63 | ||||||||||||
Japan Guaranteed Minimum Death and Income Benefit [8] | 35,793 | 649 | 419 | 66 | ||||||||||||
Total at December 31, 2007 | $ | 162,627 | $ | 5,755 | $ | 1,395 | ||||||||||
[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 greatest of current account value or MAV, net premiums paid, or a benefit amount that ratchets over time, generally based on market performance. | |
[6] | Reset: the death benefit is the greatest of current account value, net premiums paid and the most recent five to seven year anniversary account value before age 80 (adjusted for withdrawals). | |
[7] | Return of premium: the death benefit is the greater of current account value and net premiums paid. | |
[8] | Death benefits include a Return of Premium and MAV (before age 80) paid in a single lump sum. The income benefit is a guarantee to return initial investment, adjusted for earnings liquidity, paid through a fixed annuity, after a minimum deferral period of 10, 15 or 20 years. The guaranteed remaining balance related to the Japan GMIB was $26.8 billion and $22.6 billion as of December31, 2007 and 2006, respectively. |
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Asset type | As of December 31,2007 | As of December 31,2006 | ||||||
Equity securities (including mutual funds) | $ | 109,354 | $ | 104,687 | ||||
Cash and cash equivalents | 9,975 | 8,931 | ||||||
Total | $ | 119,329 | $ | 113,618 | ||||
2007 | 2006 | |||||||
Balance, January 1 | $ | 404 | $ | 359 | ||||
Cumulative effect of accounting change, pre-tax (SOP 05-1) | (1 | ) | — | |||||
Balance, January 1, as adjusted | 403 | 359 | ||||||
Sales inducements deferred | 115 | 92 | ||||||
Amortization charged to income | (37 | ) | (43 | ) | ||||
Amortization — unlock | (14 | ) | (4 | ) | ||||
Balance, end of period, December 31 | $ | 467 | $ | 404 | ||||
F-55
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Beginning liabilities for life unpaid losses and loss adjustment expenses-gross | $ | 4,985 | $ | 4,832 | $ | 4,714 | ||||||
Reinsurance recoverables | 233 | 238 | 297 | |||||||||
Beginning liabilities for life unpaid losses and loss adjustment expenses | 4,752 | 4,594 | 4,417 | |||||||||
Add provision for life unpaid losses and loss adjustment expenses | ||||||||||||
Current year | 2,127 | 2,140 | 1,994 | |||||||||
Prior years | (65 | ) | (128 | ) | (112 | ) | ||||||
Total provision for life unpaid losses and loss adjustment expenses | 2,062 | 2,012 | 1,882 | |||||||||
Less payments | ||||||||||||
Current year | 758 | 724 | 645 | |||||||||
Prior years | 1,221 | 1,130 | 1,060 | |||||||||
Total payments | 1,979 | 1,854 | 1,705 | |||||||||
Ending liabilities for life unpaid losses and loss adjustment expenses | 4,835 | 4,752 | 4,594 | |||||||||
Reinsurance recoverables | 257 | 233 | 238 | |||||||||
Ending liabilities for life unpaid losses and loss adjustment expenses-gross | $ | 5,092 | $ | 4,985 | $ | 4,832 | ||||||
2007 | 2006 | |||||||
Group Disability and Accident and Other unpaid losses and loss adjustment expenses | $ | 5,092 | $ | 4,985 | ||||
Group Life unpaid losses and loss adjustment expenses | 1,205 | 1,132 | ||||||
Individual Life unpaid losses and loss adjustment expenses | 121 | 110 | ||||||
Future Policy Benefits | 8,913 | 7,789 | ||||||
Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses | $ | 15,331 | $ | 14,016 | ||||
F-56
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Beginning liabilities for property and casualty unpaid losses and loss adjustment expenses-gross | $ | 21,991 | $ | 22,266 | $ | 21,329 | ||||||
Reinsurance and other recoverables | 4,387 | 5,403 | 5,138 | |||||||||
Beginning liabilities for property and casualty unpaid losses and loss adjustment expenses-net | 17,604 | 16,863 | 16,191 | |||||||||
Add provision for property & casualty unpaid losses and loss adjustment expenses | ||||||||||||
Current year | 6,869 | 6,706 | 6,715 | |||||||||
Prior years | 48 | 296 | 248 | |||||||||
Total provision for property and casualty unpaid losses and loss adjustment expenses | 6,917 | 7,002 | 6,963 | |||||||||
Less payments | ||||||||||||
Current year | 2,563 | 2,448 | 2,697 | |||||||||
Prior years | 3,727 | 3,702 | 3,594 | |||||||||
Total payments | 6,290 | 6,150 | 6,291 | |||||||||
Less net reserves for Omni business sold | — | 111 | — | |||||||||
Ending liabilities for property and casualty unpaid losses and loss adjustment expenses-net | 18,231 | 17,604 | 16,863 | |||||||||
Reinsurance and other recoverables | 3,922 | 4,387 | 5,403 | |||||||||
Ending liabilities for property and casualty unpaid losses and loss adjustment expenses-gross | $ | 22,153 | $ | 21,991 | $ | 22,266 | ||||||
F-57
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-58
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-59
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-60
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ending December 31, | Capital Leases | Operating Leases | ||||||
2008 | $ | 41 | $ | 147 | ||||
2009 | 27 | 109 | ||||||
2010 | 73 | 90 | ||||||
2011 | — | 66 | ||||||
2012 | — | 39 | ||||||
Thereafter | — | 31 | ||||||
Total minimum lease payments | 141 | $ | 482 | |||||
Amounts representing interest | (13 | ) | ||||||
Present value of net minimum lease payments | 128 | |||||||
Current portion of capital lease obligation | (37 | ) | ||||||
Total | $ | 91 | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-62
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Income Tax Expense | ||||||||||||
Current — U.S. Federal | $ | 436 | $ | 519 | $ | 301 | ||||||
International | — | — | 4 | |||||||||
Total current | 436 | 519 | 305 | |||||||||
Deferred — U.S. Federal | 473 | 169 | 377 | |||||||||
International | 147 | 169 | 29 | |||||||||
Total deferred | 620 | 338 | 406 | |||||||||
Total income tax expense | $ | 1,056 | $ | 857 | $ | 711 | ||||||
2007 | 2006 | |||||||
Deferred Tax Assets | ||||||||
Tax discount on loss reserves | $ | 742 | $ | 801 | ||||
Tax basis deferred policy acquisition costs | 724 | 605 | ||||||
Unearned premium reserve and other underwriting related reserves | 405 | 471 | ||||||
Investment-related items | 467 | 240 | ||||||
Employee benefits | 119 | 141 | ||||||
Net unrealized losses on investments | 302 | — | ||||||
Minimum tax credit | 773 | 807 | ||||||
Net operating loss carryover | 80 | 108 | ||||||
Other | 39 | 103 | ||||||
Total Deferred Tax Assets | 3,651 | 3,276 | ||||||
Valuation Allowance | (43 | ) | (60 | ) | ||||
Deferred Tax Assets, Net of Valuation Allowance | 3,608 | 3,216 | ||||||
Deferred Tax Liabilities | ||||||||
Financial statement deferred policy acquisition costs and reserves | (3,169 | ) | (2,222 | ) | ||||
Net unrealized gain on investments | — | (463 | ) | |||||
Other depreciable & amortizable assets | (24 | ) | (135 | ) | ||||
Other | (107 | ) | (112 | ) | ||||
Total Deferred Tax Liabilities | (3,300 | ) | (2,932 | ) | ||||
Net Deferred Tax Asset | $ | 308 | $ | 284 | ||||
F-63
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Balance, at January 1, 2007 | $ | 8 | ||
Additions based on tax positions related to the current year | 33 | |||
Additions for tax positions for prior years | 35 | |||
Reductions for tax positions for prior years | — | |||
Settlements | — | |||
Balance, at December 31, 2007 | $ | 76 | ||
For the years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Tax provision at U.S. Federal statutory rate | $ | 1,402 | $ | 1,261 | $ | 1,045 | ||||||
Tax-exempt interest | (157 | ) | (153 | ) | (149 | ) | ||||||
Dividends received deduction | (170 | ) | (186 | ) | (188 | ) | ||||||
Sale of Omni Insurance Group, Inc. | — | (40 | ) | — | ||||||||
Other | (19 | ) | (25 | ) | 3 | |||||||
Provision for income taxes | $ | 1,056 | $ | 857 | $ | 711 | ||||||
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Short-Term Debt | 2007 | 2006 | ||||||
Commercial paper | $ | 373 | $ | 299 | ||||
Current maturities of long-term debt and capital lease obligations | 992 | 300 | ||||||
Total Short-Term Debt | $ | 1,365 | $ | 599 | ||||
Long-Term Debt | ||||||||
Senior Notes and Debentures | ||||||||
6.375% Notes, due 2008 | $ | — | $ | 200 | ||||
5.663% Notes, due 2008 | — | 330 | ||||||
5.55% Notes, due 2008 | — | 425 | ||||||
7.9% Notes, due 2010 | 275 | 274 | ||||||
5.25% Notes, due 2011 | 400 | 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 | 300 | 299 | ||||||
5.375% Notes, due 2017 | 499 | — | ||||||
7.65% Notes, due 2027 | 147 | 147 | ||||||
7.375% Notes, due 2031 | 92 | 92 | ||||||
5.95% Notes, due 2036 | 298 | 298 | ||||||
6.1% Notes, due 2041 | 322 | 322 | ||||||
Total Senior Notes and Debentures | 3,051 | 3,504 | ||||||
Capital lease obligations | 91 | — | ||||||
Total Long-Term Debt | $ | 3,142 | $ | 3,504 | ||||
Consumer Notes | ||||||||
Retail notes payable, interest rates ranging from 4.75% to 6.25% for fixed notes and for variable notes, either consumer price index plus 157 basis points to 267 basis points, or indexed to the S&P 500, Dow Jones Industrials or the Nikkei 225, due in varying amounts to 2031, callable beginning in 2008 | $ | 809 | $ | 258 | ||||
Total Consumer Notes | $ | 809 | $ | 258 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2008 | $ | 955 | ||
2009 | — | |||
2010 | 275 | |||
2011 | 400 | |||
2012 | — | |||
Thereafter | 2,470 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
Effective | Expiration | December 31, | December 31, | |||||||||||||||||||||
Description | Date | Date | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
Commercial Paper | ||||||||||||||||||||||||
The Hartford | 11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | 373 | $ | 299 | ||||||||||||||
HLI [1] | 2/7/97 | N/A | — | 250 | — | — | ||||||||||||||||||
Total commercial paper | 2,000 | 2,250 | 373 | 299 | ||||||||||||||||||||
Revolving Credit Facility | ||||||||||||||||||||||||
5-year revolving credit facility | 8/9/07 | 8/9/12 | 2,000 | 1,600 | — | — | ||||||||||||||||||
Line of Credit | ||||||||||||||||||||||||
Life Japan Operations [2] | 9/18/02 | 1/5/09 | 45 | 42 | — | — | ||||||||||||||||||
Total Commercial Paper, Revolving Credit Facility and Line of Credit | $ | 4,045 | $ | 3,892 | $ | 373 | $ | 299 | ||||||||||||||||
[1] | In January 2007, the commercial paper program of HLI was terminated. | |
[2] | As of December 31, 2007 and 2006, the Company’s Japanese operation line of credit in yen was ¥5 billion. |
For the years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Short-term debt | $ | 13 | $ | 31 | $ | 13 | ||||||
Long-term debt | 250 | 246 | 239 | |||||||||
Total interest expense | $ | 263 | $ | 277 | $ | 252 | ||||||
F-67
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-68
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Statutory Net Income | 2007 | 2006 | 2005 | |||||||||
Life operations | $ | 729 | $ | 1,123 | $ | 821 | ||||||
Property & Casualty operations | 1,803 | 1,326 | 1,382 | |||||||||
Total | $ | 2,532 | $ | 2,449 | $ | 2,203 | ||||||
As of December 31, | ||||||||
Statutory Surplus | 2007 | 2006 | ||||||
Life operations | $ | 5,786 | $ | 4,733 | ||||
Japan life operations | 1,620 | 1,380 | ||||||
Property & Casualty operations | 8,509 | 8,230 | ||||||
Total | $ | 15,915 | $ | 14,343 | ||||
F-69
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unrealized | Net Gain | Foreign | Pension | Accumulated | ||||||||||||||||
Gain | (Loss) on | Currency | and Other | Other | ||||||||||||||||
(Loss) on | Cash-Flow Hedging | Translation | Postretirement Plan | Comprehensive | ||||||||||||||||
For the year ended December 31, 2007 | Securities | Instruments | Adjustments | Adjustment | Income (Loss) | |||||||||||||||
Balance, beginning of year | $ | 1,058 | $ | (234 | ) | $ | (120 | ) | $ | (526 | ) | $ | 178 | |||||||
Unrealized loss on securities [1] [2] | (1,417 | ) | — | — | — | (1,417 | ) | |||||||||||||
Net gain on cash-flow hedging instruments [1] [3] | — | 94 | — | — | 94 | |||||||||||||||
Change in foreign currency translation adjustments [1] | — | — | 146 | — | 146 | |||||||||||||||
Change in pension and other postretirement plan adjustment [1] | — | — | — | 141 | 141 | |||||||||||||||
Balance, end of year | $ | (359 | ) | $ | (140 | ) | $ | 26 | $ | (385 | ) | $ | (858 | ) | ||||||
For the year ended December 31, 2006 | ||||||||||||||||||||
Balance, beginning of year | $ | 969 | $ | (110 | ) | $ | (149 | ) | $ | (620 | ) | $ | 90 | |||||||
Unrealized gain on securities [1] [2] | 89 | — | — | — | 89 | |||||||||||||||
Net loss 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 gain 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 | |||||||
[1] | Unrealized gain/loss on securities is net of tax and Life deferred acquisition costs of $(718), $137 and $(644) for the years ended December 31, 2007, 2006 and 2005, respectively. Net gain (loss) on cash-flow hedging instruments is net of tax of $51, $(67) and $57 for the years ended December 31, 2007, 2006 and 2005, respectively. Changes in foreign currency translation adjustments are net of tax of $79, $16, and $(58) for the years ended December 31, 2007, 2006 and 2005, respectively. Change in pension and other postretirement plan adjustment is net of tax of $48, $51 and $(75) for the years ended December 31, 2007, 2006 and 2005, respectively. | |
[2] | Net of reclassification adjustment for gains/losses realized in net income of $(192), $(74) and $45 for the years ended December 31, 2007, 2006 and 2005, respectively. | |
[3] | Net of amortization adjustment of $(20), $(38) and $5 to net investment income for the years ended December 31, 2007, 2006 and 2005, respectively. |
F-70
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, | ||||||||
2007 | 2006 | |||||||
Discount rate | 6.25 | % | 5.75 | % | ||||
Rate of increase in compensation levels | 4.25 | % | 4.25 | % | ||||
For the year ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Discount rate | 5.75 | % | 5.50 | % | 5.75 | % | ||||||
Expected long-term rate of return on plan assets | 8.00 | % | 8.00 | % | 8.50 | % | ||||||
Rate of increase in compensation levels | 4.25 | % | 4.00 | % | 4.00 | % | ||||||
F-71
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Health care cost trend rate | N/A | 10.00 | % | 10.00 | % | |||||||
Pre-65 Health care cost trend rate | 9.30 | % | N/A | N/A | ||||||||
Post-65 Health care cost trend rate | 7.70 | % | N/A | N/A | ||||||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 5.00 | % | 4.50 | % | 4.50 | % | ||||||
Year that the rate reaches the ultimate trend rate | 2013 | 2013 | 2012 | |||||||||
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Change in Benefit Obligation | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Benefit obligation — beginning of year | $ | 3,604 | $ | 3,534 | $ | 371 | $ | 521 | ||||||||
Service cost (excluding expenses) | 122 | 125 | 7 | 8 | ||||||||||||
Interest cost | 209 | 193 | 21 | 20 | ||||||||||||
Plan participants’ contributions | — | — | 14 | 12 | ||||||||||||
Amendments | 30 | — | — | — | ||||||||||||
Actuarial loss/(gain) | 97 | 59 | (11 | ) | (59 | ) | ||||||||||
Change in assumptions | (193 | ) | (161 | ) | — | (97 | ) | |||||||||
Benefits paid | (165 | ) | (145 | ) | (42 | ) | (34 | ) | ||||||||
Retiree drug subsidy | — | — | 3 | — | ||||||||||||
Foreign exchange adjustment | 9 | (1 | ) | 1 | — | |||||||||||
Benefit obligation — end of year | $ | 3,713 | $ | 3,604 | $ | 364 | $ | 371 | ||||||||
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Change in Plan Assets | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Fair value of plan assets — beginning of year | $ | 3,655 | $ | 3,047 | $ | 118 | $ | 109 | ||||||||
Actual return on plan assets | 331 | 356 | 6 | 8 | ||||||||||||
Employer contributions | 124 | 402 | 46 | — | ||||||||||||
Benefits paid | (149 | ) | (136 | ) | — | — | ||||||||||
Expenses paid | (12 | ) | (11 | ) | — | — | ||||||||||
Foreign exchange adjustment | 8 | (3 | ) | — | — | |||||||||||
Fair value of plan assets — end of year | $ | 3,957 | $ | 3,655 | $ | 170 | $ | 117 | ||||||||
Funded status — end of year | $ | 244 | $ | 51 | $ | (194 | ) | $ | (254 | ) | ||||||
F-72
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2007 | 2006 | |||||||
Projected benefit obligation | $ | 262 | $ | 223 | ||||
Accumulated benefit obligation | 256 | 211 | ||||||
Fair value of plan assets | — | — | ||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
Service cost | $ | 128 | $ | 128 | $ | 116 | $ | 7 | $ | 8 | $ | 12 | ||||||||||||
Interest cost | 209 | 193 | 182 | 21 | 20 | 27 | ||||||||||||||||||
Expected return on plan assets | (283 | ) | (244 | ) | (221 | ) | (8 | ) | (8 | ) | (9 | ) | ||||||||||||
Amortization of prior service credit | (13 | ) | (13 | ) | (13 | ) | (6 | ) | (23 | ) | (23 | ) | ||||||||||||
Amortization of actuarial loss | 90 | 88 | 73 | — | — | 5 | ||||||||||||||||||
Net periodic benefit cost | $ | 131 | $ | 152 | $ | 137 | $ | 14 | $ | (3 | ) | $ | 12 | |||||||||||
Pension Benefits | Other Postretirement Benefits | ||||||||
2007 | 2007 | ||||||||
Amortization of net loss | $ | (90 | ) | $ | — | ||||
Amortization of prior service credit | 13 | 6 | |||||||
Net gain arising during the year | (139 | ) | (10 | ) | |||||
Prior service cost arising during the year | 31 | — | |||||||
Total recognized in other comprehensive income | $ | (185 | ) | $ | (4 | ) | |||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net loss/(gain) | $ | 718 | $ | 947 | $ | (39 | ) | $ | (30 | ) | ||||||
Prior service cost/(credit) | (58 | ) | (102 | ) | (3 | ) | (9 | ) | ||||||||
Transition obligation | — | — | 1 | 2 | ||||||||||||
Total | $ | 660 | $ | 845 | $ | (41 | ) | $ | (37 | ) | ||||||
F-73
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Percentage of Pension Plan Assets | ||||||||||||
Fair Value at December 31, | Target | |||||||||||
2007 | 2006 | Allocation | ||||||||||
Equity securities | 55 | % | 68 | % | 20% - 40 | % | ||||||
Debt securities | 39 | % | 32 | % | 40% - 60 | % | ||||||
Alternative Assets | 2 | % | — | 20% maximum | ||||||||
Real estate | — | — | — | |||||||||
Other | 4 | % | — | 5% maximum | ||||||||
Total | 100 | % | 100 | % | ||||||||
Percentage of Other Postretirement Benefit | ||||||||||||
Plan Assets Fair Value at December 31, | Target | |||||||||||
2007 | 2006 | Allocation | ||||||||||
Equity securities | 27 | % | 26 | % | 20% - 40 | % | ||||||
Debt securities | 73 | % | 74 | % | 60% - 80 | % | ||||||
Total | 100 | % | 100 | % | ||||||||
Employer Contributions | Pension Benefits | Other Postretirement Benefits | ||||||
2006 | $ | 402 | $ | — | ||||
2007 | $ | 158 | 46 | |||||
F-74
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pension Benefits | Other Postretirement Benefits | |||||||
2008 | $ | 187 | $ | 34 | ||||
2009 | 202 | 35 | ||||||
2010 | 215 | 36 | ||||||
2011 | 228 | 37 | ||||||
2012 | 246 | 37 | ||||||
2013-2017 | 1,384 | 186 | ||||||
Total | $ | 2,462 | $ | 365 | ||||
2008 | $ | 3 | ||
2009 | 4 | |||
2010 | 4 | |||
2011 | 4 | |||
2012 | 5 | |||
2013-2017 | 30 | |||
Total | $ | 50 | ||
F-75
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Expected dividend yield | 2.0 | % | 1.9 | % | 1.9 | % | ||||||
Expected annualized spot volatility | 21.0 % - 31.3 | % | 20.2% - 32.3 | % | 19.5% - 33.4 | % | ||||||
Weighted average annualized volatility | 29.0 | % | 28.9 | % | 29.4 | % | ||||||
Risk-free spot rate | 4.4% - 5.2 | % | 4.4% - 4.6 | % | 2.4% - 4.7 | % | ||||||
Expected term | 8 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 | 8,898 | $ | 56.48 | 4.8 | ||||||||||||
Granted | 333 | 93.59 | ||||||||||||||
Exercised | (2,843 | ) | 55.02 | |||||||||||||
Forfeited | (61 | ) | 89.57 | |||||||||||||
Expired | (4 | ) | 52.49 | |||||||||||||
Outstanding at end of year | 6,323 | 58.76 | 4.2 | $ | 180 | |||||||||||
Exercisable at end of year | 5,592 | 55.48 | 3.7 | $ | 177 | |||||||||||
Weighted average fair value of options granted | $ | 31.43 | ||||||||||||||
F-76
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Shares | Weighted-Average | |||||||
Non-vested Shares | (in thousands) | Grant-Date Fair Value | ||||||
Non-vested at beginning of year | 1,605 | $ | 75.23 | |||||
Granted | 641 | 93.10 | ||||||
Increase for change in estimated performance factors | 89 | 71.27 | ||||||
Vested | (256 | ) | 68.79 | |||||
Forfeited | (196 | ) | 81.88 | |||||
Non-vested at end of year | 1,883 | $ | 81.69 | |||||
For the year ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Dividend yield | 2.1 | % | 2.0 | % | 1.6 | % | ||||||
Implied volatility | 23.2 | % | 19.0 | % | 20.5 | % | ||||||
Risk-free spot rate | 4.7 | % | 4.7 | % | 2.9 | % | ||||||
Expected term | 3 months | 3 months | 3 months | |||||||||
F-77
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended | ||||||||||||||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||||||||||||
Revenues | $ | 6,759 | $ | 6,543 | $ | 7,660 | $ | 4,971 | $ | 5,823 | $ | 7,407 | $ | 5,674 | $ | 7,579 | ||||||||||||||||
Benefits, losses and expenses | $ | 5,547 | $ | 5,559 | $ | 6,823 | $ | 4,366 | $ | 4,648 | $ | 6,396 | $ | 4,893 | $ | 6,577 | ||||||||||||||||
Net income | $ | 876 | $ | 728 | $ | 627 | $ | 476 | $ | 851 | $ | 758 | $ | 595 | $ | 783 | ||||||||||||||||
Basic earnings per share | $ | 2.74 | $ | 2.41 | $ | 1.98 | $ | 1.57 | $ | 2.70 | $ | 2.45 | $ | 1.90 | $ | 2.45 | ||||||||||||||||
Diluted earnings per share | $ | 2.71 | $ | 2.34 | $ | 1.96 | $ | 1.52 | $ | 2.68 | $ | 2.39 | $ | 1.88 | $ | 2.42 | ||||||||||||||||
Weighted average common shares outstanding | 319.6 | 302.2 | 316.8 | 303.3 | 315.4 | 310.0 | 313.4 | 319.7 | ||||||||||||||||||||||||
Weighted average common shares outstanding and dilutive potential common shares | 322.7 | 310.9 | 319.6 | 312.3 | 318.0 | 316.7 | 316.1 | 323.9 | ||||||||||||||||||||||||
F-78
Table of Contents
(In millions) | As of December 31, 2007 | |||||||||||
Amount at which | ||||||||||||
shown on Balance | ||||||||||||
Type of Investment | Cost | Fair Value | Sheet | |||||||||
Fixed Maturities | ||||||||||||
Bonds and Notes | ||||||||||||
U.S. Government and Government agencies and authorities (guaranteed and sponsored) | $ | 836 | $ | 855 | $ | 855 | ||||||
U.S. Government and Government agencies and authorities (guaranteed and sponsored) — asset-backed | 4,392 | 4,439 | 4,439 | |||||||||
States, municipalities and political subdivisions | 13,152 | 13,489 | 13,489 | |||||||||
International governments | 999 | 1,053 | 1,053 | |||||||||
Public utilities | 4,500 | 4,577 | 4,577 | |||||||||
All other corporate bonds including international | 29,618 | 29,621 | 29,621 | |||||||||
All other mortgage-backed and asset-backed securities | 27,221 | 26,015 | 26,015 | |||||||||
Redeemable preferred stock | 6 | 6 | 6 | |||||||||
Total fixed maturities | 80,724 | 80,055 | 80,055 | |||||||||
Equity Securities | ||||||||||||
Common stocks | ||||||||||||
Utilities | 1 | 1 | 1 | |||||||||
Banks, trusts & insurance companies | 3 | 3 | 3 | |||||||||
Industrial, miscellaneous and all other | 328 | 514 | 514 | |||||||||
Non-redeemable preferred stocks | 2,279 | 2,077 | 2,077 | |||||||||
Total equity securities, available-for-sale | 2,611 | 2,595 | 2,595 | |||||||||
Total equity securities, held for trading | 30,489 | 36,182 | 36,182 | |||||||||
Total equity securities | 33,100 | 38,777 | 38,777 | |||||||||
Real Estate | 35 | 35 | 35 | |||||||||
Other Investments | ||||||||||||
Mortgage loans on real estate | 5,410 | 5,407 | 5,410 | |||||||||
Short-term investments | 1,602 | 1,602 | 1,602 | |||||||||
Policy loans | 2,061 | 2,061 | 2,061 | |||||||||
Investments in partnerships and trusts | 2,566 | 2,566 | 2,566 | |||||||||
Futures, options and miscellaneous | 407 | 580 | 580 | |||||||||
Total other investments | 12,046 | 12,216 | 12,219 | |||||||||
Total investments | $ | 125,905 | $ | 131,083 | $ | 131,086 | ||||||
S-1
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Registrant)
(In millions) | As of December 31, | |||||||
Condensed Balance Sheets | 2007 | 2006 | ||||||
Assets | ||||||||
Other assets | $ | 1,414 | $ | 1,037 | ||||
Investment in affiliates | 23,120 | 22,761 | ||||||
Total assets | $ | 24,534 | $ | 23,798 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Net payable to affiliates | $ | 663 | $ | 596 | ||||
Short-term debt (includes current maturities of long-term debt) | 1,328 | 599 | ||||||
Long-term debt | 2,811 | 3,265 | ||||||
Other liabilities | 528 | 462 | ||||||
Total liabilities | 5,330 | 4,922 | ||||||
Total stockholders’ equity | 19,204 | 18,876 | ||||||
Total liabilities and stockholders’ equity | $ | 24,534 | $ | 23,798 | ||||
(In millions) | For the years ended December 31, | |||||||||||
Condensed Statements of Operations | 2007 | 2006 | 2005 | |||||||||
Interest expense (net of interest income) | $ | 217 | $ | 198 | $ | 169 | ||||||
Other expenses | 22 | 44 | 14 | |||||||||
Loss before income taxes and earnings of subsidiaries | (239 | ) | (242 | ) | (183 | ) | ||||||
Income tax benefit | (83 | ) | (84 | ) | (63 | ) | ||||||
Loss before earnings of subsidiaries | (156 | ) | (158 | ) | (120 | ) | ||||||
Earnings of subsidiaries | 3,105 | 2,903 | 2,394 | |||||||||
Net income | $ | 2,949 | $ | 2,745 | $ | 2,274 | ||||||
the consolidated financial statements and notes thereto.
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 | 2007 | 2006 | 2005 | |||||||||
Operating Activities | ||||||||||||
Net income | $ | 2,949 | $ | 2,745 | $ | 2,274 | ||||||
Undistributed earnings of subsidiaries | (1,422 | ) | (2,366 | ) | (1,904 | ) | ||||||
Change in operating assets and liabilities | 18 | (74 | ) | (304 | ) | |||||||
Cash provided by operating activities | 1,545 | 305 | 66 | |||||||||
Investing Activities | ||||||||||||
Net sale (purchase) of short-term investments | (76 | ) | (292 | ) | 63 | |||||||
Capital contributions to subsidiaries | (127 | ) | (527 | ) | (22 | ) | ||||||
Cash provided by (used for) investing activities | (203 | ) | (819 | ) | 41 | |||||||
Financing Activities | ||||||||||||
Issuance of shares from equity unit contracts | — | 1,020 | — | |||||||||
Issuance of long-term debt | 495 | 990 | — | |||||||||
Repayment/maturity of long-term debt | (300 | ) | (1,015 | ) | (250 | ) | ||||||
Change in short-term debt | 75 | (173 | ) | 100 | ||||||||
Proceeds from issuances of shares under incentive and stock compensation plans, net | 186 | 147 | 390 | |||||||||
Treasury stock acquired | (1,193 | ) | — | — | ||||||||
Return of shares to treasury stock under incentive and stock compensation plans to treasury stock | (14 | ) | (5 | ) | (2 | ) | ||||||
Excess tax benefits on stock-based compensation | 45 | 10 | — | |||||||||
Dividends paid | (636 | ) | (460 | ) | (345 | ) | ||||||
Cash provided by (used for) financing activities | (1,342 | ) | 514 | (107 | ) | |||||||
Net change in cash | — | — | — | |||||||||
Cash — beginning of year | — | — | — | |||||||||
Cash — end of year | $ | — | $ | — | $ | — | ||||||
Supplemental Disclosure of Cash Flow Information | ||||||||||||
Interest Paid | $ | 239 | $ | 198 | $ | 170 | ||||||
Dividends Received from Subsidiaries | $ | 1,668 | $ | 441 | $ | 454 |
the consolidated financial statements and notes thereto.
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, 2007 | ||||||||||||||||
Life | ||||||||||||||||
Retail Products Group | $ | 5,315 | $ | 961 | $ | 13 | $ | 15,443 | ||||||||
Retirement Plans | 658 | 333 | — | 5,591 | ||||||||||||
Institutional Solutions Group | 143 | 6,863 | 57 | 12,460 | ||||||||||||
Individual Life | 2,406 | 737 | 2 | 5,691 | ||||||||||||
Group Benefits | 69 | 6,331 | 75 | 317 | ||||||||||||
International | 1,923 | 42 | — | 39,024 | ||||||||||||
Other | — | 64 | — | 1,816 | ||||||||||||
Total Life | 10,514 | 15,331 | 147 | 80,342 | ||||||||||||
Property & Casualty | ||||||||||||||||
Ongoing Operations | ||||||||||||||||
Personal Lines | 566 | 2,042 | 1,909 | — | ||||||||||||
Small Commercial | 282 | 3,470 | 1,357 | — | ||||||||||||
Middle Market | 236 | 4,687 | 1,191 | — | ||||||||||||
Specialty Commercial | 144 | 6,883 | 944 | — | ||||||||||||
Total Ongoing Operations | 1,228 | 17,082 | 5,401 | — | ||||||||||||
Other Operations | — | 5,071 | 1 | — | ||||||||||||
Total Property & Casualty | 1,228 | 22,153 | 5,402 | — | ||||||||||||
Corporate | — | — | (4 | ) | — | |||||||||||
Consolidated | $ | 11,742 | $ | 37,484 | $ | 5,545 | $ | 80,342 | ||||||||
As of December 31, 2006 | ||||||||||||||||
Life | ||||||||||||||||
Retail Products Group | $ | 4,680 | $ | 863 | $ | 6 | $ | 15,095 | ||||||||
Retirement Plans | 542 | 357 | — | 5,544 | ||||||||||||
Institutional Solutions Group | 111 | 5,925 | 20 | 11,405 | ||||||||||||
Individual Life | 2,111 | 623 | 3 | 5,343 | ||||||||||||
Group Benefits | 117 | 6,150 | 74 | 352 | ||||||||||||
International | 1,509 | 38 | — | 31,782 | ||||||||||||
Other | — | 60 | — | 1,790 | ||||||||||||
Total Life | 9,070 | 14,016 | 103 | 71,311 | ||||||||||||
Property & Casualty | ||||||||||||||||
Ongoing Operations | ||||||||||||||||
Personal Lines | 510 | 1,959 | 1,863 | — | ||||||||||||
Small Commercial | 286 | 3,421 | 1,348 | — | ||||||||||||
Middle Market | 253 | 4,517 | 1,291 | — | ||||||||||||
Specialty Commercial | 148 | 6,378 | 1,017 | — | ||||||||||||
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 | ||||||||
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Earned Premiums, | Net | Benefits, Losses and | Amortization of | |||||||||||||||||||||
Fee Income and | Investment | Loss Adjustment | Deferred Policy | Other | Net Written | |||||||||||||||||||
Segment [1] | Other | Income | Expenses | Acquisition Costs | Expenses [3] | Premiums | ||||||||||||||||||
For the year ended December 31, 2007 | ||||||||||||||||||||||||
Life | ||||||||||||||||||||||||
Retail Products Group | $ | 3,055 | $ | 801 | $ | 820 | $ | 406 | $ | 1,221 | $ | |||||||||||||
Retirement Plans | 242 | 355 | 249 | 58 | 170 | |||||||||||||||||||
Institutional Solutions Group | 1,238 | 1,241 | 2,074 | 23 | 185 | |||||||||||||||||||
Individual Life | 808 | 359 | 562 | 121 | 193 | |||||||||||||||||||
Group Benefits | 4,301 | 465 | 3,109 | 62 | 1,131 | |||||||||||||||||||
International | 832 | 131 | 32 | 214 | 246 | |||||||||||||||||||
Other | 67 | 290 | 301 | — | 84 | |||||||||||||||||||
Total Life | 10,543 | 3,642 | 7,147 | 884 | 3,230 | N/A | ||||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Personal Lines | 4,030 | 249 | 2,697 | 617 | 402 | 3,947 | ||||||||||||||||||
Small Commercial | 2,737 | 299 | 1,413 | 635 | 239 | 2,747 | ||||||||||||||||||
Middle Market | 2,351 | 387 | 1,524 | 529 | 188 | 2,257 | ||||||||||||||||||
Specialty Commercial | 1,869 | 504 | 1,090 | 323 | 557 | 1,484 | ||||||||||||||||||
Total Ongoing Operations | 10,987 | 1,439 | 6,724 | 2,104 | 1,386 | 10,435 | ||||||||||||||||||
Other Operations | 5 | 248 | 193 | — | 23 | 5 | ||||||||||||||||||
Total Property & Casualty | 10,992 | 1,687 | 6,917 | 2,104 | 1,409 | 10,440 | ||||||||||||||||||
Corporate | 16 | 30 | — | 1 | 219 | N/A | ||||||||||||||||||
Consolidated | $ | 21,551 | $ | 5,359 | $ | 14,064 | $ | 2,989 | $ | 4,858 | $ | 10,440 | ||||||||||||
For the year ended December 31, 2006 | ||||||||||||||||||||||||
Life | ||||||||||||||||||||||||
Retail Products Group | $ | 2,609 | $ | 839 | $ | 819 | $ | 973 | $ | 994 | $ | |||||||||||||
Retirement Plans | 212 | 326 | 250 | (4 | ) | 136 | ||||||||||||||||||
Institutional Solutions Group | 732 | 1,003 | 1,484 | 32 | 78 | |||||||||||||||||||
Individual Life | 832 | 324 | 497 | 243 | 179 | |||||||||||||||||||
Group Benefits | 4,149 | 415 | 3,002 | 41 | 1,101 | |||||||||||||||||||
International | 701 | 123 | 3 | 167 | 208 | |||||||||||||||||||
Other | 81 | 1,978 | 1,985 | — | 12 | |||||||||||||||||||
Total Life | 9,316 | 5,008 | 8,040 | 1,452 | 2,708 | N/A | ||||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Personal Lines | 3,895 | 228 | 2,478 | 622 | 409 | 3,877 | ||||||||||||||||||
Small Commercial | 2,651 | 261 | 1,468 | 634 | 181 | 2,728 | ||||||||||||||||||
Middle Market | 2,456 | 341 | 1,584 | 544 | 156 | 2,445 | ||||||||||||||||||
Specialty Commercial | 1,899 | 395 | 1,112 | 306 | 465 | 1,608 | ||||||||||||||||||
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 | $ | 2,272 | $ | 933 | $ | 895 | $ | 740 | $ | 867 | $ | |||||||||||||
Retirement Plans | 162 | 311 | 231 | 30 | 117 | |||||||||||||||||||
Institutional Solutions Group | 624 | 802 | 1,212 | 32 | 56 | |||||||||||||||||||
Individual Life | 768 | 305 | 469 | 206 | 166 | |||||||||||||||||||
Group Benefits | 3,811 | 398 | 2,794 | 31 | 1,022 | |||||||||||||||||||
International | 483 | 75 | 42 | 133 | 188 | |||||||||||||||||||
Other | 83 | 4,021 | 4,166 | — | 106 | |||||||||||||||||||
Total Life | 8,203 | 6,845 | 9,809 | 1,172 | 2,522 | N/A | ||||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Personal Lines | 3,731 | 209 | 2,294 | 581 | 451 | 3,676 | ||||||||||||||||||
Small Commercial | 2,421 | 222 | 1,452 | 596 | 196 | 2,545 | ||||||||||||||||||
Middle Market | 2,354 | 314 | 1,521 | 537 | 159 | 2,445 | ||||||||||||||||||
Specialty Commercial | 2,109 | 337 | 1,484 | 286 | 520 | 1,817 | ||||||||||||||||||
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 | ||||||||||||
[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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Percentage | ||||||||||||||||||||
Assumed | of Amount | |||||||||||||||||||
Gross | Ceded to Other | From Other | Net | Assumed | ||||||||||||||||
(In millions) | Amount | Companies | Companies | Amount | to Net | |||||||||||||||
For the year ended December 31, 2007 | ||||||||||||||||||||
Life insurance in-force | $ | 824,608 | $ | 216,439 | $ | 82,282 | $ | 690,451 | 12 | % | ||||||||||
Insurance revenues | ||||||||||||||||||||
Property and casualty insurance | $ | 11,396 | $ | 1,104 | $ | 204 | $ | 10,496 | 2 | % | ||||||||||
Life insurance and annuities | 8,360 | 369 | 188 | 8,179 | 2 | % | ||||||||||||||
Accident and health insurance | 2,315 | 36 | 85 | 2,364 | 4 | % | ||||||||||||||
Total insurance revenues | $ | 22,071 | $ | 1,509 | $ | 477 | $ | 21,039 | 2 | % | ||||||||||
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 | % | ||||||||||
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Write-offs/ | ||||||||||||||||||||
Balance | Charged to Costs | Translation | Payments/ | Balance | ||||||||||||||||
(In millions) | January 1, | and Expenses | Adjustment | Other | December 31, | |||||||||||||||
2007 | ||||||||||||||||||||
Allowance for doubtful accounts and other | $ | 114 | $ | 47 | $ | — | $ | (35 | ) | $ | 126 | |||||||||
Allowance for uncollectible reinsurance | 412 | 12 | — | (20 | ) | 404 | ||||||||||||||
Accumulated depreciation of property and equipment | 1,241 | 232 | — | (78 | ) | 1,395 | ||||||||||||||
Valuation allowance for deferred taxes | 60 | (17 | ) | — | — | 43 | ||||||||||||||
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 | |||||||||||||||
PROPERTY 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, | |||||||||||||||||
2007 | $ | 568 | $ | 6,869 | $ | 48 | $ | 6,290 | |||||||||
2006 | $ | 605 | $ | 6,706 | $ | 296 | $ | 6,150 | |||||||||
2005 | $ | 608 | $ | 6,715 | $ | 248 | $ | 6,291 | |||||||||
[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 5.5%, 5.6%, and 5.6% for 2007, 2006 and 2005, respectively. |
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THE HARTFORD FINANCIAL SERVICES GROUP, INC. | ||||
By: | /s/ Beth A. Bombara | |||
Beth A. Bombara | ||||
Senior Vice President and Controller (Chief Accounting Officer and duly authorized signatory) | ||||
Signature | Title | Date | ||
/s/ Ramani Ayer | Chairman, Chief Executive Officer and Director | February 22, 2008 | ||
Ramani Ayer | (Principal Executive Officer) | |||
* | President, Chief Operating Officer and Director | February 22, 2008 | ||
Thomas M. Marra | ||||
/s/ David M. Johnson | Executive Vice President and Chief Financial Officer | February 22, 2008 | ||
David M. Johnson | (Principal Financial Officer) | |||
/s/ Beth A. Bombara | Senior Vice President and Controller | February 22, 2008 | ||
Beth A. Bombara | (Principal Accounting Officer) | |||
* | Director | February 22, 2008 | ||
Ramon de Oliveira | ||||
* | Director | February 22, 2008 | ||
Trevor Fetter | ||||
* | Director | February 22, 2008 | ||
Edward J. Kelly, III | ||||
* | Director | February 22, 2008 | ||
Paul G. Kirk, Jr. | ||||
* | Director | February 22, 2008 | ||
Gail J. McGovern | ||||
* | Director | February 22, 2008 | ||
Michael G. Morris | ||||
* | Director | February 22, 2008 | ||
Robert W. Selander | ||||
* | Director | February 22, 2008 | ||
Charles B. Strauss | ||||
* | Director | February 22, 2008 | ||
H. Patrick Swygert |
* By: | /s/ Alan J. Kreczko | |||
Alan J. Kreczko | ||||
As Attorney-in-Fact |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
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 17, 2007 (incorporated herein by reference to Exhibit 3.1 to The Hartford’s Current Report on Form 8-K, filed May 21, 2007). | |||
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 | Senior Indenture, dated as of April 11, 2007, between The Hartford and The Bank of New York Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 4.03 to the Registration Statement on Form S-3 (Registration No. 333-142044) of The Hartford, Hartford Capital IV, Hartford Capital V and Hartford Capital VI, filed on April 11, 2007). | |||
*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). |
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Exhibit No. | Description | |||
*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) to which John C. Walters is a signatory as of September 7, 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. † | |||
*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 | Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility, dated August 9, 2007, among The Hartford and the syndicate of lenders named therein, including Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citibank, N.A., as syndication agents, and Wachovia Bank, N.A., as documentation agent (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed August 10, 2007). | |||
10.20 | 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). | |||
10.21 | 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). |
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Exhibit No. | Description | |||
10.22 | 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). | |||
10.23 | Form of Order of the Securities and Exchange Commission dated November 8, 2006 (incorporated herein by reference to Exhibit 10.26 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006) | |||
10.24 | Put Option Agreement, dated February 12, 2007, among The Hartford, Glen Meadow ABC Trust and LaSalle Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed February 16, 2007). | |||
10.25 | Form of Assurance of Discontinuance entered into by the New York Attorney General’s Office, the Illinois Attorney General’s Office and The Hartford, dated July 23, 2007 (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed July 24, 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. |
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