The Hartford 2008 Annual Report Download - page 168

Table of Contents
Year ended December 31, 2007 compared to the year ended December 31, 2006
Net income decreased by $12, or 1%, in 2007, primarily driven by a decrease in Ongoing Operations’ current accident year
underwriting results before catastrophes and a change to net realized capital losses, largely offset by an increase in net
investment income and a decrease in Other Operations’ net unfavorable reserve development.
Underwriting results • Current accident year underwriting results before catastrophes decreased by $256,
primarily due to a higher loss and loss adjustment expense ratio before catastrophes and
prior accident year development, partially offset by the effect of exiting the Omni
non-standard auto business, which generated a current accident year underwriting loss
before catastrophes in 2006. The higher current accident year loss and loss adjustment
expense ratio before catastrophes was driven by increased severity on Personal Lines
auto liability claims, increased frequency on Personal Lines auto property damage claims
and, to a lesser extent, increased severity on Personal Lines homeowners claims and a
higher loss and loss adjustment expense ratio for both Small Commercial package
business and Middle Market workers’ compensation claims.
• Current accident year catastrophe losses decreased by $22. The largest catastrophe losses
in 2007 were from wildfires in California, spring windstorms in the Southeast and
Northeast, tornadoes and thunderstorms in the Midwest and a December ice storm in the
Midwest. Catastrophes in 2006 included tornadoes and hail storms in the Midwest and
windstorms in Texas and on the East coast.
• The $248 reduction in net unfavorable prior accident year development was due to a
$167 decrease in unfavorable reserve development in Other Operations and an $81
increase in net favorable reserve development in Ongoing Operations. The lower adverse
development in Other Operations was primarily due to a $243 charge in 2006 to
recognize the effect of the Equitas agreement and strengthening of the allowance for
uncollectible reinsurance, partially offset by a $99 strengthening of reserves in 2007,
primarily related to an adverse arbitration decision. The $81 increase in net favorable
reserve development in Ongoing Operations was primarily due to a $151 release of
workers’ compensation loss and loss adjustment expenses reserves in 2007 related to
accident years 2002 to 2006, partially offset by an $83 net release of prior accident year
hurricane reserves in 2006. Refer to the “Reserves” section of the MD&A for further
discussion.
Realized capital gains
(losses)
Gross gains (losses) on sales, net
• Gross gains and losses on sales in 2007 were primarily comprised of sales of foreign
government, corporate, and municipal fixed maturity securities.
• Gross gains on sales in 2006 were primarily from sales of corporate, foreign government
and municipal fixed maturity securities. Gross losses on sales in 2006 were primarily
from sales of corporate fixed maturities and CMBS.
Impairments
• Impairments in 2007 primarily consisted of impairments of asset-backed securities
backed by sub-prime residential mortgage loans and impairments of corporate securities
in the financial services and homebuilders sectors. (See the Other-than-Temporary
Impairments discussion within Investment Results for more information on the
impairments recorded in 2007.)
Other, net
• Other net realized capital losses in 2007 were primarily due to decreases in the fair value
of non-qualifying derivatives attributable to credit spreads widening. Credit spreads
widened primarily due to the deterioration in the U.S. housing market, tightened lending
conditions, and the market’s flight to quality securities.
Net investment income • Primarily driving the $201 increase in net investment income was a higher average
invested asset base and income earned from a higher portfolio yield. The increase in the
average invested asset base contributing to the increase in investment income was
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009