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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 June 30, 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 July 31, 2002, there were outstanding 247,656,322 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
----
Independent Accountants' Review Report 3
Consolidated Statements of Income - Second Quarter and Six Months
Ended June 30, 2002 and 2001 4
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 5
Consolidated Statements of Changes in Stockholders' Equity - Six Months
Ended June 30, 2002 and 2001 6
Consolidated Statements of Cash Flows - Six Months Ended June 30,
2002 and 2001 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 33
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 34
Signature 35
- 2 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
The Hartford Financial Services Group, Inc.
Hartford, CT
We have reviewed the accompanying consolidated balance sheet of The Hartford
Financial Services Group, Inc. and subsidiaries (the "Company") as of June 30,
2002, and the related consolidated statements of income for the second quarter
and six months then ended, and changes in stockholders' equity, and cash flows
for the six months then ended. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial information as of December 31, 2001, and
for the second quarter and six months ended June 30, 2001, were not audited or
reviewed by us and, accordingly, we do not express an opinion or any other form
of assurance on them.
Deloitte & Touche LLP
Hartford, CT
August 12, 2002
- 3 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
(IN MILLIONS, EXCEPT FOR PER SHARE DATA) 2002 2001 2002 2001
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(Unaudited) (Unaudited)
REVENUES
Earned premiums $ 2,533 $ 2,357 $ 4,959 $ 4,667
Fee income 672 686 1,334 1,288
Net investment income 726 719 1,432 1,410
Other revenue 120 123 233 241
Net realized capital losses (166) (38) (173) (37)
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TOTAL REVENUES 3,885 3,847 7,785 7,569
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BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,375 2,338 4,631 4,549
Amortization of deferred policy acquisition costs and present value
of future profits 573 556 1,128 1,074
Insurance operating costs and expenses 560 470 1,094 948
Goodwill amortization -- 17 -- 28
Other expenses 177 171 364 354
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TOTAL BENEFITS, CLAIMS AND EXPENSES 3,685 3,552 7,217 6,953
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INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 200 295 568 616
Income tax expense 15 58 91 116
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INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 185 237 477 500
Cumulative effect of accounting change, net of tax -- (11) -- (34)
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NET INCOME $ 185 $ 226 $ 477 $ 466
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BASIC EARNINGS PER SHARE
Income before cumulative effect of accounting change $ 0.75 $ 1.00 $ 1.93 $ 2.13
Cumulative effect of accounting change, net of tax -- (0.05) -- (0.14)
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NET INCOME $ 0.75 $ 0.95 $ 1.93 $ 1.99
DILUTED EARNINGS PER SHARE
Income before cumulative effect of accounting change $ 0.74 $ 0.98 $ 1.91 $ 2.10
Cumulative effect of accounting change, net of tax -- (0.04) -- (0.15)
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NET INCOME $ 0.74 $ 0.94 $ 1.91 $ 1.95
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Weighted average common shares outstanding 247.4 237.3 246.7 234.4
Weighted average common shares outstanding and dilutive potential
common shares 250.7 241.3 250.2 238.4
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Cash dividends declared per share $ 0.26 $ 0.25 $ 0.52 $ 0.50
====================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 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 $41,729 and
$39,154) $ 42,984 $ 40,046
Equity securities, available for sale, at fair value (cost of $1,163 and $1,289) 1,154 1,349
Policy loans, at outstanding balance 3,204 3,317
Other investments 1,990 1,977
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Total investments 49,332 46,689
Cash 319 353
Premiums receivable and agents' balances 2,656 2,432
Reinsurance recoverables 5,167 5,162
Deferred policy acquisition costs and present value of future profits 6,722 6,420
Deferred income taxes 470 693
Goodwill 1,725 1,725
Other assets 3,069 3,044
Separate account assets 110,177 114,720
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TOTAL ASSETS $ 179,637 $ 181,238
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LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property & Casualty $ 16,761 $ 16,678
Life 9,170 8,819
Other policyholder funds and benefits payable 20,517 19,355
Unearned premiums 3,839 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 1,429 1,412
Other liabilities 5,508 5,241
Separate account liabilities 110,177 114,720
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169,981 172,225
COMMITMENTS AND CONTINGENCIES, (NOTE 5)
STOCKHOLDERS' EQUITY
Common stock - par value $0.01, 750,000,000 and 400,000,000 shares authorized,
250,517,210 and 248,477,367 shares issued 3 2
Additional paid-in capital 2,461 2,362
Retained earnings 6,501 6,152
Treasury stock, at cost - 2,941,340 shares (37) (37)
Accumulated other comprehensive income 728 534
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TOTAL STOCKHOLDERS' EQUITY 9,656 9,013
========================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 179,637 $ 181,238
========================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002 Accumulated Other Comprehensive Income (Loss)
-------------------------------------------------
Common Net Net Gain on Minimum
Stock/ Unrealized Cash-Flow Pension Outstanding
Additional Treasury Gain 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 477 477
Other comprehensive income
(loss), net of tax [1]
Unrealized gain on securities [2] 183 183
Cumulative translation
adjustments (3) (3)
Net gain on cash-flow hedging
instruments [3] 14 14
--------
Total other comprehensive income 194
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Total comprehensive income 671
--------
Issuance of shares under incentive
and stock purchase plans 83 83 2,040
Tax benefit on employee stock
options and awards 17 17
Dividends declared on common stock (128) (128)
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BALANCE, END OF PERIOD $2,464 $6,501 $(37) $789 $77 $(119) $(19) $9,656 247,576
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SIX MONTHS ENDED JUNE 30, 2001 Accumulated Other Comprehensive Income (Loss)
-------------------------------------------------
Common Net Net Gain on Minimum
Stock/ Unrealized Cash-Flow Pension Outstanding
Additional Treasury Gain 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 466 466
Other comprehensive income
(loss), net of tax [1]
Cumulative effect of
accounting change [4] (1) 24 23
Unrealized loss on securities [2] (49) (49)
Cumulative translation
adjustments (5) (5)
Net gain on cash-flow hedging
instruments [3] 3 3
--------
Total other comprehensive loss (28)
--------
Total comprehensive income 438
--------
Issuance of shares under incentive
and stock purchase plans 64 4 68 1,662
Issuance of common stock in
underwritten offering 169 446 615 10,000
Tax benefit on employee stock
options and awards 13 13
Dividends declared on common stock (119) (119)
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BALANCE, END OF PERIOD $1,934 $6,234 $(30) $447 $27 $(118) $(15) $8,479 237,952
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<FN>
[1] Unrealized gain (loss) on securities is net of tax expense (benefit) of $99
and $(26) for the six months ended June 30, 2002 and 2001, respectively. Net
gain on cash-flow hedging instruments is net of tax expense of $8 and $2 for
the six months ended June 30, 2002 and 2001, respectively. For the six
months ended June 30, 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 (losses) realized in net income
of $(104) and $33 for the six months ended June 30, 2002 and 2001,
respectively.
[3] Net of amortization adjustment of $2 and $3 to net investment income for the
six months ended June 30, 2002 and 2001, respectively.
[4] For the six months ended June 30, 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.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
- 6 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
----------------------------------
(IN MILLIONS) 2002 2001
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(Unaudited)
OPERATING ACTIVITIES
Net income $ 477 $ 466
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Change in receivables, payables and accruals (335) (143)
Change in reinsurance recoverables and other related assets 24 72
Amortization of deferred policy acquisition costs and present value of future profits 1,128 1,074
Additions to deferred policy acquisition costs and present value of future profits (1,430) (1,377)
Change in accrued and deferred income taxes 285 (60)
Increase in liabilities for future policy benefits, unpaid claims and claim adjustment
expenses and unearned premiums 820 708
Net realized capital losses 173 37
Depreciation and amortization 35 4
Cumulative effect of accounting change, net of tax -- 34
Other, net (63) (133)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,114 682
================================================================================================================================
INVESTING ACTIVITIES
Purchase of investments (8,368) (8,850)
Sale of investments 4,967 5,790
Maturity of investments 1,254 1,336
Purchase of business/affiliate -- (1,105)
Sale of affiliates 3 14
Additions to property, plant and equipment (90) (73)
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NET CASH USED FOR INVESTING ACTIVITIES (2,234) (2,888)
================================================================================================================================
FINANCING ACTIVITIES
Issuance of short-term debt 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 1,111 1,157
Dividends paid (128) (116)
Proceeds from issuance of shares under incentive and stock purchase plans 79 51
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,078 2,307
================================================================================================================================
Foreign exchange rate effect on cash 8 (4)
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Net (decrease) increase in cash (34) 97
Cash - beginning of period 353 227
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CASH - END OF PERIOD $ 319 $ 324
================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
------------------------------------------------
NET CASH (RECEIVED) PAID DURING THE PERIOD FOR:
Income taxes $ (185) $ 70
Interest $ 119 $ 99
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 7 -
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 of America for interim periods. Less
than majority-owned subsidiaries 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 consolidated 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 April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". Under historical 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. SFAS No. 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 SFAS No. 145
related to the rescission of SFAS No. 4 are applicable in fiscal years beginning
after May 15, 2002 and will be effective for The Hartford January 1, 2003.
Adoption of the provisions of SFAS No. 145 related to the rescission of SFAS No.
4 is not expected to have a material impact on the Company's consolidated
financial condition or results of operations. The provisions of SFAS No. 145
related to SFAS No. 13 are effective for transactions occurring after May 15,
2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13 did not
have a material impact on the Company's consolidated financial condition or
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for
long-lived assets to be disposed of by sale 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 SFAS No. 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 consolidated
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 consolidated
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
recoverability is periodically (at least annually) reviewed and tested for
impairment.
Goodwill must be tested at the reporting unit level 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.
During the second quarter of 2002, the Company completed the review and analysis
of its goodwill asset in accordance with the provisions of SFAS No. 142. The
result of the analysis indicated that each reporting unit's fair value exceeded
its carrying amount including goodwill. As a result, goodwill for each reporting
unit was not considered impaired. Adoption of all other provisions of SFAS No.
142 did not have a material impact on the Company's consolidated financial
condition or results of operations.
SFAS No. 142 also requires that useful lives for intangibles other than goodwill
be reassessed and remaining amortization periods be adjusted accordingly. (For
further discussion of the impact of SFAS No. 142, see Note 2.)
(C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146 "Accounting for Certain Costs
Associated with Exit or Disposal Activities", which nullifies Emerging Issues
Task Force ("EITF") Issue No. 94-3,
- 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 establishes a change in the requirements for recognition of a liability
for a cost associated with an exit or disposal activity. This statement now
requires liabilities to be recognized when a company actually incurs the
liability. Previously, under EITF Issue No. 94-3, liabilities were recognized at
the date an entity committed to an exit plan. Provisions of SFAS No. 146 are
effective for activities initiated after December 31, 2002. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial condition or results of operations.
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 for the second
quarter and six months ended June 30, 2002 and 2001, with the 2001 periods
adjusted for goodwill amortization occurring during the specified period.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
NET INCOME 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change $ 185 $ 237 $ 477 $ 500
Goodwill amortization, net of tax -- 15 -- 25
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Adjusted income before cumulative effect of accounting change 185 252 477 525
Cumulative effect of accounting change, net of tax -- (11) -- (34)
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 185 $ 241 $ 477 $ 491
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BASIC EARNINGS PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change $ 0.75 $ 1.00 $ 1.93 $ 2.13
Goodwill amortization, net of tax -- 0.07 -- 0.10
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted income before cumulative effect of accounting change 0.75 1.07 1.93 2.23
Cumulative effect of accounting change, net of tax -- (0.05) -- (0.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.75 $ 1.02 $ 1.93 $ 2.09
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change $ 0.74 $ 0.98 $ 1.91 $ 2.10
Goodwill amortization, net of tax -- 0.06 -- 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted income before cumulative effect of accounting change 0.74 1.04 1.91 2.21
Cumulative effect of accounting change, net of tax -- (0.04) -- (0.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.74 $ 1.00 $ 1.91 $ 2.06
====================================================================================================================================
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 JUNE 30, 2002
------------------------------
GROSS ACCUMULATED
CARRYING NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- ------------------------------------------------------------------------------------------------------------------------------------
Present value of future profits $ 1,406 $ 211
Renewal rights 42 24
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,448 $ 235
====================================================================================================================================
Net amortization expense for the second quarter and six months ended June 30,
2002 was $26 and $52, respectively.
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
- -----------------------------------------------------
- 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
The carrying amount of goodwill as of June 30, 2002 and December 31, 2001 is
shown below.
JUNE 30, 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 in the ordinary course
of business, including swaps, caps, floors, forwards and exchange traded futures
and options, to manage risk through one of four Company-approved risk management
strategies: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; to control transaction costs; or to enter
into income enhancement and replication transactions. All of the Company's
derivative transactions are permitted uses of derivatives under the derivatives
use plan filed and/or approved, as applicable, by the State of Connecticut and
State of New York insurance departments.
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 June 30, 2002, the Company reported $182 of derivative assets in other
investments and $196 of derivative liabilities in other liabilities.
Cash-Flow Hedges
For the second quarter and six months ended June 30, 2002, the Company's gross
gains and losses representing the total ineffectiveness of all cash-flow hedges
were immaterial, 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 other
comprehensive income to current period earnings are included in the line item in
the Consolidated Statement of Income in which the hedged item is recorded. As of
June 30, 2002, approximately $3 of after-tax deferred net gains on derivative
instruments accumulated in other comprehensive income 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 June 30, 2002, the Company held
approximately $2.7 billion in derivative notional value related to strategies
categorized as cash-flow hedges. There was $1 of losses reclassified from other
comprehensive income against earnings resulting from the discontinuance of
cash-flow hedges during the second quarter ended June 30, 2002. There were no
net reclassifications from other comprehensive income to earnings resulting from
the discontinuance of cash-flow hedges during the six months ended June 30,
2002, or the second quarter and six months ended June 30, 2001.
Fair-Value Hedges
For the second quarter and six months ended June 30, 2002, the Company's gross
gains and losses representing the total ineffectiveness of all fair-value hedges
were immaterial, 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 June 30, 2002, the Company held
approximately $863 in derivative notional value related to strategies
categorized as fair-value hedges.
Other Risk Management Activities
The Company's other risk management activities primarily relate to strategies
used to reduce economic risk or enhance income, and do not receive hedge
accounting treatment. Swap agreements, interest rate cap and floor agreements
and option contracts are used to reduce economic risk. Income enhancement and
replication transactions include the use of written covered call options which
offset embedded equity call options, total return swaps and synthetic
replication of cash market instruments. The change in the value of all
derivatives held for other risk management purposes is reported in current
period earnings as realized capital gains or losses. As of June 30, 2002, the
Company held approximately $5.3 billion in derivative notional value related to
strategies categorized as Other Risk Management Activities.
- 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. EARNINGS PER SHARE
The following tables present a reconciliation of net income and shares used in
calculating basic earnings per share to those used in calculating diluted
earnings per share.
Second Quarter Ended Six Months Ended
-------------------------------------- -----------------------------------
Net Per Share Net Per Share
JUNE 30, 2002 Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 185 247.4 $ 0.75 $ 477 246.7 $ 1.93
-------------- ----------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 3.3 -- 3.5
------------------------ -------------------------
Income available to common shareholders plus assumed
conversions $ 185 250.7 $ 0.74 $ 477 250.2 $ 1.91
====================================================================================================================================
JUNE 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 226 237.3 $ 0.95 $ 466 234.4 $ 1.99
-------------- ----------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 4.0 -- 4.0
------------------------ -------------------------
Income available to common shareholders plus assumed
conversions $ 226 241.3 $ 0.94 $ 466 238.4 $ 1.95
====================================================================================================================================
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 involved in legal actions, some of which assert claims for
substantial amounts. These actions include, among others, putative state and
federal class actions seeking certification of a state or national class. Such
putative class actions have alleged, for example, underpayment of claims or
improper underwriting practices in connection with various kinds of insurance
policies, such as personal and commercial automobile, premises liability, and
inland marine. The Hartford also is involved in individual actions in which
punitive damages are sought, such as claims alleging bad faith in the handling
of insurance claims. Management expects that the ultimate liability, if any,
with respect to such lawsuits, after consideration of provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial condition of The Hartford. Nonetheless, given the large or
indeterminate amounts sought in certain of these actions, and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated results of operations or cash flows in particular
quarterly or annual periods.
The Hartford also is involved in claims litigation arising in the ordinary
course of business, both as a liability insurer defending third-party claims
brought against insureds or as an insurer defending coverage claims brought
against it. The Hartford accounts for such activity through the establishment of
unpaid claim and claim adjustment expense reserves. Subject to the
qualifications discussed in (c) below under the caption "Asbestos and
Environmental Claims," management expects that the ultimate liability, if any,
with respect to such ordinary-course claims litigation, after consideration of
provisions made for potential losses and costs of defense, will not 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, among other things, 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 Company is involved in arbitration with one of its primary reinsurers
relating to policies with death benefit guarantees written from 1994 to 1999.
The arbitration involves alleged breaches under the reinsurance treaties.
Although the Company believes that its position in this pending arbitration is
strong, an adverse outcome could result in a decrease to the Company's
- 11 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(A) LITIGATION (CONTINUED)
statutory surplus and capital and potentially increase the death benefit costs
incurred by the Company in the future. The arbitration hearing currently is set
to begin in October 2002.
(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 accompanying consolidated financial statements for any potential
assessments that may result from tax examinations and other tax related matters
for all open tax years.
(C) ASBESTOS AND ENVIRONMENTAL CLAIMS
In 2001, The Hartford consolidated management and claims handling of all of its
asbestos and environmental exposures under the Other Operations' management
structure. (For a description of the Other Operations segment, see Note 6.) This
action was taken to maximize The Hartford's management expertise in this area.
As part of this organizational change, the Company consolidated substantially
all of its asbestos and environmental loss reserves into one legal entity
(Heritage Re) within Other Operations through intercompany reinsurance
agreements. These reinsurance agreements ceded $602 of the then carried reserves
(net of reinsurance), primarily related to asbestos and environmental exposures
from 1985 and prior, from the Specialty Commercial segment to Other Operations.
The Hartford continues to receive claims that assert damages from asbestos and
environmental-related exposures, both of which affect Other Operations. Asbestos
claims relate primarily to injuries asserted by those who came in contact with
asbestos or products containing asbestos. Environmental claims relate primarily
to pollution and related clean-up costs.
With regard to both environmental and particularly asbestos claims, uncertainty
exists which affects the ability of insurers and reinsurers to estimate the
ultimate reserves necessary for unpaid losses and related settlement expenses.
Conventional reserving techniques cannot reasonably estimate the ultimate cost
of these claims, particularly during periods where theories of law are in flux.
As a result of the factors discussed in the following paragraphs, the degree of
variability of reserve estimates for these exposures is significantly greater
than for other more traditional exposures. In particular, The Hartford believes
this high degree of estimate variability is particularly pronounced for asbestos
loss reserves.
In the case of the reserves for asbestos exposures, factors contributing to the
high degree of uncertainty include inadequate development patterns, plaintiffs'
expanding theories of liability, the risks inherent in major litigation and
inconsistent emerging legal doctrines. There are complex legal issues concerning
the interpretation of various insurance policy provisions and whether those
losses are, or were ever intended to be, covered. Courts have reached
inconsistent conclusions as to when losses are deemed to have occurred and which
policies provide coverage; what types of losses are covered; whether there is an
insurer obligation to defend; how policy limits are determined; whether or not
particular claims are product/completed operation claims subject to an aggregate
limit and how policy exclusions and conditions are applied and interpreted.
Furthermore, insurers in general, including The Hartford, have recently
experienced an increase in the number of asbestos-related claims due to, among
other things, more intensive advertising by lawyers seeking asbestos claimants,
the increasing focus by plaintiffs on new and previously peripheral defendants
and an increase in the number of entities seeking bankruptcy protection as a
result of asbestos-related liabilities. Plaintiffs and insureds have sought to
utilize bankruptcy proceedings to accelerate and increase loss payments by
insurers. In addition, new classes of claims have been arising whereby some
asbestos-related defendants are asserting that their asbestos-related claims
fall within so-called non-products liability coverage contained within their
policies rather than products liability coverage and that the claimed
non-products coverage is not subject to any aggregate limit. Management believes
these issues are not likely to be resolved in the near future.
Given the factors and emerging trends described above, The Hartford believes the
actuarial tools and other techniques it employs to estimate the ultimate cost of
paying claims for more traditional areas of insurance exposure are less
effective in estimating the necessary reserves for its asbestos exposures. The
Hartford continually evaluates new information and new methodologies to use in
evaluating its potential asbestos exposures. At any time The Hartford may be
conducting one or more evaluations of individual exposures, classes of exposures
or all of its current and potential exposures to asbestos claims. At any time
analysis of newly identified information or completion of one or more analyses
could cause The Hartford to change its estimates of its asbestos exposures and
the effect of these changes could be material to the Company's consolidated
operating results and financial condition in future periods.
Reserves and reserve activity in the Other Operations segment are categorized
and reported as either Asbestos, Environmental, or All Other activity. The
discussion below relates to reserves and reserve activity, net of applicable
reinsurance.
Constantly evolving legal theories create significant uncertainties with respect
to what types of claims may ultimately arise from the generally older policies
and liabilities managed in the Other Operations segment. The Hartford's
experience has been that while this group of policies has over time produced
significantly higher claims and losses than were initially contemplated at
inception, the areas of active claim activity have shifted over time based on
changes in plaintiff focus and the overall litigation environment. A significant
portion of the claim reserves of the Other Operations segment relates to
exposure to the insurance businesses of other insurers or reinsurers ("whole
account" exposure). Many of these whole account exposures arise from reinsurance
agreements previously written by The Hartford. The Hartford's net exposure in
these arrangements has increased for a variety of reasons, including, but not
limited to, situations where The Hartford has commuted previous retrocessions of
such business. Due to the reporting practices of cedants to their reinsurers,
determination of the nature of the individual risks involved in these whole
account exposures (such as asbestos,
- 12 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(C) ASBESTOS AND ENVIRONMENTAL CLAIMS (CONTINUED)
environmental, or other exposures) requires various assumptions and estimates,
which are subject to variability and uncertainty.
During 2001, the Company observed a decrease in newly reported environmental
claims as well as favorable settlements with respect to certain existing
environmental claims. Both observations were consistent with longer-term
positive development trends for environmental liabilities. In the same
timeframe, consistent with the reports of other insurers, The Hartford was
experiencing an increase in the number of new asbestos claims by policyholders
not previously identified as potentially significant claimants, including
installers or handlers of asbestos-containing products. In addition, new classes
of claims were beginning to arise whereby some asbestos-related defendants were
asserting that their asbestos-related claims fall within so-called non-products
liability coverage contained within their policies rather than products
liability coverage and that the claimed non-products coverage is not subject to
any aggregate limit. Also, as previously noted, The Hartford consolidated
management and claims handling responsibility of all of its asbestos and
environmental exposures within Other Operations in 2001. Based on a review of
the environmental claim trends that was completed in the fourth quarter of 2001
under the supervision of the then newly consolidated management structure and in
light of the further uncertainties posed by the foregoing asbestos trends, the
Company reclassified $100 of Environmental reserves to Asbestos reserves in
2001.
In the second quarter of 2002, The Hartford completed a review of its Other
Operations reserves and liabilities then categorized as "All Other". This review
was part of the Company's ongoing monitoring of reserves. The Hartford's primary
records of the reserves and policies managed in the Other Operations segment are
organized by individual insurance contract and by the type of insurance coverage
originally written. The review was conducted within the recently consolidated
asbestos and environmental management structure and was largely focused on the
appropriateness of the categorization of the All Other reserves, net of
reinsurance. In evaluating the appropriateness of the categorization of these
net reserves, management utilized the best information that was available to
ascertain the nature of the underlying exposures and focused significantly on
the reserves attributable to The Hartford's whole account reinsurance, including
those reserves that related to commutations of previous cessions of business.
The review also incorporated the most current information and payment and
settlement trends related to latent exposures that are not asbestos and
environmental exposures. As a result of this review, the Company reclassified
$600 of reserves from the All Other category, with $540 reclassified to Asbestos
and $60 reclassified to Environmental. The increase in reserves categorized as
Environmental of $60 in the second quarter (as contrasted with the $100 decrease
in the fourth quarter of 2001) occurred because the reviews in each of the two
periods employed actuarial techniques to analyze distinct and non-overlapping
blocks of reserves and associated exposures. Facts and circumstances associated
with each block then determined the resulting changes in category.
A portion of the 2002 reclassification relates to re-estimates of the
appropriate allocation between Asbestos, Environmental, and All Other categories
of the aggregate reserves (net of reinsurance) carried for certain assumed
reinsurance, commuted cessions and commuted retrocessions of whole account
business. As part of the 2002 reclassification, The Hartford also revised
formulas that it will use to allocate (between the Asbestos, Environmental and
All Other categories) future claim payments for which reinsurance arrangements
were commuted and to allocate claim payments made to effect commutations. As a
result of these revisions, payments categorized as asbestos and environmental
exposures will be higher in future periods than in prior periods. The Hartford
believes that any percent increase in claim payments caused by the
reclassification would be significantly less than the percent increase in total
Asbestos reserves.
On May 14, 2002, The Hartford announced its participation, along with several
dozen other insurance carriers, in a settlement in principle with 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 and
allows The Hartford to prepay its obligations at any time at a fixed discount
rate of 5.5%. 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 estimated the settlement amount to be approximately $130 (non
tax-effected) on a discounted basis and net of anticipated reinsurance
recoveries. The settlement was covered by existing asbestos reserves, and as a
result, did not have a material impact on The Company's consolidated financial
condition or results of operations.
As of June 30, 2002, the Company reported $1,142 and $658 of net Asbestos and
Environmental reserves, respectively. Based on currently known facts and the
Company's methodologies for estimating asbestos and environmental reserves, The
Hartford believes that the level of recorded reserves at June 30, 2002 is
reasonable and appropriate. Because of the significant uncertainties described
in the foregoing paragraphs, principally those related to asbestos, the ultimate
liabilities may exceed the currently recorded reserves. Any such additional
liability (or any range of additional amounts) cannot be reasonably estimated
now but could be material to The Hartford's future consolidated operating
results and financial condition. Consistent with the Company's longstanding
reserving practices, The Hartford will continue to regularly review and monitor
these reserves and, where future circumstances indicate, make appropriate
adjustments to the reserves.
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 June 27,
2000 acquisition of all of the outstanding shares of Hartford Life, Inc. ("HLI")
that the Company did not already own ("The HLI Repurchase") are included in
Corporate.
- 13 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
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 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 members 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. The Specialty Commercial
segment offers a variety of customized insurance products and risk management
services. The Risk Management Division provides standard commercial insurance
products including workers' compensation, automobile and liability coverages to
large-sized companies. Specialty Commercial also provides bond, professional
liability, specialty casualty and agricultural coverages, as well as core
property and excess and surplus lines coverages not normally written by standard
lines insurers. In addition, Specialty Commercial provides third party
administrator services for claims administration, integrated benefits, loss
control and performance measurement through Specialty Risk Services ("SRS"). 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
consists of certain property and casualty insurance operations of The Hartford
which have discontinued writing new business and includes substantially all of
the Company's asbestos and environmental exposures. The Other Operations segment
results also include activity for the Company's international property and
casualty businesses up until their dates of sale, and for 2002 include 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.)
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. Underwriting results represent premiums earned less
incurred claims, claim adjustment expenses and underwriting expenses. "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. While not considered segments, the Company also
reports and evaluates operating income results for Life, Property & Casualty and
North American. Property & Casualty includes operating income for North American
and the Other Operations segment. 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.
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.
- 14 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
REVENUES
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 659 $ 643 $ 1,309 $ 1,247
Individual Life 249 240 481 403
Group Benefits 654 641 1,298 1,254
COLI 146 181 306 365
Other (117) (10) (127) 16
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 1,591 1,695 3,267 3,285
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
North American
Earned premiums and other revenue
Business Insurance 766 640 1,498 1,260
Personal Lines 772 721 1,519 1,425
Specialty Commercial 333 303 623 588
Reinsurance 172 230 343 479
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American earned premiums and other revenue 2,043 1,894 3,983 3,752
Net investment income 234 234 451 452
Net realized capital losses (28) (22) (21) (24)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American 2,249 2,106 4,413 4,180
Other Operations 40 41 96 95
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 2,289 2,147 4,509 4,275
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate 5 5 9 9
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 3,885 $ 3,847 $ 7,785 $ 7,569
====================================================================================================================================
- 15 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
OPERATING INCOME SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 118 $ 117 $ 235 $ 228
Individual Life 35 36 66 56
Group Benefits 30 27 58 50
COLI 10 10 10 19
Other (16) (14) (15) (16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 177 176 354 337
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
North American
Underwriting results
Business Insurance (8) 10 (4) (13)
Personal Lines (24) (43) (35) (27)
Specialty Commercial 8 (24) (2) (38)
Reinsurance (9) (37) (13) (62)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American underwriting results (33) (94) (54) (140)
Net servicing and other income [1] 1 7 3 12
Net investment income 234 234 451 452
Other expenses (58) (41) (109) (103)
Income tax expense (25) (5) (50) (13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American 119 101 241 208
Other Operations 1 1 1 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 120 102 242 210
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate (6) (16) (12) (32)
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 291 262 584 515
Cumulative effect of accounting change, net of tax -- (11) -- (34)
Net realized capital losses, after-tax (106) (25) (107) (15)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 185 $ 226 $ 477 $ 466
====================================================================================================================================
<FN>
[1] Net of expenses related to service business.
</FN>
NOTE 7. STOCKHOLDERS' EQUITY
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 pre-tax
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 June 30, 2002, the Company has paid approximately $4 in employee-related
restructuring costs and $1 in occupancy related costs.
- 16 -
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 June 30, 2002, compared with December 31, 2001, and its results
of operations for the second quarter and six months ended June 30, 2002,
compared with the equivalent 2001 periods. 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 asbestos and
environmental claims and related litigation; the Company's ability to distribute
its products through distribution channels, both current and future; the
uncertain effects of emerging claim and coverage issues; the effect of
assessments and other surcharges for guaranty funds and second-injury funds and
other mandatory pooling arrangements; a downgrade in the Company's
claims-paying, financial strength or credit ratings; the ability of the
Company's subsidiaries to pay dividends to the Company; and other factors
described in such forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Consolidated Results of Operations: Operating Summary 17
Life 20
Investment Products 21
Individual Life 21
Group Benefits 22
Corporate Owned Life Insurance ("COLI") 22
Property & Casualty 23
Business Insurance 23
Personal Lines 24
Specialty Commercial 24
Reinsurance 25
Other Operations (Including Asbestos and
Environmental Claims) 25
Investments 28
Capital Markets Risk Management 30
Capital Resources and Liquidity 32
Regulatory Matters and Contingencies 33
Accounting Standards 33
- --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
- --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 3,885 $ 3,847 $ 7,785 $ 7,569
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 185 $ 226 $ 477 $ 466
Less: Cumulative effect of accounting change, net of tax [1] -- (11) -- (34)
Net realized capital losses, after-tax (106) (25) (107) (15)
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 291 $ 262 $ 584 $ 515
====================================================================================================================================
<FN>
[1] For the quarter ended June 30, 2001, represents the cumulative impact of
the Company's adoption of Emerging Issues Task Force ("EITF") Issue 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." For the six months
ended June 30, 2001, represents the cumulative impact of the Company's
adoption of EITF Issue 99-20 and Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS Nos. 137 and 138, collectively
"SFAS 133".
</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
- 17 -
lieu of, net income and may not be comparable to other performance measures used
by the Company's competitors.
OPERATING RESULTS
Revenues for the second quarter and six months ended June 30, 2002 increased
$38, or 1%, and $216, or 3%, respectively, over the comparable prior year
periods primarily as a result of increased earned premiums in the Business
Insurance, Personal Lines and Specialty Commercial segments. Partially
offsetting the increased earned premiums were higher net realized capital
losses, primarily as a result of write-downs of telecommunications securities,
including WorldCom, Inc. ("WorldCom").
Operating income increased $29, or 11%, and $69, or 13%, for the second quarter
and six months ended June 30, 2002, from the comparable prior year periods,
respectively. The increase in operating income for the second quarter ended June
30, 2002 over the prior year period was due primarily to substantial improvement
in underwriting results for the Personal Lines, Specialty Commercial and
Reinsurance segments. The increase in operating income for the six months ended
June 30, 2002 over the prior year period was a result of solid improvements in
underwriting results in the Business Insurance, Specialty Commercial and
Reinsurance segments as well as increased operating income in Life's Other
Investment Products, Individual Life and Group Benefits businesses. Also
contributing to the earnings increase was the implementation of SFAS No. 142,
"Goodwill and Other Intangible Assets," which eliminated the amortization of
goodwill and other intangibles with indefinite useful lives. Goodwill
amortization was $15 and $25, after-tax, for the second quarter and six months
ended June 30, 2001, respectively. (For further discussion of the Company's
goodwill, see Note 2 of Notes to Consolidated Financial Statements.)
Operating income for the six months ended June 30, 2002 included $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 September 11. (For
further discussion of the Bancorp litigation, see Note 5(a) of Notes to
Consolidated Financial Statements.)
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 rates for the second quarter and six months ended June 30,
2002 were 8% and 16%, respectively, as compared with 20% and 19%, respectively,
for the comparable prior year periods. Excluding the effects of net realized
capital losses for both the 2002 and 2001 periods, the effective tax rates were
20% and 21% for the second quarter and six months ended June 30, 2002,
respectively, as compared to 21% for both of the periods ended June 30, 2001.
Tax-exempt interest earned on invested assets was the principal cause 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 June 27,
2000 acquisition of all of the outstanding shares of HLI that the Company did
not already own ("The HLI Repurchase") 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, which
includes substantially all of the Company's asbestos and environmental
exposures.
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. Underwriting results represent premiums earned less
incurred claims, claim adjustment expenses and underwriting expenses. While not
considered segments, the Company also reports and evaluates operating income
results for Life, Property & Casualty and North American. Property & Casualty
includes operating income for North American and the Other Operations segment.
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.
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.
- 18 -
UNDERWRITING RESULTS (BEFORE-TAX) SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
North American 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Business Insurance $ (8) $ 10 $ (4) $ (13)
Personal Lines (24) (43) (35) (27)
Specialty Commercial 8 (24) (2) (38)
Reinsurance (9) (37) (13) (62)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (33) $ (94) $ (54) $ (140)
====================================================================================================================================
The following is a summary of operating income and net income.
OPERATING INCOME SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 118 $ 117 $ 235 $ 228
Individual Life 35 36 66 56
Group Benefits 30 27 58 50
COLI 10 10 10 19
Other (16) (14) (15) (16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 177 176 354 337
Property & Casualty
North American 119 101 241 208
Other Operations 1 1 1 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 120 102 242 210
Corporate (6) (16) (12) (32)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 291 $ 262 $ 584 $ 515
====================================================================================================================================
NET INCOME SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 118 $ 117 $ 235 $ 228
Individual Life 35 36 66 56
Group Benefits 30 27 58 50
COLI 10 10 10 19
Other (92) (28) (98) (53)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 101 162 271 300
Property & Casualty
North American 101 78 228 193
Other Operations (11) 2 (10) 5
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 90 80 218 198
Corporate (6) (16) (12) (32)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET INCOME $ 185 $ 226 $ 477 $ 466
====================================================================================================================================
An analysis of the operating results summarized above is included on the
following pages. Investment results are discussed in the Investments section.
- 19 -
- --------------------------------------------------------------------------------
LIFE
- --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 1,591 $ 1,695 $ 3,267 $ 3,285
Expenses 1,490 1,530 2,996 2,959
Cumulative effect of accounting changes, net of tax [1] - (3) - (26)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 101 162 271 300
Less: Cumulative effect of accounting changes, net of tax [1] - (3) - (26)
Net realized capital losses, after-tax (76) (11) (83) (11)
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 177 $ 176 $ 354 $ 337
====================================================================================================================================
<FN>
[1] For the second quarter ended June 30, 2001, represents the cumulative
impact of the Company's adoption of EITF Issue 99-20. For the six months
ended June 30, 2001 represents the cumulative impact of the Company's
adoption of EITF Issue 99-20 and SFAS No. 133.
</FN>
Life has the following reportable operating segments: Investment Products,
Individual Life, Group Benefits and COLI. In addition, Life includes in an
"Other" category corporate items not directly allocable to any of its reportable
operating segments, principally interest expense, as well as its international
operations, which are primarily located in Japan and Latin America.
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"). (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.)
Revenues in the Life operation decreased $104, or 6%, and $18, or 1%, for the
second quarter and six months ended June 30, 2002, respectively, as compared to
the equivalent periods in 2001. The decreases were primarily driven by net
realized capital losses, which were $120 and $135 for the second quarter and six
months ended June 30, 2002, respectively. (See Investments section for further
discussion of investment results and related net realized capital losses). In
addition, COLI experienced a decline in revenues as a result of the decrease in
leveraged COLI account values as compared to a year ago. However, the Life
operation experienced revenue growth across its other operating segments.
Revenues related to the Investment Products segment increased as a result of
continued growth related to its institutional investment product business, which
offset the decline in revenues within the individual annuity operation. The
individual annuity operation was impacted by lower assets under management due
to the decline in the equity markets. In addition, the Group Benefits segment
continued to experience an increase in revenues as a result of strong sales to
new customers and solid persistency within the in-force block of business.
Expenses decreased $40, or 3%, for the second quarter primarily due to a $44 tax
benefit related to the net realized capital losses recognized in the second
quarter. Expenses for the six months ended June 30, 2002 increased $37, or 1%,
as compared to the equivalent prior year period. The increase was primarily
driven by the Fortis acquisition and the Investment Products segment,
principally related to the growth in the institutional investment product
business and an increase in death benefits related to the individual annuity
operation, as a result of the lower equity markets. In addition, expenses for
the six months ended June 30, 2002 include $11, after-tax, of accrued expenses
recorded within the COLI segment related to the Bancorp litigation, which 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. (For a discussion of the Bancorp litigation, see Note
5(a) of Notes to Consolidated Financial Statements.)
Operating income increased $1, or 1%, and $17, or 5%, for the second quarter and
six months ended June 30, 2002, respectively. For the second quarter, two of
Life's reportable operating segments experienced earnings growth, led by Group
Benefits whose earnings increased $3, or 11%, driven principally by ongoing
premium growth and stable loss and expense ratios. Earnings for the Investment
Products segment were up $1 as compared to the equivalent prior year period as
growth in the other investment products businesses, particularly institutional
investment products, offset the decline in revenues in the individual annuity
operation, which was negatively impacted by the lower equity markets. Individual
Life earnings declined $1 in the second quarter as a result of lower fee income
related to variable life account values, which was also driven by the lower
equity markets, while the "Other" operation experienced lower net investment
income in the second quarter as compared to the comparable prior year period.
For the six months ended June 30, 2002, the increase in operating income was
principally driven by Individual Life, which is directly related to the Fortis
acquisition, Group Benefits, which continued to benefit from an increase in
premium revenue and stable loss costs, and the Investment Products segment,
which experienced growth in earnings related to its institutional investment
products business which offset the decline in individual annuity earnings
resulting from the lower equity markets. Operating income was negatively
impacted by a decrease of $9, or 47%, in operating income in the COLI segment
for the six months ended June 30, 2002, primarily due to the $11 after-tax
expense related to the Bancorp litigation.
- 20 -
- --------------------------------------------------------------------------------
INVESTMENT PRODUCTS
- --------------------------------------------------------------------------------
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 659 $ 643 $ 1,309 $ 1,247
Expenses 541 526 1,074 1,019
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 118 $ 117 $ 235 $ 228
====================================================================================================================================
JUNE 30, 2002 JUNE 30, 2001
------------------------------
Individual variable annuity account values $ 67,712 $ 78,415
Other individual annuity account values 10,413 9,228
Other investment products account values 19,511 18,101
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 97,636 105,744
Mutual fund assets under management 16,216 16,180
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 113,852 $ 121,924
====================================================================================================================================
Revenues in the Investment Products segment increased $16, or 2%, and $62, or
5%, for the second quarter and six months ended June 30, 2002 respectively,
primarily driven by growth in the institutional investment products business,
where related assets under management increased $1.1 billion, or 13%, to $9.5
billion as of June 30, 2002. The revenue increase described above was partially
offset by lower fee income related to the individual annuity operation as
average account values decreased from prior year levels, primarily due to the
lower equity markets.
Expenses increased $15, or 3%, and $55, or 5%, for the second quarter and six
months ended June 30, 2002, respectively, primarily driven by increases in
benefits and claim expenses and operating expenses as a result of the growth in
the institutional investment products business and an increase in the death
benefit costs incurred by the individual annuity operation, as a direct result
of the lower equity markets. Partially offsetting these increases were decreases
in amortization of policy acquisition costs related to the individual annuity
business, which declined as a result of lower estimated gross profits, driven by
the decrease in fee income and the increase in death benefit costs.
Operating income increased $1, or 1%, and $7, or 3%, for the second quarter and
six months ended June 30, 2002, respectively as the growth in revenues related
to other investment products, particularly the institutional investment product
business, offset the decline in revenues in the individual annuity operation,
which was negatively impacted by the lower equity markets. (For discussion of
the potential future financial statement impact of continued declines in the
equity market on the Investment Products segment, see the Capital Markets Risk
Management section under "Market Risk".)
- --------------------------------------------------------------------------------
INDIVIDUAL LIFE
- --------------------------------------------------------------------------------
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 249 $ 240 $ 481 $ 403
Expenses 214 204 415 347
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 35 $ 36 $ 66 $ 56
====================================================================================================================================
JUNE 30, 2002 JUNE 30, 2001
------------------------------
Variable life account values $ 3,760 $ 3,932
Total account values $ 7,635 $ 7,744
- ------------------------------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 64,930 $ 57,677
Total life insurance in force $ 123,896 $ 116,740
====================================================================================================================================
Revenues in the Individual Life segment increased $9, or 4%, and $78, or 19%,
for the second quarter and six months ended June 30, 2002, respectively. For the
second quarter, the revenue growth was primarily driven by an increase in net
investment income related to Individual Life's general account business, for
which the income impact was offset with an increase in benefits, claims and
expenses due to an increase in interest credited to policyholders. In addition,
second quarter revenues were negatively impacted by lower variable life account
values, which decreased as a result of the lower equity markets. The revenue
growth related to the six months ended June 30, 2002 was primarily due to higher
fee income and investment income related to the Fortis transaction.
Expenses increased $10, or 5%, and $68, or 20%, for the second quarter and six
months ended June 30, 2002, respectively. For the second quarter, the growth in
expenses is primarily driven by an increase in benefits, claims and claim
adjustment expenses. For the six months ended June 30, 2002, the increase in
expenses is primarily driven by the growth in the business resulting from the
Fortis acquisition. In addition, mortality experience (expressed as death claims
as a percentage of net amount at risk) for the six
- 21 -
months ended June 30, 2002 was higher than the comparable prior year period
primarily due to a higher than expected occurrence of large claims during the
first quarter of 2002.
Operating income decreased $1, or 3%, for the second quarter as compared to the
prior year, principally due to decreased revenues from the variable life
business, as a direct result of the lower equity markets. Operating income for
the six months ended June 30, 2002 increased $10, or 18%, as the contribution to
earnings from the Fortis transaction more than offset the unfavorable mortality
experience for the six month period ended June 30, 2002 and the lower variable
life fee income driven by the decline in the equity markets. (For discussion of
the potential future financial statement impact of continued declines in the
equity market on the Individual Life segment, see the Capital Markets Risk
Management section under "Market Risk".)
- --------------------------------------------------------------------------------
GROUP BENEFITS
- --------------------------------------------------------------------------------
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 654 $ 641 $ 1,298 $ 1,254
Expenses 624 614 1,240 1,204
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 30 $ 27 $ 58 $ 50
====================================================================================================================================
Revenues in the Group Benefits segment increased $13, or 2%, and $44, or 4%, and
excluding buyouts, increased $41, or 7%, and $104, or 9%, for the second quarter
and six months ended June 30, 2002, respectively. These increases were driven by
growth in fully insured ongoing premiums, which increased $83, or 17%, and $185,
or 19%, for the second quarter and six months ended June 30, 2002, respectively.
The growth in premium revenues was due to steady persistency and pricing actions
on the in-force block of business and strong sales to new customers. Offsetting
these increases were decreases in military Medicare supplement premiums of $43
and $84 for the second quarter and six months ended June 30, 2002, respectively,
resulting from federal legislation effective in the fourth quarter of 2001. This
legislation provides retired military officers age 65 and older with full
medical insurance paid for by the government, eliminating the need for Medicare
supplement insurance. Fully insured ongoing sales for the six months ended June
30, 2002 were $444, an increase of $130, or 41%, as compared to the equivalent
prior year period.
Expenses increased $10, or 2%, and $36, or 3%, and excluding buyouts, increased
$38, or 6%, and $96, or 8%, for the second quarter and six months ended June 30,
2002, respectively. The increase in expenses is consistent with the growth in
revenues described above. Benefits and claims expenses, excluding buyouts,
increased $32, or 7%, and $70, or 8%, for the second quarter and six months
ended June 30, 2002, respectively. The segment's loss ratio (defined as benefits
and claims as a percentage of premiums and other considerations excluding
buyouts) was approximately 82% for both the second quarter and six months ended
June 30, 2002, as compared to 83% for both of the respective prior year periods.
Other insurance expenses increased $6, or 5%, and $25, or 10%, for the second
quarter and six months ended June 30, 2002, respectively, due to the revenue
growth previously described and continued investments in the business. The
segment's expense ratio (defined as insurance expenses as a percentage of
premiums and other considerations excluding buyouts) was 22% and 23% for the
second quarter and six months ended June 30, 2002, respectively, and was
essentially consistent with the prior year periods.
Operating income increased $3, or 11%, and $8, or 16%, for the second quarter
and six months ended June 30, 2002, respectively, due to the increase in premium
revenue and the continued focus on maintaining loss costs and other expenses as
described above.
- --------------------------------------------------------------------------------
CORPORATE OWNED LIFE INSURANCE (COLI)
- --------------------------------------------------------------------------------
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 146 $ 181 $ 306 $ 365
Expenses 136 171 296 346
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 10 $ 10 $ 10 $ 19
====================================================================================================================================
JUNE 30, 2002 JUNE 30, 2001
------------------------------
Variable COLI account values $ 19,076 $ 16,628
Leveraged COLI account values 4,119 4,856
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 23,195 $ 21,484
====================================================================================================================================
COLI revenues decreased $35, or 19%, and $59, or 16%, for the second quarter and
six months ended June 30, 2002, respectively, primarily related to lower net
investment and fee income related to the declining block of leveraged COLI,
where related account values declined by $737, or 15%. Net investment income
decreased $20, or 22%, and $38, or 21%, for the second quarter
- 22 -
and six months ended June 30, 2002, respectively. Fee income decreased $15, or
17%, and $20, or 11%, for the second quarter and six months ended June 30, 2002,
respectively, primarily driven by the decrease in leveraged COLI business which
was partially offset by the increase in fee income from variable COLI business,
where related account values increased approximately $2.4 billion from June 30,
2001.
Expenses decreased $35, or 20%, and $50, or 14%, for the second quarter and six
months ended June 30, 2002, respectively, consistent with the decrease in
revenues described above. However, the decrease for the six months ended June
30, 2002 was partially offset by $11, after-tax, in accrued litigation expenses
related to the Bancorp dispute. (For a discussion of the Bancorp litigation, see
Note 5(a) of Notes to Consolidated Financial Statements.)
Operating income in the second quarter was consistent with the prior year as the
decline in leveraged COLI revenues was directly offset with lower benefits
claims and expenses. Operating income for the six months ended June 30, 2002
decreased $9, or 47%, primarily related to the $11, after-tax, expense accrued
in connection with the Bancorp litigation.
- --------------------------------------------------------------------------------
PROPERTY & CASUALTY
- --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 2,289 $ 2,147 $ 4,509 $ 4,275
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 90 $ 80 $ 218 $ 198
Less: Cumulative effect of accounting changes, net of tax - (8) - (8)
Net realized capital losses, after-tax (30) (14) (24) (4)
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 120 $ 102 $ 242 $ 210
====================================================================================================================================
Revenues for Property & Casualty increased $142, or 7%, for the second quarter
and $234, or 5%, for the six months ended June 30, 2002 compared with the same
periods in 2001. The increase in revenues for both periods was due primarily to
earned premium growth in the Business Insurance, Personal Lines and Specialty
Commercial segments as a result of price increases, new business growth and
strong premium renewal retention. Partially offsetting the increase for both
periods were lower earned premiums in the Reinsurance segment, primarily due to
the planned exit from nearly all international lines and a reduction in
Alternative Risk Transfer ("ART").
Operating income increased $18, or 18%, for the second quarter and $32, or 15%,
for the six months ended June 30, 2002, as compared to the same prior year
periods. The increase in the second quarter and six month periods was primarily
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 the improvement was an increase in automobile
severity loss costs in Personal Lines, due primarily to medical inflation and
higher repair costs.
- --------------------------------------------------------------------------------
BUSINESS INSURANCE
- --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 835 $ 714 $ 1,660 $ 1,416
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting results $ (8) $ 10 $ (4) $ (13)
Combined ratio 98.7 96.4 97.4 98.7
====================================================================================================================================
Business Insurance written premiums increased $121, or 17%, for the second
quarter and $244, or 17%, for the six months ended June 30, 2002 compared to the
same periods in 2001 due to strong growth in both Small Commercial and Middle
Market. Small Commercial increased $53, or 15%, for the second quarter and $110,
or 15%, for the six month period reflecting double-digit price increases,
particularly in the property line of business. The increase in Middle Market of
$68, or 19%, for the second quarter and $134, or 19%, for the six month period
was due primarily to price increases in the high teens as well as strong new
business growth and premium renewal retention.
Underwriting results declined $18 for the second quarter ended June 30, 2002,
with a corresponding 2.3 point increase in the combined ratio. For the six month
period ended June 30, 2002, underwriting results improved $9, with a
corresponding 1.3 point decrease in the combined ratio. The decrease in the
second quarter results was due primarily to higher taxes, licenses and fees, due
to the growth in written premium and higher rates, as well as an increase in
policyholder dividends and commissions. The improvement in underwriting results
for the six month period was the result of double-digit earned pricing and
minimal loss costs. The loss ratio improved 1.2 points for the six months ended
June 30, 2002 compared with the same prior year period.
- 23 -
- --------------------------------------------------------------------------------
PERSONAL LINES
- --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 789 $ 743 $ 1,515 $ 1,405
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting results $ (24) $ (43) $ (35) $ (27)
Combined ratio 101.7 106.0 101.7 102.0
====================================================================================================================================
Written premiums increased $46, or 6%, for the second quarter and $110, or 8%,
for the six months ended June 30, 2002 compared to the same periods in 2001
driven by growth in AARP, partially offset by a reduction in Standard. AARP
increased $63, or 15%, for the second quarter and $118, or 15%, for the six
month period ended June 30, 2002 primarily as a result of strong new business
growth, pricing increases and continued steady premium renewal retention.
Standard decreased $13 for the quarter and six month periods, or 7% and 3%,
respectively, due primarily to the conversion to six month policies in certain
states.
Underwriting results improved $19, or 44%, for the second quarter, with a
corresponding 4.3 point decrease in the combined ratio. For the six month
period, underwriting results declined $8, or 30%, while the combined ratio
decreased 0.3 points. While second quarter automobile results improved over the
prior year period due to favorable frequency loss costs, the line of business
continues to be negatively impacted by automobile severity loss costs as a
result of medical inflation and higher repair costs. Solid homeowners results
are in line with prior year as favorable frequency was offset by an increase in
severity. Six month automobile results were also negatively impacted by
severity, while homeowners results were consistent with the prior year period.
An improvement in the underwriting expense ratio, primarily due to written
pricing increases and prudent expense management, resulted in a 1.4 point and
0.9 point decrease in the expense ratio for the second quarter and six months
ended June 30, 2002, respectively.
- --------------------------------------------------------------------------------
SPECIALTY COMMERCIAL
- --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 345 $ 257 $ 645 $ 511
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting results $ 8 $ (24) $ (2) $ (38)
Combined ratio 94.8 104.3 97.5 105.7
====================================================================================================================================
Specialty Commercial written premiums increased $88, or 34%, for the second
quarter and $134, or 26%, for the six months ended June 30, 2002 compared with
the same prior year periods. The improvement was driven by the Property,
Specialty Casualty and Professional Liability lines of business. Written
premiums for Property grew $26, or 33%, for the second quarter and $69, or 54%,
for the first six months of 2002 compared with the same periods in 2001.
Specialty Casualty written premiums grew $30, or 64%, and $39, or 40%, for the
second quarter and six month periods, respectively. The written premium growth
in both lines of business was primarily due to significant price increases
reflecting an improving business environment. Professional Liability written
premiums grew $20, or 67%, for the second quarter and $32, or 52%, for the first
six months of 2002, compared with the respective prior year periods, also due to
significant price increases as well as lower premium cessions.
Underwriting results improved $32, with a corresponding 9.5 point decrease in
the combined ratio for the second quarter and improved $36, with a corresponding
8.2 point decrease in the combined ratio for the six months ended June 30, 2002,
as compared with the same periods in 2001. Improved underwriting and combined
ratio results for the second quarter and six month periods were primarily due to
favorable Property, Specialty Casualty and Professional Liability results,
partially offset by deterioration in Risk Management business. In addition, for
the six months ended June 30, 2002, lower catastrophes, primarily as a result of
the Seattle earthquake in the first quarter of 2001, also contributed to the
improvement.
- 24 -
- --------------------------------------------------------------------------------
REINSURANCE
- --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 169 $ 205 $ 383 $ 568
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting results $ (9) $ (37) $ (13) $ (62)
Combined ratio 102.5 119.4 101.5 113.2
====================================================================================================================================
Reinsurance written premiums decreased $36, or 18%, for the second quarter and
$185, or 33%, for the six months ended June 30, 2002 compared to the same
periods in 2001 due to the planned exit from nearly all international lines and
a reduction in ART written premiums. ART written premiums decreased $13, or 52%,
for the second quarter and $82, or 52%, for the six month period due to the
non-renewal of certain pro-rata contracts as a result of a business shift to
excess of loss policies. For the six month period, the decrease also was
impacted by a significant transaction in the first quarter of 2001. Excluding
ART and international, second quarter written premiums increased 14%, due
primarily to significant pricing increases as a result of continued market
firming, partially offset by premium reductions due to underwriting requirements
to maintain profitability targets.
Underwriting results improved $28, with a corresponding 16.9 point decrease in
the combined ratio for the second quarter and improved $49, with a corresponding
11.7 point decrease in the combined ratio for the six months ended June 30,
2002, as compared with the same periods in 2001. The improvement for both
periods was primarily due to underwriting initiatives including a shift to
excess of loss policies and increased property business mix, as well as the exit
from nearly all international lines and an intense focus on returns. For the six
month period, significantly lower catastrophes also contributed to the
improvement.
- --------------------------------------------------------------------------------
OTHER OPERATIONS (INCLUDING ASBESTOS AND ENVIRONMENTAL CLAIMS)
- --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 40 $ 41 $ 96 $ 95
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (11) $ 2 $ (10) $ 5
Less: Net realized capital gains (losses), after-tax (12) 1 (11) 3
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 1 $ 1 $ 1 $ 2
====================================================================================================================================
The Other Operations segment includes operations that are under a single
management structure, Heritage Holdings, that was finalized in late 2001 to be
responsible for two related activities. The first activity is the management of
certain subsidiaries and operations of The Hartford that have discontinued
writing new business. The second is the management of claims (and the associated
reserves) related to asbestos and environmental exposures.
The companies in this segment which are not writing new business include First
State Insurance Company and two affiliated subsidiaries, located in Boston,
Massachusetts; Heritage Reinsurance Company, Ltd. ("Heritage Re"), headquartered
in Bermuda; and Excess Insurance Company, Ltd., located in the United Kingdom.
Each of these companies is primarily focused on managing claims, resolving
disputes and collecting reinsurance proceeds, related largely to business
underwritten and reinsured in 1985 and prior years. While the business that was
written in these units on either a direct or reinsurance basis spanned a wide
variety of insurance and reinsurance policies and coverages, a significant and
increasing proportion of current and future claims activity arising from these
businesses relates to environmental and, to a greater extent, asbestos
exposures. Other Operations also includes the results of The Hartford's
international property-casualty businesses (substantially all of which were
disposed of in a series of transactions concluding in 2001) and the
international reinsurance businesses of HartRe, exited in the fourth quarter of
2001. (For further discussion of the restructuring, see Note 8 of Notes to
Consolidated Financial Statements.)
In 2001, The Hartford consolidated management and claims handling of all of its
asbestos and environmental exposures under the Other Operations' management
structure. This action was taken to maximize The Hartford's management expertise
in this area. As part of this organizational change, the Company consolidated
substantially all of its asbestos and environmental loss reserves into one legal
entity (Heritage Re) within Other Operations through intercompany reinsurance
agreements. These reinsurance agreements ceded $602 of the then carried reserves
(net of reinsurance), primarily related to asbestos and environmental exposures
from 1985 and prior, from the Specialty Commercial segment to Other Operations.
Discussion of Operations
Revenues for the second quarter and six months ended June 30, 2002 were
relatively flat compared to the same prior year periods as higher earned premium
was offset by net realized capital losses. The increase in earned premium was
primarily renewal premium from the exited HartRe international business, which
was transferred to Other Operations in the first quarter of 2002.
- 25 -
Operating income also was relatively flat for the second quarter and six months
ended June 30, 2002 compared to the same prior year periods. Operating income
for the second quarter included a $29 incurred loss, which was in respect to a
revised estimate of asbestos exposure arising principally from the Company's
participation in the Excess Casualty Reinsurance Association ("ECRA") in the
late 1950's to mid 1960's, which was offset by investment income and the HartRe
international earned premiums.
Asbestos and Environmental Claims
The Hartford continues to receive claims that assert damages from asbestos and
environmental-related exposures, both of which affect Other Operations. Asbestos
claims relate primarily to injuries asserted by those who came in contact with
asbestos or products containing asbestos. Environmental claims relate primarily
to pollution and related clean-up costs.
With regard to both environmental and particularly asbestos claims, uncertainty
exists which affects the ability of insurers and reinsurers to estimate the
ultimate reserves necessary for unpaid losses and related settlement expenses.
Conventional reserving techniques cannot reasonably estimate the ultimate cost
of these claims, particularly during periods where theories of law are in flux.
As a result of the factors discussed in the following paragraphs, the degree of
variability of reserve estimates for these exposures is significantly greater
than for other more traditional exposures. In particular, The Hartford believes
this high degree of estimate variability is particularly pronounced for asbestos
loss reserves.
In the case of the reserves for asbestos exposures, factors contributing to the
high degree of uncertainty include inadequate development patterns, plaintiffs'
expanding theories of liability, the risks inherent in major litigation and
inconsistent emerging legal doctrines. There are complex legal issues concerning
the interpretation of various insurance policy provisions and whether those
losses are, or were ever intended to be, covered. Courts have reached
inconsistent conclusions as to when losses are deemed to have occurred and which
policies provide coverage; what types of losses are covered; whether there is an
insurer obligation to defend; how policy limits are determined; whether or not
particular claims are product/completed operation claims subject to an aggregate
limit and how policy exclusions and conditions are applied and interpreted.
Furthermore, insurers in general, including The Hartford, have recently
experienced an increase in the number of asbestos-related claims due to, among
other things, more intensive advertising by lawyers seeking asbestos claimants,
the increasing focus by plaintiffs on new and previously peripheral defendants
and an increase in the number of entities seeking bankruptcy protection as a
result of asbestos-related liabilities. Plaintiffs and insureds have sought to
utilize bankruptcy proceedings to accelerate and increase loss payments by
insurers. In addition, new classes of claims have been arising whereby some
asbestos-related defendants are asserting that their asbestos-related claims
fall within so-called non-products liability coverage contained within their
policies rather than products liability coverage and that the claimed
non-products coverage is not subject to any aggregate limit. Management believes
these issues are not likely to be resolved in the near future.
Given the factors and emerging trends described above, The Hartford believes the
actuarial tools and other techniques it employs to estimate the ultimate cost of
paying claims for more traditional areas of insurance exposure are less
effective in estimating the necessary reserves for its asbestos exposures. The
Hartford continually evaluates new information and new methodologies to use in
evaluating its potential asbestos exposures. At any time The Hartford may be
conducting one or more evaluations of individual exposures, classes of exposures
or all of its current and potential exposures to asbestos claims. At any time
analysis of newly identified information or completion of one or more analyses
could cause The Hartford to change its estimates of its asbestos exposures and
the effect of these changes could be material to the Company's consolidated
operating results and financial condition in future periods.
Reserve Activity
Reserves and reserve activity in the Other Operations segment are categorized
and reported as either Asbestos, Environmental, or All Other activity. The
discussion below relates to reserves and reserve activity, net of applicable
reinsurance.
Constantly evolving legal theories create significant uncertainties with respect
to what types of claims may ultimately arise from the generally older policies
and liabilities managed in the Other Operations segment. The Hartford's
experience has been that while this group of policies has over time produced
significantly higher claims and losses than were initially contemplated at
inception, the areas of active claim activity have shifted over time based on
changes in plaintiff focus and the overall litigation environment. A significant
portion of the claim reserves of the Other Operations segment relates to
exposure to the insurance businesses of other insurers or reinsurers ("whole
account" exposure). Many of these whole account exposures arise from reinsurance
agreements previously written by The Hartford. The Hartford's net exposure in
these arrangements has increased for a variety of reasons, including, but not
limited to, situations where The Hartford has commuted previous retrocessions of
such business. Due to the reporting practices of cedants to their reinsurers,
determination of the nature of the individual risks involved in these whole
account exposures (such as asbestos, environmental, or other exposures) requires
various assumptions and estimates, which are subject to variability and
uncertainty.
The following table presents reserve activity, inclusive of estimates for both
reported and incurred but not reported claims, net of reinsurance, for Other
Operations, categorized by Asbestos, Environmental, and All Other claims, for
the six months ended June 30, 2002 and the year ended December 31, 2001. Also
included are the remaining Asbestos and Environmental exposures of North
American Property & Casualty.
- 26 -
OTHER OPERATIONS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2001
--------------------------------------------- ----------------------------------------------
Asbestos Environ. All Other Total Asbestos Environ. All Other Total
--------------------------------------------- ----------------------------------------------
Beginning liability - net [1] $ 616 $ 654 $ 1,593 $ 2,863 $ 572 $ 911 $ 1,639 $ 3,122
Claims and claim adjustment
expenses incurred 33 (5) 63 91 28 15 104 147
Claims and claim adjustment
expenses paid (47) (51) (95) (193) (84) (172) (150) (406)
Transfer of HartRe
International [2] -- -- 300 300 -- -- -- --
Other [3] 540 60 (600) -- 100 (100) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY - NET [4] [5] $ 1,142 $ 658 $ 1,261 $ 3,061 $ 616 $ 654 $ 1,593 $ 2,863
====================================================================================================================================
<FN>
[1] The net beginning liability for the year ended December 31, 2001 has been
adjusted to reflect the fourth quarter 2001 intercompany reinsurance
cession, primarily related to Asbestos and Environmental reserves, from
the Specialty Commercial segment to Other Operations. Also, excludes
reserves of Property and Casualty's international businesses.
[2] Represents the January 1, 2002 transfer of reserves from the exited
international reinsurance business of HartRe from the Reinsurance segment
to Other Operations.
[3] The nature of these reallocations is described in the two paragraphs
immediately following this table.
[4] Ending liabilities include reserves for Asbestos and Environmental
reported in North American Property & Casualty of $11 and $16,
respectively, as of June 30, 2002 and $6 and $32, respectively, as of
December 31, 2001.
[5] Gross of reinsurance, reserves for Asbestos and Environmental were $1,874
and $807, respectively, as of June 30, 2002 and $1,633 and $919,
respectively, as of December 31, 2001.
</FN>
During 2001, the Company observed a decrease in newly reported environmental
claims as well as favorable settlements with respect to certain existing
environmental claims. Both observations were consistent with longer-term
positive development trends for environmental liabilities. In the same
timeframe, consistent with the reports of other insurers, The Hartford was
experiencing an increase in the number of new asbestos claims by policyholders
not previously identified as potentially significant claimants, including
installers or handlers of asbestos-containing products. In addition, new classes
of claims were beginning to arise whereby some asbestos-related defendants were
asserting that their asbestos-related claims fall within so-called non-products
liability coverage contained within their policies rather than products
liability coverage and that the claimed non-products coverage is not subject to
any aggregate limit. Also, as previously noted, The Hartford consolidated
management and claims handling responsibility of all of its asbestos and
environmental exposures within Other Operations in 2001. Based on a review of
the environmental claim trends that was completed in the fourth quarter of 2001
under the supervision of the then newly consolidated management structure and in
light of the further uncertainties posed by the foregoing asbestos trends, the
Company reclassified $100 of Environmental reserves to Asbestos reserves in
2001.
In the second quarter of 2002, The Hartford completed a review of its Other
Operations reserves and liabilities then categorized as "All Other". This review
was part of the Company's ongoing monitoring of reserves. The Hartford's primary
records of the reserves and policies managed in the Other Operations segment are
organized by individual insurance contract and by the type of insurance coverage
originally written. The review was conducted within the recently consolidated
asbestos and environmental management structure and was largely focused on the
appropriateness of the categorization of the All Other reserves, net of
reinsurance. In evaluating the appropriateness of the categorization of these
net reserves, management utilized the best information that was available to
ascertain the nature of the underlying exposures and focused significantly on
the reserves attributable to The Hartford's whole account reinsurance, including
those reserves that related to commutations of previous cessions of business.
The review also incorporated the most current information and payment and
settlement trends related to latent exposures that are not asbestos and
environmental exposures. As a result of this review, the Company reclassified
$600 of reserves from the All Other category, with $540 reclassified to Asbestos
and $60 reclassified to Environmental. The increase in reserves categorized as
Environmental of $60 in the second quarter (as contrasted with the $100 decrease
in the fourth quarter of 2001) occurred because the reviews in each of the two
periods employed actuarial techniques to analyze distinct and non-overlapping
blocks of reserves and associated exposures. Facts and circumstances associated
with each block then determined the resulting changes in category.
A portion of the 2002 reclassification relates to re-estimates of the
appropriate allocation between Asbestos, Environmental, and All Other categories
of the aggregate reserves (net of reinsurance) carried for certain assumed
reinsurance, commuted cessions and commuted retrocessions of whole account
business. As part of the 2002 reclassification, The Hartford also revised
formulas that it will use to allocate (between the Asbestos, Environmental and
All Other categories) future claim payments for which reinsurance arrangements
were commuted and to allocate claim payments made to effect commutations. As a
result of these revisions, payments categorized as asbestos and environmental
exposures will be higher in future periods than in prior periods. The Hartford
believes that any percent increase in claim payments caused by the
reclassification would be significantly less than the percent increase in total
Asbestos reserves.
On May 14, 2002, The Hartford announced its participation, along with several
dozen other insurance carriers, in a settlement in principle with its insured,
PPG Industries ("PPG"), of litigation
- 27 -
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 and allows The Hartford to prepay its
obligations at any time at a fixed discount rate of 5.5%. 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 estimated the settlement
amount to be approximately $130 (non tax-effected) on a discounted basis and net
of anticipated reinsurance recoveries. The settlement was covered by existing
asbestos reserves, and as a result, did not have a material impact on the
Company's consolidated financial condition or results of operations.
Based on currently known facts and the Company's methodologies for estimating
and categorizing reserves for Other Operations, The Hartford believes that the
level of recorded reserves for Other Operations at June 30, 2002 is reasonable
and appropriate. Because of the significant uncertainties described in the
foregoing paragraphs, principally those related to asbestos, the ultimate
liabilities may exceed the currently recorded reserves. Any such additional
liability (or any range of additional amounts) cannot be reasonably estimated
now but could be material to The Hartford's future consolidated operating
results and financial condition. Consistent with the Company's long-standing
reserving practices, The Hartford will continue to regularly review and monitor
these reserves and, where future circumstances indicate, make appropriate
adjustments to the reserves.
- --------------------------------------------------------------------------------
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
have a material impact on the Company's consolidated financial condition or its
results of operations. Additionally, changes in market interest rates may impact
the period of time over which certain investments, such as mortgage-backed
securities, are repaid and whether certain investments are called by the
issuers. Such changes may, in turn, impact the yield on these investments and
also may result in reinvestment of funds received from calls and prepayments at
rates below the average portfolio yield.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, fixed maturity investments, which comprised 87% and 86% of the fair
value of its invested assets as of June 30, 2002 and December 31, 2001,
respectively. Other events beyond the Company's control also could impact
adversely the fair value of these investments. For example, a downgrade of an
issuer's credit rating or default of payment by an issuer could reduce the fair
value of the investment and 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
consolidated financial results prior to the actual sale of the investment and
may result in the recognition of either a gain or an additional loss upon the
ultimate disposition 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 June 30, 2002 and December 31, 2001.
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
AMOUNT PERCENT AMOUNT PERCENT
-------------- -------------- -------------- -----------
Fixed maturities, at fair value $ 25,549 84.0% $ 23,301 82.1%
Equity securities, at fair value 416 1.4% 428 1.5%
Policy loans, at outstanding balance 3,204 10.5% 3,317 11.7%
Limited partnerships, at fair value 690 2.3% 811 2.9%
Other investments 537 1.8% 520 1.8%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 30,396 100.0% $ 28,377 100.0%
====================================================================================================================================
Fixed maturity investments increased by 10% since December 31, 2001, primarily
due to the investment of operating cash flows and an increase in fair value due
to a lower interest rate environment.
The following table identifies fixed maturities by type held in the Life general
account as of June 30, 2002 and December 31, 2001.
- 28 -
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
Corporate $ 12,367 48.4% $ 11,419 49.0%
Asset-backed securities (ABS) 3,696 14.5% 3,427 14.7%
Commercial mortgage-backed securities (CMBS) 3,339 13.1% 3,029 13.0%
Municipal - tax-exempt 1,843 7.2% 1,565 6.7%
Mortgage-backed securities (MBS) - agency 1,458 5.7% 981 4.2%
Collateralized mortgage obligations (CMO) 642 2.5% 767 3.3%
Government/Government agencies - United States 466 1.8% 374 1.6%
Government/Government agencies - foreign 434 1.7% 390 1.7%
Municipal - taxable 32 0.1% 47 0.2%
Short-term 1,240 4.9% 1,245 5.3%
Redeemable preferred stock 32 0.1% 57 0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 25,549 100.0% $ 23,301 100.0%
====================================================================================================================================
INVESTMENT RESULTS
The table below summarizes Life's investment results.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
(before-tax) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 382 $ 365 $ 763 $ 717
Policy loan income 68 78 135 156
---------------------------------------------------------
Net investment income - total $ 450 $ 443 $ 898 $ 873
Yield on average invested assets [1] 6.2% 6.9% 6.2% 7.1%
Net realized capital losses $ (120) $ (17) $ (135) $ (17)
====================================================================================================================================
<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 second quarter and six months ended June 30, 2002, net investment
income, excluding policy loans, increased $17, or 5%, and $46, or 6%, compared
to the respective prior year periods. 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 June 30, 2001 primarily due to
operating cash flows. 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 second quarter and six months ended June 30,
2002 increased $103 and $118 compared to the respective prior year periods.
Included in the second quarter and six months ended June 30, 2002 were
write-downs for other than temporary impairments on fixed maturities of $144 and
$159, respectively, including a $74 before-tax loss related to securities issued
by WorldCom taken in the second quarter ended June 30, 2002.
PROPERTY & CASUALTY
The following table identifies invested assets by type as of June 30, 2002 and
December 31, 2001.
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
AMOUNT PERCENT AMOUNT PERCENT
---------------------------------------------------------
Fixed maturities, at fair value $ 17,433 92.1% $ 16,742 91.5%
Equity securities, at fair value 738 3.9% 921 5.0%
Limited partnerships, at fair value 523 2.7% 561 3.0%
Other investments 240 1.3% 85 0.5%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 18,934 100.0% $ 18,309 100.0%
====================================================================================================================================
Total fixed maturities increased slightly since December 31, 2001, due to the
investment of operating cash flows and an increase in the fair value due to a
lower interest rate environment.
The following table identifies fixed maturities by type as of June 30, 2002 and
December 31, 2001.
- 29 -
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
Municipal - tax-exempt $ 8,659 49.7% $ 8,401 50.2%
Corporate 4,533 26.0% 4,179 25.0%
Commercial mortgage-backed securities (CMBS) 1,331 7.6% 1,145 6.8%
Asset-backed securities (ABS) 700 4.0% 717 4.3%
Government/Government agencies - foreign 673 3.9% 613 3.6%
Mortgage-backed securities (MBS) - agency 495 2.8% 381 2.3%
Collateralized mortgage obligations (CMO) 135 0.8% 97 0.6%
Government/Government agencies - United States 70 0.4% 201 1.2%
Municipal - taxable 50 0.3% 47 0.3%
Short-term 718 4.1% 862 5.1%
Redeemable preferred stock 69 0.4% 99 0.6%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 17,433 100.0% $ 16,742 100.0%
====================================================================================================================================
INVESTMENT RESULTS
The table below summarizes Property & Casualty's investment results.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income, before-tax $ 271 $ 271 $ 525 $ 528
Net investment income, after-tax [1] $ 209 $ 210 $ 408 $ 411
------------------------------------------------------------
Yield on average invested assets, before-tax [2] 6.0% 6.4% 5.9% 6.2%
Yield on average invested assets, after-tax [1] [2] 4.7% 4.9% 4.6% 4.8%
Net realized capital gains (losses), before-tax $ (46) $ (21) $ (38) $ (20)
====================================================================================================================================
<FN>
[1] Due to the significant holdings in tax-exempt investments, after-tax net
investment income and after-tax yield also are 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 second quarter and six months ended June 30, 2002, both before- and
after-tax net investment income remained essentially unchanged compared to the
same periods in 2001. Yields on average invested assets declined due to the
lower interest rate environment, offsetting the impact of increased invested
assets.
Net realized capital losses for the second quarter and six months ended June 30,
2002 increased $25 and $18, respectively, compared to the same periods in 2001.
Included in the second quarter and six months ended June 30, 2002 were
write-downs for other than temporary impairments on fixed maturities of $76 and
$94, respectively, including a $36 before-tax loss related to securities issued
by WorldCom, and $16 and $24 on equities, respectively, partially offset by net
realized capital gains on sales of equity securities.
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
second quarter and six months ended June 30, 2002 was $5 and $9, respectively,
before-tax. Also reported in Corporate as of June 30, 2002 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.
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.
- 30 -
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 at regular intervals. The Hartford is not exposed to
any credit concentration risk of a single issuer greater than 10% of the
Company's stockholders' equity.
The following tables identify fixed maturity securities for Life, including
guaranteed separate accounts of $10.7 billion and $9.8 billion as of June 30,
2002 and December 31, 2001, respectively, 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 June 30, 2002 and December 31, 2001, over 95% and 96%, respectively, of
the fixed maturity portfolio was invested in securities rated investment grade.
While the overall credit quality of the fixed maturity portfolio has remained
essentially unchanged, the percentages of BBB and BB & below holdings have
increased due to downgraded credit ratings primarily in public corporate bonds.
FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
United States Government/Government agencies $ 3,247 9.0% $ 2,639 8.0%
AAA 5,664 15.6% 5,070 15.3%
AA 3,949 10.9% 3,644 11.0%
A 11,589 32.0% 11,528 34.8%
BBB 8,693 24.0% 7,644 23.1%
BB & below 1,620 4.4% 1,148 3.4%
Short-term 1,483 4.1% 1,470 4.4%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 36,245 100.0% $ 33,143 100.0%
====================================================================================================================================
PROPERTY & CASUALTY
As of June 30, 2002 and December 31, 2001, over 94% of the fixed maturity
portfolio was invested in securities rated investment grade. While the overall
credit quality of the fixed maturity portfolio has remained essentially
unchanged, the percentages of BBB and BB & below holdings have increased due to
downgraded credit ratings primarily in public corporate bonds.
FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------
United States Government/Government agencies $ 648 3.7% $ 639 3.8%
AAA 6,661 38.2% 6,160 36.8%
AA 3,171 18.2% 3,126 18.7%
A 3,088 17.7% 3,193 19.1%
BBB 2,168 12.5% 1,876 11.2%
BB & below 979 5.6% 886 5.3%
Short-term 718 4.1% 862 5.1%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 17,433 100.0% $ 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.
The Company's Life operations are significantly influenced by changes in the
equity markets. Life's profitability depends largely on the amount of assets
under management, which is primarily driven by the level of sales, equity market
appreciation and depreciation, and the persistency of the in-force block of
business. A prolonged and precipitous decline in the equity markets, as has been
experienced of late, can have a significant impact on the Company's operations,
as sales of variable products may decline and surrender activity may increase,
as customer sentiment towards the equity market turns negative. The lower assets
under management will have a negative impact on the Company's financial results,
primarily due to lower fee income related to the Investment Products and
Individual Life segments, where a heavy concentration of equity linked products
are administered and sold. Furthermore, the Company may experience a reduction
in profit margins if a significant portion of the assets held in the variable
annuity separate accounts move to the general account and the Company is unable
to earn an acceptable investment spread, particularly in light of the low
interest rate environment and the presence of contractually guaranteed minimum
interest credited rates, which for the most part are at a 3% rate. (For further
- 31 -
discussion of the Company's exposure to interest rate risk, please refer to the
Capital Markets Risk Management section of the MD&A in The Hartford's 2001 Form
10-K Annual Report.)
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of deferred policy acquisition costs (DAC) to be amortized in a given
financial statement period. A significant decrease in the Company's expected
gross profits would require the Company to accelerate the amount of DAC
amortization in a given period, potentially causing a material adverse deviation
in that period's net income. Although an acceleration of DAC amortization would
have a negative impact on the Company's earnings, it would not affect the
Company's cash flow or liquidity position.
Additionally, the Investment Products segment sells variable annuity contracts
that offer various guaranteed death benefits. For certain guaranteed death
benefits, The Hartford pays the greater of (1) the account value at death; (2)
the sum of all premium payments less prior withdrawals; or (3) the maximum
anniversary value of the contract, plus any premium payments since the contract
anniversary, minus any withdrawals following the contract anniversary. The
Company currently reinsures a significant portion of these death benefit
guarantees associated with its in-force block of business. The Company currently
records the death benefit costs, net of reinsurance, as they are incurred.
Declines in the equity market may increase the Company's net exposure to death
benefits under these contracts. Furthermore, the Company is involved in
arbitration with one of its primary reinsurers relating to policies with such
death benefit guarantees written from 1994 to 1999. The arbitration involves
alleged breaches under the reinsurance treaties. Although the Company believes
that its position in this pending arbitration is strong, an adverse outcome
could result in a decrease to the Company's statutory surplus and capital and
potentially increase the death benefit costs incurred by the Company in the
future. The arbitration hearing currently is set to begin in October 2002.
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 four
Company-approved risk management strategies: to hedge risk arising from interest
rate, price or currency exchange rate volatility; to manage liquidity; to
control transaction costs; or to enter into income enhancement and replication
transactions. 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.)
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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:
JUNE 30, 2002 DECEMBER 31, 2001
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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) 1,429 1,412
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT 4,009 3,976
-----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities and other, net of tax [1] 8,790 8,344
Unrealized gain on securities and other, net of tax [1] 866 669
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TOTAL STOCKHOLDERS' EQUITY 9,656 9,013
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 12,799 $ 12,320
-----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 46% 48%
Debt to capitalization [2] [3] 31% 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 29% and
31% and the debt to capitalization ratio was 20% and 21% as of June 30,
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 $479 as of June 30, 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.
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Dividends - On April 18, 2002, The Hartford declared a dividend on its common
stock of $0.26 per share payable on July 1, 2002 to shareholders of record as of
June 3, 2002.
On July 18, 2002, The Hartford declared a dividend on its common stock of $0.26
per share payable on October 1, 2002 to shareholders of record as of September
3, 2002.
CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
- ------------------------------------------------------------------
Cash provided by operating activities $ 1,114 $ 682
Cash used for investing activities $ (2,234) $ (2,888)
Cash provided by financing activities $ 1,078 $ 2,307
Cash - end of period $ 319 $ 324
- ------------------------------------------------------------------
The increase in cash provided by operating activities was primarily the result
of income tax refunds received in 2002 compared with income tax payments made in
the prior year period. 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
related to the Fortis acquisition partially offset by increased operating cash
flows. Operating cash flows in both periods have been adequate to meet liquidity
requirements.
RATINGS
After September 11 and subsequent reviews by major independent rating agencies,
all insurance financial strength and debt ratings of The Hartford were
reaffirmed. However, negative outlooks were placed upon the debt ratings of the
Company by Moody's and the property and casualty financial strength rating by
Standard & Poor's ("S&P"). All other ratings were reaffirmed with stable
outlooks. The Company has communicated to S&P its intention to seek to improve
over time its property-casualty capital adequacy as measured by S&P's capital
adequacy model to a level commensurate with its S&P rating. As a result of its
S&P capital adequacy or any other future rating issues, the Company may take a
variety of actions, which could include the issuance of debt or equity
securities.
EQUITY MARKETS
For a discussion of equity markets impact to capital and liquidity, see the
Capital Markets Risk Management section under "Market Risk".
- --------------------------------------------------------------------------------
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Hartford is involved in legal actions, some of which assert claims for
substantial amounts. These actions include, among others, putative state and
federal class actions seeking certification of a state or national class. Such
putative class actions have alleged, for example, underpayment of claims or
improper underwriting practices in connection with various kinds of insurance
policies, such as personal and commercial automobile, premises liability, and
inland marine. The Hartford also is involved in individual actions in which
punitive damages are sought, such as claims alleging bad faith in the handling
of insurance claims. Management expects that the ultimate liability, if any,
with respect to such lawsuits, after consideration of provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial condition of The Hartford. Nonetheless, given the large or
indeterminate amounts sought in certain of these actions, and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated results of operations or cash flows in particular
quarterly or annual periods.
The Hartford also is involved in claims litigation arising in the ordinary
course of business, both as a liability insurer defending third-party claims
brought against insureds or as an insurer defending coverage claims brought
against it. The Hartford accounts for such activity through the establishment of
unpaid claim and claim adjustment expense reserves. Subject to the
qualifications discussed in the MD&A under the caption "Other Operations,"
management expects that the ultimate liability, if any, with respect to such
ordinary-course claims litigation, after consideration of provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial condition, results of operations or cash flows of The Hartford.
As further discussed in the MD&A under the caption "Other Operations," 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. In addition, on May 14, 2002, The
Hartford announced its participation, along with several dozen other insurance
carriers, in a settlement in principle with its insured, PPG Industries ("PPG"),
of litigation arising from asbestos exposures involving Pittsburgh Corning
Corporation, which is 50% owned by PPG. The settlement is described more fully
in the MD&A under the caption "Other Operations: Reserve Activity."
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, among other things, 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 also is involved in arbitration with one of its primary reinsurers
relating to variable annuity contracts with death benefit guarantees. The
arbitration is discussed more fully in the MD&A under the caption "Capital
Markets Risk Management - Market Risk".
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 June 30, 2002, the Company filed the
following current reports on Form 8-K:
o dated April 16, 2002, Item 9, Regulation FD Disclosure, to report
two changes to The Hartford's Investor Supplement in its North
American Property & Casualty results.
o dated April 23, 2002, Item 4, Changes in Registrant's Certifying
Accountants, to report the engagement of Deloitte & Touche LLP as
The Hartford's independent public accountants.
o dated May 17, 2002, Item 4, Changes in Registrant's Certifying
Accountants, amending The Hartford's Current Report on Form 8-K
dated March 26, 2002.
o dated May 17, 2002, Item 4, Changes in Registrant's Certifying
Accountants, to report the dismissal of Arthur Andersen LLP as The
Hartford's Investment and Savings Plan's independent public
accountants.
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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/ Robert J. Price
-------------------------------------------
Robert J. Price
Senior Vice President and Controller
AUGUST 12, 2002
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT #
---------
15.01 Accountants' Letter of Awareness
- 36 -
Exhibit 15.01
ACCOUNTANTS' LETTER OF AWARENESS
The Hartford Financial Services Group, Inc.
Hartford, CT
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited consolidated interim
financial information of The Hartford Financial Services Group, Inc. and
subsidiaries for the second quarter and six months ended June 30, 2002, as
indicated in our report dated August 12, 2002; because we did not perform an
audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, is
incorporated by reference in Registration Statement Nos. 33-80663, 33-80665,
333-12563, 333-49170 and 333-34092 on Form S-8 and Registration Statement Nos.
333-12617, 333-49666 and 333-88762 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Hartford, CT
August 12, 2002
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