Table of Contents
SECURITIES AND EXCHANGE COMMISSION
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 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)
6.1% Notes due October 1, 2041
7.9% Notes due June 15, 2010 | 5.375% Notes due March 15, 2017 | ||
5.25% Notes due October 15, 2011 | 5.95% Notes due October 15, 2036 | ||
4.625% Notes due July 15, 2013 | 6.3% Notes due March 15, 2018 | ||
4.75% Notes due March 1, 2014 | 6.0% Notes due January 15, 2019 | ||
7.3% Debentures due November 1, 2015 | 8.125% Junior Subordinated Debentures due June 15, 2068 | ||
5.5% Notes due October 15, 2016 |
Large accelerated filerþ | Accelerated filero | Non-accelerated filero | Smaller Reporting Companyo |
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
Item | Description | Page | ||||||
1. | 3 | |||||||
1A. | 22 | |||||||
1B. | 34 | |||||||
2. | 34 | |||||||
3. | 34 | |||||||
4. | 36 | |||||||
5. | 36 | |||||||
6. | 39 | |||||||
7. | 40 | |||||||
7A. | 198 | |||||||
8. | 198 | |||||||
9. | 198 | |||||||
9A. | 199 | |||||||
9B. | 201 | |||||||
10. | 201 | |||||||
11. | 202 | |||||||
12. | 202 | |||||||
13. | 204 | |||||||
14. | 204 | |||||||
15. | 204 | |||||||
II-1 | ||||||||
II-2 | ||||||||
Exhibit 10.01 | ||||||||
Exhibit 10.02 | ||||||||
Exhibit 10.03 | ||||||||
Exhibit 10.04 | ||||||||
Exhibit 10.05 | ||||||||
Exhibit 10.06 | ||||||||
Exhibit 10.08 | ||||||||
Exhibit 10.09 | ||||||||
Exhibit 10.10 | ||||||||
Exhibit 10.12 | ||||||||
Exhibit 10.16 | ||||||||
Exhibit 10.17 | ||||||||
Exhibit 12.01 | ||||||||
Exhibit 21.01 | ||||||||
Exhibit 23.01 | ||||||||
Exhibit 24.01 | ||||||||
Exhibit 31.01 | ||||||||
Exhibit 31.02 | ||||||||
Exhibit 32.01 | ||||||||
Exhibit 32.02 |
2
Table of Contents
3
Table of Contents
4
Table of Contents
5
Table of Contents
6
Table of Contents
7
Table of Contents
8
Table of Contents
9
Table of Contents
10
Table of Contents
11
Table of Contents
12
Table of Contents
13
Table of Contents
14
Table of Contents
15
Table of Contents
16
Table of Contents
17
Table of Contents
Property And Casualty Loss And Loss Adjustment Expense Liability Development — Net of Reinsurance
For the Years Ended December 31, [1]
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||||||||||||||||||||
Liabilities for unpaid losses and loss adjustment expenses, net of reinsurance | $ | 12,902 | $ | 12,476 | $ | 12,316 | $ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | $ | 18,347 | ||||||||||||||||||||||
Cumulative paid losses and loss expenses | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 2,939 | 2,994 | 3,272 | 3,339 | 3,480 | 4,415 | 3,594 | 3,702 | 3,727 | 3,703 | ||||||||||||||||||||||||||||||||||
Two years later | 4,733 | 5,019 | 5,315 | 5,621 | 6,781 | 6,779 | 6,035 | 6,122 | 5,980 | — | ||||||||||||||||||||||||||||||||||
Three years later | 6,153 | 6,437 | 6,972 | 8,324 | 8,591 | 8,686 | 7,825 | 7,755 | — | — | ||||||||||||||||||||||||||||||||||
Four years later | 7,141 | 7,652 | 9,195 | 9,710 | 10,061 | 10,075 | 9,045 | — | — | — | ||||||||||||||||||||||||||||||||||
Five years later | 8,080 | 9,567 | 10,227 | 10,871 | 11,181 | 11,063 | — | — | — | — | ||||||||||||||||||||||||||||||||||
Six years later | 9,818 | 10,376 | 11,140 | 11,832 | 12,015 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Seven years later | 10,501 | 11,137 | 11,961 | 12,563 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Eight years later | 11,246 | 11,856 | 12,616 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Nine years later | 11,964 | 12,432 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Ten years later | 12,483 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Liabilities re-estimated | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 12,662 | 12,472 | 12,459 | 13,153 | 15,965 | 16,632 | 16,439 | 17,159 | 17,652 | 18,005 | ||||||||||||||||||||||||||||||||||
Two years later | 12,569 | 12,527 | 12,776 | 16,176 | 16,501 | 17,232 | 16,838 | 17,347 | 17,475 | — | ||||||||||||||||||||||||||||||||||
Three years later | 12,584 | 12,698 | 15,760 | 16,768 | 17,338 | 17,739 | 17,240 | 17,318 | — | — | ||||||||||||||||||||||||||||||||||
Four years later | 12,663 | 15,609 | 16,584 | 17,425 | 17,876 | 18,367 | 17,344 | — | — | — | ||||||||||||||||||||||||||||||||||
Five years later | 15,542 | 16,256 | 17,048 | 17,927 | 18,630 | 18,554 | — | — | — | — | ||||||||||||||||||||||||||||||||||
Six years later | 16,076 | 16,568 | 17,512 | 18,686 | 18,838 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Seven years later | 16,290 | 17,031 | 18,216 | 18,892 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Eight years later | 16,799 | 17,655 | 18,410 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Nine years later | 17,440 | 17,841 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Ten years later | 17,616 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Deficiency (redundancy), net of reinsurance | $ | 4,714 | $ | 5,365 | $ | 6,094 | $ | 6,032 | $ | 5,697 | $ | 2,336 | $ | 1,153 | $ | 455 | $ | (129 | ) | $ | (226 | ) | ||||||||||||||||||||||
[1] | The above table excludes Hartford Insurance, Singapore as a result of its sale in September 2001, Hartford Seguros as a result of its sale in February 2001 and Zwolsche as a result of its sale in December 2000. |
For the Years Ended December 31, [1]
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||||||||||||
Net reserve, as initially estimated | $ | 12,476 | $ | 12,316 | $ | 12,860 | $ | 13,141 | $ | 16,218 | $ | 16,191 | $ | 16,863 | $ | 17,604 | $ | 18,231 | $ | 18,347 | ||||||||||||||||||||
Reinsurance and other recoverables, as initially estimated | 3,706 | 3,871 | 4,176 | 3,950 | 5,497 | 5,138 | 5,403 | 4,387 | 3,922 | 3,586 | ||||||||||||||||||||||||||||||
Gross reserve, as initially estimated | $ | 16,182 | $ | 16,187 | $ | 17,036 | $ | 17,091 | $ | 21,715 | $ | 21,329 | $ | 22,266 | $ | 21,991 | $ | 22,153 | $ | 21,933 | ||||||||||||||||||||
Net re-estimated reserve | $ | 17,841 | $ | 18,410 | $ | 18,892 | $ | 18,838 | $ | 18,554 | $ | 17,344 | $ | 17,318 | $ | 17,475 | $ | 18,005 | ||||||||||||||||||||||
Re-estimated and other reinsurance recoverables | 5,206 | 5,342 | 5,526 | 5,142 | 5,083 | 4,979 | 5,299 | 3,891 | 3,645 | |||||||||||||||||||||||||||||||
Gross re-estimated reserve | $ | 23,047 | $ | 23,752 | $ | 24,418 | $ | 23,980 | $ | 23,637 | $ | 22,323 | $ | 22,617 | $ | 21,366 | $ | 21,650 | ||||||||||||||||||||||
Gross deficiency (redundancy) | $ | 6,865 | $ | 7,565 | $ | 7,382 | $ | 6,889 | $ | 1,922 | $ | 994 | $ | 351 | $ | (625 | ) | $ | (503 | ) | ||||||||||||||||||||
[1] | The above table excludes Hartford Insurance, Singapore as a result of its sale in September 2001, Hartford Seguros as a result of its sale in February 2001, Zwolsche as a result of its sale in December 2000 and London & Edinburgh as a result of its sale in November 1998. |
18
Table of Contents
Calendar Year | ||||||||||||||||||||||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | Total | ||||||||||||||||||||||||||||||||||
By Accident year | ||||||||||||||||||||||||||||||||||||||||||||
1998 & Prior | $ | (240 | ) | $ | (93 | ) | $ | 15 | $ | 79 | $ | 2,879 | $ | 534 | $ | 214 | $ | 509 | $ | 641 | $ | 176 | $ | 4,714 | ||||||||||||||||||||
1999 | — | 89 | 40 | 92 | 32 | 113 | 98 | (46 | ) | (17 | ) | 10 | 411 | |||||||||||||||||||||||||||||||
2000 | — | — | 88 | 146 | 73 | 177 | 152 | 1 | 80 | 8 | 725 | |||||||||||||||||||||||||||||||||
2001 | — | — | — | (24 | ) | 39 | (232 | ) | 193 | 38 | 55 | 12 | 81 | |||||||||||||||||||||||||||||||
2002 | — | — | — | — | (199 | ) | (56 | ) | 180 | 36 | (5 | ) | 2 | (42 | ) | |||||||||||||||||||||||||||||
2003 | — | — | — | — | — | (122 | ) | (237 | ) | (31 | ) | (126 | ) | (21 | ) | (537 | ) | |||||||||||||||||||||||||||
2004 | — | — | — | — | — | — | (352 | ) | (108 | ) | (226 | ) | (83 | ) | (769 | ) | ||||||||||||||||||||||||||||
2005 | — | — | — | — | — | — | — | (103 | ) | (214 | ) | (133 | ) | (450 | ) | |||||||||||||||||||||||||||||
2006 | — | — | — | — | — | — | — | — | (140 | ) | (148 | ) | (288 | ) | ||||||||||||||||||||||||||||||
2007 | — | — | — | — | — | — | — | — | — | (49 | ) | (49 | ) | |||||||||||||||||||||||||||||||
Total | $ | (240 | ) | $ | (4 | ) | $ | 143 | $ | 293 | $ | 2,824 | $ | 414 | $ | 248 | $ | 296 | $ | 48 | $ | (226 | ) | $ | 3,796 | |||||||||||||||||||
19
Table of Contents
20
Table of Contents
21
Table of Contents
22
Table of Contents
23
Table of Contents
24
Table of Contents
25
Table of Contents
26
Table of Contents
27
Table of Contents
28
Table of Contents
29
Table of Contents
30
Table of Contents
• | licensing companies and agents to transact business; | |
• | calculating the value of assets to determine compliance with statutory requirements; | |
• | mandating certain insurance benefits; | |
• | regulating certain premium rates; | |
• | reviewing and approving policy forms; | |
• | regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements; | |
• | establishing statutory capital and reserve requirements and solvency standards; | |
• | fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies and annuity contracts; | |
• | approving changes in control of insurance companies; | |
• | restricting the payment of dividends and other transactions between affiliates; | |
• | establishing assessments and surcharges for guaranty funds, second-injury funds and other mandatory pooling arrangements; | |
• | requiring insurers to dividend to policy holders any excess profits; and | |
• | regulating the types, amounts and valuation of investments. |
31
Table of Contents
32
Table of Contents
33
Table of Contents
34
Table of Contents
35
Table of Contents
1stQtr. | 2ndQtr. | 3rdQtr. | 4thQtr. | |||||||||||||
2008 | ||||||||||||||||
Common Stock Price | ||||||||||||||||
High | $ | 84.93 | $ | 79.13 | $ | 67.74 | $ | 38.11 | ||||||||
Low | 66.05 | 64.57 | 40.99 | 4.95 | ||||||||||||
Dividends Declared | 0.53 | 0.53 | 0.53 | 0.32 | ||||||||||||
2007 | ||||||||||||||||
Common Stock Price | ||||||||||||||||
High | $ | 97.75 | $ | 106.02 | $ | 99.87 | $ | 98.56 | ||||||||
Low | 90.77 | 95.82 | 85.44 | 86.78 | ||||||||||||
Dividends Declared | 0.50 | 0.50 | 0.50 | 0.53 |
36
Table of Contents
For the Years Ended | ||||||||||||||||||||
Company/Index | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||
The Hartford Financial Services Group, Inc. | 19.50 | % | 25.83 | % | 10.82 | % | (4.55 | %) | (79.99 | %) | ||||||||||
S&P 500 Index | 10.88 | % | 4.91 | % | 15.79 | % | 5.49 | % | (37.00 | %) | ||||||||||
S&P Insurance Composite Index | 7.25 | % | 14.10 | % | 10.91 | % | (6.31 | %) | (58.14 | %) |
Base | ||||||||||||||||||||||||
Period | For the Years Ended | |||||||||||||||||||||||
Company/Index | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||||
The Hartford Financial Services Group, Inc. | $ | 100 | $ | 119.50 | $ | 150.36 | $ | 166.63 | $ | 159.04 | $ | 31.82 | ||||||||||||
S&P 500 Index | $ | 100 | $ | 110.88 | $ | 116.33 | $ | 134.70 | $ | 142.10 | $ | 89.53 | ||||||||||||
S&P Insurance Composite Index | $ | 100 | $ | 107.25 | $ | 122.37 | $ | 135.73 | $ | 127.17 | $ | 53.23 |
37
Table of Contents
Approximate Dollar | ||||||||||||||||
Total Number of | Value of Shares that | |||||||||||||||
Shares Purchased as | May Yet Be | |||||||||||||||
Total Number | Part of Publicly | Purchased Under | ||||||||||||||
of Shares | Average Price | Announced Plans or | the Plans or | |||||||||||||
Period | Purchased | Paid Per Share | Programs | Programs | ||||||||||||
(in millions) | ||||||||||||||||
October 1, 2008 – October 31, 2008 | 3,940 | [1] | $ | 28.69 | — | $ | 807 | |||||||||
November 1, 2008 – November 30, 2008 | 1,483 | [1] | $ | 10.63 | — | $ | 807 | |||||||||
December 1, 2008 – December 31, 2008 | 52 | [1] | $ | 6.61 | — | $ | 807 | |||||||||
Total | 5,475 | $ | 23.59 | — | N/A | |||||||||||
[1] | Represents shares acquired from employees of the Company for tax withholding purposes in connection with the Company’s stock compensation plans. |
38
Table of Contents
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Income Statement Data | ||||||||||||||||||||
Total revenues [1] | $ | 9,219 | $ | 25,916 | $ | 26,500 | $ | 27,083 | $ | 22,708 | ||||||||||
Income (loss) before cumulative effect of accounting change [2] | (2,749 | ) | 2,949 | 2,745 | 2,274 | 2,138 | ||||||||||||||
Net income (loss) [2] [3] | (2,749 | ) | 2,949 | 2,745 | 2,274 | 2,115 | ||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Total assets | $ | 287,583 | $ | 360,361 | $ | 326,544 | $ | 285,412 | $ | 259,585 | ||||||||||
Long-term debt | 5,823 | 3,142 | 3,504 | 4,048 | 4,308 | |||||||||||||||
Total stockholders’ equity | 9,268 | 19,204 | 18,876 | 15,325 | 14,238 | |||||||||||||||
Earnings (Loss) Per Share Data | ||||||||||||||||||||
Basic earnings (loss) per share [2] [4] | ||||||||||||||||||||
Income (loss) before cumulative effect of accounting change [2] | $ | (8.99 | ) | $ | 9.32 | $ | 8.89 | $ | 7.63 | $ | 7.32 | |||||||||
Net income (loss) [2] [3] | (8.99 | ) | 9.32 | 8.89 | 7.63 | 7.24 | ||||||||||||||
Diluted earnings (loss) per share [2] [4] | ||||||||||||||||||||
Income (loss) before cumulative effect of accounting change [2] | (8.99 | ) | 9.24 | 8.69 | 7.44 | 7.20 | ||||||||||||||
Net income (loss) [2] [3] | (8.99 | ) | 9.24 | 8.69 | 7.44 | 7.12 | ||||||||||||||
Dividends declared per common share | 1.91 | 2.03 | 1.70 | 1.17 | 1.13 | |||||||||||||||
Other Data | ||||||||||||||||||||
Mutual fund assets [5] | $ | 50,126 | $ | 55,531 | $ | 43,732 | $ | 32,705 | $ | 28,068 | ||||||||||
Operating Data | ||||||||||||||||||||
Combined ratios | ||||||||||||||||||||
Ongoing Property & Casualty Operations | 90.7 | 90.8 | 89.3 | 93.2 | 95.3 | |||||||||||||||
[1] | Total revenues of The Hartford are impacted by net investment income and mark-to-market effects of equity securities held for trading supporting the international variable annuity business, which have corresponding amounts credited to policyholders within benefits losses and loss adjustment expenses. 2008 revenues include net investment losses on equity securities held for trading of $10.3 billion. Also included in 2008 revenues are net realized capital losses of $5.9 billion. | |
[2] | 2008 includes net realized capital losses of $3.6 billion, after-tax, including $2.5 billion, after-tax, in impairments. | |
2004 includes a $216 tax benefit related to agreement with the IRS on the resolution of matters pertaining to tax years prior to 2004. | ||
[3] | 2004 includes a $23 after-tax charge related to the cumulative effect of accounting change for the Company’s adoption of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. | |
[4] | Due to the net loss for the year ended December 31, 2008, no allocation of the net loss was made to the preferred shareholders under the two-class method in the calculation of basic earnings per share, as the preferred shareholders had no contractual obligation to fund the net losses of the Company. In the absence of the net loss, any such income would be allocated to the preferred shareholders based on the weighted average number of preferred shares outstanding as of December 31, 2008. | |
As a result of the net loss in the year ended December 31, 2008, FASB No.128, “Earnings per Share” (“SFAS 128”) requires the Company to use basic weighted average common shares outstanding in the calculation of the year ended December 31, 2008 diluted earnings (loss) per share, since the inclusion of the assumed conversion of convertible preferred shares to common of 5.0 and shares for stock compensation plans of 1.3 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 313.0. | ||
[5] | Mutual funds are owned by the shareholders of those funds and not by the Company. As a result, they are not reflected in total assets in the Company’s balance sheet. |
39
Table of Contents
(Dollar amounts in millions, except for per share data, unless otherwise stated)
Overview | 41 | |||
Critical Accounting Estimates | 41 | |||
Consolidated Results of Operations | 62 | |||
Life | 70 | |||
Retail | 80 | |||
Individual Life | 83 | |||
Retirement Plans | 85 | |||
Group Benefits | 87 | |||
International | 89 | |||
Institutional | 91 | |||
Other | 93 | |||
Property & Casualty | 94 | |||
Total Property & Casualty | 123 | |||
Ongoing Operations | 124 | |||
Personal Lines | 130 | |||
Small Commercial | 136 | |||
Middle Market | 140 | |||
Specialty Commercial | 145 | |||
Other Operations (Including Asbestos and Environmental Claims) | 149 | |||
Investments | 156 | |||
Investment Credit Risk | 166 | |||
Capital Markets Risk Management | 177 | |||
Capital Resources and Liquidity | 187 | |||
Impact of New Accounting Standards | 198 |
40
Table of Contents
41
Table of Contents
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Reserve Line of Business | ||||||||||||||||||||||||||||
Property | $ | 304 | $ | 2 | $ | 61 | $ | 86 | $ | 453 | $ | — | $ | 453 | ||||||||||||||
Auto physical damage | 23 | 4 | 6 | 11 | 44 | — | 44 | |||||||||||||||||||||
Auto liability | 1,615 | 281 | 252 | 142 | 2,290 | — | 2,290 | |||||||||||||||||||||
Package business | — | 1,108 | 938 | 149 | 2,195 | — | 2,195 | |||||||||||||||||||||
Workers’ compensation | 11 | 1,854 | 2,226 | 2,241 | 6,332 | — | 6,332 | |||||||||||||||||||||
General liability | 36 | 145 | 814 | 1,256 | 2,251 | — | 2,251 | |||||||||||||||||||||
Professional liability | — | — | — | 773 | 773 | — | 773 | |||||||||||||||||||||
Fidelity and surety | — | — | — | 210 | 210 | — | 210 | |||||||||||||||||||||
Assumed Reinsurance [1] | — | — | — | — | — | 562 | 562 | |||||||||||||||||||||
All other non-A&E | — | — | — | — | — | 1,066 | 1,066 | |||||||||||||||||||||
A&E | 3 | 2 | 10 | 3 | 18 | 2,153 | 2,171 | |||||||||||||||||||||
Total reserves-net | 1,992 | 3,396 | 4,307 | 4,871 | 14,566 | 3,781 | 18,347 | |||||||||||||||||||||
Reinsurance and other recoverables | 60 | 176 | 437 | 2,110 | 2,783 | 803 | 3,586 | |||||||||||||||||||||
Total reserves-gross | $ | 2,052 | $ | 3,572 | $ | 4,744 | $ | 6,981 | $ | 17,349 | $ | 4,584 | $ | 21,933 | ||||||||||||||
[1] | These net loss and loss adjustment expense reserves relate to assumed reinsurance that was moved into Other Operations (formerly known as “HartRe”). |
42
Table of Contents
43
Table of Contents
• | The accident period used may vary (e.g., year, quarter, or month); |
• | The Company may analyze the data by coverage (e.g., bodily injury separate from property damage); |
• | There may be adjustments for unusual loss activity; |
• | For ALAE, the Company uses patterns of the relationship between paid ALAE and paid losses. |
• | For one sub-set of professional liability business, management estimates frequency, not through historical claim count development, but through an analysis of the securities class actions filed and policy listings; |
• | For some methods, management projects severity on only open claims; |
• | In the commercial liability lines, the Company performs the frequency / severity technique only on claims over a certain size; |
44
Table of Contents
45
Table of Contents
46
Table of Contents
47
Table of Contents
48
Table of Contents
Individual Variable Annuities - | Individual Variable Annuities - | |||||||||||||||||||||||
U.S. | Japan | Individual Life | ||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
DAC | $ | 4,844 | $ | 4,982 | $ | 1,834 | $ | 1,760 | $ | 2,931 | $ | 2,309 | ||||||||||||
Sales Inducements | $ | 436 | $ | 390 | $ | 19 | $ | 8 | $ | 36 | $ | 20 | ||||||||||||
URR | $ | 109 | $ | 124 | $ | — | $ | — | $ | 1,299 | $ | 816 | ||||||||||||
SOP 03-1 reserves | $ | 867 | $ | 527 | $ | 229 | $ | 42 | $ | 40 | $ | 19 |
49
Table of Contents
Impact on Earnings for DAC | ||||
Assumption | Impact to EGPs | Amortization | ||
Future separate account return increases | Increase: Expected fee income would increase and expected claims would decrease. | Benefit | ||
Future separate account return decreases | Decrease:Expected fee income would decrease and expected claims would increase. | Charge | ||
Future mortality increases | Decrease:Expected fee income would decrease because the time period in which fees would be collected would be reduced and claims would increase | Charge | ||
Future mortality decreases | Increase:Expected fee income would increase because the time period in which fees would be collected would increase and claims would decrease | Benefit | ||
Future lapse rate increases | Decrease:Expected fee income would decrease because the time period in which fees would be collected would be reduced and claims would decrease. | Charge | ||
Future lapse rate decreases | Increase:Expected fee income would increase because the time period in which fees would be collected would increase and claims would increase. | Benefit |
50
Table of Contents
Death and | ||||||||||||||||||||||
DAC | Unearned | Income | Sales | |||||||||||||||||||
and | Revenue | Benefit | Inducement | |||||||||||||||||||
Segment 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 — Japan | (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. |
51
Table of Contents
Death and | ||||||||||||||||||||
DAC | Unearned | Income | Sales | |||||||||||||||||
and | Revenue | Benefit | Inducement | |||||||||||||||||
Segment 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. |
Effect on EGP-related | ||||
(Increasing separate account returns and decreasing lapse rates generally result in benefits. Decreasing | balances if unlocked | |||
separate account returns and increasing lapse rates generally result in charges.) | (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] |
Effect on EGP-related | ||||
(Increasing separate account returns and decreasing lapse rates generally result in benefits. Decreasing | balances if unlocked | |||
separate account returns and increasing lapse rates generally result in charges.) | (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. |
52
Table of Contents
[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. Since September 30, 2008, the date of the last unlock, the actual return on U.S. variable annuity assets has been 21% below our estimated aggregate return. The Company estimates the actual return would need to drop by an additional 6% since December 31, 2008, before EGPs in the Company’s models fall outside of the statistical ranges of reasonable EGPs. | |
[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. Since September 30, 2008, the date of the last unlock, the actual return on Japan variable annuity assets has been 15.5% below our estimated aggregate return. The Company estimates the actual return would need to drop by an additional 7.5% since December 31, 2008, before EGPs in the Company’s models fall outside of the statistical ranges of reasonable EGPs. | |
[5] | For the Company’s 3Win product in Japan, decreases in the contract holder’s account value (which is partially dependent upon equity market movements due to fixed contractual investment allocations) of greater 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 results in an acceleration of the amount of DAC amortization in a specific reporting period. During the fourth quarter of 2008 approximately 97% of all 3Win contractholders had account values that fell by 20% or more from their initial deposit. This resulted in accelerated amortization of DAC in the fourth quarter of 2008 of $194, pre-tax. Further declines in equity markets during 2009 could cause the entire remaining DAC balance of $11 to be amortized. |
53
Table of Contents
• | 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. |
• | 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. |
54
Table of Contents
55
Table of Contents
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Priced via third party pricing services | $ | 3,787 | $ | 50,252 | $ | 2,976 | $ | 57,015 | ||||||||
Priced via independent broker quotations | — | — | 3,962 | 3,962 | ||||||||||||
Priced via matrices | — | 180 | 4,693 | 4,873 | ||||||||||||
Priced via other methods [1] | — | — | 720 | 720 | ||||||||||||
Short-term investments [2] | 7,025 | 2,997 | — | 10,022 | ||||||||||||
Total | $ | 10,812 | $ | 53,429 | $ | 12,351 | $ | 76,592 | ||||||||
% of Total | 14.1 | % | 69.8 | % | 16.1 | % | 100.0 | % | ||||||||
[1] | Represents securities for which adjustments were made to reduce prices received from third parties and certain private equity investments that are carried at the Company’s determination of fair value from inception. [2] Short-term investments are primarily valued at amortized cost, which approximates fair value. | |
[2] | Short-term investments are primarily valued at amortized cost, which approximates fair value. |
56
Table of Contents
% of Total | ||||||||
Fair Value | Fair Value | |||||||
ABS | ||||||||
Below prime | $ | 1,643 | 13.3 | % | ||||
Collateralized loan obligations (“CLOs”) | 2,131 | 17.3 | % | |||||
Other | 560 | 4.5 | % | |||||
Corporate | ||||||||
Matrix priced private placements | 4,641 | 37.6 | % | |||||
Other | 1,755 | 14.2 | % | |||||
CMBS | 802 | 6.5 | % | |||||
Preferred stock | 337 | 2.7 | % | |||||
Other | 482 | 3.9 | % | |||||
Total Level 3 securities | $ | 12,351 | 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 public securities and private placement securities qualified for sale under rule 144A, and long-dated fixed maturities where the term of significant inputs may not be sufficient to be deemed observable. |
• | 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 lower quality preferred securities that are less liquid due to market conditions. |
Notional Value | Fair Value | |||||||
Quoted prices in active markets for identical assets (Level 1) | $ | 4,502 | $ | — | ||||
Significant observable inputs (Level 2) | 26,011 | 1,108 | ||||||
Significant unobservable inputs (Level 3) | 23,915 | 2,330 | ||||||
Total | $ | 54,428 | $ | 3,438 | ||||
Notional Value | Fair Value | |||||||
Credit derivatives | $ | 3,629 | $ | (358 | ) | |||
Interest derivatives | 3,152 | 49 | ||||||
Equity derivatives | 15,735 | 2,759 | ||||||
Other | 1,399 | (120 | ) | |||||
Total Level 3 | $ | 23,915 | $ | 2,330 | ||||
57
Table of Contents
58
Table of Contents
59
Table of Contents
Segment Goodwill | Goodwill in Corporate | Total | ||||||||||
Other Retail | $ | 159 | $ | 92 | $ | 251 | ||||||
Retirement Plans [1] | 79 | 69 | 148 | |||||||||
Institutional Solutions Group | — | 32 | 32 | |||||||||
Individual Life | 224 | 118 | 342 | |||||||||
Group Benefits | — | 138 | 138 | |||||||||
Personal Lines | 119 | — | 119 | |||||||||
Hartford Financial Products within Specialty Commercial | 30 | — | 30 | |||||||||
Total | $ | 611 | $ | 449 | $ | 1,060 | ||||||
[1] | In 2008, the Company completed three acquisitions that resulted in additional goodwill of $79 in Retirement Plans. |
Segment Goodwill | Goodwill in Corporate | Total | ||||||||||
Individual Annuity | $ | 422 | $ | 308 | $ | 730 | ||||||
Other Retail | 159 | 92 | 251 | |||||||||
Retirement Plans | — | 69 | 69 | |||||||||
Institutional Solutions Group | — | 32 | 32 | |||||||||
Individual Life | 224 | 118 | 342 | |||||||||
Group Benefits | — | 138 | 138 | |||||||||
International | — | 15 | 15 | |||||||||
Personal Lines | 119 | — | 119 | |||||||||
Hartford Financial Products within Specialty Commercial | 30 | — | 30 | |||||||||
Total | $ | 954 | $ | 772 | $ | 1,726 | ||||||
60
Table of Contents
61
Table of Contents
For the Years Ended December 31, | ||||||||||||
Operating Summary | 2008 | 2007 | 2006 | |||||||||
Earned premiums | $ | 15,503 | $ | 15,619 | $ | 15,023 | ||||||
Fee income | 5,135 | 5,436 | 4,739 | |||||||||
Net investment income (loss) | ||||||||||||
Securities available-for-sale and other | 4,335 | 5,214 | 4,691 | |||||||||
Equity securities held for trading [1] | (10,340 | ) | 145 | 1,824 | ||||||||
Total net investment income (loss) | (6,005 | ) | 5,359 | 6,515 | ||||||||
Other revenues | 504 | 496 | 474 | |||||||||
Net realized capital losses | (5,918 | ) | (994 | ) | (251 | ) | ||||||
Total revenues | 9,219 | 25,916 | 26,500 | |||||||||
Benefits, losses and loss adjustment expenses | 14,088 | 13,919 | 13,218 | |||||||||
Benefits, losses and loss adjustment expenses — returns credited on International variable annuities [1] | (10,340 | ) | 145 | 1,824 | ||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 4,271 | 2,989 | 3,558 | |||||||||
Insurance operating costs and expenses | 3,993 | 3,894 | 3,252 | |||||||||
Interest expense | 343 | 263 | 277 | |||||||||
Goodwill impairment | 745 | — | — | |||||||||
Other expenses | 710 | 701 | 769 | |||||||||
Total benefits, losses and expenses | 13,810 | 21,911 | 22,898 | |||||||||
Income (loss) before income taxes | (4,591 | ) | 4,005 | 3,602 | ||||||||
Income tax expense (benefit) | (1,842 | ) | 1,056 | 857 | ||||||||
Net income (loss) | $ | (2,749 | ) | $ | 2,949 | $ | 2,745 | |||||
[1] | Includes investment income and mark-to-market effects of equity securities held for trading supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders within benefits, losses and loss adjustment expenses. |
Net Income (Loss) by Operation and Life Segment | 2008 | 2007 | 2006 | |||||||||
Life | ||||||||||||
Retail | $ | (1,399 | ) | $ | 812 | $ | 536 | |||||
Individual Life | (43 | ) | 182 | 150 | ||||||||
Total Individual Markets Group | (1,442 | ) | 994 | 686 | ||||||||
Retirement Plans | (157 | ) | 61 | 101 | ||||||||
Group Benefits | (6 | ) | 315 | 298 | ||||||||
Total Employer Markets Group | (163 | ) | 376 | 399 | ||||||||
International | (325 | ) | 223 | 231 | ||||||||
Institutional | (502 | ) | 17 | 78 | ||||||||
Other | (11 | ) | (52 | ) | 47 | |||||||
Total Life | (2,443 | ) | 1,558 | 1,441 | ||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | ||||||||||||
Underwriting results | ||||||||||||
Personal Lines | 280 | 322 | 429 | |||||||||
Small Commercial | 437 | 508 | 422 | |||||||||
Middle Market | 169 | 157 | 214 | |||||||||
Specialty Commercial | 71 | (18 | ) | 46 | ||||||||
Ongoing Operations underwriting results | 957 | 969 | 1,111 | |||||||||
Net servicing income [1] | 31 | 52 | 53 | |||||||||
Net investment income | 1,056 | 1,439 | 1,225 | |||||||||
Net realized capital losses | (1,669 | ) | (160 | ) | (17 | ) | ||||||
Other expenses | (219 | ) | (248 | ) | (222 | ) | ||||||
Income tax (expense) benefit | 33 | (575 | ) | (596 | ) | |||||||
Ongoing Operations | 189 | 1,477 | 1,554 | |||||||||
Other Operations | (97 | ) | 30 | (35 | ) | |||||||
Total Property & Casualty | 92 | 1,507 | 1,519 | |||||||||
Corporate | (398 | ) | (116 | ) | (215 | ) | ||||||
Net income (loss) | $ | (2,749 | ) | $ | 2,949 | $ | 2,745 | |||||
[1] | Net of expenses related to service business. |
62
Table of Contents
• | Realized losses increased as compared to the comparable prior year period primarily due to impairments on investment securities and net losses from the adoption of SFAS 157. 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 driven by market depreciation of $37.8 billion for Individual Annuity and $20.2 billion for retail mutual funds during 2008, drove declines in fee income compared to 2007. |
• | Net investment income on securities, available-for-sale, and other declined primarily due to declines in limited partnership and other alternative investments income and a decrease in investment yield for fixed maturities. |
• | A goodwill impairment of $274, after-tax, in Retail. |
• | The effect of the triggering of the guaranteed minimum income benefit for the 3 Win product was $151, after-tax. |
• | Ongoing Operations’ net income decreased by $1.3 billion in 2008, from net income of $1.5 billion in 2007 to net income of $189 in 2008. Before income taxes, Ongoing Operations’ results deteriorated by $1.9 billion, primarily due to a $1.5 billion increase in net realized capital losses on investments, a $383 decrease in net investment income and a $366 increase in current accident year catastrophes, partially offset by a $210 increase in net favorable prior accident year development and more favorable underwriting results from personal auto and workers’ compensation lines of business. The increase in net realized capital losses of $1.5 billion in 2008 was primarily due to impairments of subordinated fixed maturities and preferred equity securities in the financial services sector as well as of securitized assets. Contributing to the $383 decrease in net investment income was a change from net income to net losses on limited partnerships and other alternative investments in 2008 and decreased fixed maturity income. The $366 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. The $210 increase in net favorable prior accident year development was primarily due to larger net reserve releases for workers’ compensation, professional liability and personal auto liability claims. |
• | Other Operations reported a net loss of $97 in 2008 compared to net income of $30 in 2007. Before income taxes, Other Operations’ results deteriorated by $184, primarily due to a $196 increase in net realized capital losses on investments, largely driven by impairments of subordinated fixed maturities and preferred equity securities in the financial services sector as well as of securitized assets, and a $51 decrease in net investment income, partially offset by a $64 decrease in net unfavorable prior accident year reserve development. |
63
Table of Contents
• | The DAC unlock benefit of $210 recorded in the third quarter of 2007. |
• | Increased income on asset growth in the variable annuity, mutual fund, retirement and institutional businesses. |
• | Increased non-deferrable individual annuity asset based commissions. |
• | Unfavorable mortality in Individual Life. |
• | Increased DAC amortization in Group Benefits due to the adoption of Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). |
• | During the first quarter of 2006, the Company achieved favorable settlements in several cases brought against the Company by policyholders regarding their purchase of broad-based leveraged corporate owned life insurance (“leveraged COLI”) policies in the early to mid-1990s and therefore, released a reserve for these matters of $34, after-tax. |
• | Realized losses increased for the year ended December 31, 2007 as compared to the comparable prior year periods primarily due to net losses on GMWB derivatives and impairments. |
• | Ongoing Operations’ net income decreased by $77, primarily due to a $92 after-tax decrease in underwriting results and a change from net realized capital gains of $29, after-tax, in 2006 to net realized capital losses of $104, after-tax, in 2007. The decrease in underwriting results and the change to net realized capital losses was partially offset by a $150 after-tax increase in net investment income. The decrease in underwriting results was primarily driven by an increase in the loss and loss adjustment expense ratio before catastrophes and prior accident year development and an increase in insurance and operating costs and dividends, partially offset by a reduction in prior accident year reserves for workers’ compensation business. |
• | Other Operations reported net income of $30 in 2007 compared to a net loss of $35 in 2006. The improvement in results was primarily due to a decrease in unfavorable prior accident year reserve development, partially offset by a change from net realized gains in 2006 to net realized losses in 2007 and a decrease in net investment income. |
64
Table of Contents
2008 | 2007 | 2006 | ||||||||||
Basic earnings (losses) per share | $ | (8.99 | ) | $ | 9.32 | $ | 8.89 | |||||
Diluted earnings (losses) per share | $ | (8.99 | ) | $ | 9.24 | $ | 8.69 | |||||
Weighted average common shares outstanding (basic) | 306.7 | 316.3 | 308.8 | |||||||||
Weighted average common shares outstanding and dilutive potential common shares (diluted) | 306.7 | 319.1 | 315.9 |
65
Table of Contents
66
Table of Contents
67
Table of Contents
68
Table of Contents
69
Table of Contents
70
Table of Contents
As of and for the years ended December 31, | ||||||||||||
Product/Key Indicator Information | 2008 | 2007 | 2006 | |||||||||
Retail U.S. Individual Variable Annuities | ||||||||||||
Account value, beginning of period | $ | 119,071 | $ | 114,365 | $ | 105,314 | ||||||
Net flows | (6,235 | ) | (2,733 | ) | (3,150 | ) | ||||||
Change in market value and other | (38,258 | ) | 7,439 | 12,201 | ||||||||
Account value, end of period | $ | 74,578 | $ | 119,071 | $ | 114,365 | ||||||
Retail Mutual Funds | ||||||||||||
Assets under management, beginning of period | $ | 48,383 | $ | 38,536 | $ | 29,063 | ||||||
Net sales | 2,840 | 5,545 | 5,659 | |||||||||
Change in market value and other | (20,191 | ) | 4,302 | 3,814 | ||||||||
Assets under management, end of period | $ | 31,032 | $ | 48,383 | $ | 38,536 | ||||||
Individual Life Insurance | ||||||||||||
Variable universal life account value, end of period | $ | 4,802 | $ | 7,284 | $ | 6,637 | ||||||
Total life insurance in-force | 195,464 | 179,483 | 164,227 | |||||||||
Retirement Plans Group Annuities | ||||||||||||
Account value, beginning of period | $ | 27,094 | $ | 23,575 | $ | 19,317 | ||||||
Net flows | 2,418 | 1,669 | 2,545 | |||||||||
Change in market value and other | (7,314 | ) | 1,850 | 1,713 | ||||||||
Account value, end of period | $ | 22,198 | $ | 27,094 | $ | 23,575 | ||||||
Retirement Plans Mutual Funds | ||||||||||||
Assets under management, beginning of period | $ | 1,454 | $ | 1,140 | $ | 947 | ||||||
Net sales/(redemptions) | (446 | ) | 103 | 59 | ||||||||
Acquisitions | 18,725 | — | — | |||||||||
Change in market value and other | (4,895 | ) | 211 | 134 | ||||||||
Assets under management, end of period | $ | 14,838 | $ | 1,454 | $ | 1,140 | ||||||
Japan Annuities | ||||||||||||
Account value, beginning of period | $ | 37,637 | $ | 31,343 | $ | 26,104 | ||||||
Net flows [1] | 714 | 4,525 | 4,393 | |||||||||
Change in market value and other | (10,921 | ) | (608 | ) | 1,195 | |||||||
Effect of currency translation | 7,065 | 2,377 | (349 | ) | ||||||||
Account value, end of period | $ | 34,495 | $ | 37,637 | $ | 31,343 | ||||||
S&P 500 Index | ||||||||||||
Year end closing value | 903 | 1,468 | 1,418 | |||||||||
Daily average value | 1,220 | 1,477 | 1,310 | |||||||||
[1] | Includes the effect of the triggering of the guaranteed minimum income benefit (“GMIB”) for the 3 Win product of which $(809) relates to policyholders surrendering and $(170) relates to the current period annuity payments. |
• | 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 insurance in-force growth has occurred across multiple product lines, including term, universal life and variable universal life. |
• | Retirement Plans group annuities has seen positive net flows driven by higher deposits as a result of the expanded sales force obtained through the 2008 acquisitions. |
71
Table of Contents
• | Retirement Plans mutual funds reflects an increase of $18.7 billion 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 2008 reflect expected outflows on the acquired business. |
• | International — Japan Annuities has seen positive net flows and favorable effects from currency exchange rates for 2008. Net flows have decreased in Japan annuities due the 3 Win trigger and to increased competition from domestic and foreign insurers, particularly competition relating to products offered with living benefit guarantees. |
• | Increases in Retail U.S. individual variable annuity account values as of December 31, 2007 can be primarily attributed to market growth during the year and improved net flows due to an increase in sales. |
• | In addition to strong positive net flows, market appreciation and diversified sales growth during the year contributed to Retail mutual funds assets under management growth. |
• | Individual Life variable universal life account values increased primarily due to market appreciation and positive net flows. Life insurance in-force increased from the prior periods due to business growth. |
• | Retirement Plans account values increased for the year ended December 31, 2007 due to positive net flows driven by ongoing contributions and market appreciation during the year. |
• | International — Japan annuity account values continue to grow as a result of positive net flows and a strengthening of the yen versus the dollar offset by a decline in market performance throughout the year |
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Retail — Individual Annuity | 73.1 | bps | 173.5 | bps | 153.0 | bps | ||||||
Individual Life | 89.6 | bps | 130.3 | bps | 123.9 | bps | ||||||
Retirement Plans | 92.3 | bps | 161.9 | bps | 152.0 | bps | ||||||
Institutional — Stable Value | 20.5 | bps | 100.6 | bps | 84.8 | bps |
• | Retail — Individual Annuity, Individual Life, Retirement Plans and Institutional net investment spread decreased primarily due to negative earnings on limited partnership and other alternative investment income in 2008 compared to strong earnings in these classes in 2007 and lower yields on fixed maturities, partially offset by reduced credited rates. |
• | Retail — Individual Annuity, Individual Life, Retirement Plans and Institutional net investment spreads increased primarily due to a higher allocation of investments in higher yield/higher risk investment classes, including limited partnerships and other alternative investments and relative strong performance of this asset class in 2007. |
72
Table of Contents
For the years ended December 31, | ||||||||||||
Group Benefits | 2008 | 2007 | 2006 | |||||||||
Total premiums and other considerations | $ | 4,391 | $ | 4,301 | $ | 4,149 | ||||||
Fully insured ongoing sales (excluding buyouts) | 820 | 770 | 861 | |||||||||
Persistency | 89 | % | 87 | % | 87 | % |
• | Earned premiums and other considerations include $1, $27 and $12 in buyout premiums for the years ended December 31, 2008, 2007 and 2006, respectively. Total premiums and other considerations, excluding buyouts, increased in 2008 compared to 2007 due to increases in sales and persistency that 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. The increase in premiums and other considerations for Group Benefits in 2007 compared to 2006 was driven by growth in the block of business. |
• | Fully insured ongoing sales, excluding buyouts, increased in 2008 from 2007 primarily due to national account and small case sales growth. Fully insured ongoing sales, excluding buyouts, declined in 2007 from 2006 primarily due to fewer large national account sales, and the small case competitive environment remained intense. The Company also completed a renewal rights arrangement associated with its medical stop loss business during the second quarter of 2007 eliminating new sales related to this business. In addition, there was an anticipated decrease in association life sales from an unusually high comparable prior year period. |
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Retail | ||||||||||||
General insurance expense ratio (individual annuity) | 21.0 | bps | 17.9 | bps | 17.2 | bps | ||||||
DAC amortization ratio (individual annuity) [1] | 218.5 | % | 25.5 | % | 65.3 | % | ||||||
DAC amortization ratio (individual annuity) excluding DAC Unlock [1] [3] | 65.2 | % | 47.9 | % | 52.4 | % | ||||||
Individual Life | ||||||||||||
Death benefits | $ | 359 | $ | 298 | $ | 251 | ||||||
Group Benefits | ||||||||||||
Total benefits, losses and loss adjustment expenses | $ | 3,144 | $ | 3,109 | $ | 3,002 | ||||||
Loss ratio (excluding buyout premiums) | 71.6 | % | 72.1 | % | 72.3 | % | ||||||
Expense ratio (excluding buyout premiums) | 27.0 | % | 27.9 | % | 27.6 | % | ||||||
International — Japan | ||||||||||||
General insurance expense ratio | 49.4 | bps | 48.4 | bps | 49.1 | bps | ||||||
DAC amortization ratio [2] | 109.3 | % | 35.3 | % | 30.2 | % | ||||||
DAC amortization ratio excluding DAC Unlock [2] [3] | 77.8 | % | 40.0 | % | 40.7 | % | ||||||
Institutional | ||||||||||||
General insurance expense ratio | 14.1 | bps | 14.1 | bps | 14.7 | bps | ||||||
[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 gains (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. |
73
Table of Contents
• | The Retail DAC amortization ratio (individual annuity), excluding the effects of the 2008 Unlock and realized losses, increased due to the impairment of goodwill in the fourth quarter of 2008, which reduced pre tax earnings but did not affect EGPs. Excluding the impacts of the goodwill impairment, realized losses, and DAC Unlock, the DAC amortization ratio was 43.3%, which reflects the 2008 effect of changes in assumptions made as part of the 2007 and 2008 Unlocks. |
• | The Retail general insurance expense ratio increased due to the impact of a declining asset base on relatively consistent expenses. |
• | Individual Life death benefits increased, primarily due to growth of life insurance in-force and unfavorable mortality. |
• | Group Benefits loss ratio decreased due to favorable disability and medical stop loss experience partially offset by unfavorable mortality. |
• | Group Benefits expense ratio, excluding buyouts decreased primarily due 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, as well as the accelerated amortization associated with the impact of the 3 Win trigger. |
• | Institutional general insurance expense ratio is unchanged, as additional product development expenses were offset by higher assets under management. |
• | Retail — Individual Annuity general insurance expense ratio increased in 2007 primarily due to higher service and technology costs. |
• | The Retail DAC amortization ratio (individual annuity) excluding DAC Unlock declined in 2007, primarily due to increased net investment income on allocated capital and an increase in limited partnership and other alternative investment income. |
• | Individual Life death benefits increased in 2007 primarily due to growth of life insurance in-force and unfavorable mortality. |
• | Group Benefits expense ratio, excluding buyouts, increased in 2007 primarily due to higher DAC amortization. |
• | Institutional general insurance expense ratio decreased in 2007 primarily due to higher assets under management. |
74
Table of Contents
Ratios | 2008 | 2007 | 2006 | |||||||||
Retail | ||||||||||||
Individual annuity return on assets (“ROA”) | (133.5 | ) bps | 58.9 | bps | 39.9 | bps | ||||||
Effect of net realized gains (losses), net of tax and DAC on ROA [1] | (96.5 | ) bps | (13.3 | ) bps | (7.4 | ) bps | ||||||
Effect of DAC Unlock on ROA [3] | (68.0 | ) bps | 15.6 | bps | (6.0 | ) bps | ||||||
ROA excluding realized gains (losses) and DAC Unlock | 31.0 | bps | 56.6 | bps | 53.3 | bps | ||||||
Individual Life | ||||||||||||
After-tax margin | (4.7 | %) | 16.0 | % | 13.3 | % | ||||||
Effect of net realized gains (losses), net of tax and DAC on after-tax margin [1] | (13.1 | %) | (1.3 | %) | (1.5 | %) | ||||||
Effect of DAC Unlock on after-tax margin [3] | (4.7 | %) | 1.4 | % | (1.6 | %) | ||||||
After-tax margin excluding realized gains (losses) and DAC Unlock | 13.1 | % | 15.9 | % | 16.4 | % | ||||||
Retirement Plans | ||||||||||||
Retirement ROA | (47.9 | ) bps | 22.9 | bps | 44.7 | bps | ||||||
Effect of net realized gains (losses), net of tax and DAC on ROA [1] | (51.5 | ) bps | (10.5 | ) bps | (3.1 | ) bps | ||||||
Effect of DAC Unlock on ROA [3] | (15.0 | ) bps | (3.4 | ) bps | 8.9 | bps | ||||||
ROA excluding realized gains (losses) and DAC Unlock | 18.6 | bps | 36.8 | bps | 38.9 | bps | ||||||
Group Benefits | ||||||||||||
After-tax margin (excluding buyouts) | (0.1 | %) | 6.7 | % | 6.6 | % | ||||||
Effect of net realized gains (losses), net of tax on after-tax margin (excluding buyouts) [1] | (7.3 | %) | (0.4 | %) | (0.1 | %) | ||||||
After-tax margin (excluding buyouts) excluding realized gains (losses) | 7.2 | % | 7.1 | % | 6.7 | % | ||||||
International – Japan | ||||||||||||
International – Japan ROA | (72.9 | ) bps | 73.4 | bps | 87.7 | bps | ||||||
Effect of net realized gains (losses) excluding net periodic settlements, net of tax and DAC on ROA [1] [2] | (65.1 | ) bps | (8.1 | ) bps | (5.6 | ) bps | ||||||
Effect of DAC Unlock on ROA [3] | (31.9 | ) bps | 6.4 | bps | 18.5 | bps | ||||||
ROA excluding realized gains (losses) and DAC Unlock | 24.1 | bps | 75.1 | bps | 74.8 | bps | ||||||
Institutional | ||||||||||||
Institutional ROA | (83.3 | ) bps | 3.0 | bps | 16.6 | bps | ||||||
Effect of net realized gains (losses), net of tax and DAC on ROA [1] | (85.0 | ) bps | (21.5 | ) bps | (5.1 | ) bps | ||||||
Effect of DAC Unlock on ROA [3] | — | bps | 0.2 | bps | — | bps | ||||||
ROA excluding realized gains (losses) and DAC Unlock | 1.7 | bps | 24.3 | bps | 21.7 | 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 decrease in Individual Annuity’s ROA, excluding realized gains (losses) and the effect of the DAC Unlock, reflects the write-off of goodwill of $274 after-tax, or 19.4 bps; lower limited partnership and other alternative investment income; and the net effect of lower fees. |
• | The decrease in Individual Life’s after-tax margin, excluding realized gains (losses) and the effect of the DAC Unlock, was due to lower net investment income from limited partnership and other alternative investments, unfavorable mortality expense, reduced net investment income associated with a more efficient capital approach for our secondary guarantee universal life business which released assets supporting capital and lower variable life insurance fees from equity market declines, partially offset by life insurance in-force growth, lower credited rates and higher surrender charges. |
• | 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 mutual fund assets and assets under administration as opposed to traditional annuity contracts. 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. Partially offsetting these decreases were tax benefits primarily associated with DRD. |
75
Table of Contents
• | The Group Benefit increase in after-tax margin was primarily due to the favorable expense 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, as well as the accelerated DAC amortization associated with the 3 Win trigger. |
• | The decrease in Institutional’s ROA, excluding realized gains (losses), is primarily due to a decline in limited partnership and other alternative investment income. The decrease is also due to unfavorable mortality and lower yields on fixed maturity investments. |
• | The increase in Individual Annuity’s ROA, excluding realized gains (losses) and DAC Unlock, was primarily due to increased net investment income on allocated capital and an increase in limited partnership and other alternative investment income. This was partially offset by an increase in the effective tax rate as a result of revisions in the estimates of the separate account DRD and FTC. |
• | Individual Life’s decrease in after-tax margin, excluding realized gains (losses) and DAC Unlock, was primarily due to unfavorable mortality experience. |
• | The decrease in Retirement Plan’s ROA, excluding realized gains (losses) and DAC Unlock, was primarily due to a shift in product mix resulting in lower fees as a percent of assets. |
• | The increase in Institutional’s ROA, excluding realized gains (losses) and DAC Unlock, was primarily due to an increase in limited partnership and other alternative investment income and increased net investment income on allocated capital. |
• | The increase in the Group Benefits after-tax margin, excluding buyouts, excluding realized gains (losses), was due to an improvement in the loss ratio, partially offset by higher DAC amortization. |
Life Operating Summary | 2008 | 2007 | 2006 | |||||||||
Earned premiums | $ | 5,165 | $ | 5,123 | $ | 4,590 | ||||||
Fee income | 5,118 | 5,420 | 4,726 | |||||||||
Net investment income (loss) | ||||||||||||
Securities available-for-sale and other | 3,045 | 3,497 | 3,184 | |||||||||
Equity securities held for trading [1] | (10,340 | ) | 145 | 1,824 | ||||||||
Total net investment income (loss) | (7,295 | ) | 3,642 | 5,008 | ||||||||
Net realized capital losses | (4,138 | ) | (819 | ) | (260 | ) | ||||||
Total revenues [2] | (1,150 | ) | 13,366 | 14,064 | ||||||||
Benefits, losses and loss adjustment expenses | 7,381 | 7,002 | 6,216 | |||||||||
Benefits, losses and loss adjustment expenses — returns credited on International variable annuities [1] | (10,340 | ) | 145 | 1,824 | ||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 2,176 | 884 | 1,452 | |||||||||
Goodwill impairment | 422 | �� | — | — | ||||||||
Insurance operating costs and other expenses | 3,300 | 3,230 | 2,708 | |||||||||
Total benefits, losses and expenses | 2,939 | 11,261 | 12,200 | |||||||||
Income (loss) before income taxes | (4,089 | ) | 2,105 | 1,864 | ||||||||
Income (loss) tax expense (benefit) | (1,646 | ) | 547 | 423 | ||||||||
Net income (loss) [3] | $ | (2,443 | ) | $ | 1,558 | $ | 1,441 | |||||
[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 year ended December 31, 2008. For further discussion of the SFAS 157 transition impact, refer to Note 4 of the Notes to the Consolidated Financial Statements. | |
[3] | The transition impact related to the SFAS 157 adoption was a reduction in net income of $220 for the year ended December 31, 2008. For further discussion of the SFAS 157 transition impact, refer to Note 4 of the Notes to the Consolidated Financial Statements. |
• | Realized losses increased as compared to the comparable prior year period primarily due to net losses from the adoption of SFAS 157 and impairments on investment securities. 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 driven by market depreciation of $37.8 billion for Individual Annuity and $20.2 billion for retail mutual funds during 2008, drove declines in fee income compared to 2007. |
76
Table of Contents
• | Net investment income on securities, available-for-sale, and other declined primarily due to declines in limited partnership and other alternative investments income and a decrease in investment yield for fixed maturities. |
• | A goodwill impairment of $274, after-tax, in Retail. |
• | The effect of the triggering of the guaranteed minimum income benefit for the 3 Win product was $151, after-tax. |
• | The DAC Unlock benefit of $210 recorded in the third quarter of 2007. |
• | Increased income on asset growth in the variable annuity, mutual fund, retirement and institutional businesses. |
• | Increased non-deferrable individual annuity asset based commissions. |
• | Unfavorable mortality in Individual Life. |
• | Increased DAC amortization in Group Benefits due to the adoption of SOP 05-1. |
• | During the first quarter of 2006, the Company achieved favorable settlements in several cases brought against the Company by policyholders regarding their purchase of broad-based leveraged corporate owned life insurance (“leveraged COLI”) policies in the early to mid-1990s and therefore, released a reserve for these matters of $34, after-tax. |
• | Realized losses increased for the year ended December 31, 2007 as compared to the comparable prior year periods primarily due to net losses on GMWB derivatives and impairments. |
77
Table of Contents
Individual | Group | |||||||||||||||||||||||||||||||
Retail | Life | Retirement | Benefits | International | Institutional | Other | Total | |||||||||||||||||||||||||
Gains/losses on sales, net | $ | (31 | ) | $ | (20 | ) | $ | (38 | ) | $ | (3 | ) | $ | (20 | ) | $ | 167 | $ | (32 | ) | $ | 23 | ||||||||||
Impairments | (474 | ) | (245 | ) | (243 | ) | (513 | ) | (114 | ) | (740 | ) | (95 | ) | (2,424 | ) | ||||||||||||||||
Japanese fixed annuity contract hedges, net | –– | –– | –– | –– | 64 | –– | –– | 64 | ||||||||||||||||||||||||
Periodic net coupon settlements on credit derivatives/Japan | (6 | ) | (2 | ) | (4 | ) | (1 | ) | (28 | ) | –– | 6 | (35 | ) | ||||||||||||||||||
SFAS 157 transition impact | (616 | ) | –– | –– | –– | (34 | ) | –– | –– | (650 | ) | |||||||||||||||||||||
Results of variable annuity hedge program | ||||||||||||||||||||||||||||||||
GMWB derivatives, net | (631 | ) | –– | –– | –– | (82 | ) | –– | –– | (713 | ) | |||||||||||||||||||||
Macro Hedge Program | 40 | –– | –– | –– | 34 | –– | –– | 74 | ||||||||||||||||||||||||
Total results of variable annuity hedge program | (591 | ) | –– | –– | –– | (48 | ) | –– | –– | (639 | ) | |||||||||||||||||||||
Other, net | (192 | ) | 15 | 13 | (23 | ) | (242 | ) | (216 | ) | 168 | (477 | ) | |||||||||||||||||||
Total net realized capital gains (losses) | (1,910 | ) | (252 | ) | (272 | ) | (540 | ) | (422 | ) | (789 | ) | 47 | (4,138 | ) | |||||||||||||||||
Income tax expense (benefit) and DAC | (859 | ) | (89 | ) | (101 | ) | (188 | ) | (133 | ) | (277 | ) | 13 | (1,634 | ) | |||||||||||||||||
Total gains (losses), net of tax and DAC | $ | (1,051 | ) | $ | (163 | ) | $ | (171 | ) | $ | (352 | ) | $ | (289 | ) | $ | (512 | ) | $ | 34 | $ | (2,504 | ) | |||||||||
Individual | Group | |||||||||||||||||||||||||||||||
Retail | Life | Retirement | Benefits | International | Institutional | Other | Total | |||||||||||||||||||||||||
Gains/losses on sales, net | $ | 17 | $ | 7 | $ | (11 | ) | $ | 8 | $ | — | $ | 13 | $ | 11 | $ | 45 | |||||||||||||||
Impairments | (87 | ) | (21 | ) | (22 | ) | (19 | ) | (48 | ) | (148 | ) | (13 | ) | (358 | ) | ||||||||||||||||
Japanese fixed annuity contract hedges, net | — | — | — | — | 18 | — | — | 18 | ||||||||||||||||||||||||
Periodic net coupon settlements on credit derivatives/Japan | 1 | — | — | — | (68 | ) | 3 | 24 | (40 | ) | ||||||||||||||||||||||
Results of variable annuity hedge program | ||||||||||||||||||||||||||||||||
GMWB derivatives, net | (286 | ) | –– | –– | –– | –– | –– | –– | (286 | ) | ||||||||||||||||||||||
Macro Hedge Program | (12 | ) | –– | –– | –– | –– | –– | –– | (12 | ) | ||||||||||||||||||||||
Total results of variable annuity hedge program | (298 | ) | –– | –– | –– | –– | –– | –– | (298 | ) | ||||||||||||||||||||||
Other, net | (14 | ) | (14 | ) | (8 | ) | (19 | ) | (18 | ) | (56 | ) | (57 | ) | (186 | ) | ||||||||||||||||
Total net realized capital losses | (381 | ) | (28 | ) | (41 | ) | (30 | ) | (116 | ) | (188 | ) | (35 | ) | (819 | ) | ||||||||||||||||
Income tax benefit and DAC | (212 | ) | (13 | ) | (13 | ) | (12 | ) | (52 | ) | (67 | ) | (4 | ) | (373 | ) | ||||||||||||||||
Total losses, net of tax and DAC | $ | (169 | ) | $ | (15 | ) | $ | (28 | ) | $ | (18 | ) | $ | (64 | ) | $ | (121 | ) | $ | (31 | ) | $ | (446 | ) | ||||||||
78
Table of Contents
Individual | Group | |||||||||||||||||||||||||||||||
Retail | Life | Retirement | Benefits | International | Institutional | Other | Total | |||||||||||||||||||||||||
Gains/losses on sales, net | $ | (44 | ) | $ | (1 | ) | $ | (9 | ) | $ | (6 | ) | $ | (4 | ) | $ | 23 | $ | (1 | ) | $ | (42 | ) | |||||||||
Impairments | (6 | ) | (18 | ) | (6 | ) | (3 | ) | (2 | ) | (32 | ) | (9 | ) | (76 | ) | ||||||||||||||||
Japanese fixed annuity contract hedges, net | — | — | — | — | (17 | ) | — | — | (17 | ) | ||||||||||||||||||||||
Periodic net coupon settlements on credit derivatives/Japan | 3 | (1 | ) | — | 1 | (63 | ) | 1 | 11 | (48 | ) | |||||||||||||||||||||
Results of variable annuity hedge program | ||||||||||||||||||||||||||||||||
GMWB derivatives, net | (26 | ) | — | — | — | — | — | — | (26 | ) | ||||||||||||||||||||||
Macro Hedge Program | (14 | ) | –– | –– | –– | –– | –– | –– | (14 | ) | ||||||||||||||||||||||
Total results of variable annuity hedge program | (40 | ) | –– | –– | –– | –– | –– | –– | (40 | ) | ||||||||||||||||||||||
Other, net | –– | (5 | ) | (1 | ) | (5 | ) | (2 | ) | (29 | ) | 5 | (37 | ) | ||||||||||||||||||
Total net realized capital gains (losses) | (87 | ) | (25 | ) | (16 | ) | (13 | ) | (88 | ) | (37 | ) | 6 | (260 | ) | |||||||||||||||||
Income tax expense (benefit) and DAC | 3 | (8 | ) | (9 | ) | (5 | ) | (41 | ) | (13 | ) | 1 | (72 | ) | ||||||||||||||||||
Total losses, net of tax and DAC | $ | (90 | ) | $ | (17 | ) | $ | (7 | ) | $ | (8 | ) | $ | (47 | ) | $ | (24 | ) | $ | 5 | $ | (188 | ) | |||||||||
Gross Gains and Losses on Sale | • | Gross gains and losses on sales for the year ended December 31, 2008 primarily resulted from the decision to reallocate the portfolio to securities with more favorable risk/return profiles. Also included was a gain of $141 from the sale of a synthetic CDO, as well as losses on sales of HIMCO managed CLOs in the first quarter. For more information regarding these CLO losses, refer to the Variable Interest Entities section below. During the year ended December 31, 2008, securities sold at a loss were depressed, on average, approximately 2% at the respective period’s impairment review date and were deemed to be temporarily impaired. | ||
• | Gross gains and losses on sales for the year ended December 31, 2007 were primarily comprised of corporate securities. During the year ended December 31, 2007, securities sold at a loss were depressed, on average, approximately 1% at the respective period’s impairment review date and were deemed to be temporarily impaired. | |||
• | Gross gains on sales for the year ended December 31, 2006 were primarily within fixed maturities and were concentrated in U.S. government, corporate and foreign government securities. Gross losses on sale for the year ended December 31, 2006 were primarily within fixed maturities and were concentrated in the corporate and CMBS sectors. | |||
Impairments | • | See the Other-Than-Temporary Impairments section of the “Investments” section of the MD&A for information on impairment losses. | ||
SFAS 157 | • | See Note 4 of the Notes to the Consolidated Financial Statements for a discussion of the SFAS 157 transition impact. | ||
Variable Annuity Hedge Program | • | See Note 4 of the Notes to the Consolidated Financial Statements for a discussion of variable annuity hedge program gains and losses. | ||
Other | • | Other, net losses for the year ended December 31, 2008 were primarily related to net losses of $291 related to transactional foreign currency losses predominately on the internal reinsurance of the Japan variable annuity business, which is entirely offset in AOCI, resulting from appreciation of the Yen and credit derivative losses of $222 due to significant credit spread widening. Also included were losses on HIMCO managed CLOs in the first quarter and derivative related losses of $39 in the third quarter due to counterparty default related to the bankruptcy of Lehman Brothers Holdings Inc. For more information regarding the CLO losses, refer to the Variable Interest Entities section below. | ||
• | Other, net losses for the year ended December 31, 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. Credit spreads widened primarily due to the deterioration in the U.S. housing market, tightened lending conditions and the market’s flight to quality securities. | |||
• | Other, net losses for the year ended December 31, 2006 were primarily driven from the change in value of non-qualifying derivatives due to fluctuations in interest rates and foreign currency exchange rates. These losses were partially offset by a before-tax benefit of $25 received from the WorldCom security settlement. |
79
Table of Contents
Operating Summary | 2008 | 2007 | 2006 | |||||||||
Fee income and other | $ | 2,757 | $ | 3,117 | $ | 2,695 | ||||||
Earned premiums | (4 | ) | (62 | ) | (86 | ) | ||||||
Net investment income | 747 | 801 | 839 | |||||||||
Net realized capital losses | (1,910 | ) | (381 | ) | (87 | ) | ||||||
Total revenues [1] | 1,590 | 3,475 | 3,361 | |||||||||
Benefits, losses and loss adjustment expenses | 1,008 | 820 | 819 | |||||||||
Insurance operating costs and other expenses | 1,187 | 1,221 | 994 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 1,344 | 406 | 973 | |||||||||
Goodwill impairment | 422 | — | — | |||||||||
Total benefits, losses and expenses | 3,961 | 2,447 | 2,786 | |||||||||
Income (loss) before income taxes | (2,371 | ) | 1,028 | 575 | ||||||||
Income tax expense (benefit) | (972 | ) | 216 | 39 | ||||||||
Net income (loss) [2] | $ | (1,399 | ) | $ | 812 | $ | 536 | |||||
Assets Under Management | 2008 | 2007 | 2006 | |||||||||
Individual variable annuity account values | $ | 74,578 | $ | 119,071 | $ | 114,365 | ||||||
Individual fixed annuity and other account values | 11,278 | 10,243 | 9,937 | |||||||||
Other retail products account values | 398 | 677 | 525 | |||||||||
Total account values [3] | 86,254 | 129,991 | 124,827 | |||||||||
Retail mutual fund assets under management | 31,032 | 48,383 | 38,536 | |||||||||
Other mutual fund assets under management | 1,678 | 2,113 | 1,489 | |||||||||
Total mutual fund assets under management | 32,710 | 50,496 | 40,025 | |||||||||
Total assets under management | $ | 118,964 | $ | 180,487 | $ | 164,852 | ||||||
[1] | For the year ended December 31, 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 Consolidated Financial Statements. | |
[2] | For the year ended December 31, 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 Consolidated Financial Statements. | |
[3] | Includes policyholders’ balances for investment contracts and reserves for future policy benefits for insurance contracts. |
Fee income and other | • | Fee income and other decreased $360 primarily as a result of lower variable annuity fee income due to a decline in average account values. The decrease in average variable annuity account values can be attributed to market depreciation of $38.2 billion and net outflows of $6.2 billion during the year. Net outflows were driven by surrender activity resulting from 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. Also contributing to the decrease in fee income was lower mutual fund fees due to declining assets under management primarily driven by market depreciation of $20.1 billion, partially offset by $2.8 billion of net flows. | ||
Earned Premiums | • | Earned Premiums increased primarily due to an increase in life contingent premiums combined with a decrease in reinsurance premiums as a result of the lapsing of business covered by reinsurance and the significant decline in the equity markets. |
80
Table of Contents
Net investment income | • | Net investment income was lower primarily due to a $77 decline in income from limited partnerships and other alternative investments, combined with lower yields on fixed maturity investments due to interest rate declines, partially offset by an increase in general account assets from increased fixed account sales. | ||
Net realized capital losses | • | Net realized capital losses increased primarily as a result of losses on GMWB derivatives of $(631); the adoption of SFAS 157 during the first quarter of 2008, which resulted in realized capital losses of $(616); and impairments of $(474). | ||
Benefits, losses and loss adjustment expenses | • | Benefits, losses and loss adjustment expenses increased primarily as a result of the impact of the 2008 Unlock which increased the benefit ratio used in the calculation of GMDB reserves. | ||
Insurance operating costs and other expenses | • | Insurance operating costs and other expenses decreased primarily as a result of lower non deferrable asset based trail commissions due to equity market declines. | ||
Amortization of deferred policy acquisition costs and present value of future profits (“DAC”) | • | Amortization of DAC increased primarily due to the impact of the 2008 Unlock charge as compared to the 2007 Unlock benefit. This was partially offset by a DAC benefit associated with the adoption of SFAS 157 at the beginning of the first quarter of 2008. | ||
Goodwill impairment | • | As a result of testing performed during the fourth quarter of 2008, all goodwill attributed to the individual annuity business in Retail was deemed to be impaired and was written down to $0. For further discussion of this impairment, see the Critical Accounting Estimates section of the MD&A. | ||
Income tax expense (benefit) | • | The effective tax rate increased from 21% to 41% for the year ended December 31, 2008 as compared to the prior year primarily due to losses before income taxes in 2008 compared to pre-tax earnings in 2007. The impact of DRD and other permanent differences caused an increase in the tax benefit to above 35% on the 2008 pre tax loss and a decrease in the tax expense on the 2007 pre tax income. |
81
Table of Contents
Fee income and other | • | Fee income increased for the year ended December 31, 2007 primarily as a result of growth in variable annuity average account values. The year-over-year increase in average variable annuity account values can be attributed to market appreciation of $7.4 billion during the year. Variable annuities had net outflows of $2.7 billion in 2007. Net outflows were driven by surrender activity due to the aging of the variable annuity in force block of business and increased sales competition, particularly competition related to guaranteed living benefits. | ||
• | Mutual fund fee income increased 23% for the year ended December 31, 2007 due to increased assets under management driven by net sales of $5.5 billion and market appreciation of $4.4 billion during 2007. | |||
Net investment income | • | Net investment income declined for the year ended December 31, 2007 due to a decrease in variable annuity fixed option account values of 11% or $635. The decrease in these account values can be attributed to a combination of transfers into separate accounts and surrender activity. Offsetting this decrease in net investment income was an increase in the returns from limited partnership and other alternative investment income of $14 for the year ended December 31, 2007. | ||
Insurance operating costs and other expenses | • | Insurance operating costs and other expenses increased for the year ended December 31, 2007. These increases were principally driven by mutual fund commission increases of $75 for the year ended December 31, 2007 due to growth in deposits of 29%. In addition, non-deferrable variable annuity asset based commissions increased $67 for the year ended December 31, 2007 due to a 4% growth in assets under management, as well as an increase in the number of contracts reaching anniversaries when trail commission payments begin. | ||
Amortization of deferred policy acquisition costs and present value of future profits (“DAC”) | • | Lower amortization of DAC resulted from the unlock benefit during the third quarter of 2007 as compared to an unlock expense during the fourth quarter of 2006. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. | ||
Income tax expense (benefit) | • | The effective tax rate increased from 7% to 21% for the year ended December 31, 2007 from the prior year due to an increase in income before income taxes and revisions in the estimates of the separate account DRD which resulted in an incremental tax of $17, and foreign tax credits. |
82
Table of Contents
Operating Summary | 2008 | 2007 | 2006 | |||||||||
Fee income and other | $ | 899 | $ | 870 | $ | 885 | ||||||
Earned premiums | (71 | ) | (62 | ) | (53 | ) | ||||||
Net investment income | 338 | 359 | 324 | |||||||||
Net realized capital losses | (252 | ) | (28 | ) | (25 | ) | ||||||
Total revenues | 914 | 1,139 | 1,131 | |||||||||
Benefits, losses and loss adjustment expenses | 627 | 562 | 497 | |||||||||
Insurance operating costs and other expenses | 202 | 193 | 179 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 169 | 121 | 243 | |||||||||
Total benefits, losses and expenses | 998 | 876 | 919 | |||||||||
Income (loss) before income taxes | (84 | ) | 263 | 212 | ||||||||
Income tax expense (benefit) | (41 | ) | 81 | 62 | ||||||||
Net income (loss) | $ | (43 | ) | $ | 182 | $ | 150 | |||||
Account Values | 2008 | 2007 | 2006 | |||||||||
Variable universal life insurance | $ | 4,802 | $ | 7,284 | $ | 6,637 | ||||||
Universal life/interest sensitive whole life | 4,727 | 4,388 | 4,035 | |||||||||
Modified guaranteed life and other | 653 | 677 | 699 | |||||||||
Total account values | $ | 10,182 | $ | 12,349 | $ | 11,371 | ||||||
Life Insurance In-force | ||||||||||||
Variable universal life insurance | $ | 78,853 | $ | 77,566 | $ | 73,770 | ||||||
Universal life/interest sensitive whole life | 52,356 | 48,636 | 45,230 | |||||||||
Term life | 63,334 | 52,298 | 44,175 | |||||||||
Modified guaranteed life and other | 921 | 983 | 1,052 | |||||||||
Total life insurance in-force | $ | 195,464 | $ | 179,483 | $ | 164,227 | ||||||
Fee income and other | • | Fee income and other increased primarily due to an increase in cost of insurance charges of $45 as a result of growth in guaranteed universal life insurance in-force and fees on higher surrenders of $12 due to internal exchanges from non-guaranteed universal life insurance to variable universal life insurance. Partially offsetting these increases are the impacts of the 2008 and 2007 Unlocks as well as lower variable life fees as a result of 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 primarily due to lower income from limited partnership and other alternative investments, lower yields on fixed maturity investments, and reduced net investment income associated with a more efficient capital approach for our secondary guarantee universal life business, which released assets supporting capital and the related net investment income earned on those assets (described further in the “Outlook” section), partially offset by growth in general account values. | ||
Benefits, losses and loss adjustment expenses | • | Benefits, losses and loss adjustment expenses increased as a result of higher death benefits consistent with a larger life insurance in-force and unfavorable mortality, as well as the impact of the 2008 Unlock. |
83
Table of Contents
Insurance operating costs and other expenses | • | Insurance operating costs and other increased less than the growth of in-force business as a result of active expense management efforts. | ||
Amortization of deferred policy acquisition costs and present value of future profits (“DAC”) | • | Amortization of DAC increased primarily as a result of the unlock expense in 2008 as compared to the unlock benefit in 2007, partially offset by reduced DAC amortization primarily attributed to net realized capital losses. This increase in DAC amortization had a partial offset in amortization of deferred revenues, included in fee income. | ||
Income tax expense (benefit) | • | Income tax benefits were a result of lower income before income taxes primarily due to an increase in realized capital losses and DAC amortization. |
Fee income and other | • | Fee income and other decreased primarily due to the impacts of the 2007 and 2006 Unlocks. Offsetting the impacts of the Unlocks, fee income increased primarily due to higher cost of insurance charges, the largest component of fee income, of $35 primarily driven by growth in variable universal and universal life insurance in-force. Variable fee income increased consistent with the growth in variable universal life insurance account value. | ||
Earned premiums | • | Earned premiums, which include premiums for ceded reinsurance, decreased primarily due to increased ceded reinsurance premiums. | ||
Net investment income | • | Net investment income increased consistent with growth in general account values. Individual Life earned additional net investment income throughout 2007 associated with higher returns from limited partnerships and other alternative investments. | ||
Benefits, losses and loss adjustment expenses | • | Benefits, losses and loss adjustment expenses increased due to life insurance in-force growth and unfavorable mortality. | ||
Insurance operating costs and other expenses | • | Insurance operating costs and other expenses increased in 2007 consistent with life insurance in-force growth. | ||
Amortization of deferred policy acquisition costs and present value of future profits (“DAC”) | • | Lower amortization of DAC resulted from the unlock benefit in 2007 as compared to an unlock expense in 2006. This decrease in DAC amortization had a partial offset in amortization of deferred revenues, included in fee income. |
84
Table of Contents
Operating Summary | 2008 | 2007 | 2006 | |||||||||
Fee income and other | $ | 334 | $ | 238 | $ | 193 | ||||||
Earned premiums | 4 | 4 | 19 | |||||||||
Net investment income | 342 | 355 | 326 | |||||||||
Net realized capital losses | (272 | ) | (41 | ) | (16 | ) | ||||||
Total revenues | 408 | 556 | 522 | |||||||||
Benefits, losses and loss adjustment expenses | 271 | 249 | 250 | |||||||||
Insurance operating costs and other expenses | 335 | 170 | 136 | |||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 91 | 58 | (4 | ) | ||||||||
Total benefits, losses and expenses | 697 | 477 | 382 | |||||||||
Income (loss) before income taxes | (289 | ) | 79 | 140 | ||||||||
Income tax expense (benefit) | (132 | ) | 18 | 39 | ||||||||
Net income (loss) | $ | (157 | ) | $ | 61 | $ | 101 | |||||
Assets Under Management | 2008 | 2007 | 2006 | |||||||||
403(b)/457 account values | $ | 10,242 | $ | 12,363 | $ | 11,540 | ||||||
401(k) account values | 11,956 | 14,731 | 12,035 | |||||||||
Total account values [1] | 22,198 | 27,094 | 23,575 | |||||||||
403(b)/457 mutual fund assets under management [2] | 99 | 26 | — | |||||||||
401(k) mutual fund assets under management [3] | 14,739 | 1,428 | 1,140 | |||||||||
Total mutual fund assets under management | 14,838 | 1,454 | 1,140 | |||||||||
Total assets under management | $ | 37,036 | $ | 28,548 | $ | 24,715 | ||||||
Total assets under administration – 401(k) [4] | $ | 5,122 | $ | — | $ | — | ||||||
[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 year ended December 31, 2008, Life acquired the rights to service mutual fund assets from Sun Life Retirement Services, Inc., and Princeton Retirement Group. | |
[4] | During the year ended December 31, 2008, Life acquired the rights to service 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. |
Fee income and other | • | Fee income and other increased primarily due to $109 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 a result of market depreciation of $7.3 billion, partially offset by positive net flows of $2.4 billion over the past four quarters. | ||
Net investment income | • | Net investment income declined due to a decrease in the returns from limited partnership and other alternative investment income of $33, partially offset by growth in general account assets. | ||
Insurance operating costs and other expenses | • | Insurance operating costs and other expenses increased 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 increased 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 lower DAC amortization associated with lower gross profits. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. | ||
Income tax expense (benefit) | • | The income tax benefit for 2008 as compared to the prior year periods income tax expense 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 of $12. |
85
Table of Contents
Fee income and other | • | Fee income increased for the year ended December 31, 2007 primarily due to an increase in 401(k) average account values. This growth in 401(k) business is primarily driven by positive net flows of $1.8 billion over the past four quarters resulting from strong sales and increased ongoing deposits. Market appreciation contributed an additional $888 to assets under management in 2007. | ||
Net investment income | • | Net investment income increased for the year ended December 31, 2007 for 403(b)/457 business due to growth in general account assets along with an increase in return on limited partnership and other alternative investments. | ||
Benefits, losses and loss adjustment expenses | • | Benefits, losses and loss adjustment expenses and earned premiums decreased for the year ended December 31, 2007 primarily due to a large case annuitization in the 401(k) business of $12 which occurred in the first quarter of 2006. This decrease was partially offset by an increase in interest credited resulting from the growth in general account assets. | ||
Insurance operating costs and other expenses | • | Insurance operating costs and other expenses increased for the year ended December 31, 2007, primarily attributable to greater assets under management aging beyond their first year resulting in higher trail commissions. Also contributing to higher insurance operating costs for the year ended December 31, 2007 were higher service and technology costs. | ||
Amortization of deferred policy acquisition costs and present value of future profits | • | Higher amortization of DAC resulted from the unlock expense in the third quarter of 2007 as compared to an unlock benefit in the fourth quarter of 2006. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
86
Table of Contents
Operating Summary | 2008 | 2007 | 2006 | |||||||||
Premiums and other considerations | $ | 4,391 | $ | 4,301 | $ | 4,149 | ||||||
Net investment income | 419 | 465 | 415 | |||||||||
Net realized capital losses | (540 | ) | (30 | ) | (13 | ) | ||||||
Total revenues | 4,270 | 4,736 | 4,551 | |||||||||
Benefits, losses and loss adjustment expenses | 3,144 | 3,109 | 3,002 | |||||||||
Insurance operating costs and other expenses | 1,128 | 1,131 | 1,101 | |||||||||
Amortization of deferred policy acquisition costs | 57 | 62 | 41 | |||||||||
Total benefits, losses and expenses | 4,329 | 4,302 | 4,144 | |||||||||
Income (loss) before income taxes | (59 | ) | 434 | 407 | ||||||||
Income tax expense (benefit) | (53 | ) | 119 | 109 | ||||||||
Net income (loss) | $ | (6 | ) | $ | 315 | $ | 298 | |||||
Earned Premiums and Other | 2008 | 2007 | 2006 | |||||||||
Fully insured – ongoing premiums | $ | 4,355 | $ | 4,239 | $ | 4,100 | ||||||
Buyout premiums | 1 | 27 | 12 | |||||||||
Other | 35 | 35 | 37 | |||||||||
Total earned premiums and other | $ | 4,391 | $ | 4,301 | $ | 4,149 | ||||||
Ratios, excluding buyouts | ||||||||||||
Loss ratio | 71.6 | % | 72.1 | % | 72.3 | % | ||||||
Loss ratio, excluding financial institutions | 76.3 | % | 77.3 | % | 77.2 | % | ||||||
Expense ratio | 27.0 | % | 27.9 | % | 27.6 | % | ||||||
Expense ratio, excluding financial institutions | 22.4 | % | 23.0 | % | 22.9 | % |
Premiums and other considerations | • | Premiums and other considerations increased largely due to business growth driven by new sales and persistency over the last twelve months. | ||
Net investment income | • | Net investment income decreased primarily as a result of lower yields on fixed maturity investments and lower limited partnership and other alternative investment returns of $33. | ||
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) decreased due to favorable disability and medical stop loss experience partially offset by unfavorable mortality. | ||
Expense ratio | • | The segment’s expense ratio, excluding buyouts decreased compared to the prior year due primarily to lower commission expenses. |
87
Table of Contents
Premiums and other considerations | • | Premiums and other considerations increased largely due to business growth driven by new sales and persistency over the last twelve months. | ||
Net investment income | • | Net investment income increased due to a higher invested asset base and increased interest income on allocated surplus. | ||
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 year ended December 31, 2007, decreased slightly. Loss ratios experience volatility in period over period comparisons due to fluctuation in mortality and morbidity experience. Additionally there was a change in assumptions underlying the valuation of long term disability claims incurred in 2007. | ||
Expense ratio | • | The segment’s expense ratio, excluding buyouts, for the year ended December 31, 2007, increased primarily due to higher DAC amortization resulting from a shorter amortization period following the adoption of SOP 05-1. |
88
Table of Contents
Operating Summary | 2008 | 2007 | 2006 | |||||||||
Fee income | $ | 881 | $ | 843 | $ | 709 | ||||||
Earned premiums | (9 | ) | (11 | ) | (8 | ) | ||||||
Net investment income | 167 | 131 | 123 | |||||||||
Net realized capital losses | (422 | ) | (116 | ) | (88 | ) | ||||||
Total revenues [1] | 617 | 847 | 736 | |||||||||
Benefits, losses and loss adjustment expenses | 270 | 32 | 3 | |||||||||
Insurance operating costs and other expenses | 321 | 246 | 208 | |||||||||
Amortization of deferred policy acquisition costs | 496 | 214 | 167 | |||||||||
Total benefits, losses and expenses | 1,087 | 492 | 378 | |||||||||
Income (loss) before income taxes | (470 | ) | 355 | 358 | ||||||||
Income tax expense (benefit) | (145 | ) | 132 | 127 | ||||||||
Net income (loss) [2] | $ | (325 | ) | $ | 223 | $ | 231 | |||||
Assets Under Management – Japan | 2008 | 2007 | 2006 | |||||||||
Japan variable annuity account values | $ | 29,726 | $ | 35,793 | $ | 29,653 | ||||||
Japan fixed annuity and other account values [3] | 4,769 | 1,844 | 1,690 | |||||||||
Total assets under management – Japan | $ | 34,495 | $ | 37,637 | $ | 31,343 | ||||||
[1] | The transition impact related to the SFAS 157 adoption was a reduction in revenues of $34, for the year ended December 31, 2008. For further discussion of the SFAS 157 transition impact, refer to Note 4 of the Notes to the Consolidated Financial Statements. | |
[2] | The transition impact related to the SFAS 157 adoption was a reduction in net income of $11, for the year ended December 31, 2008. For further discussion of the SFAS 157 transition impact, refer to Note 4 of the Notes to the Consolidated Financial Statements. | |
[3] | Japan fixed annuity and other account values includes an increase due to the net triggering impact of the GMIB pay-out annuity account value for the 3 Win product of $2.0 billion. |
89
Table of Contents
Fee income | • | Fee income increased primarily due to growth in Japan’s variable annuity average assets under management. The increase in average assets under management over the past four quarters was driven by deposits of $3.0 billion and a $6.6 billion increase due to foreign currency exchange translation as the yen strengthened compared to the U.S. dollar. Deposits and favorable foreign currency exchange were offset by unfavorable market performance of $10.9 billion. | ||
Benefits, losses and loss adjustment expenses | • | Benefits, losses and loss adjustment expense increased as a result of the impacts of the Unlock in the third quarter of 2008 as compared to the third quarter of 2007, the impact of the 3 Win trigger, as well as higher GMDB net amount at risk and increased claims costs. For further discussion of the 3 Win trigger, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. | ||
Insurance operating costs and other expenses | • | Insurance operating costs and other expenses increased due to the growth and strategic investment in the Japan and Other International operations, as well as lower capitalization of deferred policy acquisition costs, as acquisition costs exceeded pricing allowables. | ||
Amortization of deferred policy acquisition costs | • | Amortization of deferred policy acquisition costs increased 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 the accelerated amortization associated with the 3 Win trigger. For further discussion of the 3 Win trigger see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. | ||
Income Tax expense | • | Income tax expense decreased primarily as a result of a decline in income before taxes. |
Fee income | • | Fee income increased for the year ended December 31, 2007 primarily due to growth in Japan’s variable annuity assets under management. As of December 31, 2007, Japan’s variable annuity assets under management were $35.8 billion, an increase of $6.1 billion or 21% from the prior year period. The increase in assets under management was driven by positive net flows of $4.5 billion, partially offset by unfavorable market performance of $620, which includes the impact of foreign currency movements on the Japanese customer’s foreign assets and a $2.3 billion increase due to foreign currency exchange translation as the yen strengthened compared to the U.S. dollar. | ||
Benefits, losses and loss adjustment expenses | • | The increase in benefits, losses and loss adjustment expenses for the year ended December 31, 2007 over the prior year period was due to the unlock benefit in the fourth quarter of 2006 exceeding the unlock benefit in the third quarter of 2007. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. | ||
Insurance operating costs and other expenses | • | Insurance operating costs and other expenses increased for the year ended December 31, 2007 due to the growth in the Japan operation. | ||
Amortization of deferred policy acquisition costs and present value of future profits | • | Higher amortization of DAC resulted primarily from a decrease in the 2007 unlock benefit compared with the prior year period, as well as overall growth of operations. For further discussion, see Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A. |
90
Table of Contents
Operating Summary | 2008 | 2007 | 2006 | |||||||||
Fee income and other | $ | 152 | $ | 251 | $ | 125 | ||||||
Earned premiums | 889 | 987 | 607 | |||||||||
Net investment income | 1,004 | 1,241 | 1,003 | |||||||||
Net realized capital losses | (789 | ) | (188 | ) | (37 | ) | ||||||
Total revenues | 1,256 | 2,291 | 1,698 | |||||||||
Benefits, losses and loss adjustment expenses | 1,907 | 2,074 | 1,484 | |||||||||
Insurance operating costs and expenses | 120 | 185 | 78 | |||||||||
Amortization of deferred policy acquisition costs | 19 | 23 | 32 | |||||||||
Total benefits, losses and expenses | 2,046 | 2,282 | 1,594 | |||||||||
Income (loss) before income taxes | (790 | ) | 9 | 104 | ||||||||
Income tax expense (benefit) | (288 | ) | (8 | ) | 26 | |||||||
Net income (loss) | $ | (502 | ) | $ | 17 | $ | 78 | |||||
Assets Under Management | 2008 | 2007 | 2006 | |||||||||
Institutional account values [1] [3] | $ | 24,081 | $ | 25,103 | $ | 22,214 | ||||||
Private Placement Life Insurance account values [1] | 32,459 | 32,792 | 26,131 | |||||||||
Mutual fund assets under management [2] | 2,578 | 3,581 | 2,567 | |||||||||
Total assets under management | $ | 59,118 | $ | 61,476 | $ | 50,912 | ||||||
[1] | Includes policyholder balances for investment contracts and reserves for future policy benefits for insurance contracts. | |
[2] | Mutual fund assets under management include transfers from the Retirement Plans segment of $178 during 2006. | |
[3] | Institutional investment product account values include transfers from Retirement Plans and Retail of $763 during 2006. |
Fee income and other | • Fee income and other decreased primarily due to lower front-end loads on private placement life insurance (“PPLI”) cases during 2008. PPLI collects front-end loads recorded in fee income, offset by corresponding premium taxes reported in insurance operating costs and other expenses. For 2008 and 2007, PPLI deposits of $247 and $5.2 billion, respectively, resulted in fee income due to front-end loads of $2 and $107, respectively. | |
Earned premiums | • Earned premiums decreased as compared to the prior year due to greater amounts of life contingent business sold in 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 declined due to a decrease in returns from limited partnership and other alternative investments income of $(127), lower yields on fixed maturity investments indexed to LIBOR, and lower assets under management. 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. Assets under management decreased primarily due to stable value outflows. | |
Benefits, losses and loss adjustment expenses | • Benefits, losses and loss adjustment expenses decreased primarily due to lower reserve increases as the result of lower sales in life contingent business, as well as lower interest credited on liabilities indexed to LIBOR. The decrease was partially offset by $8 greater mortality loss. | |
Insurance operating costs and other expenses | • Insurance operating costs and other expenses decreased due to a decline in premium tax, driven by reduced PPLI deposits, partially offset by discontinued administrative system projects and product development expenses. | |
Income tax expense (benefit) | • The income tax benefit increased compared to the prior year primarily due to a decline in income before taxes primarily due to increased realized capital losses. |
91
Table of Contents
Fee income and other | • Fee income increased for the year ended December 31, 2007 primarily due to higher Mutual Fund and PPLI assets under management on net flows and change in market appreciation of $5.8 billion and $2.1 billion, respectively, during the year. In addition, PPLI collects front-end loads recorded in fee income, offset by corresponding premium taxes reported in insurance operating costs and other expenses. During the year ended December 31, 2007, PPLI had deposits of $5.2 billion, which resulted in an increase in fee income due to front-end loads of $107. | |
Earned premiums | • Earned premiums increased for the year ended December 31, 2007 primarily as a result of increased structured settlement life contingent sales, and one large terminal funding life contingent case sold in the third quarter. This increase in earned premiums was offset by a corresponding increase in benefits, losses and loss adjustment expenses. | |
Net investment income | • Net investment income increased due to higher assets under management resulting from positive net flows of $1.5 billion during the year, and higher returns on limited partnerships and other alternative investments. Net flows were favorable primarily as a result of the Company’s funding agreement backed Investor Notes program. | |
Benefits, losses and loss adjustment expenses | • Benefits, losses and loss adjustment expenses increased as compared to the comparable prior year period primarily due to higher assets under management, in addition to one large terminal funding life contingent case sold in the third quarter of 2007. | |
Insurance operating costs and other expenses | • Insurance operating costs and other expenses increased due to greater premium tax, driven by increased PPLI deposits. | |
Income tax expense (benefit) | • The change in income taxes was due to lower income before income taxes primarily driven by the increase in realized capital losses. |
92
Table of Contents
Operating Summary | 2008 | 2007 | 2006 | |||||||||
Fee income and other | $ | 60 | $ | 67 | $ | 81 | ||||||
Net investment income (loss) | ||||||||||||
Securities available-for-sale and other | 28 | 145 | 154 | |||||||||
Equity securities held for trading [1] | (10,340 | ) | 145 | 1,824 | ||||||||
Total net investment income (loss) | (10,312 | ) | 290 | 1,978 | ||||||||
Net realized capital gains (losses) | 47 | (35 | ) | 6 | ||||||||
Total revenues | (10,205 | ) | 322 | 2,065 | ||||||||
Benefits, losses and loss adjustment expenses [1] | 154 | 156 | 161 | |||||||||
Benefits, losses and loss adjustment expenses — returns credited on International variable annuities [1] | (10,340 | ) | 145 | 1,824 | ||||||||
Insurance operating costs and other expenses | 7 | 84 | 12 | |||||||||
Total benefits, losses and expenses | (10,179 | ) | 385 | 1,997 | ||||||||
Income (loss) before income taxes | (26 | ) | (63 | ) | 68 | |||||||
Income tax expense (benefit) | (15 | ) | (11 | ) | 21 | |||||||
Net income (loss) | $ | (11 | ) | $ | (52 | ) | $ | 47 | ||||
[1] | Includes investment income and mark-to-market effects of equity securities held for trading supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders within benefits, losses and loss adjustment expenses. |
Net investment income | • Net investment income on securities available-for-sale and other 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 year ended December 31, 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 reallocation of expenses to the applicable lines of business in 2008. |
Insurance operating costs and other expenses | • During the first quarter of 2006, the Company achieved favorable settlements in several cases brought against the Company by policyholders regarding their purchase of broad-based leveraged corporate owned life insurance (“leveraged COLI”) policies in the early to mid-1990s. The Company ceased offering this product in 1996. Based on the favorable outcome of these cases, together with the Company’s current assessment of the few remaining leveraged COLI cases, the Company reduced its estimate of the ultimate cost of these cases as of June 30, 2006. This reserve reduction, recorded in insurance operating costs and other expenses, resulted in an after-tax benefit of $34. | |
• Also contributing to the increase in insurance operating costs and other expenses was $18, after-tax, of interest charged by Corporate on the amount of capital held by the Life operations in excess of the amount needed to support the capital requirements of the Life Operations for the year ended December 31, 2007 | ||
• The Company recorded a reserve in the second quarter of 2007 for market regulatory matters of $21, after-tax. During the year, the Company recorded an insurance recovery of $9, after-tax, against the litigation costs associated with the regulatory matters. | ||
Realized capital gains (losses) | • Refer to Realized Capital Gains and Losses by Segment table under Life’s Operating section of the MD&A. |
93
Table of Contents
Written premiums [1] | 2008 | 2007 | 2006 | |||||||||
Personal Lines | $ | 3,925 | $ | 3,947 | $ | 3,877 | ||||||
Small Commercial | 2,696 | 2,747 | 2,728 | |||||||||
Middle Market | 2,242 | 2,326 | 2,515 | |||||||||
Specialty Commercial | 1,361 | 1,415 | 1,538 | |||||||||
Other Operations | 7 | 5 | 4 | |||||||||
Total | $ | 10,231 | $ | 10,440 | $ | 10,662 | ||||||
Earned premiums [1] | ||||||||||||
Personal Lines | $ | 3,926 | $ | 3,889 | $ | 3,760 | ||||||
Small Commercial | 2,724 | 2,736 | 2,652 | |||||||||
Middle Market | 2,299 | 2,420 | 2,523 | |||||||||
Specialty Commercial | 1,382 | 1,446 | 1,493 | |||||||||
Other Operations | 7 | 5 | 5 | |||||||||
Total | $ | 10,338 | $ | 10,496 | $ | 10,433 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
94
Table of Contents
Personal Lines | • Earned premium grew by $37, or 1%, due to a $97, or 4%, increase in AARP earned premiums, partially offset by a $60, or 5%, decrease in Agency and other earned premiums. AARP earned premiums grew primarily due to modest earned pricing increases for both auto and homeowners and the effect of new business premium outpacing non-renewals in the last nine months of 2007. Agency earned premium decreased $43, or 4%, 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 slightly, to $2,724, as a decrease in commercial auto was largely offset by an increase in worker’s compensation. Earned premium decreases were largely due to the effect of non-renewals outpacing new business for commercial auto business in 2008 and to earned pricing decreases, largely offset by new business outpacing non-renewals in workers’ compensation business over the last nine months of 2007 and first nine months of 2008. | |
Middle Market | • Earned premium decreased by $121, or 5%, driven primarily 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 in commercial auto and general liability over the last nine months of 2007 and first nine months of 2008, partially offset by the effect of new business outpacing non-renewals in workers’ compensation since the fourth quarter of 2007. | |
Specialty Commercial | • Earned premium decreased by $64, or 4%, driven primarily by a decrease in property earned premiums and, to a lesser extent, casualty earned premiums. Property earned premiums decreased due largely to the Company’s decision to stop writing specialty property business with large, national accounts and lower new business and renewal retention for core excess and surplus lines business. Casualty earned premiums decreased primarily because of lower earned premium from captive programs and a decline in new business premium on loss-sensitive business written with larger accounts over the last nine months of 2007 and first three months of 2008. |
Personal Lines | • Earned premium grew by $129, or 3%, primarily due to an increase in AARP and Agency earned premiums. AARP earned premium grew primarily due to an increase in the size of the AARP target market, the effect of direct marketing programs and the effect of cross selling homeowners insurance to insureds who have auto policies. Agency earned premium grew as a result of an increase in the number of agency appointments and further refinement of the Dimensions class plans. Partially offsetting this growth was the effect of the sale of the Omni non-standard auto business in the fourth quarter of 2006 which accounted for $127 of earned premium in 2006. Excluding Omni, Personal Lines’ earned premiums grew $251, or 7%, for the year ended December 31, 2007. | |
Small Commercial | • Earned premium increased $84, or 3%, primarily due to new business premiums outpacing non-renewals for workers’ compensation business over the last six months of 2006 and the first six months of 2007. | |
Middle Market | • Earned premium decreased by $103, or 4%, driven by decreases in all lines, including commercial auto, general liability, workers’ compensation and property. Earned premium decreases were driven by declines in earned pricing and premium renewal retention in all lines and a decline in new business premiums in all lines except workers’ compensation. | |
Specialty Commercial | • Earned premium decreased by $47, or 3%, primarily driven by a decrease in casualty and property and a decrease in earned premiums assumed under inter-segment arrangements, partially offset by an increase in professional liability, fidelity and surety. |
95
Table of Contents
2008 | 2007 | 2006 | ||||||||||
Underwriting results before catastrophes and prior accident year development | $ | 1,129 | $ | 984 | $ | 1,240 | ||||||
Current accident year catastrophes | 543 | 177 | 199 | |||||||||
Unfavorable (favorable) prior accident year reserve development | (226 | ) | 48 | 296 | ||||||||
Underwriting results | 812 | 759 | 745 | |||||||||
Net servicing and other income [1] | 31 | 52 | 53 | |||||||||
Net investment income | 1,253 | 1,687 | 1,486 | |||||||||
Other expenses | (222 | ) | (249 | ) | (223 | ) | ||||||
Net realized capital gains (losses) | (1,877 | ) | (172 | ) | 9 | |||||||
Income (loss) before income taxes | (3 | ) | 2,077 | 2,070 | ||||||||
Income tax benefit (expense) | 95 | (570 | ) | (551 | ) | |||||||
Net income | $ | 92 | $ | 1,507 | $ | 1,519 | ||||||
[1] | Net of expenses related to service business. |
2008 | 2007 | 2006 | ||||||||||
Gross gains on sales | $ | 180 | $ | 159 | $ | 205 | ||||||
Gross losses on sales | (448 | ) | (121 | ) | (164 | ) | ||||||
Impairments | (1,533 | ) | (125 | ) | (45 | ) | ||||||
Periodic net coupon settlements on credit derivatives | 2 | 15 | 4 | |||||||||
Other, net | (78 | ) | (100 | ) | 9 | |||||||
Net realized capital gains (losses), before-tax | $ | (1,877 | ) | $ | (172 | ) | $ | 9 | ||||
Realized capital gains (losses) | Gross gains (losses) on sales, net | |
• Gross gains and losses on sales in 2008 primarily resulted from the sale of corporate fixed maturities resulting from the decision to reallocate the portfolio to securities with more favorable risk/return profiles. Also included were losses on sales of 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 of the “Investments” section of the MD&A. | ||
• Gross gains and losses on sales in 2007 were primarily comprised of sales of foreign government, corporate, and municipal fixed maturity securities. | ||
Impairments | ||
• Impairments of $1.5 billion in 2008 were primarily of subordinated fixed maturities and preferred equities within the financial services sector, as well as of securitized assets. (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 capital losses in 2008 were primarily related to net losses on credit derivatives as a result of credit spread widening on credit derivatives that assume credit exposure. Also included were derivative related losses of $7 for the year ended December 31, 2008 due to counterparty default related to the bankruptcy of Lehman Brothers Holdings Inc. | ||
• Other, net realized capital losses in 2007 primarily resulted from the change in value associated with credit derivatives due to credit spreads widening. Credit spreads widened primarily due to the deterioration in the U.S. housing market, tightened lending conditions, and the market’s flight to quality securities. | ||
Net investment income | • Investment income decreased $434, or 26%, due to a change from net income to net losses on limited partnerships and other alternative investments in 2008 and decreased fixed maturity income. The net losses on limited partnerships and other alternative investments were largely due to negative returns on hedge funds and real estate partnerships as a result of the lack of liquidity in the financial markets and credit spreads widening. The decrease in income from fixed maturities was attributable to lower income on variable rate securities due to declines in short term interest rates as well as an increased allocation to lower yielding U.S. Treasuries and short-term investments. |
96
Table of Contents
Underwriting results | • Underwriting results before catastrophes and prior accident year reserve development increased by $145 as the result of a lower current accident year loss and loss adjustment expense ratio before catastrophes, partially offset by the effect of the decline in earned premiums in Middle Market and Specialty Commercial. The 2008 results benefited from a lower current accident year loss and loss adjustment expense ratio before catastrophes for Small Commercial and Middle Market workers’ compensation claims, lower claim frequency on Personal Lines auto claims and lower non-catastrophe loss costs on Small Commercial package business, partially offset by higher non-catastrophe losses on Middle Market property and Personal Lines homeowners’ business. | |
• The $366 increase in current accident year catastrophe losses was primarily due to more severe catastrophes in 2008, including losses from hurricane Ike and tornadoes and thunderstorms in the South and Midwest. | ||
• The change to favorable prior accident year reserve development was largely due to a $210 increase in net favorable reserve development in Ongoing Operations, driven largely by an increase in net reserve releases for workers’ compensation, professional liability and personal auto liability claims. Refer to the “Reserves” section of the MD&A for further discussion. | ||
Net servicing and other income | • The $21 decrease in net servicing income was primarily driven by a decrease in servicing income from the AARP Health program, Specialty Risk Services 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 changed from income tax expense of $570 in 2007 to an income tax benefit of $95 in 2008. Despite near break-even pre-tax income in 2008, there was a net income tax benefit in 2008 because the income tax benefit on realized capital losses was greater than the income tax expense on all other components of pre-tax income. A portion of the Company’s net investment income was generated from tax-exempt securities. |
97
Table of Contents
Underwriting results | • Current accident year underwriting results before catastrophes decreased by $256, primarily due to a higher loss and loss adjustment expense ratio before catastrophes and prior accident year development, partially offset by the effect of exiting the Omni non-standard auto business, which generated a current accident year underwriting loss before catastrophes in 2006. The higher current accident year loss and loss adjustment expense ratio before catastrophes was driven by increased severity on Personal Lines auto liability claims, increased frequency on Personal Lines auto property damage claims and, to a lesser extent, increased severity on Personal Lines homeowners claims and a higher loss and loss adjustment expense ratio for both Small Commercial package business and Middle Market workers’ compensation claims. | |
• Current accident year catastrophe losses decreased by $22. The largest catastrophe losses in 2007 were from wildfires in California, spring windstorms in the Southeast and Northeast, tornadoes and thunderstorms in the Midwest and a December ice storm in the Midwest. Catastrophes in 2006 included tornadoes and hail storms in the Midwest and windstorms in Texas and on the East coast. | ||
• The $248 reduction in net unfavorable prior accident year development was due to a $167 decrease in unfavorable reserve development in Other Operations and an $81 increase in net favorable reserve development in Ongoing Operations. The lower adverse development in Other Operations was primarily due to a $243 charge in 2006 to recognize the effect of the Equitas agreement and strengthening of the allowance for uncollectible reinsurance, partially offset by a $99 strengthening of reserves in 2007, primarily related to an adverse arbitration decision. The $81 increase in net favorable reserve development in Ongoing Operations was primarily due to a $151 release of workers’ compensation loss and loss adjustment expenses reserves in 2007 related to accident years 2002 to 2006, partially offset by an $83 net release of prior accident year hurricane reserves in 2006. Refer to the “Reserves” section of the MD&A for further discussion. | ||
Realized capital gains (losses) | Gross gains (losses) on sales, net | |
• Gross gains and losses on sales in 2007 were primarily comprised of sales of foreign government, corporate, and municipal fixed maturity securities. | ||
• Gross gains on sales in 2006 were primarily from sales of corporate, foreign government and municipal fixed maturity securities. Gross losses on sales in 2006 were primarily from sales of corporate fixed maturities and CMBS. | ||
Impairments | ||
• Impairments in 2007 primarily consisted of impairments of asset-backed securities backed by sub-prime residential mortgage loans and impairments of corporate securities in the financial services and homebuilders sectors. (See the Other-than-Temporary Impairments discussion within Investment Results for more information on the impairments recorded in 2007.) | ||
Other, net | ||
• Other net realized capital losses in 2007 were primarily due to decreases in the fair value of non-qualifying derivatives attributable to credit spreads widening. Credit spreads widened primarily due to the deterioration in the U.S. housing market, tightened lending conditions, and the market’s flight to quality securities. | ||
Net investment income | • Primarily driving the $201 increase in net investment income was a higher average invested asset base and income earned from a higher portfolio yield. The increase in the average invested asset base contributing to the increase in investment income was primarily due to positive operating cash flows, partially offset by the return of capital to Corporate. Contributing to the increase in net investment income was an increase in income from limited partnerships and other alternative investments, driven by a higher yield on these investments and shifting a greater allocation of investments to these asset classes. | |
Other expenses | • The $26 increase in other expenses was primarily due to $49 of interest charged by Corporate on the amount of capital held by the Property & Casualty operation in excess of the amount needed to support the capital requirements of the Property & Casualty operation, partially offset by a reduction in the estimated cost of legal settlements in 2007. | |
Income tax expense | • Income taxes increased by $19, reflecting the increase in pre-tax income from 2006 to 2007, partially offset by a $20 benefit in 2007 from a tax true-up. |
98
Table of Contents
Ongoing Operations earned premium growth | 2008 | 2007 | 2006 | |||||||||
Personal Lines | 1 | % | 3 | % | 4 | % | ||||||
Small Commercial | — | 3 | % | 10 | % | |||||||
Middle Market | (5 | %) | (4 | %) | 4 | % | ||||||
Specialty Commercial | (4 | %) | (3 | %) | (12 | %) | ||||||
Ongoing Operations | (2 | %) | 1 | % | 3 | % | ||||||
Ongoing Operations combined ratio | ||||||||||||
Combined ratio before catastrophes and prior year development | 88.9 | 90.5 | 88.0 | |||||||||
Catastrophe ratio | ||||||||||||
Current year | 5.3 | 1.7 | 1.9 | |||||||||
Prior years | (0.2 | ) | 0.1 | (0.7 | ) | |||||||
Total catastrophe ratio | 5.0 | 1.8 | 1.2 | |||||||||
Non-catastrophe prior year development | (3.2 | ) | (1.5 | ) | 0.1 | |||||||
Combined ratio | 90.7 | 90.8 | 89.3 | |||||||||
Other Operations net income (loss) | $ | (97 | ) | $ | 30 | $ | (35 | ) | ||||
Total Property & Casualty measures of net investment income | ||||||||||||
Investment yield, after-tax | 3.2 | % | 4.4 | % | 4.1 | % | ||||||
Average annual invested assets at cost | $ | 29,797 | $ | 29,760 | $ | 27,324 | ||||||
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 2007. The effects of larger declines in auto and homeowners’ new business premium and a change to 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 to no growth in 2008. The decrease in the growth rate was primarily attributable to slightly larger earned pricing decreases in 2008 compared to 2007 and 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 since the second quarter of 2008. | |
Specialty Commercial | • Earned premium decreased by 4% in 2008 compared to a decrease of 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 no growth 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 decreasing earned pricing and a change to decreasing new business in 2008 on core excess and surplus lines business. The change to no growth in professional liability, fidelity and surety earned premium in 2008 was largely due to larger earned pricing decreases in 2008 than in 2007 and a change to declining new business in professional liability since the third quarter of 2007. |
99
Table of Contents
Combined ratio before catastrophes and prior accident year development | • The combined ratio before catastrophes and prior accident year development decreased by 1.6 points, to 88.9, as the effects of a lower loss and loss adjustment expense ratio for Small Commercial and Middle Market workers’ compensation claims, lower claim frequency on Personal Lines auto claims and lower non-catastrophe losses on Small Commercial package business were partially offset by earned pricing decreases across the commercial lines businesses and higher non-catastrophe losses on Middle Market property and Personal Lines homeowners’ business. | |
Catastrophes | • The catastrophe ratio increased by 3.2 points, primarily due to an increase in current accident year catastrophes in 2008, driven by losses from hurricane Ike and losses from tornadoes and thunderstorms in the South and Midwest. | |
Non-catastrophe prior accident year development | • Net non-catastrophe prior accident year reserve development in Ongoing Operations was more favorable in 2008 than in 2007. Favorable non-catastrophe reserve development of 3.2 points, or $333, in 2008 included, among other reserve changes, a $156 release of reserves for workers’ compensation claims, primarily related to accident years 2000 to 2007, a $105 release of general liability claims, primarily related to accident years 2001 to 2007, and a $75 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 $97 in 2008 compared to net income of $30 in 2007. The change from net income in 2007 to a net loss in 2008 was primarily due to an increase in net realized capital losses and lower net investment income, partially offset by a decrease in net unfavorable prior accident year reserve development. See the Other Operations segment MD&A for further discussion. |
• | In 2008, the after-tax investment yield decreased due to a change from net income to net losses from limited partnerships and other alternative investments in 2008 and, to a lesser extent, a lower investment yield for fixed maturities. |
• | Average annual invested assets at cost increased modestly due to positive operating cash flows, partially offset by the effects of impairments of securities and dividends paid to Corporate. |
100
Table of Contents
Personal Lines | • The decrease in the earned premium growth rate from 2006 to 2007 was due to the Company’s exit from the Omni non-standard auto business. Omni, which was sold in the fourth quarter of 2006, accounted for $127 of earned premium in 2006. Excluding Omni, the Personal Lines earned premium growth rate was 7% in both 2006 and 2007. In 2007, an increase in the growth rate of AARP earned premium was offset by the effect of a decrease in the growth rate of Agency earned premium. | |
Small Commercial | • The decrease in the earned premium growth rate was primarily attributable to a decrease in new business written premium and premium renewal retention over the last six months of 2006 and the first six months of 2007. Also contributing to the lower growth rate was a decrease in earned pricing. | |
Middle Market | • The change from an increase in earned premium in 2006 to a decrease in earned premium in 2007 was primarily attributable to earned pricing decreases, a decrease in new business written premium over the last six months of 2006 and the first six months of 2007 and a decrease in premium renewal retention over the first six months of 2007. | |
Specialty Commercial | • The rate of decline in Specialty Commercial earned premium slowed in 2007, primarily due to a lower earned premium decrease in casualty and property, partially offset by a lower earned premium increase in professional liability, fidelity and surety. Casualty earned premium experienced a larger decrease in 2006, primarily because of a decrease in 2006 earned premium from a single captive insured program that expired in 2005. Earned premium decreases in property were larger in 2006 than in 2007 as a result of a strategic decision in 2006 not to renew certain accounts with properties in catastrophe-prone areas. The growth rate in professional liability, fidelity and surety earned premium slowed in 2007 due to a decrease in earned pricing and a decline in new business growth and premium renewal retention. |
Combined ratio before catastrophes and prior accident year development | • The increase in the combined ratio before catastrophes and prior accident year development, from 88.0 to 90.5, was primarily due to a 1.4 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes and, to a lesser extent, an increase in the expense ratio. The increase in the loss and loss adjustment expense ratio before catastrophes and prior accident year development was primarily due to increased severity on Personal Lines auto liability claims, increased frequency on Personal Lines auto property damage claims and, to a lesser extent, increased severity on Personal Lines homeowners claims and a higher loss and loss adjustment expense ratio for both Small Commercial package business and Middle Market workers’ compensation claims. Contributing to the increase in the expense ratio was the effect of a $41 reduction of estimated Florida Citizens’ assessments in 2006 related to the 2005 Florida hurricanes. | |
Catastrophes | • The catastrophe ratio increased, primarily due to the effect of net favorable reserve development of prior accident year catastrophe losses in 2006. In 2006, the Company recognized $83 of net reserve releases related to the 2005 and 2004 hurricanes. | |
Non-catastrophe prior accident year development | • Net non-catastrophe prior accident year reserve development was slightly unfavorable in 2006, but favorable in 2007. Favorable reserve development in 2007 was largely attributable to the release of reserves for workers’ compensation claims, primarily related to accident years 2002 to 2006. See the “Reserves” section for a discussion of prior accident year reserve development for Ongoing Operations in 2007. |
• | Other Operations reported net income of $30 in 2007 compared to a net loss of $35 in 2006. The improvement in results was primarily due to a decrease in unfavorable prior accident year reserve development, partially offset by a change from net realized gains in 2006 to net realized losses in 2007 and a decrease in net investment income. See the Other Operations segment MD&A for further discussion. |
101
Table of Contents
• | In 2007, the after-tax investment yield increased due to a higher yield on limited partnerships and other alternative investments and mortgage loans as well as due to a change in asset mix, including shifting a greater share of investments to these asset classes. |
• | The average annual invested assets at cost increased as a result of positive operating cash flows and an increase in collateral held from increased securities lending activities. |
102
Table of Contents
103
Table of Contents
104
Table of Contents
105
Table of Contents
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 | $ | 4,697 | $ | 6,873 | $ | 17,082 | $ | 5,071 | $ | 22,153 | ||||||||||||||
Reinsurance and other recoverables | 81 | 177 | 414 | 2,316 | 2,988 | 934 | 3,922 | |||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 1,961 | 3,293 | 4,283 | 4,557 | 14,094 | 4,137 | 18,231 | |||||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||||||
Current accident year before catastrophes | 2,542 | 1,447 | 1,460 | 941 | 6,390 | — | 6,390 | |||||||||||||||||||||
Current accident year catastrophes | 258 | 122 | 116 | 47 | 543 | — | 543 | |||||||||||||||||||||
Prior accident years | (51 | ) | (89 | ) | (134 | ) | (81 | ) | (355 | ) | 129 | (226 | ) | |||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 2,749 | 1,480 | 1,442 | 907 | 6,578 | 129 | 6,707 | |||||||||||||||||||||
Payments | (2,718 | ) | (1,377 | ) | (1,418 | ) | (593 | ) | (6,106 | ) | (485 | ) | (6,591 | ) | ||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 1,992 | 3,396 | 4,307 | 4,871 | 14,566 | 3,781 | 18,347 | |||||||||||||||||||||
Reinsurance and other recoverables | 60 | 176 | 437 | 2,110 | 2,783 | 803 | 3,586 | |||||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,052 | $ | 3,572 | $ | 4,744 | $ | 6,981 | $ | 17,349 | $ | 4,584 | $ | 21,933 | ||||||||||||||
Earned premiums | $ | 3,926 | $ | 2,724 | $ | 2,299 | $ | 1,382 | $ | 10,331 | $ | 7 $ | 10,338 | |||||||||||||||
Loss and loss expense paid ratio [1] | 69.2 | 50.5 | 61.6 | 42.8 | 59.1 | |||||||||||||||||||||||
Loss and loss expense incurred ratio | 70.0 | 54.3 | 62.7 | 65.6 | 63.7 | |||||||||||||||||||||||
Prior accident year development (pts.) [2] | (1.3 | ) | (3.3 | ) | (5.9 | ) | (5.8 | ) | (3.4 | ) | ||||||||||||||||||
[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. |
106
Table of Contents
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 | $ | 260 | $ | 124 | $ | 130 | $ | 58 | $ | 572 | $ | — | $ | 572 | ||||||||||||||
Ceded claim and claim adjustment expenses for current accident year catastrophes | 2 | 2 | 14 | 11 | 29 | — | 29 | |||||||||||||||||||||
Net incurred claim and claim adjustment expenses for current accident year catastrophes | 258 | 122 | 116 | 47 | 543 | — | 543 | |||||||||||||||||||||
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 | 1 | — | — | — | 1 | — | 1 | |||||||||||||||||||||
Total current accident year catastrophe impacts | $ | 269 | $ | 129 | $ | 119 | $ | 47 | $ | 564 | $ | — | $ | 564 | ||||||||||||||
107
Table of Contents
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Released workers’ compensation reserves, primarily related to accident years 2000 to 2007 | $ | — | $ | (92 | ) | $ | (64 | ) | $ | — | $ | (156 | ) | $ | — | $ | (156 | ) | ||||||||||
Released reserves for general liability claims, primarily related to accident years 2001 to 2007 | — | (15 | ) | (90 | ) | — | (105 | ) | — | (105 | ) | |||||||||||||||||
Released reserves for directors and officers claims and errors and omissions claims for accident years 2003 to 2006 | — | — | — | (75 | ) | (75 | ) | — | (75 | ) | ||||||||||||||||||
Released reserves for personal auto liability claims related to accident years 2005 to 2007 | (46 | ) | — | — | — | (46 | ) | — | (46 | ) | ||||||||||||||||||
Released commercial auto liability reserves, primarily related to accident years 2002 to 2007 | — | — | (27 | ) | — | (27 | ) | — | (27 | ) | ||||||||||||||||||
Released reserves for extra-contractual liability claims under non-standard personal auto policies | (24 | ) | — | — | — | (24 | ) | — | (24 | ) | ||||||||||||||||||
Released reserves for construction defect claims for accident years 2005 and prior | — | — | — | (10 | ) | (10 | ) | — | (10 | ) | ||||||||||||||||||
Strengthened reserves for general liability and products liability claims primarily for accident years 2004 and prior | — | 17 | 50 | — | 67 | — | 67 | |||||||||||||||||||||
Strengthened reserves for national account general liability allocated loss adjustment expense reserves related to accident years 2004 and prior | — | — | — | 25 | 25 | — | 25 | |||||||||||||||||||||
Strengthening of net environmental reserves | — | — | — | — | — | 53 | 53 | |||||||||||||||||||||
Strengthening of net asbestos reserves | — | — | — | — | — | 50 | 50 | |||||||||||||||||||||
Other reserve re-estimates, net [1] | 19 | 1 | (3 | ) | (21 | ) | (4 | ) | 26 | 22 | ||||||||||||||||||
Total prior accident year development for the year ended December 31, 2008 | $ | (51 | ) | $ | (89 | ) | $ | (134 | ) | $ | (81 | ) | $ | (355 | ) | $ | 129 | $ | (226 | ) | ||||||||
[1] | Includes reserve discount accretion of $26, including $6 in Small Commercial, $9 in Middle Market, $8 in Specialty Commercial and $3 in Other Operations. |
108
Table of Contents
• | Released workers’ compensation reserves primarily related to accident years 2000 to 2007 by $156. 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, in part, to state legal reforms, including in California and Florida, 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. The $156 reserve release represented 3% of the Company’s net reserves for workers’ compensation claims as of December 31, 2007. | |
• | Released reserves for general liability claims primarily related to the 2001 to 2007 accident years by $105. 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. During 2008, the Company observed that this favorable trend continued with the 2007 accident year. 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. The $105 reserve release represented 4% of the Company’s net reserves for general liability claims as of December 31, 2007. | |
• | Released reserves for professional liability claims for accident years 2003 to 2006 by $75. During 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 reduction of reserves. The analysis 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 reserves. The $75 reserve release represented 13% of the Company’s net reserves for professional liability claims as of December 31, 2007. | |
• | Released reserves for Personal Lines auto liability claims by $46, principally related to AARP business for the 2005 through 2007 accident years. Beginning in the first quarter of 2008, management observed an improvement in emerged claim severity for the 2005 through 2007 accident years attributed, in part, to changes made in claim handling procedures in 2007. In the third and fourth quarter of 2008, the Company recognized that favorable development in reported severity was a sustained trend and, accordingly, management reduced its reserve estimate. The $46 reserve release represented 3% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2007. | |
• | Released commercial auto liability reserves by $27, primarily related to accident years 2002 to 2007. Management has observed fewer than previously expected large losses in accident years 2006 and 2007 and lower than previously expected severity on large claims in accident years 2002 to 2005. In 2008, management recognized that favorable development in reported claim severity was a sustained trend and, accordingly, management reduced its estimate of the reserves. The $27 reserve release represented 9% of the Company’s net reserves for Middle Market commercial auto liability claims as of December 31, 2007. | |
• | Released reserves for extra-contractual liability claims under non-standard personal auto policies by $24. 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 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 $24 release of reserves. The $24 reserve release represented 1% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2007. | |
• | Released reserves for construction defect claims in Specialty Commercial by $10 for accident years 2005 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. The $10 reserve release represented 1% of the Company’s net reserves for Specialty Commercial general liability claims as of December 31, 2007. | |
• | Strengthened reserves for general liability and products liability claims primarily for accident years 2004 and prior by $67 for losses expected to emerge after 20 years of development. 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. The $67 reserve strengthening represented 3% of the Company’s net reserves for general liability claims as of December 31, 2007. | |
• | Strengthened reserves for allocated loss adjustment expenses on national account general liability claims within Specialty Commercial by $25. 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. The $25 reserve strengthening represented 2% of the Company’s net reserves for Specialty Commercial general liability claims as of December 31, 2007. |
109
Table of Contents
• | During the third quarter of 2008, the Company completed its annual ground up environmental reserve evaluation. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to environmental liability as well as assumed reinsurance accounts and its London Market exposures for both direct 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. In addition, the decline in the reporting of new accounts and sites has been slower than anticipated in our previous review. The net effect of these changes resulted in a $53 increase in net environmental reserves. |
• | 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. |
• | Among other net reserve re-estimates for Other Operations in 2008, the Company recognized favorable prior year development of $30 on its HartRe assumed reinsurance liabilities as the result of lower than expected reported losses and $25 of adverse development for assumed reinsurance obligations of the Company’s Bermuda operations. |
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 1,959 | $ | 3,421 | $ | 4,536 | $ | 6,359 | $ | 16,275 | $ | 5,716 | $ | 21,991 | ||||||||||||||
Reinsurance and other recoverables | 134 | 214 | 479 | 2,260 | 3,087 | 1,300 | 4,387 | |||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 1,825 | 3,207 | 4,057 | 4,099 | 13,188 | 4,416 | 17,604 | |||||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||||||
Current accident year before catastrophes | 2,576 | 1,594 | 1,561 | 961 | 6,692 | — | 6,692 | |||||||||||||||||||||
Current accident year catastrophes | 125 | 28 | 15 | 9 | 177 | — | 177 | |||||||||||||||||||||
Prior accident years | (4 | ) | (209 | ) | (16 | ) | 84 | (145 | ) | 193 | 48 | |||||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 2,697 | 1,413 | 1,560 | 1,054 | 6,724 | 193 | 6,917 | |||||||||||||||||||||
Payments | (2,503 | ) | (1,222 | ) | (1,248 | ) | (720 | ) | (5,693 | ) | (597 | ) | (6,290 | ) | ||||||||||||||
Reallocation of reserves for unallocated loss adjustment expenses [1] | (58 | ) | (105 | ) | (86 | ) | 124 | (125 | ) | 125 | — | |||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 1,961 | 3,293 | 4,283 | 4,557 | 14,094 | 4,137 | 18,231 | |||||||||||||||||||||
Reinsurance and other recoverables | 81 | 177 | 414 | 2,316 | 2,988 | 934 | 3,922 | |||||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,042 | $ | 3,470 | $ | 4,697 | $ | 6,873 | $ | 17,082 | $ | 5,071 | $ | 22,153 | ||||||||||||||
Earned premiums | $ | 3,889 | $ | 2,736 | $ | 2,420 | $ | 1,446 | $ | 10,491 | $ | 5 | $ | 10,496 | ||||||||||||||
Loss and loss expense paid ratio [2] | 64.4 | 44.7 | 51.5 | 49.8 | 54.3 | |||||||||||||||||||||||
Loss and loss expense incurred ratio | 69.3 | 51.6 | 64.5 | 73.0 | 64.1 | |||||||||||||||||||||||
Prior accident year development (pts.) [3] | (0.1 | ) | (7.6 | ) | (0.7 | ) | 5.8 | (1.4 | ) | |||||||||||||||||||
[1] | Prior to the second quarter of 2007, the Company evaluated the adequacy of the reserves for unallocated loss adjustment expenses on a company-wide basis. During the second quarter of 2007, the Company refined its analysis of the reserves at the segment level, resulting in the reallocation of reserves among segments, including a reallocation of reserves from Ongoing Operations to Other Operations. | |
[2] | The “loss and loss expense paid ratio” represents the ratio of paid loss and loss adjustment expenses to earned premiums. | |
[3] | “Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums. |
110
Table of Contents
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Release of workers’ compensation loss and loss adjustment expense reserves, primarily for accident years 2002 to 2006 | $ | — | $ | (151 | ) | $ | — | $ | — | $ | (151 | ) | $ | — | $ | (151 | ) | |||||||||||
Release of general liability loss and loss adjustment expense reserves for accident years 2003 to 2006 | — | — | (49 | ) | — | (49 | ) | — | (49 | ) | ||||||||||||||||||
Release of workers’ compensation loss reserves for accident years 1987 to 2000 | — | (33 | ) | — | — | (33 | ) | — | (33 | ) | ||||||||||||||||||
Release of loss reserves for package business for accident years 2003 to 2006 | — | (30 | ) | — | — | (30 | ) | — | (30 | ) | ||||||||||||||||||
Release of reserves for surety business for accident years 2003 to 2006 | — | — | — | (22 | ) | (22 | ) | — | (22 | ) | ||||||||||||||||||
Release of commercial auto liability reserves for accident years 2003 and 2004 | — | — | (18 | ) | — | (18 | ) | — | (18 | ) | ||||||||||||||||||
Release of reserves on Personal Lines auto liability claims for accident years 2002 to 2006 | (16 | ) | — | — | — | (16 | ) | — | (16 | ) | ||||||||||||||||||
Release of reserves on errors & omissions policies for accident year 2005 | — | — | — | (15 | ) | (15 | ) | — | (15 | ) | ||||||||||||||||||
Strengthening of workers’ compensation loss and loss adjustment expense reserves for accident years 1987 to 2001 | — | — | — | 47 | 47 | — | 47 | |||||||||||||||||||||
Strengthening of workers’ compensation reserves for accident years 1973 & prior | — | — | 40 | — | 40 | — | 40 | |||||||||||||||||||||
Strengthening of general liability reserves for accident years more than 20 years old | — | — | 14 | 25 | 39 | — | 39 | |||||||||||||||||||||
Strengthening of general liability reserves primarily related to accident years 1987 to 1997 | — | — | — | 34 | 34 | — | 34 | |||||||||||||||||||||
Strengthening or reserves primarily as a result of an adverse arbitration decision | — | — | — | — | — | 99 | 99 | |||||||||||||||||||||
Strengthening of environmental reserves | — | — | — | — | — | 25 | 25 | |||||||||||||||||||||
Other reserve reestimates, net [1] | 12 | 5 | (3 | ) | 15 | 29 | 69 | 98 | ||||||||||||||||||||
Total prior accident year development for the year ended December 31, 2007 | $ | (4 | ) | $ | (209 | ) | $ | (16 | ) | $ | 84 | $ | (145 | ) | $ | 193 | $ | 48 | ||||||||||
[1] | Includes reserve discount accretion of $31, including $6 in Small Commercial, $8 in Middle Market, $11 in Specialty Commercial and $6 in Other Operations. |
111
Table of Contents
• | Released Small Commercial workers’ compensation reserves by $151, primarily related to accident years 2002 to 2006. This reserve release is a continuation of favorable developments first recognized in 2005 and 2006. The workers’ compensation reserve releases in 2007 resulted from a determination that workers’ compensation losses continue to develop even more favorably from prior expectations due to the California and Florida legal reforms and underwriting actions as well as cost reduction initiatives first instituted in 2003. In particular, the state legal reforms and underwriting actions have resulted in lower than expected medical claim severity. In addition, the Company determined that paid losses related to workers’ compensation policies sold through payroll service providers were emerging favorably, leading to a release of reserves for the 2003 to 2006 accident years. The $151 reserve release represented 9% of the Company’s net reserves for Small Commercial workers’ compensation claims as of December 31, 2006. |
• | Released reserves for Middle Market general liability claims related to the 2003 to 2006 accident years by $49. Beginning in the third quarter of 2007, the Company observed that reported losses for high hazard and umbrella general liability claims for the 2003 to 2006 accident years were emerging favorably and this caused management to reduce its estimate of the cost of future reported claims for these accident years, resulting in a reserve release in the third and fourth quarter of 2007. This reserve development is unrelated to the reserve strengthening in 2005 and 2006 of other Middle Market general liability claims which developed unfavorably due to higher than anticipated loss payments beyond four years of development. The $49 reserve release represented 6% of the Company’s net reserves for Middle Market general liability claims as of December 31, 2006. |
• | Released Small Commercial workers’ compensation reserves related to accident years 2000 and prior by $33. The severity of workers’ compensation medical claims for these accident years has emerged favorably to previous expectations. As the continued development of these claims has resulted in a sustained favorable trend, management released reserves in the fourth quarter of 2007. The $33 reserve release represented 2% of the Company’s net reserves for Small Commercial workers’ compensation claims as of December 31, 2006. |
• | Recorded a $30 net release of reserves for Small Commercial package business related to the 2003 to 2006 accident years. Reserve reviews completed during 2007 identified that the frequency of reported liability claims on Small Commercial package business policies for these accident years was lower than the previously expected frequency. In addition, reported loss costs on property coverages have emerged favorably for the 2006 accident year. In recognition of these trends, in the second and fourth quarter of 2007, management reduced reserves by a total of $30. The $30 reserve release represented 3% of the Company’s net reserves for Small Commercial package business claims as of December 31, 2006. |
• | Released reserves for commercial surety business by $22 for accident years 2003 to 2006. Reported losses for commercial surety business have been emerging favorably resulting in the Company lowering its estimate of ultimate unpaid losses during the third quarter of 2007. The $22 reserve release represented 14% of the Company’s net reserves for fidelity and surety claims as of December 31, 2006. |
• | Released Middle Market commercial auto liability reserves by $18 for accident years 2003 and 2004. Since the first quarter of 2007, reported losses for commercial auto liability claims in these accident years have emerged favorably although management did not determine that this was a verifiable trend until the third quarter of 2007 when it released the reserves. The $18 reserve release represented 6% of the Company’s net reserves for Middle Market auto liability claims as of December 31, 2006. |
• | Released reserves for Personal Lines auto liability claims for accident years 2002 to 2006 by $16. This reserve release was a continuation of trends first observed in 2006. During the first quarter of 2006, the Company released auto liability reserves related to the 2005 accident year due to frequency emerging favorable to initial expectations. During the second quarter of 2006, the Company observed that loss cost severity on auto liability claims for the 2004 accident year was emerging favorable to initial expectations and released reserves to recognize this trend. For each of the 2002 to 2006 accident years, the Company has continued to observe favorable trends in reported severity and, in the fourth quarter of 2007, the Company released an additional $16 in reserves. The $16 reserve release represented 1% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2006. |
• | Released reserves for errors and omissions claims for accident year 2005 by $15. During the fourth quarter of 2007, the Company updated its analysis of certain professional liability claims and the new analysis showed that claims under errors and omissions policies were emerging favorable to initial expectations, resulting in this reserve release. The $15 reserve release represented 3% of the Company’s net reserves for professional liability claims as of December 31, 2006. |
• | Strengthened Specialty Commercial workers’ compensation reserves by $47, primarily related to accident years 1987 to 2001. Management has been observing larger than expected increases in loss cost severity, particularly on high deductible and excess policies. The $47 reserve strengthening represented 2% of the Company’s net reserves for Specialty Commercial workers’ compensation claims as of December 31, 2006. |
112
Table of Contents
• | Strengthened Middle Market workers’ compensation reserves by $40 for accident years 1973 and prior, primarily driven by a reduction in reinsurance recoverables from the commutation of certain reinsurance treaties. Due to the commutations, within the past two years, net paid losses on these claims have begun to emerge unfavorably to initial expectations and, during 2007, the Company determined that this trend in higher paid losses would ultimately result in unpaid losses settling for more than management’s previous estimates. The $40 reserve strengthening represented 2% of net reserves for Middle Market workers’ compensation claims as of December 31, 2006. |
• | Strengthened general liability reserves by $39 for accident years more than 20 years old. The Company has experienced an increase in defense costs for certain mass tort claims and, during 2007, the Company determined that the increase in defense costs was a sustained trend that resulted in an increase in reserves. The $39 reserve strengthening represented 2% of the Company’s net reserves for general liability claims as of December 31, 2006. |
• | Strengthened reserves for Specialty Commercial general and products liability claims by $34, primarily related to the 1987 to 1997 accident years. Reported losses on general and products liability claims have been emerging unfavorably to previous expectations and loss adjustment expenses have been higher than expected on late emerging claims. The $34 reserve strengthening represented 3% of the Company’s net reserves for Specialty Commercial general liability claims as of December 31, 2006. |
• | Also during 2007, the Company refined its processes for allocating IBNR reserves by accident year, resulting in a reclassification of $347 of IBNR reserves from the 2003 to 2006 accident years to the 2002 and prior accident years. This reclassification of reserves by accident year had no effect on total recorded reserves within any segment or on total recorded reserves for any line of business within a segment. |
• | During the second quarter of 2007, an arbitration panel found that a Hartford subsidiary, established as a captive reinsurance company in the 1970s by The Hartford’s former parent, ITT Corporation (“ITT”), had additional obligations to ITT’s primary insurance carrier under ITT’s captive insurance program, which ended in 1993. When ITT spun off The Hartford in 1995, the former captive became a Hartford subsidiary. The arbitration concerned whether certain claims could be presented to the former captive in a different manner than ITT’s primary insurance carrier historically had presented them. The Company recorded a charge of $99 principally as a result of this adverse arbitration decision. |
• | The Company completed its environmental reserve evaluation and increased its environmental reserves by $25. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to environmental liability as well as assumed reinsurance accounts and its London Market exposures for both direct and assumed reinsurance. The Company found estimates for individual cases changed based upon the particular circumstances of each account. These changes were case specific and not as a result of any underlying change in the current environment. |
113
Table of Contents
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-gross | $ | 2,152 | $ | 3,023 | $ | 4,185 | $ | 6,060 | $ | 15,420 | $ | 6,846 | $ | 22,266 | ||||||||||||||
Reinsurance and other recoverables | 385 | 192 | 565 | 2,306 | 3,448 | 1,955 | 5,403 | |||||||||||||||||||||
Beginning liabilities for unpaid losses and loss adjustment expenses-net | 1,767 | 2,831 | 3,620 | 3,754 | 11,972 | 4,891 | 16,863 | |||||||||||||||||||||
Provision for unpaid losses and loss adjustment expenses | ||||||||||||||||||||||||||||
Current accident year before catastrophes | 2,396 | 1,509 | 1,577 | 1,025 | 6,507 | — | 6,507 | |||||||||||||||||||||
Current accident year catastrophes | 120 | 34 | 36 | 9 | 199 | — | 199 | |||||||||||||||||||||
Prior years | (38 | ) | (75 | ) | 13 | 36 | (64 | ) | 360 | 296 | ||||||||||||||||||
Total provision for unpaid losses and loss adjustment expenses | 2,478 | 1,468 | 1,626 | 1,070 | 6,642 | 360 | 7,002 | |||||||||||||||||||||
Payments | (2,309 | ) | (1,092 | ) | (1,189 | ) | (725 | ) | (5,315 | ) | (835 | ) | (6,150 | ) | ||||||||||||||
Net reserves of Omni business sold | (111 | ) | — | — | — | (111 | ) | — | (111 | ) | ||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-net | 1,825 | 3,207 | 4,057 | 4,099 | 13,188 | 4,416 | 17,604 | |||||||||||||||||||||
Reinsurance and other recoverables | 134 | 214 | 479 | 2,260 | 3,087 | 1,300 | 4,387 | |||||||||||||||||||||
Ending liabilities for unpaid losses and loss adjustment expenses-gross | $ | 1,959 | $ | 3,421 | $ | 4,536 | $ | 6,359 | $ | 16,275 | $ | 5,716 | $ | 21,991 | ||||||||||||||
Earned premiums | $ | 3,760 | $ | 2,652 | $ | 2,523 | $ | 1,493 | $ | 10,428 | $ | 5 | $ | 10,433 | ||||||||||||||
Loss and loss expense paid ratio [1] | 61.4 | 41.1 | 47.3 | 48.4 | 51.0 | |||||||||||||||||||||||
Loss and loss expense incurred ratio | 65.9 | 55.3 | 64.6 | 71.5 | 63.7 | |||||||||||||||||||||||
Prior accident year development (pts.) [2] | (1.0 | ) | (2.8 | ) | 0.5 | 2.5 | (0.6 | ) | ||||||||||||||||||||
[1] | The “loss and loss expense paid ratio” represents the ratio of paid loss and loss adjustment expenses to earned premiums. | |
[2] | “Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums. |
114
Table of Contents
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Net release of catastrophe loss reserves for 2004 and 2005 hurricanes | $ | (23 | ) | $ | (22 | ) | $ | (3 | ) | $ | (35 | ) | $ | (83 | ) | $ | — | $ | (83 | ) | ||||||||
Release of Personal Lines auto liability reserves for accident year 2005 | (31 | ) | — | — | — | (31 | ) | — | (31 | ) | ||||||||||||||||||
Strengthening of Personal Lines auto liability reserves for claims with exposure in excess of policy limits | 30 | — | — | — | 30 | — | 30 | |||||||||||||||||||||
Strengthening of general liability loss and loss adjustment expense reserves for accident years 1998 to 2005 | — | — | 20 | — | 20 | — | 20 | |||||||||||||||||||||
Release of allocated loss adjustment expense reserves for workers’ compensation and package business for accident years 2003 to 2005 | — | (33 | ) | (25 | ) | — | (58 | ) | — | (58 | ) | |||||||||||||||||
Release of Personal Lines auto liability reserves for accident year 2003 to 2005 | (22 | ) | — | — | — | (22 | ) | — | (22 | ) | ||||||||||||||||||
Strengthening of Specialty Commercial construction defect claim reserves for accident years 1997 and prior | — | — | 10 | 35 | 45 | — | 45 | |||||||||||||||||||||
Strengthening of Specialty Commercial workers’ compensation allocated loss adjustment expense reserves | — | — | — | 20 | 20 | — | 20 | |||||||||||||||||||||
Effect of Equitas agreement and strengthening of allowance for uncollectible reinsurance | — | — | — | — | — | 243 | 243 | |||||||||||||||||||||
Strengthening of environmental reserves | — | — | — | — | — | 43 | 43 | |||||||||||||||||||||
Other reserve re-estimates, net [1] | 8 | (20 | ) | 11 | 16 | 15 | 74 | 89 | ||||||||||||||||||||
Total prior accident year development for the year ended December 31, 2006 | $ | (38 | ) | $ | (75 | ) | $ | 13 | $ | 36 | $ | (64 | ) | $ | 360 | $ | 296 | |||||||||||
[1] | Includes reserve discount accretion of $32, including $6 in Small Commercial, $8 in Middle Market, $11 in Specialty Commercial and $7 in Other Operations. |
• | Released net reserves related to prior year hurricanes by a total of $83, including $57 for hurricanes Katrina and Rita in 2005 and $26 for hurricanes Charley, Frances and Jeanne in 2004. Initial reserve estimates for the 2005 and 2004 hurricanes were higher because of the difficulty claim adjusters had in accessing the most significantly impacted areas and initially higher estimates of the cost of building materials and contractors due to “demand surge”. As the reported claims have matured, the estimated settlement value of the claims has decreased from the initial estimates. The ultimate estimate for hurricane Katrina was increased in the first quarter of 2006 because of higher than expected claim reporting, particularly in Personal Lines. Net loss reserves within Specialty Commercial decreased, primarily because hurricane Katrina losses on specialty property business were reimbursable under a specialty property reinsurance treaty as well as under the Company’s principal property catastrophe reinsurance program. After the first quarter of 2006, Katrina new claim intake abated and settlement percentages increased, resulting in a reduction of reserves in the last nine months of 2006. In addition, the rate of newly reported compensable claims for Rita and the 2004 hurricanes was less than expected, resulting in a reduction of reserves for these hurricanes. |
• | Released Personal Lines auto liability reserves by $31 related to the fourth accident quarter of 2005 as a result of better than expected frequency trends. During the third and fourth quarter of 2005, the Company had reduced the 2005 accident year loss and loss adjustment expense ratio for Personal Lines auto liability claims related to the first three accident quarters of 2005. Favorable frequency for the fourth accident quarter of 2005 emerged during the fourth quarter of 2005. However, the Company did not release reserves at that time, since reserve indications at only three months of development were not reliable. The Company released reserves in 2006 after further development indicated that early indications of reduced frequency were representative of a real trend. The $31 reserve release represented 2% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2005. |
115
Table of Contents
• | Strengthened reserves for personal auto liability claims by $30 due to an increase in estimated severity on claims where the Company is exposed to losses in excess of policy limits. From the Company’s reserve review during the first quarter of 2006, the Company determined that the facts and circumstances necessitated an increase in the reserve estimate. The $30 of reserve strengthening represented 2% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2005. | |
• | Strengthened Middle Market general liability loss and loss adjustment expense reserves by $20 for accident years 1998 to 2005, primarily as a result of increasing allocated loss adjustment expenses associated with closing older claims. The $20 of reserve strengthening represented 2% of the Company’s net reserves for general liability claims as of December 31, 2005. | |
• | Released allocated loss adjustment expense reserves by $58 for accident years 2003 to 2005, primarily for workers’ compensation business and package business, as a result of cost reduction initiatives implemented by the Company to reduce allocated loss adjustment expenses for both legal and non-legal expenses. The Company began implementing cost reduction initiatives in late 2003. It was initially uncertain what effect those efforts would have on controlling allocated loss adjustment expenses. During 2004, favorable trends started to emerge, particularly on shorter-tailed auto liability claims, but it was not clear if these trends would be sustained. In early 2005, favorable trends continued and the Company analyzed claims involving legal expenses separate from claims that do not involve legal expenses. This analysis included a review of the trends in the number of claims involving legal expenses, the average expenses incurred and trends in legal expenses. During the second quarter of 2005, the Company released allocated loss adjustment expense reserves on shorter-tailed auto liability claims as the favorable trends on shorter-tailed business emerged more quickly and were determined to be reliable. During both the second and fourth quarter of 2006, the Company determined that the favorable development on package business and workers’ compensation business had become a verifiable trend and, accordingly, reserves were reduced. The $58 release represented 1% of total net reserves for workers’ compensation and package business as of December 31, 2005. | |
• | Released Personal Lines auto liability reserves related to AARP and other affinity business by $22. AARP auto liability reserves for accident year 2004 were reduced as a result of favorable loss cost severity trends. AARP auto liability severity, as measured by reported data, began declining in 2005; however, the Company was uncertain whether this trend would prove persistent over time since paid loss data did not support a decline. During the second quarter of 2006, the Company determined that all the metrics supported a decline in severity estimates and, therefore, the Company released reserves. Auto liability reserves for other affinity business related to accident years 2003 to 2005 were reduced to recognize favorable developments in loss costs that have emerged. The $22 reserve release represented 1% of the Company’s net reserves for Personal Lines auto liability claims as of December 31, 2005. | |
• | Strengthened construction defect claim reserves by $45 for accident years 1997 and prior as a result of an increase in claim severity trends. In 2004, two large construction defects claims were reported, but these were not viewed as an indication of an increase in the severity trend for all claims. In 2005, two additional large cases were reported. Management performed an expanded review of construction defects claims in the second quarter of 2006. Based on the expanded review and additional reported claim experience, management concluded that reported losses would likely continue at a higher level in the future and this resulted in strengthening the recorded reserves. The $35 of reserve strengthening in Specialty Commercial represented 4% of the Company’s net reserves for Specialty Commercial general liability claims as of December 31, 2005. The $10 of strengthening in Middle Market represented 1% of net reserves for Middle Market general liability claims as of December 31, 2005. | |
• | Strengthened Specialty Commercial workers’ compensation allocated loss adjustment expense reserves by $20 for loss adjustment expense payments expected to emerge after 20 years of development. During 2005, the Company had done an in-depth study of loss payments expected to emerge after 20 years of development. At that time, it was believed that allocated loss adjustment expenses for a particular subset of business (primary policies on national accounts business) developed more quickly than allocated loss adjustment expenses for smaller insureds and that a similar reserve strengthening for national accounts business was not required. During the second quarter of 2006, the Company’s reserve review indicated that the development pattern for this business should be adjusted to be more consistent with that for smaller insureds. Because the Company has written very little of this business in recent years, the increase in reserves affects accident years 1995 and prior. The $20 of reserve strengthening represented 1% of the Company’s net reserves for Specialty Commercial workers’ compensation claims as of December 31, 2005. |
• | Reduced the reinsurance recoverable asset associated with older, longer-term casualty liabilities by $243. The Company reviewed the reinsurance recoverables and allowance for uncollectible reinsurance associated with older, long-term casualty liabilities in the second quarter 2006. As a result of this study, and the outcome of an agreement that resolved, with minor exception, all of the Company’s ceded and assumed domestic reinsurance exposures with Equitas, Other Operations recorded prior accident year development of $243. |
• | Strengthened environmental reserves by $43 as a result of an environmental reserve evaluation completed in the third quarter of 2006. As part of this evaluation, the Company reviewed all of its domestic direct and assumed reinsurance accounts exposed to environmental liability. The Company also examined its London Market exposures for both direct insurance and assumed reinsurance. The Company found estimates for individual cases changed based upon the particular circumstances of each account, although the review found no underlying cause or change in the claim environment. The $43 of reserve strengthening represented 2% of the Company’s net reserves for asbestos and environmental claims as of December 31, 2005. |
116
Table of Contents
Personal | Small | Middle | Specialty | Ongoing | Other | Total | ||||||||||||||||||||||
Lines | Commercial | Market | Commercial | Operations | Operations | P&C | ||||||||||||||||||||||
Range of prior accident year development for the four years ended December 31, 2008 [1] [2] | (5.2) – (0.2 | ) | (6.5) – (1.0 | ) | (3.1) – 1.6 | (1.8) – 3.1 | (2.5) – 0.3 | 3.1 – 7.4 | (1.2) – 1.5 |
[1] | Bracketed prior accident year development indicates favorable development. Unbracketed amounts represent unfavorable development. | |
[2] | Over the past ten years, reserve re-estimates for total Property & Casualty ranged from (1.3)% to 21.5%. Excluding the reserve strengthening for asbestos and environmental reserves, over the past ten years reserve re-estimates for total Property & Casualty ranged from (3.0)% to 1.6%. |
117
Table of Contents
% of layer(s) | ||||||||||||||||
Coverage | Treaty term | reinsured | Per occurrence limit | Retention | ||||||||||||
Principal property catastrophe program covering property catastrophe losses from a single event | 1/1/2009 to 1/1/2010 | Varies by layer, but averages 90% across all layers | Aggregates to $750 across all layers | $250 | ||||||||||||
Property catastrophe losses from a single event on excess and surplus property business | 1/1/2009 to 1/1/2010 | 95% | Aggregates to $280 across all layers | 20 | ||||||||||||
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% | 382[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 $382 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 (TICL)” statutory provision in excess of the coverage the Company is required to purchase from the FHCF. |
118
Table of Contents
Bond amount issued by | ||||||||||||
Foundation Re or | ||||||||||||
Covered perils | Treaty term | Covered losses | Foundation Re II | |||||||||
Hurricane loss events affecting the Gulf and Eastern Coast of the United States and loss events arising from California, Pacific Northwest, and New Madrid earthquakes. | 2/17/2006 to 2/24/2010 | 26% of $400 in losses in excess of an index loss trigger equating to approximately $1.3 billion in Hartford losses | $105 | |||||||||
Hurricane loss events affecting the Gulf and Eastern Coast of the United States | 11/17/2006 to 11/26/2010 | 45% of $400 in losses in excess of an index loss trigger equating to approximately $1.85 billion in Hartford losses | 180 |
119
Table of Contents
Hurricane | Earthquake | ||||||||||||||||
Net of | |||||||||||||||||
Expected | Net of Expected | ||||||||||||||||
Before | Reinsurance | Before | Reinsurance | ||||||||||||||
Reinsurance | Recoveries | Reinsurance | Recoveries | ||||||||||||||
Estimated 250-year probable maximum loss, before-tax | $ | 1,891 | $ | 671 | $ | 953 | $ | 316 | |||||||||
After-tax effect as a percentage of statutory surplus of the Property & Casualty operations as of December 31, 2008 | 7 | % | 3 | % |
120
Table of Contents
Reinsurance Recoverable | December 31, 2008 | December 31, 2007 | ||||||
Paid loss and loss adjustment expenses | $ | 326 | $ | 347 | ||||
Unpaid loss and loss adjustment expenses | 3,492 | 3,788 | ||||||
Gross reinsurance recoverable | 3,818 | 4,135 | ||||||
Less: allowance for uncollectible reinsurance | (379 | ) | (404 | ) | ||||
Net reinsurance recoverable | $ | 3,439 | $ | 3,731 | ||||
121
Table of Contents
Distribution of gross reinsurance recoverable | December 31, 2008 | December 31, 2007 | ||||||||||||||
Gross reinsurance recoverable | $ | 3,818 | $ | 4,135 | ||||||||||||
Less: mandatory (assigned risk) pools and structured settlements | (638 | ) | (635 | ) | ||||||||||||
Gross reinsurance recoverable excluding mandatory pools and structured settlements | $ | 3,180 | $ | 3,500 | ||||||||||||
% of Total | % of Total | |||||||||||||||
Rated A- (Excellent) or better by A.M. Best [1] | $ | 2,426 | 76.3 | % | $ | 2,614 | 74.7 | % | ||||||||
Other rated by A.M. Best | 52 | 1.6 | % | 90 | 2.6 | % | ||||||||||
Total rated companies | 2,478 | 77.9 | % | 2,704 | 77.3 | % | ||||||||||
Voluntary pools | 181 | 5.7 | % | 195 | 5.6 | % | ||||||||||
Captives | 220 | 6.9 | % | 231 | 6.6 | % | ||||||||||
Other not rated companies | 301 | 9.5 | % | 370 | 10.5 | % | ||||||||||
Total | $ | 3,180 | 100.0 | % | $ | 3,500 | 100.0 | % | ||||||||
[1] | Based on A.M. Best ratings as of December 31, 2008 and 2007, respectively. |
122
Table of Contents
Operating Summary | 2008 | 2007 | 2006 | |||||||||
Earned premiums | $ | 10,338 | $ | 10,496 | $ | 10,433 | ||||||
Net investment income | 1,253 | 1,687 | 1,486 | |||||||||
Other revenues [1] | 504 | 496 | 473 | |||||||||
Net realized capital gains (losses) | (1,877 | ) | (172 | ) | 9 | |||||||
Total revenues | 10,218 | 12,507 | 12,401 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 6,390 | 6,692 | 6,507 | |||||||||
Current accident year catastrophes | 543 | 177 | 199 | |||||||||
Prior accident years | (226 | ) | 48 | 296 | ||||||||
Total losses and loss adjustment expenses | 6,707 | 6,917 | 7,002 | |||||||||
Amortization of deferred policy acquisition costs | 2,095 | 2,104 | 2,106 | |||||||||
Insurance operating costs and expenses | 724 | 716 | 580 | |||||||||
Other expense | 695 | 693 | 643 | |||||||||
Total benefits, losses and expenses | 10,221 | 10,430 | 10,331 | |||||||||
Income (loss) before income taxes | (3 | ) | 2,077 | 2,070 | ||||||||
Income tax expense (benefit) | (95 | ) | 570 | 551 | ||||||||
Net income [2] | $ | 92 | $ | 1,507 | $ | 1,519 | ||||||
Net Income | ||||||||||||
Ongoing Operations | $ | 189 | $ | 1,477 | $ | 1,554 | ||||||
Other Operations | (97 | ) | 30 | (35 | ) | |||||||
Total Property & Casualty net income | $ | 92 | $ | 1,507 | $ | 1,519 | ||||||
[1] | Primarily servicing revenue. | |
[2] | Includes net realized capital gains (losses), after tax, of $(1,223), $(112) and $46 for the years ended December 31, 2008, 2007 and 2006, respectively. |
123
Table of Contents
Ongoing Operations | 2008 | 2007 | 2006 | |||||||||
Written premiums | $ | 10,224 | $ | 10,435 | $ | 10,658 | ||||||
Change in unearned premium reserve | (107 | ) | (56 | ) | 230 | |||||||
Earned premiums | 10,331 | 10,491 | 10,428 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 6,390 | 6,692 | 6,507 | |||||||||
Current accident year catastrophes | 543 | 177 | 199 | |||||||||
Prior accident years | (355 | ) | (145 | ) | (64 | ) | ||||||
Total losses and loss adjustment expenses | 6,578 | 6,724 | 6,642 | |||||||||
Amortization of deferred policy acquisition costs | 2,095 | 2,104 | 2,106 | |||||||||
Insurance operating costs and expenses | 701 | 694 | 569 | |||||||||
Underwriting results | 957 | 969 | 1,111 | |||||||||
Net servicing income [1] | 31 | 52 | 53 | |||||||||
Net investment income | 1,056 | 1,439 | 1,225 | |||||||||
Net realized capital losses | (1,669 | ) | (160 | ) | (17 | ) | ||||||
Other expenses | (219 | ) | (248 | ) | (222 | ) | ||||||
Income before income taxes | 156 | 2,052 | 2,150 | |||||||||
Income tax benefit (expense) | 33 | (575 | ) | (596 | ) | |||||||
Net income | $ | 189 | $ | 1,477 | $ | 1,554 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 61.9 | 63.8 | 62.4 | |||||||||
Current accident year catastrophes | 5.3 | 1.7 | 1.9 | |||||||||
Prior accident years | (3.4 | ) | (1.4 | ) | (0.6 | ) | ||||||
Total loss and loss adjustment expense ratio | 63.7 | 64.1 | 63.7 | |||||||||
Expense ratio | 26.6 | 26.3 | 25.6 | |||||||||
Policyholder dividend ratio | 0.5 | 0.4 | 0.1 | |||||||||
Combined ratio | 90.7 | 90.8 | 89.3 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 5.3 | 1.7 | 1.9 | |||||||||
Prior accident years | (0.2 | ) | 0.1 | (0.7 | ) | |||||||
Total catastrophe ratio | 5.0 | 1.8 | 1.2 | |||||||||
Combined ratio before catastrophes | 85.7 | 89.0 | 88.1 | |||||||||
Combined ratio before catastrophes and prior accident year development | 88.9 | 90.5 | 88.0 |
[1] | Net of expenses related to service business. |
124
Table of Contents
Change in underwriting results | ||||
Decrease in earned premiums | $ | (160 | ) | |
Losses and loss adjustment expenses | ||||
Ratio change — A decrease in the current accident year loss and loss adjustment expense ratio before catastrophes | 200 | |||
Volume change — Decrease in current accident year losses and loss adjustment expenses before catastrophes due to the decrease in earned premium | 102 | |||
Decrease in current accident year losses and loss adjustment expenses before catastrophes | 302 | |||
Catastrophes — Increase in current accident year catastrophe losses | (366 | ) | ||
Reserve changes — An increase in net favorable prior accident year reserve development | 210 | |||
Net decrease in losses and loss adjustment expenses | 146 | |||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 9 | |||
Increase in insurance operating costs and expenses | (7 | ) | ||
Net decrease in operating expenses | 2 | |||
Decrease in underwriting results from 2007 to 2008 | $ | (12 | ) | |
125
Table of Contents
Personal Lines | • The current accident year loss and loss adjustment expense ratio before catastrophes in Personal Lines decreased by 1.4 points, primarily due to favorable expected frequency on auto liability claims and the effect of earned pricing increases for both auto and homeowners, partially offset by increased frequency and severity of non-catastrophe losses on homeowners’ business. | |
Small Commercial | • The current accident year loss and loss adjustment expense ratio before catastrophes in Small Commercial decreased by 5.2 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 expected 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 decreased by 1.0 point, primarily due to a lower loss and loss adjustment expense ratio for workers’ compensation and general liability business, largely offset by higher non-catastrophe losses on property and marine business and the effect of earned pricing decreases. The higher non-catastrophe losses on property business were driven by increased severity, including a number of large individual claims, and the higher non-catastrophe losses on marine business were primarily driven by increased frequency. | |
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. |
126
Table of Contents
Change in underwriting results | ||||
Earned premiums | ||||
Excluding Omni, a 2% increase in earned premium | $ | 185 | ||
Decrease in earned premium due to the sale of Omni in the fourth quarter of 2006 | (122 | ) | ||
Net increase in earned premiums | 63 | |||
Losses and loss adjustment expenses | ||||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes, excluding Omni | (176 | ) | ||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premium, excluding Omni | (114 | ) | ||
Sale of Omni — Decrease in current accident year loss and loss adjustment expenses before catastrophes as a result of the sale of Omni | 105 | |||
Net increase in current accident year loss and loss adjustment expenses before catastrophes | (185 | ) | ||
Catastrophes — Decrease in current accident year catastrophe losses | 22 | |||
Reserve changes — Increase in net favorable prior accident year reserve development | 81 | |||
Net increase in losses and loss adjustment expenses | (82 | ) | ||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 2 | |||
Increase in insurance operating costs and expenses | (125 | ) | ||
Net increase in operating expenses | (123 | ) | ||
Decrease in underwriting results from 2006 to 2007 | $ | (142 | ) | |
127
Table of Contents
Personal Lines | • Excluding the effect of Omni, the 3.3 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes in Personal Lines was primarily due to increased severity on auto liability claims, increased frequency on auto property damage claims and, to a lesser extent, increased severity on homeowners claims, partially offset by the effect of earned pricing increases in homeowners. | |
Small Commercial | • The 1.4 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes in Small Commercial was primarily due to a higher loss ratio and loss adjustment expense ratio for package business and commercial auto claims, partially offset by a lower loss and loss adjustment expense ratio for workers’ compensation claims. | |
Middle Market | • The 1.9 point increase in the current accident year loss and loss adjustment expense ratio before catastrophes in Middle Market was primarily due to a higher loss and loss adjustment expense ratio for workers’ compensation, general liability and commercial auto claims driven, in part, by earned pricing decreases. For commercial auto, loss costs increased for both liability and property damage claims. | |
Specialty Commercial | • The 1.8 point decrease in the current accident year loss and loss adjustment expense ratio before catastrophes in Specialty Commercial was primarily due to a lower loss and loss adjustment ratio on directors and officers insurance in professional liability, partially offset by a higher loss and loss adjustment expense ratio on casualty business. |
128
Table of Contents
129
Table of Contents
Written Premiums [1] | 2008 | 2007 | 2006 | |||||||||
Business Unit | ||||||||||||
AARP | $ | 2,813 | $ | 2,750 | $ | 2,580 | ||||||
Agency | 1,050 | 1,123 | 1,100 | |||||||||
Other | 62 | 74 | 197 | |||||||||
Total | $ | 3,925 | $ | 3,947 | $ | 3,877 | ||||||
Product Line | ||||||||||||
Automobile | $ | 2,829 | $ | 2,848 | $ | 2,856 | ||||||
Homeowners | 1,096 | 1,099 | 1,021 | |||||||||
Total | $ | 3,925 | $ | 3,947 | $ | 3,877 | ||||||
Earned Premiums [1] | 2008 | 2007 | 2006 | |||||||||
Business Unit | ||||||||||||
AARP | $ | 2,778 | $ | 2,681 | $ | 2,466 | ||||||
Agency | 1,080 | 1,123 | 1,068 | |||||||||
Other | 68 | 85 | 226 | |||||||||
Total | $ | 3,926 | $ | 3,889 | $ | 3,760 | ||||||
Product Line | ||||||||||||
Automobile | $ | 2,824 | $ | 2,822 | $ | 2,792 | ||||||
Homeowners | 1,102 | 1,067 | 968 | |||||||||
Total | $ | 3,926 | $ | 3,889 | $ | 3,760 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Premium Measures | 2008 | 2007 | 2006 | |||||||||
Policies in force at year end | ||||||||||||
Automobile | 2,323,882 | 2,349,402 | 2,276,165 | |||||||||
Homeowners | 1,455,954 | 1,481,542 | 1,440,399 | |||||||||
Total policies in force at year end | 3,779,836 | 3,830,944 | 3,716,564 | |||||||||
New business premium | ||||||||||||
Automobile | $ | 364 | $ | 424 | $ | 469 | ||||||
Homeowners | $ | 106 | $ | 140 | $ | 161 | ||||||
Premium Renewal Retention | ||||||||||||
Automobile | 87 | % | 88 | % | 87 | % | ||||||
Homeowners | 89 | % | 96 | % | 94 | % | ||||||
Written Pricing Increase (Decrease) | ||||||||||||
Automobile | 2 | % | — | (1 | %) | |||||||
Homeowners | 2 | % | 5 | % | 5 | % | ||||||
Earned Pricing Increase (Decrease) | ||||||||||||
Automobile | 1 | % | (1 | %) | (1 | %) | ||||||
Homeowners | 3 | % | 6 | % | 5 | % | ||||||
130
Table of Contents
• | AARP earned premium grew $97, reflecting modest earned pricing increases for both auto and homeowners and the effect of new business premium outpacing non-renewals in the last nine months of 2007. New business has offset non-renewals in 2008 and new business in 2008 has been driven by 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. |
• | Agency earned premium decreased by $43 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 began to increase rates although a significant portion of the market continues to compete heavily on price. |
• | Other earned premium decreased by $17, primarily due to a decision to reduce other affinity business. |
New business premium | • Both auto and homeowners’ new business written premium decreased in 2008. Auto new business decreased by $60, or 14%, including decreases in both AARP and Agency. Homeowners’ new business decreased by $34, or 24%, 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 87%, 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 96% to 89% 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 as a result of the Company’s decision to stop renewing Florida homeowners’ policies sold through agents. | |
Earned pricing increase (decrease) | • Auto earned pricing increases of 1% represent the portion of the 2% increase in written pricing for 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. Although moderating, written pricing increases in 2008 included the effect of policyholders purchasing newer vehicle models in place of older models. Homeowners’ earned pricing increases of 3% primarily reflect the earning of a blend of mid-single digit written pricing increases recognized over the last nine months of 2007 and 2% written pricing increases recognized in the first nine 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. |
• | AARP earned premium grew $215, or 9%, reflecting growth in the size of the AARP target market, the effect of direct marketing programs and the effect of cross selling homeowners insurance to insureds who have auto policies. |
• | Agency earned premium grew $55, or 5%, as a result of an increase in the number of agency appointments and further refinement of the Dimensions class plans first introduced in 2003. Dimensions allows Personal Lines to write a broader class of risks. The plan, which is available through the Company’s network of independent agents, was enhanced beginning in the third quarter of 2006 as “Dimensions with Auto Packages” and the enhanced plan is now offered in 34 states with four distinct package offerings as of December 31, 2007. |
• | Other earned premium decreased by $141, primarily due to the sale of Omni on November 30, 2006 and a strategic decision to reduce other affinity business. Omni accounted for earned premiums of $127 for the year ended December 31, 2006. |
131
Table of Contents
New business premium | • Omni accounted for $25 of new business written premium during the 2006 calendar year. Excluding Omni business, auto new business written premium decreased by $20, or 5%, to $424, for the year ended December 31, 2007. The decrease in auto new business premium was due to a decrease in AARP and Agency auto new business as a result of increased competition. Homeowners’ new business written premium decreased by $21, or 13%, primarily due to a decrease in Agency new business, partially offset by an increase in AARP new business. | |
Premium renewal retention | • Premium renewal retention for auto increased from 87% to 88% for the year ended December 31, 2007, primarily due to the sale of the Omni non-standard auto business during 2006, which had a lower premium renewal retention than the Company’s standard auto business. Excluding Omni business, premium renewal retention decreased slightly, from 89% to 88%, as renewal retention remained flat in AARP and decreased in Agency. Premium renewal retention for homeowners increased from 94% to 96% for the year ended December 31, 2007, primarily due to an increase in retention of Agency business. | |
Earned pricing increase (decrease) | • The trend in earned pricing during 2007 was primarily a reflection of the written pricing changes in the last six months of 2006 and the first six months of 2007. Written pricing remained flat in auto primarily due to an extended period of favorable results factoring into the rate setting process. Homeowners’ written pricing continued to increase due largely to increases in insurance to value and an increase in the value of insured properties. Insurance to value is the ratio of the amount of insurance purchased to the value of the insured property. | |
Policies in-force | • Consistent with the growth in earned premium, the number of policies in-force has increased in auto and homeowners. The growth in policies in-force does not correspond directly with the growth in earned premiums due to the effect of earned pricing changes and because policy in-force counts are as of a point in time rather than over a period of time. |
132
Table of Contents
Personal Lines - Underwriting Summary | 2008 | 2007 | 2006 | |||||||||
Written premiums | $ | 3,925 | $ | 3,947 | $ | 3,877 | ||||||
Change in unearned premium reserve | (1 | ) | 58 | 117 | ||||||||
Earned premiums | 3,926 | 3,889 | 3,760 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 2,542 | 2,576 | 2,396 | |||||||||
Current accident year catastrophes | 258 | 125 | 120 | |||||||||
Prior accident years | (51 | ) | (4 | ) | (38 | ) | ||||||
Total losses and loss adjustment expenses | 2,749 | 2,697 | 2,478 | |||||||||
Amortization of deferred policy acquisition costs | 633 | 617 | 622 | |||||||||
Insurance operating costs and expenses | 264 | 253 | 231 | |||||||||
Underwriting results | $ | 280 | $ | 322 | $ | 429 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 64.8 | 66.2 | 63.8 | |||||||||
Current accident year catastrophes | 6.6 | 3.2 | 3.2 | |||||||||
Prior accident years | (1.3 | ) | (0.1 | ) | (1.0 | ) | ||||||
Total loss and loss adjustment expense ratio | 70.0 | 69.3 | 65.9 | |||||||||
Expense ratio | 22.8 | 22.4 | 22.7 | |||||||||
Combined ratio | 92.9 | 91.7 | 88.6 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 6.6 | 3.2 | 3.2 | |||||||||
Prior accident years | 0.2 | 0.2 | (0.4 | ) | ||||||||
Total catastrophe ratio | 6.8 | 3.4 | 2.8 | |||||||||
Combined ratio before catastrophes | 86.1 | 88.3 | 85.8 | |||||||||
Combined ratio before catastrophes and prior accident year development | 87.6 | 88.6 | 86.4 | |||||||||
Other revenues [1] | $ | 135 | $ | 141 | $ | 135 | ||||||
[1] | Represents servicing revenue |
Combined Ratios | 2008 | 2007 | 2006 | |||||||||
Automobile | 91.0 | 96.2 | 93.6 | |||||||||
Homeowners | 97.6 | 79.8 | 74.0 | |||||||||
Total | 92.9 | 91.7 | �� | 88.6 | ||||||||
Change in underwriting results | ||||
Increase in earned premiums | $ | 37 | ||
Losses and loss adjustment expenses | ||||
Ratio change — A decrease in the current accident loss and loss adjustment expense ratio before catastrophes | 59 | |||
Volume change — Increase in current accident year losses and loss adjustment expenses before catastrophes due to the increase in earned premium | (25 | ) | ||
Decrease in current accident year losses and loss adjustment expenses before catastrophes | 34 | |||
Catastrophes — Increase in current accident year catastrophes | (133 | ) | ||
Reserve changes — An increase in net favorable prior accident year reserve development | 47 | |||
Net increase in losses and loss adjustment expenses | (52 | ) | ||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (16 | ) | ||
Increase in insurance operating costs and expenses | (11 | ) | ||
Increase in operating expenses | (27 | ) | ||
Decrease in underwriting results from 2007 to 2008 | $ | (42 | ) | |
133
Table of Contents
Change in underwriting results | ||||
Earned premiums | ||||
Excluding Omni, a 7% increase in earned premium | $ | 251 | ||
Decrease in earned premium due to the sale of Omni in the fourth quarter of 2006 | (122 | ) | ||
Net increase in earned premiums | 129 | |||
Losses and loss adjustment expenses | ||||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premiums, excluding Omni | (160 | ) | ||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes, excluding Omni | (125 | ) | ||
Sale of Omni — Decrease in current accident year loss and loss adjustment expenses before catastrophes as a result of the sale of Omni | 105 | |||
Net increase in current accident year loss and loss adjustment expenses before catastrophes | (180 | ) | ||
Catastrophes — Increase in current accident year catastrophe losses | (5 | ) | ||
Reserve changes — A decrease in net favorable prior accident year reserve development | (34 | ) | ||
Net increase in losses and loss adjustment expenses | (219 | ) | ||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 5 | |||
Increase in insurance operating costs and expenses | (22 | ) | ||
Net increase in operating expenses | (17 | ) | ||
Decrease in underwriting results from 2006 to 2007 | $ | (107 | ) | |
134
Table of Contents
135
Table of Contents
Premiums [1] | 2008 | 2007 | 2006 | |||||||||
Written premiums | $ | 2,696 | $ | 2,747 | $ | 2,728 | ||||||
Earned premiums | $ | 2,724 | $ | 2,736 | $ | 2,652 |
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Premium Measures | 2008 | 2007 | 2006 | |||||||||
New business premium | $ | 446 | $ | 481 | $ | 533 | ||||||
Premium renewal retention | 82 | % | 84 | % | 87 | % | ||||||
Written pricing increase (decrease) | (2 | %) | (2 | %) | 1 | % | ||||||
Earned pricing increase (decrease) | (2 | %) | (1 | %) | 1 | % | ||||||
Policies in-force end of period | 1,055,463 | 1,038,542 | 991,979 |
New business premium | • New business written premium was down $35, or 7%, driven by a decrease in new package and commercial automobile business. New business for package and commercial auto business declined due to increased competition despite the use of lower pricing on targeted accounts and an increase in commissions paid to agents. New business written premium for workers’ compensation was up modestly. | |
Premium renewal retention | • Premium renewal retention decreased from 84% to 82% due largely to the effect of a decrease in retention of workers’ compensation business, including the effect of larger written pricing decreases. | |
Earned pricing increase (decrease) | • 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 2008 were primarily a reflection of written pricing decreases of 2% over the last nine months of 2007 and 2% over the first nine months of 2008. | |
Policies in-force | • While earned premium was slightly down for 2008, the number of policies in-force has increased 2%. 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. |
136
Table of Contents
New business premium | • New business written premium for Small Commercial decreased by $52, or 10%, as increased competition led to a reduction in new business for workers’ compensation, package business and commercial auto. While the Company has focused on increasing new business from its agents and expanding writings in certain territories, actions taken by some of the Company’s competitors to increase market share and increase business appetite in certain classes of risks may be contributing to the Company’s lower new business growth. Also contributing to the decrease in new business premium is lower average premium per account partly due to writing more liability-only policies. | |
Premium renewal retention | • Premium renewal retention for Small Commercial decreased due, in part, to lower retention of larger accounts and a reduction in average premium per account. | |
Earned pricing increase (decrease) | • As written premium is earned over the 12-month term of the policies, the earned pricing changes during 2007 are primarily a reflection of the written pricing changes over the last six months of 2006 and the first six months of 2007. | |
Policies in-force | • Consistent with the increase in earned premium, the number of policies in force has increased. 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, changes in the average premium per policy and because policy in force counts are as of a point in time rather than over a period of time. |
Small Commercial — Underwriting Summary | 2008 | 2007 | 2006 | |||||||||
Written premiums | $ | 2,696 | $ | 2,747 | $ | 2,728 | ||||||
Change in unearned premium reserve | (28 | ) | 11 | 76 | ||||||||
Earned premiums | 2,724 | 2,736 | 2,652 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 1,447 | 1,594 | 1,509 | |||||||||
Current accident year catastrophes | 122 | 28 | 34 | |||||||||
Prior accident years | (89 | ) | (209 | ) | (75 | ) | ||||||
Total losses and loss adjustment expenses | 1,480 | 1,413 | 1,468 | |||||||||
Amortization of deferred policy acquisition costs | 636 | 635 | 634 | |||||||||
Insurance operating costs and expenses | 171 | 180 | 128 | |||||||||
Underwriting results | $ | 437 | $ | 508 | $ | 422 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 53.1 | 58.3 | 56.9 | |||||||||
Current accident year catastrophes | 4.5 | 1.0 | 1.3 | |||||||||
Prior accident years | (3.3 | ) | (7.6 | ) | (2.8 | ) | ||||||
Total loss and loss adjustment expense ratio | 54.3 | 51.6 | 55.3 | |||||||||
Expense ratio | 29.1 | 29.2 | 28.5 | |||||||||
Policyholder dividend ratio | 0.5 | 0.6 | 0.2 | |||||||||
Combined ratio | 84.0 | 81.4 | 84.1 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 4.5 | 1.0 | 1.3 | |||||||||
Prior accident years | (0.1 | ) | 0.2 | (0.7 | ) | |||||||
Total catastrophe ratio | 4.4 | 1.2 | 0.6 | |||||||||
Combined ratio before catastrophes | 79.6 | 80.3 | 83.5 | |||||||||
Combined ratio before catastrophes and prior accident year development | 82.8 | 88.0 | 85.6 | |||||||||
137
Table of Contents
Change in underwriting results | ||||
Decrease in earned premiums | $ | (12 | ) | |
Losses and loss adjustment expenses | ||||
Ratio change — A decrease in the current accident loss and loss adjustment expense ratio before catastrophes | 140 | |||
Volume change — Decrease in current accident year losses and loss adjustment expenses before catastrophes due to the decrease in earned premium | 7 | |||
Decrease in current accident year losses and loss adjustment expenses before catastrophes | 147 | |||
Catastrophes — Increase in current accident year catastrophes | (94 | ) | ||
Reserve changes — Decrease in net favorable prior accident year reserve development | (120 | ) | ||
Net increase in losses and loss adjustment expenses | (67 | ) | ||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (1 | ) | ||
Decrease in insurance operating costs and expenses | 9 | |||
Decrease in operating expenses | 8 | |||
Decrease in underwriting results from 2007 to 2008 | $ | (71 | ) | |
138
Table of Contents
Change in underwriting results | ||||
Increase in earned premiums | $ | 84 | ||
Losses and loss adjustment expenses | ||||
Volume change — Increase in current accident year loss and loss adjustment expenses before catastrophes due to the increase in earned premium | (47 | ) | ||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes | (38 | ) | ||
Net increase in current accident year loss and loss adjustment expenses before catastrophes | (85 | ) | ||
Catastrophes — Decrease in current accident year catastrophe losses | 6 | |||
Reserve changes — Increase in net favorable prior accident year reserve development | 134 | |||
Net decrease in losses and loss adjustment expenses | 55 | |||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (1 | ) | ||
Increase in insurance operating costs and expenses | (52 | ) | ||
Increase in operating expenses | (53 | ) | ||
Increase in underwriting results from 2006 to 2007 | $ | 86 | ||
139
Table of Contents
Premiums [1] | 2008 | 2007 | 2006 | |||||||||
Written premiums | $ | 2,242 | $ | 2,326 | $ | 2,515 | ||||||
Earned premiums | $ | 2,299 | $ | 2,420 | $ | 2,523 |
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Premium Measures | 2008 | 2007 | 2006 | |||||||||
New business premium | $ | 420 | $ | 394 | $ | 464 | ||||||
Premium renewal retention | 79 | % | 78 | % | 82 | % | ||||||
Written pricing decrease | (5 | %) | (5 | %) | (5 | %) | ||||||
Earned pricing decrease | (6 | %) | (5 | %) | (5 | %) | ||||||
Policies in-force as of end of period | 90,478 | 88,254 | 86,640 |
New business premium | • New business written premium increased by $26, or 7%, in 2008 as an increase in new business written premium for workers’ compensation was partially offset by a decrease in new business for general liability, marine and commercial auto. 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 78% to 79% due largely to an increase in retention of property and marine business, partially offset by the effect of larger written pricing decreases on workers’ compensation and property business. The Company continued to take actions to protect renewals in 2008, including the use of reduced pricing on targeted accounts. | |
Earned pricing 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 in 2008 were primarily a reflection of mid-single digit written pricing decreases over the last nine months of 2007 and the first nine 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 | • The number of policies in-force increased by 3%, due largely to growth on smaller accounts. |
140
Table of Contents
New business premium | • The decrease in new business written premium was primarily due to continued price competition and the effect of state-mandated rate reductions in workers’ compensation. New business written premium declined in all lines except workers’ compensation. As written premium is earned over the 12-month term of the policies, the earned pricing changes during 2007 were primarily a reflection of the written pricing changes over the last six months of 2006 and the first six months of 2007. | |
Premium renewal retention | • The decrease in premium renewal retention was primarily due to continued price competition and the effect of state-mandated rate reductions in workers’ compensation. Premium renewal retention decreased in all lines of business, including property, commercial auto, general liability, workers’ compensation and marine. | |
Earned pricing increase (decrease) | • Earned pricing decreased in all lines of business, including property, commercial auto, general liability, workers’ compensation and marine. | |
Policies in-force | • Despite the decrease in earned premium, the number of policies in force has increased. The change in policies in force does not correspond directly with the change in earned premiums due to a reduction in the average premium per policy and because policy in force counts are as of a point in time rather than over a period of time. |
Middle Market — Underwriting Summary | 2008 | 2007 | 2006 | |||||||||
Written premiums | $ | 2,242 | $ | 2,326 | $ | 2,515 | ||||||
Change in unearned premium reserve | (57 | ) | (94 | ) | (8 | ) | ||||||
Earned premiums | 2,299 | 2,420 | 2,523 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 1,460 | 1,561 | 1,577 | |||||||||
Current accident year catastrophes | 116 | 15 | 36 | |||||||||
Prior accident years | (134 | ) | (16 | ) | 13 | |||||||
Total losses and loss adjustment expenses | 1,442 | 1,560 | 1,626 | |||||||||
Amortization of deferred policy acquisition costs | 513 | 529 | 544 | |||||||||
Insurance operating costs and expenses | 175 | 174 | 139 | |||||||||
Underwriting results | $ | 169 | $ | 157 | $ | 214 | ||||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 63.5 | 64.5 | 62.6 | |||||||||
Current accident year catastrophes | 5.1 | 0.6 | 1.5 | |||||||||
Prior accident years | (5.9 | ) | (0.7 | ) | 0.5 | |||||||
Total loss and loss adjustment expense ratio | 62.7 | 64.5 | 64.6 | |||||||||
Expense ratio | 29.0 | 28.5 | 26.7 | |||||||||
Policyholder dividend ratio | 0.9 | 0.6 | 0.2 | |||||||||
Combined ratio | 92.6 | 93.5 | 91.5 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 5.1 | 0.6 | 1.5 | |||||||||
Prior accident years | (0.5 | ) | (0.1 | ) | — | |||||||
Total catastrophe ratio | 4.6 | 0.5 | 1.4 | |||||||||
Combined ratio before catastrophes | 88.1 | 93.0 | 90.1 | |||||||||
Combined ratio before catastrophes and prior accident year development | 93.4 | 93.5 | 89.6 | |||||||||
141
Table of Contents
Change in underwriting results | ||||
Decrease in earned premiums | $ | (121 | ) | |
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 | 78 | |||
Ratio change — A decrease in the current accident year loss and loss adjustment expense ratio before catastrophes | 23 | |||
Decrease in current accident year loss and loss adjustment expenses before catastrophes | 101 | |||
Catastrophes — Increase in current accident year catastrophe losses | (101 | ) | ||
Reserve changes — Increase in net favorable prior accident year reserve development | 118 | |||
Net decrease in losses and loss adjustment expenses | 118 | |||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 16 | |||
Increase in insurance operating costs and expenses | (1 | ) | ||
Decrease in operating expenses | 15 | |||
Increase in underwriting results from 2007 to 2008 | $ | 12 | ||
142
Table of Contents
Change in underwriting results | ||||
Decrease in earned premiums | $ | (103 | ) | |
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year loss and loss adjustment expenses before catastrophes due to the decrease in earned premium | 61 | |||
Ratio change — An increase in the current accident year loss and loss adjustment expense ratio before catastrophes | (45 | ) | ||
Net decrease in current accident year loss and loss adjustment expenses before catastrophes | 16 | |||
Catastrophes — Decrease in current accident year catastrophe losses | 21 | |||
Reserve changes — Change to net favorable prior accident year reserve development | 29 | |||
Net decrease in losses and loss adjustment expenses | 66 | |||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 15 | |||
Increase in insurance operating costs and expenses | (35 | ) | ||
Net increase in operating expenses | (20 | ) | ||
Decrease in underwriting results from 2006 to 2007 | $ | (57 | ) | |
143
Table of Contents
144
Table of Contents
Written Premiums [1] | 2008 | 2007 | 2006 | |||||||||
Property | $ | 50 | $ | 111 | $ | 142 | ||||||
Casualty | 538 | 534 | 582 | |||||||||
Professional liability, fidelity and surety | 691 | 689 | 697 | |||||||||
Other | 82 | 81 | 117 | |||||||||
Total | $ | 1,361 | $ | 1,415 | $ | 1,538 | ||||||
Earned Premiums [1] | ||||||||||||
Property | $ | 87 | $ | 133 | $ | 144 | ||||||
Casualty | 526 | 543 | 579 | |||||||||
Professional liability, fidelity and surety | 685 | 685 | 650 | |||||||||
Other | 84 | 85 | 120 | |||||||||
Total | $ | 1,382 | $ | 1,446 | $ | 1,493 | ||||||
[1] | The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
• | Property earned premiums decreased by $46, or 35%, primarily due to the Company’s decision to stop writing specialty property business with large, national accounts and the effect of increased competition for core excess and surplus lines business. 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 decreased by $17, or 3%, primarily because of lower earned premium from captive programs and a decline in new business premium on loss-sensitive business written with larger accounts over the last nine months of 2007 and first three months of 2008. |
• | Professional liability, fidelity and surety earned premium was flat. Earned premium for professional liability was relatively flat as the effect of earned pricing decreases in 2008 and the effect of a decline in new business written premium over the last nine months of 2007 and the first six months of 2008 were largely offset by the effect of a decrease in the portion of risks ceded to outside reinsurers. Earned premium for fidelity and surety business was also relatively flat as a modest decrease in commercial surety was largely offset by a modest increase in contract surety. |
• | Within the “Other” category, earned premium remained relatively flat from 2007 to 2008. The “Other” category of earned premiums includes premiums assumed under inter-segment arrangements. |
• | Property earned premiums decreased by $11, or 8%, primarily due to lower premium renewal retention and the effect of an arrangement with Berkshire Hathaway to share premiums written under subscription policies. Under the arrangement with Berkshire Hathaway that commenced in the second quarter of 2007, a share of excess and surplus lines business that was previously written entirely by the Company is now being written in conjunction with Berkshire Hathaway under subscription policies, whereby both companies share, or participate, in the business written. The arrangement with Berkshire Hathaway enables the Company to offer its insureds larger policy limits and thereby enhance its competitive position in the marketplace. The decrease in earned premium was partially offset by the effect of earned pricing increases, new business growth, lower reinsurance costs and a decrease in reinstatement premium payable to reinsurers. Renewal retention has decreased in 2007, primarily due to increased competition on national account business as well as in the standard excess and surplus lines market. After experiencing significant rate increases throughout 2006 and smaller rate increases for the first six months of 2007, written pricing decreased in the last six months of the year. While new business decreased in the fourth quarter of 2007, new business increased for the full year, largely because the Company had significantly curtailed new business in 2006 in order to reduce catastrophe loss exposures in certain geographic areas. |
145
Table of Contents
• | Casualty earned premiums decreased by $36, or 6%, for the year ended December 31, 2007, primarily because of a decline in new business written premium and lower premium renewal retention on business written through industry trade groups. Also contributing to the decrease in earned premiums was an increase in the estimated return premium due to insureds under retrospectively-rated policies. |
• | Professional liability, fidelity and surety earned premium grew $35, or 5%, for the year ended December 31, 2007 due to an increase in earned premiums in professional liability and surety business. The increase in earned premium from professional liability business was primarily due to a decrease in the portion of risks ceded to outside reinsurers and an increase in the mix of lower limit middle market professional liability premium, partially offset by the effect of earned pricing decreases and a decrease in new business written premium. A lower frequency of class action cases in the past couple of years has put downward pressure on rates during 2006 and 2007. The increase in earned premium from surety business was primarily due to an increase in public construction spending and construction costs, resulting in more bonded work programs for current clients and larger bond limits. |
• | Within the “other” category, earned premium decreased by $35, or 29%. The “Other” category of earned premiums includes premiums assumed under inter-segment arrangements. Beginning in the third quarter of 2006, the Company reduced the premiums assumed by Specialty Commercial under inter-segment arrangements covering certain liability claims. |
Specialty Commercial — Underwriting Summary | 2008 | 2007 | 2006 | |||||||||
Written premiums | $ | 1,361 | $ | 1,415 | $ | 1,538 | ||||||
Change in unearned premium reserve | (21 | ) | (31 | ) | 45 | |||||||
Earned premiums | 1,382 | 1,446 | 1,493 | |||||||||
Losses and loss adjustment expenses | ||||||||||||
Current accident year before catastrophes | 941 | 961 | 1,025 | |||||||||
Current accident year catastrophes | 47 | 9 | 9 | |||||||||
Prior accident years | (81 | ) | 84 | 36 | ||||||||
Total losses and loss adjustment expenses | 907 | 1,054 | 1,070 | |||||||||
Amortization of deferred policy acquisition costs | 313 | 323 | 306 | |||||||||
Insurance operating costs and expenses | 91 | 87 | 71 | |||||||||
Underwriting results | $ | 71 | $ | (18 | ) | $ | 46 | |||||
Loss and loss adjustment expense ratio | ||||||||||||
Current accident year before catastrophes | 68.1 | 66.6 | 68.4 | |||||||||
Current accident year catastrophes | 3.4 | 0.6 | 0.6 | |||||||||
Prior accident years | (5.8 | ) | 5.8 | 2.5 | ||||||||
Total loss and loss adjustment expense ratio | 65.6 | 73.0 | 71.5 | |||||||||
Expense ratio | 28.3 | 27.4 | 25.6 | |||||||||
Policyholder dividend ratio | 0.9 | 0.9 | (0.1 | ) | ||||||||
Combined ratio | 94.8 | 101.3 | 97.0 | |||||||||
Catastrophe ratio | ||||||||||||
Current accident year | 3.4 | 0.6 | 0.6 | |||||||||
Prior accident years | (1.2 | ) | 0.1 | (2.6 | ) | |||||||
Total catastrophe ratio | 2.2 | 0.7 | (2.0 | ) | ||||||||
Combined ratio before catastrophes | 92.6 | 100.6 | 99.0 | |||||||||
Combined ratio before catastrophes and prior accident year development | 97.3 | 94.9 | 93.9 | |||||||||
Other revenues [1] | $ | 371 | $ | 354 | $ | 337 | ||||||
[1] | Represents servicing revenue. |
146
Table of Contents
Change in underwriting results | ||||
Decrease in earned premiums | $ | (64 | ) | |
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 | 42 | |||
Ratio change — Increase in the current accident year non-catastrophe loss and loss adjustment expense ratio before catastrophes | (22 | ) | ||
Net decrease in current accident year losses and loss adjustment expenses before catastrophes | 20 | |||
Catastrophes — Increase in current accident year catastrophe losses | (38 | ) | ||
Reserve changes — A change to net favorable prior accident year reserve development | 165 | |||
Net decrease in losses and loss adjustment expenses | 147 | |||
Operating expenses | ||||
Decrease in amortization of deferred policy acquisition costs | 10 | |||
Increase in insurance operating costs and expenses | (4 | ) | ||
Net decrease in operating expenses | 6 | |||
Increase in underwriting results from 2007 to 2008 | $ | 89 | ||
147
Table of Contents
Change in underwriting results | ||||
Decrease in earned premiums | $ | (47 | ) | |
Losses and loss adjustment expenses | ||||
Volume change — Decrease in current accident year loss and loss adjustment expenses before catastrophes due to the decrease in earned premium | 31 | |||
Ratio change — Decrease in the current accident year non-catastrophe loss and loss adjustment expense ratio before catastrophes | 33 | |||
Total decrease in current accident year loss and loss adjustment expenses before catastrophes | 64 | |||
Reserve changes — Increase in net unfavorable prior accident year reserve development | (48 | ) | ||
Net decrease in losses and loss adjustment expenses | 16 | |||
Operating expenses | ||||
Increase in amortization of deferred policy acquisition costs | (17 | ) | ||
Increase in insurance operating costs and expenses | (16 | ) | ||
Increase in operating expenses | (33 | ) | ||
Decrease in underwriting results from 2006 to 2007 | $ | (64 | ) | |
148
Table of Contents
2008 | 2007 | 2006 | ||||||||||
Written premiums | $ | 7 | $ | 5 | $ | 4 | ||||||
Change in unearned premium reserve | — | — | (1 | ) | ||||||||
Earned premiums | 7 | 5 | 5 | |||||||||
Losses and loss adjustment expenses — prior year | 129 | 193 | 360 | |||||||||
Insurance operating costs and expenses | 23 | 22 | 11 | |||||||||
Underwriting results | (145 | ) | (210 | ) | (366 | ) | ||||||
Net investment income | 197 | 248 | 261 | |||||||||
Net realized capital gains (losses) | (208 | ) | (12 | ) | 26 | |||||||
Other expenses | (3 | ) | (1 | ) | (1 | ) | ||||||
Net income (loss) before income taxes | (159 | ) | 25 | (80 | ) | |||||||
Income tax benefit | 62 | 5 | 45 | |||||||||
Net income (loss) | $ | (97 | ) | $ | 30 | $ | (35 | ) | ||||
• | A $65 increase in underwriting results, primarily due to a $64 decrease in unfavorable prior year loss development. Reserve development in 2008 included $50 of asbestos reserve strengthening and $53 of environmental reserve strengthening. In 2007, reserve development included $99 principally as a result of an adverse arbitration decision and $25 of environmental reserve strengthening. |
• | A $51 decrease in net investment income, primarily as a result of net losses on limited partnerships and other alternative investments in 2008 and decreased fixed maturity income. |
• | A $196 increase in net realized capital losses, primarily due to realized losses in 2008 from impairments of subordinated fixed maturities and preferred equity securities in the financial services sector as well as of securitized assets. |
• | A $57 increase in income tax benefit, primarily as a result of a change from pre-tax income in 2007 to a pre-tax loss in 2008. |
• | A $156 increase in underwriting results, primarily due to a $167 decrease in unfavorable prior year loss development. Reserve development in 2007 included $99 principally as a result of an adverse arbitration decision and $25 of environmental reserve strengthening. In 2006, reserve development included a $243 reduction in net reinsurance recoverables, $43 of environmental reserve strengthening and $12 of reserve strengthening for assumed reinsurance. |
• | A $13 decrease in net investment income, primarily as a result of a decrease in invested assets resulting from net losses and loss adjustment expenses paid. |
• | A change from $26 of net realized capital gains in 2006 to $12 of net realized capital losses in 2007, primarily due to an increase in impairments and decreases in the fair value of non-qualifying derivatives attributable to changes in value associated with credit derivatives due to credit spreads widening. |
• | A $40 decrease in income tax benefit, primarily as a result of a change from a pre-tax loss in 2006 to pre-tax income in 2007. |
149
Table of Contents
150
Table of Contents
Asbestos | Environmental | All Other [1][6] | Total | |||||||||||||
2008 | ||||||||||||||||
Beginning liability — net [2] [3] | $ | 1,998 | $ | 251 | $ | 1,888 | $ | 4,137 | ||||||||
Losses and loss adjustment expenses incurred | 68 | 54 | 7 | 129 | ||||||||||||
Losses and loss adjustment expenses paid | (182 | ) | (36 | ) | (267 | ) | (485 | ) | ||||||||
Ending liability — net [2] [3] | $ | 1,884 [5] | $ | 269 | $ | 1,628 | $ | 3,781 | ||||||||
2007 | ||||||||||||||||
Beginning liability — net [2] [3] | $ | 2,242 | $ | 316 | $ | 1,858 | $ | 4,416 | ||||||||
Losses and loss adjustment expenses incurred | 43 | 28 | 122 | 193 | ||||||||||||
Losses and loss adjustment expenses paid | (287 | ) | (93 | ) | (217 | ) | (597 | ) | ||||||||
Reallocation of reserves for unallocated loss adjustment expenses [4] | — | — | 125 | 125 | ||||||||||||
Ending liability — net [2] [3] | $ | 1,998 | $ | 251 | $ | 1,888 | $ | 4,137 | ||||||||
2006 | ||||||||||||||||
Beginning liability — net [2] [3] | $ | 2,291 | $ | 360 | $ | 2,240 | $ | 4,891 | ||||||||
Losses and loss adjustment expenses incurred | 314 | 62 | (16 | ) | 360 | |||||||||||
Losses and loss adjustment expenses paid | (363 | ) | (106 | ) | (366 | ) | (835 | ) | ||||||||
Ending liability — net [2] [3] | $ | 2,242 | $ | 316 | $ | 1,858 | $ | 4,416 | ||||||||
[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 $12 and $6, respectively, as of December 31, 2008, $9 and $6, respectively, as of December 31, 2007, and $9 and $6, respectively, as of December 31, 2006. Total net losses and loss adjustment expenses incurred in Ongoing Operations for the years ended December 31, 2008, 2007 and 2006 includes $16, $10 and $11, respectively, related to asbestos and environmental claims. Total net losses and loss adjustment expenses paid in Ongoing Operations for the years ended December 31, 2008, 2007 and 2006 includes $13, $10 and $12, respectively, related to asbestos and environmental claims. | |
[3] | Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were $2,498 and $309, respectively, as of December 31, 2008, $2,707 and $290, respectively, as of December 31, 2007, and $3,242 and $362, respectively, as of December 31, 2006. | |
[4] | Prior to the second quarter of 2007, the Company evaluated the adequacy of the reserves for unallocated loss adjustment expenses on a company-wide basis. During the second quarter of 2007, the Company refined its analysis of the reserves at the segment level, resulting in the reallocation of reserves among segments, including a reallocation of reserves from Ongoing Operations to Other Operations. | |
[5] | The one year and average three year net paid amounts for asbestos claims, including Ongoing Operations, were $189 and $283, respectively, resulting in a one year net survival ratio of 10.0 and a three year net survival ratio of 6.7. Net survival ratio is the quotient of the net carried reserves divided by the average annual payment amount and is an indication of the number of years that the net carried reserve would last (i.e. survive) if the future annual claim payments were consistent with the calculated historical average. | |
[6] | The Company includes its allowance for uncollectible reinsurance in the “All Other” category of reserves. When the Company commutes a ceded reinsurance contract or settles a ceded reinsurance dispute, the portion of the allowance for uncollectible reinsurance attributable to that commutation or settlement, if any, is reclassified to the appropriate cause of loss. |
151
Table of Contents
As of December 31, 2008
Number of | Total | |||||||
Gross Environmental Reserves as of September 30, 2008 [1] | Accounts [2] | Reserves | ||||||
Accounts with future exposure > $2.5 | 9 | $ | 44 | |||||
Accounts with future exposure < $2.5 | 565 | 100 | ||||||
Other direct [3] | — | 62 | ||||||
Total Direct | 574 | 206 | ||||||
Assumed Reinsurance | 61 | |||||||
London Market | 56 | |||||||
Total gross environmental reserves as of September 30, 2008 [1] | 323 | |||||||
Gross paid loss activity for the fourth quarter 2008 | (16 | ) | ||||||
Gross incurred loss activity for the fourth quarter 2008 | 2 | |||||||
Total gross environmental reserves as of December 31, 2008 [4] [5] | $ | 309 | ||||||
[1] | Gross Environmental Reserves based on the third quarter 2008 environmental reserve study. | |
[2] | Number of accounts established as of June 2008. | |
[3] | Includes unallocated IBNR. | |
[4] | The one year gross paid amount for total environmental claims is $52, resulting in a one year gross survival ratio of 5.9. | |
[5] | The three year average gross paid amount for total environmental claims is $95, resulting in a three year gross survival ratio of 3.2. |
• | Structured Settlements are those accounts where the Company has reached an agreement with the insured as to the amount and timing of the claim payments to be made to the insured. |
• | The Wellington subcategory includes insureds that entered into the “Wellington Agreement” dated June 19, 1985. The Wellington Agreement provided terms and conditions for how the signatory asbestos producers would access their coverage from the signatory insurers. |
• | The Other Major Asbestos Defendants subcategory represents insureds included in Tiers 1 and 2, as defined by Tillinghast that are not Wellington signatories and have not entered into structured settlements with The Hartford. The Tier 1 and 2 classifications are meant to capture the insureds for which there is expected to be significant exposure to asbestos claims. |
• | The Unallocated category includes an estimate of the reserves necessary for asbestos claims related to direct insureds that have not previously tendered asbestos claims to the Company and exposures related to liability claims that may not be subject to an aggregate limit under the applicable policies. |
152
Table of Contents
As of December 31, 2008
Number of | All Time | Total | All Time | |||||||||||||
Gross Asbestos Reserves as of June 30, 2008 [1] | Accounts [2] | Paid [3] | Reserves | Ultimate [3] | ||||||||||||
Major asbestos defendants [5] | ||||||||||||||||
Structured settlements (includes 3 Wellington accounts) | 5 | $ | 194 | $ | 408 | $ | 602 | |||||||||
Wellington (direct only) | 31 | 968 | 67 | 1,035 | ||||||||||||
Other major asbestos defendants | 29 | 482 | 168 | 650 | ||||||||||||
No known policies (includes 3 Wellington accounts) | 5 | — | — | — | ||||||||||||
Accounts with future exposure > $2.5 | 74 | 715 | 603 | 1,318 | ||||||||||||
Accounts with future exposure < $2.5 | 1,090 | 282 | 119 | 401 | ||||||||||||
Unallocated [6] | 1,653 | 444 | 2,097 | |||||||||||||
Total Direct | 4,294 | 1,809 | 6,103 | |||||||||||||
Assumed Reinsurance | 1,058 | 497 | 1,555 | |||||||||||||
London Market | 558 | 370 | 928 | |||||||||||||
Total as of June 30, 2008 [1] | 5,910 | 2,676 | 8,586 | |||||||||||||
Gross paid loss activity for the third quarter and fourth quarter 2008 | 183 | (183 | ) | — | ||||||||||||
Gross incurred loss activity for the third quarter and fourth quarter 2008 | — | 5 | 5 | |||||||||||||
Total as of December 31, 2008 [4] | $ | 6,093 | $ | 2,498 | $ | 8,591 | ||||||||||
[1] | Gross Asbestos Reserves based on the second quarter 2008 asbestos reserve study. | |
[2] | An account may move between categories from one evaluation to the next. Reclassifications were made as a result of the reserve evaluation completed in the second quarter of 2008. | |
[3] | “All Time Paid” represents the total payments with respect to the indicated claim type that have already been made by the Company as of the indicated balance sheet date. “All Time Ultimate” represents the Company’s estimate, as of the indicated balance sheet date, of the total payments that are ultimately expected to be made to fully settle the indicated payment type. The amount is the sum of the amounts already paid (e.g. “All Time Paid”) and the estimated future payments (e.g. the amount shown in the column labeled “Total Reserves”). | |
[4] | Survival ratio is a commonly used industry ratio for comparing reserve levels between companies. While the method is commonly used, it is not a predictive technique. Survival ratios may vary over time for numerous reasons such as large payments due to the final resolution of certain asbestos liabilities, or reserve re-estimates. The survival ratio is computed by dividing the recorded reserves by the average of the past three years of payments. The ratio is the calculated number of years the recorded reserves would survive if future annual payments were equal to the average annual payments for the past three years. The 3-year gross survival ratio of 5.7 as of December 31, 2008 is computed based on total paid losses of $1.307 billion for the period from January 1, 2006 to December 31, 2008. As of December 31, 2008, the one year gross paid amount for total asbestos claims is $294 resulting in a one year gross survival ratio of 8.5. | |
[5] | Includes 25 open accounts at June 30, 2008. Included 26 open accounts at June 30, 2007. | |
[6] | Includes closed accounts (exclusive of Major Asbestos Defendants) and unallocated IBNR. |
153
Table of Contents
Asbestos [1] | Environmental [1] | |||||||||||||||
Paid | Incurred | Paid | Incurred | |||||||||||||
Losses & LAE | Losses & LAE | Losses & LAE | Losses & LAE | |||||||||||||
2008 | ||||||||||||||||
Gross | ||||||||||||||||
Direct | $ | 207 | $ | 76 | $ | 32 | $ | 69 | ||||||||
Assumed — Domestic | 61 | — | 9 | (17 | ) | |||||||||||
London Market | 19 | — | 6 | 13 | ||||||||||||
Total | 287 | 76 | 47 | 65 | ||||||||||||
Ceded | (105 | ) | (8 | ) | (11 | ) | (11 | ) | ||||||||
Net | $ | 182 | $ | 68 | $ | 36 | $ | 54 | ||||||||
2007 | ||||||||||||||||
Gross | ||||||||||||||||
Direct | $ | 251 | $ | (289 | ) | $ | 90 | $ | 43 | |||||||
Assumed — Domestic | 112 | 72 | 16 | — | ||||||||||||
London Market | 31 | 76 | 8 | — | ||||||||||||
Total | 394 | (141 | ) | 114 | 43 | |||||||||||
Ceded | (107 | ) | 184 | (21 | ) | (15 | ) | |||||||||
Net | $ | 287 | $ | 43 | $ | 93 | $ | 28 | ||||||||
2006 | ||||||||||||||||
Gross | ||||||||||||||||
Direct | $ | 346 | $ | 5 | $ | 45 | $ | 57 | ||||||||
Assumed — Domestic | 199 | 4 | 50 | (25 | ) | |||||||||||
London Market | 66 | — | 9 | 3 | ||||||||||||
Total | 611 | 9 | 104 | 35 | ||||||||||||
Ceded | (248 | ) | 305 | 2 | 27 | |||||||||||
Net | $ | 363 | $ | 314 | $ | 106 | $ | 62 | ||||||||
[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 twelve months ended December 31, 2008, 2007, and 2006 includes $15, $9 and $10, respectively, related to asbestos and environmental claims. Total gross loss and LAE paid in Ongoing Operations for the twelve months ended December 31, 2008, 2007, and 2006 includes $12, $10 and $12, respectively, related to asbestos and environmental claims. |
154
Table of Contents
155
Table of Contents
156
Table of Contents
December 31, 2008 | December 31, 2007 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Fixed maturities, available-for-sale, at fair value | $ | 45,182 | 71.3 | % | $ | 52,542 | 82.6 | % | ||||||||
Equity securities, available-for-sale, at fair value | 711 | 1.1 | % | 1,284 | 2.0 | % | ||||||||||
Mortgage loans, at amortized cost [1] | 5,684 | 9.0 | % | 4,739 | 7.5 | % | ||||||||||
Policy loans, at outstanding balance | 2,208 | 3.5 | % | 2,061 | 3.2 | % | ||||||||||
Limited partnerships and other alternative investments [2] | 1,129 | 1.8 | % | 1,306 | 2.1 | % | ||||||||||
Short-term investments | 6,937 | 11.0 | % | 1,158 | 1.8 | % | ||||||||||
Other investments [3] | 1,473 | 2.3 | % | 534 | 0.8 | % | ||||||||||
Total investments excl. equity securities, held for trading | 63,324 | 100.0 | % | 63,624 | 100.0 | % | ||||||||||
Equity securities, held for trading, at fair value [4] | 30,820 | 36,182 | ||||||||||||||
Total investments | $ | 94,144 | $ | 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. |
December 31, 2008 | December 31, 2007 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Hedge funds [1] | $ | 273 | 24.2 | % | $ | 506 | 38.7 | % | ||||||||
Mortgage and real estate [2] | 259 | 22.9 | % | 309 | 23.7 | % | ||||||||||
Mezzanine debt [3] | 95 | 8.4 | % | 72 | 5.5 | % | ||||||||||
Private equity and other [4] | 502 | 44.5 | % | 419 | 32.1 | % | ||||||||||
Total | $ | 1,129 | 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. |
157
Table of Contents
2008 | 2007 | 2006 | ||||||||||||||||||||||
(Before-tax) | Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | ||||||||||||||||||
Fixed maturities [2] | $ | 2,858 | 5.2 | % | $ | 3,114 | 5.9 | % | $ | 2,860 | 5.8 | % | ||||||||||||
Equity securities, available-for-sale | 96 | 7.5 | % | 86 | 7.0 | % | 56 | 7.3 | % | |||||||||||||||
Mortgage loans | 293 | 5.7 | % | 255 | 6.2 | % | 142 | 6.3 | % | |||||||||||||||
Policy loans | 139 | 6.5 | % | 135 | 6.5 | % | 142 | 6.9 | % | |||||||||||||||
Limited partnerships and other alternative investments | (233 | ) | (17.2 | %) | 115 | 12.0 | % | 69 | 12.6 | % | ||||||||||||||
Other [3] | (36 | ) | — | (133 | ) | — | (22 | ) | — | |||||||||||||||
Investment expense | (72 | ) | — | (75 | ) | — | (63 | ) | — | |||||||||||||||
Total net investment income excluding equity securities held for trading | 3,045 | 4.8 | % | 3,497 | 6.0 | % | 3,184 | 5.8 | % | |||||||||||||||
Equity securities held for trading [4] | (10,340 | ) | 145 | 1,824 | ||||||||||||||||||||
Total net investment income (loss) | $ | (7,295 | ) | $ | 3,642 | $ | 5,008 | |||||||||||||||||
[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 $70, $97 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. 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. |
158
Table of Contents
(Before-tax) | 2008 | 2007 | 2006 | |||||||||
Gross gains on sale | $ | 422 | $ | 213 | $ | 215 | ||||||
Gross losses on sale | (399 | ) | (168 | ) | (257 | ) | ||||||
Impairments | (2,424 | ) | (358 | ) | (76 | ) | ||||||
Japanese fixed annuity contract hedges, net [1] | 64 | 18 | (17 | ) | ||||||||
Periodic net coupon settlements on credit derivatives/Japan | (35 | ) | (40 | ) | (48 | ) | ||||||
SFAS 157 transition impact [2] | (650 | ) | — | — | ||||||||
Results of variable annuity hedge program | ||||||||||||
GMWB derivatives, net | (713 | ) | (286 | ) | (26 | ) | ||||||
Macro hedge program | 74 | (12 | ) | (14 | ) | |||||||
Total results of variable annuity hedge program | (639 | ) | (298 | ) | (40 | ) | ||||||
Other, net [3] | (477 | ) | (186 | ) | (37 | ) | ||||||
Net realized capital losses, before-tax | $ | (4,138 | ) | $ | (819 | ) | $ | (260 | ) | |||
[1] | Relates to the Japanese fixed annuity product (product and related derivative hedging instruments excluding periodic net coupon settlements). | |
[2] | Includes SFAS 157 implementation losses 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, hedge ineffectiveness on qualifying derivative instruments, foreign currency gains and losses, and other investment gains and losses. |
Gross Gains and Losses on Sale | • Gross gains and losses on sales for the year ended December 31, 2008 primarily resulted from the decision to reallocate the portfolio to securities with more favorable risk/return profiles. Also included was a gain of $141 from the sale of a synthetic CDO, as well as losses on sales of HIMCO managed CLOs in the first quarter. For more information regarding these CLO losses, refer to the Variable Interest Entities section below. During the year ended December 31, 2008, securities sold at a loss were depressed, on average, approximately 2% at the respective period’s impairment review date and were deemed to be temporarily impaired. | |
• Gross gains and losses on sales for the year ended December 31, 2007 were primarily comprised of corporate securities. During the year ended December 31, 2007, securities sold at a loss were depressed, on average, approximately 1% at the respective period’s impairment review date and were deemed to be temporarily impaired. | ||
• Gross gains on sales for the year ended December 31, 2006 were primarily within fixed maturities and were concentrated in U.S. government, corporate and foreign government securities. Gross losses on sale for the year ended December 31, 2006 were primarily within fixed maturities and were concentrated in the corporate and CMBS sectors. | ||
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 Consolidated Financial Statements for a discussion of the SFAS 157 transition impact. | |
Variable Annuity Hedge Program | • See Note 4 in the Notes to the Consolidated Financial Statements for a discussion of variable annuity hedge program gains and losses. | |
Other | • Other, net losses for the year ended December 31, 2008 were primarily related to net losses of $291 related to transactional foreign currency losses predominately on the internal reinsurance of the Japan variable annuity business, which is entirely offset in AOCI, resulting from appreciation of the Yen and credit derivative losses of $222 due to significant credit spread widening. Also included were losses on HIMCO managed CLOs in the first quarter and derivative related losses of $39 in the third quarter due to counterparty default related to the bankruptcy of Lehman Brothers Holdings Inc. For more information regarding the CLO losses, refer to the Variable Interest Entities section below. | |
• Other, net losses for the year ended December 31, 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. Credit spreads widened primarily due to the deterioration in the U.S. housing market, tightened lending conditions and the market’s flight to quality securities. | ||
• Other, net losses for the year ended December 31, 2006 were primarily driven from the change in value of non-qualifying derivatives due to fluctuations in interest rates and foreign currency exchange rates. These losses were partially offset by a before-tax benefit of $25 received from the WorldCom security settlement. |
159
Table of Contents
December 31, 2008 | December 31, 2007 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Fixed maturities, available-for-sale, at fair value | $ | 19,775 | 81.7 | % | $ | 27,205 | 88.8 | % | ||||||||
Equity securities, available-for-sale, at fair value | 674 | 2.8 | % | 1,208 | 3.9 | % | ||||||||||
Mortgage loans, at amortized cost [1] | 785 | 3.2 | % | 671 | 2.2 | % | ||||||||||
Limited partnerships and other alternative investments [2] | 1,166 | 4.8 | % | 1,260 | 4.1 | % | ||||||||||
Short-term investments | 1,597 | 6.6 | % | 284 | 0.9 | % | ||||||||||
Other investments [3] | 207 | 0.9 | % | 38 | 0.1 | % | ||||||||||
Total investments | $ | 24,204 | 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. | |
[3] | Primarily relates to derivative instruments. |
160
Table of Contents
December 31, 2008 | December 31, 2007 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Hedge funds [1] | $ | 561 | 48.1 | % | $ | 728 | 57.8 | % | ||||||||
Mortgage and real estate [2] | 292 | 25.1 | % | 291 | 23.1 | % | ||||||||||
Mezzanine debt [3] | 61 | 5.2 | % | 48 | 3.8 | % | ||||||||||
Private equity and other [4] | 252 | 21.6 | % | 193 | 15.3 | % | ||||||||||
Total | $ | 1,166 | 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. |
2008 | 2007 | 2006 | ||||||||||||||||||||||
(Before-tax) | Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | ||||||||||||||||||
Fixed maturities [2] | $ | 1,418 | 5.4 | % | $ | 1,511 | 5.7 | % | $ | 1,386 | 5.5 | % | ||||||||||||
Equity securities, available-for-sale | 68 | 6.5 | % | 50 | 6.0 | % | 35 | 5.5 | % | |||||||||||||||
Mortgage loans | 40 | 5.5 | % | 38 | 6.2 | % | 16 | 5.6 | % | |||||||||||||||
Limited partnerships and other alternative investments | (212 | ) | (15.5 | %) | 140 | 14.5 | % | 64 | 9.9 | % | ||||||||||||||
Other [3] | (36 | ) | — | (27 | ) | — | 9 | — | ||||||||||||||||
Investment expense | (25 | ) | — | (25 | ) | — | (24 | ) | — | |||||||||||||||
Net investment income, before-tax | $ | 1,253 | 4.4 | % | $ | 1,687 | 5.9 | % | $ | 1,486 | 5.5 | % | ||||||||||||
Net investment income, after-tax [4] | $ | 921 | 3.2 | % | $ | 1,246 | 4.4 | % | $ | 1,107 | 4.1 | % | ||||||||||||
[1] | Yields calculated using investment income before investment expenses divided by the monthly weighted average invested assets at cost, amortized cost, or adjusted carrying value, as applicable 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 $30, $41 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. The income from securities lending activities is included within fixed maturities. Also included are derivatives that qualify for hedge accounting under SFAS 133. These derivatives hedge fixed maturities. | |
[4] | Due to significant holdings in tax-exempt investments, after-tax net investment income and yield are also included. |
161
Table of Contents
2008 | 2007 | 2006 | ||||||||||
Gross gains on sale | $ | 180 | $ | 159 | $ | 205 | ||||||
Gross losses on sale | (448 | ) | (121 | ) | (164 | ) | ||||||
Impairments | (1,533 | ) | (125 | ) | (45 | ) | ||||||
Periodic net coupon settlements on credit derivatives | 2 | 15 | 4 | |||||||||
Other, net [1] | (78 | ) | (100 | ) | 9 | |||||||
Net realized capital gains (losses), before-tax | $ | (1,877 | ) | $ | (172 | ) | $ | 9 | ||||
[1] | Primarily consists of changes in fair value on non-qualifying derivatives, hedge ineffectiveness on qualifying derivative instruments, and other investment gains and losses. |
Gross Gains and Losses on Sale | • Gross gains and losses on sales for the year ended December 31, 2008 primarily resulted from the decision to reallocate the portfolio to securities with more favorable risk/return profiles. Also included were losses on sales of HIMCO managed CLOs in the first quarter. For more information regarding these CLO losses, refer to the Variable Interest Entities section below. During the year ended December 31, 2008, securities sold at a loss were depressed, on average, approximately 2% at the respective period’s impairment review date and were deemed to be temporarily impaired. | |
• Gross gains and losses on sales for the year ended December 31, 2007 were primarily comprised of foreign government, corporate, and municipal securities. During the year ended December 31, 2007, securities sold at a loss were depressed, on average, approximately 1% at the respective period’s impairment review date and were deemed to be temporarily impaired. | ||
• Gross gains on sales for the year ended December 31, 2006 were concentrated in the corporate, foreign government and municipal sectors. Gross losses on sales for the year ended December 31, 2006 were concentrated in the corporate and CMBS sectors. | ||
Impairments | • See the Other-Than-Temporary Impairments section that follows for information on impairment losses. | |
Other | • Other, net losses for the year ended December 31, 2008 were primarily related to net losses on credit derivatives of $90 as a result of credit spread widening on credit derivatives that assume credit exposure. Also included were losses on HIMCO managed CLOs in the first quarter and derivative related losses of $7 during the third quarter due to counterparty default related to the bankruptcy of Lehman Brothers Holdings Inc. For more information regarding the CLO losses, refer to the Variable Interest Entities section below. | |
• Other, net losses for the year ended December 31, 2007 primarily resulted from the change in value associated with credit derivatives due to credit spreads widening. Credit spreads widened primarily due to the deterioration in the U.S. housing market, tightened lending conditions and the market’s flight to quality securities. |
162
Table of Contents
Cash Collateral | ||||
December 31, 2008 | ||||
Thirty days or less | $ | 917 | ||
Thirty one to 90 days | 838 | |||
Over three to six months | 784 | |||
Over six to nine months | 430 | |||
Over nine months to one year | — | |||
Total | $ | 2,969 | ||
December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||
Maximum | Maximum | |||||||||||||||||||||||
Total | Total | Exposure | Total | Total | Exposure | |||||||||||||||||||
Assets | Liabilities [1] | to Loss [2] | Assets | Liabilities [1] | to Loss | |||||||||||||||||||
CLOs | $ | 339 | $ | 69 | $ | 257 | $ | 128 | $ | 47 | $ | 107 | ||||||||||||
Limited partnerships | 151 | 43 | 108 | 309 | 47 | 262 | ||||||||||||||||||
Other investments | 249 | 59 | 221 | 377 | 71 | 317 | ||||||||||||||||||
Total | $ | 739 | $ | 171 | $ | 586 | $ | 814 | $ | 165 | $ | 686 | ||||||||||||
[1] | Creditors have no recourse against the Company in the event of default by the VIE. | |
[2] | The Company’s maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment income or as a realized capital loss and is the consolidated assets net of liabilities at cost. The Company has no implied or unfunded commitments to these VIEs. |
163
Table of Contents
December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||
Maximum | Maximum | |||||||||||||||||||||||
Exposure | Exposure | |||||||||||||||||||||||
Assets | Liabilities | to Loss | Assets | Liabilities | to Loss | |||||||||||||||||||
CLOs [1] | $ | 308 | $ | — | $ | 349 | $ | 26 | $ | — | $ | 37 | ||||||||||||
CDOs [1] | 3 | — | 15 | 76 | — | 108 | ||||||||||||||||||
Other [2] | 42 | 40 | 5 | 43 | 43 | 5 | ||||||||||||||||||
Total [3] | $ | 353 | $ | 40 | $ | 369 | $ | 145 | $ | 43 | $ | 150 | ||||||||||||
[1] | Maximum exposure to loss represents the Company’s investment in securities issued by CLOs/CDOs at cost. | |
[2] | Maximum exposure to loss represents issuance costs that were incurred to establish the contingent capital facility. | |
[3] | The Company has no implied or unfunded commitments to these VIEs. |
164
Table of Contents
2008 | 2007 | 2006 | ||||||||||
ABS | ||||||||||||
Sub-prime residential mortgages | $ | 235 | $ | 212 | $ | 1 | ||||||
Other | 27 | 19 | 7 | |||||||||
CMBS | ||||||||||||
Bonds | 141 | 18 | — | |||||||||
IOs | 61 | — | 2 | |||||||||
CRE CDOs | 398 | — | — | |||||||||
CMOs/MBS | 37 | — | — | |||||||||
Corporate | ||||||||||||
Financial Services | 1,342 | 67 | — | |||||||||
Other | 510 | 98 | 103 | |||||||||
Equities | ||||||||||||
Financial Services | 1,142 | 36 | — | |||||||||
Other | 19 | 20 | 8 | |||||||||
Other | 52 | 13 | — | |||||||||
Total other-than-temporary impairments | $ | 3,964 | $ | 483 | $ | 121 | ||||||
165
Table of Contents
166
Table of Contents
December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||
Initial | Initial | |||||||||||||||||||||||
Notional | Premium | Notional | Premium | |||||||||||||||||||||
Amount | Received | Fair Value | Amount | Received | Fair Value | |||||||||||||||||||
Assuming credit risk | $ | 1,082 | $ | (2 | ) | $ | (399 | ) | $ | 2,715 | $ | (203 | ) | $ | (416 | ) | ||||||||
Reducing credit risk | 3,668 | (1 | ) | 340 | 5,166 | (1 | ) | 81 | ||||||||||||||||
Total credit default swaps | $ | 4,750 | $ | (3 | ) | $ | (59 | ) | $ | 7,881 | $ | (204 | ) | $ | (335 | ) | ||||||||
December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
AAA | $ | 17,844 | $ | 13,489 | 20.7 | % | $ | 28,547 | $ | 28,318 | 35.4 | % | ||||||||||||
AA | 14,093 | 11,646 | 17.9 | % | 11,326 | 10,999 | 13.7 | % | ||||||||||||||||
A | 18,742 | 15,831 | 24.4 | % | 16,999 | 17,030 | 21.3 | % | ||||||||||||||||
BBB | 15,749 | 12,794 | 19.6 | % | 15,093 | 14,974 | 18.7 | % | ||||||||||||||||
United States Government/Government agencies | 9,409 | 9,568 | 14.7 | % | 5,165 | 5,229 | 6.5 | % | ||||||||||||||||
BB & below | 2,401 | 1,784 | 2.7 | % | 3,594 | 3,505 | 4.4 | % | ||||||||||||||||
Total fixed maturities | $ | 78,238 | $ | 65,112 | 100.0 | % | $ | 80,724 | $ | 80,055 | 100.0 | % | ||||||||||||
167
Table of Contents
December 31, 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 | $ | 545 | $ | — | $ | (124 | ) | $ | 421 | 0.6 | % | $ | 692 | $ | — | $ | (16 | ) | $ | 676 | 0.9 | % | ||||||||||||||||||
CLOs [1] | 2,865 | — | (735 | ) | 2,130 | 3.3 | % | 2,590 | — | (114 | ) | 2,476 | 3.1 | % | ||||||||||||||||||||||||||
Credit cards | 942 | — | (188 | ) | 754 | 1.2 | % | 957 | 3 | (22 | ) | 938 | 1.2 | % | ||||||||||||||||||||||||||
RMBS [2] | 2,532 | 7 | (891 | ) | 1,648 | 2.5 | % | 2,999 | 10 | (343 | ) | 2,666 | 3.3 | % | ||||||||||||||||||||||||||
Student loan | 764 | — | (277 | ) | 487 | 0.7 | % | 786 | 1 | (40 | ) | 747 | 0.9 | % | ||||||||||||||||||||||||||
Other [3] | 1,215 | 6 | (393 | ) | 828 | 1.3 | % | 1,491 | 19 | (98 | ) | 1,412 | 1.7 | % | ||||||||||||||||||||||||||
CMBS | ||||||||||||||||||||||||||||||||||||||||
Agency backed [4] | 433 | 16 | — | 449 | 0.7 | % | 445 | 10 | — | 455 | 0.6 | % | ||||||||||||||||||||||||||||
Bonds | 11,144 | 10 | (4,370 | ) | 6,784 | 10.4 | % | 13,196 | 116 | (421 | ) | 12,891 | 16.1 | % | ||||||||||||||||||||||||||
CRE CDOs | 1,763 | 2 | (1,302 | ) | 463 | 0.7 | % | 2,243 | 1 | (390 | ) | 1,854 | 2.3 | % | ||||||||||||||||||||||||||
Interest only (“IOs”) | 1,396 | 17 | (333 | ) | 1,080 | 1.7 | % | 1,741 | 117 | (27 | ) | 1,831 | 2.3 | % | ||||||||||||||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||||||||||
Agency backed | 849 | 46 | (8 | ) | 887 | 1.4 | % | 1,191 | 32 | (4 | ) | 1,219 | 1.5 | % | ||||||||||||||||||||||||||
Non-agency backed [5] | 413 | 1 | (124 | ) | 290 | 0.4 | % | 525 | 4 | (3 | ) | 526 | 0.7 | % | ||||||||||||||||||||||||||
Corporate [6] | ||||||||||||||||||||||||||||||||||||||||
Basic industry | 2,138 | 33 | (338 | ) | 1,833 | 2.8 | % | 2,508 | 61 | (34 | ) | 2,535 | 3.2 | % | ||||||||||||||||||||||||||
Capital goods | 2,480 | 32 | (322 | ) | 2,190 | 3.3 | % | 2,194 | 86 | (26 | ) | 2,254 | 2.8 | % | ||||||||||||||||||||||||||
Consumer cyclical | 2,335 | 34 | (388 | ) | 1,981 | 3.0 | % | 3,011 | 87 | (60 | ) | 3,038 | 3.8 | % | ||||||||||||||||||||||||||
Consumer non-cyclical | 3,435 | 60 | (252 | ) | 3,243 | 5.0 | % | 3,008 | 89 | (37 | ) | 3,060 | 3.8 | % | ||||||||||||||||||||||||||
Energy | 1,669 | 24 | (146 | ) | 1,547 | 2.4 | % | 1,595 | 71 | (12 | ) | 1,654 | 2.1 | % | ||||||||||||||||||||||||||
Financial services | 8,422 | 254 | (1,543 | ) | 7,133 | 10.9 | % | 11,153 | 227 | (512 | ) | 10,868 | 13.5 | % | ||||||||||||||||||||||||||
Tech. & comm. | 3,738 | 86 | (400 | ) | 3,424 | 5.3 | % | 3,763 | 181 | (40 | ) | 3,904 | 4.9 | % | ||||||||||||||||||||||||||
Transportation | 508 | 8 | (90 | ) | 426 | 0.7 | % | 401 | 12 | (13 | ) | 400 | 0.5 | % | ||||||||||||||||||||||||||
Utilities | 4,859 | 92 | (578 | ) | 4,373 | 6.7 | % | 4,500 | 181 | (104 | ) | 4,577 | 5.7 | % | ||||||||||||||||||||||||||
Other [7] | 1,475 | — | (444 | ) | 1,031 | 1.6 | % | 1,985 | 27 | (104 | ) | 1,908 | 2.4 | % | ||||||||||||||||||||||||||
Gov./Gov. agencies | ||||||||||||||||||||||||||||||||||||||||
Foreign | 2,786 | 100 | (65 | ) | 2,821 | 4.3 | % | 999 | 59 | (5 | ) | 1,053 | 1.3 | % | ||||||||||||||||||||||||||
United States | 5,883 | 112 | (39 | ) | 5,956 | 9.2 | % | 836 | 22 | (3 | ) | 855 | 1.1 | % | ||||||||||||||||||||||||||
MBS | 2,243 | 42 | (7 | ) | 2,278 | 3.5 | % | 2,757 | 26 | (20 | ) | 2,763 | 3.5 | % | ||||||||||||||||||||||||||
Municipal | ||||||||||||||||||||||||||||||||||||||||
Taxable | 1,115 | 8 | (229 | ) | 894 | 1.4 | % | 1,376 | 33 | (23 | ) | 1,386 | 1.7 | % | ||||||||||||||||||||||||||
Tax-exempt | 10,291 | 194 | (724 | ) | 9,761 | 15.0 | % | 11,776 | 394 | (67 | ) | 12,103 | 15.1 | % | ||||||||||||||||||||||||||
Red. preferred stock | — | — | — | — | — | 6 | — | — | 6 | — | ||||||||||||||||||||||||||||||
Fixed maturities | $ | 78,238 | $ | 1,184 | $ | (14,310 | ) | $ | 65,112 | 100.0 | % | $ | 80,724 | $ | 1,869 | $ | (2,538 | ) | $ | 80,055 | 100.0 | % | ||||||||||||||||||
Equity securities, available-for-sale | ||||||||||||||||||||||||||||||||||||||||
Financial Services | 973 | 13 | (196 | ) | 790 | 2,062 | 13 | (224 | ) | 1,851 | ||||||||||||||||||||||||||||||
Other | 581 | 190 | (103 | ) | 668 | 549 | 205 | (10 | ) | 744 | ||||||||||||||||||||||||||||||
Total securities, available-for-sale [8] | $ | 79,792 | $ | 1,387 | $ | (14,609 | ) | $ | 66,570 | $ | 83,335 | $ | 2,087 | $ | (2,772 | ) | $ | 82,650 | ||||||||||||||||||||||
[1] | As of December 31, 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 $10, respectively, as of December 31, 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 $91 and $62, respectively, as of December 31, 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 $8 and $5, respectively, as of December 31, 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] | Represents securities with pools of loans by the Small Business Administration whose issued loans are backed by the full faith and credit of the U.S. government. | |
[5] | Includes securities with an amortized cost and fair value of $214 and $135, respectively, as of December 31, 2008, and $270 as of December 31, 2007, which were backed by pools of loans issued to Alt-A borrowers. | |
[6] | As of December 31, 2008 and 2007, 95% and 92%, respectively, of corporate securities were rated investment grade. | |
[7] | Includes structured investments with an amortized cost and fair value of $526 and $364, respectively, as of December 31, 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. | |
[8] | Gross unrealized gains represent gains of $860, $526, and $1 for Life, Property & Casualty, and Corporate, respectively, as of December 31, 2008 and $1,339, $734, and $14, respectively, as of December 31, 2007. Gross unrealized losses represent losses of $10,766 $3,835, and $8 for Life, Property & Casualty, and Corporate, respectively, as of December 31, 2008 and $1,985, $781, and $6, respectively, as of December 31, 2007. |
168
Table of Contents
December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Amortized | Total Fair | Amortized | Total Fair | |||||||||||||||||||||
Cost | Fair Value | Value | Cost | Fair Value | Value | |||||||||||||||||||
AAA | $ | 728 | $ | 628 | 7.9 | % | $ | 635 | $ | 614 | 4.8 | % | ||||||||||||
AA | 2,067 | 1,780 | 22.5 | % | 4,141 | 4,008 | 31.5 | % | ||||||||||||||||
A | 5,479 | 4,606 | 58.1 | % | 6,755 | 6,525 | 51.3 | % | ||||||||||||||||
BBB | 1,015 | 816 | 10.3 | % | 1,378 | 1,283 | 10.1 | % | ||||||||||||||||
BB & below | 106 | 93 | 1.2 | % | 306 | 289 | 2.3 | % | ||||||||||||||||
Total | $ | 9,395 | $ | 7,923 | 100.0 | % | $ | 13,215 | $ | 12,719 | 100.0 | % | ||||||||||||
169
Table of Contents
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 | $ | 49 | $ | 41 | $ | 162 | $ | 136 | $ | 60 | $ | 43 | $ | 32 | $ | 26 | $ | 34 | $ | 20 | $ | 337 | $ | 266 | ||||||||||||||||||||||||
2004 | 112 | 81 | 349 | 277 | 8 | 7 | 10 | 7 | — | — | 479 | 372 | ||||||||||||||||||||||||||||||||||||
2005 | 90 | 71 | 543 | 367 | 154 | 77 | 24 | 16 | 23 | 18 | 834 | 549 | ||||||||||||||||||||||||||||||||||||
2006 | 77 | 69 | 126 | 56 | 18 | 9 | 120 | 50 | 143 | 54 | 484 | 238 | ||||||||||||||||||||||||||||||||||||
2007 | 42 | 27 | 40 | 10 | 38 | 18 | 47 | 26 | 134 | 75 | 301 | 156 | ||||||||||||||||||||||||||||||||||||
Total | $ | 370 | $ | 289 | $ | 1,220 | $ | 846 | $ | 278 | $ | 154 | $ | 233 | $ | 125 | $ | 334 | $ | 167 | $ | 2,435 | $ | 1,581 | ||||||||||||||||||||||||
Credit protection | 40.5% | 47.6% | 31.4% | 21.9% | 19.9% | 41.0% |
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 $173 and $82, respectively, as of December 31, 2008 and $260 and $217, respectively, as of December 31, 2007. | |
[3] | As of December 31, 2008, the weighted average life of the sub-prime residential mortgage portfolio was 3.8 years. | |
[4] | Approximately 84% of the portfolio is backed by adjustable rate mortgages. | |
[5] | The credit qualities above include downgrades which have shifted the portfolio from higher rated assets to lower rated assets since December 31, 2007. |
170
Table of Contents
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 | $ | 2,057 | $ | 1,869 | $ | 455 | $ | 299 | $ | 175 | $ | 102 | $ | 36 | $ | 27 | $ | 37 | $ | 25 | $ | 2,760 | $ | 2,322 | ||||||||||||||||||||||||
2004 | 667 | 576 | 85 | 35 | 65 | 22 | 23 | 10 | — | — | 840 | 643 | ||||||||||||||||||||||||||||||||||||
2005 | 1,142 | 847 | 475 | 152 | 325 | 127 | 55 | 27 | — | — | 1,997 | 1,153 | ||||||||||||||||||||||||||||||||||||
2006 | 2,562 | 1,498 | 385 | 110 | 469 | 168 | 385 | 140 | 40 | 12 | 3,841 | 1,928 | ||||||||||||||||||||||||||||||||||||
2007 | 981 | 504 | 438 | 128 | 148 | 45 | 134 | 60 | 5 | 1 | 1,706 | 738 | ||||||||||||||||||||||||||||||||||||
Total | $ | 7,409 | $ | 5,294 | $ | 1,838 | $ | 724 | $ | 1,182 | $ | 464 | $ | 633 | $ | 264 | $ | 82 | $ | 38 | $ | 11,144 | $ | 6,784 | ||||||||||||||||||||||||
Credit protection | 24.4% | 16.4% | 12.2% | 5.3% | 4.4% | 20.6% |
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 | $ | 224 | $ | 227 | $ | 30 | $ | 32 | $ | 46 | $ | 49 | $ | 3,461 | $ | 3,512 | ||||||||||||||||||||||||
2004 | 709 | 708 | 89 | 87 | 77 | 73 | 23 | 21 | — | — | 898 | 889 | ||||||||||||||||||||||||||||||||||||
2005 | 1,280 | 1,258 | 479 | 454 | 345 | 327 | 85 | 76 | 24 | 21 | 2,213 | 2,136 | ||||||||||||||||||||||||||||||||||||
2006 | 2,975 | 2,910 | 415 | 395 | 555 | 526 | 456 | 400 | 24 | 22 | 4,425 | 4,253 | ||||||||||||||||||||||||||||||||||||
2007 | 1,365 | 1,342 | 461 | 431 | 180 | 160 | 190 | 165 | 3 | 3 | 2,199 | 2,101 | ||||||||||||||||||||||||||||||||||||
Total | $ | 8,995 | $ | 8,920 | $ | 1,939 | $ | 1,869 | $ | 1,381 | $ | 1,313 | $ | 784 | $ | 694 | $ | 97 | $ | 95 | $ | 13,196 | $ | 12,891 | ||||||||||||||||||||||||
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. |
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 | $ | 180 | $ | 59 | $ | 96 | $ | 29 | $ | 79 | $ | 17 | $ | 64 | $ | 7 | $ | 31 | $ | 7 | $ | 450 | $ | 119 | ||||||||||||||||||||||||
2004 | 129 | 38 | 17 | 6 | 31 | 9 | 11 | 2 | 14 | 3 | 202 | 58 | ||||||||||||||||||||||||||||||||||||
2005 | 94 | 37 | 62 | 15 | 65 | 12 | 10 | 2 | 1 | — | 232 | 66 | ||||||||||||||||||||||||||||||||||||
2006 | 242 | 76 | 91 | 25 | 81 | 20 | 15 | 2 | — | — | 429 | 123 | ||||||||||||||||||||||||||||||||||||
2007 | 139 | 45 | 106 | 19 | 101 | 11 | 12 | 1 | — | — | 358 | 76 | ||||||||||||||||||||||||||||||||||||
2008 | 43 | 13 | �� | 22 | 5 | 24 | 3 | 3 | — | — | — | 92 | 21 | |||||||||||||||||||||||||||||||||||
Total | $ | 827 | $ | 268 | $ | 394 | $ | 99 | $ | 381 | $ | 72 | $ | 115 | $ | 14 | $ | 46 | $ | 10 | $ | 1,763 | $ | 463 | ||||||||||||||||||||||||
Credit protection | 29.7% | 21.3% | 18.2% | 19.4% | 57.0% | 25.4% |
171
Table of Contents
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 December 31, 2008, approximately 36% of the underlying CMBS CRE CDO collateral are seasoned, below investment grade securities. | |
[3] | For certain CDOs, the collateral manager has the ability to reinvest proceeds that become available, primarily from collateral maturities. The increase in the 2008 vintage year represents reinvestment under these CDOs. | |
[4] | The credit qualities above include downgrades since December 31, 2007. |
December 31, 2008 | December 31, 2007 | |||||||||||||||
AAA | AAA | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
2003 & Prior | $ | 440 | $ | 423 | $ | 548 | $ | 606 | ||||||||
2004 | 268 | 199 | 360 | 374 | ||||||||||||
2005 | 354 | 245 | 422 | 430 | ||||||||||||
2006 | 165 | 104 | 194 | 205 | ||||||||||||
2007 | 169 | 109 | 217 | 216 | ||||||||||||
Total | $ | 1,396 | $ | 1,080 | $ | 1,741 | $ | 1,831 | ||||||||
[1] | The vintage year represents the year the pool of loans was originated. |
December 31, 2008 | December 31, 2007 | |||||||||||||||
Carrying | Percent of | Carrying | Percent of | |||||||||||||
Value | Total | Value | Total | |||||||||||||
East North Central | $ | 162 | 2.5 | % | $ | 120 | 2.2 | % | ||||||||
East South Central | — | — | 9 | 0.2 | % | |||||||||||
Middle Atlantic | 717 | 11.1 | % | 674 | 12.4 | % | ||||||||||
Mountain | 223 | 3.4 | % | 200 | 3.7 | % | ||||||||||
New England | 487 | 7.5 | % | 404 | 7.5 | % | ||||||||||
Pacific | 1,495 | 23.1 | % | 1,200 | 22.2 | % | ||||||||||
South Atlantic | 1,102 | 17.0 | % | 1,104 | 20.4 | % | ||||||||||
West North Central | 64 | 1.0 | % | 32 | 0.6 | % | ||||||||||
West South Central | 333 | 5.2 | % | 286 | 5.3 | % | ||||||||||
Other [1] | 1,886 | 29.2 | % | 1,381 | 25.5 | % | ||||||||||
Total | $ | 6,469 | 100.0 | % | $ | 5,410 | 100.0 | % | ||||||||
[1] | Includes multi-regional properties. |
172
Table of Contents
December 31, 2008 | December 31, 2007 | |||||||||||||||
Carrying | Percent of | Carrying | Percent of | |||||||||||||
Value | Total | Value | Total | |||||||||||||
Industrial | $ | 1,118 | 17.3 | % | $ | 649 | 12.0 | % | ||||||||
Lodging | 483 | 7.5 | % | 524 | 9.7 | % | ||||||||||
Agricultural | 635 | 9.8 | % | 362 | 6.7 | % | ||||||||||
Multifamily | 1,131 | 17.5 | % | 991 | 18.3 | % | ||||||||||
Office | 1,885 | 29.1 | % | 1,929 | 35.6 | % | ||||||||||
Retail | 884 | 13.7 | % | 806 | 14.9 | % | ||||||||||
Other | 333 | 5.1 | % | 149 | 2.8 | % | ||||||||||
Total | $ | 6,469 | 100.0 | % | $ | 5,410 | 100.0 | % | ||||||||
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 | |||||||||||||||||||||||||||||||||||||
Auto [1] | $ | 135 | $ | 109 | $ | 29 | $ | 27 | $ | 142 | $ | 103 | $ | 209 | $ | 162 | $ | 30 | $ | 20 | $ | 545 | $ | 421 | ||||||||||||||||||||||||
Credit card [2] | 419 | 367 | 6 | 3 | 108 | 97 | 351 | 248 | 58 | 39 | 942 | 754 | ||||||||||||||||||||||||||||||||||||
Student loan [3] | 294 | 159 | 332 | 244 | 138 | 84 | — | — | — | — | 764 | 487 | ||||||||||||||||||||||||||||||||||||
Total | $ | 848 | $ | 635 | $ | 367 | $ | 274 | $ | 388 | $ | 284 | $ | 560 | $ | 410 | $ | 88 | $ | 59 | $ | 2,251 | $ | 1,662 | ||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||
Auto [1] | $ | 274 | $ | 270 | $ | 27 | $ | 27 | $ | 151 | $ | 148 | $ | 198 | $ | 192 | $ | 42 | $ | 39 | $ | 692 | $ | 676 | ||||||||||||||||||||||||
Credit card [2] | 166 | 166 | 19 | 19 | 162 | 162 | 610 | 591 | — | — | 957 | 938 | ||||||||||||||||||||||||||||||||||||
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] | Includes monoline insured securities with an amortized cost and fair value of $47 and $38, respectively, at December 31, 2008, and amortized cost and fair value of $49 at December 31, 2007. Additionally, approximately 13% of the auto consumer loan-backed securities were issued by lenders whose primary business is to sub-prime borrowers. | |
[2] | As of December 31, 2008, approximately 6% of the securities were issued by lenders that lend primarily to sub-prime borrowers. | |
[3] | Includes monoline insured securities with an amortized cost and fair value of $102 and $38, respectively, at December 31, 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. |
173
Table of Contents
December 31, 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 | 1,718 | $ | 16,425 | $ | 14,992 | $ | (1,433 | ) | 1,581 | $ | 10,879 | $ | 10,445 | $ | (434 | ) | ||||||||||||||||
Greater than three to six months | 972 | 6,533 | 5,247 | (1,286 | ) | 1,052 | 11,857 | 10,954 | (903 | ) | ||||||||||||||||||||||
Greater than six to nine months | 764 | 7,053 | 5,873 | (1,180 | ) | 813 | 10,086 | 9,354 | (732 | ) | ||||||||||||||||||||||
Greater than nine to twelve months | 741 | 6,459 | 4,957 | (1,502 | ) | 262 | 2,756 | 2,545 | (211 | ) | ||||||||||||||||||||||
Greater than twelve months | 2,417 | 25,279 | 16,071 | (9,208 | ) | 1,735 | 10,563 | 10,071 | (492 | ) | ||||||||||||||||||||||
Total | 6,612 | $ | 61,749 | $ | 47,140 | $ | (14,609 | ) | 5,443 | $ | 46,141 | $ | 43,369 | $ | (2,772 | ) | ||||||||||||||||
December 31, 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 | 859 | $ | 11,852 | $ | 6,779 | $ | (5,073 | ) | 138 | $ | 1,263 | $ | 835 | $ | (428 | ) | ||||||||||||||||
Greater than three to six months | 102 | 1,141 | 420 | (721 | ) | 12 | 146 | 91 | (55 | ) | ||||||||||||||||||||||
Greater than six to nine months | 153 | 1,966 | 687 | (1,279 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than nine to twelve months | 97 | 934 | 218 | (716 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than twelve months | 18 | 240 | 38 | (202 | ) | 6 | 40 | 26 | (14 | ) | ||||||||||||||||||||||
Total | 1,229 | $ | 16,133 | $ | 8,142 | $ | (7,991 | ) | 156 | $ | 1,449 | $ | 952 | $ | (497 | ) | ||||||||||||||||
December 31, 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 | 1,006 | $ | 10,597 | $ | 7,044 | $ | (3,553 | ) | 116 | $ | 635 | $ | 492 | $ | (143 | ) | ||||||||||||||||
Greater than three to six months | 58 | 306 | 150 | (156 | ) | 9 | 74 | 21 | (53 | ) | ||||||||||||||||||||||
Greater than six to nine months | 27 | 314 | 178 | (136 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than nine to twelve months | 8 | 115 | 68 | (47 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than twelve months | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | 1,099 | $ | 11,332 | $ | 7,440 | $ | (3,892 | ) | 125 | $ | 709 | $ | 513 | $ | (196 | ) | ||||||||||||||||
December 31, 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 | 1,865 | $ | 22,449 | $ | 13,823 | $ | (8,626 | ) | 254 | $ | 1,898 | $ | 1,327 | $ | (571 | ) | |||||||||||||||||
Greater than three to six months | 160 | 1,447 | 570 | (877 | ) | 21 | 220 | 112 | (108 | ) | |||||||||||||||||||||||
Greater than six to nine months | 180 | 2,280 | 865 | (1,415 | ) | — | — | — | — | ||||||||||||||||||||||||
Greater than nine to twelve months | 105 | 1,049 | 286 | (763 | ) | — | — | — | — | ||||||||||||||||||||||||
Greater than twelve months | 18 | 240 | 38 | (202 | ) | 6 | 40 | 26 | (14 | ) | |||||||||||||||||||||||
Total | 2,328 | $ | 27,465 | $ | 15,582 | $ | (11,883 | ) | 281 | $ | 2,158 | $ | 1,465 | $ | (693 | ) | |||||||||||||||||
174
Table of Contents
(included in the depressed over 20% table above)
December 31, 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 | 532 | $ | 7,150 | $ | 2,395 | $ | (4,755 | ) | 27 | $ | 124 | $ | 47 | $ | (77 | ) | ||||||||||||||||
Greater than three to six months | 37 | 347 | 56 | (291 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than six to nine months | 21 | 182 | 26 | (156 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than nine to twelve months | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Greater than twelve months | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | 590 | $ | 7,679 | $ | 2,477 | $ | (5,202 | ) | 27 | $ | 124 | $ | 47 | $ | (77 | ) | ||||||||||||||||
(included in the depressed over 20% table above)
December 31, 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 | 129 | $ | 1,305 | $ | 549 | $ | (756 | ) | 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 | 129 | $ | 1,305 | $ | 549 | $ | (756 | ) | 13 | $ | 20 | $ | 2 | $ | (18 | ) | ||||||||||||||||
(included in the depressed over 20% table above)
December 31, 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 | 661 | $ | 8,455 | $ | 2,944 | $ | (5,511 | ) | 36 | $ | 127 | $ | 48 | $ | (79 | ) | ||||||||||||||||
Greater than three to six months | 37 | 347 | 56 | (291 | ) | 4 | 17 | 1 | (16 | ) | ||||||||||||||||||||||
Greater than six to nine months | 21 | 182 | 26 | (156 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than nine to twelve months | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Greater than twelve months | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | 719 | $ | 8,984 | $ | 3,026 | $ | (5,958 | ) | 40 | $ | 144 | $ | 49 | $ | (95 | ) | ||||||||||||||||
175
Table of Contents
176
Table of Contents
177
Table of Contents
178
Table of Contents
179
Table of Contents
Change in Net Economic Value As of December 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Basis point shift | - 100 | + 100 | - 100 | + 100 | ||||||||||||
Amount | $ | (173 | ) | $ | 114 | $ | (160 | ) | $ | 60 |
180
Table of Contents
Change in Fair Value As of December 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Basis point shift | - 100 | + 100 | - 100 | + 100 | ||||||||||||
Amount | $ | 479 | $ | (455 | ) | $ | 375 | $ | (364 | ) |
Substantially all of the Company’s variable annuity contracts contain a GMDB and a portion of those contracts also contain one or more living benefits. The Company’s maximum exposure disclosed below for death and living benefits are calculated independently, however, these exposures are substantially overlapping.
• | reduce the value of assets under management and the amount of fee income generated from those assets; | |
• | 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; | |
• | increase the liability for GMWB and GMAB benefits resulting in realized capital losses; | |
• | increase the value of derivative assets used to hedge product guarantees resulting in realized capital gains; | |
• | increase the Company’s net amount at risk for GMDB and GMIB benefits; and | |
• | decrease the Company’s actual gross profits, resulting in a negative true-up to current period DAC amortization. | |
• | increase the amount of required statutory capital necessary to maintain targeted risk based capital (RBC) ratios. |
• | turn customer sentiment toward equity-linked products negative, causing a decline in sales; | |
• | 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 earnings, 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. During 2008, the Company recorded an unlock charge of $932. | |
• | increase costs under the Company’s hedging program. |
181
Table of Contents
182
Table of Contents
183
Table of Contents
GMWB | ||||||||||
Account | % of GMWB | |||||||||
Risk Management Strategy | Duration | Value | Account Value | |||||||
Entire GMWB risk reinsured with a third party | Life of the product | $ | 10,225 | 27 | % | |||||
Capital markets risk transferred to a third | Designed to cover the | |||||||||
party — behavior risk retained by the | effective life of the | |||||||||
Company | product | 10,464 | 27 | % | ||||||
Dynamic hedging of capital markets risk using various derivative instruments [1] | Weighted average of 5 years | 17,628 | 46 | % | ||||||
$ | 38,317 | 100 | % | |||||||
[1] | During the fourth quarter of 2008, the Company maintained a reduced level of dynamic hedge protection on U.S. GAAP earnings while placing a greater relative emphasis on the protection of statutory surplus. This shift in emphasis includes the macro hedge program. |
184
Table of Contents
185
Table of Contents
Change in Fair Value As of December 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Basis point shift | - 100 | + 100 | - 100 | + 100 | ||||||||||||
Amount | $ | 718 | $ | (695 | ) | $ | 925 | $ | (894 | ) |
186
Table of Contents
187
Table of Contents
188
Table of Contents
Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
Effective | Expiration | December 31, | December 31, | |||||||||||||||||||||
Description | Date | Date | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||
Commercial Paper | ||||||||||||||||||||||||
The Hartford | 11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | 374 | $ | 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 | 1/4/10 | 55 | 45 | — | — | ||||||||||||||||||
Total Commercial Paper, Revolving Credit Facility and Line of Credit | $ | 3,955 | $ | 4,045 | $ | 374 | $ | 373 | ||||||||||||||||
[1] | As of December 31, 2008 and 2007, the Company’s Japanese operation line of credit in yen was ¥5 billion. |
• | The Company has unfunded commitments to purchase investments in limited partnerships, mortgage and construction loans of about $1.1 billion as disclosed in Note 12 of Notes to Consolidated Financial Statements. | |
• | Warrants issued to Allianz to purchase 34,806,452 shares of the Company’s common stock, classified at issuance in equity at a fair value of $276. See Note 21 of Notes to Consolidated Financial Statements. |
189
Table of Contents
Payments due by period | ||||||||||||||||||||
Less than | 1-3 | 3-5 | More than | |||||||||||||||||
Total | 1 year | years | years | 5 years | ||||||||||||||||
Property and casualty obligations [1] | $ | 22,421 | $ | 5,940 | $ | 5,021 | $ | 2,929 | $ | 8,531 | ||||||||||
Life, annuity and disability obligations [2] | 392,118 | 27,358 | 50,147 | 49,495 | 265,118 | |||||||||||||||
Operating lease obligations [3] | 498 | 143 | 217 | 102 | 36 | |||||||||||||||
Capital lease obligations [3] | 100 | 27 | 73 | — | — | |||||||||||||||
Long-term debt obligations [4] | 20,246 | 468 | 1,569 | 1,161 | 17,048 | |||||||||||||||
Consumer notes [5] | 1,583 | 73 | 285 | 583 | 642 | |||||||||||||||
Purchase obligations [6] | 1,917 | 1,475 | 377 | 41 | 24 | |||||||||||||||
Other long-term liabilities reflected on the balance sheet [7] | 6,571 | 6,437 | 83 | — | 51 | |||||||||||||||
Total [8] | $ | 445,454 | $ | 41,921 | $ | 57,772 | $ | 54,311 | $ | 291,450 | ||||||||||
[1] | The following points are significant to understanding the cash flows estimated for obligations under property and casualty contracts: |
• | Reserves for Property & Casualty unpaid losses and loss adjustment expenses include case reserves for reported claims and reserves for claims incurred but not reported (IBNR). While payments due on claim reserves are considered contractual obligations because they relate to insurance policies issued by the Company, the ultimate amount to be paid to settle both case reserves and IBNR is an estimate, subject to significant uncertainty. The actual amount to be paid is not finally determined until the Company reaches a settlement with the claimant. Final claim settlements may vary significantly from the present estimates, particularly since many claims will not be settled until well into the future. | ||
• | In estimating the timing of future payments by year, the Company has assumed that its historical payment patterns will continue. However, the actual timing of future payments could vary materially from these estimates due to, among other things, changes in claim reporting and payment patterns and large unanticipated settlements. In particular, there is significant uncertainty over the claim payment patterns of asbestos and environmental claims. Also, estimated payments in 2009 do not include payments that will be made on claims incurred in 2009 on policies that were in force as of December 31, 2008. In addition, the table does not include future cash flows related to the receipt of premiums that may be used, in part, to fund loss payments. | ||
• | Under U.S. GAAP, the Company is only permitted to discount reserves for losses and loss adjustment expenses in cases where the payment pattern and ultimate loss costs are fixed and determinable on an individual claim basis. For the Company, these include claim settlements with permanently disabled claimants. As of December 31, 2008, the total property and casualty reserves in the above table are gross of a reserve discount of $488. |
[2] | Estimated life, annuity and disability obligations include death and disability claims, policy surrenders, policyholder dividends and trail commissions offset by expected future deposits and premiums on in-force contracts. Estimated life, annuity and disability obligations are based on mortality, morbidity and lapse assumptions comparable with Life’s historical experience, modified for recent observed trends. Life has also assumed market growth and interest crediting consistent with assumptions used in amortizing deferred acquisition costs. In contrast to this table, the majority of Life’s obligations are recorded on the balance sheet at the current account values and do not incorporate an expectation of future market growth, interest crediting, or future deposits. Therefore, the estimated obligations presented in this table significantly exceed the liabilities recorded in reserve for future policy benefits and unpaid losses and loss adjustment expenses, other policyholder funds and benefits payable and separate account liabilities. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. | |
[3] | Includes future minimum lease payments on operating and capital lease agreements. See Notes 12 and 14 of Notes to Consolidated Financial Statements for additional discussion on lease commitments. | |
[4] | Includes contractual principal and interest payments. All long-term debt obligations have fixed rates of interest. See Note 14 of Notes to Consolidated Financial Statements for additional discussion of long-term debt obligations. | |
[5] | Consumer notes include principal payments and contractual interest for fixed rate notes and interest based on current rates for floating rate notes and the market value of embedded derivatives for equity-linked notes. See Note 14 of Notes to Consolidated Financial Statements for additional discussion of consumer notes. | |
[6] | Includes $1.1 billion in commitments to purchase investments including about $1.0 billion of limited partnership and $99 of mortgage and construction loans. Outstanding commitments under these limited partnerships and mortgage and construction loans are included in payments due in less than 1 year since the timing of funding these commitments cannot be reliably estimated. The remaining commitments to purchase investments primarily represent payables for securities purchased which are reflected on the Company’s consolidated balance sheet. | |
Also included in purchase obligations is $695 relating to contractual commitments to purchase various goods and services such as maintenance, human resources, information technology, and transportation in the normal course of business. Purchase obligations exclude contracts that are cancelable without penalty or contracts that do not specify minimum levels of goods or services to be purchased. | ||
[7] | Includes cash collateral of $6.3 billion which the Company has accepted in connection with the Company’s securities lending program and derivative instruments. Since the timing of the return of the collateral is uncertain, the return of the collateral has been included in the payments due in less than 1 year. | |
Also included in other long term liabilities is $91 of net unrecognized tax benefits related to Financial Accounting Standards Board Interpretation No 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). See Note 13 of the Notes to Consolidated Financial Statements for additional discussion of FIN 48. | ||
[8] | Does not include estimated voluntary contribution of $200 to the Company’s pension plan in 2009. |
190
Table of Contents
As of December 31, | ||||||||
2008 | 2007 | |||||||
Short-term debt (includes current maturities of long-term debt and capital lease obligations) | $ | 398 | $ | 1,365 | ||||
Long-term debt | 5,823 | 3,142 | ||||||
Total debt [1] | 6,221 | 4,507 | ||||||
Equity excluding accumulated other comprehensive income (loss), net of tax (“AOCI”) | 16,788 | 20,062 | ||||||
AOCI, net of tax | (7,520 | ) | (858 | ) | ||||
Total stockholders’ equity | $ | 9,268 | $ | 19,204 | ||||
Total capitalization including AOCI, net of tax | $ | 15,489 | $ | 23,711 | ||||
Debt to equity | 67 | % | 23 | % | ||||
Debt to capitalization | 40 | % | 19 | % | ||||
[1] | Total debt of the Company excludes $1.2 billion and $809 of consumer notes as of December 31, 2008 and 2007, respectively. |
AOCI, net of tax | • | Decreased $6.7 billion primarily due to increases in unrealized losses on securities of $7.1 billion. | ||
Equity excluding AOCI, net of tax | • | Decreased $3.3 billion primarily due to a net loss of $2.7 billion, dividends declared of $598 and treasury stock acquired of $1.0 billion in connection with the Company’s stock purchase program. These decreases were offset by $967 from the issuance of preferred shares and warrants to purchase preferred shares to Allianz. | ||
Total Debt | • | The Hartford’s debt increased $1.7 billion or 38% primarily due to the issuance of $500 in 8.125% junior subordinated debentures in June 2008 and $1.75 billion in 10% junior subordinated debentures issued in October 2008. The $1.75 billion in 10% junior subordinated debentures relate to Allianz’s investment in The Hartford, and include warrants of $547, which reduced the carrying value of the debt. |
191
Table of Contents
192
Table of Contents
193
Table of Contents
2008 | 2007 | 2006 | ||||||||||
Net cash provided by operating activities | $ | 4,192 | $ | 5,991 | $ | 5,638 | ||||||
Net cash used for investing activities | $ | (8,827 | ) | $ | (6,176 | ) | $ | (7,410 | ) | |||
Net cash provided by financing activities | $ | 4,274 | $ | 499 | $ | 1,915 | ||||||
Cash — end of year | $ | 1,811 | $ | 2,011 | $ | 1,424 |
194
Table of Contents
A.M. Best | Fitch | Standard & Poor’s | Moody’s | |||||
Insurance Financial Strength Ratings: | ||||||||
Hartford Fire Insurance Company | A+ | A+ | AA- | A1 | ||||
Hartford Life Insurance Company | A+ | A | AA- | A1 | ||||
Hartford Life and Accident Insurance Company | A+ | A | AA- | A1 | ||||
Hartford Life and Annuity Insurance Company | A+ | A | AA- | A1 | ||||
Hartford Life Insurance KK (Japan) | — | — | AA- | — | ||||
Hartford Life Limited (Ireland) | — | — | AA- | — | ||||
Other Ratings: | ||||||||
The Hartford Financial Services Group, Inc.: | ||||||||
Senior debt | a- | BBB | A- | Baa1 | ||||
Commercial paper | AMB-1 | F2 | A-2 | P-2 | ||||
Junior subordinated debentures | bbb | BBB- | BBB | Baa2 | ||||
Hartford Life, Inc.: | ||||||||
Senior debt | a- | BBB | A- | Baa1 | ||||
Hartford Life Insurance Company: | ||||||||
Short term rating | — | — | A-1+ | P-1 | ||||
Consumer notes | a+ | A- | AA- | A2 |
195
Table of Contents
2008 | 2007 | |||||||
Life Operations | $ | 6,047 | $ | 5,786 | ||||
Japan Life Operations | 1,718 | 1,620 | ||||||
Property & Casualty Operations | 6,012 | 8,509 | ||||||
Total | $ | 13,777 | $ | 15,915 | ||||
• | Costs incurred by the Company to acquire insurance policies are deferred under U.S. GAAP while those costs are expensed immediately under US STAT. | |
• | Temporary differences between the book and tax basis of an asset or liability which are recorded as deferred tax assets are evaluated for recoverability under U.S. GAAP while those amounts deferred are subject to limitations under US STAT. | |
• | Certain assumptions used in the determination of Life benefit reserves are prescribed under US Stat and are intended to be conservative, while the assumptions used under U.S. GAAP are generally the Company’s best estimates. In addition, the methodologies used for determining life reserve amounts are different between US Stat and U.S. GAAP. Annuity reserving and cash-flow testing for death and living benefit reserves under US STAT are generally addressed by the Commissioners’ Annuity Reserving Valuation Methodology and the related Actuarial Guidelines. Under these Actuarial Guidelines, in general, future cash flows associated with the variable annuity business are included in these methodologies with estimates of future fee revenues, claim payments, expenses, reinsurance impacts and hedging impacts. At December 31, 2008, in determining the cash-flow impacts related to future hedging, assumptions were made in the scenarios that generate reserve requirements, about the potential future decreases in the hedge benefits and increases in hedge costs which resulted in increased reserve requirements. Reserves for death and living benefits under U.S. GAAP are either considered embedded derivatives and recorded at fair value or they may be considered SOP 03-1 reserves. | |
• | The difference between the amortized cost and fair value of fixed maturity and other investments, net of tax, is recorded as an increase or decrease to the carrying value of the related asset and to equity under U.S. GAAP, while US STAT only records certain securities at fair value, such as equity securities and certain lower rated bonds required by the NAIC to be recorded at the lower of amortized cost or fair value. In the case of the Company’s market value adjusted (MVA) fixed annuity products, invested assets are marked to fair value (including the impact of credit spreads) and liabilities are marked to fair value (but generally actual credit spreads are not fully reflected) for statutory purposes only. | |
• | US STAT for life insurance companies establishes a formula reserve for realized and unrealized losses due to default and equity risks associated with certain invested assets (the Asset Valuation Reserve), while U.S. GAAP does not. Also, for those realized gains and losses caused by changes in interest rates, US STAT for life insurance companies defers and amortizes the gains and losses, caused by changes in interest rates, into income over the original life to maturity of the asset sold (the Interest Maintenance Reserve) while U.S. GAAP does not. | |
• | Goodwill arising from the acquisition of a business is tested for recoverability on an annual basis (or more frequently, as necessary) for U.S. GAAP, while under US STAT goodwill is amortized over a period not to exceed 10 years and the amount of goodwill is limited. |
196
Table of Contents
• | In general, as equity market levels decline, our reserves for death and living benefit guarantees associated with variable annuity contracts increases, sometimes at a greater than linear rate, reducing statutory surplus levels. In addition, as equity market levels increase, generally surplus levels will increase. RBC ratios will also tend to increase when equity markets increase. However, as a result of a number of factors and market conditions, including the level of hedging costs and other risk transfer activities, reserve requirements for death and living benefit guarantees and RBC requirements could increase resulting in lower RBC ratios. | |
• | As the value of certain fixed-income and equity securities in our investment portfolio decreases, due in part to credit spread widening, statutory surplus and RBC ratios may decrease. | |
• | As the value of certain derivative instruments that do not get hedge accounting decreases, statutory surplus and RBC ratios may decrease. | |
• | Life’s exposure to foreign currency exchange risk exists with respect to non-U.S. dollar denominated assets and liabilities. Assets and liabilities denominated in foreign currencies are accounted for at their U.S. dollar equivalent values using exchange rates at the balance sheet date. As foreign currency exchange rates strengthen in comparison to the U.S. dollar, the remeasured value of those non-dollar denominated assets or liabilities will increase causing an increase or decrease to statutory surplus, respectively. | |
• | Our statutory surplus is also impacted by widening credit spreads as a result of the accounting for the assets and liabilities in our fixed market value adjusted (“MVA”) annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates in the U.S. and Japanese LIBOR in Japan. In many capital market scenarios, current crediting rates in the U.S. are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, such as we are now experiencing, actual credit spreads on investment assets may increase sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value losses. As actual credit spreads are not fully reflected in the current crediting rates in the U.S. or Japanese LIBOR in Japan, the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in reductions in statutory surplus and create funding obligations to the statutory separate account. |
197
Table of Contents
198
Table of Contents
199
Table of Contents
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Hartford, Connecticut
February 11, 2009
200
Table of Contents
201
Table of Contents
202
Table of Contents
(a) | (b) | (c) | ||||||||||
Number of Securities | Weighted-average | Number of Securities Remaining | ||||||||||
to be Issued Upon | Exercise Price of | Available for Future Issuance | ||||||||||
Exercise of | Outstanding | Under Equity Compensation Plans | ||||||||||
Outstanding Options, | Options, Warrants | (Excluding Securities Reflected in | ||||||||||
Warrants and Rights | and Rights | Column (a)) | ||||||||||
Equity compensation plans approved by stockholders | 5,805,393 | $ | 60.46 | 5,452,015 | [1] | |||||||
Equity compensation plans not approved by stockholders | 23,896 | 53.81 | 246,448 | |||||||||
Total | 5,829,289 | $ | 60.43 | 5,698,463 | ||||||||
[1] | Of these shares, 538,125 shares remain available for purchase under the ESPP. |
203
Table of Contents
(a) | Documents filed as a part of this report: |
(1) | Consolidated Financial Statements.See Index to Consolidated Financial Statements and Schedules elsewhere herein. | |
(2) | Consolidated Financial Statement Schedules.See Index to Consolidated Financial Statement and Schedules elsewhere herein. | |
(3) | Exhibits.See Exhibit Index elsewhere herein. |
204
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page(s) | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-5 | ||||
F-6 | ||||
F-7-93 | ||||
S-1 | ||||
S-2-3 | ||||
S-4-7 | ||||
S-8 | ||||
S-9 | ||||
S-9 | ||||
F-1
Table of Contents
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Hartford, Connecticut
February 11, 2009
F-2
Table of Contents
For the years ended December 31, | ||||||||||||
(In millions, except for per share data) | 2008 | 2007 | 2006 | |||||||||
Revenues | ||||||||||||
Earned premiums | $ | 15,503 | $ | 15,619 | $ | 15,023 | ||||||
Fee income | 5,135 | 5,436 | 4,739 | |||||||||
Net investment income (loss) | ||||||||||||
Securities available-for-sale and other | 4,335 | 5,214 | 4,691 | |||||||||
Equity securities held for trading | (10,340 | ) | 145 | 1,824 | ||||||||
Total net investment income (loss) | (6,005 | ) | 5,359 | 6,515 | ||||||||
Other revenues | 504 | 496 | 474 | |||||||||
Net realized capital losses | (5,918 | ) | (994 | ) | (251 | ) | ||||||
Total revenues | 9,219 | 25,916 | 26,500 | |||||||||
Benefits, losses and expenses | ||||||||||||
Benefits, losses and loss adjustment expenses | 14,088 | 13,919 | 13,218 | |||||||||
Benefits, losses, and loss adjustment expenses — returns credited on International variable annuities | (10,340 | ) | 145 | 1,824 | ||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 4,271 | 2,989 | 3,558 | |||||||||
Insurance operating costs and expenses | 3,993 | 3,894 | 3,252 | |||||||||
Interest expense | 343 | 263 | 277 | |||||||||
Goodwill impairment | 745 | — | — | |||||||||
Other expenses | 710 | 701 | 769 | |||||||||
Total benefits, losses and expenses | 13,810 | 21,911 | 22,898 | |||||||||
Income (loss) before income taxes | (4,591 | ) | 4,005 | 3,602 | ||||||||
Income tax expense (benefit) | (1,842 | ) | 1,056 | 857 | ||||||||
Net income (loss) | $ | (2,749 | ) | $ | 2,949 | $ | 2,745 | |||||
Earnings (loss) per share | ||||||||||||
Basic | $ | (8.99 | ) | $ | 9.32 | $ | 8.89 | |||||
Diluted | $ | (8.99 | ) | $ | 9.24 | $ | 8.69 | |||||
Weighted average common shares outstanding | 306.7 | 316.3 | 308.8 | |||||||||
Weighted average common shares outstanding and dilutive potential common shares | 306.7 | 319.1 | 315.9 | |||||||||
Cash dividends declared per common share | $ | 1.91 | $ | 2.03 | $ | 1.70 | ||||||
F-3
Table of Contents
As of December 31, | ||||||||
(In millions, except for share data) | 2008 | 2007 | ||||||
Assets | ||||||||
Investments | ||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost of $78,238 and $80,724) | $ | 65,112 | $ | 80,055 | ||||
Equity securities, held for trading, at fair value (cost of $35,278 and $30,489) | 30,820 | 36,182 | ||||||
Equity securities, available-for-sale, at fair value (cost of $1,554 and $2,611) | 1,458 | 2,595 | ||||||
Policy loans, at outstanding balance | 2,208 | 2,061 | ||||||
Mortgage loans on real estate | 6,469 | 5,410 | ||||||
Limited partnerships and other alternative investments | 2,295 | 2,566 | ||||||
Other investments | 1,723 | 615 | ||||||
Short-term investments | 10,022 | 1,602 | ||||||
Total investments | 120,107 | 131,086 | ||||||
Cash | 1,811 | 2,011 | ||||||
Premiums receivable and agents’ balances | 3,604 | 3,681 | ||||||
Reinsurance recoverables | 6,357 | 5,150 | ||||||
Deferred policy acquisition costs and present value of future profits | 13,248 | 11,742 | ||||||
Deferred income taxes | 5,239 | 308 | ||||||
Goodwill | 1,060 | 1,726 | ||||||
Property and equipment, net | 1,075 | 972 | ||||||
Other assets | 4,898 | 3,739 | ||||||
Separate account assets | 130,184 | 199,946 | ||||||
Total assets | $ | 287,583 | $ | 360,361 | ||||
Liabilities | ||||||||
Reserve for future policy benefits and unpaid losses and loss adjustment expenses | ||||||||
Property and casualty | $ | 21,933 | $ | 22,153 | ||||
Life | 16,747 | 15,331 | ||||||
Other policyholder funds and benefits payable | 53,753 | 44,190 | ||||||
Other policyholder funds and benefits payable — International variable annuities | 30,799 | 36,152 | ||||||
Unearned premiums | 5,379 | 5,545 | ||||||
Short-term debt | 398 | 1,365 | ||||||
Long-term debt | 5,823 | 3,142 | ||||||
Consumer notes | 1,210 | 809 | ||||||
Other liabilities | 12,089 | 12,524 | ||||||
Separate account liabilities | 130,184 | 199,946 | ||||||
Total liabilities | 278,315 | 341,157 | ||||||
Commitments and Contingencies (Note 12) | ||||||||
Stockholders’ Equity | ||||||||
Preferred stock, $0.01 par value — 50,000,000 shares authorized, 6,048,387 and 0 shares issued | — | — | ||||||
Common stock, $0.01 par value — 750,000,000 shares authorized, 329,920,310 and 329,951,138 shares issued | 3 | 3 | ||||||
Additional paid-in capital | 7,569 | 6,627 | ||||||
Retained earnings | 11,336 | 14,686 | ||||||
Treasury stock, at cost — 29,341,378 and 16,108,895 shares | (2,120 | ) | (1,254 | ) | ||||
Accumulated other comprehensive loss, net of tax | (7,520 | ) | (858 | ) | ||||
Total stockholders’ equity | 9,268 | 19,204 | ||||||
Total liabilities and stockholders’ equity | $ | 287,583 | $ | 360,361 | ||||
F-4
Table of Contents
For the years ended December 31, | ||||||||||||
(In millions, except for share data) | 2008 | 2007 | 2006 | |||||||||
Preferred Stock | $ | — | $ | — | $ | — | ||||||
Common Stock | 3 | 3 | 3 | |||||||||
Additional Paid-in Capital | ||||||||||||
Balance at beginning of year | 6,627 | 6,321 | 5,067 | |||||||||
Issuance of convertible preferred shares | 727 | — | — | |||||||||
Issuance of warrants | 240 | — | — | |||||||||
Issuance of shares from equity unit contracts | — | — | 1,020 | |||||||||
Issuance of shares and compensation expense associated with incentive and stock compensation plans | (36 | ) | 257 | 190 | ||||||||
Tax benefit on employee stock options and awards and other | 11 | 49 | 44 | |||||||||
Balance at end of year | 7,569 | 6,627 | 6,321 | |||||||||
Retained Earnings | ||||||||||||
Balance at beginning of year, before cumulative effect of accounting changes, net of tax | 14,686 | 12,421 | 10,207 | |||||||||
Cumulative effect of accounting changes, net of tax | (3 | ) | (41 | ) | — | |||||||
Balance at beginning of year, as adjusted | 14,683 | 12,380 | 10,207 | |||||||||
Net income (loss) | (2,749 | ) | 2,949 | 2,745 | ||||||||
Dividends declared on preferred stock | (8 | ) | — | — | ||||||||
Dividends declared on common stock | (590 | ) | (643 | ) | (531 | ) | ||||||
Balance at end of year | 11,336 | 14,686 | 12,421 | |||||||||
Treasury Stock, at Cost | ||||||||||||
Balance at beginning of year | (1,254 | ) | (47 | ) | (42 | ) | ||||||
Treasury stock acquired | (1,000 | ) | (1,193 | ) | — | |||||||
Issuance of shares under incentive and stock compensation plans from treasury stock | 152 | — | — | |||||||||
Return of shares to treasury stock under incentive and stock compensation plans | (18 | ) | (14 | ) | (5 | ) | ||||||
Balance at end of year | (2,120 | ) | (1,254 | ) | (47 | ) | ||||||
Accumulated Other Comprehensive Income (Loss), Net of Tax | ||||||||||||
Balance at beginning of year | (858 | ) | 178 | 90 | ||||||||
Total other comprehensive income (loss) | (6,662 | ) | (1,036 | ) | 554 | |||||||
Adjustment to initially apply SFAS 158, net of tax | — | — | (466 | ) | ||||||||
Balance at end of year | (7,520 | ) | (858 | ) | 178 | |||||||
Total stockholders’ equity | $ | 9,268 | $ | 19,204 | $ | 18,876 | ||||||
Outstanding Common Shares (in thousands) | ||||||||||||
Balance at beginning of year | 313,842 | 323,315 | 302,152 | |||||||||
Issuance of shares from equity unit contracts | — | — | 17,856 | |||||||||
Treasury stock acquired | (14,682 | ) | (12,878 | ) | — | |||||||
Issuance of shares under incentive and stock compensation plans | 1,673 | 3,549 | 3,358 | |||||||||
Return of shares to treasury stock under incentive and stock compensation plans | (254 | ) | (144 | ) | (51 | ) | ||||||
Balance at end of year | 300,579 | 313,842 | 323,315 | |||||||||
For the years ended December 31, | ||||||||||||
(In millions) | 2008 | 2007 | 2006 | |||||||||
Comprehensive Income (Loss) | ||||||||||||
Net income (loss) | $ | (2,749 | ) | $ | 2,949 | $ | 2,745 | |||||
Other Comprehensive Income (Loss), Net of Tax | ||||||||||||
Change in unrealized gain/loss on securities | (7,127 | ) | (1,417 | ) | 89 | |||||||
Change in net gain/loss on cash-flow hedging instruments | 784 | 94 | (124 | ) | ||||||||
Change in foreign currency translation adjustments | 196 | 146 | 29 | |||||||||
Changes in pension and other postretirement plan adjustments | (515 | ) | 141 | 560 | ||||||||
Total other comprehensive income (loss) | (6,662 | ) | (1,036 | ) | 554 | |||||||
Total comprehensive income (loss) | $ | (9,411 | ) | $ | 1,913 | $ | 3,299 | |||||
F-5
Table of Contents
For the years ended December 31, | ||||||||||||
(In millions) | 2008 | 2007 | 2006 | |||||||||
Operating Activities | ||||||||||||
Net income (loss) | $ | (2,749 | ) | $ | 2,949 | $ | 2,745 | |||||
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 | 4,271 | 2,989 | 3,558 | |||||||||
Additions to deferred policy acquisition costs and present value of future profits | (3,675 | ) | (4,194 | ) | (4,092 | ) | ||||||
Change in: | ||||||||||||
Reserve for future policy benefits, unpaid losses and loss adjustment expenses and unearned premiums | 1,026 | 1,357 | 975 | |||||||||
Reinsurance recoverables | 300 | 487 | 1,071 | |||||||||
Receivables | (4 | ) | 128 | (34 | ) | |||||||
Payables and accruals | (103 | ) | 306 | (287 | ) | |||||||
Accrued and deferred income taxes | (2,156 | ) | 619 | 657 | ||||||||
Net realized capital losses | 5,918 | 994 | 251 | |||||||||
Net (increase) decrease in equity securities, held for trading | 2,295 | (4,701 | ) | (5,609 | ) | |||||||
Net receipts (disbursements) from investment contracts credited to policyholder funds — | ||||||||||||
International variable annuities associated with equity securities, held for trading | (2,276 | ) | 4,695 | 5,594 | ||||||||
Goodwill impairment | 745 | — | — | |||||||||
Depreciation and amortization | 361 | 794 | 606 | |||||||||
Other, net | 239 | (432 | ) | 203 | ||||||||
Net cash provided by operating activities | 4,192 | 5,991 | 5,638 | |||||||||
Investing Activities | ||||||||||||
Proceeds from the sale/maturity/prepayment of: | ||||||||||||
Fixed maturities, available-for-sale, including short-term investments | 26,097 | 34,063 | 35,432 | |||||||||
Equity securities, available-for-sale | 616 | 468 | 514 | |||||||||
Mortgage loans | 386 | 1,365 | 392 | |||||||||
Partnerships | 438 | 324 | 154 | |||||||||
Payments for the purchase of: | ||||||||||||
Fixed maturities, available-for-sale, including short-term investments | (32,708 | ) | (37,799 | ) | (40,368 | ) | ||||||
Equity securities, available-for-sale | (714 | ) | (1,224 | ) | (924 | ) | ||||||
Mortgage loans | (1,469 | ) | (3,454 | ) | (1,974 | ) | ||||||
Partnerships | (678 | ) | (1,229 | ) | (809 | ) | ||||||
Change in policy loans, net | (147 | ) | (10 | ) | (36 | ) | ||||||
Change in payables for collateral under securities lending, net | (1,405 | ) | 2,218 | 970 | ||||||||
Derivative receipts (payments) | 1,688 | (267 | ) | (65 | ) | |||||||
Change in all other securities, net | (555 | ) | (356 | ) | (389 | ) | ||||||
Purchase price adjustment of business acquired | (94 | ) | — | — | ||||||||
Sale of subsidiary, net of cash transferred | — | — | (112 | ) | ||||||||
Additions to property and equipment, net | (282 | ) | (275 | ) | (195 | ) | ||||||
Net cash used for investing activities | (8,827 | ) | (6,176 | ) | (7,410 | ) | ||||||
Financing Activities | ||||||||||||
Deposits and other additions to investment and universal life-type contracts | 21,015 | 32,494 | 27,450 | |||||||||
Withdrawals and other deductions from investment and universal life-type contracts | (25,793 | ) | (30,443 | ) | (27,096 | ) | ||||||
Net transfers from (to) separate accounts related to investment and universal life-type contracts | 7,353 | (761 | ) | 1,189 | ||||||||
Issuance of shares from equity unit contracts | — | — | 1,020 | |||||||||
Issuance of long-term debt | 2,670 | 495 | 990 | |||||||||
Repayment/maturity of long-term debt | (955 | ) | (300 | ) | (1,415 | ) | ||||||
Payments on capital lease obligations | (37 | ) | — | — | ||||||||
Change in short-term debt | — | 75 | (173 | ) | ||||||||
Issuance of convertible preferred shares | 727 | — | — | |||||||||
Issuance of warrants | 512 | — | — | |||||||||
Proceeds from issuance of consumer notes | 445 | 551 | 258 | |||||||||
Repayments of consumer notes | (44 | ) | — | — | ||||||||
Proceeds from issuances of shares under incentive and stock compensation plans, net | 54 | 186 | 147 | |||||||||
Excess tax benefits on stock-based compensation | 5 | 45 | 10 | |||||||||
Treasury stock acquired | (1,000 | ) | (1,193 | ) | — | |||||||
Return of shares under incentive and stock compensation plans to treasury stock | (18 | ) | (14 | ) | (5 | ) | ||||||
Dividends paid | (660 | ) | (636 | ) | (460 | ) | ||||||
Net cash provided by financing activities | 4,274 | 499 | 1,915 | |||||||||
Foreign exchange rate effect on cash | 161 | 273 | 8 | |||||||||
Net increase (decrease) in cash | (200 | ) | 587 | 151 | ||||||||
Cash — beginning of year | 2,011 | 1,424 | 1,273 | |||||||||
Cash — end of year | $ | 1,811 | $ | 2,011 | $ | 1,424 | ||||||
Supplemental Disclosure of Cash Flow Information — Net Cash Paid During the Year for: | ||||||||||||
Income taxes | $ | 253 | $ | 451 | $ | 179 | ||||||
Interest | $ | 286 | $ | 257 | $ | 274 |
F-6
Table of Contents
F-7
Table of Contents
NOTES TO 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.” |
F-8
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-9
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-10
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-11
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | Most of the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree shall be measured at their acquisition-date fair values in accordance with SFAS 157 fair value rather than SFAS 141’s requirement based on estimated fair values; | |
• | Acquisition-related costs incurred by the acquirer shall be expensed in the periods in which the costs are incurred rather than included in the cost of the acquired entity; | |
• | Goodwill shall be measured as the excess of the consideration transferred, including the fair value of any contingent consideration, plus the fair value of any noncontrolling interest in the acquiree, over the fair values of the acquired identifiable net assets, rather than measured as the excess of the cost of the acquired entity over the estimated fair values of the acquired identifiable net assets; | |
• | Contractual pre-acquisition contingencies are to be recognized at their acquisition date fair values and noncontractual pre-acquisition contingencies are to be recognized at their acquisition date fair values only if it is more likely than not that the contingency gives rise to an asset or liability, whereas SFAS 141 generally permits the deferred recognition of pre-acquisition contingencies until the recognition criteria of SFAS No. 5, “Accounting for Contingencies” are met; and | |
• | Contingent consideration shall be recognized at the acquisition date rather than when the contingency is resolved and consideration is issued or becomes issuable. |
F-12
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-13
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-14
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-15
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-16
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Individual Variable Annuities — | Individual Variable Annuities — | |||||||||||||||||||||||
U.S. | Japan | Individual Life | ||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
DAC | $ | 4,844 | $ | 4,982 | $ | 1,834 | $ | 1,760 | $ | 2,931 | $ | 2,309 | ||||||||||||
Sales Inducements | $ | 436 | $ | 390 | $ | 21 | $ | 8 | $ | 36 | $ | 20 | ||||||||||||
URR | $ | 109 | $ | 124 | $ | — | $ | — | $ | 1,299 | $ | 816 | ||||||||||||
SOP 03-1 reserves | $ | 867 | $ | 527 | $ | 229 | $ | 42 | $ | 40 | $ | 19 |
F-17
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-18
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Death and | ||||||||||||||||||||
DAC | Unearned | Income | Sales | |||||||||||||||||
Segment | and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total [2] | |||||||||||||||
Retail | $ | (648 | ) | $ | 18 | $ | (75 | ) | $ | (27 | ) | $ | (732 | ) | ||||||
Retirement Plans | (49 | ) | — | — | — | (49 | ) | |||||||||||||
Institutional | — | — | — | — | — | |||||||||||||||
Individual Life | (29 | ) | (12 | ) | (3 | ) | — | (44 | ) | |||||||||||
International — Japan | (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 | ||||||||||||||||||||
DAC | Unearned | Income | Sales | |||||||||||||||||
Segment | and | Revenue | Benefit | Inducement | ||||||||||||||||
After-tax (charge) benefit | PVFP | Reserves | Reserves [1] | Assets | Total [2] | |||||||||||||||
Retail | $ | 180 | $ | (5 | ) | $ | (4 | ) | $ | 9 | $ | 180 | ||||||||
Retirement Plans | (9 | ) | — | — | — | (9 | ) | |||||||||||||
Institutional | 1 | — | — | — | 1 | |||||||||||||||
Individual Life | 24 | (8 | ) | — | — | 16 | ||||||||||||||
International — Japan | 16 | — | 6 | — | 22 | |||||||||||||||
Corporate | 3 | — | — | — | 3 | |||||||||||||||
Total | $ | 215 | $ | (13 | ) | $ | 2 | $ | 9 | $ | 213 | |||||||||
[1] | As a result of the unlock, death benefit reserves, in Retail, decreased $4, pre-tax, offset by a decrease of $10, pre-tax, in reinsurance recoverables. | |
[2] | The following were the most significant contributors to the unlock amounts recorded during the third quarter of 2007: |
• | Actual separate account returns were above our aggregated estimated return. | ||
�� | During the third quarter of 2007, the Company estimated gross profits using the mean of EGPs derived from a set of stochastic scenarios that have been calibrated to our estimated separate account return as compared to prior year where we used a single deterministic estimation. The impact of this change in estimation was a benefit of $13, after-tax, for Japan variable annuities and $20, after-tax, for U.S. variable annuities. | ||
• | As part of its continual enhancement to its assumption setting processes and in connection with its assumption study, the Company included dynamic lapse behavior assumptions. Dynamic lapses reflect that lapse behavior will be different depending upon market movements. The impact of this assumption change along with other base lapse rate changes was an approximate benefit of $40, after-tax, for U.S. variable annuities. |
F-19
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-20
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-21
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-22
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-23
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net | Per Share | |||||||||||
(In millions, except for per share data) | Income (Loss) | Shares | Amount | |||||||||
2008 | ||||||||||||
Basic Loss per Share [1] [2] | ||||||||||||
Net loss | $ | (2,749 | ) | |||||||||
Less: Preferred stock dividends | 8 | |||||||||||
Net loss available to common shareholders | (2,757 | ) | 306.7 | $ | (8.99 | ) | ||||||
Diluted Loss per Share [2] [3] | ||||||||||||
Stock compensation plans | — | — | ||||||||||
Net loss available to common shareholders plus assumed conversions | $ | (2,757 | ) | 306.7 | $ | (8.99 | ) | |||||
2007 | ||||||||||||
Basic Earnings per share | ||||||||||||
Net income available to common shareholders | $ | 2,949 | 316.3 | $ | 9.32 | |||||||
Diluted Earnings per Share | ||||||||||||
Stock compensation plans | — | 2.8 | ||||||||||
Net income available to common shareholders plus assumed conversions | $ | 2,949 | 319.1 | $ | 9.24 | |||||||
2006 | ||||||||||||
Basic Earnings per Share | ||||||||||||
Net income available to common shareholders | $ | 2,745 | 308.8 | $ | 8.89 | |||||||
Diluted Earnings per Share | ||||||||||||
Stock compensation plans | — | 3.0 | ||||||||||
Equity Units | — | 4.1 | ||||||||||
Net income available to common shareholders plus assumed conversions | $ | 2,745 | 315.9 | $ | 8.69 | |||||||
[1] | Due to the net loss for the year ended December 31, 2008, no allocation of the net loss was made to the preferred shareholders under the two-class method in the calculation of basic earnings per share, as the preferred shareholders had no contractual obligation to fund the net losses of the Company. In the absence of the net loss, any such income would be allocated to the preferred shareholders based on the weighted average number of preferred shares outstanding as of December 31, 2008. | |
[2] | As a result of the net loss in the year ended December 31, 2008, SFAS 128 requires the Company to use basic weighted average common shares outstanding in the calculation of the year ended December 31, 2008 diluted loss per share, since the inclusion of shares for stock compensation plans of 1.3 million and the assumed conversion of the preferred shares to common of 5.0 million 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 313.0 million. | |
[3] | Effective January 9, 2009, 6.0 million preferred shares converted to 24.2 million common shares. |
F-24
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-25
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net assumed (ceded) earned premiums under inter-segment | For the years ended December 31, | |||||||||||
arrangements and retention | 2008 | 2007 | 2006 | |||||||||
Personal Lines | $ | (6 | ) | $ | (7 | ) | $ | (21 | ) | |||
Small Commercial | (31 | ) | (29 | ) | (31 | ) | ||||||
Middle Market | (31 | ) | (34 | ) | (45 | ) | ||||||
Specialty Commercial | 68 | 70 | 97 | |||||||||
Total | $ | — | $ | — | $ | — | ||||||
F-26
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Revenues by Product Line | 2008 | 2007 | 2006 | |||||||||
Life | ||||||||||||
Earned premiums, fees, and other considerations | ||||||||||||
Retail | ||||||||||||
Individual annuity: | ||||||||||||
Individual variable annuity | $ | 1,943 | $ | 2,225 | $ | 1,957 | ||||||
Fixed / MVA Annuity | (6 | ) | 2 | 1 | ||||||||
Retail mutual funds | 618 | 642 | 524 | |||||||||
Other | 198 | 186 | 127 | |||||||||
Total Retail | 2,753 | 3,055 | 2,609 | |||||||||
Individual Life | ||||||||||||
Total Individual Life | 828 | 808 | 832 | |||||||||
Total Individual Markets Group | 3,581 | 3,863 | 3,441 | |||||||||
Retirement Plans | ||||||||||||
401(k) | 290 | 187 | 160 | |||||||||
403(b)/457 | 48 | 55 | 52 | |||||||||
Total Retirement Plans | 338 | 242 | 212 | |||||||||
Group Benefits | ||||||||||||
Group disability | 2,020 | 1,920 | 1,849 | |||||||||
Group life and accident | 2,084 | 1,926 | 1,830 | |||||||||
Other | 287 | 455 | 470 | |||||||||
Total Group Benefits | 4,391 | 4,301 | 4,149 | |||||||||
Total Employer Markets Group | 4,729 | 4,543 | 4,361 | |||||||||
International | ||||||||||||
Variable annuity | 876 | 820 | 691 | |||||||||
Fixed MVA annuity | (7 | ) | 10 | 10 | ||||||||
Other | 3 | 2 | — | |||||||||
Total International | 872 | 832 | 701 | |||||||||
Institutional | ||||||||||||
IIP | 923 | 1,015 | 630 | |||||||||
PPLI | 118 | 223 | 102 | |||||||||
Total Institutional | 1,041 | 1,238 | 732 | |||||||||
Other | 60 | 67 | 81 | |||||||||
Total Life premiums, fees, and other considerations | 10,283 | 10,543 | 9,316 | |||||||||
Net investment income (loss) | ||||||||||||
Securities available-for-sale and other | 3,045 | 3,497 | 3,184 | |||||||||
Equity securities held for trading | (10,340 | ) | 145 | 1,824 | ||||||||
Net investment income (loss) | (7,295 | ) | 3,642 | 5,008 | ||||||||
Net realized capital losses | (4,138 | ) | (819 | ) | (260 | ) | ||||||
Total Life | (1,150 | ) | 13,366 | 14,064 | ||||||||
F-27
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Revenues by Product Line (continued) | 2008 | 2007 | 2006 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | ||||||||||||
Earned premiums | ||||||||||||
Personal Lines | ||||||||||||
Automobile | $ | 2,824 | $ | 2,822 | $ | 2,792 | ||||||
Homeowners | 1,102 | 1,067 | 968 | |||||||||
Total Personal Lines | 3,926 | 3,889 | 3,760 | |||||||||
Small Commercial | ||||||||||||
Workers’ Compensation | 1,241 | 1,230 | 1,156 | |||||||||
Package Business | 1,167 | 1,169 | 1,143 | |||||||||
Automobile | 316 | 337 | 353 | |||||||||
Total Small Commercial | 2,724 | 2,736 | 2,652 | |||||||||
Middle Market | ||||||||||||
Workers’ Compensation | 847 | 861 | 883 | |||||||||
Property | 611 | 627 | 639 | |||||||||
Automobile | 335 | 382 | 408 | |||||||||
Liability | 506 | 550 | 593 | |||||||||
Total Middle Market | 2,299 | 2,420 | 2,523 | |||||||||
Specialty Commercial | ||||||||||||
Workers’ Compensation | 288 | 304 | 341 | |||||||||
Property | 86 | 117 | 119 | |||||||||
Automobile | 84 | 83 | 83 | |||||||||
Liability | 241 | 246 | 272 | |||||||||
Fidelity and surety | 272 | 256 | 231 | |||||||||
Professional Liability | 414 | 429 | 419 | |||||||||
Other | (3 | ) | 11 | 28 | ||||||||
Total Specialty Commercial | 1,382 | 1,446 | 1,493 | |||||||||
Total Ongoing Operations | 10,331 | 10,491 | 10,428 | |||||||||
Other Operations | 7 | 5 | 5 | |||||||||
Total earned premiums | 10,338 | 10,496 | 10,433 | |||||||||
Servicing revenue | 504 | 496 | 473 | |||||||||
Net investment income | 1,253 | 1,687 | 1,486 | |||||||||
Net realized capital gains (losses) | (1,877 | ) | (172 | ) | 9 | |||||||
Total Property & Casualty | 10,218 | 12,507 | 12,401 | |||||||||
Corporate | 151 | 43 | 35 | |||||||||
Total revenues | $ | 9,219 | $ | 25,916 | $ | 26,500 | ||||||
F-28
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Net Income (Loss) | 2008 | 2007 | 2006 | |||||||||
Life | ||||||||||||
Retail | $ | (1,399 | ) | $ | 812 | $ | 536 | |||||
Individual Life | (43 | ) | 182 | 150 | ||||||||
Total Individual Markets Group | (1,442 | ) | 994 | 686 | ||||||||
Retirement Plans | (157 | ) | 61 | 101 | ||||||||
Group Benefits | (6 | ) | 315 | 298 | ||||||||
Total Employer Markets Group | (163 | ) | 376 | 399 | ||||||||
International | (325 | ) | 223 | 231 | ||||||||
Institutional | (502 | ) | 17 | 78 | ||||||||
Other | (11 | ) | (52 | ) | 47 | |||||||
Total Life | (2,443 | ) | 1,558 | 1,441 | ||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | ||||||||||||
Underwriting Results | ||||||||||||
Personal Lines | 280 | 322 | 429 | |||||||||
Small Commercial | 437 | 508 | 422 | |||||||||
Middle Market | 169 | 157 | 214 | |||||||||
Specialty Commercial | 71 | (18 | ) | 46 | ||||||||
Total Ongoing Operations underwriting results | 957 | 969 | 1,111 | |||||||||
Net servicing income [1] | 31 | 52 | 53 | |||||||||
Net investment income | 1,056 | 1,439 | 1,225 | |||||||||
Net realized capital losses | (1,669 | ) | (160 | ) | (17 | ) | ||||||
Other expenses | (219 | ) | (248 | ) | (222 | ) | ||||||
Income tax (expense) benefit | 33 | (575 | ) | (596 | ) | |||||||
Ongoing Operations | 189 | 1,477 | 1,554 | |||||||||
Other Operations | (97 | ) | 30 | (35 | ) | |||||||
Total Property & Casualty | 92 | 1,507 | 1,519 | |||||||||
Corporate | (398 | ) | (116 | ) | (215 | ) | ||||||
Net income (loss) | $ | (2,749 | ) | $ | 2,949 | $ | 2,745 | |||||
[1] | Amount is net of expenses related to service business. |
Amortization of deferred policy acquisition costs and | For the years ended December 31, | |||||||||||
present value of future profits | 2008 | 2007 | 2006 | |||||||||
Life | ||||||||||||
Individual Markets Group | ||||||||||||
Retail | $ | 1,344 | $ | 406 | $ | 973 | ||||||
Individual Life | 169 | 121 | 243 | |||||||||
Total Individual Markets Group | 1,513 | 527 | 1,216 | |||||||||
Employer Markets Group | ||||||||||||
Retirement Plans | 91 | 58 | (4 | ) | ||||||||
Group Benefits | 57 | 62 | 41 | |||||||||
Total Employer Markets Group | 148 | 120 | 37 | |||||||||
International | 496 | 214 | 167 | |||||||||
Institutional | 19 | 23 | 32 | |||||||||
Total Life | 2,176 | 884 | 1,452 | |||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | ||||||||||||
Personal Lines | 633 | 617 | 622 | |||||||||
Small Commercial | 636 | 635 | 634 | |||||||||
Middle Market | 513 | 529 | 544 | |||||||||
Specialty Commercial | 313 | 323 | 306 | |||||||||
Total Ongoing Operations | 2,095 | 2,104 | 2,106 | |||||||||
Total Property & Casualty | 2,095 | 2,104 | 2,106 | |||||||||
Corporate | — | 1 | — | |||||||||
Total amortization of deferred policy acquisition costs and present value of future profits | $ | 4,271 | $ | 2,989 | $ | 3,558 | ||||||
F-29
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Income tax expense (benefit) | 2008 | 2007 | 2006 | |||||||||
Life | ||||||||||||
Retail | $ | (972 | ) | $ | 216 | $ | 39 | |||||
Individual Life | (41 | ) | 81 | 62 | ||||||||
Total Individual Markets Group | (1,013 | ) | 297 | 101 | ||||||||
Retirement Plans | (132 | ) | 18 | 39 | ||||||||
Group Benefits | (53 | ) | 119 | 109 | ||||||||
Total Employer Markets Group | (185 | ) | 137 | 148 | ||||||||
International | (145 | ) | 132 | 127 | ||||||||
Institutional | (288 | ) | (8 | ) | 26 | |||||||
Other | (15 | ) | (11 | ) | 21 | |||||||
Total Life | (1,646 | ) | 547 | 423 | ||||||||
Property & Casualty | ||||||||||||
Ongoing Operations | (33 | ) | 575 | 596 | ||||||||
Other Operations | (62 | ) | (5 | ) | (45 | ) | ||||||
Total Property & Casualty | (95 | ) | 570 | 551 | ||||||||
Corporate | (101 | ) | (61 | ) | (117 | ) | ||||||
Total income tax expense (benefit) | $ | (1,842 | ) | $ | 1,056 | $ | 857 | |||||
Geographical Revenue Information | For the years ended December 31, | |||||||||||
Revenues | 2008 | 2007 | 2006 | |||||||||
United States of America | $ | 18,904 | $ | 24,842 | $ | 23,848 | ||||||
Japan | (9,745 | ) | 968 | 2,536 | ||||||||
Other | 60 | 106 | 116 | |||||||||
Total revenues | $ | 9,219 | $ | 25,916 | $ | 26,500 | ||||||
As of December 31, | ||||||||
Assets | 2008 | 2007 | ||||||
Life | ||||||||
Retail | $ | 97,222 | $ | 136,023 | ||||
Individual Life | 13,770 | 15,590 | ||||||
Total Individual Markets Group | 110,992 | 151,613 | ||||||
Retirement Plans | 22,581 | 27,986 | ||||||
Group Benefits | 9,036 | 9,295 | ||||||
Total Employer Markets Group | 31,617 | 37,281 | ||||||
International | 41,502 | 41,625 | ||||||
Institutional | 59,853 | 78,766 | ||||||
Other | 3,927 | 6,891 | ||||||
Total Life | 247,891 | 316,176 | ||||||
Property & Casualty | ||||||||
Ongoing Operations | 31,484 | 35,899 | ||||||
Other Operations | 5,196 | 5,942 | ||||||
Total Property & Casualty | 36,680 | 41,841 | ||||||
Corporate | 3,012 | 2,344 | ||||||
Total Assets | $ | 287,583 | $ | 360,361 | ||||
F-30
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-31
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-32
Table of Contents
NOTES TO 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. |
• | 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. |
F-33
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-34
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of January 1, 2008
Transition | ||||||||||||
Adjustment | ||||||||||||
SFAS 157 | Pre-SFAS 157 | Gain (Loss) | ||||||||||
Fair Value | Fair Value | [Before tax and | ||||||||||
Asset (Liability) | Asset (Liability) | DAC amortization] | ||||||||||
Guaranteed Benefits | ||||||||||||
U.S. Guaranteed Minimum Withdrawal Benefits | $ | (1,114 | ) | $ | (553 | ) | $ | (561 | ) | |||
Non-Life Contingent Portion of “for Life” Guaranteed Minimum Withdrawal Benefits | ||||||||||||
U.S. Riders | (319 | ) | (154 | ) | (165 | ) | ||||||
International Riders | (17 | ) | (7 | ) | (10 | ) | ||||||
Total | (336 | ) | (161 | ) | (175 | ) | ||||||
International Guaranteed Minimum Accumulation Benefits | (22 | ) | 2 | (24 | ) | |||||||
Total Guaranteed Benefits | (1,472 | ) | (712 | ) | (760 | ) | ||||||
GMWB Reinsurance | 238 | 128 | 110 | |||||||||
Total | $ | (1,234 | ) | $ | (584 | ) | $ | (650 | ) | |||
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, money market funds, 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. |
F-35
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Quoted Prices | ||||||||||||||||
in Active | Significant | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Asset (Liability) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets accounted for at fair value on a recurring basis | ||||||||||||||||
Fixed maturities, available-for-sale | $ | 65,112 | $ | 3,541 | $ | 49,761 | $ | 11,810 | ||||||||
Equity securities, held for trading | 30,820 | 1,634 | 29,186 | — | ||||||||||||
Equity securities, available-for-sale | 1,458 | 246 | 671 | 541 | ||||||||||||
Other investments | ||||||||||||||||
Other derivatives used to hedge US GMWB | 600 | — | 13 | 587 | ||||||||||||
Other investments [1] | 976 | — | 1,005 | (29 | ) | |||||||||||
Total Other Investments | 1,576 | — | 1,018 | 558 | ||||||||||||
Short-term investments | 10,022 | 7,025 | 2,997 | — | ||||||||||||
Reinsurance recoverables for US GMWB | 1,302 | — | — | 1,302 | ||||||||||||
Separate account assets [2] [5] | 126,777 | 94,804 | 31,187 | 786 | ||||||||||||
Total assets accounted for at fair value on a recurring basis | $ | 237,067 | $ | 107,250 | $ | 114,820 | $ | 14,997 | ||||||||
Liabilities accounted for at fair value on a recurring basis | ||||||||||||||||
Other policyholder funds and benefits payable | ||||||||||||||||
US GMWB | $ | (6,526 | ) | $ | — | $ | — | $ | (6,526 | ) | ||||||
UK GMWB | (64 | ) | — | — | (64 | ) | ||||||||||
Japan GMWB | (30 | ) | — | — | (30 | ) | ||||||||||
Institutional Notes | (41 | ) | — | — | (41 | ) | ||||||||||
Equity Linked Notes | (8 | ) | — | — | (8 | ) | ||||||||||
Total other policyholder funds and benefits payable | (6,669 | ) | — | — | (6,669 | ) | ||||||||||
Other liabilities [3] | ||||||||||||||||
Customized derivatives used to hedge US GMWB | 941 | — | — | 941 | ||||||||||||
Other derivatives used to hedge US GMWB | 1,123 | — | 14 | 1,109 | ||||||||||||
Macro hedge program | 137 | — | — | 137 | ||||||||||||
Other liabilities | (339 | ) | — | 76 | (415 | ) | ||||||||||
Total Other Liabilities | 1,862 | — | 90 | 1,772 | ||||||||||||
Consumer notes [4] | (5 | ) | — | — | (5 | ) | ||||||||||
Total liabilities accounted for at fair value on a recurring basis | $ | (4,812 | ) | $ | — | $ | 90 | $ | (4,902 | ) | ||||||
[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 December 31, 2008, $574 of cash collateral liability was netted against the derivative asset value on the 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 $3 billion of investment sales receivable net of investment purchases payable that are not subject to SFAS 157. |
F-36
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-37
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
% of Total | ||||||||
Fair Value | Fair Value | |||||||
ABS | ||||||||
Below Prime | $ | 1,643 | 13.3 | % | ||||
Collateralized Loan Obligations (CLOs) | 2,131 | 17.3 | % | |||||
Other | 560 | 4.5 | % | |||||
Corporate | ||||||||
Matrix priced private placements | 4,641 | 37.6 | % | |||||
Other | 1,755 | 14.2 | % | |||||
Commercial mortgage-backed securities (“CMBS”) | 802 | 6.5 | % | |||||
Preferred stock | 337 | 2.7 | % | |||||
Other | 482 | 3.9 | % | |||||
Total Level 3 securities | $ | 12,351 | 100 | % | ||||
• | 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 public securities and private placement securities qualified for sale under rule 144A, and long dated fixed maturities where the term of significant inputs may not be sufficient to be deemed observable. | |
• | 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 lower quality preferred securities that are less liquid due to market conditions. |
F-38
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-39
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in | ||||||||||||||||||||||||||||
unrealized | ||||||||||||||||||||||||||||
gains (losses) | ||||||||||||||||||||||||||||
included in net | ||||||||||||||||||||||||||||
�� | income (loss) | |||||||||||||||||||||||||||
Total | related to | |||||||||||||||||||||||||||
SFAS 157 | realized/unrealized | SFAS 157 | financial | |||||||||||||||||||||||||
Fair value | gains (losses) | Purchases, | Transfers | Fair value | instruments | |||||||||||||||||||||||
as of | included in: | issuances, | in and/or | as of | still held at | |||||||||||||||||||||||
January 1, | Net income | AOCI | and | (out) of | December 31, | December 31, | ||||||||||||||||||||||
2008 | [2], [3] | [5] | settlements | Level 3 [7] | 2008 | 2008 [3] | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Fixed maturities | $ | 17,996 | $ | (988 | ) | $ | (4,178 | ) | $ | 858 | $ | (1,878 | ) | $ | 11,810 | $ | (811 | ) | ||||||||||
Equity securities, available-for-sale | 1,339 | (77 | ) | 11 | 64 | (796 | ) | 541 | (67 | ) | ||||||||||||||||||
Freestanding derivatives [4] | ||||||||||||||||||||||||||||
Customized derivatives used to hedge US GMWB | 91 | 850 | — | — | — | 941 | 850 | |||||||||||||||||||||
Other freestanding derivatives used to hedge US GMWB | 564 | 1,161 | — | (29 | ) | — | 1,696 | 1,043 | ||||||||||||||||||||
Macro Hedge Program | 18 | 85 | — | 34 | — | 137 | 102 | |||||||||||||||||||||
Other freestanding derivatives | (419 | ) | (471 | ) | 16 | 491 | 102 | (281 | ) | (301 | ) | |||||||||||||||||
Total Freestanding Derivatives | 254 | 1,625 | 16 | 496 | 102 | 2,493 | 1,694 | |||||||||||||||||||||
Reinsurance recoverable for US GMWB [1], [2] [10] | 238 | 962 | — | 102 | — | 1,302 | 962 | |||||||||||||||||||||
Separate accounts [6] | 701 | (204 | ) | — | (26 | ) | 315 | 786 | (73 | ) | ||||||||||||||||||
Supplemental Asset Information: | ||||||||||||||||||||||||||||
Total freestanding derivatives used to hedge US GMWB including those in Levels 1, 2 and 3 [11] | 643 | 3,374 | — | (1,353 | ) | — | 2,664 | 3,374 | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
Other policyholder funds and benefits payable accounted for at fair value [2] | ||||||||||||||||||||||||||||
US GMWB | $ | (1,433 | ) | $ | (4,967 | ) | $ | — | $ | (126 | ) | $ | — | $ | (6,526 | ) | $ | (4,967 | ) | |||||||||
UK GMWB | (17 | ) | (56 | ) | 13 | (4 | ) | — | (64 | ) | (57 | ) | ||||||||||||||||
Japan GMWB | — | (26 | ) | (2 | ) | (2 | ) | — | (30 | ) | (26 | ) | ||||||||||||||||
Japan GMAB | (22 | ) | 25 | (1 | ) | (2 | ) | — | — | 25 | ||||||||||||||||||
Institutional Notes | (24 | ) | (17 | ) | — | — | — | (41 | ) | (17 | ) | |||||||||||||||||
Equity Linked Notes | (21 | ) | 13 | — | — | — | (8 | ) | 13 | |||||||||||||||||||
Total other policyholder funds and benefits payable accounted for at fair value [2] | (1,517 | ) | (5,028 | ) | 10 | (134 | ) | — | (6,669 | ) | (5,029 | ) | ||||||||||||||||
Other Liabilities | ||||||||||||||||||||||||||||
Derivative Liability-Warrants [8] | — | 110 | — | (273 | ) | — | (163 | ) | 110 | |||||||||||||||||||
Consumer notes | (5 | ) | 5 | — | (5 | ) | — | (5 | ) | 5 | ||||||||||||||||||
Supplemental Information: | ||||||||||||||||||||||||||||
Net US GMWB (Embedded derivatives, freestanding derivatives including those in Levels 1, 2 and 3 and reinsurance recoverable) [9] | (552 | ) | (631 | ) | — | (1,377 | ) | — | (2,560 | ) | (631 | ) |
[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 $6 for the twelve months ending December 31, 2008, which is reported in benefits, losses and loss adjustment expenses. All amounts are before income taxes and amortization of DAC. |
F-40
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
[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 consolidated balance sheet in other investments and other liabilities. | |
[5] | AOCI refers to “Accumulated other comprehensive income” in the consolidated statement of comprehensive income (loss). All amounts are before income taxes and amortization of DAC. | |
[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 twelve months ended December 31, 2008 are attributable to a change in the availability of market observable information for individual securities within the respective categories. | |
[8] | These amounts represent certain Allianz warrants. See Note 21 for further discussion. | |
[9] | 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 and fourth quarters due to extremely volatile capital markets, partially offset by gains in the fourth quarter related to liability model assumption updates for lapse rates. | |
[10] | 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 is accounted for as a free-standing derivative. | |
[11] | The ‘Purchases, issuances, and settlements’ primarily relates to the receipt of cash on futures and option contracts classified as Level 1 and interest rate, currency and credit default swaps classified as Level 2. |
Total | ||||||||||||||||
Fair value | Realized/unrealized | Fair value | ||||||||||||||
as of | gains (losses) | Purchases, | as of | |||||||||||||
January 1, | included in: | issuances, and | December 31, | |||||||||||||
2007 | Net income | settlements | 2007 | |||||||||||||
Assets | ||||||||||||||||
Customized derivatives used to hedge US GMWB | $ | — | $ | 50 | $ | — | $ | 50 | ||||||||
Other freestanding derivatives used to hedge US GMWB | 346 | 198 | 48 | 592 | ||||||||||||
Reinsurance recoverable for US GMWB | (22 | ) | 127 | 23 | 128 | |||||||||||
Liabilities | ||||||||||||||||
Other policyholder funds and benefits payable accounted for at fair value | ||||||||||||||||
US GMWB | $ | 53 | $ | (661 | ) | $ | (99 | ) | $ | (707 | ) | |||||
UK GMWB | — | (8 | ) | — | (8 | ) | ||||||||||
Japan GMAB | — | 2 | — | 2 | ||||||||||||
Institutional Notes | 4 | (28 | ) | — | (24 | ) | ||||||||||
Equity Linked Notes | — | 1 | (22 | ) | (21 | ) | ||||||||||
Total other policyholder funds and benefits payable accounted for at fair value | 57 | (694 | ) | (121 | ) | (758 | ) | |||||||||
Supplemental Information: | ||||||||||||||||
Net US GMWB (Embedded derivative, freestanding derivatives and reinsurance recoverable) [1] | 377 | (286 | ) | (28 | ) | 63 |
[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. |
F-41
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2008 | December 31, 2007 | |||||||||||||||
Notional | Fair | Notional | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Reinsurance recoverables for US GMWB [1] | $ | 11,437 | $ | 1,302 | $ | 6,579 | $ | 128 | ||||||||
Customized derivatives used to hedge US GMWB [2] | 10,464 | 941 | 12,784 | 50 | ||||||||||||
Freestanding derivatives used to hedge US GMWB | 8,156 | 1,723 | 8,573 | 592 | ||||||||||||
US GMWB [3] | 46,734 | (6,526 | ) | 44,852 | (707 | ) | ||||||||||
UK GMWB[3] | 1,672 | (64 | ) | 1,048 | (8 | ) | ||||||||||
Japan GMWB[3] | 361 | (30 | ) | — | — | |||||||||||
Japan GMAB[4] | 206 | — | 2,768 | 2 | ||||||||||||
Macro Hedge Program [5] | 2,188 | 137 | 661 | 18 | ||||||||||||
Consumer Notes | 70 | (5 | ) | 19 | (5 | ) | ||||||||||
Equity Linked Notes | 55 | (8 | ) | 50 | (21 | ) | ||||||||||
Total | $ | 81,343 | $ | (2,530 | ) | $ | 77,334 | $ | 49 | |||||||
[1] | The increase in notional amount of the reinsurance recoverables for U.S. GMWB was primarily due to the execution of a reinsurance transaction in July 2008. | |
[2] | The decrease in notional amount of customized derivatives used to hedge U.S. GMWB was primarily due to current market conditions causing policyholder account values to decrease. The notional on these customized derivatives is the policyholder account value. | |
[3] | The increase in notional amount of embedded derivatives associated with GMWB riders is primarily due to additional product sales. | |
[4] | The decrease in notional amount of the Japan GMAB embedded derivative is primarily due to a significant decline in the equity markets triggering policyholders to elect the GMIB feature or lump sum payout in Japan’s 3Win product. | |
[5] | The increase in notional amount of the macro hedge program is primarily due to the rebalancing of the Company’s risk management program to place a greater relative emphasis on protection of statutory surplus. |
F-42
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2008 | 2007 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Assets | ||||||||||||||||
Policy loans | $ | 2,208 | $ | 2,435 | $ | 2,061 | $ | 2,061 | ||||||||
Mortgage loans on real estate | 6,469 | 5,654 | 5,410 | 5,407 | ||||||||||||
Liabilities | ||||||||||||||||
Other policyholder funds and benefits payable [1] | $ | 14,839 | 14,576 | $ | 15,480 | $ | 15,429 | |||||||||
Commercial paper [2] | 374 | 374 | 373 | 373 | ||||||||||||
Long-term debt [3] | 5,755 | 4,539 | 4,006 | 4,118 | ||||||||||||
Consumer Notes [4] | 1,205 | 1,188 | 804 | 809 |
[1] | Excludes guarantees on variable annuities, group accident and health and universal life insurance contracts, including corporate owned life insurance. | |
[2] | Included in short-term debt in the consolidated balance sheets. | |
[3] | Excludes capital lease obligations and includes current maturities of long-term debt. | |
[4] | Excludes amounts carried at fair value and included in FAS 157 disclosures above. |
• | Fair value for policy loans and consumer notes were estimated using discounted cash flow calculations using current interest rates. | |
• | Fair values for mortgage loans on real estate were estimated using discounted cash flow calculations based on current incremental lending rates for similar type loans. Current incremental lending rates reflect changes in credit spreads and the remaining terms of the loans. | |
• | Other policyholder funds and benefits payable, not carried at fair value and not included in above FAS 157 fair value information, is determined by estimating future cash flows, discounted at the current market rate. | |
• | Carrying amounts approximate fair value for commercial paper. | |
• | Fair value for long-term debt is based on market quotations from independent third party pricing services. |
F-43
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Components of Net Investment Income | ||||||||||||
Fixed maturities [1] | $ | 4,310 | $ | 4,653 | $ | 4,266 | ||||||
Equity securities, available-for-sale | 167 | 139 | 92 | |||||||||
Equity securities, held for trading | (10,340 | ) | 145 | 1,824 | ||||||||
Mortgage loans | 333 | 293 | 158 | |||||||||
Policy loans | 139 | 135 | 142 | |||||||||
Limited partnerships and other alternative investments | (445 | ) | 255 | 133 | ||||||||
Other investments | (72 | ) | (161 | ) | (13 | ) | ||||||
Gross investment income | (5,908 | ) | 5,459 | 6,602 | ||||||||
Less: Investment expenses | 97 | 100 | 87 | |||||||||
Net investment income | $ | (6,005 | ) | $ | 5,359 | $ | 6,515 | |||||
Components of Net Realized Capital Gains (Losses) | ||||||||||||
Fixed maturities | $ | (3,012 | ) | $ | (357 | ) | $ | (113 | ) | |||
Equity securities | (1,201 | ) | (43 | ) | (11 | ) | ||||||
Foreign currency transaction remeasurements | (459 | ) | (109 | ) | 17 | |||||||
Derivatives and other [2] | (1,246 | ) | (485 | ) | (144 | ) | ||||||
Net realized capital gains (losses) | $ | (5,918 | ) | $ | (994 | ) | $ | (251 | ) | |||
[1] | Includes income on short-term bonds. | |
[2] | Primarily consists of changes in fair value on non-qualifying derivatives, hedge ineffectiveness on qualifying derivative instruments, foreign currency gains and losses, and other investment gains and losses. |
Components of Net Unrealized Gains (Losses) on Available-for-Sale Securities | ||||||||||||
Fixed maturities | $ | (13,126 | ) | $ | (669 | ) | $ | 1,466 | ||||
Equity securities | (96 | ) | (16 | ) | 204 | |||||||
Net unrealized gains (losses) credited to policyholders | (101 | ) | 3 | (4 | ) | |||||||
Net unrealized gains (losses) | (13,323 | ) | (682 | ) | 1,666 | |||||||
Deferred income taxes and other items | (5,837 | ) | (323 | ) | 608 | |||||||
Net unrealized gains (losses), net of tax — end of year | (7,486 | ) | (359 | ) | 1,058 | |||||||
Net unrealized gains (losses), net of tax — beginning of year | (359 | ) | 1,058 | 969 | ||||||||
Change in unrealized gains (losses) on available-for-sale securities | $ | (7,127 | ) | $ | (1,417 | ) | $ | 89 | ||||
F-44
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||
Cost or | Gross | Gross | Cost or | Gross | Gross | |||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||
Bonds and Notes | ||||||||||||||||||||||||||||||||
ABS | $ | 8,863 | $ | 13 | $ | (2,608 | ) | $ | 6,268 | $ | 9,515 | $ | 33 | $ | (633 | ) | $ | 8,915 | ||||||||||||||
CMBS | ||||||||||||||||||||||||||||||||
Agency backed | 433 | 16 | — | 449 | 445 | 10 | — | 455 | ||||||||||||||||||||||||
Non-agency backed | 14,303 | 29 | (6,005 | ) | 8,327 | 17,180 | 234 | (838 | ) | 16,576 | ||||||||||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||
Agency backed | 849 | 46 | (8 | ) | 887 | 1,191 | 32 | (4 | ) | 1,219 | ||||||||||||||||||||||
Non-agency backed | 413 | 1 | (124 | ) | 290 | 525 | 4 | (3 | ) | 526 | ||||||||||||||||||||||
Corporate | 31,059 | 623 | (4,501 | ) | 27,181 | 34,118 | 1,022 | (942 | ) | 34,198 | ||||||||||||||||||||||
Government/government agencies | ||||||||||||||||||||||||||||||||
Foreign | 2,786 | 100 | (65 | ) | 2,821 | 999 | 59 | (5 | ) | 1,053 | ||||||||||||||||||||||
United States | 5,883 | 112 | (39 | ) | 5,956 | 836 | 22 | (3 | ) | 855 | ||||||||||||||||||||||
MBS | 2,243 | 42 | (7 | ) | 2,278 | 2,757 | 26 | (20 | ) | 2,763 | ||||||||||||||||||||||
States, municipalities and political subdivisions | 11,406 | 202 | (953 | ) | 10,655 | 13,152 | 427 | (90 | ) | 13,489 | ||||||||||||||||||||||
Redeemable preferred stock | — | — | — | — | 6 | — | — | 6 | ||||||||||||||||||||||||
Fixed maturities | 78,238 | 1,184 | (14,310 | ) | 65,112 | 80,724 | 1,869 | (2,538 | ) | 80,055 | ||||||||||||||||||||||
Equity securities, available-for-sale | 1,554 | 203 | (299 | ) | 1,458 | 2,611 | 218 | (234 | ) | 2,595 | ||||||||||||||||||||||
Total securities, available-for-sale | $ | 79,792 | $ | 1,387 | $ | (14,609 | ) | $ | 66,570 | $ | 83,335 | $ | 2,087 | $ | (2,772 | ) | $ | 82,650 | ||||||||||||||
December 31, 2008 | ||||||||
Maturity | Amortized Cost | Fair Value | ||||||
One year or less | $ | 2,135 | $ | 2,187 | ||||
Over one year through five years | 13,840 | 13,127 | ||||||
Over five years through ten years | 14,692 | 13,357 | ||||||
Over ten years | 35,203 | 26,718 | ||||||
Subtotal | 65,870 | 55,389 | ||||||
ABS, MBS, and CMOs | 12,368 | 9,723 | ||||||
Total | $ | 78,238 | $ | 65,112 | ||||
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Sale of Fixed Maturities | ||||||||||||
Sale proceeds | $ | 19,599 | $ | 21,968 | $ | 26,827 | ||||||
Gross gains | 511 | 424 | 427 | |||||||||
Gross losses | (873 | ) | (276 | ) | (407 | ) | ||||||
Sale of Equity Securities, Available-for-Sale | ||||||||||||
Sale proceeds | $ | 616 | $ | 468 | $ | 514 | ||||||
Gross gains | 38 | 28 | 11 | |||||||||
Gross losses | (78 | ) | (15 | ) | (14 | ) |
F-45
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-46
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 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 | $ | 1,870 | $ | 1,487 | $ | (383 | ) | $ | 6,811 | $ | 4,586 | $ | (2,225 | ) | $ | 8,681 | $ | 6,073 | $ | (2,608 | ) | |||||||||||||||
CMBS — Non-agency backed | 5,986 | 4,354 | (1,632 | ) | 8,110 | 3,737 | (4,373 | ) | 14,096 | 8,091 | (6,005 | ) | ||||||||||||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||||||
Agency backed | 75 | 68 | (7 | ) | 34 | 33 | (1 | ) | 109 | 101 | (8 | ) | ||||||||||||||||||||||||
Non-agency backed | 332 | 235 | (97 | ) | 82 | 55 | (27 | ) | 414 | 290 | (124 | ) | ||||||||||||||||||||||||
Corporate | 16,604 | 14,145 | (2,459 | ) | 7,028 | 4,986 | (2,042 | ) | 23,632 | 19,131 | (4,501 | ) | ||||||||||||||||||||||||
Government/government agencies | ||||||||||||||||||||||||||||||||||||
Foreign | 1,263 | 1,211 | (52 | ) | 43 | 30 | (13 | ) | 1,306 | 1,241 | (65 | ) | ||||||||||||||||||||||||
United States | 4,120 | 4,083 | (37 | ) | 66 | 64 | (2 | ) | 4,186 | 4,147 | (39 | ) | ||||||||||||||||||||||||
MBS | 50 | 50 | — | 250 | 243 | (7 | ) | 300 | 293 | (7 | ) | |||||||||||||||||||||||||
States, municipalities and political subdivisions | 5,153 | 4,640 | (513 | ) | 2,578 | 2,138 | (440 | ) | 7,731 | 6,778 | (953 | ) | ||||||||||||||||||||||||
Total fixed maturities | 35,453 | 30,273 | (5,180 | ) | 25,002 | 15,872 | (9,130 | ) | 60,455 | 46,145 | (14,310 | ) | ||||||||||||||||||||||||
Equity securities, available-for-sale | 1,017 | 796 | (221 | ) | 277 | 199 | (78 | ) | 1,294 | 995 | (299 | ) | ||||||||||||||||||||||||
Total temporarily impaired securities | $ | 36,470 | $ | 31,069 | $ | (5,401 | ) | $ | 25,279 | $ | 16,071 | $ | (9,208 | ) | $ | 61,749 | $ | 47,140 | $ | (14,609 | ) | |||||||||||||||
�� |
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 | ) | |||||||||||||||
CMBS — Non-agency backed | 8,138 | 7,453 | (685 | ) | 3,400 | 3,247 | (153 | ) | 11,538 | 10,700 | (838 | ) | ||||||||||||||||||||||||
CMOs | ||||||||||||||||||||||||||||||||||||
Agency backed | 324 | 321 | (3 | ) | 89 | 88 | (1 | ) | 413 | 409 | (4 | ) | ||||||||||||||||||||||||
Non-agency backed | 120 | 118 | (2 | ) | 54 | 53 | (1 | ) | 174 | 171 | (3 | ) | ||||||||||||||||||||||||
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 | ) | |||||||||||||||
F-47
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 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 | 859 | $ | 11,852 | $ | 6,779 | $ | (5,073 | ) | 138 | $ | 1,263 | $ | 835 | $ | (428 | ) | ||||||||||||||||
Greater than three to six months | 102 | 1,141 | 420 | (721 | ) | 12 | 146 | 91 | (55 | ) | ||||||||||||||||||||||
Greater than six to nine months | 153 | 1,966 | 687 | (1,279 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than nine to twelve months | 97 | 934 | 218 | (716 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than twelve months | 18 | 240 | 38 | (202 | ) | 6 | 40 | 26 | (14 | ) | ||||||||||||||||||||||
Total | 1,229 | $ | 16,133 | $ | 8,142 | $ | (7,991 | ) | 156 | $ | 1,449 | $ | 952 | $ | (497 | ) | ||||||||||||||||
December 31, 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 | 1,006 | $ | 10,597 | $ | 7,044 | $ | (3,553 | ) | 116 | $ | 635 | $ | 492 | $ | (143 | ) | ||||||||||||||||
Greater than three to six months | 58 | 306 | 150 | (156 | ) | 9 | 74 | 21 | (53 | ) | ||||||||||||||||||||||
Greater than six to nine months | 27 | 314 | 178 | (136 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than nine to twelve months | 8 | 115 | 68 | (47 | ) | — | — | — | — | |||||||||||||||||||||||
Greater than twelve months | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | 1,099 | $ | 11,332 | $ | 7,440 | $ | (3,892 | ) | 125 | $ | 709 | $ | 513 | $ | (196 | ) | ||||||||||||||||
F-48
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2008 | December 31, 2007 | |||||||||||||||
Carrying | Percent of | Carrying | Percent of | |||||||||||||
Value | Total | Value | Total | |||||||||||||
East North Central | $ | 162 | 2.5 | % | $ | 120 | 2.2 | % | ||||||||
East South Central | — | — | 9 | 0.2 | % | |||||||||||
Middle Atlantic | 717 | 11.1 | % | 674 | 12.4 | % | ||||||||||
Mountain | 223 | 3.4 | % | 200 | 3.7 | % | ||||||||||
New England | 487 | 7.5 | % | 404 | 7.5 | % | ||||||||||
Pacific | 1,495 | 23.1 | % | 1,200 | 22.2 | % | ||||||||||
South Atlantic | 1,102 | 17.0 | % | 1,104 | 20.4 | % | ||||||||||
West North Central | 64 | 1.0 | % | 32 | 0.6 | % | ||||||||||
West South Central | 333 | 5.2 | % | 286 | 5.3 | % | ||||||||||
Other [1] | 1,886 | 29.2 | % | 1,381 | 25.5 | % | ||||||||||
Total | $ | 6,469 | 100.0 | % | $ | 5,410 | 100.0 | % | ||||||||
[1] | Includes multi-regional properties. |
December 31, 2008 | December 31, 2007 | |||||||||||||||
Carrying | Percent of | Carrying | Percent of | |||||||||||||
Value | Total | Value | Total | |||||||||||||
Industrial | $ | 1,118 | 17.3 | % | $ | 649 | 12.0 | % | ||||||||
Lodging | 483 | 7.5 | % | 524 | 9.7 | % | ||||||||||
Agricultural | 635 | 9.8 | % | 362 | 6.7 | % | ||||||||||
Multifamily | 1,131 | 17.5 | % | 991 | 18.3 | % | ||||||||||
Office | 1,885 | 29.1 | % | 1,929 | 35.6 | % | ||||||||||
Retail | 884 | 13.7 | % | 806 | 14.9 | % | ||||||||||
Other | 333 | 5.1 | % | 149 | 2.8 | % | ||||||||||
Total | $ | 6,469 | 100.0 | % | $ | 5,410 | 100.0 | % | ||||||||
F-49
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||
Maximum | Maximum | |||||||||||||||||||||||
Total | Total | Exposure | Total | Total | Exposure | |||||||||||||||||||
Assets | Liabilities [1] | to Loss [2] | Assets | Liabilities [1] | to Loss | |||||||||||||||||||
CLOs | $ | 339 | $ | 69 | $ | 257 | $ | 128 | $ | 47 | $ | 107 | ||||||||||||
Limited partnerships | 151 | 43 | 108 | 309 | 47 | 262 | ||||||||||||||||||
Other investments | 249 | 59 | 221 | 377 | 71 | 317 | ||||||||||||||||||
Total | $ | 739 | $ | 171 | $ | 586 | $ | 814 | $ | 165 | $ | 686 | ||||||||||||
[1] | Creditors have no recourse against the Company in the event of default by the VIE. | |
[2] | The Company’s maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment income or as a realized capital loss and is the consolidated assets net of liabilities at cost. The Company has no implied or unfunded commitments to these VIEs. |
F-50
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||
Maximum | Maximum | |||||||||||||||||||||||
Exposure | Exposure | |||||||||||||||||||||||
Assets | Liabilities | to Loss | Assets | Liabilities | to Loss | |||||||||||||||||||
CLOs [1] | $ | 308 | $ | — | $ | 349 | $ | 26 | $ | — | $ | 37 | ||||||||||||
CDOs [1] | 3 | — | 15 | 76 | — | 108 | ||||||||||||||||||
Other [2] | 42 | 40 | 5 | 43 | 43 | 5 | ||||||||||||||||||
Total [3] | $ | 353 | $ | 40 | $ | 369 | $ | 145 | $ | 43 | $ | 150 | ||||||||||||
[1] | Maximum exposure to loss represents the Company’s investment in securities issued by CLOs/CDOs at cost. | |
[2] | Maximum exposure to loss represents issuance costs that were incurred to establish the contingent capital facility. | |
[3] | The Company has no implied or unfunded commitments to these VIEs. |
F-51
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Asset Values | Liability Values | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Fixed maturities, available-for-sale | $ | — | $ | — | $ | 3 | $ | — | ||||||||
Other investments | 1,576 | 528 | — | — | ||||||||||||
Reinsurance recoverables | 1,302 | 128 | — | — | ||||||||||||
Other policyholder funds and benefits payable | — | 2 | 6,628 | 737 | ||||||||||||
Consumer notes | — | — | 5 | 5 | ||||||||||||
Other liabilities [1] [2] | 1,862 | — | — | 617 | ||||||||||||
Total | $ | 4,740 | $ | 658 | $ | 6,636 | $ | 1,359 | ||||||||
[1] | Included in Other liabilities on the balance sheet is a liability value of $2,531 and $114 related to derivative collateral asof December 31, 2008 and 2007, respectively. | |
[2] | Included in Other liabilities in the above schedule is a liability value of $163 and $0 related to Allianz SE warrants asof December 31, 2008 and 2007, respectively. |
F-52
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hedge | ||||||||||||||||||||||||
Ineffectiveness, | ||||||||||||||||||||||||
Notional Amount | Fair Value | Before-tax | ||||||||||||||||||||||
Hedging Strategy | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||
Cash-Flow Hedges | ||||||||||||||||||||||||
Interest rate swaps | ||||||||||||||||||||||||
Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed maturity securities to fixed rates. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required to fund liabilities. | ||||||||||||||||||||||||
The Company also enters into forward starting swap agreements to hedge the interest rate exposure related to the purchase of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in the benchmark interest rate, London-Interbank Offered Rate (“LIBOR”). These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities. | ||||||||||||||||||||||||
Interest rate swaps are also used to hedge a portion of the Company’s floating-rate guaranteed investment contracts. These derivatives convert the floating-rate guaranteed investment contract payments to a fixed rate to better match the cash receipts earned from the supporting investment portfolio. | ||||||||||||||||||||||||
$ | 9,030 | $ | 5,049 | $ | 640 | $ | 113 | $ | 9 | $ | 3 | |||||||||||||
Foreign currency swaps | ||||||||||||||||||||||||
Foreign currency swaps are used to convert foreign denominated cash flows associated with certain foreign denominated fixed maturity investments to U.S. dollars. The foreign fixed maturities are primarily denominated in euros and are swapped to minimize cash flow fluctuations due to changes in currency rates. In addition, foreign currency swaps are also used to convert foreign denominated cash flows associated with certain liability payments to U.S. dollars in order to minimize cash flow fluctuations due to changes in currency rates. | 1,210 | 1,588 | (7 | ) | (318 | ) | — | (2 | ) | |||||||||||||||
Total cash-flow hedges | 10,240 | 6,637 | 633 | (205 | ) | 9 | 1 | |||||||||||||||||
Fair-Value Hedges | ||||||||||||||||||||||||
Interest rate swaps | ||||||||||||||||||||||||
Interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities and fixed maturity securities due to changes in the benchmark interest rate, LIBOR. | 2,138 | 4,226 | (86 | ) | (66 | ) | (1 | ) | — | |||||||||||||||
Foreign currency swaps | ||||||||||||||||||||||||
Foreign currency swaps are used to hedge the changes in fair value of certain foreign denominated fixed rate liabilities due to changes in foreign currency rates. | 696 | 696 | (57 | ) | 25 | — | — | |||||||||||||||||
Total fair-value hedges | 2,834 | 4,922 | (143 | ) | (41 | ) | (1 | ) | — | |||||||||||||||
Total cash-flow and fair-value hedges | $ | 13,074 | $ | 11,559 | $ | 490 | $ | (246 | ) | $ | 8 | $ | 1 | |||||||||||
F-53
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Change | ||||||||||||||||||||||||
Notional Amount | Fair Value | in Value, Before-tax | ||||||||||||||||||||||
Hedging Strategy | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||
Non-qualifying Strategies | ||||||||||||||||||||||||
Interest rate swaps, caps, floors, and forwards | ||||||||||||||||||||||||
The Company uses interest rate swaps, caps and floors to manage duration risk between assets and liabilities in certain portfolios. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap. As of December 31, 2008 and 2007, the notional amount of interest rate swaps in offsetting relationships was $6.8 billion and $2.6 billion, respectively. | ||||||||||||||||||||||||
The Company may also use interest rate forwards to replicate the purchase of mortgage-backed securities to manage duration risk and liquidity. | $ | 8,156 | $ | 9,287 | $ | (97 | ) | $ | (17 | ) | $ | 12 | $ | 29 | ||||||||||
Foreign currency swaps, forwards, and swaptions | ||||||||||||||||||||||||
The Company enters into foreign currency swaps and forwards to hedge the foreign currency exposures in certain of its foreign fixed maturity investments. | ||||||||||||||||||||||||
The Company also enters into foreign currency interest rate swaps and swaptions to hedge Yen interest rate exposures related to certain liability contracts sold in Japan. | 1,113 | 412 | 21 | (14 | ) | 47 | (14 | ) | ||||||||||||||||
Credit default swaps that sell credit protection | ||||||||||||||||||||||||
The Company enters into credit default swap agreements in which the Company assumes credit risk of an individual entity, referenced index or asset pool. These contracts entitle the Company to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty should a credit event occur on the part of the referenced security issuers. Also included are embedded derivatives associated with credit linked notes with a notional amount of $117 and $142 as of December 31, 2008 and 2007, respectively. The maximum potential future exposure to the Company is the notional amount of the swap contracts, which is $1,199 and $2,857, before-tax, as of December 31, 2008 and 2007, respectively. | 1,199 | 2,857 | (403 | ) | (416 | ) | (457 | ) | (205 | ) | ||||||||||||||
Total return and credit index swaps | ||||||||||||||||||||||||
The Company also assumes credit risk through total return and credit index swaps which reference a specific index or collateral portfolio. The maximum potential future exposure to the Company for the credit index swaps is the notional value and for the total return swaps is the cash collateral associated with the transaction, which has termination triggers that limit investment losses. The Company had no exposure to such contracts at December 31, 2008. As of December 31, 2007, the maximum potential future exposure to the Company from such contracts was $1,558, before-tax. | — | 2,306 | — | (70 | ) | (166 | ) | (127 | ) | |||||||||||||||
Credit default swaps that purchase credit protection | ||||||||||||||||||||||||
The Company enters into credit default swap agreements in which the Company reduces credit risk to an individual entity. These contracts require the Company to pay a derivative counterparty a periodic fee in exchange for compensation from the counterparty should a credit event occur on the part of the referenced security issuer. The Company enters into these agreements as an efficient means to reduce credit exposure to specified issuers or sectors. | 3,668 | 5,166 | 340 | 81 | 302 | 84 | ||||||||||||||||||
Credit default swaps in offsetting positions | ||||||||||||||||||||||||
The Company enters into credit default swap agreements to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward. | 2,626 | — | (11 | ) | — | — | — |
F-54
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Change | ||||||||||||||||||||||||
Notional Amount | Fair Value | in Value, Before-tax | ||||||||||||||||||||||
Hedging Strategy | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||
Contingent Capital Facility | ||||||||||||||||||||||||
During the first quarter of 2007, the Company entered into a put option agreement that provides the Company the right to require a third party trust to purchase, at any time, The Hartford’s junior subordinated notes in a maximum aggregate principal amount of $500. Under the put option agreement, The Hartford will pay premiums on a periodic basis and will reimburse the trust for certain fees and ordinary expenses. The instrument is accounted for as a derivative. | $ | 500 | $ | 500 | $ | 42 | $ | 43 | $ | (3 | ) | $ | (4 | ) | ||||||||||
Japanese fixed annuity hedging instruments | ||||||||||||||||||||||||
The Company enters into currency rate swaps and forwards to mitigate the foreign currency exchange rate and Yen interest rate exposures associated with the Yen denominated individual fixed annuity product. The associated liability is adjusted for changes in spot rates which was $450 and $(102), before-tax, as of December 31, 2008 and 2007, respectively, and offsets the derivative change in value. | 2,334 | 1,849 | 383 | (115 | ) | 487 | 53 | |||||||||||||||||
Guaranteed Minimum Accumulation Benefit (“GMAB”) product derivatives | ||||||||||||||||||||||||
The Company offers certain variable annuity products in Japan that may have a GMAB rider. The GMAB is a bifurcated embedded derivative that provides the policyholder with their initial deposit in a lump sum after a specified waiting period. The notional value of the embedded derivative is the Yen denominated GRB balance converted to U.S. dollars at the current December 31, 2008 and 2007, foreign spot exchange rate, respectively. | 206 | 2,768 | — | 2 | 2 | 2 | ||||||||||||||||||
GMWB product derivatives | ||||||||||||||||||||||||
The Company offers certain variable annuity products with a GMWB rider, primarily in the U.S. and, to a lesser extent, the U.K. and Japan. The GMWB is a bifurcated embedded derivative that provides the policyholder with a GRB if the account value is reduced to zero through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. The policyholder also has the option, after a specified time period, to reset the GRB to the then-current account value, if greater. The notional value of the embedded derivative is the GRB balance. For a further discussion, see the Derivative Instruments section of Note 1. | 48,767 | 45,900 | (6,620 | ) | (715 | ) | (5,786 | ) | (670 | ) | ||||||||||||||
GMWB reinsurance contracts | ||||||||||||||||||||||||
The Company has entered into reinsurance arrangements to offset a portion of its risk exposure to the GMWB for the remaining lives of covered variable annuity contracts. Reinsurance contracts covering GMWB are accounted for as free-standing derivatives. The notional amount of the reinsurance contracts is the GRB amount. | 11,437 | 6,579 | 1,302 | 128 | 1,073 | 127 | ||||||||||||||||||
GMWB hedging instruments | ||||||||||||||||||||||||
The Company enters into derivative contracts to partially economically hedge exposure to the volatility associated with the portion of the GMWB liabilities which are not reinsured. These derivative contracts include customized swaps, interest rate swaps and futures, and equity swaps, put and call options, and futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index. | 18,620 | 21,357 | 2,664 | 642 | 3,374 | 257 |
F-55
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Change | ||||||||||||||||||||||||
Notional Amount | Fair Value | in Value, Before-tax | ||||||||||||||||||||||
Hedging Strategy | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||
Equity index swaps,options, and futures | ||||||||||||||||||||||||
The Company offers certain equity indexed products, which may contain an embedded derivative that requires bifurcation. The Company enters into S&P index swaps and options to economically hedge the equity volatility risk associated with these embedded derivatives. In addition, the Company is exposed to bifurcated options embedded in certain fixed maturity investments. | ||||||||||||||||||||||||
The Company may also enter into equity indexed futures to hedge the equity volatility of certain liability contracts. | $ | 256 | $ | 154 | $ | (16 | ) | $ | (22 | ) | $ | (25 | ) | $ | 2 | |||||||||
Japanese variable annuity hedging instruments | ||||||||||||||||||||||||
The Company enters into foreign currency forward and option contracts that convert euros to Yen in order to economically hedge the foreign currency risk associated with certain Japanese variable annuity products. | 259 | — | 35 | — | 40 | (10 | ) | |||||||||||||||||
Macro hedge program | ||||||||||||||||||||||||
The Company utilizes option contracts as well as futures contracts to partially economically hedge the statutory reserve impact of equity risk arising primarily from GMDB and GMWB obligations against a decline in the equity markets. | 2,188 | 661 | 137 | 18 | 74 | (12 | ) | |||||||||||||||||
Warrants | ||||||||||||||||||||||||
During the fourth quarter of 2008, the Company issued warrants to purchase the Company’s Series C Non-Voting Contingent Convertible Preferred Stock. See Note 21 for a discussion of Allianz SE’s investment in The Hartford. These warrants are subject to the receipt of certain approvals and upon the Company’s inability to obtain such approvals on a timely basis, the Company is subject to a separate cash payment to the investor. This separate cash payment requires under EITF 00-19 that the warrants and the separate cash payment be accounted for as a derivative liability at December 31, 2008. | 869 | — | (163 | ) | — | 110 | — | |||||||||||||||||
Total non-qualifying strategies | 102,198 | 99,796 | (2,386 | ) | (455 | ) | (916 | ) | (488 | ) | ||||||||||||||
Total derivatives [1] | $ | 115,272 | $ | 111,355 | $ | (1,896 | ) | $ | (701 | ) | $ | (908 | ) | $ | (487 | ) | ||||||||
[1] | Derivative change in value includes hedge ineffectiveness for cash-flow and fair-value hedges and total change in value, including periodic derivative net coupon settlements, for derivatives in non-qualifying strategies. |
• | For a discussion on the increase in notional amount of derivatives associated with GMWB riders refer to Note 4. | |
• | The Company increased the notional amount of derivatives associated with the macro hedge program. During the three months ended December 31, 2008, the Company rebalanced its risk management program to place a greater relative emphasis on the protection of statutory surplus. As a result, the Company added the equivalent of $1.9 billion notional of equity futures as part of the macro hedge program to partially economically hedge the statutory reserve impact of equity risk arising primarily from GMDB and GMWB obligations against a decline in the equity markets. | |
• | For a discussion on the decline in notional amount related to the embedded derivative associated with GMAB riders refer to Note 4. | |
• | The notional amount related to credit derivatives declined primarily due to terminations and maturities of credit derivatives, which reduced the overall net credit exposure assumed by the Company through credit derivatives. |
F-56
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | For a discussion on the decrease in fair value of GMWB related derivatives refer to Note 4. | |
• | The fair value of the Japanese fixed annuity hedging instruments increased primarily due to the Japanese Yen strengthening against the U.S. dollar. | |
• | The fair value of interest rate derivatives increased primarily due to a decline in interest rates as well as an increase in notional amount. | |
• | The fair value of foreign currency swaps hedging foreign fixed rate bonds increased primarily due to the U.S. dollar strengthening against the euro. |
• | For a discussion on the net loss associated with GMWB related hedging derivatives refer to Note 4. | |
• | The net loss on credit default swaps was primarily due to losses on credit derivatives that sell credit protection, partially offset by gains on credit derivatives that purchase credit protection, both resulting from credit spreads widening significantly during the year. | |
• | The gain on the Japanese fixed annuity hedging instruments was primarily a result of the Japanese Yen strengthening against the U.S. dollar. | |
• | The gain on warrants associated with the Allianz transaction was primarily due to a decrease in the Company’s stock price since the issue date. | |
• | The net gain on the macro hedge program was primarily driven by a decline in the equity markets, partially offset by losses due to swap spreads tightening. |
• | For a discussion on the net loss associated with GMWB related derivatives refer to Note 4. | |
• | The net loss on credit default swaps was a result of credit spreads widening. | |
• | The gain on the Japanese fixed annuity hedging instruments was primarily a result of the Japanese Yen strengthening against the U.S. dollar. |
F-57
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Underlying Referenced Credit | ||||||||||||||||||||||||||||
Weighted | Obligation(s) [1] | |||||||||||||||||||||||||||
Average | Average | Offsetting | ||||||||||||||||||||||||||
Credit Derivative type by derivative | Notional | Fair | Years to | Credit | Notional | Offsetting | ||||||||||||||||||||||
risk exposure | Amount [2] | Value | Maturity | Type | Rating | Amount [3] | Fair Value [3] | |||||||||||||||||||||
Single name credit default swaps | ||||||||||||||||||||||||||||
Investment grade risk exposure | $ | 60 | $ | (1 | ) | 4 years | Corporate Credit | A- | $ | 35 | $ | (9 | ) | |||||||||||||||
Below investment grade risk exposure | 82 | (19 | ) | 4 years | Corporate Credit | B- | — | — | ||||||||||||||||||||
Basket credit default swaps [4] | ||||||||||||||||||||||||||||
Investment grade risk exposure | 1,778 | (235 | ) | 5 years | Corporate Credit | A- | 1,003 | 21 | ||||||||||||||||||||
Investment grade risk exposure | 275 | (92 | ) | 42 years | CMBS Credit | AAA | 275 | 92 | ||||||||||||||||||||
Below investment grade risk exposure | 200 | (166 | ) | 6 years | Corporate Credit | BB+ | — | — | ||||||||||||||||||||
Credit linked notes | ||||||||||||||||||||||||||||
Investment grade risk exposure | 117 | 106 | 2 years | Corporate Credit | BBB+ | — | — | |||||||||||||||||||||
Total | $ | 2,512 | $ | (407 | ) | $ | 1,313 | $ | 104 | |||||||||||||||||||
[1] | The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used. | |
[2] | Notional amount is equal to the maximum potential future loss amount. There is no specific collateral related to these contracts or recourse provisions included in the contracts to offset losses. | |
[3] | The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of or losses paid related to the original swap. | |
[4] | Includes $1.9 billion of standard market indices of diversified portfolios of corporate issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. Also includes $325 of customized diversified portfolios of corporate issuers. |
F-58
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loaned Securities and Collateral Pledged | 2008 | 2007 | ||||||
ABS | $ | 12 | $ | 18 | ||||
CMOs | — | 45 | ||||||
CMBS | — | 450 | ||||||
Corporate | 2,395 | 3,164 | ||||||
MBS | 410 | 492 | ||||||
Government/Government Agencies | ||||||||
Foreign | 44 | 47 | ||||||
United States | 402 | 650 | ||||||
Short-term | 618 | 1 | ||||||
Preferred stock | 10 | 77 | ||||||
Total | $ | 3,891 | $ | 4,944 | ||||
F-59
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Gross fee income, earned premiums and other | $ | 10,441 | $ | 10,675 | $ | 9,372 | ||||||
Reinsurance assumed | 263 | 273 | 313 | |||||||||
Reinsurance ceded | (421 | ) | (405 | ) | (369 | ) | ||||||
Net fee income, earned premiums and other | $ | 10,283 | $ | 10,543 | $ | 9,316 | ||||||
F-60
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Premiums Written | ||||||||||||
Direct | $ | 10,831 | $ | 11,281 | $ | 11,600 | ||||||
Assumed | 218 | 205 | 265 | |||||||||
Ceded | (818 | ) | (1,046 | ) | (1,203 | ) | ||||||
Net | $ | 10,231 | $ | 10,440 | $ | 10,662 | ||||||
Premiums Earned | ||||||||||||
Direct | $ | 10,999 | $ | 11,396 | $ | 11,465 | ||||||
Assumed | 216 | 204 | 259 | |||||||||
Ceded | (877 | ) | (1,104 | ) | (1,291 | ) | ||||||
Net | $ | 10,338 | $ | 10,496 | $ | 10,433 | ||||||
F-61
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2008 | 2007 | 2006 | ||||||||||
Balance, January 1 | $ | 10,514 | $ | 9,071 | $ | 8,568 | ||||||
Cumulative effect of accounting change, pre-tax (SOP 05-1) [1] | — | (79 | ) | — | ||||||||
Balance, January 1, as adjusted | 10,514 | 8,992 | 8,568 | |||||||||
Deferred Costs | 1,548 | 2,059 | 1,923 | |||||||||
Amortization – Deferred policy acquisition costs and present value of future profits [2] | (1,023 | ) | (1,212 | ) | (1,269 | ) | ||||||
Amortization – Unlock, pre-tax | (1,153 | ) | 327 | (183 | ) | |||||||
Adjustments to unrealized gains and losses on securities available-for-sale and other | 1,754 | 230 | 47 | |||||||||
Effect of currency translation | 348 | 118 | (15 | ) | ||||||||
Balance, December 31 | $ | 11,988 | $ | 10,514 | $ | 9,071 | ||||||
[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. |
For the years ended December 31, | ||||
2009 | $ | 52 | ||
2010 | 45 | |||
2011 | 39 | |||
2012 | 35 | |||
2013 | 32 |
2008 | 2007 | 2006 | ||||||||||
Balance, January 1 | $ | 1,228 | $ | 1,197 | $ | 1,134 | ||||||
Deferred costs | 2,127 | 2,135 | 2,169 | |||||||||
Amortization | (2,095 | ) | (2,104 | ) | (2,106 | ) | ||||||
Balance, December 31 | $ | 1,260 | $ | 1,228 | $ | 1,197 | ||||||
F-62
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Life | 2008 | 2007 | ||||||
Retail | $ | 159 | $ | 581 | ||||
Individual Life | 224 | 224 | ||||||
Retirement Plans | 79 | — | ||||||
Total Life | 462 | 805 | ||||||
Property & Casualty | ||||||||
Personal Lines | 119 | 119 | ||||||
Specialty Commercial | 30 | 30 | ||||||
Total Property & Casualty | 149 | 149 | ||||||
Corporate | 449 | 772 | ||||||
Total Goodwill | $ | 1,060 | $ | 1,726 | ||||
2008 | 2007 | |||||||||||||||
Gross Carrying | Accumulated Net | Gross Carrying | Accumulated Net | |||||||||||||
Acquired Intangible Assets | Amount | Amortization | Amount | Amortization | ||||||||||||
Renewal rights | $ | 22 | $ | 21 | $ | 22 | $ | 20 | ||||||||
Distribution agreement | 70 | 11 | 70 | 5 | ||||||||||||
Servicing intangibles | 14 | 1 | — | — | ||||||||||||
Other | 15 | 14 | 14 | 14 | ||||||||||||
Total Acquired Intangible Assets | $ | 121 | $ | 47 | $ | 106 | $ | 39 | ||||||||
F-63
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Renewal | Distribution | Servicing | ||||||||||||||||||
Rights | Agreement | Intangibles | Other | Total | ||||||||||||||||
For the year ended December 31, 2008 | ||||||||||||||||||||
Balance, beginning of year | $ | 2 | $ | 65 | $ | — | $ | — | $ | 67 | ||||||||||
Acquisition of business | — | — | 14 | 1 | 15 | |||||||||||||||
Amortization, net of the accretion of interest | (1 | ) | (6 | ) | (1 | ) | — | (8 | ) | |||||||||||
Balance, ending of year | $ | 1 | $ | 59 | $ | 13 | $ | 1 | $ | 74 | ||||||||||
For the year ended December 31, 2007 | ||||||||||||||||||||
Balance, beginning of year | $ | 2 | $ | — | $ | — | $ | 4 | $ | 6 | ||||||||||
Distribution agreement | — | 70 | — | — | 70 | |||||||||||||||
Amortization, net of the accretion of interest | — | (5 | ) | — | (4 | ) | (9 | ) | ||||||||||||
Balance, ending of year | $ | 2 | $ | 65 | $ | — | $ | — | $ | 67 | ||||||||||
For the year ended December 31, 2006 | ||||||||||||||||||||
Balance, beginning of year | $ | 5 | $ | — | $ | — | $ | 7 | $ | 12 | ||||||||||
Amortization, net of the accretion of interest | (3 | ) | — | — | (3 | ) | (6 | ) | ||||||||||||
Balance, ending of year | $ | 2 | $ | — | $ | — | $ | 4 | $ | 6 | ||||||||||
For the years ended December 31, | ||||
2009 | $ | 7 | ||
2010 | 7 | |||
2011 | 6 | |||
2012 | 6 | |||
2013 | 6 |
F-64
Table of Contents
NOTES TO 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 | 221 | 26 | 21 | |||||||||
Paid | (269 | ) | (42 | ) | — | |||||||
Unlock | 389 | 164 | — | |||||||||
Currency translation adjustment | — | 39 | — | |||||||||
Liability balance as of December 31, 2008 | $ | 870 | $ | 229 | $ | 40 | ||||||
[1] | The reinsurance recoverable asset related to the U.S. GMDB was $595 as of December 31, 2008. The reinsurance recoverable asset related to the Japan GMDB was $31 as of December 31, 2008. The reinsurance recoverable asset related to the UL Secondary Guarantees was $16 as of December 31, 2008. |
UL Secondary | ||||||||||||
U.S. GMDB[1] | Japan GMDB/GMIB[1] | Guarantees [1] | ||||||||||
Liability balance as of January 1, 2007 | $ | 475 | $ | 35 | $ | 7 | ||||||
Incurred | 142 | 16 | 12 | |||||||||
Paid | (84 | ) | (3 | ) | — | |||||||
Unlock | (4 | ) | (9 | ) | — | |||||||
Currency translation adjustment | — | 3 | — | |||||||||
Liability balance as of December 31, 2007 | $ | 529 | $ | 42 | $ | 19 | ||||||
[1] | The reinsurance recoverable asset related to the U.S. GMDB was $327 as of December 31, 2007. The reinsurance recoverable asset related to the Japan GMDB was $8 as of December 31, 2007. The reinsurance recoverable asset related to the UL Secondary Guarantees was $10 as of December 31, 2007. |
F-65
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• | 1000 stochastically generated investment performance scenarios for all issue years. | |
• | For all issue years, the weighted average return is 8.3%; it varies by asset class with a low of 3% for cash and a high of 9% for aggressive equities. | |
• | Discount rate of 7.5% for issue year 2002 & prior; discount rate of 7% for issue year 2003 & 2004 and discount rate of 5.6% for issue year 2005 — 2008. | |
• | Volatilities also vary by asset class with a low of 1% for cash, a high of 15% for aggressive equities, and a weighted average of 11%. | |
• | 100% of the Hartford experience mortality table was used for the mortality assumptions. | |
• | Lapse rates by calendar year vary from a low of 8% to a high of 11%, with an average of 10%. |
• | 1000 stochastically generated investment performance scenarios. | |
• | Separate account returns, representing the Company’s long-term assumptions, varied by asset class with a low of 3% for Japan bonds, a high of 9% for foreign equities and a weighted average of 6%. | |
• | Volatilities also varied by asset class with a low of 0% for Japan bonds, a high of 5% for foreign equities and a weighted average of 2%. | |
• | 85% of the 1996 Japan Standard Mortality Table was used for mortality assumptions. | |
• | Lapse rates by age vary from a low of 1% to a high of 25%, with an average of 3%. | |
• | Average discount rate of 5.1%. |
• | Discount rate of 4.75% for issue year 2004, discount rate of 4.50% for issue year 2005 & 2006, discount rate of 4.25% for issue year 2007, and discount rate of 3.5% for issue year 2008. | |
• | 100% of the Hartford pricing mortality table for mortality assumptions. | |
• | Lapse rates for single life policies average 4% in policy years 1-10, declining to 0% by age 95. Lapse rate for last survivor policies declining to 0.5% by age 91. |
F-66
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Retained Net | Weighted Average | |||||||||||||||
Account | Net Amount | Amount | Attained Age of | |||||||||||||
Maximum anniversary value (MAV) [1] | Value | at Risk [9] | at Risk [9] | Annuitant | ||||||||||||
MAV only | $ | 25,961 | $ | 14,743 | $ | 5,019 | 66 | |||||||||
With 5% rollup [2] | 1,858 | 1,153 | 481 | 65 | ||||||||||||
With Earnings Protection Benefit Rider (EPB) [3] | 5,068 | 2,447 | 241 | 62 | ||||||||||||
With 5% rollup & EPB | 742 | 400 | 75 | 65 | ||||||||||||
Total MAV | 33,629 | 18,743 | 5,816 | |||||||||||||
Asset Protection Benefit (APB) [4] | 25,601 | 11,985 | 6,634 | 63 | ||||||||||||
Lifetime Income Benefit (LIB) — Death Benefit [5] | 1,137 | 487 | 487 | 61 | ||||||||||||
Reset [6] (5-7 years) | 3,440 | 1,190 | 1,189 | 67 | ||||||||||||
Return of Premium [7] /Other | 17,321 | 3,889 | 3,638 | 58 | ||||||||||||
Subtotal U.S. Guaranteed Minimum Death Benefits | 81,128 | 36,294 | 17,764 | 63 | ||||||||||||
Japan Guaranteed Minimum Death and Income Benefit [8] | 29,726 | 9,151 | 7,761 | 67 | ||||||||||||
Total at December 31, 2008 | $ | 110,854 | $ | 45,445 | $ | 25,525 | ||||||||||
[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 or100% 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 $30.6 billion and $26.8 billion as of December31, 2008 and 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 |
2008 | 2007 | |||||||
Balance, January 1 | $ | 467 | $ | 404 | ||||
Cumulative effect of accounting change, pre-tax (SOP 05-1) | — | (1 | ) | |||||
Balance, January 1, as adjusted | 467 | 403 | ||||||
Sales inducements deferred | 151 | 115 | ||||||
Amortization charged to income | (21 | ) | (37 | ) | ||||
Amortization – Unlock | (44 | ) | (14 | ) | ||||
Balance, end of period, December 31 | $ | 553 | $ | 467 | ||||
F-67
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Beginning liabilities for life unpaid losses and loss adjustment expenses-gross | $ | 6,028 | $ | 5,877 | $ | 5,729 | ||||||
Reinsurance recoverables | 261 | 236 | 238 | |||||||||
Beginning liabilities for life unpaid losses and loss adjustment expenses | 5,767 | 5,641 | 5,491 | |||||||||
Add provision for life unpaid losses and loss adjustment expenses | ||||||||||||
Current year | 3,243 | 3,186 | 3,067 | |||||||||
Prior years | (118 | ) | (125 | ) | (160 | ) | ||||||
Total provision for life unpaid losses and loss adjustment expenses | 3,125 | 3,061 | 2,907 | |||||||||
Less payments | ||||||||||||
Current year | 1,554 | 1,470 | 1,335 | |||||||||
Prior years | 1,503 | 1,465 | 1,422 | |||||||||
Total payments | 3,057 | 2,935 | 2,757 | |||||||||
Ending liabilities for life unpaid losses and loss adjustment expenses, net | 5,835 | 5,767 | 5,641 | |||||||||
Reinsurance recoverables | 231 | 261 | 236 | |||||||||
Ending liabilities for life unpaid losses and loss adjustment expenses-gross | $ | 6,066 | $ | 6,028 | $ | 5,877 | ||||||
2008 | 2007 | |||||||
Group Life Term, Disability and Accident unpaid losses and loss adjustment expenses | $ | 6,066 | $ | 6,028 | ||||
Group Life Other unpaid losses and loss adjustment expenses | 253 | 269 | ||||||
Individual Life unpaid losses and loss adjustment expenses | 123 | 121 | ||||||
Future Policy Benefits | 10,305 | 8,913 | ||||||
Future Policy Benefits and Unpaid Losses and Loss Adjustment Expenses | $ | 16,747 | $ | 15,331 | ||||
F-68
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Beginning liabilities for property and casualty unpaid losses and loss adjustment expenses-gross | $ | 22,153 | $ | 21,991 | $ | 22,266 | ||||||
Reinsurance and other recoverables | 3,922 | 4,387 | 5,403 | |||||||||
Beginning liabilities for property and casualty unpaid losses and loss adjustment expenses-net | 18,231 | 17,604 | 16,863 | |||||||||
Add provision for property & casualty unpaid losses and loss adjustment expenses | ||||||||||||
Current year | 6,933 | 6,869 | 6,706 | |||||||||
Prior years | (226 | ) | 48 | 296 | ||||||||
Total provision for property and casualty unpaid losses and loss adjustment expenses | 6,707 | 6,917 | 7,002 | |||||||||
Less payments | ||||||||||||
Current year | 2,888 | 2,563 | 2,448 | |||||||||
Prior years | 3,703 | 3,727 | 3,702 | |||||||||
Total payments | 6,591 | 6,290 | 6,150 | |||||||||
Less net reserves for Omni business sold | — | — | 111 | |||||||||
Ending liabilities for property and casualty unpaid losses and loss adjustment expenses-net | 18,347 | 18,231 | 17,604 | |||||||||
Reinsurance and other recoverables | 3,586 | 3,922 | 4,387 | |||||||||
Ending liabilities for property and casualty unpaid losses and loss adjustment expenses-gross | $ | 21,933 | $ | 22,153 | $ | 21,991 | ||||||
F-69
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-70
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-71
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-72
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ending December 31, | Capital Leases | Operating Leases | ||||||
2009 | $ | 27 | 143 | |||||
2010 | 73 | 121 | ||||||
2011 | — | 96 | ||||||
2012 | — | 68 | ||||||
2013 | — | 34 | ||||||
Thereafter | — | 36 | ||||||
Total minimum lease payments | $ | 100 | $ | 498 | ||||
Amounts representing interest | (8 | ) | ||||||
Present value of net minimum lease payments | 92 | |||||||
Current portion of capital lease obligation | (24 | ) | ||||||
Total | $ | 68 | ||||||
F-73
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-74
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Income Tax Expense (Benefit) | ||||||||||||
Current - U.S. Federal | $ | (247 | ) | $ | 436 | $ | 519 | |||||
- International | –– | — | — | |||||||||
Total current | (247 | ) | 436 | 519 | ||||||||
Deferred - U.S. Federal Excluding NOL Carryforward | (1,574 | ) | 473 | 169 | ||||||||
- - Net Operating Loss Carryforward | (742 | ) | — | — | ||||||||
- International | 721 | 147 | 169 | |||||||||
Total deferred | (1,595 | ) | 620 | 338 | ||||||||
Total income tax expense (benefit) | $ | (1,842 | ) | $ | 1,056 | $ | 857 | |||||
Deferred Tax Assets | 2008 | 2007 | ||||||
Tax discount on loss reserves | $ | 725 | $ | 742 | ||||
Tax basis deferred policy acquisition costs | 703 | 724 | ||||||
Unearned premium reserve and other underwriting related reserves | 405 | 405 | ||||||
Investment-related items | 2,000 | 467 | ||||||
Employee benefits | 419 | 119 | ||||||
Net unrealized losses on investments | 4,265 | 302 | ||||||
Minimum tax credit | 641 | 773 | ||||||
Capital loss carryover | 195 | — | ||||||
Net operating loss carryover | 850 | 80 | ||||||
Other | 25 | 39 | ||||||
Total Deferred Tax Assets | 10,228 | 3,651 | ||||||
Valuation Allowance | (75 | ) | (43 | ) | ||||
Deferred Tax Assets, Net of Valuation Allowance | 10,153 | 3,608 | ||||||
Deferred Tax Liabilities | ||||||||
Financial statement deferred policy acquisition costs and reserves | (4,816 | ) | (3,169 | ) | ||||
Other depreciable & amortizable assets | (13 | ) | (24 | ) | ||||
Other | (85 | ) | (107 | ) | ||||
Total Deferred Tax Liabilities | (4,914 | ) | (3,300 | ) | ||||
Net Deferred Tax Asset | $ | 5,239 | $ | 308 | ||||
F-75
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||
2008 | 2007 | |||||||
Balance, at January 1 | $ | 76 | $ | 8 | ||||
Additions based on tax positions related to the current year | 27 | 33 | ||||||
Additions for tax positions for prior years | –– | 35 | ||||||
Reductions for tax positions for prior years | 12 | –– | ||||||
Settlements | –– | –– | ||||||
Balance, at December 31 | $ | 91 | $ | 76 | ||||
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Tax provision at U.S. Federal statutory rate | $ | (1,607 | ) | $ | 1,402 | $ | 1,261 | |||||
Tax-exempt interest | (161 | ) | (157 | ) | (153 | ) | ||||||
Dividends received deduction, net | (191 | ) | (170 | ) | (186 | ) | ||||||
Sale of Omni Insurance Group, Inc. | –– | — | (40 | ) | ||||||||
Goodwill | 113 | –– | –– | |||||||||
Other | 4 | (19 | ) | (25 | ) | |||||||
Provision for income taxes | $ | (1,842 | ) | $ | 1,056 | $ | 857 | |||||
F-76
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Short-Term Debt | 2008 | 2007 | ||||||
Commercial paper | $ | 374 | $ | 373 | ||||
Current maturities of long-term debt and capital lease obligations | 24 | 992 | ||||||
Total Short-Term Debt | $ | 398 | $ | 1,365 | ||||
Long-Term Debt | ||||||||
Senior Notes and Debentures | ||||||||
7.9% Notes, due 2010 | 275 | 275 | ||||||
5.25% Notes, due 2011 | 400 | 400 | ||||||
4.625% Notes, due 2013 | 319 | 319 | ||||||
4.75% Notes, due 2014 | 199 | 199 | ||||||
7.3% Notes, due 2015 | 200 | 200 | ||||||
5.5% Notes, due 2016 | 300 | 300 | ||||||
5.375% Notes, due 2017 | 499 | 499 | ||||||
6.3% Notes, due 2018 | 500 | — | ||||||
6.0% Notes, due 2019 | 499 | — | ||||||
7.65% Notes, due 2027 | 148 | 147 | ||||||
7.375% Notes, due 2031 | 92 | 92 | ||||||
5.95% Notes, due 2036 | 298 | 298 | ||||||
6.1% Notes, due 2041 | 323 | 322 | ||||||
Total Senior Notes and Debentures | 4,052 | 3,051 | ||||||
Junior Subordinated Debentures | ||||||||
8.125% Notes, due 2068 | 500 | — | ||||||
10.0% Notes, due 2068 | 1,203 | — | ||||||
Total Junior Subordinated Debentures | 1,703 | — | ||||||
Capital lease obligations | 68 | 91 | ||||||
Total Long-Term Debt | $ | 5,823 | $ | 3,142 | ||||
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Short-term debt | $ | 11 | $ | 13 | $ | 31 | ||||||
Long-term debt | 332 | 250 | 246 | |||||||||
Total interest expense | $ | 343 | $ | 263 | $ | 277 | ||||||
F-77
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2009 | $ | — | ||
2010 | 275 | |||
2011 | 400 | |||
2012 | — | |||
2013 | 320 | |||
Thereafter | 5,400 | |||
F-78
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Maximum Available As of | Outstanding As of | |||||||||||||||||||||||
Effective | Expiration | December 31, | December 31, | |||||||||||||||||||||
Description | Date | Date | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||
Commercial Paper | ||||||||||||||||||||||||
The Hartford | 11/10/86 | N/A | $ | 2,000 | $ | 2,000 | $ | 374 | $ | 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 | 1/4/10 | 55 | 45 | — | — | ||||||||||||||||||
Total Commercial Paper, Revolving Credit Facility and Line of Credit | $ | 3,955 | $ | 4,045 | $ | 374 | $ | 373 | ||||||||||||||||
[1] | As of December 31, 2008 and 2007, the Company’s Japanese operation line of credit in yen was ¥5 billion. |
F-79
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-80
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-81
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, | ||||||||||||
Statutory Net Income (Loss) | 2008 | 2007 | 2006 | |||||||||
Life operations | $ | (4,553 | ) | $ | 729 | $ | 1,123 | |||||
Property & Casualty operations | 497 | 1,803 | 1,326 | |||||||||
Total | $ | (4,056 | ) | $ | 2,532 | $ | 2,449 | |||||
As of December 31, | ||||||||
Statutory Surplus | 2008 | 2007 | ||||||
Life operations | $ | 6,047 | $ | 5,786 | ||||
Japan life operations | 1,718 | 1,620 | ||||||
Property & Casualty operations | 6,012 | 8,509 | ||||||
Total | $ | 13,777 | $ | 15,915 | ||||
F-82
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pension and | ||||||||||||||||||||
Net Gain (Loss) | Foreign | Other | Accumulated | |||||||||||||||||
Unrealized | on Cash-Flow | Currency | Postretirement | Other | ||||||||||||||||
Gain (Loss) on | Hedging | Translation | Plan | Comprehensive | ||||||||||||||||
Securities | Instruments | Adjustments | Adjustment | Income (Loss) | ||||||||||||||||
For the year ended December 31, 2008 | ||||||||||||||||||||
Balance, beginning of year | $ | (359 | ) | $ | (140 | ) | $ | 26 | $ | (385 | ) | $ | (858 | ) | ||||||
Unrealized loss on securities [1] [2] | (7,127 | ) | — | — | — | (7,127 | ) | |||||||||||||
Net gain on cash-flow hedging instruments [1] [3] | — | 784 | — | — | 784 | |||||||||||||||
Change in foreign currency translation adjustments [1] | — | — | 196 | — | 196 | |||||||||||||||
Change in pension and other postretirement plan adjustment [1] | — | — | — | (515 | ) | (515 | ) | |||||||||||||
Balance, end of year | $ | (7,486 | ) | $ | 644 | $ | 222 | $ | (900 | ) | $ | (7,520 | ) | |||||||
For the year ended December 31, 2007 | ||||||||||||||||||||
Balance, beginning of year | $ | 1,058 | $ | (234 | ) | $ | (120 | ) | $ | (526 | ) | $ | 178 | |||||||
Unrealized gain on securities [1] [2] | (1,417 | ) | — | — | — | (1,417 | ) | |||||||||||||
Net loss on cash-flow hedging instruments [1] [3] | — | 94 | — | — | 94 | |||||||||||||||
Change in foreign currency translation adjustments [1] | — | — | 146 | — | 146 | |||||||||||||||
Change in pension and other postretirement plan adjustment [1] | — | — | — | 141 | 141 | |||||||||||||||
Balance, end of year | $ | (359 | ) | $ | (140 | ) | $ | 26 | $ | (385 | ) | $ | (858 | ) | ||||||
For the year ended December 31, 2006 | ||||||||||||||||||||
Balance, beginning of year | $ | 969 | $ | (110 | ) | $ | (149 | ) | $ | (620 | ) | $ | 90 | |||||||
Unrealized loss on securities [1] [2] | 89 | — | — | — | 89 | |||||||||||||||
Net gain on cash-flow hedging instruments [1] [3] | — | (124 | ) | — | — | (124 | ) | |||||||||||||
Change in foreign currency translation adjustments [1] | — | — | 29 | — | 29 | |||||||||||||||
Change in pension and other postretirement plan adjustment [1] | — | — | — | 94 | 94 | |||||||||||||||
Balance, end of year | $ | 1,058 | $ | (234 | ) | $ | (120 | ) | $ | (526 | ) | $ | 178 | |||||||
[1] | Unrealized gain/loss on securities is net of tax and Life deferred acquisition costs of $(3,366), $(718), and $137 for the years ended December 31, 2008, 2007 and 2006, respectively. Net gain (loss) on cash-flow hedging instruments is net of tax of $422, $51, and $(67) for the years ended December 31, 2008, 2007 and 2006, respectively. Changes in foreign currency translation adjustments are net of tax of $106, $79, and $16 for the years ended December 31, 2008, 2007 and 2006, respectively. Change in pension and other postretirement plan adjustment is net of tax of $(276), $48, and $51 for the years ended December 31, 2008, 2007 and 2006, respectively. | |
[2] | Net of reclassification adjustment for gains/losses realized in net income of $(2,876), $(192), and $(74) for the years ended for the years ended December 31, 2008, 2007 and 2006, respectively. | |
[3] | Net of amortization adjustment of $(16), $(20) and $(38) to net investment income for the years ended December 31, 2008, 2007 and 2006, respectively. |
F-83
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, | ||||||||
2008 | 2007 | |||||||
Discount rate | 6.25 | % | 6.25 | % | ||||
Rate of increase in compensation levels | 4.25 | % | 4.25 | % |
For the year ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Discount rate | 6.25 | % | 5.75 | % | 5.50 | % | ||||||
Expected long-term rate of return on plan assets | 7.30 | % | 8.00 | % | 8.00 | % | ||||||
Rate of increase in compensation levels | 4.25 | % | 4.25 | % | 4.00 | % |
F-84
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Health care cost trend rate | N/A | N/A | 10.00 | % | ||||||||
Pre-65 Health care cost trend rate | 8.80 | % | 9.30 | % | N/A | |||||||
Post-65 Health care cost trend rate | 7.00 | % | 7.70 | % | N/A | |||||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 5.00 | % | 5.00 | % | 4.50 | % | ||||||
Year that the rate reaches the ultimate trend rate | 2015 | 2013 | 2013 |
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Change in Benefit Obligation | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Benefit obligation — beginning of year | $ | 3,713 | $ | 3,604 | $ | 364 | $ | 371 | ||||||||
Service cost (excluding expenses) | 121 | 122 | 6 | 7 | ||||||||||||
Interest cost | 230 | 209 | 23 | 21 | ||||||||||||
Plan participants’ contributions | — | — | 15 | 14 | ||||||||||||
Amendments | — | 30 | — | — | ||||||||||||
Actuarial loss/(gain) | 65 | 97 | 17 | (11 | ) | |||||||||||
Change in assumptions | (2 | ) | (193 | ) | — | — | ||||||||||
Benefits paid | (175 | ) | (165 | ) | (42 | ) | (42 | ) | ||||||||
Retiree drug subsidy | — | — | 2 | 3 | ||||||||||||
Foreign exchange adjustment | (14 | ) | 9 | (1 | ) | 1 | ||||||||||
Benefit obligation — end of year | $ | 3,938 | $ | 3,713 | $ | 384 | $ | 364 | ||||||||
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Change in Plan Assets | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Fair value of plan assets — beginning of year | $ | 3,957 | $ | 3,655 | $ | 170 | $ | 118 | ||||||||
Actual return on plan assets | (441 | ) | 331 | (16 | ) | 6 | ||||||||||
Employer contributions | 2 | 124 | — | 46 | ||||||||||||
Benefits paid | (164 | ) | (149 | ) | — | — | ||||||||||
Expenses paid | (14 | ) | (12 | ) | — | — | ||||||||||
Foreign exchange adjustment | (14 | ) | 8 | — | — | |||||||||||
Fair value of plan assets — end of year | $ | 3,326 | $ | 3,957 | $ | 154 | $ | 170 | ||||||||
Funded status — end of year | $ | (612 | ) | $ | 244 | $ | (230 | ) | $ | (194 | ) | |||||
F-85
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, | ||||||||
2008 | 2007 | |||||||
Projected benefit obligation | $ | 3,893 | $ | 262 | ||||
Accumulated benefit obligation | 3,869 | 256 | ||||||
Fair value of plan assets | 3,275 | — |
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
Service cost | $ | 121 | $ | 128 | $ | 128 | $ | 6 | $ | 7 | $ | 8 | ||||||||||||
Interest cost | 230 | 209 | 193 | 23 | 21 | 20 | ||||||||||||||||||
Expected return on plan assets | (279 | ) | (283 | ) | (244 | ) | (12 | ) | (8 | ) | (8 | ) | ||||||||||||
Amortization of prior service credit | (9 | ) | (13 | ) | (13 | ) | (1 | ) | (6 | ) | (23 | ) | ||||||||||||
Amortization of actuarial loss | 59 | 90 | 88 | — | — | — | ||||||||||||||||||
Net periodic benefit cost | $ | 122 | $ | 131 | $ | 152 | $ | 16 | $ | 14 | $ | (3 | ) | |||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Amortization of net loss | $ | (59 | ) | $ | (90 | ) | $ | — | $ | — | ||||||
Amortization of prior service credit | 9 | 13 | 1 | 6 | ||||||||||||
Net loss/(gain) arising during the year | 795 | (139 | ) | 45 | (10 | ) | ||||||||||
Prior service cost arising during the year | — | 31 | — | — | ||||||||||||
Total | $ | 745 | $ | (185 | ) | $ | 46 | $ | (4 | ) | ||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net loss/(gain) | $ | 1,454 | $ | 718 | $ | 6 | $ | (39 | ) | |||||||
Prior service cost/(credit) | (49 | ) | (58 | ) | (2 | ) | (3 | ) | ||||||||
Transition obligation | — | — | 1 | 1 | ||||||||||||
Total | $ | 1,405 | $ | 660 | $ | 5 | $ | (41 | ) | |||||||
F-86
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Percentage of Pension Plan Assets | ||||||||||||
Fair Value at December 31, | Target | |||||||||||
2008 | 2007 | Allocation | ||||||||||
Equity securities | 36 | % | 55 | % | 20% – 40 | % | ||||||
Fixed income securities | 58 | % | 43 | % | 50% – 70 | % | ||||||
Alternative Assets | 6 | % | 2 | % | 25% maximum | |||||||
Total | 100 | % | 100 | % | ||||||||
Percentage of Other Postretirement Benefit | ||||||||||||
Plan Assets Fair Value at December 31, | Target | |||||||||||
2008 | 2007 | Allocation | ||||||||||
Equity securities | 19 | % | 27 | % | 20% – 40 | % | ||||||
Fixed income securities | 81 | % | 73 | % | 60% – 80 | % | ||||||
Total | 100 | % | 100 | % | ||||||||
Employer Contributions | Pension Benefits | Other Postretirement Benefits | ||||||
2007 | $ | 158 | $ | 46 | ||||
2008 | $ | 2 | — |
F-87
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pension Benefits | Other Postretirement Benefits | |||||||
2009 | $ | 207 | $ | 36 | ||||
2010 | 220 | 39 | ||||||
2011 | 234 | 40 | ||||||
2012 | 252 | 40 | ||||||
2013 | 261 | 40 | ||||||
2014-2018 | 1,460 | 193 | ||||||
Total | $ | 2,634 | $ | 388 | ||||
2009 | $ | 3 | ||
2010 | 3 | |||
2011 | 4 | |||
2012 | 4 | |||
2013 | 4 | |||
2014-2018 | 28 | |||
Total | $ | 46 | ||
F-88
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Expected dividend yield | 2.9 | % | 2.0 | % | 1.9 | % | ||||||
Expected annualized spot volatility | 32.2% - 37.0 | % | 21.0% - 31.3 | % | 20.2% - 32.3 | % | ||||||
Weighted average annualized volatility | 33.3 | % | 29.0 | % | 28.9 | % | ||||||
Risk-free spot rate | 2.0% - 5.0 | % | 4.4% - 5.2 | % | 4.4% - 4.6 | % | ||||||
Expected term | 8 years | 8 years | 7 years |
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | Remaining | |||||||||||||||
Number of Options | Average | Contractual | Aggregate | |||||||||||||
(in thousands) | Exercise Price | Term | Intrinsic Value | |||||||||||||
Outstanding at beginning of year | 6,323 | $ | 58.76 | 4.2 | $ | 180 | ||||||||||
Granted | 431 | 69.26 | ||||||||||||||
Exercised | (445 | ) | 46.45 | |||||||||||||
Forfeited | (49 | ) | 94.95 | |||||||||||||
Expired | (431 | ) | 55.85 | |||||||||||||
Outstanding at end of year | 5,829 | 60.43 | 3.8 | — | ||||||||||||
Exercisable at end of year | 5,006 | $ | 57.44 | 3.1 | — | |||||||||||
Weighted average fair value of options granted | $ | 21.57 |
F-89
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Shares | Weighted-Average | |||||||
Non-vested Shares | (in thousands) | Grant-Date Fair Value | ||||||
Non-vested at beginning of year | 1,883 | $ | 81.69 | |||||
Granted | 792 | 70.07 | ||||||
Decrease for change in estimated performance factors | (67 | ) | — | |||||
Vested | (498 | ) | 69.87 | |||||
Forfeited | (142 | ) | 83.51 | |||||
Non-vested at end of year | 1,968 | $ | 79.63 | |||||
For the year ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Dividend yield | 3.5 | % | 2.1 | % | 2.0 | % | ||||||
Implied volatility | 45.5 | % | 23.2 | % | 19.0 | % | ||||||
Risk-free spot rate | 1.9 | % | 4.7 | % | 4.7 | % | ||||||
Expected term | 3 months | 3 months | 3 months |
F-90
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-91
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-92
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended | ||||||||||||||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||||||
Revenues [1] | $ | 1,544 | $ | 6,759 | $ | 7,503 | $ | 7,660 | $ | (393 | ) | $ | 5,823 | $ | 565 | $ | 5,674 | |||||||||||||||
Benefits, losses and expenses | $ | 1,453 | $ | 5,547 | $ | 6,851 | $ | 6,823 | $ | 3,790 | $ | 4,648 | $ | 1,716 | $ | 4,893 | ||||||||||||||||
Net income (loss) [2] | $ | 145 | $ | 876 | $ | 543 | $ | 627 | $ | (2,631 | ) | $ | 851 | $ | (806 | ) | $ | 595 | ||||||||||||||
Basic earnings (losses) per share [3] | $ | 0.46 | $ | 2.74 | $ | 1.74 | $ | 1.98 | $ | (8.74 | ) | $ | 2.70 | $ | (2.71 | ) | $ | 1.90 | ||||||||||||||
Diluted earnings (losses) per share [4] | $ | 0.46 | $ | 2.71 | $ | 1.73 | $ | 1.96 | $ | (8.74 | ) | $ | 2.68 | $ | (2.71 | ) | $ | 1.88 | ||||||||||||||
Weighted average common shares outstanding | 313.8 | 319.6 | 311.7 | 316.8 | 301.1 | 315.4 | 300.2 | 313.4 | ||||||||||||||||||||||||
Weighted average common shares outstanding and dilutive potential common shares | 315.7 | 322.7 | 313.1 | 319.6 | 301.1 | 318.0 | 300.2 | 316.1 |
[1] | Included in the three months ended September 30, 2008 and December 31, 2008 are net investment losses of $3.4 billion and $4.5 billion, respectively, related to the mark-to-market effects of equity securities held for trading supporting the International variable annuity business and net realized capital losses of $3.4 billion and $816, respectively | |
[2] | Included in the three months ended September 30, 2008 are net realized capital losses of $2.2 billion and a DAC unlock charge of $932. Included in the three months ended December 31, 2008 is an after-tax charge of $597 related to goodwill impairments and net realized capital losses of $610. | |
[3] | Due to the net loss for the three months ended December 31, 2008, no allocation of the net loss was made to the preferred shareholders under the two-class method in the calculation of basic earnings per share, as the preferred shareholders had no contractual obligation to fund the net losses of the Company. In the absence of the net loss, any such income would be allocated to the preferred shareholders based on the weighted average number of preferred shares outstanding as of December 31, 2008. | |
[4] | As a result of the net loss in the three months ended September 30, 2008 and December 31, 2008, SFAS 128 requires the Company to use basic weighted average common shares outstanding in the calculation of the year ended December 31, 2008 diluted loss per share, since the inclusion of shares for stock compensation plans of 1.0 million and 0.6 million, respectively, and the assumed conversion of the preferred shares to common of 0 and 20.1 million, 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 million and 320.9 million, respectively. |
F-93
Table of Contents
As of December 31, 2008 | ||||||||||||
Amount at | ||||||||||||
which shown on | ||||||||||||
Type of Investment | Cost | Fair Value | Balance Sheet | |||||||||
Fixed Maturities | ||||||||||||
Bonds and notes | ||||||||||||
U.S. government and government agencies and authorities (guaranteed and sponsored) | $ | 5,883 | $ | 5,956 | $ | 5,956 | ||||||
U.S. government and government agencies and authorities (guaranteed and sponsored) – asset-backed | 3,525 | 3,614 | 3,614 | |||||||||
States, municipalities and political subdivisions | 11,406 | 10,655 | 10,655 | |||||||||
International governments | 2,786 | 2,821 | 2,821 | |||||||||
Public utilities | 4,859 | 4,373 | 4,373 | |||||||||
All other corporate bonds including international | 26,200 | 22,808 | 22,808 | |||||||||
All other mortgage-backed and asset-backed securities | 23,579 | 14,885 | 14,885 | |||||||||
Total fixed maturities | 78,238 | 65,112 | 65,112 | |||||||||
Equity Securities | ||||||||||||
Common stocks | ||||||||||||
Utilities | 1 | 1 | 1 | |||||||||
Banks, trusts & insurance companies | 1 | 1 | 1 | |||||||||
Industrial, miscellaneous and all other | 331 | 445 | 445 | |||||||||
Non-redeemable preferred stocks | 1,221 | 1,011 | 1,011 | |||||||||
Total equity securities, available-for-sale | 1,554 | 1,458 | 1,458 | |||||||||
Total equity securities, held for trading | 35,278 | 30,820 | 30,820 | |||||||||
Total equity securities | 36,832 | 32,278 | 32,278 | |||||||||
Real Estate | 103 | 103 | 103 | |||||||||
Short-term Investments | 10,022 | 10,022 | 10,022 | |||||||||
Other Investments | ||||||||||||
Mortgage loans on real estate | 6,469 | 5,654 | 6,469 | |||||||||
Policy loans | 2,208 | 2,435 | 2,208 | |||||||||
Investments in partnerships and trusts | 2,295 | 2,295 | 2,295 | |||||||||
Futures, options and miscellaneous | 744 | 1,620 | 1,620 | |||||||||
Total other investments | 11,716 | 12,004 | 12,592 | |||||||||
Total investments | $ | 136,911 | $ | 119,519 | $ | 120,107 | ||||||
S-1
Table of Contents
(Registrant)
(In millions) | As of December 31, | |||||||
Condensed Balance Sheets | 2008 | 2007 | ||||||
Assets | ||||||||
Other assets | $ | 2,346 | $ | 1,414 | ||||
Investment in affiliates | 14,517 | 23,120 | ||||||
Total assets | $ | 16,863 | $ | 24,534 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Net payable to affiliates | $ | 779 | $ | 663 | ||||
Short-term debt (includes current maturities of long-term debt) | 374 | 1,328 | ||||||
Long-term debt | 5,514 | 2,811 | ||||||
Other liabilities | 928 | 528 | ||||||
Total liabilities | 7,595 | 5,330 | ||||||
Total stockholders’ equity | 9,268 | 19,204 | ||||||
Total liabilities and stockholders’ equity | $ | 16,863 | $ | 24,534 | ||||
(In millions) | For the years ended December 31, | |||||||||||
Condensed Statements of Operations | 2008 | 2007 | 2006 | |||||||||
Interest expense (net of interest income) | $ | 293 | $ | 217 | $ | 198 | ||||||
Other expenses | (106 | ) | 22 | 44 | ||||||||
Loss before income taxes and earnings of subsidiaries | (187 | ) | (239 | ) | (242 | ) | ||||||
Income tax benefit | (102 | ) | (83 | ) | (84 | ) | ||||||
Loss before earnings of subsidiaries | (85 | ) | (156 | ) | (158 | ) | ||||||
Earnings of subsidiaries | (2,664 | ) | 3,105 | 2,903 | ||||||||
Net income (loss) | $ | (2,749 | ) | $ | 2,949 | $ | 2,745 | |||||
the consolidated financial statements and notes thereto.
S-2
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
(In millions) | For the years ended December 31, | |||||||||||
Condensed Statements of Cash Flows | 2008 | 2007 | 2006 | |||||||||
Operating Activities | ||||||||||||
Net income (loss) | $ | (2,749 | ) | $ | 2,949 | $ | 2,745 | |||||
Undistributed earnings of subsidiaries | (4,766 | ) | (1,422 | ) | (2,366 | ) | ||||||
Change in operating assets and liabilities | 9,372 | 18 | (74 | ) | ||||||||
Cash provided by operating activities | 1,857 | 1,545 | 305 | |||||||||
Investing Activities | ||||||||||||
Net purchase of short-term investments | (892 | ) | (76 | ) | (292 | ) | ||||||
Capital contributions to subsidiaries | (2,300 | ) | (127 | ) | (527 | ) | ||||||
Cash used for investing activities | (3,192 | ) | (203 | ) | (819 | ) | ||||||
Financing Activities | ||||||||||||
Issuance of shares from equity unit contracts | — | — | 1,020 | |||||||||
Issuance of long-term debt | 2,670 | 495 | 990 | |||||||||
Repayment/maturity of long-term debt | (955 | ) | (300 | ) | (1,015 | ) | ||||||
Change in short-term debt | — | 75 | (173 | ) | ||||||||
Issuance of convertible preferred shares | 727 | — | — | |||||||||
Issuance of warrants | 512 | — | — | |||||||||
Proceeds from issuances of shares under incentive and stock compensation plans, net | 54 | 186 | 147 | |||||||||
Treasury stock acquired | (1,000 | ) | (1,193 | ) | — | |||||||
Return of shares to treasury stock under incentive and stock compensation plans to treasury stock | (18 | ) | (14 | ) | (5 | ) | ||||||
Excess tax benefits on stock-based compensation | 5 | 45 | 10 | |||||||||
Dividends paid | (660 | ) | (636 | ) | (460 | ) | ||||||
Cash provided by financing activities | 1,335 | (1,342 | ) | 514 | ||||||||
Net change in cash | — | — | — | |||||||||
Cash — beginning of year | — | — | — | |||||||||
Cash — end of year | $ | — | $ | — | $ | — | ||||||
Supplemental Disclosure of Cash Flow Information | ||||||||||||
Interest Paid | $ | 265 | $ | 239 | $ | 198 | ||||||
Dividends Received from Subsidiaries | $ | 2,279 | $ | 1,668 | $ | 441 |
the consolidated financial statements and notes thereto.
S-3
Table of Contents
Future Policy | Other | |||||||||||||||
Benefits, | Policyholder | |||||||||||||||
Deferred Policy | Unpaid Losses | Funds and | ||||||||||||||
Acquisition | and | Unearned | Benefits | |||||||||||||
Segment [1] | Costs [2] | Loss Adjustment Expenses | Premiums | Payable | ||||||||||||
As of December 31, 2008 | ||||||||||||||||
Life | ||||||||||||||||
Retail | $ | 5,801 | $ | 1,353 | $ | 11 | $ | 22,164 | ||||||||
Individual Life | 3,027 | 781 | 1 | 6,010 | ||||||||||||
Total Individual Markets Group | 8,828 | 2,134 | 12 | 28,174 | ||||||||||||
Retirement Plans | 877 | 313 | — | 6,437 | ||||||||||||
Group Benefits | 81 | 6,356 | 85 | 402 | ||||||||||||
Total Employer Markets Group | 958 | 6,669 | 85 | 6,839 | ||||||||||||
International | 2,046 | 229 | — | 36,461 | ||||||||||||
Institutional | 156 | 7,667 | 40 | 11,255 | ||||||||||||
Other | — | 48 | 1 | 1,823 | ||||||||||||
Total Life | 11,988 | 16,747 | 138 | 84,552 | ||||||||||||
Property & Casualty | ||||||||||||||||
Ongoing Operations | ||||||||||||||||
Personal Lines | 606 | 2,052 | 1,904 | — | ||||||||||||
Small Commercial | 282 | 3,572 | 1,318 | — | ||||||||||||
Middle Market | 232 | 4,745 | 1,128 | — | ||||||||||||
Specialty Commercial | 140 | 6,980 | 893 | — | ||||||||||||
Total Ongoing Operations | 1,260 | 17,349 | 5,243 | — | ||||||||||||
Other Operations | — | 4,584 | 1 | — | ||||||||||||
Total Property & Casualty | 1,260 | 21,933 | 5,244 | — | ||||||||||||
Corporate | — | — | (3 | ) | — | |||||||||||
Consolidated | $ | 13,248 | $ | 38,680 | $ | 5,379 | $ | 84,552 | ||||||||
As of December 31, 2007 | ||||||||||||||||
Life | ||||||||||||||||
Retail | $ | 5,315 | $ | 961 | $ | 13 | $ | 15,443 | ||||||||
Individual Life | 2,406 | 737 | 2 | 5,691 | ||||||||||||
Total Individual Markets Group | 7,721 | 1,698 | 15 | 21,134 | ||||||||||||
Retirement Plans | 658 | 333 | — | 5,591 | ||||||||||||
Group Benefits | 69 | 6,331 | 75 | 317 | ||||||||||||
Total Employer Markets Group | 727 | 6,664 | 75 | 5,908 | ||||||||||||
International | 1,923 | 42 | — | 39,024 | ||||||||||||
Institutional | 143 | 6,863 | 57 | 12,460 | ||||||||||||
Other | — | 64 | — | 1,816 | ||||||||||||
Total Life | 10,514 | 15,331 | 147 | 80,342 | ||||||||||||
Property & Casualty | ||||||||||||||||
Ongoing Operations | ||||||||||||||||
Personal Lines | 566 | 2,042 | 1,909 | — | ||||||||||||
Small Commercial | 282 | 3,470 | 1,357 | — | ||||||||||||
Middle Market | 236 | 4,697 | 1,195 | — | ||||||||||||
Specialty Commercial | 144 | 6,873 | 940 | — | ||||||||||||
Total Ongoing Operations | 1,228 | 17,082 | 5,401 | — | ||||||||||||
Other Operations | — | 5,071 | 1 | — | ||||||||||||
Total Property & Casualty | 1,228 | 22,153 | 5,402 | — | ||||||||||||
Corporate | — | — | (4 | ) | — | |||||||||||
Consolidated | $ | 11,742 | $ | 37,484 | $ | 5,545 | $ | 80,342 | ||||||||
[1] | Segment information is presented in a manner by which The Hartford’s chief operating decision maker views and manages the business. | |
[2] | Also includes present value of future profits. |
S-4
Table of Contents
Earned | Benefits, Losses | Amortization of | ||||||||||||||||||||||
Premiums, Fee | Net | and Loss | Deferred Policy | |||||||||||||||||||||
Income and | Investment | Adjustment | Acquisition | Other | Net Written | |||||||||||||||||||
Segment [1] | Other | Income | Expenses | Costs | Expenses [2] | Premiums | ||||||||||||||||||
For the year ended December 31, 2008 | �� | |||||||||||||||||||||||
Life | ||||||||||||||||||||||||
Retail | $ | 2,753 | $ | 747 | $ | 1,008 | $ | 1,344 | $ | 1,609 | $ | |||||||||||||
Individual Life | 828 | 338 | 627 | 169 | 202 | |||||||||||||||||||
Total Individual Markets Group | 3,581 | 1,085 | 1,635 | 1,513 | 1,811 | |||||||||||||||||||
Retirement Plans | 338 | 342 | 271 | 91 | 335 | |||||||||||||||||||
Group Benefits | 4,391 | 419 | 3,144 | 57 | 1,128 | |||||||||||||||||||
Total Employer Markets Group | 4,729 | 761 | 3,415 | 148 | 1,463 | |||||||||||||||||||
International | 872 | 167 | 270 | 496 | 321 | |||||||||||||||||||
Institutional | 1,041 | 1,004 | 1,907 | 19 | 120 | |||||||||||||||||||
Other | 60 | (10,312 | ) | (10,186 | ) | — | 7 | |||||||||||||||||
Total Life | 10,283 | (7,295 | ) | (2,959 | ) | 2,176 | 3,722 | N/A | ||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Personal Lines | 4,061 | 209 | 2,749 | 633 | 431 | 3,925 | ||||||||||||||||||
Small Commercial | 2,724 | 222 | 1,480 | 636 | 224 | 2,696 | ||||||||||||||||||
Middle Market | 2,297 | 279 | 1,442 | 513 | 208 | 2,242 | ||||||||||||||||||
Specialty Commercial | 1,753 | 346 | 907 | 313 | 530 | 1,361 | ||||||||||||||||||
Total Ongoing Operations | 10,835 | 1,056 | 6,578 | 2,095 | 1,393 | 10,224 | ||||||||||||||||||
Other Operations | 7 | 197 | 129 | — | 26 | 7 | ||||||||||||||||||
Total Property & Casualty | 10,842 | 1,253 | 6,707 | 2,095 | 1,419 | 10,231 | ||||||||||||||||||
Corporate | 17 | 37 | — | — | 650 | — | ||||||||||||||||||
Consolidated | $ | 21,142 | $ | (6,005 | ) | $ | 3,748 | $ | 4,271 | $ | 5,791 | $ | 10,231 | |||||||||||
[1] | Segment information is presented in a manner by which The Hartford’s chief operating decision maker views and manages the business. | |
[2] | Includes insurance operating costs, interest, goodwill impairment, and other expenses. | |
N/A | — Not applicable to life insurance pursuant to Regulation S-X. |
S-5
Table of Contents
Earned | Benefits, Losses | Amortization of | ||||||||||||||||||||||
Premiums, Fee | Net | and Loss | Deferred Policy | |||||||||||||||||||||
Income and | Investment | Adjustment | Acquisition | Other | Net Written | |||||||||||||||||||
Segment [1] | Other | Income | Expenses | Costs | Expenses [2] | Premiums | ||||||||||||||||||
For the year ended December 31, 2007 | ||||||||||||||||||||||||
Life | ||||||||||||||||||||||||
Retail | $ | 3,055 | $ | 801 | $ | 820 | $ | 406 | $ | 1,221 | $ | |||||||||||||
Individual Life | 808 | 359 | 562 | 121 | 193 | |||||||||||||||||||
Total Individual Markets Group | 3,863 | 1,160 | 1,382 | 527 | 1,414 | |||||||||||||||||||
Retirement Plans | 242 | 355 | 249 | 58 | 170 | |||||||||||||||||||
Group Benefits | 4,301 | 465 | 3,109 | 62 | 1,131 | |||||||||||||||||||
Total Employer Markets Group | 4,543 | 820 | 3,358 | 120 | 1,301 | |||||||||||||||||||
International | 832 | 131 | 32 | 214 | 246 | |||||||||||||||||||
Institutional | 1,238 | 1,241 | 2,074 | 23 | 185 | |||||||||||||||||||
Other | 67 | 290 | 301 | — | 84 | |||||||||||||||||||
Total Life | 10,543 | 3,642 | 7,147 | 884 | 3,230 | N/A | ||||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Personal Lines | 4,030 | 249 | 2,697 | 617 | 402 | 3,947 | ||||||||||||||||||
Small Commercial | 2,737 | 299 | 1,413 | 635 | 239 | 2,747 | ||||||||||||||||||
Middle Market | 2,420 | 389 | 1,560 | 529 | 208 | 2,326 | ||||||||||||||||||
Specialty Commercial | 1,800 | 502 | 1,054 | 323 | 537 | 1,415 | ||||||||||||||||||
Total Ongoing Operations | 10,987 | 1,439 | 6,724 | 2,104 | 1,386 | 10,435 | ||||||||||||||||||
Other Operations | 5 | 248 | 193 | — | 23 | 5 | ||||||||||||||||||
Total Property & Casualty | 10,992 | 1,687 | 6,917 | 2,104 | 1,409 | 10,440 | ||||||||||||||||||
Corporate | 16 | 30 | — | 1 | 219 | — | ||||||||||||||||||
Consolidated | $ | 21,551 | $ | 5,359 | $ | 14,064 | $ | 2,989 | $ | 4,858 | $ | 10,440 | ||||||||||||
[1] | Segment information is presented in a manner by which The Hartford’s chief operating decision maker views and manages the business. | |
[2] | Includes insurance operating costs, interest and other expenses. | |
N/A | — Not applicable to life insurance pursuant to Regulation S-X. |
S-6
Table of Contents
Earned | Benefits, Losses | Amortization of | ||||||||||||||||||||||
Premiums, Fee | Net | and Loss | Deferred Policy | |||||||||||||||||||||
Income and | Investment | Adjustment | Acquisition | Other | Net Written | |||||||||||||||||||
Segment [1] | Other | Income | Expenses | Costs | Expenses [2] | Premiums | ||||||||||||||||||
For the year ended December 31, 2006 | ||||||||||||||||||||||||
Life | ||||||||||||||||||||||||
Retail | $ | 2,609 | $ | 839 | $ | 819 | $ | 973 | $ | 994 | $ | |||||||||||||
Individual Life | 832 | 324 | 497 | 243 | 179 | |||||||||||||||||||
Total Individual Markets Group | 3,441 | 1,163 | 1,316 | 1,216 | 1,173 | |||||||||||||||||||
Retirement Plans | 212 | 326 | 250 | (4 | ) | 136 | ||||||||||||||||||
Group Benefits | 4,149 | 415 | 3,002 | 41 | 1,101 | |||||||||||||||||||
Total Employer Markets Group | 4,361 | 741 | 3,252 | 37 | 1,237 | |||||||||||||||||||
International | 701 | 123 | 3 | 167 | 208 | |||||||||||||||||||
Institutional | 732 | 1,003 | 1,484 | 32 | 78 | |||||||||||||||||||
Other | 81 | 1,978 | 1,985 | — | 12 | |||||||||||||||||||
Total Life | 9,316 | 5,008 | 8,040 | 1,452 | 2,708 | N/A | ||||||||||||||||||
Property & Casualty | ||||||||||||||||||||||||
Ongoing Operations | ||||||||||||||||||||||||
Personal Lines | 3,895 | 228 | 2,478 | 622 | 409 | 3,877 | ||||||||||||||||||
Small Commercial | 2,651 | 261 | 1,468 | 634 | 181 | 2,728 | ||||||||||||||||||
Middle Market | 2,525 | 346 | 1,626 | 544 | 176 | 2,515 | ||||||||||||||||||
Specialty Commercial | 1,830 | 390 | 1,070 | 306 | 445 | 1,538 | ||||||||||||||||||
Total Ongoing Operations | 10,901 | 1,225 | 6,642 | 2,106 | 1,211 | 10,658 | ||||||||||||||||||
Other Operations | 5 | 261 | 360 | — | 12 | 4 | ||||||||||||||||||
Total Property & Casualty | 10,906 | 1,486 | 7,002 | 2,106 | 1,223 | 10,662 | ||||||||||||||||||
Corporate | 14 | 21 | — | — | 367 | — | ||||||||||||||||||
Consolidated | $ | 20,236 | $ | 6,515 | $ | 15,042 | $ | 3,558 | $ | 4,298 | $ | 10,662 | ||||||||||||
[1] | Segment information is presented in a manner by which The Hartford’s chief operating decision maker views and manages the business. | |
[2] | Includes insurance operating costs, interest and other expenses. | |
N/A | — Not applicable to life insurance pursuant to Regulation S-X. |
S-7
Table of Contents
Percentage | ||||||||||||||||||||
Assumed | of Amount | |||||||||||||||||||
Gross | Ceded to Other | From Other | Net | Assumed | ||||||||||||||||
(In millions) | Amount | Companies | Companies | Amount | to Net | |||||||||||||||
For the year ended December 31, 2008 | ||||||||||||||||||||
Life insurance in-force | $ | 924,987 | $ | 123,074 | $ | 43,736 | $ | 845,649 | 5 | % | ||||||||||
Insurance revenues | ||||||||||||||||||||
Property and casualty insurance | $ | 10,999 | $ | 877 | $ | 216 | $ | 10,338 | 2 | % | ||||||||||
Life insurance and annuities | 8,187 | 390 | 173 | 7,970 | 2 | % | ||||||||||||||
Accident and health insurance | 2,254 | 31 | 90 | 2,313 | 4 | % | ||||||||||||||
Total insurance revenues | $ | 21,440 | $ | 1,298 | $ | 479 | $ | 20,621 | 2 | % | ||||||||||
For the year ended December 31, 2007 | ||||||||||||||||||||
Life insurance in-force | $ | 824,608 | $ | 216,439 | $ | 82,282 | $ | 690,451 | 12 | % | ||||||||||
Insurance revenues | ||||||||||||||||||||
Property and casualty insurance | $ | 11,396 | $ | 1,104 | $ | 204 | $ | 10,496 | 2 | % | ||||||||||
Life insurance and annuities | 8,360 | 369 | 188 | 8,179 | 2 | % | ||||||||||||||
Accident and health insurance | 2,315 | 36 | 85 | 2,364 | 4 | % | ||||||||||||||
Total insurance revenues | $ | 22,071 | $ | 1,509 | $ | 477 | $ | 21,039 | 2 | % | ||||||||||
For the year ended December 31, 2006 | ||||||||||||||||||||
Life insurance in-force | $ | 872,536 | $ | 218,795 | $ | 48,428 | $ | 702,169 | 7 | % | ||||||||||
Insurance revenues | ||||||||||||||||||||
Property and casualty insurance | $ | 11,465 | $ | 1,291 | $ | 259 | $ | 10,433 | 2 | % | ||||||||||
Life insurance and annuities | 7,092 | 333 | 247 | 7,006 | 3 | % | ||||||||||||||
Accident and health insurance | 2,280 | 36 | 66 | 2,310 | 3 | % | ||||||||||||||
Total insurance revenues | $ | 20,837 | $ | 1,660 | $ | 572 | $ | 19,749 | 3 | % | ||||||||||
S-8
Table of Contents
Charged to | Write-offs/ | |||||||||||||||||||
Balance | Costs and | Translation | Payments/ | Balance | ||||||||||||||||
(In millions) | January 1, | Expenses | Adjustment | Other | December 31, | |||||||||||||||
2008 | ||||||||||||||||||||
Allowance for doubtful accounts and other | $ | 126 | $ | 53 | $ | — | $ | (54 | ) | $ | 125 | |||||||||
Allowance for uncollectible reinsurance | 404 | 12 | — | (37 | ) | 379 | ||||||||||||||
Accumulated depreciation of property and equipment | 1,395 | 228 | — | (22 | ) | 1,601 | ||||||||||||||
Valuation allowance on mortgage loans | — | 26 | — | — | 26 | |||||||||||||||
Valuation allowance for deferred taxes | 43 | 32 | — | — | 75 | |||||||||||||||
2007 | ||||||||||||||||||||
Allowance for doubtful accounts and other | $ | 114 | $ | 47 | $ | — | $ | (35 | ) | $ | 126 | |||||||||
Allowance for uncollectible reinsurance | 412 | 12 | — | (20 | ) | 404 | ||||||||||||||
Accumulated depreciation of property and equipment | 1,241 | 232 | — | (78 | ) | 1,395 | ||||||||||||||
Valuation allowance for deferred taxes | 60 | (17 | ) | — | — | 43 | ||||||||||||||
2006 | ||||||||||||||||||||
Allowance for doubtful accounts and other | $ | 120 | $ | 35 | $ | — | $ | (41 | ) | $ | 114 | |||||||||
Allowance for uncollectible reinsurance | 413 | 284 | — | (285 | ) | 412 | ||||||||||||||
Accumulated depreciation of property and equipment | 1,150 | 193 | — | (102 | ) | 1,241 | ||||||||||||||
Valuation allowance for deferred taxes | 44 | 16 | — | — | 60 |
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Discount | Losses and Loss Adjustment | Paid Losses and | ||||||||||||||
Deducted From | Expenses Incurred Related to: | Loss Adjustment | ||||||||||||||
(In millions) | Liabilities [1] | Current Year | Prior Year | Expenses | ||||||||||||
Years ended December 31, | ||||||||||||||||
2008 | $ | 488 | $ | 6,933 | $ | (226 | ) | $ | 6,591 | |||||||
2007 | $ | 568 | $ | 6,869 | $ | 48 | $ | 6,290 | ||||||||
2006 | $ | 605 | $ | 6,706 | $ | 296 | $ | 6,150 |
[1] | Reserves for permanently disabled claimants and certain structured settlement contracts that fund loss run-offs have been discounted using the weighted average interest rates of 5.4%, 5.5%, and 5.6% for 2008, 2007 and 2006, respectively. |
S-9
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC. | |||||
By: | /s/ Beth A. Bombara | ||||
Beth A. Bombara | |||||
Senior Vice President and Controller | |||||
(Chief Accounting Officer and duly authorized signatory) |
Signature | Title | Date | ||||
/s/ Ramani Ayer | Chairman, Chief Executive Officer and Director (Principal Executive Officer) | February 11, 2009 | ||||
* | President, Chief Operating Officer and Director | February 11, 2009 | ||||
/s/ Lizabeth H. Zlatkus | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | February 11, 2009 | ||||
/s/ Beth A. Bombara | Senior Vice President and Controller (Principal Accounting Officer) | February 11, 2009 | ||||
* | Director | February 11, 2009 | ||||
* | Director | February 11, 2009 | ||||
* | Director | February 11, 2009 | ||||
* | Director | February 11, 2009 | ||||
* | Director | February 11, 2009 | ||||
* | Director | February 11, 2009 | ||||
* | Director | February 11, 2009 | ||||
* | Director | February 11, 2009 | ||||
* | Director | February 11, 2009 | ||||
*By: | /s/ Alan J. Kreczko | |||||
As Attorney-in-Fact |
II-1
Table of Contents
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
FORM 10-K
Exhibit No. | Description | |
3.01 | Corrected Amended and Restated Certificate of Incorporation of The Hartford Financial Services Group, Inc. (“The Hartford”), effective May 21, 1998, as amended by Amendment No. 1, effective May 1, 2002 (incorporated herein by reference to Exhibit 3.01 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004). | |
3.02 | Amended and Restated By-Laws of The Hartford, amended effective September 18, 2008 (incorporated herein by reference to Exhibit 3.1 to The Hartford’s Current Report on Form 8-K, filed September 24, 2008). | |
3.03 | 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). | |
3.04 | 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). | |
3.05 | 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 | Corrected Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of The Hartford (incorporated herein by reference as indicated in Exhibits 3.01 and 3.02 hereto, respectively). | |
4.02 | Senior Indenture, dated as of October 20, 1995, between The Hartford and The Chase Manhattan Bank (National Association) as Trustee (incorporated herein by reference to Exhibit 4.03 to the Registration Statement on Form S-3 (Registration No. 333-103915) of The Hartford, Hartford Capital IV, Hartford Capital V and Hartford Capital VI). | |
4.03 | Supplemental Indenture No. 1, dated as of December 27, 2000, to the Senior Indenture filed as Exhibit 4.02 hereto, between The Hartford and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.30 to The Hartford’s Registration Statement on Form S-3 (Amendment No. 1) (Registration No. 333-49666) dated December 27, 2000). | |
4.04 | Supplemental Indenture No. 2, dated as of September 13, 2002, to the Senior Indenture filed as Exhibit 4.02 hereto, between The Hartford and JPMorgan Chase Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Hartford’s Current Report on Form 8-K, filed September 17, 2002). | |
4.05 | Form of Global Security (included in Exhibit 4.04). | |
4.06 | Supplemental Indenture No. 3, dated as of May 23, 2003, to the Senior Indenture filed as Exhibit 4.02 hereto, between The Hartford and JPMorgan Chase Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 of The Hartford’s Current Report on Form 8-K, filed May 30, 2003). | |
4.07 | Senior Indenture, dated as of March 9, 2004, between The Hartford and JPMorgan Chase Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Hartford’s Current Report on Form 8-K, filed March 12, 2004). | |
4.08 | Junior Subordinated Indenture, dated as of February 12, 2007, between The Hartford and LaSalle Bank, N.A., as Trustee (incorporated herein by reference to Exhibit 4.1 to The Hartford’s Current Report on Form 8-K, filed February 16, 2007). |
II-2
Table of Contents
Exhibit No. | Description | |
4.09 | Senior Indenture, dated as of April 11, 2007, between The Hartford and The Bank of New York Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 4.03 to the Registration Statement on Form S-3 (Registration No. 333-142044) of The Hartford, Hartford Capital IV, Hartford Capital V and Hartford Capital VI, filed on April 11, 2007). | |
4.10 | 6.000% Senior Note due January 15, 2019 (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on May 12, 2008) | |
4.11 | 8.125% Fixed-to-Floating Rate Junior Subordinated Debenture due 2068 (incorporated herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on June 6, 2008). | |
4.12 | Junior Subordinated Indenture, dated as of June 6, 2008, between The Hartford Financial Services Group, Inc. and The Bank of New York Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 6, 2008). | |
4.13 | First Supplemental Indenture, dated as of June 6, 2008, between The Hartford Financial Services Group, Inc. and The Bank of New York Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 6, 2008). | |
4.14 | Replacement Capital Covenant, dated as of June 6, 2008 (incorporated herein by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on June 6, 2008). | |
4.15 | Second Supplemental Indenture, dated as of October 17, 2008, between The Hartford 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). | |
4.16 | 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). | |
4.17 | 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). | |
4.18 | Registration Rights Agreement, dated as of October 17, 2008, between The Hartford 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 | Employment Agreement, amended and restated as of October 31, 2008, between The Hartford and Ramani Ayer. | |
*10.02 | Employment Agreement, amended and restated as of October 31, 2008, between The Hartford and Thomas M. Marra.† | |
*10.03 | Employment Agreement, amended and restated as of November 24, 2008, between The Hartford and Neal S. Wolin.† | |
*10.04 | Employment Agreement, amended and restated as of November 10, 2008, between The Hartford and Lizabeth H. Zlatkus.† | |
*10.05 | Employment Agreement, amended and restated as of November 14, 2008, between The Hartford and John C. Walters.† | |
*10.06 | Form of Key Executive Employment Protection Agreement between The Hartford and certain executive officers of The Hartford, as amended .† | |
*10.07 | The Hartford Restricted Stock Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10.05 to The Hartford’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004). | |
*10.08 | The Hartford 1995 Incentive Stock Plan, as amended. † | |
*10.09 | The Hartford Incentive Stock Plan, as amended. † | |
*10.10 | The Hartford 2005 Incentive Stock Plan, as amended. † |
II-3
Table of Contents
Exhibit No. | Description | |
*10.11 | The Hartford Deferred Restricted Stock Unit Plan, as amended (incorporated herein by reference to Exhibit 10.12 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005). | |
*10.12 | The Hartford Deferred Compensation Plan, as amended. † | |
*10.13 | The Hartford Senior Executive Severance Pay Plan, as amended (incorporated herein by reference to Exhibit 10.07 to The Hartford’s Current Report on Form 8-K, filed September 12, 2006). | |
*10.14 | The Hartford Executive Severance Pay Plan I, as amended (incorporated herein by reference to Exhibit 10.18 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002). | |
*10.15 | The Hartford Planco Non-Employee Option Plan, as amended (incorporated herein by reference to Exhibit 10.19 to The Hartford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002). | |
*10.16 | The Hartford Employee Stock Purchase Plan, as amended. † | |
*10.17 | The Hartford Investment and Savings Plan, as amended. † | |
*10.18 | The Hartford 2005 Incentive Stock Plan Forms of Individual Award Agreements (incorporated herein by reference to Exhibit 10.2 to The Hartford’s Current Report on Form 8-K, filed May 24, 2005). | |
10.19 | Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility, dated August 9, 2007, among The Hartford and the syndicate of lenders named therein, including Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A. and Citibank, N.A., as syndication agents, and Wachovia Bank, N.A., as documentation agent, as amended (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed August 10, 2007; Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed July 14, 2008; and Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed December 18, 2008). | |
10.20 | Remarketing Agreement, dated as of May 9, 2006, between The Hartford and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co., J.P. Morgan Securities Inc., and J.P. Morgan Chase Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed May 15, 2006). | |
10.21 | Initial Remarketing Agreement, dated as of August 10, 2006, between The Hartford, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, and J.P. Morgan Chase Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed August 11, 2006). | |
10.22 | Put Option Agreement, dated February 12, 2007, among The Hartford, Glen Meadow ABC Trust and LaSalle Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed February 16, 2007). | |
10.23 | Form of Assurance of Discontinuance entered into by the New York Attorney General’s Office, the Illinois Attorney General’s Office and The Hartford, dated July 23, 2007 (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed July 24, 2007). | |
10.24 | Accelerated Share Repurchase Confirmation Agreement, dated as of June 4, 2008, between The Hartford Financial Services Group, Inc. and Credit Suisse International (incorporated herein by reference to Exhibit 10.01 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008). | |
10.25 | Investment Agreement, dated as of October 17, 2008 between The Hartford and Allianz SE (incorporated herein by reference to Exhibit 10.1 to The Hartford’s Current Report on Form 8-K, filed October 17, 2008). | |
10.26 | 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). | |
12.01 | Statement Re: Computation of Ratio of Earnings to Fixed Charges. † | |
21.01 | Subsidiaries of The Hartford Financial Services Group, Inc. † |
II-4
Table of Contents
Exhibit No. | Description | |
23.01 | Consent of Deloitte & Touche LLP to the incorporation by reference into The Hartford’s Registration Statements on Form S-8 and Form S-3 of the report of Deloitte & Touche LLP contained in this Form 10-K regarding the audited financial statements is filed herewith. † | |
24.01 | Power of Attorney. † | |
31.01 | Certification of Ramani Ayer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. † | |
31.02 | Certification of 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. † |
* | Management contract, compensatory plan or arrangement. | |
† | Filed with the Securities and Exchange Commission as an exhibit to this report. |
II-5