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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2003
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 001-13958
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[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No[ ]
As of October 31, 2003, there were outstanding 282,903,893 shares of Common
Stock, $0.01 par value per share, of the registrant.
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- 1 -
INDEX
PAGE
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Independent Accountants' Review Report 3
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS 4
Condensed Consolidated Statements of Operations - Third Quarter
and Nine Months Ended September 30, 2003 and 2002 4
Condensed Consolidated Balance Sheets - September 30, 2003 and
December 31, 2002 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity - Nine Months Ended September 30, 2003 and 2002 6
Condensed Consolidated Statements of Comprehensive Income (Loss)
- - Third Quarter and Nine Months Ended September 30, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 59
ITEM 4. CONTROLS AND PROCEDURES 59
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 60
ITEM 5. OTHER INFORMATION 61
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 61
Signature 62
Exhibits Index 63
- 2 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of The
Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of
September 30, 2003 and the related condensed consolidated statements of
operations and comprehensive income (loss) for the third quarter and nine months
ended September 30, 2003 and 2002, and changes in stockholders' equity and cash
flows for the nine months ended September 30, 2003 and 2002. These interim
financial statements are the responsibility of the Company's management.
We conducted our reviews 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 and
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 reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002, and the related consolidated statements of
income, changes in stockholders' equity, comprehensive income and cash flows for
the year then ended (not presented herein); and in our report dated February 19,
2003, which includes an explanatory paragraph relating to the Company's change
in its method of accounting for goodwill and indefinite-lived intangible assets
in 2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2002 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
November 3, 2003
- 3 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
(IN MILLIONS, EXCEPT FOR PER SHARE DATA) 2003 2002 2003 2002
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(Unaudited) (Unaudited)
REVENUES
Earned premiums $ 3,249 $ 2,774 $ 8,910 $ 8,000
Fee income 716 627 1,989 1,961
Net investment income 825 729 2,431 2,161
Other revenues 145 115 414 348
Net realized capital gains (losses) 12 (160) 216 (333)
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TOTAL REVENUES 4,947 4,085 13,960 12,137
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BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,998 2,557 10,872 7,455
Amortization of deferred policy acquisition costs and present value
of future profits 633 568 1,754 1,696
Insurance operating costs and expenses 609 567 1,801 1,661
Other expenses 271 199 693 563
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TOTAL BENEFITS, CLAIMS AND EXPENSES 4,511 3,891 15,120 11,375
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INCOME (LOSS) BEFORE INCOME TAXES 436 194 (1,160) 762
Income tax expense (benefit) 93 (71) (615) 20
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NET INCOME (LOSS) $ 343 $ 265 $ (545) $ 742
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BASIC EARNINGS (LOSS) PER SHARE $ 1.21 $ 1.06 $ (2.03) $ 3.00
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DILUTED EARNINGS (LOSS) PER SHARE [1] $ 1.20 $ 1.06 $ (2.03) $ 2.96
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Weighted average common shares outstanding 282.5 248.9 268.9 247.4
Weighted average common shares outstanding and dilutive potential
common shares [1] 284.8 250.5 268.9 250.3
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Cash dividends declared per share $ 0.27 $ 0.26 $ 0.81 $ 0.78
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<FN>
[1] As a result of the net loss for the nine months ended September 30, 2003,
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", requires the Company to use basic weighted average common shares
outstanding in the calculation of the nine months ended September 30, 2003
diluted earnings (loss) per share, since the inclusion of options of 1.5
would have been antidilutive to the earnings per share calculation. In the
absence of the net loss, weighted average common shares outstanding and
dilutive potential common shares would have totaled 270.4.
</FN>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS, EXCEPT FOR SHARE DATA) 2003 2002
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(Unaudited)
ASSETS
Investments
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Fixed maturities, available-for-sale, at fair value (amortized cost of $55,649 and $46,241) $ 58,909 $ 48,889
Equity securities, available-for-sale, at fair value (cost of $584 and $937) 639 917
Policy loans, at outstanding balance 2,533 2,934
Other investments 1,539 1,790
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Total investments 63,620 54,530
Cash 496 377
Premiums receivable and agents' balances 2,831 2,611
Reinsurance recoverables 6,215 5,027
Deferred policy acquisition costs and present value of future profits 7,247 6,689
Deferred income taxes 888 545
Goodwill 1,720 1,721
Other assets 3,238 3,397
Separate account assets 125,110 107,078
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TOTAL ASSETS $ 211,365 $ 181,975
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LIABILITIES
Reserve for future policy benefits and unpaid claims and claim adjustment expenses
Property and casualty $ 21,444 $ 17,091
Life 9,351 8,567
Other policyholder funds and benefits payable 26,240 23,956
Unearned premiums 4,560 3,989
Short-term debt 515 315
Long-term debt 3,660 2,596
Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding
solely junior subordinated debentures ("trust preferred securities") 962 1,468
Other liabilities 8,179 6,181
Separate account liabilities 125,110 107,078
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TOTAL LIABILITIES 200,021 171,241
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COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY
Common stock - 750,000,000 shares authorized, 285,666,976 and 258,184,483 shares issued,
$0.01 par value 3 3
Additional paid-in capital 3,897 2,784
Retained earnings 6,124 6,890
Treasury stock, at cost - 2,948,161 and 2,943,565 shares (37) (37)
Accumulated other comprehensive income 1,357 1,094
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TOTAL STOCKHOLDERS' EQUITY 11,344 10,734
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 211,365 $ 181,975
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
(IN MILLIONS, EXCEPT FOR SHARE DATA) 2003 2002
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COMMON STOCK/ADDITIONAL PAID-IN CAPITAL (Unaudited)
Balance at beginning of period $ 2,787 $ 2,364
Issuance of common stock in underwritten offering 1,161 330
Issuance of equity units (112) (33)
Issuance of shares and compensation expense associated with incentive and stock
compensation plans 56 89
Tax benefit on employee stock options and awards 8 19
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Balance at end of period 3,900 2,769
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RETAINED EARNINGS
Balance at beginning of period 6,890 6,152
Net income (loss) (545) 742
Dividends declared on common stock (221) (193)
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Balance at end of period 6,124 6,701
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TREASURY STOCK, AT COST
Balance at beginning of period (37) (37)
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Balance at end of period (37) (37)
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period 1,094 534
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Change in net unrealized gain/loss on securities, net of tax 349 899
Change in net gain/loss on cash-flow hedging instruments, net of tax (81) 81
Foreign currency translation adjustments (5) (4)
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Total other comprehensive income 263 976
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Balance at end of period 1,357 1,510
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TOTAL STOCKHOLDERS' EQUITY $ 11,344 $ 10,943
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OUTSTANDING SHARES (IN THOUSANDS)
Balance at beginning of period 255,241 245,536
Issuance of common stock in underwritten offering 26,377 7,303
Issuance of shares under incentive and stock compensation plans 1,101 2,170
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Balance at end of period 282,719 255,009
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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(IN MILLIONS) 2003 2002 2003 2002
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COMPREHENSIVE INCOME (LOSS) (Unaudited) (Unaudited)
Net income (loss) $ 343 $ 265 $ (545) $ 742
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OTHER COMPREHENSIVE INCOME (LOSS)
Change in net unrealized gain/loss on securities, net of tax (383) 716 349 899
Change in net gain/loss on cash-flow hedging instruments, net of tax (43) 67 (81) 81
Foreign currency translation adjustments (24) (1) (5) (4)
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Total other comprehensive income (450) 782 263 976
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TOTAL COMPREHENSIVE INCOME (LOSS) $ (107) $ 1,047 $ (282) $ 1,718
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER, 30,
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(IN MILLIONS) 2003 2002
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(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ (545) $ 742
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Amortization of deferred policy acquisition costs and present value of future profits 1,754 1,696
Additions to deferred policy acquisition costs and present value of future profits (2,434) (2,129)
Change in:
Reserve for future policy benefits and unpaid claims and claim adjustment expenses and
unearned premiums 5,601 1,055
Reinsurance recoverables (1,246) 208
Receivables (215) (282)
Payables and accruals (151) 114
Accrued and deferred income taxes (520) 229
Net realized capital (gains) losses (216) 333
Depreciation and amortization 199 61
Other, net 651 34
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,878 2,061
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INVESTING ACTIVITIES
Purchase of investments (24,559) (15,992)
Sale of investments 14,909 8,304
Maturity of investments 2,818 2,033
Sale of affiliates 33 3
Additions to property, plant and equipment (74) (128)
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NET CASH USED FOR INVESTING ACTIVITIES (6,873) (5,780)
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FINANCING ACTIVITIES
Issuance of short-term debt, net -- 16
Issuance of long-term debt 1,235 617
Repayment of trust preferred securities (500) --
Issuance of common stock in underwritten offering 1,162 330
Net proceeds from investment and universal life-type contracts charged against
policyholder accounts 2,399 2,916
Dividends paid (215) (192)
Proceeds from issuance of shares under incentive and stock purchase plans 34 84
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NET CASH PROVIDED BY FINANCING ACTIVITIES 4,115 3,771
================================================================================================================================
Foreign exchange rate effect on cash (1) 8
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Net increase in cash 119 60
Cash - beginning of period 377 353
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CASH - END OF PERIOD $ 496 $ 413
================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- -------------------------------------------------
NET CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Income taxes $ (121) $ (162)
Interest $ 178 $ 167
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 7 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions except per share data unless otherwise stated)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The Hartford Financial Services Group, Inc. and its consolidated subsidiaries
("The Hartford" or the "Company") provide investment products and life and
property and casualty insurance to both individual and business customers in the
United States and internationally.
The condensed consolidated financial statements have been prepared on the basis
of accounting principles generally accepted in the United States of America,
which differ materially from the accounting practices prescribed by various
insurance regulatory authorities. Subsidiaries in which The Hartford has at
least a 20% interest, but less than a majority ownership interest, are reported
on the equity basis. All material intercompany transactions and balances between
The Hartford, its subsidiaries and affiliates have been eliminated.
The accompanying condensed consolidated financial statements and the condensed
notes as of September 30, 2003, and for the third quarter and nine months ended
September 30, 2003 and 2002 are unaudited. These financial statements reflect
all adjustments (consisting only of normal accruals) which are, in the opinion
of management, necessary for the fair presentation of the financial position,
results of operations, and cash flows for the interim periods. These condensed
consolidated financial statements and condensed notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in The Hartford's 2002 Form 10-K Annual Report. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
(B) RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial information
to conform to the current period classifications.
(C) USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The most significant estimates include those used in determining reserves for
future policy benefits and unpaid claim and claim adjustment expenses; deferred
policy acquisition costs; valuation of investments and derivative instruments;
pension and other postretirement benefits; and contingencies.
(D) SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 1 of Notes to Consolidated
Financial Statements included in The Hartford's 2002 Form 10-K Annual Report.
(E) ADOPTION OF NEW ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Generally, SFAS No. 150 requires
liability classification for two broad classes of financial instruments: (a)
instruments that represent, or are indexed to, an obligation to buy back the
issuer's shares regardless of whether the instrument is settled on a net-cash or
gross physical basis and (b) obligations that (i) can be settled in shares but
derive their value predominately from another underlying instrument or index
(e.g. security prices, interest rates, and currency rates), (ii) have a fixed
value, or (iii) have a value inversely related to the issuer's shares.
Mandatorily redeemable equity and written options requiring the issuer to
buyback shares are examples of financial instruments that should be reported as
liabilities under this new guidance.
SFAS No. 150 specifies accounting only for certain freestanding financial
instruments and does not affect whether an embedded derivative must be
bifurcated and accounted for in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
SFAS No. 150 is effective for instruments entered into or modified after May 31,
2003 and for all other instruments beginning with the first interim reporting
period beginning after June 15, 2003. Adoption of this statement did not have a
material impact on the Company's consolidated financial condition or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133.
SFAS No. 149 amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group ("DIG") process that effectively required amendments to
SFAS No. 133, in connection with other FASB projects dealing with financial
instruments. SFAS No. 149 also clarifies under what circumstances a contract
with an initial net investment and purchases and sales of when-issued securities
that do not yet exist meet the characteristics of a derivative as discussed in
SFAS No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003. The provisions of this statement should be applied prospectively,
except as stated below.
- 8 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
(E) ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
The provisions of SFAS No. 149 that relate to SFAS No. 133 DIG issues that have
been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. In
addition, the guidance in SFAS No. 149 related to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on the
Company's consolidated financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
requires an enterprise to assess whether consolidation of an entity is
appropriate based upon its interests in a variable interest entity ("VIE"). A
VIE is an entity in which the equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. The initial determination of whether an entity is a
VIE shall be made on the date at which an enterprise becomes involved with the
entity. An enterprise shall consolidate a VIE if it has a variable interest that
will absorb a majority of the VIE's expected losses if they occur, receive a
majority of the entity's expected residual returns if they occur or both. FIN 46
was effective immediately for new VIEs established or purchased subsequent to
January 31, 2003. For VIEs established or purchased subsequent to January 31,
2003, the adoption of FIN 46 did not have a material impact on the Company's
consolidated financial condition or results of operations as there were no
material VIEs identified which required consolidation.
For VIEs entered into prior to February 1, 2003, FIN 46 was originally effective
for interim periods beginning after June 15, 2003. In October 2003, the FASB
deferred this effective date until interim or annual periods ending after
December 15, 2003. Early adoption is permitted. The Company has elected to defer
the adoption of FIN 46 for VIEs created before February 1, 2003 until the fourth
quarter of 2003. The adoption of FIN 46 for these VIEs is not expected to have a
material impact on the Company's consolidated financial condition or results of
operations. FIN 46 further requires the disclosure of certain information
related to VIEs in which the Company holds a significant variable interest. As
of September 30, 2003, the Company did not own any such interests that required
disclosure.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45" or "the Interpretation"). FIN 45 requires
certain guarantees to be recorded at fair value and also requires a guarantor to
make new disclosures, even when the likelihood of making payments under the
guarantee is remote. In general, the Interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument or
indices (e.g., security prices, interest rates, or currency rates) that are
related to an asset, liability or an equity security of the guaranteed party.
The recognition provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002. For further discussion, see Note 5(c),
"Lease Commitments", of Notes to Condensed Consolidated Financial Statements and
Note 1(h), "Other Investment and Risk Management Activities-Specific
Strategies", of Notes to Consolidated Financial Statements included in The
Hartford's 2002 Form 10-K Annual Report. Adoption of this statement did not have
a material impact on the Company's consolidated financial condition or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The
principal difference between SFAS No. 146 and Issue 94-3 is that SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. Adoption of SFAS No. 146
resulted in a change in the timing of when a liability is recognized for certain
restructuring activities after December 31, 2002. Adoption of this statement did
not have a material impact on the Company's consolidated financial condition or
results of operations.
(F) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In July 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a final Statement of Position
03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP").
The SOP addresses a wide variety of topics, some of which may have a significant
impact on the Company. The major provisions of the SOP require:
o Recognizing expenses for a variety of contracts and contract features,
including guaranteed minimum death benefits ("GMDB") and annuitization
options, on an accrual basis versus the previous method of recognition
upon payment;
o Reporting and measuring assets and liabilities of certain separate
account products as general account assets and liabilities when
specified criteria are not met;
o Reporting and measuring seed money in separate accounts as general
account assets based on the insurer's proportionate beneficial interest
in the separate account's underlying assets; and
o Capitalizing sales inducements that meet specified criteria and
amortizing such amounts over the life of the contracts using the same
methodology as used for amortizing deferred acquisition costs ("DAC").
- 9 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
(F) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. At the date of initial application of this SOP, the Company
will have to make various determinations, such as qualification for separate
account treatment, classification of securities in separate account arrangements
not meeting the criteria of the SOP, significance of mortality and morbidity
risk, adjustments to contract holder liabilities, and adjustments to estimated
gross profits, all of which may have a significant effect on the Company's
financial condition and results of operations.
Based on management's preliminary review of the SOP and market conditions as of
September 30, 2003, the requirement for recording a liability for variable
annuity products with a guaranteed minimum death benefit feature will have an
impact on the Company's results of operations. The determination of this
liability is based on models that involve numerous estimates and subjective
judgments, including those regarding expected market rates of return and
volatility, contract surrender rates and mortality experience. The unrecorded
GMDB liabilities, net of anticipated reinsurance recoverables of approximately
$270, are estimated to be between $60 and $70 at September 30, 2003. Net of
estimated DAC and income tax effects, the cumulative effect of establishing the
required GMDB reserves as of September 30, 2003 would result in an estimated
reduction of net income of between $30 and $40. The ultimate actual impact on
the Company's financial statements will differ from management's current
estimates and will depend in part on market conditions and other factors at the
date of adoption.
Through September 30, 2003, the Company has not recorded a liability for the
risks associated with GMDB offered on the Company's variable annuity business,
but has consistently recorded the related expenses in the period the benefits
are paid to contractholders. Net of reinsurance, the Investment Products segment
paid $12 and $43 for the third quarter and nine months ended September 30, 2003,
respectively, and $17 and $33 for the third quarter and nine months ended
September 30, 2002, respectively, in GMDB benefits to contractholders. Downturns
in the equity markets could increase these payments. At September 30, 2003, the
Investment Products segment held $68.8 billion of variable annuities in its
separate accounts. The estimate of the net amount at risk relating to these
variable annuities (the amount by which current account values of its variable
annuity contracts are not sufficient to meet its GMDB commitments) was $16.2
billion. However, at September 30, 2003, approximately 77% of the net amount at
risk was covered by reinsurance, resulting in a retained net amount at risk of
$3.7 billion.
In addition to the foregoing impact of the SOP, liabilities for certain of the
Company's fixed annuity products (primarily the Company's compound rate contract
("CRC")), of approximately $11 billion, which are currently recorded at fair
value as guaranteed separate account liabilities will be revalued at current
account value in the general account. The related guaranteed separate account
assets supporting CRC will also be reclassified to the general account as
available for sale securities and will continue to be recorded at fair value
with subsequent changes in fair value, net of amortization of deferred
acquisition costs and income taxes, recorded in other comprehensive income. Upon
adoption of the SOP, the Company will record a cumulative effect adjustment to
earnings equal to the revaluation of the liabilities from fair value to account
value plus the adjustment to record unrealized gains (losses) on the invested
assets, previously recorded as a component of net income, as other comprehensive
income. The cumulative adjustment to earnings as well as the adjustment to other
comprehensive income will be recorded net of amortization of deferred
acquisition costs. The earnings adjustment will also be recorded net of income
taxes. As of September 30, 2003, the Company is still in the process of
evaluating the impact of these changes on its consolidated financial condition
and results of operations. However, it is expected that the impact to
stockholders' equity (accumulated other comprehensive income) will be positive
and significant. Moreover, the interest rate environment at the date of the
adoption of the SOP will have a significant impact on the cumulative effect
change in earnings and other comprehensive income.
The Company's liability for variable annuity products offered in Japan, recorded
at account value in the separate account, will also be reclassified to the
general account. The related separate account assets supporting the Japanese
variable annuity liabilities will be reclassified to the general account, as
well, and recorded in accordance with the Company's investment accounting
policies. As of September 30, 2003, the Company is still in the process of
evaluating the impact of revaluing these separate account assets and liabilities
upon their movement into the general account. The Company does not expect the
impact of adopting the remaining provisions of the SOP to be significant.
In May 2003, the EITF reached a consensus in EITF Issue No. 03-4, "Determining
the Classification and Benefit Attribution Method for a Cash Balance Pension
Plan", that cash balance plans should be considered defined benefit plans for
purposes of applying SFAS No. 87, "Employers' Accounting for Pension Plans". The
EITF also concluded that the attribution method used to determine the benefit
for the entire plan for certain cash balance plans should be the traditional
unit credit method. The consensus is effective as of the next measurement date
of the plan, which is December 31, 2003, for the Company's cash balance plan.
Any difference between the valuation under the previous attribution method and
the new attribution method should be recognized as an actuarial gain or loss.
Adoption of this issue is not expected to have a material impact on the
Company's consolidated financial condition or results of operations.
In April 2003, the FASB issued guidance in Statement 133 Implementation Issue
No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only
Partially Related to the Creditworthiness of the Obligor under Those
Instruments", ("DIG B36") that addresses the instances in which bifurcation of
an instrument into a debt host contract and an embedded credit derivative is
required. DIG B36 indicates that bifurcation is necessary in a modified
coinsurance arrangement
- 10 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
(F) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
when the yield on the receivable and payable is based on a specified proportion
of the ceding company's return on either its general account assets or a
specified block of those assets, rather than the overall creditworthiness of the
ceding company. The Company believes that the majority of its modified
coinsurance and funds withheld agreements are not impacted by DIG B36 as they
were entered into prior to the Company's "grandfather" date for embedded
derivatives, without substantive modifications, or the "modco" payable or
receivable is recorded in the separate account, and is already recorded at fair
value with changes in fair value recorded in net income. The Company has
determined that one of its modified coinsurance does contain an embedded
derivative. The Company believes the embedded derivative is akin to a total
return swap and is in the process of determining the fair value for the swap.
DIG B36 is also applicable to corporate issued debt securities that incorporate
credit risk exposures that are unrelated or only partially related to the
creditworthiness of the obligor. The Company is currently evaluating the impact
of DIG B36 on such corporate issued debt securities. The Company does not
believe the adoption of DIG B36 will have a material effect on the Company's
consolidated financial condition or results of operations.
(G) STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123", which provides three optional transition methods for entities that decide
to voluntarilyadopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock-Based Compensation", and modifies the disclosure
requirements of SFAS No. 123. In January 2003, the Company adopted the fair
value recognition provisions of accounting for employee stock compensation and
used the prospective transition method. Under the prospective method,
stock-based compensation expense is recognized for awards granted or modified
after the beginning of the fiscal year in which the change is made. The fair
value of stock-based awards granted during the nine months ended September 30,
2003 was $40, after-tax. The fair value of these awards will be recognized as
expense over the awards' vesting periods, generally three years.
All stock-based awards granted or modified prior to January 1, 2003 will
continue to be valued using the intrinsic value-based provisions set forth in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees". Under the intrinsic value method, compensation expense is
determined on the measurement date, which is the first date on which both the
number of shares the employee is entitled to receive and the exercise price are
known. Compensation expense, if any, is measured based on the award's intrinsic
value, which is the excess of the market price of the stock over the exercise
price on the measurement date. The expense, including non-option plans, related
to stock-based employee compensation included in the determination of net income
for the third quarter and nine months ended September 30, 2003 and 2002 is less
than that which would have been recognized if the fair value method had been
applied to all awards granted since the effective date of SFAS No. 123. For
further discussion of the Company's stock-based compensation plans, see Note 11
of Notes to Consolidated Financial Statements included in The Hartford's 2002
Form 10-K Annual Report.
The following table illustrates the effect on net income (loss) and earnings
(loss) per share as if the fair value method had been applied to all outstanding
and unvested awards in each period.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 343 $ 265 $ (545) $ 742
Add: Stock-based employee compensation expense included in reported net
income (loss), net of related tax effects [1] 4 2 15 4
Deduct: Total stock-based employee compensation expense determined under
the fair value method for all awards, net of related tax effects (11) (16) (37) (41)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) [2] $ 336 $ 251 $ (567) $ 705
====================================================================================================================================
Earnings (loss) per share:
Basic - as reported $ 1.21 $ 1.06 $ (2.03) $ 3.00
Basic - pro forma [2] $ 1.19 $ 1.01 $ (2.11) $ 2.85
Diluted - as reported [3] $ 1.20 $ 1.06 $ (2.03) $ 2.96
Diluted - pro forma [2] [3] $ 1.18 $ 1.00 $ (2.11) $ 2.82
====================================================================================================================================
<FN>
[1] Includes the impact of non-option plans of $2 and $0, respectively, for the
third quarter, and $4 and $2, respectively, for the nine months ended
September 30, 2003 and 2002.
[2] The pro forma disclosures are not representative of the effects on net
income (loss) and earnings (loss) per share in future periods.
[3] As a result of the net loss in the nine months ended September 30, 2003,
SFAS No. 128 "Earnings Per Share" requires the Company to use basic
weighted average common shares outstanding in the calculation of the nine
months ended September 30, 2003 diluted earnings (loss) per share, since
the inclusion of options of 1.5 would have been antidilutive to the
earnings per share calculation. In the absence of the net loss, weighted
average common shares outstanding and dilutive potential common shares
would have totaled 270.4.
</FN>
- 11 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", and accordingly ceased all amortization of goodwill.
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.
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------------- ---------------------------------------
GROSS CARRYING ACCUMULATED NET GROSS CARRYING ACCUMULATED NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ------------------------------------------------------------------------------------------------------------------------------------
Present value of future profits $ 1,406 $ 346 $ 1,406 $ 274
Renewal rights 46 32 42 27
Other 9 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,461 $ 378 $ 1,448 $ 301
====================================================================================================================================
Net amortization expense for the third quarter and nine months ended September
30, 2003 was $25 and $77, respectively. Net amortization expense for the third
quarter and nine months ended September 30, 2002 was $35 and $87, respectively.
Estimated future net amortization expense for the succeeding five years is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------
2003 $ 109
2004 $ 124
2005 $ 101
2006 $ 88
2007 $ 73
=================================================================
The carrying amounts of goodwill as of September 30, 2003 and December 31, 2002,
are shown below.
SEPTEMBER 30, DECEMBER 31,
2003 2002
- -------------------------------------------------------------------
Life $ 796 $ 796
Property & Casualty 152 153
Corporate 772 772
- -------------------------------------------------------------------
Total $ 1,720 $ 1,721
===================================================================
The decrease of $1 to Property & Casualty's goodwill asset is attributable to
the sale of Trumbull Associates, LLC. For further discussion of this sale, see
Note 6.
NOTE 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS
(A) SECURITIES LENDING
The Company participates in a securities lending program to generate additional
income, whereby certain domestic fixed income securities are loaned for a short
period of time from the Company's portfolio to qualifying third parties, via a
lending agent. Borrowers of these securities provide collateral of 102% of the
market value of the loaned securities. Acceptable collateral may be in the form
of cash or U.S. Government securities. The market value of the loaned securities
is monitored and additional collateral is obtained if the market value of the
collateral falls below 100% of the market value of the loaned securities. Under
the terms of the securities lending program, the lending agent indemnifies the
Company against borrower defaults. As of September 30, 2003, the fair value of
the loaned securities wasapproximately $1.1 billion and was included in fixed
maturities. The cash collateral received as of September 30, 2003 of
approximately $1.1 billion was invested in short-term securities and was also
included in fixed maturities, with a corresponding liability for the obligation
to return the collateral recorded in other liabilities. The Company retains a
portion of the income earned from the cash collateral or receives a fee from the
borrower. The Company recorded before-tax income from securities lending
transactions, net of lending fees, of $0.5 for the third quarter and $0.8 for
the nine months ended September 30, 2003, which was included in net investment
income.
(B) DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards, futures and options, for one of four Company-approved
objectives: 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 with and/or approved by, as applicable by
the State of Connecticut and State of New York insurance departments. The
Company does not make a market or trade in these instruments for the express
purpose of earning short-term trading profits.
For a detailed discussion of the Company's use of derivative instruments, see
Note 1(h) of Notes to Consolidated Financial Statements included in The
Hartford's 2002 Form 10-K Annual Report.
As of September 30, 2003 and December 31, 2002, the Company carried $297 and
$299, respectively, of derivative assets in other investments and $228 and $208,
respectively, of derivative liabilities in other liabilities. In addition, the
Company recognized embedded derivative (assets) liabilities related to
guaranteed minimum withdrawal benefits ("GMWB") on certain of its variable
annuity contracts of $(39) and $48 at September 30, 2003 and December 31, 2002,
respectively, in other policyholder funds. The Company has entered into an
offsetting reinsurance arrangement, which is recognized as a derivative asset.
The fair value of this derivative (liability) asset, at September 30, 2003 and
December 31, 2002 was $(42) and $48, respectively, and was
- 12 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(B) DERIVATIVE INSTRUMENTS (CONTINUED)
included in reinsurance recoverables. See "Product Derivatives and Risk
Management" section below for a discussion concerning the Company's risk
management strategies for the unreinsured GMWB business.
Cash-Flow Hedges
For the third quarter ended September 30, 2003, the Company reported a net
realized loss representing the total ineffectiveness of all cash-flow hedges of
$1. For the nine months ended September 30, 2002, the Company's net gain or loss
representing the total ineffectiveness of all cash-flow hedges was immaterial.
Gains and losses on derivative contracts that are reclassified from accumulated
other comprehensive income ("AOCI") to current period earnings are included in
the line item in the statement of income in which the hedged item is recorded.
As of September 30, 2003 and 2002, the after-tax deferred net gains on
derivative instruments accumulated in AOCI that are expected to be reclassified
to earnings during the next twelve months were $8 and $5, respectively. 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 and 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 twenty-four months. As of each of September
30, 2003 and December 31, 2002, the Company held derivative notional value
related to strategies categorized as cash-flow hedges of $3.2 billion. For the
third quarter and nine months ended September 30, 2003 and 2002, the net
reclassifications from AOCI to earnings resulting from the discontinuance of
cash-flow hedges were immaterial.
Fair-Value Hedges
During the third quarter of 2003, The Company entered into an interest rate swap
with a notional value of $250 as an economic hedge of a portion of the Company's
senior debt. The interest rate swap agreement was structured to exactly offset
the terms and conditions of the hedged senior debt (i.e., notional value,
maturity date and payment dates) and has been designated as a hedge of the
benchmark interest rate (i.e., LIBOR).
For the third quarter and nine months ended September 30, 2003 and 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 net realized
capital gains and losses. All components of each derivative's gain or loss are
included in the assessment of hedge effectiveness. As of September 30, 2003 and
December 31, 2002, the Company held $1.0 billion and $800, respectively, in
derivative notional value related to strategies categorized as fair-value
hedges.
Other Investment and Risk Management Activities
General
The Company's other investment and 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 investment and risk management purposes is reported
in current period earnings as net realized capital gains and losses. As of
September 30, 2003 and December 31, 2002, the Company held $7.6 billion and $6.8
billion, respectively, in derivative notional value related to strategies
categorized as Other Investment and Risk Management Activities, excluding
Product Derivatives and Risk Management activities.
Product Derivatives and Risk Management
The Company offers certain variable annuity products with a GMWB rider. The GMWB
provides the policyholder with a guaranteed remaining balance ("GRB") if the
account value is reduced to zero through a combination of market declines and
withdrawals. The GRB is generally equal to premiums less withdrawals. However,
annual withdrawals that exceed 7% of the premiums paid may reduce the GRB by an
amount greater than the withdrawals and may also impact the guaranteed annual
withdrawal amount that subsequently applies after the excess annual withdrawals
occur. The policyholder also has the option, after a specified time period, to
reset the GRB to the then-current account value, if greater. The GMWB represents
an embedded derivative in the variable annuity contract that is required to be
reported separately from the host variable annuity contract. It is carried at
fair value and reported in other policyholder funds. The fair value of the GMWB
obligations is calculated based on actuarial assumptions related to the
projected cash flows, including benefits and related contract charges, over the
lives of the contracts, incorporating expectations concerning policyholder
behavior. Because of the dynamic and complex nature of these cash flows,
stochastic techniques under a variety of market return scenarios and other best
estimate assumptions are used. Estimating these cash flows involves numerous
estimates and subjective judgments including those regarding expected market
rates of return, market volatility, correlations of market returns and discount
rates. In valuing the embedded derivative, the Company attributes a portion of
the fees collected from the policyholder equal to the present value of future
GMWB claims (the "Attributed Fees"). All changes in the fair value of the
embedded derivative are recorded in net realized capital gains and losses. The
excess of fees collected from the policyholder for the GMWB over the Attributed
Fees is recorded in fee income.
For all contracts in effect through July 6, 2003, the Company entered into a
reinsurance arrangement to offset its exposure to the GMWB for the lives of
those contracts. This arrangement is recognized as a derivative and carried at
fair value in reinsurance recoverables. Changes in the fair value of both the
derivative
- 13 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(B) DERIVATIVE INSTRUMENTS (CONTINUED)
assets and liabilities related to the reinsured GMWB are recorded in net
realized capital gains and losses. As of July 6, 2003, the Company exhausted all
but a small portion of the reinsurance capacity under the current arrangement,
as it relates to new business, and will be ceding only a very small number of
new contracts subsequent to July 6, 2003. Substantially all new contracts with
the GMWB are not covered by reinsurance. As of September 30, 2003, $9.8 billion
out of $12.6 billion of account value with the GMWB feature was reinsured. In
order to minimize the volatility associated with the unreinsured GMWB
liabilities, the Company has established an alternative risk management
strategy. During the third quarter of 2003, the Company began hedging its
unreinsured GMWB exposure using interest rate futures, Standard and Poor's
("S&P") 500 and NASDAQ index put options and futures contracts. At September 30,
2003, the notional value of the options and futures contracts purchased was
$475. During the third quarter of 2003, net realized capital gains and losses
included the change in market value of both the value of the embedded derivative
related to the GMWB liability and the related derivative contracts that were
purchased as economic hedges, the net effect of which was a loss of less than $1
before deferred policy acquisition costs and tax effects for the quarter ended
September 30, 2003.
For further discussion of the Company's other investment and risk management
activities, see "Other Investments and Risk Management Activities" in Note 1(h)
of Notes to Consolidated Financial Statements included in The Hartford's 2002
Form 10-K Annual Report.
NOTE 4. EARNINGS (LOSS) PER SHARE
The following tables present a reconciliation of net income (loss) and shares
used in calculating basic earnings (loss) per share to those used in calculating
diluted earnings (loss) per share.
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------------------------- -------------------------------------
NET PER SHARE NET INCOME PER SHARE
SEPTEMBER 30, 2003 INCOME SHARES AMOUNT (LOSS) SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) available to common shareholders $ 343 282.5 $ 1.21 $ (545) 268.9 $ (2.03)
------------- -----------
DILUTED EARNINGS (LOSS) PER SHARE [1]
Options -- 2.3 -- --
------------------------- --------------------------
Income (loss) available to common shareholders plus
assumed conversions $ 343 284.8 $ 1.20 $ (545) 268.9 $ (2.03)
====================================================================================================================================
<FN>
[1] As a result of the net loss in the nine months ended September 30, 2003,
SFAS No. 128 requires the Company to use basic weighted average common
shares outstanding in the calculation of the nine months ended September
30, 2003 diluted earnings (loss) per share, since the inclusion of options
of 1.5 would have been antidilutive to the earnings per share calculation.
In the absence of the net loss, weighted average common shares outstanding
and dilutive potential common shares would have totaled 270.4.
</FN>
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------------------------- -------------------------------------
NET PER SHARE NET PER SHARE
SEPTEMBER 30, 2002 INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 265 248.9 $ 1.06 $ 742 247.4 $ 3.00
------------- -----------
DILUTED EARNINGS PER SHARE
Options -- 1.6 -- 2.9
------------------------- --------------------------
Income available to common shareholders plus
assumed conversions $ 265 250.5 $ 1.06 $ 742 250.3 $ 2.96
====================================================================================================================================
Basic earnings (loss) per share reflects the actual weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share
includes the dilutive effect of outstanding options, using the treasury stock
method. 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.
- 14 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
The Hartford is involved in claims litigation arising in the ordinary course of
business, both as a liability insurer defending third-party claims brought
against insureds and 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 discussion of the
litigation below involving Mac Arthur Company and its subsidiary, Western
MacArthur Company, both former regional distributors of asbestos products
(collectively or individually, "MacArthur"), and the uncertainties discussed in
(b) 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.
The Hartford also is involved in other kinds of 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 MacArthur Litigation - Hartford Accident and Indemnity Company ("Hartford
A&I"), a subsidiary of the Company, issued primary general liability policies to
MacArthur during the period 1967 to 1976. MacArthur sought coverage for
asbestos-related claims from Hartford A&I under these policies beginning in
1978. During the period between 1978 and 1987, Hartford A&I paid its full
aggregate limits under these policies plus defense costs. In 1987, Hartford A&I
notified MacArthur that its available limits under these policies had been
exhausted, and MacArthur ceased submitting claims to Hartford A&I under these
policies.
On October 3, 2000, thirteen years after it had accepted Hartford A&I's notice
of exhaustion, MacArthur filed an action against Hartford A&I and another
insurer in the U.S. District Court for the Eastern District of New York,
seeking, for the first time, additional coverage for asbestos bodily injury
claims under the Hartford A&I primary policies on the theory that Hartford A&I
had not exhausted limits that MacArthur alleges to be available for non-products
liability. The complaint sought a declaration of coverage and unquantified
damages. On March 28, 2003, the District Court dismissed this action without
prejudice on MacArthur's motion.
On June 3, 2002, The St. Paul Companies, Inc. ("St. Paul") announced a
settlement of a coverage action brought by MacArthur against United States
Fidelity and Guaranty Company ("USF&G"), a subsidiary of St. Paul. Under the
settlement, St. Paul agreed to pay a total of $975 to resolve its asbestos
liability to MacArthur in conjunction with a proposed bankruptcy petition and
pre-packaged plan of reorganization to be filed by MacArthur. USF&G provided at
least twelve years of primary general liability coverage to MacArthur, but,
unlike Hartford A&I, had denied coverage and had refused to pay for defense or
indemnity.
On October 7, 2002, MacArthur filed an action in the Superior Court in Alameda
County, California, against Hartford A&I and two other insurers. As in the
now-dismissed New York action, MacArthur seeks a declaration of coverage and
damages for asbestos bodily injury claims. Four asbestos claimants who allegedly
have obtained default judgments against MacArthur also are joined as plaintiffs;
they seek to recover the amount of their default judgments and additional
damages directly from the defendant insurers and assert a right to an
accelerated trial.
On November 22, 2002, MacArthur filed a bankruptcy petition and proposed plan of
reorganization, which seeks to implement the terms of its settlement with St.
Paul. MacArthur asked the bankruptcy court to determine the full amount of its
current and future asbestos liability in an amount substantially more than the
alleged liquidated but unpaid claims. On October 31, 2003, the bankruptcy court
ruled that it would neither determine nor estimate the total amount of current
and future asbestos liability claims against MacArthur. The Company expects that
MacArthur will ask the Alameda County court instead to determine the total
amount of current and future asbestos liability claims against MacArthur and to
enter judgment against Hartford A&I for a substantial portion of that amount. A
confirmation trial currently is scheduled to begin November 10, 2003.
In a second amended complaint filed on July 21, 2003 in the Alameda County
action, following Hartford A&I's successful demurrer to the first two
complaints, MacArthur alleges that its liability for liquidated but unpaid
asbestos bodily injury claims is $2.5 billion, of which more than $1.8 billion
consists of unpaid judgments. The ultimate amount of MacArthur's asbestos
liability, including any unresolved present claims and future demands, is
currently unknown.
- 15 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(A) LITIGATION (CONTINUED)
Hartford A&I intends to defend the MacArthur action vigorously. In the opinion
of management, the ultimate outcome is highly uncertain for many reasons. It is
not yet known, for example, whether Hartford A&I's defenses based on MacArthur's
long delay in asserting claims for further coverage will be successful; how
other significant coverage defenses will be decided; or the extent to which the
claims and default judgments against MacArthur involve injury outside of the
products and completed operations hazard definitions of the policies. In the
opinion of management, an adverse outcome could have a material adverse effect
on the Company's results of operations, financial condition and liquidity.
Bancorp Services, LLC - In the third quarter of 2003, Hartford Life Insurance
Company ("HLIC") and its affiliate International Corporate Marketing Group, LLC
("ICMG") settled their intellectual property dispute with Bancorp Services, LLC
("Bancorp"). The dispute concerned, among other things, Bancorp's claims for
alleged patent infringement, breach of a confidentiality agreement, and
misappropriation of trade secrets related to certain stable value corporate-
owned life insurance products. The dispute was the subject of litigation in the
United States District Court for the Eastern District of Missouri, in which
Bancorp obtained in 2002 a judgment exceeding $134 against HLIC and ICMG after a
jury trial on the trade secret and breach of contract claims, and HLIC and ICMG
obtained summary judgment on the patent infringement claim. Based on the advice
of legal counsel following entry of the judgment, the Company recorded an $11
after-tax charge in the first quarter of 2002 to increase litigation reserves.
Both components of the judgment were appealed.
Under the terms of the settlement, The Hartford will pay a minimum of $70 and a
maximum of $80, depending on the outcome of the patent appeal, to resolve all
disputes between the parties. The appeal from the trade secret and breach of
contract judgment will be dismissed. The settlement resulted in the recording of
an additional charge of $40 after-tax in the third quarter of 2003, reflecting
the maximum amount payable under the settlement.
(B) ASBESTOS AND ENVIRONMENTAL CLAIMS
The Hartford continues to receive claims that assert damages from asbestos- and
environmental-related exposures. Asbestos claims relate primarily to bodily
injuries asserted by those who came in contact with asbestos or products
containing asbestos. Environmental claims relate primarily to pollution and the
related costs.
The Hartford wrote several different categories of insurance coverage to which
asbestos and environmental claims may apply. First, The Hartford wrote direct
policies as a primary liability insurance carrier. Second, The Hartford wrote
direct excess insurance policies providing additional coverage for insureds that
exhausted their underlying liability insurance coverage. Third, The Hartford
acted as a reinsurer assuming a portion of risks previously assumed by other
insurers writing primary, excess and reinsurance coverages. Fourth, The Hartford
participated as a London Market company that wrote both direct insurance and
assumed reinsurance business.
With regard to both environmental and particularly asbestos claims, significant
uncertainty limits the ability of insurers and reinsurers to estimate the
ultimate reserves necessary for unpaid losses and related expenses. Traditional
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
there is a high degree of uncertainty inherent in the estimation of 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. 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 applied; whether particular injuries
are subject to the product/completed operation claims aggregate limit; and how
policy exclusions and conditions are applied and interpreted. Furthermore,
insurers in general, including The Hartford, recently have experienced an
increase in the number of asbestos-related claims due to, among other things,
more intensive advertising by lawyers seeking asbestos claimants, plaintiffs'
increased focus on new and previously peripheral defendants, and an increase in
the number of insureds seeking bankruptcy protection as a result of
asbestos-related liabilities. Plaintiffs and insureds have sought to use
bankruptcy proceedings, including "pre-packaged" bankruptcies, to accelerate and
increase loss payments by insurers. In addition, some policyholders have begun
to assert new classes of claims for so-called "non-product" coverages to which
an aggregate limit of liability may not apply. Recently, many insurers,
including The Hartford, also have been sued directly by asbestos claimants
asserting that insurers had a duty to protect the public from the dangers of
asbestos. Management believes these issues are not likely to be resolved in the
near future.
Further uncertainties include the effect of the recent acceleration in the rate
of bankruptcy filings by asbestos defendants on the rate and amount of The
Hartford's asbestos claims payments; a further increase or decrease in asbestos
and environmental claims that cannot be anticipated at this time, whether some
policyholders' liabilities will reach the umbrella or excess layer of their
coverage; the resolution or adjudication of some disputes pertaining to the
amount of available coverage for asbestos claims in a manner inconsistent with
The Hartford's previous assessment of these claims; the number and outcome of
direct actions against The Hartford; and unanticipated developments pertaining
to The Hartford's ability to recover reinsurance for asbestos and environmental
claims. It also is not possible to predict changes
- 16 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(B) ASBESTOS AND ENVIRONMENTAL CLAIMS (CONTINUED)
in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. In particular, it is unknown
whether a potential Federal bill concerning asbestos litigation approved by the
Senate Judiciary Committee, or some other potential Federal asbestos-related
legislation, will be enacted and, if so, what its effect will be on The
Hartford's aggregate asbestos liabilities. Additionally, the reporting pattern
for excess insurance and reinsurance claims is much longer than direct claims.
In many instances, it takes months or years to determine that the policyholder's
own obligations have been met and how the reinsurance in question may apply to
such claims. The delay in reporting excess and reinsurance claims and exposures
adds to the uncertainty of estimating the related reserves.
In the case of the reserves for environmental exposures, factors contributing to
the high degree of uncertainty include court decisions that have interpreted the
insurance coverage to be broader than originally intended; inconsistent
decisions, especially across jurisdictions; and uncertainty as to the monetary
amount being sought by the claimant from the insured.
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
claims for traditional kinds of insurance exposure are less precise in
estimating reserves for its asbestos and environmental exposures.
In the first quarter of 2003, several events occurred that in the Company's view
confirmed the existence of a substantial long-term deterioration in the asbestos
litigation environment. For example, in February 2003, Combustion Engineering,
long a major asbestos defendant, filed a pre-packaged bankruptcy plan under
which it proposed to emerge from bankruptcy within five weeks, before opponents
of the plan could have a meaningful opportunity to object, and included many
novel features in its plan that its insurers found objectionable. In December
2002, Halliburton had announced its intention to file a similar plan through one
or more subsidiaries, although it has not yet filed, and in January 2003,
Honeywell announced that it had reached an agreement with the plaintiffs' bar
that would enable it to file a pre-negotiated plan through its former NARCO
subsidiary, then already in bankruptcy. In January 2003, Congoleum, a floor tile
manufacturer, which previously had defended claims successfully in the tort
system, announced its intention to file a pre-packaged plan of reorganization to
be funded almost entirely with insurance proceeds. Moreover, prominent members
of the plaintiffs' and policyholders' bars announced publicly their intention to
file many more such plans. These events represented a worsening of conditions
the Company observed in 2002, which were described in the Company's 2002 Form
10-K Annual Report.
As a result of these worsening conditions, the Company conducted a
comprehensive, ground-up study of its asbestos exposures in the first quarter of
2003 in an effort to project, beginning at the individual account level, the
effect of these trends on the Company's estimated total exposure to asbestos
liability. Based on the results of the study and the Company's reevaluation of
the deteriorating conditions described above, the Company strengthened its gross
and net asbestos reserves by $3.9 billion and $2.6 billion, respectively. The
Company believes that its current asbestos reserves are reasonable and
appropriate. However, analyses of future developments could cause The Hartford
to change its estimates of its asbestos and environmental reserves, and the
effect of these changes could be material to the Company's consolidated
operating results, financial condition and liquidity.
As of September 30, 2003 and December 31, 2002, the Company reported $3.6
billion and $1.1 billion of net asbestos reserves and $517 and $591 of net
environmental reserves, respectively. Because of the significant uncertainties
previously described, 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, financial condition and liquidity. 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.
(C) LEASE COMMITMENTS
On June 30, 2003, the Company entered into a sale-leaseback of certain furniture
and fixtures with a net book value of $40. The sale-leaseback resulted in a gain
of $15, which was deferred and will be amortized into earnings over the initial
lease term of three years. The lease qualifies as an operating lease for
accounting purposes. At the end of the initial lease term, the Company has the
option to purchase the leased assets, renew the lease for two one-year periods
or return the leased assets to the lessor. If the Company elects to return the
assets to the lessor at the end of the initial lease term, the assets will be
sold, and the Company has guaranteed a residual value on the furniture and
fixtures of $20.
At September 30, 2003, no liability was recorded for this guarantee, as the
expected fair value of the furniture and fixtures at the end of the initial
lease term was greater than the residual value guarantee.
(D) TAX MATTERS
The Hartford's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). The Company is currently under audit for the 1998-2001
tax years. No material issues have been raised to date by the IRS. Management
believes that adequate provision has been made in the financial statements for
any potential assessments that may result from tax examinations and other
tax-related matters for all open tax years.
The tax provision recorded during the nine months ended September 30, 2003,
reflects a benefit of $30, consisting primarily of a change in estimate of the
dividends-received deduction ("DRD") tax benefit reported during 2002. The
change in estimate was the result of actual 2002 investment performance on the
related separate accounts being unexpectedly out of pattern with past
performance, which had been the basis for the estimate. The total DRD benefit
related to the 2003 tax year for the nine months ended September 30, 2003 was
$65.
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, the capital raising and purchase
accounting adjustment activities related to the June 27, 2000 acquisition of all
of the shares of Hartford Life, Inc. ("HLI") that the Company did not already
own ("the HLI Repurchase"), as well as capital raised that has not been
contributed to the Company's insurance subsidiaries are included in Corporate.
Life is organized into four reportable operating segments: Investment Products,
Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI").
Investment Products offers individual variable and fixed annuities, mutual
funds, retirement plan services and other investment products. Individual Life
sells a variety of life insurance products, including variable life, universal
life, interest-sensitive whole life and term life insurance. Group Benefits
sells group insurance products, including group life and group disability
insurance, as well as other products, including stop loss and supplementary
medical coverage to employers and employer-sponsored plans, accidental death and
dismemberment, travel accident and other special risk coverages to employers and
associations. COLI primarily offers variable products used by employers to fund
non-qualified benefits or other postemployment benefit obligations as well as
leveraged COLI. Life also includes in an Other category its
- 17 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
international operations, which are primarily located in Japan and Brazil;
realized capital gains and losses; as well as corporate items not directly
allocated to any of its reportable operating segments, principally interest
expense; and intersegment eliminations.
Property & Casualty is 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. "North American" includes the combined underwriting results of the
Business Insurance, Personal Lines, Specialty Commercial and Reinsurance
underwriting segments. Property & Casualty also includes income and expense
items not directly allocated to these segments, such as net investment income,
net realized capital gains and losses, and other expenses including interest,
severance and income taxes. Included in net income for Property & Casualty for
the nine months ended September 30, 2003 is an expense of $27, after-tax,
related to severance costs associated with several expense reduction initiatives
announced in May 2003.
On September 1, 2003, the Company sold a wholly owned subsidiary, Trumbull
Associates, LLC, for $33, resulting in a gain of $15, after-tax. The gain is
included in net realized capital gains. The revenues and net income of Trumbull
Associates, LLC were not material to the Company or the Property & Casualty
operation.
Business Insurance provides standard commercial insurance coverage to small
commercial and middle market commercial business primarily throughout the United
States. This segment offers workers' compensation, property, automobile,
liability, umbrella and marine coverages. Commercial risk management products
and services also are provided.
Personal Lines provides automobile, homeowners' and home-based business
coverages to the members of AARP through a direct marketing operation; to
individuals who prefer local agent involvement through a network of independent
agents in the standard personal lines market; and through the Omni Insurance
Group 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. Specialty Commercial 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. Alternative markets, within Specialty
Commercial, provides insurance products and services primarily to captive
insurance companies, pools and self-insurance groups. In addition, Specialty
Commercial provides third party administrator services for claims
administration, integrated benefits, loss control and performance measurement
through Specialty Risk Services, a subsidiary of the Company.
On May 16, 2003, as part of the Company's decision to withdraw from the assumed
reinsurance business, the Company entered into a quota share and purchase
agreement with Endurance Reinsurance Corporation of America ("Endurance")
whereby the Reinsurance segment retroceded the majority of its inforce book of
business as of April 1, 2003 and sold renewal rights to Endurance. Under the
quota share agreement, Endurance will reinsure most of the segment's assumed
reinsurance contracts that were written on or after January 1, 2002 and that had
unearned premium as of April 1, 2003. In consideration for Endurance reinsuring
the unearned premium as of April 1, 2003, the Company paid Endurance an amount
equal to unearned premiums less the related unamortized commissions/deferred
acquisition costs and an override commission, which was established by the
contract. In addition, Endurance will pay a profit sharing commission based on
the loss performance of property treaty, property catastrophe and aviation pool
unearned premium. Under the purchase agreement, Endurance will pay additional
amounts, subject to a guaranteed minimum of $15, based on the level of renewal
premium on the reinsured contracts over the next two years. The guaranteed
minimum is reflected in net income for the nine months ended September 30, 2003.
The Company remains subject to reserve development relating to all retained
business.
Prior to the Endurance transaction, the Reinsurance segment assumed reinsurance
in North America and primarily wrote treaty reinsurance through professional
reinsurance brokers covering various property, casualty, property catastrophe,
marine and alternative risk transfer ("ART") products. ART included
non-traditional reinsurance products such as multi-year property catastrophe
treaties, aggregate of excess of loss agreements and quota share treaties with
single event caps. International property catastrophe, marine and ART were also
written outside of North America through a London contact office.
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 measure of profit or loss used by The Hartford's management in evaluating
the performance of its Life segments is net income. Property & Casualty
underwriting segments are evaluated by The Hartford's management primarily based
upon underwriting results. Underwriting results represent earned premiums less
incurred claims, claim adjustment expenses and underwriting expenses.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided, security transfers and capital contributions. In addition, 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 annuities to settle casualty claims. In
addition, certain intersegment transactions occur in Life. These transactions
include interest
- 18 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
income on allocated surplus and the allocation of certain net realized capital
gains and losses through net investment income utilizing the duration of the
segment's investment portfolios. During the nine months ended September 30,
2003, $1.8 billion of securities were sold by the Property & Casualty operation
to the Life operation. For segment reporting, the net gain on this sale was
deferred by the Property & Casualty operation and will be reported as realized
when the underlying securities are sold by the Life operation. On December 1,
2002, the Property & Casualty segments entered into a contract with a
subsidiary, whereby reinsurance will be provided to the Property & Casualty
operation. The financial results of this reinsurance program, net of
retrocessions to unrelated reinsurers, are included in the Specialty Commercial
segment.
The following tables present revenues and net income (loss). Underwriting
results are presented for the Business Insurance, Personal Lines, Specialty
Commercial, Reinsurance and Other Operations segments, while net income is
presented for Life and Property & Casualty.
REVENUES THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 1,182 $ 761 $ 2,832 $ 2,337
Individual Life 249 239 733 720
Group Benefits 663 645 1,968 1,943
COLI 117 145 370 451
Other [1] 37 (125) 93 (252)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 2,248 1,665 5,996 5,199
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
Earned premiums and other revenues
Business Insurance 947 795 2,724 2,293
Personal Lines 837 789 2,454 2,308
Specialty Commercial 512 414 1,370 1,037
Reinsurance 82 178 296 521
Other Operations -- 19 14 58
- ------------------------------------------------------------------------------------------------------------------------------------
Total earned premiums and other revenues 2,378 2,195 6,858 6,217
Net investment income 302 262 878 787
Net realized capital gains (losses) 14 (42) 216 (80)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 2,694 2,415 7,952 6,924
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate 5 5 12 14
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 4,947 $ 4,085 $ 13,960 $ 12,137
====================================================================================================================================
<FN>
[1] Amounts include net realized capital gains (losses), before-tax, of $(2)
and $(118) for the third quarter ended September 30, 2003 and 2002,
respectively, and $0 and $(253) for the nine months ended September 30,
2003 and 2002, respectively.
</FN>
- 19 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
NET INCOME (LOSS) THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 129 $ 100 $ 368 $ 335
Individual Life 36 33 104 99
Group Benefits 38 34 107 92
COLI (30) 10 (11) 20
Other [1] (12) (16) (38) (114)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 161 161 530 432
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
Underwriting results
Business Insurance 20 21 50 17
Personal Lines 37 (13) 92 (48)
Specialty Commercial (50) 3 (54) 1
Reinsurance (10) (4) (105) (17)
Other Operations (12) (42) (2,657) (129)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Underwriting results (15) (35) (2,674) (176)
Net servicing and other income 9 4 15 7
Net investment income 302 262 878 787
Net realized capital gains (losses) 14 (42) 216 (80)
Other expenses [2] (42) (68) (161) (162)
Income tax (expense) benefit (66) (11) 692 (48)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 202 110 (1,034) 328
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate (20) (6) (41) (18)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 343 $ 265 $ (545) $ 742
====================================================================================================================================
<FN>
[1] Amounts include net realized capital gains (losses), after-tax, of $(1) and
$(71) for the third quarter ended September 30, 2003 and 2002,
respectively, and $0 and $(154) for the nine months ended September 30,
2003 and 2002, respectively.
[2] Amounts include before-tax severance charges of $41 for the nine months
ended September 30, 2003.
</FN>
NOTE 7. DEBT SEPT. 30, DEC. 31,
2003 2002
- --------------------------------------------------------------------
SHORT-TERM DEBT
Commercial paper $ 315 $ 315
Current maturities of long-term debt 200 --
- --------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 515 $ 315
====================================================================
LONG-TERM DEBT [1]
6.9% Notes, due 2004 $ -- $ 199
7.75% Notes, due 2005 247 247
2.375% Notes, due 2006 254 --
7.1% Notes, due 2007 198 198
4.7% Notes, due 2007 300 300
2.56% Equity Units Notes, due 2008 690 --
6.375% Notes, due 2008 200 200
4.1% Equity Units Notes, due 2008 330 330
7.9% Notes, due 2010 274 274
4.625% Notes, due 2013 319 --
7.3% Notes, due 2015 200 200
7.65% Notes, due 2027 248 248
7.375% Notes, due 2031 400 400
- --------------------------------------------------------------------
TOTAL LONG TERM DEBT $ 3,660 $ 2,596
- --------------------------------------------------------------------
[1] The Hartford's long-term debt securities are issued by either The Hartford
Financial Services Group, Inc. ("HFSG") or HLI and are unsecured
obligations of HFSG or HLI and rank pari passsu with all other unsecured
and unsubordinated indebtedness of HFSG or HLI.
(A) LONG-TERM DEBT
Equity Units Offering
- ---------------------
On May 23, 2003, The Hartford issued 12.0 million 7% equity units at a price of
fifty dollars per unit and received net proceeds of $582. Subsequently, on May
30, 2003, The Hartford issued an additional 1.8 million 7% equity units at a
price of fifty dollars per unit and received net proceeds of $87.
Each equity unit offered initially consists of a corporate unit with a stated
amount of fifty dollars per unit. Each corporate unit consists of one purchase
contract for the sale of a certain number of shares of the Company's stock and a
5% ownership interest in one thousand dollars principal amount of senior notes
due August 16, 2008.
The corporate unit may be converted by the holder into a treasury unit
consisting of the purchase contract and a 5% undivided beneficial interest in a
zero-coupon U.S. Treasury security with a principal amount of one thousand
dollars that matures on August 15, 2006. The holder of an equity unit owns the
underlying senior notes or treasury securities but has pledged the senior notes
or treasury securities to the Company to secure the holder's obligations under
the purchase contract.
- 20 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 7. DEBT (CONTINUED)
(A) LONG-TERM DEBT (CONTINUED)
The purchase contract obligates the holder to purchase, and obligates The
Hartford to sell, on August 16, 2006, for fifty dollars, a variable number of
newly issued common shares of The Hartford. The number of The Hartford's shares
to be issued will be determined at the time the purchase contracts are settled
based upon the then current applicable market value of The Hartford's common
stock. If the applicable market value of The Hartford's common stock is equal to
or less than $45.50, then the Company will deliver 1.0989 shares to the holder
of the equity unit, or an aggregate of 15.2 million shares. If the applicable
market value of The Hartford's common stock is greater than $45.50 but less than
$56.875, then the Company will deliver the number of shares equal to fifty
dollars divided by the then current applicable market value of The Hartford's
common stock to the holder. Finally, if the applicable market value of The
Hartford's common stock is equal to or greater than $56.875, then the Company
will deliver 0.8791 shares to the holder, or an aggregate of 12.1 million
shares. Accordingly, upon settlement of the purchase contracts on August 16,
2006, The Hartford will receive proceeds of approximately $690 and will deliver
between 12.1 million and 15.2 million common shares in the aggregate. The
proceeds will be credited to stockholders' equity and allocated between the
common stock and additional paid-in capital accounts. The Hartford will make
quarterly contract adjustment payments to the equity unit holders at a rate of
4.44% of the stated amount per year until the purchase contract is settled.
Each corporate unit also includes a 5% ownership interest in one thousand
dollars principal amount of senior notes that will mature on August 16, 2008.
The aggregate maturity value of the senior notes is $690. The notes are pledged
by the holders to secure their obligations under the purchase contracts. The
Hartford will make quarterly interest payments to the holders of the notes
initially at an annual rate of 2.56%. On May 11, 2006, the notes will be
remarketed. At that time, The Hartford's remarketing agent will have the ability
to reset the interest rate on the notes in order to generate sufficient
remarketing proceeds to satisfy the holder's obligation under the purchase
contract. If the initial remarketing is unsuccessful, the remarketing agent will
attempt to remarket the notes, as necessary, on June 13, 2006, July 12, 2006 and
August 11, 2006. If all remarketing attempts are unsuccessful, the Company will
exercise its rights as a secured party to obtain and extinguish the notes.
The total distributions payable on the equity units are at an annual rate of 7%,
consisting of interest (2.56%) and contract adjustment payments (4.44%). The
corporate units are listed on the New York Stock Exchange under the symbol "HIG
PrD".
The present value of the contract adjustment payments of $95 was accrued upon
the issuance of the equity units as a charge to additional paid-in capital and
is included in other liabilities in the accompanying condensed consolidated
balance sheet as of September 30, 2003. Subsequent contract adjustment payments
will be allocated between this liability account and interest expense based on a
constant rate calculation over the life of the purchase contracts. Additional
paid-in capital as of September 30, 2003 also reflected a charge of $17
representing a portion of the equity unit issuance costs that were allocated to
the purchase contracts.
The equity units have been reflected in the diluted earnings per share
calculation using the treasury stock method, which would be used for the equity
units at any time before the settlement of the purchase contracts. Under the
treasury stock method, the number of shares of common stock used in calculating
diluted earnings per share is increased by the excess, if any, of the number of
shares issuable upon settlement of the purchase contracts over the number of
shares that could be purchased by The Hartford in the market, at the average
market price during the period, using the proceeds received upon settlement. The
Company anticipates that there will be no dilutive effect on its earnings per
share related to the equity units, except during periods when the average market
price of a share of the Company's common stock is above the threshold
appreciation price of $56.875. Because the average market price of The
Hartford's common stock during the quarter and nine months ended September 30,
2003 was below this threshold appreciation price, the shares issuable under the
purchase contract component of the equity units have not been included in the
diluted earnings per share calculation.
Senior Notes Offerings
- ----------------------
On May 23, 2003, The Hartford issued 2.375% senior notes due June 1, 2006 and
received net proceeds of $249. Interest on the notes is payable semi-annually on
June 1 and December 1, commencing on December 1, 2003.
On July 10, 2003, the Company issued 4.625% senior notes due July 15, 2013 and
received net proceeds of $317. Interest on the notes is payable semi-annually on
January 15 and July 15, commencing on January 15, 2004.
(B) TRUST PREFERRED SECURITIES
The Hartford and its subsidiary HLI have formed statutory business trusts, which
exist for the exclusive purposes of (i) issuing Trust Securities representing
undivided beneficial interests in the assets of the Trust; (ii) investing the
gross proceeds of the Trust Securities in Junior Subordinated Deferrable
Interest Debentures ("Junior Subordinated Debentures") of The Hartford or HLI as
applicable; and (iii) engaging in only those activities necessary or incidental
thereto. These Junior Subordinated Debentures and the related income effects are
eliminated in the consolidated financial statements.
The financial structure of Hartford Capital I and III, and Hartford Life Capital
I and II, as of September 30, 2003 and December 31, 2002, were as follows:
- 21 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 7. DEBT (CONTINUED)
(B) TRUST PREFERRED SECURITIES (CONTINUED)
Hartford Capital Hartford Life Hartford Life Hartford
III Capital II Capital I Capital I [4]
- ------------------------------------------------------------------------------------------------------------------------------------
TRUST PREFERRED SECURITIES
Issuance date Oct. 26, 2001 Mar. 6, 2001 June 29, 1998 Feb. 28, 1996
Securities issued 20,000,000 8,000,000 10,000,000 20,000,000
Liquidation preference per security (in dollars) $25 $25 $25 $25
Liquidation value $500 $200 $250 $500
Coupon rate 7.45% 7.625% 7.20% 7.70%
Distribution payable Quarterly Quarterly Quarterly Quarterly
Distribution guaranteed by [1] The Hartford HLI HLI The Hartford
Balance September 30, 2003 $517 $200 $245 $--
Balance December 31, 2002 $523 $200 $245 $500
JUNIOR SUBORDINATED DEBENTURES [2] [3]
Amount owed $500 $200 $250 $500
Coupon rate 7.45% 7.625% 7.20% 7.70%
Interest payable Quarterly Quarterly Quarterly Quarterly
Maturity date Oct. 26, 2050 Feb. 15, 2050 June 30, 2038 Feb. 28, 2016
Redeemable by issuer on or after Oct. 26, 2006 Mar. 6, 2006 June 30, 2003 Feb. 28, 2001
====================================================================================================================================
<FN>
[1] The Hartford has guaranteed, on a subordinated basis, all of the Hartford
Capital III obligations under the Hartford Series C Preferred Securities,
including the payment of the redemption price and any accumulated and
unpaid distributions to the extent of available funds and upon dissolution,
winding up or liquidation, but only to the extent that Hartford Capital III
has funds to make such payments.
[2] For each of the respective debentures, The Hartford or HLI, has the right
at any time, and from time to time, to defer payments of interest on the
Junior Subordinated Debentures for a period not exceeding 20 consecutive
quarters up to the debentures' maturity date. During any such period,
interest will continue to accrue and The Hartford or HLI may not declare or
pay any cash dividends or distributions on, or purchase, The Hartford's or
HLI's capital stock nor make any principal, interest or premium payments on
or repurchase any debt securities that rank equally with or junior to the
Junior Subordinated Debentures. The Hartford or HLI will have the right at
any time to dissolve the Trust and cause the Junior Subordinated Debentures
to be distributed to the holders of the Preferred Securities.
[3] The Hartford Junior Subordinated Debentures are unsecured and rank junior
and subordinate in right of payment to all senior debt of The Hartford and
are effectively subordinated to all existing and future liabilities of its
subsidiaries.
[4] $180 of the securities for Hartford Capital I were redeemed on June 30,
2003. The remaining $320 of these securities were redeemed on September 30,
2003.
</FN>
(C) SHORT-TERM DEBT
The following is a summary of short-term borrowings available to the Company and
outstanding balances at September 30, 2003 and December 31, 2002
OUTSTANDING AS OF
-------------------------------
EFFECTIVE EXPIRATION MAXIMUM SEPTEMBER 30, DECEMBER 31,
DESCRIPTION DATE DATE AVAILABLE 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper
The Hartford 11/10/86 N/A $ 2,000 $ 315 $ 315
HLI 2/7/97 N/A 250 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial paper $ 2,250 $ 315 $ 315
Revolving Credit Facility
5-year revolving credit facility 6/20/01 6/20/06 $ 1,000 $ -- $ --
3-year revolving credit facility 12/31/02 12/31/05 490 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total revolving credit facility $ 1,490 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT [1] $ 3,740 $ 315 $ 315
====================================================================================================================================
<FN>
[1] Excludes current maturities of long-term debt of $200 and $0 as of
September 30, 2003 and December 31, 2002, respectively.
</FN>
- 22 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 7. DEBT (CONTINUED)
(C) SHORT-TERM DEBT (CONTINUED)
On December 31, 2002, the Company and HLI entered into a joint three-year
Competitive Advance and Revolving Credit Facility with a group of participating
banks to enable the Company and HLI to borrow an aggregate amount of up to $490.
As of September 30, 2003 and December 31, 2002, there were no outstanding
borrowings under this facility. On February 26, 2003, the Company entered into a
Second Amended and Restated Five-Year Competitive Advance and Revolving Credit
Facility with a group of participating banks to amend and restate the Company's
ability to borrow an aggregate amount of up to $1 billion. As of September 30,
2003 and December 31, 2002, there were no outstanding borrowings under this
facility.
(D) INTEREST EXPENSE
The following table presents interest expense incurred related to debt and trust
preferred securities for the third quarter and nine months ended September 30,
2003 and 2002, respectively.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term debt $ 1 $ 1 $ 4 $ 4
Long-term debt 52 44 141 127
Trust preferred securities 17 22 60 67
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 70 $ 67 $ 205 $ 198
====================================================================================================================================
NOTE 8. STOCKHOLDERS' EQUITY
Issuance of Common Stock
- ------------------------
On May 23, 2003, The Hartford issued approximately 24.2 million shares of common
stock pursuant to an underwritten offering at a price to the public of $45.50
per share and received net proceeds of $1.1 billion. Subsequently, on May 30,
2003, The Hartford issued approximately 2.2 million shares of common stock at a
price to the public of $45.50 per share and received net proceeds of $97. On May
23, 2003 and May 30, 2003, The Hartford issued 12.0 million 7% equity units and
1.8 million 7% equity units, respectively. Each equity unit contains a purchase
contract obligating the holder to purchase and The Hartford to sell, a variable
number of newly issued shares of The Hartford's common stock. Upon settlement of
the purchase contracts on August 16, 2006, The Hartford will receive proceeds of
approximately $690 and will deliver between 12.1 million and 15.2 million shares
in the aggregate. For further discussion of the equity units issuance, see Note
7 above.
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as all changes in stockholders' equity,
except those arising from transactions with stockholders. Comprehensive income
(loss) includes net income (loss) and other comprehensive income (loss), which
for the Company consists of changes in unrealized appreciation or depreciation
of investments carried at market value, changes in gains or losses on cash-flow
hedging instruments, changes in foreign currency translation gains or losses and
changes in the Company's minimum pension liability.
The components of accumulated other comprehensive income (loss) were as follows:
NET NET GAIN
UNREALIZED (LOSS) ON FOREIGN MINIMUM
GAIN (LOSS) CASH-FLOW CURRENCY PENSION
ON HEDGING CUMULATIVE LIABILITY ACCUMULATED OTHER
SECURITIES, INSTRUMENTS, TRANSLATION ADJUSTMENT, COMPREHENSIVE
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2003 NET OF TAX NET OF TAX ADJUSTMENTS NET OF TAX INCOME (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 2,176 $ 90 $ (76) $ (383) $ 1,807
Unrealized gain/loss on securities [1] [2] (383) -- -- -- (383)
Net gain/loss on cash-flow hedging instruments [1] [3] -- (43) -- -- (43)
Foreign currency translation adjustments -- -- (24) -- (24)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 1,793 $ 47 $ (100) $ (383) $ 1,357
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 789 $ 77 $ (119) $ (19) $ 728
Unrealized gain/loss on securities [1] [2] 716 -- -- -- 716
Net gain/loss on cash-flow hedging instruments [1] [3] -- 67 -- -- 67
Foreign currency translation adjustments -- -- (1) -- (1)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 1,505 $ 144 $ (120) $ (19) $ 1,510
====================================================================================================================================
- 23 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED)
NET GAIN
NET (LOSS) ON FOREIGN MINIMUM
UNREALIZED CASH-FLOW CURRENCY PENSION
GAIN ON HEDGING CUMULATIVE LIABILITY ACCUMULATED OTHER
SECURITIES, INSTRUMENTS, TRANSLATION ADJUSTMENT, COMPREHENSIVE
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 NET OF TAX NET OF TAX ADJUSTMENTS NET OF TAX INCOME (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 1,444 $ 128 $ (95) $ (383) $ 1,094
Unrealized gain/loss on securities [1] [2] 349 -- -- -- 349
Net gain/loss on cash-flow hedging instruments [1] [3] -- (81) -- -- (81)
Foreign currency translation adjustments -- -- (5) -- (5)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 1,793 $ 47 $ (100) $ (383) $ 1,357
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 606 $ 63 $ (116) $ (19) $ 534
Unrealized gain/loss on securities [1] [2] 899 -- -- -- 899
Net gain/loss on cash-flow hedging instruments [1] [3] -- 81 -- -- 81
Foreign currency translation adjustments -- -- (4) -- (4)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 1,505 $ 144 $ (120) $ (19) $ 1,510
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Unrealized gain/loss on securities is net of tax and other items of $(465)
and $385 for the third quarter and $152 and $484 for the nine months ended
September 30, 2003 and 2002, respectively. Net gain/loss on cash-flow
hedging instruments is net of tax expense (benefit) of $(24) and $36 for
the third quarter and $(44) and $44 for the nine months ended September 30,
2003 and 2002, respectively.
[2] Net of reclassification adjustment for gains (losses) realized in net
income (loss) of $33 and $(106) for the third quarter and $148 and $(210)
for the nine months ended September 30, 2003 and 2002, respectively.
[3] Net of amortization adjustment of $3 and $1 for the third quarter and $16
and $3 for the nine months ended September 30, 2003 and 2002, respectively.
</FN>
NOTE 10. REINSURANCE RECAPTURE
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, HLI reinsured a
portion of the GMDB feature associated with certain of its annuity contracts. As
consideration for recapturing the business and final settlement under the
treaty, the Company has received assets valued at approximately $32 and one
million warrants exercisable for the unaffiliated company's stock. This amount
represents to the Company an advance collection of its future recoveries under
the reinsurance agreement and will be recognized as future losses are incurred.
Prospectively, as a result of the recapture, HLI will be responsible for all of
the remaining and ongoing risks associated with the GMDB's related to this block
of business. The recapture increased the net amount at risk retained by the
Company, which is included in the net amount at risk discussed in Note 1(f).
- 24 -
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 September 30, 2003, compared with December 31, 2002, and its
results of operations for the third quarter and nine months ended September 30,
2003, compared to the equivalent 2002 periods. This discussion should be read in
conjunction with the MD&A in The Hartford's 2002 Form 10-K Annual Report.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
Certain of the statements contained herein 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
difficulty in predicting the Company's potential exposure for asbestos and
environmental claims and related litigation, in particular, significant
uncertainty with regard to the outcome of the Company's current dispute with Mac
Arthur Company and its subsidiary, Western MacArthur Company (collectively or
individually, "MacArthur"); 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 uncertain effect on the Company of the
Jobs and Growth Tax Relief Reconciliation Act of 2003, in particular the
reduction in tax rates on long-term capital gains and most dividend
distributions; the response of reinsurance companies under reinsurance
contracts, the impact of increasing reinsurance rates and the availability and
adequacy of reinsurance to protect the Company against losses; the inability to
effectively mitigate the impact of equity market volatility on the Company's
financial position and results of operations arising from obligations under
annuity product guarantees; 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 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.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Critical Accounting Estimates 25
Consolidated Results of Operations: Operating Summary 27
Life 31
Investment Products 32
Individual Life 33
Group Benefits 33
Corporate Owned Life Insurance ("COLI") 34
Property & Casualty 35
Business Insurance 38
Personal Lines 39
Specialty Commercial 40
Reinsurance 41
Other Operations (Including Asbestos and
Environmental Claims) 42
Investments 45
Capital Markets Risk Management 49
Capital Resources and Liquidity 55
Accounting Standards 59
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
- --------------------------------------------------------------------------------
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America ("GAAP"), requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: reserves; valuation of investments and derivative instruments;
deferred policy acquisition costs; pension and other postretirement benefits;
and contingencies. In developing these estimates management makes subjective and
complex judgments that are inherently uncertain and subject to material change
as facts and circumstances develop. Although variability is inherent in these
estimates, management believes the amounts provided are appropriate based upon
the facts available upon compilation of the financial statements.
- 25 -
RESERVES
ASBESTOS AND ENVIRONMENTAL CLAIMS
In the first quarter of 2003, The Hartford conducted a detailed study of its
asbestos exposures. The Company undertook the study consistent with its practice
of regularly updating its reserve estimates as new information becomes
available. The Company strengthened its gross and net asbestos reserves by $3.9
billion and $2.6 billion, respectively, during the first quarter ended March 31,
2003.
The process of estimating asbestos reserves remains subject to a wide variety of
uncertainties, which are detailed in Note 5(b) of Notes to Condensed
Consolidated Financial Statements. Due to these uncertainties, further
developments could cause The Hartford to change its estimates of asbestos
reserves and the effect of these changes could be material to the Company's
consolidated operating results, financial condition and liquidity.
DEFERRED POLICY ACQUISITION COSTS
LIFE
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years. These deferred costs, together with the present value of future profits
of acquired business, are recorded as an asset commonly referred to as deferred
policy acquisition costs and present value of future profits ("DAC"). At
September 30, 2003 and December 31, 2002, the carrying value of the Company's
Life operations' DAC was $6.3 billion and $5.8 billion, respectively. For
statutory accounting purposes, such costs are expensed as incurred.
DAC related to traditional policies are amortized over the premium-paying period
in proportion to the present value of annual expected premium income. DAC
related to investment contracts and universal life-type contracts are deferred
and amortized using the retrospective deposit method. Under the retrospective
deposit method, acquisition costs are amortized in proportion to the present
value of the estimated gross profits ("EGPs") arising principally from projected
investment, mortality and expense margins and surrender charges. The
attributable portion of the DAC amortization is allocated to realized gains and
losses on investments. The DAC balance is also adjusted through other
comprehensive income by an amount that represents the amortization of deferred
policy acquisition costs that would have been required as a charge or credit to
operations had unrealized gains and losses on investments been realized. Actual
gross profits can vary from management's estimates, resulting in increases or
decreases in the rate of amortization.
The Company regularly evaluates its EGPs to determine if actual experience or
other evidence suggests that earlier estimates should be revised. In the event
that the Company were to revise its EGPs, the cumulative DAC amortization would
be adjusted to reflect such revised EGPs in the period the revision was
determined to be necessary. Several assumptions considered to be significant in
the development of EGPs include separate account fund performance, surrender and
lapse rates, estimated interest spread and estimated mortality. The separate
account fund performance assumption is critical to the development of the EGPs
related to the Company's variable annuity and variable life insurance
businesses. The average annual long-term rate of assumed separate account fund
performance (before mortality and expense charges) used in estimating gross
profits for the variable annuity and variable life business was 9% for the nine
months ended September 30, 2003 and September 30, 2002. For other products,
including fixed annuities and other universal life-type contracts, the average
assumed investment yield ranged from 5% to 8.5% for the periods ended September
30, 2003 and 2002.
Due to increased volatility and the decline experienced by the U.S. equity
markets in recent periods, the Company continues to enhance its DAC evaluation
process. The Company has developed sophisticated modeling capabilities, which
allowed it to run a large number of stochastically determined scenarios of
separate account fund performance. These scenarios were then utilized to
calculate a statistically significant range of reasonable estimates of EGPs.
This range was then compared to the present value of EGPs currently utilized in
the DAC amortization model. As of September 30, 2003, the present value of the
EGPs utilized in the DAC amortization model fall within a reasonable range of
statistically calculated present value of EGPs. As a result, the Company does
not believe there is sufficient evidence to suggest that a revision to the EGPs
(and therefore, a revision to the DAC) as of September 30, 2003 is necessary;
however, if in the future the EGPs utilized in the DAC amortization model were
to exceed the margin of the reasonable range of statistically calculated EGPs, a
revision could be necessary. Furthermore, the Company has estimated that the
present value of the EGPs is likely to remain within a reasonable range if
overall separate account returns decline by 10% or less for the remainder of
2003, and if overall separate account returns decline by 5% or less for the next
twelve months, and if certain other assumptions that are implicit in the
computations of the EGPs are achieved.
Additionally, the Company continues to perform analyses with respect to the
potential impact of a revision to future EGPs. If such a revision to EGPs were
deemed necessary, the Company would adjust, as appropriate, all of its
assumptions for products accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments", and reproject its future EGPs based on
current account values at the end of the quarter in which a revision is deemed
to be necessary. To illustrate the effects of this process, assume the Company
had concluded that a revision of the Company's EGPs was required at September
30, 2003. If the Company assumed a 9% average long-term rate of growth from
September 30, 2003 forward along with other appropriate assumption changes in
determining the revised EGPs, the Company estimates the cumulative increase to
amortization would be approximately $75-$80, after-tax. If instead the Company
were to assume a long-term growth rate of 8% in determining the revised EGPs,
the adjustment would be approximately $100-$110, after-tax. Assuming that such
an adjustment were to have been required, the Company anticipates that there
would have been immaterial impacts on its DAC amortization for the 2003 and 2004
years exclusive of the adjustment, and that there would have been positive
earnings effects in later years. Any such adjustment
- 26 -
would not affect statutory income or surplus, due to the prescribed accounting
for such amounts that is discussed above.
Aside from absolute levels and timing of market performance assumptions,
additional factors that will influence this determination include the degree of
volatility in separate account fund performance and shifts in asset allocation
within the separate account made by policyholders. The overall return generated
by the separate account is dependent on several factors, including the relative
mix of the underlying sub-accounts among bond funds and equity funds as well as
equity sector weightings. The Company's overall separate account fund
performance has been reasonably correlated to the overall performance of the
Standard & Poor's 500 Index ("S&P") (which closed at 996 on September 30, 2003),
although no assurance can be provided that this correlation will continue in the
future.
The overall recoverability of the DAC asset is dependent on the future
profitability of the business. The Company tests the aggregate recoverability of
the DAC asset by comparing the amounts deferred to the present value of total
EGPs. In addition, the Company routinely stress tests its DAC asset for
recoverability against severe declines in its separate account assets, which
could occur if the equity markets experienced another significant sell-off, as
the majority of policyholders' funds in the separate accounts is invested in the
equity market. As of September 30, 2003, the Company believed variable annuity
separate account assets could fall by at least 30% before portions of its DAC
asset would be unrecoverable.
VALUATION OF DERIVATIVE INSTRUMENTS
Derivative instruments are reported at fair value based upon internally
established valuations that are consistent with external valuation models,
quotations furnished by dealers in such instrument or market quotations.
The Company has calculated the fair value of the guaranteed minimum withdrawal
benefit ("GMWB") liability (see Note 3(b) of Notes to Condensed Consolidated
Financial Statements) based on actuarial assumptions related to the projected
cash flows, including benefits and related contract charges, over the lives of
the contracts, incorporating expectations concerning policyholder behavior.
Because of the dynamic and complex nature of these cash flows, stochastic
techniques under a variety of market return scenarios and other best estimate
assumptions are used. Estimating these cash flows involves numerous estimates
and subjective judgments including those regarding expected market rates of
return, market volatility, correlations of market returns and discount rates. At
each valuation date, the Company has assumed expected returns based on risk-free
rates as represented by the current LIBOR forward curve rates; market volatility
assumptions for each underlying index will be based on a blend of observed
market "implied volatility" data and annualized standard deviations of monthly
returns using the most recent 20 years of observed market performance;
correlations of market returns across underlying indices shall be based on
actual observed market returns and relationships over the ten years preceding
the valuation date; and current risk-free spot rates as represented by the
current LIBOR spot curve shall be used to determine the present value of
expected future cash flows produced in the stochastic projection process.
OTHER CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to the Company's critical accounting
estimates regarding Property & Casualty DAC; valuation of investments; pension
and other postretirement benefits; and contingencies since the filing of the
Company's 2002 Form 10-K Annual Report.
- --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
- --------------------------------------------------------------------------------
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 3,249 $ 2,774 17% $ 8,910 $ 8,000 11%
Fee income 716 627 14% 1,989 1,961 1%
Net investment income 825 729 13% 2,431 2,161 12%
Other revenues 145 115 26% 414 348 19%
Net realized capital gains (losses) 12 (160) NM 216 (333) NM
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,947 4,085 21% 13,960 12,137 15%
Benefits, claims and claim adjustment expenses 2,998 2,557 17% 10,872 7,455 46%
Amortization of deferred policy acquisition costs
and present value of future profits 633 568 11% 1,754 1,696 3%
Insurance operating costs and expenses 609 567 7% 1,801 1,661 8%
Other expenses 271 199 36% 693 563 23%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,511 3,891 16% 15,120 11,375 33%
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 436 194 125% (1,160) 762 NM
Income tax expense (benefit) 93 (71) NM (615) 20 NM
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 343 $ 265 29% $ (545) $ 742 NM
====================================================================================================================================
The Hartford defines the following as "NM" or not meaningful: increases or
decreases greater than 200%, or changes from a net gain to a net loss position,
or vice versa.
OPERATING RESULTS
Revenues for the third quarter and nine months ended September 30, 2003
increased $862 and $1.8 billion, respectively, over the comparable 2002 periods.
Contributing to these increases were
- 27 -
net realized capital gains and earned pricing increases within both the Business
Insurance and Specialty Commercial segments. Higher earned premiums and net
investment income in the Investment Products segment also contributed to these
increases.
Total benefits, claims and expenses increased $620 for the third quarter ended
September 30, 2003 over the comparable prior year period. The increase was
primarily due to growth within the Business Insurance, Specialty Commercial and
Investment Products segments.
Total benefits, claims and expenses increased $3.7 billion for the nine months
ended September 30, 2003 over the comparable prior year period primarily due to
the Company's asbestos reserve strengthening actions during the first quarter of
2003.
As compared to the third quarter ended September 30, 2002, net income increased
$78 for the third quarter ended September 30, 2003. The increase is primarily
due to net realized capital gains as well as strong earned pricing increases in
the Personal Lines segment and the favorable effect of the rebound in the equity
markets on the Investment Products segment, partially offset by $40 of after-tax
expense related to the settlement of litigation with Bancorp Services, LLC
("Bancorp"). For further discussion of the Bancorp litigation, see Note 5(a) of
Notes to Condensed Consolidated Financial Statements.
The net loss for the nine months ended September 30, 2003 is primarily due to
the Company's first quarter 2003 asbestos reserve strengthening of $1.7 billion,
after-tax, partially offset by net realized capital gains. Included in net loss
for the nine months ended September 30, 2003 is $27 of severance charges,
after-tax, in Property & Casualty. Included in net income for the nine months
ended September 30, 2002 is the $8 after-tax benefit recognized by Hartford
Life, Inc. ("HLI") related to the reduction of HLI's reserves associated with
September 11 and $11 of after-tax expense related to litigation with Bancorp.
INCOME TAXES
The Hartford's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). The Company is currently under audit for the 1998-2001
tax years. No material issues have been raised to date by the IRS. Management
believes that adequate provision has been made in the financial statements for
any potential assessments that may result from tax examinations and other
tax-related matters for all open tax years.
The tax provision recorded during the nine months ended September 30, 2003,
reflects a benefit of $30, consisting primarily of a change in estimate of the
dividends-received deduction ("DRD") tax benefit reported during 2002. The
change in estimate was the result of actual 2002 investment performance on the
related separate accounts being unexpectedly out of pattern with past
performance, which had been the basis for the estimate. The total DRD benefit
related to the 2003 tax year for the nine months ended September 30, 2003 was
$65.
The effective tax rate for the third quarter and nine months ended September 30,
2003 was 21% and 53%, respectively, as compared with (37%) and 3%, respectively,
for the comparable periods in 2002. Tax-exempt interest earned on invested
assets and the dividends-received deduction were the principal causes of the
effective tax rates differing from the 35% U.S. statutory rate.
ADOPTION OF FAIR VALUE RECOGNITION PROVISIONS FOR STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
an Amendment of FASB Statement No. 123", which provides three optional
transition methods for entities that decide to voluntarily adopt the fair value
recognition principles of SFAS No. 123, "Accounting for Stock-Based
Compensation", and modifies the disclosure requirements of SFAS No. 123. In
January 2003, the Company adopted the fair value recognition provisions of
accounting for employee stock compensation and used the prospective transition
method. Under the prospective method, stock-based compensation expense is
recognized for awards granted or modified after the beginning of the fiscal year
in which the change is made. The fair value of stock-based awards granted during
the nine months ended September 30, 2003 was $40, after-tax. The fair value of
these awards will be recognized as expense over the awards' vesting periods,
generally three years.
All stock-based awards granted or modified prior to January 1, 2003 will
continue to be valued using the intrinsic value-based provisions set forth in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees". Under the intrinsic value method, compensation expense is
determined on the measurement date, which is the first date on which both the
number of shares the employee is entitled to receive and the exercise price are
known. Compensation expense, if any, is measured based on the award's intrinsic
value, which is the excess of the market price of the stock over the exercise
price on the measurement date. The expense, including non-option plans, related
to stock-based employee compensation included in the determination of net income
for the third quarter and nine months ended September 30, 2003 and 2002 is less
than that which would have been recognized if the fair value method had been
applied to all awards since the effective date of SFAS No. 123. For further
discussion of the Company's stock-based compensation plans, see Note 11 of Notes
to Consolidated Financial Statements included in The Hartford's 2002 Form 10-K
Annual Report.
The following table illustrates the effect on net income (loss) and earnings
(loss) per share as if the fair value method had been applied to all outstanding
and unvested awards in each period.
- 28 -
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- ------------- ------------- -----------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 343 $ 265 $ (545) $ 742
Add: Stock-based employee compensation expense included in reported
net income (loss), net of related tax effects [1] 4 2 15 4
Deduct: Total stock-based employee compensation expense determined
under the fair value method for all awards, net of related tax (11) (16) (37) (41)
effects
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) [2] $ 336 $ 251 $ (567) $ 705
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic - as reported $ 1.21 $ 1.06 $ (2.03) $ 3.00
Basic - pro forma [2] $ 1.19 $ 1.01 $ (2.11) $ 2.85
Diluted - as reported [3] $ 1.20 $ 1.06 $ (2.03) $ 2.96
Diluted - pro forma [2] [3] $ 1.18 $ 1.00 $ (2.11) $ 2.82
====================================================================================================================================
<FN>
[1] Includes the impact of non-option plans of $2 and $0, respectively, for the
third quarter and $4 and $2, respectively, for the nine months ended
September 30, 2003 and 2002.
[2] The pro forma disclosures are not representative of the effects on net
income (loss) and earnings (loss) per share in future periods.
[3] As a result of the net loss in the nine months ended September 30, 2003,
SFAS No. 128, "Earnings Per Share", requires the Company to use basic
weighted average common shares outstanding in the calculation of the nine
months ended September 30, 2003 diluted earnings (loss) per share, since
the inclusion of options of 1.5 would have been antidilutive to the
earnings per share calculation. In the absence of the net loss, weighted
average common shares outstanding and dilutive potential common shares
would have totaled 270.4.
</FN>
ORGANIZATIONAL STRUCTURE
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, the capital raising and purchase
accounting adjustment activities related to the June 27, 2000 acquisition of all
of the shares of Hartford Life, Inc. ("HLI") that the Company did not already
own ("the HLI Repurchase"), as well as capital raised that has not been
contributed to the Company's insurance subsidiaries 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 Japan and Brazil; realized capital gains and losses; as
well as corporate items not directly allocated to any of its reportable
operating segments, principally interest expense; and intersegment eliminations.
Property & Casualty is 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. "North American" includes the combined underwriting results of the
Business Insurance, Personal Lines, Specialty Commercial and Reinsurance
underwriting segments. Property & Casualty also includes income and expense
items not directly allocated to these segments, such as net investment income,
net realized capital gains and losses, and other expenses including interest,
severance and income taxes. Included in net income for the nine months ended
September 30, 2003 for Property & Casualty is $27, after-tax, related to
severance costs associated with several expense reduction initiatives announced
in May 2003.
On May 16, 2003, as part of the Company's decision to withdraw from the assumed
reinsurance business, the Company entered into a quota share and purchase
agreement with Endurance Reinsurance Corporation of America ("Endurance")
whereby the Reinsurance segment retroceded the majority of its inforce book of
business as of April 1, 2003 and sold renewal rights to Endurance. Under the
quota share agreement, Endurance will reinsure most of the segment's assumed
reinsurance contracts that were written on or after January 1, 2002 and that had
unearned premium as of April 1, 2003. In consideration for Endurance reinsuring
the unearned premium as of April 1, 2003, the Company paid Endurance an amount
equal to unearned premiums less the related unamortized commissions/deferred
acquisition costs and an override commission, which was established by the
contract. In addition, Endurance will pay a profit sharing commission based on
the loss performance of property treaty, property catastrophe and aviation pool
unearned premium. Under the purchase agreement, Endurance will pay additional
amounts, subject to a guaranteed minimum of $15, based on the level of renewal
premium on the reinsured contracts over the next two years. The guaranteed
minimum is reflected in net income for the nine months ended September 30, 2003.
The Company remains subject to reserve development relating to all retained
business.
On September 1, 2003, the Company sold a wholly owned subsidiary, Trumbull
Associates, LLC, for $33, resulting in a gain of $15, after-tax. The gain is
included in net realized capital gains. The revenues and net income of Trumbull
Associates, LLC were not material to the Company or the Property & Casualty
operation.
The measure of profit or loss used by The Hartford's management in evaluating
the performance of its Life segments is net income. Property & Casualty
underwriting segments are evaluated by The Hartford's management primarily based
upon underwriting results. Underwriting results represent earned premiums less
- 29 -
incurred claims, claim adjustment expenses and underwriting expenses.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided, security transfers and capital contributions. In addition, 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 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 certain net
realized capital gains and losses through net investment income utilizing the
duration of the segment's investment portfolios. During the nine months ended
September 30, 2003, $1.8 billion of securities were sold by the Property &
Casualty operation to the Life operation. For segment reporting, the net gain on
this sale was deferred by the Property & Casualty operation and will be reported
as realized when the underlying securities are sold by the Life operation. On
December 1, 2002, the Property & Casualty segments entered into a contract with
a subsidiary, whereby reinsurance will be provided to the Property & Casualty
operations through this subsidiary, allowing for reinsurance decisions to be
made on a corporate-wide basis. The financial results of this reinsurance
program, net of retrocessions by the reinsuring subsidiary to unrelated
reinsurers, are included in the Specialty Commercial segment.
SEGMENT RESULTS
The following is a summary of net income (loss) for each of the Company's Life
segments and aggregate net income (loss) for the Company's Property & Casualty
operations.
NET INCOME (LOSS) THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 129 $ 100 29% $ 368 $ 335 10%
Individual Life 36 33 9% 104 99 5%
Group Benefits 38 34 12% 107 92 16%
COLI (30) 10 NM (11) 20 NM
Other (12) (16) 25% (38) (114) 67%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 161 161 -- 530 432 23%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 202 110 84% (1,034) 328 NM
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate (20) (6) NM (41) (18) (128%)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 343 $ 265 29% $ (545) $ 742 NM
====================================================================================================================================
The following is a summary of the Property & Casualty underwriting results by
segment. Underwriting results represent premiums earned less incurred claims,
claim adjustment expenses and underwriting expenses.
UNDERWRITING RESULTS (BEFORE-TAX) THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Business Insurance $ 20 $ 21 (5%) $ 50 $ 17 194%
Personal Lines 37 (13) NM 92 (48) NM
Specialty Commercial (50) 3 NM (54) 1 NM
Reinsurance (10) (4) (150%) (105) (17) NM
Other Operations (12) (42) 71% (2,657) (129) NM
====================================================================================================================================
In the sections that follow, the Company analyzes the results of operations of
its various segments using the performance measurements that the Company
believes are meaningful.
- 30 -
- --------------------------------------------------------------------------------
LIFE
- --------------------------------------------------------------------------------
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 981 $ 667 47% $ 2,370 $ 2,040 16%
Fee income 716 627 14% 1,989 1,961 1%
Net investment income 518 462 12% 1,538 1,360 13%
Other revenues 35 27 30% 99 91 9%
Net realized capital gains (losses) (2) (118) 98% -- (253) 100%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,248 1,665 35% 5,996 5,199 15%
Benefits, claims and claim adjustment expenses 1,375 1,050 31% 3,544 3,135 13%
Amortization of deferred policy acquisition costs
and present value of future profits 202 163 24% 540 486 11%
Insurance operating costs and expenses 379 335 13% 1,125 1,050 7%
Other expenses 94 34 176% 159 114 39%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,050 1,582 30% 5,368 4,785 12%
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 198 83 139% 628 414 52%
Income tax expense (benefit) 37 (78) NM 98 (18) NM
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 161 $ 161 -- $ 530 $ 432 23%
====================================================================================================================================
Revenues increased for the third quarter and nine months ended September 30,
2003 as a result of higher revenues in the Investment Products segment and a
decrease in realized capital losses reported in the Other category compared to
the prior year comparable periods. Earned premiums in Investment Products
increased due to higher sales in the institutional investment products business.
Additionally, net investment income increased due to higher general account
assets in the individual annuity business and growth in assets in the
institutional investments business. Fee income in the Investment Products
segment was higher for the third quarter ended September 30, 2003 as a result of
higher average account values, specifically in individual annuities and mutual
fund businesses, due primarily to stronger variable annuity sales and the higher
equity market values compared to the prior year period. Partially offsetting
these increases were lower fee income and net investment income in the COLI
segment. The decrease in COLI net investment income for the third quarter and
nine months ended September 30, 2003 was primarily due to lower average
leveraged COLI account values as compared to a year ago. In addition, COLI had
lower fee income due in part to lower sales in the third quarter of 2003 and for
the nine months ended September 30, 2003, as compared to the prior year
comparable periods.
Benefits, claims and expenses increased for the third quarter and nine months
ended September 30, 2003 primarily due to increases in the Investment Products
segment associated with the growth in the institutional investment business,
partially offset by lower benefit costs in COLI related to the decline in the
account values of the leveraged COLI business. For the third quarter ended
September 30, 2003, COLI other expenses increased due to a $40 after-tax charge,
associated with the settlement of the Bancorp litigation. (For further
discussion of the Bancorp litigation, see Note 5(a) of Notes to Condensed
Consolidated Financial Statements.)
Net income remained the same for the third quarter and increased for the nine
months ended September 30, 2003 as compared to the prior year comparable
periods. Net income has been favorably impacted by growth in the Investment
Products segment and a decrease in net realized capital losses compared to a
year ago. Additionally, Group Benefits net income increased due principally to
more favorable loss ratios as compared to the prior year. Partially offsetting
these increases was a decrease in COLI net income of $31 for the nine months
ended September 30, 2003, as compared to the prior year period. This decrease
included the effects of a year over year increase in the charge for the Bancorp
litigation, aggregating $29, and the positive $8 after-tax impact recorded in
the first quarter of 2002 related to favorable development on the Company's
estimated September 11 exposure.
The tax provision recorded during the nine months ended September 30, 2003,
reflects a benefit of $30, consisting primarily of a change in estimate of the
DRD tax benefit reported during 2002. The change in estimate was the result of
actual 2002 investment performance on the related separate accounts being
unexpectedly out of pattern with past performance, which had been the basis for
the estimate. The total DRD benefit related to the 2003 tax year for the nine
months ended September 30, 2003 was $65.
Future net income for the Company will be affected by the effectiveness of the
risk management strategies the Company has implemented to mitigate the net
income volatility associated with the unreinsured GMWB rider currently being
sold with the majority of new variable annuity contracts. The GMWB represents an
embedded derivative in the variable annuity contract that is required to be
reported separately from the host variable annuity contract. Beginning July 7,
2003, substantially all new contracts with the GMWB have not been covered by
reinsurance. These unreinsured contracts are expected to generate volatility in
net income as the underlying embedded derivative liabilities are recorded at
fair value each reporting period, resulting in the recognition of net realized
capital gains or losses in response to changes in certain critical factors
including capital market conditions and policyholder behavior. In order to
minimize the volatility associated with the unreinsured GMWB liabilities, the
Company established an alternative risk management strategy.
- 31 -
During the third quarter of 2003, the Company began hedging its unreinsured GMWB
exposure using interest rate futures, S&P 500 and NASDAQ index put options and
futures contracts. The net impact to the Company's net income for the third
quarter of the change in value of the embedded derivative net of the results of
the hedging program was immaterial.
- --------------------------------------------------------------------------------
INVESTMENT PRODUCTS
- --------------------------------------------------------------------------------
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 459 $ 385 19% $ 1,243 $ 1,253 (1%)
Earned premiums 393 96 NM 627 306 105%
Net investment income 330 280 18% 962 778 24%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,182 761 55% 2,832 2,337 21%
Benefits, claims and claim adjustment expenses 707 368 92% 1,552 1,068 45%
Insurance operating costs and other expenses 165 157 5% 470 489 (4%)
Amortization of deferred policy acquisition costs 145 108 34% 375 342 10%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,017 633 61% 2,397 1,899 26%
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 165 128 29% 435 438 (1%)
Income tax expense 36 28 29% 67 103 (35%)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 129 $ 100 29% $ 368 $ 335 10%
- ------------------------------------------------------------------------------------------------------------------------------------
Individual variable annuity account values $ 77,572 $ 59,618 30%
Other individual annuity account values 10,939 10,513 4%
Other investment products account values 24,295 19,368 25%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES [1] 112,806 89,499 26%
Mutual fund assets under management 18,900 14,092 34%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 131,706 $ 103,591 27%
====================================================================================================================================
<FN>
[1] Includes policyholder balances for investment contracts and reserves for
future policy benefits for insurance contracts.
</FN>
Revenues in the Investment Products segment increased for the third quarter and
nine months ended September 30, 2003. The increase in earned premiums is due to
higher sales of terminal funding in the institutional investment products
business. Net investment income increased due to higher general account assets
in the individual annuity business. General account individual annuity assets
were $9.8 billion as of September 30, 2003, an increase of $2.2 billion, or 29%,
from September 30, 2002, due to policyholders transfer activity and increased
sales of individual annuities. Additionally, net investment income related to
other investment products increased as a result of the growth in average assets
over the last twelve months in the institutional investment business, where
related assets under management increased $2.2 billion, or 22%, since September
30, 2002, to $11.9 billion as of September 30, 2003. Assets under management is
an internal performance measure used by the Company since a significant portion
of the Company's revenue is based upon asset values. These revenues increase or
decrease with a rise or fall, respectively, in the level of average assets under
management. Fee income in the Investment Products segment was higher for the
third quarter ended September 30, 2003 as a result of higher average account
values, specifically in individual annuities and mutual fund businesses, due
primarily to stronger variable annuity sales and the higher equity market values
compared to the prior year period. However, fee income was slightly lower for
the nine months ended September 30, 2003 as those average account values were
lower when compared to the prior year period.
Total benefits, claims and expenses increased for the third quarter and nine
months ended September 30, 2003, primarily driven by growth in the institutional
investments business. Additionally, amortization of deferred policy acquisition
costs increased for the third quarter and nine months ended September 30, 2003
due to higher gross profits.
Net income increased for the third quarter and nine months ended September 30,
2003. Net income was higher for the nine months ended September 30, 2003 due to
the favorable impact of $21, resulting from the Company's previously discussed
change in estimate of the DRD tax benefit reported during 2002. The change in
estimate was the result of 2002 actual investment performance on the related
separate accounts being unexpectedly out of pattern with past performance which
had been the basis for the estimate. The total DRD benefit related to the 2003
tax year for the nine months ended September 30, 2003 was $60.
- 32 -
- --------------------------------------------------------------------------------
INDIVIDUAL LIFE
- --------------------------------------------------------------------------------
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 190 $ 178 7% $ 556 $ 528 5%
Earned premiums (4) (3) (33%) (14) (5) (180%)
Net investment income 63 64 (2%) 191 197 (3%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 249 239 4% 733 720 2%
Benefits, claims and claim adjustment expenses 117 104 13% 337 330 2%
Insurance operating costs and other expenses 38 37 3% 116 116 --
Amortization of deferred policy acquisition costs 42 49 (14%) 131 128 2%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 197 190 4% 584 574 2%
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 52 49 6% 149 146 2%
Income tax expense 16 16 -- 45 47 (4%)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 36 $ 33 9% $ 104 $ 99 5%
====================================================================================================================================
Variable life account values $ 4,284 $ 3,458 24%
Total account values $ 8,247 $ 7,360 12%
- ------------------------------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 66,561 $ 65,797 1%
Total life insurance in force $ 128,462 $ 125,138 3%
====================================================================================================================================
Revenues in the Individual Life segment increased for the third quarter and nine
months ended September 30, 2003 primarily driven by increases in fees and cost
of insurance charges as life insurance in force values grew, and variable life
account values increased 24% from the prior year. These increases were partially
offset by decreases in net investment income and lower earned premiums. The
decrease in investment income was due primarily to lower investment yields. The
lower earned premiums were driven by higher ceded premiums and declining assumed
premiums on the Fortis block of business.
Total benefits, claims and expenses increased for the third quarter ended
September 30, 2003 principally due to higher benefit costs when compared to the
prior year favorable results. Year-to-date mortality was higher in 2003 largely
due to the increased size and age of the inforce business.
Net income increased for the third quarter and nine months ended September 30,
2003 due to increases in fee income and growth in the in force business. These
increases were partially offset by mortality experience and lower net investment
income for the third quarter and nine months ended September 30, 2003 compared
to the equivalent prior year periods. Additionally, net income for the nine
months ended September 30, 2003 includes the favorable impact of $2 DRD benefit
resulting from the Company's previously discussed change in estimate of the DRD
tax benefit reported during 2002. The total DRD benefit related to the 2003 tax
year for the nine months ended September 30, 2003 was $3.
- --------------------------------------------------------------------------------
GROUP BENEFITS
- --------------------------------------------------------------------------------
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums and other $ 597 $ 582 3% $ 1,772 $ 1,754 1%
Net investment income 66 63 5% 196 189 4%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 663 645 3% 1,968 1,943 1%
Benefits, claims and claim adjustment expenses 472 471 -- 1,412 1,431 (1%)
Amortization of deferred policy acquisition costs 4 4 -- 13 11 18%
Insurance operating costs and other expenses 137 127 8% 406 385 5%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 613 602 2% 1,831 1,827 --
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 50 43 16% 137 116 18%
Income tax expense 12 9 33% 30 24 25%
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 38 $ 34 12% $ 107 $ 92 16%
====================================================================================================================================
Revenues increased for the third quarter and nine months ended September 30,
2003 primarily due to an increase in earned premiums. The Group Benefits segment
had premium buyouts of $11 and $40 for the third quarter and nine months ended
September 30, 2003 compared with $6 for both the third quarter and nine months
ended September 30, 2002. Premiums, excluding buyouts, for the third quarter
ended September 30, 2003 were higher primarily due to sales growth and improved
persistency. Premiums, excluding buyouts, for the nine months ended September
30, 2003 were lower as a result of the Group Benefits division's continued
pricing and risk management discipline in light of a challenging competitive and
economic environment.
- 33 -
Total benefits, claims and expenses increased 2% for the third quarter and
remained essentially flat for the nine months ended September 30, 2003 due to an
increase in commission expenses and operating expenses, partially offset by
lower loss costs for the nine months ended September 30, 2003 as compared to the
equivalent prior year period. The segment's loss ratio (defined as benefits and
claims as a percentage of premiums and other considerations, excluding buyouts)
was 79% for both the third quarter and nine months ended September 30, 2003,
respectively as compared to 81% and 82% for the comparable prior year periods.
Net income increased for the third quarter and nine months ended September 30,
2003 principally due to favorable loss ratios discussed above. However, future
net income growth will be dependent upon the Group Benefits segment's ability to
increase earned premiums and continue to control benefit costs within pricing
assumptions.
- --------------------------------------------------------------------------------
CORPORATE OWNED LIFE INSURANCE ("COLI")
- --------------------------------------------------------------------------------
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 64 $ 79 (19%) $ 201 $ 238 (16%)
Net investment income 53 66 (20%) 169 213 (21%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 117 145 (19%) 370 451 (18%)
Benefits, claims and claim adjustment expenses 78 108 (28%) 242 325 (26%)
Insurance operating costs and expenses 72 15 NM 93 70 33%
Dividends to policyholders 14 7 100% 53 27 96%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 164 130 26% 388 422 (8%)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (47) 15 NM (18) 29 NM
Income tax expense (benefit) (17) 5 NM (7) 9 NM
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (30) $ 10 NM $ (11) $ 20 NM
====================================================================================================================================
Variable COLI account values $ 20,557 $ 19,298 7%
Leveraged COLI account values 2,602 3,601 (28%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 23,159 $ 22,899 1%
====================================================================================================================================
COLI revenues decreased for the third quarter and nine months ended September
30, 2003 due to lower net investment and fee income. Net investment income
decreased, primarily due to the decline in leveraged COLI account values as a
result of surrender activity. Fee income was reduced as the result of lower
sales for the third quarter and nine months ended September 30, 2003 as compared
to the equivalent prior year periods.
Total benefits, claims and expenses increased for the third quarter ended
September 30, 2003 due primarily to a $40 after-tax expense related to the
Bancorp litigation. Total benefits, claims and expenses decreased for the nine
months ended September 30, 2003 primarily as a result of a decline in interest
credited expenses due to lower general account assets and policy loans compared
to prior year due to the decline in the leveraged COLI account values noted
above. These decreases for the nine months ended September 30, 2003 were
partially offset by an increase in insurance operating costs and other expenses
due primarily to the $40 after-tax expense related to the Bancorp litigation
expense recorded in 2003, compared with the $11 after-tax expense recorded in
2002. In addition, dividends to policyholders increased for the third quarter
and nine months ended September 30, 2003 due to an increase in mortality
dividends on the leveraged COLI product related primarily to surrender activity.
Net income decreased for the third quarter and nine months ended September 30,
2003 as compared to the prior periods principally as a result of the Bancorp
litigation expense. Excluding the expenses associated with the Bancorp
litigation discussed above, net income was $10 for the third quarter ended
September 30, 2003 and 2002, and was $29 and $31 for the nine months ended
September 30, 2003 and 2002. This decline in net income for the nine months
ended September 30, 2003 was principally related to the decline in the leveraged
COLI business discussed above.
- 34 -
- --------------------------------------------------------------------------------
PROPERTY & CASUALTY
- --------------------------------------------------------------------------------
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 2,268 $ 2,107 8% $ 6,540 $ 5,960 10%
Net investment income 302 262 15% 878 787 12%
Other revenues [1] 110 88 25% 318 257 24%
Net realized capital gains (losses) 14 (42) NM 216 (80) NM
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,694 2,415 12% 7,952 6,924 15%
Benefits, claims and claim adjustment expenses 1,622 1,505 8% 7,324 4,315 70%
Amortization of deferred policy acquisition costs 431 405 6% 1,214 1,210 --
Insurance operating costs and expenses 230 232 (1%) 676 611 11%
Other expenses 143 152 (6%) 464 412 13%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,426 2,294 6% 9,678 6,548 48%
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 268 121 121% (1,726) 376 NM
Income tax expense (benefit) 66 11 NM (692) 48 NM
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) [2] $ 202 $ 110 84% $ (1,034) $ 328 NM
====================================================================================================================================
NORTH AMERICAN PROPERTY & CASUALTY
GAAP UNDERWRITING RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
Loss ratio 59.8 59.1 (0.7) 59.7 59.6 (0.1)
Loss adjustment expense ratio 11.6 10.9 (0.7) 11.9 11.2 (0.7)
Expense ratio 27.5 28.0 0.5 26.8 28.3 1.5
Policyholder dividend ratio 0.4 0.7 0.3 0.4 0.7 0.3
Combined ratio 99.2 98.7 (0.5) 98.9 99.8 0.9
Catastrophe ratio 3.4 1.1 (2.3) 3.6 1.6 (2.0)
Combined ratio before catastrophes 95.8 97.5 1.7 95.3 98.2 2.9
====================================================================================================================================
<FN>
[1] Represents servicing revenue.
[2] Includes net realized capital gains (losses), after-tax, of $9 and $(29)
for the third quarter ended September 30, 2003 and 2002, respectively, and
$141 and $(53) for the nine months ended September 30, 2003 and 2002,
respectively.
</FN>
Revenues for Property & Casualty increased $279 for the third quarter and $1.0
billion for the nine months ended September 30, 2003. The improvement in both
periods was due primarily to earned premium growth in the Business Insurance and
Specialty Commercial segments, primarily as a result of earned pricing
increases, as well as an improvement in net realized capital gains and losses,
and net investment income.
Net income increased $92 for the third quarter and decreased $1.4 billion for
the nine months ended September 30, 2003. The increase for the quarter was
primarily due to an improvement in net realized capital gains and losses, an
increase in net investment income and improved underwriting results in the
Personal Lines segment. Strong earned pricing and favorable frequency loss costs
resulted in an increase in underwriting results in Personal Lines, which offset
a decrease in underwriting results in the Specialty Commercial segment. Net
investment income, after-tax, rose $24 for the third quarter due to higher
invested assets as a result of strong cash flows and additional capital raised
during the second quarter of 2003. Partially offsetting these factors was an
increase in after-tax catastrophe losses of $35, or 2.3 combined ratio points,
for the third quarter, primarily due to losses related to Hurricane Isabel of
$25, or 1.7 points. The $1.4 billion decrease in net income for the nine month
period was primarily due to the net asbestos reserve strengthening of $1.7
billion, after-tax, in the first quarter. Results for the nine month period were
favorably impacted by an increase in net realized capital gains and losses and
improved underwriting results in Personal Lines. In addition, net investment
income, after-tax, rose $56 for the nine months ended September 30, 2003 due to
higher invested assets, primarily from strong cash flows.
RATIOS
The previous table and the following segment discussions for the third quarter
and nine months ended September 30, 2003 and 2002 include various underwriting
ratios. Management believes that these ratios are useful in understanding the
underlying trends in The Hartford's current insurance underwriting business.
However, these measures should only be used in conjunction with, and not in lieu
of, underwriting income and may not be comparable to other performance measures
used by the Company's competitors. The "loss ratio" is the ratio of claims
expense (exclusive of claim adjustment expenses) to earned premiums. The "loss
adjustment expense ratio" represents the ratio of claim adjustment expenses to
earned premiums. The "expense ratio" is the ratio of underwriting expenses,
excluding bad debt expense, to earned premiums. The "policyholder dividend
ratio" is the ratio of policyholder dividends to earned premiums. The "combined
ratio" is the sum of the loss ratio, the loss adjustment expense ratio, the
expense ratio and the policyholder dividend ratio. These ratios are relative
measurements that describe for every $100 of net premiums earned, the cost of
losses and expenses as defined above, respectively. A combined ratio below 100
demonstrates underwriting profit; a combined ratio above 100 demonstrates
underwriting losses. The "catastrophe ratio" represents the ratio of catastrophe
losses to earned premiums. A catastrophe is an event that causes $25 or more in
industry insured property losses
- 35 -
and affects a significant number of property and casualty policyholders and
insurers.
WRITTEN PREMIUMS
Written premiums are a non-GAAP financial measure which represents the amount of
premiums charged for policies issued during a fiscal period. Earned premiums is
a GAAP measure. Premiums are considered earned and are included in the financial
results on a pro rata basis over the policy period. The following segment
discussions for the third quarter and nine months ended September 30, 2003 and
2002, respectively, include the presentation of written premiums in addition to
earned premiums. Management believes that this performance measure is useful to
investors as it reflects current trends in the Company's sale of property and
casualty insurance products, as compared to earned premium. Premium renewal
retention is defined as renewal premium written in the current period divided by
new and renewal premium written in the prior period. Reinstatement premium
represents additional ceded premium paid for the reinstatement of the amount of
reinsurance coverage that was reduced as a result of a reinsurance loss payment
under a catastrophe cover.
RISK MANAGEMENT STRATEGY
The Hartford's property and casualty operations have well-developed processes to
manage catastrophic risk exposures to natural catastrophes, such as hurricanes
and earthquakes, and other perils, such as terrorism. These processes involve
establishing underwriting guidelines for both individual risk and in aggregate
including individual policy limits and aggregate exposure limits by geographic
zone and peril. The Company establishes exposure limits and actively monitors
the risk exposures as a percent of North American property-casualty surplus.
Generally the Company limits its exposure from a single 250-year event to less
than 30% of surplus for losses prior to reinsurance and to less than 15% of
surplus for losses net of reinsurance. The Company monitors exposures monthly
and employs both internally developed and externally purchased loss modeling
tools.
The Hartford utilizes reinsurance to manage risk and transfer exposures to
well-established and financially secure reinsurers. Reinsurance is used to
manage both aggregate exposures as well as specific risks based on accumulated
property and casualty liabilities in certain geographic zones. All treaty
purchases are administered by a centralized function to support a consistent
strategy and ensure that the reinsurance activities are fully integrated into
the organization's risk management processes.
A variety of traditional reinsurance products are used in the development and
execution of the overall corporate risk management strategy. The risk transfer
products used include both excess of loss occurrence-based products, protecting
aggregate property and workers compensation exposures, and individual risk or
quota share products, protecting specific classes or lines of business.
Facultative reinsurance is also used to manage policy-specific risk exposures
based on established underwriting guidelines. The Hartford also participates in
governmentally administered reinsurance facilities such as the Florida Hurricane
Catastrophe Fund ("FHCF").
To minimize the potential credit risk resulting from the use of reinsurance, a
centralized group evaluates the credit standing of potential reinsurers and
establishes the Company's schedule of approved reinsurers. The assessment
process reviews reinsurers against a set of predetermined financial and
management criteria and distinguishes between long-tail casualty and short-tail
property business. A committee meets regularly to review activity with each
reinsurer and affirm the schedule of approved reinsurers.
REINSURANCE RECOVERABLES
The Company's net reinsurance recoverables from various property and casualty
reinsurance arrangements amounted to $5.5 billion and $4.2 billion at September
30, 2003 and December 31, 2002, respectively. Of the total net reinsurance
recoverables as of December 31, 2002, $494 relates to the Company's mandatory
participation in various involuntary assigned risk pools, which are backed by
the financial strength of the property and casualty insurance industry. Of the
remainder, $2.7 billion, or 72%, were rated by A.M. Best. Of the total rated by
A.M. Best, 91% were rated A- (excellent) or better. The remaining $1.0 billion,
or 28%, of net recoverables from reinsurers were comprised of the following: 9%
related to Equitas, 6% related to voluntary pools, 1% related to captive
insurance companies, and 12% related to companies not rated by A.M. Best, of
which no single reinsurer constituted more than 0.75% of the Company's
reinsurance recoverables. There have been no material changes to the
distribution of net recoverables from reinsurers for the Company since December
31, 2002.
Where its contracts permit, the Company secures future claim obligations with
various forms of collateral including irrevocable letters of credit, New York
Regulation 114 trusts, funds held accounts and group wide offsets.
The allowance for unrecoverable reinsurance was $464 at September 30, 2003 and
$211 at December 31, 2002. The significant increase was primarily related to the
Company's asbestos reserve strengthening actions during the first quarter of
2003.
RESERVES
Reserving for property and casualty losses is an estimation process. As
additional experience and other relevant claim data become available, reserve
levels are adjusted accordingly. Such adjustments of reserves related to claims
incurred in prior years are a natural occurrence in the loss reserving process
and are referred to as "reserve development". Reserve development that increases
previous estimates of ultimate cost is called "reserve strengthening". Reserve
development that decreases previous estimates of ultimate cost is called
"reserve releases". Reserve development can influence the comparability of year
over year underwriting results and is set forth in the paragraphs and tables
that follow. The "prior accident year development (pts.)" in the following
tables for the third quarter and nine months ended September 30, 2003 represents
the ratio of reserve development to earned premiums. For a detailed discussion
of the Company's reserve policies, see Notes 1(l), 7 and 16(b) of Notes to
Consolidated Financial Statements and the Critical Accounting Estimates section
of the MD&A included in The Hartford's 2002 Form 10-K Annual Report.
- 36 -
There was no significant reserve strengthening or release in the Business
Insurance and Personal Lines segments for the third quarter and nine months
ended September 30, 2003. Specialty Commercial strengthened prior accident year
reserves by $45 in the third quarter and nine month periods as a result of
losses in the bond and professional liability lines of business.
There was no significant reserve strengthening or release in the Reinsurance
segment for the third quarter ended September 30, 2003. For the nine month
period, reserve strengthening of $94 in the Reinsurance segment occurred across
multiple accident years, primarily 1997 through 2000, and principally in the
casualty line of traditional reinsurance. In addition, the Other Operations
segment for the nine months ended September 30, 2003 reflects the Company's net
asbestos reserve strengthening of $2.6 billion during the first quarter of 2003.
A rollforward of liabilities for unpaid claims and claim adjustment expenses by
segment for the third quarter and nine months ended September 30, 2003 for
Property & Casualty is as follows:
THIRD QUARTER ENDED SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
NORTH
BUSINESS PERSONAL SPECIALTY AMERICAN OTHER
INSURANCE LINES COMMERCIAL REINSURANCE P&C OPERATIONS TOTAL P&C
- ------------------------------------------------------------------------------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES-GROSS $ 5,057 $ 1,721 $ 4,675 $ 1,611 $ 13,064 $ 8,004 $ 21,068
Reinsurance and other recoverables 400 45 1,690 385 2,520 2,612 5,132
- ------------------------------------------------------------------------------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES-NET 4,657 1,676 2,985 1,226 10,544 5,392 15,936
- ------------------------------------------------------------------------------------------------------------------------------------
Add: provision for unpaid claims and claim
adjustment expenses 595 583 366 73 1,617 5 1,622
Less: payments 416 551 236 68 1,271 107 1,378
- ------------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID CLAIMS AND
CLAIM ADJUSTMENT EXPENSES-NET 4,836 1,708 3,115 1,231 10,890 5,290 16,180
Reinsurance and other recoverables 429 44 1,800 411 2,684 2,580 5,264
- ------------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID CLAIMS AND
CLAIM ADJUSTMENT EXPENSES-GROSS $ 5,265 $ 1,752 $ 4,915 $ 1,642 $ 13,574 $ 7,870 $ 21,444
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 947 $ 805 $ 434 $ 82 $ 2,268 $ -- $ 2,268
Combined ratio 96.4 95.1 110.7 111.3 99.2
Loss and loss expense paid ratio 44.1 68.6 54.6 82.1 56.2
Loss and loss expense incurred ratio 63.0 72.5 84.3 87.8 71.3
Catastrophe ratio 3.2 4.2 2.5 3.0 3.4
Prior accident year development (pts.) -- -- 10.4 -- 2.0
Prior accident year development ($) $ -- $ -- $ 45 $ -- $ 45
====================================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
NORTH
BUSINESS PERSONAL SPECIALTY AMERICAN OTHER
INSURANCE LINES COMMERCIAL REINSURANCE P&C OPERATIONS TOTAL P&C
- ------------------------------------------------------------------------------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES-GROSS $ 4,744 $ 1,692 $ 4,957 $ 1,614 $ 13,007 $ 4,084 $ 17,091
Reinsurance and other recoverables 366 49 1,998 388 2,801 1,149 3,950
- ------------------------------------------------------------------------------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES-NET 4,378 1,643 2,959 1,226 10,206 2,935 13,141
- ------------------------------------------------------------------------------------------------------------------------------------
Add: provision for unpaid claims and claim
adjustment expenses 1,754 1,725 871 324 4,674 2,650 7,324
Less: payments 1,296 1,660 715 319 3,990 295 4,285
- ------------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID CLAIMS AND
CLAIM ADJUSTMENT EXPENSES-NET 4,836 1,708 3,115 1,231 10,890 5,290 16,180
Reinsurance and other recoverables 429 44 1,800 411 2,684 2,580 5,264
- ------------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID CLAIMS AND
CLAIM ADJUSTMENT EXPENSES-GROSS $ 5,265 $ 1,752 $ 4,915 $ 1,642 $ 13,574 $ 7,870 $ 21,444
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 2,724 $ 2,362 $ 1,144 $ 296 $ 6,526 $ 14 $ 6,540
Combined ratio 96.7 95.6 101.5 135.2 98.9
Loss and loss expense paid ratio 47.6 70.2 62.6 107.6 61.2
Loss and loss expense incurred ratio 64.4 73.0 76.1 109.0 71.6
Catastrophe ratio 3.4 4.6 2.0 2.8 3.6
Prior accident year development (pts.) [1] -- -- 3.9 31.7 2.1
Prior accident year development ($) [1] $ -- $ -- $ 45 $ 94 $ 139
====================================================================================================================================
<FN>
[1] In addition to prior year loss reserve development of $94, Reinsurance had
$10 of earned premium in 2003 that related to exposure periods prior to
2003.
</FN>
- 37 -
- --------------------------------------------------------------------------------
BUSINESS INSURANCE
- --------------------------------------------------------------------------------
UNDERWRITING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 987 $ 867 14% $ 2,951 $ 2,527 17%
Change in unearned premium reserve 40 72 (44%) 227 234 (3%)
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums 947 795 19% 2,724 2,293 19%
Benefits, claims and claim adjustment expenses 595 489 22% 1,754 1,452 21%
Amortization of deferred policy acquisition costs 236 195 21% 654 575 14%
Insurance operating costs and expenses 96 90 7% 266 249 7%
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ 20 $ 21 (5%) $ 50 $ 17 194%
====================================================================================================================================
Loss ratio 50.6 50.1 (0.5) 51.7 51.6 (0.1)
Loss adjustment expense ratio 12.4 11.5 (0.9) 12.7 11.7 (1.0)
Expense ratio 32.7 32.7 -- 31.4 32.7 1.3
Policyholder dividend ratio 0.8 1.6 0.8 0.8 1.5 0.7
Combined ratio 96.4 95.9 (0.5) 96.7 97.6 0.9
Catastrophe ratio 3.2 0.7 (2.5) 3.4 0.9 (2.5)
Combined ratio before catastrophes 93.3 95.2 1.9 93.3 96.7 3.4
====================================================================================================================================
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
WRITTEN PREMIUMS BREAKDOWN [1]
- ------------------------------------------------------------------------------------------------------------------------------------
Small Commercial $ 454 $ 418 9% $ 1,393 $ 1,238 13%
Middle Market 533 449 19% 1,558 1,289 21%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 987 $ 867 14% $ 2,951 $ 2,527 17%
====================================================================================================================================
EARNED PREMIUMS BREAKDOWN [1]
Small Commercial $ 449 $ 391 15% $ 1,321 $ 1,142 16%
Middle Market 498 404 23% 1,403 1,151 22%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 947 $ 795 19% $ 2,724 $ 2,293 19%
====================================================================================================================================
<FN>
[1] The difference between written premiums and earned premiums is attributable
to the change in unearned premium reserve.
</FN>
Business Insurance achieved written premium growth of $120 and $424 for the
third quarter and nine months ended September 30, 2003, respectively, compared
with the same periods in 2002. Growth for both periods was primarily due to
written pricing increases of 9% for the third quarter and 10% for the nine month
period and strong premium renewal retention of 85% and 88%, respectively, for
the third quarter and nine months ended September 30, 2003. The written premium
increases in middle market business of $84 and $269 for the third quarter and
nine month periods, respectively, were driven primarily by continued strong
written pricing increases and new business growth. Small commercial business
increased $36 for the third quarter and $155 for the nine month period,
reflecting strong written pricing increases and premium renewal retention.
Earned premiums increased $152 for the third quarter and $431 for the nine
months ended September 30, 2003 due to strong 2002 and 2003 written pricing
increases impacting 2003 earned premium. Earned premiums for middle market
business increased $94 and $252 for the third quarter and nine month periods,
respectively, and earned premiums for small commercial business increased $58
and $179 for the third quarter and nine months ended September 30, 2003,
respectively, reflecting double-digit earned pricing increases.
Underwriting results decreased $1 for the third quarter, with a corresponding
0.5 point increase in the combined ratio, and improved $33, with a corresponding
0.9 point decrease in the combined ratio, for the nine months ended September
30, 2003. Both periods were negatively affected by a significant increase in
catastrophe losses. Before catastrophes, underwriting results for the third
quarter increased $24, with a corresponding 1.9 point decrease in the combined
ratio, and, for the nine month period, underwriting results increased $106, with
a corresponding 3.4 point decrease in the combined ratio, compared to the prior
year periods. The improvement in underwriting results and combined ratio before
catastrophes, for both 2003 periods, was driven by improvement in the loss ratio
before catastrophes for both small commercial and middle market, primarily due
to improved frequency of loss and double-digit earned pricing increases.
- 38 -
- --------------------------------------------------------------------------------
PERSONAL LINES
- --------------------------------------------------------------------------------
UNDERWRITING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 845 $ 779 8% $ 2,469 $ 2,294 8%
Change in unearned premium reserve 40 21 90% 107 76 41%
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums 805 758 6% 2,362 2,218 6%
Benefits, claims and claim adjustment expenses 583 594 (2%) 1,725 1,735 (1%)
Amortization of deferred policy acquisition costs 99 92 8% 303 316 (4%)
Insurance operating costs and expenses 86 85 1% 242 215 13%
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ 37 $ (13) NM $ 92 $ (48) NM
====================================================================================================================================
Loss ratio 61.4 67.0 5.6 61.8 66.5 4.7
Loss adjustment expense ratio 11.0 11.1 0.1 11.2 11.7 0.5
Expense ratio 22.6 23.0 0.4 22.6 23.5 0.9
Combined ratio 95.1 101.1 6.0 95.6 101.7 6.1
Catastrophe ratio 4.2 1.9 (2.3) 4.6 3.0 (1.6)
Combined ratio before catastrophes 90.8 99.3 8.5 91.0 98.7 7.7
Other revenues [1] $ 32 $ 31 3% $ 92 $ 90 2%
====================================================================================================================================
<FN>
[1] Represents servicing revenues.
</FN>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
WRITTEN PREMIUMS BREAKDOWN [1] 2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Business Unit
AARP $ 537 $ 479 12% $ 1,562 $ 1,400 12%
Other Affinity 35 43 (19%) 113 137 (18%)
Agency 212 194 9% 599 559 7%
Omni 61 63 (3%) 195 198 (2%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 845 $ 779 8% $ 2,469 $ 2,294 8%
====================================================================================================================================
Product Line
Automobile $ 632 $ 587 8% $ 1,897 $ 1,774 7%
Homeowners 213 192 11% 572 520 10%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 845 $ 779 8% $ 2,469 $ 2,294 8%
====================================================================================================================================
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
EARNED PREMIUMS BREAKDOWN [1] 2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Business Unit
AARP $ 499 $ 446 12% $ 1,446 $ 1,290 12%
Other Affinity 40 48 (17%) 125 147 (15%)
Agency 202 201 -- 599 594 1%
Omni 64 63 2% 192 187 3%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 805 $ 758 6% $ 2,362 $ 2,218 6%
- ------------------------------------------------------------------------------------------------------------------------------------
Product Line
Automobile $ 620 $ 591 5% $ 1,828 $ 1,732 6%
Homeowners 185 167 11% 534 486 10%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 805 $ 758 6% $ 2,362 $ 2,218 6%
====================================================================================================================================
COMBINED RATIOS
Automobile 95.9 101.2 5.3 96.7 102.6 5.9
Homeowners 92.1 100.7 8.6 91.9 98.5 6.6
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 95.1 101.1 6.0 95.6 101.7 6.1
====================================================================================================================================
<FN>
[1] The difference between written premiums and earned premiums is attributable
to the change in unearned premium reserve.
</FN>
Written premiums increased $66 for the third quarter and $175 for the nine
months ended September 30, 2003, compared to the same periods in 2002, due to
growth in both the automobile and homeowners lines. The increase in automobile
of $45 for the third quarter and $123 for the nine month period was primarily
due to written pricing increases of 6% and 8% for the third quarter and nine
month period, respectively. Automobile premium renewal retention remained strong
at 91% for the third quarter and 92% for the nine months ended September 30,
2003. Homeowners growth of $21 for the third quarter and $52 for the
- 39 -
nine month period was largely driven by written pricing increases of 14% and
15%, respectively. Homeowners premium renewal retention continued to be strong
for the third quarter and nine months ended September 30, 2003. The increases in
both automobile and homeowners written premiums for both periods were primarily
due to growth in the AARP program. AARP increased $58 for the third quarter and
$162 for the nine month period primarily as a result of strong written pricing
increases. Partially offsetting the increase was an $8 decrease for the third
quarter and a $24 decrease for the nine month period in written premiums in
other affinity business due to a planned reduction in policy counts as a result
of the Company's strategic decision to de-emphasize other affinity business.
Earned premiums increased $47 for the third quarter and $144 for the nine months
ended September 30, 2003 due primarily to growth in AARP. AARP increased $53 and
$156 for the third quarter and nine month periods, respectively, primarily as a
result of earned pricing increases.
Underwriting results increased $50, with a corresponding 6.0 point decrease in
the combined ratio, for the third quarter and improved $140, with a
corresponding 6.1 point decrease in the combined ratio, for the nine month
period. The improvement was primarily due to the successful execution of the
segment's state-specific strategies to manage pricing and loss costs. Automobile
results improved 5.3 combined ratio points for the quarter and 5.9 combined
ratio points for the nine month period due to earned pricing increases and
favorable frequency loss costs. Homeowners results improved 8.6 combined ratio
points for the quarter and 6.6 points for the nine month period due primarily to
earned pricing increases and favorable frequency loss costs. Personal Lines
financial performance was negatively affected by pre-tax catastrophe increases
of $20, or 2.3 points, for the third quarter and $43, or 1.6 points, for the
nine month period due largely to Hurricane Isabel.
- --------------------------------------------------------------------------------
SPECIALTY COMMERCIAL
- --------------------------------------------------------------------------------
UNDERWRITING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 469 $ 383 22% $ 1,274 $ 1,028 24%
Change in unearned premium reserve 35 26 35% 130 158 (18%)
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums 434 357 22% 1,144 870 31%
Benefits, claims and claim adjustment expenses 366 247 48% 871 597 46%
Amortization of deferred policy acquisition costs 78 73 7% 189 189 --
Insurance operating costs and expenses 40 34 18% 138 83 66%
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (50) $ 3 NM $ (54) $ 1 NM
====================================================================================================================================
Loss ratio 72.6 57.8 (14.8) 63.7 56.2 (7.5)
Loss adjustment expense ratio 11.7 11.4 (0.3) 12.4 12.4 --
Expense ratio 25.9 28.1 2.2 24.7 29.4 4.7
Policyholder dividend ratio 0.6 0.5 (0.1) 0.7 0.6 (0.1)
Combined ratio 110.7 97.8 (12.9) 101.5 98.6 (2.9)
Catastrophe ratio 2.5 0.5 (2.0) 2.0 0.3 (1.7)
Combined ratio before catastrophes 108.2 97.4 (10.8) 99.5 98.3 (1.2)
Other revenues [1] $ 78 $ 57 37% $ 226 $ 167 35%
====================================================================================================================================
<FN>
[1] Represents servicing revenues.
</FN>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
WRITTEN PREMIUMS BREAKDOWN [1] 2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Property $ 147 $ 139 6% $ 360 $ 335 7%
Casualty 179 156 15% 515 428 20%
Bond 42 43 (2%) 123 119 3%
Professional Liability 93 71 31% 236 164 44%
Other 8 (26) NM 40 (18) NM
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 469 $ 383 22% $ 1,274 $ 1,028 24%
====================================================================================================================================
EARNED PREMIUMS BREAKDOWN [1]
Property $ 140 $ 118 19% $ 325 $ 251 29%
Casualty 165 141 17% 454 353 29%
Bond 33 39 (15%) 110 110 -
Professional Liability 77 57 35% 213 145 47%
Other 19 2 NM 42 11 NM
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 434 $ 357 22% $ 1,144 $ 870 31%
====================================================================================================================================
<FN>
[1] The difference between written premiums and earned premiums is attributable
to the change in unearned premium reserve.
</FN>
- 40 -
Written premiums increased $86 and $246 for the third quarter and nine months
ended September 30, 2003, respectively, compared with the same periods in 2002
primarily due to double-digit growth in casualty and professional liability.
Professional liability written premiums grew $22 for the third quarter and $72
for the nine month period due to significant written pricing increases. Written
premiums for casualty increased $23 and $87 for the third quarter and nine month
period, respectively, due primarily to strong written pricing increases and new
business growth as a result of an improved operating environment. While property
pricing has begun to turn negative, written premiums increased $8 and $25 for
the third quarter and nine months ended September 30, 2003, respectively. Bond
growth for both periods was negatively impacted by ceded reinstatement premium.
Earned premiums increased $77 and $274 for the third quarter and the nine month
periods, respectively, due to earned premium growth across substantially all
lines of business as a result of strong earned pricing increases.
Underwriting results deteriorated $53 for the third quarter and $55 for the nine
months ended September 30, 2003, respectively, due primarily to prior accident
year loss reserve strengthening of $20 in the bond and $25 in the professional
liability lines of business and higher catastrophes compared to unusually low
catastrophes in the prior periods. The bond reserve strengthening is isolated to
a few severe contract surety claims related to accident year 2002. The
professional liability reserve strengthening involved a provision for
anticipated settlements of reinsurance obligations for contracts outstanding at
the time of the original acquisition of Reliance Group Holdings' auto residual
value portfolio in the third quarter of 2000. In addition, an increase in
doubtful accounts expense of $27 contributed to the decrease in underwriting
results for the nine months ended September 30, 2003. Excluding catastrophes,
property underwriting results continued to be favorable due to earned pricing
increases. Casualty continued to show underwriting improvement over prior year.
The Specialty Commercial combined ratio deteriorated 12.9 points and 2.9 points
for the third quarter and nine months ended September 30, 2003, respectively,
due primarily to the reserve strengthening and higher catastrophes referenced
above, partially mitigated by strong earned pricing and prudent expense
management.
- --------------------------------------------------------------------------------
REINSURANCE
- --------------------------------------------------------------------------------
UNDERWRITING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 19 $ 167 (89%) $ 194 $ 550 (65%)
Change in unearned premium reserve (63) (11) NM (102) 29 NM
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums 82 178 (54%) 296 521 (43%)
Benefits, claims and claim adjustment expenses 73 132 (45%) 324 394 (18%)
Amortization of deferred policy acquisition costs 18 44 (59%) 68 130 (48%)
Insurance operating costs and expenses 1 6 (83%) 9 14 (36%)
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (10) $ (4) (150%) $ (105) $ (17) NM
====================================================================================================================================
Loss ratio 82.0 68.3 (13.7) 101.5 71.0 30.5)
Loss adjustment expense ratio 5.8 6.2 0.4 7.5 4.7 (2.8)
Expense ratio 23.5 27.6 4.1 26.2 27.5 1.3
Combined ratio 111.3 102.2 (9.1) 135.2 103.2 (32.0)
Catastrophe ratio 3.0 1.2 (1.8) 2.8 0.7 (2.1)
Combined ratio before catastrophes 108.2 101.0 (7.2) 132.4 102.5 (29.9)
====================================================================================================================================
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
WRITTEN PREMIUMS BREAKDOWN [1] 2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Traditional reinsurance $ 17 $ 162 (90%) $ 156 $ 468 (67%)
Alternative risk transfer ("ART") 2 5 (60%) 38 82 (54%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 19 $ 167 (89%) $ 194 $ 550 (65%)
====================================================================================================================================
EARNED PREMIUMS BREAKDOWN [1]
Traditional reinsurance $ 70 $ 155 (55%) $ 261 $ 450 (42%)
Alternative risk transfer ("ART") 12 23 (48%) 35 71 (51%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 82 $ 178 (54%) $ 296 $ 521 (43%)
====================================================================================================================================
<FN>
[1] The difference between written premiums and earned premiums is attributable
to the change in unearned premium reserve.
</FN>
On May 16, 2003, as part of the Company's decision to withdraw from the assumed
reinsurance business, the Company entered into a quota share and purchase
agreement with Endurance Reinsurance Corporation of America ("Endurance"),
whereby the Reinsurance segment retroceded the majority of its inforce book of
business as of April 1, 2003 and sold renewal rights to Endurance. Under the
quota share agreement, Endurance will reinsure most of the segment's assumed
reinsurance contracts that were written on or after January 1, 2002 and that had
unearned premium as of April 1, 2003. In consideration for Endurance reinsuring
the unearned premium as of April 1, 2003, the Company paid Endurance an amount
equal to unearned premium
- 41 -
less the related unamortized commissions/deferred acquisition costs and an
override commission which was established by the contract. In addition,
Endurance will pay a profit sharing commission based on the loss performance of
property treaty, property catastrophe and aviation pool unearned premium. Under
the purchase agreement, Endurance will pay additional amounts, subject to a
guaranteed minimum of $15, based on the level of renewal premium on the
reinsured contracts over the next two years. The guaranteed minimum is reflected
in net income for the nine months ended September 30, 2003. The Company remains
subject to reserve development relating to all retained business.
Reinsurance written premiums decreased $148 for the third quarter and $356 for
the nine months ended September 30, 2003 and earned premiums decreased $96 and
$225 for the third quarter and nine month periods, respectively, primarily due
to the Company's decision to withdraw from most of the assumed reinsurance
business as discussed above. The decrease in written premiums for the nine
months ended September 30, 2003 also reflects the $145 cession of the unearned
premium to Endurance related to contracts written by the Company prior to April
1, 2003.
Underwriting results decreased $6, with a corresponding 9.1 point increase in
the combined ratio, for the third quarter primarily due to the impacts of the
Company's decision to withdraw from most of the assumed reinsurance business.
For the nine month period, underwriting results decreased $88, with a
corresponding 32.0 point increase in the combined ratio, primarily as a result
of adverse loss development on prior underwriting years, primarily 1997 through
2000, particularly in the casualty lines of traditional reinsurance.
- --------------------------------------------------------------------------------
OTHER OPERATIONS (INCLUDING ASBESTOS AND ENVIRONMENTAL CLAIMS)
- --------------------------------------------------------------------------------
UNDERWRITING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ (2) $ 9 NM $ 11 $ 48 (77%)
Change in unearned premium reserve (2) (10) 80% (3) (10) 70%
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums -- 19 (100%) 14 58 (76%)
Benefits, claims and claim adjustment expenses 5 43 (88%) 2,650 137 NM
Insurance operating costs and expenses 7 18 (61%) 21 50 (58%)
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (12) $ (42) 71% $ (2,657) $ (129) NM
====================================================================================================================================
The Other Operations segment includes operations that are under a single
management structure, which is 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 decline in written and earned premiums for the third quarter and nine months
ended September 30, 2003 was due to the runoff of the international assumed
reinsurance business that was transferred to the Other Operations segment in
January 2002. The underwriting loss for the nine months ended September 30, 2003
was due primarily to the first quarter net reserve strengthening of $2.6 billion
as discussed in the section that follows.
The paragraphs that follow are background information and a discussion of
asbestos and environmental claims, the deteriorating trends with respect to
asbestos, and a summary of the Company's detailed study of asbestos reserves.
Asbestos and Environmental Claims
The Hartford continues to receive asbestos and environmental claims, both of
which affect Other Operations. These claims are made pursuant to several
different categories of insurance coverage. First, The Hartford wrote direct
policies as a primary liability insurance carrier. Second, The Hartford wrote
direct excess insurance policies providing additional coverage for insureds that
exhaust their underlying liability insurance coverage. Third, The Hartford acted
as a reinsurer assuming a portion of risks previously assumed by other insurers
writing primary, excess and reinsurance coverages. Fourth, The Hartford
participated as a London Market company that wrote both direct insurance and
assumed reinsurance business.
With regard to both environmental and particularly asbestos claims, significant
uncertainty limits the ability of insurers and reinsurers to estimate the
ultimate reserves necessary for unpaid losses and related expenses. Traditional
actuarial reserving techniques cannot reasonably estimate the ultimate cost of
these claims, particularly during periods when 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
there is a high degree of uncertainty inherent in the estimation of 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. 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 applied; whether 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, plaintiffs'
increased focus on new and previously peripheral defendants and an increase in
the number of insureds seeking bankruptcy protection as a result of
asbestos-
- 42 -
related liabilities. Plaintiffs and insureds have sought to use bankruptcy
proceedings, including "pre-packaged" bankruptcies, to accelerate and increase
loss payments by insurers. In addition, some policyholders have begun to assert
new classes of claims for so-called "non-product" coverages to which an
aggregate limit of liability may not apply. Recently, many insurers, including
The Hartford, also have been sued directly by asbestos claimants asserting that
insurers had a duty to protect the public from the dangers of asbestos.
Management believes these issues are not likely to be resolved in the near
future.
Further uncertainties include the effect of the recent acceleration in the rate
of bankruptcy filings by asbestos defendants on the rate and amount of The
Hartford's asbestos claims payments; a further increase or decrease in asbestos
and environmental claims that cannot now be anticipated; whether some
policyholders' liabilities will reach the umbrella or excess layer of their
coverage; the resolution or adjudication of some disputes pertaining to the
amount of available coverage for asbestos claims in a manner inconsistent with
The Hartford's previous assessment of these claims; the number and outcome of
direct actions against The Hartford; and unanticipated developments pertaining
to The Hartford's ability to recover reinsurance for asbestos and environmental
claims. It is also not possible to predict changes in the legal and legislative
environment and their impact on the future development of asbestos and
environmental claims.
It is unknown whether a potential Federal bill concerning asbestos litigation
approved by the Senate Judiciary Committee, or some other potential Federal
asbestos-related legislation, will be enacted and, if so, what its effect will
be on The Hartford's aggregate asbestos liabilities. Additionally, the reporting
pattern for excess insurance and reinsurance claims is much longer than direct
claims. The delay in reporting excess and reinsurance claims adds to the
uncertainty of estimating the related reserves.
In the case of the reserves for environmental exposures, factors contributing to
the high degree of uncertainty include: court decisions that have interpreted
the insurance coverage to be broader than originally intended; inconsistent
decisions, especially across jurisdictions; and uncertainty as to the monetary
amount being sought by the claimant from the insured.
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
claims for more traditional kinds of insurance exposure are less precise in
estimating reserves for its asbestos and environmental exposures. The Hartford
regularly evaluates new information in assessing its potential asbestos
exposures.
Reserve Activity
Reserves and reserve activity in the Other Operations segment are categorized
and reported as asbestos, environmental or "all other" activity. The discussion
below relates to reserves and reserve activity, net of applicable reinsurance.
There are a wide variety of claims that drive the reserves associated with
asbestos, environmental and the "all other" category the Company has included in
Other Operations. Asbestos claims relate primarily to bodily 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.
The all other category of reserves covers a wide range of insurance coverages,
including liability for breast implants, blood products, construction defects
and lead paint as well as unallocated loss adjustment expense for the Other
Operations segment.
The Other Operations historic book of business contains policies written from
the 1940's to 1992, with the majority of the business spanning the interval 1960
to 1990. The Hartford's experience has been that this book of business has over
time produced significantly higher claims and losses than were contemplated at
inception. The areas of active claim activity have also shifted 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 The Hartford's
commutation of 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 uncertainty, as previously discussed.
In the first quarter of 2003, several events occurred that in the Company's view
confirmed the existence of a substantial long-term deterioration in the asbestos
litigation environment. For example, in February 2003, Combustion Engineering,
long a major asbestos defendant, filed a pre-packaged bankruptcy plan under
which it proposed to emerge from bankruptcy within five weeks, before opponents
of the plan could have a meaningful opportunity to object, and included many
novel features in its plan that its insurers found objectionable. In December
2002, Halliburton had announced its intention to file a similar plan through one
or more subsidiaries, although it has not yet filed, and in January 2003,
Honeywell announced that it had reached an agreement with the plaintiffs' bar
that would enable it to file a pre-negotiated plan through its former NARCO
subsidiary, then already in bankruptcy. In January 2003, Congoleum, a floor tile
manufacturer, which previously had defended claims successfully in the tort
system, announced its intention to file a pre-packaged plan of reorganization to
be funded almost entirely with insurance proceeds. Moreover, prominent members
of the plaintiffs' and policyholders' bars announced publicly their intention to
file many more such plans. These events represented a worsening of conditions
the Company observed in 2002, which were described in the Company's 2002 Form
10-K Annual Report.
As a result of these worsening conditions, the Company conducted a
comprehensive, ground-up study of its asbestos exposures in the first quarter of
2003 in an effort to project, beginning at the individual account level, the
effect of these trends on the Company's estimated total exposure to asbestos
liability. Based on the results of the study and the Company's reevaluation of
the deteriorating conditions described above, the Company strengthened its gross
and net asbestos reserves by $3.9 billion and $2.6 billion, respectively. The
Company believes that its current asbestos reserves are reasonable and
appropriate. However, analyses of future developments could cause The Hartford
to change its estimates of its asbestos and environmental reserves and the
effect of these changes could be material to the Company's consolidated
operating results, financial condition and liquidity.
Consistent with the Company's long-standing reserving practices, The Hartford
will continue to review and monitor these reserves regularly and, where future
developments indicate, make appropriate adjustments to the reserves. The loss
reserving assumptions, drawn from both industry data and the Company's
experience, have been applied over time to all of this business and have
resulted in reserve strengthening or reserve releases at various times over the
past decade.
The following tables present 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
third quarter and nine months ended September 30, 2003. Also included are the
remaining asbestos and environmental exposures of North American Property &
Casualty.
- 43 -
OTHER OPERATIONS CLAIMS AND CLAIM ADJUSTMENT EXPENSES
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2003 ASBESTOS ENVIRONMENTAL ALL OTHER [1] TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning liability - net $ 3,639 $ 536 $ 1,242 $ 5,417
Claims and claim adjustment expenses incurred [2] 2 3 3 8
Claims and claim adjustment expenses paid 40 22 50 112
- ------------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY - NET [3] [4] [5] $ 3,601 $ 517 $ 1,195 $ 5,313
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 ASBESTOS ENVIRONMENTAL ALL OTHER [1] TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning liability - net $ 1,118 $ 591 $ 1,250 $ 2,959
Claims and claim adjustment expenses incurred 2,609 7 42 2,658
Claims and claim adjustment expenses paid 126 81 97 304
- ------------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY - NET [3] [4] [5] $ 3,601 $ 517 $ 1,195 $ 5,313
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Includes unallocated loss adjustment expense reserves.
[2] The asbestos claims and claim adjustment expenses incurred for the third
quarter ended September 30, 2003 related to the unwinding of the discount
on certain reserves.
[3] Ending liabilities include asbestos and environmental reserves reported in
North American Property & Casualty of $13 and $10, respectively, as of
September 30, 2003 and $14 and $10, respectively, as of December 31, 2002.
[4] Gross of reinsurance, asbestos and environmental reserves were $5,768 and
$594, respectively, as of September 30, 2003 and $1,994 and $682,
respectively, as of December 31, 2002.
[5] As of September 30, 2003, the one year and average three year net paid
amounts for asbestos claims are $171 and $119, respectively, resulting in
one year and three year net survival ratios of 21.1 and 30.2 years,
respectively. Net survival ratio is the quotient of the carried reserves
divided by the average annual payment amount and is an indication of the
number of years that the carried reserve would last (i.e. survive) if the
future annual claim payments were consistent with the calculated historical
average.
</FN>
At September 30, 2003, asbestos reserves were $3.6 billion, an increase of $2.5
billion compared to $1.1 billion as of December 31, 2002. Net incurred losses
and loss adjustment expenses were $2 for the third quarter of 2003 and $2.6
billion for the nine months ended September 30, 2003. The increase in reserves
for the nine month period reflects asbestos claim and litigation trends. The
Company classifies its asbestos reserves into three categories: direct
insurance; assumed reinsurance and London Market. Direct insurance includes
primary and excess coverage. Assumed Reinsurance includes both "treaty"
reinsurance (covering broad categories of claims or blocks of business) and
"facultative" reinsurance (covering specific risks or individual policies of
primary or excess insurance companies). London Market business includes the
business written by one or more of The Hartford's subsidiaries in the United
Kingdom, which are no longer active in the insurance or reinsurance business.
Such business includes both direct insurance and assumed reinsurance.
The following tables set forth, for the third quarter and nine months ended
September 30, 2003, paid and incurred loss activity by the three categories of
claims for asbestos and environmental.
PAID AND INCURRED LOSS AND LOSS ADJUSTMENT EXPENSE ("LAE") DEVELOPMENT - ASBESTOS AND ENVIRONMENTAL
ASBESTOS ENVIRONMENTAL
---------------------------------------- ----------------------------------
PAID INCURRED PAID INCURRED
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2003 LOSS & LAE LOSS & LAE LOSS & LAE LOSS & LAE
- ------------------------------------------------------------------------------------------------------------------------------------
Gross
Direct $ 65 $ 3 $ 25 $ 3
Assumed - Domestic 8 -- 4 --
London Market 8 -- 3 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total 81 3 32 3
Ceded (41) (1) (10) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET $ 40 $ 2 $ 22 $ 3
====================================================================================================================================
ASBESTOS ENVIRONMENTAL
---------------------------------------- ----------------------------------
PAID INCURRED PAID INCURRED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 LOSS & LAE LOSS & LAE LOSS & LAE LOSS & LAE
- ------------------------------------------------------------------------------------------------------------------------------------
Gross
Direct $ 160 $ 3,030 $ 76 $ 10
Assumed - Domestic 27 585 10 (3)
London Market 17 363 9 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total 204 3,978 95 7
Ceded (78) (1,369) (14) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET $ 126 $ 2,609 $ 81 $ 7
====================================================================================================================================
- 44 -
- --------------------------------------------------------------------------------
INVESTMENTS
- --------------------------------------------------------------------------------
The Hartford's investment portfolios are primarily 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 2002 Form
10-K Annual Report for a description of the Company's investment objectives and
policies.
Return on general account invested assets is an important element of The
Hartford's financial results. Significant fluctuations in the fixed income or
equity markets could weaken the Company's financial condition or its results of
operations. 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 approximately 93% and 90%
of the fair value of its general account invested assets as of September 30,
2003 and December 31, 2002, respectively. Other events beyond the Company's
control could also adversely impact the fair value of these investments.
Specifically, a downgrade of an issuer's credit rating or default of payment by
an issuer could reduce the Company's investment return.
A decrease in the fair value of any investment that is deemed other than
temporary would result in the Company's recognition of a realized loss in its
financial results prior to the actual sale of the investment.
LIFE
The following table identifies invested assets by type held in the Life general
account as of September 30, 2003 and December 31, 2002.
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------ ---------------------------
AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed maturities, at fair value $ 35,237 90.2% $ 29,377 86.7%
Equity securities, at fair value 424 1.1% 458 1.3%
Policy loans, at outstanding balance 2,533 6.5% 2,934 8.7%
Limited partnerships, at fair value 236 0.6% 519 1.5%
Other investments 655 1.6% 603 1.8%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 39,085 100.0% $ 33,891 100.0%
====================================================================================================================================
Fixed maturity investments increased 20% since December 31, 2002, primarily the
result of investment and universal life contract sales and operating cash flows.
In March 2003, the Company decided to liquidate its hedge fund limited
partnership investments and reinvest the proceeds in fixed maturity investments.
Hedge fund liquidations have totaled approximately $323 since December 31, 2002.
As of September 30, 2003, Life owned approximately $71 of hedge fund
investments, all of which are expected to be liquidated by March 31, 2004.
INVESTMENT RESULTS
The table below summarizes Life's investment results.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------
(Before-tax) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 467 $ 401 $ 1,375 $ 1,164
Policy loan income 51 61 163 196
--------------------------------------------------------------
Net investment income - total $ 518 $ 462 $ 1,538 $ 1,360
Yield on average invested assets [1] 5.7% 6.0% 5.9% 6.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross gains on sale $ 61 $ 44 $ 209 $ 118
Gross losses on sale (31) (28) (95) (75)
Impairments (27) (132) (111) (291)
Other, net [2] [3] (5) (2) (3) (5)
--------------------------------------------------------------
Net realized capital gains (losses) $ (2) $ (118) $ -- $ (253)
====================================================================================================================================
<FN>
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost or amortized
cost, as applicable, for the third quarter and nine months ended September
30, 2003 and 2002. Average invested assets are calculated by dividing the
sum of the beginning and ending period amounts by two.
[2] Primarily consists of changes in fair value and hedge ineffectiveness on
derivative instruments.
[3] Includes the net GMWB derivative activity, which was a loss of less than $1
for the third quarter and nine months ended September 30, 2003.
</FN>
- 45 -
For the third quarter and nine months ended September 30, 2003, net investment
income, excluding policy loan income, increased $66, or 16%, and $211, or 18%,
compared to the respective prior year periods. The increases in net investment
income were primarily due to income earned on a higher invested asset base
partially offset by lower investment yields. Yields on average invested assets
decreased as a result of lower rates on new investment purchases and decreased
policy loan income.
Net realized capital gains (losses) for the third quarter and nine months ended
September 30, 2003 improved by $116 and $253, respectively, compared to the
prior year periods, primarily as a result of a decrease in other than temporary
impairments on fixed maturities.
The table below and following discussion identify Life's other than temporary
impairments by type.
OTHER THAN TEMPORARY IMPAIRMENTS BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities ("ABS")
Aircraft lease receivables $ 15 $ 53 $ 15 $ 72
Corporate debt obligations ("CDO") -- 13 10 22
Credit card receivables -- -- 12 --
Interest only securities -- 3 5 3
Manufacturing housing ("MH") receivables 9 12 9 12
Mutual fund fee receivables -- 7 3 14
Other ABS 2 3 3 5
Commercial mortgage-backed securities ("CMBS") -- -- 4 --
Corporate
Basic industry 1 -- 1 --
Consumer non-cyclical -- -- 7 --
Financial services -- 1 4 1
Technology and communications -- 10 3 125
Transportation -- -- 7 1
Utilities -- 6 -- 12
Equity -- 14 21 14
Foreign government -- 10 -- 10
Mortgage-backed securities ("MBS") - interest only securities -- -- 7 --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL IMPAIRMENTS $ 27 $ 132 $ 111 $ 291
====================================================================================================================================
ABS
- ---
During 2003, impairments were recorded for various ABS security types as a
result of a continued deterioration of cash flows derived from the underlying
collateral. The ABS securities supported by aircraft lease and enhanced
equipment trust certificates (together, "aircraft lease receivables") have
continued to decline primarily due to a reduction in lease payments and aircraft
values driven by a decline in airline travel. CDO impairments were primarily the
result of increasing default rates and lower recovery rates on the collateral.
Impairments on securities supported by MH receivables were primarily the result
of repossessed units liquidated at depressed levels. Interest only security
impairments recorded during 2003 and 2002 were due to the flattening of the
forward yield curve.
Impairments of ABS during the nine months ended September 30, 2002 were driven
by deterioration of collateral cash flows. Numerous bankruptcies, collateral
defaults, weak economic conditions and reduced airline travel were all factors
contributing to lower collateral cash flows and broker quoted market prices of
ABS in 2002.
Corporate
- ---------
The decline in corporate bankruptcies and improvement in general economic
conditions have contributed to much lower corporate impairment levels in 2003
compared to 2002.
Corporate impairments recorded during the third quarter of 2003 were
concentrated in the United States steel industry and resulted from a decision to
dispose of securities, which were in an unrealized loss position. A significant
portion of corporate impairments during the nine months ended September 30, 2003
were driven by a deterioration in the transportation sector, specifically
issuers of airline debt as the result of a decline in airline travel.
Impairments during the nine months ended September 30, 2003 were also the result
of one consumer non-cyclical issuer in the healthcare industry stemming from its
decline in value due to accounting fraud, and one communications sector issuer
in the cable television industry due to deteriorating earnings forecasts, debt
restructuring issues and accounting irregularities.
For the third quarter and nine months ended September 30, 2002, impairments of
corporate securities were concentrated in the technology and communications
sector and for the nine months ended September 30, 2002 included a $74
before-tax loss related to securities issued by WorldCom.
Other
- -----
Other than temporary impairments were also recorded in 2003 and 2002, on various
diversified seeded equity and mutual fund investments that had experienced
declines in fair value for an extended period of time.
- 46 -
PROPERTY & CASUALTY
The following table identifies invested assets by type as of September 30, 2003
and December 31, 2002.
COMPOSITION OF INVESTED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------ ---------------------------
AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed maturities, at fair value $ 23,565 96.5% $ 19,446 94.5%
Equity securities, at fair value 215 0.9% 459 2.2%
Limited partnerships, at fair value 193 0.8% 362 1.8%
Other investments 451 1.8% 306 1.5%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 24,424 100.0% $ 20,573 100.0%
====================================================================================================================================
Total fixed maturities increased 21% since December 31, 2002, primarily due to
increased operating cash flow, changes in portfolio allocation and the May
capital raising proceeds. In March 2003, the Company decided to liquidate its
hedge fund limited partnership investments and certain equity securities and
reinvest the proceeds into fixed maturity investments. Equity securities and
hedge fund investment liquidations have totaled $289 and $168, respectively,
since December 31, 2002. As of September 30, 2003, Property & Casualty owned
approximately $22 of hedge fund investments, all of which are expected to be
liquidated by March 31, 2004.
INVESTMENT RESULTS
The table below summarizes Property & Casualty's investment results.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income, before-tax $ 302 $ 262 $ 878 $ 787
--------------------------------------------------------------
Net investment income, after-tax [1] $ 228 $ 204 $ 668 $ 612
Yield on average invested assets, before-tax [2] 5.4% 5.6% 5.5% 5.7%
--------------------------------------------------------------
Yield on average invested assets, after-tax [1] [2] 4.0% 4.4% 4.2% 4.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross gains on sale [3] $ 71 $ 48 $ 363 $ 191
Gross losses on sale (49) (54) (116) (125)
Impairments (2) (43) (34) (162)
Other, net [4] (6) 7 3 16
--------------------------------------------------------------
Net realized capital gains (losses) $ 14 $ (42) $ 216 $ (80)
====================================================================================================================================
<FN>
[1] Due to significant holdings in tax-exempt investments, after-tax net
investment income and yield are also included.
[2] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost or amortized
cost, as applicable, for the third quarter and nine months ended September
30, 2003 and 2002. Average invested assets are calculated by dividing the
sum of the beginning and ending period amounts by two.
[3] Includes a gain of $23 associated with the sale of Trumbull Associates,
LLC.
[4] Primarily consists of changes in fair value and hedge ineffectiveness on
derivative instruments.
</FN>
For the third quarter and nine months ended September 30, 2003, before-tax net
investment income increased $40, or 15%, and $91, or 12%, respectively, and
after-tax net investment income increased $24, or 12%, and $56, or 9%,
respectively, compared to the respective prior year periods. The increases in
net investment income were primarily due to income earned on a higher invested
asset base partially offset by lower investment yields. Yields on average
invested assets decreased from the prior year as a result of lower rates on new
investment purchases.
Net realized capital gains (losses) for the third quarter and nine months ended
September 30, 2003 improved by $56 and $296, respectively, compared to the prior
year periods. The improvements were primarily the result of net gains on sales
of fixed maturity investments, Trumbull Associates, LLC and a decrease in other
than temporary impairments.
The table below and following discussion identify Property & Casualty's other
than temporary impairments by type.
- 47 -
OTHER THAN TEMPORARY IMPAIRMENTS BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
ABS
Aircraft lease receivables $ -- $ 3 $ -- $ 11
CDO 1 4 6 10
Credit card receivables -- -- 2 --
Interest only securities -- 4 7 4
MH receivables -- 8 -- 8
Other ABS -- 3 -- 5
Corporate
Basic industry 1 -- 1 --
Consumer non-cyclical -- -- 2 --
Technology and communications -- 7 2 76
Transportation -- 4 3 4
Utilities -- 2 1 12
Equity -- 8 9 32
MBS - interest only securities -- -- 1 --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL IMPAIRMENTS $ 2 $ 43 $ 34 $ 162
====================================================================================================================================
ABS
- ---
During 2003, impairments were recorded for various ABS security types as a
result of a continued deterioration of cash flows derived from the underlying
collateral. CDO impairments were primarily the result of increasing default
rates and lower recovery rates on the collateral. Interest only security
impairments recorded during 2003 and 2002 were due to the flattening of the
forward yield curve.
Impairments of ABS during the nine months ended September 30, 2002 were driven
by deterioration of collateral cash flows. Numerous bankruptcies, collateral
defaults, weak economic conditions and reduced airline travel were all factors
contributing to lower collateral cash flows and broker quoted market prices of
ABS in 2002.
Corporate
- ---------
The decline in corporate bankruptcies and improvement in general economic
conditions have contributed to much lower corporate impairment levels in 2003
compared to 2002.
Corporate impairments recorded during the third quarter of 2003 were
concentrated in the United States steel industry and resulted from a decision to
dispose of securities, which were in an unrealized loss position. A significant
portion of corporate impairments during the nine months ended September 30, 2003
were driven by a deterioration in the transportation sector, specifically
issuers of airline debt, as a result of a decline in airline travel. Impairments
during the nine months ended September 30, 2003 were also the result of one
consumer non-cyclical sector issuer in the healthcare industry stemming from its
decline in value due to accounting fraud, and one communications sector issuer
in the cable television industry due to deteriorating earnings forecasts, debt
restructuring issues and accounting irregularities.
For the third quarter and nine months ended September 30, 2002, impairments of
corporate securities were concentrated in the technology and communications
sector and for the nine months ended September 30, 2002 included a $36
before-tax loss related to securities issued by WorldCom.
Other
- -----
Other than temporary impairments were also recorded in 2003 on various
diversified mutual fund and preferred stock investments and in 2002 on various
common stock investments, primarily in the technology and communications sector,
all of which had experienced declines in fair value for an extended period of
time.
CORPORATE
Certain proceeds from the Company's September 2002 and May 2003 capital raising
activities have been retained in Corporate. As of September 30, 2003 and
December 31, 2002, Corporate held $107 and $66, respectively, of short-term
fixed maturity investments. In addition, Corporate held $4 of other investments
as of September 30, 2003. These investments earned $0 and $2 of income for the
third quarter and nine months ended September 30, 2003, respectively.
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
third quarter and nine months ended September 30, 2003 was $5 and $13,
respectively. The total amount of amortization for the third quarter and nine
months ended September 30, 2002 was $4 and $13, respectively.
- 48 -
- --------------------------------------------------------------------------------
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 dedicated risk management units supporting Life, including guaranteed
separate accounts, 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 2002 Form 10-K Annual Report for a description of the Company's
objectives, policies and strategies.
CREDIT RISK
The Company invests primarily in securities that are rated investment grade, and
has established exposure limits, diversification standards and review procedures
for all credit risks including borrower, issuer and counterparty.
Creditworthiness of specific obligors is determined by an internal credit
evaluation supplemented by consideration of external determinants of
creditworthiness, typically ratings assigned by nationally recognized ratings
agencies. Obligor, asset sector and industry concentrations are subject to
established limits and are monitored on a regular basis. 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 table identifies fixed maturity securities by type on a
consolidated basis, including guaranteed separate accounts, as of September 30,
2003 and December 31, 2002.
CONSOLIDATED FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------------------------------------- ------------------------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
COST GAINS LOSSES VALUE VALUE COST GAINS LOSSES VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
ABS $ 6,544 $ 152 $ (150) $ 6,546 9.3% $ 6,109 $ 155 $ (173) $ 6,091 10.1%
CMBS 9,414 637 (34) 10,017 14.2% 6,964 607 (10) 7,561 12.6%
Collateralized mortgage
obligation ("CMO") 1,023 26 (2) 1,047 1.5% 909 45 (2) 952 1.6%
Corporate
Basic industry 3,554 243 (15) 3,782 5.3% 2,931 194 (19) 3,106 5.2%
Capital goods 1,691 135 (9) 1,817 2.6% 1,399 92 (10) 1,481 2.5%
Consumer cyclical 2,764 192 (12) 2,944 4.2% 1,873 121 (5) 1,989 3.3%
Consumer non-cyclical 3,532 259 (10) 3,781 5.4% 3,101 220 (22) 3,299 5.5%
Energy 1,938 160 (9) 2,089 3.0% 1,812 137 (10) 1,939 3.2%
Financial services 7,133 580 (55) 7,658 10.8% 6,454 441 (100) 6,795 11.3%
Technology and
communications 4,595 514 (14) 5,095 7.2% 3,972 337 (92) 4,217 7.0%
Transportation 744 60 (11) 793 1.1% 707 57 (20) 744 1.2%
Utilities 2,711 212 (28) 2,895 4.1% 2,371 147 (60) 2,458 4.1%
Other 619 37 (2) 654 0.9% 483 23 -- 506 0.9%
Government/Government
agencies
Foreign 1,395 141 (6) 1,530 2.2% 1,780 162 (8) 1,934 3.2%
United States 1,019 55 (2) 1,072 1.5% 764 53 -- 817 1.4%
MBS - agency 3,026 54 (2) 3,078 4.4% 2,739 79 -- 2,818 4.7%
Municipal
Taxable 451 18 (11) 458 0.6% 147 20 (1) 166 0.3%
Tax-exempt 9,399 800 (8) 10,191 14.4% 10,029 822 (5) 10,846 18.1%
Redeemable preferred stock 77 5 (1) 81 0.1% 97 6 (1) 102 0.2%
Short-term 5,058 2 (1) 5,059 7.2% 2,151 2 -- 2,153 3.6%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 66,687 $ 4,282 $ (382) $ 70,587 100.0% $ 56,792 $ 3,720 $ (538) $ 59,974 100.0%
====================================================================================================================================
Total general account
fixed maturities $ 55,649 $ 3,561 $ (301) $ 58,909 83.5% $ 46,241 $ 3,062 $ (414) $ 48,889 81.5%
Total guaranteed separate
account fixed maturities $ 11,038 $ 721 $ (81) $ 11,678 16.5% $ 10,551 $ 658 $ (124) $ 11,085 18.5%
====================================================================================================================================
The Company's fixed maturity gross unrealized gains and losses have improved by
$562 and $156, respectively, from December 31, 2002 to September 30, 2003,
primarily as a result of improved corporate credit quality and to a lesser
extent asset sales, partially
- 49 -
offset by an increase in interest rates. The improvement in corporate credit
quality was largely due to the security issuers' renewed emphasis on improving
liquidity, reducing leverage and various cost cutting measures. Throughout 2003,
the general economic outlook has continued to rebound, the result of improved
profitability supported by improved manufacturing demand, a continued strong
housing market and robust consumer and government spending. The apparent
economic acceleration has resulted in the increase of the 10-year Treasury rate
since December 2002, including an 80 basis point increase from its low in June
2003 of 3.1%. In recent months, there has been a considerable amount of
volatility in the Treasury market. Speculation over the possibility of the
Federal Reserve purchasing Treasuries combined with talk of deflation on the
part of the Federal Reserve pushed the yield on 10-year Treasuries down to its
June low. However, signs of a rebound in the economy and the Federal Reserve's
comments downplaying the prospects for both deflation and market intervention
have caused the price of 10-year Treasuries to fall by almost 9% between
mid-June and the end of July, as the yield rose to nearly 4.5%. As of September
30, 2003, the 10-year Treasury yield dipped down to 3.94%.
Except for CMBS, municipal tax-exempt and short-term securities, the investment
allocations as a percentage of total fixed maturities have remained materially
consistent since December 31, 2002.
Portfolio allocations to CMBS increased due to the asset class's stable spreads
and high quality. CMBS securities have lower prepayment risk than MBS due to
contractual penalties. The Company decreased its percentage of tax-exempt
municipal holdings due to the alternative minimum tax implications. Short-term
securities have increased primarily due to the receipt of operating cash flows
awaiting investment in longer term securities and from the collateral obtained
related to the Company's securities lending program.
For a discussion of risk factors associated with sectors with significant
unrealized loss positions, please see the sector risk factor commentary under
the Consolidated Total Securities with Unrealized Loss Greater than Six Months
by Sector schedule in this section of the MD&A.
The following table identifies fixed maturities by credit quality on a
consolidated basis, including guaranteed separate accounts, as of September 30,
2003 and December 31, 2002. The ratings referenced below 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.
CONSOLIDATED FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------------------------- ------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
United States Government/Government agencies $ 5,020 $ 5,146 7.3% $ 4,234 $ 4,397 7.3%
AAA 14,542 15,490 21.9% 13,344 14,358 24.0%
AA 7,082 7,583 10.7% 7,267 7,784 13.0%
A 17,000 18,200 25.8% 15,082 16,034 26.7%
BBB 14,567 15,536 22.0% 11,531 12,121 20.2%
BB & below 3,418 3,573 5.1% 3,183 3,127 5.2%
Short-term 5,058 5,059 7.2% 2,151 2,153 3.6%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 66,687 $ 70,587 100.0% $ 56,792 $ 59,974 100.0%
====================================================================================================================================
Total general account fixed maturities $ 55,649 $ 58,909 83.5% $ 46,241 $ 48,889 81.5%
Total guaranteed separate account fixed maturities $ 11,038 $ 11,678 16.5% $ 10,551 $ 11,085 18.5%
====================================================================================================================================
As of September 30, 2003 and December 31, 2002, over 94% of the fixed maturity
portfolio was invested in securities rated investment grade (BBB and above).
- 50 -
The following table presents the Below Investment Grade ("BIG") fixed maturities
by type including guaranteed separate accounts, as of September 30, 2003 and
December 31, 2002.
CONSOLIDATED BIG FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------------------------- ------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
ABS $ 305 $ 260 7.3% $ 237 $ 209 6.7%
CMBS 213 218 6.1% 196 214 6.8%
Corporate
Basic industry 329 335 9.4% 338 339 10.8%
Capital goods 190 196 5.5% 177 180 5.8%
Consumer cyclical 361 384 10.7% 289 298 9.5%
Consumer non-cyclical 390 403 11.3% 263 255 8.2%
Energy 112 119 3.3% 111 113 3.6%
Financial services 19 20 0.6% 53 45 1.4%
Technology and communications 451 528 14.7% 612 571 18.3%
Transportation 44 45 1.3% 44 40 1.3%
Utilities 485 490 13.7% 415 376 12.0%
Foreign government 468 525 14.7% 397 441 14.1%
Other [1] 51 50 1.4% 51 46 1.5%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 3,418 $ 3,573 100.0% $ 3,183 $ 3,127 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Total general account fixed maturities $ 2,631 $ 2,753 77.1% $ 2,494 $ 2,443 78.1%
Total guaranteed separate account fixed maturities $ 787 $ 820 22.9% $ 689 $ 684 21.9%
====================================================================================================================================
<FN>
[1] Other represents tax-exempt municipal bonds, redeemable preferred stocks
and real estate investment trusts.
</FN>
As of September 30, 2003 and December 31, 2002, the Company held no issuer of a
BIG security with a fair value in excess of 3% and 4%, respectively, of the
total fair value for BIG securities.
The following table presents the Company's unrealized loss aging for total fixed
maturity and equity securities on a consolidated basis, including guaranteed
separate accounts, as of September 30, 2003 and December 31, 2002, by length of
time the security was in an unrealized loss position.
CONSOLIDATED UNREALIZED LOSS AGING OF TOTAL SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------------------------- ------------------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
Three months or less $ 5,806 $ 5,670 $ (136) $ 2,042 $ 1,949 $ (93)
Greater than three months to six months 597 572 (25) 1,542 1,463 (79)
Greater than six months to nine months 312 299 (13) 703 611 (92)
Greater than nine months to twelve months 387 357 (30) 1,820 1,719 (101)
Greater than twelve months 2,037 1,849 (188) 2,351 2,103 (248)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 9,139 $ 8,747 $ (392) $ 8,458 $ 7,845 $ (613)
====================================================================================================================================
Total general accounts $ 7,355 $ 7,044 $ (311) $ 6,339 $ 5,852 $ (487)
Total guaranteed separate accounts $ 1,784 $ 1,703 $ (81) $ 2,119 $ 1,993 $ (126)
====================================================================================================================================
The decrease in the unrealized loss amount since December 31, 2002 is primarily
the result of improved corporate fixed maturity credit quality and to a lesser
extent asset sales, partially offset by an increase in interest rates. For
further discussion, please see the economic commentary under the Consolidated
Fixed Maturities by Type table in this section of the MD&A.
As of September 30, 2003, fixed maturities represented $382, or 97%, of the
Company's total unrealized loss. There were no fixed maturities as of September
30, 2003 with a fair value less than 80% of the security's amortized cost basis
for six continuous months other than certain asset-backed and commercial
mortgage-backed securities. Other than temporary impairments for certain
asset-backed and commercial mortgage-backed securities are recognized if the
fair value of the security, as determined by external pricing sources, is less
than its carrying amount and there has been a decrease in the present value of
the expected cash flows since the last reporting period. There were no
asset-backed or commercial mortgage-backed securities included in the table
above, as of September 30, 2003 and December 31, 2002, for which management's
best estimate of future cash flows adversely changed during the reporting
period. As of September 30, 2003, no asset-backed securities had an unrealized
loss in excess of $20. For a detailed discussion of the other than temporary
impairment criteria, see "Valuation of Investments and Derivative Instruments"
included in the Critical Accounting Estimates section of the MD&A and in Note
1(g) of Notes to Consolidated Financial Statements, both of which are included
in The Hartford's 2002 Form 10-K Annual Report.
As of September 30, 2003 and December 31, 2002, the Company held no securities
of a single issuer that were at an unrealized loss position in excess of 5% and
6%, respectively, of the total unrealized loss amount.
The total securities in an unrealized loss position for longer than six months
by type as of September 30, 2003 and December 31, 2002 are presented in the
following table.
- 51 -
CONSOLIDATED TOTAL SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------------------------------- --------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
ABS and CMBS
Aircraft lease receivables $ 182 $ 117 $ (65) 28.1% $ 94 $ 79 $ (15) 3.4%
CDOs 211 175 (36) 15.6% 262 217 (45) 10.2%
Credit card receivables 273 253 (20) 8.7% 408 359 (49) 11.1%
MH receivables 30 28 (2) 0.9% 21 20 (1) 0.2%
ther ABS and CMBS 815 798 (17) 7.4% 763 748 (15) 3.4%
Corporate
Financial services 725 683 (42) 18.2% 910 831 (79) 17.9%
Technology and communications 26 23 (3) 1.3% 609 536 (73) 16.6%
Transportation 44 36 (8) 3.5% 89 72 (17) 3.9%
Utilities 163 147 (16) 6.9% 361 325 (36) 8.2%
Other 213 199 (14) 6.1% 821 781 (40) 9.1%
Diversified equity mutual funds 6 5 (1) 0.4% 113 88 (25) 5.7%
Other securities 48 41 (7) 2.9% 423 377 (46) 10.3%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,736 $ 2,505 $ (231) 100.0% $ 4,874 $ 4,433 $(441) 100.0%
====================================================================================================================================
Total general accounts $ 1,951 $ 1,780 $ (171) 74.0% $ 3,597 $ 3,258 $ (339) 76.9%
Total guaranteed separate accounts $ 785 $ 725 $ (60) 26.0% $ 1,277 $ 1,175 $ (102) 23.1%
====================================================================================================================================
The ABS in an unrealized loss position for six months or more as of September
30, 2003, were primarily supported by aircraft lease receivables, CDOs and
credit card receivables. The Company's current view of risk factors relative to
these fixed maturity types is as follows:
Aircraft lease receivables - The securities supported by aircraft, aircraft
lease payments and enhanced equipment trust certificates (together, "aircraft
lease receivables") have continued to decline in value due to a reduction in
lease payments and aircraft values driven by a decline in airline travel, which
resulted in bankruptcies and other financial difficulties of airline carriers.
As a result of these factors, significant risk premiums have been required by
the market for securities in this sector, resulting in reduced liquidity and
lower broker quoted prices. The level of recovery will depend on economic
fundamentals and airline operating performance. Aircraft lease receivables will
be further stressed if passenger air traffic declines or airlines liquidate
rather than emerge from bankruptcy protection.
CDOs - Adverse CDO experience can be attributed to higher than expected default
rates on the collateral, particularly in the technology and utilities sectors,
and lower than expected recovery rates. Improved economic and operating
fundamentals of the underlying security issuers should lead to improved pricing
levels.
Credit card receivables - The unrealized loss position in credit card securities
has primarily been caused by exposure to companies originating loans to
sub-prime borrowers. While the unrealized loss position improved for these
holdings during the year, the Company believes that this sub-sector will
continue to be under stress and expects holdings to be very sensitive to changes
in collateral performance.
As of September 30, 2003, security types other than ABS and CMBS that were in a
significant unrealized loss position were corporate fixed maturities primarily
within the financial services and utilities sectors.
Financial Services - The financial services securities in an unrealized loss
position are primarily variable rate securities with extended maturity dates,
which have been adversely impacted by the reduction in forward interest rates
resulting in lower expected cash flows. Unrealized loss amounts for these
securities have declined during the year as interest rates have risen.
Additional changes in fair value of these securities are primarily dependent on
future changes in forward interest rates. A substantial percentage of these
securities are currently hedged with interest rate swaps, which convert the
variable rate earned on the securities to a fixed amount. The swaps receive cash
flow hedge accounting treatment and are currently in an unrealized gain
position.
Utilities - The utilities sector remains adversely impacted by several events
that primarily occurred in 2001 including the bankruptcy of Enron Corp., the
decline in the energy trading industry and the regulatory, political and legal
effect of the California utility crisis. These events led to credit downgrades,
which continue to negatively impact security price levels. Companies have begun
to reduce leverage, selling various non-core businesses and have secured
liquidity sources either through capital market issuances or bank lines to
support cash flow needs. Improved credit fundamentals coupled with increased
energy prices and demand should allow the price of these companies' securities
to improve.
As part of the Company's ongoing security monitoring process by a committee of
investment and accounting professionals, the Company has reviewed its investment
portfolio and concluded
- 52 -
that there were no additional other than temporary impairments as of September
30, 2003 and December 31, 2002. Due to the issuers' continued satisfaction of
the securities' obligations in accordance with their contractual terms and the
expectation that they will continue to do so, as well as the evaluation of the
fundamentals of the issuers' financial condition, the Company believes that the
prices of the securities in the sectors identified above were temporarily
depressed primarily as a result of a market dislocation and generally poor
cyclical economic conditions and sentiment. See "Valuation of Investments and
Derivative Instruments" included in the Critical Accounting Estimates section of
MD&A and in Note 1(g) of Notes to Consolidated Financial Statements both
included in The Hartford's 2002 Form 10-K Annual Report.
The evaluation for other than temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties in the
determination of whether declines in the fair value of investments are other
than temporary. The risks and uncertainties include changes in general economic
conditions, the issuer's financial condition or near term recovery prospects and
the effects of changes in interest rates. In addition, for securitized financial
assets with contractual cash flows (e.g. ABS and CMBS), projections of expected
future cash flows may change based upon new information regarding the
performance of the underlying collateral.
The following table presents the Company's unrealized loss aging for BIG and
equity securities on a consolidated basis, including guaranteed separate
accounts, as of September 30, 2003 and December 31, 2002.
CONSOLIDATED UNREALIZED LOSS AGING OF BIG AND EQUITY SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------------------------- ------------------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
Three months or less $ 401 $ 386 $ (15) $ 274 $ 229 $ (45)
Greater than three months to six months 144 133 (11) 308 267 (41)
Greater than six months to nine months 77 73 (4) 266 213 (53)
Greater than nine months to twelve months 86 76 (10) 576 515 (61)
Greater than twelve months 460 383 (77) 610 517 (93)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,168 $ 1,051 $ (117) $ 2,034 $ 1,741 $ (293)
====================================================================================================================================
Total general accounts $ 987 $ 887 $ (100) $ 1,702 $ 1,444 $ (258)
Total guaranteed separate accounts $ 181 $ 164 $ (17) $ 332 $ 297 $ (35)
====================================================================================================================================
Similar to the decrease in the Consolidated Unrealized Loss Aging of Total
Securities table from December 31, 2002 to September 30, 2003, the decrease in
the BIG and equity security unrealized loss amount was primarily the result of
improved corporate fixed maturity credit quality and to a lesser extent asset
sales, partially offset by an increase in interest rates. For further
discussion, please see the economic commentary under the Consolidated Fixed
Maturities by Type table in this section of the MD&A.
The BIG and equity securities in an unrealized loss position for longer than six
months by type as of September 30, 2003 and December 31, 2002 are presented in
the following table.
CONSOLIDATED BIG AND EQUITY SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
----------------------------------------------- --------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
ABS and CMBS
Aircraft lease receivables $ 62 $ 38 $ (24) 26.4% $ 4 $ 2 $ (2) 1.0%
CDOs 47 38 (9) 9.9% 4 2 (2) 1.0%
Credit card receivables 53 36 (17) 18.7% 36 23 (13) 6.3%
Other ABS and CMBS 54 47 (7) 7.7% 45 39 (6) 2.9%
Corporate
Financial services 80 75 (5) 5.5% 141 131 (10) 4.8%
Technology and communications 21 19 (2) 2.2% 325 267 (58) 28.0%
Transportation 21 17 (4) 4.4% 33 26 (7) 3.4%
Utilities 148 134 (14) 15.4% 209 182 (27) 13.0%
Other 127 120 (7) 7.7% 379 346 (33) 15.9%
Diversified equity mutual funds 6 5 (1) 1.1% 113 88 (25) 12.1%
Other securities 4 3 (1) 1.0% 163 139 (24) 11.6%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 623 $ 532 $ (91) 100.0% $ 1,452 $ 1,245 $(207) 100.0%
====================================================================================================================================
Total general accounts $ 502 $ 428 $ (74) 81.3% $ 1,191 $ 1,012 $(179) 86.5%
Total guaranteed separate accounts $ 121 $ 104 $ (17) 18.7% $ 261 $ 233 $ (28) 13.5%
====================================================================================================================================
- 53 -
For a discussion of the Company's current view of risk factors relative to
certain security types listed above, please refer to the Consolidated Total
Securities with Unrealized Loss Greater Than Six Months by Type table in this
section of the MD&A.
EQUITY RISK
The Company's operations are significantly influenced by changes in the equity
markets. The Company'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. Prolonged and precipitous declines in the equity markets can have a
significant impact on the Company's operations, as sales of variable products
may decline and surrender activity may increase, if customer sentiment towards
the equity market turns negative. 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.
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 DAC to be amortized in a given financial statement period. A
significant decrease in the Company's estimated 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 the 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.
The Investment Products segment's total gross exposure (i.e. before reinsurance)
to these guaranteed death benefits as of September 30, 2003 was $16.2 billion.
Due to the fact that 77% of this amount is reinsured, the net exposure is $3.7
billion. This amount is often referred to as the retained net amount at risk.
However, the Company will incur these guaranteed death benefit payments in the
future only if the policyholder has an in-the-money guaranteed death benefit at
their time of death. In order to analyze the total costs that the Company may
incur in the future related to these guaranteed death benefits, the Company
performed an actuarial present value analysis. This analysis included developing
a model utilizing stochastically generated scenarios and best estimate
assumptions related to mortality and lapse rates. A range of projected costs was
developed and discounted back to the financial statement date utilizing the
Company's cost of capital, which for this purpose was assumed to be 9.25%. Based
on this analysis, the Company estimated a 95% confidence interval of the present
value of the retained death benefit costs to be incurred in the future to be a
range of $110 to $368 for these contracts. The median of the stochastically
generated investment performance scenarios was $176.
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, Hartford Life
reinsured a portion of the guaranteed minimum death benefit ("GMDB") feature
associated with certain of its annuity contracts. As consideration for
recapturing the business and final settlement under the treaty, the Company has
received assets valued at approximately $32 and one million warrants exercisable
for the unaffiliated company's stock. This amount represents to the Company an
advance collection of its future recoveries under the reinsurance agreement and
will be recognized as future losses are incurred. Prospectively, as a result of
the recapture, Hartford Life will be responsible for all of the remaining and
ongoing risks associated with the GMDB's related to this block of business. The
recapture increased the net amount at risk retained by the Company, which is
included in the net amount at risk discussed in Note 1 (f).
In the first quarter of 2004, the Company will adopt the provisions of Statement
of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts", (the "SOP").
The provisions of the SOP include a requirement for recording a liability for
variable annuity products with a guaranteed minimum death benefit feature. The
determination of this liability is also based on models that involve numerous
estimates and subjective judgments, including those regarding expected market
rates of return and volatility, contract surrender rates and mortality
experience. Based on management's preliminary review of the SOP and current
market conditions, the unrecorded GMDB liabilities, net of reinsurance, are
estimated to be between $60 and $70 at September 30, 2003. Net of estimated DAC
and income tax effects, the cumulative effect of establishing the required GMDB
reserves is expected to result in a reduction of net income of between $30 and
$40. The ultimate actual impact on the Company's financial statements will
differ from management's current estimates and will depend in part on market
conditions and other factors at the date of adoption.
In addition, the Company offers certain variable annuity products with a GMWB
rider. The GMWB provides the policyholder with a guaranteed remaining balance
("GRB") if the account value is reduced to zero through a combination of market
declines and withdrawals. The GRB is generally equal to premiums less
withdrawals. However, annual withdrawals that exceed 7% of the premiums paid may
reduce the GRB by an amount greater than the withdrawals and may also impact
that guaranteed annual withdrawal amount that subsequently applies after the
excess annual withdrawals occur. The policyholder also has the option,
- 54 -
after a specified time period, to reset the GRB to the then-current account
value, if greater. The GMWB represents an embedded derivative liability in the
variable annuity contract that is required to be reported separately from the
host variable annuity contract. It is carried at fair value and reported in
other policyholder funds. The fair value of the GMWB obligations are calculated
based on actuarial assumptions related to the projected cash flows, including
benefits and related contract charges, over the lives of the contracts,
incorporating expectations concerning policyholder behavior. Because of the
dynamic and complex nature of these cash flows, stochastic techniques under a
variety of market return scenarios and other best estimate assumptions are used.
Estimating cash flows involves numerous estimates and subjective judgments
including those regarding expected market rates of return, market volatility,
correlations of market returns and discount rates. Declines in the equity market
may increase the Company's exposure to benefits under these contracts. For all
contracts in effect through July 6, 2003, the Company entered into a reinsurance
arrangement to offset its exposure to the GMWB for the remaining lives of those
contracts. As of July 6, 2003, the Company exhausted all but a small portion of
the reinsurance capacity for new business under the current arrangement and will
be ceding only a very small number of new contracts subsequent to July 6, 2003.
Substantially all new contracts with the GMWB are not covered by reinsurance. In
order to minimize the volatility associated with the unreinsured GMWB
liabilities, the Company established an alternative risk management strategy.
During the third quarter of 2003, the Company began hedging its unreinsured GMWB
exposure using capital market instruments.
- --------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
Capital resources and liquidity represent the overall financial strength of The
Hartford and its ability to generate 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:
SEPTEMBER 30, DECEMBER 31,
2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term debt (includes current maturities of long-term debt) $ 515 $ 315 63%
Long-term debt 3,660 2,596 41%
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures ("trust preferred securities") 962 1,468 (34%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 5,137 $ 4,379 17%
- ------------------------------------------------------------------------------------------------------------------------------------
Equity excluding accumulated other comprehensive income ("AOCI"), net of tax $ 9,987 $ 9,640 4%
AOCI, net of tax 1,357 1,094 24%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 11,344 $ 10,734 6%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION INCLUDING AOCI $ 16,481 $ 15,113 9%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION EXCLUDING AOCI $ 15,124 $ 14,019 8%
- ------------------------------------------------------------------------------------------------------------------------------------
Debt to equity [1] 45% 41%
Debt to capitalization [1] 31% 29%
====================================================================================================================================
<FN>
[1] Excluding trust preferred securities from total debt and AOCI from total
stockholders' equity and total capitalization, the debt to equity ratio was
42% and 30% and the debt to capitalization ratio was 28% and 21% as of
September 30, 2003 and December 31, 2002, respectively.
</FN>
CAPITALIZATION
The Hartford endeavors to maintain a capital structure that provides financial
and operational flexibility to its insurance subsidiaries, ratings that support
its competitive position in the financial services marketplace, and strong
shareholder returns. As a result, the Company may from time to time raise
capital from the issuance of stock, debt or other capital securities. The
issuance of common stock, debt or other capital securities could result in the
dilution of shareholder interests or reduced net income due to additional
interest expense.
During the second quarter of 2003, the Company increased its capitalization by
$2.1 billion through the issuance of $1.2 billion in common stock, $669 in
equity units and $249 in senior notes. Contributions of proceeds included: $300
to the Company's qualified pension plan, $150 to the life insurance
subsidiaries, $180 to redeem a portion of its Series A 7.7% Cumulative Quarterly
Income Preferred Securities due February 28, 2016, with the balance to be used
in the property and casualty insurance subsidiaries.
The Hartford's total capitalization increased $1.4 billion and total
capitalization excluding AOCI increased $1.1 billion as of September 30, 2003
compared to December 31, 2002. This increase was due to the capital raising
stated above, partially offset by a net loss of $(545) for the nine months ended
September 30, 2003, which reflects the $1.7 billion, after-tax, charge taken to
strengthen reserves for asbestos related exposure.
DEBT
On May 23, 2003, The Hartford issued 12.0 million 7% equity units at a price of
fifty dollars per unit and received net proceeds of $582. Subsequently, on May
30, 2003, The Hartford issued an additional 1.8 million 7% equity units at a
price of fifty dollars per unit and received net proceeds of $87.
- 55 -
Each equity unit offered initially consists of a corporate unit with a stated
amount of fifty dollars per unit. Each corporate unit consists of one purchase
contract for the sale of a certain number of shares of the Company's stock and a
5% ownership interest in one thousand dollars principal amount of senior notes
due August 16, 2008.
The corporate unit may be converted by the holder into a treasury unit
consisting of the purchase contract and a 5% undivided beneficial interest in a
zero-coupon U.S. Treasury security with a principal amount of one thousand
dollars that matures on August 15, 2006. The holder of an equity unit owns the
underlying senior notes or treasury securities but has pledged the senior notes
or treasury securities to the Company to secure the holder's obligations under
the purchase contract.
The purchase contract obligates the holder to purchase, and obligates The
Hartford to sell, on August 16, 2006, for fifty dollars, a variable number of
newly issued common shares of The Hartford. The number of The Hartford's shares
to be issued will be determined at the time the purchase contracts are settled
based upon the then current applicable market value of The Hartford's common
stock. If the applicable market value of The Hartford's common stock is equal to
or less than $45.50, then the Company will deliver 1.0989 shares to the holder
of the equity unit, or an aggregate of 15.2 million shares. If the applicable
market value of The Hartford's common stock is greater than $45.50 but less than
$56.875, then the Company will deliver the number of shares equal to fifty
dollars divided by the then current applicable market value of The Hartford's
common stock to the holder. Finally, if the applicable market value of The
Hartford's common stock is equal to or greater than $56.875, then the Company
will deliver 0.8791 shares to the holder, or an aggregate of 12.1 million
shares. Accordingly, upon settlement of the purchase contracts on August 16,
2006, The Hartford will receive proceeds of approximately $690 and will deliver
between 12.1 million and 15.2 million common shares in the aggregate. The
proceeds will be credited to stockholders' equity and allocated between the
common stock and additional paid-in-capital accounts. The Hartford will make
quarterly contract adjustment payments to the equity unit holders at a rate of
4.44% of the stated amount per year until the purchase contract is settled.
Each corporate unit also includes a 5% ownership interest in one thousand
dollars principal amount of senior notes that will mature on August 16, 2008.
The aggregate maturity value of the senior notes is $690. The notes are pledged
by the holders to secure their obligations under the purchase contracts. The
Hartford will make quarterly interest payments to the holders of the notes
initially at an annual rate of 2.56%. On May 11, 2006, the notes will be
remarketed. At that time, The Hartford's remarketing agent will have the ability
to reset the interest rate on the notes in order to generate sufficient
remarketing proceeds to satisfy the holder's obligation under the purchase
contract. If the initial remarketing is unsuccessful, the remarketing agent will
attempt to remarket the notes, as necessary, on June 13, 2006, July 12, 2006 and
August 11, 2006. If all remarketing attempts are unsuccessful, the Company will
exercise its rights as a secured party to obtain and extinguish the notes.
The total distributions payable on the equity units are at an annual rate of 7%,
consisting of interest (2.56%) and contract adjustment payments (4.44%). The
corporate units are listed on the New York Stock Exchange under the symbol "HIG
PrD".
The present value of the contract adjustment payments of $95 was accrued upon
the issuance of the equity units as a charge to additional paid-in capital and
is included in other liabilities in the accompanying condensed consolidated
balance sheet as of September 30, 2003. Subsequent contract adjustment payments
will be allocated between this liability account and interest expense based on a
constant rate calculation over the life of the purchase contracts. Additional
paid-in capital as of September 30, 2003 also reflected a charge of $17
representing a portion of the equity unit issuance costs that were allocated to
the purchase contracts.
The equity units have been reflected in the diluted earnings per share
calculation using the treasury stock method, which would be used for the equity
units at any time before the settlement of the purchase contracts. Under the
treasury stock method, the number of shares of common stock used in calculating
diluted earnings per share is increased by the excess, if any, of the number of
shares issuable upon settlement of the purchase contracts over the number of
shares that could be purchased by The Hartford in the market, at the average
market price during the period, using the proceeds received upon settlement. The
Company anticipates that there will be no dilutive effect on its earnings per
share related to the equity units, except during periods when the average market
price of a share of the Company's common stock is above the threshold
appreciation price of $56.875. Because the average market price of The
Hartford's common stock during the quarter and nine months ended September 30,
2003 was below this threshold appreciation price, the shares issuable under the
purchase contract component of the equity units have not been included in the
diluted earnings per share calculation.
On May 23, 2003, The Hartford issued 2.375% senior notes due June 1, 2006 and
received net proceeds of $249. Interest on the notes is payable semi-annually on
June 1 and December 1, commencing on December 1, 2003.
On July 10, 2003, the Company issued 4.625% senior notes due July 15, 2013 and
received net proceeds of $317. Interest on the notes is payable semi-annually on
January 15 and July 15, commencing on January 15, 2004.
- 56 -
The table below details the Company's short-term debt programs and the
applicable balances outstanding.
OUTSTANDING
AS OF
----------------- ---------------
EFFECTIVE EXPIRATION MAXIMUM SEPTEMBER 30, DECEMBER 31,
DESCRIPTION DATE DATE AVAILABLE 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper
The Hartford 11/10/86 N/A $ 2,000 $ 315 $ 315
HLI 2/7/97 N/A 250 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial paper $ 2,250 $ 315 $ 315
Revolving Credit Facility
5-year revolving credit facility 6/20/01 6/20/06 $ 1,000 $ -- $ --
3-year revolving credit facility 12/31/02 12/31/05 490 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total revolving credit facility $ 1,490 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT [1] $ 3,740 $ 315 $ 315
====================================================================================================================================
<FN>
[1] Excludes current maturities of long-term debt of $200 and $0 as of
September 30, 2003 and December 31, 2002, respectively.
</FN>
TRUST PREFERRED SECURITIES
On June 30, 2003, the Company redeemed $180 of its 7.7% trust preferred
securities issued by Hartford Capital I. On September 30, 2003, the Company
redeemed the remaining $320 of its 7.7% trust preferred securities issued by
Hartford Capital I.
STOCKHOLDERS' EQUITY
Issuance of common stock - On May 23, 2003, The Hartford issued approximately
24.2 million shares of common stock pursuant to an underwritten offering at a
price to the public of $45.50 per share and received net proceeds of $1.1
billion. Subsequently, on May 30, 2003, The Hartford issued approximately 2.2
million shares of common stock at a price to the public of $45.50 per share and
received net proceeds of $97. On May 23, 2003 and May 30, 2003, The Hartford
issued 12.0 million 7% equity units and 1.8 million 7% equity units,
respectively. Each equity unit contains a purchase contract obligating the
holder to purchase and The Hartford to sell, a variable number of newly issued
shares of The Hartford's common stock. Upon settlement of the purchase contracts
on August 16, 2006, The Hartford will receive proceeds of approximately $690 and
will deliver between 12.1 million and 15.2 million shares in the aggregate. For
further discussion of the equity units issuance, see the Debt section above.
Dividends - On July 17, 2003, The Hartford declared a dividend on its common
stock of $0.27 per share payable on October 1, 2003 to shareholders of record as
of September 2, 2003.
CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2003 2002
- ------------------------------------------------------------------
Cash provided by operating activities $ 2,878 $ 2,061
Cash used for investing activities $ (6,873) $ (5,780)
Cash provided by financing activities $ 4,115 $ 3,771
Cash - end of period $ 496 $ 413
==================================================================
The increase in cash provided by financing activities was primarily the result
of capital raising activities in the second quarter, partially offset by lower
proceeds from investment and universal life-type contracts. The increase in cash
provided by operating activities was primarily the result of income before the
impact of the 2003 asbestos reserve addition, as well as changes in receivables
and liabilities balances. The increase in cash from operating and financing
activities accounted for the majority of the change in cash used for investing
activities. Operating cash flows for the nine months ended September 30, 2003
and 2002 were adequate to meet liquidity requirements.
PENSION PLAN
During September 2003, the Company announced its approval to amend its pension
plan to implement, effective January 1, 2009, the cash balance formula for
purposes of calculating pension benefits for all employees hired before January
1, 2001.
On May 29, 2003, the Company contributed $300 to its U.S. qualified defined
benefit pension plan.
RATINGS
Ratings are an important factor in establishing the competitive position in the
insurance and financial services marketplace. There can be no assurance that the
Company's ratings will continue for any given period of time or that they will
not be changed. In the event the Company's ratings are downgraded, the level of
revenues or the persistency of the Company's business may be adversely impacted.
Upon completion of the Company's asbestos reserve study and the Company's
capital-raising activities, certain of the major independent ratings
organizations revised The Hartford's financial ratings as follows:
On May 23, 2003, Fitch affirmed all ratings on The Hartford Financial Services
Group, Inc. including the fixed income ratings and the insurer financial
strength rating of the Hartford Fire Intercompany Pool. Further, these ratings
have been removed from Rating Watch Negative and now have a Stable Rating
Outlook.
On May 20, 2003, Standard & Poor's removed from CreditWatch and affirmed the
long-term counterparty credit and senior debt rating of The Hartford Financial
Services Group, Inc. and the counterparty credit and financial strength ratings
on the operating companies following the Company's completion of the
capital-raising activities. The outlook is stable.
- 57 -
On May 14, 2003, Moody's downgraded the debt ratings of both The Hartford
Financial Services Group, Inc. and Hartford Life, Inc. to A3 from A2 and their
short-term commercial paper ratings to P-2 from P-1. The outlook on all of the
ratings except for the P-2 rating on commercial paper is negative.
On May 13, 2003, A.M. Best affirmed the financial strength ratings of A+
(Superior) of The Hartford Fire Intercompany Pool and the main operating life
insurance subsidiaries of HLI. Concurrently, A.M. Best downgraded to "a-" from
"a+" the senior debt ratings of The Hartford Financial Services Group, Inc. and
Hartford Life Inc. and removed the ratings from under review.
The following table summarizes The Hartford's significant United States member
companies' financial ratings from the major independent rating organizations as
of November 3, 2003.
A.M. STANDARD
BEST FITCH & POOR'S MOODY'S
- ------------------------------------------------------------------
INSURANCE FINANCIAL
STRENGTH RATINGS:
Hartford Fire A+ AA AA- Aa3
Hartford Life Insurance
Company A+ AA AA- Aa3
Hartford Life & Accident A+ AA AA- Aa3
Hartford Life & Annuity A+ AA AA- Aa3
OTHER RATINGS:
The Hartford Financial
Services Group, Inc.:
Senior debt a- A A- A3
Commercial paper AMB-2 F1 A-2 P-2
Hartford Capital I
quarterly income
preferred securities bbb A- BBB Baa1
Hartford Capital III
trust originated
preferred securities bbb A- BBB Baa1
Hartford Life, Inc.:
Senior debt a- A A- A3
Commercial paper -- F1 A-2 P-2
Hartford Life, Inc.:
Capital I and II trust
preferred securities bbb A- BBB Baa1
Hartford Life Insurance
Company:
Short Term Rating -- -- A-1+ P-2
==================================================================
These ratings are not a recommendation to buy or hold any of The Hartford's
securities and they may be revised or revoked at any time at the sole discretion
of the rating organization.
The agencies consider many factors in determining the final rating of an
insurance company. One consideration is the relative level of statutory surplus
necessary to support the business written. Statutory surplus represents the
capital of the insurance company reported in accordance with accounting
practices prescribed by the applicable state insurance department. The table
below sets forth statutory surplus for the Company's insurance companies.
SEPTEMBER 30, DECEMBER 31,
(in billions) 2003 2002
- ------------------------------------------------------------------
Life operations $ 3.6 $ 3.0
Property & Casualty operations 5.6 4.9
- ------------------------------------------------------------------
TOTAL $ 9.2 $ 7.9
==================================================================
LIQUIDITY REQUIREMENTS
The Hartford Financial Services Group, Inc. and HLI are holding companies which
rely upon operating cash flow in the form of dividends from their subsidiaries,
which enable them to service debt, pay dividends, and pay certain business
expenses. The insurance holding company laws of the jurisdictions in which the
Company's insurance subsidiaries are incorporated (or deemed commercially
domiciled) limit the payment of dividends. As of October 31, 2003, the Company's
insurance subsidiaries have paid $326 to HFSG and HLI and are permitted to pay
up to a maximum of approximately $1.1 billion in dividends to HFSG and HLI for
the remainder of 2003 without prior approval from the applicable insurance
commissioner.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
On June 30, 2003, the Company entered into a sale-leaseback of certain furniture
and fixtures with a net book value of $40. The sale-leaseback resulted in a gain
of $15, which was deferred and will be amortized into earnings over the initial
lease term of three years. The lease qualifies as an operating lease for
accounting purposes. At the end of the initial lease term, the Company has the
option to purchase the leased assets, renew the lease for two one-year periods
or return the leased assets to the lessor. If the Company elects to return the
assets to the lessor at the end of the initial lease term, the assets will be
sold, and the Company has guaranteed a residual value on the furniture and
fixtures of $20. If the fair value of the furniture and fixtures were to decline
below the residual value, the Company would have to make up the difference under
the residual value guarantee.
The Company will periodically evaluate whether an accrual is required related to
this residual value guarantee. At September 30, 2003, no liability was recorded
for this guarantee, as the expected fair value of the furniture and fixtures at
the end of the initial lease term was greater than the residual value guarantee.
CONTINGENCIES
Legal Proceedings - The Hartford is involved in claims litigation arising in the
ordinary course of business, both as a liability insurer defending third-party
claims brought against insureds and 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 discussion of the litigation involving MacArthur in Part II, Item 1. Legal
Proceedings and the uncertainties related to asbestos and environmental claims
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.
The Hartford is also involved in other kinds of legal actions, some of which
assert claims for substantial amounts. These actions
- 58 -
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.
Legislative Initiatives - Certain elements of the Jobs and Growth Tax Relief
Reconciliation Act of 2003, in particular the reduction in tax rates on
long-term capital gains and most dividend distributions, could have a material
effect on The Hartford's sales of variable annuities and other investment
products. In addition, other tax proposals and regulatory initiatives which have
been or are being considered by Congress could have a material effect on the
insurance business. These proposals and initiatives include changes pertaining
to the tax treatment of insurance companies and life insurance products and
annuities, reductions in certain individual tax rates and the estate tax,
reductions in benefits currently received by The Hartford stemming from the
dividends received deduction, changes to the tax treatment of deferred
compensation arrangements, and changes to investment vehicles and retirement
savings plans and incentives. Prospects for enactment and the ultimate market
effect of these proposals are uncertain. Any potential effect to The Hartford's
financial condition or results of operations from the Jobs and Growth Act of
2003 or future tax proposals cannot be reasonably estimated at this time.
On July 10, 2003, the Senate Judiciary Committee approved legislation that, if
enacted, would provide for the creation of a Federal asbestos trust fund in
place of the current tort system for determining asbestos liabilities. The
prospects for enactment and the ultimate details of any legislation creating a
Federal asbestos trust fund are uncertain. Therefore, any potential effect on
the Company's financial condition or results of operations cannot be reasonably
estimated at this time.
On August 15, 2003, the Treasury Department announced that it would not use its
legislatively-granted authority to include group life insurance under the
Federal backstop for terrorism losses in the Terrorism Risk Insurance Act of
2002. In announcing this decision, the Treasury stated that they would continue
to monitor the group life situation.
- --------------------------------------------------------------------------------
ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
For a discussion of accounting standards, see Note 1 of Notes to Condensed
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.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's principal executive officer and its principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) have concluded that the Company's
disclosure controls and procedures are adequate and effective for the purposes
set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of
September 30, 2003.
CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in the Company's internal control over financial reporting
that occurred during the third quarter of 2003 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
- 59 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Hartford is involved in claims litigation arising in the ordinary course of
business, both as a liability insurer defending third-party claims brought
against insureds and 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 discussion of the
litigation involving Mac Arthur Company and its subsidiary, Western MacArthur
Company, both former regional distributors of asbestos products (collectively or
individually, "MacArthur"), below and the uncertainties discussed in Note 5(b)
of Notes to Condensed Consolidated Financial Statements 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.
The Hartford is also involved in other kinds of 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.
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.
The MacArthur Litigation - Hartford Accident and Indemnity Company ("Hartford
A&I"), a subsidiary of the Company, issued primary general liability policies to
MacArthur during the period 1967 to 1976. MacArthur sought coverage for
asbestos-related claims from Hartford A&I under these policies beginning in
1978. During the period between 1978 and 1987, Hartford A&I paid its full
aggregate limits under these policies plus defense costs. In 1987, Hartford A&I
notified MacArthur that its available limits under these policies had been
exhausted, and MacArthur ceased submitting claims to Hartford A&I under these
policies.
On October 3, 2000, thirteen years after it had accepted Hartford A&I's notice
of exhaustion, MacArthur filed an action against Hartford A&I and another
insurer in the U.S. District Court for the Eastern District of New York, seeking
for the first time additional coverage for asbestos bodily injury claims under
the Hartford A&I primary policies on the theory that Hartford A&I had note
exhausted limits MacArthur alleges to be available for non-products liability.
The complaint sought a declaration of coverage and unquantified damages. On
March 28, 2003, the District Court dismissed this action without prejudice on
MacArthur's motion.
On June 3, 2002, The St. Paul Companies, Inc. ("St. Paul") announced a
settlement of a coverage action brought by MacArthur against United States
Fidelity and Guaranty Company ("USF&G"), a subsidiary of St. Paul. Under the
settlement, St. Paul agreed to pay a total of $975 to resolve its asbestos
liability to MacArthur in conjunction with a proposed bankruptcy petition and
pre-packaged plan of reorganization to be filed by MacArthur. USF&G provided at
least twelve years of primary general liability coverage to MacArthur, but,
unlike Hartford A&I, had denied coverage and had refused to pay for defense or
indemnity.
On October 7, 2002, MacArthur filed an action in the Superior Court in Alameda
County, California, against Hartford A&I and two other insurers. As in the
now-dismissed New York action, MacArthur seeks a declaration of coverage and
damages for asbestos bodily injury claims. Four asbestos claimants who allegedly
have obtained default judgments against MacArthur also are joined as plaintiffs;
they seek to recover the amount of their default judgments and additional
damages directly from the defendant insurers and assert a right to an
accelerated trial.
On November 22, 2002, MacArthur filed a bankruptcy petition and proposed plan of
reorganization, which seeks to implement the terms of its settlement with St.
Paul. MacArthur asked the bankruptcy court to determine the full amount of its
current and future asbestos liability in an amount substantially more than the
alleged liquidated but unpaid claims. On October 31, 2003, the bankruptcy court
ruled that it would neither determine nor estimate the total amount of current
and future asbestos liability claims against MacArthur. The Company expects that
MacArthur will ask the Alameda County court instead to determine the total
amount of current and future asbestos liability claims against MacArthur and to
enter judgment against Hartford A&I for a substantial portion of that amount. A
confirmation trial currently is scheduled to begin November 10, 2003.
In a second amended complaint filed on July 21, 2003 in the Alameda County
action, following Hartford A&I's successful demurrer to the first two
complaints, MacArthur alleges that its liability for liquidated but unpaid
asbestos bodily injury claims is $2.5 billion, of which more than $1.8 billion
consists of unpaid judgments. The ultimate amount of MacArthur's asbestos
liability, including any unresolved present claims and future demands, is
currently unknown.
- 60 -
Hartford A&I intends to defend the MacArthur action vigorously. In the opinion
of management, the ultimate outcome is highly uncertain for many reasons. It is
not yet known, for example, whether Hartford A&I's defenses based on MacArthur's
long delay in asserting claims for further coverage will be successful; how
other significant coverage defenses will be decided; or the extent to which the
claims and default judgments against MacArthur involve injury outside of the
products and completed operations hazard definitions of the policies. In the
opinion of management, an adverse outcome could have a material adverse effect
on the Company's results of operations, financial condition and liquidity.
Bancorp Services, LLC - In the third quarter of 2003, Hartford Life Insurance
Company ("HLIC") and its affiliate International Corporate Marketing Group, LLC
("ICMG") settled their intellectual property dispute with Bancorp Services, LLC
("Bancorp"). The dispute concerned, among other things, Bancorp's claims for
alleged patent infringement, breach of a confidentiality agreement, and
misappropriation of trade secrets related to certain stable value
corporate-owned life insurance products. The dispute was the subject of
litigation in the United States District Court for the Eastern District of
Missouri, in which Bancorp obtained in 2002 a judgment exceeding $134 against
HLIC and ICMG after a jury trial on the trade secret and breach of contract
claims, and HLIC and ICMG obtained summary judgment on the patent infringement
claim. Based on the advice of legal counsel following entry of the judgment, the
Company recorded an $11 after-tax charge in the first quarter of 2002 to
increase litigation reserves. Both components of the judgment were appealed.
Under the terms of the settlement, The Hartford will pay a minimum of $70 and a
maximum of $80, depending on the outcome of the patent appeal, to resolve all
disputes between the parties. The appeal from the trade secret and breach of
contract judgment will be dismissed. The settlement resulted in the recording of
an additional charge of $40 after-tax in the third quarter of 2003, reflecting
the maximum amount payable under the settlement.
ITEM 5. OTHER INFORMATION
While the Company's Board of Directors has not set the date of the Company's
2004 annual meeting of shareholders, the Company anticipates that the date of
the meeting will be May 20, 2004. As a result, proposals submitted by
shareholders for inclusion in the proxy statement relating to the 2004 annual
meeting of shareholders must be received by the Company no later than the close
of business on January 5, 2004, as compared to the original deadline of November
12, 2003, which was included in the proxy statement for the Company's 2003
annual meeting of shareholders. Any proposal received after January 5, 2004 will
not be included in the Company's proxy materials for 2004. In addition, all
proposals for inclusion in the 2004 proxy statement must comply with all of the
requirements of SEC Rule 14a-8 under the Securities Exchange Act of 1934. In
accordance with the Company's bylaws, no proposal may be presented at the 2004
annual meeting of shareholders unless the Company receives notice of the
proposal by January 17, 2004. Proposals must be addressed to Brian S. Becker,
Senior Vice President and Corporate Secretary, The Hartford Financial Services
Group, Inc., 690 Asylum Avenue, Hartford, CT 06105. All proposals must comply
with the requirements set forth in the Company's bylaws, a copy of which may be
obtained from the Corporate Secretary of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index on page 63.
(b) Reports on Form 8-K:
During the quarterly period ended September 30, 2003, the Company filed the
following Current Report on Form 8-K:
Dated July 8, 2003, Item 5, Other Events, to report the sale of $320
aggregate principal amount of 4.625% senior notes due July 15, 2013.
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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
November 5, 2003
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
FORM 10-Q
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION
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4.01 Supplemental Indenture No. 4, dated as of July 10, 2003, to the
Senior Indenture, dated as of October 20, 1995, between ITT
Hartford Group, Inc. and The Chase Manhattan Bank (National
Association) as Trustee, between the Company and JPMorgan Chase
Bank, as Trustee.
15.01 Deloitte & Touche LLP Letter of Awareness.
31.1 Certification of Ramani Ayer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of David M. Johnson pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Ramani Ayer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of David M. Johnson pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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