The Hartford 2008 Annual Report Download - page 124

Table of Contents
Excluding catastrophes and prior accident year development, Ongoing Operations underwriting margins will likely decline
in 2009 due primarily to increases in both the loss and loss adjustment expense ratio as well as the expense ratio, partially
offset by lower anticipated policyholder dividends. The Ongoing Operations’ 2009 accident year loss and loss adjustment
expense ratio before catastrophes is expected to increase due to mid single-digit increases in claim cost severity and
continued earned pricing decreases in commercial lines, partially offset by moderately favorable claim frequency.
For auto business, emerged claim frequency in 2008 was favorable to the prior year and claim severity was slightly higher.
In 2009, management expects claim severity will increase and claim frequency will be less favorable than it was in 2008.
Non-catastrophe loss costs of homeowners claims increased in 2008 due to higher claim frequency and severity and
management expects loss costs to continue to increase in 2009, driven by higher claim severity.
Small Commercial experienced favorable frequency on workers’ compensation claims in recent accident years and
management expects favorable frequency to continue for the 2009 accident year though not as favorable as it has been.
While the Company experienced favorable non-catastrophe property losses on package business and commercial auto claims
in 2008, management expects that severity will increase for non-catastrophe property claims in 2009 and that frequency will
be less favorable.
For Middle Market, management expects an increase in claim cost severity in 2009 across all lines, although the increase in
claim severity for non-catastrophe property claims will not likely be as high as it was in 2008 when the Company
experienced a number of individually large property losses. Partially offsetting the expected increase in severity is an
expectation of moderately lower frequency.
On professional liability business within Specialty Commercial, the Company expects its losses from the fallout of the
sub-prime mortgage market and from the alleged Madoff fraud to be manageable based on several factors. Principal among
them is the diversified nature of the product and customer portfolio, with the majority of the Company’s total in-force
professional liability net written premium derived from policyholders with privately-held ownership and, therefore,
relatively low shareholder class action exposure. The Company’s average net limit exposed is $8 at an average attachment
point of $74 on reported claims or notices of potential claims on sub-prime exposed policies. While the Madoff alleged
fraud case continues to evolve, based on the involved parties noted in press reports to date, the Company expects a limited
number of its policies will be exposed and, based on the net limits expected to be at risk, does not expect its losses from the
Madoff case will be material.
The Ongoing Operations expense ratio is expected to increase in 2009, in part, due to a lower expected earned premium in
Middle Market, the amortization of a higher amount of acquisition costs on AARP business and an increase in the cost of
investments in technology to support future growth. The policyholder dividend ratio was unusually high in 2008 due to the
accrual of $26 in dividends due to certain workers’ compensation policyholders as a result of underwriting profits. (See the
Property and Casualty MD&A section for further discussion.)
Current accident year catastrophe losses in 2008, at 5.3 percent of Ongoing Operations’ earned premium, were higher than
the long-term historical average due principally to hurricane Ike and higher than average losses from tornadoes and
thunderstorms in the South and Midwest. While catastrophe losses vary significantly from year to year and are
unpredictable, management has assumed that catastrophe losses in 2009 will be closer to 3% to 3.5% of earned premium.
The Company will continue to manage its exposure to catastrophe losses through the ongoing assessment of its risk,
disciplined underwriting and the use of reinsurance and other risk transfer alternatives, as appropriate. As of January 1,
2009, the Company’s retention under its principal property catastrophe reinsurance program remained at $250 per
catastrophe event. With the January 1, 2009 renewal, the cost of the Company’s principal property catastrophe reinsurance
program increased modestly.
Driven primarily by an expected increase in loss costs and underwriting expenses, the Company expects the Ongoing
Operations’ combined ratio before catastrophes and prior accident year development in 2009 to be higher than the 88.9
achieved in 2008. At the segment level, the combined ratio before catastrophes and prior accident year development is
expected to be higher in 2009 for Personal Lines, Small Commercial and Middle Market as increases in loss costs are
expected to outpace earned pricing. For Specialty Commercial, management expects that the combined ratio before
catastrophes and prior accident year development for 2009 will be in line with the ratio for 2008.
Property & Casualty operating cash flow is expected to be less favorable in 2009 than in 2008, although still positive. Based
upon the current interest rate and credit environment, Property & Casualty expects a slightly higher investment portfolio
yield for 2009.
The Other Operations segment will continue to manage the discontinued operations of the Company as well as claims (and
associated reserves) related to asbestos, environmental and other exposures. The Company will continue to review various
components of all of its reserves on a regular basis. The Company expects to perform its regular reviews of asbestos
liabilities in the second quarter of 2009, Other Operations reinsurance recoverables and the allowance for uncollectible
reinsurance in the second quarter 2009, and environmental liabilities in the third quarter of 2009. If there are significant
developments that affect particular exposures, reinsurance arrangements or the financial condition of particular reinsurers,
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009