As of December 31, 2009 and 2008, The Hartford owned building space of approximately 2.7 million and 2.5 million square feet, respectively, of which approximately 2.3 million and 2.1 million square feet, respectively, comprised its Hartford, Connecticut location and other properties within the greater Hartford, Connecticut area. In addition, as of December 31, 2009 and 2008, The Hartford leased approximately 5.0 million and 5.7 million square feet, respectively, throughout the United States of America, and approximately 220 thousand square feet, for both 2009 and 2008, in other countries. All of the properties owned or leased are used by one or more of all eleven reporting segments, depending on the location. For more information on reporting segments, see Part I, Item 1, Business of The Hartford - Reporting Segments. The Company believes its properties and facilities are suitable and adequate for current operations.
A decrease in net realized losses, which included other-than-temporary impairments of $1.5 billion compared to $4.0 billion in 2009 and 2008, respectively, and gains on the variable annuity hedge program of $631 in 2009 compared to losses of $639 in 2008. Partially offsetting the decrease in realized losses was approximately $300 in net realized capital losses in 2009 related to the settlement of a contingent obligation to Allianz SE (“Allianz”).
The change from consolidated net income to consolidated net loss was primarily due to the following:
A roll-forward follows of Property & Casualty liabilities for unpaid losses and loss adjustment expenses by segment for the year ended December 31, 2009:
Released reserves for Middle Market general liability claims related to the 2003 to 2006 accident years by $49. Beginning in the third quarter of 2007, the Company observed that reported losses for high hazard and umbrella general liability claims for the 2003 to 2006 accident years were emerging favorably and this caused management to reduce its estimate of the cost of future reported claims for these accident years, resulting in a reserve release in the third and fourth quarter of 2007. This reserve development is unrelated to the reserve strengthening in 2005 and 2006 of other Middle Market general liability claims which developed unfavorably due to higher than anticipated loss payments beyond four years of development. The $49 reserve release represented 6% of the Company’s net reserves for Middle Market general liability claims as of December 31, 2006.
The Company reduced its 20-year projected separate account return assumption from 7.8% to 7.2% in the U.S.
The Hartford is organized into two major operations: Life and Property & Casualty, each containing reporting segments. The following discussion describes the Life and Property & Casualty operations.
Property & Casualty is organized into five reporting segments: the underwriting segments of Personal Lines, Small Commercial, Middle Market and Specialty Commercial (collectively “Ongoing Operations”), and the Other Operations segment. Through Property & Casualty the Company 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 and surety, professional liability and director’s and officer’s liability coverages. Property & Casualty also provides automobile, homeowners, and home-based business coverage to individuals throughout the United States, as well as insurance-related services to businesses.
Through its Other Operations segment, Property & Casualty is responsible for managing property and casualty operations of The Hartford that have discontinued writing new or renewal business as well as managing the claims related to asbestos and environmental exposures.
• The general expense ratio has remained flat as a result of management’s efforts to reduce expenses, offset by a decline in the average asset base.
The transition impact related to the adoption of fair value accounting guidance was a reduction in net income of $11 the year ended December 31, 2008. For further discussion of the fair value guidance transition impact, refer to Note 4a of the Notes to Consolidated Financial Statements.
• Amortization of DAC decreased as a result of a favorable Unlock in the third quarter of 2009. For further discussion see Unlocks within the Critical Accounting Estimates section of the MD&A.
• Japan DAC amortization ratio, excluding realized gains (losses) and DAC Unlocks, increased due to actual gross profits being less than expected as a result of lower fees earned on declining assets resulting in negative true-ups and a higher DAC amortization rate, as well as the accelerated amortization associated with the impact of the 3 Win trigger.
• Benefits, losses and loss adjustment expenses were lower driven by lower interest credited due to lower rates on floating rate GIP’s as well as an overall smaller block of business.
• Insurance operating costs and other expenses decreased due to a decline in premium tax, driven by reduced PPLI deposits, partially offset by discontinued administrative system projects and product development expenses.
A variety of traditional reinsurance products are used as part of the Company’s risk management strategy, including excess of loss occurrence-based products that protect property and workers’ compensation exposures, and individual risk or quota share arrangements, that protect specific classes or lines of business. The Company has no significant finite risk contracts in place and the statutory surplus benefit from all such prior year contracts is immaterial. Facultative reinsurance is used by the Company to manage policy-specific risk exposures based on established underwriting guidelines. The Hartford also participates in governmentally administered reinsurance facilities such as the Florida Hurricane Catastrophe Fund (“FHCF”), the Terrorism Risk Insurance Program established under The Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and other reinsurance programs relating to particular risks or specific lines of business.
The Company uses credit derivatives to purchase credit protection and, to a lesser extent, assume credit risk with respect to a single entity, referenced index, or asset pool. The Company purchases credit protection through credit default swaps to economically hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio. The Company has also entered into credit default swaps that assume credit risk as part of replication transactions. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that would otherwise be permissible investments under the Company’s investment policies. These swaps reference investment grade single corporate issuers and baskets, which include trades ranging from baskets of up to five corporate issuers to standard and customized diversified portfolios of corporate issuers, which are established within sector concentration limits and are typically divided into tranches which possess different credit ratings ranging from AAA through the CCC rated first loss position.
In addition to CMBS, the Company has exposure to commercial mortgage loans as presented in the following table. These loans are collateralized by a variety of commercial properties and are diversified both geographically throughout the United States and by property type. These loans may be either in the form of a whole loan, where the Company is the sole lender, or a loan participation. Loan participations are loans where the Company has purchased or retained a portion of an outstanding loan or package of loans and participates on a pro-rata basis in collecting interest and principal pursuant to the terms of the participation agreement. In general, A-Note participations have senior payment priority, followed by B-Note participations and then mezzanine loan participations. As of December 31, 2009, loans within the Company’s mortgage loan portfolio have had minimal extension or restructurings. The recent deterioration in the global real estate market, as evidenced by increases in property vacancy rates, delinquencies and foreclosures, has negatively impacted property values and sources of refinancing and should these trends continue, additional increases in our valuation allowance for mortgage loans may result.
increase the value of derivative assets used to dynamically hedge product guarantees resulting in realized capital gains;
The Company’s macro hedging program uses derivative instruments to partially hedge the statutory tail scenario risk arising from U.S. and Japan GMWB, GMDB, and GMIB statutory liabilities, on the Company’s statutory surplus and the associated target RBC ratios (see Capital Resources and Liquidity). The macro hedge program will result in additional cost and U.S. GAAP earnings volatility in times of market increases as changes in the value of the macro hedge derivatives which hedge statutory liabilities may not be closely aligned to changes in U.S. GAAP liabilities.
Represents the aggregate net impact of a 1% increase or decrease in blended implied volatility that is generally skewed towards longer durations of each of the S&P 500, NASDAQ and EAFE indices.
Includes future minimum lease payments on operating and capital lease agreements. See Notes 12 and 14 of the Notes to Consolidated Financial Statements for additional discussion on lease commitments.