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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, 2000
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
8.35% Cumulative Quarterly Income Preferred Securities, Series B, issued
by Hartford Capital II
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, 2001, there were outstanding 236,640,967 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
$15,025,144,711 based on the closing price of $63.85 per share of the Common
Stock on the New York Stock Exchange on February 28, 2001.
Documents Incorporated by Reference:
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Portions of the Registrant's definitive proxy statement for its 2001 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of The Hartford 2
2 Properties 13
3 Legal Proceedings 13
4 Submission of Matters to a Vote of Security Holders 13
PART II 5 Market for The Hartford's Common Stock and Related
Stockholder Matters 13
6 Selected Financial Data 14
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
7A Quantitative and Qualitative Disclosures About
Market Risk 47
8 Financial Statements and Supplementary Data 47
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 47
PART III 10 Directors and Executive Officers of The Hartford 47
11 Executive Compensation 47
12 Security Ownership of Certain Beneficial Owners
and Management 47
13 Certain Relationships and Related Transactions 47
PART IV 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 47
Signatures II-1
Exhibits Index II-2
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, 2000,
total assets and total stockholders' equity of The Hartford were $171.5 billion
and $7.5 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.
The Hartford Financial Services Group, Inc., a Delaware corporation, was formed
in December 1985 as a wholly-owned subsidiary of ITT Corporation ("ITT"). On
December 19, 1995, ITT distributed all of the outstanding shares of The Hartford
Financial Services Group, Inc. to ITT shareholders of record in an action known
herein as the Distribution. As a result of the Distribution, The Hartford became
an independent, publicly traded company.
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 fourteen
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 2 of Notes to
Consolidated Financial Statements.
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh")
subsidiary. The Hartford retained ownership of Excess Insurance Company Limited,
London & Edinburgh's property and casualty insurance and reinsurance subsidiary,
which discontinued writing new business in 1993.
On December 22, 2000, The Hartford completed the sale of its Netherlands-based
Zwolsche Algemeene N.V. subsidiary to Assurances Generales de France, a
subsidiary of Allianz AG. The Hartford received $547, before costs of sale.
Management used the proceeds from the sale to reduce outstanding commercial
paper which was issued to partially fund The HLI Repurchase.
On January 25, 2001, The Hartford agreed to acquire the U.S. 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 will
effect 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. The Fortis
transaction, which is subject to insurance regulatory approval and other
customary conditions, is expected to be completed in the second quarter of 2001.
The acquisition will be recorded as a purchase transaction.
On February 8, 2001, The Hartford completed the sale of its Spain-based
subsidiary, Hartford Seguros, to Liberty International, a subsidiary of Liberty
Mutual Group. The Hartford received $29, before costs of sale.
REPORTING SEGMENTS
The Hartford is organized into two major operations: Worldwide Life and
Worldwide Property & Casualty. Within these operations, The Hartford conducts
business principally in eight operating segments. Additionally, all activities
related to The HLI Repurchase, the minority interest in HLI for pre-acquisition
periods and The Hartford Bank, FSB are included in Corporate.
Worldwide Life, headquartered in Simsbury, Connecticut, is organized into four
reportable operating segments: Investment Products, Individual Life, Group
Benefits (formerly Employee
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Benefits) and Corporate Owned Life Insurance ("COLI"). Worldwide Life also
includes in an Other category its international operations, which are primarily
located in Latin America and the Far East, and corporate items not directly
allocable to any of its reportable operating segments, principally interest
expense.
Worldwide Property & Casualty is organized into four reportable operating
segments: the underwriting segments of Commercial, Personal and Reinsurance, and
an International and Other Operations segment. Also reported within Worldwide
Property & Casualty is North American, which includes the combined underwriting
results of Commercial, Personal and Reinsurance along with income and expense
items not directly allocable to these segments, such as net investment income.
The following is a description of Worldwide Life and Worldwide 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 18 of Notes to Consolidated Financial Statements.
WORLDWIDE LIFE
Worldwide Life's business is conducted by HLI, a leading financial services and
insurance organization. Through Worldwide 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 500,000 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.
According to the latest publicly available data, with respect to the United
States, the Company is the largest writer of individual variable annuities based
on sales for the year ended December 31, 2000 and the third largest writer of
group disability insurance based on sales for the nine months ended September
30, 2000. In addition, the Company offers a retail-oriented mutual fund family
that is the fastest in history to reach $10 billion in assets. 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. The Company is the
third largest consolidated life insurance group based on statutory assets as of
December 31, 1999. In the past year, Worldwide Life's total assets under
management, which include $11.4 billion of third-party assets invested in the
Company's mutual funds, increased 7% to $155.1 billion at December 31, 2000.
Worldwide Life generated $6.0 billion in revenues and net income of $575 in
2000.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
Worldwide 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 more than half, declining from 43
basis points in 1992 to 21 basis points in 2000. 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 2000 Annuity Service Award
by DALBAR Inc., a recognized independent financial services research
organization, for the fifth consecutive year. The Hartford is the only company
to receive this prestigious award in every year of the award's existence. Also,
The Hartford Mutual Funds, Inc. have been 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.
RISK MANAGEMENT
Worldwide 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, 2000, the
Company had limited exposure to disintermediation risk on approximately 98% 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, 1995 to December 31, 2000, this segment's assets under management
grew to $116.0 billion from $43.9 billion, a five year compounded annual growth
rate of 21%. Investment Products generated revenues of $2.4 billion, $2.0
billion and $1.8 billion in 2000, 1999 and 1998, respectively, of which
individual annuities accounted for $1.5 billion, $1.4 billion and $1.1 billion
of total Investment Products revenues in 2000, 1999 and 1998, respectively. Net
income in the Investment Products segment was $424 in 2000, a 28% increase over
1999.
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 $10.7 billion,
$10.9 billion and $10.0 billion in 2000, 1999 and 1998, respectively. According
to Variable Annuity and Research Data
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Service ("VARDS"), The Hartford was the number one writer of individual variable
annuities in the United States for 2000, 1999 and 1998 with sales of $9.0
billion, $10.3 billion and $9.9 billion, respectively. In addition, the Company
was the number one seller of individual variable annuities through banks in
2000, 1999 and 1998, according to Kenneth Kehrer Associates (a leading
consultant to banks).
The Company's total account value related to individual annuity products was
$87.2 billion as of December 31, 2000. Of this total account value, $78.2
billion, or 90%, related to individual variable annuity products and $9.0
billion, or 10%, related primarily to fixed MVA annuity products.
The Hartford is emerging as a significant participant in the mutual fund
business. The Company is among the top providers of retirement products and
services, including asset management and plan administration, to municipalities
pursuant to Section 457 and plans to corporations under Section 401(k) of the
Internal Revenue Code of 1986, as amended (referred to as "Section 457" and
"Section 401(k)", respectively). The Company also provides structured settlement
contracts, terminal funding products and other investment products such as
guaranteed investment contracts ("GICs").
As previously mentioned, in January 2001, The Hartford agreed to acquire the
annuity and mutual fund businesses of Fortis. This acquisition is expected to
increase assets under management in the Company's fast growing mutual fund
business by over 30%, as well as solidify the Company's number one position in
variable annuities. (For additional information, see the Capital Resources and
Liquidity section of the MD&A under "Subsequent Event".)
Principal Products
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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 ranging initially from 6% to 8% of the contract's initial
deposit less withdrawals which reduce to zero on a sliding scale, usually within
seven policy years. Volatility experienced by the equity markets in 2000, 1999
and 1998 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 $78.2 billion as
of December 31, 2000, has grown significantly from $13.1 billion as of December
31, 1994 due to strong net cash flow, the result of a high level of sales, low
levels of surrenders and equity market appreciation. Approximately 96% and 95%
of the individual variable annuity account values were held in non-guaranteed
separate accounts as of December 31, 2000 and 1999, 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 and Morgan Stanley Dean Witter InterCapital, 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. Two of the industry's top twenty leading variable
annuities, (based on sales for the year ended 2000), The Director(R) and Putnam
Hartford Capital Manager Variable Annuity, are sponsored by The Hartford and are
managed in part by Wellington and Putnam, respectively. The Hartford Leaders, a
multi-manager variable annuity introduced in July 1999, combines the product
manufacturing, wholesaling and service capabilities of The Hartford with the
investment management expertise of three of the nation's most successful
investment management organizations, American Funds, Franklin Templeton Group
and MFS. The Hartford Leaders has proved to be a strong product from inception
and is poised to join The Director(R) and Putnam Hartford Capital Manager
Variable Annuity as an industry leader.
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 seven years. Sales of the Company's fixed MVA annuities increased
during 2000 as a result of the higher interest rate environment making 2000 the
best sales year for this product since 1995. Account values of fixed MVA
annuities were $9.0 billion and $8.4 billion as of December 31, 2000 and 1999,
respectively.
Mutual Funds -- In September 1996, the Company launched a new family of retail
mutual funds. The Company provides investment management and administrative
services to The Hartford Mutual Funds, Inc., a family of fourteen mutual funds.
These funds are managed by Wellington and Hartford Investment Management
Company, a wholly-owned subsidiary
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of The Hartford. The Company has entered into agreements with over 750 financial
services firms to distribute these mutual funds.
The Company charges management 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
since they are not assets, liabilities and operations of the Company.
According to Strategic Insight (a mutual fund research and consulting
organization), The Hartford Mutual Funds, Inc. reached $10 billion in assets
faster than any other retail-oriented fund family in history. Eight of the
fourteen funds have Morningstar ratings and all eight have three-, four- or
five- star ratings as of December 31, 2000. Total retail mutual fund sales were
$5.2 billion, $3.3 billion and $1.6 billion in 2000, 1999 and 1998,
respectively.
Corporate -- The Company sells retirement plan products and services to
corporations under Section 401(k) plans targeting the small and medium case
markets since the Company believes these markets are underpenetrated in
comparison to the large case market. As of December 31, 2000, the Company
administered over 1,400 Section 401(k) plans.
Governmental -- The Company sells retirement plan products and services to
municipalities under Section 457 plans. The Company offers a number of different
funds, both fixed income and equity, to the employees in Section 457 plans.
Generally, 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, 2000, the Company administered
over 2,000 Section 457 plans.
Institutional Liabilities -- The Company also 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.
Marketing and Distribution
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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, 2000, 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. In August 1998, the Company
completed the purchase of all outstanding shares of PLANCO Financial Services,
Inc. and its affiliate, PLANCO, Incorporated (collectively, "PLANCO"), a primary
wholesaler of the Company's individual annuities and mutual funds. PLANCO is the
nation's largest wholesaler 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 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. This acquisition secured 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
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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. As a result of court decisions and regulatory
actions, national banks may become more significant competitors in the future
for insurers which sell annuities. The 1999 Gramm-Leach-Bliley Act ("the
Financial Services Modernization Act"), which allows affiliations among banks,
insurance companies and securities firms, did not precipitate any significant
changes in ownership in 2000. (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. Life insurance in force
increased 13% to $75.1 billion as of December 31, 2000 from $66.7 billion as of
December 31, 1999. Account values grew 8% to $5.8 billion as of December 31,
2000 from $5.4 billion as of December 31, 1999. The Individual Life segment
generated revenues of $640, $584 and $567 in 2000, 1999 and 1998, respectively.
Net income in the Individual Life segment was $79 in 2000, an 11% increase over
1999.
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As previously mentioned, in January 2001, The Hartford agreed to acquire the
U.S. individual life insurance business of Fortis. This acquisition will add
significant scale to the Company's individual life business, and according to
data provided by Tillinghast-Towers Perrin, HLI will move to third largest from
fifth largest writer of variable life insurance in the United States based upon
new premium sales. It will also broaden the Company's reach in the emerging
affluent market with the addition of a retail broker-dealer consisting of
approximately 3,000 registered representatives. (For additional information, see
the Capital Resources and Liquidity section of the MD&A under "Subsequent
Event".)
Principal Products
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The trend in the individual life industry has been a shift away from traditional
products and fixed universal life insurance towards variable life (including
variable universal life) insurance products, in which The Hartford has been on
the leading edge. In 2000, of the Company's new sales of individual life
insurance, 89% was variable life and 10% 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 $2.9 billion and $2.6 billion as of December
31, 2000 and 1999, 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 $2.1 billion and $2.0 billion as of December 31, 2000 and
1999, respectively.
Marketing and Distribution
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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 210 individuals and expects to continue to increase the number
of wholesalers in the future.
Competition
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The Individual Life segment competes with approximately 1,500 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 coverage
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. According to the latest results published by Life Insurance Marketing and
Research Association ("LIMRA"), the Company, based on sales, was the third
largest provider of group disability insurance and the fourth largest writer of
group term life insurance in the United States for the nine months ended
September 30, 2000. Generally, policies sold in this segment are term insurance,
typically with one or two year rate guarantees. These rate guarantees allow the
Company to make adjustments in rate 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, 2000 and 1999, the Company had group
disability reserves of $2.0 billion and $1.8 billion and group life reserves of
$601 and $560, respectively. The Group Benefits segment generated revenues of
$2.2 billion, $2.0 billion and $1.8 billion in 2000, 1999 and 1998,
respectively, of which group disability insurance accounted for $939, $860 and
$763 and group life insurance accounted for $687, $654 and $593 of total Group
Benefits revenues in 2000, 1999 and 1998, respectively. Net income in the Group
Benefits segment was $90 in 2000, a 14% increase over 1999.
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
- 6 -
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 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 coverage 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 provides Medicare
Supplement, travel accident, hospital indemnity and other coverages (including
group life and disability) primarily to individual members of various
associations as well as employee groups.
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 expanded its
sales office system during 1999, by increasing the sales force and the number of
sales offices by about 25% and 15%, respectively. The Company will continue to
expand the system over the coming years in areas that have the highest growth
potential. The Company will also 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., the country's tenth
largest third-party administrator, 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 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 $15.9 billion and $12.4
billion as of December 31, 2000 and 1999, respectively.
Leveraged COLI account values decreased to $5.0 billion as of December 31, 2000
from $5.7 billion as of December 31, 1999, primarily due to the HIPA Act of
1996. Although COLI revenues decreased in 2000 to $767 from $831 in 1999, COLI
net income increased 13%, to $34 in 2000.
WORLDWIDE PROPERTY & CASUALTY
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, 1999
according to A.M. Best. Worldwide Property & Casualty generated $8.7 billion in
revenues, $7.3 billion in written premiums and $494 in net income in 2000. Total
assets for Worldwide Property & Casualty were $27.1 billion as of December 31,
2000.
Worldwide Property & Casualty is organized into four reportable operating
segments: the underwriting segments of Commercial, Personal and Reinsurance, and
an International and Other Operations segment. Also reported within Worldwide
Property & Casualty is North American, which includes the combined underwriting
results of Commercial, Personal and Reinsurance along with income and expense
items not directly allocable to these segments, such as net investment income.
COMMERCIAL
The Commercial segment provides insurance coverages to commercial accounts
primarily throughout the United States. Commercial is organized into three
customer markets: Business Insurance, Commercial Affinity and Commercial
Specialty.
- 7 -
Business Insurance provides standard commercial business for small accounts
("Select Customer") and mid-sized insureds ("Key Accounts"). Commercial Affinity
provides commercial risk management products and services to small and mid-sized
members of affinity groups and customers of financial institutions. Commercial
Specialty provides insurance through retailers and wholesalers to large
commercial clients ("Major/National") and insureds requiring a variety of
specialized coverages. The Commercial segment had written premiums of $3.5
billion, $3.2 billion and $3.2 billion in 2000, 1999 and 1998, respectively.
Underwriting losses for 2000, 1999 and 1998 were $153, $171 and $213,
respectively.
Principal Products
- ------------------
The Commercial segment offers workers' compensation, property, automobile,
liability, financial products, marine, agricultural and bond coverages. Excess
and surplus lines coverages not normally written by standard line insurers are
also provided.
Marketing and Distribution
- --------------------------
The Commercial segment provides insurance products and services through its home
office located in Hartford, Connecticut, and multiple domestic regional and
district office locations and insurance centers. The segment markets its
products nationwide utilizing a variety of distribution networks including
approximately 5,400 independent agents as well as wholesalers and direct
marketing including 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.
Competition
- -----------
The commercial insurance industry continues to be a highly challenging and
competitive environment in which the Commercial segment competes with other
stock insurance companies, self insurers and other underwriting organizations.
This competitive environment is created by price competition, consolidation and
globalization of companies, excess capital within the commercial insurance
industry, exploration and utilization of alternative distribution techniques and
emphasis on cost containment and reduction. In 2000, market conditions in the
commercial industry have improved as a result of a firming pricing environment.
PERSONAL
The Hartford ranks among the largest carriers of personal lines insurance. The
Personal segment provides insurance coverages to individuals throughout the
United States. Personal is organized to provide customized products and services
to the following markets: the membership of AARP through a direct marketing
operation; 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 Omni Insurance Group, Inc. ("Omni"), which was
acquired in 1998; 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 which began in
1996; and customer service for all health insurance products offered through
AARP's Health Care Options effective January 1, 1998. AARP's exclusive licensing
arrangement continues through the year 2002 for automobile, homeowners and
home-based business and through 2007 for Health Care Options. These agreements
provide the Personal segment with an important competitive advantage. The
Personal segment had written premiums of $2.6 billion, $2.5 billion and $2.2
billion in 2000, 1999 and 1998, respectively. Underwriting income for 2000, 1999
and 1998 were $2, $34 and $77, respectively.
Principal Products
- ------------------
The Personal segment provides automobile, homeowners, home-based business and
fire coverages to individuals across North America, including a special program
designed exclusively for members of AARP.
Marketing and Distribution
- --------------------------
The Personal segment reaches diverse markets through multiple distribution
channels. The segment markets directly to the 33 million members of AARP, sells
its products through independent agents and also markets through affinity
groups, including Sears, Ford and financial institutions.
Competition
- -----------
The personal lines marketplace continues to be competitive, especially in the
personal automobile line. Over the last two 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 108.9 for the first
nine months of 2000, according to A.M. Best. In the absence of renewal price
increases by competitors, attracting new customers becomes more difficult,
forcing companies to offer greater price incentives and product features and to
increase advertising costs.
A major competitive advantage of the Personal segment is the exclusive licensing
arrangement with AARP to provide personal automobile, homeowners and home-based
business insurance products to its members through 2002. Favorable "baby boomer"
demographics are expected to increase AARP membership during this period. The
Personal segment's relationship with AARP was further strengthened when it was
awarded a contract, effective January 1, 1998, to provide customer service for
all health insurance products offered through AARP's Health Care Options. The
Hartford's contract with Sears entered into in 2000, joins two major brands in
marketing automobile, homeowners, and home-based business, further enhancing The
Hartford's reputation and competitive advantage.
REINSURANCE
The Hartford is a major global reinsurer, with operations in the United States,
Canada, the United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan.
The Reinsurance segment had written premiums of $826, $703 and $711 in 2000,
1999 and 1998, respectively. Underwriting losses for 2000, 1999 and 1998 were
$73, $48 and $36, respectively.
- 8 -
Principal Products
- ------------------
The Reinsurance segment offers a full range of treaty and facultative
reinsurance products including property, casualty, marine, fidelity, finite
risk, including alternative risk transfer, and specialty coverages.
Marketing and Distribution
- --------------------------
The Reinsurance segment assumes insurance from other insurers, primarily through
reinsurance brokers in the worldwide reinsurance market.
Competition
- -----------
The worldwide property and casualty reinsurance market remains extremely
competitive with consolidation in the market creating fewer, but stronger,
competitors. Also, nontraditional solutions are beginning to emerge, which
complement traditional reinsurance products. The pricing environment in the
worldwide reinsurance market continued to improve throughout 2000.
INTERNATIONAL AND OTHER OPERATIONS
Worldwide Property & Casualty's International operations 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 international asset
accumulation businesses has resulted in the sale of the majority of its
international property and casualty operations. London & Edinburgh, located in
the United Kingdom, was sold by The Hartford 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. Worldwide Property &
Casualty's remaining International operation is The Hartford Insurance Company
(Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore
Insurance")), of which The Hartford owned an 80% interest at December 31, 2000,
after acquiring an additional 31% in December 2000.
Worldwide Property & Casualty's Other Operations consist of the 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.
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 have no new product sales, distribution systems, or competitive
issues.
The International and Other Operations segment generated revenues of $602, $661
and $1.8 billion in 2000, 1999 and 1998, respectively. Net income for 2000, 1999
and 1998 were $28, $33 and $97, respectively.
Principal Products
- ------------------
Singapore Insurance writes property and casualty products, primarily automobile.
Zwolsche offered property and casualty, life and asset management products and
services. Hartford Seguros provided both personal and commercial lines property
and casualty, and life insurance products.
Methods of Distribution
- -----------------------
The International operations conducts its business primarily through independent
brokers who are compensated on a commission basis. Zwolsche distributed its
products through various financial institutions.
Competition
- -----------
Singapore is a relatively small market with traditional local companies as well
as a large foreign presence primarily through branch operations. Competition is
very strong in most product lines with pricing set freely by the market.
WORLDWIDE LIFE RESERVES
In accordance with applicable insurance regulations under which Worldwide 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 Worldwide
Life Reserves may be found in the Reserves section of the MD&A.
WORLDWIDE 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 primarily based on historical experience and involves a variety of
actuarial techniques which analyze trends and other relevant factors. For the
year ended December 31, 2000, there were no changes to these reserving
assumptions that had a significant impact on the reserves or results of
operations.
The Hartford continually reviews its estimated claims and claim adjustment
expense reserves as additional experience and other relevant data become
available, and reserve levels are adjusted accordingly. Such adjustments are
reflected in net income of the period in which they are made. In the judgment of
The
- 9 -
Hartford's management, all information currently available has been properly
considered in establishing the reserves for unpaid claims and claim adjustment
expenses. Further discussion on The Hartford's property and casualty reserves
may be found in the Reserves section of the MD&A.
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 $396 and $480 as of December 31, 2000
and 1999, respectively, and amortization of the discount had no material effect
on net income during 2000, 1999 and 1998.
As of December 31, 2000, statutory basis property and casualty reserves for
claims and claim adjustment expenses exceeded those reported under Generally
Accepted Accounting Principles ("GAAP") by $10. The primary differences resulted
from the discounting of GAAP-basis workers' compensation reserves at risk free
interest rates which exceeded the required statutory discount rates set by
regulators, and the required exclusion from statutory reserves of assumed
retroactive reinsurance.
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.
The Company had no unusually large property and casualty insurance losses or
gains for the year ended December 31, 2000.
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.
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET
FOR THE YEARS ENDED DECEMBER 31, [1]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities for unpaid claims and
claim adjustment expenses [2] $8,887 $9,204 $10,498 $10,717 $10,776 $11,063 $12,242 $12,297 $12,485 $12,122 $11,963
CUMULATIVE PAID CLAIMS AND CLAIM
EXPENSES
One year later 2,584 2,684 2,596 2,578 2,654 2,434 2,569 2,475 2,939 2,982 --
Two years later 4,341 4,350 4,282 4,207 4,179 4,022 4,099 4,256 4,420 -- --
Three years later 5,490 5,550 5,433 5,268 5,286 5,074 5,412 5,146 -- -- --
Four years later 6,325 6,396 6,229 6,112 6,040 6,097 5,981 -- -- -- --
Five years later 6,961 7,020 6,895 6,682 6,877 6,485 -- -- -- -- --
Six years later 7,456 7,569 7,354 7,391 7,153 -- -- -- -- -- --
Seven years later 7,913 7,954 7,987 7,608 -- -- -- -- -- -- --
Eight years later 8,256 8,532 8,160 -- -- -- -- -- -- -- --
Nine years later 8,795 8,680 -- -- -- -- -- -- -- -- --
Ten years later 8,919 -- -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 9,174 10,535 10,757 10,811 11,019 12,025 12,217 12,119 12,280 12,090 --
Two years later 10,512 10,866 10,970 11,009 12,142 12,023 12,096 11,840 12,050 -- --
Three years later 10,818 11,095 11,182 12,094 12,127 11,947 11,919 11,575 -- -- --
Four years later 11,094 11,417 12,304 12,157 12,113 11,820 11,710 -- -- -- --
Five years later 11,427 12,515 12,406 12,184 12,082 11,706 -- -- -- -- --
Six years later 12,516 12,642 12,462 12,165 11,998 -- -- -- -- -- --
Seven years later 12,619 12,757 12,414 12,127 -- -- -- -- -- -- --
Eight years later 12,739 12,710 12,409 -- -- -- -- -- -- -- --
Nine years later 12,701 12,691 -- -- -- -- -- -- -- -- --
Ten years later 12,671 -- -- -- -- -- -- -- -- -- --
DEFICIENCY (REDUNDANCY) $3,784 $3,487 $1,911 $1,410 $1,222 $643 $(532) $(722) $(435) $(32) $--
- ------------------------------------------------------------------------------------------------------------------------------------
- 10 -
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
- ------------------------------------------------------------------------------------------------------------------------------------
NET RESERVE [2] $10,776 $11,063 $12,242 $12,297 $12,485 $12,122 $11,963
Reinsurance recoverables 5,156 4,829 4,357 3,996 3,280 3,267 3,452
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS RESERVE $15,932 $15,892 $16,599 $16,293 $15,765 $15,389 $15,415
- ------------------------------------------------------------------------------------------------------------------------------------
NET REESTIMATED RESERVE $11,998 $11,706 $11,710 $11,575 $12,050 $12,090
Reestimated reinsurance 5,578 4,817 4,154 3,878 3,423 3,687
recoverables
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $17,576 $16,523 $15,864 $15,453 $15,473 $15,777
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY (REDUNDANCY) $1,644 $631 $(735) $(840) $(292) $388
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] The above tables exclude Zwolsche as a result of its sale on December 22,
2000 and London & Edinburgh as a result of its sale on November 16, 1998.
[2] The above tables exclude the liabilities and claim developments for
reinsurance coverage written for affiliated parties.
</FN>
1994 1995 1996 1997 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, net and gross of reinsurance for unpaid claims and claim
adjustment expenses excluded $495 $550 $500 $505 $501 $456 $459
- ------------------------------------------------------------------------------------------------------------------------------------
Included in the tables above is the impact of the change in The Hartford's method of discounting to present value certain
workers' compensation reserves, principally for permanently disabled claimants, which was effective January 1, 1994.
The following table reconciles the Loss Development Table to the Consolidated
Financial Statements:
2000 1999 1998
- ------------------------------------------------------------------
Loss Development Table:
Gross reserves $ 15,415 $ 15,389 $ 15,765
Exclusion of Zwolsche -- 169 183
Reinsurance - affiliated parties 459 456 501
- ------------------------------------------------------------------
Gross reserves per Consolidated
Financial Statements (see Note
1 (h)) $ 15,874 $ 16,014 $ 16,449
- ------------------------------------------------------------------
CEDED REINSURANCE
Consistent with normal industry practice, The Hartford cedes insurance risk to
reinsurance companies. For property and 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.
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, Worldwide Life is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. As of December 31, 2000, the maximum amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.5.
In 2000, the Company did not make any significant changes in the terms under
which reinsurance is ceded to other insurers. Also in 2000, there were no
specific reinsurance transactions that had a material effect on earnings or
reserves.
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 Worldwide Life and Worldwide Property & Casualty. The investment
activities of both the Worldwide Life and Worldwide Property & Casualty
operations are managed based on the underlying characteristics and nature of
their respective liabilities.
The primary investment objective of Worldwide 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 relative to that of policyholder obligations.
The investment objective for the majority of Worldwide Property & Casualty is to
maximize economic value while generating after-tax income and sufficient
liquidity to meet corporate and policyholder obligations. For Worldwide Property
& Casualty's Other Operations, the investment objective is to ensure the full
and timely payment of all liabilities. Property and 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
- 11 -
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; 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.
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".
YEAR 2000
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Year 2000".
EMPLOYEES
The Hartford had approximately 26,600 employees as of February 28, 2001.
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 2001
Proxy Statement. Set forth below is information about other executive officers
of the Company:
BRENDA FURLONG, 52, became Chief Investment Officer of the Company and President
of Hartford Investment Management Company ("HIMCO"), a wholly-owned subsidiary
of the Company, effective October 1, 1999. Previously, Ms. Furlong was Senior
Vice President, Capital Planning and Development with responsibility for mergers
and acquisitions, strategic
- 12 -
planning and capital allocation. Prior to joining the Company in 1996, she was
Vice President and Treasurer of Sheraton Corp. and held senior positions at
several ITT Corporation companies. Ms. Furlong began her career at State Street
Bank and Trust, where she was a commercial lending officer.
JOHN N. GIAMALIS, 43, is Senior Vice President and Controller of the Company.
Mr. Giamalis joined the Company in January 1997, functioning as Corporate
Controller and Director, Financial Reporting and Analysis. He was appointed in
mid-1998 to the position of Deputy Controller. Prior to joining the Company, Mr.
Giamalis held senior financial positions in the insurance and technology
industries. Previously, he served in public accounting positions, including as
Senior Manager with responsibility for insurance, securities and middle market
clients for Deloitte & Touche. He holds a B.S. degree in business administration
and a Master of professional accountancy from West Virginia University. He is a
member of the American Institute and Connecticut Society of Certified Public
Accountants.
RANDALL I. KIVIAT, 50, 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, Director of Employee Benefits, and Vice President of Human Resources
Services.
EDWARD L. MORGAN, 57, has held the position of Group Senior Vice President,
Corporate Relations and Government Affairs, of the Company since 1998.
Previously, he was Senior Vice President, Corporate Relations and Public Affairs
since 1995. Mr. Morgan also has held the position since 1993 of Senior Vice
President, Corporate Relations and Public Affairs of Hartford Fire.
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 5.4 million square feet throughout the United States and 56
thousand square feet in other countries. All of the properties owned or leased
are used by one or more of all eight 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.
Regarding these claims, The Hartford continually reviews its overall reserve
levels, methodologies and reinsurance coverages.
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.
- -------------------------- --------- --------- --------- --------
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
1999
Common Stock Price
High $58.81 $65.06 $61.94 $53.44
Low 48.31 57.13 40.88 37.31
Dividends Declared 0.22 0.23 0.23 0.24
- -------------------------- --------- --------- --------- --------
As of February 28, 2001, the Company had approximately 160,000 shareholders.
On October 19, 2000, The Hartford's Board of Directors approved a 4% increase in
the quarterly dividend to $0.25 per share. 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".
- 13 -
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS)
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues [1] $ 14,703 $ 13,528 $ 15,022 $ 13,461 $ 12,577
Net income (loss) [2] 974 862 1,015 1,332 (99)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 171,532 $ 167,051 $ 150,632 $ 131,743 $ 108,840
Long-term debt and redeemable preferred stock 1,862 1,548 1,548 1,482 1,032
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 1,243 1,250 1,250 1,000 1,000
Total stockholders' equity 7,464 5,466 6,423 6,085 4,520
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE DATA
Basic earnings (loss) per share [2] 4.42 3.83 4.36 5.64 (0.42)
Diluted earnings (loss) per share [2] 4.34 3.79 4.30 5.58 (0.42)
Dividends declared per common share 0.97 0.92 0.85 0.80 0.80
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [3] 102.4 103.3 102.9 102.3 105.2
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] 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 for
1998, 1997 and 1996 of $1,117, $1,225 and $1,056, respectively.
[2] 1997 includes an equity gain of $368, or $1.56 basic/$1.54 diluted
earnings per share, resulting from the initial public offering of HLI.
1996 includes other charges of $693, after-tax, or $2.96 basic/diluted
earnings per share, consisting primarily of environmental and asbestos
reserve increases and recognition of losses on guaranteed investment
contract business.
[3] 1996 excludes the impact of a $660, before-tax, environmental and asbestos
charge. Including the impact of this charge, the combined ratio for 1996
was 116.9.
</FN>
Outlined in the table below are U.S. Industry Combined Ratios for each of the
five years ended December 31:
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Industry Combined Ratios [a] 110.3 107.8 105.6 101.6 105.9
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined
ratio for 2000 is an A.M. Best estimate prepared as of January 2001.
</FN>
- 14 -
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, 2000, compared with December 31, 1999, and its
results of operations for the three years ended December 31, 2000, 1999 and
1998. 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.
Such 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 Hartford. 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
Hartford, depending on the outcome of certain factors, including the possibility
of general economic and business conditions that are less favorable than
anticipated, legislative developments, changes in interest rates or the stock
markets, stronger than anticipated competitive activity, more frequent or severe
natural catastrophes than anticipated and those 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 15
Worldwide Life 18
Investment Products 19
Individual Life 20
Group Benefits 21
Corporate Owned Life Insurance (COLI) 22
Worldwide Property & Casualty 23
Commercial 24
Personal 25
Reinsurance 26
International and Other Operations 26
Reserves 27
Environmental and Asbestos Claims 28
Investments 30
Capital Markets Risk Management 32
Capital Resources and Liquidity 42
Regulatory Matters and Contingencies 45
Effect of Inflation 46
Accounting Standards 46
- --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
- --------------------------------------------------------------------------------
OVERVIEW
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 8,941 $ 8,342 $ 9,021
Fee income 2,493 2,112 2,106
Net investment income 2,674 2,627 3,102
Other revenue 450 413 489
Net realized capital gains 145 34 304
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 14,703 13,528 15,022
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 8,419 7,902 8,613
Amortization of deferred policy acquisition costs 2,213 2,011 2,020
Insurance operating costs and expenses 1,958 1,779 2,315
Other expenses 695 601 599
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 13,285 12,293 13,547
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,418 1,235 1,475
Income tax expense 390 287 388
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 1,028 948 1,087
Minority interest in consolidated subsidiary (54) (86) (72)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 974 862 1,015
Less: Net realized capital gains, after-tax 12 25 199
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 962 $ 837 $ 816
====================================================================================================================================
The Hartford defines "core earnings" as after-tax operational results excluding,
as applicable, net realized capital gains or losses, the cumulative effect of
accounting changes and certain other items. Core earnings is an internal
performance measure
- 15 -
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, core
earnings 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.
2000 COMPARED TO 1999 -- Revenues increased $1.2 billion, or 9%, primarily as a
result of continued 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.
Core earnings increased $125, or 15%, due to earnings growth of 10% or more
across all segments in Worldwide Life partially offset by a decline in Worldwide
Property & Casualty, primarily due to an increase in personal automobile loss
costs and adverse loss development in reinsurance.
1999 COMPARED TO 1998 -- Revenues decreased $1.5 billion, or 10%, primarily as a
result of the November 1998 sale of United Kingdom-based London & Edinburgh
Insurance Group, Ltd. ("London & Edinburgh"), which was The Hartford's largest
international subsidiary, the declining block of leveraged corporate owned life
insurance ("COLI") business and lower net realized capital gains. The decrease
was partially offset by earned premium growth in the Personal segment of
Worldwide Property & Casualty and higher fee income in the Investment Products
segment of Worldwide Life as a result of increasing account values. (For an
analysis of net investment income and net realized capital gains, see the
Investments section.)
Core earnings increased $21, or 3%, primarily due to higher fee income in the
Investment Products segment as a result of increasing assets under management.
Partially offsetting this increase was a decrease in Worldwide Property &
Casualty results, due primarily to $55 of proceeds received in 1998 related to
the Industrial Risk Insurance pool ("IRI transaction"), and lower International
and Other Operations segment core earnings as a result of the sale of London &
Edinburgh.
NET REALIZED CAPITAL GAINS
See "Investment Results" in the Investments section.
INCOME TAXES
The effective tax rates for 2000, 1999 and 1998 were 28%, 23% and 26%,
respectively. The increase in the effective tax rate for 2000 was primarily due
to taxes related to the gain on the sale of Zwolsche Algemeene N.V. ("Zwolsche")
partially offset by a $24 tax benefit resulting from a settlement with the
Internal Revenue Service with respect to certain tax matters for the 1993-1995
tax years. For a further discussion on the sale of Zwolsche, see the
International and Other Operations section. The decrease in the effective tax
rate for 1999 was due to an increase in the proportionate share of tax-exempt
net investment income to total pre-tax income for 1999 compared to 1998.
Tax-exempt interest earned on invested assets was the principal cause of
effective rates lower than the 35% U.S. statutory rate. Income taxes paid in
2000, 1999 and 1998 were $95, $41 and $407, respectively. (For additional
information, see Note 14 of Notes to Consolidated Financial Statements.)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Prior to the June 27, 2000 acquisition of all of the outstanding shares of
Hartford Life, Inc. ("HLI") that The Hartford did not already own ("The HLI
Repurchase"), the minority interest in consolidated subsidiary represented an
approximate 19% minority interest in HLI's operating results. (For additional
information, see the Capital Resources and Liquidity section under
"Acquisitions" and Note 2 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:
2000 1999 1998
- -----------------------------------------------------------------
Basic earnings per share $4.42 $3.83 $4.36
Weighted average common shares
outstanding 220.6 224.9 232.8
Diluted earnings per share $4.34 $3.79 $4.30
Weighted average common shares
outstanding and dilutive
potential common shares 224.4 227.5 236.2
Return on equity [1] 15.4% 15.3% 18.7%
- -----------------------------------------------------------------
[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: Worldwide Life and
Worldwide Property & Casualty. Within these operations, The Hartford conducts
business principally in eight operating segments. Additionally, all activities
related to The HLI Repurchase, the minority interest in HLI for pre-acquisition
periods and The Hartford Bank, FSB are included in Corporate.
Worldwide Life is organized into four reportable operating segments: Investment
Products, Individual Life, Group Benefits (formerly Employee Benefits) and
Corporate Owned Life Insurance ("COLI"). Worldwide Life also includes in an
Other category its international operations as well as corporate items not
directly allocable to any of its reportable operating segments, principally
interest expense.
Worldwide Property & Casualty is organized into four reportable operating
segments: the underwriting segments of Commercial, Personal and Reinsurance, and
an International and Other Operations segment. Also reported within Worldwide
Property & Casualty is North American, which includes the combined underwriting
results of Commercial, Personal and Reinsurance along with income and expense
items not directly allocable to these segments, such as net investment income.
While the measure of profit or loss used by The Hartford's management in
evaluating performance is core earnings for its non-underwriting segments, the
Commercial, Personal and Reinsurance segments are evaluated by The Hartford's
management primarily based upon underwriting results. While
- 16 -
not considered segments, the Company also reports and evaluates core earnings
results for Worldwide Life and Worldwide Property & Casualty, including North
American. Worldwide Property & Casualty includes core earnings for North
American and the International and 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 Worldwide 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 Worldwide Property & Casualty. Underwriting results
represent premiums earned less incurred claims, claim adjustment expenses and
underwriting expenses.
UNDERWRITING RESULTS
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial $ (153) $ (171) $ (213)
Personal 2 34 77
Reinsurance (73) (48) (36)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (224) $ (185) $ (172)
====================================================================================================================================
The following is a summary of core earnings and net income.
CORE EARNINGS
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Life
Investment Products $ 424 $ 330 $ 266
Individual Life 79 71 65
Group Benefits 90 79 71
COLI 34 30 24
Other 5 (43) (40)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 632 467 386
Worldwide Property & Casualty
North American 412 434 457
International and Other Operations 17 22 45
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 429 456 502
Corporate (99) (86) (72)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE EARNINGS $ 962 $ 837 $ 816
====================================================================================================================================
NET INCOME (LOSS)
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Life
Investment Products $ 424 $ 330 $ 266
Individual Life 79 71 65
Group Benefits 90 79 71
COLI 34 30 24
Other (52) (43) (40)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 575 467 386
Worldwide Property & Casualty
North American 466 448 604
International and Other Operations 28 33 97
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 494 481 701
Corporate (95) (86) (72)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET INCOME $ 974 $ 862 $ 1,015
====================================================================================================================================
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.
- 17 -
- --------------------------------------------------------------------------------
WORLDWIDE LIFE
- --------------------------------------------------------------------------------
Worldwide 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.
Worldwide 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.
Worldwide 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.
Worldwide 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.
OPERATING SUMMARY [1]
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income $ 2,484 $ 2,105 $ 2,100
Earned premiums 1,886 1,764 1,607
Net investment income 1,592 1,562 1,955
Other revenue 116 110 126
Net realized capital losses (88) (5) --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 5,990 5,536 5,788
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 3,162 3,054 3,227
Insurance operating costs and expenses 1,281 1,132 1,440
Amortization of deferred policy acquisition costs 671 568 441
Other expenses 88 96 95
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,202 4,850 5,203
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 788 686 585
Income tax expense 213 219 199
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 575 467 386
Less: Net realized capital losses, after-tax (57) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 632 $ 467 $ 386
====================================================================================================================================
<FN>
[1] Worldwide Life excludes the effect of activities related to The HLI
Repurchase, along with minority interest for pre-acquisition periods, both
of which are reflected in Corporate.
</FN>
As discussed above, Worldwide Life consists of the following reportable
operating segments: Investment Products, Individual Life, Group Benefits
(formerly Employee Benefits) and COLI. In addition, Worldwide Life includes in
an Other category its international operations, which are primarily located in
Latin America and the Far East, and corporate items not directly allocable to
any of its reportable operating segments.
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 under "Acquisitions".)
On January 25, 2001, The Hartford agreed to acquire the U.S. individual life
insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as
Fortis Financial Group, or "Fortis"). This transaction is expected to be
completed in the second quarter of 2001. (For additional information, see the
Capital Resources and Liquidity section under "Subsequent Event".)
2000 COMPARED TO 1999 -- Revenues increased $454, or 8%, primarily related to
the growth across each of Worldwide 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.
- 18 -
Benefits, claims and expenses increased $352, or 7%, primarily related to the
growth in Worldwide Life's principal operating segments described above. Core
earnings increased $165, or 35%, led by the Investment Products segment where
core earnings increased $94, or 28%. Additionally, core earnings related to each
of the remaining three operating segments increased 10% or more. Worldwide Life
also recorded a benefit related to the settlement of certain federal tax matters
of $24 in 2000 (see Note 15 (d) of Notes to Consolidated Financial Statements).
This benefit, along with an $8 benefit related to state income taxes, resulted
in $32 of tax benefits for the year ended December 31, 2000. Additionally, net
realized capital losses increased due to portfolio rebalancing. Excluding the
tax items and net realized capital losses, earnings increased $133, or 28%.
1999 COMPARED TO 1998 -- Revenues decreased $252, or 4%, primarily due to the
declining block of leveraged COLI business. Excluding the COLI segment, revenues
increased $484, or 11%, to $4.7 billion. This increase was driven primarily by
the Investment Products and Group Benefits segments, where revenues increased
$257, or 14%, and $215, or 12%, respectively. The revenue growth in the
Investment Products segment was, for the most part, due to higher fee income in
the individual annuity and mutual fund operations. Total fee income for these
operations increased $301, or 33%, to $1.2 billion due to significant growth in
related assets under management resulting from strong sales, favorable
persistency and equity market appreciation. The Group Benefits segment
experienced higher earned premiums due to strong sales and persistency.
Benefits, claims and expenses decreased $353, or 7%, primarily due to the
declining block of leveraged COLI business. Excluding the COLI segment, total
benefits, claims and expenses increased $394, or 11%, consistent with the
revenue growth described above. Core earnings increased $81, or 21%, driven
mostly by increased fee income associated with higher assets under management in
the Investment Products segment, as well as continued growth across its other
reportable segments.
- --------------------------------------------------------------------------------
INVESTMENT PRODUCTS
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 1,639 $ 1,333 $ 1,045
Net investment income 741 708 739
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,380 2,041 1,784
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 700 668 671
Insurance operating costs and other expenses 551 440 376
Amortization of deferred policy acquisition costs 516 430 326
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,767 1,538 1,373
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 613 503 411
Income tax expense 189 173 145
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 424 $ 330 $ 266
--------------------------------------------------------------------------------------------------------------------------
Individual variable annuity account values $ 78,174 $ 80,588 $ 62,210
Other individual annuity account values 9,059 8,383 8,574
Other investment products account values 17,376 16,352 15,389
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 104,609 105,323 86,173
Mutual fund assets under management 11,432 6,374 2,506
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 116,041 $ 111,697 $ 88,679
====================================================================================================================================
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 was ranked the number one writer of individual variable annuities in the
United States for 2000 according to Variable Annuity and Research Data Service
("VARDS") and the number one seller of individual variable annuities through
banks, according to Kenneth Kehrer Associates (a leading consultant to banks).
In addition, The Hartford Mutual Funds, Inc. reached $10 billion in assets
faster than any other retail-oriented mutual fund family in history, according
to Strategic Insight. Also, eight of the fourteen retail mutual funds have
Morningstar ratings and, as of December 31, 2000, all eight have three-, four-
or five-star ratings.
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.
- 19 -
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.
Core earnings 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.
1999 COMPARED TO 1998 -- Revenues increased $257, or 14%, primarily driven by
higher fee income in the individual annuity and retail mutual fund operations.
Fee income generated by individual annuities increased $248, or 29%, as related
account values grew $18.2 billion, or 26%. The growth in individual annuity
account values was mostly due to strong individual annuity sales of $10.9
billion in 1999 and favorable persistency, as well as equity market
appreciation. In addition, fee income from other investment products increased
$68, or 59%, primarily due to the Company's continued growth in its retail
mutual fund operation, where related assets under management grew $3.9 billion,
or 154%. This significant growth in the retail mutual fund operation was driven
by strong sales of $3.3 billion in 1999, favorable persistency and equity market
appreciation.
Associated with continued growth in this segment, total benefits, claims and
expenses increased $165, or 12%. This increase was primarily driven by
amortization of deferred policy acquisition costs, which grew $104, or 32%, and
operating expenses, which increased $32, or 13%, as a result of growth in the
individual annuity and retail mutual fund operations described above.
Core earnings increased $64, or 24%, for the most part due to the growth in
revenues discussed above. Also contributing to the higher core earnings were
operating efficiencies that the segment continues to achieve, particularly in
its individual variable annuity operation, where individual annuity operating
expenses as a percentage of average individual annuity account values decreased
from 23 basis points in 1998 to 21 basis points in 1999.
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.
- --------------------------------------------------------------------------------
INDIVIDUAL LIFE
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 459 $ 412 $ 378
Net investment income 181 172 189
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 640 584 567
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 274 258 269
Amortization of deferred policy acquisition costs 145 129 108
Insurance operating costs and other expenses 103 88 89
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 522 475 466
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 118 109 101
Income tax expense 39 38 36
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 79 $ 71 $ 65
--------------------------------------------------------------------------------------------------------------------------
Variable life account values $ 2,947 $ 2,595 $ 1,727
Total account values $ 5,849 $ 5,419 $ 4,512
- ------------------------------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 33,460 $ 23,854 $ 16,305
Total life insurance in force $ 75,113 $ 66,690 $ 61,074
====================================================================================================================================
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.
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%,
- 20 -
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. Core
earnings 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.
1999 COMPARED TO 1998 -- Revenues increased $17, or 3%, resulting primarily from
higher fee income associated with the growing block of variable life insurance.
Fee income increased $59, or 18%, as variable life account values increased
$868, or 50%, and variable life insurance in force increased $7.5 billion, or
46%. The higher fee income was partially offset by a decrease in earned premiums
resulting from the sale of HLI's Canadian life insurance operation in 1999.
Benefits, claims and expenses increased slightly, principally due to a $21, or
19%, increase in amortization of deferred policy acquisition costs associated
with the growth in this segment's revenues. The increase was partially offset by
a decrease of $11, or 4%, in benefits, claims and claim adjustment expenses due
to the sale of the Canadian life insurance operation and lower mortality costs.
Core earnings increased $6, or 9%, essentially due to higher fee income and
favorable mortality experience.
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 agreement to acquire the U.S. individual life
insurance business of Fortis is expected to increase its scale while broadening
its distribution capabilities through the addition of a retail broker-dealer. It
is expected that the consummation of this transaction will enhance the Company's
goal of broadening its reach in the emerging affluent market.
- --------------------------------------------------------------------------------
GROUP BENEFITS
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums and other $ 1,981 $ 1,829 $ 1,629
Net investment income 226 195 180
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,207 2,024 1,809
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,643 1,507 1,335
Insurance operating costs and other expenses 450 415 376
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,093 1,922 1,711
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 114 102 98
Income tax expense 24 23 27
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 90 $ 79 $ 71
====================================================================================================================================
The Group Benefits segment sells group life and group disability insurance as
well as other products, including stop loss and supplementary medical coverage
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. According to the latest results published by the Life Insurance Marketing
and Research Association ("LIMRA"), the Company was the third largest provider
of group disability insurance and the fourth largest writer of group term life
insurance, based on sales, in the United States for the nine months ended
September 30, 2000.
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. As
such, core earnings increased $11, or 14%, primarily driven by the increased
revenues described above.
1999 COMPARED TO 1998 -- Revenues increased $215, or 12%, driven by growth in
fully insured premiums, excluding buyouts, which increased $172, or 11%. This
increase was fundamentally due to group life and group disability, where ongoing
premiums increased $49, or 9%, and $63, or 11%, respectively, due to strong
persistency of the in force block of business, coupled with an increase in sales
to new customers.
Benefits, claims and expenses increased $211, or 12%, primarily due to higher
benefits, claims and claim adjustment expenses, which, excluding buyouts,
increased $187, or 11%, due to the growth in this segment. The loss ratio (loss
costs as a percentage of earned premiums and other), excluding buyouts, remained
consistent at 82%, indicating a continuation of favorable mortality and
morbidity experience. In addition, the expense ratio (ratio of insurance
operating costs and other
- 21 -
expenses as a percentage of earned premiums and other), excluding buyouts,
remained consistent at 24%. The segment's effective income tax rate was reduced
to 23% in 1999 from 28% in 1998 as a result of increasing the level of
investment in tax-exempt securities. As a result of increased premium revenue,
consistent loss and expense ratios and increased after-tax investment income,
core earnings increased $8, or 11%.
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.
- --------------------------------------------------------------------------------
CORPORATE OWNED LIFE INSURANCE (COLI)
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 401 $ 400 $ 774
Net investment income 366 431 793
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 767 831 1,567
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 545 621 924
Insurance operating costs and expenses 102 59 278
Dividends to policyholders 67 104 329
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 714 784 1,531
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 53 47 36
Income tax expense 19 17 12
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 34 $ 30 $ 24
--------------------------------------------------------------------------------------------------------------------------
Variable COLI account values $ 15,937 $ 12,386 $ 11,220
Leveraged COLI account values 4,978 5,729 9,148
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 20,915 $ 18,115 $ 20,368
====================================================================================================================================
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.
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. Core earnings 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. For additional information on this recaptured business, see
Note 13 of Notes to Consolidated Financial Statements.
1999 COMPARED TO 1998 -- Revenues decreased $736, or 47%, primarily attributable
to the downsizing of the leveraged COLI business as a result of the HIPA Act of
1996. During 1999, leveraged COLI account values decreased $3.4 billion, or 37%.
Consistent with the decrease in revenues, benefits, claims and expenses
decreased $747, or 49%. Core earnings increased $6, or 25%, primarily due to
growth in the variable COLI business, where related account values increased
$1.2 billion, or 10%. Additionally, leveraged COLI core earnings increased due
to earnings associated with a block of leveraged COLI business recaptured in
1998, which was partially offset by decreases associated with the downsizing of
the overall leveraged COLI business.
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.
- 22 -
- --------------------------------------------------------------------------------
WORLDWIDE PROPERTY & CASUALTY
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 7,055 $ 6,578 $ 7,414
Net investment income 1,072 1,065 1,147
Other revenue [1] 343 310 369
Net realized capital gains 234 39 304
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 8,704 7,992 9,234
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 5,253 4,848 5,386
Amortization of deferred policy acquisition costs 1,542 1,443 1,579
Insurance operating costs and expenses 677 647 875
Other expenses 548 505 504
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 8,020 7,443 8,344
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 684 549 890
Income tax expense 190 68 189
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 494 481 701
Less: Net realized capital gains, after-tax 65 25 199
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 429 $ 456 $ 502
====================================================================================================================================
<FN>
[1] Primarily servicing revenue.
</FN>
As discussed above, Worldwide Property & Casualty is organized into four
reportable operating segments: the underwriting segments of Commercial, Personal
and Reinsurance, and an International and Other Operations segment. Also
reported within Worldwide Property & Casualty is North American, which includes
the combined underwriting results of Commercial, Personal and Reinsurance along
with income and expense items not directly allocable to these segments, such as
net investment income, net realized capital gains or losses, other expenses
including interest and income taxes.
The following is a summary of Worldwide Property & Casualty core earnings,
after-tax. Core earnings exclude net realized capital gains.
(after-tax) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
North American
Underwriting results $ (146) $ (120) $ (112)
Net investment income 695 684 656
Other expenses [1] (137) (130) (87)
- ------------------------------------------------------------------------------------------------------------------------------------
NORTH AMERICAN CORE EARNINGS 412 434 457
- ------------------------------------------------------------------------------------------------------------------------------------
International and Other Operations core earnings 17 22 45
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 429 $ 456 $ 502
====================================================================================================================================
<FN>
[1] Includes interest and net servicing income.
</FN>
Underwriting results are discussed in each of the Commercial, Personal and
Reinsurance segment sections. Net investment income is discussed in the
Investments section.
2000 COMPARED TO 1999 -- Core earnings decreased $27, or 6%, primarily due to an
increase in Personal automobile loss costs, adverse loss development in
Reinsurance and expenses related to the Commercial field office and claim
reorganizations. Partially offsetting this decrease was a reduction in property
catastrophe losses and improvement in Commercial mid-market results.
1999 COMPARED TO 1998 -- Core earnings were $456, a decrease of $46, or 9%. The
decrease was primarily the result of a $43 increase in other expenses, due
primarily to proceeds received in 1998 related to the IRI transaction and an $8,
or 7%, decrease in after-tax underwriting results. Partially offsetting the
decrease was an increase in net investment income of $28, or 4%.
- 23 -
- --------------------------------------------------------------------------------
COMMERCIAL
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 3,485 $ 3,181 $ 3,188
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 3,332 $ 3,130 $ 3,222
Benefits, claims and claim adjustment expenses 2,285 2,155 2,250
Amortization of deferred policy acquisition costs 873 823 815
Insurance operating costs and expenses 327 323 370
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (153) $ (171) $ (213)
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 102.6 105.5 106.2
- ------------------------------------------------------------------------------------------------------------------------------------
Other revenue [1] $ 168 $ 141 $ 163
====================================================================================================================================
<FN>
[1] Primarily servicing revenue.
</FN>
Commercial provides workers' compensation, property, automobile, liability,
financial products, marine, agricultural and bond coverages to commercial
accounts primarily throughout the United States. Excess and surplus lines
business not normally written by standard lines insurers is also provided.
Commercial is organized into three customer markets: Business Insurance,
Commercial Affinity and Commercial Specialty.
Business Insurance provides standard commercial business for small accounts
("Select Customer") and mid-sized insureds ("Key Accounts"). Commercial Affinity
provides commercial risk management products and services to small and mid-sized
members of affinity groups and customers of financial institutions in addition
to marine coverage. Commercial Specialty provides insurance through retailers
and wholesalers to large commercial clients ("Major/National") and insureds
requiring a variety of specialized coverages. Its results also include the bond
lines and 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 within Commercial
Specialty.
2000 COMPARED TO 1999 -- Written premiums increased $304, or 10%, partially due
to The Hartford's purchase of the in force, new and renewal financial products
business as well as the majority of the excess and surplus lines of Reliance
Group Holdings, Inc. ("Reliance") in 2000, which resulted in $108 of additional
written premiums for the year. Continued premium growth in Select Customer, up
$171, or 19%, over the prior year, also contributed to the increase in written
premiums. Enhanced product offerings, targeted geographic strategies, new
business growth coupled with modest price increases were the primary drivers of
the Select Customer growth. These increases were slightly offset by a 2%
decrease in mid-market standard commercial business. The decline in mid-market
premiums continued to reflect the effective execution of the Company's
underwriting initiatives, although significant price increases have partially
mitigated this decrease.
Underwriting results improved $18, or 2.9 combined ratio points, primarily the
result of reduced loss ratios due to the continued 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.
1999 COMPARED TO 1998 -- Written premiums decreased slightly. Solid premium
growth in The Hartford's small commercial businesses resulted in growth of 15%
driven by enhanced product offerings, targeted geographic strategies and
partnerships with other entities. These increases, however, were more than
offset by declines in the middle and large national account businesses primarily
due to intense price competition in the casualty lines, where The Hartford
maintained underwriting discipline, allowing business to move to other carriers
while the Company's margins were preserved.
Underwriting results improved $42, or 0.7 combined ratio points, attributable to
a decline in the loss ratio of 1.3 points resulting from underwriting
initiatives and price increases. Partially offsetting this improvement was an
increase in the other underwriting expense ratio due to investments in growth
areas, primarily Select Customer.
OUTLOOK
Market conditions in the commercial sector are expected to continue to improve
in 2001 although price competition within many markets of the commercial
industry will continue to remain a challenge into the foreseeable future.
Management expects growth in small commercial businesses to continue to be
achieved, in part, due to strategic actions being taken which include providing
a complete product solution for the small commercial coverage needs of the
commercial 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 mid-market standard commercial business should have a positive impact on
overall profitability in 2001. The acquisition of Reliance in 2000 creates an
opportunity to broaden the portfolio of products offered by the Commercial
segment. Additionally, the alliance formed with USAA in late 2000, to be the
exclusive provider of small business insurance to USAA members, is also expected
to achieve new premium growth.
- 24 -
- --------------------------------------------------------------------------------
PERSONAL
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 2,647 $ 2,470 $ 2,220
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 2,547 $ 2,343 $ 2,068
Benefits, claims and claim adjustment expenses 1,921 1,732 1,477
Amortization of deferred policy acquisition costs 377 348 265
Insurance operating costs and expenses 247 229 249
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ 2 $ 34 $ 77
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 100.1 99.6 97.1
- ------------------------------------------------------------------------------------------------------------------------------------
Other revenue [1] $ 166 $ 162 $ 200
====================================================================================================================================
<FN>
[1] Primarily servicing revenue.
</FN>
Personal provides automobile, homeowners, home-based business and fire coverages
to individuals across North America. Personal is organized to provide customized
products and services to the following markets: the membership of AARP through a
direct marketing operation; customers who prefer local agent involvement through
a network of independent agents in the standard personal lines market and
through Omni Insurance Group, Inc. ("Omni"), which was acquired in 1998, in the
non-standard automobile market; 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; and customer
service for all health insurance products offered through AARP's Health Care
Options effective January 1, 1998. AARP's exclusive licensing arrangement
continues through 2002 for automobile, homeowners and home-based business and
through 2007 for Health Care Options, thus providing the Personal segment with
an important competitive advantage.
2000 COMPARED TO 1999 -- Written premiums increased $177, or 7%. Written
premiums increased $87, or 6%, in the AARP program and $57, or 8%, in the
standard Agency business for the year due primarily to policy count growth and
improved renewal retention. Affinity growth of $45, or 37%, for the year
included increased business from the Ford and Sears accounts. Non-standard
automobile written premiums through Omni decreased $12, or 5%, for the year as a
result of an expected consumer reaction to rate increases in certain states.
Underwriting results decreased $32 with a corresponding 0.5 point increase in
the combined ratio. The decrease in underwriting results and related increase in
the combined ratio were primarily due to increased Agency and Omni automobile
loss costs. Partially offsetting this decrease was strong growth in Agency and
AARP homeowners lines. A 1.3 point decrease in the expense ratio for the year
reflected the continued trend of productivity gains from prior initiatives.
1999 COMPARED TO 1998 -- Written premiums increased $250, or 11%. Omni written
premiums increased $88, or 53%, contributing 4% to the segment's total written
premium growth in 1999. AARP written premiums increased $65, or 5%, contributing
3% to the segment's total written premium growth in 1999. Agency written premium
growth was $31, or 5%, contributing 1% to the segment's total written premium
growth in 1999. The Affinity unit experienced written premium growth of $66, or
120%, contributing 3% to the segment's total written premium growth in 1999.
Written premium increases in all the units were achieved in light of very
competitive pricing in the personal lines market, primarily in the personal
automobile line. Servicing revenues from AARP's Health Care Options unit
declined by $38 due to revenues related to the transfer of business from the
prior carrier in 1998.
Underwriting results decreased by $43, with a corresponding 2.5 point increase
in the combined ratio. The decrease in underwriting results and increase in
combined ratio resulted primarily from increased claim and claim adjustment
expenses. Loss experience in the property line was higher due to increases in
both frequency and severity of claims. Claim adjustment expenses increased due
to investments in claim initiatives for automobile bodily injury, physical
damage and property to reduce loss costs in future periods. Catastrophe losses
impacted the combined ratio by 2.9 points in 1999 compared with 3.5 points in
1998.
OUTLOOK
The personal insurance market remains highly competitive. Management believes
that market conditions in the personal industry will improve in 2001. The
current environment in the personal market involves rising loss costs resulting
from inflation in both medical and automobile repair costs. Management believes
that the Personal segment is positioned for continued written premium growth
through multiple distribution channels. Initiatives are being implemented to
further strengthen the AARP relationship and attract more members to the
program. In 2000, Affinity entered into an agreement with Sears to market to its
customers. The Hartford expects the Sears program to be a major market in the
future. In the independent agency channel, investments in agency interface, new
products and agency relations continue to position The Hartford for premium
growth. The segment's investments in such areas as advertising, product research
and development, agency relations, technology and staff training will continue
in an effort to further heighten brand awareness, increase product offerings,
further develop alternative distribution channels, improve productivity and
reduce the expense ratio.
- 25 -
- --------------------------------------------------------------------------------
REINSURANCE
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 826 $ 703 $ 711
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 809 $ 680 $ 716
Benefits, claims and claim adjustment expenses 624 507 560
Amortization of deferred policy acquisition costs 243 211 181
Insurance operating costs and expenses 15 10 11
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (73) $(48) $ (36)
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 108.9 107.2 105.7
====================================================================================================================================
The Hartford assumes reinsurance worldwide through its thirteen Hartford
Reinsurance Company ("HartRe") offices located in the United States, Canada, the
United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan. HartRe
primarily writes treaty reinsurance through professional reinsurance brokers
covering various property, casualty, specialty and marine classes of business.
2000 COMPARED TO 1999 -- Reinsurance written premiums increased $123, or 17%,
primarily due to successful pricing increases in a firming pricing environment
in North America, as well as growth in new casualty programs business, and
continued execution of new business development strategies in the alternative
risk transfer line and in Europe.
Underwriting results decreased $25 with a corresponding 1.7 point increase in
the combined ratio. This decrease was primarily due to continued adverse prior
underwriting years loss development, partially offset by lower property
catastrophe losses.
1999 COMPARED TO 1998 -- Written premiums decreased $8, or 1%, primarily due to
an increase in ceded reinsurance premium, principally as a result of cessions
under an aggregate stop loss treaty in 1999, and the non-recurrence of a
significant single finite risk account written in 1998. These decreases were
partially offset by the first quarter 1999 acquisition of renewal rights for the
reinsurance business of Vesta Fire Insurance Corp., a subsidiary of Vesta
Insurance Group Inc.
Underwriting results decreased $12, with a corresponding 1.5 point increase in
the combined ratio. Excluding the finite risk account referred to above, which
had no significant impact on underwriting results in 1998, the decrease in
underwriting results was due primarily to loss development in 1999 from business
written principally in 1998, partially offset by recoveries under the aggregate
stop loss treaty.
OUTLOOK
The worldwide reinsurance market remains highly competitive. Market pricing
improved during 2000 in the worldwide reinsurance sector, and management expects
that this pricing will continue to firm in 2001. HartRe is committed to the
effective execution of its pricing strategy in both traditional and alternative
risk transfer products and is prepared to capitalize on new business
opportunities resulting from the changing marketplace.
- --------------------------------------------------------------------------------
INTERNATIONAL AND OTHER OPERATIONS
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 367 $ 425 $ 1,408
Net investment income 210 212 323
Fee income 9 7 6
Net realized capital gains 16 17 73
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 602 661 1,810
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 423 454 1,099
Amortization of deferred policy acquisition costs 49 61 318
Insurance operating costs and expenses 88 85 245
Other expenses 7 9 18
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 567 609 1,680
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 35 52 130
Income tax expense 7 19 33
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 28 33 97
LESS: Net realized capital gains, after-tax 11 11 52
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 17 $ 22 $ 45
====================================================================================================================================
- 26 -
The International and Other Operations segment results for 2000 and 1999 include
activity for Zwolsche located in the Netherlands, Belgium and Luxembourg until
its sale on December 22, 2000 (discussed below), Hartford Seguros in Spain
(formerly ITT Ercos), which was sold in February 2001 (discussed below) and The
Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance
Company, Ltd. ("Singapore Insurance")), of which The Hartford acquired a 49%
interest in January 1998 and an additional 31% interest in December 2000. In
addition, segment results for 1998, also include London & Edinburgh in the
United Kingdom, until its sale by The Hartford in November 1998, (discussed
below). Products offered by these companies include 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
the majority of The Hartford's International Operations continued the company's
strategic shift in its International Operations to emphasize growth
opportunities in asset accumulation business.
On February 8, 2001, The Hartford completed the sale of Hartford Seguros to
Liberty International, a subsidiary of Liberty Mutual Group. The Hartford
received $29, before costs of sale.
On December 22, 2000, The Hartford completed the sale of Zwolsche to Assurances
Generales de France, a subsidiary of Allianz AG. The Hartford received $547,
before costs of sale, for Zwolsche. The gain from the sale of Zwolsche of $69,
after-tax, has been reported in the 2000 investment results of North American
Property & Casualty. Zwolsche's operating results are included in the
International and Other Operations segment through the date of sale.
On November 16, 1998, The Hartford completed the sale of London & Edinburgh. The
Hartford received approximately $525, before costs of sale, for the ongoing
operations of London & Edinburgh. The Hartford retained ownership of Excess
Insurance Co. Ltd. ("Excess"), London & Edinburgh's property and casualty
insurance and reinsurance subsidiary, which discontinued writing new business in
1993. Excess is included in Other Operations. The gain from the sale of London &
Edinburgh of $33, after-tax, has been reported in the 1998 investment results of
North American Property & Casualty. London & Edinburgh's operating results are
included in the International and Other Operations segment 1998 results through
the date of sale and, therefore, are not comparable to current and prior year
results.
Other Operations consist of the property and casualty insurance operations of
The Hartford which have discontinued writing new business. These operations
primarily include First State Insurance Company, Heritage Reinsurance Company,
Ltd. and Excess. 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.
2000 COMPARED TO 1999 -- Revenues were down $59, or 9%, primarily due to lower
earned premiums at Zwolsche. Core earnings were down $5, or 23%, primarily due
to a higher calendar year loss ratio in automobile business in Hartford Seguros
and unfavorable foreign exchange impacts.
1999 COMPARED TO 1998 -- Revenues of $661 were down $1.1 billion, or 63%,
primarily due to the sale of London & Edinburgh, while core earnings were down
$23 or 51% also as a result of the sale of London & Edinburgh.
OUTLOOK
The Hartford continues to explore acquisition opportunities in Latin America and
Asia with an emphasis on asset accumulation businesses.
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.
- --------------------------------------------------------------------------------
RESERVES
- --------------------------------------------------------------------------------
In accordance with applicable insurance regulations under which Worldwide 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.
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. 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
- 27 -
years. Such surrender charge is initially a percentage of either the
accumulation value or considerations received, which varies 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.
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.
The Hartford continually reviews its estimated claims and claim adjustment
expense reserves as additional experience and other relevant data become
available, and 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, 2000, 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 North American Property & Casualty and the International and Other
Operations segment. 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 claim 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 U.S. exposures of The
Hartford's International and 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
("IBNR"). 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 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 and estimates continue
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, 2000, 1999 and 1998, was as
follows (net of reinsurance):
- 28 -
ENVIRONMENTAL AND ASBESTOS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
2000 1999 1998
-------------------------------- -------------------------------- ------------------------------
Environ. Asbestos Total Environ. Asbestos Total Environ. Asbestos Total
--------------------------------------------------------------------------------------------------
Beginning liability [1] $ 995 $ 625 $ 1,620 $ 1,144 $ 668 $ 1,812 $ 1,312 $ 708 $ 2,020
Claims and claim adjustment
expenses incurred 8 8 16 7 4 11 -- 6 6
Claims and claim adjustment
expenses paid (92) (61) (153) (156) (47) (203) (150) (64) (214)
Other [2] -- -- -- -- -- -- (18) 18 --
-----------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY [3] $ 911 $ 572 $ 1,483 $ 995 $ 625 $ 1,620 $ 1,144 $ 668 $ 1,812
-----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Prior years have been restated to include additional asbestos reserves
that were reclassified from non-asbestos reserves.
[2] Other represents reclassifications of beginning reserves between
environmental and asbestos for 1998.
[3] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,506, $1,524 and $1,730 for 2000, 1999 and 1998, respectively.
As of December 31, 2000, 1999 and 1998, reserves for environmental and
asbestos, gross of reinsurance, were $1,483 and $1,506, $1,609 and $1,535,
and $1,850 and $1,692, respectively.
</FN>
The Hartford believes that the environmental and asbestos reserves reported at
December 31, 2000 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.
- 29 -
- --------------------------------------------------------------------------------
INVESTMENTS
- --------------------------------------------------------------------------------
An important element of the financial results of The Hartford is return on
invested assets. The Hartford's investment portfolios are divided between
Worldwide Life and Worldwide Property & Casualty. The investment portfolios are
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 Worldwide Life and Worldwide Property & Casualty
are managed by distinct investment strategy groups. They are 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. Hartford Investment Management Company,
a wholly-owned subsidiary of The Hartford executes the investment plan of the
strategy groups for Worldwide Life and Worldwide Property & Casualty, including
the identification and purchase of securities that fulfill the objectives of the
strategy groups.
WORLDWIDE LIFE
The primary investment objective of Worldwide 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 relative to
that of policyholder obligations, as discussed in the Capital Markets Risk
Management section under "Market Risk - Worldwide Life - Interest Rate Risk".
The following table identifies the invested assets by type held in the general
account as of December 31, 2000 and 1999.
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
AMOUNT PERCENT AMOUNT PERCENT
-------------- -------------- -------------- -----------
Fixed maturities, at fair value $ 18,248 79.6% $ 17,035 78.2%
Equity securities, at fair value 171 0.7% 153 0.7%
Policy loans, at outstanding balance 3,610 15.7% 4,222 19.4%
Other investments 910 4.0% 376 1.7%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 22,939 100.0% $ 21,786 100.0%
====================================================================================================================================
Policy loans are secured by the cash value of the life policy and do not mature
in a conventional sense, but expire in conjunction with the related policy
liabilities. The decrease in policy loans was primarily due to the decline in
leveraged COLI business, as discussed in the COLI section. The increase in other
investments primarily reflects an increase in limited partnership investments.
The following table identifies by type the fixed maturity securities held in the
general account as of December 31, 2000 and 1999.
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
Corporate $ 7,663 42.0% $ 7,737 45.4%
Asset-backed securities (ABS) 3,070 16.8% 2,508 14.7%
Commercial mortgage-backed securities (CMBS) 2,776 15.2% 2,112 12.4%
Municipal - tax-exempt 1,390 7.6% 1,108 6.5%
Collateralized mortgage obligations (CMO) 928 5.1% 592 3.5%
Mortgage-backed securities (MBS) - agency 602 3.3% 853 5.0%
Government/Government agencies - Foreign 321 1.8% 339 2.0%
Government/Government agencies - United States 244 1.3% 229 1.3%
Municipal - taxable 83 0.5% 165 1.0%
Short-term 975 5.3% 1,346 7.9%
Redeemable preferred stock 196 1.1% 46 0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 18,248 100.0% $ 17,035 100.0%
====================================================================================================================================
During 2000, Worldwide Life continued its investment strategy of increasing its
allocation to municipal tax-exempt securities with the objective of increasing
after-tax yield. Short-term and corporate securities declined primarily as a
result of the funding of scheduled liability maturities and reallocation into
other asset sectors, particularly ABS and CMBS. Additionally, investments were
shifted from MBS to CMO to increase the prepayment protection of the portfolio.
As of December 31, 2000 and 1999, approximately 22.3% and 21.5%, respectively,
of Worldwide Life's fixed maturities were invested in private placement
securities (including 13% and 12% of Rule 144A offerings as of December 31, 2000
and December 31, 1999, 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
- 30 -
Company's investment credit policies, see the Capital Markets Risk Management
section under "Credit Risk".)
INVESTMENT RESULTS
The following table summarizes Worldwide Life's investment results.
(before-tax) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 1,284 $ 1,171 $ 1,166
Policy loan income 308 391 789
-------------------------------------------------------
Net investment income - total $ 1,592 $ 1,562 $ 1,955
Yield on average invested assets [1] 7.0% 6.7% 7.9%
Net realized capital losses $ (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). In 1998, average invested assets were calculated assuming the
recaptured leveraged COLI business proceeds were received on January 1,
1998.
</FN>
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.
1999 COMPARED TO 1998 -- Total net investment income decreased $393, or 20%,
primarily due to a decrease in policy loan income resulting from the decrease in
leveraged COLI business. The decline in yield on average invested assets was due
to the decrease in policy loan income and the decline in the policy loan
weighted average interest rate to 7.5% for 1999 from 9.9% for 1998.
Net realized capital gains on the sale of equity securities and fixed maturities
for the year ended December 31, 1999 partially offset a $32, after-tax, other
than temporary impairment and sale of asset-backed securities securitized and
serviced by Commercial Financial Services, Inc. ("CFS").
WORLDWIDE PROPERTY & CASUALTY
The investment objective for the majority of Worldwide Property & Casualty is to
maximize economic value while generating after-tax income and sufficient
liquidity to meet corporate and policyholder obligations. For Worldwide Property
& Casualty's Other Operations, the investment objective is to ensure the full
and timely payment of all liabilities. Property and casualty 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, 2000 and 1999.
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
AMOUNT PERCENT AMOUNT PERCENT
-------------- -------------- -------------- -----------
Fixed maturities, at fair value $ 16,239 91.6% $ 15,840 91.3%
Equity securities, at fair value 885 5.0% 1,133 6.5%
Other investments 601 3.4% 382 2.2%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 17,725 100.0% $ 17,355 100.0%
====================================================================================================================================
The following table identifies by type the fixed maturity securities held as of
December 31, 2000 and 1999.
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
FAIR VALUE PERCENT FAIR VALUE PERCENT
-------------- -------------- -------------- -----------
Municipal - tax-exempt $ 8,527 52.5% $ 8,160 51.5%
Corporate 3,105 19.1% 3,104 19.6%
Commercial mortgage-backed securities (CMBS) 1,141 7.0% 881 5.6%
Asset-backed securities (ABS) 760 4.7% 596 3.8%
Government/Government agencies - Foreign 682 4.2% 1,140 7.2%
Mortgage-backed securities (MBS) - agency 315 1.9% 445 2.8%
Collateralized mortgage obligations (CMO) 236 1.5% 240 1.5%
Government/Government agencies - United States 63 0.4% 101 0.6%
Municipal - taxable 46 0.3% 54 0.4%
Short-term 1,120 6.9% 1,003 6.3%
Redeemable preferred stock 244 1.5% 116 0.7%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,239 100.0% $ 15,840 100.0%
====================================================================================================================================
- 31 -
Foreign government and foreign government agency securities declined due to the
December 2000 sale of Zwolsche.
INVESTMENT RESULTS
The following table below summarizes Worldwide Property & Casualty's investment
results.
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income, before-tax $ 1,072 $ 1,065 $ 1,147
Net investment income, after-tax [1] $ 836 $ 828 $ 877
Yield on average invested assets, before-tax [2] 6.2% 6.1% 6.2%
Yield on average invested assets, after-tax [1] [2] 4.9% 4.6% 4.7%
Net realized capital gains, before-tax $ 234 $ 39 $ 304
====================================================================================================================================
<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 (excluding net realized capital gains)
divided by average invested assets at cost (fixed maturities at amortized
cost).
</FN>
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 losses in the investment portfolio.
1999 COMPARED TO 1998 -- Before-tax net investment income decreased by $82, or
7% and after-tax net investment income decreased by $49, or 6%. These decreases
were primarily due to the effects of the London & Edinburgh sale in November
1998, partially offset by increases in income from limited partnership
investments.
Net realized capital gains decreased $265, primarily as a result of
opportunities taken in 1998 in a strong equity market. Net realized capital
gains for 1999 were partially offset by a $9, after-tax, other than temporary
impairment and sale of asset-backed securities securitized and serviced by CFS.
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 $104.3 billion and $102.6 billion as of December 31,
2000 and 1999, respectively, wherein the policyholder assumes substantially all
the risk and reward; and guaranteed separate accounts totaling $9.8 billion and
$9.1 billion as of December 31, 2000 and 1999, respectively, wherein The
Hartford contractually guarantees either a minimum return or the account value
to the policyholder. 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 - Worldwide 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. 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.
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 amortization
for the year ended December 31, 2000 was $10, before-tax. Also reported in
Corporate are $5 of fixed maturity security investments of The Hartford Bank,
FSB.
- --------------------------------------------------------------------------------
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 Worldwide Life and
Worldwide 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 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
- 32 -
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 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. 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 significant credit concentration risk of a
single issuer.
The following tables identify fixed maturity securities for Worldwide Life,
including guaranteed separate accounts, and Worldwide 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.
WORLDWIDE LIFE
As of December 31, 2000 and 1999, over 97% of the fixed maturity portfolio was
invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
United States Government/Government agencies $ 2,329 8.4% $ 2,404 9.3%
AAA 4,896 17.6% 3,535 13.6%
AA 3,546 12.7% 3,199 12.3%
A 9,675 34.7% 8,731 33.6%
BBB 5,633 20.2% 5,816 22.4%
BB & below 708 2.5% 559 2.1%
Short-term 1,085 3.9% 1,728 6.7%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 27,872 100.0% $ 25,972 100.0%
====================================================================================================================================
WORLDWIDE PROPERTY & CASUALTY
As of December 31, 2000 and 1999, over 95% of the fixed maturity portfolio was
invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
United States Government/Government agencies $ 516 3.2% $ 650 4.1%
AAA 6,414 39.5% 6,378 40.3%
AA 3,414 21.0% 3,298 20.8%
A 2,664 16.4% 2,613 16.5%
BBB 1,442 8.9% 1,240 7.8%
BB & below 669 4.1% 658 4.2%
Short-term 1,120 6.9% 1,003 6.3%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,239 100.0% $ 15,840 100.0%
====================================================================================================================================
MARKET RISK
The Hartford has several objectives in managing market risk associated with
Worldwide Life and Worldwide Property & Casualty. Worldwide Life is responsible
for maximizing after-tax returns within acceptable risk parameters, including
the management of the interest rate sensitivity of invested assets to that of
policyholder obligations. Worldwide Life's fixed maturity portfolios have
material market exposure to interest rate risk. Worldwide Property & Casualty
attempts to maximize economic value while generating appropriate after-tax
income and sufficient liquidity to meet corporate and policyholder obligations.
Worldwide 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 2000 resulted in a significant
increase in the unrealized appreciation of the fixed maturity security portfolio
from 1999. However, The Hartford's asset allocation and its exposure to market
risk have not changed materially from its position at December 31,
- 33 -
1999.
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.
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 Worldwide Life and Worldwide Property & Casualty discussions below.)
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Company's Finance Committee.
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, 2000 and 1999 totaled $8.8 billion
and $9.8 billion, respectively.
The following discussions focus on the key market risk exposures within
Worldwide Life and Worldwide Property & Casualty.
WORLDWIDE LIFE
Interest Rate Risk
- ------------------
Worldwide 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 Worldwide Life's profitability. Under certain circumstances
of interest rate volatility, Worldwide Life could be exposed to
disintermediation risk and reduction in net interest rate spread or profit
margins. For Worldwide Life's non-guaranteed separate accounts, the Company's
exposure is not significant, as the policyholder assumes substantially all of
the investment risk.
Worldwide 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 Worldwide 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, Worldwide Life holds a significant fixed maturity portfolio
that includes both fixed and variable rate features. The following table
reflects the principal amounts of Worldwide Life's general and guaranteed
separate account fixed and variable rate fixed maturity portfolios, along with
the respective weighted average coupons by estimated maturity year at December
31, 2000. Comparative totals are included as of December 31, 1999. 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, 2000 and 1999, 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 Worldwide Life investment
portfolio.
- 34 -
2000 1999
2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
CALLABLE BONDS
Fixed Rate
Par value $ 5 $ 50 $ 14 $ 27 $ 7 $ 1,355 $ 1,458 $ 1,076
WAC 7.0% 6.4% 6.4% 4.6% 6.1% 5.5% 5.5% 5.6%
Fair value $ 1,439 $ 1,016
Variable Rate
Par value $ 1 $ 11 $ 22 $ 38 $ 1 $ 1,085 $ 1,158 $ 1,363
WAC 7.4% 7.5% 6.6% 7.3% 7.3% 7.1% 7.1% 6.6%
Fair value $ 1,075 $ 1,256
- ------------------------------------------------------------------------------------------------------------------------------------
BONDS - OTHER
Fixed Rate
Par value $ 724 $ 1,580 $ 1,286 $ 1,162 $ 1,154 $ 8,793 $ 14,699 $ 15,724
WAC 7.3% 6.2% 7.2% 6.9% 6.2% 5.7% 6.1% 6.2%
Fair value $ 13,409 $ 14,044
Variable Rate
Par value $ 2 $ 116 $ 158 $ 166 $ 87 $ 706 $ 1,235 $ 920
WAC 4.8% 6.5% 7.0% 7.2% 6.5% 7.8% 7.4% 5.7%
Fair value $ 1,108 $ 827
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Fixed Rate
Par value $ 731 $ 433 $ 305 $ 261 $ 178 $ 435 $ 2,343 $ 2,199
WAC 6.7% 6.3% 6.9% 7.0% 7.2% 7.6% 6.9% 6.8%
Fair value $ 2,342 $ 2,045
Variable Rate
Par value $ 214 $ 300 $ 298 $ 218 $ 335 $ 759 $ 2,124 $ 1,677
WAC 7.3% 7.2% 7.3% 7.1% 7.2% 7.4% 7.3% 6.6%
Fair value $ 2,099 $ 1,540
- ------------------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 157 $ 133 $ 113 $ 99 $ 111 $ 485 $ 1,098 $ 1,138
WAC 6.4% 6.5% 6.4% 6.5% 6.3% 6.4% 6.4% 6.5%
Fair value $ 1,087 $ 1,022
Variable Rate
Par value $ 4 $ 2 $ 1 $ 2 $ 1 $ 102 $ 112 $ 128
WAC 9.4% 11.6% 12.7% 8.9% 10.4% 4.8% 5.3% 5.8%
Fair value $ 101 $ 117
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES
Fixed Rate
Par value $ 50 $ 79 $ 52 $ 100 $ 54 $ 2,271 $ 2,606 $ 2,096
WAC 7.3% 7.1% 7.1% 7.2% 7.1% 7.3% 7.3% 7.2%
Fair value $ 2,674 $ 1,922
Variable Rate
Par value $ 323 $ 266 $ 268 $ 240 $ 89 $ 544 $ 1,730 $ 1,433
WAC 7.8% 7.7% 7.9% 7.7% 7.9% 8.0% 7.9% 7.5%
Fair value $ 1,738 $ 1,228
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
Fixed Rate
Par value $ 72 $ 80 $ 80 $ 71 $ 63 $ 426 $ 792 $ 1,288
WAC 7.2% 7.3% 7.2% 7.2% 7.2% 7.2% 7.2% 7.5%
Fair value $ 800 $ 994
Variable Rate
Par value $ 1 $ 1 $ -- $ -- $ -- $ 1 $ 3 $ 4
WAC 7.2% 7.2% -- -- -- 6.9% 7.0% 6.4%
Fair value $ 3 $ 4
====================================================================================================================================
- 35 -
The table below provides information as of December 31, 2000 on debt obligations
and TruPS and reflects principal cash flows and related weighted average
interest rates by maturity year. Comparative totals are included as of December
31, 1999.
2000 1999
2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ 200 $ -- $ 450 $ 650 $ 650
Weighted average interest rate -- -- -- 7.0% -- 7.5% 7.4% 7.4%
Fair value $ 658 $ 633
TRUST PREFERRED SECURITIES (TRUPS) [1]
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 250 $ 250 $ 250
Weighted average interest rate -- -- -- -- -- 7.4% 7.4% 7.4%
Fair value $ 245 $ 203
====================================================================================================================================
<FN>
[1] Represents Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trusts Holding Solely Junior Subordinated Debentures.
</FN>
Asset and Liability Management Strategies Used to Manage Market Risk
- --------------------------------------------------------------------
Worldwide 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, Worldwide 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, 2000, notional amounts pertaining to derivatives totaled $8.5 billion ($6.5
billion related to insurance investments and $2.0 billion related to life
insurance liabilities). Notional amounts pertaining to derivatives totaled $9.6
billion at December 31, 1999 ($6.3 billion related to insurance investments and
$3.3 billion related to life insurance liabilities).
The strategies described below are used to manage the aforementioned risks.
Anticipatory Hedging -- For certain liabilities, Worldwide Life 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
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, 2000
and 1999 were $144 and $314, respectively. Liability Hedging -- Several products
obligate Worldwide Life to credit a return to the contractholder which is
indexed to a market rate. To hedge risks associated with these products,
Worldwide Life 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 Worldwide Life to customize
contract terms and conditions to customer objectives and satisfies the
operation's asset/liability matching policy. Interest rate swaps are used to
convert certain fixed contract rates into floating rates, thereby allowing them
to be appropriately matched against floating rate assets. Additionally, interest
rate caps are used to hedge against the risk of contractholder disintermediation
in a rising interest rate environment. The notional amounts of derivatives used
for liability hedging as of December 31, 2000 and 1999 were $2.0 billion and
$3.3 billion, respectively.
Asset Hedging -- To meet the various policyholder obligations and to provide
cost-effective prudent investment risk diversification, Worldwide Life 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, 2000
and 1999, were $5.4 billion and $4.8 billion, respectively.
Portfolio Hedging -- Worldwide Life 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 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, 2000 and 1999, were $1.0
billion and $1.2 billion, respectively.
The following tables provide information as of December 31, 2000 with
comparative totals for December 31, 1999 on derivative instruments used in
accordance with the
- 36 -
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.
2000 1999
INTEREST RATE SWAPS [1] 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable
Notional value $ 65 $ 95 $ 98 $ 35 $ 126 $ 612 $ 1,031 $ 1,694
Weighted average pay rate 6.0% 4.4% 5.9% 6.1% 7.5% 6.9% 6.6% 5.8%
Weighted average receive rate 6.7% 7.0% 6.9% 6.8% 6.8% 6.8% 6.8% 6.2%
Fair value $ (43) $ 76
Pay Variable/Receive Fixed
Notional value $ 336 $ 372 $ 645 $ 1,198 $ 964 $ 1,371 $ 4,886 $ 4,763
Weighted average pay rate 6.7% 6.7% 6.6% 6.7% 8.1% 6.7% 7.0% 6.2%
Weighted average receive rate 7.0% 6.5% 5.8% 6.1% 7.6% 6.7% 6.6% 6.2%
Fair value $ 78 $ (160)
Pay Variable/Receive Different Variable
Notional value $ 85 $ 28 $ 4 $ 85 $ 30 $ 46 $ 278 $ 442
Weighted average pay rate 6.7% 6.8% 7.0% 6.2% 6.9% 7.2% 6.6% 6.2%
Weighted average receive rate 7.8% 6.6% 6.7% 4.7% (6.6)% 7.2% 4.9% 6.0%
Fair value $ (1) $ 1
====================================================================================================================================
<FN>
[1] Negative weighted average receive rate in 2005 results when payments are
required on both sides of an index swap.
</FN>
2000 1999
INTEREST RATE CAPS - LIBOR BASED 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 2
Notional value $ -- $ 19 $ -- $ -- $ -- $ -- $ 19 $ 31
Weighted average strike rate (10.0 - 11.9%) -- 10.1% -- -- -- -- 10.1% 10.6%
Fair value $ -- $ --
====================================================================================================================================
2000 1999
INTEREST RATE CAPS - CMT BASED [1] 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 494
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 7.7%
Fair value $ -- $ 1
Notional value $ -- $ -- $ 250 $ -- $ 250 $ -- $ 500 $ 850
Weighted average strike rate (8.0 - 9.9%) -- -- 8.7% -- 8.7% -- 8.7% 8.8%
Fair value $ -- $ 4
Issued
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 244
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 7.7%
Fair value $ -- $ --
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 100
Weighted average strike rate (8.0 - 9.9%) -- -- -- -- -- -- -- 9.5%
Fair value $ -- $ --
====================================================================================================================================
<FN>
[1] CMT represents the Constant Maturity Treasury Rate.
</FN>
- 37 -
2000 1999
INTEREST RATE FLOORS - LIBOR BASED 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ -- $ -- $ 27 $ -- $ -- $ 27 $ 27
Weighted average strike rate (6.0 - 7.9%) -- -- -- 7.9% -- -- 7.9% 7.9%
Fair value $ 2 $ 2
Issued
Notional value $ -- $ 28 $ 54 $ 34 $ 77 $ -- $ 193 $ 206
Weighted average strike rate (4.0 - 5.9%) -- 5.3% 5.4% 5.3% 5.3% -- 5.3% 5.3%
Fair value $ (2) $ (1)
Notional value $ -- $ -- $ -- $ 27 $ -- $ -- $ 27 $ 27
Weighted average strike rate (6.0 - 7.9%) -- -- -- 7.8% -- -- 7.8% 7.8%
Fair value $ (2) $ (2)
====================================================================================================================================
2000 1999
INTEREST RATE FLOORS - CMT BASED [1] 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ -- $ 150 $ -- $ -- $ -- $ 150 $ 250
Weighted average strike rate (4.0 - 5.9%) -- -- 5.5% -- -- -- 5.5% 5.6%
Fair value $ 3 $ 1
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 10
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 6.0%
Fair value $ -- $ --
====================================================================================================================================
<FN>
[1] CMT represents the Constant Maturity Treasury Rate.
</FN>
2000 1999
INTEREST RATE FUTURES 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Long
Contract amount/notional $ 198 $ -- $ -- $ -- $ -- $ -- $ 198 $ 27
Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 97
Short
Contract amount/notional $ 59 $ -- $ -- $ -- $ -- $ -- $ 59 $ 51
Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 93
====================================================================================================================================
Option Contracts
- ----------------
Worldwide Life uses option contracts to hedge debt instruments that totaled $951
and $254 in notional amounts and $(34) and $(50) in carrying value as of
December 31, 2000 and 1999, respectively.
Currency Exchange Risk
- ----------------------
As of December 31, 2000, Worldwide Life had immaterial currency exposures
resulting from its international operations.
Life Insurance Liability Characteristics
- ----------------------------------------
Worldwide Life's insurance 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.
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 Worldwide Life's variable annuity products.
- 38 -
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 Worldwide Life's management strategy.
The estimated cash flows of insurance policy liabilities based upon internal
actuarial assumptions as of December 31, 2000 are reflected in the table below
by expected maturity year. Comparative totals are included for December 31,
1999.
(dollars in billions)
2000 1999
DESCRIPTION [1] 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed rate asset accumulation vehicles $ 1.3 $ 0.8 $ 0.9 $ 2.7 $ 2.0 $ 2.7 $ 10.4 $ 9.7
Weighted average credited rate 6.5% 6.5% 5.6% 6.8% 6.9% 6.9% 6.7% 6.6%
Indexed asset accumulation vehicles $ 0.6 $ 0.1 $ -- $ -- $ -- $ -- $ 0.7 $ 0.6
Weighted average credited rate 6.3% 6.2% -- -- -- -- 6.3% 6.2%
Interest credited asset accumulation vehicles $ 4.1 $ 0.6 $ 0.6 $ 0.3 $ 0.3 $ 4.2 $ 10.1 $ 10.6
Weighted average credited rate 6.4% 5.4% 5.4% 5.6% 5.6% 5.6% 5.9% 5.7%
Long-term pay out liabilities $ 0.8 $ 0.7 $ 0.6 $ 0.5 $ 0.4 $ 3.5 $ 6.5 $ 5.6
Short-term pay out liabilities $ 0.9 $ -- $ -- $ -- $ -- $ -- $ 0.9 $ 0.8
====================================================================================================================================
<FN>
[1] As of December 31, 2000 and 1999, the fair values of Worldwide Life's
investment contracts, including guaranteed separate accounts, were $21.4
billion and $20.9 billion, respectively.
</FN>
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 Worldwide 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 tables. These fixed liabilities
represented about 60% and 55% of Worldwide Life's general and guaranteed
separate account liabilities at December 31, 2000 and 1999, respectively. The
remaining liabilities generally allow Worldwide 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.
Change in Net Economic Value
2000 1999
----------------------------------------
Basis point shift - 100 + 100 - 100 + 100
- -------------------------------------------------------------------
Amount $ (15) $ (27) $ (4) $ (5)
Percent of liability value (0.09)% (0.16)% (0.03)% (0.03)%
- --------------------------------------------------------------------
WORLDWIDE PROPERTY & CASUALTY
Interest Rate Risk
- ------------------
The primary exposure to interest rate risk in Worldwide 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 issued. Derivative
instruments are used periodically to manage interest rate risk and as a result,
their value will change as market rates change, generally in the opposite
direction of the item being hedged. The total notional amounts of derivatives
used for hedging interest rate risk as of December 31, 2000 and 1999 were $318
and $136, 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, 2000, are reflected in the following table. Comparative totals are
included as of December 31, 1999. Expected maturities differ from contractual
maturities due to call or prepayment provisions. The weighted average coupon on
variable rate securities is based on spot rates as of December 31, 2000 and
1999, 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
- 39 -
of principal over the remaining life of the 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
Worldwide Property & Casualty's investment portfolio.
2000 1999
2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
CALLABLE BONDS
Fixed Rate
Par value $ 18 $ 28 $ 46 $ 32 $ 88 $ 7,099 $ 7,311 $ 6,880
WAC 6.8% 5.5% 5.6% 5.6% 5.7% 5.4% 5.4% 5.3%
Fair value $ 7,498 $ 6,662
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 282 $ 282 $ 389
WAC -- -- -- -- -- 6.5% 6.5% 6.2%
Fair value $ 227 $ 311
- ------------------------------------------------------------------------------------------------------------------------------------
BONDS - OTHER
Fixed Rate
Par value $ 1,055 $ 411 $ 281 $ 418 $ 540 $ 3,470 $ 6,175 $ 6,444
WAC 6.8% 5.5% 6.5% 6.5% 6.6% 6.2% 6.2% 5.9%
Fair value $ 5,967 $ 6,542
Variable Rate
Par value $ -- $ -- $ -- $ 2 $ -- $ 126 $ 128 $ 136
WAC -- -- -- 5.3% -- 4.8% 4.8% 9.6%
Fair value $ 88 $ 143
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Fixed Rate
Par value $ 47 $ 96 $ 97 $ 54 $ 74 $ 258 $ 626 $ 521
WAC 8.2% 6.9% 6.7% 7.1% 7.1% 7.8% 7.4% 6.7%
Fair value $ 620 $ 503
Variable Rate
Par value $ 6 $ 9 $ 3 $ 33 $ 8 $ 96 $ 155 $ 112
WAC 11.3% 8.7% 8.0% 7.7% 7.7% 7.7% 7.9% 6.3%
Fair value $ 141 $ 113
- ------------------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 34 $ 27 $ 32 $ 24 $ 16 $ 89 $ 222 $ 260
WAC 6.5% 6.6% 6.5% 6.6% 6.6% 6.6% 6.6% 6.8%
Fair value $ 219 $ 228
Variable Rate
Par value $ 2 $ 2 $ 2 $ 1 $ 2 $ 9 $ 18 $ 13
WAC 5.4% 5.4% 5.4% 5.5% 6.3% 5.7% 5.6% 10.2%
Fair value $ 17 $ 12
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES
Fixed Rate
Par value $ 24 $ 16 $ 12 $ 19 $ 12 $ 606 $ 689 $ 706
WAC 7.1% 7.1% 6.7% 7.1% 6.8% 7.2% 7.2% 7.1%
Fair value $ 697 $ 633
Variable Rate
Par value $ 47 $ 65 $ 60 $ 62 $ 45 $ 162 $ 441 $ 262
WAC 8.4% 8.4% 8.1% 7.7% 7.8% 8.2% 8.1% 7.8%
Fair value $ 444 $ 249
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
Fixed Rate
Par value $ 23 $ 28 $ 28 $ 25 $ 23 $ 186 $ 313 $ 462
WAC 7.1% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.0%
Fair value $ 315 $ 445
====================================================================================================================================
- 40 -
The following table provides information as of December 31, 2000 on interest
rate swaps used to manage interest rate risk on fixed maturities and presents
notional amounts with weighted average pay and receive rates by maturity year.
Comparative totals are included as of December 31, 1999. The weighted average
rates are based on spot rates as of December 31, 2000 and 1999.
2000 1999
INTEREST RATE SWAPS 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Pay Variable/Receive Fixed
Notional value $ -- $ 10 $ -- $ 35 $ -- $ -- $ 45 $ 75
Weighted average pay rate -- 6.8% -- 6.7% -- -- 6.7% 6.3%
Weighted average receive rate -- 6.5% -- 6.7% -- -- 6.7% 6.6%
Fair value $ 1 $ (1)
Pay Variable/Receive Different Variable
Notional value $ 273 $ -- $ -- $ -- $ -- $ -- $ 273 $ 61
Weighted average pay rate 6.5% -- -- -- -- -- 6.5% 6.2%
Weighted average receive rate 6.9% -- -- -- -- -- 6.9% 6.7%
Fair value $ 5 $ (1)
====================================================================================================================================
The table below provides information as of December 31, 2000 on debt obligations
and QUIPS and reflects principal cash flows and related weighted average
interest rates by maturity year. Comparative totals are included as of December
31, 1999.
2000 1999
2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
Fixed Rate
Amount $ 235 $ -- $ -- $ -- $ -- $ -- $ 235 $ 31
Weighted average interest rate 8.1% -- -- -- -- -- 8.1% 6.4%
Fair value $ 238 $ 31
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ 300 $ -- $ -- $ -- $ 400 $ 700 $ 900
Weighted average interest rate -- 6.4% -- -- -- 6.8% 6.6% 7.1%
Fair value $ 689 $ 872
CUMULATIVE QUARTERLY INCOME PREFERRED
SECURITIES (QUIPS) [1]
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 1,000 $ 1,000 $ 1,000
Weighted average interest rate -- -- -- -- -- 8.4% 8.4% 8.4%
Fair value $ 988 $ 879
====================================================================================================================================
<FN>
[1] Represents Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trusts Holding Solely Junior Subordinated Debentures.
</FN>
Equities Price Risk
- -------------------
Worldwide 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, 2000 and
1999, grouped by major market type.
2000 1999
FAIR VALUE PERCENT FAIR VALUE PERCENT
- ---------------------------------------------------------------
EQUITY SECURITIES
Domestic
Large cap $ 521 58.9% $ 519 45.8%
Midcap/small cap 179 20.2% 114 10.1%
Foreign
EAFE [1]/Canadian 185 20.9% 465 41.0%
Emerging -- -- 35 3.1%
- ---------------------------------------------------------------
TOTAL $ 885 100.0% $ 1,133 100.0%
===============================================================
[1] Europe, Australia, Far East countries index.
Currency Exchange Risk
- ----------------------
As of December 31, 2000, Worldwide Property & Casualty had immaterial currency
exposures resulting from its international operations.
- 41 -
Currency exchange risk also exists with respect to investments in foreign equity
securities. Forward foreign contracts with a notional amount of $8 and $48 were
used to manage this risk at December 31, 2000 and 1999, 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 $5 in fixed
maturity security investments that represent an immaterial interest rate
exposure.
The table below provides information as of December 31, 2000 on Corporate's debt
obligations and reflects principal cash flows and related weighted average
interest rates by maturity year. Because the debt was issued in 2000,
comparative totals are not presented.
2000
2001 2002 2003 2004 2005 THEREAFTER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ 250 $ 275 $ 525
Weighted average interest rate -- -- -- -- 7.8% 7.9% 7.8%
Fair value $ 554
====================================================================================================================================
- --------------------------------------------------------------------------------
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, 2000 consists of
debt and equity, and as of December 31, 1999 and 1998 also consisted of minority
interest, summarized as follows:
As of December 31,
-----------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term debt $ 235 $ 31 $ 31
Long-term debt 1,862 1,548 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debentures (QUIPS and TruPS) 1,243 1,250 1,250
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 3,340 $ 2,829 $ 2,829
------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ -- $ 491 $ 414
------------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain (loss) on securities, net of tax $ 6,967 $ 5,664 $ 5,612
Unrealized gain (loss) on securities, net of tax 497 (198) 811
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 7,464 $ 5,466 $ 6,423
------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 10,307 $ 8,984 $ 8,855
------------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 48% 50% 50%
Debt to capitalization [2] [3] 32% 31% 32%
===================================================================================================================================
<FN>
[1] Excludes unrealized gain (loss) on securities, net of tax, of $(62) and
$51 as of December 31, 1999 and 1998, respectively.
[2] Excludes unrealized gain (loss) on securities, net of tax.
[3] Excluding QUIPS and TruPS, the debt to equity ratios were 30%, 28% and
28%, and the debt to capitalization ratios were 20%, 18% and 18% as of
December 31, 2000, 1999 and 1998, respectively.
</FN>
ACQUISITIONS
On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI
that it did not already own. The HLI Repurchase has been recorded as a purchase
transaction. Consideration totaled $1.4 billion and resulted in recognition of
goodwill (excess of the purchase price over the fair values of the net assets
acquired) of $862, which is being amortized on a straight-line basis over a 25
year period.
Purchase accounting for this transaction resulted in adjustments to the cost
basis of certain assets and liabilities acquired based on assessments of fair
value, including the recognition of an asset representing the present value of
estimated net cash flows (present value of the future gross profits to be
earned, PVP) embedded in HLI's existing insurance and investment contracts.
The amount of the purchase price allocated to PVP was $801. PVP is amortized to
expense in relation to the estimated gross profits on those contracts, and
interest is accreted on the unamortized balance. For the year ended December 31,
2000, amortization of PVP amounted to $47. Amortization of all purchase
adjustments, excluding goodwill, will not have a significant impact on the
Company's ongoing results of operations.
- 42 -
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
=================================================================
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain (loss) on
securities, 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.
The Hartford's total capitalization, excluding unrealized gain (loss) on
securities, net of tax, increased by $129 in 1999 from 1998. This change
primarily was the result of earnings, partially offset by dividends declared on
The Hartford's common stock and the effect of treasury stock acquired, net of
reissuances for incentive and stock purchase plans.
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. (For a further discussion of the shelf registration,
see Note 6 of Notes to Consolidated Financial Statements.)
DEBT
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 all the $400 of
commercial paper on December 29, 2000. (For additional information regarding
debt, see Note 6 of Notes to Consolidated Financial Statements.)
On March 1, 2001, HLI issued and sold $400 of senior debt securities from its
existing shelf registration. (For additional information, see Note 17 of Notes
to Consolidated Financial Statements.)
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (QUIPS AND TRUPS)
On March 6, 2001, HLI issued and sold $200 of trust preferred securities from
its existing shelf registration. (For additional information, see Note 17 of
Notes to Consolidated Financial Statements.)
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 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 $214 and paid $210 in dividends to
shareholders in 2000 and declared $209 and paid $207 in 1999.
On October 19, 2000, The Hartford declared a dividend on its common stock of
$0.25 per share payable on January 2, 2001 to shareholders of record as of
December 1, 2000.
Treasury Stock - In December 1997, The Hartford's Board of Directors authorized
the repurchase of up to $1.0 billion of the Company's outstanding common stock
over a three-year period beginning with the first quarter of 1998. The Hartford
completed the $1.0 billion repurchase authorization during 1999 by repurchasing
9.2 million shares of its common stock in the open market at a total cost of
$453. In October 1999, The Hartford's Board of Directors authorized the
repurchase of up to an additional $1.0 billion of the Company's outstanding
common stock. This repurchase authorization was effective in November 1999 and
covers a three-year period. For the year ended December 31, 2000, The Hartford
repurchased 2.8 million shares of its common stock in the open market at a total
cost of $100. Since the inception of the 1999 repurchase program, The Hartford
has repurchased 5.9 million shares at a total cost of $243. Certain of these
repurchased shares have been reissued pursuant to certain stock-based benefit
plans. During the first quarter of 2000 and in conjunction with The HLI
Repurchase, management elected to discontinue repurchase activity.
Unrealized Gain (Loss) - Unrealized gain (loss) on securities, net of tax,
increased by $695 as of December 31, 2000 compared to December 31, 1999. The
change resulted primarily from the impact of decreased interest rates on the
fixed maturity portfolio.
Subsequent Event - On February 16, 2001, The Hartford issued 10 million shares
of common stock pursuant to an underwritten offering for net proceeds of $615.
(For additional information, see Note 17 of Notes to Consolidated Financial
Statements.)
- 43 -
RATINGS
The following table summarizes The Hartford's significant U.S. member companies'
financial ratings from the major independent rating organizations as of February
28, 2001.
A.M. FITCH STANDARD
BEST [1] & 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 and
II quarterly income
preferred securities [2] a- A BBB+ a2
Hartford Life, Inc.:
Senior debt a+ A+ A A2
Commercial paper -- F-1 A-1 P-1
Hartford Life, Inc.:
Capital I trust
preferred securities [2] a- A BBB+ a2
=================================================================
[1] Formerly Duff & Phelps
[2] A.M. Best ratings were adjusted to reflect the integration of A.M. Best's
debt and preferred stock scales.
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.
On January 26, 2001, Moody's confirmed the insurance and debt financial ratings
of The Hartford Financial Services Group, Inc. and HLI following the
announcement of the Fortis acquisition, but changed the outlook on both
companies' debt ratings to negative from stable. Moody's stated that the
revision in debt ratings outlook was based upon Moody's concerns that the Fortis
acquisition would increase The Hartford's operating and financial leverage over
the medium term and fixed charge coverage would weaken. The revision in ratings
outlook does not constitute a ratings "downgrade", nor has Moody's placed the
Company on its "watchlist" for possible downgrade.
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 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 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, 2000, the maximum amount of statutory dividends which may be
paid to The Hartford Financial Services Group, Inc. from its insurance
subsidiaries in 2001, without prior regulatory approval, is $779.
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.)
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, 2000, each of The Hartford's
insurance subsidiaries within Worldwide Life and Worldwide Property & Casualty
had more than sufficient capital to meet the NAIC's RBC requirements.
- 44 -
CASH FLOW
2000 1999 1998
- ----------------------------------------------------------------
Net cash provided by
operating activities $ 2,350 $ 891 $ 907
Net cash (used for) provided
by investing activities $ (2,079) $ 2,279 $ 411
Net cash used for financing
activities $ (208) $ (3,104) $ (1,340)
Cash - end of year $ 227 $ 182 $ 123
- ----------------------------------------------------------------
2000 COMPARED TO 1999 -- The increase in operating cash flow was primarily the
result of growth in Worldwide Life business, along with favorable underwriting
cash flows in Worldwide 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.
1999 COMPARED TO 1998 -- Operating cash flow decreased slightly in 1999 compared
to 1998. The change in both investing and financing cash flows was primarily the
result of an increase in disbursements for investment type contracts related to
the leveraged COLI block of business.
Operating cash flows in each of the last three years have been more than
adequate to meet liquidity requirements.
SUBSEQUENT EVENT
On January 25, 2001, The Hartford agreed to acquire the U.S. individual life
insurance, annuity and mutual fund businesses of Fortis for $1.12 billion in
cash. The Company will effect 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. The Fortis transaction, which is subject to insurance regulatory
approval and other customary conditions, is expected to be completed in the
second quarter of 2001. The acquisition will be reported as a purchase
transaction. The Company plans to finance the transaction through the issuance
of debt and equity securities. (For additional information, see Note 17 of Notes
to Consolidated Financial Statements.)
- --------------------------------------------------------------------------------
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, notably the elimination of rate and form filing
requirements for property and casualty lines. Altogether, about half the states
have considered a variety of such measures, which could result in reduced
transaction costs and improved speed to market.
Federal measures which have been previously considered by Congress and which, if
adopted, 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. Other proposals pertain to medical testing for
insurability, and the use of gender in determining insurance and pension rates
and benefits. It is too early to determine whether any of these proposals will
ultimately be enacted by Congress. 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 to consider reform of the Superfund hazardous
waste cleanup program and the creation of a centralized mechanism for handling
asbestos injury claims. Both proposals 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 $2 in 2000, $4 in 1999 and $12 in
1998.
- 45 -
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. The Company has determined that
the overall impact of applying the new guidance will result in a one-time
statutory cumulative transition benefit of approximately $250 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 will allow 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.
YEAR 2000
As of December 31, 2000, The Hartford had not experienced any Year 2000-related
business interruptions arising either from its own systems or those of third
parties. As an insurer, The Hartford has received claims from insureds who have
incurred losses as a result of Year 2000 issues. Insurance coverage, if any,
will depend upon the provisions of the policies and the facts and circumstances
of each claim. The Hartford does not believe that the claim and claim adjustment
expenses related to such claims will have a material impact upon The Hartford's
financial condition or results of operations.
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.
- 46 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is said 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 2001 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
None.
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 no reports on Form 8-K during
the quarter ended December 31, 2000.
(c) See Item 14(a)(3).
(d) See Item 14(a)(2).
- 47 -
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, 2000 F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended December 31, 2000 F-5-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 2000 F-7
Notes to Consolidated Financial Statements F-8-31
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-7
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 operation, 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
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, 2000 and 1999, 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, 2000. 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, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.
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 25, 2001 (except with respect to the matters discussed in Notes 6, 7, 8
and 17, as to which the date is March 6, 2001)
F-2
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
-----------------------------------------------------
(In millions, except for per share data) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------
REVENUES
Earned premiums $ 8,941 $ 8,342 $ 9,021
Fee income 2,493 2,112 2,106
Net investment income 2,674 2,627 3,102
Other revenue 450 413 489
Net realized capital gains 145 34 304
----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 14,703 13,528 15,022
--------------------------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 8,419 7,902 8,613
Amortization of deferred policy acquisition costs 2,213 2,011 2,020
Insurance operating costs and expenses 1,958 1,779 2,315
Other expenses 695 601 599
----------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 13,285 12,293 13,547
--------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,418 1,235 1,475
Income tax expense 390 287 388
----------------------------------------------------------------------------------------------------------------------------
Income before minority interest 1,028 948 1,087
Minority interest in consolidated subsidiary (54) (86) (72)
----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 974 $ 862 $ 1,015
----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 4.42 $ 3.83 $ 4.36
Diluted earnings per share $ 4.34 $ 3.79 $ 4.30
----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 220.6 224.9 232.8
Weighted average common shares outstanding and
dilutive potential common shares 224.4 227.5 236.2
----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 0.97 $ 0.92 $ 0.85
============================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
----------------------------------
(In millions, except for share data) 2000 1999
- ------------------------------------------------------------------------------------------- ----------------- ----------------
ASSETS
Investments
-----------
Fixed maturities, available for sale, at fair value (amortized cost of $33,856 and
$33,653) $ 34,492 $ 32,875
Equity securities, available for sale, at fair value (cost of $921 and $937) 1,056 1,286
Policy loans, at outstanding balance 3,610 4,222
Other investments 1,511 758
- ------------------------------------------------------------------------------------------- ----------------- ----------------
Total investments 40,669 39,141
Cash 227 182
Premiums receivable and agents' balances 2,295 2,071
Reinsurance recoverables 4,579 4,473
Deferred policy acquisition costs and present value of future profits 5,305 5,038
Deferred income tax 682 1,404
Other assets 3,721 3,075
Separate account assets 114,054 111,667
- ------------------------------------------------------------------------------------------- ----------------- ----------------
TOTAL ASSETS $ 171,532 $ 167,051
=================================================================================== ================= ================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 15,874 $ 16,014
Life 7,105 6,564
Other policyholder funds and benefits payable 15,848 16,884
Unearned premiums 3,093 2,777
Short-term debt 235 31
Long-term debt 1,862 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,243 1,250
Other liabilities 4,754 4,421
Separate account liabilities 114,054 111,667
- ------------------------------------------------------------------------------------------- ----------------- ----------------
164,068 161,156
COMMITMENTS AND CONTINGENCIES, NOTE 15
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -- 429
STOCKHOLDERS' EQUITY
Common stock - authorized 400,000,000, issued 238,645,675 shares, par value $0.01 2 2
Additional paid-in capital 1,686 1,551
Retained earnings 5,887 5,127
Treasury stock, at cost - 12,355,414 and 21,419,460 shares (480) (942)
Accumulated other comprehensive income (loss) 369 (272)
- ------------------------------------------------------------------------------------------- ----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 7,464 5,466
=================================================================================== ================= ================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 171,532 $ 167,051
=================================================================================== ================= ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000
Accumulated Other Comprehensive
Income (Loss)
---------------------------------------
Common Minimum
Stock/ Unrealized Pension
Additional Treasury Gain (Loss) Cumulative Liability Outstanding
Paid-in Retained Stock, on Securities Translation Adjustment, Shares
(In millions) Capital Earnings at Cost net of taz Adjustments net of tax Total (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
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, net of
tax [1]
Unrealized gain on securities [2] 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
====================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1999
Accumulated Other Comprehensive
Income (Loss)
---------------------------------------
Common Minimum
Stock/ Unrealized Pension
Additional Treasury Gain (Loss) Cumulative Liability Outstanding
Paid-in Retained Stock, on Securities Translation Adjustment, Shares
(In millions) Capital Earnings at Cost net of taz Adjustments net of tax Total (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
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 [2] (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
====================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
FOR THE YEAR ENDED DECEMBER 31, 1998
Accumulated Other
Comprehensive Income
----------------------------------
Common Stock/ Treasury Cumulative Outstanding
Additional Retained Stock, Unrealized Gain on Translation Shares
(In millions) Paid-in Capital Earnings at Cost Securities, net of tax Adjustments Total (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $1,643 $3,658 $(48) $853 $(21) $6,085 235,952
Comprehensive income
Net income 1,015 1,015
Other comprehensive income (loss),
net of tax [1]
Unrealized gain (loss) on
securities [2] (42) (42)
Cumulative translation adjustments 21 21
-----------
Total other comprehensive income
(loss) (21)
-----------
Total comprehensive income 994
-----------
Issuance of shares under incentive
and stock purchase plans (2) 70 68 2,203
Tax benefit on employee stock options
and awards 22 22
Treasury stock acquired (70) (477) (547) (10,760)
Dividends declared on common stock (199) (199)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $1,593 $4,474 $(455) $811 $-- $6,423 227,395
====================================================================================================================================
<FN>
[1] Unrealized gain (loss) on securities is net of tax of $370, $(546) and
$(17) for the years ended December 31, 2000, 1999 and 1998, respectively.
There is no tax effect on cumulative translation adjustments. Minimum
pension liability adjustment is net of tax of $(2) and $(6) for the years
ended December 31, 2000 and 1999, respectively.
[2] Net of reclassification adjustment for gains (losses) realized in net
income of $(57), $25 and $166 for the years ended December 31, 2000, 1999
and 1998, respectively.
</FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------------------------
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------- ---------------- ----------------- ---------------
OPERATING ACTIVITIES
Net income $ 974 $ 862 $ 1,015
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Change in receivables, payables and accruals 126 132 (28)
Change in reinsurance recoverables (85) 126 622
Amortization of deferred policy acquisition costs 2,213 2,011 2,020
Additions to deferred policy acquisition costs (2,573) (2,498) (2,600)
Change in accrued and deferred income taxes 398 166 (67)
Increase in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 1,130 454 266
Minority interest in consolidated subsidiary 54 86 72
Net realized capital gains (145) (34) (304)
Depreciation and amortization 63 58 89
Other, net 195 (472) (178)
- --------------------------------------------------------------------------------- ---------------- ----------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,350 891 907
================================================================================= ================ ================= ===============
INVESTING ACTIVITIES
Purchase of investments (15,104) (13,172) (15,473)
Sale of investments 11,985 13,525 13,681
Maturity of investments 2,001 2,098 2,156
Purchase of minority interest in HLI (1,329) -- --
Sale (purchase) of other affiliates 483 (52) 155
Additions to property, plant and equipment (115) (120) (108)
- --------------------------------------------------------------------------------- ---------------- ----------------- ---------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (2,079) 2,279 411
================================================================================= ================ ================= ===============
FINANCING ACTIVITIES
Short-term debt, net 4 -- (60)
Issuance of long-term debt 516 -- 200
Repayment of long-term debt -- -- (200)
Issuance of common stock from treasury 398 -- --
Net proceeds from issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely junior
subordinated debentures -- -- 250
Net disbursements for investment and universal life-type contracts charged
against policyholder accounts (947) (2,356) (835)
Dividends paid (210) (207) (197)
Acquisition of treasury stock (100) (596) (547)
Proceeds from issuances of shares under incentive and stock purchase plans 131 55 49
- --------------------------------------------------------------------------------- ---------------- ----------------- ---------------
NET CASH USED FOR FINANCING ACTIVITIES (208) (3,104) (1,340)
================================================================================= ================ ================= ===============
Foreign exchange rate effect on cash (18) (7) 5
- --------------------------------------------------------------------------------- ---------------- ----------------- ---------------
Net increase (decrease) in cash 45 59 (17)
Cash - beginning of year 182 123 140
- --------------------------------------------------------------------------------- ---------------- ----------------- ---------------
CASH - END OF YEAR $ 227 $ 182 $ 123
================================================================================= ================ ================= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ------------------------------------------------
NET CASH PAID DURING THE YEAR FOR:
Income taxes $ 95 $ 41 $ 407
Interest $ 248 $ 214 $ 220
NONCASH INVESTING ACTIVITIES
- ----------------------------
For the year ended December 31, 1998, due to the recapture of an in force block
of business previously ceded to MBL Life Assurance Co. of New Jersey,
reinsurance recoverables of $4,753 were exchanged for the fair value of assets
comprised of $4,310 in policy loans and $443 in other net assets.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
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 life and property and casualty
insurance to both individual and commercial customers in the United States and
internationally.
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 2.)
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh")
subsidiary. For purposes of these financial statements, London & Edinburgh's
operating results are included in The Hartford's Consolidated Statements of
Income through the date of sale. (For additional information, see Note 19.)
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 and the liability for future policy benefits, unpaid claims
and claim adjustment expenses. 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
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44" or "the
Interpretation"). 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 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.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
In November 1998, the Emerging Issues Task Force ("EITF") reached consensus on
Issue 98-15, "Structured Notes Acquired for a Specific Investment Strategy".
This pronouncement requires companies to account for structured notes acquired
for a specific investment strategy as a unit. Affected companies that entered
into these notes prior to September 25, 1998 are required to either restate
prior period financial statements to conform with the prescribed unit accounting
model, or disclose the related impact on earnings for all periods presented and
cumulatively over the life of the instruments had the registrant accounted for
the structure as a unit. Cumulatively, over the period that the Company held the
instrument, net income would have been unchanged as the Company disposed of its
remaining structured note in September 2000.
The Hartford's cash flows were not impacted by adopting these changes in
accounting principles.
(C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In October 2000, the FASB issued Statement of Financial Accounting Standards
("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 criteria for accounting for certain transfers of
financial assets and the reporting and disclosure requirements for collateral
arrangements. Implementation of the provisions of SFAS No. 140 is not expected
to have a material impact on the Company's financial condition or results of
operations.
In July 2000, the EITF reached consensus on Issue No. 99-20, "Recognition of
Interest Income and Impairment on Certain Investments". This pronouncement
requires investors in certain asset-backed securities to record changes in their
estimated yield on a prospective basis and to evaluate these securities for an
other than temporary decline in value. This consensus is effective for financial
statements with fiscal quarters beginning after March 15, 2001. Adoption of EITF
No. 99-20 is not expected to have a material impact on the Company's financial
condition or results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amended SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
established accounting and reporting requirements for derivative instruments,
including certain derivative instruments embedded in other contracts. SFAS No.
133 requires, among other things, that all derivatives be carried on the balance
sheet at fair value. SFAS No. 133 also specifies hedge accounting criteria under
which a derivative can qualify for special accounting. SFAS No. 138 amended SFAS
No. 133 so that for interest rate hedges, a company may designate as the hedged
risk, the risk of changes only in a benchmark interest rate. Also, credit risk
is newly defined as the company-specific spread over the benchmark interest rate
and may be hedged separately from, or in combination with, the benchmark
interest rate. Initial application of SFAS No. 133, as amended, for The Hartford
began January 1, 2001. Implementation of SFAS No. 133, as amended, is expected
to result in a cumulative transition adjustment, decreasing net income by $23
after-tax. However, the FASB's Derivative Implementation Group continues to
deliberate on multiple issues, the resolution of which could have a significant
impact on the Company's expectations.
(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 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 invested
assets consist primarily of partnership investments which are accounted for by
the equity method. Non-partnership other invested assets are valued at amortized
cost.
Realized capital gains (losses) on security transactions associated with the
Company's immediate participation guaranteed contracts are recorded and offset
by amounts owed to policyholders and were $(9), $2 and $8 for the years ended
December 31, 2000, 1999 and 1998, respectively. Under the terms of the
contracts, the 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 of investments
requires recognition of an other than temporary impairment charge on a security
if it is determined that the Company is unable to recover all amounts due under
the contractual obligations of the security. 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
HEDGE ACCOUNTING - 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 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;
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) DERIVATIVE INSTRUMENTS (CONTINUED)
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. The Hartford's
accounting for derivative instruments used to manage risk is in accordance with
the concepts established in SFAS No. 80, "Accounting for Futures Contracts",
SFAS No. 52, "Foreign Currency Translation", AICPA Issue Paper No. 86-2,
"Accounting for Options", and various EITF pronouncements. Written options are
used, in all cases in conjunction with other assets and derivatives, as part of
the Company's asset and liability management strategy. Derivative instruments
are carried at values consistent with the asset or liability being hedged.
Derivative instruments used to hedge fixed maturities or equities are carried at
fair value with the after-tax difference from cost reflected in stockholders'
equity as a component of accumulated other comprehensive income. Derivative
instruments used to hedge liabilities are carried at cost. In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Initial application of SFAS No. 133, as amended, for The Hartford
began for the first quarter of 2001. For further discussion of SFAS No. 133, as
amended, see (c) Future Adoption of New Accounting Standards.
Derivative instruments must be designated at inception as a hedge and measured
for effectiveness both at inception and on an ongoing basis. The Hartford's
correlation threshold for hedge designation is 80% to 120%. If correlation,
which is assessed monthly or quarterly and measured based on a rolling
three-month average, falls outside the range of 80% to 120%, hedge accounting is
terminated. Derivative instruments used to create a synthetic asset must meet
synthetic accounting criteria including designation at inception and consistency
of terms between the synthetic and the instrument being replicated. Synthetic
instrument accounting, consistent with industry practice, provides that the
synthetic asset is accounted for like the financial instrument it is intended to
replicate. Derivative instruments which fail to meet risk management criteria
are marked to market with the impact reflected in the Consolidated Statements of
Income.
FUTURES - Gains or losses on financial futures contracts entered into in
anticipation of the future receipt of product cash flows are deferred and, at
the time of the ultimate purchase, reflected as an adjustment to the cost basis
of the purchased asset. Gains or losses on futures used in invested asset risk
management are deferred and adjusted into the cost basis of the hedged asset
when the futures contracts are closed, except for futures used in duration
hedging which are deferred and adjusted into the cost basis on a quarterly
basis. The adjustments to the cost basis are amortized into net investment
income over the remaining asset life.
FORWARD COMMITMENTS - Open forward commitment contracts are marked to market
through stockholders' equity as a component of accumulated other comprehensive
income. Such contracts are recorded at settlement by recording the purchase of
the specified securities at the previously committed price. Gains or losses
resulting from the termination of the forward commitment contracts before the
delivery of the securities are recognized immediately in the Consolidated
Statements of Income as a component of net investment income.
OPTIONS - The cost of options entered into as part of a risk management strategy
are adjusted into the basis of the underlying asset or liability and amortized
over the remaining life of the hedge. Gains or losses on expiration or
termination are adjusted into the basis of the underlying asset or liability and
amortized over the remaining life.
INTEREST RATE SWAPS - Interest rate swaps involve the periodic exchange of
payments without the exchange of underlying principal or notional amounts. Net
receipts or payments are accrued and recognized over the life of the swap
agreement as an adjustment to income. Should the swap be terminated, the gain or
loss is adjusted into the basis of the asset or liability and amortized over the
remaining life. Should the hedged asset be sold or liability terminated without
terminating the swap position, any swap gains or losses are immediately
recognized in earnings. Interest rate swaps purchased in anticipation of an
asset purchase (anticipatory transaction) are recognized consistent with the
underlying asset components such that the settlement component is recognized in
the Consolidated Statements of Income while the change in market value is
recognized as an unrealized gain or loss.
INTEREST RATE CAPS AND FLOORS - Premiums paid on purchased floor or cap
agreements and the premium received on issued cap or floor agreements (used for
risk management) are adjusted into the basis of the applicable asset or
liability and amortized over the asset or liability life. Gains or losses on
termination of such positions are adjusted into the basis of the asset or
liability and amortized over the remaining life. Net payments are recognized as
an adjustment to income or basis adjusted and amortized depending on the
specific hedge strategy.
FORWARD EXCHANGE AND CURRENCY SWAPS CONTRACTS - Forward exchange contracts and
foreign currency swaps are accounted for in accordance with SFAS No. 52. Changes
in the spot rate of instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in stockholders' equity as a component of
accumulated other comprehensive income.
(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
WORLDWIDE LIFE - Policy acquisition costs, including commissions and certain
other expenses associated with acquiring business, are deferred and amortized
over the estimated lives of the contracts, generally 20 years. Generally,
acquisition costs are deferred and amortized using the
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) DEFERRED POLICY ACQUISITION COSTS (CONTINUED)
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 reestimated and readjusted by a cumulative charge
or credit to income.
WORLDWIDE PROPERTY & CASUALTY - Policy acquisition costs, representing
commissions, premium taxes and certain other underwriting expenses, are deferred
and amortized over policy terms. Estimates of future revenues, including net
investment income and tax benefits, are compared to estimates of future costs,
including amortization of policy acquisition costs, to determine if business
currently in force is expected to result in a net loss.
(H) FUTURE POLICY BENEFITS, UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
WORLDWIDE 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,
--------------------------------
2000 1999 1998
--------------------------------
BEGINNING CLAIM RESERVES-GROSS $2,128 $1,938 $1,746
Reinsurance recoverables 125 125 71
- -----------------------------------------------------------------
BEGINNING CLAIM RESERVES-NET 2,003 1,813 1,675
- -----------------------------------------------------------------
INCURRED EXPENSES RELATED TO
Current year 1,093 1,013 902
Prior years (11) (33) (48)
- -----------------------------------------------------------------
TOTAL INCURRED 1,082 980 854
- -----------------------------------------------------------------
PAID EXPENSES RELATED TO
Current year 410 360 334
Prior years 468 430 382
- -----------------------------------------------------------------
TOTAL PAID 878 790 716
- -----------------------------------------------------------------
ENDING CLAIM RESERVES-NET 2,207 2,003 1,813
Reinsurance recoverables 177 125 125
- -----------------------------------------------------------------
ENDING CLAIM RESERVES-GROSS $2,384 $2,128 $1,938
=================================================================
WORLDWIDE 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 5.7% in 2000 and 6.3% in 1999.
At December 31, 2000 and 1999, such discounted reserves totaled $716 and $768,
respectively (net of discounts of $396 and $480, respectively). Amortization of
the discount did not have a material effect on net income during 2000, 1999 and
1998, respectively. A reconciliation of liabilities for unpaid claims and claim
adjustment expenses follows:
For the years ended December 31,
--------------------------------
2000 1999 1998
--------------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $16,014 $16,449 $18,376
Reinsurance recoverables 3,271 3,286 4,348
- -----------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 12,743 13,163 14,028
- -----------------------------------------------------------------
ADD PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES
Current year 5,170 4,953 5,404
Prior years [1] 27 (171) (152)
- -----------------------------------------------------------------
TOTAL PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES 5,197 4,782 5,252
- -----------------------------------------------------------------
LESS PAYMENTS
Current year 2,265 2,137 2,275
Prior years 3,069 3,024 2,876
- -----------------------------------------------------------------
TOTAL PAYMENTS 5,334 5,161 5,151
- -----------------------------------------------------------------
Foreign currency translation (26) (41) (1)
Reserves resulting from -- -- 86
acquisitions
Other [2] (158) -- (1,051)
- -----------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 12,422 12,743 13,163
Reinsurance recoverables 3,452 3,271 3,286
- -----------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $15,874 $16,014 $16,449
=================================================================
[1] Excludes the effects of foreign exchange adjustments.
[2] 2000 includes $161 related to the sale of Zwolsche. 1998 includes $1,067
related to the sale of London & Edinburgh. (See Note 19.)
The Company has an exposure to catastrophe losses which can be caused by
significant events including hurricanes, severe winter storms, earthquakes,
windstorms and fires. The frequency and severity of catastrophes 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 catastrophe losses through individual risk
selection and the purchase of catastrophe reinsurance.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE
Other policyholder funds and benefits payable include reserves for investment
contracts without life contingencies, corporate owned life insurance and
universal life insurance contracts. Of the amounts included in this item, $15.6
billion and $16.6 billion, as of December 31, 2000 and 1999, 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
WORLDWIDE LIFE - 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. Premiums for
traditional life insurance are recognized as revenues 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.
WORLDWIDE 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.
WORLDWIDE LIFE - Participating life insurance in force accounted for 17%, 20%
and 22% as of December 31, 2000, 1999 and 1998, respectively, of total life
insurance in force. Dividends to policyholders were $67, $104 and $330 for the
years ended December 31, 2000, 1999 and 1998, respectively. There were no
additional amounts of income allocated to participating policyholders.
WORLDWIDE PROPERTY & CASUALTY - Net written premiums for participating property
and casualty insurance policies represented 9%, 11% and 13% of total net written
premiums for the years ended December 31, 2000, 1999 and 1998, respectively.
Dividends to policyholders were $33, $40 and $30 for the years ended December
31, 2000, 1999 and 1998, 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 fourteen
mutual funds. The Company charges management 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. THE 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 has been recorded as a purchase
transaction. Consideration totaled $1.4 billion and resulted in recognition of
goodwill (excess of the purchase price over the fair value of the net assets
acquired) of $862, which is being amortized on a straight-line basis over a 25
year period.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. THE HLI REPURCHASE (CONTINUED)
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
- ----------------------------------------------------------------
Purchase accounting for this transaction resulted in adjustments to the cost
basis of certain assets and liabilities acquired based on assessments of fair
value. These adjustments also include the recognition of an asset representing
the present value of estimated net cash flows (present value of the future gross
profits to be earned, "PVP") embedded in HLI's existing insurance and investment
contracts. The amount of the purchase price allocated to PVP was $801. PVP is
amortized to expense in relation to the estimated gross profits on those
contracts, and interest is accreted on the unamortized balance. For the year
ended December 31, 2000, amortization of PVP amounted to $47. Amortization of
all purchase adjustments, excluding goodwill, will not have a significant impact
on the Company's ongoing results of operations.
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS
For the years ended December 31,
(A) COMPONENTS OF NET INVESTMENT INCOME 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 2,544 $ 2,530 $ 3,018
Dividends 27 31 32
Other investment income 142 107 91
- ----------------------------------------------------------------------------------------------------------------------------------
Gross investment income 2,713 2,668 3,141
Less: Investment expenses 39 41 39
- ----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 2,674 $ 2,627 $ 3,102
==================================================================================================================================
(B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed maturities $ (251) $ (64) $ (64)
Equity securities 148 105 302
Real estate and other [1] 239 (5) 74
Change in liability to policyholders for net realized capital (gains)
losses 9 (2) (8)
- ----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED CAPITAL GAINS $ 145 $ 34 $ 304
==================================================================================================================================
[1] 2000 includes a $242, before-tax, gain on the sale of Zwolsche. 1998 includes a $55, before-tax,
gain on the sale of London & Edinburgh.
- ----------------------------------------------------------------------------------------------------------------------------------
(C) UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES
Gross unrealized gains $ 230 $ 395 $ 283
Gross unrealized losses (95) (46) (60)
Minority interest in consolidated subsidiary -- (4) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains 135 345 220
Deferred income taxes 45 121 76
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains, net of tax 90 224 144
Balance - beginning of year 224 144 274
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES $ (134) $ 80 $ (130)
==================================================================================================================================
(D) UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES
- ----------------------------------------------------------------------------------------------------------------------------------
Gross unrealized gains $ 1,042 $ 271 $ 1,318
Gross unrealized losses (406) (1,049) (178)
Minority interest in consolidated subsidiary -- 105 (77)
Net unrealized (gains) losses credited to policyholders (10) 24 (32)
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 626 (649) 1,031
Deferred income taxes 219 (227) 364
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses), net of tax 407 (422) 667
Balance - beginning of year (422) 667 579
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES $ 829 $ (1,089) $ 88
==================================================================================================================================
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(E) FIXED MATURITY INVESTMENTS As of December 31, 2000
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
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
=================================================================================================================================
As of December 31, 1999
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) $ 331 $ 5 $ (6) $ 330
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 1,931 6 (54) 1,883
States, municipalities and political subdivisions 9,656 101 (270) 9,487
International governments 1,444 72 (36) 1,480
Public utilities 1,304 7 (51) 1,260
All other corporate including international 9,260 70 (398) 8,932
All other corporate - asset-backed 6,546 8 (211) 6,343
Short-term investments 2,348 1 -- 2,349
Certificates of deposit 666 -- (17) 649
Redeemable preferred stock 167 1 (6) 162
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 33,653 $ 271 $ (1,049) $ 32,875
==================================================================================================================================
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 2000 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 $ 2,459 $ 2,472
Over one year through five years 9,346 9,406
Over five years through ten years 11,029 11,305
Over ten years 11,022 11,309
- -----------------------------------------------------------------
TOTAL $ 33,856 $ 34,492
=================================================================
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(F) SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS
Sales of fixed maturities, excluding short-term fixed maturities, for the years
ended December 31, 2000, 1999 and 1998 resulted in proceeds of $9.6 billion,
$9.8 billion and $9.2 billion, gross gains of $187, $245 and $230 and gross
losses of $(429), $(311) and $(302), respectively. Sales of equity security
investments for the years ended December 31, 2000, 1999 and 1998 resulted in
proceeds of $1.3 billion, $1.3 billion and $2.2 billion, gross gains of $258,
$124 and $636 and gross losses of $(110), $(19) and $(334), respectively.
(G) CONCENTRATION OF CREDIT RISK
The Hartford is not exposed to any credit concentration risk of a single issuer
greater than 10% of stockholders' equity.
(H) DERIVATIVE INSTRUMENTS
The Hartford utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded financial futures and options, in
compliance with Company policy and 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 transactions 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.
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.
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. Credit
risk is measured as the amount owed to The Hartford 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 or held by the Company to the extent that the current
value of derivative instruments exceeds exposure policy thresholds.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to The Hartford's Finance
Committee. 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 $5.3 billion at December 31, 2000 and $7.7
billion at December 31, 1999.
A summary of derivative instruments for The Hartford, segregated by major
investment and liability category, was as follows as of December 31, 2000 and
1999:
2000 AMOUNT HEDGED (NOTIONAL AMOUNTS)
------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors & Rate Swaps Currency Notional
ASSETS HEDGED Value & Floors Options Futures [1] & Forwards Swaps [2] Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities (excluding
anticipatory) $ 9,831 $ -- $ 15 $ -- $ 1,791 $ -- $ 1,806
Anticipatory [3] -- -- -- 144 -- -- 144
Other bonds and notes 22,565 139 439 -- 1,967 37 2,582
Short-term investments 2,096 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 34,492 139 454 144 3,758 37 4,532
Equity securities, policy loans and
other investments 6,177 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 40,669 $ 139 $ 454 $ 144 $ 3,758 $ 37 $ 4,532
OTHER POLICYHOLDER FUNDS AND BENEFITS
PAYABLE $ 15,848 -- 650 -- 124 -- 774
====================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS - NOTIONAL VALUE $ 139 $ 1,104 $ 144 $ 3,882 $ 37 $ 5,306
====================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS - FAIR VALUE $ (4) $ 11 $ -- $ (2) $ -- $ 5
====================================================================================================================================
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(H) DERIVATIVE INSTRUMENTS (CONTINUED)
1999 AMOUNT HEDGED (NOTIONAL AMOUNTS)
------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors & Rate Swaps & Currency Notional
ASSETS HEDGED VALUE & Floors Options Futures [1] Forwards Swaps [2] Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities (excluding
anticipatory) $ 8,227 $ -- $ 15 $ -- $ 1,017 $ -- $ 1,032
Anticipatory [3] -- -- -- 13 232 -- 245
Other bonds and notes 22,299 505 681 -- 3,101 83 4,370
Short-term investments 2,349 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 32,875 505 696 13 4,350 83 5,647
Equity securities, policy loans and
other investments 6,266 -- -- -- 5 -- 5
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 39,141 $ 505 $ 696 $ 13 $ 4,355 $ 83 $ 5,652
OTHER POLICYHOLDER FUNDS AND BENEFITS
PAYABLE $ 16,884 -- 1,150 -- 848 16 2,014
====================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS - NOTIONAL VALUE $ 505 $ 1,846 $ 13 $ 5,203 $ 99 $ 7,666
====================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS - FAIR VALUE $ (22) $ 10 $ -- $ (24) $ 6 $ (30)
====================================================================================================================================
<FN>
[1] As of December 31, 2000 and 1999, 100% of the notional futures contracts
mature within one year.
[2] As of December 31, 2000 and 1999, 0% and 39%, respectively, of foreign
currency swaps mature within one year. In years 2007 to 2009, 80% of the
notional value will mature.
[3] Deferred gains and losses on anticipatory transactions are included in the
carrying value of fixed maturity investments in the Consolidated Balance
Sheets. At the time of the ultimate purchase, they are reflected as a basis
adjustment to the purchased asset. As of December 31, 2000, the Company had
$0.2 of net deferred gains for futures contracts. The Hartford expects the
anticipatory transaction to occur in the first quarter of 2001 and the
entire $0.2 of net deferred gains will be amortized into income as a hedge
of a forecasted transaction. As of December 31, 1999, the Company had $3.4
of net deferred losses for futures contracts and interest rate swaps, which
were basis adjusted in 2000.
</FN>
A reconciliation between notional amounts as of December 31, 2000 and 1999 by
derivative type and strategy is as follows:
December 31, 1999 Maturities/ December 31, 2000
Notional Amount Additions Terminations [1] Notional Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BY DERIVATIVE TYPE
Caps $ 1,779 $ -- $ 1,187 $ 592
Floors 405 100 210 295
Swaps/Forwards 5,302 5,403 6,786 3,919
Futures 13 357 226 144
Options 167 426 237 356
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 7,666 $ 6,286 $ 8,646 $ 5,306
====================================================================================================================================
BY STRATEGY
Liability $ 2,014 $ 1,122 $ 2,362 $ 774
Anticipatory 245 625 726 144
Asset 4,271 3,516 4,298 3,489
Portfolio 1,136 1,023 1,260 899
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 7,666 $ 6,286 $ 8,646 $ 5,306
====================================================================================================================================
<FN>
[1] During 2000, the Company had no significant gain or loss on terminations of
hedge positions using derivative financial instruments.
</FN>
(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, 2000, collateral
pledged has not been separately reported in the Consolidated Balance Sheet. The
classification and carrying amounts of collateral pledged at December 31, 2000
were as follows:
Carrying
ASSETS Amount
- -----------------------------------------------------------------
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) $ 3
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 31
- -----------------------------------------------------------------
TOTAL $ 34
=================================================================
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(I) COLLATERAL ARRANGEMENTS (CONTINUED)
At December 31, 2000, The Hartford had accepted collateral consisting primarily
of U.S. Government securities with a fair value of $252. While The Hartford is
permitted by contract to sell or repledge the collateral accepted, none of the
collateral had been sold or repledged at December 31, 2000. As of December 31,
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 for other invested assets, which primarily consist of partnerships
and trusts, is based on external market valuations from partnership and trust
management.
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 QUIPS and TruPS (which represent company
obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures) is based on external valuation
using discounted future cash flows at current market interest rates.
The fair value of derivative financial instruments, including swaps, caps,
floors, futures, options and forward commitments, is determined using an
internal pricing model that is similar to external valuation models. Derivative
instruments are reported below as a component of other investments.
The carrying amounts and fair values of The Hartford's financial instruments at
December 31, 2000 and 1999 were as follows:
2000 1999
----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------
ASSETS
Fixed maturities $34,492 $34,492 $32,875 $32,875
Equity securities 1,056 1,056 1,286 1,286
Policy loans 3,610 3,610 4,222 4,222
Other investments 1,511 1,512 758 774
LIABILITIES
Other policyholder
funds and benefits
payable [1] $11,985 $11,607 $11,991 $11,416
Short-term debt 235 238 31 31
Long-term debt 1,862 1,901 1,548 1,505
QUIPS/TruPS 1,243 1,233 1,250 1,082
==================================================================
[1] Excludes group accident and health and universal life insurance contracts,
including corporate owned life insurance.
5. SEPARATE ACCOUNTS
The Hartford maintained separate account assets and liabilities totaling $114.1
billion and $111.7 billion at December 31, 2000 and 1999, 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 $104.3 billion and $102.6 billion at December 31,
2000 and 1999, respectively, wherein the policyholder assumes the investment
risk, and guaranteed separate accounts totaling $9.8 billion and $9.1 billion at
December 31, 2000 and 1999, 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 $697 and $860
at December 31, 2000 and 1999, 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 were $1.4 billion, $1.1
billion and $911 in 2000, 1999 and 1998, respectively. The guaranteed separate
accounts include fixed market value adjusted ("MVA") individual annuity and
modified guaranteed life insurance. The average credited interest rate on these
contracts was 6.6% and 6.5% at December 31, 2000 and 1999, respectively. The
assets that support these liabilities were comprised of $9.6 billion and $9.1
billion in fixed maturities as of December 31, 2000 and 1999, respectively, and
$127 of other invested assets as of December 31, 2000. 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 $3 and $(96) in carrying value and $3.5 billion and
$2.1 billion in notional amounts as of December 31, 2000 and 1999, respectively.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. DEBT 2000 1999
-------------------------------------------------------------------------------------
Weighted Average Weighted Average
Amount Interest Rate [1] Amount Interest Rate [1]
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
Commercial paper $ 35 6.6% $ 31 6.4%
Current maturities of long-term debt 200 8.3% -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 235 8.1% $ 31 6.4%
====================================================================================================================================
LONG-TERM DEBT
8.3% Notes, due 2001 $ -- -- $ 200 8.4%
6.375% Notes, due 2002 300 6.6% 299 6.6%
6.9% Notes, due 2004 199 7.0% 200 7.0%
7.75% Notes, due 2005 245 8.2% -- --
7.1% Notes, due 2007 198 7.2% 200 7.2%
6.375% Notes, due 2008 200 6.5% 200 6.5%
7.9% Notes, due 2010 274 8.4% -- --
7.3% Notes, due 2015 199 7.4% 199 7.4%
7.65% Notes, due 2027 247 7.8% 250 7.8%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 1,862 7.2% $ 1,548 7.2%
====================================================================================================================================
<FN>
[1] Represents the effective interest rate at the end of the year.
</FN>
(A) SHORT-TERM DEBT
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 19).
The Hartford's commercial paper ranks equally with its other unsecured and
unsubordinated indebtedness. As of December 31, 2000, The Hartford had a $1.5
billion five-year revolving credit facility with one year remaining with
twenty-six participating banks. This facility is available for general corporate
purposes and to provide additional support to the Company's commercial paper
program. At December 31, 2000, there were no outstanding borrowings under the
facility.
As of December 31, 2000, 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, 2000, there were
no outstanding borrowings under the facility or commercial paper program.
(B) LONG-TERM DEBT
The Hartford's long-term debt securities of The Hartford Financial Services
Group, Inc. ("HFSG") are unsecured obligations of HFSG and rank on a parity with
all other unsecured and unsubordinated indebtedness of HFSG.
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 October 11, 1995 shelf registration, as amended, allowed for the potential
offering and sale of up to $2.25 billion in debt and equity securities. As of
December 31, 1999, The Hartford had $1.05 billion remaining under this shelf
registration. On June 8, 2000, The Hartford issued 7.25 million shares of common
stock under the shelf registration for $398. On June 16, 2000, The Hartford
issued and sold $525 of unsecured redeemable long-term debt under this 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 2).
On June 8, 1998, HLI filed an omnibus registration statement with the Securities
and Exchange Commission for the issuance of up to $1.0 billion of debt and
equity securities, including up to $350 of previously registered but unsold
securities. HLI had $750 remaining on this shelf registration on December 31,
2000.
(C) SUBSEQUENT EVENT
On March 1, 2001, HLI issued and sold $400 of senior debt securities from its
existing shelf registration. (For additional information, see Note 17.)
(D) INTEREST EXPENSE
Interest expense incurred related to short- and long-term debt totaled $150,
$114 and $125 for 2000, 1999 and 1998, respectively.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (QUIPS AND TRUPS)
(A) DESCRIPTION
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.
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 but not in
part, in certain circumstances upon the occurrence of certain specified events,
in either case at a redemption price equal to 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 upon dissolution, winding up or liquidation
to the extent funds are available.
On January 19, 1996, The Hartford and several wholly-owned special purpose
trusts ("Hartford Trusts") formed by The Hartford filed with the Securities and
Exchange Commission a shelf registration statement for the potential offering
and sale of $500 of debt securities and preferred stock, including up to an
aggregate $500 Junior Subordinated Deferrable Interest Debentures of The
Hartford and Preferred Securities of the Hartford Trusts.
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 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
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (QUIPS AND TRUPS)
(CONTINUED)
(A) DESCRIPTION (CONTINUED)
principal amount thereof, 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
7.7% of the principal amount, payable quarterly in arrears commencing March 31,
1996, and mature on February 28, 2016. 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 I obligations under the Hartford Series A 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 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.
(B) SUBSEQUENT EVENT
On March 6, 2001, HLI issued and sold $200 of trust preferred securities from
its existing shelf registration. (For additional information, see Note 17.)
(C) INTEREST EXPENSE
Interest expense incurred with respect to the Series A Preferred Securities and
Series B Preferred Securities totaled approximately $100, $100 and $91 in 2000,
1999 and 1998, respectively.
8. STOCKHOLDERS' EQUITY
(A) COMMON STOCK
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 (see Note 2).
On May 21, 1998, The Hartford's shareholders approved an increase in the number
of authorized common shares from 200,000,000 to 400,000,000. On that date, the
Board of Directors declared a two-for-one stock split effected in the form of a
100% stock dividend distributed on July 15, 1998 to shareholders of record as of
June 24, 1998. Agreements concerning stock options and other commitments payable
in shares of the Company's common stock either provide for the issuance of the
additional shares due to the declaration of the stock split or have been
modified to reflect the stock split. In addition, retroactive adjustments to
treasury stock and additional paid-in capital have been made to reflect the
stock split. All references to issued, outstanding and weighted average shares,
as well as per share amounts, reflect the stock split in the consolidated
financial statements and related notes. Par value per common share remained
unchanged at $0.01.
In December 1997, The Hartford's Board of Directors authorized the repurchase of
up to $1.0 billion of the Company's outstanding common stock over a three-year
period beginning with the first quarter of 1998. The Hartford completed the $1.0
billion repurchase authorization during 1999 by repurchasing 9.2 million shares
of its common stock in the open market at a total cost of $453. In October 1999,
The Hartford's Board of Directors authorized the repurchase of up to an
additional $1.0 billion of the Company's outstanding common stock. This
repurchase authorization was effective in November 1999 and covers a three-year
period. For the year ended December 31, 2000, The Hartford repurchased 2.8
million shares of its common stock in the open market at a total cost of $100.
Since the inception of the 1999 repurchase program, The Hartford has repurchased
5.9 million shares at a total cost of $243. Certain of these repurchased shares
have been reissued pursuant to certain stock-based benefit plans. During the
first quarter of 2000 and in conjunction with The HLI Repurchase, management
elected to discontinue repurchase activity. Shares repurchased in the open
market are carried at cost and reflected as a reduction to stockholders' equity.
Treasury shares subsequently reissued are reduced from treasury stock on a
weighted average cost basis.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
(B) SUBSEQUENT EVENT
On February 16, 2001, The Hartford issued 10 million shares of common stock
pursuant to an underwritten offering for net proceeds of $615. (For additional
information, see Note 17.)
(C) PREFERRED STOCK
The Company has 50,000,000 shares of preferred stock authorized, none of which
have been issued. In 1995, the Company approved The Hartford Stockholder Rights
Plan, pursuant to which a nonvoting right attaches to each share of common
stock. Upon the occurrence of certain triggering events, the right will permit
each shareholder to purchase a fraction of a share of the Series A Participating
Cumulative Preferred Stock (the "Series A Preferred Stock") of The Hartford.
There are 300,000 authorized shares of Series A Preferred Stock. No shares were
issued or outstanding at December 31, 2000, 1999 or 1998.
(D) STATUTORY RESULTS
For the years ended December 31,
-----------------------------------
2000 1999 1998
- -----------------------------------------------------------------
STATUTORY NET INCOME
Life operations $ 422 $ 245 $ 290
Property and casualty
operations 779 315 497
- -----------------------------------------------------------------
TOTAL $ 1,201 $ 560 $ 787
=================================================================
STATUTORY SURPLUS
Life operations $ 2,407 $ 2,356 $ 2,144
Property and casualty
operations 3,495 4,678 6,705
- -----------------------------------------------------------------
TOTAL $ 5,902 $ 7,034 $ 8,849
=================================================================
A significant percentage of the consolidated statutory surplus is permanently
reinvested or is subject to various state and foreign government regulatory
restrictions or other agreements which limit the payment of dividends without
prior approval. As of December 31, 2000, the maximum amount of statutory
dividends which may be paid to HFSG from its insurance subsidiaries in 2001,
without prior approval, is $779.
The domestic insurance subsidiaries of HFSG prepare their statutory financial
statements in accordance with accounting practices prescribed by the applicable
state insurance department. Prescribed statutory accounting practices include
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules.
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. The Company has determined that
the overall impact of applying the new guidance will result in a one-time
statutory cumulative transition benefit of approximately $250 in statutory
surplus.
9. EARNINGS PER SHARE
Earnings per share amounts have been computed in accordance with the provisions
of SFAS No. 128, "Earnings per Share". The following tables present a
reconciliation of income and shares used in calculating basic earnings per share
to those used in calculating diluted earnings per share.
2000 Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 974 220.6 $ 4.42
-------------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 3.8
----------------------------
Income available to common shareholders plus assumed conversions $ 974 224.4 $ 4.34
====================================================================================================================================
1999 Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 862 224.9 $ 3.83
-------------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 2.6
----------------------------
Income available to common shareholders plus assumed conversions $ 862 227.5 $ 3.79
====================================================================================================================================
1998 Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 1,015 232.8 $ 4.36
-------------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 3.4
----------------------------
Income available to common shareholders plus assumed conversions $ 1,015 236.2 $ 4.30
====================================================================================================================================
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. EARNINGS PER SHARE (CONTINUED)
Basic earnings per share are computed based on the weighted average number of
shares outstanding during the year. Diluted earnings per share include the
dilutive effect of outstanding options, using the treasury stock method, and
also contingently issuable shares. Under the treasury stock method, exercise of
options is assumed with the proceeds used to purchase common stock at the
average market price for the period. The difference between the number of shares
assumed issued and number of shares purchased represents the dilutive shares.
Contingently issuable shares are included upon satisfaction of certain
conditions related to the contingency.
10. STOCK COMPENSATION PLANS
On May 18, 2000, the shareholders of The Hartford approved The Hartford 2000
Incentive Stock Plan (the "2000 Plan"), which replaced The Hartford 1995
Incentive Stock Plan (the "1995 Plan"). The terms of the 1995 Plan were
substantially similar to the terms of the 2000 Plan except that the 1995 Plan
had an annual award limit and a higher maximum award limit.
Under the 2000 Plan, awards may be granted in the form of non-qualified or
incentive stock options qualifying under Section 422A of the Internal Revenue
Code, performance shares or restricted stock, or any combination of the
foregoing. In addition, stock appreciation rights may be granted in connection
with all or part of any stock options granted under the 2000 Plan. The aggregate
number of shares of stock which may be awarded is subject to a maximum limit of
17,211,837 shares applicable to all awards for the ten-year duration of the 2000
Plan.
All options granted have an exercise price equal to the market price of the
Company's common stock on the date of grant, and an option's maximum term is ten
years. Certain options become exercisable over a three year period commencing
one year from the date of grant, while certain other options become exercisable
upon the attainment of specified market price appreciation of the Company's
common shares or at seven years after the date of grant. For any year, no
individual employee may receive an award of options for more than 1,000,000
shares. As of December 31, 2000, The Hartford had not issued any incentive stock
options under the 2000 Plan.
Performance awards of common stock granted under the 2000 Plan become payable
upon the attainment of specific performance goals achieved over a period of not
less than two nor more than five years, and restricted stock granted is subject
to a restriction period. On a cumulative basis, no more than 20% of the
aggregate number of shares which may be awarded under the 2000 Plan are
available for performance shares and restricted stock awards. Also, the maximum
award of performance shares for any individual employee in any year is 200,000
shares.
In 1997, the Company awarded special performance based options and restricted
stock to certain key executives under the 1995 Plan. The awards vested only if
the Company's stock traded at certain predetermined levels for ten consecutive
days by March 1, 2001. Vested options could not be exercised nor restricted
shares disposed of until March 1, 2001. As a result of the Company's stock
trading at predetermined levels for ten consecutive days, in May 1999 and also
in September 2000, the special performance based options and restricted stock
vested. As a result, the Company began recognizing compensation expense in May
1999 and continued to recognize expense through March 1, 2001.
In 1996, the Company established The Hartford Employee Stock Purchase Plan
("ESPP"). Under this plan, eligible employees of The Hartford may purchase
common stock of the Company at a 15% discount from the lower of the market price
at the beginning or end of the quarterly offering period. The Company may sell
up to 5,400,000 shares of stock to eligible employees under the ESPP, and
241,742, 255,971 and 220,911 shares were sold in 2000, 1999 and 1998,
respectively. The weighted average fair value of the discount under the ESPP was
$14.89, $9.99 and $12.20 in 2000, 1999 and 1998, respectively. Additionally,
during 1997, The Hartford established employee stock purchase plans for certain
employees of the Company's international subsidiaries. Under these plans,
participants may purchase common stock of The Hartford at a fixed price at the
end of a three-year period.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans.
Accordingly, in the measurement of compensation expense, the Company utilizes
the excess of market price over exercise price on the first date that both the
number of shares and award price are known. For the years ended December 31,
2000, 1999 and 1998, compensation expense related to the Company's two
stock-based compensation plans was $23, $16 and $21 after-tax, respectively. Had
compensation cost for the Company's incentive stock plan and ESPP been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated as follows:
2000 1999 1998
- -------------------------------- --------- ---------- ---------
Net income:
As reported $974 $862 $1,015
Pro forma [1] [2] $937 $834 $988
Basic earnings per share:
As reported $4.42 $3.83 $4.36
Pro forma [1] [2] $4.25 $3.71 $4.24
Diluted earnings per share:
As reported $4.34 $3.79 $4.30
Pro forma [1] [2] $4.18 $3.67 $4.19
- -------------------------------- --------- ---------- ---------
[1] The pro forma disclosures are not representative of the effects on net
income and earnings per share in future years.
[2] Includes The Hartford's ownership share of compensation costs related to
HLI's incentive stock plan and employee stock purchase plan determined in
accordance with SFAS No. 123.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. STOCK COMPENSATION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2000, 1999 and 1998: dividend yield of 1.5% for
2000, 2.1% for 1999 and 1.7% for 1998; expected price variability of 35.7% for
2000, 29.0% for 1999 and 25.7% for 1998; risk-free interest rates of 6.41% for
2000 grants, 5.08% for 1999 grants and 4.89% for 1998 grants; and expected lives
of four years for 2000, seven years for 1999 and five years for 1998.
A summary of the status of non-qualified options included in the Company's
incentive stock plan as of December 31, 2000, 1999 and 1998 and changes during
the years ended December 31, 2000, 1999 and 1998 is presented below:
2000 1999 1998
------------------------------- ------------------------------- ------------------------------
Weighted Average Weighted Average Weighted Average
(shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beg. of year 12,103 $36.58 12,478 $33.89 10,350 $26.66
Granted 5,374 37.62 1,131 51.86 4,265 46.06
HLI converted options 3,770 44.00 -- -- -- --
Exercised (3,894) 30.07 (1,387) 23.79 (1,909) 20.96
Canceled/Expired (383) 40.97 (119) 44.93 (228) 40.89
----------- ----------- -----------
Outstanding at end of year 16,970 39.96 12,103 36.58 12,478 33.89
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 7,885 37.29 6,923 29.49 5,671 23.58
Weighted average fair value of
options granted $17.60 $15.83 $12.20
====================================================================================================================================
The following table summarizes information about stock options outstanding and
exercisable (shares in thousands) at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------------- -----------------------------------------
Number Outstanding Weighted Average Weighted Average Number Weighted
Range of at December 31, 2000 Remaining Contractual Exercise Price Exercisable at Average
Exercise Prices Life (Years) December 31, 2000 Exercise Price
------------------ ---------------------- ----------------------- ------------------ ---- --------------------- -------------------
$9.27 - $9.27 52 0.9 $9.27 52 $9.27
16.37 - 24.50 1,046 3.9 19.56 1,046 19.56
25.88 - 38.57 6,389 7.8 33.03 2,919 31.88
39.06 - 58.50 8,870 7.8 45.96 3,787 46.26
58.75 - 76.56 613 8.8 62.68 81 60.13
------------------ ---------------------- ----------------------- ------------------ ---- --------------------- -------------------
$9.27 - $76.56 16,970 7.6 $39.96 7,885 $37.29
================== ====================== ======================= ================== ==== ===================== ===================
11. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT
PLANS
The following tables set forth a reconciliation of beginning and ending balances
of the benefit obligation and fair value of plan assets as well as the funded
status of The Hartford's defined benefit pension and postretirement health care
and life insurance benefit plans for the years ended December 31, 2000 and 1999.
International plans represent an immaterial percentage of total pension assets,
liabilities and expense and, for reporting purposes, are combined with domestic
plans.
Pension Benefits Other Benefits
------------------------------- -------------------------------
CHANGE IN BENEFIT OBLIGATION 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation - beginning of year $ 1,684 $ 1,800 $ 278 $ 306
Service cost 58 63 7 8
Interest cost 136 131 23 21
Plan participants' contributions -- -- 5 3
Actuarial loss 36 78 11 --
Change in assumption:
Discount rate 121 (304) 28 (46)
Salary scale 1 21 -- --
Demographic -- (13) -- 3
Benefits paid (90) (92) (21) (17)
Sale of Zwolsche (66) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION - END OF YEAR $ 1,880 $ 1,684 $ 331 $ 278
====================================================================================================================================
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT
PLANS (CONTINUED)
Pension Benefits Other Benefits
------------------------------- -------------------------------
CHANGE IN PLAN ASSETS 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets - beginning of year $ 1,890 $ 1,795 $ 96 $ 93
Actual return on plan assets 96 179 7 7
Employer contribution 1 -- -- --
Benefits paid (88) (81) (3) (4)
Expenses paid (3) (3) -- --
Sale of Zwolsche (57) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS - END OF YEAR $ 1,839 $ 1,890 $ 100 $ 96
====================================================================================================================================
Funded status $ (41) $ 206 $ (231) $ (182)
Unrecognized net actuarial (gain) loss (119) (351) 13 (29)
Unrecognized prior service cost 37 49 (151) (174)
Unrecognized initial obligation -- 5 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
ACCRUED BENEFIT COST $ (123) $ (91) $ (369) $ (385)
====================================================================================================================================
Assumptions used in the accounting for the plans were:
December 31,
--------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------
Benefit discount rate 7.75% 8.25%
Expected long-term rate of return on plan assets 9.75% 9.75%
Rate of increase in compensation levels 4.25% 4.25%
- -----------------------------------------------------------------------------------------------
For measurement purposes, a 6.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2000. The rate was assumed to
decrease gradually to 5.0% for 2007 and remain at that level thereafter.
Increasing (decreasing) the table of health care trend rates by one percent per
year would have the effect of increasing (decreasing) the benefit obligation as
of December 31, 2000 by $7 ($7) and the annual net periodic expense for the year
then ended by $1 ($1), respectively, for the postretirement health care and life
insurance benefit plan.
Total pension cost for the years ended December 31, 2000, 1999 and 1998 include
the following components:
Pension Benefits Other Benefits
----------------------------------- ----------------------------------
2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost (excludes expenses) $ 62 $ 67 $ 68 $ 7 $ 8 $ 7
Interest cost 135 131 122 23 21 20
Expected return on plan assets (159) (149) (138) (9) (9) (8)
Amortization of prior service cost 6 6 8 (23) (24) (23)
Amortization of unrecognized net (gains) losses 3 6 5 -- 1 --
Amortization of unrecognized net obligation arising
from initial application of SFAS No. 87 1 1 1 -- -- --
Loss due to curtailment [1] -- -- 1 -- -- --
Loss due to settlement [1] -- -- 16 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
NET PENSION COST $ 48 $ 62 $ 83 $ (2) $ (3) $ (4)
====================================================================================================================================
<FN>
[1] Reflects the sale of London & Edinburgh (see Note 19).
</FN>
The Hartford provides certain health care and life insurance benefits for
eligible retired employees. The Hartford's contribution for health care benefits
will depend upon the retiree's date of retirement and years of service. In
addition, the plan has a defined dollar cap which limits average Company
contributions. The Hartford has prefunded a portion of the health care and life
insurance obligations through trust funds where such prefunding can be
accomplished on a tax effective basis.
12. INVESTMENT AND SAVINGS PLAN
Substantially all U.S. employees are eligible to participate in The Hartford's
Investment and Savings Plan under which designated contributions may be invested
in common stock of The Hartford or certain other investments. These
contributions are matched, up to 3% of compensation, by the Company. In
addition, the Company allocates 0.5% of base salary to the plan for each
eligible employee. Matching Company contributions are used to acquire The
Hartford's common stock. The cost to The Hartford for the above plan was
approximately $28, $26 and $24 for 2000, 1999 and 1998, respectively.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. REINSURANCE
The Hartford cedes insurance to other insurers in order to limit its maximum
losses. Such transfer does not relieve The Hartford of its primary liability
and, as such, failure of reinsurers to honor their obligations could result in
losses to The Hartford. The Hartford also assumes reinsurance from other
insurers. The Hartford evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk. As of December 31, 2000, The Hartford
had no significant reinsurance-related concentrations of credit risk.
Life insurance net retained premiums were comprised of the following:
For the years ended December 31,
-------------------------------------
2000 1999 1998
- -----------------------------------------------------------------
Gross premiums $ 4,731 $ 4,165 $ 4,121
Assumed 137 154 98
Ceded (303) (250) (217)
- -----------------------------------------------------------------
NET RETAINED PREMIUMS $ 4,565 $ 4,069 $ 4,002
=================================================================
The Hartford records a receivable for reinsured benefits paid and the portion of
insurance liabilities that are reinsured. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies. Life insurance recoveries on ceded reinsurance
contracts, which reduce death and other benefits, were $225, $168 and $119 for
the years ended December 31, 2000, 1999 and 1998, respectively.
In 1998, the Company recaptured an in force block of Corporate Owned Life
Insurance ("COLI") business previously ceded to MBL Life Assurance Co. of New
Jersey (MBL Life). The transaction was consummated through an assignment of a
reinsurance arrangement between the Company and MBL Life to a subsidiary of the
Company. The Company originally assumed the life insurance block in 1992 from
Mutual Benefit Life, which had been placed in court-supervised rehabilitation in
1991, and reinsured a portion of those policies back to MBL Life. This recapture
was effective January 1, 1998 and resulted in a decrease in ceded premiums and
other considerations of $163 in 1998. Additionally, this transaction resulted in
a decrease in reinsurance recoverables of $4.8 billion, which was exchanged for
the fair value of assets comprised of $4.3 billion in policy loans and $443 in
other net assets.
The effect of reinsurance on property and casualty premiums written and earned
was as follows:
For the years ended December 31,
--------------------------------------
2000 1999 1998
- ----------------------------------------------------------------
PREMIUMS WRITTEN
Direct $ 7,108 $ 6,464 $ 7,221
Assumed 965 833 866
Ceded (826) (585) (633)
- ----------------------------------------------------------------
NET $ 7,247 $ 6,712 $ 7,454
================================================================
PREMIUMS EARNED
Direct $ 6,769 $ 6,189 $ 7,029
Assumed 1,001 827 872
Ceded (795) (528) (656)
- ----------------------------------------------------------------
NET $ 6,975 $ 6,488 $ 7,245
================================================================
Reinsurance cessions which reduce claims and claim expenses incurred were $650,
$565 and $115 for the years ended December 31, 2000, 1999 and 1998,
respectively.
14. INCOME TAX
For the years ended December 31,
-------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
U.S. Federal $ 1,381 $ 1,188 $ 1,344
International 37 47 131
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST $ 1,418 $ 1,235 $ 1,475
===================================================================================================================================
INCOME TAX EXPENSE (BENEFIT)
Current - U.S. Federal $ 58 $ (28) $ 493
International 31 28 42
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT 89 -- 535
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred - U.S. Federal 318 289 (145)
International (17) (2) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED 301 287 (147)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 390 $ 287 $ 388
===================================================================================================================================
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. INCOME TAX (CONTINUED)
Deferred tax assets (liabilities) include the following as of December 31:
2000 1999
-----------------------------------------------------------------------
U.S. Federal International U.S. Federal International
- ------------------------------------------------------------------------------------------------------------------------------------
Discounted loss reserves $ 627 $ -- $ 769 $ --
Other insurance-related items 533 -- 478 (46)
Employee benefits 214 -- 174 (3)
Earnings from foreign subsidiaries 22 -- 109 --
Reserve for bad debts 25 -- 29 --
Accelerated depreciation 25 -- 22 --
Unrealized gains (262) (2) 128 (22)
Other investment-related items (454) -- (490) --
Other (48) (1) 185 (4)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 682 $ (3)* $ 1,404 $ (75)*
====================================================================================================================================
<FN>
* Included in other liabilities on the Consolidated Balance Sheets.
</FN>
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax Act
of 1959 permitted the deferral from taxation of a portion of statutory income
under certain circumstances. In these situations, the deferred income was
accumulated in a "Policyholders' Surplus Account" and, based on current tax law,
will be taxable in the future only under conditions which management considers
to be remote; therefore, no federal income taxes have been provided on the
balance in this account, which for tax return purposes was $104 as of December
31, 2000.
No additional provision or benefit has been recognized for U.S. taxes on
international losses amounting to approximately $(154) at December 31, 2000.
A reconciliation of the tax provision at the U.S. Federal statutory rate to the
provision for income taxes is as follows:
For the years ended December 31,
-----------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Tax provision at U.S. Federal statutory rate $ 496 $ 432 $ 516
Tax-exempt interest (178) (146) (128)
Foreign tax rate differential (3) 2 (6)
Sale of Zwolsche (see Note 19(b)) 88 -- --
Internal Revenue Service audit settlement (see Note 15(d)) (24) -- --
Other 11 (1) 6
- ------------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAX $ 390 $ 287 $ 388
====================================================================================================================================
15. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
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.
(B) ENVIRONMENTAL AND ASBESTOS CLAIMS
Historically, The Hartford has found it difficult to estimate ultimate
liabilities related to environmental and asbestos claims due to uncertainties
surrounding these exposures. 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. A study which
incorporated these methodologies was initiated by The Hartford in April 1996.
The study included a review of identified environmental and asbestos exposures
of North American Property & Casualty, along with U.S. exposures of The
Hartford's International and 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
("IBNR"). 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 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.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(B) ENVIRONMENTAL AND ASBESTOS CLAIMS (CONTINUED)
The Hartford believes that the environmental and asbestos reserves reported at
December 31, 2000 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.
(C) LEASE COMMITMENTS
Total rental expense on operating leases was $214 in 2000, $187 in 1999 and $188
in 1998. Future minimum lease commitments are as follows:
2001 $ 115
2002 93
2003 79
2004 70
2005 61
Thereafter 185
- ------------------------------------------------ --- -----------
TOTAL $ 603
================================================ === ===========
(D) TAX MATTERS
The Hartford's federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). As of December 31, 2000, the Company's 1996-1997
federal income tax returns are under audit by the IRS. Management believes that
adequate provision has been made in the financial statements for any potential
assessments that may result from tax examinations and other tax related matters
for all open tax years.
During the second quarter of 2000, the Company reached a settlement with the IRS
with respect to certain tax matters for the 1993-1995 tax years. The settlement
resulted in a $24 tax benefit being recorded in the Company's second quarter
results of operations. As of December 31, 2000, the same matter is under review
with the IRS for the 1996-1997 tax years.
(E) UNFUNDED COMMITMENTS
At December 31, 2000, The Hartford has outstanding commitments to fund limited
partnership investments totaling $357. These capital commitments can be called
by the partnerships during the 5-year commitment period 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.
16. TRANSACTIONS WITH AFFILIATES
On December 19, 1995, ITT Corporation ("ITT") distributed all of the outstanding
shares of common stock of The Hartford to the shareholders of ITT common stock
("the Distribution"). As a result of the Distribution, The Hartford became an
independent publicly traded company. Prior to the Distribution, The Hartford had
substantial dealings with ITT and its affiliates as described below.
The Distribution Agreement entered into by The Hartford, ITT Destinations, Inc.,
and ITT Industries, Inc. (the former ITT subsidiaries) addressed the disposition
of shared liabilities. A shared liability is defined as a liability arising out
of, or related to, business conducted by ITT prior to the Distribution that was
not otherwise specifically related to one of the former ITT subsidiaries. Under
the Distribution Agreement, responsibility for shared liabilities generally will
be borne equally by each of the former ITT subsidiaries (or any successor to
each former ITT subsidiary), including related attorney's fees and other
out-of-pocket expenses. As of December 31, 2000, accruals had been established
for liabilities covered by this agreement.
17. SUBSEQUENT EVENTS
(A) SALE OF HARTFORD SEGUROS
On February 8, 2001, The Hartford completed the sale of its Spain-based
subsidiary, Hartford Seguros, to Liberty International, a subsidiary of Liberty
Mutual Group. The Hartford received $29 before costs of sale.
(B) FORTIS ACQUISITION
On January 25, 2001, The Hartford agreed to acquire the U.S. 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 will
effect 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. The Fortis
transaction, which is subject to insurance regulatory approval and other
customary conditions, is expected to be completed in the second quarter of 2001.
The acquisition will be reported as a purchase transaction.
The Company plans to finance the acquisition through (1) its February 16, 2001,
issuance of 10 million shares of common stock pursuant to an underwritten
offering under its current shelf registration for net proceeds of $615, (2)
proceeds from the March 1, 2001, HLI issuance of $400 of senior debt securities
under HLI's shelf registration and (3) proceeds from the March 6, 2001, HLI
issuance of $200 of trust preferred securities under HLI's shelf registration.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. SEGMENT INFORMATION
The Hartford is organized into two major operations: Worldwide Life and
Worldwide Property & Casualty. Within these operations, The Hartford conducts
business principally in eight operating segments. Additionally, all activities
related to The HLI Repurchase, the minority interest in HLI for pre-acquisition
periods and The Hartford Bank, FSB are included in Corporate.
Worldwide Life is organized into four reportable operating segments: Investment
Products, Individual Life, Group Benefits and Corporate Owned Life Insurance
("COLI"). Investment Products offers individual variable and fixed annuities,
mutual funds, retirement plan services and other investment products. Individual
Life sells a variety of life insurance products, including variable life,
universal life, interest sensitive whole life and term life insurance. Group
Benefits sells group insurance products, including group life and group
disability insurance as well as other products, including stop loss and
supplementary medical coverage to employers and employer sponsored plans,
accidental death and dismemberment, travel accident and other special risk
coverages to employers and associations. COLI primarily offers variable products
used by employers to fund non-qualified benefits or other postemployment benefit
obligations as well as leveraged COLI. Worldwide Life also includes in an Other
category its international operations as well as corporate items not directly
allocable to any of its reportable operating segments, principally interest
expense.
Worldwide Property & Casualty is organized into four reportable operating
segments: the underwriting segments of Commercial, Personal and Reinsurance, and
an International and Other Operations segment. Also reported within Worldwide
Property & Casualty is North American, which includes the combined underwriting
results of Commercial, Personal and Reinsurance along with income and expense
items not directly allocable to these segments, such as net investment income.
The Commercial segment provides primarily workers' compensation, property,
automobile, liability, financial products, marine, agricultural and bond
coverages to commercial accounts throughout the United States. Excess and
surplus lines coverages not normally written by standard lines insurers is also
provided. The Personal segment provides automobile, homeowners, home-based
business and fire coverages to individuals throughout the United States. The
Reinsurance segment assumes reinsurance worldwide through its thirteen HartRe
offices located in the United States, Canada, the United Kingdom, France, Italy,
Germany, Spain, Hong Kong and Taiwan. HartRe primarily writes treaty reinsurance
through professional reinsurance brokers covering various property, casualty,
specialty and marine classes of business. International consists of European and
Asian companies offering a variety of insurance products (primarily property and
casualty products) designed to meet the needs of local customers (see Note 17
for subsequent event) and Other Operations consists of operations which have
ceased writing new business.
While the measure of profit or loss used by The Hartford's management in
evaluating performance is core earnings for its non-underwriting segments, the
Commercial, Personal and Reinsurance segments are evaluated by The Hartford's
management primarily based upon underwriting results. The Hartford defines "core
earnings" as after-tax operational results excluding, as applicable, net
realized capital gains or losses, the cumulative effect of accounting changes,
allocated Distribution items (see Note 16) and certain other items. Core
earnings is an internal performance measure used by the Company in the
management of its operations. While not considered segments, the Company also
reports and evaluates core earnings results for Worldwide Life and Worldwide
Property & Casualty, including North American. Worldwide Property & Casualty
includes core earnings for North American and the International and 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 Worldwide 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 tables present revenues and core earnings. Underwriting results
are presented for the Commercial, Personal and Reinsurance segments while core
earnings are presented for the non-underwriting segments, along with Worldwide
Life and Worldwide Property & Casualty, including North American.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. SEGMENT INFORMATION (CONTINUED)
REPORTING SEGMENT INFORMATION
For the years ended December 31,
------------------------------------------------------------
REVENUES 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Life
Investment Products $ 2,380 $ 2,041 $ 1,784
Individual Life 640 584 567
Group Benefits 2,207 2,024 1,809
COLI 767 831 1,567
Other (4) 56 61
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 5,990 5,536 5,788
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Property & Casualty
North American
Earned premiums and other revenue
Commercial 3,500 3,271 3,385
Personal 2,713 2,505 2,268
Reinsurance 809 680 716
- ------------------------------------------------------------------------------------------------------------------------------------
Total earned premiums and other revenue from underwriting segments 7,022 6,456 6,369
Net investment income 862 853 824
Net realized capital gains 218 22 231
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American 8,102 7,331 7,424
International and Other Operations 602 661 1,810
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 8,704 7,992 9,234
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate 9 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 14,703 $ 13,528 $ 15,022
====================================================================================================================================
For the years ended December 31,
CORE EARNINGS AND NET INCOME 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Life
Investment Products $ 424 $ 330 $ 266
Individual Life 79 71 65
Group Benefits 90 79 71
COLI 34 30 24
Other 5 (43) (40)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 632 467 386
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Property & Casualty
North American
Underwriting results
Commercial (153) (171) (213)
Personal 2 34 77
Reinsurance (73) (48) (36)
- ------------------------------------------------------------------------------------------------------------------------------------
Total underwriting results (224) (185) (172)
Net servicing and other income [1] 9 19 80
Net investment income 862 853 824
Other expenses (216) (212) (203)
Income tax expense (19) (41) (72)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American 412 434 457
International and Other Operations 17 22 45
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 429 456 502
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate (99) (86) (72)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE EARNINGS 962 837 816
Net realized capital gains, after-tax 12 25 199
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 974 $ 862 $ 1,015
====================================================================================================================================
<FN>
[1] Net of expenses related to service business.
</FN>
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. SEGMENT INFORMATION (CONTINUED)
As of December 31,
------------------------------------------------------------
ASSETS 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Life $ 143,621 $ 139,033 $ 122,022
Worldwide Property & Casualty 27,094 28,018 28,610
Corporate 817 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 171,532 $ 167,051 $ 150,632
====================================================================================================================================
REVENUES BY PRODUCT LINE
For the years ended December 31,
REVENUES 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Life
Investment Products
Individual annuities $ 1,538 $ 1,354 $ 1,137
Other 842 687 647
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Products 2,380 2,041 1,784
Individual Life 640 584 567
Group Benefits 2,207 2,024 1,809
COLI 767 831 1,567
Other (4) 56 61
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 5,990 5,536 5,788
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Property & Casualty
North American
Commercial
Workers' compensation 882 900 996
Property 1,071 964 929
Automobile 363 347 345
Liability 155 111 135
Other [1] 1,029 949 980
- ------------------------------------------------------------------------------------------------------------------------------------
Total Commercial 3,500 3,271 3,385
Personal
Automobile 1,936 1,784 1,553
Homeowners and other [1] 777 721 715
- ------------------------------------------------------------------------------------------------------------------------------------
Total Personal 2,713 2,505 2,268
Reinsurance 809 680 716
Net investment income 862 853 824
Net realized capital gains 218 22 231
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American 8,102 7,331 7,424
International and Other Operations 602 661 1,810
- ------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 8,704 7,992 9,234
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate 9 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 14,703 $ 13,528 $ 15,022
====================================================================================================================================
<FN>
[1] Includes servicing revenue.
</FN>
GEOGRAPHICAL SEGMENT INFORMATION
For the years ended December 31,
------------------------------------------------------------
REVENUES 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
North America $ 14,062 $ 12,826 $ 13,201
United Kingdom 69 108 1,212
Other 572 594 609
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 14,703 $ 13,528 $ 15,022
====================================================================================================================================
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. ACQUISITIONS AND DISPOSITIONS
(A) ACQUISITIONS
On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI
that it did not already own (for a description of The HLI Repurchase, see Note
2).
On August 26, 1998, HLI completed the purchase of all outstanding shares of
PLANCO Financial Services, Inc. ("PLANCO") and its affiliate, PLANCO,
Incorporated. PLANCO is a primary distributor of HLI's annuity and investment
products. As a wholesaler, PLANCO distributes HLI's annuity and investment
products, including fixed and variable annuities, mutual funds and single
premium variable life insurance, as well as providing sales support to
registered representatives, financial planners and broker-dealers at brokerage
firms and banks across the United States. The acquisition was recorded as a
purchase transaction and accordingly, the results of PLANCO's operations have
been included in The Hartford's consolidated financial statements from the
closing date of the transaction.
On February 12, 1998, The Hartford completed the purchase of all outstanding
shares of Omni Insurance Group, Inc. ("Omni"), a holding company of two
non-standard auto insurance subsidiaries licensed in 25 states and the District
of Columbia. The Hartford paid cash of $31.75 per share, plus transaction costs,
for a total of $189. The acquisition was recorded as a purchase transaction and
accordingly, the results of Omni's operations have been included in The
Hartford's consolidated financial statements from the closing date of the
transaction.
(B) DISPOSITIONS
On December 22, 2000, The Hartford completed the sale of its Netherlands-based
Zwolsche subsidiary to Assurances Generales de France, a subsidiary of Allianz
AG. The Hartford received $547, before costs of sale, and reported an after-tax
net realized capital gain of $69 related to the transaction. Management used the
proceeds from the sale to reduce outstanding commercial paper which was issued
to partially fund The HLI Repurchase.
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh subsidiary. The Hartford received approximately
$525, before costs of sale, and reported an after-tax net realized capital gain
of $33 related to the transaction. The Hartford retained ownership of Excess
Insurance Co. Ltd., London & Edinburgh's property and casualty insurance and
reinsurance subsidiary, which discontinued writing new business in 1993.
20. QUARTERLY RESULTS FOR 2000 AND 1999 (UNAUDITED)
Three Months Ended
----------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 3,499 $ 3,299 $ 3,514 $ 3,349 $ 3,791 $ 3,444 $ 3,899 $ 3,436
Benefits, claims and expenses $ 3,155 $ 2,955 $ 3,256 $ 3,042 $ 3,472 $ 3,191 $ 3,402 $ 3,105
Net income $ 238 $ 238 $ 213 $ 215 $ 250 $ 186 $ 273 $ 223
Basic earnings per share $ 1.10 $ 1.05 $ 0.98 $ 0.95 $ 1.11 $ 0.83 $ 1.21 $ 1.01
Diluted earnings per share $ 1.10 $ 1.04 $ 0.97 $ 0.93 $ 1.09 $ 0.82 $ 1.18 $ 1.00
Weighted average common shares
outstanding 215.8 227.0 216.5 226.8 224.4 225.3 225.7 220.4
Weighted average common shares
outstanding and dilutive potential
common shares 217.3 229.9 219.9 230.0 229.3 227.8 231.0 222.3
==================================================================================================================================
F-31
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
(In millions) As of December 31, 2000
---------------------------------------------------------
Amount at which
shown on Balance
Type of Investment Cost Fair Value Sheet
- ---------------------------------------------------------------------------------------------------------------------------------
FIXED MATURITIES
Bonds and Notes
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) $ 288 $ 307 $ 307
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 1,651 1,683 1,683
States, municipalities and political subdivisions 9,574 10,046 10,046
International governments 963 1,003 1,003
Public utilities 869 863 863
All other corporate including international 9,399 9,333 9,333
All other corporate - asset-backed 8,000 8,148 8,148
Short-term investments 2,091 2,096 2,096
Certificates of deposit 582 573 573
Redeemable preferred stock 439 440 440
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 33,856 34,492 34,492
- ---------------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES
Common stocks
Public utilities 30 50 50
Banks, trusts and insurance companies 96 117 117
Industrial and miscellaneous 722 816 816
Nonredeemable preferred stocks 73 73 73
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES 921 1,056 1,056
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 34,477 35,548 35,548
- ---------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE 5 4 5
OTHER INVESTMENTS
Mortgage loans on real estate 322 321 321
Policy loans 3,610 3,610 3,610
Investments in partnerships and trusts 1,196 1,137 1,137
Futures, options and miscellaneous 48 50 48
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INVESTMENTS 5,176 5,118 5,116
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 39,658 $ 40,670 $ 40,669
=================================================================================================================================
S-1
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(REGISTRANT)
(In millions) As of December 31,
---------------------------------------
BALANCE SHEETS 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Receivables from affiliates $ 212 $ 209
Other assets 119 112
Investment in affiliates 9,680 7,192
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 10,011 7,513
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt 235 31
Long-term debt 1,218 898
Company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely parent junior subordinated
debentures 1,000 1,000
Other liabilities 94 118
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,547 2,047
TOTAL STOCKHOLDERS' EQUITY 7,464 5,466
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,011 $ 7,513
==================================================================================================================================
(In millions)
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings of subsidiaries $ 1,096 $ 944 $ 1,105
Interest expense (net of interest income) 186 150 149
Other expenses (income) 3 1 (9)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX BENEFIT 907 793 965
Income tax benefit (67) (69) (50)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 974 $ 862 $ 1,015
==================================================================================================================================
S-2
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
(In millions)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
-------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 974 $ 862 $ 1,015
Undistributed earnings of subsidiaries (436) (86) (302)
Change in working capital 48 (28) 2
- -----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 586 748 715
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital contribution to subsidiary (1,325) -- (10)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (1,325) -- (10)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in debt 520 -- (10)
Issuance of common stock from treasury 398 -- --
Dividends paid (210) (207) (197)
Acquisition of treasury stock (100) (596) (547)
Proceeds from issuances of shares under incentive and stock
purchase plans 131 55 49
- -----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 739 (748) (705)
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in cash -- -- --
Cash - beginning of year -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ -- $ -- $ --
===================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------
NET CASH PAID DURING THE YEAR FOR:
Interest $ 184 $ 148 $ 148
S-3
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 2000, 1999 and 1998
(In millions) Future
Policy
Benefits,
Unpaid Other
Deferred Claims and Policyholder Earned
Policy Claim Funds and Premiums, Net
Acquisition Adjustment Unearned Benefits Fee Income Investment
Costs [1] Expenses Premiums Payable and Other Income
- ------------------------------------------------------------------------------------------------------------
2000
Worldwide Life $ 4,527 $ 7,074 $ 54 $ 15,849 $ 4,486 $ 1,592
Worldwide P&C 777 15,934 3048 2 7,398 1,072
Corporate 1 (29) (9) (3) __ 10
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 5,305 $ 22,979 $ 3,093 $ 15,848 $ 11,884 $ 2,674
===========================================================================================================
1999
Worldwide Life $ 4,210 $ 6,236 $ 48 $ 16,873 $ 3,979 $ 1,562
Worldwide P&C 828 16,342 2,729 11 6,888 1,065
Corporate __ __ __ __ __ __
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 5,038 $ 22,578 $ 2,777 $ 16,884 $ 10,867 $ 2,627
===========================================================================================================
1998
Worldwide Life $ 3,842 $ 5,717 $ 42 $ 19,767 $ 3,833 $ 1,955
Worldwide P&C 737 16,820 2,436 7 7,783 1,147
Corporate __ __ __ __ __ __
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 4,579 $ 22,537 $ 2,478 $ 19,774 $ 11,616 $ 3,102
===========================================================================================================
<FN>
[1] Includes present value of future profits for 2000.
Note: Certain reclassifications have been made to prior year financial
information to conform to current year presentation.
N/A - Not applicable to life insurance pursuant to Regulation S-X.
</FN>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 2000, 1999 and 1998
(Continued)
(In millions)
Benefits, Amortization
Claims and of Deferred
Net Realized Claim Policy
Capital Adjustment Acquisition Other Net Written
Gains(Losses) Expenses Costs Expenses Premiums
- ------------------------------------------------------------------------------------------------
2000
Worldwide Life $ (88) $ 3,162 $ 671 $ 1,369 $ N/A
Worldwide P&C 234 5,253 1,542 1,225 7,248
Corporate (1) 4 __ 59 N/A
- -----------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 145 $ 8,419 $ 2,213 $ 2,653 $ 7,248
===============================================================================================
1999
Worldwide Life $ (5) $ 3,054 $ 568 $ 1,228 $ N/A
Worldwide P&C 39 4,848 1,443 1,152 6,712
Corporate __ __ __ __ N/A
- -----------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 34 $ 7,902 $ 2,011 $ 2,380 $ 6,712
===============================================================================================
1998
Worldwide Life $ __ $ 3,227 $ 441 $ 1,535 $ N/A
Worldwide P&C 304 5,386 1,579 1,379 7,454
Corporate __ __ __ __ N/A
- -----------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 304 $ 8,613 $ 2,020 $ 2,914 $ 7,454
===============================================================================================
<FN>
[1] Includes present value of future profits for 2000.
Note: Certain reclassifications have been made to prior year financial
information to conform to current year presentation.
N/A - Not applicable to life insurance pursuant to Regulation S-X.
</FN>
S-4
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE IV
REINSURANCE
Ceded to Assumed From Percentage of
Gross Other Other Net Amount Assumed
(In millions) Amount Companies Companies Amount to Net
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
Life insurance in force $ 567,208 $ 110,781 $ 18,374 $ 474,801 4%
- ----------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Property and casualty insurance $ 6,769 $ 795 $ 1,001 $ 6,975 14%
Life insurance 3,392 197 64 3,259 2%
Accident and health insurance 1,339 106 73 1,306 6%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 11,500 $ 1,098 $ 1,138 $ 11,540 10%
============================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1999
Life insurance in force $ 527,285 $ 128,478 $ 14,916 $ 413,723 4%
- ----------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Property and casualty insurance $ 6,189 $ 528 $ 827 $ 6,488 13%
Life insurance 2,999 174 54 2,879 2%
Accident and health insurance 1,166 76 100 1,190 8%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 10,354 $ 778 $ 981 $ 10,557 9%
============================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1998
Life insurance in force $ 528,608 $ 195,920 $ 11,675 $ 344,363 3%
- ----------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Property and casualty insurance $ 7,029 $ 656 $ 872 $ 7,245 12%
Life insurance 3,014 157 62 2,919 2%
Accident and health insurance 1,107 60 36 1,083 3%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 11,150 $ 873 $ 970 $ 11,247 9%
============================================================================================================================
S-5
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
Charged to
Balance Costs and Translation Write-offs/ Balance
(In millions) January 1, Expenses Adjustment Payments/Other December 31,
- --------------------------------------------------------------------------------------------------------------------------------
2000
----
Allowance for doubtful accounts $ 135 $ 32 $ -- $ (40) $ 127
Accumulated depreciation of plant,
property and equipment 665 94 (3) (81) 675
1999
----
Allowance for doubtful accounts $ 131 $ 30 $ -- $ (26) $ 135
Accumulated depreciation of plant,
property and equipment 595 93 (3) (20) 665
1998
----
Allowance for doubtful accounts $ 118 $ 36 $ -- $ (23) $ 131
Accumulated depreciation of plant,
property and equipment 628 84 2 (119) 595
================================================================================================================================
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY
AND CASUALTY INSURANCE OPERATIONS
Claims and Claim Adjustment Expenses
Discount Incurred Related to: Paid Claims and
Deducted From --------------------------------------- Claim Adjustment
(In millions) Liabilities [1] Current Year Prior Years Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
2000 $ 396 $ 5,170 $ 27 $ 5,334
1999 $ 480 $ 4,953 $ (171) $ 5,161
1998 $ 423 $ 5,404 $ (152) $ 5,151
...................................................................................................................................
<FN>
[1] Reserves for permanently disabled claimants, terminated reinsurance
treaties and certain reinsurance contracts have been discounted using the
rate of return The Hartford could receive on risk-free investments of
5.7%, 6.3% and 5.6% for 2000, 1999 and 1998, respectively.
</FN>
S-6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
By: /s/ John N. Giamalis
-------------------------------------------
John N. Giamalis
Senior Vice President and Controller
Date: March 23, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ramani Ayer Chairman, President, Chief March 23, 2001
- ------------------------
Ramani Ayer Executive Officer and Director
/s/ Lowndes A. Smith Vice Chairman and Director March 23, 2001
- ------------------------
Lowndes A. Smith
/s/ David K. Zwiener Executive Vice President, March 23, 2001
- ------------------------
David K. Zwiener Chief Financial Officer and Director
/s/ John N. Giamalis Senior Vice President March 23, 2001
- ------------------------
John N. Giamalis and Controller
/s/ Bette B. Anderson Director March 23, 2001
- ------------------------
Bette B. Anderson
/s/ Rand V. Araskog Director March 23, 2001
- ------------------------
Rand V. Araskog
/s/ Dina Dublon Director March 23, 2001
- ------------------------
Dina Dublon
/s/ Donald R. Frahm Director March 23, 2001
- ------------------------
Donald R. Frahm
/s/ Paul G. Kirk, Jr. Director March 23, 2001
- ------------------------
Paul G. Kirk, Jr.
/s/ Robert W. Selander Director March 23, 2001
- ------------------------
Robert W. Selander
/s/ H. Patrick Swygert Director March 23, 2001
- ------------------------
H. Patrick Swygert
/s/ Gordon I. Ulmer Director March 23, 2001
- ------------------------
Gordon I. Ulmer
II-1
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
FORM 10-K
EXHIBITS INDEX
The exhibits attached to this Form 10-K are those which are required by Item 601
of Regulation S-K and which have not been previously filed with the Securities
and Exchange Commission.
EXHIBIT #
- ---------
3.01 Amended and Restated Certificate of Incorporation of The Hartford
Financial Services Group, Inc. ("The Hartford"), amended effective May
21, 1998, was filed as Exhibit 3.01 to The Hartford's Form 10-Q for the
quarterly period ended June 30, 1998 and is incorporated herein by
reference.
3.02 Amended By-Laws of The Hartford, amended effective February 18, 1999,
were filed as Exhibit 3.02 to The Hartford's Form 10-K for the fiscal
year ended December 31, 1998 and are incorporated herein by reference.
4.01 Amended and Restated Certificate of Incorporation and By-Laws of The
Hartford (included as Exhibits 3.01 and 3.02, respectively).
4.02 Rights Agreement dated as of November 1, 1995 between The Hartford and
The Bank of New York as Rights agent was filed as Exhibit 4.02 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is
incorporated herein by reference.
4.03 Form of certificate of the voting powers, preferences and relative
participating, optional and other special rights, qualifications,
limitations or restrictions of Series A Participating Cumulative
Preferred Stock of The Hartford (attached as Exhibit A to the Rights
Agreement that is incorporated by reference as Exhibit 4.02 hereto).
4.04 Form of Right Certificate (attached as Exhibit B to the Rights Agreement
that is incorporated by reference as Exhibit 4.02 hereto).
4.05 Indenture dated as of May 15, 1991 between The Hartford and The Chase
Manhattan Bank (National Association), as trustee, with respect to The
Hartford's 8.20% Notes due October 15, 1998, 7.25% Notes due December 1,
1996, and 8.30% Notes due December 1, 2001 (incorporated by reference to
Exhibit 4(b) to The Hartford's Form 10 filed on May 9, 1991, as amended,
file no. 0-19277).
4.06 Forms of The Hartford's 8.20% Notes due October 15, 1998, 7.25% Notes
due December 1, 1996 and 8.30% Notes due December 1, 2001(included in
the Indenture incorporated by reference as Exhibit 4.05 hereto).
4.07 Senior Indenture, dated as of October 20, 1995, between The Hartford and
The Chase Manhattan Bank (National Association), as trustee, with
respect to The Hartford's 6.375% Notes Due November 1, 2002, 7.30%
Debentures Due November 1, 2015 and 6.375% Notes Due November 1, 2008
(incorporated by reference to Exhibit 4.08 to The Hartford's Report on
Form 8-K dated November 15, 1995).
4.08 Forms of The Hartford's 6.375% Notes Due November 1, 2002 and 7.30%
Debentures due November 1, 2015 (incorporated by reference to Exhibits
4.09 and 4.10, respectively, of The Hartford's Report on Form 8-K dated
November 15, 1995).
4.09 Form of The Hartford's 6.375% Notes due November 1, 2008 was filed as
Exhibit 4.09 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1998 and is incorporated herein by reference.
4.10 Junior Subordinated Indenture, dated as of February 28, 1996, between
The Hartford and Wilmington Trust Company, as Trustee, with respect to
The Hartford's 7.70% Junior Subordinated Deferrable Interest Debentures,
Series A, due February 28, 2016 ("Junior Debentures") was filed as
Exhibit 4.09 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1995 and is incorporated herein by reference.
4.11 Supplemental Indenture No. 1 dated as of February 28, 1996 between The
Hartford and Wilmington Trust Company, as Trustee, with respect to the
Junior Debentures, was filed as Exhibit 4.10 to The Hartford's Form 10-K
for the fiscal year ended December 31, 1995 and is incorporated herein
by reference.
II-2
EXHIBITS INDEX (continued)
EXHIBIT #
- ---------
4.12 Form of The Hartford's 7.70% Junior Subordinated Deferrable Interest
Debenture, Series A, due February 28, 2016 (included in the Indenture
incorporated by reference as Exhibit 4.10 hereto).
4.13 Amended and Restated Trust Agreement dated as of February 28, 1996 of
Hartford Capital I, relating to the 7.70% Cumulative Quarterly Income
Preferred Securities, Series A ("Preferred Securities") was filed as
Exhibit 4.12 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1995 and is incorporated herein by reference.
4.14 Agreement as to Expenses and Liabilities dated as of February 28, 1996
between The Hartford and Hartford Capital I was filed as Exhibit 4.13 to
The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and
is incorporated herein by reference.
4.15 Preferred Security Certificate for Hartford Capital I (included as
Exhibit E of the Trust Agreement incorporated by reference as Exhibit
4.13 hereto).
4.16 Guarantee Agreement dated as of February 28, 1996 between The Hartford
and Wilmington Trust, as trustee, relating to The Hartford's guarantee
of the Preferred Securities, was filed as Exhibit 4.15 to The Hartford's
Form 10-K for the fiscal year ended December 31, 1995 and is
incorporated herein by reference.
4.17 Junior Subordinated Indenture, dated as of October 30, 1996, between The
Hartford and Wilmington Trust Company, as Trustee, with respect to The
Hartford's 8.35% Junior Subordinated Deferrable Interest Debentures,
Series B, due October 30, 2026 ("Series B Junior Debentures") was filed
as Exhibit 4.16 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1996 and is incorporated herein by reference.
4.18 Form of The Hartford's 8.35% Junior Subordinated Deferrable Interest
Debenture, Series B, due October 30, 2026 was filed as Exhibit 4.2 to
The Hartford's Form 8-K dated November 4, 1996 and is incorporated
herein by reference.
4.19 Amended and Restated Trust Agreement dated as of October 30, 1996 of
Hartford Capital II, relating to the 8.35% Cumulative Quarterly Income
Preferred Securities, Series B, ("Series B Preferred Securities") was
filed as Exhibit 4.1 to The Hartford's Form 8-K dated November 4, 1996
and is incorporated herein by reference.
4.20 Agreement as to Expenses and Liabilities dated as of October 30, 1996
between The Hartford and Hartford Capital II (included as Exhibit D of
Exhibit 4.19 that is incorporated by reference herein).
4.21 Preferred Security Certificate for Hartford Capital II (included as
Exhibit E of Exhibit 4.19 that is incorporated by reference herein).
4.22 Guarantee Agreement dated as of October 30, 1996 between The Hartford
and Wilmington Trust, as trustee, relating to The Hartford's guarantee
of the Series B Preferred Securities, was filed as Exhibit 4.21 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1996 and is
incorporated herein by reference.
4.23 Supplemental Indenture No. 1, dated as of December 27, 2000, to the
Senior Indenture between The Hartford and The Chase Manhattan Bank, as
Trustee, was filed as Exhibit 4.30 to The Hartford's Registration
Statement on From S-3 (Registration No. 333-49666) and is incorporated
herein by reference.
4.24 Form of The Hartford's 7.75% Senior Notes due June 15, 2005 is filed
herewith.
4.25 Form of The Hartford's 7.90% Senior Notes due June 15, 2010 is filed
herewith.
10.01 Distribution Agreement among ITT Corporation, ITT Destinations, Inc. and
The Hartford was filed as Exhibit 10.01 to The Hartford's Form 10-K for
the fiscal year ended December 31, 1995 and is incorporated herein by
reference.
10.02 Intellectual Property License Agreement among ITT Corporation, ITT
Destinations, Inc. and The Hartford was filed as Exhibit 10.02 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is
incorporated herein by reference.
10.03 Tax Allocation Agreement among ITT Corporation, ITT Destinations, Inc.
and The Hartford was filed as Exhibit 10.03 to The Hartford's Form 10-K
for the fiscal year ended December 31, 1995 and is incorporated herein
by reference.
II-3
EXHIBITS INDEX (continued)
EXHIBIT #
- ---------
10.04 Form of Trade Name and Service Mark License Agreement between ITT
Corporation and The Hartford was filed as Exhibit 10.04 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is
incorporated herein by reference.
10.05 License Assignment Agreement among ITT Destinations, Inc., The Hartford
and Nutmeg Insurance Company was filed as Exhibit 10.05 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is
incorporated herein by reference.
10.06 License Assignment Agreement among ITT Destinations, Inc., Nutmeg
Insurance Company and Hartford Fire Insurance Company was filed as
Exhibit 10.06 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1995 and is incorporated herein by reference.
10.07 Employee Benefit Services and Liability Agreement among ITT Corporation,
ITT Destinations, Inc. and The Hartford was filed as Exhibit 10.07 to
The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and
is incorporated herein by reference.
10.08 Debt allocation agreement dated as of November 1, 1995 between ITT
Corporation and The Hartford, and related Fourth Supplemental Indenture
dated as of November 1, 1995 among ITT Corporation, The Hartford and
State Street Bank and Trust Company, as successor trustee, were filed as
Exhibit 10.10 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1995 and are incorporated herein by reference.
10.09 Five-Year Competitive Advance and Revolving Credit Facility Agreement
dated as of December 20, 1996 among The Hartford, the Lenders named
therein and The Chase Manhattan Bank as Administrative Agent was filed
as Exhibit 10.11 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1996 and is incorporated herein by reference.
10.10 364 Day Competitive Advance and Revolving Credit Facility Agreement
dated as of December 20, 1996 among The Hartford, the lenders named
therein and The Chase Manhattan Bank as Administrative Agent was filed
as Exhibit 10.12 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1996 and is incorporated herein by reference.
*10.11 Employment Agreement dated July 1, 1997 between The Hartford and Ramani
Ayer was filed as Exhibit 10.01 to The Hartford's Form 10-Q for the
quarterly period ended September 30, 1997 and is incorporated herein by
reference.
*10.12 Employment Agreement dated July 1, 1997 between Hartford Life, Inc.
("Hartford Life"), The Hartford and Lowndes A. Smith was filed as
Exhibit 10.02 to The Hartford's Form 10-Q for the quarterly period ended
September 30, 1997 and is incorporated herein by reference.
*10.13 Employment Agreement dated July 1, 1997 between The Hartford and David
K. Zwiener was filed as Exhibit 10.03 to The Hartford's Form 10-Q for
the quarterly period ended September 30, 1997 and is incorporated herein
by reference.
*10.14 Employment Agreement dated July 1, 2000 between The Hartford and Thomas
M. Marra was filed as Exhibit 10.1 to The Hartford's Form 10-Q for the
quarterly period ended September 30, 2000 and is incorporated herein by
reference.
*10.15 Form of Employment Protection Agreement between The Hartford and certain
executive officers of The Hartford was filed as Exhibit 10.15 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1997 and is
incorporated herein by reference.
*10.16 The Hartford 1996 Restricted Stock Plan for Non-Employee Directors, as
amended, was filed as Exhibit 10.15 to The Hartford's Form 10-K for the
fiscal year ended December 31, 1998 and is incorporated herein by
reference.
*10.17 The Hartford 2000 Incentive Stock Plan dated as of May 18, 2000 was
filed as Exhibit 10.1 to The Hartford's Form 10-Q for the quarterly
period ended June 30, 2000 and is incorporated herein by reference.
*10.18 The Hartford 1996 Deferred Restricted Stock Unit Plan, as amended, was
filed as Exhibit 10.17 to The Hartford's Form 10-K for the fiscal year
ended December 31, 1998 and is incorporated herein by reference.
*10.19 The Hartford 1996 Deferred Compensation Plan, as amended in June 2000,
is filed herewith.
II-4
EXHIBITS INDEX (continued)
EXHIBIT #
- ---------
*10.20 The Hartford 1997 Senior Executive Severance Pay Plan I, revised as of
October 15, 1998, was filed as Exhibit 10.19 to The Hartford's Form 10-K
for the fiscal year ended December 31, 1998 and is incorporated herein
by reference.
*10.21 The Hartford Executive Severance Pay Plan, revised as of February 1,
1999, was filed as Exhibit 10.20 to The Hartford's Form 10-K for the
fiscal year ended December 31, 1998 and is incorporated herein by
reference.
10.22 Master Intercompany Agreement among Hartford Life, The Hartford and with
respect to Articles VI and XII, Hartford Fire Insurance Company was
filed as Exhibit 10.01 to Hartford Life's Form 10-Q filed for the
quarterly period ended June 30, 1997 and is incorporated herein by
reference.
10.23 Tax Sharing Agreement among The Hartford and its subsidiaries, including
Hartford Life, was filed as Exhibit 10.02 to Hartford Life's Form 10-Q
filed for the quarterly period ended June 30, 1997 and is incorporated
herein by reference.
10.24 Management Agreement between Hartford Life Insurance Company and The
Hartford Investment Management Company, was filed as Exhibit 10.03 to
Hartford Life's Form 10-Q filed for the quarterly period ended June 30,
1997 and is incorporated herein by reference.
10.25 Management Agreement among certain subsidiaries of Hartford Life and
Hartford Investment Services, Inc., was filed as Exhibit 10.04 to
Hartford Life's Form 10-Q filed for the quarterly period ended June 30,
1997 and is incorporated herein by reference.
10.26 Sublease Agreement between Hartford Fire Insurance Company and Hartford
Life was filed as Exhibit 10.05 to Hartford Life's Form 10-Q filed for
the quarterly period ended June 30, 1997 and is incorporated herein by
reference.
12.01 Statement Re: Computation of Ratio of Earnings to Fixed Charges is filed
herewith.
21.01 Subsidiaries of The Hartford Financial Services Group, Inc. is filed
herewith.
23.01 Consent of Arthur Andersen LLP to the incorporation by reference into
The Hartford's Registration Statements on Forms S-8 and Form S-3 of the
report of Arthur Andersen LLP contained in this Form 10-K regarding the
audited financial statements is filed herewith.
* Management contract, compensatory plan or arrangement.
II-5
EXHIBIT 4.24
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST
COMPANY OR A NOMINEE OF THE DEPOSITORY TRUST COMPANY. THIS SECURITY IS
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE
DEPOSITORY TRUST COMPANY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITORY TRUST COMPANY TO A NOMINEE OF THE DEPOSITORY TRUST COMPANY OR BY A
NOMINEE OF THE DEPOSITORY TRUST COMPANY TO THE DEPOSITORY TRUST COMPANY OR
ANOTHER NOMINEE OF THE DEPOSITORY TRUST COMPANY.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
7.75% Senior Notes due June 15, 2005
No.1 $250,000,000
CUSIP 416515 AD 6
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (formerly ITT Hartford
Group, Inc.) , a corporation organized and existing under the laws of Delaware
(hereinafter called the "Company", which term includes any successor corporation
under the Indenture hereinafter referred to), for value received, hereby
promises to pay to Cede & Co., or registered assigns, the principal sum of Two
Hundred Fifty Million Dollars ($250,000,000) on June 15, 2005, and to pay
interest thereon from June 16, 2000 or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, semi-annually on June
15 and December 15 in each year, commencing December 15, 2000, at the rate of
7.75% per annum, on the basis of a 360-day year consisting of twelve
- 1 -
30-day months, until the principal hereof is paid or duly provided for or made
available for payment, and (to the extent that the payment of such interest
shall be legally enforceable) at the rate of 7.75% per annum on any overdue
principal or premium and on any overdue installment of interest. The interest so
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in such Indenture, be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on the Regular Record Date for such interest, which shall be the June 1
or December 1 (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date. Any such interest not so punctually paid
or duly provided for will forthwith cease to be payable to the Holder on such
Regular Record Date and may either be paid to the person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Securities
of this series not less than 10 days prior to such Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities of this series
may be listed and, upon such notice as may be required by such exchange, all as
more fully provided in said Indenture.
Payment of the principal of (and premium, if any) and interest on this
Security will be made at the office or agency of the Company maintained for that
purpose in The City of New York, in such coin or currency of the United States
of America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
-------- -------
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Securities Register.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
- 2 -
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
By:
-----------------------------------------------------------------------
J. Richard Garrett
Senior Vice President and Treasurer
Attest:
________________________________
Michael O' Halloran
Assistant Secretary
- 3 -
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities referred to in the within mentioned
Indenture.
THE CHASE MANHATTAN BANK,
as Trustee
By:
-----------------------------
Authorized officer
- 4 -
Reverse of Security
This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one or more
series under a Senior Indenture, dated as of October 20, 1995 (herein called the
"Indenture"), between the Company and The Chase Manhattan Bank, as Trustee,
successor to The Chase Manhattan Bank (National Association) (herein called the
"Trustee", which term includes any successor trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee and the Holders of the
Securities and of the terms upon which the Securities are, and are to be,
authenticated and delivered. This Security is one of the series designated on
the face hereof, limited in aggregate principal amount to $250,000,000.
The Company may, at its option, upon not less than 30 days' notice by
mail, redeem the Securities of this series on any Interest Payment Date in whole
at any time or in part from time to time at a redemption price equal to any
accrued and unpaid interest plus the greater of the principal amount thereof or
an amount equal to the Discounted Remaining Fixed Amount Payments as defined in
the Indenture. For purposes of this Security, the term "Current Value" shall
mean, in respect of any amount, the present value of that amount on the date
fixed for redemption after discounting that amount on a semiannual basis from
the originally scheduled date for payment on the basis of the Treasury Rate, all
computed in accordance with generally accepted financial practice.
In the event of redemption of this Security in part only, a new
Security or Securities of this series for the unredeemed portion hereof will be
issued in the name of the Holder hereof upon the cancellation hereof.
The Indenture contains provisions for satisfaction, discharge and
defeasance of the entire indebtedness on this security, upon compliance by the
Company with certain conditions set forth therein.
If an Event of Default with respect to Securities of this series shall
occur and be continuing, the principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of a majority in principal amount of the Securities at
the time Outstanding of each series to be affected. The Indenture also contains
provisions permitting the Holders of specified percentages in principal amount
of the Securities of each series at the time Outstanding, on behalf of the
Holders of all Securities of such series, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of
- 5 -
this Security and of any Security issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Securities
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in any place where the principal of (and
premium, if any) and interest on this Security are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Securities Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities of
this series, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series of a different authorized denomination, as
requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
- 6 -
EXHIBIT 4.25
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST
COMPANY OR A NOMINEE OF THE DEPOSITORY TRUST COMPANY. THIS SECURITY IS
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE
DEPOSITORY TRUST COMPANY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITORY TRUST COMPANY TO A NOMINEE OF THE DEPOSITORY TRUST COMPANY OR BY A
NOMINEE OF THE DEPOSITORY TRUST COMPANY TO THE DEPOSITORY TRUST COMPANY OR
ANOTHER NOMINEE OF THE DEPOSITORY TRUST COMPANY.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
7.90% Senior Notes due June 15, 2010
No.1 $275,000,000
CUSIP 416515 AE 4
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (formerly ITT Hartford
Group, Inc.) , a corporation organized and existing under the laws of Delaware
(hereinafter called the "Company", which term includes any successor corporation
under the Indenture hereinafter referred to), for value received, hereby
promises to pay to Cede & Co., or registered assigns, the principal sum of Two
Hundred Seventy-Five Million Dollars ($275,000,000) on June 15, 2010, and to pay
interest thereon from June 16, 2000 or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, semi-annually on June
15 and December 15 in each year, commencing December 15, 2000, at the rate of
7.90% per annum, on the basis of a 360-day year
- 7 -
consisting of twelve 30-day months, until the principal hereof is paid or duly
provided for or made available for payment, and (to the extent that the payment
of such interest shall be legally enforceable) at the rate of 7.90% per annum on
any overdue principal or premium and on any overdue installment of interest. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, as provided in such Indenture, be paid to the Person in whose
name this Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest, which shall be
the June 1 or December 1 (whether or not a Business Day), as the case may be,
next preceding such Interest Payment Date. Any such interest not so punctually
paid or duly provided for will forthwith cease to be payable to the Holder on
such Regular Record Date and may either be paid to the person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Securities
of this series not less than 10 days prior to such Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities of this series
may be listed and, upon such notice as may be required by such exchange, all as
more fully provided in said Indenture.
Payment of the principal of (and premium, if any) and interest on this
Security will be made at the office or agency of the Company maintained for that
purpose in the City of New York, in such coin or currency of the United States
of America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
-------- --------
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Securities Register.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
- 8 -
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
By:
-----------------------------------------------------------------------
J. Richard Garrett
Senior Vice President and Treasurer
Attest:
_______________________________
Michael O' Halloran
Assistant Secretary
- 9 -
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities referred to in the within mentioned
Indenture.
THE CHASE MANHATTAN BANK,
as Trustee
By:
-----------------------------
Authorized officer
- 10 -
Reverse of Security
This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one or more
series under a Senior Indenture, dated as of October 20, 1995 (herein called the
"Indenture"), between the Company and The Chase Manhattan Bank, as Trustee,
successor to The Chase Manhattan Bank (National Association) (herein called the
"Trustee", which term includes any successor trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee and the Holders of the
Securities and of the terms upon which the Securities are, and are to be,
authenticated and delivered. This Security is one of the series designated on
the face hereof, limited in aggregate principal amount to $275,000,000.
The Company may, at its option, upon not less than 30 days' notice by
mail, redeem the Securities of this series on any Interest Payment Date in whole
at any time or in part from time to time at a redemption price equal to any
accrued and unpaid interest plus the greater of the principal amount thereof or
an amount equal to the Discounted Remaining Fixed Amount Payments as defined in
the Indenture, except that, for purposes of this Security, the term "Current
Value" shall mean, in respect of any amount, the present value of that amount on
the date fixed for redemption after discounting that amount on a semiannual
basis from the originally scheduled date for payment on the basis of the
Treasury Rate plus 10 basis points, all computed in accordance with generally
accepted financial practice.
In the event of redemption of this Security in part only, a new
Security or Securities of this series for the unredeemed portion hereof will be
issued in the name of the Holder hereof upon the cancellation hereof.
The Indenture contains provisions for satisfaction, discharge and
defeasance of the entire indebtedness on this security, upon compliance by the
Company with certain conditions set forth therein.
If an Event of Default with respect to Securities of this series shall
occur and be continuing, the principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of a majority in principal amount of the Securities at
the time Outstanding of each series to be affected. The Indenture also contains
provisions permitting the Holders of specified percentages in principal amount
of the Securities of each series at the time Outstanding, on behalf of the
Holders of all Securities of such series, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this
- 11 -
Security shall be conclusive and binding upon such Holder and upon all future
Holders of this Security and of any Security issued upon the registration of
transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Securities
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in any place where the principal of (and
premium, if any) and interest on this Security are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Securities Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities of
this series, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series of a different authorized denomination, as
requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
- 12 -
EXHIBIT 10.19
THE HARTFORD 1996 DEFERRED COMPENSATION PLAN
ARTICLE I
PURPOSE
1.1 PURPOSE. The purpose of the Plan is to provide, in the discretion of the
Committee, an opportunity for certain Key Employees to defer the receipt of
certain Eligible Compensation to the extent provided herein. The Plan is
intended to constitute an unfunded and unsecured deferred compensation
arrangement for a select group of management or highly compensated employees for
purposes of ERISA. The Plan restates the terms of certain unfunded and unsecured
deferred compensation arrangements established for such employees by ITT
Corporation and The Hartford in 1994 and 1995, and continued by The Hartford to
the extent provided hereunder. Capitalized terms used in the Plan shall have the
meanings provided herein.
ARTICLE II
DEFINITIONS
The following terms shall have the following meanings for purposes of the Plan:
"ACCOUNT" means the account maintained on behalf of a Participant pursuant to
-------
the Plan.
"ACT" means the Securities Exchange Act of 1934, as amended.
---
"BENEFICIAL OWNER" means any Person who, directly or indirectly, has the right
-----------------
to vote or dispose of or has "beneficial ownership" (within the meaning of Rule
13d-3 under the Act) of any securities of a company, including any such right
pursuant to any agreement, arrangement or understanding (whether or not in
writing), provided that: (A) a Person shall not be deemed the Beneficial Owner
-------------
of any security as a result of an agreement, arrangement or understanding to
vote such security (i) arising solely from a revocable proxy or consent given in
response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the Act and the applicable rules and regulations thereunder, or
(ii) made in connection with, or to otherwise participate in, a proxy or consent
solicitation made, or to be made, pursuant to, and in accordance with, the
applicable provisions of the Act and the applicable rules and regulations
thereunder, in either case described in clause (i) or (ii) above, whether or not
such agreement, arrangement or understanding is also then reportable by such
Person on Schedule 13D under the Act (or any comparable or successor report);
and (B) a Person engaged in business as an underwriter of securities shall not
be deemed to be the Beneficial Owner of any security acquired through such
Person's participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.
"BOARD OF DIRECTORS" means the Board of Directors of The Hartford Financial
-------------------
Services Group, Inc.
June, 2000
Page 2
"CHANGE OF CONTROL" means:
-----------------
(A) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Act disclosing
that any Person, other than The Hartford or a subsidiary of The
Hartford or any employee benefit plan sponsored by The Hartford or a
subsidiary of The Hartford, is the Beneficial Owner directly or
indirectly of twenty percent or more of the outstanding stock of The
Hartford entitled to vote in the election of directors of The Hartford;
(B) any Person, other than The Hartford or a subsidiary of The Hartford
or any employee benefit plan sponsored by The Hartford or a subsidiary
of The Hartford, shall purchase shares pursuant to a tender offer or
exchange offer to acquire any stock of The Hartford (or securities
convertible into stock) for cash, securities or any other
consideration, provided that after consummation of the offer, the
Person in question is the Beneficial Owner of fifteen percent or more
of the outstanding stock of The Hartford entitled to vote in the
election of directors of The Hartford (calculated as provided in
paragraph (d) of Rule 13d-3 under the Act in the case of rights to
acquire stock);
(C) the stockholders of The Hartford shall approve (1) any
consolidation or merger in which The Hartford is not the continuing or
surviving corporation or pursuant to which shares of stock of The
Hartford entitled to vote in the election of directors of The Hartford
would be converted into cash, securities or other property, other than
a consolidation or merger of The Hartford in which holders of such
stock of The Hartford immediately prior to the consolidation or merger
have the same proportionate ownership of stock of the surviving
corporation entitled to vote in the election of directors immediately
after the consolidation or merger as immediately before, or (2) any
sale, lease, exchange or other transfer (in one transaction or a series
of related transactions) of all or substantially all the assets of The
Hartford; or
(D) within any 12 month period, the persons who were directors of The
Hartford immediately before the beginning of such period (the
"Incumbent Directors of The Hartford") shall cease (for any reason
other than death) to constitute at least a majority of the board of
directors of The Hartford or the board of directors of any successor to
The Hartford, provided that any director of The Hartford who was not a
director of The Hartford at the beginning of such period shall be
deemed to be an Incumbent Director of The Hartford if such director (1)
was elected to the board of directors of The Hartford by, or on the
recommendation of or with the approval of, at least two-thirds of the
directors of The Hartford who then qualified as Incumbent Directors of
The Hartford either actually or by prior operation of this clause (D),
and (2) was not designated by a Person who has entered into an
agreement with The Hartford to effect a transaction described in the
immediately preceding clause (C) hereof.
"COMMITTEE" means the Compensation and Personnel Committee of the Board of
---------
Directors, or such other Committee as the Board may designate to administer the
Plan pursuant to Article VII.
Page 3
"ELIGIBLE COMPENSATION" means the amount of compensation of a Key Employee, if
----------------------
any, designated by the Committee in its sole discretion as eligible for deferral
under the Plan, which may include (A) the cash amount, if any, which may become
payable to a Key Employee pursuant to a Participating Company's executive bonus
program, (B) the cash amount, if any, which may become payable to a Key Employee
pursuant to a Participating Company's life sales incentive payment program, and
(C) the amount of any such other compensation of a Key Employee of a
Participating Company as the Committee may deem appropriate for deferral in
accordance with the Plan.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended
-----
from time to time.
"INCENTIVE STOCK PLAN" means The Hartford 1995 Incentive Stock Plan, as may be
---------------------
amended from time to time, and any successor Plan thereto.
"INVESTMENT AND SAVINGS PLAN" means The Hartford Investment and Savings Plan, as
---------------------------
may be amended from time to time, and any successor Plan thereto.
"KEY EMPLOYEE" shall have the meaning assigned by the Incentive Stock Plan.
------------
"PARTICIPANT" means a Key Employee who properly elects to participate in the
-----------
Plan pursuant to Article III.
"PARTICIPATING COMPANY" shall have the meaning assigned by the Incentive Stock
----------------------
Plan.
"PERSON" has the meaning ascribed to such term in Section 3(a)(9) of the Act, as
------
supplemented by Section 13(d)(3) of the Act; provided, however, that Person
shall not include (A) The Hartford, any subsidiary of The Hartford or any Person
controlled by The Hartford, (B) any trustee or other fiduciary holding
securities under any employee benefit plan of The Hartford or of any subsidiary
of The Hartford, or (C) a corporation owned, directly or indirectly, by the
stockholders of The Hartford in substantially the same proportions as their
respective ownership of securities of The Hartford.
"PHANTOM FUND" means a mutual fund or other investment vehicle or measure or
-------------
index of investment performance selected by the Committee to determine the
hypothetical investment experience of Participant Accounts pursuant to Article
IV.
"PLAN" means this plan, The Hartford 1996 Deferred Compensation Plan, as may be
----
amended from time to time.
"PLAN ADMINISTRATOR" shall have the meaning assigned by Article VII of the Plan.
------------------
Page 4
"THE HARTFORD" means The Hartford Financial Services Group, Inc., or a successor
------------
by merger, purchase or otherwise.
"VALUATION DATE" means the last business day of each calendar quarter in an
---------------
applicable calendar year, or such other date as may be designated by the Plan
Administrator.
ARTICLE III
PARTICIPATION
3.1 ELECTION TO PARTICIPATE. A Key Employee of a Participating Company may
------------------------
participate in the Plan by filing a properly completed election form (or such
other authorization as the Plan Administrator may require) with the party and by
the date designated by the Plan Administrator. The election of a Key Employee in
accordance with this Article III shall apply only to the Eligible Compensation
as to which the election is made, and shall have the effect, to the extent
provided herein, of deferring the payment of such Eligible Compensation beyond
the date that it might otherwise have become payable to the Participant. Such
election shall be irrevocable, except to the extent provided herein or
determined by the Committee in its sole discretion.
3.2 FORM OF ELECTION. The election form filed by a Participant pursuant to this
----------------
Article III shall (A) identify a portion of the Participant's Eligible
Compensation that may become payable with respect to the Participant's services,
(B) contain the Participant's election to defer the payment of such portion of
such Eligible Compensation that is determinable for tax purposes in the
following calendar year in accordance with the terms of the Plan, and (C)
contain such other information as the Plan Administrator may require.
3.3 MAXIMUM AND MINIMUM AMOUNTS REQUIRED FOR PARTICIPATION. The Committee or the
------------------------------------------------------
Plan Administrator may designate a maximum and a minimum portion of a Key
Employee's Eligible Compensation, in terms of a percentage or other amount
thereof, as to which an election may be made hereunder.
3.4 NULLIFICATION OF ELECTION. Notwithstanding anything herein to the contrary,
-------------------------
any election made by a Key Employee hereunder shall be deemed null and void to
the extent that (A) the Eligible Compensation as to which the election applies
is designated by the Committee, in its sole discretion, as not payable to such
Key Employee, (B) such election applies to Eligible Compensation payable during
the 12 month period during which the Key Employee ceases savings under the
Investment and Savings Plan as a result of receiving a hardship withdrawal under
that Plan, or (C) the Committee so determines in its sole discretion.
3.5 ESTABLISHMENT OF PARTICIPANT ACCOUNTS. An account shall be maintained on
---------------------------------------
behalf of each Participant on the books of The Hartford. Amounts shall be
credited to or debited from a Participant's Account as provided in Article V.
The Plan Administrator shall cause each Participant's Account to be valued on
the applicable Valuation Date, and shall cause records indicating such value
Page 5
to be maintained. When an event requires a determination of the value of a
Participant's Account, such value shall be determined as of the Valuation Date
coincident with or next succeeding the date of such event. The value of a
Participant's Account shall be reported to the Participant from time to time as
determined appropriate by the Plan Administrator.
3.6 OBTAINING OF LIFE INSURANCE POLICIES. As a condition of participation
---------------------------------------
hereunder, the Committee may require that a Participant provide assistance in
obtaining a life insurance policy on the life of such Participant, such policy
to be solely owned by, and solely payable to, The Hartford (or such other entity
as may be designated by the Committee). Such Participant may be required to (A)
complete an application for life insurance, (B) furnish underwriting information
(including but not limited to submitting to medical examinations by an insurance
company approved examiner), (C) authorize the release of the Participant's
medical history to an insurance company underwriter, and (D) provide such other
information and take such other actions relating to such life insurance policy
as may be required by the Plan Administrator. A Participant as to whom a life
insurance policy is obtained hereunder shall have no right to or interest in
such policy or the proceeds thereof.
3.7 TERMINATION OF PARTICIPATION. The participation of a Participant in the Plan
----------------------------
shall terminate on the earlier of (A) the date that all amounts credited to the
Participant's Account have been distributed pursuant to the Plan, (B) the date
of termination of the Plan, or (C) such other date as may be designated by the
Committee.
ARTICLE IV
PHANTOM FUND INVESTMENT ALLOCATIONS
4.1 SELECTION OF PHANTOM FUNDS. The Committee shall select one or more Phantom
--------------------------
Funds to which a Participant may elect pursuant to the Plan to allocate all or a
portion of the amount then and thereafter credited to the Participant's Account.
To the extent provided herein, such Phantom Funds shall be used to measure the
hypothetical investment experience of the portion of a Participant's Account
that the Participant properly elects to have allocated thereto. The Committee
may change the selection of Phantom Funds from time to time in its sole
discretion. The selection of any such Phantom Funds shall not require the
Company to invest or earmark any of its assets in any specific manner.
4.2 INVESTMENT ALLOCATION ELECTION. To the extent permitted by the Plan
--------------------------------
Administrator, a Participant may elect to have the amount then and thereafter
credited to his or her Account allocated among one or more of the Phantom Funds.
Such election shall be made by filing a properly completed election form (or
such other authorization as the Plan Administrator may require) with the party
and by the date designated by the Plan Administrator. Such election shall result
in the investment experience of an elected Phantom Fund being used to measure
the hypothetical investment experience of the particular portion of the
Participant's Account allocated to that Phantom Fund as provided herein.
Page 6
Page 7
4.3 CHANGES IN INVESTMENT ALLOCATION. To the extent permitted by the Plan
-----------------------------------
Administrator, a Participant may change the investment allocation previously
elected by filing a properly completed change form (or such other authorization
as the Plan Administrator may require) with the party and by the date designated
by the Plan Administrator. Such change shall be effective as soon as practicable
after the Valuation Date coincident with or next succeeding receipt of the
timely filed change form by the designated party (or such other date as may be
designated by the Plan Administrator), and shall apply to all amounts then and
thereafter credited to the Participant's Account.
4.4 FAILURE TO MAKE PROPER ELECTION. In the event that a Participant does not
--------------------------------
make a proper election pursuant to this Article IV, such Participant shall be
deemed to have elected to have the entire amount (as to which no proper election
is made) then and thereafter credited to the Participant's Account allocated to
the Phantom Fund that the Plan Administrator determines generally to have the
least risk of loss of principal.
4.5 LIMITATIONS ON INVESTMENT ALLOCATION. The Plan Administrator may (A)
---------------------------------------
establish a minimum and/or a maximum portion of a Participant's Account, in
terms of a percentage or other amount thereof, that a Participant may elect to
allocate to a particular Phantom Fund hereunder, (B) preclude any Participant
who is an executive officer of the Company from allocating any portion of his or
her Account to a Phantom Fund with an investment experience determined primarily
in relation to the investment performance of securities issued by the Company,
and (C) establish such other limitations on investment allocations as the Plan
Administrator may deem appropriate.
4.6 NO ACTUAL INVESTMENT. Notwithstanding anything herein to the contrary, no
--------------------
amount of Eligible Compensation as to which an election is made hereunder, and
no amount credited to a Participant's Account pursuant to the Plan, shall be set
aside or invested in any actual fund on behalf of the Participant, provided,
however, that nothing in the Plan shall be construed to preclude the Company
from directly or indirectly making investments for its own account in any actual
investment vehicle corresponding to the Phantom Funds (or otherwise) in order to
assist the Company in meeting its obligations hereunder, or for any other reason
whatsoever. No Participant or any other person or entity shall have by reason of
the Plan any right to or in any such investment made by the Company.
ARTICLE V
CREDITING AND DEBITING OF PARTICIPANT ACCOUNTS
5.1 CREDITING OF ELIGIBLE COMPENSATION. Eligible Compensation as to which the
-----------------------------------
Participant makes an election in accordance with the Plan shall be credited to
the Participant's Account as of the last day of the month in which such Eligible
Compensation would otherwise have been paid to the Participant.
5.2 CREDITING AND/OR DEBITING OF PHANTOM FUND INVESTMENT EXPERIENCE. As of any
----------------------------------------------------------------
particular Valuation Date upon which an amount is credited to a Participant's
Account, such Account shall be
Page 8
credited or debited, as the case may be, with an amount equal to the
hypothetical net investment gain or loss that such Participant would have
realized if the portion of his or her Account properly elected to be allocated
to a particular Phantom Fund pursuant to Article IV were actually invested in
such Phantom Fund during the period beginning with the preceding Valuation Date
and ending upon such particular Valuation Date (or such other period as may be
designated by the Plan Administrator).
5.3 DEBITING OF DISTRIBUTIONS. The amount of any distribution from a
----------------------------
Participant's Account pursuant to the Plan shall be debited from the
Participant's Account as of the Valuation Date coincident with or next
succeeding the date of such distribution.
5.4 DEBITING OF ADMINISTRATIVE EXPENSES. The Participant's allocable share (as
------------------------------------
determined by the Plan Administrator) of any administrative expenses related to
the operation of the Plan that are determined by the Committee to be payable by
Participants shall be debited from the Participant's Account as of the Valuation
Date coincident with or next succeeding the date upon which such expenses are
incurred.
5.5 VESTING OF CREDITED AMOUNTS. The rights of a Participant in regard to the
----------------------------
amounts credited to the Participant's Account hereunder shall be fully vested at
all times.
ARTICLE VI
DISTRIBUTIONS FROM PARTICIPANT ACCOUNTS
6.1 DISTRIBUTION ELECTION. A Participant may elect, by filing a properly
----------------------
completed election form (or such other authorization as the Plan Administrator
may require) with the party and by the date designated by the Plan
Administrator, to have the total amount credited to the Participant's Account
distributed to him or her on a date and in a manner permitted by the Plan
Administrator. Distributions from a Participant's Account shall be made in
accordance with the date and manner of distribution elected by the Participant
hereunder, except to the extent that a different date and/or manner of
distribution is required pursuant to the Plan. Distributions made in accordance
with a Participant's distribution election shall be made as soon as practicable
after the Valuation Date coincident with or next succeeding the date of
distribution elected by the Participant. A Participant who does not file a
properly completed election form in accordance with this Section shall be deemed
to have elected to have such amount distributed to the Participant in a single
lump sum cash payment as soon as practicable after the Valuation Date coincident
with or next succeeding the date the Participant's employment with all
Participating Companies terminates. The election or deemed election by a
Participant of a distribution date and manner pursuant to this Section shall
apply to all amounts then and thereafter credited to a Participant's Account
under the Plan, and shall be irrevocable except to the extent otherwise provided
herein or permitted in the discretion of the Committee or the Plan Administrator
to the extent determined consistent with applicable tax laws.
Page 9
6.2 DISTRIBUTION IN THE EVENT OF HARDSHIP. A Participant may request a hardship
-------------------------------------
distribution from his or her Account by filing a properly completed hardship
distribution form (or such other authorization as the Plan Administrator may
require) by the date and with the party designated by the Plan Administrator.
The Plan Administrator may, if it determines that a severe and unforeseeable
financial hardship on the part of the Participant exists, permit a distribution
to the Participant of an amount credited to the Participant's Account that is
reasonably necessary to meet such hardship, including any amount reasonably
necessary to pay any income or other taxes resulting from such distribution.
6.3 DISTRIBUTION UPON TERMINATION OF EMPLOYMENT. As soon as practicable after
--------------------------------------------
the Valuation Date coincident with or next succeeding the date that a
Participant's employment with all Participating Companies terminates for any
reason other than Retirement, the Company shall distribute to the Participant a
single lump sum cash payment equal to the total amount credited to the
Participant's Account as of such Valuation Date.
6.4 DISTRIBUTION IN THE EVENT OF A TERMINATION OF THE PLAN. In the event of a
--------------------------------------------------------
termination of the Plan, the entire amount credited to a Participant's Account
as of the Valuation Date coincident with or next succeeding such event shall be
distributed to the Participant in a single lump sum cash payment as soon as
practicable after such Valuation Date.
6.5 DISTRIBUTION TO FIDUCIARY. If the Plan Administrator determines that any
-------------------------
person to whom any amount is otherwise distributable hereunder is unable to care
for his or her affairs, such amount (unless a prior claim therefor shall have
been made by a duly appointed guardian, committee or other legal representative)
may be distributed to any person determined by the Plan Administrator to have
fiduciary responsibility for such person otherwise entitled to such amount, in
such manner and proportions as the Plan Administrator may deem appropriate. Any
such distribution shall constitute a complete discharge of any obligation of the
Company to such person under the Plan.
6.6 DISTRIBUTION IN THE EVENT OF DEATH. Notwithstanding anything herein to the
----------------------------------
contrary, in the event of a Participant's death, the entire amount credited to
the Participant's Account as of the Valuation Date coincident with or next
succeeding the date of the Participant's death shall be distributed in a single
lump sum cash payment as soon as practicable after such Valuation Date to one or
more beneficiaries, if any, properly designated by the Participant by the date
and in the manner required by the Plan Administrator. If (A) no such designation
is in effect at the time of the Participant's death, (B) no designated
beneficiary survives the Participant, or (C) any beneficiary designation made by
the Participant conflicts with applicable law, such amount shall be paid to the
Participant's estate as soon as practicable after such Valuation Date.
6.7 DISTRIBUTION UPON THE OCCURRENCE OF A CHANGE OF CONTROL.
-------------------------------------------------------
(A) DISTRIBUTION OF ACCOUNTS. Upon the occurrence of a Change of
--------------------------
Control, all Participants shall be paid single lump sum cash payments
equal to the entire amount credited
Page 10
to their respective Accounts as of the date of such occurrence, such
payments to be made immediately following the date of such Change of
Control.
(B) EXCEPTION FOR PRIOR ELECTION. Notwithstanding Section 6.7(A), if a
----------------------------
Participant who is an employed by a Participating Company immediately
prior to a Change of Control has made a prior valid election to not
receive a lump sum distribution of his or her Account (and therefore to
continue participating in the Plan) upon a Change of Control, then such
Participant's Account shall not be so distributed and shall (to the
extent permitted by the Plan) continue to be maintained under the Plan,
and any such Participant's Account shall be distributed to such
Participant at the time and in the form otherwise required by the Plan.
(C) DEATH PRIOR TO RECEIPT OF PAYMENT. In the event of the death of
------------------------------------
such a Participant before receiving a payment required by Section
6.7(A) hereof, such payment shall be made immediately following the
date of the occurrence of the Change of Control to the individual or
entity who would have received payment hereunder in the absence of a
Change of Control.
6.8 DISTRIBUTION IN OTHER CIRCUMSTANCES. The Committee may determine in its sole
-----------------------------------
discretion that a distribution of an amount credited to a Participant's Account
is appropriate under the circumstances. As soon as practicable after the
Valuation Date coincident with or next succeeding the date of any such
determination, the Company shall distribute such amount to the Participant in a
single lump sum cash payment (or in such other manner of payment as determined
appropriate by the Committee).
ARTICLE VII
ADMINISTRATION
7.1 ADMINISTRATION BY COMMITTEE. Except as otherwise delegated by the Committee
---------------------------
pursuant to the Plan, (A) the Plan shall be administered by the Committee, (B)
the Committee shall have full authority to administer and interpret this Plan in
any manner it deems appropriate in its sole discretion, and (C) the
determinations of the Committee shall be binding on and conclusive as to all
parties.
7.2 DELEGATION OF CERTAIN AUTHORITY TO PLAN ADMINISTRATOR. Except as otherwise
------------------------------------------------------
provided by the Committee in accordance with the Plan, the Plan Administrator
shall be The Hartford's Group Senior Vice President, Human Resources (or other
person holding a similar position). Except as otherwise provided herein,
required by applicable law, or determined by the Committee, (A) the Plan
Administrator shall be responsible for the performance of such administrative
duties under this Plan that are not otherwise reserved to the Committee by the
Plan, (B) the Plan Administrator shall have full authority to administer and
interpret this Plan in any manner it deems appropriate in its sole discretion,
and (C) the determinations of the Plan Administrator shall be binding and
conclusive as to all parties.
Page 11
7.3 LIABILITY AND INDEMNIFICATION OF COMMITTEE AND PLAN ADMINISTRATOR. In
----------------------------------------------------------------------
connection with any action or determination made in connection with the Plan,
the Plan Administrator and the Committee shall be entitled to rely upon
information furnished by or on behalf of the Company or any Participant. To the
extent permitted by law, the Plan Administrator and the members of the Committee
shall not be liable for, and The Hartford shall indemnify the Plan Administrator
and the members of the Committee against any liability for, any loss sustained
by reason of any act or failure to act in their administrative capacities,
provided such act or failure to act does not involve willful misconduct. Such
indemnification shall include attorneys' fees and other costs and expenses
reasonably incurred in defense of any action brought against the Plan
Administrator or any member of the Committee by reason of any such act or
failure to act. The Plan Administrator and any member of the Committee shall not
be liable or responsible for any act or omission of another fiduciary in
relation to the Plan unless the Plan Administrator or such member (A)
participates knowingly in, or knowingly undertakes to conceal, such act or
omission by such other fiduciary, or (B) has knowledge of a breach of fiduciary
responsibility by such other fiduciary and does not make reasonable efforts to
remedy such breach.
ARTICLE VIII
MISCELLANEOUS
8.1 UNFUNDED AND UNSECURED PLAN. The Plan shall be unfunded and unsecured for
-----------------------------
tax purposes and for purposes of ERISA. The Hartford shall have no obligation to
fund its liabilities, if any, under the Plan. Nothing in the Plan and no action
taken by The Hartford or its agents hereunder shall be construed to create a
trust of any kind, or a fiduciary relationship between The Hartford and any
other person or entity. All funds or other assets received or held by The
Hartford pursuant to or in connection with the Plan may be used by The Hartford
for any corporate purpose, and The Hartford shall not be obligated to segregate
such amounts from its general assets. No Participant or any other person or
entity shall have any claim against The Hartford or its assets other than as an
unsecured and unsubordinated general creditor of The Hartford. Without limiting
the generality of the foregoing, a Participant's claim hereunder shall at any
time be solely for the amount then credited to the Participant's Account.
Notwithstanding the foregoing, The Hartford may establish a grantor trust or
purchase securities or take any other action deemed appropriate to assist The
Hartford in meeting its obligations under the Plan, provided, however, that in
no event shall any person or entity have any right to or interest in such trust
or property by reason of the Plan.
8.2 ABSENCE OF REPRESENTATIONS. The Plan shall not be construed to provide any
---------------------------
representation or guarantee by The Hartford that any particular income or other
tax consequence will result from a Participant's participation in the Plan. Each
Participant shall be deemed to have consulted with his or her professional tax
advisor to determine the tax consequences of participation hereunder. The Plan
shall not be construed to provide any representation or guarantee by The
Hartford that any particular amount of a Participant's Account allocated to any
of the Phantom Funds hereunder will
Page 12
result in any particular investment experience related thereto, and The Hartford
shall in no event be required to pay any amount to any person or entity on
account of any loss suffered by reason of the operation of the Plan.
8.3 WITHHOLDING. The Plan Administrator shall have the right to make such
-----------
provisions as it deems appropriate to satisfy any obligation of The Hartford to
withhold federal, state or local income or other taxes incurred by reason of the
operation of the Plan, including but not limited to at any time requiring a
Participant to submit payment to The Hartford for such taxes, or withholding
such taxes from a Participant's wages (or other amounts) due to the Participant.
8.4 NO EMPLOYMENT RIGHTS. The Plan shall not, directly or indirectly, create in
--------------------
any Participant any right with respect to continuation of employment with any of
the Participating Companies or to the receipt of any Eligible Compensation or
other compensation. The Plan shall not interfere in any way with the rights of
the applicable Participating Company to terminate, or otherwise modify, the
employment of any Participant or its compensation policies at any time.
8.5 RIGHTS NOT TRANSFERABLE. The rights of a Participant under the Plan shall
------------------------
not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed
of, other than (A) by will, (B) by the laws of descent or distribution, or (C)
pursuant to a qualified domestic relations order as defined in the Internal
Revenue Code of 1986, as amended, provided that the rights of any transferee of
a Participant shall not be greater than the rights of the Participant hereunder.
The foregoing restriction shall be in addition to any restrictions imposed by
applicable law on a Participant's ability to dispose of any rights under the
Plan.
8.6 EFFECT OF PLAN. The provisions of the Plan shall be binding upon all
---------------
successors and assigns of a Participant, including without limitation the
Participant's estate and the executors, administrators or trustees thereof,
heirs and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of the Participant.
8.7 ADMINISTRATIVE EXPENSES. The Hartford shall pay for all administrative
------------------------
expenses related to the operation of the Plan, except as otherwise determined by
the Committee.
8.8 AMENDMENT AND TERMINATION OF THE PLAN. The Board of Directors or the
-----------------------------------------
Committee (acting on behalf of the Board of Directors) may amend or terminate
the Plan or any Participant elections hereunder at any time. The Committee may
at any time amend or terminate the Plan or any Participant elections hereunder
if the Committee determines in its sole discretion that The Hartford will
recognize income for income tax purposes with respect to any reserves
accumulated under any life insurance policy obtained with respect to any
Participant hereunder. The Committee or the Plan Administrator may amend the
Plan to the extent (A) required by applicable law or regulation, or (B) required
to maintain a favorable tax status for the Plan.
8.9 GOVERNING LAW. The laws of the State of Connecticut shall govern all matters
-------------
relating to the Plan, except to the extent such laws are superseded by the laws
of the United States.
Page 13
8.10 SEVERABILITY OF PROVISIONS. If any provision of the Plan shall be held
----------------------------
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provisions hereof, and the Plan shall be construed and enforced as if
such invalid or unenforceable provisions had not been included herein.
8.11 EFFECTIVE DATE. The Effective Date of this restatement of the Plan shall be
--------------
July 16, 1998, or such later date as the Plan Administrator may determine.
Page 14
Page 15
PLAN HISTORY
------------
10/17/96: Key terms of Plan formally approved by the Compensation and
- --------------------------------------------------------------------------------
Personnel Committee of the Board of Directors of ITT Hartford
----------------------------------------------------------------
Group, Inc., and authority to create Plan document and implement
----------------------------------------------------------------
Plan delegated to management on same date. Plan restates
----------------------------------------------------------------
essential terms of provisions of deferred compensation
----------------------------------------------------------------
arrangements established by ITT Corporation in 1994 (for 1995
----------------------------------------------------------------
executive salary and for executive bonuses determinable and
----------------------------------------------------------------
payable in 1995), and by ITT Corporation and ITT Hartford Group,
----------------------------------------------------------------
Inc. in 1995 (for 1996 executive salary and executive bonuses
----------------------------------------------------------------
determinable and payable in 1996, and for life sales incentive
----------------------------------------------------------------
payments earned in 1996).
-------------------------
5/2/97: Plan amended to reflect Company name change from ITT Hartford
- --------------------------------------------------------------------------------
Group, Inc. to The Hartford Financial Services Group, Inc. No
----------------------------------------------------------------
changes determined necessary to reflect Life Company public
----------------------------------------------------------------
offerings.
----------
10/97 No changes determined necessary to reflect committee's approval
- --------------------------------------------------------------------------------
at 10/16/97 meeting of reduction in threshold pay for
----------------------------------------------------------------
participation to the IRS Section 401(a)(17) amount for the year
----------------------------------------------------------------
participation is elected ($160k for 1997). Determined
----------------------------------------------------------------
unnecessary to have committee re-approve plan every year - plan
----------------------------------------------------------------
terms permit plan to be in effect until committee terminates it.
----------------------------------------------------------------
7/98 Plan amended to include change of control provisions approved by
- --------------------------------------------------------------------------------
the Compensation Committee of The Hartford Financial Services
----------------------------------------------------------------
Group, Inc.
-----------
6/00 Plan amended to include additional change of control provisions
- --------------------------------------------------------------------------------
approved by the Compensation Committees of The Hartford
----------------------------------------------------------------
Financial Services Group, Inc. and Hartford Life, Inc. on
----------------------------------------------------------------
February 16, 2000, and also amended to reflect the merger of
----------------------------------------------------------------
Hartford Life, Inc. into a wholly owned subsidiary of The
----------------------------------------------------------------
Hartford Financial Services Group, Inc. in June, 2000.
------------------------------------------------------
Page 16
EXHIBIT 12.01
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS [1]
(In millions) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS $ 1,418 $ 1,235 $ 1,475 $ 1,703 $ (318)
ADD:
FIXED CHARGES
Interest expense 250 219 216 213 148
Interest factor attributable to rentals 67 61 54 48 36
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED CHARGES 317 280 270 261 184
- ---------------------------------------------------------------------------------------------------------------------------------
Interest credited to contractholders 1,124 1,197 1,475 1,180 1,258
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED CHARGES INCLUDING INTEREST CREDITED TO
CONTRACTHOLDERS 1,441 1,477 1,745 1,441 1,442
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS, AS DEFINED 1,735 1,515 1,745 1,964 (134)
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS, AS DEFINED INCLUDING INTEREST CREDITED TO
CONTRACTHOLDERS $ 2,859 $ 2,712 $ 3,220 $ 3,144 $ 1,124
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS
Earnings, as defined, to total fixed charges [2] 5.5 5.4 6.5 7.5 $ (318)
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings, as defined, including interest credited to
contractholders, to total fixed charges including
interest credited to contractholders [3] 2.0 1.8 1.8 2.2 $ (318)
=================================================================================================================================
<FN>
[1] The Company had no dividends on preferred stock for the years 1996 to
2000.
[2] Excluding the equity gain on HLI initial public offering of $368, the
1997 ratio of earnings to fixed charges was 6.1. Excluding other charges
of $1,061, before-tax, primarily related to environmental and asbestos
reserve increases and recognition of losses on GIC, the 1996 ratio of
earnings to fixed charges, was 5.0.
[3] Excluding the equity gain on HLI initial public offering of $368, the
1997 ratio of earnings to fixed charges including interest credited to
contractholders was 1.9. Excluding other charges of $1,061, before-tax,
primarily related to environmental and asbestos reserve increases and
recognition of losses on GIC, the 1996 ratio of earnings to fixed
charges including interest credited to contractholders was 1.5.
</FN>
EXHIBIT 21.01
SUBSIDIARIES OF THE HARTFORD FINANCIAL SERVICES GROUP, INC.
JURISDICTION
OF
COMPANY NAME INCORPORATION
- ------------ -------------
American Maturity Life Insurance Company (60%) Connecticut
AML Financial, Inc. Connecticut
Brazilcap Capitalizacao, S.A. (17%) Brazil
BMG Capital Advisers, L.L.C. Connecticut
Business Management Group, Inc. Connecticut
CCS Commercial, L.L.C. (50%) Delaware
CLA Corporation Connecticut
Dornberger/Berry & Company, Inc. South Dakota
1810 Corporation Delaware
Ersatz Corporation Delaware
Excess Insurance Company, Limited U.K.
Fedcap Capitalizacao S.A. (25%) Brazil
Fencourt Reinsurance Company, Ltd. Bermuda
First State Insurance Company Connecticut
First State Management Group, Inc. Delaware
First State Management Group Insurance
Services of Massachusetts, LLC Massachusetts
First State Management Group Insurance Services of Texas, LLC Texas
Four Thirty Seven Land Company, Inc. Delaware
Galicia Retiro Compania de Seguros S.A. Argentina
Galicia Vida Compania de Seguros, S.A., (40%) Argentina
HARCO Property Services, Inc. Connecticut
Hartford Accident and Indemnity Company Connecticut
Hartford Casualty Insurance Company Indiana
Hartford-Comprehensive Employee Benefit Service Company Connecticut
Hartford Equity Sales Company, Inc. Connecticut
Hartford Fianzas, S.A. de C.V. (80%) Mexico
Hartford Financial Services, LLC Delaware
Hartford Financial Services Life Insurance Company Connecticut
Hartford Fire Insurance Company Connecticut
Hartford Fire International (Germany) GMBH Germany
Hartford Fire International, Ltd. Connecticut
Hartford Insurance, Ltd. Bermuda
Hartford Insurance Company of Canada Canada
Hartford Insurance Company of Illinois Illinois
Hartford Insurance Company of the Midwest Indiana
Hartford Insurance Company of the Southeast Florida
Hartford Integrated Technologies, Inc. Connecticut
Hartford International Life Reassurance Corporation Connecticut
Hartford International Management Services Company, L.L.C. Delaware
Hartford Investment Financial Services Company Delaware
Hartford Investment Management Company Delaware
Hartford Investments Canada Corp. Canada
Hartford Investment Services, Inc. Connecticut
Hartford Investor Services Company, LLC Connecticut
Hartford Life and Accident Insurance Company Connecticut
Hartford Life and Annuity Insurance Company Connecticut
Hartford Life Insurance Company Connecticut
Hartford Life Insurance, KK Japan
Hartford Life, Inc. Delaware
EXHIBIT 21.01
Hartford Life International, Ltd. Connecticut
Hartford Life, Ltd. Bermuda
Hartford Lloyd's Corporation Texas
Hartford Lloyd's Insurance Company (partnership) Texas
Hartford Management, Ltd. Bermuda
Hartford of Florida, L.L.C. Florida
Hartford Re Company Connecticut
Hartford Re Spain Correduria De Reaseguros S.A. Spain
Hartford Risk Management, Inc. (90%) Delaware
Hartford Salud, S.A. Argentina
Hartford Securities Distribution Company, Inc. Connecticut
Hartford Seguros de Retiro S.A. Argentina
Hartford Seguros, S.A. de C.V. (80%) Mexico
Hartford Seguros de Vida, S.A. Argentina
Hartford Specialty Company Delaware
Hartford Specialty Insurance Services of Texas, LLC Texas
Hartford Technology Service Company Connecticut
Hartford Technology Services Company, L.L.C. Delaware
Hartford Underwriters Insurance Company Connecticut
Hart Life Insurance Company Connecticut
HartRe Company, L.L.C. Connecticut
Hart Re Group, L.L.C. Connecticut
Heritage (Bermuda), Ltd. Bermuda
Heritage Holdings, Inc. Connecticut
Heritage Reinsurance Company, Ltd. Bermuda
HL Investment Advisors, LLC Connecticut
Horizon Management Group, L.L.C. Delaware
Horizon Portfolio Management Ltd U.K.
HRA, Inc. Connecticut
HRA Brokerage Services, Inc. Connecticut
ICATU Hartford Administracao de Beneficios, Ltda. Brazil
ICATU Hartford Capitalizacao, S.A. Brazil
ICATU Hartford Fundo de Pensao Brazil
ICATU Hartford Seguros, S.A. (45%) Brazil
Instituto de Salta Compania de Seguros de Vida S.A. (90%) Argentina
International Corporate Marketing Group, Inc. Connecticut
ISOP Financing Company Limited Partnership Connecticut
ITT Hartford International, Ltd U.K.
ITT Hartford Seguros de Vida, S.A. (16.67%) Uruguay
Sudamericana Holding S.A. (56.7%) Argentina
ITT New England Management Company, Inc. Massachusetts
New England Insurance Company Connecticut
New England Reinsurance Corporation Connecticut
New Ocean Insurance Company, Ltd. Bermuda
Nutmeg Insurance Agency, Inc. Connecticut
Nutmeg Insurance Company Connecticut
Nutmeg Life Insurance Company Iowa
Omni General Agency, Inc. Texas
Omni Indemnity Company Illinois
Omni Insurance Company Illinois
Omni Insurance Group, Inc. Georgia
Pacific Insurance Company, Limited Connecticut
Personal Lines Insurance Center, Inc. Connecticut
Planco Financial Services, Inc. Pennsylvania
Planco Incorporated Pennsylvania
Property and Casualty Insurance Company of Hartford Indiana
EXHIBIT 21.01
Sentinel Insurance Company, Ltd. Connecticut
Servus Life Insurance Company Connecticut
Specialty Risk Services, Inc. Delaware
Terry Associates, Inc. Connecticut
The Confluence Group, Inc. Connecticut
The Evergreen Group, Inc. New York
The Harford Bank, FSB Federal
The Hartford Club of Simsbury, Inc. Connecticut
The Hartford Fidelity & Bonding Company Connecticut
The Hartford Financial Services Group, Inc. Delaware
The Hartford Insurance Company, (Singapore), Ltd. (80%) Singapore
The Hartford International Financial Services Group
Compania De Seguros Y Reaseguros S.A. (99.75%) Spain
The Hartford International Financial Services Group, LLC Delaware
Thesis S.A. Argentina
Trumbull Finance, L.L.C. Connecticut
Trumbull Insurance Company Connecticut
Trumbull Recovery Services, Inc. Florida
Trumbull Services, L.L.C. Connecticut
Twin City Fire Insurance Company Indiana
United Premium Capital, L.L.C. (50%) Connecticut
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To The Hartford Financial Services Group, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
registration statements (i) on Forms S-3 (Registration Nos. 333-12617 and
333-49666) and (ii) on Forms S-8 (Registration Nos. 33-80663, 33-80665,
333-12563, 333-49170 and 333-34092).
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 23, 2001