Certain of the statements contained herein (other than statements of historical fact) are forward-looking statements. Such 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 Hartford. 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 Hartford, depending on the outcome of certain factors, including the possibility of general economic and business conditions that are less favorable than anticipated, changes in interest rates or the stock markets, stronger than anticipated competitive activity, more frequent or severe natural catastrophes than anticipated and those described in the forward-looking statements herein.
Management believes that it has developed and implemented strategies to maintain and enhance its position as a market leader within the financial services industry, to continue the Life segment's growth in assets under management and fully insured premium and to maximize shareholder value. The Life segment is well positioned to assist individuals in meeting their financial goals as they increasingly save and plan for retirement, protect themselves and their families against disability or death and prepare their estates for an efficient transfer of wealth between generations. The Life segment's strong market position in its primary businesses, which aligns with these growing markets, will provide opportunities to increase sales of the Life segment's products and services.
Revenues decreased $11 in 1999 whereas they were essentially flat in the prior years. Core earnings were reduced by $86, $72 and $37 in 1999, 1998 and 1997, respectively, representing the approximate 19% minority interest in HLI's operating results. (For additional information regarding HLI's results, see the Life section.) Excluding minority interest, core earnings increased $3 in 1999 over 1998 and $2 in 1998 over 1997.
The investment objective of North American Property & Casualty is to maximize economic value while generating after-tax income and sufficient liquidity to meet corporate and policyholder obligations. Investment strategies are developed based on a variety of factors, including business needs, regulatory requirements and tax considerations.
Corporate $ 7,737 45.4% $ 7,898 44.6% ABS 2,508 14.7% 2,465 13.9% Commercial MBS 2,112 12.4% 2,036 11.5% Municipal - tax-exempt 1,108 6.5% 916 5.2% MBS - agency 853 5.0% 503 2.9% CMO 592 3.5% 831 4.7% Gov't/Gov't agencies - For. 339 2.0% 530 3.0% Gov't/Gov't agencies - U.S. 229 1.3% 166 0.9% Municipal - taxable 165 1.0% 223 1.3% Short-term 1,346 7.9% 2,119 12.0% Redeemable preferred stock 46 0.3% 5 -- - ----------------------------------------------------------------- Total fixed maturities $ 17,035 100.0% $ 17,692 100.0% - -----------------------------------------------------------------
Net investment income $ 65 $ 164 $ 185 Yield on average invested assets[1] 6.1% 7.0% 7.2% Net realized capital gains $ 17 $ 70 $ 95 - ---------------------------------------------------------------- [1] Represents net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost).
The decrease in net realized capital gains in 1998 was primarily due to the weakening of the equity market in the Netherlands.
Derivatives play an important role in facilitating the management of interest rate risk, creating opportunities to efficiently fund obligations, hedge against risks that affect the value of certain liabilities and adjust broad investment risk characteristics as a result of any significant changes in market risks. As an end user of derivatives, the life operations use a variety of derivatives, including swaps, caps, floors, forwards and exchange-traded financial futures and options, in order to hedge exposure primarily to interest rate risk on anticipated investment purchases or existing assets and liabilities. Notional amounts pertaining to derivatives totaled $9.6 billion at December 31, 1999 ($6.3 billion related to insurance investments and $3.3 billion related to life insurance liabilities). At December 31, 1998, notional amounts pertaining to derivatives totaled $11.2 billion ($6.0 billion related to insurance investments and $5.2 billion related to life insurance liabilities). The strategies described below are used to manage the aforementioned risks.
Liability Hedging -- Several products obligate the life operations to credit a return to the contractholder which is indexed to a market rate. To hedge risks associated with these products, the life operation enters into various derivative contracts. Interest rate swaps are used to convert the contract rate into a rate that trades in a more liquid and efficient market. This hedging strategy enables the life operations to customize contract terms and conditions to customer objectives and satisfies the operation's asset/liability matching policy. Interest rate swaps are used to convert certain fixed contract rates into floating rates, thereby allowing them to be appropriately matched against floating rate assets. Additionally, interest rate caps are used to hedge against the risk of contractholder disintermediation in a rising interest rate environment. The notional amounts of derivatives used for liability hedging as of December 31, 1999 and 1998 were $3.3 billion and $5.2 billion, respectively.
The maximum amount of statutory dividends which may be paid to The Hartford Financial Services Group, Inc. from its insurance subsidiaries in 2000, without prior approval, is $1.0 billion.
The National Association of Insurance Commissioners (NAIC) has regulations establishing minimum capitalization requirements based on risk-based capital (RBC) formulas for both property and casualty and life companies. The requirements consist of formulas, which identify companies that are undercapitalized and require specific regulatory actions. RBC is calculated for property and casualty companies after adjusting capital for certain underwriting, asset, credit and off-balance sheet risks. The RBC formula for life companies establishes capital requirements relating to insurance, business, asset and interest rate risks. As of December 31, 1999, each of The Hartford's insurance subsidiaries within North American Property & Casualty and the Life segment had more than sufficient capital to meet the NAIC's RBC requirements.