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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000948572-02-000009.txt : 20020415
<SEC-HEADER>0000948572-02-000009.hdr.sgml : 20020415
ACCESSION NUMBER: 0000948572-02-000009
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020320
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HARTFORD FINANCIAL SERVICES GROUP INC/DE
CENTRAL INDEX KEY: 0000874766
STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411]
IRS NUMBER: 133317783
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13958
FILM NUMBER: 02579593
BUSINESS ADDRESS:
STREET 1: HARTFORD PLZ
CITY: HARTFORD
STATE: CT
ZIP: 06115
BUSINESS PHONE: 8605475000
MAIL ADDRESS:
STREET 1: HARTFORD PLAZA T-15
CITY: HARTFORD
STATE: CT
ZIP: 06115
FORMER COMPANY:
FORMER CONFORMED NAME: ITT HARTFORD GROUP INC /DE
DATE OF NAME CHANGE: 19930328
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>b10kdec01.txt
<DESCRIPTION>THE HARTFORD FINANCIAL SERVICES GROUP, INC.
<TEXT>
================================================================================
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: the following, all
of which are registered on the New York Stock Exchange, Inc.:
Common Stock, par value $0.01 per share
6.375% Notes due November 1, 2002
7.75% Notes due June 15, 2005
6.375% Notes due November 1, 2008
7.90% Notes due June 15, 2010
7.30% Debentures due November 1, 2015
7.70% Cumulative Quarterly Income Preferred Securities, Series A,
issued by Hartford Capital I
7.45% Trust Originated Preferred Securities, Series C, issued by
Hartford Capital III
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 2002, there were outstanding 246,259,394 shares of Common
Stock, $0.01 par value per share, of the registrant. The aggregate market value
of the shares of Common Stock held by non-affiliates of the registrant was
$16,099,428,325 based on the closing price of $67.00 per share of the Common
Stock on the New York Stock Exchange on February 28, 2002.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 2002 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
================================================================================
<PAGE>
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of The Hartford 2
2 Properties 14
3 Legal Proceedings 14
4 Submission of Matters to a Vote of Security Holders 14
PART II 5 Market for The Hartford's Common Stock and Related
Stockholder Matters 14
6 Selected Financial Data 15
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
7A Quantitative and Qualitative Disclosures About Market Risk 53
8 Financial Statements and Supplementary Data 53
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 53
PART III 10 Directors and Executive Officers of The Hartford 53
11 Executive Compensation 53
12 Security Ownership of Certain Beneficial Owners
and Management 53
13 Certain Relationships and Related Transactions 53
PART IV 14 Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 53
Signatures II-1
Exhibits Index II-2
<PAGE>
PART I
ITEM 1. BUSINESS OF THE HARTFORD
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR SHARE DATA, UNLESS OTHERWISE STATED)
GENERAL
The Hartford Financial Services Group, Inc. (together with its subsidiaries,
"The Hartford" or the "Company") is a diversified insurance and financial
services company. The Hartford, headquartered in Connecticut, is among the
largest providers of investment products, individual life, group life and group
disability insurance products, and property and casualty insurance products in
the United States. Hartford Fire Insurance Company, founded in 1810, is the
oldest of The Hartford's subsidiaries. The Hartford writes insurance and
reinsurance in the United States and internationally. At December 31, 2001,
total assets and total stockholders' equity of The Hartford were $181.2 billion
and $9.0 billion, respectively.
ORGANIZATION
The Hartford strives to maintain and enhance its position as a market leader
within the financial services industry and to maximize shareholder value. The
Company pursues a strategy of developing and selling diverse and innovative
products through multiple distribution channels, continuously developing and
expanding those distribution channels, achieving cost efficiencies through
economies of scale and improved technology, maintaining effective risk
management and prudent underwriting techniques and capitalizing on its brand
name and customer recognition of The Hartford Stag Logo, one of the most
recognized symbols in the financial services industry.
As a holding company that is separate and distinct from its insurance
subsidiaries, The Hartford Financial Services Group, Inc. has no significant
business operations of its own. Therefore, it relies on the dividends from its
insurance company subsidiaries, which are primarily domiciled in Connecticut, as
the principal source of cash flow to meet its obligations. Additional
information regarding the cash flow and liquidity needs of The Hartford
Financial Services Group, Inc. may be found in the Capital Resources and
Liquidity section of Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A").
The Company maintains a retail mutual fund operation, whereby the Company,
through wholly-owned subsidiaries, provides investment management and
administrative services to The Hartford Mutual Funds, Inc., a family of 21
mutual funds. Investors can purchase "shares" in the mutual funds, all of which
are registered with the Securities and Exchange Commission in accordance with
the Investment Company Act of 1940. The mutual funds are owned by the
shareholders of those funds and not by the Company.
Pursuant to its initial public offering of Class A common stock on May 22, 1997
(the "Offering") of Hartford Life, Inc. ("HLI"), the holding company parent of
The Hartford's significant life insurance subsidiaries, HLI sold to the public
26 million shares at $28.25 per share and received proceeds, net of offering
expenses, of $687. The 26 million shares sold in the Offering represented
approximately 19% of the equity ownership in HLI. On June 27, 2000, The Hartford
acquired all of the outstanding shares of HLI that it did not already own ("The
HLI Repurchase"). As a result, HLI again became a wholly-owned subsidiary of The
Hartford. Additional information on The HLI Repurchase may be found in the
Capital Resources and Liquidity section of the MD&A and Note 16 of Notes to
Consolidated Financial Statements.
On April 2, 2001, The Hartford acquired the United States individual life
insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as
"Fortis Financial Group", or "Fortis") for $1.12 billion in cash. The Company
effected the acquisition through several reinsurance agreements with
subsidiaries of Fortis and the purchase of 100% of the stock of Fortis Advisors,
Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis. (For
additional information, see the Capital Resources and Liquidity section of the
MD&A and Note 18(a) of Notes to Consolidated Financial Statements.)
The Company has exited its international property and casualty businesses.
Accordingly, in September 2001, The Hartford entered into an agreement to sell
Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance
Company, Ltd. ("Singapore Insurance")). The sale was completed in January 2002.
On February 8, 2001, The Hartford completed the sale of its Spain-based
subsidiary, Hartford Seguros. On December 22, 2000, The Hartford completed the
sale of its Netherlands-based Zwolsche Algemeene N.V. ("Zwolsche") subsidiary.
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh")
subsidiary.
REPORTING SEGMENTS
The Hartford is organized into two major operations: Life and Property &
Casualty. Within these operations, The Hartford conducts business principally in
ten operating segments. Additionally, all activities related to The HLI
Repurchase and the minority interest in HLI for pre-acquisition periods are
included in Corporate.
Life, headquartered in Simsbury, Connecticut, is organized into four reportable
operating segments: Investment Products, Individual Life, Group Benefits and
Corporate Owned Life Insurance ("COLI"). Life also includes in an Other category
its international operations, which are primarily located in Latin America and
Japan, as well as corporate items not directly allocable to any of its
reportable operating segments, principally interest expense.
Property & Casualty, headquartered in Hartford, Connecticut, was reorganized
into six reportable operating segments and, effective January 1, 2001, is
reported as the North American underwriting segments of Business Insurance,
Affinity Personal Lines, Personal Insurance, Specialty Commercial and
Reinsurance; and the Other Operations segment, formerly "International and Other
Operations".
The following is a description of Life and Property & Casualty along with each
of their segments, including a discussion of principal products, marketing and
distribution and competitive environments. Additional information on The
Hartford's reporting segments may be found in the MD&A and Note 17 of Notes to
Consolidated Financial Statements.
- 2 -
<PAGE>
LIFE
Life's business is conducted by HLI, a leading financial services and insurance
organization. Through Life, The Hartford provides (i) investment products,
including variable annuities, fixed market value adjusted ("MVA") annuities,
mutual funds and retirement plan services for the savings and retirement needs
of over 1.5 million customers, (ii) life insurance for income protection and
estate planning to approximately 750,000 customers, (iii) group benefits
products such as group life and group disability insurance for the benefit of
millions of individuals and (iv) corporate owned life insurance, which includes
life insurance policies purchased by a company on the lives of its employees.
The Company is one of the largest sellers of individual variable annuities,
variable life insurance and group disability insurance in the United States. In
addition, in 2001 The Hartford Mutual Funds, Inc. reached $12 billion in assets
faster than any other retail-oriented mutual fund family in history, according
to Strategic Insight. The Company's strong position in each of its core
businesses provides an opportunity to increase the sale of The Hartford's
products and services as individuals increasingly save and plan for retirement,
protect themselves and their families against disability or death and engage in
estate planning. In an effort to advance the Company's strategy of growing its
life and asset accumulation businesses, The Hartford acquired the individual
life insurance, annuity and mutual fund businesses of Fortis on April 2, 2001.
(For additional information, see the Capital Resources and Liquidity section of
the MD&A and Note 18(a) of Notes to Consolidated Financial Statements).
HLI is among the largest consolidated life insurance groups in the United States
based on statutory assets as of December 31, 2000. In the past year, Life's
total assets under management, which include $16.8 billion of third-party assets
invested in the Company's mutual funds, increased 9% to $168.4 billion at
December 31, 2001 from $155.1 billion at December 31, 2000. Life generated
revenues of $6.5 billion, $6.0 billion and $5.5 billion in 2001, 2000 and 1999,
respectively. Additionally Life generated net income of $685, $575 and $467 in
2001, 2000, and 1999, respectively.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
Life maintains advantageous economies of scale and operating efficiencies due to
its continued growth, attention to expense and claims management and commitment
to customer service and technology. These advantages allow the Company to
competitively price its products for its distribution network and policyholders.
The Company continues to achieve operating efficiencies in its Investment
Products segment. Operating expenses associated with the Company's individual
annuity products as a percentage of total individual annuity account values
reduced by nearly half since 1992, declining from 43 basis points to 22 basis
points in 2001. In addition, the Company utilizes computer technology to enhance
communications within the Company and throughout its distribution network in
order to improve the Company's efficiency in marketing, selling and servicing
its products and, as a result, provides high-quality customer service. In
recognition of excellence in customer service for variable annuities, The
Hartford was awarded the 2001 Annuity Service Award by DALBAR Inc., a recognized
independent financial services research organization, for the sixth consecutive
year. The Hartford is the only company to receive this prestigious award in
every year of the award's existence. Also, in both 2001 and 2000, The Hartford
Mutual Funds, Inc. was named the leading mid-sized fund complex in the industry
for top service providers, according to a survey of broker-dealers conducted by
DALBAR Inc. Additionally, the Company's Individual Life Division won the DALBAR
award for service of life insurance customers in 2001 and was the only life
insurance operation to be recognized with this prestigious award.
RISK MANAGEMENT
Life's product designs, prudent underwriting standards and risk management
techniques protect it against disintermediation risk and greater than expected
mortality and morbidity experience. As of December 31, 2001, the Company had
limited exposure to disintermediation risk on approximately 97% of its domestic
life insurance and annuity liabilities through the use of non-guaranteed
separate accounts, MVA features, policy loans, surrender charges and
non-surrenderability provisions. The Company effectively utilizes prudent
underwriting to select and price insurance risks and regularly monitors
mortality and morbidity assumptions to determine if experience remains
consistent with these assumptions and to ensure that its product pricing remains
appropriate. The Company also enforces disciplined claims management to protect
itself against greater than expected morbidity experience.
INVESTMENT PRODUCTS
The Investment Products segment focuses, through the sale of individual variable
and fixed annuities, mutual funds, retirement plan services and other investment
products, on the savings and retirement needs of the growing number of
individuals who are preparing for retirement or who have already retired. From
December 31, 1996 to December 31, 2001, this segment's assets under management
grew to $120.3 billion from $55.3 billion, a five year compounded annual growth
rate of 17%. Investment Products generated revenues of $2.5 billion, $2.4
billion and $2.0 billion in 2001, 2000 and 1999, respectively, of which
individual annuities accounted for $1.5 billion in 2001 and 2000, and $1.4
billion in 1999. Net income in the Investment Products segment was $463, $424
and $330 in 2001, 2000 and 1999, respectively.
The Hartford sells both variable and fixed individual annuity products through a
wide distribution network of national and regional broker-dealer organizations,
banks and other financial institutions and independent financial advisors. The
Hartford is a market leader in the annuity industry with sales of $10.0 billion,
$10.7 billion and $10.9 billion in 2001, 2000 and 1999, respectively. The
Hartford was among the largest sellers of individual variable annuities in the
United States for 2001, 2000 and 1999 with sales of $9.0 billion, $9.0 billion
and $10.3 billion, respectively. In addition, the Company continues to be among
the largest sellers of individual variable annuities through banks in the United
States.
The Company's total account value related to individual annuity products was
$84.2 billion as of December 31, 2001. Of this total account value, $74.6
billion, or 89%, related to individual variable annuity products and $9.6
billion, or 11%, related primarily to fixed MVA annuity products. In 2000, the
Company's total account values related to individual annuity products was $87.2
billion. Of this total account value, $78.2
- 3 -
<PAGE>
billion, or 90%, related to individual variable annuity products and $9.0
billion, or 10%, related primarily to fixed MVA annuity products.
In addition to its leading position in individual annuities, The Hartford
continues to emerge as a significant participant in the mutual fund business and
is among the top providers of retirement products and services, including asset
management and plan administration sold to corporations pursuant to Section 401
of the Internal Revenue Code of 1986, as amended (referred to as "401(k)") and
to municipalities pursuant to Section 457 of the Internal Revenue Code of 1986,
as amended (referred to as "Section 457"). The Company also provides structured
settlement contracts, terminal funding products and other investment products
such as guaranteed investment contracts ("GICs").
As previously mentioned, The Hartford acquired the individual annuity and mutual
fund businesses of Fortis, Inc. in 2001. This acquisition increased assets under
management in the Company's fast growing mutual fund business by 20%, and helped
solidify the Company's strong position in variable annuities.
Principal Products
- ------------------
Individual Variable Annuities -- The Hartford earns fees, based on
policyholders' account values, for managing variable annuity assets and
maintaining policyholder accounts. The Company uses specified portions of the
periodic deposits paid by a customer to purchase units in one or more mutual
funds as directed by the customer who then assumes the investment performance
risks and rewards. As a result, variable annuities permit policyholders to
choose aggressive or conservative investment strategies, as they deem
appropriate, without affecting the composition and quality of assets in the
Company's general account. These products offer the policyholder a variety of
equity and fixed income options, as well as the ability to earn a guaranteed
rate of interest in the general account of the Company. The Company offers an
enhanced guaranteed rate of interest for a specified period of time (no longer
than twelve months) if the policyholder elects to dollar-cost average funds from
the Company's general account into one or more non-guaranteed separate accounts.
Due to this enhanced rate and the volatility experienced in the overall equity
markets, this option continues to be popular with policyholders. Policyholders
may make deposits of varying amounts at regular or irregular intervals and the
value of these assets fluctuates in accordance with the investment performance
of the funds selected by the policyholder. To encourage persistency, many of the
Company's individual variable annuities are subject to withdrawal restrictions
and surrender charges. Surrender charges range initially from 5% to 8% of the
contract's initial deposit less withdrawals, and reduce to zero on a sliding
scale, usually within seven policy years. Volatility experienced by the equity
markets over the past few years did not cause a significant increase in variable
annuity surrenders, demonstrating that policyholders are generally aware of the
long-term nature of these products. Individual variable annuity account values
of $74.6 billion as of December 31, 2001, have grown significantly from $13.1
billion as of December 31, 1994, due to strong net cash flow, resulting from
high levels of sales, low levels of surrenders and equity market appreciation.
Approximately 94% and 96% of the individual variable annuity account values were
held in non-guaranteed separate accounts as of December 31, 2001 and 2000,
respectively.
The assets underlying the Company's variable annuities are managed both
internally and by outside money managers, while the Company provides all policy
administration services. The Company utilizes a select group of money managers,
such as Wellington Management Company, LLP ("Wellington"), Putnam Financial
Services, Inc. ("Putnam"), American Funds, MFS Investment Management ("MFS"),
Franklin Templeton Group, AIM Investments ("AIM") and Morgan Stanley Investment
Advisors, Inc. All have an interest in the continued growth in sales of the
Company's products and greatly enhance the marketability of the Company's
annuities and the strength of its product offerings. The Director variable
annuity, which is managed in part by Wellington, continues to be an industry
leader in terms of sales. In addition, Hartford Leaders, which is a
multi-manager variable annuity that combines the product manufacturing,
wholesaling and service capabilities of The Hartford with the investment
management expertise of four of the nation's most successful investment
management organizations: American Funds, Franklin Templeton Group, AIM and MFS,
has quickly emerged as a strong selling product for the Company.
Fixed MVA Annuities -- Fixed MVA annuities are fixed rate annuity contracts
which guarantee a specific sum of money to be paid in the future, either as a
lump sum or as monthly income. In the event that a policyholder surrenders a
policy prior to the end of the guarantee period, the MVA feature increases or
decreases the cash surrender value of the annuity in respect of any interest
rate decreases or increases, respectively, thereby protecting the Company from
losses due to higher interest rates at the time of surrender. The amount of
payment will not fluctuate due to adverse changes in the Company's investment
return, mortality experience or expenses. The Company's primary fixed MVA
annuities have terms varying from one to ten years with an average term of
approximately eight years. Account values of fixed MVA annuities were $9.6
billion and $9.0 billion as of December 31, 2001 and 2000, respectively.
Mutual Funds -- In September 1996, The Hartford launched a family of retail
mutual funds for which the Company provides investment management and
administrative services. The fund family has grown significantly from 8 funds at
inception to the current offering of 21 funds. These funds are managed by
Wellington and Hartford Investment Management Company, a wholly-owned subsidiary
of The Hartford. The Company has entered into agreements with over 750 financial
services firms to distribute these mutual funds.
The Company charges fees to the shareholders of the mutual funds, which are
recorded as revenue by the Company. Investors can purchase shares in the mutual
funds, all of which are registered with the Securities and Exchange Commission,
in accordance with the Investment Company Act of 1940. The mutual funds are
owned by the shareholders of those funds and not by the Company. As such, the
mutual fund assets and liabilities, as well as related investment returns, are
not reflected in the Company's consolidated financial statements. Total retail
mutual fund sales were $5.7 billion, $5.2 billion and $3.3 billion in 2001, 2000
and 1999, respectively.
- 4 -
<PAGE>
Governmental -- The Company sells retirement plan products and services to
municipalities under Section 457 plans. The Company offers a number of different
investment products, including fixed and variable annuities, to the employees in
Section 457 plans. Generally, with the variable products, the Company manages
the fixed income funds and certain other outside money managers act as advisors
to the equity funds offered in Section 457 plans administered by the Company. As
of December 31, 2001, the Company administered over 3,000 Section 457 plans.
Corporate -- The Company sells retirement plan products and services to
corporations under Section 401(k) plans targeting the small and medium case
markets. The Company believes these markets are under-penetrated in comparison
to the large case market. As of December 31, 2001, the Company administered over
2,400 Section 401(k) plans.
Institutional Liabilities -- The Company sells structured settlement contracts
which provide for periodic payments to an injured person or survivor for a
generally determinable number of years, typically in settlement of a claim under
a liability policy in lieu of a lump sum settlement. The Company's structured
settlements are sold through The Hartford's Property & Casualty insurance
operations as well as specialty brokers. The Company also markets other annuity
contracts for special purposes such as the funding of terminated defined benefit
pension plans. In addition, the Company offers GICs and short-term funding
agreements.
Section 529 Plans - The Hartford is introducing a tax advantaged college savings
product (529 plan) in early 2002 called SMART 529. SMART 529 is a
state-sponsored education savings program established by the State of West
Virginia which offers an easy way for both the residents of West Virginia and
out-of-state participants to invest for a college education. In 1996, Congress
created a tax-advantaged college savings program (529 Plan) as part of Section
529 of the Internal Revenue Code (the "Code"). The 529 Plan is an investment
plan operated by a state, designed to help families save for future college
costs. On January 1, 2002, 529 Plans became federal tax-exempt for qualified
withdrawals.
SMART 529 is designed to be flexible by allowing investors to choose from a wide
variety of investment portfolios to match their risk preference to help
investors accumulate savings for college. An individual can open a SMART 529
account for anyone, at any age. The SMART 529 product complements HLI's existing
offering of investment products (mutual funds, variable annuities, 401 (k), 457
and 403 (b) plans). It also leverages the Company's capabilities in
distribution, service and fund performance. The Hartford believes this is a
significant market opportunity and the benefits of investing in 529 plans will
be well received by many Americans saving for college.
Marketing and Distribution
- --------------------------
The Investment Products distribution network is based on management's strategy
of utilizing multiple and competing distribution channels to achieve the
broadest distribution to reach target customers. The success of the Company's
marketing and distribution system depends on its product offerings, fund
performance, successful utilization of wholesaling organizations, quality of
customer service, and relationships with national and regional broker-dealer
firms, banks and other financial institutions, and independent financial
advisors (through which the sale of the Company's individual annuities to
customers is consummated).
The Hartford maintains a distribution network of approximately 1,500
broker-dealers and approximately 500 banks. As of September 30, 2001, the
Company was selling products through 24 of the 25 largest retail banks in the
United States, including proprietary relationships with 10 of the top 25. The
Company periodically negotiates provisions and terms of its relationships with
unaffiliated parties, and there can be no assurance that such terms will remain
acceptable to the Company or such third parties. The Company's primary
wholesaler of its individual annuities and mutual funds is its wholly-owned
subsidiary, PLANCO Financial Services, Inc. and its affiliate, PLANCO,
Incorporated (collectively "PLANCO"). PLANCO is one of the nation's largest
wholesalers of individual annuities and has played a significant role in The
Hartford's growth over the past decade. As a wholesaler, PLANCO distributes The
Hartford's fixed and variable annuities, mutual funds, 401(k) plans and single
premium variable life insurance by providing sales support to registered
representatives, financial planners and broker-dealers at brokerage firms and
banks across the United States. Owning PLANCO secures an important distribution
channel for the Company and gives the Company a wholesale distribution platform
which it can expand in terms of both the number of individuals wholesaling its
products and the portfolio of products which they wholesale. In addition, the
Company uses internal personnel with extensive experience in the Section 457
market, as well as access to the Section 401(k) market, to sell its products and
services in the retirement plan market.
Competition
- -----------
The Investment Products segment competes with numerous other insurance companies
as well as certain banks, securities brokerage firms, investment advisors and
other financial intermediaries marketing annuities, mutual funds and other
retirement-oriented products. The 1999 Gramm-Leach-Bliley Act ("the Financial
Services Modernization Act"), which allows affiliations among banks, insurance
companies and securities firms, has not precipitated any significant changes in
bank ownership of insurance companies. (For additional information, see the
Regulatory Matters and Contingencies section of the MD&A.) Product sales are
affected by competitive factors such as investment performance ratings, product
design, visibility in the marketplace, financial strength ratings, distribution
capabilities, levels of charges and credited rates, reputation and customer
service.
INDIVIDUAL LIFE
The Individual Life segment sells a variety of products including variable life,
universal life, interest sensitive whole life and term life insurance primarily
to the high end estate and business planning markets. The individual life
business acquired from Fortis added significant scale to the Company's
Individual Life segment, contributing to the significant increase in life
insurance in force. As of December 31, 2001, life insurance in force increased
60% to $120.3 billion, from $75.1 billion as of December 31, 2000 and account
values grew 35% to $7.9 billion as of December 31, 2001 from $5.8 billion as of
December 31, 2000. Revenues were $890, $640 and $584 in 2001, 2000 and 1999,
respectively. Net income in the
- 5 -
<PAGE>
Individual Life segment was $121, $79 and $71 in 2001, 2000 and 1999,
respectively.
Principal Products
- ------------------
The trend in the individual life industry has been a shift away from traditional
products towards variable life (including variable universal life) insurance
products, in which The Hartford has been on the leading edge. In 2001, of the
Company's new sales of individual life insurance, 82% was variable life and 15%
was either universal life or interest sensitive whole life. The Company also
sold a small amount of term life insurance.
Variable Life -- Variable life insurance provides a return linked to an
underlying investment portfolio and the Company allows policyholders to
determine their desired asset mix among a variety of underlying mutual funds. As
the return on the investment portfolio increases or decreases, as the case may
be, the death benefit or surrender value of the variable life policy may
increase or decrease. The Company's single premium variable life product
provides a death benefit to the policy beneficiary based on a single premium
deposit. The Company's second-to-die products are distinguished from other
products in that two lives are insured rather than one, and the policy proceeds
are paid upon the death of both insureds. Second-to-die policies are frequently
used in estate planning, often to fund estate taxes for a married couple.
Variable life account values were $4.0 billion and $2.9 billion as of December
31, 2001 and 2000, respectively.
Universal Life and Interest Sensitive Whole Life -- Universal life and interest
sensitive whole life insurance coverages provide life insurance with adjustable
rates of return based on current interest rates. The Company offers both
flexible and fixed premium policies and provides policyholders with flexibility
in the available coverage, the timing and amount of premium payments and the
amount of the death benefit, provided there are sufficient policy funds to cover
all policy charges for the coming period. The Company also sells universal life
insurance policies with a second-to-die feature similar to that of the variable
life insurance product offered. Universal life and interest sensitive whole life
account values were $3.1 billion and $2.1 billion as of December 31, 2001 and
2000, respectively.
Marketing and Distribution
- --------------------------
Consistent with the Company's strategy to access multiple distribution outlets,
the Individual Life distribution organization has been developed to penetrate a
multitude of retail sales channels. These include independent life insurance
sales professionals; agents of other companies; national, regional and
independent broker-dealers; banks and property and casualty insurance
organizations. The primary organization used to wholesale The Hartford's
products to these outlets is a group of highly qualified life insurance
professionals with specialized training in sophisticated life insurance sales,
particularly as it pertains to estate and business planning. These individuals
are generally employees of The Hartford who are managed through a regional sales
office system. The Company has grown this organization rapidly the past few
years to over 225 individuals and expects to continue to increase the number of
wholesalers in the future. The acquisition of the United States individual life
insurance business of Fortis has broadened the Company's reach in the emerging
affluent market with the addition of a retail broker-dealer consisting of
approximately 2,300 registered representatives.
Competition
- -----------
The Individual Life segment competes with approximately 1,800 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered, pricing,
relationships with third-party distributors and the quality of underwriting and
customer service.
GROUP BENEFITS
The Group Benefits segment sells group life and group disability insurance, as
well as other products, including stop loss and supplementary medical coverages
to employers and employer sponsored plans, accidental death and dismemberment,
travel accident and other special risk coverage to employers and associations.
The Company also offers disability underwriting, administration, claims
processing services and reinsurance to other insurers and self-funded employer
plans. Generally, policies sold in this segment are term insurance, typically
with one or two year rate guarantees. This allows the Company to adjust the
rates or terms of its policies in order to minimize the adverse effect of
various market trends. In the disability market, the Company focuses on strong
underwriting and claims management to derive a competitive advantage. As of
December 31, 2001 and 2000, the Company had group disability reserves of $2.4
billion and $2.0 billion and group life reserves of $706 and $601, respectively.
The Group Benefits segment generated revenues of $2.5 billion, $2.2 billion and
$2.0 billion in 2001, 2000 and 1999, respectively, of which group disability
insurance accounted for $1.1 billion, $939 and $860 and group life insurance
accounted for $763, $687 and $654, respectively. Net income in the Group
Benefits segment was $106, $90 and $79 in 2001, 2000 and 1999, respectively.
Principal Products
- ------------------
Group Disability -- The Hartford is one of the largest participants in the
"large case" market of the group disability insurance business. The large case
market, as defined by the Company, generally consists of group disability
policies covering over 500 employees in a particular company. The Company is
continuing its focus on the "small case" and "medium case" group markets,
emphasizing name recognition and reputation as well as the Company's managed
disability approach to claims and administration. The Company's efforts in the
group disability market focus on early intervention, return-to-work programs,
reduction of long-term disability claims and successful rehabilitation. Over the
last several years, the focus of new disability products introduced is to
provide incentives for employees to return to independence. The Company also
works with disability claimants to improve the receipt rate of Social Security
offsets (i.e., reducing payment of benefits by the amount of Social Security
payments received).
The Hartford has concentrated on a managed disability approach, which emphasizes
early claimant intervention in an effort to facilitate a disabled claimant's
return to work and thereby contain costs. This approach, coupled with an
individualized approach to claim servicing, and an incentive to
- 6 -
<PAGE>
contain costs, leads to an overall reduction in the cost of disability coverage
for employers. The Company's short-term disability benefit plans provide a
weekly benefit amount (typically 60% to 70% of the employee's earned income up
to a specified maximum benefit) to insured employees when they are unable to
work due to an accident or illness. Long-term disability insurance provides a
monthly benefit for those extended periods of time not covered by a short-term
disability benefit plan when insured employees are unable to work due to
disability. Employees may receive total or partial disability benefits. Most of
these policies begin providing benefits following a 90 or 180 day waiting period
and generally continue providing benefits until the employee reaches age 65.
Long-term disability benefits are paid monthly and are limited to a portion,
generally 50-70%, of the employee's earned income up to a specified maximum
benefit.
Group Life -- Group term life insurance provides term coverage to employees and
their dependents for a specified period and has no accumulation of cash values.
The Company offers options for its basic group life insurance coverage,
including portability of coverage and a living benefit option, whereby
terminally ill policyholders can receive death benefits prior to their deaths.
In addition, the Company offers premium waivers and accidental death and
dismemberment coverages to employee groups.
Other -- The Hartford provides excess of loss medical coverage (known as stop
loss insurance) to employers who self-fund their medical plans and pay claims
using the services of a third party administrator. The Company also provides
Medicare supplement insurance, travel accident, hospital indemnity and other
coverages (including group life and disability) primarily to individual members
of various associations, as well as employee groups. A significant Medicare
supplement customer of the company has been the members of the Retired Officers
Association, an organization consisting of retired military officers. Congress
recently passed legislation, effective in the fourth quarter of 2001, whereby
retired military officers age 65 and older will receive full medical insurance,
eliminating the need for Medicare supplement insurance. This legislation will
reduce the Company's premium revenue by approximately $131 in 2002.
Marketing and Distribution
- --------------------------
The Hartford uses an experienced group of Company employees, managed through a
regional sales office system, to distribute its group insurance products and
services through a variety of distribution outlets. The Company intends to
continue to expand the system over the coming years in areas that have the
highest growth potential and also will continue to develop alternative
distribution channels to sell its products, such as sales to employers through
brokers, consultants and third-party administrators as well as to multiple
employer groups through its relationships with trade associations. In keeping
with its strategy of developing multiple distribution channels, the Company
signed an agreement in January 2001 with Wausau Benefits, Inc., to sell its
group life and group disability products.
Competition
- -----------
Competitive factors primarily affecting Group Benefits are the variety and
quality of products offered, the price quoted for coverage and services, the
Company's relationships with its third-party distributors and the quality of
customer service. Group Benefits competes with numerous other insurance
companies and other financial intermediaries marketing insurance products.
However, many of these businesses have relatively high barriers to entry and
there have been very few new entrants over the past few years, while other major
carriers have exited the market.
CORPORATE OWNED LIFE INSURANCE ("COLI")
The Hartford is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
or a trust sponsored by the company named as the beneficiary under the policy.
Until the Health Insurance Portability and Accountability Act of 1996 ("HIPA Act
of 1996"), the Company sold two principal types of COLI, leveraged and variable
products. Leveraged COLI is a fixed premium life insurance policy owned by a
company or a trust sponsored by a company. The HIPA Act of 1996 phased out the
deductibility of interest on policy loans under leveraged COLI at the end of
1998, virtually eliminating all future sales of leveraged COLI. Variable COLI
continues to be a product used by employers to fund non-qualified benefits or
other postemployment benefit liabilities.
Variable COLI account values were $18.0 billion and $15.9 billion as of December
31, 2001 and 2000, respectively. Leveraged COLI account values decreased to $4.3
billion as of December 31, 2001 from $5.0 billion as of December 31, 2000,
primarily due to the continuing effects of the HIPA Act of 1996. COLI generated
revenues of $719, $767 and $831 in 2001, 2000 and 1999, respectively. COLI
generated net income of $37, $34 and $30 in 2001, 2000 and 1999, respectively.
PROPERTY & CASUALTY
- -------------------
Property & Casualty provides (1) workers' compensation, property, automobile,
liability, marine, agricultural and bond coverages to commercial accounts
throughout the United States; (2) professional liability coverage and directors
and officers liability coverage, as well as excess and surplus lines business
not normally written by standard lines insurers; (3) automobile, homeowners and
home-based business coverage to individuals throughout the United States; (4)
assumed reinsurance through professional reinsurance brokers covering various
property, casualty, specialty and marine classes of business; and (5) insurance
related services.
The Hartford has the tenth largest property and casualty insurance operation in
the United States based on written premiums for the year ended December 31, 2000
according to A.M. Best. Property & Casualty generated revenues of $8.6 billion,
$8.7 billion and $8.0 billion, in 2001, 2000 and 1999, respectively. Written
premiums for 2001, 2000 and 1999 were $7.6 billion, $7.0 billion and $6.4
billion, respectively. Additionally, net income (loss) was $(115), $494 and $481
for 2001, 2000 and 1999, respectively. Excluding the impact of the September 11
terrorist attack ("September 11"), Property & Casualty generated $8.7 billion in
revenues, $7.7 billion in written premiums and $305 in net income in 2001. Total
assets for Property & Casualty were $28.8 billion as of December 31, 2001. (For
a discussion of the impact of September 11 and terrorism exposures, see MD&A
under Property & Casualty and Capital Resources and Liquidity sections.)
- 7 -
<PAGE>
The Hartford's Property & Casualty operation was reorganized into six reportable
operating segments and, effective January 1, 2001, is reported as the North
American underwriting segments of Business Insurance, Affinity Personal Lines,
Personal Insurance, Specialty Commercial and Reinsurance; and the Other
Operations segment, formerly "International and Other Operations". Also reported
within Property & Casualty is North American, which includes the combined
underwriting results of the North American underwriting segments along with
income and expense items not directly allocable to these segments, such as net
investment income, net realized capital gains and losses, other expenses
including interest, and income taxes.
BUSINESS INSURANCE
Business Insurance provides standard commercial insurance coverage to small
("Select Customer") and mid-sized ("Key Accounts") commercial businesses
throughout the United States. This segment also provides commercial risk
management products and services to small and mid-sized members of affinity
groups in addition to marine coverage. The segment had written premiums of $2.9
billion, $2.4 billion and $2.2 billion in 2001, 2000 and 1999, respectively, and
underwriting losses of $242 ($3 of underwriting income excluding the impact of
September 11), $50 and $123 in 2001, 2000 and 1999, respectively.
Principal Products
- ------------------
The Business Insurance segment offers workers' compensation, property,
automobile, liability, umbrella and marine coverages. Commercial risk management
products and services are also provided to small and mid-sized members of
affinity groups.
Marketing and Distribution
- --------------------------
Business Insurance provides insurance products and services through its home
office located in Hartford, Connecticut, and multiple domestic regional office
locations and insurance centers. The segment markets its products nationwide
utilizing a variety of distribution networks including independent agents as
well as wholesalers and direct marketing through trade associations, customers
of financial institutions and employee groups. Independent agents, who often
represent other companies as well, are compensated on a commission basis and are
not employees of The Hartford.
AFFINITY PERSONAL LINES
Affinity Personal Lines provides insurance coverage to individuals throughout
the United States. Affinity Personal Lines is organized to provide customized
products and services to the following markets: the membership of AARP through a
direct marketing operation; customers of Sears, Roebuck & Co. ("Sears") and Ford
Motor Company and Ford Motor Credit Company (collectively, "Ford"); as well as
customers of financial institutions through an affinity center. Affinity
Personal Lines also operates a member contact center for health insurance
products offered through AARP's Health Care Options. The Hartford's exclusive
licensing arrangement with AARP, which was renewed during the fourth quarter of
2001, continues through January 1, 2010 for automobile, homeowners and
home-based business. The Health Care Options agreement continues through 2007.
These agreements provide Affinity Personal Lines with an important competitive
advantage. Affinity Personal Lines had written premiums of $1.8 billion, $1.7
billion and $1.5 billion in 2001, 2000 and 1999, respectively. Underwriting
income (loss) for 2001, 2000 and 1999 was $(39), ($(36) excluding the impact of
September 11), $17 and $19, respectively.
Principal Products
- ------------------
Affinity Personal Lines provides automobile, homeowners and home-based business
coverages to individuals across the United States, including a special program
designed exclusively for members of AARP.
Marketing and Distribution
- --------------------------
Affinity Personal Lines reaches diverse markets through multiple distribution
channels including direct mail, the Internet and advertising in publications.
The segment markets directly to the over 34 million members of AARP as well as
other affinity groups.
PERSONAL INSURANCE
Personal Insurance provides insurance coverage to individuals throughout the
United States. Personal Insurance is organized to provide customized products
and services to customers who prefer local agent involvement through a network
of independent agents in the standard personal lines market and in the
non-standard automobile market through the Company's Omni Insurance Group, Inc.
("Omni") subsidiary. Personal Insurance had written premiums of $1.0 billion,
$988 and $943 in 2001, 2000 and 1999, respectively. Underwriting income (loss)
for 2001, 2000 and 1999 was $(48) (($42) excluding the impact of September 11),
$(15) and $15, respectively.
Principal Products
- ------------------
Personal Insurance provides standard and non-standard automobile, homeowners and
home-based business coverages to individuals across North America.
Marketing and Distribution
- --------------------------
Personal Insurance provides customized products and services to customers
through a network of independent agents in the standard personal lines market
and in the non-standard automobile market through Omni. Independent agents, who
often represent other companies as well, are compensated on a commission basis
and are not employees of The Hartford.
SPECIALTY COMMERCIAL
Specialty Commercial provides a wide variety of property and casualty insurance
products and services through retailers and wholesalers to large commercial
clients and insureds requiring a variety of specialized coverages. Excess and
surplus lines coverages not normally written by standard line insurers are also
provided, primarily through wholesale brokers. Specialty Commercial had written
premiums of $989 ($996 excluding the impact of September 11), $1.1 billion and
$954 in 2001, 2000 and 1999, respectively, and underwriting losses of $262 ($95
excluding the impact of September 11), $103 and $48 in 2001, 2000 and 1999,
respectively.
- 8 -
<PAGE>
Principal Products
- ------------------
The Specialty Commercial segment offers a variety of customized insurance
products and risk management services in addition to standard commercial
insurance including workers' compensation, casualty, automobile and liability
coverages to large-sized companies. Specialty Commercial also provides bond,
professional liability and agricultural coverages, as well as excess and surplus
lines coverages not normally written by standard lines insurers.
Marketing and Distribution
- --------------------------
Specialty Commercial provides insurance products and services through its home
office located in Hartford, Connecticut and multiple domestic regional and
district office locations. The segment markets its products nationwide utilizing
a variety of distribution networks including independent agents and brokers as
well as wholesalers. Independent agents, who often represent other companies as
well, are compensated on a commission basis and are not employees of The
Hartford.
REINSURANCE
The Hartford assumed reinsurance worldwide through its thirteen Hartford
Reinsurance Company ("HartRe") offices and wrote treaty reinsurance through
professional reinsurance brokers covering various property, casualty, specialty
and marine classes of business until the fourth quarter of 2001. In October
2001, HartRe announced a centralization of all underwriting and claims
operations in Hartford, Connecticut. While exiting most international lines,
HartRe will continue to write worldwide catastrophe, Alternative Risk Transfer
("ART") and marine from Hartford. The Reinsurance segment had written premiums
of $849 ($918 excluding the impact of September 11), $826 and $703 in 2001, 2000
and 1999, respectively, and underwriting losses of $375 ($149 excluding the
impact of September 11), $73 and $48 in 2001, 2000 and 1999, respectively.
Principal Products
- ------------------
The Reinsurance segment offers a full range of treaty and facultative
reinsurance products including property, casualty, marine and alternative risk
transfer which includes non-traditional reinsurance products.
Marketing and Distribution
- --------------------------
The Reinsurance segment assumes insurance from other insurers, primarily through
reinsurance brokers in the worldwide reinsurance market.
OTHER OPERATIONS
Property & Casualty's Other Operations currently consist of certain property and
casualty insurance operations of The Hartford which have ceased writing new
business. These operations primarily include First State Insurance Company,
located in Boston, Massachusetts; Heritage Reinsurance Company, Ltd.,
headquartered in Bermuda; and Excess Insurance Company Limited, located in the
United Kingdom. Also included in Other Operations are Property & Casualty's
international businesses up until their dates of sales.
Property & Casualty's international businesses have historically consisted
primarily of Western European companies offering a variety of insurance products
designed to meet the needs of local customers. The Company's strategic shift to
emphasize growth opportunities in asset accumulation businesses has resulted in
the sale of all of its international property and casualty businesses. London &
Edinburgh, located in the United Kingdom, was sold in November 1998. Zwolsche,
located in the Netherlands, Belgium and Luxembourg, was sold in December 2000.
Hartford Seguros, located in Spain, was sold in February 2001. In September
2001, The Hartford entered into an agreement to sell The Hartford Insurance
Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore
Insurance")). The sale was completed in January 2002.
The primary objectives of Other Operations are the proper disposition of claims,
the resolution of disputes, and the collection of reinsurance proceeds primarily
related to policies written and reinsured prior to 1985. As such, Other
Operations has no new product sales, distribution systems, or competitive
issues.
The Other Operations segment generated revenues of $168, $602 and $661 in 2001,
2000 and 1999, respectively. Net income for 2001, 2000 and 1999 was $10, $28 and
$33, respectively.
PROPERTY & CASUALTY COMPETITION
The commercial insurance industry continues to be a highly challenging and
competitive environment in which The Hartford competes with other insurance
companies, self insurers and other underwriting organizations. This competitive
environment is created by price competition, consolidation and globalization of
companies, exploration and utilization of alternative distribution techniques
and emphasis on cost containment and reduction. Additionally, September 11 has
created an ambiguous environment and economic uncertainty as federal backing in
the event of future terrorist attacks remains uncertain. In 2001, market
conditions in the commercial industry have continued to improve as a result of a
firming pricing environment.
The personal lines marketplace continues to remain competitive. Over the past
few years, intense price competition, upward trends in loss costs and the
significant expense of establishing alternative distribution channels have
caused underwriting results to decrease. The personal lines marketplace reported
a combined ratio of 111.4 for the first nine months of 2001, according to A.M.
Best. A major competitive advantage of The Hartford is the exclusive licensing
arrangement with AARP to provide personal automobile, homeowners and home-based
business insurance products to its members through January 1, 2010. Management
expects favorable "baby boom" demographics to increase AARP membership during
this period. In addition, The Hartford provides customer service for all health
insurance products offered through AARP's Health Care Options, with an agreement
that continues through 2007. The Hartford's contracts with Ford and Sears join
major brands in marketing automobile, homeowners, and home-based business
insurance products.
The property and casualty worldwide reinsurance market remains extremely
competitive, although the pricing
- 9 -
<PAGE>
environment continued to improve in 2001. As a result of September 11, however,
the worldwide reinsurance market has been transformed to an environment of some
uncertainty. New capital, dramatic price increases and modifications in contract
terms and conditions have contributed to the uncertainty. HartRe's
organizational realignment has created a centralized organization aimed at
enhancing core functions consistent with the segment's return objectives.
LIFE RESERVES
In accordance with applicable insurance regulations under which Life operates,
life insurance subsidiaries of The Hartford establish and carry as liabilities
actuarially determined reserves which are calculated to meet The Hartford's
future obligations. Reserves for life insurance and disability contracts are
based on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect The
Hartford's actual experience when appropriate. These reserves are computed at
amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet The Hartford's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims incurred but not reported and claims reported
but not yet paid. Reserves for assumed reinsurance are computed in a manner that
is comparable to direct insurance reserves. Additional information on Life
reserves may be found in the Reserves section of the MD&A.
PROPERTY & CASUALTY RESERVES
The Hartford establishes reserves to provide for the estimated costs of paying
claims made by policyholders or against policyholders. These reserves include
estimates for both claims that have been reported and those that have been
incurred but not yet reported to The Hartford and include estimates of all
expenses associated with processing and settling these claims. This estimation
process is based primarily on historical experience and involves a variety of
actuarial techniques which analyze trends and other relevant factors. For the
year ended December 31, 2001, there were no changes to these reserving
assumptions that had a significant impact on the reserves or results of
operations.
The Hartford continually reviews the adequacy of its estimated claims and claim
adjustment expense reserves on an overall basis. As additional experience and
other relevant data become available, reserve levels are adjusted accordingly.
Such adjustments are reflected in net income for the period in which they are
made. In the judgment of The Hartford's management, all information currently
available has been properly considered in establishing the reserves for unpaid
claims and claim adjustment expenses.
As a result of September 11, the Company established estimated gross reserves of
$1.1 billion and estimated net reserves of $556 related to property and casualty
operations. This loss estimate includes coverages related to property, business
interruption, workers' compensation and other liability exposures, including
those underwritten by the Company's assumed reinsurance operation. The Company
based the loss estimate upon a review of insured exposures using a variety of
assumptions and actuarial techniques, including estimated amounts for unknown
and unreported policyholder losses and costs incurred in settling claims.
Included in net reserves was an estimate of amounts recoverable under the
Company's ceded reinsurance programs. As a result of the uncertainties involved
in the estimation process, final claims settlement may vary from present
estimates.
The Hartford continues to receive claims that assert damages from environmental
pollution and related clean-up costs and injuries from asbestos and
asbestos-related products. Due to deviations from past experience and a variety
of social, economic and legal issues, the Company's ability to estimate the
future policy benefits, unpaid claims and claim adjustment expenses is
significantly impacted. A study which reviewed and identified environmental and
asbestos exposures in the United States was performed in 1996 and is discussed
in the Environmental and Asbestos Claims section of the MD&A.
Certain liabilities for unpaid claims, principally for permanently disabled
claimants, terminated reinsurance treaties and certain contracts that fund loss
run-offs for unrelated parties, have been discounted to present value. The
amount of the discount was approximately $429 and $396 as of December 31, 2001
and 2000, respectively, and amortization of the discount had no material effect
on net income during 2001, 2000 and 1999.
As of December 31, 2001, property and casualty reserves for claims and claim
adjustment expenses reported under Generally Accepted Accounting Principles
("GAAP") exceeded those reported on a statutory basis by $26. The primary
differences resulted from the required exclusion from statutory reserves of
assumed retroactive reinsurance and the discounting of GAAP-basis workers'
compensation reserves at risk free interest rates, which exceeded the required
statutory discount rates set by regulators.
There were no significant changes in the mix of the Company's business which
have impacted property and casualty claims and claim adjustment expense
reserves; nor has the Company completed any significant portfolio loss
transfers, structured settlements or other transactions which would change claim
payment patterns.
Further discussion on The Hartford's Property & Casualty reserves may be found
in the Reserves section of the MD&A.
A reconciliation of liabilities for unpaid claims and claim adjustment expenses
is herein referenced from Note 1(h) of Notes to Consolidated Financial
Statements. A table depicting the historical development of the liabilities for
unpaid claims and claim adjustment expenses follows.
- 10 -
<PAGE>
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET
FOR THE YEARS ENDED DECEMBER 31, [1]
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities for unpaid
claims and claim
adjustment expenses [2] $9,204 $10,498 $10,717 $10,776 $11,024 $12,202 $12,265 $12,401 $12,020 $11,857 $12,437
CUMULATIVE PAID CLAIMS AND
CLAIM EXPENSES
One year later 2,684 2,596 2,578 2,654 2,434 2,551 2,447 2,903 2,929 3,183
Two years later 4,350 4,282 4,207 4,179 4,004 4,078 4,223 4,626 4,873 --
Three years later 5,550 5,433 5,268 5,286 5,056 5,390 5,363 5,972 -- --
Four years later 6,396 6,229 6,112 6,040 6,077 6,211 6,303 -- -- --
Five years later 7,020 6,895 6,682 6,877 6,717 6,922 -- -- -- --
Six years later 7,569 7,354 7,391 7,406 7,303 -- -- -- -- --
Seven years later 7,954 7,987 7,861 7,924 -- -- -- -- -- --
Eight years later 8,532 8,411 8,332 -- -- -- -- -- -- --
Nine years later 8,924 8,851 -- -- -- -- -- -- -- --
Ten years later 9,340 -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 10,535 10,757 10,811 11,019 11,988 12,183 12,090 12,176 11,980 11,973
Two years later 10,866 10,970 11,009 12,142 11,992 12,065 11,808 12,048 11,975 --
Three years later 11,095 11,182 12,094 12,127 11,919 11,887 11,638 11,992 -- --
Four years later 11,417 12,304 12,157 12,113 11,789 11,772 11,511 -- -- --
Five years later 12,515 12,406 12,184 12,082 11,769 11,615 -- -- -- --
Six years later 12,642 12,462 12,165 12,088 11,640 -- -- -- -- --
Seven years later 12,757 12,414 12,218 11,981 -- -- -- -- -- --
Eight years later 12,710 12,500 12,154 -- -- -- -- -- -- --
Nine years later 12,789 12,472 -- -- -- -- -- -- -- --
Ten years later 12,778 -- -- -- -- -- -- -- -- --
DEFICIENCY (REDUNDANCY) $3,574 $1,974 $1,437 $1,205 $616 $(587) $(754) $(409) $(45) $116
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31, [1]
1994 1995 1996 1997 1998 1999 2000 2001
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET RESERVE [2] $ 10,776 $ 11,024 $ 12,202 $ 12,265 $ 12,401 $ 12,020 $ 11,857 $ 12,437
Reinsurance recoverables 5,156 4,829 4,357 3,996 3,275 3,264 3,452 3,818
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS RESERVE $ 15,932 $ 15,853 $ 16,559 $ 16,261 $ 15,676 $ 15,284 $ 15,309 $ 16,255
- ----------------------------------------------------------------------------------------------------------------------------------
NET REESTIMATED RESERVE $ 11,981 $ 11,640 $ 11,615 $ 11,511 $ 11,992 $ 11,975 11,973
Reestimated reinsurance recoverables 5,594 4,821 4,138 3,848 3,360 3,637 3,688
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $ 17,575 $ 16,461 $ 15,753 $ 15,359 $ 15,352 $ 15,612 $ 15,661
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY (REDUNDANCY) $ 1,643 $ 608 $ (806) $ (902) $ (324) $ 328 $ 352
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] The above tables exclude Hartford Insurance, Singapore as a result of its
sale in September 2001, Hartford Seguros as a result of its sale in
February 2001, Zwolsche as a result of its sale in December 2000 and
London & Edinburgh as a result of its sale in November 1998.
[2] The above tables exclude the liabilities and claim developments for
certain reinsurance coverages written for affiliated parties.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999 2000 2001
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities, net and gross of
reinsurance for unpaid claims
and claim adjustment expenses
excluded $ 495 $ 550 $ 500 $ 505 $ 501 $ 456 $ 459 $ 423
==================================================================================================================================
</TABLE>
The following table reconciles the Loss Development Table to the Consolidated
Financial Statements:
- ----------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------
Loss Development Table:
Gross reserves $ 16,255 $ 15,309 $ 15,284
Exclusion of international
subsidiaries -- 106 274
Reinsurance - affiliated parties 423 459 456
- ----------------------------------------------------------------------
Gross reserves per Consolidated
Financial Statements (see Note
1 (h)) $ 16,678 $ 15,874 $ 16,014
- ----------------------------------------------------------------------
CEDED REINSURANCE
Consistent with normal industry practice, The Hartford cedes insurance risk to
reinsurance companies. For Property & Casualty operations, these reinsurance
arrangements 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 certain losses over stipulated amounts.
- 11 -
<PAGE>
The ceding of insurance obligations does not discharge the original insurer from
its primary liability to the policyholder. The original insurer would remain
liable in those situations where the reinsurer is unable to meet the obligations
assumed under reinsurance agreements. The Hartford has established strict
standards that govern the placement of reinsurance and monitors ceded
reinsurance security. Virtually all of The Hartford's property and casualty
reinsurance is placed with reinsurers that meet strict financial criteria
established by a credit committee.
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, 2001, the maximum amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.5.
In 2001, the Company did not make any significant changes in the terms under
which reinsurance is ceded to other insurers. Also, the Company did not enter
into a specific reinsurance transaction that had a material effect on earnings
or reserves. However, as a result of September 11, The Hartford established
estimated ceded reserves of $569 under existing reinsurance contracts and
recorded premium cessions of $91 related to reinstatement and other reinsurance
premiums. Also as a result of September 11, the reinsurance market has become an
environment of some uncertainty. Specifically, dramatic price increases, changes
in contract terms and conditions and program modifications have resulted. As a
result, it has become more difficult to get selected types of reinsurance
coverage at a reasonable price, particularly terrorism coverage.
INVESTMENT OPERATIONS
An important element of the financial results of The Hartford is return on
invested assets. The Hartford's investment activities are primarily divided
between Life and Property & Casualty. The investment activities of both the Life
and Property & Casualty operations are managed based on the underlying
characteristics and nature of their respective liabilities.
The primary investment objective of Life's general account and guaranteed
separate accounts is to maximize after-tax returns consistent with acceptable
risk parameters, including the management of the interest rate sensitivity of
invested assets and the generation of sufficient liquidity, relative to that of
corporate and policyholder obligations.
The investment objective for the majority of Property & Casualty is to maximize
economic value while generating after-tax income and sufficient liquidity to
meet corporate and policyholder obligations. For Property & Casualty's Other
Operations segment, the investment objective is to ensure the full and timely
payment of all liabilities. Property & Casualty investment strategies are
developed based on a variety of factors including business needs, regulatory
requirements and tax considerations.
For a further discussion of The Hartford's approach to managing risks, including
derivative utilization, see the Capital Markets Risk Management section of the
MD&A, as well as Note 3 of Notes to Consolidated Financial Statements.
REGULATION AND PREMIUM RATES
Although there has been some deregulation with respect to large commercial
insureds in recent years, insurance companies, for the most part, are still
subject to comprehensive and detailed regulation and supervision throughout the
United States. The extent of such regulation varies, but generally has its
source in statutes which delegate regulatory, supervisory and administrative
powers to state insurance departments. Such powers relate to, among other
things, the standards of solvency that must be met and maintained; the licensing
of insurers and their agents; the nature of and limitations on investments;
establishing premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Regulatory requirements applying to property and casualty premium rates vary
from state to state, but generally provide that rates shall not be inadequate,
excessive or unfairly discriminatory. Rates for many products, including
automobile and homeowners insurance, are subject to prior regulatory approval in
many states. Ocean marine insurance rates are exempt from rate regulation.
Subject to regulatory requirements, management determines the rates charged for
its policies. Methods for arriving at rates vary by product, exposure assumed
and size of risk.
While premium rates in the property and casualty insurance business are for the
most part subject to regulation, such rates are not in most instances uniform
for all insurers within a given jurisdiction, or in all jurisdictions. The
Hartford is a member of various fire, casualty and surety rating organizations.
For some lines of business, The Hartford uses the rates and rating plans which
are filed by these organizations in the various states, while for other lines of
business it uses loss cost data published by such organizations. The Hartford
also uses its own independent rates or otherwise departs from rating
organization rates, where appropriate.
Most states have enacted legislation that regulates insurance holding company
systems such as The Hartford. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
- 12 -
<PAGE>
State insurance regulations require property and casualty insurers to
participate in assigned risk plans, reinsurance facilities and joint
underwriting associations, which are mechanisms to provide risks with various
basic or minimum insurance coverage when they are not available in voluntary
markets. Such mechanisms are most prevalent for automobile and workers'
compensation insurance, but a majority of states also mandate participation in
so-called FAIR Plans or Windstorm Plans providing basic property coverage.
Additionally, some states mandate such participation in facilities for providing
medical malpractice insurance. Participation is based upon the amount of a
company's written premiums in a particular state for the classes of insurance
involved.
The extent of insurance regulation on business outside the United States varies
significantly among the countries in which The Hartford operates. Some countries
have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors domiciled in that particular
jurisdiction. The Hartford's international operations are comprised of insurers
licensed in their respective countries and, therefore, are subject to the
generally less restrictive domestic insurance regulations.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-based Capital".
LEGISLATIVE INITIATIVES
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Legislative Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Insolvency Fund".
NAIC CODIFICATION
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "NAIC Codification".
EMPLOYEES
The Hartford had approximately 27,400 employees as of February 28, 2002.
EXECUTIVE OFFICERS OF THE HARTFORD
Information about the executive officers of The Hartford who are also directors
and/or nominees for election as directors is set forth in The Hartford's 2002
Proxy Statement. Set forth below is information about other executive officers
of the Company:
JOHN N. GIAMALIS
(Senior Vice President and Controller)
Mr. Giamalis, 44, is Senior Vice President and Controller of the Company. Mr.
Giamalis joined the Company in January 1997 as Director, Financial Reporting and
Analysis. In April 1998, he was appointed to the position of Vice President and
Corporate Controller. Prior to joining the Company, Mr. Giamalis held senior
financial positions in the insurance and technology industries, including Chief
Financial Officer of Intelidata Technologies Corp. from March 1995 to December
1996. He also held various public accounting positions, including senior manager
with responsibility for insurance, securities and middle market clients at
Deloitte & Touche LLP. Mr. Giamalis is a member of the American Institute and
the Connecticut Society of Certified Public Accountants.
DAVID M. JOHNSON
(Executive Vice President and Chief Financial Officer)
Mr. Johnson, 41, has held the position of Executive Vice President and Chief
Financial Officer of the Company since May 1, 2001. Prior to joining the
Company, Mr. Johnson was Senior Executive Vice President and Chief Financial
Officer of Cendant Corporation since November 1998 and Managing Director,
Investment Banking Division, at Merrill Lynch, Pierce, Fenner and Smith, where
he worked with major clients in a variety of industries including insurance,
airlines and technology, as well as leveraged buyout funds, since 1986.
RANDALL I. KIVIAT
(Group Senior Vice President of Human Resources)
Mr. Kiviat, 51, has held the position of Group Senior Vice President of Human
Resources for the Company since June 1999. Since joining the Company in 1982, he
has held positions of increasing responsibility, including Director of Payroll
and Director of Employee Benefits. He was appointed Vice President of Human
Resources Services in April 1998.
EDWARD L. MORGAN, JR.
(Group Senior Vice President, Corporate Relations)
Mr. Morgan, 58, has held the position of Group Senior Vice President, Corporate
Relations, of the Company since April 1998. Previously, he was Senior Vice
President, Corporate Relations and Government Affairs since December 1995. Mr.
Morgan also has held the position of Senior Vice President, Corporate Relations
of Hartford Fire since 1993.
NEAL S. WOLIN
(Executive Vice President and General Counsel)
Mr. Wolin, 40, has held the position of Executive Vice President and General
Counsel since joining the Company on March 20, 2001. Previously, Mr. Wolin
served as General Counsel of the U.S. Treasury from 1999 to January 2001. In
that capacity, he headed Treasury's legal division, composed of 2,000 lawyers
providing services to all of Treasury's offices and bureaus, including the
Internal Revenue Service, Customs, Secret Service, Public Debt, the Office of
Thrift Supervision, the Financial Management Service, the U.S. Mint and the
Bureau of Engraving and Printing. Mr. Wolin served as the Deputy General Counsel
of the Department of the Treasury from 1995 to 1999. Prior to joining the
Treasury Department, he served in the White House, first as the Executive
Assistant to the National Security Advisor and then as the Deputy Legal Advisor
to the National Security Council. Mr. Wolin joined the U.S. Government in 1991
as special assistant to the Directors of Central Intelligence, William H.
Webster, Robert M. Gates and
- 13 -
<PAGE>
R. James Woolsey. Mr. Wolin served on the President's Advisory Commission on
Holocaust Assets in the United States from 1999 to 2000.
DAVID M. ZNAMIEROWSKI
(Group Senior Vice President and Chief Investment Officer)
Mr. Znamierowski, 41, was appointed Group Senior Vice President and Chief
Investment Officer of the Company and President of Hartford Investment
Management Company ("HIMCO"), a wholly-owned subsidiary of the Company,
effective November 5, 2001. Previously, he was Senior Vice President and Chief
Investment Officer for the Company's life operations since May 1999, Vice
President since September 1998 and Vice President, Investment Strategy since
February 1997. Prior to joining the Company in April 1996, Mr. Znamierowski held
a variety of positions in the investment industry, including portfolio manager
and Vice President of Investment Strategy and Policy for Aetna Life & Casualty
Company from 1991 to April 1996 and Vice President of Corporate Finance for
Salomon Brothers, Inc. since 1986. Mr. Znamierowski is a member of the Board of
Governors of the Investment Company Institute and of the policy-making
investment committee of the American Council of Life Insurance. He also serves
as a director and President of each of The Hartford-sponsored mutual funds.
ITEM 2. PROPERTIES
The Hartford owns the land and buildings comprising its Hartford location and
other properties within the greater Hartford, Connecticut area which total
approximately 1.6 million square feet. In addition, The Hartford leases
approximately 6.4 million square feet throughout the United States and 32
thousand square feet in other countries. All of the properties owned or leased
are used by one or more of all ten operating segments, depending on the
location. (For more information on operating segments see Part 1, Item 1,
Business of The Hartford - Reporting Segments.) The Company believes its
properties and facilities are suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
The Hartford is or may become involved in various legal actions, some of which
involve claims for substantial amounts. In the opinion of management, the
ultimate liability with respect to such actual and potential lawsuits, after
consideration of provisions made for potential losses and costs of defense, is
not expected to be material to the consolidated financial condition, results of
operations or cash flows of The Hartford.
The Hartford is involved in claims litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed in the MD&A under the Environmental and Asbestos
Claims section, The Hartford continues to receive environmental and asbestos
claims which involve significant uncertainty regarding policy coverage issues.
With respect to these claims, The Hartford continually reviews its overall
reserve levels, methodologies and reinsurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of The Hartford during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE HARTFORD'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Hartford's common stock is traded on the New York Stock Exchange ("NYSE")
under the trading symbol "HIG".
The following table presents the high and low closing prices for the common
stock of The Hartford on the NYSE for the periods indicated, and the quarterly
dividends declared per share.
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- -----------------------------------------------------------------------------
2001
Common Stock Price
High $67.75 $70.46 $69.28 $62.83
Low 55.15 56.88 50.10 53.91
Dividends Declared 0.25 0.25 0.25 0.26
2000
Common Stock Price
High $52.75 $64.00 $73.75 $79.31
Low 29.38 44.25 56.38 65.44
Dividends Declared 0.24 0.24 0.24 0.25
- -----------------------------------------------------------------------------
As of February 28, 2002, the Company had approximately 120,000 shareholders. The
closing price of The Hartford's common stock on the NYSE on February 28, 2002
was $67.00.
On October 18, 2001, The Hartford's Board of Directors declared a quarterly
dividend of $0.26 per share payable on January 2, 2002 to shareholders of record
as of December 3, 2001. The dividend represented a 4% increase from the prior
quarter. Dividend decisions are based on and affected by a number of factors,
including the operating results and financial requirements of The Hartford and
the impact of regulatory restrictions discussed in the Capital Resources and
Liquidity section of the MD&A under "Liquidity Requirements".
There are also various legal limitations governing the extent to which The
Hartford's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to The Hartford Financial Services Group, Inc. as discussed in the
Capital Resources and Liquidity section of the MD&A under "Liquidity
Requirements".
- 14 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS)
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenues [1] $ 15,147 $ 14,703 $ 13,528 $ 15,022 $ 13,461
Income before extraordinary item and cumulative
effect of accounting changes [2] 549 974 862 1,015 1,332
Net income [2] [3] 507 974 862 1,015 1,332
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET AND OTHER DATA
Total assets $ 181,238 $ 171,532 $ 167,051 $ 150,632 $ 131,743
Mutual fund assets [4] 16,809 11,432 6,374 2,506 972
Long-term debt 1,965 1,862 1,548 1,548 1,482
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,412 1,243 1,250 1,250 1,000
Total stockholders' equity 9,013 7,464 5,466 6,423 6,085
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA
BASIC EARNINGS PER SHARE [2]
Income before extraordinary item and cumulative
effect of accounting changes [2] $ 2.31 $ 4.42 $ 3.83 $ 4.36 $ 5.64
Net income [2] [3] 2.13 4.42 3.83 4.36 5.64
DILUTED EARNINGS PER SHARE [2]
Income before extraordinary item and cumulative
effect of accounting changes [2] 2.27 4.34 3.79 4.30 5.58
Net income [2] [3] 2.10 4.34 3.79 4.30 5.58
Dividends declared per common share 1.01 0.97 0.92 0.85 0.80
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [5] 112.4 102.4 103.3 102.9 102.3
====================================================================================================================================
<FN>
[1] 2001 includes a $91 reduction in premiums from reinsurance cessions
related to September 11. 1998 includes $541 related to the recapture of an
in force block of Corporate Owned Life Insurance ("COLI") business from
MBL Life Assurance Co. of New Jersey. Also, includes revenues from London
& Edinburgh, which was sold in November 1998, for 1998 and 1997 of $1,117
and $1,225, respectively.
[2] 2001 includes $440 of losses ($1.85 per basic and $1.82 per diluted share)
related to September 11 and a $130 tax benefit ($0.55 per basic and $0.54
per diluted share) at HLI. 1997 includes an equity gain of $368 ($1.56 per
basic and $1.54 per diluted share) resulting from the initial public
offering of HLI.
[3] 2001 includes a $34 after-tax charge ($0.14 per basic and per diluted
share) related to the cumulative effect of accounting changes for the
Company's adoption of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and EITF Issue 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets". Also includes an $8 extraordinary after-tax
loss ($0.04 per basic and $0.03 per diluted share) related to the
Company's retirement of its 8.35% Cumulative Quarterly Income Preferred
Securities.
[4] Mutual funds are owned by the shareholders of those funds and not by the
Company. As a result, they are not reflected in total assets on the
Company's balance sheet.
[5] 2001 includes the impact of September 11. Excluding the impact of
September 11, 2001 combined ratio was 103.4.
</FN>
</TABLE>
Outlined in the table below are United States Industry Combined Ratios for each
of the five years ended December 31:
<TABLE>
<CAPTION>
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States Industry Combined Ratios [a] 117.0 110.1 107.8 105.6 101.6
====================================================================================================================================
<FN>
[a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined
ratio for 2001 is an A.M. Best estimate prepared as of January 2002.
</FN>
</TABLE>
- 15 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE STATED)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of The Hartford Financial
Services Group, Inc. and its subsidiaries (collectively, "The Hartford" or the
"Company") as of December 31, 2001, compared with December 31, 2000, and its
results of operations for the three years ended December 31, 2001, 2000 and
1999. This discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes beginning on page F-1.
Certain of the statements contained herein or in Part I of the Company's Form
10-K (other than statements of historical fact) are forward-looking statements.
These forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 and include estimates
and assumptions related to economic, competitive and legislative developments.
These forward-looking statements are subject to change and uncertainty which
are, in many instances, beyond the Company's control and have been made based
upon management's expectations and beliefs concerning future developments and
their potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on The Hartford will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors. These factors include: the
uncertain nature of damage theories and loss amounts and the development of
additional facts related to the September 11 terrorist attack ("September 11");
the response of reinsurance companies under reinsurance contracts, the impact of
increasing reinsurance rates, and the adequacy of reinsurance to protect the
Company against losses; the possibility of more unfavorable loss experience than
anticipated; the possibility of general economic and business conditions that
are less favorable than anticipated; the incidence and severity of catastrophes,
both natural and man-made; the effect of changes in interest rates, the stock
markets or other financial markets; stronger than anticipated competitive
activity; unfavorable legislative, regulatory or judicial developments; the
difficulty in predicting the Company's potential exposure for environmental and
asbestos claims and related litigation; the Company's ability to distribute its
products through distribution channels, both current and future; the uncertain
effects of emerging claim and coverage issues; the effect of assessments and
other surcharges for guaranty funds and second-injury funds and other mandatory
pooling arrangements; a downgrade in the Company's claims-paying, financial
strength or credit ratings; the ability of the Company's subsidiaries to pay
dividends to the Company; and other factors described in such forward-looking
statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Consolidated Results of Operations: Operating Summary 17
Life 20
Investment Products 21
Individual Life 23
Group Benefits 24
Corporate Owned Life Insurance (COLI) 25
Property & Casualty 26
Business Insurance 27
Affinity Personal Lines 28
Personal Insurance 29
Specialty Commercial 30
Reinsurance 31
Other Operations 32
Deferred Acquisition Costs 33
Reserves 33
Environmental and Asbestos Claims 34
Investments 35
Capital Markets Risk Management 38
Capital Resources and Liquidity 48
Regulatory Matters and Contingencies 52
Effect of Inflation 52
Accounting Standards 52
- 16 -
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OVERVIEW 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums $ 9,409 $ 8,941 $ 8,342
Fee income 2,633 2,484 2,105
Net investment income 2,850 2,674 2,627
Other revenue 491 459 420
Net realized capital gains (losses) (236) 145 34
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 15,147 14,703 13,528
----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 9,764 8,419 7,902
Amortization of deferred policy acquisition costs and present value of
future profits 2,214 2,213 2,011
Insurance operating costs and expenses 2,037 1,958 1,779
Goodwill amortization 60 28 10
Other expenses [1] 718 667 591
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 14,793 13,285 12,293
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 354 1,418 1,235
Income tax expense (benefit) (195) 390 287
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 549 1,028 948
Minority interest in consolidated subsidiary -- (54) (86)
Extraordinary loss from early retirement of debt, net of tax [2] (8) -- --
Cumulative effect of accounting changes, net of tax [3] (34) -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME [4] 507 974 862
Less: Restructuring charges, net of tax (11) -- --
Extraordinary loss from early retirement of debt, net of tax [2] (8) -- --
Cumulative effect of accounting changes, net of tax [3] (34) -- --
Net realized capital gains (losses), after-tax (164) 12 25
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME [4] $ 724 $ 962 $ 837
================================================================================================================================
<FN>
[1] Includes restructuring charges of $16, for the year ended December 31,
2001.
[2] Represents the write-off of unamortized issuance costs on the Company's
8.35% Cumulative Quarterly Income Preferred Securities which were redeemed
on December 31, 2001.
[3] Represents the cumulative impact of the Company's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 133, as amended, "Accounting
for Derivative Instruments and Hedging Activities" and Emerging Issues
Task Force ("EITF") Issue 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets".
[4] 2001 includes $440 of losses related to September 11 and a $130 tax
benefit at HLI.
</FN>
</TABLE>
The Hartford defines "operating income" (defined in previous years as "core
earnings") as after-tax operational results excluding, as applicable, net
realized capital gains and losses, extraordinary items, the cumulative effect of
accounting changes and certain other items. Operating income is an internal
performance measure used by the Company in the management of its operations.
Management believes that this performance measure delineates the results of
operations of the Company's ongoing businesses in a manner that allows for a
better understanding of the underlying trends in the Company's current business.
However, operating income should only be analyzed in conjunction with, and not
in lieu of, net income and may not be comparable to other performance measures
used by the Company's competitors.
OPERATING RESULTS
2001 COMPARED TO 2000 -- Revenues increased $444, or 3%. Included in revenues in
2001 was a $91 reduction in North American Property & Casualty premiums,
resulting from additional reinsurance cessions related to September 11. Also
included in revenues were net realized capital losses of $236 in 2001 and net
realized capital gains of $145 in 2000. These capital gains and losses related
primarily to the sales of international subsidiaries and other than temporary
impairments on securities. Excluding the effects of both September 11 and the
net realized capital gains and losses, revenues increased $916, or 6%. The
increase was related to continued new business growth in Group Benefits,
increased fee income in Individual Life, primarily as a result of the April 2001
acquisition of the United States individual life insurance, annuity and mutual
fund businesses of Fortis, Inc. (operating as "Fortis" or "Fortis Financial
Group") and earned premium growth in most of the Property & Casualty
underwriting segments. (For further discussion of the Fortis acquisition, see
Note 18 (a) of Notes to Consolidated Financial Statements). Also contributing to
the increase was higher net investment income, primarily due to income earned on
fixed maturities. These increases were partially offset by a decrease in
revenues in the Other Operations segment, reflecting the sales of Property &
Casualty's international subsidiaries.
Operating income decreased $238, or 25%. Included in the Company's operating
income for the year ended December 31, 2001, were $440 of losses, after-tax and
net of reinsurance, related to September 11 and a $130 tax benefit at Hartford
Life, Inc. ("HLI"), primarily the result of the favorable treatment of
- 17 -
<PAGE>
certain tax matters related to separate account investment activity during the
1996-2000 tax years. Excluding the effects of September 11 and HLI tax benefit,
operating income increased $72, or 7%. The increase reflected favorable
operating performance in the Company's Business Insurance, Individual Life,
Investment Products and Group Benefits segments, partially offset by higher loss
costs in the Company's Affinity Personal Lines and Personal Insurance segments
as well as adverse loss development in the Reinsurance segment.
2000 COMPARED TO 1999 -- Revenues increased $1.2 billion, or 9%, primarily as a
result of strong growth in fee income in the Investment Products and Individual
Life segments, along with premium growth in the Group Benefits segment and in
all North American Property & Casualty underwriting segments.
Operating income increased $125, or 15%, due to double-digit earnings growth
across all segments in Life partially offset by a decline in Property &
Casualty, primarily due to adverse loss development in Reinsurance, increased
automobile losses in the Personal Insurance segment, expenses related to the
Business Insurance field office and claim reorganizations and deteriorating
underwriting results from discontinued operations (public entity ("PENCO"),
Canada, Farm and Industrial Risk Insurance pool ("IRI").
SIGNIFICANT ACCOUNTING POLICIES
For information on the Company's significant accounting policies, see the
Deferred Acquisition Costs, Reserves and Investments sections and Note 1 of
Notes to Consolidated Financial Statements.
NET REALIZED CAPITAL GAINS AND LOSSES
See "Investment Results" in the Investments section.
INCOME TAXES
The effective tax expense (benefit) rate for 2001, 2000 and 1999 was (55)%, 28%
and 23%, respectively. Excluding the impacts of September 11 and the HLI federal
tax benefits of $130 and $24 in 2001 and 2000, respectively, the effective tax
rate for 2001 was 17% compared with 29% and 23%, respectively, for 2000 and
1999. Excluding the impact of September 11 and the HLI federal tax benefits, the
decrease in the effective tax rate for 2001 was primarily due to an increase in
the proportionate share of tax-exempt net investment income to total pre-tax
income for 2001 compared to 2000 and taxes related to the gain on the sale of
Zwolsche Algemeene N.V. ("Zwolsche") in 2000. The increase in the effective tax
rate for 2000, excluding the $24 tax benefit at HLI, was primarily due to taxes
related to the gain on the sale of Zwolsche. (For a further discussion on the
sale of Zwolsche, see the Other Operations section and Note 18(b) of Notes to
the Consolidated Financial Statements.)
Tax-exempt interest earned on invested assets was the principal cause of
effective rates lower than the 35% United States statutory rate in all years.
Income taxes paid (received) in 2001, 2000 and 1999 were $(52), $95 and $41,
respectively. (See Note 14 of Notes to Consolidated Financial Statements for
further information.)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Prior to the June 27, 2000 acquisition of all of the outstanding shares of HLI
that The Hartford did not already own ("The HLI Repurchase"), the minority
interest in the consolidated subsidiary's operating results represented
approximately 19%. (For additional information, see the Capital Resources and
Liquidity section under "Acquisitions" and Note 16 of Notes to Consolidated
Financial Statements.)
PER COMMON SHARE
The following table represents per common share data and return on equity for
the past three years:
2001 2000 1999
- -------------------------------------------------------------------
Basic earnings per share $2.13 $4.42 $3.83
Diluted earnings per share $2.10 $4.34 $3.79
Weighted average common shares
outstanding 237.7 220.6 224.9
Weighted average common shares
outstanding and dilutive
potential common shares 241.4 224.4 227.5
Return on equity excluding
September 11 and Life tax
benefit [1] 10.5% 15.4% 15.3%
Return on equity [1] 6.6% 15.4% 15.3%
- -------------------------------------------------------------------
[1] Calculated by dividing net income by average equity excluding unrealized
gain (loss), after-tax.
SEGMENT RESULTS
The Hartford is organized into two major operations: Life and Property &
Casualty. Within these operations, The Hartford conducts business principally in
ten operating segments. Additionally, all activities related to The HLI
Repurchase and the minority interest in HLI for pre-acquisition periods are
included in Corporate.
Life is organized into four reportable operating segments: Investment Products,
Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI").
Life also includes in an Other category its international operations, which are
primarily located in Latin America and Japan, as well as corporate items not
directly allocable to any of its reportable operating segments, principally
interest expense.
Property & Casualty was reorganized into six reportable operating segments and,
effective January 1, 2001, is reported as the North American underwriting
segments of Business Insurance, Affinity Personal Lines, Personal Insurance,
Specialty Commercial and Reinsurance; and the Other Operations segment, formerly
"International and Other Operations".
The measure of profit or loss used by The Hartford's management in evaluating
performance is operating income, except for its North American underwriting
segments, which are evaluated by The Hartford's management primarily based upon
underwriting results. While not considered segments, the Company also reports
and evaluates operating income results for Life, Property & Casualty, and North
American, which includes the combined underwriting results of the North American
underwriting segments along with income and expense items not directly allocable
to these segments, such as
- 18 -
<PAGE>
net investment income. Property & Casualty includes operating income for North
American and the Other Operations segment.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided and capital contributions. Certain reinsurance stop loss agreements
exist between the segments which specify that one segment will reimburse another
for losses incurred in excess of a predetermined limit. Also, one segment may
purchase group annuity contracts from another to fund pension costs and claim
annuities to settle casualty claims. In addition, certain intersegment
transactions occur in Life. These transactions include interest income on
allocated surplus and the allocation of net realized capital gains and losses
through net invested income utilizing the duration of the segment's investment
portfolios.
The following is a summary of North American underwriting results by
underwriting segment within Property & Casualty. Underwriting results represent
premiums earned less incurred claims, claim adjustment expenses and underwriting
expenses.
<TABLE>
<CAPTION>
UNDERWRITING RESULTS (BEFORE-TAX)
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Insurance $ 3 $ (50) $ (123)
Affinity Personal Lines (36) 17 19
Personal Insurance (42) (15) 15
Specialty Commercial (95) (103) (48)
Reinsurance (149) (73) (48)
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting results excluding September 11 (319) (224) (185)
September 11 (647) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (966) $ (224) $ (185)
====================================================================================================================================
</TABLE>
The following is a summary of operating income and net income.
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS)
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life
Investment Products $ 463 $ 424 $ 330
Individual Life 121 79 71
Group Benefits 106 90 79
COLI 37 34 30
Other 73 5 (43)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 800 632 467
Property & Casualty
North American (20) 412 434
Other Operations 6 17 22
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty (14) 429 456
Corporate (62) (99) (86)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 724 $ 962 $ 837
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET INCOME (LOSS)
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life
Investment Products $ 463 $ 424 $ 330
Individual Life 121 79 71
Group Benefits 106 90 79
COLI 37 34 30
Other (42) (52) (43)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 685 575 467
Property & Casualty
North American (125) 466 448
Other Operations 10 28 33
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty (115) 494 481
Corporate (63) (95) (86)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET INCOME $ 507 $ 974 $ 862
====================================================================================================================================
</TABLE>
An analysis of the operating results summarized above is included on the
following pages. Reserves, Environmental and Asbestos Claims, and Investments
are discussed in separate sections.
- 19 -
<PAGE>
- --------------------------------------------------------------------------------
LIFE
- --------------------------------------------------------------------------------
Life provides investment and retirement products such as variable and fixed
annuities; mutual funds, and retirement plan services; individual and corporate
owned life insurance; and group benefit products, such as group life and group
disability insurance.
Life derives its revenues principally from: (a) 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; (b) fully insured premiums;
(c) certain other fees; and (d) net investment income on general account assets.
Asset management fees and mortality and expense fees are primarily generated
from separate account assets, which are deposited with the Company through the
sale of variable annuity and variable life products, and mutual funds. Cost of
insurance charges are assessed on the net amount at risk for investment-oriented
life insurance products. Premium revenues are derived primarily from the sale of
group life and group disability insurance products.
Life's expenses essentially consist of interest credited to policyholders on
general account liabilities, insurance benefits provided, dividends to
policyholders, costs of selling and servicing the various products offered by
the Company, and other general business expenses.
Life's profitability depends largely on the amount of assets under management,
the level of fully insured premiums, the adequacy of product pricing and
underwriting discipline, claims management and operating efficiencies, and its
ability to earn target spreads between earned investment rates on general
account assets and credited rates to customers. The level of assets under
management is generally impacted by equity market performance, persistency of
the in-force block of business, sales and other deposits, as well as any
acquired blocks of business.
<TABLE>
<CAPTION>
OPERATING SUMMARY [1]
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fee income $ 2,633 $ 2,484 $ 2,105
Earned premiums 2,142 1,886 1,764
Net investment income 1,779 1,592 1,562
Other revenue 128 116 110
Net realized capital losses (133) (88) (5)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 6,549 5,990 5,536
----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 3,611 3,162 3,054
Insurance operating costs and expenses 1,390 1,281 1,132
Amortization of deferred policy acquisition costs and present value of
future profits 642 671 568
Goodwill amortization 24 6 6
Other expenses 117 82 90
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,784 5,202 4,850
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 765 788 686
Income tax expense 54 213 219
Cumulative effect of accounting change, net of tax [2] (26) -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME 685 575 467
Less: Cumulative effect of accounting changes, net of tax [2] (26) -- --
Net realized capital losses, after-tax (89) (57) --
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME [3] $ 800 $ 632 $ 467
================================================================================================================================
<FN>
[1] Life excludes the effect of activities related to The HLI Repurchase,
along with the minority interest for pre-acquisition periods, both of
which are reflected in Corporate.
[2] For the year ended December 31, 2001, represents the cumulative impact of
the Company's adoption of SFAS No. 133 and EITF Issue 99-20.
[3] For the year ended December 31, 2001, includes $130 tax benefit related to
separate account investment activity and $20 of after-tax losses related
to September 11. For the year ended December 31, 2000, includes $32 tax
benefit related to favorable tax items.
</FN>
</TABLE>
As discussed above, Life consists of the following reportable operating
segments: Investment Products, Individual Life, Group Benefits and COLI. In
addition, Life includes in an Other category its international operations, which
are primarily located in Latin America and Japan, and corporate items not
directly allocable to any of its reportable operating segments.
On April 2, 2001, The Hartford acquired the United States individual life
insurance, annuity and mutual fund businesses of Fortis. (For further
discussion, see "Acquisitions" in the Capital Resources and Liquidity section
and Note 18(a) of Notes to Consolidated Financial Statements.) This transaction
was accounted for as a purchase and, as such, the revenues and expenses
generated by this business from April 2, 2001 forward are included in Life's
consolidated results of operations.
On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI
that it did not already own. (For additional information, see the Capital
Resources and Liquidity section
- 20 -
<PAGE>
under "Acquisitions" and Note 16 of Notes to Consolidated Financial Statements.)
2001 COMPARED TO 2000 -- Revenues increased $559, or 9%, primarily related to
the growth across each of Life's primary operating segments, particularly the
Individual Life and Group Benefits segments, where revenues increased $250, or
39%, and $300, or 14%, respectively. The revenue growth in the Individual Life
segment was primarily due to higher earned fee income and net investment income
resulting from the business acquired from Fortis. The Group Benefits segment
experienced higher earned premiums due to strong sales and persistency. The
Investment Products segment also contributed to the revenue increase as a result
of higher fee income in the retail mutual fund business and higher net
investment income in the institutional business. Revenues related to the
Company's Individual Annuity business were down $46 or 3%, primarily due to
lower fee income as a result of the lower equity markets in 2001. Additionally,
COLI revenues were below prior year due to a decrease in variable COLI sales and
the declining block of leveraged COLI business.
Benefits claims and expenses increased $582, or 11%, primarily associated with
the growth in Life revenues discussed above.
Operating income increased $168, or 27%, led by the Individual Life and Group
Benefits segments where operating income increased $42, or 53% and $16, or 18%,
respectively. In addition, the 2001 results include a $130 federal income tax
benefit primarily related to separate account investment activity and a $20
charge associated with the impact of September 11. Additionally, 2000 results
include a benefit of $32 also related to favorable tax items. Excluding these
tax items and the impact of September 11, operating income increased $90, or
15%, for the year ended December 31, 2001, as each of the Company's operating
segments experienced growth from a year ago.
2000 COMPARED TO 1999 -- Revenues increased $454, or 8%, primarily related to
the growth across each of Life's primary operating segments, particularly the
Investment Products and Group Benefits segments, where revenues increased $339,
or 17%, and $183, or 9%, respectively. The revenue growth in the Investment
Products segment was primarily due to higher fee income in the individual
annuity and retail mutual fund operations as related average assets under
management in 2000 were higher than 1999. The Group Benefits segment experienced
higher earned premiums due to strong sales and persistency. The Individual Life
segment also contributed to the revenue increase as a result of strong sales and
favorable persistency. Partially offsetting the growth in revenues was the
decrease in COLI revenues primarily related to the declining block of leveraged
COLI business.
Benefits, claims and expenses increased $352, or 7%, primarily related to the
growth in Life's principal operating segments described above.
Operating income increased $165, or 35%, led by the Investment Products segment,
where operating income increased $94, or 28%. Additionally, operating income
related to each of the remaining three operating segments increased 10% or more.
As discussed above, Life also recorded benefits of $32 in 2000 related to
favorable tax items. Excluding these tax items, operating income increased $133,
or 28%.
- --------------------------------------------------------------------------------
INVESTMENT PRODUCTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fee income and other $ 1,620 $ 1,639 $ 1,333
Net investment income 886 741 708
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,506 2,380 2,041
----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 819 700 668
Insurance operating costs and other expenses 608 551 440
Amortization of deferred policy acquisition costs 461 516 430
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,888 1,767 1,538
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 618 613 503
Income tax expense 155 189 173
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 463 $ 424 $ 330
- --------------------------------------------------------------------------------------------------------------------------------
Individual variable annuity account values $ 74,581 $ 78,174 $ 80,588
Other individual annuity account values 9,572 9,059 8,383
Other investment products account values 19,322 17,376 16,352
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 103,475 104,609 105,323
Mutual fund assets under management 16,809 11,432 6,374
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 120,284 $ 116,041 $ 111,697
================================================================================================================================
</TABLE>
The Investment Products segment focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired through the sale of individual variable and fixed annuities,
mutual funds, retirement plan services and other investment products. The
Company is both a leading writer of individual variable annuities and a top
seller of individual variable annuities through banks in the United States. In
addition, in 2001 The Hartford Mutual Funds, Inc. reached $12 billion in assets
faster than any other retail-oriented mutual fund family in history, according
to Strategic Insight.
2001 COMPARED TO 2000 -- Revenues in the Investment Products segment increased
$126, or 5%, driven primarily by other investment products. Fee income from
other investment products increased $59, or 21%, principally due to growth in
Life's mutual fund assets under management. Mutual fund assets increased $5.4
billion, or 47%, to $16.8 billion as of
- 21 -
<PAGE>
December 31, 2001, due to strong sales and the inclusion of the mutual fund
assets acquired from Fortis. Net investment income from other investment
products increased $113, or 20%, due mostly to growth in the institutional
business, where account values were $9.1 billion at December 31, 2001, an
increase of $1.4 billion, or 18%, from a year ago. The increase in revenues from
other investment products was partially offset by individual annuity revenues,
which decreased $46, or 3%. Fee income and net investment income from the
individual annuity business acquired from Fortis helped to partially offset
lower revenues in the individual annuity operation which was primarily
associated with decreased account values resulting from the lower equity markets
as compared to the prior year. Individual annuity account values at December 31,
2001 were $84.2 billion, a decrease of $3.1 billion, or 4%, from December 31,
2000.
Benefits, claims and expenses increased $121, or 7%, driven by higher interest
credited and insurance operating expenses related to other investment products
consistent with the revenue growth described above. Interest credited related to
other investment products increased $83, or 18%, while insurance operating
expenses increased $44, or 17%. Also, individual annuity benefits and claims
expenses increased $35, or 14%, principally due to the business acquired from
Fortis and higher death benefits resulting from the lower equity markets in
2001. Individual annuity's insurance operating costs increased $13, or 4%, due
to the business acquired from Fortis. Excluding Fortis, individual annuity's
operating expenses decreased $39, or 4%, from prior year, driven by management's
continued focus on maintaining operating expense levels. Partially offsetting
the increase in benefits, claims, and insurance operating costs was a decrease
in amortization of deferred policy acquisition costs resulting from the lower
gross profits associated with the individual annuity business. In addition,
income tax expense for the twelve months ended December 31, 2001 was $118, a
$45, or 28%, decrease due to lower pretax operating income and the ongoing tax
impact related to separate account investment activity.
Operating income increased $39, or 9%. These increases were driven by the growth
in revenues in other investment products described above, the favorable impact
of Fortis and the lower effective tax rate related to the individual annuity
business.
2000 COMPARED TO 1999 -- Revenues increased $339, or 17%, primarily due to
higher fee income in the individual annuity and retail mutual fund operations.
Fee income generated by individual annuities increased $227, or 20%, while
related average account values grew $8.2 billion, or 10%, to $88.1 billion. The
growth in average account values was due, in part, to strong sales of $10.7
billion in 2000, and the significant equity market performance in 1999,
partially offset by surrenders. Although average individual annuity account
values in 2000 were higher than 1999, account values at December 31, 2000
declined $1.7 billion, or 2%, as compared to December 31, 1999, as strong sales
were not sufficient to offset surrenders and the impact of the retreating equity
markets. In addition, fee income from other investment products increased $99,
or 54%, primarily driven by the Company's retail mutual fund operation, where
related assets under management increased $4.0 billion, or 63%. This substantial
increase in the retail mutual fund operation was due to sales of $5.2 billion in
2000, which was partially offset by redemptions.
Due to the continued growth in this segment, particularly the individual annuity
and retail mutual fund operations, total benefits, claims and expenses increased
$229, or 15%. This increase was driven by amortization of deferred policy
acquisition costs and operating expenses, which grew $86, or 20%, and $43, or
15%, respectively, primarily related to growth in the individual annuity
operation. Additionally, non-deferred commissions increased $83, or 59%,
principally related to growth in the retail mutual fund operation.
Operating income increased $94, or 28%, primarily due to the growth in revenues
discussed above. Additionally, the Investment Products segment continued to
maintain its profit margins related to its primary businesses, thus contributing
to the segment's earnings growth. In particular, its individual annuity
operation's operating expenses as a percentage of average individual annuity
account values remained consistent with the prior year at 21 basis points.
OUTLOOK
The market for retirement products continues to expand as individuals
increasingly save and plan for retirement. Demographic trends suggest that as
the "baby boom" generation matures, a significant portion of the United States
population will allocate a greater percentage of their disposable incomes to
saving for their retirement years due to uncertainty surrounding the Social
Security system and increases in average life expectancy. As this market grows,
particularly for variable annuities and mutual funds, new companies are
continually entering the market, aggressively seeking distribution channels and
pursuing market share. This trend is not expected to subside, particularly in
light of the Gramm-Leach-Bliley Act of 1999 ("the Financial Services
Modernization Act"), which permits affiliations among banks, insurance companies
and securities firms.
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader in the financial services industry.
For example, The Hartford is introducing a tax advantaged college savings
product (529 plan) in early 2002 called SMART 529. SMART 529 is a
state-sponsored education savings program established by the State of West
Virginia which offers an easy way for both the residents of West Virginia and
out-of-state participants to invest for a college education. SMART 529 will
allow investors to choose from a wide variety of investment portfolios to match
their risk preference to help accumulate savings for college. The SMART 529
product complements Hartford Life's existing offering of investment products
(mutual funds, variable annuities, 401 (k), 457 and 403 (b) plans). It also
leverages The Company's capabilities in distribution, service and fund
performance. The Hartford believes this is a significant market opportunity and
the benefits of investing in 529 plans will be well received by many Americans
saving for college.
- 22 -
<PAGE>
- --------------------------------------------------------------------------------
INDIVIDUAL LIFE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fee income and other $ 647 $ 459 $ 412
Net investment income 243 181 172
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 890 640 584
----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 385 274 258
Amortization of deferred policy acquisition costs 168 145 129
Insurance operating costs and other expenses 159 103 88
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 712 522 475
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 178 118 109
Income tax expense 57 39 38
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 121 $ 79 $ 71
----------------------------------------------------------------------------------------------------------------------
Variable life account values $ 3,993 $ 2,947 $ 2,595
Total account values $ 7,868 $ 5,849 $ 5,419
- --------------------------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 61,617 $ 33,460 $ 23,854
Total life insurance in force $ 120,269 $ 75,113 $ 66,690
================================================================================================================================
</TABLE>
The Individual Life segment sells a variety of life insurance products,
including variable life, universal life, interest sensitive whole life and term
life insurance primarily to the high end estate and business planning markets.
Additionally, the Fortis transaction, through the addition of a retail broker
dealer, which has been renamed Woodbury Financial Services, has allowed the
Individual Life segment to increase its reach in the emerging affluent market.
2001 COMPARED TO 2000 -- Revenues in the Individual Life segment increased $250,
or 39%, primarily due to the business acquired from Fortis. Fee income,
including cost of insurance charges, increased $180, or 40%, driven principally
by growth in the variable life business where account values increased $1.0
billion, or 35%, and life insurance in force increased $28.2 billion, or 84%,
from a year ago. In addition, net investment income on general account business
(universal life, interest sensitive whole life and term life) increased $66, or
34%, consistent with the growth in related account values.
Benefits, claims and expenses increased $190, or 36%, due principally to the
growth in revenues described above. Although death benefits were higher in 2001
than the prior year as a result of the increase in life insurance in force,
year-to-date mortality experience (expressed as death claims as a percentage of
net amount at risk) for 2001 was within pricing assumptions.
Operating income increased $42, or 53%, primarily due to the revenue growth
described above. Individual Life incurred an after-tax loss of $3 related to
September 11. Excluding this loss, operating income increased $45, or 57%,
primarily due to the growth factors described above.
2000 COMPARED TO 1999 -- Revenues increased $56, or 10%, resulting primarily
from fee income associated with the growing block of variable life insurance.
Fee income increased $59, or 15%, as variable life account values increased
$352, or 14%, and variable life insurance in force increased $9.6 billion, or
40%.
Benefits, claims and expenses increased $47, or 10%, primarily due to a $16, or
6%, increase in benefits, claims and claim adjustment expenses and a $16, or
12%, increase in amortization of deferred policy acquisition costs mostly
associated with the growth in this segment's variable business. Additionally,
insurance operating costs and other expenses increased $15, or 17%, directly
associated with the growth in this segment as previously described.
Operating income increased $8, or 11%, primarily due to higher fee income as
mortality experience (death claims as a percentage of net amount at risk) was
consistent with prior year.
OUTLOOK
Management believes that the Company's strong market position will provide
opportunities for growth in this segment as individuals increasingly focus on
estate planning. The Hartford's acquisition of the United States individual life
insurance business of Fortis has increased its scale while broadening its
distribution capabilities as described above.
- 23 -
<PAGE>
- --------------------------------------------------------------------------------
GROUP BENEFITS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums and other $ 2,259 $ 1,981 $ 1,829
Net investment income 248 226 195
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,507 2,207 2,024
----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,874 1,643 1,507
Insurance operating costs and other expenses 498 450 415
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,372 2,093 1,922
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 135 114 102
Income tax expense 29 24 23
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 106 $ 90 $ 79
================================================================================================================================
</TABLE>
The Hartford is a leading provider of group benefits, and through this segment
sells group life and group disability insurance as well as other products,
including stop loss and supplementary medical coverages to employers and
employer sponsored plans, accidental death and dismemberment, travel accident
and other special risk coverages to employers and associations. The Company also
offers disability underwriting, administration, claims processing services and
reinsurance to other insurers and self-funded employer plans.
2001 COMPARED TO 2000 -- Revenues in the Group Benefits segment increased $300,
or 14%, driven primarily by growth in premiums, which increased $278, or 14%,
due to solid persistency and increased premium rates related to the in force
block of business, and strong sales to new customers. Fully insured ongoing
sales for the year ended December 31, 2001 were $531, $85, or 19%, higher than
the prior year. Additionally, net investment income increased $22, or 10%, due
to the overall growth in the in-force business.
Total benefits, claims and expenses increased $279, or 13%, driven primarily by
higher benefits and claims which increased $231, or 14%. These increases are
consistent with the growth in the business described above as the loss ratios
(defined as benefits and claims and claim adjustment expenses as a percentage of
premiums and other considerations) have remained relatively consistent with the
comparable prior year periods. In addition, expenses other than benefits and
claims increased $48, or 11%, for the year ended December 31, 2001, also
consistent with the overall growth in the segment.
Operating income increased $16, or 18%, driven by overall revenue growth and
consistent loss and expense ratios as compared to the prior year. Group Benefits
incurred an after-tax loss of $2 related to September 11; excluding this loss,
operating income increased $18, or 20%.
2000 COMPARED TO 1999 -- Revenues increased $183, or 9%, driven primarily by
growth in fully insured premiums, excluding buyouts, which increased $182, or
10%, principally due to favorable persistency of the in force block of business,
as well as new sales. Also contributing to the revenue growth was an increase in
net investment income of $31, or 16%.
Total benefits, claims and expenses increased $171, or 9%, primarily due to
higher benefits, claims and claim adjustment expenses which, excluding buyouts,
increased $168, or 12%, directly related to revenue growth in this segment. The
segment's combined ratio (ratio of total benefits, claims and expenses as a
percentage of earned premiums and other) was consistent with the prior year.
Operating income increased $11, or 14%, primarily driven by the increased
revenues described above.
OUTLOOK
As employers continue to offer benefit plans in order to attract and retain
valued employees, management expects that the need for group life and group
disability insurance will continue to expand and believes the Company is well
positioned to take advantage of this growth potential.
The Group Benefits segment offered Medicare supplement insurance to members of
several retired military officer associations. Federal legislation effective in
the fourth quarter of 2001, now provides retired military officers age 65 and
older with full medical insurance paid for by the government, eliminating the
need for Medicare supplement insurance. This legislation will reduce Group
Benefits premium revenues by approximately $131 in 2002.
- 24 -
<PAGE>
- --------------------------------------------------------------------------------
CORPORATE OWNED LIFE INSURANCE (COLI)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fee income and other $ 367 $ 401 $ 400
Net investment income 352 366 431
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 719 767 831
----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 514 545 621
Insurance operating costs and expenses 84 102 59
Dividends to policyholders 66 67 104
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 664 714 784
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 55 53 47
Income tax expense 18 19 17
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 37 $ 34 $ 30
----------------------------------------------------------------------------------------------------------------------
Variable COLI account values $ 18,019 $ 15,937 $ 12,386
Leveraged COLI account values 4,315 4,978 5,729
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 22,334 $ 20,915 $ 18,115
================================================================================================================================
</TABLE>
The Hartford is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
or a trust sponsored by the company named as beneficiary under the policy. Until
the Health Insurance Portability and Accountability Act of 1996 ("HIPA Act of
1996"), the Company sold two principal types of COLI business, leveraged and
variable products. Leveraged COLI is a fixed premium life insurance policy owned
by a company or a trust sponsored by a company. The HIPA Act of 1996 phased out
the deductibility of interest on policy loans under leveraged COLI through the
end of 1998, virtually eliminating all future sales of this product. Variable
COLI continues to be a product used by employers to fund non-qualified benefits
or other postemployment benefit liabilities.
2001 COMPARED TO 2000 -- COLI revenues decreased $48, or 6%, mostly due to lower
fee income and net investment income. Fee income and other decreased $34, or 8%,
due to a decline in variable COLI sales and deposits which were approximately
$1.5 billion in 2001 as compared to $2.9 billion in 2000. In addition, net
investment income decreased $14, or 4%, due primarily to lower interest rates
and the decline in leveraged COLI account values.
Benefits, claims and expenses decreased $50, or 7%, directly related to the
decrease in revenue discussed above.
Operating income increased $3, or 9%, primarily due to the overall growth in
variable COLI business and earnings associated with the leveraged COLI business
recaptured in 1998. COLI incurred an after-tax charge of $2 related to September
11; excluding this charge, operating income increased $5, or 15%.
2000 COMPARED TO 1999 -- Revenues in the COLI segment decreased $64, or 8%,
primarily due to a decline in net investment income of $65, or 15%. This decline
was principally due to the leveraged COLI block of business, as related account
values decreased $751, or 13%, as a result of the continued downsizing caused by
the HIPA Act of 1996.
Total benefits, claims and expenses decreased $70, or 9%, primarily due to the
factor described above.
Operating income increased $4, or 13%, principally due to the variable COLI
business where related account values increased $3.6 billion, or 29%, as well as
earnings associated with a block of leveraged COLI business recaptured in 1998.
OUTLOOK
The focus of this segment is variable COLI, which continues to be a product
generally used by employers to fund non-qualified benefits or other
postemployment benefit liabilities. The leveraged COLI product has been an
important contributor to The Hartford's profitability in recent years and will
continue to contribute to the profitability of The Hartford in the future,
although the level of profit is expected to decline over the long run. COLI is
subject to a changing legislative and regulatory environment that could have a
material adverse effect on its business.
- 25 -
<PAGE>
- --------------------------------------------------------------------------------
PROPERTY & CASUALTY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums $ 7,267 $ 7,055 $ 6,578
Net investment income 1,053 1,072 1,065
Other revenue [1] 363 343 310
Net realized capital gains (losses) (103) 234 39
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 8,580 8,704 7,992
----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 6,146 5,253 4,848
Amortization of deferred policy acquisition costs 1,572 1,542 1,443
Insurance operating costs and expenses 647 677 647
Goodwill amortization 3 5 4
Other expenses [2] 547 543 501
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 8,915 8,020 7,443
-----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (335) 684 549
Income tax expense (benefit) (236) 190 68
- --------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (99) 494 481
Extraordinary loss from early retirement of debt, net of tax [3] (8) -- --
Cumulative effect of accounting change, net of tax [4] (8) -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) [5] (115) 494 481
Less: Restructuring charges, net of tax (10) -- --
Extraordinary loss from early retirement of debt, net of tax [3] (8) -- --
Cumulative effect of accounting change, net of tax [4] (8) -- --
Net realized capital gains (losses), after-tax (75) 65 25
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) [5] $ (14) $ 429 $ 456
================================================================================================================================
<FN>
[1] Primarily servicing revenue.
[2] Includes restructuring charges of $15 for the year ended December 31,
2001.
[3] Represents the write-off of unamortized issuance costs on the Company's
8.35% Cumulative Quarterly Income Preferred Securities which were redeemed
on December 31, 2001.
[4] Represents the cumulative impact of the Company's adoption of EITF Issue
99-20.
[5] 2001 includes $420 of after-tax losses related to September 11.
</FN>
</TABLE>
As discussed above, Property & Casualty was reorganized into six reportable
operating segments and, effective January 1, 2001, is reported as the North
American underwriting segments of Business Insurance, Affinity Personal Lines,
Personal Insurance, Specialty Commercial and Reinsurance; and the Other
Operations segment. Also reported within Property & Casualty is North American,
which includes the combined underwriting results of the North American
underwriting segments along with income and expense items not directly allocable
to these segments, such as net investment income, net realized capital gains and
losses, other expenses including interest and income taxes.
The following is a summary of Property & Casualty operating income, after-tax.
Operating income excludes net realized capital gains and losses, restructuring
charges, extraordinary items and the cumulative effect of accounting changes.
<TABLE>
<CAPTION>
(after-tax) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
North American
Underwriting results excluding September 11 $ (207) $ (146) $ (120)
September 11 (420) -- --
- --------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS (627) (146) (120)
Net investment income 722 695 684
Other expenses [1] (115) (137) (130)
- --------------------------------------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATING INCOME (LOSS) (20) 412 434
Other Operations operating income 6 17 22
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) $ (14) $ 429 $ 456
================================================================================================================================
<FN>
[1] Includes interest, net servicing income and goodwill amortization.
</FN>
</TABLE>
Underwriting results are discussed in each of the Business Insurance, Affinity
Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance segment
sections. Net investment income and net realized capital gains and losses are
- 26 -
<PAGE>
discussed in the Investments section. (For a further discussion of September 11,
see Capital Resources and Liquidity section and Note 2 of Notes to Consolidated
Financial Statements.)
2001 COMPARED TO 2000 -- Operating income decreased $443 as compared with 2000.
Excluding the $420 impact of September 11, operating income decreased $23, or
5%. Earned premium growth in Business Insurance due to price increases, strong
new business growth and improved premium renewal retention, as well as an
increase in North American investment income, was offset by increased losses in
the personal automobile lines of business and in Reinsurance. A decrease in
underwriting results of $16, after-tax, related to Enron Corporation and lower
income resulting from the sales of international subsidiaries also contributed
to the decrease.
2000 COMPARED TO 1999 -- Operating income decreased $27, or 6%, primarily due to
adverse loss development in Reinsurance, expenses related to the Business
Insurance field office and claim reorganizations, deteriorating underwriting
results from discontinued operations (PENCO, Canada, Farm and IRI) and increased
automobile losses in the Personal Insurance segment. Partially offsetting this
decrease was a reduction in property catastrophe losses and improvement in
Business Insurance mid-market results.
- --------------------------------------------------------------------------------
BUSINESS INSURANCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums [1] $ 2,886 $ 2,405 $ 2,227
- --------------------------------------------------------------------------------------------------------------------------------
Earned premiums [1] $ 2,645 $ 2,298 $ 2,202
Benefits, claims and claim adjustment expenses 1,704 1,506 1,525
Amortization of deferred policy acquisition costs 681 605 566
Insurance operating costs and expenses 257 237 234
- --------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 3 (50) (123)
September 11 (245) -- --
-----------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (242) $ (50) $ (123)
-----------------------------------------------------------------------------------------------------------------------
Combined ratio excluding September 11 97.8 100.6 105.6
Combined ratio impact of September 11 9.3 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Combined ratio 107.1 100.6 105.6
================================================================================================================================
<FN>
[1] 2001 excludes $15 of reinsurance cessions related to September 11.
</FN>
</TABLE>
Business Insurance provides workers' compensation, property, automobile and
liability coverages to small ("Select Customer") and mid-sized ("Key Accounts")
commercial businesses primarily throughout the United States. This segment also
provides commercial risk management products and services to small and mid-sized
members of affinity groups in addition to marine coverage.
2001 COMPARED TO 2000 -- Written premiums increased $481, or 20%, driven by
strong growth in Select Customer and Key Accounts. Select Customer increased
$209, or 19%, as a result of pricing increases, strong premium renewal retention
and the success of product, marketing, technology and service growth
initiatives. The increase in Key Accounts of $195, or 19%, was attributable
primarily to significant pricing increases and improved premium renewal
retention as well as strong new business growth.
Excluding the impact of September 11, underwriting results improved $53, with a
corresponding 2.8 point decrease in the combined ratio. The improvement for the
year was primarily due to strong pricing and decreased frequency loss costs as
well as an improved expense ratio. The favorable expense ratio was the result of
current year benefits of the 2000 field office reorganization and reorganization
costs in 2000 not recurring in 2001.
2000 COMPARED TO 1999 -- Written premiums increased $178, or 8%, primarily as a
result of strong growth in Select Customer, up $171, or 19%. Enhanced product
offerings, targeted geographic strategies and new business growth coupled with
mid-single digit price increases were the primary drivers of the Select Customer
growth. This increase was slightly offset by a 2% decrease in Key Accounts. The
decline in mid-market premiums reflected the effective execution of the
Company's underwriting initiatives, although significant price increases
partially mitigated this decrease.
Underwriting results improved $73, or 5.0 combined ratio points, primarily the
result of reduced loss ratios due to the effective execution of pricing actions
and lower catastrophe losses. A decrease in the expense ratio, despite field and
claim reorganization costs, also contributed to the lower combined ratio.
OUTLOOK
Firming market conditions in the standard commercial sector are expected to
continue in 2002, although price competition within many markets of the
commercial industry will remain a challenge. Additionally, September 11 has
created an ambiguous environment and economic uncertainty as federal backing in
the event of future terrorist attacks remains uncertain. Uncertainties in the
reinsurance market also may impact the segment's ability to obtain adequate
reinsurance coverage for certain exposures at a reasonable price. Management
expects significant growth in small commercial businesses will continue to be
achieved, in part, due to continued strategic actions being implemented. This
includes providing a complete product solution for the small commercial coverage
needs of the
- 27 -
<PAGE>
segment's customers, expanding non-traditional distribution alternatives,
executing geographic market share strategies and developing technology solutions
that deliver superior business tools to The Hartford's agents, alliances and
policyholders. Continued pricing and underwriting actions in the middle market
business should continue to have a positive impact on overall profitability in
2002.
- --------------------------------------------------------------------------------
AFFINITY PERSONAL LINES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums $ 1,839 $ 1,659 $ 1,527
- --------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 1,741 $ 1,583 $ 1,468
Benefits, claims and claim adjustment expenses 1,400 1,220 1,125
Amortization of deferred policy acquisition costs 180 164 155
Insurance operating costs and expenses 197 182 169
- --------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 (36) 17 19
September 11 (3) -- --
-----------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (39) $ 17 $ 19
-----------------------------------------------------------------------------------------------------------------------
Combined ratio excluding September 11 102.8 100.0 100.2
Combined ratio impact of September 11 0.1 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Combined ratio 102.9 100.0 100.2
- --------------------------------------------------------------------------------------------------------------------------------
Other revenue [1] $ 150 $ 166 $ 162
================================================================================================================================
<FN>
[1] Primarily servicing revenue.
</FN>
</TABLE>
Affinity Personal Lines provides automobile, homeowners and home-based business
coverages to individuals across the United States. Affinity Personal Lines is
organized to provide customized products and services to the following markets:
the membership of AARP through a direct marketing operation; customers of Sears,
Roebuck & Co. ("Sears") and Ford Motor Company and Ford Motor Credit Company
(collectively, "Ford") as well as customers of financial institutions through an
affinity center. Affinity Personal Lines also operates a member contact center
for health insurance products offered through AARP's Health Care Options. The
Hartford's exclusive licensing arrangement with AARP, which was renewed during
the fourth quarter of 2001, continues through January 1, 2010 for automobile,
homeowners and home-based business. The Health Care Options agreement continues
through 2007.
2001 COMPARED TO 2000 -- Written premiums increased $180, or 11%, driven by
growth in both the AARP program and Affinity business unit. AARP increased
primarily as a result of strong new business growth and continued steady premium
renewal retention. The improvement in the Affinity business unit continues to
reflect increased new business from the Ford and Sears accounts.
Excluding the impact of September 11, underwriting results decreased $53, with a
corresponding 2.8 point increase in the combined ratio. Higher automobile losses
continue to adversely impact underwriting results and the combined ratio. In
addition, the loss adjustment expense ratio increased, primarily as a result of
higher losses and increased litigation costs. Although underwriting expenses
increased, primarily due to increased written premiums, the expense ratio
improved slightly as compared to the prior year, primarily as a result of
prudent expense management.
2000 COMPARED TO 1999 -- Written premiums increased $132, or 9%, due primarily
to policy count growth and improved renewal retention in the AARP program as
well as growth in the Affinity business unit resulting from increased business
from the Ford and Sears accounts.
Underwriting results decreased $2, with a slight improvement in the combined
ratio. The decrease in underwriting results was primarily due to increased
automobile losses, partially offset by strong improvement in the AARP homeowners
line. The combined ratio improvement was primarily attributable to a decrease in
the expense ratio, reflecting productivity gains from prior initiatives.
OUTLOOK
The personal lines industry is struggling to regain its momentum towards
profitability as rising loss costs resulting from inflation in both medical and
automobile repair costs have adversely impacted results. In addition, September
11 will likely have negative short-term implications to the industry as a result
of lower investment yields and higher reinsurance rates. More severe
catastrophes could also impact future results. Management does believe, however,
that with increased rate activity, the personal lines industry will be
positioned for recovery.
During the fourth quarter of 2001, The Hartford's exclusive licensing
arrangement with AARP to offer personal insurance products to the over 34
million AARP members was renewed through January 1, 2010. This agreement
provides the segment with an important competitive advantage. Favorable "baby
boom" demographics as well as initiatives implemented to further strengthen the
AARP relationship are expected to increase membership during this period.
- 28 -
<PAGE>
- --------------------------------------------------------------------------------
PERSONAL INSURANCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums $ 1,021 $ 988 $ 943
- --------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 1,006 $ 964 $ 875
Benefits, claims and claim adjustment expenses 764 701 607
Amortization of deferred policy acquisition costs 205 213 193
Insurance operating costs and expenses 79 65 60
- --------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 $ (42) $ (15) $ 15
September 11 (6) -- --
-----------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (48) $ (15) $ 15
-----------------------------------------------------------------------------------------------------------------------
Combined ratio excluding September 11 102.9 100.3 98.4
Combined ratio impact of September 11 0.5 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Combined ratio 103.4 100.3 98.4
================================================================================================================================
</TABLE>
Personal Insurance provides automobile, homeowners and home-based business
coverages to individuals across the United States. Personal Insurance is
organized to provide products and services to individuals who prefer local agent
involvement through a network of independent agents in the standard personal
lines market and through Omni Insurance Group ("Omni"), in the non-standard
automobile market.
2001 COMPARED TO 2000 -- Written premiums increased $33, or 3%, primarily due to
premium growth in the standard automobile and homeowners lines as a result of
pricing increases and strong premium renewal retention. Premium declines in
non-standard auto reflect decreased policy counts, the result of significant
price increases to address loss cost issues.
Excluding the impact of September 11, underwriting results decreased $27, with a
corresponding 2.6 point increase in the combined ratio. Increased automobile
losses in both standard and non-standard adversely impacted the underwriting
results and combined ratios. In addition, higher losses and increased litigation
costs resulted in an increase in the loss adjustment expense ratio. Partially
offsetting the combined ratio increase was improvement in the expense ratio,
primarily due to lower commissions and prudent expense management.
2000 COMPARED TO 1999 -- Written premiums increased $45, or 5%, due primarily to
policy count growth and improved renewal retention in the standard automobile
and homeowners' lines. Non-standard automobile written premiums through Omni
decreased for the year as a result of an expected consumer reaction to rate
increases in certain states.
Underwriting results decreased $30, with a corresponding 1.9 point increase in
the combined ratio. The decrease in underwriting results and related increase in
the combined ratio were primarily due to increased standard and non-standard
automobile losses. Partially offsetting this decrease was an improvement in the
homeowners line of business. A 1.4 point decrease in the expense ratio for the
year reflected the continued trend of productivity gains from prior initiatives.
OUTLOOK
The personal lines industry is struggling to regain its momentum towards
profitability as rising loss costs resulting from inflation in both medical and
automobile repair costs have adversely impacted results. In addition, September
11 will likely have negative short-term implications to the industry in the form
of lower investment yields and higher reinsurance rates. More severe
catastrophes could also impact future results. Management does believe, however,
that with increased rate activity, the personal lines industry will be
positioned for recovery.
Strategic actions being taken by the Personal Insurance segment include
unprofitable agency closures in the standard lines and a continued shift in
state mix away from poor loss performing states in non-standard automobile.
Additionally, further investments in technology, continued efforts to reduce
expenses and improve the product line, ease of doing business and customer
service capability will position Personal Insurance to take advantage of future
market conditions.
- 29 -
<PAGE>
- --------------------------------------------------------------------------------
SPECIALTY COMMERCIAL
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums [1] $ 996 $ 1,080 $ 954
- --------------------------------------------------------------------------------------------------------------------------------
Earned premiums [1] $ 1,029 $ 1,034 $ 928
Benefits, claims and claim adjustment expenses 766 779 630
Amortization of deferred policy acquisition costs 267 268 257
Insurance operating costs and expenses 91 90 89
- --------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 $ (95) $ (103) $ (48)
September 11 (167) -- --
-------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (262) $ (103) $ (48)
-------------------------------------------------------------------------------------------------------------------
Combined ratio excluding September 11 108.3 107.1 105.1
Combined ratio impact of September 11 16.5 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Combined ratio 124.8 107.1 105.1
- --------------------------------------------------------------------------------------------------------------------------------
Other revenue [2] $ 213 $ 168 $ 141
================================================================================================================================
<FN>
[1] 2001 excludes $7 of reinsurance cessions related to September 11.
[2] Primarily servicing revenue.
</FN>
</TABLE>
Specialty Commercial provides insurance through retailers and wholesalers to
large commercial clients and insureds requiring a variety of specialized
coverages. The segment's results also include the professional liability and
bond lines as well as First State Management Group, a leading underwriter of
excess and surplus lines business produced primarily through wholesale brokers.
Agricultural and livestock products are also included in the property line of
business in Specialty Commercial.
2001 COMPARED TO 2000 -- Written premiums decreased $84, or 8%, primarily due to
a decrease in written premiums from sold or exited business lines which include
farm, public entity and Canada. Partially offsetting the decrease was an
increase in written premiums due to The Hartford's purchase, in the third
quarter of 2000, of the in force, new and renewal financial products business as
well as the majority of the excess and surplus lines business of Reliance Group
Holdings, Inc. ("Reliance"), which resulted in $60 of additional written
premiums as compared with 2000.
Excluding the impact of September 11, underwriting results improved $8, with a
1.2 point increase in the combined ratio. The improved underwriting results were
primarily a result of favorable results in the property lines of business and
lower losses and underwriting expenses from the sold or exited business lines.
Partially offsetting the improvement was deteriorating underwriting results in
risk management and a decrease in underwriting results related to Enron
Corporation. The increase in the combined ratio was primarily due to an increase
in the commission ratio as well as additional taxes, licenses and fees in the
risk management and professional liability lines of business. The increase in
the commission ratio was primarily a result of lower ceding commissions.
2000 COMPARED TO 1999 -- Written premiums increased $126, or 13%, primarily due
to the purchase of Reliance's in force, new and renewal financial products
business as well as the majority of the excess and surplus lines in 2000, which
resulted in $108 of additional written premiums for the year. Higher written
premiums in the casualty line of business also contributed to the increase.
Underwriting results decreased $55, impacting the combined ratio by 2.0 points,
primarily the result of increased losses and loss adjustment expenses in the
property and bond lines of business as well as in PENCO and Canada. The combined
ratio was adversely impacted by the higher loss ratios. The increase in the
combined ratio was partially offset by a decrease in the expense ratio.
OUTLOOK
Firming market conditions in the specialty commercial sector are expected to
continue in 2002. However, September 11 has created an ambiguous environment and
economic uncertainty as federal backing in the event of future terrorist attacks
remains uncertain. Uncertainties in the reinsurance market also may impact the
segment's ability to obtain adequate reinsurance coverage for certain exposures
at a reasonable price. Strong property pricing should be even stronger in 2002
as a result of September 11. New capital is flowing into the industry as a
result of a hardening market, thereby increasing capacity. Management believes,
however, that strategic actions being taken which include providing innovative
new products as well as expanding product lines; expanding non-traditional
distribution alternatives; and further leveraging underwriting discipline and
capabilities will position the segment to capitalize on a continued improving
marketplace.
- 30 -
<PAGE>
- --------------------------------------------------------------------------------
REINSURANCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums [1] $ 918 $ 826 $ 703
- --------------------------------------------------------------------------------------------------------------------------------
Earned premiums [1] $ 920 $ 809 $ 680
Benefits, claims and claim adjustment expenses 815 624 507
Amortization of deferred policy acquisition costs 239 243 211
Insurance operating costs and expenses 15 15 10
- --------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 $ (149) $ (73) $ (48)
September 11 (226) -- --
-----------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (375) $ (73) $ (48)
-----------------------------------------------------------------------------------------------------------------------
Combined ratio excluding September 11 116.1 108.9 107.2
Combined ratio impact of September 11 27.8 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Combined ratio 143.9 108.9 107.2
================================================================================================================================
<FN>
[1] 2001 excludes $69 of reinsurance cessions related to September 11.
</FN>
</TABLE>
The Hartford assumed reinsurance worldwide through its thirteen Hartford
Reinsurance Company ("HartRe") offices and wrote treaty reinsurance through
professional reinsurance brokers covering various property, casualty, specialty
and marine classes of business until the fourth quarter of 2001. In October
2001, HartRe announced a centralization of all underwriting and claims
operations in Hartford, Connecticut and an exit from all international lines
except catastrophe, Alternative Risk Transfer ("ART") and marine. The exited
international lines contributed $101 of written premiums in 2001.
2001 COMPARED TO 2000 -- Written premiums increased $92, or 11%, primarily due
to growth in ART written premiums, driven primarily by a significant first
quarter ART transaction. The achievement of double-digit pricing increases in
traditional reinsurance was offset by underwriting discipline to maintain
profitability targets.
Excluding the impact of September 11, underwriting results decreased $76, with a
corresponding 7.2 point increase in the combined ratio. The decrease in
underwriting results and corresponding increase in the combined ratio were
primarily attributable to continued adverse loss development on prior
underwriting years.
2000 COMPARED TO 1999 -- Reinsurance written premiums increased $123, or 17%,
primarily due to successful pricing increases in a firming pricing environment,
as well as growth in new casualty programs business, and continued execution of
new business development strategies in the ART line.
Underwriting results decreased $25, with a corresponding 1.7 point increase in
the combined ratio. This decrease was primarily due to adverse prior
underwriting years loss development, partially offset by lower property
catastrophe losses.
OUTLOOK
As a result of September 11, the reinsurance market has been transformed to an
environment of some uncertainty. Net new capital, price increases and
modifications in contract terms and conditions have contributed to the
uncertainty. The property and casualty worldwide reinsurance market remains
extremely competitive, although the pricing environment continued to improve in
2001. It is anticipated by management that rates and terms will continue to
improve in 2002. HartRe's organizational realignment has created a centralized
organization aimed at enhancing core functions consistent with the segment's
return objectives. HartRe will be established as a specialized worldwide
property catastrophe underwriting practice, blending technical underwriting
expertise and state-of-the-art catastrophe modeling and risk portfolio analysis.
- 31 -
<PAGE>
- --------------------------------------------------------------------------------
OTHER OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums $ 17 $ 367 $ 425
Net investment income 146 210 212
Other revenue -- 9 7
Net realized capital gains 5 16 17
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 168 602 661
----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 142 423 454
Amortization of deferred policy acquisition costs -- 49 61
Insurance operating costs and expenses 7 88 85
Other expenses 5 7 9
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 154 567 609
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 14 35 52
Income tax expense 4 7 19
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME 10 28 33
- --------------------------------------------------------------------------------------------------------------------------------
Less: Net realized capital gains, after-tax 4 11 11
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 6 $ 17 $ 22
================================================================================================================================
</TABLE>
The Other Operations segment, formerly International and Other Operations,
consists of certain property and casualty insurance operations of The Hartford
which have discontinued writing new business. These operations primarily include
First State Insurance Company, located in Boston, Massachusetts; Heritage
Reinsurance Company, Ltd., headquartered in Bermuda; and Excess Insurance
Company, Ltd, located in the United Kingdom. The main focus of these operations
is the proper disposition of claims, resolving disputes and collecting
reinsurance proceeds related largely to business underwritten and reinsured
prior to 1985. Also included in Other Operations are the Company's international
property and casualty businesses.
During the fourth quarter 2001, the Company finalized a new management structure
within its Other Operations segment that consolidates the management and claims
handling responsibility of the Company's environmental and asbestos exposures.
In addition, the Company consolidated its environmental and asbestos reserves
into one legal entity within Other Operations. The transaction was accomplished
through the use of an intercompany reinsurance agreement, and resulted in $602
of reserves, primarily related to environmental and asbestos exposures from 1986
and prior, being ceded from the Specialty Commercial segment to Other
Operations. There was no impact to the Company's consolidated financial
condition or results of operations as a result of this transaction.
The Other Operations segment results include activity for the Company's
international property and casualty businesses up until their dates of sale as
discussed below. Products offered by these companies included property and
casualty products in both personal and commercial lines as well as life
insurance products and services designed to meet the needs of local customers.
The sale of all of The Hartford's property and casualty international businesses
continued the Company's strategic shift in its international operations to
emphasize growth opportunities in asset accumulation business.
In September 2001, The Hartford entered into an agreement to sell its
Singapore-based Hartford Insurance Company (Singapore), Ltd. The Company
recorded a net realized capital loss of $9 after-tax related to the sale, which
was recorded in the 2001 investment results of North American. The sale was
completed in January 2002.
On February 8, 2001, The Hartford completed the sale of its Spain-based
subsidiary, Hartford Seguros. The Hartford received $29, before costs of sale
and recorded a $16 after-tax net realized capital loss which was reported in the
2001 investment results of North American.
On December 22, 2000, The Hartford completed the sale of Zwolsche located in the
Netherlands, Belgium and Luxembourg. The Hartford received $547, before costs of
sale and recorded a $69 after-tax net realized capital gain which was reported
in the 2000 investment results of North American.
2001 COMPARED TO 2000 -- Revenues were down $434, or 72%, and operating income
was down $11, or 65%, primarily due to the sale of Zwolsche.
2000 COMPARED TO 1999 -- Revenues were down $59, or 9%, primarily due to lower
earned premiums at Zwolsche. Operating income was down $5, or 23%, primarily due
to a higher calendar year loss ratio in automobile business in Hartford Seguros
and unfavorable foreign exchange impacts.
OUTLOOK
Except for the uncertainties related to dispute resolution, reinsurance
collection and those discussed in the Environmental and Asbestos Claims section,
management does not anticipate the future financial performance of Other
Operations to have a material effect on the future operating results of the
Company.
- 32 -
<PAGE>
- --------------------------------------------------------------------------------
DEFERRED ACQUISITION COSTS
- --------------------------------------------------------------------------------
Management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. One of the
significant estimates made includes those used in determining deferred policy
acquisition costs. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.
LIFE
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years.
Deferred policy acquisition costs related to investment contracts and universal
life type contracts are deferred and amortized using the retrospective deposit
method. Under the retrospective deposit method, acquisition costs are amortized
in proportion to the present value of expected gross profits from investment,
mortality and expense margins and surrender charges. Actual gross profits can
vary from management's estimates, resulting in increases or decreases in the
rate of amortization. Management periodically reviews these estimates and
evaluates the recoverability of the deferred acquisition cost asset. When
appropriate, management revises its assumptions on the estimated gross profits
of these contracts and the cumulative amortization for the books of business are
re-estimated and adjusted by a cumulative charge or credit to income. The
average rate of assumed future investment yield used in estimating expected
gross profits related to variable annuity and variable life business was 9% at
December 31, 2001 and for all other products including fixed annuities and other
universal life type contracts the average assumed investment yield ranged from
5.0% - 8.5%.
Deferred policy acquisition costs related to traditional policies are amortized
over the premium paying period of the related policies in proportion to the
ratio of the present value of annual expected premium income to the present
value of total expected premium income. Adjustments are made each year to
recognize actual experience as compared to assumed experience for the current
period.
To date, our experience has generally been consistent or favorable to the
assumptions used in determining DAC amortization. However, if we were to
experience a material adverse deviation in certain critical assumptions,
including surrender rates, mortality experience, or investment performance,
there could be a negative effect on the Company's reported earnings and
stockholders' equity.
PROPERTY & CASUALTY
The Property & Casualty operations also incur costs related to the acquisition
of new and renewal insurance policies. These costs include agent and broker
commissions, premium taxes and certain other underwriting expenses. These costs
are deferred and amortized over policy terms. Estimates of the present value of
future revenues, including net investment income and tax benefits, are compared
to estimates of the present value of future costs, including amortization of
policy acquisition costs, to determine if the deferred acquisition costs are
recoverable, and if not, they are charged to expense.
- --------------------------------------------------------------------------------
RESERVES
- --------------------------------------------------------------------------------
LIFE
In accordance with applicable insurance regulations under which Life operates,
life insurance subsidiaries of The Hartford establish and carry as liabilities
actuarially determined reserves which are calculated to meet The Hartford's
future obligations. Reserves for life insurance and disability contracts are
based on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect The
Hartford's actual experience when appropriate. These reserves are computed at
amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet The Hartford's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims incurred but not reported ("IBNR") and claims
reported but not yet paid. Reserves for assumed reinsurance are computed in a
manner that is comparable to direct insurance reserves.
The liability for policy benefits for universal life-type contracts and
interest-sensitive whole life policies is equal to the balance that accrues to
the benefit of policyholders, including credited interest, amounts that have
been assessed to compensate the Company for services to be performed over future
periods, and any amounts previously assessed against policyholders that are
refundable on termination of the contract. Certain contracts include provisions
whereby a guaranteed death benefit is provided in the event that the
contractholder's account value at death is below the guaranteed value. Although
the Company reinsures the majority of the death benefit guarantees associated
with its in-force block of business, declines in the equity market may increase
the Company's net exposure to death benefits under these contracts. The Company
records the death benefit costs, net of reinsurance, as they are incurred. For
investment contracts, policyholder liabilities are equal to the accumulated
policy account values, which consist of an accumulation of deposit payments plus
credited interest, less withdrawals and amounts assessed through the end of the
period. For the Company's group disability policies, the level of reserves is
based on a variety of factors including particular diagnoses, termination rates
and benefit levels.
The persistency of The Hartford's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed a
surrender charge during a penalty period, which is usually at least seven years.
Such surrender charge is initially a percentage of either the accumulation value
or considerations received, which varies
- 33 -
<PAGE>
by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect The Hartford from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies.
PROPERTY & CASUALTY
The Hartford establishes property and casualty reserves to provide for the
estimated costs of paying claims made by policyholders or against policyholders.
These reserves include estimates for both claims that have been reported and
those that have been incurred but not reported, and include estimates of all
expenses associated with processing and settling these claims. Estimating the
ultimate cost of future claims and claim adjustment expenses is an uncertain and
complex process. This estimation process is based largely on the assumption that
past developments are an appropriate predictor of future events, and involves a
variety of actuarial techniques that analyze experience, trends and other
relevant factors. The uncertainties involved with the reserving process have
become increasingly unpredictable due to a number of complex factors including
social and economic trends and changes in the concepts of legal liability and
damage awards. Accordingly, final claim settlements may vary from the present
estimates, particularly when those payments may not occur until well into the
future.
As a result of September 11, the Company established estimated gross reserves of
$1.1 billion and estimated net reserves of $556 related to property and casualty
operations. This loss estimate includes coverages related to property, business
interruption, workers' compensation and other liability exposures, including
those underwritten by the Company's assumed reinsurance operation. The Company
based the loss estimate upon a review of insured exposures using a variety of
assumptions and actuarial techniques, including estimated amounts for unknown
and unreported policyholder losses and costs incurred in settling claims.
Included in net reserves was an estimate of amounts recoverable under the
Company's ceded reinsurance programs. As a result of the uncertainties involved
in the estimation process, final claims settlement may vary from present
estimates.
The Hartford continually reviews the adequacy of its estimated claims and claim
adjustment expense reserves on an overall basis. As additional experience and
other relevant data become available, reserve levels are adjusted accordingly.
Adjustments to previously established reserves, if any, will be reflected in the
operating results of the period in which the adjustment is made. For the year
ended December 31, 2001, there were no changes to these reserving assumptions
that had a significant impact on the reserves or results of operations. In the
judgment of management, all information currently available has been properly
considered in the reserves established for claims and claim adjustment expenses.
For a discussion of environmental and asbestos claims and the uncertainties
related to these reserves, refer to the next section.
- --------------------------------------------------------------------------------
ENVIRONMENTAL AND ASBESTOS CLAIMS
- --------------------------------------------------------------------------------
The Hartford continues to receive claims that assert damages from environmental
exposures and for injuries from asbestos and asbestos-related products, both of
which affect the Property & Casualty operation. Environmental claims relate
primarily to pollution and related clean-up costs. With regard to these claims,
uncertainty exists which impacts the ability of insurers and reinsurers to
estimate the ultimate reserves for unpaid losses and related settlement
expenses. The Hartford finds that conventional reserving techniques cannot
estimate the ultimate cost of these claims because of inadequate development
patterns and inconsistent emerging legal doctrine. The majority of environmental
claims and many types of asbestos claims differ from any other type of
contractual claims because there is almost no agreement or consistent precedent
to determine what, if any, coverage exists or which, if any, policy years and
insurers or reinsurers may be liable. Further uncertainty arises with
environmental claims since claims are often made under policies, the existence
of which may be in dispute, the terms of which may have changed over many years,
which may or may not provide for legal defense costs, and which may or may not
contain environmental exclusion clauses that may be absolute or allow for
fortuitous events. Courts in different jurisdictions have reached disparate
conclusions on similar issues and in certain situations have broadened the
interpretation of policy coverage and liability issues. In light of the
extensive claim settlement process for environmental and asbestos claims, which
involves comprehensive fact gathering, subject matter expertise and intensive
litigation, The Hartford established an environmental claims facility in 1992 to
defend itself aggressively against unwarranted claims and to minimize costs.
Within the property and casualty insurance industry in the mid-1990s, progress
was made in developing sophisticated, alternative methodologies utilizing
company experience and supplemental databases to assess environmental and
asbestos liabilities. Consistent with The Hartford's practice of using the best
techniques to estimate the Company's environmental and asbestos exposures, a
study was initiated in April 1996 based on known cases. The Hartford, utilizing
internal staff supplemented by outside legal and actuarial consultants,
completed the study in October 1996.
The study included a review of identified environmental and asbestos exposures
of North American Property & Casualty, along with the United States exposures of
The Hartford's Other Operations segment. The methodology utilized a ground-up
analysis of policy, site and exposure level data for a representative sample of
The Hartford's claims. The results of the evaluation were extrapolated against
the balance of the claim population to estimate the Company's overall exposure
for reported claims.
In addition to estimating liabilities on reported environmental and asbestos
claims, The Hartford estimated reserves for claims incurred but not reported.
The IBNR reserve was estimated using information on reporting patterns of known
insureds, characteristics of insureds such as limits exposed, attachment points
and number of coverage years involved, third party costs and closed claims.
Included in The Hartford's analysis of environmental and asbestos exposures was
a review of applicable reinsurance
- 34 -
<PAGE>
coverage. Reinsurance coverage applicable to the sample was used to estimate the
reinsurance coverage that applied to the balance of the reported environmental
and asbestos claims and to the IBNR estimates.
An international actuarial firm reviewed The Hartford's approach and concluded
that the way the Company studied its exposures, the thoroughness of its analysis
and the way The Hartford came to its estimates were reasonable and
comprehensive. The Company believes that its methodology continues to be
reasonable and comprehensive.
Reserve activity for both reported and unreported environmental and asbestos
claims, including reserves for legal defense costs, for the years ended December
31, 2001, 2000 and 1999, was as follows (net of reinsurance):
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------- -------------------------------
Environ. Asbestos Total Environ. Asbestos Total Environ. Asbestos Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning liability $ 911 $ 572 $ 1,483 $ 995 $ 625 $ 1,620 $ 1,144 $ 668 $ 1,812
Claims and claim
adjustment expenses
incurred [1] 15 28 43 8 8 16 7 4 11
Claims and claim
adjustment expenses
paid (172) (84) (256) (92) (61) (153) (156) (47) (203)
Other [2] (100) 100 -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY [3] $ 654 $ 616 $ 1,270 $ 911 $ 572 $ 1,483 $ 995 $ 625 $ 1,620
====================================================================================================================================
<FN>
[1] For 2001, environmental and asbestos include $2 and $19, respectively, of
incurred expenses related to the assumption of previously ceded reserves
from commutations of reinsurance contracts.
[2] 2001 includes a $100 reclassification from environmental to asbestos.
[3] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,282, $1,506 and $1,524 for 2001, 2000 and 1999, respectively.
As of December 31, 2001, 2000 and 1999, reserves for environmental and
asbestos, gross of reinsurance, were $919 and $1,633, $1,483 and $1,506,
and $1,609 and $1,535, respectively.
</FN>
</TABLE>
Actual claim settlements since 1996 have indicated that a smaller proportion of
the total environmental and asbestos reserves should have originally been
allocated to environmental, with a greater portion allocated to asbestos. As a
result, during the fourth quarter of 2001, the Company reclassified $100 of
environmental reserves to asbestos.
With the consolidation of The Hartford's environmental and asbestos liabilities
into the Other Operations segment, as previously discussed in the Other
Operations section, essentially all of the Company's environmental and asbestos
reserves are held within Other Operations. The Hartford believes that the
environmental and asbestos reserves, reported at December 31, 2001, are a
reasonable estimate of the ultimate remaining liability for these claims based
upon known facts, current assumptions and The Hartford's methodologies. Future
social, economic, legal or legislative developments may alter the original
intent of policies and the scope of coverage. The Hartford will continue to
evaluate new methodologies and developments, such as the increasing level of
asbestos claims being tendered under the comprehensive general liability
operations (non-product) section of policies, as they arise in order to
supplement the Company's ongoing analysis and review of its environmental and
asbestos exposures. These future reviews may result in a change in reserves,
impacting The Hartford's results of operations in the period in which the
reserve estimates are changed. While the impact of these changes could have a
material effect on future results of operations, The Hartford does not expect
such changes would have a material effect on its liquidity or financial
condition.
- --------------------------------------------------------------------------------
INVESTMENTS
- --------------------------------------------------------------------------------
Return on invested assets is an important element of The Hartford's financial
results. Significant fluctuations in the fixed income or equity markets could
weaken the Company's financial condition or its results of operations. Net
investment income and net realized capital gains and losses accounted for
approximately 17% and 19% of the Company's consolidated revenues for the years
ended December 31, 2001 and 2000, respectively.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, fixed maturity investments, which comprised approximately 86% and 85%
of the fair value of its invested assets as of December 31, 2001 and 2000,
respectively. Other events beyond the Company's control could also adversely
impact the fair value of these investments. Specifically, a downgrade of an
issuer's credit rating or default of payment by an issuer could reduce the
Company's investment return.
The Company also invests in unaffiliated limited partnership arrangements in
order to further diversify its investment portfolio. These limited partnerships
represent approximately 3% of the fair value of its invested assets as of
December 31, 2001 and 2000. Limited partnerships are typically less liquid than
direct investments in fixed income or equity investments. Market volatility and
other factors beyond the Company's control can adversely affect the value of
these investments. Because the Company is a limited partner, its ability to
control the timing or the realization of the related investment income is
restricted.
A significant decrease in the fair value of any investment that is deemed other
than temporary could result in the Company's recognition of a loss in its
financial results prior to the actual sale of the investment.
The Hartford's investment portfolios are divided between Life and Property &
Casualty. The investment portfolios are
- 35 -
<PAGE>
managed based on the underlying characteristics and nature of each operation's
respective liabilities and within established risk parameters. (For a further
discussion on The Hartford's approach to managing risks, see the Capital Markets
Risk Management section.)
The investment portfolios of Life and Property & Casualty are managed by
Hartford Investment Management Company ("HIMCO"), a wholly-owned subsidiary of
The Hartford. HIMCO is responsible for monitoring and managing the
asset/liability profile, establishing investment objectives and guidelines, and
determining, within specified risk tolerances and investment guidelines, the
appropriate asset allocation, duration, convexity and other characteristics of
the portfolios. Security selection and monitoring are performed by asset class
specialists working within dedicated portfolio management teams.
LIFE
The primary investment objective of Life's general account is to maximize
after-tax returns consistent with acceptable risk parameters, including the
management of the interest rate sensitivity of invested assets and the
generation of sufficient liquidity relative to that of corporate and
policyholder obligations, as discussed in the Capital Markets Risk Management
section under "Market Risk - Life - Interest Rate Risk".
The following table identifies the invested assets by type held in the general
account as of December 31, 2001 and 2000.
<TABLE>
<CAPTION>
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
AMOUNT PERCENT AMOUNT PERCENT
-----------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities, at fair value $ 23,301 82.1% $ 18,248 79.6%
Equity securities, at fair value 428 1.5% 171 0.7%
Policy loans, at outstanding balance 3,317 11.7% 3,610 15.7%
Limited partnerships, at fair value 811 2.9% 668 2.9%
Other investments 520 1.8% 242 1.1%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 28,377 100.0% $ 22,939 100.0%
========================================================================================================================
</TABLE>
During 2001, fixed maturity investments increased $5.1 billion as a result of
the Fortis acquisition, increased operating cash flow and an increase in fair
value due to a lower interest rate environment. The decrease in policy loans was
primarily due to the decrease in leveraged COLI business, partially offset by
policy loans acquired as a result of the Fortis acquisition. Policy loans are
secured by the cash value of the associated life policy and do not mature in a
conventional sense, but expire in conjunction with the related policy
liabilities.
The following table identifies, by type, the fixed maturity securities held in
the general account as of December 31, 2001 and 2000.
<TABLE>
<CAPTION>
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
FAIR VALUE PERCENT FAIR VALUE PERCENT
----------------------------------------------
<S> <C> <C> <C> <C>
Corporate $ 11,419 49.0% $ 7,663 42.0%
Asset-backed securities (ABS) 3,427 14.7% 3,070 16.8%
Commercial mortgage-backed securities (CMBS) 3,029 13.0% 2,776 15.2%
Municipal - tax-exempt 1,565 6.7% 1,390 7.6%
Mortgage-backed securities (MBS) - agency 981 4.2% 602 3.3%
Collateralized mortgage obligations (CMO) 767 3.3% 928 5.1%
Government/Government agencies - Foreign 390 1.7% 321 1.8%
Government/Government agencies - United States 374 1.6% 244 1.3%
Municipal - taxable 47 0.2% 83 0.5%
Short-term 1,245 5.3% 975 5.3%
Redeemable preferred stock 57 0.3% 196 1.1%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 23,301 100.0% $ 18,248 100.0%
========================================================================================================================
</TABLE>
During 2001, corporate and ABS fixed maturity investments increased due to the
Fortis acquisition.
As of December 31, 2001 and 2000, approximately 21% and 22%, respectively, of
Life's fixed maturities were invested in private placement securities (including
12% and 13% of Rule 144A offerings as of December 31, 2001 and December 31,
2000, respectively). Private placement securities are generally less liquid than
public securities. However, private placements generally have covenants designed
to compensate for liquidity risk. Most of the private placement securities in
the operation's portfolio are rated by nationally recognized rating agencies.
(For further discussion of the Company's investment credit policies, see the
Capital Markets Risk Management section under "Credit Risk".)
INVESTMENT RESULTS
The following table summarizes Life's investment results.
- 36 -
<PAGE>
<TABLE>
<CAPTION>
(before-tax) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income - excluding policy loan income $ 1,472 $ 1,284 $ 1,171
Policy loan income 307 308 391
-------------------------------------------------
Net investment income - total $ 1,779 $ 1,592 $ 1,562
Yield on average invested assets [1] 7.0% 7.0% 6.7%
Net realized capital losses $ (133) $ (88) $ (5)
================================================================================================================================
<FN>
[1] Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized
cost).
</FN>
</TABLE>
2001 COMPARED TO 2000 -- Net investment income, excluding policy loan income,
increased $188, or 15%. The increase was primarily due to income earned on the
previously discussed increase in fixed maturity investments, partially offset by
lower yields on fixed maturities in the third and fourth quarters of 2001.
Yields on overall average invested assets were flat.
Included in 2001 net realized capital losses were write-downs for other than
temporary impairments on fixed maturities of $105, including a $37 loss related
to securities issued by Enron Corporation. Also included in net realized capital
losses is a $35 loss recognized on the sale of the Company's interest in an
Argentine insurance joint venture, in addition to losses associated with the
credit deterioration of certain investments in which the Company has an indirect
economic interest. These losses were partially offset by gains from the sale of
fixed maturities.
2000 COMPARED TO 1999 -- Net investment income, excluding policy loan income,
increased $113, or 10%. The increase was primarily due to higher yields earned
on the investment of cash flow from operations and reinvestment of proceeds from
sales and maturities of fixed maturity securities in a higher interest rate
environment. Policy loan income decreased $83, or 21%, due to the decrease in
leveraged COLI business.
Net realized capital losses increased $83 primarily as a result of portfolio
rebalancing in a higher interest rate environment.
PROPERTY & CASUALTY
The investment objective for the majority of Property & Casualty is to maximize
economic value while generating after-tax income and sufficient liquidity to
meet corporate and policyholder obligations. For Property & Casualty's Other
Operations segment, the investment objective is to ensure the full and timely
payment of all liabilities. Property & Casualty's investment strategies are
developed based on a variety of factors including business needs, regulatory
requirements and tax considerations.
The following table identifies the invested assets by type held as of December
31, 2001 and 2000.
<TABLE>
<CAPTION>
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
AMOUNT PERCENT AMOUNT PERCENT
-----------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities, at fair value $ 16,742 91.5% $ 16,239 91.6%
Equity securities, at fair value 921 5.0% 885 5.0%
Limited partnerships, at fair value 561 3.0% 470 2.7%
Other investments 85 0.5% 131 0.7%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 18,309 100.0% $ 17,725 100.0%
========================================================================================================================
</TABLE>
During 2001, fixed maturity investments increased slightly, as a result of an
increase in operating and financing cash flow and an increase in fair value due
to a lower interest rate environment, partially offset by a decline in fixed
maturities due to sales of international subsidiaries.
The following table identifies, by type, the fixed maturity securities held as
of December 31, 2001 and 2000.
<TABLE>
<CAPTION>
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
FAIR VALUE PERCENT FAIR VALUE PERCENT
----------------------------------------------
<S> <C> <C> <C> <C>
Municipal - tax-exempt $ 8,401 50.2% $ 8,527 52.5%
Corporate 4,179 25.0% 3,105 19.1%
Commercial mortgage-backed securities (CMBS) 1,145 6.8% 1,141 7.0%
Asset-backed securities (ABS) 717 4.3% 760 4.7%
Government/Government agencies - Foreign 613 3.6% 682 4.2%
Mortgage-backed securities (MBS) - agency 381 2.3% 315 1.9%
Government/Government agencies - United States 201 1.2% 63 0.4%
Collateralized mortgage obligations (CMO) 97 0.6% 236 1.5%
Municipal - taxable 47 0.3% 46 0.3%
Short-term 862 5.1% 1,120 6.9%
Redeemable preferred stock 99 0.6% 244 1.5%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,742 100.0% $ 16,239 100.0%
========================================================================================================================
</TABLE>
- 37 -
<PAGE>
During 2001, corporate fixed maturities increased primarily due to a
reallocation from municipal tax-exempts, resulting from a strategy to invest in
this sector during a period of wide credit spreads.
INVESTMENT RESULTS
The following table below summarizes Property & Casualty's investment results.
<TABLE>
<CAPTION>
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income, before-tax $ 1,053 $ 1,072 $ 1,065
Net investment income, after-tax [1] $ 819 $ 836 $ 828
Yield on average invested assets, before-tax [2] 6.1% 6.2% 6.1%
Yield on average invested assets, after-tax [1] [2] 4.7% 4.9% 4.6%
Net realized capital gains (losses), before-tax $ (103) $ 234 $ 39
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Due to the significant holdings in tax-exempt investments, after-tax net
investment income and yield are included.
[2] Represents net investment income (losses) (excluding net realized capital
gains) divided by average invested assets at cost (fixed maturities at
amortized cost).
</FN>
</TABLE>
2001 COMPARED TO 2000 -- Both before- and after-tax net investment income
decreased 2% compared to the prior year. The decreases were primarily due to a
reduction in investment income resulting from the sales of Zwolsche and Hartford
Seguros, partially offset by higher income on taxable fixed maturities in the
North American Property & Casualty operations. Yields on average invested assets
declined slightly due to the lower interest rate environment.
Net realized capital losses were $103 compared to net realized capital gains of
$234 for the prior year. The 2001 net realized capital losses included
write-downs for other than temporary impairments of $61 on fixed maturities,
including a $16 loss related to securities issued by Enron Corporation, and $30
on equities and other invested assets. An additional $7 of losses were sustained
on sales of Enron Corporation common stock. Also included in 2001 net realized
capital losses were losses generated from the sales of international
subsidiaries of $54, in addition to losses associated with the credit
deterioration of certain investments in which the Company has an indirect
economic interest. These losses were partially offset by gains from the sale of
fixed maturities.
2000 COMPARED TO 1999 -- Both before- and after-tax net investment income and
yields were relatively flat compared to the prior year.
Net realized capital gains increased by $195 for 2000 primarily as a result of
the $242 before-tax gain recognized on the sale of Zwolsche, partially offset by
net realized capital losses in the investment portfolio.
CORPORATE
In connection with The HLI Repurchase, the carrying value of the purchased fixed
maturity security investments was adjusted to fair market value as of the date
of the repurchase. This adjustment was reported in Corporate. The amortization
of the adjustment to the fixed maturity security investment's carrying values is
reported in Corporate's net investment income. The total amount of before-tax
amortization for the years ended December 31, 2001 and 2000 was $18 and $10,
respectively. Also reported in Corporate as of December 31, 2001 and 2000 are $3
and $5, respectively, of fixed maturity security investments.
SEPARATE ACCOUNT PRODUCTS
Separate account products are those for which a separate investment and
liability account is maintained on behalf of the policyholder. The Company's
separate accounts reflect two categories of risk assumption: non-guaranteed
separate accounts totaling $104.6 billion and $104.3 billion as of December 31,
2001 and 2000, respectively, wherein the policyholder assumes substantially all
the risk and reward; and guaranteed separate accounts totaling $10.1 billion and
$9.8 billion as of December 31, 2001 and 2000, respectively, wherein The
Hartford contractually guarantees either a minimum return or the account value
to the policyholder. Guaranteed separate account products primarily consist of
modified guaranteed individual annuities and modified guaranteed life insurance
and generally include market value adjustment features and surrender charges to
mitigate the risk of disintermediation. The primary investment objective of
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters, including the management of the interest rate
sensitivity of invested assets relative to that of policyholder obligations, as
discussed in the Capital Markets Risk Management section under "Market Risk -
Life - Interest Rate Risk."
Investment objectives for non-guaranteed separate accounts vary by fund account
type, as outlined in the applicable fund prospectus or separate account plan of
operations. Non-guaranteed separate account products include variable annuities,
variable life insurance contracts and variable COLI.
- --------------------------------------------------------------------------------
CAPITAL MARKETS RISK MANAGEMENT
- --------------------------------------------------------------------------------
The Hartford has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments, while asset/liability management is the responsibility
of separate and distinct risk management units supporting Life and Property &
Casualty operations. Derivative instruments are utilized in compliance with
established Company policy and regulatory requirements and are monitored
internally and reviewed by senior management.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or
- 38 -
<PAGE>
counterparty to make timely payments of principal and/or interest, and market
risk, relating to the market price and/or cash flow variability associated with
changes in interest rates, securities prices, market indices, yield curves or
currency exchange rates. The Company does not hold any financial instruments
purchased for trading purposes.
CREDIT RISK
The Hartford has established investment credit policies that focus on the credit
quality of obligors and counterparties, limit credit concentrations, encourage
diversification and require frequent creditworthiness reviews. Investment
activity, including setting of policy and defining acceptable risk levels, is
subject to regular review and approval by senior management and by the Company's
Finance Committee.
The Company invests primarily in securities which are rated investment grade and
has established exposure limits, diversification standards and review procedures
for all credit risks including borrower, issuer and counterparty.
Creditworthiness of specific obligors is determined by an internal credit
evaluation supplemented by consideration of external determinants of
creditworthiness, typically ratings assigned by nationally recognized ratings
agencies. Obligor, asset sector and industry concentrations are subject to
established limits and monitored on a regular interval.
The Company's derivative counterparty exposure policy establishes market-based
credit limits, favors long-term financial stability and creditworthiness and
typically requires credit enhancement/credit risk reducing agreements. Credit
risk is measured as the amount owed to the Company based on current market
conditions and potential payment obligations between the Company and its
counterparties. Credit exposures are generally quantified weekly and netted, and
collateral is pledged to and held by, or on behalf of, the Company to the extent
the current value of derivatives exceeds exposure policy thresholds.
The Hartford is not exposed to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholders' equity.
The following tables identify fixed maturity securities for Life, including
guaranteed separate accounts, and Property & Casualty by credit quality. The
ratings referenced in the tables are based on the ratings of a nationally
recognized rating organization or, if not rated, assigned based on the Company's
internal analysis of such securities.
LIFE
As of December 31, 2001 and 2000, over 96% and 97%, respectively, of the fixed
maturity portfolio was invested in securities rated investment grade (BBB and
above). During 2001, the percentage of BBB rated fixed maturity investments
increased due to the Fortis acquisition and the continued active management of
the general account portfolios.
<TABLE>
<CAPTION>
FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
FAIR VALUE PERCENT FAIR VALUE PERCENT
----------------------------------------------
<S> <C> <C> <C> <C>
United States Government/Government agencies $ 2,639 8.0% $ 2,329 8.4%
AAA 5,070 15.3% 4,896 17.6%
AA 3,644 11.0% 3,546 12.7%
A 11,528 34.8% 9,675 34.7%
BBB 7,644 23.1% 5,633 20.2%
BB & below 1,148 3.4% 708 2.5%
Short-term 1,470 4.4% 1,085 3.9%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 33,143 100.0% $ 27,872 100.0%
========================================================================================================================
</TABLE>
PROPERTY & CASUALTY
As of December 31, 2001 and 2000, over 94% and 95%, respectively, of the fixed
maturity portfolio was invested in securities rated investment grade. During
2001, the percentage of BBB rated fixed maturity investments increased primarily
due to the continued active management of the general account portfolios.
<TABLE>
<CAPTION>
FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
FAIR VALUE PERCENT FAIR VALUE PERCENT
----------------------------------------------
<S> <C> <C> <C> <C>
United States Government/Government agencies $ 639 3.8% $ 516 3.2%
AAA 6,160 36.8% 6,414 39.5%
AA 3,126 18.7% 3,414 21.0%
A 3,193 19.1% 2,664 16.4%
BBB 1,876 11.2% 1,442 8.9%
BB & below 886 5.3% 669 4.1%
Short-term 862 5.1% 1,120 6.9%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,742 100.0% $ 16,239 100.0%
========================================================================================================================
</TABLE>
MARKET RISK
The Hartford has several objectives in managing market risk associated with Life
and Property & Casualty. Life is responsible for maximizing after-tax returns
within acceptable risk parameters, including the management of the interest rate
sensitivity of invested assets and the generation of sufficient liquidity to
that of corporate and policyholder obligations.
- 39 -
<PAGE>
Life's fixed maturity portfolios have material market exposure to interest rate
risk. Property & Casualty attempts to maximize economic value while generating
appropriate after-tax income and sufficient liquidity to meet corporate and
policyholder obligations. Property & Casualty has material exposure to interest
rate and equity market risk. The Company continually monitors these exposures
and makes portfolio adjustments to manage these risks within established limits.
Downward movement in market interest rates during 2001 resulted in a significant
increase in the unrealized appreciation of the fixed maturity security portfolio
from 2000. However, The Hartford's asset allocation and its exposure to market
risk as of December 31, 2001 have not changed materially from its position at
December 31, 2000.
The Company analyzes interest rate risk using various models, including
multi-scenario cash flow projection models that forecast cash flows of the
liabilities and their supporting investments, including derivative instruments.
DERIVATIVE INSTRUMENTS
The Hartford utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in compliance
with Company policy and regulatory requirements in order to achieve one of three
Company approved objectives: to hedge risk arising from interest rate, price or
currency exchange rate volatility; to manage liquidity; or to control
transaction costs. The Company does not make a market or trade derivatives for
the express purpose of earning trading profits.
Interest rate swaps involve the periodic exchange of payments with other
parties, at specified intervals, calculated using the agreed upon rates and
notional principal amounts. Generally, no cash or principal payments are
exchanged at the inception of the contract. Typically, at the time a swap is
entered into, the cash flow streams exchanged by the counterparties are equal in
value.
Foreign currency swaps exchange an initial principal amount in two currencies,
agreeing to re-exchange the currencies at a future date, at an agreed exchange
rate. There is also periodic exchange of payments at specified intervals
calculated using the agreed upon rates and exchanged principal amounts.
Interest rate cap and floor contracts entitle the purchaser to receive from the
issuer at specified dates, the amount, if any, by which a specified market rate
exceeds the cap strike rate or falls below the floor strike rate, applied to a
notional principal amount. A premium payment is made by the purchaser of the
contract at its inception, and no principal payments are exchanged.
Forward contracts are customized commitments to either purchase or sell
designated financial instruments, at a future date, for a specified price and
may be settled in cash or through delivery of the underlying instrument.
Financial futures are standardized commitments to either purchase or sell
designated financial instruments, at a future date, for a specified price and
may be settled in cash or through delivery of the underlying instrument. Futures
contracts trade on organized exchanges. Margin requirements for futures are met
by pledging securities, and changes in the futures' contract values are settled
daily in cash.
Option contracts grant the purchaser, for a premium payment, the right to either
purchase from or sell to the issuer a financial instrument at a specified price,
within a specified period or on a stated date.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities. (For additional information on these
strategies along with tables reflecting outstanding derivative instruments, see
the Life and Property & Casualty discussions below.)
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Finance Committee of the
Board of Directors. The notional amounts of derivative contracts represent the
basis upon which pay or receive amounts are calculated and are not reflective of
credit risk. Notional amounts pertaining to derivative instruments for both
general and guaranteed separate accounts at December 31, 2001 and 2000 totaled
$11.2 billion and $8.8 billion, respectively.
The following discussions focus on the key market risk exposures within Life and
Property & Casualty.
LIFE
Interest Rate Risk
- ------------------
Life's general account and guaranteed separate account exposure to interest rate
risk relates to the market price and/or cash flow variability associated with
changes in market interest rates. Changes in interest rates can potentially
impact Life's profitability. In certain scenarios where interest rates are
volatile, Life could be exposed to disintermediation risk and reduction in net
interest rate spread or profit margins.
Life's general account and guaranteed separate account investment portfolios
primarily consist of investment grade, fixed maturity securities, including
corporate bonds, asset-backed securities, commercial mortgage-backed securities,
tax-exempt municipal securities and collateralized mortgage obligations. The
fair value of these and Life's other invested assets fluctuates depending on the
interest rate environment and other general economic conditions. During periods
of declining interest rates, paydowns on mortgage-backed securities and
collateralized mortgage obligations increase as the underlying mortgages are
prepaid. During such periods, the Company generally will not be able to reinvest
the proceeds of any such prepayments at comparable yields. Conversely, during
periods of rising interest rates, the rate of prepayments generally declines,
exposing the Company to the possibility of asset/liability cash flow and yield
mismatch. (For further discussion of the Company's risk management techniques to
manage this market risk, see the "Asset and Liability Management Strategies Used
to Manage Market Risk" discussed below.)
As described above, Life holds a significant fixed maturity portfolio that
includes both fixed and variable rate securities. The following table reflects
the principal amounts of Life's general and guaranteed separate accounts fixed
and variable rate fixed maturity portfolios, along with the respective weighted
average coupons by estimated maturity year at December 31, 2001. Comparative
totals are included as of December 31, 2000.
- 40 -
<PAGE>
Expected maturities differ from contractual maturities due to call or prepayment
provisions. The weighted average coupon ("WAC") on variable rate securities is
based on spot rates as of December 31, 2001 and 2000, and is primarily based on
London Interbank Offered Rate ("LIBOR"). Callable bonds and notes are
distributed to either call dates or maturity, depending on which date produces
the most conservative yield. Asset-backed securities, collateralized mortgage
obligations and mortgage-backed securities are distributed based on estimates of
the rate of future prepayments of principal over the remaining life of the
securities. These estimates are developed using prepayment speeds provided in
broker consensus data. Such estimates are derived from prepayment speeds
previously experienced at the interest rate levels projected for the underlying
collateral. Actual prepayment experience may vary from these estimates.
Financial instruments with certain leverage features have been included in each
of the fixed maturity categories. These instruments have not been separately
displayed because they were immaterial to the Life investment portfolio.
<TABLE>
<CAPTION>
2001 2000
2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALLABLE BONDS
Fixed Rate
Par value $ 17 $ 34 $ 9 $ 52 $ 17 $ 2,795 $ 2,924 $ 1,458
WAC 6.5% 5.2% 6.7% 8.2% 8.3% 3.8% 4.0% 5.5%
Fair value $ 2,445 $ 1,439
Variable Rate
Par value $ 12 $ 24 $ 3 $ 37 $ 9 $ 980 $ 1,065 $ 1,158
WAC 4.0% 3.2% 3.8% 4.1% 5.7% 3.4% 3.4% 7.1%
Fair value $ 972 $ 1,075
- ---------------------------------------------------------------------------------------------------------------------------------
BONDS - OTHER
Fixed Rate
Par value $ 2,531 $ 1,521 $ 1,304 $ 1,680 $ 1,934 $ 9,275 $ 18,245 $ 14,699
WAC 5.8% 6.7% 6.1% 7.4% 6.1% 6.1% 6.2% 6.1%
Fair value $ 17,424 $ 13,409
Variable Rate
Par value $ 211 $ 224 $ 70 $ 248 $ 73 $ 221 $ 1,047 $ 1,235
WAC 4.6% 3.9% 5.2% 4.2% 7.7% 5.8% 4.9% 7.4%
Fair value $ 947 $ 1,108
- ---------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Fixed Rate
Par value $ 462 $ 365 $ 484 $ 264 $ 168 $ 509 $ 2,252 $ 2,343
WAC 6.9% 6.6% 6.3% 6.9% 6.5% 7.7% 6.9% 6.9%
Fair value $ 2,234 $ 2,342
Variable Rate
Par value $ 276 $ 305 $ 380 $ 343 $ 212 $ 880 $ 2,396 $ 2,124
WAC 2.4% 2.8% 2.8% 2.7% 2.7% 2.9% 2.8% 7.3%
Fair value $ 2,333 $ 2,099
- ---------------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 104 $ 116 $ 110 $ 102 $ 95 $ 441 $ 968 $ 1,098
WAC 6.7% 6.1% 6.1% 6.1% 6.1% 6.5% 6.3% 6.4%
Fair value $ 960 $ 1,087
Variable Rate
Par value $ 4 $ 3 $ 3 $ 2 $ 1 $ 2 $ 15 $ 112
WAC 7.9% 6.7% 6.6% 6.7% 6.7% 6.4% 6.9% 5.3%
Fair value $ 16 $ 101
- ---------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES
Fixed Rate
Par value $ 85 $ 69 $ 106 $ 77 $ 198 $ 2,483 $ 3,018 $ 2,606
WAC 7.0% 6.8% 7.1% 6.9% 7.3% 7.1% 7.1% 7.3%
Fair value $ 3,123 $ 2,674
Variable Rate
Par value $ 274 $ 289 $ 242 $ 137 $ 118 $ 441 $ 1,501 $ 1,730
WAC 4.2% 4.1% 4.0% 5.7% 7.1% 7.9% 5.8% 7.9%
Fair value $ 1,498 $ 1,738
=================================================================================================================================
</TABLE>
- 41 -
<PAGE>
<TABLE>
<CAPTION>
2001 2000
2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES
Fixed Rate
Par value $ 159 $ 175 $ 158 $ 128 $ 104 $ 444 $ 1,168 $ 792
WAC 7.0% 6.9% 6.8% 6.8% 6.8% 6.7% 6.8% 7.2%
Fair value $ 1,189 $ 800
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 2 $ 2 $ 3
WAC -- -- -- -- -- 5.4% 5.4% 7.0%
Fair value $ 2 $ 3
===================================================================================================================================
</TABLE>
The table below provides information as of December 31, 2001 on debt obligations
and trust preferred securities and reflects principal cash flows and related
weighted average interest rates by maturity year. Comparative totals are
included as of December 31, 2000.
<TABLE>
<CAPTION>
2001 2000
2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ 200 $ -- $ -- $ 850 $ 1,050 $ 650
Weighted average interest rate -- -- 6.9% -- -- 7.4% 7.3% 7.4%
Fair value $ 1,118 $ 658
TRUST PREFERRED SECURITIES [1]
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 450 $ 450 $ 250
Weighted average interest rate -- -- -- -- -- 7.4% 7.4% 7.4%
Fair value $ 461 $ 245
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Represents Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trusts Holding Solely Junior Subordinated Debentures.
</FN>
</TABLE>
Asset and Liability Management Strategies Used to Manage Market Risk
- --------------------------------------------------------------------
Life employs several risk management tools to quantify and manage market risk
arising from their investments and interest sensitive liabilities. For certain
portfolios, management monitors the changes in present value between assets and
liabilities resulting from various interest rate scenarios using integrated
asset/liability measurement systems and a proprietary system that simulates the
impacts of parallel and non-parallel yield curve shifts. Based on this current
and prospective information, management implements risk reducing techniques to
improve the match between assets and liabilities.
Derivatives play an important role in facilitating the management of interest
rate risk, creating opportunities to efficiently fund obligations, hedge against
risks that affect the value of certain liabilities and adjust broad investment
risk characteristics as a result of any significant changes in market risks. As
an end-user of derivatives, Life uses a variety of derivatives, including swaps,
caps, floors, forwards and exchange-traded financial futures and options, in
order to hedge exposure primarily to interest rate risk on anticipated
investment purchases or existing assets and liabilities. At December 31, 2001,
notional amounts pertaining to derivatives totaled $9.9 billion ($8.2 billion
related to insurance investments and $1.7 billion related to life insurance
liabilities). Notional amounts pertaining to derivatives totaled $8.5 billion at
December 31, 2000 ($6.5 billion related to insurance investments and $2.0
billion related to life insurance liabilities).
The economic objectives and strategies for which the Company utilizes
derivatives are categorized as follows:
Anticipatory Hedging -- For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit.
Anticipatory hedges are executed to offset the impact of changes in asset prices
arising from interest rate changes pending the receipt of premium or deposit and
the subsequent purchase of an asset. These hedges involve taking a long position
(purchase) in interest rate futures or entering into an interest rate swap with
duration characteristics equivalent to the associated liabilities or anticipated
investments. The notional amounts of anticipatory hedges as of December 31, 2001
and 2000 were $320 and $144, respectively.
Liability Hedging -- Several products obligate the Company to credit a return to
the contract holder which is indexed to a market rate. To hedge risks associated
with these products, the Company enters into various derivative contracts.
Interest rate swaps are used to convert the contract rate into a rate that
trades in a more liquid and efficient market. This hedging strategy enables the
Company to customize contract terms and conditions to customer objectives and
satisfies the operation's asset/liability matching policy. In addition, interest
rate swaps are used to convert certain variable contract rates to different
variable rates, thereby allowing them to be appropriately
- 42 -
<PAGE>
matched against variable rate assets. Finally, interest rate caps and option
contracts are used to hedge against the risk of contract holder
disintermediation in a rising interest rate environment. The notional amounts of
derivatives used for liability hedging as of December 31, 2001 and 2000 were
$1.7 billion and $2.0 billion, respectively.
Asset Hedging -- To meet the various policyholder obligations and to provide
cost-effective, prudent investment risk diversification, the Company may combine
two or more financial instruments to achieve the investment characteristics of a
fixed maturity security or that match an associated liability. The use of
derivative instruments in this regard effectively transfers unwanted investment
risks or attributes to others. The selection of the appropriate derivative
instruments depends on the investment risk, the liquidity and efficiency of the
market, and the asset and liability characteristics. The notional amounts of
asset hedges as of December 31, 2001 and 2000 were $6.8 billion and $5.4
billion, respectively.
Portfolio Hedging -- The Company periodically compares the duration and
convexity of its portfolios of assets to its corresponding liabilities and
enters into portfolio hedges to reduce any difference to desired levels.
Portfolio hedges reduce the duration and convexity mismatch between assets and
liabilities and offset the potential impact to cash flows caused by changes in
interest rates. The notional amounts of portfolio hedges as of December 31, 2001
and 2000 were $1.1 and $1.0 billion, respectively.
The following tables provide information as of December 31, 2001 with
comparative totals for December 31, 2000 on derivative instruments used in
accordance with the aforementioned hedging strategies. For interest rate swaps,
caps and floors, the tables present notional amounts with weighted average pay
and receive rates for swaps and weighted average strike rates for caps and
floors by maturity year. For interest rate futures, the table presents contract
amount and weighted average settlement price by expected maturity year. For
option contracts, the table presents contract amount by expected maturity year.
<TABLE>
<CAPTION>
2001 2000
INTEREST RATE SWAPS 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable
Notional value $ 90 $ 198 $ 35 $ 140 $ 50 $ 794 $ 1,307 $ 1,031
Weighted average pay rate 5.9% 5.1% 6.1% 7.5% 6.7% 7.0% 6.5% 6.6%
Weighted average receive rate 2.1% 2.3% 2.2% 2.2% 2.4% 2.2% 2.2% 6.8%
Fair value $ (65) $ (43)
Pay Variable/Receive Fixed
Notional value $ 204 $ 518 $ 1,299 $ 935 $ 797 $ 1,327 $ 5,080 $ 4,886
Weighted average pay rate 2.1% 2.0% 2.2% 2.1% 2.0% 2.1% 2.1% 7.0%
Weighted average receive rate 5.9% 5.4% 5.6% 6.0% 5.7% 6.3% 5.8% 6.6%
Fair value $ 194 $ 78
Pay Variable/Receive Different Variable
Notional value $ 5 $ 2 $ 150 $ 11 $ -- $ 251 $ 419 $ 278
Weighted average pay rate 5.4% 2.2% 3.3% 4.0% -- 3.1% 3.2% 6.6%
Weighted average receive rate 3.0% 1.9% 3.0% 1.2% -- 5.5% 4.4% 4.9%
Fair value $ (48) $ (1)
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
2001 2000
INTEREST RATE CAPS - LIBOR BASED 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchased
Notional value $ 10 $ 54 $ -- $ 77 $ -- $ 30 $ 171 $ 171
Weighted average strike rate
(8.0 - 9.9%) 8.9% 8.5% -- 8.4% -- 8.3% 8.5% 8.5%
Fair value $ 1 $ 1
Notional value $ 19 $ -- $ -- $ -- $ -- $ -- $ 19 $ 19
Weighted average strike rate
(10.0 - 11.9%) 10.1% -- -- -- -- -- 10.1% 10.1%
Fair value $ -- $ --
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
2001 2000
INTEREST RATE CAPS - CMT BASED [1] 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchased
Notional value $ -- $ 250 $ -- $ 250 $ -- $ -- $ 500 $ 500
Weighted average strike rate
(8.0 - 9.9%) -- 8.7% -- 8.7% -- -- 8.7% 8.7%
Fair value $ 3 $ --
===================================================================================================================================
<FN>
[1] CMT represents the Constant Maturity Treasury Rate.
</FN>
</TABLE>
- 43 -
<PAGE>
<TABLE>
<CAPTION>
2001 2000
INTEREST RATE FLOORS - LIBOR BASED 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchased
Notional value $ -- $ -- $ 27 $ -- $ -- $ -- $ 27 $ 27
Weighted average strike rate
(6.0 - 7.9%) -- -- 7.9% -- -- -- 7.9% 7.9%
Fair value $ 3 $ 2
Issued
Notional value $ 28 $ 54 $ 34 $ 77 $ -- $ -- $ 193 $ 193
Weighted average strike rate
(4.0 - 5.9%) 5.3% 5.4% 5.3% 5.3% -- -- 5.3% 5.3%
Fair value $ (8) $ (2)
Notional value $ -- $ -- $ 27 $ -- $ -- $ -- $ 27 $ 27
Weighted average strike rate
(6.0 - 7.9%) -- -- 7.8% -- -- -- 7.8% 7.8%
Fair value $ (3) $ (2)
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
2001 2000
INTEREST RATE FLOORS - CMT BASED [1] 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchased
Notional value $ -- $ 150 $ -- $ -- $ -- $ -- $ 150 $ 150
Weighted average strike rate
(4.0 - 5.9%) -- 5.5% -- -- -- -- 5.5% 5.5%
Fair value $ 5 $ 3
===================================================================================================================================
<FN>
[1] CMT represents the Constant Maturity Treasury Rate.
</FN>
</TABLE>
<TABLE>
<CAPTION>
2001 2000
INTEREST RATE FUTURES 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long
Contract amount/notional $ 266 $ -- $ -- $ -- $ -- $ -- $ 266 $ 198
Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 105
Short
Contract amount/notional $ 25 $ -- $ -- $ -- $ -- $ -- $ 25 $ 59
Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 105
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
2001 2000
OPTION CONTRACTS 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long
Contract amount/notional $ -- $ 119 $ 107 $ 45 $ 324 $ 128 $ 723 $ 589
Fair value 28 $ 6
Short
Contract amount/notional $ 39 $ 178 $ 427 $ 137 $ 245 $ 30 $1,056 $ 362
Fair value $ (61) $ (40)
===================================================================================================================================
</TABLE>
Currency Exchange Risk
- ----------------------
As of December 31, 2001, Life had immaterial currency exposures resulting from
its international operations.
Life Product Liability Characteristics
- --------------------------------------
Life's product liabilities, other than non-guaranteed separate accounts, include
accumulation vehicles such as fixed and variable annuities, other investment and
universal life-type contracts, and other insurance products such as long-term
disability and term life insurance.
Asset Accumulation Vehicles
While interest rate risk associated with these insurance products has been
reduced through the use of market value adjustment features and surrender
charges, the primary risk associated with these products is that the spread
between investment return and credited rate may not be sufficient to earn
targeted returns.
Fixed Rate -- Products in this category require the payment of a fixed rate for
a certain period of time. The cash flows are not interest sensitive because the
products are written with a market value adjustment feature and the liabilities
have protection against the early withdrawal of funds through surrender charges.
Product examples include fixed rate annuities with a market value adjustment and
fixed rate guaranteed investment contracts. Contract duration is dependent on
the policyholder's choice of guarantee period.
Indexed -- Products in this category are similar to the fixed rate asset
accumulation vehicles but require the life operations to pay a rate that is
determined by an external index. The amount and/or timing of cash flows will
therefore vary based on the level of the particular index. The primary risks
inherent in these products are similar to the fixed rate asset accumulation
vehicles, with the additional risk that changes in the index may adversely
affect profitability. Product examples include indexed-guaranteed investment
contracts with an estimated duration of up to two years.
- 44 -
<PAGE>
Interest Credited -- Products in this category credit interest to policyholders,
subject to market conditions and minimum guarantees. Policyholders may surrender
at book value but are subject to surrender charges for an initial period.
Product examples include universal life contracts and the general account
portion of Life's variable annuity products. Liability duration is short- to
intermediate-term.
Other Insurance Products
Long-term Pay Out Liabilities -- Products in this category are long-term in
nature and may contain significant actuarial (including mortality and morbidity)
pricing and cash flow risks. The cash flows associated with these policy
liabilities are not interest rate sensitive but do vary based on the timing and
amount of benefit payments. The primary risks associated with these products are
that the benefits will exceed expected actuarial pricing and/or that the actual
timing of the cash flows differ from those anticipated, resulting in an
investment return lower than that assumed in pricing. Product examples include
structured settlement contracts, on-benefit annuities (i.e., the annuitant is
currently receiving benefits thereon) and long-term disability contracts.
Contract duration is generally five to ten years.
Short-term Pay Out Liabilities -- These liabilities are short-term in nature
with a duration of less than one year. The primary risks associated with these
products are determined by the non-investment contingencies such as mortality or
morbidity and the variability in the timing of the expected cash flows.
Liquidity is of greater concern than for the long-term pay out liabilities.
Products include individual and group term life insurance contracts and
short-term disability contracts.
Management of the duration of investments with respective policyholder
obligations is an explicit objective of Life's management strategy. The
estimated cash flows of insurance policy liabilities based upon internal
actuarial assumptions as of December 31, 2001 are reflected in the table below
by expected maturity year. Comparative totals are included for December 31,
2000.
<TABLE>
<CAPTION>
(dollars in billions)
2001 2000
DESCRIPTION [1] 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate asset accumulation vehicles $ 1.0 $ 1.3 $ 2.9 $ 3.0 $ 2.3 $ 5.3 $ 15.8 $ 10.4
Weighted average credited rate 5.3% 5.5% 6.5% 6.1% 5.7% 5.8% 5.9% 6.7%
Indexed asset accumulation vehicles $ 0.6 $ 0.1 $ -- $ -- $ -- $ 0.1 $ 0.8 $ 0.7
Weighted average credited rate 6.5% 6.5% -- -- -- 6.5% 6.5% 6.3%
Interest credited asset accumulation
vehicles $ 4.7 $ 0.5 $ 0.5 $ 0.2 $ 0.2 $ 2.0 $ 8.1 $ 10.1
Weighted average credited rate 6.2% 4.6% 4.5% 5.5% 5.5% 5.4% 5.7% 5.9%
Long-term pay out liabilities $ 1.0 $ 0.5 $ 0.7 $ 0.6 $ 0.5 $ 5.3 $ 8.6 $ 6.5
Short-term pay out liabilities $ 0.9 $ 0.1 $ -- $ -- $ -- $ -- $ 1.0 $ 0.9
===================================================================================================================================
<FN>
[1] As of December 31, 2001 and 2000, the fair values of Life's investment
contracts, including guaranteed separate accounts, were $26.0 billion and
$21.4 billion, respectively.
</FN>
</TABLE>
Sensitivity to Changes in Interest Rates
- ----------------------------------------
For liabilities whose cash flows are not substantially affected by changes in
interest rates ("fixed liabilities") and where investment experience is
substantially absorbed by Life, the sensitivity of the net economic value
(discounted present value of asset cash flows less the discounted present value
of liability cash flows) of those portfolios to 100 basis point shifts in
interest rates are shown in the following table.
Change in Net Economic Value
2001 2000
------------------------------------------
Basis point shift - 100 + 100 - 100 + 100
- ----------------------------------------------------------------------
Amount $ 6 $ (31) $ (15) $ (27)
Percent of liability value 0.03% (0.16)% (0.09)% (0.16)%
======================================================================
These fixed liabilities represented about 61% and 60% of Life's general and
guaranteed separate account liabilities at December 31, 2001 and 2000,
respectively. The remaining liabilities generally allow Life significant
flexibility to adjust credited rates to reflect actual investment experience and
thereby pass through a substantial portion of actual investment experience to
the policyholder. The fixed liability portfolios are managed and monitored
relative to defined objectives and are analyzed regularly by management for
internal risk management purposes using scenario simulation techniques, and are
evaluated on an annual basis, in compliance with regulatory requirements.
PROPERTY & CASUALTY
Interest Rate Risk
- ------------------
The primary exposure to interest rate risk in Property & Casualty relates to its
fixed maturity investments. Changes in market interest rates directly impact the
market value of the fixed maturity securities. In addition, but to a lesser
extent, interest rate risk exists on debt and trust preferred securities issued.
Derivative instruments are used to manage interest rate risk and had a total
notional amount as of December 31, 2001 and 2000 of $1.3 billion and $318,
respectively.
The principal amounts of the fixed and variable rate fixed maturity portfolios,
along with the respective weighted average coupons by estimated maturity year at
December 31, 2001, are reflected in the following table. Comparative totals are
included as of December 31, 2000. Expected maturities differ from contractual
maturities due to call or prepayment provisions. The WAC on variable rate
securities is based on spot rates as of December 31, 2001 and 2000, and is based
primarily on LIBOR. Callable bonds and notes are primarily municipal bonds, and
are distributed to either call dates or maturity depending on which date
produces the most conservative yield. Asset-backed securities, collateralized
mortgage obligations and mortgage-backed securities are distributed based on
estimates of the rate of future prepayments of principal over the remaining life
of the
- 45 -
<PAGE>
securities. These estimates are developed using prepayment speeds contained in
broker consensus data. Such estimates are derived from prepayment speeds
previously experienced at interest rate levels projected for the underlying
collateral. Actual prepayment experience may vary from these estimates.
Financial instruments with certain leverage features have been included in each
of the fixed maturity categories. These instruments have not been separately
displayed, as they were immaterial to Property & Casualty's investment
portfolio.
<TABLE>
<CAPTION>
2001 2000
2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALLABLE BONDS
Fixed Rate
Par value $ 14 $ 12 $ 53 $ 148 $ 273 $ 7,124 $ 7,624 $ 7,311
WAC 5.9% 5.8% 5.7% 5.6% 5.5% 5.3% 5.3% 5.4%
Variable Rate
Par value $ 1 $ 1 $ 1 $ 15 $ 5 $ 243 $ 266 $ 282
WAC 4.0% 4.0% 4.0% 6.6% 6.1% 5.3% 5.4% 6.5%
Fair value $ 214 $ 227
- ---------------------------------------------------------------------------------------------------------------------------------
BONDS - OTHER
Fixed Rate
Par value $ 1,050 $ 311 $ 465 $ 566 $ 743 $ 3,278 $ 6,413 $ 6,175
WAC 5.9% 6.5% 6.8% 7.0% 6.2% 6.4% 6.4% 6.2%
Fair value $ 6,297 $ 5,967
Variable Rate
Par value $ 38 $ 2 $ 51 $ 1 $ 1 $ 175 $ 268 $ 128
WAC 4.9% 5.4% 3.2% 5.0% 5.2% 5.2% 4.8% 4.8%
Fair value $ 231 $ 88
- ---------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Fixed Rate
Par value $ 51 $ 59 $ 75 $ 95 $ 64 $ 226 $ 570 $ 626
WAC 8.0% 7.2% 6.5% 6.6% 7.0% 7.7% 7.2% 7.4%
Fair value $ 549 $ 620
Variable Rate
Par value $ 10 $ 5 $ 39 $ 9 $ 19 $ 109 $ 191 $ 155
WAC 5.0% 3.7% 2.9% 3.3% 3.1% 4.1% 3.8% 7.9%
Fair value $ 168 $ 141
- ---------------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 15 $ 14 $ 18 $ 12 $ 7 $ 21 $ 87 $ 222
WAC 6.9% 6.9% 7.1% 7.0% 6.9% 6.2% 6.8% 6.6%
Fair value $ 88 $ 219
Variable Rate
Par value $ 1 $ 1 $ 1 $ 1 $ 1 $ 3 $ 8 $ 18
WAC 15.5% 15.4% 15.3% 15.1% 15.0% 14.4% 15.1% 5.6%
Fair value $ 9 $ 17
- ---------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES
Fixed Rate
Par value $ 19 $ 14 $ 19 $ 10 $ 19 $ 626 $ 707 $ 689
WAC 7.0% 6.7% 7.1% 7.1% 7.4% 7.1% 7.1% 7.2%
Fair value $ 728 $ 697
Variable Rate
Par value $ 84 $ 76 $ 34 $ 47 $ 21 $ 148 $ 410 $ 441
WAC 4.2% 4.2% 6.0% 6.3% 7.9% 8.3% 6.2% 8.1%
Fair value $ 417 $ 444
- ---------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
Fixed Rate
Par value $ 47 $ 51 $ 49 $ 39 $ 33 $ 160 $ 379 $ 313
WAC 6.8% 6.7% 6.6% 6.6% 6.6% 6.6% 6.6% 7.2%
Fair value $ 381 $ 315
=================================================================================================================================
</TABLE>
- 46 -
<PAGE>
The following table provides information as of December 31, 2001 on interest
rate swaps used to manage interest rate risk on fixed maturities and trust
preferred securities and presents notional amounts with weighted average pay and
receive rates by maturity year. Comparative totals are included as of December
31, 2000. The weighted average rates are based on spot rates as of December 31,
2001 and 2000.
<TABLE>
<CAPTION>
2001 2000
INTEREST RATE SWAPS 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay Variable/Receive Fixed
Notional value $ 10 $ -- $ 35 $ -- $ -- $ 500 $ 545 $ 45
Weighted average pay rate 2.0% -- 2.0% -- -- 3.2% 3.1% 6.7%
Weighted average receive rate 6.5% -- 6.7% -- -- 7.5% 7.4% 6.7%
Fair value $ (29) $ 1
Pay Variable/Receive Different Variable
Notional value $ 226 $ -- $ -- $ -- $ -- $ 230 $ 456 $ 273
Weighted average pay rate 1.8% -- -- -- -- 3.1% 2.5% 6.5%
Weighted average receive rate 6.7% -- -- -- -- 5.5% 6.1% 6.9%
Fair value $ (54) $ 5
=================================================================================================================================
</TABLE>
Property & Casualty uses option contracts to hedge fixed maturity investments
that totaled $252 in notional value and $1 in carrying value as of December 31,
2001. There were no option contracts in use as of December 31, 2000.
The table below provides information as of December 31, 2001 on debt obligations
and trust preferred securities and reflects principal cash flows and related
weighted average interest rates by maturity year. Comparative totals are
included as of December 31, 2000.
<TABLE>
<CAPTION>
2001 2000
2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM DEBT
Fixed Rate
Amount $ 599 $ -- $ -- $ -- $ -- $ -- $ 599 $ 235
Weighted average interest rate 4.2% -- -- -- -- -- 4.2% 8.1%
Fair value $ 607 $ 238
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 400 $ 400 $ 700
Weighted average interest rate -- -- -- -- -- 6.8% 6.8% 6.6%
Fair value $ 401 $ 689
TRUST PREFERRED SECURITIES [1]
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $1,000 $1,000 $ 1,000
Weighted average interest rate -- -- -- -- -- 7.6% 7.6% 8.0%
Fair value $ 968 $ 988
=================================================================================================================================
<FN>
[1] Represents Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trusts Holding Solely Junior Subordinated Debentures.
</FN>
</TABLE>
Equities Price Risk
- -------------------
Property & Casualty holds a diversified portfolio of investments in equity
securities representing firms in various countries, industries and market
segments ranging from small market capitalization stocks to Standard & Poor's
500 stocks. The risk associated with these securities relates to potential
decreases in value resulting from changes in equity prices.
The following table reflects equity securities owned at December 31, 2001 and
2000, grouped by major market type.
2001 2000
-------------------------------------------
FAIR VALUE PERCENT FAIR VALUE PERCENT
- --------------------------------------------------------------------
EQUITY SECURITIES
Domestic
Large cap $ 393 42.7% $ 521 58.9%
Midcap/small cap 342 37.1% 179 20.2%
Foreign
EAFE [1]/ Canadian 184 20.0% 185 20.9%
Emerging 2 0.2% -- --
- --------------------------------------------------------------------
TOTAL $ 921 100.0% $ 885 100.0%
====================================================================
[1] Europe, Australia, Far East countries index.
- 47 -
<PAGE>
Currency Exchange Risk
- ----------------------
As of December 31, 2001, Property & Casualty had immaterial currency exposures
resulting from its international operations.
Currency exchange risk also exists with respect to investments in foreign equity
securities. Forward foreign contracts with a notional amount of $7 and $8 were
used to manage this risk at December 31, 2001 and 2000, respectively.
CORPORATE
Interest Rate Risk
- ------------------
The primary exposure to interest rate risk in Corporate relates to the debt
issued in connection with The HLI Repurchase. Corporate also has $3 in fixed
maturity security investments that represent an immaterial interest rate
exposure.
The table below provides information as of December 31, 2001 on Corporate's debt
obligations and reflects principal cash flows and related weighted average
interest rates by maturity year.
<TABLE>
<CAPTION>
2001 2000
2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ 250 $ -- $ 275 $ 525 $ 525
Weighted average interest rate -- -- -- 7.8% -- 7.9% 7.8% 7.8%
Fair value $ 563 $ 554
=================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
Capital resources and liquidity represent the overall financial strength of The
Hartford and its ability to generate strong cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The capital structure of The Hartford as of December 31, 2001 and 2000
consisted of debt and equity, and as of December 31, 1999 also consisted of
minority interest, summarized as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term debt $ 599 $ 235 $ 31
Long-term debt 1,965 1,862 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debentures (trust preferred securities) 1,412 1,243 1,250
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 3,976 $ 3,340 $ 2,829
-------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ -- $ -- $ 491
-------------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain (loss) on securities and other, net of tax [2] $ 8,344 $ 6,967 $ 5,664
Unrealized gain (loss) on securities and other, net of tax [2] 669 497 (198)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 9,013 $ 7,464 $ 5,466
-------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [3] $12,320 $10,307 $ 8,984
-------------------------------------------------------------------------------------------------------------------------------
Debt to equity [3] [4] 48% 48% 50%
Debt to capitalization [3] [4] 32% 32% 31%
====================================================================================================================================
<FN>
[1] Excludes unrealized gain (loss) on securities, net of tax, of $(62) as of
December 31, 1999.
[2] Other represents the net gain on cash-flow hedging instruments as a result
of the Company's adoption of SFAS No. 133.
[3] Excludes unrealized gain (loss) on securities, net of tax.
[4] Excluding trust preferred securities, the debt to equity ratio was 31%,
30% and 28%, and the debt to capitalization ratio was 21%, 20% and 18% as
of December 31, 2001, 2000 and 1999, respectively.
</FN>
</TABLE>
CONTRACTUAL OBLIGATION AND COMMITMENTS
The following table identifies the Company's contractual obligations by payment
due period.
<TABLE>
<CAPTION>
2002 2003 2004 2005 2006 THEREAFTER TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term debt $ 599 $ -- $ -- $ -- $ -- $ -- $ 599
Long-term debt -- -- 200 250 -- 1,525 1,975
Trust preferred securities -- -- -- -- -- 1,450 1,450
- ---------------------------------------------------------------------------------------------------------------------
Total debt $ 599 $ -- $ 200 $ 250 $ -- $ 2,975 $ 4,024
Operating leases 131 112 98 84 69 194 688
- ---------------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 730 $ 112 $ 298 $ 334 $ 69 $ 3,169 $ 4,712
=====================================================================================================================
</TABLE>
In addition to the contractual obligations above, The Hartford had certain
unfunded commitments at December 31, 2001 to fund limited partnership
investments totaling $375. These capital commitments can be called by the
partnerships during
- 48 -
<PAGE>
the commitment period (on average, 3-6 years) to fund working capital needs or
the purchase of new investments. If the commitment period expires and the
commitment has not been fully funded, The Hartford is not required to fund the
remaining unfunded commitment but may elect to do so.
ACQUISITIONS
Fortis
On April 2, 2001, The Hartford acquired Fortis Financial Group for $1.12 billion
in cash. The Company effected the acquisition through several reinsurance
agreements with subsidiaries of Fortis, Inc. and the purchase of 100% of the
stock of Fortis Advisers, Inc. and Fortis Investors, Inc., wholly-owned
subsidiaries of Fortis, Inc. The acquisition was recorded as a purchase
transaction.
Purchase consideration for the transaction was as follows:
Issuance of:
- ------------
Common stock issuance (10 million shares
@ $64.00 per share), net of transaction costs $ 615
Long-term notes:
$400 7.375% notes due March 1, 2031 400
Trust preferred securities:
$200 7.625% Trust Preferred Securities (Series B)
due February 15, 2050 200
- -----------------------------------------------------------------------
Consideration raised $ 1,215
=======================================================================
For a further discussion of the Fortis Acquisition, see Note 18(a) of Notes to
Consolidated Financial Statements.
HLI Repurchase
On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI
that it did not already own. The HLI Repurchase was recorded as a purchase
transaction.
Purchase consideration for the transaction was as follows:
Issuance of:
- ------------
Common stock from treasury (7.25 million shares
@ $54.90 per share) $ 398
Long-term notes:
$250 7.75% notes due June 15, 2005 244
$275 7.90% notes due June 15, 2010 272
Commercial paper 400
- -----------------------------------------------------------------------
Consideration raised 1,314
Other, including conversion of HLI employee
stock options and restricted shares 102
- -----------------------------------------------------------------------
Total consideration $ 1,416
- -----------------------------------------------------------------------
For a further discussion of the HLI Repurchase, see Note 16 of Notes to
Consolidated Financial Statements.
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain (loss) on
securities and other, net of tax, increased by $2.0 billion as of December 31,
2001 compared to December 31, 2000. This change was primarily the result of
earnings and financing activities related to Fortis and September 11, partially
offset by dividends declared.
The Hartford's total capitalization, excluding unrealized gain (loss) on
securities and other, net of tax, increased by $1.3 billion as of December 31,
2000 compared to December 31, 1999. This change was primarily the result of
earnings and financing activities related to The HLI Repurchase, partially
offset by dividends declared and the effect of treasury stock acquired in the
first quarter of 2000.
SHELF REGISTRATION
On May 15, 2001, HLI filed with the SEC a shelf registration statement for the
potential offering and sale of up to $1.0 billion in debt and preferred
securities. The registration statement was declared effective on May 29, 2001.
As of December 31, 2001, HLI had $1.0 billion remaining on its shelf.
On November 9, 2000, The Hartford filed with the Securities and Exchange
Commission a shelf registration statement and a prospectus, as amended on
January 31, 2001, for the potential offering and sale of up to $2.6 billion in
debt and equity securities. As of December 31, 2001, The Hartford had $1.1
billion remaining on its shelf.
For a further discussion of the shelf registration statements, see Note 6 of
Notes to Consolidated Financial Statements.
DEBT
The Hartford has a commercial paper program which allows the Company to borrow
up to a maximum amount of $2.0 billion in short-term commercial paper notes. As
of December 31, 2001, the Company had $299 of outstanding borrowings under the
program.
Effective June 20, 2001, The Hartford entered into an amended and restated
five-year revolving $1.0 billion credit facility with fourteen banks. This
facility is available for general corporate purposes and to provide additional
support to the Company's commercial paper program. As of December 31, 2001,
there were no outstanding borrowings under the facility.
HLI has a commercial paper program which allows it to borrow up to a maximum
amount of $250 in short-term commercial paper notes. As of December 31, 2001,
HLI had no outstanding borrowings under the program.
As of December 31, 2001, HLI maintained a $250 five-year revolving credit
facility comprised of four participatory banks. As of December 31, 2001, there
were no outstanding borrowings under the facility.
On December 1, 2001, The Hartford's 8.3% medium term notes became due. The
Company borrowed $200 under its commercial paper program to retire the debt.
On March 1, 2001, HLI issued and sold $400 of senior debt securities to
partially finance the Fortis acquisition.
On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable
long-term debt. On June 23, 2000, The Hartford issued $400 of commercial paper.
Proceeds from the debt issuances were used to partially fund The HLI Repurchase.
The Company used proceeds from the sale of Zwolsche to pay off the $400 of
commercial paper on December 29, 2000.
- 49 -
<PAGE>
For additional information regarding debt, see Note 6 of Notes to Consolidated
Financial Statements.
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST PREFERRED
SECURITIES)
On December 31, 2001, The Hartford redeemed its 20,000,000 Series B, 8.35%
Cumulative Quarterly Income Preferred Securities due October 30, 2026 for $500.
The Company used proceeds from its October 26, 2001 issuance of 7.45% Trust
Originated Preferred Securities, Series C to redeem the securities.
On October 26, 2001, Hartford Capital III, a Delaware statutory business trust
formed by The Hartford, issued 20,000,000, 7.45% Trust Originated Preferred
Securities, Series C and received proceeds before underwriting expenses of $500.
On March 6, 2001, HLI issued and sold $200 of trust preferred securities to
partially finance the Fortis acquisition.
For a further discussion of Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures,
see Note 7 of Notes to Consolidated Financial Statements.
STOCKHOLDERS' EQUITY
Issuance of common stock - As a result of September 11, on October 22, 2001, The
Hartford issued 7.0 million shares of common stock pursuant to an underwritten
offering for net proceeds of $400.
Issuance of common stock-Fortis Financial Group acquisition - On February 16,
2001, The Hartford issued 10 million shares of common stock pursuant to an
underwritten offering for net proceeds of $615 to partially fund the Fortis
Financial Group acquisition.
Issuance of common stock from treasury - On June 8, 2000, The Hartford issued
7.25 million shares of common stock in a block trade to Goldman, Sachs & Co. for
$398. The shares were issued out of treasury. The Hartford used the net proceeds
from the issuance of the shares to partially fund The HLI Repurchase.
Dividends - The Hartford declared $242 and paid $235 in dividends to
shareholders in 2001, declared $214 and paid $210 in 2000 and declared $209 and
paid $207 in 1999.
On October 18, 2001, The Hartford's Board of Directors declared a quarterly
dividend of $0.26 per share payable on January 2, 2002 to shareholders of record
as of December 3, 2001. The dividend represented a 4% increase from the prior
quarter.
Treasury Stock - In October 1999, The Hartford's Board of Directors authorized
the repurchase of up to $1.0 billion of the Company's outstanding common stock.
This repurchase authorization was effective in November 1999 and covers a
three-year period. On the first two trading days following September 11, The
Hartford repurchased 0.1 million shares of its common stock in the open market
at a total cost of $7. These were the Company's only repurchases in 2001. Since
the inception of the 1999 repurchase program, The Hartford has repurchased 6.1
million shares at a total cost of $250. Certain of these repurchased shares have
been reissued pursuant to certain stock-based benefit plans.
Unrealized Gain (Loss) and Other - Unrealized gain (loss) on securities and
other, net of tax, increased by $172 as of December 31, 2001 compared to
December 31, 2000. The change resulted primarily from the impact of decreased
interest rates on the fixed maturity portfolio and the net gain on cash-flow
hedging instruments.
For additional information on stockholders' equity, see Note 8 of Notes to
Consolidated Financial Statements.
RATINGS
The following table summarizes The Hartford's significant United States member
companies' financial ratings from the major independent rating organizations as
of February 28, 2002.
- --------------------------------------------------------------------
A.M. STANDARD
BEST FITCH & POOR'S MOODY'S
- --------------------------------------------------------------------
Insurance Ratings:
Hartford Fire A+ AA AA Aa3
Hartford Life Insurance
Company A+ AA+ AA Aa3
Hartford Life & Accident A+ AA+ AA Aa3
Hartford Life & Annuity A+ AA+ AA Aa3
- --------------------------------------------------------------------
OTHER RATINGS:
The Hartford Financial
Services Group, Inc.:
Senior debt a+ A+ A A2
Commercial paper AMB-1 F-1 A-1 P-1
Hartford Capital I
quarterly income
preferred securities [1] a- A BBB+ A3
Hartford Capital III trust
originated preferred
securities [1] a- A BBB+ A3
Hartford Life, Inc.:
Senior debt a+ A+ A A2
Commercial paper -- F-1 A-1 P-1
Hartford Life, Inc.:
Capital I and II trust
preferred securities [1] a- A BBB+ A3
- --------------------------------------------------------------------
[1] In 2001, Moody's Investor Service recalibrated its rating scale for
preferred stock and subordinated bonds to increase comparability of credit
risk assessments across sectors of fixed income markets globally. The
recalibration represents a change in Moody's overall rating system for
preferred stocks and subordinated bonds but not a change in its risk
assessment of an issuer's fundamental credit quality. The Company's
preferred securities ratings were changed from A2 to A3 as a result of the
recalibration.
Ratings are an important factor in establishing the competitive position of an
insurance company such as The Hartford. There can be no assurance that the
Company's ratings will continue for any given period of time or that they will
not be changed.
As a result of September 11 and subsequent reviews by major independent rating
agencies, all insurance financial strength and debt ratings of The Hartford were
reaffirmed. However, negative outlooks were placed upon the debt ratings of the
Company by Moody's and the property and casualty financial strength rating by
Standard & Poor's. All other ratings were reaffirmed with stable outlooks.
- 50 -
<PAGE>
LIQUIDITY REQUIREMENTS
The liquidity requirements of The Hartford have been and will continue to be met
by funds from operations as well as the issuance of commercial paper, debt
securities and borrowings from its credit facility. The principal sources of
operating funds are premiums and investment income as well as maturities and
sales of invested assets. The Hartford Financial Services Group, Inc. is a
holding company which receives operating cash flow in the form of dividends from
its subsidiaries, enabling it to service debt, pay dividends on its common stock
and pay certain business expenses.
Dividends to The Hartford Financial Services Group, Inc. from its subsidiaries
are restricted. The payment of dividends by Connecticut-domiciled insurers is
limited under the insurance holding company laws of Connecticut. Under these
laws, the insurance subsidiaries may only make their dividend payments out of
restricted surplus. These laws require notice to and approval by the state
insurance commissioner for the declaration or payment of any dividend, which,
together with other dividends or distributions made within the preceding twelve
months, exceeds the greater of (i) 10% of the insurer's policyholder surplus as
of December 31 of the preceding year or (ii) net income (or net gain from
operations, if such company is a life insurance company) for the twelve-month
period ending on the thirty-first day of December last preceding, in each case
determined under statutory insurance accounting policies. In addition, if any
dividend of a Connecticut-domiciled insurer exceeds the insurer's earned
surplus, it requires the prior approval of the Connecticut Insurance
Commissioner.
The insurance holding company laws of the other jurisdictions in which The
Hartford's insurance subsidiaries are incorporated (or deemed commercially
domiciled) generally contain similar (although in certain instances somewhat
more restrictive) limitations on the payment of dividends.
As of December 31, 2001, the maximum amount of statutory dividends which may be
paid to The Hartford Financial Services Group, Inc. from its insurance
subsidiaries in 2002, without prior regulatory approval, is $577.
The primary uses of funds are to pay claims, policy benefits, operating expenses
and commissions, and to purchase new investments. In addition, The Hartford has
a policy of carrying a significant short-term investment position and
accordingly does not anticipate selling intermediate- and long-term fixed
maturity investments to meet any liquidity needs. (For a discussion of the
Company's investment objectives and strategies, see the Investments and Capital
Markets Risk Management sections.)
FUTURE TERRORISM EXPOSURES
The September 11 terrorist attack had a significant impact on The Hartford and
the insurance industry as a whole. Since that time, The Hartford has taken steps
to limit future exposure to terrorist acts. These steps include attaching
terrorist exclusions to our policies wherever possible and identifying and
managing concentrated exposures by location and dividing the exposures into
terrorism risk classes. The Hartford and the industry continue to support the
development of Federal legislation to provide a federal insurance program, which
would help share in potential losses from terrorism. However, in the absence of
a federally backed capital resource or availability of adequate reinsurance
coverage and despite the steps already taken to limit exposure, The Hartford may
not have the capacity to cover future large-scale terrorist acts such as
nuclear, chemical or biological attacks. In addition, losses related to future
terrorist attacks could negatively impact the Company's financial strength and
debt ratings. As a result, any losses related to future terrorist attacks could
have a material impact to the liquidity, financial condition and results of
operation of The Hartford.
CASH FLOW
- --------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------
Net cash provided by
operating activities $ 2,303 $ 2,435 $ 954
Net cash provided by (used
for) investing activities $ (5,536) $ (2,164) $ 2,216
Net cash provided by (used
for) financing activities $ 3,365 $ (208) $ (3,104)
Cash - end of year $ 353 $ 227 $ 182
====================================================================
2001 COMPARED TO 2000 -- The increase in cash from financing activities was the
result of current year proceeds on investment type contracts versus the prior
year disbursements for investment type contracts and financing activities
related to Fortis and September 11. Cash provided by financing and operating
activities accounted for the majority of the change in cash for investing
activities. Cash flows from operating activities were comparable with prior
year.
2000 COMPARED TO 1999 -- The increase in operating cash flow was primarily the
result of growth in Life business, along with favorable underwriting cash flows
in Property & Casualty. The decrease in cash used for financing activities was
attributable to net financing for The HLI Repurchase as well as a lower level of
disbursements for investment type contracts related to the leveraged block of
COLI business. The financing activities, along with the increase in cash
provided by operating activities, accounted for the change in cash from
investing activities.
Operating cash flows in each of the last three years have been more than
adequate to meet liquidity requirements.
RISK-BASED CAPITAL
The National Association of Insurance Commissioners ("NAIC") has regulations
establishing minimum capitalization requirements based on risk-based capital
("RBC") formulas for both life and property and casualty companies. The
requirements consist of formulas, which identify companies that are
undercapitalized and require specific regulatory actions. The RBC formula for
life companies establishes capital requirements relating to insurance, business,
asset and interest rate risks. RBC is calculated for property and casualty
companies after adjusting capital for certain underwriting, asset, credit and
off-balance sheet risks. As of December 31, 2001, each of The Hartford's
insurance subsidiaries within Life and Property & Casualty had more than
sufficient capital to meet the NAIC's RBC requirements.
- 51 -
<PAGE>
- --------------------------------------------------------------------------------
REGULATORY MATTERS AND CONTINGENCIES
- --------------------------------------------------------------------------------
LEGISLATIVE INITIATIVES
The business of insurance is primarily regulated by the states and is also
affected by a range of legislative developments at the state and federal levels.
Passage in November 1999 of the Financial Services Modernization Act, which
permits affiliations among banks, insurance companies and securities firms, may
have competitive, operational and other implications for the Company. Among
other provisions, the measure includes privacy protections requiring all
financial service providers to disclose their privacy policies and restrict the
sharing of personal information for marketing purposes. Various states are
considering even more restrictive privacy measures that could potentially affect
the Company's operations.
Enactment of the Financial Services Modernization Act at the federal level has
also focused renewed attention on state regulation of insurance. Elements of the
insurance industry are involved in a countrywide initiative to streamline
regulatory procedures, either through the modification of rate and form filing
requirements or Congressional adoption of optional federal charter legislation.
Federal measures which have been previously considered or enacted by Congress
and which, if revisited, could affect the insurance business, include tax law
changes pertaining to the tax treatment of insurance companies and life
insurance products, as well as changes in individual income tax rates and the
estate tax, a number of which changes could have an impact on the relative
desirability of various personal investment vehicles. Legislation to restructure
the social security system, expand private pension plans, and create new
retirement savings incentives also may be considered. It is too early to
determine the future disposition of any of these proposals. Therefore, the
potential impact to the Company's financial condition or results of operations
cannot be reasonably estimated at this time.
Congress is expected to continue considering terrorism insurance backstop
legislation and proposals to moderate the business community's asbestos
exposure. Both have the potential to reduce claim exposures; however, enactment
of such legislation may not occur in the current Congress. Proposed legislation
to reduce abusive class-action lawsuits would also have a beneficial impact, but
prospects for near-term enactment are likewise uncertain. So-called "patient
protection" legislation introduced in Congress and passed in many states
includes provisions permitting lawsuits against health maintenance organizations
("HMOs") for denial of coverage. Although the Company is not a health insurer or
health care provider, passage of such legislation could affect medical claim
costs to the extent that HMOs were constrained from actively managing care.
INSOLVENCY FUND
In all states, insurers licensed to transact certain classes of insurance are
required to become members of an insolvency fund. In most states, in the event
of the insolvency of an insurer writing any such class of insurance in the
state, members of the fund are assessed to pay certain claims of the insolvent
insurer. A particular state's fund assesses its members based on their
respective written premiums in the state for the classes of insurance in which
the insolvent insurer is engaged. Assessments are generally limited for any year
to one or two percent of premiums written per year depending on the state. Such
assessments paid by The Hartford approximated $6 in 2001, $2 in 2000 and $4 in
1999.
NAIC CODIFICATION
The NAIC adopted the Codification of Statutory Accounting Principles
("Codification") in March 1998. The effective date for the statutory accounting
guidance was January 1, 2001. Each of The Hartford's domiciliary states has
adopted Codification, and the Company has made the necessary changes in its
statutory reporting required for implementation. As of December 31, 2001, the
impact of applying the new guidance resulted in a benefit of approximately $400
in statutory surplus.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
The Company distributes its annuity, life and certain property and casualty
insurance products through a variety of distribution channels, including
broker-dealers, banks, wholesalers, its own internal sales force and other third
party organizations. The Company periodically negotiates provisions and renewals
of these relationships and there can be no assurance that such terms will remain
acceptable to the Company or such third parties. An interruption in the
Company's continuing relationship with certain of these third parties could
materially affect the Company's ability to market its products. During the first
quarter of 1999, the Company modified its existing, exclusive contract with one
such third party, Putnam Mutual Funds Corp. ("Putnam") to eliminate the
exclusivity provision which allowed both parties to pursue new market
opportunities. Putnam is contractually obligated to support and service the
related annuity in force block of business and to market, support and service
new business. However, there can be no assurance that this contract modification
will not adversely impact the Company's ability to distribute Putnam related
products.
OTHER
For further information on other contingencies, see Note 15 of Notes to
Consolidated Financial Statements.
- --------------------------------------------------------------------------------
EFFECT OF INFLATION
- --------------------------------------------------------------------------------
The rate of inflation as measured by the change in the average consumer price
index has not had a material effect on the revenues or operating results of The
Hartford during the three most recent fiscal years.
- --------------------------------------------------------------------------------
ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
For a discussion of accounting standards, see Note 1 of Notes to Consolidated
Financial Statements.
- 52 -
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth in the Capital Markets Risk
Management section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE HARTFORD
Certain of the information called for by Item 10 is set forth in the definitive
proxy statement for the 2002 annual meeting of shareholders (the "Proxy
Statement") filed or to be filed by The Hartford with the Securities and
Exchange Commission within 120 days after the end of the last fiscal year
covered by this Form 10-K under the caption "Item 1. Election of Directors -
Directors and Nominees" and "Stock Ownership of Directors, Executive Officers
and Certain Shareholders - Compliance with Section 16(a) of the Securities
Exchange Act of 1934" and is incorporated herein by reference. Additional
information required by Item 10 regarding The Hartford's executive officers is
set forth in Item 1 of this Form 10-K under the caption "Executive Officers of
The Hartford" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is set forth in the Proxy Statement under
the captions "Compensation of Executive Officers" and "The Board of Directors
and its Committees - Directors' Compensation" and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is set forth in the Proxy Statement under
the caption "Stock Ownership of Directors, Executive Officers and Certain
Shareholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is set forth in the Proxy Statement under
the caption "Certain Relationships and Related Transactions" and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS. See Index to Consolidated
Financial Statements elsewhere herein.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. See Index to
Consolidated Financial Statement Schedules elsewhere herein.
3. EXHIBITS. See Exhibit Index elsewhere herein.
(b) Reports on Form 8-K - The Hartford has filed 3 reports on Form 8-K during
the quarter ended December 31, 2001.
(c) See Item 14(a)(3).
(d) See Item 14(a)(2).
Shareholders may receive, without charge, a copy of the documents filed with the
Securities and Exchange Commission as exhibits to this report by submitting a
written request to the Investor Relations Department at the following address:
The Hartford Financial Services Group, Inc. 690 Asylum Avenue, Hartford, CT
06115 or by calling (888) 322-8444.
- 53 -
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page(s)
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the three years
ended December 31, 2001 F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-4
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended December 31, 2001 F-5-6
Consolidated Statements of Cash Flows for the three years ended
December 31, 2001 F-7
Notes to Consolidated Financial Statements F-8-35
Summary of Investments - Other Than Investments in Affiliates S-1
Condensed Financial Information of The Hartford Financial
Services Group, Inc. S-2-3
Supplementary Insurance Information S-4
Reinsurance S-5
Valuation and Qualifying Accounts S-6
Supplemental Information Concerning Property and Casualty
Insurance Operations S-6
REPORT OF MANAGEMENT
The management of The Hartford Financial Services Group, Inc. and its
subsidiaries ("The Hartford") is responsible for the preparation and integrity
of information contained in the accompanying consolidated financial statements
and other sections of the Annual Report. The financial statements are prepared
in accordance with accounting principles generally accepted in the United States
and, where necessary, include amounts that are based on management's informed
judgments and estimates. Management believes these statements present fairly The
Hartford's financial position and results of operations, and that any other
information contained in the Annual Report is consistent with the financial
statements.
Management has made available The Hartford's financial records and related data
to Arthur Andersen LLP, independent public accountants, in order for them to
perform an audit of The Hartford's consolidated financial statements. Their
report appears on page F-2.
An essential element in meeting management's financial responsibilities is The
Hartford's system of internal controls. These controls, which include accounting
controls and the internal auditing program, are designed to provide reasonable
assurance that assets are safeguarded, and transactions are properly authorized,
executed and recorded. The controls, which are documented and communicated to
employees in the form of written codes of conduct and policies and procedures,
provide for careful selection of personnel and for appropriate division of
responsibility. Management continually monitors for compliance, while The
Hartford's internal auditors independently assess the effectiveness of the
controls and make recommendations for improvement. Also, Arthur Andersen LLP
took into consideration The Hartford's system of internal controls in
determining the nature, timing and extent of their audit tests.
Another important element is management's recognition of its responsibility for
fostering a strong, ethical climate, thereby ensuring that The Hartford's
affairs are transacted according to the highest standards of personal and
professional conduct. The Hartford has a long-standing reputation of integrity
in business conduct and utilizes communication and education to create and
fortify a strong compliance culture.
The Audit Committee of the Board of Directors of The Hartford, composed of
independent directors, meets periodically with the external and internal
auditors to evaluate the effectiveness of work performed by them in discharging
their respective responsibilities and to ensure their independence and free
access to the Committee.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE HARTFORD FINANCIAL SERVICES GROUP, INC.:
We have audited the accompanying Consolidated Balance Sheets of The Hartford
Financial Services Group, Inc. (a Delaware corporation) and its subsidiaries as
of December 31, 2001 and 2000, and the related Consolidated Statements of
Income, Changes in Stockholders' Equity and Cash Flows for each of the three
years in the period ended December 31, 2001. These consolidated financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Hartford
Financial Services Group, Inc. and its subsidiaries as of December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
As explained in Note 1(b) to the financial statements, effective January 1,
2001, the Company changed its method of accounting for derivatives and hedging
activities. Effective April 1, 2001, the Company changed its method of
accounting for recognition of interest income and impairment on purchased and
retained beneficial interests in securitized financial assets.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the Index to
Consolidated Financial Statements and Schedules are presented for the purpose of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 28, 2002
F-2
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
-----------------------------------------------------
(IN MILLIONS, EXCEPT FOR PER SHARE DATA) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Earned premiums $ 9,409 $ 8,941 $ 8,342
Fee income 2,633 2,484 2,105
Net investment income 2,850 2,674 2,627
Other revenue 491 459 420
Net realized capital gains (losses) (236) 145 34
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 15,147 14,703 13,528
-----------------------------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 9,764 8,419 7,902
Amortization of deferred policy acquisition costs and present value
of future profits 2,214 2,213 2,011
Insurance operating costs and expenses 2,037 1,958 1,779
Goodwill amortization 60 28 10
Other expenses 718 667 591
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 14,793 13,285 12,293
-----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST,
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 354 1,418 1,235
Income tax expense (benefit) (195) 390 287
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 549 1,028 948
Minority interest in consolidated subsidiary -- (54) (86)
Extraordinary loss from early retirement of debt, net of tax (8) -- --
Cumulative effect of accounting changes, net of tax (34) -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 507 $ 974 $ 862
=======================================================================================================================
BASIC EARNINGS PER SHARE
Income before extraordinary item and cumulative effect of
accounting changes $ 2.31 $ 4.42 $ 3.83
Extraordinary loss from early retirement of debt, net of tax (0.04) -- --
Cumulative effect of accounting changes, net of tax (0.14) -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2.13 $ 4.42 $ 3.83
DILUTED EARNINGS PER SHARE
Income before extraordinary item and cumulative effect of
accounting changes $ 2.27 $ 4.34 $ 3.79
Extraordinary loss from early retirement of debt, net of tax (0.03) -- --
Cumulative effect of accounting changes, net of tax (0.14) -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2.10 $ 4.34 $ 3.79
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 237.7 220.6 224.9
Weighted average common shares outstanding and dilutive potential
common shares 241.4 224.4 227.5
- --------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 1.01 $ 0.97 $ 0.92
================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
-----------------------
(In millions, except for share data) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments
-----------
Fixed maturities, available for sale, at fair value (amortized cost of $39,154
and $33,856) $ 40,046 $ 34,492
Equity securities, available for sale, at fair value (cost of $1,289 and $921) 1,349 1,056
Policy loans, at outstanding balance 3,317 3,610
Other investments 1,977 1,511
- ---------------------------------------------------------------------------------------------------------------------------
Total investments 46,689 40,669
Cash 353 227
Premiums receivable and agents' balances 2,432 2,295
Reinsurance recoverables 5,162 4,579
Deferred policy acquisition costs and present value of future profits 6,420 5,305
Deferred income tax 693 682
Goodwill 1,694 1,202
Other assets 3,075 2,519
Separate account assets 114,720 114,054
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 181,238 $ 171,532
===============================================================================================================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 16,678 $ 15,874
Life 8,819 7,105
Other policyholder funds and benefits payable 19,355 15,848
Unearned premiums 3,436 3,093
Short-term debt 599 235
Long-term debt 1,965 1,862
Company obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debentures 1,412 1,243
Other liabilities 5,241 4,754
Separate account liabilities 114,720 114,054
- ---------------------------------------------------------------------------------------------------------------------------
172,225 164,068
COMMITMENTS AND CONTINGENCIES, NOTE 15
STOCKHOLDERS' EQUITY
Common stock - authorized 400,000,000, issued 248,477,367 and 238,645,675
shares, par value $0.01 2 2
Additional paid-in capital 2,362 1,686
Retained earnings 6,152 5,887
Treasury stock, at cost - 2,941,340 and 12,355,414 shares (37) (480)
Accumulated other comprehensive income 534 369
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,013 7,464
---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 181,238 $ 171,532
===============================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2001
Accumulated Other Comprehensive Income (Loss)
---------------------------------------------
Common Unrealized Net Gain on Minimum
Stock/ Gain Cash-Flow Pension Outstanding
Additional Treasury (Loss) on Hedging Cumulative Liability Shares
Paid-in Retained Stock Securities, Instruments Translation Adjustment, (In
(In millions) Capital Earnings at Cost net of tax net of tax Adjustments net of tax Total thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR $1,688 $5,887 $(480) $497 $-- $(113) $(15) $7,464 226,290
Comprehensive income
Net income 507 507
Other comprehensive income
(loss), net of tax [1]
Cumulative effect of accounting
change [2] (1) 24 23
Unrealized gain on securities [3] 110 110
Cumulative translation
adjustments (3) (3)
Net gain on cash-flow hedging
instruments [4] 39 39
Minimum pension liability
adjustment (4) (4)
-----
Total other comprehensive income 165
-----
Total comprehensive income 672
=====
Issuance of shares under incentive
and stock purchase plans 93 4 97 2,331
Issuance of common stock in
underwritten offering 569 446 1,015 17,042
Tax benefit on employee stock
options and awards 14 14
Treasury stock acquired (7) (7) (127)
Dividends declared on common stock (242) (242)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $2,364 $6,152 $(37) $606 $63 $(116) $(19) $9,013 245,536
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 2000
Accumulated Other Comprehensive
Income (Loss)
-------------------------------------
Common Unrealized Minimum
Stock/ Gain Pension Outstanding
Additional Treasury (Loss) on Cumulative Liability Shares
Paid-in Retained Stock Securities, Translation Adjustment, (In
(In millions) Capital Earnings at Cost net of tax Adjustments net of tax Total thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR $1,553 $5,127 $(942) $(198) $(63) $(11) $5,466 217,226
Comprehensive income
Net income 974 974
Other comprehensive income (loss),
net of tax [1]
Unrealized gain on securities [3] 695 695
Cumulative translation adjustments (50) (50)
Minimum pension liability
adjustment (4) (4)
-------
Total other comprehensive income 641
-------
Total comprehensive income 1,615
=======
Issuance of shares under incentive and
stock purchase plans (51) 212 161 4,460
Issuance of common stock from treasury 56 342 398 7,250
Conversion of Hartford Life, Inc.
employee stock options and
restricted shares 84 8 92 186
Tax benefit on employee stock options
and awards 46 46
Treasury stock acquired (100) (100) (2,832)
Dividends declared on common stock (214) (214)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $1,688 $5,887 $(480) $497 $(113) $(15) $7,464 226,290
====================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
Accumulated Other Comprehensive
Income (Loss)
-------------------------------------
Common Unrealized Minimum
Stock/ Gain Pension Outstanding
Additional Treasury (Loss) on Cumulative Liability Shares
Paid-in Retained Stock Securities, Translation Adjustment, (In
(In millions) Capital Earnings at Cost net of tax Adjustments net of tax Total thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR $1,593 $4,474 $(455) $811 $ -- $ -- $6,423 227,395
Comprehensive income
Net income 862 862
Other comprehensive income (loss),
net of tax [1]
Unrealized gain (loss) on
securities [3] (1,009) (1,009)
Cumulative translation adjustments (63) (63)
Minimum pension liability
adjustment (11) (11)
-------
Total other comprehensive income
(loss) (1,083)
-------
Total comprehensive income (loss) (221)
=======
Issuance of shares under incentive and
stock purchase plans (54) 106 52 2,109
Tax benefit on employee stock options
and awards 17 17
Treasury stock acquired (3) (593) (596) (12,278)
Dividends declared on common stock (209) (209)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $1,553 $5,127 $(942) $(198) $(63) $(11) $5,466 217,226
====================================================================================================================================
<FN>
[1] Unrealized gain (loss) on securities is net of tax of $60, $370 and $(546)
for the years ended December 31, 2001, 2000 and 1999, respectively. Net
gain on cash-flow hedging instruments is net of tax of $21 for the year
ended December 31, 2001. There is no tax effect on cumulative translation
adjustments. Minimum pension liability adjustment is net of tax of $(2),
$(2) and $(6) for the years ended December 31, 2001, 2000 and 1999,
respectively.
[2] Unrealized gain (loss) on securities, net of tax, includes cumulative
effect of accounting change of $(23) to net income and $24 to net gain on
cash-flow hedging instruments.
[3] Net of reclassification adjustment for gains (losses) realized in net
income of $(98), $(57) and $25 for the years ended December 31, 2001, 2000
and 1999, respectively.
[4] Net of amortization adjustment of $6 to net investment income.
</FN>
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(In millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 507 $ 974 $ 862
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Change in receivables, payables and accruals 197 126 132
Change in reinsurance recoverables (599) (85) 126
Amortization of deferred policy acquisition costs 2,214 2,213 2,011
Additions to deferred policy acquisition costs (2,739) (2,573) (2,498)
Change in accrued and deferred income taxes (114) 398 166
Increase in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 2,737 1,130 454
Minority interest in consolidated subsidiary -- 54 86
Net realized capital (gains) losses 236 (145) (34)
Depreciation and amortization 72 63 58
Cumulative effect of accounting changes, net of tax 34 -- --
Extraordinary item, net of tax 8 -- --
Other, net (250) 280 (409)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,303 2,435 954
====================================================================================================================
INVESTING ACTIVITIES
Purchase of investments (16,871) (15,104) (13,172)
Sale of investments 9,850 11,985 13,525
Maturity of investments 2,760 2,001 2,098
Purchase of business/affiliate (1,105) (1,391) (52)
Sale of affiliates 39 545 --
Additions to property, plant and equipment (209) (200) (183)
- --------------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (5,536) (2,164) 2,216
====================================================================================================================
FINANCING ACTIVITIES
Short-term debt, net 264 4 --
Issuance of long-term debt 400 516 --
Issuance of trust preferred securities 684 -- --
Repayment of long-term debt (200) -- --
Repayment of trust preferred securities (500) -- --
Issuance of common stock 1,015 398 --
Net proceeds from (disbursements for) investment and universal
life-type contracts charged against policyholder accounts 1,867 (947) (2,356)
Dividends paid (235) (210) (207)
Acquisition of treasury stock (7) (100) (596)
Proceeds from issuances of shares under incentive and stock purchase plans 77 131 55
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 3,365 (208) (3,104)
====================================================================================================================
Foreign exchange rate effect on cash (6) (18) (7)
- --------------------------------------------------------------------------------------------------------------------
Net increase in cash 126 45 59
Cash - beginning of year 227 182 123
- --------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 353 $ 227 $ 182
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ------------------------------------------------
NET CASH PAID (RECEIVED) DURING THE YEAR FOR:
Income taxes $ (52) $ 95 $ 41
Interest $ 282 $ 248 $ 214
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE STATED)
1. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The Hartford Financial Services Group, Inc. and its consolidated subsidiaries
("The Hartford" or the "Company") provide investment products, life and property
and casualty insurance to both individual and commercial customers in the United
States and internationally.
On April 2, 2001, The Hartford acquired the U.S. individual life insurance,
annuity and mutual fund businesses of Fortis, Inc. (operating as "Fortis
Financial Group", or "Fortis"). The acquisition was accounted for as a purchase
transaction and, as such, the revenues and expenses generated by this business
from April 2, 2001 forward are included in the Company's Consolidated Statements
of Income. (For further discussion of the Fortis Acquisition, see Note 18(a).)
On December 22, 2000, The Hartford completed the sale of its Netherlands-based
Zwolsche Algemeene N.V. ("Zwolsche") subsidiary to Assurances Generales de
France, a subsidiary of Allianz AG. For purposes of these financial statements,
Zwolsche's operating results are included in The Hartford's Consolidated
Statements of Income through the date of sale.
On June 27, 2000, The Hartford acquired all of the outstanding shares of
Hartford Life, Inc. ("HLI") that it did not already own ("The HLI Repurchase").
The accompanying consolidated financial statements reflect the minority interest
in HLI of approximately 19% prior to the acquisition date. (For a further
discussion of The HLI Repurchase, see Note 16.)
The consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States which differ
materially from the accounting prescribed by various insurance regulatory
authorities. All material intercompany transactions and balances between The
Hartford, its subsidiaries and affiliates have been eliminated.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy
acquisition costs, the liability for future policy benefits, unpaid claims and
claim adjustment expenses and investment values. Although some variability is
inherent in these estimates, management believes the amounts provided are
adequate.
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts.
(B) ADOPTION OF NEW ACCOUNTING STANDARDS
Effective September 2001, the Company adopted Emerging Issues Task Force
("EITF") Issue 01-10, "Accounting for the Impact of the Terrorist Attacks of
September 11, 2001". Under the consensus, costs related to the terrorist act
should be reported as part of income from continuing operations and not as an
extraordinary item. The Company has recognized and classified all direct and
indirect costs associated with the attack of September 11 in accordance with the
consensus. (For discussion of the impact of the September 11 terrorist attack
("September 11"), see Note 2.)
Effective April 1, 2001, the Company adopted EITF Issue 99-20, "Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets". Under the consensus, investors in certain
asset-backed securities are required to record changes in their estimated yield
on a prospective basis and to evaluate these securities for an other than
temporary decline in value. If the fair value of the asset-backed security has
declined below its carrying amount and the decline is determined to be other
than temporary, the security is written down to fair value. Upon adoption of
EITF Issue 99-20, the Company recorded an $11 charge in net income as a net of
tax cumulative effect of accounting change.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS Nos. 137 and 138. The standard requires, among
other things, that all derivatives be carried on the balance sheet at fair
value. The standard also specifies hedge accounting criteria under which a
derivative can qualify for special accounting. In order to receive special
accounting, the derivative instrument must qualify as a hedge of either the fair
value or the variability of the cash flow of a qualified asset or liability, or
forecasted transaction. Special accounting for qualifying hedges provides for
matching the timing of gain or loss recognition on the hedging instrument with
the recognition of the corresponding changes in value of the hedged item. The
Company's policy prior to adopting SFAS No. 133 was to carry its derivative
instruments on the balance sheet in a manner similar to the hedged item(s).
Upon adoption of SFAS No. 133, the Company recorded a $23 charge in net income
as a net of tax cumulative effect of accounting change. The transition
adjustment was primarily comprised of gains and losses on derivatives that had
been previously deferred and not adjusted to the carrying amount of the hedged
item. Also included in the transition adjustment were gains and losses related
to recognizing at fair value all derivatives that are designated as fair-value
hedging instruments offset by the difference between the book values and fair
values of related hedged items attributable to the hedged risks. The entire
transition amount was previously recorded in Accumulated Other Comprehensive
Income ("OCI") - Unrealized Gain/Loss on Securities in accordance with SFAS No.
115. Gains and losses on derivatives that were previously deferred as
adjustments to the carrying amount of hedged items were not affected by the
implementation of SFAS No. 133.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
Upon adoption, the Company also reclassified $24, net of tax, to Accumulated OCI
- - Gain on Cash-Flow Hedging Instruments from Accumulated OCI - Unrealized
Gain/Loss on Securities. This reclassification reflects the January 1, 2001 net
unrealized gain for all derivatives that are designated as cash-flow hedging
instruments. (For further discussion of the Company's derivative-related
accounting policies, see Note 1(e).)
In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a Replacement of FASB Statement No. 125". SFAS
No. 140 revises the accounting for securitizations, other financial asset
transfers and collateral arrangements. SFAS No. 140 was effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. For recognition and disclosure of collateral and for
additional disclosures related to securitization transactions, SFAS No. 140 was
effective for the Company's December 31, 2000 financial statements. Adoption of
SFAS No. 140 did not have a material impact on the Company's financial condition
or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of Accounting
Principles Board ("APB") Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25 regarding the definition of employee, the
criteria for determining a non-compensatory plan, the accounting for changes to
the terms of a previously fixed stock option or award, the accounting for an
exchange of stock compensation awards in a business combination, and other stock
compensation related issues. FIN 44 became effective July 1, 2000, with respect
to new awards, modifications to outstanding awards, and changes in grantee
status that occur on or after that date. The adoption of FIN 44 did not have a
material impact on the Company's financial condition or results of operations.
Effective January 1, 2000, The Hartford adopted Statement of Position ("SOP")
No. 98-7, "Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk". This SOP provides guidance on the method of accounting
for insurance and reinsurance contracts that do not transfer insurance risk,
defined in the SOP as the deposit method. Adoption of this SOP did not have a
material impact on the Company's financial condition or results of operations.
In December 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides that if registrants have not applied
the accounting therein, they should implement the SAB and report a change in
accounting principle. SAB 101, as subsequently amended, became effective for the
Company in the fourth quarter of 2000. The adoption of SAB 101 did not have a
material impact on the Company's financial condition or results of operations.
Effective January 1, 1999, The Hartford adopted SOP No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use". This SOP
provides guidance on accounting for costs of internal use software and in
determining whether software is for internal use. The SOP defines internal use
software as software that is acquired, internally developed, or modified solely
to meet internal needs and identifies stages of software development and
accounting for the related costs incurred during the stages. Adoption of this
SOP did not have a material impact on the Company's financial condition or
results of operations.
Effective January 1, 1999, The Hartford adopted SOP No. 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments". This SOP
addresses accounting by insurance and other enterprises for assessments related
to insurance activities including recognition, measurement and disclosure of
guaranty fund or other assessments. Adoption of this SOP did not have a material
impact on the Company's financial condition or results of operations.
The Hartford's cash flows were not impacted by adopting these changes in
accounting principles.
(C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for
long-lived assets to be disposed of by sale by requiring those long-lived assets
be measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. The
provisions of Statement 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 will
not have a material impact on the Company's financial condition or results of
operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 eliminates the pooling-of-interests method of accounting for business
combinations requiring all business combinations to be accounted for under the
purchase method. Accordingly, net assets acquired are recorded at fair value
with any excess of cost over net assets assigned to goodwill.
SFAS No. 141 also requires that certain intangible assets acquired in a business
combination be recognized apart from goodwill. The provisions of SFAS No. 141
apply to all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method of accounting for those transactions is prohibited.
Adoption of SFAS No. 141 will not have a material impact on the Company's
financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". Under SFAS No. 142, amortization of goodwill is precluded; however, its
fair value is periodically (at least annually) reviewed and tested for
impairment. Goodwill must be tested for impairment in the year of adoption,
including an initial test performed within six months of adoption. If the
initial test indicates a potential impairment, then a more detailed analysis to
determine the extent of impairment must be completed by the end of the year of
adoption.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
SFAS No. 142 requires that useful lives for intangibles other than goodwill be
reassessed and remaining amortization periods be adjusted accordingly. The
reassessment must be completed prior to the end of the first quarter of 2002.
All provisions of SFAS No. 142 will be applied beginning January 1, 2002 to
goodwill and other intangible assets. Goodwill amortization totaled $52,
after-tax, in 2001. Application of the non-amortization provisions of the
statement is expected to result in an increase in net income of $56, after-tax,
in 2002. The Company is in the process of assessing the impacts from the
implementation of the other provisions of SFAS No. 142.
(D) INVESTMENTS
The Hartford's investments in both fixed maturities, which include bonds,
redeemable preferred stock and commercial paper, and equity securities, which
include common and non-redeemable preferred stocks, are classified as "available
for sale" in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". Accordingly, these securities are carried at
fair value with the after-tax difference from amortized cost reflected in
stockholders' equity as a component of accumulated other comprehensive income.
Policy loans are carried at outstanding balance which approximates fair value.
Other investments consist primarily of limited partnership investments which are
accounted for by the equity method, except in instances in which the Company's
interest is so minor that it exercises virtually no influence over operating and
financial policies. In such instances, the Company applies the cost method of
accounting. The Company's net income from partnerships is included in net
investment income. Other investments also include mortgage loans at amortized
cost and derivatives at fair value.
Net realized capital gains and losses on security transactions associated with
the Company's immediate participation guaranteed contracts are recorded and
offset by amounts owed to policyholders and were $(1), $(9) and $2 for the years
ended December 31, 2001, 2000 and 1999, respectively. Under the terms of the
contracts, the net realized capital gains and losses will be credited to
policyholders in future years as they are entitled to receive them. Net realized
capital gains and losses, after deducting the life and pension policyholders'
share, are reported as a component of revenues and are determined on a specific
identification basis.
The Company's accounting policy for impairment recognition requires other than
temporary impairment charges to be recorded when it is determined that the
Company is unable to recover its cost basis in an investment. Impairment charges
on investments are included in net realized capital gains and losses. Factors
considered in evaluating whether a decline in value is other than temporary
include: (a) the length of time and the extent to which the fair value has been
less than cost, (b) the financial conditions and near-term prospects of the
issuer, and (c) the intent and ability of the Company to retain the investment
for a period of time sufficient to allow for any anticipated recovery. In
addition, for securities expected to be sold, an other than temporary impairment
charge is recognized if the Company does not expect the fair value of a security
to recover to cost or amortized cost prior to the expected date of sale. Once an
impairment charge has been recorded, the Company then continues to review the
other than temporarily impaired securities for appropriate valuation on an
ongoing basis.
(E) DERIVATIVE INSTRUMENTS
Overview
- --------
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, in order to achieve
one of three Company approved objectives: to hedge risk arising from interest
rate, price or currency exchange rate volatility; to manage liquidity; or to
control transaction costs. The Company is considered an "end-user" of derivative
instruments and as such does not make a market or trade in these instruments for
the express purpose of earning trading profits. (For a description of derivative
instruments utilized by the Company, see the Capital Markets Risk Management
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") under Derivative Instruments.)
Accounting and Financial Statement Presentation of Derivative Instruments and
- --------------------------------------------------------------------------------
Hedging Activities
- ------------------
Effective January 1, 2001, and in accordance with SFAS No. 133, all derivatives
are recognized on the balance sheet at their fair value. On the date the
derivative contract is entered into, the Company designates the derivative as
(1) a hedge of the fair value of a recognized asset or liability ("fair value"
hedge), (2) a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability ("cash
flow" hedge), (3) a foreign-currency, fair value or cash-flow hedge
("foreign-currency" hedge), (4) a hedge of a net investment in a foreign
operation, or (5) held for other risk management activities, which primarily
involve managing asset or liability related risks which do not qualify for hedge
accounting under SFAS No. 133. Changes in the fair value of a derivative that is
designated and qualifies as a fair-value hedge, along with the gain or loss on
the hedged asset or liability that is attributable to the hedged risk, are
recorded in current period earnings as net realized capital gains and losses.
Changes in the fair value of a derivative that is designated and qualifies as a
cash-flow hedge are recorded in OCI and are reclassified into earnings when
earnings are impacted by the variability of the cash flow of the hedged item.
Changes in the fair value of derivatives that are designated and qualify as
foreign-currency hedges are recorded in either current period earnings or OCI,
depending on whether the hedge transaction is a fair value hedge or a cash-flow
hedge. If, however, a derivative is used as a hedge of a net investment in a
foreign operation, its changes in fair value, to the extent effective as a
hedge, are recorded in the cumulative translation adjustments account within
stockholders' equity. Changes in the fair value of derivative instruments held
for other risk management purposes are reported in current period earnings as
net realized capital gains and losses.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) DERIVATIVE INSTRUMENTS (CONTINUED)
Accounting and Financial Statement Presentation of Derivative Instruments and
- --------------------------------------------------------------------------------
Hedging Activities (continued)
- ------------------------------
As of December 31, 2001, the Company carried $138 of derivative assets in other
investments and $208 of derivative liabilities in other liabilities.
Hedge Documentation and Effectiveness Testing
- ---------------------------------------------
At hedge inception, the Company formally documents all relationships between
hedging instruments and hedged items, as well as its risk-management objective
and strategy for undertaking each hedge transaction. In connection with the
implementation of SFAS No. 133, the Company designated anew all existing hedge
relationships. The documentation process includes linking all derivatives that
are designated as fair value, cash flow or foreign-currency hedges to specific
assets and liabilities on the balance sheet or to specific forecasted
transactions. The Company also formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. At inception, and on a quarterly basis, the change in
value of the hedging instrument and the change in value of the hedged item are
measured to assess the validity of maintaining special hedge accounting. Hedging
relationships are considered highly effective if the changes in the fair value
or discounted cash flows of the hedging instrument are within a ratio of 80-120%
of the inverse changes in the fair value or discounted cash flows of the hedged
item. High effectiveness is calculated using a cumulative approach. If it is
determined that a derivative is no longer highly effective as a hedge, the
Company discontinues hedge accounting prospectively, as discussed below under
discontinuance of hedge accounting.
Credit Risk
- -----------
The Company's derivatives counterparty exposure policy establishes market-based
credit limits, favors long-term financial stability and creditworthiness, and
typically requires credit enhancement/credit risk reducing agreements. By using
derivative instruments, the Company is exposed to credit risk which is measured
as the amount owed to the Company based on current market conditions and
potential payment obligations between the Company and its counterparties. When
the fair value of a derivative contract is positive, this indicates that the
counterparty owes the Company, and, therefore, exposes the Company to credit
risk. Credit exposures are generally quantified weekly and netted, and
collateral is pledged to and held by, or on behalf of, the Company to the extent
the current value of derivatives exceeds exposure policy thresholds. The Company
also minimizes the credit risk in derivative instruments by entering into
transactions with high quality counterparties that are reviewed periodically by
the Company's internal compliance unit, reviewed frequently by senior management
and reported to the Company's Finance Committee. The Company also maintains a
policy of requiring that all derivative contracts be governed by an
International Swaps and Derivatives Association Master Agreement which is
structured by legal entity and by counterparty and permits right of offset.
Embedded Derivatives
- --------------------
The Company occasionally purchases or issues financial instruments that contain
a derivative instrument that is embedded in the financial instrument. When it is
determined that (1) the embedded derivative possesses economic characteristics
that are not clearly and closely related to the economic characteristics of the
host contract, and (2) a separate instrument with the same terms would qualify
as a derivative instrument, the embedded derivative is separated from the host
contract, carried at fair value, and designated as a fair value, cash flow, or
foreign-currency hedge, or as held for other risk management purposes. However,
in cases where (1) the host contract is measured at fair value, with changes in
fair value reported in current earnings or (2) the Company is unable to reliably
identify and measure an embedded derivative for separation from its host
contract, the contract is not designated as a hedging instrument. The entire
contract is carried on the balance sheet at fair value with changes in fair
value recorded as net realized capital gains and losses.
Discontinuance of Hedge Accounting
- ----------------------------------
The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item; (2) the derivative is
dedesignated as a hedge instrument, because it is unlikely that a forecasted
transaction will occur; or (3) the derivative expires or is sold, terminated, or
exercised. When hedge accounting is discontinued because it is determined that
the derivative no longer qualifies as an effective fair-value hedge, the
derivative continues to be carried at fair value on the balance sheet with
changes in its fair value recognized in current period earnings. The changes in
the fair value of the hedged asset or liability are no longer recorded in
earnings. When hedge accounting is discontinued because the Company becomes
aware that it is probable that a forecasted transaction will not occur, the
derivative continues to be carried on the balance sheet at its fair value, and
gains and losses that were accumulated in OCI are recognized immediately in
earnings. In all other situations in which hedge accounting is discontinued on a
cash-flow hedge, including those where the derivative is sold, terminated or
exercised, amounts previously deferred in OCI are amortized into earnings when
earnings are impacted by the variability of the cash flow of the hedged item.
SFAS No. 133 Categorization of the Company's Hedging Activities
- ---------------------------------------------------------------
Cash-Flow Hedges
General
For the year ended December 31, 2001, the Company's gross gains and losses
representing the total ineffectiveness of all cash-flow hedges essentially
offset, with the net impact reported as net realized capital gains and losses.
All components of each derivative's gain or loss are included in the assessment
of hedge effectiveness.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) DERIVATIVE INSTRUMENTS (CONTINUED)
SFAS No. 133 Categorization of the Company's Hedging Activities (continued)
- ---------------------------------------------------------------------------
Cash-Flow Hedges (continued)
General (continued)
Gains and losses on derivative contracts that are reclassified from OCI to
current period earnings are included in the line item in the statement of income
in which the hedged item is recorded. As of December 31, 2001, $2 of after-tax
deferred net gains on derivative instruments accumulated in OCI are expected to
be reclassified to earnings during the next twelve months. This expectation is
based on the anticipated interest payments on hedged investments in fixed
maturity securities that will occur over the next twelve months, at which time
the Company will recognize the deferred net gains/losses as an adjustment to
interest income over the term of the investment cash flows. The maximum term
over which the Company is hedging its exposure to the variability of future cash
flows (for all forecasted transactions, excluding interest payments on
variable-rate debt) is twelve months. As of December 31, 2001, the Company held
$2.6 billion in derivative notional value related to strategies categorized as
cash- flow hedges. There were no reclassifications from OCI to earnings
resulting from the discontinuance of cash-flow hedges during the year ended
December 31, 2001.
Specific Strategies
The Company's primary use of cash-flow hedging is to use interest-rate swaps as
an "asset hedging" strategy, in order to convert interest receipts on
floating-rate fixed maturity investments to fixed rates. When multiple assets
are designated in a hedging relationship under SFAS No. 133, a homogeneity test
is performed to ensure that the assets react similarly to changes in market
conditions. To satisfy this requirement, at inception of the hedge, fixed
maturity investments with identical variable rates are grouped together (for
example: 1-month LIBOR or 3-month LIBOR, not both).
The Company enters into "receive fixed/pay variable" interest rate swaps to
hedge the variability in the first LIBOR-based interest payments received on
each pool of eligible variable rate fixed maturity investments. Effectiveness is
measured by comparing the present value of the variable rate pay side of the
swaps to the present value of the first anticipated variable rate interest
receipts on the hedged fixed maturity investments. At December 31, 2001, the
Company held $2.0 billion in derivative notional value related to this strategy.
The Company also uses cash-flow hedges, in its anticipated purchase of fixed
maturity investments.
Fair-Value Hedges
General
For the year ended December 31, 2001, the Company's gross gains and losses
representing the total ineffectiveness of all fair-value hedges essentially
offset, with the net impact reported as net realized capital gains and losses.
All components of each derivative's gain or loss are included in the assessment
of hedge effectiveness. As of December 31, 2001, the Company held $899 in
derivative notional value related to strategies categorized as fair-value
hedges.
Specific Strategies
During 2001, the Company entered an interest rate swap as an economic hedge of a
portion of its Trust Preferred Securities issued. The interest rate swap
agreement was structured to exactly offset the terms and conditions of the
hedged trust preferred securities (i.e. notional value, call provisions,
maturity date, and payment dates) and has been designated as a hedge of the
benchmark interest rate (i.e. LIBOR). The calculation of ineffectiveness
involves a comparison of the present value of the cumulative change in the
expected future cash flows on the interest rate swap and the present value of
the cumulative change in the expected future cash flows on the hedged trust
preferred securities. If hedge ineffectiveness exists, it is recorded as net
realized capital gain or loss. At December 31, 2001, the Company held $500 in
derivative notional value related to this strategy.
The Company purchases interest rate caps and sells interest rate floor contracts
in an "asset hedging" strategy utilized to offset corresponding interest rate
caps and floors that exist in certain of its variable-rate fixed maturity
investments. The standalone interest rate cap and floor contracts are structured
to exactly offset those embedded in the hedged investment. The calculation of
ineffectiveness involves a comparison of the present value of the cumulative
change in the expected future cash flows on the interest rate cap/floor and the
present value of the cumulative change in the expected future interest cash
flows that are hedged on the fixed maturity investment. If hedge ineffectiveness
exists, it is recorded as net realized capital gain or loss. All hedges
involving variable rate bonds with embedded interest rate caps and floors are
perfectly matched with respect to notional values, payment dates, maturity,
index, and the hedge relationship does not contain any other basis differences.
No component of the hedging instruments fair value is excluded from the
determination of effectiveness. At December 31, 2001, the Company held $200 in
derivative notional value related to this strategy.
The Company enters into swaption arrangements in an "asset hedging" strategy
utilized to offset the change in the fair value of call options embedded in
certain of its investments in municipal fixed maturity investments. The
swaptions give the Company the option to enter into a "receive fixed" swap. The
swaption's exercise dates coincide with the municipal fixed maturity's call
dates, and the receive side of the swaps closely matches the coupon rate on the
original municipal fixed maturity investment. The purpose of the swaptions is to
ensure a fixed return over the original term to maturity. Should the municipal
fixed maturity investment be called, the swaptions would be either settled in
cash or exercised. The proceeds from the call are used to purchase a variable
rate fixed maturity investment. If the bonds are not called, the swaptions
expire worthless. Each swaption contract hedges multiple fixed maturity
investments containing embedded call options. These fixed maturity investments
are subdivided into portfolio hedges. In accordance with SFAS No. 133, a stress
test is performed at the inception of the hedge to prove the homogeneity of each
portfolio (with regard to the risk being hedged) and thereby
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) DERIVATIVE INSTRUMENTS (CONTINUED)
SFAS No. 133 Categorization of the Company's Hedging Activities (continued)
- ---------------------------------------------------------------------------
Fair-Value Hedges (continued)
Specific Strategies (continued)
qualify that hedge for special hedge accounting treatment. Correlation
calculations are performed at various interest rate levels comparing the total
change in the aggregate value of the embedded calls in the hedged portfolio to
the change in value of the embedded call in each individual fixed maturity
investment in the portfolio. The correlation statistic for homogeneity must be
within a range of 0.85 to 1.00. The calculation of ineffectiveness involves a
comparison of the cumulative change in fair value of the embedded call option
with the cumulative change in fair value of the swaption. Ineffectiveness is
reported as net realized capital gains and losses. No component of the hedging
instruments' fair value is excluded from the determination of effectiveness. At
December 31, 2001, the Company held $133 in derivative notional value related to
this strategy.
Other Risk Management Activities
General
The Company's other risk management activities relate to strategies used to meet
the following Company-approved objectives; to hedge risk arising from interest
rate, price or currency exchange rate volatility; to manage liquidity; or to
control transaction costs. For the year ended December 31, 2001, the Company
recognized an after-tax net loss of $23 (reported as net realized capital losses
in the statement of income), which represented the total change in value for
other derivative-based strategies which do not qualify for hedge accounting
under SFAS No. 133. As of December 31, 2001, the Company held $4.6 billion in
derivative notional value related to strategies categorized as Other Risk
Management Activities.
Specific Strategies
The Company issues liability contracts in which policyholders have the option to
surrender their policies at book value and that guarantee a minimum credited
rate of interest. Typical products with these features include Whole Life,
Universal Life and Repetitive Premium Variable Annuities. The Company uses
interest rate cap and swaption contracts as an economic hedge, classified for
internal purposes as a "liability hedge", thereby mitigating the Company's loss
in a rising interest rate environment. The Company is exposed to the situation
where interest rates rise and the Company is not able to raise its credited
rates to competitive yields. The policyholder can then surrender at book value
while the underlying bond portfolio may be at a loss. The increase in yield in a
rising interest rate environment due to the interest rate cap and swaption
contracts may be used to raise credited rates, increasing the Company's
competitiveness and reducing the policyholder's incentive to surrender. In
accordance with Company policy, the amount of notional value will not exceed the
book value of the liabilities being hedged and the term of the derivative
contract will not exceed the average maturity of the liabilities. As of December
31, 2001, the Company held $516 in derivative notional value related to this
strategy.
When terminating certain hedging relationships, the Company will enter a
derivative contract with terms and conditions that directly offset the original
contract, thereby offsetting its changes in value from that date forward. The
Company de-designates the original contract and records the changes in value of
both the original contract and the new offsetting contract through net realized
capital gains and losses. At December 31, 2001, the Company held $2.0 billion in
derivative notional value related to this strategy.
Periodically, the Company enters into swap agreements that have cash flows based
upon the results of a referenced index or asset pool. These arrangements are
entered into to modify portfolio duration or to increase diversification while
controlling transaction costs. At December 31, 2001, the Company held $687 in
derivative notional value related to this strategy.
The Company will issue an option in an "asset hedging" strategy utilized to
monetize the option embedded in certain of its fixed maturity investments. The
Company will receive a premium for issuing the freestanding option. The
structure is designed such that the fixed maturity investment and freestanding
option have identical expected lives, typically 3-5 years. At December 31, 2001,
the Company held $1.2 billion in derivative notional value related to this
strategy.
(F) SEPARATE ACCOUNTS
The Company maintains separate account assets and liabilities which are reported
at fair value. Separate account assets are segregated from other investments,
and investment income and gains and losses accrue directly to the policyholders.
Separate accounts reflect two categories of risk assumption: non- guaranteed
separate accounts, wherein the policyholder assumes the investment risk, and
guaranteed separate accounts, wherein the Company contractually guarantees
either a minimum return or the account value to the policyholder.
(G) DEFERRED POLICY ACQUISITION COSTS
LIFE - Policy acquisition costs, which include commissions and certain other
expenses that vary with and are primarily associated with acquiring business,
are deferred and amortized over the estimated lives of the contracts, usually 20
years.
Deferred policy acquisition costs related to investment contracts and universal
life type contracts are deferred and amortized using the retrospective deposit
method. Under the retrospective deposit method, acquisition costs are amortized
in proportion to the present value of expected gross profits from investment
mortality and expense margins and surrender charges. Actual gross profits can
vary from management's estimates, resulting in increases or decreases in the
rate of amortization. Management periodically reviews these estimates and
evaluates the recoverability of the deferred acquisition cost asset. When
appropriate, management revises its assumptions on the estimated gross profits
of these contracts and the cumulative amortization for the books of business are
re-estimated and adjusted by a cumulative charge or credit to income. The
average rate of assumed future investment yield used in estimating expected
gross profits related to variable annuity and
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) DEFERRED POLICY ACQUISITION COSTS (CONTINUED)
variable life business was 9% at December 31, 2001 and for all other products
including fixed annuities and other universal life type contracts the average
assumed investment yield ranged from 5.0% - 8.5%.
Deferred policy acquisition costs related to traditional policies are amortized
over the premium paying period of the related policies in proportion to the
ratio of the present value of annual expected premium income to the present
value of total expected premium income. Adjustments are made each year to
recognize actual experience as compared to assumed experience for the current
period.
PROPERTY & CASUALTY - Policy acquisition costs, representing commissions,
premium taxes and certain other underwriting expenses, are deferred and
amortized over policy terms. Estimates of the present value of future revenues,
including net investment income and tax benefits, are compared to estimates of
the present value of future costs, including amortization of policy acquisition
costs, to determine if the deferred acquisition costs are recoverable and, if
not, they are charged to expense.
(H) FUTURE POLICY BENEFITS, UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
LIFE - Liabilities for future policy benefits are computed by the net level
premium method using interest assumptions ranging from 3% to 11% and withdrawal
and mortality assumptions appropriate at the time the policies were issued.
Claim reserves, which are the result of sales of group long-term and short-term
disability, stop loss, and Medicare supplement, are stated at amounts determined
by estimates on individual cases and estimates of unreported claims based on
past experience.
The following table displays the development of the claim reserves (included in
future policy benefits in the Consolidated Balance Sheets) resulting primarily
from group disability products.
For the years ended December 31,
----------------------------------
2001 2000 1999
- -------------------------------------------------------------------
BEGINNING CLAIM RESERVES-GROSS $2,384 $2,128 $1,938
Reinsurance recoverables 177 125 125
- -------------------------------------------------------------------
BEGINNING CLAIM RESERVES-NET 2,207 2,003 1,813
- -------------------------------------------------------------------
INCURRED EXPENSES RELATED TO
Current year 1,272 1,093 1,013
Prior years (15) (11) (33)
- -------------------------------------------------------------------
TOTAL INCURRED 1,257 1,082 980
- -------------------------------------------------------------------
PAID EXPENSES RELATED TO
Current year 439 410 360
Prior years 525 468 430
- -------------------------------------------------------------------
TOTAL PAID 964 878 790
- -------------------------------------------------------------------
ENDING CLAIM RESERVES-NET 2,500 2,207 2,003
Reinsurance recoverables 264 177 125
- -------------------------------------------------------------------
ENDING CLAIM RESERVES-GROSS $2,764 $2,384 $2,128
===================================================================
PROPERTY & CASUALTY - The Hartford establishes reserves to provide for the
estimated costs of paying claims made by policyholders or against policyholders.
These reserves include estimates for both claims that have been reported and
those that have been incurred but not reported to The Hartford and include
estimates of all expenses associated with processing and settling these claims.
This estimation process is primarily based on historical experience and involves
a variety of actuarial techniques which analyze trends and other relevant
factors. Certain liabilities for unpaid claims, principally for permanently
disabled claimants, terminated reinsurance treaties and certain contracts that
fund loss run-offs for unrelated parties, have been discounted to present value
using an average interest rate of 5.1% in 2001 and 5.7% in 2000. At December 31,
2001 and 2000, such discounted reserves totaled $719 and $716, respectively (net
of discounts of $429 and $396, respectively). Amortization of the discount did
not have a material effect on net income during 2001, 2000 and 1999,
respectively. A reconciliation of liabilities for unpaid claims and claim
adjustment expenses follows:
For the years ended December 31,
---------------------------------
2001 2000 1999
- -------------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $15,874 $16,014 $16,449
Reinsurance recoverables 3,452 3,271 3,286
- -------------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 12,422 12,743 13,163
- -------------------------------------------------------------------
ADD PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES
Current year 5,992 5,170 4,953
Prior years [1] 143 27 (171)
- -------------------------------------------------------------------
TOTAL PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES 6,135 5,197 4,782
- -------------------------------------------------------------------
LESS PAYMENTS
Current year 2,349 2,265 2,137
Prior years 3,243 3,069 3,024
- -------------------------------------------------------------------
TOTAL PAYMENTS 5,592 5,334 5,161
- -------------------------------------------------------------------
Foreign currency translation (3) (26) (41)
Reserves resulting from acquisitions -- -- --
Other [2] (102) (158) --
- -------------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 12,860 12,422 12,743
Reinsurance recoverables 3,818 3,452 3,271
- -------------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $16,678 $15,874 $16,014
===================================================================
[1] Excludes the effects of foreign exchange adjustments.
[2] Includes $101 in 2001 and $161 in 2000 related to the sale of
international subsidiaries.
The Company has an exposure to catastrophic losses, both natural and man made,
which can be caused by significant events including hurricanes, severe winter
storms, earthquakes, windstorms, fires and terrorist acts. The frequency and
severity of catastrophic losses are unpredictable, and the exposure to a
catastrophe is a function of both the total amount insured in an area affected
by the event and the severity of the event. Catastrophes generally impact
limited geographic areas; however, certain events may produce significant damage
in heavily populated areas. The Company generally seeks to reduce its exposure
to catastrophic losses through individual risk selection and the purchase of
catastrophe reinsurance.
(I) OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE
Other policyholder funds and benefits payable include reserves for investment
contracts without life contingencies, corporate
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE (CONTINUED)
owned life insurance and universal life insurance contracts. Of the amounts
included in this item, $18.8 billion and $15.6 billion, as of December 31, 2001
and 2000, respectively, represent policyholder obligations. The liability for
policy benefits for universal life-type contracts is equal to the balance that
accrues to the benefit of policyholders, including credited interest, amounts
that have been assessed to compensate the Company for services to be performed
over future periods, and any amounts previously assessed against policyholders
that are refundable on termination of the contract. For investment contracts,
policyholder liabilities are equal to the accumulated policy account values,
which consist of an accumulation of deposit payments plus credited interest,
less withdrawals and amounts assessed through the end of the period.
(J) REVENUE RECOGNITION
LIFE - For investment and universal life-type contracts, the amounts collected
from policyholders are considered deposits and are not included in revenue. Fee
income for investment and universal life-type contracts consists of policy
charges for policy administration, cost of insurance charges and surrender
charges assessed against policyholders' account balances and are recognized in
the period in which services are provided. Traditional life and the majority of
the Company's accident and health products are long duration contracts, and
premiums are recognized as revenue when due from policyholders. Retrospective
and contingent commissions and other related expenses are incurred and recorded
in the same period that the retrospective premiums are recorded or other
contract provisions are met.
PROPERTY & CASUALTY - Property and casualty insurance premiums are earned
principally on a pro rata basis over the lives of the policies and include
accruals for ultimate premium revenue anticipated under auditable and
retrospectively rated policies. Unearned premiums represent the portion of
premiums written applicable to the unexpired terms of policies in force.
Unearned premiums also include estimated and unbilled premium adjustments. Other
revenue consists primarily of revenues associated with the Company's servicing
businesses. Retrospective and contingent commissions and other related expenses
are incurred and recorded in the same period that the retrospective premiums are
recorded or other contract provisions are met.
(K) FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in stockholders'
equity as a component of accumulated other comprehensive income. Balance sheet
accounts are translated at the exchange rates in effect at each year end and
income statement accounts are translated at the average rates of exchange
prevailing during the year. The national currencies of the international
operations are generally their functional currencies.
(L) DIVIDENDS TO POLICYHOLDERS
Policyholder dividends are accrued using an estimate of the amount to be paid
based on underlying contractual obligations under policies and applicable state
laws. If limitations exist on the amount of net income from participating life
insurance contracts that may be distributed to stockholders, the policyholders'
share of net income on those contracts that cannot be distributed is excluded
from stockholders' equity by a charge to operations and a credit to a liability.
LIFE - Participating life insurance in force accounted for 8%, 17% and 20% as of
December 31, 2001, 2000 and 1999, respectively, of total life insurance in
force. Dividends to policyholders were $68, $67 and $104 for the years ended
December 31, 2001, 2000 and 1999, respectively. There were no additional amounts
of income allocated to participating policyholders.
PROPERTY & CASUALTY - Net written premiums for participating property and
casualty insurance policies represented 9%, 9% and 11% of total net written
premiums for the years ended December 31, 2001, 2000 and 1999, respectively.
Dividends to policyholders were $38, $33 and $40 for the years ended December
31, 2001, 2000 and 1999, respectively.
(M) MUTUAL FUNDS
The Company maintains a retail mutual fund operation, whereby the Company,
through wholly-owned subsidiaries, provides investment management and
administrative services to The Hartford Mutual Funds, Inc., a family of 21
mutual funds. The Company charges fees to the shareholders of the mutual funds,
which are recorded as revenue by the Company. Investors can purchase "shares" in
the mutual funds, all of which are registered with the Securities and Exchange
Commission, in accordance with the Investment Company Act of 1940. The mutual
funds are owned by the shareholders of those funds and not by the Company. As
such, the mutual fund assets and liabilities and related investment returns are
not reflected in the Company's consolidated financial statements since they are
not assets, liabilities and operations of the Company.
2. SEPTEMBER 11, 2001
As a result of the September 11 terrorist attack, the Company recorded in 2001
an estimated before-tax loss amounting to $678, net of reinsurance: $647 related
to property and casualty operations and $31 related to life operations. The
Property & Casualty loss included a $1.1 billion gross reserve addition and
cessions under reinsurance contracts of $569. Also included in the Property &
Casualty loss was $91 of reinstatement and other reinsurance premiums. The
property-casualty portion of the estimate includes coverages related to
property, business interruption, workers' compensation, and other liability
exposures, including those underwritten by the Company's assumed reinsurance
operation. The Company based the loss estimate upon a review of insured
exposures using a variety of assumptions and actuarial techniques, including
estimated amounts for unknown and unreported policyholder losses and costs
incurred in settling claims. Also included was an estimate of amounts
recoverable under the Company's ceded reinsurance programs, including the cost
of additional reinsurance premiums. As a result of the uncertainties involved in
the estimation process, final claims settlement may vary from present estimates.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS
For the years ended December 31,
--------------------------------
(A) COMPONENTS OF NET INVESTMENT INCOME 2001 2000 1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 2,669 $ 2,544 $ 2,530
Dividends 39 27 31
Other investment income 178 142 107
- -------------------------------------------------------------------------------------------------------
Gross investment income 2,886 2,713 2,668
Less: Investment expenses 36 39 41
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 2,850 $ 2,674 $ 2,627
=======================================================================================================
(B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
- -------------------------------------------------------------------------------------------------------
Fixed maturities $ (50) $ (251) $ (64)
Equity securities (34) 148 105
Sale of affiliates and other [1] (153) 239 (5)
Change in liability to policyholders for net realized capital (gains)
losses 1 9 (2)
- -------------------------------------------------------------------------------------------------------
NET REALIZED CAPITAL GAINS (LOSSES) $ (236) $ 145 $ 34
=======================================================================================================
<FN>
[1] 2001 primarily relates to before-tax losses on the sales of international
subsidiaries and the change in value of certain derivative instruments.
2000 includes a $242, before-tax, gain on the sale of Zwolsche.
</FN>
</TABLE>
<TABLE>
<CAPTION>
(C) UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized gains $ 177 $ 230 $ 395
Gross unrealized losses (117) (95) (46)
Minority interest in consolidated subsidiary -- -- (4)
- -------------------------------------------------------------------------------------------------------
Net unrealized gains 60 135 345
Deferred income taxes 19 45 121
- -------------------------------------------------------------------------------------------------------
Net unrealized gains, net of tax 41 90 224
Balance - beginning of year 90 224 144
- -------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAINS/LOSSES ON EQUITY SECURITIES $ (49) $ (134) $ 80
=======================================================================================================
(D) UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES
- -------------------------------------------------------------------------------------------------------
Gross unrealized gains $ 1,369 $ 1,042 $ 271
Gross unrealized losses (477) (406) (1,049)
Minority interest in consolidated subsidiary -- -- 105
Net unrealized (gains) losses credited to policyholders (22) (10) 24
- -------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 870 626 (649)
Deferred income taxes 305 219 (227)
- -------------------------------------------------------------------------------------------------------
Net unrealized gains (losses), net of tax 565 407 (422)
Balance - beginning of year 407 (422) 667
- -------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAINS/LOSSES ON FIXED MATURITIES $ 158 $ 829 $(1,089)
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(E) FIXED MATURITY INVESTMENTS As of December 31, 2001
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------
BONDS AND NOTES
<S> <C> <C> <C> <C>
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) $ 559 $ 20 $ (4) $ 575
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 1,925 47 (4) 1,968
States, municipalities and political subdivisions 9,642 452 (34) 10,060
International governments 938 75 (10) 1,003
Public utilities 1,470 30 (31) 1,469
All other corporate including international 13,187 454 (213) 13,428
All other corporate - asset-backed 8,469 263 (152) 8,580
Short-term investments 2,104 3 -- 2,107
Certificates of deposit 708 20 (28) 700
Redeemable preferred stock 152 5 (1) 156
- -----------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 39,154 $ 1,369 $ (477) $ 40,046
=================================================================================================================
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
(E) FIXED MATURITY INVESTMENTS (CONTINUED) As of December 31, 2001
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BONDS AND NOTES
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) $ 288 $ 19 $ -- $ 307
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 1,651 42 (10) 1,683
States, municipalities and political subdivisions 9,574 502 (30) 10,046
International governments 963 54 (14) 1,003
Public utilities 869 10 (16) 863
All other corporate including international 9,399 192 (258) 9,333
All other corporate - asset-backed 8,000 206 (58) 8,148
Short-term investments 2,091 5 -- 2,096
Certificates of deposit 582 6 (15) 573
Redeemable preferred stock 439 6 (5) 440
- -----------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 33,856 $ 1,042 $ (406) $ 34,492
=================================================================================================================
</TABLE>
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 2001 by estimated maturity year are shown below. Expected
maturities differ from contractual maturities due to call or prepayment
provisions. Asset-backed securities, including mortgage-backed securities and
collateralized mortgage obligations, are distributed to maturity year based on
the Company's estimates of the rate of future prepayments of principal over the
remaining lives of the securities. These estimates are developed using
prepayment speeds provided in broker consensus data. Such estimates are derived
from prepayment speeds experienced at the interest rate levels projected for the
applicable underlying collateral. Actual prepayment experience may vary from
these estimates.
- ------------------------------------------------------------------
Amortized
MATURITY Cost Fair Value
- ------------------------------------------------------------------
One year or less $ 4,324 $ 4,352
Over one year through five years 10,980 11,218
Over five years through ten years 11,352 11,644
Over ten years 12,498 12,832
- ------------------------------------------------------------------
TOTAL $ 39,154 $ 40,046
==================================================================
(F) SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS
For the years ended December 31,
-----------------------------------
2001 2000 1999
- ----------------------------------------------------------------------
SALE OF FIXED MATURITIES
Sale proceeds $ 8,714 $ 9,606 $ 9,761
Gross gains 202 187 245
Gross losses (82) (429) (311)
SALE OF EQUITY SECURITIES
Sale proceeds $ 803 $ 1,306 $ 1,317
Gross gains 135 258 124
Gross losses (139) (110) (19)
======================================================================
(G) CONCENTRATION OF CREDIT RISK
The Hartford is not exposed to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholders' equity.
(H) DERIVATIVE INSTRUMENTS
The notional amounts of derivative contracts represent the basis upon which pay
or receive amounts are calculated and are not reflective of credit risk.
Notional amounts pertaining to derivative instruments (excluding guaranteed
separate accounts) totaled $8.0 billion at December 31, 2001 and $5.3 billion at
December 31, 2000.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(H) DERIVATIVE INSTRUMENTS (CONTINUED)
A reconciliation between notional amounts as of December 31, 2001 and 2000 by
derivative type and strategy is as follows:
<TABLE>
<CAPTION>
DERIVATIVE INSTRUMENTS
December 31, 2000 Maturities/ December 31, 2001
Notional Amount Additions Terminations [1] Notional Amount
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BY DERIVATIVE TYPE
Caps $ 592 $ 11 $ -- $ 603
Floors 295 25 -- 320
Swaps/Forwards 3,919 3,190 1,509 5,600
Futures 144 153 220 77
Options 356 1,363 311 1,408
- -------------------------------------------------------------------------------------
TOTAL $ 5,306 $ 4,742 $ 2,040 $ 8,008
=====================================================================================
BY STRATEGY
Liability $ 774 $ 582 $ 43 $ 1,313
Anticipatory 144 475 292 327
Asset 3,489 3,685 1,705 5,469
Portfolio 899 -- -- 899
- -------------------------------------------------------------------------------------
TOTAL $ 5,306 $ 4,742 $ 2,040 $ 8,008
=====================================================================================
<FN>
[1] During 2001, the Company had no significant gain or loss on terminations
of hedge positions using derivative financial instruments.
</FN>
</TABLE>
(I) COLLATERAL ARRANGEMENTS
The Hartford entered into various collateral arrangements which require both the
pledging and accepting of collateral in connection with its derivative
instruments and repurchase agreements. As of December 31, 2001 and 2000,
collateral pledged has not been separately reported in the Consolidated Balance
Sheet. The classification and carrying amounts of collateral pledged at December
31, 2001 and 2000 were as follows:
ASSETS 2001 2000
- ------------------------------------------------------------------------------
U.S. Gov't and Gov't agencies and
authorities (guaranteed and sponsored) $ 1 $ 3
U.S. Gov't and Gov't agencies and
authorities (guaranteed and sponsored
- asset backed) 53 31
- ------------------------------------------------------------------------------
TOTAL $ 54 $ 34
- ------------------------------------------------------------------------------
At December 31, 2001 and 2000, The Hartford had accepted collateral consisting
of cash and U.S. Government securities with a fair value of $161 and $252,
respectively. At December 31, 2001 and 2000, only cash collateral of $108 and
$31, respectively, was recorded on the balance sheet in fixed maturities and
other liabilities. While The Hartford is permitted by contract to sell or
repledge the noncash collateral, none of the collateral has been sold or
repledged at December 31, 2001 and 2000. As of December 31, 2001 and 2000 all
collateral accepted was held in separate custodial accounts.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", requires
disclosure of fair value information of financial instruments. For certain
financial instruments where quoted market prices are not available, other
independent valuation techniques and assumptions are used. Because considerable
judgment is used, these estimates are not necessarily indicative of amounts that
could be realized in a current market exchange. SFAS No. 107 excludes certain
financial instruments from disclosure, including insurance contracts, other than
financial guarantees and investment contracts. The Hartford uses the following
methods and assumptions in estimating the fair value of each class of financial
instrument.
Fair value for fixed maturities and marketable equity securities approximates
those quotations published by applicable stock exchanges or received from other
reliable sources.
For policy loans, carrying amounts approximate fair value.
Fair value of limited partnerships and trusts is based on external market
valuations from partnership and trust management.
Derivative instruments are reported at fair value based on internally
established valuations that are consistent with external valuation models. Other
policyholder funds and benefits payable fair value information is determined by
estimating future cash flows, discounted at the current market rate.
For short-term debt, carrying amounts approximate fair value.
Fair value for long-term debt and trust preferred securities is based on
external valuation using discounted future cash flows at current market interest
rates.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of The Hartford's financial instruments at
December 31, 2001 and 2000 were as follows:
2001 2000
------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------
ASSETS
Fixed maturities $40,046 $40,046 $34,492 $34,492
Equity securities 1,349 1,349 1,056 1,056
Policy loans 3,317 3,317 3,610 3,610
Limited partnerships [1] 1,372 1,372 1,138 1,138
Other investments [2] [3] 605 605 373 374
LIABILITIES
Other policyholder funds
and benefits payable [4] $16,077 $15,939 $11,985 $11,607
Short-term debt 599 607 235 238
Long-term debt 1,965 2,082 1,862 1,901
Trust preferred securities 1,412 1,429 1,243 1,233
Derivative related
liabilities [3] [5] 208 208 -- --
======================================================================
[1] Included in other investments on the balance sheet.
[2] 2001 includes $138 of derivative related assets.
[3] Prior year derivative related assets and liabilities were reported along
with the items being hedged in accordance with then generally accepted
accounting principles.
[4] Excludes group accident and health and universal life insurance contracts,
including corporate owned life insurance.
[5] Included in other liabilities on the balance sheet.
5. SEPARATE ACCOUNTS
The Hartford maintained separate account assets and liabilities totaling $114.7
billion and $114.1 billion at December 31, 2001 and 2000, respectively, which
are reported at fair value. Separate account assets, which are segregated from
other investments, reflect two categories of risk assumption: non-guaranteed
separate accounts totaling $104.6 billion and $104.3 billion at December 31,
2001 and 2000, respectively, wherein the policyholder assumes the investment
risk, and guaranteed separate accounts totaling $10.1 billion and $9.8 billion
at December 31, 2001 and 2000, respectively, wherein The Hartford contractually
guarantees either a minimum return or the account value to the policyholder.
Included in the non-guaranteed category were policy loans totaling $575 and $697
at December 31, 2001 and 2000, respectively. Net investment income (including
net realized capital gains and losses) and interest credited to policyholders on
separate account assets are not reflected in the Consolidated Statements of
Income.
Separate account management fees and other revenues included in fee income were
$1.3 billion, $1.4 billion and $1.1 billion in 2001, 2000 and 1999,
respectively. The guaranteed separate accounts include fixed market value
adjusted ("MVA") individual annuities and modified guaranteed life insurance.
The average credited interest rate on these contracts was 6.4% and 6.6% at
December 31, 2001 and 2000, respectively. The assets that support these
liabilities were comprised of $9.8 billion and $9.6 billion in fixed maturities
as of December 31, 2001 and 2000, respectively, and $243 and $127 of other
investments as of December 31, 2001 and 2000, respectively. The portfolios are
segregated from other investments and are managed to minimize liquidity and
interest rate risk. In order to minimize the risk of disintermediation
associated with early withdrawals, fixed MVA annuity and modified guaranteed
life insurance contracts carry a graded surrender charge as well as a market
value adjustment. Additional investment risk is hedged using a variety of
derivatives which totaled $37 and $3 in net carrying value and $3.2 billion and
$3.5 billion in notional amounts as of December 31, 2001 and 2000, respectively.
6. DEBT
<TABLE>
<CAPTION>
2001 2000
-----------------------------------------------------------
Weighted Average Weighted Average
Amount Interest Rate [1] Amount Interest Rate [1]
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM DEBT
Commercial paper $ 299 2.0% $ 35 6.6%
Current maturities of long-term debt 300 6.4% 200 8.3%
- --------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 599 4.2% $ 235 8.1%
==============================================================================================================
LONG-TERM DEBT
6.375% Notes, due 2002 -- -- 300 6.6%
6.9% Notes, due 2004 199 7.0% 199 7.0%
7.75% Notes, due 2005 246 8.2% 245 8.2%
7.1% Notes, due 2007 198 7.2% 198 7.2%
6.375% Notes, due 2008 200 6.5% 200 6.5%
7.9% Notes, due 2010 274 8.0% 274 8.0%
7.3% Notes, due 2015 200 7.4% 199 7.4%
7.65% Notes, due 2027 248 7.8% 247 7.8%
7.375% Notes, due 2031 400 7.5% -- --
- --------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 1,965 7.4% $ 1,862 7.2%
==============================================================================================================
<FN>
[1] Represents the effective interest rate at the end of the year.
</FN>
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
(A) SHELF REGISTRATIONS
On May 15, 2001, HLI filed with the SEC a shelf registration statement for the
potential offering and sale of up to $1.0 billion in debt and preferred
securities. The registration statement was declared effective on May 29, 2001.
This registration statement includes an aggregate $150 of HLI securities
remaining under the shelf registration filed by HLI with the SEC in June 1998.
As of December 31, 2001, HLI had $1.0 billion remaining on its shelf.
On November 9, 2000, The Hartford filed with the Securities and Exchange
Commission a shelf registration statement and a prospectus, as amended on
January 31, 2001, for the potential offering and sale of up to $2.6 billion in
debt and equity securities. Specifically, the registration statement allows for
the following types of securities to be offered: debt securities, preferred
stock, common stock, depositary shares, warrants, stock purchase contracts,
stock purchase units and junior subordinated deferrable interest debentures of
the Company, preferred securities of any of one or more capital trusts organized
by The Hartford ("The Hartford Trusts") and guarantees by the Company with
respect to the preferred securities of any of The Hartford Trusts (see Note 7).
This registration statement includes an aggregate of $127 of The Hartford
securities remaining under a shelf registration statement filed by The Hartford
with the Securities and Exchange Commission on October 11, 1995 and subsequently
amended on October 2, 1996. The registration statement was declared effective on
February 12, 2001. As of December 31, 2001, The Hartford had $1.1 billion
remaining on the shelf.
(B) SHORT-TERM DEBT
The Hartford has a commercial paper program which allows the Company to borrow
up to a maximum amount of $2.0 billion in short-term commercial paper notes. The
Hartford's commercial paper ranks equally with its other unsecured and
unsubordinated indebtedness. As of December 31, 2001, the Company had $299 of
outstanding borrowings under the program.
Effective June 20, 2001, The Hartford entered into an amended and restated
five-year revolving $1.0 billion credit facility with fourteen banks. This
facility is available for general corporate purposes and to provide additional
support to the Company's commercial paper program. As of December 31, 2001,
there were no outstanding borrowings under the facility.
HLI has a commercial paper program which allows it to borrow up to a maximum
amount of $250 in short-term commercial paper notes. As of December 31, 2001,
HLI had no outstanding borrowings under the program.
As of December 31, 2001, HLI maintained a $250 five-year revolving credit
facility comprised of four participatory banks. This facility, which expires in
2003, is available for general corporate purposes and to provide additional
support to HLI's commercial paper program. As of December 31, 2001, there were
no outstanding borrowings under the facility or commercial paper program.
On June 23, 2000, The Hartford borrowed $400 under its commercial paper program,
the proceeds of which were used to partially fund The HLI Repurchase. On
December 29, 2000, the Company paid off this borrowing with proceeds received
from the sale of Zwolsche (see Note 18(b)).
(C) LONG-TERM DEBT
The Hartford's long-term debt securities are issued by either The Hartford
Financial Services Group, Inc. ("HFSG") or HLI and are unsecured obligations of
HFSG or HLI and rank on a parity with all other unsecured and unsubordinated
indebtedness of HFSG or HLI.
On December 1, 2001, The Hartford's 8.3% medium term notes became due. The
Company borrowed $200 under its commercial paper program to retire the debt.
On March 1, 2001, HLI issued and sold $400 of senior debt securities from its
existing shelf registration. The long-term debt was issued in the form of 7.375%
thirty-year senior notes due March 1, 2031. Interest on the notes is payable
semi-annually on March 1 and September 1, commencing on September 1, 2001. As
previously discussed, HLI used the net proceeds from the issuance of the notes
to partially fund the Fortis acquisition. (For further discussion of the Fortis
Acquisition, see Note 18(a).)
On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable
long-term debt under its October 11, 1995 shelf. The long-term debt was issued
in the form of $250 7.75% five-year notes due June 15, 2005, and $275 7.90%
ten-year notes due June 15, 2010. Interest on the notes is payable semi-annually
on June 15 and December 15, commencing on December 15, 2000. The Hartford used
the net proceeds from the issuance of the common stock and debt to partially
fund The HLI Repurchase (see Note 16).
(D) INTEREST EXPENSE
Interest expense incurred related to short-term and long-term debt totaled $179,
$150 and $114 for 2001, 2000 and 1999, respectively.
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST
PREFERRED SECURITIES)
(A) DESCRIPTION
On October 26, 2001, Hartford Capital III, a Delaware statutory business trust
formed by The Hartford, issued 20,000,000, 7.45% Trust Originated Preferred
Securities, Series C. The proceeds from the sale of the Series C Preferred
Securities were used to acquire $500 of Junior Subordinated Deferrable Interest
Debentures Senior C issued by The Hartford. The Hartford used the proceeds from
the sale of such debentures for the redemption of the 8.35% Cumulative Quarterly
Income Preferred Securities, Series B of Hartford Capital II.
The Series C Preferred Securities represent undivided beneficial interests in
the assets of Hartford Capital III. The Hartford owns all of the common
securities of Hartford Capital III. Holders of Series C Preferred Securities are
entitled to receive cumulative cash distributions accruing from October 26,
2001, the date of issuance, and payable quarterly in arrears
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST
PREFERRED SECURITIES) (CONTINUED)
(A) DESCRIPTION (CONTINUED)
commencing January 2, 2002 at the annual rate of 7.45% of the stated liquidation
amount of $25.00 per Series C Preferred Security. The Series C Preferred
Securities are subject to mandatory redemption upon repayment of the Series C
Junior Subordinated Debentures at maturity or upon earlier redemption. The
Hartford has the right to redeem the Hartford Junior Subordinated Debentures (i)
at any time, in whole or in part, at a redemption price equal to the accrued and
unpaid interest on the Hartford Junior Subordinated Debentures so redeemed to
the date fixed for redemption, plus the greater of (a) the principal amount
thereof and (b) an amount equal to the interest and principal that would have
been payable after the redemption date, discounting that amount on a U.S.
Treasury rate basis to present value, or (ii) on or after October 26, 2006, in
whole or part, at a redemption price equal to the accrued and unpaid interest on
the Hartford Junior Subordinated Debentures so redeemed to the date fixed for
redemption plus 100% of the principal amount, or (iii) at any time, in whole,
but not in part, upon the occurrence of certain specified events, at a
redemption price equal to the accrued and unpaid interest on the Hartford Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof, in each case subject to certain conditions.
The Hartford Junior Subordinated Debentures bear interest at the annual rate of
7.45% of the principal amount, payable quarterly in arrears commencing January
2, 2002, and mature on October 26, 2050. The Hartford Junior Subordinated
Debentures are unsecured and rank junior and subordinate in right of payment to
all senior debt of The Hartford and are effectively subordinated to all existing
and future liabilities of its subsidiaries.
The Hartford has the right to defer payments of interest on the Hartford Junior
Subordinated Debentures by extending the interest payment period for up to 20
consecutive quarters for each deferral period, up to the maturity date. During
any such period, interest will continue to accrue and The Hartford may not
declare or pay any cash dividends or distributions on The Hartford's common
stock nor make any principal, interest or premium payments on or repurchase any
debt securities that rank pari passu with or junior to the Hartford Junior
Subordinated Debentures. In the event of failure to pay interest for 30
consecutive days (subject to the deferral of any due date in the case of an
extension period), the Hartford Junior Subordinated Debentures will become due
and payable. The Hartford has guaranteed, on a subordinated basis, all of the
Hartford Capital III obligations under the Hartford Series C Preferred
Securities, including to pay the redemption price and any accumulated and unpaid
distributions to the extent of available funds and upon dissolution, winding up
or liquidation, but only to the extent that Hartford Capital III has funds to
make such payments.
On March 6, 2001, Hartford Life Capital II, a Delaware statutory business trust
formed by HLI, issued 8,000,000, 7.625% Trust Preferred Securities, Series B
under its June 1998 shelf registration. The proceeds from the sale of the Series
B Preferred Securities were used to acquire $200 of 7.625% Series B Junior
Subordinated Debentures issued by HLI. HLI used the proceeds from the offering
to partially fund the Fortis acquisition.
The Series B Preferred Securities represent undivided beneficial interests in
Hartford Life Capital II's assets, which consist solely of the Series B Junior
Subordinated Debentures. HLI owns all of the common securities of Hartford Life
Capital II. Holders of Series B Preferred Securities are entitled to receive
cumulative cash distributions accruing from March 6, 2001, the date of issuance,
and payable quarterly in arrears commencing April 15, 2001 at the annual rate of
7.625% of the stated liquidation amount of $25.00 per Series B Preferred
Security. The Series B Preferred Securities are subject to mandatory redemption
upon repayment of the Series B Junior Subordinated Debentures at maturity or
upon earlier redemption. HLI has the right to redeem the Series B Junior
Subordinated Debentures on or after March 6, 2006 or earlier upon the occurrence
of certain events. Holders of Series B Preferred Securities generally have no
voting rights.
The Series B Junior Subordinated Debentures bear interest at the annual rate of
7.625% of the principal amount, payable quarterly in arrears commencing April
15, 2001, and mature on February 15, 2050. The Series B Junior Subordinated
Debentures are unsecured and rank junior and subordinate in right of payment to
all present and future senior debt of HLI and are effectively subordinated to
all existing and future obligations of HLI subsidiaries.
HLI has the right at any time, and from time to time, to defer payments of
interest on the Series B Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters up to the debentures' maturity date. During
any such period, interest will continue to accrue and HLI may not declare or pay
any cash dividends or distributions on, or purchase, HLI's capital stock nor
make any principal, interest or premium payments on or repurchase any debt
securities that rank equally with or junior to the Series B Junior Subordinated
Debentures. HLI will have the right at any time to dissolve the Trust and cause
the Series B Junior Subordinated Debentures to be distributed to the holders of
the Series B Preferred Securities. HLI has guaranteed, on a subordinated basis,
all of the Hartford Life Capital II obligations under the Series B Preferred
Securities including payment of the redemption price and any accumulated and
unpaid distributions to the extent of available funds and upon dissolution,
winding up or liquidation but only to the extent Hartford Life Capital II has
funds available to make such payments.
On June 29, 1998, Hartford Life Capital I, a special purpose Delaware trust
formed by HLI, issued 10,000,000, 7.2% Trust Preferred Securities, Series A
("Series A Preferred Securities"). The proceeds from the sale of the Series A
Preferred Securities were used to acquire $250 of 7.2% Series A Junior
Subordinated Deferrable Interest Debentures ("Junior Subordinated Debentures")
issued by HLI. HLI used the proceeds from the offering for the retirement of its
outstanding commercial paper, for acquisitions and for other general corporate
purposes.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST
PREFERRED SECURITIES) (CONTINUED)
(A) DESCRIPTION (CONTINUED)
The Series A Preferred Securities represent undivided beneficial interests in
Hartford Life Capital I's assets, which consist solely of the Junior
Subordinated Debentures. HLI owns all of the beneficial interests represented by
Series A Common Securities of Hartford Life Capital I. Holders of Series A
Preferred Securities are entitled to receive cumulative cash distributions
accruing from June 29, 1998, the date of issuance, and payable quarterly in
arrears commencing July 15, 1998 at the annual rate of 7.2% of the stated
liquidation amount of $25.00 per Series A Preferred Security. Holders of Series
A Preferred Securities generally have no voting rights. The Series A Preferred
Securities are subject to mandatory redemption upon repayment of the Junior
Subordinated Debentures at maturity or upon earlier redemption.
HLI has the right to redeem the Junior Subordinated Debentures (i) in whole or
in part on or after June 30, 2003, or (ii) at any time, in whole only, upon the
occurrence of certain specified events. In either case, the redemption price
equals the accrued and unpaid interest on the Junior Subordinated Debentures so
redeemed to the date fixed for redemption plus the principal amount thereof. In
addition, prior to June 30, 2003, HLI shall have the right to redeem the Junior
Subordinated Debentures at any time, in whole or in part, at a redemption price
equal to the accrued and unpaid interest on the Junior Subordinated Debentures
so redeemed to the date fixed for redemption, plus the greater of (a) the
principal amount thereof or (b) an amount equal to the present value on the
redemption date of the interest payments that would have been paid through June
20, 2003, after discounting that amount on a quarterly basis from the originally
scheduled date for payment, and the present value on the redemption date of
principal, after discounting that amount on a quarterly basis from June 30,
2003, at a discount rate tied to the interest rate on U.S. Treasury securities
maturing on June 30, 2003. The Junior Subordinated Debentures bear interest at
the annual rate of 7.2% of the principal amount, payable quarterly in arrears
commencing June 29, 1998, and mature on June 30, 2038. The Junior Subordinated
Debentures are unsecured and rank junior and subordinate in right of payment to
all present and future senior debt of HLI and are effectively subordinated to
all existing and future liabilities of its subsidiaries.
HLI has the right at any time, and from time to time, to defer payments of
interest on the Junior Subordinated Debentures for a period not exceeding 20
consecutive quarters up to the debentures' maturity date. During any such
period, interest will continue to accrue and HLI may not declare or pay any cash
dividends or distributions on, or purchase, HLI's capital stock nor make any
principal, interest or premium payments on or repurchase any debt securities
that rank pari passu with or junior to the Junior Subordinated Debentures. HLI
will have the right at any time to dissolve the Trust and cause the Junior
Subordinated Debentures to be distributed to the holders of the Series A
Preferred Securities and the Series A Common Securities. HLI has guaranteed, on
a subordinated basis, all of the Hartford Life Capital I obligations under the
Series A Preferred Securities, including payment of the redemption price and any
accumulated and unpaid distributions to the extent of available funds and upon
dissolution, winding up or liquidation but only to the extent that Hartford Life
Capital I has funds to make such payments.
On October 30, 1996, Hartford Capital II, a special purpose Delaware trust
formed by The Hartford, issued 20,000,000 Series B, 8.35% Cumulative Quarterly
Income Preferred Securities ("Series B Preferred Securities"). The material
terms of the Series B Preferred Securities are substantially the same as the
Hartford Series A Preferred Securities described above, except for the rate and
maturity date. The proceeds from the sale of the Series B Preferred Securities
were used to acquire $500 of Junior Subordinated Deferrable Interest Debentures,
Series B ("Series B Debentures"), issued by The Hartford. The Series B
Debentures bear interest at the annual rate of 8.35% of the principal amount
payable quarterly in arrears commencing December 31, 1996, and mature on October
30, 2026. The Hartford used the proceeds from the sale of such debentures for
general corporate purposes.
The Series B Preferred Securities were redeemed on December 31, 2001, using the
proceeds from the October 2001 Series C Preferred Securities. The Company
incurred an $8, after-tax, extraordinary loss related to unamortized issue costs
associated with the early extinguishment of the Series B Preferred Securities.
On February 28, 1996, Hartford Capital I, a special purpose Delaware trust
formed by The Hartford, issued 20,000,000 Series A, 7.7% Cumulative Quarterly
Income Preferred Securities ("Hartford Series A Preferred Securities"). The
proceeds from the sale of Hartford Series A Preferred Securities were used to
acquire $500 of Junior Subordinated Deferrable Interest Debentures, Series A
("Hartford Junior Subordinated Debentures"), issued by The Hartford. The
Hartford used the proceeds from the sale of such debentures for the partial
repayment of outstanding commercial paper and short-term bank indebtedness.
Hartford Series A Preferred Securities represent undivided beneficial interests
in the assets of Hartford Capital I. The Hartford owns all of the beneficial
interests represented by Series A Common Securities of Hartford Capital I.
Holders of Hartford Series A Preferred Securities are entitled to receive
preferential cumulative cash distributions accruing from February 28, 1996 and
payable quarterly in arrears commencing March 31, 1996 at the annual rate of
7.7% of the liquidation amount of $25.00 per Hartford Series A Preferred
Security. Holders of Hartford Series A Preferred Securities have limited voting
rights. The Hartford Series A Preferred Securities are subject to mandatory
redemption upon repayment of the Hartford Junior Subordinated Debentures at
maturity or their earlier redemption.
The Hartford has the right to redeem the Hartford Junior Subordinated Debentures
(i) at any time, in whole or in part, at a redemption price equal to the accrued
and unpaid interest on the Hartford Junior Subordinated Debentures so redeemed
to the date fixed for redemption, plus the greater of (a) the principal amount
thereof and (b) an amount equal to the interest and
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST
PREFERRED SECURITIES) (CONTINUED)
(A) DESCRIPTION (CONTINUED)
principal that would have been payable after the redemption date, discounting
that amount on a U.S. Treasury rate basis to a present value, or (ii) on or
after February 28, 2001, in whole or part, at a redemption price equal to the
accrued and unpaid interest on the Hartford Junior Subordinated Debentures so
redeemed to the date fixed for redemption plus 100% of the principal amount
thereof, or (iii) at any time, in whole only, upon the occurrence of certain
specified events, at a redemption price equal to the accrued and unpaid interest
on the Hartford Junior Subordinated Debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount thereof, in each case subject to
certain conditions.
The Hartford Junio