10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| |
|
|
| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
OR
| |
|
|
| o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the transition period from to
Commission File Number: 001-13958
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
| |
|
|
| Delaware
|
|
13-3317783 |
| (State or other jurisdiction of
|
|
(I.R.S. Employer |
| incorporation or organization)
|
|
Identification No.) |
One Hartford Plaza, Hartford, Connecticut 06155
(Address of principal executive offices)
(860) 547-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of April 20, 2007, there were outstanding 316,663,287 shares of Common Stock, $0.01 par value
per share, of the registrant.
The Hartford Financial Services Group, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2007
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial
Services Group, Inc. and subsidiaries (the “Company”) as of March 31, 2007, and the related
condensed consolidated statements of operations, changes in stockholders’ equity, comprehensive
income, and cash flows for the three-month periods ended March 31, 2007 and 2006. These interim
financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of the Company as of December 31,
2006, and the related consolidated statements of operations, changes in stockholders’ equity,
comprehensive income, and cash flows for the year then ended (not presented herein); and in our
report dated February 21, 2007 (which report includes an explanatory paragraph relating to the
Company’s change in its method of accounting and reporting for defined benefit pension and other
postretirement plans in 2006, and for certain nontraditional long-duration contracts and for
separate accounts in 2004), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
April 24, 2007
3
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| (In millions, except for per share data) |
|
2007 |
|
2006 |
| |
| |
|
(Unaudited) |
Revenues |
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
3,831 |
|
|
$ |
3,839 |
|
Fee income |
|
|
1,282 |
|
|
|
1,121 |
|
Net investment income: |
|
|
|
|
|
|
|
|
Securities available-for-sale and other |
|
|
1,273 |
|
|
|
1,127 |
|
Equity securities held for trading |
|
|
210 |
|
|
|
454 |
|
| |
Total net investment income |
|
|
1,483 |
|
|
|
1,581 |
|
Other revenues |
|
|
117 |
|
|
|
123 |
|
Net realized capital gains (losses) |
|
|
46 |
|
|
|
(121 |
) |
| |
Total revenues |
|
|
6,759 |
|
|
|
6,543 |
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses |
|
|
|
|
|
|
|
|
Benefits, losses and loss adjustment expenses |
|
|
3,543 |
|
|
|
3,779 |
|
Amortization of deferred policy acquisition costs and present
value of future profits |
|
|
872 |
|
|
|
817 |
|
Insurance operating costs and expenses |
|
|
888 |
|
|
|
727 |
|
Interest expense |
|
|
63 |
|
|
|
66 |
|
Other expenses |
|
|
181 |
|
|
|
170 |
|
| |
Total benefits, losses and expenses |
|
|
5,547 |
|
|
|
5,559 |
|
Income before income taxes |
|
|
1,212 |
|
|
|
984 |
|
Income tax expense |
|
|
336 |
|
|
|
256 |
|
| |
Net income |
|
$ |
876 |
|
|
$ |
728 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings Per Share |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
2.74 |
|
|
$ |
2.41 |
|
Diluted earnings per share |
|
$ |
2.71 |
|
|
$ |
2.34 |
|
Weighted average common shares outstanding |
|
|
319.6 |
|
|
|
302.2 |
|
Weighted average common shares outstanding and dilutive
potential common shares |
|
|
322.7 |
|
|
|
310.9 |
|
| |
|
|
|
|
|
|
|
|
|
Cash dividends declared per share |
|
$ |
0.50 |
|
|
$ |
0.40 |
|
| |
See Notes to Condensed Consolidated Financial Statements.
4
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
December 31, |
| (In millions, except for per share data) |
|
2007 |
|
2006 |
| |
| |
|
(Unaudited) |
Assets |
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale, at fair value (amortized cost of $80,162 and $79,289) |
|
$ |
81,566 |
|
|
$ |
80,755 |
|
Equity securities, held for trading, at fair value (cost of $25,019 and $23,668) |
|
|
30,805 |
|
|
|
29,393 |
|
Equity securities, available-for-sale, at fair value (cost of $1,995 and $1,535) |
|
|
2,212 |
|
|
|
1,739 |
|
Policy loans, at outstanding balance |
|
|
2,099 |
|
|
|
2,051 |
|
Mortgage loans on real estate |
|
|
4,015 |
|
|
|
3,318 |
|
Other investments |
|
|
2,246 |
|
|
|
1,917 |
|
| |
Total investments |
|
|
122,943 |
|
|
|
119,173 |
|
Cash |
|
|
1,790 |
|
|
|
1,424 |
|
Premiums receivable and agents’ balances |
|
|
3,767 |
|
|
|
3,675 |
|
Reinsurance recoverables |
|
|
5,485 |
|
|
|
5,571 |
|
Deferred policy acquisition costs and present value of future profits |
|
|
10,360 |
|
|
|
10,268 |
|
Deferred income taxes |
|
|
142 |
|
|
|
284 |
|
Goodwill |
|
|
1,726 |
|
|
|
1,717 |
|
Property and equipment, net |
|
|
815 |
|
|
|
791 |
|
Other assets |
|
|
3,957 |
|
|
|
3,323 |
|
Separate account assets |
|
|
181,726 |
|
|
|
180,484 |
|
| |
Total assets |
|
$ |
332,711 |
|
|
$ |
326,710 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Reserve for future policy benefits and unpaid losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
Property and casualty |
|
$ |
21,987 |
|
|
$ |
21,991 |
|
Life |
|
|
14,255 |
|
|
|
14,016 |
|
Other policyholder funds and benefits payable |
|
|
73,465 |
|
|
|
71,311 |
|
Unearned premiums |
|
|
5,657 |
|
|
|
5,620 |
|
Short-term debt |
|
|
468 |
|
|
|
599 |
|
Long-term debt |
|
|
4,004 |
|
|
|
3,504 |
|
Consumer notes |
|
|
435 |
|
|
|
258 |
|
Other liabilities |
|
|
11,863 |
|
|
|
10,051 |
|
Separate account liabilities |
|
|
181,726 |
|
|
|
180,484 |
|
| |
Total liabilities |
|
|
313,860 |
|
|
|
307,834 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity |
|
|
|
|
|
|
|
|
Common stock - 750,000,000 shares authorized, 328,022,346 and 326,401,820 shares issued, $0.01 par value |
|
|
3 |
|
|
|
3 |
|
Additional paid-in capital |
|
|
6,435 |
|
|
|
6,321 |
|
Retained Earnings |
|
|
13,095 |
|
|
|
12,421 |
|
Treasury stock, at cost 11,650,855 and 3,086,429 shares |
|
|
(859 |
) |
|
|
(47 |
) |
Accumulated other comprehensive income, net of tax |
|
|
177 |
|
|
|
178 |
|
| |
Total stockholders’ equity |
|
|
18,851 |
|
|
|
18,876 |
|
| |
Total liabilities and stockholders’ equity |
|
$ |
332,711 |
|
|
$ |
326,710 |
|
| |
See Notes to Condensed Consolidated Financial Statements.
5
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| (In millions, except for share data) |
|
2007 |
|
2006 |
| |
| |
|
(Unaudited) |
Common Stock and Additional Paid-in Capital |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
6,324 |
|
|
$ |
5,070 |
|
Issuance of shares under incentive and stock compensation plans |
|
|
92 |
|
|
|
15 |
|
Tax benefit on employee stock options and awards |
|
|
22 |
|
|
|
14 |
|
| |
Balance at end of period |
|
|
6,438 |
|
|
|
5,099 |
|
| |
Retained Earnings |
|
|
|
|
|
|
|
|
Balance at beginning of period, before cumulative effect of accounting
changes, net of tax |
|
|
12,421 |
|
|
|
10,207 |
|
Cumulative effect of accounting changes, net of tax |
|
|
(41 |
) |
|
|
— |
|
| |
Balance at beginning of period, as adjusted |
|
|
12,380 |
|
|
|
10,207 |
|
Net income |
|
|
876 |
|
|
|
728 |
|
Dividends declared on common stock |
|
|
(161 |
) |
|
|
(121 |
) |
| |
Balance at end of period |
|
|
13,095 |
|
|
|
10,814 |
|
| |
Treasury Stock, at Cost |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(47 |
) |
|
|
(42 |
) |
Treasury stock acquired |
|
|
(800 |
) |
|
|
— |
|
Return of shares under incentive and stock compensation plans to treasury stock |
|
|
(12 |
) |
|
|
(4 |
) |
| |
Balance at end of period |
|
|
(859 |
) |
|
|
(46 |
) |
| |
Accumulated Other Comprehensive Income, Net of Tax |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
178 |
|
|
|
90 |
|
Total other comprehensive loss |
|
|
(1 |
) |
|
|
(547 |
) |
| |
Balance at end of period |
|
|
177 |
|
|
|
(457 |
) |
| |
Total stockholders’ equity |
|
$ |
18,851 |
|
|
$ |
15,410 |
|
| |
Outstanding Shares (in thousands) |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
323,315 |
|
|
|
302,152 |
|
Treasury stock acquired |
|
|
(8,439 |
) |
|
|
— |
|
Issuance of shares under incentive and stock compensation plans |
|
|
1,620 |
|
|
|
846 |
|
Return of shares under incentive and stock compensation plans to treasury stock |
|
|
(125 |
) |
|
|
(41 |
) |
| |
Balance at end of period |
|
|
316,371 |
|
|
|
302,957 |
|
| |
Condensed Consolidated Statements of Comprehensive Income
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| (In millions) |
|
2007 |
|
2006 |
| |
| |
|
(Unaudited) |
Comprehensive Income |
|
|
|
|
|
|
|
|
Net income |
|
$ |
876 |
|
|
$ |
728 |
|
| |
Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
Change in unrealized gain/loss on securities |
|
|
(46 |
) |
|
|
(475 |
) |
Change in net gain/loss on cash flow hedging instruments |
|
|
27 |
|
|
|
(88 |
) |
Change in foreign currency translation adjustments |
|
|
9 |
|
|
|
16 |
|
Amortization of prior service cost and actuarial net losses included
in net periodic benefits costs |
|
|
9 |
|
|
|
— |
|
| |
Total other comprehensive loss |
|
|
(1 |
) |
|
|
(547 |
) |
| |
Total comprehensive income |
|
$ |
875 |
|
|
$ |
181 |
|
| |
See Notes to Condensed Consolidated Financial Statements.
6
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| (In millions) |
|
2007 |
|
2006 |
| |
| |
|
(Unaudited) |
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
876 |
|
|
$ |
728 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
872 |
|
|
|
817 |
|
Additions to deferred policy acquisition costs and present value of future profits |
|
|
(1,056 |
) |
|
|
(1,038 |
) |
Change in: |
|
|
|
|
|
|
|
|
Reserve for future policy benefits and unpaid losses and loss adjustment expenses and
unearned premiums |
|
|
250 |
|
|
|
198 |
|
Reinsurance recoverables |
|
|
37 |
|
|
|
369 |
|
Receivables |
|
|
(82 |
) |
|
|
(49 |
) |
Payables and accruals |
|
|
120 |
|
|
|
(452 |
) |
Accrued and deferred income taxes |
|
|
347 |
|
|
|
425 |
|
Net realized capital (gains) losses |
|
|
(46 |
) |
|
|
121 |
|
Net receipts from investment contracts credited to policyholder
accounts associated with equity securities, held for trading |
|
|
1,323 |
|
|
|
2,105 |
|
Net increase in equity securities, held for trading |
|
|
(1,132 |
) |
|
|
(2,028 |
) |
Depreciation and amortization |
|
|
112 |
|
|
|
44 |
|
Other, net |
|
|
(316 |
) |
|
|
128 |
|
| |
Net cash provided by operating activities |
|
|
1,305 |
|
|
|
1,368 |
|
| |
Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from the sale/maturity/prepayment of: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
9,126 |
|
|
|
8,216 |
|
Equity securities, available-for-sale |
|
|
265 |
|
|
|
49 |
|
Mortgage loans |
|
|
164 |
|
|
|
118 |
|
Partnerships |
|
|
48 |
|
|
|
48 |
|
Payments for the purchase of: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
(10,252 |
) |
|
|
(8,985 |
) |
Equity securities, available-for-sale |
|
|
(345 |
) |
|
|
(125 |
) |
Mortgage loans |
|
|
(861 |
) |
|
|
(532 |
) |
Partnerships |
|
|
(309 |
) |
|
|
(218 |
) |
Change in policy loans, net |
|
|
(48 |
) |
|
|
9 |
|
Change in payables for collateral under securities lending, net |
|
|
1,199 |
|
|
|
336 |
|
Change in all other securities, net |
|
|
(122 |
) |
|
|
(141 |
) |
Additions to property and equipment, net |
|
|
(61 |
) |
|
|
(21 |
) |
| |
Net cash used for investing activities |
|
|
(1,196 |
) |
|
|
(1,246 |
) |
| |
Financing Activities |
|
|
|
|
|
|
|
|
Deposits and other additions to investment and universal life-type contracts |
|
|
8,445 |
|
|
|
6,707 |
|
Withdrawals and other deductions from investment and universal life-type contracts |
|
|
(7,047 |
) |
|
|
(7,187 |
) |
Net transfers from (to) separate accounts related to investment and universal life-type contracts |
|
|
(767 |
) |
|
|
523 |
|
Issuance of long-term debt |
|
|
495 |
|
|
|
— |
|
Change in short-term debt |
|
|
(131 |
) |
|
|
— |
|
Proceeds from issuance of consumer notes |
|
|
177 |
|
|
|
— |
|
Proceeds from issuances of shares under incentive and stock compensation plans, net |
|
|
74 |
|
|
|
22 |
|
Excess tax benefits on stock-based compensation |
|
|
— |
|
|
|
14 |
|
Treasury stock acquired |
|
|
(800 |
) |
|
|
— |
|
Return of shares under incentive and stock compensation plans to treasury stock |
|
|
(12 |
) |
|
|
(4 |
) |
Dividends paid |
|
|
(162 |
) |
|
|
(91 |
) |
| |
Net cash provided by (used for) financing activities |
|
|
272 |
|
|
|
(16 |
) |
| |
Foreign exchange rate effect on cash |
|
|
(15 |
) |
|
|
15 |
|
Net increase in cash |
|
|
366 |
|
|
|
121 |
|
Cash — beginning of period |
|
|
1,424 |
|
|
|
1,273 |
|
| |
Cash — end of period |
|
$ |
1,790 |
|
|
$ |
1,394 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Net Cash Paid (Received) During the Period For: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
(10 |
) |
|
$ |
(183 |
) |
Interest |
|
$ |
36 |
|
|
$ |
57 |
|
See Notes to Condensed Consolidated Financial Statements.
7
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions except per share data unless otherwise stated)
(Unaudited)
1. Basis of Presentation and Accounting Policies
Basis of Presentation
The Hartford Financial Services Group, Inc. is a financial holding company for a group of
subsidiaries that provide investment products and life and property and casualty insurance to both
individual and business customers in the United States and internationally (collectively, “The
Hartford” or the “Company”).
The condensed consolidated financial statements have been prepared on the basis of accounting
principles generally accepted in the United States of America, which differ materially from the
accounting practices prescribed by various insurance regulatory authorities.
The accompanying condensed consolidated financial statements and notes as of March 31, 2007, and
for the three months ended March 31, 2007 and 2006 are unaudited. These financial statements
reflect all adjustments (consisting only of normal accruals) which are, in the opinion of
management, necessary for the fair presentation of the financial position, results of operations,
and cash flows for the interim periods. These condensed consolidated financial statements and
notes should be read in conjunction with the consolidated financial statements and notes thereto
included in The Hartford’s 2006 Form 10-K Annual Report. The results of operations for the interim
periods should not be considered indicative of the results to be expected for the full year.
Consolidation
The condensed consolidated financial statements include the accounts of The Hartford Financial
Services Group, Inc., companies in which the Company directly or indirectly has a controlling
financial interest and those variable interest entities in which the Company is the primary
beneficiary. The Company determines if it is the primary beneficiary using both qualitative and
quantitative analyses. Entities in which The Hartford does not have a controlling financial
interest but in which the Company has significant influence over the operating and financing
decisions are reported using the equity method. All material intercompany transactions and
balances between The Hartford and its subsidiaries and affiliates have been eliminated.
Reclassifications
Certain reclassifications have been made to prior period financial information to conform to the
current period presentation.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining property and casualty reserves for
unpaid losses and loss adjustment expenses, net of reinsurance; Life deferred policy acquisition
costs and present value of future profits associated with variable annuity and other universal
life-type contracts; the evaluation of other-than-temporary impairments on investments in
available-for-sale securities; the valuation of guaranteed minimum withdrawal benefit derivatives;
pension and other postretirement benefit obligations; and contingencies relating to corporate
litigation and regulatory matters.
Significant Accounting Policies
For a description of significant accounting policies, see Note 1 of Notes to Consolidated Financial
Statements included in The Hartford’s 2006 Form 10-K Annual Report.
Income Taxes
The effective tax rate for the three months ended March 31, 2007 and 2006 was 28% and 26%,
respectively. The principal causes of the difference between the effective rate and the U.S.
statutory rate of 35% were tax-exempt interest earned on invested assets and the separate account
dividends received deduction (“DRD”).
The separate account DRD is estimated for the current year using information from the prior
year-end, adjusted for current year equity market performance. The estimated DRD is generally
updated in the third quarter for the provision to filed return adjustments, and in the fourth
quarter based on current year ultimate mutual fund distributions and fee income from The Hartford’s
variable insurance products. The actual current year DRD can vary from the estimates based on, but
not limited to, changes in eligible dividends received by the mutual funds, amounts of
distributions from these mutual funds, appropriate levels of taxable income as well as the
utilization of capital loss carryforwards at the mutual fund level.
8
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of Presentation and Accounting Policies (continued)
The Company receives a foreign tax credit (“FTC”) against its U.S. tax liability for foreign
taxes paid by the Company including payments from its separate account assets. The separate
account FTC is estimated for the current year using information from the most recent filed return,
adjusted for the change in the allocation of separate accounts investments to the international
equity markets during the current year. The actual current year FTC can vary from the estimates
due to actual FTC’s passed through by the mutual funds.
Adoption of New Accounting Standards
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
The Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), dated June
2006. FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only when
the position is “more likely than not” to be sustained assuming examination by tax authorities. The
amount recognized represents the largest amount of tax benefit that is greater than 50% likely of
being ultimately realized. A liability is recognized for any benefit claimed, or expected to be
claimed, in a tax return in excess of the benefit recorded in the financial statements, along with
any interest and penalty (if applicable) on the excess.
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption, the
Company recognized a $12 decrease in the liability for unrecognized tax benefits and a
corresponding increase in the January 1, 2007 balance of retained earnings. The total amount of
unrecognized tax benefits as of January 1, 2007 was $8 including an immaterial amount for interest.
If these unrecognized tax benefits were recognized, they would have an immaterial effect on the
Company’s effective tax rate. The Company does not believe it would be subject to any penalties in
any open tax years and, therefore, has not booked any such amounts. The Company classifies
interest and penalties (if applicable) as income tax expense in the financial statements.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and various states and foreign jurisdictions. During 2005, the Internal Revenue Service (IRS)
commenced an examination of the Company’s U.S. income tax returns for 2002 through 2003 that is
anticipated to be completed by the end of 2007. The 2004 through 2005 examination is expected to
begin by the end of 2007. The Company is not aware of any tax positions for which it is reasonably
possible that the total amounts of unrecognized tax benefits will significantly change in the next
12 months.
Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
Instruments—an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). This statement amends
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” and resolves issues addressed in SFAS 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets”. SFAS 155: (a) permits fair
value remeasurement for any hybrid financial instrument (asset or liability) that contains an
embedded derivative that otherwise would require bifurcation; (b) clarifies which interest-only
strips and principal-only strips are not subject to the requirements of SFAS 133; (c) establishes a
requirement to evaluate beneficial interests in securitized financial assets to identify interests
that are freestanding derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation; (d) clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives; and (e) eliminates restrictions on a qualifying special
purpose entity’s ability to hold passive derivative financial instruments that pertain to
beneficial interests that are or contain a derivative financial instrument. SFAS 155 also requires
presentation within the financial statements that identifies those hybrid financial instruments for
which the fair value election has been applied and information on the income statement impact of
the changes in fair value of those instruments. The Company began applying SFAS 155 to all
financial instruments acquired, issued or subject to a remeasurement event beginning January 1,
2007. SFAS 155 did not have an effect on the Company’s consolidated financial condition and results
of operations upon adoption on January 1, 2007.
Accounting by Insurance Enterprises for Deferred Acquisition Costs (“DAC”) in Connection with
Modifications or Exchanges of Insurance Contracts
In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued
Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs
(“DAC”) in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP
05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of
insurance and investment contracts. An internal replacement is a modification in product benefits,
features, rights or coverages that occurs by the exchange of a contract for a new contract, or by
amendment, endorsement, or rider to a contract, or by the election of a
9
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of Presentation and Accounting Policies (continued)
feature or coverage within a contract. Modifications that result in a replacement contract
that is substantially changed from the replaced contract should be accounted for as an
extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred
sales inducements from the replaced contract must be written-off. Modifications that result in a
contract that is substantially unchanged from the replaced contract should be accounted for as a
continuation of the replaced contract. The Company adopted SOP 05-1 on January 1, 2007 and
recognized the cumulative effect of the adoption of SOP 05-1 as a reduction in retained earnings of
$53, after-tax.
2. Earnings Per Share
The following tables present a reconciliation of net income and shares used in calculating
basic earnings per share to those used in calculating diluted earnings per share.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net |
|
|
|
|
|
Per Share |
| March 31, 2007 |
|
Income |
|
Shares |
|
Amount |
| |
Basic Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
876 |
|
|
|
319.6 |
|
|
$ |
2.74 |
|
| |
Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plans |
|
|
— |
|
|
|
3.1 |
|
|
|
|
|
| |
Net income available to common shareholders plus assumed conversions |
|
$ |
876 |
|
|
|
322.7 |
|
|
$ |
2.71 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
728 |
|
|
|
302.2 |
|
|
$ |
2.41 |
|
| |
Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plans |
|
|
— |
|
|
|
3.0 |
|
|
|
|
|
Equity units |
|
|
— |
|
|
|
5.7 |
|
|
|
|
|
| |
Net income available to common shareholders plus assumed conversions |
|
$ |
728 |
|
|
|
310.9 |
|
|
$ |
2.34 |
|
| |
3. Segment Information
The Hartford is organized into two major operations: Life and Property & Casualty, each
containing reporting segments. Within the Life and Property & Casualty operations, The Hartford
conducts business principally in ten reportable operating segments. Additionally, Corporate
primarily includes the Company’s debt financing and related interest expense, as well as certain
capital raising and purchase accounting adjustment activities.
Life
Life is organized into six reportable operating segments: Retail Products Group (“Retail”),
Retirement Plans, Institutional Solutions Group (“Institutional”), Individual Life, Group Benefits
and International.
The accounting policies of the reportable operating segments are the same as those described in the
summary of significant accounting policies in Note 1. Life evaluates performance of its segments
based on revenues, net income and the segment’s return on allocated capital. Each operating
segment is allocated corporate surplus as needed to support its business. The Company charges
direct operating expenses to the appropriate segment and allocates the majority of indirect
expenses to the segments based on an intercompany expense arrangement. Intersegment revenues
primarily occur between Life’s Other category and the operating segments. These amounts primarily
include interest income on allocated surplus, interest charges on excess separate account surplus,
the allocation of certain net realized capital gains and losses and the allocation of credit risk
charges. For a discussion of segment allocations, see Note 3 of Notes to the Consolidated
Financial Statements included in The Hartford’s 2006 Form 10-K Annual Report.
10
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Segment Information (continued)
The positive (negative) impact on realized gains and losses of the segments for allocated
interest rate related realized gains and losses and the credit-risk fees were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| |
|
2007 |
|
2006 |
| |
Retail
Realized gains (losses) |
|
$ |
4 |
|
|
$ |
9 |
|
Credit risk fees |
|
|
(7 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
Retirement Plans
Realized gains (losses) |
|
|
1 |
|
|
|
3 |
|
Credit risk fees |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Institutional
Realized gains (losses) |
|
|
5 |
|
|
|
4 |
|
Credit risk fees |
|
|
(8 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
Individual Life
Realized gains (losses) |
|
|
— |
|
|
|
3 |
|
Credit risk fees |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Group Benefits
Realized gains (losses) |
|
|
1 |
|
|
|
1 |
|
Credit risk fees |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
International
Realized gains (losses) |
|
|
— |
|
|
|
— |
|
Credit risk fees |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Other
Realized gains (losses) |
|
|
(11 |
) |
|
|
(20 |
) |
Credit risk fees |
|
|
23 |
|
|
|
19 |
|
| |
Total |
|
$ |
— |
|
|
$ |
— |
|
| |
Property & Casualty
Property & Casualty is organized into four reportable operating segments: the underwriting segments
of Business Insurance, Personal Lines, and Specialty Commercial (collectively “Ongoing
Operations”); and the Other Operations segment. For the three months ended March 31, 2007 and
2006, AARP accounted for earned premiums of $653 and $595, respectively, in Personal Lines.
Through intersegment arrangements, Specialty Commercial reimburses Business Insurance and Personal
Lines for certain losses, including, among other coverages, losses incurred from uncollectible
reinsurance. In addition, the Company retains a portion of the risks ceded under the Company’s
principal catastrophe reinsurance program and other reinsurance programs and the financial results
of the Company’s retention are recorded in the Specialty Commercial segment. Apart from the
Company’s retention, the amount of premiums ceded to third party reinsurers under the principal
catastrophe reinsurance program and other reinsurance programs is allocated to the operating
segments based on the risks written by each operating segment that are subject to the programs.
Earned premiums assumed (ceded) under the intersegment arrangements and retention were as follows:
| |
|
|
|
|
|
|
|
|
| Net assumed (ceded) earned premiums under intersegment arrangements |
|
Three Months Ended |
| and retention |
|
March 31, |
| |
|
2007 |
|
2006 |
| |
Business Insurance |
|
$ |
(14 |
) |
|
$ |
(20 |
) |
Personal Lines |
|
|
(2 |
) |
|
|
(7 |
) |
Specialty Commercial |
|
|
16 |
|
|
|
27 |
|
| |
Total |
|
$ |
— |
|
|
$ |
— |
|
| |
11
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Segment Information (continued)
Financial Measures and Other Segment Information
For further discussion of the types of products offered by each segment, see Note 3 of Notes to
Consolidated Financial Statements included in The Hartford’s 2006 Form 10-K Annual Report.
The measure of profit or loss used by The Hartford’s management in evaluating the performance of
its Life segments is net income. Within Property & Casualty, net income is the measure of profit
or loss used in evaluating the performance of Ongoing Operations and the Other Operations segment.
Within Ongoing Operations, the underwriting segments of Business Insurance, Personal Lines and
Specialty Commercial are evaluated by The Hartford’s management primarily based upon underwriting
results. Underwriting results represent premiums earned less incurred losses, loss adjustment
expenses and underwriting expenses. The sum of underwriting results, net investment income, net
realized capital gains and losses, net servicing and other income, other expenses, and related
income taxes is net income.
The following tables present revenues and net income (loss). Underwriting results are
presented for the Business Insurance, Personal Lines and Specialty Commercial segments, while net
income is presented for each of Life’s reportable segments, total Property & Casualty, Ongoing
Operations, Other Operations and Corporate.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March, 31 |
| Revenues |
|
2007 |
|
2006 |
| |
Life |
|
|
|
|
|
|
|
|
Retail |
|
$ |
904 |
|
|
$ |
850 |
|
Retirement Plans |
|
|
143 |
|
|
|
137 |
|
Institutional |
|
|
517 |
|
|
|
518 |
|
Individual Life |
|
|
285 |
|
|
|
271 |
|
Group Benefits |
|
|
1,201 |
|
|
|
1,132 |
|
International |
|
|
206 |
|
|
|
180 |
|
Other |
|
|
105 |
|
|
|
(57 |
) |
| |
Total Life segment revenues |
|
|
3,361 |
|
|
|
3,031 |
|
Net investment income on equity securities held for trading [1] |
|
|
210 |
|
|
|
454 |
|
| |
Total Life |
|
|
3,571 |
|
|
|
3,485 |
|
| |
Property & Casualty |
|
|
|
|
|
|
|
|
Ongoing Operations |
|
|
|
|
|
|
|
|
Earned premiums |
|
|
|
|
|
|
|
|
Business Insurance |
|
|
1,292 |
|
|
|
1,263 |
|
Personal Lines |
|
|
953 |
|
|
|
919 |
|
Specialty Commercial |
|
|
378 |
|
|
|
383 |
|
| |
Total Ongoing Operations earned premiums |
|
|
2,623 |
|
|
|
2,565 |
|
Other Operations earned premiums |
|
|
— |
|
|
|
1 |
|
Other revenues [2] |
|
|
118 |
|
|
|
123 |
|
Net investment income |
|
|
413 |
|
|
|
357 |
|
Net realized capital gains |
|
|
23 |
|
|
|
5 |
|
| |
Total Property & Casualty |
|
|
3,177 |
|
|
|
3,051 |
|
Corporate |
|
|
11 |
|
|
|
7 |
|
| |
Total revenues |
|
$ |
6,759 |
|
|
$ |
6,543 |
|
| |
|
|
|
| [1] |
|
Management does not include net investment income and the
mark-to-market effects of equity securities held for trading
supporting the international variable annuity business in its
International segment revenues since corresponding amounts
credited to policyholders are included within benefits, losses and
loss adjustment expenses. |
| |
| [2] |
|
Represents servicing revenue. |
12
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Segment Information (continued)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Net Income (Loss) |
|
2007 |
|
2006 |
| |
Life |
|
|
|
|
|
|
|
|
Retail |
|
$ |
189 |
|
|
$ |
176 |
|
Retirement Plans |
|
|
23 |
|
|
|
21 |
|
Institutional |
|
|
33 |
|
|
|
22 |
|
Individual Life |
|
|
46 |
|
|
|
45 |
|
Group Benefits |
|
|
66 |
|
|
|
68 |
|
International |
|
|
54 |
|
|
|
46 |
|
Other |
|
|
27 |
|
|
|
(32 |
) |
| |
Total Life |
|
|
438 |
|
|
|
346 |
|
| |
Property & Casualty |
|
|
|
|
|
|
|
|
Ongoing Operations |
|
|
|
|
|
|
|
|
Underwriting results |
|
|
|
|
|
|
|
|
Business Insurance |
|
|
124 |
|
|
|
134 |
|
Personal Lines |
|
|
130 |
|
|
|
106 |
|
Specialty Commercial |
|
|
39 |
|
|
|
47 |
|
| |
Total Ongoing Operations underwriting results |
|
|
293 |
|
|
|
287 |
|
Net servicing and other income [1] |
|
|
11 |
|
|
|
18 |
|
Net investment income |
|
|
351 |
|
|
|
291 |
|
Net realized capital gains |
|
|
17 |
|
|
|
5 |
|
Other expenses |
|
|
(60 |
) |
|
|
(53 |
) |
Income tax expense |
|
|
(183 |
) |
|
|
(159 |
) |
| |
Ongoing Operations |
|
|
429 |
|
|
|
389 |
|
Other Operations |
|
|
32 |
|
|
|
35 |
|
| |
Total Property & Casualty |
|
|
461 |
|
|
|
424 |
|
Corporate |
|
|
(23 |
) |
|
|
(42 |
) |
| |
Net income |
|
$ |
876 |
|
|
$ |
728 |
|
| |
|
|
|
| [1] |
|
Net of expenses related to service business. |
4. Investments and Derivative Instruments
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
| |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
| |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| |
Bonds and Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities (“ABS”) |
|
$ |
8,997 |
|
|
$ |
41 |
|
|
$ |
(47 |
) |
|
$ |
8,991 |
|
|
$ |
7,924 |
|
|
$ |
54 |
|
|
$ |
(53 |
) |
|
$ |
7,925 |
|
Collateralized mortgage
obligations (“CMOs”) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
1,105 |
|
|
|
20 |
|
|
|
(4 |
) |
|
|
1,121 |
|
|
|
1,184 |
|
|
|
17 |
|
|
|
(8 |
) |
|
|
1,193 |
|
Non-agency backed |
|
|
111 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
110 |
|
|
|
116 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
115 |
|
Commercial mortgage-backed
securities (“CMBS”) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
711 |
|
|
|
9 |
|
|
|
(1 |
) |
|
|
719 |
|
|
|
756 |
|
|
|
12 |
|
|
|
(1 |
) |
|
|
767 |
|
Non-agency backed |
|
|
16,202 |
|
|
|
210 |
|
|
|
(138 |
) |
|
|
16,274 |
|
|
|
15,823 |
|
|
|
220 |
|
|
|
(144 |
) |
|
|
15,899 |
|
Corporate |
|
|
33,890 |
|
|
|
1,147 |
|
|
|
(301 |
) |
|
|
34,736 |
|
|
|
35,069 |
|
|
|
1,193 |
|
|
|
(371 |
) |
|
|
35,891 |
|
Government/Government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
1,230 |
|
|
|
49 |
|
|
|
(7 |
) |
|
|
1,272 |
|
|
|
1,213 |
|
|
|
87 |
|
|
|
(6 |
) |
|
|
1,294 |
|
United States |
|
|
1,055 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
1,055 |
|
|
|
848 |
|
|
|
5 |
|
|
|
(7 |
) |
|
|
846 |
|
Mortgage-backed securities
(“MBS”) –agency backed |
|
|
2,535 |
|
|
|
9 |
|
|
|
(35 |
) |
|
|
2,509 |
|
|
|
2,742 |
|
|
|
5 |
|
|
|
(45 |
) |
|
|
2,702 |
|
States, municipalities and
political subdivisions |
|
|
12,358 |
|
|
|
486 |
|
|
|
(33 |
) |
|
|
12,811 |
|
|
|
11,897 |
|
|
|
536 |
|
|
|
(27 |
) |
|
|
12,406 |
|
Redeemable preferred stock |
|
|
47 |
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
|
|
36 |
|
|
|
— |
|
|
|
— |
|
|
|
36 |
|
Short-term investments |
|
|
1,921 |
|
|
|
— |
|
|
|
— |
|
|
|
1,921 |
|
|
|
1,681 |
|
|
|
— |
|
|
|
— |
|
|
|
1,681 |
|
| |
Total fixed maturities |
|
$ |
80,162 |
|
|
$ |
1,975 |
|
|
$ |
(571 |
) |
|
$ |
81,566 |
|
|
$ |
79,289 |
|
|
$ |
2,129 |
|
|
$ |
(663 |
) |
|
$ |
80,755 |
|
| |
13
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments and Derivative Instruments (continued)
As of March 31, 2007 and December 31, 2006, under terms of securities lending programs, the
fair value of loaned securities was approximately $3.3 billion and $2.2 billion, respectively, and
was included in fixed maturities in the condensed consolidated balance sheet.
Derivative Instruments
The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards,
futures and options to achieve one of four Company-approved objectives: to hedge risk arising from
interest rate, equity market, price or currency exchange rate risk or volatility; to manage
liquidity; to control transaction costs; or to enter into replication transactions.
On the date the derivative contract is entered into, the Company designates the derivative as (1) a
hedge of the fair value of a recognized asset or liability (“fair-value” hedge), (2) a hedge of the
variability of cash flows of a forecasted transaction or of amounts to be received or paid related
to a recognized asset or liability (“cash-flow” hedge), (3) a foreign-currency fair-value or
cash-flow hedge (“foreign-currency” hedge), (4) a hedge of a net investment in a foreign operation
(“net investment” hedge) or (5) held for other investment and risk management purposes, which
primarily involve managing asset or liability related risks and do not qualify for hedge
accounting.
The Company’s derivative transactions are used in strategies permitted under the derivatives use
plans required by the State of Connecticut, the State of Illinois and the State of New York
insurance departments.
For a detailed discussion of the Company’s use of derivative instruments, see Notes 1 and 4 of
Notes to Consolidated Financial Statements included in The Hartford’s 2006 Form 10-K Annual Report.
Derivative instruments are recorded in the condensed consolidated balance sheets at fair value.
Asset and liability values are determined by calculating the net position for each derivative
counterparty by legal entity and are presented as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
Asset |
|
Liability |
|
Asset |
|
Liability |
| |
|
Values |
|
Values |
|
Values |
|
Values |
| |
Other investments |
|
$ |
326 |
|
|
$ |
— |
|
|
$ |
287 |
|
|
$ |
— |
|
Reinsurance recoverables |
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
22 |
|
Other policyholder funds and benefits payable |
|
|
96 |
|
|
|
4 |
|
|
|
53 |
|
|
|
1 |
|
Other liabilities |
|
|
— |
|
|
|
724 |
|
|
|
— |
|
|
|
772 |
|
| |
Total |
|
$ |
422 |
|
|
$ |
754 |
|
|
$ |
340 |
|
|
$ |
795 |
|
| |
The following table summarizes the notional amount and fair value of derivatives by hedge
designation as of March 31, 2007 and December 31, 2006. The notional amount of derivative
contracts represents the basis upon which pay or receive amounts are calculated and are not
necessarily reflective of credit risk. The fair value amounts of derivative assets and liabilities
are presented on a net basis in the following table.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
Notional |
|
Fair |
|
Notional |
|
Fair |
| |
|
Amount |
|
Value |
|
Amount |
|
Value |
| |
Cash-flow hedge |
|
$ |
7,326 |
|
|
$ |
(351 |
) |
|
$ |
7,964 |
|
|
$ |
(392 |
) |
Fair-value hedge |
|
|
4,586 |
|
|
|
(1 |
) |
|
|
4,338 |
|
|
|
1 |
|
Other investment and risk management activities |
|
|
77,729 |
|
|
|
20 |
|
|
|
73,542 |
|
|
|
(64 |
) |
| |
Total |
|
$ |
89,641 |
|
|
$ |
(332 |
) |
|
$ |
85,844 |
|
|
$ |
(455 |
) |
| |
The increase in notional amount since December 31, 2006, is primarily due to an increase in
derivatives associated with guaranteed minimum withdrawal benefit (“GMWB”) product sales and an
increase in credit derivatives. The Company increased its investment in credit derivatives,
primarily AAA rated CMBS and ABS index swaps, as an efficient means to gain additional exposure to
certain security types. Also contributing to the increase in notional amount is the put option
agreement related to the Company’s contingent capital facility. On February 12, 2007, the Company
entered into a put option agreement, which is accounted for as a derivative instrument, that
provides the Company the right to require a third party trust to
purchase, at any time and from time to time, The
Hartford’s junior subordinated notes in a maximum aggregate
principal amount not to exceed $500. For further
discussion of the contingent capital facility and related put option agreement, refer to Note 14 of
Notes to Consolidated Financial Statements included in The Hartford’s 2006 Form 10-K Annual Report.
14
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments and Derivative Instruments (continued)
The increase in net fair value of derivative instruments since December 31, 2006 was primarily
related to an increase in fair value of foreign currency swaps, the fair value associated with the
put option agreement related to the contingent capital facility, as well as increases in fair value
of the GMWB product embedded derivative and the Japanese fixed annuity hedging instruments. The
fair value of foreign currency swaps hedging foreign bonds increased primarily as a result of the
sale of certain swaps that were in loss positions due to the weakening of the U.S. dollar in
comparison to certain foreign currencies. The GMWB product embedded derivative increased in value
primarily due to decreasing equity index volatility and rising long-term interest rates during the
quarter. The Japanese fixed annuity contract hedging instruments increased in value primarily due
to appreciation of the yen in comparison to the U.S. dollar.
The Company offers certain variable annuity products with a GMWB rider, which is accounted for as
an embedded derivative. For further discussion on the GMWB product, refer to Note 6 of Notes to
Condensed Consolidated Financial Statements.
For the three months ended March 31, 2007, after-tax net gains (losses) representing the total
ineffectiveness of all cash-flow hedges and fair-value hedges were $1 and less than $1,
respectively. For the three months ended March 31, 2006, after-tax net gains (losses) representing
the total ineffectiveness of all cash-flow hedges and fair-value hedges were $(5) and less than $l,
respectively.
The total change in value for derivative-based strategies that do not qualify for hedge accounting
treatment (“non-qualifying strategies”), including periodic derivative net coupon settlements, are
reported in net realized capital gains (losses). These non-qualifying strategies resulted in an
after-tax net gain (loss) of $10 and $(62), for the three months ended March 31, 2007 and 2006,
respectively. For the three months ended March 31, 2007, net gains were primarily comprised of net
gains on GMWB product and hedging derivatives related to a decline in equity index volatility and
gains on interest rate derivatives used to manage portfolio duration, partially offset by net
losses on credit default swaps due to credit spread widening. For the three months ended March 31,
2006, net realized capital losses were predominantly comprised of net losses associated with the
Japanese fixed annuity hedging instruments primarily due to an increase in Japanese interest rates.
As of March 31, 2007, the after-tax deferred net gains (losses) on derivative instruments recorded
in accumulated other comprehensive income (“AOCI”) that are expected to be reclassified to earnings
during the next twelve months are $(7). This expectation is based on the anticipated interest
payments on hedged investments in fixed maturity securities that will occur over the next twelve
months, at which time the Company will recognize the deferred net gains (losses) as an adjustment
to interest income over the term of the investment cash flows. The maximum term over which the
Company is hedging its exposure to the variability of future cash flows (for all forecasted
transactions, excluding interest payments on variable-rate debt) is twenty-four months. For the
three months ended March 31, 2007 and 2006, the Company had less than $1 of net reclassifications
from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted
transactions that were no longer probable of occurring.
5. Deferred Policy Acquisition Costs and Present Value of Future Profits
Changes in deferred policy acquisition costs and present value of future profits by Life and
Property & Casualty were as follows:
Life
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
| |
Balance, January 1, before cumulative effect of accounting change, pre-tax |
|
$ |
9,071 |
|
|
$ |
8,568 |
|
Cumulative
effect of accounting change, pre-tax (SOP 05-1) [1] |
|
|
(79 |
) |
|
|
— |
|
| |
Balance, January 1, as adjusted |
|
|
8,992 |
|
|
|
8,568 |
|
Deferred costs |
|
|
524 |
|
|
|
504 |
|
Amortization – Deferred policy acquisition costs and present value of future profits |
|
|
(344 |
) |
|
|
(299 |
) |
Adjustments to unrealized gains and losses on securities available-for-sale and other |
|
|
(25 |
) |
|
|
276 |
|
Effect of currency translation adjustment |
|
|
12 |
|
|
|
— |
|
| |
Balance, March 31 |
|
$ |
9,159 |
|
|
$ |
9,049 |
|
| |
|
|
|
| [1] |
|
The Company’s cumulative effect of accounting change includes an additional $(1), pre-tax,
related to sales inducements. |
Property & Casualty
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
| |
Balance, January 1 |
|
$ |
1,197 |
|
|
$ |
1,134 |
|
Deferred costs |
|
|
532 |
|
|
|
534 |
|
Amortization – Deferred policy acquisition costs |
|
|
(528 |
) |
|
|
(518 |
) |
| |
Balance, March 31 |
|
$ |
1,201 |
|
|
$ |
1,150 |
|
| |
15
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Separate Accounts, Death Benefits and Other Insurance Benefit Features
The Company records the variable portion of individual variable annuities, 401(k),
institutional, 403(b)/457, private placement life and variable life insurance products within
separate account assets and liabilities, which are reported at fair value. Separate account assets
are segregated from other investments. Investment income and gains and losses from those separate
account assets, which accrue directly to, and whereby investment risk is borne by the policyholder,
are offset by the related liability changes within the same line item in the condensed consolidated
statement of income. The fees earned for administrative and contract holder maintenance services
performed for these separate accounts are included in fee income. For the three months ended March
31, 2007 and 2006, there were no gains or losses on transfers of assets from the general account to
the separate account.
Many of the variable annuity contracts issued by the Company offer various guaranteed minimum
death, withdrawal and income benefits. Guaranteed minimum death and income benefits are offered in
various forms as described in the footnotes to the table below. The Company currently reinsures a
significant portion of the death benefit guarantees associated with its in-force block of business.
Effective April 1, 2006, the Company began reinsuring certain of its death benefit guarantees
associated with the in-force block of variable annuity products offered in Japan. Changes in the
gross U.S. guaranteed minimum death benefit (“GMDB”) and Japan GMDB/guaranteed minimum income
benefits (“GMIB”) liability balance sold with annuity products are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Japan |
| |
|
U.S. GMDB [1] |
|
GMDB/GMIB[1] |
| |
Liability balance as of January 1, 2007 |
|
$ |
475 |
|
|
$ |
35 |
|
Incurred |
|
|
34 |
|
|
|
4 |
|
Paid |
|
|
(24 |
) |
|
|
— |
|
| |
Liability balance as of March 31, 2007 |
|
$ |
485 |
|
|
$ |
39 |
|
| |
|
|
|
| [1] |
|
The reinsurance recoverable asset related to the U.S. GMDB was $319 as of March 31, 2007.
The reinsurance recoverable asset related to the Japan GMDB was $5 as of March 31, 2007. |
| |
|
|
|
|
|
|
|
|
| |
|
U.S. GMDB [1] |
|
Japan GMDB/GMIB |
| |
Liability balance as of January 1, 2006 |
|
$ |
158 |
|
|
$ |
50 |
|
Incurred |
|
|
34 |
|
|
|
9 |
|
Paid |
|
|
(29 |
) |
|
|
— |
|
| |
Liability balance as of March 31, 2006 |
|
$ |
163 |
|
|
$ |
59 |
|
| |
|
|
|
| [1] |
|
The reinsurance recoverable asset related to the U.S. GMDB was $38 as of March 31, 2006 |
The net GMDB and GMIB liability is established by estimating the expected value of net
reinsurance costs and death and income benefits in excess of the projected account balance. The
excess death and income benefits and net reinsurance costs are recognized ratably over the
accumulation period based on total expected assessments. The GMDB and GMIB liabilities are recorded
in reserves for future policy benefits on the Company’s condensed consolidated balance sheet.
Changes in the GMDB and GMIB liability are recorded in benefits, losses and loss adjustment
expenses on the Company’s condensed consolidated statement of operations. In a manner consistent
with the Company’s accounting policy for deferred acquisition costs, the Company regularly
evaluates estimates used and adjusts the additional liability balances, with a related charge or
credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions
should be revised.
16
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)
The following table provides details concerning GMDB and GMIB exposure as of March 31, 2007:
Breakdown of Variable Annuity Account Value by GMDB/GMIB Type
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Retained Net |
|
Weighted Average |
| |
|
Account |
|
Net Amount |
|
Amount |
|
Attained Age of |
| Maximum anniversary value ("MAV") [1] |
|
Value |
|
at Risk |
|
at Risk |
|
Annuitant |
| |
MAV only |
|
$ |
51,702 |
|
|
$ |
3,534 |
|
|
$ |
334 |
|
|
|
65 |
|
With 5% rollup [2] |
|
|
3,693 |
|
|
|
332 |
|
|
|
65 |
|
|
|
64 |
|
With Earnings Protection Benefit Rider (“EPB”) [3] |
|
|
5,565 |
|
|
|
481 |
|
|
|
78 |
|
|
|
61 |
|
With 5% rollup & EPB |
|
|
1,395 |
|
|
|
150 |
|
|
|
29 |
|
|
|
63 |
|
| |
Total MAV |
|
|
62,355 |
|
|
|
4,497 |
|
|
|
506 |
|
|
|
|
|
Asset Protection Benefit (“APB”) [4] |
|
|
39,189 |
|
|
|
91 |
|
|
|
48 |
|
|
|
62 |
|
Lifetime Income Benefit (“LIB”) — Death Benefit [5] |
|
|
4,606 |
|
|
|
11 |
|
|
|
11 |
|
|
|
61 |
|
Reset [6] (5-7 years) |
|
|
6,608 |
|
|
|
190 |
|
|
|
190 |
|
|
|
66 |
|
Return of Premium [7]/Other |
|
|
10,100 |
|
|
|
27 |
|
|
|
25 |
|
|
|
54 |
|
| |
Subtotal U.S. Guaranteed Minimum Death Benefits |
|
|
122,858 |
|
|
|
4,816 |
|
|
|
780 |
|
|
|
63 |
|
Japan Guaranteed Minimum Death and Income Benefit [8] |
|
|
31,148 |
|
|
|
83 |
|
|
|
35 |
|
|
|
66 |
|
| |
Total at March 31, 2007 |
|
$ |
154,006 |
|
|
$ |
4,899 |
|
|
$ |
815 |
|
|
|
|
|
| |
|
|
|
| [1] |
|
MAV: the death benefit is the greatest of current account value, net premiums paid and the highest account value on any
anniversary before age 80 (adjusted for withdrawals). |
| |
| [2] |
|
Rollup: the death benefit is the greatest of the MAV, current account value, net premium paid and premiums (adjusted for
withdrawals) accumulated at generally 5% simple interest up to the earlier of age 80 or 100% of adjusted premiums. |
| |
| [3] |
|
EPB: the death benefit is the greatest of the MAV, current account value, or contract value plus a percentage of the
contract’s growth. The contract’s growth is account value less premiums net of withdrawals, subject to a cap of 200% of
premiums net of withdrawals. |
| |
| [4] |
|
APB: the death benefit is the greater of current account value or MAV, not to exceed current account value plus 25% times
the greater of net premiums and MAV (each adjusted for premiums in the past 12 months). |
| |
| [5] |
|
LIB: the death benefit is the greater of current account value or MAV, net premiums paid, or a benefit amount that
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 $24.1 billion and
$22.6 billion as of March 31, 2007 and December 31, 2006, respectively. |
The Company offers certain variable annuity products with a GMWB rider. The GMWB provides the
policyholder with a guaranteed remaining balance (“GRB”) if the account value is reduced to zero
through a combination of market declines and withdrawals. The GRB is generally equal to premiums
less withdrawals. However, annual withdrawals that exceed a specific percentage of the premiums
paid may reduce the GRB by an amount greater than the withdrawals and may also impact the
guaranteed annual withdrawal amount that subsequently applies after the excess annual withdrawals
occur. For certain of the withdrawal benefit features, the policyholder also has the option, after
a specified time period, to reset the GRB to the then-current account value, if greater. In
addition, the Company has introduced features, for contracts issued beginning in the fourth quarter
of 2005, that allow policyholders to receive the guaranteed annual withdrawal amount for as long as
they are alive. Through this feature, the policyholder or their beneficiary will receive the GRB
and the GRB is reset on an annual basis to the maximum anniversary account value subject to a cap.
The GMWB represents an embedded derivative in the variable annuity contracts that is required to be
reported separately from the host variable annuity contract. It is carried at fair value and
reported in other policyholder funds. The fair value of the GMWB obligation is calculated based on
actuarial and capital market assumptions related to the projected cash flows, including benefits
and related contract charges, over the lives of the contracts, incorporating expectations
concerning policyholder behavior. Because of the dynamic and complex nature of these cash flows,
best estimate assumptions and stochastic techniques under a variety of market return scenarios are
used. Estimating these cash flows involves numerous estimates and subjective judgments including
those regarding expected market rates of return, market volatility, correlations of market returns
and discount rates. At each valuation date, the Company assumes expected returns based on risk-free
rates as represented by the current LIBOR forward curve rates; market volatility assumptions for
each underlying index based on a blend of observed market “implied volatility” data and annualized
standard deviations of monthly returns using the most recent 20 years of observed market
performance; correlations of market returns across underlying indices based on actual observed
market returns and relationships over the ten years preceding the valuation date; 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
17
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)
projection process. As markets change, mature and evolve and actual policyholder behavior
emerges, management continually evaluates the appropriateness of its assumptions. In addition,
management regularly evaluates the valuation model, incorporating emerging valuation techniques
where appropriate, including drawing on the expertise of market participants and valuation experts.
As of March 31, 2007 and December 31, 2006, the embedded derivative asset recorded for GMWB, before
reinsurance or hedging, was $96 and $53, respectively. For the three months ended March 31, 2007
and 2006, the increase (decrease) in value of the GMWB, before reinsurance and hedging, reported in
realized gains was $65 and $84, respectively. There were no benefit payments made for the GMWB
during 2007 or 2006.
As of March 31, 2007 and December 31, 2006, $39.7 billion, or 79%, and $37.3 billion, or 77%,
respectively, of account value representing substantially all of the contracts written after July
2003 with the GMWB feature were unreinsured. In order to minimize the volatility associated with
the unreinsured GMWB liabilities, the Company has established an alternative risk management
strategy. The Company uses derivative instruments to hedge its unreinsured GMWB exposure including
interest rate futures, Standard and Poor’s (“S&P”) 500 and NASDAQ index options and futures
contracts and Europe, Australasia and Far East (“EAFE”) Index swaps to hedge GMWB exposure to
international equity markets. The total (reinsured and unreinsured) GRB as of March 31, 2007 and
December 31, 2006 was $39.5 billion and $37.8 billion, respectively.
A contract is ‘in the money’ if the contract holder’s GRB is greater than the account value. For
contracts that were ‘in the money’ the Company’s exposure, as of March 31, 2007 and December 31,
2006, was $13 and $8, respectively. However, the only ways the contract holder can monetize the
excess of the GRB over the account value of the contract is upon death or if their account value is
reduced to zero through a combination of a series of withdrawals that do not exceed a specific
percentage of the premiums paid per year and market declines. If the account value is reduced to
zero, the contract holder will receive a period certain annuity equal to the remaining GRB. As the
amount of the excess of the GRB over the account value can fluctuate with equity market returns on
a daily basis, the ultimate amount to be paid by the Company, if any, is uncertain and could be
significantly more or less than $13.
7. Commitments and Contingencies
Litigation
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a
liability insurer defending or providing indemnity for third-party claims brought against insureds
and as an insurer defending coverage claims brought against it. The Hartford accounts for such
activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to
the uncertainties discussed below under the caption “Asbestos and Environmental Claims,” management
expects that the ultimate liability, if any, with respect to such ordinary-course claims
litigation, after consideration of provisions made for potential losses and costs of defense, will
not be material to the consolidated financial condition, results of operations or cash flows of The
Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for
substantial amounts. These actions include, among others, putative state and federal class actions
seeking certification of a state or national class. Such putative class actions have alleged, for
example, underpayment of claims or improper underwriting practices in connection with various kinds
of insurance policies, such as personal and commercial automobile, property, life and inland
marine; improper sales practices in connection with the sale of life insurance and other investment
products; and improper fee arrangements in connection with mutual funds and structured settlements.
The Hartford also is involved in individual actions in which punitive damages are sought, such as
claims alleging bad faith in the handling of insurance claims. Like many other insurers, The
Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that
insurers had a duty to protect the public from the dangers of asbestos and that insurers committed
unfair trade practices by asserting defenses on behalf of their policyholders in the underlying
asbestos cases. Management expects that the ultimate liability, if any, with respect to such
lawsuits, after consideration of provisions made for estimated losses, will not be material to the
consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate
amounts sought in certain of these actions, and the inherent unpredictability of litigation, an
adverse outcome in certain matters could, from time to time, have a material adverse effect on the
Company’s consolidated results of operations or cash flows in particular quarterly or annual
periods.
Broker Compensation Litigation – On October 14, 2004, the New York Attorney General’s Office filed
a civil complaint (the “NYAG Complaint”) against Marsh Inc. and Marsh & McLennan Companies, Inc.
(collectively, “Marsh”) alleging, among other things, that certain insurance companies, including
The Hartford, participated with Marsh in arrangements to submit inflated bids for business
insurance and paid contingent commissions to ensure that Marsh would direct business to them. The
Hartford was not joined as a defendant in the action, which has since settled. Since the filing of
the NYAG Complaint, several private actions have been filed against the Company asserting claims
arising from the allegations of the NYAG Complaint.
18
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Commitments and Contingencies (continued)
Two securities class actions, now consolidated, have been filed in the United States District
Court for the District of Connecticut alleging claims against the Company and certain of its
executive officers under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. The
consolidated amended complaint alleges on behalf of a putative class of shareholders that the
Company and the four named individual defendants, as control persons of the Company, failed to
disclose to the investing public that The Hartford’s business and growth was predicated on the
unlawful activity alleged in the NYAG Complaint. The class period alleged is August 6, 2003
through October 13, 2004, the day before the NYAG Complaint was filed. The complaint seeks damages
and attorneys’ fees. Defendants filed a motion to dismiss in June 2005, and, on July 13, 2006, the
district court granted the motion. The plaintiffs have noticed an appeal of the dismissal.
Two corporate derivative actions, now consolidated, also have been filed in the same court. The
consolidated amended complaint, brought by shareholders on behalf of the Company against its
directors and an additional executive officer, alleges that the defendants knew adverse non-public
information about the activities alleged in the NYAG Complaint and concealed and misappropriated
that information to make profitable stock trades, thereby breaching their fiduciary duties, abusing
their control, committing gross mismanagement, wasting corporate assets, and unjustly enriching
themselves. The complaint seeks damages, injunctive relief, disgorgement, and attorneys’ fees.
Defendants filed a motion to dismiss in May 2005, and the plaintiffs have agreed to stay further
proceedings until after the resolution of the appeal from the dismissal of the securities
action. All defendants dispute the allegations and intend to defend these actions vigorously.
The Company is also a defendant in a multidistrict litigation in federal district court in New
Jersey. There are two consolidated amended complaints filed in the multidistrict litigation, one
related to alleged conduct in connection with the sale of property-casualty insurance and the other
related to alleged conduct in connection with the sale of group benefits products. The Company and
various of its subsidiaries are named in both complaints. The actions assert, on behalf of a class
of persons who purchased insurance through the broker defendants, claims under the Sherman Act, the
Racketeer Influenced and Corrupt Organizations Act (“RICO”), state law, and in the case of the
group benefits complaint, claims under ERISA arising from conduct similar to that alleged in the
NYAG Complaint. The class period alleged is 1994 through the date of class certification, which
has not yet occurred. The complaints seek treble damages, injunctive and declaratory relief, and
attorneys’ fees. On October 3, 2006, the court denied in part the defendants’ motions to dismiss
the two consolidated amended complaints but found the complaints deficient in other respects and
ordered the plaintiffs to file supplemental pleadings. After the plaintiffs filed their
supplemental pleadings, the defendants renewed their motions to dismiss. On April 5, 2007, the
court granted the defendants’ renewed motions to dismiss the Sherman Act and RICO claims, dismissed
the consolidated actions without prejudice, and gave the plaintiffs thirty days to file any amended
complaints. The Company also has been named in two similar actions filed in
state courts, which the defendants have removed to federal court. Those actions currently are
transferred to the court presiding over the multidistrict litigation. The Company disputes the
allegations in all of these actions and intends to defend the actions vigorously.
Additional complaints may be filed against the Company in various courts alleging claims under
federal or state law arising from the conduct alleged in the NYAG Complaint. The Company’s
ultimate liability, if any, in the pending and possible future suits is highly uncertain and
subject to contingencies that are not yet known, such as how many suits will be filed, in which
courts they will be lodged, what claims they will assert, what the outcome of investigations by the
New York Attorney General’s Office and other regulatory agencies will be, the success of defenses
that the Company may assert, and the amount of recoverable damages if liability is established. In
the opinion of management, it is possible that an adverse outcome in one or more of these suits
could have a material adverse effect on the Company’s consolidated results of operations or cash
flows in particular quarterly or annual periods.
Asbestos and Environmental Claims – As discussed in Note 12, Commitments and Contingencies, of the
Notes to Consolidated Financial Statements under the caption “Asbestos and Environmental Claims”,
included in the Company’s 2006 Form 10-K Annual Report, The Hartford continues to receive asbestos
and environmental claims that involve significant uncertainty regarding policy coverage issues.
Regarding these claims, The Hartford continually reviews its overall reserve levels and reinsurance
coverages, as well as the methodologies it uses to estimate its exposures. Because of the
significant uncertainties that limit the ability of insurers and reinsurers to estimate the
ultimate reserves necessary for unpaid losses and related expenses, particularly those related to
asbestos, the ultimate liabilities may exceed the currently recorded reserves. Any such additional
liability cannot be reasonably estimated now but could be material to The Hartford’s consolidated
operating results, financial condition and liquidity.
19
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Commitments and Contingencies (continued)
Regulatory Developments
In June 2004, the Company received a subpoena from the New York Attorney General’s Office in
connection with its inquiry into compensation arrangements between brokers and carriers. In
mid-September 2004 and subsequently, the Company has received additional subpoenas from the New
York Attorney General’s Office, which relate more specifically to possible anti-competitive
activity among brokers and insurers. Since the beginning of October 2004, the Company has received
subpoenas or other information requests from Attorneys General and regulatory agencies in more than
a dozen jurisdictions regarding broker compensation and possible anti-competitive activity. The
Company may receive additional subpoenas and other information requests from Attorneys General or
other regulatory agencies regarding similar issues. In addition, the Company has received a
request for information from the New York Attorney General’s Office concerning the Company’s
compensation arrangements in connection with the administration of workers compensation plans. The
Company intends to continue cooperating fully with these investigations, and is conducting an
internal review, with the assistance of outside counsel, regarding broker compensation issues in
its Property & Casualty and Group Benefits operations.
On October 14, 2004, the New York Attorney General’s Office filed a civil complaint against Marsh &
McLennan Companies, Inc., and Marsh, Inc. (collectively, “Marsh”). The complaint alleges, among
other things, that certain insurance companies, including the Company, participated with Marsh in
arrangements to submit inflated bids for business insurance and paid contingent commissions to
ensure that Marsh would direct business to them. The Hartford was not joined as a defendant in the
action, which has since settled. Although no regulatory action has been initiated against the
Company in connection with the allegations described in the civil complaint, it is likely that the
New York Attorney General’s Office or one or more other regulatory agencies will pursue action
against the Company or one or more of its employees in the future. The Company is engaged in discussions regarding the potential resolution of the inquiry by the New York Attorney General’s Office and other regulatory agencies into broker compensation. The potential timing of any
such resolution or the initiation of any formal action is difficult to predict. If such an action is brought, it could have a material
adverse effect on the Company.
On October 29, 2004, the New York Attorney General’s Office informed the Company that the Attorney
General is conducting an investigation with respect to the timing of the previously disclosed sale
by Thomas Marra, a director and executive officer of the Company, of 217,074 shares of the
Company’s common stock on September 21, 2004. The sale occurred shortly after the issuance of two
additional subpoenas dated September 17, 2004 by the New York Attorney General’s Office. The
Company has engaged outside counsel to review the circumstances related to the transaction and is
fully cooperating with the New York Attorney General’s Office. On the basis of the review, the
Company has determined that Mr. Marra complied with the Company’s applicable internal trading
procedures and has found no indication that Mr. Marra was aware of the additional subpoenas at the
time of the sale.
The SEC’s Division of Enforcement and the New York Attorney General’s Office are investigating
aspects of the Company’s variable annuity and mutual fund operations related to market timing. The
Company continues to cooperate fully with the SEC and the New York Attorney General’s Office in
these matters. The Company’s mutual funds are available for purchase by the separate accounts of
different variable universal life insurance policies, variable annuity products, and funding
agreements, and they are offered directly to certain qualified retirement plans. Although existing
products contain transfer restrictions between subaccounts, some products, particularly older
variable annuity products, do not contain restrictions on the frequency of transfers. In addition,
as a result of the settlement of litigation against the Company with respect to certain owners of
older variable annuity contracts, the Company’s ability to restrict transfers by these owners has,
until recently, been limited. The Company has executed an agreement with the parties to the
previously settled litigation which, together with separate agreements between these contract
owners and their broker, has resulted in the exchange or surrender of all of the variable annuity
contracts that were the subject of the previously settled litigation.
To date, the SEC’s and New York Attorney General’s market timing investigations have not resulted
in the initiation of any formal action against the Company by these regulators. However, the
Company believes that one or both of the SEC and the New York Attorney General’s Office are likely
to take some action against the Company at the conclusion of the respective investigations. The
Company is engaged in discussions regarding the potential resolution of these investigations. The
potential timing of any resolution of these matters or the initiation of any formal action by these
regulators is difficult to predict. As of March 31, 2007, the Company had a reserve of $83,
pre-tax, for these matters. This reserve is an estimate; in view of the uncertainties regarding
the outcome of these regulatory investigations, it is possible that the ultimate cost to the
Company of these matters could exceed the reserve by an amount that would have a material adverse
effect on the Company’s consolidated results of operations or cash flows in a particular quarterly
or annual period.
On May 24, 2005, the Company received a subpoena from the Connecticut Attorney General’s Office
seeking information about the Company’s participation in finite reinsurance transactions in which
there was no substantial transfer of risk between the parties. The Company is cooperating fully
with the Connecticut Attorney General’s Office in this matter.
20
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Commitments and Contingencies (continued)
On June 23, 2005, the Company received a subpoena from the New York Attorney General’s Office
requesting information relating to purchases of the Company’s variable annuity products, or
exchanges of other products for the Company’s variable annuity products, by New York residents who
were 65 or older at the time of the purchase or exchange. On August 25, 2005, the Company received
an additional subpoena from the New York Attorney General’s Office requesting information relating
to purchases of or exchanges into the Company’s variable annuity products by New York residents
during the past five years where the purchase or exchange was funded using funds from a
tax-qualified plan or where the variable annuity purchased or exchanged for was a sub-account of a
tax-qualified plan or was subsequently put into a tax-qualified plan. The Company is cooperating
fully with the New York Attorney General’s Office in these matters.
On July 14, 2005, the Company received an additional subpoena from the Connecticut Attorney
General’s Office concerning the Company’s structured settlement business. This subpoena requests
information about the Company’s sale of annuity products for structured settlements, and about the
ways in which brokers are compensated in connection with the sale of these products. The Company is
cooperating fully with the Connecticut Attorney General’s Office in these matters.
The Company has received a request for information from the New York Attorney General’s Office
about issues relating to the reporting of workers’ compensation premium. The Company is
cooperating fully with the New York Attorney General’s Office in this matter.
8. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans
Components of Net Periodic Benefit Cost
Total net periodic benefit cost for the three months ended March 31, 2007 and 2006 include the
following components:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
Other Postretirement Benefits |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
| |
Service cost |
|
$ |
32 |
|
|
$ |
32 |
|
|
$ |
2 |
|
|
$ |
3 |
|
Interest cost |
|
|
51 |
|
|
|
48 |
|
|
|
5 |
|
|
|
7 |
|
Expected return on plan assets |
|
|
(70 |
) |
|
|
(61 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
Amortization of prior service cost |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(5 |
) |
Amortization of actuarial net losses |
|
|
19 |
|
|
|
21 |
|
|
|
— |
|
|
|
1 |
|
| |
Net periodic benefit cost |
|
$ |
29 |
|
|
$ |
37 |
|
|
$ |
3 |
|
|
$ |
4 |
|
| |
9. Stock Compensation Plans
The Company has two primary stock-based compensation plans, The Hartford 2005 Incentive Stock
Plan and The Hartford Employee Stock Purchase Plan. For a description of these plans, see Note 18
of Notes to Consolidated Financial Statements included in The Hartford’s 2006 Form 10-K Annual
Report.
Shares issued in satisfaction of stock-based compensation may be made available from authorized but
unissued shares, shares held by the Company in treasury or from shares purchased in the open
market. The Company typically issues new shares in satisfaction of stock-based compensation. The
compensation expense recognized for the stock-based compensation plans was $20 and $13 for the
three months ended March 31, 2007 and 2006, respectively. The income tax benefit recognized for
stock-based compensation plans was $6 and $4 for the three months ended March 31, 2007 and 2006,
respectively. The Company did not capitalize any cost of stock-based compensation. As of March
31, 2007, the total compensation cost related to non-vested awards not yet recognized was $117,
which is expected to be recognized over a weighted average period of 2.3 years.
10. Debt
On March 9, 2007, The Hartford issued $500 of 5.375% senior notes due March 15, 2017.
Consumer Notes
As of March 31, 2007, and December 31, 2006, $435 and $258 of consumer notes had been issued. As
of March 31, 2007, these consumer notes have interest rates ranging from 5.0% to 6.0% for fixed
notes and, for variable notes, either consumer price index plus 175 to 267 basis points, S&P 500
Index, or Dow Jones Index. For the three months ended March 31, 2007, interest credited to holders
of consumer notes was $5.
21
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in millions except share data unless otherwise stated)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
addresses the financial condition of The Hartford Financial Services Group, Inc. and its
subsidiaries (collectively, “The Hartford” or the “Company”) as of March 31, 2007, compared with
December 31, 2006, and its results of operations for the three months ended March 31, 2007,
compared to the prior year period. This discussion should be read in conjunction with the MD&A in
The Hartford’s 2006 Form 10-K Annual Report.
Certain of the statements contained herein are forward-looking statements. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic, competitive and
legislative developments. These forward-looking statements are subject to change and uncertainty
which are, in many instances, beyond the Company’s control and have been made based upon
management’s expectations and beliefs concerning future developments and their potential effect
upon the Company. There can be no assurance that future developments will be in accordance with
management’s expectations or that the effect of future developments on The Hartford will be those
anticipated by management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors, including, but not limited to, those set
forth in Part II, Item 1A, Risk Factors as well as Part I,
Item 1A, Risk Factors in The Hartford’s 2006 Form 10-K Annual
Report. These factors include: the difficulty in predicting the
Company’s potential exposure for asbestos and environmental claims; the possible occurrence of
terrorist attacks; the response of reinsurance companies under reinsurance contracts and the
availability, pricing and adequacy of reinsurance to protect the Company against losses; changes in
the stock markets, interest rates or other financial markets, including the potential effect on the
Company’s statutory capital levels; the inability to effectively mitigate the impact of equity
market volatility on the Company’s financial position and results of operations arising from
obligations under annuity product guarantees; the Company’s potential exposure arising out of
regulatory proceedings or private claims relating to incentive compensation or payments made to
brokers or other producers and alleged anti-competitive conduct; the uncertain effect on the
Company of regulatory and market-driven changes in practices relating to the payment of incentive
compensation to brokers and other producers, including changes that have been announced and those
which may occur in the future; the possibility of unfavorable loss development; the incidence and
severity of catastrophes, both natural and man-made; stronger than anticipated competitive
activity; unfavorable judicial or legislative developments; the potential effect of domestic and
foreign regulatory developments, including those which could increase the Company’s business costs
and required capital levels; the possibility of general economic and business conditions that are
less favorable than anticipated; the Company’s ability to distribute its products through
distribution channels, both current and future; the uncertain effects of emerging claim and
coverage issues; a downgrade in the Company’s financial strength or credit ratings; the ability of
the Company’s subsidiaries to pay dividends to the Company; the Company’s ability to adequately
price its property and casualty policies; the ability to recover the Company’s systems and
information in the event of a disaster or other unanticipated event; potential for difficulties
arising from outsourcing relationships; potential changes in Federal or State tax laws; and other
factors described in such forward-looking statements.
INDEX
| |
|
|
|
|
|
|
|
22 |
|
|
|
|
23 |
|
|
|
|
24 |
|
|
|
|
26 |
|
|
|
|
31 |
|
|
|
|
32 |
|
|
|
|
33 |
|
|
|
|
35 |
|
|
|
|
36 |
|
|
|
|
37 |
|
|
|
|
38 |
|
|
|
|
39 |
|
|
|
|
44 |
|
|
|
|
44 |
|
|
|
|
47 |
|
|
|
|
51 |
|
|
|
|
54 |
|
|
|
|
56 |
|
|
|
|
59 |
|
|
|
|
64 |
|
|
|
|
67 |
|
|
|
|
70 |
|
|
|
|
75 |
|
OVERVIEW
The Hartford is a diversified insurance and financial services company with operations dating
back to 1810. The Company is headquartered in Connecticut and is organized into two major
operations: Life and Property & Casualty, each containing reporting segments. Within the Life and
Property & Casualty operations, The Hartford conducts business principally in ten reportable
operating segments. Additionally, Corporate primarily includes the Company’s debt financing and
related interest expense, as well as certain capital raising activities and purchase accounting
adjustments.
22
Many of the principal factors that drive the profitability of The Hartford’s Life and Property &
Casualty operations are separate and distinct. Management considers this diversification to be a
strength of The Hartford that distinguishes the Company from many of its peers. To present its
operations in a more meaningful and organized way, management has included separate overviews
within the Life and Property & Casualty sections of the MD&A. For further overview of Life’s
profitability and analysis, see page 26. For further overview of Property & Casualty’s
profitability and analysis, see page 39.
Broker Compensation
As the Company has disclosed previously, the Company pays brokers and independent agents
commissions and other forms of incentive compensation in connection with the sale of many of the
Company’s insurance products. Since the New York Attorney General’s Office filed a civil complaint
against Marsh on October 14, 2004, several of the largest national insurance brokers, including
Marsh, Aon Corporation and Willis Group Holdings Limited, have announced that they have
discontinued the use of contingent compensation arrangements. Other industry participants may make
similar, or different, determinations in the future. In addition, legal, legislative, regulatory,
business or other developments may require changes to industry practices relating to incentive
compensation.
Pursuant to settlement agreements reached with regulators, several insurance companies have agreed
to restrictions on the payment of contingent compensation relating to the placement of excess
casualty insurance policies. These insurers have agreed that the restrictions may be extended in
time, and to other property and casualty lines, if insurers in a given line or segment, that
together represent more than 65% of the market share in the insurance line (based upon national
gross written premiums), do not pay contingent compensation. On November 30, 2006, the New York
Attorney General’s Office notified these insurers that the 65% threshold had been reached for a
number of insurance lines, including personal automobile and homeowners insurance. As a result,
beginning January 1, 2007, these insurers were prohibited from paying contingent compensation
relating to the placement of these types of insurance. In addition, on December 21, 2006, Chubb
Corporation agreed to forego the payment of contingent compensation for all property and casualty
insurance lines pursuant to a settlement agreement reached with regulators. These insurers,
including Chubb, have also agreed to support legislation and regulations to abolish contingent
compensation and to require greater disclosure of compensation. At this time, it is not possible
to predict the effect of these announced or potential future changes on our business or
distribution strategies, but such changes could have a material adverse effect on us in the future.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America (“GAAP”), requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree
of judgment and are subject to a significant degree of variability: property and casualty reserves
for unpaid losses and loss adjustment expenses, net of reinsurance; Life deferred policy
acquisition costs and present value of future profits associated with variable annuity and other
universal life-type contracts; the evaluation of other-than-temporary impairments on investments in
available-for-sale securities; the valuation of guaranteed minimum withdrawal benefit derivatives;
pension and other postretirement benefit obligations; and contingencies relating to corporate
litigation and regulatory matters. In developing these estimates management makes subjective and
complex judgments that are inherently uncertain and subject to material change as facts and
circumstances develop. Although variability is inherent in these estimates, management believes
the amounts provided are appropriate based upon the facts available upon compilation of the
financial statements. For a discussion of each of these critical accounting estimates, see MD&A in
The Hartford’s 2006 Form 10-K Annual Report.
23
CONSOLIDATED RESULTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Earned premiums |
|
$ |
3,831 |
|
|
$ |
3,839 |
|
|
|
— |
|
Fee income |
|
|
1,282 |
|
|
|
1,121 |
|
|
|
14 |
% |
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale and other |
|
|
1,273 |
|
|
|
1,127 |
|
|
|
13 |
% |
Equity securities held for trading [1] |
|
|
210 |
|
|
|
454 |
|
|
|
(54 |
%) |
| |
Total net investment income |
|
|
1,483 |
|
|
|
1,581 |
|
|
|
(6 |
%) |
Other revenues |
|
|
117 |
|
|
|
123 |
|
|
|
(5 |
%) |
Net realized capital gains (losses) |
|
|
46 |
|
|
|
(121 |
) |
|
NM |
| |
Total revenues |
|
|
6,759 |
|
|
|
6,543 |
|
|
|
3 |
% |
Benefits, losses and loss adjustment expenses [1] |
|
|
3,543 |
|
|
|
3,779 |
|
|
|
(6 |
%) |
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
872 |
|
|
|
817 |
|
|
|
7 |
% |
Insurance operating costs and expenses |
|
|
888 |
|
|
|
727 |
|
|
|
22 |
% |
Interest expense |
|
|
63 |
|
|
|
66 |
|
|
|
(5 |
%) |
Other expenses |
|
|
181 |
|
|
|
170 |
|
|
|
6 |
% |
| |
Total benefits, losses and expenses |
|
|
5,547 |
|
|
|
5,559 |
|
|
|
— |
|
Income before income taxes |
|
|
1,212 |
|
|
|
984 |
|
|
|
23 |
% |
Income tax expense |
|
|
336 |
|
|
|
256 |
|
|
|
31 |
% |
| |
Net income |
|
$ |
876 |
|
|
$ |
728 |
|
|
|
20 |
% |
| |
|
|
|
| [1] |
|
Includes investment income and mark-to-market effects of equity securities held for trading
supporting the international variable annuity business, which are classified in net investment
income with corresponding amounts credited to policyholders within benefits, losses and loss
adjustment expenses. |
The Hartford defines “NM” as not meaningful for increases or decreases greater than 200%, or
changes from a net gain to a net loss position, or vice versa.
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income increased $148 primarily due to the following:
| • |
|
Life’s net income increased in all of its reportable operating segments, except Group Benefits.
The Retail and International segments net income increased $13 and $8, respectively, primarily due
to increased fees from growth in assets under management. Institutional’s net income increased $11
primarily due to increased partnership income and the release of certain premium tax accruals.
Life Other net income increased $59 due primarily to realized gains in 2007 compared to losses in
2006 as a result of net gains on sales of investments in the first quarter of 2007 as compared to
net losses in the comparable 2006 period due to tighter credit spreads on certain issuers since the
date of security purchase; net gains on the Japanese fixed annuity contract hedges in the first
quarter of 2007 due to declining Japanese interest rates as compared to net losses in the
comparable 2006 period due to rising interest rates in Japan; and net gains on GMWB derivatives in
the first quarter of 2007 as compared to net losses in the comparable 2006 period primarily due to
declines in equity index volatility. |
| |
| • |
|
Increase in Property & Casualty net income of $37, primarily due to a $37, after-tax, increase in
net investment income, driven primarily by a larger investment base due to increased cash flows
from underwriting and an increase in income from investments in limited partnerships. |
Total revenues increased $216 primarily due to the following:
| • |
|
An increase of $161 in fee income driven primarily by growth in average account values from
positive net flows and market appreciation in International and Retail. |
| |
| • |
|
Net realized capital gains in 2007 compared to losses in 2006, primarily in Life as described above. |
Partially offsetting the increase in total revenues was the following:
| • |
|
A decrease of $98 in net investment income, driven primarily by a $244 decrease in net investment
income on the Company’s equity securities held for trading. Partially offsetting this decrease was
an increase in net investment income of $146 from securities available-for-sale and other,
primarily due to a higher invested asset base and income from limited partnerships. |
Income Taxes
The effective tax rate for the three months ended March 31, 2007 and 2006 was 28% and 26%,
respectively. The principal causes of the difference between the effective rate and the U.S.
statutory rate of 35% were tax-exempt interest earned on invested assets and the separate account
dividends received deduction (“DRD”).
24
The separate account DRD is estimated for the current year using information from the prior
year-end, adjusted for current year equity market performance. The estimated DRD is generally
updated in the third quarter for the provision to filed return adjustments, and in the fourth
quarter based on current year ultimate mutual fund distributions and fee income from The Hartford’s
variable insurance products. The actual current year DRD can vary from the estimates based on, but
not limited to, changes in eligible dividends received by the mutual funds, amounts of
distributions from these mutual funds, appropriate levels of taxable income as well as the
utilization of capital loss carryforwards at the mutual fund level.
The Company receives a foreign tax credit (“FTC”) against its U.S. tax liability for foreign taxes
paid by the Company including payments from its separate account assets. The separate account FTC
is estimated for the current year using information from the most recent filed return, adjusted for
the change in the allocation of separate accounts investments to the international equity markets
during the current year. The actual current year FTC can vary from the estimates due to actual
FTC’s passed through by the mutual funds.
Organizational Structure
The Hartford is organized into two major operations: Life and Property & Casualty. Within the Life
and Property & Casualty operations, The Hartford conducts business principally in ten reportable
operating segments. Additionally, Corporate primarily includes the Company’s debt financing and
related interest expense, as well as certain capital raising and purchase accounting adjustment
activities.
Life is organized into six reportable operating segments: Retail Products Group, Retirement Plans,
Institutional Solutions Group, Individual Life, Group Benefits and International.
Property & Casualty is organized into four reportable operating segments: the underwriting segments
of Business Insurance, Personal Lines, and Specialty Commercial (collectively “Ongoing
Operations”); and the Other Operations segment.
For a further description of each operating segment, see Note 3 of Notes to Consolidated Financial
Statements and Item 1, Business both of which are in The Hartford’s 2006 Form 10-K Annual Report.
Segment Results
The following is a summary of net income for each of the Company’s Life segments and aggregate net
income for the Company’s Property & Casualty operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Net Income (Loss) |
|
2007 |
|
2006 |
|
Change |
| |
Life |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
189 |
|
|
$ |
176 |
|
|
|
7 |
% |
Retirement |
|
|
23 |
|
|
|
21 |
|
|
|
10 |
% |
Institutional |
|
|
33 |
|
|
|
22 |
|
|
|
50 |
% |
Individual Life |
|
|
46 |
|
|
|
45 |
|
|
|
2 |
% |
Group Benefits |
|
|
66 |
|
|
|
68 |
|
|
|
(3 |
%) |
International |
|
|
54 |
|
|
|
46 |
|
|
|
17 |
% |
Other |
|
|
27 |
|
|
|
(32 |
) |
|
NM |
| |
Total Life |
|
|
438 |
|
|
|
346 |
|
|
|
27 |
% |
| |
Property & Casualty |
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations |
|
|
429 |
|
|
|
389 |
|
|
|
10 |
% |
Other Operations |
|
|
32 |
|
|
|
35 |
|
|
|
(9 |
%) |
| |
Total Property & Casualty |
|
|
461 |
|
|
|
424 |
|
|
|
9 |
% |
Corporate |
|
|
(23 |
) |
|
|
(42 |
) |
|
|
45 |
% |
| |
Total net income |
|
$ |
876 |
|
|
$ |
728 |
|
|
|
20 |
% |
| |
Net income is the measure of profit or loss used in evaluating the performance of Total Property &
Casualty and the Ongoing Operations and Other Operations segments. Within Ongoing Operations, the
underwriting segments of Business Insurance, Personal Lines and Specialty Commercial are evaluated
by The Hartford’s management primarily based upon underwriting results. Underwriting results
represent premiums earned less incurred losses, loss adjustment expenses and underwriting expenses.
The sum of underwriting results, net investment income, net realized capital gains and losses, net
servicing and other income, other expenses, and related income taxes is net income.
25
The following is a summary of Ongoing Operations underwriting results by segment.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Underwriting Results (before-tax) |
|
2007 |
|
2006 |
|
Change |
| |
Business Insurance |
|
$ |
124 |
|
|
$ |
134 |
|
|
|
(7 |
%) |
Personal Lines |
|
|
130 |
|
|
|
106 |
|
|
|
23 |
% |
Specialty Commercial |
|
|
39 |
|
|
|
47 |
|
|
|
(17 |
%) |
| |
Outlook
The Hartford provides projections and other forward-looking information in the “Outlook” section of
each segment discussion within MD&A. The “Outlook” sections contain many forward-looking
statements, particularly relating to the Company’s future financial performance. These
forward-looking statements are estimates based on information currently available to the Company,
are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to the precautionary statements set forth in the introduction to MD&A above.
Actual results are likely to differ materially from those forecast by the Company, depending on the
outcome of various factors, including, but not limited to, those set forth in each “Outlook”
section, in Item 1A, Risk Factors in The Hartford’s 2006
Form 10-K Annual Report, and in Item 1A of this Quarterly Report.
LIFE
Executive Overview
Life is organized into six reportable operating segments: Retail Products Group (“Retail”),
Retirement Plans, Institutional Solutions Group (“Institutional”), Individual Life, Group Benefits
and International. The Company provides investment and retirement products, such as variable and
fixed annuities, mutual funds and retirement plan services and other institutional investment
products, such as structured settlements; individual and private-placement life insurance (“PPLI”)
and products including variable universal life, universal life, interest sensitive whole life and
term life; and group benefit products, such as group life and group disability insurance.
The following provides a summary of the significant factors used by management to assess the
performance of the business. For a complete discussion of these factors, see MD&A in The
Hartford’s 2006 Form 10-K Annual Report.
Performance Measures
Fee Income
Fee income is largely driven from amounts collected as a result of contractually defined
percentages of assets under management on investment type contracts. These fees are generally
collected on a daily basis. For individual life insurance products, fees are contractually defined
as percentages based on levels of insurance, age, premiums and deposits collected and contract
holder value. Life insurance fees are generally collected on a monthly basis. Therefore, the
growth in assets under management either through positive net flows or net sales, or favorable
equity market performance will have a positive impact on fee income. Conversely, either negative
net flows or net sales, or unfavorable equity market performance will reduce fee income generated
from investment type contracts.
26
| |
|
|
|
|
|
|
|
|
| |
|
As of and For the |
| |
|
Three Months Ended |
| |
|
March 31, |
| Product/Key Indicator Information |
|
2007 |
|
2006 |
| |
United States Individual Variable Annuities |
|
|
|
|
|
|
|
|
Account value, beginning of period |
|
$ |
114,365 |
|
|
$ |
105,314 |
|
Net flows |
|
|
(583 |
) |
|
|
(828 |
) |
Change in market value and other |
|
|
1,548 |
|
|
|
4,209 |
|
| |
Account value, end of period |
|
$ |
115,330 |
|
|
$ |
108,695 |
|
| |
|
|
|
|
|
|
|
|
|
Retail Mutual Funds |
|
|
|
|
|
|
|
|
Assets under management, beginning of period |
|
$ |
38,536 |
|
|
$ |
29,063 |
|
Net sales |
|
|
1,885 |
|
|
|
1,528 |
|
Change in market value and other |
|
|
500 |
|
|
|
1,397 |
|
| |
Assets under management, end of period |
|
$ |
40,921 |
|
|
$ |
31,988 |
|
| |
|
|
|
|
|
|
|
|
|
Retirement Plans |
|
|
|
|
|
|
|
|
Account value, beginning of period |
|
$ |
23,575 |
|
|
$ |
19,317 |
|
Net flows |
|
|
777 |
|
|
|
854 |
|
Change in market value and other |
|
|
380 |
|
|
|
294 |
|
| |
Account value, end of period |
|
$ |
24,732 |
|
|
$ |
20,465 |
|
| |
|
|
|
|
|
|
|
|
|
Individual Life Insurance |
|
|
|
|
|
|
|
|
Variable universal life account value, end of period |
|
$ |
6,754 |
|
|
$ |
6,191 |
|
Total life insurance in-force |
|
|
167,546 |
|
|
|
153,445 |
|
| |
|
|
|
|
|
|
|
|
|
Japan Annuities |
|
|
|
|
|
|
|
|
Account value, beginning of period |
|
$ |
31,343 |
|
|
$ |
26,104 |
|
Net flows |
|
|
1,197 |
|
|
|
1,846 |
|
Change in market value and other |
|
|
331 |
|
|
|
291 |
|
| |
Account value, end of period |
|
$ |
32,871 |
|
|
$ |
28,241 |
|
| |
|
|
|
|
|
|
|
|
|
S&P 500 Index |
|
|
|
|
|
|
|
|
Period end closing value |
|
|
1,421 |
|
|
|
1,295 |
|
Daily average value |
|
|
1,424 |
|
|
|
1,284 |
|
| |
| • |
|
The increase in U.S. variable annuity account values can be attributed to market growth over the past four quarters. |
| |
| • |
|
Mutual Fund net sales increased over the prior year period as a result of focused wholesaling efforts and continued
favorable fund performance. |
| |
| • |
|
Japan annuity account values continue to grow as a result of sales and market growth throughout the past four quarters.
Japan net flows have decreased due to increased competition. |
Net Investment Income and Interest Credited
Certain investment type contracts such as fixed annuities and other spread-based contracts generate
deposits that the Company collects and invests to earn investment income. These investment type
contracts use this investment income to credit the contract holders an amount of interest specified
in the respective contract; therefore, management evaluates performance of these products based on
the spread between net investment income and interest credited. Net investment income and interest
credited can be volatile period over period, which can have a significant positive or negative
effect on the operating results of each segment. The volatile nature of net investment income is
driven primarily by prepayments on securities and earnings on partnership investments. In
addition, insurance type contracts such as those sold by Group Benefits (discussed below) collect
and invest premiums to pay for losses specified in the particular insurance contract and those sold
by Institutional, collect and invest premiums for certain life contingent benefits. For these
insurance products, the investment spread is reflected in net investment income and policyholder
benefits. Finally, the return generated by the funds underlying the Japan variable annuities is
reported in net investment income in Other with an offsetting amount credited to those contract
holders in interest credited. The net investment income and interest credited from the Japan
variable annuities is volatile due to the market performance of the funds and, similar to returns
on U.S. separate account assets, accrues to the benefit of the policyholders, not the Company.
27
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Net Investment Income |
|
2007 |
|
2006 |
| |
Retail |
|
$ |
197 |
|
|
$ |
216 |
|
Retirement Plans |
|
|
88 |
|
|
|
80 |
|
Institutional |
|
|
291 |
|
|
|
225 |
|
Individual Life |
|
|
87 |
|
|
|
79 |
|
Group Benefits |
|
|
118 |
|
|
|
101 |
|
International |
|
|
33 |
|
|
|
28 |
|
Other |
|
|
248 |
|
|
|
491 |
|
| |
Total net investment income |
|
$ |
1,062 |
|
|
$ |
1,220 |
|
| |
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Interest Credited on General Account Assets |
|
2007 |
|
2006 |
| |
Retail |
|
$ |
154 |
|
|
$ |
163 |
|
Retirement Plans |
|
|
56 |
|
|
|
50 |
|
Institutional |
|
|
154 |
|
|
|
115 |
|
Individual Life |
|
|
63 |
|
|
|
60 |
|
International |
|
|
6 |
|
|
|
5 |
|
Other |
|
|
233 |
|
|
|
487 |
|
| |
Total interest credited on general account assets |
|
$ |
666 |
|
|
$ |
880 |
|
| |
| • |
|
Net investment income and interest credited in Other decreased for
the three months ended March 31, 2007 due to a decrease in the
mark-to-market effects of trading account securities supporting
the Japanese variable annuity business. |
| |
| • |
|
Net investment income and interest credited on general account
assets in Retail declined for the three months ended March 31,
2007 due to transfers within variable annuity products from the
general account option to separate account funds as well as, lower
assets under management from surrenders on market value adjusted
(“MVA”) fixed annuity products at the end of their guarantee
period. |
| |
| • |
|
Net investment income and interest credited on general account
assets in Institutional increased as a result of the Company’s
funding agreement backed Investor Notes program. |
| |
| • |
|
In addition to interest credited on general account assets,
Institutional also had other contract benefits for limited payment
contracts of $97 and $78, for the three months ended March 31,
2007 and 2006, respectively. These amounts need to be deducted
from net investment income to understand the earnings pattern on
these businesses because these contracts are accounted for as
traditional insurance products. |
Premiums
As discussed above, traditional insurance type products, such as those sold by Group Benefits,
collect premiums from policyholders in exchange for financial protection of the policyholder from a
specified insurable loss, such as death or disability. These premiums together with net investment
income earned from the overall investment strategy are used to pay the contractual obligations
under these insurance contracts. Two factors impacting premium growth are sales and persistency.
Sales can increase or decrease in a given year based on a number of factors, including but not
limited to, customer demand for the Company’s product offerings, pricing competition, distribution
channels and the Company’s reputation and ratings. A majority of sales correspond with the open
enrollment periods of employers’ benefits, typically January 1 or July 1. Persistency is the
percentage of insurance policies remaining in-force from year to year as measured by premiums.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Group Benefits |
|
2007 |
|
2006 |
| |
Premiums and other considerations |
|
$ |
1,084 |
|
|
$ |
1,032 |
|
Fully insured ongoing sales (excluding buyouts) |
|
$ |
386 |
|
|
$ |
441 |
|
| |
| • |
|
Premiums and other considerations include $11 and $4 in buyout
premiums for the three months ended March 31, 2007 and 2006,
respectively. The increase in premiums and other considerations
for Group Benefits in 2007 compared to 2006 was driven by sales
and persistency over the last twelve months. |
| |
| • |
|
Fully insured ongoing sales, excluding buyouts, declined from 2006
due to a higher number of large cases sold in 2006 and to a lesser
extent the competitive sales environment for Group Benefits
products. |
28
Expenses
There are three major categories for expenses: benefits and losses, insurance operating costs and
expenses, and amortization of deferred policy acquisition costs and the present value of future
profits.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Retail |
|
2007 |
|
2006 |
| |
General insurance expense ratio (individual annuity) |
|
16.4 |
bps |
|
15.4 |
bps |
DAC amortization ratio (individual annuity) |
|
|
46.9 |
% |
|
|
49.3 |
% |
Insurance expenses, net of deferrals |
|
$ |
274 |
|
|
$ |
228 |
|
| |
|
|
|
|
|
|
|
|
|
Individual Life |
|
|
|
|
|
|
|
|
Death benefits |
|
$ |
70 |
|
|
$ |
69 |
|
Insurance expenses, net of deferrals |
|
$ |
47 |
|
|
$ |
42 |
|
| |
|
|
|
|
|
|
|
|
|
Group Benefits |
|
|
|
|
|
|
|
|
Total benefits and losses |
|
$ |
806 |
|
|
$ |
767 |
|
Loss ratio (excluding buyout premiums) |
|
|
74.1 |
% |
|
|
74.2 |
% |
Insurance expenses, net of deferrals |
|
$ |
288 |
|
|
$ |
261 |
|
Expense ratio (excluding buyout premiums) |
|
|
28.4 |
% |
|
|
26.4 |
% |
| |
|
|
|
|
|
|
|
|
|
International – Japan |
|
|
|
|
|
|
|
|
General insurance expense ratio |
|
41.1 |
bps |
|
50.1 bps |
DAC amortization ratio |
|
|
37.3 |
% |
|
|
38.9 |
% |
Insurance expenses, net of deferrals |
|
$ |
42 |
|
|
$ |
37 |
|
| |
| • |
|
The ratio of individual annuity DAC amortization over income
before taxes and DAC amortization declined for the three months
ended March 31, 2007 as a result of the DAC unlock in the fourth
quarter of 2006 reducing future amortization expense for the block
of business covered by the unlock. |
| |
| • |
|
Retail insurance expenses, net of deferrals, increased due to
increasing trail commissions on growing variable annuity assets as
well as increasing non-deferrable commissions on strong mutual
fund deposits. |
| |
| • |
|
Individual Life death benefits increased a moderate 1% for the
three months ended March 31, 2007 due to favorable mortality
experience on a larger insurance in-force. |
| |
| • |
|
The Group Benefits expense ratio, excluding buyouts, for the three
months ended March 31, 2007 increased primarily due to higher
commission expense and higher DAC amortization resulting from a
shorter amortization period following the adoption of SOP 05-1. |
| |
| • |
|
International’s expense ratio declined in the first quarter of
2007 as Japan further leveraged the existing infrastructure as it
attains economies of scale. Although the Company expects Japan to
continue to achieve economies of scale over the long-term, Japan’s
expense ratio may increase from period to period depending on
investments in infrastructure to support the business. |
Profitability
Management evaluates the rates of return various businesses can provide as an input in determining
where additional capital should be invested to increase net income and shareholder returns.
Specifically, because of the importance of its individual annuity products, the Company uses the
return on assets for the individual annuity business for evaluating profitability. In Group
Benefits, after-tax margin, excluding buyouts, is a key indicator of overall profitability.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Ratios |
|
2007 |
|
2006 |
| |
Retail |
|
|
|
|
|
|
|
|
Individual annuity return on assets (“ROA”) |
|
55.8 |
bps |
|
54.6 |
bps |
Individual Life |
|
|
|
|
|
|
|
|
After-tax margin |
|
|
16.1 |
% |
|
|
16.6 |
% |
Group Benefits |
|
|
|
|
|
|
|
|
After-tax margin (excluding buyouts) |
|
|
6.2 |
% |
|
|
6.6 |
% |
International – Japan |
|
|
|
|
|
|
|
|
International ROA |
|
76.0 |
bps |
|
70.7 |
bps |
| |
| • |
|
International’s ROA increased for the three months ended March 31, 2007 compared to the prior year period as a result of
the favorable expense variances discussed above. |
| |
| • |
|
The reduction in the Group Benefits after-tax margin, excluding buyouts, for the three months ended March 31, 2007 was
due to a higher expense ratio including higher DAC amortization, partially offset by higher net investment income. |
| |
| • |
|
Individual Life’s after-tax margin decreased due to favorable net DAC amortization revisions in the first quarter of 2006. |
29
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Earned premiums |
|
$ |
1,208 |
|
|
$ |
1,273 |
|
|
|
(5 |
%) |
Fee income |
|
|
1,278 |
|
|
|
1,118 |
|
|
|
14 |
% |
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale and other |
|
|
852 |
|
|
|
766 |
|
|
|
11 |
% |
Equity securities held for trading [1] |
|
|
210 |
|
|
|
454 |
|
|
|
(54 |
%) |
| |
Total net investment income |
|
|
1,062 |
|
|
|
1,220 |
|
|
|
(13 |
%) |
Net realized capital gains (losses) |
|
|
23 |
|
|
|
(126 |
) |
|
NM |
| |
Total revenues |
|
|
3,571 |
|
|
|
3,485 |
|
|
|
2 |
% |
Benefits, losses and loss adjustment expenses [1] |
|
|
1,868 |
|
|
|
2,138 |
|
|
|
(13 |
%) |
Amortization of deferred policy acquisition
costs and present value of future profits |
|
|
344 |
|
|
|
299 |
|
|
|
15 |
% |
Insurance operating costs and other expenses |
|
|
767 |
|
|
|
593 |
|
|
|
29 |
% |
| |
Total benefits, losses and expenses |
|
|
2,979 |
|
|
|
3,030 |
|
|
|
(2 |
%) |
Income before income taxes |
|
|
592 |
|
|
|
455 |
|
|
|
30 |
% |
Income tax expense |
|
|
154 |
|
|
|
109 |
|
|
|
41 |
% |
| |
Net income |
|
$ |
438 |
|
|
$ |
346 |
|
|
|
27 |
% |
| |
|
|
|
| [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. |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
The increase in Life’s net income was due to the following:
| • |
|
Net income in Retail increased 7%,
principally driven by higher fee income
from growth in the variable annuity and
mutual fund businesses as a result of
higher assets under management as
compared to the prior year period,
partially offset by increased asset
based commissions and non-deferrable
mutual fund commissions on increased
mutual fund sales. |
| |
| • |
|
Retirement Plans net income increased
10% primarily driven by 401(k) fees
attributable to growth in assets under
management. |
| |
| • |
|
Institutional contributed higher
earnings, increasing 50%, driven by
partnership income and the release of
certain premium tax accruals. |
| |
| • |
|
Individual Life earnings increased
primarily driven by growth in fee
income generated from higher life
insurance in-force and account values,
relatively favorable mortality, offset by
favorable net DAC amortization
revisions recorded in the first quarter
of 2006. |
| |
| • |
|
Net income in International increased
primarily driven by the increased fees
from an increase in assets under
management of the Japan annuity
business. |
| |
| • |
|
Net realized capital gains occurred in
the first quarter of 2007 compared to
net realized losses in the
corresponding 2006 period due to net
gains on sales of investments in the
first quarter of 2007 as compared to
net losses in the comparable 2006
period due to tighter credit spreads on
certain issuers since the date of
security purchase; net gains on the
Japanese fixed annuity contract hedges
in the first quarter of 2007 due to
declining Japanese interest rates as
compared to net losses in the
comparable 2006 period due to rising
interest rates in Japan; and net gains
on GMWB derivatives in the first
quarter of 2007 as compared to net
losses in the comparable 2006 period
primarily due to declines in equity
index volatility. |
Partially offsetting the increase in net income were the following:
| • |
|
A decline in Group Benefits net income
due to a higher expense ratio including
higher DAC amortization, partially
offset by higher net investment income. |
| |
| • |
|
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. |
30
RETAIL
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Fee income |
|
$ |
730 |
|
|
$ |
648 |
|
|
|
13 |
% |
Earned premiums |
|
|
(21 |
) |
|
|
(17 |
) |
|
|
(24 |
%) |
Net investment income |
|
|
197 |
|
|
|
216 |
|
|
|
(9 |
%) |
Net realized capital gains (losses) |
|
|
(2 |
) |
|
|
3 |
|
|
NM |
| |
Total revenues |
|
|
904 |
|
|
|
850 |
|
|
|
6 |
% |
Benefits, losses and loss adjustment expenses |
|
|
196 |
|
|
|
207 |
|
|
|
(5 |
%) |
Insurance operating costs and other expenses |
|
|
274 |
|
|
|
228 |
|
|
|
20 |
% |
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
204 |
|
|
|
198 |
|
|
|
3 |
% |
| |
Total benefits, losses and expenses |
|
|
674 |
|
|
|
633 |
|
|
|
6 |
% |
Income before income taxes |
|
|
230 |
|
|
|
217 |
|
|
|
6 |
% |
Income tax expense |
|
|
41 |
|
|
|
41 |
|
|
|
— |
|
| |
Net income |
|
$ |
189 |
|
|
$ |
176 |
|
|
|
7 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management |
|
|
|
|
|
|
|
|
|
|
|
|
Individual variable annuity account values |
|
$ |
115,330 |
|
|
$ |
108,695 |
|
|
|
6 |
% |
Individual fixed annuity and other account values |
|
|
9,895 |
|
|
|
10,069 |
|
|
|
(2 |
%) |
Other retail products account values |
|
|
569 |
|
|
|
386 |
|
|
|
47 |
% |
| |
Total account values [1] |
|
|
125,794 |
|
|
|
119,150 |
|
|
|
6 |
% |
Retail mutual fund assets under management |
|
|
40,921 |
|
|
|
31,988 |
|
|
|
28 |
% |
Other mutual fund assets under management |
|
|
1,629 |
|
|
|
1,140 |
|
|
|
43 |
% |
| |
Total mutual fund assets under management |
|
|
42,550 |
|
|
|
33,128 |
|
|
|
28 |
% |
| |
Total assets under management |
|
$ |
168,344 |
|
|
$ |
152,278 |
|
|
|
11 |
% |
| |
|
|
|
| [1] |
|
Includes policyholder balances for investment contracts and reserves for future policy benefits
for insurance contracts. |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income in Retail increased 7%, principally driven by higher fee income from growth in the
variable annuity and mutual fund businesses as a result of higher assets under management as
compared to the prior year period, partially offset by increased asset based commissions and
non-deferrable mutual fund commissions on increased mutual fund sales. A more expanded discussion
of earnings can be found below:
| • |
|
The increase in fee income in the variable annuity business
occurred primarily as result of growth in average account values.
The year-over-year increase in average account values can be
attributed to market appreciation of $9.5 billion over the past
four quarters. Variable annuities had net outflows of $2.9
billion over the past four quarters. Net outflows for the past
four quarters were driven by surrender activity due to increased
sales competition, particularly as it relates to guaranteed living
benefits. |
| • |
|
Mutual fund fee income increased 16% due to increased assets under
management driven by net sales of $6.0 billion and market
appreciation of $3.0 billion during the past four quarters. These
net sales were primarily attributable to focused wholesaling
efforts and favorable fund performance. |
| • |
|
Net investment income has declined due to a decrease in the
account values in the fixed option of variable annuities. The
decrease in these account values can be attributed to a
combination of transfers into separate accounts and surrender
activity. Over the same period, there is a corresponding decrease
in benefits, losses and loss adjustment expenses due to a decline
in interest credited on these account values. |
| • |
|
Throughout Retail, insurance operating costs and other expenses
increased. Mutual Fund commissions increased due to significant
growth in sales. In addition, variable annuity asset based
commissions increased due to a 6% growth in assets under
management, as well as an increase in the number of contracts
reaching anniversaries when trail commission payments begin. |
| • |
|
Higher amortization of deferred costs was driven primarily by
higher amortization of acquisition costs incurred for mutual
funds. Mutual fund deferrable costs are amortized on a
straight-line basis over the contingent deferred sales charge
period. Net sales have increased, which has resulted in a higher
deferred cost balance, and consequently higher amortization for
the first quarter of 2007 compared to the corresponding prior year
period. For individual annuity, higher gross profits due to the
positive earnings drivers discussed above, was offset by a lower
DAC amortization rate, as the amortization as a percentage of
pre-tax profits has declined slightly as a result of the DAC
unlock that occurred in the fourth quarter of 2006. |
31
Outlook
Management believes the market for retirement products continues to expand as individuals
increasingly save and plan for retirement. Demographic trends suggest that as the “baby boom”
generation matures, a significant portion of the United States population will allocate a greater
percentage of their disposable incomes to saving for their retirement years due to uncertainty
surrounding the Social Security system and increases in average life expectancy. Competition has
increased substantially in the variable annuities market with most major variable annuity writers
offering living benefits such as lifetime GMWB riders. The Company’s strategy in 2007 revolves
around driving acceptance for our lifetime withdrawal benefit options introduced in August 2006
while continually evaluating the portfolio of products currently offered.
The retail mutual fund business has seen a substantial increase in net sales and assets over the
past year as a result of focused wholesaling efforts as well as strong investment performance. As
this business continues to evolve, success will be driven by diversifying net sales across the
mutual fund platform, delivering superior investment performance and creating new investment
solutions to current and future mutual fund shareholders.
Based on the results to date, management’s current full year projections are as follows:
| • |
|
Variable annuity sales of $12.5 billion to $13.5 billion |
| |
| • |
|
Fixed annuity sales of $500 to $1.0 billion |
| |
| • |
|
Retail mutual fund sales of $13.0 billion to $14.5 billion |
| |
| • |
|
Variable annuity outflows of $3.5 billion to $2.5 billion |
| |
| • |
|
Fixed annuity outflows of $1.0 billion to $500 |
| |
| • |
|
Retail mutual fund net sales of $6.0 billion to $7.0 billion |
| |
| • |
|
Individual annuity return on assets of 55 to 57 basis points |
| |
| • |
|
Other retail return on assets of 13 to 15 basis points |
RETIREMENT PLANS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Fee income |
|
$ |
54 |
|
|
$ |
43 |
|
|
|
26 |
% |
Earned premiums |
|
|
2 |
|
|
|
14 |
|
|
|
(86 |
%) |
Net investment income |
|
|
88 |
|
|
|
80 |
|
|
|
10 |
% |
Net realized capital losses |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
| |
Total revenues |
|
|
143 |
|
|
|
137 |
|
|
|
4 |
% |
Benefits, losses and loss adjustment expenses |
|
|
62 |
|
|
|
69 |
|
|
|
(10 |
%) |
Insurance operating costs and other expenses |
|
|
40 |
|
|
|
31 |
|
|
|
29 |
% |
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
9 |
|
|
|
8 |
|
|
|
13 |
% |
| |
Total benefits, losses and expenses |
|
|
111 |
|
|
|
108 |
|
|
|
3 |
% |
Income before income taxes |
|
|
32 |
|
|
|
29 |
|
|
|
10 |
% |
Income tax expense |
|
|
9 |
|
|
|
8 |
|
|
|
13 |
% |
| |
Net income |
|
$ |
23 |
|
|
$ |
21 |
|
|
|
10 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management |
|
|
|
|
|
|
|
|
|
|
|
|
403(b)/457 account values |
|
$ |
11,753 |
|
|
$ |
10,427 |
|
|
|
13 |
% |
401(k) account values |
|
|
12,979 |
|
|
|
10,038 |
|
|
|
29 |
% |
| |
Total account values [1] |
|
|
24,732 |
|
|
|
20,465 |
|
|
|
21 |
% |
401(k) mutual fund assets under management |
|
|
1,209 |
|
|
|
1,032 |
|
|
|
17 |
% |
| |
Total assets under management |
|
$ |
25,941 |
|
|
$ |
21,497 |
|
|
|
21 |
% |
| |
|
|
|
| [1] |
|
Includes policyholder balances for investment contracts and reserves for future policy
benefits for insurance contracts. |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income in the Retirement Plans increased due to higher earnings in the 401(k) business. Net
income for 403(b)/457 business was relatively stable.
| • |
|
Fee income for 401(k) increased 24%, or $8 due to an increase in
average account values. This growth is primarily driven by
positive net flows of $2.0 billion over the past four quarters
resulting from strong sales and increased ongoing deposits.
Market appreciation contributed an additional $963 to assets under
management over the past year. |
| • |
|
Net investment income has increased due to an increase in general
account assets under management. Over the same period, there is a
corresponding increase in the associated interest credited within
benefits, losses and loss adjustment expenses due to growth in
general account assets under management. |
32
| • |
|
Benefits, losses and loss adjustment expenses and earned premiums
decreased due to a large case annuitization in the 401(k) business
of $12 for the quarter ended March 31, 2006. |
| • |
|
Insurance operating costs and other expenses increased, primarily
attributable to higher technology costs in addition to greater
assets under management resulting in higher trail commissions and
maintenance expenses. |
Outlook
The future profitability of this segment will depend on Life’s ability to increase assets under
management across all businesses and maintain its investment spread earnings on the general account
products sold largely in the 403(b)/457 business. As the “baby boom” generation approaches
retirement, management believes these individuals, as well as younger individuals, will contribute
more of their income to retirement plans due to the uncertainty of the Social Security system and
the increase in average life expectancy. In 2007, Life has begun selling mutual fund based
products in the 401(k) market that will increase Life’s ability to grow assets under management in
the medium size 401(k) market. Life will also be selling mutual fund based products in the 403(b)
market as we look to grow assets in a highly competitive environment primarily targeted at health
and education workers. Disciplined expense management will continue to be a focus; however, as Life
looks to expand its reach in these markets, additional investments in service and technology will
occur.
Based on the results to date, management’s current full-year projections are as follows:
| • |
|
Deposits of $5.5 billion to $6.5 billion |
| • |
|
Net flows of $2.0 billion to $3.0 billion |
| • |
|
Return on assets of 36 to 38 basis points |
INSTITUTIONAL
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Fee income |
|
$ |
61 |
|
|
$ |
27 |
|
|
|
126 |
% |
Earned premiums |
|
|
168 |
|
|
|
267 |
|
|
|
(37 |
%) |
Net investment income |
|
|
291 |
|
|
|
225 |
|
|
|
29 |
% |
Net realized capital losses |
|
|
(3 |
) |
|
|
(1 |
) |
|
NM |
| |
Total revenues |
|
|
517 |
|
|
|
518 |
|
|
|
— |
|
Benefits, losses and loss adjustment expenses |
|
|
417 |
|
|
|
463 |
|
|
|
(10 |
%) |
Insurance operating costs and other expenses |
|
|
38 |
|
|
|
16 |
|
|
|
138 |
% |
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
15 |
|
|
|
8 |
|
|
|
88 |
% |
| |
Total benefits, losses and expenses |
|
|
470 |
|
|
|
487 |
|
|
|
(3 |
%) |
Income before income taxes |
|
|
47 |
|
|
|
31 |
|
|
|
52 |
% |
Income tax expense |
|
|
14 |
|
|
|
9 |
|
|
|
56 |
% |
| |
Net income |
|
$ |
33 |
|
|
$ |
22 |
|
|
|
50 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management |
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Investment Product account values [1] |
|
$ |
23,159 |
|
|
$ |
19,017 |
|
|
|
22 |
% |
Private Placement Life Insurance account values [1] |
|
|
27,839 |
|
|
|
24,216 |
|
|
|
15 |
% |
Mutual fund assets under management |
|
|
2,669 |
|
|
|
2,100 |
|
|
|
27 |
% |
| |
Total assets under management |
|
$ |
53,667 |
|
|
$ |
45,333 |
|
|
|
18 |
% |
| |
|
|
|
| [1] |
|
Includes policyholder balances for investment contracts and reserves for future policy benefits for insurance contracts. |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income in Institutional increased and was driven by higher earnings in both institutional
investment products (“IIP”) and private-placement life insurance (“PPLI”). A more expanded
discussion of earnings growth can be found below:
| • |
|
General account spread is the main driver of net income for IIP.
An increase in spread income in 2007 was driven by higher assets
under management, in IIP driven by positive net flows of $2.4
billion during the past four quarters resulting in higher assets
under management. Net flows for IIP were strong primarily as a
result of the Company’s funding agreement backed Investor Notes
program. Investor Notes deposits for the four quarters ended
March 31, 2007 were $2.6 billion. General account spread also
increased due to improved returns on certain high risk portions of
IIP’s investment portfolio. For the three months ended March 31,
2007 and 2006, income related to partnership income was $8 and $2,
after-tax, respectively. |
| • |
|
Fee income increased primarily due to PPLI’s higher assets under
management due to net flows of $2.3 billion and change in market
value of $1.5 billion over the past four quarters. PPLI collects
fee income for premium tax; and recognizes a corresponding expense
in insurance operating costs and other expenses. During the three
months ended March 31, 2007, PPLI had deposits of $1.4 billion,
that resulted in an increase in fee income and insurance operating
costs and other expenses of $28. |
| • |
|
In addition, PPLI’s income increased for the three months ended
March 31, 2007 due to a true up of premium tax accruals resulting
in an additional $4, after-tax, in earnings. |
33
| • |
|
For the three months ended March 31, 2007, earned premiums
decreased as a result of a large terminal funding case that was
sold during the three months ended March 31, 2006. This decrease
in earned premiums was offset by a corresponding decrease in
benefits, losses and loss adjustment expenses. |
Outlook
The future net income of this segment will depend on Institutional’s ability to increase assets
under management across all businesses, and specifically for the IIP products, maintenance of its
investment spreads. These products are highly competitive from a pricing perspective, and a small
number of cases often account for a significant portion of deposits. Therefore, the Company may not
be able to sustain the level of assets under management growth attained in 2006. Hartford Income
Notes and other structured notes products provide the Company with continued opportunity for future
growth. These products provide access to both a multi-billion dollar retail market, and a nearly
trillion dollar institutional market. These markets are highly competitive and the Company’s
success depends in part on the level of credited interest rates and the Company’s credit rating.
As the “baby boom” generation approaches retirement, management believes these individuals will
seek investment and insurance vehicles that will give them steady streams of income throughout
retirement. IIP has launched new products in 2006 to provide solutions that deal specifically with
longevity risk, and will continue to introduce products in 2007. Longevity risk is defined as the
likelihood of an individual outliving their assets. IIP is also designing innovative solutions to
corporations’ defined benefit liabilities.
The focus of the PPLI business is variable PPLI products used primarily to fund non-qualified
benefits or other post employment benefit liabilities. PPLI has experienced a surge in marketplace
activity due to COLI Best Practices enacted as part of the Pension Reform Act in August of 2006.
This act has clarified the prior legislative uncertainty relating to insurable interest under COLI
policies, potentially increasing future demand in corporate owned life insurance. The market served
by PPLI continues to be subject to extensive legal and regulatory scrutiny that can affect this
business.
Based on the results to date, management’s current full year projections are as follows:
| • |
|
Deposits (including mutual funds) of $7.0 billion to $8.0 billion |
| • |
|
Net flows (excluding mutual funds) of $4.0 billion to $5.0 billion |
| • |
|
Return on assets (including mutual funds) of 19 to 21 basis points |
34
INDIVIDUAL LIFE
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Fee income |
|
$ |
215 |
|
|
$ |
203 |
|
|
|
6 |
% |
Earned premiums |
|
|
(15 |
) |
|
|
(12 |
) |
|
|
(25 |
%) |
Net investment income |
|
|
87 |
|
|
|
79 |
|
|
|
10 |
% |
Net realized capital gains (losses) |
|
|
(2 |
) |
|
|
1 |
|
|
NM |
Total revenues |
|
|
285 |
|
|
|
271 |
|
|
|
5 |
% |
Benefits, losses and loss adjustment expenses |
|
|
136 |
|
|
|
131 |
|
|
|
4 |
% |
Insurance operating costs and other expenses |
|
|
47 |
|
|
|
42 |
|
|
|
12 |
% |
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
36 |
|
|
|
32 |
|
|
|
13 |
% |
| |
Total benefits, losses and expenses |
|
|
219 |
|
|
|
205 |
|
|
|
7 |
% |
Income before income taxes |
|
|
66 |
|
|
|
66 |
|
|
|
— |
|
Income tax expense |
|
|
20 |
|
|
|
21 |
|
|
|
(5 |
%) |
| |
Net income |
|
$ |
46 |
|
|
$ |
45 |
|
|
|
2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Values |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Variable universal life insurance |
|
$ |
6,754 |
|
|
$ |
6,191 |
|
|
|
9 |
% |
Universal life/interest sensitive whole life |
|
|
4,126 |
|
|
|
3,775 |
|
|
|
9 |
% |
Modified guaranteed life and other |
|
|
698 |
|
|
|
712 |
|
|
|
(2 |
%) |
| |
Total account values |
|
$ |
11,578 |
|
|
$ |
10,678 |
|
|
|
8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance In-force |
|
|
|
|
|
|
|
|
|
|
|
|
Variable universal life insurance |
|
$ |
74,439 |
|
|
$ |
71,852 |
|
|
|
4 |
% |
Universal life/interest sensitive whole life |
|
|
46,013 |
|
|
|
42,372 |
|
|
|
9 |
% |
Term |
|
|
46,053 |
|
|
|
38,137 |
|
|
|
21 |
% |
Modified guaranteed life and other |
|
|
1,041 |
|
|
|
1,084 |
|
|
|
(4 |
%) |
| |
Total life insurance in-force |
|
$ |
167,546 |
|
|
$ |
153,445 |
|
|
|
9 |
% |
| |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income increased 2% over the first quarter 2006. The first quarter of 2006 included favorable
net DAC amortization revisions of $5, after-tax. The following other factors contributed to the
changes in earnings:
| • |
|
Fee income increased $12. Cost of insurance charges, the largest component of fee income, increased $8 driven by
business growth in the variable universal and universal life insurance in-force. Variable life fees increased, with
the growth in the variable universal life insurance account value. |
| • |
|
Net investment income increased primarily due to increased
general account assets from sales growth. |
| • |
|
Benefits, losses and loss adjustment expenses increased consistent with the growth in account values and life insurance
in-force, partially offset by favorable mortality experience for the three months ended March 31, 2007 compared to
March 31, 2006. |
| • |
|
Insurance operating costs and other expenses increased primarily as a result of business growth. |
Outlook
Individual Life operates in a mature, competitive marketplace with customers desiring products with
guarantees and distribution requiring highly trained insurance professionals. Individual Life
continues to focus on its core distribution model of sales through financial advisors and banks,
while also pursuing growth opportunities through other distribution sources such as independent
life professionals. In its core channels, the Company is looking to expand its sales system and
internal wholesaling, take advantage of cross selling opportunities and extend its penetration in
the private wealth management services areas.
Sales results for the first quarter of 2007 were strong across core distribution channels,
including wirehouses/regional broker dealers and banks. The variable universal life mix remains
strong at 43% of total sales in the first quarter of 2007. In the first quarter of 2007,
Individual Life introduced a new accelerated death benefit rider to variable universal life
products. Future sales will be driven by the Company’s management of current distribution
relationships and developing new sources of distribution while offering competitive and innovative
new products and product features.
Individual Life continues to face uncertainty surrounding estate tax legislation, aggressive
competition from other life insurance providers, reduced availability and higher price of
reinsurance, and the current regulatory environment related to reserving for universal life
providers with no-lapse guarantees. These risks may have a negative impact on Individual Life’s
future earnings.
35
Based on the results to date, management’s current full year projections are as follows:
| • |
|
Life insurance in-force increase of 8% to 10% |
| • |
|
After-tax margin on total revenues of 15% to 16% |
GROUP BENEFITS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Premiums and other considerations |
|
$ |
1,084 |
|
|
$ |
1,032 |
|
|
|
5 |
% |
Net investment income |
|
|
118 |
|
|
|
101 |
|
|
|
17 |
% |
Net realized capital losses |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
— |
|
Total revenues |
|
|
1,201 |
|
|
|
1,132 |
|
|
|
6 |
% |
Benefits, losses and loss adjustment expenses |
|
|
806 |
|
|
|
767 |
|
|
|
5 |
% |
Insurance operating costs and other expenses |
|
|
288 |
|
|
|
261 |
|
|
|
10 |
% |
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
17 |
|
|
|
10 |
|
|
|
70 |
% |
| |
Total benefits, losses and expenses |
|
|
1,111 |
|
|
|
1,038 |
|
|
|
7 |
% |
Income before income taxes |
|
|
90 |
|
|
|
94 |
|
|
|
(4 |
%) |
Income tax expense |
|
|
24 |
|
|
|
26 |
|
|
|
(8 |
%) |
| |
Net income |
|
$ |
66 |
|
|
$ |
68 |
|
|
|
(3% |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fully insured – ongoing premiums |
|
$ |
1,065 |
|
|
$ |
1,017 |
|
|
|
5 |
% |
Buyout premiums |
|
|
11 |
|
|
|
4 |
|
|
|
175 |
% |
Other |
|
|
8 |
|
|
|
11 |
|
|
|
(27 |
%) |
| |
Total premiums and other considerations |
|
$ |
1,084 |
|
|
$ |
1,032 |
|
|
|
5 |
% |
| |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income decreased primarily due to a higher expense ratio including higher DAC amortization,
partially offset by higher earned premiums and net investment income. Group Benefits has a block
of financial institution business that is experience rated. This business comprised approximately
9% of the segment’s premiums and other considerations (excluding buyouts) for the three months
ended March 31, 2007 and 2006, and, on average, 3% to 5% of the segment’s net income. The following
factors contributed to the change in earnings:
| • |
|
Premiums and other considerations increased driven by sales and persistency over the last twelve months. |
| • |
|
Net investment income increased due to a higher invested asset base, increased interest income on allocated surplus and
a higher overall earned rate. The higher invested asset base has increased due primarily to the business growth
experienced in 2006. |
| • |
|
The segment’s loss ratio (defined as benefits, losses and loss adjustment expenses as a percentage of premiums and
other considerations excluding buyouts) was 74.1%, down from 74.2% in the prior year period. Excluding financial
institutions, the loss ratio was 80.2%, up from 79.2% in the prior year period, due primarily to higher medical stop
loss costs and morbidity experience, partially offset by favorable experience in certain life lines of business. |
| • |
|
The Company strengthened medical stop loss reserves by $8, after-tax, as a result of claims development on 2006
business in the first quarter of 2007. |
| • |
|
The segment’s expense ratio, excluding buyouts, was 28.4% compared to 26.4% in the prior year period. Excluding
financial institutions, the expense ratio was 22.8%, up from 21.6% in the prior year period resulting largely from the
increase in DAC amortization. |
| • |
|
Amortization of DAC increased due to shorter amortization lives for deferrable costs following the adoption of SOP 05-1
of $3, after-tax, and growth in the overall block of business. |
Outlook
Management is committed to selling competitively priced products that meet the Company’s internal
rate of return guidelines and as a result, sales may fluctuate based on the competitive pricing
environment in the marketplace. In 2006, the Company generated strong premium and sales growth due
to the increased scale of the group life and disability operations and the expanded distribution
network for its products and services. During the first quarter of 2007, large national account
sales declined primarily due to a lower number of new case proposals, and the small case
competitive environment remained intense. In addition, there was an anticipated reduction in
association life sales from an unusually high first quarter last year. The Company also announced a
renewal rights arrangement associated with its medical stop loss business. Given these factors and
the sales results for the first quarter, which is the largest sales and renewal quarter in the
segment’s business cycle, the Company is projecting a year over year sales decline and low to
mid-single digit growth in fully insured ongoing premiums. The Company anticipates relatively
stable loss ratios and expense ratios based on
36
underlying trends in the in-force business and
disciplined new business and renewal underwriting. Based on the results to date, the Company has
increased the expected after-tax margins for the full year 2007 as noted below.
Despite the current market conditions, including rising medical costs, the changing regulatory
environment and cost containment pressure on employers, the Company continues to leverage its
strength in claim practices risk management, service and distribution, enabling the Company to
capitalize on market opportunities. Additionally, employees continue to look to the workplace for
a broader and ever expanding array of insurance products. As employers design benefit strategies
to attract and retain employees, while attempting to control their benefit costs, management
believes that the need for the Company’s products will continue to expand. This, combined with the
significant number of employees who currently do not have coverage or adequate levels of coverage,
creates opportunities for our products and services.
Based on results to date, management’s current full year projections are as follows:
| • |
|
Fully insured ongoing premiums (excluding buyout premiums and premium equivalents) of $4.3 billion to $4.4 billion |
| • |
|
Sales (excluding buyout premiums and premium equivalents) of $750 to $800 |
| • |
|
Loss ratio (excluding buyout premiums) between 72% and 74% |
| • |
|
Expense ratio (excluding buyout premiums) between 27% and 29% |
| • |
|
After-tax margin, on premiums and other considerations
(excluding buyout premiums), between 7.1% and 7.5%, which
reflects the estimated impact of adopting SOP 05-1 “Accounting by Insurance Enterprises for Deferred Acquisition Costs
in Connection with Modifications or Exchanges of Insurance Contracts.” |
INTERNATIONAL
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Fee income |
|
$ |
194 |
|
|
$ |
166 |
|
|
|
17 |
% |
Earned premiums |
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
Net investment income |
|
|
33 |
|
|
|
28 |
|
|
|
18 |
% |
Net realized capital losses |
|
|
(18 |
) |
|
|
(14 |
) |
|
|
(29 |
%) |
| |
Total revenues |
|
|
206 |
|
|
|
180 |
|
|
|
14 |
% |
Benefits, losses and loss adjustment expenses |
|
|
8 |
|
|
|
12 |
|
|
|
(33 |
%) |
Insurance operating costs and other expenses |
|
|
55 |
|
|
|
46 |
|
|
|
20 |
% |
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
57 |
|
|
|
49 |
|
|
|
16 |
% |
| |
Total benefits, losses and expenses |
|
|
120 |
|
|
|
107 |
|
|
|
12 |
% |
Income before income taxes |
|
|
86 |
|
|
|
73 |
|
|
|
18 |
% |
Income tax expense |
|
|
32 |
|
|
|
27 |
|
|
|
19 |
% |
| |
Net income |
|
$ |
54 |
|
|
$ |
46 |
|
|
|
17 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management – Japan |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Japan variable annuity assets under management |
|
$ |
31,148 |
|
|
$ |
26,696 |
|
|
|
17 |
% |
Japan MVA fixed annuity assets under management |
|
|
1,723 |
|
|
|
1,545 |
|
|
|
12 |
% |
Total assets under management |
|
$ |
32,871 |
|
|
$ |
28,241 |
|
|
|
16 |
% |
| |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income increased, principally driven by higher fee income in Japan derived from a 16% increase
in assets under management. A more expanded discussion of earnings growth is presented below:
| • |
|
The increase in fee income was mainly a result of growth in Japan’s variable annuity assets under management.
As of March 31, 2007, Japan’s variable annuity assets under management were $31.1 billion, an increase of $4.5
billion or 17% from the prior year period. The increase in assets under management was driven by positive net
flows of $3.6 billion and favorable market appreciation of $894 over the past four quarters. |
| • |
|
The decrease in benefits, losses and loss adjustment expenses by 33% over prior year is due to the unlock of
the GMDB/GMIB reserve in the fourth quarter of 2006, which caused a lower expectation of future benefit claims,
resulting in a lower accrual for such costs. |
Partially offsetting the positive earnings drivers discussed above were the following items:
| • |
|
DAC amortization increased due to higher actual gross profits consistent with the growth in the Japan operation. |
| • |
|
Insurance operating costs and other expenses increased for the quarter ended March 31, 2007 due to the growth
in the Japan operation, as well as the build out of the European operation. |
37
Outlook
Management continues to be optimistic about the growth potential of the retirement savings market
in Japan. Several trends, such as an aging population, longer life expectancies and declining birth
rates leading to a smaller number of younger workers to support each retiree, have resulted in
greater need for an individual to plan and adequately fund retirement savings.
Profitability depends on the account values of our customers, which are affected by equity, bond
and currency markets. Periods of favorable market performance will increase assets under management
and thus increase fee income earned on those assets. In addition, higher account value levels will
generally reduce certain costs for individual annuities to the Company, such as guaranteed minimum
death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”). Expense management is
also an important component of product profitability.
Competition has continued to increase in the Japanese market with the most significant competition
being the strengthening of domestic competitors. This competition has resulted in changes to key
distribution relationships that have negatively impacted current year deposits and could
potentially impact future deposits. The Company continues to focus its efforts on strengthening our
distribution relationships and improving our wholesaling and servicing efforts. In addition, the
Company continues to evaluate product designs that meet customers’ needs while maintaining prudent
risk management. In the first quarter 2007, the Company successfully launched a new variable
annuity product called “3 Win” to complement its existing variable annuity product offerings. The
new product has been favorably received by the market with the new product accounting for 31% of
Japan’s sales in the first quarter, despite the fact that the product was launched in February and
thereby not on the market for the full quarter. New product sales, combined with seasonality of
sales due to the Japanese March 31, fiscal year end, also partially contributed to the significant
increase in sales over the fourth quarter of 2006.
The success of the Company’s enhanced product offerings will ultimately be based on customer
acceptance in an increasingly competitive environment. International continues to invest in its
operations outside of Japan. In the short term, the Company expects short-term losses in
operations outside of Japan in 2007 to be relatively consistent with the 2006 experience.
Based on results to date, management’s full year projections for Japan are as follows (using
¥118/$1 exchange rate for 2007):
| • |
|
Variable annuity deposits of ¥650 billion to ¥825 billion ($5.5 billion to $7.0 billion) |
| • |
|
Variable annuity net flows of ¥380 billion to ¥650 billion ($3.2 billion to $5.5 billion) |
| • |
|
Return on assets of 70 to 74 basis points |
OTHER
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Fee income and other |
|
$ |
17 |
|
|
$ |
20 |
|
|
|
(15 |
%) |
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale and other |
|
|
38 |
|
|
|
37 |
|
|
|
3 |
% |
Equity securities held for trading [1] |
|
|
210 |
|
|
|
454 |
|
|
|
(54 |
%) |
| |
Total net investment income |
|
|
248 |
|
|
|
491 |
|
|
|
(49 |
%) |
Net realized capital gains (losses) |
|
|
50 |
|
|
|
(114 |
) |
|
NM |
| |
Total revenues |
|
|
315 |
|
|
|
397 |
|
|
|
(21 |
%) |
Benefits, losses and loss adjustment expenses [1] |
|
|
243 |
|
|
|
489 |
|
|
|
(50 |
%) |
Insurance operating costs and other expenses |
|
|
25 |
|
|
|
(31 |
) |
|
NM |
Amortization of deferred policy acquisition costs and present value of future profits |
|
|
6 |
|
|
|
(6 |
) |
|
NM |
| |
Total benefits, losses and expenses |
|
|
274 |
|
|
|
452 |
|
|
|
(39 |
%) |
Income (loss) before income taxes |
|
|
41 |
|
|
|
(55 |
) |
|
NM |
Income tax expense (benefit) |
|
|
14 |
|
|
|
(23 |
) |
|
NM |
| |
Net income (loss) |
|
$ |
27 |
|
|
$ |
(32 |
) |
|
NM |
| |
|
|
|
| [1] |
|
Includes investment income and mark-to-market effects of equity securities held for trading
supporting the international variable annuity business, which are classified in net investment
income with corresponding amounts credited to policyholders within benefits, losses and loss
adjustment expenses. |
38
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
For the three months ended March 31, 2007, net income increased $59, from a net loss of $32 for the
three months ended March 31, 2006 due to the following factors:
| • |
|
Net realized capital gains occurred in the first quarter
of 2007 compared to net realized losses in the
corresponding 2006 period due to net gains on sales of
investments in the first quarter of 2007 as compared to
net losses in the comparable 2006 period due to tighter
credit spreads on certain issuers since the date of
security purchase; net gains on the Japanese fixed
annuity contract hedges in the first quarter of 2007 due
to declining Japanese interest rates as compared to net
losses in the comparable 2006 period due to rising
interest rates in Japan; and net gains on GMWB
derivatives in the first quarter of 2007 as compared to
net losses in the comparable 2006 period primarily due
to declines in equity index volatility. |
Partially offsetting the increase:
| • |
|
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 March 31,
2006. This reserve reduction, recorded in insurance
operating costs and other expenses, resulted in an
after-tax benefit of $34 in the quarter ended March 31,
2006. |
| • |
|
Also contributing to the increase in insurance operating
costs and other expenses was $7, after-tax, of interest
charged by Corporate on excess capital of the Life
operations. |
PROPERTY & CASUALTY
Executive Overview
Property & Casualty is organized into four reportable operating segments: the underwriting segments
of Business Insurance, Personal Lines and Specialty Commercial (collectively “Ongoing Operations”);
and the Other Operations segment.
Property & Casualty provides a number of coverages, as well as insurance related services, to
businesses throughout the United States, including workers’ compensation, property, automobile,
liability, umbrella, specialty casualty, marine, livestock, fidelity, surety, professional
liability and directors and officers’ liability coverages. Property & Casualty also provides
automobile, homeowners and home-based business coverage to individuals throughout the United
States.
Property & Casualty derives its revenues principally from premiums earned for insurance coverages
provided to insureds, investment income, and, to a lesser extent, from fees earned for services
provided to third parties and net realized capital gains and losses. Premiums charged for
insurance coverages are earned principally on a pro rata basis over the terms of the related
policies in-force.
Service fees principally include revenues from third party claims administration services provided
by Specialty Risk Services and revenues from member contact center services provided through AARP’s
Health Care Options program.
Total Property & Casualty Financial Highlights
The following discusses Property & Casualty financial highlights for the three months ended March
31, 2007 compared to three months ended March 31, 2006.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Premium revenue |
|
2007 |
|
2006 |
| |
Earned Premiums |
|
$ |
2,623 |
|
|
$ |
2,566 |
|
| |
Earned premiums grew $57, or 2%, primarily due to:
| • |
|
A $29 increase in Business Insurance earned premium due to a $38 increase in small
commercial, partially offset by a $9 decrease in middle market |
| • |
|
A $71 increase in Personal Lines earned premium before considering the sale of
Omni, primarily due to new business outpacing non-renewals over the last nine
months of 2006 and the first three months of 2007 in both auto and homeowners |
| • |
|
Earned pricing increases in Personal Lines homeowners. |
Partially offsetting these favorable drivers were factors that decreased earned premium:
| • |
|
The sale of the Omni non-standard auto business in 2006 which accounted for $39 of
earned premium in the first quarter of 2006 |
| • |
|
Higher property catastrophe treaty reinsurance costs. |
39
The increase in small commercial earned premium was primarily driven by new business outpacing
non-renewals over the last nine months of 2006 and the first three months of 2007, largely for
workers’ compensation business. The decrease in middle market earned premium was principally due
to a decrease in property, commercial auto and general liability earned premium, driven by a
decrease in new business written premium over the last nine months of 2006 and first three months
of 2007 and, to a lesser extent, lower premium renewal retention in the first quarter of 2007.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| Net income |
|
2007 |
|
|
2006 |
|
| |
Underwriting results |
|
$ |
269 |
|
|
$ |
266 |
|
Net servicing and other income [1] |
|
|
11 |
|
|
|
18 |
|
Net investment income |
|
|
413 |
|
|
|
357 |
|
Other expenses |
|
|
(60 |
) |
|
|
(52 |
) |
Net realized capital gains |
|
|
23 |
|
|
|
5 |
|
Income tax expense |
|
|
(195 |
) |
|
|
(170 |
) |
| |
Net income |
|
$ |
461 |
|
|
$ |
424 |
|
| |
|
|
|
| [1] |
|
Net of expenses related to service business. |
Net income increased $37, or 9%, primarily due to:
| • |
|
A $56 increase in net investment income |
| • |
|
An $18 increase in net realized capital gains |
| • |
|
A $13 decrease in current accident year catastrophe losses |
| • |
|
A $12 increase in current accident year underwriting results from earned premium growth,
largely from Personal Lines and small commercial |
| • |
|
An increase in current accident year underwriting results due to the sale of the Omni
non-standard auto business, which generated a $7 underwriting loss in 2006. |
Partially offsetting these favorable drivers were factors reducing net income:
| • |
|
A $25 increase in income tax expense, reflecting an increase in income before income taxes |
| • |
|
A $16 decrease in current accident year underwriting results due to a 0.6 point increase in
the combined ratio before catastrophes and prior accident year development before considering
the sale of Omni |
| • |
|
A $9 increase in net unfavorable prior accident year development |
| • |
|
An $8 increase in other expenses, due primarily to $14 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 legal expenses related to regulatory investigations |
| • |
|
A $7 decrease in net servicing income due to lower income generated by Specialty Risk Services. |
Primarily driving the $56 increase in net investment income was a higher portfolio yield driven by
a change in asset mix (e.g. greater investment in mortgage loans and limited partnerships), a $22
increase in income from limited partnership investments and an increase in interest rates. Also
contributing to the increase was a higher average invested assets base due to positive operating
cash flows. The $18 increase in net realized capital gains was primarily due to an increase in net
realized gains on the sale of investments in fixed maturities and a decrease in
other-than-temporary impairments.
Key Performance Ratios and Measures
The Company considers several measures and ratios to be the key performance indicators for the
property and casualty underwriting businesses. For a detailed discussion of the Company’s key
performance and profitability ratios and measures, see the Property & Casualty Executive Overview
section of the MD&A included in The Hartford’s 2006 Form 10-K Annual Report. The following table
and the segment discussions include the more significant ratios and measures of profitability for
the three months ended March 31, 2007 and 2006. Management believes that these ratios and measures
are useful in understanding the underlying trends in The Hartford’s property and casualty insurance
underwriting business. However, these key performance indicators should only be used in
conjunction with, and not in lieu of, underwriting income for the underwriting segments of Business
Insurance, Personal Lines and Specialty Commercial and net income for the Property & Casualty
business as a whole, Ongoing Operations and Other Operations. These ratios and measures may not be
comparable to other performance measures used by the Company’s competitors.
40
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Ongoing Operations earned premium growth |
|
2007 |
|
2006 |
| |
Business Insurance |
|
|
2 |
% |
|
|
10 |
% |
Personal Lines |
|
|
4 |
% |
|
|
3 |
% |
Specialty Commercial |
|
|
(1 |
%) |
|
|
(18 |
%) |
| |
Total Ongoing Operations |
|
|
2 |
% |
|
|
2 |
% |
| |
|
|
|
|
|
|
|
|
|
Ongoing Operations combined ratio |
|
|
|
|
|
|
|
|
Combined ratio before catastrophes and prior accident year development |
|
|
87.6 |
|
|
|
87.4 |
|
Catastrophe ratio |
|
|
|
|
|
|
|
|
| |
Current year |
|
|
1.1 |
|
|
|
1.6 |
|
Prior years |
|
|
(0.2 |
) |
|
|
(0.7 |
) |
| |
Total catastrophe ratio |
|
|
0.9 |
|
|
|
0.9 |
|
Non-catastrophe prior accident year development |
|
|
0.4 |
|
|
|
0.5 |
|
| |
Combined ratio |
|
|
88.8 |
|
|
|
88.8 |
|
| |
|
|
|
|
|
|
|
|
|
Other Operations net income |
|
$ |
32 |
|
|
$ |
35 |
|
| |
|
|
|
|
|
|
|
|
|
Total Property & Casualty measures of net investment income: |
|
|
|
|
|
|
|
|
| |
Investment yield, after-tax |
|
|
4.4 |
% |
|
|
4.1 |
% |
Average invested assets at cost |
|
$ |
28,798 |
|
|
$ |
26,360 |
|
| |
Ongoing Operations earned premium growth
| • |
|
The lower growth rate in Business Insurance was primarily
attributable to a decrease in new business written premium over
the last nine months of 2006 and first three months of 2007 and,
to a lesser extent, lower premium renewal retention in the first
quarter of 2007. |
| • |
|
The rate of growth in Personal Lines increased slightly, as an
increase in the rate of new business growth in both auto and
homeowners and an increase in premium renewal retention in both
auto and homeowners was largely offset by the effect of the
Company’s exit from the Omni non-standard auto business. Omni,
which was sold in the fourth quarter of 2006, accounted for $39 of
earned premiums in the first quarter of 2006. Before considering
the effect of the sale of Omni, the Personal Lines earned premium
growth rate was 8%. |
| • |
|
The rate of decline in Specialty Commercial earned premium slowed
in 2007, primarily due to a large earned premium decrease in 2006.
The 18% decrease in earned premium in 2006 resulted from a
decrease in earned premium from a single captive insured program
that expired in 2005 and a decrease in specialty property earned
premium as a result of a decline in new business. Specialty
Commercial earned premium decreased slightly in 2007 as a decrease
in property, casualty and other earned premium was largely offset
by an increase in professional liability, fidelity and surety. |
Ongoing Operations combined ratio
The combined ratio was flat, at 88.8, as a 0.2 point increase in the combined ratio before
catastrophes and prior accident year development was offset by a 0.2 point decrease in
non-catastrophe prior accident year development.
| • |
|
The 0.2 point increase in the combined ratio before catastrophes and prior accident year development, from 87.4 to
87.6, was primarily due to an increase in non-catastrophe property loss costs in Business Insurance and Personal Lines,
partially offset by an improved loss and loss adjustment expense ratio in Specialty Commercial and the effect of
exiting the Omni non-standard auto business, which had a significantly higher combined ratio than other business
written by the Company. |
| • |
|
The catastrophe ratio was flat, at 0.9 points, as a decrease in current accident year catastrophes was offset by a
decrease in net favorable reserve development of prior accident year catastrophe losses. In the first quarter of 2006,
the Company recognized $18 of net reserve releases related to the 2005 and 2004 hurricanes. |
| • |
|
Net non-catastrophe prior accident year reserve development was not significant in either 2006 or 2007. |
Other Operations net income
| • |
|
Other Operations reported net income of $32 in 2007 compared to net income of $35 in 2006 as lower underwriting results
and net investment income were partially offset by higher realized capital gains. |
41
Investment yield and average invested assets
| • |
|
The after-tax investment yield increased from 4.1% in 2006 to 4.4% in 2007. The higher average portfolio yield was
primarily driven by shifting a greater share of investments to higher yielding mortgage loans and limited partnerships
and to higher interest rates. |
| • |
|
The average annual invested assets at cost increased as a result of positive operating cash flows and investment income. |
Reserves
Reserving for property and casualty losses is an estimation process. As additional experience and
other relevant claim data become available, reserve levels are adjusted accordingly. Such
adjustments of reserves related to claims incurred in prior years are a natural occurrence in the
loss reserving process and are referred to as “reserve development”. Reserve development that
increases previous estimates of ultimate cost is called “reserve strengthening”. Reserve
development that decreases previous estimates of ultimate cost is called “reserve releases”.
Reserve development can influence the comparability of year over year underwriting results and is
set forth in the paragraphs and tables that follow. The “prior accident year development” in the
following table represents the ratio of reserve development to earned premiums. For a detailed
discussion of the Company’s reserve policies, see Notes 1, 11 and 12 of Notes to Consolidated
Financial Statements and the Critical Accounting Estimates section of the MD&A included in The
Hartford’s 2006 Form 10-K Annual Report.
Based on the results of the quarterly reserve review process, the Company determines the
appropriate reserve adjustments, if any, to record. Recorded reserve estimates are changed after
consideration of numerous factors, including but not limited to, the magnitude of the difference
between the actuarial indication and the recorded reserves, improvement or deterioration of
actuarial indications in the period, the maturity of the accident year, trends observed over the
recent past and the level of volatility within a particular line of business. In general, changes
are made more quickly to more mature accident years and less volatile lines of business. For
information regarding reserving for asbestos and environmental claims within Other Operations,
refer to the Other Operations segment discussion.
As part of its quarterly reserve review process, the Company is closely monitoring reported loss
development in certain lines where the recent emergence of paid losses and case reserves could
indicate a trend that may eventually lead the Company to change its estimate of ultimate losses in
those lines. If, and when, the emergence of reported losses is determined to be a trend that
changes the Company’s estimate of ultimate losses, prior accident year reserves would be adjusted
in the period the change in estimate is made. For example, for Personal Lines homeowners’ claims,
during the latter half of 2006 and the first three months of 2007, there was an increase in
severity in reported losses for recent accident years. While it is too early to tell whether this
increase in severity constitutes a reliable trend, if reported losses continue to emerge
unfavorably in 2007, prior accident year reserves may be strengthened. For Personal Lines auto
liability claims, the Company’s estimates of ultimate losses include assumptions about frequency
and severity trends. These assumptions are updated each quarter as the Company’s actuaries
complete a review of reserves. During 2005 and 2006, these updates resulted in improvements in
estimates of both frequency and severity trends for the 2003 to 2005 accident years and, as a
result, the Company released reserves in the first, second, and fourth quarters of 2006. Auto
liability losses for the 2006 accident year, however, are not emerging as favorably. Accordingly,
further reserve releases for auto liability claims may be less likely.
The Company expects to perform its regular reviews of asbestos liabilities in the second quarter of
2007 and environmental liabilities in the third quarter of 2007. The Company also expects to
perform its regular comprehensive review of Other Operations reinsurance recoverables in the second
quarter of 2007. Consistent with the Company’s long-standing reserve practices, the Company will
continue to review and monitor its reserves in the Other Operations segment regularly. If there
are significant developments that affect particular exposures, reinsurance arrangements or the
financial condition of particular reinsurers, the Company will make adjustments to its reserves, or
the portion of liabilities it expects to cede to reinsurers. In addition, during the second
quarter of 2007, the Company expects to complete a review of its reserves for unallocated loss
adjustment expenses. The Company evaluates the adequacy of the reserves for
unallocated loss adjustment expenses on a company-wide basis. During the second quarter of 2007,
the Company expects to refine its analysis of the reserves at the segment level, which could result
in a reallocation of reserves between segments.
42
A roll forward of liabilities for unpaid losses and loss adjustment expenses by segment for the
three months ended March 31, 2007 for Property & Casualty follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2007 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| |
|
Business |
|
|
Personal |
|
|
Specialty |
|
|
Ongoing |
|
|
Other |
|
|
Property & |
|
| |
|
Insurance |
|
|
Lines |
|
|
Commercial |
|
|
Operations |
|
|
Operations |
|
|
Casualty |
|
| |
Beginning liabilities for unpaid losses and
loss adjustment expenses-gross |
|
$ |
7,794 |
|
|
$ |
1,959 |
|
|
$ |
6,522 |
|
|
$ |
16,275 |
|
|
$ |
5,716 |
|
|
$ |
21,991 |
|
Reinsurance and other recoverables |
|
|
650 |
|
|
|
134 |
|
|
|
2,303 |
|
|
|
3,087 |
|
|
|
1,300 |
|
|
|
4,387 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning liabilities for unpaid losses and
loss adjustment expenses-net |
|
|
7,144 |
|
|
|
1,825 |
|
|
|
4,219 |
|
|
|
13,188 |
|
|
|
4,416 |
|
|
|
17,604 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add provision for unpaid losses and loss
adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
793 |
|
|
|
610 |
|
|
|
250 |
|
|
|
1,653 |
|
|
|
— |
|
|
|
1,653 |
|
Prior year [1] |
|
|
6 |
|
|
|
4 |
|
|
|
(6 |
) |
|
|
4 |
|
|
|
18 |
|
|
|
22 |
|
| |
Total provision for unpaid losses and loss
adjustment expenses |
|
|
799 |
|
|
|
614 |
|
|
|
244 |
|
|
|
1,657 |
|
|
|
18 |
|
|
|
1,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Payments |
|
|
(617 |
) |
|
|
(645 |
) |
|
|
(192 |
) |
|
|
(1,454 |
) |
|
|
(151 |
) |
|
|
(1,605 |
) |
| |
Ending liabilities for unpaid losses and loss
adjustment expenses-net |
|
|
7,326 |
|
|
|
1,794 |
|
|
|
4,271 |
|
|
|
13,391 |
|
|
|
4,283 |
|
|
|
17,674 |
|
Reinsurance and other recoverables |
|
|
635 |
|
|
|
99 |
|
|
|
2,388 |
|
|
|
3,122 |
|
|
|
1,191 |
|
|
|
4,313 |
|
| |
Ending liabilities for unpaid losses and loss
adjustment expenses-gross |
|
$ |
7,961 |
|
|
$ |
1,893 |
|
|
$ |
6,659 |
|
|
$ |
16,513 |
|
|
$ |
5,474 |
|
|
$ |
21,987 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
1,292 |
|
|
$ |
953 |
|
|
$ |
378 |
|
|
$ |
2,623 |
|
|
$ |
— |
|
|
$ |
2,623 |
|
Loss and loss expense paid ratio [2] |
|
|
47.8 |
|
|
|
67.7 |
|
|
|
49.8 |
|
|
|
55.3 |
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred ratio |
|
|
61.8 |
|
|
|
64.5 |
|
|
|
64.1 |
|
|
|
63.1 |
|
|
|
|
|
|
|
|
|
Prior accident year development (pts.) [3] |
|
|
0.5 |
|
|
|
0.5 |
|
|
|
(1.7 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
| [1] |
|
Includes reserve discount accretion of $9, including $4 in Business Insurance, $3 in Specialty Commercial and $2 in Other Operations. |
| |
| [2] |
|
The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums. |
| |
| [3] |
|
“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums. |
Risk Management Strategy
Refer to the MD&A in The Hartford’s 2006 Form 10-K Annual Report for an explanation of Property &
Casualty’s risk management strategy.
Reinsurance Recoverables
Refer to the MD&A in The Hartford’s 2006 Form 10-K Annual Report for an explanation of Property &
Casualty’s reinsurance recoverables.
Premium Measures
Written premium is a statutory accounting financial measure which represents the amount of premiums
charged for policies issued, net of reinsurance, during a fiscal period. Earned premium is a
measure under both GAAP and statutory accounting principles. Premiums are considered earned and
are included in the financial results on a pro rata basis over the policy period. Management
believes that written premium is a performance measure that is useful to investors as it reflects
current trends in the Company’s sale of property and casualty insurance products. Written and
earned premium are recorded net of ceded reinsurance premium. Reinstatement premium represents
additional ceded premium paid for the reinstatement of the amount of reinsurance coverage that was
reduced as a result of a reinsurance loss payment.
Unless otherwise specified, the following discussion speaks to changes in the first quarter of 2007
as compared to the first quarter of 2006.
43
TOTAL PROPERTY & CASUALTY
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Property & Casualty Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Earned premiums |
|
$ |
2,623 |
|
|
$ |
2,566 |
|
|
|
2 |
% |
Net investment income |
|
|
413 |
|
|
|
357 |
|
|
|
16 |
% |
Other revenues [1] |
|
|
118 |
|
|
|
123 |
|
|
|
(4 |
%) |
Net realized capital gains |
|
|
23 |
|
|
|
5 |
|
|
NM |
| |
Total revenues |
|
|
3,177 |
|
|
|
3,051 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
1,653 |
|
|
|
1,628 |
|
|
|
2 |
% |
Prior year |
|
|
22 |
|
|
|
13 |
|
|
|
69 |
% |
| |
Total benefits, losses and loss adjustment expenses |
|
|
1,675 |
|
|
|
1,641 |
|
|
|
2 |
% |
Amortization of deferred policy acquisition costs |
|
|
528 |
|
|
|
518 |
|
|
|
2 |
% |
Insurance operating costs and expenses |
|
|
151 |
|
|
|
141 |
|
|
|
7 |
% |
Other expenses |
|
|
167 |
|
|
|
157 |
|
|
|
6 |
% |
| |
Total benefits, losses and expenses |
|
|
2,521 |
|
|
|
2,457 |
|
|
|
3 |
% |
Income before income taxes |
|
|
656 |
|
|
|
594 |
|
|
|
10 |
% |
Income tax expense |
|
|
195 |
|
|
|
170 |
|
|
|
15 |
% |
| |
Net income [2] |
|
$ |
461 |
|
|
$ |
424 |
|
|
|
9 |
% |
| |
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing Operations |
|
$ |
429 |
|
|
$ |
389 |
|
|
|
10 |
% |
Other Operations |
|
|
32 |
|
|
|
35 |
|
|
|
(9 |
%) |
| |
Total Property & Casualty net income |
|
$ |
461 |
|
|
$ |
424 |
|
|
|
9 |
% |
| |
|
|
|
| [1] |
|
Primarily servicing revenue. |
| |
| [2] |
|
Includes net realized capital gains, after-tax, of $15 and $3 for the three months ended March 31, 2007 and 2006, respectively. |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income increased $37, or 9%, as a result of a $40 increase in Ongoing Operations’ net income,
partially offset by a $3 decrease in Other Operations’ net income. See the Ongoing Operations and
Other Operations segment MD&A discussions for an analysis of the underwriting results and
investment performance driving the change in net income.
ONGOING OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Written Premiums [1] |
|
Earned Premiums [1] |
| |
|
Three Months Ended |
|
Three Months Ended |
| |
|
March 31, |
|
March 31, |
| Premiums |
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
| |
Business Insurance |
|
$ |
1,298 |
|
|
$ |
1,302 |
|
|
|
— |
|
|
$ |
1,292 |
|
|
$ |
1,263 |
|
|
|
2 |
% |
Personal Lines |
|
|
939 |
|
|
|
901 |
|
|
|
4 |
% |
|
|
953 |
|
|
|
919 |
|
|
|
4 |
% |
Specialty Commercial |
|
|
385 |
|
|
|
426 |
|
|
|
(10 |
%) |
|
|
378 |
|
|
|
383 |
|
|
|
(1 |
%) |
| |
Total Ongoing Operations |
|
$ |
2,622 |
|
|
$ |
2,629 |
|
|
|
— |
|
|
$ |
2,623 |
|
|
$ |
2,565 |
|
|
|
2 |
% |
| |
|
|
|
| [1] |
|
The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Earned Premiums
Total Ongoing Operations’ earned premiums grew $58, or 2%, due to growth in Business Insurance and
Personal Lines, partially offset by a decrease in Specialty Commercial.
| • |
|
Earned premium grew $29, or 2%, in Business Insurance, primarily
due to a $38 increase in small commercial, partially offset by a
$9 decrease in middle market. The increase in small commercial
earned premium was primarily driven by new business outpacing
non-renewals over the last nine months of 2006 and the first three
months of 2007, largely for workers’ compensation business. The
decrease in middle market earned premium was principally due to a
decrease in property, commercial auto and general liability earned
premium, driven by a decrease in new business written premium over
the last nine months of 2006 and first three months of 2007 and,
to a lesser extent, lower premium renewal retention in the first
quarter of 2007. |
| • |
|
Earned premium grew $34, or 4%, in Personal Lines, primarily due
to new business outpacing non-renewals over the last nine months
of 2006 and the first three months of 2007 in both auto and
homeowners. 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 $39 of earned premium in the
first quarter of 2006. Before considering the sale of Omni,
earned premiums grew $71, or 8%. |
44
| • |
|
Specialty Commercial earned premium decreased by $5, or 1%,
primarily driven by a decrease in property, casualty and other
earned premiums, largely offset by an increase in professional
liability, fidelity and surety. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Underwriting Summary |
|
2007 |
|
2006 |
|
Change |
| |
Written premiums |
|
$ |
2,622 |
|
|
$ |
2,629 |
|
|
|
— |
|
Change in unearned premium reserve |
|
|
(1 |
) |
|
|
64 |
|
|
NM |
| |
Earned premiums |
|
|
2,623 |
|
|
|
2,565 |
|
|
|
2 |
% |
Benefits, losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
1,653 |
|
|
|
1,628 |
|
|
|
2 |
% |
Prior year |
|
|
4 |
|
|
|
(6 |
) |
|
NM |
| |
Total benefits, losses and loss adjustment expenses |
|
|
1,657 |
|
|
|
1,622 |
|
|
|
2 |
% |
Amortization of deferred policy acquisition costs |
|
|
528 |
|
|
|
518 |
|
|
|
2 |
% |
Insurance operating costs and expenses |
|
|
145 |
|
|
|
138 |
|
|
|
5 |
% |
| |
Underwriting results |
|
|
293 |
|
|
|
287 |
|
|
|
2 |
% |
Net servicing income [1] |
|
|
11 |
|
|
|
18 |
|
|
|
(39 |
%) |
Net investment income |
|
|
351 |
|
|
|
291 |
|
|
|
21 |
% |
Net realized capital gains |
|
|
17 |
|
|
|
5 |
|
|
NM |
Other expenses |
|
|
(60 |
) |
|
|
(53 |
) |
|
|
(13 |
%) |
Income tax expense |
|
|
(183 |
) |
|
|
(159 |
) |
|
|
(15 |
%) |
| |
Net income |
|
$ |
429 |
|
|
$ |
389 |
|
|
|
10 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
63.0 |
|
|
|
63.4 |
|
|
|
0.4 |
|
Prior year |
|
|
0.2 |
|
|
|
(0.2 |
) |
|
|
(0.4 |
) |
| |
Total loss and loss adjustment expense ratio |
|
|
63.1 |
|
|
|
63.3 |
|
|
|
0.2 |
|
Expense ratio |
|
|
25.5 |
|
|
|
25.4 |
|
|
|
(0.1 |
) |
Policyholder dividend ratio |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
— |
|
| |
Combined ratio |
|
|
88.8 |
|
|
|
88.8 |
|
|
|
— |
|
| |
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
1.1 |
|
|
|
1.6 |
|
|
|
0.5 |
|
Prior year |
|
|
(0.2 |
) |
|
|
(0.7 |
) |
|
|
(0.5 |
) |
| |
Total catastrophe ratio |
|
|
0.9 |
|
|
|
0.9 |
|
|
|
— |
|
Combined ratio before catastrophes |
|
|
87.9 |
|
|
|
87.9 |
|
|
|
— |
|
Combined ratio before catastrophes and prior accident year development |
|
|
87.6 |
|
|
|
87.4 |
|
|
|
(0.2 |
) |
| |
|
|
|
| [1] |
|
Net of expenses related to service business. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Current accident year loss and loss adjustment expense ratio |
|
2007 |
|
2006 |
|
Change |
| |
Current accident year loss and loss adjustment expense ratio before catastrophes |
|
|
61.9 |
|
|
|
61.9 |
|
|
|
— |
|
Current accident year catastrophe ratio |
|
|
1.1 |
|
|
|
1.6 |
|
|
|
0.5 |
|
| |
Current accident year loss and loss adjustment expense ratio |
|
|
63.0 |
|
|
|
63.4 |
|
|
|
0.4 |
|
| |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income and operating ratios
Net income increased $40, or 10%, primarily due to:
| • |
|
A $60 increase in net investment income |
| • |
|
A $12 increase in net realized capital gains |
| • |
|
A $6 increase in underwriting results. |
Partially offsetting these improvements in net income were the following factors:
| • |
|
A $24 increase in income tax expense, reflecting an increase in income before income taxes |
| • |
|
A $7 decrease in net servicing income due to lower income generated by Specialty Risk Services |
| • |
|
A $7 increase in other expenses, due primarily to $14 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 legal expenses related to regulatory investigations. |
Primarily driving the $60 increase in net investment income was a higher portfolio yield driven by
a change in asset mix (e.g. greater investment in mortgage loans and limited partnerships), a $22
increase in income from limited partnership investments and an increase in interest rates. Also
contributing to the increase was a higher average invested assets base due to positive operating
cash flows. The
45
$12 increase in net realized capital gains was primarily due to an increase in net realized gains
on the sale of investments in fixed maturities and a decrease in other-than-temporary impairments.
Underwriting results increased by $6, from $287 to $293, due to:
| |
|
|
|
|
Lower current accident year catastrophe losses |
|
$ |
13 |
|
Increase in current accident year underwriting results before catastrophes |
|
|
3 |
|
Change to net unfavorable prior accident year development |
|
|
(10 |
) |
| |
Increase in underwriting results from 2006 to 2007 |
|
$ |
6 |
|
| |
| |
|
Lower current accident year catastrophe losses |
| |
| |
|
Current accident year catastrophe losses decreased from $41 in 2006 to $28 in 2007. Current
accident year catastrophe losses in 2006 included losses from tornadoes and wind storms in the
mid-west and winter storms in the northeast. Current accident year catastrophe losses in 2007
included losses from winter storms in the west and mid-west and tornadoes and thunderstorms in
the southeast. |
| |
| |
|
Increase in current accident year underwriting results before catastrophes |
| |
| |
|
The $3 increase in current accident year underwriting results before catastrophes was primarily
due to: |
| |
|
|
|
|
Before considering the sale of Omni, a $95 increase in earned premium at a combined ratio less
than 100.0 |
|
$ |
12 |
|
Underwriting loss incurred on Omni non-standard business in 2006 not recurring due to the sale
of the business in the fourth quarter of 2006 |
|
|
7 |
|
An increase in the combined ratio before catastrophes and prior accident year development,
excluding the effect of Omni |
|
|
(16 |
) |
| |
Increase in current accident year underwriting results before catastrophes from 2006 to 2007 |
|
$ |
3 |
|
| |
| |
|
The $12 increase in current accident year underwriting results before catastrophes that was
attributable to an increase in earned premium was generated by earned premium increases in
Personal Lines and small commercial, partially offset by earned premium decreases in middle
market and Specialty Commercial. |
| |
| |
|
The combined ratio before catastrophes and prior accident year development increased by 0.2
points, from 87.4 to 87.6. Because the Omni non-standard auto business had a higher combined
ratio than other businesses, exiting from the Omni business improved underwriting results and
significantly offset the increase in the combined ratio before catastrophes and prior accident
year development. Apart from the effect that the Omni business had on the ratio in 2006, the
combined ratio before catastrophes and prior accident year development increased by 0.7 points,
from 86.9 to 87.6, resulting in a $16 decrease in current accident year underwriting results
before catastrophes. The 0.7 point increase in the combined ratio before catastrophes and
prior accident year development was primarily driven by a 0.5 point increase in the current
accident year loss and loss adjustment expense ratio before catastrophes, to 61.9, and a 0.2
point increase in the expense ratio, to 25.5. |
| |
• |
|
Apart from the effect that the Omni business had on the ratio in 2006, the current
accident year loss and loss adjustment expense ratio before catastrophes increased by 0.5
points as the effect of a higher current accident year loss and loss adjustment expense
ratio before catastrophes in Business Insurance and Personal Lines was partially offset by
an improvement in Specialty Commercial. |
| |
• |
|
The increase in the current accident year loss and loss adjustment expense ratio
before catastrophes in Business Insurance was primarily due to higher non-catastrophe
property loss costs, driven by increasing claim frequency and severity and earned
pricing decreases in middle market. |
| |
| |
• |
|
The increase in the current accident year loss and loss adjustment expense ratio
before catastrophes in Personal Lines was primarily due to higher non-catastrophe
property loss costs. The increase in Personal Lines non-catastrophe property loss costs
was primarily driven by increasing claim frequency and severity in homeowners and auto
physical damage. |
| |
| |
• |
|
The improved current accident year loss and loss adjustment expense ratio before
catastrophes in Specialty Commercial was largely due to lower non-catastrophe property
loss costs on specialty property business and a lower loss and loss adjustment expense
ratio for professional liability business, partially offset by higher loss costs for
specialty casualty business. |
| |
• |
|
The expense ratio increased slightly, to 25.5, due largely to lower ceding commissions
for professional liability business, the effect of earned premium growth and higher IT
costs for Business Insurance, partially offset by an increase in Florida Citizens
recoupments from policyholders and lower IT costs in Personal lines. |
| |
|
Change to net unfavorable prior accident year development |
| |
| |
|
There were no significant prior accident year reserve developments in 2007. Net favorable
prior accident year reserve development of $6 in 2006 primarily included an $18 release of
catastrophe loss reserves for the 2004 and 2005 hurricanes and a |
46
| |
|
$31 release of Personal Lines
auto liability reserves for accident year 2005, partially offset by a $30 strengthening of
Personal Lines auto liability reserves for claims with exposure in excess of policy limits and
other reserve increases. |
BUSINESS INSURANCE
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Written Premiums [1] |
|
Earned Premiums [1] |
| |
|
Three Months Ended |
|
Three Months Ended |
| |
|
March 31, |
|
March 31, |
| Premiums |
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
| |
Small Commercial |
|
$ |
740 |
|
|
$ |
721 |
|
|
|
3 |
% |
|
$ |
681 |
|
|
$ |
643 |
|
|
|
6 |
% |
Middle Market |
|
|
558 |
|
|
|
581 |
|
|
|
(4 |
%) |
|
|
611 |
|
|
|
620 |
|
|
|
(1 |
%) |
| |
Total |
|
$ |
1,298 |
|
|
$ |
1,302 |
|
|
|
— |
|
|
$ |
1,292 |
|
|
$ |
1,263 |
|
|
|
2 |
% |
| |
|
|
|
| [1] |
|
The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
| |
|
|
|
|
|
|
|
|
| Premium Measures |
|
2007 |
|
2006 |
| |
Policies in-force |
|
|
|
|
|
|
|
|
Small Commercial |
|
|
1,005,879 |
|
|
|
941,265 |
|
Middle Market |
|
|
105,641 |
|
|
|
104,159 |
|
| |
Total policies in-force end of period |
|
|
1,111,520 |
|
|
|
1,045,424 |
|
| |
|
|
|
|
|
|
|
|
|
New business premium |
|
|
|
|
|
|
|
|
Small Commercial |
|
$ |
129 |
|
|
$ |
149 |
|
Middle Market |
|
$ |
106 |
|
|
$ |
112 |
|
| |
Premium Renewal Retention |
|
|
|
|
|
|
|
|
Small Commercial |
|
|
85 |
% |
|
|
87 |
% |
Middle Market |
|
|
79 |
% |
|
|
81 |
% |
| |
|
|
|
|
|
|
|
|
|
Written Pricing Increase (Decrease) |
|
|
|
|
|
|
|
|
Small Commercial |
|
|
(1 |
%) |
|
|
— |
|
Middle Market |
|
|
(4 |
%) |
|
|
(4 |
%) |
| |
|
|
|
|
|
|
|
|
|
Earned Pricing Increase (Decrease) |
|
|
|
|
|
|
|
|
Small Commercial |
|
|
— |
|
|
|
2 |
% |
Middle Market |
|
|
(5 |
%) |
|
|
(5 |
%) |
| |
47
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Earned Premiums
Earned premiums for Business Insurance increased $29, primarily due to new business premium
outpacing non-renewals in small commercial over the last nine months of 2006 and first three months
of 2007. Partially offsetting the growth was the effect of middle market earned pricing decreases,
a decrease in middle market new business over the last nine months of 2006 and first three months
of 2007 and higher property catastrophe treaty reinsurance costs.
| • |
|
Small commercial earned premium grew $38, driven primarily by
earned premium growth in workers’ compensation. Premium renewal
retention for small commercial decreased primarily due to a
decrease in retention on workers’ compensation and commercial auto
business. New business written premium for small commercial
decreased by $20, or 13%, for the first three months of 2007 due
to lower production of new workers’ compensation and package
business and, to a lesser extent, commercial auto business.
While the Company has increased the number of appointed
agents to expand writings in certain territories, actions taken by
some of the Company’s competitors to increase market share and
business appetite may be contributing to the Company’s lower new
business growth. Also contributing to the decrease in new
business premium was the trend to writing more liability-only
policies and to writing a greater percentage of new business for
commercial auto policies with lower policy limits. |
| • |
|
Middle market earned premium decreased by $9, primarily due to a
decrease in property, commercial auto and general liability,
partially offset by an increase in marine business. Premium
renewal retention for middle market decreased primarily due to a
decrease in retention on workers’ compensation and commercial
marine business. In response to increased competition, management
continues to focus heavily on premium renewal retention. New
business written premium for middle market decreased by $6, or 5%,
for the first three months of 2007, primarily due to a decrease in
property, commercial auto, general liability and marine new
business, partially offset by an increase in workers’ compensation
new business. |
As written premium is earned over the 12-month term of the policies, the earned pricing changes
during the first three months of 2007 were primarily a reflection of the written pricing changes
over the last nine months of 2006 and the first three months of 2007.
48
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Underwriting Summary |
|
2007 |
|
2006 |
|
Change |
| |
Written premiums |
|
$ |
1,298 |
|
|
$ |
1,302 |
|
|
|
— |
|
Change in unearned premium reserve |
|
|
6 |
|
|
|
39 |
|
|
|
(85 |
%) |
| |
Earned premiums |
|
|
1,292 |
|
|
|
1,263 |
|
|
|
2 |
% |
Benefits, losses and loss adjustment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
793 |
|
|
|
767 |
|
|
|
3 |
% |
Prior year |
|
|
6 |
|
|
|
10 |
|
|
|
(40 |
%) |
| |
Total benefits, losses and loss adjustment expenses |
|
|
799 |
|
|
|
777 |
|
|
|
3 |
% |
Amortization of deferred policy acquisition costs |
|
|
297 |
|
|
|
292 |
|
|
|
2 |
% |
Insurance operating costs and expenses |
|
|
72 |
|
|
|
60 |
|
|
|
20 |
% |
| |
Underwriting results |
|
$ |
124 |
|
|
$ |
134 |
|
|
|
(7 |
%) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
61.4 |
|
|
|
60.8 |
|
|
|
(0.6 |
) |
Prior year |
|
|
0.5 |
|
|
|
0.8 |
|
|
|
0.3 |
|
| |
Total loss and loss adjustment expense ratio |
|
|
61.8 |
|
|
|
61.5 |
|
|
|
(0.3 |
) |
Expense ratio |
|
|
28.3 |
|
|
|
27.7 |
|
|
|
(0.6 |
) |
Policyholder dividend ratio |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
— |
|
| |
Combined ratio |
|
|
90.4 |
|
|
|
89.4 |
|
|
|
(1.0 |
) |
| |
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current year |
|
|
0.9 |
|
|
|
1.2 |
|
|
|
0.3 |
|
Prior year |
|
|
(0.1 |
) |
|
|
0.5 |
|
|
|
0.6 |
|
| |
Total catastrophe ratio |
|
|
0.7 |
|
|
|
1.7 |
|
|
|
1.0 |
|
| |
Combined ratio before catastrophes |
|
|
89.6 |
|
|
|
87.7 |
|
|
|
(1.9 |
) |
Combined ratio before catastrophes and prior accident year development |
|
|
89.1 |
|
|
|
87.4 |
|
|
|
(1.7 |
) |
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Current accident year loss and loss adjustment expense ratio |
|
2007 |
|
2006 |
|
Change |
| |
Current accident year loss and loss adjustment expense ratio before catastrophes |
|
|
60.5 |
|
|
|
59.6 |
|
|
|
(0.9 |
) |
Current accident year catastrophe ratio |
|
|
0.9 |
|
|
|
1.2 |
|
|
|
0.3 |
|
| |
Current accident year loss and loss adjustment expense ratio |
|
|
61.4 |
|
|
|
60.8 |
|
|
|
(0.6 |
) |
| |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Underwriting results and ratios
Underwriting results decreased by $10, with a corresponding 1.0 point increase in the combined
ratio, to 90.4. The net decrease in underwriting results was principally driven by the following
factors:
| |
|
|
|
|
Decrease in current accident year underwriting results before catastrophes |
|
$ |
(17 |
) |
Decrease in net unfavorable prior accident year development |
|
|
4 |
|
Lower current accident year catastrophe losses |
|
|
3 |
|
| |
Decrease in underwriting results from 2006 to 2007 |
|
$ |
(10 |
) |
| |
| |
|
Decrease in current accident year underwriting results before catastrophes |
| |
| |
|
The $17 decrease in current accident year underwriting results before catastrophes was primarily
due to: |
| |
|
|
|
|
|
|
| |
|
An increase in the combined ratio before catastrophes and prior accident year development |
|
$ |
(21 |
) |
| |
|
A $29 increase in earned premium at a combined ratio less than 100.0 |
|
|
4 |
|
| |
|
|
| |
|
Decrease in current accident year underwriting results before catastrophes from 2006 to 2007 |
|
$ |
(17 |
) |
| |
|
|
| |
|
The combined ratio before catastrophes and prior accident year development increased by 1.7
points, from 87.4 to 89.1, resulting in a $21 decrease in current accident year underwriting
results before catastrophes. The 1.7 point increase in the combined ratio before catastrophes
and prior accident year development was primarily driven by a 0.9 point increase in the current
accident year loss and loss adjustment expense ratio before catastrophes and a 0.6 point
increase in the expense ratio. |
| |
• |
|
Before catastrophes, the current accident year loss and loss adjustment expense ratio
increased by 0.9 points, to 60.5, primarily due to earned pricing decreases in middle
market and an increase in non-catastrophe property loss costs in middle market and small
commercial, driven by increasing claim frequency and severity. |
| |
| |
• |
|
The expense ratio increased by 0.6 points, due, in part, to an increase in IT costs. |
49
The $4 increase in current accident year underwriting results before catastrophes attributable to
an increase in earned premium was generated by earned premium increases in small commercial,
partially offset by earned premium decreases in middle market.
Outlook
With no written premium growth in the first quarter of 2007, management expects the Business
Insurance segment will achieve no written premium growth for the 2007 full year. In small
commercial, the Company expects to generate 2% to 5% written premium growth in 2007 as it further
increases the number of appointed agents and seeks to increase the flow of new business from its
agents. In addition, small commercial expects to increase written premium by expanding its
underwriting appetite, refining its pricing models and upgrading product features. To support the
expected increase in premium writings, small commercial continues to build a low-cost operating
model that is scalable for further expansion.
Within middle market, the Company expects written premium to decrease 2% to 5% as the Company takes
a disciplined approach to evaluating and pricing risks in the face of declines in written pricing.
Nevertheless, the Company will seek to increase its market share in a number of regions where the
Company is currently under-represented. To generate growth in commercial auto and property
business, the Company has been developing new underwriting and pricing models. In 2007, the
Company continues to focus on renewal retention, particularly in the mid-Western states, where
competition is expected to be particularly strong. Written pricing has been affected by increased
competition as evidenced by 1% written pricing decreases in small commercial and 4% written pricing
decreases in middle market during the first quarter of 2007. New business has declined in small
commercial due to increased competition while new business has declined in middle market due to
increased competition and written pricing decreases.
During the first quarter of 2007, non-catastrophe property loss costs increased, driven by higher
claim severity in middle market and small commercial, and, to a lesser extent, higher claim
frequency in middle market. Management expects loss costs to continue to increase for the
remainder of 2007 as a change in trend from the favorable non-catastrophe loss costs experienced
over the past couple of years. Based on anticipated trends in earned pricing and loss costs, the
combined ratio before catastrophes and prior accident year development is expected to be in the
range of 88.5 to 91.5 in 2007. The combined ratio before catastrophes and prior accident year
development was 89.1 in the first quarter of 2007 and 87.7 for the 2006 full year.
To summarize, management’s outlook in Business Insurance for the 2007 full year is:
| • |
|
No written premium growth as growth of 2% to 5% in small commercial is expected to be offset by a 2% to 5% decline in
middle market |
| • |
|
A combined ratio before catastrophes and prior accident year development of 88.5 to 91.5 |
50
PERSONAL LINES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Written Premiums [1] |
|
Earned Premiums [1] |
| |
|
Three Months Ended |
|
Three Months Ended |
| |
|
March 31, |
|
March 31, |
| Premiums |
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
| |
Business Unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AARP |
|
$ |
650 |
|
|
$ |
589 |
|
|
|
10 |
% |
|
$ |
653 |
|
|
$ |
595 |
|
|
|
10 |
% |
Agency |
|
|
269 |
|
|
|
250 |
|
|
|
8 |
% |
|
|
277 |
|
|
|
258 |
|
|
|
7 |
% |
Other |
|
|
20 |
|
|
|
62 |
|
|
|
(68 |
%) |
|
|
23 |
|
|
|
66 |
|
|
|
(65 |
%) |
| |
Total |
|
$ |
939 |
|
|
$ |
901 |
|
|
|
4 |
% |
|
$ |
953 |
|
|
$ |
919 |
|
|
|
4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
$ |
699 |
|
|
$ |
690 |
|
|
|
1 |
% |
|
$ |
693 |
|
|
$ |
686 |
|
|
|
1 |
% |
Homeowners |
|
|
240 |
|
|
|
211 |
|
|
|
14 |
% |
|
|
260 |
|
|
|
233 |
|
|
|
12 |
% |
| |
Total |
|
$ |
939 |
|
|
$ |
901 |
|
|
|
4 |
% |
|
$ |
953 |
|
|
$ |
919 |
|
|
|
4 |
% |
| |
|
|
|
| [1] |
|
The difference between written premiums and earned premiums is attributable to the change in unearned premium reserve. |
| |
|
|
|
|
|
|
|
|
| Premium Measures |
|
2007 |
|
2006 |
| |
Policies in-force |
|
|
|
|
|
|
|
|
Automobile |
|
|
2,313,512 |
|
|
|
2,252,977 |
|
Homeowners |
|
|
1,478,797 |
|
|
|
1,396,102 |
|
| |
Total policies in-force end of period |
|
|
3,792,309 |
|
|
|
3,649,079 |
|
| |
|
|
|
|
|
|
|
|
|
New business premium |
|
|
|
|
|
|
|
|
Automobile |
|
$ |
117 |
|
|
$ |
109 |
|
Homeowners |
|
$ |
37 |
|
|
$ |
32 |
|
| |
|
|
|
|
|
|
|
|
|
Premium Renewal Retention |
|
|
|
|
|
|
|
|
Automobile |
|
|
89 |
% |
|
|
86 |
% |
Homeowners |
|
|
100 |
% |
|
|
94 |
% |
| |
|
|
|
|
|
|
|
|
|
Written Pricing Increase (Decrease) |
|
|
|
|
|
|
|
|
Automobile |
|
|
— |
|
|
|
— |
|
Homeowners |
|
|
8 |
% |
|
|
4 |
% |
| |
|
|
|
|
|
|
|
|
|
Earned Pricing Increase (Decrease) |
|
|
|
|
|
|
|
|
Automobile |
|
|
(1 |
%) |
|
|
— |
|
Homeowners |
|
|
6 |
% |
|
|
5 |
% |
| |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Earned Premiums
Earned premiums increased $34, due primarily to earned premium growth in both AARP and Agency,
partially offset by a reduction in Other earned premium.
| • |
|
AARP earned premium grew $58, reflecting growth in the size of the
AARP target market and the effect of direct marketing programs to
increase premium writings in both auto and homeowners. |
| • |
|
Agency earned premium grew $19 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 29 states with four distinct package offerings. |
| • |
|
Other earned premium decreased by $43, primarily due to the sale
of Omni on November 30, 2006 and a strategic decision to reduce
other affinity business. Omni accounted for $39 of earned premium
in 2006. |
The earned premium growth in AARP and Agency during the first three months of 2007 was primarily
due to auto and homeowners’ new business written premium outpacing non-renewals in the last nine
months of 2006 and first three months of 2007 and to earned pricing increases in homeowners’
business.
Auto earned premium grew $7, or 1%, primarily from new business outpacing non-renewals in both AARP
and Agency over the last nine months of 2006 and the first three months of 2007, partially offset
by a decline in other earned premium as a result of the sale of Omni. Before considering the
decline in other auto business, auto earned premium grew $49, or 8%. Homeowners’ earned premium
grew $27, or 12%, primarily due to new business outpacing non-renewals in both AARP and Agency
business over the last nine months of 2006 and the first three months of 2007 and due to earned
pricing increases. Consistent with the growth in earned premium,
51
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.
Auto new business written premium increased by $8, or 7%, to $117 in 2007. The increase in auto
new business written premium was primarily due to an increase in AARP and Agency new business,
partially offset by a decrease in other new business as a result of the sale of Omni. Before
considering the decline in other auto business, auto new business
grew $19, or 19%. Homeowners’
new business written premium increased by $5, or 16%, to $37 in 2007. The increase in homeowners’
new business written premium was due to an increase in AARP new business .
Premium renewal retention for auto increased from 86% in 2006 to 89% in 2007, primarily due to
the sale of the Omni non-standard auto business, which had a lower premium renewal retention than
the Company’s standard auto business. Premium renewal retention for homeowners increased from 94%
in 2006 to 100% in 2007, primarily due to an increase in the retention of both AARP and Agency
business.
The trend in earned pricing during 2007 was a reflection of the written pricing changes in the last
nine months of 2006 and the first three 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 continues to increase due to rate and insurance to value increases.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Three Months Ended |
|
|
| |
|
|
|
|
|
March 31, |
|
|
| Underwriting Summary |
|
2007 |
|
2006 |
|
Change |
| |
Written premiums |
|
$ |
939 |
|
|
$ |
901 |
|
|
|
4 |
% |
Change in unearned premium reserve |
|
|
(14 |
) |
|
|
(18 |
) |
|
|
(22 |
%) |
| |
Earned premiums |
|
|
953 |
|
|
|
919 |
|
|
|
4 |
% |
Benefits, losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
610 |
|
|
|
589 |
|
|
|
4 |
% |
Prior year |
|
|
4 |
|
|
|
14 |
|
|
|
(71 |
%) |
| |
Total benefits, losses and loss adjustment expenses |
|
|
614 |
|
|
|
603 |
|
|
|
2 |
% |
Amortization of deferred policy acquisition costs |
|
|
152 |
|
|
|
153 |
|
|
|
(1 |
%) |
Insurance operating costs and expenses |
|
|
57 |
|
|
|
57 |
|
|
|
— |
|
| |
Underwriting results |
|
$ |
130 |
|
|
$ |
106 |
|
|
|
23 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
64.0 |
|
|
|
64.0 |
|
|
|
— |
|
Prior year |
|
|
0.5 |
|
|
|
1.5 |
|
|
|
1.0 |
|
| |
Total loss and loss adjustment expense ratio |
|
|
64.5 |
|
|
|
65.6 |
|
|
|
1.1 |
|
Expense ratio |
|
|
21.9 |
|
|
|
22.9 |
|
|
|
1.0 |
|
| |
Combined ratio |
|
|
86.4 |
|
|
|
88.5 |
|
|
|
2.1 |
|
| |
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
1.8 |
|
|
|
2.6 |
|
|
|
0.8 |
|
Prior year |
|
|
— |
|
|
|
0.6 |
|
|
|
0.6 |
|
| |
Total catastrophe ratio |
|
|
1.8 |
|
|
|
3.2 |
|
|
|
1.4 |
|
| |
Combined ratio before catastrophes |
|
|
84.6 |
|
|
|
85.3 |
|
|
|
0.7 |
|
Combined ratio before catastrophes and prior accident year development |
|
|
84.1 |
|
|
|
84.4 |
|
|
|
0.3 |
|
Other revenues [1] |
|
$ |
36 |
|
|
$ |
33 |
|
|
|
9 |
% |
| |
|
|
|
| [1] |
|
Represents servicing revenue. |
52
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Current accident year loss and loss adjustment expense ratio |
|
2007 |
|
2006 |
|
Change |
| |
Current accident year loss and loss adjustment expense ratio before catastrophes |
|
|
62.2 |
|
|
|
61.5 |
|
|
|
(0.7 |
) |
Current accident year catastrophe ratio |
|
|
1.8 |
|
|
|
2.6 |
|
|
|
0.8 |
|
| |
Current accident year loss and loss adjustment expense ratio |
|
|
64.0 |
|
|
|
64.0 |
|
|
|
— |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Combined Ratios |
|
2007 |
|
2006 |
|
Change |
| |
Automobile |
|
|
90.7 |
|
|
|
93.2 |
|
|
|
2.5 |
|
Homeowners |
|
|
74.8 |
|
|
|
74.5 |
|
|
|
(0.3 |
) |
| |
Total |
|
|
86.4 |
|
|
|
88.5 |
|
|
|
2.1 |
|
| |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Underwriting results and ratios
Underwriting results increased by $24, with a corresponding 2.1 point decrease in the combined
ratio, to 86.4. The increase in underwriting results was principally driven by the following
factors:
| |
|
|
|
|
Decrease in net unfavorable prior accident year development |
|
$ |
10 |
|
Increase in current accident year underwriting results before catastrophes |
|
|
8 |
|
Decrease in current accident year catastrophe losses |
|
|
6 |
|
| |
Increase in underwriting results from 2006 to 2007 |
|
$ |
24 |
|
| |
| |
|
Decrease in net unfavorable prior accident year development |
| |
| |
|
There were no significant prior accident year reserve developments in 2007. Net unfavorable
prior accident year reserve development of $14 in 2006 included a $30 strengthening of reserves
for personal auto liability claims due to an increase in estimated severity on claims where the
Company may be exposed to losses in excess of policy limits and a $13 increase in reserves for
hurricanes Katrina and Wilma, partially offset by a $31 reduction in reserves for personal auto
liability claims related to accident year 2005 as a result of better than expected frequency
trends on these claims. |
| |
| |
|
Increase in current accident year underwriting results before catastrophes |
| |
| |
|
The $8 improvement in current accident year underwriting results before catastrophes was
primarily due to: |
| |
|
|
|
|
|
|
| |
|
Before considering the sale of Omni, a $71 increase in earned premium at a combined ratio less than 100.0 |
|
$ |
12 |
|
| |
|
Underwriting loss incurred on Omni non-standard business in 2006 not recurring due to the sale of the
business in the fourth quarter of 2006 |
|
|
7 |
|
| |
|
An increase in the combined ratio before catastrophes and prior accident year development, excluding the
effect of Omni |
|
|
(11 |
) |
| |
|
|
| |
|
Increase in current accident year underwriting results before catastrophes from 2006 to 2007 |
|
$ |
8 |
|
| |
|
|
| |
|
The combined ratio before catastrophes and prior accident year development decreased by 0.3
points, from 84.4 to 84.1, primarily because of the sale of Omni which had a higher combined
ratio before catastrophes and prior accident year development than other business in the
Personal Lines segment. Excluding the effect of Omni, the combined ratio before catastrophes
and prior accident year development increased by 1.3 points, from 82.8 to 84.1, resulting in an
$11 decrease in current accident year underwriting results before catastrophes. The 1.3 point
increase was primarily due to a 2.0 point increase in the current accident year loss and loss
adjustment expense ratio before catastrophes, to 62.2, partially offset by a 0.7 point
improvement in the expense ratio, to 21.9. |
| |
• |
|
Apart from the effect that the Omni business had on the ratio in 2006, the current
accident year loss and loss adjustment expense ratio before catastrophes increased by 2.0
points, primarily due to higher non-catastrophe property loss costs in both homeowners and
auto physical damage, partially offset by an improvement in the loss and loss adjustment
expense ratio for auto liability claims. The increase in non-catastrophe property loss
costs was driven by increasing claim frequency and severity. The auto liability loss and
loss adjustment expense ratio for the 2006 accident year recorded in the first quarter of
2006 was subsequently reduced in the fourth quarter of 2006 due largely to favorable
frequency on AARP business. This favorable trend was reflected in the loss and loss
adjustment expense ratio for the 2007 accident year recorded in the first quarter of 2007. |
| |
| |
• |
|
Before considering the effect that the Omni business had on the ratio in 2006, the
expense ratio improved by 0.7 points, largely due to an increase in recoupments of Florida
Citizens’ assessments, the effect of earned premium growth and a decrease in IT costs. |
53
Outlook
With written premium growth of 4% in the first quarter of 2007, management expects the Personal
Lines segment to deliver 4% to 7% written premium growth in 2007. Written premium growth of 3% to
6% in auto and 7% to 10% in homeowners is expected to come from growth in both AARP and Agency.
For AARP business, management expects to achieve its targeted written premium growth primarily
through an increase in marketing to AARP members. In addition to marketing through mail, magazines
and other traditional channels, the Company is attracting new customers by continuing to help AARP
build its membership, using internet advertisements and placing more direct response television
advertisements.
For the Agency business, management expects to increase written premium by successfully engaging
new and recently appointed agents. The Company sold its Omni non-standard auto business on
November 30, 2006 and because Omni accounted for 4% of written premium in 2006, Personal Lines
written premium growth for the 2007 full year will be moderated by the sale of this business.
Strong underwriting profitability within the past couple of years has intensified the level of
competition, particularly in auto, where written pricing for the first quarter of 2007 was flat.
For homeowners, written pricing increased 8% in the first quarter of 2007, reflecting an increase
in rate and insurance to value. Non-catastrophe loss costs in homeowners increased in the first
quarter of 2007, driven largely by an increase in claim frequency and severity. Management expects
claim severity to be higher for the remainder of 2007 and claim frequency to increase slightly.
While earned pricing and loss cost trends are expected to be less favorable in 2007 than in 2006,
underwriting results in 2007 will benefit from the sale of Omni which generated an underwriting
loss of $52 in 2006. The Company expects a 2007 combined ratio before catastrophes and prior
accident year development in the range of 84.5 to 87.5. The combined ratio before catastrophes and
prior accident year development was 84.1 in the first quarter of 2007 and 86.4 for the 2006 full
year.
To summarize, management’s outlook in Personal Lines for the 2007 full year is:
| • |
|
Written premium growth of 4% to 7%, including growth of 3% to 6% in auto and 7% to 10% in homeowners |
| |
| • |
|
A combined ratio before catastrophes and prior accident year development of 84.5 to 87.5 |
SPECIALTY COMMERCIAL
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Written Premiums [1] |
|
Earned Premiums [1] |
| |
|
Three Months Ended |
|
Three Months Ended |
| |
|
March 31, |
|
March 31, |
| Premiums |
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
| |
Property |
|
$ |
41 |
|
|
$ |
43 |
|
|
|
(5 |
%) |
|
$ |
52 |
|
|
$ |
55 |
|
|
|
(5 |
%) |
Casualty |
|
|
164 |
|
|
|
189 |
|
|
|
(13 |
%) |
|
|
135 |
|
|
|
142 |
|
|
|
(5 |
%) |
Professional liability, fidelity and surety |
|
|
159 |
|
|
|
157 |
|
|
|
1 |
% |
|
|
170 |
|
|
|
154 |
|
|
|
10 |
% |
Other |
|
|
21 |
|
|
|
37 |
|
|
|
(43 |
%) |
|
|
21 |
|
|
|
32 |
|
|
|
(34 |
%) |
| |
Total |
|
$ |
385 |
|
|
$ |
426 |
|
|
|
(10 |
%) |
|
$ |
378 |
|
|
$ |
383 |
|
|
|
(1 |
%) |
| |
|
|
|
| [1] |
|
The difference between written premiums and earned premiums is attributable to the change
in unearned premium reserve. |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Earned Premiums
Earned premiums for the Specialty Commercial segment decreased by $5, due to decreases in casualty
and other earned premiums, partially offset by an increase in professional liability, fidelity and
surety earned premiums.
| • |
|
Property earned premium decreased $3, primarily due to a decrease
in new business over the last nine months of 2006 and an increase
in reinsurance costs, partially offset by the effect of earned
pricing increases. The reduction in new business in 2006 reflects
management’s decision to reduce catastrophe loss exposures in
certain geographic areas and a determination that, despite rate
increases, rates on some business opportunities were not adequate.
During the first quarter of 2007, new business increased, but
renewal retention decreased. Property business experienced
significant rate increases throughout 2006 and more moderate rate
increases continued into the first quarter of 2007, reflecting a
hardening of the market after the 2005 hurricanes. |
| • |
|
Casualty earned premiums decreased by $7, primarily because of a
decline in new business written premium growth and premium renewal
retention and a decrease in earned pricing. |
| • |
|
Professional liability, fidelity and surety earned premium grew
$16, primarily due to an increase in earned premium from
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, partially offset by earned pricing decreases and a
decrease in new business and premium renewal retention. The
increase in earned premium from surety business was primarily due
to increases in public construction spending, resulting in more
bonded work programs for current clients. |
| • |
|
Within the “Other” category, earned premium decreased by $11. The
“Other” category of earned premiums includes premiums assumed
under intersegment arrangements and retentions. Beginning in the
third quarter of 2006, the Company reduced the premiums assumed by
Specialty Commercial under intersegment arrangements covering
certain liability claims. |
54
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Underwriting Summary |
|
2007 |
|
2006 |
|
Change |
| |
Written premiums |
|
$ |
385 |
|
|
$ |
426 |
|
|
|
(10 |
%) |
Change in unearned premium reserve |
|
|
7 |
|
|
|
43 |
|
|
|
(84 |
%) |
| |
Earned premiums |
|
|
378 |
|
|
|
383 |
|
|
|
(1 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
250 |
|
|
|
272 |
|
|
|
(8 |
%) |
Prior year |
|
|
(6 |
) |
|
|
(30 |
) |
|
|
80 |
% |
| |
Total benefits, losses and loss adjustment expenses |
|
|
244 |
|
|
|
242 |
|
|
|
1 |
% |
Amortization of deferred policy acquisition costs |
|
|
79 |
|
|
|
73 |
|
|
|
8 |
% |
Insurance operating costs and expenses |
|
|
16 |
|
|
|
21 |
|
|
|
(24 |
%) |
| |
Underwriting results |
|
$ |
39 |
|
|
$ |
47 |
|
|
|
(17 |
%) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
65.8 |
|
|
|
70.9 |
|
|
|
5.1 |
|
Prior year |
|
|
(1.7 |
) |
|
|
(7.4 |
) |
|
|
(5.7 |
) |
| |
Total loss and loss adjustment expense ratio |
|
|
64.1 |
|
|
|
63.6 |
|
|
|
(0.5 |
) |
Expense ratio |
|
|
25.0 |
|
|
|
23.7 |
|
|
|
(1.3 |
) |
Policyholder dividend ratio |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
— |
|
| |
Combined ratio |
|
|
89.6 |
|
|
|
87.7 |
|
|
|
(1.9 |
) |
| |
Catastrophe ratio |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
0.1 |
|
|
|
0.5 |
|
|
|
0.4 |
|
Prior year |
|
|
(1.1 |
) |
|
|
(7.6 |
) |
|
|
(6.5 |
) |
| |
Total catastrophe ratio |
|
|
(1.0 |
) |
|
|
(7.1 |
) |
|
|
(6.1 |
) |
| |
Combined ratio before catastrophes |
|
|
90.6 |
|
|
|
94.8 |
|
|
|
4.2 |
|
Combined ratio before catastrophes and prior accident year development |
|
|
91.2 |
|
|
|
94.6 |
|
|
|
3.4 |
|
Other revenues [1] |
|
$ |
82 |
|
|
$ |
90 |
|
|
|
(8 |
%) |
| |
|
|
|
| [1] |
|
Represents servicing revenue. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Current accident year loss and loss adjustment expense ratio |
|
2007 |
|
2006 |
|
Change |
| |
Current accident year loss and loss adjustment expense ratio before catastrophes |
|
|
65.7 |
|
|
|
70.4 |
|
|
|
4.7 |
|
Current accident year catastrophe ratio |
|
|
0.1 |
|
|
|
0.5 |
|
|
|
0.4 |
|
| |
Current accident year loss and loss adjustment expense ratio |
|
|
65.8 |
|
|
|
70.9 |
|
|
|
5.1 |
|
| |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Underwriting results and ratios
Underwriting results decreased by $8, with a corresponding 1.9 point increase in the combined
ratio, to 89.6. The decrease in underwriting results was principally driven by the following
factors:
| |
|
|
|
|
| |
Decrease in net favorable prior accident year development |
|
$ |
(24 |
) |
Increase in current accident year underwriting results before catastrophes |
|
|
12 |
|
Decrease in current accident year catastrophe losses |
|
|
4 |
|
| |
Decrease in underwriting results from 2006 to 2007 |
|
$ |
(8 |
) |
| |
| |
|
Decrease in net favorable prior accident year development |
| |
| |
|
There were no significant prior accident year reserve developments in 2007. Net favorable prior
accident year development of $30 in the first quarter of 2006 included a $30 reduction in net
catastrophe loss reserves related to the 2005 hurricanes. |
| |
| |
|
Increase in current accident year underwriting results before catastrophes |
| |
| |
|
Current accident year underwriting results before catastrophes increased by $12, driven by
increases in property and in professional liability, fidelity and surety, partially offset by a
decrease in casualty. Current accident year underwriting results before catastrophes for
property business increased due to lower non-catastrophe property losses. For professional
liability, fidelity and surety business, current accident year underwriting results before
catastrophes increased primarily due to an improvement in underwriting results for professional
liability. The improvement in professional liability was primarily driven by a lower loss and
loss adjustment expense ratio on directors and officers insurance and earned premium growth,
partially offset by the effect of lower ceding commissions. Current accident year underwriting
results before catastrophes for casualty decreased, primarily because of loss cost increases
coupled with earned pricing decreases. |
55
Outlook
In 2007, the Company expects written premium to be flat to 3% lower for the Specialty Commercial
segment. For property business, the Company expects written premium to be down moderately in 2007
as the effect of moderately higher reinsurance costs and moderately lower growth will be partially
offset by the positive effect of direct rate increases. Management expects a modest decrease
in casualty written premium in 2007 due largely to a decline in new business growth. Within the
specialty casualty business, the Company will focus on increasing its share of business with larger
brokers and will continue to improve sales execution at regional offices. Within professional
liability, fidelity and surety, management expects modest growth in professional liability and
fidelity written premium, partially offset by a decline in surety bond written premium. Despite
declining written pricing, management expects to grow professional liability written premium in
2007 by, among other things, expanding sales to small and middle market companies and larger
private companies and writing more public employment practices liability insurance. Written
premium growth could be lower than planned in any one or all of the Specialty Commercial businesses
if written pricing is less favorable than anticipated and management determines that new and
renewal business is not adequately priced.
During 2006, direct written pricing decreased in casualty and professional liability and increased
in property as well as in fidelity and surety. In the first quarter of 2007, the Company has
experienced larger direct written pricing decreases in professional liability and smaller written
pricing increases in property. In the latter half of 2006 and first quarter of 2007, competition
intensified for professional liability business, particularly for directors’ and officers’
insurance coverage. A lower frequency of class action cases in the past couple of years has put
downward pressure on rates and this trend could reduce the growth rate of the Company’s
professional liability business going forward. The year-over-year rate of increase in direct
written pricing for property business has slowed in 2007 as market pricing for catastrophe exposed
business has moderated in 2007 compared to the sharp rate increases registered in 2006 following
the major 2005 hurricanes. During 2007, the Company expects a lower non-catastrophe loss and loss
adjustment expense ratio in specialty property due to the growth in earned pricing. Given the
anticipated trends in pricing and loss costs in Specialty Commercial, management expects a combined
ratio before catastrophes and prior accident year development in the range of 92.0 to 95.0 for
2007. The combined ratio before catastrophes and prior accident year development was 91.2 for the
first quarter of 2007 and 93.0 for the 2006 full year.
To summarize, management’s outlook in Specialty Commercial for the 2007 full year is:
| • |
|
Written premium flat to 3% lower |
| • |
|
A combined ratio before catastrophes and prior accident year development of 92.0 to 95.0 |
OTHER OPERATIONS (INCLUDING ASBESTOS AND ENVIRONMENTAL CLAIMS)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| Operating Summary |
|
2007 |
|
2006 |
|
Change |
| |
Written premiums |
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
Change in unearned premium reserve |
|
|
— |
|
|
|
(1 |
) |
|
|
100 |
% |
| |
Earned premiums |
|
|
— |
|
|
|
1 |
|
|
|
(100 |
%) |
Benefits, losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Prior year |
|
|
18 |
|
|
|
19 |
|
|
|
(5 |
%) |
| |
Total benefits, losses and loss adjustment expenses |
|
|
18 |
|
|
|
19 |
|
|
|
(5 |
%) |
Insurance operating costs and expenses |
|
|
6 |
|
|
|
3 |
|
|
|
100 |
% |
| |
Underwriting results |
|
|
(24 |
) |
|
|
(21 |
) |
|
|
(14 |
%) |
Net investment income |
|
|
62 |
|
|
|
66 |
|
|
|
(6 |
%) |
Net realized capital gains |
|
|
6 |
|
|
|
— |
|
|
|
— |
|
Other income |
|
|
— |
|
|
|
1 |
|
|
|
(100 |
%) |
Income tax expense |
|
|
(12 |
) |
|
|
(11 |
) |
|
|
(9 |
%) |
| |
Net income |
|
$ |
32 |
|
|
$ |
35 |
|
|
|
(9 |
%) |
| |
The Other Operations segment includes operations that are under a single management structure,
Heritage Holdings, which is responsible for two related activities. The first activity is the
management of certain subsidiaries and operations of the Company that have discontinued writing new
business. The second is the management of claims (and the associated reserves) related to
asbestos, environmental and other exposures. The Other Operations book of business contains
policies written from approximately the 1940s to 2003. The Company’s experience has been that this
book of runoff business has, over time, produced significantly higher claims and losses than were
contemplated at inception.
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net income for the three months ended March 31, 2007 decreased $3 compared to the prior year
period, driven by the following:
| • |
|
A $3 decrease in underwriting results, primarily due to a $3 increase in insurance operating costs and expenses. |
56
| • |
|
A $4 decrease in net investment income, primarily as a result of a decrease in invested assets resulting from net
losses and loss adjustment expenses paid in 2006. Other Operations net investment income includes income earned on the
separate portfolios of Heritage Holdings, and its subsidiaries, and on the Hartford Fire Insurance Company invested
asset portfolio, which is allocated between Ongoing Operations and Other Operations. The Company attributes capital and
invested assets to each segment using an internally developed risk-based capital attribution methodology. |
| • |
|
Partially offsetting the decrease in net income was a $6 increase in net realized capital gains, principally due to
higher sales of fixed maturity investments. |
Asbestos and Environmental Claims
The Company continues to receive asbestos and environmental claims. Asbestos claims relate
primarily to bodily injuries asserted by people who came in contact with asbestos or products
containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs.
The Company wrote several different categories of insurance contracts that may cover asbestos and
environmental claims. First, the Company wrote primary policies providing the first layer of
coverage in an insured’s liability program. Second, the Company wrote excess policies providing
higher layers of coverage for losses that exhaust the limits of underlying coverage. Third, the
Company acted as a reinsurer assuming a portion of those risks assumed by other insurers writing
primary, excess and reinsurance coverages. Fourth, subsidiaries of the Company participated in the
London Market, writing both direct insurance and assumed reinsurance business.
With regard to both environmental and particularly asbestos claims, significant uncertainty limits
the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid
losses and related expenses. Traditional actuarial reserving techniques cannot reasonably estimate
the ultimate cost of these claims, particularly during periods where theories of law are in flux.
The degree of variability of reserve estimates for these exposures is significantly greater than
for other more traditional exposures. In particular, the Company believes there is a high degree
of uncertainty inherent in the estimation of asbestos loss reserves.
In the case of the reserves for asbestos exposures, factors contributing to the high degree of
uncertainty include inadequate loss development patterns, plaintiffs’ expanding theories of
liability, the risks inherent in major litigation, and inconsistent emerging legal doctrines.
Furthermore, over time, insurers, including the Company, have experienced significant changes in
the rate at which asbestos claims are brought, the claims experience of particular insureds, and
the value of claims, making predictions of future exposure from past experience uncertain.
Plaintiffs and insureds also have sought to use bankruptcy proceedings, including “pre-packaged”
bankruptcies, to accelerate and increase loss payments by insurers. In addition, some
policyholders have asserted new classes of claims for coverages to which an aggregate limit of
liability may not apply. Further uncertainties include insolvencies of other carriers and
unanticipated developments pertaining to the Company’s ability to recover reinsurance for asbestos
and environmental claims. Management believes these issues are not likely to be resolved in the
near future.
In the case of the reserves for environmental exposures, factors contributing to the high degree of
uncertainty include expanding theories of liability and damages, the risks inherent in major
litigation, inconsistent decisions concerning the existence and scope of coverage for environmental
claims and uncertainty as to the monetary amount being sought by the claimant from the insured.
It is also not possible to predict changes in the legal and legislative environment and their
effect on the future development of asbestos and environmental claims. Although potential Federal
asbestos-related legislation has been considered in the Senate, it is uncertain whether such
legislation will be reconsidered or enacted in the future and, if enacted, what its effect would be
on the Company’s aggregate asbestos liabilities.
The reporting pattern for assumed reinsurance claims, including those related to asbestos and
environmental claims, is much longer than for direct claims. In many instances, it takes months or
years to determine that the policyholder’s own obligations have been met and how the reinsurance in
question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to
the uncertainty of estimating the related reserves.
Given the factors described above, the Company believes the actuarial tools and other techniques it
employs to estimate the ultimate cost of claims for more traditional kinds of insurance exposure
are less precise in estimating reserves for its asbestos and environmental exposures. For this
reason, the Company relies on exposure-based analysis to estimate the ultimate costs of these
claims and regularly evaluates new information in assessing its potential asbestos and
environmental exposures.
Reserve Activity
Reserves and reserve activity in the Other Operations segment are categorized and reported as
asbestos, environmental, or “all other”. The “all other” category of reserves covers a wide range
of insurance and assumed reinsurance coverages, including, but not limited to, potential liability
for construction defects, lead paint, silica, pharmaceutical products, molestation and other
long-tail liabilities. In addition, within the “all other” category of reserves, Other Operations
records its allowance for future reinsurer insolvencies and disputes that might affect reinsurance
collectibility associated with asbestos, environmental, and other claims recoverable from
reinsurers.
The following table presents reserve activity, inclusive of estimates for both reported and
incurred but not reported claims, net of reinsurance, for Other Operations, categorized by
asbestos, environmental and “all other” claims, for the three months ended March 31, 2007.
57
Other Operations Losses and Loss Adjustment Expenses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended March 31, 2007 |
|
Asbestos |
|
Environmental |
|
All Other [1] |
|
Total |
| |
Beginning liability – net [2] [3] |
|
$ |
2,242 |
|
|
$ |
316 |
|
|
$ |
1,858 |
|
|
$ |
4,416 |
|
Losses and loss adjustment expenses incurred |
|
|
6 |
|
|
|
— |
|
|
|
12 |
|
|
|
18 |
|
Losses and loss adjustment expenses paid |
|
|
(72 |
) |
|
|
(17 |
) |
|
|
(62) |
|
|
|
(151 |
) |
| |
Ending liability – net [2] [3] |
|
|
$2,176 [4] |
|
|
$ |
299 |
|
|
$ |
1,808 |
|
|
$ |
4,283 |
|
| |
|
|
|
| [1] |
|
“All Other” also includes unallocated loss adjustment expense reserves and the allowance for uncollectible reinsurance. |
| |
| [2] |
|
Excludes asbestos and environmental liabilities reported in Ongoing Operations of $9 and $6, respectively, as of March
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 three months ended March 31, 2007 includes $1 related to asbestos and environmental
claims. Total net losses and loss adjustment expenses paid in Ongoing Operations for the three months ended March 31,
2007 includes $1 related to asbestos and environmental claims. |
| |
| [3] |
|
Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were $3,095 and
$336, respectively, as of March 31, 2007 and $3,242 and $362, respectively, as of December 31, 2006. |
| |
| [4] |
|
The one year and average three year net paid amounts for asbestos claims, including Ongoing
Operations, are $370 and $256, respectively, resulting in a one year net survival ratio of 5.9
and a three year net survival ratio of 8.5. Net survival ratio is the quotient of the net
carried reserves divided by the average annual payment amount and is an indication of the
number of years that the net carried reserve would last (i.e. survive) if the future annual
claim payments were consistent with the calculated historical average. |
For paid and incurred losses and loss adjustment expenses reporting, the Company classifies
its asbestos and environmental reserves into three categories: Direct insurance, Assumed
reinsurance and London Market. Direct insurance includes primary and excess coverage. Assumed
reinsurance includes both “treaty” reinsurance (covering broad categories of claims or blocks of
business) and “facultative” reinsurance (covering specific risks or individual policies of primary
or excess insurance companies). London Market business includes the business written by one or
more of the Company’s subsidiaries in the United Kingdom, which are no longer active in the
insurance or reinsurance business. Such business includes both direct insurance and assumed
reinsurance.
Of the three categories of claims (Direct, Assumed reinsurance and London Market), direct policies
tend to have the greatest factual development from which to estimate the Company’s exposures.
Assumed reinsurance exposures are inherently less predictable than direct insurance exposures
because the Company may not receive notice of a reinsurance claim until the underlying direct
insurance claim is mature. This causes a delay in the receipt of information at the reinsurer
level and adds to the uncertainty of estimating related reserves.
London Market exposures are the most uncertain of the three categories of claims. As a participant
in the London Market (comprised of both Lloyd’s of London and London Market companies), certain
subsidiaries of the Company wrote business on a subscription basis, with those subsidiaries’
involvement being limited to a relatively small percentage of a total contract placement. Claims
are reported, via a broker, to the “lead” underwriter and, once agreed to, are presented to the
following markets for concurrence. This reporting and claim agreement process makes estimating
liabilities for this business the most uncertain of the three categories of claims.
The following table sets forth, for the three months ended March 31, 2007, paid and incurred loss
activity by the three categories of claims for asbestos and environmental.
Paid and Incurred Losses and Loss Adjustment Expenses (“LAE”) Development – Asbestos
and Environmental
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Asbestos [1] |
|
Environmental [1] |
| |
|
Paid |
|
Incurred |
|
Paid |
|
Incurred |
| For the Three Months Ended March 31, 2007 |
|
Losses & LAE |
|
Losses & LAE |
|
Losses & LAE |
|
Losses & LAE |
| |
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
83 |
|
|
$ |
2 |
|
|
$ |
20 |
|
|
$ |
— |
|
Assumed – Domestic |
|
|
60 |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
London Market |
|
|
6 |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
| |
Total |
|
|
149 |
|
|
|
2 |
|
|
|
26 |
|
|
|
— |
|
Ceded |
|
|
(77 |
) |
|
|
4 |
|
|
|
(9 |
) |
|
|
— |
|
| |
Net |
|
$ |
72 |
|
|
$ |
6 |
|
|
$ |
17 |
|
|
$ |
— |
|
| |
|
|
|
| [1] |
|
Excludes asbestos and environmental paid and incurred losses and LAE reported in Ongoing
Operations. Total gross losses and loss adjustment expenses incurred in Ongoing Operations for
the three months ended March 31, 2007 includes $1 related to asbestos and environmental
claims. Total gross losses and losses adjustment expenses paid in Ongoing Operations for the
three months ended March 31, 2007 includes $1 related to asbestos and environmental claims. |
A number of factors affect the variability of estimates for asbestos and environmental
reserves including assumptions with respect to the frequency of claims, the average severity of
those claims settled with payment, the dismissal rate of claims with no payment and the expense to
indemnity ratio. The uncertainty with respect to the underlying reserve assumptions for asbestos
and environmental adds a greater degree of variability to these reserve estimates than reserve
estimates for more traditional exposures. While this variability is reflected in part in the size
of the range of reserves developed by the Company, that range may still not be indicative of the
potential variance between the ultimate outcome and the recorded reserves. The recorded net
reserves as of March 31, 2007 of $2.50 billion ($2.19 billion and $305 for asbestos and
environmental, respectively) is within an estimated range, unadjusted for covariance, of $1.91
58
billion to $2.98 billion. The process of estimating asbestos and environmental reserves remains
subject to a wide variety of uncertainties, which are detailed in the Company’s 2006 Form 10-K
Annual Report. The Company believes that its current asbestos and environmental reserves are
reasonable and appropriate. However, analyses of future developments could cause the Company to
change its estimates and ranges of its asbestos and environmental reserves, and the effect of these
changes could be material to the Company’s consolidated operating results, financial condition and
liquidity. The Company expects to perform its regular reviews of asbestos liabilities in the second
quarter of 2007 and environmental liabilities in the third quarter of 2007. If there are
significant developments that affect particular exposures, reinsurance arrangements or the financial condition
of particular reinsurers, the Company will make adjustments to its reserves, or the portion of
liabilities it expects to cede to reinsurers.
The Company expects to perform its regular comprehensive review of Other Operations reinsurance
recoverables in the second quarter of 2007. Consistent with the Company’s long-standing reserve
practices, the Company will continue to review and monitor its reserves in the Other Operations
segment regularly, and where future developments indicate, make appropriate adjustments to the
reserves. For a discussion of the Company’s reserving practices, see the Critical Accounting
Estimates—Property & Casualty Reserves, Net of Reinsurance and Other Operations (Including Asbestos
and Environmental Claims) sections of the MD&A included in the Company’s 2006 Form 10-K Annual
Report.
INVESTMENTS
General
The Hartford’s investment portfolios are primarily divided between Life and Property & Casualty.
The investment portfolios of Life and Property & Casualty are managed by Hartford Investment
Management Company (“HIMCO”), a wholly-owned subsidiary of The Hartford. HIMCO manages the
portfolios to maximize economic value, while attempting to generate the income necessary to support
the Company’s various product obligations, within internally established objectives, guidelines and
risk tolerances. For a further discussion of how HIMCO manages the investment portfolios, see the
Investments section of the MD&A under the “General” section in The Hartford’s 2006 Form 10-K Annual
Report. Also, for a further discussion of how the investment portfolio’s credit and market risks
are assessed and managed, see the “Investment Credit Risk” and “Capital Markets Risk Management”
sections that follow.
Return on general account invested assets is an important element of The Hartford’s financial
results. Significant fluctuations in the fixed income or equity markets could weaken the Company’s
financial condition or its results of operations. Additionally, changes in market interest rates
may impact the period of time over which certain investments, such as mortgage-backed securities
(“MBS”), are repaid and whether certain investments are called by the issuers. Such changes may,
in turn, impact the yield on these investments and also may result in re-investment of funds
received from calls and prepayments at rates below the average portfolio yield. Net investment
income and net realized capital gains and losses accounted for approximately 23% and 22% of the
Company’s consolidated revenues for the three months ended March 31, 2007 and 2006, respectively.
Excluding net investment income from trading securities, net investment income and net realized
capital gains and losses accounted for approximately 20% and 17% of the Company’s consolidated
revenues for the three months ended March 31, 2007 and 2006, respectively. The increase was
primarily due to income earned from a higher average invested assets base and a higher portfolio
yield driven by a change in asset mix (e.g. greater investment in mortgage loans and limited
partnerships) and an increase in interest rates. Also contributing to the increase were net
realized capital gains for the three months ended March 31, 2007, compared to net realized capital
losses in the prior year period.
Fluctuations in interest rates affect the Company’s return on, and the fair value of, fixed
maturity investments, which comprised approximately 66% and 68% of the fair value of its invested
assets as of March 31, 2007 and December 31, 2006, respectively. Other events beyond the Company’s
control could also adversely impact the fair value of these investments. Specifically, a downgrade
of an issuer’s credit rating or default of payment by an issuer could reduce the Company’s
investment return.
A decrease in the fair value of any investment that is deemed other-than-temporary would result in
the Company’s recognition of a net realized capital loss in its financial results prior to the
actual sale of the investment. Following the recognition of the other-than-temporary impairment
for fixed maturities, the Company amortizes the new cost basis to par or to estimated future value
over the remaining life of the security based on future estimated cash flows. For a further
discussion of the evaluation of other-than-temporary impairments, see the “Critical Accounting
Estimates” section of the MD&A under the “Evaluation of Other-Than-Temporary Impairments on
Available-for-Sale Securities” section in The Hartford’s 2006 Form 10-K Annual Report.
Life
The primary investment objective of Life’s general account is to maximize economic value consistent
with acceptable risk parameters, including the management of the interest rate sensitivity of
invested assets, while generating sufficient after-tax income to meet policyholder and corporate
obligations.
59
The following table identifies Life’s invested assets by type as of March 31, 2007 and December 31,
2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Composition of Invested Assets |
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
| |
Fixed maturities, available-for-sale, at fair value |
|
$ |
53,942 |
|
|
|
58.0 |
% |
|
$ |
53,173 |
|
|
|
59.4 |
% |
Equity securities, available-for-sale, at fair value |
|
|
1,298 |
|
|
|
1.4 |
% |
|
|
811 |
|
|
|
0.9 |
% |
Equity securities held for trading, at fair value |
|
|
30,805 |
|
|
|
33.2 |
% |
|
|
29,393 |
|
|
|
32.9 |
% |
Policy loans, at outstanding balance |
|
|
2,099 |
|
|
|
2.3 |
% |
|
|
2,051 |
|
|
|
2.3 |
% |
Mortgage loans, at amortized cost [1] |
|
|
3,509 |
|
|
|
3.8 |
% |
|
|
2,909 |
|
|
|
3.3 |
% |
Limited partnerships, at fair value |
|
|
966 |
|
|
|
1.0 |
% |
|
|
794 |
|
|
|
0.9 |
% |
Other investments |
|
|
297 |
|
|
|
0.3 |
% |
|
|
283 |
|
|
|
0.3 |
% |
| |
Total investments |
|
$ |
92,916 |
|
|
|
100.0 |
% |
|
$ |
89,414 |
|
|
|
100.0 |
% |
| |
|
|
|
| [1] |
|
Represents commercial and agricultural loans. |
Fixed maturity investments increased $769 since December 31, 2006, primarily as the result of
an increase in collateral held from increased securities lending activities and a decrease in
interest rates. Equity securities held for trading increased $1.4 billion since December 31, 2006,
due to positive cash flow primarily generated from sales and deposits related to variable annuity
products sold in Japan and positive performance of the underlying investment funds supporting the
Japanese variable annuity product. Mortgage loans increased $600 since December 31, 2006, as a
result of a decision to increase Life’s investment in this asset class primarily due to its
attractive yields and diversification opportunities.
Investment Results
The following table summarizes Life’s investment results.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| |
|
2007 |
|
2006 |
| |
Net investment income – excluding income on policy loans and
equity securities held for trading |
|
$ |
816 |
|
|
$ |
733 |
|
Equity securities held for trading [1] |
|
|
210 |
|
|
|
454 |
|
Policy loan income |
|
|
36 |
|
|
|
33 |
|
| |
Net investment income – total |
|
$ |
1,062 |
|
|
$ |
1,220 |
|
| |
Yield on average invested assets [2] |
|
|
5.9 |
% |
|
|
5.7 |
% |
| |
|
|
|
|
|
|
|
|
|
Gross gains on sale |
|
$ |
72 |
|
|
$ |
41 |
|
Gross losses on sale |
|
|
(40 |
) |
|
|
(59 |
) |
Impairments |
|
|
|
|
|
|
|
|
Credit related |
|
|
(12 |
) |
|
|
— |
|
Other [3] |
|
|
(2 |
) |
|
|
(9 |
) |
| |
Total impairments |
|
|
(14 |
) |
|
|
(9 |
) |
Japanese fixed annuity contract hedges, net [4] |
|
|
5 |
|
|
|
(44 |
) |
Periodic net coupon settlements on credit derivatives/Japan |
|
|
(12 |
) |
|
|
(14 |
) |
GMWB derivatives, net |
|
|
22 |
|
|
|
(13 |
) |
Other, net [5] |
|
|
(10 |
) |
|
|
(28 |
) |
| |
Net realized capital gains (losses), before-tax |
|
$ |
23 |
|
|
$ |
(126 |
) |
| |
|
|
|
| [1] |
|
Represents dividend income and the change in value of equity securities held for trading. |
| |
| [2] |
|
Represents annualized net investment income (excluding income related to equity securities held for trading) divided by the monthly
weighted average invested assets at cost or amortized cost, as applicable, excluding equity securities held for trading, collateral
received associated with the securities lending program and reverse repurchase agreements as well as consolidated variable interest
entity minority interests. |
| |
| [3] |
|
Primarily relates to fixed maturity impairments for which the Company was uncertain of its intent to retain the investment for a period
of time sufficient to allow for a recovery to amortized cost. These impairments do not relate to security issuers for which the Company
has current concerns regarding their ability to pay future interest and principal amounts based upon the securities’ contractual terms. |
| |
| [4] |
|
Relates to the Japanese fixed annuity product (product and related derivative hedging instruments excluding periodic net coupon
settlements). |
| |
| [5] |
|
Primarily consists of changes in fair value on non-qualifying derivatives and hedge ineffectiveness on qualifying derivative instruments. |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Net investment income, excluding income on policy loans and equity securities held for trading,
increased $83, or 11%, compared to the prior year period. The increase in net investment income
was primarily due to a higher average invested assets base, income earned from a higher portfolio
yield driven by a change in asset mix (e.g. greater investment in mortgage loans and limited
partnerships) and an increase in interest rates. The increase in the average invested assets base,
as compared to the prior year, was primarily due to positive operating cash flows, investment
contract sales such as retail and institutional notes, universal life-type product sales, and an
increase in collateral held from securities lending activities.
60
Net investment income on equity securities held for trading for the three months ended March 31,
2007, can be primarily attributed to an increase in the value of the underlying investment funds
supporting the Japanese variable annuity product generated by positive market performance.
For 2007, the yield on average invested assets increased compared to the prior year period due to
changes in asset mix, an increase in yield from limited partnerships, and higher interest rates.
Based upon current market expectations, Life expects the full year 2007 yield on average invested
assets to be higher than the comparable 2006 yield.
Net realized capital gains were recognized in 2007 compared to net realized capital losses in the
prior year period. The components that drove the net gains for 2007 compared to the net losses in
the prior year period included net gains on sales of fixed maturity securities, net gains
associated with GMWB derivatives, net gains associated with Japanese fixed annuity contract hedges,
and lower other, net losses. The circumstances giving rise to these changes are as follows:
| • |
|
The net gains on fixed maturity sales in 2007 were primarily the result of tighter credit spreads on certain issuers
since the date of security purchase. For further discussion of gross gains and losses, see below. |
| • |
|
The net gains associated with the Japanese fixed annuity contract hedges in 2007 primarily resulted from a decline in
Japanese interest rates. The net losses in 2006 resulted from an increase in Japanese interest rates. |
| • |
|
The net gains associated with the GMWB derivatives in 2007 were primarily driven by net gains related to declines in
equity index volatility. The net losses in 2006 were primarily driven by equity index volatility. |
| • |
|
Other, net losses in both 2007 and 2006 were primarily driven from the change in value of non-qualifying derivatives
due to fluctuations in interest rates and foreign currency exchange rates. |
| • |
|
See the Other-Than-Temporary Impairments section that follows for information on impairment losses. |
Gross gains on sales for 2007 were primarily within fixed maturities and were largely comprised of
corporate securities. The sales were made to reallocate the portfolio to higher quality securities
with more favorable risk-return profiles. The gains on sales were primarily the result of changes
in credit spreads and interest rates since the date of purchase.
Gross losses on sales for 2007 were primarily within fixed maturities and were concentrated in the
corporate sector with no single security sold at a loss in excess of $4 and an average loss as a
percentage of the fixed maturity’s amortized cost of less than 2% which, under the Company’s
impairment policy was deemed to be depressed only to a minor extent.
Gross gains on sales for 2006 were primarily within fixed maturities and were largely comprised of
corporate securities. The sales were made to reposition the portfolio to shorter-term assets with
the expectation of higher future interest rates and a steeper yield curve. The gains on sales were
primarily the result of changes in interest rates and credit spreads since the date of purchase.
Gross losses on sales for 2006 were primarily within fixed maturities and were concentrated in the
corporate and CMBS sectors with no single security sold at a loss in excess of $5 and an average
loss, as a percentage of the fixed maturity’s amortized cost, of less than 3% which, under the
Company’s impairment policy, was deemed to be depressed only to a minor extent.
61
Property & Casualty
The primary investment objective for Property & Casualty’s Ongoing Operations segment is to
maximize economic value while generating after-tax income to meet policyholder and corporate
obligations. For Property & Casualty’s Other Operations segment, the investment objective is to
ensure the full and timely payment of all liabilities. Property & Casualty’s investment strategies
are developed based on a variety of factors including business needs, regulatory requirements and
tax considerations.
The following table identifies Property & Casualty’s invested assets by type as of March 31, 2007
and December 31, 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Composition of Invested Assets |
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
| |
Fixed maturities, available-for-sale, at fair value |
|
$ |
27,138 |
|
|
|
92.2 |
% |
|
$ |
27,178 |
|
|
|
92.8 |
% |
Equity securities, available-for-sale, at fair value |
|
|
861 |
|
|
|
2.9 |
% |
|
|
873 |
|
|
|
3.0 |
% |
Mortgage loans, at amortized cost [1] |
|
|
506 |
|
|
|
1.7 |
% |
|
|
409 |
|
|
|
1.4 |
% |
Limited partnerships, at fair value |
|
|
534 |
|
|
|
1.8 |
% |
|
|
450 |
|
|
|
1.5 |
% |
Other investments |
|
|
404 |
|
|
|
1.4 |
% |
|
|
390 |
|
|
|
1.3 |
% |
| |
Total investments |
|
$ |
29,443 |
|
|
|
100.0 |
% |
|
$ |
29,300 |
|
|
|
100.0 |
% |
| |
|
|
|
| [1] |
|
Represents commercial and agricultural loans. |
Fixed maturity investments decreased $40 since December 31, 2006, primarily as the result of
widening credit spreads and sales of securities, partially offset by an increase in collateral held
from increased securities lending activities and a decrease in interest rates. Mortgage loans
increased $97 since December 31, 2006, as a result of a decision to increase Property & Casualty’s
investment in this asset class primarily due to its attractive yields and diversification
opportunities.
Investment Results
The table below summarizes Property & Casualty’s investment results.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| |
|
2007 |
|
2006 |
| |
Net investment income, before-tax |
|
$ |
413 |
|
|
$ |
357 |
|
Net investment income, after-tax [1] |
|
$ |
306 |
|
|
$ |
269 |
|
Yield on average invested assets, before-tax [2] |
|
|
5.9 |
% |
|
|
5.5 |
% |
Yield on average invested assets, after-tax [1] [2] |
|
|
4.4 |
% |
|
|
4.1 |
% |
| |
|
|
|
|
|
|
|
|
|
Gross gains on sale |
|
$ |
52 |
|
|
$ |
50 |
|
Gross losses on sale |
|
|
(26 |
) |
|
|
(47 |
) |
Impairments |
|
|
|
|
|
|
|
|
Credit related |
|
|
— |
|
|
|
— |
|
Other [3] |
|
|
(1 |
) |
|
|
(14 |
) |
| |
Total impairments |
|
|
(1 |
) |
|
|
(14 |
) |
Periodic net coupon settlements on credit derivatives |
|
|
3 |
|
|
|
— |
|
Other, net [4] |
|
|
(5 |
) |
|
|
16 |
|
| |
Net realized capital gains, before-tax |
|
$ |
23 |
|
|
$ |
5 |
|
| |
|
|
|
| [1] |
|
Due to significant holdings in tax-exempt investments, after-tax net investment income and
yield are also included. |
| |
| [2] |
|
Represents annualized net investment income divided by the monthly weighted average invested
assets at cost or amortized cost, as applicable, excluding the collateral received associated
with the securities lending program. |
| |
| [3] |
|
Primarily relates to fixed maturity impairments for which the Company was uncertain of its
intent to retain the investment for a period of time sufficient to allow for a recovery to
amortized cost. These impairments do not relate to security issuers for which the Company has
current concerns regarding their ability to pay future interest and principal amounts based
upon the securities’ contractual terms. |
| |
| [4] |
|
Primarily consists of changes in fair value on non-qualifying derivatives, hedge
ineffectiveness on qualifying derivative instruments and other investment gains. |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
Before-tax net investment income increased $56, or 16%, and after-tax net investment income
increased $37, or 14%, compared to the prior year period. The increase in net investment income was
primarily due to income earned from a higher portfolio yield driven by a change in asset mix (e.g.
greater investment in mortgage loans and limited partnerships), an increase in yield from limited
partnerships, and an increase in interest rates. Also contributing to the increase was a higher
average invested assets base. The increase in the average invested assets base, as compared to the
prior year period, was primarily due to positive operating cash flows and an increase in collateral
held from increased securities lending activities.
For 2007, the yield on average invested assets increased compared to the prior year period due to
change in asset mix, an increase in yield from limited partnerships, and higher interest rates.
Based upon current market expectations, Property & Casualty expects the full year 2007 yield on
average invested assets to be higher than the comparable 2006 yield.
62
The increase in net realized capital gains in 2007 was primarily due to gains on the sale of fixed
maturity investments and a decrease in other-than-temporary impairments. For further discussion of
gross gains and losses on fixed maturity investments and other-than-temporary impairments, see
below.
Gross gains on sales for 2007 were primarily within fixed maturities and were concentrated in the
corporate and foreign government sectors and were made to reallocate the portfolio to higher
quality securities with more favorable risk-return profiles. The gains on sales were primarily the
result of changes in interest rates and credit spreads since the date of purchase.
Gross losses on sales for 2007 were primarily within fixed maturities and were concentrated in the
corporate and CMBS sectors with no single security sold at a loss in excess of $2 and an average
loss as a percentage of the fixed maturity’s amortized cost of less than 3% which, under the
Company’s impairment policy, was deemed to be depressed only to a minor extent.
Gross gains on sales for 2006 were primarily within fixed maturities and were concentrated in the
corporate, municipal and foreign government sectors and were the result of decisions to reposition
the portfolio to shorter-term assets with the expectation of higher future interest rates and a
steeper yield curve. The gains on sales were primarily the result of changes in interest rates and
credit spreads since the date of purchase.
Gross losses on sales for 2006 were primarily within fixed maturities and were concentrated in the
corporate and MBS sectors with no single security sold at a loss in excess of $4 and an average
loss, as a percentage of the fixed maturity’s amortized cost, of less than 3% which, under the
Company’s impairment policy, was deemed to be depressed only to a minor extent.
Corporate
The investment objective of Corporate is to raise capital through financing activities to support
the Life and Property & Casualty operations of the Company and to maintain sufficient funds to
support the cost of those financing activities including the payment of interest for The Hartford
Financial Services Group, Inc. (“HFSG”) issued debt and dividends to shareholders of The Hartford’s
common stock. As of March 31, 2007 and December 31, 2006, Corporate held $486 and $404,
respectively, of fixed maturity investments. In addition, Corporate held $53 and $55 of equity
securities as of March 31, 2007 and December 31, 2006, respectively. As of March 31, 2007,
a put option agreement with a fair value of $45 was included in other invested assets. For further
discussion of this position, see Note 14 of Notes to Consolidated Financial Statements included in
The Hartford’s 2006 Form 10-K Annual Report.
Other-Than-Temporary Impairments
The following table identifies the Company’s other-than-temporary impairments by type.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| |
|
2007 |
|
2006 |
| |
ABS |
|
$ |
12 |
|
|
$ |
— |
|
CMBS/Collateralized mortgage obligations (“CMOs”) |
|
|
— |
|
|
|
2 |
|
Corporate |
|
|
1 |
|
|
|
18 |
|
Equity |
|
|
2 |
|
|
|
3 |
|
| |
Total other-than-temporary impairments |
|
$ |
15 |
|
|
$ |
23 |
|
| |
|
|
|
|
|
|
|
|
|
Credit related |
|
$ |
12 |
|
|
$ |
— |
|
Other |
|
|
3 |
|
|
|
23 |
|
| |
Total other-than-temporary impairments |
|
$ |
15 |
|
|
$ |
23 |
|
| |
The following discussion provides an analysis of significant other-than-temporary impairments
recognized during the three months ended March 31, 2007 and 2006, the related circumstances giving
rise to the other-than-temporary impairments.
During the three months ended March 31, 2007, other-than-temporary impairments were recorded on
ABS, corporate debt securities and equity securities. The credit related other-than-temporary
impairment was recorded on one ABS security backed by aircraft lease receivables due to a continued
decline in value. The decline was attributable to higher than expected aircraft maintenance costs
and a recent rating agency downgrade.
During the three months ended March 31, 2006, other-than-temporary impairments were recorded on
corporate securities, equity securities and CMBS. Other-than-temporary impairments were recorded on
certain corporate securities that had declined in value and for which the Company was uncertain of
its intent and ability to retain the investment for a period of time sufficient to allow recovery
to amortized cost. Prior to the other-than-temporary impairments, these securities had an average
market value as a percentage of amortized cost of 87%. Other-than-temporary impairments recorded on
CMBS resulted from a decline in future expected cash flows for several securities.
63
INVESTMENT CREDIT RISK
The Company has established investment credit policies that focus on the credit quality of
obligors and counterparties, limit credit concentrations, encourage diversification and require
frequent creditworthiness reviews. Investment activity, including setting of policy and defining
acceptable risk levels, is subject to regular review and approval by senior management and by The
Hartford’s Board of Directors.
The Company invests primarily in securities which are rated investment grade and has established
exposure limits, diversification standards and review procedures for all credit risks including
borrower, issuer and counterparty. Creditworthiness of specific obligors is determined by
consideration of external determinants of creditworthiness, typically ratings assigned by
nationally recognized ratings agencies and is supplemented by an internal credit evaluation.
Obligor, asset sector and industry concentrations are subject to established Company limits and are
monitored on a regular basis.
The Company is not exposed to any credit concentration risk of a single issuer greater than 10% of
the Company’s stockholders’ equity other than U.S. government and certain U.S. government
agencies. For further discussion, see the “Investment Credit Risk” section of the MD&A in The
Hartford’s 2006 Form 10-K Annual Report for a description of the Company’s objectives, policies and
strategies, including the use of derivative instruments.
The following table identifies fixed maturity securities by type on a consolidated basis as of
March 31, 2007 and December 31, 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated Fixed Maturities by Type |
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Total |
| |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Fair |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Fair |
| |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Value |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Value |
| |
ABS |
|
$ |
8,997 |
|
|
$ |
41 |
|
|
$ |
(47 |
) |
|
$ |
8,991 |
|
|
|
11.0 |
% |
|
$ |
7,924 |
|
|
$ |
54 |
|
|
$ |
(53 |
) |
|
$ |
7,925 |
|
|
|
9.8 |
% |
CMBS |
|
|
16,913 |
|
|
|
219 |
|
|
|
(139 |
) |
|
|
16,993 |
|
|
|
20.8 |
% |
|
|
16,579 |
|
|
|
232 |
|
|
|
(145 |
) |
|
|
16,666 |
|
|
|
20.6 |
% |
CMOs |
|
|
1,216 |
|
|
|
20 |
|
|
|
(5 |
) |
|
|
1,231 |
|
|
|
1.5 |
% |
|
|
1,300 |
|
|
|
17 |
|
|
|
(9 |
) |
|
|
1,308 |
|
|
|
1.6 |
% |
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic industry |
|
|
2,867 |
|
|
|
76 |
|
|
|
(27 |
) |
|
|
2,916 |
|
|
|
3.6 |
% |
|
|
2,801 |
|
|
|
83 |
|
|
|
(32 |
) |
|
|
2,852 |
|
|
|
3.6 |
% |
Capital goods |
|
|
2,373 |
|
|
|
101 |
|
|
|
(15 |
) |
|
|
2,459 |
|
|
|
3.0 |
% |
|
|
2,568 |
|
|
|
111 |
|
|
|
(20 |
) |
|
|
2,659 |
|
|
|
3.3 |
% |
Consumer cyclical |
|
|
3,196 |
|
|
|
95 |
|
|
|
(32 |
) |
|
|
3,259 |
|
|
|
4.0 |
% |
|
|
3,279 |
|
|
|
94 |
|
|
|
(34 |
) |
|
|
3,339 |
|
|
|
4.1 |
% |
Consumer non-cyclical |
|
|
3,067 |
|
|
|
73 |
|
|
|
(35 |
) |
|
|
3,105 |
|
|
|
3.8 |
% |
|
|
3,465 |
|
|
|
84 |
|
|
|
(47 |
) |
|
|
3,502 |
|
|
|
4.4 |
% |
Energy |
|
|
1,648 |
|
|
|
73 |
|
|
|
(14 |
) |
|
|
1,707 |
|
|
|
2.1 |
% |
|
|
1,779 |
|
|
|
73 |
|
|
|
(21 |
) |
|
|
1,831 |
|
|
|
2.3 |
% |
Financial services |
|
|
10,039 |
|
|
|
278 |
|
|
|
(71 |
) |
|
|
10,246 |
|
|
|
12.6 |
% |
|
|
10,276 |
|
|
|
307 |
|
|
|
(78 |
) |
|
|
10,505 |
|
|
|
13.1 |
% |
Technology and
communications |
|
|
3,874 |
|
|
|
189 |
|
|
|
(28 |
) |
|
|
4,035 |
|
|
|
4.9 |
% |
|
|
4,136 |
|
|
|
191 |
|
|
|
(44 |
) |
|
|
4,283 |
|
|
|
5.3 |
% |
Transportation |
|
|
698 |
|
|
|
19 |
|
|
|
(11 |
) |
|
|
706 |
|
|
|
0.9 |
% |
|
|
730 |
|
|
|
17 |
|
|
|
(10 |
) |
|
|
737 |
|
|
|
0.9 |
% |
Utilities |
|
|
4,527 |
|
|
|
188 |
|
|
|
(53 |
) |
|
|
4,662 |
|
|
|
5.7 |
% |
|
|
4,588 |
|
|
|
195 |
|
|
|
(66 |
) |
|
|
4,717 |
|
|
|
5.8 |
% |
Other |
|
|
1,601 |
|
|
|
55 |
|
|
|
(15 |
) |
|
|
1,641 |
|
|
|
2.0 |
% |
|
|
1,447 |
|
|
|
38 |
|
|
|
(19 |
) |
|
|
1,466 |
|
|
|
1.8 |
% |
Government/Government
agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
1,230 |
|
|
|
49 |
|
|
|
(7 |
) |
|
|
1,272 |
|
|
|
1.6 |
% |
|
|
1,213 |
|
|
|
87 |
|
|
|
(6 |
) |
|
|
1,294 |
|
|
|
1.6 |
% |
United States |
|
|
1,055 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
1,055 |
|
|
|
1.3 |
% |
|
|
848 |
|
|
|
5 |
|
|
|
(7 |
) |
|
|
846 |
|
|
|
1.0 |
% |
MBS – agency |
|
|
2,535 |
|
|
|
9 |
|
|
|
(35 |
) |
|
|
2,509 |
|
|
|
3.1 |
% |
|
|
2,742 |
|
|
|
5 |
|
|
|
(45 |
) |
|
|
2,702 |
|
|
|
3.3 |
% |
Municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,344 |
|
|
|
25 |
|
|
|
(24 |
) |
|
|
1,345 |
|
|
|
1.6 |
% |
|
|
1,342 |
|
|
|
25 |
|
|
|
(23 |
) |
|
|
1,344 |
|
|
|
1.7 |
% |
Tax-exempt |
|
|
11,014 |
|
|
|
461 |
|
|
|
(9 |
) |
|
|
11,466 |
|
|
|
14.1 |
% |
|
|
10,555 |
|
|
|
511 |
|
|
|
(4 |
) |
|
|
11,062 |
|
|
|
13.7 |
% |
Redeemable preferred
stock |
|
|
47 |
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
|
|
0.1 |
% |
|
|
36 |
|
|
|
— |
|
|
|
— |
|
|
|
36 |
|
|
|
— |
|
Short-term |
|
|
1,921 |
|
|
|
— |
|
|
|
— |
|
|
|
1,921 |
|
|
|
2.3 |
% |
|
|
1,681 |
|
|
|
— |
|
|
|
— |
|
|
|
1,681 |
|
|
|
2.1 |
% |
| |
Total fixed maturities |
|
$ |
80,162 |
|
|
$ |
1,975 |
|
|
$ |
(571 |
) |
|
$ |
81,566 |
|
|
|
100.0 |
% |
|
$ |
79,289 |
|
|
$ |
2,129 |
|
|
$ |
(663 |
) |
|
$ |
80,755 |
|
|
|
100.0 |
% |
| |
The Company’s fixed maturity net unrealized gains decreased $62 from December 31, 2006 to
March 31, 2007. The decrease was primarily due to net sales of securities in an unrealized gain
position and credit spread widening offset by a decrease in interest rates and other-than-temporary
impairments.
For further discussion of risk factors associated with sectors with significant unrealized loss
positions, see the sector risk factor commentary under the Consolidated Total Available-for-Sale
Securities with Unrealized Loss Greater than Six Months by Type table in this section of the MD&A.
As of March 31, 2007, investment sector allocations as a percentage of total fixed maturities have
not significantly changed since December 31, 2006, with the exception of ABS. The increase in ABS
was primarily related to the investment in AAA rated collateralized loan obligations from the cash
collateral received from securities lending programs.
Included in ABS in the table above are the Company’s securities backed by pools of sub-prime and
Alt-A (collectively “below prime”) mortgage loans, which had a fair value of $3.3 billion and $3.0
billion, as of March 31, 2007 and December 31, 2006, respectively, of which approximately 86% and
89%, respectively, ($2.8 billion at March 31, 2007 and $2.6 billion at December 31, 2006) were
rated
64
AA or higher. Sub-prime mortgage lending is the origination of residential mortgage loans to
customers with impaired credit histories. Alt-A mortgage lending is the origination of residential
mortgage loans to customers who are rated above the sub-prime category of creditworthiness but
below a top rated prime borrower. The Company is not an originator of residential below prime
loans. The slowing U.S. housing market, increased interest rates, and relaxed underwriting
standards for some originators of below prime mortgages have recently led to higher delinquency
rates. The Company expects to continue to receive payments in accordance with the contractual terms
of the securities.
The following table presents the Company’s exposure to below prime mortgage loans by credit quality
as of March 31, 2007 and December 31, 2006, respectively.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Below Prime ABS Residential Mortgage Loans |
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
| |
|
Cost |
|
Value |
|
Cost |
|
Value |
| |
AAA |
|
$ |
1,267 |
|
|
$ |
1,267 |
|
|
$ |
1,044 |
|
|
$ |
1,045 |
|
AA |
|
|
1,570 |
|
|
|
1,573 |
|
|
|
1,588 |
|
|
|
1,595 |
|
A |
|
|
300 |
|
|
|
300 |
|
|
|
233 |
|
|
|
234 |
|
BBB |
|
|
97 |
|
|
|
97 |
|
|
|
47 |
|
|
|
47 |
|
BB & Below |
|
|
75 |
|
|
|
70 |
|
|
|
58 |
|
|
|
52 |
|
| |
Total investments |
|
$ |
3,309 |
|
|
$ |
3,307 |
|
|
$ |
2,970 |
|
|
$ |
2,973 |
|
| |
The following table identifies fixed maturities by credit quality on a consolidated basis as of
March 31, 2007 and December 31, 2006. The ratings referenced below are based on the ratings of a
nationally recognized rating organization or, if not rated, assigned based on the Company’s
internal analysis of such securities. The Company held no issuer of a below investment grade
(“BIG”) security (BB & below) with a fair value in excess of 4% of the total fair value for BIG
securities as of March 31, 2007 and December 31, 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated Fixed Maturities by Credit Quality |
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
Percent of |
| |
|
Amortized |
|
|
|
|
|
Total Fair |
|
Amortized |
|
|
|
|
|
Total Fair |
| |
|
Cost |
|
Fair Value |
|
Value |
|
Cost |
|
Fair Value |
|
Value |
| |
AAA |
|
$ |
25,108 |
|
|
$ |
25,500 |
|
|
|
31.3 |
% |
|
$ |
23,216 |
|
|
$ |
23,629 |
|
|
|
29.2 |
% |
AA |
|
|
10,698 |
|
|
|
10,911 |
|
|
|
13.4 |
% |
|
|
10,107 |
|
|
|
10,298 |
|
|
|
12.8 |
% |
A |
|
|
16,694 |
|
|
|
17,175 |
|
|
|
21.1 |
% |
|
|
17,696 |
|
|
|
18,251 |
|
|
|
22.6 |
% |
BBB |
|
|
16,761 |
|
|
|
17,023 |
|
|
|
20.9 |
% |
|
|
17,402 |
|
|
|
17,655 |
|
|
|
21.9 |
% |
United States Government/Government agencies |
|
|
5,405 |
|
|
|
5,406 |
|
|
|
6.6 |
% |
|
|
5,529 |
|
|
|
5,507 |
|
|
|
6.8 |
% |
BB & below |
|
|
3,575 |
|
|
|
3,630 |
|
|
|
4.4 |
% |
|
|
3,658 |
|
|
|
3,734 |
|
|
|
4.6 |
% |
Short-term |
|
|
1,921 |
|
|
|
1,921 |
|
|
|
2.3 |
% |
|
|
1,681 |
|
|
|
1,681 |
|
|
|
2.1 |
% |
| |
Total fixed maturities |
|
$ |
80,162 |
|
|
$ |
81,566 |
|
|
|
100.0 |
% |
|
$ |
79,289 |
|
|
$ |
80,755 |
|
|
|
100.0 |
% |
| |
At the March 2007 Federal Open Market Committee (“FOMC”) meeting, the Federal Reserve maintained
the target federal funds rate at 5.25%. The FOMC stated that inflation risks have improved modestly
in recent months and inflation pressure was likely to moderate over time, but maintained the view
that upside risk remains. An increase in future interest rates may result in lower fixed maturity
valuations, an increase in gross unrealized losses and a decrease in gross unrealized gains.
65
The following table presents the Company’s unrealized loss aging for total fixed maturity and
equity securities classified as available-for-sale on a consolidated basis, as of March 31, 2007
and December 31, 2006, by length of time the security was in an unrealized loss position.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated Unrealized Loss Aging of Total Available-for-Sale Securities |
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
Amortized |
|
Fair |
|
Unrealized |
|
Amortized |
|
Fair |
|
Unrealized |
| |
|
Cost |
|
Value |
|
Loss |
|
Cost |
|
Value |
|
Loss |
| |
Three months or less |
|
$ |
13,387 |
|
|
$ |
13,251 |
|
|
$ |
(136 |
) |
|
$ |
12,601 |
|
|
$ |
12,500 |
|
|
$ |
(101 |
) |
Greater than three months to six months |
|
|
698 |
|
|
|
690 |
|
|
|
(8 |
) |
|
|
1,261 |
|
|
|
1,242 |
|
|
|
(19 |
) |
Greater than six months to nine months |
|
|
769 |
|
|
|
758 |
|
|
|
(11 |
) |
|
|
1,239 |
|
|
|
1,210 |
|
|
|
(29 |
) |
Greater than nine months to twelve months |
|
|
954 |
|
|
|
936 |
|
|
|
(18 |
) |
|
|
1,992 |
|
|
|
1,959 |
|
|
|
(33 |
) |
Greater than twelve months |
|
|
15,737 |
|
|
|
15,331 |
|
|
|
(406 |
) |
|
|
15,402 |
|
|
|
14,911 |
|
|
|
(491 |
) |
| |
Total |
|
$ |
31,545 |
|
|
$ |
30,966 |
|
|
$ |
(579 |
) |
|
$ |
32,495 |
|
|
$ |
31,822 |
|
|
$ |
(673 |
) |
| |
The decrease in the unrealized loss amount since December 31, 2006 is primarily the result of a
decrease in interest rates, asset sales and other-than-temporary impairments offset in part by
credit spread widening.
As a percentage of amortized cost, the average security unrealized loss at March 31, 2007, and
December 31, 2006, was less than 2% and 3%, respectively. As of March 31, 2007, and December 31,
2006, fixed maturities represented $571 and $663, respectively, or 99% of the Company’s total
unrealized loss associated with securities classified as available-for-sale.
The Company held no securities of a single issuer that were at an unrealized loss position in
excess of 5% of the total unrealized loss amount as of March 31, 2007 and December 31, 2006.
The total securities classified as available-for-sale in an unrealized loss position for greater
than six months by type as of March 31, 2007 and December 31, 2006, are presented in the following
table.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated Total Available-for-Sale Securities with Unrealized Loss Greater Than Six Months by Type |
| |
|
March 31, 2007 |
|
December 31, 2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| |
|
Amortized |
|
Fair |
|
Unrealized |
|
Unrealized |
|
Amortized |
|
Fair |
|
Unrealized |
|
Unrealized |
| |
|
Cost |
|
Value |
|
Loss |
|
Loss |
|
Cost |
|
Value |
|
Loss |
|
Loss |
| |
ABS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft lease receivables |
|
$ |
103 |
|
|
$ |
88 |
|
|
$ |
(15 |
) |
|
|
3.4 |
% |
|
$ |
107 |
|
|
$ |
79 |
|
|
$ |
(28 |
) |
|
|
5.1 |
% |
CDOs |
|
|
601 |
|
|
|
589 |
|
|
|
(12 |
) |
|
|
2.8 |
% |
|
|
133 |
|
|
|
129 |
|
|
|
(4 |
) |
|
|
0.7 |
% |
Credit card receivables |
|
|
110 |
|
|
|
109 |
|
|
|
(1 |
) |
|
|
0.2 |
% |
|
|
150 |
|
|
|
148 |
|
|
|
(2 |
) |
|
|
0.4 |
% |
Other ABS |
|
|
938 |
|
|
|
921 |
|
|
|
(17 |
) |
|
|
3.9 |
% |
|
|
777 |
|
|
|
760 |
|
|
|
(17 |
) |
|
|
3.1 |
% |
CMBS |
|
|
5,102 |
|
|
|
4,997 |
|
|
|
(105 |
) |
|
|
24.1 |
% |
|
|
4,694 |
|
|
|
4,575 |
|
|
|
(119 |
) |
|
|
21.5 |
% |
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic industry |
|
|
762 |
|
|
|
743 |
|
|
|
(19 |
) |
|
|
4.4 |
% |
|
|
859 |
|
|
|
834 |
|
|
|
(25 |
) |
|
|
4.5 |
% |
Consumer cyclical |
|
|
695 |
|
|
|
672 |
|
|
|
(23 |
) |
|
|
5.3 |
% |
|
|
752 |
|
|
|
724 |
|
|
|
(28 |
) |
|
|
5.1 |
% |
Consumer non-cyclical |
|
|
903 |
|
|
|
877 |
|
|
|
(26 |
) |
|
|
6.0 |
% |
|
|
1,106 |
|
|
|
1,068 |
|
|
|
(38 |
) |
|
|
6.9 |
% |
Financial services |
|
|
2,368 |
|
|
|
2,319 |
|
|
|
(49 |
) |
|
|
11.3 |
% |
|
|
2,749 |
|
|
|
2,689 |
|
|
|
(60 |
) |
|
|
10.8 |
% |
Technology and communications |
|
|
676 |
|
|
|
655 |
|
|
|
(21 |
) |
|
|
4.8 |
% |
|
|
912 |
|
|
|
877 |
|
|
|
(35 |
) |
|
|
6.3 |
% |
Transportation |
|
|
174 |
|
|
|
166 |
|
|
|
(8 |
) |
|
|
1.8 |
% |
|
|
225 |
|
|
|
216 |
|
|
|
(9 |
) |
|
|
1.6 |
% |
Utilities |
|
|
1,239 |
|
|
|
1,199 |
|
|
|
(40 |
) |
|
|
9.2 |
% |
|
|
1,384 |
|
|
|
1,331 |
|
|
|
(53 |
) |
|
|
9.6 |
% |
Other |
|
|
1,203 |
|
|
|
1,169 |
|
|
|
(34 |
) |
|
|
7.8 |
% |
|
|
1,454 |
|
|
|
1,404 |
|
|
|
(50 |
) |
|
|
9.0 |
% |
Other securities |
|
|
2,586 |
|
|
|
2,521 |
|
|
|
(65 |
) |
|
|
15.0 |
% |
|
|
3,331 |
|
|
|
3,246 |
|
|
|
(85 |
) |
|
|
15.4 |
% |
| |
Total |
|
$ |
17,460 |
|
|
$ |
17,025 |
|
|
$ |
(435 |
) |
|
|
100.0 |
% |
|
$ |
18,633 |
|
|
$ |
18,080 |
|
|
$ |
(553 |
) |
|
|
100.0 |
% |
| |
The decrease in total unrealized loss greater than six months since December 31, 2006 was primarily
driven by a decrease in interest rates, asset sales and other-than-temporary impairments offset in
part by credit spread widening. The sectors with the most significant concentration of unrealized
losses were CMBS and corporate fixed maturities most significantly within the financial services
and utilities sectors. The Company’s current view of risk factors relative to these fixed maturity
types is as follows:
CMBS — As of March 31, 2007, the Company held approximately 630 different securities that were in
an unrealized loss position for greater than six months. The unrealized loss was the result of an
increase in interest rates and modest changes in credit spreads from the security’s purchase date.
Substantially all of these securities are investment grade securities with extended maturity dates
priced at, or greater than, 90% of amortized cost as of March 31, 2007. Future changes in fair
value of these securities are primarily dependent on future changes in interest rates and credit
spread movements.
66
Financial services — As of March 31, 2007, the Company held approximately 200 different securities
in the financial services sector that were in an unrealized loss position for greater than six
months. Substantially all of these securities are investment grade securities priced at, or greater
than, 90% of amortized cost as of March 31, 2007. These positions are a mixture of fixed and
variable rate securities, which have been adversely impacted by modest changes in credit spreads
and an increase in interest rates after the purchase date. Future changes in fair value of these
securities are primarily dependent on future changes in general market conditions, including
interest rates and credit spread movements.
Utilities — As of March 31, 2007, the Company held approximately 130 different securities that were
in an unrealized loss position for six months or more. Substantially all of these securities are
investment grade securities priced at, or greater than, 90% of amortized cost as of March 31, 2007.
Most of these securities are fixed rate, investment grade securities which have been adversely
impacted by increases in interest rates and modest changes in credit spreads after the purchase
date. Future changes in fair value of these securities are primarily dependent on future changes in
general market conditions, including interest rates and credit spread movements.
As part of the Company’s ongoing security monitoring process by a committee of investment and
accounting professionals, the Company has reviewed its investment portfolio and concluded that
there were no additional other-than-temporary impairments as of March 31, 2007 and December 31,
2006. Due to the issuers’ continued satisfaction of the securities’ obligations in accordance with
their contractual terms and the expectation that they will continue to do so, management’s intent
and ability to hold these securities to recovery as well as the evaluation of the fundamentals of
the issuers’ financial condition and other objective evidence, the Company believes that the prices
of the securities in the sectors identified above were temporarily depressed.
The evaluation for other-than-temporary impairments is a quantitative and qualitative process,
which is subject to risks and uncertainties in the determination of whether declines in the fair
value of investments are other-than-temporary. The risks and uncertainties include changes in
general economic conditions, the issuer’s financial condition or near term recovery prospects and
the effects of changes in interest rates. In addition, for securitized financial assets with
contractual cash flows (e.g. ABS and CMBS), projections of expected future cash flows may change
based upon new information regarding the performance of the underlying collateral. As of March 31,
2007 and December 31, 2006, management’s expectation of the discounted future cash flows on these
securities was in excess of the associated securities’ amortized cost. For further discussion, see
the “Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities” section
included in the “Critical Accounting Estimates” section of the MD&A and the “Other-Than-Temporary
Impairments on Available-for-Sale Securities” section in Note 1 of Notes to Consolidated Financial
Statements both of which are included in The Hartford’s 2006 Form 10-K Annual Report.
CAPITAL MARKETS RISK MANAGEMENT
The Hartford has a disciplined approach to managing risks associated with its capital markets
and asset/liability management activities. Investment portfolio management is organized to focus
investment management expertise on the specific classes of investments, while asset/liability
management is the responsibility of a dedicated risk management unit supporting the Life and
Property & Casualty operations. Derivative instruments are utilized in compliance with established
Company policy and regulatory requirements and are monitored internally and reviewed by senior
management.
Market Risk
The Hartford is exposed to market risk, primarily relating to the market price and/or cash flow
variability associated with changes in interest rates, market indices or foreign currency exchange
rates. The Company analyzes interest rate risk using various models including parametric models
that forecast cash flows of the liabilities and the supporting investments, including derivative
instruments under various market scenarios. For further discussion of market risk see the “Capital
Markets Risk Management” section of the MD&A in The Hartford’s 2006 Form 10-K Annual Report. There
have been no material changes in market risk exposures from December 31, 2006.
Derivative Instruments
The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards,
futures and options, in compliance with Company policy and regulatory requirements, designed to
achieve one of four Company approved objectives: to hedge risk arising from interest rate, equity
market, price or foreign currency rate risk or volatility; to manage liquidity; to control
transaction costs; or to enter into replication transactions. The Company does not make a market or
trade in these instruments for the express purpose of earning short-term trading profits. For
further discussion on The Hartford’s use of derivative instruments, refer to Note 4 of Notes to
Condensed Consolidated Financial Statements.
Life’s Equity Risk
The Company’s operations are significantly influenced by changes in the equity markets, primarily
in the U.S., but increasingly in Japan and other global markets. The Company’s profitability in its
investment products businesses depends largely on the amount of assets under management, which is
primarily driven by the level of sales, equity market appreciation and depreciation and the
persistency of the in-force block of business. Prolonged and precipitous declines in the equity
markets can have a significant effect on the Company’s operations, as sales of variable products
may decline and surrender activity may increase, as customer sentiment towards the equity market
turns negative. Lower assets under management will have a negative effect on the Company’s
financial results, primarily due to lower fee income related to the Retail, Retirement Plans, Institutional
and International and, to a lesser extent, the Individual Life segment, where a heavy concentration
of equity linked products are administered and sold.
67
Furthermore, the Company may experience a reduction in profit margins if a significant portion of
the assets held in the U.S. variable annuity separate accounts move to the general account and the
Company is unable to earn an acceptable investment spread, particularly in light of the low
interest rate environment and the presence of contractually guaranteed minimum interest credited
rates, which for the most part are at a 3% rate.
In addition, immediate and significant declines in one or more equity markets may also decrease the
Company’s expectations of future gross profits in one or more product lines, which are utilized to
determine the amount of DAC to be amortized in reporting product profitability in a given financial
statement period. A significant decrease in the Company’s future estimated gross profits would
require the Company to accelerate the amount of DAC amortization in a given period, which,
particularly in the case of U.S. variable annuities, could potentially cause a material adverse
deviation in that period’s net income. Although an acceleration of DAC amortization would have a
negative effect on the Company’s earnings, it would not affect the Company’s cash flow or liquidity
position.
The Company’s statutory financial results also have exposure to equity market volatility due to the
issuance of variable annuity contracts with guarantees. Specifically, in scenarios where equity
markets decline substantially, we would expect significant increases in the amount of statutory
surplus the Company would have to devote to maintain targeted rating agency and regulatory risk
based capital (“RBC”) ratios (via the C3 Phase II methodology) and other similar solvency margin
ratios. Various actions have been taken to partially mitigate this risk including the use of
guaranteed benefit reinsurance, dynamic hedging programs of U.S. GMWBs, and other statutory reserve
hedges.
The Company sells variable annuity contracts that offer one or more benefit guarantees, the value
of which generally increases with declines in equity markets. As is described in more detail below,
the Company manages the equity market risks embedded in these guarantees through reinsurance,
product design and hedging programs. The Company believes its ability to manage equity market risks
by these means gives it a competitive advantage; and, in particular, its ability to create
innovative product designs that allow the Company to meet identified customer needs while
generating manageable amounts of equity market risk. The Company’s relative sales and variable
annuity market share in the U.S. have generally increased during periods when it has recently
introduced new products to the market. In contrast, the Company’s relative sales and market share
have generally decreased when competitors introduce products that cause an issuer to assume larger
amounts of equity and other market risk than the Company is confident it can prudently manage. The
Company believes its long-term success in the variable annuity market will continue to be aided by
successful innovation that allows the Company to offer attractive product features in tandem with
prudent equity market risk management. In the absence of this innovation, the Company’s market
share in one or more of its markets could decline. Recently, the Company has experienced lower
levels of U.S. variable annuity sales as competitors continue to introduce new equity guarantees of
increasing risk and complexity. New product development is an ongoing process and during the fourth
quarter of 2006, the Company introduced a new U.S. living income benefit, which guarantees a steady
income stream for the life of the policyholder. During the first quarter of 2007, the Company
launched a new rider that may be attached to its Japan variable annuity business (“3 Win”) which
provides three different potential outcomes for the contract holder. The first outcome allows the
contract holder to lock-in gains on their account value upon reaching a specified appreciation
target. Upon reaching the target, contract holder funds are transferred out of the underlying funds
and into the Company’s general account from which the contract holder can access their account
value without penalty. The second outcome provides a “safety-net” that provides the contract holder
a guaranteed minimum income benefit (“GMIB”) of the contract holder’s original deposit over 15
years, if the contract holder’s account value drops by more than 20% from the original deposit. The
third outcome provides the contract holder a guaranteed minimum accumulation benefit (“GMAB”) of
the contract holder’s original deposit in a lump sum if the first two outcomes are not met after a
ten-year waiting period. This is the Company’s first GMAB issuance. GMABs are accounted for
differently from GMIBs. There is also a return of premium death benefit attached to this rider. In
addition, the Company expects to make further changes in its living benefit offerings from time to
time. Depending on the degree of consumer receptivity and competitor reaction to continuing changes
in the Company’s product offerings, the Company’s future level of sales will continue to be subject
to a high level of uncertainty.
The accounting for various benefit guarantees offered with variable annuity contracts can be
significantly different. Those accounted for under SFAS 133 (such as GMWBs or GMABs) are subject to
significant fluctuation in value, which is reflected in net income, due to changes in interest
rates, equity markets and equity market volatility as use of those capital market rates are
required in determining the liability’s fair value at each reporting date. Benefit guarantee
liabilities accounted for under SOP 03-1 (such as GMIBs and GMDBs) may also change in value;
however, the change in value is not immediately reflected in net income. Under SOP 03-1, the income
statement reflects the current period increase in the liability due to the deferral of a percentage
of current period revenues. The percentage is determined by dividing the present value of claims by
the present value of revenues using best estimate assumptions over a range of market scenarios.
Current period revenues are impacted by actual increases or decreases in account value. Claims
recorded against the liability have no immediate impact on the income statement unless those claims
exceed the liability. As a result of these significant accounting differences the liability for
guarantees recorded under SOP 03-1 may be significantly different if it was recorded under SFAS 133
and vice versa. In addition, the conditions in the capital markets in Japan vs. those in the U.S.
are sufficiently different that if the Company’s GMWB product currently offered in the U.S. were
offered in Japan, the capital market conditions in Japan would have a significant impact on the
valuation of the GMWB, irrespective of the accounting model. The same would hold true if the
Company’s GMIB product currently offered in Japan were to be offered in the U.S. Capital market
conditions in the U.S. would have a significant impact on the valuation of the GMIB. Many benefit
guarantees meet the definition of an embedded derivative, under SFAS 133 (GMWB and GMAB), and as
such are recorded at fair value with changes in fair value recorded in net income. However, certain
contract features that define how the contract holder can access the value of the guaranteed
benefit change the accounting from SFAS 133 to SOP 03-1. For contracts where the contract holder
can only obtain the value of the guaranteed benefit upon the
68
occurrence of an insurable event such as death (GMDB) or by making a significant initial net
investment (GMIB), such as when one invests in an annuity, the accounting for the benefit is
prescribed by SOP 03-1.
In the U.S., the Company sells variable annuity contracts that offer various guaranteed death
benefits. The Company maintains a liability, under SOP 03-1, for the death benefit costs of $485,
as of March 31, 2007. Declines in the equity market may increase the Company’s net exposure to
death benefits under these contracts. The majority of the contracts with the guaranteed death
benefit feature are sold by the Retail segment. For certain guaranteed death benefits, The Hartford
pays the greater of (1) the account value at death; (2) the sum of all premium payments less prior
withdrawals; or (3) the maximum anniversary value of the contract, plus any premium payments since
the contract anniversary, minus any withdrawals following the contract anniversary.
For certain guaranteed death benefits sold with variable annuity contracts beginning in June 2003,
the Retail segment pays the greater of (1) the account value at death; or (2) the maximum
anniversary value; not to exceed the account value plus the greater of (a) 25% of premium payments,
or (b) 25% of the maximum anniversary value of the contract. The Company currently reinsures a
significant portion of these death benefit guarantees associated with its in-force block of
business. Under certain of these reinsurance agreements, the reinsurers’ exposure is subject to an
annual cap.
The Company’s total gross exposure (i.e. before reinsurance) to these guaranteed death benefits as
of March 31, 2007 is $4.8 billion. Due to the fact that 84% of this amount is reinsured, the
Company’s net exposure is $780. This amount is often referred to as the retained net amount at
risk. However, the Company will incur these guaranteed death benefit payments in the future only if
the policyholder has an in-the-money guaranteed death benefit at their time of death.
In Japan, the Company offers certain variable annuity products with both a guaranteed death benefit
and a guaranteed income benefit. The Company maintains a liability for these death and income
benefits, under SOP 03-1, of $39 as of March 31, 2007. Declines in equity markets as well as a
strengthening of the Japanese Yen in comparison to the U.S. dollar may increase the Company’s
exposure to these guaranteed benefits. This increased exposure may be significant in extreme market
scenarios. For the guaranteed death benefits, the Company pays the greater of (1) account value at
death; (2) a guaranteed death benefit which, depending on the contract, may be based upon the
premium paid and/or the maximum anniversary value established no later than age 80, as adjusted for
withdrawals under the terms of the contract. With the exception of the GMIB in 3 Win as described
above, the guaranteed income benefit guarantees to return the contract holder’s initial investment,
adjusted for any earnings withdrawals, through periodic payments that commence at the end of a
minimum deferral period of 10, 15 or 20 years as elected by the contract holder. The value of the
guaranteed minimum accumulation benefit associated with Japan’s new product offering in the first
quarter of 2007, recorded as an embedded derivative under SFAS 133, was immaterial at March 31,
2007.
In April 2006, the Company entered into an indemnity reinsurance agreement with an unrelated party.
Under this agreement, the reinsurer will reimburse the Company for death benefit claims, up to an
annual cap, incurred for certain death benefit guarantees associated with an in-force block of
variable annuity products offered in Japan with an account value of $2.5 billion as of March 31,
2007.
The Company’s total gross exposure (i.e. before reinsurance) to these guaranteed death benefits and
income benefits offered in Japan as of March 31, 2007 is $83. Due to the fact that 58% of this
amount is reinsured, the Company’s net exposure is $35. This amount is often referred to as the
retained net amount at risk. However, the Company will incur these guaranteed death or income
benefits in the future only if the contract holder has an in-the-money guaranteed benefit at either
the time of their death or if the account value is insufficient to fund the guaranteed living
benefits.
The majority of the Company’s recent U.S. variable annuities are sold with a GMWB living benefit
rider, which, as described above, is accounted for under SFAS 133. Declines in the equity
market may increase the Company’s exposure to benefits under the GMWB contracts. For all contracts
in effect through July 6, 2003, the Company entered into a reinsurance arrangement to offset its
exposure to the GMWB for the remaining lives of those contracts. Substantially all U.S. GMWB riders
sold since July 6, 2003 are not covered by reinsurance. These unreinsured contracts generate
volatility in net income each quarter as the underlying embedded derivative liabilities are
recorded at fair value each reporting period, resulting in the recognition of net realized capital
gains or losses in response to changes in certain critical factors including capital market
conditions and policyholder behavior. In order to minimize the volatility associated with the
unreinsured GMWB liabilities, the Company established an alternative risk management strategy. The
Company uses hedging instruments to hedge its unreinsured GMWB exposure. These instruments include
interest rate futures and swaps, Standard and Poor’s (“S&P”) 500 and NASDAQ index put options and
futures contracts. The Company also uses Europe, Australasia and Far East (“EAFE”) Index swaps to
hedge GMWB exposure to international equity markets. The hedging program involves a detailed
monitoring of policyholder behavior and capital markets conditions on a daily basis and rebalancing
of the hedge position as needed. While the Company actively manages this hedge position, hedge
ineffectiveness may result due to factors including, but not limited to, policyholder behavior,
capital markets dislocation or discontinuity and divergence between the performance of the
underlying funds and the hedging indices.
The net effect of the change in value of the embedded derivative net of the results of the hedging
program was a gain (loss) of $22 and $(13) before deferred policy acquisition costs and tax effects
for the three months ended March 31, 2007 and 2006, respectively. As of March 31, 2007, the
notional and fair value related to the embedded derivatives, the hedging strategy and reinsurance
was $54.5 billion and $400 respectively. As of December 31, 2006, the notional and fair value
related to the embedded derivatives, the hedging strategy, and reinsurance was $53.3 billion and
$377, respectively.
69
The Company employs additional strategies to manage equity market risk in addition to the
derivative and reinsurance strategy described above that economically hedges the fair value of the
U.S. GMWB rider. Notably, the Company purchases one and two year S&P 500 Index put option contracts
to economically hedge certain other liabilities that could increase if the equity markets decline.
As of March 31, 2007 and December 31, 2006, the notional value related to this strategy was $2.2
billion and $2.2 billion, respectively, while the fair value related to this strategy was $27 and
$29, respectively. Because this strategy is intended to partially hedge certain equity-market
sensitive liabilities calculated under statutory accounting (see Capital Resources and Liquidity),
changes in the value of the put options may not be closely aligned to changes in liabilities
determined in accordance with GAAP, causing volatility in GAAP net income.
The Company continually seeks to improve its equity risk management strategies. The Company has
made considerable investment in analyzing current and potential future market risk exposures
arising from a number of factors, including but not limited to, product guarantees (GMDB, GMWB,
GMAB, and GMIB), equity market and interest rate risks (in both the U.S. and Japan) and foreign
currency exchange rates. The Company evaluates these risks individually and, increasingly, in the
aggregate to determine the risk profiles of all of its products and to judge their potential
impacts on GAAP net income, statutory capital volatility and other metrics. Utilizing this and
future analysis, the Company expects to evolve its risk management strategies over time, modifying
its reinsurance, hedging and product design strategies to optimally mitigate its aggregate
exposures to market-driven changes in GAAP equity, statutory capital and other economic metrics.
Because these strategies could target an optimal reduction of a combination of exposures rather
than targeting a single one, it is possible that volatility of GAAP net income would increase,
particularly if the Company places an increased relative weight on protection of statutory surplus
in future strategies.
Interest Rate Risk
The Hartford’s exposure to interest rate risk relates to the market price and/or cash flow
variability associated with changes in market interest rates. The Company manages its exposure to
interest rate risk through asset allocation limits, asset/liability duration matching and through
the use of derivatives. For further discussion of interest rate risk, see the Interest Rate Risk
discussion within the Capital Markets Risk Management section of the MD&A in The Hartford’s 2006
Form 10-K Annual Report.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of The Hartford and
its ability to generate strong cash flows from each of the business segments, borrow funds at
competitive rates and raise new capital to meet operating and growth needs.
Liquidity Requirements
The liquidity requirements of The Hartford have been and will continue to be met by funds from
operations as well as the issuance of commercial paper, common stock, debt or other capital
securities and borrowings from its credit facilities. Current and expected patterns of claim
frequency and severity may change from period to period but continue to be within historical norms
and, therefore, the Company’s current liquidity position is considered to be sufficient to meet
anticipated demands. However, if an unanticipated demand was placed on the Company, it is likely
that the Company would either sell certain of its investments to fund claims which could result in
larger than usual realized capital gains and losses or the Company would enter the capital markets
to raise further funds to provide the requisite liquidity. For a discussion and tabular
presentation of the Company’s current contractual obligations by period, including those related to
its Life and Property & Casualty insurance operations, refer to Off-Balance Sheet and Aggregate
Contractual Obligations within the Capital Resources and Liquidity section of the MD&A included in
The Hartford’s 2006 Form 10-K Annual Report.
The Hartford endeavors to maintain a capital structure that provides financial and operational
flexibility to its insurance subsidiaries, ratings that support its competitive position in the
financial services marketplace (see the “Ratings” section below for further discussion), and strong
shareholder returns. As a result, the Company may from time to time raise capital from the issuance
of stock, debt or other capital securities. The issuance of common stock, debt or other capital
securities could result in the dilution of shareholder interests or reduced net income due to
additional interest expense.
The Hartford’s Board of Directors has authorized the Company to repurchase up to $2 billion of its
securities. In the first quarter of 2007, The Hartford repurchased
$800 of its securities (8.4 million shares) under
this program. The Company’s repurchase authorization permits purchases of common stock, which may
be in the open market or through privately negotiated transactions. The Company also may enter into
derivative transactions to facilitate future repurchases of common stock. The Company has no
immediate intention to repurchase any additional shares of common stock. The timing of any future
repurchases will be dependent upon several factors, including the market price of the Company’s
securities, the Company’s capital position, consideration of the effect of any repurchases on the
Company’s financial strength or credit ratings, and other corporate considerations. The repurchase
program may be modified, extended or terminated by the Board of Directors at any time.
HFSG and Hartford Life, Inc. (“HLI”) are holding companies which rely upon operating cash flow in
the form of dividends from their subsidiaries, which enable them to service debt, pay dividends,
and pay certain business expenses. Dividends to the Company from its insurance subsidiaries are
restricted. The payment of dividends by Connecticut-domiciled insurers is limited under the
insurance holding company laws of Connecticut. These laws require notice to and approval by the
state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made
within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s policyholder
surplus as of December 31 of the preceding year or (ii) net income
70
(or net gain from operations, if such company is a life insurance company) for the twelve-month
period ending on the thirty-first day of December last preceding, in each case determined under
statutory insurance accounting principles. In addition, if any dividend of a Connecticut-domiciled
insurer exceeds the insurer’s earned surplus, it requires the prior approval of the Connecticut
Insurance Commissioner. The insurance holding company laws of the other jurisdictions in which The
Hartford’s insurance subsidiaries are incorporated (or deemed commercially domiciled) generally
contain similar (although in certain instances somewhat more restrictive) limitations on the
payment of dividends. Dividends paid to HFSG by its insurance subsidiaries are further dependent on
cash requirements of HLI and other factors. The Company’s property-casualty insurance subsidiaries
are permitted to pay up to a maximum of approximately $1.5 billion in dividends to HFSG in 2007
without prior approval from the applicable insurance commissioner. The Company’s life insurance
subsidiaries are permitted to pay up to a maximum of approximately $620 in dividends to HLI in 2007
without prior approval from the applicable insurance commissioner. The aggregate of these amounts,
net of amounts required by HLI, is the maximum the insurance subsidiaries could pay to HFSG in
2007. Through April 24, 2007, HFSG and HLI received a combined total of $979 from their insurance
subsidiaries.
The principal sources of operating funds are premiums and investment income, while investing cash
flows originate from maturities and sales of invested assets. The primary uses of funds are to pay
claims, policy benefits, operating expenses and commissions and to purchase new investments. In
addition, The Hartford has a policy of carrying a significant short-term investment position and
accordingly does not anticipate selling intermediate and long-term fixed maturity investments to
meet any liquidity needs. For a discussion of the Company’s investment objectives and strategies,
see the Investments and Capital Markets Risk Management sections above.
Sources of Capital
Shelf Registrations
On April 11, 2007, The Hartford filed an automatic shelf registration statement (Registration No.
333-142044) for the potential offering and sale of debt and equity securities with the Securities
and Exchange Commission. The registration statement allows for the following types of securities
to be offered: (i) debt securities, preferred stock, common stock, depositary shares, warrants,
stock purchase contracts, stock purchase units and junior subordinated deferrable interest
debentures of the Company, and (ii) preferred securities of any of one or more capital trusts
organized by The Hartford (“The Hartford Trusts”). The Company may enter into guarantees with
respect to the preferred securities of any of The Hartford Trusts. In that The Hartford is a
well-known seasoned issuer, as defined in Rule 405 under the Securities Act of 1933, the
registration statement went effective immediately upon filing and The Hartford may offer and sell
an unlimited amount of securities under the registration statement during the three-year life of
the shelf.
Contingent Capital Facility
On February 12, 2007, The Hartford entered into a put option agreement (the “Put Option
Agreement”) with Glen Meadow ABC Trust, a Delaware statutory trust (the “ABC Trust”), and LaSalle
Bank National Association, as put option calculation agent. The Put Option Agreement provides The
Hartford with the right to require the ABC Trust, at any time and from time to time, to purchase
The Hartford’s junior subordinated notes (the “Notes”) in a maximum aggregate principal amount not
to exceed $500. Under the Put Option Agreement, The Hartford will pay the ABC Trust premiums on a
periodic basis, calculated with respect to the aggregate principal amount of Notes that The
Hartford had the right to put to the ABC Trust for such period. The Hartford has agreed to
reimburse the ABC Trust for certain fees and ordinary expenses.
71
Commercial Paper, Revolving Credit Facility and Line of Credit
The table below details the Company’s short-term debt programs and the applicable balances
outstanding.
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Maximum Available As of |
|
Outstanding As of |
| |
|
Effective |
|
Expiration |
|
March 31, |
|
December |
|
March 31, |
|
December 31, |
| Description |
|
Date |
|
Date |
|
2007 |
|
31, 2006 |
|
2007 |
|
2006 |
| |
Commercial Paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Hartford |
|
|
11/10/86 |
|
|
|
N/A |
|
|
$ |
2,000 |
|
|
$ |
2,000 |
|
|
$ |
168 |
|
|
$ |
299 |
|
HLI [1] |
|
|
2/7/97 |
|
|
|
N/A |
|
|
|
— |
|
|
|
250 |
|
|
|
— |
|
|
|
— |
|
| |
Total commercial paper |
|
|
|
|
|
|
|
|
|
|
2,000 |
|
|
|
2,250 |
|
|
|
168 |
|
|
|
299 |
|
Revolving Credit Facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5-year revolving credit facility |
|
|
9/7/05 |
|
|
|
9/7/10 |
|
|
|
1,600 |
|
|
|
1,600 |
|
|
|
— |
|
|
|
— |
|
Line of Credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Japan Operations [2] |
|
|
9/18/02 |
|
|
|
1/4/08 |
|
|
|
42 |
|
|
|
42 |
|
|
|
— |
|
|
|
— |
|
| |
Total Commercial Paper, Revolving
Credit Facility and Line of Credit |
|
|
|
|
|
|
|
|
|
$ |
3,642 |
|
|
$ |
3,892 |
|
|
$ |
168 |
|
|
$ |
299 |
|
| |
|
|
|
| [1] |
|
In January 2007, the commercial paper program of HLI was terminated. |
| |
| [2] |
|
As of March 31, 2007 and December 31, 2006, the Company’s Japanese operation line of credit
in yen was ¥5 billion. |
The revolving credit facility provides for up to $1.6 billion of unsecured credit. Of the
total availability under the revolving credit facility, up to $100 is available to support letters
of credit issued on behalf of The Hartford or other subsidiaries of The Hartford. Under the
revolving credit facility, the Company must maintain a minimum level of consolidated statutory
surplus. In addition, the Company must not exceed a maximum ratio of debt to capitalization.
Quarterly, the Company certifies compliance with the financial covenants for the syndicate of
participating financial institutions. As of March 31, 2007, the Company was in compliance with all
such covenants.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
There have been no material changes to the Company’s off-balance sheet arrangements and aggregate
contractual obligations since the filing of the Company’s 2006 Form 10-K Annual Report.
Pension Plans and Other Postretirement Benefits
While the Company has significant discretion in making voluntary contributions to the U. S.
qualified defined benefit pension plan (the “Plan”), the Employee Retirement Income Security Act of
1974 regulations mandate minimum contributions in certain circumstances. For 2007, the Company does
not have a required minimum funding contribution for the Plan and the funding requirements for all
of the pension plans is expected to be immaterial. The Company expects to contribute $200 to the
pension plans during 2007.
Capitalization
The capital structure of The Hartford as of March 31, 2007 and December 31, 2006 consisted of debt
and equity, summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
December 31, |
|
|
| |
|
2007 |
|
2006 |
|
Change |
| |
Short-term debt (includes current maturities of long-term debt) |
|
$ |
468 |
|
|
$ |
599 |
|
|
|
(22 |
%) |
Long-term debt |
|
|
4,004 |
|
|
|
3,504 |
|
|
|
14 |
% |
| |
Total debt [1] |
|
|
4,472 |
|
|
|
4,103 |
|
|
|
9 |
% |
Equity excluding accumulated other comprehensive income, net of tax (“AOCI”) |
|
|
18,674 |
|
|
|
18,698 |
|
|
|
— |
|
AOCI |
|
|
177 |
|
|
|
178 |
|
|
|
(1 |
%) |
| |
Total stockholders’ equity |
|
$ |
18,851 |
|
|
$ |
18,876 |
|
|
|
— |
|
| |
Total capitalization including AOCI |
|
$ |
23,323 |
|
|
$ |
22,979 |
|
|
|
1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt to equity |
|
|
24 |
% |
|
|
22 |
% |
|
|
|
|
Debt to capitalization |
|
|
19 |
% |
|
|
18 |
% |
|
|
|
|
| |
|
|
|
| [1] |
|
Total debt of the Company excludes $435 and $258 of consumer notes as of March 31, 2007 and
December 31, 2006, respectively. |
The Hartford’s total capitalization as of March 31, 2007 increased by $344 as compared with
December 31, 2006. This increase was due to a $369 increase in total debt and a $25 decrease in
total stockholders’ equity. Total debt increased from issuance of $500 of 5.375% senior notes
offset by $131 in repayments on commercial paper. Total stockholders’ equity decreased primarily
due to treasury stock acquired of $800 and stockholder dividends of $161, partially offset by net
income of $876 and an increase in issuance of shares under incentive and stock compensation plans
of $77.
72
Debt
For additional information regarding debt, see Note 14 of Notes to Consolidated Financial
Statements in The Hartford’s 2006 Form 10-K Annual Report.
On March 9, 2007, The Hartford issued $500 of 5.375% senior notes due March 15, 2017. The Hartford
intends to use most of the net proceeds from this issuance to repay its $300 of 4.7% notes, due September
1, 2007, at maturity and used the balance of the proceeds to pay down a portion of the commercial
paper portfolio. The issuance was made pursuant to the Company’s shelf registration statement
(Registration No. 333-108067).
Consumer Notes
For additional information regarding consumer notes, see Note 14 of Notes to Consolidated Financial
Statements in The Hartford’s 2006 Form 10-K Annual Report.
As of March 31, 2007, and December 31, 2006, $435 and $258 of consumer notes had been issued. As of
March 31, 2007, these consumer notes have interest rates ranging from 5.0% to 6.0% for fixed notes
and, for variable notes, either consumer price index plus 175 to 267 basis points, S&P 500 Index,
or Dow Jones Index. For the three months ended March 31, 2007, interest credited to holders of
consumer notes was $5.
Stockholders’ Equity
Treasury
stock acquired — In the first quarter of 2007, The Hartford
repurchased $800 of its securities (8.4 million
shares) under its share repurchase program. For additional information regarding the share
repurchase program, see the Liquidity Requirements section above.
For additional information on stockholders’ equity and AOCI, see Notes 15 and 16, respectively, of
Notes to Consolidated Financial Statements in The Hartford’s 2006 Form 10-K Annual Report.
Cash Flows
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| |
|
2007 |
|
2006 |
| |
Net cash provided by operating activities |
|
$ |
1,305 |
|
|
$ |
1,368 |
|
Net cash provided by (used for) investing activities |
|
$ |
(1,196 |
) |
|
$ |
(1,246 |
) |
Net cash provided by (used for) financing activities |
|
$ |
272 |
|
|
$ |
(16 |
) |
Cash – end of period |
|
$ |
1,790 |
|
|
$ |
1,394 |
|
| |
The decrease in cash from operating activities was primarily the result of a decrease in the
Company’s tax refund in 2007 compared to the prior year period. Cash from financing activities
increased primarily due to increases in net receipts from investment and universal life-type
contracts, proceeds from issuance of long-term debt and consumer notes, and proceeds from the
issuance of shares under incentive and stock compensation plans, partially offset by treasury
stock acquired and increases in dividends paid. Net cash from operating and financing activities
accounted for the majority of cash used for investing activities.
Operating cash flows for the three months ended March 31, 2007 and 2006 have been adequate to meet
liquidity requirements.
Equity Markets
For a discussion of the potential impact of the equity markets on capital and liquidity, see the
Capital Markets Risk Management section under “Market Risk” above.
The Company’s statutory financial results also have exposure to equity market volatility due to the
issuance of variable annuity contracts with guarantees. Specifically, in scenarios where equity
markets decline substantially, we would expect significant increases in the amount of statutory
surplus the Company would have to devote to maintain targeted rating agency and regulatory risk
based capital (“RBC”) ratios (via the C3 Phase II methodology) and other similar solvency margin
ratios. Various actions have been taken to partially mitigate this risk including the use of
guaranteed benefit reinsurance, dynamic hedging programs of U.S. GMWBs, and other statutory reserve
hedges.
Ratings
Ratings are an important factor in establishing the competitive position in the insurance and
financial services marketplace. There can be no assurance that the Company’s ratings will continue
for any given period of time or that they will not be changed. In the event the Company’s ratings
are downgraded, the level of revenues or the persistency of the Company’s business may be adversely
impacted.
73
The following table summarizes The Hartford’s significant member companies’ financial ratings from
the major independent rating organizations as of April 24, 2007.
| |
|
|
|
|
|
|
|
|
| Insurance Financial Strength Ratings: |
|
A.M. Best |
|
Fitch |
|
Standard & Poor’s |
|
Moody’s |
| |
Hartford Fire Insurance Company |
|
A+ |
|
AA |
|
AA- |
|
Aa3 |
Hartford Life Insurance Company |
|
A+ |
|
AA |
|
AA- |
|
Aa3 |
Hartford Life and Accident Insurance Company |
|
A+ |
|
AA |
|
AA- |
|
Aa3 |
Hartford Life and Annuity Insurance Company |
|
A+ |
|
AA |
|
AA- |
|
Aa3 |
Hartford Life Insurance KK (Japan) |
|
— |
|
— |
|
AA- |
|
— |
Hartford Life Limited (Ireland) |
|
— |
|
— |
|
AA- |
|
— |
| |
Other Ratings: |
|
|
|
|
|
|
|
|
The Hartford Financial Services Group, Inc.: |
|
|
|
|
|
|
|
|
Senior debt |
|
a- |
|
A |
|
A |
|
A2 |
Commercial paper |
|
AMB-2 |
|
F1 |
|
A-1 |
|
P-1 |
Hartford Life, Inc.: |
|
|
|
|
|
|
|
|
Senior debt |
|
a- |
|
A |
|
A |
|
A2 |
Hartford Life Insurance Company: |
|
|
|
|
|
|
|
|
Short term rating |
|
— |
|
— |
|
A-1+ |
|
P-1 |
Consumer notes |
|
a+ |
|
AA- |
|
AA- |
|
A1 |
| |
These ratings are not a recommendation to buy or hold any of The Hartford’s securities and they may
be revised or revoked at any time at the sole discretion of the rating organization.
The agencies consider many factors in determining the final rating of an insurance company. One
consideration is the relative level of statutory surplus necessary to support the business written.
Statutory surplus represents the capital of the insurance company reported in accordance with
accounting practices prescribed by the applicable state insurance department.
The table below sets forth statutory surplus for the Company’s insurance companies.
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
December 31, |
| |
|
2007 |
|
2006 |
| |
Life Operations |
|
$ |
4,818 |
|
|
$ |
4,734 |
|
Japan Life Operations |
|
|
1,429 |
|
|
|
1,380 |
|
Property & Casualty Operations |
|
|
8,307 |
|
|
|
8,230 |
|
| |
Total |
|
$ |
14,554 |
|
|
$ |
14,344 |
|
| |
Contingencies
Legal Proceedings – For a discussion regarding contingencies related to The Hartford’s legal
proceedings, see Part II, Item 1, “Legal Proceedings”.
For a discussion regarding contingencies related to the manner in which The Hartford compensates
brokers and other producers, see “Overview—Broker Compensation” above.
Regulatory Developments – For a discussion regarding contingencies related to regulatory
developments that affect The Hartford, see Note 7 of Notes to Condensed Consolidated Financial
Statements.
Federal Terrorism Risk Insurance
For a discussion of terrorism reinsurance legislation and how it affects The Hartford, see the
“Risk Management Strategy-Terrorism” under the Property & Casualty section of the MD&A in The
Hartford’s 2006 Form 10-K Annual Report.
Legislative Initiatives
In early
2007, Florida enacted legislation intended to address increasing
rates and shrinking capacity for homeowners insurance in the state. The legislation will make significantly more reinsurance
capacity available to companies that choose to purchase it. Specifically, the legislation increases
the capacity of the Florida Hurricane Catastrophe Fund, which provides reinsurance to
primary insurers for Florida catastrophes at generally below-market rates, from the current level
of $16 billion to a potential total of $35 billion. The new Florida legislation includes many other
provisions, including steps designed to make Citizens Property Insurance Corporation more
competitive with private insurers, provisions to provide rate relief to homeowners and requirements
that excess profits on residential property business be returned to policyholders. The Hartford is
still in the process of analyzing the new legislation to assess the impact on The Hartford.
The Hartford expects legislation to be introduced in Congress which would provide for new
retirement and savings vehicles designed to simplify retirement plan administration and expand
individual participation in retirement savings plans. If enacted, these proposals
74
could have a material effect on sales of the Company’s life insurance and investment products.
Prospects for enactment of this legislation in 2007 are uncertain.
In addition, other tax proposals and regulatory initiatives which have been or are being considered
by Congress could have a material effect on the insurance business. These proposals and initiatives
include changes pertaining to the tax treatment of insurance companies and life insurance products
and annuities, repeal or reform of the estate tax and comprehensive federal tax reform. The nature
and timing of any Congressional action with respect to these efforts is unclear.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial
Statements included in The Hartford’s 2006 Form 10-K Annual Report and Note 1 of Notes to Condensed
Consolidated Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by
reference.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company’s principal executive officer and its principal financial officer, based on their
evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) have concluded that the Company’s disclosure controls and procedures are effective for
the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of March 31,
2007.
Changes in internal control over financial reporting
There was no change in the Company’s internal control over financial reporting that occurred during
the Company’s first fiscal quarter of 2007 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting. Beginning in the second
quarter of 2007, the Company outsourced certain information technology infrastructure services,
which will materially affect internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Hartford is involved in claims litigation arising in the ordinary course of business, both
as a liability insurer defending or providing indemnity for third-party claims brought against
insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for
such activity through the establishment of unpaid loss and loss adjustment expense reserves.
Subject to the uncertainties discussed below under the caption “Asbestos and Environmental Claims,”
management expects that the ultimate liability, if any, with respect to such ordinary-course claims
litigation, after consideration of provisions made for potential losses and costs of defense, will
not be material to the consolidated financial condition, results of operations or cash flows of The
Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for
substantial amounts. These actions include, among others, putative state and federal class actions
seeking certification of a state or national class. Such putative class actions have alleged, for
example, underpayment of claims or improper underwriting practices in connection with various kinds
of insurance policies, such as personal and commercial automobile, property, life and inland
marine; improper sales practices in connection with the sale of life insurance and other investment
products; and improper fee arrangements in connection with mutual funds and structured settlements.
The Hartford also is involved in individual actions in which punitive damages are sought, such as
claims alleging bad faith in the handling of insurance claims. Like many other insurers, The
Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that
insurers had a duty to protect the public from the dangers of asbestos and that insurers committed
unfair trade practices by asserting defenses on behalf of their policyholders in the underlying
asbestos cases. Management expects that the ultimate liability, if any, with respect to such
lawsuits, after consideration of provisions made for estimated losses, will not be material to the
consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate
amounts sought in certain of these actions, and the inherent unpredictability of litigation, an
adverse outcome in certain matters could, from time to time, have a material adverse effect on the
Company’s consolidated results of operations or cash flows in particular quarterly or annual
periods.
Broker Compensation Litigation – On October 14, 2004, the New York Attorney General’s Office filed
a civil complaint (the “NYAG Complaint”) against Marsh Inc. and Marsh & McLennan Companies, Inc.
(collectively, “Marsh”) alleging, among other things, that certain insurance companies, including
The Hartford, participated with Marsh in arrangements to submit inflated bids for business
insurance and paid contingent commissions to ensure that Marsh would direct business to them. The
Hartford was not joined as a defendant in the action, which has since settled. Since the filing of
the NYAG Complaint, several private actions have been filed against the Company asserting claims
arising from the allegations of the NYAG Complaint.
Two securities class actions, now consolidated, have been filed in the United States District Court
for the District of Connecticut alleging claims against the Company and certain of its executive
officers under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. The consolidated
amended complaint alleges on behalf of a putative class of shareholders that the Company and the
four
75
named individual defendants, as control persons of the Company, failed to disclose to the investing
public that The Hartford’s business and growth was predicated on the unlawful activity alleged in
the NYAG Complaint. The class period alleged is August 6, 2003 through October 13, 2004, the day
before the NYAG Complaint was filed. The complaint seeks damages and attorneys’ fees. Defendants
filed a motion to dismiss in June 2005, and, on July 13, 2006, the district court granted the
motion. The plaintiffs have noticed an appeal of the dismissal.
Two corporate derivative actions, now consolidated, also have been filed in the same court. The
consolidated amended complaint, brought by shareholders on behalf of the Company against its
directors and an executive officer, alleges that the defendants knew adverse non-public information
about the activities alleged in the NYAG Complaint and concealed and misappropriated that
information to make profitable stock trades, thereby breaching their fiduciary duties, abusing
their control, committing gross mismanagement, wasting corporate assets, and unjustly enriching
themselves. The complaint seeks damages, injunctive relief, disgorgement, and attorneys’ fees.
Defendants filed a motion to dismiss in May 2005, and the plaintiffs have agreed to stay further
proceedings until after the resolution of the appeal from the dismissal of the securities
action. All defendants dispute the allegations and intend to defend these actions vigorously.
The Company is also a defendant in a multidistrict litigation in federal district court in New
Jersey. There are two consolidated amended complaints filed in the multidistrict litigation, one
related to alleged conduct in connection with the sale of property-casualty insurance and the other
related to alleged conduct in connection with the sale of group benefits products. The Company and
various of its subsidiaries are named in both complaints. The actions assert, on behalf of a class
of persons who purchased insurance through the broker defendants, claims under the Sherman Act, the
Racketeer Influenced and Corrupt Organizations Act (“RICO”), state law, and in the case of the
group benefits complaint, claims under ERISA arising from conduct similar to that alleged in the
NYAG Complaint. The class period alleged is 1994 through the date of class certification, which has
not yet occurred. The complaints seek treble damages, injunctive and declaratory relief, and
attorneys’ fees. On October 3, 2006, the court denied in part the defendants’ motions to dismiss
the two consolidated amended complaints but found the complaints deficient in other respects and
ordered the plaintiffs to file supplemental pleadings. After the plaintiffs filed their
supplemental pleadings, the defendants renewed their motions to dismiss. On April 5, 2007, the
court granted the defendants’ renewed motions to dismiss the Sherman Act and RICO claims, dismissed
the consolidated actions without prejudice, and gave the plaintiffs
thirty days to file any amended
complaints. The Company also has been named in two similar actions filed in
state courts, which the defendants have removed to federal court. Those actions currently are
transferred to the court presiding over the multidistrict litigation. The Company disputes the
allegations in all of these actions and intends to defend the actions vigorously.
Additional complaints may be filed against the Company in various courts alleging claims under
federal or state law arising from the conduct alleged in the NYAG Complaint. The Company’s ultimate
liability, if any, in the pending and possible future suits is highly uncertain and subject to
contingencies that are not yet known, such as how many suits will be filed, in which courts they
will be lodged, what claims they will assert, what the outcome of investigations by the New York
Attorney General’s Office and other regulatory agencies will be, the success of defenses that the
Company may assert, and the amount of recoverable damages if liability is established. In the
opinion of management, it is possible that an adverse outcome in one or more of these suits could
have a material adverse effect on the Company’s consolidated results of operations or cash flows in
particular quarterly or annual periods.
Asbestos and Environmental Claims – As discussed in Item 7 in The Hartford’s 2006 Form 10-K Annual
Report, Management’s Discussion and Analysis of Financial Condition and Results of Operations under
the caption “Other Operations (Including Asbestos and Environmental Claims)”, The Hartford
continues to receive asbestos and environmental claims that involve significant uncertainty
regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its
overall reserve levels and reinsurance coverages, as well as the methodologies it uses to estimate
its exposures. Because of the significant uncertainties that limit the ability of insurers and
reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses,
particularly those related to asbestos, the ultimate liabilities may exceed the currently recorded
reserves. Any such additional liability cannot be reasonably estimated now but could be material to
The Hartford’s consolidated operating results, financial condition and liquidity.
Item 1A. RISK FACTORS
We are particularly vulnerable to losses from the incidence and severity of
catastrophes, both natural and man-made, the occurrence of which may have a
material adverse effect on our financial condition, consolidated results of
operations or cash flows in a particular quarterly or annual period.
Our property and casualty insurance operations expose us to claims arising out
of catastrophes. Catastrophes can be caused by various unpredictable events,
including earthquakes, hurricanes, hailstorms, severe winter weather, fires,
tornadoes, explosions and other natural or man-made disasters. We also face
substantial exposure to losses resulting from acts of terrorism, disease
pandemics and political instability. The geographic distribution of our
business subjects us to catastrophe exposure for natural events occurring in a
number of areas, including, but not limited to, hurricanes in Florida, the Gulf
Coast, the Northeast and the Atlantic coast regions of the United States, and
earthquakes in California and the New Madrid region of the United States. We
expect that increases in the values and concentrations of insured property in
these areas will continue to increase the severity of catastrophic events in
the future. In the aftermath of the 2004 and 2005 hurricane season, third-party
catastrophe loss models for hurricane loss events were updated to incorporate
medium-term forecasts of increased hurricane frequency and severity. In
addition, changing climate conditions, primarily rising global temperatures,
may be increasing, or may in the future increase, the frequency and severity of
natural catastrophes such as hurricanes. Our life insurance operations are
also exposed to risk of loss from catastrophes. For example, natural
or man-made disasters or a disease pandemic such as could arise from avian flu, could
significantly increase our mortality and morbidity experience. Policyholders
may be unable to meet their obligations to pay premiums on our insurance
policies or make deposits on our investment products. Our liquidity could be
constrained by a catastrophe, or multiple catastrophes, which result in
extraordinary losses or a downgrade of our debt or financial strength ratings.
In addition, in part because accounting rules do not permit insurers to reserve
for such catastrophic events until they occur, claims from catastrophic events
could have a material adverse effect on our financial condition, consolidated
results of operations or cash flows in a particular quarterly or annual period.
Refer to
Item 1A in The Hartford’s 2006 Form 10-K Annual Report for an explanation
of the Company’s other risk factors.
76
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
The following table summarizes the Company’s repurchases of its common stock for the three months
ended March 31, 2007:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Total Number of Shares |
|
Approximate Dollar Value of |
| |
|
Total Number |
|
|
|
Purchased as Part of |
|
Shares that May Yet Be |
| |
|
of Shares |
|
Average Price |
|
Publicly Announced |
|
Purchased Under |
| Period |
|
Purchased |
|
Paid Per Share |
|
Plans or Programs |
|
the Plans or Programs |
| |
January 1, 2007 — January 31, 2007 |
|
2,118,687 [1] |
|
$93.10 |
|
2,115,200 |
|
$803,069,966 [2] |
February 1, 2007 — February 28, 2007 |
|
3,487,259 [1] |
|
$96.18 |
|
3,370,310 |
|
$1,479,029,768 [3] |
March 1, 2007 — March 31, 2007 |
|
2,958,480 [1] |
|
$94.47 |
|
2,953,797 |
|
$1,200,000,012 [3] |
| |
Total |
|
8,564,426 |
|
$94.83 |
|
8,439,307 |
|
N/A |
| |
|
|
|
| [1] |
|
Includes 3,487, 116,949 and 4,683 shares in January, February and March, respectively, acquired from employees of the Company for
tax withholding purposes in connection with the Company’s stock compensation plans. |
| |
| [2] |
|
In January 2007, $1 billion of the Company’s securities were eligible for repurchase pursuant to the Company’s repurchase program. |
| |
| [3] |
|
In February 2007, the Company announced that its Board of Directors had authorized the Company to repurchase up to an additional
$1 billion of its securities, bringing the Company’s total share repurchase authorization to $2 billion. |
The Company’s repurchase authorization permits purchases of common stock, which may be in the
open market or through privately negotiated transactions. The Company also may enter into
derivative transactions to facilitate future repurchases of common stock. The timing of any future
repurchases will be dependent upon several factors, including the market price of the Company’s
securities, the Company’s capital position, consideration of the effect of any repurchases on the
Company’s financial strength or credit ratings, and other corporate considerations. The repurchase
program may be modified, extended or terminated by the Board of Directors at any time. The Company
has no immediate intention to repurchase any additional shares of common stock.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
See Exhibit Index on page 79.
77
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| |
|
|
| |
The Hartford Financial Services Group, Inc.
|
|
| |
(Registrant) |
|
| |
|
|
| |
| |
|
|
| Date: April 26, 2007 |
/s/ Robert J. Price
|
|
| |
Robert J. Price |
|
| |
Senior Vice President and Controller
(Chief accounting officer and duly
authorized signatory) |
|
| |
78
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE THREE MONTHS ENDED MARCH 31, 2007 FORM 10-Q
EXHIBITS INDEX
| |
|
|
| Exhibit No. |
|
Description |
4.01
|
|
5.375% Senior Note due March 15, 2017 (incorporated herein by reference to Exhibit 4.2 of the
Company’s Current Report on Form 8-K, filed March 12, 2007). |
|
|
|
15.01
|
|
Deloitte & Touche LLP Letter of Awareness. |
|
|
|
31.01
|
|
Certification of Ramani Ayer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.02
|
|
Certification of David M. Johnson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.01
|
|
Certification of Ramani Ayer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.02
|
|
Certification of David M. Johnson pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
79