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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: the following, all
of which are registered on the New York Stock Exchange, Inc.:
Common Stock, par value $0.01 per share
6.375% Notes due November 1, 2002
7.75% Notes due June 15, 2005
6.375% Notes due November 1, 2008
7.90% Notes due June 15, 2010
7.30% Debentures due November 1, 2015
7.70% Cumulative Quarterly Income Preferred Securities, Series A,
issued by Hartford Capital I
7.45% Trust Originated Preferred Securities, Series C, issued by
Hartford Capital III
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 2002, there were outstanding 246,259,394 shares of Common
Stock, $0.01 par value per share, of the registrant. The aggregate market value
of the shares of Common Stock held by non-affiliates of the registrant was
$16,099,428,325 based on the closing price of $67.00 per share of the Common
Stock on the New York Stock Exchange on February 28, 2002.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 2002 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of The Hartford 2
2 Properties 14
3 Legal Proceedings 14
4 Submission of Matters to a Vote of Security Holders 14
PART II 5 Market for The Hartford's Common Stock and Related
Stockholder Matters 14
6 Selected Financial Data 15
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
7A Quantitative and Qualitative Disclosures About Market Risk 53
8 Financial Statements and Supplementary Data 53
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 53
PART III 10 Directors and Executive Officers of The Hartford 53
11 Executive Compensation 53
12 Security Ownership of Certain Beneficial Owners
and Management 53
13 Certain Relationships and Related Transactions 53
PART IV 14 Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 53
Signatures II-1
Exhibits Index II-2
PART I
ITEM 1. BUSINESS OF THE HARTFORD
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR SHARE DATA, UNLESS OTHERWISE STATED)
GENERAL
The Hartford Financial Services Group, Inc. (together with its subsidiaries,
"The Hartford" or the "Company") is a diversified insurance and financial
services company. The Hartford, headquartered in Connecticut, is among the
largest providers of investment products, individual life, group life and group
disability insurance products, and property and casualty insurance products in
the United States. Hartford Fire Insurance Company, founded in 1810, is the
oldest of The Hartford's subsidiaries. The Hartford writes insurance and
reinsurance in the United States and internationally. At December 31, 2001,
total assets and total stockholders' equity of The Hartford were $181.2 billion
and $9.0 billion, respectively.
ORGANIZATION
The Hartford strives to maintain and enhance its position as a market leader
within the financial services industry and to maximize shareholder value. The
Company pursues a strategy of developing and selling diverse and innovative
products through multiple distribution channels, continuously developing and
expanding those distribution channels, achieving cost efficiencies through
economies of scale and improved technology, maintaining effective risk
management and prudent underwriting techniques and capitalizing on its brand
name and customer recognition of The Hartford Stag Logo, one of the most
recognized symbols in the financial services industry.
As a holding company that is separate and distinct from its insurance
subsidiaries, The Hartford Financial Services Group, Inc. has no significant
business operations of its own. Therefore, it relies on the dividends from its
insurance company subsidiaries, which are primarily domiciled in Connecticut, as
the principal source of cash flow to meet its obligations. Additional
information regarding the cash flow and liquidity needs of The Hartford
Financial Services Group, Inc. may be found in the Capital Resources and
Liquidity section of Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A").
The Company maintains a retail mutual fund operation, whereby the Company,
through wholly-owned subsidiaries, provides investment management and
administrative services to The Hartford Mutual Funds, Inc., a family of 21
mutual funds. Investors can purchase "shares" in the mutual funds, all of which
are registered with the Securities and Exchange Commission in accordance with
the Investment Company Act of 1940. The mutual funds are owned by the
shareholders of those funds and not by the Company.
Pursuant to its initial public offering of Class A common stock on May 22, 1997
(the "Offering") of Hartford Life, Inc. ("HLI"), the holding company parent of
The Hartford's significant life insurance subsidiaries, HLI sold to the public
26 million shares at $28.25 per share and received proceeds, net of offering
expenses, of $687. The 26 million shares sold in the Offering represented
approximately 19% of the equity ownership in HLI. On June 27, 2000, The Hartford
acquired all of the outstanding shares of HLI that it did not already own ("The
HLI Repurchase"). As a result, HLI again became a wholly-owned subsidiary of The
Hartford. Additional information on The HLI Repurchase may be found in the
Capital Resources and Liquidity section of the MD&A and Note 16 of Notes to
Consolidated Financial Statements.
On April 2, 2001, The Hartford acquired the United States individual life
insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as
"Fortis Financial Group", or "Fortis") for $1.12 billion in cash. The Company
effected the acquisition through several reinsurance agreements with
subsidiaries of Fortis and the purchase of 100% of the stock of Fortis Advisors,
Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis. (For
additional information, see the Capital Resources and Liquidity section of the
MD&A and Note 18(a) of Notes to Consolidated Financial Statements.)
The Company has exited its international property and casualty businesses.
Accordingly, in September 2001, The Hartford entered into an agreement to sell
Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance
Company, Ltd. ("Singapore Insurance")). The sale was completed in January 2002.
On February 8, 2001, The Hartford completed the sale of its Spain-based
subsidiary, Hartford Seguros. On December 22, 2000, The Hartford completed the
sale of its Netherlands-based Zwolsche Algemeene N.V. ("Zwolsche") subsidiary.
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh")
subsidiary.
REPORTING SEGMENTS
The Hartford is organized into two major operations: Life and Property &
Casualty. Within these operations, The Hartford conducts business principally in
ten operating segments. Additionally, all activities related to The HLI
Repurchase and the minority interest in HLI for pre-acquisition periods are
included in Corporate.
Life, headquartered in Simsbury, Connecticut, is organized into four reportable
operating segments: Investment Products, Individual Life, Group Benefits and
Corporate Owned Life Insurance ("COLI"). Life also includes in an Other category
its international operations, which are primarily located in Latin America and
Japan, as well as corporate items not directly allocable to any of its
reportable operating segments, principally interest expense.
Property & Casualty, headquartered in Hartford, Connecticut, was reorganized
into six reportable operating segments and, effective January 1, 2001, is
reported as the North American underwriting segments of Business Insurance,
Affinity Personal Lines, Personal Insurance, Specialty Commercial and
Reinsurance; and the Other Operations segment, formerly "International and Other
Operations".
The following is a description of Life and Property & Casualty along with each
of their segments, including a discussion of principal products, marketing and
distribution and competitive environments. Additional information on The
Hartford's reporting segments may be found in the MD&A and Note 17 of Notes to
Consolidated Financial Statements.
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LIFE
Life's business is conducted by HLI, a leading financial services and insurance
organization. Through Life, The Hartford provides (i) investment products,
including variable annuities, fixed market value adjusted ("MVA") annuities,
mutual funds and retirement plan services for the savings and retirement needs
of over 1.5 million customers, (ii) life insurance for income protection and
estate planning to approximately 750,000 customers, (iii) group benefits
products such as group life and group disability insurance for the benefit of
millions of individuals and (iv) corporate owned life insurance, which includes
life insurance policies purchased by a company on the lives of its employees.
The Company is one of the largest sellers of individual variable annuities,
variable life insurance and group disability insurance in the United States. In
addition, in 2001 The Hartford Mutual Funds, Inc. reached $12 billion in assets
faster than any other retail-oriented mutual fund family in history, according
to Strategic Insight. The Company's strong position in each of its core
businesses provides an opportunity to increase the sale of The Hartford's
products and services as individuals increasingly save and plan for retirement,
protect themselves and their families against disability or death and engage in
estate planning. In an effort to advance the Company's strategy of growing its
life and asset accumulation businesses, The Hartford acquired the individual
life insurance, annuity and mutual fund businesses of Fortis on April 2, 2001.
(For additional information, see the Capital Resources and Liquidity section of
the MD&A and Note 18(a) of Notes to Consolidated Financial Statements).
HLI is among the largest consolidated life insurance groups in the United States
based on statutory assets as of December 31, 2000. In the past year, Life's
total assets under management, which include $16.8 billion of third-party assets
invested in the Company's mutual funds, increased 9% to $168.4 billion at
December 31, 2001 from $155.1 billion at December 31, 2000. Life generated
revenues of $6.5 billion, $6.0 billion and $5.5 billion in 2001, 2000 and 1999,
respectively. Additionally Life generated net income of $685, $575 and $467 in
2001, 2000, and 1999, respectively.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
Life maintains advantageous economies of scale and operating efficiencies due to
its continued growth, attention to expense and claims management and commitment
to customer service and technology. These advantages allow the Company to
competitively price its products for its distribution network and policyholders.
The Company continues to achieve operating efficiencies in its Investment
Products segment. Operating expenses associated with the Company's individual
annuity products as a percentage of total individual annuity account values
reduced by nearly half since 1992, declining from 43 basis points to 22 basis
points in 2001. In addition, the Company utilizes computer technology to enhance
communications within the Company and throughout its distribution network in
order to improve the Company's efficiency in marketing, selling and servicing
its products and, as a result, provides high-quality customer service. In
recognition of excellence in customer service for variable annuities, The
Hartford was awarded the 2001 Annuity Service Award by DALBAR Inc., a recognized
independent financial services research organization, for the sixth consecutive
year. The Hartford is the only company to receive this prestigious award in
every year of the award's existence. Also, in both 2001 and 2000, The Hartford
Mutual Funds, Inc. was named the leading mid-sized fund complex in the industry
for top service providers, according to a survey of broker-dealers conducted by
DALBAR Inc. Additionally, the Company's Individual Life Division won the DALBAR
award for service of life insurance customers in 2001 and was the only life
insurance operation to be recognized with this prestigious award.
RISK MANAGEMENT
Life's product designs, prudent underwriting standards and risk management
techniques protect it against disintermediation risk and greater than expected
mortality and morbidity experience. As of December 31, 2001, the Company had
limited exposure to disintermediation risk on approximately 97% of its domestic
life insurance and annuity liabilities through the use of non-guaranteed
separate accounts, MVA features, policy loans, surrender charges and
non-surrenderability provisions. The Company effectively utilizes prudent
underwriting to select and price insurance risks and regularly monitors
mortality and morbidity assumptions to determine if experience remains
consistent with these assumptions and to ensure that its product pricing remains
appropriate. The Company also enforces disciplined claims management to protect
itself against greater than expected morbidity experience.
INVESTMENT PRODUCTS
The Investment Products segment focuses, through the sale of individual variable
and fixed annuities, mutual funds, retirement plan services and other investment
products, on the savings and retirement needs of the growing number of
individuals who are preparing for retirement or who have already retired. From
December 31, 1996 to December 31, 2001, this segment's assets under management
grew to $120.3 billion from $55.3 billion, a five year compounded annual growth
rate of 17%. Investment Products generated revenues of $2.5 billion, $2.4
billion and $2.0 billion in 2001, 2000 and 1999, respectively, of which
individual annuities accounted for $1.5 billion in 2001 and 2000, and $1.4
billion in 1999. Net income in the Investment Products segment was $463, $424
and $330 in 2001, 2000 and 1999, respectively.
The Hartford sells both variable and fixed individual annuity products through a
wide distribution network of national and regional broker-dealer organizations,
banks and other financial institutions and independent financial advisors. The
Hartford is a market leader in the annuity industry with sales of $10.0 billion,
$10.7 billion and $10.9 billion in 2001, 2000 and 1999, respectively. The
Hartford was among the largest sellers of individual variable annuities in the
United States for 2001, 2000 and 1999 with sales of $9.0 billion, $9.0 billion
and $10.3 billion, respectively. In addition, the Company continues to be among
the largest sellers of individual variable annuities through banks in the United
States.
The Company's total account value related to individual annuity products was
$84.2 billion as of December 31, 2001. Of this total account value, $74.6
billion, or 89%, related to individual variable annuity products and $9.6
billion, or 11%, related primarily to fixed MVA annuity products. In 2000, the
Company's total account values related to individual annuity products was $87.2
billion. Of this total account value, $78.2
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billion, or 90%, related to individual variable annuity products and $9.0
billion, or 10%, related primarily to fixed MVA annuity products.
In addition to its leading position in individual annuities, The Hartford
continues to emerge as a significant participant in the mutual fund business and
is among the top providers of retirement products and services, including asset
management and plan administration sold to corporations pursuant to Section 401
of the Internal Revenue Code of 1986, as amended (referred to as "401(k)") and
to municipalities pursuant to Section 457 of the Internal Revenue Code of 1986,
as amended (referred to as "Section 457"). The Company also provides structured
settlement contracts, terminal funding products and other investment products
such as guaranteed investment contracts ("GICs").
As previously mentioned, The Hartford acquired the individual annuity and mutual
fund businesses of Fortis, Inc. in 2001. This acquisition increased assets under
management in the Company's fast growing mutual fund business by 20%, and helped
solidify the Company's strong position in variable annuities.
Principal Products
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Individual Variable Annuities -- The Hartford earns fees, based on
policyholders' account values, for managing variable annuity assets and
maintaining policyholder accounts. The Company uses specified portions of the
periodic deposits paid by a customer to purchase units in one or more mutual
funds as directed by the customer who then assumes the investment performance
risks and rewards. As a result, variable annuities permit policyholders to
choose aggressive or conservative investment strategies, as they deem
appropriate, without affecting the composition and quality of assets in the
Company's general account. These products offer the policyholder a variety of
equity and fixed income options, as well as the ability to earn a guaranteed
rate of interest in the general account of the Company. The Company offers an
enhanced guaranteed rate of interest for a specified period of time (no longer
than twelve months) if the policyholder elects to dollar-cost average funds from
the Company's general account into one or more non-guaranteed separate accounts.
Due to this enhanced rate and the volatility experienced in the overall equity
markets, this option continues to be popular with policyholders. Policyholders
may make deposits of varying amounts at regular or irregular intervals and the
value of these assets fluctuates in accordance with the investment performance
of the funds selected by the policyholder. To encourage persistency, many of the
Company's individual variable annuities are subject to withdrawal restrictions
and surrender charges. Surrender charges range initially from 5% to 8% of the
contract's initial deposit less withdrawals, and reduce to zero on a sliding
scale, usually within seven policy years. Volatility experienced by the equity
markets over the past few years did not cause a significant increase in variable
annuity surrenders, demonstrating that policyholders are generally aware of the
long-term nature of these products. Individual variable annuity account values
of $74.6 billion as of December 31, 2001, have grown significantly from $13.1
billion as of December 31, 1994, due to strong net cash flow, resulting from
high levels of sales, low levels of surrenders and equity market appreciation.
Approximately 94% and 96% of the individual variable annuity account values were
held in non-guaranteed separate accounts as of December 31, 2001 and 2000,
respectively.
The assets underlying the Company's variable annuities are managed both
internally and by outside money managers, while the Company provides all policy
administration services. The Company utilizes a select group of money managers,
such as Wellington Management Company, LLP ("Wellington"), Putnam Financial
Services, Inc. ("Putnam"), American Funds, MFS Investment Management ("MFS"),
Franklin Templeton Group, AIM Investments ("AIM") and Morgan Stanley Investment
Advisors, Inc. All have an interest in the continued growth in sales of the
Company's products and greatly enhance the marketability of the Company's
annuities and the strength of its product offerings. The Director variable
annuity, which is managed in part by Wellington, continues to be an industry
leader in terms of sales. In addition, Hartford Leaders, which is a
multi-manager variable annuity that combines the product manufacturing,
wholesaling and service capabilities of The Hartford with the investment
management expertise of four of the nation's most successful investment
management organizations: American Funds, Franklin Templeton Group, AIM and MFS,
has quickly emerged as a strong selling product for the Company.
Fixed MVA Annuities -- Fixed MVA annuities are fixed rate annuity contracts
which guarantee a specific sum of money to be paid in the future, either as a
lump sum or as monthly income. In the event that a policyholder surrenders a
policy prior to the end of the guarantee period, the MVA feature increases or
decreases the cash surrender value of the annuity in respect of any interest
rate decreases or increases, respectively, thereby protecting the Company from
losses due to higher interest rates at the time of surrender. The amount of
payment will not fluctuate due to adverse changes in the Company's investment
return, mortality experience or expenses. The Company's primary fixed MVA
annuities have terms varying from one to ten years with an average term of
approximately eight years. Account values of fixed MVA annuities were $9.6
billion and $9.0 billion as of December 31, 2001 and 2000, respectively.
Mutual Funds -- In September 1996, The Hartford launched a family of retail
mutual funds for which the Company provides investment management and
administrative services. The fund family has grown significantly from 8 funds at
inception to the current offering of 21 funds. These funds are managed by
Wellington and Hartford Investment Management Company, a wholly-owned subsidiary
of The Hartford. The Company has entered into agreements with over 750 financial
services firms to distribute these mutual funds.
The Company charges fees to the shareholders of the mutual funds, which are
recorded as revenue by the Company. Investors can purchase shares in the mutual
funds, all of which are registered with the Securities and Exchange Commission,
in accordance with the Investment Company Act of 1940. The mutual funds are
owned by the shareholders of those funds and not by the Company. As such, the
mutual fund assets and liabilities, as well as related investment returns, are
not reflected in the Company's consolidated financial statements. Total retail
mutual fund sales were $5.7 billion, $5.2 billion and $3.3 billion in 2001, 2000
and 1999, respectively.
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Governmental -- The Company sells retirement plan products and services to
municipalities under Section 457 plans. The Company offers a number of different
investment products, including fixed and variable annuities, to the employees in
Section 457 plans. Generally, with the variable products, the Company manages
the fixed income funds and certain other outside money managers act as advisors
to the equity funds offered in Section 457 plans administered by the Company. As
of December 31, 2001, the Company administered over 3,000 Section 457 plans.
Corporate -- The Company sells retirement plan products and services to
corporations under Section 401(k) plans targeting the small and medium case
markets. The Company believes these markets are under-penetrated in comparison
to the large case market. As of December 31, 2001, the Company administered over
2,400 Section 401(k) plans.
Institutional Liabilities -- The Company sells structured settlement contracts
which provide for periodic payments to an injured person or survivor for a
generally determinable number of years, typically in settlement of a claim under
a liability policy in lieu of a lump sum settlement. The Company's structured
settlements are sold through The Hartford's Property & Casualty insurance
operations as well as specialty brokers. The Company also markets other annuity
contracts for special purposes such as the funding of terminated defined benefit
pension plans. In addition, the Company offers GICs and short-term funding
agreements.
Section 529 Plans - The Hartford is introducing a tax advantaged college savings
product (529 plan) in early 2002 called SMART 529. SMART 529 is a
state-sponsored education savings program established by the State of West
Virginia which offers an easy way for both the residents of West Virginia and
out-of-state participants to invest for a college education. In 1996, Congress
created a tax-advantaged college savings program (529 Plan) as part of Section
529 of the Internal Revenue Code (the "Code"). The 529 Plan is an investment
plan operated by a state, designed to help families save for future college
costs. On January 1, 2002, 529 Plans became federal tax-exempt for qualified
withdrawals.
SMART 529 is designed to be flexible by allowing investors to choose from a wide
variety of investment portfolios to match their risk preference to help
investors accumulate savings for college. An individual can open a SMART 529
account for anyone, at any age. The SMART 529 product complements HLI's existing
offering of investment products (mutual funds, variable annuities, 401 (k), 457
and 403 (b) plans). It also leverages the Company's capabilities in
distribution, service and fund performance. The Hartford believes this is a
significant market opportunity and the benefits of investing in 529 plans will
be well received by many Americans saving for college.
Marketing and Distribution
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The Investment Products distribution network is based on management's strategy
of utilizing multiple and competing distribution channels to achieve the
broadest distribution to reach target customers. The success of the Company's
marketing and distribution system depends on its product offerings, fund
performance, successful utilization of wholesaling organizations, quality of
customer service, and relationships with national and regional broker-dealer
firms, banks and other financial institutions, and independent financial
advisors (through which the sale of the Company's individual annuities to
customers is consummated).
The Hartford maintains a distribution network of approximately 1,500
broker-dealers and approximately 500 banks. As of September 30, 2001, the
Company was selling products through 24 of the 25 largest retail banks in the
United States, including proprietary relationships with 10 of the top 25. The
Company periodically negotiates provisions and terms of its relationships with
unaffiliated parties, and there can be no assurance that such terms will remain
acceptable to the Company or such third parties. The Company's primary
wholesaler of its individual annuities and mutual funds is its wholly-owned
subsidiary, PLANCO Financial Services, Inc. and its affiliate, PLANCO,
Incorporated (collectively "PLANCO"). PLANCO is one of the nation's largest
wholesalers of individual annuities and has played a significant role in The
Hartford's growth over the past decade. As a wholesaler, PLANCO distributes The
Hartford's fixed and variable annuities, mutual funds, 401(k) plans and single
premium variable life insurance by providing sales support to registered
representatives, financial planners and broker-dealers at brokerage firms and
banks across the United States. Owning PLANCO secures an important distribution
channel for the Company and gives the Company a wholesale distribution platform
which it can expand in terms of both the number of individuals wholesaling its
products and the portfolio of products which they wholesale. In addition, the
Company uses internal personnel with extensive experience in the Section 457
market, as well as access to the Section 401(k) market, to sell its products and
services in the retirement plan market.
Competition
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The Investment Products segment competes with numerous other insurance companies
as well as certain banks, securities brokerage firms, investment advisors and
other financial intermediaries marketing annuities, mutual funds and other
retirement-oriented products. The 1999 Gramm-Leach-Bliley Act ("the Financial
Services Modernization Act"), which allows affiliations among banks, insurance
companies and securities firms, has not precipitated any significant changes in
bank ownership of insurance companies. (For additional information, see the
Regulatory Matters and Contingencies section of the MD&A.) Product sales are
affected by competitive factors such as investment performance ratings, product
design, visibility in the marketplace, financial strength ratings, distribution
capabilities, levels of charges and credited rates, reputation and customer
service.
INDIVIDUAL LIFE
The Individual Life segment sells a variety of products including variable life,
universal life, interest sensitive whole life and term life insurance primarily
to the high end estate and business planning markets. The individual life
business acquired from Fortis added significant scale to the Company's
Individual Life segment, contributing to the significant increase in life
insurance in force. As of December 31, 2001, life insurance in force increased
60% to $120.3 billion, from $75.1 billion as of December 31, 2000 and account
values grew 35% to $7.9 billion as of December 31, 2001 from $5.8 billion as of
December 31, 2000. Revenues were $890, $640 and $584 in 2001, 2000 and 1999,
respectively. Net income in the
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Individual Life segment was $121, $79 and $71 in 2001, 2000 and 1999,
respectively.
Principal Products
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The trend in the individual life industry has been a shift away from traditional
products towards variable life (including variable universal life) insurance
products, in which The Hartford has been on the leading edge. In 2001, of the
Company's new sales of individual life insurance, 82% was variable life and 15%
was either universal life or interest sensitive whole life. The Company also
sold a small amount of term life insurance.
Variable Life -- Variable life insurance provides a return linked to an
underlying investment portfolio and the Company allows policyholders to
determine their desired asset mix among a variety of underlying mutual funds. As
the return on the investment portfolio increases or decreases, as the case may
be, the death benefit or surrender value of the variable life policy may
increase or decrease. The Company's single premium variable life product
provides a death benefit to the policy beneficiary based on a single premium
deposit. The Company's second-to-die products are distinguished from other
products in that two lives are insured rather than one, and the policy proceeds
are paid upon the death of both insureds. Second-to-die policies are frequently
used in estate planning, often to fund estate taxes for a married couple.
Variable life account values were $4.0 billion and $2.9 billion as of December
31, 2001 and 2000, respectively.
Universal Life and Interest Sensitive Whole Life -- Universal life and interest
sensitive whole life insurance coverages provide life insurance with adjustable
rates of return based on current interest rates. The Company offers both
flexible and fixed premium policies and provides policyholders with flexibility
in the available coverage, the timing and amount of premium payments and the
amount of the death benefit, provided there are sufficient policy funds to cover
all policy charges for the coming period. The Company also sells universal life
insurance policies with a second-to-die feature similar to that of the variable
life insurance product offered. Universal life and interest sensitive whole life
account values were $3.1 billion and $2.1 billion as of December 31, 2001 and
2000, respectively.
Marketing and Distribution
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Consistent with the Company's strategy to access multiple distribution outlets,
the Individual Life distribution organization has been developed to penetrate a
multitude of retail sales channels. These include independent life insurance
sales professionals; agents of other companies; national, regional and
independent broker-dealers; banks and property and casualty insurance
organizations. The primary organization used to wholesale The Hartford's
products to these outlets is a group of highly qualified life insurance
professionals with specialized training in sophisticated life insurance sales,
particularly as it pertains to estate and business planning. These individuals
are generally employees of The Hartford who are managed through a regional sales
office system. The Company has grown this organization rapidly the past few
years to over 225 individuals and expects to continue to increase the number of
wholesalers in the future. The acquisition of the United States individual life
insurance business of Fortis has broadened the Company's reach in the emerging
affluent market with the addition of a retail broker-dealer consisting of
approximately 2,300 registered representatives.
Competition
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The Individual Life segment competes with approximately 1,800 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered, pricing,
relationships with third-party distributors and the quality of underwriting and
customer service.
GROUP BENEFITS
The Group Benefits segment sells group life and group disability insurance, as
well as other products, including stop loss and supplementary medical coverages
to employers and employer sponsored plans, accidental death and dismemberment,
travel accident and other special risk coverage to employers and associations.
The Company also offers disability underwriting, administration, claims
processing services and reinsurance to other insurers and self-funded employer
plans. Generally, policies sold in this segment are term insurance, typically
with one or two year rate guarantees. This allows the Company to adjust the
rates or terms of its policies in order to minimize the adverse effect of
various market trends. In the disability market, the Company focuses on strong
underwriting and claims management to derive a competitive advantage. As of
December 31, 2001 and 2000, the Company had group disability reserves of $2.4
billion and $2.0 billion and group life reserves of $706 and $601, respectively.
The Group Benefits segment generated revenues of $2.5 billion, $2.2 billion and
$2.0 billion in 2001, 2000 and 1999, respectively, of which group disability
insurance accounted for $1.1 billion, $939 and $860 and group life insurance
accounted for $763, $687 and $654, respectively. Net income in the Group
Benefits segment was $106, $90 and $79 in 2001, 2000 and 1999, respectively.
Principal Products
- ------------------
Group Disability -- The Hartford is one of the largest participants in the
"large case" market of the group disability insurance business. The large case
market, as defined by the Company, generally consists of group disability
policies covering over 500 employees in a particular company. The Company is
continuing its focus on the "small case" and "medium case" group markets,
emphasizing name recognition and reputation as well as the Company's managed
disability approach to claims and administration. The Company's efforts in the
group disability market focus on early intervention, return-to-work programs,
reduction of long-term disability claims and successful rehabilitation. Over the
last several years, the focus of new disability products introduced is to
provide incentives for employees to return to independence. The Company also
works with disability claimants to improve the receipt rate of Social Security
offsets (i.e., reducing payment of benefits by the amount of Social Security
payments received).
The Hartford has concentrated on a managed disability approach, which emphasizes
early claimant intervention in an effort to facilitate a disabled claimant's
return to work and thereby contain costs. This approach, coupled with an
individualized approach to claim servicing, and an incentive to
- 6 -
contain costs, leads to an overall reduction in the cost of disability coverage
for employers. The Company's short-term disability benefit plans provide a
weekly benefit amount (typically 60% to 70% of the employee's earned income up
to a specified maximum benefit) to insured employees when they are unable to
work due to an accident or illness. Long-term disability insurance provides a
monthly benefit for those extended periods of time not covered by a short-term
disability benefit plan when insured employees are unable to work due to
disability. Employees may receive total or partial disability benefits. Most of
these policies begin providing benefits following a 90 or 180 day waiting period
and generally continue providing benefits until the employee reaches age 65.
Long-term disability benefits are paid monthly and are limited to a portion,
generally 50-70%, of the employee's earned income up to a specified maximum
benefit.
Group Life -- Group term life insurance provides term coverage to employees and
their dependents for a specified period and has no accumulation of cash values.
The Company offers options for its basic group life insurance coverage,
including portability of coverage and a living benefit option, whereby
terminally ill policyholders can receive death benefits prior to their deaths.
In addition, the Company offers premium waivers and accidental death and
dismemberment coverages to employee groups.
Other -- The Hartford provides excess of loss medical coverage (known as stop
loss insurance) to employers who self-fund their medical plans and pay claims
using the services of a third party administrator. The Company also provides
Medicare supplement insurance, travel accident, hospital indemnity and other
coverages (including group life and disability) primarily to individual members
of various associations, as well as employee groups. A significant Medicare
supplement customer of the company has been the members of the Retired Officers
Association, an organization consisting of retired military officers. Congress
recently passed legislation, effective in the fourth quarter of 2001, whereby
retired military officers age 65 and older will receive full medical insurance,
eliminating the need for Medicare supplement insurance. This legislation will
reduce the Company's premium revenue by approximately $131 in 2002.
Marketing and Distribution
- --------------------------
The Hartford uses an experienced group of Company employees, managed through a
regional sales office system, to distribute its group insurance products and
services through a variety of distribution outlets. The Company intends to
continue to expand the system over the coming years in areas that have the
highest growth potential and also will continue to develop alternative
distribution channels to sell its products, such as sales to employers through
brokers, consultants and third-party administrators as well as to multiple
employer groups through its relationships with trade associations. In keeping
with its strategy of developing multiple distribution channels, the Company
signed an agreement in January 2001 with Wausau Benefits, Inc., to sell its
group life and group disability products.
Competition
- -----------
Competitive factors primarily affecting Group Benefits are the variety and
quality of products offered, the price quoted for coverage and services, the
Company's relationships with its third-party distributors and the quality of
customer service. Group Benefits competes with numerous other insurance
companies and other financial intermediaries marketing insurance products.
However, many of these businesses have relatively high barriers to entry and
there have been very few new entrants over the past few years, while other major
carriers have exited the market.
CORPORATE OWNED LIFE INSURANCE ("COLI")
The Hartford is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
or a trust sponsored by the company named as the beneficiary under the policy.
Until the Health Insurance Portability and Accountability Act of 1996 ("HIPA Act
of 1996"), the Company sold two principal types of COLI, leveraged and variable
products. Leveraged COLI is a fixed premium life insurance policy owned by a
company or a trust sponsored by a company. The HIPA Act of 1996 phased out the
deductibility of interest on policy loans under leveraged COLI at the end of
1998, virtually eliminating all future sales of leveraged COLI. Variable COLI
continues to be a product used by employers to fund non-qualified benefits or
other postemployment benefit liabilities.
Variable COLI account values were $18.0 billion and $15.9 billion as of December
31, 2001 and 2000, respectively. Leveraged COLI account values decreased to $4.3
billion as of December 31, 2001 from $5.0 billion as of December 31, 2000,
primarily due to the continuing effects of the HIPA Act of 1996. COLI generated
revenues of $719, $767 and $831 in 2001, 2000 and 1999, respectively. COLI
generated net income of $37, $34 and $30 in 2001, 2000 and 1999, respectively.
PROPERTY & CASUALTY
- -------------------
Property & Casualty provides (1) workers' compensation, property, automobile,
liability, marine, agricultural and bond coverages to commercial accounts
throughout the United States; (2) professional liability coverage and directors
and officers liability coverage, as well as excess and surplus lines business
not normally written by standard lines insurers; (3) automobile, homeowners and
home-based business coverage to individuals throughout the United States; (4)
assumed reinsurance through professional reinsurance brokers covering various
property, casualty, specialty and marine classes of business; and (5) insurance
related services.
The Hartford has the tenth largest property and casualty insurance operation in
the United States based on written premiums for the year ended December 31, 2000
according to A.M. Best. Property & Casualty generated revenues of $8.6 billion,
$8.7 billion and $8.0 billion, in 2001, 2000 and 1999, respectively. Written
premiums for 2001, 2000 and 1999 were $7.6 billion, $7.0 billion and $6.4
billion, respectively. Additionally, net income (loss) was $(115), $494 and $481
for 2001, 2000 and 1999, respectively. Excluding the impact of the September 11
terrorist attack ("September 11"), Property & Casualty generated $8.7 billion in
revenues, $7.7 billion in written premiums and $305 in net income in 2001. Total
assets for Property & Casualty were $28.8 billion as of December 31, 2001. (For
a discussion of the impact of September 11 and terrorism exposures, see MD&A
under Property & Casualty and Capital Resources and Liquidity sections.)
- 7 -
The Hartford's Property & Casualty operation was reorganized into six reportable
operating segments and, effective January 1, 2001, is reported as the North
American underwriting segments of Business Insurance, Affinity Personal Lines,
Personal Insurance, Specialty Commercial and Reinsurance; and the Other
Operations segment, formerly "International and Other Operations". Also reported
within Property & Casualty is North American, which includes the combined
underwriting results of the North American underwriting segments along with
income and expense items not directly allocable to these segments, such as net
investment income, net realized capital gains and losses, other expenses
including interest, and income taxes.
BUSINESS INSURANCE
Business Insurance provides standard commercial insurance coverage to small
("Select Customer") and mid-sized ("Key Accounts") commercial businesses
throughout the United States. This segment also provides commercial risk
management products and services to small and mid-sized members of affinity
groups in addition to marine coverage. The segment had written premiums of $2.9
billion, $2.4 billion and $2.2 billion in 2001, 2000 and 1999, respectively, and
underwriting losses of $242 ($3 of underwriting income excluding the impact of
September 11), $50 and $123 in 2001, 2000 and 1999, respectively.
Principal Products
- ------------------
The Business Insurance segment offers workers' compensation, property,
automobile, liability, umbrella and marine coverages. Commercial risk management
products and services are also provided to small and mid-sized members of
affinity groups.
Marketing and Distribution
- --------------------------
Business Insurance provides insurance products and services through its home
office located in Hartford, Connecticut, and multiple domestic regional office
locations and insurance centers. The segment markets its products nationwide
utilizing a variety of distribution networks including independent agents as
well as wholesalers and direct marketing through trade associations, customers
of financial institutions and employee groups. Independent agents, who often
represent other companies as well, are compensated on a commission basis and are
not employees of The Hartford.
AFFINITY PERSONAL LINES
Affinity Personal Lines provides insurance coverage to individuals throughout
the United States. Affinity Personal Lines is organized to provide customized
products and services to the following markets: the membership of AARP through a
direct marketing operation; customers of Sears, Roebuck & Co. ("Sears") and Ford
Motor Company and Ford Motor Credit Company (collectively, "Ford"); as well as
customers of financial institutions through an affinity center. Affinity
Personal Lines also operates a member contact center for health insurance
products offered through AARP's Health Care Options. The Hartford's exclusive
licensing arrangement with AARP, which was renewed during the fourth quarter of
2001, continues through January 1, 2010 for automobile, homeowners and
home-based business. The Health Care Options agreement continues through 2007.
These agreements provide Affinity Personal Lines with an important competitive
advantage. Affinity Personal Lines had written premiums of $1.8 billion, $1.7
billion and $1.5 billion in 2001, 2000 and 1999, respectively. Underwriting
income (loss) for 2001, 2000 and 1999 was $(39), ($(36) excluding the impact of
September 11), $17 and $19, respectively.
Principal Products
- ------------------
Affinity Personal Lines provides automobile, homeowners and home-based business
coverages to individuals across the United States, including a special program
designed exclusively for members of AARP.
Marketing and Distribution
- --------------------------
Affinity Personal Lines reaches diverse markets through multiple distribution
channels including direct mail, the Internet and advertising in publications.
The segment markets directly to the over 34 million members of AARP as well as
other affinity groups.
PERSONAL INSURANCE
Personal Insurance provides insurance coverage to individuals throughout the
United States. Personal Insurance is organized to provide customized products
and services to customers who prefer local agent involvement through a network
of independent agents in the standard personal lines market and in the
non-standard automobile market through the Company's Omni Insurance Group, Inc.
("Omni") subsidiary. Personal Insurance had written premiums of $1.0 billion,
$988 and $943 in 2001, 2000 and 1999, respectively. Underwriting income (loss)
for 2001, 2000 and 1999 was $(48) (($42) excluding the impact of September 11),
$(15) and $15, respectively.
Principal Products
- ------------------
Personal Insurance provides standard and non-standard automobile, homeowners and
home-based business coverages to individuals across North America.
Marketing and Distribution
- --------------------------
Personal Insurance provides customized products and services to customers
through a network of independent agents in the standard personal lines market
and in the non-standard automobile market through Omni. Independent agents, who
often represent other companies as well, are compensated on a commission basis
and are not employees of The Hartford.
SPECIALTY COMMERCIAL
Specialty Commercial provides a wide variety of property and casualty insurance
products and services through retailers and wholesalers to large commercial
clients and insureds requiring a variety of specialized coverages. Excess and
surplus lines coverages not normally written by standard line insurers are also
provided, primarily through wholesale brokers. Specialty Commercial had written
premiums of $989 ($996 excluding the impact of September 11), $1.1 billion and
$954 in 2001, 2000 and 1999, respectively, and underwriting losses of $262 ($95
excluding the impact of September 11), $103 and $48 in 2001, 2000 and 1999,
respectively.
- 8 -
Principal Products
- ------------------
The Specialty Commercial segment offers a variety of customized insurance
products and risk management services in addition to standard commercial
insurance including workers' compensation, casualty, automobile and liability
coverages to large-sized companies. Specialty Commercial also provides bond,
professional liability and agricultural coverages, as well as excess and surplus
lines coverages not normally written by standard lines insurers.
Marketing and Distribution
- --------------------------
Specialty Commercial provides insurance products and services through its home
office located in Hartford, Connecticut and multiple domestic regional and
district office locations. The segment markets its products nationwide utilizing
a variety of distribution networks including independent agents and brokers as
well as wholesalers. Independent agents, who often represent other companies as
well, are compensated on a commission basis and are not employees of The
Hartford.
REINSURANCE
The Hartford assumed reinsurance worldwide through its thirteen Hartford
Reinsurance Company ("HartRe") offices and wrote treaty reinsurance through
professional reinsurance brokers covering various property, casualty, specialty
and marine classes of business until the fourth quarter of 2001. In October
2001, HartRe announced a centralization of all underwriting and claims
operations in Hartford, Connecticut. While exiting most international lines,
HartRe will continue to write worldwide catastrophe, Alternative Risk Transfer
("ART") and marine from Hartford. The Reinsurance segment had written premiums
of $849 ($918 excluding the impact of September 11), $826 and $703 in 2001, 2000
and 1999, respectively, and underwriting losses of $375 ($149 excluding the
impact of September 11), $73 and $48 in 2001, 2000 and 1999, respectively.
Principal Products
- ------------------
The Reinsurance segment offers a full range of treaty and facultative
reinsurance products including property, casualty, marine and alternative risk
transfer which includes non-traditional reinsurance products.
Marketing and Distribution
- --------------------------
The Reinsurance segment assumes insurance from other insurers, primarily through
reinsurance brokers in the worldwide reinsurance market.
OTHER OPERATIONS
Property & Casualty's Other Operations currently consist of certain property and
casualty insurance operations of The Hartford which have ceased writing new
business. These operations primarily include First State Insurance Company,
located in Boston, Massachusetts; Heritage Reinsurance Company, Ltd.,
headquartered in Bermuda; and Excess Insurance Company Limited, located in the
United Kingdom. Also included in Other Operations are Property & Casualty's
international businesses up until their dates of sales.
Property & Casualty's international businesses have historically consisted
primarily of Western European companies offering a variety of insurance products
designed to meet the needs of local customers. The Company's strategic shift to
emphasize growth opportunities in asset accumulation businesses has resulted in
the sale of all of its international property and casualty businesses. London &
Edinburgh, located in the United Kingdom, was sold in November 1998. Zwolsche,
located in the Netherlands, Belgium and Luxembourg, was sold in December 2000.
Hartford Seguros, located in Spain, was sold in February 2001. In September
2001, The Hartford entered into an agreement to sell The Hartford Insurance
Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore
Insurance")). The sale was completed in January 2002.
The primary objectives of Other Operations are the proper disposition of claims,
the resolution of disputes, and the collection of reinsurance proceeds primarily
related to policies written and reinsured prior to 1985. As such, Other
Operations has no new product sales, distribution systems, or competitive
issues.
The Other Operations segment generated revenues of $168, $602 and $661 in 2001,
2000 and 1999, respectively. Net income for 2001, 2000 and 1999 was $10, $28 and
$33, respectively.
PROPERTY & CASUALTY COMPETITION
The commercial insurance industry continues to be a highly challenging and
competitive environment in which The Hartford competes with other insurance
companies, self insurers and other underwriting organizations. This competitive
environment is created by price competition, consolidation and globalization of
companies, exploration and utilization of alternative distribution techniques
and emphasis on cost containment and reduction. Additionally, September 11 has
created an ambiguous environment and economic uncertainty as federal backing in
the event of future terrorist attacks remains uncertain. In 2001, market
conditions in the commercial industry have continued to improve as a result of a
firming pricing environment.
The personal lines marketplace continues to remain competitive. Over the past
few years, intense price competition, upward trends in loss costs and the
significant expense of establishing alternative distribution channels have
caused underwriting results to decrease. The personal lines marketplace reported
a combined ratio of 111.4 for the first nine months of 2001, according to A.M.
Best. A major competitive advantage of The Hartford is the exclusive licensing
arrangement with AARP to provide personal automobile, homeowners and home-based
business insurance products to its members through January 1, 2010. Management
expects favorable "baby boom" demographics to increase AARP membership during
this period. In addition, The Hartford provides customer service for all health
insurance products offered through AARP's Health Care Options, with an agreement
that continues through 2007. The Hartford's contracts with Ford and Sears join
major brands in marketing automobile, homeowners, and home-based business
insurance products.
The property and casualty worldwide reinsurance market remains extremely
competitive, although the pricing
- 9 -
environment continued to improve in 2001. As a result of September 11, however,
the worldwide reinsurance market has been transformed to an environment of some
uncertainty. New capital, dramatic price increases and modifications in contract
terms and conditions have contributed to the uncertainty. HartRe's
organizational realignment has created a centralized organization aimed at
enhancing core functions consistent with the segment's return objectives.
LIFE RESERVES
In accordance with applicable insurance regulations under which Life operates,
life insurance subsidiaries of The Hartford establish and carry as liabilities
actuarially determined reserves which are calculated to meet The Hartford's
future obligations. Reserves for life insurance and disability contracts are
based on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect The
Hartford's actual experience when appropriate. These reserves are computed at
amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet The Hartford's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims incurred but not reported and claims reported
but not yet paid. Reserves for assumed reinsurance are computed in a manner that
is comparable to direct insurance reserves. Additional information on Life
reserves may be found in the Reserves section of the MD&A.
PROPERTY & CASUALTY RESERVES
The Hartford establishes reserves to provide for the estimated costs of paying
claims made by policyholders or against policyholders. These reserves include
estimates for both claims that have been reported and those that have been
incurred but not yet reported to The Hartford and include estimates of all
expenses associated with processing and settling these claims. This estimation
process is based primarily on historical experience and involves a variety of
actuarial techniques which analyze trends and other relevant factors. For the
year ended December 31, 2001, there were no changes to these reserving
assumptions that had a significant impact on the reserves or results of
operations.
The Hartford continually reviews the adequacy of its estimated claims and claim
adjustment expense reserves on an overall basis. As additional experience and
other relevant data become available, reserve levels are adjusted accordingly.
Such adjustments are reflected in net income for the period in which they are
made. In the judgment of The Hartford's management, all information currently
available has been properly considered in establishing the reserves for unpaid
claims and claim adjustment expenses.
As a result of September 11, the Company established estimated gross reserves of
$1.1 billion and estimated net reserves of $556 related to property and casualty
operations. This loss estimate includes coverages related to property, business
interruption, workers' compensation and other liability exposures, including
those underwritten by the Company's assumed reinsurance operation. The Company
based the loss estimate upon a review of insured exposures using a variety of
assumptions and actuarial techniques, including estimated amounts for unknown
and unreported policyholder losses and costs incurred in settling claims.
Included in net reserves was an estimate of amounts recoverable under the
Company's ceded reinsurance programs. As a result of the uncertainties involved
in the estimation process, final claims settlement may vary from present
estimates.
The Hartford continues to receive claims that assert damages from environmental
pollution and related clean-up costs and injuries from asbestos and
asbestos-related products. Due to deviations from past experience and a variety
of social, economic and legal issues, the Company's ability to estimate the
future policy benefits, unpaid claims and claim adjustment expenses is
significantly impacted. A study which reviewed and identified environmental and
asbestos exposures in the United States was performed in 1996 and is discussed
in the Environmental and Asbestos Claims section of the MD&A.
Certain liabilities for unpaid claims, principally for permanently disabled
claimants, terminated reinsurance treaties and certain contracts that fund loss
run-offs for unrelated parties, have been discounted to present value. The
amount of the discount was approximately $429 and $396 as of December 31, 2001
and 2000, respectively, and amortization of the discount had no material effect
on net income during 2001, 2000 and 1999.
As of December 31, 2001, property and casualty reserves for claims and claim
adjustment expenses reported under Generally Accepted Accounting Principles
("GAAP") exceeded those reported on a statutory basis by $26. The primary
differences resulted from the required exclusion from statutory reserves of
assumed retroactive reinsurance and the discounting of GAAP-basis workers'
compensation reserves at risk free interest rates, which exceeded the required
statutory discount rates set by regulators.
There were no significant changes in the mix of the Company's business which
have impacted property and casualty claims and claim adjustment expense
reserves; nor has the Company completed any significant portfolio loss
transfers, structured settlements or other transactions which would change claim
payment patterns.
Further discussion on The Hartford's Property & Casualty reserves may be found
in the Reserves section of the MD&A.
A reconciliation of liabilities for unpaid claims and claim adjustment expenses
is herein referenced from Note 1(h) of Notes to Consolidated Financial
Statements. A table depicting the historical development of the liabilities for
unpaid claims and claim adjustment expenses follows.
- 10 -
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET
FOR THE YEARS ENDED DECEMBER 31, [1]
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities for unpaid
claims and claim
adjustment expenses [2] $9,204 $10,498 $10,717 $10,776 $11,024 $12,202 $12,265 $12,401 $12,020 $11,857 $12,437
CUMULATIVE PAID CLAIMS AND
CLAIM EXPENSES
One year later 2,684 2,596 2,578 2,654 2,434 2,551 2,447 2,903 2,929 3,183
Two years later 4,350 4,282 4,207 4,179 4,004 4,078 4,223 4,626 4,873 --
Three years later 5,550 5,433 5,268 5,286 5,056 5,390 5,363 5,972 -- --
Four years later 6,396 6,229 6,112 6,040 6,077 6,211 6,303 -- -- --
Five years later 7,020 6,895 6,682 6,877 6,717 6,922 -- -- -- --
Six years later 7,569 7,354 7,391 7,406 7,303 -- -- -- -- --
Seven years later 7,954 7,987 7,861 7,924 -- -- -- -- -- --
Eight years later 8,532 8,411 8,332 -- -- -- -- -- -- --
Nine years later 8,924 8,851 -- -- -- -- -- -- -- --
Ten years later 9,340 -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 10,535 10,757 10,811 11,019 11,988 12,183 12,090 12,176 11,980 11,973
Two years later 10,866 10,970 11,009 12,142 11,992 12,065 11,808 12,048 11,975 --
Three years later 11,095 11,182 12,094 12,127 11,919 11,887 11,638 11,992 -- --
Four years later 11,417 12,304 12,157 12,113 11,789 11,772 11,511 -- -- --
Five years later 12,515 12,406 12,184 12,082 11,769 11,615 -- -- -- --
Six years later 12,642 12,462 12,165 12,088 11,640 -- -- -- -- --
Seven years later 12,757 12,414 12,218 11,981 -- -- -- -- -- --
Eight years later 12,710 12,500 12,154 -- -- -- -- -- -- --
Nine years later 12,789 12,472 -- -- -- -- -- -- -- --
Ten years later 12,778 -- -- -- -- -- -- -- -- --
DEFICIENCY (REDUNDANCY) $3,574 $1,974 $1,437 $1,205 $616 $(587) $(754) $(409) $(45) $116
- -----------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31, [1]
1994 1995 1996 1997 1998 1999 2000 2001
- ----------------------------------------------------------------------------------------------------------------------------------
NET RESERVE [2] $ 10,776 $ 11,024 $ 12,202 $ 12,265 $ 12,401 $ 12,020 $ 11,857 $ 12,437
Reinsurance recoverables 5,156 4,829 4,357 3,996 3,275 3,264 3,452 3,818
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS RESERVE $ 15,932 $ 15,853 $ 16,559 $ 16,261 $ 15,676 $ 15,284 $ 15,309 $ 16,255
- ----------------------------------------------------------------------------------------------------------------------------------
NET REESTIMATED RESERVE $ 11,981 $ 11,640 $ 11,615 $ 11,511 $ 11,992 $ 11,975 11,973
Reestimated reinsurance recoverables 5,594 4,821 4,138 3,848 3,360 3,637 3,688
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $ 17,575 $ 16,461 $ 15,753 $ 15,359 $ 15,352 $ 15,612 $ 15,661
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY (REDUNDANCY) $ 1,643 $ 608 $ (806) $ (902) $ (324) $ 328 $ 352
- ----------------------------------------------------------------------------------------------------------------------------------
[1] The above tables exclude Hartford Insurance, Singapore as a result of its
sale in September 2001, Hartford Seguros as a result of its sale in
February 2001, Zwolsche as a result of its sale in December 2000 and
London & Edinburgh as a result of its sale in November 1998.
[2] The above tables exclude the liabilities and claim developments for
certain reinsurance coverages written for affiliated parties.
1994 1995 1996 1997 1998 1999 2000 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities, net and gross of
reinsurance for unpaid claims
and claim adjustment expenses
excluded $ 495 $ 550 $ 500 $ 505 $ 501 $ 456 $ 459 $ 423
==================================================================================================================================
The following table reconciles the Loss Development Table to the Consolidated
Financial Statements:
- ----------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------
Loss Development Table:
Gross reserves $ 16,255 $ 15,309 $ 15,284
Exclusion of international
subsidiaries -- 106 274
Reinsurance - affiliated parties 423 459 456
- ----------------------------------------------------------------------
Gross reserves per Consolidated
Financial Statements (see Note
1 (h)) $ 16,678 $ 15,874 $ 16,014
- ----------------------------------------------------------------------
CEDED REINSURANCE
Consistent with normal industry practice, The Hartford cedes insurance risk to
reinsurance companies. For Property & Casualty operations, these reinsurance
arrangements provide greater diversification of business and limit The
Hartford's maximum net loss arising from large risks or catastrophes.
A major portion of The Hartford's property and casualty reinsurance is effected
under general reinsurance contracts known as treaties, or, in some instances, is
negotiated on an individual risk basis, known as facultative reinsurance. The
Hartford also has in-force excess of loss contracts with reinsurers that protect
it against a specified part or all of certain losses over stipulated amounts.
- 11 -
The ceding of insurance obligations does not discharge the original insurer from
its primary liability to the policyholder. The original insurer would remain
liable in those situations where the reinsurer is unable to meet the obligations
assumed under reinsurance agreements. The Hartford has established strict
standards that govern the placement of reinsurance and monitors ceded
reinsurance security. Virtually all of The Hartford's property and casualty
reinsurance is placed with reinsurers that meet strict financial criteria
established by a credit committee.
In accordance with normal industry practice, Life is involved in both the
cession and assumption of insurance with other insurance and reinsurance
companies. As of December 31, 2001, the maximum amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.5.
In 2001, the Company did not make any significant changes in the terms under
which reinsurance is ceded to other insurers. Also, the Company did not enter
into a specific reinsurance transaction that had a material effect on earnings
or reserves. However, as a result of September 11, The Hartford established
estimated ceded reserves of $569 under existing reinsurance contracts and
recorded premium cessions of $91 related to reinstatement and other reinsurance
premiums. Also as a result of September 11, the reinsurance market has become an
environment of some uncertainty. Specifically, dramatic price increases, changes
in contract terms and conditions and program modifications have resulted. As a
result, it has become more difficult to get selected types of reinsurance
coverage at a reasonable price, particularly terrorism coverage.
INVESTMENT OPERATIONS
An important element of the financial results of The Hartford is return on
invested assets. The Hartford's investment activities are primarily divided
between Life and Property & Casualty. The investment activities of both the Life
and Property & Casualty operations are managed based on the underlying
characteristics and nature of their respective liabilities.
The primary investment objective of Life's general account and guaranteed
separate accounts is to maximize after-tax returns consistent with acceptable
risk parameters, including the management of the interest rate sensitivity of
invested assets and the generation of sufficient liquidity, relative to that of
corporate and policyholder obligations.
The investment objective for the majority of Property & Casualty is to maximize
economic value while generating after-tax income and sufficient liquidity to
meet corporate and policyholder obligations. For Property & Casualty's Other
Operations segment, the investment objective is to ensure the full and timely
payment of all liabilities. Property & Casualty investment strategies are
developed based on a variety of factors including business needs, regulatory
requirements and tax considerations.
For a further discussion of The Hartford's approach to managing risks, including
derivative utilization, see the Capital Markets Risk Management section of the
MD&A, as well as Note 3 of Notes to Consolidated Financial Statements.
REGULATION AND PREMIUM RATES
Although there has been some deregulation with respect to large commercial
insureds in recent years, insurance companies, for the most part, are still
subject to comprehensive and detailed regulation and supervision throughout the
United States. The extent of such regulation varies, but generally has its
source in statutes which delegate regulatory, supervisory and administrative
powers to state insurance departments. Such powers relate to, among other
things, the standards of solvency that must be met and maintained; the licensing
of insurers and their agents; the nature of and limitations on investments;
establishing premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Regulatory requirements applying to property and casualty premium rates vary
from state to state, but generally provide that rates shall not be inadequate,
excessive or unfairly discriminatory. Rates for many products, including
automobile and homeowners insurance, are subject to prior regulatory approval in
many states. Ocean marine insurance rates are exempt from rate regulation.
Subject to regulatory requirements, management determines the rates charged for
its policies. Methods for arriving at rates vary by product, exposure assumed
and size of risk.
While premium rates in the property and casualty insurance business are for the
most part subject to regulation, such rates are not in most instances uniform
for all insurers within a given jurisdiction, or in all jurisdictions. The
Hartford is a member of various fire, casualty and surety rating organizations.
For some lines of business, The Hartford uses the rates and rating plans which
are filed by these organizations in the various states, while for other lines of
business it uses loss cost data published by such organizations. The Hartford
also uses its own independent rates or otherwise departs from rating
organization rates, where appropriate.
Most states have enacted legislation that regulates insurance holding company
systems such as The Hartford. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
- 12 -
State insurance regulations require property and casualty insurers to
participate in assigned risk plans, reinsurance facilities and joint
underwriting associations, which are mechanisms to provide risks with various
basic or minimum insurance coverage when they are not available in voluntary
markets. Such mechanisms are most prevalent for automobile and workers'
compensation insurance, but a majority of states also mandate participation in
so-called FAIR Plans or Windstorm Plans providing basic property coverage.
Additionally, some states mandate such participation in facilities for providing
medical malpractice insurance. Participation is based upon the amount of a
company's written premiums in a particular state for the classes of insurance
involved.
The extent of insurance regulation on business outside the United States varies
significantly among the countries in which The Hartford operates. Some countries
have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors domiciled in that particular
jurisdiction. The Hartford's international operations are comprised of insurers
licensed in their respective countries and, therefore, are subject to the
generally less restrictive domestic insurance regulations.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-based Capital".
LEGISLATIVE INITIATIVES
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Legislative Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Insolvency Fund".
NAIC CODIFICATION
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "NAIC Codification".
EMPLOYEES
The Hartford had approximately 27,400 employees as of February 28, 2002.
EXECUTIVE OFFICERS OF THE HARTFORD
Information about the executive officers of The Hartford who are also directors
and/or nominees for election as directors is set forth in The Hartford's 2002
Proxy Statement. Set forth below is information about other executive officers
of the Company:
JOHN N. GIAMALIS
(Senior Vice President and Controller)
Mr. Giamalis, 44, is Senior Vice President and Controller of the Company. Mr.
Giamalis joined the Company in January 1997 as Director, Financial Reporting and
Analysis. In April 1998, he was appointed to the position of Vice President and
Corporate Controller. Prior to joining the Company, Mr. Giamalis held senior
financial positions in the insurance and technology industries, including Chief
Financial Officer of Intelidata Technologies Corp. from March 1995 to December
1996. He also held various public accounting positions, including senior manager
with responsibility for insurance, securities and middle market clients at
Deloitte & Touche LLP. Mr. Giamalis is a member of the American Institute and
the Connecticut Society of Certified Public Accountants.
DAVID M. JOHNSON
(Executive Vice President and Chief Financial Officer)
Mr. Johnson, 41, has held the position of Executive Vice President and Chief
Financial Officer of the Company since May 1, 2001. Prior to joining the
Company, Mr. Johnson was Senior Executive Vice President and Chief Financial
Officer of Cendant Corporation since November 1998 and Managing Director,
Investment Banking Division, at Merrill Lynch, Pierce, Fenner and Smith, where
he worked with major clients in a variety of industries including insurance,
airlines and technology, as well as leveraged buyout funds, since 1986.
RANDALL I. KIVIAT
(Group Senior Vice President of Human Resources)
Mr. Kiviat, 51, has held the position of Group Senior Vice President of Human
Resources for the Company since June 1999. Since joining the Company in 1982, he
has held positions of increasing responsibility, including Director of Payroll
and Director of Employee Benefits. He was appointed Vice President of Human
Resources Services in April 1998.
EDWARD L. MORGAN, JR.
(Group Senior Vice President, Corporate Relations)
Mr. Morgan, 58, has held the position of Group Senior Vice President, Corporate
Relations, of the Company since April 1998. Previously, he was Senior Vice
President, Corporate Relations and Government Affairs since December 1995. Mr.
Morgan also has held the position of Senior Vice President, Corporate Relations
of Hartford Fire since 1993.
NEAL S. WOLIN
(Executive Vice President and General Counsel)
Mr. Wolin, 40, has held the position of Executive Vice President and General
Counsel since joining the Company on March 20, 2001. Previously, Mr. Wolin
served as General Counsel of the U.S. Treasury from 1999 to January 2001. In
that capacity, he headed Treasury's legal division, composed of 2,000 lawyers
providing services to all of Treasury's offices and bureaus, including the
Internal Revenue Service, Customs, Secret Service, Public Debt, the Office of
Thrift Supervision, the Financial Management Service, the U.S. Mint and the
Bureau of Engraving and Printing. Mr. Wolin served as the Deputy General Counsel
of the Department of the Treasury from 1995 to 1999. Prior to joining the
Treasury Department, he served in the White House, first as the Executive
Assistant to the National Security Advisor and then as the Deputy Legal Advisor
to the National Security Council. Mr. Wolin joined the U.S. Government in 1991
as special assistant to the Directors of Central Intelligence, William H.
Webster, Robert M. Gates and
- 13 -
R. James Woolsey. Mr. Wolin served on the President's Advisory Commission on
Holocaust Assets in the United States from 1999 to 2000.
DAVID M. ZNAMIEROWSKI
(Group Senior Vice President and Chief Investment Officer)
Mr. Znamierowski, 41, was appointed Group Senior Vice President and Chief
Investment Officer of the Company and President of Hartford Investment
Management Company ("HIMCO"), a wholly-owned subsidiary of the Company,
effective November 5, 2001. Previously, he was Senior Vice President and Chief
Investment Officer for the Company's life operations since May 1999, Vice
President since September 1998 and Vice President, Investment Strategy since
February 1997. Prior to joining the Company in April 1996, Mr. Znamierowski held
a variety of positions in the investment industry, including portfolio manager
and Vice President of Investment Strategy and Policy for Aetna Life & Casualty
Company from 1991 to April 1996 and Vice President of Corporate Finance for
Salomon Brothers, Inc. since 1986. Mr. Znamierowski is a member of the Board of
Governors of the Investment Company Institute and of the policy-making
investment committee of the American Council of Life Insurance. He also serves
as a director and President of each of The Hartford-sponsored mutual funds.
ITEM 2. PROPERTIES
The Hartford owns the land and buildings comprising its Hartford location and
other properties within the greater Hartford, Connecticut area which total
approximately 1.6 million square feet. In addition, The Hartford leases
approximately 6.4 million square feet throughout the United States and 32
thousand square feet in other countries. All of the properties owned or leased
are used by one or more of all ten operating segments, depending on the
location. (For more information on operating segments see Part 1, Item 1,
Business of The Hartford - Reporting Segments.) The Company believes its
properties and facilities are suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
The Hartford is or may become involved in various legal actions, some of which
involve claims for substantial amounts. In the opinion of management, the
ultimate liability with respect to such actual and potential lawsuits, after
consideration of provisions made for potential losses and costs of defense, is
not expected to be material to the consolidated financial condition, results of
operations or cash flows of The Hartford.
The Hartford is involved in claims litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed in the MD&A under the Environmental and Asbestos
Claims section, The Hartford continues to receive environmental and asbestos
claims which involve significant uncertainty regarding policy coverage issues.
With respect to these claims, The Hartford continually reviews its overall
reserve levels, methodologies and reinsurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of The Hartford during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE HARTFORD'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Hartford's common stock is traded on the New York Stock Exchange ("NYSE")
under the trading symbol "HIG".
The following table presents the high and low closing prices for the common
stock of The Hartford on the NYSE for the periods indicated, and the quarterly
dividends declared per share.
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- -----------------------------------------------------------------------------
2001
Common Stock Price
High $67.75 $70.46 $69.28 $62.83
Low 55.15 56.88 50.10 53.91
Dividends Declared 0.25 0.25 0.25 0.26
2000
Common Stock Price
High $52.75 $64.00 $73.75 $79.31
Low 29.38 44.25 56.38 65.44
Dividends Declared 0.24 0.24 0.24 0.25
- -----------------------------------------------------------------------------
As of February 28, 2002, the Company had approximately 120,000 shareholders. The
closing price of The Hartford's common stock on the NYSE on February 28, 2002
was $67.00.
On October 18, 2001, The Hartford's Board of Directors declared a quarterly
dividend of $0.26 per share payable on January 2, 2002 to shareholders of record
as of December 3, 2001. The dividend represented a 4% increase from the prior
quarter. Dividend decisions are based on and affected by a number of factors,
including the operating results and financial requirements of The Hartford and
the impact of regulatory restrictions discussed in the Capital Resources and
Liquidity section of the MD&A under "Liquidity Requirements".
There are also various legal limitations governing the extent to which The
Hartford's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to The Hartford Financial Services Group, Inc. as discussed in the
Capital Resources and Liquidity section of the MD&A under "Liquidity
Requirements".
- 14 -
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS)
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues [1] $ 15,147 $ 14,703 $ 13,528 $ 15,022 $ 13,461
Income before extraordinary item and cumulative
effect of accounting changes [2] 549 974 862 1,015 1,332
Net income [2] [3] 507 974 862 1,015 1,332
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET AND OTHER DATA
Total assets $ 181,238 $ 171,532 $ 167,051 $ 150,632 $ 131,743
Mutual fund assets [4] 16,809 11,432 6,374 2,506 972
Long-term debt 1,965 1,862 1,548 1,548 1,482
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,412 1,243 1,250 1,250 1,000
Total stockholders' equity 9,013 7,464 5,466 6,423 6,085
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA
BASIC EARNINGS PER SHARE [2]
Income before extraordinary item and cumulative
effect of accounting changes [2] $ 2.31 $ 4.42 $ 3.83 $ 4.36 $ 5.64
Net income [2] [3] 2.13 4.42 3.83 4.36 5.64
DILUTED EARNINGS PER SHARE [2]
Income before extraordinary item and cumulative
effect of accounting changes [2] 2.27 4.34 3.79 4.30 5.58
Net income [2] [3] 2.10 4.34 3.79 4.30 5.58
Dividends declared per common share 1.01 0.97 0.92 0.85 0.80
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [5] 112.4 102.4 103.3 102.9 102.3
====================================================================================================================================
[1] 2001 includes a $91 reduction in premiums from reinsurance cessions
related to September 11. 1998 includes $541 related to the recapture of an
in force block of Corporate Owned Life Insurance ("COLI") business from
MBL Life Assurance Co. of New Jersey. Also, includes revenues from London
& Edinburgh, which was sold in November 1998, for 1998 and 1997 of $1,117
and $1,225, respectively.
[2] 2001 includes $440 of losses ($1.85 per basic and $1.82 per diluted share)
related to September 11 and a $130 tax benefit ($0.55 per basic and $0.54
per diluted share) at HLI. 1997 includes an equity gain of $368 ($1.56 per
basic and $1.54 per diluted share) resulting from the initial public
offering of HLI.
[3] 2001 includes a $34 after-tax charge ($0.14 per basic and per diluted
share) related to the cumulative effect of accounting changes for the
Company's adoption of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and EITF Issue 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets". Also includes an $8 extraordinary after-tax
loss ($0.04 per basic and $0.03 per diluted share) related to the
Company's retirement of its 8.35% Cumulative Quarterly Income Preferred
Securities.
[4] Mutual funds are owned by the shareholders of those funds and not by the
Company. As a result, they are not reflected in total assets on the
Company's balance sheet.
[5] 2001 includes the impact of September 11. Excluding the impact of
September 11, 2001 combined ratio was 103.4.
Outlined in the table below are United States Industry Combined Ratios for each
of the five years ended December 31:
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
United States Industry Combined Ratios [a] 117.0 110.1 107.8 105.6 101.6
====================================================================================================================================
[a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined
ratio for 2001 is an A.M. Best estimate prepared as of January 2002.
- 15 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE STATED)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of The Hartford Financial
Services Group, Inc. and its subsidiaries (collectively, "The Hartford" or the
"Company") as of December 31, 2001, compared with December 31, 2000, and its
results of operations for the three years ended December 31, 2001, 2000 and
1999. This discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes beginning on page F-1.
Certain of the statements contained herein or in Part I of the Company's Form
10-K (other than statements of historical fact) are forward-looking statements.
These forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 and include estimates
and assumptions related to economic, competitive and legislative developments.
These forward-looking statements are subject to change and uncertainty which
are, in many instances, beyond the Company's control and have been made based
upon management's expectations and beliefs concerning future developments and
their potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on The Hartford will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors. These factors include: the
uncertain nature of damage theories and loss amounts and the development of
additional facts related to the September 11 terrorist attack ("September 11");
the response of reinsurance companies under reinsurance contracts, the impact of
increasing reinsurance rates, and the adequacy of reinsurance to protect the
Company against losses; the possibility of more unfavorable loss experience than
anticipated; the possibility of general economic and business conditions that
are less favorable than anticipated; the incidence and severity of catastrophes,
both natural and man-made; the effect of changes in interest rates, the stock
markets or other financial markets; stronger than anticipated competitive
activity; unfavorable legislative, regulatory or judicial developments; the
difficulty in predicting the Company's potential exposure for environmental and
asbestos claims and related litigation; the Company's ability to distribute its
products through distribution channels, both current and future; the uncertain
effects of emerging claim and coverage issues; the effect of assessments and
other surcharges for guaranty funds and second-injury funds and other mandatory
pooling arrangements; a downgrade in the Company's claims-paying, financial
strength or credit ratings; the ability of the Company's subsidiaries to pay
dividends to the Company; and other factors described in such forward-looking
statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Consolidated Results of Operations: Operating Summary 17
Life 20
Investment Products 21
Individual Life 23
Group Benefits 24
Corporate Owned Life Insurance (COLI) 25
Property & Casualty 26
Business Insurance 27
Affinity Personal Lines 28
Personal Insurance 29
Specialty Commercial 30
Reinsurance 31
Other Operations 32
Deferred Acquisition Costs 33
Reserves 33
Environmental and Asbestos Claims 34
Investments 35
Capital Markets Risk Management 38
Capital Resources and Liquidity 48
Regulatory Matters and Contingencies 52
Effect of Inflation 52
Accounting Standards 52
- 16 -
- --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
- --------------------------------------------------------------------------------
OVERVIEW 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 9,409 $ 8,941 $ 8,342
Fee income 2,633 2,484 2,105
Net investment income 2,850 2,674 2,627
Other revenue 491 459 420
Net realized capital gains (losses) (236) 145 34
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 15,147 14,703 13,528
----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 9,764 8,419 7,902
Amortization of deferred policy acquisition costs and present value of
future profits 2,214 2,213 2,011
Insurance operating costs and expenses 2,037 1,958 1,779
Goodwill amortization 60 28 10
Other expenses [1] 718 667 591
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 14,793 13,285 12,293
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 354 1,418 1,235
Income tax expense (benefit) (195) 390 287
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 549 1,028 948
Minority interest in consolidated subsidiary -- (54) (86)
Extraordinary loss from early retirement of debt, net of tax [2] (8) -- --
Cumulative effect of accounting changes, net of tax [3] (34) -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME [4] 507 974 862
Less: Restructuring charges, net of tax (11) -- --
Extraordinary loss from early retirement of debt, net of tax [2] (8) -- --
Cumulative effect of accounting changes, net of tax [3] (34) -- --
Net realized capital gains (losses), after-tax (164) 12 25
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME [4] $ 724 $ 962 $ 837
================================================================================================================================
[1] Includes restructuring charges of $16, for the year ended December 31,
2001.
[2] Represents the write-off of unamortized issuance costs on the Company's
8.35% Cumulative Quarterly Income Preferred Securities which were redeemed
on December 31, 2001.
[3] Represents the cumulative impact of the Company's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 133, as amended, "Accounting
for Derivative Instruments and Hedging Activities" and Emerging Issues
Task Force ("EITF") Issue 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets".
[4] 2001 includes $440 of losses related to September 11 and a $130 tax
benefit at HLI.
The Hartford defines "operating income" (defined in previous years as "core
earnings") as after-tax operational results excluding, as applicable, net
realized capital gains and losses, extraordinary items, the cumulative effect of
accounting changes and certain other items. Operating income is an internal
performance measure used by the Company in the management of its operations.
Management believes that this performance measure delineates the results of
operations of the Company's ongoing businesses in a manner that allows for a
better understanding of the underlying trends in the Company's current business.
However, operating income should only be analyzed in conjunction with, and not
in lieu of, net income and may not be comparable to other performance measures
used by the Company's competitors.
OPERATING RESULTS
2001 COMPARED TO 2000 -- Revenues increased $444, or 3%. Included in revenues in
2001 was a $91 reduction in North American Property & Casualty premiums,
resulting from additional reinsurance cessions related to September 11. Also
included in revenues were net realized capital losses of $236 in 2001 and net
realized capital gains of $145 in 2000. These capital gains and losses related
primarily to the sales of international subsidiaries and other than temporary
impairments on securities. Excluding the effects of both September 11 and the
net realized capital gains and losses, revenues increased $916, or 6%. The
increase was related to continued new business growth in Group Benefits,
increased fee income in Individual Life, primarily as a result of the April 2001
acquisition of the United States individual life insurance, annuity and mutual
fund businesses of Fortis, Inc. (operating as "Fortis" or "Fortis Financial
Group") and earned premium growth in most of the Property & Casualty
underwriting segments. (For further discussion of the Fortis acquisition, see
Note 18 (a) of Notes to Consolidated Financial Statements). Also contributing to
the increase was higher net investment income, primarily due to income earned on
fixed maturities. These increases were partially offset by a decrease in
revenues in the Other Operations segment, reflecting the sales of Property &
Casualty's international subsidiaries.
Operating income decreased $238, or 25%. Included in the Company's operating
income for the year ended December 31, 2001, were $440 of losses, after-tax and
net of reinsurance, related to September 11 and a $130 tax benefit at Hartford
Life, Inc. ("HLI"), primarily the result of the favorable treatment of
- 17 -
certain tax matters related to separate account investment activity during the
1996-2000 tax years. Excluding the effects of September 11 and HLI tax benefit,
operating income increased $72, or 7%. The increase reflected favorable
operating performance in the Company's Business Insurance, Individual Life,
Investment Products and Group Benefits segments, partially offset by higher loss
costs in the Company's Affinity Personal Lines and Personal Insurance segments
as well as adverse loss development in the Reinsurance segment.
2000 COMPARED TO 1999 -- Revenues increased $1.2 billion, or 9%, primarily as a
result of strong growth in fee income in the Investment Products and Individual
Life segments, along with premium growth in the Group Benefits segment and in
all North American Property & Casualty underwriting segments.
Operating income increased $125, or 15%, due to double-digit earnings growth
across all segments in Life partially offset by a decline in Property &
Casualty, primarily due to adverse loss development in Reinsurance, increased
automobile losses in the Personal Insurance segment, expenses related to the
Business Insurance field office and claim reorganizations and deteriorating
underwriting results from discontinued operations (public entity ("PENCO"),
Canada, Farm and Industrial Risk Insurance pool ("IRI").
SIGNIFICANT ACCOUNTING POLICIES
For information on the Company's significant accounting policies, see the
Deferred Acquisition Costs, Reserves and Investments sections and Note 1 of
Notes to Consolidated Financial Statements.
NET REALIZED CAPITAL GAINS AND LOSSES
See "Investment Results" in the Investments section.
INCOME TAXES
The effective tax expense (benefit) rate for 2001, 2000 and 1999 was (55)%, 28%
and 23%, respectively. Excluding the impacts of September 11 and the HLI federal
tax benefits of $130 and $24 in 2001 and 2000, respectively, the effective tax
rate for 2001 was 17% compared with 29% and 23%, respectively, for 2000 and
1999. Excluding the impact of September 11 and the HLI federal tax benefits, the
decrease in the effective tax rate for 2001 was primarily due to an increase in
the proportionate share of tax-exempt net investment income to total pre-tax
income for 2001 compared to 2000 and taxes related to the gain on the sale of
Zwolsche Algemeene N.V. ("Zwolsche") in 2000. The increase in the effective tax
rate for 2000, excluding the $24 tax benefit at HLI, was primarily due to taxes
related to the gain on the sale of Zwolsche. (For a further discussion on the
sale of Zwolsche, see the Other Operations section and Note 18(b) of Notes to
the Consolidated Financial Statements.)
Tax-exempt interest earned on invested assets was the principal cause of
effective rates lower than the 35% United States statutory rate in all years.
Income taxes paid (received) in 2001, 2000 and 1999 were $(52), $95 and $41,
respectively. (See Note 14 of Notes to Consolidated Financial Statements for
further information.)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Prior to the June 27, 2000 acquisition of all of the outstanding shares of HLI
that The Hartford did not already own ("The HLI Repurchase"), the minority
interest in the consolidated subsidiary's operating results represented
approximately 19%. (For additional information, see the Capital Resources and
Liquidity section under "Acquisitions" and Note 16 of Notes to Consolidated
Financial Statements.)
PER COMMON SHARE
The following table represents per common share data and return on equity for
the past three years:
2001 2000 1999
- -------------------------------------------------------------------
Basic earnings per share $2.13 $4.42 $3.83
Diluted earnings per share $2.10 $4.34 $3.79
Weighted average common shares
outstanding 237.7 220.6 224.9
Weighted average common shares
outstanding and dilutive
potential common shares 241.4 224.4 227.5
Return on equity excluding
September 11 and Life tax
benefit [1] 10.5% 15.4% 15.3%
Return on equity [1] 6.6% 15.4% 15.3%
- -------------------------------------------------------------------
[1] Calculated by dividing net income by average equity excluding unrealized
gain (loss), after-tax.
SEGMENT RESULTS
The Hartford is organized into two major operations: Life and Property &
Casualty. Within these operations, The Hartford conducts business principally in
ten operating segments. Additionally, all activities related to The HLI
Repurchase and the minority interest in HLI for pre-acquisition periods are
included in Corporate.
Life is organized into four reportable operating segments: Investment Products,
Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI").
Life also includes in an Other category its international operations, which are
primarily located in Latin America and Japan, as well as corporate items not
directly allocable to any of its reportable operating segments, principally
interest expense.
Property & Casualty was reorganized into six reportable operating segments and,
effective January 1, 2001, is reported as the North American underwriting
segments of Business Insurance, Affinity Personal Lines, Personal Insurance,
Specialty Commercial and Reinsurance; and the Other Operations segment, formerly
"International and Other Operations".
The measure of profit or loss used by The Hartford's management in evaluating
performance is operating income, except for its North American underwriting
segments, which are evaluated by The Hartford's management primarily based upon
underwriting results. While not considered segments, the Company also reports
and evaluates operating income results for Life, Property & Casualty, and North
American, which includes the combined underwriting results of the North American
underwriting segments along with income and expense items not directly allocable
to these segments, such as
- 18 -
net investment income. Property & Casualty includes operating income for North
American and the Other Operations segment.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided and capital contributions. Certain reinsurance stop loss agreements
exist between the segments which specify that one segment will reimburse another
for losses incurred in excess of a predetermined limit. Also, one segment may
purchase group annuity contracts from another to fund pension costs and claim
annuities to settle casualty claims. In addition, certain intersegment
transactio