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SECURITIES AND EXCHANGE COMMISSION
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 13-3317783 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Large accelerated filerþ | Accelerated filero | Non-accelerated filero | Smaller reporting companyo | |||
(Do not check if a smaller reporting company) |
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
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2. | 44 | |||||||
3. | 161 | |||||||
4. | 161 | |||||||
1. | 161 | |||||||
1A. | 163 | |||||||
2. | 166 | |||||||
6. | 166 | |||||||
167 | ||||||||
168 | ||||||||
Exhibit 15.01 | ||||||||
Exhibit 31.01 | ||||||||
Exhibit 31.02 | ||||||||
Exhibit 32.01 | ||||||||
Exhibit 32.02 |
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The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Hartford, Connecticut
October 28, 2008
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In millions, except for per share data) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenues | ||||||||||||||||
Earned premiums | $ | 3,903 | $ | 4,062 | $ | 11,637 | $ | 11,760 | ||||||||
Fee income | 1,333 | 1,398 | 4,056 | 4,026 | ||||||||||||
Net investment income (loss) | ||||||||||||||||
Securities available-for-sale and other | 1,103 | 1,298 | 3,526 | 3,907 | ||||||||||||
Equity securities held for trading | (3,415 | ) | (698 | ) | (5,840 | ) | 746 | |||||||||
Total net investment income (loss) | (2,312 | ) | 600 | (2,314 | ) | 4,653 | ||||||||||
Other revenues | 132 | 126 | 377 | 368 | ||||||||||||
Net realized capital losses | (3,449 | ) | (363 | ) | (5,102 | ) | (565 | ) | ||||||||
Total revenues | (393 | ) | 5,823 | 8,654 | 20,242 | |||||||||||
Benefits, losses and expenses | ||||||||||||||||
Benefits, losses and loss adjustment expenses | 3,994 | 3,666 | 10,937 | 10,543 | ||||||||||||
Benefits, losses and loss adjustment expenses — returns credited on International variable annuities | (3,415 | ) | (698 | ) | (5,840 | ) | 746 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 1,927 | 476 | 3,201 | 2,185 | ||||||||||||
Insurance operating costs and expenses | 1,029 | 973 | 3,026 | 2,826 | ||||||||||||
Interest expense | 84 | 67 | 228 | 196 | ||||||||||||
Other expenses | 171 | 164 | 542 | 522 | ||||||||||||
Total benefits, losses and expenses | 3,790 | 4,648 | 12,094 | 17,018 | ||||||||||||
Income (loss) before income taxes | (4,183 | ) | 1,175 | (3,440 | ) | 3,224 | ||||||||||
Income tax expense (benefit) | (1,552 | ) | 324 | (1,497 | ) | 870 | ||||||||||
Net income (loss) | $ | (2,631 | ) | $ | 851 | $ | (1,943 | ) | $ | 2,354 | ||||||
Earnings (Loss) per share | ||||||||||||||||
Basic | $ | (8.74 | ) | $ | 2.70 | $ | (6.29 | ) | $ | 7.42 | ||||||
Diluted | $ | (8.74 | ) | $ | 2.68 | $ | (6.29 | ) | $ | 7.35 | ||||||
Weighted average common shares outstanding | 301.1 | 315.4 | 308.8 | 317.3 | ||||||||||||
Weighted average common shares outstanding and dilutive potential common shares | 301.1 | 318.0 | 308.8 | 320.1 | ||||||||||||
Cash dividends declared per share | $ | 0.53 | $ | 0.50 | $ | 1.59 | $ | 1.50 | ||||||||
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September 30, | December 31, | |||||||
(In millions, except for share and per share data) | 2008 | 2007 | ||||||
(Unaudited) | ||||||||
Assets | ||||||||
Investments | ||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost of $77,007 and $80,724) | $ | 70,091 | $ | 80,055 | ||||
Equity securities, held for trading, at fair value (cost of $33,974 and $30,489) | 33,655 | 36,182 | ||||||
Equity securities, available-for-sale, at fair value (cost of $1,645 and $2,611) | 1,730 | 2,595 | ||||||
Policy loans, at outstanding balance | 2,159 | 2,061 | ||||||
Mortgage loans on real estate | 6,222 | 5,410 | ||||||
Limited partnerships and other alternative investments | 2,817 | 2,566 | ||||||
Other investments | 1,410 | 615 | ||||||
Short-term investments | 5,353 | 1,602 | ||||||
Total investments | 123,437 | 131,086 | ||||||
Cash | 1,963 | 2,011 | ||||||
Premiums receivable and agents’ balances | 3,627 | 3,681 | ||||||
Reinsurance recoverables | 5,675 | 5,150 | ||||||
Deferred policy acquisition costs and present value of future profits | 12,272 | 11,742 | ||||||
Deferred income taxes | 3,560 | 308 | ||||||
Goodwill | 1,801 | 1,726 | ||||||
Property and equipment, net | 1,038 | 972 | ||||||
Other assets | 4,083 | 3,739 | ||||||
Separate account assets | 154,029 | 199,946 | ||||||
Total assets | $ | 311,485 | $ | 360,361 | ||||
Liabilities | ||||||||
Reserve for future policy benefits and unpaid losses and loss adjustment expenses | ||||||||
Property and casualty | $ | 22,605 | $ | 22,153 | ||||
Life | 16,602 | 15,331 | ||||||
Other policyholder funds and benefits payable | 47,208 | 44,190 | ||||||
Other policyholder funds and benefits payable — International variable annuities | 33,629 | 36,152 | ||||||
Unearned premiums | 5,523 | 5,545 | ||||||
Short-term debt | 927 | 1,365 | ||||||
Long-term debt | 4,620 | 3,142 | ||||||
Consumer notes | 1,225 | 809 | ||||||
Other liabilities | 12,560 | 12,524 | ||||||
Separate account liabilities | 154,029 | 199,946 | ||||||
Total liabilities | 298,928 | 341,157 | ||||||
Commitments and Contingencies (Note 8) | ||||||||
Stockholders’ Equity | ||||||||
Common stock, $0.01 par value — 750,000,000 shares authorized, 329,923,910 and 329,951,138 shares issued | 3 | 3 | ||||||
Additional paid-in capital | 6,598 | 6,627 | ||||||
Retained earnings | 12,249 | 14,686 | ||||||
Treasury stock, at cost — 29,569,622 and 16,108,895 shares | (2,138 | ) | (1,254 | ) | ||||
Accumulated other comprehensive loss, net of tax | (4,155 | ) | (858 | ) | ||||
Total stockholders’ equity | 12,557 | 19,204 | ||||||
Total liabilities and stockholders’ equity | $ | 311,485 | $ | 360,361 | ||||
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Nine Months Ended | ||||||||
September 30, | ||||||||
(In millions, except for share data) | 2008 | 2007 | ||||||
(Unaudited) | ||||||||
Common Stock and Additional Paid-in Capital | ||||||||
Balance at beginning of period | $ | 6,630 | $ | 6,324 | ||||
Issuance of shares under incentive and stock compensation plans | (39 | ) | 219 | |||||
Tax benefit on employee stock options and awards | 10 | 45 | ||||||
Balance at end of period | 6,601 | 6,588 | ||||||
Retained Earnings | ||||||||
Balance at beginning of period, before cumulative effect of accounting changes, net of tax | 14,686 | 12,421 | ||||||
Cumulative effect of accounting changes, net of tax | (3 | ) | (41 | ) | ||||
Balance at beginning of period, as adjusted | 14,683 | 12,380 | ||||||
Net income (loss) | (1,943 | ) | 2,354 | |||||
Dividends declared on common stock | (491 | ) | (474 | ) | ||||
Balance at end of period | 12,249 | 14,260 | ||||||
Treasury Stock, at Cost | ||||||||
Balance at beginning of period | (1,254 | ) | (47 | ) | ||||
Treasury stock acquired | (1,000 | ) | (1,172 | ) | ||||
Issuance of shares under incentive and stock compensation plans from treasury stock | 133 | — | ||||||
Return of shares under incentive and stock compensation plans to treasury stock | (17 | ) | (13 | ) | ||||
Balance at end of period | (2,138 | ) | (1,232 | ) | ||||
Accumulated Other Comprehensive Loss, Net of Tax | ||||||||
Balance at beginning of period | (858 | ) | 178 | |||||
Total other comprehensive loss | (3,297 | ) | (844 | ) | ||||
Balance at end of period | (4,155 | ) | (666 | ) | ||||
Total stockholders’ equity | $ | 12,557 | $ | 18,950 | ||||
Outstanding Shares (in thousands) | ||||||||
Balance at beginning of period | 313,842 | 323,315 | ||||||
Treasury stock acquired | (14,682 | ) | (12,643 | ) | ||||
Issuance of shares under incentive and stock compensation plans | 1,442 | 3,185 | ||||||
Return of shares under incentive and stock compensation plans to treasury stock | (248 | ) | (135 | ) | ||||
Balance at end of period | 300,354 | 313,722 | ||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In millions) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Comprehensive Income (Loss) | ||||||||||||||||
Net income (loss) | $ | (2,631 | ) | $ | 851 | $ | (1,943 | ) | $ | 2,354 | ||||||
Other comprehensive income (loss) | ||||||||||||||||
Change in net unrealized gain/loss on securities | (1,483 | ) | (224 | ) | (3,509 | ) | (970 | ) | ||||||||
Change in net gain/loss on cash-flow hedging instruments | 163 | 48 | 177 | (20 | ) | |||||||||||
Change in foreign currency translation adjustments | (63 | ) | 100 | 11 | 111 | |||||||||||
Amortization of prior service cost and actuarial net losses included in net periodic benefit costs | 8 | 11 | 24 | 35 | ||||||||||||
Total other comprehensive loss | (1,375 | ) | (65 | ) | (3,297 | ) | (844 | ) | ||||||||
Total comprehensive income (loss) | $ | (4,006 | ) | $ | 786 | $ | (5,240 | ) | $ | 1,510 | ||||||
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Nine Months Ended | ||||||||
September 30, | ||||||||
(In millions) | 2008 | 2007 | ||||||
(Unaudited) | ||||||||
Operating Activities | ||||||||
Net income (loss) | $ | (1,943 | ) | $ | 2,354 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 3,201 | 2,185 | ||||||
Additions to deferred policy acquisition costs and present value of future profits | (2,837 | ) | (3,177 | ) | ||||
Change in: | ||||||||
Reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums | 1,689 | 1,216 | ||||||
Reinsurance recoverables | (19 | ) | 417 | |||||
Receivables and other assets | 646 | (234 | ) | |||||
Payables and accruals | (673 | ) | 437 | |||||
Accrued and deferred income taxes | (1,604 | ) | 538 | |||||
Net realized capital losses | 5,102 | 565 | ||||||
Net receipts (to) from investment contracts related to policyholder funds - International variable annuities | 1,740 | 4,446 | ||||||
Net (increase) decrease in equity securities, held for trading | (1,799 | ) | (4,288 | ) | ||||
Depreciation and amortization | 263 | 484 | ||||||
Other, net | (828 | ) | (376 | ) | ||||
Net cash provided by operating activities | 2,938 | 4,567 | ||||||
Investing Activities | ||||||||
Proceeds from the sale/maturity/prepayment of: | ||||||||
Fixed maturities, available-for-sale | 17,523 | 26,816 | ||||||
Equity securities, available-for-sale | 995 | 450 | ||||||
Mortgage loans | 351 | 1,245 | ||||||
Partnerships | 130 | 250 | ||||||
Payments for the purchase of: | ||||||||
Fixed maturities, available-for-sale | (19,392 | ) | (30,127 | ) | ||||
Equity securities, available-for-sale | (689 | ) | (865 | ) | ||||
Mortgage loans | (1,161 | ) | (3,161 | ) | ||||
Partnerships | (556 | ) | (929 | ) | ||||
Purchase price of businesses acquired | (94 | ) | — | |||||
Change in policy loans, net | (98 | ) | 1 | |||||
Change in payables for collateral under securities lending, net | (339 | ) | 2,046 | |||||
Change in all other securities, net | (524 | ) | (379 | ) | ||||
Additions to property and equipment, net | (195 | ) | (251 | ) | ||||
Net cash used for investing activities | (4,049 | ) | (4,904 | ) | ||||
Financing Activities | ||||||||
Deposits and other additions to investment and universal life-type contracts | 15,752 | 26,315 | ||||||
Withdrawals and other deductions from investment and universal life-type contracts | (20,276 | ) | (22,678 | ) | ||||
Net transfers from (to) separate accounts related to investment and universal life-type contracts | 5,584 | (2,226 | ) | |||||
Issuance of long-term debt | 1,487 | 495 | ||||||
Repayments at maturity of long-term debt | (425 | ) | (300 | ) | ||||
Payments on capital lease obligations | (37 | ) | — | |||||
Change in short-term debt | — | 75 | ||||||
Proceeds from issuance of consumer notes | 445 | 465 | ||||||
Repayments at maturity of consumer notes | (29 | ) | — | |||||
Proceeds from issuance of shares under incentive and stock compensation plans | 47 | 166 | ||||||
Excess tax benefits on stock-based compensation | 4 | 29 | ||||||
Treasury stock acquired | (1,000 | ) | (1,172 | ) | ||||
Return of shares under incentive and stock compensation plans to treasury stock | (17 | ) | (13 | ) | ||||
Dividends paid | (501 | ) | (481 | ) | ||||
Net cash provided by financing activities | 1,034 | 675 | ||||||
Foreign exchange rate effect on cash | 29 | 190 | ||||||
Net increase (decrease) in cash | (48 | ) | 528 | |||||
Cash — beginning of period | 2,011 | 1,424 | ||||||
Cash — end of period | $ | 1,963 | $ | 1,952 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Net Cash Paid During the Period For: | ||||||||
Income taxes | $ | 232 | $ | 366 | ||||
Interest | $ | 186 | $ | 172 |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination that are not subsequently remeasured at fair value; | |
• | Reporting units measured at fair value in the goodwill impairment test as described in SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and nonfinancial assets and nonfinancial liabilities measured at fair value in the SFAS 142 goodwill impairment test, if applicable; and | |
• | Nonfinancial long-lived assets measured at fair value for impairment assessment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2008 | September 30, 2008 | |||||||||||||||||||||||
Net Income | Per Share | Net Income | Per Share | |||||||||||||||||||||
(Loss) | Shares | Amount | (Loss) | Shares | Amount | |||||||||||||||||||
Basic Earnings (Loss) per Share | ||||||||||||||||||||||||
Net income available to common shareholders | $ | (2,631 | ) | 301.1 | $ | (8.74 | ) | $ | (1,943 | ) | 308.8 | $ | (6.29 | ) | ||||||||||
Diluted Earnings (Loss) per Share [1] | ||||||||||||||||||||||||
Stock compensation plans | — | — | — | — | ||||||||||||||||||||
Net income available to common shareholders plus assumed conversions | $ | (2,631 | ) | 301.1 | $ | (8.74 | ) | $ | (1,943 | ) | 308.8 | $ | (6.29 | ) | ||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2007 | September 30, 2007 | |||||||||||||||||||||||
Net | Per Share | Net | Per Share | |||||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
Basic Earnings per Share | ||||||||||||||||||||||||
Net income available to common shareholders | $ | 851 | 315.4 | $ | 2.70 | $ | 2,354 | 317.3 | $ | 7.42 | ||||||||||||||
Diluted Earnings per Share | ||||||||||||||||||||||||
Stock compensation plans | — | 2.6 | — | 2.8 | ||||||||||||||||||||
Net income available to common shareholders plus assumed conversions | $ | 851 | 318.0 | $ | 2.68 | $ | 2,354 | 320.1 | $ | 7.35 | ||||||||||||||
[1] | As a result of the net loss in the three and nine months ended September 30, 2008, SFAS 128 requires the Company to use basic weighted average common shares outstanding in the calculation of the three and nine months ended September 30, 2008 diluted earnings (loss) per share, since the inclusion of shares for stock compensation plans of 1.0 and 1.5, respectively, would have been antidilutive to the earnings per share calculation. In the absence of the net loss, weighted average common shares outstanding and dilutive potential common shares would have totaled 302.1 and 310.3, respectively. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended | Nine Months Ended | |||||||||||||||
Net assumed (ceded) earned premiums under | September 30, | September 30, | ||||||||||||||
inter-segment arrangements | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Personal Lines | $ | (1 | ) | $ | (2 | ) | $ | (4 | ) | $ | (5 | ) | ||||
Small Commercial | (8 | ) | (7 | ) | (23 | ) | (22 | ) | ||||||||
Middle Market | (8 | ) | (8 | ) | (24 | ) | (25 | ) | ||||||||
Specialty Commercial | 17 | 17 | 51 | 52 | ||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | ||||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Revenues | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Life [1] | ||||||||||||||||
Retail [2] | $ | 435 | $ | 806 | $ | 1,483 | $ | 2,550 | ||||||||
Individual Life | 119 | 267 | 660 | 853 | ||||||||||||
Total Individual Markets Group | 554 | 1,073 | 2,143 | 3,403 | ||||||||||||
Retirement Plans | 1 | 130 | 293 | 426 | ||||||||||||
Group Benefits | 779 | 1,166 | 3,099 | 3,573 | ||||||||||||
Total Employer Markets Group | 780 | 1,296 | 3,392 | 3,999 | ||||||||||||
International [2] | 190 | 247 | 603 | 643 | ||||||||||||
Institutional | (84 | ) | 782 | 692 | 1,831 | |||||||||||
Other | (29 | ) | 25 | 28 | 157 | |||||||||||
Total Life segment revenues [1] [2] | 1,411 | 3,423 | 6,858 | 10,033 | ||||||||||||
Net investment income (loss) on equity securities, held for trading [3] | (3,415 | ) | (698 | ) | (5,840 | ) | 746 | |||||||||
Total Life [1] [2] | (2,004 | ) | 2,725 | 1,018 | 10,779 | |||||||||||
Property & Casualty | ||||||||||||||||
Ongoing Operations | ||||||||||||||||
Earned premiums | ||||||||||||||||
Personal Lines | 978 | 984 | 2,941 | 2,904 | ||||||||||||
Small Commercial | 678 | 683 | 2,048 | 2,048 | ||||||||||||
Middle Market | 553 | 582 | 1,688 | 1,779 | ||||||||||||
Specialty Commercial | 358 | 377 | 1,087 | 1,139 | ||||||||||||
Ongoing Operations earned premiums | 2,567 | 2,626 | 7,764 | 7,870 | ||||||||||||
Net investment income | 285 | 346 | 929 | 1,082 | ||||||||||||
Other revenues [4] | 132 | 126 | 377 | 368 | ||||||||||||
Net realized capital losses | (1,268 | ) | (72 | ) | (1,455 | ) | (73 | ) | ||||||||
Total Ongoing Operations | 1,716 | 3,026 | 7,615 | 9,247 | ||||||||||||
Other Operations | (109 | ) | 60 | (10 | ) | 184 | ||||||||||
Total Property & Casualty | 1,607 | 3,086 | 7,605 | 9,431 | ||||||||||||
Corporate | 4 | 12 | 31 | 32 | ||||||||||||
Total revenues [1] [2] | $ | (393 | ) | $ | 5,823 | $ | 8,654 | $ | 20,242 | |||||||
[1] | For the three and nine months ended September 30, 2008, Life segment revenues includes other-than-temporary impairments of $1.8 billion and $2.1 billion, respectively. | |
[2] | For the nine months ended September 30, 2008, the transition impact related to the SFAS 157 adoption was a reduction in revenues of $616 and $34 for Retail and International, respectively. For further discussion of the SFAS 157 adoption impact, refer to Note 4. | |
[3] | Management does not include net investment income (loss) and the mark-to-market effects of equity securities held for trading supporting the international variable annuity business in its segment revenues since corresponding amounts are credited to policyholders. | |
[4] | Represents servicing revenue. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Net Income (Loss) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Life [1] | ||||||||||||||||
Retail [2] | $ | (822 | ) | $ | 294 | $ | (729 | ) | $ | 616 | ||||||
Individual Life | (102 | ) | 55 | (52 | ) | 151 | ||||||||||
Total Individual Markets Group | (924 | ) | 349 | (781 | ) | 767 | ||||||||||
Retirement Plans | (160 | ) | 4 | (134 | ) | 54 | ||||||||||
Group Benefits | (186 | ) | 83 | (78 | ) | 235 | ||||||||||
Total Employer Markets Group | (346 | ) | 87 | (212 | ) | 289 | ||||||||||
International [2] | (107 | ) | 90 | (27 | ) | 185 | ||||||||||
Institutional | (393 | ) | 8 | (543 | ) | 60 | ||||||||||
Other | (45 | ) | (9 | ) | (73 | ) | (20 | ) | ||||||||
Total Life [1] [2] | (1,815 | ) | 525 | (1,636 | ) | 1,281 | ||||||||||
Property & Casualty | ||||||||||||||||
Ongoing Operations | ||||||||||||||||
Underwriting results | ||||||||||||||||
Personal Lines | (45 | ) | 78 | 78 | 292 | |||||||||||
Small Commercial | 82 | 119 | 270 | 304 | ||||||||||||
Middle Market | (38 | ) | 22 | 14 | 89 | |||||||||||
Specialty Commercial | (43 | ) | 6 | 20 | 50 | |||||||||||
Total Ongoing Operations underwriting results | (44 | ) | 225 | 382 | 735 | |||||||||||
Net servicing income [3] | 14 | 16 | 21 | 41 | ||||||||||||
Net investment income | 285 | 346 | 929 | 1,082 | ||||||||||||
Net realized capital losses | (1,268 | ) | (72 | ) | (1,455 | ) | (73 | ) | ||||||||
Other expenses | (58 | ) | (63 | ) | (180 | ) | (179 | ) | ||||||||
Income tax (expense) benefit | 405 | (111 | ) | 195 | (452 | ) | ||||||||||
Ongoing Operations | (666 | ) | 341 | (108 | ) | 1,154 | ||||||||||
Other Operations | (108 | ) | 12 | (91 | ) | 4 | ||||||||||
Total Property & Casualty | (774 | ) | 353 | (199 | ) | 1,158 | ||||||||||
Corporate | (42 | ) | (27 | ) | (108 | ) | (85 | ) | ||||||||
Net income (loss) [1] [2] | $ | (2,631 | ) | $ | 851 | $ | (1,943 | ) | $ | 2,354 | ||||||
[1] | For the three and nine months ended September 30, 2008, Life segment net income includes other-than-temporary impairments, after-tax and DAC, of $1.1 billion and $1.3 billion, respectively. | |
[2] | For the nine months ended September 30, 2008, the transition impact related to the SFAS 157 adoption was a reduction in net income of $209 and $11 for Retail and International, respectively. For further discussion of the SFAS 157 adoption impact, refer to Note 4. | |
[3] | Net of expenses related to service business. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, | December 31, | |||||||
Assets | 2008 | 2007 | ||||||
Life | ||||||||
Retail | $ | 112,145 | $ | 136,023 | ||||
Individual Life | 14,516 | 15,590 | ||||||
Total Individual Markets Group | 126,661 | 151,613 | ||||||
Retirement Plans | 25,743 | 27,986 | ||||||
Group Benefits | 9,203 | 9,295 | ||||||
Total Employer Markets Group | 34,946 | 37,281 | ||||||
International | 40,298 | 41,625 | ||||||
Institutional | 62,598 | 78,766 | ||||||
Other | 4,364 | 6,891 | ||||||
Total Life | 268,867 | 316,176 | ||||||
Property & Casualty | ||||||||
Ongoing Operations | 34,582 | 35,899 | ||||||
Other Operations | 5,377 | 5,942 | ||||||
Total Property & Casualty | 39,959 | 41,841 | ||||||
Corporate | 2,659 | 2,344 | ||||||
Total Assets | $ | 311,485 | $ | 360,361 | ||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
17
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | risk-free rates as represented by the current LIBOR forward curve rates; | |
• | forward market volatility assumptions for each underlying index based primarily on a blend of observed market “implied volatility” data; | |
• | correlations of market returns across underlying indices based on actual observed market returns and relationships over the ten years preceding the valuation date; | |
• | three years of history for fund regression; and | |
• | current risk-free spot rates as represented by the current LIBOR spot curve to determine the present value of expected future cash flows produced in the stochastic projection process. |
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NOTES TO CONDENSED 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 guaranteed benefit obligations or the GMWB reinsurance recoverables will not be fulfilled (“nonperformance risk”). SFAS 157 explicitly requires nonperformance risk to be reflected in fair value. The Company calculates the Credit Standing Adjustment by using default rates provided by rating agencies, adjusted for market recoverability, reflecting the long-term nature of living benefit obligations and the priority of payment on these obligations versus long-term debt. | |
• | Market Illiquidity Premium.This component makes an adjustment that market participants would require to reflect that guaranteed benefit obligations are illiquid and have no market observable exit prices in the capital markets. | |
• | Behavior Risk Margin.This component adds a margin that market participants would require for the risk that the 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 interest rate and volatility assumptions that the Company believes market participants would use in developing risk margins. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SFAS 157 Transition Adjustment for Guaranteed Benefit Liabilities and Derivative Assets As of January 1, 2008 | ||||||||||||
Transition | ||||||||||||
Adjustment | ||||||||||||
SFAS 157 | Pre-SFAS 157 | Gain (Loss) | ||||||||||
Fair Value | Fair Value | [Before tax and | ||||||||||
Asset (Liability) | Asset (Liability) | DAC amortization] | ||||||||||
Guaranteed Benefits | ||||||||||||
U.S. Guaranteed Minimum Withdrawal Benefits | $ | (1,114 | ) | $ | (553 | ) | $ | (561 | ) | |||
Non-Life Contingent Portion of “for Life” Guaranteed | ||||||||||||
Minimum Withdrawal Benefits | ||||||||||||
U.S. Riders | (319 | ) | (154 | ) | (165 | ) | ||||||
International Riders | (17 | ) | (7 | ) | (10 | ) | ||||||
Total | (336 | ) | (161 | ) | (175 | ) | ||||||
International Guaranteed MinimumAccumulation Benefits | (22 | ) | 2 | (24 | ) | |||||||
Total Guaranteed Benefits | (1,472 | ) | (712 | ) | (760 | ) | ||||||
GMWB Reinsurance | 238 | 128 | 110 | |||||||||
Total | $ | (1,234 | ) | $ | (584 | ) | $ | (650 | ) | |||
Transition | ||||
Adjustment | ||||
Gain (Loss) | ||||
[Before tax and | ||||
DAC amortization] | ||||
Actively-Managed Volatility Adjustment | $ | (100 | ) | |
Credit Standing Adjustment | 4 | |||
Market Illiquidity Premium | (194 | ) | ||
Behavior Risk Margin | (360 | ) | ||
Total SFAS 157 Transition Adjustment before tax and DAC amortization | $ | (650 | ) | |
Level 1 | Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 1 securities include highly liquid U.S. Treasury securities, certain mortgage backed securities, and exchange traded equity and derivative securities. | |
Level 2 | Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities. Most debt securities and some preferred stocks are model priced by vendors using observable inputs and are classified within Level 2. Also included in the Level 2 category are derivative instruments that are priced using models with observable market inputs, including interest rate, foreign currency and certain credit swap contracts. | |
Level 3 | Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Level 3 securities include less liquid securities such as highly structured and/or lower quality asset-backed securities (“ABS”) and commercial mortgage-backed securities (“CMBS”), including ABS backed by sub-prime loans, and private placement debt and equity securities. Embedded derivatives and complex derivatives securities, including equity derivatives, longer dated interest rate swaps and certain complex credit derivatives are also included in Level 3. Because Level 3 fair values, by their nature, contain unobservable market inputs as there is no observable market for these assets and liabilities, considerable judgment is used to determine the SFAS 157 Level 3 fair values. Level 3 fair values represent the Company’s best estimate of an amount that could be realized in a current market exchange absent actual market exchanges. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Quoted Prices | ||||||||||||||||
in Active | Significant | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets accounted for at fair value on a recurring basis | ||||||||||||||||
Fixed maturities, available-for-sale | $ | 70,091 | $ | 648 | $ | 53,206 | $ | 16,237 | ||||||||
Equity securities, held for trading | 33,655 | 1,717 | 31,938 | — | ||||||||||||
Equity securities, available-for-sale | 1,730 | 269 | 348 | 1,113 | ||||||||||||
Other investments | ||||||||||||||||
Customized derivatives used to hedge US GMWB | 201 | — | — | 201 | ||||||||||||
Other derivatives used to hedge US GMWB | 872 | — | 11 | 861 | ||||||||||||
Other investments [1] | 190 | — | 116 | 74 | ||||||||||||
Total Other Investments | 1,263 | — | 127 | 1,136 | ||||||||||||
Short-term investments | 5,353 | 837 | 4,516 | — | ||||||||||||
Reinsurance recoverables for US GMWB | 438 | — | — | 438 | ||||||||||||
Separate account assets [2] [5] | 149,679 | 117,897 | 30,769 | 1,013 | ||||||||||||
Total assets accounted for at fair value on a recurring basis | $ | 262,209 | $ | 121,368 | $ | 120,904 | $ | 19,937 | ||||||||
Liabilities accounted for at fair value on a recurring basis | ||||||||||||||||
Other policyholder funds and benefits payable | ||||||||||||||||
US GMWB | $ | (2,397 | ) | $ | — | $ | — | $ | (2,397 | ) | ||||||
UK GMWB [6] | (30 | ) | — | — | (30 | ) | ||||||||||
Japan GMAB | (20 | ) | — | — | (20 | ) | ||||||||||
Japan GMWB | (4 | ) | — | — | (4 | ) | ||||||||||
Institutional Notes | (9 | ) | — | — | (9 | ) | ||||||||||
Equity Linked Notes | (12 | ) | — | — | (12 | ) | ||||||||||
Total other policyholder funds and benefits payable | (2,472 | ) | — | — | (2,472 | ) | ||||||||||
Other liabilities [3] | ||||||||||||||||
Other derivatives used to hedge US GMWB | 80 | — | (10 | ) | 90 | |||||||||||
Other liabilities | (741 | ) | — | (205 | ) | (536 | ) | |||||||||
Total Other Liabilities | (661 | ) | — | (215 | ) | (446 | ) | |||||||||
Consumer notes [4] | (6 | ) | — | — | (6 | ) | ||||||||||
Total liabilities accounted for at fair value on a recurring basis | $ | (3,139 | ) | $ | — | $ | (215 | ) | $ | (2,924 | ) | |||||
[1] | Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral to the Company. At September 30, 2008, $725 was the amount of cash collateral liability that was netted against the derivative asset value on the condensed consolidated balance sheet and is excluded from the table above. See footnote 3 below for derivative liabilities. | |
[2] | Pursuant to the conditions set forth in SOP 03-1, the value of separate account liabilities is set to equal the fair value for separate account assets. | |
[3] | Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the SFAS 157 Level 3 roll forward table included below in this Note, the derivative asset and liability are referred to as “freestanding derivatives” and are presented on a net basis. | |
[4] | Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes. | |
[5] | Excludes approximately $4 billion of investment sales receivable net of investment purchases payable that are not subject to SFAS 157. | |
[6] | Includes a foreign currency translation adjustment of $2. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
22
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
% of Total | ||||||||
Fair Value | Fair Value | |||||||
ABS | ||||||||
Below Prime | $ | 1,983 | 11.4 | % | ||||
Collateralized Loan Obligations (“CLOs”) | 2,472 | 14.3 | % | |||||
Other | 908 | 5.2 | % | |||||
Corporate | ||||||||
Matrix priced private placements | 5,035 | 29.0 | % | |||||
Other | 2,830 | 16.3 | % | |||||
Commercial mortgage-backed securities (“CMBS”) | 2,688 | 15.5 | % | |||||
Preferred stock | 887 | 5.1 | % | |||||
Other | 547 | 3.2 | % | |||||
Total Level 3 securities | $ | 17,350 | 100.0 | % | ||||
• | ABS below prime primarily represents sub-prime and Alt-A securities which are classified as Level 3 due to the lack of liquidity in the market. | |
• | ABS CLOs represent senior secured bank loan CLOs which are primarily priced by independent brokers. | |
• | ABS Other primarily represents broker priced securities. | |
• | Corporate-matrix priced represents private placement securities that are thinly traded and priced using a pricing matrix which includes significant non-observable inputs. | |
• | Corporate-other primarily represents broker-priced securities which are thinly traded and privately negotiated transactions. | |
• | CMBS primarily represents CMBS bonds and commercial real estate collateralized debt obligations (“CRE CDOs”) which were either fair valued by the Company or by independent brokers due to the illiquidity of this sector. | |
• | Preferred stock primarily represents perpetual preferred securities that are currently illiquid due to market conditions. |
23
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
24
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in | ||||||||||||||||||||||||||||
unrealized | ||||||||||||||||||||||||||||
gains (losses) | ||||||||||||||||||||||||||||
Total | included in net | |||||||||||||||||||||||||||
realized/unrealized | income related | |||||||||||||||||||||||||||
SFAS 157 | gains (losses) | SFAS 157 | to financial | |||||||||||||||||||||||||
Fair value | included in: | Purchases, | Transfers | Fair value | instruments | |||||||||||||||||||||||
as of | Net | issuances, | in and/or | as of | still held at | |||||||||||||||||||||||
July 1, | income | AOCI | and | (out) of | September 30, | September 30, | ||||||||||||||||||||||
2008 | [2], [3] | [5] | settlements | Level 3 [7] | 2008 | 2008 [3] | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Fixed maturities | $ | 16,512 | $ | (683 | ) | $ | (596 | ) | $ | 77 | $ | 927 | $ | 16,237 | $ | (680 | ) | |||||||||||
Equity securities, available-for-sale | 1,367 | (229 | ) | 122 | (232 | ) | 85 | 1,113 | (217 | ) | ||||||||||||||||||
Freestanding derivatives [4] | ||||||||||||||||||||||||||||
Customized derivatives used to hedge US GMWB | 85 | 116 | — | — | — | 201 | 116 | |||||||||||||||||||||
Other freestanding derivatives used to hedge US GMWB | 686 | 293 | — | (28 | ) | — | 951 | 269 | ||||||||||||||||||||
Other freestanding derivatives | (382 | ) | (146 | ) | (4 | ) | 68 | 2 | (462 | ) | (165 | ) | ||||||||||||||||
Total Freestanding Derivatives | 389 | 263 | (4 | ) | 40 | 2 | 690 | 220 | ||||||||||||||||||||
Reinsurance recoverable for US GMWB [2][9] | 250 | 106 | — | 82 | — | 438 | 106 | |||||||||||||||||||||
Separate accounts [6] | 665 | (53 | ) | (25 | ) | 426 | 1,013 | (34 | ) | |||||||||||||||||||
Supplemental Asset Information: | ||||||||||||||||||||||||||||
Total freestanding derivatives used to hedge US GMWB including those in Levels 1, 2 and 3 | 784 | 475 | — | (106 | ) | — | 1,153 | 475 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
Other policyholder funds and benefits payable accounted for at fair value [2] | ||||||||||||||||||||||||||||
US GMWB | $ | (1,664 | ) | $ | (697 | ) | $ | — | $ | (36 | ) | $ | — | $ | (2,397 | ) | $ | (697 | ) | |||||||||
UK GMWB | (17 | ) | (13 | ) | 2 | (2 | ) | — | (30 | ) | (13 | ) | ||||||||||||||||
Japan GMWB | 1 | (4 | ) | — | (1 | ) | — | (4 | ) | (4 | ) | |||||||||||||||||
Japan GMAB | (23 | ) | 4 | — | (1 | ) | — | (20 | ) | 4 | ||||||||||||||||||
Institutional Notes | (21 | ) | 12 | — | — | — | (9 | ) | 12 | |||||||||||||||||||
Equity Linked Notes | (15 | ) | 3 | — | — | — | (12 | ) | 3 | |||||||||||||||||||
Total other policyholder funds and benefits payable accounted for at fair value[2] | (1,739 | ) | (695 | ) | 2 | (40 | ) | — | (2,472 | ) | (695 | ) | ||||||||||||||||
Consumer notes | (3 | ) | 2 | — | (5 | ) | — | (6 | ) | 2 | ||||||||||||||||||
Supplemental Information: | �� | |||||||||||||||||||||||||||
Net US GMWB (Embedded derivatives, freestanding derivatives including those in Levels 1, 2 and 3 and reinsurance recoverable)[8] | (630 | ) | (116 | ) | — | (60 | ) | — | (806 | ) | (116 | ) | ||||||||||||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in | ||||||||||||||||||||||||||||
unrealized | ||||||||||||||||||||||||||||
gains (losses) | ||||||||||||||||||||||||||||
Total | included in net | |||||||||||||||||||||||||||
realized/unrealized | income related | |||||||||||||||||||||||||||
SFAS 157 | gains (losses) | SFAS 157 | to financial | |||||||||||||||||||||||||
Fair value | included in: | Purchases, | Transfers | Fair value | instruments | |||||||||||||||||||||||
as of | Net | issuances, | in and/or | as of | still held at | |||||||||||||||||||||||
January 1, | income | AOCI | and | (out) of | September 30, | September 30, | ||||||||||||||||||||||
2008 | [2], [3] | [5] | settlements | Level 3 [7] | 2008 | 2008 [3] | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Fixed maturities | $ | 17,996 | $ | (860 | ) | $ | (1,992 | ) | $ | 1,355 | $ | (262 | ) | $ | 16,237 | $ | (824 | ) | ||||||||||
Equity securities, available-for-sale | 1,339 | (230 | ) | (7 | ) | 95 | (84 | ) | 1,113 | (228 | ) | |||||||||||||||||
Freestanding derivatives [4] | ||||||||||||||||||||||||||||
Customized derivatives used to hedge US GMWB | 91 | 110 | — | — | — | 201 | 110 | |||||||||||||||||||||
Other freestanding derivatives used to hedge US GMWB | 564 | 360 | — | 27 | — | 951 | 334 | |||||||||||||||||||||
Other freestanding derivatives | (401 | ) | (411 | ) | (2 | ) | 249 | 103 | (462 | ) | (303 | ) | ||||||||||||||||
Total Freestanding Derivatives | 254 | 59 | (2 | ) | 276 | 103 | 690 | 141 | ||||||||||||||||||||
Reinsurance recoverable for US GMWB [1], [2] [9] | 238 | 108 | — | 92 | — | 438 | 108 | |||||||||||||||||||||
Separate accounts [6] | 701 | (109 | ) | — | (5 | ) | 426 | 1,013 | (89 | ) | ||||||||||||||||||
Supplemental Asset Information: | ||||||||||||||||||||||||||||
Total freestanding derivatives used to hedge US GMWB including those in Levels 1, 2 and 3 | 643 | 520 | — | (10 | ) | — | 1,153 | 520 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
Other policyholder funds and benefits payable accounted for at fair value [2] | ||||||||||||||||||||||||||||
US GMWB | $ | (1,433 | ) | $ | (869 | ) | $ | — | $ | (95 | ) | $ | — | $ | (2,397 | ) | $ | (869 | ) | |||||||||
UK GMWB | (17 | ) | (12 | ) | 1 | (2 | ) | — | (30 | ) | (12 | ) | ||||||||||||||||
Japan GMWB | — | (3 | ) | — | (1 | ) | — | (4 | ) | (3 | ) | |||||||||||||||||
Japan GMAB | (22 | ) | 4 | — | (2 | ) | — | (20 | ) | 4 | ||||||||||||||||||
Institutional Notes | (24 | ) | 15 | — | — | — | (9 | ) | 15 | |||||||||||||||||||
Equity Linked Notes | (21 | ) | 9 | — | — | — | (12 | ) | 9 | |||||||||||||||||||
Total other policyholder funds and benefits payable accounted for at fair value [2] | (1,517 | ) | (856 | ) | 1 | (100 | ) | — | (2,472 | ) | (856 | ) | ||||||||||||||||
Consumer notes | (5 | ) | 4 | — | (5 | ) | — | (6 | ) | 4 | ||||||||||||||||||
Supplemental Information: | ||||||||||||||||||||||||||||
Net US GMWB (Embedded derivatives, freestanding derivatives including those in Levels 1, 2 and 3 and reinsurance recoverable)[8] | (552 | ) | (241 | ) | — | (13 | ) | — | (806 | ) | (241 | ) | ||||||||||||||||
[1] | The January 1, 2008 fair value of $238 includes the pre-SFAS 157 fair value of $128 and transitional adjustment of $110. | |
[2] | The Company classifies all the gains and losses on GMWB reinsurance derivatives and GMWB embedded derivatives as unrealized gains/losses for purposes of disclosure in this table because it is impracticable to track on a contract-by-contract basis the realized gains/losses for these derivatives and embedded derivatives. | |
[3] | All amounts in these columns are reported in net realized capital gains/losses except for $2 and $3 for the three and nine months ending September 30, 2008 respectively, which are reported in benefits, losses and loss adjustment expenses. All amounts are before income taxes and amortization of DAC. | |
[4] | The freestanding derivatives, excluding reinsurance derivatives instruments, are reported in this table on a net basis for asset/(liability) positions and reported on the condensed consolidated balance sheet in other investments and other liabilities. | |
[5] | AOCI refers to “Accumulated other comprehensive income” in the condensed consolidated statement of comprehensive income (loss). All amounts are before income taxes and amortization of DAC. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
[6] | The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on net income for the Company. | |
[7] | Transfers in and/or (out) of Level 3 during the three and nine months ended September 30, 2008 are attributable to a change in the availability of market observable information for individual securities with the respective categories. | |
[8] | The net loss on US GMWB since January 1, 2008 was primarily related to liability model assumption updates for mortality in the first quarter and market-based hedge ineffectiveness in the third quarter due to extremely volatile capital markets in September. | |
[9] | During July 2008, the Company reinsured, with a third party, U.S. GMWB risks associated with approximately $7.8 billion of account value sold between 2003 and 2006. The reinsurance agreement is an 80% quota-share agreement. The third party’s financial strength is rated A+ by A.M. Best, AA- by Standard and Poor’s and Aa2 by Moody’s. The reinsurance agreement will be accounted for as a free-standing derivative. |
Total | ||||||||||||||||
Realized/unrealized | Fair value | |||||||||||||||
Fair value | gains (losses) | Purchases, | as of | |||||||||||||
as of | included in: | issuances, and | September 30, | |||||||||||||
July 1, 2007 | Net income | settlements | 2007 | |||||||||||||
Assets | ||||||||||||||||
Customized derivatives used to hedge US GMWB | $ | (21 | ) | $ | 29 | $ | — | $ | 8 | |||||||
Other freestanding derivatives used to hedge US GMWB | 265 | 104 | 6 | 375 | ||||||||||||
Reinsurance recoverable for US GMWB | 20 | 54 | 6 | 80 | ||||||||||||
Liabilities | ||||||||||||||||
Other policyholder funds and benefits payable accounted for at fair value | ||||||||||||||||
US GMWB | $ | (56 | ) | $ | (326 | ) | $ | (25 | ) | $ | (407 | ) | ||||
UK GMWB | — | (2 | ) | — | (2 | ) | ||||||||||
Institutional Notes | 18 | (25 | ) | — | (7 | ) | ||||||||||
Equity Linked Notes | — | 1 | (22 | ) | (21 | ) | ||||||||||
Total other policyholder funds and benefits payable accounted for at fair value | (38 | ) | (352 | ) | (47 | ) | (437 | ) | ||||||||
Supplemental Information: | ||||||||||||||||
Net US GMWB (Embedded derivatives, freestanding derivatives and reinsurance recoverable) [1] | 208 | (139 | ) | (13 | ) | 56 | ||||||||||
[1] | The net loss on US GMWB was primarily due to liability model assumption updates made during the third quarter to reflect model refinements. |
27
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Total | ||||||||||||||||
Fair value | Realized/unrealized | Fair value | ||||||||||||||
as of | gains (losses) | Purchases, | as of | |||||||||||||
January 1, | included in: | issuances, and | September 30, | |||||||||||||
2007 | Net income | settlements | 2007 | |||||||||||||
Assets | ||||||||||||||||
Customized derivatives used to hedge US GMWB | $ | — | $ | 8 | $ | — | $ | 8 | ||||||||
Other freestanding derivatives used to hedge US GMWB | 346 | 46 | (17 | ) | 375 | |||||||||||
Reinsurance recoverable for US GMWB | (22 | ) | 85 | 17 | 80 | |||||||||||
Liabilities | ||||||||||||||||
Other policyholder funds and benefits payable accounted for at fair value | ||||||||||||||||
US GMWB | $ | 53 | $ | (389 | ) | $ | (71 | ) | $ | (407 | ) | |||||
UK GMWB | — | (2 | ) | — | (2 | ) | ||||||||||
Institutional Notes | 4 | (11 | ) | — | (7 | ) | ||||||||||
Equity Linked Notes | — | 1 | (22 | ) | (21 | ) | ||||||||||
Total other policyholder funds and benefits payable accounted for at fair value | 57 | (401 | ) | (93 | ) | (437 | ) | |||||||||
Supplemental Information: | ||||||||||||||||
Net US GMWB (Embedded derivative, freestanding derivatives and reinsurance recoverable) [1] | 377 | (250 | ) | (71 | ) | 56 | ||||||||||
[1] | The net loss on US GMWB was primarily due to liability model assumption updates made during the second and third quarter to reflect newly reliable market inputs for volatility and model refinements. |
September 30, 2008 | December 31, 2007 | |||||||||||||||
Notional | Fair | Notional | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Reinsurance recoverables for US GMWB | $ | 11,815 | $ | 438 | $ | 6,579 | $ | 128 | ||||||||
Customized derivatives used to hedge US GMWB | 12,862 | 201 | 12,784 | 50 | ||||||||||||
Freestanding derivatives used to hedge US GMWB | 10,751 | 952 | 8,573 | 592 | ||||||||||||
US GMWB | 47,022 | (2,397 | ) | 44,852 | (707 | ) | ||||||||||
UK GMWB | 1,768 | (30 | ) | 1,048 | (8 | ) | ||||||||||
Japan GMWB | 253 | (4 | ) | — | — | |||||||||||
Japan GMAB | 3,674 | (20 | ) | 2,768 | 2 | |||||||||||
Consumer Notes | 70 | (6 | ) | 19 | (5 | ) | ||||||||||
Equity Linked Notes | 50 | (12 | ) | 50 | (21 | ) | ||||||||||
Total | $ | 88,265 | $ | (878 | ) | $ | 76,673 | $ | 31 | |||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||
Cost or | Gross | Gross | Cost or | Gross | Gross | |||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||
Bonds and Notes | ||||||||||||||||||||||||||||||||
ABS | $ | 9,200 | $ | 12 | $ | (1,588 | ) | $ | 7,624 | $ | 9,515 | $ | 33 | $ | (633 | ) | $ | 8,915 | ||||||||||||||
CMBS | 15,053 | 56 | (2,827 | ) | 12,282 | 17,625 | 244 | (838 | ) | 17,031 | ||||||||||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||
Agency backed | 856 | 14 | (6 | ) | 864 | 1,191 | 32 | (4 | ) | 1,219 | ||||||||||||||||||||||
Non-agency backed | 425 | 1 | (55 | ) | 371 | 525 | 4 | (3 | ) | 526 | ||||||||||||||||||||||
Corporate | 33,438 | 425 | (2,331 | ) | 31,532 | 34,118 | 1,022 | (942 | ) | 34,198 | ||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||
Foreign | 886 | 26 | (37 | ) | 875 | 999 | 59 | (5 | ) | 1,053 | ||||||||||||||||||||||
United States | 1,824 | 35 | (7 | ) | 1,852 | 836 | 22 | (3 | ) | 855 | ||||||||||||||||||||||
MBS | 2,726 | 16 | (20 | ) | 2,722 | 2,757 | 26 | (20 | ) | 2,763 | ||||||||||||||||||||||
States, municipalities and political subdivisions | 12,599 | 195 | (825 | ) | 11,969 | 13,152 | 427 | (90 | ) | 13,489 | ||||||||||||||||||||||
Redeemable preferred stock | — | — | — | — | 6 | — | — | 6 | ||||||||||||||||||||||||
Fixed maturities | 77,007 | 780 | (7,696 | ) | 70,091 | 80,724 | 1,869 | (2,538 | ) | 80,055 | ||||||||||||||||||||||
Equity securities, available-for-sale | 1,645 | 197 | (112 | ) | 1,730 | 2,611 | 218 | (234 | ) | 2,595 | ||||||||||||||||||||||
Total securities, available-for-sale | $ | 78,652 | $ | 977 | $ | (7,808 | ) | $ | 71,821 | $ | 83,335 | $ | 2,087 | $ | (2,772 | ) | $ | 82,650 | ||||||||||||||
29
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2008 | ||||||||||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | ||||||||||||||||||||||||||||
Cost | Value | Losses | Cost | Value | Losses | Cost | Value | Losses | ||||||||||||||||||||||||||||
ABS | $ | 4,548 | $ | 3,873 | $ | (675 | ) | $ | 4,228 | $ | 3,315 | $ | (913 | ) | $ | 8,776 | $ | 7,188 | $ | (1,588 | ) | |||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||||||
Agency backed | 309 | 304 | (5 | ) | 29 | 28 | (1 | ) | 338 | 332 | (6 | ) | ||||||||||||||||||||||||
Non-agency backed | 265 | 226 | (39 | ) | 64 | 48 | (16 | ) | 329 | 274 | (55 | ) | ||||||||||||||||||||||||
CMBS | 6,600 | 5,629 | (971 | ) | 7,144 | 5,288 | (1,856 | ) | 13,744 | 10,917 | (2,827 | ) | ||||||||||||||||||||||||
Corporate | 18,491 | 17,157 | (1,334 | ) | 6,458 | 5,461 | (997 | ) | 24,949 | 22,618 | (2,331 | ) | ||||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||||||
Foreign | 555 | 522 | (33 | ) | 56 | 52 | (4 | ) | 611 | 574 | (37 | ) | ||||||||||||||||||||||||
United States | 505 | 498 | (7 | ) | — | — | — | 505 | 498 | (7 | ) | |||||||||||||||||||||||||
MBS | 849 | 842 | (7 | ) | 441 | 428 | (13 | ) | 1,290 | 1,270 | (20 | ) | ||||||||||||||||||||||||
States, municipalities and political subdivisions | 6,044 | 5,528 | (516 | ) | 2,120 | 1,811 | (309 | ) | 8,164 | 7,339 | (825 | ) | ||||||||||||||||||||||||
Redeemable preferred stock | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Total fixed maturities | 38,166 | 34,579 | (3,587 | ) | 20,540 | 16,431 | (4,109 | ) | 58,706 | 51,010 | (7,696 | ) | ||||||||||||||||||||||||
Equity securities, available-for-sale | 605 | 518 | (87 | ) | 170 | 145 | (25 | ) | 775 | 663 | (112 | ) | ||||||||||||||||||||||||
Total temporarily impaired securities | $ | 38,771 | $ | 35,097 | $ | (3,674 | ) | $ | 20,710 | $ | 16,576 | $ | (4,134 | ) | $ | 59,481 | $ | 51,673 | $ | (7,808 | ) | |||||||||||||||
December 31, 2007 | ||||||||||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | ||||||||||||||||||||||||||||
Cost | Value | Losses | Cost | Value | Losses | Cost | Value | Losses | ||||||||||||||||||||||||||||
ABS | $ | 7,811 | $ | 7,222 | $ | (589 | ) | $ | 671 | $ | 627 | $ | (44 | ) | $ | 8,482 | $ | 7,849 | $ | (633 | ) | |||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||||||
Agency backed | 324 | 321 | (3 | ) | 89 | 88 | (1 | ) | 413 | 409 | (4 | ) | ||||||||||||||||||||||||
Non-agency backed | 120 | 118 | (2 | ) | 54 | 53 | (1 | ) | 174 | 171 | (3 | ) | ||||||||||||||||||||||||
CMBS | 8,138 | 7,453 | (685 | ) | 3,400 | 3,247 | (153 | ) | 11,538 | 10,700 | (838 | ) | ||||||||||||||||||||||||
Corporate | 13,849 | 13,165 | (684 | ) | 4,873 | 4,615 | (258 | ) | 18,722 | 17,780 | (942 | ) | ||||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||||||
Foreign | 226 | 221 | (5 | ) | 66 | 66 | — | 292 | 287 | (5 | ) | |||||||||||||||||||||||||
United States | 216 | 213 | (3 | ) | 14 | 14 | — | 230 | 227 | (3 | ) | |||||||||||||||||||||||||
MBS | 56 | 56 | — | 1,033 | 1,013 | (20 | ) | 1,089 | 1,069 | (20 | ) | |||||||||||||||||||||||||
States, municipalities and political subdivisions | 3,157 | 3,081 | (76 | ) | 342 | 328 | (14 | ) | 3,499 | 3,409 | (90 | ) | ||||||||||||||||||||||||
Redeemable preferred stock | 6 | 6 | — | — | — | — | 6 | 6 | — | |||||||||||||||||||||||||||
Total fixed maturities | 33,903 | 31,856 | (2,047 | ) | 10,542 | 10,051 | (491 | ) | 44,445 | 41,907 | (2,538 | ) | ||||||||||||||||||||||||
Equity securities, available-for-sale | 1,675 | 1,442 | (233 | ) | 21 | 20 | (1 | ) | 1,696 | 1,462 | (234 | ) | ||||||||||||||||||||||||
Total temporarily impaired securities | $ | 35,578 | $ | 33,298 | $ | (2,280 | ) | $ | 10,563 | $ | 10,071 | $ | (492 | ) | $ | 46,141 | $ | 43,369 | $ | (2,772 | ) | |||||||||||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Securitized Assets Depressed over 20% | ||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||
Cost or | Cost or | |||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||
Three months or less | 437 | $ | 6,003 | $ | 3,975 | $ | (2,028 | ) | 138 | $ | 1,263 | $ | 835 | $ | (428 | ) | ||||||||||||||||
Greater than three to six months | 120 | 1,381 | 780 | (601 | ) | 12 | 146 | 91 | (55 | ) | ||||||||||||||||||||||
Greater than six to nine months | 106 | 1,125 | 682 | (443 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than nine to twelve months | 4 | 24 | 16 | (8 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than twelve months | 3 | 13 | 7 | (6 | ) | 6 | 40 | 26 | (14 | ) | ||||||||||||||||||||||
Total | 670 | $ | 8,546 | $ | 5,460 | $ | (3,086 | ) | 156 | $ | 1,449 | $ | 952 | $ | (497 | ) | ||||||||||||||||
All Other Securities Depressed over 20% | ||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||
Cost or | Cost or | |||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||
Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||
Three months or less | 391 | $ | 3,084 | $ | 2,300 | $ | (784 | ) | 116 | $ | 635 | $ | 492 | $ | (143 | ) | ||||||||||||||||
Greater than three to six months | 27 | 331 | 230 | (101 | ) | 9 | 74 | 21 | (53 | ) | ||||||||||||||||||||||
Greater than six to nine months | 31 | 301 | 205 | (96 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than nine to twelve months | 6 | 31 | 21 | (10 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than twelve months | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | 455 | $ | 3,747 | $ | 2,756 | $ | (991 | ) | 125 | $ | 709 | $ | 513 | $ | (196 | ) | ||||||||||||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||
Maximum | Maximum | |||||||||||||||||||||||
Total | Total | Exposure | Total | Total | Exposure | |||||||||||||||||||
Assets | Liabilities [1] | to Loss | Assets | Liabilities [1] | to Loss | |||||||||||||||||||
CLOs [2] | $ | 336 | $ | 41 | $ | 291 | $ | 128 | $ | 47 | $ | 107 | ||||||||||||
Limited partnerships | 301 | 51 | 251 | 309 | 47 | 262 | ||||||||||||||||||
Other investments [3] | 261 | 107 | 148 | 377 | 71 | 317 | ||||||||||||||||||
Total | $ | 898 | $ | 199 | $ | 690 | $ | 814 | $ | 165 | $ | 686 | ||||||||||||
[1] | Creditors have no recourse against the Company in the event of default by the VIE. | |
[2] | The Company provides collateral management services and earns a fee associated with these structures. | |
[3] | Other investments include one unlevered investment bank loan fund for which the Company provides collateral management services and earns an associated fee. As of December 31, 2007, two investment structures were also included that were backed by preferred securities. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2008 | December 31, 2007 | |||||||||||||||
Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
Fixed maturities, available-for-sale | $ | — | $ | 4 | $ | — | $ | — | ||||||||
Other investments | 1,263 | — | 528 | — | ||||||||||||
Reinsurance recoverables | 438 | — | 128 | — | ||||||||||||
Other policyholder funds and benefits payable | — | 2,463 | 2 | 737 | ||||||||||||
Consumer notes | — | 6 | — | 5 | ||||||||||||
Other liabilities | — | 661 | — | 617 | ||||||||||||
Total | $ | 1,701 | $ | 3,134 | $ | 658 | $ | 1,359 | ||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||
Notional | Fair | Notional | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Cash-flow hedges | $ | 8,442 | $ | (79 | ) | $ | 6,637 | $ | (205 | ) | ||||||
Fair-value hedges | 2,886 | (20 | ) | 4,922 | (41 | ) | ||||||||||
Other investment and risk management activities | 113,602 | (1,334 | ) | 99,796 | (455 | ) | ||||||||||
Total | $ | 124,930 | $ | (1,433 | ) | $ | 111,355 | $ | (701 | ) | ||||||
33
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Ineffectiveness on cash-flow hedges | $ | — | $ | 1 | $ | 3 | $ | 1 | ||||||||
Ineffectiveness on fair-value hedges | — | 1 | — | (3 | ) | |||||||||||
Total change in value for non-qualifying strategies | (1,203 | ) | (125 | ) | (185 | ) | (368 | ) | ||||||||
Other | (46 | ) | — | (46 | ) | — | ||||||||||
Net earnings impact, before tax | $ | (1,249 | ) | $ | (123 | ) | $ | (228 | ) | $ | (370 | ) | ||||
• | For the three months ended September 30, 2008, net losses were primarily comprised of net losses on credit default swaps and GMWB related hedging derivatives (See Note 4), partially offset by net gains on foreign currency swaps and forwards. The net losses on credit default swaps were primarily due to losses on credit derivatives that assume credit exposure as a result of credit spread widening. The Company uses foreign currency swaps and forwards to hedge the currency risk related to certain foreign currency bonds and liabilities. These swaps resulted in net gains primarily due to weakening of the Euro. | |
• | For the nine months ended September 30, 2008, net losses were primarily comprised of net losses on GMWB related derivatives (See Note 4) and credit derivatives, partially offset by net gains on the Japan fixed annuity hedging instruments. The net losses on credit derivatives were primarily comprised of losses on credit derivatives that assume credit exposure as a result of credit spread widening. The gains on the Japanese fixed annuity hedging instruments were primarily due to the Japanese yen strengthening against the U.S. dollar. | |
• | For the three and nine months ended September 30, 2007, net losses were primarily comprised of net losses on GMWB related derivatives (See Note 4) and credit default swaps, partially offset by gains on the Japan fixed annuity hedging instruments. The net losses on credit default swaps were a result of credit spread widening. The gains on the Japanese fixed annuity hedging instruments were primarily due to the Japanese yen strengthening against the U.S. dollar. |
34
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Death and | ||||||||||||||||||||
Unearned | Income | Sales | ||||||||||||||||||
Segment | DAC and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total | |||||||||||||||
Retail | $ | (648 | ) | $ | 18 | $ | (75 | ) | $ | (27 | ) | $ | (732 | ) | ||||||
Retirement Plans | (49 | ) | — | — | — | (49 | ) | |||||||||||||
Individual Life | (29 | ) | (12 | ) | (3 | ) | — | (44 | ) | |||||||||||
International | (23 | ) | (1 | ) | (90 | ) | (2 | ) | (116 | ) | ||||||||||
Corporate | 9 | — | — | — | 9 | |||||||||||||||
Total | $ | (740 | ) | $ | 5 | $ | (168 | ) | $ | (29 | ) | $ | (932 | ) | ||||||
[1] | As a result of the unlock, death benefit reserves, in Retail, increased $389, pre-tax, offset by an increase of $273, pre-tax, in reinsurance recoverables. In International, death benefit reserves increased $164 pre-tax, offset by an increase of $25, pre-tax, in reinsurance recoverables. |
2008 | 2007 | |||||||
Balance, January 1, before cumulative effect of accounting change, pre-tax | $ | 10,514 | $ | 9,071 | ||||
Cumulative effect of accounting change, pre-tax (SOP 05-1) [1] | — | (79 | ) | |||||
Balance, January 1, as adjusted | 10,514 | 8,992 | ||||||
Deferred costs | 1,238 | 1,570 | ||||||
Amortization — Deferred policy acquisition costs and present value of future profits [2] | (481 | ) | (931 | ) | ||||
Amortization — Unlock, pre-tax | (1,153 | ) | 327 | |||||
Adjustments to unrealized gains and losses on securities, available-for-sale and other | 820 | 257 | ||||||
Effect of currency translation adjustment | 74 | 61 | ||||||
Balance, September 30 | $ | 11,012 | $ | 10,276 | ||||
[1] | The Company’s cumulative effect of accounting change includes an additional $(1), pre-tax, related to sales inducements. | |
[2] | The decrease in amortization from the prior year period is due to lower actual gross profits resulting from increased realized capital losses primarily from the adoption of SFAS 157 at the beginning of the first quarter of 2008 and impairment charges taken during 2008. For further discussion of the SFAS 157 transition impact, see Note 4. |
2008 | 2007 | |||||||
Balance, January 1 | $ | 1,228 | $ | 1,197 | ||||
Deferred costs | 1,599 | 1,607 | ||||||
Amortization — Deferred policy acquisition costs | (1,567 | ) | (1,581 | ) | ||||
Balance, September 30 | $ | 1,260 | $ | 1,223 | ||||
35
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
UL Secondary | ||||||||||||
U.S. GMDB [1] | Japan GMDB/GMIB [1] | Guarantees [1] | ||||||||||
Liability balance as of January 1, 2008 | $ | 529 | $ | 42 | $ | 19 | ||||||
Incurred | 127 | 21 | 16 | |||||||||
Paid | (127 | ) | (19 | ) | — | |||||||
Unlock | 389 | 164 | — | |||||||||
Currency translation adjustment | — | 4 | — | |||||||||
Liability balance as of September 30, 2008 | $ | 918 | $ | 212 | $ | 35 | ||||||
[1] | The reinsurance recoverable asset related to the U.S. GMDB was $613 as of September 30, 2008. The reinsurance recoverable asset related to the Japan GMDB was $34 as of September 30, 2008. The reinsurance recoverable asset related to the UL Secondary Guarantees was $14 as of September 30, 2008. |
UL Secondary | ||||||||||||
U.S. GMDB [1] | Japan GMDB/GMIB [1] | Guarantees [1] | ||||||||||
Liability balance as of January 1, 2007 | $ | 475 | $ | 35 | $ | 7 | ||||||
Incurred | 108 | 12 | 2 | |||||||||
Paid | (67 | ) | (1 | ) | — | |||||||
Unlock | (4 | ) | (9 | ) | — | |||||||
Currency translation adjustment | — | 1 | — | |||||||||
Liability balance as of September 30, 2007 | $ | 512 | $ | 38 | $ | 9 | ||||||
[1] | The reinsurance recoverable asset related to the U.S. GMDB was $320 as of September 30, 2007. The reinsurance recoverable asset related to the Japan GMDB was $8 as of September 30, 2007. The reinsurance recoverable asset related to the UL Secondary Guarantees was $8 as of September 30, 2007. |
36
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Breakdown of Individual Variable and Group Annuity Account Value by GMDB/GMIB Type | ||||||||||||||||
Retained Net | Weighted Average | |||||||||||||||
Account | Net Amount | Amount | Attained Age of | |||||||||||||
Maximum anniversary value (“MAV”) [1] | Value | at Risk [9] | at Risk [9] | Annuitant | ||||||||||||
MAV only | $ | 32,985 | $ | 9,699 | $ | 2,967 | 66 | |||||||||
With 5% rollup [2] | 2,363 | 782 | 304 | 65 | ||||||||||||
With Earnings Protection Benefit Rider (“EPB”) [3] | 3,417 | 768 | 130 | 62 | ||||||||||||
With 5% rollup & EPB | 946 | 247 | 46 | 64 | ||||||||||||
Total MAV | 39,711 | 11,496 | 3,447 | |||||||||||||
Asset Protection Benefit (“APB”) [4] | 33,685 | 7,339 | 4,081 | 63 | ||||||||||||
Lifetime Income Benefit (“LIB”) — Death Benefit [5] | 9,813 | 246 | 246 | 63 | ||||||||||||
Reset [6] (5-7 years) | 4,378 | 619 | 618 | 66 | ||||||||||||
Return of Premium [7]/Other | 11,531 | 321 | 173 | 54 | ||||||||||||
Subtotal U.S. Guaranteed Minimum Death Benefits | 99,118 | 20,021 | 8,565 | 63 | ||||||||||||
Japan Guaranteed Minimum Death and Income Benefit [8] | 32,706 | 4,538 | 3,716 | 66 | ||||||||||||
Total at September 30, 2008 | $ | 131,824 | $ | 24,559 | $ | 12,281 | ||||||||||
[1] | MAV: the death benefit is the greatest of current account value, net premiums paid and the highest account value on any anniversary before age 80 (adjusted for withdrawals). | |
[2] | Rollup: the death benefit is the greatest of the MAV, current account value, net premium paid and premiums (adjusted for withdrawals) accumulated at generally 5% simple interest up to the earlier of age 80 or 100% of adjusted premiums. | |
[3] | EPB: the death benefit is the greatest of the MAV, current account value, or contract value plus a percentage of the 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, net premiums paid, or for certain contracts a benefit amount that ratchets over time, generally based on market performance. | |
[6] | Reset: the death benefit is the greatest of current account value, net premiums paid and the most recent five to seven year anniversary account value before age 80 (adjusted for withdrawals). | |
[7] | Return of premium: the death benefit is the greater of current account value and net premiums paid. | |
[8] | Death benefits include a Return of Premium and MAV (before age 80) paid in a single lump sum. The income benefit is a guarantee to return initial investment, adjusted for earnings liquidity, paid through a fixed annuity, after a minimum deferral period of 10, 15 or 20 years. The guaranteed remaining balance related to the Japan GMIB was $29.8 billion and $26.8 billion as of September 30, 2008 and December 31, 2007, respectively. | |
[9] | Net amount at risk and retained net amount at risk are highly sensitive to equity markets movements. For example, as equity markets decline, net amount at risk and retained net amount at risk will generally increase. |
37
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
38
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
39
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Service cost | $ | 30 | $ | 30 | $ | 2 | $ | 2 | ||||||||
Interest cost | 57 | 52 | 5 | 5 | ||||||||||||
Expected return on plan assets | (69 | ) | (70 | ) | (3 | ) | (2 | ) | ||||||||
Amortization of prior service cost | (2 | ) | (3 | ) | — | (1 | ) | |||||||||
Amortization of actuarial loss | 15 | 23 | — | — | ||||||||||||
Net periodic benefit cost | $ | 31 | $ | 32 | $ | 4 | $ | 4 | ||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Service cost | $ | 90 | $ | 91 | $ | 5 | $ | 5 | ||||||||
Interest cost | 171 | 155 | 17 | 16 | ||||||||||||
Expected return on plan assets | (207 | ) | (210 | ) | (9 | ) | (6 | ) | ||||||||
Amortization of prior service cost | (7 | ) | (9 | ) | (1 | ) | (4 | ) | ||||||||
Amortization of actuarial loss | 44 | 73 | — | — | ||||||||||||
Net periodic benefit cost | $ | 91 | $ | 100 | $ | 12 | $ | 11 | ||||||||
40
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
41
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
42
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
43
Table of Contents
AND RESULTS OF OPERATIONS
Overview | 45 | |||
Critical Accounting Estimates | 45 | |||
Consolidated Results of Operations | 53 | |||
Life | 57 | |||
Retail | 67 | |||
Individual Life | 70 | |||
Retirement Plans | 73 | |||
Group Benefits | 76 | |||
International | 78 | |||
Institutional | 81 | |||
Other | 84 | |||
Property & Casualty | 85 | |||
Total Property & Casualty | 99 | |||
Ongoing Operations | 100 | |||
Personal Lines | 105 | |||
Small Commercial | 111 | |||
Middle Market | 116 | |||
Specialty Commercial | 121 | |||
Other Operations (Including Asbestos and Environmental Claims) | 126 | |||
Investments | 131 | |||
Investment Credit Risk | 140 | |||
Capital Markets Risk Management | 151 | |||
Capital Resources and Liquidity | 155 | |||
Accounting Standards | 161 |
44
Table of Contents
Individual Variable Annuities - | Individual Variable Annuities - | Individual | ||||||||||||||||||||||
U.S. | Japan | Life | ||||||||||||||||||||||
September 30, | December 31, | September 30, | December 31, | September 30, | December 31, | |||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
DAC | $ | 4,632 | $ | 4,982 | $ | 1,816 | $ | 1,760 | $ | 2,618 | $ | 2,309 | ||||||||||||
Sales Inducements | $ | 454 | $ | 390 | $ | 15 | $ | 8 | $ | 39 | $ | 20 | ||||||||||||
URR | $ | 108 | $ | 124 | $ | — | $ | — | $ | 1,102 | $ | 816 | ||||||||||||
SOP 03-1 reserves | $ | 915 | $ | 527 | $ | 212 | $ | 42 | $ | 35 | $ | 19 |
45
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46
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Death and | ||||||||||||||||||||
Unearned | Income | Sales | ||||||||||||||||||
Segment | DAC and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total [2] | |||||||||||||||
Retail | $ | (648 | ) | $ | 18 | $ | (75 | ) | $ | (27 | ) | $ | (732 | ) | ||||||
Retirement Plans | (49 | ) | — | — | — | (49 | ) | |||||||||||||
Individual Life | (29 | ) | (12 | ) | (3 | ) | — | (44 | ) | |||||||||||
International | (23 | ) | (1 | ) | (90 | ) | (2 | ) | (116 | ) | ||||||||||
Corporate | 9 | — | — | — | 9 | |||||||||||||||
Total | $ | (740 | ) | $ | 5 | $ | (168 | ) | $ | (29 | ) | $ | (932 | ) | ||||||
[1] | As a result of the Unlock, death benefit reserves in Retail, increased $389, pre-tax, offset by an increase of $273, pre-tax, in reinsurance recoverables. In International, death benefit reserves increased $164, pre-tax, offset by an increase of $25, pre-tax, in reinsurance recoverables. | |
[2] | The following were the most significant contributors to the Unlock amounts recorded during the third quarter of 2008: |
• | Actual separate account returns from the period ending July 31, 2007 to September 30, 2008 were significantly below our aggregated estimated return. | ||
• | The Company reduced its 20 year projected separate account return assumption from 7.8% to 7.2% in the U.S. | ||
• | In Retirement Plans, the Company reduced its estimate of future fees as plans meet contractual size limits (“breakpoints”) causing a lower fee schedule to apply and the Company increased its assumption for future deposits by existing plan participants. |
Death and | ||||||||||||||||||||
Unearned | Income | Sales | ||||||||||||||||||
Segment | DAC and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total [2] | |||||||||||||||
Retail | $ | 180 | $ | (5 | ) | $ | (4 | ) | $ | 9 | $ | 180 | ||||||||
Retirement Plans | (9 | ) | — | — | — | (9 | ) | |||||||||||||
Institutional | 1 | — | — | — | 1 | |||||||||||||||
Individual Life | 24 | (8 | ) | — | — | 16 | ||||||||||||||
International — Japan | 16 | — | 6 | — | 22 | |||||||||||||||
Corporate | 3 | — | — | — | 3 | |||||||||||||||
Total | $ | 215 | $ | (13 | ) | $ | 2 | $ | 9 | $ | 213 | |||||||||
[1] | As a result of the Unlock, death benefit reserves, in Retail, decreased $4, pre-tax, offset by a decrease of $10, pre-tax, in reinsurance recoverables. | |
[2] | The following were the most significant contributors to the Unlock amounts recorded during the third quarter of 2007: |
• | Actual separate account returns were above our aggregated estimated return. | ||
• | During the third quarter of 2007, the Company estimated gross profits using the mean of EGPs derived from a set of stochastic scenarios that have been calibrated to our estimated separate account return as compared to prior year where we used a single deterministic estimation. The impact of this change in estimation was a benefit of $13, after-tax, for Japan variable annuities and $20, after-tax, for U.S. variable annuities. | ||
• | As part of its continual enhancement to its assumption setting processes and in connection with its assumption study, the Company included dynamic lapse behavior assumptions. Dynamic lapses reflect that lapse behavior will be different depending upon market movements. The impact of this assumption change along with other base lapse rate changes was an approximate benefit of $40, after-tax, for U.S. variable annuities. |
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Effect on EGP-related | ||||||||||||
balances if Unlocked | ||||||||||||
(after-tax) [1] | ||||||||||||
If actual separate account returns were 1% above or below our aggregated estimated return | $ | 20 | — | $ | 40 | [3] | ||||||
If actual lapse rates were 1% above or below our estimated aggregate lapse rate | $ | 10 | — | $ | 25 | [2] | ||||||
If we changed our future separate account return rate by 1% from our aggregated estimated future return | $ | 90 | — | $ | 120 | |||||||
If we changed our future lapse rate by 1% from our estimated aggregate future lapse rate | $ | 50 | — | $ | 80 | [2] | ||||||
Japan Variable Annuities | ||||||||||||
(Increasing separate account returns and decreasing lapse rates generally result in benefits. Decreasing separate account returns and increasing lapse rates generally result in charges.) | ||||||||||||
Effect on EGP-related | ||||||||||||
balances if Unlocked | ||||||||||||
(after-tax) [1] | ||||||||||||
If actual separate account returns were 1% above or below our aggregated estimated return | $ | 5 | — | $ | 20 | [4][5] | ||||||
If actual lapse rates were 1% above or below our estimated aggregate lapse rate | $ | 1 | — | $ | 10 | [2] | ||||||
If we changed our future separate account return rate by 1% from our aggregated estimated future return | $ | 50 | — | $ | 70 | |||||||
If we changed our future lapse rate by 1% from our estimated aggregate future lapse rate | $ | 10 | — | $ | 25 | [2] |
[1] | These sensitivities are reflective of the results of our 2008 assumption studies. The 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 September 30, 2008, the date of our third quarter 2008 Unlock, and reflect all current in-force and account value data, including the corresponding market levels, allocation of funds, policyholder behavior and actuarial assumptions. These sensitivities are not perfectly linear nor perfectly symmetrical for increases and decreases. As such, extrapolating results over a wide range will decrease the accuracy of the sensitivities’ predictive ability. Sensitivity results are, in part, based on the current “in-the-moneyness” of various guarantees offered with the products. Future market conditions could significantly change the sensitivity results. | |
[2] | Sensitivity around lapses assumes lapses increase or decrease consistently across all cohort years and products. | |
[3] | The overall actual return generated by the U.S. variable annuity separate accounts is dependent on several factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds as well as equity sector weightings and as a result of the large proportion of separate account assets invested in U.S. equity markets, the 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. | |
[5] | For the Company’s 3Win product in Japan, which represented approximately $3.2 billion account values as of September 30, 2008, significant movements in the contract holders account value, (which is partially dependent upon equity market movements due to fixed contractual investment allocations) down by more than 20% of the initial deposit, require the contract holder to withdraw 80% of their initial deposit without penalty or recover their initial investment through a payout annuity. The exercise of these options will result in an acceleration of the amount of DAC amortization in a specific reporting period. As of September 30, 2008, the contract holder with the largest account value decline was 17.4% down from their initial deposit. The average for all contract holders was 13% down from initial deposits. As of September 30, 2008, the Company had $219 of DAC associated with the Japan 3Win product. Subsequent to September 30, 2008, equity markets further declined from their September 30, 2008 levels. As a result, as of October 27, 2008, approximately 95% of all 3Win contractholders now have account values that are 20% down from their initial deposit. This will result in accelerated amortization of DAC in the fourth quarter of 2008 of at least $124, after-tax. Additionally, to the extent policyholders elect the annuity option, the Company will establish a reserve for future annuity payments. Based on current assumptions about the percentage of policyholders who will elect the annuity option and expected investment returns, which could be higher or lower than today’s investment returns and a yen to dollar exchange rate of ¥93 to $1 dollar, the Company estimates that establishing this reserve will reduce net income in the fourth quarter by $60-$100, after-tax. Further declines in equity markets during the fourth quarter of 2008 or thereafter could cause the entire DAC balance of $219 to be amortized. |
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Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Priced via third party pricing services | $ | 917 | $ | 53,183 | $ | 3,869 | $ | 57,969 | ||||||||
Priced via independent broker quotations | — | — | 4,178 | 4,178 | ||||||||||||
Priced via matrices | — | 367 | 5,495 | 5,862 | ||||||||||||
Priced via other methods [1] | — | 4 | 3,808 | 3,812 | ||||||||||||
Short-term investments [2] | 837 | 4,516 | — | 5,353 | ||||||||||||
Total | $ | 1,754 | $ | 58,070 | $ | 17,350 | $ | 77,174 | ||||||||
% of Total | 2.3 | % | 75.2 | % | 22.5 | % | 100.0 | % | ||||||||
[1] | Primarily represents securities for which adjustments were made to reduce prices received from third parties. | |
[2] | Short-term investments are primarily valued at amortized cost, which approximates fair value. |
% of Total | ||||||||
Fair Value | Fair Value | |||||||
ABS | ||||||||
Below prime | $ | 1,983 | 11.4 | % | ||||
Collateralized loan obligations (“CLOs”) | 2,472 | 14.3 | % | |||||
Other | 908 | 5.2 | % | |||||
Corporate | ||||||||
Matrix priced private placements | 5,035 | 29.0 | % | |||||
Other | 2,830 | 16.3 | % | |||||
Commercial mortgage-backed securities (“CMBS”) | 2,688 | 15.5 | % | |||||
Preferred stock | 887 | 5.1 | % | |||||
Other | 547 | 3.2 | % | |||||
Total Level 3 securities | $ | 17,350 | 100.0 | % | ||||
• | ABS below prime primarily represents sub-prime and Alt-A securities which are classified as Level 3 due to the lack of liquidity in the market. | |
• | ABS CLOs represent senior secured bank loan CLOs which are primarily priced by independent brokers. | |
• | ABS Other primarily represents broker priced securities. | |
• | Corporate matrix priced represents private placement securities that are thinly traded and priced using a pricing matrix which includes significant non-observable inputs. | |
• | Corporate other primarily represents broker priced securities which are thinly traded and privately negotiated transactions. | |
• | CMBS primarily represents CMBS bonds and commercial real estate collateralized debt obligations (“CRE CDOs”) which were either fair valued by the Company or by independent brokers due to the illiquidity of this sector. | |
• | Preferred stock primarily represents perpetual preferred securities that are currently illiquid due to market conditions. |
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Notional Value | Fair Value | |||||||
Quoted prices in active markets for identical assets (Level 1) | $ | 3,084 | $ | — | ||||
Significant observable inputs (Level 2) | 25,509 | (88 | ) | |||||
Significant unobservable inputs (Level 3) | 31,376 | 690 | ||||||
Total | $ | 59,969 | $ | 602 | ||||
Notional Value | Fair Value | |||||||
Credit derivatives | $ | 3,945 | $ | (568 | ) | |||
Interest derivatives | 3,384 | (23 | ) | |||||
Equity derivatives | 23,517 | 1,241 | ||||||
Other | 530 | 40 | ||||||
Total Level 3 | $ | 31,376 | $ | 690 | ||||
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Earned premiums | $ | 3,903 | $ | 4,062 | (4 | %) | $ | 11,637 | $ | 11,760 | (1 | %) | ||||||||||||
Fee income | 1,333 | 1,398 | (5 | %) | 4,056 | 4,026 | 1 | % | ||||||||||||||||
Net investment income (loss) | ||||||||||||||||||||||||
Securities available-for-sale and other | 1,103 | 1,298 | (15 | %) | 3,526 | 3,907 | (10 | %) | ||||||||||||||||
Equity securities held for trading [1] | (3,415 | ) | (698 | ) | NM | (5,840 | ) | 746 | NM | |||||||||||||||
Total net investment income (loss) | (2,312 | ) | 600 | NM | (2,314 | ) | 4,653 | NM | ||||||||||||||||
Other revenues | 132 | 126 | 5 | % | 377 | 368 | 2 | % | ||||||||||||||||
Net realized capital losses | (3,449 | ) | (363 | ) | NM | (5,102 | ) | (565 | ) | NM | ||||||||||||||
Total revenues | (393 | ) | 5,823 | NM | 8,654 | 20,242 | (57 | %) | ||||||||||||||||
Benefits, losses and loss adjustment expenses | 3,994 | 3,666 | 9 | % | 10,937 | 10,543 | 4 | % | ||||||||||||||||
Benefits, losses and loss adjustment expenses — returns credited on International variable annuities [1] | (3,415 | ) | (698 | ) | NM | (5,840 | ) | 746 | NM | |||||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 1,927 | 476 | NM | 3,201 | 2,185 | 46 | % | |||||||||||||||||
Insurance operating costs and expenses | 1,029 | 973 | 6 | % | 3,026 | 2,826 | 7 | % | ||||||||||||||||
Interest expense | 84 | 67 | 25 | % | 228 | 196 | 16 | % | ||||||||||||||||
Other expenses | 171 | 164 | 4 | % | 542 | 522 | 4 | % | ||||||||||||||||
Total benefits, losses and expenses | 3,790 | 4,648 | (18 | %) | 12,094 | 17,018 | (29 | %) | ||||||||||||||||
Income (loss) before income taxes | (4,183 | ) | 1,175 | NM | (3,440 | ) | 3,224 | NM | ||||||||||||||||
Income tax expense (benefit) | (1,552 | ) | 324 | NM | (1,497 | ) | 870 | NM | ||||||||||||||||
Net income (loss) | $ | (2,631 | ) | $ | 851 | NM | $ | (1,943 | ) | $ | 2,354 | NM | ||||||||||||
[1] | Includes investment income and mark-to-market effects of equity securities held for trading supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders within benefits, losses and loss adjustment expenses. |
Segment Results | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Life | ||||||||||||||||||||||||
Retail [1] | $ | (822 | ) | $ | 294 | NM | $ | (729 | ) | $ | 616 | NM | ||||||||||||
Individual Life | (102 | ) | 55 | NM | (52 | ) | 151 | NM | ||||||||||||||||
Total Individual Markets Group | (924 | ) | 349 | NM | (781 | ) | 767 | NM | ||||||||||||||||
Retirement Plans | (160 | ) | 4 | NM | (134 | ) | 54 | NM | ||||||||||||||||
Group Benefits | (186 | ) | 83 | NM | (78 | ) | 235 | NM | ||||||||||||||||
Total Employer Markets Group | (346 | ) | 87 | NM | (212 | ) | 289 | NM | ||||||||||||||||
International [1] | (107 | ) | 90 | NM | (27 | ) | 185 | NM | ||||||||||||||||
Institutional | (393 | ) | 8 | NM | (543 | ) | 60 | NM | ||||||||||||||||
Other | (45 | ) | (9 | ) | NM | (73 | ) | (20 | ) | NM | ||||||||||||||
Total Life [1] | (1,815 | ) | 525 | NM | (1,636 | ) | 1,281 | NM | ||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Underwriting results | ||||||||||||||||||||||||
Personal Lines | (45 | ) | 78 | NM | 78 | 292 | (73 | %) | ||||||||||||||||
Small Commercial | 82 | 119 | (31 | %) | 270 | 304 | (11 | %) | ||||||||||||||||
Middle Market | (38 | ) | 22 | NM | 14 | 89 | (84 | %) | ||||||||||||||||
Specialty Commercial | (43 | ) | 6 | NM | 20 | 50 | (60 | %) | ||||||||||||||||
Ongoing Operations underwriting results | (44 | ) | 225 | NM | 382 | 735 | (48 | %) | ||||||||||||||||
Net servicing income [2] | 14 | 16 | (13 | %) | 21 | 41 | (49 | %) | ||||||||||||||||
Net investment income | 285 | 346 | (18 | %) | 929 | 1,082 | (14 | %) | ||||||||||||||||
Net realized losses | (1,268 | ) | (72 | ) | NM | (1,455 | ) | (73 | ) | NM | ||||||||||||||
Other expenses | (58 | ) | (63 | ) | 8 | % | (180 | ) | (179 | ) | (1 | %) | ||||||||||||
Income taxes | 405 | (111 | ) | NM | 195 | (452 | ) | NM | ||||||||||||||||
Ongoing Operations | (666 | ) | 341 | NM | (108 | ) | 1,154 | NM | ||||||||||||||||
Other Operations | (108 | ) | 12 | NM | (91 | ) | 4 | NM | ||||||||||||||||
Total Property & Casualty | (774 | ) | 353 | NM | (199 | ) | 1,158 | NM | ||||||||||||||||
Corporate | (42 | ) | (27 | ) | (56 | %) | (108 | ) | (85 | ) | (27 | %) | ||||||||||||
Net income (loss) [1] | $ | (2,631 | ) | $ | 851 | NM | $ | (1,943 | ) | $ | 2,354 | NM | ||||||||||||
[1] | For the nine months ended September 30, 2008, the transition impact related to the SFAS 157 adoption was a reduction in net income of $209 and $11 for Retail and International, respectively. For further discussion of the SFAS 157 adoption impact, refer to Note 4. | |
[2] | Net of expenses related to service business. |
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• | Realized losses increased $1,724 as compared to the comparable prior year period primarily due to increased impairments in 2008. For further discussion, please refer to the Realized Capital Gains and Losses by Segment table under Life’s Operating Section of the MD&A. | |
• | Life recorded a DAC unlock charge of $941, after-tax, during the third quarter of 2008 as compared to a DAC unlock benefit of $210, after-tax, during the third quarter of 2007. See Critical Accounting Estimates within MD&A for a further discussion on the DAC unlock. | |
• | Declines in assets under management in Retail, primarily due to equity market declines during 2008, drove fee income in that segment down $65 as compared to the third quarter of 2007. | |
• | Declines in net investment income on securities, available for sale and other of $124, due to a decrease in investment yield for fixed maturities and declines in limited partnership and other alternative investments income. |
• | Ongoing Operations’ results changed from net income of $341 for the three months ended September 30, 2007 to a net loss of $666 for the three months ended September 30, 2008. Before income taxes, Ongoing Operations’ results deteriorated by $1.5 billion, primarily due to a $1.2 billion increase in net realized capital losses on investments and, to a lesser extent, a $293 increase in current accident year catastrophes and a $61 decrease in net investment income, partially offset by a $59 increase in net favorable prior accident year reserve development. The increase in net realized capital losses of $1.2 billion in 2008 was primarily due to impairments of corporate debt and equity securities in the financial services sector. The $293 increase in current accident year catastrophes was largely due to losses incurred from hurricane Ike in September of 2008. Contributing to the $61 decrease in net investment income was a decrease in investment yield for limited partnerships and other alternative investments and, to a lesser extent, a decrease in yield on fixed maturity investments. Net favorable reserve development for Ongoing Operations in 2008 was largely driven by releases of reserves for workers’ compensation, personal auto liability and professional liability claims. | |
• | Other Operations’ results changed from net income of $12 for the three months ended September 30, 2007 to a net loss of $108 for the three months ended September 30, 2008. Before income taxes, Other Operations’ results deteriorated by $184, primarily due to a $157 increase in net realized capital losses on investments, largely driven by impairments of corporate debt and equity securities in the financial services sector. |
• | Realized losses increased as compared to the comparable prior year period primarily due to net losses from the adoption of SFAS 157 and impairments. For further discussion, please refer to the Realized Capital Gains and Losses by Segment table under Life’s Operating Section of the MD&A. | |
• | Life recorded a DAC unlock charge of $941, after-tax, during the third quarter of 2008 as compared to a DAC unlock benefit of $210, after-tax, during the third quarter of 2007. See Critical Accounting Estimates with Managements Discussion and Analysis for a further discussion on the DAC unlock. | |
• | Declines in assets under management in Retail, primarily due to equity market declines during 2008, drove fee income in that segment down $70 as compared to the nine months ended September 30, 2007. | |
• | Declines in net investment income on securities, available-for-sale, and other of $212, primarily due to a decrease in investment yield for fixed maturities and declines in limited partnership and other alternative investments income. | |
• | Death benefits in Individual Life increased $43 due to growth in in-force and unfavorable mortality. |
• | Increased fee income of $72 on asset growth in International businesses. | |
• | Benefits of $13 from provision to filed return adjustments and revisions to estimates of the separate account dividends received deduction and foreign tax credit. | |
• | A charge of $21 recorded in the second quarter of 2007 for regulatory matters. |
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• | Ongoing Operations’ results changed from net income of $1.2 billion for the nine months ended September 30, 2007 to a net loss of $108 for the nine months ended September 30, 2008. Before income taxes, Ongoing Operations’ results deteriorated by $1.9 billion, primarily due to a $1.4 billion increase in net realized capital losses on investments and, to a lesser extent, a $434 increase in current accident year catastrophes and a $153 decrease in net investment income, partially offset by a $141 increase in net favorable prior accident year reserve development. The increase in net realized capital losses of $1.4 billion in 2008 was primarily due to impairments of corporate debt and equity securities in the financial services sector. The $434 increase in current accident year catastrophes was largely due to losses incurred from hurricane Ike in September of 2008 and an increase in losses from tornadoes and thunderstorms in the South and Midwest. Contributing to the $153 decrease in net investment income was a decrease in investment yield for limited partnerships and other alternative investments and, to a lesser extent, a decrease in yield on fixed maturity investments. Net favorable reserve development for Ongoing Operations in 2008 was largely driven by releases of reserves for workers’ compensation and professional liability claims. |
• | Other Operations’ results changed from net income of $4 for the nine months ended September 30, 2007 to a net loss of $91 for the nine months ended September 30, 2008. Before income taxes, Other Operations’ results deteriorated by $144, primarily due to a $173 increase in net realized capital losses on investments, largely driven by impairments of corporate debt and equity securities in the financial services sector. Partially offsetting the increase in net realized capital losses was a $47 decrease in net unfavorable prior accident year reserve development. |
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As of and For the | As of and For the | |||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Product/Key Indicator Information | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Retail U.S. Individual Variable Annuities | ||||||||||||||||
Account value, beginning of period | $ | 105,345 | $ | 121,529 | $ | 119,071 | $ | 114,365 | ||||||||
Net flows | (1,540 | ) | (633 | ) | (4,357 | ) | (1,635 | ) | ||||||||
Change in market value and other | (11,555 | ) | 2,155 | (22,464 | ) | 10,321 | ||||||||||
Account value, end of period | $ | 92,250 | $ | 123,051 | $ | 92,250 | $ | 123,051 | ||||||||
Retail Mutual Funds | ||||||||||||||||
Assets under management, beginning of period | $ | 47,239 | $ | 45,644 | $ | 48,383 | $ | 38,536 | ||||||||
Net sales | 816 | 651 | 3,838 | 4,285 | ||||||||||||
Change in market value and other | (7,152 | ) | 1,490 | (11,318 | ) | 4,964 | ||||||||||
Assets under management, end of period | $ | 40,903 | $ | 47,785 | $ | 40,903 | $ | 47,785 | ||||||||
Individual Life Insurance | ||||||||||||||||
Variable universal life account value, end of period | $ | 5,848 | $ | 7,402 | $ | 5,848 | $ | 7,402 | ||||||||
Total life insurance in-force | $ | 191,361 | $ | 175,723 | $ | 191,361 | $ | 175,723 | ||||||||
Retirement Plans Group Annuities | ||||||||||||||||
Account value, beginning of period | $ | 27,029 | $ | 26,255 | $ | 27,094 | $ | 23,575 | ||||||||
Net flows | 587 | 370 | 2,098 | 1,447 | ||||||||||||
Change in market value and other | (2,448 | ) | 546 | (4,024 | ) | 2,149 | ||||||||||
Account value, end of period | $ | 25,168 | $ | 27,171 | $ | 25,168 | $ | 27,171 | ||||||||
Retirement Plans Mutual Funds | ||||||||||||||||
Assets under management, beginning of period | $ | 19,854 | $ | 1,329 | $ | 1,454 | $ | 1,140 | ||||||||
Net sales | 39 | 18 | (69 | ) | 71 | |||||||||||
Acquisitions | — | — | 18,725 | — | ||||||||||||
Change in market value and other | (1,767 | ) | 62 | (1,984 | ) | 198 | ||||||||||
Assets under management, end of period | $ | 18,126 | $ | 1,409 | $ | 18,126 | $ | 1,409 | ||||||||
Japan Annuities | ||||||||||||||||
Account value, beginning of period | $ | 38,122 | $ | 33,708 | $ | 37,637 | $ | 31,343 | ||||||||
Net flows | 579 | 1,398 | 1,839 | 3,874 | ||||||||||||
Change in market value and other | (3,499 | ) | (900 | ) | (6,241 | ) | 192 | |||||||||
Effect of currency translation | (80 | ) | 2,467 | 1,887 | 1,264 | |||||||||||
Account value, end of period | $ | 35,122 | $ | 36,673 | $ | 35,122 | $ | 36,673 | ||||||||
S&P 500 Index | ||||||||||||||||
Period end closing value | 1,165 | 1,527 | 1,165 | 1,527 | ||||||||||||
Daily average value | 1,252 | 1,489 | 1,324 | 1,471 | ||||||||||||
• | Retail U.S. individual variable annuity recorded increased negative net flows as a result of increased competition and equity market volatility. | |
• | Retail Mutual funds has seen positive net sales as a result of diversified sales growth. | |
• | Individual Life in-force growth has occurred across multiple product lines, including variable universal life, guaranteed universal life and term. | |
• | Retirement Plans group annuities has seen positive net flows driven by strong sales. | |
• | Retirement Plans mutual funds reflects an increase of $18.7 billion in Retirement Plans mutual funds from the acquisition of servicing rights of Sun Life Retirement Services, Inc and Princeton Retirement Group, both of which closed in the first quarter of 2008. Net sales for the nine months ended September 30, 2008 reflect expected outflows on the acquired business. | |
• | International — Japan Annuities has seen positive net flows and favorable effects from currency exchange rates for the nine months ended September 30, 2008. Net flows for the three and nine months ended have decreased in Japan annuities due to increased competition in Japan, particularly competition relating to products offered with living benefit guarantees. |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Retail — Individual Annuity | 73bps | 169bps | 169bps | 266bps | ||||||||||||
Individual Life | 86bps | 137bps | 116bps | 131bps | ||||||||||||
Retirement Plans | 106bps | 161bps | 127bps | 166bps | ||||||||||||
Institutional (GIC’s, Funding Agreements, Funding Agreement Backed Notes and Consumer Notes) | 20bps | 113bps | 63bps | 100bps |
• | Retail individual annuity, Retirement Plans and Institutional net investment spreads decreased primarily due to lower yields on limited partnerships and alternative investment income. Retail individual annuity and Retirement Plans declines also are impacted by decreases in interest rates. | |
• | Individual Life net investment spread decreased primarily due to lower yields on fixed maturities and declines on limited partnership and other alternative investment income, partially offset by reduced credited rates. |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Group Benefits | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Total premiums and other considerations | $ | 1,109 | $ | 1,061 | $ | 3,283 | $ | 3,237 | ||||||||
Fully insured ongoing sales (excluding buyouts) | $ | 158 | $ | 125 | $ | 674 | $ | 630 |
• | Total premiums and other considerations include $0 and $26, in buyout premiums for the three and nine months ended September 30, 2007, respectively, and $1 of buyout premiums for the three and nine months ended September 30, 2008. Total premiums and other considerations, excluding buyouts, increased for the three and nine months ended September 30, 2008 as increases in sales and persistency were offset by lower premiums in the medical stop loss business as a result of the renewal rights transaction that closed during the second quarter of 2007. |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Retail | ||||||||||||||||
General insurance expense ratio (individual annuity) | 20.5 | bps | 16.6 | bps | 19.5 | bps | 17.2 | bps | ||||||||
DAC amortization ratio (individual annuity) [1] | 555.9 | % | (26.0 | %) | 154.6 | % | 21.4 | % | ||||||||
DAC amortization ratio (individual annuity) excluding DAC Unlock [1], [3] | 42.3 | % | 47.0 | % | 42.8 | % | 46.3 | % | ||||||||
Insurance expenses, net of deferrals | $ | 294 | $ | 305 | $ | 933 | $ | 889 | ||||||||
Individual Life | ||||||||||||||||
Death benefits | $ | 86 | $ | 78 | $ | 265 | $ | 222 | ||||||||
Insurance expenses, net of deferrals | 49 | 44 | 147 | 141 | ||||||||||||
Group Benefits | ||||||||||||||||
Total benefits, losses and loss adjustment expenses | $ | 780 | $ | 765 | $ | 2,379 | $ | 2,364 | ||||||||
Loss ratio (excluding buyout premiums) | 70.3 | % | 72.1 | % | 72.5 | % | 72.8 | % | ||||||||
Insurance expenses, net of deferrals | $ | 283 | $ | 273 | $ | 838 | $ | 836 | ||||||||
Expense ratio (excluding buyout premiums) | 26.9 | % | 27.0 | % | 26.8 | % | 27.5 | % | ||||||||
International — Japan | ||||||||||||||||
General insurance expense ratio | 47.0 | bps | 52.3 | bps | 47.3 | bps | 45.9 | bps | ||||||||
DAC amortization ratio [2] | 605.6 | % | 20.0 | % | 68.2 | % | 31.2 | % | ||||||||
DAC amortization ratio excluding DAC Unlock [2], [3] | 40.6 | % | 36.6 | % | 40.3 | % | 37.2 | % | ||||||||
Insurance expenses, net of deferrals | $ | 60 | $ | 51 | $ | 171 | $ | 137 | ||||||||
[1] | Excludes the effects of realized gains and losses. | |
[2] | Excludes the effects of realized gains and losses except for net periodic settlements. Included in the net realized capital gain (losses) are amounts that represent the net periodic accruals on currency rate swaps used in the risk management of Japan fixed annuity products. | |
[3] | See Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
• | The Retail DAC amortization ratio (individual annuity), excluding the effects of the 2008 Unlock and realized losses, decreased for the three and nine months ended September 30, 2008, due to amortization rates declining as a result of the 2007 Unlock. | |
• | Retail insurance expenses, net of deferrals, increased during the nine months ended September 30, 2008 primarily due to increasing non-deferrable commissions on strong mutual fund deposits, while insurance expenses, net of deferrals decreased for the three months ended September 30, 2008 as trail commissions on declining individual annuity account values decreased. | |
• | Retail — individual annuity’s general insurance expense ratio has increased primarily due to individual annuity assets declining due to declining equity markets. | |
• | Individual Life death benefits increased, primarily due to a larger life insurance in-force for the three and nine months ended September 30, 2008 and unfavorable mortality for the nine months ended September 30, 2008. | |
• | Individual Life insurance expenses, net of deferrals increased in line with growth of in-force business. | |
• | Group Benefits loss ratio decreased due to favorable morbidity and favorable medical stop loss experience partially offset by unfavorable mortality. | |
• | Group Benefits expense ratio, excluding buyouts decreased for the nine months ended September 30, 2008 due primarily to lower commission expense. | |
• | International — Japan DAC amortization ratio, excluding DAC Unlock and certain realized gains or losses, increased due to actual gross profits being less than expected as a result of lower fees earned on declining assets resulting in negative true-ups and a higher DAC amortization rate. | |
• | International — Japan insurance expenses, net of deferrals increased due to growth and strategic investment in the Japan operation. |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Ratios | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Retail | ||||||||||||||||
Individual annuity return on assets (“ROA”) | (305.1 | )bps | 83.7 | bps | (88.2 | )bps | 58.8 | bps | ||||||||
Effect of net realized gains (losses), net of tax and DAC on ROA [1] | (99.5 | )bps | (21.2 | )bps | (65.1 | )bps | (14.2 | )bps | ||||||||
Effect of DAC Unlock on ROA [3] | (267.4 | )bps | 54.7 | bps | (84.0 | )bps | 18.6 | bps | ||||||||
ROA excluding realized gains (losses) and DAC Unlock | 61.8 | bps | 50.2 | bps | 60.9 | bps | 54.4 | bps | ||||||||
Individual Life | ||||||||||||||||
After-tax margin | (85.7 | )% | 20.6 | % | (7.9 | )% | 17.7 | % | ||||||||
Effect of net realized gains (losses), net of tax and DAC on after-tax margin [1] | (68.4 | )% | (1.3 | )% | (15.6 | )% | (0.2 | )% | ||||||||
Effect of DAC Unlock on after-tax margin [3] | (31.9 | )% | 5.7 | % | (6.5 | )% | 1.8 | % | ||||||||
After-tax margin excluding realized gains (losses) and DAC Unlock | 14.6 | % | 16.2 | % | 14.2 | % | 16.1 | % | ||||||||
Retirement Plans | ||||||||||||||||
Retirement Plans ROA | (141.9 | )bps | 5.7 | bps | (49.7 | )bps | 27.0 | bps | ||||||||
Effect of net realized gains (losses), net of tax and DAC on ROA [1] | (109.1 | )bps | (20.0 | )bps | (55.1 | )bps | (6.5 | )bps | ||||||||
Effect of DAC Unlock on ROA [3] | (43.4 | )bps | (12.8 | )bps | (18.1 | )bps | (4.5 | )bps | ||||||||
ROA excluding realized gains (losses) and DAC Unlock | 10.6 | bps | 38.5 | bps | 23.5 | bps | 38.0 | bps | ||||||||
Group Benefits | ||||||||||||||||
After-tax margin (excluding buyouts) | (23.9 | )% | 7.1 | % | (2.5 | )% | 6.6 | % | ||||||||
Effect of net realized gains (losses), net of tax on after-tax margin [1] | (32.2 | )% | (0.5 | )% | (9.6 | )% | (0.2 | )% | ||||||||
After-tax margin excluding realized gains (losses) | 8.3 | % | 7.6 | % | 7.1 | % | 6.8 | % | ||||||||
International — Japan | ||||||||||||||||
International — Japan ROA | (88.5 | )bps | 111.4 | bps | 0.7 | bps | 80.4 | bps | ||||||||
Effect of net realized gains (losses) excluding net periodic settlements, net of tax and DAC on ROA [1] [2] | (32.8 | )bps | 11.4 | bps | (29.7 | )bps | (3.2 | )bps | ||||||||
Effect of DAC Unlock on ROA [3] | (125.6 | )bps | 25.0 | bps | (42.2 | )bps | 8.7 | bps | ||||||||
ROA excluding realized gains (losses) and DAC Unlock | 69.9 | bps | 75.0 | bps | 72.6 | bps | 74.9 | bps | ||||||||
Institutional | ||||||||||||||||
Institutional ROA | (255.6 | )bps | 5.5 | bps | (118.5 | )bps | 14.4 | bps | ||||||||
Effect of net realized gains (losses), net of tax and DAC on ROA [1] | (255.6 | )bps | (19.9 | )bps | (129.2 | )bps | (10.6 | )bps | ||||||||
Effect of DAC Unlock on ROA [3] | — | 0.7 | bps | — | 0.3 | bps | ||||||||||
ROA excluding realized gains (losses) and DAC Unlock | — | 24.7 | bps | 10.7 | bps | 24.7 | bps | |||||||||
[1] | See “Realized Capital Gains and Losses by Segment” table within the Life Section of the MD&A. | |
[2] | Included in the net realized capital gain (losses) are amounts that represent the net periodic accruals on currency rate swaps used in the risk management of Japan fixed annuity products. | |
[3] | See Unlock and Sensitivity Analysis within the Critical Accounting Estimates section of the MD&A. |
• | The increase in Retail — individual annuity ROA, excluding realized gains (losses) and the effect of the DAC Unlock, was primarily due to declining DAC amortization in 2008, and a higher DRD benefit. | |
• | The decrease in Individual Life’s after-tax margin, excluding realized gains (losses) and the effect of the DAC Unlock, was primarily due to the implementation of a more efficient capital approach for our secondary guarantee universal life business which drove down assets supporting capital and the related net investment income earned on those assets, described further in Individual Life’s “Outlook” section of the MD&A, lower net investment income from limited partnership and other alternative investments and lower fees from equity market declines, partially offset by life insurance in-force growth, lower credited rates and higher surrender charges for the three months and nine months ended September 30, 2008, as well as unfavorable mortality for the nine months ended September 30, 2008. | |
• | The decrease in Retirement Plans ROA, excluding realized gains (losses) and the effect of the DAC Unlock, was primarily driven by an increase in assets under management due to the acquired rights to service $18.7 billion in mutual funds, comprised of $15.8 billion in mutual funds from Sun Life Retirement Services, Inc., and $2.9 billion in mutual funds from Princeton Retirement Group, both of which closed in the first quarter of 2008. The acquired blocks of assets produce a lower ROA as they are comprised of larger cases that tend to have institutional pricing. Also contributing to the decrease was lower yields on fixed maturity investments and a decline in limited partnership and other alternative investment income, higher service and technology costs and additional expenses associated with the acquisitions. Offsetting the decrease for the nine months ended September 30, 2008, were benefits associated with DRD provision to filed return adjustments and changes in estimates. |
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• | The Group Benefit increase in after-tax margin for the three months ended September 30, 2008 was primarily due to a favorable loss ratio. | |
• | International-Japan ROA, excluding realized gains (losses) and the effect of the DAC Unlock, declined due to lower earned fees as a result of declining account values, lower surrender fees due to a reduction in lapses and an increase in the DAC amortization rate due to lower actual gross profits. | |
• | The decrease in Institutional’s ROA, excluding realized gains (losses), is primarily due to a decrease in limited partnership and other alternative investment income. |
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Earned premiums | $ | 1,335 | $ | 1,434 | (7 | %) | $ | 3,869 | $ | 3,887 | — | |||||||||||||
Fee income | 1,329 | 1,394 | (5 | %) | 4,042 | 4,013 | 1 | % | ||||||||||||||||
Net investment income (loss) | ||||||||||||||||||||||||
Securities, available-for-sale and other | 759 | 883 | (14 | %) | 2,407 | 2,619 | (8 | %) | ||||||||||||||||
Equity securities, held for trading [1] | (3,415 | ) | (698 | ) | NM | (5,840 | ) | 746 | NM | |||||||||||||||
Total net investment income (loss) | (2,656 | ) | 185 | NM | (3,433 | ) | 3,365 | NM | ||||||||||||||||
Net realized capital losses | (2,012 | ) | (288 | ) | NM | (3,460 | ) | (486 | ) | NM | ||||||||||||||
Total revenues [2] | (2,004 | ) | 2,725 | NM | 1,018 | 10,779 | (91 | %) | ||||||||||||||||
Benefits, losses and loss adjustment expenses | 2,045 | 1,911 | 7 | % | 5,523 | 5,293 | 4 | % | ||||||||||||||||
Benefits, losses and loss adjustment expenses — returns credited on International variable annuities [1] | (3,415 | ) | (698 | ) | NM | (5,840 | ) | 746 | NM | |||||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 1,404 | (49 | ) | NM | 1,634 | 604 | 171 | % | ||||||||||||||||
Insurance operating costs and other expenses | 838 | 811 | 3 | % | 2,518 | 2,379 | 6 | % | ||||||||||||||||
Total benefits, losses and expenses | 872 | 1,975 | (56 | %) | 3,835 | 9,022 | (57 | %) | ||||||||||||||||
Income (loss) before income taxes | (2,876 | ) | 750 | NM | (2,817 | ) | 1,757 | NM | ||||||||||||||||
Income (loss) tax expense (benefit) | (1,061 | ) | 225 | NM | (1,181 | ) | 476 | NM | ||||||||||||||||
Net income (loss) [3] | $ | (1,815 | ) | $ | 525 | NM | $ | (1,636 | ) | $ | 1,281 | NM | ||||||||||||
[1] | Net investment income includes investment income and mark-to-market effects of equity securities, held for trading, supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders. | |
[2] | The transition impact related to the SFAS 157 adoption was a reduction in revenues of $650 for the nine months ended September 30, 2008. For further discussion of the SFAS 157 transition impact, refer to Note 4 in the Notes to the Condensed Consolidated Financial Statements | |
[3] | The transition impact related to the SFAS 157 adoption was a reduction in net income of $220 for the nine months ended September 30, 2008. For further discussion of the SFAS 157 transition impact, refer to Note 4 in the Notes to the Condensed Consolidated Financial Statements. |
• | Realized losses increased $1,724 as compared to the comparable prior year period primarily due to increased impairments and realized losses on credit default swaps in 2008. For further discussion, please refer to the Realized Capital Gains and Losses by Segment table under Life’s Operating Section of the MD&A. | |
• | Life recorded a DAC Unlock charge of $941, after-tax during, the third quarter of 2008 as compared to a DAC Unlock benefit of $210, after-tax, during the third quarter of 2007. See Critical Accounting Estimates within Managements Discussion and Analysis for a further discussion on the DAC Unlock. | |
• | Declines in assets under management in Retail, primarily due to equity market declines during 2008, drove fee income in that segment down $65 as compared to the third quarter of 2007. | |
• | Declines in net investment income on securities, available for sale and other of $124, due to a decrease in investment yield for fixed maturities and declines in limited partnership and other alternative investment income. |
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• | Realized losses increased as compared to the comparable prior year period primarily due to net losses from the adoption of SFAS 157 and impairments. For further discussion, please refer to the Realized Capital Gains and Losses by Segment table under Life’s Operating Section of the MD&A. | |
• | Life recorded a DAC Unlock charge of $941, after-tax, during the third quarter of 2008 as compared to a DAC Unlock benefit of $210, after-tax, during the third quarter of 2007. See Critical Accounting Estimates with Managements Discussion and Analysis for a further discussion on the DAC Unlock. | |
• | Declines in assets under management in Retail, primarily due to equity market declines during 2008, drove fee income in that segment down $70 as compared to the nine months ended September 30, 2007. | |
• | Declines in net investment income on securities, available-for-sale and other of $212, primarily due to a decrease in investment yield for fixed maturities and declines in limited partnership and other alternative investments income. | |
• | Death benefits in Individual Life increased $43 due to growth in in-force and unfavorable mortality. |
• | Increased fee income of $72 on asset growth in International businesses. | |
• | Benefits of $13 from provision to filed return adjustments and revisions to estimates of the separate account dividends received deduction and foreign tax credit. | |
• | A charge of $21 recorded in the second quarter of 2007 for regulatory matters. |
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Japanese | ||||||||||||||||||||||||||||||||
fixed | ||||||||||||||||||||||||||||||||
annuity | Periodic net | �� | Total gains/ | |||||||||||||||||||||||||||||
contract | coupon | GMWB | losses, net | |||||||||||||||||||||||||||||
Gains/losses | hedges, | settlements on | derivatives, | Other, | of tax and | |||||||||||||||||||||||||||
on sales, net | Impairments | net | credit derivatives | net | net | Total | DAC | |||||||||||||||||||||||||
Retail | $ | (16 | ) | $ | (329 | ) | $ | — | $ | (1 | ) | $ | (116 | ) | $ | (21 | ) | $ | (483 | ) | $ | (283 | ) | |||||||||
Individual Life | — | (175 | ) | — | — | — | 5 | (170 | ) | (111 | ) | |||||||||||||||||||||
Retirement Plans | (11 | ) | (174 | ) | — | (1 | ) | — | 5 | (181 | ) | (123 | ) | |||||||||||||||||||
Group Benefits | — | (428 | ) | — | (1 | ) | — | (12 | ) | (441 | ) | (287 | ) | |||||||||||||||||||
International | 1 | (84 | ) | 36 | (8 | ) | (17 | ) | 5 | (67 | ) | (36 | ) | |||||||||||||||||||
Institutional | (10 | ) | (498 | ) | — | — | — | (97 | ) | (605 | ) | (394 | ) | |||||||||||||||||||
Other | (9 | ) | (72 | ) | — | 3 | — | 13 | (65 | ) | (43 | ) | ||||||||||||||||||||
Total | $ | (45 | ) | $ | (1,760 | ) | $ | 36 | $ | (8 | ) | $ | (133 | ) | $ | (102 | ) | $ | (2,012 | ) | $ | (1,277 | ) | |||||||||
Japanese | ||||||||||||||||||||||||||||||||
fixed | Total | |||||||||||||||||||||||||||||||
annuity | Periodic net | gains/ | ||||||||||||||||||||||||||||||
contract | coupon | GMWB | losses, net | |||||||||||||||||||||||||||||
Gains/losses | hedges, | settlements on | derivatives, | Other, | of tax and | |||||||||||||||||||||||||||
on sales, net | Impairments | net | credit derivatives | net | net | Total | DAC | |||||||||||||||||||||||||
Retail | $ | (9 | ) | $ | (22 | ) | $ | — | $ | 1 | $ | (139 | ) | $ | (5 | ) | $ | (174 | ) | $ | (87 | ) | ||||||||||
Individual Life | (6 | ) | (4 | ) | — | — | — | (6 | ) | (16 | ) | (11 | ) | |||||||||||||||||||
Retirement Plans | (6 | ) | (6 | ) | — | — | — | (9 | ) | (21 | ) | (16 | ) | |||||||||||||||||||
Group Benefits | — | (3 | ) | — | — | — | (7 | ) | (10 | ) | (6 | ) | ||||||||||||||||||||
International | 1 | (3 | ) | 15 | (16 | ) | (2 | ) | 5 | — | 1 | |||||||||||||||||||||
Institutional | 2 | (36 | ) | — | 1 | — | (13 | ) | (46 | ) | (29 | ) | ||||||||||||||||||||
Other | (2 | ) | (1 | ) | — | 5 | — | (23 | ) | (21 | ) | (15 | ) | |||||||||||||||||||
Total | $ | (20 | ) | $ | (75 | ) | $ | 15 | $ | (9 | ) | $ | (141 | ) | $ | (58 | ) | $ | (288 | ) | $ | (163 | ) | |||||||||
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Japanese | ||||||||||||||||||||||||||||||||||||
fixed | Total | |||||||||||||||||||||||||||||||||||
annuity | Periodic net | gains/ | ||||||||||||||||||||||||||||||||||
contract | coupon | GMWB | SFAS 157 | losses, net | ||||||||||||||||||||||||||||||||
Gains/losses | hedges, | settlements on | derivatives, | Transition | Other, | of tax and | ||||||||||||||||||||||||||||||
on sales, net | Impairments | net | credit derivatives | net | Impact | net | Total | DAC | ||||||||||||||||||||||||||||
Retail | $ | (24 | ) | $ | (393 | ) | $ | — | $ | (3 | ) | $ | (241 | ) | $ | (616 | ) | $ | (34 | ) | $ | (1,311 | ) | $ | (576 | ) | ||||||||||
Individual Life | (13 | ) | (207 | ) | — | (1 | ) | — | — | (6 | ) | (227 | ) | (145 | ) | |||||||||||||||||||||
Retirement Plans | (25 | ) | (210 | ) | — | (2 | ) | — | — | 1 | (236 | ) | (149 | ) | ||||||||||||||||||||||
Group Benefits | (2 | ) | (468 | ) | — | (1 | ) | — | — | (43 | ) | (514 | ) | (334 | ) | |||||||||||||||||||||
International | (10 | ) | (106 | ) | 13 | (26 | ) | (15 | ) | (34 | ) | — | (178 | ) | (97 | ) | ||||||||||||||||||||
Institutional | (44 | ) | (649 | ) | — | 1 | — | — | (219 | ) | (911 | ) | (592 | ) | ||||||||||||||||||||||
Other | 2 | (82 | ) | — | 6 | — | — | (9 | ) | (83 | ) | (54 | ) | |||||||||||||||||||||||
Total | $ | (116 | ) | $ | (2,115 | ) | $ | 13 | $ | (26 | ) | $ | (256 | ) | $ | (650 | ) | $ | (310 | ) | $ | (3,460 | ) | $ | (1,947 | ) | ||||||||||
Japanese | ||||||||||||||||||||||||||||||||
fixed | Total | |||||||||||||||||||||||||||||||
annuity | Periodic net | gains/ | ||||||||||||||||||||||||||||||
contract | coupon | losses, net | ||||||||||||||||||||||||||||||
Gains/losses | hedges, | settlements on | GMWB | of tax | ||||||||||||||||||||||||||||
on sales, net | Impairments | net | credit derivatives | derivatives, net | Other, net | Total | and DAC | |||||||||||||||||||||||||
Retail | $ | (9 | ) | $ | (28 | ) | $ | — | $ | 1 | $ | (250 | ) | $ | (17 | ) | $ | (303 | ) | $ | (156 | ) | ||||||||||
Individual Life | 5 | (9 | ) | — | — | — | (6 | ) | (10 | ) | (7 | ) | ||||||||||||||||||||
Retirement Plans | (11 | ) | (7 | ) | — | — | — | (1 | ) | (19 | ) | (14 | ) | |||||||||||||||||||
Group Benefits | (1 | ) | (5 | ) | — | — | — | (8 | ) | (14 | ) | (9 | ) | |||||||||||||||||||
International | 1 | (3 | ) | 3 | (52 | ) | (2 | ) | (10 | ) | (63 | ) | (40 | ) | ||||||||||||||||||
Institutional | 7 | (56 | ) | — | 1 | — | (21 | ) | (69 | ) | (44 | ) | ||||||||||||||||||||
Other | 4 | (1 | ) | — | 16 | — | (27 | ) | (8 | ) | (8 | ) | ||||||||||||||||||||
Total | $ | (4 | ) | $ | (109 | ) | $ | 3 | $ | (34 | ) | $ | (252 | ) | $ | (90 | ) | $ | (486 | ) | $ | (278 | ) | |||||||||
Gross Gains and Losses on Sale | • Gross gains on sales for the three and nine months ended September 30, 2008 were predominantly within fixed maturities and were primarily comprised of corporate securities. Gross losses on sales for the three and nine months ended September 30, 2008 were primarily comprised of corporate securities, CMBS, and municipal securities, as well as $17 of CLOs in the first quarter for which HIMCO is the collateral manager. Gross gains and losses on sale, excluding the loss on CLOs, primarily resulted from the decision to reallocate the portfolio to securities with more favorable risk/return profiles. During the three and nine months ended September 30, 2008, securities sold at a loss were depressed, on average, approximately 7% and 2%, respectively, at the respective period’s impairment review date and were deemed to be temporarily impaired. | |
• Gross gains and losses on sales for three and nine months ended September 30, 2007 were primarily comprised of corporate securities. During the three and nine months ended September 30, 2007, securities sold at a loss were depressed, on average, approximately 2% and 1%, respectively, at the respective period’s impairment review date and were deemed to be temporarily impaired. |
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Impairments | • See the Other-Than-Temporary Impairments section for information on impairment losses. | |
SFAS 157 | • See Note 4 in the Notes to the Condensed Consolidated Financial Statements for a discussion of the SFAS 157 transition impact. | |
GMWB | • See Note 4 in the Notes to the Condensed Consolidated Financial Statements for a discussion of GMWB gains and losses. | |
Other | • Other, net losses for the three and nine months ended September 30, 2008 were primarily related to net losses on credit derivatives of $106 and $314, respectively. The net losses on credit derivatives were primarily due to significant credit spread widening on credit derivatives that assume credit exposure. Included in the nine months ended September 30, 2008 were losses incurred in the first quarter on HIMCO managed CLOs. Also included were derivative related losses of $39 for the three and nine months ended September 30, 2008 due to counterparty default related to the bankruptcy of Lehman Brothers Holdings Inc. | |
• Other, net losses for the three and nine months ended September 30, 2007 were primarily driven by the change in value of non-qualifying derivatives due to credit spread widening as well as fluctuations in interest rates and foreign currency exchange rates. |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Fee income and other | $ | 723 | $ | 788 | (8 | %) | $ | 2,229 | $ | 2,299 | (3 | %) | ||||||||||||
Earned premiums | 11 | (13 | ) | NM | (2 | ) | (48 | ) | 96 | % | ||||||||||||||
Net investment income | 184 | 205 | (10 | %) | 567 | 602 | (6 | %) | ||||||||||||||||
Net realized capital losses | (483 | ) | (174 | ) | (178 | %) | (1,311 | ) | (303 | ) | NM | |||||||||||||
Total revenues [1] | 435 | 806 | (46 | %) | 1,483 | 2,550 | (42 | %) | ||||||||||||||||
Benefits, losses and loss adjustment expenses | 351 | 210 | 67 | % | 741 | 609 | 22 | % | ||||||||||||||||
Insurance operating costs and other expenses | 294 | 305 | (4 | %) | 933 | 889 | 5 | % | ||||||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 1,118 | (126 | ) | NM | 1,130 | 262 | NM | |||||||||||||||||
Total benefits, losses and expenses | 1,763 | 389 | NM | 2,804 | 1,760 | 59 | % | |||||||||||||||||
Income (loss) before income taxes | (1,328 | ) | 417 | NM | (1,321 | ) | 790 | NM | ||||||||||||||||
Income tax expense (benefit) | (506 | ) | 123 | NM | (592 | ) | 174 | NM | ||||||||||||||||
Net income (loss) [2] | $ | (822 | ) | $ | 294 | NM | $ | (729 | ) | $ | 616 | NM | ||||||||||||
Assets Under Management | ||||||||||||||||||||||||
Individual variable annuity account values | $ | 92,250 | $ | 123,051 | (25 | %) | ||||||||||||||||||
Individual fixed annuity and other account values | 10,687 | 10,263 | 4 | % | ||||||||||||||||||||
Other retail products account values | 500 | 671 | (25 | %) | ||||||||||||||||||||
Total account values [3] | 103,437 | 133,985 | (23 | %) | ||||||||||||||||||||
Retail mutual fund assets under management | 40,903 | 47,785 | (14 | %) | ||||||||||||||||||||
Other mutual fund assets under management | 2,084 | 2,039 | 2 | % | ||||||||||||||||||||
Total mutual fund assets under management | 42,987 | 49,824 | (14 | %) | ||||||||||||||||||||
Total assets under management | $ | 146,424 | $ | 183,809 | (20 | %) | ||||||||||||||||||
[1] | For the nine months ended September 30, 2008, the transition impact related to the SFAS 157 adoption was a reduction in revenues of $616. For further discussion of the SFAS 157 transition impact, refer to Note 4 in the Notes to the Condensed Consolidated Financial Statements. | |
[2] | For the nine months ended September 30, 2008, the transition impact related to the SFAS 157 adoption was a reduction in net income of $209. For further discussion of the SFAS 157 transition impact, refer to Note 4 in the Notes to the Condensed Consolidated Financial Statements. | |
[3] | For the nine months ended September 30, 2008, includes policyholders’ balances for investment contracts and reserves for future policy benefits for insurance contracts. |
Fee income and other | • Fee income and other decreased for the three and nine months ended September 30, 2008 primarily as a result of lower variable annuity fee income of $94 and $151, respectively. Variable annuity fee income decreased for the three and nine months ended September 30, 2008 due to a decline in average variable annuity account values. The decrease in average variable annuity account values can be attributed to market depreciation of $25 billion and net outflows of $5 billion over the past four quarters. Net outflows were driven by surrender activity due to the aging of the variable annuity in-force block of business; increased sales competition, particularly competition related to guaranteed living benefits and volatility in the equity markets. | |
Earned Premiums | • Earned Premiums increased for the three and nine months ended September 30, 2008 primarily due to an increase in life contingent premiums combined with a decrease in reinsurance premiums as a result of significant decline in equity markets values. |
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Net investment income | • Net investment income was lower primarily due to decreased yields on limited partnership and other alternative investments, combined with lower yields on fixed maturity investments due to interest rate declines. | |
Benefits, losses and loss adjustment expenses | • Benefits, losses and loss adjustment expenses increased for the three and nine months ended September 30, 2008 primarily as a result of the impact of the 2008 Unlock of the GMDB reserve and sales inducement asset. | |
Insurance operating costs and other expenses | • Insurance operating costs and other expenses declined for the three months ended September 30, 2008, principally driven by lower trail commissions as a result of the significant market declines at the end of the third quarter. Insurance operating costs increased for the nine months ended September 30, 2008 primarily as a result of increased non-deferrable commissions on higher sales of retail mutual funds. | |
Amortization of deferred policy acquisition costs and present value of future profits (“DAC”) | • Amortization of DAC increased for the three and nine months ended September 30, 2008, primarily due to the impact of the 2008 Unlock charge as compared to the 2007 Unlock benefit, offset by DAC amortization benefits associated with increased realized capital losses. The nine months ended September 30, 2008 also includes a DAC benefit associated with the adoption of SFAS 157 at the beginning of the first quarter of 2008. | |
Income tax expense (benefit) | • For the nine months ended September 30, 2008, the income tax benefits are caused by the pre-tax losses driven by the factors previously discussed. Differences from tax rates of 35% are caused by the recognition of tax benefits associated with the dividends received deduction and foreign tax credits. |
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• | Variable annuity sales of $8 billion to $8.5 billion | |
• | Fixed annuity sales of $1.1 billion to $1.3 billion | |
• | Retail mutual fund sales of $14 billion to $14.8 billion | |
• | Variable annuity outflows of $6.2 billion to $6.9 billion | |
• | Fixed annuity flows of $(100) to $300 | |
• | Retail mutual fund net sales of $2 billion to $2.5 billion |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Fee income and other | $ | 220 | $ | 206 | 7 | % | $ | 675 | $ | 638 | 6 | % | ||||||||||||
Earned premiums | (15 | ) | (14 | ) | (7 | %) | (52 | ) | (42 | ) | (24 | %) | ||||||||||||
Net investment income | 84 | 91 | (8 | %) | 264 | 267 | (1 | %) | ||||||||||||||||
Net realized capital losses | (170 | ) | (16 | ) | NM | (227 | ) | (10 | ) | NM | ||||||||||||||
Total revenues | 119 | 267 | (55 | %) | 660 | 853 | (23 | %) | ||||||||||||||||
Benefits, losses and loss adjustment expenses | 159 | 143 | 11 | % | 466 | 415 | 12 | % | ||||||||||||||||
Insurance operating costs and other expenses | 49 | 44 | 11 | % | 147 | 141 | 4 | % | ||||||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 73 | (1 | ) | NM | 142 | 78 | 82 | % | ||||||||||||||||
Total benefits, losses and expenses | 281 | 186 | 51 | % | 755 | 634 | 19 | % | ||||||||||||||||
Income (loss) before income taxes | (162 | ) | 81 | NM | (95 | ) | 219 | NM | ||||||||||||||||
Income tax expense (benefit) | (60 | ) | 26 | NM | (43 | ) | 68 | NM | ||||||||||||||||
Net income (loss) | $ | (102 | ) | $ | 55 | NM | $ | (52 | ) | $ | 151 | NM | ||||||||||||
Account Values | ||||||||||||||||||||||||
Variable universal life insurance | $ | 5,848 | $ | 7,402 | (21 | %) | ||||||||||||||||||
Universal life/interest sensitive whole life | 4,663 | 4,285 | 9 | % | ||||||||||||||||||||
Modified guaranteed life and other | 660 | 683 | (3 | %) | ||||||||||||||||||||
Total account values | $ | 11,171 | $ | 12,370 | (10 | %) | ||||||||||||||||||
Life Insurance In-force | ||||||||||||||||||||||||
Variable universal life insurance | $ | 78,809 | $ | 76,498 | 3 | % | ||||||||||||||||||
Universal life/interest sensitive whole life | 51,355 | 47,581 | 8 | % | ||||||||||||||||||||
Term Life | 60,261 | 50,641 | 19 | % | ||||||||||||||||||||
Modified guaranteed life and other | 936 | 1,003 | (7 | %) | ||||||||||||||||||||
Total life insurance in-force | $ | 191,361 | $ | 175,723 | 9 | % | ||||||||||||||||||
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Fee income and other | • Fee income and other increased for the three and nine months ended September 30, 2008 primarily due to growth in variable universal and universal life insurance in-force and fees on higher surrenders of $9 and $14, respectively, partially offset by impacts of the Unlock in the third quarter of 2008 compared to 2007 as well as equity market declines. | |
Earned premiums | • Earned premiums, which include premiums for ceded reinsurance, decreased primarily due to increased ceded reinsurance premiums due to life insurance in-force growth. | |
Net investment income | • Net investment income decreased due to lower investment yields driven primarily by lower yields on fixed maturity investments, lower income from limited partnership and other alternative investments and reduced net investment income associated with the capital approach for our secondary guarantee universal life business, described further in the “Outlook” section below, partially offset by growth in general account values. | |
Benefits, losses and loss adjustment expenses | • Benefits, losses and loss adjustment expenses increased for the three and nine months ended September 30, 2008 as a result of increased death benefits consistent with a larger life insurance in-force and the impacts of the Unlock in the third quarter of 2008 along with unfavorable mortality volatility for the nine months ended September 30, 2008. | |
Insurance operating costs and other expenses | • Insurance operating costs and other increased for the three and nine months ended September 30, 2008 in line with growth of in-force business. | |
Amortization of deferred policy acquisition costs and present value of future profits (“DAC”) | • Amortization of DAC increased primarily as a result of the Unlock in the third quarter of 2008 compared to 2007, partially offset by reduced DAC amortization primarily attributed to net realized capital losses. This increase had a partial offset in amortization of deferred revenues, included in fee income. | |
Income tax expense (benefit) | • For the three and nine months ended September 30, 2008, the income tax benefits were a result of lower income before income taxes primarily due to an increase in realized capital losses and DAC amortization in the third quarter of 2008 as compared to the third quarter of 2007. |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Fee income and other | $ | 94 | $ | 62 | 52 | % | $ | 259 | $ | 175 | 48 | % | ||||||||||||
Earned premiums | 1 | — | — | 3 | 3 | — | ||||||||||||||||||
Net investment income | 87 | 89 | (2 | %) | 267 | 267 | — | |||||||||||||||||
Net realized capital losses | (181 | ) | (21 | ) | NM | (236 | ) | (19 | ) | NM | ||||||||||||||
Total revenues | 1 | 130 | (99 | %) | 293 | 426 | (31 | %) | ||||||||||||||||
Benefits, losses and loss adjustment expenses | 69 | 62 | 11 | % | 200 | 186 | 8 | % | ||||||||||||||||
Insurance operating costs and other expenses | 95 | 40 | 138 | % | 248 | 125 | 98 | % | ||||||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 94 | 26 | NM | 93 | 44 | 111 | % | |||||||||||||||||
Total benefits, losses and expenses | 258 | 128 | 102 | % | 541 | 355 | 52 | % | ||||||||||||||||
Income (loss) before income taxes | (257 | ) | 2 | NM | (248 | ) | 71 | NM | ||||||||||||||||
Income tax expense (benefit) | (97 | ) | (2 | ) | NM | (114 | ) | 17 | NM | |||||||||||||||
Net income (loss) | $ | (160 | ) | $ | 4 | NM | $ | (134 | ) | $ | 54 | NM | ||||||||||||
Assets Under Management | ||||||||||||||||||||||||
403(b)/457 account values | $ | 11,432 | $ | 12,486 | (8 | %) | ||||||||||||||||||
401(k) account values | 13,736 | 14,685 | (6 | %) | ||||||||||||||||||||
Total account values [1] | 25,168 | 27,171 | (7 | %) | ||||||||||||||||||||
403(b)/457 mutual fund assets under management [2] | 104 | 20 | NM | |||||||||||||||||||||
401(k) mutual fund assets under management [3] | 18,022 | 1,389 | NM | |||||||||||||||||||||
Total mutual fund assets under management | 18,126 | 1,409 | NM | |||||||||||||||||||||
Total assets under management | $ | 43,294 | $ | 28,580 | 51 | % | ||||||||||||||||||
Total assets under administration — 401(k) [4] | $ | 5,853 | $ | — | — | |||||||||||||||||||
[1] | Includes policyholder balances for investment contracts and reserves for future policy benefits for insurance contracts. | |
[2] | In 2007, Life began selling mutual fund based products in the 403(b) market. | |
[3] | During the nine months ended September 30, 2008, Life acquired the rights to service $18.7 billion in mutual funds from Sun Life Retirement Services, Inc., and Princeton Retirement Group. | |
[4] | During the nine months ended September 30, 2008, Life acquired the rights to service $5.7 billion of assets under administration (“AUA”) from Princeton Retirement Group. Servicing revenues from AUA are based on the number of plan participants and do not vary directly with asset levels. As such, they are not included in AUM upon which asset based returns are calculated. |
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Fee income and other | • For the three and nine months ended September 30, 2008, fee income and other increased primarily due to $35 and $79, respectively, of fees earned on assets relating to the acquisitions in the first quarter of 2008. Offsetting this increase was lower annuity fees driven by lower average account values as market depreciation of $4.3 billion was partially offset by positive net flows of $2.3 billion over the past four quarters. | |
Net investment income | • Net investment income remained relatively consistent, for the three and nine months ended September 30, 2008, with growth in general account assets offset by a decrease in yields on fixed maturity investments and a decrease in limited partnership and other alternative investment income, particularly during the three months ended September 30, 2008. | |
Insurance operating costs and other expenses | • Insurance operating costs and other expenses increased for the three and nine months ended September 30, 2008, primarily attributable to operating expenses associated with the acquired businesses. Also contributing to higher insurance operating costs were higher trail commissions resulting from an aging portfolio and higher service and technology costs. | |
Amortization of deferred policy acquisition costs and present value of future profits | • Amortization of deferred policy acquisition costs and present value of future profits increased for the three and nine months ended September 30, 2008 as a result of the higher Unlock in the third quarter of 2008 as compared to the Unlock in the third quarter of 2007, partially offset by DAC amortization benefits associated with increased realized capital losses. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. | |
Income tax expense (benefit) | • For the three and nine months ended September 30, 2008 the income tax benefit as compared to the prior year periods income tax balances was due to lower income before income taxes primarily due to increased realized capital losses and increased tax benefits associated with the dividends received deduction. |
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• | Deposits of $8.9 billion to $9.3 billion | |
• | Net flows of $2.25 billion to $2.75 billion |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Premiums and other considerations | $ | 1,109 | $ | 1,061 | 5 | % | $ | 3,283 | $ | 3,237 | 1 | % | ||||||||||||
Net investment income | 111 | 115 | (3 | %) | 330 | 350 | (6 | %) | ||||||||||||||||
Net realized capital losses | (441 | ) | (10 | ) | NM | (514 | ) | (14 | ) | NM | ||||||||||||||
Total revenues | 779 | 1,166 | (33 | %) | 3,099 | 3,573 | (13 | %) | ||||||||||||||||
Benefits, losses and loss adjustment expenses | 780 | 765 | 2 | % | 2,379 | 2,364 | 1 | % | ||||||||||||||||
Insurance operating costs and other expenses | 283 | 273 | 4 | % | 838 | 836 | — | |||||||||||||||||
Amortization of deferred policy acquisition costs | 15 | 13 | 15 | % | 42 | 48 | (13 | %) | ||||||||||||||||
Total benefits, losses and expenses | 1,078 | 1,051 | 3 | % | 3,259 | 3,248 | — | |||||||||||||||||
Income (loss) before income taxes | (299 | ) | 115 | NM | (160 | ) | 325 | NM | ||||||||||||||||
Income tax expense (benefit) | (113 | ) | 32 | NM | (82 | ) | 90 | NM | ||||||||||||||||
Net income (loss) | $ | (186 | ) | $ | 83 | NM | $ | (78 | ) | $ | 235 | NM | ||||||||||||
Earned Premiums and Other | ||||||||||||||||||||||||
Fully insured — ongoing premiums | $ | 1,099 | $ | 1,053 | 4 | % | $ | 3,255 | $ | 3,186 | 2 | % | ||||||||||||
Buyout premiums | 1 | — | — | 1 | 26 | (96 | %) | |||||||||||||||||
Other | 9 | 8 | 13 | % | 27 | 25 | 8 | % | ||||||||||||||||
Total earned premiums and other | $ | 1,109 | $ | 1,061 | 5 | % | $ | 3,283 | $ | 3,237 | 1 | % | ||||||||||||
Ratios, excluding buyouts | ||||||||||||||||||||||||
Loss ratio | 70.3 | % | 72.1 | % | 72.5 | % | 72.8 | % | ||||||||||||||||
Loss ratio, excluding financial institutions | 74.8 | % | 76.6 | % | 77.1 | % | 78.1 | % | ||||||||||||||||
Expense ratio | 26.9 | % | 27.0 | % | 26.8 | % | 27.5 | % | ||||||||||||||||
Expense ratio, excluding financial institutions | 22.1 | % | 22.6 | % | 22.3 | % | 22.6 | % |
Net investment income | • For the three and nine months ended September 30, 2008, net investment income decreased primarily as a result of lower yields on fixed maturity investments and lower limited partnership and other alternative investment returns. | |
Loss ratio | • The segment’s loss ratio (defined as benefits, losses and loss adjustment expenses as a percentage of premiums and other considerations excluding buyouts) for the three and nine months ended September 30, 2008, decreased due to favorable morbidity and favorable medical stop loss experience partially offset by unfavorable mortality. | |
Expense ratio | • The segment’s expense ratio, excluding buyouts, for the nine months ended September 30, 2008, decreased compared to the prior year due to lower commission expenses. |
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• | Fully insured ongoing premiums (excluding buyout premiums and premium equivalents) of $4.3 billion to $4.4 billion | |
• | Loss ratio (excluding buyout premiums) between 71% and 74% | |
• | Expense ratio (excluding buyout premiums) between 26% and 28% |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Fee income | $ | 225 | $ | 216 | 4 | % | $ | 684 | $ | 612 | 12 | % | ||||||||||||
Earned premiums | (2 | ) | (3 | ) | 33 | % | (7 | ) | (8 | ) | 13 | % | ||||||||||||
Net investment income | 34 | 34 | — | 104 | 102 | 2 | % | |||||||||||||||||
Net realized capital losses | (67 | ) | — | — | (178 | ) | (63 | ) | (183 | %) | ||||||||||||||
Total revenues [1] | 190 | 247 | (23 | %) | 603 | 643 | (6 | %) | ||||||||||||||||
Benefits, losses and loss adjustment expenses | 157 | 1 | NM | 188 | 18 | NM | ||||||||||||||||||
Insurance operating costs and other expenses | 84 | 69 | 22 | % | 234 | 179 | 31 | % | ||||||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 99 | 36 | 175 | % | 211 | 153 | 38 | % | ||||||||||||||||
Total benefits, losses and expenses | 340 | 106 | NM | 633 | 350 | 81 | % | |||||||||||||||||
Income (loss) before income taxes | (150 | ) | 141 | NM | (30 | ) | 293 | NM | ||||||||||||||||
Income tax expense (benefit) | (43 | ) | 51 | NM | (3 | ) | 108 | NM | ||||||||||||||||
Net income (loss) [2] | $ | (107 | ) | $ | 90 | NM | $ | (27 | ) | $ | 185 | NM | ||||||||||||
Assets Under Management — Japan | ||||||||||||||||||||||||
Japan variable annuity account values | $ | 32,706 | $ | 34,888 | (6 | %) | ||||||||||||||||||
Japan MVA fixed annuity account values | 2,416 | 1,785 | 35 | % | ||||||||||||||||||||
Total assets under management — Japan | $ | 35,122 | $ | 36,673 | (4 | %) | ||||||||||||||||||
[1] | The transition impact related to the SFAS 157 adoption was a reduction in revenues of $34 during the nine months ended September 30, 2008. For further discussion of the SFAS 157 transition impact, refer to Note 4 in the Notes to the Condensed Consolidated Financial Statements. | |
[2] | The transition impact related to the SFAS 157 adoption was a reduction in net income of $11 during the nine months ended September 30, 2008. For further discussion of the SFAS 157 transition impact, refer to Note 4 in the Notes to the Condensed Consolidated Financial Statements. |
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Fee income | • Fee income increased for the three and nine months ended September 30, 2008, primarily due to growth in Japan’s variable annuity average assets under management offset by lower fees on lower surrenders. The increase in average assets under management over the past four quarters was driven by positive net flows of $2.0 billion and a $2.9 billion increase due to foreign currency exchange translation as the yen strengthened compared to the U.S. dollar. Positive net flows and favorable foreign currency exchange were offset by unfavorable market performance of $7.0 billion. | |
Benefits, losses and loss adjustment expenses | • Benefits, losses and loss adjustment expense increased for the three and nine months ended September 30, 2008, as a result of the impacts of the Unlock in the third quarter of 2008 as compared to the third quarter of 2007, as well as higher GMDB net amount at risk and increased claims costs resulting from declining markets between customers’ date of death and date of payment. | |
Insurance operating costs and other expenses | • Insurance operating costs and other expenses increased for the three and nine months ended September 30, 2008 due to the growth and strategic investment in the Japan and Other International operations. | |
Amortization of deferred policy acquisition costs and present value of future profits | • Amortization of deferred policy acquisition costs and present value of future profits increased for the three and nine months ended September 30, 2008 as a result of the impacts of the Unlock in the third quarter of 2008 as compared to the third quarter of 2007. | |
Income Tax expense | • Income tax expense decreased for the three and nine months ended September 30, 2008 primarily as a result of a decline in income before taxes. |
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• | Variable annuity deposits of ¥310 billion to ¥350 billion ($2.9 billion to $3.3 billion) | |
• | Variable annuity outflows of ¥210 billion to ¥110 billion ($2.1 billion to $1.1 billion) [1] |
[1] | Variable annuity net flows projection includes approximately ¥300 billion ($3.0 billion) of outflows due to the 3 Win trigger. |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Fee income and other | $ | 40 | $ | 97 | (59 | %) | $ | 119 | $ | 211 | (44 | %) | ||||||||||||
Earned premiums | 241 | 411 | (41 | %) | 671 | 770 | (13 | %) | ||||||||||||||||
Net investment income | 240 | 320 | (25 | %) | 813 | 919 | (12 | %) | ||||||||||||||||
Net realized capital losses | (605 | ) | (46 | ) | NM | (911 | ) | (69 | ) | NM | ||||||||||||||
Total revenues | (84 | ) | 782 | NM | 692 | 1,831 | (62 | %) | ||||||||||||||||
Benefits, losses and loss adjustment expenses | 485 | 692 | (30 | %) | 1,431 | 1,583 | (10 | %) | ||||||||||||||||
Insurance operating costs and other expenses | 35 | 81 | (57 | %) | 93 | 149 | (38 | %) | ||||||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 5 | 2 | 150 | % | 16 | 19 | (16 | %) | ||||||||||||||||
Total benefits, losses and expenses | 525 | 775 | (32 | %) | 1,540 | 1,751 | (12 | %) | ||||||||||||||||
Income (loss) before income taxes | (609 | ) | 7 | NM | (848 | ) | 80 | NM | ||||||||||||||||
Income tax expense (benefit) | (216 | ) | (1 | ) | NM | (305 | ) | 20 | NM | |||||||||||||||
Net income (loss) | $ | (393 | ) | $ | 8 | NM | $ | (543 | ) | $ | 60 | NM | ||||||||||||
Assets Under Management | ||||||||||||||||||||||||
Institutional account values [1] | $ | 24,496 | $ | 25,041 | (2 | %) | ||||||||||||||||||
Bank Owned Life Insurance account values [1] | 32,866 | 32,041 | 3 | % | ||||||||||||||||||||
Mutual fund assets under management | 3,325 | 3,398 | (2 | %) | ||||||||||||||||||||
Total assets under management | $ | 60,687 | $ | 60,480 | — | |||||||||||||||||||
Fee income and other | • Fee income and other decreased for the three and nine months ended September 30, 2008, primarily due to large Private Placement Life Insurance (“PPLI”) cases sold during the three and nine months ended September 30, 2007. PPLI collects front-end loads recorded in fee income, offset by corresponding premium taxes reported in insurance operating costs and other expenses. For the three months ended September 30, 2008 and 2007, PPLI had deposits of $33 and $2.6 billion, respectively, which resulted in fee income due to front-end loads of $1 and $55, respectively. For the nine months ended September 30, 2008 and 2007, PPLI had deposits of $189 and $4.8 billion, respectively, which resulted in fee income due to front-end loads of $2 and $100, respectively. | |
Earned premiums | • For the three and nine months ended September 30, 2008, earned premiums decreased as compared to the comparable prior year periods due to one large terminal funding life contingent case sold in the third quarter of 2007. The decrease in earned premiums was offset by a corresponding decrease in benefits, losses, and loss adjustment expenses. | |
Net investment income | • Net investment income decreased for the three and nine months ended September 30, 2008, due to decreased returns on limited partnership and other alternative investments, as well as lower income yields on fixed maturity investments. For the three and nine months ended September 30, 2008, limited partnership and other alternative investment losses were ($24) and ($15), respectively. For the comparable three and nine month periods in 2007, limited partnership and other alternative investment income was $13 and $42, respectively. The decline in yield on fixed maturities was largely offset by a corresponding decrease in interest credited on liabilities reported in benefits, losses, and loss adjustment expenses. |
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Benefits, losses and loss adjustment expenses | • Benefits, losses and loss adjustment expenses decreased for the three and nine months ended September 30, 2008 as compared to the comparable prior year periods primarily due to lower changes in reserve, driven by one large terminal funding life contingent case sold in the third quarter of 2007. The decrease was also caused by lower interest credited on liabilities indexed to LIBOR. | |
Insurance operating costs and other expenses | • Insurance operating costs and other expenses decreased for the three and nine months ended September 30, 2008, due to a decline in PPLI premium tax, driven by reduced PPLI deposits. | |
Income tax expense (benefit) | • The income tax benefit for the three and nine month periods ended September 30, 2008 increased compared to the prior year primarily due to a decline in income before taxes primarily due to increased realized capital losses. For further discussion of net realized capital losses, see Realized Capital Gains and Losses by Segment table under the Operating section of the MD&A. |
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• | Deposits (including mutual funds) of $4.5 billion to $5.5 billion | |
• | Net flows (including mutual funds) of ($500) to $500 |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Fee income and other | $ | 17 | $ | 17 | — | $ | 49 | $ | 53 | (8 | %) | |||||||||||||
Net investment income (loss) | ||||||||||||||||||||||||
Securities available-for sale and other | 19 | 29 | (34 | %) | 62 | 112 | (45 | %) | ||||||||||||||||
Equity securities, held for trading [1] | (3,415 | ) | (698 | ) | NM | (5,840 | ) | 746 | NM | |||||||||||||||
Total net investment income (loss) | (3,396 | ) | (669 | ) | NM | (5,778 | ) | 858 | NM | |||||||||||||||
Net realized capital losses | (65 | ) | (21 | ) | NM | (83 | ) | (8 | ) | NM | ||||||||||||||
Total revenues | (3,444 | ) | (673 | ) | NM | (5,812 | ) | 903 | NM | |||||||||||||||
Benefits, losses and loss adjustment expenses | 44 | 38 | 16 | % | 118 | 118 | — | |||||||||||||||||
Benefits, losses and loss adjustment expenses — returns credited on International variable annuities [1] | (3,415 | ) | (698 | ) | NM | (5,840 | ) | 746 | NM | |||||||||||||||
Insurance operating costs and other expenses | (2 | ) | — | — | 25 | 60 | (58 | %) | ||||||||||||||||
Total benefits, losses and expenses | (3,373 | ) | (660 | ) | NM | (5,697 | ) | 924 | NM | |||||||||||||||
Loss before income taxes | (71 | ) | (13 | ) | NM | (115 | ) | (21 | ) | NM | ||||||||||||||
Income tax benefit | (26 | ) | (4 | ) | NM | (42 | ) | (1 | ) | NM | ||||||||||||||
Net loss | $ | (45 | ) | $ | (9 | ) | NM | �� | $ | (73 | ) | $ | (20 | ) | NM | |||||||||
[1] | Includes investment income and mark-to-market effects of equity securities held for trading supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders. |
Net investment income | • Net investment income on securities available-for-sale declined primarily due to decreases in yields on fixed maturity investments and declines in limited partnerships and other alternative investment income. | |
Realized capital gains (losses) | • See Realized Capital Gains and Losses by Segment table under Life’s Operating section of the MD&A. | |
Insurance operating costs and other expenses | • Insurance operating costs and other expenses decreased for the nine months ended September 30, 2008 as compared to the prior year period, primarily due to a charge of $21 for regulatory matters in the second quarter of 2007 and for the three and nine months ended September 30, 2008 due to a reallocation of expenses to the applicable lines of business in 2008. |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Premium revenue | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Written Premiums [1] | ||||||||||||||||
Personal Lines | $ | 1,024 | $ | 1,035 | $ | 2,989 | $ | 3,013 | ||||||||
Small Commercial | 652 | 664 | 2,074 | 2,098 | ||||||||||||
Middle Market | 555 | 573 | 1,616 | 1,666 | ||||||||||||
Specialty Commercial | 361 | 356 | 1,080 | 1,147 | ||||||||||||
Other Operations | 1 | 2 | 5 | 3 | ||||||||||||
Total | $ | 2,593 | $ | 2,630 | $ | 7,764 | $ | 7,927 | ||||||||
Earned Premiums [1] | ||||||||||||||||
Personal Lines | $ | 978 | $ | 984 | $ | 2,941 | $ | 2,904 | ||||||||
Small Commercial | 678 | 683 | 2,048 | 2,048 | ||||||||||||
Middle Market | 553 | 582 | 1,688 | 1,779 | ||||||||||||
Specialty Commercial | 358 | 377 | 1,087 | 1,139 | ||||||||||||
Other Operations | 1 | 2 | 4 | 3 | ||||||||||||
Total | $ | 2,568 | $ | 2,628 | $ | 7,768 | $ | 7,873 | ||||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
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Personal Lines | • Earned premium decreased slightly, by $6, as a $21, or 7%, decrease in Agency and Other earned premiums was largely offset by a $15, or 2%, increase in AARP earned premiums. AARP earned premiums grew primarily due to an increase in the size of the AARP target market, the effect of direct marketing programs and the effect of cross selling homeowners insurance to insureds who have auto policies. Agency earned premium decreased $17, or 6%, largely due to a decline in new business premium and premium renewal retention since the middle of 2007, partially offset by the effect of modest earned pricing increases. | |
Small Commercial | • Earned premium decreased by $5, or 1%, primarily due to the effect of modest earned pricing decreases, partially offset by new business outpacing non-renewals over the last six months of 2007 and the first three months of 2008. | |
Middle Market | • Earned premium decreased by $29, or 5%, driven by decreases in commercial auto, general liability, property and marine. Earned premium decreases were driven primarily by earned pricing decreases. | |
Specialty Commercial | • Earned premium decreased by $19, or 5%, driven primarily by a decrease in property due largely to the Company’s decision to stop writing specialty property business with large, national accounts and the effect of decreases in earned pricing and new business written premium. |
Personal Lines | • Earned premium grew by $37, or 1%, due to a $77, or 4%, increase in AARP earned premiums, partially offset by a $40, or 4%, decrease in Agency and other earned premiums. AARP earned premiums grew primarily due to an increase in the size of the AARP target market, the effect of direct marketing programs and the effect of cross selling homeowners insurance to insureds who have auto policies. Agency earned premium decreased $26, or 3%, largely due to a decline in new business premium and premium renewal retention since the middle of 2007, partially offset by the effect of modest earned pricing increases. | |
Small Commercial | • Earned premium was flat, at $2,048, primarily due to new business outpacing non-renewals in workers’ compensation business over the last six months of 2007 and first three months of 2008, largely offset by the effect of earned pricing decreases. | |
Middle Market | • Earned premium decreased by $91, or 5%, driven by decreases in commercial auto, workers’ compensation and general liability. Earned premium decreases were driven primarily by a decline in earned pricing in 2008 and the effect of non-renewals outpacing new business over the last six months of 2007. | |
Specialty Commercial | • Earned premium decreased by $52, or 5%, driven primarily by a decrease in property due largely to the Company’s decision to stop writing specialty property business with large, national accounts and the effect of decreases in earned pricing and new business written premium. |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Net income | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Underwriting results before catastrophes and prior accident year development | $ | 206 | $ | 242 | $ | 756 | $ | 814 | ||||||||
Current accident year catastrophes | 325 | 32 | 546 | 112 | ||||||||||||
Prior accident year reserve development | (14 | ) | 28 | (34 | ) | 154 | ||||||||||
Underwriting results | (105 | ) | 182 | 244 | 548 | |||||||||||
Net servicing and other income [1] | 14 | 16 | 21 | 41 | ||||||||||||
Net investment income | 335 | 407 | 1,091 | 1,266 | ||||||||||||
Net realized capital losses | (1,428 | ) | (75 | ) | (1,631 | ) | (76 | ) | ||||||||
Other expenses | (57 | ) | (64 | ) | (181 | ) | (182 | ) | ||||||||
Income (loss) before income taxes | (1,241 | ) | 466 | (456 | ) | 1,597 | ||||||||||
Income tax (expense) benefit | 467 | (113 | ) | 257 | (439 | ) | ||||||||||
Net income (loss) | $ | (774 | ) | $ | 353 | $ | (199 | ) | $ | 1,158 | ||||||
[1] | Net of expenses related to service business. |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Net realized capital gains (losses) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Gross gains on sales | $ | 12 | $ | 31 | $ | 95 | $ | 121 | ||||||||
Gross losses on sales | (82 | ) | (36 | ) | (195 | ) | (98 | ) | ||||||||
Impairments | (1,312 | ) | (35 | ) | (1,425 | ) | (56 | ) | ||||||||
Periodic net coupon settlements on credit derivatives | 2 | 5 | 5 | 11 | ||||||||||||
Other, net | (48 | ) | (40 | ) | (111 | ) | (54 | ) | ||||||||
Net realized capital losses, before-tax | $ | (1,428 | ) | $ | (75 | ) | $ | (1,631 | ) | $ | (76 | ) | ||||
Realized capital gains (losses) | Gross gains (losses) on sales, net | |
• Gross gains on sales in 2008 were predominantly within fixed maturities and were comprised of sales of corporate and municipal securities. Gross gains in 2007 were primarily from sales of municipal and foreign government securities. | ||
• Gross losses on sales in 2008 were predominantly from sales of financial services securities. Gross losses on sales in 2007 were primarily from sales of corporate and municipal securities. | ||
Impairments | ||
• Impairments of $1.3 billion in 2008 primarily consisted of impairments of corporate debt and equity securities in the financial services sector and impairments of previously impaired sub-prime ABS and CMBS securities. (See the Other-Than-Temporary Impairments discussion within “Investment Results” in the “Investments” section of the MD&A for more information on the impairments recorded in 2008). | ||
Other, net | ||
• Other, net realized losses in 2008 were primarily related to $42 of net losses on credit derivatives. The net losses on credit derivatives were primarily due to significant credit spread widening on credit derivatives that assume credit exposure. Also included in other, net realized losses for 2008 were $7 of derivative related losses due to counterparty default related to the Lehman Brothers Holdings bankruptcy. | ||
• Other, net realized losses in 2007 were primarily driven by the change in value of non-qualifying derivatives due to credit spread widening. | ||
Net investment income | • Primarily driving the $72 decrease in net investment income was a decrease in investment yield for limited partnerships and other alternative investments and, to a lesser extent, a decrease in investment yield for fixed maturities. |
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Underwriting results | • Contributing to the $36 decrease in underwriting results before catastrophes and prior accident year reserve development was a $35 increase in insurance operating costs and expenses, primarily driven by $20 of hurricane Ike-related assessments and an $11 increase in the estimated amount of dividends payable to certain workers’ compensation policyholders due to underwriting profits. Apart from the increase in insurance operating costs and expenses, current accident year underwriting results before catastrophes were relatively flat as the effect of a lower loss and loss adjustment expense ratio for Small Commercial workers’ compensation and Personal Lines auto liability and physical damage claims was largely offset by the effects of lower earned premium in Middle Market and higher non-catastrophe losses on Middle Market property, marine and Personal Lines homeowners’ business. | |
• The $293 increase in current accident year catastrophe losses was primarily due to losses from hurricane Ike in September 2008. | ||
• The change from net unfavorable prior accident year reserve development in 2007 to net favorable reserve development in 2008 was largely due to an increase in net favorable reserve development in Ongoing Operations, partially offset by a larger environmental reserve increase in 2008 than in 2007. Net favorable reserve development for Ongoing Operations in 2008 was largely due to releases of reserves for workers’ compensation, personal auto liability and professional liability claims. Refer to the “Reserves” section of the MD&A for further discussion. | ||
Income tax expense | • Income taxes decreased by $580, from income tax expense of $113 in 2007 to an income tax benefit of $467 in 2008 primarily reflecting the change from pre-tax income of $466 in 2007 to a pre-tax loss of $1,241 in 2008. |
Realized capital gains (losses) | Gross gains (losses) on sales, net | |
• Gross gains on sales in 2008 were predominantly within fixed maturities and were comprised of sales of corporate and municipal securities. Gross gains in 2007 were primarily from sales of corporate and foreign government securities. | ||
• Gross losses on sales in 2008 were predominantly from sales of financial services securities and included $19 of losses on CLOs in the first quarter for which HIMCO is the collateral manager. For more information regarding losses on the sale of HIMCO managed CLOs, refer to the Variable Interest Entities section within “Investment Results” in the “Investments” section of the MD&A. Gross losses on sales in 2007 were primarily from sales of corporate securities. | ||
Impairments | ||
• Impairments of $1.4 billion in 2008 primarily consisted of impairments of corporate debt and equity securities in the financial services sector and impairments of previously impaired sub-prime ABS and CMBS securities. (See the Other-Than-Temporary Impairments discussion within “Investment Results” in the “Investments” section of the MD&A for more information on the impairments recorded in 2008). | ||
Other, net | ||
• Other, net realized losses in 2008 were primarily related to $118 of net losses on credit derivatives. The net losses on credit derivatives were primarily due to significant credit spread widening on credit derivatives that assume credit exposure. Also included in other, net realized losses for 2008 were losses on HIMCO managed CLOs as well as $7 of derivative related losses due to counterparty default related to the Lehman Brothers Holdings bankruptcy. For more information regarding losses on HIMCO managed CLOs, refer to the Variable Interest Entities section within “Investment Results” in the “Investments” section of the MD&A. | ||
• Other, net realized losses in 2007 were primarily driven by the change in value of non-qualifying derivatives due to credit spread widening. | ||
Net investment income | • Primarily driving the $175 decrease in net investment income was a decrease in investment yield for limited partnerships and other alternative investments and, to a lesser extent, a decrease in investment yield for fixed maturities. |
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Underwriting results | • Contributing to the $58 decrease in underwriting results before catastrophes and prior accident year reserve development was a $49 increase in insurance operating costs and expenses, primarily driven by $20 of hurricane Ike-related assessments and a $26 increase in the estimated amount of dividends payable to certain workers’ compensation policyholders due to underwriting profits. Apart from the increase in insurance operating costs and expenses, current accident year underwriting results before catastrophes decreased as the effects of lower earned premium in Middle Market and higher non-catastrophe losses on Middle Market property, marine and Personal Lines homeowners’ business were partially offset by a lower loss and loss adjustment expense ratio for Small Commercial workers’ compensation and Personal Lines auto physical damage claims. | |
• The $434 increase in current accident year catastrophe losses was primarily due to more severe catastrophes in 2008, including losses from hurricane Ike, tornadoes and thunderstorms in the South and Midwest. | ||
• The change from net unfavorable prior accident year reserve development in 2007 to net favorable reserve development in 2008 was largely due to an increase in net favorable reserve development in Ongoing Operations, partially offset by a decrease in unfavorable reserve development in Other Operations. Net favorable reserve development for Ongoing Operations in 2008 was largely due to releases of reserves for workers’ compensation and professional liability claims. Refer to the “Reserves” section of the MD&A for further discussion. | ||
Net servicing and other income | • The $20 decrease in net servicing income was primarily driven by a decrease in servicing income from the AARP Health program and the Write Your Own flood program and the write-off of software used in administering policies for third parties. | |
Income tax expense | • Income taxes decreased by $696, from income tax expense of $439 in 2007 to an income tax benefit of $257 in 2008, reflecting the change from pre-tax income of $1,597 in 2007 to a pre-tax loss of $456 in 2008. |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Ongoing Operations earned premium growth | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Personal Lines | (1 | %) | 3 | % | 1 | % | 3 | % | ||||||||
Small Commercial | (1 | %) | 2 | % | — | 4 | % | |||||||||
Middle Market | (5 | %) | (6 | %) | (5 | %) | (4 | %) | ||||||||
Specialty Commercial | (5 | %) | (3 | %) | (5 | %) | (3 | %) | ||||||||
Total Ongoing Operations | (2 | %) | — | (1 | %) | 1 | % | |||||||||
Ongoing Operations combined ratio | ||||||||||||||||
Combined ratio before catastrophes and prior year development | 91.8 | 90.6 | 90.1 | 89.5 | ||||||||||||
Catastrophe ratio | ||||||||||||||||
Current year | 12.7 | 1.2 | 7.0 | 1.4 | ||||||||||||
Prior years | (0.2 | ) | 0.3 | (0.2 | ) | 0.1 | ||||||||||
Total catastrophe ratio | 12.5 | 1.5 | 6.8 | 1.5 | ||||||||||||
Non-catastrophe prior year development | (2.6 | ) | (0.7 | ) | (1.9 | ) | (0.3 | ) | ||||||||
Combined ratio | 101.7 | 91.4 | 95.1 | 90.7 | ||||||||||||
Other Operations net income (loss) | $ | (108 | ) | $ | 12 | $ | (91 | ) | $ | 4 | ||||||
Total Property & Casualty measures of net investment income | ||||||||||||||||
Investment yield, after-tax | 3.4 | % | 4.1 | % | 3.7 | % | 4.4 | % | ||||||||
Average invested assets at cost | $ | 30,134 | $ | 30,227 | $ | 30,380 | $ | 29,512 | ||||||||
Personal Lines | • | The decrease in the earned premium growth rate from 2007 to 2008 was due to a significantly lower growth rate on AARP business and a change to declining earned premium in Agency, partially offset by the effect of the sale of Omni in 2006 which lowered the growth rate in 2007. Excluding Omni, Personal Lines earned premium grew 7% in both the three and nine month periods ended September 30, 2007. By contrast, earned premiums were relatively flat in 2008, declining 1% in the third quarter and increasing 1% in the nine month period. The effects of a change to declining auto and homeowners’ new business premium and declining homeowners’ renewal retention since the middle of 2007 were largely offset by the effect of a change to modest earned pricing increases in auto. | ||
Small Commercial | • | The earned premium growth rate in 2008 was reduced from moderate earned premium increases in 2007, declining by 1% for the third quarter of 2008 and remaining flat for the nine month period. The decrease in the growth rate was primarily attributable to slightly larger earned pricing decreases in 2008 compared to 2007 and because of a change to decreasing premium renewal retention since the middle of 2007. | ||
Middle Market | • | Earned premium declined in the mid-single digits in both 2007 and 2008. The effect of slightly larger earned pricing decreases in 2008 has been largely offset by the effect of a change to new business growth and increasing premium renewal retention in the three and nine months ended September 30, 2008. | ||
Specialty Commercial | • | For both the three and nine month periods, earned premium decreased by 5% in 2008 compared to 3% in 2007. A larger earned premium decrease in property and a change from earned premium growth in professional liability, fidelity and surety in 2007 to flat or declining earned premium in 2008, was partially offset by an improvement in the rate of earned premium decline in casualty. Property earned premium decreased more significantly in 2008 than in 2007 due, in part, to a decision to stop writing specialty property business with large, national accounts. Also contributing to the larger decrease in property earned premium in 2008 were the effects of a change to earned pricing decreases in 2008 and a change to declining new business and premium renewal retention since the third quarter of 2007. |
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Combined ratio before catastrophes and prior accident year development | • | For the three and nine month periods, there was an increase in the combined ratio before catastrophes and prior accident year development of 1.2 points and 0.6 points, respectively. Contributing to the increase was an increase in insurance operating costs and expenses of 1.5 points and 0.7 points, respectively, primarily driven by hurricane Ike-related assessments and an increase in the estimated amount of dividends payable to certain workers’ compensation policyholders due to underwriting profits. Apart from the increase in insurance operating costs and expenses, the combined ratio before catastrophes and prior accident year development improved slightly as the effect of a lower loss and loss adjustment expense ratio for Small Commercial workers’ compensation and Personal Lines auto physical damage claims was largely offset by higher non-catastrophe losses on Middle Market property, marine and Personal Lines homeowners’ business and earned pricing decreases in Middle Market. | ||
Catastrophes | • | The catastrophe ratio increased for both the three and nine month periods due to an increase in current accident year catastrophes in 2008 primarily due to losses from hurricane Ike and, for the nine month period, losses from tornadoes and thunderstorms in the South and Midwest. | ||
Non-catastrophe prior accident year development | • | For both the three and nine month periods, net non-catastrophe prior accident year reserve development was more favorable in 2008 than in 2007. Favorable reserve development in 2008 included, among other reserve changes, a release of reserves for workers’ compensation claims, primarily related to accident years 2000 to 2007, and a release of reserves for professional liability claims related to accident years 2003 through 2006. See the “Reserves” section for a discussion of prior accident year reserve development for Ongoing Operations in 2008. |
• | Other Operations reported a net loss of $108 in the three months ended September 30, 2008 compared to net income of $12 for the comparable period in 2007 and a net loss of $91 in the nine months ended September 30, 2008 compared to net income of $4 for the comparable period in 2007. The change from net income to a net loss for the three months ended September 30, 2008 was primarily due to an increase in net realized capital losses, a larger environmental reserve increase in 2008 than in 2007 and lower net investment income. The change from net income to a net loss for the nine month period was primarily due to an increase in net realized capital losses and a decrease in net investment income, partially offset by a decrease in unfavorable prior accident year reserve development. See the Other Operations segment MD&A for further discussion. |
• | For both the three and nine months ended September 30, 2008, the after-tax investment yield decreased due to a lower investment yield for limited partnerships and other alternative investments and, to a lesser extent, a lower investment yield for fixed maturities. | |
• | For the three month period, the average annual invested assets at cost decreased as a result of impairments of securities and dividends paid to Corporate, partially offset by the effect of positive operating cash flows. For the nine month period, average annual invested assets at cost increased due to positive operating cash flows, partially offset by the effects of impairments of securities and dividends paid to Corporate. |
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Three Months Ended September 30, 2008 | ||||||||||||||||||||||||||||
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,091 | $ | 3,619 | $ | 4,791 | $ | 6,888 | $ | 17,389 | $ | 4,926 | $ | 22,315 | ||||||||||||||
Reinsurance and other recoverables | 62 | 191 | 431 | 2,164 | 2,848 | 919 | 3,767 | |||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 2,029 | 3,428 | 4,360 | 4,724 | 14,541 | 4,007 | 18,548 | |||||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||||||
Current accident year before catastrophes | 634 | 380 | 377 | 247 | 1,638 | — | 1,638 | |||||||||||||||||||||
Current accident year catastrophes | 168 | 49 | 64 | 44 | 325 | — | 325 | |||||||||||||||||||||
Prior accident years | (9 | ) | (46 | ) | (17 | ) | 2 | (70 | ) | 56 | (14 | ) | ||||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 793 | 383 | 424 | 293 | 1,893 | 56 | 1,949 | |||||||||||||||||||||
Payments | (704 | ) | (354 | ) | (357 | ) | (135 | ) | (1,550 | ) | (103 | ) | (1,653 | ) | ||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 2,118 | 3,457 | 4,427 | 4,882 | 14,884 | 3,960 | 18,844 | |||||||||||||||||||||
Reinsurance and other recoverables | 87 | 189 | 423 | 2,158 | 2,857 | 904 | 3,761 | |||||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,205 | $ | 3,646 | $ | 4,850 | $ | 7,040 | $ | 17,741 | $ | 4,864 | $ | 22,605 | ||||||||||||||
Earned premiums | $ | 978 | $ | 678 | $ | 553 | $ | 358 | $ | 2,567 | $ | 1 | $ | 2,568 | ||||||||||||||
Loss and loss expense paid ratio [1] | 71.9 | 52.4 | 64.3 | 37.3 | 60.3 | |||||||||||||||||||||||
Loss and loss expense incurred ratio | 81.1 | 56.5 | 76.5 | 81.7 | 73.7 | |||||||||||||||||||||||
Prior accident year development (pts) [2] | (0.9 | ) | (6.8 | ) | (3.2 | ) | 0.5 | (2.8 | ) | |||||||||||||||||||
[1] | The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums. | |
[2] | “Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums. |
Nine Months Ended September 30, 2008 | ||||||||||||||||||||||||||||
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,042 | $ | 3,470 | $ | 4,687 | $ | 6,883 | $ | 17,082 | $ | 5,071 | $ | 22,153 | ||||||||||||||
Reinsurance and other recoverables | 81 | 177 | 413 | 2,317 | 2,988 | 934 | 3,922 | |||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 1,961 | 3,293 | 4,274 | 4,566 | 14,094 | 4,137 | 18,231 | |||||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||||||
Current accident year before catastrophes | 1,914 | 1,130 | 1,118 | 740 | 4,902 | — | 4,902 | |||||||||||||||||||||
Current accident year catastrophes | 295 | 93 | 106 | 52 | 546 | — | 546 | |||||||||||||||||||||
Prior accident years | (16 | ) | (50 | ) | (55 | ) | (39 | ) | (160 | ) | 126 | (34 | ) | |||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 2,193 | 1,173 | 1,169 | 753 | 5,288 | 126 | 5,414 | |||||||||||||||||||||
Payments | (2,036 | ) | (1,009 | ) | (1,016 | ) | (437 | ) | (4,498 | ) | (303 | ) | (4,801 | ) | ||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 2,118 | 3,457 | 4,427 | 4,882 | 14,884 | 3,960 | 18,844 | |||||||||||||||||||||
Reinsurance and other recoverables | 87 | 189 | 423 | 2,158 | 2,857 | 904 | 3,761 | |||||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,205 | $ | 3,646 | $ | 4,850 | $ | 7,040 | $ | 17,741 | $ | 4,864 | $ | 22,605 | ||||||||||||||
Earned premiums | $ | 2,941 | $ | 2,048 | $ | 1,688 | $ | 1,087 | $ | 7,764 | $ | 4 | $ | 7,768 | ||||||||||||||
Loss and loss expense paid ratio [1] | 69.2 | 49.2 | 60.1 | 40.1 | 57.9 | |||||||||||||||||||||||
Loss and loss expense incurred ratio | 74.6 | 57.2 | 69.2 | 69.3 | 68.1 | |||||||||||||||||||||||
Prior accident year development (pts) [2] | (0.6 | ) | (2.4 | ) | (3.3 | ) | (3.6 | ) | (2.1 | ) | ||||||||||||||||||
[1] | The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums. | |
[2] | “Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums. |
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For the Three Months Ended September 30, 2008 | ||||||||||||||||||||||||||||
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Gross incurred claim and claim adjustment expenses for current accident year catastrophes | $ | 194 | $ | 56 | $ | 73 | $ | 57 | $ | 380 | $ | — | $ | 380 | ||||||||||||||
Ceded claim and claim adjustment expenses for current accident year catastrophes | 26 | 7 | 9 | 13 | 55 | — | 55 | |||||||||||||||||||||
Net incurred claim and claim adjustment expenses for current accident year catastrophes | 168 | 49 | 64 | 44 | 325 | — | 325 | |||||||||||||||||||||
Assessments owed to Texas Windstorm Insurance Association due to hurricane Ike | 10 | 7 | 3 | — | 20 | — | 20 | |||||||||||||||||||||
Reinstatement premium ceded to reinsurers due to hurricane Ike | 7 | 2 | 1 | 1 | 11 | — | 11 | |||||||||||||||||||||
Total current accident year catastrophe impacts | $ | 185 | $ | 58 | $ | 68 | $ | 45 | $ | 356 | $ | — | $ | 356 | ||||||||||||||
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Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Released reserves for personal auto liability claims related to accident years 2000 to 2007 | $ | (23 | ) | $ | — | $ | — | $ | — | $ | (23 | ) | $ | — | $ | (23 | ) | |||||||||||
Released workers’ compensation reserves, primarily related to accident years 2000 to 2007 | — | (33 | ) | (15 | ) | — | (48 | ) | — | (48 | ) | |||||||||||||||||
Released reserves for directors and officers claims and errors and omissions claims for accident years 2004 to 2006 | — | — | — | (25 | ) | (25 | ) | — | (25 | ) | ||||||||||||||||||
Strengthened reserves for national account general liability claims related to accident years 2004 and prior | — | — | — | 15 | 15 | — | 15 | |||||||||||||||||||||
Strengthening of net environmental reserves | — | — | — | — | — | 53 | 53 | |||||||||||||||||||||
Other reserve re-estimates, net [1] | 14 | (13 | ) | (2 | ) | 12 | 11 | 3 | 14 | |||||||||||||||||||
Total prior accident year development for the three months ended September 30, 2008 | $ | (9 | ) | $ | (46 | ) | $ | (17 | ) | $ | 2 | $ | (70 | ) | $ | 56 | $ | (14 | ) | |||||||||
Strengthened reserves for claims under Small Commercial package policies related to accident year 2007 | $ | — | $ | 10 | $ | — | $ | — | $ | 10 | $ | — | $ | 10 | ||||||||||||||
Released reserves for extra-contractual liability claims under non-standard personal auto policies | (9 | ) | — | — | — | (9 | ) | — | (9 | ) | ||||||||||||||||||
Released workers’ compensation reserves, primarily related to accident years 2000 to 2007 | — | (39 | ) | (19 | ) | — | (58 | ) | — | (58 | ) | |||||||||||||||||
Strengthened reserves for general liability and products liability claims primarily for accident years 2004 and prior | — | 17 | 30 | — | 47 | — | 47 | |||||||||||||||||||||
Released reserves for general liability claims, primarily related to accident years 2001 to 2006 | — | (5 | ) | (37 | ) | — | (42 | ) | — | (42 | ) | |||||||||||||||||
Released reserves for directors and officers claims and errors and omissions claims for accident years 2003, 2004 and 2006 | — | — | — | (20 | ) | (20 | ) | — | (20 | ) | ||||||||||||||||||
Strengthening of net asbestos reserves | — | — | — | — | — | 50 | 50 | |||||||||||||||||||||
Released reserves for construction defect claims for accident years 2001 and prior | — | — | — | (10 | ) | (10 | ) | — | (10 | ) | ||||||||||||||||||
Other reserve re-estimates, net [2] | 2 | 13 | (12 | ) | (11 | ) | (8 | ) | 20 | 12 | ||||||||||||||||||
Total prior accident year development for the six months ended June 30, 2008 | $ | (7 | ) | $ | (4 | ) | $ | (38 | ) | $ | (41 | ) | $ | (90 | ) | $ | 70 | $ | (20 | ) | ||||||||
Total prior accident year development for the nine months ended September 30, 2008 | $ | (16 | ) | $ | (50 | ) | $ | (55 | ) | $ | (39 | ) | $ | (160 | ) | $ | 126 | $ | (34 | ) | ||||||||
[1] | Includes reserve discount accretion of $6, including $2 in Small Commercial, $2 in Middle Market and $2 in Specialty Commercial. | |
[2] | Includes reserve discount accretion of $15, including $3 in Small Commercial, $4 in Middle Market, $5 in Specialty Commercial and $3 in Other Operations. |
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• | Released workers’ compensation reserves related to accident years 2000 to 2007 by $106 in the nine months ended September 30, 2008, including $48 in the third quarter of 2008. These reserve releases are a continuation of favorable developments first recognized in 2005 and recognized in both 2006 and 2007. The reserve releases in 2008 resulted from a determination that workers’ compensation losses continue to develop even more favorably from prior expectations due to the California and Florida legal reforms and underwriting actions as well as cost reduction initiatives first instituted in 2003. In particular, the state legal reforms and underwriting actions have resulted in lower than expected medical claim severity. | |
• | Released reserves for professional liability claims for accident years 2003 to 2006 by $45 in the nine months ended September 30, 2008, including $25 in the third quarter of 2008. During the first nine months of 2008, the Company updated its analysis of certain professional liability claims and the new analysis showed that claim severity for directors and officers losses in the 2003 to 2006 accident years were favorable to previous expectations, resulting in a $10 reduction of reserves in the first quarter, a $4 reduction of reserves in the second quarter, and a $25 reduction of reserves in the third quarter. The analysis in the second quarter also showed favorable emergence of claim severity on errors and omission policy claims for the 2004 and 2005 accident years, resulting in a release of $6 in reserves in the second quarter. | |
• | During the third quarter of 2008, released reserves for Personal Lines auto liability claims by $23, principally related to AARP business for the 2006 and 2007 accident years. Beginning in the first quarter of 2008, management observed an improvement in emerged claim severity for the 2006 and 2007 accident years attributed, in part, to changes made in claim handling procedures in 2007. In the third quarter of 2008, the Company recognized that favorable trends in reported severity were a sustained trend and accordingly, management reduced its reserve estimate in the third quarter. | |
• | During the third quarter of 2008, strengthened reserves for allocated loss adjustment expenses on national account general liability claims within Specialty Commercial by $15. Allocated loss adjustment expense reserves on general liability excess and umbrella claims were strengthened for accident years 2004 and prior as the Company observed that the cost of settling these claims has exceeded previous expectations. | |
• | Released reserves for general liability claims primarily related to the 2001 to 2006 accident years by $42 in the first six months of 2008. Beginning in the third quarter of 2007, the Company observed that reported losses for high hazard and umbrella general liability claims, primarily related to the 2001 to 2006 accident years, were emerging favorably and this caused management to reduce its estimate of the cost of future reported claims for these accident years, resulting in a reserve release in each quarter since the third quarter of 2007. The number of reported claims for this line of business has been lower than expected, a trend first observed in 2005. Over time, management has come to believe that the lower than expected number of claims reported to date will not be offset by a higher than expected number of late reported claims. | |
• | During the second quarter of 2008, strengthened reserves for claims under Small Commercial package policies by $10. Beginning in the first quarter of 2008, the Company observed an increase in the emerged severity of package business claims for the 2007 accident year, under both property and liability coverages, driven by a higher than initially expected number of large-sized claims. In the second quarter of 2008, the Company recognized that this trend in increasing severity was a verifiable trend and, accordingly, increased reserves in the second quarter of 2008. | |
• | During the first quarter of 2008, released reserves for extra-contractual liability claims under non-standard personal auto policies by $9. As part of the agreement to sell its non-standard auto insurance business in November, 2006, the Company continues to be obligated for certain extra-contractual liability claims arising prior to the date of sale. Reserve estimates for extra-contractual liability claims are subject to significant variability depending on the expected settlement of individually large claims and, during the first quarter of 2008, the Company determined that the settlement value of a number of these claims was expected to be less than previously anticipated, resulting in a $9 release of reserves. | |
• | During the first quarter of 2008, strengthened reserves for general liability and products liability claims primarily for accident years 2004 and prior by $47 for losses expected to emerge after 20 years of development, including $17 in Small Commercial and $30 in Middle Market. In 2007, management observed that long outstanding general liability claims have been settling for more than previously anticipated and, during the first quarter of 2008, the Company increased the estimate of late development of general liability claims. | |
• | During the first quarter of 2008, released reserves for construction defect claims in Specialty Commercial by $10 for accident years 2001 and prior due to lower than expected reported claim activity. Lower than expected claim activity was first noted in the first quarter of 2007 and continued throughout 2007. In the first quarter of 2008, management determined that this was a verifiable trend and reduced reserves accordingly. |
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• | During the third quarter of 2008, the Company completed its annual ground up environmental reserve evaluation, resulting in a $53 increase in net environmental reserves. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to environmental liability as well as assumed reinsurance accounts and its London Market exposures for both direct and assumed reinsurance. The Company found estimates for some individual accounts increased based upon new damage and defense cost information obtained on these accounts since the last review. In addition, the decline in the reporting of new accounts and sites has been slower than anticipated in our previous review. | |
• | During the second quarter of 2008, the Company completed its annual ground up asbestos reserve evaluation. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to asbestos liability as well as assumed reinsurance accounts and its London Market exposures for both direct insurance and assumed reinsurance. The Company found estimates for individual cases changed based upon the particular circumstances of each account. These changes were case specific and not as a result of any underlying change in the current environment. The net effect of these changes resulted in a $50 increase in net asbestos reserves. |
% of layer(s) | ||||||||||||||||
Coverage | Treaty term | reinsured | Per occurrence limit | Retention | ||||||||||||
Layer covering property catastrophe losses from a single wind or earthquake event affecting the northeast of the United States from Virginia to Maine | 6/1/2008 to 6/1/2009 | 90 | % | $ | 300 | $ | 1,000 | |||||||||
Reinsurance with the FHCF covering Florida Personal Lines property catastrophe losses from a single event | 6/1/2008 to 6/1/2009 | 90 | % | 436 | [1] | 83 | ||||||||||
Workers’ compensation losses arising from a single catastrophe event | 7/1/2008 to 7/1/2009 | 95 | % | 280 | 20 |
[1] | The per occurrence limit on the FHCF treaty is $436 for the 6/1/2008 to 6/1/2009 treaty year based on the 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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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Earned premiums | $ | 2,568 | $ | 2,628 | (2 | %) | $ | 7,768 | $ | 7,873 | (1 | %) | ||||||||||||
Net investment income | 335 | 407 | (18 | %) | 1,091 | 1,266 | (14 | %) | ||||||||||||||||
Other revenues [1] | 132 | 126 | 5 | % | 377 | 368 | 2 | % | ||||||||||||||||
Net realized capital losses | (1,428 | ) | (75 | ) | NM | (1,631 | ) | (76 | ) | NM | ||||||||||||||
Total revenues | 1,607 | 3,086 | (48 | %) | 7,605 | 9,431 | (19 | %) | ||||||||||||||||
Losses and loss adjustment expenses | ||||||||||||||||||||||||
Current accident year before catastrophes | 1,638 | 1,695 | (3 | %) | 4,902 | 4,984 | (2 | %) | ||||||||||||||||
Current accident year catastrophes | 325 | 32 | NM | 546 | 112 | NM | ||||||||||||||||||
Prior accident years | (14 | ) | 28 | NM | (34 | ) | 154 | NM | ||||||||||||||||
Total losses and loss adjustment expenses | 1,949 | 1,755 | 11 | % | 5,414 | 5,250 | 3 | % | ||||||||||||||||
Amortization of deferred policy acquisition costs | 523 | 525 | — | 1,567 | 1,581 | (1 | %) | |||||||||||||||||
Insurance operating costs and expenses | 201 | 166 | 21 | % | 543 | 494 | 10 | % | ||||||||||||||||
Other expenses | 175 | 174 | 1 | % | 537 | 509 | 6 | % | ||||||||||||||||
Total losses and expenses | 2,848 | 2,620 | 9 | % | 8,061 | 7,834 | 3 | % | ||||||||||||||||
Income (loss) before income taxes | (1,241 | ) | 466 | NM | (456 | ) | 1,597 | NM | ||||||||||||||||
Income tax expense (benefit) | (467 | ) | 113 | NM | (257 | ) | 439 | NM | ||||||||||||||||
Net income (loss) [2] | $ | (774 | ) | $ | 353 | NM | $ | (199 | ) | $ | 1,158 | NM | ||||||||||||
Net Income (Loss) | ||||||||||||||||||||||||
Ongoing Operations | $ | (666 | ) | $ | 341 | NM | $ | (108 | ) | $ | 1,154 | NM | ||||||||||||
Other Operations | (108 | ) | 12 | NM | (91 | ) | 4 | NM | ||||||||||||||||
Total Property & Casualty net income (loss) | $ | (774 | ) | $ | 353 | NM | $ | (199 | ) | $ | 1,158 | NM | ||||||||||||
[1] | Represents servicing revenue. | |
[2] | Includes net realized capital losses, after-tax, of $(929) and $(49) for the three months ended September 30, 2008 and 2007, respectively, and $(1,061) and $(50) for the nine months ended September 30, 2008 and 2007, respectively. |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2008 | 2007 | Change | 2008 | 2007 | Change | |||||||||||||||||||
Written premiums | $ | 2,592 | $ | 2,628 | (1 | %) | $ | 7,759 | $ | 7,924 | (2 | %) | ||||||||||||
Change in unearned premium reserve | 25 | 2 | NM | (5 | ) | 54 | NM | |||||||||||||||||
Earned premiums | 2,567 | 2,626 | (2 | %) | 7,764 | 7,870 | (1 | %) | ||||||||||||||||
Losses and loss adjustment expenses | ||||||||||||||||||||||||
Current accident year before catastrophes | 1,638 | 1,695 | (3 | %) | 4,902 | 4,984 | (2 | %) | ||||||||||||||||
Current accident year catastrophes | 325 | 32 | NM | 546 | 112 | NM | ||||||||||||||||||
Prior accident years | (70 | ) | (11 | ) | NM | (160 | ) | (19 | ) | NM | ||||||||||||||
Total losses and loss adjustment expenses | 1,893 | 1,716 | 10 | % | 5,288 | 5,077 | 4 | % | ||||||||||||||||
Amortization of deferred policy acquisition costs | 523 | 525 | — | 1,567 | 1,581 | (1 | %) | |||||||||||||||||
Insurance operating costs and expenses | 195 | 160 | 22 | % | 527 | 477 | 10 | % | ||||||||||||||||
Underwriting results | (44 | ) | 225 | NM | 382 | 735 | (48 | %) | ||||||||||||||||
Net servicing income [1] | 14 | 16 | (13 | %) | 21 | 41 | (49 | %) | ||||||||||||||||
Net investment income | 285 | 346 | (18 | %) | 929 | 1,082 | (14 | %) | ||||||||||||||||
Net realized capital losses | (1,268 | ) | (72 | ) | NM | (1,455 | ) | (73 | ) | NM | ||||||||||||||
Other expenses | (58 | ) | (63 | ) | 8 | % | (180 | ) | (179 | ) | (1 | %) | ||||||||||||
Income (loss) before income taxes | (1,071 | ) | 452 | NM | (303 | ) | 1,606 | NM | ||||||||||||||||
Income tax (expense) benefit | 405 | (111 | ) | NM | 195 | (452 | ) | NM | ||||||||||||||||
Net income (loss) | $ | (666 | ) | $ | 341 | NM | $ | (108 | ) | $ | 1,154 | NM | ||||||||||||
Loss and loss adjustment expense ratio | ||||||||||||||||||||||||
Current accident year before catastrophes | 63.8 | 64.5 | 0.7 | 63.1 | 63.3 | 0.2 | ||||||||||||||||||
Current accident year catastrophes | 12.7 | 1.2 | (11.5 | ) | 7.0 | 1.4 | (5.6 | ) | ||||||||||||||||
Prior accident years | (2.8 | ) | (0.4 | ) | 2.4 | (2.1 | ) | (0.2 | ) | 1.9 | ||||||||||||||
Total loss and loss adjustment expense ratio | 73.7 | 65.3 | (8.4 | ) | 68.1 | 64.5 | (3.6 | ) | ||||||||||||||||
Expense ratio | 27.3 | 25.9 | (1.4 | ) | 26.4 | 25.9 | (0.5 | ) | ||||||||||||||||
Policyholder dividend ratio | 0.7 | 0.2 | (0.5 | ) | 0.5 | 0.2 | (0.3 | ) | ||||||||||||||||
Combined ratio | 101.7 | 91.4 | (10.3 | ) | 95.1 | 90.7 | (4.4 | ) | ||||||||||||||||
Catastrophe ratio | ||||||||||||||||||||||||
Current accident year | 12.7 | 1.2 | (11.5 | ) | 7.0 | 1.4 | (5.6 | ) | ||||||||||||||||
Prior accident years | (0.2 | ) | 0.3 | 0.5 | (0.2 | ) | 0.1 | 0.3 | ||||||||||||||||
Total catastrophe ratio | 12.5 | 1.5 | (11.0 | ) | 6.8 | 1.5 | (5.3 | ) | ||||||||||||||||
Combined ratio before catastrophes | 89.2 | 89.9 | 0.7 | 88.2 | 89.2 | 1.0 | ||||||||||||||||||
Combined ratio before catastrophes and prior accident year development | 91.8 | 90.6 | (1.2 | ) | 90.1 | 89.5 | (0.6 | ) | ||||||||||||||||
[1] | Net of expenses related to service business. |
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Change in underwriting results | ||||
Decrease in earned premiums | $ | (59 | ) | |
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year losses and loss adjustment expenses before catastrophes due to the decrease in earned premium | 38 | |||
Ratio change — A decrease in the current accident year loss and loss adjustment expense ratio before catastrophes | 19 | |||
Decrease in current accident year losses and loss adjustment expenses before catastrophes | 57 | |||
Catastrophes — Increase in current accident year catastrophe losses | (293 | ) | ||
Reserve changes — An increase in net favorable prior accident year reserve development | 59 | |||
Net increase in losses and loss adjustment expenses | (177 | ) | ||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 2 | |||
Increase in insurance operating costs and expenses | (35 | ) | ||
Net increase in operating expenses | (33 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (269 | ) | |
Personal Lines | • | The current accident year loss and loss adjustment expense ratio before catastrophes in Personal Lines decreased by 2.2 points, primarily due to a lower current accident year loss and loss adjustment expense ratio for auto claims, partially offset by increased severity of non-catastrophe losses on homeowners’ business. Contributing to the lower loss and loss adjustment expense ratio for auto claims was the effect of a $9 release of current accident year auto liability reserves and favorable frequency on auto physical damage claims as well as the effect of earned pricing increases. | ||
Small Commercial | • | The current accident year loss and loss adjustment expense ratio before catastrophes in Small Commercial decreased by 3.1 points, primarily due to a lower loss and loss adjustment expense ratio for workers’ compensation business. The lower loss and loss adjustment expense ratio for workers’ compensation business was primarily due to lower claim frequency, partially offset by the effect of earned pricing decreases. | ||
Middle Market | • | The current accident year loss and loss adjustment expense ratio before catastrophes in Middle Market increased by 2.0 points due primarily to earned pricing decreases and higher non-catastrophe losses on property and marine business, driven by increased claim severity. | ||
Specialty Commercial | • | The current accident year loss and loss adjustment expense ratio before catastrophes in Specialty Commercial increased by 3.1 points, primarily due to a higher loss and loss adjustment ratio on directors and officers insurance for professional liability business, driven by earned pricing decreases. |
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Change in underwriting results | ||||
Decrease in earned premiums | $ | (106 | ) | |
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year losses and loss adjustment expenses before catastrophes due to the decrease in earned premium | 67 | |||
Ratio change — A decrease in the current accident year loss and loss adjustment expense ratio before catastrophes | 15 | |||
Net decrease in current accident year losses and loss adjustment expenses before catastrophes | 82 | |||
Catastrophes — Increase in current accident year catastrophe losses | (434 | ) | ||
Reserve changes — An increase in net favorable prior accident year reserve development | 141 | |||
Net increase in losses and loss adjustment expenses | (211 | ) | ||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 14 | |||
Increase in insurance operating costs and expenses | (50 | ) | ||
Net increase in operating expenses | (36 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (353 | ) | |
Personal Lines | • | The current accident year loss and loss adjustment expense ratio before catastrophes in Personal Lines increased by 0.4 points, primarily due to increased severity of non-catastrophe losses on homeowners business, partially offset by favorable frequency on auto physical damage claims and the effect of earned pricing increases for both auto and homeowners. | ||
Small Commercial | • | The current accident year loss and loss adjustment expense ratio before catastrophes in Small Commercial decreased by 3.5 points, primarily due to a lower loss and loss adjustment expense ratio for workers’ compensation business and, to a lesser extent, a lower loss and loss adjustment expense ratio for package business. The lower loss and loss adjustment expense ratio for workers’ compensation business was primarily due to lower claim frequency, partially offset by the effect of earned pricing decreases. | ||
Middle Market | • | The current accident year loss and loss adjustment expense ratio before catastrophes in Middle Market increased by 1.9 points, primarily due to higher non-catastrophe losses on property and marine business, driven by a number of large individual claims, and the effect of earned pricing decreases. | ||
Specialty Commercial | • | The current accident year loss and loss adjustment expense ratio before catastrophes in Specialty Commercial increased by 1.5 points, primarily due to a higher loss and loss adjustment ratio on directors and officers insurance in professional liability, driven by earned pricing decreases. |
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Premiums | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Written Premiums [1] | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Business Unit | ||||||||||||||||||||||||
AARP | $ | 741 | $ | 724 | 2 | % | $ | 2,144 | $ | 2,101 | 2 | % | ||||||||||||
Agency | 269 | 294 | (9 | %) | 798 | 856 | (7 | %) | ||||||||||||||||
Other | 14 | 17 | (18 | %) | 47 | 56 | (16 | %) | ||||||||||||||||
Total | $ | 1,024 | $ | 1,035 | (1 | %) | $ | 2,989 | $ | 3,013 | (1 | %) | ||||||||||||
Product Line | ||||||||||||||||||||||||
Automobile | $ | 726 | $ | 732 | (1 | %) | $ | 2,153 | $ | 2,170 | (1 | %) | ||||||||||||
Homeowners | 298 | 303 | (2 | %) | 836 | 843 | (1 | %) | ||||||||||||||||
Total | $ | 1,024 | $ | 1,035 | (1 | %) | $ | 2,989 | $ | 3,013 | (1 | %) | ||||||||||||
Earned Premiums [1] | ||||||||||||||||||||||||
Business Unit | ||||||||||||||||||||||||
AARP | $ | 695 | $ | 680 | 2 | % | $ | 2,073 | $ | 1,996 | 4 | % | ||||||||||||
Agency | 266 | 283 | (6 | %) | 816 | 842 | (3 | %) | ||||||||||||||||
Other | 17 | 21 | (19 | %) | 52 | 66 | (21 | %) | ||||||||||||||||
Total | $ | 978 | $ | 984 | (1 | %) | $ | 2,941 | $ | 2,904 | 1 | % | ||||||||||||
Product Line | ||||||||||||||||||||||||
Automobile | $ | 707 | $ | 712 | (1 | %) | $ | 2,120 | $ | 2,110 | — | |||||||||||||
Homeowners | 271 | 272 | — | 821 | 794 | 3 | % | |||||||||||||||||
Total | $ | 978 | $ | 984 | (1 | %) | $ | 2,941 | $ | 2,904 | 1 | % | ||||||||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Premium Measures | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Policies in-force end of period | ||||||||||||||||
Automobile | 2,324,124 | 2,359,246 | ||||||||||||||
Homeowners | 1,465,907 | 1,484,157 | ||||||||||||||
Total policies in-force end of period | 3,790,031 | 3,843,403 | ||||||||||||||
New business premium | ||||||||||||||||
Automobile | $ | 97 | $ | 108 | $ | 268 | $ | 340 | ||||||||
Homeowners | $ | 29 | $ | 36 | $ | 80 | $ | 112 | ||||||||
Premium Renewal Retention | ||||||||||||||||
Automobile | 86 | % | 88 | % | 87 | % | 88 | % | ||||||||
Homeowners | 90 | % | 94 | % | 90 | % | 97 | % | ||||||||
Written Pricing Increase | ||||||||||||||||
Automobile | 2 | % | — | 2 | % | — | ||||||||||
Homeowners | 3 | % | 5 | % | 2 | % | 6 | % | ||||||||
Earned Pricing Increase | ||||||||||||||||
Automobile | 1 | % | — | 1 | % | — | ||||||||||
Homeowners | 2 | % | 6 | % | 3 | % | 6 | % | ||||||||
• | AARP earned premium grew $15 and $77, respectively, for the three and nine months ended September 30, 2008, reflecting growth in the size of the AARP target market, the effect of direct marketing programs and the effect of cross selling homeowners insurance to insureds who have auto policies. In the three month period, the earned premium growth in AARP was primarily due to modest increases in earned pricing for both auto and homeowners. In the nine month period, the earned premium growth in AARP was largely due to new business written premium outpacing non-renewals over the last six months of 2007 and to modest earned pricing increases for both auto and homeowners. In the first nine months of 2008, non-renewals have outpaced new business due largely to a decline in new business written premium and renewal retention driven by increased competition. |
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• | Agency earned premium decreased by $17 and $26, respectively, for the three and nine months ended September 30, 2008 as the effect of a decline in new business premium and premium renewal retention since the middle of 2007 was partially offset by the effect of modest earned pricing increases. The market environment continues to be intensely competitive. The increase in advertising for auto business among the top carriers is also occurring with homeowners’ business, particularly in non-coastal and non-catastrophe prone areas. In 2008, a number of Personal Lines carriers have begun to increase rates although a significant portion of the market continues to compete heavily on price. | |
• | Other earned premium decreased by $4 and $14, respectively, for the three and nine months ended September 30, 2008, primarily due to a decision to reduce other affinity business. |
New business premium | • | Both auto and homeowners’ new business written premium decreased in the three and nine months ended September 30, 2008. Auto new business decreased by $11, or 10%, for the three month period and by $72, or 21%, for the nine month period, including decreases in both AARP and Agency. Homeowners’ new business decreased by $7, or 19%, for the three month period and by $32, or 29%, for the nine month period, including decreases in both AARP and Agency. AARP new business written premium decreased primarily due to lower auto and homeowners’ policy conversion rates, driven by increased competition, including the effect of price decreases by some carriers and the effect of continued advertising among carriers for new business. Agency new business written premium decreased primarily due to price competition driven, in part, by a greater number of agents using comparative rating software to obtain quotes from multiple carriers. | ||
Premium renewal retention | • | Premium renewal retention for auto decreased from 88% to 86% in the three month period and from 88% to 87% in the nine month period, driven primarily by a decrease in policy retention for both AARP and Agency business, partially offset by the effect of modest written pricing increases in 2008. Premium renewal retention for homeowners decreased from 94% to 90% in the three month period and from 97% to 90% in the nine month period driven by a decrease in retention for both AARP and Agency business. The decrease in premium renewal retention for AARP homeowners’ business was driven by increased price competition by some carriers and mandated homeowners rate declines in Florida for AARP policies. The decrease in premium renewal retention for Agency homeowners’ business was due, in part, to Florida policyholders non-renewing in advance of the Company’s decision to stop renewing Florida homeowners’ policies sold through agents which took effect at the end of August 2008. | ||
Earned pricing increase (decrease) | • | Auto earned pricing increases of 1% in the three and nine months ended September 30, 2008 represents the portion of the 2% increase in written pricing for the first nine months of 2008 that is reflected in earned premium. While auto written pricing was flat in 2007, in 2008 the Company has increased auto insurance rates in certain states for certain classes to maintain profitability in the face of rising loss costs. In addition, written pricing increases included the effect of policyholders purchasing newer vehicle models in place of older models. Homeowners’ earned pricing increases of 2% and 3% in the three and nine months ended September 30, 2008, respectively, primarily reflect the earning of a blend of mid-single digit written pricing increases recognized over the last six months of 2007 and 2% written pricing increases recognized in the first six months of 2008. Written pricing increases in homeowners were largely driven by increases in coverage limits due to rising replacement costs. | ||
Policies in-force | • | The number of policies in-force decreased slightly for both auto and homeowners, primarily due to a 7% decline in the number of Agency policies in-force, partially offset by a 1% increase in the number of AARP policies in-force. |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Personal Lines — Underwriting Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Written premiums | $ | 1,024 | $ | 1,035 | (1 | %) | $ | 2,989 | $ | 3,013 | (1 | %) | ||||||||||||
Change in unearned premium reserve | 46 | 51 | (10 | %) | 48 | 109 | (56 | %) | ||||||||||||||||
Earned premiums | 978 | 984 | (1 | %) | 2,941 | 2,904 | 1 | % | ||||||||||||||||
Losses and loss adjustment expenses | ||||||||||||||||||||||||
Current accident year before catastrophes | 634 | 659 | (4 | %) | 1,914 | 1,880 | 2 | % | ||||||||||||||||
Current accident year catastrophes | 168 | 26 | NM | 295 | 75 | NM | ||||||||||||||||||
Prior accident years | (9 | ) | 7 | NM | (16 | ) | 15 | NM | ||||||||||||||||
Total losses and loss adjustment expenses | 793 | 692 | 15 | % | 2,193 | 1,970 | 11 | % | ||||||||||||||||
Amortization of deferred policy acquisition costs | 159 | 155 | 3 | % | 470 | 461 | 2 | % | ||||||||||||||||
Insurance operating costs and expenses | 71 | 59 | 20 | % | 200 | 181 | 10 | % | ||||||||||||||||
Underwriting results | $ | (45 | ) | $ | 78 | NM | $ | 78 | $ | 292 | (73 | %) | ||||||||||||
Loss and loss adjustment expense ratio | ||||||||||||||||||||||||
Current accident year before catastrophes | 64.7 | 66.9 | 2.2 | 65.1 | 64.7 | (0.4 | ) | |||||||||||||||||
Current accident year catastrophes | 17.2 | 2.6 | (14.6 | ) | 10.0 | 2.6 | (7.4 | ) | ||||||||||||||||
Prior accident years | (0.9 | ) | 0.7 | 1.6 | (0.6 | ) | 0.5 | 1.1 | ||||||||||||||||
Total loss and loss adjustment expense ratio | 81.1 | 70.1 | (11.0 | ) | 74.6 | 67.8 | (6.8 | ) | ||||||||||||||||
Expense ratio | 23.5 | 21.9 | (1.6 | ) | 22.8 | 22.1 | (0.7 | ) | ||||||||||||||||
Combined ratio | 104.6 | 92.0 | (12.6 | ) | 97.3 | 89.9 | (7.4 | ) | ||||||||||||||||
Catastrophe ratio | ||||||||||||||||||||||||
Current year | 17.2 | 2.6 | (14.6 | ) | 10.0 | 2.6 | (7.4 | ) | ||||||||||||||||
Prior years | 0.8 | 0.4 | (0.4 | ) | 0.2 | 0.2 | — | |||||||||||||||||
Total catastrophe ratio | 18.1 | 3.0 | (15.1 | ) | 10.2 | 2.8 | (7.4 | ) | ||||||||||||||||
Combined ratio before catastrophes | 86.5 | 89.0 | 2.5 | 87.2 | 87.1 | (0.1 | ) | |||||||||||||||||
Combined ratio before catastrophes and prior accident years development | 88.3 | 88.7 | 0.4 | 87.9 | 86.9 | (1.0 | ) | |||||||||||||||||
Other revenues [1] | $ | 33 | $ | 33 | — | $ | 96 | $ | 102 | (6 | %) | |||||||||||||
[1] | Represents servicing revenues. |
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Combined Ratios | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Automobile | 90.5 | 95.9 | 5.4 | 92.5 | 94.2 | 1.7 | ||||||||||||||||||
Homeowners | 141.2 | 81.9 | (59.3 | ) | 109.9 | 78.6 | (31.3 | ) | ||||||||||||||||
Total | 104.6 | 92.0 | (12.6 | ) | 97.3 | 89.9 | (7.4 | ) | ||||||||||||||||
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Change in underwriting results | ||||
Decrease in earned premiums | $ | (6 | ) | |
Losses and loss adjustment expenses | ||||
Ratio change — A decrease in the current accident loss and loss adjustment expense ratio before catastrophes | 21 | |||
Volume change — Decrease in current accident year losses and loss adjustment expenses before catastrophes due to the decrease in earned premium | 4 | |||
Decrease in current accident year losses and loss adjustment expenses before catastrophes | 25 | |||
Catastrophes — Increase in current accident year catastrophes | (142 | ) | ||
Reserve changes — A change to net favorable prior accident year reserve development | 16 | |||
Net increase in losses and loss adjustment expenses | (101 | ) | ||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (4 | ) | ||
Increase in insurance operating costs and expenses | (12 | ) | ||
Increase in operating expenses | (16 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (123 | ) | |
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Change in underwriting results | ||||
Increase in earned premiums | $ | 37 | ||
Losses and loss adjustment expenses | ||||
Volume change — Increase in current accident year losses and loss adjustment expenses before catastrophes due to the increase in earned premium | (24 | ) | ||
Ratio change — An increase in the current accident loss and loss adjustment expense ratio before catastrophes | (10 | ) | ||
Increase in current accident year losses and loss adjustment expenses before catastrophes | (34 | ) | ||
Catastrophes — Increase in current accident year catastrophes | (220 | ) | ||
Reserve changes — A change to net favorable prior accident year reserve development | 31 | |||
Net increase in losses and loss adjustment expenses | (223 | ) | ||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (9 | ) | ||
Increase in insurance operating costs and expenses | (19 | ) | ||
Increase in operating expenses | (28 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (214 | ) | |
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• | Written premium flat to 2% lower, with both auto and homeowners’ written premium flat to 2% lower | |
• | A combined ratio before catastrophes and prior accident year development of 87.5 to 89.5 |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Premiums [1] | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Written premiums | $ | 652 | $ | 664 | (2 | %) | $ | 2,074 | $ | 2,098 | (1 | %) | ||||||||||||
Earned premiums | 678 | 683 | (1 | %) | 2,048 | 2,048 | — |
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Premium Measures | 2008 | 2007 | 2008 | 2007 | ||||||||||||
New business premium | $ | 105 | $ | 116 | $ | 349 | $ | 371 | ||||||||
Premium renewal retention | 83 | % | 84 | % | 82 | % | 84 | % | ||||||||
Written pricing decrease | (2 | %) | (1 | %) | (2 | %) | (1 | %) | ||||||||
Earned pricing decrease | (2 | %) | (1 | %) | (2 | %) | — | |||||||||
Policies in-force end of period | 1,062,291 | 1,031,855 |
New business premium | • | New business written premium was down $11, or 9%, in the three months ended September 30, 2008 and down $22, or 6%, for the nine months then ended, primarily driven by a decrease in new package and commercial automobile business. New business declined due to increased competition despite the use of lower pricing on targeted accounts and an increase in commissions paid to agents. | ||
Premium renewal retention | • | Premium renewal retention decreased from 84% to 83% in the three month period and decreased from 84% to 82% in the nine month period due largely to the effect of a decrease in retention of workers’ compensation business and the effect of larger written pricing decreases for workers’ compensation business. | ||
Earned pricing increase (decrease) | • | For both the three and nine month periods, earned pricing decreased for workers’ compensation and commercial auto and was flat for package business. As written premium is earned over the 12-month term of the policies, the earned pricing changes during the three and nine month periods ended September 30, 2008 were primarily a reflection of written pricing decreases of 2% over the last six months of 2007 and 3% over the first six months of 2008. | ||
Policies in-force | • | While earned premium was flat to slightly down for the three and nine month periods, the number of policies in-force has increased 3% from September 30, 2007 to September 30, 2008. The growth in policies in-force does not correspond directly with the change in earned premiums due to the effect of changes in earned pricing and changes in the average premium per policy. |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Small Commercial — Underwriting Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Written premiums | $ | 652 | $ | 664 | (2 | %) | $ | 2,074 | $ | 2,098 | (1 | %) | ||||||||||||
Change in unearned premium reserve | (26 | ) | (19 | ) | (37 | %) | 26 | 50 | (48 | %) | ||||||||||||||
Earned premiums | 678 | 683 | (1 | %) | 2,048 | 2,048 | — | |||||||||||||||||
Losses and loss adjustment expenses | ||||||||||||||||||||||||
Current accident year before catastrophes | 380 | 406 | (6 | %) | 1,130 | 1,202 | (6 | %) | ||||||||||||||||
Current accident year catastrophes | 49 | 6 | NM | 93 | 25 | NM | ||||||||||||||||||
Prior accident years | (46 | ) | (47 | ) | 2 | % | (50 | ) | (79 | ) | 37 | % | ||||||||||||
Total losses and loss adjustment expenses | 383 | 365 | 5 | % | 1,173 | 1,148 | 2 | % | ||||||||||||||||
Amortization of deferred policy acquisition costs | 159 | 158 | 1 | % | 477 | 477 | — | |||||||||||||||||
Insurance operating costs and expenses | 54 | 41 | 32 | % | 128 | 119 | 8 | % | ||||||||||||||||
Underwriting results | $ | 82 | $ | 119 | (31 | %) | $ | 270 | $ | 304 | (11 | %) | ||||||||||||
Loss and loss adjustment expense ratio | ||||||||||||||||||||||||
Current accident year before catastrophes | 56.3 | 59.4 | 3.1 | 55.2 | 58.7 | 3.5 | ||||||||||||||||||
Current accident year catastrophes | 7.0 | 0.8 | (6.2 | ) | 4.5 | 1.2 | (3.3 | ) | ||||||||||||||||
Prior accident years | (6.8 | ) | (6.9 | ) | (0.1 | ) | (2.4 | ) | (3.9 | ) | (1.5 | ) | ||||||||||||
Total loss and loss adjustment expense ratio | 56.5 | 53.3 | (3.2 | ) | 57.2 | 56.0 | (1.2 | ) | ||||||||||||||||
Expense ratio | 30.1 | 28.8 | (1.3 | ) | 28.9 | 28.8 | (0.1 | ) | ||||||||||||||||
Policyholder dividend ratio | 1.3 | 0.3 | (1.0 | ) | 0.6 | 0.2 | (0.4 | ) | ||||||||||||||||
Combined ratio | 87.9 | 82.4 | (5.5 | ) | 86.8 | 85.1 | (1.7 | ) | ||||||||||||||||
Catastrophe ratio | ||||||||||||||||||||||||
Current year | 7.0 | 0.8 | (6.2 | ) | 4.5 | 1.2 | (3.3 | ) | ||||||||||||||||
Prior years | (0.5 | ) | 0.1 | 0.6 | (0.1 | ) | 0.2 | 0.3 | ||||||||||||||||
Total catastrophe ratio | 6.5 | 1.0 | (5.5 | ) | 4.4 | 1.4 | (3.0 | ) | ||||||||||||||||
Combined ratio before catastrophes | 81.4 | 81.5 | 0.1 | 82.4 | 83.7 | 1.3 | ||||||||||||||||||
Combined ratio before catastrophes and prior accident years development | 87.7 | 88.5 | 0.8 | 84.7 | 87.8 | 3.1 | ||||||||||||||||||
Change in underwriting results | ||||
Decrease in earned premiums | $ | (5 | ) | |
Losses and loss adjustment expenses | ||||
Ratio change — A decrease in the current accident loss and loss adjustment expense ratio before catastrophes | 23 | |||
Volume change — Decrease in current accident year losses and loss adjustment expenses before catastrophes due to the decrease in earned premium | 3 | |||
Net decrease in current accident year losses and loss adjustment expenses before catastrophes | 26 | |||
Catastrophes — Increase in current accident year catastrophes | (43 | ) | ||
Reserve changes — Decrease in net favorable prior accident year reserve development | (1 | ) | ||
Net increase in losses and loss adjustment expenses | (18 | ) | ||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (1 | ) | ||
Increase in insurance operating costs and expenses | (13 | ) | ||
Increase in operating expenses | (14 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (37 | ) | |
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Change in underwriting results | ||||
No change in earned premiums | $ | — | ||
Losses and loss adjustment expenses | ||||
Ratio change — A decrease in the current accident loss and loss adjustment expense ratio before catastrophes | 72 | |||
Catastrophes — Increase in current accident year catastrophes | (68 | ) | ||
Reserve changes — Decrease in net favorable prior accident year reserve development | (29 | ) | ||
Net increase in losses and loss adjustment expenses | (25 | ) | ||
Operating expenses | ||||
No change in amortization of deferred policy acquisition costs | — | |||
Increase in insurance operating costs and expenses | (9 | ) | ||
Increase in operating expenses | (9 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (34 | ) | |
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• | Written premium 0.5% to 2.5% lower |
• | A combined ratio before catastrophes and prior accident year development of 84.0 to 86.0 |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Premiums [1] | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Written premiums | $ | 555 | $ | 573 | (3 | %) | $ | 1,616 | $ | 1,666 | (3 | %) | ||||||||||||
Earned premiums | 553 | 582 | (5 | %) | 1,688 | 1,779 | (5 | %) |
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Premium Measures | 2008 | 2007 | 2008 | 2007 | ||||||||||||
New business premium | $ | 111 | $ | 93 | $ | 315 | $ | 296 | ||||||||
Premium renewal retention | 78 | % | 77 | % | 79 | % | 77 | % | ||||||||
Written pricing decrease | (5 | %) | (3 | %) | (6 | %) | (4 | %) | ||||||||
Earned pricing decrease | (6 | %) | (5 | %) | (6 | %) | (5 | %) | ||||||||
Policies in-force end of period | 83,188 | 79,813 |
New business premium | • | New business written premium increased by $18, or 19%, to $111 in the third quarter of 2008 and increased by $19, or 6%, for the first nine months of 2008. An increase in new business written premium for workers’ compensation was partially offset by a decrease in new business for general liability and marine. While continued price competition and the effect of some state-mandated rate reductions in workers’ compensation has lessened the attractiveness of new business in certain lines and regions, the Company has increased new business for workers’ compensation due, in part, to the effect of targeting business in selected industries and regions of the country. | ||
Premium renewal retention | • | Premium renewal retention increased from 77% to 78% for the three month period and increased from 77% to 79% for the nine month period due largely to an increase in retention of workers’ compensation, property and marine, partially offset by a decrease in retention of auto business for the three month period and the effect of larger written pricing decreases. The Company continued to take actions to protect renewals in the first nine months of 2008, including the use of reduced pricing on targeted accounts. | ||
Earned pricing increase (decrease) | • | Earned pricing decreased in all lines of business, including workers’ compensation, commercial auto, general liability, property and marine. As written premium is earned over the 12-month term of the policies, the earned pricing decreases during the third quarter and first nine months of 2008 were primarily a reflection of mid-single digit written pricing decreases over the last six months of 2007 and the first three months of 2008. A number of carriers have continued to compete fairly aggressively on price, particularly on larger accounts within Middle Market, which has contributed to mid-single digit price decreases across the industry. | ||
Policies in-force | • | While the number of policies in-force increased by 4% from September 30, 2007 to September 30, 2008, due largely to growth on smaller accounts, earned premium declined due to the reduction in the average premium per policy. |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Middle Market — Underwriting Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Written premiums | $ | 555 | $ | 573 | (3 | %) | $ | 1,616 | $ | 1,666 | (3 | %) | ||||||||||||
Change in unearned premium reserve | 2 | (9 | ) | NM | (72 | ) | (113 | ) | 36 | % | ||||||||||||||
Earned premiums | 553 | 582 | (5 | %) | 1,688 | 1,779 | (5 | %) | ||||||||||||||||
Losses and loss adjustment expenses | ||||||||||||||||||||||||
Current accident year before catastrophes | 377 | 384 | (2 | %) | 1,118 | 1,145 | (2 | %) | ||||||||||||||||
Current accident year catastrophes | 64 | (1 | ) | NM | 106 | 9 | NM | |||||||||||||||||
Prior accident years | (17 | ) | 11 | NM | (55 | ) | 27 | NM | ||||||||||||||||
Total losses and loss adjustment expenses | 424 | 394 | 8 | % | 1,169 | 1,181 | (1 | %) | ||||||||||||||||
Amortization of deferred policy acquisition costs | 127 | 132 | (4 | %) | 385 | 401 | (4 | %) | ||||||||||||||||
Insurance operating costs and expenses | 40 | 34 | 18 | % | 120 | 108 | 11 | % | ||||||||||||||||
Underwriting results | $ | (38 | ) | $ | 22 | NM | $ | 14 | $ | 89 | (84 | %) | ||||||||||||
Loss and loss adjustment expense ratio | ||||||||||||||||||||||||
Current accident year before catastrophes | 68.1 | 66.1 | (2.0 | ) | 66.3 | 64.4 | (1.9 | ) | ||||||||||||||||
Current accident year catastrophes | 11.5 | — | (11.5 | ) | 6.3 | 0.5 | (5.8 | ) | ||||||||||||||||
Prior accident years | (3.2 | ) | 1.8 | 5.0 | (3.3 | ) | 1.5 | 4.8 | ||||||||||||||||
Total loss and loss adjustment expense ratio | 76.5 | 67.9 | (8.6 | ) | 69.2 | 66.4 | (2.8 | ) | ||||||||||||||||
Expense ratio | 29.6 | 28.2 | (1.4 | ) | 28.8 | 28.1 | (0.7 | ) | ||||||||||||||||
Policyholder dividend ratio | 0.8 | 0.3 | (0.5 | ) | 1.1 | 0.5 | (0.6 | ) | ||||||||||||||||
Combined ratio | 106.8 | 96.3 | (10.5 | ) | 99.2 | 95.0 | (4.2 | ) | ||||||||||||||||
Catastrophe ratio | ||||||||||||||||||||||||
Current year | 11.5 | — | (11.5 | ) | 6.3 | 0.5 | (5.8 | ) | ||||||||||||||||
Prior years | (1.1 | ) | (0.3 | ) | 0.8 | (0.4 | ) | (0.4 | ) | — | ||||||||||||||
Total catastrophe ratio | 10.4 | (0.3 | ) | (10.7 | ) | 5.8 | 0.2 | (5.6 | ) | |||||||||||||||
Combined ratio before catastrophes | 96.4 | 96.6 | 0.2 | 93.3 | 94.8 | 1.5 | ||||||||||||||||||
Combined ratio before catastrophes and prior accident years development | 98.5 | 94.5 | (4.0 | ) | 96.2 | 93.0 | (3.2 | ) | ||||||||||||||||
Change in underwriting results | ||||
Decrease in earned premiums | $ | (29 | ) | |
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year loss and loss adjustment expenses before catastrophes due to the decrease in earned premium | 19 | |||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes | (12 | ) | ||
Net decrease in current accident year losses and loss adjustment expenses before catastrophes | 7 | |||
Catastrophes — Increase in current accident year catastrophes | (65 | ) | ||
Reserve changes — A change to net favorable prior accident year reserve development | 28 | |||
Net increase in losses and loss adjustment expenses | (30 | ) | ||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 5 | |||
Increase in insurance operating costs and expenses | (6 | ) | ||
Net increase in operating expenses | (1 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (60 | ) | |
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Change in underwriting results | ||||
Decrease in earned premiums | $ | (91 | ) | |
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year loss and loss adjustment expenses before catastrophes due to the decrease in earned premium | 59 | |||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes | (32 | ) | ||
Net decrease in current accident year losses and loss adjustment expenses before catastrophes | 27 | |||
Catastrophes — Increase in current accident year catastrophes | (97 | ) | ||
Reserve changes — Change to net favorable prior accident year reserve development | 82 | |||
Net decrease in losses and loss adjustment expenses | 12 | |||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 16 | |||
Increase in insurance operating costs and expenses | (12 | ) | ||
Net decrease in operating expenses | 4 | |||
Decrease in underwriting results from 2007 to 2008 | $ | (75 | ) | |
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• | Written premium 3% to 5% lower |
• | A combined ratio before catastrophes and prior accident year development of 95.5 to 97.5 |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2008 | 2007 | Change | 2008 | 2007 | Change | |||||||||||||||||||
Written Premiums [1] | ||||||||||||||||||||||||
Property | $ | 30 | $ | 44 | (32 | %) | $ | 84 | $ | 144 | (42 | %) | ||||||||||||
Casualty | 134 | 119 | 13 | % | 428 | 431 | (1 | %) | ||||||||||||||||
Professional liability, fidelity and surety | 178 | 173 | 3 | % | 506 | 510 | (1 | %) | ||||||||||||||||
Other | 19 | 20 | (5 | %) | 62 | 62 | — | |||||||||||||||||
Total | $ | 361 | $ | 356 | 1 | % | $ | 1,080 | $ | 1,147 | (6 | %) | ||||||||||||
Earned Premiums [1] | ||||||||||||||||||||||||
Property | $ | 35 | $ | 52 | (33 | %) | $ | 119 | $ | 153 | (22 | %) | ||||||||||||
Casualty | 131 | 130 | 1 | % | 395 | 409 | (3 | %) | ||||||||||||||||
Professional liability, fidelity and surety | 173 | 176 | (2 | %) | 512 | 514 | — | |||||||||||||||||
Other | 19 | 19 | — | 61 | 63 | (3 | %) | |||||||||||||||||
Total | $ | 358 | $ | 377 | (5 | %) | $ | 1,087 | $ | 1,139 | (5 | %) | ||||||||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
• | Property earned premiums decreased by $17, or 33%, for the three month period and by $34, or 22%, for the nine month period, primarily due to the Company’s decision to stop writing specialty property business with large, national accounts, the effect of increased competition for core excess and surplus lines business and the effect of an arrangement with Berkshire Hathaway to share premiums written under subscription policies sold in the excess and surplus lines market. Under the arrangement with Berkshire Hathaway that commenced in the second quarter of 2007, a share of excess and surplus lines business that was previously written entirely by the Company is now being written in conjunction with Berkshire Hathaway under subscription policies, whereby both companies share, or participate, in the business written. As a result of increased competition and capacity for core excess and surplus lines business, the Company has experienced a decrease in earned pricing, lower new business growth and lower premium renewal retention since the third quarter of 2007, particularly for catastrophe-exposed business. |
• | Casualty earned premiums were relatively flat for the three month period and decreased by $14, or 3%, for the nine month period, primarily because of earned pricing decreases and, for the nine month period, a decline in new business premium on loss-sensitive business written with larger accounts. |
• | Professional liability, fidelity and surety earned premium decreased $3, or 2%, for the three month period due to a slight decrease in contract surety earned premium and decreased $2 in the nine month period due to a slight decrease in professional liability earned premium. The decrease in contract surety earned premium for the three month period was primarily due to increased competition for public construction projects and reduced private construction activity. The decrease in earned premium from professional liability business in the nine month period was primarily due to earned pricing decreases in 2008 and the effect of a decline in new business written premium over the last six months of 2007 and first six months of 2008, partially offset by the effect of a decrease in the portion of risks ceded to outside reinsurers. |
• | Within the “Other” category, earned premium remained relatively flat from 2007 to 2008 in both the three and nine month periods. The “Other” category of earned premiums includes premiums assumed under inter-segment arrangements. |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Specialty Commercial — Underwriting Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Written premiums | $ | 361 | $ | 356 | 1 | % | $ | 1,080 | $ | 1,147 | (6 | %) | ||||||||||||
Change in unearned premium reserve | 3 | (21 | ) | NM | (7 | ) | 8 | NM | ||||||||||||||||
Earned premiums | 358 | 377 | (5 | %) | 1,087 | 1,139 | (5 | %) | ||||||||||||||||
Losses and loss adjustment expenses | ||||||||||||||||||||||||
Current accident year before catastrophes | 247 | 246 | — | 740 | 757 | (2 | %) | |||||||||||||||||
Current accident year catastrophes | 44 | 1 | NM | 52 | 3 | NM | ||||||||||||||||||
Prior accident years | 2 | 18 | (89 | %) | (39 | ) | 18 | NM | ||||||||||||||||
Total losses and loss adjustment expenses | 293 | 265 | 11 | % | 753 | 778 | (3 | %) | ||||||||||||||||
Amortization of deferred policy acquisition costs | 78 | 80 | (3 | %) | 235 | 242 | (3 | %) | ||||||||||||||||
Insurance operating costs and expenses | 30 | 26 | 15 | % | 79 | 69 | 14 | % | ||||||||||||||||
Underwriting results | $ | (43 | ) | $ | 6 | NM | $ | 20 | $ | 50 | (60 | %) | ||||||||||||
Loss and loss adjustment expense ratio | ||||||||||||||||||||||||
Current accident year before catastrophes | 68.6 | 65.5 | (3.1 | ) | 67.9 | 66.4 | (1.5 | ) | ||||||||||||||||
Current accident year catastrophes | 12.6 | 0.2 | (12.4 | ) | 4.9 | 0.3 | (4.6 | ) | ||||||||||||||||
Prior accident years | 0.5 | 5.0 | 4.5 | (3.6 | ) | 1.7 | 5.3 | |||||||||||||||||
Total loss and loss adjustment expense ratio | 81.7 | 70.7 | (11.0 | ) | 69.3 | 68.4 | (0.9 | ) | ||||||||||||||||
Expense ratio | 29.0 | 27.7 | (1.3 | ) | 28.0 | 26.9 | (1.1 | ) | ||||||||||||||||
Policyholder dividend ratio | 1.3 | 0.3 | (1.0 | ) | 0.9 | 0.4 | (0.5 | ) | ||||||||||||||||
Combined ratio | 111.9 | 98.6 | (13.3 | ) | 98.1 | 95.7 | (2.4 | ) | ||||||||||||||||
Catastrophe ratio | ||||||||||||||||||||||||
Current year | 12.6 | 0.2 | (12.4 | ) | 4.9 | 0.3 | (4.6 | ) | ||||||||||||||||
Prior years | (0.7 | ) | 1.2 | 1.9 | (1.0 | ) | 0.1 | 1.1 | ||||||||||||||||
Total catastrophe ratio | 11.9 | 1.4 | (10.5 | ) | 3.9 | 0.4 | (3.5 | ) | ||||||||||||||||
Combined ratio before catastrophes | 100.0 | 97.2 | (2.8 | ) | 94.3 | 95.3 | 1.0 | |||||||||||||||||
Combined ratio before catastrophes and prior accident years development | 98.8 | 93.5 | (5.3 | ) | 96.8 | 93.7 | (3.1 | ) | ||||||||||||||||
Other revenues [1] | $ | 99 | $ | 91 | 9 | % | $ | 281 | $ | 264 | 6 | % | ||||||||||||
[1] | Represents servicing revenue. |
Change in underwriting results | ||||
Decrease in earned premiums | $ | (19 | ) | |
Losses and loss adjustment expenses | ||||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes | (13 | ) | ||
Volume change — Decrease in current accident year loss and loss adjustment expenses before catastrophes due to the decrease in earned premium | 12 | |||
Net increase in current accident year losses and loss adjustment expenses before catastrophes | (1 | ) | ||
Catastrophes — Increase in current accident year catastrophe losses | (43 | ) | ||
Reserve changes — Decrease in net unfavorable prior accident year reserve development | 16 | |||
Net increase in losses and loss adjustment expenses | (28 | ) | ||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 2 | |||
Increase in insurance operating costs and expenses | (4 | ) | ||
Net increase in operating expenses | (2 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (49 | ) | |
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Change in underwriting results | ||||
Decrease in earned premiums | $ | (52 | ) | |
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year loss and loss adjustment expenses before catastrophes due to the decrease in earned premium | 34 | |||
Ratio change — Increase in the current accident year non-catastrophe loss and loss adjustment expense ratio before catastrophes | (17 | ) | ||
Net decrease in current accident year losses and loss adjustment expenses before catastrophes | 17 | |||
Catastrophes — Increase in current accident year catastrophe losses | (49 | ) | ||
Reserve changes — A change to net favorable prior accident year reserve development | 57 | |||
Net decrease in losses and loss adjustment expenses | 25 | |||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 7 | |||
Increase in insurance operating costs and expenses | (10 | ) | ||
Net increase in operating expenses | (3 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (30 | ) | |
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• | Written premium 4% to 6% lower |
• | A combined ratio before catastrophes and prior accident year development of 96.5 to 98.5 |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
Operating Summary | 2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||||
Written premiums | $ | 1 | $ | 2 | (50 | %) | $ | 5 | $ | 3 | 67 | % | ||||||||||||
Change in unearned premium reserve | — | — | — | 1 | — | — | ||||||||||||||||||
Earned premiums | 1 | 2 | (50 | %) | 4 | 3 | 33 | % | ||||||||||||||||
Losses and loss adjustment expenses — prior years | 56 | 39 | 44 | % | 126 | 173 | (27 | %) | ||||||||||||||||
Insurance operating costs and expenses | 6 | 6 | — | 16 | 17 | (6 | %) | |||||||||||||||||
Underwriting results | (61 | ) | (43 | ) | (42 | %) | (138 | ) | (187 | ) | 26 | % | ||||||||||||
Net investment income | 50 | 61 | (18 | %) | 162 | 184 | (12 | %) | ||||||||||||||||
Net realized capital losses | (160 | ) | (3 | ) | NM | (176 | ) | (3 | ) | NM | ||||||||||||||
Other expenses | 1 | (1 | ) | NM | (1 | ) | (3 | ) | 67 | % | ||||||||||||||
Income (loss) before income taxes | (170 | ) | 14 | NM | (153 | ) | (9 | ) | NM | |||||||||||||||
Income tax (expense) benefit | 62 | (2 | ) | NM | 62 | 13 | NM | |||||||||||||||||
Net income (loss) | $ | (108 | ) | $ | 12 | NM | $ | (91 | ) | $ | 4 | NM | ||||||||||||
• | An $18 decrease in underwriting results, primarily due to a $17 increase in unfavorable prior year loss development. Reserve development in the three months ended September 30, 2008 included $53 of environmental reserve strengthening as a result of the Company’s annual environmental reserve evaluation. For the comparable three month period ended September 30, 2007, reserve development included $25 of environmental reserve strengthening. |
• | An $11 decrease in net investment income, primarily as a result of a decrease in investment yield for limited partnerships and other alternative investments and, to a lesser extent, a decrease in investment yield for fixed maturities and a decrease in invested assets resulting from net losses and loss adjustment expenses paid. |
• | A $157 increase in net realized capital losses in 2008, primarily due to realized losses in 2008 from impairments of corporate debt and equity securities in the financial services sector. (See the Other-Than-Temporary Impairments discussion within “Investment Results” in the “Investments” section of the MD&A for more information on the impairments recorded in 2008). |
• | A change from $2 income tax expense to $62 income tax benefit, primarily as a result of an increase in net realized capital losses. |
• | A $49 increase in underwriting results, primarily due to a $47 decrease in unfavorable prior year loss development. Reserve development in the nine months ended September 30, 2008 included $53 of environmental reserve strengthening as a result of the Company’s annual environmental reserve evaluation and $50 of asbestos reserve strengthening as a result of the Company’s annual asbestos reserve evaluation. For the comparable nine month period ended September 30, 2007, reserve development included $99 principally as a result of an adverse arbitration decision and $25 of environmental reserve strengthening. |
• | A $22 decrease in net investment income, primarily as a result of a decrease in investment yield for limited partnerships and other alternative investments and, to a lesser extent, a decrease in investment yield for fixed maturities and a decrease in invested assets resulting from net losses and loss adjustment expenses paid. |
• | A $173 increase in net realized capital losses in 2008, primarily due to realized losses in 2008 from impairments of corporate debt and equity securities in the financial services sector. (See the Other-Than-Temporary Impairments discussion within “Investment Results” in the “Investments” section of the MD&A for more information on the impairments recorded in 2008). |
• | A $49 increase in income tax benefit, primarily as a result of an increase in net realized capital losses. |
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For the Three Months Ended September 30, 2008 | Asbestos | Environmental | All Other [1] | Total | |||||||||||||||
Beginning liability — net [2][3] | $ | 1,967 | $ | 237 | $ | 1,803 | $ | 4,007 | |||||||||||
Losses and loss adjustment expenses incurred | 3 | 53 | — | 56 | |||||||||||||||
Losses and loss adjustment expenses paid | (35 | ) | (9 | ) | (59 | ) | (103 | ) | |||||||||||
Ending liability — net [2][3] | $ | 1,935 | [4] | $ | 281 | $ | 1,744 | $ | 3,960 | ||||||||||
For the Nine Months Ended September 30, 2008 | Asbestos | Environmental | All Other [1] | Total | |||||||||||||||
Beginning liability — net [2][3] | $ | 1,998 | $ | 251 | $ | 1,888 | $ | 4,137 | |||||||||||
Losses and loss adjustment expenses incurred | 59 | 53 | 14 | 126 | |||||||||||||||
Losses and loss adjustment expenses paid | (122 | ) | (23 | ) | (158 | ) | (303 | ) | |||||||||||
Ending liability — net [2][3] | $ | 1,935 | [4] | $ | 281 | $ | 1,744 | $ | 3,960 | ||||||||||
[1] | “All Other” includes unallocated loss adjustment expense reserves and the allowance for uncollectible reinsurance. |
[2] | Excludes asbestos and environmental net liabilities reported in Ongoing Operations of $15 and $6, respectively, as of September 30, 2008, $12 and $6, respectively, as of June 30, 2008, and $9 and $6, respectively, as of December 31, 2007. Total net losses and loss adjustment expenses incurred in Ongoing Operations for the three and nine months ended September 30, 2008 includes $5 and $13, respectively, related to asbestos and environmental claims. Total net losses and loss adjustment expenses paid in Ongoing Operations for the three and nine months ended September 30, 2008 includes $2 and $7, respectively, related to asbestos and environmental claims. |
[3] | Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were $2,625 and $323, respectively, as of September 30, 2008, $2,676 and $271, respectively, as of June 30, 2008,and $2,707 and $290, respectively, as of December 31, 2007. |
[4] | The one year and average three year net paid amounts for asbestos claims, including Ongoing Operations, are $237 and $277, respectively, resulting in a one year net survival ratio of 8.2 and a three year net survival ratio of 7.0. Net survival ratio is the quotient of the net carried reserves divided by the average annual payment amount and is an indication of the number of years that the net carried reserve would last (i.e. survive) if the future annual claim payments were consistent with the calculated historical average. |
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Total | ||||||||
Number of Accounts [1] | Reserves | |||||||
Accounts with future exposure > $2.5 | 9 | $ | 44 | |||||
Accounts with future exposure < $2.5 | 565 | 100 | ||||||
Other direct [2] | — | 62 | ||||||
Total Direct | 574 | $ | 206 | |||||
Assumed Reinsurance | 61 | |||||||
London Market | 56 | |||||||
Total as of September 30, 2008 [3] [4] | $ | 323 | ||||||
[1] | Number of accounts established as of June 2008. |
[2] | Includes unallocated IBNR. |
[3] | The one year gross paid amount for total environmental claims is $47, resulting in a one year gross survival ratio of 6.9. |
[4] | The three year average annual gross paid amount for total environmental claims is $96, resulting in a three year gross survival ratio of 3.4. |
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Asbestos [1] | Environmental [1] | |||||||||||||||
Paid | Incurred | Paid | Incurred | |||||||||||||
Three Months Ended September 30, 2008 | Losses & LAE | Losses & LAE | Losses & LAE | Losses & LAE | ||||||||||||
Gross | ||||||||||||||||
Direct | $ | 28 | $ | — | $ | 9 | $ | 69 | ||||||||
Assumed — Domestic | 17 | — | — | (17 | ) | |||||||||||
London Market | 10 | — | 1 | 13 | ||||||||||||
Total | 55 | — | 10 | 65 | ||||||||||||
Ceded | (20 | ) | 3 | (1 | ) | (12 | ) | |||||||||
Net | $ | 35 | $ | 3 | $ | 9 | $ | 53 | ||||||||
Nine Months Ended September 30, 2008 | ||||||||||||||||
Gross | ||||||||||||||||
Direct | $ | 97 | $ | 76 | $ | 23 | $ | 69 | ||||||||
Assumed — Domestic | 51 | — | 5 | (17 | ) | |||||||||||
London Market | 16 | — | 3 | 13 | ||||||||||||
Total | 164 | 76 | 31 | 65 | ||||||||||||
Ceded | (42 | ) | (17 | ) | (8 | ) | (12 | ) | ||||||||
Net | $ | 122 | $ | 59 | $ | 23 | $ | 53 | ||||||||
[1] | Excludes asbestos and environmental paid and incurred loss and LAE reported in Ongoing Operations. Total gross loss and LAE incurred in Ongoing Operations for the three and nine months ended September 30, 2008 includes $4 and $12, respectively, related to asbestos and environmental claims. Total gross loss and LAE paid in Ongoing Operations for the three and nine months ended September 30, 2008 includes $3 and $7, respectively, related to asbestos and environmental claims. |
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Composition of Invested Assets | ||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Fixed maturities, available-for-sale, at fair value | $ | 46,292 | 75.5 | % | $ | 52,542 | 82.6 | % | ||||||||
Equity securities, available-for-sale, at fair value | 908 | 1.5 | % | 1,284 | 2.0 | % | ||||||||||
Policy loans, at outstanding balance | 2,159 | 3.5 | % | 2,061 | 3.2 | % | ||||||||||
Mortgage loans, at amortized cost [1] | 5,460 | 8.9 | % | 4,739 | 7.5 | % | ||||||||||
Limited partnerships and other alternative investments [2] | 1,410 | 2.3 | % | 1,306 | 2.1 | % | ||||||||||
Short-term investments | 3,793 | 6.2 | % | 1,158 | 1.8 | % | ||||||||||
Other investments [3] | 1,308 | 2.1 | % | 534 | 0.8 | % | ||||||||||
Total investments excl. equity securities, held for trading | $ | 61,330 | 100.0 | % | $ | 63,624 | 100.0 | % | ||||||||
Equity securities, held for trading, at fair value [4] | 33,655 | 36,182 | ||||||||||||||
Total investments | $ | 94,985 | $ | 99,806 | ||||||||||||
[1] | Consist of commercial and agricultural loans. | |
[2] | Includes a real estate joint venture. | |
[3] | Primarily relates to derivative instruments. | |
[4] | These assets primarily support the International variable annuity business. Changes in these balances are also reflected in the respective liabilities. |
Composition of Limited Partnerships and Other Alternative Investments | ||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Hedge funds [1] | $ | 514 | 36.4 | % | $ | 506 | 38.7 | % | ||||||||
Mortgage and real estate [2] | 300 | 21.3 | % | 309 | 23.7 | % | ||||||||||
Mezzanine debt [3] | 93 | 6.6 | % | 72 | 5.5 | % | ||||||||||
Private equity and other [4] | 503 | 35.7 | % | 419 | 32.1 | % | ||||||||||
Total | $ | 1,410 | 100.0 | % | $ | 1,306 | 100.0 | % | ||||||||
[1] | Hedge funds include investments in funds of funds as well as direct funds. The hedge funds of funds invest in approximately 25 to 50 different hedge funds within a variety of investment styles. Examples of hedge fund strategies include long/short equity or credit, event driven strategies and structured credit. | |
[2] | Mortgage and real estate funds consist of investments in funds whose assets consist of mortgage loans, participations in mortgage loans, mezzanine loans or other notes which may be below investment grade credit quality as well as equity real estate. Also included is the investment in a real estate joint venture. | |
[3] | Mezzanine debt funds consist of investments in funds whose assets consist of subordinated debt that often times incorporates equity-based options such as warrants and a limited amount of direct equity investments. | |
[4] | Private equity and other funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small non-public businesses with high growth potential. |
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Three Months Ended | Nine months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||||||||||
Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | |||||||||||||||||||||||||
Fixed maturities [2] | $ | 718 | 5.4 | % | $ | 794 | 5.9 | % | $ | 2,184 | 5.4 | % | $ | 2,313 | 5.9 | % | ||||||||||||||||
Equity securities, available-for-sale | 17 | 5.2 | % | 23 | 6.8 | % | 73 | 7.0 | % | 63 | 7.0 | % | ||||||||||||||||||||
Mortgage loans | 71 | 5.4 | % | 68 | 6.2 | % | 214 | 5.7 | % | 184 | 6.3 | % | ||||||||||||||||||||
Policy loans | 34 | 6.3 | % | 32 | 6.3 | % | 101 | 6.3 | % | 102 | 6.6 | % | ||||||||||||||||||||
Limited partnerships and other alternative investments | (59 | ) | (16.8 | %) | 23 | 9.3 | % | (67 | ) | (6.7 | %) | 101 | 14.7 | % | ||||||||||||||||||
Other [3] | (3 | ) | — | (39 | ) | — | (44 | ) | — | (90 | ) | — | ||||||||||||||||||||
Investment expense | (19 | ) | — | (18 | ) | — | (54 | ) | — | (54 | ) | — | ||||||||||||||||||||
Total net investment income excl. equity securities held for trading | $ | 759 | 4.8 | % | $ | 883 | 6.0 | % | $ | 2,407 | 5.2 | % | $ | 2,619 | 6.0 | % | ||||||||||||||||
Equity securities, held for trading [4] | (3,415 | ) | — | (698 | ) | — | (5,840 | ) | — | 746 | — | |||||||||||||||||||||
Total net investment income (loss) | $ | (2,656 | ) | — | $ | 185 | — | $ | (3,433 | ) | — | $ | 3,365 | — | ||||||||||||||||||
[1] | Yields calculated using investment income before investment expenses divided by the monthly weighted average invested assets at cost, amortized cost, or adjusted carrying value, as applicable excluding collateral received associated with the securities lending program and consolidated variable interest entity minority interests. Included in the fixed maturity yield is Other income (loss) as it primarily relates to fixed maturities (see footnote [3] below). Included in the total net investment income yield is investment expense. | |
[2] | Includes net investment income on short-term bonds. | |
[3] | Includes fees associated with securities lending activities of $11 and $50, respectively, for the three and nine months ended September 30, 2008, and $29 and $67, respectively, for the three and nine months ended September 30, 2007. The income from securities lending activities is included within fixed maturities. Also included are derivatives that qualify for hedge accounting under SFAS 133. These derivatives hedge fixed maturities. | |
[4] | Includes investment income and mark-to-market effects of equity securities, held for trading. |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Gross gains on sale | $ | 44 | $ | 25 | $ | 128 | $ | 133 | ||||||||
Gross losses on sale | (89 | ) | (45 | ) | (244 | ) | (137 | ) | ||||||||
Impairments | (1,760 | ) | (75 | ) | (2,115 | ) | (109 | ) | ||||||||
Japanese fixed annuity contract hedges, net [1] | 36 | 15 | 13 | 3 | ||||||||||||
Periodic net coupon settlements on credit derivatives/Japan | (8 | ) | (9 | ) | (26 | ) | (34 | ) | ||||||||
SFAS 157 transition impact [2] | — | — | (650 | ) | — | |||||||||||
GMWB derivatives, net | (133 | ) | (141 | ) | (256 | ) | (252 | ) | ||||||||
Other, net [3] | (102 | ) | (58 | ) | (310 | ) | (90 | ) | ||||||||
Net realized capital losses, before-tax | $ | (2,012 | ) | $ | (288 | ) | $ | (3,460 | ) | $ | (486 | ) | ||||
[1] | Relates to the Japanese fixed annuity product (product and related derivative hedging instruments excluding periodic net coupon settlements). | |
[2] | Includes losses from SFAS 157 transition impact of $616, $10 and $24 related to the embedded derivatives within GMWB-US, GMWB-UK and GMAB liabilities, respectively. | |
[3] | Primarily consists of changes in fair value on non-qualifying derivatives and other investment gains and losses. |
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Gross Gains and Losses on Sale | • | Gross gains on sales for the three and nine months ended September 30, 2008 were predominantly within fixed maturities and were primarily comprised of corporate securities. Gross losses on sales for the three and nine months ended September 30, 2008 were primarily comprised of corporate securities, CMBS, and municipal securities, as well as $17 of CLOs in the first quarter for which HIMCO is the collateral manager. Gross gains and losses on sale, excluding the loss on CLOs, primarily resulted from the decision to reallocate the portfolio to securities with more favorable risk/return profiles. For more information regarding losses on the sale of HIMCO managed CLOs, refer to the Variable Interest Entities section below. During the three and nine months ended September 30, 2008, securities sold at a loss were depressed, on average, approximately 7% and 2%, respectively, at the respective period’s impairment review date and were deemed to be temporarily impaired. | ||
• | Gross gains and losses on sales for three and nine months ended September 30, 2007 were primarily comprised of corporate securities. During the three and nine months ended September 30, 2007, securities sold at a loss were depressed, on average, approximately 2% and 1%, respectively, at the respective period’s impairment review date and were deemed to be temporarily impaired. | |||
Impairments | • | See the Other-Than-Temporary Impairments section that follows for information on impairment losses. | ||
SFAS 157 | • | See Note 4 in the Notes to the Condensed Consolidated Financial Statements for a discussion of the SFAS 157 transition impact. | ||
GMWB | • | See Note 4 in the Notes to the Condensed Consolidated Financial Statements for a discussion of GMWB gains and losses. | ||
Other | • | Other, net losses for the three and nine months ended September 30, 2008 were primarily related to net losses on credit derivatives of $106 and $314, respectively. The net losses on credit derivatives were primarily due to significant credit spread widening on credit derivatives that assume credit exposure. Included in the nine months ended September 30, 2008 were losses incurred in the first quarter on HIMCO managed CLOs. For more information regarding these losses, refer to the Variable Interest Entities section below. Also included were derivative related losses of $39 for the three and nine months ended September 30, 2008 due to counterparty default related to the bankruptcy of Lehman Brothers Holdings Inc. | ||
• | Other, net losses for the three and nine months ended September 30, 2007 were primarily driven by the change in value of non-qualifying derivatives due to credit spread widening as well as fluctuations in interest rates and foreign currency exchange rates. |
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Composition of Invested Assets | ||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Fixed maturities, available-for-sale, at fair value | $ | 23,727 | 86.2 | % | $ | 27,205 | 88.8 | % | ||||||||
Equity securities, available-for-sale, at fair value | 741 | 2.7 | % | 1,208 | 3.9 | % | ||||||||||
Mortgage loans, at amortized cost [1] | 762 | 2.8 | % | 671 | 2.2 | % | ||||||||||
Limited partnerships and other alternative investments [2] | 1,407 | 5.1 | % | 1,260 | 4.1 | % | ||||||||||
Short-term investments | 827 | 3.0 | % | 284 | 0.9 | % | ||||||||||
Other investments | 62 | 0.2 | % | 38 | 0.1 | % | ||||||||||
Total investments | $ | 27,526 | 100.0 | % | $ | 30,666 | 100.0 | % | ||||||||
[1] | Consist of commercial and agricultural loans. | |
[2] | Includes hedge fund investments outside of limited partnerships and a real estate joint venture. |
Composition of Limited Partnerships and Other Alternative Investments | ||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Hedge funds [1] | $ | 780 | 55.4 | % | $ | 728 | 57.8 | % | ||||||||
Mortgage and real estate [2] | 318 | 22.6 | % | 291 | 23.1 | % | ||||||||||
Mezzanine debt [3] | 60 | 4.3 | % | 48 | 3.8 | % | ||||||||||
Private equity and other [4] | 249 | 17.7 | % | 193 | 15.3 | % | ||||||||||
Total | $ | 1,407 | 100.0 | % | $ | 1,260 | 100.0 | % | ||||||||
[1] | Hedge funds include investments in funds of funds as well as direct funds. The hedge funds of funds invest in approximately 25 to 50 different hedge funds within a variety of investment styles. Examples of hedge fund strategies include long/short equity or credit, event driven strategies and structured credit. | |
[2] | Mortgage and real estate funds consist of investments in funds whose assets consist of mortgage loans, participations in mortgage loans, mezzanine loans or other notes which may be below investment grade credit quality as well as equity real estate. Also included is the investment in a real estate joint venture. | |
[3] | Mezzanine debt funds consist of investments in funds whose assets consist of subordinated debt that often times incorporates equity-based options such as warrants and a limited amount of direct equity investments. | |
[4] | Private equity and other funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small non-public businesses with high growth potential. |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||||||||||
Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | |||||||||||||||||||||||||
Fixed maturities [2] | $ | 364 | 5.5 | % | $ | 383 | 5.7 | % | $ | 1,092 | 5.5 | % | $ | 1,126 | 5.6 | % | ||||||||||||||||
Equity securities, available-for-sale | 17 | 5.8 | % | 12 | 5.6 | % | 56 | 6.2 | % | 34 | 5.9 | % | ||||||||||||||||||||
Mortgage loans | 11 | 5.8 | % | 11 | 6.7 | % | 30 | 5.6 | % | 28 | 6.4 | % | ||||||||||||||||||||
Limited partnerships and other alternative investments | (42 | ) | (11.8 | %) | 19 | 7.2 | % | (45 | ) | (4.4 | %) | 114 | 16.4 | % | ||||||||||||||||||
Other [3] | (8 | ) | — | (11 | ) | — | (23 | ) | — | (17 | ) | — | ||||||||||||||||||||
Investment expense | (7 | ) | — | (7 | ) | — | (19 | ) | — | (19 | ) | — | ||||||||||||||||||||
Net investment income, before-tax | $ | 335 | 4.6 | % | $ | 407 | 5.6 | % | $ | 1,091 | 4.9 | % | $ | 1,266 | 5.9 | % | ||||||||||||||||
Net investment income, after-tax [4] | $ | 248 | 3.4 | % | $ | 296 | 4.1 | % | $ | 810 | 3.7 | % | $ | 933 | 4.4 | % | ||||||||||||||||
[1] | Yields calculated using investment income before investment expenses divided by the monthly weighted average invested assets at cost, amortized cost, or adjusted carrying value, as applicable excluding collateral received associated with the securities lending program. Included in the fixed maturity yield is Other income (loss) as it primarily relates to fixed maturities (see footnote [3] below). Included in the total net investment income yield is investment expense. | |
[2] | Includes net investment income on short-term bonds. | |
[3] | Includes fees associated with securities lending activities of $4 and $22, respectively, for the three and nine months ended September 30, 2008 and $14 and $28, respectively, for the three and nine months ended September 30, 2007. Also included are derivatives that qualify for hedge accounting under SFAS 133. These derivatives hedge fixed maturities. | |
[4] | Due to significant holdings in tax-exempt investments, after-tax net investment income and yield are also included. |
Three Months Ended | Nine months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Gross gains on sale | $ | 12 | $ | 31 | $ | 95 | $ | 121 | ||||||||
Gross losses on sale | (82 | ) | (36 | ) | (195 | ) | (98 | ) | ||||||||
Impairments | (1,312 | ) | (35 | ) | (1,425 | ) | (56 | ) | ||||||||
Periodic net coupon settlements on credit derivatives | 2 | 5 | 5 | 11 | ||||||||||||
Other, net [1] | (48 | ) | (40 | ) | (111 | ) | (54 | ) | ||||||||
Net realized capital losses, before-tax | $ | (1,428 | ) | $ | (75 | ) | $ | (1,631 | ) | $ | (76 | ) | ||||
[1] | Primarily consists of changes in fair value on non-qualifying derivatives and other investment gains and losses. |
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Gross Gains and Losses on Sale | • | Gross gains on sales for the three and nine months ended September 30, 2008 were predominantly within fixed maturities and were comprised of corporate and municipal securities. Gross losses on sales for the three and nine months ended September 30, 2008, were primarily comprised of financial services securities, as well as $19 of CLOs in the first quarter for which HIMCO is the collateral manager. Gross gains and losses on sale, excluding the loss on CLOs, primarily resulted from the decision to reallocate the portfolio to securities with more favorable risk/return profiles. For more information regarding losses on the sale of HIMCO managed CLOs, refer to the Variable Interest Entities section below. During the three and nine months ended September 30, 2008, securities sold at a loss were depressed, on average, approximately 6% and 3%, respectively at the respective period’s impairment review date and were deemed to be temporarily impaired. | ||
• | Gross gains and losses on sales for three and nine months ended September 30, 2007 were primarily comprised of foreign government, corporate, and municipal securities. During the three and nine months ended September 30, 2007, securities sold at a loss were depressed, on average, approximately 1% and 2%, respectively, at the respective period’s impairment review date and were deemed to be temporarily impaired. | |||
Impairments | • | See the Other-Than-Temporary Impairments section that follows for information on impairment losses. | ||
Other | • | Other, net losses for the three and nine months ended September 30, 2008 were primarily related to net losses on credit derivatives of $42 and $118, respectively. The net losses on credit derivatives were primarily due to significant credit spread widening on credit derivatives that assume credit exposure. Included in the nine months ended September 30, 2008 were losses incurred in the first quarter on HIMCO managed CLOs. For more information regarding these losses, refer to the Variable Interest Entities section below. Also included were derivative related losses of $7 for the three and nine months ended September 30, 2008 due to counterparty default related to the bankruptcy of Lehman Brothers Holdings Inc. | ||
• | Other, net losses for the three and nine months ended September 30, 2007 were primarily driven by the change in value of non-qualifying derivatives due to credit spread widening. |
Cash Collateral | ||||
Thirty days or less | $ | 992 | ||
Thirty one to 90 days | 598 | |||
Over three to six months | 1,322 | |||
Over six to nine months | 692 | |||
Over nine months to one year | 417 | |||
Total | $ | 4,021 | ||
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September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||
Total | Total | Maximum Exposure | Total | Total | Maximum Exposure | |||||||||||||||||||
Assets | Liabilities [1] | to Loss | Assets | Liabilities [1] | to Loss | |||||||||||||||||||
CLOs [2] | $ | 336 | $ | 41 | $ | 291 | $ | 128 | $ | 47 | $ | 107 | ||||||||||||
Limited partnerships | 301 | 51 | 251 | 309 | 47 | 262 | ||||||||||||||||||
Other investments [3] | 261 | 107 | 148 | 377 | 71 | 317 | ||||||||||||||||||
Total | $ | 898 | $ | 199 | $ | 690 | $ | 814 | $ | 165 | $ | 686 | ||||||||||||
[1] | Creditors have no recourse against the Company in the event of default by the VIE. | |
[2] | The Company provides collateral management services and earns a fee associated with these structures. | |
[3] | Other investments include one unlevered investment bank loan fund for which the Company provides collateral management services and earns an associated fee. As of December 31, 2007, two investment structures were also included that were backed by preferred securities. |
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
ABS | ||||||||||||||||
Sub-prime residential mortgages | $ | 117 | $ | 54 | $ | 198 | $ | 54 | ||||||||
Other | 27 | 5 | 27 | 17 | ||||||||||||
CMBS | ||||||||||||||||
Bonds | 70 | –– | 93 | –– | ||||||||||||
IOs | 59 | –– | 59 | –– | ||||||||||||
CRE CDOs | 225 | –– | 357 | –– | ||||||||||||
CMOs/MBS | 37 | –– | 37 | –– | ||||||||||||
Corporate | ||||||||||||||||
Financial Services | 1,198 | 7 | 1,293 | 9 | ||||||||||||
Other | 286 | 26 | 344 | 56 | ||||||||||||
Equities | ||||||||||||||||
Financial Services | 1,052 | 3 | 1,119 | 11 | ||||||||||||
Other | 2 | 2 | 5 | 5 | ||||||||||||
Other | 4 | 13 | 13 | 13 | ||||||||||||
Total other-than-temporary impairments | $ | 3,077 | $ | 110 | $ | 3,545 | $ | 165 | ||||||||
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Credit Default Swaps | ||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||
Initial | Initial | |||||||||||||||||||||||
Notional | Premium | Fair | Notional | Premium | Fair | |||||||||||||||||||
Amount | Received | Value | Amount | Received | Value | |||||||||||||||||||
Assuming credit risk | $ | 1,392 | $ | (157 | ) | $ | (592 | ) | $ | 2,715 | $ | (203 | ) | $ | (416 | ) | ||||||||
Reducing credit risk | 3,596 | 33 | 133 | 5,166 | (1 | ) | 81 | |||||||||||||||||
Total credit default swaps | $ | 4,988 | $ | (124 | ) | $ | (459 | ) | $ | 7,881 | $ | (204 | ) | $ | (335 | ) | ||||||||
Consolidated Fixed Maturities by Credit Quality | ||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
AAA | $ | 19,886 | $ | 17,613 | 25.1 | % | $ | 28,547 | $ | 28,318 | 35.4 | % | ||||||||||||
AA | 13,929 | 12,410 | 17.7 | % | 11,326 | 10,999 | 13.7 | % | ||||||||||||||||
A | 18,710 | 17,069 | 24.3 | % | 16,999 | 17,030 | 21.3 | % | ||||||||||||||||
BBB | 14,992 | 13,794 | 19.7 | % | 15,093 | 14,974 | 18.7 | % | ||||||||||||||||
United States Government/Government agencies | 5,754 | 5,785 | 8.3 | % | 5,165 | 5,229 | 6.5 | % | ||||||||||||||||
BB & below | 3,736 | 3,420 | 4.9 | % | 3,594 | 3,505 | 4.4 | % | ||||||||||||||||
Total fixed maturities | $ | 77,007 | $ | 70,091 | 100.0 | % | $ | 80,724 | $ | 80,055 | 100.0 | % | ||||||||||||
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Consolidated Available-for-Sale Securities by Type | ||||||||||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||||||||||||||||||
Cost or | Gross | Gross | of Total | Cost or | Gross | Gross | of Total | |||||||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Fair | Amortized | Unrealized | Unrealized | Fair | Fair | |||||||||||||||||||||||||||||||
Cost | Gains | Losses | Value | Value | Cost | Gains | Losses | Value | Value | |||||||||||||||||||||||||||||||
ABS | ||||||||||||||||||||||||||||||||||||||||
Auto | $ | 580 | $ | –– | $ | (57 | ) | $ | 523 | 0.8 | % | $ | 692 | $ | — | $ | (16 | ) | $ | 676 | 0.9 | % | ||||||||||||||||||
CLOs [1] | 2,908 | 2 | (438 | ) | 2,472 | 3.5 | % | 2,590 | — | (114 | ) | 2,476 | 3.1 | % | ||||||||||||||||||||||||||
Credit cards | 1,047 | — | (77 | ) | 970 | 1.4 | % | 957 | 3 | (22 | ) | 938 | 1.2 | % | ||||||||||||||||||||||||||
RMBS [2] | 2,614 | 3 | (623 | ) | 1,994 | 2.8 | % | 2,999 | 10 | (343 | ) | 2,666 | 3.3 | % | ||||||||||||||||||||||||||
Student loan | 766 | — | (168 | ) | 598 | 0.9 | % | 786 | 1 | (40 | ) | 747 | 0.9 | % | ||||||||||||||||||||||||||
Other [3] | 1,285 | 7 | (225 | ) | 1,067 | 1.5 | % | 1,491 | 19 | (98 | ) | 1,412 | 1.7 | % | ||||||||||||||||||||||||||
CMBS | ||||||||||||||||||||||||||||||||||||||||
Bonds | 11,766 | 25 | (1,809 | ) | 9,982 | 14.2 | % | 13,641 | 126 | (421 | ) | 13,346 | 16.7 | % | ||||||||||||||||||||||||||
CRE CDOs | 1,834 | — | (937 | ) | 897 | 1.3 | % | 2,243 | 1 | (390 | ) | 1,854 | 2.3 | % | ||||||||||||||||||||||||||
Interest only (“IOs”) | 1,453 | 31 | (81 | ) | 1,403 | 2.0 | % | 1,741 | 117 | (27 | ) | 1,831 | 2.3 | % | ||||||||||||||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||||||||||
Agency backed | 856 | 14 | (6 | ) | 864 | 1.3 | % | 1,191 | 32 | (4 | ) | 1,219 | 1.5 | % | ||||||||||||||||||||||||||
Non-agency backed [4] | 425 | 1 | (55 | ) | 371 | 0.5 | % | 525 | 4 | (3 | ) | 526 | 0.7 | % | ||||||||||||||||||||||||||
Corporate [5] | ||||||||||||||||||||||||||||||||||||||||
Basic industry | 2,719 | 36 | (110 | ) | 2,645 | 3.8 | % | 2,508 | 61 | (34 | ) | 2,535 | 3.2 | % | ||||||||||||||||||||||||||
Capital goods | 2,393 | 27 | (122 | ) | 2,298 | 3.3 | % | 2,194 | 86 | (26 | ) | 2,254 | 2.8 | % | ||||||||||||||||||||||||||
Consumer cyclical | 2,689 | 29 | (150 | ) | 2,568 | 3.7 | % | 3,011 | 87 | (60 | ) | 3,038 | 3.8 | % | ||||||||||||||||||||||||||
Consumer non-cyclical | 3,551 | 37 | (126 | ) | 3,462 | 4.9 | % | 3,008 | 89 | (37 | ) | 3,060 | 3.8 | % | ||||||||||||||||||||||||||
Energy | 1,727 | 22 | (106 | ) | 1,643 | 2.3 | % | 1,595 | 71 | (12 | ) | 1,654 | 2.1 | % | ||||||||||||||||||||||||||
Financial services | 8,967 | 106 | (879 | ) | 8,194 | 11.7 | % | 11,153 | 227 | (512 | ) | 10,868 | 13.5 | % | ||||||||||||||||||||||||||
Technology and communications | 4,156 | 74 | (284 | ) | 3,946 | 5.6 | % | 3,763 | 181 | (40 | ) | 3,904 | 4.9 | % | ||||||||||||||||||||||||||
Transportation | 558 | 6 | (45 | ) | 519 | 0.8 | % | 401 | 12 | (13 | ) | 400 | 0.5 | % | ||||||||||||||||||||||||||
Utilities | 5,022 | 86 | (319 | ) | 4,789 | 6.8 | % | 4,500 | 181 | (104 | ) | 4,577 | 5.7 | % | ||||||||||||||||||||||||||
Other [6] | 1,656 | 2 | (190 | ) | 1,468 | 2.1 | % | 1,985 | 27 | (104 | ) | 1,908 | 2.4 | % | ||||||||||||||||||||||||||
Government/Government agencies | ||||||||||||||||||||||||||||||||||||||||
Foreign | 886 | 26 | (37 | ) | 875 | 1.2 | % | 999 | 59 | (5 | ) | 1,053 | 1.3 | % | ||||||||||||||||||||||||||
United States | 1,824 | 35 | (7 | ) | 1,852 | 2.6 | % | 836 | 22 | (3 | ) | 855 | 1.1 | % | ||||||||||||||||||||||||||
MBS | 2,726 | 16 | (20 | ) | 2,722 | 3.9 | % | 2,757 | 26 | (20 | ) | 2,763 | 3.5 | % | ||||||||||||||||||||||||||
Municipal | ||||||||||||||||||||||||||||||||||||||||
Taxable | 1,113 | 7 | (91 | ) | 1,029 | 1.5 | % | 1,376 | 33 | (23 | ) | 1,386 | 1.7 | % | ||||||||||||||||||||||||||
Tax-exempt | 11,486 | 188 | (734 | ) | 10,940 | 15.6 | % | 11,776 | 394 | (67 | ) | 12,103 | 15.1 | % | ||||||||||||||||||||||||||
Redeemable preferred stock | — | — | — | — | — | 6 | — | — | 6 | — | ||||||||||||||||||||||||||||||
Fixed maturities | $ | 77,007 | $ | 780 | $ | (7,696 | ) | $ | 70,091 | 100.0 | % | $ | 80,724 | $ | 1,869 | $ | (2,538 | ) | $ | 80,055 | 100.0 | % | ||||||||||||||||||
Equity securities, available-for-sale | ||||||||||||||||||||||||||||||||||||||||
Financial Services | 1,042 | — | (66 | ) | 976 | 2,062 | 13 | (224 | ) | 1,851 | ||||||||||||||||||||||||||||||
Other | 603 | 197 | (46 | ) | 754 | 549 | 205 | (10 | ) | 744 | ||||||||||||||||||||||||||||||
Total securities, available-for-sale [7] | $ | 78,652 | $ | 977 | $ | (7,808 | ) | $ | 71,821 | $ | 83,335 | $ | 2,087 | $ | (2,772 | ) | $ | 82,650 | ||||||||||||||||||||||
[1] | As of September 30, 2008, 99% of these senior secured bank loan CLOs were AAA rated with an average subordination of 29%. | |
[2] | Includes securities with an amortized cost and fair value of $14 and $11, respectively, as of September 30, 2008, and $40 and $37, respectively, as of December 31, 2007, which were backed by pools of loans issued to prime borrowers. Includes securities with an amortized cost and fair value of $92 and $69, respectively, as of September 30, 2008, and $96 and $87, respectively, as of December 31, 2007, which were backed by pools of loans issued to Alt-A borrowers. | |
[3] | Includes CDO securities with an amortized cost and fair value of $17 and $5, respectively, as of September 30, 2008, and $16 and $15, respectively, as of December 31, 2007, that contain a below-prime residential mortgage loan component. Typically these CDOs are also backed by assets other than below-prime loans. | |
[4] | Includes securities with an amortized cost and fair value of $221 and $185, respectively, as of September 30, 2008, and $270 as of December 31, 2007, which were backed by pools of loans issued to Alt-A borrowers. | |
[5] | As of September 30, 2008 and December 31, 2007, 92% of corporate securities were rated investment grade. | |
[6] | Includes structured investments with an amortized cost and fair value of $682 and $586, respectively, as of September 30, 2008 and $782 and $730, respectively, as of December 31, 2007. The underlying securities supporting these investments are primarily diversified pools of investment grade corporate issuers which can withstand a 15% cumulative default rate, assuming a 35% recovery. | |
[7] | Gross unrealized gains represent gains of $535, $436, and $6 for Life, Property & Casualty, and Corporate, respectively, as of September 30, 2008 and $1,339, $734, and $14, respectively, as of December 31, 2007. Gross unrealized losses represent losses of $5,620, $2,183, and $5 for Life, Property & Casualty, and Corporate, respectively, as of September 30, 2008 and $1,985, $781, and $6, respectively, as of December 31, 2007. |
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Financial Services by Credit Quality | ||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
AAA | $ | 743 | $ | 658 | 7.2 | % | $ | 635 | $ | 614 | 4.8 | % | ||||||||||||
AA | 2,726 | 2,510 | 27.4 | % | 4,141 | 4,008 | 31.5 | % | ||||||||||||||||
A | 5,471 | 5,019 | 54.7 | % | 6,755 | 6,525 | 51.3 | % | ||||||||||||||||
BBB | 931 | 846 | 9.2 | % | 1,378 | 1,283 | 10.1 | % | ||||||||||||||||
BB & below | 138 | 137 | 1.5 | % | 306 | 289 | 2.3 | % | ||||||||||||||||
Total | $ | 10,009 | $ | 9,170 | 100.0 | % | $ | 13,215 | $ | 12,719 | 100.0 | % | ||||||||||||
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Sub-Prime Residential Mortgage Loans [1] [2] [3] [4] | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2008 [5] | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 59 | $ | 51 | $ | 177 | $ | 153 | $ | 59 | $ | 46 | $ | 31 | $ | 20 | $ | 28 | $ | 16 | $ | 354 | $ | 286 | ||||||||||||||||||||||||
2004 | 114 | 101 | 361 | 298 | 6 | 5 | 2 | 1 | — | — | 483 | 405 | ||||||||||||||||||||||||||||||||||||
2005 | 93 | 83 | 683 | 544 | 55 | 42 | 3 | 3 | 9 | 9 | 843 | 681 | ||||||||||||||||||||||||||||||||||||
2006 | 221 | 178 | 142 | 71 | 21 | 13 | 75 | 38 | 53 | 14 | 512 | 314 | ||||||||||||||||||||||||||||||||||||
2007 | 133 | 94 | 15 | 6 | 54 | 27 | 30 | 26 | 101 | 80 | 333 | 233 | ||||||||||||||||||||||||||||||||||||
Total | $ | 620 | $ | 507 | $ | 1,378 | $ | 1,072 | $ | 195 | $ | 133 | $ | 141 | $ | 88 | $ | 191 | $ | 119 | $ | 2,525 | $ | 1,919 | ||||||||||||||||||||||||
Credit protection | 35.9% | 47.9% | 26.9% | 22.9% | 13.8% | 41.1% | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 93 | $ | 92 | $ | 213 | $ | 199 | $ | 113 | $ | 94 | $ | 8 | $ | 7 | $ | 7 | $ | 7 | $ | 434 | $ | 399 | ||||||||||||||||||||||||
2004 | 133 | 131 | 358 | 324 | 2 | 2 | 2 | 1 | — | — | 495 | 458 | ||||||||||||||||||||||||||||||||||||
2005 | 113 | 107 | 796 | 713 | 8 | 5 | 10 | 3 | 33 | 23 | 960 | 851 | ||||||||||||||||||||||||||||||||||||
2006 | 457 | 413 | 67 | 55 | 2 | 3 | 3 | 2 | 8 | 2 | 537 | 475 | ||||||||||||||||||||||||||||||||||||
2007 | 280 | 241 | 71 | 39 | 56 | 47 | 21 | 20 | 25 | 27 | 453 | 374 | ||||||||||||||||||||||||||||||||||||
Total | $ | 1,076 | $ | 984 | $ | 1,505 | $ | 1,330 | $ | 181 | $ | 151 | $ | 44 | $ | 33 | $ | 73 | $ | 59 | $ | 2,879 | $ | 2,557 | ||||||||||||||||||||||||
Credit protection | 32.7% | 47.3% | 21.1% | 19.6% | 17.1% | 39.8% | ||||||||||||||||||||||||||||||||||||||||||
[1] | The vintage year represents the year the underlying loans in the pool were originated. | |
[2] | The Company’s exposure to second lien residential mortgages is composed primarily of loans to prime and Alt-A borrowers, of which approximately over half were wrapped by monoline insurers. These securities are included in the table above and have an amortized cost and fair value of $183 and $110, respectively, as of September 30, 2008 and $260 and $217, respectively, as of December 31, 2007. | |
[3] | As of September 30, 2008, the weighted average life of the sub-prime residential mortgage portfolio was 3.9 years. | |
[4] | As of September 30, 2008, approximately 83% of the portfolio is backed by adjustable rate mortgages. | |
[5] | The credit qualities above include downgrades since December 31, 2007. |
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CMBS – Bonds [1] | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 2,226 | $ | 2,186 | $ | 463 | $ | 436 | $ | 181 | $ | 157 | $ | 36 | $ | 35 | $ | 37 | $ | 36 | $ | 2,943 | $ | 2,850 | ||||||||||||||||||||||||
2004 | 725 | 691 | 85 | 72 | 65 | 50 | 23 | 16 | — | — | 898 | 829 | ||||||||||||||||||||||||||||||||||||
2005 | 1,200 | 1,087 | 475 | 356 | 325 | 240 | 56 | 42 | 23 | 10 | 2,079 | 1,735 | ||||||||||||||||||||||||||||||||||||
2006 | 2,757 | 2,307 | 411 | 297 | 481 | 342 | 389 | 262 | 43 | 20 | 4,081 | 3,228 | ||||||||||||||||||||||||||||||||||||
2007 | 1,036 | 849 | 439 | 301 | 148 | 103 | 139 | 86 | 3 | 1 | 1,765 | 1,340 | ||||||||||||||||||||||||||||||||||||
Total | $ | 7,944 | $ | 7,120 | $ | 1,873 | $ | 1,462 | $ | 1,200 | $ | 892 | $ | 643 | $ | 441 | $ | 106 | $ | 67 | $ | 11,766 | $ | 9,982 | ||||||||||||||||||||||||
Credit protection | 24.7% | 16.2% | 11.7% | 5.2% | 4.3% | 20.6% | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 2,666 | $ | 2,702 | $ | 495 | $ | 502 | $ | 289 | $ | 292 | $ | 30 | $ | 32 | $ | 46 | $ | 49 | $ | 3,526 | $ | 3,577 | ||||||||||||||||||||||||
2004 | 709 | 708 | 89 | 87 | 130 | 128 | 23 | 21 | — | — | 951 | 944 | ||||||||||||||||||||||||||||||||||||
2005 | 1,280 | 1,258 | 479 | 454 | 404 | 389 | 85 | 76 | 24 | 21 | 2,272 | 2,198 | ||||||||||||||||||||||||||||||||||||
2006 | 2,975 | 2,910 | 415 | 395 | 763 | 739 | 456 | 400 | 24 | 22 | 4,633 | 4,466 | ||||||||||||||||||||||||||||||||||||
2007 | 1,365 | 1,342 | 461 | 431 | 240 | 220 | 190 | 165 | 3 | 3 | 2,259 | 2,161 | ||||||||||||||||||||||||||||||||||||
Total | $ | 8,995 | $ | 8,920 | $ | 1,939 | $ | 1,869 | $ | 1,826 | $ | 1,768 | $ | 784 | $ | 694 | $ | 97 | $ | 95 | $ | 13,641 | $ | 13,346 | ||||||||||||||||||||||||
Credit protection | 23.8% | 16.4% | 13.6% | 6.8% | 3.7% | 20.6% | ||||||||||||||||||||||||||||||||||||||||||
[1] | The vintage year represents the year the pool of loans was originated. |
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CMBS – CRE CDOs [1] [2] [3] | ||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2008 [4] | ||||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 184 | $ | 113 | $ | 97 | $ | 48 | $ | 84 | $ | 26 | $ | 64 | $ | 17 | $ | 33 | $ | 7 | $ | 462 | $ | 211 | ||||||||||||||||||||||||||
2004 | 127 | 68 | 18 | 10 | 30 | 12 | 11 | 3 | 14 | 3 | 200 | 96 | ||||||||||||||||||||||||||||||||||||||
2005 | 93 | 58 | 67 | 36 | 65 | 22 | 11 | 3 | — | — | 236 | 119 | ||||||||||||||||||||||||||||||||||||||
2006 | 262 | 150 | 96 | 53 | 85 | 35 | 22 | 4 | — | — | 465 | 242 | ||||||||||||||||||||||||||||||||||||||
2007 | 147 | 97 | 108 | 48 | 112 | 36 | 28 | 8 | — | — | 395 | 189 | ||||||||||||||||||||||||||||||||||||||
2008 | 34 | 24 | 16 | 8 | 20 | 6 | 6 | 2 | — | — | 76 | 40 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 847 | $ | 510 | $ | 402 | $ | 203 | $ | 396 | $ | 137 | $ | 142 | $ | 37 | $ | 47 | $ | 10 | $ | 1,834 | $ | 897 | ||||||||||||||||||||||||||
Credit protection | 28.3% | 22.6% | 18.9% | 18.3% | 57.2% | 25.0% | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
2003 & Prior | $ | 378 | $ | 320 | $ | 88 | $ | 73 | $ | 64 | $ | 42 | $ | 13 | $ | 10 | $ | — | $ | — | $ | 543 | $ | 445 | ||||||||||||||||||||||||
2004 | 170 | 149 | 17 | 15 | 24 | 17 | 8 | 7 | — | — | 219 | 188 | ||||||||||||||||||||||||||||||||||||
2005 | 178 | 153 | 63 | 52 | 60 | 42 | 6 | 5 | — | — | 307 | 252 | ||||||||||||||||||||||||||||||||||||
2006 | 517 | 436 | 178 | 136 | 149 | 118 | 46 | 34 | — | — | 890 | 724 | ||||||||||||||||||||||||||||||||||||
2007 | 107 | 97 | 92 | 80 | 72 | 58 | 13 | 10 | — | — | 284 | 245 | ||||||||||||||||||||||||||||||||||||
Total | $ | 1,350 | $ | 1,155 | $ | 438 | $ | 356 | $ | 369 | $ | 277 | $ | 86 | $ | 66 | $ | — | $ | — | $ | 2,243 | $ | 1,854 | ||||||||||||||||||||||||
Credit protection | 31.5% | 27.1% | 16.7% | 10.4% | — | 27.5% | ||||||||||||||||||||||||||||||||||||||||||
[1] | The vintage year represents the year that the underlying collateral in the pool was originated. Individual CDO market value is allocated by the proportion of collateral within each vintage year. | |
[2] | As of September 30, 2008, approximately 36% of the underlying CMBS CRE CDO collateral are seasoned, below investment grade securities. | |
[3] | For certain CDO’s, the collateral manager has the ability to reinvest proceeds that become available, primarily from collateral maturities. The increase in the 2008 vintage year represents reinvestment under these CDO’s. | |
[4] | The credit qualities above include downgrades since December 31, 2007. |
CMBS – IOs [1] | ||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||
AAA | AAA | |||||||||||||||
Amortized | Amortized | |||||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
2003 & Prior | $ | 462 | $ | 462 | $ | 548 | $ | 606 | ||||||||
2004 | 283 | 272 | 360 | 374 | ||||||||||||
2005 | 366 | 339 | 422 | 430 | ||||||||||||
2006 | 169 | 163 | 194 | 205 | ||||||||||||
2007 | 173 | 167 | 217 | 216 | ||||||||||||
Total | $ | 1,453 | $ | 1,403 | $ | 1,741 | $ | 1,831 | ||||||||
[1] | The vintage year represents the year the pool of loans was originated. |
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ABS Consumer Loans | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
Credit card [1] | $ | 438 | $ | 416 | $ | 6 | $ | 5 | $ | 128 | $ | 125 | $ | 417 | $ | 378 | $ | 58 | $ | 46 | $ | 1,047 | $ | 970 | ||||||||||||||||||||||||
Auto [2] | 160 | 150 | 30 | 29 | 154 | 137 | 205 | 181 | 31 | 26 | 580 | 523 | ||||||||||||||||||||||||||||||||||||
Student loan [3] | 294 | 220 | 332 | 278 | 140 | 100 | — | — | — | — | 766 | 598 | ||||||||||||||||||||||||||||||||||||
Total | $ | 892 | $ | 786 | $ | 368 | $ | 312 | $ | 422 | $ | 362 | $ | 622 | $ | 559 | $ | 89 | $ | 72 | $ | 2,393 | $ | 2,091 | ||||||||||||||||||||||||
December 31, 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||
AAA | AA | A | BBB | BB and Below | Total | |||||||||||||||||||||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||||||||||||||
Credit card [1] | $ | 166 | $ | 166 | $ | 19 | $ | 19 | $ | 162 | $ | 162 | $ | 610 | $ | 591 | $ | — | $ | — | $ | 957 | $ | 938 | ||||||||||||||||||||||||
Auto [2] | 274 | 270 | 27 | 27 | 151 | 148 | 198 | 192 | 42 | 39 | 692 | 676 | ||||||||||||||||||||||||||||||||||||
Student loan [3] | 313 | 297 | 333 | 317 | 140 | 133 | — | — | — | — | 786 | 747 | ||||||||||||||||||||||||||||||||||||
Total | $ | 753 | $ | 733 | $ | 379 | $ | 363 | $ | 453 | $ | 443 | $ | 808 | $ | 783 | $ | 42 | $ | 39 | $ | 2,435 | $ | 2,361 | ||||||||||||||||||||||||
[1] | As of September 30, 2008, approximately 9% of the securities were issued by lenders that lend primarily to sub-prime borrowers. | |
[2] | Includes monoline insured securities with an amortized cost and fair value of $53 and $50, respectively, at September 30, 2008, and amortized cost and fair value of $49 at December 31, 2007. Additionally, approximately 5% of the auto consumer loan-backed securities were issued by lenders whose primary business is to sub-prime borrowers. | |
[3] | Includes monoline insured securities with an amortized cost and fair value of $102 and $55, respectively, at September 30, 2008, and amortized cost and fair value of $102 and $93, respectively, at December 31, 2007. Additionally, approximately half of the student loan-backed exposure is guaranteed by the Federal Family Education Loan Program, with the remainder comprised of loans to prime-borrowers. |
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Consolidated Securities | ||||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||||
Cost or | Cost or | |||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||||
Items | Cost | Value | Loss | Items | Cost | Value | Loss | |||||||||||||||||||||||||||
Three months or less | 2,777 | $ | 19,417 | $ | 18,324 | $ | (1,093 | ) | 1,581 | $ | 10,879 | $ | 10,445 | $ | (434 | ) | ||||||||||||||||||
Greater than three to six months | 1,002 | 8,280 | 7,575 | (705 | ) | 1,052 | 11,857 | 10,954 | (903 | ) | ||||||||||||||||||||||||
Greater than six to nine months | 746 | 5,899 | 5,047 | (852 | ) | 813 | 10,086 | 9,354 | (732 | ) | ||||||||||||||||||||||||
Greater than nine to twelve months | 459 | 5,175 | 4,151 | (1,024 | ) | 262 | 2,756 | 2,545 | (211 | ) | ||||||||||||||||||||||||
Greater than twelve months | 2,136 | 20,710 | 16,576 | (4,134 | ) | 1,735 | 10,563 | 10,071 | (492 | ) | ||||||||||||||||||||||||
Total | 7,120 | $ | 59,481 | $ | 51,673 | $ | (7,808 | ) | 5,443 | $ | 46,141 | $ | 43,369 | $ | (2,772 | ) | ||||||||||||||||||
Securitized Assets Depressed over 20% | ||||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||||
Cost or | Cost or | |||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||||
Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||||
Three months or less | 437 | $ | 6,003 | $ | 3,975 | $ | (2,028 | ) | 138 | $ | 1,263 | $ | 835 | $ | (428 | ) | ||||||||||||||||||
Greater than three to six months | 120 | 1,381 | 780 | (601 | ) | 12 | 146 | 91 | (55 | ) | ||||||||||||||||||||||||
Greater than six to nine months | 106 | 1,125 | 682 | (443 | ) | –– | –– | –– | –– | |||||||||||||||||||||||||
Greater than nine to twelve months | 4 | 24 | 16 | (8 | ) | –– | –– | –– | –– | |||||||||||||||||||||||||
Greater than twelve months | 3 | 13 | 7 | (6 | ) | 6 | 40 | 26 | (14 | ) | ||||||||||||||||||||||||
Total | 670 | $ | 8,546 | $ | 5,460 | $ | (3,086 | ) | 156 | $ | 1,449 | $ | 952 | $ | (497 | ) | ||||||||||||||||||
All Other Securities Depressed over 20% | ||||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||||
Cost or | Cost or | |||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||||
Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||||
Three months or less | 391 | $ | 3,084 | $ | 2,300 | $ | (784 | ) | 116 | $ | 635 | $ | 492 | $ | (143 | ) | ||||||||||||||||||
Greater than three to six months | 27 | 331 | 230 | (101 | ) | 9 | 74 | 21 | (53 | ) | ||||||||||||||||||||||||
Greater than six to nine months | 31 | 301 | 205 | (96 | ) | –– | –– | –– | –– | |||||||||||||||||||||||||
Greater than nine to twelve months | 6 | 31 | 21 | (10 | ) | –– | –– | –– | –– | |||||||||||||||||||||||||
Greater than twelve months | — | — | — | — | –– | –– | –– | –– | ||||||||||||||||||||||||||
Total | 455 | $ | 3,747 | $ | 2,756 | $ | (991 | ) | 125 | $ | 709 | $ | 513 | $ | (196 | ) | ||||||||||||||||||
Consolidated Securities Depressed over 20% | ||||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||||
Cost or | Cost or | |||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||||
Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||||
Three months or less | 828 | $ | 9,087 | $ | 6,275 | $ | (2,812 | ) | 254 | $ | 1,898 | $ | 1,327 | $ | (571 | ) | ||||||||||||||||||
Greater than three to six months | 147 | 1,712 | 1,010 | (702 | ) | 21 | 220 | 112 | (108 | ) | ||||||||||||||||||||||||
Greater than six to nine months | 137 | 1,426 | 887 | (539 | ) | — | — | — | — | |||||||||||||||||||||||||
Greater than nine to twelve months | 10 | 55 | 37 | (18 | ) | — | — | — | — | |||||||||||||||||||||||||
Greater than twelve months | 3 | 13 | 7 | (6 | ) | 6 | 40 | 26 | (14 | ) | ||||||||||||||||||||||||
Total | 1,125 | $ | 12,293 | $ | 8,216 | $ | (4,077 | ) | 281 | $ | 2,158 | $ | 1,465 | $ | (693 | ) | ||||||||||||||||||
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Securitized Assets Depressed over 50% (included in the depressed over 20% table above) | ||||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||||
Cost or | Cost or | |||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||||
Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||||
Three months or less | 108 | $ | 1,095 | $ | 388 | $ | (707 | ) | 27 | $ | 124 | $ | 47 | $ | (77 | ) | ||||||||||||||||||
Greater than three to six months | 38 | 338 | 118 | (220 | ) | –– | –– | –– | –– | |||||||||||||||||||||||||
Greater than six to nine months | 8 | 44 | 12 | (32 | ) | –– | –– | –– | –– | |||||||||||||||||||||||||
Greater than nine to twelve months | — | — | — | — | –– | –– | –– | –– | ||||||||||||||||||||||||||
Greater than twelve months | — | — | — | — | –– | –– | –– | –– | ||||||||||||||||||||||||||
Total | 154 | $ | 1,477 | $ | 518 | $ | (959 | ) | 27 | $ | 124 | $ | 47 | $ | (77 | ) | ||||||||||||||||||
All Other Securities Depressed over 50% (included in the depressed over 20% table above) | ||||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||||
Cost or | Cost or | |||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||||
Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||||
Three months or less | 23 | $ | 51 | $ | 16 | $ | (35 | ) | 9 | $ | 3 | $ | 1 | $ | (2 | ) | ||||||||||||||||||
Greater than three to six months | — | — | — | — | 4 | 17 | 1 | (16 | ) | |||||||||||||||||||||||||
Greater than six to nine months | — | — | — | — | –– | –– | –– | –– | ||||||||||||||||||||||||||
Greater than nine to twelve months | — | — | — | — | –– | –– | –– | –– | ||||||||||||||||||||||||||
Greater than twelve months | — | — | — | — | –– | –– | –– | –– | ||||||||||||||||||||||||||
Total | 23 | $ | 51 | $ | 16 | $ | (35 | ) | 13 | $ | 20 | $ | 2 | $ | (18 | ) | ||||||||||||||||||
Consolidated Securities Depressed over 50% (included in the depressed over 20% table above) | ||||||||||||||||||||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||||
Cost or | Cost or | |||||||||||||||||||||||||||||||||
Amortized | Fair | Unrealized | Amortized | Fair | Unrealized | |||||||||||||||||||||||||||||
Consecutive Months | Items | Cost | Value | Loss | Items | Cost | Value | Loss | ||||||||||||||||||||||||||
Three months or less | 131 | $ | 1,146 | $ | 404 | $ | (742 | ) | 36 | $ | 127 | $ | 48 | $ | (79 | ) | ||||||||||||||||||
Greater than three to six months | 38 | 338 | 118 | (220 | ) | 4 | 17 | 1 | (16 | ) | ||||||||||||||||||||||||
Greater than six to nine months | 8 | 44 | 12 | (32 | ) | — | — | — | — | |||||||||||||||||||||||||
Greater than nine to twelve months | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Greater than twelve months | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Total | 177 | $ | 1,528 | $ | 534 | $ | (994 | ) | 40 | $ | 144 | $ | 49 | $ | (95 | ) | ||||||||||||||||||
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1) | reduce the value of assets under management and the amount of fee income generated from those assets; | |
2) | reduce the value of equity securities, held for trading, for international variable annuities, the related policyholder funds and benefits payable, and the amount of fee income generated from those annuities; | |
3) | increase the liability for guaranteed minimum withdrawal and accumulation benefits (GMWB and GMAB) resulting in realized capital losses; | |
4) | increase the value of derivative assets used to hedge GMWB resulting in realized capital gains; | |
5) | increase the Company’s net amount at risk for guaranteed death benefits and guaranteed income benefits; and | |
6) | decrease the Company’s actual gross profits, resulting in a negative true-up to current period DAC amortization |
1) | turn customer sentiment toward equity-linked products negative, causing a decline in sales; | |
2) | cause a significant decrease in the range of reasonable estimates of future gross profits used in the Company’s quantitative assessment of its modeled estimates of gross profits. If, in a given financial statement period, the modeled estimates of gross profits are determined to be unreasonable, the Company will accelerate the amount of DAC amortization in that period. Particularly in the case of variable annuities, an acceleration of DAC amortization could potentially cause a material adverse deviation in that period’s net income, but it would not affect the Company’s cash flow or liquidity position. See Life Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts within Critical Accounting Estimates for further information on DAC and related equity market sensitivities; and increase costs under the Company’s hedging programs. |
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Risk Management Strategy | Duration | Account Value | % | |||||||
Entire risk reinsured with a third party | Life of Product | $ | 12,787 | 28 | % | |||||
Capital markets risk transferred to a third party — behavior risk retained by the Company | Designed to cover the effective life of the product | 12,862 | 28 | % | ||||||
Dynamic hedging of capital markets risk using various derivative instruments | Weighted average of 7 years | 20,685 | 44 | % | ||||||
$ | 46,334 | 100 | % | |||||||
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Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
Effective | Expiration | September 30, | December 31, | September 30, | December 31, | |||||||||||||||||||
Description | Date | Date | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||
Commercial Paper | ||||||||||||||||||||||||
The Hartford | 11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | 373 | $ | 373 | ||||||||||||||
Revolving Credit Facility | ||||||||||||||||||||||||
5-year revolving credit facility | 8/9/07 | 8/9/12 | 1,900 | 2,000 | — | — | ||||||||||||||||||
Line of Credit | ||||||||||||||||||||||||
Life Japan Operations [1] | 9/18/02 | 1/5/09 | 47 | 45 | — | — | ||||||||||||||||||
Total Commercial Paper, Revolving Credit Facility and Line of Credit | $ | 3,947 | $ | 4,045 | $ | 373 | $ | 373 | ||||||||||||||||
[1] | As of September 30, 2008 and December 31, 2007, the line of credit in yen was ¥5 billion. |
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September 30, | December 31, | |||||||||||
2008 | 2007 | Change | ||||||||||
Short-term debt (includes current maturities of long-term debt and capital lease obligations) | $ | 927 | $ | 1,365 | (32 | %) | ||||||
Long-term debt | 4,620 | 3,142 | 47 | % | ||||||||
Total debt [1] | 5,547 | 4,507 | 23 | % | ||||||||
Equity excluding accumulated other comprehensive loss, net of tax (“AOCI”) | 16,712 | 20,062 | (17 | %) | ||||||||
AOCI, net of tax | (4,155 | ) | (858 | ) | NM | |||||||
Total stockholders’ equity | $ | 12,557 | $ | 19,204 | (35 | %) | ||||||
Total capitalization including AOCI | $ | 18,104 | $ | 23,711 | (24 | %) | ||||||
Debt to equity | 44 | % | 23 | % | ||||||||
Debt to capitalization | 31 | % | 19 | % | ||||||||
[1] | Total debt of the Company excludes $1.2 billion and $809 of consumer notes as of September 30, 2008 and December 31, 2007, respectively. |
AOCI, net of tax | • | Decreased $3.3 billion primarily due to increases in unrealized losses on securities of $3.5 billion. | ||
Equity excluding AOCI, net of tax | • | Decreased $3.4 billion primarily due to a net loss of $1.9 billion and share repurchases of $1.0 billion. | ||
Total Debt | • | Increased from issuance of $1.0 billion in senior notes and $500 in junior subordinated debentures, partially offset by repayment of The Hartford’s $425 5.55% senior notes. |
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Nine months ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
Net cash provided by operating activities | $ | 2,938 | $ | 4,567 | ||||
Net cash used for investing activities | $ | (4,049 | ) | $ | (4,904 | ) | ||
Net cash provided by financing activities | $ | 1,034 | $ | 675 | ||||
Cash – end of period | $ | 1,963 | $ | 1,952 | ||||
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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 | ||||
Junior subordinated debentures | bbb+ | A- | BBB+ | A3 | ||||
Hartford Life, Inc.: | ||||||||
Senior debt | a | A | A | A2 | ||||
Hartford Life Insurance Company: | ||||||||
Short term rating | — | — | A-1+ | P-1 | ||||
Consumer notes | a+ | AA- | AA- | A1 | ||||
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Life Operations | $ | 4,691 | $ | 5,786 | ||||
Japan Life Operations | 1,546 | 1,620 | ||||||
Property & Casualty Operations | 6,883 | 8,509 | ||||||
Total | $ | 13,120 | $ | 15,915 | ||||
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Approximate Dollar | ||||||||||||||||
Total Number of | Value of Shares that | |||||||||||||||
Shares Purchased as | May Yet Be | |||||||||||||||
Total Number | Average Price | Part of Publicly | Purchased Under | |||||||||||||
of Shares | Paid Per | Announced Plans or | the Plans or | |||||||||||||
Purchased | Share | Programs | Programs | |||||||||||||
Period | (in millions) | |||||||||||||||
July 1, 2008 – July 31, 2008 | 2,011,315 | [1] | $ | 64.08 | 2,007,835 | $ | 807 | |||||||||
August 1, 2008 – August 31, 2008 | 73 | [1] | $ | 62.94 | — | $ | 807 | |||||||||
September 1, 2008 – September 30, 2008 | 1,000,224 | [1] [2] | $ | 68.18 | 999,944 | $ | 807 | |||||||||
Total | 3,011,612 | $ | 65.44 | 3,007,779 | N/A | |||||||||||
[1] | Includes 3,480, 73 and 280 shares in July, August, and September, respectively, acquired from employees of the Company for tax withholding purposes in connection with the Company’s stock compensation plans. | |
[2] | Includes 1.0 million shares delivered to the Company’s treasury stock account pursuant to the terms of a collared accelerated stock repurchase confirmation agreement between the Company and a major financial institution (see Note 12 to the Condensed Consolidated Financial Statements). |
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The Hartford Financial Services Group, Inc. | ||
(Registrant) | ||
Date: October 29, 2008 | /s/ Beth A. Bombara | |
Beth A. Bombara | ||
Senior Vice President and Controller | ||
(Chief accounting officer and duly | ||
authorized signatory) |
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FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
FORM 10-Q
Exhibit No. | Description | |
3.01 | Amended and Restated By-Laws of the Company, effective September 18, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on September 24, 2008). | |
3.02 | Certificate of Designation with respect to Series B Non-Voting Contingent Convertible Preferred Stock, including form of stock certificate (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K/A filed on October 17, 2008). | |
3.03 | Certificate of Designation with respect to Series C Non-Voting Contingent Convertible Preferred Stock, including form of stock certificate (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K/A filed on October 17, 2008). | |
3.04 | Certificate of Designation with respect to Series D Non-Voting Contingent Convertible Preferred Stock, including form of stock certificate (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K/A filed on October 17, 2008). | |
4.01 | Second Supplemental Indenture, dated as of October 17, 2008, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 10% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068, including form of Debenture (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A filed on October 17, 2008). | |
4.02 | Form of Series B Warrant to Purchase Shares of Non-Voting Contingent Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K/A filed on October 17, 2008). | |
4.03 | Form of Series C Warrant to Purchase Shares of Non-Voting Contingent Convertible Preferred Stock (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K/A filed on October 17, 2008). | |
4.04 | Registration Rights Agreement, dated as of October 17, 2008, between the Company and Allianz SE (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K/A filed on October 17, 2008). | |
10.01 | First Amendment, dated July 10, 2008, to the Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement, dated as of August 9, 2007, by and among the Company and the Lenders, including Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citibank, N.A., as syndication agents, and Wachovia Bank, N.A., as documentation agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 14, 2008). | |
10.02 | Investment Agreement, dated as of October 17, 2008, between the Company and Allianz SE (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on October 17, 2008). | |
10.03 | �� | Replacement Capital Covenant, dated as of October 17, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on October 17, 2008). |
15.01 | Deloitte & Touche LLP Letter of Awareness. | |
31.01 | Certification of Ramani Ayer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.02 | Certification of Lizabeth H. Zlatkus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.01 | Certification of Ramani Ayer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.02 | Certification of Lizabeth H. Zlatkus pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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