Operating income increased $125, or 15%, due to double-digit earnings growth across all segments in Life partially offset by a decline in Property & Casualty, primarily due to adverse loss development in Reinsurance, increased automobile losses in the Personal Insurance segment, expenses related to the Business Insurance field office and claim reorganizations and deteriorating underwriting results from discontinued operations (public entity ("PENCO"), Canada, Farm and Industrial Risk Insurance pool ("IRI").
The Individual Life segment sells a variety of life insurance products, including variable life, universal life, interest sensitive whole life and term life insurance primarily to the high end estate and business planning markets. Additionally, the Fortis transaction, through the addition of a retail broker dealer, which has been renamed Woodbury Financial Services, has allowed the Individual Life segment to increase its reach in the emerging affluent market.
2000 COMPARED TO 1999 -- Revenues increased $56, or 10%, resulting primarily from fee income associated with the growing block of variable life insurance. Fee income increased $59, or 15%, as variable life account values increased $352, or 14%, and variable life insurance in force increased $9.6 billion, or 40%.
2001 COMPARED TO 2000 -- Revenues in the Group Benefits segment increased $300, or 14%, driven primarily by growth in premiums, which increased $278, or 14%, due to solid persistency and increased premium rates related to the in force block of business, and strong sales to new customers. Fully insured ongoing sales for the year ended December 31, 2001 were $531, $85, or 19%, higher than the prior year. Additionally, net investment income increased $22, or 10%, due to the overall growth in the in-force business.
The focus of this segment is variable COLI, which continues to be a product generally used by employers to fund non-qualified benefits or other postemployment benefit liabilities. The leveraged COLI product has been an important contributor to The Hartford's profitability in recent years and will continue to contribute to the profitability of The Hartford in the future, although the level of profit is expected to decline over the long run. COLI is subject to a changing legislative and regulatory environment that could have a material adverse effect on its business.
Firming market conditions in the standard commercial sector are expected to continue in 2002, although price competition within many markets of the commercial industry will remain a challenge. Additionally, 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. Management expects significant growth in small commercial businesses will continue to be achieved, in part, due to continued strategic actions being implemented. This includes providing a complete product solution for the small commercial coverage needs of the
segment's customers, expanding non-traditional distribution alternatives, executing geographic market share strategies and developing technology solutions that deliver superior business tools to The Hartford's agents, alliances and policyholders. Continued pricing and underwriting actions in the middle market business should continue to have a positive impact on overall profitability in 2002.
Excluding the impact of September 11, underwriting results decreased $76, with a corresponding 7.2 point increase in the combined ratio. The decrease in underwriting results and corresponding increase in the combined ratio were primarily attributable to continued adverse loss development on prior underwriting years.
Deferred policy acquisition costs related to investment contracts and universal life type contracts are deferred and amortized using the retrospective deposit method. Under the retrospective deposit method, acquisition costs are amortized in proportion to the present value of expected gross profits from investment, mortality and expense margins and surrender charges. Actual gross profits can vary from management's estimates, resulting in increases or decreases in the rate of amortization. Management periodically reviews these estimates and evaluates the recoverability of the deferred acquisition cost asset. When appropriate, management revises its assumptions on the estimated gross profits of these contracts and the cumulative amortization for the books of business are re-estimated and adjusted by a cumulative charge or credit to income. The average rate of assumed future investment yield used in estimating expected gross profits related to variable annuity and variable life business was 9% at December 31, 2001 and for all other products including fixed annuities and other universal life type contracts the average assumed investment yield ranged from 5.0% - 8.5%.
To date, our experience has generally been consistent or favorable to the assumptions used in determining DAC amortization. However, if we were to experience a material adverse deviation in certain critical assumptions, including surrender rates, mortality experience, or investment performance, there could be a negative effect on the Company's reported earnings and stockholders' equity.
The primary exposure to interest rate risk in Property & Casualty relates to its fixed maturity investments. Changes in market interest rates directly impact the market value of the fixed maturity securities. In addition, but to a lesser extent, interest rate risk exists on debt and trust preferred securities issued. Derivative instruments are used to manage interest rate risk and had a total notional amount as of December 31, 2001 and 2000 of $1.3 billion and $318, respectively.
The following table provides information as of December 31, 2001 on interest rate swaps used to manage interest rate risk on fixed maturities and trust preferred securities and presents notional amounts with weighted average pay and receive rates by maturity year. Comparative totals are included as of December 31, 2000. The weighted average rates are based on spot rates as of December 31, 2001 and 2000.
Effective June 20, 2001, The Hartford entered into an amended and restated five-year revolving $1.0 billion credit facility with fourteen banks. This facility is available for general corporate purposes and to provide additional support to the Company's commercial paper program. As of December 31, 2001, there were no outstanding borrowings under the facility.
On October 26, 2001, Hartford Capital III, a Delaware statutory business trust formed by The Hartford, issued 20,000,000, 7.45% Trust Originated Preferred Securities, Series C and received proceeds before underwriting expenses of $500.
Issuance of common stock from treasury - On June 8, 2000, The Hartford issued 7.25 million shares of common stock in a block trade to Goldman, Sachs & Co. for $398. The shares were issued out of treasury. The Hartford used the net proceeds from the issuance of the shares to partially fund The HLI Repurchase.
On October 18, 2001, The Hartford's Board of Directors declared a quarterly dividend of $0.26 per share payable on January 2, 2002 to shareholders of record as of December 3, 2001. The dividend represented a 4% increase from the prior quarter.
Federal measures which have been previously considered or enacted by Congress and which, if revisited, could affect the insurance business, include tax law changes pertaining to the tax treatment of insurance companies and life insurance products, as well as changes in individual income tax rates and the estate tax, a number of which changes could have an impact on the relative desirability of various personal investment vehicles. Legislation to restructure the social security system, expand private pension plans, and create new retirement savings incentives also may be considered. It is too early to determine the future disposition of any of these proposals. Therefore, the potential impact to the Company's financial condition or results of operations cannot be reasonably estimated at this time.