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FORM 10-K/A
Amendment No. 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(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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Explanatory Note:
This Amendment No. 1 to Part I, Item 1 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000 is being filed solely for the purpose
of revising the Company's Property and Casualty Claim and Claim Adjustment
Expense Liability historical development tables for the 1998 and prior years as
follows:
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY - NET
Cumulative paid claims, current year diagonal
Liabilities reestimated, current year diagonal
Deficiency (Redundancy)
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY - GROSS
Net reestimated reserve
Gross reestimated reserve
Gross deficiency (redundancy)
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 4,672 -- --
Three years later 5,490 5,550 5,433 5,268 5,286 5,074 5,412 5,399 -- -- --
Four years later 6,325 6,396 6,229 6,112 6,040 6,097 6,234 -- -- -- --
Five years later 6,961 7,020 6,895 6,682 6,877 6,738 -- -- -- -- --
Six years later 7,456 7,569 7,354 7,391 7,406 -- -- -- -- -- --
Seven years later 7,913 7,954 7,987 7,861 -- -- -- -- -- -- --
Eight years later 8,256 8,532 8,411 -- -- -- -- -- -- -- --
Nine years later 8,795 8,924 -- -- -- -- -- -- -- -- --
Ten years later 9,159 -- -- -- -- -- -- -- -- -- --
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 12,143 -- --
Three years later 10,818 11,095 11,182 12,094 12,127 11,947 11,919 11,668 -- -- --
Four years later 11,094 11,417 12,304 12,157 12,113 11,820 11,803 -- -- -- --
Five years later 11,427 12,515 12,406 12,184 12,082 11,798 -- -- -- -- --
Six years later 12,516 12,642 12,462 12,165 12,088 -- -- -- -- -- --
Seven years later 12,619 12,757 12,414 12,218 -- -- -- -- -- -- --
Eight years later 12,739 12,710 12,500 -- -- -- -- -- -- -- --
Nine years later 12,701 12,789 -- -- -- -- -- -- -- -- --
Ten years later 12,785 -- -- -- -- -- -- -- -- -- --
DEFICIENCY (REDUNDANCY) $3,898 $3,585 $2,002 $1,501 $1,312 $735 $(439) $(629) $(342) $(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 $12,088 $11,798 $11,803 $11,668 $12,143 $12,090
Reestimated reinsurance 5,578 4,817 4,154 3,878 3,423 3,687
recoverables
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $17,666 $16,615 $15,957 $15,546 $15,566 $15,777
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY (REDUNDANCY) $1,734 $723 $(642) $(747) $(199) $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
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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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to 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: April 24, 2001
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