The Hartford 2008 Annual Report Download - page 42

Table of Contents
Reserve changes for accident years 2003 through 2007
Even after considering the 2007 calendar year reclassification of $347 of IBNR reserves from the 2003 to 2006 accident
years to the 2002 and prior accident years, accident years 2003 through 2007 show favorable development in calendar years
2004 through 2008. A portion of the release comes from short-tail lines of business, where results emerge quickly. During
calendar year 2005 and 2006, favorable re-estimates occurred in Personal Lines for both loss and allocated loss adjustment
expenses. In addition, catastrophe reserves related to the 2004 and 2005 hurricanes developed favorably in 2006. During
calendar years 2005 through 2008, the Company recognized favorable re-estimates of both loss and allocated loss
adjustment expenses on workers’ compensation claims driven, in part, by state legal reforms, including in California and
Florida, underwriting actions and expense reduction initiatives that have had a greater impact in controlling costs than was
originally estimated. In 2007, the Company released reserves for Small Commercial package business claims as reported
losses have emerged favorably to previous expectations. In 2007 and 2008, the Company released reserves for Middle
Market general liability claims due to the favorable emergence of losses for high hazard and umbrella general liability
claims. Reserves for professional liability claims were released in 2008 related to the 2003 through 2006 accident years due
to a lower estimate of claim severity on both directors’ and officers’ insurance claims and errors and omissions insurance
claims. Reserves of Personal Lines auto liability claims were released in 2008 due largely to an improvement in emerged
claim severity for the 2005 to 2007 accident years.
Ceded Reinsurance
The Hartford cedes some of its insurance risk to reinsurance companies. Reinsurance does not relieve The Hartford of its
primary liability and, therefore, failure of reinsurers to honor their obligations could result in losses to The Hartford. The
Hartford evaluates the risk transfer of its reinsurance contracts, the financial condition of its reinsurers and monitors
concentrations of credit risk. The Company’s monitoring procedures include careful initial selection of its reinsurers,
structuring agreements to provide collateral funds where possible, and regularly monitoring the financial condition and
ratings of its reinsurers. Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of
Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard No. 113, “Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” (“SFAS 113”) have been met. For further
discussion, see Note 6 of Notes to Consolidated Financial Statements.
For Property & Casualty operations, these reinsurance arrangements are intended to provide greater diversification of
business and limit The Hartford’s maximum net loss arising from large risks or catastrophes. A major portion of The
Hartford’s property and casualty reinsurance is effected under general reinsurance contracts known as treaties, or, in some
instances, is negotiated on an individual risk basis, known as facultative reinsurance. The Hartford also has in-force excess
of loss contracts with reinsurers that protect it against a specified part or all of a layer of losses over stipulated amounts.
In accordance with normal industry practice, Life is involved in both the cession and assumption of insurance with other
insurance and reinsurance companies. As of December 31, 2008 and 2007, the Company’s policy for the largest amount of
life insurance retained on any one life by any company comprising the life operations was $10. In addition, Life has
reinsured U.S. minimum death benefit guarantees, Japan’s guaranteed minimum death benefits, as well as the U.S.
guaranteed minimum withdrawal benefits offered in connection with its variable annuity contracts. Reinsurance of the
Company’s GMWB riders meet the definition of a derivative reported under SFAS 133; the difference in fair value of the
reinsurance derivative is reported in earnings. Life also assumes reinsurance from other insurers. For the years ended
December 31, 2008, 2007 and 2006, Life did not make any significant changes in the terms under which reinsurance is
ceded to other insurers. For further discussion on reinsurance, see Reinsurance in the Capital Markets Risk Management
section of the MD&A.
Investment Operations
The Hartford’s investment portfolios are primarily divided between Life and Property & Casualty. The investment portfolios
of Life and Property & Casualty are managed by HIMCO. HIMCO manages the portfolios to maximize economic value,
while attempting to generate the income necessary to support the Company’s various product obligations, within internally
established objectives, guidelines and risk tolerances. The portfolio objectives and guidelines are developed based upon the
asset/liability profile, including duration, convexity and other characteristics within specified risk tolerances. The risk
tolerances considered include, for example, asset and credit issuer allocation limits, maximum portfolio below investment
grade holdings and foreign currency exposure. The Company attempts to minimize adverse impacts to the portfolio and the
Company’s results of operations from changes in economic conditions through asset allocation limits, asset/liability duration
matching and through the use of derivatives. During the latter part of 2008, HIMCO initiated certain activities to reduce
overall credit risk exposure in the investment portfolios. For further discussion of HIMCO’s portfolio management
approach, see the Investments — General and the Investment Credit Risk sections of the MD&A.
In addition to managing the general account assets of the Company, HIMCO is also a Securities and Exchange Commission
(“SEC”) registered investment advisor for third party institutional clients, a sub-advisor for certain mutual funds and serves
as the sponsor and collateral manager for capital markets transactions. HIMCO specializes in investment management that
incorporates proprietary research and active management within a disciplined risk framework to provide value added returns
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009