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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended March 31, 2002
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)
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[ ]
As of April 30, 2002, there were outstanding 247,428,540 shares of Common Stock,
$0.01 par value per share, of the registrant.
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INDEX
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Statements of Income - First Quarter Ended March 31,
2002 and 2001 3
Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 4
Consolidated Statements of Changes in Stockholders' Equity - First Quarter
Ended March 31, 2002 and 2001 5
Consolidated Statements of Cash Flows - First Quarter Ended March 31,
2002 and 2001 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
Signature 29
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FIRST QUARTER ENDED
MARCH 31,
-----------------------------
(IN MILLIONS, EXCEPT FOR PER SHARE DATA) 2002 2001
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(Unaudited)
REVENUES
Earned premiums $ 2,426 $ 2,310
Fee income 662 602
Net investment income 706 691
Other revenue 113 118
Net realized capital gains (losses) (7) 1
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TOTAL REVENUES 3,900 3,722
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BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,256 2,211
Amortization of deferred policy acquisition costs and present value of
future profits 555 518
Insurance operating costs and expenses 534 478
Goodwill amortization -- 11
Other expenses 187 183
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TOTAL BENEFITS, CLAIMS AND EXPENSES 3,532 3,401
==========================================================================================================================
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 368 321
Income tax expense 76 58
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INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 292 263
Cumulative effect of accounting change, net of tax -- (23)
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NET INCOME $ 292 $ 240
==========================================================================================================================
BASIC EARNINGS PER SHARE
Income before cumulative effect of accounting change $ 1.19 $ 1.14
Cumulative effect of accounting change, net of tax -- (0.10)
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NET INCOME $ 1.19 $ 1.04
DILUTED EARNINGS PER SHARE
Income before cumulative effect of accounting change $ 1.17 $ 1.12
Cumulative effect of accounting change, net of tax -- (0.10)
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NET INCOME $ 1.17 $ 1.02
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Weighted average common shares outstanding 246.1 231.5
Weighted average common shares outstanding and dilutive potential common
shares 249.7 235.5
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Cash dividends declared per share $ 0.26 $ 0.25
====================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(IN MILLIONS, EXCEPT FOR SHARE DATA) 2002 2001
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(Unaudited)
ASSETS
Investments
-----------
Fixed maturities, available for sale, at fair value (amortized cost of $39,811 and
$39,154) $ 40,346 $ 40,046
Equity securities, available for sale, at fair value (cost of $1,256 and $1,289) 1,309 1,349
Policy loans, at outstanding balance 3,288 3,317
Other investments 2,116 1,977
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Total investments 47,059 46,689
Cash 351 353
Premiums receivable and agents' balances 2,579 2,432
Reinsurance recoverables 5,141 5,162
Deferred policy acquisition costs and present value of future profits 6,581 6,420
Deferred income tax 747 693
Goodwill 1,725 1,725
Other assets 3,065 3,044
Separate account assets 117,689 114,720
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TOTAL ASSETS $ 184,937 $ 181,238
========================================================================================================================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 16,712 $ 16,678
Life 9,029 8,819
Other policyholder funds and benefits payable 19,771 19,355
Unearned premiums 3,649 3,436
Short-term debt 615 599
Long-term debt 1,965 1,965
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,425 1,412
Other liabilities 5,043 5,241
Separate account liabilities 117,689 114,720
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175,898 172,225
COMMITMENTS AND CONTINGENCIES, NOTE 5
STOCKHOLDERS' EQUITY
Common stock - authorized 400,000,000, issued 249,665,224 and 248,477,367 shares, par
value $0.01 2 2
Additional paid-in capital 2,416 2,362
Retained earnings 6,380 6,152
Treasury stock, at cost - 2,941,340 shares (37) (37)
Accumulated other comprehensive income 278 534
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TOTAL STOCKHOLDERS' EQUITY 9,039 9,013
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 184,937 $ 181,238
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FIRST QUARTER ENDED MARCH 31, 2002 Accumulated Other Comprehensive Income (Loss)
-------------------------------------------------
Net Gain
Common Unrealized (Loss) on Minimum
Stock/ Gain Cash-Flow Pension Outstanding
Additional Treasury (Loss) on Hedging Cumulative Liability Shares
Paid-in Retained Stock, Securities, Instruments, Translation Adjustment, (In
(In millions) (Unaudited) Capital Earnings at Cost net of tax net of tax Adjustments net of tax Total thousands)
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BALANCE, BEGINNING OF PERIOD $2,364 $6,152 $(37) $606 $63 $(116) $(19) $9,013 245,536
Comprehensive income
Net income 292 292
Other comprehensive income
(loss), net of tax [1]
Unrealized loss on securities (235) (235)
[2]
Cumulative translation adj. (4) (4)
Net loss on cash-flow hedging
instruments [3] (17) (17)
---------
Total other comprehensive income
(loss) (256)
---------
Total comprehensive income 36
=========
Issuance of shares under incentive
and stock purchase plan 44 44 1,188
Tax benefit on employee stock
options and awards 10 10
Dividends declared on common stock (64) (64)
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BALANCE, END OF PERIOD $2,418 $6,380 $(37) $371 $46 $(120) $(19) $9,039 246,724
====================================================================================================================================
FIRST QUARTER ENDED MARCH 31, 2001 Accumulated Other Comprehensive Income (Loss)
------------------------------------------------
Net Gain
Common Unrealized on Minimum
Stock/ Gain Cash-Flow Pension Outstanding
Additional Treasury (Loss) on Hedging Cumulative Liability Shares
Paid-in Retained Stock, Securities, Instruments, Translation Adjustment, (In
(In millions) (Unaudited) Capital Earnings at Cost net of tax net of tax Adjustments net of tax Total thousands)
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BALANCE, BEGINNING OF PERIOD $1,688 $5,887 $(480) $497 $-- $(113) $(15) $7,464 226,290
Comprehensive income
Net income 240 240
Other comprehensive income, net
of tax [1]
Cumulative effect of
accounting change [4] (1) 24 23
Unrealized gain on securities 124 124
[2]
Cumulative translation adj. (14) (14)
Net gain on cash-flow hedging
instruments [3] 20 20
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Total other comprehensive income 153
---------
Total comprehensive income 393
=========
Issuance of shares under incentive
and stock purchase plans 27 4 31 572
Issuance of common stock in
underwritten offering 169 446 615 10,000
Tax benefit on employee stock
options and awards 2 2
Dividends declared on common stock (59) (59)
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BALANCE, END OF PERIOD $1,886 $6,068 $(30) $620 $44 $(127) $(15) $8,446 236,862
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<FN>
[1] Unrealized gain (loss) on securities is net of tax expense (benefit) of
$(127) and $67 for the first quarter ended March 31, 2002 and 2001,
respectively. Net gain (loss) on cash-flow hedging instruments is net of tax
expense (benefit) of $(9) and $11 for the first quarter ended March 31, 2002
and 2001, respectively. For the first quarter ended March 31, 2001,
cumulative effect of accounting change is net of tax benefit of $12. There
is no tax effect on cumulative translation adjustments.
[2] Net of reclassification adjustment for gains realized in net income of $0
and $26 for the first quarter ended March 31, 2002 and 2001, respectively.
[3] Net of amortization adjustment of $1 and $2 to net investment income for the
first quarter ended March 31, 2002 and 2001, respectively.
[4] For the first quarter ended March 31, 2001, unrealized gain (loss) on
securities, net of tax, includes cumulative effect of accounting change of
$(23) to net income and $24 to net gain on cash-flow hedging instruments.
</FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST QUARTER ENDED
MARCH 31,
----------------------------------
(IN MILLIONS) 2002 2001
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(Unaudited)
OPERATING ACTIVITIES
Net income $ 292 $ 240
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Change in receivables, payables and accruals (339) (113)
Change in reinsurance recoverables and other related assets 45 215
Amortization of deferred policy acquisition costs and present value of future profits 555 518
Additions to deferred policy acquisition costs and present value of future profits (716) (687)
Change in accrued and deferred income taxes 96 (39)
Increase in liabilities for future policy benefits, unpaid claims and claim adjustment
expenses and unearned premiums 440 310
Net realized capital losses (gains) 7 (1)
Depreciation and amortization 13 15
Cumulative effect of accounting change, net of tax -- 23
Other, net (6) (175)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 387 306
================================================================================================================================
INVESTING ACTIVITIES
Purchase of investments (3,760) (5,439)
Sale of investments 2,604 2,893
Maturity of investments 412 653
Sale of affiliates -- 25
Additions to property, plant and equipment (31) (31)
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NET CASH USED FOR INVESTING ACTIVITIES (775) (1,899)
================================================================================================================================
FINANCING ACTIVITIES
Short-term debt, net 16 --
Issuance of long-term debt -- 400
Issuance of company obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debentures -- 200
Issuance of common stock in underwritten offering -- 615
Net proceeds from investment and universal life-type contracts charged against
policyholder accounts 389 469
Dividends paid (64) (57)
Proceeds from issuance of shares under incentive and stock purchase plans 45 16
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 386 1,643
================================================================================================================================
Net increase (decrease) in cash (2) 50
Cash - beginning of period 353 227
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CASH - END OF PERIOD $ 351 $ 277
================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
=================================================
NET CASH PAID DURING THE PERIOD FOR:
Income taxes $ -- $ --
Interest $ 29 $ 5
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 6 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions except per share data unless otherwise stated)
(unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Hartford
Financial Services Group, Inc. and its consolidated subsidiaries ("The Hartford"
or the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim periods. Less than
majority-owned entities in which The Hartford has at least a 20% interest are
reported on the equity basis. In the opinion of management, these statements
include all normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows for the periods
presented. (For a description of accounting policies, see Note 1 of Notes to
Consolidated Financial Statements included in The Hartford's 2001 Form 10-K
Annual Report.)
On April 2, 2001, The Hartford acquired the U.S. individual life insurance,
annuity and mutual fund businesses of Fortis, Inc. (operating as "Fortis
Financial Group" or "Fortis"). The acquisition was accounted for as a purchase
transaction and, as such, the revenues and expenses generated by this business
from April 2, 2001 forward are included in the Company's Consolidated Statements
of Income.
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 August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 establishes an accounting model for long-lived assets to be disposed of
by sale that applies to all long-lived assets, including discontinued
operations. SFAS No. 144 requires that those long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. The provisions of
Statement 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Adoption of SFAS No. 144 did not have a
material impact on the Company's financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 eliminates the pooling-of-interests method of accounting for business
combinations, requiring all business combinations to be accounted for under the
purchase method. Accordingly, net assets acquired are recorded at fair value
with any excess of cost over net assets assigned to goodwill.
SFAS No. 141 also requires that certain intangible assets acquired in a business
combination be recognized apart from goodwill. The provisions of SFAS No. 141
apply to all business combinations initiated after June 30, 2001. Adoption of
SFAS No. 141 did not have a material impact on the Company's financial condition
or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". Under SFAS No. 142, amortization of goodwill is precluded; however, its
fair value is periodically (at least annually) reviewed and tested for
impairment.
Goodwill must be tested for impairment in the year of adoption, including an
initial test performed within six months of adoption. If the initial test
indicates a potential impairment, then a more detailed analysis to determine the
extent of impairment must be completed within twelve months of adoption.
SFAS No. 142 requires that useful lives for intangibles other than goodwill be
reassessed and remaining amortization periods be adjusted accordingly.
While the Company is in the process of testing its goodwill asset for
recoverability, it does not expect any potential impairments to have a material
impact on the Company's financial condition or results of operations. Adoption
of all other provisions of SFAS No. 142 did not have a material impact on the
Company's financial condition or results of operations. (For further discussion
of the impact of SFAS No. 142, see Note 2.)
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and
138. Upon adoption of SFAS No. 133, as amended, the Company recorded a $23
charge to net income as a net-of-tax cumulative effect of accounting change.
(C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Under current guidance all gains and losses resulting from the extinguishment of
debt were required to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. SFAS No. 145 rescinds that
guidance and requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they are both unusual and infrequent
in occurrence. Statement 145 also amends SFAS No. 13, "Accounting for Leases"
for the required accounting treatment of certain lease modifications that have
economic effects similar to sale-leaseback transactions. SFAS No. 145 requires
that those lease modifications be accounted for in the same manner as
sale-leaseback transactions. The provisions of Statement 145 related to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions of Statement 145 related to SFAS No. 13 shall be
effective for transactions occurring after May 15, 2002. Adoption of SFAS No.
145 will not have a material impact on the Company's financial condition or
results of operations.
- 7 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142 and accordingly
ceased all amortization of goodwill.
The following tables show net income and earnings per share with the quarter
ended March 31, 2001 adjusted for goodwill amortization occurring in that
quarter.
FIRST QUARTER ENDED
MARCH 31,
------------------------------
NET INCOME 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change $ 292 $ 263
Goodwill amortization, net of tax -- 10
- -----------------------------------------------------------------------------------------------------------------------------
Adjusted income before cumulative effect of accounting change 292 273
Cumulative effect of accounting change, net of tax -- (23)
- -----------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 292 $ 250
=============================================================================================================================
FIRST QUARTER ENDED
MARCH 31,
------------------------------
BASIC EARNINGS PER SHARE 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change $ 1.19 $ 1.14
Goodwill amortization, net of tax -- 0.04
- -----------------------------------------------------------------------------------------------------------------------------
Adjusted income before cumulative effect of accounting change 1.19 1.18
Cumulative effect of accounting change, net of tax -- (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 1.19 $ 1.08
=============================================================================================================================
DILUTED EARNINGS PER SHARE
Income before cumulative effect of accounting change $ 1.17 $ 1.12
Goodwill amortization, net of tax -- 0.04
- -----------------------------------------------------------------------------------------------------------------------------
Adjusted income before cumulative effect of accounting change 1.17 1.16
Cumulative effect of accounting change, net of tax -- (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 1.17 $ 1.06
=============================================================================================================================
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
AS OF MARCH 31, 2002
------------------------------
GROSS ACCUMULATED
CARRYING NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- -----------------------------------------------------------------------------------------------------------------------------
Present value of future profits $ 1,406 $ 187
Renewal rights 42 22
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 1,448 $ 209
=============================================================================================================================
Net amortization expense for the quarter ended March 31, 2002 was $26.
Estimated future net amortization expense for the succeeding five years is as
follows:
For the year ended December 31,
- -----------------------------------------------------
2002 $ 131
2003 $ 120
2004 $ 114
2005 $ 104
2006 $ 93
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- 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
The carrying amount of goodwill as of March 31, 2002 and December 31, 2001,
respectively, is shown below. The Company is in the process of completing its
allocation of goodwill to the reporting segment and unit levels.
MARCH 31, DECEMBER 31,
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Life $ 799 $ 799
Property & Casualty 154 154
Corporate 772 772
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,725 $ 1,725
====================================================================================================================================
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, in order to achieve
one of three Company approved objectives: to hedge risk arising from interest
rate, price or currency exchange rate volatility; to manage liquidity; or to
control transaction costs. The Company is considered an "end-user" of derivative
instruments and, as such, does not make a market or trade in these instruments
for the express purpose of earning trading profits.
For a detailed discussion of the Company's use of derivative instruments, see
Note 1(e) of Notes to Consolidated Financial Statements included in The
Hartford's December 31, 2001 Form 10-K Annual Report.
As of March 31, 2002, the Company reported $113 of derivative assets in other
invested assets and $183 of derivative liabilities in other liabilities.
Cash-Flow Hedges
For the quarter ended March 31, 2002, the Company's gross gains and losses
representing the total ineffectiveness of all cash-flow hedges essentially
offset, with the net impact reported as realized capital gains or losses. All
components of each derivative's gain or loss are included in the assessment of
hedge effectiveness.
Gains and losses on derivative contracts that are reclassified from OCI to
current period earnings are included in the line item in the statement of income
in which the hedged item is recorded. As of March 31, 2002, approximately $3 of
after-tax deferred net gains on derivative instruments accumulated in OCI are
expected to be reclassified to earnings during the next twelve months. This
expectation is based on the anticipated interest payments on hedged investments
in fixed maturity securities that will occur over the next twelve months, at
which time the Company will recognize the deferred net gains/losses as an
adjustment to interest income over the term of the investment cash flows. The
maximum term over which the Company is hedging its exposure to the variability
of future cash flows (for all forecasted transactions, excluding interest
payments on variable-rate debt) is twelve months. As of March 31, 2002, the
Company held approximately $2.5 billion in derivative notional value related to
strategies categorized as cash-flow hedges. There was $1 of reclassifications
from OCI to earnings resulting from the discontinuance of cash-flow hedges
during the quarter ended March 31, 2002. There were no reclassifications from
OCI to earnings resulting from the discontinuance of cash-flow hedges during the
quarter ended March 31, 2001.
Fair-Value Hedges
For the quarter ended March 31, 2002, the Company's gross gains and losses
representing the total ineffectiveness of all fair-value hedges essentially
offset, with the net impact reported as realized capital gains or losses. All
components of each derivative's gain or loss are included in the assessment of
hedge effectiveness. As of March 31, 2002, the Company held approximately $863
in derivative notional value related to strategies categorized as fair-value
hedges.
Other Risk Management Activities
In general, the Company's other risk management activities relate to strategies
used to meet the previously mentioned Company-approved objectives. Swap
agreements, interest rate cap and floor agreements and option contracts are used
to meet these objectives. Changes in the value of all derivatives held for other
risk management purposes are reported in current period earnings as realized
capital gains or losses. As of March 31, 2002, the Company held approximately
$5.2 billion in derivative notional value related to strategies categorized as
Other Risk Management Activities.
- 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. 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.
MARCH 31, 2002 Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 292 246.1 $ 1.19
===================
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 3.6
-----------------------------
Income available to common shareholders plus assumed conversions $ 292 249.7 $ 1.17
====================================================================================================================================
MARCH 31, 2001 Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 240 231.5 $ 1.04
===================
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 4.0
-----------------------------
Income available to common shareholders plus assumed conversions $ 240 235.5 $ 1.02
====================================================================================================================================
Basic earnings per share reflects the actual weighted average number of shares
outstanding during the period. Diluted earnings per share includes the dilutive
effect of outstanding options, using the treasury stock method, and contingently
issuable shares. Under the treasury stock method exercise of options is assumed,
with the proceeds used to repurchase common stock at the average market price
for the period. Contingently issuable shares are included upon satisfaction of
certain conditions related to the contingency.
NOTE 5. 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, if any, 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.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company ("HLIC"), et al. in favor of Bancorp in the amount of $118.
The case involved claims of patent infringement, misappropriation of trade
secrets, and breach of contract against HLIC and its affiliate International
Corporate Marketing Group, Inc. ("ICMG"). The judge dismissed the patent
infringement claim on summary judgment. The jury's award was based on the last
two claims.
HLIC and ICMG have moved the district court for, inter alia, judgment as a
matter of law or a new trial, and intend to appeal the judgment if the district
court does not set it aside or substantially reduce it. In either event, the
Company's management, based on the opinion of its legal advisers, believes that
there is a substantial likelihood that the jury award will not survive at its
current amount. Based on the advice of legal counsel regarding the potential
outcome of this litigation, the Company recorded an $11 after-tax charge in the
first quarter of 2002 to increase litigation reserves associated with this
matter. Should HLIC and ICMG not succeed in eliminating or reducing the
judgment, a significant additional expense would be recorded in the future
related to this matter.
(B) TAX MATTERS
The Hartford's federal income tax returns are routinely audited by the Internal
Revenue Service ("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.
(C) ENVIRONMENTAL AND ASBESTOS CLAIMS
Information regarding environmental and asbestos claims may be found in the
Environmental and Asbestos Claims section of Management's Discussion and
Analysis of Financial Condition and Results of Operations and Subsequent Event,
below.
(D) SUBSEQUENT EVENT
On May 14, 2002, The Hartford announced its participation in a settlement in
principle by its insured, PPG Industries ("PPG"), of litigation arising from
asbestos exposures involving Pittsburgh Corning Corporation ("Pittsburgh
Corning"), which is 50% owned by PPG. The structure of the settlement will allow
The Hartford to make fixed payments to a settlement trust over a 20-year period
beginning in 2004. The settlement is subject to a number of contingencies,
including the negotiation of a definitive agreement among the parties and
approval of the bankruptcy court supervising the reorganization of Pittsburgh
Corning. The Hartford estimates the settlement amount to be between $120 and
$150 (non tax-affected) on a discounted basis and net of anticipated reinsurance
recoveries. The settlement is covered by existing asbestos reserves, and as a
result, will not have a material impact on The Company's financial condition or
results of operations.
- 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SEGMENT INFORMATION
The Hartford is organized into two major operations: Life and Property &
Casualty. Within these operations, The Hartford conducts business principally in
nine operating segments. Additionally, all activities related to The HLI
Repurchase in June 2000 and the minority interest in HLI for pre-acquisition
periods are included in Corporate.
Life is organized into four reportable operating segments: Investment Products,
Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI").
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 coverages 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. Life also includes in an Other category its international
operations, which are primarily located in Latin America and Japan, as well as
corporate items not directly allocable to any of its reportable operating
segments, principally interest expense.
In January 2002, Property & Casualty integrated its Affinity Personal Lines and
Personal Insurance segments, now reported as Personal Lines. As a result,
Property & Casualty is now organized into five reportable operating segments,
the North American underwriting segments of Business Insurance, Personal Lines,
Specialty Commercial and Reinsurance; and the Other Operations segment.
Business Insurance provides standard commercial insurance coverage to small
commercial and middle market insureds. This segment also provides commercial
risk management products and services to small and mid-sized members of affinity
groups in addition to marine coverage. Personal Lines provides automobile,
homeowners and home-based business coverages to the membership of AARP through a
direct marketing operation; to customers of Sears and Ford as well as customers
of financial institutions through an affinity center; to individuals who prefer
local agent involvement through a network of independent agents in the standard
personal lines market; and through Omni in the non-standard automobile market.
Personal Lines also operates a member contact center for health insurance
products offered through AARP's Health Care Options. Specialty Commercial
provides property, bond and professional liability coverages as well as
insurance through retailers and wholesalers to large commercial clients and
insureds requiring a variety of specialized coverages. The Reinsurance segment
assumes reinsurance worldwide and primarily writes treaty reinsurance through
professional reinsurance brokers covering various property, casualty, specialty
and marine classes of business. The Other Operations segment currently consists
of certain property and casualty insurance operations of The Hartford which have
discontinued writing new business. For 2002, this includes the activity in the
exited international lines of HartRe as a result of its restructuring in October
2001. (For further discussion of this restructuring, see Note 8 of Notes to
Consolidated Financial Statements.) The Other Operations segment results also
include activity for the Company's international property and casualty
businesses up until their dates of sale.
The measure of profit or loss used by The Hartford's management in evaluating
performance is operating income, except for its North American underwriting
segments, which are evaluated by The Hartford's management primarily based upon
underwriting results. "Operating income" is defined as after-tax operational
results excluding, as applicable, net realized capital gains and losses, the
cumulative effect of accounting changes and certain other items. While not
considered segments, the Company also reports and evaluates operating income
results for Life, Property & Casualty and North American. North American
includes the combined underwriting results of the North American underwriting
segments along with income and expense items not directly allocable to these
segments, such as net investment income. Property & Casualty includes operating
income for North American and the Other Operations segment.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided and capital contributions. Certain reinsurance stop loss agreements
exist between the segments which specify that one segment will reimburse another
for losses incurred in excess of a predetermined limit. Also, one segment may
purchase group annuity contracts from another to fund pension costs and claim
annuities to settle casualty claims. In addition, certain intersegment
transactions occur in Life. These transactions include interest income on
allocated surplus and the allocation of net realized capital gains and losses
through net invested income utilizing the duration of the segment's investment
portfolios.
The following tables present revenues and operating income. Underwriting results
are presented for the Business Insurance, Personal Lines, Specialty Commercial
and Reinsurance segments, while operating income is presented for all other
segments, along with Life and Property & Casualty, including North American.
- 11 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
REVENUES
FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 650 $ 604
Individual Life 232 163
Group Benefits 644 613
COLI 160 184
Other (10) 26
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 1,676 1,590
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
North American
Earned premiums and other revenue
Business Insurance 732 620
Personal Lines 747 704
Specialty Commercial 290 285
Reinsurance 171 249
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American earned premiums and other revenue 1,940 1,858
Net investment income 217 218
Net realized capital gains (losses) 7 (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American 2,164 2,074
Other Operations 56 54
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 2,220 2,128
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate 4 4
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 3,900 $ 3,722
====================================================================================================================================
- 12 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
OPERATING INCOME FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 117 $ 111
Individual Life 31 20
Group Benefits 28 23
COLI -- 9
Other 1 (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 177 161
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
North American
Underwriting results
Business Insurance 4 (23)
Personal Lines (11) 16
Specialty Commercial (10) (14)
Reinsurance (4) (25)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American underwriting results (21) (46)
Net servicing and other income [1] 2 5
Net investment income 217 218
Other expenses (51) (62)
Income tax expense (25) (8)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American 122 107
Other Operations -- 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 122 108
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate (6) (16)
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 293 253
Cumulative effect of accounting change, net of tax -- (23)
Net realized capital gains (losses), after-tax (1) 10
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 292 $ 240
====================================================================================================================================
<FN>
[1] Net of expenses related to service business.
</FN>
NOTE 7. STOCKHOLDERS' EQUITY
Increase in authorized shares - At the Company's annual meeting of shareholders
held on April 18, 2002, shareholders approved an amendment to Section (a)
Article Fourth of the Amended and Restated Certificate of Incorporation to
increase the aggregate authorized number of shares of common stock from 400
million to 750 million.
NOTE 8. RESTRUCTURING
During the fourth quarter of 2001, the Company approved and implemented plans
for restructuring the operations of both HartRe and The Hartford Bank, FSB ("The
Hartford Bank"). HartRe announced a restructuring of its entire international
and domestic operations, with the purpose of centralizing the underwriting
organization in Hartford, Connecticut. Also, the Boards of Directors for both
The Hartford Bank and The Hartford Financial Services Group, Inc., approved The
Hartford Bank's dissolution plan. Both plans will be completed during 2002.
As a result of these restructuring plans, the Company recorded a 2001 pretax
charge and accrual of approximately $16. This amount included $8 in
employee-related costs, $5 in occupancy-related costs and the remaining $3 in
other restructuring costs.
The 79 employees terminated under these restructuring plans primarily relate to
all levels of the underwriting and claims areas. The occupancy-related costs
represent the remaining lease liabilities for both the domestic and
international offices of HartRe to be closed pursuant to the restructuring plan.
As of March 31, 2002, the Company has paid approximately $3 in employee-related
restructuring costs.
- 13 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions except 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 March 31, 2002, compared with December 31, 2001, and its
results of operations for the first quarter ended March 31, 2002, compared to
the equivalent 2001 period. This discussion should be read in conjunction with
the MD&A in The Hartford's 2001 Form 10-K Annual Report.
Certain of the statements contained herein (other than statements of historical
fact) are forward-looking statements. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect upon the
Company. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on The Hartford will be those anticipated by management. Actual
results could differ materially from those expected by the Company, depending on
the outcome of various factors. These factors include: the uncertain nature of
damage theories and loss amounts and the development of additional facts related
to the September 11 terrorist attack ("September 11"); the response of
reinsurance companies under reinsurance contracts, the impact of increasing
reinsurance rates, and the adequacy of reinsurance to protect the Company
against losses; the possibility of more unfavorable loss experience than
anticipated; the possibility of general economic and business conditions that
are less favorable than anticipated; the incidence and severity of catastrophes,
both natural and man-made; the effect of changes in interest rates, the stock
markets or other financial markets; stronger than anticipated competitive
activity; unfavorable legislative, regulatory or judicial developments; the
difficulty in predicting the Company's potential exposure for environmental and
asbestos claims and related litigation; the Company's ability to distribute its
products through distribution channels, both current and future; the uncertain
effects of emerging claim and coverage issues; the effect of assessments and
other surcharges for guaranty funds and second-injury funds and other mandatory
pooling arrangements; a downgrade in the Company's claims-paying, financial
strength or credit ratings; the ability of the Company's subsidiaries to pay
dividends to the Company; and other factors described in such forward-looking
statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Consolidated Results of Operations: Operating Summary 14
Life 16
Investment Products 17
Individual Life 18
Group Benefits 18
Corporate Owned Life Insurance ("COLI") 19
Property & Casualty 19
Business Insurance 19
Personal Lines 20
Specialty Commercial 20
Reinsurance 20
Other Operations 21
Environmental and Asbestos Claims 21
Investments 22
Capital Markets Risk Management 24
Capital Resources and Liquidity 26
Regulatory Matters and Contingencies 27
Accounting Standards 27
- --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
- --------------------------------------------------------------------------------
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 3,900 $ 3,722
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 292 $ 240
Less: Cumulative effect of accounting change, net of tax [1] -- (23)
Net realized capital gains (losses), after-tax (1) 10
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 293 $ 253
====================================================================================================================================
<FN>
[1] Represents the cumulative impact of the Company's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos.
137 and 138.
</FN>
"Operating income" is defined as after-tax operational results excluding, as
applicable, net realized capital gains or losses, the cumulative effect of
accounting changes and certain other items. Management believes that this
performance measure delineates the results of operations of the Company's
ongoing businesses in a manner that allows for a better understanding of the
underlying trends in the Company's current business. However, operating income
should only be analyzed in conjunction with, and not in lieu of, net income and
may not be comparable to other performance measures used by the Company's
competitors.
OPERATING RESULTS
Operating income increased $40, or 16%, for the first quarter ended March 31,
2002, from the comparable prior year period.
- 14 -
The increase was due primarily to earnings growth in both Property & Casualty
and Life operations. Property & Casualty's increase was led by strong pricing in
Business Insurance and Specialty Commercial and the positive impact of
underwriting initiatives in the Reinsurance segment. Contributing to the Life
increase was strong growth in the Individual Life and Group Benefits segments.
Also contributing to the earnings growth was the implementation of SFAS No. 142,
"Goodwill and Other Intangible Assets," which eliminates the amortization of
goodwill and other intangibles with indefinite useful lives. Goodwill
amortization was $10, after-tax, for the quarter ended March 31, 2001. (For
further discussion of the Company's goodwill, see Note 2 of Notes to
Consolidated Financial Statements.)
First quarter 2002 operating income includes $11 of after-tax expense at
Hartford Life, Inc. ("HLI") related to litigation with Bancorp Services, LLC
("Bancorp"), partially offset by an $8 after-tax benefit related to the
reduction of HLI's reserves associated with the September 11 terrorist attack.
(For further discussion of the Bancorp litigation, see Note 5(a) of Notes to
Consolidated Financial Statements.)
Revenues for the first quarter ended March 31, 2002 increased $178, or 5%, over
the comparable prior year period, primarily as a result of increased fee income
in Individual Life, reflecting the April 2001 acquisition of the United States
individual life insurance, annuity and mutual fund businesses of Fortis, Inc.
(operating as "Fortis" or "Fortis Financial Group"), as well as double-digit
earned premium growth in the Business Insurance segment. These increases were
partially offset by a decrease in Reinsurance revenues driven by the planned
exit of nearly all international lines and a significant first quarter 2001
Alternative Risk Transfer ("ART") transaction.
SIGNIFICANT ACCOUNTING POLICIES
For information on the Company's significant accounting policies, see the
Deferred Acquisition Costs, Reserves and Investments sections of the MD&A and
Note 1 of Notes to Consolidated Financial Statements, both included in The
Hartford's 2001 Form 10-K Annual Report.
INCOME TAXES
The effective tax rate for the first quarter ended March 31, 2002 was 21%
compared with 18% for the comparable period in 2001. The 2001 effective tax rate
included a tax benefit on the loss from the sale of Hartford Seguros. Tax-exempt
interest earned on invested assets and, for 2001, the tax benefit on the sale of
Hartford Seguros, were the principal causes of the effective tax rates being
lower than the 35% U.S. statutory rate.
SEGMENT RESULTS
The Hartford is organized into two major operations: Life and Property &
Casualty. Within these operations, The Hartford conducts business principally in
nine operating segments. Additionally, all activities related to The HLI
Repurchase in June 2000 and the minority interest in HLI for pre-acquisition
periods are included in Corporate.
Life is organized into four reportable operating segments: Investment Products,
Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI").
Life also includes in an Other category its international operations, which are
primarily located in Latin America and Japan, as well as corporate items not
directly allocable to any of its reportable operating segments, principally
interest expense.
In January 2002, Property & Casualty integrated its Affinity Personal Lines and
Personal Insurance segments, now reported as Personal Lines. As a result,
Property & Casualty is now organized into five reportable operating segments,
the North American underwriting segments of Business Insurance, Personal Lines,
Specialty Commercial and Reinsurance; and the Other Operations segment.
The measure of profit or loss used by The Hartford's management in evaluating
performance is operating income, except for its North American underwriting
segments, which are evaluated by The Hartford's management primarily based upon
underwriting results. While not considered segments, the Company also reports
and evaluates operating income results for Life, Property & Casualty, and North
American, which includes the combined underwriting results of the North American
underwriting segments along with income and expense items not directly allocable
to these segments, such as net investment income. Property & Casualty includes
operating income for North American and the Other Operations segment.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided and capital contributions. Certain reinsurance stop loss agreements
exist between the segments which specify that one segment will reimburse another
for losses incurred in excess of a predetermined limit. Also, one segment may
purchase group annuity contracts from another to fund pension costs and claim
annuities to settle casualty claims. In addition, certain intersegment
transactions occur in Life. These transactions include interest income on
allocated surplus and the allocation of net realized capital gains and losses
through net invested income utilizing the duration of the segment's investment
portfolios.
The following is a summary of North American underwriting results by
underwriting segment within Property & Casualty. Underwriting results represent
premiums earned less incurred claims, claim adjustment expenses and underwriting
expenses.
UNDERWRITING RESULTS (BEFORE-TAX) FIRST QUARTER ENDED
MARCH 31,
---------------------------
North American 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Business Insurance $ 4 $ (23)
Personal Lines (11) 16
Specialty Commercial (10) (14)
Reinsurance (4) (25)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (21) $ (46)
====================================================================================================================================
- 15 -
The following is a summary of operating income and net income.
OPERATING INCOME FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 117 $ 111
Individual Life 31 20
Group Benefits 28 23
COLI -- 9
Other 1 (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Life 177 161
Property & Casualty
North American 122 107
Other Operations -- 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 122 108
Corporate (6) (16)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 293 $ 253
==================================================================================================================================
NET INCOME FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 117 $ 111
Individual Life 31 20
Group Benefits 28 23
COLI -- 9
Other (6) (25)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Life 170 138
Property & Casualty
North American 127 115
Other Operations 1 3
- ----------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 128 118
Corporate (6) (16)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET INCOME $ 292 $ 240
==================================================================================================================================
An analysis of the operating results summarized above is included on the
following pages. Environmental and Asbestos Claims and Investments are discussed
in separate sections.
- --------------------------------------------------------------------------------
LIFE
- --------------------------------------------------------------------------------
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
--------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 1,676 $ 1,590
Expenses 1,506 1,429
Cumulative effect of accounting change, net of tax [1] -- (23)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 170 138
Less: Cumulative effect of accounting change, net of tax [1] -- (23)
Net realized capital losses, after-tax (7) --
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 177 $ 161
====================================================================================================================================
<FN>
[1] For the first quarter ended March 31, 2001, represents the cumulative
impact of the Company's adoption of SFAS No. 133.
</FN>
Life has the following reportable operating segments: Investment Products,
Individual Life, Group Benefits and COLI. In addition, Life reports corporate
items not directly allocable to any of its segments, principally interest
expense, as well as its international operations in "Other".
On April 2, 2001, The Hartford acquired the U.S. individual life insurance,
annuity and mutual fund businesses of Fortis. (For further discussion, see Note
18(a) of Notes to Consolidated Financial Statements included in The Hartford's
December 31, 2001 Form 10-K Annual Report.)
- 16 -
Revenues in the Life operation increased $86, or 5%, as a result of growth
across its primary operating segments, particularly the Individual Life segment
where revenues grew $69, or 42%, to $232 for the first quarter ended March 31,
2002, primarily due to the acquisition of Fortis. Revenue in the Investment
Products segment grew $46, or 8%, to $650 for the first quarter ended March 31,
2002. The increase was primarily attributable to increased asset levels related
to mutual funds and institutional investment products. Revenues within Group
Benefits, excluding buyouts, were $644 for the first quarter ended March 31,
2002, an increase of $63, or 11%, over the comparable prior year period. The
revenue increase was attributable to higher earned premiums as a result of
strong sales and solid persistency. The increases in revenue were partially
offset by a decrease in COLI revenue of $24, or 13%, as compared to the first
quarter ended March 31, 2001, primarily as a result of decreased net investment
income as leveraged COLI account values declined $702, or 14%, as compared to a
year ago.
Expenses increased $77, or 5%, directly related to the revenue growth described
above. Expenses for the first quarter ended March 31, 2002 include $11,
after-tax, of accrued expenses recorded in connection with Bancorp litigation
within the COLI segment. The litigation expense accrual was partially offset by
an after-tax benefit of $8 recorded within Other, associated with favorable
development related to the Company's estimated September 11 exposure.
Operating income increased $16, or 10%, as Life's three primary reportable
operating segments experienced earnings growth, led by Individual Life whose
earnings increased $11, or 55%, to $31 for the first quarter ended March 31,
2002. The increase in operating income in the Individual Life segment was
primarily the result of the Fortis acquisition and was partially offset by
unfavorable mortality experience in the first quarter 2002. Earnings for the
Investment Products segment were $117 for the first quarter ended March 31,
2002, an increase of $6, or 5%. The increase in earnings was primarily due to
growth in the mutual funds and institutional investment products businesses.
This was partially offset by individual annuity earnings, which declined
slightly to $90, as compared to $91 in the same prior year period. The decrease
was primarily related to the decline in the equity markets. Group Benefits
operating income was $28 and $23 for the first quarter ended March 31, 2002 and
2001, respectively, an increase of $5, or 22%, driven principally by ongoing
premium growth and an improved loss ratio (defined as benefits and claims as a
percentage of premiums and other considerations excluding buyouts). The increase
in operating income was partially offset by a decrease of $9 in operating income
in the COLI segment, primarily due to the $11 after-tax expense related to the
Bancorp litigation. As mentioned above, Life operating income was positively
impacted by an $8 benefit related to favorable development on the Company's
estimated September 11 exposure.
- --------------------------------------------------------------------------------
INVESTMENT PRODUCTS
- --------------------------------------------------------------------------------
FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 650 $ 604
Expenses 533 493
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 117 $ 111
================================================================================================================================
Individual variable annuity account values $ 75,044 $ 70,649
Other individual annuity account values 10,080 8,926
Other investment products account values 19,894 16,994
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 105,018 96,569
Mutual fund assets under management 17,695 11,271
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 122,713 $ 107,840
================================================================================================================================
Revenues in the Investment Products segment increased $46, or 8%, primarily due
to higher net investment income and fee income related to other investment
products which was partially offset by lower fee income in individual annuity.
Fee income generated by individual annuities decreased $12, or 4%, as average
account values decreased from prior year levels, primarily due to the lower
equity markets. Net investment income related to other investment products was
$186 for the first quarter ended March 31, 2002, an increase of $25, or 16%.
This increase was primarily due to growth in the institutional investment
business, where related assets under management increased $1.5 billion, or 19%,
to $9.3 billion as of March 31, 2002. Fee income from other investment products
was $100 as of March 31, 2002, an increase of $23, or 30%, principally driven by
the Company's retail mutual fund business. Mutual fund assets under management
increased $6.4 billion, or 57%, from a year ago. This substantial increase was
primarily due to strong sales of retail mutual funds over the last twelve months
and the addition of the mutual fund business acquired from Fortis.
Expenses increased $40, or 8%, primarily driven by increases in benefits and
claim expenses and operating expenses as a result of the growth in the other
investment products businesses. Interest credited to policyholders related to
other investment products increased $13, or 10%, to $138 for the first quarter
ended March 31, 2002 primarily related to the growth in the institutional
investment business. Additionally, insurance expenses and other related to other
investment products was $107 for the first quarter ended March 31, 2002, an
increase of $23, or 27%, as compared to the same period in 2001. Partially
offsetting these increases was a $10, or 9%, decrease in amortization of policy
acquisition costs in the individual annuity operation which declined as a result
of lower estimated gross profits driven by the decrease in fee income.
- 17 -
Operating income increased $6, or 5%, driven by the growth in revenues in the
other investment products businesses and the lower effective tax rate in the
individual annuity operation driven primarily by separate account investment
activity.
- --------------------------------------------------------------------------------
INDIVIDUAL LIFE
- --------------------------------------------------------------------------------
FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 232 $ 163
Expenses 201 143
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 31 $ 20
- -----------------------------------------------------------------------------------------------------------------------------
Variable life account values $ 4,119 $ 2,755
Total account values $ 7,983 $ 5,681
- -----------------------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 63,288 $ 35,734
Total life insurance in force $ 121,935 $ 77,070
=============================================================================================================================
Revenues in the Individual Life segment increased $69, or 42%, resulting
primarily from higher fee and investment income due to the acquisition of
Fortis. Fee income was $167 and $115 for the first quarter ended March 31, 2002
and 2001, respectively, an increase of $52, or 45%, as account values increased
$2.3 billion, or 41%, and life insurance in force increased $44.9 billion, or
58%. Additionally, net investment income increased $17, or 37%, as general
account assets increased $1.1 billion, or 42%, to $3.6 billion as of March 31,
2002.
Expenses increased $58, or 41%, principally due to increases in benefits, claims
and claim adjustment expenses and operating expenses. Although the increase in
these expenses was primarily driven by the growth in the business resulting from
the Fortis acquisition, mortality experience (expressed as death claims as a
percentage of net amount at risk) for the first quarter of 2002 was higher than
the comparable prior year period primarily due to a higher than expected
occurrence of large claims.
Operating income increased $11, or 55%, as the contribution to earnings from the
Fortis acquisition more than offset the unfavorable mortality experience.
- --------------------------------------------------------------------------------
GROUP BENEFITS
- --------------------------------------------------------------------------------
FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 644 $ 613
Expenses 616 590
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 28 $ 23
=============================================================================================================================
Revenues in the Group Benefits segment increased $31, or 5%, and excluding
buyouts, increased $63, or 11%. Growth in fully insured ongoing premiums, which
were $577 for the first quarter ended March 31, 2002, an increase of $61, or
12%, over the same period in 2001, primarily drove this increase. The growth in
premium revenues was due to solid persistency of the in-force block of business
and strong sales to new customers. Fully insured ongoing sales for the first
quarter of 2002 were $354, a $120, or 51%, increase over the same prior year
period.
Expenses increased $26, or 4%, and excluding buyouts, increased $58, or 10%. The
increase in expenses is primarily driven by the growth in revenues described
above. Benefits and claims expenses, excluding buyouts, were $474 for the first
quarter ended March 31, 2002, an increase of $38, or 9%. The segment's loss
ratio (defined as benefits and claims as a percentage of premiums and other
considerations excluding buyouts) was approximately 81.4% for the first quarter
ended March 31, 2002, as compared to 83.7% for the comparable prior year period.
Other insurance expenses were $135 for the first quarter 2002, an increase of
$19, or 16%, due to the revenue growth previously described and continued
investment in the service operations of this segment. The segment's expense
ratio (defined as insurance expenses as a percentage of premiums and other
considerations excluding buyouts) was 23.2% for the first quarter ended March
31, 2002, compared to 22.3% for the comparable period.
Operating income increased $5, or 22%, as higher earned premium and favorable
loss costs more than offset the increase in other insurance expenses.
- 18 -
- --------------------------------------------------------------------------------
CORPORATE OWNED LIFE INSURANCE (COLI)
- --------------------------------------------------------------------------------
FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 160 $ 184
Expenses 160 175
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ - $ 9
- ---------------------------------------------------------------------------------------------------------------------------
Variable COLI account values $ 18,764 $ 16,207
Leveraged COLI account values 4,293 4,995
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 23,057 $ 21,202
===========================================================================================================================
COLI revenues decreased $24, or 13%, mostly due to lower net investment and fee
income. Net investment income was $76 and $94 for the first quarter ended March
31, 2002 and 2001, respectively, a decrease of $18, or 19%. The decrease was
primarily related to the decline in leveraged COLI account values, which
decreased $702, or 14%.
Expenses decreased $15, or 9%, consistent with the decrease in revenues
described above. However, the decrease was partially offset by $11, after-tax,
in expenses accrued in connection with litigation costs related to the Bancorp
dispute. Operating income decreased $9, or 100%, primarily related to amounts
accrued in connection with the Bancorp litigation.
- --------------------------------------------------------------------------------
PROPERTY & CASUALTY
- --------------------------------------------------------------------------------
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 2,220 $ 2,128
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 128 $ 118
Net realized capital gains, after-tax 6 10
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 122 $ 108
===========================================================================================================================
Revenues for Property & Casualty increased $92, or 4%, for the first quarter
ended March 31, 2002 compared with the first quarter of 2001. The increase was
due primarily to earned premium growth in the Business Insurance and Personal
Lines segments as a result of price increases, new business growth and strong
renewal retention. Partially offsetting this increase were lower revenues as a
result of the sale of the Company's ongoing international property and casualty
businesses and lower earned premiums in the Reinsurance segment, primarily due
to a significant first quarter 2001 transaction in ART.
Operating income increased $14, or 13%, for the first quarter compared to the
same prior year period due to strong earned pricing in the Business Insurance
and Specialty Commercial segments, the impact of underwriting initiatives in
Reinsurance and lower catastrophes. Partially offsetting this increase were
higher automobile losses in the Personal Lines segment.
- --------------------------------------------------------------------------------
BUSINESS INSURANCE
- --------------------------------------------------------------------------------
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Written premiums $ 825 $ 702
- ---------------------------------------------------------------------------------------------------------------------------
Underwriting results $ 4 $ (23)
Combined ratio 96.1 101.2
===========================================================================================================================
Business Insurance written premiums increased $123, or 18%, over the comparable
prior year period driven by strong growth in small commercial and middle market.
Small commercial increased $57, or 16%, reflecting price increases, strong
renewal retention and the success of product, marketing, technology and service
growth initiatives. The increase in middle market of $66, or 19%, was due
primarily to double-digit price increases as well as strong new business growth
and renewal retention.
Underwriting results increased $27, with a corresponding 5.1 point decrease in
the combined ratio, for the first quarter as compared with the same prior year
period. The improvement was primarily due to favorable market conditions, as
well as an improved expense ratio. The loss ratio improved 2.9 points as a
result of double-digit earned pricing and minimal loss costs.
- 19 -
- --------------------------------------------------------------------------------
PERSONAL LINES
- --------------------------------------------------------------------------------
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Written premiums $ 726 $ 662
- ---------------------------------------------------------------------------------------------------------------------------
Underwriting results $ (11) $ 16
Combined ratio 101.7 98.1
===========================================================================================================================
Written premiums increased $64, or 10%, for the first quarter of 2002 over the
comparable prior year period driven by growth in the AARP program and
non-standard business. AARP increased $55, or 15%, primarily from strong new
business growth and continued steady premium renewal retention. Non-Standard
increased $10, or 17%, as a result of double-digit price increases.
Underwriting results decreased $27, with a corresponding 3.6 point increase in
the combined ratio, for the first quarter of 2002 as compared with the same
prior year period. Higher automobile losses adversely impacted underwriting
results and the combined ratio. The losses were primarily due to an increase in
severity as a result of medical inflation and higher repair costs, and bodily
injury frequency loss costs. In addition, higher losses and increased litigation
costs resulted in a 1.0 point increase in the loss adjustment expense ratio.
- --------------------------------------------------------------------------------
SPECIALTY COMMERCIAL
- --------------------------------------------------------------------------------
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Written premiums $ 300 $ 254
- ---------------------------------------------------------------------------------------------------------------------------
Underwriting results $ (10) $ (14)
Combined ratio 100.7 107.2
===========================================================================================================================
Specialty Commercial written premiums increased $46, or 18%, from the comparable
prior year period driven by the property and professional liability lines of
business. Written premiums for property grew $43, or 90%, due primarily to
significant price increases reflecting an improving business environment.
Professional liability written premiums grew $12, or 39%, also due to
significant price increases as well as lower premium cessions.
Underwriting results improved $4, or 29%, while the combined ratio decreased 6.5
points, for the first quarter as compared with the same prior year period.
Improved underwriting and combined ratio results were primarily due to favorable
property results, partially offset by deterioration in risk management business.
In addition, catastrophes were significantly lower in the first quarter of 2002
as a result of the Seattle earthquake in the first quarter of 2001.
- --------------------------------------------------------------------------------
REINSURANCE
- --------------------------------------------------------------------------------
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Written premiums $ 214 $ 363
- ---------------------------------------------------------------------------------------------------------------------------
Underwriting results $ (4) $ (25)
Combined ratio 100.9 109.5
===========================================================================================================================
Reinsurance written premiums decreased $149, or 41%, due to decreases in both
traditional reinsurance and ART written premiums. Traditional reinsurance
written premiums decreased $80, or 35%, due primarily to the planned exit from
nearly all international lines. ART written premiums decreased $69, or 51%,
primarily as a result of a significant transaction in the first quarter of 2001.
Excluding ART and international, written premiums declined 14% due primarily to
underwriting discipline to maintain profitability targets, partially offset by
the achievement of significant price increases due to continued market firming.
Underwriting results improved $21 with a corresponding 8.6 point decrease in the
combined ratio for the first quarter of 2002 as compared with the same prior
year period. The improvement was primarily due to underwriting initiatives
including a shift to excess of loss policies and increased property business
mix, as well as an intense focus on returns. In addition, first quarter 2002
catastrophes were significantly lower than the same prior year period.
- 20 -
- --------------------------------------------------------------------------------
OTHER OPERATIONS
- --------------------------------------------------------------------------------
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 56 $ 54
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1 $ 3
Less: Net realized capital gains, after-tax 1 2
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ -- $ 1
===========================================================================================================================
The Other Operations segment consists of property and casualty operations of The
Hartford which have discontinued writing new business. Operating income
decreased $1 for the first quarter ended March 31, 2002 compared with the first
quarter ended March 31, 2001. Revenues increased $2, or 4%, primarily due to the
movement of nearly all international reinsurance lines from the Reinsurance
segment to the Other Operations segment. Partially offsetting this increase was
a decrease in revenue as a result of the sales of Hartford Seguros and Hartford
Insurance Company (Singapore), Ltd.
- --------------------------------------------------------------------------------
ENVIRONMENTAL AND ASBESTOS CLAIMS
- --------------------------------------------------------------------------------
The Hartford continues to receive claims that assert damages from environmental
exposures and for injuries from asbestos and asbestos-related products, both of
which affect the Property & Casualty operation. Environmental claims relate
primarily to pollution and related clean-up costs. With regard to these claims,
uncertainty exists which impacts the ability of insurers and reinsurers to
estimate the ultimate reserves for unpaid losses and related settlement
expenses. The Hartford finds that conventional reserving techniques cannot
estimate the ultimate cost of these claims because of inadequate development
patterns and inconsistent emerging legal doctrine. The majority of environmental
claims and many types of asbestos claims differ from any other type of
contractual claims because there is almost no agreement or consistent precedent
to determine what, if any, coverage exists or which, if any, policy years and
insurers or reinsurers may be liable. Further uncertainty arises with
environmental claims since claims are often made under policies, the existence
of which may be in dispute, the terms of which may have changed over many years,
which may or may not provide for legal defense costs, and which may or may not
contain environmental exclusion clauses that may be absolute or allow for
fortuitous events. Courts in different jurisdictions have reached disparate
conclusions on similar issues and in certain situations have broadened the
interpretation of policy coverage and liability issues. In light of the
extensive claim settlement process for environmental and asbestos claims, which
involves comprehensive fact gathering, subject matter expertise and intensive
litigation, The Hartford established an environmental claims facility in 1992 to
defend itself aggressively against unwarranted claims and to minimize costs.
Within the property and casualty insurance industry in the mid-1990s, progress
was made in developing sophisticated, alternative methodologies utilizing
company experience and supplemental databases to assess environmental and
asbestos liabilities. Consistent with The Hartford's practice of using the best
techniques to estimate the Company's environmental and asbestos exposures, a
study was initiated in April 1996 based on known cases. The Hartford, utilizing
internal staff supplemented by outside legal and actuarial consultants,
completed the study in October 1996.
The study included a review of identified environmental and asbestos exposures
of North American Property & Casualty, along with the United States exposures of
The Hartford's Other Operations segment. The methodology utilized a ground-up
analysis of policy, site and exposure level data for a representative sample of
The Hartford's claims. The results of the evaluation were extrapolated against
the balance of the claim population to estimate the Company's overall exposure
for reported claims.
In addition to estimating liabilities on reported environmental and asbestos
claims, The Hartford estimated reserves for claims incurred but not reported.
The IBNR reserve was estimated using information on reporting patterns of known
insureds, characteristics of insureds such as limits exposed, attachment points
and number of coverage years involved, third party costs and closed claims.
Included in The Hartford's analysis of environmental and asbestos exposures was
a review of applicable reinsurance coverage. Reinsurance coverage applicable to
the sample was used to estimate the reinsurance coverage that applied to the
balance of the reported environmental and asbestos claims and to the IBNR
estimates.
An international actuarial firm reviewed The Hartford's approach and concluded
that the way the Company studied its exposures, the thoroughness of its analysis
and the way The Hartford came to its estimates were reasonable and
comprehensive. The Company believes that its methodology continues to be
reasonable and comprehensive.
Reserve activity for both reported and unreported environmental and asbestos
claims, including reserves for legal defense costs, for the first quarter ended
March 31, 2002 and the year ended December 31, 2001, was as follows (net of
reinsurance):
- 21 -
ENVIRONMENTAL AND ASBESTOS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
- ------------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER ENDED YEAR ENDED
MARCH 31, 2002 DECEMBER 31, 2001
--------------------------------------------------------------------------------
Environmental Asbestos Total Environmental Asbestos Total
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning liability $ 654 $ 616 $ 1,270 $ 911 $ 572 $ 1,483
Claims and claim adjustment expenses incurred (7) 5 (2) 15 28 43
Claims and claim adjustment expenses paid (24) (13) (37) (172) (84) (256)
Other [1] -- -- -- (100) 100 --
- ------------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY [2] $ 623 $ 608 $ 1,231 $ 654 $ 616 $ 1,270
====================================================================================================================================
<FN>
[1] 2001 includes a $100 reclassification from environmental to asbestos.
[2] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,247 and $1,282 for March 31, 2002 and December 31, 2001,
respectively. Gross of reinsurance as of March 31, 2002 and December 31,
2001, reserves for environmental and asbestos were $880 and $1,598 and
$919 and $1,633, respectively.
</FN>
The Hartford believes that the environmental and asbestos reserves, reported at
March 31, 2002, 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.
On May 14, 2002, The Hartford announced its participation in a settlement in
principle by its insured, PPG Industries, of litigation arising from asbestos
exposures. (For additional information, see Note 5(d) of Notes to Consolidated
Financial Statements.)
- --------------------------------------------------------------------------------
INVESTMENTS
- --------------------------------------------------------------------------------
Return on invested assets is an important element of The Hartford's financial
results. Significant fluctuations in the fixed income or equity markets could
weaken the Company's financial condition or its results of operations.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, fixed maturity investments, which comprised approximately 86% of the
fair value of its invested assets as of March 31, 2002 and December 31, 2001.
Other events beyond the Company's control could also adversely impact the fair
value of these investments. Specifically, a downgrade of an issuer's credit
rating or default of payment by an issuer could reduce the Company's investment
return.
A significant decrease in the fair value of any investment that is deemed other
than temporary could result in the Company's recognition of a loss in its
financial results prior to the actual sale of the investment.
The Hartford's investment portfolios are divided between Life and Property &
Casualty. The investment portfolios are 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.)
Please refer to the Investments section of the MD&A in The Hartford's 2001 Form
10-K Annual Report for a description of the Company's investment objectives and
policies.
LIFE
The following table identifies invested assets by type held in the Life general
account as of March 31, 2002 and December 31, 2001.
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001
AMOUNT PERCENT AMOUNT PERCENT
-----------------------------------------------------------
Fixed maturities, at fair value $ 23,558 82.4% $ 23,301 82.1%
Equity securities, at fair value 412 1.4% 428 1.5%
Policy loans, at outstanding balance 3,288 11.5% 3,317 11.7%
Limited partnerships, at fair value 862 3.0% 811 2.9%
Other investments 484 1.7% 520 1.8%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 28,604 100.0% $ 28,377 100.0%
====================================================================================================================================
Fixed maturity investments increased slightly since December 31, 2001, as
increased operating cash flows were partially offset by decreases in fair value.
- 22 -
The following table identifies fixed maturities by type held in the Life general
account as of March 31, 2002 and December 31, 2001.
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
Corporate $ 11,472 48.7% $ 11,419 49.0%
Asset-backed securities (ABS) 3,476 14.8% 3,427 14.7%
Commercial mortgage-backed securities (CMBS) 3,047 12.9% 3,029 13.0%
Municipal - tax-exempt 1,644 7.0% 1,565 6.7%
Mortgage-backed securities (MBS) - agency 1,217 5.2% 981 4.2%
Collateralized mortgage obligations (CMO) 671 2.8% 767 3.3%
Government/Government agencies - Foreign 397 1.7% 390 1.7%
Government/Government agencies - United States 325 1.4% 374 1.6%
Municipal - taxable 45 0.2% 47 0.2%
Short-term 1,208 5.1% 1,245 5.3%
Redeemable preferred stock 56 0.2% 57 0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 23,558 100.0% $ 23,301 100.0%
====================================================================================================================================
INVESTMENT RESULTS
The table below summarizes Life's results.
FIRST QUARTER ENDED
MARCH 31,
--------------------------
(before-tax) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 381 $ 352
Policy loan income 67 78
---------------------------
Net investment income - total $ 448 $ 430
Yield on average invested assets [1] 6.3% 7.2%
Net realized capital losses $ (15) $ --
====================================================================================================================================
<FN>
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed
maturities at amortized cost).
</FN>
For the first quarter ended March 31, 2002, net investment income, excluding
policy loans, increased $29, or 8%, compared to the same period in 2001. The
increase was primarily due to income earned on a higher invested asset base
partially offset by lower investment yields. Invested assets increased 14% from
March 31, 2001 primarily due to the Fortis acquisition. Yields on average
invested assets decreased as a result of lower rates on new investment purchases
and decreased policy loan income.
Net realized capital losses for the first quarter ended March 31, 2002 increased
by $15 compared to the same period in 2001. Included in 2002 net realized
capital losses were write-downs for other than temporary impairments on fixed
maturities of $15.
PROPERTY & CASUALTY
The following table identifies invested assets by type as of March 31, 2002 and
December 31, 2001.
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001
AMOUNT PERCENT AMOUNT PERCENT
--------------------------------------------------------
Fixed maturities, at fair value $ 16,786 91.0% $ 16,742 91.5%
Equity securities, at fair value 897 4.9% 921 5.0%
Limited partnerships, at fair value 643 3.4% 561 3.0%
Other investments 127 0.7% 85 0.5%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 18,453 100.0% $ 18,309 100.0%
====================================================================================================================================
- 23 -
Total fixed maturities remained essentially flat since December 31, 2001.
The following table identifies fixed maturities by type as of March 31, 2002 and
December 31, 2001.
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001
FAIR VALUE PERCENT FAIR VALUE PERCENT
--------------------------------------------------------
Municipal - tax-exempt $ 8,444 50.3% $ 8,401 50.2%
Corporate 4,286 25.5% 4,179 25.0%
Commercial mortgage-backed securities (CMBS) 1,123 6.7% 1,145 6.8%
Asset-backed securities (ABS) 700 4.2% 717 4.3%
Government/Government agencies - Foreign 624 3.7% 613 3.6%
Mortgage-backed securities (MBS) - agency 300 1.8% 381 2.3%
Collateralized mortgage obligations (CMO) 82 0.5% 97 0.6%
Government/Government agencies - United States 71 0.4% 201 1.2%
Municipal - taxable 47 0.3% 47 0.3%
Short-term 1,011 6.0% 862 5.1%
Redeemable preferred stock 98 0.6% 99 0.6%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,786 100.0% $ 16,742 100.0%
====================================================================================================================================
INVESTMENT RESULTS
The table below summarizes Property & Casualty's results.
FIRST QUARTER ENDED
MARCH 31,
--------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income, before-tax $ 254 $ 257
Net investment income, after-tax [1] $ 199 $ 201
---------------------------
Yield on average invested assets, before-tax [2] 5.7% 6.0%
Yield on average invested assets, after-tax [1] [2] 4.5% 4.7%
Net realized capital gains (losses), before-tax $ 8 $ 1
====================================================================================================================================
<FN>
[1] Due to the significant holdings in tax-exempt investments, after-tax net
investment income and after-tax yield are also included.
[2] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed
maturities at amortized cost).
</FN>
For the first quarter ended March 31, 2002, both before- and after-tax net
investment income decreased by 1% compared to the same period in 2001. The
decrease in net investment income was primarily due to a reduction in investment
income resulting from the sale of Hartford Seguros partially offset by an
increase in limited partnership income. Yields on average invested assets
declined due to the lower interest rate environment.
Net realized capital gains for the first quarter ended March 31, 2002 increased
$7 compared to the same period in 2001. Included in the first quarter ended
March 31, 2002 were net realized capital gains on sales of equity securities,
partially offset by write-downs for other than temporary impairments on fixed
maturities of $19 and equities of $8. Net realized capital gains for the first
quarter ended March 31, 2001 included a $16, after-tax, capital loss generated
from the sale of Hartford Seguros offset by gains from the sales of fixed
maturities and equities.
CORPORATE
In connection with The HLI Repurchase, the carrying value of the purchased fixed
maturity 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 investments' carrying values is reported in
Corporate's net investment income. The total amount of amortization for the
quarters ended March 31, 2002 and 2001 was $4, before-tax. Also reported in
Corporate were $2 of fixed maturity investments for 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 Life and Property &
Casualty operations. Derivative instruments are utilized in compliance with
established Company policy and regulatory requirements and are monitored
internally and reviewed by senior management.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or 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.
- 24 -
Please refer to the Capital Markets Risk Management section of the MD&A in The
Hartford's 2001 Form 10-K Annual Report for a description of the Company's
objectives, policies and strategies.
CREDIT RISK
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 or counterparty.
Creditworthiness of specific obligors is determined by an internal credit
assessment and ratings assigned by nationally recognized ratings agencies.
Obligor, asset sector and industry concentrations are subject to established
limits and are monitored on a regular interval. The Hartford is not exposed to
any significant credit concentration risk of a single issuer.
The following tables identify fixed maturity securities for Life, including
guaranteed separate accounts, and Property & Casualty, by credit quality. The
ratings referenced in the tables are based on the ratings of a nationally
recognized rating organization or, if not rated, assigned based on the Company's
internal analysis of such securities.
LIFE
As of March 31, 2002 and December 31, 2001, 96% of the fixed maturity portfolio
was invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
United States Government/Government agencies $ 2,790 8.3% $ 2,639 8.0%
AAA 5,053 15.0% 5,070 15.3%
AA 3,729 11.0% 3,644 11.0%
A 11,497 34.0% 11,528 34.8%
BBB 8,255 24.4% 7,644 23.1%
BB & below 1,356 4.0% 1,148 3.4%
Short-term 1,131 3.3% 1,470 4.4%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 33,811 100.0% $ 33,143 100.0%
====================================================================================================================================
PROPERTY & CASUALTY
As of March 31, 2002 and December 31, 2001, over 94% of the fixed maturity
portfolio was invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
United States Government/Government agencies $ 422 2.5% $ 639 3.8%
AAA 6,188 36.9% 6,160 36.8%
AA 3,146 18.7% 3,126 18.7%
A 3,078 18.3% 3,193 19.1%
BBB 2,011 12.0% 1,876 11.2%
BB & below 930 5.6% 886 5.3%
Short-term 1,011 6.0% 862 5.1%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,786 100.0% $ 16,742 100.0%
====================================================================================================================================
MARKET RISK
The Hartford has material exposure to both interest rate and equity market risk.
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.
There have been no material changes in market risk exposures from December 31,
2001.
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. (For further discussion on The
Hartford's use of derivative instruments, refer to Note 3 of Notes to
Consolidated Financial Statements.)
- 25 -
- --------------------------------------------------------------------------------
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 consists of debt and equity
summarized as follows:
MARCH 31, 2002 DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term debt $ 615 $ 599
Long-term debt 1,965 1,965
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures (trust preferred securities) 1,425 1,412
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 4,005 $ 3,976
-----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities and other, net of tax [1] $ 8,622 $ 8,344
Unrealized gain on securities and other, net of tax [1] 417 669
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 9,039 $ 9,013
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 12,627 $ 12,320
-----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 46% 48%
Debt to capitalization [2] [3] 32% 32%
====================================================================================================================================
<FN>
[1] Other represents the net gain on cash-flow hedging instruments as a result
of the Company's adoption of SFAS No. 133.
[2] Excludes unrealized gain on securities and other, net of tax.
[3] Excluding trust preferred securities, the debt to equity ratio was 30% and
31% and the debt to capitalization ratio was 20% and 21% as of March 31,
2002 and December 31, 2001, respectively.
</FN>
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
There have been no significant changes to The Hartford's contractual obligations
and commitments since December 31, 2001.
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain on securities and
other, net of tax, increased by $307 as of March 31, 2002 compared to December
31, 2001. This increase was a result of earnings and stock issued related to
stock compensation plans partially offset by dividends declared.
DEBT
In March 2002, the Company borrowed $16 of short-term commercial notes for
general corporate purposes.
STOCKHOLDERS' EQUITY
Increase in authorized shares - At the Company's annual meeting of shareholders
held on April 18, 2002, shareholders approved an amendment to Section (a)
Article Fourth of the Amended and Restated Certificate of Incorporation to
increase the aggregate authorized number of shares of common stock from 400
million to 750 million.
Dividends - On February 21, 2002, The Hartford declared a dividend on its common
stock of $0.26 per share payable on April 1, 2002 to shareholders of record as
of March 4, 2002.
CASH FLOWS
FIRST QUARTER ENDED
MARCH 31,
--------------------------
2002 2001
- ------------------------------------------------------------------
Cash provided by operating activities $ 387 $ 306
Cash used for investing activities $ (775) $ (1,899)
Cash provided by financing activities $ 386 $ 1,643
Cash - end of period $ 351 $ 277
- ------------------------------------------------------------------
The decrease in cash provided by financing activities was primarily the result
of the issuance of debt and equity related to the Fortis acquisition in 2001.
The decrease in cash used for investing activities was also related to the
Fortis acquisition, as funds were invested short-term until the transaction
closed in April 2001. Operating cash flows in both periods have been more than
adequate to meet liquidity requirements.
RATINGS
As a result of the September 11 terrorist attack and subsequent reviews by major
independent rating agencies, all insurance financial strength and debt ratings
of The Hartford were reaffirmed. However, negative outlooks were placed upon the
debt ratings of the Company by Moody's and the property and casualty financial
strength rating by Standard & Poor's. All other ratings were reaffirmed with
stable outlooks.
- 26 -
- --------------------------------------------------------------------------------
REGULATORY MATTERS AND CONTINGENCIES
- --------------------------------------------------------------------------------
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.
OTHER
For information on other contingencies, please refer to Note 5 of Notes to
Consolidated Financial Statements and The Hartford's 2001 Form 10-K Annual
Report, Note 15 of Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
For a discussion of accounting standards, see Note 1 of Notes to Consolidated
Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
- 27 -
PART II. OTHER INFORMATION
ITEM 1. 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, if any, 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.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company ("HLIC"), et al. in favor of Bancorp in the amount of $118.
The case involved claims of patent infringement, misappropriation of trade
secrets, and breach of contract against HLIC and its affiliate International
Corporate Marketing Group, Inc. ("ICMG"). The judge dismissed the patent
infringement claim on summary judgment. The jury's award was based on the last
two claims.
HLIC and ICMG have moved the district court for, inter alia, judgment as a
matter of law or a new trial, and intend to appeal the judgment if the district
court does not set it aside or substantially reduce it. In either event, the
Company's management, based on the opinion of its legal advisers, believes that
there is a substantial likelihood that the jury award will not survive at its
current amount. Based on the advice of legal counsel regarding the potential
outcome of this litigation, the Company recorded an $11 after-tax charge in the
first quarter of 2002 to increase litigation reserves associated with this
matter. Should HLIC and ICMG not succeed in eliminating or reducing the
judgment, a significant additional expense would be recorded in the future
related to this matter.
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 that 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
On April 18, 2002, The Hartford held its annual meeting of shareholders. The
following matters were considered and voted upon: (1) the election of twelve
directors to serve for a one year term, (2) amending the Company's Certificate
of Incorporation to increase the number of authorized shares of common stock;
and (3) a shareholder proposal regarding The Hartford's investment in tobacco
equities.
Set forth below is the vote tabulation relating to the three items presented to
the shareholders at the annual meeting:
(1) The shareholders elected each of the twelve nominees to the Board of
Directors for a one-year term:
Name of Director Nominees Shares For Shares Withheld
--------------------------------------------------------------
Rand V. Araskog 208,684,300 2,878,506
Ramani Ayer 209,106,336 2,456,470
Dina Dublon 142,693,518 68,869,288
Donald R. Frahm 204,883,156 6,679,650
Edward J. Kelly, III 209,108,089 2,454,717
Paul G. Kirk, Jr. 208,984,868 2,577,938
Thomas M. Marra 209,143,947 2,418,859
Robert W. Selander 209,116,261 2,446,545
Charles B. Strauss 209,112,040 2,450,766
H. Patrick Swygert 209,115,808 2,446,998
Gordon I. Ulmer 209,092,007 2,470,799
David K. Zwiener 209,136,524 2,426,282
--------------------------------------------------------------
(2) The shareholders approved the amendment to the Company's Certificate of
Incorporation:
Shares For: 190,371,714
Shares Against: 19,800,537
Shares Abstained: 1,390,555
(3) The shareholders defeated a shareholder proposal regarding The Hartford's
investment in tobacco equities:
Shares For: 8,562,284
Shares Against: 177,210,455
Shares Abstained: 4,025,331
Broker Non-Votes: 21,764,736
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K:
During the quarterly period ended March 31, 2002, the Company filed the
following Current Reports on Form 8-K:
o dated March 20, 2002, Item 5, Other Events, to report a verdict by a
jury in the U.S. District Court for the Eastern District of Missouri
in Bancorp Services, LLC v. Hartford Life Insurance Company, et al
in favor of Bancorp.
o dated March 26, 2002, Item 4, Change in Registrant's Certifying
Accountants, to report the dismissal of Arthur Andersen LLP as The
Hartford's independent public accountants.
o dated March 29, 2002, Item 4, Change in Registrant's Certifying
Accountants, amending The Hartford's Current Report on Form 8-K
dated March 26, 2002.
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SIGNATURE
Pursuant to the requirements 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.
(Registrant)
/s/ John N. Giamalis
------------------------------------------------
John N. Giamalis
Senior Vice President and Controller
MAY 15, 2002
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT #
---------
3.01 Amended and Restated Articles of Incorporation, effective May 21,
1998, as amended by Amendment No. 1, effective May 1, 2002, is filed
herewith.
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