The Hartford 2010 Annual Report Download - page 73

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Year ended December 31, 2010 compared to the year ended December 31, 2009
Net income increased in 2010, as compared to the prior year, driven by improvements in net realized capital gains (losses) and higher
net investment income, despite a decrease in underwriting results. The primary causes of the decrease in underwriting results were
lower earned premiums and higher current accident year catastrophe losses.
Earned premiums decreased across most product lines, with the exception of workers compensation and specialty casualty. The effects
of the economic downturn have contributed to the decrease in earned premiums during 2010. Although earned premiums declined,
several key measures have shown improvement. New business written premium increased, driven by increases in specialty casualty and
package business, partially offset by decreases in general liability, professional liability and marine. In addition, for standard
commercial lines, policy count retention has increased in all lines of business, due in part by an improvement in mid-term cancellations
in 2010. Renewal earned pricing was flat for standard commercial lines, as an increase in package business and property was offset by a
decrease in all other lines. The earned pricing changes were primarily a reflection of written pricing changes over the last year. Renewal
written pricing increased for standard commercial lines driven by increases in property and workers compensation, partially offset by
decreases in all other lines. Lastly, the number of policies-in-force increased, primarily due to the increase in policy count retention. The
growth in policies in-force does not correspond directly with the change in earned premiums due to the effect of changes in earned
pricing and changes in the average premium per policy.
Current accident year losses and loss adjustment expenses before catastrophes decreased slightly, due to the decrease in earned
premiums, which was mostly offset by an increase in the current accident year loss and loss adjustment expense ratio before
catastrophes. The ratio increased, primarily due to higher severity on package business and workers’ compensation, as well as an
increased ratio for specialty casualty.
Current accident year catastrophe losses in 2010 were higher than in 2009 primarily due to more severe windstorm events, particularly
from hail in the West, Midwest, plains states and the Southeast, and from winter storms in the Mid-Atlantic and Northeast. Losses in
2009 were primarily incurred from ice storms, windstorms and tornadoes across many states.
Net favorable prior accident year reserve development, in both periods, included reserve releases in the following: general liability,
professional liability, workers’ compensation, auto liability and uncollectible reinsurance. Reserve development in 2010 also included a
release in package business, while reserve development in 2009 also included strengthening in both package business and fidelity and
surety. For a discussion on prior accident year reserve development, see the Property and Casualty Insurance Product Reserves, Net of
Reinsurance section within Critical Accounting Estimates.
Insurance operating costs and expenses increased in 2010, driven by an increase in taxes, licenses and fees of $19, which included a $5
increase in reserve strengthening for other state funds and taxes and a $7 reduction in TWIA assessments recognized in 2009 related to
hurricane Ike. Also contributing to the increase were higher IT costs. The increased expenses were partially offset by a decrease of $5
in dividends payable primarily for workers’ compensation policyholders, and lower compensation-related costs. Amortization of
deferred policy acquisition costs decreased, largely due to the decrease in earned premiums.
Net realized capital gains (losses) improved as compared to the prior year, as did net investment income. The improvements in net
realized capital gains (loss) were primarily driven by lower impairments in 2010 compared to 2009 and realized gains on derivatives in
2010 compared to losses in 2009. Net investment income increased in 2010, primarily as a result of improvements in limited
partnerships and other alternative investments, partially offset by lower returns on taxable fixed maturities due to declining interest
rates. For additional information, see the Investment Results section within Key Performance Measures and Ratios.
The effective tax rate, in both periods, differs from the U.S. Federal statutory rate primarily due to permanent differences related to
investments in tax exempt securities. For further discussion, see Income Taxes within Note 13 of the Notes to Consolidated Financial
Statements.