The following is a summary of North American underwriting results by underwriting segment within Property & Casualty. Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses.
2001 COMPARED TO 2000 -- Revenues in the Individual Life segment increased $250, or 39%, primarily due to the business acquired from Fortis. Fee income, including cost of insurance charges, increased $180, or 40%, driven principally by growth in the variable life business where account values increased $1.0 billion, or 35%, and life insurance in force increased $28.2 billion, or 84%, from a year ago. In addition, net investment income on general account business (universal life, interest sensitive whole life and term life) increased $66, or 34%, consistent with the growth in related account values.
Management believes that the Company's strong market position will provide opportunities for growth in this segment as individuals increasingly focus on estate planning. The Hartford's acquisition of the United States individual life insurance business of Fortis has increased its scale while broadening its distribution capabilities as described above.
2000 COMPARED TO 1999 -- Operating income decreased $27, or 6%, primarily due to adverse loss development in Reinsurance, expenses related to the Business Insurance field office and claim reorganizations, deteriorating underwriting results from discontinued operations (PENCO, Canada, Farm and IRI) and increased automobile losses in the Personal Insurance segment. Partially offsetting this decrease was a reduction in property catastrophe losses and improvement in Business Insurance mid-market results.
Firming market conditions in the specialty commercial sector are expected to continue in 2002. However, September 11 has created an ambiguous environment and economic uncertainty as federal backing in the event of future terrorist attacks remains uncertain. Uncertainties in the reinsurance market also may impact the segment's ability to obtain adequate reinsurance coverage for certain exposures at a reasonable price. Strong property pricing should be even stronger in 2002 as a result of September 11. New capital is flowing into the industry as a result of a hardening market, thereby increasing capacity. Management believes, however, that strategic actions being taken which include providing innovative new products as well as expanding product lines; expanding non-traditional distribution alternatives; and further leveraging underwriting discipline and capabilities will position the segment to capitalize on a continued improving marketplace.
The persistency of The Hartford's annuity and other interest-sensitive life insurance reserves is enhanced by policy restrictions on the withdrawal of funds. Withdrawals in excess of allowable penalty-free amounts are assessed a surrender charge during a penalty period, which is usually at least seven years. Such surrender charge is initially a percentage of either the accumulation value or considerations received, which varies
The Company also invests in unaffiliated limited partnership arrangements in order to further diversify its investment portfolio. These limited partnerships represent approximately 3% of the fair value of its invested assets as of December 31, 2001 and 2000. Limited partnerships are typically less liquid than direct investments in fixed income or equity investments. Market volatility and other factors beyond the Company's control can adversely affect the value of these investments. Because the Company is a limited partner, its ability to control the timing or the realization of the related investment income is restricted.
The following table identifies, by type, the fixed maturity securities held as of December 31, 2001 and 2000.
The Company's derivative counterparty exposure policy establishes market-based credit limits, favors long-term financial stability and creditworthiness and typically requires credit enhancement/credit risk reducing agreements. Credit risk is measured as the amount owed to the Company based on current market conditions and potential payment obligations between the Company and its counterparties. Credit exposures are generally quantified weekly and netted, and collateral is pledged to and held by, or on behalf of, the Company to the extent the current value of derivatives exceeds exposure policy thresholds.
The table below provides information as of December 31, 2001 on debt obligations and trust preferred securities and reflects principal cash flows and related weighted average interest rates by maturity year. Comparative totals are included as of December 31, 2000.
The September 11 terrorist attack had a significant impact on The Hartford and the insurance industry as a whole. Since that time, The Hartford has taken steps to limit future exposure to terrorist acts. These steps include attaching terrorist exclusions to our policies wherever possible and identifying and managing concentrated exposures by location and dividing the exposures into terrorism risk classes. The Hartford and the industry continue to support the development of Federal legislation to provide a federal insurance program, which would help share in potential losses from terrorism. However, in the absence of a federally backed capital resource or availability of adequate reinsurance coverage and despite the steps already taken to limit exposure, The Hartford may not have the capacity to cover future large-scale terrorist acts such as nuclear, chemical or biological attacks. In addition, losses related to future terrorist attacks could negatively impact the Company's financial strength and debt ratings. As a result, any losses related to future terrorist attacks could have a material impact to the liquidity, financial condition and results of operation of The Hartford.
- -------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------- Net cash provided by operating activities $ 2,303 $ 2,435 $ 954 Net cash provided by (used for) investing activities $ (5,536) $ (2,164) $ 2,216 Net cash provided by (used for) financing activities $ 3,365 $ (208) $ (3,104) Cash - end of year $ 353 $ 227 $ 182 ====================================================================
The Company distributes its annuity, life and certain property and casualty insurance products through a variety of distribution channels, including broker-dealers, banks, wholesalers, its own internal sales force and other third party organizations. The Company periodically negotiates provisions and renewals of these relationships and there can be no assurance that such terms will remain acceptable to the Company or such third parties. An interruption in the Company's continuing relationship with certain of these third parties could materially affect the Company's ability to market its products. During the first quarter of 1999, the Company modified its existing, exclusive contract with one such third party, Putnam Mutual Funds Corp. ("Putnam") to eliminate the exclusivity provision which allowed both parties to pursue new market opportunities. Putnam is contractually obligated to support and service the related annuity in force block of business and to market, support and service new business. However, there can be no assurance that this contract modification will not adversely impact the Company's ability to distribute Putnam related products.