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HIG > SEC Filings for HIG > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for HARTFORD FINANCIAL SERVICES GROUP INC/DE

Form 10-K for HARTFORD FINANCIAL SERVICES GROUP INC/DE


28-Feb-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in millions, except for per share data, unless otherwise stated)

The Hartford provides projections and other forward-looking information in the following discussions, which 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 cautionary statements set forth on pages 3 and 4 of this Form 10-K and the risk factors set forth under Item 1A and other similar information contained in this Form 10-K and in other filings made from time to time by the Company with the SEC. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in each discussion below and in Item 1A, Risk Factors. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.

INDEX
Description Page

The Hartford's Operations Overview 34

Consolidated Results of Operations 35

Investment Results 38

Critical Accounting Estimates 42

Key Performance Measures and Ratios 68

Property & Casualty Commercial 72

Consumer Markets 75

Property & Casualty Other Operations 79

Group Benefits 80

Mutual Funds 82

Talcott Resolution 84

Corporate 87

Enterprise Risk Management 89

Capital Resources and Liquidity 121

Impact of New Accounting Standards 132

Certain reclassifications have been made to prior year financial information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") to conform to the current year presentation. The Hartford defines increases or decreases greater than or equal to 200% as "NM" or not meaningful.


THE HARTFORD'S OPERATIONS OVERVIEW
The Hartford is a financial holding company for a group of subsidiaries that provide property and casualty and investment products to both individual and business customers in the United States and continues to administer life and annuity products previously sold.
On January 1, 2013, the Company completed the sale of its Retirement Plans business to Massachusetts Mutual Life Insurance Company ("MassMutual") and on January 2, 2013 the Company completed the sale of its Individual Life insurance business to The Prudential Insurance Company of America ("Prudential"), a subsidiary of Prudential Financial, Inc. On December 12, 2013, the Company completed the sale of Hartford Life International Limited ("HLIL"), which comprised the Company's U.K. variable annuity business, to Columbia Insurance Company, a Berkshire Hathaway company. For further discussion of these and other such transactions, see Note 2 - Business Dispositions, Note 7 - Reinsurance and Note 20 - Discontinued Operations of Notes to Consolidated Financial Statements. The Company derives its revenues principally from: (a) premiums earned for insurance coverages provided to insureds; (b) fee income, including asset management fees, on separate account and mutual fund assets and mortality and expense fees, as well as cost of insurance charges; (c) net investment income;
(d) fees earned for services provided to third parties; and (e) 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. Asset management fees and mortality and expense fees are primarily generated from separate account assets. Cost of insurance charges are assessed on the net amount at risk for investment-oriented life insurance products. The profitability of the Company's property and casualty insurance businesses over time is greatly influenced by the Company's underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance, the size of its in force block, actual mortality and morbidity experience, and its ability to manage its expense ratio which it accomplishes through economies of scale and its management of acquisition costs and other underwriting expenses. Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future loss cost frequency and severity based on historical loss experience adjusted for known trends, the Company's response to rate actions taken by competitors, and expectations about regulatory and legal developments and expense levels. The Company seeks to price its insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. For many of its insurance products, the Company is required to obtain approval for its premium rates from state insurance departments. The financial results in the Company's variable annuity and mutual fund businesses depend largely on the amount of the contract holder or shareholder account value or assets under management on which it earns fees and the level of fees charged. Changes in account value or assets under management are driven by two main factors: net flows, which measure the success of the Company's asset gathering and retention efforts, and the market return of the funds, which is heavily influenced by the return realized in the equity markets. Net flows are comprised of deposits less surrenders, death benefits, policy charges and annuitizations of investment type contracts, such as variable annuity contracts. In the mutual fund business, net flows are known as net sales. Net sales are comprised of new sales less redemptions by mutual fund customers. The Company uses the average daily value of the S&P 500 Index as an indicator for evaluating market returns of the underlying account portfolios in the United States. Relative financial results of variable products are highly correlated to the growth in account values or assets under management since these products generally earn fee income on a daily basis. Equity market movements could also result in benefits for or charges against deferred acquisition costs. The profitability of fixed annuities and other "spread-based" products depends largely on the Company's ability to earn target spreads between earned investment rates on its general account assets and interest credited to policyholders. In addition, the size and persistency of gross profits from these businesses is an important driver of earnings as it affects the rate of amortization of deferred policy acquisition costs. The investment return, or yield, on invested assets is an important element of the Company's earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits, loss and loss adjustment expenses are paid. Due to the need to maintain sufficient liquidity to satisfy claim obligations, the majority of the Company's invested assets have been held in available-for-sale securities, including, among other asset classes, corporate bonds, municipal bonds, government debt, short-term debt, mortgage-backed securities and asset-backed securities. The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while generating sufficient after-tax income to meet policyholder and corporate obligations. Investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations.


CONSOLIDATED RESULTS OF OPERATIONS
The Consolidated Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes beginning on page F-1.

                                                                       Increase    Increase
                                                                      (Decrease)  (Decrease)
                                                                       From 2012   From 2011
                                        2013       2012       2011      to 2013     to 2012
Earned premiums                      $ 13,226   $ 13,631   $ 14,088     $(405)      $(457)
Fee income                              2,805      4,386      4,700     (1,581)      (314)
Net investment income (loss):                                              -           -
Securities available-for-sale and
other                                   3,362      4,227      4,263      (865)       (36)
Equity securities, trading              6,061      4,364     (1,345 )    1,697       5,709
Total net investment income             9,423      8,591      2,918       832        5,673
Net realized capital gains (losses):                                       -           -
Total other-than-temporary
impairment ("OTTI") losses                (93 )     (389 )     (263 )     296        (126)
OTTI losses recognized in other
comprehensive income                       20         40         89      (20)        (49)
Net OTTI losses recognized in
earnings                                  (73 )     (349 )     (174 )     276        (175)
Net realized capital gains on
business dispositions                   1,575          -          -      1,575         -
Net realized capital gains (losses),
excluding net OTTI losses recognized
in earnings                              (995 )     (395 )      (52 )    (600)       (343)
Total net realized capital gains
(losses)                                  507       (744 )     (226 )    1,251       (518)
Other revenues                            275        258        253       17           5
Total revenues                         26,236     26,122     21,733       114        4,389
Benefits, losses and loss adjustment
expenses                               10,948     13,248     14,627     (2,300)     (1,379)
Benefits, losses and loss adjustment
expenses - returns credited on
international variable annuities        6,060      4,363     (1,345 )    1,697       5,708
Amortization of deferred policy
acquisition costs and present value
of future profits                       2,701      1,988      2,444       713        (456)
Insurance operating costs and other
expenses                                4,280      5,204      5,269      (924)       (65)
Loss on extinguishment of debt            213        910          -      (697)        910
Reinsurance loss on disposition,
including reduction in goodwill of
$156 and $342, respectively             1,574        533          -      1,041        533
Interest expense                          397        457        508      (60)        (51)
Goodwill impairment                         -          -         30        -         (30)
Total benefits, losses and expenses    26,173     26,703     21,533      (530)       5,170
Income (loss) from continuing
operations before income taxes             63       (581 )      200       644        (781)
Income tax benefit                       (247 )     (481 )     (373 )     234        (108)
Income (loss) from continuing
operations, net of tax                    310       (100 )      573       410        (673)
Income (loss) from discontinued
operations, net of tax                   (134 )       62        139      (196)       (77)
Net income (loss)                    $    176   $    (38 ) $    712      $214       $(750)

Year ended December 31, 2013 compared to the year ended December 31, 2012 The increase in net income from 2012 to 2013 was primarily due to the following items:
Current accident year losses and loss adjustment expenses before catastrophes of $6.3 billion, before tax, in 2013, decreased from $6.6 billion, before tax, in 2012. The decrease was primarily driven by lower loss and loss adjustment expenses in Property and Casualty Commercial workers' compensation business due to favorable severity and frequency.

Current accident year catastrophe losses of $312, before tax, in 2013, compared to $706, before tax, in 2012. Losses in 2013 were primarily due to multiple thunderstorm, hail, and tornado events across various U.S. geographic regions. Losses in 2012 were primarily driven by $350 related to Storm Sandy and multiple thunderstorm, hail, and tornado events across various U.S. geographic regions.


A loss on extinguishment of debt of $213, before tax, in 2013, compared to $910, before tax in 2012. The loss in 2013 related to the repurchase of approximately $800 of senior notes at a premium to the face amount of the then outstanding debt. The resulting loss on extinguishment of debt consists of the repurchase premium, the write-off of the unamortized discount, and debt issuance and other costs related to the repurchase transaction. The loss in 2012 related to the repurchase of all outstanding 10% fixed-to-floating rate junior subordinated debentures due 2068 with a $1.75 billion aggregate principal amount all held by Allianz. The loss in 2012 consisted of the premium associated with repurchasing the 10% Debentures at an amount greater than the face amount, the write-off of the unamortized discount and debt issuance costs related to the 10% Debentures and other costs related to the repurchase transaction.

Reinsurance loss on disposition of $533, before tax, in 2012 consisting of an impairment of goodwill and a loss accrual for premium deficiency related to the disposition of the Individual Life business, and losses in 2012 from the operations of the Retirement Plans and Individual Life businesses sold in 2013. For further discussion of the sale of these businesses, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements.

Partially offsetting the increase in net income were the following items:
An increase of $853 in the Unlock charge, before tax, in 2013 compared to an Unlock benefit of $47, before tax, in 2012. The Unlock charge in 2013 was primarily due to Japan hedge cost assumption changes associated with expanding the Japan variable annuity hedging program in 2013, partially offset by actual separate account returns being above our aggregated estimated returns during the period. The Unlock benefit in 2012 was driven primarily by actual separate account returns above our aggregated estimated return, partially offset by assumption changes in connection with the annual policyholder behavior assumption study. For further discussion of Unlocks, see MD&A - Critical Accounting Estimates, Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts and MD&A - Talcott Resolution.

Net realized capital gains (losses), excluding the realized capital gain on business dispositions and OTTI, increased to a loss of $995, before tax, from a loss in the prior year of $395, before tax, primarily due to losses on the international variable annuity hedge program in 2013. The losses in 2013 primarily resulted from the weakening of the yen and rising equity markets. Certain hedge assets generated realized capital losses on rising equity markets and weakening of the yen and are used to hedge liabilities that are not carried at fair value. For further discussion of investment results, see MD&A - Key Performance Measures and Ratios, Net Realized Capital Gains (Losses). For information on the related sensitivities of the variable annuity hedging program, see Enterprise Risk Management, Variable Product Guarantee Risks and Risk Management.

Net asbestos reserve strengthening of $130, before tax in 2013, compared to $48, before tax in 2012, resulting from the Company's annual review of its asbestos liabilities. For further information, see MD&A - Critical Accounting Estimates, Property & Casualty Other Operations Claims with the Property and Casualty Insurance Product Reserves, Net of Reinsurance.

The Company reported a loss from discontinued operations primarily due to the realized capital loss of $102, after-tax, on the sale of Hartford Life International, Ltd. ("HLIL") in 2013.

Differences between the Company's effective income tax rate and the U.S. statutory rate of 35% are due primarily to tax-exempt interest earned on invested assets and the dividends received deduction ("DRD"). The $234 decrease in the income tax benefit in 2013 compared with the higher income tax benefit in 2012 was primarily due to the $644 increase in income (loss) from continuing operations, before tax. The income tax benefit of $247 and $481 in 2013 and 2012, respectively, includes separate account DRD benefits of $139 and $145, respectively.

Year ended December 31, 2012 compared to the year ended December 31, 2011 The decrease in net income from 2011 to 2012 was primarily due to the following items:
Net realized capital losses increased primarily due to losses in 2012 on the international variable annuity hedge program, compared to gains in 2011. The losses resulted from rising equity markets and weakening of the yen. Certain hedge assets generated realized capital losses on rising equity markets and weakening of the yen and are used to hedge liabilities that are not carried at fair value. In addition, 2012 includes intent-to-sell impairments relating to the sales of the Retirement Plans and Individual Life businesses.

A loss on extinguishment of debt of $910, before tax in 2012 related to the repurchase of all outstanding 10% fixed-to-floating rate junior subordinated debentures due 2068 with a $1.75 billion aggregate principal amount all held by Allianz. The loss consisted of the premium associated with repurchasing the 10% Debentures at an amount greater than the face amount, the write-off of the unamortized discount and debt issuance costs related to the 10% Debentures and other costs related to the repurchase transaction.


Reinsurance loss on disposition of $533, before tax, in 2012 consisting of a goodwill impairment charge and loss accrual for premium deficiency related to the disposition of the Individual Life business.

Income (loss) from discontinued operations, after-tax, decreased due to a realized gain on the sale of Specialty Risk Services of $150, after-tax, which was partially offset by a loss of $74, after-tax, from the disposition of Federal Trust Corporation.

Partially offsetting these decreases in net income were the following items:
An Unlock benefit of $47, before tax, in 2012 compared to an Unlock charge of $734, before tax, in 2011. The benefit in 2012 was driven primarily by actual separate account returns above our aggregated estimated return, partially offset by policyholder assumption changes which reduced expected future gross profits including additional costs associated with the U.S. variable annuity macro hedge program. The Unlock charge in 2011 was primarily due to the impact of changes to the international variable annuity hedge program.

Differences between the Company's effective income tax rate and the U.S. statutory rate of 35% are due primarily to tax-exempt interest earned on invested assets and the dividends received deduction ("DRD"). The $108 increase in the income tax benefit in 2012 compared with the income tax benefit in 2011 was primarily due to the $781 decrease in income (loss) from continuing operations, before tax. The income tax benefit of $481and $373 in 2012 and 2011, respectively, includes separate account DRD benefits of $140 and $201, respectively. The income tax benefit in 2011 includes a release of $86, or 100%, of the valuation allowance associated with realized capital losses, as well as a tax benefit of $52 as a result of a resolution of a tax matter with the IRS for the computation of DRD for years 1998, 2000 and 2001.

Current accident year catastrophe losses of $706, before tax, in 2012 compared to $745, before tax, in 2011. The losses in 2012 primarily include Storm Sandy, as well as multiple thunderstorm, hail, and tornado events across various U.S. geographic regions in both 2012 and 2011.

The Company recorded reserve releases of $61, before tax, in 2012, compared to reserve strengthening of $48, before tax, in 2011, in its property and casualty insurance prior accident years development, excluding asbestos and environmental reserves. For additional information regarding prior accident years development, see MD&A - Critical Accounting Estimates.

Net asbestos reserve strengthening of $48, before tax, in 2012, compared to $294, before tax, in 2011 resulting from the Company's annual review of its asbestos liabilities.

A $112, before tax charge in 2011 related to the write-off of capitalized costs associated with a policy administration software project that was discontinued.

The following table presents net income (loss) for each reporting segment, as well as the Corporate category. For a discussion of the Company's operating results by segment, see the segment sections of MD&A.

                                                                           Increase               Increase
                                                                    (Decrease) From 2012 to (Decrease) From 2011
Net income (loss) by segment           2013       2012      2011             2013                  to 2012
Property & Casualty Commercial       $   870   $    547   $   526   $            323        $            21
Consumer Markets                         229        166         7                 63                    159
Property & Casualty Other Operations      (2 )       57      (117 )              (59 )                  174
Group Benefits                           192        129        92                 63                     37
Mutual Funds                              76         71        98                  5                    (27 )
Talcott Resolution                      (634 )        1       540               (635 )                 (539 )
Corporate                               (555 )   (1,009 )    (434 )              454                   (575 )
Net income (loss)                    $   176   $    (38 ) $   712   $            214        $          (750 )


Investment Results
Composition of Invested Assets
                                                      December 31, 2013           December 31, 2012
                                                       Amount        Percent      Amount       Percent
Fixed maturities, available-for-sale ("AFS"), at
fair value                                       $     62,357          79.2 % $      85,922      81.6 %
Fixed maturities, at fair value using the fair
value option ("FVO")                                      844           1.1 %         1,087       1.0 %
Equity securities, AFS, at fair value                     868           1.1 %           890       0.8 %
Mortgage loans                                          5,598           7.1 %         6,711       6.4 %
Policy loans, at outstanding balance                    1,420           1.8 %         1,997       1.9 %
Limited partnerships and other alternative
investments                                             3,040           3.9 %         3,015       2.9 %
Other investments [1]                                     521           0.7 %         1,114       1.1 %
Short-term investments                                  4,008           5.1 %         4,581       4.3 %
Total investments excluding equity securities,
trading                                                78,656           100 %       105,317       100 %
Equity securities, trading, at fair value [2]          19,745                        28,933
Total investments                                $     98,401                 $     134,250

[1] Primarily relates to derivative instruments.
[2] As of December 31, 2013 and 2012, approximately $19.7 billion and $27.1 billion, respectively, of equity securities, trading, support Japan variable annuities. Those equity securities, trading, were invested in mutual funds, which, in turn, invested in the following asset classes as of December 31, 2013 and 2012, respectively: Japan equity 22% and 20%, Japan fixed income (primarily government securities) 15% and 15%, global equity 22% and 21%, global government bonds 40% and 43%, and cash and other 1% and 1%.
Total investments decreased since December 31, 2012, principally due to the sale of the Retirement Plans and Individual Life businesses resulting in the transfer of fixed maturities, AFS, fixed maturities, FVO, equity securities, AFS, mortgage loans, and policy loans with a total carrying value of $17.3 billion in January 2013. In addition, the sale of the U.K. variable annuity business, HLIL, in the fourth quarter of 2013 resulted in a decline in the carrying value of fixed maturities, AFS and equity securities, trading of $469 and $1.7 billion, respectively. Refer to Note 2 - Business Dispositions of Notes to Consolidated Financial Statements for further discussion of these transactions. The remaining decrease in total invested assets is primarily due to a decrease in equity securities, trading, fixed maturities, AFS, other investments, and short-term investments. The decline in equity securities, trading was primarily due to variable annuity policy surrenders, the depreciation of the Japanese Yen as compared to the U.S. dollar, partially offset by equity market gains. The decrease in fixed maturities, AFS was due to a decline in valuations due to an increase in interest rates, a reduction in assets levels in Talcott Resolution associated with dollar rolls and repurchase agreements, and capital management actions, including debt repayments and share repurchases. The decline in other investments was largely due to a decline in derivative market value primarily resulting from an increase in interest rates and the depreciation of the Japanese yen in comparison to the euro and U.S dollar. The decrease in short-term investments is primarily attributable to a decline in derivative collateral held due to decreases in derivative market values.


Net Investment Income (Loss)
                                                          For the years ended December 31,
                                                  2013                  2012                  2011
(Before tax)                               Amount    Yield [1]   Amount    Yield [1]   Amount   Yield [1]
Fixed maturities [2]                      $ 2,623       4.1 %   $ 3,352       4.2 %   $ 3,382        4.2 %
Equity securities, AFS                         30       3.6 %        37       4.3 %        36        3.8 %
Mortgage loans                                262       4.9 %       337       5.2 %       281        5.4 %
Policy loans                                   83       5.9 %       119       6.0 %       131        6.1 %
. . .
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